The Future of Global Business: A Reader

The Future of Global Business

The Future of Global Business A Reader

Michael R. Czinkota McDonough School of Business, Georgetown University and the University of Birmingham, U.K. Masaaki Kotabe Institute of Global Management, Temple University, Philadelphia, P.A. Ilkka A. Ronkainen McDonough School of Business, Georgetown University, Washington, D.C.

First published 2011 by Routledge 711 Third Avenue, New York, NY 10017 Simultaneously published in the UK by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business

This edition published in the Taylor & Francis e-Library, 2011. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. © 2011 Taylor & Francis The right of the editors to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging in Publication Data The future of global business: a reader / [edited by] Michael R Czinkota, Ilkka A Ronkainen, Masaaki Kotabe. p. cm. 1. Export marketing. 2. International business enterprises. 3. International trade. I. Czinkota, Michael R. II. Ronkainen, Ilkka A. III. Kotabe, Masaaki. HF1416.F88 2011 338.8'8—dc22 2010022288

ISBN 0-203-87813-2 Master e-book ISBN

ISBN13: 978-0-415-80093-8 (hbk) ISBN13: 978-0-203-87813-2 (ebk)

To Ilona and Margaret. MRC To my children in pursuit of their dreams. MK To Sirkka and Alpo Ronkainen. IAR

Table of Contents

About the Editors 1. Role of Research in International Marketing 1.1 Czinkota, Michael R. and Ilkka A. Ronkainen, “An International Marketing Manifesto,” Journal of International Marketing 11,1, 2003, 13–27.

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1.2 Czinkota, Michael R. and A. Coskun Samli, “The Remarkable Performance of International Marketing in the Second Half of the 20th Century,” European Business Review, 19, 4, 2007, 316–331.

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1.3 Czinkota, Michael R., “Freedom and International Marketing: Janis Joplin’s Candidacy as Patron of the Field,” Thunderbird International Business Review, January–February 2005, 1–13.

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1.4 Czinkota, Michael R., “Academic Freedom for All in Higher Education: The Role of the General Agreement on Trade in Services,” Journal of World Business, 41, 2, 2006, 149–160.

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1.5 Czinkota, Michael R., “International Information CrossFertilization in Marketing: An Empirical Assessment,” European Journal of Marketing, 34, 15, 2000, 1305–1314. Winner, Article of the Year Award.

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1.6 Czinkota, Michael R. and Ilkka A. Ronkainen, “Trends and Indications in International Business: Topics for Future Research,” Management International Review, April 2009. 1.7 Kotabe, Masaaki and Crystal X. Jiang, “Contemporary Research Trends in International Marketing: The 2000s,” in Alan Rugman, ed., Oxford Handbook of International Business, 2nd ed., Oxford: Oxford University Press, 2008, 447–501.

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2. Competition from Emerging Markets 193 2.1 Malik, Omar R. and Masaaki Kotabe, “Dynamic Capabilities, Government Policies, and Performance in Firms from Emerging Economies: Evidence from India and Pakistan,” Journal of Management Studies, 2009. 195 2.2 Gao, Gerald Y., Janet Y. Murray, Masaaki Kotabe, and Jiangyong Lu, “A ‘Strategy Tripod’ Perspective on Export Behaviors: Evidence from Domestic and Foreign Firms Based in an Emerging Economy,” Journal of International Business Studies, 39, 2009.

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2.3 Aulakh, Preet S., Masaaki Kotabe, and Hildy Teegen, “Export Strategies and Performance of Firms from Emerging Economies: Evidence from Brazil, Chile, and Mexico,” Academy of Management Journal, 43 (3), 2000, 342–361.

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2.4 Aulakh, Preet S. and Masaaki Kotabe, “Institutional Changes and Organizational Transformation in Developing Economies,” Journal of International Management, 14 (September), 2008, 209–216.

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3. Marketing Mix 3.1 Dimofte, Claudiu V., Johny K. Johansson, and Ilkka A. Ronkainen, “Cognitive and Affective Reactions of U.S. Consumers to Global Brands,” Journal of International Marketing, 16, 4, December 2008.

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3.2 Czinkota, Michael R. and Masaaki Kotabe, “Entering the Japanese Market: A Reassessment of Foreign Firms’ Entry and Distribution Strategies,” Industrial Marketing Management, 29, November 2000, 483–491.

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3.3 Swan, K. Scott, Masaaki Kotabe, and Brent B. Allred, “Exploring Robust Design Capabilities, Their Role in Creating Global Products, and Their Relationship to Firm Performance,” Journal of Product Innovation Management, 22, 2, March 2005, 144–164.

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3.4 Clark, Terry, Masaaki Kotabe, and Dan Rajaratnam, “Exchange Rate Pass-Through and International Pricing Strategy: A Conceptual Framework and Research Propositions,” Journal of International Business Studies, 30, Second Quarter, 1999, 249–268.

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3.5 Gençtürk, Esra F. and Masaaki Kotabe, “The Effect of Export Assistance Program Usage on Export Performance: A Contingency Explanation,” Journal of International Marketing, 9, 2, 2001, 51–72. 459 4. Global Sourcing and Supply Chain Management 4.1 Czinkota, Michael R., “An Analysis of the Global Position of U.S. Manufacturing,” Thunderbird International Business Review, October 2003: 505–519.

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4.2 Kotabe, Masaaki, Michael J. Mol, and Sonia Ketkar, “An Evolutionary Stage Model of Outsourcing and Competence Destruction: A Triad Comparison of the Consumer Electronics Industry,” Management International Review, 48, 1, 2008, 65–93.

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4.3 Kotabe, Masaaki, Michael J. Mol, and Janet Y. Murray, “Outsourcing, Performance, and the Role of E-Commerce: A Dynamic Perspective,” Industrial Marketing Management, 37, 1, 2008, 37–45.

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4.4 Murray, Janet Y., Masaaki Kotabe, and Joe Nan Zhou, “Strategic Alliance-Based Sourcing and Market Performance:

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Evidence from Foreign Firms Operating in China,” Journal of International Business Studies, 36, 2, March 2005, 187–208.

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5. Emerging Issues 5.1 Czinkota, Michael R., Gary A. Knight, Peter W. Liesch, and John Steen, “Positioning Terrorism in Management and Marketing: Research Propositions” Journal of International Management, 11, 2005, 581–604.

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5.2 Czinkota, Michael R., David A. Grossman, Rajshekhar G. Javalgi, and Nicholas Nugent, “Foreign Market Entry Mode of Service Firms: The Case of U.S. MBA Programs,” Journal of World Business, forthcoming.

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5.3 Czinkota, Michael R., “How Government Can Help Increase U.S. Export Performance: Testimony Before the House Committee on Small Business.”

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5.4 Kotabe, Masaaki and Crystal X. Jiang, “Three Dimensional: The Markets of Japan, Korea, and China are Far from Homogeneous,” Marketing Management, 15, 2, 2006, 39–43.

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5.5 Kotabe, Masaaki, Srini S. Srinivasan, and Preet S. Aulakh, “Multinationality and Firm Performance: The Moderating Role of R&D and Marketing Capabilities,” Journal of International Business Studies, 33, 1, 2002, 79–97.

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Index

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The Future of Global Business: A Reader Edited by Michael R. Czinkota and Ilkka A. Ronkainen Global Business: Positioning Ventures Ahead Michael R. Czinkota and Ilkka A. Ronkainen This list matches the chapters in Global Business: Positioning Ventures Ahead with the readings found in this book.

Chapter 1: The Global Imperative 1.1 Czinkota, Michael R. and Ilkka K. Ronkainen, “An International Marketing Manifesto” 1.2 Czinkota, Michael R. and J. Samli “The Remarkable Performance of International Marketing in the Second Half of the 20th Century” Chapter 2: Establishing the Context 2.1 Malik, Omar R. and Masaaki Kotabe, “Dynamic Capabilities, Government Policies, and Performance in Firms from Emerging Economies: Evidence from India and Pakistan” 2.3 Aulakh, Preet S., Masaaki Kotabe, and Hildy Teegen, “Export Strategies and Performance of Firms from Emerging Economies: Evidence from Brazil, Chile, and Mexico” 2.4 Aulakh, Preet S. and Masaaki Kotabe, “Institutional Changes and Organizational Transformation in Developing Economies” 3.5 Gençtürk, Esra F. and Masaaki Kotabe, “The Effect of Export Assistance Program Usage on Export Performance: A Contingency Explanation” Chapter 3: Doing Your Homework on Global Markets 1.5 Czinkota, Michael R., “International Information Cross-Fertilization in Marketing: An Empirical Assessment”

1.7 Kotabe, Masaaki and Crystal Jiang, “Contemporary Research Trends in International Marketing: The 2000s” 5.3 Czinkota, Michael R., “How Government Can Help Increase U.S. Export Performance; Testimony Before the House Committee on Small Business” Chapter 4: Getting There with Customers and Suppliers 3.2 Czinkota, Michael R. and Masaaki Kotabe, “Entering the Japanese Market: A Reassessment of Foreign Firms’ Entry and Distribution Strategies” 3.3 Swan, K. Scott, Masaaki Kotabe, and Brent Allred, “Exploring Robust Design Capabilities, Their Role in Creating Global Products, and Their Relationship to Firm Performance” 4.3 Kotabe, Masaaki, Michael J. Mol, and Janet Y. Murray, “Outsourcing, Performance, and the Role of E-Commerce: A Dynamic Perspective” Chapter 5: Creating a Global Presence 2.2 Gao, Gerald Y., Janet Y. Murray, Masaaki Kotabe, and Jiangyong Lu, “A ‘Strategy Tripod’ Perspective on Export Behaviors: Evidence from Domestic and Foreign Firms Based in an Emerging Economy” 4.1 Czinkota, Michael R., “An Analysis of the Global Position of U.S. Manufacturing” 4.4 Murray, Janet Y., Masaaki Kotabe, Joe Nan Zhou, “Strategic Alliance-Based Sourcing and Market Performance: Evidence from Foreign Firms Operating in China” 5.2 Czinkota, Michael R., David A. Grossman, Rajshekhar (Raj) G. Javalgi, Nicholas Nugent, “Foreign Market Entry Mode of Service Firms: The Case of U.S. MBA Programs” Chapter 6: Making Communication Happen 1.3 Czinkota, Michael R., “Freedom and International Marketing: Janis Joplin’s Candidacy as Patron of the Field”

Chapter 7: Negotiating Cultural Chasms 5.1 Czinkota, Michael R., Gary A. Knight, Peter W. Liesch, and John Steen, “Positioning Terrorism in Management and Marketing: Research Propositions” Chapter 8: Positioning the Product and Brand 1.4 Czinkota, Michael R., “Academic Freedom For All in Higher Education: The Role of the General Agreement on Trade in Services” 3.1 Dimofte, Claudiu V., Johny K. Johansson, and Ilkka A. Ronkainen, “Cognitive and Affective Reactions of U.S. Consumers to Global Brands” 5.4 Kotabe, Masaaki and Crystal X. Jiang, “Three Dimensional: The Markets of Japan, Korea, and China are Far from Homogeneous” 5.5 Kotabe, Masaaki, Srini S. Srinivasan, and Preet S. Aulakh, “Multinationality and Firm Performance: The Moderating Role of R&D and Marketing Capabilities” Chapter 9: Making Money 3.4 Clark, Terry, Masaaki Kotabe, and Dan Rajaratnam, “Exchange Rate Pass-Through and International Pricing Strategy: A Conceptual Framework and Research Propositions” 4.2 Kotabe, Masaaki, Michael J. Mol, and Sonia Ketkar, “An Evolutionary Stage Model of Outsourcing and Competence Destruction: A Triad Comparison of the Consumer Electronics Industry” Chapter 10: Discovering and Using Trends in International Business 1.6 Czinkota, Michael R. and Ilkka A. Ronkainen, “Trends and Indications in International Business: Topics for Future Research”

About the Editors

Michael R. Czinkota Michael R. Czinkota presents international business and marketing issues at the Graduate School and the Robert Emmett McDonough School of Business at Georgetown University and the Birmingham Business School in the United Kingdom. He has held professorial appointments at universities in Asia, Australia, Europe, and the Americas. Dr. Czinkota served in the U.S. government as Deputy Assistant Secretary of Commerce. He also served as head of the U.S. Delegation to the OECD Industry Committee in Pars and as senior advisor for Export Controls. His background includes ten years of private-sector business experience as a partner in a fur trading firm and in an advertising agency. His research has been supported by the U.S. government, the National Science Foundation, the Organization of American States, and the American Management Association. He was listed as one of the three most published contributors to international business research in the world by the Journal of International Business Studies and has written a number of books. Dr. Czinkota was born and raised in Germany and educated in Austria, Scotland, Spain, and the United States. He studied law and business administration at the University of Erlangen-Nürnberg and was awarded a two-year Fulbright Scholarship. He holds an MBA in international business and a Ph.D. in logistics from the Ohio State University.

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Masaaki Kotabe Masaaki Kotabe holds the Washburn Chair Professorship in International Business and Marketing, and is Director of Research at the Institute of Global Management Studies at the Fox School of Business at Temple University. Prior to joining Temple University in 1998, he was Ambassador Edward Clark Centennial Endowed Fellow and Professor of Marketing and International Business at the University of Texas at Austin. Dr. Kotabe also served as the Vice President of the Academy of International Business in the 1997–1998 term. He received his Ph.D. in Marketing and International Business at Michigan State University. Dr. Kotabe teaches international marketing, global sourcing strategy (R&D, manufacturing, and marketing interfaces), and Asian business practices at the undergraduate and MBA levels and theories of international business at the Ph.D. level. He has lectured widely at various business schools around the world, including Austria, Germany, Finland, Norway, Sweden, Brazil, Colombia, Mexico, China, Japan, Korea, Indonesia, and Turkey. For his research, he has worked closely with leading companies such as AT&T, Kohler, NEC, Nissan, Philips, Sony, and Ito-Yokado (parent of 7-Eleven stores), and served as advisor to the United Nations’ and World Trade Organization’s Executive Forum on National Export Strategies. Dr. Kotabe has written many scholarly publications. He serves as the Editor of the Journal of International Management, and also has served on the editorial boards of the Journal of Marketing, the Journal of International Business Studies, the Journal of International Marketing, the Journal of World Business, the Journal of the Academy of Marketing Science, Advances in International Management, the Journal of Business Research, and the Thunderbird International Business Review, among others. He also serves as an Advisor to the Institute of Industrial Policy Studies (IPS) National Competitiveness Report Ilkka A. Ronkainen Ilkka A. Ronkainen is a member of the faculty of marketing and international business at the School of Business at Georgetown University. He has received the undergraduate teaching and research awards twice, and in 2001 and 2008, the International Executive MBA program at Georgetown recognized him as the Outstanding Professor of

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the Year. He is the founder and director of the MSB’s summer Hong Kong program. He has been a member of the Georgetown University Faculty Senate since 1992. Dr. Ronkainen serves as docent of international marketing at the Helsinki School of Economics. He was visiting professor at HSE during the 1988–1997 and 1991–1992 academic years and continues to teach in its Executive MBA, International MBA, and International BBA programs. He is co-author of two key college texts, International Marketing, 9th edition (Cengage) and International Business, 8th edition, Wiley. Dr. Ronkainen holds a Ph.D. and a Master’s degree from the University of South Carolina as well as an M.S. (Economics) degree from the Helsinki School of Economics.

Section 1

Role of Research in International Marketing

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Chapter 1.1

An International Marketing Manifesto Michael R. Czinkota and Ilkka A. Ronkainen

INTERNATIONAL MARKETING WORKS Today might be called the triumph of international marketing. There seems finally to be proof that planned economies are less efficient than market economies. Governments all over the world are encouraging market-based activities. The abolishment of state monopolies, the privatization of state-owned companies, the opening of national economies toward the world market, and the ongoing introduction and enforcement of rules and laws to ensure competitive market conditions are being witnessed. As a change agent, international marketing has brought important benefits to nation-states, firms and their employees, and customers. During the past 30 years, the value of global trade has risen from $200 billion to more than $7.6 trillion (World Trade Organization 2002). The growth rate of marketing between countries has consistently exceeded average domestic growth rates (International Monetary Fund 2000). The fastest globalizing nations have enjoyed rates of economic growth up to 50% higher than those that have integrated into the world economy more slowly (Global Business Policy Council 2000). Linked to this growth, these same countries have also achieved relatively greater gains of political freedom, greater increases in life expectancy, higher literacy rates, and better overall standards of living.

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Firms have benefited substantially from global marketing expansion. With wider market reach and many more customers, firms in the international market produce more and do so more efficiently than their domestic-only counterparts. As a result, international firms simultaneously achieve lower costs and higher profits both at home and abroad. Market diversification and the stability arising from firms’ lack of dependence on any particular market are other positive effects. Firms also learn from their competitors, which often makes their managers more sensitive and responsive to differing environments, thus preparing them for change. In addition, their recruiting can expressly seek out and develop the best talent from all nationalities (Theuerkauf, Ernst, and Mahini 1996). The cumulative effect of these dimensions is major. Research has shown that firms of all sizes and in all industries that engage in international marketing outperform their strictly domestic counterparts. They grow more than twice as fast in sales and earn significantly higher returns on equity and assets (Taylor and Henisz 1994). Workers also benefit from international marketing activities. International firms of all sizes pay significantly higher wages than domestic-only firms (Business America 1996). Because of their greater profitability and longevity, workplace security is also substantially greater for employees who work in plants of international marketers than for those who work in local firms (Richardson and Rindal 1996). Compelled by global media scrutiny, international firms have become greater practitioners of social responsibility—much to the benefit of their employees around the world. Never before have workers benefited to such a degree from benevolent rules implemented by corporations headquartered far away from their locale. For example, the global working conditions set by Nike, for its subcontractors, or by Kmart, for its suppliers, are unique in the annals of global commerce. Consumers are the greatest beneficiaries of all. They are offered an unprecedented degree of product availability and choice. Furthermore, as a result of international competition, the prices of these products are usually low and offer a better quality of life to a broad spectrum of individuals. Rising incomes have ensured leaps in purchasing power. For the first time in history, international goods and service availability has gone beyond the luxury of the elite and has become, especially in emerging markets, the reasonable expectation of the masses.

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Advocates and activists have had their causes benefit substantially from the spread of international marketing. In 1999, business, labor, and government representatives from 173 countries affirmed core labor standards as fundamental human rights, including freedom of association and the right to organize and bargain collectively. Included was also a call to eliminate child labor, forced labor, and employment-related discrimination (Mazur 2000). International marketing linkages have also resulted in the emergence of pressure points for activists, which has led to the introduction and implementation of new concepts. The acceptance of “fair trade” and “living wage” requirements has achieved substantial increases in the incomes of the poorer participants in international trade flows (The Economist 2001).

THE FIELD STAGNATES In spite of these achievements, the academic field of international marketing bears up unsteadily under the weight of these laurels. Some researchers doubt whether the insights they gain from studying and working with other marketing systems broaden their own horizons and increase their abilities to explain marketing phenomena (Douglas 2001). Many practitioners ignore the academic pronouncement of globalization and still refuse to participate in the global market—judging either the market to be too dangerous or themselves too unprepared. This even applies to the most technologically advanced firms. For example, in the United States, most e-tailers do not accept orders from outside their home market, and more than 55% of U.S. web-merchants do not even ship to Canada (Putzger 2000). International marketing academics are not deluged by great attention from policymakers. Few marketers are offered chairs at the table in international negotiations, and the writings of international marketers are not often sufficiently part of any great readings package for policymakers (Czinkota 2000a). Most visible is the discontent of consumers. The “Battle of Seattle” and the subsequent confrontations in Washington, D.C.; Davos and Geneva, Switzerland; Quebec, Canada; and Genoa, Italy have alerted the world to the displeasure vocalized by a variety of groups (Kobrin 2001). Simplistic populist messages have turned globalization into a derogatory term and

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are swaying the sentiments of the general public. For example, after the Seattle summit, a survey found that 52% of the respondents were sympathetic toward the protestors even though they may have been hard-pressed to explain the goals of the protest (BusinessWeek Online 1999). Within the United States, many people have come to believe that international marketing undermines U.S. labor and living standards. Outside of the United States, international marketing and its agents, the marketers, are derided as exploiters, destroyers, and Americanizers (see, e.g., Barnet and Cavanagh 1994; Klein 2000). Papers by experts are derided as planning for economic rape and pillage; their speeches and meetings are disrupted. International meetings are being shortened and held at inaccessible locations, giving the public impression of a gathering of fiends in the dark. Proponents of international marketing talk about retreat and introspection even though opponents do not offer any coherent alternative economic or social approaches. Is this an example of the classic Sun Tzu strategy in which the victorious general only attacks already defeated armies? Has international marketing already begun its demise? We think not. We believe that the best is yet to come for international marketing. However, it will take new thinking and new actions by researchers to propel the field forward again. International marketing academics need to be the guardians who separate fact from fiction in policy, practitioner, and consumer discussions. Qualified not by weight of office but by expertise, thoughtfulness, and knowledge (rather than emotions), international marketing researchers must be the guarantors and guides toward free and open markets. Antiglobalization activists deride international marketing but seem to have difficulties articulating what they are really for. At the same time, government and business arguments in favor of globalization are often vague and based on an abstract long-term vision. No wonder ordinary citizens are left confused, skeptical, and ill-informed, which may lead them to make poor decisions. Given that the public in general does not have a great deal of interest toward international and trade matters, the need is great for outspoken comment on the transformational and uplifting capabilities of market forces. This is a task for marketing scholars. Two examples can highlight this imperative. Antiglobalizers have argued (1) that globalization equals Americanization and (2) that globalization leads to global brands’ hegemony and, therefore, global

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uniformity. In practice, it is evident that cultural imperialism does not sell. In nearly every television market of the world, local production has grown at the expense of imports (The Economist 2002). More significantly, with the increased facilitation of global production companies, local producers and products have penetrated markets beyond their domestic ones. Although global brands may have gained worldwide prominence in terms of headlines, they constitute only a small percentage of a global marketer’s sales in any given market.

. . . THE DEEPER THEY FALL The ongoing growth and success of international marketing cannot be taken for granted. As the events of September 11, 2001, show, the international landscape can change with the impact of tectonic-plate adjustment. Even the very essence of international exchange may be called into question. History demonstrates that international marketing has not always persisted in spite of its proven benefits. For example, in 1896, the Empress Dowager Tz’u-hsi, to finance the renovation of her summer palace, impounded government funds that had been designated for China’s shipping and its Navy. As a result, China’s participation in world trade came almost to a halt. In the subsequent decades, deprived of its means to market internationally, China operated in virtual isolation, without transfer of knowledge from the outside, without major inflows of goods, and without the innovation and productivity increases that result from exposure to international trade. During the 1930s, the turning away from international marketing came through the Smoot-Hawley Act, which raised U.S. duties to reduce the volume of imports into the United States in the hopes that this would restore domestic employment. However, the result was an increase of duties and other barriers to imports by most other trading nations as well. These measures were key contributing factors in the subsequent worldwide depression and the collapse of the world financial system, which in turn set the scene for World War II (Czinkota and Ronkainen 2002). As global marketing advances to emerging markets, new challenges emerge and old ones may be magnified. For example, international

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expansion typically results in a more widespread use of intellectual property (Czinkota and Ronkainen 1997). More customers should then lead to an increase in the value of such property. However, resource constraints combined with popular demands and political power have delivered different scenarios. Entry into some markets may actually lead to value destruction. The government-induced price revisions of AIDS drugs in Latin America and South Africa and of Cipro, the anthrax antidote, have revealed new problems, which may yet fan local flames into global conflagrations. The present-day worst-case scenario is frightening. Some people view globalization as a force of oppression, exploitation, and injustice. Might not then extreme actions, such as anarchism and terrorism, be justifiable to correct for its impacts? Successful international marketing scholarship can perhaps become a bulwark against terrorism. Such work does not need to be perceived as apologetic for business interests in promoting international trade. International marketing may well become a key remedy for the world’s poor, because scholars should help devise creative strategies for the poor to access the world marketplace.

SEVEN PROPOSITIONS Given the precarious experiences by the international marketing field in spite of the substantial global improvements due to international marketing activities, steps undertaken by international marketers in academia must be considered to ensure the further progress of and ongoing contribution by the field. Such progress is not viewed narrowly to benefit the academic high priests of international marketing and their acolytes, but rather it is considered imperative in order to have input and guidance for further improvements in the global economy and in the lives of people. Here, we present propositions for the strengthening of the future role of international marketing. We hope that they will lead to introspection as well as to an open and frank exchange of ideas with a subsequent renaissance of international marketing.

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1 Remember the Roots and Purpose of the Field International marketing is a practical field. It is based on the premise that international marketing transactions can be carried out more effectively, that there are many needs that have been left unsatisfied worldwide, and that the field of international marketing can improve the quality of life of individuals. The field requires that its proponents visit with people, institutions, and companies to observe, talk, and understand their activities. The central role of people in international marketing subjects the field to all the vagaries inherent in social sciences. Research gains are not only what researchers can learn about other systems but also what they are forced to learn about their own system in order to understand what happens elsewhere (Cox 1965). With this approach, junior researchers do not need to compromise the requirements placed on them for detailed research at the expense of seeing the bigger picture. Rediscovery of this truth may force some international marketing researchers to shed their “lab coat” syndrome. For some, complexity has become fashionable and esoteric, and analytical tools have become the drivers of research content. On occasion, researchers talk more about models than about people, substitute tools for insight, and examine printouts instead of market participants. Although some international marketers may have chosen the academic profession in a repressed desire to become hard scientists such as physicists or chemists, it is unlikely that a squirt of one compound, a dash of another liquid, or an increase in pressure will precisely manifest itself in international marketing outcomes. It is critical to develop ways for international marketing to become more accepted by the academic community for its past efforts and the contributions it can make in the future. The field of finance achieved such acceptance through its association with economics; international marketing may want to expand its roots by extending its association with international trade. Perhaps, in the future, international marketing work may then make a scholar eligible for the Nobel Prize. At the same time, senior scholars have the responsibility not only to develop knowledge but also to help grow journals in terms of acceptance and respect. By placing their best work in the internationally oriented outlets, scholars can perform an important service to the profession.

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2 Resist the Temptations of Overspecialization In an academic era of publish or perish, publishing in North America mainly refers to academic journals of the highest order. To avoid becoming academic equivalents of day laborers, international marketing researchers often feel the need to rapidly produce as many top-tier “hits” in as short a time as possible. Top-tier journals, however, together with their editors and reviewers, often tend to adhere to traditional research orthodoxies. Such orthodoxies may involve specific research methodologies, the citation of domestic (e.g., U.S.) literature, and the analysis of problems, which are considered locally important. We do not believe that such local-content requirements (Maruyama 1991) are perversely or conspiratorially designed by the gatekeepers to publications, but we recognize how easy it is to fall into that trap. The problem of publishing is made even more acute by the challenges of conducting research in an international setting, due to data compatibility, definitional equivalence, timing, or funding difficulties. International research typically introduces more noise into data sets. Editors and reviewers need to appreciate and accept a responsible adaptation of evaluative criteria if there is to be more knowledge development and dissemination in the international marketing field. The expectations set by journals and their evaluators have forced many international marketing academics to become highly specialized special specialists. They often investigate narrower and narrower aspects of problems with tools that are ever increasing in their quantitative sophistication, but in which many unrealistic conditions must be met for the model to work. Many times the results are uninspiring for practitioners or policymakers. The end results are insights that are decreasingly useful for the discipline or for its social structure. Work in the field must again become more broad-based and be linked to the practice of international marketing. It is important that a discipline have a communication venue in which new approaches, concepts, frameworks, and ideas can be published without the constraints imposed by rigid establishment journals. Thinkers must be allowed to speculate, tease, bully, or simply visualize and then be able to disseminate their thoughts.

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3 A New Paradigm and New Methods There is the emergence of a new approach to furthering the advance of international marketing. Historically, the “case” period can be called an early important approach to international marketing research. Researchers analyzed the activities of one particular firm in great detail and then attempted to generalize the findings to other firms, the industry, or the discipline. This case era was supplemented, and some would even say replaced, by the “numeric” era. Now the goal became the accumulation of quantitative data, which were subjected to rigorous analysis. The goal was to use statistical significances to build stepping-stones for the advancement of knowledge. Taken in conjunction with other tools of analysis and insight, the goal was quite praiseworthy. However, for some, the actual insights obtained were of little concern. Rather, the use and application of new tools became the only issue that mattered— with the motto, “Have tool, will apply!” Although useful in bringing a scientific perspective to international marketing research, in today’s complex times, the singular focus on such an approach has become too limiting. In our view, today’s new paradigm is “boundary-spanning eclecticism.” Interdependence requires the recognition of linkages. Progress in international marketing makes it increasingly important to bring together various perspectives from a variety of disciplines to truly understand interactions and consequences. Such an eclectic approach in the international marketing field needs to cover different areas such as jurisprudence and cultural anthropology. In addition, the new eclecticism needs to cover a wide variety of fields and include, for example, history, anthropology, or political science that reflects both qualitative and quantitative insights. Given the newness of some of these linkages and the need to understand and interpret them, this boundary-spanning eclecticism may be today’s version of what Bartels (1988) labeled the “period of discovery” by early marketing scholars in 1900–10 during the formative years of marketing. Perhaps the celebration of a centennial reflection of marketing will lead to old paths not lately traveled. The new eclecticism needs to use and define time lines and differentiate between the short-term and long-term outcomes. It also must simultaneously address the issues from the perspective of the key

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constituencies—business, consumers, and governments—and do so over a growing variety of countries. In addition, the different subcomponents of the business discipline itself need to become reappreciated in their interrelationships so that for example, the analyst fully understands the repercussions that changing exchange or interest rates have on the international marketing domain. The proof in the pudding? International marketing academics should (again) become comfortable in teaching a broadly focused “Introduction to Global Business” course. International marketing scholars should join forces periodically with colleagues in other disciplines beyond the conventional ones. Areas such as genetics, health care, history, and linguistics should be considered. By definition, this would also mean becoming familiar with the literature and attending appropriate annual meetings in these disciplines. True cross-fertilization may then result in the application of medical theories of pandemics and resistance to the development of theory for the global diffusion of goods or the application of sociolinguistics to international negotiations. Becoming more interdisciplinary will also be the raison d’être for outlets such as the Journal of International Business Studies.

4 Look to the World In the international marketing field, the world is our oyster. Editors, recruiting committees, and grant-giving organizations should look at the world rather than their comfortable confines as their suppliers of talent and knowledge. Journals need to look for content not just among their traditional constituents but also among the great minds abroad. It must be understood that English, albeit the language of many international marketing transactions, is not the only storehouse of knowledge. It pays to heed the historic lesson that power waxes and wanes depending on the support, input, and actions of allies. When walking the dusty roads of Baghdad, the congested streets of Rome, or the grassy plains of Carthage, one remembers that these locations were once the economic and political leaders of the world. Although the cradle of marketing may indeed be in the United States, significant contributions to the practice and theory of international

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marketing have been made throughout the world as the discipline has matured. An examination of the origins of today’s academic contributors to the international marketing discipline shows that many of them hail from the Nordic Countries, Central Europe, Turkey, China, India, and Japan. For example, many of the innovations and new thinking in retailing have European roots. The emergent U.S. empire should joyfully acknowledge its magnetism for contributions from around the globe. It should also proudly highlight its emphasis on the protection of all players and its reliance on market forces rather than on the rapaciousness typical of earlier superpowers. Today, if there is a demand by the superpower, there is true exchange rather than simple taking. If the practices of centuries past are considered, one current example of comparative advantage would be the burial of U.S. nuclear waste in Africa rather than the western United States. Academics in the United States in particular should build and maintain contacts with colleagues in other countries, learn other languages, and scrutinize nondomestic literature. After all, it was not long ago when every chemist was expected to know German and every painter had to have been to Italy. Academics dealing with international marketing should also be encouraged to be truly international in their outlook. Listening to the world will make the field better, and doing so in their own tongues will make the sounds so much more understandable. In this context, it should be remembered that the search engines, which have become so instrumental to academic research, tend to pick up only a small portion of actual work carried out and are still heavily biased toward English language publications. Just as multinational corporations should have substantial international board membership, academic journals should include more members from abroad on their review boards. Such membership tends to have an effect on the scope of activities. For example, the European Journal of Marketing, which carries articles from the broadest national array of authors, boasts 57% of its review board members from outside of the United Kingdom. The non-U.S. share for the Journal of Marketing is a mere 4% (Czinkota 2000b). International marketing would also benefit from a regularly published volume (or a special issue) of articles not originally published in English from language areas such as Germany, Northern Europe, and Japan.

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5 Maintain the Dialogue International marketing is principally a dialogue between marketers and their international constituents. Key constituents are consumers, the business community, and policymakers. The international marketing researcher must reach out to them not only to describe phenomena but also to prescribe meaningful action. All three of these constituencies are unlikely to actively search for pearls of academic wisdom, the existence of which is not necessarily plain to them. Therefore, academics should not shy away from making available an explanation, condensation, and simplification of their research findings. For example, it may be useful to consider distributing summaries of research implications through editorials or electronic means. It also must be clearly indicated what portions of findings are relevant to which community. Subtle hints or slight intonations will not bring out the hidden gem and will only deprive international marketing researchers of the opportunity to contribute through their work to a more prosperous, safe, and responsive international marketplace. Businesses, consumers, and policymakers all need research insights, just as international marketers need them. However, they may be willing to access such insights only through media particular to them. We know that knowledge not communicated rapidly loses its value. Either it finds no application or it may be lost all together. Let us disseminate knowledge! On the policy side, the importance of communications with constituents and of framing the terminology can be highlighted by the fate of the “fast-track” trade authority sought by President Clinton. Presidents of the United States for decades have had such trade negotiation authority that permits the negotiation of international trade agreements, which Congress could then approve or reject but not change. Lately, however, public misperceptions stirred on by trade foes interpreted the term to mean a railroading of consumers and workers rather than the key to long-term economic benefits. As a result, the request for such authority was denied three times by the U.S. Congress. The Bush administration was forced to change the term to “trade promotion” authority for Congress to even consider and approve it. It is also imperative to communicate much more with the field’s critics (Williams 1984). These opponents are a constituency that

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must be brought into the tent. Not only are they a source of ideas for research, but they are also a key target group to work with in explaining the benefits of market forces. It is hard to improve the world by pulling on both ends of the rope. Either the rope breaks, or one side (temporarily) eats dirt. Pulling together is far more efficient than a tugof-war. Thoughtful critics have already acknowledged the worth of trade versus aid and are shying away from the McDonald’s-trashing approach (The Washington Post 2002).

6 Work Also with Those Who Place or Show There is an innate human tendency to focus on and celebrate winners. Nonetheless, not everyone touched by international marketing will come out a winner. International marketing relies heavily on market forces, which in turn implies a competitive race for limited resources. In any competition, some will arrive first, while others will only place or show. Working with the ones that benefit from increased resources is usually more fun than standing at the side of the ones who, once again, have missed out. However, to maintain its acceptance by the world community at large, the international marketing field must increase its focus on those who are less likely to emerge victorious from the battle of competition. These firms can eventually become global contenders or out-localize their big-name competitors (Ger 1999). These consumers and workers can become major targets of opportunity be it only because of their sheer numbers. There is a future in working with the unserved majority (Prahalad and Hart 2002). Such a focus needs to help, learn, guide, and suggest and is perhaps best accompanied by a good dosage of “tough love.” Those who clamor that the rising tide is expected to lift all boats must understand that they are, at least in part, responsible for their own boats. Have they checked their vessel for leakage, for crew training, and for a working sail? Help should also include the identification of trade-offs between current needs and new sources of comparative advantage. For example, developing nations may not, for reasons of pandemic infection and lack of resources, be able to honor and pay for intellectual property rights inherent in pharmaceuticals. There may be reasons and special conditions for using

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an escape clause, but if countries expect to receive ongoing intellectual property improvements, they need to consider nontraditional forms of compensation rather than simplistic expropriations. This way, perhaps AIDS drugs will someday be paid for with the protection of the rainforest. Positive solutions must also be found to directly assist the battleweakened participants in global competition. It should be part and parcel of an international marketer’s academic work to consider linkages between policy actions and their effect on disenfranchised communities. For example, should the dumping penalties paid be absorbed by the black hole of a general treasury, or should these funds be used to assist those dislocated by dumped merchandise? Should fees paid for preferred treatment in the work visa granting process be used to strengthen the budget of an agency, or should these moneys help create more domestic workers in that desirable employment category? Should AIDS prevention and treatment campaigns not highlight that AIDS is bad for business and thus encourage businesses to extend health care to their workers (Fréchette 2002)? If more such linkages can be built, the benefits of international marketing not only will be better understood but also will become more acceptable to those who have been exposed to the two-faced, Janus-like effects of the field. Despite inherently more challenging circumstances, international marketing scholars should be the ones to initiate projects dealing with emerging and developing markets and try to work with colleagues in these countries. This way, they can offer an inside perspective rather than an outside view on the issues. Ultimately, the goal for international marketers is not only to apply existing frameworks to new situations but also to develop new frameworks from the insight that they garner from working in different and diverse environments. These frameworks can then be used to develop new general theories of business.

7 Profess Expertise Professors are the ones who have chosen to profess, which means to make an open or public declaration of their views, to make protestations, or to affirm and avow their perspectives (Simon and Schuster 1972). All

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too often, there is an unwillingness of today’s academics to publicly step up and separate right from wrong in their field. It often appears as if international marketing academics assume that everyone is keenly aware of the benefits of free trade and exchange. However, not all people are concerned or have had thorough academic training in international marketing. Ignorance and apathy remain key enemies of the truth. Arguments from university settings may often be dismissed as coming from individuals who are not relevant in the practical sense and who bear no responsibility for their statements. Real-life marketing managers are held accountable by their constituents, a standard that does not always hold for international marketing professors. Such accountability can only increase if professors seek out positions of responsibility, be it as board members in associations, as advisors to local or even national governments, or as consultants to business. To get to the critical hub linking academia, practice, and public policy, international marketing scholars must do their share. Memberships on boards can be earned through speeches, articles in newsletters, and other constructive contributions. It is necessary to provide cogent, concise, and easily understood information on key issues. For example, there needs to be a widespread understanding of why a reduction of barriers to international marketing is important and what the benefits are. The many misconceptions that abound in the international marketing field must also be addressed and removed. For example, many believe that the World Trade Organization has the power to override domestic laws. This is not the case. Nonetheless, many people believe that this is so—just as many believe in the existence of black helicopters by the United Nations. Similarly, survey research has indicated that in 1981, 12% of U.S. workers were fearful of losing their jobs. In 2000, that fear of job loss had more than tripled, even though unemployment had declined from well over 7% in 1981 to just 4% in 2000 (Hills 2001). Globalization is blamed for increases in poverty, and yet the number of people in extreme poverty has declined from 20% 25 years ago to less than 5% today (Sala-i-Martin 2002). International marketing academics should be proud of their field and should be cogniscent that they may well be the only thin three-striped black line able to keep apart fact, fiction, and emotion. Although it is unlikely that researchers can ever dictate decisions, they should be the ones providing the factual input, so that decisions, however they

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may come out, have at least a chance of being grounded in reality. For example, in times of global activism, international marketing scholars have a role in assessing both the responsibilities of the companies and the impact that codes of conduct and certifications have on markets and consumers (Gereffi, Garcia-Johnson, and Sasser 2001). Just imagine, in days of future International Monetary Fund demonstrations, academics could become the original cast members of an international marketing reality show on television.

IN CONCLUSION Many academics are disappointed in the lack of appreciation of international marketing by the world. However, worldly reaction clearly indicates that international marketing academics have also fallen short of what the world expects of them. Though perhaps disturbing to some, for marketers who thrive on change, this is a key opportunity. There are new mountains to climb and new frontiers to cross. International marketing researchers have the opportunity to shape activities so that they can continue to be at the center of social change and become the architects of improvements in the quality of life. If international marketing researchers manage to do so, they can be assured that for their discipline, the best is yet to come.

ABOUT THE AUTHORS Michael Czinkota works at Georgetown University in Washington D.C. and holds the chair in International Marketing at the University of Birmingham in the U.K. He served in the U.S. government as Deputy Assistant Secretary of Commerce. He was born and raised in Germany, and educated in Austria, Scotland, Spain and the United States. His Ph.D. is from Ohio State University. [email protected] Ilkka Ronkainen works at Georgetown University in Washington D.C. and at the Aalto (Helsinki) School of Economics. He is the co-author of International Marketing (9th edition). He grew up in Finland, and holds a Ph.D. from the University of South Carolina. [email protected]

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ACKNOWLEDGMENTS The authors extend their appreciation to Juan Luis Colaiácovo, Masaaki Kotabe, John Ryans, and three anonymous JIM reviewers for their valuable comments.

REFERENCES Barnet, Richard J. and John Cavanagh (1994), Global Dreams: Imperial Corporations and the New World Order. New York: Simon & Schuster. Bartels, Robert (1988), The History of Marketing Thought. Columbus, OH: Publishing Horizons Inc. Business America (1996), “Letter from Secretary Michael Kantor,” 117 (9), 9. BusinessWeek Online (1999), “Global Growing Pains,” (December 22), (accessed April 21, 2001) [available at http://www.businessweek.com]. Cox, Reavis (1965), “The Search for Universals in Comparative Studies of Domestic Marketing Systems,” Marketing and Economic Development, Peter D. Bennett, ed. Chicago: American Marketing Association, 143–62. Czinkota, Michael R. (2000a), “The Policy Gap in International Marketing,” Journal of International Marketing, 8 (March), 99–111. Czinkota, Michael R. (2000b), “International Information Cross-Fertilization in Marketing: An Empirical Assessment,” European Journal of Marketing, 34 (12), 1305–14. Czinkota, Michael R. and Ilkka A. Ronkainen (1997), “International Business and Trade in the Next Decade: Report from a Delphi Study,” Journal of International Business Studies, 28 (4), 827–44. Czinkota, Michael R. and Ilkka A. Ronkainen (2002), International Marketing, 6th ed. Fort Worth, TX: Harcourt Inc., 32. Douglas, Susan P. (2001), “Exploring New Worlds: The Challenge of Global Marketing,” Journal of Marketing, 64 (January), 103–107. The Economist (2001), “Globalisation and Its Critics,” a survey of Globalization, (September 29), 3–30. The Economist (2002), “Think Local,” a survey of Television, (April 13), 12–14. Fréchette, Louise (2002), “Development Cannot Be Imposed from Outside,” speech given at Yale University, New Haven (April 3). Ger, Güliz (1999), “Localizing in the Global Village: Local Firms Competing in Global Markets,” California Management Review, 41 (4), 45–63. Gereffi, Gary, Ronie Garcia-Johnson, and Erika Sasser (2001), “The NGO-Industrial Complex,” Foreign Policy, 31 (July/August), 56–65. Global Business Policy Council (2000), Globalization Ledger. Washington, DC: A.T. Kearney. Hills, Carla (2001), “Getting Over the Fear of Free Trade,” The Globalist, (accessed April 3, 2002), [available at http://www.theglobalist.com].

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International Monetary Fund (2000), International Financial Statistics. Washington, DC: International Monetary Fund. Klein, Naomi (2000), No Logo: Taking Aim at the Bullies. New York: Picador USA. Kobrin, Stephen J. (2001), “Our Resistance is as Global as Your Oppression,” paper presented at the 2001 meeting of the International Studies Association, Chicago (February). Maruyama, Magoroh (1991), “Disciplinary Contents Requirement: Academic Non-Tariff Barrier in Interdisciplinary Communication,” Human Systems Management, 10 (2), 155. Mazur, Jay (2000), “Labor’s New Internationalism,” Foreign Affairs, 79 (January–February), 79–93. Prahalad, C.K. and Stuart L. Hart (2002), “The Fortune at the Bottom of the Pyramid,” Strategy and Business, 7 (First Quarter), 38–48. Putzger, Jan (2000), “On-line and International,” Journal of Commerce Weekly (November 13–19), 27–28. Richardson, J. David and Karin Rindal (1996), Why Exports Matter: More! Washington, DC: The Institute for International Economics and the Manufacturing Institute. Sala-i-Martin, Xavier (2002), “The Disturbing ‘Rise’ of Global Income Inequality,” Discussion Paper No. 0102–44, Department of Economics, Columbia University. Simon and Schuster (1972), Webster’s New Twentieth Century Dictionary, 2d ed. New York: Simon and Schuster. Taylor, Charles and Witold Henisz (1994), U.S. Manufacturers in the Global Marketplace, Report 1058. New York: The Conference Board. Theuerkauf, Ingo, David Ernst, and Amir Mahini (1996), “Think Local, Organize . . .?” International Marketing Review, 13 (3), 7–12. The Washington Post (2002), “New Faith in Free Trade” (April 11), E1, E14. Williams, Oliver (1984), “Who Cast the First Stone?” Harvard Business Review, 62 (September–October), 151–60. World Trade Organization (2002), “International Trade Statistics” (accessed February 13, 2002), [available at http:/www.wto.org].

Chapter 1.2

The Remarkable Performance of International Marketing in the Second Half of the 20th Century Michael R. Czinkota and A. Coskun Samli

INTRODUCTION Many peoples throughout history have gained preeminence in the world through their trade and exchange activities. Among them were the Etruscans, Phoenicians, Egyptians, Chinese, Spaniards, and Portuguese. All of them had a major effect on the flow of goods and distribution of wealth around the world. It has only been since the second-half of the twentieth century that these efforts have been accompanied by a systematic understanding of consumer needs, an organized consideration of customer satisfaction, an analysis of the responsiveness of supply and demand in conjunction with cultural diversity, and by methodological approaches to market entry, expansion and penetration. Thus, it is only for the past two generations that international marketing has emerged as a research discipline. Within this short time span, globalization has enabled international marketing practitioners and thinkers to live up to the claim of the ancient Greek philosopher Socrates, who stated “I am a citizen, not of Athens or Greece, but of the world.” We define

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globalization as “the increase in the frequency and duration of linkages between countries, leading to similarities in activities of individuals, practices of companies, and policies of governments” (Czinkota, 2002). This globalization enables international marketing to take place all around us, and to continuously offer new opportunities and challenges. Some might even call today the triumph of international marketing. There is clear proof at hand that economies driven by consumer demands are more efficient that those directed by the plans of bureaucrats. The fastest globalizing nations have enjoyed rates of economic growth up to 50 percent higher than those that have integrated into the world economy more slowly (Global Business Policy Council, 2000; Samli, 2002; Czinkota et al., 2004). Globalizing countries have also achieved relatively more gains in political freedom, and greater increases in life expectancy, literacy rates and overall standard of living. Many firms have benefited substantially from the global market. With wider market reach and many more customers, firms in the international market typically achieve simultaneously lower costs and higher profits both at home and abroad. The benefits of market diversification and the stability arising from a lack of dependence on any particular market are additional positive effects. International marketers now learn from their competitors around the globe and can access, recruit and develop the best talent from anywhere. The cumulative effect of all these dimensions is significant. Research has demonstrated that, if engaged in international marketing, firms of all sizes and in all industries were able to outperform their strictly domestic counterparts. They grow more than twice as fast in sales, and earn significantly higher returns on equity and assets (Taylor and Henisz, 1994). Indeed, for Japan, Germany and the USA there have been periods where the international sector provided the only economic growth. Workers benefit from the international marketing surge. International firms of all sizes pay significantly higher wages than strictly domestic firms. Encouraged by global media scrutiny, international firms have also become greater practitioners of social responsibility, much to the benefit of their employees around the world. Never before have so many benefited to such a degree from benevolent rules implemented by corporate headquarters.

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Consumers are the greatest beneficiaries of all. They receive an unprecedented degree of product availability and choice. The products offer a better quality of life to a broader spectrum of individuals, usually at low prices due to international competition. International marketing has made it possible that, for the first time in history, the availability of goods and services from around the globe has gone beyond the reach of the elite and has become, especially in emerging markets, a reasonable expectation for large portions of the population. In spite of all these apparent benefits bestowed by international marketing, however, both the discipline and practice face major challenges. Many practitioners refuse to participate in global markets, either judging them to be too risky or themselves too unprepared. For example, in the USA, most e-tailers do not accept orders from outside their home market, and many European firms on the web do not support sales outside of Europe. Some equate the benefits of international marketing with the siren songs that lured Odysseus’ sailors to ruin. International marketers stand accused of undermining advanced labor and living standards, exporting jobs, and exploiting, damaging or Americanizing the world. The academics representing the field are often unprepared to refute popular indictment in equally popular terms. Today, the field has its own academic journals and the second largest special interest group among the educators within the American Marketing Association. Nevertheless, academics are joining other specialties, and important subfields such as outsourcing and logistics, which could have brought major intellectual growth to the discipline, have been handed over to other fields. It almost appears as if past success achieved by international marketing has drained the field’s enthusiasm and exuberance, and risks converting it into an inward-looking, hesitant discipline which follows rather than leads. We propose to develop a brief overview of the shifts, changes and adjustments of international marketing that took place during the second-half of the twentieth century and their far-reaching economic benefits for society and individuals alike. The analysis presented here offers some lessons as to reasons for accomplishments, causes for misdirection, and an outlook for what the future may hold.

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A Chronology Table 1 presents a brief chronology of international marketing during the second-half of the twentieth century. We will look at four distinct periods—three to carry us through today, and one oriented towards the future. The periods we identify reflect the key progress that has been experienced in international marketing and its impact on macromarketing’s status. Our focus was on capturing the shifts in international marketing and trade that take place from generation to generation. One definition states that “a generation is the interval of time between the birth of parents and the birth of their offspring” (Heritage, 2005). We therefore searched for the median age of mothers at first birth. Since different countries have different median ages of first birth, and the median is changing over time, we needed to make a judgment decision of an appropriate interval. For example, in the USA the median age was 21.3 years in 1969, but increased to 25.1 years by 2005 (Census, 2005). In the 1970s Europe, the median was 22 years, but rose to 25 years by 1997 (Demos, 1999). The National Academy Press (2005) in turn reports that the current median age in formerly Soviet Asia, South and Central America is 21.5 years, in South Asia and the Middle East 20 years and in Africa 19 years. Given our desire to analyze international developments over a prolonged period, we decided to go beyond contemporary US numbers and look at the concept of a generation in its historical length and within the context of global information. Therefore, the decision was made to settle on an average generation length of 20.

1945–1964 The State of the World World War II had just ended with tremendous economic destruction to many countries. Europe gave up its claim to world leadership and, together with Asia, was concentrating on rebuilding from devastation. Individual countries had to learn how to find a new modus vivendi internally—through developing and expanding coalitions, finding a common focus, and overcoming historic patterns. The USA was victorious,

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A Chronology

Period

The world

1945–1964

A state of economic recuperation. Unsatiated demand

International marketing phases

Coincidence. Little effort needed to sell products everywhere. Trade preceded individual marketing strategies. Preliminary attempts to connect marketing functions to the economy. Growth facilitated the expansion of international marketing 1965–1984 Emergence of international Confluence. Four Asian tigers organizations become a major international force mainly emphasizing the Japanese style of marketing. Multinational corporations begin to use a marketing focus in their international outreach 1984–2004 World markets become Commingling. Asian firms, first much larger, blurring Japan then the Four Tigers and borders. Globalization’s particularly China became a power results in benefits major force emphasizing and dislocations economies of scale, low prices and delivery efficiency. 2005–forward The need for Creative conflicted collaboration. understanding of conflict More and better communication. and collaboration. Reaching out to poorer markets. Develop better products and Combining them in the form of creative conflict services. Taking advantage of the flattening world. Improving overall quality of life. Full synergistic collaboration of international marketing and globalization

and ready to be interested in the world. New experiences had been brought home. As political threats increased, a willingness to forgive and offer a clean slate to old enemies emerged. The world became divided into East and West, with market orientation driving the West, and

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planned economics dominating the East; each side developed an international infrastructure to expand the realm of its influence. The stirrings of freedom led to the shedding of colonial ties and to the emergence of new nations. This was particularly the case in Africa. The United Nations was formed in 1945 to help structure the global political debate. To facilitate international business and trade, the charter of the International Trade Organization (ITO) was signed in 1948 in Havana, Cuba. The charter, which represented a series of agreements among 53 countries, was designed to cover international commercial policies, domestic business practices, commodity agreements, employment and reconstruction, economic development and international investment, and a constitution for a new United Nations agency to administer the whole. The General Agreement on Tariffs and Trade (GATT) was part of the ITO, with the purpose of reducing tariffs among countries, and international institutions such as the World Bank and the International Monetary Fund were created (Hufbauer, 1982). Even though the ITO incorporated many farsighted notions, most nations refused to ratify it, fearing its power, its bureaucratic size, and its threat to national sovereignty. As a result, the most forward-looking approach to international trade was never taken. However, other institutions conceived at the time—the GATT, the World Bank and the IMF—remain in existence, and, by reducing international trade frictions, have made major contributions toward improving the capabilities of international marketers.

The State of International Marketing During this time, modern proactive marketing strategies were typically not used. Countries and consumers needed many products after years of under-consumption and suppliers were able to sell their wares rather easily. A lack of fear of manufacturing competition helped open up international doors. Five developments, shown in Table 2 triggered the prelude to more specific, targeted, and strategic marketing activity. European firms in particular saw international markets as a lifeline to survival and expansion. Local demand, though pent up, was limited by a lack of resources, so that drawing on foreign demand was imperative. A lack of corporate capital confined most of the forays to exporting rather

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Major Developments Encouraging International Marketing

Developments

Impact

The growth of customs unions

Ease of trading among groups of countries Increased demand for products

Economic redevelopment of Europe and Japan Emergence of new countries The development of multinational corporations Easing of barriers to global business

New demand for new products Ability to trade in different parts of the world Encouragement of trade expansion

Source: Adopted from Mazze (1967)

than investments overseas. Those firms and individuals that participated in international marketing were accorded special status by their governments, given their role as heroes of the rebuilding process. They were the ones to attract foreign currency and thereby increase reserves, making possible the imports upon which their economies depended. Special export norms were developed for international marketers to appropriately represent their country abroad. Merchandise labeled “for export” indicated a special and superior quality level that may not have been available domestically. The situation differed in Eastern Europe and the Soviet Union. In the 1920s, for example, Ford Motor Co. had constructed a huge facility in Gorky to build Model A cars and buses and Tungsram of Hungary had been a key research and development facility for GE. By the middle of the last century, international marketing between East and West had slowed down to a trickle (Hammer, 1989). To a large extent, this limited contact was the result of an ideological wariness on both sides: socialist countries perceived international corporations as “aggressive business organizations developed to further the imperialistic aims of Western, especially American, capitalists the world over” (Lauter and Dickie, 1975). Furthermore, many aspects of capitalism, such as private ownership of the means of production, were seen as exploitative and antithetical to communist ideology (Sherr, 1988). Western managers, in

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turn, saw socialism as a threat to the Western world and capitalistic values in general. In consequence, each side intended to be as selfsufficient as possible and ignored the international marketing potential outside its sphere. However, to fortify its position, the Soviet Union’s planning system allocated production facilities across its empire in order to achieve cohesion and interdependence. The resulting massive international exchange within the USSR, however, was not based on need or demand, but rather on instructions and plans handed down from above. In consequence, little, if any, of the production was ever designed to be market responsive. Rather, the goal was to fulfill the plan which is the essence of “command economies.” The US firms were mainly preoccupied with meeting local demand, which had been pent up at home during the war years. Their international outreach was typically driven by “surplus disposal” rather than market responsiveness. Nonetheless, this approach was successful since due to the devastation of production facilities in Europe and Asia, little was available for consumption. The US products not only carried with them the halo of the victorious nation, but also the mere fact of availability resulted in purchases. The key US international marketers were the multinational corporations, some of whom had revived old investments—such as Ford or General Motors—while others had begun to gradually explore the world. However, there was no concentrated effort directed at becoming a global company or country. Overall, we label this period one of international marketing by coincidence. Most companies in the world were inward looking in their efforts: European firms had a desire to go international, but were lacking resources; the US firms had the resources but were lacking interest.

The Societal Context Since the marketing field’s overwhelming domestic short-run focuses only a few pioneers such as Drucker (1954) and Wroe Alderson (1957) discussed its greater societal outreach. Drucker (1954) asserted that marketing encompasses the entire business and stimulates innovation and economic growth. Alderson discussed how individual firms become part of the national economy and achieve influence or even control (Alderson, 1957).

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Others examined how the firm’s marketing functions may reach out and influence the international economies. Revzan (1961) for instance examined marketing channels from the perspective of society. Bartels (1963) connected wholesaling functions in different countries and displayed environmental connections of distributive functions. The analyses of these pioneers were typically descriptive as opposed to strategic.

1965–1984 The State of the World There was substantial turmoil in this period. The Vietnam War had major repercussions on domestic US policies, on relations with and between Europe, Asia, and on the communist sphere. The Cold War had reached new heights—with massive amounts of troops and equipment stationed around the world, and nuclear missiles ready to go off on a moment’s notice. The independent nations of Africa were tempted with policy measures, treaties, armaments support and gifts to become adherents of either the capitalist or the socialist camp. New generations grew up with a never before sensed uncertainty of survival—a “will our generation be the last one?” feeling, which surely had an influence on national reproduction, spiritualism, and cultural cohesiveness. International organizations were not very successful—the chasm between the key players had become too large. However, on the economic front, the Western organizations pulled slowly but surely ahead. Repeated GATT negotiations resulted in major cuts in tariffs and other trade barriers, lowering the average tariff level from over 50 percent to less than 10 percent.

The State of International Marketing European firms and Japanese companies entered a period of optimismand renewed strength. The formation of the European Economic Community made marketing relations with one’s neighbors much easier, causing trade volume to swell. Though investment activity was gaining, exporting remained the primary mode of international marketing.

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Governments continued their encouragement and support of exporting firms. As needs became more specific and competition keener, international marketing strategies emerged and were put to practice. In Asia, Japan and the four Asian “tigers” emerged as major international players. Japan graduated from the position of a cheap imitator to that of a respected innovator, and became a key participant in international automotive markets with Honda, Toyota and Datsun (subsequently renamed Nissan). Hong Kong, Singapore, Taiwan and South Korea were called newly industrialized countries. Computer-aided designs and computer-aided manufacturing (CAD/CAM) enabled companies in these countries to create pockets of competent suppliers who aggressively captured a portion of international trade flows. Some of these countries subsequently developed their own product lines and global brands (such as Samsung, Emerson, or Hyundai). During that time, core differences began to emerge in marketing approaches between American companies and their Japanese or other Asian counterparts. The “Japanese miracle” emerged, leading to the identification of a Japanese management style and the Japanese marketing model. It is ironic that during this era, a society as multicultural as the US was the one to develop an ethnocentric marketing strategy for the world, displaying a tendency to use similar marketing strategies for different world markets. By contrast, the unicultural Japan gave rise to a polycentric marketing orientation uniquely designed for different world markets. This latter approach proved to be more successful than that of the USA. Becoming more international and understanding market conditions in different parts of the world were advocated as the solutions to the US trade deficit dilemma. Table 3 illustrates one study comparing the American model to the Japanese model in marketing. The true fundamentals of international marketing emerged as focal points of theory and practice. The differences between the “A” model and the “J” model illustrate key reasons for Japan’s success in international markets while the US influence receded. Whereas the US multinationals were preoccupied with extending their domestic strategies into a few large international markets, they ignored many unique and somewhat small international markets. By contrast, Japan, and subsequently the Asian four tigers, each cultivated markets

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1965–1984: Comparing Marketing Strategies: US vs Japan

Functions

The US model

The Japanese model

General orientation Overall strategy

Ethnocentric Extension of large-scale American markets

Promotional practices

Global orientation exporting the American message Positioning and repositioning existing American products

Polycentric Adaptation to unique conditions of small markets Significantly localized messages

Product strategy

Distribution systems

Pricing and entry strategy Target Market objectives

Vertical distribution system, partially or fully owned High price and high-end skimming Major world core markets Short-term profitability only

Developing products adapted and wellperforming in local markets Global distribution networks, working with the existing systems Low price and low-end penetration Small, peripheral or marginal markets Long-term profitability with future growth goal

Source: Samli (1987)

by using proactive and aggressive, specifically localized international marketing strategies. Throughout this period, the Soviet Union invested largely in capital goods production and the support of current and potential allies around the world. Support payments and cross subsidization led to temporarily successful industrial sectors, but in the long-term became major drains on the budget. Very little progress was made in consumption quantity or product quality. The West, meanwhile, experienced large increases in consumption and a rapid depreciation of the dollar. “Guns and butter” had been too high a set of expectations which the US economy could not meet. There also was the key influence of the shifting power in oil markets. Western

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trade volume rose to about $200 billion per year and the US experienced its first huge trade deficit of $5 billion. In light of this deficit, President Nixon closed the gold window, and the trade community replaced the fixed-currency gold standard with freely floating currencies capable of adjusting to market supply and demand. However, no other major public steps were taken to encourage the international marketing participation by American firms. Political adversity resulted in a stronger business divergence between East and West. Export controls, designed to restrict the flow of goods between the two regions, took on great prominence. In the USA, President Nixon had declared international marketing to be a privilege rather than a right. An increasingly restrictive export licensing regime was designed by Western nations in order to restrict the flow of strategically important products and technology into the hands of foreign adversaries. International marketing also encountered global business terrorism. In Germany, the Bader Meinhof Gang was laying bombs, shooting at police, and murdering business executives. For the first time in their history, the modern Olympic Games were disrupted by the murder of Israel’s delegation when members of the Black September organization took over the quarters of its athletes. Americans and American products were attacked particularly to demonstrate opposition to the US policies. The multipolarity of the time is perhaps characterized best by Janis Joplin, a well known singer of her time. She was a great communicator, and her songs are famous even more than three decades after her death. Just like the field of international marketing, Janis Joplin had her share of problems and difficulties. In her songs, she was perhaps the first one to raise international marketing issues. At a time when Corvettes were cool, she sang of international brands like Porsches, but implored the Lord to buy her a Mercedes-Benz (Czinkota, 2005). At the same time, she raised the issue of freedom as a key concern when she sang at her most powerful: Freedom’s just another word for nothin’ left to lose Nothin’, it ain’t nothin’ honey, if it ain’t free And feeling good was easy Lord, when he sang the blues And feeling good was good enough for me Good enough for me and my Bobby McGee (Kristofferson, 1969)

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Her song shows the inherent and growing conflict between the desire for possessions—encouraged by global exchange—and the simultaneous urge to be free from it all, not to be hemmed in or confined; walking a thin line of not being held hostage by either wealth or poverty. This is a freedom which does not force one to do something one does not want to do (Hayek, 1971). International marketers view advertisements for products both as information and as an alert mechanism. Their opponents, meanwhile, are prone to interpret the same activity as a persuasive effort to lock the world onto the shackles of consumption. It is this conflict which provides the first strong indication of a future path for international marketing, both welcoming and forbidding at the same time. The US firms became increasingly more interested in international markets—particularly when recessions caused their domestic markets to stagnate or fail. Exporters learned the bitter lesson that other firms, particularly new competitors from Japan, had arrived before them and already held market share. Foreign direct investment grew in importance, though remaining the prerogative of a few large multinational corporations. Growing oil revenues contributed to the global investment flow. International acceptance of licensing and franchising activities gave rise to corporate expansion, particularly in the hospitality and automotive industries—strongly supported by standardized approaches which offered uniformity of service and product. We label this period as one of international marketing confluence. Firms from industrial nations reached out through international marketing to increase their customer base abroad, invested if large market opportunities were encountered, and occasionally found themselves importing the merchandise necessary to satisfy special needs.

The Societal Context A number of marketing titans emerged during this era of examining environmental influences. Bucklin (1972) posited that prevailing economic and social circumstances determined the characteristics of distribution systems. Others maintained that macromarketing must be functioning well before micromarketing can reach an elevated societal status (Alderson, 1965).

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Another group compared the economic conditions and marketing practices in dissimilar countries. They concluded that economic conditions of dissimilar countries do not necessarily require major alterations in marketing practices. Attempting to connect economics to marketing, Moyer (1965) posited that marketing is indispensable to an economy. A general consensus prevailed that the marketing system is formed and manipulated by the economic environment (Bartels, 1976) rather than the other way around.

1985–2004 The State of the World This period saw a major transformation of the political landscape. After some rapid intensification of Cold War enmity, East–West relations grew almost cordial, with the ultimate demise of the Soviet Union and the dissolution of its satellite structure. Newly emerging market economies arose, with the great desire to increase their standard of living. After more than 40 years of partition, West Germany re-merged with its East-German counterpart. The European Union (EU) expanded into 25 members, many emanating from the former Eastern Europe. Additional hopefuls range from Bulgaria to Turkey. The adoption of a common currency provided cohesion to the EU formation. Yet continued high-levels of unemployment and a rejection of the constitution by the populace cast doubts on the continuity of governments and their approaches to Europeanization. In Asia, Japan became a country in prolonged recession with only exports maintaining minimal growth levels. China and India produced consistently high growth rates, and became suppliers of both goods and services for large regions of the world, particularly for the USA. Strong economic growth resulted in increased domestic demand as well, leading to disagreements between regions, inequities in income, concerns about employment, and rises in energy prices. Many African nations found themselves in the midst of regional conflicts which no longer were supported by outside donors. There was a neglect of nation building efforts and a major accumulation of international debt. Russia underwent economic transition, but was held back by continued government involvement in its economy. It appeared that whenever

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private sector efforts were seen as being too successful, a quick reigningin process emerged from the state. The USA became a crucial market to the world—with imports rising dramatically. The key players during these two decades were typically one of three categories of countries, those doing the feeding, the funding or the fighting. The USA learned the limits of trying to accomplish all three of these tasks simultaneously and experienced large and growing trade deficits.

The State of International Marketing European economic growth was severely curtailed due to corporate outsourcing, efficiency measures, and a consumer reluctance to spend. Many Europeans failed to see the benefits promised by political unification, and were directly affected by many of the economic and lifestyle drawbacks. Threats and fears, whether realistic or just on the far horizon, led to powerful inhibitions in consumption and population growth, and a growing suspicion of change and innovation. Asian firms, particularly those in China, have taken on a much greater role in international markets much more quickly than even they would have expected. Beyond their ability to deliver quality goods at very low prices, these countries have become large consumers of imports. Individuals in these economies, many of them quite young, only have experience with conditions of major growth rates. They often cannot fathom a smaller expansion which leads to expectations that may be increasingly hard to fulfill. The USA has opened up its markets to all comers. It provided leadership in the area of globalization, accelerated by decentralization, deregulation, privatization, and the development of cyberspace. Decentralization has allowed companies to make, sell, and buy products and services throughout the world according to local and regional needs. It has created new trading networks and trading blocks in various parts of the world. Deregulation eliminates barriers to trade. Efforts of the World Trade Organization, NAFTA, LAFTA, and others have accelerated international marketing.

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Privatization has been particularly important for non-government entities to get involved in globalization. Private companies decide for themselves what to make, buy or sell. This has been critical for firms in the former Soviet republics who have started to make their own private decisions. Cyberspace is perhaps the most critical of these four factors. Technology has allowed India, China and many other countries to participate directly in modern global supply chain activities for the first time (Friedman, 2005). These developments are supported by four major flows that accelerated the globalization process. Capital flows have made large foreign direct investments a reality. Global giants such as General Electric, Nokia, and Nissan have been joint venturing and investing throughout the world. Information flows through cyberspace developments helped the expansion of research and communication. New knowledge enabled many firms to internationalize. Furthermore, it stimulated worldwide consumer demand for more variety and better quality of goods and services. Technology flow is the most important aspect of globalization, and can be used very effectively by third world countries in their efforts to develop their industries and to form pockets of competent suppliers. Finally, the flow of know-how has made it possible for companies in many countries to receive the best and most competent managerial talent and advice. In many major corporations, top management teams and CEOs are now more multinational than ever (Samli, 2004). It is useful to think of the foundation of globalization as two axes, one characterized by decentralization, deregulation, prioritization, and the development of cyberspace and the other by the four flows of capital, information, technology and know-how. They provide the basis for accelerated globalization, which in turn enables international marketing to provide a growing flow of goods and services. Globalization and international marketing have developed a complex but co-stimulating relationship. Globalization reached out to provide the powerful foundation upon which international marketing makes progress. Sales of branded goods and services exploded during this era and wired consumers around the world have found themselves very close to the sources of these products and services, regardless of location. Markets

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and marketers faced new opportunities along with significant competition which provided choice and freedom to consumers. However, with weak international marketing strategies abroad and substantially open domestic markets at home, the US trade deficits reached new records. By 2006, the trade imbalance was reaching more than 5.9 percent of GDP and over $835 billion (BEA, 2006). These growing imbalances, lead to concern about international marketing. Central bankers talk about “irrational exuberance,” and Congressional voices are worried about their unemployed constituents. Even though on a relative scale, the dislocations are minor, their persistence is likely to trigger contravening policy actions. What these two decades have brought is, for the first time, major linkages between various portions of the world. Calling baseball elimination rounds the “World Series” does not make them so. The carefully devised separation of interest spheres between East and West and the artfully designed trade restrictions which limited participation of many individuals had never really allowed for “World Trade” in international marketing in earlier years. Now, due to many changes, both politically and technologically, such direct interaction is possible. This ability leads us to call this era one of commingling—where distant markets and individuals, for the first time are able to touch each other directly.

The Societal Context During this era, marketing in general is recognized as an important discipline. In addition to environmental and comparative aspects of marketing, macromarketers explored international marketing. In the earlier era Fayerweather (1965) had already identified four themes that gave critical direction to macromarketing as a discipline. He had identified the similarity of marketing problems in different countries; examined variations in marketing functions stemming from differences in basic societal systems; analyzed international economic forces that are forming trade patterns; and how these patterns are distorted by nationalistic government policies. Towards the end of this era governments’ nationalistic policies were outranked by the market forces of globalization which dominated

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trade and financial patterns (Friedman, 2000; Samli, 2002). Marketing’s societal role to advance not only the overall economic status of society but also to explore the importance of quality of life, sustainability, consumer protection and freedom in choosing goods and services became new focal points.

Future Prospects So what is the outlook, both in terms of the state of the world as well as the state of international marketing?

The State of the World Globalization appears to be unstoppable which has led some to question whether international marketing will face boundaries of growth. We think not. International marketing is not confined to either vertical or horizontal growth. Rather, like the degree lines of a protractor—which is used to measure angles—product variations, adaptations and innovations all present new opportunities for simultaneous and parallel growth. Our vision of international marketing is that of a circle which expands at a varying pace around its circumference and has ample opportunity to do so. One major challenge for international marketing is the differentiation among people, firms and nations who primarily grow, make, create, or coordinate things (Czinkota et al., 2004). These differences in activities may well lead to major conflicts. International marketing needs to develop a Schumpeterian capability to achieve creative collaboration which is born out of conflict. For example, conflict among those who grow and those who create could lead to limits in exchanges but also to the emergence of better choices; collaboration between workers and coordinators may lead perhaps to a slightly lesser quality of goods and services but a wider distribution; there may also need to be a redefinition and a reassessment of the benefits offered by expansion and progress. The key question is whether conflict and collaboration combined can lead to a better overall outcome? We believe this to be the case and call this phenomenon creatively conflicted collaboration. There needs to be collaboration in some areas and competition in others. The macro

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setting—which includes the rules of the game, and affects the ability of nations to compete—needs to be determined and enforced collaboratively. Here, the outreach and effectiveness of globalization are necessary conditions for international marketing to deliver quantity and quality of life to consumers everywhere. The micro aspects, which determine the outcome for the individual competitor, are the result of conflict driven by competition.

The State of International Marketing For international marketing to expand, there must be collaboration in macro issues which can support healthy conflict in micromarketing. Otherwise, if globalization leaves some regions or some countries behind, then the potential of international marketing will be limited (Samli, 2006). International marketing continues to generate important assimilations among value systems. More new products offer international appeal and encourage similar tastes in consumption around the world. Growing numbers of people wear denim, like Western styles of dance music, eat pizza, and splurge on sushi. Simultaneously, local product offerings help define people and give them special identity, making local idiosyncrasies different and beautiful (Johansson, 2004). Values are learned and not genetically implanted. As information technology advances, better identification and articulation of values will bring about goods and services catering to general as well as local values. In today’s times, there is a new era of friction and distrust which increases the psychological distance between peoples and slows international interactions. However, international marketing forges new linkages in thinking and makes additional progress in shaping a greater global commonality of values. It may well be that international marketing’s ability to align global values, making it easier for countries, companies and individuals to build bridges between them and think of mutuality of interest rather than that which divides them, may eventually become the field’s greatest gift to the world. While global trade volume was about $200 billion per year in the 1970s, it rose to $12,500 billion in 2006 (IMF, 2006). As international marketing learns to reach out to even the remotest markets of the world and increases consumer value, its growth prospects are high. Greater

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quantities of products and services touched by local idiosyncrasies will emerge. Consumer information and power will reach new plateaus, providing more attention to the poorer sections of the world (Samli, 2004; Prahalad, 2005).

The Societal Context In theory, powerful, progressive and futuristic collaboration of micro and macromarketing will increase performance and competition. The synchronicity of macro and micromarketing is crucial. Consumers, producers and suppliers need to have an enhanced ability to make better allocation decisions, improve their quality-of-life, and raise their level of freedom (Czinkota, 2005). Thus, creative conflicted collaboration at home and abroad is a necessity for further economic progress throughout the world.

PROGRESS WITH NO LIMITS As globalization expands without discrimination, international marketing can provide the world with improved freedom and a better quality of life. Table 4 presents a six-point summary of this scenario. Consumers will be empowered throughout the world because they are better informed. Their choices allow international marketers to make better allocation decisions (Friedman, 2005). Horizontal co-production will lead to the emergence of dedicated supply chains reaching out to the far corners of the globe. The global workforce will allow more available talent to participate in economic activity. Most importantly, the adaptive nature of international marketing will help take the sharp edge off the effects of globalization and lead to improvements in the quantity and quality of life.

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TABLE 4.

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Six Trends and their Specific Impact on International Marketing

Trends

Impact

Futher progress of information technology Flattening of the world

Empowering the consumers throughout the world Horizontal production and adjustment in quality of products Reaching the remotest corners of the world Improved consumer information, better product and service choice leading to higher quality-of-life Enhanced marketability of workers throughout the world Enhancement and mitigation of globalization effects through the adaptative power of marketing

Dedicated supply chains Digital, mobile personal and virtual information flow Seamless entry to globlal workforce Guidance of marketing to improve domestic economies and global sharing of benefits

REFERENCES Alderson, W. (1957), Marketing Behavior and Executive Action, Richard D. Irwin, Homewood, IL. Alderson, W. (1965), Dynamic Marketing Behavior, Richard D. Irwin, Homewood, IL. Bartels, R. (1976), The History of Marketing Thought, Grid Inc., Columbus, OH. Bartels, R. (Ed.) (1963), Comparative Marketing: Wholesaling in Fifteen Countries, Richard D. Irwin, Homewood, IL. BEA (2006), U.S. International Transactions: Second Quarter 2006, Bureau of Economic Analysis, Washington, DC. Bucklin, L.P. (1972), Competition and Evolution in the Distributive Trades, Prentice-Hall, Englewood Cliffs, NJ. Census.gov (2005), US Bureau of the Census, Washington DC, available at: www.census.gov. Czinkota, M.R. (2005),“Freedom and international marketing: Janis Joplin’s candidacy as patron of the field”, Thunderbird International Business Review, January/February, pp. 1–13. Czinkota, M.R. (2002), Georgetown Globalization Project, McDonough School of Business, Georgetown University, Washington, DC.

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Czinkota, M.R., Ronkainen, I.A. and Donath, B. (2004), Mastering Global Markets, Thomson, Cincinnati, OH. Demos (1999), “Education and age of first birth”, Demos, August, special issue. Drucker, P.F. (1954), The Practice of Management, Harper and Row, New York, NY. Fayerweather, J. (1965), International Marketing, Prentice-Hall, Englewood Cliffs, NJ. Friedman, T.L. (2005), The World is Flat, Farrar, Straus and Giroux, New York, NY. Friedman, T.L. (2000), Lexus and the Olive Tree, Anchor, New York, NY. Global Business Policy Council (2000), Globalization Ledger, A.T. Kearney, Washington, DC. Hammer, R.M. (1989), “Dramatic winds of change”, Price Waterhouse Review, Vol. 33, pp. 23–7. Hayek, F.v. (1971), Die Verfassung der Freiheit, Mohr Siebeck, Tuebingen. Heritagedictionary.com (2005), The Heritage World Dictionary, available at: heritagedictionary.com (accessed December 21, 2005). Hufbauer, G.C. (1982), US International Economic Policy 1981. IMF (2006), International Financial Statistics, International Monetary Fund, Washington, DC. Johansson, J.K. (2004), In your Face: How American Marketing Excess Fuels Anti-Americanism, Pearson Education, Upper Saddle River, NJ. Kristofferson, K. (1969), Me and Bobby McGee, Sony Records, New York, NY (recorded by J Joplin), (CD), 1971. Lauter, P.G. and Dickie, P.M. (1975), “Multinational corporations in eastern European socialist economies”, Journal of Marketing, Vol. 25, pp. 40–6. Mazze, E.M. (1967), International Marketing Administration, Chandler Publishing Co., San Francisco, CA. Moyer, R. (1965), Marketing and Economic Development, Michigan State University, East Lansing, MI. National Academy Press (2005), Growing Up Global: The Changing Transitions to Adulthood in Developing Countries, National Academy Press, Washington, DC. Prahalad, C.K. (2005), The Fortune at the Bottom of the Pyramid, Wharton School of Publishing, Upper Saddle River, NJ. Revzan, D.A. (1961), Wholesaling in Marketing Organizations, Wiley, New York, NY. Samli, A.C. (2006), “Needed a second wave of globalization: a vital strategic posture for world entrepreneurs”, The Marketing Review, Summer, pp. 149–62. Samli, A.C. (2004), Entering and Succeeding in Emerging Countries, Thomson-Southwestern, Mason, OH. Samli, A.C. (2002), In Search of Equitable, Sustainable Globalization, Quorum Books, Westport, CT. Samli, A.C. (1987), “An alternative international marketing strategy: the ‘J’ model”, in Cavusgil, T. (Ed.), Advances in International Marketing, JAI Press, Greenwich, CT. Sherr, A.B. (1988), “Joint ventures in the USSR: Soviet and western interests with considerations for negotiations”, Columbia Journal of World Business, Vol. 23, pp. 25–37. Taylor, C. and Henisz, W. (1994), “US manufacturers in the global market place”, The Conference Board, Report 1058, New York, NY.

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FURTHER READING Fisk, G. (1987), “Macromarketing and the quality-of-life”, in Samli, A.C. (Ed.), Marketing and the Quality of Life Interface, Quorum Books, Westport, CT. Hollander, S.C. (1970), Multinational Retailing, Michigan State University International Business and Economic Studies, East Lansing, MI. Kotler, P. (2004), New Forms of International Marketing, American Marketing Association, Summer Educator’s Conference, Chicago, IL. McCarthy, E.J. (1960), Basic Marketing: A Managerial Approach, Richard D. Irwin, Homewood, IL. Richardson, J.D. and Rindal, K. (1996), Why Exports Matter: More!, The Institute for International Economics, Washington, DC.

ABOUT THE AUTHORS Michael Czinkota works at Georgetown University in Washington D.C. and holds the chair in International Marketing at the University of Birmingham in the U.K. He served in the U.S. government as Deputy Assistant Secretary of Commerce. He was born and raised in Germany, and educated in Austria, Scotland, Spain and the United States. His Ph.D. is from Ohio State University. [email protected] A. Coskun Samli has published widely in International Marketing. He is the Research Professor of Marketing and International Business at the University of North Florida. E-mail: [email protected]

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Chapter 1.3

Freedom and International Marketing Janis Joplin’s Candidacy as Patron of the Field Michael R. Czinkota

SOME BACKGROUND Patrons have been anointed to watch over guilds, professions, or special intentions. St. Valentine watches over lovers and florists. Hippocrates looks after physicians and their patients, and Her Majesty the Queen is the Patron of the Royal Society for the Arts. Having a patron appears to be particularly useful under conditions where a field and its adherents are under scrutiny or even under fire, or when the results of an undertaking can go either way. The patron is either expected to extend some measure of protection or provide that special “nudge” from above that hopefully tilts the eventual outcome in the right direction. Given the Janus-like face of international marketing, often beneficial but also known to be controversial, it seems only appropriate to search for a patron in order to obtain guidance for the future of the profession and to bring distinction upon a discipline that all too often has had to fight for recognition and acceptance.

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FINDING THE CANDIDATE Searching for patron candidates is not easy. In spite of today’s rampant globalization, many people want nothing to do with things international, much less with marketing. Others haven’t made a contribution that deserves such honorific recognition. That rapidly slims the eligible listing and brings us to Janis Joplin. She has lots of patron support going for her. She was a great communicator and her songs are famous for their outreach even more than three decades after her death. She is from America—the cradle of marketing as a scholarly discipline. Just like the field of international marketing, Janis Joplin had her share of problems and difficulties. She also was an interpreter of modern international marketing issues at their inception. She sang of key international brand thinking—her lyrics praised the glory of Porsches when Corvettes were cool, but she implored the Lord to buy her a Mercedes-Benz. In another international marketing song titled “Me and Bobby McGee,” Joplin sang about the bandanna, Hindi for “ties and bonds,” which are the core focus of the marketing discipline. She sang about the “shared secrets of my soul,” surely an early reference to customer relationship management. But Joplin is at her most powerful when she sings: Freedom’s just another word for nothin’ left to lose Nothin’, it ain’t nothin’, honey, if it ain’t free And feeling good was easy Lord, when he sang the blues And feeling good was good enough for me Good enough for me and my Bobby McGee (Kristofferson, 1969) In her concern for freedom, she has an ability to reach out across generations, which leads to her continued broad global appeal today. Millions of fans are still singing these lines. Today, when the issue of freedom has surged to the forefront in the thinking of many, let us do some thinking about its meaning in an international marketing context.

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AN ANALYSIS Let us briefly think back to the environment of the early 1970s when “Me and Bobby McGee” entered the world. The Western world in particular was reaching far beyond globalization, exploring the universe through regular Apollo landings on the moon. Back on earth, there was economic turmoil. The dollar had begun to depreciate sharply. Global trade volume was about $200 billion per year, poised to take off and reach about $8,300 billion in 2003 (International Monetary Fund, 2004). In the global financial sector, the gold window had already been closed to everyone but central banks. In light of seemingly large trade deficits, which then amounted to $5 billion per year, the U.S. government would soon abandon the gold standard altogether and replace it gradually with freely floating currencies that would adjust to market demand and supply. Terrorism was introduced on a global scale during that time. In Germany, the Bader Meinhof Gang was laying bombs and shooting at police, and for the first time, the modern Olympics were disrupted by the murder of a country’s delegation when members of the Black September organization took over the quarters of Israeli athletes. These years laid the groundwork for the globalization trends to follow over the next 30 years.

THE ISSUE OF FREEDOM Back to the lyrics and Joplin’s preoccupation with freedom. You may ask what this has to do with international marketing, particularly in light of the fact that trade between far-flung peoples has existed for millennia (just think of the Silk Road or the Spice Caravans). Well, that is true, but in modern times, international marketing, just like the term freedom, has had many links with the United States. Consider why the Pilgrims came to American shores—to be free from persecution. Look at the U.S. Constitution, which, in its preamble, refers to “securing the Blessing of Liberty.” Americans have had a special affinity for the term freedom, just as, in his time, the Yankee trader had been of world repute. Second, freedom is about options. If there is no alternative, there is no freedom, only a predestined path taken without conscious decision or the

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possibility to exercise one’s virtue. Having a true alternative provides the opportunity to make a decision, to exercise virtue. In the blaze of the klieg lights, it is easy to make the “right” decision. That is not an exercise in virtue, because real alternatives are effectively removed. The real selection among alternatives takes place in the darkness of night when nobody is looking and when there is a good chance of getting away with things. The focus and aim of international marketing is on crossing borders to provide more than one selection for customers, letting them pick among the variety offered in order to attain the greatest possible satisfaction. International marketing does so in all corners of the globe, the glamorous ones—often called the Elizabeth Arden circuit of London–Paris–Rome— as well as in the small and remote ones where the efforts are not seen by others. By operating in the limelight but also well outside of it, international marketing offers the freedom to exercise virtue—be it in decisions of pricing, supplying, or purchasing. By providing choices, international marketing also helps with decision making in general. It participates in shaping environments, if the participants are allowed actual choices (Johansson, 1990). That’s where the linkage to freedom becomes very evident, because the claims of freedom do not always match reality. An analysis of market thinking can quite easily provide the acid test here. I like going to countries where stuff is owned by “the people”—things like parks, steel plants, or television studios. I like to suggest to individuals (usually state-sponsored guides) who proudly show off these achievements of freedom that they sell their share. As we discuss this issue, typically several things happen. First, the box they all live in is pointed out: “Nobody has ever done that!” Then, the demand limitation is highlighted: “We are unaware of a buyer.” Finally, the real supply constraints emerge: “I couldn’t because they wouldn’t let me.” By then, understanding typically begins to emerge about the difference between purported and actual freedom. Freedom and international marketing are linked in many more ways. Freedom is typically recognized by specific rights and privileges in order to be meaningful. When John F. Kennedy wanted to make life better in America, he focused on the freedom of consumers. He formulated the individual’s right to safety, to be heard, to be informed, and to choose— rights that continue to play key roles worldwide when international marketers branch out today.

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Another key dimension of freedom is not to be hemmed in, allowing people to be able to work outside of the box. For most activities, the box tends to be the result of the borders that define a nation. That is usually where government policy ends and where citizenship encounters its limits. But that is a mere point of transition for international marketing. The discipline depends on the understanding of how to successfully cross national borders, what the differences are once the crossing is done, and how to reconcile profitably any conflicts resulting from variances and inconsistencies in rules and expectations. Concurrently, international marketing contains the freedom of almost unlimited growth potential. Activities confined to domestic borders will likely soon run into limits of expansion. With international market opportunities, the limits to growth are reached far less quickly. Different families of products can extend the life of goods or services for a long time. Instead of restrictions, the international marketing paradigm encourages the stripping away of restraints; instead of limitations, there is the pointing out of opportunity. Being passionate about international markets can open one’s eyes to the prospects of freedom. Freedom also means not being forced to do something one does not want to do. In the words of Hayek, freedom is the absence of force (Hayek, 1971). In today’s times, many speak about migration pressures that force people to move from their rural homes into urban areas or from their developing countries into industrialized ones. Industrialized nations, in turn, speak about immigration pressure. For both sides, little if any freedom is involved here. The individuals who do the moving would much rather stay home but cannot afford to do so due to economic exigencies. The recipient countries might not want to welcome the migrants but do so in response to political and humanitarian pressures. Both sides are losing or have lost their freedom. International marketing may have been part of what triggers some of these migrations, but it also can be instrumental in stemming the tide. It can provide the economic opportunity at home for individuals so that they need not migrate. It can let individuals become productive contributors to the global economy and, in an organized, proud, and supraterranean fashion, remove sensitive political points of friction. The chapter of world history written in the late part of the twentieth century has been most instrumental in showing us how markets,

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market forces, and the recognition of demand and supply have directly affected human rights and the extent of freedom. That was the time when the long-standing rivalry between socialism and market orientation was resolved. With all humility and gratefulness, one can now make the following conclusion: markets were right! In country after country, markets have demonstrated typically greater efficiency and effectiveness in their ability to better satisfy the needs of people. International marketing has been instrumental in stimulating these newly emerging market forces. When the Iron Curtain disintegrated, Central and Eastern Europe very rapidly joined the community of market-oriented nations. All too often, these important political shifts in the latter part of the twentieth century are ascribed simply to an overwhelming desire for democracy. To a large degree, however, the key demand for change was aimed at perestroika, a fundamental reform of the Soviet-style economy through increased availability of food, housing, and consumer goods; in other words, an increase in choice and market alternatives (Theroux & George, 1989). In spite of complaints about the slowness of change, the insufficiency of wealth redistribution, and the inequities inherent in societal upheavals, a large majority of participants in all these marketoriented changes seem to be better off now than they were before. Without the transition provided by international marketing, these changes would not have come about that swiftly.

THE COST OF ALL THIS FREEDOM Another big issue raised in the context of freedom is its cost. One keeps hearing about the large segment of the world population that is poor and therefore supposedly excluded from any international marketing efforts; the World Bank’s president calls them the 3 billion $2-a-day poor (Wolfensohn, 2001). One can also see them as an attractive $6 billion-aday opportunity for firms who may have valuable exchanges to offer. Consider the surprising (for some) effects of exchanging surpluses through international marketing: One really big surprise of the postwar era has been that historic enemies such as Germany and France, or Japan and the United States

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have not had the remotest threat of war (between them) since 1945. Why should they? Anything Japan has that we want we can buy, and on very easy credit terms, so why fight for it? Why should the Japanese fight the United States and lose all those profitable markets? France and Germany, linked intimately through marketing and the European Union, are now each other’s largest trading partners. Closed systems build huge armies and waste their substance on guns and troops; open systems spend their money on new machine tools to crank out Barbie dolls or some such trivia. Their bright young people figure out how to tool the machines, not how to fire the latest missile. For some reason, they not only get rich fast but also lose interest in military adventures. Japan, that peculiar superpower without superguns, confounds everyone simply because no one has ever seen a major world power that got that way by selling you to death, not shooting you to death. In short, if you trade a lot with someone, why fight? The logical answer—you don’t—is perhaps the best news mankind has had in millennia. (Farmer, 1987) So international marketing provides us with the opportunity to acquire resources from someone else without force. International marketing, therefore, is also crucial in contributing to freedom from war and, at the same time, assuring additional choice for consumption.

THE RISING COST OF FREEDOM We are finding that the cost of freedom seems to be increasing lately. Terms like free trade or free choice have been misleading since they all come with a price, which international marketers pay in terms of preparing their shipments, scrutinizing their customers, and conforming to government regulations of tariffs or taxes. They pay for it when subsidies are reduced and markets are opened further, resulting in more intense competition. Now prices are going up when international marketers have to file special paperwork or comply with security guidelines, which slow down the flow of merchandise. Every time a shipment is delayed, international transactions are less profitable and the subsequent business dealings

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become less competitive. Customers talk about unmet expectations and domestic firms point to the vagaries of international markets. We all are paying a higher price due to global terrorism, which has permeated the global marketplace. In most instances, terrorism is not an outgrowth of choice but rather the lack of it. Terrorists may succeed in reducing the freedom of others but not in increasing their own. The principal choices played out between those exercising terrorism and those exposed to it are those consistent with economic theory of return on investment. When terrorists select targets in response to governmental implementation of anti-terrorism policies, the harder targets are likely to motivate them to go for easier ones. Increased protection of past targets may result in attacks on new and unexpected targets that are more likely to succeed. Similarly, if terrorists can no longer enter a country, they may attack that country’s symbols and representatives abroad. If embassies are then more secured and fortified, terrorists may attack that nation’s individuals and companies. Who is typically most affected by terrorist acts? Attacks aimed at businesses, such as the infamous bombings of U.S. franchises abroad, do not bring big MNCs to their knees. The local participants, the local employees, the local investors, and the local customers are affected most. Who can protect themselves against such attacks and who can afford to protect targets? Only the more wealthy countries and companies can. They have the choice of where to place their funds, with whom to trade, and whether to hold the enemy at bay through a security bubble created via exports, a franchise, or a wholly owned subsidiary. The poor players do not have any choices and their alternatives are not improved by any gruesome act. The local firms, the nations with economies in development, and the poor customers continue to be out there, exposed to further acts of terrorism without the ability to influence events. But international marketing can enable the disenfranchised to develop alternatives. As suggested by Prahalad and Hammond (2002), multinational firms can invest in the world’s poorest markets and increase their own revenue while reducing poverty. With support from shareholders and the benefit of good governance, marketers can, and should, continue in their role as social change agents. It should be kept in mind that international marketing has value maximization at its

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heart. If it is worthwhile to fulfill the needs of large segments of people, even at low margins, then it will be done.

VALUE AND FREEDOM Implicit in raising the cost consideration is also the question of value. In a global setting, freedom can take on many dimensions. It would appear then that there are likely to be differences in valences of freedom across borders. Privileges and obligations that are near and dear to one may well be cheap and easily disposed of by others. The views of Western society may differ from those views of other parts of the world. Such differences then account for misunderstandings, surprises, and long-term conflicts. It is therefore important to consider ways we can harmonize values or at least get a shared view and understanding of values. There are two value dimensions at work here, both of them highly relevant to international marketing. One of them refers to the macro dimension and may also be circumscribed as the international values and virtues of a market economy. It is important to understand the value here because it offers, quite subtly, a mechanism of checks and balances. In a world that no longer has the political adversity and restraint of the second half of the twentieth century, the existence of a neutral and effective mechanism for this role is necessary and crucial. The unheralded underpinnings of what is being “sold” to the world in a market economy setting are fourfold. First, there is an interaction between supply and demand that is driven by reasonably free market forces. Second, this interaction permits the price mechanism to work, which provides indications as to where investments are likely to be most profitable. Third, investors, who provide resources to the economy, will find these resources to be steered to productive and efficient uses and receive the opportunity to earn profits and to keep these profits. Fourth, in return for high compensation, the non-owner managerial class provides the absentee owners or shareholders with their best efforts to preserve and increase stakeholder benefits. The keys to making this macro dimension work are governmental, managerial, and corporate virtue, vision, and veracity. Unless the world can believe in what firms and their managers say and do, it will be

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difficult to forge a global commitment between those doing the marketing and the ones being marketed to. It is therefore of vital interest to the proponents of freedom and international marketing to ensure that corruption, bribery, lack of transparency, and poor governance are exposed for their negative effects in any setting or society. The main remedy will be the collaboration of the global policy community in agreeing on what constitutes transgressions and swift punishment of the culprits involved. In order to avoid an abuse of such regulations as nontariff barriers, rigid standards emanating from an agreement supervised by the World Trade Organization are in everyone’s interest (Czinkota, Ronkainen, & Donath, 2004). A second and perhaps even more crucial issue is the value system we use in making choices. Some years ago, the Mars Climate Orbiter missions failed spectacularly as a result of the use of different values by the mission navigation teams. One team was using metric units and the other used the English system of measurement. This mistake caused the orbiter to get too close to the atmosphere, where it was destroyed (“NASA’s Metric Confusion,” 1999). There are major differences among what people value around the world. Contrasts include togetherness next to individuality, cooperation next to competition, modesty next to assertiveness, and self-effacement next to self-actualization (Hofstede, 1998). Often, global differences in value systems are what keep us apart and what frequently result in spectacularly destructive differences. How we value a life, for example, can be crucial in terms of how we treat individuals. What value we place on family, work, leisure time, or progress has a substantial effect on how we see and evaluate each other. Cultural studies tell us that there are major differences between and even within nations. International marketing, through its linkages via goods, services, ideas, and communications, can achieve important assimilation of value systems. On the consumer side, new products have attained international appeal and encouraged similar activities around the world, where many of us wear denim, dance the same dances, and eat pizza and sushi (Marquardt & Reynolds, 1994). It has been claimed that local product offerings help define people and provide identity and that it is the local idiosyncrasies that make people beautiful (Johansson, 2004). Some offer the persistence of the specific breakfast habits of the

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English and the French as evidence of immutability in the face of globalization (de Mooij, 1998). It is worth remembering that values as key manifestations of culture are learned, not genetically implanted. As life’s experiences grow more international and more similar, so do values. Therefore, every time marketing forges a new linkage in thinking, new progress is made in shaping greater commonality in values. There is another value aspect to consider. In today’s times, many people are growing uncertain about the issue of values in general. Old providers of values who were societal pillars such as teachers, soldiers, and even churchmen have, through their behavior, sown doubt on their personal rectitude. Institutions such as government or universities have suffered from a similar growth of public doubt in their credibility. In such an era of uncertainty, it is important to have some anchors on which one can rely and platforms to which one can rally. Freedom provides such an opportunity—philosophers in their vernacular call the term a “hurrah” word (Cranston, 1953). International marketing, in turn, aims to achieve the “feeling good” part of Joplin’s song—another hurrah experience—and it does so by bringing new resources and opportunities to consumers. Overall, international marketing’s interaction with the issue of values may eventually become the field’s greatest gift to the world. Its participation in aligning global values may make it easier for countries, companies, and individuals to build bridges between them. On the business side, Raymond Vernon developed an international product cycle (IPC) theory to look at the production, technology, and cost of production and to formulate predictions about their country of production (Vernon, 1966). In the years since this economic theory was formulated, many things have changed. The innovators, which Vernon saw primarily in the United States, have now emerged around the world; manufacturers have been joined by service providers in the international market; and the entire process has been gaining speed. But the fundamentals still apply. Those countries that follow the innovators most closely are the ones that participate rapidly in new developments and are consequently catching up. Here is another opportunity for international marketing to contribute to value assimilation. When a German firm moves from Hungary to Romania, the move represents a success story for both Romania and Hungary. It means that in Hungary the wages have risen to such a degree and the comparative advantage differential has

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shrunk by such a measure that it is no longer sufficiently attractive to maintain the investment of the firm. That means Hungary has caught up—come closer—to the level of the economy of Germany. It also means that Romania has become more productive and represents now a viable alternative for an investment decision. The result is that both Hungary and Romania are better off than before. But just like with Sherlock Holmes’s evidence of the dog that did not bark, a lack of response to IPC should give rise to questions. The logical consequence of the international product cycle theory should have led economic expansion into an increasing number of developing nations. In some regions, this has occurred. There has been the entry and subsequent movement of plants from Germany to Central and Eastern Europe. There have been U.S. plants going from Mexico to Brazil. Japanese plants have shifted from Korea to Vietnam. But for the past decades, we have failed to see any significant thrust of international markets into Africa. Since the withdrawal of British and French forces two generations ago, most of these nations have not been able to develop a successful domestic economic environment by themselves. If change is to come, international marketers, with their desire to create new customers and suppliers and bring about relief and freedom from extremes of hunger, sickness, and intolerance, will need to be a key part of it (Samli, 2003).

FACING THE MUSIC How does all that match with today’s discontent so forcefully expressed by the antiglobalists in their opposition to international marketing? Many claim that never before in history has there been so much evidence about such a strong opposition movement to globalization—pointing to the demonstrations in Genoa, Washington, D.C., and Seattle. Perhaps those making such claims are sadly mistaken. In looking at other “globalizers” in world history, such as the Vikings, the Mongols, the Tatars, and the Romans, there probably was both intellectual and physical opposition (or do we really believe that everybody enjoyed Genghis Khan?). But protest was never allowed to become very vocal, or to engage in repeated, large demonstrations or widespread pamphleteering. Due to rather harsh policies of dealing with the opposition, very few records of

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such resistance are available today. Consequently, comparisons with past intensity are difficult to make. It would appear that it is perhaps even more difficult to find comparable examples of benign exercise of power. Take as an example the instance when a superpower like the United States decides to bury nuclear waste within its own borders rather than foisting it upon the territory of its hapless opposition abroad. Indeed, power structures and networks are subject to shifts, but for now the timing of the how and when looks favorable for the United States. The news is good for international marketing. The discipline is so closely aligned with freedom that one can call it essential for freedom. It is the freedom Thomas Aquinas saw as the means to human excellence and happiness (Weigel, 2001). There is much reciprocal causality. Freedom has caused and facilitated international marketing; international marketing is a key pillar of the cause of freedom. Here we have identified 12 linkages between international marketing and freedom. In the art and science of fingerprint analysis, it is generally accepted that the presence of 12 points of agreement during a comparison indicates that the items compared are the same (Interpol, 2004). With hard work, and at a price, international marketing offers a road leading to growth, peace, and the emergence of values that will let humankind be more human and more kind to each other. In the matter of Janis Joplin’s candidacy for patron of international marketing, you be the judge. Just listen closely to the music and to your heart and let your mind decide.

REFERENCES Cranston, M. (1953). Freedom. New York: Basic Books. Czinkota, M. R., Ronkainen, I., & Donath, B. (2004). Mastering global markets: Strategies for today’s trade globalist. Cincinnati, OH: Thomson. de Mooij, M. (1998). Global marketing and advertising: Understanding cultural paradoxes. Thousand Oaks, CA: Sage. Farmer, R. N. (1987, October). Would you want your granddaughter to marry a Taiwanese marketing man? Journal of Marketing, 51, 114–115. Hayek, F. v. (1971). Die verfassung der freiheit. Tuebingen: Mohr Siebeck. Hofstede, G. (1998). Foreword. In M. de Mooij, Global marketing and advertising (p. xiii). Thousand Oaks, CA: Sage.

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International Monetary Fund. (2004). International financial statistics. Washington, DC: Author. Interpol. (2004). Method for fingerprint identification. European Expert Group on Fingerprint Identification. Retrieved January 24, 2004, from http://www.interpol.int/public/Forensic/ fingerprints/WorkingParties/IEEGFI/ieegfi.asp Johansson, J. K. (1990). Marketing, free choice and the new international order. Washington, DC: Georgetown University Press. Johansson, J. K. (2004). In your face: How American marketing excess fuels anti-Americanism. Upper Saddle River, NJ: Pearson. Kristofferson, K. (1969). Me and Bobby McGee [Recorded by J. Joplin]. On Pearl [CD] New York: Sony Records. (1971) Marquardt, M., & Reynolds, A. (1994). The global learning organization. Burr Ridge, IL: Irwin. NASA’s metric confusion causes Mars orbiter loss. (1999). Retrieved November 22, 2004 from http://www.cnn.com/TECH/space/9909/30/mars.metric/ Prahalad, C. K., & Hammond, A. (2002, November/December). Serving the world’s poor, profitably. Harvard Business Review, pp. 48–57. Samli, C. (2003). Entering and succeeding in emerging countries: Marketing to the forgotten majority. Cincinnati, OH: Thomson. Theroux, E., & George, A. L. (1989). Joint ventures in the Soviet Union: Law and practice (Revised edition). Washington, DC: Baker & McKenzie. Vernon, R. (1966, March). International investment and international trade in the product cycle. Quarterly Journal of Economics, 80, 190–207. Weigel, G. (2001, December 1). Two ideas of freedom. Washington, DC: Ethics and Public Policy Center. Wolfensohn, J. (2001, August). Address at the Opportunity International Australia’s Annual Corporate Dinner, Sydney.

ABOUT THE AUTHOR Michael Czinkota works at Georgetown University in Washington D.C. and holds the chair in International Marketing at the University of Birmingham in the U.K. He served in the U.S. government as Deputy Assistant Secretary of Commerce. He was born and raised in Germany, and educated in Austria, Scotland, Spain and the United States. His Ph.D. is from Ohio State University. [email protected]

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Chapter 1.4

Academic Freedom for All in Higher Education The Role of the General Agreement on Trade in Services Michael R. Czinkota

ABSTRACT In an era of the knowledge society, one would expect to encounter a sense of urgency in assuring the free flow of higher education across national borders. Yet, to the contrary, there is a substantial reluctance to the integration of this sector into the General Agreement on Trade in Services (GATS). This contribution postulates that academia is missing out on a major opportunity by setting itself apart in trade negotiations. Though higher education has a higher calling, it will not be able to compete successfully for necessary resources unless it adapts to the rules of the World Trade Organization.

1 Introduction Learning is crucial to the evolution of humankind. The ability to build blocs of complex issues and to codify and pass on this knowledge has been the essential dimension which sets humans apart from all other creatures. Since antiquity, centers of learning have evolved that reduced

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the cost of transmission of ideas and innovations across professions and trades. These centers were the genesis of our modern medical schools, schools of fine arts and universities (Dickson and Czinkota, 1996). Typically, those countries that offered the most learning were also able to protect themselves the best. There is much truth to the saying “the pen is mightier than the sword.” Take the Roman Empire. The knowledge available in Rome—be it regarding systematic laws, administration of cities, central market locations, communication and distribution systems—all led to a reduction of uncertainty, a decrease in risk and an increased quality of life. As a result, the wellbeing within and outside the empire differed sharply. Citynations and tribes that were not part of the Empire wanted to share in the benefits of belonging and joined as allies. Much of the Empire’s growth occurred through learning advantages rather than through the marching of its legions and warfare. Of course, the advantages had to persist in order to make it worthwhile for others to belong. In its decline, outsiders were attacking an Empire that no longer offered the benefits of learning. Former allies, therefore, no longer saw any advantage in being associated with Rome, and, rather than face prolonged battles, willingly cooperated with invaders. International openness to learning (and teaching) continued to be respected over the centuries. Consider the Minnesänger of yore, where Walther von der Vogelweide moved from castle to castle to pass on the latest news and knowledge. Think of the business report filed by Marco Polo after his trip to China, offering readers valuable intelligence about potential enemies and allies and their practices in a distant society (Nevett, 2004). Remember the itinerant apprentices and artists who would travel to Italy or go to France to become masters in their field. Today there is broad acceptance of the need for and benefit of learning. UNESCO reports that “better education contributes to higher lifetime earnings and more robust national economic growth” (EFA, 2004). Those concerned with business recognize how important it is for a country to be a learning source to both insiders and outsiders. Peter Drucker, in describing post-capitalist society, sharpens the edge when he states “The basic economic resource is no longer capital, nor natural resources, nor labor. Value is now created by ‘productivity’ and ‘innovation,’ both applications of knowledge at work” (Drucker, 1993).

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2 Higher Education and Global Negotiations Governments have drawn a clear linkage between higher education and the quality of life. In the Bologna Declaration, the European Ministers of Education stated that “the vitality and efficiency of any civilization can be measured by the appeal that its culture has for other countries. We need to ensure that the European higher education system acquires a worldwide degree of attraction equal to our extraordinary cultural and scientific traditions” (Bologna Declaration, 1999). What a mission statement for those active in the transfer of knowledge! In today’s era of globalization, governments are concerned about the ability of their institutions to expand abroad, team up with global partners and outperform international competitors. Government negotiators regularly go to bat in the World Trade Organization for their corporations active in the international arena, to ensure that they have a level or at least decent playing field with reasonable rules. In a time of the global knowledge society, one would expect such concern to be particularly keen when it comes to universities. There is an existing international framework for services industries, the General Agreement on Trade in Services (GATS) within the World Trade Organization, which shapes rules and offers a negotiation forum for world trade and investment in services. The application of GATS rules to international ventures of higher education proposes an environment covered and protected by international rules and reduces the risk for investors. In consequence, there can be more investment, which leads to more competition, which gives a boost to productivity. In addition, rate of return expectations can be lowered, which makes it far easier to build international education capacity. Without the global regulatory framework of GATS there will be many opportunities for insular opponents to slow down or even prevent the flow of trade and investment into the knowledge pods of higher education. Without regulatory protection, it is easy to deny building permits, endlessly review applications for structures, implement creative licensing changes, or even just not give any public sector jobs to graduates of private universities. The umbrella of the GATS raises a private education joint venture to the level of an international trade

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and investment concern. The resulting reduction of risk is likely to substantially encourage trade and investment. Yet, even though the global community is busily engaging in the Doha Round of international trade negotiations, to date only 5 out of 148 WTO members have chosen to propose commitments for higher education (GATS). Unless there is a rapid integration of higher education in the current trade negotiations, the freedom for trade and investment in the academic sector will only be systematically addressed in the next trade round, which may be decades from now. It is therefore important to look closely at the reasons for this reluctance of countries to propose more international liberalization and, if appropriate, to find ways for overcoming this unwillingness to free up academia for internationalization.

3 Higher Education—a Different and Higher Calling Many see higher education, which we define as post-secondary or tertiary level education, as a sacrosanct activity. After all, higher education addresses the highest strata of thinking, fosters dramatic debates, and has the potential to affect social power. Historically, students—if not their faculty members—have often been the instigators of dramatic shifts in society. The issue of academic freedom is very close to the hearts of many. Being able to teach what “needs” to be taught—being able to speak out— being able to pursue thoughts to wherever they may lead are some of the most crucial components of academia. In many instances, it is felt that institutions of higher learning are the true fourth estate—an independent pillar of society crucial to innovation and progress while guarding the insights of the past. These considerations have major implications on the perspective brought to issues such as competition and “foreignness.” While competition of thought may be welcome, the same is not so easily said for competition by institutions. There are several indicators of such differentiation. For example, academic institutions have typically been very unwelcoming to any comparative rating system, even though such a

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system would be a key prerequisite for greater sector transparency for both institutions and individuals. Rather than working on facilitating a standardized assessment, work usually grinds to a halt with a finger pointing at the subtle differences which are said to make up the major gaps between universities. As a colleague from the field of logistics remarked: “The Academy always behaves more like teamsters whenever their turf is threatened.” Similarly, foreign students and professors may be accepted, but foreign institutions are seen—if not with disdain—then at least with great caution. The cultural aspects of higher education are seen as being inviolable and deserving of special protection. Since higher education thrives on that special cultural “Fingerspitzengefühl,” there are grave concerns about the participation of unsavory foreign hands. Very closely related is the topic of quality. All can agree on the fact that it is important to imbue participants in higher education with a sense of excellence and that any examinations and degrees need to be reflective of high standards. Worries about “degree mills” (usually from abroad), which certify unqualified individuals with unearned honors, have been a major explanatory reason for cross-border barriers for decades. Yet, after all this time, little progress has been achieved in the area of quality assurance. Subsidiary issues then are concerns of equivalence and comparability. How do we ensure that degrees and diplomas are equal, particularly if institutions of higher education are to accept students from another? How can a common taxonomy assure that a term used in one country maintains the same meaning when used in another? For example, at this time, the global use of the title “engineer” does not always guarantee the same level of education, nor does the term “university” connote the same type of institution. It is these concerns which lead to significant barriers to cross-border educational services activities in market entry as well as in conducting operations. For example, among others, problems have been noted in the licensing and credentialing sectors, the transmission of content, the activities of investors and in the intellectual property rights sector (Moll, 2002). The higher calling has also given higher education a special institutional perspective of itself. Academia has staunchly resisted accepting the notion

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of being part of any services “sector.” In discussions with university presidents, deans, and professors from around the world, I have been consistently assured that the problems faced are so special, specific and unique, that wholesale approaches to anything would be heresy to the purpose of higher education. As the editor of an important business journal put it “reviewers generally reject the notion that higher education is a ‘service.’ ” The special position that academia expects for itself has been made clear in the Statement on Behalf of Higher Education Institutions Worldwide. In this statement, which was co-signed by the American Council on Education, of which my home institution, Georgetown University, is a member, several limitations of multilateral and regional trade regimes in regulating education are outlined: “Trade frameworks are not designed to deal with the academic, research, or broader social and cultural purposes of higher education” and “Trade policy and national education policy may conflict with each other and jeopardize higher education’s capacity to carry out . . . its mission”, finally, “Applying trade rules to complex national higher education systems . . . may have unintended consequences that can be harmful.” (A statement, 2005) In other words, academia should be treated differently in the process of international services negotiations. It is mainly the universities themselves who apparently demand of their negotiators to ensure that the key principles of the GATS framework, such as free competition, transparency, non-discrimination and national treatment should not apply. While higher education may see itself exempt from international service industry rules, it certainly is not immune from the rules of economics, particularly when it comes to issues of supply, demand, and money. On a global level, the higher education sector has fallen behind other industries in innovations and facilities and is in need of substantial funding. Future investments are needed to implement the path-breaking capabilities to which education should be entitled.

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Even in highly developed countries students today encounter much less favorable conditions than their peers in earlier generations, and after they graduate they are positioned on a much less competitive platform. These students and their parents know that in spite of substantial public support and subsidy, the public purse alone will not bring their universities up to global leadership levels. What then are the options? Without additional funding the key alternatives are: (i) declining universities, which accommodate all, but offer progress to none; or (ii) a return to the elite institutions of yesteryear, with higher education for only a select few. Surely both models are unacceptable. Additional funds will have to come from academia’s acceptance of new economic models, consisting of a mix of fundraising, user fees, alumni contributions, and—to a growing degree—market-driven activities in the education trade and investment sector.

4 Higher Education and Productivity International competition influences productivity and has been connected to low levels of inflation. New thoughts, processes and innovations are said to be key benefits of globalization and the main motivators of investment streams. It is therefore well worth exploring how the higher education sector stacks up in the productivity field. Productivity discussions typically measure changes in output achieved with the same level of input. In academia, as in many other service industries, such measurements and comparisons are difficult to make since the type and quality of outputs and inputs vary.

4.1 A Time Transformation Perspective One basic perspective can be gleaned by looking at how much an industry has changed over time. For example, the field of transportation can be divided into land, sea, and air. Within the span of the last one hundred years, these sectors have shifted from the horse buggy, camel, or donkey to the automobile and truck on land, from the dhow to the multi thousand container ship on sea, and from the images of Ikarus and his bird feathers to large jet planes and rockets in the air.

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When we apply such a change perspective to universities in general we find that in contrast to other sectors, university structures and processes have experienced few shifts. Just think, if we could time-transport a professor (or a student) from the year 1386 in Heidelberg to one of today’s universities, that person would be a fully functional professional. There is still the classroom where the professor expounds great thoughts and the students claim to listen. There are still the volumes to read, the papers to write and the ritualized exams to take. Mostly, one professor still offers only one field at one university, and students still receive their knowledge from only one location in one course increments which, as if by magic, last exactly one semester. All this in an era, which is characterized by technology-driven knowledge generation and information dissemination, global reach, cross-fertilization of fields, substantial productivity enhancements and Six Sigma quality control levels. It might appear as if higher education has not innovated at the same pace as other industries.

4.2 A Cost Data Perspective There are also some sectoral and international productivity and cost data available. From 1995 to 2001, general business productivity in the United States increased by 17 percent. In the manufacturing sector, which was subject to most international competition, productivity levels increased by 25 percent (Bureau of Labor Statistics, 2005). All that means is that cost per unit of output have decreased. On the higher education side, U.S. data for annual institutional expenditure per student at four-year institutions indicate that between 1970 and 1996, these expenditures in constant 2000–2001 dollars increased by 37 percent (National Center for Education Statistics, 2005). If we expand our scrutiny in time and scope to include average published tuition fee, room, and board at four-year institutions in the United States, we discover, in constant 2004 dollars, an increase of 114 percent at private and of 82 percent at public institutions between 1976 and 2005 (College Board, 2004). The same data for OECD countries between 1995 and 2001 (in constant 2001 prices) show a dismal picture. If one assumes that overall education quality remained relatively constant during that period,

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there are a few productivity improvements to report: Australia is up 4 percent, Hungary 8 percent, Norway 6 percent and the United Kingdom 4 percent. In most countries, higher education productivity declined: For example, Austria recorded a drop of 9 percent, Denmark 24 percent, France 13 percent, Germany 11 percent, Greece 31 percent, Italy 20 percent and Spain 33 percent (OECD, 2004a). Since these data primarily indicate changes in expenditure per student, one could argue that rather than revealing lower productivity, they reflect higher investments per student—and therefore are a good thing. While such an argument may be accurate in the case of a specific institution due to, say, investments into classroom technology, in most instances our own look into classrooms reveals the sad reality of overburdened teaching faculty and students with fewer choices. Currently, the spheres of interest of productivity and higher education experts are culturally quite far apart from each other. To maintain the nexus between the two domains, it will be important to continue the use of joint terminology. Words and definitions do matter! As has been argued consistently over time, terms like learning efficiency, effectiveness, retention, and relevance must become part and parcel of any discussion of learning. The use of new technologies, self-paced and footloose instruction, person-specific content responsiveness, benchmarking, learning absorption testing, critical knowledge deficiency detection, and specific learning recycling must become commonplace parlance in the education industry (Dickson and Czinkota, 1996). A final key argument on the productivity side concerns the battle between central planning and market economies. In many academic organizations virtually everything remains the opposite of the entrepreneurial system. Funding comes from the government, salaries are set based on years of service, grants are awarded based on seniority. Often universities have even mobility monopolies over students within a region. Rewards for management come for the ability to manage coalitions and increase subsidies, rather than the capacity to raise industry funds or be market responsive. After many decades of ideological conflict the evidence is quite clear that central planning has not worked. Yet, in spite of our university classroom teachings to that effect, many of the institutions where we do the teaching remain the last vestiges of central planning.

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Perhaps the abandonment of a failed concept will bring prosperity to all! (Cabrera, 2005).

5 Higher Expectations of Higher Education The world places growing expectations onto academe. We conducted a Delphi study with a set of experts drawn from the policy, business, and academic communities ranging from the mega markets of the world to the emerging and developing ones. Over three rounds of interaction, these experts analyzed and debated the likelihood of changes in the international business and economic environment over the next decade and the impact of these changes. The findings reported here focus primarily on the education dimension. The full report can be found in the Journal of World Business (Czinkota and Ronkainen, 2005). The higher education sector emerged as the most important component of global strategy. There was seen a formidable need for administering national transition. Universities have internationalized over time but have not kept pace with globalization and the transformation of world relations. For many years foreign language training was the main international activity on campus. Over time, culture was added to the verbs and international studies departments were formed. Policy concerns led to programs in international diplomacy. More recently, global marketing and management courses produced the now highly competitive international business programs. In all instances, however, little has been done to deal with the conflicts and problems of transition management. The new mandate for institutions of higher learning is still to develop leaders well grounded in functional skills; however, they need knowledge of international affairs and sensitivity to a diversity of beliefs and social forces. They must know about the impact of culture and the workings of legal institutions. They need to have a sense of history and appreciation of ethics. They may have to administer crowd control, guard national treasures, and provide for public health. They will need to have an understanding of logistics and be experts at liaison with groups ranging from local zealots to representatives of international organizations. They will need to learn a dose of market-based thinking, but also be

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understanding of clashing religious beliefs and the importance of family ties. Above all, they need to communicate well. New thinking in academia must pool the best knowledge, the most spirited desire for change, and the deepest experience in implementation. Matching such resources with the most talented students from around the world will give new meaning to the term “elite.” Such global learning centers need to be linked to centers of power and maintain insights into both business and policy processes. The occasional physical presence of key decision makers from legislative, military, and judicial organizations will help. Other than that, such programs will be footloose around the world. While it may help to be part of an existing organization, close relations with like-minded partners can provide the opportunity for a coalition of many countries and institutions to teach how to do things better in the future.

6 Types of International Higher Education WTO negotiation convention considers different types of cross-border activities by industries. These are consumption abroad, delivery abroad, cross-border supply, and commercial presence abroad. Since any educational services integration into the GATS system would, at this stage, be most likely achieved by adjusting to the existing negotiating framework and terminology, the activities of international higher education are differentiated into these four dimensions. Student mobility is consumption abroad and continues to constitute an important component of the international supply of higher education services. Professors and researchers can move abroad to provide for the presence of natural persons. Programs can be sent abroad with distance learning and online education to offer a cross-border supply of services. Finally, there can be a commercial presence through the move abroad of institutions where universities open up a branch campus or join forces with another entity. One could even envision a take-over battle for the leading education provider in a country. Table 1 summarizes these four alternatives. Our subsequent discussion will follow this format.

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The Four Types of International Higher Education

Gats type Mobility

Example

1. Consumption abroad: Student mobility 2. Delivery abroad: Academic mobility 3. Cross-border supply: Program mobility 4. Commercial presence: Institution mobility

Students shift countries Faculty, researchers shift countries Distance learning, online, franchising Branch campus, j.v., investment

Adapted from: Internationalization and Trade in Higher Education: Opportunities and Challenges, Paris, OECD 2004.

6.1 Student Mobility Participating in a period of “study abroad” is perhaps the most traditional and visible experience of global higher education. This activity most directly corresponds to the view of trade in services. Over the past twenty years, student mobility has increased rapidly. The number of international students in OECD countries alone has doubled to 1.6 million, with Europe being the largest recipient and Asia being the largest emittent region. Structurally, it should be noted that Asian students typically use their mobility to acquire a degree at full fee, while American and European students typically participate in much shorter term programs (OECD, 2004b). For many countries international students represent an important source of export revenue. These students cover not only their education and travel cost, but also their living expenses for themselves and, in many instances, for their families. It has been estimated that international student mobility amounts to a minimum of 3 percent of global services exports. In Australia and New Zealand, educational services rank, respectively, third and fourth in terms of services exports (OECD, 2004b). In the United States, the expenditures of international students have consistently exceeded the monies spent by Americans studying

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abroad. This attractiveness of U.S. educational institutions resulted in a services surplus of more than US$ 10.7 billion in 2003 (U.S. Bureau of Economic Analysis, 2004). International students also make powerful contributions to their immediate environment. In financial terms, they often generate key additional income streams. In the teaching and research arena, their teaching of large undergraduate courses at relatively low compensation often enables the faculty to devote much more time to other tasks. In fact, one could argue that it may be such a low wage strategy which enables some institutions to build their research reputation. Student mobility has at its core the focus on experiential learning and the ability to be immersed in a new environment. Compared to many other ways of becoming knowledgeable about an issue, few other approaches convey the same proximity and capacity to feel, touch, see and hear the subject matter. Particularly where culture and values are key components of the experience, the student mobility approach to internationalization is unique. However, for many, constraints of time and money have been and will continue to represent harsh obstacles to such mobility.

6.1.1 Shifts in Student Mobility The vast increase in international student mobility has not been matched with a similar increase in support structures in their home and host countries. It has been relatively easy for students to “fall between the cracks.” There have been insufficient mechanisms in place to even find out whether, once arrived in a country, students actually were able to participate in classes which they intended to attend. Such a lack of infrastructure is difficult to accept, particularly for individuals at an age vulnerable to hostile intent. The murderous terrorist attacks of 9/11 may have had a long-term effect on the direction and extent of international student mobility. Today’s heightened security environment has imposed new scrutiny and reporting requirements on the academic sector, particularly in the United States. New bureaucratic processes led to lengthy delays in visa interviews and rapid increases in the delay and the denial of visas. Often, the delays conflict with admission interviews, schedules, short-term travel plans, or

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other time sensitive requirements of academe. It has been difficult for universities to restructure their time frames for international students in a manner more accommodating to the realities and needs of national security. There has also been disenchantment with studying in the United States for reasons of policy disagreements, fear of exposure to greater scrutiny, and indirect reasons such as a greater desire to stay at home. In consequence, the number of international students enrolled at U.S. educational institutions, after minimal increases in 2002/3, decreased by 2.4 percent in 2003/4, the first absolute decline since 1971. By region, the sharpest decreases were students from China (–20 percent), Japan (–14 percent) and the Middle East (–9 percent). Substantial decreases were also noted for India and several European nations. Student applications have decreased even more sharply (Open Doors, 2004). Though the delays have been greatly shortened, difficulties encountered in the United States have caused some students who earlier might have come to the US, to change their choice of country. However, these declines may also well mark a watershed indicating a reduction in student mobility. One more “score” to add to the collateral damage inflicted by the terrorists, and one additional example of unintended yet powerful consequences of policy actions. It is important to distinguish such legitimate manifestations of national security from trade concerns such as visa requirements regulating the free flow of international students, foreign exchange requirements which affect student’s ability to pursue their activities and variances in the recognition of qualifications. On the institutional side, issues such as the possibility of overburdening students in their institutional obligations need to be safeguarded.

6.2 Academic Mobility Here, conditions may often resemble those of student mobility, only that the persons involved are faculty members, researchers, and program administrators. However, the issues of culture and values become particularly powerful, since it is often through academic mobility that highly sensitive sectors of society are touched. The range of activities can be a simple speech, but also consist of a lengthy course or program development lasting for years. Those very issues, which make academic

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freedom so precious in any given classroom, may give rise to concern and even conflict when it comes to cross-border activities. Who needs a foreign professor fomenting discontent with one’s policies? It is of course tempting then to apply employment rules, visa regulations or concern with the transfer of educational materials as administrative tools in support of national priorities—yet, the discriminatory use of such tools to inhibit the services transfer is inappropriate. It is here, incidentally, where smaller countries may benefit the most from an open market approach. If the industry abandons its traditional “one professor at one institution” approach, the much broader reach of leading individuals is likely to make many more talents much more available than before.

6.3 Program Mobility For many decades and in many countries, higher education has gone the distance via correspondence teaching. Such traditional program mobility by mail has been substantially enhanced by new capabilities which have made future opportunities in distance learning particularly large. Technology has made it possible to transmit learning content at a low cost over vast distances and to do so even at synchronous learning times. Technology applications have also enabled us to re-structure the content itself to become more amenable to such transmission yet retain much of its value. Furthermore, both the educators and particularly the learners have adapted to a learning style which is visual and audio friendly—and highly transmittable. The academic sector has supported such program mobility. Universities around the world are recognizing the advantage of online coursework both as a supplement and a replacement of classroom time. Pioneering international consortium programs have brought together students from several different universities worldwide in one virtual classroom to create a global cultural learning environment. They engage in conversation and work together on projects to simulate the international work environment. The City University of Hong Kong and its HKNET, created in 1998 (City University, 2005) together with the Spanish National University of Distance Education (UJNED) or the French National Centre for Distance Learning (CNED) may serve as examples (Norway,

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2003). The impact of such efforts has been substantial. It has been reported that “international students enrolled in Australian institutions from their home country though distance education represented 9 percent of the total enrollment of international students in Australia in 2001,” and that distance education has been crucial in assisting education institutions to expand their capacity (Norway, 2003). Individual academic institutions have reached out as well. Some have done so to simply disseminate knowledge—without necessarily expecting a subsequent student or degree interaction. Take the Massachusetts Institute of Technology (MIT) as an example. Since March of 2005, this university has more than 1100 courses available on its web-accessible Open Courseware System (OCW) (Potts, 2005). The system is free and requires no registration. It does not lead to a degree or certificate and does not guarantee access to MIT professors, but it provides free, searchable and coherent access to virtually all MIT course materials. Even though most early users may have been MIT students who perhaps missed a class or wanted to check up on a particular issue, by 2005 more than 52 percent of all visitors were self learners and 54 percent of the more than 12,000 average daily visitors came from outside North America (Carson, 2004). Are there concerns about this widespread free availability of knowledge? Probably some, but Professor Paul Penfield of MIT tries to put them to rest: “The way to make progress in science is by using the best results of others—‘standing on the shoulders of giants’ is one way of expressing this idea. That’s why we publish scientific results. OCW will let the same thing happen in education” (Penfield, 2004). Besides, the system works very well as a recruiting tool. On the more remunerative side, universities also have formed consortia to reach out successfully. For example, Oxford, Stanford, and Yale universities participate in allLearn.org where non-credit courses are offered to students of all ages. There are faculty forums, live chats and student interactions, combining traditional teaching elements with streaming media, message boards and videotapes. Simultaneously, many individual faculty members have developed their own interactive distance learning approaches with multiple institutions around the world. What makes this option very attractive is the fact that it provides increasing independence of faculty members from colleges and universities in the delivery of their message and

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education (DiPaolo, 2001). Personally, for example, I have run internetbased courses out of Washington which met with students in Geneva, Switzerland, Ingolstadt, Germany, and Vienna, Austria almost simultaneously. Due to my easy internet accessibility to students for questions and discussion, I even won a top of the list spot when it came to evaluations of teaching and student satisfaction. However, all these efforts by traditional academia pale in light of private higher education sector developments. The electronic learning market around the world is about to make its major impact felt. In 2003, Western European corporate e-earning market revenues were estimated at US$ 697 million, projected to reach, with a continued growth of 24 percent per year, revenues of more than US$ 2 billion by 2008. In the Asia/Pacific Region, the revenues are expected to grow during the same period from US$ 172 million to more than US$ 723 million and in the United States the revenues are expected to rise from US$ 4.1 billion to US$ 13.5 billion by 2008, an annual growth rate of almost 27 percent (International Data Group, 2004). Such electronic learning can easily reach widely dispersed mobile groups. It can take the so far hidden resources of organizations, be they governmental, semi-public or private, and make them accessible to the world. No longer are individuals—be they teachers or learners—required to make provisions for travel and lodging which are costly, time and energy consuming. Now it is much easier to expand horizons through e-learning interactions on a global scale. For example, were a professor of international business to discuss foreign direct investment issues in a classroom, students would mainly tend to discuss the perspective of the investor entering a nation. Under e-learning conditions, however, it is quite likely that an international audience would also contribute the perspective of the nation being entered and that of the local firms experiencing the new competition—certainly a broader view. There is still substantial resistance to such e-learning on many levels. Its quality is doubted and severe barriers are erected which is not unexpected, particularly in the international arena. Accepting international competition often requires abandonment of traditional approaches. Doing so is difficult. Explains Drucker: “To abandon anything is always bitterly resisted. People in any organization, including bureaucrats and politicians (administrators and professors) are always attached to the

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obsolete; the obsolescent; the things that should have worked that didn’t; the things than once were productive but no longer are” (1993, p.164). I personally remember the furor that was raised at my home institution when I gave my first “international exam by fax”—but the caravan keeps moving on. Program mobility provides for a substantial alteration of the competitive platform of learning. Just consider the activities of the Apollo Group—corporate umbrella for several e-learning organizations, among them the University of Phoenix in the United States. More than 255,000 adult learners attended the group’s 219 institutions in 2004. Flexible class times at night or weekends and sequential and short courses which can be accessed at any time from any computer with Internet access are at the core of the firms’ offering. Graduate and undergraduate degrees are offered to students in more than 130 countries. As the firm grew, its instructional costs and services and its general and administrative expenses increased in absolute terms, yet both categories declined as a percentage of tuition to 42.5 percent and 4.9 percent, respectively in 2004 (Apollo, 2004). A good omen for productivity!

6.4 Institution Mobility Institutions of higher education also have an international mobility of their own. In the longer term one can well conceive of a substantial growth in international investment activities by universities. They can be driven externally through traditional investment capital, or internally through their own indigenous investment power. For example, given the system of university endowments and strong alumni support prevalent in some nations, there may well be opportunities for some institutions to become leading investment vehicles. Lest one underestimate the power of the ivory tower, there is some impressive financial potential present to expand around the globe. In the United States and Great Britain, for example, some universities can boast of rather significant endowments in the billions of dollars and pounds. However, two constraints need to be kept in mind. For one, the mega endowments are the exception, rather than the rule. Even though the approximate endowment of Oxford and Cambridge Universities in Britain amount to 2 billion British pounds each, the total endowments

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of the top 500 academic institutions in Britain amount to approximately 5.7 billion pounds (University Endowments, 2003). While endowment levels are substantially higher in the United States, again the US$ 23 billion endowment of Harvard University is quite unique and most other U.S. institutions have far lower endowment levels (National Association of Colleges, 2005). Second, it must be considered that in many instances, endowment funds are not fungible but rather committed and therefore not readily available for foreign investment. Nonetheless, there are several reasons why institution mobility is important and should increase. First, the institutional presence offers contextual learning to the student. The direct and individual experience can make a crucial difference in understanding. Take as an example the flying of a modern plane. Virtually all the activities necessary are regulated by computer. Even the human responses are all precisely mapped out in guide books. If any particular warning light comes on, the pilot looks it up in the manual and takes the proper response. Yet, does that make button-pushing skills sufficient to be a good pilot? Of course not! The close connection between technology, experience and sensitivity to events is what sets the excellent pilot apart—yet those traits are mostly acquired by personal interaction. Institutional mobility also helps build the fiber of connectivity which accounts for the socialization part of education. The friendships formed among cohorts, the understanding gained in terms of human interactions, and the links refreshed when returning for a “homecoming” are all dimensions which can both change and strengthen culture, and which only institutions can convey. The building of an institution is often crucial in attracting new funds for the higher education mission. Investors, both local and foreign, may not be willing to put their money at risk for anything other than the expansion of an established proven concept in higher education. Here are several examples: The Cambridge–MIT Institute (CMI) is a joint venture between Cambridge University of the United Kingdom and the Massachusetts Institute of Technology (MIT) of the United States. Funded in 2000 by the British Department of Trade and Industry (DTI) with a grant of 65.1 million pounds and private funds, CMI is jointly owned by the two universities and designed to enhance the knowledge exchange between universities and industry (CMI, 2005). Georgetown University is

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developing a branch campus of its School of Foreign Service in Qatar. With local government funding, this campus will be part of a site called Education City, where a series of universities, each concentrating on its specialties, will form an education magnet in the Middle East. The business school of Northwestern University in Chicago teaches about half of its students through local partners in locations such as Israel and Hong Kong. The school itself controls the curriculum, inspects standards and issues the degrees. But the actual teaching is outsourced—a logical step under conditions where a university can examine far more students than it can actually teach (Higher Education, 2005). Such ventures are the university industry of the future: specialization in areas of competence to use resources most effectively, and reaching out to the world to make the most efficient use of the resources employed.

7 Some Considerations for Trade Negotiators The country representatives involved in the current GATS negotiations must ask themselves an old negotiator’s question: Do we need to be followers or leaders on this issue? Typically, trade agreements tend to be designed to cover trade that already takes place. Trade is rarely initiated by trade agreements (Internationalization and Trade, 2004). Doing so is the safe way because it allows everyone to take measures on issues that are well known and familiar. It is important to realize that flows in education services across borders will take place regardless of whether or when agreements are put in place. At the same time, what is perhaps different and special in this instance of higher education is the fact that we may have waited too long already. Waiting to discuss issues, holding back on international competition in higher education may have deprived us of progress, of the benefits of such competition and may account for the slowness of change in the sector. Yet, progress is too important to be neglected or deferred to another round. In the age of a knowledge society we cannot in good conscience withhold the benefits of higher education from large segments of the global population.

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The Doha Round can bring an entirely new dimension to information dissemination and knowledge building. With today’s technology, one can combine the capabilities of education with the benefits of trade and investment to transcend national boundaries and escape from narrow sector silos. It is now important to ensure that there will be collaboration in several ways. For one, institutions must begin to think beyond their splendid isolationism, individual fiefdoms must gradually give ways to confederations. It must become possible to know about each other and collaborate within in order to structure activities without. Such a shift requires a major change in the culture of most institutions of higher learning. Next, there needs to be dialogue between educators, technologists, commercial individuals and trade negotiators. That interaction and collaboration sine ira et studio, leads all parties to understand that each of them is an important contributor of different components. Just like in a car race, the engine will not go far without fuel, tires and the driver are essential, and the race would not take place without the sponsorship by individuals and institutions. Perhaps more chairs are needed around the table to accommodate the broader thoughts and concerns pertaining to the education sector, but the losses to global higher learning, if one were not to do so now, would be era retarding—akin to the burning of the great library of Alexandria. Today, education is the crucial nexus of progress. Within the European Union, the ability to achieve cross-national education progress is essential if there is to be rapid progress by the new accession countries. Higher education must not constrain the new mobility but rather help to convert investments into innovation into direct employment outcomes. Waiting for gradual institutional transformation at a snail’s pace would delay crucially needed progress to many. However, opening up the industry to the benefits of investment mobility can speedily bring best practices to many. Developed nations are perhaps slow to react to growing opportunities and the changes in higher education. Too many entrenched forces have to be accommodated to achieve liberalization. Emerging nations, together with marginalized communities who have been excluded routinely from the benefits of higher education can achieve the most rapid gains from the global liberalization of the sector. Just think of

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detained juveniles in Malaysia who can now enroll in distance learning by universities, sit for tests by mail and be paroled early; or Native Americans who can take classes on their reservations; or any conditions in developing countries where culture or costs have constrained higher learning (Ambler, 2005; Malaysian News Agency, 2005).

8 Avenues and Responsiblities for Action Trade negotiations set the framework and outline the rules of the game. Important as those may be, however, the key activities always emanate from the players. In this instance, these are the three sectors of government, business and academia. The government needs to lose its timidity and bondage with regards to education. In many countries, there are long-standing phenomena such as the “Grandes Ecoles,” which intertwine government with higher education and encourage complacency. In this era of knowledge diversity and information diffusion, government officials must be aware of the risks they incur if their borders confine higher education input and output. Rather than being the wardens of higher education, government policy makers should become enthusiastic centrifugal forces of outreach. New approaches should not be encountered with disdain or suspicion, but rather with interest and encouragement. The unusual should be met with an anticipation of the best rather than a fear of the worst. The business sector in turn should see itself as a partner rather than just as a consumer or limited supplier of higher education. Business is boosted by the research performed by the knowledge giants who have walked before, the insights of academia have propelled us all forward. Even the failures helped avoid the pursuit of blind alleys. Investors should make higher education projects part of their desirable selection alternatives. Investment into knowledge generation and diffusion should become at least as attractive to the financial sector as the drilling of an oil well. The fact that this is not the case today may largely result from the parties having looked at each other with suspicion for too long. Though business controls resources are needed by academia, the relationship should not be characterized by conflict, but rather by an acute desire for collaboration and mutual learning. Such collaboration

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must be accompanied by reciprocal respect for values and traditions of which higher education tends to have more than most other sectors in the world. There needs to be an appreciation of why things are done in certain ways and why, after many years of trial and error, certain processes have survived. Innovation is good, but it cannot ignore the foundations erected in the past. Finally, on to academia: Movement and transfer between institutions, both domestically and internationally, should be encouraged. Such movement, at the very least, exposes members of one organization to those of another, along with their expectations, capabilities and preferences. Such exposure is likely to lead to learning, the formation and strengthening of research networks, a new understanding of problematics and a new appreciation for different conditions. There need be no fear that such mobility might change the competitive platform. With or without encouragement, market forces are already bringing about changes in competitive intensity. For example, during the past decade in Washington, DC alone, dozens of new institutions of higher learning have opened their portals to student intake. Depending on their ability to differentiate themselves and serve their market, they will either succeed or fail. Mobility, however, will help enhance competition and service. Academia should also offer greater transparency in its work. Certain terms of art or particular rituals may have great merits. In many instances, however, their original use is now shrouded in the past and only serves to intimidate, bewilder or turn away outsiders. A fresh wind of openness will make it much easier to evaluate market prospects, compare competitive offerings, and let students make wiser choices. Such clearer information will also lead to better resource allocation decisions and a renewed rise of meritocracy in academia. Openness will make the industry stronger and better. Faculty members might also consider participating more actively in the dissemination of their knowledge. For example, one could imagine professors investing into their own institution or their own discipline. Given the knowledge comfort that faculty members typically possess about their own area, one could envision a “management buyout” leading to a greater expansion of the best-positioned areas of a university. One could even surmise a faculty team making itself available with a group of professorial “turn around” experts who could improve the standing

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of a university in order to make the institution more attractive for funding, donations, or acquisition. After achieving the objective, the team would move on to the next target, bringing knowledge, reputation and investment to new shores. Finally, let us not forget about the students. Reaching out to them, working with them, and leading them on the path to discovery is one of the great thrusts and trusts inherent in the life of a faculty member. Making available more academic institutions to more people is the equivalent to finding new sands where professors can place their footsteps and have them followed by new students. Once this proud privilege offered by new opportunities is understood and appreciated, the professoriate itself will surely become the key to taking off the shackles and making higher education truly footloose.

REFERENCES A statement on behalf of higher education institutions worldwide. (2005). http://www. unesco.org/iau/p_statements/index.html, accessed March 23, 2005. Ambler, M. (2004, Summer). Distance education comes home. Tribal College Journal of American Indian Higher Education, 15(4): 8–9 (accessed February 23, 2005). Apollo Group, Inc. 2004 Annual Report. AZ: Phoenix. Bologna Declaration, Joint declaration of the European Ministers of Education (1999, June 19). Bureau of Labor Statistics, http://www.bls.gov/news.release/pdf.prod2.pdf, accessed March 4, 2005. Cabrera, A. (2005), President, Thunderbird University, Personal Interview, March 21. Carson, S. E. (2004, March). MIT OpenCourseWare program evaluation findings report. Cambridge, MA. City

University of Hong Kong. http://www.blackboard.comldocs/casestudy/en/ CITYUhongkong_casestudy.1201.pdf, accessed March 2, 2005. CMI, Cambridge-MIT Institute. http://www.cambridge-mit.org/, accessed March 16, 2005. College Board, www.collegeboard.com/prod_downloads/press/cost04/041264TrendsPricin g2004_Final.pdf (p. 9). Czinkota, M. R., & Ronkainen, I. A. (2005). A forecast of globalization, international business and trade: Report from a Delphi study. Journal of World Business, 43(2): 111–123, Dickson, P. R., & Czinkota, M. R. (1996, Fall). How the United States can be number one again: Resurrecting the industrial policy debate. Columbia Journal of World Business, 76–87. DiPaolo, A. (2001). Online education: Myth or reality? Stanford Center for Professional Development, Stanford University, http://scpd.stanford.edu/SCPD/js/brandingFrame/ externa-IURL.htm, accessed February 16, 2005.

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Drucker, P. (1993). Post-capitalist society. (p. 8) New York: Harper Business. EFA Global Monitoring Report 2005. (2004). Paris: UNESCO, p. 2. Higher education. (2005, February 24). The Economist, p. 3, accessed March 21, 2005. International Data Group. (2004, November). e-Learning market 2003–2008, forecast and analysis, Framingham, MA. Malaysian National News Agency. (2005, March 16). Detained juveniles may be allowed to enroll in distance learning, accessed March 21, 2005. Moll, J. (2002). Trade in educating and training services. Export America, 25–28. National Association of College and University Business Officers, http://www.nacubo.org/, accessed March 8, 2005. National Center for Education Statistics, http://www.nced.govllprograms.digest/, accessed March 8, 2005. Nevett, T. R. (2004). Marco Polo: International marketing pioneer. Journal of Macromarketing, 24(2): 178–185. Norway. OECD Forum on Trade in Education Services. (2003). Key developments and policy rationales: E-learning and distance courses. Paris. OECD. (2004a). Education at a glance. Paris: OECD. OECD. (2004b, August). Policy brief internationalization of higher education. Paris: OECD. OECD. (2004c) Internationalization and trade in higher education: Opportunities and challenges. Paris: OECD, p. 261. Open doors. (2004). International students in the U.S. Institute of International Education, New York. Penfield, Paul, as cited in MIT OpenCourseWare Program Evaluation Findings Report, op. cit. (p. 33). Potts, J. P. (2005, February 14). Personal interview. University endowments: A UK/US comparison. (2003, May). Sutton Trust. http//www.suttontrust.com/, accessed March 29, 2005. U.S. Bureau of Economic Analysis. (2004, July). Survey of current business. Washington DC.

Chapter 1.5

International Information Cross-Fertilization in Marketing An Empirical Assessment Michael R. Czinkota

Information is a crucial strategic resource. This is particularly the case in business, “where managing a business well is managing its future, and managing its future is managing information” (Daser, 1984). The importance of information is further underscored by the business strategy literature which has developed concepts such as the learning organization (Nonaka, 1991) and “intelligent enterprises” (Quinn, 1992). Some even claim that “to become information intensive is not a choice but rather an adaptive response, a requisite to survival” (Cadeaux, 1997). Information and its management is even more important in the international setting, where entirely new parameters and environments are encountered. The marketing literature continues to highlight the linkage between international information, competitiveness and corporate success. For example, Kedia and Chahokar (1986) claim that a lack of information is the major deterrent for international market participation by small and medium-sized firms. Some see management’s willingness to gather information as crucial for international marketing success (Dichtl et al., 1990). It has been claimed that companies can expect to remain competitive in the global marketplace only if they are aware of crucial macro and micro information from around the globe (Czinkota, 1991),

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and that “learning may be the only source of sustainable competitive advantage” (Slater and Narver, 1994). An analysis of international market failures found that most errors could have been avoided if the firm and its managers had obtained adequate information first (Ricks, 1999). On the overall point of the importance of information, Farmer (1987, p. 113), stated that “to be world class one needs world class information.” Bill Gates, Chairman of Microsoft, raises the stakes even higher when he argues “How you gather, manage and use information will determine whether you win or lose” (Gates, 1999).

International Information Integration in Marketing Managers understand that international information gathering is crucial to the success of their enterprise. The rapid growth of international activities by the leading business research organizations provides clear evidence of the corporate awareness of and desire for information on an international basis. For example, the top 50 US marketing research firms derive, on average, more than 38 per cent of their revenues from outside the USA (Marketing News, 1996). On a conceptual level, in academe, a fundamental assumption posited is that learning is likely to improve future performance (Garvin, 1993). This key tenet of course, serves as the main justification for the entire academic industry itself! It has been said that “a unique characteristic of knowledge is that it is one of the few assets that grows most when shared” (Quinn, 1992, p. 254). Furthermore, the history of the rise and fall of civilizations indicates that valuable knowledge not only can emanate in one location but also is usually footloose in origin. Key intellectual contributions have been made by places as far apart as Athens, Baghdad, Cairo, Heidelberg, Moscow, Peking, and Princeton. The three key dimensions of information and knowledge identified here are therefore: (1) information and knowledge are useful for learning and progress; (2) information and knowledge can emanate from multiple sources around the globe; (3) information and knowledge, when shared, become more valuable.

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In light of these dimensions, one would expect that academia, which has done so much to conceptually analyze information and knowledge issues, would be particularly sensitized and interested in the international transmission and use of information. Within the general area of academia, the business field would appear to be particularly attuned to such international cross-fertilization, since business research has indicated the great value of such information and knowledge linkages. Since much of the international research and focus on cultural differences has occurred in the field of marketing, one could surmise that the members of the research community in the marketing field would be the ones most successful in the international cross-fertilization of information. These expectations, however, are not universally accepted. There is the belief that the international exchange of information may be hampered by significant external barriers. For example, some hold that non-US authors face barriers to entry when it comes to publishing in US journals, particularly when these authors are mainly referencing non-US literature. There appears to be the belief that, in order to get published in US journals, the author needs to move to the USA or work in the USA for some time.1 This issue is brought home by a letter from the renowned international researcher Geert Hofstede in which he states: “I always had the greatest trouble in getting my manuscripts accepted by North American journals. Recently two of my very good manuscripts were rejected . . . Both manuscripts are now being published in Europe. My diagnosis is that most of North American social sciences is conducted by in-group persons who read only one another’s work and cite one another. There is no conscience of belonging to a borderless crowd of humans who try to explore the same social reality” (Hofstede, 1998). Similar complaints have been heard even from UK colleagues who claim that much of their work published in Europe is neither cited nor acknowledged in the USA. Maruyama likens such introspection to a “local content requirement” by US social scientists (Maruyama, 1991) which may lead to inbreeding and the insulation of researchers from progress elsewhere (Maruyama, 1998). Similar impediments may also be presented by internal barriers to authors who (plan to) publish outside their own country. Apart from language concerns, these barriers can also consist of institutional evaluation systems which do not treasure (or even count) publications

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outside one’s own narrow confines. Particularly in a “publish or perish” environment, such policies may serve to significantly affect international publication activity.

An Analysis of International Contributions to Journals Method In light of these controversies surrounding international information exchange, it was decided to investigate the degree to which the marketing literature benefits from the input of international authors. This way, a more fact-based understanding of the extent of global cross-fertilization of ideas would be obtained. Academic journals are said to reflect the developments and the directions of a field most clearly. Therefore an international analysis of key journals was conducted to analyze the country affiliation of the contributing authors. The focus was on selected journals in Europe, Japan and the USA, which were likely to carry marketing articles from international authors. In the USA, these publications were Journal of Marketing, Journal of the Academy of Marketing Science, (Columbia) Journal of World Business, Journal of International Business Studies, Journal of International Marketing and Harvard Business Review. In Europe, the analysis covered the European Journal of Marketing, published in the UK, and the publication Marketing in Germany. In Japan, the publication Marketing was reviewed. The period of analysis covered 18 years for the US publications (1980–1997), with the exception of the Journal of International Marketing, which had only been in existence since 1993 and was therefore analyzed from its initial appearance. For the UK, German and Japanese publications the period of analysis covered the 11 years between 1987 and 1997. The analysis focused on the country affiliation of authors in these journals. Particular attention was paid to non-regional authors, i.e. authors who did not have an affiliation with an institution in the country (or region) in which the journal was published. Overall, the articles and affiliations of 8,078 authors were reviewed.

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Findings The findings indicated a surprisingly low degree of international cross-fertilization for most publications. In the US journals analyzed, in an 18-year period, articles had been written by 6,361 authors. Overall, only 8.9 per cent of these articles were published by non-US affiliated authors. However, the range of international contributions varied widely by journal. For example, on the low side, the Journal of the Academy of Marketing Science had only 1.9 per cent of its contributions emanate from authors which were not affiliated with US or Canadian institutions. By comparison, the Journal of International Business Studies which positions itself as an outlet for research conducted globally, had 22 per cent of its authors coming from outside the USA and Canada. Surprising were the findings for the Journal of Marketing and the Journal of International Marketing. Both publications are marketing-specific outlets, yet they turn out to have very different degrees of internationalization. The Journal of Marketing has one of the lowest levels of international authorship with 4.7 per cent, while the Journal of International Marketing has the highest international permeation in the Western Hemisphere with an international authorship of 28 per cent. As of 1998, both of these publications are part of the American Marketing Association’s publication program. It will be interesting to see whether the high differential in international authorship levels between these two journals will continue. Over an 11-year period in Japan’s Marketing Journal the number of internationally affiliated authors was 43, or 9.1 per cent of total authors, quite similar to the average level of the USA. For Europe, Germany’s Marketing had contributions from 27 non-regional authors, which amounts to 7.3 per cent of total authors. By contrast, the European Journal of Marketing had, during the same period, 394 non-Europe affiliated authors, accounting for a total of 45 per cent of international authorship, and thus making it the most globally oriented journal of the ones analyzed here. This degree of internationalism of the authors contributing to the European Journal of Marketing (EJM) is the more remarkable, since it reflects all the authors who do not come from the European Union, which in itself already represents a very diverse number of countries. Details of all these findings are presented in Table 1.

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TABLE 1.

The Country Affiliation of Authors in Key Marketing Journals in Europe, Japan and North America

Region/journal

Percentage non-regional authors

Total authors

Non-regional authors

372

(Non-German) 27 (Non-Euro) 394

45

471

(Non-Japanese) 43

9.1

963

(Non-US/ Canada) 148

15

2,035

106

5.2

1,145

22

1.9

824

181

22

192

53

28

1,202

57

4.7

6,361

567

8.9

I. Europe Germany: Marketing (1987–1997) UK: European Journal of Marketing (1987–1997) II. Japan Marketing Journal (1987–1997) III. North America (Columbia) Journal of World Business (1980–1997) Harvard Business Review (1980–1997) Journal of the Academy of Marketing Science (1980–1997) Journal of International Business Studies (1980–1997) Journal of International Marketing (93–97) Journal of Marketing (1980–1997) Total US

874

7.3

A further analysis was conducted to determine the countries of affiliation of the non-regional authors. This analysis was done in order to find out whether the home language of the country of affiliation and the language of publication of the journal had a major influence on the international contributions. For US publications there was a strong, yet not overwhelming, language effect. The lead country of affiliation of non-US/Canadian based authors was the UK, where 26 per cent of the

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TABLE 2.

Non-regional Authors in US Marketing Journals 1980–1997

Rank

Country of Affiliation

Number of authors

Per cent of non-regional authors

1 2 3 4 5 6 6 8 9 9

UK France Japan Hong Kong Australia Israel Switzerland Sweden Korea The Netherlands Other

148 53 47 28 24 23 23 20 16 16 169

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authors were located. However, as Table 2 shows, a wide variety of authors from other nations were represented as well, many of them in non-English speaking locales. Of course, this analysis did not consider the extent to which authors had studied or lived in North America. In the Japanese Marketing journal no language effect was evident. The overwhelming number of contributors came from North America (38 of 43), while five contributors were affiliated with European institutions. It should, however, also be mentioned that all of the contributions by nonJapanese authors were translated by the journal staff. For the German journal Marketing 15 of the 27 non-German affiliated authors came from German-speaking countries, ten from Austria, five from Switzerland. Of the remaining 12 authors, two each were affiliated with Poland, the UK and the Czech Republic, and one each with China, Canada, Holland, Russia, Sweden, and the USA. For the European Journal of Marketing, published in the UK, there was a strong language effect. More than one-half of the non-European contributors came from the USA, followed by Australia, Canada and New Zealand. Table 3 provides some more detail on the affiliations of the non-European authors.

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TABLE 3.

Non-Regional Authors in the European Journal of Marketing 1987–1997

Rank

Country of affiliation

Number of authors

Per cent of non-regional authors

1 2 2 4 5 6 7

USA Australia Canada New Zealand Singapore Hong Kong South Africa Other

232 40 40 27 14 10 7 24

59 11 11 7 3 2 2 5

Some Early Conclusions In light of these overall findings, several conclusions can be drawn. First, in spite of the globalization of marketing practice, there is much less progress in the globalization and exchange of academic marketing concepts and thought. In particular for Germany, Japan and the USA, the extent of intellectual contributions by non-regional authors is far under-represented, when compared to the internationalization of the respective societies based on trade and investment. For example, while US GNP is now almost 30 per cent trade dependent, less than 9 per cent of the authors in key US journals come from outside the region. Quite disappointing also is the fact that countries with major marketing expertise, such as Japan and Germany, appear to have relatively few authors contributing their expertise outside their immediate region. For example, it is difficult to understand why authors from Germany do not even rank among the top ten non-regional contributors in US marketing journals. As the number two export country in the world, surely German marketing expertise deserves to be shared with others? Similarly disappointing is the fact that very little knowledge appears to be transferred by Japanese academic authors to Europe.

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At the same time, the results also include some heartening findings. Several journals, in particular the European Journal of Marketing and the Journal of International Marketing have managed to be at the forefront of offering content written by global authors. As a result, they can be considered to be the leaders in the presentation of truly global marketing knowledge. Heartening is also the finding that US authors appear to be the ones most actively sharing their expertise around the globe. Whether this is the result of pressure on US academics to publish or of their desire to address a global audience, 88 per cent of non-regional contributions to the Japanese Marketing journal and 59 per cent of the non-regional contributions to the European Journal of Marketing emanate from US affiliated authors. The quantity of these contributions may also be an indicator of the importance of US-based thinking in the marketing field.

Some Limitations There are some limitations to these findings. With a caveat typical for almost any research project, more time and resources could have permitted an expansion of the investigation to more journals in more nations over more years. However, in this analysis the principal publications likely to carry marketing articles in the key international business regions were investigated. Any expansion of coverage is unlikely to change the key findings. It could also be argued that the country affiliation of the European Journal of Marketing is the UK, rather than Europe. However, the “Editorial objectives” and “General principles” published in EJM, as well as the overwhelming portion of its authors, tend to support a “European” positioning. If one were to shift definitions, however, and consider all authors from outside the UK as international contributors to EJM, the results would not change the rank order of international authorship in the journals investigated, but would merely greatly strengthen the international lead of EJM over the other journals. This analysis also addressed only the writings in academic publications. Clearly, there are many news articles, trade publications and pamphlets which may result in a cross-fertilization of marketing thought. This research, however, focused specifically on the activities

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within the academic sector—since it is here where typically new conceptual and normative thoughts are propagated.

Enhancing the Globalization of Marketing Knowledge We must recognize the fact that marketing knowledge, and the publications disseminating such knowledge must globalize their perspective if they are to remain leading edge and cognizant of new developments around the globe. Publications which do not undertake efforts to internationalize themselves will fall behind as preferred and sought out sources of knowledge. At the same time, authors who do not expose their knowledge to a global audience may miss out on important market input. Here, then, are some recommendations which might be useful in increasing the internationalization of marketing publications. Editors and the sponsoring organizations of journals should undertake steps to internationalize their publications. This will require a systematic broadening of the distribution base of their journals. There should be no more regional marketing journals but only international ones, since important marketing work may possess value in many corners of the earth. At the same time, a journal’s value creation hinges on the content of the publication. Therefore, efforts also need to be undertaken to ensure that the content and the contributors emanate from a diverse number of sources around the globe. Proactive efforts should therefore encourage authors to submit their findings to publications outside their own regions as well. Since language considerations may pose a major constraint here, journals and their editors should make provisions for assistance in terms of language presentation. It should be kept in mind, as a former editor of the Journal of Marketing stated, that non-native authors “may speak with an accent, but they do not think with an accent” (Varadarajan, 1998). Editors will therefore have to overcome their self-reference criteria and look beyond the format and presentation of submitted manuscripts and concentrate even more than they currently do on the content. In addition, they should then, once good content is found, make provisions to provide the appropriate “localized” presentation, be it

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through translation or editing services, in order to help their own readership overcome problems of ethnocentricity. Editors may also wish to begin reconsidering the exclusivity of publication which has so long been held sacrosanct. For example, if a particular journal has only regional distribution, or very spotty global distribution, editors may no longer wish to restrict the dissemination of knowledge, but rather permit the publication of the same article in other, geographically different oriented publications. The continuation of a “one article in one journal” policy may only be viable in the future if a publication outlet can assure that global distribution of the information takes place. Otherwise, particularly during an era of increased Web-based publication activities, hard-copy journals may eventually find themselves deprived of the contributions of leading edge authors. It may also be useful for editors to revisit the structure of their editorial boards. The causality between editorial board affiliation and international orientation of journals deserves more in-depth research. There does, however, seem to be a high correlation between the international structure of the editorial board and the degree of international authorship in a journal. For example, some of the journals analyzed here which had a review board with a very international composition also tended to have the most diverse countries of origin of its authors. The European Journal of Marketing had 57 per cent of its review board from outside the UK, and 36 per cent from outside Europe. The Journal of International Marketing had 37 per cent of its reviewers affiliated with institutions from outside the USA and Canada, while the Journal of International Business Studies had 27 per cent of its review board from outside North America. Low scoring journals in terms of international authors also had few international editorial board members: for example, both the Journal of Marketing and the Journal of the Academy of Marketing Science had less than 4 per cent of their editorial board from abroad. Colleagues, department chairs and tenure and promotion committees on campus also need to be educated on the importance of the internationalization of the communication of knowledge. All too often today, publication in non-domestic outlets is automatically discounted. Rather than take such an ethnocentric approach, it might make more sense to determine the audience with which the author should, and wishes to, communicate, and then evaluate publication outlets based on their

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ability to reach that particular audience. In addition, the globalization effects of disseminating knowledge internationally and the positive repercussions on the reputation of individuals and institutions should not be underestimated. While there are some important business schools whose faculty purposefully publishes very little in English, there needs to be the eventual recognition that in an era of globalization the language of business is English. If institutions and individuals persist in publishing only in their non-English native language, there will be an increasing cost associated with that decision which affects the value of research, be it in the delay or even ignorance of new thoughts and ideas. Most important, however, is a shift in the publication and communication outlook of individual academics. As choices are made about where to publish and what publications to read, it needs to be appreciated that important knowledge exists in many parts of the world and that many readers around the globe are in need of newly developed business knowledge. Those academics who intend to be truly internationally oriented, should obtain and disseminate their knowledge on a global rather than a domestic level. Researchers who expect to be truly informed about the state-of-the-art of a field, need to search earnestly for work done in other nations. US authors in particular need to take account of non-US literature and cite or acknowledge non-US work. In this context, it is well worth remembering that the now so helpful search engines in our computer programs tend to only pick up a small portion of actual work carried out and are still heavily biased towards English language publications. Overall, knowledge is precious. It becomes even more precious when shared globally. Marketing academics in particular should feel an obligation to encourage such global cross-fertilization through their own activities by making an effort to reach out to colleagues in other countries, through both the dissemination of their works and the use of work carried out by others abroad.

NOTE 1.

The author is grateful to the anonymous reviewers for this point.

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REFERENCES Cadeaux, J.M. (1997), “Counter-revolutionary forces in the information revolution: entrepreneurial action, information intensity and market transformation”, European Journal of Marketing, Vol. 31, pp. 768–85. Czinkota, M.R. (1991), “International information needs for US competitiveness”, Business Horizons, Vol. 35, pp. 86–91. Daser, S. (1984), “International marketing information systems: a neglected prerequisite for foreign market planning”, in Kaynak, E. (Ed.), International Marketing Management, Praeger Publishers, New York, NY. Dichtl, E., Koglmayr, H.-G. and Muller, S. (1990), “International orientation as a pre-condition for export success”, Journal of International Business Studies, Vol. 21, pp. 23–40. Farmer, R.N. (1987), “Would you want your granddaughter to marry a Taiwanese marketing man?”, Journal of Marketing, Vol. 51, pp. 111–16. Garvin, D.A. (1993), “Building a learning organization”, Harvard Business Review, Vol. 71, pp. 78–91. Gates, B. (1999), Business @ The Speed of Thought, Warner Books, New York, NY, p. 3. Hofstede, G. (1998), letter to Magoroh Maruyama, cited in Maruyama, M., “Academic concept inbreeding, failure of interbreeding, and its remedy by outbreeding”, Human Systems Management, Vol. 17, p. 89. Kedia, B.L. and Chahokar, J.S. (1986), “An empirical investigation of export promotion programs”, Columbia Journal of World Business, Winter, Vol. 13, p. 20. Marketing News (1996), “Top 50 marketing/ad/opinion research firms profiled”, 3 June, p. H4. Maruyama, M. (1991), “Disciplinary contents requirement: academic non-tariff barrier in interdisciplinary communication”, Human Systems Management, Vol. 10, p. 155. Maruyama, M. (1998), “Academic concept inbreeding, failure of interbreeding, and its remedy by outbreeding”, Human Systems Management, Vol. 17, pp. 89–91. Nonaka, I. (1991), “The knowledge-creating company”, Harvard Business Review, Vol. 69, pp. 96–104. Quinn, J.B. (1992), Intelligent Enterprise, The Free Press, New York, NY. Ricks, D.A. (1999), Blunders in International Business, Blackwell Publishers, Malden, MA. Slater, S.F. and Narver, J.C. (1994), Market Oriented Isn’t Enough: Build a Learning Organization, Report No. 94–103, March, Marketing Science Institute, Cambridge, MA. Varadarajan, R. (1998), presentation at the AMA Faculty Consortium, East Lansing, MI, 13 July.

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Chapter 1.6

Trends and Indications in International Business Topics for Future Research Michael R. Czinkota and Ilkka A. Ronkainen

INTRODUCTION Forecasting changes in the international business environment is critical for the policy, corporate, and academic communities. As the importance and impact of international business overall has increased, there is a commensurate need to identify, as early as possible, emerging issues, and assess their potential effect on policy makers, practitioners, and researchers (McKinsey & Co. 2006). While there are many individual broad visions as to the future business environment (Marcovitch 1997), a more specific way to engage in forecasting is to get the business, policy and research communities to interact in the process of outlining possible scenarios and resulting actions. Since no one region or location will be the only origin of change, a diversity of opinion across geographies secures a more balanced portfolio of comments. The possibility to identify, analyze, and debate changes allows for the timely preparation of strategies in response to them. While some of the issues presented may already be emerging, the ideal results identify early signals of outlying phenomena thereby allowing policy makers and business leaders to execute proactive responses. Similarly, academics can

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be normative in their research rather than analyzing what may have already occurred (Dunning 2002). Interestingly, while most agree that international trends are more important than they were only a few years ago, preparation for the changes brought about by these trends is lagging. In their global trends survey of 1,136 executives, McKinsey and Co. (2008) found that while identifying global trends has become increasingly important, few companies are addressing them successfully. In addition, the cross-over of information between the “silos” of disciplines is very limited. For example, top management research publications show an insignificant share of articles focused on the international and policy dimensions. On average only 5 percent of articles present an international focus (Werner/Brouthers 2002). At the same time, only 11 percent of policy articles focus on international issues (Sprott/Miyazaki 2002). A review of the 69 social sciences journals, listed in die Harzing quality list and with a title beginning with “International” (Harzing 2006), revealed that many journals do not publish international research but rather try to indicate through their title that they would like to appeal to, or draw submissions from, an international community.

METHOD This study used the Delphi technique, reported to be a “method (which) produces useful results which are accepted and supported by the majority of the expert community” (Fraunhofer Institut 1998). The method integrates the opinions of experts using multiple waves of data collection and interaction between respondents. For 50 years, it has been used by leading corporations and organizations to develop strategic guidelines (Duboff 2007). Results of the technique have been used to guide decisions into investing in new technologies and markets and have brought together the thinking of a variety of different communities. The overall objective is to achieve consensus among the panelists who represent a diversity of backgrounds and geographies. The selection criteria for panelists included active careers and leadership roles in the international business community, a demonstrated ability to see issues beyond the local and current circumstances, as well as a willingness to

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engage in intellectual dialogue and debate. A total of 34 experts participated in each of the three phases of the study. There is no agreement on the specific panel size for Delphi studies, but past studies have typically included 10–30 experts (Akins/Tolson/Cole 2005). Users recommend groups of about 30 experts based on the finding that larger groups create few additional ideas and limit the in-depth explorations of the ones generated (Delbecq/Van De Ven/Gustafson 1975). This report is the latest of five international Delphi studies undertaken by the authors in the past 25 years (Czinkota 1986, Czinkota/Ronkainen 1992, 1997, 2005) in order to identify the key international business dimensions subject to change in the next 10 years. The critical question targets the appropriateness of the Delphi technique to establish expert consensus on very complex issues. Green and Armstrong (2007) suggest that “the Delphi technique could be used to improve the assessment of analogies . . ., potentially increasing accuracy further at a low cost.” We compared the predictive ability of each of the past studies. Our “hit rates” were in 1986 (82 percent), 1992 (80 percent), 1997 (65 percent), and 2005 (89 percent) providing an average accuracy level of 79 percent. Nevertheless, the changes between Delphi studies have been substantial; for example, from 2005 to 2009, terrorism and corruption issues rose in importance, while trade negotiations declined. Similarly, corporate strategies were much more influenced by the need for reform than was the case only four years earlier. Over time, the accuracy percentage has increased, possibly as a function of the panels being more global and diversified, though the 2005 result may be overly strong due to the recency of the forecast. In many cases, however, the inaccuracies have been more so on the expected rate and speed of a particular change rather than on missing out on the change itself. There have, however, also been the misses for big events—which were seemingly unpredictable, even by the world’s finest intelligence agencies. Examples are eruptions such as the fall of the Berlin wall, the disappearance of the Soviet Union, or the sudden escalation of the global financial crisis. For those instances we seek recourse to the “Black Swan” phenomenon (Taleb 2007) which postulates that conditions or phenomena which have never been encountered before (such as non-white swans in European descriptions before the discovery of Australia) are particularly hard to incorporate in a forecast.

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The quality of participants and their willingness to expend effort on the Delphi work determines the value of the study results. The experts need to understand the issues, have a vision, and represent a substantial variety of viewpoints. The selected participants needed to have more than 20 years of experience in their fields and be very well connected to their global counterparts. In addition, they needed to be active in international business for at least 10 years; have a leadership role within their professional setting; a global vision beyond local and temporary concerns and accessibility and willingness to engage in intellectual dialogue. Most business respondents were either chief executives or executive vice presidents of their organizations, most policy respondents were current or former members of the legislative and executive branches of government. The academic participants were mostly professors specializing in international business. Some individuals had participated in earlier Delphi studies, but most were new respondents. Table 1 below indicates the number, location, and profile of the panelists. In order to make use of today’s heightened connectivity and expedite the interactive process, e-mail was used for the data collection. The method was adopted also to secure participant commitment through faster turnaround periods between the waves.

TABLE 1.

Delphi Participants

Corporate Policy Research Total Responses

Africa/Asia

Europe

Americas

Total

4 3 2 9

4 4 3 11

5 5 4 14

13 12 9 34

Respondent profile Corporate: Chairman, member of the board, president, executive vice president, director Policy: Ambassador, congressman, director general, executive director, strategist Research: Rector, chaired professor, professor

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DATA COLLECTION The data collection effort started with an open-ended question. Panelists were asked to “identify international business dimensions subject to change in the next 10 years and highlight the corporate and policy responses to these changes.” Issues and projected responses were to be rated for their impact on a 10-point scale from very low to very high. Responses from the first round were categorized and linked to corporate responses. In the second round, panelists were presented with the categories and comments and were asked to indicate their level of agreement with the statements made. In addition, they were requested to rate the impact each proposed change would have on corporations and policy makers using a 10-point scale to generate the precision of information needed (Gleason/Devlin/Brown 1994). The overall goal in the first two rounds is to achieve the highest level of consensus possible among the three constituent groups. The third round focused on statements for which there continued to be disagreement between the panelists. A key element in the data collection is the interaction of the respondents across the corporate, policy, and academic communities as well as across the different geographic locations. The interaction provides broadened perspectives on the importance and impact of the trends. No one community or any geographic location has a monopoly on trends. However, some are more likely to influence or be subject to change than others. We therefore worked on securing input from multiple key groups and locations, but to also ensure that key change regions and fields were represented. This targeted diversity forces respondents to consider realistic and broad aspects within their strategic perspective. As mentioned previously, panelists in the previous Delphi studies had not identified major outliers of change (such as the collapse of the Soviet Union). Therefore, special provisions were made to re-introduce statements into the debate which were considered unusual or extreme in order to stimulate discussion of even outlandish claims in order to gauge trends beyond the normal realm of expectations (Taleb 2007).

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RESULTS Items were analyzed for their intensity by determining a word count frequency and extent of comments elicited by each issue. Subsequently, items were normalized to provide for a comparable scale. Scale values were determined by multiplying the measures of an event/issue or region with its impact on international business, based on individual responses. The result was then standardized on a scale where the highest value was represented by 100 and all other items were assigned a value relative to the top score. The two top five issues identified by the panelists are presented in Table 2.

TERRORISM Firms and policy makers have a clear understanding that terrorism is an ongoing phenomenon to be confronted. Combating terrorism was seen as a fact of life and history, resulting in a continuous job for push-back to be conducted multi-laterally and without compromise. Counterterrorism needs to preclude the failure of the will of the people and governments opposing the terrorists. The root causes of terrorism were identified as policies towards immigrants and the sometimes dividing roles taken on by advocates of specific religions, cultures, regions, or races. Approaches proposed to address these root causes were education, improved nourishment, and

TABLE 2.

Key Policy Issues

Issue

Scale Value

Terrorism Globalization Corruption Cultural adjustment Information

100 83 72 55 46

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the ability to control one’s own destiny. But there will also be a growing emphasis on national interests accompanied by limited readiness for multilateral solutions. It will be a key task for governments to diffuse such desires rather than coddle to popular demands. Only with the collaboration of all parties concerned can local and regional protectionism and de-globalization be avoided. The greatest imperative will be to develop and maintain the power to execute peace. Much disagreement rested with the assessment of key approaches to defeat, or at least to manage terrorism. Some panelists felt very strongly that materialism and “having something to lose” are key dimensions to secure for those who perceive themselves excluded from the benefits of globalization. Others suggested a prime role for spirituality, empathy for and understanding of cultural differences. Future success may favor those who have the ability to pair values with valuation. Consumers appear willing to change their consumption patterns if needed for security considerations. In response to cultural diversity and cross-border cultural conflicts many may give up earlier preferences, giving country-of-origin a new meaning. Corporations are likely to revive ethnocentric and polycentric policies and use export activities, rather than foreign direct investment, as the dominant form of dealing with foreign markets. They will either pull out from countries that lack law and order or service them only at a very high risk premium.

GLOBALIZATION Key gains of globalization are achieved by consumers, intermediaries, and originators, since those participating in the supply chain can move to different locations to benefit for low costs or other advantages. The key issue is mobility. Workers are not necessarily able to take advantage of this since the cost of moving may be quite high due to different environments and cultures. Education and training are crucial for better and more rewarding tasks for workers. When asked how countries can move up on the globalization chain, our panelists consistently rated education as the most important component, followed by competition and investment. A discussion forum with former Latin American presidents fully supported

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this perspective (Pino 2007). However, there was a sharp divide between panelists when it came to the content of education. Some stressed the importance of keeping up with learning both quantitative and qualitative knowledge. Others believed that learning of difficult knowledge—say physics, mathematics, chemistry—could be outsourced to those who revel in such materials. Quality education time could then be dedicated to other pursuits, such as music, art, or poetry. Repeatedly, the question arose whether learning was to serve an inner spiritual desire or society and whether, for example, the implantation of a “knowledge chip” would be better or worse than the stepwise acquisition of knowledge under difficult or even unpleasant conditions. A key point was: Are we really all dumbed down since the invention of the calculator? Workers in low-wage countries are often unable to earn developedmarket pay due to barriers imposed by governments. While there is strong evidence that the removal of trade and investment barriers raises living standards across the board, there still will be winners and losers. There is a need for sequencing to minimize disruptions; for example, it may be necessary that a lengthy phase-in time will allow people to adjust to change and help those who are worst hit. Location-specific differences in how quickly globalization’s effects will trickle down jointly with variations in social standards and the existence of a social net greatly affect the change on workers. Currently, brawn and assembly are cheap, while knowledge and creativity are expensive. These dimensions can be cyclical, however. Conditions may change quickly to reward “fighters” more than “thinkers.” Entire clusters of opticians and grinders became obsolete with the advent of electronic manufacture of optical devices. Those who suffer from globalization will be fierce opponents. No matter if one cogently points out that only a small portion of their troubles emanate from international issues, the mere fact that these issues are implicated will be enough to result in vitriolic campaigns against them. Of crucial importance will be the supportive role played by those who accumulate the gains from international economic activity. However, their preoccupation with managing growth may make their support questionable or limited, letting them recognize their loss only after major actions against the global economy are taken.

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Changes in reserves and economic relations, accompanied by an unbundling of financial systems between the U.S. and other nations are also likely to lead to changes in the acceptance of laws and politics. Less deep financial pockets will lead to financing difficulties in markets which have depended on an ample supply of money. The exit of marginal participants and the tightening of existing rules and expenditure habits will be one consequence. The United States continues to present new and special opportunities to the world. It offers the security and safety that have, sadly, been unattainable for most people on earth. It presents a vision, flexibility, and capability to adjust to new conditions which are the envy around the globe. A long term perspective is needed to appreciate past effects and future prospects. Global investors are not foolish when they show their reluctance to turn away from the dollar. What determines the value of money in the long term is the trust, promise, and the future that a nation offers to those holding its currency. Finding ways of steering these investor expectations enables a country to maintain or systematically alter the value of its currency. It is likely that the role of international organizations will shift. The World Trade Organization is already pressed to take on more responsibilities, some of them reaching well beyond trade. The feeling of many is that, if we are to avoid growing trade conflicts and the exploitation of local rules for the benefit of nefarious individuals and firms, a uniform implementation of key principles will be necessary. Such principles will include child employment, working conditions, and the rule of law in areas such as contract awards. Violators of such rules will eventually find out that the eventual enforcement of consistent regimes around the world, there may be an ability to run, but there is no ability to hide, particularly not from highly motivated consumer activists. Other international organizations may become much weaker. For example, in an era of individual links with one another for purposes of information, trade, and financial exchange, the developmental role of the World Bank may well diminish. Poor countries may feel that they simply have no stake, no respect, and no benefit from the institution. Similarly, the International Monetary Fund may be far outperformed by local and regional lending arrangements which do not impose requirements for economic adjustment which are harsh and of little relevance to long term

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performance. The currently overwhelming power of rich countries in the voting system of the fund increasingly lets developing countries feel that they are members of less than full value.

CORRUPTION Corruption is a major detractor from global welfare and local economic development. Its consequences are shoddily built roads, structures that collapse, clinics with equipment purchased at high prices or inappropriate specifications. In all such circumstances vast public expenditures do not achieve the envisioned use and local interest suffers. Typical side payments are 10–15 percent of all major expenditures, with much higher levels in the developing world. “It is human nature to lubricate relationship with gratuity” was a typical statement, with more diversion attributed to high-context cultures (e.g., Latin America, Latin Europe, and Asia) and less to low-context ones (e.g., United States, Northern and Germanic Europe). Yet, the social acceptance of corruption was seen as a bigger danger because it protects the elite from domestic scrutiny and control. Therefore, the ongoing impact of the U.S. Foreign Corrupt Practices Act and the OECD discussions were seen as instrumental in reducing or at least containing such misappropriations. More multilateral action is seen as necessary to ensure broad, continuous and relentless enforcement of measures against violators. Beneficiaries of ill gotten gains from bribery should eventually be pursued globally to disgorge their ill gotten gains.

CULTURAL ADJUSTMENT There is a strong belief that cultures around the globe will become more similar to each other, particularly in the area of macro issues such as accountability, performance expectations, freedom accorded within society, and product preferences. Such cultural assimilations were also seen to be profoundly influenced by the United States, threatening lessdominant cultures. At the same time, it will be more difficult to export overwhelmingly uniform ways of thinking due to an increase in regional

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and local sovereignty and calls for cultural protectionism even by multilateral organizations such as UNESCO (Moore 2005). History indicates that cultures rise and fall over time, with conflict in the process, regardless of information flows, insights, and learning. Otherwise, the world would now be speaking Greek, Latin, or Arabic. Already today, the use of English as a business language can create resentment and hostility. Companies are discovering that language also conveys cultural norms, which, in turn, reduce the creativity and local connections of their employees. It appears to be quite likely that firms will increasingly develop a norm stating “we did not hire you for your English” which will introduce a new multi-polarity to global management. On the micro level, however, ongoing culture clashes were foreseen to continue, often giving a boost to fundamentalism. In many regions of the world, individuals will, for the first time be truly exposed to new cultural groups. For example, it will be a new experience for many Americans to be exposed to large groups of Latinos, and, perhaps even be confronted with becoming a regional minority. Similarly, “Western” Europeans will become exposed to the influx and major competition from what used to be communist neighbors. Some might find this advent of new neighbors unacceptable. All these moves will not leave cultures unchanged. Culture is the result of learned behavior and adjustment to new conditions. Opening up to others on a such a gigantic scale as the world has done within a relatively short time, will bring some individual xenophobia, but also the reward of growing flexibility, better understanding and rising tolerance levels. Mobility may well create a new generation of innovators and risk takers. It is the task of governments to prevent cultural conflicts from becoming irreconcilable and to find ways to keep society cohesive, linked, and ready for collaboration. Governments must recognize the investment models driving the behavior of firms. They evaluate locations and opportunities in terms of risk and return within a particular time frame. Higher risk or shorter investment periods require higher returns. Expedited returns lead to higher prices, lower investments, and less investment stability. It is important that governments provide a lower risk platform and communicate about their planning and results, so that

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investors can recognize and reward a less risky environment. In addition, the impact of consumer activists on corporate actions needs to be recognized. Rapid and transparent information flows result in greater insights and more challenges on the part of consumers. They are willing and able to express their views, consolidate their emotions into commercial action and use their networks to enhance their reach. In consequence, governments need to develop and adhere to standards of behavior which comply with global expectations for human dignity. The corporate challenge is to reap the economic advantages of globalization while preserving local cultural values. Corporate business practices are likely to become more global due to the growing participation by Asian firms, brands, and managers in world markets. Therefore, a better understanding of networks and networking across cultures becomes more crucial. For example, Chinese, Indians, and Russians have different approaches to network building than Westerners. Increased participation by international players will affect market opportunities for American products and force firms to globalize their strategies. Similarly, corporations will opt for more use of soft power (e.g., corporate philanthropy) rather than hard power of penalties to achieve gains in the global market place (Tse/Cainey/Haddock 2007). They may also have to find ways to adjust to different subcultures around the globe which are already entrenched and growing. The Archbishop of Canterbury stirred up much public sentiment when he called for a re-examination of the role of Sharia in British life in 2008. Sharia is the body of Islamic religious law which is based on the Koran, the words and actions of the Prophet Mohammad, and the rulings of Islamic scholars. It typically finds its application mainly in Muslim countries. The Archbishop suggested that, with a population of more than 2 million Muslims in Great Britain, Sharia already figures prominently in the lives of many. Informal neighborhood councils provide rulings on family issues such as divorce; banks, such as HSBC already market mortgages which comply with Sharia rules of lending (Adam 2008). Perhaps Muslims in Britain would be more comfortable and willing to build a more constructive relationship within British society if they could choose Sharia law for the settling of civil disputes.

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INFORMATION Even though a greater diversification of information sources may typically provide for better knowledge evolution, there is an expectation of fewer data sources offering increasingly larger quantities of data due to mergers and acquisitions, cost cutting, or limited user willingness to pay. Such developments are likely to affect accuracy and reliability making data use heavily trust-dependent. To a growing degree, data users may demand more insights into the origin of information in order to gauge its validity. Just like butchers are expected to label the meat they sell with precise origins, information providers need to offer data locale and source of origin. Under such conditions, the locality of data can be systematically used to enhance credibility (e.g., through increased use of local debt-rating agencies). Due to more transparent sourcing, there will be a decrease in the willingness of firms and people to offer information. Nebulous laws and restrictions may be increasing the threat of law suits. Also, the gains from free information that have greatly helped businesses and individuals in the past 10 years are likely to shrink. There may be a tendency towards “organic” data unaltered by manipulation or interpretation. Another alternative may be “comparative” data which, on an onion basis, provide multi-source perspectives. In addition, quantitative data are likely to be combined with qualitative information, resulting in a diagnostic perspective. Once data pass the trust threshold, they can then be used in a much more aggressive and insightful way, going far beyond the traditional and retrospective use of statistics. Advancements of information technology and convergence of new technologies will allow any new equipment to be more sophisticated and to perform more functions at lower cost. Even though companies will be willing to adopt these new technologies faster than ever before, doing so will only provide a competitive edge if it is not done at the expense of ease to user and customer friendliness. While youth markets will be quick to use new capabilities, more mature buyers will be reluctant to invest in products which require a high degree of additional learning. Excelling in technology alone has no intrinsic value. It is the application of technology to satisfy human needs and values, at a profit that will matter for business success.

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LOCATION AND SOURCE OF GROWTH The key growth industries in the future are summarized in Table 3. The focus was on the industry identification rather than internal growth. In terms of geography, emerging market economies will continue to increase their impact on the global economy. The threat of polarization and an increase in regional and the local trade and finance relations will encourage an eventual completion of the Doha Round of trade negotiations. Countries will focus on those issues which are most relevant for their economies, thus leading to a differentiation of players which grow, make, create, or coordinate. Significant new market opportunities will develop within emerging economies. At the same time, growing capabilities will let these countries compete directly with more self-developed products and services in the developed world. There will be more cooperation between emerging regions, resulting in more integration among them, and perhaps more protectionism outside of their sphere. Developing nations will welcome more diversity of partners and will welcome increased competition among larger players. For some countries, this collaboration is also likely to introduce new global moral positions, raising the relative precedence of business, politics, human dignity and freedom. While efficiency will gain in importance, there will also be more incorporation of Eastern business practices into overall methods. Overall, economic power is likely to shift globally to Asia, both in terms of investment and output.

TABLE 3.

Key Industries Affected

Industry

Scale Value

Communications/IT Coordination of Services/Demographics Pharma/biotech Environmental Energy

100 84 72 66 55

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China will be the player to watch. For firms who are planning to enter the global market, succeeding in China will be a crucial indicator of competitiveness, since “if you can make it there, you can make it anywhere.” Due to domestic pressures fueled by weaknesses in the banking system, urban/rural imbalances, and regional political dissonance, top Chinese corporations are likely to expand significantly overseas. Multinational firms from third world countries will expand in general, and the Fortune 1,000 will soon include a significant number of Chinaheadquartered companies. There will also be a significant increase in mergers and acquisitions led by Chinese firms. Another important participant will be India. That country’s opening will rival the growth of China, due to its wide-spread facility with the English language, its close alignment with the rule of law, a well developed commercial infrastructure, and a democratic government. Companies are likely to see India as both a primary place for outsourcing and as an important market for their goods. In particular, Indian linkages in the communications and information sectors are likely to soar.

ENVIRONMENT, CONSERVATION AND SUSTAINABILITY China will demonstrate only limited concern towards the environment, even though environmental problems will have a major effect on its ability to compete as a global manufacturing center. Medical, environmental and other social costs will dramatically reduce the advantages of firms to manufacture in China—therefore leading to a move of FDI to other locations, including the U.S. and Europe. One consequence of China’s and India’s rapid growth will be an ongoing depletion of natural resources. Aspirations for economic progress and better lifestyles will cause shortages in the natural resources. In consequence, the sourcing and controlling of important raw materials will be a key strategic issue, often leading to preferential bilateral agreements perhaps even in contradiction to multilateral arrangements. Governments will attempt to put more land into grain production and also use tools such as subsidies and price controls. Scarcity will also drive up the price of consumer alcohol. Protection of materials within society

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from theft will become a key issue (e.g., cutting electrical wires to steal copper). Recycling and recovery will grow as vital business opportunities. Farming will become highly attractive and profitable again as fuel production from food accelerates. The global shortage of potable water will be re-discovered as a key issue and a key constraint on global advancement and wellbeing. There will be much higher government investments in desalination and reverse osmosis technologies and more emphasis on water conservation. In light of public concern about climate change, there will be growing preference for energy saving technologies and a reduction and limit to energy use. A stream of scientific and non-scientific proof will be offered for global warming, with any unusual natural phenomenon being blamed for global warming. Public impressions and perceptions will lead to changes in living patterns—for example the population of dry arid and hot climate areas may well shift due to water shortages and, say, limits to the use of air conditioning technology. Such effects will occur even if it becomes generally accepted that global warming is only slightly dependent on human activities—given the overriding argument of: What can it hurt? Africa may well emerge in offering the most opportunities for green investments and the accumulation of carbon credits. However, if the transfer of resources resulting from carbon trading grows, such trading will become, in the eyes of governments, non-sustainable and therefore prohibitive. There is more likely to be an increase in international agreements (both multilateral and bilateral) which set a framework for corporations, promotion and subsidies for technologies and products which protect the environment. Rich countries will give more importance to this concern, and most internationally operating companies will take this concern seriously. Key sectors for industry creation and expansion will focus on the protection of public health; the need for sustainability; the saving of energy, water and natural resources; the growth of biotechnology, genomics and nano-technology; the creation and promotion of eco products, services and processes. For example, sustainable water recycling technologies will spawn new industries. Governments will, at the same time, adopt and encourage more advanced pollution control policies, particularly for heavy metals and engineered (non-naturally occurring) substances.

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DEMOGRAPHICS The aging of populations of North America and Europe will be joined by those of Asia and Latin America. These older populations will become a growing customer segment for the financial-services sector as well as to providers of health care and appropriate household products. In particular, the lack of public support for the disabled and needy—often the result of cultural traditions—will create problems for generations caught in transition. At the same time, there will be major opportunities as older generations will expect more education, entertainment and involvement to enjoy their increased leisure time. As baby-boomer societies experience waves of retirement, companies will shift to increase employee longevity and loyalty. New and substantial incentives will be designed to maintain expertise within and to reduce the need to find specialists outside the firm. In a world of permeable borders, there will be more of an opportunity to pick up and move. The ability to prove and improve oneself as well as to access new resources is a powerful motivator for migration. The young and the not-so-well off are primary groups to be involved. The moves and behavior of the young will become an informational signal for others. A tremendous opportunity exists for regions to enrich their quality of life, through the acquisition of young, upwardly mobile immigrants.

REFORMING THE GLOBAL CORPORATION Corporations are likely to face increasing pressures from a wide variety of stakeholders, governments, unions, media, and the public at large. These grow even more intense in light of a corporate migration from a Western-centric organization to multi-polar structures, accompanied by a shift from a West–North to an East–South orientation. Accountability and transparency will be the basis for key developments. Accounting systems will recognize and develop procedures for calculating the value and the change of intangible corporate assets, so that they can increasingly be used to drive corporate capitalization and performance. Such assets will increasingly become the prime measure of corporations and will have the key influence on predicted future cash

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flows and stock prices. Value investors will recognize that the building of intangible assets is a multiyear, multi-faceted endeavor. Consequently, buy-and-hold strategies will become more dominant and quarter-toquarter performances will become less important in the investing decision. Corporate responsibility will be interpreted to include broad-based activity and profit sharing. Low capital manufacturing facilities will be expected around the world. Stakeholders will demand greater involvement, and, for better or for worse, will play a major role in the image building of the corporation. Since lapses in ethics or social responsibility will have a major negative impact on brand equity, strong corporations will increasingly be indicated with strong corporate social responsibility (CSR) programs and strong corporate ethical conduct. There will be a backlash against excessive executive remuneration— not only from regulators but also from shareholders, inside managers, and employees. Executive compensation will again be seen in comparison to average pay levels—which may well lead to pay raises for those at lower levels. At the same time, the higher education of future business leaders will increase new dimensions of morality, ascetics and long term orientation in their mission. Perhaps a new class of trained and dedicated managers will emerge who will become the transforming new “Jesuits” of business management, working with precision, force and success to ensure both improved performance and increased social wellbeing. Back-office and support functions are increasingly likely to be outsourced, allowing global firms to eliminate internal functions like treasury and tax. Global banks will expand into outsourcing by providing high value added services, such as the oversight of corporate treasuries. Emerging markets will increasingly account for larger portions of corporate profits and sales, particularly in light of their representation of more than two-thirds of the total consumer base. Corporations will be expected to provide improved product access and help overcome difficulties in logistics and infrastructures. For many products, the development strategies will need to shift from “the latest” to increased affordability. The most critical business functions for global success are those listed in Table 4. Given the commonalities among these functions, the indications are that all these functions will be part of an even stronger

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TABLE 4.

Critical Business Functions for Global Success

Function

Scale Value

Logistics Marketing Human resources Finance Communications

100 86 71 57 34

evolution of supply chain management around the globe. There will be a greater emphasis on the markets provided by “second tier cities”, which are large cities not yet in the political or economic spotlight—particularly in Russia, China and India. Firms will need to expand their distribution and market entry strategies to these large cities, thus creating new regional hubs. There must also be collaboration with the public sector to encourage infrastructural investments in these regions, which, in turn increase their political and economic importance. Smaller firms can benefit from the globalization of markets by focusing on niche markets, especially those abandoned by the large players. What may be uneconomical to produce for a multinational conglomerate may well be a key viable segment for much smaller firms. Of course, just because they are small players does not mean that they do not face large problems. For example, it may be a small village where nuclear waste is deposited, but the problems to be solved are of a world class nature. Strategic alliances and other joint efforts will often be the key answer based on which smaller players can compete for global market share. These firms will also be heavily dependent and therefore heavily concerned about open markets and global standards. Consequently, uniform local codes and enforcement supported by the rule of one country, one vote will be crucial for the success of smaller players.

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CONCLUSIONS AND DISCUSSION Three dimensions were seen as objectives for the future of globalization: First, the reduction of global inequality; second, new and widely enforced global rules which would provide stability and consistency of basic rights and obligations across borders; and third, the support for individual freedom. There was an expectation that over time, nations, institutions, and individuals around the world will increasingly accept these dimensions as the foundation of the good life. In reciprocal causality, freedom is seen to cause and facilitate international business, while international business is a key pillar in support of the cause of freedom. There may well be a reconsideration of the economic growth construct, particularly regarding growth expectations. Many believe that we have come to the point where mere stability and constancy is seen as wrong and as indicative of “falling behind.” There is nothing necessarily negative about rearranging resources and the acceptance of everything not being linear. It may well emerge that growth, particularly on a global level, is increasingly seen in the context of the angles on a protractor: Growth does not always have to take place at all degrees, on all levels, and simultaneously, because there are many different areas to grow. Therefore, the current “go-go-grow” economic mentality may be reduced in its future importance. Concurrently, the importance attributed to the embeddedness of industries will become more relevant. Countries, regions and cities will further specialize in the development of industry clusters. Firms increasingly will open subsidiaries and representative offices in such locations in order to take advantage of the proximity to competitors, suppliers, and customers. New corporate hubs will emerge beyond the traditional ones to exploit future opportunities. Public policy makers will encourage these developments and place greater emphasis on the special educational needs of the workforce in those industrial clusters. A new world-wide division of labor and specialization will change growth patterns by causing a new competitive setting which includes the disappearance of the old borderlines between West–East and North–South and resulting in new East-South configurations. Rather than being a function of location, the new borders are defined by research

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intensity and high standards of education and training of the human work force. Firms will have to focus on highly specialized research- and serviceintensive niche products. In order to stay ahead, they need to set the technological standard and, aim for narrow, monopoly positions. Politics will play less of a role, since liberal social market economies are not automatically more competitive and efficient than different political and economic systems which may develop in other areas. Most experts agree that (business) trends are more important to business strategy than they were only a few years ago. The critical question targets the appropriateness of the Delphi technique to establish expert consensus on very complex issues. Many of the issues raised by the panelists can be described as “wicked,” i.e., they have many causes, they change their appearances constantly, and for which no correct answers seem to exist (Camillus 2008). However, one of the most effective ways proposed to tackle them is to solicit stakeholder perspectives on these issues, involve them in developing possible scenarios, as well as communicate the findings to foster commitment to their subsequent implementation. The Delphi method is ideal as a data collection method for “wicked” problems. The choice of e-mail as a data collection tool was intended to allow the participants convenience and the possibility of responding quickly to the presented materials. Participant commitment may easily falter if the process is too long or the materials presented are too cumbersome. Additionally, the use of e-mail cuts down on the costs of the data collection effort. Even though there is much optimism in the literature for electronic Delphi work (Nielsen/Thangadurai 2007), we found the process of data collection for each of the three waves to be long (in this case, 6 months). Even with advance alerts and reminders, any one particular e-mail can be buried in the respondent’s mailbox or stopped by gatekeepers. Due to the vast amounts of data, especially in the second round, respondents may feel overwhelmed. This may be exacerbated when the respondent is working on screen with the data presented. Researchers using the Delphi technique should try strenuously to present the data in the most concise form possible. There are a number of ways to improve on the existing process. Although not necessarily practical and certainly cost prohibitive, it would be ideal to bring the panelists together at the latter stages to discuss the

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findings or to maintain the panel over a number of number of years to gauge the effectiveness of the actions or moves that may have been taken to correct for a problem. To increase validity, the use of multiple panels could be possible. The challenges of recruiting and retaining the experts needed may challenge this, however.

REFERENCES Adam, K., Archbishop Defends Remarks on Islamic Law in Britain, Washington Post, February 12, 2008. Akins, R. B./Tolson, H./Cole, B. R., Stability of Response Characteristics of a Delphi Panel: Application of Bootstrap Data Expansion, BMC Medical Research Methodology, 5, 3, 2005, pp. 1–12. Camillus, J. C, Strategy as a Wicked Problem, Harvard Business Review, 86, 5, 2008, pp. 98–106. Czinkota, M. R. International Trade and Business in the late 1980s: An Integrated U.S. Perspective, Journal of International Business Studies, 17, 1, 1986, pp. 127–134. Czinkota, M. R/Ronkainen, I. A., Global Marketing 2000: A Marketing Survival Guide, Marketing Management, 1, 1, 1992, pp. 37–44. Czinkota, M. R/Ronkainen, I. A., International Business and Trade in the Next Decade: Report from a Delphi Study, Journal of International Business Studies, 28, 4, 1997, pp. 827–844. Czinkota, M. R/Ronkainen I. A., A Forecast of Globalization, International Business and Trade: Report from a Delphi Study, Journal of World Business, 40, 2, 2005, pp. 111–123. Delbecq, A./Van De Ven, A. H./Gustafson, D. H., Group Techniques for Program Planning, Glenview: Scott Foresman 1975. Duboff, R. S., The Wisdom of (Expert) Crowds, Harvard Business Review, 85, 9, 2007, p. 28. Dunning, J. H., Perspectives on International Business Research: A Professional Autobiography, Journal of International Business Studies, 33, 4, 2002, pp. 817–835. Fraunhofer Institut. Second German Delphi Study, 1998, http://www.isi.fhg.de. Gleason, T. C./Devlin, S. J./Brown M., In Search of the Optimum Scale, Marketing Research, 6, 4, 1994, pp. 28–34. Green, K. C./Armstrong, C. S., Structured Analogies for Forecasting, International Journal of Forecasting, 23, 3, 2007, pp. 265–376. Harzing, A.-W., Journal Quality List, 14th Edition, University of Melbourne 2006. Marcovitch, J., Trends in International Business Thought and Literature: Global Change: Challenges for Business and Society: Some Thoughts for the Next Millennium, International Executive, 39, 4, 1997, pp. 519–530. McCool, J. D., Scouting Emerging Business Trends, Business Week, May 7, 2008. http://www.businessweek.com/managing/content/may2008/ca2008057_786245.htm (accessed May 20, 2008).

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McKinsey & Company, How Companies Act on Global Trends, McKinsey Quarterly, March, 2008. http://www.mckinseyquarterly.com/Strategy/Globalization/How_companies_ act_on_global_trends_A_McKinsey_Global_Survey_2130 (accessed May 20, 2008). McKinsey & Company, An Executive Take on the Top Business Trends, McKinsey Quarterly, March, 2006. http://www.mckinseyquarterly.com/An_executive_take_on_the_top_ business_trends_AMcKinsey_Global_Survey_1754 (accessed May 20, 2008). Moore, M. U. N., Body Endorses Cultural Protectionism, Washington Post, October 21, 2008, p. A14. Nielsen, C./Thangadurai M., Janus and the Delphi Oracle: Entering the New World of International Business, Journal of International Management, 13, 2, 2007, p. 3. Pino, A., MSB Hosts Panel of Dignitaries on Competitiveness in Latin America, McDonough School of Business, Georgetown University, Dec. 4, 2007. Sprott, D. E/Miyazaki, A. D., Two Decades of Contributions to Marketing and Public Policy: An Analysis of Research, Journal of Public Policy and Marketing, 21, 1, 2002, pp. 105–125. Taleb, N. N., The Black Swan: The Impact of the Highly Improbable, New York: Random House 2007. Tse, E./Cainey, A./Haddock, R., Evolution on the Global Stage: Leading Ideas On Line, October 9, 2007, available at http://www.strategy-business.com/li/leadingideas/ li00046?pg=all (accessed May 22, 2008). Werner, S./Brouthers, L. E., How International is Management?, Journal of International Business Studies, 33, 3, 2002, pp. 583–591.

Chapter 1.7

Contemporary Research Trends in International Marketing The 2000s Masaaki Kotabe and Crystal X. Jiang

The climate of the time continues to shape the contextual nature of business research. International business research is probably more influenced by various forces of the economic and political climates than its domestic (or generic) counterpart. The emergence of new market economies in Eastern Europe, China, India, and Brazil, the consolidation of the European Union, as well as a decade of economic stagnation and recent resurgence in Japan’s economy has given global competition greater significance. The emergence of regional trading blocs in the form of the EU (European Union), the NAFTA (North American Free Trade Agreement), and MERCOSUR (Mercado Común del Sur) and an increasing number of bilateral trade agreements (e.g. EU–Mexico, Japan–Mexico, Japan–Singapore) have necessitated reorganization of firms’ production and marketing strategies. Advances in technology enhance communication and permit access to ever-increasing amounts of information. Globalizing trends in culture, technology, and financial markets drive global demand and global supply chains. Given these facts, it is no surprise that multinational enterprises (MNEs hereafter) have evolved into increasingly complex business environments. They attempt to maximize economic gains and efficiencies by increasing their scope of

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operations, penetrating ever more obscure markets, and accumulating knowledge from ever wider networks of subsidiaries, alliances, and acquisitions in this increasingly fast-paced, turbulent, and competitive environment. As MNEs have pushed the geographic frontiers of their operations the paradigm has shifted from a hierarchical MNE federation focus to a network-based focus by emphasizing firms’ integrated strategies and organizations (Holm and Pedersen 2000). It becomes imperative that firms conduct more research in unfamiliar and distant markets and in less developed and rapidly changing emerging economies. They must also increase their speed in collecting, interpreting, and reacting to new and unfamiliar market stimuli in order to respond with effective marketing strategies (Craig and Douglas 2001). Although national boundaries have begun to lose their significance as psychological and physical barriers to international business, local environments, particularly cultural, political, and legal environments, still play an important role not as a facilitator, but rather as an inhibitor, of optimal global marketing strategy development. Indeed, we still debate the very issue raised forty years ago: counteracting forces of “unification versus fragmentation” in developing operational strategies along the value chain. As early as 1969, John Fayerweather wrote emphatically: What fundamental effects does (the existence of many national borders) have on the strategy of the multinational firm? Although many effects can be itemized, one central theme recurs; that is, their tendency to push the firm toward adaptation to the diversity of local environments which leads toward fragmentation of operations. But there is a natural tendency in a single firm toward integration and uniformity that is basically at odds with fragmentation. Thus the central issue . . . is the conflict between unification and fragmentation—a close-knit operational strategy with similar foreign units versus a loosely related, highly variegated family of activities. (Fayerweather 1969, 133–4) The same counteracting forces have since been revisited by many authors with such terms as “standardization versus adaptation” (1970s), “globalization versus localization” (1980s), “global integration versus local

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responsiveness” (1990s), and most recently, “scale versus sensitivity”, and “online scale versus offline market sensitivity” (2000s). Basically, the leftside concept (i.e. unification, standardization, globalization, global integration, scale, and online scale) refers to a supply-side argument in favour of the benefit of economies of scale and scope, while the right-side concept (i.e. fragmentation, adaptation, localization, local responsiveness, sensitivity, and offline market sensitivity) refers to a demand-side argument addressing the existence of market differences and the importance of catering to the differing market needs and conditions. Terms have changed, but the quintessence of the strategic dilemma that MNEs face today has not changed and will probably remain unchanged for years to come (Kotabe and Helsen 2007). The importance of these changes is reflected in the development of new research streams in international marketing (Balabanis, Theodosiou, and Katsikea 2004; Craig and Douglas 2001; Czinkota and Ronkainen 2002; Douglas and Craig 2006; Katsikeas, Samiee, and Theodosiou 2006; Kotabe, Martin, and Domoto 2003; Nakata and Huang 2005), market globalization/regionalization (Subramaniam and Hewett 2004; Rugman 2003; Zou and Cavusgil 2002), collaborative business arrangements (including strategic alliances) (Luo 2002; Reus and Ritchie 2004; Robson 2002; Warrington, Abgrab, and Caldwell 2000), and multinational corporations in emerging markets (Luo 2007a; Meyer 2004; Steenkamp and Burgess 2002). These trends have increased the importance of research in international marketing, but it is not clear how research in the field has coped with this broadened responsibility. Past reviews of international marketing research (Douglas and Craig 2006; Kotabe 2001; Nakata and Huang 2005) highlighted two major deficiencies: studies in international marketing were simple, narrow and, perhaps, parsimonious without supplying a strong theoretical framework to guide firms’ global expansion; and international marketing research lacked the methodological rigour, particularly in equivalence of constructs and concepts, in comparison to generic (or domestic) research. While the first deficiency can be attributed to the preponderance of incorporating simple conceptualizations to represent complex relationships among multidimensional constructs (Nakata and Huang 2005), the latter can be attributed to the difficulties inherent in research involving more than one country (Aulakh and

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Kotabe 1993) (e.g. conducting primary data collection, the problem of data comparability in cross-cultural research, the implementation of methodological techniques in foreign markets). There have been various attempts to address these problems (e.g. Craig and Douglas 2000). This study looks at research in international marketing to see if the discipline has overcome the deficiencies outlined in the previous review articles. We examine the state of the art in international marketing research, with particular emphasis on conceptual frameworks and theory development. Our primary focus is on studies published since the year 2000 because the first decade of the twenty-first century has been characterized by changes in virtually all aspects of businesses and personal life. Earlier review articles (e.g. Aulakh and Kotabe 1993; Cavusgil and Li 1992; Douglas and Craig 1992; Kotabe 2001) classified the research into three main streams: macro-environmental issues, marketing management, and consumer behaviour. This review of the international marketing literature follows the classification system originally employed in Douglas and Craig (1992). Advances in International Marketing (2000–2007): This chapter reviews both macro and micro-environmental topics in international marketing. Research for this review spanned more than 1,000 articles in the journals from marketing and other related business areas that are listed in the ProQuest database. A list of the journals reviewed in this survey is provided in the Appendix. Although the list is not comprehensive, it sufficiently covers the domain of research in international marketing. A large majority of articles published in the 2000s deal specifically with issues related to marketing management rather than the macroenvironments that affect marketing management practices.

1 THE MACRO-CONTEXT International marketers have paid relatively limited attention to these global economic, legal/institutional and political/social developments. Oftentimes the environmental factors are perceived as “foreign environment uncontrollables” and receive limited academic attention

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(Young 2001). The same author summarized the impact of the global business environment on international marketing literature and suggested the following research agenda:  

  

Examine the impact of the evolution of regulation and liberalization in different countries or regional markets and sectors on the firm Take a country focus to investigate government intervention in international trade and investment, as well as government assistance and support on FDI Uncover how multilateral institutions, such as the WTO, influence trade and investment relations and international marketing Examine international marketing strategies of the non-government organizations (NGOs) Use a macro-economic perspective to examine both developing country firms operating abroad and MNEs operating in poor nations in terms of international marketing and economic development.

The macro-environmental context in which the issues of area studies, consumerism in society and institutional infrastructure are addressed is not examined in detail here due primarily to the lack of substantial and specific research addressing those issues in the 2000s. As stated earlier, research focus in the 2000s has been predominantly on international marketing strategy issues. However, the discussion on the micro-environmental issues familiarizes the reader with the countries or regions that have captured the attention of international marketing researchers. A few articles addressed the issue of consumerism in society. O’Shaughnessy and O’Shaughnessy (2002) examined the connections among marketing, the consumer society, globalization, and the hedonistic lifestyle, and discussed whether marketing is guilty as charged. They propose that marketing cannot really be the cause of materialism and that there is existence of credible alternatives. Later, Abela (2006) evaluated the claims made by O’Shaughnessy and O’Shaughnessy and found associations between consumerism and reduced personal well-being and between the historical development of consumerism and rise of modern marketing; although in both cases the existence of a causal relationship and its likely direction remain unclear. The author calls for future research to investigate the possibility of

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working within the current market economy to reduce the incidence of materialism.

2 THE MICRO-CONTEXT The micro-context of research in international marketing constitutes the bulk of research conducted in the field. Although there is no single best way to arrange various topics, they are arranged as follows. First, we examine research in both organizational and personal consumer behaviour as it represents the initial interfaces between firms and customers. In particular, the effect of country of origin on consumer behaviour received a significant amount of research attention. Second, research in various modes of entry and their performance implications is examined. Third, the literature on the marketing mix strategy is highlighted as it constitutes the crux of marketing. Fourth, research in global strategy and strategic alliances is covered. Both marketing and strategy researchers generally share common research interest in these strategy-related issues. Researchers in marketing tend to be more interested in market performance implications of global strategy and strategic alliances, while strategy researchers seem to place more emphasis on the theories driving the strategies. In the next segment, we review emerging issues concerning the Internet in global marketing, ethics in the global market place, and marketing strategies for emerging markets. Finally, research methodologies that are in the extant literature are examined. A map of the topics covered under the micro-context is summarized in Table 1.

2.1 Organizational and Consumer Behaviour 2.1.1 Organizational Buying Behaviour Organizational buying research has focused on the structure of the informal group that is involved in buying decisions (e.g. Dawes, Lee, and Dowling 1998), the decision-making process (e.g. Smith and Taylor 1985), and the factors that influence both matters (e.g. Ghingold and Wilson 1998).

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A mapping of the topics covered under the micro-context

1. Organizational and Consumer Behaviour

2. Market Entry Decisions

3. Local Market Expansion: Marketing Mix Decisions

4. Global Strategy

1.1 1.2 1.3 1.4 2.1 2.2

Organizational Buying Behaviour International Negotiations Consumer Behaviour Country of Origin (COO) Initial Mode of Entry Specific Modes of Entry 2.2.1 Exporting 2.2.2 Joint Ventures 2.2.3 Franchising 3.1 Global Standardization vs. Local Responsiveness 3.2 Marketing Mix 3.2.1 Product Policy 3.2.2 Advertising 3.2.3 Pricing 3.2.4 Distribution 4.1 Competitive Strategy 4.1.1 Conceptual Development 4.1.2 Competitive Advantage versus Competitive Positioning 4.1.3 Sources of Competitive Advantage and Performance. Implications 4.2 Strategic Alliances 4.2.1 Learning and Trust 4.2.2 Recipes for Alliance Success 4.2.3 Performance for Different Types of Alliances 4.3 Global Sourcing 4.3.1 Global Sourcing in a Service Context 4.3.2 Benefits of Global Sourcing 4.3.3 Country of Origin Issues in Global Sourcing 4.4 Multinational Performance 4.4.1 Determinants of Performance 4.4.2 A Different Interpretation of Performance

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TABLE 1.

Continued.

5. Emerging Issues

6. Analytical Techniques in Cross-National Research

5.1 Internet in Global Marketing 5.2 Ethics in the Global Marketplace 5.3 Marketing Strategies for Emerging Markets 6.1 Measurement Issues 6.2 Reliability and Validity Issues

Hunter, Bunn, and Perreault (2006) examined interrelationships among key aspects of the procurement process used by organizational customers. In their study, the procurement process included the relationships among purchase importance, extensiveness of choice set, buyer power, reliance on procedural controls, a proactive focus on longterm strategic issues, and search for information. Barclay and Bunn (2006) categorized organizational buying behaviour as follows: decision stages, buying activities, process heuristics, choice heuristics, and decision tactics. They focused on process heuristics and examined how it relates to aspects of the market and organizational context and to the buying situation of an organization.

2.1.2 International Negotiations Extant studies in this area examine issues on cross-cultural business-tobusiness negotiations. As global companies rely increasingly on the effectiveness of business negotiations for their survival and growth, international business negotiations have attracted considerable attention among researchers over the last decade. A review study on international business negotiations from 1990 to 2000 identified five categories of interests in negotiation research: environmental and organizational conditions, cultural influences, characteristics of the individual negotiators, the negotiation situation itself, and the outcome of the negotiation (Reynolds, Simintiras,

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and Vlachou (2003). Environmental conditions include the legal and political environment, currency fluctuations, foreign exchange, foreign government controls, instability and change. The organizational factors include firm-specific characteristics and firms’ decision-making process. Nakamura’s (2005) study, for instance, examined how firms’ intangible assets can be an integral source of their bargaining power in negotiations with potential joint venture partners in the host country. However, the foreign partner’s bargaining power relative to joint venture partners’ does not remain constant since, in a dynamic context, the joint venture itself can enhance the partners’ bargaining power as they learn from their own international joint ventures and through increased R&D capacity. The impact of cultural factors on international negotiation has caught researchers’ attention, especially in an emerging economy context. Leung and Chan (2003) examined business to business (B-to-B) relationships in terms of issues such as “inducement factors”, “face work” and “favour” from a Hong Kong-China intra-cultural negotiation environment. Their findings suggested that Western negotiators should adapt “face work” as a cultural strategy to facilitate their market entry to the Chinese market. In an Eastern cultural context, “face work”, which can be conceptualized as saving face, facilitates smooth business transactions and long-term relationship building. With the increasing growth of international trade and business opportunities in the Arab region, it becomes important to investigate the dynamics of cross-cultural negotiation processes in an Arab context. Drawing a sample from the United Arab Emirates (UAE), Al-Khatib, Rawwas, and Swaidan (2005) examine the impact of Idealism, Relativism, and Machiavellianism on the perceived appropriateness of five opportunistic negotiation tactics: traditional competitive bargaining, attacking opponent’s network, making false promises, misrepresentation of information, and inappropriate information gathering. Idealism and Machiavellianism are found to be strong predictors of managers’ perceptions of the ethical appropriateness of negotiating tactics.

2.1.3 Consumer Behaviour The issue of international consumer behaviour suffers from three key problems—a lack of theories, a lack of measurement reliability and a

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neglect of moderating variables. Research in this area has been extensive and mostly can be grouped under the following subtitles:    

Impact of culture on consumer behaviour Universality of American consumer behaviour models to the international context Debate on global consumer homogeneity versus heterogeneity Descriptions of international consumer behaviour

Culture and Consumer Behaviour: Recently, more scholars are interested in exploring the influence of culture on consumer attitudes and behaviour. Kongsompong (2006) compared Australian and Singaporean consumer purchasing decisions and orientation toward locus of control. The study showed that Singaporean consumers, representing a typical collectivist country, demonstrated more external locus of control tendencies and were more responsive to social influence in a hypothetical buying situation than those from a typical individualist country (e.g. Australia). Similarly, Keillor, Hult, and Kandemir (2004) reported significant differences across eight countries in the impact that technical (physical goods quality) and functional (service quality and servicescape) elements of the service encounter had on consumers’ behaviour intentions. Universality of American Consumer Behaviour Models: As noted by Steenkamp and Burgess (2002), it is problematic to apply measurement instruments established in Western cultures to other cultures when more than 80 per cent of the world’s consumers live in emerging consumer markets and transitional economies. It is necessary, therefore, to develop consumer behaviour measurements that fit into the political, legal, economic, and cultural background of these countries. Keillor, Owens, and Pettijohn (2001) investigated factors that contribute to social desirability bias in a cross-cultural/cross-national setting. They found that the factors influencing social desirability bias vary across countries and cultures. These factors can be categorized as either internal (e.g. from within the nation, culture or local business community) or external (e.g. from other localities, nations or cultures). This paper clearly presents the notion that although businesses predict an increasing homogeneous pattern of consumer behaviour due to increased economic

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development, the strong influence of family, friends, and cultural traditions may override the multinational exposure. Hence, given the complexity of the international business environment, care must be taken when applying current instruments to businesses in diverse cultural contexts. Consumer Heterogeneity versus Homogeneity: Research was conducted on the attitudes of Japanese, Chinese, and Korean consumers towards foreign countries and products (Kotabe and Jiang 2006). The authors suggest that although consumers in Japan, China and Korea differ in their brand orientation, quality/price perceptions, and product feature preferences, young generations in the three countries demonstrate similarities that allow for standardized strategies across national boundaries. It is essential that business strategists identify strategically equivalent segments, suggesting that a geocentric orientation in approaching global markets is necessary to reflect both similarities and differences among consumers. Descriptive Consumer Behaviour: Research was conducted on the influence of situational factors on the Japanese gift-giving market (Gehrt and Shim 2002). Those situational factors are (1) the age of the recipient in relation to that of the giver; (2) the relationship between the recipient and the giver (informal versus formal); and (3) the occasion of the gift (ordinary visit versus gift-giving season). Situational influence was found to have a significant impact on Japanese consumer behaviour and the magnitude of situational influence is substantial. In examining the reality of counterfeits and consumers’ experience with the phenomenon, Gentry et al. (2001) indicated that consumers in emerging markets may consider the brand and the product as separate entities serving different purposes. They are generally willing to pay disproportionate parts of their income for symbolic Western brands and often lower-priced Western merchandise is mistakenly perceived as counterfeit rather than as a comparable product with low-price. Soman and Gourville (2001) examined one of the marketing practices, specifically price bundling and found that consumers are more likely to refrain from consuming and demand less compensation for an individual benefit when it is purchased as part of a bundle.

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2.1.4 Country of Origin (COO) Although the COO research falls under the domain of consumer behaviour research, it will be examined separately as it has carved out its own niche in international marketing research. The pattern of research in this domain can be placed under the following themes:     

Conceptual refinement COO and information processing Establishing further proof for robustness of COO measure Proof on robustness of COO measure Measurement issues

Conceptual Refinement: The COO construct is decomposed into the following components: country of product design (COD), country of parts manufacture (COP), country of product assembly (COA), and country of manufacture (COM) (Chao, 2001; Quester, Dzever and Chetty 2000; Insch and McBride 2004). Prior results indicate that country-of-origin components do affect consumer perceptions of design quality, manufacturing quality, and overall quality for each product in distinctly different ways (Chao 2001; Insch and McBride 2004). COO and Consumer Information Processing: Recent studies examine how consumer ethnocentrism, patriotism, and economic nationalism affect product purchase behaviour (Balabanis and Diamantopoulos 2004: Balabanis et al. 2001). The COO effect may be an outcome of a combination of two processes—cultural stereotypes and personal beliefs. Similarly, Riefler (2007) suggested that consumers differ in their animosity targets and there may be different reasons, such as economic, political, religious, or personal, that cause their animosity feelings and thus determining their foreign product purchasing behaviour. Singh et al. (2007) compared the differences between Western (US) and Eastern (China) consumers in moral intensity and personal moral philosophies in decision-making processes. Kwak, Jaju, and Larsen (2006) used data from three diverse cultural and economic environments and confirmed that consumer ethnocentrism provokes negative attitudes toward foreign advertisements and foreign products. However, their study suggested that consumer variables such as

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global mindset and a market’s e-mail communication efforts mediate consumer ethnocentrism attitudes toward foreign brands. COO could be either a benefit or a liability. Amine, Chao, and Arnold’s (2005) study explored how negative COO effects and animosity can slow down a firm’s globalization efforts. Pharr (2005) conducted a narrative review of empirical studies of COO evaluations researched from 1995 to 2005. The review indicated that COO influence was subject to culturally derived antecedents and moderated by both product-based and individual consumer factors. A number of culturally derived factors affecting COO evaluations were identified (e.g. ethnocentrism, country-specific animosity, stereotypes, and Hofstede’s cultural dimensions) (Balabanis and Diamantopoulos 2004; Gürhan-Canli and Maheswaran 2000a; Insch and McBride 2004). For example, Laroche et al. (2003) suggested that COO effects vary significantly based on the consumers’ subcultural differences such as geographic region and language. External factors such as a country’s level of economic development or the influence of a consumer’s evaluation also affect COO evaluations (Liu and Johnson 2005). As for the moderators of COO effects, brand image or brand equity were found to moderate the effect of COO on product evaluations and purchase intentions, indicating that COO evaluations may operate through a brand-based construct rather than based on product quality evaluations or purchase intentions. It is reported that consumers’ perceptions of a brand’s developmental origins are more important than COO information in relationship to the product’s parts, assembly, design, or manufacture (Pharr, 2005). Based on the framework of accessibility–diagnosticity and information integration, Jo, Nakamoto, and Nelson (2003) found that brand image protects against the effects of negative COO evaluations. Strong brands were less influenced by consumer perceptions of countries-of-origin than brands with weak images. Establishing Further Proof for Robustness of COO Measure: Research was conducted to examine the influence of COO relative to other product attributes in consumers’ evaluation of domestic and foreign food products (Ahmed et al. 2004). The results indicated that when buying low-involvement products, COO mattered to Singaporean

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consumers in terms of its effects on high-involvement product categories in developed countries. However, when considering other extrinsic factors, such as price and brand, the impact of COO was weak and brand became an important factor for local consumers. Another significant finding was that country quality perception varied across product categories. Research by Piron (2000) examined whether a product’s COO affects consumers’ purchasing intentions of public versus private and luxury versus necessity products. COO was important for luxury products and necessities but less important than intrinsic cues, such as a product’s reliability and performance. Further, it was noted that consumers’ purchasing intentions were higher with no COO information than when presented with a moderate impression. By examining Hong Kong consumers’ perception of products coming from China and other major sourcing countries, Kaynak and Kucukemiroglu (2001) suggested that “made in” images of products affect consumers’ product selection. These “made in” images can be influenced by national characteristics, representative products, political and economic background and past experience with the sourcing countries and their products. Proof Against Robustness of COO Measure: As more research decomposes COO measurement, the salience of COO information itself in consumers’ product evaluations and choices has been questioned. For example, Liefeld (2004) reported that COO of products is not an important attribute in the choice processes of North American consumers. Suggesting that past research may have inflated the influence of COO on consumers’ consumption behaviour, a study conducted by Samiee, Shimp, and Sharma (2005) revealed that consumers have only modest knowledge of the national origins of brands, since factors such as socioeconomic status, past international travel, foreign language skills, and gender affect American consumers’ capability of recognizing foreign brand origins. Furthermore, brand origin recognition is based largely on consumers’ associations of brand names with languages that suggest country origins. Another study by Chao, Wührer, and Werani (2005) suggested that in a country (Austria) where consumers speak a different language with very different cultural heritage, the use of a

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foreign celebrity and a foreign brand name balances negative COO product evaluations. Consumer ethnocentrism is considered a plausible explanation for this observation. Finally, in contrast to the general notion of using country-of-origin or “made-in” labels as the key research cue, Bradley (2001) examined the influence of country effects and company effects on company preferences among industrial buyers of electrical and electronic equipment. It was found that company effects (i.e. elements of the firm’s marketing programme) were stronger and dominated country effects. Country effect had a weak impact on company preference and serve as an interaction variable mediated by company advertising. Measurement Issues: Pereira, Hsu, and Kundu (2005), among others, looked at COO evaluations as part of the larger COO image construct which includes cognitive, affective, and nonnative components. These studies indicate that country-of-origin bias may stem not only from country-specific beliefs but also one’s emotions or feelings toward a country (Gürhan-Canli and Maheswaran 2000b). It is therefore not only necessary to examine what is being perceived based on country image but also who is doing the perceiving (Insch and Miller 2005).

2.2 Market Entry Decisions Market entry decisions have been of great interest to international business academics and practitioners (Malhotra, Agarwal, and Ulgado 2003; Mayrhofer 2004). The choice of an MNE’s foreign market entrymode, for instance, licensing, equity joint venture (EJV), or whollyowned subsidiary (WOS), represents one of the most important strategic decisions for a firm engaging in foreign direct investment (FDI). The entry mode decision influences a firm’s commitment of financial and human resources. It determines development and implementation marketing programmes, the coordination of business activities both within and across markets, and ultimately the MNEs’ success in foreign markets (Chen, Griffith, and Ru 2006; Malhotra, Agarwal, and Ulgado 2003).

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2.2.1 Initial Mode of Entry Research in this area has focused its attention on three areas:   

To lay a conceptual foundation for understanding the choice of entry-mode Entry-mode choice in service firms and how this differs from manufacturing firms Entry-mode choice in emerging economies

Conceptual Foundation: Earlier studies on foreign entry strategy have followed a transaction cost aspect (Hennart and Park 1993; Hennart and Reddy 1997; Makino and Neupert 2000) and resource-based perspective (Barney 1991). Extant studies have examined the influence of the combination of internal factors and external institutional pressures on a firms’ foreign entry-mode. Davis, Desai, and Francis (2000) examined the market entry decision-making process and found that firms’ entrymode choices can be affected by internal (parent) and external (host country) institutional pressures. Particularly, business units that are greatly influenced by their parent firm’s institutional norms would prefer wholly-owned entry-modes, whereas business units that are influenced more by host country environmental factors would prefer export as their entry-mode. More importantly, a firm’s goal of internal isomorphism could be more important than host country factors in determining entrymode choice. Further, Elango and Sambharya’s (2004) study tested for the influence of host country industry structure factors, such as entry barriers, nature of demand, and degree of rivalry, on entry-mode choice. This study supports the notion that firms seek to “fit” their mode of entry with host country industry characteristics. It is argued that the larger the institutional distance, the more difficult it is for MNEs to establish legitimacy in the host country and to transfer strategic routines to foreign subsidiaries (Kostova and Zaheer 1999). New studies have emerged from institutional theory on institutional distance and FDI (Xu and Shenkar 2002). These studies argue that entry strategies must be matched with institutional distance from the host country in order to gain the advantage over competitors with small institutional distance or those who have experience working

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with large institutional distance. Treviño, Franklin, and Mixon (2004), for instance, believe that MNEs must conform to the institutional environment prevailing in the host country (DiMaggio and Powell 1983). That is, firms should understand the level of macroeconomic and institutional reform that has taken place in proposed host countries and managers should undertake FDI where the institutional distance is minimal. Thus, following institutional theory, when institutional distances exist, firms tend to seek legitimacy as well as efficiency, by selecting less integrated modes of entry (Delios and Beamish 1999; Brouthers 2002). By incorporating multilevel factors, Luo (2001) used an integrated framework to investigate whether entry-mode choices can be affected by country, industry, firm, and project factors. The author indicated that firms should assess the risk, return, control, and stock of owned resources for each entry-mode. Brouthers, Brouthers, and Werner (2003) applied transaction cost variables to predict firms’ entry-mode choices and found that asset specificity and economic uncertainty can predict entry-mode choices. Their results indicate that transaction cost-enhanced selected entrymode choices lead to superior firm performance. Erramilli, Agarwal, and Dev (2002) explored how firms make non-equity entry-mode decisions and reported that the availability of management capabilities, firm’s imperfectly imitable capabilities, and the availability of a support infrastructure affect the modes chosen. Entry-Mode Choice in Service Firms: Sanchez-Peinado, Pla-Barber, and Hébert (2007) identified principles in the manufacturing sector that can be applied to service firms and others that can be modified to the specific characteristics of services. They suggest that entry-mode choices for service firms cannot be fully examined through the perspectives offered in the manufacturing sector. By incorporating transaction cost factors and the influence of risk and trust propensity, Brouthers and Brouthers (2003) investigated the differences between service and manufacturing firms’ international entry-mode choices. The entry-mode of service firms was driven by people-oriented measures of uncertainty: asset specificity, behavioural uncertainty, and trust propensity; whereas manufacturing firms’ looked

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at investment based uncertainties, such as environmental uncertainty and risk propensity. Ekeledo and Sivakumar (2004) suggested that resource based theory can be applied to entry-mode strategies. Their analysis indicated that the transferability of entry-mode concept, practice or theory from manufacturing to service firms depended on the type of services involved. They found significant differences between entry-mode strategies for non-separable service firms and those of manufacturing firms due to simultaneity of production and consumption of nonseparable services. Entry-Mode Choice in Emerging Economies: Prior research has examined the ownership and control of entry strategies focusing primarily on the mature market economy context. It was not until lately that studies have looked at entry-modes of MNEs in emerging markets. Entering into transition economies presents considerable uncertainty for businesses. Gielens and Dekimpe’s (2007) study indicated that managers should take certain industry wisdom into consideration, in terms of entry timing and size; otherwise a firm’s attempt to develop unique entry rules can be dysfunctional. In addition, rather than just imitating the most popular or well-recognized decision in terms of entry timing and size, managers should closely monitor the actions of their home competitors, distinguish their actions between same-format competitors and different-format ones, and adjust the observed industry practice for the specificity of their own resources. Furthermore, the negative effects of entering at a different point in time from the industry norm persist and even become amplified over time, whereas the negative impact of size differences is temporary. Meyer and Nguyen (2005) examined how institutions in an emerging economy influence entry strategy decisions. They reported that subnational institutional variables demonstrate a significant influence on both location and mode of foreign entry. Institutional pressures arising from incumbent state-owned firms and the domestic market orientation of the investor lead to a preference for joint venture entry, while the availability of scarce resources affects the location of FDI and the likelihood of green field entry.

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2.2.2 Specific Modes of Entry 2.2.2.1 Exporting Exporting has been one of the most frequently studied areas in the literature on entry-modes. Most of the academic work revolved around the following issues:        

Conceptual foundation Exporting and the marketing mix Determinants of exporting Export performance Exporting and small business Factors of export success Barriers to exporting Exporting and strategic alliances

Conceptual Foundation: The literature on export mode choices has evolved from the lenses of Hymer’s theory, through International Product Life Cycle, Internationalization, Internalization, Eclectic Paradigm, Transaction Cost Economics, to the present-day Resourcebased View explanation (Sharma and Erramilli 2004). Recently, export studies have examined the contribution of firms’ resources and capabilities to the realization of their competitive advantage in export markets, including experiential, scale, tangible resources, informational, relationship marketing, pricing, distribution, communication, and product development capabilities (Morgan, Kaleka, and Katsikeas, 2004; Zou, Fang, and Zhao, 2003). Exporting and the Marketing Mix: Lim, Sharkey, and Heinrichs’ study (2003) explored the importance of new product development practices to the export development process. The following aspects of the new product development process were investigated: team development, customer involvement, modular design, supplier involvement, and computer usage. The results support the notion that in order to achieve a higher degree of export involvement, a firm must possess new product development capabilities. The key to exporting success includes the firms’ capability to gather and analyse information to take advantage of

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opportunities and its ability to develop internal resources and capabilities to support new product development. Determinants of Exporting: The impact of organizational culture and ownership type in a firm’s export intention is explored by DosogluGuner (2001). The results indicate that while adhocracy increases the likelihood of a firm’s intention to export, internally oriented cultures (such as clan culture) decrease the likelihood. Analyses of ownership type indicate that externally controlled firms are more willing to engage in export activities than manager-controlled and owner-controlled firms. Export Performance: Leonidou, Katsikeas, and Samiee (2002) conducted a meta analysis of extant literature and assessed relationships between export marketing strategy and performance. Their study suggested: (1) a strong association between export marketing strategy and export performance measures although the relationship is not always significant; (2) that of the export performance measures examined in various studies, stronger effects are observed in relation to export proportion of sales (such as export intensity); only a few marketing parameters (product advantage, pricing strategy, and dealer support, respectively) affect different measures of performance; and (3) study characteristics (such as the time of study, geographic focus, and product type) have a limited impact on export performance. By examining export strategy-performance relationships of firms from emerging economies, Aulakh, Kotabe, and Teegen (2000) suggested a strong relationship between degree of cost leadership and performance in developed markets, whereas a strong relationship between the degree of differentiation and performance in developing countries. Standardization may be appropriate for firms to enter a culturally closed foreign country and there is an inverted U-shaped relationship between international diversification and firm performance. MacPherson (2000) identified key factors influencing firm success in exporting machine tools: an international focus, gathering market intelligence to understand foreign niche market product requirements, product specialization instead of a broad product line, and adequate R&D investments.

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Cadogan, Cui, and Li (2003) investigated the effect of export marketoriented (EMO) behaviour on export performance. EMO behaviours were important predictors of export performance in terms of growth and profits. Further, EMO behaviour was more important under turbulent competitive conditions in firms’ export operations. Sivakumar and Nakata (2003) studied culture’s role in the process and outcomes of new product development. Their theory identified four factors that influence new product development: intensity of cultural values, heterogeneity of culture values, and consistency of culture across the two development phases, and newness of the product to both the firm and the market. They found that all four factors must be considered to ensure optimal results. Gregory, Karavdic, and Zou (2007) integrated e-commerce concepts with export marketing strategy theory and examined how e-commerce affects a firm’s export market strategy and export performance. Their study illustrates the importance of using e-commerce concepts to enhance our understanding of exporters’ international operations and export performance. Exporting and Small Business: In investigating smaller firms’ export behaviour, Wilkinson and Brouthers (2006) suggested that firms’ export success largely depends on the ability to assemble and deploy appropriate resources. Since small firms generally lack necessary internal resources, export promotion activities can complement internal firm resources to enhance firms’ export performance. Economic growth of East Asian countries as well as Central and Eastern European countries has made them attractive targets for international firms, both large and small and medium-sized enterprises (SMEs). Haahti et al. (2005) proposed that SMEs employing cooperative strategies to enrich their knowledge base about export markets can consequently improve their performance. They found that knowledge intensity mediated the relationship between cooperative strategy and export performance. Firm size does not have a direct relationship with performance, but demonstrates an indirect effect on export performance through cooperative strategy and knowledge intensity. Ibeh (2003) examined the effect of external environment on the export venture creation process of small business. This author highlights

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the importance of possessing an entrepreneurial orientation when challenged by hostile operating environments. A committed top management team, the firm’s requisite competencies in product quality and technology, foreign market information search, new market development, and networking skills also contribute to export venturing prospects. A study by Brouthers and Nakos (2005) indicated that SMEs that adopt a systematic methodology in selecting foreign target markets (systematic market selection) outperform those with an ad hoc market selection methodology. When controlling for decision-maker and firmspecific characteristics, systematic international market selection serves as a significant determinant of SMEs’ export performance. Further, firm size serves as a necessary and sufficient condition for export success (Mittelstaedt, Harben, and Ward 2003). Factors for Export Success: Gencturk and Kotabe (2001) found that export marketing involvement and the use of government export promotion assistance programs are important export success factors. These findings support the importance of firms’ export involvement behaviour for export success in terms of efficiency through improved profitability, effectiveness through growth in export sales, and competitive position. Technological progress has been considered an important driver of the changing patterns of exports (Balabanis, Theodosiou and Katsikea 2004). For instance, the Internet helps exporters initiate and maintain constructive relationships with foreign customers (Chaffey et al. 2003) and assists with market research (Quelch and Klein 1996). More empirical research is necessary to determine how the Internet can support a firm’s export objectives and what factors could prevent effective use of the Internet (Balabanis, Theodosiou, and Katsikea 2004). Barriers to Exporting: An attempt is made to review, assess, and synthesize existing empirical research on barriers hindering small business export development (Leonidou 2004). Internal barriers (incorporating informational, functional, and marketing) and external barriers (procedural, governmental, task, and environmental) are summarized from

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prior studies. It is suggested that the impact of export barriers is situation-specific, which can be explained by the idiosyncratic managerial, organizational, and environmental background of the firm. Regardless of the influence of these variables, certain barriers (such as information inefficiencies, price competitiveness, foreign customer habits, and politico-economic hurdles) seem to have a systematically strong negative effect on export behaviour. Exporting and Strategic Alliances: An empirical study is conducted to examine whether cultural differences affect trust, commitment, and cooperation in international marketing channel alliances between US exporters and their foreign distribution partners (Mehta et al. 2006). The study indicates that cultural differences have a negative effect on trust, commitment, and cooperation. In other words, greater cultural differences between channel partners result in lower levels of trust, commitment, and cooperation. In summary, recent studies have incorporated a resource-based view into the industrial organization perspective by suggesting that firms’ responsiveness to the external environment and their capabilities and resources (e.g. experiential, scale, financial and physical resources, informational, relationship building, pricing, distribution, communication and product development capabilities) contribute to the achievement of a competitive advantage in export markets (Zou, Fang, and Zhao 2003; Morgan, Kaleka, and Katsikeas 2004). Although marketing researchers have developed a wide range of explanations for understanding export mode choices based upon respective paradigms within the firm, theoretical challenges for export marketing are summarized as follows (Balabanis, Theodosiou, and Katsikea 2004): 

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More attention should be directed to addressing the issue of leveraging export firms’ capabilities and transferability of capabilities across borders. Further investigation of factors that facilitate or inhibit the use of entrepreneurial and strategy-making processes; the relationships between capabilities, process for strategy-making, strategy and export performance.

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Call for more empirical study of international relationship marketing in an international context, especially involving partners from developing and transitional economies.

2.2.2.2 Joint Ventures Research in this area examined the following issues:   

Joint Venture Performance Selection International Joint Ventures Failing in Joint Ventures

JV Performance: With firms’ increasing adoption of the international joint venture (IJV) as a strategic foreign market entry-mode, considerable amount of research has focused on identifying factors conducive to superior IJV performance. Robson, Leonidou and Katsikeas (2002) provided a systemic review and integrated assessment of over ninety empirical studies on drivers of IJV performance. Their evaluation is based on an integrated framework including background, antecedent, core, and external variables on IJV performance. Yeheskel et al. (2001) investigated firms’ alliance activities and performance in Israel’s medical technology industry and found that firms that have undertaken alliances marginally underperformed those that have not. Both marketing and R&D alliances with a foreign partner are found to outperform alliances with local firms, yet marketing alliances demonstrate no effect on firms’ survivability. In contrast, production alliances that involve another Israeli firm will outperform alliances with a foreign firm, except for cost. Firms learn more through IJVs than through licensing contracts (Anand and Khanna 2000). IJVs allow firms to build relational capital, learn integrative approaches to managing conflict, and be protected from opportunistic behaviour (Kale, Singh, and Perlmutter 2000). Studies also found that personal and structural attachments contribute to IJV performance although such effects diminish as the attachments increase. Further, personal and structural attachments strengthen each other in their effects on IJV performance (Luo 2002). When competing in foreign countries, firms can align with partners that have local knowledge to mitigate shortage of resources and capabilities (Lu and Beamish 2001).

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Selection of International Joint Ventures: Chen and Hennart (2002) examined how market barriers and firm capabilities affect MNEs’ choice of joint ventures versus wholly-owned subsidiaries. Japanese investors are more likely to choose joint ventures when facing high market barriers, while those possessing strong competitive capabilities are more likely to set up wholly-owned subsidiaries. They reported that marketing factors, such as advertising intensity and brand equity, were more influential than technological ones in determining the choice of partial versus full ownership. These findings, however, vary across subsamples representing low- versus high-tech industries and consumer versus industrial products. Failing in Joint Ventures: In the face of the increasing failed joint venture cases, joint venture conflicts have become an important subject in alliance practice and research. Conflicts lead to poor performance, failure and even dissolution. In investigating terminated joint venture relationships, Peng and Shenkar (2002) used divorce as a metaphorical image to discuss a four-phase dissolution process, initiation, going public, uncoupling, and aftermath. Their study indicated that a JV relationship can be complicated by its multi-parent origins.

2.2.2.3 Franchising By incorporating the analogy of marriage to enhance current understanding of the business-to-business relationship in international retail franchising, Doherty and Alexander (2004) show that rational or hard benefits alone (such as financial stability) are not sufficient to sustain the relationships. Instead, it is essential to have mutual attraction and a trusting relationship that strives for understanding, seeking, evaluating franchise partners, and sustaining the stabilizing role of partnerships. Pak (2002) tested dynamic links between strategic motivation and the ownership structure of international franchisers. Based on the knowledge-based view perspective, Pak’s paper examines how international franchisers can be recognized not only as market seekers but also learners in terms of knowledge-gaining and strategic learning.

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2.3 Local Market Expansion: Marketing Mix Decisions This section examines the studies relating to the global standardization debate, followed by a discussion of the international marketing mix variables of product policy, advertising, pricing, and distribution.

2.3.1 Global Standardization versus Local Responsiveness The issue of a standardized marketing programme versus customized programmes to suit the specific needs of individual foreign markets has received research attention in the last four decades. The findings of each study in international marketing are summarized below: 

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Katsikeas, Samiee, and Theodosiou (2006) focused on the nature and performance implications of ‘fit’ between marketing strategy standardization and adaptation by incorporating prior studies on strategy fit from the strategic management and organization theory literature. It is reported that the degree of strategy standardization is significantly related to similarity between markets with respect to regulatory environments, technological intensity and velocity, customs and traditions, customer characteristics, a product’s stage in its life cycle, and competitive intensity. They show that a firm’s superior performance results from strategy standardization only to the extent that there is a fit or co-alignment between the MNE’s external environmental and its international marketing strategy choice. Kotabe (2002) suggested that globally operating firms need to constantly seek to ‘kill two birds with one stone,’ or meet the counteracting forces between supply-side and demand-side to sustain their competitive advantage. In order to cope with the notso-peaceful business environment, firms need to proactively assess their supply-side and demand-side requirements simultaneously. By examining the 500 largest MNEs in the world, Rugman (2003) posited that there are very few truly global firms and that most MNEs operate in their home region of the triad. The study shows that multinationals are not global, but regional. US firms, for

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instance, are more intra-regionally oriented when compared to their counterparts in Europe and Asia. It is inappropriate to assume a unified and homogeneous perspective when discussing today’s businesses; neither is it appropriate to substitute global strategy for regional triad strategies. Malhotra et al. (2005) examined the variations in perception of service quality dimensions (e.g. reliability, customer understanding, responsiveness, competence, courtesy, communication, credibility, security, and tangibility) in banking services in the US, India, and the Philippines. They reported significant differences in perceptions of these dimensions and attributed them to economic and sociocultural factors. Chung’s study (2005) revealed that the spectrum of degree of standardization of marketing programme/process constructs in the home-host scenario should be product process price distribution promotion. Product type, consumer behaviour, marketing infrastructure, political environment, and firm size are important factors in the selection of standardized marketing strategies in the home-host scenario. Backhaus, Mühlfeld, and Van Doorn (2001) investigated advertisement elements that can be perceived as standardized for international advertising campaigns and reported that the visual aspect is the most important determinant of a standardized advertisement campaign, while other factors play a minor role in determining perceptions of similarity. As such, by using the same visual elements in an international campaign, firms can mitigate problems of image confusion and irritation caused by localized campaigns.

2.3.2 Marketing Mix The formulation of an optimal marketing mix is challenging when considering its effectiveness across international markets. Extensive literature exists on the influence of cross-cultural differences in consumption. Generally, culture values and norms determine consumers’ buying motives (De Mooij 2005). For example, customers’ willingness to pay for products will vary across cultures. In Japan, consumers view

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non-price information, such as brand, packaging, and advertisement, as important variables in assessing product quality and in making their buying decisions. However in emerging countries, charging a high price may be considered gouging the customer (Kotabe and Helsen 2007). Further, advertising styles that are effective in one country may be counterproductive in others. Obviously, consideration of cultural differences can be costly when firms have to adapt marketing strategies to numerous environments. On the other hand, if marketers do not consider cultural differences, they may be accused of having an ethnocentric view of the world. Current studies indicate the importance of flexibility in marketing strategies to accommodate cultural differences and similarities, interdependence, product-market conditions, and broader global concerns (Grein 2000).

2.3.2.1 Product Policy The bulk of the studies in this domain examined the following two key concepts:  

determinants of new product development and management in international markets new product adaptation and firm performance

Determinants of New Product Development: Verhees and Meulenberg (2004) investigated the combined effect of market orientation and innovativeness on product innovation and firm performance in small companies. They confirmed that effective market intelligence allows the small firm owner to better understand his firm’s markets, make better decisions in developing and marketing new products, and improve firm performance. However, market intelligence may slow down a firm’s product innovation when the owner is highly innovative, and enhances it with less innovative owners. Sivakumar and Nakata (2003) looked at ways global new product teams deal with cultural variances. This paper presented a theoretical framework focusing on the impact of national culture on product development tasks. Using analytical derivations and comparative statistics, their model examined the levels and variances of culture values

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that maximize product development success by taking into account dimensions of GNPT (global new product team) performance. Their analysis provides group compositions that optimize product development results. In the context of global product development, where to develop and deliver timely and innovative products across heterogeneous cultures, locales, and markets are critical and ongoing challenges. Dealing with such challenges requires that firms operate effectively across the geographic, political and cultural boundaries that are encountered in global operations. As the time-to-market dimension of new product development (NPD) has become a critical determinant of an MNE’s competitive advantage, MNEs increasingly rely on cross-teams to exploit their knowledge throughout their dispersed subsidiaries. Murray and Chao (2005) examined the antecedents and outcomes of international knowledge acquisition at the cross-team level. Their study showed the importance of fostering NPD project teams’ realized absorptive capacity to transform acquired knowledge resources into NPD capabilities so as to enhance new product market performance. Investigating the relationship between strategic, organizational and process factors and new product performance (NPP), a study of Japanese and South Korean companies revealed that innovation success depends on process capabilities, which are derived from a strategic focus on customers, skilled and capable NPD personnel, and intensive collaboration and effective communication across functions (Im et al. 2003). An analysis of 4,840 dyads between new product development teams and subsidiaries that were potential targets for competence transfers in a high-technology multinational company revealed that studying the determinants of competence transfer separately can yield biased results. The authors suggested broadening research by analyzing multiple determinants of competence transfer on synergies, integration, technology transfers, and geographical and cultural differentiation in multinational enterprises (Hansen and Løvås 2004). New Product Adaptation and Firm Performance: Calantone et al. (2006) studied the antecedents of product adaptation strategy, namely internal and external firm factors, and export performance of firms in the United

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States, Korea, and Japan. They reported a positive relationship between product adaptation strategy and export performance. Further, innovative organizational practices (e.g. better communication) enhance firms’ export performance. Interestingly, the influence of the similarity between the home and foreign market effect is more significant in the US than in Japan or Korea. Cultural differences also influence consumers’ product choice decisions and the diffusion of new products (Yaveroglu and Donthu 2002). Yeniyurt and Townsend’s (2003) study shows that Hofstede’s cultural dimensions (individualism, power distance, and uncertainty avoidance), moderated by socioeconomic variables, can explain consumers’ acceptance of new products.

2.3.2.2 Advertising The bulk of the literature in this domain has struggled with the issues surrounding the standardization versus adaptation debate. As globalization has demonstrated a powerful homogenizing influence on consumers in many countries, consumers worldwide receive the same intense communications and perceive global brands as ubiquitous. MNEs are increasingly interested in understanding the transferability of brand equity across cultural geographies and the management of global positioning and communication programs (Ewing, Caruana, and Zinkhan 2002). Therefore, the three key areas that have received most of the research attention are:   

Advertising Standardization versus Customization International Advertising Strategy Measurement Issues

Advertising Standardization versus Customization: An effort has been made to review, assess and recommend international advertising strategies (Melewar and Vemmervik 2004). Three basic schools of thought concerning advertising standardization have been identified: standardization, adaptation and compromise. Advantages and disadvantages of advertising standardization, adaptation as well as some of the contingency models have been discussed extensively. The authors

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provide the following recommendations and directions for future research:    

Designing a comprehensive survey that tracks companies and sectors over time A clear and easily understood definition of standardization A sufficient sampling frequency An identical statistical analysis over time and across sectors

Over the last fifty years, academic researchers have generally advocated the adaptation approach, while practitioners have alternated between advertising standardization and customization with a trend toward standardization. Even with a global theme, MNEs still find it essential to address local cultural differences in the foreign market. Using a case analysis of Toyota’s Land Cruiser SUV advertising campaign in China, Li, and Shooshtari (2006) encouraged MNEs to recognize the importance of understanding sociolinguistic systems indigenous to targeted consumers in international markets. The message is clear that marketing researchers should incorporate bicultural and bilingual ethnographic studies outside the well-explored Western cultural dimension to examine international marketing behaviours. The perspective of subsidiary managers in multinational corporations should be taken into consideration in the advertising planning process in order to avoid conflict that could decrease the effectiveness of global campaigns (Jaeseok, Tharp, and Choi 2002). Further, regional consumer clustering is more exaggerated than is applicable (Kanso and Nelson 2002). International Advertising Strategy: Two dimensions to advertising strategies have been identified (Melewar and Vemmervik 2004), to what extent an advertisement or a campaign is standardized and the geographical coverage of the campaign. The standardized school of thought promotes the idea that markets are homogeneous and that an adapted strategy is unnecessary (Levitt 1983; Peebles 1988). The adaptation school argues that advertising is more dependent on cultural influences than other marketing elements, thus making it difficult to standardize (Boddewyn, Soehl, and Picard 1986). For example, Teng and Laroche (2006) stressed the importance of matching advertising to the distinctive cultural values

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of the target consumers during international advertising and marketing campaigns. Another school of thought advocates local differences with some degree of advertising standardization (Papavassiliou and Stathakopoulos 1997). Measurement Issues: Few studies have investigated the generalizability of marketing models, concepts and theories to non-US contexts. Ewing, Caruana, and Zinkhan (2002) extend the theory of cross-national measurement invariance by examining the equivalence of four advertising response scales across six countries. They report equivalence for some of the scales.

2.3.2.3 Pricing Global pricing is one of the most critical and complex issues which global firms face. An important issue for managers is whether to adapt or standardize the domestic pricing strategy to the foreign market. A firm’s global pricing strategy may make or break its overseas expansion efforts. However, with the exception of a few recent studies (e.g. Cavusgil, Chan and Zhang 2003), studies on pricing have been ignored (Nakata and Huang 2005). The following two key areas have received considerable research attention:  

Pricing standardization versus customization Nonconscious factors

Standardization versus Customization: It has been suggested that globalization of markets does not lead to standardized pricing. Market idiosyncrasies, such as different levels of country risk, market size, and strategic importance of the market to the firm, typically justify adapted prices in local markets (Solberg, Stöttinger, and Yaprak 2006). By investigating factors that influence international pricing strategy along the standardization–adaptation continuum and incorporating the viewpoints of subsidiary managers, Theodosiou and Katsikeas (2001) suggested that customer characteristics and behaviour, economic and legal conditions, and stage of product life cycle should be taken into account when formulating pricing strategies. It is imperative that

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managers match their marketing programmes with the environmental and market conditions of the foreign markets served. It is posited that customer preference, customer retention, and price elasticity differ across service quality dimensions in vertical, horizontal, and global segment dimensions (Bolton and Myers 2003). The connection among global customers’ price elasticities, service quality preferences, and organizational characteristics indicates that (1) firms can optimize profits from establishing specific price points for service feature bundles that attract and retain customers; (2) service delivery systems can be customized to match individual customer preferences for perceived service quality; (3) the importance of understanding how price elasticities vary across different service delivery and organization profiles. Non-conscious factors: In examining the effect of nonconsciousness expectations on the relationships between price and quality on consumers, Irmak, Block and Fitzsimons (2005) suggested that consumers’ nonconscious beliefs about the price–quality relationship changes their experience with the merchandise. More notably, motivation can drive “marketing placebo” effects, thereby suggesting that innocuous marketing activities could do far more than meets the eye. Fairness has been defined as a judgment of whether an outcome and/or the process to reach an outcome are reasonable, acceptable, or fair (Bolton, Warlop, and Alba 2003). Xia, Monroe, and Cox (2004) integrated theoretical foundations of fairness perceptions and summarized empirical findings on price fairness. The authors suggested the following factors that influence price fairness judgments: transaction contextual information, procedure information, buyer–seller relationships (e.g. different types and dimensions of trust along relationship development), and more generic influences such as social norms, consumer knowledge, and individual characteristics. Shehryar and Hunt (2005) investigated whether consumers’ familiarity with products impacts the degree to which consumers are sensitive to a seller’s violation of procedural fairness norms in pricing. When less familiar with a product, consumers are more likely to rely on procedural fairness to form purchase intentions and often equate procedural fairness with perceived quality. The following topics in pricing are identified as deserving of further investigation (Nakata and Huang 2005):

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Pricing in inflationary or deflationary environments Using pricing to position products effectively in emerging markets Pricing transparency and signaling in regional markets Effects of dual currency pricing or dollarization on purchasing behaviours Preventing grey market through international pricing coordination

2.3.2.4 Distribution Research in this area focused on the following broad issues:    

Channel Cooperation and Conflict Channels in Emerging Markets Channels and MNE Performance Standardization versus Adaptation Debate

Channel Cooperation and Conflict: This is a popular area of research in the international marketing field. Rose and Shoham (2004), for example, examined the antecedents and consequences of task and emotional conflicts on the quality of the strategy employed and their effect on business performance and manufacturer’s satisfaction with the distribution channel. Their results suggested that team spirit and interorganizational connectedness reduce task and emotional conflicts and increase manufacturers’ satisfaction with the distribution channel. Both task and emotional conflicts have a negative impact on international channels of distribution. Channels in Emerging Markets: Griffith, Chandra, and Fealey’s (2005) study investigated whether international marketing decision-makers incorporate the natural channel when entering an emerging market. They proposed that the use of natural channels, the utilization of natural resources contained within an area of trade, allows firms to overcome the weaknesses in infrastructure and fragmented retail structure prevalent in emerging markets. Of particular note is that a mismatch between channel choices and internal (e.g. corporate elements and product elements) and external factors (e.g. market elements and customer elements) could impede the effectiveness of the entire marketing strategy in an emerging market context such as in India.

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Zhang, Cavusgil, and Roath (2003) focused on the direct and indirect effects of the manufacturer’s use of governance via relational norms and its competitiveness in the export market. Their findings indicated that the power of relational norms resides not only in their influence on tangible outcomes, such as enhanced competitive position of manufacturers in export channels, but also in their ability to generate an intangible relational asset, such as trust. The indirect effect resulting from the mediating role of trust made a key contribution to the understanding of the role of relational governance in cross-border relationships and export performance. Recognizing the environmental differences across countries and the impact of external and internal factors on channels, Kaynak and Kara (2001) examined channels of distribution in developing countries and suggested that channels should be studied based on levels of socioeconomic development. Channels and MNE Performance: Using the power–satisfaction– commitment–performance framework, Ramaseshan, Yip, and Pae (2006) explored channel exchange relationships in China. They discovered a subtle difference in channel member behaviour between individualist and collective cultures. Although the relationships between power, satisfaction, commitment, and performance are applicable to China, it is essential for firms to exercise power with caution by accounting for the collectivistic cultural context. In examining the development and maintenance of long-term channel relationships, channel governance relies on two different types of satisfaction—economic and social satisfaction (Geyskens and Steenkamp 2000). Economic satisfaction indicates a channel member’s evaluation of the economic outcomes that flow from the relationship and social satisfaction refers to a channel member’s evaluation of the psychosocial aspects of the relationship and interactions with its exchange partner. Future studies are necessary to examine different roles of satisfaction, either separately or in combination, in managing long-term channel relationships. Standardization versus Adaptation Debate: It is noted that research on marketing standardization has focused primarily on products and

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advertising (Kustin 2004). Few studies have examined international standardization strategies for the total marketing mix. Chung (2003) suggested that product-related constructs are the most likely standardized aspects, followed by process and promotion. The two least likely standardized constructs are distribution and price. A standardized distribution channel has an effect on firm performance in terms of sales growth and market share (Chung 2003).

2.4 Global Strategy A literature review was performed to advance the knowledge in the four sub-areas as identified by Douglas and Craig (1992). They are: competitive strategy, strategic alliances, sourcing, and multinational company performance. Search for articles in these four areas was conducted within an international or global context.

2.4.1 Competitive Strategy Three broad issues seem to be dominant in mainstream research:   

Theoretical and Conceptual Development to help in Understanding the Role of Competitive Strategy, Difference between Competitive Advantage and Competitive Positioning and, Sources of Competitive Advantage in International Marketing Strategy and Performance Implications.

2.4.1.1 Conceptual Development A resource-based strategic management model of MNE market entry demonstrates the value of this new conceptual framework to the understanding of competitive strategies of MNEs (Tallman 1991). The integration–responsiveness framework in the choice of the models of international strategy is less helpful for devising competitive strategy (Taggart 1998). A contingency framework illustrates how national and political institutions of a country impact the effectiveness

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of an MNE’s international strategies (Murtha and Lenway 1994). The Porter–Dunning Diamond model of international competitiveness is used to explain the current situation and the further development of the international competitive strategy of mainland China’s manufacturing sector (Liu and Song 1997).

2.4.1.2 Competitive Advantage versus Competitive Positioning Strategy literature in the 1990s tried to differentiate between two sources of competitive strategy—competitive advantage and competitive positioning. A firm experiences competitive advantage in terms of its core competencies. A firm’s competitive positioning, on the other hand, raises the need for important strategy choices beyond the core competencies of a single corporation. Such an overall strategy then combines the internal competencies of each company to become the core competencies of the entire competitive system. Competitive positioning strategy interacts with internationalization strategy in the formulation of an overall strategy (Morrison and Roth 1992). Gupta and Govindarajan (2001) suggested that global presence does not automatically equate with global competitive advantage. Firms should evaluate their global network for each value-chain activity along the dimensions of activity architecture, competencies at the locations, and coordination across locations. Subsequently, they should design and execute actions to mitigate or eliminate the sub-optimalities.

2.4.1.3 Sources of Competitive Advantage and Performance Implications Ghemawat (2003) suggested that globalizing firms must consider the trade-offs among globalization, regionalization, and semi-globalization marketing strategies. Semi-globalization presents the most cautious alternative for competing across multiple locations. The author discussed the need for international business strategy to maintain a balance between attention to location-specificity and other types of specificity. Ghemawat also examines conditions under which market specific problems should be given priority.

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Yeniyurt, Cavusgil, and Hult (2005) suggested that in order to achieve sustainable competitive advantage, there must be global market knowledge development and coordination. The inter-functional and the value-chain coordination of firms and their ability to share information and integrate business functions across the global company will result in improved strategic and financial performance.

2.4.2 Strategic Alliances Literature in this area has focused on three broad areas:   

Issues of Learning and Trust in Alliances Recipes for Alliance Success Performance Issues for Different Types of Alliances.

2.4.2.1 Learning and Trust Voss et al. (2006) integrated the cultural sensitivity construct into a relational exchange model of international alliances. Their findings showed that quality information exchange is a key construct in relational exchange and that it mediates the trust and alliance marketing performance relationship. US firms place a higher emphasis on behavioural exchanges than their relatively more affective Japanese partners. As for Japanese partners, the benevolence dimension of trust is a more important determinant of managerially assessed alliance marketing performance than for US firms.

2.4.2.2 Recipes for Alliance Success Nielsen (2007) extended our understanding of the international strategic alliance (ISA) relationship between ex ante and ex post alliance formation factors and multiple measures of performance, taking both outcome and process into consideration. The results report a significant relationship between alliance performance and host country risk as well as partner reputation proceeding alliance formation. Pre-alliance formation factors, such as prior experience, do not predict alliance performance. Post-alliance formation factors, such as collaborative

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know-how, trust and protectiveness, however, are found to have an impact on ISA performance. Trust is beneficial to alliance relations and can have different effects on alliance performance, depending on the levels of behavioural and environmental uncertainty (Krishnan, Martin, and Noorderhaven 2006). The benefits of trust can be magnified with high behavioural uncertainty; however, the beneficial effect decreases in light of strong environmental uncertainty. In other words, alliance partners should use caution in relying on inter-organizational trust and expend more effort on scanning to handle environmental uncertainty. It is believed that success of international strategic alliances requires not only the hard side of the alliance relationship management (e.g. financial issues and other operational issues) but also its soft side (e.g. the development and management of relationship capital in the alliance) (Cullen, Johnson, and Sakano 2000). Two important areas of relationship capital, specifically mutual trust and commitment have an effect on the performance of ISA within the Japanese firms. In examining relational exchange in marketing-oriented non-equity international strategic alliances, Kevin et al. (2006) reported that the exchange of relevant, timely and important information affects firms’ performance. Information exchange relies on the development of trust and cultural sensitivity in the relationships. US firms place more emphasis on behavioural exchange than their relatively affective Japanese partners, whereas Japanese partners give emphasis to the benevolence dimension of trust. Investigating how procedural, distributive and interactional justice can be individually and interactively associated with alliance performance, Luo’s (2007b) study suggests that strategic alliance performance is not only determined by economic/structural factors (such as contracting, control, complementary and governance) and social/relational forces, such as justice, but also trust, attachment, and interpersonal relationships. Hyder and Eriksson (2005) examined why two multinationals end their alliance relationships after years of collaboration. They posit that alliance partners should be prepared for separation when the goals of the partners are fulfilled. Environmental changes and changes in personnel can also cause the breakdown of successful alliances. These changes are

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not always negative; they can create viable growth opportunities for both parties.

2.4.2.3 Performance for Different Types of Alliances An analysis of 463 R&D alliances in the telecommunications equipment industry revealed that alliances contribute significantly to firms’ innovation when their technological capabilities align with those of the alliance partners. In addition, organizational form influences the ability and incentives to share information, which also affects performance. Equity joint ventures improve firms’ benefits when the firms are more technologically diverse (Sampson 2007). After examining 135 alliances among competing firms over a 30-year period, Dussauge, Garrette, and Mitchell (2000, 2004) reported significant differences in the outcomes of scale alliance where partner firms make similar contributions and link alliances where partners make complementary contributions. More asymmetrical outcomes of link alliances resulted in greater changes in the relative market shares of the partner firms due to inter-partner learning or learning-by-doing. Proper coalignment of alliance attributes (such as trust) and alliance forms (equity versus non-equity alliances) enhance alliance performance (Murray and Kotabe 2005).

2.4.3 Global Sourcing Isolated studies examined the role of global sourcing as a critical factor in a variety of competitive strategies, differentiated between opportunistic and strategic sourcing (Samli, Browning, and Busbia 1998) and offered suggestions on how to reduce the uncertainty associated with supplier selection in global markets (Min, LaTour, and Williams 1994). The global market environment has changed drastically in the last decade due to events such as the Asian financial crisis in 1997 and the terrorist attack on the United States in 2001. More attention has been given to global sourcing strategy in the context of an unstable world economy resulting in suggestions that firms need to meet the counteracting forces of both supply-side and demand-side without sacrificing marketing flexibility, manufacturing capability and R&D activities (Kotabe and Murray 2004).

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The three broad areas most often studied in this domain are:   

Global Sourcing in a Service Context Benefits of Global Sourcing Country of Origin Effects

2.4.3.1 Global Sourcing in a Service Context A growing area of interest has been the comparability of product versus services sourcing strategies. International off shoring of services is primarily driven by (1) large wage differentials between developed and developing countries and the availability of skilled employees in developing countries; (2) economic liberalization of developing countries; (3) dramatic technological change in telecommunication sectors (Ramamurti, 2004). Using the transaction cost economics paradigm, Murray and Kotabe (1999) investigated the locational (domestic versus global sourcing) and the ownership (internal versus external sourcing) aspects of service sourcing strategy. Performance implications were also discussed. Teigland and Wasko (2003) suggested that it is important that a firm find the balance between relying on internal sources of knowledge and pushing the boundaries by exploring the knowledge base of external sources. Tiwana and Keil (2007) examined the importance of peripheral knowledge in technological outsourcing alliances and suggested that outsourcing firms may need knowledge outside their common domain to effectively facilitate their alliance governance. Similar to the risks of separating manufacturing activities from R&D and marketing which may decrease firms’ capability in terms of pioneering product design and innovation over time, global sourcing of services also requires close coordination of R&D, service, and marketing activities on a global basis (Kotabe and Murray 2004). Further, given the intensified competition of service activities worldwide, firms should make great efforts to align with strategic partner firms that have the capability to deliver innovative supplementary service activities. This could result in a competitive advantage for the outsourcing firms by allowing them to utilize the external suppliers’ investment, innovations, and specialized professional capabilities that would be prohibitively expensive or even impossible

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to duplicate. It also allows them to spend their financial and developmental resources on their core service activities (Kotabe and Murray 2004). Sako (2006) believed that outsourcing business services can be part of corporate restructuring through unbundling of corporate functions as well as vertical disintegration. However, the future of business-service productivity enhancement depends on the combination of greater standardization and capturing value from customized solutions.

2.4.3.2 Benefits of Global Sourcing The benefits of global sourcing have been an important focus of academic interest over the course of the last three decades. Since the 1970s, outsourcing topics have been examined through the lenses of “economies of scale”, “competitive analysis of firms”, “strategic focus”, “relational rent”, and “knowledge management”. Murray (2001) suggested that strategic alliance-based global sourcing when highly specific assets are deployed may enhance a firm’s competitive advantage by combining resources in unique ways. This article presents the benefits gained by a firm that forms partnerships with its suppliers through global outsourcing. These partnerships create competitive advantages when suppliers possess resources that cannot be generated internally by the firm. Similarly, Kotabe, Martin, and Domoto (2003) confirmed the importance of relation-specific assets as a source of competitive advantage by extending literature on knowledge transfer, buy-supplier partnerships and the performance dynamics of inter- and intra-firm relationships. It is proposed that supplier performance will increase most where time-bound relational assets have developed between a buyer and supplier and the firms exploit the resulting communication efficiency by transferring productive knowledge. Recent research (Leiblein 2003; Leiblein and Miller 2003) suggested that the make-or-buy decision can also be framed as a real option where outsourcing and vertical integration create a platform for future investments and strategizing. The larger the uncertainty surrounding decision-making, the more valuable such options become.

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Trent and Monczka (2002) summarized factors that differentiate successful from less successful global sourcing efforts and provided suggestions to enhance firms’ global sourcing performances. One important note is that international outsourcing does not always enhance firms’ global performances. However, outsourcing from the same economic region demonstrates clear advantages (Mol, Van Tulder, and Beije 2005) when lowered transportation and transaction costs and shared institutional regimes are taken into consideration.

2.4.3.3 Country of Origin Issues in Global Sourcing It is important to understand how COO information and other cues influence MNEs’ buying processes when considering global sourcing. Andersen and Chao (2003) reviewed country-of-origin (COO) effects on global industrial sourcing and developed an integrated framework to assess how COO cues (such as product performance, price expectation, supplier performance and exchange regime of country) affect firms’ sourcing decisions. Li, Murray, and Scott (2000) examined how global sourcing locations and other related factors influence consumers’ product evaluations in the context of multiple country-of-origin considerations (e.g. country-ofdesign, country-of-assembly, country-of-corporation). MNEs should consider country designations for product design because of all the COO factors, country of destination (COD) seems to have the biggest influence on consumers’ evaluations of a product’s key functional and symbolic qualities. For MNEs from newly developed countries, firms should utilize global sourcing to overcome or reduce the effects of unfavorable stereotypes consumers hold against their products.

2.4.4 Multinational Performance The literature here has focused on two sets of issues:  

Determinants of Performance—“What” Leads to High MNE Performance An Environmental Interpretation of Performance

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2.4.4.1 Determinants of Performance Murray, Kotabe, and Zhou (2005) examined the linkage between sourcing strategy and firm performance in an emerging economy context. They reported that at low levels of product innovativeness and technological uncertainty, firms’ use of strategic alliance sourcing is positively related to market performance. However, product differentiation and demand uncertainty do not demonstrate a significant impact on the sourcingperformance relationship. Cousins and Lawson (2007) noted that relationship approaches have an effect on performance outcomes. Lu and Beamish (2004) found a non-linear horizontal s-shaped relationship between geographic diversification and firm performance. It was suggested that intangible assets, such as R&D-based and advertisingbased assets, enhanced the value of firms in geographic expansion. Further, firms’ ability to internalize the intermediate markets, such as technology, production know-how, and brands, was positively associated with their performance. A meta-analysis of fifty-six studies conducted in twenty-eight countries was conducted by Ellis (2006). It suggested that market orientation and contextual factors (e.g. the cultural setting of the study, size of the firm’s dominant market, and the level of development of the market) had an effect on firm performance. An insightful review of theoretical perspectives on multinationality and firm performance was conducted by Li (2007). The author suggested the following areas for further conceptual development and empirical investigation: (1) conceptual refinement and measurement of multinationality as a construct; (2) cost-efficiency implications of multinationality; (3) impact of internationalization motivation on both multinationality and performance; (4) two-way relationships between multinationality and performance; and (5) moderating roles of important external and internal contextual factors. High commitment of resources and the timing of entry were also found to have positive effects on the perceived economic performance of the Sino-Japanese joint ventures (Isobe, Makino, and Montgomery 2000). The effects were related to internal and external factors such as the strategic importance of an investment, parental control of a JV, and the availability of supporting local infrastructure.

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Hult et al. (2007) investigated the role of strategy and other organizational dimensions, such as leadership, culture, structure, and processes, on the performance of globally focused marketing firms. It is reported that a complex interplay of strategy, leadership and culture drives the structure and processes, which, in turn, influence marketing and financial performance.

2.4.4.2 A Different Interpretation of Performance The measurement of firm performance includes financial and operational performance. Earlier studies incorporated accounting-based and marketbased financial indicators. Operational factors such as cost efficiency and technological capability determine firms’ underlying processes which ultimately affect financial performance (Venkatraman and Ramanujam 1986). Another determinant of performance is customer fit (Santala and Parvinen, 2007). The study revealed that different customer fits are necessary given the heterogeneous, situational and contextual (e.g. cultural and social) nature of customer tastes.

2.5 Emerging Issues   

Internet in Global Marketing Ethics in the Global Marketplace Marketing Strategies for Emerging Markets

2.5.1 Internet in Global Marketing The Internet has become a powerful medium for reaching and servicing customers around the world. The fast growing Internet world has provided marketers with new ways of promoting, communicating, and distributing information and products (Warrington, Abgrab, and Caldwell 2000). Research in this area focused on the following broad issues:  

Standardization versus Localization Internet and Performance

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2.5.1.1 Standardization versus Localization Although the Internet helps companies at both global and local levels (Yip and Dempster, 2005), companies have to implement strategies to accommodate cross-national differences in infrastructure, regulation, language, buyer demographics and behaviour, payments and currency regulations (Guillén 2002). For instance, products whose features and performance are highly desired by the customers will need a strong local responsiveness in terms of web design, local language, currency, customer services, etc. On the other hand, global commodities, such as CDs, books, videos can adopt global low-cost strategies because efficiency is the main source of competitive advantage (Guillén 2002). Often viewed as the “soft” aspect of international marketing, the consideration of culture has become crucial in international marketing, such as in the context of website adaptation. Singh, Zhao, and Hu (2005) look at local websites in China, India, Japan, and US to determine if they are culturally neutral or infused with the values of the host country. Their study indicates the importance of firms’ being culturally mindful when launching standardized or machine-translated websites for their global audience.

2.5.1.2 Internet and Performance Just as in a direct-marketing exchange, it is essential to build customers’ trust in the electronic world through such cues as product guarantees, secure website transactions, and alternative ordering processes (Singh, Zhao and Hu 2005). An important message is that today’s businesses must initiate and nurture trust with on-line shoppers in order to develop long-term relationships. Hunter et al. (2004) classified organizational purchasing situations into categories with implications for e-businesses. The study suggested that the utilities of e-business vary and that these benefits depend on buying circumstances. It is important that buyers and sellers match their needs with the different uses of e-businesses to maximize the benefits of e-business in B-to-B transactions. Sharma (2005) provided a new explanation for the survival of export management companies by linking firms’ market-based assets

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with e-businesses (any business conducted over the Internet) and suggests that the linkages can enhance firms’ competitive position in their value chains, resulting in better performance. An investigation of the Internet’s roles in firms’ international business activities in an emerging economy context was conducted by Nguyen and Barrett (2006). They suggested that it was important for a firm to use the Internet to collect data and transfer information effectively and efficiently to improve foreign sales intensity. The Internet also has an impact on the following (Balabanis, Theodosiou, and Katsikea 2004):      

Internationalization of small and medium-sized enterprises (SMEs) Communication and information management Relationship management Marketing intelligence Pricing strategies The structure of distribution channels

2.5.2 Ethics in the Global Marketplace This area has been under-researched in the past. It has recently been gaining attention due to an increased awareness of the importance of cultural differences in international marketing and firms being good “corporate citizens” in foreign markets. Gaining institutional legitimacy in foreign markets has become an increasingly important focus for many multinational companies. Multinational firms must be cognizant of the social and environmental concerns that engage newly energized actors (e.g. NGOs, popular anti-capitalist and anti-globalist movements, and religious and ideological groups with economic agendas). The important points in this research area are:   

Business ethics at the macro level Ethical perceptions at the behavioural level Ethical issues in complex social and political environment

At the macro level, business ethics are examined as part of a firm’s profit motive and, further, as part of capitalism. The health and well-being of

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consumers is a subject of social responsibility in business ethics. It is hard to ignore the “ethics gaps” between what societies expect and what marketing scholars are delivering (Carrigan, Marinova, and Szmigin 2005). At the behavioural level, ethical perceptions about various business practices differ across countries. Carrigan, Marinova, and Szmigin (2005) gave a summary of the current debate on ethics and international marketing and lamented that development in the field of marketing ethics, both in theory and practice, has not progressed as quickly as those early scholars might have desired or predicted. The increasing globalization of firms and the growing interdependencies among countries require today’s marketers to have a better understanding of cultural influences on ethical and organizational practices. Paul, Roy, and Mukhopadhyay (2006) investigated the relationship between the cultural values and marketing ethics in two diverse countries. They reported significant differences in the interpretation of the marketing ethical norms between the countries. Their study clearly indicated the need for sensitivity to the values, culture and ethical standards of the countries that multinational companies enter into. MNEs are concerned about the effect their handling of ethical matters has on financial performance. A recent meta-analysis conducted by Orlitzky, Schmidt, and Rynes (2003) indicated that corporate virtue in the form of social responsibility is likely to pay off. Since images serve as a foundation for future attempts to comprehend and construct the world around us, Borgerson and Schroeder (2002) examined the ethics of representation in international marketing communication. It is suggested that firms should try to avoid bad faith and be aware of potential negative communication. They believe that increased visual and semiotic literacy is an important component of societal marketing and that firms should consider multiple constituents for corporate activities, including marketing communication. Ethical relativists (e.g. Crane and Matten 2004) suggested that morals are based on the social norms of the society in which they are practiced. It is inappropriate to apply universal moral standards to all peoples at all times. Cui et al. (2005) identified potential pitfalls for researchers who use the original, unmodified Forsyth’s Ethical Position Questionnaire (EPQ) scale in any country. The authors suggested that researchers

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employ a culture-specific approach whenever possible to ensure measurement invariance and optimal capture of cultural diversity. These studies highlight a need for marketing adaptation within a particular market over time as the societal culture, knowledge, and technology evolve (Carrigan, Marinova, and Szmigin 2005). Marta and Singhapakdi (2005) compared the perceived intensity of unethical marketing practices, corporate ethical values (CEV) and perceived importance of ethics by Thai and US business people. The authors suggested that economic development drives countries in a common direction, regardless of the divergence of their cultures and histories. Top managers need to be explicit about the behaviours they consider unethical and management training should change the “corporate ethical values” of an organization. The paper also raised the problems of unethical practices and the ethics gap in emerging markets illustrated by such issues as bribery and the need for companies to abide by the ethical principles of the local community. International marketing scholars should examine how MNEs manage the moral standards in their countries of operation, and present guidelines for managers facing normative decisions (Meyer 2004). Mainstream research on marketing ethics has generally focused on developed economies while emerging markets have received rather limited attention (Donaldson 1985; Rogers, Ogbuehi, and Kochunny 1995). Well-established MNEs have bargaining power greater than that of local governments in many developing economies. Foreign markets, therefore, are more vulnerable to unethical marketing due to their desire for economic growth, their low bargaining power, and a lack of legal framework and law enforcement to protect local firms, consumers and the society as a whole. The moral issues inherent in developing and implementing marketing strategies in developing countries are more important than ever before as MNEs expand into international markets seeking untapped market growth potential, creating new market segments and penetrating existing ones, and expanding the product life cycle of outdated products (Carrigan, Marinova, and Szmigin 2005). Frenkel and Scott’s (2002) study indicated that global firms’ application of codes of labour in foreign countries, such as emerging economies, can uphold core labour standards, improve workers’ well-being, and affect workplace performance. However, compared with compliance type

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relationships, a collaborative partnership between a global firm and its contractor generates superior performance for both parties and for their workers. In addition, higher standards may protect MNEs from negative publicity in developing countries (Frenkel and Scott 2002).

2.5.3 Marketing Strategies for Emerging Markets During the twentieth century, large economies and large trading partners have been located mostly in the triad regions of the world, North America, Western Europe and Japan, collectively producing over 80 per cent of world GDP with only 20 per cent of the world’s population. However, as the centre of economic activity shifts toward non-traditional markets in newly emerging economies (e.g. Chinese Economic Area (CEA, comprising China, Hong Kong region, and Taiwan), India, Commonwealth of Independent States (CIS, comprising Russia, Central Asia, and the Caucasus State), South Korea, Mexico, Brazil, Argentina, South Africa, Central European countries, Turkey, and the Association of Southeast Asia Nations (ASEAN, comprising Indonesia, Brunei, Malaysia, Singapore, Thailand, the Philippines, and Vietnam)) multinational firms are learning to cope with institutional environments characterized by a different set of institutional criteria, such as limited property rights, less sophisticated legal structures, and different kinds of socioeconomic relationships. Accordingly, there has been an increased amount of research on how to enter and compete in emerging markets and how firms from emerging markets can compete successfully in the developed parts of the world. Are traditional models and methods adequate to describe this changing world? Do we need to adopt new approaches to decipher the different institutional environments? Most importantly, how can multinational firms benefit from these changes? Many studies point to a fundamental inconsistency in the emerging market strategies of multinational firms. On the one hand, they see the market potential of billions of new consumers in the emerging market; on the other hand, their marketing programs are scarcely adapted for those markets. The result is low market penetration, disappointing market shares, and poor profitability. Meyer (2004) provided a comprehensive review on the FDI impact in emerging economies from

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the perspectives of industry-level, firm-level, and business ethics and presents suggestions on ways to advance current research. Khanna, Palepu, and Sinha (2005) suggested that when companies match their strategies to each country’s contexts (e.g. political and social systems, openness, product markets, labour markets and capital markets), they can take advantage of a location’s unique strengths. Although MNEs cannot employ the same strategies in all developing countries, they can generate synergies by treating different markets as part of a system. Clearly a fine-tuned marketing strategy is essential for entering emerging markets. Luo (2007a) provided a unifying framework examining the shifting regulatory and competitive parameters MNEs face in the emerging economy of China. The author analysed shifting dominant strategies MNEs used to deal with changing environmental landscapes. The study indicated the need for international business scholars to extend and rethink current MNE theories to explain the shifting parameters, prescriptions, and paradigms for MNEs in a foreign country.

2.6 Analytical Techniques in National and Cross-National Research Mainstream theories in the international marketing field were primarily based on the experience of Western (primarily US) firms. Despite the rising number of studies on firms’ global expansion, there has been a lack of theory development and contribution to the conceptual literature in the international marketing field. Further, researchers should not ignore the substantial variation in attitudes and behaviour within countries (Douglas and Craig 2006). It is essential to examine differences both within and among countries to account for intra-country heterogeneity. Our research tends to suffer from the “pitfalls and problems associated with extending the scope of research beyond the confines of a single country’s borders” (Douglas and Craig 2006, 1). More attention needs to be paid to refining conceptual frameworks and units of analysis and uncovering issues and contextual differences in multicountry marketing research. The same authors suggest the following resolutions:

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(1) Refining the conceptual framework    

Decentring the research perspective Assessing the role of context Identifying the mediators and moderators Identifying construct bias

(2) Refining the unit of analysis  Alternative units  Purposive selection  Degree of cultural interpenetration

(3) Improving construct measurement  Preliminary research and pretesting  Unit of emic/etic instruments  Use of parallel translation

Douglas and Craig (2006) proposed two approaches to adjust for crosscountry research: the adapted etic and the linked emic approach. The etic approach adapts the conceptual model developed in the base culture to other contexts, accounting for differences in the context being studied and their implications for the research design; the linked emic approach starts with the local context, but takes input from multiple research sites and incorporates them into the overall conceptual framework and research design. Reynolds, Simintiras, and Diamantopoulos (2003) outlined theoretical issues that researchers need to consider when making sampling choices in an international setting, for example, the need to balance withincountry representation with cross-national comparability. They present a framework for sampling approach in international studies and indicate how different research objectives affect the desired sampling method and the desired sample characteristics. The two broad concerns within cross-national research are measurement and reliability and validity issues of the scales and measures used. These two concerns are reflected in the research review as follows:

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2.6.1 Measurement Issues Singh (2004) contrasted classical test theory (CTT) and a more general item response theory (IRT) model and suggested that there are several issues that differ significantly. The author stressed the importance of using the simplest but most appropriate measurement model for each situation. Research was conducted to review, evaluate, and develop export performance measures (Katsikeas, Leonidou, and Morgan 2000). The same authors showed that measurement of the export performance construct suffers from serious conceptual, methodological, and practical limitations thereby hindering theory advancement in the field. The following efforts should be made:   

 

Adopting a contingency approach in selecting individual export performance measures Incorporating multiple measures to explore the multifaceted phenomenon of export performance Utilizing multidimensional conceptualizations and operationalizations of export performance and examining interrelationships among them Referencing multiple frames of reference to discover the impact of performance from different perspectives Combining primary data with secondary sources of information to explore export performance indicators

Culture is a fuzzy concept that has raised definitional, conceptual, and operational obstacles for researchers. Soares, Farhangmehr, and Shoham (2007) advocated several approaches to conceptualizing and operationalizing this multidimensional construct. They proposed a multimeasure approach for cultural assessment using Regional Affiliation, Indirect Values, and Direct Value Inference. Their multi-method approach contributes to current research toward capturing this elusive concept. The traditional concept of using countries as the cultural unit of analysis or basis for market segmentation has been criticized since most countries are already multicultural and growing evermore so. Furthermore, even within relatively homogeneous nations, individuals

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vary substantially in the extent to which they identify with, adhere to, and practice cultural norms. An increasing number of researchers argue that increasing globalization is reducing the heterogeneity of consumer behaviours within countries, while increasing commonalities across countries. Cleveland and Laroche (2007) developed and validated a multifaceted scale for the measurement of acculturation to global consumer culture (AGCC) and proposed a research paradigm for simultaneously assessing global and local cultural influences on consumption behaviours. As suggested by Ueltschy and Krampf (2001), consumer satisfaction scales and service quality measures are culturally sensitive. That is, a measure that works well in one market may not function properly or comparatively in a culturally diverse group in the same country or abroad.

2.6.2 Reliability and Validity Issues Prior studies suggest that response styles can be a source of systematic measurement error and thus threaten the validity of conclusions drawn from marketing research data (Bearden and Netemeyer 1999). The Baumgartner and Steenkamp (2001) study examined five forms of stylistic response: acquiescence and disacquiescence response styles, extreme response style/response range, midpoint response, and noncontingent response. Their study indicated that response styles can lead to nontrivial contamination of observed scores and substantial bias in observed correlations between scales that are contaminated by stylistic variance. Further, when compared with the variation across scales, the variation across countries is small. Their findings provided evidence for the robustness of response style effects across different countries, cultural settings, and languages. In the same spirit, Murray et al. (2007) examined the cross-cultural measurement invariance of the export market orientation (EMO) and export performance (EP) scales, and tested the EMO–EP relationships with a sample of Chinese and non-Chinese export ventures. Their results provided support for measurement invariance both for EMO and EP between Chinese and non-Chinese firms. Without the evidence supporting the cross-national invariance of EMO measures in the emerging economy context, our understanding of the relative impact of

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EMO in explaining EP for firms from developing nations vis-à-vis those from developed nations would be inaccurate. A review of research methodologies in international business was conducted by Yang, Wang, and Su (2006). The study indicated that mail surveys dominate empirical research. An over emphasis on empiricalquantitative research may bias researchers toward theory building. Accordingly, to address the issue of survey method dominance, Nakata and Huang (2005) advocated comparative ethnography, historical or time series analyses, and computer simulations as well as developing modules or workshops to enrich theory and construct development.

3 CRITIQUE AND DIRECTIONS FOR FUTURE RESEARCH Having surveyed the international marketing literature published since 2000, we have to ask if the research deficiencies identified in the last three decades have been addressed. In the early 1990s, Douglas and Craig (1992) lamented that strategy issues were a sadly neglected area in international marketing and that marketing’s role in global strategy was largely ignored. Kotabe’s (2001) review of the international marketing literature published during the 1990–1999 period echoed the same concerns. These earlier literature reviews, among others, asserted that researchers in international marketing continue to borrow concepts and theories from the management and strategy literature, and tend to relate them to market performance. Once seen as a trend over the last thirty years, however, such criticisms may have been ill-founded. The survey of the recent literature as well as the personal experience of the authors of this chapter points to a trend in which researchers trained in the marketing field have increasingly started publishing their marketing strategy-related work in some leading management journals, primarily in Strategic Management Journal. This trend rather appears to suggest that the scope of research areas published in leading marketing journals have narrowed over time such that marketing strategy researchers have found it easier and more impactful by publishing their work in strategy journals rather than in marketing journals. In a positive light, international marketing

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researchers complement management and strategy researchers in subjecting supply-side theories to demand-side considerations. Market segmentation and target marketing are two major concepts uniquely developed in the marketing literature with focus on the demand (customer) side. Yet, studies in these areas continue to be scarce in both domestic and international marketing literature. This area of research promises to have some profound impact on supply-side strategy research if sufficiently developed. In particular, benefit and intermarket segmentation concepts appear promising for further development in the international marketing literature. In the generic (domestic) context, marketing as a discipline has gradually migrated away from economic issues to behavioural issues. For example, marketing was developed as a study of distribution channels and logistics at the dawn of the twentieth century. Today, logistics is not generally considered as part of the marketing discipline. Even economics of new product development as well as marketing strategy is increasingly considered outside the mainstream marketing field. On the other hand, behavioural research, as well as quantitative applications, in consumer behaviour, promotion, and channel management has become mainstream. In the international area, the same forces have been at work. Consequently, there have been a disproportionately large number of studies in consumer behaviour, modes of entry (particularly, exporting), and channel performance. The focal area of marketing is the marketing mix strategy, encompassing product, price, promotion, and distribution management. Studies that address various aspects of the marketing mix were limited to the standardization versus adaptation issue. Part of the limited attention to each aspect of the marketing mix is due to the difficulty of conducting empirical research. Product development has become so technically and technologically complex that this area is increasingly better examined by researchers in the engineering fields, or jointly by those in engineering and marketing fields. Pricing has always been one of the most difficult areas of research in marketing as firms are not willing to share pricing and cost information. Promotion—in particular, advertising-related research, such as advertising effectiveness and global advertising—as well as consumer behaviour has attracted many marketing researchers. It is due mainly to the relative ease of collecting data and theory development

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from the psychology literature. Research in distribution management is more or less limited to such behavioural issues as dyadic trust and power (control) relationships. Although global sourcing issues (including procurement and supply chain management) are considered part of the broadly defined domain of marketing (Douglas and Craig 1992), studies in these areas, as stated earlier, appear to have gradually migrated into the strategy literature away from the contemporary domain of marketing. One area where marketing has genuine strength is research methodology. As the marketing discipline has evolved into a strongly psychology-based behavioural discipline, researchers have paid serious attention to the reliability and validity of measurement issues. In the last decade, we have seen the trickle-down effect of an increased call for more methodological scrutiny in international marketing research. However, it should be noted that international marketing research is faced with many more operational difficulties and pitfalls in conducting empirical research than is generic, domestic-bound research (Craig and Douglas 2000; Kotabe 2001). Consequently, international marketing researchers may not be able to address those measurement and other methodological issues as effectively as would be possible in domestic research. As stated at the beginning of this chapter, the current climate strongly affects the contextual nature of research in international marketing. One such change that needs to be highlighted first is the recent rise of emerging economies. The dramatic institutional, cultural, and strategic transformations of firms from the emerging markets of Eastern Europe and the rapidly re-emerging markets of Southeast Asia have ramifications for the global economy in the twenty-first century. There is a significant demand for knowledge on interpreting firms operating in emerging economies. Firms’ strategic choices and performance are not only driven by industry conditions and firm capabilities but are also a reflection of the formal and informal constraints of a particular institutional environment that firms have to conform to (Peng, Lee, and Wang 2005). It is therefore worthwhile to consider the profound differences in institutional frameworks between emerging economies and developed countries in addition to examining industry- and resource-based factors (Makino, Isobe, and Chan 2004) when interpreting MNEs’ behaviour and performance. Consequently, institutional theory could be included when probing into

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emerging economies. Firms today are under constant competitive pressure to move forward both reactively (responding to the changes in the market and competitive environments) and proactively (anticipating the change) with a sound evaluation of the economic, cultural, political, and legal environments of the country markets they enter. The international marketing field also needs to incorporate theories from social sciences, such as anthropology, sociology, and political science to produce new theories and perspectives (Nakata and Huang 2005). Although we witnessed a significant increase in the percentages of comparative and global studies and a corresponding drop in single country research, regional frameworks have received scant attention (Nakata and Huang 2005). With the increasingly crucial role of regional trade agreements such as NAFTA, MERCOSUR, and the EU in the global economy, it is important that the debate between regional standardization and local adaptation needs to be further focused on. Further, regionalization may have important effects on the use of international joint ventures. With the unified European Union, low transaction costs may affect the entry strategy choices of European firms (Reus and Ritchie 2004). Our recognition of the challenges inherent in conducting crosscultural research has not led to the debate on the adaptation of qualitative methods. Some scholars suggest utilizing qualitative research methods to enhance cross-cultural understanding and lessen potential problems of cultural bias and ethnocentric assumptions (e.g. Osland and Osland 2001). Qualitative research can be particularly appropriate in developing countries where secondary data collection is more difficult than in developed countries and where social, face-to-face relations and trust relationship building are valued (Harari and Beaty 1990; Kotabe, Parente, and Murray 2007). Researchers should take into consideration environmental characteristics, resource constraints, and cultural traits in their international marketing research. Further, most past research in international marketing has focused on large firms. It is increasingly important to understand the approaches adopted by small and medium-sized enterprises (SMEs) that have successfully established themselves in international markets. Another profound change in the last decade has been the proliferation of the Internet and electronic commerce. The Internet opened the gates

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for businesses to sell direct-to-consumers across national borders. Further, advances in information technology and reductions in the cost of communication are facilitating the shift of backroom operations to the developing world. The fast growing Internet and accompanying information technology applications make it possible for firms to function as a network of interconnected responsibilities (Cavusgil 2002). As for marketing research, the latest technology should enable scholars to create approaches to interpret behaviour in differing cultural contexts and to integrate complex data from diverse sources and environments. There is also a need for international marketing researchers to collaborate with scholars in emerging economies to obtain an inside perspective on relevant marketing issues (Czinkota and Ronkainen 2002). It is time for researchers to develop new frameworks and theories to enhance our understanding of businesses in different and diverse environments.

APPENDIX 1 LIST OF JOURNALS REVIEWED Marketing Journals

General Business Journals

Advances in Consumer Research European Journal of Marketing Industrial Marketing Management International Journal of Advertising International Journal of Market Research International Journal of Research in Marketing International Marketing Review International Journal of Research in Marketing Journal of Advertising Journal of Advertising Research Journal of Business and Industrial Marketing Journal of Consumer Behavior Journal of Consumer Behaviour

Academy of Management Executive Academy of Management Journal Academy of Management Review American Sociological Review British Journal of Management Business Horizons California Management Review Competitiveness Review Decision Sciences European Management Journal Harvard Business Review International Business Review International Journal of Innovation Management International Journal of Management

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Marketing Journals

General Business Journals

Journal of Consumer Marketing Journal of Consumer Research Journal of International Consumer Marketing Journal of International Marketing Journal of Marketing Journal of Marketing Research Journal of Marketing Theory and Practice Journal of Product and Brand Management Journal of Retailing Journal of the Academy of Marketing Science Marketing Management

International Journal of Management Reviews Journal of American Academy of Business Journal of Business Ethics Journal of Business Research Journal of General Management Journal of International Business Studies Journal of International Management Journal of Management Journal of Management Studies Journal of Managerial Issues Journal of Small Business Management Journal of World Business Long Range Planning Management Decision Management Science Management International Review Multinational Business Review Organization Studies Oxford Review of Economic Policy R&D Management Sloan Management Review Strategic Management Journal Thunderbird International Business Review

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Section 2

Competition from Emerging Markets

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Dynamic Capabilities, Government Policies, and Performance in Firms from Emerging Economies Evidence from India and Pakistan Omar R. Malik and Masaaki Kotabe

INTRODUCTION Economic liberalization in emerging economies over the last two and a half decades (Sachs and Warner, 1995) has provided increased technological and learning opportunities for Emerging Market Firms (EMFs), leveraging options for offering new products and imitating capabilities of developed country firms (Zahra et al., 2006). Trade and market liberalization fuels dynamism in emerging economies. As market environments become more dynamic, firm capabilities also require corresponding changes (Hoskisson et al., 2000). Thus a key question pertaining to this adaptation to environmental changes is: How do firms manage the creation of new, and reconfiguration of existing capabilities necessitated by changing environments? In response to economic liberalization, many EMFs have responded to expanded menus of technological options by actively acquiring

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new technologies and upgrading firm capabilities. Technological and capability upgrading of firms from industrializing economies has been a historically recurrent pattern across firms from many countries (Abramovitz, 1986). Technological capability upgrading processes of Japanese (Cho et al., 1998; Friedman, 1988; Lynn, 1985; Ozawa, 1974), South Korean (Kim, 1997, 1998), Taiwanese (Mathews and Cho, 2000), and Indian firms (Lall, 1983, 1984, 1987) have been documented over time. These studies, which are largely qualitative, have predominantly focused on country and industry level explanations of technology absorption and capability building. This literature stream provides a research opportunity to develop systematic firm-level understanding of processes underpinning technology absorption and capability building in EMFs. EMFs are fundamentally different from their counterparts in industrialized economies in terms of both their weaknesses and strengths (West and DeCastro, 2001). EMFs, in most cases, have historically focused low attention and resources on R&D, and consequently have weaker technological capabilities compared with Multinational Enterprises (MNEs) from industrialized economies. Many EMFs have relied upon buying off-the-shelf technologies from industrialized country firms, and have used these sourced technologies as a basis for firm-level capability development. Hence, mechanisms for developing new capabilities in EMFs are theoretically distinct from R&D based learning before doing (Henderson and Cockburn, 2000). Furthermore, the institutional context of emerging economies is also very different from industrialized economies. Emerging economies display resource scarcities and a pervasive role of government institutions in economic activities (Austin, 1991; Wright et al., 2005). These institutional characteristics, coupled with economic liberalization, lead to firm-level changes in resources and capabilities that are different from those in industrialized economies. Thus researchers have pointed out the need to study how firms adapt and learn in the face of environmental changes in emerging economies (Hoskisson et al., 2000; Wright et al., 2005). This study answers these calls to develop and test theory pertaining to EMFs (Bruton and Lau, 2008) by examining the question of how firms from two important Asian economies—India and Pakistan—develop dynamic capabilities that can possibly enhance

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performance. In this manner, our study also contributes to the resources and capabilities literature stream, where researchers have called for identifying capabilities that lead to superior performance in specific contexts (Collis, 1994; Priem and Butler, 2001). In rapidly changing environments, firms need capabilities that facilitate change to reconfigure resources and take advantage of new opportunities (Wright et al., 2005). The organizational capabilities perspective (Collis, 1994; Nelson and Winter, 1982; Teece et al., 1997; Winter, 2003) provides an appropriate theoretical lens for conceptualizing capabilities for change or dynamic capabilities in EMFs. Dynamic capability has been defined as “the capacity of an organization to purposefully create, extend, or modify its resource base (Helfat, 2007, p. 1)”. The dynamic capabilities literature also points out that these capabilities are identifiable organizational processes, which are firm specific, but also share commonalities among firms facing similar environmental conditions (Eisenhardt and Martin, 2000). In a seminal conceptual article on dynamic capabilities, Teece et al. (1997) have identified three main types of organizational processes that underpin dynamic capabilities: organizational processes for learning, reconfiguration and coordination. Learning refers to use of repetition and experimentation to improve organizational processes. Reconfiguration delineates firm capabilities in identifying external opportunities through scanning, and then changing the asset structure of firms to take advantage of opportunities. Coordination capabilities relate to how managers within firms coordinate and integrate internal activities. In this study we extend the dynamic capabilities perspective vertically and horizontally. As a vertical extension we offer our conceptualization of three dynamic capability building mechanisms, important for EMFs, that map over the Teece et al. (1997) conceptualization of learning, reconfiguration and coordination. We theoretically conceptualize and define organizational learning, reverse engineering, and manufacturing flexibility as EMF dynamic capability building mechanisms and posit their links with performance. As noted in the literature, the relationship between developing dynamic capabilities and superior performance is neither a given nor conceptually clear (Zahra et al., 2006). Our conceptualization also includes the synergistic capability building roles played by managerial perceptions and use, of both input side and

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marketing related government support policies targeted at EMFs, thereby incorporating the role played by these important contextual variables within our conceptual framework (Bruton and Lau, 2008). In vertically extending the domain of dynamic capabilities research, we tested our framework on a sample of Indian and Pakistani firms. Here our contribution is to test theory, developed specifically for EMFs, on a sample of firms from two major Asian emerging economies (Bruton and Lau, 2008). Since we examined dynamic capability creation mechanisms related to new technology absorption, our unit of analysis was product technologies. We defined this as a related set of subsystems, implemented as a whole, to create and sell a new product group. Product technologies included both equipment and process technologies. All constructs in this study were measured at this level of a focal product technology implemented by an emerging market manufacturing firm. Our dependent variable was performance, defined at this level of analysis, including both financial and operational aspects of performance (Venkatraman and Ramanujam, 1986).

CONCEPTUAL FRAMEWORK EMFs face low availability of domestically produced capital equipment and technologies. Therefore, most equipment and technologies used by EMFs are imported from industrialized countries (Tybout, 2000). In many cases, these technologies are considered matured in industrialized nations, and are designed for labour-saving rather than labour-intensive applications. Equipment and technology importing EMFs face immediate challenges of reducing output costs by adapting imported technologies in ways that make them more labour-intensive and use locally abundant raw materials (Lall, 1983; Lecraw, 1977; Wells, 1983). Furthermore, given the relatively smaller market sizes of most emerging economies, another key EMF goal has been to adapt production technologies for a smaller scale of operations (Wells, 1983). Earlier research has pointed out that rather than using R&D based learning as a mechanism for technology development, EMFs use cumulative learning in real-time production environments to adapt imported technologies, with aims to create lower cost output and smaller

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scale production systems (Cantwell and Tolentino, 1990; Lall, 1983; Tolentino, 1993). This EMF specific nature of technology development points towards organizational learning as a key dynamic capability creating mechanism for these firms. EMFs typically manufacture simple products and are weak in product differentiation and marketing capabilities (Aggarwal and Weekly, 1982). Products and services, created by EMFs, are mostly marketed to low cost market segments in both home and other developing country markets (Lecraw, 1977; Wells, 1983). Lacking product focused R&D, many EMFs use foreign competing products as sources of both ideas and knowledge and employ systematic reverse discovery through studying and disassembling such products. By way of example, Mahindra & Mahindra, a large Indian industrial firm, has established a “tear-down” complex in Chennai, India, employing 1,000 engineers to reverse-engineer products and technologies (Marsh, 2006). Thus EMFs’ weaknesses in new product development processes, and anecdotal evidence point towards the importance of reverse engineering as a dynamic capability development mechanism for EMFs. Since EMFs buy technologies off-the-shelf, these technologies have to be integrated with firm-level routines to enhance performance. Effective integration of externally sourced technologies with firm-level routines has the potential of leveraging a standardized, available to all with financial resources, technology into a source of superior performance. In manufacturing firms, lean production systems have evolved as the key source of organizational meta-routines that mark superior coordinative processes (Womack et al., 1990). Indian firms are systematically acquiring lean-production capabilities, focused upon creating manufacturing flexibility (Ohno, 1988), as part of their strategy to build manufacturing prowess (Mahmood, 2005). Hence, fostering manufacturing flexibility based routines is an important dynamic capability development mechanism for EMFs. Governments are an important contextual aspect influencing firm behaviour across countries (Ring et al., 2005), especially in emerging economies (Bruton and Lau, 2008). In the early stages of industrial development, government agencies can facilitate technology absorption among local firms through a variety of support processes (Mahmood and Rufin, 2005; Porter, 1990). EMFs find existing paths and processes

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difficult and costly to change. This resistance to change is rooted in path-dependence (David, 1985) and structural inertia (Hannan and Freeman, 1984). Capability upgrading is further hampered by EMFs’ information and knowledge asymmetries compared with industrialized country firms. Because absorbing new technologies is a slow and deliberate process involving both experimentation and imitation, government policies can help EMFs overcome some of these barriers to building new capabilities through setting priorities and developing and implementing policy programmes (Metcalfe, 1994). Therefore, we incorporate two key aspects of the perception and use of government support policies by EMF managers in our framework, taking account of government support on both the inputs and marketing value adding activities of EMFs. The conceptual framework for this study (see Figure 1) includes three dynamic capability development mechanisms uniquely important to EMFs adapting to liberalization induced environmental changes. Additionally, we conceptualize the synergistic effects of government support policies. We develop the logic that links these dynamic capability mechanisms to performance in the hypotheses section of this article, arguing that appropriately construed and implemented these dynamic

Input Supporting Government Policies H1

H4

Organizational Learning

H2 Reverse Engineering

H3

Performance

Manufacturing Flexibility

H5 Marketing Supporting Government Policies

FIGURE 1

The Conceptual Framework

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capability development mechanisms lead to superior performance. In the following sub-sections, we conceptually tailor the independent variable constructs used in this study with aims to establish their relevance and importance to EMFs.

Organizational Learning Organizational learning is the capacity of an organization to learn from experience and experimentation (DiBella et al., 1996; Easterby-Smith et al., 2000). Because EMFs have been historically weak in R&D or experimentation based learning, the main mode of their organizational learning is experiential learning. Experiential learning is based upon improvisation and trial and error cycles (Zahra et al., 2006), with the aim of adapting externally obtained technologies for effective use within EMF operations (DiBella et al., 1996). This form of learning is different from R&D based learning, because the aim of activities undertaken is to carry out actual production and not to generate information that reduces production uncertainty. Knowledge is created as a consequence of identifying and solving problems that occur during the course of production activities (Arrow, 1969). Problem solving by engineers and workers translates into shared group cognitive schemas that are later institutionalized as learning based organizational routines (Bontis et al., 2002; Crossan et al., 1999). Thus learning by doing is an important component of EMF organizational learning (Dutton and Thomas, 1985; Stiglitz, 1987). Hence, we define EMF organizational learning as learningbased associations between actions and outcomes that occur as by products of experience in using focal technologies (Arrow, 1962, 1969).

Reverse Engineering Reconfiguration based organizational mechanisms focus on changing asset structures in response to market and technological change (Teece, 2007). Products represent the flip side of a firm’s resources and capabilities (Wernerfelt, 1984), thus processes causing changes in product offerings represent reconfiguration capabilities applied to organizational assets. In

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cases where firms have weak R&D capabilities (Teubal, 1996), such as EMFs, reverse engineering is a useful alternative product development mechanism. In this sense, reverse engineering can aid in shortening time for new technology absorption and product development by identifying knowledge components of products that meet market needs. Projects for reverse engineering can be instigated through both competing products as well as customer ideas (Von Hippel, 1988). As an organizational mechanism, reverse engineering consists of spillovers of product specific knowledge from competing products and ideas to EMFs. In this study, we define reverse engineering as knowledge obtained by disassembling products into observable technological units and gleaning declarative and procedural knowledge (Kogut and Zander, 1992) that allows imitation, and improvements in product designs (Kim, 1997; Samuelson and Scotchmer, 2002).

Manufacturing Flexibility Lean manufacturing methods (Spear and Bowen, 1999; Womack et al., 1990) have been widely implemented because of their perceived performance advantages (Haunschild and Miner, 1997). Effective implementation of lean manufacturing routines builds coordinative capabilities that integrate activities within firms (Teece et al., 1997). This model of effective manufacturing management has also spread to EMFs, and firms are implementing these methods to build effective operations and increase flexibility (Mahmood, 2005). These EMF attempts to implement lean manufacturing systems are tempered by obstacles to full-scale implementation in many emerging economies. Most emerging economies suffer from weak and unreliable transportation and power infrastructures, and complex labour and tax law regimes. Therefore, EMFs have to significantly localize and selectively pick lean manufacturing routines that can work in emerging economy environments. This leads to EMF managers focusing on salient and core aspects of lean manufacturing, with an emphasis on operations within firms. A broad objective of lean manufacturing is to provide manufacturing flexibility (Ohno, 1988). Flexibility, broadly defined, is a firm’s capacity to

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adapt to changing environmental conditions with low impact on performance (Upton, 1994). Specifically, manufacturing flexibility is defined in terms of a firm’s ability to vary products, product mixes and production volumes quickly through use of coordinated routines (Nemetz and Fry, 1988; Upton, 1994). Given that dynamic capabilities are created intentionally and deliberately (Dosi et al., 2000), the following question emerges: Which sets of flexibility routines would be most pertinent for EMFs? Since creating flexibility and efficiency are primary rationales of lean systems (Coriat, 2000; Cusumano, 1988), we expect ability to vary production volumes (Upton, 1994) and use of inventory management systems that reduce manufacturing process inventories (Coriat, 2000) to be primary representations of manufacturing flexibility in EMFs. Weak R&D capabilities make it less likely for EMFs to create flexibility through varying products or product mixes as these firms have relatively narrower product lines compared with industrialized nation MNEs. Thus, in this study, we define EMF manufacturing flexibility as the ability to vary production volumes easily and quickly, and the capacity to reduce manufacturing process inventories relative to earlier levels.

Input Supporting Government Policies Government agencies in emerging economies can help firms on the input side by helping in technology identification, selection and implementation (Mazzoleni and Nelson, 2007). For example, the government of India’s Department of Science & Technology has established technology development programmes in areas such as instrumentation development and drug manufacturing process improvements to aid local firms improve technological capabilities. Similarly, the Government of Pakistan under the auspices of its Ministry of Science & Technology (MoST) has established an array of Technology Development Institutes (TDI) focused on providing technological support to local firms. TDIs can reduce costs to firms of selecting and implementing new technologies (Grossman and Helpman, 2001). EMF managers, in many cases, may not be fully aware of better technology options because of information asymmetries. TDIs can aid in this search process using

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superior government resources. Managers may also be hesitant to experiment with newer technologies because they may require changes to organizational routines (Feldman and Rafaeli, 2002), and furthermore implementing newer technologies is undertaking expensive investments with uncertain outcomes (David, 1986). TDIs can help in reducing this uncertainty by aiding in adaptation of technologies for local use. Awareness and perceptions of benefits offered through TDI support would vary among EMF firm’s managers. This would lead to different levels of usage of policy benefits by firms. Therefore, we conceptualized input supporting government policies as managers’ perceptions of how TDIs helped EMFs in identifying, selecting and implementing new technologies.1

Marketing Supporting Government Policies Given that EMFs are weak in marketing capabilities compared with MNEs from industrialized nations (Aulakh et al., 2000), governments can play a role in partly compensating for these weaknesses, and also help in EMF capability development in this arena. In many cases, in the light of the evidence supporting the relationship between exports and economic growth (Kraay, 1997; Tybout, 2000), government support on the marketing side is manifested through export promotion activities. In India, the government has implemented a decentralized model where an apex body, the Indian Federation of Export Councils, oversees government sponsored export councils operating in a range of industries such as chemicals, pharmaceuticals and textiles. Pakistan government’s export promotional activities are coordinated under the aegis of the Trade Development Authority of Pakistan. Both governments sponsor a range of marketing supporting activities through these institutions. Generally, emerging economy governments apply a range of specific policy instruments including financial incentives for exporting firms (Lall and Teubal, 1998), establishing product quality standards (Porter, 1980), and help in marketing research and distribution (Dominguez and Sequeira, 1993). Financial incentives attract EMFs to export markets (Bauman and Braga, 1988), product quality awards spur product devel-

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opment processes (Porter, 1980), and marketing research and distribution support can reduce knowledge gaps, allowing EMFs to broaden and deepen their involvement in export markets (Johanson and Vahlne, 1977). Thus we defined marketing supporting government policies as financial incentives, product quality standards, and complementary downstream capabilities provided by government agencies. As in the earlier case of input supporting government policies, the levels of use of these policies would depend on the awareness and perceptions of EMF managers. Therefore, we captured perceptions of government marketing side support, since these would mirror varying levels of usage of policy benefits by EMF managers.

HYPOTHESES Organizational Learning and Performance Implementation of new technologies presents temporally and spatially situated opportunities for EMFs to learn (Tyre and Orlikowski, 1994). As EMFs undertake implementation of new technologies, managers, engineers and workers face problems as well as performance gaps in realizing potential value from improved operations. Implementation problems and performance gaps instigate search and learning among individual employees (Winter, 2000). Systematic problem solving at this stage can lead to building individual knowledge and skills, as well as shared understanding among employees regarding how to increase value from using new technologies (Crossan et al., 1999; Sitkin, 1992). This integrated specialized knowledge of individual employees forms the basis for an organizational learning capability (Grant, 1996). Because EMF learning is largely a by-product of repetition and experience it is largely focused upon exploitation of newly implemented technologies (Adler and Clark, 1991).2 This systematic error detection and correction, within the context of newly implemented technologies, leads to single-loop learning within EMFs. Problem solving also leads to new cognitive schemas, shared between employees, that can lead to improved process methods. This formation of shared mental maps borders double-loop learning where operating methods, frames of

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reference and assumptions are revised in attempts to enhance performance (Fiol and Lyles, 1985). However organizational learning, as a dynamic capability development mechanism (Zollo and Winter, 2002), does not always lead to superior performance (Zahra et al., 2006). Organizational learning will only lead to performance improvements to the extent that such learning leads to effective new routines at the firm level (Bontis et al., 2002). It is possible that organizational search can plateau at low levels of acceptable performance (Winter, 2000), and organizations can also learn ineffective routines that lead to lower levels of performance (Nystrom and Starbuck, 1984). Furthermore, organizational mechanisms that facilitate integration on individual knowledge at the group level, and the institutionalization of group schemas at the firm level are necessary for organizational learning to have a positive impact on performance (Bontis et al., 2002; Crossan et al., 1999). These opposing arguments necessitate an empirical test of the relationship between organizational learning and performance in the EMF domain, as this relationship varies across contexts and conditions. Hypothesis 1: Organizational learning is positively associated with performance in manufacturing firms from emerging economies.

Reverse Engineering and Performance The dominant mode for new product development in EMFs is imitation of successful products.3 Low levels of development of R&D capabilities in EMFs lead to weak understanding of cause–effect relationships in product development, thereby fuelling technological uncertainty. Experiential approaches to product development, based upon improvisations, iterations and extensive testing can help reduce this technological uncertainty (Brown and Eisenhardt, 1995; Eisenhardt and Tabrizi, 1995). Besides potentially reducing causal ambiguity in product development, reverse engineering of successful competing products also allows EMFs to gain late follower advantages by building upon market winning product attributes. Successful competing products provide cognitive representations of states of knowledge4 that if successfully

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imitated and improved upon lead to higher chances of success for new products (Gavetti and Levinthal, 2000). Effective reverse engineering addresses the antecedents of causal ambiguity: complexity, tacitness and product design specificity (Reed and Defillippi, 1990). Complexity is reduced through studying various elements of competing products, and developing an understanding of what certain parts accomplish, and why they fit in predetermined configurations. Tacit knowledge is built as engineers work with existing product designs and attempt to recreate and improve these products. Knowledge specific to designing better products can come from customer ideas about improved product attributes (Von Hippel, 1988) and from customer experiences in using EMF products (Rosenberg, 1982). Thus effective reverse engineering can significantly reduce causal ambiguity in product development. Reverse engineering as a dynamic capability creating mechanism allows EMFs access to external knowledge that helps in product development, and consequently shifts EMF asset bases. Katila and Ahuja (2002) have found that in the context of the global robotics industry, an interaction between depth and scope of knowledge search is positively associated with the number of new products launched by firms. Thus we would expect that systematic reverse engineering would lead to higher numbers of improved product offerings from EMFs. Furthermore, creating these new products would also contribute to dynamically reconfiguring EMF asset bases, to reflect changing product lines, and realign EMF asset structures with products demanded by customers (Teece, 2007). This logic leads to our second hypothesis: Hypothesis 2: Reverse engineering is positively associated with performance in manufacturing firms from emerging economies.

Manufacturing Flexibility and Performance Global diffusion of manufacturing best practices is encouraging many EMF managers to attempt implementation of lean manufacturing systems, despite infrastructural obstacles to effective integration of these systems in many emerging economies. Although, there are many studies

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on the relationships between implementing lean systems and firm performance (Womack et al., 1990), there is little cause–effect analysis of how performance improves because of implementing specific lean manufacturing routines (Davies and Kochhar, 2002). Winter and Szulanski (2001) have argued that firms identify and transfer valuable traits of a business model when replicating capabilities. Knowledge of these valuable traits is labelled as the “Arrow Core” of a business model. Firms that choose a template for replication go through iterative cycles of exploration and exploitation (March, 1991), as they learn and implement the Arrow Core of a selected template. Similarly, in the course of implementing lean manufacturing systems, EMFs focus on the most salient aspects of lean systems—flexibility and inventory reduction—and go through cycles of attempting to implement routines related to these meta-routines. Increasing production volume flexibility, through modifying internal equipment and processes, contributes to agility in responding to changing customer demand patterns. Lowered inventories expose problems in manufacturing flow, thereby increasing throughput, and also reduce variable costs (Katayama and Bennett, 1999). EMF attempts at systematically building manufacturing flexibility contribute to the development of an internal integration and coordination based dynamic capability (Grant, 1996; Teece et al., 1997). Integrated and coordinated operations, besides increasing efficiency, position EMFs to respond effectively and flexibly to market opportunities, as well as downturns. Based on these arguments we present our third hypothesis: Hypothesis 3: Manufacturing flexibility is positively associated with performance in manufacturing firms from emerging economies.

The Synergistic Effect of Organizational Learning and Input Supporting Government Policies As EMFs search for new technologies to improve competitiveness, TDI support can aid in identification of appropriate technologies (Mazzoleni and Nelson, 2007). In this search process, TDIs can bring to bear superior

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scientists and technologists funded by government resources. EMFs, in many cases, may not have the resources to attract such talent, and also have not historically treated in-house scientific capability as a priority. Once appropriate technologies are identified, selection of well-fitting technologies can again gain from the resource advantages of TDIs (Metcalfe, 1994). Selection may also involve work by government scientists and technologists to adapt selected technologies for effective use by EMFs. In this role, TDIs become external developers of technologies for EMF use. Moreover, TDI support in implementation of new technologies would help reduce knowledge asymmetries between EMF employees and TDI scientists. Two-way communication between these groups would lead to effective use of new technologies within EMFs, and also educate TDI scientists about the needs and capabilities of EMFs. TDI knowledge of EMF capabilities can have a positive feedback effect into future technology identification and selection efforts. TDI interventions can be conceptually construed as targeted knowledge spillovers from the public sector, aimed at EMFs, which help reduce costs involved in absorbing new to firm technologies (Grossman and Helpman, 2001). Government support in search, adaptation and implementation of appropriately fitting technologies provides a lower cost and higher productivity starting point for organizational learning efforts.5 Subsequent, organizational learning efforts build upon this higher starting point in technological choice by identifying and solving implementation problems, merging new technology with organizational routines, and thereby creating superior performance. Hypothesis 4: Input supporting government policies will enhance the effect of organizational learning on performance in manufacturing firms from emerging economies.

The Synergistic Effect of Manufacturing Flexibility and Marketing Supporting Government Policies The main objective of government support for marketing activities, provided through a range of institutions, is to encourage EMFs to build

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marketing knowledge. Marketing knowledge includes understanding of quality standards, market segments and distribution systems in viable foreign markets. By offering these services through government agencies, and linking export performance to financial rewards, governments hope to instil customer driven resource investments in EMFs, thereby facilitating more customer-oriented marketing strategies. Greater understanding of target markets, especially niches, can combine very effectively with manufacturing flexibility to enhance returns for EMFs. These performance gains would be underpinned by the ability to adjust nimbly to changing demand patterns at low costs to the firm, and the capacity to tap into niche markets overlooked by larger competitors. Fiegenbaum and Karnani (1991) have found that smaller firms with manufacturing flexibility are better positioned to target niche markets, and smaller firm size combined with flexibility has a positive impact on performance. Furthermore, better market knowledge also allows EMFs to effectively differentiate their products in foreign markets (Aulakh et al., 2000). Combining effective differentiation with manufacturing flexibility can provide EMFs with low cost and differentiation as bases for competitive strategies (Porter, 1980). These integrated strategies which are combinations of low cost and differentiation, can allow EMFs to establish stronger competitive positions than those grounded in either differentiation or low cost alone (Karnani, 1984). Based on these arguments, we expect that: Hypothesis 5: Marketing supporting government policies will enhance the effect of manufacturing flexibility on performance in manufacturing firms from emerging economies.

METHODS Research Settings and Design We chose India and Pakistan as representative emerging economies. Both these countries provide a rich context to study dynamic capability building among manufacturing EMFs. India has a larger economy, which is liberalizing at a measured pace, and enjoys a mix of low, medium and high technology firms. Pakistan has a relatively smaller economy, is at

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similar levels of economic liberalization, but has a largely low technology industrial structure. This combination provides a diverse and illustrative sample for understanding dynamic capability development mechanisms that lead to superior performance in EMFs. Both economies also share structural attributes including relatively limited resources compared with richer economies, largely unskilled manufacturing workforces, use of older technologies, and relatively small manufacturing sectors. These shared attributes allow for the study of firms from these two economies as archetypical EMFs. We opted to collect data for this study through a survey instrument, because secondary data for focal variables were unavailable. Our survey instrument had questions, using Likert scales, about firm and technology characteristics, dynamic capability building mechanisms, and performance impacts of new technology implementation (see the Appendix for details of scales and items). English is widely spoken in both countries so we administered our survey in this language. Data for this study were collected in 2004 and 2005. Indian manufacturing firms in Chennai, Coimbatore, Hyderabad, Mumbai, and Tirupur responded to our survey. In Pakistan data were collected from firms in Lahore and Sialkot. All seven cities are relatively large manufacturing centres in these countries.

Data Collection There are significant obstacles in data collection in emerging economies (Hoskisson et al., 2000). Comprehensive and current lists of firms are unavailable. Many firms are hesitant to share any data, especially information pertaining to financial performance and firm size because of widespread tax evasion. Further, mail systems in both these countries are also unreliable. In these circumstances, personal interviews of managers are suitable means for data collection. Personal interviewing ensures access to correct respondents, facilitates accuracy in interpretation of the survey instrument, and improves data quality (Slater and Kwaku, 2004). Our interviewers were trained on the nature of the questions in the instrument, as well as our broader research objectives. Respondents were mainly upper level and middle managers, with manufacturing managers (25) constituting the largest group (27 per cent of respondents);

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directors (18) and general managers (18) each constituted 19 per cent of respondents; maintenance managers (7) and R&D managers (6) were the next largest groups of respondents. Smaller groups of respondents were chief executive officers (5), engineers (4), international (3) and marketing managers (3), assistant general managers (2), a consultant (1), and a development manager (1). The main benefit in targeting these managers as respondents was that they had been directly involved in selecting and implementing new technologies, and were in a position to engage in higher order reflective thinking about the focal phenomena for this study (Podsakoff and Organ, 1986).

Sample We set three criteria for firms that were included in the sample for this study. First, we chose manufacturing firms that had recently implemented new technologies. Examples of technologies purchased offthe-shelf by EMFs included manufacturing process equipment for textile manufacturers, fermentation process equipment and enterprise resources planning software for pharmaceutical manufacturers, injection moulding and assembly equipment for automotive component manufacturers, and grinding machines and quality checking equipment for machine tool manufacturers. Second, we chose local firms, i.e. EMFs with India and Pakistan as home countries. Third, we chose firms with some involvement in international business, mostly in the form of exports. Since published listings of firms were either unavailable or inaccurate, we decided to target main exporting manufacturing industries in both countries. This was a non-random sample in the strict sense of the definition of randomness of samples. However, our sample provides stratified sampling from populations of firms of interest. We attempted to maximize variance on focal variables, especially on our dependent variable: performance. This strategy of maximizing variance on focal and dependent variables is suitable in situations where strict probability samples are not feasible (Hazelrigg, 2004). We collected completed survey instruments from 115 firms (India = 65 and Pakistan = 50). However, some of these completed instruments did not meet our criteria for the sample. Some were MNE subsidiaries,

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problematic because subsidiaries may have formalized mechanisms for creating knowledge spillovers; others were non-exporters, or had not reported new technology information. We eliminated these firms from our analyses. Our final sample was 93 firms (India = 54 and Pakistan = 39). Sample details are presented in Table 1. Firms in our sample derived a large share of their sales and profits from selling in foreign markets, on average 50 per cent of sales and 43 per cent of profits came from foreign operations. Major international selling regions included South East Asia, Middle Eastern countries, the USA, Canada, and Europe. In terms of industrial focus, our sample represented a range of low and medium technology manufacturing industries. Largest groupings of firms were in textiles (29 per cent), pharmaceuticals (14 per cent), metal products (14 per cent), electrical equipment (11 per cent) and automotive components (11 per cent). We compared our sample with the industrial structure of each country with data obtained from the United Nations Industrial Development Organization (UNIDO) industrial statistics database. Our sample covered 59 per cent of Indian and Pakistani manufacturing industries. This comparison is shown in Table 1. Thus the industries in our sample provide an adequate representation of the major manufacturing and exporting activities of firms from both these countries. TABLE 1.

Sample Characteristics

Characteristics

Indian firms

Pakistani firms

Total sample

Firms’ attributes Numbers of firms Sell under own brands Average number of foreign markets Average % of sales in foreign markets Average % of profits in foreign markets

54 78% 9 34% 30%

39 80% 5 74% 60%

93 79% 7 50% 43%

Foreign markets’ attributes Main foreign markets (% of firms selling in each) Africa Europe

39% 46%

26% 36%

33% 42%

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TABLE 1.

Continued.

Characteristics

Middle East Russia and Central Europe South East Asia South America USA and Canada Focal product technology group’s attributes Average focal product technology group as % of sales Average focal product technology group as % of profits

Indian firms

Pakistani firms

Total sample

59% 24% 69% 24% 43%

51% 26% 56% 13% 44%

56% 25% 63% 19% 43%

65%

48%

61%

57%

27%

51%

Industrial focus of sample firms

Indian firms

% of Indian Pakistani % of Pakistani Total manufacturing firms manufacturing sample

Auto components Bonding materials Chemicals Electrical equipment Fabricated metal products Food Leather products Machinery and equipment Paper containers Pharmaceuticals Surgical instruments Textiles Total

13.0% 1.9% 9.3% 13.0%

2.9% N.A. 7.6% 5.3%

7.7% 0.0% 0.0% 7.7%

3.5% N.A. 8.5% 7.7%

10.5% 1.1% 5.4% 10.8%

20.4%

19.8%

5.1%

0.7%

14.0%

0.0% 0.0% 3.7%

6.5% 0.6% 7.1%

2.6% 5.1% 0.0%

15.2% 0.8% 1.6%

1.1% 2.2% 2.2%

3.7% 22.0% 3.7%

1.5% 8.6% N.A.

0.0% 2.6% 12.8%

1.6% 7.7% 0.3%

2.2% 14.0% 7.5%

9.3% 100.0%

5.8% 65.7%

56.4% 100.0%

23.5% 71.1%

29.0% 100.0%

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Scale Development We developed scales and items based upon the conceptual domain of our focal constructs. First, we conceptually defined each construct. Second, we developed items that would serve as indicators of that domain. Concurrently, we reviewed relevant literature and initially identified a pool of items for each construct. Third, these items were reduced in number through correlational analysis of a subset of the data from initially completed survey instruments. Fourth, we conducted exploratory factor analyses to identify items that loaded on each construct and then verified that these items corresponded with the conceptual definition of the construct. Finally, we conducted exploratory factor analyses and calculated reliabilities for each scale. Performance. EMF performance was measured using a scale consisting of eight items. Our items focused on the impact of a focal product technology on creation of new products, improvements in existing products, sales and profit growth, market share growth, customer satisfaction levels, return on investment, and speed to market. We used five-point Likert scale items to capture these aspects of firm performance. We collected subjective data for this scale because performance information in EMFs is closely guarded for reasons stated earlier. Chandler and Hanks (1993) have argued that in such situations managerial self-reports on performance are acceptable proxies, and are closely correlated with objective performance measures (Dess and Robinson, 1984). Reliability for this scale was measured using coefficient alpha (α = 0.89). Principal component analysis revealed a single factor with an eigenvalue of 4.58 accounting for 57 per cent of the variance and having factor loadings ranging from 0.64 to 0.86. Organizational learning. In accordance with our conceptual definition, we measured this construct by using three Likert scale items indicating whether solving problems associated with the focal product technology had improved the ability to incorporate focal new technology into manufacturing processes, and to what extent operational problems had been solved. We also tapped into the actions—outcomes association formation aspect of organizational learning by asking whether employees

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had developed new skills because of employing this new technology. Reliability for this construct was 0.73 and a principal component analysis showed one factor with an eigenvalue of 1.96 which accounted for 65 per cent of the variance. Factor loadings on this component ranged from 0.71 to 0.90. Reverse engineering. This scale consisted of four items. Two of these items examined the extent to which new product development was influenced by competitors and customers (Von Hippel, 1988). Further, we ascertained if competing products were disassembled with aims to learn product and process knowledge that underpinned these products (Kim, 1997). Finally, we asked if the focal firm’s new products were based upon designs and technology of competing products (Samuelson and Scotchmer, 2002). Reliability for this scale was 0.76. A principal component analysis of these four items yielded a single factor that had an eigenvalue of 2.37 that accounted for 59 per cent of the variance. Factor loadings for items for this scale ranged from 0.58 to 0.83. Manufacturing flexibility. In measuring this construct we focused on two aspects: inventory reductions and creation of volume flexibility. Two items representing inventory reduction focused on the extent to which raw material and in-process inventories were reduced using new processes. Two additional items asked if the focal firm’s plants could shift between low and high production volumes easily and quickly. Reliability for this scale was 0.75. A principal component analysis of items associated with this scale showed a single factor with an eigenvalue of 2.32 that explained 58 per cent of the variance. Loadings on this factor ranged from 0.56 to 0.88. Input supporting government policies. This construct focused on the role played by TDIs in helping EMFs identify, select and implement focal product technologies. Accordingly, we had three items that asked questions about the level of TDI support in identifying and selecting focal technologies from available options and help in technology implementation. Since these items were stated in the negative, i.e. TDIs did not help, they were reverse-coded before further analysis. Reliability for this scale was 0.92. Principal component analysis revealed one factor with loadings greater than 0.50 and an eigenvalue of 2.61. This factor

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accounted for 87 per cent of the variance and had loadings ranging from 0.90 to 0.95. Marketing supporting government policies. To measure government support in EMFs’ marketing activities, we used eight items that asked questions about the extent of government support in sponsoring quality inspections for exported products, help in market research, customer contacts and distribution, and aid in attending trade and export events. Reliability for this scale was 0.88. Factor analysis showed a single factor with loadings exceeding 0.50. This factor had an eigenvalue of 4.41 and explained 55 per cent of the variance. Loadings on this factor ranged from 0.53 to 0.84.

Addressing Validity and Common Method Bias Estimation of discriminant validity of constructs was first carried out by examining average correlations of intra-construct items as a “within” correlation and the average correlation between each construct’s items with each other construct’s items as a “between” correlation. The intraconstruct correlations were higher than the between correlations, providing an estimate of discriminant validity of the constructs in our study. We also conducted a confirmatory factor analysis (CFA) of our measurement model. This six-factor CFA model included items for our hypothesized theoretical constructs: organizational learning, reverse engineering, manufacturing flexibility, input supporting government policies, marketing supporting government policies, and performance. Each item was allowed to only load on one construct for which it was an indicator. Item loadings were as hypothesized and were significant (all except one at p < 0.001, the remaining one at p < 0.01). Results indicated that a six-factor model fitted the data moderately well (χ2 = 412.86, df = 347, p < 0.001, GFI = 0.79, AGFI = 0.72, CFI = 0.96, IFI = 0.96).6 The GFI and AGFI index values were interpreted in the context of a relatively small sample size (<100). It has been shown that both these indexes display strong downward bias in cases where sample size is relatively small (Fan et al., 1999). In relatively smaller samples, root mean squared error of approximation (RMSEA) has been shown to be sensitive to possible

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model misspecification. In our CFA analysis the RMSEA value was 0.045, which indicates a good fit of our proposed model to the data (Browne and Cudeck, 1989). We compared our six-factor model with two competing models. A three-factor model had one factor for items indicating organizational learning, reverse engineering and manufacturing flexibility. The second factor was comprised of items representing input and marketing supporting government policies, and the third factor was composed of items linked to firm performance. A single-factor model linked all indicators to one factor. Our six-factor model provided a better fit with the data than possible three or one factor models. Akaike’s information criterion (AIC) for the six-factor model was lower than its three or one factor rivals (AIC6-factor = 648.85, AIC3-factor = 1,303.08, AIC1-factor = 1,713.53). These results indicated that the six scales represented theoretically and empirically distinct constructs. To reduce informant response bias (Podsakoff and Organ, 1986), we used trained interviewers who not only collected data on the Likert scales in our instrument, but also provided explanatory notes for responses, giving us deeper understanding of what had transpired during new technology absorption. Targeting middle level managers directly involved in new technology implementation also helped reduce informant response bias. Non-response bias could not be statistically tested since data were collected through interviews. To further address the possibility of substantial common method variance in our data we used Harman’s one-factor test (Podsakoff and Organ, 1986). This test assumes that if there is substantial common method variance in the data, then one factor will account for majority of the co-variation in the independent and dependent variables. We conducted factor analysis of measures related to organizational learning, reverse engineering, manufacturing flexibility, input supporting and marketing supporting government policies, and performance. No single factor was apparent in the un-rotated factor structure, with one factor accounting for 22 per cent of variance. We also followed the recommendations of Podsakoff et al. (2003) regarding strong tests for possible common method variance, and tested three competing confirmatory factor models. The first model loaded all items on a common method factor (AIC = 1,713.53). The second model

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loaded items onto their theoretically assigned latent variables (AIC = 648.85). Third, we loaded items on their theoretical latent variables, as well as onto an additional method factor (AIC = 853.94). The second model where items were loaded on their theoretically assigned latent variables showed a better fit than both other models. We also compared our second and third models using a chi-squared difference test (∆χ2 = 263.08, ∆df = 29, p < 0.001). This test showed that adding a method factor, in addition to the theoretically assigned latent variables, significantly reduced model fit; thus we concluded that common method bias was not a significant problem in our measurement model (Williams et al., 1989).

Aggregation of Variables We used regression factor scores for constructing aggregated scales representing each of the constructs of this study. Regression factor scores have the advantage of representing the weight of each indicator in each composite score.

Control Variables EMFs in our sample varied by country, industry, and level of sales and profits derived from foreign markets. We controlled for these variables to avoid possible confounds. Country of origin was designated as a dummy variable. We classified primary industries for each firm in the sample using two-digit SITC codes. Percentage of sales and profits obtained from foreign markets and number of foreign markets which the firm operated in, were used as the third, fourth and fifth control variables. By using these variables as control variables, we were able to partial out systematic variance related to foreign market operations of firms, industry membership, and country of origin.

ANALYSES AND RESULTS We computed bivariate correlations between all variables in our study (see Table 2). Correlation results showed that organizational learning

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0.88

0.03

1.17 0.19 –0.02 0.49 –0.13 –0.08 0.35 0.21* 0.09 0.35 0.24* 0.09 9.19 0.01 –0.02

–0.15

–0.02

0.03

Notes: a N = 93. b Interaction terms were calculated by multiplying factor scores for variables. * p < 0.05; ** p < 0.01.

–0.19 0.58 0.50 0.44 7.46

1.00 –0.08

0.00

0.03

1.00 –0.09

0.00

2

0.42** 0.45** 0.18 0.41** 0.25*

1

1.00 1.00 1.00 1.00

SD

0.00 0.00 0.00 0.00

Mean

0.09

–0.06

–0.20

0.05

4

6

7

–0.02 0.17 –0.21* 0.01 0.12 0.04 –0.25* 0.00 0.04 –0.02

0.41** 0.19

0.36**

5

0.01 0.24* –0.16 –0.54** 0.18 –0.07 0.42** –0.04 0.03 0.39** 0.15 –0.23* –0.02 0.14 0.08

–0.09

0.12

–0.04

3

Means, Standard Deviations, and Correlations of Study Variablesa

1. Performance 2. Organizational learning 3. Reverse engineering 4. Manufacturing flexibility 5. Input supporting government policies 6. Market supporting government policies 7. Organizational learning × Input supporting government policiesb 8. Manufacturing flexibility × Marketing supporting government policies 9. Country of origin 10. % of sales in foreign markets 11. % of profits in foreign markets 12. Number of foreign markets

Variables

TABLE 2.

9

10

11

0.15 –0.17 –0.57** 0.03 –0.43** 0.77** 0.09 0.19 –0.01 0.07

8

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(r = 0.42, p < 0.001), reverse engineering (r = 0.45, p < 0.001) and manufacturing flexibility (r = 0.41, p < 0.001) were all positively and significantly associated with EMF performance. However, both input (r = –0.09) and marketing supporting (r = –0.08) government policies variables showed low, negative and insignificant correlations with firm performance, though both types of government policies were positively and significantly associated with each other (r = 0.36, p < 0.001). Additionally, percentages of sales (r = 0.21, p < 0.05) and profits (r = 0.24, p < 0.05) in foreign markets were also positively and significantly associated with EMF performance. We tested hypotheses in this study using Ordinary Least Squares (OLS) regression. We checked for possible collinearity among variables by first examining bivariate correlations, and second by computing variance inflation factors (VIFs ranged from 1.08 to 3.34), all of which were within acceptable ranges. To determine adequacy of our regression models we checked for independence of errors, equality of variance, and normality of residuals for all regression models. In Model 1 we regressed firm performance on the control variables and the three main effects: organizational learning, reverse engineering and manufacturing flexibility (see Table 3). This model was statistically significant (F = 7.51, p < 0.001). Hypothesis 1 stated that organizational learning was positively associated with performance. The coefficient for organizational learning was positive and statistically significant (b = 0.28, p < 0.01). Hypothesis 2 stated that reverse engineering was also positively associated with performance. The coefficient for reverse engineering was also positive and statistically significant (b = 0.37, p < 0.001), supporting Hypothesis 2. Our third hypothesis stated that manufacturing flexibility was positively associated with performance. The coefficient for manufacturing flexibility was positive and statistically significant (b = 0.29, p < 0.01), rendering support for our third hypothesis. Hence, all three dynamic capability mechanisms identified in this study were positively and significantly associated with EMF performance. Furthermore, our analyses showed that reverse engineering has the strongest impact on manufacturing EMF performance, followed by manufacturing flexibility and organizational learning respectively. Our fourth hypothesis stated that an interaction between organizational learning and input supporting government policies would be

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TABLE 3.

Regression Results: Firm Performance on Organizational Learning, Reverse Engineering and Manufacturing Flexibility Model 1

Independent variables

β

Country 0.11 –0.06 Industry Percentage of sales in foreign markets 0.08 Percentage of profits in foreign markets 0.02 Number of foreign markets –0.04 Organizational learning 0.28 Reverse engineering 0.37 Manufacturing flexibility 0.29 R2 0.42 0.36 Adjusted R2 F 7.51***

S.E.

t

0.24 0.01 0.39 0.38 0.01 0.08 0.10 0.09

0.91 –0.73 0.57 0.12 –0.48 3.16** 3.58*** 3.11**

Notes: N = 93. ** p < 0.01, *** p < 0.001.

positively associated with firm performance. We tested this hypothesis in Models 2 and 3 (see Table 4 (a)). The coefficient for the interaction term between organizational learning and input supporting government policies was positive and statistically significant (b = 0.22, p < 0.05). The change in R2 was also significant (F = 4.55, p < 0.05). Therefore, combinations of organizational learning and government support in technology identification, selection and implementation augment firm performance. An interesting aspect of this result was that the term for input supporting government policies was negatively and significantly associated with firm performance (b = –0.21, p < 0.05). However, once the interaction term entered the model, its coefficient was positive and statistically significant. This result showed support for our rationale that input supporting government policies without organizational learning have minimal, and in this case, negative effects on firm performance. This interaction effect has been plotted in Figure 2 over –1 to +1 s.d. of organizational learning. As illustrated in Figure 2, the relationship

Dynamic Capabilities, Government Policies

TABLE 4.

223

(a) Regression Results on Firm Performance (Organizational Learning × Input Supporting Government Policies as Moderator) Model 2

Independent variables Country Industry Percentage of sales in foreign markets Percentage of profits in foreign markets Number of foreign markets Organizational learning Reverse engineering Manufacturing flexibility Input supporting government policies Organizational learning × Input supporting government policies ∆R2 ∆ F value R2 Adjusted R2 F

β

S.E.

0.09 –0.06 0.12

Model 3

β

S.E.

t

0.24 0.72 0.01 –0.65 0.41 0.85

0.07 –0.06 0.13

0.23 0.01 0.40

0.58 –0.75 0.95

–0.05

0.42 –0.33

–0.09

0.41

–0.71

–0.03

0.01 –0.33

0.01

0.01

–0.14

0.28

0.09

3.16**

0.31

0.09

3.59***

0.36

0.11

3.47***

0.38

0.10

3.68***

0.31

0.09

3.26**

0.33

0.09

3.52***

–0.21

0.10

–2.09*

0.22

0.11

2.34*

–0.11

t

0.09 –1.14

0.43 0.36 6.85***

0.03* 0.19 0.46 0.39 7.04***

Notes: N = 93. * p < 0.05, ** p < 0.01, *** p < 0.001.

between organizational learning and performance is stronger (has a steeper positive slope) at higher levels of input supporting government policies. Because the organizational learning variable is centred, the average regression of firm performance on organizational learning is 0.31, i.e. for each unit increase in organizational learning, performance

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0.60 0.40 Performance

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0.20 0.00 –1.00

–0.20

–0.80

–0.60

–0.40

–0.20

0.00

0.20

0.40

0.60

0.80

1.00

–0.40 –0.60 –0.80 Organizational Learning High Input Supporting Government Policies Low Input Supporting Government Policies

FIGURE 2

Interaction Between Organizational Learning and Input Supporting Government Policies

increases by 0.31. However, at higher levels of input supporting government policies (+1 s.d.), this slope increases to 0.56, an 81 per cent increase. Thus the effect of organizational learning on performance increases by 81 per cent above and beyond its direct effect when input supporting government policies are increased by 1 s.d. At low levels of input supporting government policies (–1 s.d.), the slope of the regression of performance on organizational learning falls to 0.06, an 81 per cent decrease from its average level of 0.31. This supports our assertion that at higher levels of input supporting government policies, organizational learning has a stronger impact on EMF performance. Hypothesis 5 in this study stated that an interaction between manufacturing flexibility and marketing supporting government policies would be associated with firm performance. We tested this hypothesis in Models 4 and 5 (see Table 4 (b)). The coefficient for the interaction term was statistically insignificant (b = –0.001, p > 0.10). We discuss plausible theoretical reasons for this lack of support for Hypothesis 5 in the next section.

DISCUSSION This study is one of the first steps in developing the dynamic capabilities perspective for emerging market firms. In this regard, we developed and

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TABLE 4.

225

(b) Regression Results on Firm Performance (Manufacturing Flexibility × Marketing Supporting Government Policies as Moderator) Model 4

Independent variables

β

S.E.

Country 0.06 0.24 Industry –0.07 0.01 Percentage of 0.15 0.42 sales in foreign markets Percentage of –0.13 0.45 profits in foreign markets Number of –0.01 0.01 foreign markets Organizational 0.31 0.08 learning Reverse engineering 0.38 0.10 Manufacturing 0.32 0.09 flexibility Input supporting –0.19 0.10 government policies Organizational 0.22* 0.11 learning × Input supporting government policies Marketing supporting –0.05 0.10 government policies Manufacturing flexibility × Marketing supporting government policies 0.00 ∆R2 ∆ F value –0.67 0.46 R2 0.39 Adjusted R2 F 6.37*** Notes: N = 93. * p < 0.05, ** p < 0.01, *** p < 0.001.

Model 5

t

β

S.E.

t

0.51 –0.83 1.05

0.06 –0.07 0.15

0.24 0.01 0.43

0.51 –0.82 1.01

–0.85

–0.13

0.45

–0.83

–0.07

–0.01

0.01

–0.07

3.57***

0.31

0.08

3.54***

3.69*** 3.39***

0.38 0.32

0.10 0.09

3.66*** 3.27**

–1.93*

–0.19

0.10

2.34*

0.22

0.11

–0.05

0.10

–0.50

0.00

0.08

–0.02

–0.52

0.00 –0.60 0.46 0.38 5.77***

–1.84 2.24*

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tested a conceptual framework of dynamic capabilities, relevant to EMFs, and their association with firm performance. We also modelled and tested the role of the use of two categories of government support mechanisms by EMF managers—input supporting and marketing supporting policies—in catalysing firm-efforts in capability building. A central contribution of our study is the identification, conceptualization and testing of EMF context-specific dynamic capability mechanism (Collis, 1994). Although previous research on EMFs has focused on weak R&D as a primary attribute of these firms (Wells, 1983), our findings show that dynamic capability mechanisms different from internal product and process R&D are operative, and linked to superior performance in these firms. Specifically, fostering reverse-engineering, creating manufacturing flexibility, and implementing experiential organizational learning contribute towards enhanced performance. These findings are supportive of earlier assertions that dynamic capabilities vary across contexts but also have general attributes, are composed of routines in moderately dynamic markets, and are rooted in the initial resource conditions faced by firms (Collis, 1994; Eisenhardt and Martin, 2000). Recently researchers have started to delineate the importance of looking beyond the firm level to understand origins of firm capabilities (Dosi et al., 2000). Public policies and programmes can be important external catalysts for developing firm capabilities (Helfat and Peteraf, 2003). Especially in emerging economies, governments are important participants in business and powerful influencers of economic activity (Austin, 1991). Findings from this study suggest that managerial use of government support on the inputs side in identifying, selecting and implementing new technologies when combined with firm-level organizational learning will have a synergistic impact on firm performance. This result provides preliminary support for the catalysing role played by TDIs across many emerging economies. We also hypothesized a synergistic relationship between manufacturing flexibility and marketing supporting government policies. However, we were unable to find support for this hypothesis. Coordinating marketing and operations capabilities effectively, though normatively desirable, has been a challenge even within business organizations. Thus such coordination at multiple levels—government agencies and EMFs—may be even harder to achieve. Another plausible reason for this lack of support may be

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that marketing support government policies, as defined in the present study, include a range of activities such as export financing, quality inspections, market research and foreign market distribution support. Because different government departments administer policies, weak coordination across departments may lead to inefficacy of policy implementation. Effective coordination of public policy programmes has historically been a noticeable weakness of emerging economy governments (Evans, 1995). It is possible that the governments of India and Pakistan do offer marketing support for domestic firms that operate internationally, through a proliferation of government departments and agencies, but are unable to coordinate efforts in ways that build upon the manufacturing flexibility of these firms. Our study also makes two methodological contributions. First, we have shown that it is possible to conceptualize and operationalize dynamic capabilities, which are fundamentally routines-based organizational processes oriented towards adaptation in changing environments (Nelson and Winter, 1982). Second, we have developed new reliable scales that tap into the conceptual domains of dynamic capability mechanisms and government support policies. There has been considerable debate on whether organizational capabilities are observable (Eisenhardt and Martin, 2000). Recent conceptual work has pointed out that a routines-based view of dynamic capabilities, making such capabilities observable, allows furthering empirical research in this domain (Jacobides, 2006; Winter, 2003). This study both conforms to this view and takes a step towards its initial validation as an empirical approach.

LIMITATIONS This study also had many limitations. Our data were self-reported accounts of middle level managers. Although we used interviewer training, interviewing and detailed accounts of activities, to reduce informant bias, such sources of bias cannot be ruled out as a possibility. We developed new measures for our focal constructs. Although we have attempted to ascertain the validity and reliability of these measures, given that our research design was cross-sectional, further elaboration, testing

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and validation of these measures is required. Our performance measure encompasses both operational and financial dimensions of growth related to new product technology implementation; development of finer-grained performance measures would have led to stronger content, discriminant, and convergent validity for the dependent variable. Furthermore, use of objective performance measures, if available, would have increased the strength of our conclusions. Given the cross-sectional nature of our research design, we were only able to show association rather than causality between dynamic capability building mechanisms and performance. Finally, our sample size was both relatively small and non-random. Interpretation of the results of this study should be underpinned by the assumption that this was a convenience sample and that our focus on firms with some export sales may have biased the sample towards higher performing firms in emerging economies.

CONCLUSION Despite the limitations of our study, we have taken a first step in developing and testing a conceptual model of dynamic capabilities in emerging economies. This research has practical implications for both firm managers and policy makers in emerging economies. Firm managers can gain from our results by identifying and fostering dynamic capabilities, thereby leading to better adaptation to liberalization induced environmental changes. Policy makers can use our findings to adjust government support mechanisms in ways that they synergistically combine with firm capabilities. Our research can be extended in at least three directions. First, future research can theoretically extend our model by identifying country, industry and firm variables that are antecedent to the dynamic capability development mechanisms identified in our model. Additionally, linking dynamic capabilities to finer grained measures of performance would also provide theoretical insights into the work initiated in this study. Second, understanding of the historical development, internal architecture, role and performance impacts of dynamic capabilities requires longitudinal study. Developing process models of each of these dynamic capability mechanisms would provide deep insights into how EMFs

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incorporate new technologies in enhancing performance. Third, the role of governments and external network connections in fostering firm capabilities is gaining more research attention. Research focused on the evolution and performance impacts of specific policy and programme initiatives will further knowledge of how governments can shape firm capabilities in emerging economy contexts. Finally, questions related to industry and firm heterogeneity in capabilities and performance offer additional avenues of research in this domain. As emerging economies display rapid growth rates, answering questions of why some firms renew and grow while others persist in low performance will provide greater understanding of firm-level adaptation.

ACKNOWLEDGMENTS We thank Tom Brush, Andrew Delios, and our three reviewers for helpful comments on earlier versions of this article.

NOTES 1

2

3

4 5

As pointed out by one of our reviewers, this is a narrow conceptualization of government catalyst programmes used to aid firm capability building. However, this form of government intervention is commonly observable across many emerging economies, and similar interventions have been attributed with relative success in newly industrialized countries (Amsden, 1989, 2001). Predominant focus on exploitation would lead to competency traps, where firms continue to stay with exploitation-based activities because of lack of resource allocation towards explorative activities (Levitt and March, 1988). We thank an anonymous JMS reviewer for pointing out this implication of this type of organizational learning. The relative efficacy of reverse engineering would vary across institutional contexts. Legal regimes vary across states, and what may or may not be reverse engineered, and the extent of allowable reverse engineering would vary across states. We thank an anonymous JMS reviewer for pointing this out. In this sense, reverse engineering is a lower cost and low risk exploration mechanism. Logically, it would be possible for TDIs to aid in firm reverse engineering efforts. However, our definition and operationalization of the reverse engineering construct is focused on knowledge spillovers from customers, competitors and competing foreign products, whereas our definition and operationalization of input supporting government policies is narrowly focused on government support in identifying, selecting and implementing new

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product technologies. Given these definitional and operational constraints, we did not hypothesize an interaction effect between EMF reverse engineering and input supporting government policies. Furthermore, given recent efforts at strong enforcement of Intellectual Property Rights regimes in many emerging economies, governments may be hesitant to directly support firm reverse engineering efforts. GFI, goodness-of-fit index; AGFI, adjusted goodness-of-fit index; CFI, comparative fit index; IFI, incremental index of fit.

APPENDIX: SCALES AND ITEMS FOR CONSTRUCTS (All items were measured on a five-point scale on which 1 was “strongly disagree” and 5 was “strongly agree”.)

α = 0.89) Performance (α        

The use of this product technology has allowed us to create new products. The use of this product technology has allowed our company to offer modified or improved products to our customers. The use of this product technology has led to sales growth for our company. The use of this product technology has led to growth in profits for our company. We have increased our market share by using this product technology. Our customers are more satisfied as a result of our employing this product technology. Our return on investment has improved because of using this product technology. Our speed of getting new products to market has increased because of using this product technology.

α = 0.73) Organizational Learning (α 

Solving problems with this new technology has improved our ability to incorporate this new technology into our manufacturing process.

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 

231

Most of the implementation problems associated with this new technology have been solved. Our engineers and manufacturing workers have built new skills using this new technology.

α = 0.76) Reverse Engineering (α  

 

We look towards our foreign competitors for ideas to develop new products. Our engineers have often bought competing products and disassembled them in order to understand the technologies and manufacturing practices underpinning these products. Some of our new product ideas have come from foreign customers. We have developed new products based upon the design and technology of competing foreign products.

α = 0.75) Manufacturing Flexibility (α    

We have attempted to reduce our raw material inventories by using new inventory management processes. We have attempted to reduce our in-process inventories by using new inventory management processes. Plants owned by this company can change from low volumes of production to high levels of production easily and quickly. Plants owned by this company can change from high volumes of production to low levels of production easily and quickly.

Input Supporting Government α = 0.92) Policies (α (All three items for this construct were reverse-coded.) 

Government technology development institutes did not play any role in helping us identify this technology.

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



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Government technology development institutes did not play any role in helping us select this technology from various available technology options. Government technology development institutes did not play any role in helping us implement this technology.

Marketing Supporting Government α = 0.88) Policies (α       

Our national government offers financial incentives to exporting firms. Our national government has instituted a series of quality inspections and certification processes that help exporting companies. Our government helps in conducting market research in foreign countries. Our government helps in obtaining commercially available market research about foreign markets. Our government has helped us obtain foreign customers for our products. Our government has helped with distributing our products in foreign countries. Our government has offered this company financial or material support for attending trade shows and export fairs.

All the government support methods mentioned in this section (Marketing Supporting Policies) are available to our competitors as well as other industries.

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Von Hippel, E. (1988). The Sources of Innovation. New York: Oxford University Press. Wells, L. (1983). Third World Multinationals: The Rise of Foreign Investment from Developing Countries. Cambridge, MA: MIT Press. Wernerfelt, B. (1984). “The resource-based view of the firm”. Strategic Management Journal, 5, 171–80. West III, G. and DeCastro, J. (2001). “The Achilles heel of firm strategy: resource weaknesses and distinctive inadequacies”. Journal of Management Studies, 38, 417–42. Williams, L., Cote, J. and Buckley, M. (1989). “Lack of method variance in self-reported affect and perceptions at work: reality or artifact?”. Journal of Applied Psychology, 74, 462–8. Winter, S. (2000). “The satisficing principle in capability learning”. Strategic Management Journal, 21, 981–96. Winter, S. (2003). “Understanding dynamic capabilities”. Strategic Management Journal, 24, 991–5. Winter, S. and Szulanski, G. (2001). “Replication as strategy”. Organization Science, 12, 730–43. Womack, J., Daniel, J. and Roos, D. (1990). The Machine that Changed the World: The Story of Lean Production. New York: HarperPerennial. Wright, M., Filatotchev, I., Hoskisson, R. and Peng, M. (2005). “Guest editors’ introduction: strategy research in emerging economies: challenging the conventional wisdom”. Journal of Management Studies, 42, 1–33. Zahra, S., Sapienza, H. and Davidsson, P. (2006). “Entrepreneurship and dynamic capabilities: a review, model and research agenda”. Journal of Management Studies, 43, 917–55. Zollo, M. and Winter, S. (2002). “Deliberate learning and the evolution of dynamic capabilities”. Organization Science, 13, 339–51.

Chapter 2.2

A “Strategy Tripod” Perspective on Export Behaviors Evidence from Domestic and Foreign Firms Based in an Emerging Economy Gerald Y. Gao, Janet Y. Murray, Masaaki Kotabe, and Jiangyong Lu

INTRODUCTION Exporting, as opposed to other modes of foreign market entry, is the quickest and easiest way for firms to penetrate foreign markets and engage in internationalization (Johanson & Vahlne, 1977, 1990; Root, 1994). It requires fewer organizational resources, provides greater flexibility for managerial actions, and involves lower business risks than other modes of entry such as licensing and equity investment (Leonidou, Katsikeas, Palihawadana, & Spyropoulou, 2007). Globalization and the rapid growth of international trade have further made it imperative for firms to seek opportunities for market expansion. Governments in emerging economies have increasingly provided incentives for both local and foreign-invested firms to actively export and compete in foreign markets (Aulakh, Kotabe, & Teegen, 2000; Kotler, Jatusripitak, &

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Maesincee, 1997; Luo, 2000). Given that many firms from emerging economies lack experience in marketing their products abroad, it is imperative for them to comprehend the impetus for export behaviors and, more importantly, the outcomes of such behaviors. However, there have been few empirical studies conducted on export behaviors of firms from emerging economies or the performance implications of such behaviors (e.g., Aulakh et al., 2000). This represents a notable research gap in exporting. There have been many empirical studies conducted on the determinants of export performance (Fernández & Nieto, 2006; Filatotchev, Dyomina, Wright & Buck, 2001; Zhao & Zou, 2002; for a review, see Aaby & Slater, 1989; Zou & Stan, 1998). At the macro level, researchers have investigated variables including comparative advantage, government policies, exchange rate fluctuations, and domestic market characteristics. Micro-level research focuses on factors including export strategies, managerial perceptions and attributes, firm resources, and firm capabilities/competencies. Although studies that have examined export performance using the developed nation context are abundant, much of the knowledge regarding successful export performance is fragmented, often resulting in inconsistent findings. In rectifying such a deficiency, Aaby and Slater (1989) proposed an integrative model of export performance in synthesizing export knowledge. However, their literature review focused only on factors closely related to managerially controllable variables, thus omitting the effects of external environmental factors on export performance. In an effort to better synthesize and assimilate the fragmented knowledge on export performance, and to overcome the weaknesses pointed out in previous reviews, Zou and Stan (1998) conducted a review of the empirical literature on export performance by including both internal and external determinants of export performance. Specifically, internal determinants are informed by the resource-based view, whereas external determinants are supported by industrial organization theory. Despite the excellent efforts by these researchers in reviewing and synthesizing the export performance literature, they have assumed institutions as “background” (Peng, Wang, & Jiang, 2008). This represents a serious shortcoming, as institutions in emerging economies differ drastically from those in developed countries (Seligman, 1999;

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Shenkar, 2005). The role of institutions is more salient in emerging economies because the rules are being fundamentally and comprehensively changed, and the scope and pace of institutional transitions are unprecedented (Peng, 2003). Indeed, as institutions in emerging economies significantly shape the strategies and performance of both domestic and foreign-invested firms, omitting institutional environments in examining the drivers of export behaviors and performance has seriously limited our understanding of exporting. In our study, therefore, we address two questions: (1) Does the institutional environment affect export behaviors of firms based in emerging economies, above and beyond resource- and industry-based factors? (2) What are the effects of firms’ export behaviors on firm performance? We attempt to correct the deficiencies in the extant literature on exporting by addressing these two questions based on the “strategy tripod” perspective introduced by Peng (2006) and Peng et al. (2008). We contribute theoretically to the extant literature on exporting by integrating the resource-, institution-, and industry-based views in examining the factors that influence a firm’s export propensity (whether firms export or not) and export intensity (export sales as a percentage of total sales), and their relationships with firm performance. We tested these relationships by empirically using a 4-year comprehensive longitudinal data set from China. In response to Wright, Filatotchev, Hoskisson and Peng’s (2005) call for research on comparing domestic and foreign firms’ strategies in emerging markets, we included both domestic private enterprises and foreign wholly owned subsidiaries based in China, and compared export behaviors between these two types of firms. We chose China as the research context for the following reasons. Since China liberalized its economy for trade and investment in the late 1970s, it has risen as a globally influential economic powerhouse. With an annual growth rate of approximately 10% in the last two decades, China now ranks as one of the world’s largest economies and trading partners for many major economies, including the EU, the US, and Japan. Worldwide exports reached US$13.7 trillion in 2007, and China became

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the largest exporter, with US$1.22 trillion in exports, surpassing the United States with US$1.14 trillion (CIA, 2008). Many Chinese firms have pursued internationalization, and the Chinese government has adopted a flexible and practical approach to govern these firms’ international initiatives (Liu & Li, 2002), thus providing a unique institutional environment for exporting. Likewise, many foreign-invested firms have established manufacturing operations in China to capitalize on its high economic growth, huge market size, and low labor cost. Consequently, China has become an excellent sourcing and exporting platform, and a marketing location for both Chinese and foreign firms to improve their firm performance. Thus the Chinese market provides an excellent research context to capture the complexity of exporting using the “strategy tripod” perspective.

THEORETICAL FOUNDATION AND HYPOTHESES DEVELOPMENT There exist several studies examining firms’ export behaviors and strategies in China. Researchers have investigated the determinants of firms’ export behaviors indicated by export propensity and export intensity (Buck, Liu, Wei, & Liu, 2007; Zhao & Zou, 2002) and the effects of different product strategies and capabilities on export performance (Brouthers, O’Donnell, & Hadjimarcou, 2005; Brouthers & Xu, 2002; Zou, Fang, & Zhao, 2003). However, more studies have examined the effects of internal, as opposed to external, factors on firms’ export behaviors (Zou & Stan, 1998). In particular, institutional environment factors have mostly been neglected in the extant literature, despite the fact that institutional factors have a direct effect on firms’ behaviors and strategic choices, especially in emerging economies that are experiencing drastic institutional changes (Peng, 2003; Peng et al., 2008). We summarize the major findings of studies on firms’ export behaviors and strategies in China in Table 1. In using an emerging economy as a new empirical context to test and extend existing theories, it is imperative that IB researchers strive to contribute to the theoretical development of the overall field of business disciplines and social sciences (Meyer, 2006, 2007; Peng et al., 2008).

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A Summary of Studies of Export Strategy in China

Studies

Sample

Brouthers and Xu Survey data of 88 Chinese export (2002) companies located at developed and coastal provinces

Zhao and Zou (2002)

Secondary data of 1649 Chinese manufacturing firms from China’s Leading Companies

Zou et al. (2003) Survey data of 176 product–market export ventures of 50 companies located at an eastern province of China

Key findings (1) Performance satisfaction decreases when Chinese exporters pursue price leadership product strategies and increases when they pursue branding product strategies. (2) Chinese exporters can significantly increase performance satisfaction when using branding product strategies and targeting other less-developed countries. (1) Chinese manufacturing firms’ export propensity and intensity are significantly lower in a highly concentrated industry than in a less concentrated industry. (2) Firms located in coastal areas have higher export propensity and intensity than firms located in inland areas. (1) Export marketing capabilities including distribution, communication, and product development capabilities have significant effects on financial performance of export ventures. (2) Low-cost and branding advantages mediate the relationship between export marketing capabilities and export financial performance.

Brouthers et al. (2005)

Survey data of 68 Chinese and 33 Romanian exporters

(1) Exporters from emerging markets can imitate the home country MNEs’ generic product strategies in Triad nations. (2) Exporters that successfully fit host country strategies achieve high levels of satisfaction with export performance.

Buck et al. (2007)

Secondary panel data of 7697 Chinese firms in 1998–2001

(1) Multinational enterprises in China positively affect local Chinese firms’ export behaviors. (2) FDI from Hong Kong, Macau, and Taiwan generates a stronger effect on export propensity than FDI from OECD countries.

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Research focusing on an emerging economy can help lead to the emergence of an institution-based view of strategy, in conjunction with the traditional resource- and industry-based views (Peng, 2006; Peng et al., 2008). The rise of the institution-based view as an influential theoretical tool is an outcome of Kiggundu, Jørgensen, & Hafsi’s (1983) call for new theoretical tools to capture the complex and rapid change in the organization–environment relationships in emerging economies. In using a “strategy tripod” (i.e., resource-, institution-, and industry-based) perspective, we contribute to the theory building of exporting research. Based on these paradigms, we developed hypotheses in examining the determinants and performance outcomes of firms’ export propensity and export intensity in an emerging economy. Our conceptual model is presented in Figure 1. The resource-based view focuses on the origins of firms’ competitive advantage, and addresses why firms in the same industry vary systematically in performance over time (Barney, 1991; Teece, Pisano, & Shuen, 1997; Wernerfelt, 1984). According to the resource-based view, firms accumulate both tangible and intangible resources that represent the ultimate sources of competitive advantage (Barney, 1991; Collis, 1991; Zou et al., 2003). This perspective focuses on the internal factors of

Resource-based view Cost leadership competencies Differentiation competencies

Institution-based view Free market mechanism development Intermediate institutions development

Export behaviors Export propensity Export intensity

Industry-based view Industry export orientation Industry instability

FIGURE 1

A “Strategy Tripod” Perspective

Firm performance

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firms, thus complementing the traditional emphasis of strategy on industry structure and strategic positioning within the industry as the determinants of competitive advantage (Eisenhardt & Martin, 2000; Porter, 1980). It assumes that resources are heterogeneously distributed across firms, and that resource differences persist over time (Wernerfelt, 1984). The two types of resources that are necessary for creating competitive advantages are assets and capabilities (Day, 1994; Zou et al., 2003). Assets are a firm’s accumulated resource endowments (e.g., investments in the facilities). Capabilities (or competencies) are a firm’s accumulated knowledge and skills that enable the firm to coordinate activities by deploying its assets advantageously (Day, 1994; Zou et al., 2003). Thus the resource-based view stresses that firms with superior systems and structures have better performance. This is the case not because firms make strategic investments that may deter entry and raise prices above long term costs, but rather because they have substantially lower costs, or offer substantially higher quality or product performance (Teece et al., 1997). Based on the resource-based view, a firm’s internal competencies drive its export behavior, which in turn affects firm performance. In the extant literature on exporting, firm resources and competencies that have been used include R&D activity and uniqueness of product (Schlegelmilch & Crook, 1988) and technological intensity (Aaby & Slater, 1989) to measure differential advantages and resources; Aulakh et al. (2000) have also used cost leadership and differentiation in examining export performance. In our study, we examined cost leadership and differentiation competencies as a firm’s internal competencies that are related to export propensity and export intensity (Aulakh et al., 2000). Defined as “the rules of the game” (North, 1990; Scott, 1995), institutions exhibit significant legitimacy pressures for firms, and directly affect firms’ strategic choices and performance consequences (Hoskisson, Eden, Lau, & Wright, 2000; Peng, 2003; Peng et al., 2008; Wright et al., 2005). The institution-based view asserts that firms sharing the same environment will adopt similar practices, thus becoming “isomorphic” with each other. Driven by legitimacy motives, firms conform to institutional pressures (DiMaggio & Powell, 1983; Kostova & Roth, 2002). Broadly speaking, institutions can be classified as formal and informal ones that guide societal transactions in the areas of politics, law,

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and society. The institution-based view focuses on the interplay between institutions and organizations, and considers strategic choices as the outcomes of such interplay. Specifically, in addition to industry conditions and firm competencies, formal and informal constraints of a particular institutional environment that managers encounter also drive their strategic choices (Peng et al., 2008). In other words, institutions determine directly how firms formulate and implement strategy that creates a competitive advantage (Ingram & Silverman, 2002; Peng et al., 2008). As profound differences in institutional frameworks exist between emerging and developed economies (Peng et al., 2008), it is critical to include the institutional environment when examining firms’ export behaviors and export performance in an emerging economy such as China. In our study, we used free market mechanism development (represented by market-determined prices and the reduction of local protectionism) and intermediate institutions development (represented by market intermediaries development, consumer rights protection, and intellectual property right development) as factors for institutional environment in China, as these are often regarded as the two most important indicators for the business environment in emerging economies. The industry-based view, pioneered by Porter (1980), stresses that the key principle of competitive strategy formulation is a firm’s relationship to its environment, represented by the industry in which it competes. In other words, external factors determine the firm’s strategy, which in turn affects its performance (Scherer & Ross, 1990). Thus the external environment exerts pressures to which a firm must adapt to survive and prosper (Collis, 1991). While firms’ dependence on the external environment poses constraints on their strategic choices, they can manage their dependence by developing appropriate competitive strategies. Firms develop and implement competitive strategies in an attempt to alter their position in the industry vis-à-vis competitors and suppliers. Hence industry factors play a critical role in determining and limiting a firm’s strategic behavior (Teece et al., 1997). Based on this rationale, the industry factors are the primary determinants of a firm’s export behaviors (Cavusgil & Zou, 1994; Zou & Stan, 1998). Various industry factors have been used in the extant literature on exporting, for example industry export intensity (Naidu & Prasad, 1994), industry

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export orientation (Campa & Goldberg, 1997), and industry instability (Sakakibara & Porter, 2001). In our study, we examined industry export orientation and industry instability as industry factors that are related to export behaviors.

Firm Competencies The resource-based view suggests that a firm can gain a competitive advantage through deploying its valuable, rare, inimitable, and nonsubstitutable resources (Barney, 1991). Performance differences between firms result not only from the control of idiosyncratic resources, but also from competencies that combine and transform available resources into superior customer value (Barney, 1991; Day, 1994). Firms can develop competitive competencies with respect to competitors in a specific industry through the strategies either of cost leadership or of differentiation (Porter, 1980, 1985). The literature has provided supportive evidence for the link between these two competitive strategies and firm performance (e.g., Aulakh et al., 2000; David, Hwang, & Pei, 2002; Spanos, Zaralis, & Lioukas, 2004). Consistent with those previous studies, we define firms’ realized competencies along the dimensions of cost leadership and differentiation, which reflect an observable pattern of strategic resources deployment (Mintzberg, 1978). Firms pursuing a cost leadership strategy aim to enhance performance and increase market share based on competitive advantages through a low-cost position relative to their rivals. In order to achieve cost leadership competencies, firms have to outperform their competitors in activities of producing, selling, and delivering goods and services to customers by providing consumer value at lower costs. Cost leadership competencies require large-scale production facilities, rigorous process improvements, cost reduction through experience, cost control, and cost minimization in R&D, advertising, sales, and services. Because of the ability to match competitors’ offerings at lower prices, firms with realized cost leadership competencies can achieve above average returns (Porter, 1980, 1985). Firm characteristics and competencies are considered as important determinants of export behaviors (Zou & Stan, 1998). If firms’ domestic

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competitive competencies enable them to engage in exporting, they can leverage such strengths in international markets. For example, Salomon and Shaver (2005) have found that domestic and export sales are complements for Spanish-owned firms, and their strengths in the domestic market drive export sales. Moreover, firms with cost leadership competencies can rely on their domestic competitive advantages to compete in international markets. Therefore we expect that firms from China that have developed cost leadership competencies in the domestic market are more likely to become exporters and have higher export volumes. Hence we hypothesize: Hypothesis 1: Cost leadership competencies are positively related to (a) the export propensity and (b) the export intensity of a firm. Firms pursuing differentiation strategies emphasize producing a good or a service that customers perceive as unique and are willing to pay a premium price for (Porter, 1980, 1985). Differentiation strategies can be realized through creating strong brand equity, continuous innovation, advanced technology, and superior customer service. To implement such a strategy, firms have to make investments in costly activities such as extensive R&D, product design, and brand development. If firms can successfully differentiate themselves from rivals in the marketplace, they can enjoy above-market prices, because differentiation strategies can create high customer loyalty. Firms can achieve competitive advantages through differentiation strategies, which in turn enhance firm performance. Moreover, compared with advantages through cost leadership, differentiation advantages are more difficult for competitors to imitate and hence are more likely to be sustained (Barney, 2002). In the exporting literature, researchers have found that technology level or R&D intensity are positively associated with export propensity (e.g., Benvignati, 1990). However, findings of the impact of technology on export intensity are inconsistent, with some studies reporting positive effects whereas others report insignificant or even negative effects (cf. Aaby & Slater, 1989; Zou & Stan, 1998). Despite the inconsistency, researchers have suggested that firms can make investment in R&D in order to innovate for foreign markets (Kuemmerle, 1999). Firms with realized differentiation competencies are better equipped to compete in

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the export market. Firms’ ability to apply their differentiation competencies to export markets affects their export behaviors. Hypothesis 2: Differentiation competencies are positively related to (a) the export propensity and (b) the export intensity of a firm.

Institutional Environment Institutions significantly shape firms’ strategy and behaviors, because of their salient role in emerging economies, and consequently we posit that firms’ export behaviors may be stimulated or deterred by the institutional environment. As the largest emerging economy, China has been experiencing the change from a centrally planned to a market-based economy through liberalization and privatization, accompanied by institutional transitions in political systems, legal frameworks, and market structures (Child & Tse, 2001; Peng & Heath, 1996). Because the institutional transition is far from complete in China, formal institutions including legal system and regulations remain weak, while informal institutions still play a significant role in driving firm behaviors (Chen & Chen, 2004; Luo, 2000). Firms can face serious institutional difficulties because of government control and the imperfection of the market mechanism (Nee, 1992). In addition, the central government has delegated some authority to lowerlevel governmental units, so provincial governments can formulate policies to govern business operations. For instance, the provincial government usually controls key resources, including raw materials and energy. Since the Chinese government exercises control over firms’ operations and management in terms of resource distribution, investment size, bank loans, and strategic organizational changes, firms operating in China opt for developing relationships with both central and provincial government officials and legislators, who have the power to ratify projects, allocate resources, arrange financing, supply raw materials, and provide opportunities that are vital to firms’ growth (Luo, 2000). Institutional changes are expected to foster more transparent rules of the game and increase market efficiency. As predicted by Peng (2003), there will be a longitudinal process from a relationship- to a

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market-based structure. Because of the institutional transition in China, many barriers for business operations have gradually been removed. However, the extent of the transition to the market economy still varies between different locations and industries. The development of a free market mechanism increases the efficiency of market transactions and resources allocation in the industry, which is helpful for firms in achieving economies of scale nationally. Firms’ dependence on government relationships to secure resources can be reduced (Child & Tse, 2001). Moreover, the development of intermediate institutions also reduces the transaction and agency costs and uncertainties for firms. Firms would then rely less on bureaucrats for contract enforcement and dispute settlement (Walder, 1995). Therefore an improved institutional environment can foster a better overall business environment and facilitate firms’ export behaviors. Hypothesis 3a: The development of free market mechanisms is positively related to (a) the export propensity and (b) the export intensity of a firm. Hypothesis 3b: The development of intermediate institutions is positively related to (a) the export propensity and (b) the export intensity of a firm.

Industry Factors Firms often imitate the export behaviors of other firms within the same industry. First, firms can gain benefits from exporting by enjoying economies of scale, revenue diversification, and larger market powers. Other firms exporting to foreign markets may serve as an important signal of export attractiveness. Moreover, exporting firms can create external economies and information spillover, which in turn reduce the costs of exporting. Second, an industry is an organizational field providing relevant information about the characteristics and behaviors of firms. Firms usually observe and follow their competitors’ behaviors in the same industry because the decisions and actions by competitors increase the legitimacy of similar actions (Guillén, 2003; Scott, 1995). The desire to conform to

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the established norms often leads to inter-organizational mimetic behaviors (DiMaggio & Powell, 1983). The oligopolistic reaction theory suggests that firms pursue follow-the-leader strategies in locating foreign investments (Knickerbocker, 1973). The literature has provided empirical evidence about mimetic behaviors in entry mode decisions in foreign markets (Guillén, 2003), international expansions of automotive components of supplies (Martin, Swaminathan, & Mitchell, 1998), and location choices of chain acquisitions (Baum, Li, & Usher, 2000). Hence other firms’ export behaviors in the same industry serve as a reference point and subsequently increase the attractiveness of exporting. Hypothesis 4: The export orientation of an industry is positively related to (a) the export propensity and (b) the export intensity of a firm. In addition, domestic industry instability can have a direct effect on firms’ export behaviors. Industry instability measures the sum of fluctuations of the market share of each individual firm in a specific industry. When the domestic market is stable, firms may have little motivation to explore sales opportunities in the export market because export markets are comparatively riskier. Moreover, competitive pressures in the home market can keep firms actively pursuing innovation activities, which eventually produce a competitive industry in world trade (Porter, 1980, 1985; Sakakibara & Porter, 2001). Sakakibara and Porter (2001) have found a strong relationship between market instability and world export share, using a sample of Japanese firms. Salomon and Shaver (2005) have further suggested that domestic and export sales are substitutes for foreign-invested firms in Spain. In China, the transition toward a market economy has created one of the most competitive markets in the world. The rise of township and village enterprises and private enterprises brings new forces to the economy, and foreign-invested firms also exert high competitive pressures for local firms (Buckley, Clegg, & Wang, 2002; Shenkar, 2005). A number of firms have emerged as powerful competitors in the global market, including Haier, Lenovo, and Galanz. Some have become successful exporters through leveraging their competitive advantages in the domestic market (Zeng &Williamson, 2003). As the domestic

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market becomes saturated and more competitive, firms are compelled to consider exporting and search for opportunities in international markets. Hypothesis 5: Instability of the industry is positively related to (a) the export propensity and (b) the export intensity of a firm.

Performance Implications Export performance has received much attention in the exporting literature. Researchers have measured export performance in various ways, including sales, profits, and changes of performance; the most frequently used measure in previous studies is export intensity (Leonidou, Katsikeas, & Samiee, 2002; Shoham, 1998; Zou & Stan, 1998). Numerous studies have examined the determinants of export intensity. However, whether export intensity contributes to firm-level performance has attracted only limited attention. In the economics literature, previous studies have provided consistent evidence that export firms have higher levels of productivity than nonexporters (e.g., Bernard & Jensen, 2004; Greenaway & Kneller, 2004). Furthermore, researchers have found that for firms that engage in exporting activities, the knowledge gained from international markets can improve performance, measured by total factor productivity (e.g., Alvarez & Lopez, 2005; Blalock & Gertler, 2004). However, several studies have indicated a negative relationship between export intensity and firm financial performance. Ito (1997) found that export intensity had a negative effect on ROA (return on assets) for a sample of Japanese manufacturing firms in 1985. This suggests that firms may be forced to sell products abroad to maintain employment, even with lower profitability. Geringer, Tallman, and Olsen (2000) have concluded that exporting activities contribute positively to Japanese multinational firms’ performance, measured by ROS (return on sales), but only for a very limited time period. Using a sample of small- and medium-sized Japanese firms, Lu and Beamish (2001) have also found a negative relationship between export intensity and firms’ ROA. They suggested that the relationship is affected by Japanese yen appreciation, which

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significantly increased the costs of exporting. Small- and medium-sized firms were forced to lower the prices of export goods, and suffered from a diminished export margin.We posit that firms need to possess competitive advantages in the export market in order to compete for financial success. Otherwise, export behaviors may not bring benefits for firms. Hence export propensity and export intensity can contribute to better performance for firms with realized competencies in the domestic market. Hypothesis 6: (a) Export propensity and (b) export intensity are positively related to firm performance for a firm with realized competencies.

METHOD Data Our main data source is the Annual Census of Chinese Industrial Firms (2001–2005), which is conducted by the National Bureau of Statistics of China. It covers all industrial enterprises, including domestic and foreign-invested firms with at least 5 million RMB (or approximately US$676,000) annual sales. The data set provides detailed information on a firm’s identification, assets, liabilities, capital structure, financial performance, total shipments and exported shipments, among others. The number of manufacturing enterprises with valid total shipments and exported shipments information in the database varies from 152,000 to 243,000 for various years. According to the data from China statistical yearbooks, the database consistently represents approximately 70% of China’s total export during the period. The data set is suitable for studying the export strategy of firms from China for the following reasons. First, Chow (1993) has reported that census data are reliable and internally consistent for empirical studies. Studies using the data have been published in leading journals (e.g., Pan, Li, & Tse, 1999; Tan & Peng, 2003). Second, the multi-year census data enable us to employ a panel data structure to test our models. Thus we can investigate firms’ export behaviors over time, and test the dynamic causal relationship,

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which is the main advantage over static cross-sectional data (Filatotchev et al., 2001; Fitzmaurice, Laird, & Ware, 2004). Export policies in China have experienced dramatic changes for both domestic and foreign firms in the last two decades. First, the export behaviors of foreign firms in China were formerly subject to strict government controls. Since the 1980s, China has adopted policies to encourage foreign firms to establish export-oriented firms. According to the Law on Foreign-invested Enterprises of the People’s Republic of China adopted in 1986, foreign invested firms must either make investment in high technology and realize import replacement, or export at least 50% of total outputs annually. These restrictions were removed in 2001. Second, China established two separate trading regimes during the mid-1980s. Foreign firms were allowed to use direct exporting for their own products (Naughton, 1996). However, exporting of domestic firms had to be channeled through state trading companies. With China’s accession to the WTO in 2001, all firms are now entitled to obtain direct export rights, including private enterprises. In our study, we focus on domestic private enterprises and foreign wholly owned subsidiaries. Domestic private enterprises include the following types: individual invested private enterprises; joint enterprises by private investors; private limited liability corporations; and private shareholding enterprises. Domestic private enterprises usually adopt a simple and flexible structure, which enables them to select aggressive strategies and react quickly to market opportunities (Peng, Tan, & Tong, 2004). The contribution of domestic private enterprises to China’s export has increased significantly, and they accounted for 17.8% of the overall export volume in 2006. Ample evidence has demonstrated that foreign-invested firms in China have been a driving force for its economic and export growth. According to statistics provided by China Customs, foreign-invested firms produced 58.2% of the export volume from China in 2006. Therefore a study on exporters based in China is deemed not comprehensive if it excludes foreign-invested firms. We excluded SOEs from our study because the government still heavily controls SOEs’ operations and strategies. Although the government has undertaken various reforms to change the mechanism of SOEs, most SOEs in China continue to rely on the government (Peng

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et al., 2004). Moreover, SOEs’ contribution to the overall economy has dropped substantially because of the reform and privatization of SOEs in China. Although SOEs account for 32.3% of the total sales of industrial enterprises with at least 5 million RMB sales, they contributed only 19.8% of China’s export volume in 2006. In constructing a balanced panel of domestic private enterprises and foreign wholly owned subsidiaries during 2001–2005, we obtained a balanced sample of 18,644 firms. Because we used lagged firm-level variables in our models to eliminate endogeneity problems and establish casual relationships, we dropped the data of 2001. In doing so, the number of observations used in our analyses was 74,576 (4×18,644), with 49,372 domestic private enterprises and 25,204 foreign wholly owned subsidiaries.

Measurement of Variables We provide the measurement for the dependent, independent, and control variables as follows. Dependent variables. Following the literature, we used two dependent variables—export propensity and export intensity—to measure export behaviors (e.g., Fernández & Nieto, 2006; Zhao & Zou, 2002). Export propensity equals 1 if a firm exports a positive proportion of its output in a specific year, and 0 otherwise. Export intensity equals the ratio of export sales to total sales by a firm in a specific year. For the effects of export behaviors on firm performance, we used ROS. Independent variables. We measured Firm Competencies of a firm i’s competitive position along the dimensions of cost leadership and differentiation as the divergence from typical levels of the three-digit industries (MacKay & Phillips, 2005). In constructing the industry–year median, we excluded the firm itself. We divided this deviation by the range of different measures in each industry–year, thus bounding these proxies by – 1 and 1. The measures of cost leadership and differentiation competencies can be expressed as

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Cost Leadership Competenciesi,t (1)

Differentiation Competenciesi,t

(2)

where i stands for firm, j stands for industry sector, and t stands for year. Following the literature, we measured cost leadership competencies by: (1) production cost to total sales ratio; and (2) selling and administrative cost to total sales ratio (Berman et al., 1999; Nair & Filer, 2003). Small values of these numbers indicate better operational efficiency for firms. Differentiation competencies were measured by: (1) R&D intensity, which is R&D expenses divided by total sales; and (2) new product outputs to total outputs ratio (David et al., 2002; Thomas, Litschert, & Ramaswamy, 1991). In order to pursue a successful differentiation strategy, a key factor is the ability to offer innovative goods and services in the marketplace (Porter, 1980, 1985). We used two Institutional Environment indices for (1) free market mechanism development, and (2) intermediate institutions development. Because of the institutional transition and unbalanced development across different regions in China, institutional environments in different provinces are quite different. The institutional indices were developed by the National Economic Research Institute (NERI) for regional marketization level for different provinces in China. The indices reflect the development status of market trading mechanisms and other institutions in achieving more efficient market functioning. The index of free market mechanism development captures two subindices of the percentage of products with market-determined prices and the reduction of local protectionism, which affect a firm’s ability to decide where and at what price to sell their products. The index of intermediate institutions development, on the other hand, was measured by three sub-indices of market intermediaries development, consumer

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rights protection, and intellectual property right development that secure a firm’s property rights in case disputes happen while the firm is selling its products (Child & Tse, 2001). Sub-indices were computed by NERI using data from the statistical yearbooks, reports from the administration of industry and commerce, and survey data, etc. A score for each province was given based on objective measures, such as the ratio of lawyers or the ratio of accountants to the provincial population, and then normalized to a value between 0 and 10 proportionately to measure institutional conditions relative to other provinces. The NERI indices are available from 1997. We matched the index with our multiyear data. Indices beyond the base year of 1997 were relaxed from the 0–10 restriction to reflect institutional changes over time, and the final indices were weighted averages of sub-indices. The indices have been used in economics and finance studies on China (Chen, Firth, Gao & Rui, 2006; Li, Meng, & Zhang, 2006). We measured Industry Factors as: (1) industry export orientation, by calculating the percentage of exporters in a specific industry; and (2) industry instability, by following Sakakibara and Porter (2001). We constructed industry instability from the sum of individual market share fluctuations of firms in the market.

Industry Instabilityjt

(3)

where Sit is the domestic market share of the ith-ranked firm in industry j for period t, calculated for all firms available. These two variables are both at three-digit industry levels. Control variables. Following previous studies on export behaviors, we included four control variables in our analyses. Firm size was measured by the logarithm of the number of employees (Verwaal & Donkers, 2002). We also controlled for industry sales growth rate at the three-digit industry level and foreign wholly owned subsidiaries with a dummy variable (foreign subsidiaries=1, domestic firms=0). We report descriptive statistics of variables and the correlation matrix in Table 2. We checked the variance inflation factors and found that the highest value was 1.65, which indicated that multicollinearity was not a serious problem.

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0.02*** 0.01** –0.00 –0.01***

0.03 0.13

Mean SD

***p <0.001, **p <0.01, *p <0.05.

0.01 0.08

0.24*** 0.24*** 1.00 0.08*** 0.09*** 0.32*** 0.13*** 0.31*** 0.26***

7

0.01 0.07

0.03 0.13

9.12 1.10

6.79 2.18

0.34 0.20

0.02*** 0.05*** 0.10*** 0.04*** 0.24*** –0.02*** –0.00 –0.05*** 0.00 –0.03***

–0.00

0.04*** –0.01** –0.02*** 0.02*** –0.01*** –0.01*** 0.16*** –0.03*** –0.04***

–0.01*

0.00 –0.00 0.10***

6

0.40*** 1.00

5

0.05***

4

–0.01**

3

1.00

1.00

2

0.12*** 0.14*** 1.00 0.06*** 0.04*** 0.11*** 1.00 –0.15*** –0.11*** –0.01*** –0.00

1.00 0.65***

1

Descriptive Statistics and Correlations

1. Production cost ratio 2. Selling and administrative cost ratio 3. R&D intensity 4. New product ratio 5. Free market mechanism development 6. Intermediate institutions development 7. Industry export orientation 8. Industry instability 9. Wholly owned subsidiary dummy 10. Firm size 11. Industry growth rate

TABLE 2.

9

10

1.27 2.43

0.35 0.48

5.10 1.04

0.07*** 0.23*** 1.00 0.14*** –0.01* –0.00

1.00 0.10*** 1.00

8

0.13 0.21

1.00

11

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ANALYSIS AND RESULTS We constructed logistic and tobit models for the estimation of export propensity and export intensity, respectively. All the independent variables were lagged one year in the panel data models, which can provide more consistent estimates of coefficients and identify causal relationships (Filatotchev et al., 2001; Leonidou & Katsikeas, 1996). We included both industry and year fixed effects in the model estimation.

Export Propensity and Export Intensity Using the overall sample, we report the results of export propensity and export intensity in Tables 3 and 4, respectively. To clarify the hypothesized effects, we present a series of models with different sets of independent variables for export propensity and export intensity, respectively. We test the effects of firm competencies in Models 1 and 5, institutional environment in Models 2 and 6, industry factors in Models 3 and 7, and all three sets of variables in Models 4 and 8. As shown in Tables 3 and 4, both production cost ratio and selling and administrative cost ratio have negative effects on export propensity and export intensity. Lower values of production cost ratio and selling and administrative cost ratio indicate cost leadership competencies. Therefore firms with realized competencies of cost leadership are more likely to export and have high levels of export intensity. Hence Hypothesis 1 is supported. Hypothesis 2 posits that firms with differentiation competencies are more likely to be involved in export markets and have high export intensity. The results suggest that new product ratio is significantly related to export propensity and export intensity, while R&D intensity only has a significant effect on export propensity but not on export intensity, providing partial support for Hypothesis 2. Hypotheses 3a and 3b deal with the impact of the institutional environment on firms’ export behaviors. The results show that the indices of free market mechanism development and intermediate institutions development both have strong effects on export propensity and export intensity, supporting both Hypothesis 3a and Hypothesis 3b. Industry export orientation has significant effects on both export

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TABLE 3.

Export Propensity: The Overall Sample in 2002–2005 Export propensity

Independent variables Intercept Production cost ratio Selling and administrative cost ratio R&D intensity New product ratio

Firm competencies Model 1

Institutional environment Model 2

Industry factors Model 3

–1.86*** (0.07) –1.29*** (0.09)

–5.91*** (0.12)

–4.89*** (0.09)

–0.72*** (0.14) 0.71*** (0.13) 0.72*** (0.07)

Free market mechanism development Intermediate institutions development

0.37*** (0.01)

0.30*** (0.01)

0.08*** (0.00) 4.80*** (0.08) –0.00 (0.00)

0.07*** (0.00) 4.48*** (0.08) –0.00 (0.00)

1.75*** (0.02) 0.52*** (0.01) 0.02 (0.05)

1.76*** (0.02) 0.54*** (0.01) –0.00 (0.05)

Industry instability

Firm size Industry growth rate

Tau-a Log likelihood Concordant Number of observations

1.88*** (0.02) 0.52*** (0.01) 0.09* (0.05) 0.32 25,080.83 81.8% 74,576

–7.97*** (0.13) –0.93*** (0.10) –0.73*** (0.15) 0.67*** (0.14) 0.71*** (0.07)

Industry export orientation

Control variables Wholly owned subsidiary dummy

Combined Model 4

1.68*** (0.02) 0.54*** (0.01) 0.05 (0.05) 0.33 27,065.32 83.0% 74,576

***p <0.001, **p <0.01, *p <0.05. Industry and year fixed effects are included and not shown.

0.34 28,809.40 83.9% 74,576

0.35 31,015.57 85.0% 74,576

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TABLE 4.

Export Intensity: The Overall Sample of 2002–2005 Export intensity

Independent

Firm competencies

Institutional environment

Industry factors

Combined

variables

Model 5

Model 6

Model 7

Model 8

Intercept Production cost ratio Selling and administrative cost ratio R&D intensity New product ratio Free market mechanism development Intermediate institutions development

–0.33*** (0.02) –0.63*** (0.03)

–1.68*** (0.03)

–1.26*** (0.02)

–0.16*** (0.04) 0.11** (0.04) 0.12*** (0.02)

–2.14*** (0.03) 0.46*** (0.02) –0.18*** (0.04) 0.07 (0.04) 0.13*** (0.02)

0.13*** (0.00)

0.09*** (0.00)

0.02*** (0.00)

0.02*** (0.00) 1.42*** (0.02) 0.00 (0.00)

Industry export orientation Industry instability Control variables Wholly owned subsidiary dummy

1.57*** (0.02) 0.00 (0.00)

0.56*** 0.48*** 0.48*** 0.47*** (0.01) (0.01) (0.01) (0.01) Firm size 0.13*** 0.12*** 0.12*** 0.11*** (0.00) (0.00) (0.00) (0.00) Industry growth rate 0.03* 0.02 0.01 0.00 (0.01) (0.01) (0.01) (0.01) Log likelihood –52466.28 –51240.44 –49848.68 –48146.59 Number of observations 74,576 74,576 74,576 74,576

***p <0.001, **p <0.01, *p <0.05. Industry and year fixed effects are included and not shown.

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propensity and export intensity. Therefore Hypothesis 4 is also supported. However, industry instability is not significantly associated with either export propensity or export intensity. Thus Hypothesis 5 is not supported.

Domestic Private Enterprises vs Foreign Wholly owned Subsidiaries We further conduct subgroup analysis for domestic private enterprises and foreign wholly owned subsidiaries. We present the results in Table 5. The findings suggest that firm competencies exhibit different effects on export propensity and export intensity for domestic private enterprises and foreign wholly owned subsidiaries. For domestic private enterprises, both production cost ratio and selling and administrative cost ratio have significantly negative effects on both export propensity and export intensity. Both R&D intensity and new product ratio are positively significantly related to export propensity and export intensity. For foreign wholly owned subsidiaries, production cost ratio is negatively associated with export propensity and export intensity. Selling and administrative cost ratio has a significantly negative effect on export intensity, but not on export propensity. R&D intensity has no significant effects on export behaviors. Moreover, contrary to domestic private enterprises, new product ratio has a significantly negative impact on export intensity. The results indicate that cost leadership and differentiation competencies increase export propensity and export intensity for domestic private enterprises. However, for foreign wholly owned subsidiaries, only those with cost leadership competencies have high levels of export intensity; those with differentiation competencies have low levels of export intensity. Institutional environment has significant effects on export behaviors for both domestic private enterprises and foreign wholly owned subsidiaries. The effects of industry export orientation are consistent across the two groups of firms.

TABLE 5.

Export Propensity and Export Intensity: Subgroup Analysis of Domestic Private Enterprises and Foreign Wholly Owned Subsidiaries Export propensity

Independent variables Intercept Production cost ratio Selling and administrative cost ratio R&D intensity New product ratio Free market mechanism development Intermediate institutions development Industry export orientation Industry instability Control variables Firm size Industry growth rate Tau-a Log likelihood Concordant Number of observations

Domestic Model 9

Foreign Model 10

Export intensity Domestic Model 11

Foreign Model 12

–8.97*** (0.17) –1.54*** (0.15)

–5.32*** (0.21) –0.47*** (0.13)

–3.02*** (0.05) –0.64*** (0.05)

–0.98*** (0.04) –0.43*** (0.03)

–0.83*** (0.23) 0.86*** (0.17) 1.02*** (0.08)

–0.34 (0.20) 0.54 (0.30) –0.23 (0.14)

–0.24** (0.07) 0.15** (0.06) 0.28*** (0.03)

–0.11** (0.04) 0.01 (0.05) –0.14*** (0.03)

0.38*** (0.02)

0.26*** (0.02)

0.14*** (0.01)

0.07*** (0.00)

0.04*** (0.01) 5.17*** (0.10) –0.00 (0.01)

0.06*** (0.01) 3.01*** (0.14) –0.00 (0.01)

0.01*** (0.00) 2.00*** (0.03) 0.00 (0.00)

0.01*** (0.00) 0.84*** (0.02) 0.00 (0.00)

0.61*** (0.01) 0.04 (0.06)

0.48*** (0.02) –0.00 (0.01)

0.17*** (0.00) 0.01 (0.02)

0.08*** (0.00) –0.01 (0.01)

0.26 13,724.50 80.8% 49,372

0.18 3872.79 75.2% 25,204

***p <0.001, **p <0.01, *p <0.05. Industry and year fixed effects are included and not shown.

–28,243.01 49,372

–1778.49 25,204

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Performance Implications Since firms can self-select export behaviors, performance outcomes may be affected by unobserved factors that influence firms’ export choices. We adopted a two-stage model to estimate the impact of export behaviors on firm performance to correct for the potential self-selection biases (Heckman, 1979; Shaver, 1998). We calculated the inverse Mills ratio based on the results of the first-stage probit model of firms’ export behaviors, and then included it as a regressor in the second-stage performance models. The inverse Mills ratio was statistically significant in our models, which suggests that endogeneity may be less of a concern for the performance equations. We obtained consistent results using ROA in the analysis. To further explore the relationship between export behaviors and firm performance, we divided firms into different groups based on firm competencies. We conducted factor analysis for the measures of cost leadership and differentiation competencies. As expected, the factor analysis resulted in two dimensions. We then divided firms into four groups by comparing the two factor scores with the mean levels. We reversed the factor score for cost leadership competencies in the subgroup analysis. Specifically, the pure cost leadership group scored high on cost leadership competencies and low on differentiation competencies; the pure differentiation group scored high on differentiation competencies and low on cost leadership competencies; the hybrid group scored high on both of the two competencies; and the unattractive combination group scored low on the two dimensions. We report the effects of export propensity and export intensity on firms’ ROS for different firm groups in Table 6. After controlling for the effects of firm size, industry growth rate, and industry and year fixed effects, we found that export propensity and export intensity have significantly negative effects on performance for the sample of all firms, for domestic private firms, and for foreign wholly owned subsidiaries. We then investigated the effects of export propensity and export intensity on performance for different competency groups. For both domestic private enterprises, export propensity and export intensity have negative effects on performance for the pure cost leadership group and the unattractive combination group. For instance, ROS is 0.7% lower for

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exporting firms than for non-exporting firms, and ROS is 0.007% lower with each 1% increase in export intensity (i.e., the ratio of export sales to total sales) for domestic firms in the pure cost leadership group. From a practical point of view, since the mean ROS for these firms is 3.1%, the change in the level of exporting activities clearly has a measurable effect on firm performance (ROS). The positive effect of export propensity on performance for hybrid firms turned insignificant after we controlled for self-selection bias. For foreign wholly owned subsidiaries, export propensity and export intensity have negative effects on performance for the pure cost leadership group, and export intensity has a negative effect for the unattractive combination group. For foreign firms in pure cost leadership group, ROS is 0.9% lower for exporting firms than for nonexporting firms, and ROS is 0.014% lower with each 1% increase in export intensity. Since the mean ROS for these foreign firms is 2.7%, the change in the level of exporting activities has a measurable effect on firm performance (ROS) as well. The results suggest that cost leadership competencies cannot bring about financial success from export behaviors. Plausible reasons for this performance implication will be explored in the Discussion section.

DISCUSSION Despite the critical role of institutions in emerging economies in shaping the strategy and performance of both domestic and foreign-invested firms, research on exporting by firms from emerging economies has mostly taken a low-context approach and neglected institutional environments in examining the drivers of export behaviors and performance. In our study, we aim to address this oversight by adopting the “strategy tripod” perspective (Peng, 2006; Peng et al., 2008) in investigating the factors influencing firms’ export propensity and export intensity, and their relationships with firm performance, based on 4-year longitudinal data for both domestic and foreign-invested firms. The findings suggest that only industry export orientation of the two industry factors affects firms’ export behaviors, while the institutional environments, represented by free market mechanism development and intermediate institutions development indices, are strongly associated

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All firms

Domestic private enterprises

Pure differentiation group Hybrid group

Unattractive combination group

0.010*** 0.011***

Domestic private enterprises

0.013*** 0.029***

Foreign wholly owned subsidiaries

Pure cost leadership group

0.014 0.011

0.002 0.004

Pure differentiation Hybrid group group

0.011** 0.017***

Unattractive combination group

With correction for self-selection (λ)

0.002* 0.021***

All firms

Effects on performance (ROS) for domestic private enterprises by competencies groups Export propensity 0.003*** 0.005 0.005** 0.001* 0.007*** Export intensity 0.008*** 0.007 0.006 0.020*** 0.007***

Pure cost leadership group

0.013*** 0.032***

Foreign wholly owned subsidiaries

With correction for self-selection (λ)

The Effects of Export Propensity and Export Intensity on Firm Performance: Subgroup Analysis

Effects on performance (ROS) Export propensity 0.001 0.004*** Export intensity 0.021*** 0.014***

TABLE 6.

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Pure differentiation group Hybrid group

Unattractive combination group

Pure cost leadership group

0.004 0.001

0.005 0.027**

Unattractive combination group

where Xi,t is the firm’s export propensity or export intensity and Ds,t is a vector of industry and year fixed effects. Correction for self-selection (λ) was included in the two-stage models.

ROSit = α + β1Xi,t + β2FirmSizei,t + β3IndustryGrowthi,t–1 + δDs,t + εit

0.004 0.003

Pure differentiation Hybrid group group

***p <0.001, **p <0.01, *p <0.05. The effects of export propensity and export intensity on Return on Sales (ROS) were estimated by the model:

Effects on performance (ROS) for foreign wholly owned subsidiaries by competencies groups Export propensity 0.003** 0.003 0.001 0.008** 0.009*** Export intensity 0.015*** 0.007 0.002 0.029*** 0.014***

Pure cost leadership group

With correction for self-selection (λ)

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with export propensity and export intensity. Firms with realized competencies of cost leadership and differentiation are more likely to export and have high levels of export intensity for the overall sample. However, while this holds true for domestic firms, foreign firms with differentiation competencies are found to have low levels of export intensity, and only those with cost leadership competencies have higher levels of export propensity and export intensity. Similar to previous studies (Ito, 1997; Lu & Beamish, 2001), we found that export intensity has a negative effect on ROS for the overall sample.

Contributions Our results advance the exporting literature in several ways. First, we examine whether the institutional environment affects firms’ export behaviors in emerging economies, above and beyond resource- and industry-based factors. The results confirm that the institutional environment can be regarded as a resource environment that provides firms with opportunities for conducting transactional activities (Wan, 2005). Therefore it is of critical importance to include institutional variables to investigate firm strategy and behaviors in emerging economies (Hoskisson et al., 2000; Peng et al., 2008; Wright et al., 2005). Firms in emerging economies usually seek substitutes when formal institutions are missing. Li et al. (2006) have found that the underdevelopment of market institutions stimulates entrepreneurs’ politics participation to establish good relationships with government officials, which in turn can help them deal with market failures and get preferential treatments. However, the improvement of institutional environments also provides a favorable environment for export behaviors. Comparatively, domestic firms are more capable of managing the imperfection of market institutions. For foreign firms, it is even more important to handle the complexities of the institutional environment. Foreign firms may absorb the impact of institutions through cooperation with local allies to participate in local relational systems (Child & Tse, 2001). Second, we contribute to the literature by comparing the determinants of export behaviors between domestic private enterprises and foreign wholly owned subsidiaries in China. The different competency—

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export behavior relationships among foreign firms may be due to the variations in their motivation in making foreign direct investment in China. Foreign firms that have differentiation competencies tend to make market-seeking investment due to market failure of one kind or another (Nachum & Zaheer, 2005). By contrast, foreign firms that tend to make efficiency-seeking investment are driven by the intention to spread value-added activities geographically to take advantage of factor cost differentials among countries (Nachum & Zaheer, 2005). Through making efficiency-seeking investment, foreign firms possess cost leadership competencies to help them engage in more exporting from the host country for their downstream activities in the value chain. Foreign firms often source from local firms for inputs in assembling them into manufactured goods for exporting to their home or other foreign countries (Wan, 2005). Indeed, Luo and Park (2001) have suggested that market expansion and resource seeking are often the primary goals of foreign firms that make foreign direct investment in emerging economies such as China. Third, we further investigate whether export behaviors can bring improved financial performance to firms, and test whether firms with different competitive competencies will gain differently from exporting activities. The results suggest that, for both domestic and foreign pure cost leadership groups, export propensity and export intensity are negatively associated with performance. As China has long been labeled as the world’s factory, export products from China are usually characterized as low-cost, labor-intensive, and low-priced products. Schott (2006: 14) has found that while the export similarity between Chinese and OECD exports has been increasing, “Chinese products on average sell for a discount relative to their GDP per capita and skill abundance.” According to The Economist (2007), firms in China assemble and test Apple’s iPod for export. However, the inputs account for only $3.70 of the total $224 value. Because of the low-cost and low-priced approach, exporters from China may suffer from low export margins. The RMB appreciation, rising wages, and intense competition from other low-cost countries further reduce the profit level of Chinese exporters. Therefore pure cost leadership competencies are not sufficient to compete for financial success in the export market. Indeed, Fong and Canaves (2008) have recently reported that rising costs and tighter

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regulations are making southern China, where many low-end export manufacturing firms are located, much less competitive. As a result, it is predicted that this year’s factory closures in this region is likely to be the highest in the last two decades. In response, the Chinese government has encouraged manufacturers to focus on higher-value goods (Fong & Canaves, 2008). Thus China’s exporting structure has been moving gradually from low-end manufacturing to more advanced sectors. More Chinese exporters are investing in R&D, acquiring foreign know-how, and creating their own brand names (Tschang, 2007). According to the Ministry of Commerce, ASEAN, Russia, and India have been among China’s top ten trading partners in 2006. Chinese exporters have also diversified into multiple regions of the world, and have achieved high growth in markets including Eastern Europe, Latin America, and Africa. Electronics and industrial machinery have accounted for a big proportion of the total export, especially for export to these developing countries. Some domestic exporters have become very competitive in the global market through leveraging their competitive advantages in the domestic market. For instance, Huawei Technologies, a telecom company based in Shenzhen, is a major competitor in the world’s router market, and it now also supplies handsets to Vodafone. Therefore many domestic firms are combining their cost leadership and differentiation competencies to compete in the export market and achieve better performance. The significant effect of export propensity on firm performance for domestic hybrid firms (i.e., domestic firms with both cost leadership and differentiation competencies) turned insignificant after we included correction for self-selection. Nonetheless, we believe switching from pure cost leadership approaches represents the future direction of development for domestic firms in China, as many Chinese firms are in a state of transition from emphasizing low-cost strategy to building differentiation competencies. Aulakh et al. (2000) have found that export ventures from emerging economies can improve performance through using cost leadership strategy in developed economies and differentiation strategy in developing economies. Our study did not capture the positive effect of cost leadership strategy at an aggregate level, and the lack of target country data in the database prevented us from exploring in this direction.

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Limitations and Future Directions Our study is subject to several limitations, which also represent fertile avenues for further research in the exporting field. First, we measured firms’ realized competencies based on secondary data. Therefore we could not investigate how managerial skills and organizational knowledge may help firms utilize competencies to achieve better performance. It will be interesting to examine how firms implement selected strategies in the export market. Second, a related issue is that we cannot use multiitem measures for the constructs in our study, owing to the limitation of employing secondary data. Further research could combine both secondary and primary survey data to obtain convergent and more powerful results (Tan & Peng, 2003). Third, we examined the impact of resource-, institution-, and industry-based variables on firms’ export behaviors in China. Those variables are not exhaustive. Although the restriction of direct export rights has been removed, many domestic Chinese exporters still employ export intermediaries, owing to their limited expertise in the export market. Future research can further examine the impact of the capabilities of export intermediaries on firms’ export behaviors (Peng & York, 2001). Similarly, we did not investigate the influence of corporate governance dimensions on export behaviors (Filatotchev et al., 2001). The dynamic and fast-changing institutional environment in China provides an excellent research context to investigate this issue. For instance, it will be worthwhile to examine how the reform and privatization of SOEs in China and the associated change in governance structure transform firms’ behaviors in the export market. Fourth, it will be a very promising direction to explore the interactions of resource-, institution-, and industry-based variables and examine how they jointly shape firms’ strategies and performance. Finally, the data do not contain information about target export countries of firms. Consequently, the models did not include important factors including host country institution, cultural distance, and export restrictions. Future studies in this direction can further extend our understanding of firms’ export behaviors in emerging economies.

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CONCLUSION In this study, we adopt a “strategy tripod” perspective in integrating the impact of the resource-, institution-, and industry-based factors on firms’ export propensity and export intensity with performance implications. We found that the institutional environment provides strong explanatory power, above and beyond the firm- and industry-based factors, thus shedding new light on firms’ export behaviors in emerging economies. We also found important differences in the export behaviors of domestic and foreign firms. While both cost leadership and differentiation competencies are positively related to export propensity and export intensity for domestic firms, foreign firms with differentiation competencies have lower levels of export intensity. Finally, exporting does not always improve performance for firms: those firms that do not possess distinct firm competencies, and those that have only cost leadership competencies, do not obtain financial benefits from exporting.

ACKNOWLEDGMENTS We thank the Special Issue Editor Mike W. Peng and the three anonymous reviewers for their insightful and constructive comments. We acknowledge support from the Center for International Studies at the University of Missouri-St Louis and the National Social Science Foundation of China (08CJL024).

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ABOUT THE AUTHORS Gerald Yong Gao is Assistant Professor of Marketing at College of Business Administration, University of Missouri-St Louis. He received his PhD degree in marketing from the University of Hong Kong. Born in China, he is a Chinese citizen. His current research interest includes market entry strategy, export performance, and strategic orientation. He can be reached at [email protected].

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Janet Y. Murray is E. Desmond Lee Professor for Developing Women Leaders and Entrepreneurs in International Business and Professor of Marketing at the College of Business Administration, University of Missouri-St Louis. She received her PhD degree in marketing and international business from the University of Missouri-Columbia. She was born in Hong Kong and is a US citizen. Her research interests include international marketing, global sourcing strategies, strategic alliances, and strategies in emerging markets. She can be reached at [email protected]. Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected] Jiangyong Lu is Associate Professor of Strategic Management at Guanghua School of Management, Peking University, Beijing, China. He received his PhD degree in economics and business strategy from the University of Hong Kong. Born in China, he is a Chinese citizen. His current research interest includes privatization of state-owned enterprises, and export and outward direct investment strategy of Chinese firms. He can be reached at lujiangyong @gsm.pku.edu.cn.

Chapter 2.3

Export Strategies and Performance of Firms from Emerging Economies Evidence from Brazil, Chile, and Mexico* Preet S. Aulakh, Masaaki Kotabe, and Hildy Teegen

This study develops a framework for examining the export strategies of firms from emerging economies and their performance in foreign markets. Hypotheses derived from this framework were tested on a sample of firms from Brazil, Chile, and Mexico. Findings suggest that cost-based strategies enhance export performance in developed country markets and differentiation strategies enhance performance in other developing countries. Adapting marketing mix variables to the specific needs of developed country markets also enhances export performance. The relationship between geographical diversification and export performance is nonlinear.

* The authors sincerely acknowledge Maria Cecilia Coutinho de Arruda (Fundação Getúlio Vargas, São Paulo, Brazil) and Roberto J. Santillán Salgado (Instituto Tecnologica y de Estudios Superiores de Monterrey, Monterrey, Mexico) for their herculean efforts at accessing companies and collecting data from them, in Brazil and Chile, respectively.

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The globalization of the business environment in recent years has made it imperative for firms to look for foreign market opportunities in order to gain and sustain competitive advantage. Trade and market liberalization policies around the globe in the last two decades, especially in the erstwhile closed economies of Asia, Eastern Europe, and Latin America, provide new market, investment, and sourcing opportunities for multinational firms (Garten, 1997). Concurrently, firms from emerging economies are a growing presence in an integrated global economy. Reinforced by the success of firms from newly industrialized countries such as South Korea, Taiwan, and Singapore, emerging economies are moving away from inward-oriented import substitution policies toward outward-oriented export-led growth (Kotler, Jatusripitak, & Maesincee, 1997). Thus, public policy instruments in emerging economies are increasingly geared to providing incentives for local firms to actively internationalize and compete in foreign markets (Kotler et al., 1997). The international expansion of private enterprises from an emerging economy is primarily accomplished by manufacturing in the home country and exporting products to foreign markets (Vernon-Wortzel & Wortzel, 1988). In fact, the pattern of foreign expansion of these firms follows the prescriptions of both the internationalization (Johanson & Vahlne, 1977) and international product life cycle (Vernon, 1966) models: firms first expand into foreign countries through exporting and, with increased market knowledge, escalate commitments in the form of more investment-oriented entry modes. Given that a majority of firms from emerging markets are still in the early stages of the internationalization process, with exporting being the dominant mode of their foreign market participation, an important research issue is what strategies these enterprises pursue as they compete in the global competitive landscape. However, there have been few systematic studies of the export strategies followed by firms from emerging economies and the performance implications of those strategies (Dominguez & Brenes, 1997). The few studies that exist have examined the internationalization process of developing country firms (e.g., Vernon-Wortzel & Wortzel, 1988), the relationship between organizational characteristics and export performance (e.g., Christensen, Rocha, & Gertner, 1987; Dominguez & Sequeira, 1993), or the links between macro policy initiatives, trade

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liberalization, and economic development at the country level (Otani & Villanueva, 1990). In the contemporary environment of market and trade liberalization, the importance of private enterprises in emerging economies as engines of outward-oriented growth necessitates an examination of their export strategies for building competitive advantage in foreign markets. The purpose of this study was to provide an understanding of the export strategies of firms from emerging economies. In particular, we developed a framework by incorporating the different strategies available to exporting firms as they compete in foreign markets and linked those strategies to export performance. A set of hypotheses was generated from this overall framework and empirically tested on a sample of firms from three key Latin American countries—Brazil, Chile, and Mexico. Latin America, comprising Mexico and countries from Central and South America, is home to about 500 million people. The region, with an average per capita gross national product (GNP) of about $3,000, represents one-third of the developing world’s economy (Dominguez & Brenes, 1997). According to Kotler, Jatusripitak, and Maesincee, Latin American countries represent a distinct strategic group with “shared histories (e.g., import substitution), common problems (e.g., inflation), and same solutions (e.g., foreign debts)” (1997: 95). Although most of the countries in the region have always participated in international trade, much of this trade activity was in commodity products like oil, copper, and cocoa, owing to the region’s natural resource endowments. Furthermore, most of this trade was managed by state-owned enterprises, and the limited activity in the manufacturing sector was guided by import substitution policies, under the assumption that the sizes of domestic markets and endowments of natural resources were sufficient to support industrialization (Dominguez & Brenes, 1997; Kotler et al., 1997). However, existing economic models of reliance on natural resources and state-owned enterprises in a protectionist environment grew to be no longer feasible. Consequently, a number of Latin American countries instituted drastic reforms in the 1980s and 1990s,1 including

1

Chile was an exception as it initiated liberalization in 1973.

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privatization of state-owned companies and an increased role for private enterprises in fostering economic growth, opening domestic markets to foreign competition to bring in capital and new technologies and provide high-powered incentives for efficient enterprises, policy initiatives to invigorate noncommodity and higher-value-added industries, and emphasis on export-led growth. Although an objective of these economic reforms was to emulate Asia’s export-led growth policies, liberalization in Latin American is distinct on two dimensions. First, the contemporary international liberal trade regime makes it difficult to implement export-led growth through partially protecting key industries, as did Japan and South Korea. Second, given that liberalization policies have been initiated around the globe since the 1980s, the international environment is much more competitive than the one faced in the 1970s by the Asian “tigers,” thus making it difficult for firms to compete in the global marketplace solely on the basis of comparative cost advantages in labor and natural resources. Thus, we see examples of increased international participation of Latin American firms in different industries through emphasis on competitive advantages built around manufactured products, strategies based on product, service, and price differentiation, and participation in value-adding activities (Dominguez & Brenes, 1997). Since Latin American firms are competing with firms from developed countries in both domestic and international markets, an understanding of their strategies and performance can provide important insights into management thought and practice in the contemporary global environment. Accordingly, we chose three major countries of Latin America as contexts within which to explore these strategy-performance links.

EXPORT PERFORMANCE: LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK Numerous researchers have examined the strategies and performance aspects of multinational corporations (MNCs), and this collective effort has enriched relevant theory, but relatively few conceptual advances have been made regarding firms whose international participation is primarily through export operations. The few studies examining the behavior and

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performance of exporting firms have primarily identified management characteristics and attitudes (for instance, experience in foreign markets, cultural orientation, risk-taking propensity), firm characteristics (firm size, international experience), and product, industry, and export market variables as key factors in explaining export initiation and performance (e.g., Aaby & Slater, 1989, Rosson & Ford, 1982). Furthermore, these studies contain diverse export performance measures, including propensity to export (Rosson & Ford, 1982), attitudes toward exports, export sales level (Madsen, 1989), and export involvement (Diamantopolous & Inglis, 1988). The diversity both of conceptualizations of determinants of export performance and of performance measures has led to inconsistent and contradictory findings and lack of a coherent theoretical framework for exporting firms (Aaby & Slater 1989). We sought to develop a framework incorporating the various strategic factors relevant to exporting firms as they compete in the international arena and linking these factors to the firms’ performance in foreign markets. In developing the hypotheses, we incorporated the special challenges faced by exporting firms from emerging economies. The main logic underlying our framework is that although organizational characteristics and managerial risk perceptions have been shown to impact internationalization behavior (the decision to initiate exports), the current global competitive environment necessitates proactive application of specific export strategies to achieve success in foreign markets.2 We incorporated three distinct strategic factors into our framework to explain export performance: the competitive strategies of cost leadership and differentiation, marketing standardization (or adaptation) across foreign markets, and geographical diversification of exports. There is some conceptual ambiguity in the literature as to whether these are business-level or corporationwide strategies. Since we viewed these factors in the context of exports of single or a few product offerings, we examined the strategies at the level of export operations. Thus, we investigated whether strategies of cost leadership, differentiation, marketing standardization, and geographical diversification by firms in 2

Firm characteristics (size and experience) were used as control variables in our analyses. However, management characteristics were not included in this study either as determinants of export performance or as control variables.

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their export operations affected export performance. In this context, we did not distinguish between business- and corporation-level strategies but saw their applicability as export strategies. The strategies of cost leadership and differentiation concern how a firm develops an advantage with respect to competitors in an industry. Firms following a differentiation strategy aim at creating a product or service that customers see as unique. This is usually accomplished through such means as a superior brand image (an example is Rolls Royce automobiles), technology (Polaroid cameras), customer service (Saturn cars), or innovative products (Rubbermaid) (Miller & Friesen, 1986a). The objective of firms following a differentiation strategy is to build customer loyalty and create barriers to entry for newcomers. Because of the loyalty created for a brand, demand is price-inelastic, leading to higher profit margins for the manufacturer. A cost-leadership strategy involves giving consumers value comparable to that of other products at a lower cost (Porter, 1986). According to Porter, cost leadership requires “aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, . . . and cost minimization in areas like R&D, service, sales force, and advertising” (1980: 35). This strategy can provide above-average returns because firms following cost leadership can lower prices to match those of competitors and still earn profits (Miller & Friesen, 1986b).3 Marketing standardization was defined in this study as the degree to which an exporting firm used the same marketing programs in different foreign markets (Samiee & Roth, 1992). At one extreme, an exporting firm can develop marketing programs that differ in terms of products, pricing, distribution, and promotion for individual foreign markets. On the other hand, a firm can develop one marketing program, which is then implemented in all export markets. As a strategy, marketing standardization is similar to the segment differentiation strategy proposed by

3 Porter (1980) identified a third generic strategy, focus, that involves serving a specialized segment more effectively or efficiently than competitors who are competing more broadly. We incorporated only the individual and interactive effects of the cost leadership and differentiation strategies because a focus strategy involves achieving low cost or differentiation, or both (Govindarajan, 1988; Karnani, 1984).

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Chrisman, Hofer, and Boulton (1988), with a segmented-by-market approach being akin to adaptation and a homogenous-across-markets approach equivalent to standardization (Carpano, Chrisman, & Roth, 1994; Douglas & Wind, 1987; Porter, 1986). It should be noted that marketing standardization is distinct from cost leadership and differentiation. The latter relate to a firm’s posture with respect to competitors, but marketing standardization concerns the consistency of marketing programs and processes between domestic and foreign markets as well as across multiple markets. Thus, it is possible for firms pursuing cost-leadership or differentiation-based competitive strategies to implement either standardized marketing programs or to adapt their programs to individual markets.4 The third component of strategy considered in this study was export diversification. The number of foreign markets that an exporting firm targets is a strategic choice that can have important implications for the firm’s overall export performance. Although the costs and benefits of MNCs’ international diversification through foreign direct investment have been well documented (e.g., Carpano et al, 1994; Hitt, Hoskisson, & Kim, 1997; Geringer, Beamish, & daCosta, 1989; Kim, Hwang, & Burgers, 1989; Tallman & Li, 1996), the performance impact of export

4

For example, an exporting firm following a differentiation strategy in foreign markets can use different or similar tools to convey this differentiation in different countries. In one country, it can differentiate its products on prestige aspects, through higher pricing and distribution in luxury boutiques, for instance. In another, it can differentiate on service aspects, through distribution via an in-home sales force. In this case, although the exporter is using a differentiation strategy in both markets, it is adapting its marketing program specifically for each market. A second issue regarding marketing standardization versus adaptation concerns links to the global versus multidomestic approaches identified in the strategy literature. Global strategy deals with management of globally dispersed value chains; a multidomestic strategy refers to complete value chain management on a country-by-country basis. Product/marketing standardization has some bearing on, but is not synonymous with, the global/multidomestic strategy dichotomy. For example, Ford and Honda both use global platform strategies. Ford brings major components from several key plants around the world to produce standardized cars with identical product positioning. Honda designs its globally standardized Accord with inputs coming from Japan, the United States, and Germany, but its market positioning is adapted to individual markets.

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diversification has not been examined. In the next section, we identify the costs and benefits of geographical diversification for exporting firms and examine its performance implications. Existing research examining the links between competitive strategies and performance has suggested both direct and contingency effects. For instance, Miller and Friesen (1986b) found that firms following any of the three generic strategies outperformed those that did not follow any one strategy; Dess and Davis (1984) suggested that firms following “pure strategies” outperformed those “stuck in the middle”; and Miller (1988) discovered that the performance impact of generic strategies was contingent on environmental factors (cost leadership worked better in stable environments, but differentiation was positively related to performance in volatile environments). The marketing standardizationperformance links have also been examined in prior research, and findings have been inconsistent and often contradictory. For instance, studies have found no effects of standardization on performance (Samiee & Roth, 1992), weak links (Carpano et al., 1994), negative effects (Cavusgil & Zou, 1994), and positive effects (Kotabe, 1990). Since research findings on the performance implications of standardization and adaptation are mixed, this relationship may conceivably be moderated by different environmental factors. In light of the above discussion, we examined the export strategy— performance relationships of emerging economy firms within a contingency framework based on the foreign market environments in which these firms compete. The important environmental factors relevant here, which have found some support in the context of developed markets, are competition and environmental uncertainty, with its underlying dimensions of dynamism and instability. Given that the firms in our sample were competing in numerous countries, each with different levels of competition and uncertainty, and our focus was the impact of export strategies on overall export performance rather than the strategies’ impact in individual markets, we used a surrogate measure for environment. Accordingly, we incorporated a foreign market focus variable into our framework, dichotomized into developed countries and developing countries. The rationale here was that, compared to developing country markets, developed country markets are more competitive, with large numbers of resource-endowed competitors and

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demanding consumers, and are more dynamic, with frequent changes in consumer tastes and introductions of innovative products and services. Differences between the competitive conditions in developed and developing markets, combined with the internal resource constraints of exporting firms from emerging economies, will lead to differing effects of cost leadership, differentiation, and marketing standardization strategies on performance for firms that compete primarily in developed countries and those focusing on developing countries.

HYPOTHESES Cost Leadership, Differentiation, and Export Performance As firms from emerging economies begin to compete in export markets in the value-added manufacturing and service sectors, their export success depends upon their ability to develop and implement unique competitive strategies. When developing strategies of cost leadership and/or differentiation, these firms have to match their internal and location-specific competitive and comparative advantages with the requirements of the external environment in which they compete. In particular, given their relatively weak technology bases, these firms concentrate primarily on mature products (Gomez, 1997; VernonWortzel & Wortzel, 1988), thus precluding any competitive advantage derived from developing innovative products and/or process technologies. However, firms from emerging economies possess certain comparative advantages in terms of low labor and production costs. The fundamental issues in developing competitive export strategies for emerging economy firms then become the following: (1) Given their natural cost advantages, should they use cost leadership as their primary competitive strategy in foreign markets? (2) Since they do not have innovative products, can these firms differentiate their products along other dimensions in foreign markets and thus make differentiation their competitive weapon? (3) Is it viable for these firms to use an integrated strategy whereby they simultaneously achieve cost leadership and differentiation? We examine the viability of emerging economy

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firms’ use of individual and integrated competitive strategies and their performance implications in the following paragraphs. Our argument is that emerging economy firms encounter different competitive and customer environments for their products in developed and developing markets that require them to adapt their competitive strategies to the specific needs of the two types of markets. In particular, a cost-based strategy is more likely to achieve superior performance in developed country markets, and differentiation is more likely to do so in developing countries. Developed country markets are characterized by competition (due to a history of free market economic philosophies and to the presence of both large numbers of resource-endowed firms competing in particular product markets and demanding customers) and by dynamism (due to the continuous introduction of innovative products and the frequent changes in customer tastes and preferences). Emerging economy firms exporting to these markets are at a disadvantage with respect to local firms because the latter have more financial, managerial, and technological resources, established brands, and innovative products. Furthermore, a number of studies (e.g., Cordell, 1993) have shown that consumers in developed markets perceive products and brands from developing countries negatively and generally equate them with low price and quality. Taken together, the poor quality image, focus on mature products, and resource-rich competitors make it very difficult for emerging economy firms to build advantage by differentiating their products and services. Emerging economy firms, however, do have cost advantages over competitors from developed countries. Although liberalization of trade and investment around the world in the last two decades has led to a partial expropriation of these cost advantages, since multinational corporations with established brands can locate their production facilities in emerging markets, domestic emerging economy firms still enjoy overall cost advantages relative to developed country firms. These advantages stem from emerging economy firms’ lower R&D, product development, and marketing costs, in turn resulting from a concentration on mature products and the absence of elaborate expenditures in brand development and other areas. Thus, emerging economy firms are more likely to achieve success in developed countries by pursuing a cost-based strategy that allows them to leverage

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comparative cost advantages. Further, a low cost-low price strategy is compatible with consumer perceptions and expectations of products made in emerging economies. The characteristics of markets in developing countries are different from those in developed countries. Developing countries have traditionally had protected economies. Protectionist environments, coupled with control by state-owned enterprises of much of these economies, led to situations in which consumers either faced shortages of various products or had limited choice sets to buy from. Because of these factors, the competition within product markets was low, and pentup demand for various types of products was substantial (Arnold & Quelch, 1998; Gillespie & Alden, 1989). Thus, developing countries provided tremendous opportunities for foreign products once their markets were liberalized. In the context of this study, the question then is, What competitive strategy will lead to superior performance on the part of emerging economy firms in other developing countries? Firms from emerging economies do not have any particular cost advantage visà-vis other developing economy firms, since marginal differences in costs would probably be negated by transportation costs and the remaining tariff and non tariff barriers. Therefore, a cost-based strategy may not be very effective in developing countries. On the other hand, emerging economy firms can differentiate their products and services from local competitors’ to build advantage. Research suggests that consumers in developing countries perceive foreign-made products (from both industrialized and developing countries) to be of superior quality and are willing to pay a price premium over domestically made products (Hulland, Todino, & Lecraw, 1996). This observation suggests that emerging economy exporters can leverage positive consumer perceptions by differentiating their products on the country-of-origin dimension and can, over time, build enduring brand reputations. Furthermore, the cost of implementing a differentiation strategy will be lower in developing countries than in developed countries since the former are less competitive markets with fewer entrenched local competitors having established brands or other reputations. In view of the above arguments, we suggest contingency relationships between competitive strategies and export performance—specifically, that the effectiveness of cost leadership and differentiation strategies will

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depend on the types of foreign markets in which they are implemented. Accordingly, we tested the following contingency hypotheses: Hypothesis 1. The use of a cost leadership strategy is more likely to enhance export performance for firms that have a developed country focus than it is for those that have a developing country focus. Hypothesis 2. The use of a differentiation strategy is more likely to enhance export performance for firms that have a developing country focus than it is for those that have a developed country focus. Porter (1980, 1986) argued that although firms could pursue both strategies successfully under certain conditions, such an approach could not be sustained, given each strategy’s requirements (high R&D and advertising expenditures for differentiation versus scale and scope economies and low overhead for cost leadership). Thus, Porter suggested that “a firm must make a choice between [the two generic strategies] . . . as achieving cost leadership and differentiation are usually inconsistent, because differentiation is usually costly” (1985: 17–18). However, a few studies, using U.S. samples, have identified successful firms pursuing both cost leadership and differentiation (e.g., White, 1986). Hill also addressed the issue, writing this: “Porter’s model is flawed in two important respects. First, differentiation can be a means for firms to achieve an overall low-cost position. Hence, . . . cost leadership and differentiation are not necessarily inconsistent. Second, there are many situations in which establishing a sustained competitive advantage requires the firm to simultaneously pursue both low-cost and differentiation strategies” (1988: 401). Similarly, Karnani (1984) identified numerous contextual factors that affect the ability of firms to successfully implement both strategies. Thus, both empirical evidence, mainly in the context of U.S. firms, and theoretical advances suggest that firms can and may need to implement an integrated strategy whereby they simultaneously differentiate and lead on cost (Hitt, Ireland, & Hoskisson, 1997). We examine the viability of emerging economy firms’ pursuing both cost leadership and differentiation. The argument put forth here is that a combination of factors related to the nature of the products exported

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by firms from emerging economies as well as to weak resource bases will make implementing an integrated strategy very costly and thus negatively impact export performance. In order to support our rationale, we briefly review the work of Hill (1988) and Karnani (1984). Hill (1988) suggested that pursuing both cost leadership and differentiation can lead to superior performance when a firm can push the demand curve outward (by increasing expenditures on differentiation) but can at the same time ensure that the shift in the cost curve is smaller than the demand curve movement. He identified certain factors that will help firms accomplish this dual task: ability to differentiate, a competitive product market, switching costs for consumers, economies derived from learning, and economies of scale and scope. Similarly, Karnani (1984) pointed out that firms can achieve lower costs, independent of scale, that can allow for simultaneous achievement of both cost leadership and differentiation. Although space does not permit us to provide a point-by-point discussion of the arguments put forth by Hill and Karnani, we would argue that some of the important conditions for successful implementation of these strategies that they identified do not hold for emerging economy firms. In particular, economies of scope and learning effects are not relevant, as most firms from emerging countries have narrow product lines, thus precluding the possibility of reducing costs by sharing resources across multiple products. Second, these firms concentrate on products that are in the growth and maturity stages and thus do not allow them to leverage steep learning curves to reduce costs faster than competitors. Third, their relative lack of experience in foreign markets and poor resource bases, relative to those of competitors from developed countries, put them at a competitive disadvantage, making it very costly for them to pursue both cost leadership and differentiation. Thus, a combination of these product-, experience-, and resource-related factors prevents emerging economy firms from effectively employing an integrated strategy in foreign markets. We tested these arguments through the following hypothesis: Hypothesis 3. The simultaneous use of both cost leadership and differentiation strategies by firms from emerging economies is negatively related to their export performance.

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Marketing Standardization and Export Performance Yip (1992) and Samiee and Roth (1992), among others, have identified a number of benefits of using a standardized approach across foreign markets. First, substantial cost savings are realized by developing one or a few marketing programs and implementing these in multiple markets. Second, marketing program effectiveness is increased as firms can concentrate more resources behind standardized programs. Third, consistency of a marketing program (in terms, for instance, of products and advertising) across markets avoids confusion in the minds of consumers and builds brand awareness among consumer segments. Fourth, a standardized approach allows firms to quickly enter new markets and reduces the costs of simultaneously entering multiple markets. But although firms can build competitive advantage by standardizing marketing programs across markets, this approach also has limitations that explain the inconsistent and somewhat contradictory findings regarding the performance impact of standardization (Samiee & Roth, 1992). Probably the biggest drawback is related to implementation. In the case of multinationals, there is evidence that subsidiary managers responsible for marketing can be reluctant to give full support to standardized programs dictated by headquarters (Kotabe, 1992), since they perceive encroachment on their autonomy. This issue becomes even more critical for exporting firms, where marketing programs are implemented by independent distributors who tend to favor their own distinct strategies grounded in local conditions. Furthermore, exporting firms have lower bargaining power with local distributors than established MNCs. Besides the implementation difficulties, cultural, political, and economic constraints in individual markets may make it difficult for a firm to develop a standardized strategy acceptable to various country segments (Douglas & Wind, 1987). In addition, research suggests that the success of a standardized approach is contingent on the nature of the industry within which a firm competes, with global industries being more amenable to standardization than multidomestic ones (Porter, 1986). To achieve the benefits of a standardization strategy, firms can follow two possible approaches. First, they can extend marketing programs

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developed for domestic markets into foreign countries. This approach is viable for firms with established brand names that are appealing to similar segments in different countries. Second, firms can proactively develop global products and programs by incorporating the diverse preferences of consumers and other external factors from various countries (the World Car approach of Ford Motor Company is an example). This action usually involves high R&D and marketing costs, high involvement of individual subsidiaries in different markets, global coordination of marketing and production, and long lead times (Kotabe & Helsen, 1998). In essence, both approaches require a combination of facilitating conditions (established global brands, intermarket segments, resources with which to develop global programs, and so forth) to be present for firms to achieve the benefits of standardization. The relevant issue in the context of this study was whether emerging economy firms have these needed facilitating conditions. As mentioned earlier, most emerging economy firms have relatively low resource bases, lack branded (or at least, globally branded), mature products, and lack experience in foreign markets. Furthermore, since most of these firms are in the early stages of internationalization, they are not likely to have subsidiaries in foreign markets. These characteristics make it difficult for emerging economy firms to implement a standardized marketing strategy either by extending their domestic marketing programs to foreign countries or by proactive development of globally standardized products and programs. In addition, research on exporting (the primary mode of emerging economy firms’ international participation) suggests that exporters are more likely to achieve superior performance in foreign countries by adapting elements of their marketing to the needs of individual markets (Cavusgil & Zou, 1994), since the market-oriented approach (adaptation) outweighs the cost savings of a standardization strategy. We hypothesize that, although exporters from emerging economies can realize some inherent benefits of standardization (lower marketing costs, speed-to-market advantages, and so forth), given their lack of experience in foreign markets (which makes it difficult for them to proactively incorporate heterogeneous consumer preferences into standardized offerings) and low bargaining power with respect to local distributors (undermining implementation), they are more likely to achieve success by adapting their marketing

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strategies in individual markets, especially during the early stages of international expansion. Thus, we propose the following: Hypothesis 4. The degree of marketing standardization across foreign markets by firms from emerging economies is negatively related to their export performance. Although we expected a negative impact of standardization on export performance, it appeared likely that this association would be stronger in developed countries. First, the market conditions in developed countries are very different from those faced by emerging economy firms in their domestic markets. Owing to the cultural distance (Kogut & Singh, 1988) between developing and developed countries and the competitive environments of the latter, exporting firms from emerging economies have to modify their marketing mixes to be successful in developed country markets. On the other hand, emerging country firms face economic and infrastructure conditions similar to those at home in other developing countries. The low cultural distance and pent-up consumer demand in developing countries puts less pressure on exporters to adapt their marketing programs and allows them more leverage in terms of extending their domestic programs into other developing country markets. Thus, Hypothesis 5. The negative relationship between marketing standardization and export performance is stronger for firms with a developed country focus than for those with a developing country focus.

Export Diversification and Export Performance Strategic management and international business researchers have examined the impact of international diversification strategy on firm performance (e.g., Geringer et al., 1989; Hitt, Hoskisson, & Kim, 1997; Kim et al., 1989; Tallman & Li, 1996). These researchers argue that diversification into a foreign market from a firm’s home base or across multiple markets allows the firm to build and sustain competitive

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advantage by attaining economies of scale and scope, achieving synergies across geographically dispersed locations, arbitraging across individual country markets, and leveraging ownership, internalization, and location advantages, among others (Dunning, 1988; Hitt, Hoskisson, & Kim, 1997). Empirical studies have supported the performance implications of international diversification. For instance, Kim, Hwang, and Burgers (1989) found a linear effect of international diversification on performance, and Hitt, Hoskisson, and Kim (1997) found an inverted U-shaped relationship, whereby very low levels of international diversification were insufficient to allow for any synergy gains, moderate levels of international diversification enhanced performance, and very high levels of diversification were detrimental, as costs started outweighing potential benefits. Both of these studies, as well as Tallman and Li (1996), showed interactive effects between international and product diversification on firm performance. Although these studies used different diversification and performance measures, the theoretical rationales and empirical findings of all three point toward international diversification as an important strategic variable for building and sustaining competitive advantage. However, most of the literature on international diversification has focused on large multinational corporations and examined diversification in terms of dispersion of value-chain operations across multiple markets accomplished through foreign direct investment. In fact, the main theoretical arguments made for the advantages of geographical diversification stem from internalization theory (Buckley & Casson, 1976), Dunning’s eclectic paradigm (1988), and the organizational learning perspective (Kogut & Zander, 1993), all of which imply that foreign direct investment allows firms to exploit firm-specific ownership and internalization and country-specific location advantages to develop knowledge about foreign markets. Thus, existing studies do not provide insights into whether diversification advantages will accrue to firms that are not involved in foreign direct investment. This is a crucial issue for a large number of emerging economy firms whose primary mode of foreign market participation is exporting. Furthermore, internationalization models (Johanson & Vahlne, 1977) suggest that firms follow a sequential path of international involvement, first expanding abroad through low-risk entry modes such as exporting. Since firms from emerging

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economies are still in the early stages of internationalization (Dominguez & Sequeira, 1993; Vernon-Wortzel & Wortzel, 1988), they are likely to export products from their home bases rather than engage in foreign direct investment. The primary issue for these firms is to determine the number of countries they will export their products and services to (their level of export diversification) and the impact diversification will have on export performance. For exporting firms, the main benefits of export diversification arise from four sources. First, exporters face much higher exchange rate exposure than multinational corporations since their costs are in one currency and revenues from product sales come from the foreign market currency. This leads to high transaction risk, given that exchange rates (especially in emerging economies) are volatile and futures foreign exchange markets do not exist for certain currencies. Thus, a major benefit of export diversification is minimization of transaction risks by trading in multiple currencies (Dominguez & Sequeira, 1993). Second, firms can increase market coverage for their products and services by targeting similar customer segments across countries. This advantage of export diversification is particularly strong for firms whose products are targeted to very narrow market segments. For such a product, the potential market in any one country is saturated very quickly, and the only way to expand the size of the market is to target like segments in different countries. Third, and related to the above, are the scale advantages of export diversification. Government export promotion programs in a number of emerging economies are targeted to increase export sales and, thus, firms develop products especially for export markets. Here, the only way to achieve scale advantages is to increase foreign sales, which is accomplished by simultaneously targeting a number of foreign markets. Fourth, according to the organizational learning perspective expounded by Kogut and Zander (1993) and internationalization theory (Johanson & Vahlne, 1977), exporting firms can leverage their accumulated knowledge of one country to target other economically and culturally similar foreign markets. The above discussion suggests that exporting firms can achieve and leverage their competitive advantages by targeting multiple foreign markets for their products and services. Exporting firms also face challenges of diversification similar to those faced by multinational corporations (Hitt, Hoskisson, & Kim,

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1997). First, increased geographical diversification increases the coordination costs of managing export operations. Cavusgil and Zou (1994) and Madsen (1989) suggested that important determinants of export performance are the amount of support provided to foreign distributors and the commitment shown to individual export markets. Thus, increased geographical diversification can spread managerial resources thinly across markets, reducing ability to support the marketing programs of foreign distributors. Second, as Hitt, Hoskisson, and Kim (1997) noted, geographical diversification increases both managerial information-processing needs, because managers must deal with culturally diverse markets, and transaction costs, which arise from the different tariff and nontariff barriers faced in different countries. The above discussion suggests that an exporting firm has to determine its optimal level of export diversification, the point where the benefits exceed the costs. The optimal point will be a function of the resource base of an individual firm and, to a certain extent, of the product type (Madsen, 1989), but in general we expected a nonlinear relationship between export diversification and export performance. Thus, our prediction, which is in line with Hitt, Hoskisson, and Kim’s (1997) findings about the international diversification of multinational corporations, is that increased export diversification will lead to higher performance until a certain point, after which the costs of diversification outweigh the benefits, thus reducing export performance. Thus, Hypothesis 6. The relationship between the export diversification of firms from emerging economies and their export performance has an inverted < shape; the slope is positive for moderate levels of export diversification but negative for high levels of export diversification.

METHODS Setting and Instrument Design Data for this study were simultaneously collected from firms in Brazil, Chile, and Mexico during the period October 1996 through May 1997. A survey methodology was considered appropriate as relevant published

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data were either not available in these emerging markets or did not capture the specific variables of interest. An instrument was first designed in English that included questions related to the characteristics of the responding firms, different types of strategies followed in foreign markets, and aspects of export performance. After finalizing the English version, we translated the questionnaire into Spanish and Portuguese. The back-translation technique was used to accomplish item equivalence in different languages. Subsequently, similar procedures were used to translate both the Spanish and English versions into Portuguese. The Spanish and Portuguese versions were content-analyzed by academics in Brazil, Chile, and Mexico to ensure the suitability of the items in the respective business settings. Subsequently, three versions of the questionnaire were finalized, one each for Brazilian, Chilean, and Mexican firms.

Data Collection The target sample in each country was local firms—that is, firms that were not subsidiaries of foreign multinationals—that were involved in international operations. Since the primary objective of this study was to examine the determinants of export performance, the survey included questions related to export activities.5 The actual data collection procedure varied by venue, given particular limitations and opportunities within each country. As no single master directory of internationally oriented firms existed for any of the venues, various sources were used in each country, including chambers of commerce, published directories, and business school contacts.

5 The assumption made in this study is that since firms from emerging markets are relative novices in foreign markets (especially for noncommodity manufactured products), they are more likely to participate in foreign markets through exports than to use other investment modes. To verify the validity of this assumption, we asked how many foreign countries the responding firms had manufacturing operations in. Of the 228 firms that responded to this question, 212 (or 93%) reported that they manufactured in just their home countries.

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Brazil. Initially, 357 firms were selected as the target sample. These firms were first contacted via phone calls (a total of 1,200 calls were made) during which the caller explained the nature of the study and asked for the name or names of those in charge of the company’s export operations. Of the 357 firms, 294 were effectively contacted. In the second stage, 294 questionnaires were mailed out to these firms. However, soon after the mailing, there was a nationwide postal strike and sabotage, and numerous firms did not receive the questionnaire. Hence, some surveys had to be hand-delivered or faxed to potential respondents. A total of 93 surveys were returned, out of which 80 were complete, for an effective response rate of 27.2 percent. Chile. The target sample consisted of 180 manufacturing firms that traded on the Bolsa de Comercio de Santiago. Given concerns of local researchers about the feasibility of mail surveys, only 40 questionnaires were initially sent through the mail. After two reminders and extensive telephone followups, only 3 questionnaires had been returned. Subsequently, master’s of business administration (M.B.A.) students at a prominent local university were asked to contact the firms in person and get questionnaires filled out. These students hand-delivered the surveys and collected them after they had been answered. A total of 92 surveys were returned, out of which 80 were usable, for a response rate of 44.4 percent. Mexico. The data were collected by executive M.B.A. students of a major business school in Mexico with campuses at over 20 locations. As part of a class project, each student was given the responsibility of identifying a Mexican firm and a senior manager responsible for the firm’s export operations. One of the authors then verified (1) that each student had identified a different firm and (2) that the firms were actively involved in exporting. After this verification, the students hand-delivered the survey instrument to the key informants. Given this data collection approach, a 100 percent response rate was achieved.

Validity of Responses Although survey research has been useful in studying organizational behavior and, in certain contexts, may be the only feasible way to get

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TABLE 1.

Sample Characteristicsa

Characteristic Total employment Total sales Number of countries the firm exported to Number of years of international experience Percentage of exports to developed countries Percentage of exports to developing countries Industry Manufactured durables Manufactured nondurables Services Food/agricultural products

Brazil 3,347 $250 million

Chile

Mexico

2,567 5,735 $373 million $163 million

14

13

8

13

13

10

23

27

68

66

56

20

20.5 65.8 5.5 8.2

5.6 44.4 24.1 25.9

20.5 32.4 25.0 22.1

a Except for industry, the reported values are means. Values for industry are percentages.

desired information (Dess & Robinson, 1984; Huber & Power, 1985), there are several concerns related to the validity of this data collection methodology. In particular, three issues have been raised: (1) selection of key informants and informant response bias, (2) nonresponse bias, which leads to a systematic exclusion of firms from a population, and (3) common method variance (Huber & Power, 1985; Podsakoff & Organ, 1986). First, in designing the survey, we had the measures of dependent variables related to performance precede the independent variables. Second, to further minimize consistency artifacts, we interspersed open-ended questions throughout the instrument and used both Likert and semantic differential scales. Regarding key informants, we targeted managers who were explicitly responsible for their firms’ export operations. All the respondents held upper-management positions and had an average 10 years of experience with their firms and an average 6.3

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years managing export operations. Nonresponse bias could not be statistically examined because comprehensive secondary information was not available, and early and late respondents could not be compared, as most of the questionnaires were collected in person; however, sample characteristics point to the appropriateness of the represented firms for testing the model, in that the firms on the average had $150 million in total sales, foreign sales constituted 28.3 percent of total sales, and the sample firms belonged to different industries. Finally, we examined the common method variance issue through two post hoc statistical tests. First, we used Harman’s one-factor test. The logic behind this test is that if common method variance is a serious issue in a data set, a single factor will emerge, or one general factor will account for most of the covariance in the independent and dependent variables (Aulakh & Kotabe, 1997; Podsakoff & Organ, 1986). We performed a factor analysis on items related to the cost and differentiation strategies, marketing standardization, international diversification, and performance measures, extracting five factors with eigenvalues greater than one. Furthermore, no general factor was apparent in the unrotated factor structure, with factor 1 accounting for only 28 percent of the variance. Second, we examined the correlation between the total sales reported by the respondents and sales figures available from secondary sources. The correlation coefficient for 45 firms for which secondary data were available was .90 (p < .0001).6

Measures Export performance was measured through a four-item scale assessing the overall role of exports in the firms’ sales growth, market shares, and competitive positions, as well as the profitability of export sales. The overall coefficient alpha for the scale was .84 (Brazil, .78; Chile, .87; 6

Secondary data on export performance were not available because it is not reported in annual reports or other published sources. Given that our objective was to ensure the validity of retrospective reports, the high correlation (r = .90, p < .001) between reported and published total sales for the 45 firms suggested that the respondents were providing accurate information.

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Mexico, .81). Table 2 (below) gives the items in this scale and in others used in this research. A strategy of cost leadership emphasizes having efficient-scale facilities and lower costs than major competitors (Porter, 1980). Accordingly, we used a two-item Likert scale to assess this strategy (α = .68, overall; Brazil, .60; Chile, .72; Mexico, .72). A firm following a differentiation

TABLE 2.

Factor Analysis Results for Independent and Dependent Variable Scalesa

Scale and Item Differentiation Maintaining higher quality standards for our products Maintaining unique image for our products Differentiating products and services from competitors Cost leadership Having lower costs than our major competitors Achieving economies of scale in our international operations Marketing standardization Product design Brand name Advertising messages Product positioning Pricing strategy Promotional techniques Export diversification Export performance Exporting has contributed to the sales growth of our firm Exporting has improved our firm’s market share Our export activity has made our firm more competitive Profitability of our export sales Eigenvalue Percentage of variance explained Cumulative percentage of variance explained

1

2

3

4

5

.13

.06

.79

.24

–.06

.10 .26

.11 .26

.88 .67

.01 .12

.04 –.04

.03 .13

.04 .36

.36 .02

.80 .80

.03 –.02

.52 .72 .85 .75 .51 .83

–.08 .07 .06 .12 .30 –.02

.23 .21 .08 .20 .02 –.05

.22 –.06 .06 –.07 .23 .16

.36 .14 –.14 .06 .20 –.14

–.02

.08

–.11

–.01

.82

–.03

.90

.05

.08

.09

.03 .06

.87 .83

.12 .19

.09 .12

.12 –.09

.04

.59

.06

.11

–.30

2.62 1.59 1.16 1.05 4.55 28.42 16.39 9.96 7.25 6.55 28.42 44.81 54.77 62.02 68.57

a Varimax rotation was performed. Factor loadings greater than .40 are shown in bold. Export diversification is a single-item entropy measure.

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strategy wishes to create a unique image for its products and services (Porter, 1980). We thus adapted a three-item scale from Aulakh and Kotabe (1997) that captured the dimensions of quality standards, image, and general differentiation with respect to competitors (α = .82, overall; Brazil, .77; Chile, .80; Mexico, .86). A six-item scale was developed to measure the extent of marketing standardization in foreign countries. Accordingly, respondents were asked to indicate, on a five-point scale, the extent of their firms’ standardization of product design, brand name, advertising messages, product positioning, pricing, and promotional techniques in foreign markets (α = .82, overall; Brazil, .86; Chile, .73; Mexico, .84). Export diversification was an adaptation of the entropy measure developed by Hitt, Hoskisson, and Kim (1997). Since the primary focus of this study was to examine diversification of exports in foreign markets (geographical diversification), respondents were asked to indicate the extent of their export sales to six regions: South America, Central America and Mexico, Africa/Middle East, United States/Canada, Western Europe, and Asia/Australia. The entropy measure of export diversification of exports is defined as Export diversification = Σi [Pi × ln(1/Pi)], where Pi is the sales attributed to each of the six regions and ln(1/ Pi) is the weight given to each region. To measure foreign market focus, respondents were asked to indicate the percentages of their foreign sales in each of the following regions: South America, Central America and Mexico, Africa/Middle East, United States/Canada, Western Europe, and Asia/Australia. The first three regions were classified as developing countries. United States/Canada and Western Europe were classified as developed countries. The Asia/Australia region consists of both developing and developed countries. We dropped this region from analyses because the percentages of sales in the two types of markets could not be distinguished, and not all of the responding firms had significant (>5%) sales in the region. For a firm to be categorized as having either a developed country or a developing country focus, 75 percent or more of its sales had to be in one of the groups. On the basis of this criterion, 94 firms from the sample had a developed country focus, and 102 firms had a developing country focus. The subsequent empirical analyses is based on the 196 firms that had clear developed or developing country foreign market focuses.

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To control for possible confounds, we included several control variables. Two dummy variables, one for Mexico and one for Brazil, were used to capture any systematic differences across the three countries in the sample. We included three dummy variables to control for industry effects. Given that standard industry classifications were not available through secondary sources and that classification systems vary across countries, we asked the respondents to list the primary industries of their export products. These were then classified independently by two people and coded into different industry groups. The set of export products fell under four broad industry groups: manufactured durables, manufactured nondurables, services, and food and agricultural products. Firm size, measured by the natural logarithm of total sales, was used to control for economies and diseconomies of scale (Hitt, Hoskisson, & Kim, 1997). Finally, firms’ international experience, measured as the number of years of exporting to foreign countries, was used to control for experience effects on export performance.

Psychometric Properties and Pooling Considerations Besides the issue of translation equivalence in a cross-national sample, other factors that need to be taken into consideration were construct and measurement equivalence. To ensure that construct meanings were consistent, we took care during the questionnaire design stage, performing further empirical tests after collecting the data. A reasonably good convergence of reliability estimates across the three samples confirmed construct equivalence. We then performed three factor analyses to examine whether the factor structures were similar for the three country samples. The scale items for the three strategy variables and for the diversification and export performance measures were used in computing factor solutions. In all cases, five factors with eigenvalues greater than one emerged, and factor loadings were similar for the three samples. After construct and measurement equivalence had been confirmed, the next step was to examine sampling equivalence. We thus compared the responding firms’ means on key characteristics. There were no

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significant differences among the three national samples on firm size (total employment and total sales) and international experience (the number of countries in which a firm had exporting operations and the length of experience in foreign countries). Thus, the data were pooled, and subsequently reported analyses were based on the pooled data. 7 To further confirm the convergent and discriminant validity of the constructs, we performed another factor analysis with the pooled data. The five-factor solution accounted for about 69 percent of the variance and represented all the derived factors with eigenvalues greater than one. The pattern of observed loadings indicated that the scales represented distinct measures of the underlying constructs. Accordingly, a composite score was calculated for each multi-item scale as an unweighted linear sum of the respective item scores. Sample characteristics and factor analysis results are provided in Tables 1 and 2, respectively.

RESULTS The hypotheses were tested through ordinary least squares (OLS) regression analysis. We performed collinearity diagnostics by examining the bivariate correlations (reported in Table 3) and variance inflation factors (VIFs; reported in Tables 4 and 5). Furthermore, assumptions of equality of variance, independence of error, and normality of the distribution of errors were met for all regression equations. Table 4 presents the results of a hierarchical regression analysis in which we first regressed export performance on the different strategy aspects and control variables for country, industry, size, and international experience (model 1). In the second stage, we entered the foreign market focus dummy variable as well as its interactions with cost leadership, differentiation, and marketing standardization to examine the moderating effects (model 2).

7 Pooling data from the three countries was considered necessary as the number of observations in each sample was relatively small. Furthermore, we did not expect countryspecific differences in the strategy-performance relationships. However, we included two dummy variables in the regression equations to control for any country-specific effects.

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1.36 –.21** 97.12 .12 2.78 1.11

2.70 –378.55

0.99 3.42

–.10 –.15

4

.39*** .06 –.05 .04

–.26*** –.13† –.13† .21** .37*** .28***

6

–.13† .29*** .01

5

.28*** –.06

–.05 .04

.13† .01

.34*** –.05 –.24**

3

8

.79*** .03 –.24**

7

b

N = 196. The interaction and squared terms were calculated by first standardizing the constituent parts and then multiplying the standardized variables. † p < .10 * p < .05 ** p < .01 *** p < .001

a

2

.39*** .01 .06 –.30*** .03 .04 –.14†

2.24 1.00 0.97 0.93 1.29

3.62 2.14 3.94 3.98 0.34

Sales International experience Cost leadership Differentiation Cost leadership × differentiationb 6. Marketing standardization 7. Export diversification 8. Export diversification squaredb 9. Export performance

1

1. 2. 3. 4. 5.

s.d.

Mean

Means, Standard Deviations, and Correlationsa

Variable

TABLE 3.

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Cost leadership Differentiation Cost leadership × differentiation Marketing standardization Export diversification Export diversification squared Mexico Brazil Manufactured durables Manufactured nondurables Services Sales International experience Foreign market focus Foreign market focus × cost leadership Foreign market focus × differentiation Foreign market focus × marketing standardization

3.33*** 1.84† –1.02 –2.12* 3.85*** –5.14*** 3.31*** –2.27* 0.25 –1.27 –1.39 –0.61 1.85†

–.14 .40 –.56 .29 –.18 .02 –.11 –.11 –.06 .14

t

.23 .13 –.07

β

Model 1

Results of Hierarchical Regression Analysis for Export Performancea

Independent Variableb, c

TABLE 4.

1.19 3.00 3.22 2.15 1.75 1.87 2.18 1.79 2.28 1.45

1.31 1.47 1.18

VIF

–.06 .33 –.54 .24 –.14 .04 –.10 –.10 –.06 .11 .48 .17 –.34 –.16

.21 .17 –.09

β

–0.78 3.06** –5.00*** 2.54** –1.80† 0.48 –1.09 –1.20 –0.67 1.56 1.34 0.57 –0.96 –1.01

2.36** 1.72† –1.30

t

Model 2

2.24 3.29 3.28 2.50 1.82 1.96 2.27 1.95 2.30 1.47 36.46 25.13 36.47 7.00

2.20 2.73 1.25

VIF

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Continued.

.50 .46 10.64***

β t

Model 1

9.05***

VIF .54 .48 0.04 2.44*

β t

Model 2 VIF

b

N = 196. Two dummy variables were created for the three countries, with Chile omitted. Three dummy variables were created for the four industry classifications, with food and agricultural products omitted. c Foreign market focus is a dummy variable, with 0 representing developing countries and 1 representing developed countries. † p < .10 * p < .05 ** p < .01 *** p < .001 All significance levels are based on two-tailed tests.

a

R2 Adjusted R2 F ∆R2 ∆F

Independent Variableb, c

TABLE 4.

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1.47 1.69 1.38 1.31 2.47 1.84 1.58 2.18 1.60 2.32 1.43 .42 .32 4.11***

2.00* 2.68** –1.47 –0.33 2.82** –1.05 –0.01 –1.20 –0.96 1.55 0.26

1.23 1.43 1.09 1.28 1.94 1.56 2.92 3.73 2.93 2.26 1.36

b

For group 1, n = 94. For group 2, n = 102. Two dummy variables were created for the three countries, with Chile omitted. Three dummy variables were created for the four industry classifications, with food and agricultural products omitted. † p < .10, * p < .05, ** p < .01, *** p < .001 All significance levels are based on two-tailed tests.

a

.35 .24 3.09**

R2 Adjusted R2 F

3.24** 0.15 –1.59 –2.03* 0.96 –0.76 0.09 –0.62 –0.80 –1.19 3.15**

.21 .31 –.15 –.04 .38 –.13 .00 –.22 –.16 .22 .03

.40 .02 –.19 –.24 .15 –.10 .01 –.08 –.10 –.18 .38

VIF

Cost leadership Differentiation Cost leadership × differentiation Marketing standardization Mexico Brazil Manufactured durables Manufactured nondurables Services Sales International experience

t

β

VIF

β

Independent Variableb t

Group 2: Developing Country Focus

Results of Subgroup Analyses Examining Moderating Effects of Foreign Market Focus on Export Performancea Group 1: Developed Country Focus

TABLE 5.

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The overall regression equation in model 1 is statistically significant (F = 10.64, p < .001), and the set of independent and control variables explain 50 percent of the variance in export performance. We had hypothesized that a firm’s attempt to simultaneously achieve both cost leadership and differentiation would have a negative impact on its export performance (Hypothesis 3). This prediction was not supported, as the coefficient for the interaction term (cost leadership × differentiation) is not statistically significant (β = –.07, p > .10). Hypothesis 4 states that high marketing standardization in foreign markets on the part of firms from emerging economies will lead to lower export performance. This hypothesis was supported, as the coefficient is negative and statistically significant (β = –.14, p < .05). To examine the curvilinear relationship between export diversification and export performance (Hypothesis 6), we included export diversification and its squared term in the regression equation. The coefficient for export diversification is positive and significant (β = .40, p < .001), and for the squared term, it is negative and significant (β = –.56, p < .001). Taken together, these findings support Hypothesis 6, showing an inverted ø-shaped relationship implying that diversifying into a few foreign markets improves export performance but that going beyond a certain number of markets is detrimental to performance. Although no specific hypotheses were proposed on the direct effects of cost leadership and differentiation on export performance, we found positive and significant beta coefficients (β = .23, p < .001, cost leadership; β = .13, p < .10, differentiation). These relationships will be discussed in more detail below. Secondly, the results also suggest that our Mexican firms had higher export performance than both the Chilean and Brazilian firms (β = .29, p < .001), with the Brazilian firms having the lowest export performance (β = –.18, p < .01). What explains these results? One factor that appears to be meaningful is economic liberalization and integration in Mexico. Its signing of the North American Free Trade Agreement (NAFTA) provided Mexico with clear, cheap, and easy exporting access to two big industrialized markets, Canada and the United States (Kotabe & Arruda, 1998). This factor only explains Mexico’s export success in these industrialized markets. However, other countries, such as Columbia, have signed bilateral trade agreements with Mexico in order to use Mexico as a gateway into the

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NAFTA markets. These trade agreements, then, provide Mexican firms easy access to both developed and developing countries and thus have positive effects on the country’s export performance. Brazil is a member of another trading bloc, Mercado Común del Sur (Mercosur), but the latter has met with less success in effectively opening trade among member nations (Kotabe & Arruda, 1998), making Brazil’s negotiating leverage with other countries less than Mexico’s. Chile’s situation seems to fall in between the other two countries’. It has a long history of liberalization and, through reciprocal trade deals, it has been able to build a sizable number of informal trading relationships with various countries. Also, Chile has been widely reported to be the next entrant to NAFTA, making it an attractive trading partner. The results in Table 4 (model 2) also point toward the moderating effect of foreign market focus. The overall model is significant (F = 9.05, p < .001), and the change in the squared multiple correlation coefficient (R2) of .04 when the moderating variable and the interaction terms are entered into the equation is also statistically significant (∆F = 2.44, p < .05). Although the moderating effect demonstrated in Table 4 is significant overall, we do not interpret the individual coefficients, since multiple interaction terms lead to high multicollinearity. This is apparent from the extremely high variance inflation factors for foreign market focus and the interaction terms. To test for the moderation predicted in Hypotheses 1, 2, and 5, we used subgroup analyses. Two regression equations were estimated. In the first equation, export performance was regressed on the set of independent and control variables for the subsample of firms whose primary foreign market focus was developed countries, and the second equation was estimated for firms whose foreign market focus was developing countries.8 The results are presented in Table 5. Both the equations are significant (F = 3.09, p < .01, and F = 4.11, p < .01), with the set of independent variables respectively explaining

8 International diversification was not included in the subgroup analysis because this variable and foreign market focus are related. Although the degree of export diversification within developed and developing countries may have provided additional insights on its performance effects, our data did not allow this analysis since we did not have exports sales data for individual foreign markets within each group.

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35 and 42 percent of the variance in export performance for the two groups. Hypothesis 1 states that the effect of cost leadership on export performance will be stronger for firms with a developed country focus than for those with a developing country focus. Although the beta coefficients for cost leadership for both subgroups are statistically significant (β = .40, p < .01, developed country focus; β = .21, p < .05, developing country focus), results of a Z-test (Cohen & Cohen (1983) comparing the two coefficients (Z = 1.42, p < .10) support the hypothesis that a cost leadership strategy has a stronger effect on export performance in developed country markets than it does in developing markets. Hypothesis 2 states that the effect of a differentiation strategy on export performance is stronger for firms with a developing country focus than for those with a developed country focus. This hypothesis was also supported; the coefficient for a developed country focus is not significant (β = .02, p > .10), that for a developing country focus is positive and significant (β = .31, p < .01), and the Z (1.65, p < .05) shows significant differences in the sizes of the beta coefficients. Finally, we expected that the negative relationship between marketing standardization and export performance would be stronger for firms with a developed country focus than for those with a developing country focus. The beta coefficient for the former group is negative and significant (β = –.24, p < .05), and that for the latter is negative but not significant (β = –.04, p > .10). A significant Z (1.55, p < .05) confirms differences in the coefficients, thus supporting Hypothesis 5. These empirical results support five of the six hypotheses tested and collectively provide evidence for the export performance model for emerging economy firms proposed in this study. Before discussing the implications of these findings, we further examine the impact on export performance of an integrated strategy, as captured by the interaction of our cost leadership and differentiation variables. We argued, in developing Hypothesis 3, that two sets of factors (the first related to the nature of products and the second to financial and experiential resources) would prevent emerging economy firms from successfully developing and implementing an integrated strategy in export markets. Accordingly, we expected a negative relationship between an integrated strategy and export performance. However, the results do not support this hypothesis; none of the beta coefficients, for either the full sample (Table

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4) or the subsamples (Table 5) are statistically significant. What explains this nonsignificance? Is it possible that some firms in our sample were able to successfully implement an integrated strategy, while others were not, so that combining results produced a neutral effect? To answer these questions, we conducted a post hoc analysis in which we examined the role of firm resources (measured in terms of size and international experience) on the integrated strategy–performance relationship. Since firm resources are likely related to the implementation of a particular strategy, we first divided the sample into two groups, large and small, on the basis of total sales. Then we examined the correlations between integrated strategy and export performance for the two groups. Neither the correlation for large firms (r = –.05, p = .67) nor that for small firms (r = –.01, p = .95) was statistically significant. Next, we did the same test for more versus less internationally experienced firms. Although the correlation between integrated strategy and export performance for more internationally experienced firms (r = .12, p = .32) is positive, and that of less internationally experienced firms (r = –.11, p = .30) is negative, neither is significant. In summary, our post hoc analyses did not provide additional insights into the relationship between export performance and use of a strategy integrating cost leadership and differentiation for firms from emerging economies.

DISCUSSION Understanding firms’ competitive strategies has been a major focus of researchers in both management and marketing disciplines, and these efforts have provided important insights into strategic types, their impact on performance, and the contextual, organizational, and environmental factors that affect the choices and consequences of different types of strategy. Most of these models were developed to explain the competitive behavior of firms from developed countries (mainly from the “triad regions” of North America, Europe, and Japan), competing primarily within their own national markets, and of multinational corporations competing through foreign direct investment. Two questions about the external validity of these strategy models become relevant: First, are these models applicable to enterprises that participate in international markets

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mainly through export operations from their domestic bases? Second, are they applicable to enterprises from countries outside the triad, and in particular, to those from emerging markets, which operate under unique institutional pressures and have different managerial processes and resource capabilities than enterprises from developed countries? We made two contributions in this study. First, we proposed a framework that incorporates various strategic factors explaining the performance of exporting firms. In particular, we examined the effects on performance of three strategy components (Chrisman et al., 1988): competitive weapons (differentiation, cost leadership), segmentation differentiation (marketing standardization versus adaptation in targeting markets), and scope (geographic diversification). Second, we developed and empirically tested hypotheses in the context of emerging economy firms from Brazil, Chile, and Mexico. The results point to the validity of the proposed framework. We found that, with firm and industry characteristics controlled, the different strategies pursued by firms from emerging markets explain their export performance.

Managerial and Theoretical Implications Our findings have important implications for both practice and theory. The first finding relates to the performance implications of two competitive strategies, cost leadership and differentiation. This study adds a geographical market dimension to earlier evidence that the relationship between these two strategies and performance is contingent on the environment within which they are implemented (e.g., Lim & Kim, 1988; Miller, 1988). We found that, although a cost leadership strategy tends to enhance export performance for emerging economy firms in both developed and developing markets, the impact of this strategy is more pronounced when the target market focus is on developed countries. On the other hand, a differentiation strategy leads to improved performance if the market focus is on developing countries. These findings are plausible for several reasons detailed below. Since competition in developed country markets is intense, owing to the sophistication of consumers, the large number of competitors, and dynamism related to technology, it would be rather difficult, if not

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impossible, for emerging economy firms offering mature products to differentiate their products on the basis of quality and unique features and build their brand recognition in those developed country markets. Also, a number of studies (e.g., Cordell, 1993) have found that consumers in developed countries perceive products and brands from developing countries negatively and generally equate them with low price and quality. These negative perceptions will not allow firms from emerging countries to successfully create a unique image and demand premium prices for their products and services, as would be necessary to implement a differentiation strategy. Marketing products on a low-cost basis tends to be a more suitable strategy for developed country markets, as was amply demonstrated by Japanese firms in the 1960s and 70s and by firms from the Asian tigers in the 1970s and 80s. Since firms from emerging economies concentrate on mature products, they have cost advantages vis-à-vis developed country firms and can thus better compete through a cost leadership strategy. Thus, we found a stronger relationship between degree of cost leadership and performance in developed markets. In the case of firms whose foreign market focus was primarily other developing markets, we found stronger effects of a differentiation strategy on performance. This finding could be due to the fact that firms in our sample may not have had any particular cost advantage vis-à-vis domestic firms in the other emerging country markets, thus making a differentiation strategy a more appropriate way to gain competitive advantage. As a result, a differentiation strategy seems to be more effective for emerging economy firms within a group of countries that are at similar stages of economic development. Our second major finding, regarding the association between degree of marketing standardization in foreign markets and performance, is twofold. First, like Cavusgil and Zou (1994), we found that standardized marketing programs tend to result in lower performance. Second, we found another contingency effect: firms using a standardized approach in developed countries have lower performance than those adapting their marketing programs, but in developing countries, the effect is not significant. Some studies have suggested that standardization might be appropriate when a firm is marketing to countries that are similar to its home market (Douglas & Wind, 1987; Samiee & Roth, 1992). This standardized marketing approach fails to work in developed countries

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because the cultural distance between the exporter and the market is high, with customers unwilling to sacrifice idiosyncratic preferences for lower costs. Finally, we found that some extent of export market diversification is beneficial for reducing currency risks and attaining synergy and economies of scale. However, a high level of diversification can spread limited managerial and financial resources too thin. Such a stretch, along with high transaction and coordination costs, is detrimental to export performance, as the costs of targeting multiple markets outweigh the benefits. This finding is consistent with those of Hitt, Hoskisson, and Kim (1997), who found a similar inverted ø-shaped relationship between international diversification and firm performance. However, our study provides further insights for the diversification literature, as it identifies specific advantages and disadvantages relevant to exporting firms that are different from the location and internalization benefits accruing to firms that enter foreign markets through foreign direct investment.

Further Research According to the resource-based view of the firm (Barney, 1997), firms need to build, acquire, or identify valuable, inimitable, rare, and nonsubstitutable resources in order to gain competitive advantage. Enterprises from emerging economies traditionally had comparative cost advantages in factors of production, especially for commodity and nondifferentiated manufactured products. However, these advantages may not be sufficient in the contemporary global environment, as competition is increasingly based on differentiated products and services, and the present liberal trade regime allows firms from different countries to access locationspecific factors related to factors of production. In the preceding discussion, we suggest the possibility that the reasons behind the inability of emerging economy firms to successfully implement certain strategies include their lack of experience in foreign markets, deficiencies in managerial, financial, and technological skills vis-à-vis established multinationals from developed countries, negative brand and country-of-origin effects, and narrow product lines that preclude their taking advantage of economies of scale and scope. A

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fruitful area for future research would be to examine the processes through which firms can acquire these deficient resources. One possible way could be through strategic alliances with firms from developed countries. Such alliances can potentially overcome the resource constraints of emerging economy firms as well as alleviate negative country-of-origin effects, especially if products are marketed under the developed country partners’ programs. Second, there is evidence (Dominguez & Brenes, 1997) that firms from developing countries have acquired established foreign brands. These processes can potentially compensate for lack of resources and negative consumer perceptions. Furthermore, as Khanna and Palepu (1997) suggested, firms in emerging economies become part of diversified business groups in order to create entry barriers for foreign entrants and manage the political process collectively. It is conceivable that such pooling of resources within diversified groups can enhance their competitive advantages in foreign markets as well and allow them to reap both scale and scope economies. Another, related avenue for research is to further investigate the nature of participation by emerging economy firms in foreign markets. According to Craig and Douglas, a firm “must broaden its participation in the transnational value chain and gain a controlling role, if it is to develop a strong competitive position in world markets” (1997: 73). Finally, our study did not examine the role of organizational structures and administrative mechanisms in the implementation of successful strategies (Govindarajan, 1988; Miller, 1988). Future research can provide important insights by incorporating structural aspects in the strategy-performance models and examining if emerging economy firms use organizational forms that are similar to those used by multinationals from developed countries.

Limitations This study has a number of limitations. The first shortcoming is that, given its exploratory nature, our measures of strategy and performance constructs were parsimonious and did not incorporate various subdimensions identified in previous research. For instance, Miller (1988)

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and Lim and Kim (1988) identified innovation and marketing differentiation as two subdimensions of a differentiation strategy. Second, our environmental variable, foreign market focus, was simplistic and all encompassing, and thus did not capture heterogeneity within developed and developing markets. Finally, all of our measures were perceptual and, despite our best efforts to control for informant bias and associated common method variance problems, the results of this study should be interpreted in light of the inherent limitations of a survey methodology.

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Tallman, S., & Li, J. 1996. Effects of international diversity and product diversity on the performance of multinational firms. Academy of Management Journal, 39: 179–196. Vernon, R. 1966. International investment and international trade in the product cycle. Quarterly Journal of Economics, 81: 190–207. Vernon-Wortzel, H., & Wortzel, L. H. 1988. Globalizing strategies for multinationals from developing countries. Columbia Journal of World Business, 23(spring): 27–35. White, R. E. 1986. Generic business strategies, organizational context and performance: An empirical investigation. Strategic Management Journal, 7: 217–231. Yip, G. S. 1992. Total global strategy: Managing for worldwide competitive advantage. Englewood Cliffs, NJ: Prentice-Hall.

ABOUT THE AUTHORS Preet S. Aulakh is an associate professor of strategic management and international business at the Fox School of Business and Management, Temple University. He received his Ph.D. from the University of Texas at Austin. His research interests include international technology licensing, firm strategies in emerging markets, and foreign entry modes. Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected] Hildy Teegen is an associate professor of international business at George Washington University. She received her Ph.D. from the University of Texas at Austin. Her research focuses on international alliances, marketing strategy, and negotiation, particularly in Latin America.

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Institutional Changes and Organizational Transformation in Developing Economies Preet S. Aulakh and Masaaki Kotabe

1 INTRODUCTION A significant aspect of the changes in the global economy in the last two decades is the economic liberalization of protected markets and the further liberalization of market economies. Institutional changes emanating from evolving political landscapes within individual countries and pressures from supra-national bodies such as the World Trade Organization (WTO), International Monetary Fund (IMF), and the World Bank have been instrumental in the liberalization of developing countries’ economies and their integration into the global economy. As part of these reforms, a number of developing countries implemented policies aimed at encouraging competition in the domestic marketplace, urging domestic firms to build international levels of competitiveness, and allowing multinational enterprises (MNEs) to enter their erstwhile protected markets. Increasing integration in the global economy has meant changed competitive landscapes for organizations from developing countries as well as multinationals operating in these economies, thus necessitating organizational transformations to deal with new competitive dynamics. For instance, indigenous firms from developing

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economies now have to compete without the protectionist umbrella prevalent during the earlier periods. In the context of these institutional reforms, a critical question faced by local firms in developing countries is how to respond to the challenges presented by a radically changed competitive environment. The nature of local firms’ strategic responses in this changed environment has strong implications for the perceived success or failure of economic reforms undertaken by developing country governments (Aulakh, 2007; Meyer, 2004; Ramamurti, 2004). The 8th Annual International Business Research Forum on the theme, “Institutional Changes and Organizational Transformations in Developing Economies,” was held at Temple University in Philadelphia on April 21, 2007. We invited papers that examine the interactions/ impact of institutional changes at various levels on the organizational transformations of firms in developing economies. We were interested in papers that explored transformation of indigenous firms from these economies, including business groups, private and public enterprises and non-governmental organizations as well as foreign multinationals operating in these economies. After a first round of blind reviews, a dozen papers out of more than thirty submissions were initially selected for presentation at the Research Forum. Authors were then asked to revise their papers based on various critiques and comments received during the forum. Those revised papers were further subjected to a second round of up to two more reviews. Eventually, six of these papers have been selected for inclusion in this special issue. In the following paragraphs we first review the past literature on institutional changes and organizational transformation and then introduce the six papers as they intervene and expand on our understanding beyond the extant research.

2 LITERATURE REVIEW: INSTITUTIONAL CHANGES AND ORGANIZATIONAL RESPONSES An important study examining organizational transformation in emerging economies was a conceptual paper by Newman (2000). She argued that institutional changes in Eastern and Central Europe in the 1990s “initiated a period of intense social, political, and economic change in the region”

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that “destroyed the underlying assumptions of economic activity” (Newman, 2000: 602). Such monumental changes required second-order organizational learning (defined as change in the core values, templates and archetypes). However, it was speculated that firms which were more embedded with the past institutional environment were less likely to accomplish second-order transformation necessitated by changed “rules of the game.” This view finds empirical support in a study on Lithuania. Kriauciunas and Kale (2006) surveyed 67 firms to assess the factors that influence transition economy firms to change their operating knowhow and knowledge sets (i.e., second second-order learning defined by Newman (2000) to compete in a changed environment). Their findings suggest firms that were formed during the socialist era (thus having a “socialist imprinting”) were less able to change their operating knowledge. In addition firms that were able to access external sources of knowledge were better able to meet the “demands of the new market-oriented environment” (Kriauciunas and Kale, 2006: 659). One way for organizational transformation to access outside resources (including capital, technology, and managerial know-how) is through the privatization of state-owned enterprises in a number of developing economies as part of the liberalization process. As stated by Zahra et al., 2000: 509–510), “[b]y placing the means of production outside of state ownership and control, privatization unleashes the forces and discipline of the free market . . .. Privatization, therefore, has the potential to transform national economies, industries, and organizations by infusing a spirit of entrepreneurial risk taking. These changes are in process currently across the world’s six major continents, making privatization an integral part of emerging, developing, and developed countries’ twenty-first-century strategic agendas. Effective privatizations however . . . without creating significant unemployment and related disruptions, are difficult to achieve.” In this regard, a number of studies have examined strategic transformation through privatization of state-owned enterprises (SOEs). Ramamurti (2000) proposed a multi-level theoretical model incorporating firm, industry and country level factors to explain the likelihood of a particular SOE being privatized and how they impact post-privatization performance of these firms. Johnson et al. (2000), Cuervo and Villalonga (2000) and Dharwadkar et al. (2000) use institutional, public choice and agency theories, respectively, to address

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managerial level transformation in privatizing organizations through restructuring of reward and incentive structures as well as overall corporate governance aspects. Spicer et al. (2000: 630), using the case study of privatization in Central Europe, suggest that “entrepreneurship is better fostered through gradualist policies permitting negotiated solutions to restructuring, as opposed to market-driven reforms.” Konings et al. (2005) use panel data of Bulgarian and Romanian manufacturing firms and suggest that creation of competitive markets and privatization go hand-in-hand. The general approach of gradualist reforms and transformation is seen in the liberalization model followed by China where state-owned enterprises continue to play an important role. However, organizational transformation in a market-based regime is accomplished through accessing external resources through inter-organizational collaborations and changes in intra-organizational norms and culture. Using a sample of Chinese state-owned pharmaceutical firms, White (2000) examined the impact of a set of internal and external factors on how the state-owned enterprises acquire new technology by make, buy or ally decisions. The external factors considered are suggested by transaction cost and resource dependency perspectives and the internal factors are suggested primarily by an organizational capabilities perspective. One of the key findings of the study was that these factors were primarily based on subjective managerial perceptions of the threat of opportunistic behavior by other organizations and the required marginal investment in organizational capabilities. Ralston et al. (2006) examine the transformation of Chinese state-owned enterprises from hierarchical and bureaucratic structures to market-oriented forms through a change in organizational cultures. Peng and Luo (2000) demonstrate that Chinese firm managers’ micro personal ties with other executives and government officials helped improve organizational performance. Hitt et al. (2000) study the resource acquisition and learning opportunities for emerging economy firms through international alliances. Their main contribution was that partner selection criteria are contextdependent and vary across emerging and developed economies. In particular, they find that the firms from emerging markets place greater importance on financial assets, technical capabilities, intangible assets and willingness to share expertise as criteria for partner selection. On the

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other hand, firms in developed markets are found to stress unique competencies, knowledge and access to local markets. In a follow-up comparative study of firms from China and Russia, Hitt et al. (2004: 173) find that “China’s more stable and supportive institutional environment has helped Chinese firms take a longer-term view of alliance partner selection, focusing more on the potential partner’s intangible assets along with technological and managerial capabilities. In contrast, the less stable Russian institutional environment has influenced Russian managers to focus more on the short term, selecting partners that provide access to financial capital and complementary capabilities so as to enhance their firms’ ability to weather that nation’s turbulent environment.” The institutional changes experienced in the centrally planned command economies such as China and Eastern European countries manifested through full privatization of state-owned enterprises (e.g., Eastern Europe) or partial-privatization (e.g., China through the mode of equity joint ventures). This, in turn, brought about dramatic increases in inflows of foreign direct investment (FDI) and led to high rates of growth, primarily driven by inward FDI. A number of other emerging economies such as India, Brazil, and Mexico initiated liberalization through opening up their markets and general deregulation of key sectors. This resulted in stronger competition from domestic and foreign players and the issue of strategic transformation in these economies is fundamentally different. Aggarwal (2000) examined the innovation strategies of Indian firms in the pre- and post-liberalization era. She finds that “unlike in a regulated regime where technology imports [were] viewed important for filling gaps in domestic technological capabilities, in a deregulated regime technology up-gradation seems to be the major role of technology imports (p. 1081).” Peng (2000) examined strategic choices during institutional transitions. Severe institutional transitions pose a challenge to organizations as they can cope when the new rules are not completely known. In such circumstances, organizations face two broad strategic choices—a network-based strategy emphasizing managers’ inter-personal ties as well as the firm’s inter-organizational relationships with other firms; and a marketbased strategy that relies on the firm’s unique competitive resources and capabilities. Also during such transitions, three types of firms emerge—

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incumbent firms, entrepreneurial start-ups and foreign entrants. In the initial phases of transitions, all the three types of firms are likely to compete on the basis of networks and relationships rather than competitive resources and capabilities. In this phase, in order to pursue network-based strategies even foreign entrants are more likely to form joint ventures and alliances. During the later phases of transitions, except old incumbent firms that continue to compete based on relationships, all other types of firms such as new, young incumbent firms, start-ups and foreign entrants will move towards competing based on competitive resources and capabilities through restructuring and transformation. In the developing economy contexts, firms are known to form networks and their strategies and performance are posited to be strongly influenced by these networks. Using three longitudinal cases from China, Peng (1997) explores whether growth of the firm in transitional economies has a distinct theoretical explanation compared to the Western theories given the vast differences in the institutional environments. Top managers of three Chinese firms representing different ownership-types were interviewed over the 1989–96 period. Based on these case studies, Peng (1997) posits that in a transition economy such as China, firms adopt a network-based strategy. This involved a process of what the author calls as “boundary blurring” through development of inter-organizational relationships with other firms. This unique strategy of growth has enabled the firms to avoid the tricky issue of ownership transfer of assets while allowing them access to complementary assets in the uncertain period of transition. This hybrid strategy, which is neither market nor hierarchy, was adopted by firms due to constraints on generic expansion or acquisitions imposed by the institutional environment. Elango and Pattnaik (2007) study the role of networks in the internationalization of Indian firms. Using a panel data of 794 firms, they find support for their hypothesis that international experiences of their parental and foreign networks help these firms to build capabilities to succeed in international markets. Similarly, Garg and Delios (2007) explore the role of business group affiliation on the performance of foreign subsidiaries of emerging economy multinationals. Operationalizing performance as subsidiary survival, they find that advantages associated with business group affiliation are more transferable in other developing countries (with similar institutional environments) than in developed country markets. Yiu et al. (2007) examine the

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internationalization strategies of Chinese enterprises and conclude that “the roles of business networks, for example, in sharing market information and securing control over a supply chain, constitute a weaker direct effect on international venturing, as compared with institutional networks. The findings show that institutional networks play a more important role at this stage of economic development of the country under study. This indicates that institutional networks may help firms in emerging economies such as China to cope with the transitioning institutional environment better” (p. 12.).

2.1 Business Groups as Micro-institutions A rich body of work has established the significance of business groups in the socio-economic landscape of developing economies (Strachen, 1976; Amsden, 1989; Keister, 1998; Khanna and Palepu, 1997, 1999; Ghemawat and Khanna, 1998). Ranging from Korean Chaebols, Turkish families, Latin American and Spanish grupos to Indian business groups, they have been defined as “a set of firms which, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action” (Khanna and Rivkin, 2001, p. 47). While the focus of earlier research was to understand the rationale behind business groups, and relate their underlying characteristics to different country contexts (e.g., Khanna and Palepu, 2000a, 2000b; Guillen, 2000; Kock and Guillen, 2001), recent studies have been motivated by an attempt to understand their strategic responses to institutional transformations that potentially undermine the very reasons for group formation in the first place (e.g., Hoskisson et al., 2004; Hoskisson et al., 2005; Yiu et al., 2005). One view is that business groups emerge as a response to strategic factor market imperfections in developing economies (Khanna and Palepu, 2000a; Khanna and Rivkin, 2001). Due to information asymmetries, poor contract enforcement, and imperfect regulatory structures, institutional voids tend to develop in product, labor and capital markets. The absence of intermediary institutions increases transaction costs in acquiring inputs such as technology, finance and managerial talent. In response, business groups emerge. Performing the role of missing

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institutional intermediaries, business groups fill these voids by generating their own internal markets for financial capital and managerial talent. Member firms of a group are thus able to leverage their group’s scale, scope, track record and reputation and benefit from sheer availability and lower input costs of scarce resources. Guillen (2000) offered an alternative view on the rationale for business groups. Claiming that the prevailing predominant explanations for existence of business groups in emerging economies—market imperfections, authority structures or late development—were not convincing enough, the author offers a resource-based view explanation. Guillen posits that firms and entrepreneurs create business groups when they acquire and possess resources and capabilities to enter new industries quickly and in a cost effective manner. Also, it is argued that this capability will be inimitable only under conditions of asymmetric foreign trade and investment which limit this capability to a select few firms. Findings of an empirical study based on cross-sectional data on business groups from nine emerging economies indicate that asymmetries in foreign trade and investment are associated with business groups after controlling for alternative explanations. In a recent study on business groups, rejecting the established view that business groups in emerging markets exist primarily to fill institutional voids, Yiu et al. (2005) attempted to integrate the resource-based view with the institutional view by proposing that the value created by the business groups varied depending on the type of resources and capabilities they were able to acquire. Unlike most studies on business groups that were conducted at the member firm level, this study examined directly a sample of 224 largest business groups in China. Yieu et al. (2005) proposed that there were two kinds of potential resources and capabilities that a business group could possess—endowed and acquired/developed resources. Age of the group, government ownership, top management background etc. were classified as endowed resources whereas those acquired through mergers and acquisitions, development of internal capabilities, international diversification and so on were classified as acquired/developed resources. The results of the study indicated that most of the endowed resources did not help business groups to create a competitive edge. Instead, the business groups that had sought to develop new capabilities through acquisitions,

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internal development, or international diversification showed better group performance. In spite of their benefits, some associated costs of business groups have also been identified (Keister, 1998; Khanna and Palepu, 2000a,b). While controlling families have been known to interfere in both tactical and strategic decision-making, member firms tend to suffer from conflict of interests between controlling (typically family) and minority shareholders. Bertrand et al. (2002) found evidence that controlling shareholders of Indian business groups engage in tunneling, or moving profits from firms where they have low cash flow rights to those where they have high cash flow rights. Further, due to inequity and nepotism, inefficient compensation systems tend to develop across group companies, with detrimental effects on market for talent. Coupled with the security that group affiliation offers, managers of group-affiliated firms typically have weaker incentives to run their firms efficiently (Khanna and Rivkin, 2001). As variety of the businesses within a group increases, the dominant logic of the traditional businesses may prove to be increasingly inadequate when applied to emerging initiatives, thus leading to sub-optimal decisions and organizational inertia. Recent research has queried the relevance as well as the ability of business groups to respond to disruptive institutional changes arising due to economic liberalization. As emerging economies continue to improve their economic institutions, largely as a consequence of market reforms, the performance of many large business groups, which acted as marketsubstitute mechanisms, has been reduced (Hoskisson et al., 2005). Business group affiliation, which was considered a plus during periods of underdeveloped capital markets and protectionist regimes that hindered the inflow of required technological know-how and other resources, is thus being questioned in a post-liberalization era. Local firms require second-order organizational changes in response to market reforms, which in turn requires greater emphasis on both exploratory and exploitative learning (Newman, 2000). Firms that are embedded in past institutional frameworks are, however, less likely and slower to undertake transformations when faced with environmental changes than firms that are less so (Greenwood and Hinings, 1996; Newman, 2000; Kriauciunas and Kale, 2006). For instance, Hoskisson et al. (2004) find that while business group group-affiliated firms were more responsive in

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restructuring their assets than non-group-affiliated firms to environmental contingencies that arose from domestic opportunities, they were less responsive than independent firms to regulatory changes and new competition. Similarly, given their market power and institutional positioning, business groups are more likely to follow sustaining strategies than independent firms during periods of environmental upheaval (Hoskisson et al., 2005). Khanna and Palepu (2000a) examine the issues of the future of business groups, especially in the changing institutional context brought about by a wave of deregulation in the emerging economies. The paper offers evidence from Chile, which has undergone significant changes in its institutional context, through a study of changes in the value creation by business groups between late 1980s and mid 1990s. Contrary to the evidence from studies in the western context, the authors find support for their hypothesis that marginal increases in group (unrelated) diversification will lead to marginal increase in firm performance, though the net benefits are found to kick in after the diversification reaches a threshold. This threshold was found to rise as market institutions evolve over time. The authors also find a nondiversification related net positive effect of group affiliation, which however diminished over time as emerging markets evolved. The authors conclude that the value-creating potential of business groups is reduced gradually with the evolution of the institutional context. Kim et al. (2004) propose an evolutionary model of the business groups by tracing the evolution and restructuring of two large business groups in Korea—the LG group and Hyundai Motor. The 30 largest Chaebols formed the backbone of Korean economy, but many of them suffered severe financial problems during the Asian crisis in 1997. Many of the Chaebols undertook restructuring measures either on government directive or on their own. The authors propose that the sources of valuecreating potential of business groups change and evolve along with its institutional environment and the strategy-structure fit is a key determinant of the performance of the diversified business groups. Initially, under weak market environments, the internal market capability of Chaebols (mainly unrelated business groups) under the organizational structure of co-operative M-form served as a rare and valuable resource. However, with increased competition and evolution of markets, the value of the internal market capability diminished. The Chaebols have

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two restructuring options—either change their structure to competitive M-form or refocus themselves into related businesses.

3 PAPERS IN THE SPECIAL ISSUE As the above literature review shows, there has been a flurry of research on developing economy firms during the last decade. While this research collectively has provided important insights into the evolution of organizations in the face of economic liberalization, there are a number of emerging trends that necessitate further examination of the linkages between organizational transformations and institutional changes. First, much of the extant research has focused on the privatization of stateowned enterprises (mostly in Eastern Europe) and the evolution of stateowned firms in a semi-liberalized environment (e.g., China). A number of developing economies have initiated reforms that do not necessarily involve a reduced role of the public sector in the new environment, but more through deregulation of the internal environment and open trade policies. In these economies (e.g., Brazil, Mexico, India, South Africa), the institutional changes are qualitatively different, and thus one would expect organizational responses to such changes would take different trajectories. Second, much of the extant research has identified factors that constrain strategic transformation as a response to institutional changes (e.g., pace of change (Newman, 2000), governance (Filatotchev et al., 2003), factor markets (Spicer et al., 2000), historical imprinting (Kriauciunas and Kale, 2006)). Thus as suggested by Uhlenbruck et al. (2003), future research needs to examine factors that explain firm level heterogeneity in fostering organizational transformation in light of macro- and micro-institutional changes. Third, the extant research has primarily used theoretical lenses honed in the developed country markets to understand organizational transformation in developing economies. This has inadvertently led to relating successful transformation to firm level resource and capability configurations similar to firms in developed countries. There is however increasing evidence that developing economy firms possess unique resources and capabilities that can be combined with new ones to sustain competitive advantages in an environment of market-based competition.

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The six papers in the special issue complement existing research by addressing some of these existing gaps. A summary of these papers is provided in Table 1. In the first paper, Malik provides a theoretical framework of organizational adaptation by developing economy firms to economic liberalization. Using a dynamic capability theoretical lens, he argues for the importance of examining organizational transformation from the perspective of evolutionary fit and suggests that initial firm level resources at the time of market liberalization determines the strategic path followed by a particular firm. Depending on the combination of existing core and complementary capabilities, a firm could use domestic competitive conditions, access international resources through alliances or use political leverage to create a fit conducive to post-liberalization conditions. He provides anecdotal evidence to build the theoretical arguments and develops propositions that can be empirically tested in diverse national and industry settings. The following two papers, respectively using the contexts of Mexico and India, examine internationalization as a strategic response to market liberalization in these two countries. Perez-Batres and Eden develop the concept of “liability of localness” that emerges in the post-liberalization environment. They suggest that “in a protectionist environment it is difficult to uncover the liabilities that local firms face when doing business in their home market. . . . When liberalization and privatization occur, and these artificial barriers are removed, the inefficiencies of local firms become visible. These firms incur a liability of localness, that is, added socio-political and relational costs or hazards of adjusting to the ‘now’ being different from ‘then’.” They further suggest that overcoming the liability of localness entails international diversification (especially through foreign acquisitions) and test and find support for their hypotheses on panel data of Mexican banks. Chittoor, Ray, Aulakh and Sarkar study the Indian pharmaceutical industry as it faced economy-wide market liberalization and changes in the intellectual property regime in the 1990s, which together took away historical competitive advantages of domestic Indian firms. The industry renewed itself by aggressively participating in international resource and product markets which were facilitated by the overall globalized context of the industry. They contrast the Indian institutional changes with those of other developing economies during the same period and speculate on

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Diversity of strategic responses to economic liberalization; role of firm level core and complementary capabilities Perez-Batres Advance concept of and Eden “liability of localness” and relate it to survival of domestic firms during periods of regulatory punctuations Chittoor, Ray, Internationalization as the Aulakh and Sarkar engine of growth as a response to domestic and global institutional changes Dieleman and Sachs Advance evolutionary concept of “economies of connectedness” as the basis for organizational responses to institutional changes

Research focus

Author(s)

Malik

Summary of the articles in the special issue

TABLE 1.

Aggregate industry data (1995–2005); trend analysis

Historical case study Indonesia; business groups

Resource-based view; growth models

Industrial organization; networks; social capital

India; pharmaceuticals

Mexico; Banking

Longitudinal panel data of 37 banks (1991–2004)

Liability of foreignness; punctuated equilibrium; diversification

National/industry contexts Developing economy firms

Methodology

Dynamic capabilities; Theory building RBV; evolutionary fitness

Theoretical approaches

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Lorenzen and Taeube Examine the evolution of India’s film industry (Bollywood) in an era of globalization and regulatory pressures. Kshetri and Ajami Propose a framework of antecedents of institutional reforms in the Gulf Cooperation Council countries; identifies economic change agents in developing countries Gulf countries

Institutional theory

Theory building; Regional analysis

India; film industry

Evolutionary economics; Interviews and social network theory archival sources

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Preet S. Aulakh and Masaaki Kotabe

the possible factors explaining the “indigenous” growth model of this industry. The following two papers draw attention to the role of existing networks of individuals and firms in coping with institutional changes. Dieleman and Sachs use a case-study approach to understanding the transformation of an Indonesian business group in light of the 1997 Asian financial crisis. Proposing the concept of “economies of connectedness” as a complement to traditional economies of scale and scope, they suggest the shifting relative importance of these in evolving institutional contexts (Peng, 2003). Lorenzen and Taeube examine the domestic and international growth of the Indian film industry, Bollywood, in the postliberalization period beginning in the early 1990s. They suggest the importance of understanding the interplay between the structure of social networks and environmental conditions to assess unique industry evolutions in emerging economies. While the first five papers attempt to understand organizational transformations as a response to a diversity of institutional changes, the last paper by Kshetri and Ajami pushes the analyses into a different direction, that is, what are the factors that push institutional reforms compatible with free-market economics. Placing their paper in the context of the Gulf Cooperation Council countries in the Middle East, they identify societal structure, internal and external change agents, the nexus between economic and political actors, and external political relations influencing the nature and extent of institutional reforms in these countries. They provide extensive policy and managerial implications of their proposed framework.

4 EPILOGUE We would like to thank the authors of the six papers for their contributions to the special issue and their willingness to revise their manuscripts based on reviewer comments and discussions during the research forum in which they presented their work. We are also indebted to the reviewers who reviewed the papers under time constraints and provided useful feedback for the papers’ development. We appreciate the effort

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of Arvind Parkhe, Ram Mudambi, Ronaldo Parente and Robert Hamilton who served as discussants at the research forum and helped build connections between the various papers. Finally, we would like to thank the Temple and George Washington University CIBERs for supporting this endeavor and providing the financial support for the research forum and Kim Cahill and her staff for providing their support in putting together the forum and this special issue. We are hopeful that the set of papers in this issue individually and collectively makes important contributions to furthering our understanding of organizations from developing economies which are increasingly leaving an important imprint on global competition.

REFERENCES Aggarwal, A., 2000. Deregulation, technology imports and in-house R&D efforts: an analysis of the Indian experience. Res. Policy 29, 1081–1093. Amsden, A., 1989. Asia’s Next Giant: South Korea and Late Industrialization. Oxford University Press, New York. Aulakh, P.S., 2007. Emerging multinationals from developing economies: motivations, paths and performance. J. Internat. Manag. 13 (3), 235–240. Bertrand, M., Mehta, P., Mullainathan, S., 2002. Ferreting out tunneling: an application to Indian business groups. Q. J. Econ. 117, 121–148. Cuervo, A., Vilalong, B., 2000. Explaining the variance in the performance effects of privatization. Acad. Manage. Rev. 25 (3), 581–591. Dharwadkar, R., George, G., Brandes, P., 2000. Privatization in emerging economies: an agency theory perspective. Acad. Manage. Rev. 25, 650–669. Elango, B., Pattnaik, C., 2007. Building capabilities for international operations through networks: a study of Indian firms. J. Int. Bus. Stud. 38 (4), 541–555. Filatotchev, I., Wright, M., Hoskisson, R., Uhlenbruck, K., Tihanyi, L., 2003. Governance, organizational capabilities, and restructuring in transition economies. J. World Bus. 38, 331–347. Garg, M., Delois, A., 2007. Survival of foreign subsidiaries of TMNCS: the influence of business group affiliation. J. Int. Manage. 13 (3), 278–295. Ghemawat, P., Khanna, T., 1998. The nature of diversified business groups: a research design and two case studies. J. Ind. Econ. 46, 35–62. Greenwood, R., Hinings, C.R., 1996. Understanding radical organizational change: bridging together the old and new institutionalism. Acad. Manage. Rev. 21, 1052–1081. Guillen, M., 2000. Business groups in emerging economies: a resource-based view. Acad. Manage. J. 43, 362–380.

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Hitt, M.A., Dacin, M.T., Levitas, E., Arregle, J-L., Borza, A., 2000. Partner selection in emerging and developed market contexts: resource-based and organization learning perspectives. Acad. Manage. J. 43 (3), 449–467. Hitt, M.A., Ahlstrom, D., Dacin, M.T., Levitas, E., Svobodina, L., 2004. The institutional effects on strategic alliance partner selection in transition economies. Organ. Sci. 15 (2), 173–185. Hoskisson, R.E., Johnson, R.A., Tihanyi, L., White, R.E., 2005. Corporate restructuring in emerging economies: balancing institutional change, transaction and organization costs. J. Manage. 31 (6), 941–965. Hoskisson, R.E., Cannella, A.A., Tihanyi, L., Faraci, R., 2004. Asset restructuring and business group affiliation in French civil law countries. Strateg. Manage. J. 25, 525–539. Johnson, G., Smith, S., Codling, B., 2000. Microprocesses of institutional change in the context of privatization. Acad. Manage. Rev. 25 (3), 572–581. Keister, L., 1998. Engineering growth: business group structure and firm performance in China’s Transition Economy. Am. J. Sociol. 104, 404–440. Khanna, T., Palepu, K., 1997. Why focused strategies may be wrong for emerging markets. Harvard Bus. Rev. 75 July–August, 3–10. Khanna, T., Palepu, K., 1999. The right way to restructure conglomorates in emerging markets. Harvard Bus. Rev. 77 (4). Khanna, T., Palepu, K., 2000a. The future of business groups in emerging markets: long-run evidence from Chile. Acad. Manage. J. 43, 268–285. Khanna, T., Palepu, K., 2000b. Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. J. Finance 55 (2), 867–891. Khanna, T., Rivkin, J., 2001. Estimating the performance of business groups in emerging markets. Strateg. Manage. J. 22, 45–74. Kim, H., Hoskisson, R., Tihanyi, L., Hong, J., 2004. The evolution and restructuring of diversified business groups in emerging markets: the lessons from chaebols in Korea. Asia Pac. J. Manage. 21, 25–48. Kock, C.J., Guillen, M.F., 2001. Strategy and structure in developing countries: business groups as an evolutionary response to opportunities for unrelated diversification. Ind. Corp. Change 10 (1), 77–113. Konings, J., Cayseele, P.V., Warzynski, F., 2005. The effects of privatization and competitive pressure on firms’ price–cost margins: micro evidence from emerging economies. Rev. Econ. Stat. 87 (1), 124–134. Kriauciunas, A., Kale, P., 2006. The impact of socialist imprinting and search on resource change: a study of firms in Lithuania. Strateg. Manage. J. 27, 659–679. Meyer, K.E., 2004. Perspectives on multinational enterprises in emerging economies. J. Int. Bus. Stud. 35, 259–276. Newman, K., 2000. Organizational transformation during institutional upheaval. Acad. Manage. Rev. 25, 602–619. Peng, M.W., 2000. Business Strategies in Transition Economies. Sage, Thousand Oaks, CA and London. Peng, M.W., Luo, Y., 2000. Managerial ties and firm performance in a transition economy: the nature of a micro-macro link. Acad. Manage. J. 43, 486–501.

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Peng, M.W., 1997. Firm growth in transitional economies: three longitudinal cases from China, 1989–96. Organ. Stud. 18 (3), 385–413. Peng, M.W., 2003. Institutional transitions and strategic choices. Acad. Manage. Rev. 28, 275–296. Ralston, D.A., Terpstra-Tong, J., Terpstra, R.H., Wang, X., Egri, C., 2006. Today’s state-owned enterprises of China: are they dying dinosaurs or dynamic dynamos? Strateg. Manage. J. 27 (9), 825–843. Ramamurti, R., 2000. A multilevel model of privatization in emerging economies. Acad. Manage. Rev. 25 (3), 525–550. Ramamurti, R., 2004. Developing countries and MNEs: extending and enriching the research agenda. J. Int. Bus. Stud. 35, 277–283. Spicer, A., Kogut, B., McDermott, G., 2000. Entrepreneurship and privatization in Central Europe: the tenuous balance between destruction and creation. Acad. Manage. Rev. 25, 630–649. Strachen, H., 1976. Family and Other Business Groups in Economic Development: the Case of Nicaragua. Praeger, New York. Uhlenbruck, K., Meyer, K.E., Hitt, M.A., 2003. Organizational transformation in transition economies: resource-based and organizational learning perspectives. J. Manag. Stud. 40, 257–283. White, S., 2000. Competition, capabilities, and the make, buy, or ally decisions of Chinese state-owned firms. Acad. Manage. J. 43, 324–341. Yiu, D., Bruton, G.D., Lau, Y., 2005. Understanding business group performance in an emerging economy: acquiring resources and capabilities in order to prosper. J. Manag. Stud. 42 (1), 183–206. Yiu, D.W., Lau, C., Bruton, G.D., 2007. International venturing by emerging economy firms: the effects of firm capabilities, home country networks, and corporate entrepreneurship. J. Int. Bus. Stud. 38 (4), 556–572. Zahra, S.A., Ireland, D., Gutierrez, I., Hitt, M.A., 2000. Privatization and entrepreneurial transformation: emerging issues and future research agenda. Acad. Manage. Rev. 25 (3), 509–524.

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Section 3

Marketing Mix

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Chapter 3.1

Cognitive and Affective Reactions of U.S. Consumers to Global Brands Claudiu V. Dimofte, Johny K. Johansson, and Ilkka A. Ronkainen

Marketing and brand managers in companies whose market offerings span multiple cultures and borders are faced with the difficult task of coordinating resources and strategies to serve broad global markets profitably. In addition to this challenge, many are unsure about what the globality of their brands means to their consumers or even whether this globality is a brand attribute that should be mentioned or perhaps concealed in marketing communications. Academic research on the topic is modestly informative. Several recent studies have provided some evidence of a positive relationship between the perceived globality of a brand and its perceptions of quality (Holt, Quelch, and Taylor 2004), prestige (Steenkamp, Batra, and Alden 2003), and esteem (Johansson and Ronkainen 2004). Even when other factors are controlled for, researchers have argued that this global brand effect influences brand purchase intentions through higher quality and status ratings (Steenkamp, Batra, and Alden 2003). What the global brand effect actually consists of is still unclear. Holt, Quelch, and Taylor (2004) suggest two important factors, global myth and social responsibility, whereas others suggest cosmopolitanism and the

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desire to belong to a global community (Alden, Steenkamp, and Batra 1999; Kapferer 1997). Attractive as such benefits might be, it is difficult to find evidence that consumers actually consider globality as captured by these dimensions in their marketplace choices. There is strong evidence that individual consumers in developing countries choose global brands regardless of merit for conspicuous consumption or aspirational reasons (Batra et al. 2000; Holt, Quelch, and Taylor 2004). In more mature markets, however, it is likely that “the consumer does not buy a global brand per se, but on the contrary, individualistic brands that correspond exactly to his/her specific needs” (Kapferer 1997, p. 345).

CONCEPTUAL FRAMEWORK Defining the Global Brand Concept The ambiguity of the global brand construct is evident in the discrepancies between various definitions and rankings of global brands in the popular and managerial literature. For example, two of the most visible such rankings (one compiled by Interbrand and published in BusinessWeek and the other a joint effort of Millward Brown Optimor and Euromonitor International published in the Financial Times) shared only five of their top ten global brands in their 2006 ranking, and none were ranked in the same spot. This ambiguity may be even more pronounced in consumers’ minds. It is not clear what their understanding of global brands is or what importance they place on globality when evaluating brands. Even the large cross-country and multiyear database underlying Young & Rubicam’s (Y&R’s) Brand Asset Valuator model lacks measures of perceived brand globality (Johansson and Ronkainen 2005). Moreover, relevant empirical research has naturally involved actual marketplace brands, raising the possibility that the effect is confounded by a brand equity effect. Global brands are typically larger than local or domestic brands and therefore are also likely to be perceived as stronger and more powerful. An appropriate way to control for such confound would be to include in the database both global and local brands that are judged to be equally strong, thus varying mainly in terms of globality (e.g., Steenkamp, Batra, and Alden 2003).

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However, it is difficult to account (conceptually and statistically) for all the associations evoked by actual brand names and to isolate the pure globality effect. To illustrate, two rival brands such as Nike and New Balance differ in their level of globality, but they also differ in terms of the prompted brand associations, positioning, segmentation, and other more basic respects, including range of products, designs, and country of manufacturing. The distinction we make is that between a category prototype (the global brand label) and category exemplars (specific brand names). The literature on categorization levels supports the claim that using brand names when evaluating global brands in general can produce spurious results. Archambault, O’Donnell, and Schyns (1999) demonstrate that learning to categorize an object as general or specific may help a person perceive different features in the object. Along these lines, providing consumers with specific brand exemplars essentially primes them with idiosyncratic brand equity associations that cannot be easily suppressed (see Wenzlaff and Wegner 2000). Indeed, in a brand extension context, Mao and Krishnan (2006) show the distinction between consumer perceptions of brand prototype fit and product exemplar fit, as driven by two distinct evaluative processes (top-down and parallel attitude transfer, respectively). Accordingly, questionnaire items evaluating consumer perceptions of attributes of Nike or Coke as global brands will elicit specific, idiosyncratic attribute associations with these brands regardless of the global brand qualifier. It is difficult to avoid the conclusion that to evaluate consumers’ attitudes toward global brands in general, researchers must avoid biasing brand names. Finally, does it make sense to expect consumers to have formed and be able to articulate attitudes toward general brand categories, such as the global brand, in the absence of being primed with specific exemplars thereof? Research by Crowley, Spangenberg, and Hughes (1992) suggests that the answer is affirmative and that, for example, consumers have reasonably clear perceptions of the hedonic and utilitarian dimensions of various product categories. In a similar vein, we expect that, though not always salient, perceptions of and attitudes toward global brands are easily retrievable for consumers, albeit perhaps colored by individual difference filters such as education, ethnocentrism, age, and so on. Thus, a goal of the current research is to understand this attitudinal variance and its underlying factors.

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Hypothesis Development In general, there are at least two possible consumer interpretations of the global brand construct. On the one hand, it might be that brand globality is simply a distinct brand attribute that is considered and weighted in the evaluation process much like other attributes (e.g., quality, functionality, price, image). On the other hand, it could be that the consumer does not explicitly evaluate the globality of a brand but that globality operates nonetheless as a halo effect, similar to the way country of origin can affect evaluations of more objective product attributes (Han 1989). Both alternatives could viably explain specific marketplace behaviors (Kapferer 2005). From a theoretical perspective, the globality construct is related to the country-of-origin construct. Both can have a direct effect as a brand attribute and an indirect effect as a halo. A halo perspective would suggest that the global brand effect involves the biasing of perceived brand attributes, favoring the global brand. This is suggested by some of the existing research. Thus, consumers in the developing world harbor aspirations toward a global brand because it helps them identify with the world outside (Batra et al. 2000). For consumers in developed countries, a brand’s globality could imply worldwide success and, thus, the seal of approval of a wide marketplace audience (e.g., Holt, Quelch, and Taylor 2004). Furthermore, Boatwright, Kalra, and Zhang (2008) show that consumers’ use of a halo is consistent with the goal of minimizing risk, and thus the global brand halo might exist as a positive effect that entails minimizing choice risk. Therefore, for consumers, a generalized positive sentiment could be manifested as a halo effect favoring the global brand. Analyzing brand equity, Leuthesser, Kohli, and Harich (1995) find that the halo effect is a systematic bias in attribute ratings resulting from raters’ tendency to rely on overall affect rather than carefully discriminating among conceptually distinct and potentially independent brand attributes. Because this is likely the response mode that global brands engender, we hypothesize the following: H1: Consumers harbor largely positive evaluations of global brands, even though brand globality may not be acknowledged as an important brand attribute.

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An alternative conceptualization is to view the globality of a brand as an attribute. Again, the reference to the country-of-origin construct is informative. As an attribute, country of origin should bring about associations with a specific country of manufacture and add or subtract value depending on this country’s image (see Hong and Wyer 1989). This requires that the country of origin be known, though this is not always the case. Recent research (see Balabanis and Diamantopoulos 2008; Samiee, Shimp, and Sharma 2005) has shown that consumers across the world are largely unaware of the precise origin of many marketplace brands. If consumers do recognize a brand as global or foreign, they might add this fact to the list of salient attributes and use it for evaluation. This does not require that the consumer correctly identify the source of the brand specifically, but rather it would be a generalized distaste for things not coming from home. If “globality” is thus equated with “foreignness,” consumer ethnocentrism should affect the degree to which globality matters, and more ethnocentric consumers would derogate or discount global brands. Research shows that ethnocentrism is not uncommon in the U.S. marketplace. The original work on consumer ethnocentrism by Shimp and Sharma (1987) develops a robust scale for measuring ethnocentrism with respect to foreign products and also shows how more ethnocentric consumers in the United States indeed denigrate foreign products (though their actual choices were less ethnocentric). Subsequent work corroborates these results for Korean consumers and also shows how perceived competition from abroad sharpens ethnocentric behavior (Sharma, Shimp, and Shin 1995). However, applying the ethnocentric framework to explain U.S. consumers’ responses to brand globality is not straightforward. First, the assumption that global brands are from the outside, non-local, or foreign goes against the fact that most of the leading global brands are U.S. based.1 For example, there are likely few U.S. consumers who would not consider Coca-Cola global and hardly any who would consider Coke foreign. Second, the relatively high level of outsourcing among U.S. producers has been well publicized, again blurring perceptual distinctions between “American” and “global.” The result is that though some ethnocentric tendencies should play a role in evaluations of some brands in strongly contested product categories (e.g., automobiles), in

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general, ethnocentrism is unlikely to be a major factor. Accordingly, we hypothesize the following: H2: Ethnocentrism has a minimal impact on consumers’ attitudes toward global brands. Nonetheless, we expect that the U.S. marketplace (like most of the world’s advanced economies) features a small but vocal minority of consumers who oppose all things corporate and fight globalization trends in general (termed “politically motivated brand rejection” by Sandikci and Ekici 2008). These anti–global brand consumers (one in ten around the world, according to Holt, Quelch, and Taylor 2004) will naturally be highly negative about global brands. For such consumers, knowing that a brand is global suggests direct rejection, an attribute-type effect. Accordingly, we hypothesize the following: H3: In general, consumers who are against globalization show significantly more negative attitudes toward global brands than other consumers. The preceding discussion suggests that consumer responses to global brands in a U.S. marketplace environment are less about attribute-type perceptions of globality and more about halo-type influences. A halo effect is likely to be more subtle than an attribute-based rejection. Under these conditions, we expect that though direct brand evaluations from some consumers may be unfavorable, indirect evaluations could bypass their negativist filters and allow the positive halo effect to come through. Accordingly, we hypothesize the following: H4: Consumers with unfavorable attitudes toward global brands are less negative when responding to indirect than direct measures of brand globality attractiveness. In this research, we first identify the precise meaning of a global brand for U.S. consumers and then focus on how a brand’s globality affects these consumers’ perceptions and attitudes. We propose that the global brand effect is conceptually similar to the country-of-origin effect but is not

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directly influenced by consumer ethnocentrism. To avoid the potential confound from actual brands, we begin by eliciting open-ended responses about what characterizes a global brand in general in a pretest employing a small purposive sample. Then, we compare the results with similar data for local brands. Creating a set of relevant Likert items, we use the elicited global brand characteristics in a questionnaire administered online to a larger, more representative sample and then summarize the global brand characteristics through factor analysis into a few dimensions. We show the objective characteristics different consumer segments associate with global brands and the inferred attributes these brands are perceived to possess. One significant finding is the lack of a direct quality association for global brands. To evaluate this further, we administer and analyze a second survey. The results suggest that for most U.S. consumers, the quality effect is essentially a size effect, whereas positive affective responses toward global brands emerge despite the relatively low cognitive favor awarded to these brands.

CONSUMER ASSOCIATIONS WITH GLOBAL BRANDS To get a true sense of what a global brand might stand for in a consumer’s mind, we avoided defining a global brand and thus imposing our own interpretation onto respondents’ opinions. The notion was simply to get to the unbiased, top-of-the-mind awareness of the concept to subsequently develop relevant questionnaire items. Drawing on prior research on global branding and the larger literature on branding in general, we were able to develop a few propositions about what the associations of a global brand would likely be.

Pretest: Global Versus Local Brands We began by collecting open-ended responses from a student-based convenience sample. College students represent a market segment that is often targeted by the marketing strategies of some of the best-known global brands (Kerner and Pressman 2007; Klein 2002; Quart 2004), and

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thus we deemed that they would be well acquainted with the topic of global brands. Data were collected from 135 respondents who participated in a large undergraduate subject pool at a metropolitan East Coast university. The questions about brand globality were introduced as part of a larger research project on brands and their role in consumer decision making. Participants were instructed through open-ended responses to list the first three characteristics that came to mind when thinking about global brands. (No specific brand names were provided.) Using a coding scheme devised by two investigators, one investigator and one research assistant independently content-analyzed the openended responses; then, all authors reviewed them. The content analysis identified five major dimensions of a global brand: geographical reach (e.g., “A worldwide presence,” “Products available internationally”), wide recognition across the world (e.g., “International recognition of brand name,” “All cultures and societies should be able to recognize the brand at first glance”), its special image as a global brand (e.g., “Consumer appeal,” “Special relation with its customers”), its universality/relevance across countries (e.g., “Useful to all regardless of location or culture,” “Products that appeal to people all over the world”), and its likely lack of sensitivity or adaptation to customer needs in individual national markets (e.g., “Must be the same all around the world,” “Needs to be cross-cultural without major adaptations”). These results are largely similar to previous studies of global brands (e.g., Batra et al. 2000; Holt, Quelch, and Taylor 2004). By far, the most agreed-on dimensions were wide availability and recognition, whereas—in surprising discordance with previous research—quality was mentioned only 22 times out of the possible 405 responses (135 × 3). We next collected open-ended responses for local brand characteristics. About one month after the initial data collection, another sample of subject pool participants (N = 131) was asked to provide three characteristics of a local brand. Again, the query was introduced at the beginning of an online project session with several separate studies. No further details were specified. We expected that, in general, the factors brought out would be opposite to those of the global brand responses, under the implicit assumption that a local brand is simply one that is not global. The content analysis of the open-ended responses proved this to

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be only partially correct. As expected, whereas global brands had been characterized by reach and availability, local brands were indeed described as “only available in a specific geographical region,” with a “concentrated market,” and “not international.” Unlike the few mentions of “product quality” for global brands, quality was never mentioned, either positively or negatively. Also in contrast with global brands, local brands were viewed as adapted to the local market and characterized as committed to the local economy. Other characteristics were less obviously counter to global brands. Most noteworthy was the sense that local brands have their own important strengths, such as uniqueness, cultural originality, and the pride of representing the local area. Thus, although wide recognition was the second-most frequent mention for global brands, local brands were also viewed as well recognized, albeit primarily in their local community. These are indicators of a brand that happens to be targeting a specific market niche, in this case geographically determined. Thus, a local brand is not simply the opposite of a global brand (or vice versa). Local brands are necessarily smaller and less widely distributed, but they are also considered original and unique, with a decided measure of affinity, pride, and respect. A local brand is one that not only reflects but also helps define the character of the local community. In this research, our purpose is first to identify the meaning of a global brand. In the process, we aimed to contrast global and local brands. However, the results of this brief inquiry into local brands suggest that focusing on this contrast activates particular mental representations and generates different responses than merely asking what characterizes a global brand. Therefore, we decided to pursue a more open-ended approach, by simply evoking the global brand concept and analyzing people’s perceptions of global brands relative to other brands.

Study 1: Global Brand Survey We used the open-ended global brand pretest responses to develop a comprehensive set of 56 Likert items (“agree/disagree” on seven-point scales) to represent characteristics of global brands. A survey questionnaire was developed and administered to an online consumer

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panel spanning approximately three million respondents from across the United States. This sample (N = 719) was selected with an equal number of men and women, covering age groups from 18 to 45 years, and included people with education levels from high school to postcollege degrees. We selected a younger sample than the general population to provide a sample with relatively high familiarity with global brands and to ensure the relevance of the items developed. The survey was intended to gauge consumers’ general and attribute-level perceptions of global brands. Item Comparisons. Table 1 presents the mean values of a selected set of items tapping into the global brand associations. These were tested for significance against 4 (i.e., the midpoint of the seven-point scale: “Not sure” = “neither agree nor disagree”). Several things are of note. First, there is general agreement on several items associated with brand globality. As the results of the pretest suggest, global brands have wide recognition and availability, are essentially the same everywhere, are dominant brands (and thus have greater ethical responsibility), and show more cosmopolitanism. By the same token, global brands are not significantly more exciting, nor do they have a special aura about them. Second, the most significant finding here is perhaps the result for the quality items. On average, respondents did not associate global brands with higher quality. If anything, global brands were perceived as not having the highest quality in their category (i.e., the item mean on “highest quality in their category” is significantly lower than 4). Table 1 also shows the mean scores for the attitude and attribute importance items, scored on seven-point scales (7 = “highest”). The average attitude toward global brands is slightly positive. As to the importance of brand globality in choice, the mean score is decidedly low; brand globality is not very important to these respondents. Both results provide support for H1. Attitude Differences. The attitude responses can be used to explore the potential heterogeneity in the sample. As we discussed in the “Defining the Global Brand Concept” section, the global brand construct may evoke ethnocentric and possibly antiglobalization sentiments, which could color beliefs about such brands. In general, and as H3 predicted, the more antiglobalization respondents’ position, the more unimpressed they were with global brands. (In a linear regression, feelings toward

Cognitive and Affective Reactions of U.S. Consumers

TABLE 1.

353

Study 1: Mean Values for Selected Survey Items (N = 719)

Item A global brand is available in most countries. When traveling abroad, one can buy global brands. People across the world are able to recognize global brands. A global brand is familiar to many people around the world. Global brands are basically the same everywhere. Global brands do not customize their products to local tastes. Global brands have higher quality than other brands. Global brands have the highest quality in their category. Choosing a global brand saves time compared to choosing another brand. Global brands are a safer choice than other brands. Global brands are more innovative than other brands. Global brands are often ahead of market trends. Global brands are the most dominant brands. Dominating the competition describes global brands. The ethical behavior of a global brand is an important part of its image. Global brands have greater social responsibilities than other brands. Being more cosmopolitan is part of the appeal of global brands. I do not find that there is a unique aura about a global brand. I think that global brands are more exciting. To me, global brands are more stylish. Attitude toward global brands. Global brand importance in choice.

Sample Mean

Significance Level of Contrast to Scale Midpoint

5.05 5.21

.000 .000

5.12

.000

5.18

.000

4.12 3.81

.017 .000

4.03

.555

3.88

.014

4.19

.000

4.21 3.96

.000 .474

4.36 4.52 4.53 5.37

.000 .000 .000 .000

4.53

.000

4.41

.000

4.39

.000

3.59 3.67 4.56 2.92

.000 .000 .000 .000

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globalization were a significant predictor of global brand attitudes: β = .34, p < .001.) It is intuitive to expect consumers favorable toward global brands to rate them more highly than consumers with more negative views toward them. This is borne out in Table 2, which shows the means for selected items broken down by overall attitude toward global brands. “Proglobals” are respondents with a score greater than 4 on a seven-point favorableness item (N = 334), whereas “antiglobals” are those scoring lower than 4 (N = 67, or 16.7% of the sample).2 Table 2 also presents the significance levels of the contrast between the item response means for the two groups. The differences between the two groups are striking. On virtually all dimensions, proglobals score significantly higher than antiglobals. Respondents with favorable attitudes find that global brands have higher quality, are more innovative and ahead of market trends, and offer safer TABLE 2.

Study 1: Mean Values for Antiglobals (N = 67) and Proglobals (N = 334) (7 Point Scale 1 = Highly unfavorable, 7 Highly favorable)

Item A global brand is available in most countries. When traveling abroad, one can buy global brands. People across the world are able to recognize global brands. A global brand is familiar to many people around the world. Global brands are basically the same everywhere. Global brands do not customize their products to local tastes. Global brands have higher quality than other brands. Global brands have the highest quality in their category.

Antiglobals Mean

Proglobals Mean

Significance Level of Anti–Pro Contrast

4.37

5.47

.000

4.73

5.60

.000

4.73

5.46

.000

4.84

5.50

.000

4.18

4.12

.754

4.30

3.70

.013

3.30

4.35

.000

3.26

4.13

.000

Cognitive and Affective Reactions of U.S. Consumers

Choosing a global brand saves time compared to choosing another brand. Global brands are a safer choice than other brands. Global brands are more innovative than other brands. Global brands are often ahead of market trends. Global brands are the most dominant brands. Dominating the competition describes global brands. The ethical behavior of a global brand is an important part of its image. Global brands have greater social responsibilities than other brands. Being more cosmopolitan is part of the appeal of global brands. I do not find that there is a unique aura about a global brand. I think that global brands are more exciting. To me, global brands are more stylish. Attitude toward global brands. Global brand importance in choice.

3.62

4.48

.000

3.57

4.56

.000

3.43

4.32

.000

3.81

4.68

.000

4.68

4.70

.923

4.66

4.65

.968

5.22

5.62

.082

4.25

4.82

.023

4.16

4.59

.047

4.83

4.13

.001

2.90

3.93

.000

3.00 2.45 2.30

3.97 5.53 3.23

.000 .000 .000

355

and more time-saving choices than other brands. Even on items for which there was a basic agreement between pro- and antiglobals, the former score consistently higher. Accordingly, proglobals perceived more cosmopolitanism and ethical responsibilities in global brands, and even for relatively objective items such as reach and availability, they scored higher than the (also agreeing) antiglobals. The only dimensions showing complete agreement were the lack of adaptation to local markets and competitive dominance: Both groups agreed that global brands are basically the same everywhere and tend to be strong, dominant brands. However, the acknowledgment that global brands do not adapt to local cultures was not accompanied by their derogation (e.g., “Foreigners that do not understand me and whom I do not like”). Indeed, and as H 2 predicted, the single item capturing ethnocentrism (“If I had a chance, I

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would rather buy an American [rather than an imported] brand”) did not predict consumer attitudes toward global brands in a linear regression: β = .02, p = .36. However, note that though this single item mimicked one of the items with the highest reliabilities in Shimp and Sharma’s (1981) ethnocentrism scale, it is possible that the full scale (17 items) would have better captured the complexity of the ethnocentrism construct (or conversely could have primed ethnocentrism) and the results might have been different. The significant differences in perceptions indicate that explicit overall attitudes toward global brands strongly favor what consumers see in them. This result is not surprising, given the relative lack of salience of the brand globality construct in consumer choices. However, this result also makes it problematic to attribute any causal effect to the globality aspect directly. It suggests that what people associate with global brands—whether it is “high quality,” “innovativeness,” or a “global myth”—depends directly on their reported attitudes. Consumers seem to justify their overall attitudes by making positive or negative attributions to global brands. Overall, the results suggest that consumers show general agreement on what constitutes a global brand. Across all respondents, global brands are viewed as available, well recognized, standardized, more powerful, more cosmopolitan, and socially obligated. Moreover, they are not perceived as more exciting, more unique, or of higher quality. However, consumers whose attitudes toward global brands are more positive perceive these global brands as offering more of certain benefits. They perceive them as significantly safer to choose, higher in quality, and more innovative. Conversely, respondents with less positive attitudes toward global brands deny these benefits. Because the majority of the sample was favorable toward global brands, the average response trends upward (see Table 1). However, in the case of quality, this upward momentum is not strong enough to bring the average significantly above the neutral point. Construct Dimensionality. To get a better sense of the dimensionality of the global brand construct, we performed a factor analysis. We analyzed the 56 items using principal components with Varimax rotation. The standard scree plot and the eigenvalues suggested that there are five dimensions to the global brand construct. To interpret the five factors, we focused on the larger loadings. Table 3 presents these results.3

.826 .808

When traveling abroad, one can buy global brands. A global brand is available in most countries. People across the world are able to recognize global brands. Purchasing a global brand says something special about the buyer. Global brands are more exciting. Users of global brands are more self-conscious. There is no unique aura about a global brand. Choosing a global brand saves time compared to choosing another brand. Global brands are a safer choice than other brands. Global brands have higher quality than other brands. Global brands should be particularly concerned about the environment. The ethical behavior of a global brand is an important part of its image. Dominating the competition describes global brands. Global brands do not customize their products to local tastes. Global brands are basically the same everywhere. .770

Reach

Study 1: Factor Analysis: Rotated Component Matrix

Item

TABLE 3.

.760 .757 .673 –.621

Aspiration

.755 .690 .605

Low Risk

.783 .486

.807

Ethics

.844 .719

Standardization

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The first factor reflects the simple availability, recognition, and geographical reach of a global brand. This dimension highlights the advantage of a global brand for global consumers, who can find the brand everywhere, or what we call the “reach” of a global brand. The second factor reflects the sense that a global brand has a special appeal, in terms of both individual achievement and excitement.4 We term this aura the “aspiration” component of a global brand, a factor that seems closely related to the global myth notion. The third factor involves the convenience and the low risk associated with choosing a global brand, in which quality seems to play some role. We broadly call this factor a “lowrisk” dimension, though arguably it may represent quality inferences that consumers make and translate into perceptions of lower-risk choices. The fourth factor represents the perception that global brands have more environmental and social responsibility and need to demonstrate high ethical standards, a factor that other researchers have also found. This perception seems to be tied to the sense that global brands tend to dominate the marketplace and, as such, have more of an ethical burden. We call this the “ethics” factor. Finally, global brands are viewed as basically the same everywhere, with no particular adaptation to local markets. This is the standardization or nonlocal factor, which sets global brands apart from local brands. As indicated in the pretest responses, the adaptation to local preferences is a key characteristic of a local brand. Discussion. The results of Study 1 help clarify the dimensions of the global brand construct. When consumers think of a global brand, they think of wide recognition, availability, and similarity around the world. These are objective, definitional items that consumers tend to agree on, as the mean scores show. There is evidence of an association of global brands with individual aspirations, but here we find strong differences between respondents, depending on their explicit attitudes toward global brands. The same holds true for the low-risk items, including higher quality, with some consumers less willing to attribute lower risk to global brands. For the last two dimensions evoked—ethical responsibility and standardization—consumers also tend to agree that these are characteristics of global brands. Overall, consumers largely agree on the reach, ethical burden, and nonlocal components of global brands. Proglobals are more strongly convinced about this than antiglobals, but there is general agreement. However, when it comes to whether global

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brands are more aspirational and low risk (including impressions of higher quality), perceptions are split. Consumers whose attitudes toward global brands are more positive also find them to be more aspirational and less risky. Not surprisingly, antiglobals disagree. The Quality Explanation. What is it that explains the observed discrepancy relative to previous research on the global brand effect on quality? In other words, why are global brands not consistently associated with higher quality? Undoubtedly, part of the answer involves the stimulus employed. We used global brands as a generic category, without naming any particular brand. Previous global branding research has focused explicitly on well-known, large brands in popular product categories (e.g., Nike, Mercedes, Coke). When such brands are used as stimuli, we would expect a strong correlation between globality and quality perceptions (see Dawar and Parker 1994). Unless brand strength is explicitly controlled for, we argue that this globality–quality correlation is potentially spurious. Naturally, without actual brand names in our studies, we could not ask for specific brand strength or globality perceptions. (The quality items are simply focused on global brands in general.) Therefore, we collected subject pool data with actual brand names mentioned and with perceptions of brand strength, globality, and quality measured. In one study, undergraduate students enrolled in an introductory marketing course at a metropolitan East Coast university (N = 139) were exposed to a battery of questions about branding. Hidden among scores of unrelated items, we elicited participants’ perceptions of the quality, strength, and globality of Nike, Pepsi, Sony, and Nivea on seven-point semantic differential scales. An analysis of variance (ANOVA) with quality as the dependent variable and globality as the independent variable showed a significant effect for the latter (F(5, 133) = 12.15, p < .001). By introducing brand strength as a covariate, the globality impact on quality was rendered insignificant (F(5, 132) = 1.51, p = .19). We found a similar effect in another study (sample recruited from the same population, N = 80) involving four similar brands (Nike, New Balance, Colgate, and Crest). Again, we observed a significant effect of globality on quality in the initial ANOVA (F(6, 73) = 2.73, p < .02), but it disappeared after the brand strength covariate was introduced (F(6, 72) = 1.42, p = .22). In both cases, the covariate was significant at the .001 level.

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These results suggest that using actual brands can confound the globality effect with the sheer brand equity effect. Indeed, the more global the named brand, the higher was the perceived quality—but not because of its globality; rather, it is because more global brands simply have higher brand equity (i.e., are stronger brands) as well. In general, we argue that it is more parsimonious and preferable to assign the quality effect to a simpler strong brand effect rather than claim that globality per se is at work, especially because there is no evidence that brand globality is explicitly considered in consumers’ choice processes.5 The lack of a quality effect from globality alone is also supported by previous findings of Johansson and Ronkainen (2005) in their analysis of Y&R data. Analyzing the top 150 brands (in terms of Y&R’s measure of brand strength) in each of eight countries, they divide the brands into local-domestic, local-foreign, and global according to the number of countries in which the brand is mentioned. They find no difference in mean perceived quality between the three groupings of brands, with local-domestic and global virtually tied. Schuiling and Kapferer (2004) report similar results in their analysis of local brand strength in Europe. They find that local brands are as high as international brands in percentage of brands with high quality (25.3% versus 24.3%). More recent findings from Cheng and colleagues (2007) also suggest that brands they call international private label are perceived to be inferior in quality to domestic, national brands (albeit in the context of Taiwanese consumers). These results are consistent with the notion that the quality effect is tied to the strength of the brand rather than to globality per se: For a set level of brand strength, globality does not suggest quality.

THE IMPORTANCE OF BRAND GLOBALITY The data presented thus far show low values for the perceived importance of brand globality, even for consumers with explicitly favorable attitudes toward global brands. Thus, as Table 1 shows, when asked to describe agreement with “It is important that the brands I buy be global,” respondents in the sample (N = 719) largely disagreed (Mall = 2.92 on a seven-point scale with 1 = “completely disagree” and 7 = “completely agree”). Although a significant difference emerged

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between proglobals and antiglobals in Table 2 (Mpro = 3.23, Manti = 2.30; p < .001), neither score is very high. A similar item (“When choosing, I don’t really care if a brand is global or not”) showed high levels of agreement across the board (Mpro = 4.48, Manti = 4.35; not significant). These responses cast doubt about any explicit role of globality in brand evaluations. It is significant that there are no considerable differences on the latter item. Regardless of attitudes toward global brands, respondents do not seem to care about globality at all (at least not in the sense of a brand attribute that is given explicit consideration; see Leuthesser, Kohli, and Harich 1995). However, it is well known that many consumers deny marketing influences in their choices, despite evidence to the contrary. In addition, as Hastings, Stead, and Webb (2004, p. 964) indicate, “asking consumers to explain their responses . . . may not yield accurate answers, because consumers tend to revert to the safety of logical explanations for what are largely emotion-based reactions.” Could it be that the globality of a brand is more influential than the respondents want to acknowledge? There are two potential explanations for an affirmative answer to this question. One involves issues of respondent concerns with self-presentation. It is conceivable that some respondents find it difficult to admit the attraction to global brands because they fear appearing shallow and unsophisticated (respondent anonymity notwithstanding). Yet another explanation is a possible lack of awareness, such that some consumers are simply unaware of their innate, automatic preference for global brands. To evaluate these alternative explanations and assess the extent to which consumers may hold different feelings toward global brands than they volunteer in self-reports, we collected additional data to capture consumers’ disguised preferences in an online survey using indirect explicit measures.

Study 2: The Indirect Effect of Globality We developed a survey and administered it to respondents (N = 756) from the online consumer panel used in Study 1. We matched the previous sample in terms of gender (equal split), age group (18–45 years), and education (high school and above).

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Measures. As in Study 1, the online survey began by directing respondents to provide their attitudes toward global brands in general. A six-point scale was used to force commitment away from the neutral point. Then, the survey directed respondents to rate the importance of four global brand attributes (i.e., quality, image, globality, and country of origin) in their purchase decisions. Respondents also indicated their agreement with the assertion that larger brands are better brands. After answering these items, respondents were randomly exposed (depending on their odd- or even-numbered day of birth) to a constructed online profile of a person. Each profile followed the typical format of a MySpace entry, including the person’s location (East Coast United States), age group (30–40 years), appearance (“above average”), education (“college graduate”), smoking status (“nonsmoker”), car owned (“late model sports sedan”), interests (“sports, movies, traveling”), contact preference (“e-mail”), and drink of choice (global profile: “a leading import beer”; nonglobal profile: “the local brew”). Thus, the two profiles were relatively average, not gender specific, and identical except for the drink of choice descriptor. Subsequent to profile exposure, respondents described the extent to which they liked this person and evaluated the person along four summary dimensions: trustworthiness, success, confidence, and happiness.6 Results. Depending on respondents’ answers to the attitude item, we split the sample into an “anti–global brand consumer” group (antiglobals scored below the middle of the six-point scale; N = 163, or 21.6% of the sample) and a “pro–global brand consumer” group (proglobals scored above the middle of the scale; N = 593, or 78.4%). Note that consistent with the previous survey, antiglobals represent approximately 20% of the sample population. Paired comparisons on each brand attribute item found significant differences between the two consumer categories, in the expected direction (i.e., as in Study 1, proglobals placed more importance on a global brand’s quality, image, and globality; see Table 4). Proglobals also agreed more with the assertion that larger brands are better brands, though data show that, across the board, merely being a larger brand does not mean being a better brand. Responses to the profile-related measures were subject to ANOVA, with profile (global or not) and consumer group (antiglobals or proglobals) as factors. This analysis of the “person liking” item revealed

Cognitive and Affective Reactions of U.S. Consumers

TABLE 4.

363

Study 2: Means of Selected Variables for Total Sample (N = 756), Antiglobals (N = 163), and Proglobals (N = 593) Significance Level Sample Antiglobals Proglobals of Anti–Pro Mean Mean Mean Contrast

Attitude toward global brands Brand globalness importance Are larger brands better? Global brand quality importance Global brand image importance Global brand origin importance Global brand importance in choice

4.00

2.61

4.38

.000

3.48

2.76

3.68

.000

3.25

2.58

3.44

.000

3.90

2.79

4.21

.000

3.72

2.63

4.01

.000

3.61

2.91

3.80

.000

2.95

2.11

3.18

.000

Notes: Scales from 1 = “negative/disagree” to 6 = “positive/agree.”

a surprising but theoretically uninteresting main effect of group such that, in general, proglobals were more favorable to both featured profiles than antiglobals (Mpro = 3.39, Manti = 3.24; F(1, 754) = 10.38, p < .001). More important, there was also a significant two-way interaction of group and profile such that, compared with the local profile, proglobals liked the global profile more and antiglobals liked it less (Mpro = 3.50, Manti = 3.01; F(1, 754) = 4.68, p < .04). As expected, given the elaborate priming of brand globality and, thus, its salience, respondents adjusted their global profile liking response in line with their previously stated attitudes toward global brands. Thus, their cognitive answers were highly consistent: When noticing the global aspect of the profiled consumer’s drink of choice, proglobals liked the person more, whereas antiglobals liked the person less (see Figure 1, Panel A).

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Then, we examined items that less obviously addressed the global brand issue. If the consistency we found previously is based on a conscious effort of self-presentation or belief consistency and not representative of true feelings, the impact of global brands could perhaps be uncovered indirectly through higher scores on some dimensions for the more global profile, even among antiglobals. In other words, the inferred personality traits of the global brand user profile should be positive even for antiglobals, showing the disguised impact of brand globality. Relevant contrasts on the more cognitive personality traits (i.e., trustworthiness, confidence, and success) showed no significant elevation in ratings for the global profile. However, the affective item (i.e., happiness) did show the expected pattern: Both pro- and antiglobals perceived the global beer buyer as a happier person than the local brew consumer (MG = 3.69, MNG = 3.52; F(1, 754) = 4.49, p < .04). Thus, as H4 predicted, even antiglobals’ responses show that there is something about global brands that makes their users affectively better off (see Figure 1, Panel B). Discussion. Although the brand attitude and attribute importance differences between proglobals and antiglobals were not surprising and largely replicated Study 1, it seems that more subtle, indirect questions on the issue can circumvent these explicitly constructed beliefs and show that the self-reported indifference to or outright dislike of global brands is not necessarily representative of consumers’ true (or possibly implicit) attitudes. Positive affective inferences about global brands (and their users) occur even for antiglobals, who explicitly denigrate these very brands (e.g., antiglobals strongly agreed with the statement that branding only raises prices and that brands are not useful in the marketplace). It seems that though cognitive responses suggest low influence of brand globality across the board and even active disliking among antiglobals, indirect ways of evaluating affective responses to brand globality describe a different picture: Everyone feels good about global brands and what they convey to their users.

DISCUSSION AND IMPLICATIONS The contributions of this research to the global brand literature are twofold. On the one hand, we build on previous findings of a positive

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365

3.50 Antiglobals Proglobals Buyer Liking

3.25

3.00

2.75

2.50 Local Beer Drinker

Global Beer Drinker

3.75 Antiglobals Buyer Happiness

Proglobals 3.50

3.25

3.00

2.75 Local Beer Drinker FIGURE 1

Global Beer Drinker

Impact of Brand Globality on Perceptions of Its Buyer

consumer predisposition toward global brands by explaining its affective, albeit unacknowledged, nature. On the other hand, we depart from previous findings of consumers’ associating positive characteristics with global brands (e.g., quality signal as in Holt, Quelch, and Taylor 2004) and argue that they are an artifact of using actual brand names that engender brand equity associations that are largely independent of their globality. In general, this research suggests that U.S. consumers do not explicitly associate anything special with global brands beyond their broad reach and limited local adaptation. For example, the greater ethical responsibility of global brands seems to be more of an afterthought than top-of-the-mind awareness. More important, the association with higher

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quality established in previous studies for largely non-U.S. samples is shown here to be due to the generally larger size and strength of the specific global brands employed rather than to globality per se. In line with these findings, in general, consumers also claim that a brand’s globality has low importance in their choice decisions. Nevertheless, global brands tend to evoke positive sentiments, though consumers are unable or unwilling to articulate these explicitly. Importantly, this positive halo effect also operates for consumers who do not view global brands favorably. In other words, regardless of how cognitive perceptions of global brands are explicitly described, there is something innately appealing about a brand that is generally available, has wide recognition, and is basically the same across markets. These results are reminiscent of the argument Hsieh (2004) makes when proposing that global brand equity involves both specific benefit associations and an unmeasured component attached to the brand. In our terminology, explicit benefit associations are neither strong nor necessarily favorable for global brands in general, but the implicit, affective component of consumers’ responses to the globality aspect (largely driven by perceptions of brand strength) is what drives the success of global brands.

Limitations and Further Research Because our findings go against the previous literature to some extent, it is important to spell out the limitations of our research. The most important limitation involves the samples employed. The two surveys used online data collection, the drawbacks of which are still a contentious issue among market researchers (see Lynch 1999). Despite our best efforts to employ representative samples, not everyone is part of such a population (e.g., because Web access is required). Furthermore, given that willingness to participate in online panels is not uniform across the target population, it is possible that the actual respondents were not even a representative subset of the Internet population. However, these factors are not necessarily unique to the online panel research method but affect many marketing panels. One comforting factor is that the used panel pooled from among three million people across the country, and

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allowing for the selection criteria used (age, gender, and education), the samples should be representative of the subset of people with Internet access. Other limitations suggest further research possibilities. We largely avoided using actual brands; therefore, researchers should test the quality hypothesis against actual global brands. To do this properly, it is important that other characteristics (e.g., image, strength, equity) be controlled for. With actual brands, it will be difficult to avoid contamination from other brand equity influences. Previous research (e.g., Holt, Quelch, and Taylor 2004) that employs well-known and liked global brand names has inadvertently placed all respondents in the proglobals category. As such, their results only capture half the picture, and their explanation for the success of global brand competitors is, at best, incomplete. In Study 2, we used the beer category, and this limitation suggests an avenue for future work. To the extent that hedonic product categories emphasize self-presentation and affective or psychological benefits, it is conceivable that for such products, a brand globality cachet may enhance consumer responses even more (for a related point, see Hsieh 2002). Alternatively, the argument that the positive affective impact of brand globality operates largely outside conscious awareness would suggest that even utilitarian products could benefit from globality associations. This is an empirical question that raises conceptual and practical possibilities for global brand researchers and marketers alike.

Managerial Implications Marketing managers in charge of global brands should take solace that the globality of their brand is a positive attribute, even if not acknowledged as such by most consumers or viewed as an outright negative by some. Whereas brand globality does not seem to be a sufficient condition for quality inferences, it may be a necessary one for eliciting more favorable affective responses. Thus, to extract value from the benefits implied by their products, marketers should subtly emphasize the globality of their brand through, for example, soft power—that is, winning over consumers by using

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cultural values and aspirational ideals (Tse, Cainey, and Haddock 2007). This may take the form of referring to the brand’s leadership position in terms of technology or innovation, which is only possible for a brand with substantial market reach. Similarly, to match consumer expectations for global brands, marketers could focus on the social dimension to highlight their role as a responsible global citizen. The current research supports the suggestion that even when specific brand claims are only implied, people are quick to make assumptions that, in the case of globality, can only help the brand. Consumers who harbor reservations about global brands are a group of sufficient size not to be dismissed. Furthermore, some of the results point to a paradoxical disconnect between unfavorable attitudes and actual behavior. Given their real and perceived size, global brands are automatically associated with hard power (i.e., exploiting scale to gain acceptance and access). Antiglobals are not convinced that this means higher quality or more innovativeness; for them, it raises questions about fairness and fosters feelings of resentment. The convenience of global brands can overcome this concern. Indeed, marketers should give this segment every chance to be inconsistent and appeal to these consumers through individual level marketing: When social presentation demands are minimal, these consumers may well rely on their positive affective responses instead of a calculated, conscious choice. In addition to more widespread physical availability, it is advisable to localize features of the marketing mix. Through their association with good causes, global brands can begin changing some of the reservations that antiglobal consumers have about the larger brands. Emphasizing the globality of a brand may not constitute the most critical factor in the marketing of a product. Satisfying the basics of brand strength through differentiation and brand stature through familiarity remains the cornerstone of success. However, the evoked positive feelings may tip the balance in a global brand’s favor in decision-making situations, even when cold cognitions may not directly concur. By their very size and extensive experience base, global firms and their brands have the resources to develop products and communications that offer consumers the needed resonance.

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NOTES 1. 2.

3. 4.

5.

6.

Approximately two-thirds of Interbrand’s annual list of the top 100 global brands are typically U.S. based. Because 4 was the midpoint and indicated a neutral attitude, we did not consider these respondents. Although this eliminated a large portion of the total sample (318, or 44.2%), it was necessary to avoid measurement noise. In Study 2, we reduced the attitude scale to six points, forcing respondents away from the midpoint. In addition, it is significant that a clustering analysis of factor scores aiming to identify specific market segments in the respondent sample uncovered two clusters largely mapping onto our proglobal–antiglobal dichotomy. For brevity purposes, we only included the highest loading items in each factor. Cross-loadings were minimal. This factor suggests that global brands are perceived as more exciting, contrary to our previous findings. However, note that factors are based on correlations, not mean values. In a similar vein, some authors argue that sustainable brand benefits come from global brand leadership, not merely from having a global brand (see Aaker and Joachimsthaler 1999). This study was inspired by the classic Nescafé study (Haire 1950).

REFERENCES Aaker, David A. and Erich Joachimsthaler (1999), “The Lure of Global Branding,” Harvard Business Review, 77 (6), 137–44. Alden, Dana L., Jan-Benedict E.M. Steenkamp, and Rajeev Batra (1999), “Brand Positioning Through Advertising in Asia, North America, and Europe: The Role of Global Consumer Culture,” Journal of Marketing, 63 (January), 75–87. Archambault, Annie, Christopher O’Donnell, and Philippe G. Schyns (1999), “Blind to Object Changes: When Learning the Same Object at Different Levels of Categorization Modifies Its Perception,” Psychological Science, 10 (3), 249–55. Balabanis, George and Adamantios Diamantopoulos (2008), “Brand Origin Identification by Consumers: A Classification Perspective,” Journal of International Marketing, 16 (1), 39–71. Batra, Rajeev, Venkatram Ramaswamy, Dana L. Alden, Jan-Benedict E.M. Steenkamp, and S. Ramachander (2000), “Effects of Brand Local and Nonlocal Origin on Consumer Attitudes in Developing Countries,” Journal of Consumer Psychology, 9 (2), 83–95. Boatwright, Peter, Ajay Kalra, and Wei Zhang (2008), “Should Consumers Use the Halo to Form Product Evaluations?” Management Science, 54 (1), 217–23. Cheng, Julian Ming-Sung, Lily Shui-Lien Chen, Julia Ying-Chao Lin, and Edward Shih-Tse Wang (2007), “Do Consumers Perceive Differences Among National Brands, International

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Private Labels, and Local Private Labels? The Case of Taiwan,” Journal of Product & Brand Management, 16 (6), 368–76. Crowley, Ayn E., Eric R. Spangenberg, and Kevin R. Hughes (1992), “Measuring the Hedonic and Utilitarian Dimensions of Attitudes Toward Product Categories,” Marketing Letters, 3 (3), 239–49. Dawar, Niraj and Philip Parker (1994), “Marketing Universals: Consumers’ Use of Brand Name, Price, Physical Appearance, and Retailer Reputation as Signals of Product Quality,” Journal of Marketing, 58 (April), 81–95. Haire, Mason (1950), “Projective Techniques in Marketing Research,” Journal of Marketing, 14 (April), 649–56. Han, Min C. (1989), “Country Image: Halo or Summary Construct?” Journal of Marketing Research, 26 (May), 222–29. Hastings, Gerard, Martine Stead, and John Webb (2004), “Fear Appeals in Social Marketing: Strategic and Ethical Reasons for Concern,” Psychology and Marketing, 21 (11), 961–86. Holt, Douglas B., John A. Quelch, and Earl L. Taylor (2004), “How Global Brands Compete,” Harvard Business Review, 82 (9), 68–81. Hong, Sung-Tai and Robert S. Wyer Jr. (1989), “Effects of Country-of-Origin and ProductAttribute Information on Product Evaluation: An Information Processing Perspective,” Journal of Consumer Research, 16 (2), 175–87. Hsieh, Ming-Huei (2002), “Identifying Brand Image Dimensionality and Measuring the Degree of Brand Globalization: A Cross-National Study,” Journal of International Marketing, 10 (2), 46–67. —— (2004), “Measuring Global Brand Equity Using Cross-National Survey Data,” Journal of International Marketing, 12 (2), 28–58. Johansson, Johny K. and Ilkka A. Ronkainen (2005), “The Esteem of Global Brands,” Journal of Brand Management, 12 (5), 339–54. Kapferer, Jean-Noël (1997), Strategic Brand Management, 2d ed. London: Kogan-Page. —— (2005), “The Post-Global Brand,” Journal of Brand Management, 12 (5), 319–24. Kerner, Noah and Gene Pressman (2007), Chasing Cool: Standing Out in Today’s Cluttered Marketplace. New York: Atria Books. Klein, Naomi (2002), No Logo: No Space, No Choice, No Jobs. New York: Picador. Leuthesser, Lance, Chiranjeev S. Kohli, and Katrin R. Harich (1995), “Brand Equity: The Halo Effect Measure,” European Journal of Marketing, 29 (4), 57–66. Lynch, John G., Jr. (1999), “Theory and External Validity,” Journal of the Academy of Marketing Science, 27 (3), 367–76. Mao, Huifang and H. Shanker Krishnan (2006), “Effects of Prototype and Exemplar Fit on Brand Extension Evaluations: A Two-Process Contingency Model,” Journal of Consumer Research, 33 (1), 41–49. Quart, Alissa (2004), Branded: The Buying and Selling of Teenagers. New York: Basic Books. Samiee, Saeed, Terence A. Shimp, and Subhash Sharma (2005), “Brand Origin Recognition Accuracy: Its Antecedents and Consumers’ Cognitive Limitations,” Journal of International Business Studies, 36 (4), 379–97.

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Sandikci, Ozlem and Ahmet Ekici (2008), “Politically Motivated Brand Rejection,” Journal of Business Research, 61, forthcoming. Schuiling, Isabelle and Jean-Noël Kapferer (2004), “Real Differences Between Local and International Brands: Strategic Implications for International Marketers,” Journal of International Marketing, 12 (4), 97–112. Sharma, Subhash, Terence A. Shimp, and Jeongshin Shin (1995), “Consumer Ethnocentrism: A Test of Antecedents and Moderators,” Journal of the Academy of Marketing Science, 23 (1), 26–37. Shimp, Terence A. and Subhash Sharma (1987), “Consumer Ethnocentrism: Construction and Validation of the CETSCALE,” Journal of Marketing Research, 24 (August), 280–89. Steenkamp, Jan-Benedict E.M., Rajeev Batra, and Dana L. Alden (2003), “How Perceived Brand Globalness Creates Brand Value,” Journal of International Business Studies, 34 (1), 53–65. Tse, Edward, Andrew Cainey, and Ronald Haddock (2007), “Evolution on the Global Stage,” Leading Ideas, (accessed July 9, 2008), [available at http://www.strategybusiness.com/media/file/leading_ideas-20071009.pdf]. Wenzlaff, Richard M. and Daniel M. Wegner (2000), “Thought Suppression,” Annual Review of Psychology, 51 (1), 59-91.

ABOUT THE AUTHORS Claudiu V. Dimofte is Assistant Professor of Marketing (e-mail: [email protected]). Johny K. Johansson is McCrane/Shaker Professor of Marketing and International Business (e-mail: [email protected]). Ilkka Ronkainen works at Georgetown University in Washington D.C. and at the Aalto (Helsinki) School of Economics. He is the co-author of International Marketing (9th edition). He grew up in Finland, and holds a Ph.D. from the University of South Carolina. [email protected]

ACKNOWLEDGMENTS The authors thank participants in the 2007 McDonough School of Business Marketing Camp, the MSB Summer Seminar Series, Bob Thomas in particular, and the two anonymous JIM reviewers for their helpful comments and suggestions.

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Chapter 3.2

Entering the Japanese Market A Reassessment of Foreign Firms’ Entry and Distribution Strategies Michael R. Czinkota and Masaaki Kotabe

INTRODUCTION In the early 1990s, Japan’s economic relations with its major trading partners had become increasingly acrimonious. In times of major economic uncertainty in most countries in the world, Japanese firms seemed to be blessed with continued economic growth, ongoing trade successes and able to accumulate apparently never-ending trade surpluses. In 1989, Japan had a trade surplus of $43 billion with the United States, $19 billion with the European Community, and $21 billion with Southeast Asia. At the same time, Japan appeared to assert itself in new ways, perhaps most clearly seen in the book co-authored by Shintaro Ishihara entitled The Japan That Can Say No [1]. Globally, there was much public and private discussion about the alleged economic danger originating from Japan. Opinion polls in the United States showed that over two-thirds of the American people regarded Japan as more threatening than the former Soviet Union [2], and 63% of U.S. consumers indicated in a Washington Post/ABC news poll that they made a conscious effort to avoid buying Japanese products [3]. High level U.S. policy visits were the order of the day, as

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were discussions of radical embargoes and a call for government programs which would finally work in fighting back the Japanese tsunami of success. While many non-tariff barriers were blamed for keeping foreign firms out of Japan, the structure of Japan’s channels of distribution was seen as a key reason for the apparent failure of foreign firms to establish major market participation in Japan. A report by the U.S. International Trade Commission concluded that “the end result of the close, sometimes overlapping relations and practices in Japan’s distribution chain is that it may be unusually difficult and expensive for foreigners, including U.S. exporters, to break into the system [4].” According to the study conducted in 1991 and reported by Czinkota and Kotabe [5], the following factors were identified as the major market entry problem areas in Japan during the last decade. Among Japanese trade barriers, distribution and cultural impediments, such as existing close business linkages and high entry cost were the most important barriers, followed by government trade barriers, very demanding customers and bureaucratic practices. With the exception of governmental trade barriers, little change was anticipated in all the other dimensions, since they were seen as being deeply rooted in the political, social, and economic institutions of Japan. Trade negotiations were seen as playing some role to improve foreign firms’ ability to penetrate the Japanese market. Much more important, however, were changes in business strategy such as market research, product adaptation, service orientation, willingness to collaborate and long-term orientation. The experts foresaw that Japanese-type practices were likely to emerge in more countries, and that it was mainly foreign direct investment that would facilitate entry into Japan’s markets. Overall, the consensus emerged that it was at the corporate level, where the greatest potential for improved competitiveness would come from. It was recommended that firms and governments in all nations strengthen information flows and their interaction with customers, encourage collaborative efforts, overcome export reluctance and enhance human resources in order to present a level playing field for the success of international business.

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A DECADE LATER At the threshold of a new millennium, many Japanese market conditions have changed. The country has been racked by low or even negative economic growth rates. Major problems festering in the financial sector have brought fear and uncertainly to domestic Japanese markets and have curbed the willingness of consumers to spend. Even though large Japanese firms continue to be leading innovators and their employees continue unabated in their dedication and devotion to the tasks at hand, not too many Japanese success stories are heard today. There is mainly talk about Japan’s highest level of unemployment since the end of the war (at 4.5%), and the increasing “Americanization” of Japanese corporations, which often consists of announcing major downsizing plans. In the last decade, Japan’s trade surplus with other countries has continued to grow. In 1998 it amounted to $51 billion with the United States, $32 billion with the European Union and $29 billion with Southeast Asia [6]. Japan’s overall trade relations with its major trading partners were quite harmonious. Controversial thinker Ishihara, after serving as a member of the Diet, had by now become the governor of Tokyo but with much less visibility in the West. While there had been some spectacular high profile trade cases and actions, such as the KodakFuji case at the World Trade Organization (WTO) and the brief U.S. port closure by the U.S. Federal Maritime Commission to Japanese vessels during 1997, Japan’s trade performance was met with major apathy around the world. Even though President Clinton’s 1999 State of the Union Address contained a brief warning to Japanese steel exporters, regular visits to Japan on the topic of trade were no longer de rigueur for policy makers. In part this may be explained by other, non-economic problems which were seen as more urgent than trade matters, such as the crisis in the former Yugoslavia. In part, non-Japanese trade matters took on more of a center stage, particularly with the banana wars and the beef hormone dispute between the United States and Europe, and the overall economic malaise in Southeast Asia. Perhaps, in light of Japan’s sputtering domestic economy, its continuing strategic importance, and its influential global financial position, policy makers abroad recognized the limits of governmental capability. The latter thesis is supported by revealing calls from the outside that Japan’s government needs

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to take on more responsibility within the domestic economy and intervene more directly on the firm level which represents quite a contrast to the old calls for more free market activity. Or perhaps it is simply the fear that an exacerbation of Japanese economic problems may place an unbearable strain on the openness of the world trading system [7]. The relative quiet on the policy side is contrasted by major changes within Japanese distribution systems. Foreign firms are successfully penetrating Japanese niche markets. L.L. Bean and Eddie Bauer, which began their entry into Japan via catalog mailings, are now firmly present with their stores, which, in the case of L.L. Bean helped sell merchandise worth $60 million [8]. On the services side, auto insurance by AIG is now sold directly to Japanese consumers, while McDonalds corporation, which entered the Japanese market 27 years ago has now 2,000 outlets and annual sales of $2.5 billion [9]. Morgan Stanley announced its entry into the Japanese financial services industry by opening retail branches in Japan [10] and Charles Schwab, the U.S. discount brokerage, planned to revolutionize personal finance in Japan by offering Japanese customers their own Schwab account to log on and trade U.S. stocks and overseas mutual funds. [11]. At the same time, the Tokyu Department Store Group announced the closure of its Nihonbashi store after 337 years, in part due to the greater price consciousness of Japanese consumers [12]. Many of the traditional barriers to entry into the distributions sector still persist in Japan. Real estate prices, though lower, are still high, labor cost and freight charges are far greater than in most other nations, and the need continues to offer channel members very high levels of service and substantial financing. Yet, new forms of doing business abound. Mail order and non-store retailing are rapidly becoming part of the daily consumer landscape. Likely to be even more prominent are the capabilities to do business in market space rather than the traditional marketplace. The global emergence of electronic commerce offers alternatives that bypass many of the effects of these impediments. It is here where U.S. firms are thought to be better positioned than Japanese members of the distribution system, since Japanese industry lags behind the U.S. in its approach to information technologies and their utilization [13].

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On the other hand, a recent study by the Washington-based Council on Competitiveness [14], led by Michael Porter of the Harvard Business School and Scott Stern of Massachusetts Institute of Technology depicts an opposite picture. They statistically show that if current technological trends continue, by 2005 the U.S. will trail Japan, particularly in such areas as advanced-materials science and solid-state physics, because of inadequate spending on basic research and education and a shrinking percentage of technical workers. Those areas are key to a host of information technologies. The study reports that software is equally vulnerable. This prognosis is not entirely difficult to understand. While still considered inefficient by many U.S. observers, for example, the Japanese retail industry has undergone a quiet revolution at the hands of major retail and convenience store chains, such as Seven-Eleven Japan, which boast world-class efficiency and profitability despite Japan’s current recession [15]. Taken together with ongoing major shifts in manufacturing and established linkage practices, of which the restructuring of Nissan is only one highly visible example [16], Japan may well reposition itself to strive for world economic leadership in this new century. Corporate survival in the next century is said to be predicated on the successful application of digital technology [17]. Clearly, Japanese firms have some weaknesses and strengths in their technological applications. The long-term competitiveness of Japanese firms cannot be ignored.

THE RESEARCH What then are the changes that have taken place, and how are they affecting the Japanese distribution system and U.S.–Japanese trade relations? To discuss and examine this issue, the American Marketing Association and the Japan Marketing Association co-sponsored a global meeting on the Japanese distribution system in 1998. Participation was solicited. Eventually, 70 participants—business executives, policy makers and researchers with a high level of expertise and interest—were brought together for three days of meetings and discussions that focused on the complexity of distribution and trade practices, on impending changes,

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and on future opportunities. Participation by current and former high-level policy makers, representatives of major corporations, and leading researchers ensured important discussions and insights into the process of trade and distribution policy and practice. This study is based on a survey conducted at the end of the meeting of those key participants who were asked either in interviews or via a questionnaire to impart their views and perspectives. Due to the unique configuration of participants, in terms of expertise, diversity, and orientation, it was expected that the input would shed light on the road to change. The findings reported here are based on a total of 36 interviews and questionnaires. Thirty-nine percent of the respondents worked in Japan, 50% in the United States, 8% in Europe and 3% in Australia. Seventy percent of the respondents were academic researchers, 20% were business practitioners, and the remaining 10% were government officials. Although the number of individuals who participated may seem low by the standards of traditional quantitative research, the fact that each respondent was one of the few global experts in the field under analysis makes the collective insights obtained quite meaningful. In terms of pool of expertise, a possible analogy might be found in the input to U.S. policy analysis by “only” 36 U.S. Senators. It is the analysis of trade and distribution issues of these experts, which was carried out with detachment if not disinterest that is reported here.

RESULTS Japanese Market Impediments to Foreign Firms Initially, 16 problem areas were identified for foreign firms doing business in and with Japan. Respondents were asked to rate the importance of the problems and then to rate their assessment of the improvement of those problems in the past five years and the expected improvement in the next five years. Because we searched for the main impediments, we looked for consistency, depth and consensus in the responses. Factor analysis showed that 11 of those 16 problem areas consistently converged into four discrete categories of barriers to entry. In order of

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importance (as rated by our expert observers), they are: (1) unique Japanese business practices, (2) rigid quality/standard expectation and regulation, (3) high operational cost, and (4) preference for Japan-made products.1 Summary findings are reported in Table 1. Unique Japanese business practices, represented by close business linkages (known as keiretsu), are considered the most important market impediment to foreign firms. Although the age-old Japanese business culture is unlikely to change drastically in a short period, our expert observers believe that there will be some improvement. It is primarily due to Japan’s eight-year battle with the worst postwar recession during the 1990s when many keiretsu companies have experienced severe asset deflation and could no longer hold on to their member companies’ shares in a tightly knit cross-shareholding relationship. This is a significant change in light of the fact that less than 10 years ago, keiretsu relationships were considered the most unlikely aspect of the Japanese market impediment to change. Consumers’ high quality and standard expectations and government’s bureaucratic practices are considered somewhat important. Consistent with Czinkota and Kotabe’s [5] survey results seven years ago, these two aspects of market impediments are also perceived not to have changed much in the last five years. In our current survey, no further significant changes are expected. While the high cost of doing business in Japan is no longer considered as important as in the past, our expert observers believe that the situation will improve in the next five years. This is due primarily to the continued weakness of the post-bubble deflationary Japanese economy. Finally, Japanese preference for Japan-made products is considered much less important than in the past. This is another significant change from the past survey results. More improvement is expected in the next five years.

1

Principal components analysis with varimax rotation was employed to identify the number of problem dimensions. As a result of the scree test, four dimensions were identified. These four dimensions were represented by 11 problem areas in the questionnaire. The mean rating of the problem areas with a loading of > 0.5 was computed to represent each of the problem dimensions.

Note: Hypothesis: Mean response = 3. *p <.001. **p <.01.

3.04

2.86

3.19

3.47**

3.37**

3.11

2.19*

Improvement in the Last 5 Years (Not at all = 1 . . . 5 = Very Much)

3.90*

Importance (Not at all important = 1 . . . 5 = Very important)

Japanese Market Impediments to Foreign Firms: The Past and The Future

Japanese business practices Cultural barriers Close business linkages High quality/standard expectations and bureaucratic practices Inadequate import infrastructure Excessive quality expectations Unreasonable standards Delay in patent processing Delay in trademark processing High cost of doing business in Japan High retail prices Lack of economies of scale High entry cost Preference for Japan-made products Unwillingness to purchase foreign products

TABLE 1.

3.53*

3.30**

3.04

3.28**

Expected Improvement in the Next 5 Years (Not at all = 1 . . . 5 = Very Much)

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What Will Bring About the Change? Overall, very optimistic perceptions by the leading distribution thinkers and doers in the policy, business, and research communities perhaps reflect some fundamental changes in the nature of the Japanese market mechanism that will facilitate entry by foreign firms. However, consumers’ high quality expectations and government bureaucratic practices appear to remain unchanged. How, then, should foreign firms and policy makers cope with Japan’s bureaucratic inefficiency and high quality expectations, among other obstacles in order to improve their ability to penetrate into the Japanese market? If the market does not change, are there perhaps some areas where outside firms and governments can become active to succeed better in Japan? We asked the respondents nine questions on this score. As shown in Table 2, our analysis2 suggested that there are two principal ways to enhance the ability of foreign firms to enter the Japanese market: (1) trade negotiations and (2) better business strategy. These findings are essentially identical to our earlier study findings seven years ago. Although respondents acknowledge that trade negotiations with the Japanese government may be of some help, they see the use of seasoned business practices as the key elements which make market penetration possible. Such practices consist of the willingness and ability of foreign firms to conduct thorough market research, adapt products whenever necessary, be more service-oriented, enter into collaborative ventures, have a long-term orientation, and be more responsive to changes in the market. It is interesting to note that it is these very same business practices which have been a hallmark of successful Japanese companies around the world [18].

Structural Changes in the Next Five Years So far, we have explored various market impediments to trade that foreign firms apparently face in entering the Japanese market and the internal and external forces that could help mitigate entry barriers. The 2

The same procedure was used as described in footnote 1.

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Methods of Improving Foreign Companies’ Ability to Penetrate the Japanese Market Likelihood of Improvement (Very low = 1 . . . 5 = Very high)

Trade negotiations Business strategy Product adaptation Market research Service orientation Collaborative ventures Long-term orientation Personnel training Information systems Complaint responsiveness

3.33** 3.77*

Note: Hypothesis: Mean response = 3. *p < .001. **p < .01.

Japanese market is changing constantly because of, or despite, the internal and external forces at play. As in our earlier survey, we asked our respondents to assess the same set of questions regarding the degree to which various structural changes are taking place in Japan. We also asked whether those changes are attributable to Japanese or U.S. government initiatives, or to Asia’s financial crisis. Summary findings are presented in Table 3. It is to be noted that significant changes have occurred in the way expert observers see the structural changes in Japan. In 1991, they believed quite strongly that Japan would emerge as the leader of a Pacific trading bloc. An increase in Japanese imports was seen as mainly occurring through increased import activities of Japanese firms, largely in the field of manufacturing, and, to a lesser extent in the agricultural sector. On the other hand, little expectation existed that the complexity of the Japanese distribution system would be reduced. According to our 1998 survey, the reverse seems to be the case. Japan may or may not emerge as the leader in the Pacific trading bloc. Nor are Japanese imports expected to increase significantly. Respondents

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3.39 3.00 3.00 2.94 2.83 2.78 2.59**

2.85<<< 2.91 4.09*>>> 2.77* 3.86*>>> 3.39**>>> 2.59**

b

Strongly disagree = 1 . . . 5 = Strongly agree. Not at all = 1 . . . 5 = Very much. Note: Bold represents particularly noteworthy changes and implications. Hypothesis: Mean response = 3. *p < .001. **p < .01. ***p < .05.

a

3.50**

Level of agreement in 1998a

3.32***

Level of agreement in 1991a

3.08 2.83 3.08 3.14 2.72

2.97

2.86

2.89

Japanese government initiativesb

Change agents

3.33 3.22 3.17 2.97 3.59*

3.00

2.78

2.92

U.S. government initiativesb

Structural Changes in Japan in the Next Five Years and their Key Change Agents

Foreign direct investment will improve market penetration The complexity of the Japanese distribution system will be reduced More exports to Japan will improve market penetration Japan will emerge as the leader of a Pacific trading bloc Japanese competitiveness will decrease Japanese firms increase imports Agricultural imports will increase The Japanese trade surplus will decline

TABLE 3.

2.31* 2.97 3.03 3.42** 3.31

3.14

3.36***

2.97

Asia’s financial crisisb

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apparently attribute these structural changes more to Asia’s financial crisis than to Japanese or U.S. government initiatives. Despite U.S. government pressure on Japan to reduce its trade surplus, it is not expected to decline as the Japanese tend to increase exports and reduce imports as a result of the recession in Japan. Expert observers recognize that as a result of these fundamental economic forces brought on by Asia’s financial crisis and Japan’s recession, Japanese firms may need to streamline their distribution systems in Japan to improve efficiency. It is clear from these observations that the market mechanism apparently works better than government interventions to bring about much needed changes in the Japanese distribution system. In a similar vein, expert observers believe that foreign firms will improve their foothold in the Japanese market mainly through direct investment, rather than through exports. Lack of such investment may well serve as a self-fulfilling prophecy. If being there sends the signals of reliability, long-term outlook, and corporate commitment for foreign firms, then an export-only strategy may be seen as communicating the damaging obverse. Again, consistent with our earlier observation, it is seasoned business strategy, rather than government interventions, that seem to help foreign firms enter the Japanese market successfully. Thanks to Asia’s financial crisis and Japan’s worst postwar recession, the Japanese business practices and competitive environment are also changing and becoming less culture-centric. The famed Japanese business practices that heralded Japan’s postwar economic growth in the last 40 years may come to an end at last in the next five to ten years.

CONCLUSIONS AND IMPLICATIONS In less than a decade, the expert observers have changed their opinions about the competitiveness of Japanese firms. It was once thought that Japanese firms would be invincible and that the emergence of the Japan era at the dawn of the 21st century was imminent. Now, many of the Japanese market impediments to foreign firms—close business linkages epitomized by the keiretsu, high cost of doing business in Japan, and “Buy Japanese” attitude—once thought to be so recalcitrant have waned considerably due to Asia’s financial crisis and Japan’s prolonged

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recession. The only areas that are not expected to change in any measurable way are the Japanese government’s bureaucratic practices and Japanese consumers’ high quality expectations. Despite some fundamental changes in the Japanese economy, the main road to success for foreign firms remains the same as seven years ago: continued trade negotiations to reduce Japan’s bureaucratic impediments and sound business strategy to better cater to demanding Japanese consumers. We believe that the impact of trade negotiations needs to be seen in a new light. Traditional trade negotiations may well lead to some success, particularly if they concentrate on bureaucratic impediments directly controlled by the government. In doing so, however, they focus mainly on issues which, although perhaps highly visible and of key concern to a particular firm or industry, are only of relatively marginal importance to overall business success in Japan. This is not to say that traditional, itemor sector-specific trade negotiations have no value, but rather that they are unlikely to fulfill to any great degree the expectations placed in them by government and the public, and will not accomplish a major turnaround in the trade imbalance. An alternative strategy could, then, be to make negotiations less traditional by elevating their aim abroad to areas that have historically not been considered part of trade policy. Such areas included the distribution system, the close business linkages, the persistent high savings rate of the Japanese and perhaps even the high quality expectations. The Strategic Impediments Initiative (SII) of the 1980s represented such a strategy. Whether the SII was successful or not, Asia’s financial crisis and Japan’s prolonged recession during the second half of the 1990s have begun to alter the fundamental nature of Japanese firms’ closely knit business linkages and practices. The most likely alternative to be crowned by success consists, then, of reorienting trade negotiations and policy by making them more domestic. Such an approach would reduce the pressure on government to pry open foreign markets through politics, and would instead concentrate efforts on the revamping of strategic skills of firms combined with a refocusing from exports to direct investment. This alternative, in essence, would require foreign firms to become more Japanese, both in terms of orientation and location. It would make foreign firms in the Japanese market compete the Japanese way, bypassing border barriers, heightening

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quality concerns, and strengthening their information systems to respond swiftly to the ever-changing needs of demanding Japanese consumers. As a case in point we offer the results of a U.S. Government Accounting Office investigation of wood exports to Japan to illustrate the importance of customer service. For more than a decade, the U.S. government negotiated with Japan for more market access. Building codes were revised, product certification was delegated from the Japanese government to foreign testing organizations, and tariffs were drastically reduced. In addition, the Foreign Agricultural Service spent close to $18 million to promote U.S. wood sales to Japan. The results of these U.S. government efforts were appalling. While there were only marginal increases in U.S. exports to Japan, Canadian lumber companies have become the lead importers in the Japanese market. The reason for this debacle is that the U.S. effort consisted mainly of getting Japanese buyers to agree to buy U.S. products. But the products were not tailored to the Japanese market. Japanese builders prefer post-and-beam construction, which requires four-by-four-inch lumber and three-by-six-foot modules to match the standard tatami floor mats. U.S. companies were either unaware of those requirements or unwilling to meet them. Instead, the U.S. producers focused on the standard two-by-four products used in the United States, even though only 7% of new homes in Japan use that standard. Furthermore, many of the U.S. exporters entered the market with only limited enthusiasm and commitment. In contrast to the Canadian firms, many companies paid little or no attention to product quality and appearance and did not deliver after-sales service. For example, only a few U.S. firms translated their product information into Japanese or wrote manuals describing the new type of construction. No wonder the Japanese chose the Canadian suppliers. The lesson here is that despite government efforts at deregulation and market opening, customer responsiveness and commitment remain primary to success. This lesson does not necessarily mean that there is nothing the Japanese government can do to improve the efficiency of the Japanese market environment. The second issue has to do with the still largely underexplored area of nonstore retailing in Japan. This form of retailing already constitutes 30–40% of all the retailing sales in the United States. The expansion of television, mail-order retailing, and electronic commerce should offer significant opportunities for importers to circumvent traditional channel constraints in Japan.

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Japan initiated HI-Ovis, an interactive cable television experiment in 1976. At that time, home shopping was revolutionary. Unfortunately, the initial promise of this channel has not been realized, even though other nations, most notably the United States, have achieved major breakthroughs. Shopping by TV is a multibillion dollar business in the United States today, but remains only a minuscule business in Japan. Similarly, the mail-order industry lags in growth by international comparison. Federal Express, which delivers for L.L. Bean, has seen deliveries in Japan to rise from 6 per day in 1988 to over 1,000 per day in recent years. Similarly, e-commerce has already become a mainstay in the United States, while in Japan it is still in its incipient stage of development. In part, the lagging growth is the result of the Japanese government’s on-going restrictive regulation of distribution technology. While technology is quite advanced in Japan’s distribution sector, such advancements have occurred mainly on the industrial side of channel management through enhancements of electronic data interchange and point-of-sale (POS) systems. On the consumer side, this technology has been sadly neglected or restricted. For example, the prohibition of drug sales outside a pharmacy severely handicaps the pharmaceutical industry. Service industries such as travel and banking suffer from a Ministry of Transport prohibition on ticket sales outside a registered travel office and a Ministry of Finance restriction that limits banking business to banking hours. Similarly, the Ministry of Posts and Telecommunications still charges local phone calls by the minute, thus making unbridled use of the Internet prohibitive to most consumers. Overall, some changes in the Japanese distribution system have brought new opportunities for market entry and penetration. However, many core features of Japanese bureaucracy and distribution channels remain in place. Even with substantial corporate commitment to this important market, many restrictions and regulations of technology and industries may still inhibit importers from providing consumers with global choice.

REFERENCES Ishihara, Shintaro: The Japan That Can Say No. Simon & Schuster, New York, 1991. World Policy Institute: World Policy Institute Survey, June 1989.

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Morin, Richard: U.S. Gets Negative About Japan. The Washington Post February 14, 1992 B1. U.S. International Trade Commission: Japan’s Distribution System and Options for Improving U.S. Access. Washington, D.C., June 1990, 2. Czinkota, Michael R., and Kotabe, Masaaki, Eds.: The Japanese Distribution System: Opportunities and Obstacles, Structures and Practices. Probus Publishing, Chicago, 1993. JETRO (Japan External Trade Organization): Japan Tariff Data. Tokyo, 1999. Posen, Adam S.: Restoring Japan’s Economic Growth. Institute for International Economics, Washington, D.C., 1998. Nawata, Masahrio: L.L. Bean Japan Store Sales to Hit $60 Million This Year. DM News International January 20, 14 (1997). Shirouzu, Norihiko: Whoppers Face Entrenched Foes in Japan: Big Macs. Wall Street Journal February 4, 1997, Bl. Bruno, Joel Bel, and Nishitani, Yumiko: Morgan Stanley Feels Its Way Around Japan. Business Week Online: Daily Briefing, Bridge.com, March 25, 1999. U.S. News & World Report: “Japan, Say Hello to Charles Schwab-San.” Nov. 1, 1999, 58. Miyashita, Cynthia: US Direct Marketers are Cautious but Optimistic. DM News International February 22, 1999, 5. Tomio, Tsutsumi: Future Economic Interaction between Japan and the U.S. Journal of Japanese Trade and Industry 3, 28–31 (1998). Council on Competitiveness: The New Challenge to America’s Prosperity: Findings from the Innovation Index. Washington, D.C., 1999. Kotabe, Masaaki: The Return of 7-Eleven . . . from Japan: The Vanguard Program. Columbia Journal of World Business 30, 70–81 (1995). The Economist, O-Hayo Gozaimasu, Mon Ami. October 23, 1999, 70–72 Gates, Bill: Business @ the Speed of Thought. Warner Books, New York, 1999, p. 160. Czinkota, Michael R., and Kotabe, Masaaki: Product Development the Japanese Way. Journal of Business Strategy 11, 31–36 (1990).

Michael Czinkota works at Georgetown University in Washington D.C. and holds the chair in International Marketing at the University of Birmingham in the U.K. He served in the U.S. government as Deputy Assistant Secretary of Commerce. He was born and raised in Germany, and educated in Austria, Scotland, Spain and the United States. His Ph.D. is from Ohio State University. [email protected] Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University.

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Exploring Robust Design Capabilities, Their Role in Creating Global Products, and Their Relationship to Firm Performance* K. Scott Swan, Masaaki Kotabe, and Brent B. Allred

INTRODUCTION Rothwell and Gardiner (1984) first suggested the use of the term robust design to denote a product design that has sufficient inherent versatility to enable it to evolve into a “design family” of significant variants. Robust strategic response capabilities (i.e., the potential for success under varying circumstances or scenarios), such as robust design capabilities, are an organizational response to rapid technological change and the inability to forecast (Bettis and Hitt, 1995). An enduring advantage is created through an ability to anticipate evolving customer needs and dynamic competitive situations across a broad range of contexts (Garud and Kumaraswamy,

* The authors would like to thank Patrick Brockett, Kate Gillespie, Tim Ruefli, and Bob Green for their helpful comments on earlier drafts. The authors gratefully acknowledge the assistance of the Bonham Fund at the University of Texas at Austin, along with important contributions from two anonymous reviewers and Abbie Griffin.

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1993; Kotha, 1995; Sanchez, 1999; Sanchez and Mahoney, 1996; Teece, Pisano, and Shuen, 1997). The promise of a robustly designed product may be realized in application to global markets. The benefits of global designs include influencing consumer preferences, establishing global brands and dominant designs, anticipating emergent segments, leveraging existing knowledge, and improving firm performance (Yip, 2003). As a result, global product designs are being increasingly sought by innovators, manufacturers, and customers (Kotabe and Helsen, 2003). With the increasing speed of innovation, the world scale of many new technologies and the ability to acquire and to apply knowledge quickly in uncertain environments is an essential characteristic of a firm’s success (D’Aveni, 1994; Dickson, 1992). Consequently, what are the robust design capabilities that improve firm performance across widely varying markets worldwide? The general proposition of this study is that the influence of robust design capabilities on firm performance is moderated by environmental uncertainty, which is defined as the degree of variability in customers’ preferences, productrelated needs, and technological standards (Hargadon and Yellowless, 2001). Hypotheses are reasoned from emergent themes derived from field work, resource-based theory, and modular architecture (Day and Wensley, 1988; Hunt, 1997; Hunt and Morgan, 1995; Sanchez, 1999; Sanchez and Mahoney, 1996; Teece, Pisano, and Shuen, 1997; Wernerfelt, 1984). An example of the use of robust functionality, aesthetics, technology, and quality-based capabilities resides in New York at the Museum of Modern Art (MOMA) alongside paintings and sculptures by Picasso, Monet, and Rodin: the Bell-47 Helicopter (see Figure 1). A plaque reads, Between 1946 and 1973 more than 3,000 Bell-47 helicopters were made and sold in 40 countries. It looks as straightforward today as it did 40 years ago. Like the Jeep, it was designed without the imposition of self-conscious styling. Yet Arthur Young, its designer, knew particularly well that on juxtaposing a transparent plastic bubble with the open structure of the tail boom, he had created an object whose delicate beauty is inseparable from its efficiency. The utilitarian character of the design makes one overlook the aesthetic reason for its most decisive detail: The plastic bubble is made in one piece rather than in sections held together with metal seams as in other helicopters.

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FIGURE 1

Even though this means a more expensive replacement if the bubble is damaged, the appearance is so pleasing that most connoisseurs of heli-design have preferred it. On seeing the Bell-47D1 people think of a hovering insect. The visual metaphor is so strong that the machine is often referred to as the “bug-eyed” helicopter. There is a certain poetic logic to the resemblance, since one of the principal uses of the Bell-47D1 is pest control by crop dusting and spraying. It can hover like a dragonfly at an altitude of 10,000 feet. The Bell-47 functioned well for almost 30 years across different uses, countries, and contexts. Aesthetically, its expensive bubble enhanced the product’s desirability through superior vision (functionality); better adaptability of form to function; and the aesthetic appeal of form, color, and texture. The Bell-47 helicopter frame also was able to incorporate new technology (e.g., instruments, engines). Advances in technology also could be incorporated or rejected, depending on the motivation (i.e., government requirements or costly increases in functionality). These quality-based considerations allowed for manufacturing and assembly at an attractive cost while reliably performing in the field and improving functional considerations. Strategically, costs were not necessarily minimized, but investment in each of these capabilities produced a product that was recognized as globally superior. Finally, these robust design capabilities offered unique attributes to the product while interacting with the other attributes.

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Product development and design are an important function of the development and use of firm knowledge and are essential for gaining global competitiveness (Bhattacharya, Krishna, and Mahajan, 1998; Slater and Narver, 1998). The decision of which capabilities to develop depends on the critical strategic choice of the product market in which to compete (Rumelt, 1984). Under the dominant marketing logic concerning segmentation, a product is designed for a fully formed target market or segment (Levitt, 1983; Mahajan and Wind, 1991). Alternatively, product development decisions can be perceived as requiring trade-offs between larger (or aggregated) versus smaller target markets with the goal of improving the firm’s “satisfactory response.” Accordingly, robust design capabilities offer the potential to develop acceptable products to broader target segments, events, and/or conditions with costs offset by the anticipated organizational benefits (Bettis and Hitt, 1995; Sanchez, 1999; Sanchez and Mahoney, 1996). Firm resource flexibility and coordination can lead to the formation of key product creation capabilities and can transform competitive product markets (Sanchez, 1995, 1999; Sanchez and Mahoney, 1996). Past theory building and analysis of adaptive, flexible, or versatile capacity have focused on (1) firms’ adaptability to a changing market (Chakravarthy, 1982; Kogut and Zander, 1993; Lawrence and Lorsch, 1967; Miles and Snow, 1978) and (2) internal organizational systems (McKee, Varadarajan, and Pride, 1989). The present study seeks to build on the research conducted on robust product design and its performance implications. This study draws upon a unique dataset, resulting in a broader empirical analysis of robust design capabilities. The contribution of this research comes from defining and expanding the use of the robust design concept beyond functional variety and manufacturing quality to broader application. This article first reviews the literature from which the definition and domain of robust design capabilities emerge and analyzes their influence on performance variables. Then, it gives and tests a model of the research hypotheses that uncertainty moderates the relationship between the four robust design capabilities (i.e., functional, aesthetic, technological, and quality-based) and firm performance and speed to market. Finally, it offers input into how global designs may be best implemented (Bettis and Hitt, 1995; Douglas and Wind, 1987; Huszagh, Fox, and Day, 1986;

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Jain, 1989; Levitt, 1983), the managerial implications of this study are given, along with research directions.

DEFINITION, DOMAIN, AND HYPOTHESES RELATED TO ROBUST DESIGN A multidimensional construct that could serve to illuminate the product development process is robust design. A robust design starts at the opportunity identification stage to discern the product definition or design space encompassing the desired current and future product solutions for customer segments (Rothwell, 1992; Rothwell and Gardiner, 1984, 1989). Through increased initial fixed cost, robust design promotes standardization of the core within a product line and across time, while lowering the variable costs of adapting and extending the product periphery in the future. The implementation of robust design capabilities is expected to reduce the number of new components, parts, materials, and technologies used across a product family over time. Such implementation also increases product line variety, lowers manufacturing costs, introduces technologically improved products more rapidly, brings new products to market more quickly, and subsequently increases the number and size of the target segments (Sanchez, 1999). It is proposed that product design can be viewed as a continuum between robust and lean product design (Rothwell and Gardiner, 1984). Robustness is the potential for success under varying circumstances or scenarios (Bettis and Hitt, 1995). The application of robust design capabilities in product development is partially manifested in modular architecture (Sanchez, 1999). On one hand, a robust product is the result of processes and knowledge for creating products of high versatility across uses, technologies, and situations (including across geographies). On the other hand, a lean product is the result of an optimized or invariant design for one specific use with limited thought to possible future changes in technology and differences in usage situations (Rothwell and Gardiner, 1984). Lean products are described as customized for a particular segment in time, as they are designed with little planning for the product’s potential uses or future outside of a

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particular application (although they may fortuitously be acceptable in new contexts or applications). An example of the application of robust design capabilities is Honda’s development of a world car on a standardized platform incorporating adjustable brackets (Business Week, 1995). This innovation is important because it extends the static view of a standardized component core to include a dynamic and robust core that broadens the ability to offer a larger product family. Honda Accords offered in the United States, Europe, and Japan are of different widths, heights, and lengths. Using the same platform, a minivan, a sport utility vehicle, and Acura luxury cars have since emerged. From a practical standpoint, while the platform is the most expensive and time-consuming component to develop, a robust design leads to future flexibility and cost savings. This global platform allowed Honda to offer different Accords to different countries and to achieve a US$1,200 savings per car, thereby both increasing profitability and offering customer savings (Business Week, 1995). This example highlights the possibility that more expensive robust design efforts in fact may be the most efficient. “Platform projects” have some support as long-term successes through sustaining the launch of profitable product families (Bacon et al., 1994). The resulting designs are robust with respect to evolving user requirements and the development of market requirements. Such robustness comes at a cost. First, additional resources are expended. Understanding possible contexts, and the likely trajectory of consumer needs along with incorporating those possibilities into current designs, is costly, time consuming, and risky. Second, currently nonfunctional parts, components, or ports may be included at some expense to offer future options. Thus, for a robust functional design capability to be efficient and to improve relative performance outcomes, the long-term functionality of the product demanded by future customers must be largely unknown. Conversely, as a standardized or dominant design emerges and consumer needs become more predictable, fewer variants remain an option. Successful product development efforts require companies to avoid two problems that may arise from pursuing global designs. First, the high cost of designing products or components that are acceptable in many settings could negatively affect performance. Second, the product, a “world car” for example, may be a low-cost competitive solution and may

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only meet the lowest common denominator of taste. It also may result in model cannibalism and brand-strategy confusion which is not an effective “customer” solution. In other words, it may result in an inexpensive product yet may fail to meet long-term objectives. Uncertainty compounds the difficulty of avoiding these problems. Customer perceptions regarding the need for and potential benefits of a product are influenced by the degree of uncertainty (Veryzer, 1998). Similar to March’s (1981) view of organizational slack, product design slack is proposed to be necessary in an uncertain environment (Grenadier and Weiss, 1997). Strategic opportunities are uncertain and contextual and are connected to the possession of unique resources. Uncertainty traditionally has been cited as affecting the use of strategic response capabilities (Barney, 1991; Groot, 1994; Lei, Hitt, and Bettis, 1996). The level of uncertainty has been found to influence the relationship between product development processes and performance (MacCormack and Verganti, 2003; Souder and Song, 1997). Uncertainty is defined as the dynamic nature of consumer wants and needs and through more environmental forces such as rate of change of product, process, and management innovations (Dess and Beard, 1984; Moorman and Miner, 1997). Specifically, uncertainty is proposed to influence robust design capabilities’ relationship with firm performance. From 10 in-depth interviews with executives knowledgeable of their firms’ product development efforts, it was found that robust design offers versatility in meeting evolving user requirements, the ability to cope with developing market segments, and the capability to manage product development conditional on the level of uncertainty in the environment. Managers suggest there are two ways to respond to uncertainty. The first is a cautious approach, which relies on a focused, efficient, or lean product design process that seeks to limit the commitment of resources, mistakes, and the number of opportunities with respect to markets, contexts, and technologies. The second is an aggressive approach that requires slack resources, handles contingencies, allows mistakes, and expects some opportunities to not materialize. Executives also suggested two performance measures—relative firm performance and speed to market—that are important and likely to be affected by the use of robust design capabilities in differing degrees of environmental uncertainty. The literature addressing robust design

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capabilities has been supportive of positive performance outcomes, and speed to market is important to robust design through several avenues including its impact on variety. “Variety refers to the range of product models the firm can produce within a particular time period in response to market demands” (Ulrich and Eppinger, 2004, p. 168). An ability to reach multiple segments with robust designs allows quicker roll-outs across national boundaries and uses. Additionally, robust quality-based capabilities are proposed to be associated with design for manufacture and assembly, which influence speed to market. Next follows a consideration of the influence of these capabilities on firm performance under uncertainty (see Figure 1 for model). Broadly, four design capabilities used to create products, processes, and knowledge architecture that are robust across uses, technology changes, and contextual differences emerge. Derived from literature, executive interviews, and anecdotal evidence, the four robust capabilities are (1) functional; (2) aesthetic; (3) technological; and (4) quality based. These capabilities are at the intersection of strategy, research and development (R&D), manufacturing, and marketing. Each of the functional areas has the potential ability to develop robust capabilities either alone or in conjunction with the others. By definition, robust functional product breadth capability involves designing products with similar technology but with the versatility or

Environmental Uncertainty Functional Capabilities Aesthetic Capabilities Technological Capabilities

Performance —Market Performance —Speed to Market

Quality Capabilities FIGURE 1

Robust Capabilities and Environmental Uncertainty Interaction Model

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adaptability to be extended into a significant family of variants concurrently usable or easily modifiable for domestic and foreign uses. Robust aesthetic product capability entails making the product visually informative and desirable across domestic and multiple foreign markets. Robust technology capability consists of selecting core product technologies and materials that satisfy the technical and customer requirements of both present and future product generations. Robust quality-based capability is made up of solving problems in the design stage that proactively eliminate deviations from established requirements in multiple contexts (i.e., manufacturing, assembly, as well as customer usage situations). A summary of the robust design capabilities is presented in Table 1.

Functional Capability Products can be designed to be robust across a wide range of possible uses (March, 1994; Sanchez, 1995, 1999; Sanchez and Mahoney, 1996). For example, NTT DoCoMo’s i-mode cell phone enables its user continuous access to the Internet. The sleek styles and range of applications available, as well as the fact that it comes in a lightweight 90–gram design (so light, in fact, that some people carry their i-mode cell phone on a key chain), give this product mass appeal (Kotabe and Helsen, 2003). Additionally, companies creating information appliances are integrating more and more capabilities into a single device that offers multiple uses and incorporates next-generation technology as it becomes available. Both Sony and Microsoft are seeking to incorporate a wide range of functionality (e.g., managing music and video files) into their next generation of game consoles (Wall Street Journal, 2004). Moving beyond traditional game-playing functions, the upcoming Sony PSX will include a DVD player, a hard drive that can record hundreds of hours of video (similar to TiVo), network capabilities, and Internet access. These actions attempt to incorporate robust functionality to handle the uncertain uses required in the future of gaming into these consoles. These continual upgrades and improvements in software and hardware beg the question: What circumstances would a focused, limited-function device—which tends to be less expensive, easier to use, and better optimized for a

commercial messages across uses technology changes

Aestheticc

lowest cost manufacturing and assembly maximum number of usable situations

positive/ informative semantics long technology life

large product family

Goal

marketing/ management

manufacturing/ process engineering

management strategy/ Research & Development

marketing/industrial design

marketing

NPD Leader

Taguchi method simulation

innovation caps. virtual manufacturing

leading design physics

market research

House of Qualityb market research

Tools

Boeing 777 Apple Powerbook

silicon chips GM bumpers

Lexus M-R storagee

NTT Cell Phones Sony PlayStation Microsoft Xbox Ford Explorer

Robust Examples

Involves designing products with similar technology but the versatility or adaptability to be extended into a significant family of variants concurrently usable or easily modifiable for domestic and foreign uses. b See Hauser and Clausing (1994). c Entails making the product visually informative and desirable across domestic and multiple foreign markets. d Consists of selecting core product technologies and materials that satisfy the technical and customer requirements of present and future product generations. e Magneto-resistive. f Is made up of solving problems in the design stage that proactively eliminate deviations from established requirements in multiple contexts (i.e., manufacturing, assembly, as well as customer usage situations).

a

Quality-Based Customer

Quality-Basedf Manufacturing

manufacturing/ assembly situations environments/ usage situations

uses

Functionala

Technologicald

Robust to:

Robust Design Capabilities Review

Robust Design Capabilities

TABLE 1.

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given purpose (a lean design)—have merit for widely varying global markets? According to the resource-based view (RBV) of the firm, a firm’s competitive advantage comes from capabilities based on resources that are rare, valuable, and difficult to imitate or substitute (Barney, 1991; Wernerfelt, 1984). The development or acquisition of necessary resources can strengthen relative competitive advantage and performance, given the appropriate context (Peteraf, 1993). A functional design capability in more certain environments typically gives competitors access to similar information and resources. It is under uncertainty that a firm can leverage its resources to create sustainable robust functional design competitive advantages that result in improved market performance and speed to market. Miller and Shamsie (1996) report that advantage is gained in uncertain environments through increased knowledge assets and decreased fixed assets. Efficient design in more certain environments would move more toward leaner design. Superfluous variation is reduced, since it is possible to limit unnecessary versatility or variety. In more certain conditions, the risk of being wrong is especially detrimental because options to expand functional product breadth are relatively inexpensive. Accordingly, firm performance and speed to market should positively benefit from a robust functional breadth design capability in uncertain markets. Preliminary designs that support variation allow for accelerated speed to market for the family of products. Having the ability to quickly offer variants and upgraded products for emerging segments is likely to produce superior performance. Thus, H1: Robust functional capability is more positively associated with (a) firm performance and (b) speed to market in high-uncertainty environments than in low-uncertainty environments.

Aesthetic Capability Aesthetics is an important component of design and marketing—a means of differentiation, communication, stimulation, and long-term social attention (Bloch, 1995; Time, 2000) but has received limited attention

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in business (Bitner, 1990, 1992; Kotler and Rath, 1984; NCR, 1992; Stanford Design Forum, 1989; Yamaoto and Lambert, 1994). Other academic traditions have explored dimensions of aesthetics including economics examination of hedonic pricing (Mooney and Eisgruber, 2001) and law addressing “look-and-feel” issues related to patent infringements (Ezring et al., 1999). Practitioners realize the importance of visual or aesthetic design. For example, in the automobile industry one of the most important aspects for body design is how light will reflect off the surface of a car, e.g., how a medium willow green hood on a Ford Explorer will appear to the buyer in the showroom (Wall Street Journal, 1997). The aesthetics of luxury automobiles, such as Jaguar, are critical to their consumer appeal. Urban and Hauser (1980, p. 155) consider design as “the designation of the key benefits the product is to provide, the psychological positioning of these benefits versus competitive products, and the fulfillment of the product promises by physical features.” This is consistent with classical views from the birth of industrial design as a response to the transition from a supply-driven industrial output to a more demanddriven need to differentiate products. Doren (1940, p. 3) suggests that “(d)esign interprets the function of useful things in terms of appeal to the eye; to endow them with beauty of form and color; above all to create in the consumer the desire to possess.” From a global perspective, firms find it advantageous to develop products that visually communicate and appeal to a wide range of users. Product aesthetics can affect product evaluation (Veryzer, 1998). Yamaoto and Lambert (1994) found that portraying a quality image and product integrity through pleasing aesthetics influences consumer product evaluation, even if the appearance has no bearing on the functional performance of the product. This research highlights the value of capabilities that promote aesthetic semantics, that is visually communicate positive attributes about the product and the consumer, as well as inform consumers how to use the product, i.e., informative semantics. Aesthetic capabilities are implemented by incorporating key components that bring perceived variety and value to a product across customer segments and that incorporate these positive (e.g., wood dash in Jaguar car, “European” styling of frames for prescription lenses) and informative (e.g., function-shaped buttons on television remote control,

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color-coded lamp wires for easier installation) visual cues. Components that do not increase perceived value are consolidated into a core subassembly common across a product family. Following the resource-based view, a distinctive aesthetic capability can result in a competitive advantage. Although the aesthetic attributes of a product may be imitated, other more tacit aesthetic factors can sustain the competitive advantage (Reed and DeFillipi, 1990). While high quality is a clear goal, other aesthetically accomplished goals are not identified as easily. The competitive rationality of robust aesthetic design is its ability to add value through positive and informative semantics across customer segments in a predictable way. Thus, a robust aesthetic capability is likely to be negatively associated with uncertainty. With high uncertainty as to what is accepted by the customer (and the group the customer wishes to communicate to through the ownership of the product), it is more difficult to design products that robustly signal messages other than high quality. An emphasis on aesthetics is likely to occur in the mature stage of the product life cycle, as the product standard has emerged and as differentiation becomes a competitive necessity. In this more stable environment, an emphasis on a robust aesthetic design capability could provide avenues to expand an existing product line within the same market or across to new markets. A successful aesthetic capability promotes peripheral, visual, or interface innovations, which allow a successful product to use its core functionality and to be adapted for extended uses and environmental/cultural differences in other markets as they become known. Both firm performance and speed to market are likely to be negatively associated with a too-early emphasis on a robust aesthetic capability within highly uncertain conditions. Therefore, H2: Robust aesthetic capability is more negatively associated with (a) firm performance and (b) speed to market in high-uncertainty environments than in low-uncertainty environments.

Technological Capability Technological capabilities are forward looking and are developed in anticipation of subsequent generations of product technology

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(Marsh and Stock, 2003). For example, Microsoft’s application software in its office suite is developed to be compatible with both previous and future versions of the product. In addition, computers, game consoles, and personal digital assistants (PDAs) are designed to allow buyers to upgrade to future processors, peripherals, and add-ons (e.g., Sony’s PlayStation 2). This illustrates that companies select core technology, materials, or a “platform” used across a product family and stretched over multiple product generations—in other words, have technological overhead, technological slack, or technological flexibility (Sanchez, 1995, 1999; Sanchez and Mahoney, 1996; Ulrich and Eppinger, 2004). For technologically based robust designs, the capability stems from efficiently designing products with a long technology life that satisfy both current and future product generation requirements. The capability to produce products with robust technology is necessary when the product investment and length of the product’s life does not provide adequate profits in a single generation. A 3M Ph.D. in product development commented, “It is my job to know the technological limits of the materials before the product development effort starts. We may not know how to reach those limits yet but the materials must be capable of being used in successive generations of products for us to recoup our investment” (personal conversation). An example of this includes magneto-resistive (M-R) technology that allowed disk-drive capacity to double every two and one-half years from 1956 to 1991, congruent with Moore’s Law. Additionally, technology in silicon chips, facing limitations on atomic size, may give way to optical techniques such as holography by year 2020 (Economist, 1997a). The difficulty in these adoptive decisions is associated with the uncertainty in the timing of commercialization of the technology advances. Technological compatibility preserves knowledge across product generations and reduces cost and time in the product development process (Clark, 1985; Kotabe, Sahay, and Aulakh, 1996). A robust technological design capability allows companies to stretch core technology, components, parts, or materials over multiple product generations. While firms such as Intel and Microsoft have developed excellent technological capabilities that consider both current and future

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customer needs, they do not come without risks. The costs of such R&D is significant and if the product investment and length of the product’s life does not provide adequate payback within a single generation, then uncertainty only increases costs and risk. The presence of AMD in the microprocessor market and the emergence of the Linux open-source operating software have put both Intel and Microsoft on the defensive and have raised the stakes regarding their investments in robust technological capabilities. A commitment to successive generations of the same technology not only may be costly but may allow competitors to “leap frog” technologies. While technological compatibility preserves knowledge across product generations, it is increasingly common that utilizing the same technology may not be necessarily appropriate or even feasible. If the robust technology proves inadequate to maintain competitive advantage or parity, then it puts the firm at a cost disadvantage. Firms outside the industry may enter with discontinuous technology and may change the competitive landscape. Because of the difficulty and expense in identifying, creating, and commercializing a robust technology, along with the long lag of benefits of success versus the costs, the performance outcomes are proposed to be negative in uncertainty environments. In this context, robust technology capabilities are likely to be associated with R&D activities that traditionally have had a negative association with short- and medium-term firm performance (Kotabe and Swan, 1994). In more certain environments, the firm is better able to anticipate future uses and needs, subsequently assuming less risk when investing in forward-looking technologies. Thus, H3: Robust technological capability is more negatively associated with (a) firm performance and (b) speed to market in high-uncertainty environments than in low-uncertainty environments.

Quality-Based Capability A robust quality-based capability includes the ability to efficiently solve problems at the design stage that could lead to product failures (i.e., quality as conformance). This is the capability of designing products that

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avoid quality difficulties in the production process as well as in their use. Thus, this capability is tied closely with the product’s versatility to perform consistently in a variety of conditions (e.g., differences in manufacturing processes or dissimilar contexts) and not with its versatility to perform different uses. The development of robust qualitybased capabilities is important for improving quality, manufacturability, and reliability (Taguchi and Clausing, 1990). This capability is proposed to increase yields, to extend product lifetimes, to reduce defects, and to improve product performance. Traditionally, through statistical experimental design, product and process performance is made insensitive to hard-to-control disturbances or noise factors that affect quality (Arvidsson, Gremyr, and Johansson, 2003; Scailia et al., 2003; Ulrich and Eppinger, 2004). An example of this manufacturing-focused robust quality-based capability is the trend toward reduction in the number of parts, reduction in the level of difficulty in assembly, and reduction in the elements of the design that create problems in manufacturing. This capability pushes quality responsibilities back from manufacturing process to the product design and development stage and results in the development of more cost-effective solutions. GM applied its robust quality-based capabilities by reducing the number of parts in its bumpers by 90 percent (Economist, 1997b). Additionally, tools such as “virtual manufacturing” allow designers to assemble complex products like an entire virtual 777 aircraft to make sure the hundreds of thousands of parts fit and are able to be manufactured by existing machinery (Economist, 1997b). Robust quality is not only a manufacturing concern. Understanding what constitutes quality from the customer’s perspective is critical to success (Cristiano, Liker, and White, 2000). Kordupleski, Rust, and Zahorik (1993) argue that true product quality cannot be achieved unless the traditional engineering and process-focused ideas of quality include a customer perspective. Companies have been articulating usability domains, have been isolating product quality implications, and have been interpreting what those ranges of usability or utility mean for a family of product variants. For example, endeavoring to improve its rust prevention, Toyota broke down “body durability” into 53 items such as climate and modes of operation (GVO Inc., 1991). Then, with

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customer evaluations, its product developers ran experiments to optimize the design, i.e., identifying features or benefits customers were willing to pay for and how those trade-off decisions affect interrelated features. Similarly, Apple Computer’s designers defined 159 user—computer interactions that were measured through 450 tests of usability for their PowerBook line of notebook computers (GVO Inc., 1991). The alignment between firm and customer views of product quality has been found to influence firm performance (Morgan and Vorhies, 2001). The customer’s usage situations must be designed into the product to eliminate product deviations from established requirements in the field as well as at the factory. A quality-based capability is essential for developing products that meet the criteria for creating a sustainable competitive advantage (Barney, 1991). Since uncertainty can influence customer perceptions (Veryzer, 1998), the greater the ability of the product to maintain reliability within an uncertain environment, the greater the firm is likely to be rewarded. A reputation for highly reliable products under diverse environmental conditions is more likely to produce brand loyalty, market share, and superior profits. A robust quality-based capability is also likely to improve speed to market since confidence in multiple customer-usage contexts would allow market development efforts to proceed more quickly. Therefore, H4: Robust quality-based capability is more positively associated with (a) firm performance and (b) speed to market in high-uncertainty environments than in low-uncertainty environments. Thus, these four capabilities are an organizational response to rapid technological change and the inability to forecast. They can create an enduring advantage through an ability to anticipate evolving customer needs and dynamic competitive situations across a broad range of contexts. Finally, robustly designed products offer promise in global markets. The following section undertakes an empirical test of the hypotheses. First, the methodology and data analysis techniques are presented. Next, the results are reported. Finally, a discussion of findings and implications of this study are offered.

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DATA COLLECTION, VALIDITY, AND RELIABILITY Sample To test the hypotheses, a study was conducted to examine firms competing in high-technology (high-tech) industries. Two U.S. cities with a significant presence of manufacturing firms in high-tech industries were selected as the sample pool. Pretest results indicated potential respondents were positively disposed toward the university sponsoring the research, subsequently improving trust and response rates (a critical concern when collecting product development and performance data). The U.S. Department of Labor, Bureau of Labor Statistics defines through classification the following industries as high tech [three-digit standard industry classification (SIC) code follows in parentheses]: office, computing, and accounting machinery (357); communication equipment (366); electronic components and accessories (367); miscellaneous electrical machinery (369); engineering, lab, scientific research instruments (381); and measuring and controlling instruments (382). An initial sample of 382 companies was identified from these industries in the target cities. A phone/fax data-gathering design then was adopted for this study [see Dickson and Maclachlan (1996) for relative advantages of fax versus mail surveys]. An attempt was made to contact potential participant companies’ representative to identify the product development manager and to request his or her participation. After eliminating all who were unable to be contacted, an effective sample of 321 product development managers or appropriate proxies [e.g., product development leading chief executive officers (CEOs), R&D managers, and engineering managers] were contacted. Forty-four percent, or 142, of the individuals contacted agreed to participate at some level (i.e., to complete or to examine the survey). After numerous contacts and attempts, a total of 84 usable responses were finally received, resulting in a response rate of 59% of those agreeing to participate and 26% of the effective sample. This rate of response is acceptable for organizational research, especially given the sensitivity and perceived risk of possible damage due to the loss of secrecy of a firm’s product development processes, costs, and resources. An analysis of early versus late responses revealed no significant differences, which suggests that nonresponse bias is not present in the data

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(Armstrong and Overton, 1977). Interviewing a sample of respondents and nonrespondents revealed no systematic differences across firm size or other key variables.

Survey Design, Validity, and Reliability The survey instrument was developed based on the technology development and strategic management literatures as well as executive interviews. In accordance with established techniques for measurement development, the constructs were defined and multiple items were generated through the literature review and field research. Content validity, internal reliability, and stability of internally reliable items over time were accomplished through a two-stage pretest. First, five academicians and five practitioners reviewed the items for each measure as suggested by Churchill (1979). Suggestions were integrated, and a subset of items was selected for the final instrument. Second, 25 participants from the sample were asked to complete the survey. The responses were assessed for reliability, and final items were selected that remained internally reliable. The formal data collection stage then was conducted, and unidimensional measures were constructed with factor analysis for each of the constructs. See the Appendix for a summary of items included in the final scales and their reliabilities. Table 2 includes variable means, standard deviations, and a correlation matrix. The study participants each identified a specific and representative product development project within the previous two years with which they were very familiar (Huber and Power, 1985; Philips, 1981). This helped ensure that the respondents’ knowledge of the project was both recent and detailed. It also resulted in variability across the data, since most respondents have a limited number of product development projects from which to choose and so may be forced to choose a failure, thus reducing a success bias. Since the data for this study was obtained from a single survey, common method variance is possible (Crampton and Wagner, 1994; Lindell and Whitney, 2001). As suggested by Podsakoff and Organ (1986), Harman’s one-factor test and a partial correlation procedure were employed to address this concern. The factor analysis yielded seven factors, with the largest explaining only 12.19% of

0.238

0.842

0.863

0.885 0.733

0.716

0.739

0.586

0.221

3.423

2.984

3.079 0.000

0.000

0.000

0.000

2

0.269*

0.033

–0.217*

0.105

–0.128

–0.273*

–0.054 –0.068

0.070

–0.221*

–0.128

–0.055 –0.059

0.373*** 0.181

0.248*

0.061

–0.008

1.000 0.409*** 1.000 0.264* 0.122

n = 84, *** p<.001, ** p<.01, * p<.05

2.814

4.882

a

0.821 1.033 3.038

3.391 3.133 5.142

1. Market Performance 2. Speed to Market 3. Size (Product Sales—logged) 4. Firm Size (# of Emp.—logged) 5. Outsourced Percentage 6. Product-Related Resources 7. Ownership-Related Resources 8. Environment Uncertainty 9. Robust Fuctionality Capabilities 10. Robust Aesthetics Capabilities 11. Robust Technological Capabilities 12. Robust Quality Capabilities

Std. Dev. 1

Mean

Correlations and Descriptive Statisticsa

Variable

TABLE 2.

1.000

–0.165

–0.123

–0.007

0.065 0.094

0.045

0.175

–0.024

–0.024

3

–0.071

1.000

5

0.011

0.218* –0.099

0.282** –0.066

0.159

7

0.031

0.125

0.093

0.002

0.009

0.058

–0.021 –0.051

0.518*** 1.000

1.000

6

0.117 –0.047 –0.102 0.338** –0.134 –0.014

0.296** –0.112

0.027

–0.103

1.000

4

9

–0.097 0.172

–0.051 0.321**

0.017 0.266*

1.000 0.021 1.000

8

11

–0.194 0.408***

0.129 1.000

1.000

10

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the variance, indicating that one general factor did not exist. In a regression analysis for all four models of this study, there was no significant change to the R2 or significance of the interaction terms. Moreover, the results for the study’s moderated hypotheses are less likely to be biased since the respondents were not aware of the theorized moderated relationship, nor was this relationship obvious when completing the survey. Spector (1987) indicated that common method variance may be more of a problem when employing single-item measures and poorly designed scales. Taken together, this study’s results should be viewed with reasonable confidence that they are not materially influenced by a common method variance bias.

Dependent Variables Two dependent variables were utilized for this study. Relative firm performance is a construct of six items that captures various aspects of the firm’s market performance over the most recent 12 months relative to major competitors. Relative speed to market is made up of two items that indicate the time to market and speed of introducing new products, relative to major competitors over the past 12 months.

Independent Variables The robust design items portray different capabilities pursued in product development. These constructs attempt to capture not only the amount of time and resources spent on developing these capabilities but also the relative commitment to a given capability as compared to the other options (see the Appendix for survey instrument wording). Due to the different units of measurement (i.e., hours and dollars), these items were standardized prior to constructing the final variable, resulting in a mean of zero for these measures. Functional capability is measured by the amount of time (total hours), resources (total dollars), relative time commitment, and relative resource commitment spent on designing the product to be easily stretched into a family of products usable across domestic and multiple foreign market

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situations. Aesthetic capability captures the amount of time, resources, relative time commitment, and relative resource commitment spent on designing the product to be visually acceptable across domestic and multiple foreign markets. Technological capability is measured by the amount of time, resources, relative time commitment, and relative resource commitment spent on selecting core product technologies that satisfy not only present requirements but also are applicable to future product generations. Quality-based capability represents the amount of time, resources, relative time commitment, and relative resource commitment to solving problems in the design stage that increase the manufacturability, ease of assembly, usability, and reliability of the product.

Moderator Variable Environmental uncertainty attempts to capture the level of uncertainty in the environment. This variable is comprised of three questions dealing with the changing nature of customer preferences and standards. Additionally, uncertainty is notably difficult to measure with acceptable reliability (Dess and Beard, 1984; McKee et al., 1989).

Control Variables Five control variables suggested by the literature also were included in the analysis. Two size control variables were included to capture both product- and firm-level effects, since prior research has empirically validated the significance of size on product technology development (Kotabe and Swan, 1995; Tyler and Steensma, 1998). Moreover, controlling for size also accounts for potential economies or diseconomies of scale (Hitt, Hoskisson, and Kim, 1997). A log function of product sales is used to account for specific product and business unit effects. A log function of total firm employees is used as a proxy for firm size. Outsourced percentage considers the percentage of the product’s technology that is outsourced. Sourcing—the decision to develop or to acquire parts and components—is inextricably related to product design decisions (Kotabe

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and Helsen, 2003). Product-related resources measures the comparative strength of the firm’s resources across four categories, as compared to the firm’s three major competitors. Ownership-related resources gauges the comparative strength of the firm’s resources across four categories, as compared to the firm’s three major competitors. These resource controls are derived from RBV (Miller and Shamsie, 1996).

DATA ANALYSIS AND RESULTS Estimation Procedure and Robustness Checks This study’s theoretical model required a moderation methodology (Baron and Kenny, 1986). Following Aiken and West (1991), the independent variables were centered prior to generating the interaction terms. By centering the variables, any existing multicollinearity between the variables in the interaction and in relation to the interaction term itself is reduced. This procedure improves the robustness of the analysis without degrading the quality of the data. To assess the threat of multicollinearity, variance inflation factors were estimated and were found to be in each case below the threshold level of 10, averaging 1.571 for all measures (Hair et al., 1998). Moreover, this study tested for the predicted moderation effect between R&D capabilities and environmental uncertainty on relative firm performance and speed to market through the inclusion of the direct and interaction effects. This is a conservative approach of examining moderation since the interaction term is tested for significance after the direct effects are controlled for. To enhance the interpretability of the interaction results, a standard plotting procedure was employed as suggested by Cohen and Cohen (1983) (see Figures 2a–2e for significant interaction plots). For each of these significant interactions, the plots show relative firm performance and speed to market when the given capability moves from low (one standard deviation below the mean) to high (one standard deviation above the mean) under low and high uncertainty. For example, Figure 2a shows that firm performance increases within the high-uncertainty context as functional design capabilities move from low (lean) to high (robust). Within the low-

Firm Performance

Exploring Robust Design Capabilities

5 4 3 2

High Uncertainty Low Uncertainty

1 Low Functional Capabilities

5 4 3 2

High Uncertainty Low Uncertainty

1 Low Aesthetic Capabilities

5 4 3 2

High Uncertainty Low Uncertainty

1 Low Technological Capabilities

FIGURE 2c

High Aesthetic Capabilities

Aesthetic Capabilities × Environmental Uncertainty Interaction

Firm Performance

FIGURE 2b

High Functional Capabilities

Functional Capabilities × Environmental Uncertainty Interaction

Firm Performance

FIGURE 2a

411

High Technological Capabilities

Technological Capabilities × Environmental Uncertainty Interaction

uncertainty context, the opposite is true: firm performance declines when functional design capabilities shift from low (lean) to high (robust). Figure 2e shows that speed to market declines during high uncertainty as firm technological capabilities move from low (lean) to high (robust). This figure also shows that within a low-uncertainty

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412

Speed-to-Market

5 4 3 2

High Uncertainty Low Uncertainty

1 Low Functional Capabilities FIGURE 2d

High Functional Capabilities

Functional Capabilities × Environmental Uncertainty Interaction

5 Speed-to-Market

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4 3 2

High Uncertainty Low Uncertainty

1 Low Technological Capabilities FIGURE 2e

High Technological Capabilities

Technological Capabilities × Environmental Uncertainty Interaction

context, there is a nominally positive relationship between technological design capabilities and speed to market. Since this study relied on cross-sectional survey data, the results might be susceptible to reverse causality and possibly to endogeneity. To assess these potential threats, two-stage least-square regression models were run (Greene, 2003; Nickerson, Hamilton, and Wada, 2001; Shan, Walker, and Kogut, 1994). The goal is to find an instrument that is correlated with the explanatory variable in question but that is uncorrelated with the disturbance (Kennedy, 1996). First, when assessing reverse causality, an item was used that assessed the firm’s relative performance to major competitors in the last 12 months in regards to products becoming the dominant design in the industry (firm performance: r = .51; p<.001; speed to market: r = .45; p<.001). The results indicate that reverse causality is not present when relative firm

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performance or speed to market (as the independent variable) is regressed on the robust design capabilities (as the dependent variable). Second, when investigating the threat of endogeneity, the total monthly resources that were spent on design and development for this product were used. This variable was significantly correlated with each robust design capability (range of r between .38 and .48, all at p<.001) but was uncorrelated with the disturbances. The results indicated that endogeneity was not present. Third, the survey instrument was designed to inquire about perceived competitive advantage only within the last 12 months. While limiting the assessment to a very recent performance period does not allow for the ability to speak to the sustainability of performance or long-term effects, it reduces the threat of reverse causality and endogeneity. Taken together, these measures enhance confidence in the results presented following. Table 3 shows the results of the regression analysis for both relative firm performance and speed-to-market models. The unstandardized regression coefficients for the variables are presented. This table presents a base model, with the control and direct effects variables included. The interaction model adds the interaction variables to the base model. For relative firm performance, the R2 increases from .339 (p<.001) for the base model to .453 (p<.001) for the interaction model. For speed to market, the R2 increased .240 (p<.05) to .348 (p<.01). Changes in adjusted R2 for both models are similar. Examining H1, the interaction term for functional capabilities and environmental uncertainty are significant for both relative firm performance and speed to market. The plots indicate that functional capabilities are more positively associated with market performance and speed to market in high- than low-uncertainty environments, supporting H1a and H1b (see Figure 2a and 2d). For H2, the interaction term is significant and the relationship is as predicted for firm performance, supporting H2a (see Figure 2b). The interaction term is not significant for speed to market, failing to support H2b. With H3, the interaction term is significant and the relationships are as predicted for both relative firm performance and speed to market, supporting H3a and H3b (see Figures 2c and 2e). For H4, the interaction term is not significant for either relative firm performance or speed to market, failing to support H4a or H4b.

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0.339 0.249

R2 Adj. R2 Improvement in Adjusted R2 F

a

1.838*** 0.072* –0.039 0.422 0.027 0.398*** 0.072 –0.281* –0.132 0.248 –0.022

Constant Project Size (Sales—Logged) Firm Size (# of Employees—Logged) Outsourced Percentage Product-related Resouces Ownership-related Resources Robust Functional Capability Robust Aesthetics Capability Robust Technological Capability Robust Quality Capability Environmental Uncertainty Uncertainty × Functional Capability Uncertainty × Aesthetics Capability Uncertainty × Technological Capability Uncertainty × Quality Capability 0.453 0.342 0.093** 4.080***

1.804*** 0.071** –0.052 0.323 0.053 0.403*** 0.000 –0.149 –0.105 0.326* –0.062 0.507* –0.524** –0.416* –0.126

Interaction Model

2.306*

0.240 0.136

+

1.908*** 0.036 –0.102* 0.264 0.258+ 0.201 0.155 –0.090 –0.383* 0.403+ 0.006

Base Model

p<.10

0.348 0.216 0.080* 2.635**

2.092*** 0.035 –0.115* 0.239 0.309* 0.091 0.158 0.097 –0.445* 0.489* –0.030 0.788** 0.004 –0.629** –0.146

Interaction Model

Speed-to-Market

n = 84. The unstandardized regression coefficients are presented above, *** p <.001, ** p<.01, * p<.05,

3.751***

Base Model

Firm Performance

Regression Analysis of Robust Design Capabilities Uncertainty Moderated Influence on Performance Outcomesa

Variables

TABLE 3.

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Additional analysis provides interesting insights. Ad-hoc analysis was conducted that compares the means of the study’s primary variables, including the individual components that make up both performance measures, across low and high levels of the four robust design capabilities (see Table 4). These t-tests reveal few significant differences for when the robust capabilities were either low or high (appropriate caution is necessary for this analysis given the number of t-tests and sample size). The interesting exceptions were that market share growth was significantly higher with high functional and aesthetic capabilities and lower with high quality-based capabilities. Sales growth and overall firm performance were also significantly higher with high aesthetic capabilities. Additionally, functional capabilities were significantly lower and quality-based capabilities were higher when aesthetic capabilities were high. High technological capabilities led to quicker speed to market. When functional capabilities were higher, aesthetic capabilities were lower and the outsourcing percentage increased.

CONCLUSIONS AND IMPLICATIONS Rumelt (1984), in explicitly combining Schumpeterian and the resource-based perspectives, suggests that strategy formulation concerns the constant search for ways in which the firm’s unique resources can be redeployed in changing circumstances. This study supports this perspective and finds that the relationship between robust new product development capabilities and firm outcomes is moderated by environmental uncertainty. The findings indicate that as uncertainty increases, functional (positive), aesthetic (negative), and technological (negative) capabilities are associated with relative firm performance. As uncertainty increases, functional (positive), and technological (negative) capabilities are associated with speed to market. While the management of resources or capabilities involves identifying those that balance short-term goals against a long-term capacity to address further expansion and growth in dynamic circumstances (Penrose, 1959; Wernerfelt, 1984), this finding suggests that robust platform decisions have short-term as well as longterm speed-to-market payoffs for functional capabilities but not for technological capabilities.

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3.25 3.33 3.17 — –0.135* –0.062 0.001 3.07 3.45 3.04 0.261*

3.00 3.00 3.01 0.195 — 0.059 –0.156 3.07 3.47 2.95 0.224

34 3.16 3.01 2.95 3.22 3.34 3.33 3.13

Low

3.22 3.32 3.12 –0.133* — –0.040 0.106* 3.09 3.39 3.01 0.219

50 3.55* 3.62** 3.54** 3.48 3.48 3.58 3.58*

High Sig.

Aesthetic Capability

2.91 2.92 2.90 0.095 0.059 — 0.143 3.03 3.54 3.08 0.215

35 3.31 3.18 3.21 3.41 3.47 3.40 3.18

Low

3.30 3.39* 3.20 –0.068 –0.042 — –0.102 3.12 3.34 2.92 0.226

49 3.45 3.51 3.37 3.35 3.39 3.53 3.55

High Sig.

Technological Capability

Mean Value of Measure at Low and High Levels

3.26 3.33 3.18 –0.073 –0.118 0.107 — 2.920 3.410 3.090 0.210

39 3.51 3.54 3.56 3.46 3.51 3.49 3.51

Low

3.02 3.07 2.99 0.063 0.102 –0.093 — 3.215 3.433 2.888 0.231

45 3.28 3.23 3.07* 3.30 3.34 3.47 3.30

High Sig.

Quality Capability

a Low and high values are determined as below or above the mean for the given measure. The significance test is based on a t-test on the difference between the means at low and high levels. *** p<.001, ** p<.01, * p<.05.

2.91 2.93 2.90 — 0.256 0.117 –0.026 3.09 3.38 2.89 0.147

Relative Speed-to-Market Time-to-Market Speed of intro. New Prods. Functional Capability Aesthetic Capability Technological Capability Quality Capability Uncertainty Product-Related Resources Ownership-Related Resources Outsourcing Percentage

55 3.47 3.50 3.46* 3.41 3.41 3.51 3.51

High Sig.

Functional Capability

29 3.25 3.14 3.00 3.31 3.45 3.41 3.17

Low

Comparison of Means Testa

Number of Firms Relative Firm Performance Sales Growth Market Share Growth Change in Profitability Return on Investment Growth in Return on Sales Overall Firm Perform. (1 yr.)

TABLE 4.

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The resource-based view underlies the range of strategic flexibility research that has investigated the firm’s ability to respond to dynamic competitive environments and uncertain demand conditions. While this study suggests support for the RBV of the firm, there is a possibility that the study’s interactions could arise from the aggregation of segments that do not exhibit such interactions when considered separately (Hutchinson, Wagner, and Lynch, 2000). Specifically, the findings suggest that robust design creates opportunities to enlarge the number of target market segments served, to evolve with dynamic market segments, and to implement more rapidly to serve newly created market segments in uncertain environments (Sanchez, 1995, 1999; Sanchez and Mahoney, 1996). If firms fully understand the ideal method of designing and producing a product, it is generally too late to exploit that information (Rumelt, 1984). In a summarization of the literature, empirical studies suggest that the resource-based view of the firm provides a theoretical underpinning for explaining and predicting significant firm and industry effects (Hunt, 1997; Kotabe and Swan, 1995; Montgomery and Wernerfelt, 1988). Alternatively, development of the theory at the firm level has left much work to be done to understand and to provide theoretical structure, as well as predictive ability, for a product development process model.

CONTRIBUTIONS, LIMITATIONS, AND RESEARCH DIRECTIONS This study advances the product development and strategy literatures in several ways. First, theoretical contributions include a start toward the delineation of key design capabilities. These robust design capabilities assist in understanding the decision-making process of balancing the forces for standardizing the product globally versus creating a flexible and adaptable product to better fit a greater number of smaller segment needs, environmental conditions, and technological changes. These capabilities are based on emergent research within the literature and are supported by industry practice. Further, the exploration of the situational importance of robust design capabilities and their performance implications broadens and strengthens the domains of reliably applying the resource-based view.

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Second, this article contributes by tackling the critical managerial concerns of product failure, high development costs, speed to market, and uncertainty. Additionally, actionable constructs are developed to be accessible to managers. The definitions are clear and identify controllable capabilities at the interface of management, marketing, manufacturing, and R&D. In line with the concerns and goals of managers, performance implications are tied to these new constructs. For example, functional, aesthetic, and technological capabilities are generally not found to have strong direct relationships with firm performance and speed-to-market outcomes. Instead, it is within the context of environmental uncertainty that the nature of these relationships is understood. Interestingly, while robust quality-based capabilities were found to have a direct and positive influence on both firm performance and speed to market, these relationships were not moderated by uncertainty. Successful product development capabilities allow the firm to spread the high cost of designing products or components across many contexts and to offer appealing products to consumers in different countries. For example, product development capabilities can provide firms greater flexibility and improved efficiency when pursuing a multidomestic strategy, where distinct or customized products are developed for each market. After the firm has determined the context in which the product is to be offered, then relevant capabilities can be emphasized. On one hand, because of competitive intensity, it would be difficult to develop new capabilities in a timely manner after the product context is determined—the capabilities need to be resident. On the other hand, robust design capabilities are successful in multiple contexts as was demonstrated by this study. Because of this property, the coalescence of at least some robust capabilities is critical to relative firm performance and speed to market. Third, the results of the study suggest that robust design capabilities affect relative firm performance and speed to market. This finding can be instructive in two ways. First, firms can have a high initial level of robustness in design capabilities that would lessen the likelihood that any changes in capabilities will be necessary. Second, firms can have a higher response curve and can develop these capabilities quicker than their peers. In the former, firms risk developing costly capabilities that they do not need, and in the latter, they risk not having the capabilities when they

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are needed. While a product is the dominant offering from the respondent firms, the impact of services is not explored (services could compensate for deficiencies in the four product-focused capabilities). It is critical to capture more information regarding specific product markets (e.g., generational products, standards-based, mark-ups, brand-oriented) to ascertain whether the emphasis of certain capabilities over others (e.g., marketing, distribution, and supply chain) is consistent with product market characteristics. Since this study focuses on the firm and not product markets, this study suggests that future research examine the inherent nature of product markets, e.g., how product markets compare on the inherent level of aesthetics required. A greater understanding of the role of perceptions of relative firm performance on design decisionmaking also is needed along with validation of perceptions using actual industry data. This analysis does not indicate whether an increase in uncertainty of the environment makes it desirable to put greater emphasis on robust functional design capabilities or whether an increase in robust functional design capabilities makes it more attractive to operate in a more uncertain environment. The full contextual, interaction, and causal relationships as yet are unclear. The link between any one product development project and the firm’s overall performance could be relatively tenuous. Since the length of time since product introduction is less than two years, it may make it difficult to draw conclusions about technology capabilities and investments’ influence on long-term performance. The present authors also believe that other capabilities are necessary for success. The relationship between robust design capabilities and other capabilities is not certain, nor is the hierarchy of these capabilities. This study is exploratory, and other specific NPD-related capabilities must be examined and incorporated in this context. Although mixed results have been achieved in the past, there is a need for researchers to improve the measure of uncertainty and obtain more global samples. In this study, “more certain” could mean that the firm does not have perfect knowledge of the future (this is a truism); alternatively, “more uncertain” could mean that the firm does not have a good understanding of the future nor their present markets. The present authors perceive that uncertainty does not change the product market but is proposed to change the response to the product market. Thus, the

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product market and the inability to determine the exact needs of the current and future product market along with the desire to appeal to the needs of multiple contexts reward the use of robust design capabilities. This suggests that although product markets may be inherently more aesthetic, uncertainty as to the inherent characteristics of product markets interact with the product markets. Other environmental variables (e.g., tariff structure, competitor response) could add explanatory power to the model. Part of the ambiguity in the literature is caused by the complexity of understanding when firm-related resources, product development resources, and robust design capabilities each should be brought to bear in a particular environment (Bourgeois, 1980; Bourgeois and Eisenhardt, 1988; Eisenhardt, 1989). The interactions among the NPD team, product attributes, and environmental uncertainty need to be amplified. Specifically, how these team capabilities evolve over time and the degree to which they are updated or refined based on the introduction (or resolution) of environmental uncertainty, as well as organization-based routines (e.g., accurate goal setting) or individual-based characteristics (e.g., risk profile of NPD team members). A richer treatment of capability evolution and lock-in layered with feedback loops could be an important contribution to this area. This study’s measure of the design capabilities involves the amount of time and money spent on one focal product of a “specific and representative product development project.” Consequently, it is not an unambiguous measure of robust design capabilities. In fact, it is expected that many factors may influence how the time and money invested in these capabilities actually creates and sustains these capabilities. A phenomenon that could confound this study is “fire fighting”—the unplanned allocation of resources to fix problems— although slack resources provide a buffer against this problem (see Repenning, 2001; Perlow, 1999). A material level of fire fighting would undercut the proactive assumption necessary for robust design and would produce “me-too” products less likely to achieve robustness. There are several additional research directions likely to expand our knowledge of the product development process. Interesting results are likely to be found with the inclusion of more firm and product development level constructs than environmental variables since much

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of the explained variance of performance is accounted for by the former (Hunt, 1997; Rumelt, Schendel, and Teece, 1991). There are also opportunities to explore interactions between capabilities—e.g., robust quality-based capability’s “providing the maximum number of customer usable situations” relationship with the robust functional capability. Strategic choices are not necessarily explicit but may be characterized by infrequency, uncertainty, and being multifunctional in scope (Eisenhardt, 1989). The most critical strategic choices firms make are those concerned with product market areas, or segments in which the firm will compete (Rumelt, 1984). A rich connection among a firm’s resources, distinctive competencies, and the mental models or dominant logic of the managerial team drives the decision-making process (Mahoney and Pandian, 1992). Penrose (1959) states that management is the major limiting factor. Biases underlie the unpredictability of the internal environment, and understanding the influence of such biases on the managerial mindset would allow for better insight of the situational nature of robust design and performance. Managers suggest that the choice of robust versus lean design capabilities is a matter of environmental context but also of mindset and managerial style, including risk-taking behavior. There are also implications associated with the availability of slack resources and the choice of performance measures for evaluating managers. Future research must explore these avenues as well as answer the critical questions of how robust designoriented firms build into their design process versatility, the ability to cope with new segments, and the capability to manage NPD in light of uncertainty. In another vein, exploration of how firms maintain a robust design or how firms account for the inevitable discontinuous technology change that forces the old robust design capabilities to be replaced by a new paradigm are intriguing research questions. It also could be productive to understand how a firm can influence the environment to maintain design viability and in which way it would be more profitable (e.g., through technology, marketing, regulatory changes, or social influences). These are important extensions that are of practical and theoretical relevance.

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APPENDIX Data Reduction Summary for Constructs Dependent Variables Relative Firm Performance (Cronbach’s alpha = .913) Compare your firm’s performance relative to your major competitors in the last 12 months (1 = Much Lower to 5 = Much Higher): 1. Sales growth 2. Market share growth 3. Change in profitability

4. Return on investment increase 5. Growth in return on sales 6. Overall performance of the firm last year

Relative Speed-to-Market (correlation = .783) Compare your firm’s performance relative to your major competitors in the last 12 months (1 = Much Lower to 5 = Much Higher): 1. Time-to-market

2. Speed of introducing new products

Robust Design Items Functional Capability (Cronbach’s alpha = .714) 1. What was the total amount of time (in man-hours) spent on designing this product to be easily stretched into a family of products usable across domestic and multiple foreign market situations? 2. What was the total amount of resources (in thousands of U.S. $) spent on designing this product to be easily stretched into a family

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of products usable across domestic and multiple foreign market situations? 3. The relative time commitment to R&D Functional Capabilities (as measured by the total hours spent on this capability versus the total time spent on the other three capabilities). 4. The relative resource commitment to R&D Functional Capabilities (as measured by the total U.S. $ spent on this capability versus the U.S. $ spent on the other three capabilities). Aesthetic Capability (Cronbach’s alpha = .683) 1. What was the total amount of time (in man-hours) spent on designing this product to be visually acceptable across domestic and multiple foreign market situations? 2. What was the total amount of resources (in thousands of U.S. $) spent on designing this product to be visually acceptable across domestic and multiple foreign market situations? 3. The relative time commitment to R&D Aesthetic Capabilities (as measured by the total hours spent on this capability versus the total time spent on the other three capabilities). 4. The relative resource commitment to R&D Aesthetic Capabilities (as measured by the total U.S. $ spent on this capability versus the total U.S. $ spent on the other three capabilities). Technological Capability (Cronbach’s alpha = .723) 1. What was the total amount of time (in man-hours) spent on selecting core product technologies that satisfy not only present requirements but are applicable to future product generations? 2. What was the total amount of resources (in thousands of U.S. $) spent on selecting core product technologies that satisfy not only present requirements but are applicable to future product generations? 3. The relative time commitment to R&D Technological Capabilities (as measured by the total hours spent on this capability versus the total time spent on the other three capabilities).

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Technological Capability (Cont.) 4. The relative resource commitment to R&D Technological Capabilities (as measured by the total U.S. $ spent on this capability versus the total U.S. $ spent on the other three capabilities). Quality-based Capability (Cronbach’s alpha = .726) 1. What was the total amount of time (in man-hours) spent on solving problems in the design stage that proactively eliminate deviations from established requirements in manufacturing and assembly? 2. What was the total amount of resources (in thousands of U.S. $) spent on solving problems in the design stage that proactively eliminate deviations from established requirements in manufacturing and assembly? 3. What was the total amount of time (in man-hours) spent on solving problems in the design stage that increase the usability and durability of the product in diverse customer usage situations? 4. What was the total amount of resources (in thousands of U.S. $) spent on solving problems in the design stage that increase the usability and durability of the product in diverse customer usage situations? 5. The relative time commitment to R&D Quality Capabilities (as measured by the total hours spent on this capability versus the total hours spent on the other three capabilities). 6. The relative resource commitment to R&D Quality Capabilities (as measured by the total U.S. $ spent on this capability versus the total U.S. $ spent on the other three capabilities).

Moderator Variable Environmental Uncertainty (Cronbach’s alpha = .617) Circle the appropriate answer (1 = Strongly Disagree to 5 = Strongly Agree): 1. In our business, customers’ product preferences change quite a bit over time.

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Environmental Uncertainty (Cont.) 2. Our customers tend to look for new products all the time. 3. Frequent changes in product standards are common.

Control Variables Product-Related Resources (Cronbach’s alpha = .786) Estimate the comparative strength of the resources of your firm relative to your three major competitors in the last 12 months (1 = Much Lower to 5 = Much Higher): 1. Stock of product technology 2. Stock of process technology

3. R&D Capabilities 4. New product development capabilities

Ownership-Related Resources (Cronbach’s alpha = 0.613) Estimate the comparative strength of the resources of your firm relative to your three major competitors in the last 12 months (1 = Much Lower to 5 = Much Higher): 1. Financial Resources 2. Newness of plant and equipment

3. Marketing capabilities

ABOUT THE AUTHORS Dr. K. Scott Swan is associate professor of international business and marketing at The College of William & Mary in Williamsburg, VA. His research interests include sourcing strategies, cooperative strategies, global product development, as well as the interaction between innovation and culture, which have led to publications in journals such as Strategic Management Journal, Journal of International Management, Journal of International Business Studies, Management International Review, and Journal of Product Innovation Management. Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global

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Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected] Dr. Brent B. Allred is assistant professor of business administration at the College of William & Mary. He specializes in global competitive strategy and organization structure and the management of technology and innovation. His publications include articles in the Academy of Management Executive, Management International Review, Journal of Product Innovation Management, and Journal of International Management. He received his Ph.D. from Pennsylvania State University and has lectured at American University in Bulgaria and University of Queensland (Australia). Prior to joining academia Dr. Allred worked in the computer industry with Intel, Novel, Symantec, and Central Point Software. He has had extensive international experience and has lived in the Netherlands, Hong Kong, Belgium, and Bulgaria.

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Chapter 3.4

Exchange Rate Pass-Through and International Pricing Strategy A Conceptual Framework and Research Propositions Terry Clark, Masaaki Kotabe, and Dan Rajaratnam

INTRODUCTION Because of its effects on product positioning, market segmentation, demand management, and market share dynamics, price is generally seen as having strategic and tactical significance (Day and Montgomery, 1983; Nagle and Holden, 1995). In the international context, price is further complicated by the fact that it must be managed with costs and revenues accruing in different fluctuating currencies. While the accelerating globalization of markets increasingly pressures firms to consolidate operations and to standardize marketing activities, price remains a point of international differentiation for most products, because firms choose to price discriminate in order to capitalize on cross-border differences in taste, price sensitivity, and supply. However, price discrimination itself can cause problems by creating cross-border arbitrage opportunities,

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resulting in gray markets (Assmus and Wiese, 1995; Cavusgil and Sikora, 1988; Duhan and Sheffet, 1988). Thus, it is no exaggeration to say that international pricing is “. . . a big headache and problem for many companies” (Dolan and Simon, 1996). In the light of its managerial significance, and in the context of the sheer volume of world exports—$5.46 trillion in 1997, of which the United States accounts for 12.6 percent (IMF, 1998)—one would expect a large marketing literature on international pricing. Surprisingly, despite its clear importance, and despite repeated calls for more research in the area (Aulakh and Kotabe, 1993; Baker and Ryans, 1973; Cavusgil, 1988; Terpstra, 1983), pricing remains one of the most persistently under-studied areas in international marketing (Assmus and Wiese, 1995). There are several plausible explanations for this neglect. First, the lack of international pricing data has discouraged otherwise interesting projects. Second, because international pricing is a distributed knowledge area requiring cross-functional integration of expertise, it has not become the domain of any academic discipline (Lessard and Zaheer, 1996). Third, a lack of international pricing theories suitable for fostering research hampers development. These are all daunting issues. Nevertheless, recent work by trade economists (e.g., Dornbusch, 1987; Dixit, 1989; Krugman, 1987), investigating the macroeconomic consequences of exporter reactions to exchange rate changes, promises to shed new light on international pricing. Central to these investigations is the notion of exchange rate pass-through—the extent to which exporters pass along exchange rate-induced margin increases (decreases) by lowering (raising) prices in export market currency terms. Building on the work of these trade economists, we develop an international pricing model critically reflective of the interactions between exchange rate passthrough and strategic marketing issues, particularly product positioning and market segmentation. The balance of this paper is arranged as follows: First, exchange rate pass-through is described and its relevance for international marketing is discussed. Then a model of international pricing which critically reflects pass-through concepts is developed, followed by research propositions.

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Exchange Rate Pass-Through According to Krugman (1987), foreign exporters to the United States during the early to mid-1980s passed-through only 60–65 percent of the real appreciation of the U.S. dollar to their U.S. customers. In attempting to explain why pass-through is rarely 100 percent, trade economists have identified a number of factors. For example, the extent of pass-through has been found to be related to: (i) size of export market economy— greater for small countries (Khosla and Teranishi, 1989); (ii) level of industry concentration in target country—decreasing with concentration (Feinberg 1986, 1989); (iii) whether the exchange rate change in the export market is an appreciation or a depreciation—greater for appreciations than depreciations (Kreinin, Martin and Sheehey, 1987; Marston, 1990); (iv) the proportion of foreign exporters to domestic firms—greater as the number of export competitors in a market increases (Dornbusch, 1987; Feinberg, 1986); (v) the type and height of non-tariff barriers in the export market—import quotas discourage pass-through (Bhagwati, 1988); (vi) country-of-origin of exporter—European exporters generally pass-through exchange rate changes more than U.S. exporters do (Athukorala and Menon, 1995); German and Japanese exporters tend to absorb portions of unfavorable exchange rate changes by reducing margins; U.S. firms prefer to keep their margins fixed, varying their foreign market prices instead (Knetter, 1994), and Japanese exporters use markup adjustments more than German exporters in order to smooth foreign currency prices of exports (Gagnon and Knetter, 1995); (vii) across industries, pass-through is greater in final goods as compared to raw material and intermediary goods’ industries (Khosla and Teranishi, 1989); and (viii) product size—pass-through is more pronounced for small as opposed to large German auto exports (Gagnon and Knetter, 1995). While these studies provide structural explanations of exchange rate pass-through, they fail to take into account intentional strategic behaviors in firms’ international pricing activities in the face of fluctuating exchange rates. For example, when the dollar appreciated against the Japanese yen and the German mark in the 1980s, Japanese cars were priced fairly low in the United States, while German cars became far more expensive in the United States than in Europe. By the

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1990s, when the dollar began depreciating against both the yen and the mark, Japanese and German automakers had to increase their dollar prices in the United States. However, Japanese automakers raised their U.S. prices disproportionately less than their German competitors did (Gagnon and Knetter, 1995). Why? By “pricing to market,” the Japanese automakers were acting strategically, with the result that they did not decrease their U.S. market shares as much as the German car makers (Ito and Rose, 1994; Kotabe and Helsen, 1998, p. 68).

Role of International Marketers Trade economists are interested in exchange rate pass-through because it promises to explain persistent trade imbalances (macroeconomic phenomena). In the process, they reference export pricing practices (microeconomic phenomena). However, they do so without adequate perspectives on firm-level pricing and other strategic marketing behaviors. Moreover, their analyses proceed without sufficiently dissagregated data (product category or brand level). Because of its preferred level of analysis (brand, product category, etc.), international marketing is well suited to provide innovative insight into exchange rate pass-through. Building on marketing’s tactical and strategic pricing knowledge, a link between international pricing decisions and the extent of exchange rate passthrough seems reasonable. Krugman (1987) advocates investigation of just such a link. According to him, his preferred explanation of persistent trade imbalances would stress “. . . the roles of both supply dynamics, resulting from the costs of rapidly adjusting the marketing and distribution infrastructure needed to sell some imports, and demand dynamics, resulting from the need of firms to invest in reputation” (p. 70). In emphasizing the relevance of “. . . marketing and distribution infrastructure . . .” and the “. . . need of firms to invest in reputation . . .,” Krugman explicitly links passthrough with international marketing in that: (i) marketing variables are mentioned as critical to understanding pass-through dynamics; and (ii) marketing decision makers are identified as the pass-through gatekeepers. It is the marketer’s strategic and tactical decisions (using traditional marketing tools—distribution, brand, price, etc.) which in

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large measure lead to increased, decreased, faster or slower pass-through effects (Cavusgil, 1988). While Krugman (1987) is interested in marketing variables only to the extent they promise to help economists explain persistent trade imbalances, his remarks suggest that the issue might be viewed from the other direction—exchange rate changes and pass-through as the contingency nexus for the analysis and development of international marketing strategy, and for the creation of competitive advantage. For example, Krugman seems to think that the investments firms make in reputation are important. This implies that branding and brand equity are important. It also raises a broader question: Under what competitive and market conditions will marketers pass-along (or not) price changes to their customer? How does the marketing mix affect such decisions? In the next section, we develop a theoretical framework which links pass-through to international pricing issues in a broad marketing context. In particular, we develop a model in which exchange rate changes are seen as a key contingency variable triggering a marketing response. This response is moderated by the firm’s strategic marketing mix decisions.

CONCEPTUAL FRAMEWORK The model in Figure 1 shows six marketing-related variables antecedent to strategic response: exchange rate uncertainty, distribution policy, brand equity, competitive symmetry, sourcing strategy, and firm orientation toward profit. Discussion of these variables and of their effect on pass-through is the central purpose of this section. In the following discussion, “export market” is used to refer to the foreign market where the product is sold, and “home country” to refer to the country of origin where the product is manufactured.1 We also use the term “exchange rate change” to mean real rather than nominal exchange rate change. This distinction is important since changes in foreign exchange rates that only reflect inflation rate differentials would not represent real price changes.

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Distribution Channel length

Competitive symmetry

integration intensity Exchange rate uncertainty

Brand equity

Strategic Response

Exchange Rate Changes FIGURE 1

Firm orientation • profit • export price

Sourcing policy

Extent of Pass-Through

Export Price

A Model of Export Pricing and Exchange Rate Pass-Through

Pricing Policy The most obvious marketing variable affecting pass-through is the policy a firm adopts to guide routine export pricing decisions. That firms employ different pricing policies is a matter of empirical record (Arpan, 1971; Lanzillotti, 1958; Samiee, 1987). The literature identifies three general export pricing policies: Cost-plus, profit contribution, and incremental cost (Cavusgil, 1988, 1996; Piercy, 1982; Root, 1987). In this section, we explore the effect of these three pricing policies on exchange rate pass-through. Firms using cost-plus policy set export prices by adding a predetermined profit margin in home currency terms to the fully allocated domestic cost base of the product. Thus, their profit margin is inelastic with regards to exchange rate movements. Strictly adhered to, this policy would result in complete pass-through. As such, it most reflects closely the behavior trade theory suggests should occur in response to trade imbalances. From the firm’s perspective, this policy is attractive because it stabilizes margins in home currency terms and simplifies administration. However, strict adherence to cost-plus export pricing may hurt unit sales when competition is strong, because it produces a price without reference to market conditions. Indeed, according to Cavusgil (1988), most U.S. firms use cost-plus export pricing only until external pressures (usually competitive) force them to do otherwise.

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Profit-contribution pricing policy is premised on the fact that demand conditions often differ from market to market. When different geographic market segments exist, firms using this policy practice price discrimination by setting prices to maximize profits in each export market. Success depends on gray marketing activities being minimized. Assuming price elasticities are fixed, a move in the exchange rate would change marginal revenue and marginal cost (in the export market) by some amount proportionate to the change in currency values. Under these conditions, strict adherence to profit contribution pricing policy would result in zero pass-through because the firm’s prices are optimally set to market conditions and maintain unit sales. Incremental cost export pricing downplays the role of fixed costs in setting export prices, and focuses instead on the incremental cost of exporting. Using this method, exporters regard fixed costs as covered by domestic sales, and so are free to price exports at anything above their domestic variable costs. This is what Tellis (1986) calls “second market discounting.” The policy is based on the assumption that producers have excess capacity, and that arbitrage between domestic and export markets is not possible. Because the firm fixes its price neither by reference to full costs, nor strictly by market conditions, incremental cost pricing represents a middle ground between cost-plus and profit contribution export pricing. As such, it gives the firm greatest flexibility in maximizing excess capacity unit sales. Indeed, provided additional costs of exporting are covered, incremental cost pricing frees the firm from the need to respond to exchange rate movements. However, because incremental cost pricing may result in export prices below domestic levels, local competitors in the export market may complain to their governments of dumping, and lobby for retaliation (Czinkota and Kotabe, 1997). This effect is not symmetric—host country firms and governments will not likely complain about imports that are priced above the home country level. However, even a small discrepancy below home country price will usually trigger scrutiny. Thus, the effects of incremental cost pricing on pass-through depend as much on competitive pressure as on political pressure.2 Our discussion thus far is summarized in the following propositions:

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P1: The extent of exchange rate pass-through is highest for firms using cost-plus pricing, followed by those using incremental cost pricing, and then by those using profit contribution pricing. P2: For firms using profit contribution pricing, the extent of exchange rate pass-through increases as the extent of gray market activity between the two markets increases. P3: For firms using incremental cost export pricing to price below their home country levels, the extent of exchange rate pass-through is negatively related to the level of local competitive pressure and positively related to the level of local political pressure.

Performance Orientation Export pricing policy is closely related to, but conceptually distinct from how the firm views and measures market performance. Export pricing policies are frameworks designed to provide routine guidance in setting actual prices. A performance orientation relates to how the firm defines and measures market success. In the marketing literature, discussion of performance orientation revolves around the relative merits of marketbased versus finance-based measures of performance (Capon, Farley and Hoenig, 1990; Jacobson, 1988; Szymanski, Bharadwaj and Varadarajan, 1993). Research suggests significant variation in country-to-country performance orientation. For example, Kotabe and Duhan (1991) show that Japanese firms tend to emphasize market share more heavily than do U.S. firms in evaluating market performance. Similarly, Doyle, Saunders and Wright (1988) show that Japanese firms pursue market shares more often than either U.K. or U.S. firms, while U.S. firms pursue short-term profits more aggressively. Such differences in performance orientation will affect the extent of exchange rate pass-through. Firms pricing to maximize export market share will seek to lower export market prices whenever feasible (as an investment in market share), and hesitate to raise them, even when margins are being squeezed, because of the risks of losing market share. However, firms pricing to maximize a financial performance measure such as ROI, would

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more likely focus attention on maintaining and expanding margins whenever possible. Thus: P4: When exporter’s country currency appreciates, market shareoriented firms tend to pass through less of the cost increase in the export market than do financial performance-oriented firms. P5: When exporter’s country currency depreciates, market shareoriented firms tend to pass through more of the cost decrease in the export market than financial performance-oriented firms do.

Sourcing Strategy Since the mid-1970s, exchange rates have fluctuated considerably. In an era of liberal trade policies, firms respond to such volatility by procuring their inputs from abroad. For example, during the mid-1980s when the U.S. dollar appreciated steeply, U.S. imports surged. However, in a U.S. dollar depreciation, U.S. firms would find it increasingly difficult to use foreign supplies because they have to pay higher dollar prices, squeezing their margins. In such situations, companies evaluate the likely movement in exchange rates to determine the extent to which they can continue to engage in foreign sourcing (Swamidass, 1993). However, a recent study (Murray, 1996) shows that exchange rate fluctuations have limited impact on the nature of sourcing strategy for crucial components, and that foreign sourcing occurs for non-cost reasons (quality, reliability, technology, etc.). Since developing overseas suppliers is time consuming, purchasing managers cannot easily drop a foreign supplier even when exchange rate changes have adverse effects on the cost of imported items. Furthermore, savvy U.S. components suppliers are known to increase domestic prices to match rising import prices following exchange rate changes. Thus switching to local suppliers in the U.S. may not ensure cost advantages for foreign firms. Moreover, many companies seek long-term relationships with international suppliers. In a long-term supply relationship, exchange rate fluctuations may be viewed as a temporary problem by the parties involved. Also, some companies with global operations can shift supply locations from

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one country to another to overcome the effects of adverse exchange rate fluctuations. That is, increasing the number of supplier locations internationally makes the firm less vulnerable to adverse currency changes in the export market because they can readily relocate their sourcing to more favorable currency locations. Obviously, factors other than cost may permit foreign firms exporting to the United States to reduce the impact of exchange rate fluctuations, thereby reducing the extent of exchange rate pass-through (Kotabe and Helsen, 1998, pp. 275–280). Therefore, P6: Firms using international suppliers on a long-term basis tend to pass through less of the exchange rate fluctuations than those relying on spot purchases of supplies. P7: Firms with many alternative sources of supplies tend to pass through less of the exchange rate fluctuations than those with few such suppliers.

Distribution System There has been considerable interest in international distribution channels in recent years. This interest has focused primarily on issues such as channel design and structure (e.g., Bello and Lohtia, 1995; Klein and Roth, 1990), channel integration (e.g., Klein, Frazier and Roth, 1990; Osborne, 1996), channel control (e.g., Bello and Gilland, 1997; Gatignon and Anderson, 1988), and closely related to channel control, gray markets (e.g., Assmus and Wiese, 1995; Cavusgil and Sikora, 1988; Duhan and Sheffet, 1988). However, Krugman’s (1987) concern to explain persistent trade imbalances by reference to “. . . the costs of rapidly adjusting the marketing and distribution infrastructure needed to sell imports . . .” (p. 70) suggests an interesting and largely unexamined pricing-related aspect of channels. Specifically, Krugman alludes to three areas especially germane to our discussions: Intensity of distribution (reflecting expansion flexibility); channel length (reflecting the number of intermediaries between an exchange rate change and final export market price); and control (reflecting the exporter’s effectiveness in

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determining how much of a currency change is passed-through into export market prices).

Distribution Intensity Krupp and Davidson (1996) identify two types of distribution flexibility affecting the firm’s international operations: (i) flexibility in allocating product volume among export markets after an exchange rate change (allocative flexibility); and (ii) flexibility in the number of sales outlets available in particular export markets (intensity flexibility). Allocative flexibility represents a general production and appropriation problem. Intensity flexibility reflects the characteristics of particular foreign market operations per se. Reflecting on distribution intensity flexibility, one explanation for persistent trade imbalances relates to the “bottleneck” effect (Baldwin, 1988). A bottleneck occurs when a firm is unable to respond to increased demand because of low distribution intensity. For example, some firms exporting to the United States in the early 1980s did not lower their U.S. prices as the U.S. dollar strengthened because they had inadequate U.S. distribution facilities and could not have supplied the increased demand that lower U.S. prices implied (Knetter, 1994). Because their U.S. distribution intensity was low, they could not easily increase the flow of their products to U.S. markets. Instead of passing through the increases in margins to their U.S. customers in the form of lower prices, they kept them. The bottleneck phenomenon can be easily understood when, for example, a firm’s export is handled by a single importer/distributor responsible for setting up contracts with retailers. Under such conditions, a quick volume sales increase may be impossible simply because the single distributor cannot handle the increased administrative responsibilities. If the exchange rate change (and hence the bottleneck) is temporary, using alternative channels to expand distribution will not likely be feasible, because of the time and effort needed for a fast expansion. For more permanent exchange rate changes, a variety of solutions are possible. For example, in the medium to long run, exporters may respond to bottlenecks by increasing distribution intensity and by allowing prices to fall proportionately, leading to increased market share. Export bottlenecks occur only with export market currency appreciations, since

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depreciations imply a contraction rather than an expansion of demand. Thus we propose: P8: In an export market currency appreciation, the extent of exchange rate pass-through is positively related to the firm’s intensity of distribution in the export market.

Channel Length and Integration The relationship between channel length and exchange rate pass-through is of great relevance to our discussion, because, ceteris paribus, an increase in channel length implies an increase in the number of pass-through gatekeepers. One way to think about the problem is to view each vertical channel dyad as a micro channel in itself—each with an independent buyer and seller, each with a pass-through problem to deal with. Presumably, independent actors will act to optimize their own position. That is, they will pass-through and/or absorb changes as it suits them. Complete channel pass-through will occur only if all dyads pass through all the increases (decreases) in margins. This will likely occur only when the channel is dominated or owned by a single party. In all other cases, passthrough is not likely to be complete. In other words, the effects of channel length on pass-through will be modified by degree of channel integration. We deal with the issue of channel integration more fully below. Assume, for example, that an exchange rate change takes place across the first of a number of channel dyads, resulting in a real margin gain for the first channel member (the exporter). If that first channel member then passes through a portion (even a large portion) of the margin gain it receives to its dyadic partner (the importer), who in turn passes on a portion of the margin increase he receives, and so on across the remaining dyads, total pass-through will be reduced in proportion to the number of channel members. An issue discussed in the sales promotions literature relates to how much of a manufacturer’s trade promotion is kept by channel members, and how much gets through to end users (Blattberg and Levin, 1987; Bucklin, 1987). While trade promotions are intentional and strategic, and exchange rates are purely exogenous, the channel behavior of trade promotions and exchange rate pass-through have a concern common

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with the notion of channel control, or channel integration. Anderson and Coughlan (1987) define channel integration in terms of the degree to which firms own their channel intermediaries. In the international arena, Klein, Frazier and Roth (1990) found that firms engaged in differing degrees of forward integration so as to be able to enforce contracts and reduce the opportunistic tendencies of outside intermediaries. In a multiintermediary channel, pass-through provides independent intermediaries opportunities to act opportunistically and to frustrate efforts to control export market prices. The discussion thus far assumes independent channel members, and that export market prices emerge as the residual of autonomous channel member actions. However, what happens to pass-through as channel integration changes? Consider a simple four-member three-dyad export channel with a produce/exporter in country i (Ei), and an importer/ distributor (Ij), retailer (Rj), and end-user (Uj) in country j. Ei’s margins are directly exposed to exchange rate changes, Ij’s and Rj’s are not. Figure 2 outlines a number of channel integration scenarios. For example, in scenario #1, Ei controls Ij (i.e. Ei dictates Ij’s pass-through to Rj), and Ij controls Rj (i.e., Ij. dictates the price Rj charges Uj). From Ei’s perspective, scenario #1, represents the greatest degree of channel integration, followed in order by scenarios # 2, 3, and 4. If a channel member controls its downstream dyadic partner, assume that partner’s downstream dyadic pass-through weight = 1. If a channel member does not control its downstream dyadic partner, assume the partner’s downstream dyadic pass-through weight < 1. After an exchange-rate induced margin change of DM, assume Ei’s dyadic passthrough weight to Ij = a (i.e. Ij receives a pass-through of aDM from Ei). If controlled by Ei, Ij passes the entire amount through to Rj. In turn, if controlled by Ij, Rj also passes-through aDM to end-user Uj. However, if Ij is independent, assume Ij’s dyadic pass-through weight = b. Thus Rj receives abDM in pass-through from an independent Ij. If Rj is independent, assume their dyadic pass-through weight = g. Thus, U j receives abgDM. The total pass-through amounts for each channel scenario are shown in Figure 2. Since a, b and g < 1, it is clear also that DMa > DMab, DMbg > DMabg. This adds to the analysis above by suggesting that although pass-through is impeded by channel length, it is facilitated by channel

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Ei

locus of exchange rate changes

controls (C)

does not control (N)

Ij C

Rj

α

Dyad #1 Ei’s pass-through to Ij =

Ij N

C

Rj

Rj

β

Dyad #2 Ij’s pass-through to Rj =

N

Rj

γ

Dyad #3 Rj’s pass-through to Uj =

total pass-through channel scenario FIGURE 2

Uj

α

Uj

αβ

Uj

Uj

αγ

αβγ

1

2

3

4

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integration. In general, however, we should expect control to moderate the effects of channel length. That is to say, channel length will have only weak effects in pass-through when control is very high, but strong effects when control is low. Our discussion is summed up in the following proposition: P9: The extent of exchange rate pass-through is inversely related to channel length, as moderated by the degree of channel integration.

Exchange Rate Uncertainty Perceived uncertainty is higher in export than in domestic channels (Raven, McCullough and Tansuhaj, 1994), largely because of uncertainties associated with exchange rates (Page, 1977; Rodriguez, 1988). Reflecting on this, some trade economists argue that persistent trade imbalances can

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be explained partly by reference to the fact that exporters simply “got it wrong” in predicting exchange rate movements. Thus, Krugman (1987) suggests that the extent of pricing to market in the early 1980s was attributable in part to “the belief of foreign firms that the dollar will fall again in the not too distant future” (p. 62, emphasis added). Such misalignments between export prices and exchange rates necessitate price adjustments based on predictions of future exchange rates. Since price adjustments are made in the presence of customers (wholesale, retail, end users) who will not tolerate frequent price changes, and competitors who will not hesitate to leverage mistakes, the process is fraught with dangers. Hedging offers protection against loss. For example, if the export market currency should depreciate, exporting firms that have hedged against the depreciation would not lose their home currency revenue. However, hedging does not eliminate the need for price adjustments in the face of long term currency trends (Krupp and Davidson, 1996). Surprisingly, the pass-through literature has had little to say regarding the effects of exchange rate uncertainty per se. However, it is clear that uncertainty over exchange rate movements will increase exporter caution in price setting and price adjustment, simply because they will be unwilling to pass-through margin gains (losses) thought to be temporary. P1O: Extent of pass-through decreases as exchange rate uncertainty increases.

Brand Equity The pass-through literature suggests that extent of pass-through is related to product differentiation and firm reputation (Cowling and Sugden, 1989), because product differentiation decreases price elasticity. Thus, Krugman (1987) advises that solutions to the problem of persistent trade imbalances stress the role of “. . . the need of firms to invest in reputation” (p. 70). In the context of marketing, these issues fall under the rubric of brand equity. Aaker (1996) defines brand equity as “. . . a set of assets (and liabilities) linked to a brand’s name and symbols that adds to (or subtracts

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from) the value provided by a product or service to a firm and/or that firm’s reputation” (pp. 7–8). Keller (1993) develops the brand equity concept in terms of the consumer’s memory-based knowledge of the brand, arguing that “. . . the long-term success of all future marketing programs for a brand is greatly affected by the knowledge about the brand in memory that has been established by the firm’s short-term marketing efforts” (p. 2). Strong brand equity implies high customer awareness, and generally assumes strong promotional support. Brand equity provides numerous benefits, including brand loyalty, competitive advantage, and more flexibility with prices and margins. On this last point, Aaker (1996) argues that brand-based competition be viewed as an alternative to pricebased competition. Attesting to this point in the international context, Samiee (1987) found that foreign firms put “. . . less emphasis on price (and) . . . concentrate . . . marketing efforts on other marketing mix variables . . . (such as) promotion, selling functions, and product research and development . . . (to) build long-range product superiority and goodwill for the company” (p. 28). The argument is essentially that strong brand equity increases loyalty, decreases the propensity to switch brands, and so decreases price elasticity. Conversely, where product reputation and brand equity are less important (commodities for example), firms become price takers, and will tend to price to maximize short run profits (Krugman, 1987). This being the case, it is clear that brand equity is a significant factor in exchange rate pass-through phenomena. Indeed, in a competitive export environment, investment in brand equity provides a buffer, allowing firms to escape some of the intensity of global price competition (Piercy, 1982), retain more of margin gains during appreciations, and pass-through more of the losses in a depreciation. By the same logic, the firm with high brand equity will be able to delay passthrough in an export market currency appreciation, and to expedite it in depreciation. Thus: P11: In an export market currency appreciation (depreciation), the greater the brand equity, the lesser (greater) the extent of exchange rate pass-through.

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Competitive Symmetry When firms from different countries compete in the same export markets, pricing is more complicated because all currencies fluctuate against each other over time, inevitability resulting in a “. . . wedge (being driven) between the value of the revenues earned by firms . . . located in different countries but . . . (competing) in a common market” (Krupp and Davidson, 1996, p. 436). This wedge creates an asymmetry of exchange rate effects on competing firm margins. Consider the simple case of two exporters, a and b, from countries i and j, exporting strategic substitutes to country k. Assume both firms are market share performance-oriented, and that each firm accrues all costs in the home country, and that exchange rates fxik (country i’s in terms of country k’s currency), fxjk (country j’s in terms of country k’s currency), and fxij. (country i’s in terms of country j’s currency) are independent, free floating and unaffected by the transactions of a and b. Moreover, assume a and b’s costs are fixed in home currency terms at some arbitrary level. Figure 3 outlines a number of currency movement scenarios, and explores their differential effects on a and b’s margins, their likely pricing decisions, and on pass-through. In cell 1, country j’s currency strengthens against country k’s, reducing b’s margins in k, while country i’s currency weakens against country k’s, increasing a’s margins. While b would likely prefer to increase its currency k price, so as to regain its margins, its competitor is in a position to lower its k price and take market share away from b. If a did this, b has no obvious short term pricing response. In cell 4, the situation is identical but reversed. The situations in cells 2 and 3 are more complex. In cell 2, both country i and j’s currencies are strengthening against country k’s currency, implying that both a and b have depreciating k revenue streams, and therefore decreasing margins from k. However, unless the cross-exchange rate (fxij) remains unchanged, one firm will gain a comparative advantage in relatively greater margins. In cell 2a, country j’s currency strengthens against i’s, implying a is hurt less by the depreciation than b. As a result, a gains a relative advantage over b. At a time when both firms would like to increase the price of their products in k to regain margins, a needs to do so the least. Indeed, a might leverage

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its relative advantage by refusing to raise price, or even by lowering it. In cell 2b, the situation is reversed. Cells 3a and b show a similar situation. However, in this case both firms experience increases in their revenues from k, implying wider margins. Again, examination of the cross-rate (fxij) will show which, if any, firm realizes a comparative advantage in relatively greater margins. In cell 3a, exporter a has the comparative advantage, in cell 3b, exporter b has. This analysis might be tellingly recast if the products exported by a and b to k are strategic complements, rather than strategic substitutes. Where the firm has a strategic export complement in the foreign market, favorable (unfavorable) exchange rate changes for that complementary product will favorably (unfavorably) affect the firm’s export. In other words, some portion of the demand for a’s product is dependent on the demand for b’s product, and vice versa. Thus, if a’s margins are reduced by an export market currency depreciation, while b’s are increased by an appreciation, a might be able to raise its prices and regain margin without great loss in demand by riding on the coat tails of demand for b’s product.

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This discussion can be summarized in the following propositions: P12: In an export market currency depreciation (appreciation) where the firm’s strategic competitor gains a comparative advantage (disadvantage), extent of pass-through will be small (large). P13: In an export market currency depreciation (appreciation) where the firm’s strategic complement gains a comparative disadvantage (advantage), the extent of pass-through will be large (small).

DISCUSSION Trade theorists’ explanations of persistent trade imbalances hinge critically around the notion of exchange rate pass-through. While these explanations have potential for shedding light on issues of interest to international marketers, problems with level of analysis (country, industry), and data (highly aggregated) limit their contributions at present. However, Krugman’s (1987) comment that explanations of persistent imbalances should stress “. . . the roles of both supply dynamics, resulting from the costs of rapidly adjusting the marketing and distribution infrastructure needed to sell some imports, and demand dynamics, resulting from the need of firms to invest in reputation” (p. 70), suggests the initiative for progress is with international marketing. With a level of analysis at the category and/or brand level, and an extensive body of literature on domestic tactical and strategic pricing at the firm level, international marketing is well positioned to advance its own body of knowledge on international pricing, and to contribute back to the international trade literature. In this final section, we outline a research agenda to facilitate knowledge development on pricing issues in international marketing.

Competitive Exporting Exchange rate pass-through suggests an innovative approach for linking all elements of the marketing mix in exploring competitive behavior in

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export markets. Our discussion on competitive symmetry evaluates the role of price and exchange rates in the competitive equation. Extension of this discussion in four directions would be helpful in developing the topic further. First, the total marketing mix should be incorporated in the analysis. Most obviously, given the model outlined here, this means establishing links among brand equity, channels of distribution, firm orientation, etc., and exchange rate pass-through, in the context of the discussion surrounding Figure 3. In particular, it would be helpful to extend the analysis presented here to incorporate price-brand competition (e.g., Blattberg and Wisniewski, 1989). Second, the strategic substitutability/complementarity concept (Bulow, Geanakoplis and Klemperer, 1985) shows promise in explaining competition in export markets (Baniak and Phlips, 1995). These concepts relate also to the idea of price bundling (Guiltinan, 1987). Guiltinan defines price bundling as the practice of “. . . marketing two or more products and/or services in a single ‘package’ for a special price” (p. 74). In the context of export pricing, this suggests the development of “virtual bundling” strategies involving complements to leverage advantage as exchange rates move differentially for players. Virtual bundling would require exporters to make implicit or explicit commitments to strategic complements to manage and price products cooperatively. Where such agreements are illegal or not possible, the firm could still develop normative contingency models incorporating their strategic complements. Third, discussion surrounding Figure 3 should be expanded to include consideration of multimarket competition (Karnani and Wernerfelt, 1985). Our discussion was developed in the context of exporters competing in a single market. However, the issues linking pass-through and competition become more complex when multiple currencies, multiple products and multiple export markets are brought into the picture. Models incorporating such complexity could make considerable contributions to our understanding of international markets. Finally, because of the difficulties in data collection, it might also be useful to develop simulations of export competition to gain insight into the dynamic interactions of exchange rates, prices, market shares, brand equity, and distribution channels.

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Generalization of the Model The model developed above is limited to the exploration of pass-through dynamics in pure export situations. This simplification was necessary to identify salient issues more clearly. However, the model is generalizable beyond the pure export context. Generalizing the model would add complexity, but would not change its essential features. For example, the global producer has no “home” country as such. Rather, cost and revenue elements are found in many country locations. Problems of currencies, pass-through, competition and pricing remain. In pursuing a generalized global model, a careful distinction should be maintained between analysis aimed at managing exchange rate risk and analysis aimed at managing price strategically and tactically, as marketers understand it. A pure risk management perspective would be myopic vis-à-vis the types of particular strategic threats and opportunities described above.

Data and Measurement Issues Most frustrations in researching exchange rate pass-through stem from difficulties in developing satisfactory data (Menon, 1995; Smith, 1996). To get around this problem, researchers resort to surrogates (Menon, 1996). Wide use of surrogates prompted one observer to complain that persistent trade imbalances may simply be an illusion, an artifact of the data gathered to investigate them (Lawrence, 1990). Legitimate criticisms of data notwithstanding, Lawrence’s view is not widely held. For international marketing scholars, there are many problems. For example, it is difficult to assemble symmetric data sets (matching timeseries price, cost, revenue and market data for groups of competing exporters). The paucity of research on international pricing in general has been put down to the reluctance of firms to share sensitive price and price decision-making information (Aulakh and Kotabe, 1993). At first glance, the development of large scanner databases in many developed countries would seem to answer the case. However, the value of these databases is limited by the fact that they are not available in most countries. Following the practice of trade theorists (e.g., Menon, 1995), international marketing scholars might also resolve some of their data problems

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using surrogates. For example, careful collection and integration of industry data (market shares, company sales), annual reports (policy statements, aggregate costs, sales volume, marketing expenditures), government statistics (volume, origin and value of imports), consumer reports (brand ratings and rankings), surveys (retail prices, distribution system characteristics, pricing policies), and currency movements could provide databases useful for studying pass-through from a marketing perspective. Products most promising for testing the model developed here would minimally have five characteristics: (i) a clearly defined cost component in one currency, and a clearly defined revenue component in another currency—that is “pure exports”; (ii) a well defined and limited set of competitors from a variety of countries; (iii) home currencies for the set of competitors should move freely against each other, and against the export market currency; (iv) strong branding; and (v) posted or otherwise publicly available prices. Beer and wine imports, and some international publications would seem to fit these requirements quite closely. For example, Cecchetti (1986) uses newsstand magazines’ prices (printed on the cover) to explore domestic price behavior over time. Ghosh and Wolf (1994) use a similar approach with The Economist, to investigate pricing in twelve countries over a period of almost twenty years. To obtain insight useful for both theory building and normative prescription, patterns of export pricing will have to be examined in a broad context over extended periods of time. Fortunately, the decade of the 1980s provides a natural laboratory of sorts, in which the U.S. dollar both rose (1980–1985) and fell (1985–1995) against most major currencies. Unfortunately, to take full advantage of this, brand equity, export pricing policy, etc. would have to be estimated post-hoc. Establishment of an ongoing PIMS-like database, which included all relevant brand-level export marketing data, would eliminate many of the problems. Such a database would have more uses than the investigation of pass-through effects on export pricing.

CONCLUSION International pricing has been remarkably under-researched in marketing for at least the past twenty five years. This paper addresses this gap

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by building on recent developments in trade theory to build a model of export pricing, critically reflective of marketing decision variables. The model contributes to the international marketing literature in four ways: (i) it develops the marketing export pricing literature in an innovative direction by integrating insight from the international trade literature on exchange rate pass-through; (ii) in doing so, the model addresses the long standing criticism that international pricing is seriously under researched in marketing; (iii) the model also helps fill a gap by developing theoretical linkages between price and other elements of the marketing mix (Rao, 1984), this gap is most telling in the international context (Williamson and Bello, 1992); and (iv) the model offers a fuller explanation of the surprising findings of Cavusgil and Zou (1994) that price competitiveness is only weakly related to strategic response in an export context. Moreover, by including brand and/or category-level marketing variables in a model of exchange rate pass-through, the model also contributes back to the trade literature by suggesting an avenue of inquiry towards a solution of the adjustment puzzle of persistent trade imbalances.

NOTES 1.

2.

Our study framework is limited to traditional trade of manufactured components and products between independent exporters and importers. Intra-firm trade that takes place between affiliated companies within the same corporate system transcending national boundaries tends to be subject to transfer price manipulations, and is not included in our study. About 70 percent of manufactured goods trade is traditional in nature, while some 30 per cent of it is intra-firm in nature (United Nations Centre on Transnational Corporations, 1988). These traditional and intra-firm trade ratios have been fairly stable over time (Organisation for Economic Co-operation and Development, 1993). However, whenever a price gap exists between the two markets, gray marketing by the entrepreneurial third party tends to occur to arbitrage the price gap away in the long run. When the foreign market price is lower than the home market price, alert gray marketers will engage in gray market sales back to the home market. Of course, in the reverse situation, gray marketers will develop an additional sales channel to increase sales to the foreign market. Therefore, to the extent that gray marketing activities occur or are tolerated, the long run effect of incremental pricing on pass-through will be actually smaller.

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ABOUT THE AUTHORS Terry Clark is associate professor of marketing at Southern Illinois University. His research interests include international marketing and marketing strategy. Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected] Daniel Rajaratnam is associate professor at the Hankamer School of Business, Baylor University Waco TX. His research interests include international marketing and marketing strategy.

Chapter 3.5

The Effect of Export Assistance Program Usage on Export Performance A Contingency Explanation Esra F. Gençtürk and Masaaki Kotabe

Over the past ten years, a substantial amount of systematic research has been done on the determinants of and impediments to knowledge utilization within organizations (Diamantopoulos and Souchon 1996; Menon and Varadarajan 1992; Sinkula 1994; Sinkula, Baker, and Noordewier 1997). This work has been motivated by the realization that success in an intensely competitive global business environment hinges on better and effective use of information. Indeed, information as a source of sustainable competitive advantage and therefore success in the global marketplace has risen to the forefront in debates on the global competitiveness of specific industries and markets. As the largest producers of external information, states’ as well as federal governments’ role in providing local firms with information necessary to enhance their global competitiveness and performance is no longer taken for granted. Almost all developed and most developing countries have strengthened their commitment to export marketing assistance programs and have developed full-fledged programs to enhance the export activity of firms located within their jurisdiction. Broadly,

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export marketing assistance programs refer to all public measures designed to assist firms’ exporting activity, ranging from counseling, tax incentives, and export financing to trade shows and sales leads. Therefore, the basic objective for these programs is to act as an external resource for firms to gain knowledge and experience that is vital for successful foreign market involvement. At least on the surface, state export marketing assistance programs make sense, because they are reputed to have impressive results. In one nationwide study, for example, every increase of $1 in state export assistance expenditures was claimed to result in approximately $432 increase in exports (Coughlin and Cartwright 1987). Opponents, however, argue that private market forces and not public assistance programs determine the competitive position and export performance of firms within a state. Furthermore, claims of significant increase in export performance attributed to these programs are considered selfserving post hoc rationalizations by many commentators, because most states do not have reliable evidence or necessary data (Nothdurft 1992) to either support or contradict these claims. The presumed effect of information use on organizational performance, though commonly mentioned in the literature, has not been tested or validated in any systematic fashion in the marketing literature or in export research. Because virtually nothing is known about the relationships among knowledge utilization and organizational performance, little can be said conclusively about the effect of export assistance usage on export performance (Seringhaus and Rosson 1990). The purpose of this study is to build on existing research on knowledge utilization and export marketing in an attempt to provide empirical insight into the performance consequences of export marketing assistance programs. A necessary step in achieving this understanding is to identify the factors, other than export assistance usage, that have been found to explain export success. To this end, the objectives of this study are to assess the determinants of firms’ export performance and explore the role that the use of state export assistance programs plays in this process. Thus, our approach complements other studies reported in the marketing and export literature that have examined the factors affecting the use of externally available information.

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CONCEPTUAL FRAMEWORK AND OVERVIEW OF THE LITERATURE On the basis of a review and synthesis of prior research, we use the model depicted in Figure 1 as a conceptual framework for assessing the performance implications of export promotion assistance usage. The model focuses on the determinants of export performance at the firm level. Although the focal explanatory variable in this study is the use of state export promotion assistance programs, we incorporated other explanatory variables into the model to ascertain the unique contribution export promotion programs make to the understanding of a firm’s export performance. To this end, the proposed model incorporates export involvement, along with the use of export promotion programs, as a critical variable affecting export performance. The model suggests that export promotion assistance usage can influence export performance directly as well as indirectly through firms’ export involvement. In turn, we postulate that contextual factors, described in terms of organizational and managerial characteristics, affect the involvement of exporting firms,

Organizational Characteristics

Managerial Characteristics

International experience Export coverage Technological intensity of products

Education Export expertise Internal orientation

Export Involvement

Export Performance Effficiency Effectiveness Competitive positioning

Usage of Export promotion Assistance FIGURE 1

A Conceptual Model of Export Performance

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and we use them in this study to assess the robustness and validity of the expected differences in export involvement behavior. Each component of the model and the hypothesized relationships are described subsequently on the basis of the theoretical and empirical support available in the literature.

Export Involvement The extant literature conceptually documents and empirically supports a firm’s export involvement as an important success factor. The prevailing view in this literature suggests that involvement in exporting is a developmental process that can be conceptualized as a learning sequence or as export stages. In this context, several taxonomies have been proposed for classifying firms according to their level of involvement in exporting (e.g., Bilkey and Tesar 1977; Czinkota and Johnston 1981). Although the number and nature of classifications vary across studies, we focus on the following five exporter categories, which represent the frequently used and widely accepted behavioral patterns encountered in the literature: passive, exploratory, experimental, active, and committed. Passive involvement characterizes the behavior of firms that display little interest in exporting and foreign market development. Exporting activity is typically prompted by unsolicited inquiries in a reactive manner and involves no effort to explore the feasibility of exporting. Exploratory involvement represents the firms that actively explore the feasibility of exporting but currently export less than 5% of total sales. Because the firm continues to treat its international activities as marginal business, it tends to allocate managerial and financial resources as well as production capacity to export markets with some degree of reluctance. Experimental involvement occurs when the firm exports on an experimental basis to countries that are geographically close or share a culture similar to that of the home country. Export sales represents a volume greater than 5% of total sales. Active involvement represents an experienced exporter with an export sales level greater than 5% of total sales, whose exporting activity is conducted on a regular basis and whose export offerings are adjusted

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optimally to changes in the foreign environment (e.g., exchange rates, tariffs). Similarly, strategies tend to be designed to meet the specific needs of foreign customers and to capitalize on foreign market opportunities better. Committed involvement represents the highest level of involvement in exporting, in which export sales account for greater than 5% of total sales. A committed exporter searches for business opportunities worldwide, most notably in countries that have very different cultures and are farther away from the home country than the firm’s current export markets. Many exporting researchers have attempted to explain the observed difference in firms’ level of involvement in exporting—namely, why some firms remain passive whereas others aggressively pursue export opportunities worldwide. The research on this issue indicates that though all firms are exposed to factors that stimulate (e.g., unutilized production capacity) and/or obstruct (e.g., financial constraints) export involvement, the impact of both stimuli and barriers to involvement varies depending on exporters’ organizational and managerial characteristics. Research has consistently pointed to exporters’ organizational characteristics, such as firms’ international experience, export coverage, and technological intensity (e.g., Cavusgil and Nevin 1981; Cooper and Kleinschmidt 1985; Diamantopoulos and Inglis 1988; Piercy 1981), as important sources of organizational advantage for initiation, development, and sustenance of higher levels of involvement in exporting. Similarly, the importance of managerial attributes in shaping the firm’s export involvement is widely recognized in the extant literature. Of the many characteristics considered in the literature and reviewed recently by Leonidou, Katsikeas, and Piercy (1998), a fairly consistent pattern of support is available for the positive influence of decision makers’ education level, export expertise, and international orientation on firms’ level of export involvement. In this investigation, our primary research focus is the performance implications of state export promotion assistance usage along the export involvement continuum. Accordingly, we consider organizational and managerial antecedents of export involvement only to ascertain their collective impact on export involvement; this approach validates the export involvement construct used in this study to represent different types of exporters.

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Export Performance The export performance of a firm constitutes the key dependent variable of interest in this study and represents an important stream of research in international business. However, the difficulties of assessing performance, especially in an international context, have made the evaluation of export performance of individual firms mostly an elusive goal. As a result, this topic has attracted considerable conceptual but relatively little empirical attention (Chetty and Hamilton 1993). The complexity and difficulty of assessing export performance is further revealed by the diversity of approaches and measures employed in both conceptual and empirical research on this topic (Cavusgil and Zou 1994). The multitude of performance dimensions considered in the literature demonstrates that there is no universally accepted criterion for export success and that organizations can pursue, measure, and judge export performance on various dimensions. Therefore, in this study we argue that no single aspect of performance can accurately encompass the total contribution of export promotion programs to either the immediate or the long-term export success of a business. On the basis of a review of extant literature on performance in general and export performance in particular, we adopt a multidimensional view of performance in which efficiency, effectiveness, and competitive position represent the dimensions considered to be of particular importance for export success. Efficiency captures the relationship between the organizational resources employed and the organizational outputs achieved. The most common indicator of efficiency used in the literature is export profitability (Piercy 1981; Samiee and Walters 1990). Effectiveness reflects the success of a business compared with competitors in the market. Measures of effectiveness include market share and export sales growth (Kirpalani and Macintosh 1980; Samiee and Walters 1990). Competitive position refers to the overall strength of a firm that arises from its distinctive competencies, management style, and pattern of resource deployment. Indicators of competitive position used in the export literature include overall quality and competence applied to firms’ export activities (Kotabe and Czinkota 1992). According to the conceptual model proposed in this study, the export success of a firm along all three dimensions of performance is posited to

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be a function of its export involvement and its use of state export promotion assistance programs. Each of these explanatory variables and its hypothesized effect on export performance are discussed subsequently. A few studies that have related various levels of export involvement to performance consistently report a positive relationship. In one of the earlier and more direct tests of this relationship, Piercy (1981) notes that whereas reactive/passive exporters tend to be more concerned about export volume, both volume and profitability become increasingly important for active exporters. These results are confirmed by Cavusgil and Zou (1994), who observe a positive association between higher levels of export involvement and export performance in terms of both export sales and profits. It appears that firms, while still seeking sales growth, emphasize profitability more at higher levels of export involvement as a compensation for the perceived increase in uncertainty and risk. Greater involvement in exports is enhanced by greater reliance on foreign markets as a source of sales and especially of profits. The competitive benefits of exporting also appear to be more salient at higher levels of export involvement. Kotabe and Czinkota (1992), for example, note that firms consider their competitiveness to be enhanced by exporting as a result of increased sales opportunities and improved quality of management. Less direct yet equally strong evidence of a positive association between export involvement and performance abounds in the literature. For example, Cooper and Kleinschmidt (1985) find that exporters that have a broader world market coverage and therefore pursue higher levels of involvement and realize a more rapid growth rate in export sales than do those relying on a nearest neighbor. Samiee and Walters (1990) suggest that successful exporters consider exporting important for their overall business, are motivated to export for proactive reasons, and export on a sustained basis that reflects higher levels of export involvement. Similarly, several studies report that systematic analysis and planning of exports found at higher levels of involvement is a strong predictor of export success (e.g., Diamantopoulos and Inglis 1988). In view of these findings, we hypothesize the following: H1: The export involvement of a business will be positively associated with its performance in terms of (a) efficiency, (b) effectiveness, and (c) competitive position.

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Export Promotion Assistance Export promotion has also received an increasing amount of research attention (e.g., Cavusgil 1990; Diamantopoulos and Souchon 1996; Samiee and Walters 1990). Similarly, the growth of state trade initiatives and export promotion programs in the United States during the last two decades has been staggering. In light of federal budget cuts and as a supplement to the International Trade Administration’s trade promotion efforts, state governments have significantly increased their staff and budgets for export assistance, particularly in nurturing small local businesses (Cavusgil 1990; Kotabe and Czinkota 1992). The International Trade Administration’s U.S. and Foreign Commercial Service (a consolidated federal export promotion program) promotes export assistance partnerships with state government agencies through the development of local export promotion networks. Given the prominent role of state export promotion agencies as external sources of export information, this study focuses specifically on these agencies and exporters’ use of the assistance available from them. Export promotion assistance generally comprises (1) export service programs such as seminars for potential exporters, export counseling, howto-export handbooks, and export financing and (2) market development programs such as dissemination of sales leads to local firms, participation in foreign trade shows, preparation of market analysis, and export newsletters (National Governors’ Association 1985; Lesch, Eshghi, and Eshghi 1990). In addition, assistance efforts can be differentiated by whether the intent is to provide informational or experiential knowledge. Informational knowledge typically is provided through how-to-export assistance, workshops, and seminars, and experiential knowledge is imparted through the arrangement of foreign buyers or trade missions, trade and catalog shows, or participation in international market research. The conceptual model outlined in Figure 1 suggests that the use of state export promotion assistance programs is an important determinant of firms’ export performance not only directly but also through its interaction with the firms’ export involvement behavior. The direct effect explicitly models the premise that state export assistance programs are an important resource for building the knowledge and experience necessary for successful foreign market involvement. However, this normative logic

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has not been subjected to a rigorous empirical test, and even less attention has been given to the effect export promotion assistance usage has on different types of performance outcomes. On the basis of the implications of the limited research on this topic, we argue that export promotion assistance usage is an important export success factor but that its importance depends on the dimension of export performance considered. More specifically, usage of export assistance is expected to provide the highest payoff in terms of a firm’s competitive position and efficiency but to make little if any contribution to its effectiveness. The rationale for the expected differences in the performance impact of export promotion assistance stems from export activities requiring a large amount of detailed and varied information, involving substantial paperwork, and demanding a considerable amount of financial and managerial resources. In this respect, export promotion programs represent readily available external sources of information and experiential knowledge and provide the firm with an external capability to cope with the complexities of exporting. As such, export promotion programs are believed to enhance a firm’s competitiveness compared with that of nonusers by increasing the knowledge and competence applied to export market development. Furthermore, export assistance is generally provided free or at a nominal charge, offering a cost-efficient means of gaining knowledge and experience. Such assistance also provides a central inventory for market information and sales leads, which enables the firm to save time and money. Therefore, the use of export promotion programs can result in a considerable reduction in the investment necessary to generate and maintain in-house export expertise. Another well-known and empirically supported financial benefit of export promotion assistance is the direct cost savings enjoyed by users through programs such as subsidies, belowmarket rate loans, and reduced bulk rates on rental spaces at trade shows and travel fares (e.g., Grønhaug and Lorentzen 1983). As such, usage of export promotion programs enables a firm to reduce operating costs and become more profitable and therefore more efficient in its export activities. Reliance on export promotion assistance, however, has not been shown to be influential in export expansion (Kirpalani and Macintosh 1980). It appears that export promotion programs may not automatically

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culminate in sales: Firms must engage in various activities to bring about export sales. Therefore, export assistance is not expected to be a determinant of firms’ effectiveness in terms of sales growth. A reliable trade lead or even a secured export order will be ineffective, for example, if the firm does not have the working capital requirements needed to fulfil the order or finance the deal. Export promotion assistance may be necessary for firms to compete in international markets, but it is not sufficient, by itself, for export sales growth (Kirpalani and Macintosh 1980; Seringhaus 1986). Thus, we hypothesize the following: H2: The usage of export promotion programs by a business will be positively associated with the firm’s (a) efficiency and (b) competitive position but will have (c) no impact on its effectiveness. In addition to its direct effects, the usage of state export promotion programs is hypothesized to influence a firm’s export performance indirectly through its interaction with the firm’s level of export involvement. The potential role of export assistance usage as an intervening variable, as well as the need to focus on more complex relationships, has already been recognized in export research (e.g., Grønhaug and Lorentzen 1983; Leonidou, Katsikeas, and Piercy 1998; Seringhaus 1986). Accordingly, the indirect effect of export assistance usage depicted in Figure 1 models the widely held and conceptually appealing presumption that a firm’s information needs and usage depend on the extent of its export involvement (e.g., Cavusgil 1990; Czinkota and Johnston 1981; Samiee and Walters 1990). However, neither the nature nor the extent of this indirect relationship has been explicitly specified in the extant literature, and the limited evidence bearing on this relationship is equivocal at best. On the one hand, the export literature supports the contention that higher export involvement facilitates greater access to and usage of export promotion programs and thus better export performance. Highly involved firms are considered to be better positioned for acquiring necessary expertise from secondary sources, because their established organizational structures and managerial processes facilitate the processing of external information (Samiee and Walters 1990). The use of externally available secondary programs can also be habit forming in

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that firms continue to rely on external assistance despite a buildup of necessary experience. On the other hand, equally strong conceptual and empirical support is available for the opposing argument that the need for, as well as the performance impact of, export assistance is greater at lower levels of export involvement. Because inexperienced exporters perceive the intensity of export impediments and the cost of export activities to be prohibitive, they are expected to depend on and benefit more from readily available external expertise and knowledge that is provided by export promotion programs. Conversely, the relatively lower reliance of highly involved firms on external sources of information and assistance has been attributed to their highly developed internal capability to cope with the complexities of exporting as well as their more specific and focused information needs (e.g., Bilkey and Tesar 1977; Diamantopoulos and Inglis 1988). Therefore, this research stream supports the contention that the usage of export promotion programs becomes increasingly inconsequential for export success at higher levels of export involvement. In view of the limited and equivocal evidence available on the indirect effect of export promotion assistance usage on export performance, neither the nature nor the direction of this relationship can be specified conclusively. Furthermore, there is a paucity of both theoretical and empirical work addressing this indirect relationship across various dimensions of performance. Thus, the potential interaction between the usage of export promotion assistance and export involvement in determining export performance is not specified in a formal hypothesis but is incorporated into this study as an exploratory relationship to be assessed empirically.

RESEARCH METHOD Research Setting We empirically test the hypothesized relationships derived from the conceptual model proposed in this study in a field study. We undertook this study as a part of a project sponsored by a Midwestern state government to assess the performance consequences of export

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promotion assistance programs. In addition to time and cost considerations, we deemed it desirable to limit the data collection to a single state because of the reported variations in the type, content, and format of export promotion programs across states. The single-state coverage of this study also provided the geographical proximity necessary to establish a close working relationship with the prospective firms, which enabled us to generate accurate information about actual usage of export promotion programs and the perceived impact of these programs on firms’ export performance.

Data Collection The sampling frame for the study was the Harris Publishing Company database, which consisted of 8761 manufacturing firms of which 1212, or 13.8%, were classified as exporters. Because the descriptive information available in this database did not permit an a priori classification of firms according to their level export involvement, we used a simple random sampling procedure to select a total of 500 exporters, which represented approximately 41% of the population of interest. We used structured mail questionnaires to collect the data for testing the hypothesized relationships. After an extensive review of the pertinent literature to clarify constructs and develop measurement scales, we finalized the mail questionnaire following a two-stage pretest process. The first pretest involved an in-depth assessment of the questionnaire for content validity by three academicians and two representatives of the state’s export development office. The second pretest consisted of personal interviews with export managers and/or presidents of 20 manufacturing exporters that represented a wide range of firms in terms of both export involvement and organizational characteristics (e.g., sales, employment). Overall, no difficulties were observed regarding either the ability or the willingness of pretest participants to understand and complete the survey instrument. The discussions with pretest participants also confirmed the appropriateness of using export managers as key informants for obtaining information about the issues addressed in this study. In addition to exercising great care in pretesting the survey instrument and identifying the key informants to enhance the accuracy

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of informant responses, we followed Huber and Power’s (1985) suggestions to ensure that all the questions were within the responsibility and expertise of the survey participants. We then sent the survey instrument directly to the principal export executive at each of the randomly selected 500 exporting firms along with a self-addressed, stamped envelope and an endorsement letter from the state’s export development office. After a follow-up letter, 162 usable responses were returned, for a final effective response rate of 32.4%. The results of the t-tests comparing the firms participating in this study with nonrespondents suggest that nonresponse bias is unlikely to pose a major threat to the study findings, because no significant differences were observed between the two groups in terms of the industries they represented, their employment, or their sales. To assess the appropriateness of sample informants and firms, we used sample statistics on descriptive attributes. Almost all the respondents were in executive positions and directly involved in exporting. Approximately 80% of them were in the cadre of top management: chief executive officers, presidents, or owners (65%) and vice presidents or directors (15%). Middle-management ranks (i.e., functional managers and treasurers) represented the remaining 20% of the sample. The participation of these executive informants who are involved in important export decision making ensures the reliability of the information provided. Key informant bias would not likely have occurred, because managers responded to questions within their levels of responsibility. In terms of firm characteristics, the sample consists of 51 passive, 61 exploratory, 17 experimental, 8 active, and 25 committed exporters, on the basis of the self-reported measure of export involvement used in this study. Total employment of these exporters ranges from a low of one person to more than 10,000. Furthermore, the sample includes exporters with annual sales that range from $15,000 to more than $10 billion, with an average of $140 million. The observed sample variance is considered desirable, because it suggests that sample firms are different enough to generate adequate variation in theoretical variables of interest.

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Measures In operationalizing the constructs used in this study, we used existing scales as well as multiple-item measures whenever possible. Following is a description of the scale used for each construct. Export Involvement. Export involvement is measured on the basis of the description of the behavioral patterns used in this study to characterize five levels of export involvement (i.e., passive, exploratory, experimental, active, and committed involvement). These descriptions were developed from various taxonomies proposed in the extant literature for classifying firms according to their level of export involvement (e.g., Bilkey and Tesar 1977; Czinkota and Johnston 1981). The five export involvement categories along with their respective descriptions were provided in the questionnaire, and executives were asked to indicate the one that best characterizes the nature of their firms’ export involvement. To verify the convergence of this self-reported measure with those reported in the extant literature, we included in different sections of the questionnaire several questions regarding organizational characteristics (i.e., international experience, export coverage, and technological intensity) and managerial characteristics (i.e., education level, export expertise, and international orientation) that have been shown to influence a firm’s export involvement positively. In operationalizing the organizational and managerial correlates of export involvement, we used existing scales and multiple-item measures whenever possible. The description of the measurement scale used for each of these constructs is provided in Appendix A. As shown in Appendix B, each of these characteristics corresponded significantly to the five levels of export involvement, which provides sufficient evidence for the appropriateness and validity of the self-reported measure of export involvement used in this study. Export Performance. In assessing export performance, we used three separate dimensions of performance to capture the different operational outcomes associated with export activities. The first dimension considered in this study pertains to efficiency as reflected by the perceived profitability of the export activities. Consistent with Kotabe and Czinkota’s (1992) research, efficiency is measured as relative

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export profitability; the executives were asked to indicate the profit contribution of export sales relative to their firms’ domestic sales on a five-point scale ranging from “much higher than domestic” (scored 5) to “much less than domestic” (scored 1). As noted in the literature review section, the second dimension of performance, effectiveness, has generally been operationalized in export studies as export shares or growth in export sales (Kirpalani and MacIntosh 1980; Samiee and Walters 1990). In this study, both considerations are incorporated into the measure of effectiveness, which is operationalized as the expected growth in export shares. To this end, two questions were developed using the same 12-point scale that ranged from “0%” to “over 50%.” For the first question, the executives were asked to indicate their firms’ current annual export sales as a percentage of total sales. The second question asked the executives to indicate the share of exports in total sales of their firm two years earlier. The midpoint of each percentage bracket (e.g., 13% in the case of a 11%–15% category) was used to represent the export percentage of a company’s annual sales. Because no firm generated more than 50% of its annual sales by exporting, the last response category, “over 50%,” was not used. The ratio of current to past export shares was calculated for each firm and used to represent export effectiveness as the realized growth of export shares. The third dimension of performance considered in this study is the competitive position of the firm and reflects one of the frequently noted benefits of exporting (e.g., Kotabe and Czinkota 1992). Because no standard instrument for measuring competitive position was available in the literature, a three-item scale was developed from the perceived competitive benefits of exporting suggested in conceptual studies. For this measure, a five-point Likert scale was used, and the executives were asked to indicate their level of agreement with the statements that exporting has contributed to the growth of the firm, contributed to the overall quality of the firm’s management, and enhanced the relative position of the firm by making it more competitive. The unidimensionality of this three-item scale was confirmed by a principal components factor analysis, and its internal reliability was deemed acceptable, with a Cronbach’s coefficient alpha of .90. A competitive position score was then computed for each firm as the mean of the three statements.

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Usage of Export Promotion Programs. We developed a 14-item measure consisting of export promotion programs that represent the core set of widely available state export support to the business community. The programs considered in this study are (1) how-to-export information, (2) export workshops and seminars, (3) trade and catalog show exhibitions, (4) use of contact office in the home state, (5, 6, and 7) use of the state’s promotion assistance offices in three major foreign countries, (8) overseas promotion of the firm’s products, (9) trade and sales lead development, (10) inclusion in trade missions, (11) one-on-one export consultation, (12) use of export credit insurance, (13) introductions to foreign buyers, and (14) international market research. For each of these 14 programs, the executives were asked to indicate whether they are aware of the program and, if so, whether they have used that particular program. Therefore, the usage data obtained in this study control for the awareness of the respondents in assessing actual usage of various state programs. We calculated a usage index for each firm by summing the responses across all 14 state export promotion programs. On the basis of this index, we created four different user categories to represent nonusers, low users (1 to 5 state programs used), medium users (6 to 9 state programs used), and heavy users (10 or more state programs used) of export promotion assistance.

DATA ANALYSIS AND RESULTS Correlates of Export Performance An analysis of variance procedure was used to test the main and joint effects of export involvement and export assistance usage on export performance. To this end, each of the three measures of export performance was used as a dependent variable in a separate analysis with five levels of export involvement and four export assistance usage levels as the independent variables. As summarized in Table 1, the overall results for each performance measure are significant at the .05 level or below. Because the relationships addressed in these analyses have not been subjected to a systematic investigation in the extant literature, the overall results are encouraging in providing insight into the

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Analysis of Variance Results for Three Export Performance Measures Export Performance

Export involvement Usage of export assistance Involvement x usage R2

Efficiency

Effectiveness Competitive Position

3.88** 1.43 2.46* 19.8%**

6.35** .46 .59 15.4%**

26.20** 3.48* .65 50.0%**

*p < .05. **p < .08

impact export promotion assistance usage has on the performance of exporting firms. The Main Effect of Export Involvement. The results provide unequivocal support for H1, confirming the positive relationships expected between a firm’s level of export involvement and all three indicators of export performance. More specifically, sequential increases in export involvement from passive all the way to committed involvement are systematically associated with significant increases in perceived (1) efficiency in terms of relative export profitability (F = 3.88, p < .01), (2) effectiveness in terms of expected growth of export sales (F = 6.35, p < .01), and (3) competitive position (F = 26.20, p < .01). The Main Effect of Export Assistance Usage. The results empirically support our contention that though export assistance usage is an important factor for export success, its impact manifests itself differently depending on the specific performance criterion considered. The main effect results pertaining to export assistance usage confirm our expectations with only one exception. Consistent with H2c, the relationship between export assistance usage and effectiveness in terms of expected growth in export shares is nonsignificant. Thus, export promotion programs, irrespective of the extent to which they are used, are not found to be instrumental in increasing export sales. Support is also found for H2b, which posits a positive relationship between export assistance usage and export performance in terms of the competitive position of a

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firm (F = 3.48, p < .05). These results suggest that the competitive benefits of exporting are evaluated more favorably as the usage of export promotion programs increases. However, the extent of export assistance usage does not appear to have a significant, direct effect on exporters’ efficient performance in terms of relative export profitability. This nonsignificant association, though contrary to H2a, suggests that the real or perceived cost savings associated with these assistance programs may not be large enough to compensate for the costs of exporting and enhance its relative profitability. The Joint Effect of Export Assistance Usage and Involvement. Although the potential interdependency between the export involvement level of a firm and its usage of export promotion programs is acknowledged in the extant literature, the paucity of theoretical and empirical work on this relationship precludes a priori specification of its nature or direction. Therefore, the results pertaining to the interaction between export involvement and export assistance usage are evaluated on an exploratory basis. In this study, usage of export assistance does not interact with export involvement in determining either the effectiveness or the competitive position of exporting firms. The significant (p < .05) interaction effect is observed only on the efficiency measure of performance. Plotting the changes in relative export profitability across different levels of export involvement and export assistance usage reveals several interesting changes. As depicted in Figure 2, the perceived profitability of exporting peaks for both passive and exploratory exporters at low levels of export assistance usage, whereas the profitability of exporting is perceived to be most pronounced at medium usage for experimental exporters. Thus, at low levels of export involvement, export assistance has the strongest effect on relative export profitability of the low users of these programs but has the weakest effect on the perceived profitability of medium users. At the other extreme of export involvement, perceived relative profitability of exporting peaks at a high level of export assistance usage for active exporters. The results also reveal that for committed exporters, both medium and heavy usage of export assistance are associated with significantly greater perceived export profitability than either no or low usage levels. These findings are consistent with and provide at least preliminary support for the contention that highly involved firms are in

477

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5.00

4.00

4.00 4.00

3.67

Profitability

3.00 3.00

3.00

3.00

2.90 2.75 2.66

2.00

2.93 2.75

2.83

2.40

2.07 1.75 No use low use Medium use Heavy use

1.00

.00 Passive involvement

Exploratory Experimental Active involvement involvement involvement

=

=

Commited involvement

Notes: Profitability is measured as follows: 1 much lower than domestic sales, 5 much higher than domestic sales. A score of 3 signifies that export and domestic sales are equal in profitability.

FIGURE 2

Joint Effect of Export Involvement and Export Assistance Usage on Export Performance

a better position to use export promotion programs and take full advantage of their cost-saving benefits.

CONCLUSIONS AND IMPLICATIONS Role of Export Involvement This study explicitly highlights and empirically supports the notion that companies can pursue different levels of export involvement and that the outcome of this involvement can be assisted by various state export promotion programs and measured on a variety of dimensions. These include, at a minimum, efficiency through improved profitability, effectiveness through growth in export sales, and competitive position benefits of exporting behavior. The results unequivocally support the

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importance of firms’ export involvement behavior for export success in terms of all three measures of performance considered in this study. Therefore, it is critical for exporting firms to understand the process of export involvement and the specific variables that can influence this process. This analysis should assist firms in determining what capabilities may be needed to make the necessary transition and realize the expected benefits of greater involvement in exporting.

Role of Export Assistance Program Usage Although export promotion programs have received increased policy and research attention in recent years, prior studies have not addressed the performance implications of assistance program usage in an explicit and systematic fashion, especially at the firm level. As such, the literature provides little insight into the contribution these programs make to firm performance. One of the key objectives of this study and therefore one of its major contributions is to provide a better insight into the extent to which firms use export promotion programs and what impact, if any, that usage has on the performance of exporting firms. To this end, the study argues for and empirically supports the contention that the impact of export promotion program usage can manifest itself differently depending on the specific performance criterion considered. The results, taken together, call into question the generalized anecdotal assertions made by both the proponents and the opponents of export promotion programs. The results show that these programs are neither a panacea nor a complete waste of resources. On the one hand, the perceived inability of these programs to increase export sales either directly or indirectly suggests that export promotion assistance is not a sufficient factor in enhancing exporting firms’ effectiveness. Therefore, it can be argued that realization of export sales entails several other interrelated activities, any of which can adversely affect the firm’s prospects of achieving its sales objectives. An important policy implication of these results is that the highly publicized reluctance to use government export assistance programs, especially by smaller firms, may be attributed to the lack of perceived contribution such programs make to export sales growth. A formidable task awaiting export development

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offices is to generate and disseminate information providing strong and direct evidence contrary to the perceived inability of export promotion programs to assist in export sales growth. On the other hand, the direct contribution of export promotion programs to a firm’s competitive position and the indirect contribution to its profitability present a strong policy argument in favor of these programs, suggesting that they can provide an important platform for export success. As a result, export promotion efforts geared at increasing the distinctive competence of exporting firms and emphasizing competitive benefits may provide the highest payoff in increasing usage of these programs. Inasmuch as lower operating costs may lead to increased export profitability, efforts to familiarize firms with programs that directly reduce the cost of export marketing should prove helpful in strengthening the perceived contribution of export promotion programs to firms’ efficiency. The results also stress the importance of formulating performanceoriented goals in evaluating current export promotion programs and developing new ones. Given budget constraints, state governments must analyze the local export services to determine which performance goals are attainable and quantifiable with the existing programs. This analysis should provide valuable insight into the design of both current and future export promotion programs, because each performance outcome may be associated with different programs and thus require different levels of specialists, information, training, and budgetary resources.

Limitations and Research Directions The results of this study strongly support the assertion that government export promotion programs in general, and their performance implications in particular, represent an important topic necessitating further theory development and empirical research. Because these issues have previously received only scant attention, the findings of this study offer several fruitful areas for additional research. One such area involves the need for further refinement of the dimensions of export performance. Although the proposed multidimensional conceptualization of export performance and its systematic measurement represents an important

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contribution of this study, our efforts can best be considered preliminary, necessitating considerable additional work. Indeed, it may be argued that further research on the conceptualization and measurement of export performance would constitute a major contribution to the export literature. From the standpoint of both practitioner and theorist, it also would be extremely helpful to extend the current study by incorporating other potentially important factors (e.g., export strategy, external factors) and undertaking a more detailed assessment of individual export promotion programs. Given the potential differences in the purpose and usage patterns of export assistance services as well as other internal and external influences on export performance, further research that extends the current study along these lines may be instrumental in developing a more fine-tuned and sophisticated framework with greater explanatory power. This study also suggests that there is an acute need to develop more refined models that not only are tied to specific components of export performance but also incorporate intervening and indirect influences among the model constructs. Because export promotion programs can display some degree of uniqueness in their content, format, and/or delivery, the focus of this study was oriented toward the development of a better understanding of export promotion programs at the state level. Our decision to pursue an internally valid assessment within the context of a single state was predicated on our interest in reducing the potential for exogenous variation stemming from program differences across states. Therefore, more research is needed to assess the generalizability of our findings. An additional avenue for further research is to expand on our usagebased conceptualization and operationalization of export assistance programs. For example, macro and public government activities that are not designed to focus on exporting yet make contributions to the international success of firms (e.g., international negotiations) might be considered in further research. Similarly, usage frequency could also be considered in measuring export assistance program usage. The awareness-controlled usage measure employed in this study is based on the number of different programs used and thus captures the breadth of usage. Usage frequency, in contrast, captures depth of usage, which may represent a distinct dimension of usage. We therefore recommend that

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usage frequency be incorporated into future studies to examine its psychometric as well as substantive contributions to the understanding of export promotion assistance usage. Finally, given the cross-sectional data and the methodology used in this study, the results allow for definitive conclusions regarding only the degree of association among constructs of interest. Further research attention should also be given to identifying the direction of causality among the relationships addressed in this study.

APPENDIX A. MEASURES OF ORGANIZATIONAL AND MANAGERIAL CORRELATES OF EXPORT INVOLVEMENT Among the organizational correlates of export involvement, firms’ international experience was measured in two ways to capture both the length and the extent of their export experience. For the first measure, executives were asked to indicate on a five-point scale the number of years their firm has been exporting, ranging from “1 year or less” to “over 10 years.” The second measure was an open-ended question in which the executives were asked to specify the number of export transactions carried by their firm in a year. Consistent with previous studies (e.g., Diamantopoulos and Inglis 1988; Piercy 1981), we assessed export coverage of a firm with two measures to ascertain both the customer base and the geographic scope of its export activities. To measure the customer coverage of a firm’s export activities, we used an open-ended question that asked the executives to identify the number of different export customers their firm dealt with in a given year. The measure of geographical coverage was again an open-ended question that involved a simple count of the number of countries to which the firm was currently exporting. Technological intensity of a firm’s products, which is used as yet another organizational correlate of its export involvement, was derived from the Standard Industrial Classification code selected by the executives in classifying their firms’ major product lines. Each firm’s primary product line was then represented by a trichotomous measure consisting of low (=1), medium (=2), and high (=3) levels of

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technological intensity as reported in a Research and Development in Industry report (National Science Foundation 1999) based on U.S. Census of Manufacturers data. Of the managerial characteristics expected to be associated positively with export involvement, education was determined by a single measure, in which the respondents were asked to indicate the highest level of academic degree attained by the executive with primary responsibility for the firm’s export decisions (number of years as computed from categorical academic degree levels). The export expertise scale was developed from the measure of procedural export expertise used by Kotabe and Czinkota (1992). The seven items included in this scale pertained to the export manager’s knowledge of overseas shipping and transportation, structure of export transactions, foreign product demand, export regulations and paperwork, public and private international marketing services, tax implications of exporting, and antitrust regulations. For each of these seven items, the executives were instructed to indicate the level of knowledge on a five-point scale ranging from 1 = “not at all knowledgeable” to 5 = “extremely knowledgeable.” The internal consistency of this multi-item scale was estimated by calculating each item’s correlation with the total score on this measure. Relatively high and consistent item-to-total correlations, along with a Cronbach’s alpha of .93, attest to the scale’s internal homogeneity. The scale unidimensionality was confirmed by a principal components factor analysis, in which only one factor with an eigenvalue greater than one emerged. Subsequently, the mean of the seven items was computed to represent management’s export expertise. Management’s international orientation is represented by the sum of the responses to four dichotomous questions in which the executives were asked to indicate whether they have a command of foreign languages, have traveled abroad, have lived abroad, and are interested in foreign cultures.

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APPENDIX B. ORGANIZATIONAL AND MANAGERIAL CORRELATES OF EXPORT INVOLVEMENT Export Involvement Passive Exploratory Experimental Active Committed F Organizational Characteristicsa  International experience Years of exporting 5.2 4.3 Number of export transactions 8.7 34.8  Export coverage Number of export 2.3 14.8 customers Number of export countries .8 2.0  Technological 1.4 1.5 intensity

7.5

7.4

10.3

6.26*

71.8

169.1 153.4

3.60*

18.1

14.8 104.1

2.84*

5.3

7.51

9.4

22.30*

1.5

2.0

1.9

2.85*

15.6 2.4

16.8 3.1

16.1 3.4

.62 27.00*

1.0

1.3

1.1

a

Managerial Characteristics  Education 15.5 15.6  Export expertise 1.5 2.0  International orientation .7 1.1

2.14

a For details of measurement, see Appendix A. * p < .05.

REFERENCES Bilkey, Warren J. and George Tesar (1977), “The Export Behavior of Smaller-Sized Wisconsin Firms,” Journal of International Business Studies, 8 (Spring/Summer), 93–98. Cavusgil, S. Tamer (1990), “Export Development Efforts in the United States: Experiences and Lessons Learned,” in International Perspectives on Trade Promotion and Assistance, S. Tamer Cavusgil and Michael R. Czinkota, eds. New York: Quorum Books, 173–83. —— and John R. Nevin (1981), “Internal Determinants of Export Marketing Behavior: An Empirical Investigation,” Journal of Marketing Research, 28 (February), 114–19. —— and Shaoming Zou (1994), “Marketing Strategy–Performance Relationship: An Investigation of the Empirical Link in Export Market Ventures,” Journal of Marketing, 58 (January), 1–21.

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Chetty, Sylvie K. and R.T. Hamilton (1993), “Firm-Level Determinants of Export Performance: A Meta Analysis,” International Marketing Review, 10 (3), 26–34. Cooper, R.G. and E.J. Kleinschmidt (1985), “The Impact of Export Strategy on Export Sales Performance,” Journal of International Business Studies, 16 (Spring), 37–55. Coughlin, Cletus C. and Phillip A. Cartwright (1987), “An Examination of State Foreign Export Promotion and Manufacturing Exports,” Journal of Regional Science, 27 (August), 439–49. Czinkota, Michael R. and Wesley Johnston (1981), “Segmenting U.S. Firms for Export Development,” Journal of Business Research, 9 (December), 353–65. Diamantopoulos, Adamantios and Karen Inglis (1988), “Identifying Differences Between Highand Low-Involvement Exporters,” International Marketing Review, 5 (Summer), 52–60. —— and Anne Souchon (1996), “Instrumental, Conceptual, and Symbolic Use of Export Information: An Exploratory Study of UK Firms,” in Advances in International Marketing, S. Tamer Cavusgil, ed. Greenwich, CT: JAI Press, 117–44. Grønhaug, Kjell and Tore Lorentzen (1983), “Exploring the Impact of Governmental Export Subsidies,” European Journal of Marketing, 17 (2), 5–12. Huber, George P. and Daniel J. Power (1985), “Retrospective Reports of Strategic Level Managers: Guidelines for Increasing Their Accuracy,” Strategic Management Journal, 6 (April–June), 171–80. Kirpalani, V.H. and N.B. Macintosh (1980), “International Marketing Effectiveness of Technology-Oriented Small Firms,” Journal of International Business Studies, 11 (Winter), 81–90. Kotabe, Masaaki and Michael R. Czinkota (1992), “State Government Promotion of Manufacturing Exports: A Gap Analysis,” Journal of International Business Studies, 23 (4th Quarter), 647–58. Leonidou, Leonidas C., Constantine S. Katsikeas, and Nigel Piercy (1998), “Identifying Managerial Influences on Exporting: Past Research and Future Directions,” Journal of International Marketing, 6 (2), 74–102. Lesch, William C., Abdolreza Eshghi, and Golpira S. Eshghi (1990), “A Review of Export Promotion Programs in the Ten Largest Industrial States,” in International Perspectives on Trade Promotion and Assistance, S. Tamer Cavusgil and Michael R. Czinkota, eds. New York: Quorum Books, 25–37. Menon, Anil and P. Rajan Varadarajan (1992), “A Model of Marketing Knowledge Use Within Firms,” Journal of Marketing, 56 (October), 53–71. National Governors’ Association (1985), “States in the International Economy,” report prepared for the 77th Annual Meeting of the National Governors’ Association, Washington, DC (August). National Science Foundation (1999), Research and Development in Industry, (accessed February 26, 2001) [available at http://www.census.gov/econ/overview/mu1200.html]. Nothdurft, William E. (1992), “The Export Game,” Governing, 5 (August), 57–61. Piercy, Nigel (1981), “Company Internationalization: Active and Reactive Exporting,” European Journal of Marketing, 15 (3), 26–40. Samiee, Saeed and Peter G.P. Walters (1990), “Influence of Firm Size and Export Planning and Performance,” Journal of Business Research, 20 (May), 235–48.

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Seringhaus, F.H. Rolf (1986), “The Impact of Government Export Marketing Assistance,” International Marketing Review, 3 (2), 55–66. —— and Phillip J. Rosson (1990), Government Export Promotion: A Global Perspective, London: Routledge. Sinkula, James (1994), “Market Information Processing and Organizational Learning,” Journal of Marketing, 58 (1), 35–45. ——, William E. Baker, and Thomas Noordewier (1997), “A Framework for Market-Based Organiztional Learning: Linking Values, Knowledge and Behavior,” Journal of the Academy of Marketing Science, 25 (3), 49–71.

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Global Sourcing and Supply Chain Management

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Chapter 4.1

An Analysis of the Global Position of U.S. Manufacturing* Michael R. Czinkota

INTRODUCTION Since 1975, the United States has been importing more than exporting, therefore running a continuous current account deficit. Exhibit 1 shows the U.S. current account balance over the past 32 years. Although there have always been ups and downs, since the early 1990s, the growth of the deficit has been rapid and major. On a global level, U.S. imports are necessarily some other country’s exports. The U.S. current account deficit is matched by bilateral current account surpluses of other nations. At $103 billion, China had the largest current account surplus with the United States in 2002, followed by Japan with $70 billion, Canada with $50 billion, and Germany with $36 billion. Exhibit 2 breaks the current account down into its components: merchandise trade, services trade, investment income, and net unilateral transfers. Merchandise trade is not only the largest factor, but it also contributes the most to the deficit. In 2002, services trade was substantial and had a surplus of over $49 billion but was overwhelmed by merchandise flows. Investment income produced a deficit of $5 billion, while net unilateral transfers resulted in a deficit of $56 billion. Virtually without exception, the size of the deficits in merchandise trade has driven the size of current account deficits. Exhibit 3 shows that U.S.

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–500 2002

2000

1997

1994

1991

1988

1985

1982

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Bureau of Economic Analysis (BEA), 2003 Exhibit 1

U.S. Current Account Balance, 1970–2002

1167 1200 Exports

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Imports 683

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–600 Merchandise BEA, 2003 Exhibit 2

Services

Investment Income

Net Unilateral Transfers

U.S. Current Account Components, 2002

merchandise exports have been mostly rising. However, since the mid-1990s, these increases have remained far below the increases in merchandise imports. Therefore, the gap between imports and exports has been widening and merchandise trade deficits have been growing rapidly.

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Imports

1000

Exports

-Deficits-

800 600 683

400 200

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

0

BEA, 2003 Exhibit 3

U.S. Merchandise Exports, Imports, and Deficits, 1978–2002

Exhibit 4 breaks overall merchandise trade down into its components: manufactured goods, mineral fuels, agricultural goods, and the catchall category of “other.” For both U.S. exports and imports, manufactured goods play a key role. Eighty-one percent of merchandise exports are manufactured goods, as are almost 84% of imports. Exhibit 5 highlights the deficit development in manufactures trade. Although there have been deficits over the decades, these were quite stable in their size during the 1980s and into the early 1990s. However, from 1992 on, the growth of imports in manufactured goods has been much steeper than the growth in exports, leading to a widening manufactures trade deficit. Exhibit 6 indicates the top surplus and deficit countries in U.S. manufactures trade. Although there are substantial manufactures surpluses with The Netherlands, Australia, and Belgium, these are dwarfed by manufactures deficits with Mexico, Germany, Japan, and China. In 2002, U.S. bilateral manufactures trade with China alone was $103 billion in deficit. Looking at the key manufactures trade imbalances by type of commodity, Exhibit 7 shows that in 2002, there were large U.S. surpluses in airplanes and parts, wood manufactures, scientific instruments, and chemicals. Yet, these surpluses were far outweighed by deficits in industries such as furniture, toys and games, televisions and VCRs, and apparel. The largest deficit category in the manufacturing sector is motor vehicles, with an imbalance of $111 billion.

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Mineral Fuels 1.7% Agricultural 7.8%

Other 10.6%

Manufactures 81%

Mineral Fuels 10%

EXPORTS

Other 2.8%

Agricultural 3.6%

Manufactures 83.6%

IMPORTS

Census, 2003 Exhibit 4

Composition of U.S. Merchandise Trade, 2002

PROVIDING AN OVERALL CONTEXT In the mid 1800s, about 68% of U.S. employment was in the agricultural sector. Manufacturing accounted for only 17% of employment. Since then, the employment absorbed by these sectors has shifted dramatically. By 2001, agriculture, for example, accounted only for 1.5% of employment. But 66% of the work-eligible population does not consist of unemployed farmers. Rather, there have been dramatic increases of employment in the services sector, where employment has risen from 22% to almost 80% of the overall economy. The manufacturing sector, in turn, grew to an employment proportion of almost 30% in 1960. In the last 20 years, however, employment levels have decreased at a

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$U.S. Billions

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Imports

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Exports

-Deficits-

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200 0 ’78

’80

’82

’84

’86

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’90

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’00

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U.S. Manufactures Exports, Imports, and Deficits, 1978–2002

Exhibit 5

Netherlands

9

Australia

9 7

Belgium 2

Hong Kong

1

Egypt –3

Canada –30

Mexico

–34

Germany –78

Japan –103

China –120

–100

–80

–60

–40

–20

0

20

$U.S. Billions Census, 2003 Exhibit 6

Key Manufactures Trade Imbalances for Top Surplus & Deficit Countries, 2002

rising rate. At the turn of the new millennium, U.S. manufacturing employment, at 14.8%, had decreased below the levels of when it was first officially measured. For a global context, Exhibit 8 compares employment developments in manufacturing in the United States, Germany, and Japan. German manufacturing employment dropped by more than 13 percentage points during the past 31 years, and its shift as a proportion of GDP, was from

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Airplanes and parts

23.8

Wood Manufactures

6.3

Scientific Instruments

6.2

Chemicals (n.e.s.)

6.2

Electrical Mach.

–14.4

Footware

–14.9

Furniture

–17.8

Toys/Games

–19.1

Televisions, VCR, etc.

–46.9

Apparel/Clothing Vehicles

–58.3 –110.7

–140

–90

–40

10

60

$U.S. Billions Census, 2003 Exhibit 7

Key U.S. Manufactures Trade Imbalances by Commodity Group, 2002

40

35

30

25

20

15

10 % of German employment % of Japanese employment % of United States employment

5

Exhibit 8

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19 7

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36 to 23%. The steepest decline came in the 1990s, when, within one decade, employment dropped by almost 7 percentage points. In Japan, manufacturing employment dropped by 6.5% from 1970 to 2001. As a percent of GDP, the shift was from 33.5 to 21%. There, the steepest decline also occurred in the 1990s; yet, it was a much milder reduction in which manufacturing as a percent of total employment fell by 3.5 percentage points. This is in sharp contrast with U.S. employment changes. U.S. and Japanese manufacturing employment were almost the same in 1970. Since then, U.S. proportionate employment has been cut almost in half—and is now more than five percentage points lower than the Japanese manufacturing employment and almost 10 percentage points below German levels. U.S. manufacturers and their workers have, therefore, undergone the most drastic changes among the three countries when it comes to employment. Other countries have taken protective measures to soften the blow against their manufacturers. U.S. firms have experienced the full power of market forces. All these shifts in employment reflected a transfer of manufacturing away from the industrialized nations towards the emerging economies. Exhibit 9 shows how the proportion of manufacturing has rapidly grown in nations such as Malaysia, South Korea, Thailand, and Indonesia.

SOME KEY CAUSES Such a shift is greatly hastened when manufacturers underexport. When entering international markets, firms are faced with new risks, new cultures, new processes, and new conditions such as changing exchange rates and divergent government regulations. There are difficulties in obtaining financing for export ventures, and the regulatory rules for exporters can be complex. For many U.S. firms, the size of their home market seems to provide ample opportunity, obviating the need to learn about international prospects. As a result, U.S. firms do not take sufficient advantage of international market opportunities and underexport relative to other nations. U.S. merchandise exports comprise only 11% of GDP, compared to almost 34% for the European Union (excluding intra-EU trade) and 26% for China. On a per capita basis, in 2002 the European Union exported $7,434 for every man,

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30

25

20

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10 S.Korea Malaysia Thailand Indonesia

5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Exhibit 9

Manufacturing as a Percentage of GDP, 1970–2000

woman, and child, while for the United States it was only $3,794. (Czinkota & Roukaineu, 2003) U.S. manufacturers also contribute to the migration of plants. To maintain their price competitiveness many of them have established subsidiaries abroad to take advantage of lower labor costs. They specify the products to be produced by these subsidiaries, decide on the quantities to be turned out, and determine the volume of shipments back to the United States. In 2000, the latest year for which data are available, such import shipments from foreign affiliates of U.S. companies amounted to 14% of U.S. imports. In addition, many firms have developed long-term supplier relationships with firms abroad, which lead to another large set of “captive” imports. Subsidiaries of foreign firms in the United States also import from affiliated plants of their home countries. The share of U.S. imports accounted for by these foreign parents of U.S. affiliates was 20% in 2000 (Lowe, 2003). Therefore, at least one-half of U.S. imports are initiated and encouraged by U.S. corporate entities who consider it good business strategy to source from abroad rather than producing in the United States.

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PRACTICAL IMPLICATIONS Although it is comforting to point towards the gradual adjustment of employment sectors over time, individuals currently experiencing the economic shifts through their personal unemployment will see this explanation as providing little solace. The U.S. economy appears to be working quite efficiently from a long-term perspective. But the need to adjust lifestyles, obtain a new set of skills, and change location may be overwhelming to many. Similarly, such shifts have an impact on the firm’s stakeholders. Companies are one piece of a mosaic that affects the appearance and stability of the other pieces. For example, the disappearance of a firm will affect the local community and government, shape the fate of local suppliers, educational opportunities, health care, and may even determine whether a community can survive. There also has to be a holistic perspective that looks beyond the immediate surroundings. When important shifts occur in the economy, one needs to consider the repercussions down the road. Otherwise, it would be the rare exception to see investments for the long-term common good. There would be few trees planted, lighthouses built, or basic research projects conducted. Finally, while important, the economic dimension cannot be the only criterion driving a nation. Issues such as national security, public safety, and the overall standard of living must be considered when analyzing the importance of specific changes.

REPERCUSSIONS AND CONCERNS The shift in U.S. manufactures trade and the continued accumulation of growing trade deficits gives rise to concerns on a macro- and microeconomic level. Nations need to have a sound footing to be strong in their offense against terrorism, capable in their maintenance of a standard of living, and kind in their support of the poor and the ill. On the macroeconomic level trade deficits of the current magnitude are unsustainable in the long run. At about 5% of GDP, these trade deficits add to the U.S. international debt burden, which must be serviced through interest payments and eventually perhaps even repaid.

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Therefore, an improved global performance by U.S. manufacturing firms that results in an increase in their exports and an improved competitiveness with imports will be crucial for the nation. There will be concern by the international trade community about any U.S. desire to gain more market share for its exports and to stem the rapid increase of imports. However, the United States has the right to argue for a special case. After all, as the trade figures have shown, over the decades the U.S. market has remained wide open to imports. Even today, when faced with many international machinations, the United States continues to offer its own market and consumptive power as an economic locomotive to the world. Many nations would have fallen into the abyss of economic disaster had their exports not had virtually unfettered U.S. market access as a recourse. U.S. manufacturing has already paid the price by suffering the most drastic declines among all the industrialized nations. When it comes to future trade concessions in manufacturing, it’s fair for U.S. negotiators to say, “We already gave at the office.” One should also consider U.S. manufacturing capability in the context of lifestyle and national needs. When a manufacturing sector disappears domestically, it leaves behind a void that goes beyond lost jobs. Replacement parts suddenly become unavailable or much more expensive. Product reorders, now filled abroad, take weeks rather than days. Some crucial input components to other manufacturing processes may be lost or delayed, slowing down the production of related products. Particularly for industries critical to the national welfare and national security, such effects can be devastating in case of an emergency. Even if there is a good relationship with the governments of the countries to which sensitive manufacturing industries migrate, one has to take the long-term developments under consideration. For example, how many of us would wish, in today’s fog of war, to rely on old friends abroad for the rapid resupply of crucial manufactures? We must recognize that the much praised interdependence of globalization of manufacturing has also increased national dependence. Then there are the effects of manufacturing migration on innovation and market responsiveness. Together with my colleague Masaaki Kotabe of Temple University, I have analyzed the use of emerging technologies in existing products. We found that the closer companies are to their market,

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the more they can use such technologies in new products. Japanese companies systematically incorporate new technologies in existing products. This enables them to gain experience, debug technological glitches, reduce costs, boost performance, and adapt designs for worldwide customer benefit. As a result, they have been able to increase the speed of new product introductions, meet the competitive demands of a rapidly changing marketplace, and capture market share. The continual introduction of newer and better designed products brings a greater likelihood of market success. However, when production is removed from its primary market, such rapid response to market demands may well be dulled, which can lead to a decline in manufacturing competitiveness. (Czinkota & Kotabe, 1990). Sourcing from abroad through independent suppliers on a contractual basis may also have long-term consequences on the processes, competence, and capabilities of firms. In a comparison between the outsourcing networks of Japanese and U.S. companies, Professor Kotabe (1999) finds that U.S. companies gradually severed their value chain and, in search of cost efficiency, have willingly increased their dependence on foreign suppliers for components and finished products that have become technologically more sophisticated. The creation of new technology is a gradual and painstaking learning process of continual adjustment and refinement, as new productive methods are tested and adapted in the light of a company’s accumulated experience. Thus, overreliance on acquisitions and new technologies from other firms may not result in the same sustainable competitive advantage available through internal development. The manufacturing shift abroad may, therefore, eradicate current technology, design, and process advantages possessed by U.S. firms, placing them and the country at further, future disadvantage. There are also effects of manufacturing migration on cluster formation. Over the past decades many industries have gradually emerged in a cluster formation—where a diverse set of firms eventually shapes regions or centers of excellence. Such centers are characterized by strong competition from a wide variety of firms, demanding customers, and a multitude of creative and innovative suppliers. They tend to be attractive to job seekers in that particular industry, generate specific expertise, and bring in even more firms wanting to be in close proximity to industrial capability either for production or buying

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purposes. Silicon Valley in California or the Diamond District in New York can serve as examples. Typically, only a few firms were the originators of such a cluster of excellence. It is therefore reasonable to expect that similar developments are true in reverse. For example, the migration of a few key firms can result in the decomposition of such clusters and their relocation to other regions. Such a phenomenon may occur particularly in industries where changes in technology make skill levels less important. As the shoe and optical equipment industries have demonstrated, a decline in the skills required can lead to movement of an entire industry. Such a lumpy migration of manufacturing can then result in a greatly magnified effect on individuals and communities. Therefore, the shift of any one manufacturing firm must be seen in the context of the overall stability of existing clusters.

SOME POSSIBLE POLICY REMEDIES The concerns raised can be addressed by various actions. One major temptation may be to press legislation against those countries and foreign industries that account for substantial imbalances in manufactures trade. Doing so, however, runs the grave risk of substituting government judgment for market direction, a replacement that has not distinguished itself by past success. Prices might rise disproportionately, consumers might be deprived of desirable goods, and firms might find their ability to export undermined. More positive change might be achieved by encouraging existing market activities through better processes, more support, and more information. For example, export promotion can persuade U.S. manufacturers to take more advantage of international opportunities. This will require coordinated and streamlined services by government. They must include more information, a greater availability and ease of export financing, more streamlining of the logistics of international shipments, better tools for risk analysis, and better targeting for the delivery of this support. For example, there need to be more systematic efforts to introduce customer relations management activities and benchmarks into government export promotion work. When a firm seeks

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governmental help with financing, communication, or its shipments, such assistance ought to be provided through one “personal export officer,” regardless of which agency handles the details. There also needs to be more emphasis on and opportunities for the bundling of products, services, financing, and the creation of global networks when it comes to the international effort. It is through such bundling that U.S. manufacturers can gain specific advantages not available to their competitors abroad. Consider one example from the automotive industry: airbags, the global positioning system, and a telephone in a car are no longer anything special. Yet, by bundling all these components together, car manufacturers have been able to develop an entire new set of passenger assistance services that can even independently notify emergency services in case of an accident. Such combinations of available products, technology, and networks can lead to an entirely new plateau of customer satisfaction. On the regulatory side, a stable and safe international environment is, in itself, an important support for U.S. firms. But regulations also need to incorporate more of an international dimension by considering the global implications and effects of regulatory actions. U.S. export control rules need to be revisited in order to ensure that they are precise and targeted, while not needlessly inhibiting to firms. The foreign availability of products needs to be taken into consideration before denying a firm the opportunity to export. If similar products are available from abroad (even though perhaps at different prices and in different quantities), the regulatory community must face a particularly high hurdle of proof of effectiveness before denying a license application. Likewise, if a U.S. firm receives an export order that requires a production inspection by the foreign buyer, visa regulations should be able to quickly accommodate the need for a brief visit by foreign customers. By delaying such visits for months, current and future manufacturing export contracts may well be in jeopardy. In revising the structure of critical industries list, it would also make sense to add the survival of manufacturing industries as a specific evaluative dimension. There should be a systematic effort to alert customers and consumers to the long-term consequences of their purchasing decisions. Their knowledge level should be addressed before the final consequences of their decisions are reached. Perhaps we can learn from the motto of a

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national clothing chain: “An informed consumer is our best customer.” More available domestic information on manufacturing and its future may well affect some decision processes. The White House Office of Global Communication has been created to let the world know more about the U.S. and its intentions abroad. Perhaps a similar outreach effort should communicate the condition of manufacturing to a domestic audience. As a caveat, it is worth noting that services are, at 79% of the workforce, the largest employing economic sector in the United States. Increasingly, U.S. services industries are becoming footloose and are beginning to go global. We have all heard the stories about the back office operations in Ireland and India. These services are growing progressively sophisticated. For example, many X-ray and CT scan frames are read by radiology experts abroad. One should therefore also consider how to ensure that U.S. services firms and employees retain their international competitiveness. There is always the question of who pays for such efforts. For the past half century, various U.S. administrations have been instrumental in opening up world markets. Congress has been supportive by ratifying the resulting agreements with the expectation of beneficial economic effects. However, the positive effects caused by free trade are not self-evident; they must be explained, defined, and provided by industry in a highly visible fashion on a regular basis, particularly when it comes to jobs. The public understanding of free trade and its resulting reverberation is often insufficiently addressed. In listening to some of the arguments brought forth by activists against free trade, one might gain the impression that there are no benefits at all. It is up to the beneficiaries to step up to the plate and provide positive evidence both to legislators and the public at large. For too long, there has been little, if any, linkage between the governmental efforts that open markets and the industry response to the benefits obtained from such openings. For example, even though most trade negotiations result in both winners and losers, there are no current incentives for winners to let others share in their bounty. Similarly, there are few if any requirements placed on the beneficiaries of protective measures to convincingly demonstrate how they have used their enhanced revenues to help the transition of workers and communities.

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Perhaps the times should be over during which industries reap the benefits from government actions and negotiations, without having to deal with any of the negative reverberations. We need a program where we learn to appreciate the requirements for adjustment by all: stake holders, including workers and their communities. A program where winners chip in to pay for the cost of such adjustment. In an era of renewed budget restraint, such a program can become an essential engine for further trade liberalization. If there are trade enhancing measures for which there is insufficient public sector funding, perhaps the private sector can pay for further trade policy aims.

REFERENCES Czinkota, M. R., & Kotabe, M. (1990, November/December). Product development the Japanese way. Journal of Business Strategy, 11, 31–36. Czinkota, M. R., & Ronkainen, I. A. (2003). International marketing, 7th ed. Cincinnati: Thomson. Lowe, J. H. (2003, January). An ownership-based framework of the U.S. current account, 1989–2001. Survey of Current Business, 17–19. Kotabe, M. (1999). Efficiency vs. effectiveness orientation of global sourcing strategy: A comparison of U.S. and Japanese multinational companies. Academy of Management Executive, 12(4), 107–119. * This article is based on the author’s testimony delivered to the Congress of the United States, 108th Congress, First Session, House of Representatives Committee on Small Business on April 9, 2003.

ABOUT THE AUTHOR Michael Czinkota works at Georgetown University in Washington D.C. and holds the chair in International Marketing at the University of Birmingham in the U.K. He served in the U.S. government as Deputy Assistant Secretary of Commerce. He was born and raised in Germany, and educated in Austria, Scotland, Spain and the United States. His Ph.D. is from Ohio State University. [email protected]

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An Evolutionary Stage Model of Outsourcing and Competence Destruction A Triad Comparison of the Consumer Electronics Industry Masaaki Kotabe, Michael J. Mol, and Sonia Ketkar

INTRODUCTION Offshoring and outsourcing remain high on managerial agendas, although the type of sourcing that grabs most headlines and managerial attention tends to change fairly rapidly. In the late 1980s and early 1990s global sourcing of components and products was seen as a key trend among manufacturing firms. The mid-1990s saw corporations farm out information technology activities on a large scale. Currently major trends are business process outsourcing to countries like India and South Africa and the continuing shift of manufacturing activities to China. The latter types of offshoring and outsourcing are not only highly contentious politically but also pose managerial dilemmas.1 Until quite recently it was generally accepted that outsourcing, and especially outsourcing across borders, was primarily implemented to

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cut costs in order to maintain competitiveness. An argument commonly used by decision-makers and academic writers alike is that outsourcing, the reliance on external suppliers for the delivery of components and entire products, leads to an increased focus on remaining activities (Quinn 1999). By keeping in-house a more limited number of activities, managers can devote more attention to maintaining a world-class level in those activities. Because (foreign) suppliers likewise target their efforts, it is possible to obtain specialized help from outside suppliers with much lower production costs, so the argument goes. Of course, these lower production costs are at least partly offset by higher transaction costs, because of the difficulties associated with sourcing across borders (Mol/van Tulder/Beije 2005). This comparative cost approach is relatively well understood and has been widely implemented by practitioners, although firms often fail to take into account the true total costs of ownership in make-or-buy and offshoring decisions, as we demonstrate in this paper. The disadvantage of this approach is that it is relatively static. In recent years a second argument has therefore been added to sway managers toward outsourcing. Outsourcing can be a means of accessing supplier competences that would otherwise remain inaccessible, or it can even serve as the gateway to the creation of competences that reside in the relationship between the firm and its supplier (Dyer/Singh 1998). Toyota, for instance, has been able to distill a competitive edge from long-term and intimate relations with suppliers like Nippondenso. Thus one might argue that the effects of outsourcing on the acquisition of competences have now come to the fore in managerial practice and academic literature. Outsourcing can be a source of both cost savings and competence acquisition. Like in the popular press, much of the outsourcing literature is focused on its immediate impact in the form of potential cost savings. For the simplest forms of outsourcing (e.g., those involving procurement of commodity goods and services), this makes sense as an outsourcing decision will have no implications beyond the current bookkeeping period. Where more complicated forms of outsourcing are concerned, this is normally not the case. For instance, it took the U.K. government and Network Rail ten years and several deadly incidents to reconsider the outsourcing of maintenance that accompanied the privatization of

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the railroads (Economist 2005). At the heart of these problems was the gradual erosion of knowledge on the technical state of the railways and a lack of technological investments that could have helped detect impending failures. But any understanding of the long-run consequences of outsourcing should also include how it could affect a firm’s ability to maintain appropriate skill levels and upgrade its competitive position, not just cut costs in the short run. This is much less well-understood and a less popular route of scholarly investigation. It has been noted that the long-run consequences of outsourcing are sometimes not particularly comforting (Bettis/Bradley/Hamel 1992, Kotabe 1998, Doig/Ritter/Speckhals/ Woolson 2001). However, no general explanation has so far been provided for how outsourcing could lead to deterioration in a firm’s competence base. Therefore we ask the question “how does outsourcing affect competences?” By doing so we reverse the questions that various authors (e.g., Barney 1999, Quinn 1999) have addressed. Researchers often focus on comparing the current governance costs of in-house production with those of external offerings. Transaction cost economics argues that outsourcing levels ought to be the results of levels of asset specificity, business uncertainty, and the frequency of transactions (Leiblein/Reuer/Dalsace 2002, Williamson 1985). This approach has obvious merits for its simplicity and its ability to correctly predict the governance structure of many transactions. It has also been argued, however, that there is a range of transactions for which it is not particularly apt (Barney 1999). Barney (1999) argues that transaction cost arguments are too static to cope with more dynamic industries, especially those with blurred industry boundaries. Transaction cost economics focuses on current transaction characteristics but if important future learning and change can occur, current governance costs may not be a proper predictor for future governance costs and optimal outsourcing choices. Such shifts can occur in technologically uncertain and intensive industries, such as the electronics industry. In fact, we would argue that this is exactly what has been happening in the electronics industry over the past few decades. Firms have had to face major technological shifts, such as that from analog to digital technology. They also faced stiff global competition and business cycles, for instance, in

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consumer electronics (CE) and semiconductors. For this type of industry additional analytical tools may be required that incorporate long-term change into viability assessments on outsourcing. So far empirical investigations on the effects of outsourcing over longer time periods are scarce (with some exceptions, like the semi-longitudinal study of D’Aveni/Ravenscraft 1994). Also relatively sparse are discussions of forms of international outsourcing, as much published work seems to be focused on single countries and treats outsourcing as either a strictly domestic issue or is agnostic as to outsourcing locations. We seek to address both issues, broadly asking the question how changes in outsourcing levels and locations change competence development inside the firm. We longitudinally analyze and compare the cases of three major electronics manufacturers, Emerson Radio from the U.S., Japan’s Sony and Philips from the Netherlands, focusing particularly on how these firms changed their sourcing strategies over time. Using these cases we then construct a stage model that relates offshoring and outsourcing to competence development inside the firm and shows that a vicious cycle may emerge. We describe the specific conditions under which such a cycle comes into existence, especially the loss of competitiveness in manufacturing in firms’ home bases. The stage model helps managers to understand for which activities and under which conditions outsourcing is not a viable option.

METHODOLOGY: CONTENT ANALYSIS Because this research question includes a longitudinal element, it cannot be adequately captured by survey or cross-sectional research. Therefore, we used content analysis of news articles, company documents, industry trends, books and other published reports as well as personal interviews pertaining to the CE industry in general and our three firms in particular. We focused on our three firms mainly because our initial review of the data documents revealed that the stages cycle emerged most conspicuously in these firms. Also, in order to keep our cases clear and discrete, we restricted our analysis only to these firms. The fact that all three firms hail from different parts of the Triad, allows us to

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capture different development paths in their home country electronics industries. The time period ranged from 1954 to 2007 and we reviewed the content from around fifty different sources. Where possible, we were able to compare different reports of the same firm information or event as recounted by various reporters. We also compared what was reported against interviews on outsourcing we held with electronic firms (not reported here) and against what other authors have written about outsourcing and subcontracting in the electronics industry (Kenney/ Florida 1995). An in-depth analysis of our sources suggested that there was a similar pattern in the histories and behavior of all three firms over time even though the timing (actual years) did not correspond for the firms. Emerson Radio (U.S.) for example, went through its outsourcing experiences much earlier than Philips and especially Sony.

GLOBAL CONSUMER ELECTRONICS INDUSTRY No explanation of consumer electronics firms is complete without a brief introduction to the dynamics underlying the industry in the years when the specter of global competition first appeared. The worldwide CE industry has seen much international competition since the 1950s. The Western world dominated the field of CE until this time and the 1950s witnessed the advent of the Japanese competition, which began with the export of transistors. Soon, Japanese CE firms such as Sony, Matsushita, and others became a force to reckon with. In particular, rivalry in television technology was the most intense in the 1970s. It is difficult to pinpoint exactly when global competition became so fierce among firms in the Triad region. But, in 1951, when MITI (Ministry of International Trade and Industry, Japan) permitted Japanese companies to enter into licensing agreements for television technology with foreign firms, several Japanese companies signed pacts with U.S. companies, such as RCA. At the time, MITI expected to receive only a few applications for approval but it ended up authorizing around thirty-seven applications (Partner 1999). As electrical goods rapidly permeated Japanese society, local companies grew larger and developed a competitive edge based on a quick learning process and low labor costs.

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U.S. companies, such as Emerson Radio, RCA, Zenith and Magnavox also realized that they could gain cost-based competitive advantage by subcontracting assembly and later on manufacturing operations to their Asian partners at lower costs. Hence, around the 1960s and 1970s, outsourcing became popular with many U.S. firms. In subsequent years, Japanese CE firms acquired technology from U.S. companies, gained technological competency and launched new technologically advanced products derived from their own R&D. Competition between U.S. firms and their Japanese counterparts heated up when Japanese firms entered the U.S. domestic market and began selling their products at lower prices. This led U.S. firms to charge dumping allegations against the Japanese firms. The developments in the industry that followed show that U.S. companies rapidly increased outsourcing and in turn their dependence on their Japanese partners first for radios and later on for television sets. By the end of the 1960s, there were no U.S. radio manufacturers left in the United States (Partner 1999). A discussion of the European CE industry is mostly an account of Philips and its activities. There was probably only one other company, Thomson of France, that was as active in the industry, more so than firms such as Siemens and Telefunken. Like some U.S. firms (National Union Electric, Zenith), European firms felt threatened by Japanese competition in the CE industry. Prompted by a turbulent environment post the 1970s and lobbying for protection from non-European rivals by influential firms like Philips, Europe implemented new policies. European CE firms were also granted subsidies. Especially in the 1980s, the EU stepped in to defend its CE firms from Japanese penetration of its markets. Nevertheless, the European CE industry went through a series of restructurings into the 1990s like the major turnaround operation “Centurion” at Philips. To illustrate the intensity of rivalry and firms’ attempts to outdo each other through innovation and imitation, let us take this example. As the story goes, in 1963, Philips gave the world the audiocassette, which was a noise reduction innovation because Philips eliminated the background tape sound. Based on this product, in 1964, a Sony employee proposed the idea of a videocassette. Finally, by 1976, Sony introduced its Betamax VCR in the U.S. Late 1977 RCA launched its VHS SelectaVision VCR format that was made by Matsushita. This product was an improvement

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on Sony’s Betamax, which could record for only an hour. Thus, an innovation/product introduction by one firm was very quickly followed by the creation of another entrant which sought to gain market share. We historically examine the corporate strategies, trials and tribulations of three companies, Emerson Radio (U.S.), Royal Philips Electronics (The Netherlands-Europe), and Sony Corp. (Japan) in the field of CE. We focus on firm decisions related to entertainment products groups, namely audio, video and television products in these companies. Every product introduction built on and upgraded previous technology. The three companies in our sample have slightly and sometimes even drastically changed their corporate strategies innumerable times in the last 30–40 years. We focus on those strategies that are relevant to outsourcing. All three firms, Emerson Radio, Philips and Sony were technological pioneers at some point in the early days of CE. While Emerson Radio discovered a way to retain its market share by supplying CE products at low prices, Philips “became Europe’s core consumer electronics learning base” and Sony revolutionized the industry with its miniaturization of CE products (Chandler 2001, p. 221). So, how did these firms acquire technological competences? And how did these firms start losing their technical prowess?

OVERVIEW OF THREE COMPANIES Emerson Radio (U.S.) From pioneer and maker of CE products to distributor recites the Emerson Radio saga in a sentence. The company’s history is complex because it changed ownership a few times. Emerson Radio & Phonograph, as the company was originally called by its founder Max Abrams in 1922, mass-produced radios around the time of World War II. Its radios were known to be very modern for their time and decorative in appearance. It also manufactured phonographs and TVs. In 1965, it was taken over by National Union Corp. (NUC)2 and in 1975 Major Corp (a phonograph manufacturer founded in 1956) bought its brand name for CE from NUC and changed its own name to Emerson Radio.

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Emerson Radio obtained technology mainly through its own efforts and through acquisitions. Soon after entering the radio business, the company introduced the first radio-phonograph combination sold in the U.S. In 1932, it launched its popular miniature radio, which was around 81/2 inches by 61/4 inches wide, and Emerson Radio was the leader in the manufacture and sale of miniature radios. By 1938, it had sold over 1 million of these radios. Years before Japan’s Sony became famous for miniaturization of CE products, Emerson Radio introduced the tiniest radio to date in 1954, which measured 31/2 × 3 × 3/4 inches. This achievement made Emerson Radio the largest producer of tiny radios in the world. It was so technologically advanced in the 1950s that it planned to “build a radio, using transistors instead of tubes, so small that it can be worn like a wrist watch” (Forbes 1954, p. 22). After World War II, it introduced one of the first television sets in the U.S., and this caused earnings to more than double by the mid-1950s. Emerson Radio also had R&D labs in the U.S. By this time, Emerson Radio had a solid brand name and superior technological capabilities, and attempted to capture nearby markets, mainly in Canada and Latin America. However, as more players entered the emerging television industry, competition at home grew and Emerson started cutting the price of its television sets in order to survive in the market. It is around this time when the company realized that it needed to take drastic measures to subsist in the industry and it did (explained in the following section). In 1953, Emerson Radio launched the first compatible color-TV receiver and, in 1958, it acquired further technological capabilities when it bought CE inventor DuMont’s television sets, phonograph and high-fidelity stereo equipment operations. By the early 1960s Emerson Radio had developed production capabilities complemented by a strong brand name in CE. But even then, in the battle for market share and the onslaught of foreign CE firms, U.S. producers like Emerson Radio were fast losing market share. In the latter half of the 1960s, although American companies such as RCA, Westinghouse Electric, Admiral and General Electric were struggling to make profits and hang on to their businesses, Emerson managed to continue making a profit (New York Times 1981). Emerson built a large customer base and acquired a significant portion of the market by eventually setting up cost-efficient manufacturing operations in East Asia to deliver electronic products at reasonable prices to middle-class

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American citizens. It was indeed one of the very first U.S. companies to popularize such manufacturing strategies. In the short run profitability grew but in the long run it faced several problems due to excessive outsourcing.

Philips Electronics (The Netherlands) Philips was established in the Netherlands in 1912, and grew to be the largest European CE company and one of the largest in the world. Its main activity was electrical lighting, but it acquired a leading position in CE before the mid-1970s when Japanese companies entered Europe. Right from the time it was set up, Philips was based on R&D and developed its own technologies and mostly kept R&D in-house in various labs across Europe. This enabled it to increase its own product portfolio from the 1920s. However, during World War II, several of its European operations were destroyed. Postwar Philips enhanced its technical capabilities by relying on color TV technology licensed from RCA like most of the Japanese CE firms in the 1970s. At the same time, Philips’s research efforts proved to be beneficial for Japan’s Matsushita because Philips owned 35 percent of Matsushita, which depended on Philips’s R&D. Philips entered into collaborations and joint ventures for innovation and new product development in the 1980s. Its most successful collaboration was with Sony to launch the compact disc system. However, by the late 1990s, Philips had lost its once superior technological capabilities.

Sony Corporation (Japan) Although Sony did not invent the transistor, it was the first company to launch the transistor radio and this innovative feat played a major role in Sony’s emergence as a technological leader (Partner 1999). Founded in 1953, Tokyo Tsushin, as the company was originally called before its name was changed to Sony, quickly built a reputation for itself in Japan and soon in the rest of the world. In 1953, Sony signed a pact with U.S.-based Western Electric to learn its transistor technology and then conducted its own research on radios. In 1955, Sony introduced its

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first transistor radio, TR-55, in the market. Just like Sony, other U.S. and Japanese manufacturers had developed their versions of the transistor radio around the same time and sold those in the U.S. market. But, in the international arena, Sony had to compete not only with other Japanese contenders but also with the U.S. and European ones, which already had brand equity and established distribution networks. In 1982, Sony introduced the TV Walkman, a technological breakthrough in those days. Throughout this era, Sony, like most other Japanese companies relied on in-house R&D, continually increasing R&D spending over the years, for instance, by 9.6 percent in 1983 to $90.6 million. Sony, like most other Japanese CE firms, initially followed a conservative policy by keeping R&D in-house, but eventually gave in to financial concerns (brought about by an inability to meet high demand and fierce rivalry) and resorted to outsourcing. Hence, the 1990s saw “a shift from a technology-based company to a product-based company” in the words of Kutaragi, President of Sony Computer Entertainment Corp (Nikkei Weekly 2003). In the next section we examine the dynamic shifts, in four different stages, in the sourcing strategies employed by Emerson, Philips, and Sony. Table 1 contains a summary.

STAGES OVER TIME Stage 1: Offshore Sourcing (Setting up a Foreign Subsidiary in Low-cost Locations) Before plunging headlong into the establishment of foreign manufacturing subsidiaries, CE firms dabbled in foreign transactions. After Emerson faced trouble selling its television sets amid tough competition and after trying out the price-cut strategy, the company found another way to increase profits—by lowering costs. In 1956 sales fell from over $87 million to $74 million while earnings were a meager $84,850. Then the company moved further to set up cost-efficient manufacturing operations in East Asia in the 1960s. Philips, on the other hand, had been collaborating with foreign companies, starting in 1916 with General Electric, to exchange technical know-how and experience. Although the company had been engaged in

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Increased cost competition

Trigger

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Foreign market access

R&D—Decentralized Increased cost Manufacturing— competition Decentralized

R&D—Centralized Manufacturing— Decentralized

Firm Characteristics

Evolution of Outsourcing Strategy

Emerson (1922)

TABLE 1.

Setting up manufacturing subsidiaries in the US, Brazil, Taiwan, etc. (1970s)

Setting up manufacturing subsidiaries in Taiwan, etc. (1980s)

Outsourcing deals with U.S.’s Admiral and East Asian manufacturers

Stage 1

Selling some of its manufacturing plants to Solectron; and more outsourcing to independent manufacturers (1990s)

Selling its foreign factories and increased outsourcing from Taiwan and Korea (1980s)

Fall out with Admiral and complete reliance on foreign OEMs. Emerson in charge of design but not manufacture.

Stage 2

Realization of the loss of innovative capabilities (2003) components

Loss of DVD Technology to Japanese (1990s)

Realization of the loss of technology to East Asian OEMs

Stage 3

Reduced outsourcing for high-tech and increased in-house production of high-demand products (2000s)

Increased R&D inhouse, stepped up outsourcing as well (1990s)

Complete reliance on outsourcing, unrelated diversification

Stage 4

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foreign trade activities, foreign investment were not established until in the 1920s. Philips moved many of its production plants out of the Netherlands to avoid high tariffs leaving behind unemployed people. This was the first time it set up offshore production. In the following years, Philips closed down some more plants in the Netherlands. It followed an aggressive expansionist policy in the next decade and set up several subsidiaries in different parts of the world. By the late 1960s, Philips had manufacturing operations in several parts of the world including Singapore, Indonesia, South Africa, Kenya, and also Algeria in the early 1970s. Almost all of these places were low-cost locations. In 1968, the company’s profits rose by 10 percent. Philips set up operations in low-cost Taiwan (1970), where it began production of monochrome picture tubes (by 1989, this facility had become the world’s largest tube manufacturer and Philips had a total of 5 plants in Taiwan). In 1974, the company discontinued its non-color picture tube production in the United Kingdom and moved production to low-cost locations. Around this time CE companies the world over were involved in similar moves to low-cost regions for manufacturing. By 1974, Philips already had TV and audio plants in Singapore, a black & white TV plant in Taiwan, a stereo plant in Brazil and an electronics production plant in South Korea. Philips suffered a setback in profits in the fourth quarter of 1975. This was also a turning point for Philips as it faced tough competition from the Japanese companies. Philips’s video technology, V2000, was in direct competition with Beta and VHS, i.e., the Japanese VCR systems. By the end of the 1970s, the Japanese companies had entered Europe and formed partnerships and collaborations and this helped them gain a foothold and market share in Europe. Although the V2000 format developed by Philips was technologically superior to the Japanese VCR systems, the V2000 system failed partly due to Philips’s inability to find partners (Dai 1996). This was the beginning of the collaborative era for Philips during which it went on an alliance spree and partnered with several foreign firms. Philips increased its presence in Japan by buying a stake in Japan’s Marantz in 1980 from U.S.-based Superscope that owned a majority stake in the company. Marantz, then owned by Philips, soon became its base in Japan for the production of goods at low costs. Hence, as time went by, Philips, like other CE firms had spread itself over several low-cost regions, which enabled it to compete more efficiently in the industry.

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Sony set up its first foreign production plant, Champagne Plant, in 1959 in Hong Kong. It was a transistor radio assembly plant through a local firm that provided all the capital and managed the business. It was only a contractual agreement for production. Goods at this plant (mainly assembled transistor radios) were then sent to Europe, Australia, Canada and other areas. However, Sony already shut down the plant in 1961 due to some undisclosed “disagreement” with the local firm, making for an unsuccessful first move abroad. Compared to most U.S. firms, Sony moved operations abroad much later. Competition in the industry compelled it to set up several foreign plants in the 1970s. In 1973, Sony formed Sony do Brazil. In the same year, Sony also denied reports that it would second source products from National Semicon. By 1973, Sony was manufacturing radios, black and white TVs and tape recorders in its Sony Korea subsidiary. It also formed a joint venture with a Korean partner, Hwasin Industries, for production of color TVs. Following a drop in overall sales, Sony reorganized its distribution network. Other foreign subsidiaries set up in the 1970s and 1980s include audio manufacturing subsidiary, Sony da Amazonia, in Brazil, a VCR factory in Taiwan and in Malaysia, an audio tape manufacturing subsidiary Magneticos de Mexico, a joint venture with Motoradio, Sony Videobras for video tape manufacturing and several others worldwide. It also established Sony Precision Engineering Center in Singapore to manufacture optical pickups for CD players and joint production of CE products with a Chinese trading firm. Most of these offshore plants were in low-cost locations and involved joint production with local partners. Until the late 1980s, Sony kept R&D in Japan. By 1988, Sony had considerably increased offshore production. The company claimed that the appreciation of the yen prompted it to expand overseas production because this made it less profitable to manufacture goods in Japan. In the 1980s around 20 percent of Sony’s production was undertaken by its foreign plants and it felt the need to further increase manufacturing overseas. Sony aimed to develop its Asian plants as supply centers for high-technology products. The company hoped that it would achieve at least 35 percent of manufacturing outside of Japan in the 1990s. Thus, it moved toward increasing offshore production in the 1980s. But, in 1985, Sony announced that it would start shifting focus from CE to business customers in response to a fall in profits. It also started setting

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up regional R&D and engineering centers in 1989 such as Advanced Video Technology Center (AVTC), the development base for HDTV in San Jose in the U.S. By the first half of the 1990s, Sony had over twenty R&D centers outside Japan. All three firms perceived the need to lower manufacturing costs, and Philips and Sony responded to this need by setting up plants in low-cost locations as did their industry rivals. Emerson seemed to opt directly for sourcing components and then final products from overseas manufacturers, which were low cost producers. CE firms often followed each other to low cost destinations in Asia, thereby overturning each other’s temporary gains and then re-entering the race to reduce costs even further. Nevertheless, this opening move to low-cost regions seemed to be successful as profits rose initially in all three cases. The relentless pursuit of advanced technologies, however, soon prompted CE firms to reduce costs even further, which characterizes Stage 2 of our model.

Stage 2: Phasing Out (Transferring Production to Independent Operators) U.S.-based Emerson Radio moved through the stages of the model we will conceptualize later much faster than the other two firms. After the takeover by NUC, Emerson Radio continued to produce television sets and other CE products. However, sales were low and profits remained elusive. Emerson Radio began operating in the red under NUC, with the problem apparently too little volume to cover fixed costs. Between 1967 and 1971 the division lost about $27 million. In order to reduce fixed costs, NUC outsourced manufacturing of Emerson Radio’s CE products to U.S.-based Admiral Corp. Under the pact, Emerson Radio was in charge of designing, engineering, and marketing. At the same time, Emerson also imported home entertainment products and some other CE goods from East Asian manufacturers. However in 1973, Admiral terminated its contract with Emerson Radio, which was thereafter dependent almost entirely on Asian OEMers (original equipment manufacturers) for its products. Philips went through its own share of problems and after profits took a beating in 1975, it was encouraged to further lower its fixed cost levels

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by increasing its reliance on offshore manufacturers. The company continued to phase out production in higher cost locations such as its color TV manufacturing plant in Canada and moved further production offshore. In 1981, it set up its seventh factory in Singapore for the production of radios and increased its investment in product development and automation in Singapore and also set up an audio equipment plant in China in 1985. In 1980, Philips restructured its organization. The V2000 debacle had hit Philips hard. Until then, it was a prosperous organization but after the V2000 case, profitability fell. At the time, it introduced its make-orbuy policy. Under this new policy, the company withdrew itself from certain industries such as military and defense. The company that was managed thus far as locally responsive in its various markets started moving toward globalizing its businesses, divesting itself of non-core operations and entering joint ventures for production. In the later 1980s, Philips’s Chairman-CEO at the time clarified the new direction of the company by stating, “On a world scale, you must be selective and stick to what you can do best” (TV Digest 1988, p. 10). It also sold its white goods unit to Whirlpool and its minicomputers unit to Digital Equipment. Under its agreement with Whirlpool, Whirlpool was to own 53 percent of the joint venture with Philips, but soon Whirlpool bought out Philips’s stake in the company. Philips continued to sell white goods until the 1990s when it disengaged itself from the business entirely. In 1981, Philips spun off its electronics parts subsidiary and in a series of sales a few years later, sold two more electronics component units to Cambridge Electronics Industries. In 1981 Sanyo acquired Philips’s U.K. color TV production plant to sell its own color TV sets. In 1983, after the failure of its V2000, Philips bought VHS models from Matsushita in Japan and sold them in Australia and New Zealand. NAP (North American Philips, Philips’s U.S. subsidiary) on the other hand, purchased TV sets from Matsushita for sale under the Magnavox, Philco and Sylvania brands in the United States. Japan’s Pioneer was also supplying consumer disc players to NAP. Matsushita also supplied VCRs to be sold under the Magnavox brand name in the United States. Thus NAP was entirely dependent on products supplied by Japanese companies. What is notable about Philips’s strategies is its proclivity to form joint ventures. After 1980s, the company ended up with many pacts with

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foreign CE companies for joint production or R&D in Asia. Significant examples of these are joint production of VHS recorders in South Korea with local Dong Won Electronics and the venture for compact disc players with Shenzhen Shen Fei Laser of China. These enabled the partner in the venture to learn from more technologically advanced Philips. Philips gradually increased reliance on these partners and in many cases the partners finally took over operations from Philips. Philips had a videodisc laser optics factory in Shenzhen, China, and it also formed a partnership with China’s Shenzhen Advanced Science and Technology Development Company to produce cassettes for Philips in the 1980s. The output was to be used for the Chinese market as well as different world markets. By the end of 1989, Philips had increased its dependence on this plant and begun manufacturing CD boom boxes, laserdisc players and optical discs. This 50–50 joint venture with Shenzhen used Philips’s equipment worth $40 million and also employees and technicians trained by Philips. In 2001, Philips reduced its share in the joint venture. But by this time, the Chinese partner had ample opportunity to acquire knowledge about Philips’s technology. Philips also had a 20 percent stake in a VCR and other components production plant in Czechoslovakia. Philips was providing this plant with production facilities, know-how, information systems and employee training, all forms of tacit knowledge. Other divestments include the sale of Philips’s 35 percent stake in Matsushita3 to Matsushita’s parent company which had by then learned most of Philips’s technologies and product development capabilities in CE products, the sale of its manufacturing division in South Korea to South Korean investors, and the sale of plants that were manufacturing television and audio equipment in Singapore and Brazil in 1998. As recently as September 2002, Philips sold its contract-manufacturing unit for CE goods (PCMS, set up by Philips in 1999) to the U.S.-based EMS (electronics manufacturing services) company, Jabil Circuit, Inc. Under the pact, Philips guaranteed sales worth $4 billion to Jabil over a period of four years even after the unit was sold. Jabil also acquired nine of Philips’s plants (mostly in low-cost locations worldwide) and 5,000 employees, which include 150 design engineers. The year 1997 was significant for Philips, in that, followed by a loss of $349 million in 1996, the company went through a series of measures

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to boost profits and these included a host of outsourcing deals. Executive VP-CFO Eustace said, “In the past, we did not ‘contain our creativity’, under the label of freedom, we were spending an enormous amount of money on R&D” (TV Digest 1997a, p. 12). This statement indicates the direction of Philips’s upcoming strategies toward outsourcing whereby it reduced its R&D expenditures. In October 1997, Philips moved from inhouse production of 19”–20” TV tubes to sourcing them from Samsung and Toshiba. In the same year, it sold its TV plant in Greeneville, Tennessee, in the U.S. to Taylor-White. As recently as 2001, Philips laid off employees at its own VCR factory in Austria and instead moved production of VCRs to Japan’s Funai Electric. Philips gradually reduced its R&D function for CE products and ultimately lost its technological capabilities (next stages). Like the American and European CE firms before it, Sony also eventually gave in to pressures and increased its reliance on outside operators and slowly moved toward outsourcing deals with foreign firms. But, some of Sony’s first outsourcing ventures were with domestic companies that it was familiar with. For example, Sony’s audio speaker manufacturing subsidiary Audio Research was launched in 1969 as a joint venture of Sony and Pioneer but Sony acquired it in 1972. In 1983, it sold Audio Research in Japan to Minebea, a Japanese producer of ball bearings. Nevertheless, Sony maintained ties with Audio Research in the form of an outsourcing relationship whereby Sony continued to be its customer and provided it with R&D support. Their relationship constituted a typical Japanese-style keiretsu relationship. Sony also entered into agreements with many different firms in low-cost countries to supply components. In October 2000, Sony was outsourcing 60–70 percent of its radio and speakers manufacturing and around 50 percent of its component stereos to Chinese equipment makers. The company claimed that outsourcing to Asian countries such as China and Taiwan would boost its competitiveness against Western firms. Sony went on to increase outsourcing to other firms such as U.S.-based personal computers and telecommunications equipment manufacturer, Solectron4 in 2000. Under the pact, Solectron acquired two of Sony’s manufacturing units, one in Japan and the other in Taiwan. Solectron was to retain the employees at the factories and supply products to Sony as

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well as to other customers. Solectron had been expanding through mergers and had previously acquired Singapore’s NatSteel Electronics for $2.4 billion in anticipation of catering to Japanese business (Wilson 2001). By outsourcing production, Sony hoped to lower costs and increase profitability. Thenceforth, Sony continued to divest its manufacturing operations in an attempt to reduce fixed investment. At the extreme, Sony even considered outsourcing production of its core CE production to its unit, Aiwa, 50 percent owned by Sony at the time. Regarding Sony’s decision to outsource production to third parties, the company’s President Ando was reported as saying, “There will be some products on which we think it better to entrust the production also to non-Sony group companies and business partners, and we currently outsource some audio products” (AFX News 2000). Sony was outsourcing some manufacturing to Celestica, Flextronics and SCI systems. The move to increase outsourcing followed a fall in profits in 1999. By March 2003, Sony had reduced the number of its factories worldwide from 70 (in 1999) to 54. Sony hoped that by outsourcing, it could reduce the fixed costs of manufacturing by transferring it to other contractor firms and instead be involved more in the design and planning stages of products. Sony planned to increase its reliance on products from Taiwanese vendors to $938 million by 2001. Thus, Stage 2 was marked by significant divestitures by our firms, some of which were to local partners in foreign locations. This enabled the firms to reduce fixed costs but this move gradually pushed these firms into Stage 3 of our model. As outsourcing appeared to produce shortterm benefits, the CE firms increased their reliance on foreign firms and were soon exposed to the long-term effects of outsourcing.

Stage 3: Increasing Dependence on Foreign Suppliers In the case of Emerson Radio, NUC sold the brand name to Major Electronics in 1973. U.S.-based Major Electronics used to produce radios, tape recorders and other equipment. In 1968 the company began importing these products from overseas establishments and became a distributor of finished Far Eastern goods. When it took over Emerson

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Radio, it was buying 80 percent of its components and products from East Asia. In 1980 Emerson Radio dropped its last U.S.-made product— the phonograph line—because labor costs had made it unprofitable. Thus Emerson was completely dependent on foreign suppliers for all its finished products. As firm President Stephen Lane commented, “I think most of the profits we’ve made have been because of controlling overhead and purchasing.” (Forbes 1981) According to Lane, “Our philosophy is simple, that is, to have the best of two worlds. To be in sophisticated, state-of-the-art products by maintaining our own engineering and design capabilities here and keeping close tabs on quality control at all our vendors, and at the same time being able to react quickly to changes by having no hard assets, which would mean worrying about keeping factories going and people employed in a recession” (Mehler 1984, p. 86). Other than manufacturing capabilities, Emerson Radio also lost its design and technical capabilities as it made its fortune by persuading its East Asian suppliers to imitate high-end, branded (Sony, Panasonic) CE products and then selling them to consumers at much lower prices. Based on published records, around the mid-1980s, Emerson Radio had outsourcing deals with over 15 Asian suppliers, which depended on Emerson for over 90 percent of their business. In November 1984, Lane claimed, “It’s been 12 years since we achieved our running goal of 5 (percent) net of sales” (Mehler 1984, p. 87). About this time, Emerson possessed design and engineering capabilities only for audio products, “But, in the video area, outside of the cabinetry, the U.S. firm has deferred to the superior design skills of its Japanese suppliers, such as Mitsubishi” (Mehler 1984, p. 86). Emerson struggled to hang on to its CE business. In 1985, it acquired a CE company H. H. Scott, a relatively small producer of audio equipment; in 1986, it introduced Asian-made refrigerators to the market; and in the following couple of years added several more electronics-related products to its range including computers in 1990. However, by 1991, it had withdrawn the H. H. Scott line and some other CE products. In the late 1980s, having lost its CE capabilities, it had begun diversifying into other areas. By the early 1990s, Emerson Radio was heavily in debt of over $200 million. To add to that, it was involved in lawsuits and in 1993, the company finally filed for bankruptcy. What remains of the old Emerson Radio today is its brand name. Even today

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the company capitalizes on the brand by licensing it to other CE firms. Philips experienced its own share of troubles due to increased outsourcing. In 1988, Philips’ woes reflected those of the U.S. CE firms not too long ago. Philips’s income fell again and the company claimed that competition from the Far East led to its problems. As Philips itself established plants abroad and outsourced production, it gradually increased its dependence on these foreign suppliers and unintentionally but invariably passed on tacit knowledge. The Philips-Sony liaison was a particularly interesting one. It began in October 1979 when the two companies joined hands to use each other’s patent rights for certain products (tapes, cassettes, discs, etc). This pact gave Sony access to Philips’s V2000 system as well as its CD-audio system. Industry analysts concluded that due to this arrangement, Sony learned to manufacture its own optical videodisc for consumer use although the company denied these charges. Philips meanwhile had plans to launch videodiscs in Europe by 1980. Philips made consumer versions while Sony made industrial videodiscs until 1982 when Sony announced that it would sell its videodiscs in Knoxville, North American Philips’s hometown. Philips continued to post lower income forecasts toward the end of the 1980s and planned to cut its workforce by 10,000–20,000 globally in the following years. The company hoped that its initial measures for cost cutting would increase profitability. But, in 1988, Philips lowered its forecast for the year and announced that it would take severe measures to improve its operations through further cost cutting. In reaction to lower earnings, the company reduced its European plants from 170 to 110 in the next five years and also shifted more production to Mexico and Taiwan. The company already operated plants in these countries at the time and this shift increased the company’s reliance on these foreign plants. It hoped to cut costs by $400 million. The company started to improve profitability for a while until profits fell again. And so the efforts went on. Toward the end of the 1990s, Philips was looking for buyers for its TV assembly plant in Juarez, Mexico (TV Digest 1998). In the late 1980s Philips was involved in R&D of LCD (Liquid Crystal Display), a joint project of four of Philips’s divisions, consumer electronics, lighting, research and components. Although a certain part of the development efforts used to take place at headquarters in Eindhoven, the Netherlands, production was shifted to the Philips-owned plant,

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Marantz, in Japan. In 1986, Philips reorganized Marantz Japan into an R&D base. Prior to 1988, NAP outsourced production of TVs to Matsushita but in 1988, Marantz (Marantz Japan Inc or MJI) began shipping VCRs to the United States for sale under Philips’s brand. In 1988, Philips manufactured liquid display TVs at the Marantz plant and later increased its reliance on that manufacturing facility by producing wireless radio equipment in 1991 and new CD players in 1999. In 1997, Marantz introduced its own (Marantz-branded) low price version (with some small changes) of Philips’ television models in Asia. Hence, Marantz, 50.6 percent owned by Philips at the time had learned Philips’ technology, upgraded its competences and forward integrated into launching and marketing its own line of similar products. Finally, in 2001, Philips reduced its controlling ownership stake in MJI, which also acquired the “Marantz” brand and its business in Europe and the U.S. from Philips and established its own units in these places. The companies still maintained working relations in many areas, but MJI also developed and introduced its own products (mainly audio equipment) under its own brand name, Marantz. A year later, in 2002, Philips further reduced its stake to 14.7 percent in MJI when MJI merged with U.S.-based Denon Ltd. The late 1990s was the age of the DVD technology in the CE industry and ideally Philips should have been a formidable contender. But, by his own admission, the Philips Sound & Vision Chairman and CEO said with respect to Philips’ DVD program in the U.S., “We’ve had to catch up on DVD in every sense of the word. We didn’t have a DVD program 12 months ago and now we’ve launched a player” (TV Digest 1997b, p. 15). The company launched a DVD player that was being sourced from Toshiba (Japan). By the end of the 20th century, Philips was on its way out of the CE industry having lost most of its development capabilities. Meanwhile, Japan’s Sony faced its own set of challenges with its partners. Even after selling its audio speaker manufacturing subsidiary Audio Research to Minebea in 1983 (explained in Stage 2 above), Sony maintained ties with Audio Research in the form of an outsourcing relationship whereby Sony continued to be its customer and to provide it with R&D support. The following year, Minebea set up its own subsidiary for audio R&D by merging Audio Research (acquired from

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Sony) with another of its divisions, Minebea Denshi Co., Ltd. In this manner, Minebea learned Sony’s audio research capabilities. What started off as simple contractual agreements with foreign operators eventually led Sony to increase its reliance on its partners. Agreements also took the form of joint ventures. For example, in 1992, Viettronics Tan Binh, a Ho Chi Minh City, Vietnam-based local electric appliance maker, was in a licensing pact with Sony to produce color TVs and audio players. In 1994, Sony established a joint venture with the same company to manufacture 14-inch and 21-inch Trinitron color TVs and audio products for the Vietnamese market. Thus, with this new venture in 1994, Sony in fact increased its dependence on Viettronics (from licensing to joint venture) to jointly manufacture goods at low cost. After the Solectron deal in 2000, Sony announced that it would farm out more production to independent manufacturers if need be. It also finalized plans to create engineering, manufacturing and customer services units to cater to the needs of Sony and other firms that outsourced production. Taiwan being a source of low-cost labor, Sony increased its reliance on Taiwanese firms to supply its products. In merely a period of one year, Sony bought goods worth $2 billion from Taiwan in 2001, which was an increase of seven times on the year 2000. Such was the extent of its increasing reliance on subcontractors. In February 2003, Sony entered a contract with Oak Technology to supply decoder chips to Sony, which would replace IC (integrated circuit) chips developed by Sony’s in-house facility. To start with, the decoder chips were to be used in Sony’s digital TVs to be sold in Japan but Oak Tech planned to supply chips for use in Sony’s products sold in Europe and the U.S. later on. Previously, Oak Tech was in a similar decoder supply pact with Sony for its personal video recorders in Japan. Oak Tech also supplied chips to other CE companies like Thomson and Daewoo – another example of Sony’s ever growing dependence on external suppliers and the increasing capabilities of such suppliers. The year 2003 witnessed an awakening at Sony. Touted as the “Sony Shock”, Sony incurred a net loss of $927 million in the first three months of 2003. Many said that Sony’s state reflected that of the Japanese CE industry and also the economy as a whole. But the unpredictable global environment and the company’s activities in the past few years might have exacerbated its performance. Sony had introduced only a few “new”

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products in the recent past and to add to that, it was losing its once fêted technological ability to innovate. The company used to ‘generate huge profit from its vertically integrated business model in which it developed high-performance parts . . . on a commercial basis before anyone else and released hit products based on them” (Nikkei Weekly 2003). However, in the 1990s, it lost a major part of its technological glory. According to Ken Kutaragi, President of Sony Computer Entertainment and a recent addition to Sony’s top management team, “top management chose not to continue investing in technology” SinoCast China IT Watch 2003). Sony’s technological excellence and product creativity were further tarnished by recalls in 2006 of Sony-made lithium-ion batteries used for notebook computers. The Sony batteries have been blamed for causing some Dell and Apple computers to overheat and catch fire. As if to rub salt into Sony’s wounds, due to delays in production of blue laser diodes, a key component of Blue-ray Disc players, Sony was also forced to postpone the European release of the PlayStation 3 game console from November 2006 to March 2007. Sony’s current crises are also attributed to its increased outsourcing by farming out a large part of production of these components to EMS (electronic manufacturing services) companies (Nikkei News 2006).

Stage 4: Industry Departure or Reduction of Outsourcing As time went by, Emerson Radio and Philips lost their place in the CE industry. Emerson Radio moved through the first three stages of the model so quickly that it did not get a chance to salvage itself and instead sought to diversify into other, sometimes unrelated areas. The brand name “Emerson” was associated solely with CE and having lost its technological competences, the firm is presently struggling to survive. Philips managed to shift its focus away from CE to its lighting and other businesses and managed to survive but not as a significant CE player. Although Philips was originally founded as a lighting company, it made a very successful transition into CE and maintained its foothold in the industry for several decades. What is evident is that at several times Philips experienced declining profitability, restructured its organization

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and altered its strategies. Prior to the 1970s, Philips changed its strategy from one of local responsiveness to a more global strategy and reduced product lines. Then at the time of the failure of its V2000 home video system around 1980, Philips believed that it was probably due to its lack of partnership with other companies to effectively commercialize its technology (Dai 1996). More recently, in 1996, Philips incurred a loss of $349 million on year and the company once again decided to increase outsourcing and increase its reliance on third party manufacturers. As of 2002, Philips planned to increase outsourcing of chip production from 10 percent to between 20–30 percent. The company also increased its reliance on products from United Microelectronics Corp. and Singaporebased Chartered Semiconductor Manufacturing. Thus, Philips never reduced outsourcing but instead increased it. In June 2001, Philips even abandoned its wireless phone manufacturing efforts and to cut costs, it also reduced its interest in its Chinese R&D plant by transferring control over to its Chinese partner, which was to make phones and supply them to Philips for sale under Philips’s name. At the dawn of the 21st century, Philips was no longer an independent producer in the CE industry. It sold off its remaining CE divisions including Polygram and “to emphasize the shift of Philips’ business out of CE, the CEO, Cor Boonstra, moved Philips’ headquarters from Eindhoven to Amsterdam” (Chandler 2001, p. 221). Today, Philips markets CE products but its main focus is on its other divisions such as lighting and semiconductors. The only company that is still active in the industry, Sony, is learning the hazards of excessive outsourcing and gradually reducing its reliance on outsiders for its core products. Although Sony is better known for CE than semiconductors, it uses semiconductors in many of its CE products (digital cameras, camcorders). In 1998, Sony’s profits fell along with those of other Japanese companies in the semiconductors industry such as Toshiba and Fujitsu. However, the slump was attributed to lower demand for their products. Surprisingly, in 2000, Sony reduced outsourcing for semiconductors by 5 percent and also shifted to in-house production of some of its “most wanted” products like personal computers, camcorders and digital cameras. There is no hard evidence that shows why Sony reduced outsourcing for its core products, but this move followed a fall in profits in 1999. In the year 2000, Sony announced that it would set up a “supervisory company”, which would

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be responsible for management of design, purchase and manufacturing for several of Sony’s plants. Thus, although Sony has not entirely eliminated its dependence on outsourcing to keep costs under control, it has moved toward in-house production of its popular money-making products. Also, the establishment of a company to monitor production indicates a very cautious components strategy. As Sony President, Ando said, “Engineering and manufacturing are (some of) Sony’s key strengths. That is why key products will be done by our own internal production, not OEM” (Financial Times 2000, p. 36). The fear of technology falling in the wrong hands also extends to national governments. In 2000, the Japanese government imposed an export control on Sony’s PlayStation 2 (PS2) electronic game console. PS2’s 128-bit central microprocessor developed by Sony and Toshiba had twice the raw number-crunching power of Intel’s most advanced Pentium chip used in professional desktop computers. When coupled with a video camera, PS2 could make an ideal missile-guidance system (Economist 2000, Re 2003). Then in 2001, Sony was to outsource the console of its PS2 product to Taiwanese firms capable of producing at low costs. There were two drivers for this outsourcing initiative. First was Sony’s inability to meet demand and second was Microsoft’s move to outsource the XBOX (in direct competition with PS2) to firms in Taiwan. The U.S. and Japanese governments asked Sony to keep production and assembly of the console in Japan lest the Taiwanese firms (who were low-cost subcontractors) could learn the DVD application of the console’s chip and use it for military purposes (Yu/Teng 2001). In 2001, Sony also announced that it would not expand outsourcing of its personal computers production at its plant in China. Although on the surface it appears to have evaded the grave dangers of excessive outsourcing by contracting out only “peripheral operations,” it continues to face the danger of losing its core competences. In May 2002, Sony stressed the fact that it was keeping key technologies in Japan as compared with other Japanese makers who were throwing away their future due to outsourcing. In September 2002 it was reported that “Three of Japan’s leading electronics manufacturers will start making DVD recorders, reversing a trend for outsourcing the production of such items” (Pilling 2002). Sony is one of those companies. Whereas on one hand, Sony reacted to its weakening situation by reducing outsourcing

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for its core operations, it continued to outsource peripheral technologies. Sony did not focus on increasing investment in developing technology or its reinstating control over manufacturing operations until its awakening in 2003. In 2003, the company took proactive measures to improve its position in the industry. Under the leadership of Kutaragi, it has charted out a course to bring it back to its role as a technological leader. For the purpose, it planned to invest $8.6 billion in “electrical equipment and electronics over three years and the introduction of in-house production and centralized management of key components” (Nikkei Weekly 2003). Sony also revealed that it would reduce the number of components used to 100,000 parts (90 percent decrease) by the year 2005 and also indicate 20,000 standard parts to be shared by engineers, company-wide. By doing so, it would be able to shorten the time taken for new product development. In late 2005, Sony announced that under the leadership of its first ever, foreign Chief Executive Howard Stringer, it would reduce 10,000 jobs and close 11 of its 65 plants to boost profits at its electronics unit. However, these cuts and closures were not expected to affect jobs and plants in China, its low cost manufacturing location.

A STAGE MODEL With these cases in hand, we can now construct a stage model around outsourcing and competences that draws upon existing theory, specifically the resource-based view and dynamic capabilities perspective (Barney 1991, Leiblein/Reuer/Dalsace 2002, Teece/Pisano/Shuen 1997) and work on value appropriation in alliances (Nooteboom 1999). The relationship between outsourcing and a firm’s competences, the set of routines in which it has specialized, is a complex one. On the one hand, outsourcing can free up resources that can be used to speed up or redirect competence development in other areas, the argument used by some proponents of outsourcing (Quinn 1999). In our cases, however, we observe the inverse effect as over time outsourcing seemed to lead to a loss of competences. Our stage model contains a description of the process through which such competence loss occurs. We then tackle the question under which conditions such a process presents itself and, related to that, when it does not.

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The resource-based view of the firm suggests that firms can be conceived of as controlling bundles of resources, also called competences (Barney 1991, Wernerfelt 1984). These competences are constructed through previous experience and over time. When resources are valuable, hard to imitate and substitute and rare, they can lead to sustainable competitive advantage (Barney 1991). The dynamic capabilities approach (Teece/Pisano/Shuen 1997) adds to this a process perspective by suggesting that capabilities are constructed through evolutionary, pathdependent, processes. Outsourcing invariably involves ceding some control over resources, for instance, in the form of transferring machinery, technology, and/or people. In an arm’s length transaction all control is ceded. In a cooperative or partnership outsourcing relationship, firms arguably maintain some control over resources, even if these physically reside at suppliers. In such relations there are two key questions. The first question is how much value is created and the second is who gets to appropriate that value (Nooteboom 1999). Value creation is not a central concern here, but suffice it to say that various mechanisms can be instated by the outsourcing partners to create additional rents (Dyer/Singh 1998). In our cases, lack of value appropriation is the central concern – one that has been addressed in the literature as well (Nooteboom 1999, Porter 1980, Teece 1986, 2000). One way in which insufficient value appropriation may occur is when in-house competences are leaked to the supplier, for instance, in the form of the supplier taking on board the outsourcing firm’s intellectual property rights (Teece 2000), a problem especially prevalent when no institutional guarantees are provided (Teece 1986). The supplier may subsequently start to compete head-on with the outsourcing firm or supply to competing firms leading to a loss in bargaining power (Porter 1980). Another possibility is the gradual erosion of the firm’s internal competences because it can no longer engage in learning-by-doing leading to hollowing out (Bettis/Bradley/ Hamel 1992, Kotabe 1998). Our stage model, based on the three CE cases, integrates both streams of literature. We suggest that firms need to maintain and develop their competence base in order to sustain their advantages vis-à-vis competitors, but may be unable to do so when engaging in (international) outsourcing because they cannot distill enough value from their relations

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with suppliers. We propose that there is a “vicious outsourcing cycle”, which occurs when the future need for in-house competences differs substantially from the currently perceived need and firms are unable to bridge that difference because they are too dependent on outsourcing. Specifically, a vicious outsourcing cycle can occur when firms either lose competences whose contribution is not understood well enough or close off trajectories of competence learning that prove to be important in the future. One might alternatively refer to these conditions as causal ambiguity and uncertainty. Figure 1 describes the different stages of the outsourcing cycle. In Stage 1, firms see an opportunity to lower their production costs by shifting in-house production to a different country. As we showed above, Philips, for instance, set up plants in a wide range of low labor cost countries in the 1960s. Vernon’s (1974) international product life cycle model clearly illustrates this stage. Because of substantial labor cost differentials, the existing production location, which is normally the firm’s home country in the early stages of internationalization, is no longer seen as competitive. Sometimes other, more qualitative factors, such as the need to access new customers or suppliers, may come into play as well as has been documented in the literature on plant locations and facility management (Ferdows 1997). In terms of Dunning’s (1988) organization, location, and internalization (OLI) model, which intends

Extent of Offshoring / Outsourcing Offshoring Outsourcing

??? Stage 3 Stage 2 Stage 1

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F I G U R E 1 The Outsourcing Cycle

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to explain when certain types of internationalization may or may not occur, activities are transferred from the home base to low-cost countries in order to benefit from L-type advantages available in these offshore locations and because a firm possesses the O-type advantages necessary to engage in international production. As a consequence of this decision, production and engineering capabilities are transferred and replicated abroad. Such a decision will bring relief in the short term as it allows the firm to maintain or improve its margins. As suggested above, Emerson increased its profits in 1959 after a cost-cutting operation. However, because most locations are not unique, competitors can easily replicate location decisions, and perhaps even improve on them. There are many instances of an industry-wide bandwagon where firms all relocate to the same country, for example in textiles production. The classic description of such bandwagons in international business is Knickerbocker’s (1973) work on “follow-the-leader” in foreign direct investment. In other words, after some time competitors will offset any temporary gains from a production shift. If cost pressures remain high and there is overcapacity in the industry, the firm finds itself in need of taking additional measures. In our cases this tended to show up in the form of some immediate financial crisis, which came upon each of the three firms at some point in time. When responding to such a crisis, one important option is to sell off the foreign production plant to an independent operator and outsource production to this firm or simply to outsource without selling existing assets – Stage 2 of the model. As we saw, Emerson for instance started to make extensive use of Asian OEM’s. Referring again to the OLI model, the advantages of internalization (I) seem to have disappeared to the point where the market (outsourcing) is seen as a better solution. If these advantages decrease, outsourcing becomes a more viable option. In the case of Sony this occurred when it outsourced most of the making of stereo equipment to Chinese suppliers. Production and engineering capabilities are now transferred to or replicated by the supplier because the outsourcing firm will help it set up production. Thus the value appropriation issues mentioned earlier (Nooteboom 1999, Teece 2000) emerge. Given that there are such issues around value appropriation, what motives do firms have for moving from stage 1 to stage 2 of our model?

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An outsourcing firm replaces internal fixed costs by the production costs of outside suppliers which are variable from its perspective. This lowers the breakeven point, providing the firm with more flexibility to respond to unforeseen changes, which are quite common in the CE industry. In particular, it helps the firm to reduce the size of potential losses. Since in our cases outsourcing often appears to be a consequence of a drop in sales and profitability, this move seems sensible if further drops can be expected. Financial markets for instance may appreciate such decisions in the context of the CE industry where firms like Emerson and Philips saw themselves confronted with ever more intense competition from Asian producers. In case of a crisis the alternative to outsourcing is to restructure internally, which often does not involve terminating the production of specific components, like outsourcing may do, but of entire products. The wholesale closure of plants can be socially and politically sensitive and costly, and therefore outsourcing may be a preferred solution. But if the firm outsources its fixed costs in this way, these costs will still have to be borne by the independent supplier instead. Unless that supplier can find a way to be more cost-efficient and to make these costs variable, such a move could amount to a mere accounting fallacy. Perhaps some managers and some investors buy into this but we have little hard evidence that is the case. Yet, as illustrated by the emergence of EMS (electronics manufacturing services) companies, there are reasons to believe that independent suppliers can be more cost-efficient and can make better use of fixed investments. First, independent local suppliers, operating in a low-cost location, do not have to bear the same overheads that producers from more expensive countries, like Emerson, Philips and later Sony, faced. They are run locally and, being a much smaller firm, can also be more nimble. Second, and related to the first point, their expenses for research and development are much lower, at least initially, as they import more advanced technology from elsewhere. Philips and Sony, for example, have large R&D bases because they want to be first movers in new technologies, whereas the supplier in a low-cost country would be content with adopting new technologies invented by others. Perhaps more importantly, the outsourcing firm needs to spread its fixed costs over a relatively fixed volume of products but the independent supplier has the option to supply other customers, thereby reusing its

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assets. So after outsourcing takes place, the supplier can enjoy larger economies of scale in production, resulting in further lower average costs because fixed costs are spread over a higher volume of production. For example, this logic applied to Aiwa, as Sony was contemplating to outsource more production to it. Furthermore, outsourcing changes the incentive structure of the independent supplier in important ways. Some arguments for this may be found in Grossman and Hart’s (1986) “theory of costly contracting”, also known as the property rights approach. They suggest that outsourcing takes place when it is relatively easy to write complete contracts, in which specific rights can be assigned to both the outsourcing firm and its supplier. When this is the case, there is no longer an incentive for the outsourcing firm to own and vertically integrate the supplier (Grossman/Hart 1986). For this to happen, a supplier must develop a set of distinct production capabilities for a component or product, to which property rights may then be assigned. These distinct capabilities can develop if the product architecture is well-understood, allowing for easy separation of tasks. Once the supplier has gained its independence, it can then develop its capabilities further, which leads to future cost improvements. The supplier will have an incentive to develop its production capabilities because these will directly drive its cost levels, and hence its profitability, and indirectly its ability to retain the outsourcing firm as a customer in the future and to attract further customers. Because both the outsourcing firm and potential future customers will be making a comparison of their own production capabilities with those of the supplier firm, the supplier’s odds of attracting future business increase with improvements in those capabilities (Jacobides/Winter 2005). In Quinn’s (1999) view, the supplier builds these advantages, to the extent that it can become best-in-world in the production of this component or product, through increasing focus. Over time several changes can occur that alter the balance of decisionmaking and push firms into Stage 3. One change, quite common in the context of emerging countries, is learning by the supplier, which can take the forms of increased productivity and upgraded production capabilities, as discussed above. Philips experienced this in its earlier ventures with Japanese producers and Sony found this out in Taiwan. If supplier productivity is increased by learning-by-doing and this increase

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is shared exclusively with the outsourcing company and not with its competitors, there is no real problem. However, when suppliers manage to upgrade their own competences, there is little to prevent them from forward integration into the firm’s markets. Thus the supplier can easily become a competitor. Emerson found itself competing against the Asian producers who were initially its suppliers. The buyer now has serious problems to appropriate as much value from the relationship as it would like to. When the gain of a buyer-supplier alliance is no longer shared evenly in the eyes of the buyer, it may want to reconsider its motives for having entered that alliance (Doz/Hamel 1998). The bargaining constellation is a second area of possible change (Porter 1980). When the supplier starts to supply to competing firms as well, it will grow in size, become less dependent on the original buyer, and raise prices, which may pose the outsourcing firm with the need to build up alternative supply sources, if that is possible in the first place. Rather than the supplier being captive, the buyer can become captive this way. A third change can be in the outsourcing firm’s in-house capacity to produce and engineer the product. Because the firm no longer produces the product, it will become more difficult to keep particularly tacit knowledge about production technology up-to-date as loss of manufacturing experience leads to a loss in development capability, particularly for existing products (Dankbaar 2007). Emerson for instance had clearly given up on the idea of retaining any production knowledge in-house. This may also affect the ability to implement engineering changes. The supplier will need to become involved in the design of the next generation of the product. Under each of these scenarios, there is change that occurs after initial contracting and that increases the outsourcing (buyer) firm’s long-term dependence on the supplier because that supplier now possesses more competences relative to the buyer. Because our evidence on Stage 4 is limited as the electronics industry is still evolving, our discussion of it is perhaps best interpreted as a form of informed theoretical speculation. When faced with a situation like Stage 3, firms essentially have two options in Stage 4. Firms can exit the industry altogether as Emerson and to some extent Philips have done. Or they can decide to take activities back in-house, as Sony has begun doing in recent years. This choice can be likened to Hirschman’s (1970) exitvoice model, where decision-makers also have the choice between

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departing from the scene and engaging and confronting a problem. Leroy’s (1976) detailed empirical work on U.S. multinational firms’ production location decisions along the international product life cycle (IPLC) model points to this strategic dichotomy. He traced their production location decisions over time. In reality, a majority of U.S. multinationals stopped short of reaching the last stage of the IPLC as theorized by Vernon (1974), where the subsidiaries of those U.S. multinationals based in developing countries would have become the net exporters to the U.S. of what had once been products innovated in the U.S. His conclusion alluded to U.S. firms’ reliance on product innovations and reluctance to investing in manufacturing process innovations. This finding is consistent in a way with later studies that found the sustained competitiveness of many Japanese firms resulting from their pursuit of process innovations (e.g., Cusumano 1988, Kotabe 1990). Exiting the industry equates to admitting the competence loss is too large to overcome. Facing the problem, like Sony, sounds like a much easier task than it actually is. First, it will require precisely those fixed investments that the firm’s business model is no longer based on. Thus the question is how to fund this reversal and make it consistent with the firm’s strategy. Second, the firm will by now have lost much of its ability to produce and engineer the product and will have to seriously update its competences by training people and obtaining knowledge externally. Both may come at a high price, particularly since the competitive and technological landscapes may have changed substantially in the meantime. Hence in Stage 4 there is no ideal solution to the problems around competence losses that a firm has accumulated through the first three stages. The stage model raises several further questions. One is why the loss of competences would occur, as it appears to be inconsistent with perfectly rational managerial decision-making. Several reasons come to mind. A lack of foresight perhaps produced by technological or volume uncertainty, is one possibility. Differing estimations of the buyer’s and the supplier’s ability to develop the underlying competences in future could be another. Another possible reason is strategic myopia that makes the short-term consequences of not outsourcing, in the form of higher fixed costs and higher production costs, look worse than the long-term consequences of outsourcing, in the form of a loss of technological prowess

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(Bettis/Bradley/Hamel 1992, Doig et al. 2001, Kotabe 1998). For instance, the more immediate trigger for outsourcing decisions in our cases appeared to be a downturn in business cycles and short term losses that firms were facing. Outsourcing may also be perceived as a response to adverse demand conditions because of its propensity to lower the breakeven point. This could be framed as a “Faustian dilemma”5. Because of immediate pressures to compete in the marketplace, firms need to focus and streamline their production activities. But in order to do so, they have to “sell their soul”, namely their core assets and capabilities, which in the long run will catch up with them. Viewed in this way, there is no myopia but simply a lack of strategic choice. This determinism inevitably drives firms towards more outsourcing. A further implication is that causality in our model may well run in both directions, since poor results lead to more outsourcing as much as more outsourcing may lead to poorer results. A second question is why our three case study firms experienced their outsourcing cycles and resulting competence losses at different points in time, with Emerson being first in roughly the 1950s to 1970s, Philips following in roughly the 1970s to 1990s, and Sony being last in roughly the 1980s to 2000s. Other CE producers from the same Triad regions seemed to go through the same timing. We would like to suggest that it is a combination of the cost competitiveness of the home country and the mental models and financial incentives of managers in the country that are responsible for such differences in timing. Over time, and with the development of their home economies, firms found that their home country simply could not compete with offshore locations anymore because labor costs were too high. This effect may have occurred in the United States before it did in Europe, partly because European firms were more effective at limiting imports from lower cost producers. In Japan it may again have come at a later time, not until the 1980s. But managers in these countries are also different. In Japan, outsourcing is seen as a problem-solving tool, while in the U.S. it tends to be a problemremoval tool (Kotabe 1998). And U.S. managers are incentivized to achieve good short-term results, encouraging them to find cost savings through outsourcing, while this is less true for European (especially Germanic) managers or Japanese managers. The latter group is rewarded for market share growth more than for financial results alone (Kotabe

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1998). Our earlier quote from the Emerson executive illustrates the point. A third point is whether firms necessarily need to go through all stages for the competence loss to occur. Although this is ultimately an empirical question, our cases seem to show that all three firms went through the first three stages in more or less chronological fashion. In Stage 4 they took different routes, though, with Sony appearing to use a voice, engagement strategy, and Emerson and Philips preferring an exit strategy. So there are different responses to the loss of competences through outsourcing. At the same time we think it is feasible that some firms, like SMEs, never set up foreign operations but immediately engage in international outsourcing. Mol, van Tulder and Beije (2005) seemed to have evidence for this in their empirical study. Such firms will probably transfer fewer assets and less knowledge to their foreign suppliers and are therefore perhaps not as prone as larger firms to competence losses. The smaller volumes these firms produce might also make it less attractive for their suppliers to engage in forward integration. This touches upon the intriguing and more general issue how inward and outward internationalization processes are related. Finally, we would like to raise the related issue of the conditions under which this stage model is most likely to apply. Several requirements appear to apply. First, there is causal ambiguity and uncertainty over future technological and competence trajectories as discussed above. In transaction cost economics terms, this implies that asset specificity levels cannot be estimated with much certainty, and are subject to change, and that uncertainty makes it difficult to contract with suppliers. Second, the rise of new, lower cost producers in emerging countries that puts additional competitive and cost pressures on incumbents from developed countries. Third, the presence of international trade regimes that allow for this type of outsourcing. And finally a certain size of production is needed as well. Therefore we think the stage model may be generalized to some situations, especially larger firms competing in highly competitive and technologically intensive industries. One interesting thought experiment is whether Chinese automobile and component suppliers are going to benefit from collaborative agreements with Western producers and the purchase of technology like the acquisition of the remains of Rover in the U.K.

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CONCLUSIONS AND IMPLICATIONS Outsourcing can be more than a cost-cutting device and potentially contributes to a firm’s competence base (Quinn 1999). There are, however, circumstances under which outsourcing leads to competence destruction. Through documenting the experiences of three firms in the CE industry we illustrated how such competence destruction through outsourcing takes place and coined it the vicious outsourcing cycle. Clearly not all outsourcing processes will adhere to such a cycle. When firms outsource competences that later become important platforms for growth and innovation, the vicious outsourcing cycle can occur. This stands in contrast to the use of outsourcing to obtain new competences (Barney 1999, Quinn 1999), because in our cases supplier competences appear to be less complementary and more overlapping, which generates the possibility of forward integration by suppliers. In such instances it is important for firms to consider the future value of in-house production rather than merely the present costs of keeping production in-house versus outsourcing it. For instance, it was evident in the Philips case that on the basis of its past capabilities in R&D, it should have been able to compete in the DVD market. But due to excessive outsourcing of components and products before the age of the DVD, it “did not have a DVD program” in the U.S. market as conceded by Philips Sound and Vision Chairman and CEO Doug Dunn (TV Digest 1997b, p. 15). Its European DVD launch also proved to be unsuccessful. One of the main reasons was that Philips’ DVD technology MPEG-2 suffered due to unavailability of software. Future prospects for availability of content for these players were also bleak. This preempted the introduction of products based on Philips’ DVD technology later on that were based on its own previous DVD technology. To revert back to basics proved to be harder than expected because regaining technical abilities included building plants and incurring other prohibitively high costs. Philips’s case was also unique because the company’s own technologies (e.g., V2000 for videos and MPEG-2 for DVDs) found no support in the market and were largely unsuccessful. Therefore, in such cases, many firms have no choice but to buy products from overseas manufacturers in order to remain in the industry.

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Information contained in our sources seems to indicate that most CE firms were similarly faced with few choices: To either exit the product line(s) because sales were dropping or to go abroad like their rivals were doing and lower costs. It is unclear as to whether or not these firms and others lacked foresight. Based upon patterns in our data, it appears as though it started off as one decision, which led to an increasing dependence on suppliers, as our model proposes. These firms progressed through the stages of the model as they faced pressures to meet demand, lower prices, etc. Thus, the increasing outsourcing relationships and their outcomes were the culmination of this gradual process. Upon the sale of Philips’ Greenville TV plant (Tennessee, U.S.) in mid 1997, Philips Sound & Vision Chairman-CEO Doug Dunn said it was “a tough decision, I don’t take any joy in selling or closing down assets” (TV Digest 1997b, p. 14). Firms do not need to go through all stages of this cycle for its effects to become visible. Sometimes they do not use offshore subsidiaries but instead opt to go straight for outside suppliers from abroad. Emerson Radio at some point in time looked to nearby Canada and Latin America to set up subsidiaries but it eventually relied mainly on external Asian suppliers for its components and finished products. Emerson Radio only went through two of the stages of the cycle and much faster than the other two firms. This was probably due to the market it faced in the United States, which was severely competitive. Philips, on the other hand, appears to have gone through the first three stages and never really got back to being a technological leader in CE. It would be interesting to observe what pattern other CE firms have followed. Furthermore, one might expect firms in other industries, where international competition has emerged later than in CE, to show a similar pattern at some point in the future. From a decision-maker’s viewpoint the vicious outsourcing cycle is more than just a cause for cautionary behavior. It provides managers with an important criterion for future outsourcing decisions: To what extent does the activity that we are considering to outsource embody competences that matter for our future growth and innovation potential? And are we sure that the competences contained in this activity are all easily observable? This criterion does not need to replace more traditional considerations of cost minimization or those that are based on

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comparisons between the firm’s current resource stock and that of its potential suppliers, but is a useful supplement to such considerations. In addition to short-term considerations firms and their managers also need to think about long-term variables such as future growth, continued innovation and sustainability of competitive advantage, all three of which are inextricably linked together. There is no a priori correct answer to the question whether outsourcing is good or bad for the development of competences inside the firm. Its consequences hinge on the circumstances under which outsourcing takes place and how these conditions then change over time. In technologically intensive industries such as CE, continued innovation is the key to future growth and sustainability of competitive advantage. But in order to innovate, firms need to learn to identify those competences that underlie components and could possibly lead to the development of unanticipated technology or products in the future. The ability for identification is often elusive or is sometimes sacrificed by myopic managers and managers suffering from the Faustian dilemma we discussed. Managers need to tell themselves not to think in terms of “just one more component” to be outsourced. The three firms in our sample had the potential to innovate but they started giving it away bit by bit. This does not mean that firms should necessarily increase their R&D budget or keep all production activities in-house. But it calls for more judicious outsourcing strategies. Some firms have recognized this need, for example, Sony, which has shifted some of its manufacturing for semiconductors back in-house. Semiconductors, used in almost all electronic equipment today, are the basis for future innovation and being knowledgeable about the process for making semiconductors should ideally enable Sony to sustain its technological capabilities. Another important step forward seems to be the ability to move from one type of product to the next. Emerson never really made it beyond the radio and started losing out when it missed out on the DVD revolution. So firms that outsource need to think about how they can proceed to entirely new products without having productive capacity. That may require different forms of cooperation in the research and development stage, for instance with specialist manufacturing outsourcing companies such as Flextronics, which unfortunately were not around yet when Emerson and Philips made their decisions.

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NOTES 1

2

3 4 5

Although our model includes an “offshoring” stage, which refers to the transfer of activities across geographical borders but inside a firm, we almost exclusively discuss the “outsourcing” stage that follows it because it involves activities that are both transferred across geographical borders and performed by outside suppliers and hence is the more complex issue. In 1970, NUC charged its Japanese competitors with attempting to drive U.S. TV makers out of the domestic market by dumping or selling foreign made televisions at artificially low prices. This was one of the most controversial disputes in the industry at the time and the largest antitrust case against Japanese competitors. But in 1981, a federal court judge ruled that NUC and Zenith had been unable to provide sufficient evidence to support their charges. Matsushita also acquired Philips’s main U.S. subsidiary Magnavox in 1992. U.S.-based Solectron is one of the world’s fastest growing electronics manufacturing services (EMS) provider. Its offerings include product design and manufacturing. This term is courtesy to one of our reviewers’ suggestions.

REFERENCES AFX News (ed.), Sony May Sell More Production Plants after Solectron Deal, AFX News, October 18, 2000. Barney, J. B., How A Firm’s Capabilities Affect Boundary Decisions, Sloan Management Review, 40, 3, 1999, pp. 137–145. Bettis, R., Bradley, S. and Hamel, G., Outsourcing and Industrial Decline, Academy of Management Executive, 6, 1, 1991, pp. 7–16. Chandler, A., Inventing the Electronic Century, New York: Free Press 2001. Cusumano, M. A., Manufacturing Innovation: Lessons from the Japanese Auto Industry, Sloan Management Review, 30, 1, 1988, pp. 29–39. Dankbaar, B., Global Sourcing and Innovation: The Consequences of Losing both Organizational and Geographical Proximity, European Planning Studies, 15, 2, 2007, pp. 271–288. D’Aveni, R. A./Ravenscraft, D. J., Economies of Integration versus Bureaucracy Costs: Does Vertical Integration Improve Performance?, Academy of Management Journal, 37, 5, 1994, pp. 1167–1206. Dai, X., Corporate Strategy, Public Policy and New Technologies: Philips and the Consumer Electronics Industry, London: Elsevier Science 1996. Doig, S. J./Ritter, R. C./Speckhals, K./Woolson, D., Has Outsourcing Gone Too Far?, McKinsey Quarterly, 4, 2001, pp. 22–37. Doz, Y. L./Hamel, G., Alliance Advantage: The Act of Creating Value through Partnering, Boston, Massachusetts: Harvard Business School Press 1998.

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Dyer, J. H./Singh, H., The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantage, Academy of Management Review, 23, 4, 1998, pp. 660–679. Dunning, J. H., The Eclectic Paradigm of International Production: A Restatement and Some Possible Replications, Journal of International Business Studies, 19, 1, 1988, pp. 1–31. Ferdows, K., Making the Most of Foreign Factories, Harvard Business Review, 75, 2, 1997, pp. 73–88. Forbes (ed.), In Tune with Emerson, Forbes, June 15, 1954, pp. 22–23. Forbes (ed.), A Dangerous Dream?, Forbes, July 20, 1981, p. 52. Grossman, S. J./Hart, O. D., The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, Journal of Political Economy, 94, 4, 1986, pp. 691–719. Hirschman, A. O., Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Cambridge, Massachusetts: Harvard University Press 1970. Jacobides, M. G./Winter, S. G., The Co-evolution of Capabilities and Transaction Costs: Explaining the Institutional Structure of Production, Strategic Management Journal, 26, 5, 2005, pp. 395–413. Knickerbocker, F. T., Oligopolistic Reaction and Multinational Enterprise, Boston: Division of Research, Graduate School of Business, Harvard University 1973. Kenney, M./Florida, R. The Transfer of Japanese Management Styles in Two US Transplant Industries: Autos and Electronics, Journal of Management Studies, 32, 6, 1995, pp. 789–802. Kotabe, M., Corporate Product Policy and Innovative Behavior of European and Japanese Multinationals: An Empirical Investigation, Journal of Marketing, 54, 2, 1990, pp. 19–33. Kotabe, M., Efficiency vs. Effectiveness Orientation of Global Sourcing Strategy: A Comparison of U.S. and Japanese Multinational Companies, Academy of Management Executive, 12, 4, 1998, pp. 107–119. Leiblein, M. J./Reuer, J. J./Dalsace, F., Do Make or Buy Decisions Matter?: The Influence of Organizational Governance on Technological Performance, Strategic Management Journal, 23, 9, 2002, pp. 817–833. Leroy, G., Multinational Product Strategy: A Taxonomy for Analysis of Worldwide Product Innovation and Diffusion, New York: Praeger 1976. Mehler, M., Every Which Way is Up for Emerson, Financial World, November 14–27, 1984, pp. 86–87. Mol, M. J./van Tulder, R. J. M./Beije, P. R., The Antecedents and Performance Consequences of International Outsourcing, International Business Review, 14, 5, 2005, pp. 599–617. Nikkei News (ed.), Sony’s Technological Leadership in Jeopardy, Nikkei News, October 7, 2006. Nikkei Weekly (ed.), Maverick on Board to Revive Sony, Nikkei Weekly, September 16, 2003. Nooteboom, B, Innovation and Inter-firm Linkages: New Implications for Policy, Research Policy, 28, 8, 1999, pp. 793–805. Partner, S., Assembled in Japan: Electrical Goods and the Making of the Japanese Consumer, University of California Press 1999.

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Pilling, D., DVDs Made in Japan, The Financial Times, London, September 9, 2002, p. 30. Porter, M. E., Competitive Strategy, New York: Free Press 1980. Quinn, J. B., Strategic Outsourcing: Leveraging Knowledge Capabilities, Sloan Management Review, 40, 3, 1999, pp. 9–21. Re, R., Playstation2 Detonation, Harvard International Review, 25, 3, 2003, pp. 46–50. SinoCast China IT Watch, Sony to Reform Production Management Model in China, October 6, 2003. Teece, D. J., Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy, Research Policy, 15, 6, 1986, pp. 285–305. Teece, D. J., Managing Intellectual Capital: Organizational, Strategic, and Policy Dimensions, Oxford: Oxford University Press 2000. Teece, D. J./Pisano, G./Shuen, A., Dynamic Capabilities and Strategic Management, Strategic Management Journal, 18, 7, 1997, pp. 509–533. The Economist (ed.), War Games, The Economist, April 22, 2000. The Economist (ed.), Parked, The Economist, April 9, 2005. The Financial Times (ed.), Sony Sells Factories in Streamlining Move, The Financial Times, October 19, 2000. The New York Times (ed.), Emerson Perseveres with Heart Device, The New York Times, October 19, 1981. TV Digest, Grundig Charges Push Philips Back Into Red, February 17, 1997a, pp. 12–13. TV Digest, Philips Plans 2 DVD Players for Europe, June 30, 1997b, pp.14–15. TV Digest, Weekly News, March – December 1988, September 21, 1998. Vernon, R., The Location of Economic Activity, in Dunning, J. H. (ed.), Economic Analysis and the Multinational Enterprise, London: George Allen & Unwin 1974. Wernerfelt, B., A Resource-based View of the Firm, Strategic Management Journal, 5, 2, 1984, pp. 272–280. Williamson, O. E., The Economic Institutions of Capitalism, New York: Free Press 1985. Wilson, D., Ready to Turn the Key: Asia’s Contract Manufacturers are Poised for Japanese handoffs, Electronic Business Asia, May 2001, http://www.eb-asia.com/EBA/issues/ 0105/0105c-story.htm. Yu, S. /Teng, W., www.DigiTimes.com, July 2, 2001.

ABOUT THE AUTHORS Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected]

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Michael J. Mol is Senior Lecturer, University of Reading and Visiting Researcher, London Business School, London, United Kingdom. Sonia Ketkar is Assistant Professor, College of Business and Economics, Towson University, Towson, Maryland, USA.

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Outsourcing, Performance, and the Role of E-Commerce A Dynamic Perspective Masaaki Kotabe, Michael J. Mol, and Janet Y. Murray

1 INTRODUCTION History has repeatedly shown that in a highly competitive global environment, many manufacturers begin to either set up manufacturing facilities in lower-cost locations or outsource components and finished products from lower-cost producers on a contractual OEM (original equipment manufacture) basis. Without established sourcing plans, distribution, and service networks, it is extremely difficult to exploit both emerging technology and potential markets around the world simultaneously. As a result, the increased pace of new product introduction and reduction in innovational lead time calls for more proactive management of locational and corporate resources on a global basis. Following this trend, increased outsourcing of manufacturing activities has become a prominent part of the restructuring of firms’ supply chains since the 1990s. Many academics and consultancy firms seem to support the view of outsourcing as one of the key drivers of superior performance. Outsourcing strategy is part and parcel of the value chain of corporate activities. Outsourcing strategy not only affects but is also affected by the

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other aspects of the firm’s supply chain. Levy (2005) has asserted that the core driver of the latest form of global outsourcing is the increasing organizational and technological capacity of firms in decoupling and coordinating a network of remotely located external suppliers performing an intricate set of activities. Thus, executives should understand and appreciate the important roles that product designers, engineers, and production managers, and purchasing managers, among others, play in global sourcing strategy development. Let us take a look at Toyota’s global sourcing strategy as an example. Toyota is equipping its operations in the United States, Europe, and Southeast Asia with integrated capabilities for creating and marketing automobiles. The company gives the managers at those operations ample authority to accommodate local circumstances and values without diluting the benefit of integrated global operations. Thus, in the United States, Calty Design Research, a Toyota subsidiary in California, designs the bodies and interiors of new Toyota models, including Lexus and Solara. Toyota has technical centers in the United States and in Brussels to adapt engine and vehicle specifications to local needs. Toyota operations that make automobiles in Southeast Asia supply each other with key components to foster increased economies of scale and standardization in those components—gasoline engines in Indonesia, steering components in Malaysia, transmissions in the Philippines, and diesel engines in Thailand. Toyota also started developing vehicles in Australia and Thailand in 2003. These new bases develop passenger cars and trucks for production and sale only in the Asia-Pacific region. The Australian base is engaged mainly in designing cars, while the Thai facility is responsible for testing them. In addition to capitalizing on the comparative advantages of different sourcing locations and its own unique capabilities by designing and manufacturing certain components in-house (i.e., insourcing), Toyota also reaps the advantages of outsourcing. To outsource manufacturing activities, Toyota adopts both the arm’s length and partner models in managing its external suppliers. It would purchase necessary, but nonstrategic inputs from independent suppliers on an arm’s length basis to obtain a lower cost for these inputs. Examples would be belts, tires, and batteries that are not customized and do not differentiate its products from its competitors. Strategic inputs that are of high value and provide

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differentiation (e.g., transmission, engine parts) are sourced from suppliers based on strategic partnerships to gain access to suppliers’ capabilities, and yet other activities are still performed inside Toyota (Kotabe & Murray, 2004). In 2000 Toyota was approached by General Motors and Ford to jointly develop an online business-to-business (B2B) automotive components clearinghouse. Although Toyota declined to join as it was not convinced of the wisdom of standardizing parts with other automakers, General Motors and Ford, along with Daimler-Chrysler, proceeded to create Covisint to jointly address escalating costs and inefficiencies in their supply chain management.1 In this conceptual article, we seek to bring together various empirical trends and to provide a coherent explanation for these. As the Toyota example shows, the first trend is that we see increased, yet not unlimited, outsourcing. The second trend, which we discuss relatively sparingly (for more details see for example Van der Valk & Wynstra, 2005), is in an increase in partnership-type supplier relations. And the third trend is the adoption of electronic commerce (e-commerce) in these supplier relations. In Section 2 we conceptualize global sourcing strategy. In Section 3 we raise the question on how outsourcing affects firm-level performance, by arguing that there is an inverted-U shape relationship between them. Section 4 takes up the theme of e-commerce, and describes how the introduction of e-commerce in supplier relations affects this inverted-U shape relationship. We conclude by sketching some managerial and research implications of our work.

2 GLOBAL SOURCING STRATEGY Global sourcing strategy refers to identifying which production units will serve which particular markets and how components will be supplied for production, and thus includes a number of basic choices companies make in deciding how to serve various markets. One choice relates to the

1 Although its success is debatable, Covisint today supports over 250,000 users, representing more than 30,000 organizations in over 96 countries in the global automotive industry (Applegate & Collins, 2005).

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use of imports, assembly, or production within the country to serve a foreign market. Another decision involves the use of internal or external supplies of components or finished goods. Therefore, the term “sourcing” is used to describe how multinational companies manage the flow of components and finished products in serving foreign and domestic markets. Sourcing decision-making is multifaceted and entails both contractual and locational implications. From a contractual point of view, the sourcing of major components and products by multinational companies takes place in two ways: (1) from the parents or their foreign subsidiaries on an “intrafirm” basis, and (2) from independent suppliers on a “contractual” basis. The first type of sourcing is known as insourcing. The second type of sourcing is referred to commonly as outsourcing. Outsourcing can further be broken down into two types: on an arm’s length or strategic partnership basis. Similarly, from a locational point of view, multinational companies can procure components and products either: (1) domestically (i.e., onshoring), or (2) from abroad (i.e., offshoring). In developing viable sourcing strategies on a global scale, companies must consider not only manufacturing costs, the costs of various resources, and exchange rate fluctuations, but also availability of infrastructure (including transportation, communications, and energy), industrial and cultural environments, the ease of working with foreign host governments, and so on. Furthermore, the complex nature of sourcing strategy on a global scale spawns many barriers to its successful execution. In particular, logistics, inventory management, distance, nationalism, and a lack of working knowledge about foreign business practices, among others, are major operational problems identified by multinational companies engaging in global sourcing. Some studies have shown, however, that despite, or maybe, as a result of those operational problems, where to source major components seems much less important than how to source them (Kotabe & Swan, 1994; Mol, van Tulder, & Beije, 2005; Murray, Kotabe, & Wildt, 1995). Thus, when examining the relationship between sourcing and competitiveness of multinational companies, it is crucial to distinguish between insourcing and outsourcing, for these two types of sourcing will have a different impact on their long-term competitiveness.

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2.1 Insourcing Multinational companies can procure their components in-house within their corporate system around the world. They produce major components at their respective home base and/or at their affiliates overseas to be incorporated in their products marketed in various parts of the world. Thus, trade takes place between a parent company and its subsidiaries abroad, and also between foreign subsidiaries across national boundaries. This is often referred to as insourcing. If such in-house component procurement takes place at home, it is essentially onshore insourcing. If it takes place at a company’s foreign subsidiary, it is called offshore insourcing. Insourcing makes trade statistics more complex to interpret, since part of the international flow of products and components is taking place between affiliated companies within the same multinational corporate system, which transcends national boundaries. One-third of multinational companies’ trade is accounted for by insourcing activities between the multinational parent company and its affiliates or among those affiliates (UNCTAD, 2002).

2.2 Outsourcing Dyer, Cho, and Chu (1998) have observed that Japanese companies make a distinction of outsourcing as to whether it is based on an arm’s length or a strategic partnership basis. In the 1970s, foreign competitors gradually caught up in a productivity race with U.S. companies. This coincided with U.S. corporate strategic emphasis shifting from manufacturing to finance and marketing. This strategic shift was based chiefly on a cost–benefit analysis that manufacturing functions could, and should, be transferred to independent operators and subcontractors, depending upon the cost differential between in-house and contractedout production. A company’s reliance on domestic suppliers for major components is basically a domestic purchase arrangement (i.e., onshore outsourcing). Furthermore, in order to lower production costs under competitive pressure, U.S. companies turned increasingly to outsourcing of components and finished products from abroad (i.e., offshore outsourcing), particularly from such countries as China, India, South

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Korea, Taiwan, Hong Kong, and Mexico. Initially, subsidiaries were set up for production purposes (i.e., offshore insourcing), but gradually, independent foreign suppliers took over component production for U.S. companies. This latter phenomenon is usually called offshore outsourcing (or offshore sourcing, for short). Although there are exceptions such as Philips and Sanofi-Aventis, many European firms have been relatively slow in adopting offshore outsourcing strategy. Outsourcing helps reduce fixed investment in in-house manufacturing facilities and thus lower the breakeven point, which subsequently helps boost an outsourcing company’s return on equity (ROE). Thus, if corporate executives’ performance is evaluated on the basis of their contribution to the company’s ROE, they tend to have a strong incentive to increase outsourcing. This financial logic appealed in particular to U.S. corporate executives who tend to be evaluated on relatively short-term results. Unlike their U.S. counterparts who historically managed all suppliers in an arm’s length fashion, Japanese companies managed their outsourcing activities based on the types of inputs sourced. Although many studies of supplier–assembler relationships in Japan implied that all suppliers are part of the keiretsu, this perception is inaccurate (Dyer et al., 1998). Japanese companies differentiate strategic suppliers (kankei kaisha) that fall into the keiretsu category from independent suppliers (dokuritsu kaisha) that do not. In utilizing both types of outsourcing, Japanese companies are able to achieve economies of scale using arm’s length transactions. At the same time, they also gain access to their suppliers’ capabilities for strategic inputs by using strategic partnerships for improved long-term performance (Dyer et al., 1998). Therefore, the performance implications of outsourcing strategy are multifaceted and require careful examination.

3 OUTSOURCING AND FIRM PERFORMANCE Outsourcing has become one of the buzzwords in managerial practice today. Similarly, it has received an increasing amount of academic attention (Domberger, 1998; Leiblein, Reuer, & Dalsace, 2002; Porter, 1997; Quinn, 1999). Yet, conflicting predictions have arisen over its

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performance implications with varying attention for its benefits and drawbacks. Practitioners are now beginning to doubt whether universally prescribing outsourcing is the right way to go (Doig, Ritter, Speckhals, & Woolson, 2001). Indeed, Gottfredson, Puryear, and Phillips (2005) found that about 50% of firms in their sample reported that their outsourcing programs fell short of expectations. Only 10% were highly satisfied with the cost savings, and 6% were highly satisfied with their offshore outsourcing overall. Similarly, Booz Allen Hamilton recently found that the success rate of outsourcing deals from the customer’s perspective was only 12% (Fortune, April 3, 2006). Likewise, some researchers have even suggested that outsourcing may not be directly related to performance (Leiblein et al., 2002). Thus, our thinking on outsourcing strategy and firm performance may have to be redefined. Watson, Zinkhan, and Pitt (2004) offer a useful theoretical framework for examining the performance implications of outsourcing strategy. When independent firms operate in a network, they face two kinds of costs (coordination costs and suboptimality costs) depending upon the level of their autonomy in the network. While their autonomous operations may lower coordination costs within a network (albeit maintaining their own respective capabilities), such autonomous operations may result in less than optimal performance for the network as a whole. On the other hand, while more coordinated operations by network firms may improve network performance, such coordinated operations may result in increased coordination costs. The outsourcing strategy literature offers arguments both for and against outsourcing strategy. In essence, those who argue in favor of outsourcing strategy base their argument on the benefit of reduced coordination costs as a result of increased autonomous operations by firms in a network. This argument is based primarily on short-term benefits. On the other hand, those who argue against outsourcing strategy derive their view primarily from increased coordination costs as a result of the network firms’ increased attempt to accomplish an optimal network performance. Their argument is based more on long-term benefits. Short-term vs. long-term views on outsourcing seem consistent with institutional perspectives on managerial innovations (Westphal, Gulati, & Shortell, 1997). Early adopters of outsourcing strategy indeed

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experienced efficiency gains as they were able to reduce fixed investment in in-house manufacturing facilities and boost their ROE. Later adopters may have bandwagoned on outsourcing to gain institutional legitimacy, or because of competitive pressures in the industry, despite some inherent uncertainties about the long-term costs and benefits of outsourcing strategy (Abrahamson & Rosenkopf, 1993). Naturally, some deviation from an optimal level of outsourcing is bound to occur and bandwagoning can provide one important explanation for it. We posit that the outsourcing-performance relationship inherently takes on an inverted-U shape, implying that there is an optimal degree of outsourcing for every individual firm and as a firm deviates further from its optimum, either by insourcing or outsourcing too much, its performance will suffer disproportionately. Based on this perspective, we first address these arguments and then combine them to develop a dynamic perspective of the performance implications of outsourcing strategy for firm performance. Note that our focus is not on any single outsourcing decision or transaction, but rather on the overall extent of outsourcing of a business unit, across all of the activities performed to meet customer demand.

3.1 The Case for Outsourcing Various arguments have been supplied to make the case for outsourcing. We briefly outline these arguments to explain why firms would want to outsource:

3.1.1 Strategic Focus/Reduction of Assets Through outsourcing activities, a firm can reduce its level of asset investment in manufacturing and related areas. Therefore, stock markets usually react favorably to outsourcing since more or less similar absolute profit levels can be obtained with lower fixed investments (Domberger, 1998). Furthermore, outsourcing can help the management of a firm redirect its attention to its core competencies, instead of having to possess and keep updated a wide range of competencies.

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3.1.2 Complementary Capabilities/Lower Production Costs External suppliers are often highly specialized in the production of components or products, allowing them to produce at lower costs than the outsourcing firm could due to scale economies. Therefore, a firm can improve production cost levels by outsourcing non-core activities (Hendry, 1995; Quinn, 1999). Firms are increasingly relying on thirdparty specialists to help with administrative matters, thus avoiding the high cost of new technology, and allowing their own human resources professionals to focus on transforming their human capital into a real strategic advantage (Corbett, 2006). Indeed, Everest Research Institute’s recent study found that human resources outsourcing arrangements increased by more than 40% in 2005 alone (Corbett, 2006).

3.1.3 Strategic Flexibility Global outsourcing may increase the firm’s strategic flexibility. By using outside sources, it is much easier to switch from one supplier to another (Harris, Giunipero, & Hult, 1998). If an external shock occurs, firms are better able to deal with it by simply increasing or decreasing the volumes obtained from an external supplier. If the same item were produced in-house (i.e., insourcing), there would not only be high restructuring costs, but also a much longer response time to external events.

3.1.4 Avoiding Bureaucratic Costs Rising production costs are associated with internal production (D’Aveni & Ravenscraft, 1994). More generally, there is a lack of a price mechanism and economic incentives inside a firm (Domberger, 1998). To the extent that such incentives are missing, firm efficiency will suffer as a consequence.

3.1.5 Relational Rent In recent years, many researchers have argued that certain relationships with external suppliers can deliver competitive advantage (e.g., Dyer &

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Singh, 1998). By outsourcing items and then building idiosyncratic and valuable relationships with suppliers, firms may be able to innovate, learn, and reduce transaction costs.

3.2 The Case Against Outsourcing Extant literature on outsourcing strategy has also highlighted the disadvantages of outsourcing strategy.

3.2.1 Interfaces/Economies of Scope Firms may benefit from internalizing production through scope economies (D’Aveni & Ravenscraft, 1994). Kotabe (1998) has suggested that manufacturing firms, in their outsourcing decisions, ought to reflect on the interfaces among R&D, manufacturing, and marketing. If there are important interfaces between activities, decoupling them into separate activities performed by separate suppliers will generate less than optimal results and potential integration problems.

3.2.2 Hollowing Out Firms that excessively outsource activities are hollowing out their competitive base (Kotabe, 1998). Once activities have been outsourced, it tends to become difficult to differentiate a firm’s products on the basis of these activities. Furthermore, a firm could lose bargaining power visà-vis its suppliers because the capabilities of the suppliers increase relative to those of the firm.

3.2.3 Opportunistic Behavior External suppliers may behave opportunistically (Williamson, 1985) as their incentive structure varies widely from that of the outsourcing firms. Opportunistic behavior allows a supplier to extract more rents from the relationship than it would normally do, for example by supplying a lower than agreed-on product quality or withholding information on changes in production costs.

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3.2.4 Rising Transaction and Coordination Costs Hendry (1995) has emphasized the issue of the high coordination costs incurred due to excessive outsourcing. Firms are limited in their capacity to work with external suppliers as partners, and therefore have to prioritize external partners. If they simultaneously invest time in and pay attention to all external suppliers, this would induce very high coordination costs indeed. Rottman and Lacity (2006) recently concluded that U.S. customers micromanage their offshore suppliers to a much greater degree than they manage their domestic suppliers. They found that transaction costs for offshore projects neared 50% of contract value, compared to 5% to 10% for domestically outsourced projects.

3.2.5 Limited Learning and Innovation A form of learning that is deemed especially important for attaining tacit knowledge is learning-by-doing. External suppliers will acquire tacit knowledge by performing the activity, but in this case the outsourcing firm cannot appropriate all benefits. Appropriation of innovations and rents is always a problem in buyer–supplier relationships (Nooteboom, 1999) because both parties will try to obtain as many private benefits as possible. Furthermore, it may become more difficult to innovate, given differing incentives and the subsequent lack of interfaces between firms.

3.2.6 Higher Procurement Costs Due to Fluctuating Currency Exchange Rates During the Asian financial crisis, many foreign firms operating in Asian countries learned an invaluable lesson on the negative impact of fluctuating currency exchange rates on their procurement costs and profitability. MNCs operating in Asian countries tend to procure certain crucial components and equipment from the parent companies and other suppliers using global outsourcing. When Asian currencies depreciated precipitously, these MNCs’ subsidiaries were faced with imported components and equipment whose prices had increased enormously in local (i.e., Asian) currencies. In other words, the more dispersed these MNCs’ assets, capabilities, and activities are due to global outsourcing,

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the more difficult it is for them to manage wild currency exchange rate fluctuations, and the higher the probability that they will suffer from increased procurement costs and lower profits (Kotabe, 2002).

3.3 A Dynamic Perspective Given the conflicting predictions on the performance impact of outsourcing, with some arguments in favor of outsourcing yet others against it, there is a need to synthesize the arguments. We approach this by evaluating the proposed consequences of each. Proponents of outsourcing argue that firms which procure almost all of their activities internally will be so far removed from the market that their efficiency tends to suffer. In other words, if almost no outsourcing is undertaken, there will be no benchmark available that would permit a firm to judge how efficient its own activities are relative to the market. If outsourcing is undertaken, such a beacon exists. The less outsourcing, the more inefficient firms tend to be. However, others have argued that insourcing has its merits. Put differently, outsourcing also seems to have negative effects on a range of performance indicators. Thus, there are reasons to argue for a negative relationship between outsourcing and performance. Opponents of outsourcing particularly warn of the long-term detrimental effects of excessive outsourcing. Firms that become hollow or virtual lack a solid basis for competing, and can neither innovate enough nor learn much. The disadvantages of outsourcing are at their worst when firms outsource (almost) everything. In general, one could argue that there is a feasible range of outsourcing strategies where firms can uphold reasonable performance. If, however, they implement either very high insourcing or very high outsourcing, their competitive position and performance will suffer deeply. Simply stated, too little outsourcing tends to result in internal bureaucratic and other non-market inefficiency, while too much outsourcing tends to result in external relational inefficiency and technological dependence. Moving toward a high level of insourcing (i.e., vertical integration) implies that firms could lose touch with the efficient production propagated by markets. They could face staggering production costs as

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some U.S. and British conglomerates discovered in the 1980s and 1990s before being dissolved. The reverse can be equally true. As has been argued by Chesbrough and Teece (1996), virtual is not always virtuous. This is a lesson many dot.com firms have learned over the past several years. Their extreme degree of outsourcing, coupled with a lack of internal capabilities has led to very high transaction costs, for example, in terms of having to obtain those capabilities externally through acquisitions in the stock market, or even losing touch with reality (Doig et al., 2001; Krugman, 2001). Combining these two perspectives, we expect an inverted-U shape relationship, since the extremes produce the worst possible outcomes, while there is some optimum in the middle (see Fig. 1). In other words, a firm has some overall optimal level of outsourcing that lies in between complete integration (i.e., insourcing) and complete outsourcing. This explains why firms never integrate all of their activities nor outsource them all. Also, one should note that we do not argue there is a universal single optimum. Rather, each firm will have its own optimal level, depending on factors at the country-, industry-, firm- and transaction-levels. Another justification for this proposed relationship is to consider a firm as a bundle of activities needed to satisfy customer demand. To the left of the optimum we find activities which should be best outsourced, because the costs of insourcing do not outweigh the benefits. This includes, at very low levels of outsourcing (i.e., near the left hand extreme of Fig. 1), activities that are simply procured in an arm’s length manner. For these activities it is very costly to make the wrong decision,

Firm profitability

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Degree of outsourcing

Figure 1. The Relationship Between the Degree of Outsourcing and Firm Profitability.

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to insource when outsourcing is much more appropriate. As we move towards the optimum, we find activities where it becomes progressively less clear that outsourcing is the best solution. These activities should still be outsourced, but will be outsourced through partnerships with external suppliers. This involves reciprocal sharing of knowledge with the supplier undertaking production of the activity. As we move beyond the optimum, on the right-hand side of Fig. 1, we will first find activities for which integration is the better choice, but not by a large margin. These will be produced by the firm itself but with inputs from suppliers and others (open innovation R&D activities could be an example). As we move closer to the right-hand extreme of Fig. 1, we find activities for which insourcing should be an increasingly obvious choice, and for which making the wrong choice (i.e., outsourcing instead of insourcing) is an increasingly costly mistake. Outsourcing of top management of a firm comes to mind as an example of this category.

3.4 Some Empirical Illustrations In a separate paper (Kotabe & Mol, 2005), we tested this hypothesized relationship empirically and find compelling evidence in favor of it. The test involves around 1100 manufacturing businesses operating in the Netherlands. We regressed their overall performance on their overall outsourcing level and a range of control variables, in line with the level of analysis proposed in this article, and take into account a time lag to counter problems of reverse causality. The tests also showed that the steepness of this curve is moderated by the level of uncertainty the business faces, which confirms the importance of the dimensions suggested by transaction cost economics. Other empirical research confirms that there is indeed a spread of activities similar to that suggested by the curve presented in Fig. 1. There are those activities that are almost always outsourced, and for which it matters more how outsourcing is organized. Poppo and Zenger (1998), for instance, investigate different types of supplier relations in IT outsourcing. There are activities which are closer to the optimal level and which can either be outsourced or integrated. The popular press regularly publishes stories on failed outsourcing attempts and management consultants have

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started to suggest there should be some balance in a firm’s outsourcing levels, arguing that “[f]arming out in-house operations has become a religion. Now it must be tempered by reason” (Doig et al., 2001, p. 25). Abrahamson (2004) discusses how Cisco outsourced, integrated, and again outsourced a particular project over a 2-year time span. Parmigiani (2007) discusses why firms would simultaneously make and buy the same good, reminiscent of earlier discussions of taper integration in the literature. And there is still a class of activities, which is probably shrinking as we will discuss in Section 4, that is never outsourced, and therefore not researched in any detail either. A prominent example would be the making of outsourcing decisions and the subsequent management of outsourcing. Firms keep these activities inhouse.

4 THE IMPACT OF E-COMMERCE This hypothesized relationship can be further extended to bring in the other empirical trends mentioned in the introduction, partnership relationships with suppliers and the rise of e-commerce. We use the term e-commerce broadly to refer to exchanges culminating in transactions between buyers and suppliers based on computer and information technology. Examples might include electronic (web-based) auctions, EDI, file-sharing protocols for product design, and perhaps even video conferencing. Technological change can alter the effectiveness of the make and/or buy options because it affects transaction and production costs and firm capabilities.2 New technology can for instance enable instant contact with a supplier or electronic information sharing between buyers and

2 We readily acknowledge that there are many other factors influencing optimal and actual outsourcing levels. These would include all kinds of other technologies than e-commerce, like transportation technology or managerial technology, as well as institutional factors. Institutional factors may include items like contract law, international trade regimes, intellectual property rights regimes, and economic liberalization. A full discussion of what causes changes in outsourcing levels over time clearly extends beyond the boundaries of this paper. So while we acknowledge these other factors, our focus will be on e-commerce alone.

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suppliers (Eng, 2004). These types of information sharing can facilitate coordination between various players in a supply chain and thus lower transaction costs. As Hamel (2000, p. 99) succinctly put it: “the fact remains that vertical integration, which was in the past a response to high transactions costs (which could be lowered by bringing key functions inside the corporate boundary), is becoming less critical in a world where real-time information allows for transparency and trust between business partners.” Hence e-commerce helps facilitate partnership relations with outside suppliers. There is a long-standing debate around the possible effects of information technology (IT) and e-commerce on outsourcing levels. First, it is argued that that IT reduces the transaction costs associated with operating in the market (e.g., Malone, Yates, & Benjamin, 1987). Furthermore, reduced communication costs as a result of IT even permit smaller suppliers to extend their geographical market boundaries (e.g., Downes & Mui, 1998). Because of these lower transaction costs, it is argued that markets become relatively more beneficial when compared to hierarchies. Hence, the increasing use of IT should lead to more outsourcing, and developments in IT indeed are a prime, if not the prime, driver of outsourcing. On the other hand, other authors countered this notion. Clemons, Reddi, and Rowe (1993) spoke of the move towards the middle, by which they implied the formation of networks and partnership relations rather than either markets or hierarchies. Because information becomes so much easier to spread to many actors simultaneously through electronic means, for example by copying multiple recipients into an e-mail, IT supports electronic networks. Holland and Lockett (1997) described the formation of such networks in more details by explaining how the introduction of EDI solidified existing cooperative relations rather than leading to more market-like conditions. These authors therefore believed that the introduction of information systems further promotes the formation of inter-firm networks of perhaps changing composition in which cooperative ties are formed between buyers and suppliers. The option of creating networks of suppliers, facilitated by e-commerce, makes outsourcing an even more interesting option. Regardless of the specific form that buyer-supplier relations takes on, whether it be arm’s length market-like relationships or cooperative network relations, there therefore appears to be broad agreement that

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the introduction of new information technology supports more outsourcing, or put more negatively, makes vertical integration a less attractive alternative, although IT can also lower the internal costs of communication substantially. This impact may differ according to the stages of the sourcing process. E-commerce is particularly effective in reducing the costs and increasing the effectiveness of search. Internet technology, for instance, can now be used to search for providers of offshore outsourcing services all over the globe. But the costs of evaluating these suppliers and their product and service offerings are harder to change through the use of e-commerce alone. Evaluation normally involves getting to know the other party in details, finding out about the other party’s history of relations with other buyers through personal connections, and establishing effective communications. Ecommerce now lends itself somewhat for these purposes, but virtual networks are and will remain at best an imperfect substitute for real networks. This is especially true in B2B transactions, where orders are normally specified. All things considered, e-commerce has a positive impact on the degree of global outsourcing as well as the sophistication with which such outsourcing takes place. This implies that the introduction of e-commerce has two parallel consequences. First, it raises the optimal level of outsourcing. The curve we portrayed in Fig. 1 shifts towards the righthand side as e-commerce is introduced into a supply chain. This confirms what so many observers have suggested: firms not only are outsourcing much more than in the past, say 20 years ago, but they can actually profitably do so. At the same time, e-commerce does not fundamentally alter the relationship between outsourcing and performance. That is, there are still very real limits to how much a firm should outsource and deviations from the optimum continue to be costly. Even in a world full of e-commerce, firms need to keep performing some activities in-house to maintain effective and differentiated in the eyes of their customers. Second, as e-commerce gets introduced, and outsourcing levels go up, firms will increasingly engage in partnership relationships with suppliers. E-commerce enables the transfer of relatively more complex and madeto-order components and services to remote external suppliers. As firms outsource more activities, they also enter that range of more complex and made-to-order components and services, after having already outsourced

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their simple and off-the-shelf components and services at some point in the past. This is an indirect effect of outsourcing, and it implies that e-commerce creates more challenges in terms of managing supplier relations and supplier networks. In other words, there is a clear link between the introduction of e-commerce, increases in outsourcing, and more partnership relations and supplier networks. There is also a link to subsequent increases and decreases in firm performance, based on how well firms adapt to these changed circumstances.

5 CONCLUSIONS AND MANAGERIAL IMPLICATIONS We have presented a novel perspective on outsourcing and firm performance, arguing there is an inverted-U shape. Although this is based on the age-old notion that “too much of a good thing may be a bad thing”, or what is known as diminishing returns in economics, it provides newness in applying that principle to the study of outsourcing, and in detailing the advantages and disadvantages of outsourcing that help produce such a curve. It also helps us understand in a more systematic way how it is that e-commerce produces higher optimal, and actual, levels of outsourcing. Based on our discussion, managers should rethink and redesign their global outsourcing activities. Many managers have a strong general sense for what constitutes a sound outsourcing policy. They realize that outsourcing every activity may lead to disasters, just as much as they recognize that not all activities should be insourced. However, we suggest the above can improve managerial decision-making in various respects. There is currently a tendency in practice to describe (performance) problems related to outsourcing as “implementation issues.” Managers often assume that outsourcing is the proper design choice, so they attribute the unsatisfactory performance to implementation problems in that suppliers are not well equipped, insufficient guarantees are built into contracts, or market circumstances change rapidly. We suggest that there are much more fundamental objections against outsourcing that have nothing to do with implementation problems. Rather, there are limits to outsourcing and many inputs of a firm should not be outsourced. Our

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work confirms managerial intuitions that there is an optimal level. Thus, we help lower the uncertainty surrounding managerial decision-making on outsourcing and also improve its quality. Managers are often not conscious of the fact that there is an optimal degree of outsourcing for their entire portfolio. Instead of using this portfolio level, they tend to see the good or the evil of outsourcing or insourcing particular items or activities in that “[o]utsourcing is more than a bidding process. Companies don’t do enough analysis before they jump into it” (Fortune, April 3, 2006, p.S4). This helps explain why in practice outsourcing often looks like a bandwagoning process. Likewise, many academic approaches have centered on analyzing single make-or-buy decisions. To some extent this is appropriate, since outsourcing decisions are made on an irregular basis. However, the performance advantages of outsourcing will only materialize when a firm has the organizational capacity to integrate outsourced items/activities into its operations. Furthermore, many companies make outsourcing decisions by evaluating only a few options on the basis of their previous experience and by what their competitors are doing (Farrell, 2006). For example, in June 2006, Apple Computer pulled the plug on a call center in India due to the high cost of operating there (Kripalani & Burrows, 2006), although many managers still perceive India as a low-cost location for call centers. Managers are in need of guidelines as to where the optimal point lies for their particular business at a particular time. Based on the extant literature and our current research, we can suggest several indicators to help answer that question including asset specificity, uncertainty, firm competences, industry trends, and firm nationality and location. These factors will help determine what is optimal for a particular firm at a particular time. Timing is crucial, as the optimal point will change due to changes inside and outside the firm. In this article, we examined one particular type of change, the introduction of e-commerce. E-commerce increases optimal outsourcing levels, and managers ought to be cognizant of this. As new e-commerce opportunities arise in their environment, the pressure to outsource more activities will mount. What would really be useful from a managerial perspective is a model that helps determine what the optimal degree of outsourcing is for a firm. Upon determining that, managers could prioritize their set of activities and outsource until they more or less reach optimality. Such a

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model provides the next challenge for the academic community. As outsourcing strategy is a dynamic process, competing firms may not accurately grasp the full benefit (and cost) of outsourcing activities due to causal ambiguity. Simply band-wagoning on the first-mover’s current outsourcing strategy offers no guarantee for improved performance. We suggest that tackling that challenge involves a broader behavioral understanding of how outsourcing trajectories of firms change over time and within industries.

REFERENCES Abrahamson, E. (2004). Change without pain: How managers can overcome initiative overload, organizational chaos, and employee burnout Boston: Harvard Business School Press. Abrahamson, E., & Rosenkopf, L. (1993). Institutional and competitive bandwagons: Using mathematical modeling as a tool to explore innovation diffusion. Academy of Management Review, 18(3), 487–517. Applegate, L. M., & Collins, E. L. (2005, June). Covisint (A): The evolution of a B2B marketplace. Harvard Business School Case, 1, 1–29. Chesbrough, H.W., & Teece, D. J. (1996). When is virtual virtuous? Organizing for innovation. Harvard Business Review, 74(1), 65–72. Clemons, E., Reddi, S. P., & Rowe, M. C. (1993). The impact of information technology on the organisation of economic activities: The “move to the middle” hypothesis. Journal of Management Information Systems, 10(2), 9–33. Corbett, M. (2006, August). Solving the puzzle: Third-party specialists are helping globetrotting companies put the right people in the right places. Fortune, 7, 58. D’Aveni, R. A., & Ravenscraft, D. J. (1994). Economies of integration versus bureaucracy costs: Does vertical integration improve performance? Academy of Management Journal, 37(5), 1167–1206. Doig, S. J., Ritter, R. C., Speckhals, K., & Woolson, D. (2001). Has outsourcing gone too far? McKinsey Quarterly, 26(4), 26–37. Domberger, S. (1998). The contracting organization: A strategic guide to outsourcing Oxford: Oxford University Press. Downes, L., & Mui, C. (1998). Unleashing the killer app: Digital strategies for market dominance Boston: Harvard Business School Press. Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23(4), 660–679. Dyer, J. H., Cho, D. S., & Chu, W. (1998). Strategic supplier segmentation: The next “best practice” in supply chain management. California Management Review, 40(2), 57–77.

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Eng, T. Y. (2004). The role of e-marketplaces in supply chain management. Industrial Marketing Management, 33 (February), 97–105. Farrell, D. (2006, June). Smarter offshoring. Harvard Business Review, 85–92. Fortune (2006, April 3). The global outsourcing 100 (pp. S2–S17). Gottfredson, M., Puryear, R., & Phillips, S. (2005, February). Strategic sourcing—From periphery to the core. Harvard Business Review, 132–139. Hamel, G. (2000). Leading the revolution Boston: Harvard Business School Press. Harris, A., Giunipero, L. C., & Hult, G. T. M. (1998, September). Impact of organizational and contract flexibility on outsourcing contracts. Industrial Marketing Management, 7, 373–384. Hendry, J. (1995). Culture, community and networks: The hidden cost of outsourcing. European Management Journal, 13(2), 218–229. Holland, C. P., & Lockett, A. G. (1997). Mixed mode network structures: The strategic use of electronic communication by organizations. Organization Science, 8(5), 475–488. Kotabe, M. (1998). Efficiency vs. effectiveness orientation of global sourcing strategy: A comparison of U.S. and Japanese multinational companies. Academy of Management Executive, 12(4), 107–119. Kotabe, M. (2002). To kill two birds with one stone: Revisiting the integration responsiveness framework. In M. Hitt & J. Cheng (Eds.), Managing transnational firms (pp. 59–69). New York: Elsevier. Kotabe, M., & Mol, M. J. (2005). Outsourcing and firm profitability: A negative curvilinear effect. London: London Business School working paper. Kotabe, M., & Murray, J. Y. (2004). Global sourcing strategy and sustainable competitive advantage. Industrial Marketing Management, 33(1), 7–14. Kotabe, M., & Swan, K. S. (1994). Offshore sourcing: Reaction, maturation, and consolidation of U.S. multinationals. Journal of International Business Studies, 25(1), 115–140. Kripalani, M., & Burrows, P. (2006, June). India: Why Apple walked away. BusinessWeek, 19, 48. Krugman, P. (2001, April). Reckonings: Chip of fools: New York Times. Leiblein, M. J., Reuer, J. J., & Dalsace, F. (2002). Do make or buy decisions matter? The influence of organizational governance on technological performance. Strategic Management Journal, 23(9), 817–833. Levy, D. L. (2005). Offshoring in the new global political economy. Journal of Management Studies, 42(3), 687–693. Malone, T. W., Yates, J., & Benjamin, R. I. (1987). Electronic markets and electronic hierarchies. Communications of the ACM, 30(6), 484–497. Mol, M. J., van Tulder, R. J. M., & Beije, P. R. (2005). Antecedents and performance consequences of international outsourcing. International Business Review, 14(5), 599–617. Murray, J. Y., Kotabe, M., & Wildt, A. R. (1995). Strategic and financial performance implications of global sourcing strategy: A contingency analysis. Journal of International Business Studies, 26(1), 181–202. Nooteboom, B. (1999). Inter-firm alliances: Analysis and design London: Routledge.

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Parmigiani, A. (2007). Why do firms both make and buy? An investigation of concurrent sourcing. Strategic Management Journal, 28(3), 285–311. Poppo, L., & Zenger, T. (1998). Testing alternative theories of the firm: Transaction cost, knowledge-based, and measurement explanations for make-or-buy decisions in information services. Strategic Management Journal, 19(9), 853–877. Porter, M. E. (1997). On Competition Boston, MA: Harvard Business School Press. Quinn, J. B. (1999). Strategic outsourcing: Leveraging knowledge capabilities. Sloan Management Review, 40(3), 9–21. Rottman, J. W., & Lacity, M. C. (2006). Proven practices for effectively offshoring IT work. Sloan Management Review, 47(3), 56–63. Van der Valk, W., & Wynstra, F. (2005). Supplier involvement in new product development in the food industry. Industrial Marketing Management, 34(7), 681–694. Watson, R. T., Zinkhan, G. M., & Pitt, L. F. (2004). Object-orientation: A tool for enterprise design. California Management Review, 46(Summer), 89–110. Westphal, J.D., Gulati, R., & Shortell, S.M. (1997). Customization or conformity? An institutional and network perspective on the content and consequences of TQM adoption. Administrative Science Quarterly, 42(June), 366–394. Williamson, O. E. (1985). The economic institutions of capitalism New York: Free Press. United Nations Conference on Trade and Invesment (2002). World Investment Report 2002: Geneva.

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Chapter 4.4

Strategic Alliance-Based Sourcing and Market Performance Evidence from Foreign Firms Operating in China Janet Y. Murray, Masaaki Kotabe, and Joe Nan Zhou

INTRODUCTION One of the most important trends in industrial buying behavior is the radical change in buying attitudes and behavior among business customers. Many firms are consolidating their supplier base and developing strategic alliances with key suppliers to achieve strategic goals that range from cost and risk reduction to new skills or knowledge acquisition. Thorelli (1986) defined strategic alliances as interorganizational governance structures that exist between markets and hierarchies. Alliances are expected to create more value than “go-it-alone” approaches, especially when the capabilities of the partners are combined in such a way that the competitive advantage of either the alliance or one or more of the partners is improved (Borys and Jemison, 1989). Thus, alliances provide access to complementary assets without requiring the investment or long-term commitment to those assets as in acquisitions (Ireland and Hitt, 1999).

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Despite the seeming popularity of utilizing strategic alliance-based sourcing (SA sourcing hereafter) among firms, alliances were reported to have failure rates as high as 70%, with many not achieving the intended outcomes (Das and Teng, 2000). Even more puzzling is the fact that if SA sourcing were significantly related to higher firm performance, then one should question why all firms would not elect to use such structures to improve their performance (Ahuja, 2000). The inconsistent view of the performance implications of SA sourcing suggests that its relationship with performance is made more complex by the existence of some key moderating factors than has been theoretically argued and empirically tested before (Kotabe, 1992; Murray et al., 1995). This may be due to a lack of direct effect of SA sourcing on performance; instead, firm or environmental factors may moderate the sourcing–performance relationship. Indeed, because the effects of SA sourcing on firm performance remain debatable, researchers have cautioned the universal applicability of supplier alliances for all firms (Ramsay, 1996; McCutcheon and Stuart, 2000). Our present study promises to contribute to the sourcing literature both empirically and theoretically by addressing these moderating conditions, using resource complementarity and resource dependence theory. First, although the importance of resource complementarity has been generally stressed in the strategic alliance literature (Harrison et al., 1991, 2001; Ireland and Hitt, 1999), the benefits of resource complementarity in sourcing in particular have received scant attention empirically. Product innovativeness and product differentiation are the key resources that provide sustainable competitive advantage to a firm’s product. We believe that we could advance the sourcing literature by examining how SA sourcing influences a sourcing firm’s market performance, given a certain level of the firm’s key resources. Second, resource dependence theory views strategic alliances as a strategic response to conditions of uncertainty (Pfeffer and Salancik, 1978). Firms often form alliances because no alternatives for uncertainty reduction are available (Young-Ybarra and Wiersema, 1999); hence, it is necessary to examine the role of environmental uncertainty on the SA sourcing–performance relationship. Furthermore, the mixed results of the effects of strategic alliances on performance may arise from an overly

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broad conceptualization of environmental uncertainty. Song and Montoya-Weiss (2001, 61) have suggested that “uncertainty should be studied in relation to specific components of the environment in order to properly attribute its effects.” There are no prior studies, to our knowledge, that have systematically examined the moderating effects of different dimensions of environmental uncertainty on the relationship between SA sourcing and market performance. In our study, we examine two types of uncertainty: technological and demand uncertainty. By examining different dimensions of environmental uncertainty, our study promises to contribute to the literature by providing a means to resolve the inconsistent findings in previous research. Third, the inconsistent results may be due to how the relationships have been examined. In developing hypotheses investigating contingency relationships, Schoonhoven (1981) cautioned that contingency arguments assume symmetrical effects. The symmetrical property of contingency arguments suggests a nonmonotonic effect of SA sourcing on performance over the range of the moderator variables, instead of the usual assumption of a unidirectional effect (i.e., either a positive or a negative moderating effect). In other words, a moderator variable may exert both a positive and negative effect on the sourcing–performance relationship, depending upon the value of the moderator variable. To better capture the sourcing–performance relationships, we use a set of three hypotheses for each of the moderator variables to reflect its nonmonotonic effect, instead of developing only one hypothesis for each of the moderator variables, as it was generally done in the past. Fourth, extant research in sourcing in general (e.g., Kotabe, 1992; Murray et al., 1995) and in SA sourcing in particular (Dyer et al., 1998) tends to focus on firms in developed nations, its applicability to transitional economies remains unclear and thus represents a significant research gap. Researchers (e.g., Peng and Luo, 2000; Lukas et al., 2001; Luo, 2003) have voiced the same concern that the applicability of many paradigms has been almost exclusively studied in Western economies. As a result, we could not be sure of these paradigms’ universal applicability, which consequently limits theory building. Extant research on strategy has stressed that transitional economies such as China pose severe resource, management and other challenges; hence, previous research has argued that the use of strategic alliances may provide an avenue for

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firms to be successful in a transitional economy (e.g., Peng and Heath, 1996). To the best of our knowledge, no studies have directly examined the sourcing–performance relationships for foreign multinational firms operating in China, even though many of them consider China as an important production and marketing location, as evidenced in the magnitude of the foreign direct investment made in China. Hence, China provides a highly important setting for examining sourcing strategy–performance relationships. Through these contributions, we hope that we can improve our understanding of the sourcing– performance relationships in a critical setting like China, and subsequently help build a theory in sourcing.

THE SCOPE OF THE STUDY The subjects of our study are foreign multinational firms with final assembly activities in mainland China. Before these firms perform the final assembly of a product in China, they have to make sourcing decisions on the activities in the value chain, which include the design, manufacturing, marketing, and supporting activities (Porter, 1985). Many firms increasingly perform only certain activities in the value chain, and source components and parts or the final product from suppliers before they market the product to their customers. Therefore, we focus on SA sourcing of components at the product level. The types of buyer–supplier relationships have been defined in different ways in the sourcing literature. First, in delineating sourcing strategies, researchers have highlighted the necessity of distinguishing between the types of components involved due to their strategic implications. Kraljic (1983) classified a whole spectrum of purchased items as strategic (high profit impact, high supply risk), bottleneck (low profit impact, high supply risk), leverage (high profit impact, low supply risk), and noncritical (low profit impact, low supply risk). Later on, following the transaction cost economics, researchers have placed greater emphasis on “make-or-buy” decisions on proprietary components for their strategic importance. Focusing on proprietary components, researchers in global sourcing strategy (Kotabe, 1992; Murray et al., 1995; Murray and Kotabe, 1999) have classified the relationships as internal sourcing (i.e.,

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intrafirm transactions) and external sourcing (i.e., interfirm transactions on an arm’s-length basis). Second, researchers have examined the nature of sourcing relationships. Burt et al. (2003), for example, have depicted the sourcing relationships as transactional, collaborative, and alliance, with the presence of institutional trust representing the fundamental difference between collaborative relationships and supply alliances. Lambert et al. (1997) have categorized suppliers as primary and secondary, with the primary supplier defined as the supplier from which the majority of the product purchases were made. Ellram and Cooper (1993) have made a distinction between supply chain management and keiretsu. They have asserted that while there are many similarities between supply chain management and keiretsu, many fundamental differences exist in the level of control, participation, commitment, dependence, trust, and strategic coordination. Finally, Dyer et al. (1998) have classified the relationships as arm’s length and partner. In our study, we define SA sourcing as the sourcing of proprietary components from suppliers who have more than an arm’s-length relationship with the sourcing firm, but who are less than 100% owned by the sourcing firm (Terpstra and Simonin, 1993), representing the intermediate mode that lies between market and hierarchy. Indeed, researchers reported that many firms increasingly develop supplier linkages that fall somewhere between markets and hierarchies (Achrol and Stern, 1988; McCutcheon and Stuart, 2000). Since noncritical (often referred to as standardized) components are off-the-shelf components that are widely available, there is no reason to expect that SA sourcing of standardized components will have any significant effect on market performance (Kotabe, 1992). In fact, Dyer et al. (1998) found that noncritical components are best sourced from independent suppliers. Therefore, our study focuses on SA sourcing of proprietary components. Proprietary (we will use the term “major” from this point onwards, as it was best understood and interpreted by respondents in the data collection stage) components refer to those customized and crucial components that are technical in nature and affect the product performance of the product (c.f., Kraljic, 1983; Dyer et al., 1998), while noncritical are off-the-shelf components that do not differentiate a firm’s product from those marketed by its competitors (c.f., Kotabe, 1992).

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THEORETICAL DEVELOPMENT Our model combines the theoretical perspectives of resource complementarity (Harrison et al., 1991) and resource dependence theory (Pfeffer and Salancik, 1978). The logic of resource complementarity perspective explains the importance of sourcing from alliance suppliers as an opportunity to capitalize on the strengths of a firm’s suppliers, while resource dependence theory stresses the importance of alleviating threats in a transitional economy by managing uncertainties. These two perspectives are complementary, because firms should capitalize on opportunities and reduce threats, and both theories focus on how resource deployment affects operational outcomes.

Resource Complementarity Wernerfelt (1984) has stressed that firms should be viewed as bundles of resources. Firm resources that are costly to copy are sources of economic rents and are the fundamental drivers of performance and competitive advantage. Increasingly, firms form strategic alliances to get access to complementary resources, since “it is difficult for a single firm to possess all resources needed to develop and sustain current competitive advantages while trying simultaneously to build new ones” (Harrison et al., 2001: 680). Resource complementarity creates mutual interdependency and “facilitates the formation, development and collaborative effectiveness” of alliances (Parkhe, 1991: 580). Furthermore, getting access to complementary resources through market mechanisms is not always feasible (Chung et al., 2000). While both acquisitions and strategic alliances can be used to attract needed resources, alliances may be preferred due to their strategic flexibility and risk reduction potential (Hitt et al., 1998), and lower investment and commitment than acquisitions (Ireland and Hitt, 1999). Similarly, Eisenhardt and Schoonhoven (1996) have argued that firms that are in vulnerable strategic positions (i.e., new markets, many competitors, and pioneering technology) often acquire resources by forming alliances. Strategic alliances between a firm and its suppliers are formed to maximize firm value through gaining access to other firms’ valuable resources (Das and Teng, 2000).

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Resource Dependence Theory Resource dependence theory focuses on the effects of environmental factors as to how firms should organize in order to compete in the marketplace. The theory recommends that a firm should reduce its dependence on other firms for critical resources, and adjust its boundaries to manage environmental uncertainties (Pfeffer and Salancik, 1978). It explains not only why firms adopt SA sourcing for major components, but also why such a strategy’s effect on product performance may be contingent on the environment and other factors. Resource dependence theory has two tenets. First, firms are constrained by, and depend on, other organizations that control critical resources for them. Second, firms attempt to manage uncertainty in order to increase their performance (Greening and Gray, 1994). Resource dependence theorists have suggested that managers make strategic choices within constraints (Pfeffer and Salancik, 1978; Hrebeniak and Joyce, 1985). Although managers do not have unbridled strategic choice, they do have discretion over how to structure organizational relationships to manage uncertainties (Oliver, 1990). Hence, resource dependence theory has two major implications regarding SA sourcing. First, the use of SA sourcing is a mechanism to manage environmental uncertainties. Second, in response to different levels of uncertainties, differences in the use of SA sourcing should affect a firm’s performance.

Integrating the Two Perspectives Harrison et al. (2001) have asserted that strategic alliances provide synergistic benefits from resource combinations when based on complementarity, while resource dependence theory has suggested that firms depend on strategic alliance partners as a provider of resources to manage environmental uncertainties (Pfeffer and Salancik, 1978). In reality, strategic alliance partners help firms by both providing complementary resources and managing environmental uncertainties, and, theoretically, both are related to firm performance. In combining these two theoretical perspectives, we argue that sourcing from alliance suppliers would help firms obtain complementary resources and manage

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uncertainties. These two theoretical perspectives explain not only why firms adopt SA sourcing, but also why the effect of SA sourcing on performance may be contingent on product- and uncertainty-related factors. In the literature, resources have been categorized on the basis of barriers to duplication, with intangible assets that include a firm’s intellectual property, corporate reputation, and brand equity (Hall, 1992; Luo, 2000, 2002). In our study, product innovativeness and product differentiation were used to represent a firm’s resources. Barney and Zajac (1994) have criticized that while studies contain many generalizations about the merits of some resources, they often fail to consider the contexts within which these resources might be of value to an organization. To complement the importance of resource complementarity, this study also included environmental uncertainty variables in investigating the relationship between SA sourcing and performance. To accommodate the multidimensional characteristics of uncertainty, we examined both demand and technological uncertainties.

CONCEPTUAL MODEL AND HYPOTHESES Anecdotal discussions often suggest that there is a main effect of SA sourcing on performance. We test whether such a main effect exists through the first hypothesis. We also examine whether the moderator variables (product innovativeness, product differentiation, technological uncertainty, and demand uncertainty) affect the sourcing–performance relationship. The unit of analysis for this study is at the product level.

Relationship Between SA Sourcing and Market Performance SA sourcing, as once mainly adopted by Japanese firms, has helped them achieve a competitive advantage over their American competitors for the reasons that range from suppliers’ greater investment on specific assets to the development of major components and sub-assemblies to reap the advantages of hierarchy without its associated disadvantages (Dyer, 1996a, b). Since alliance partners stand to develop idiosyncratic

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interaction routines that allow them to collaborate more effectively in a continued relationship (Levinthal and Fichman, 1988), they are able to achieve their respective or mutual goals and receive the expected benefits. Similarly, other researchers have stressed that alliances allow firms to engage in quicker market entry, product innovation, and technology enhancement (Hamel and Prahalad, 1985). Thus, we would expect SA of major components to have a positive effect on performance because of the above-mentioned advantages. H1: SA sourcing of major components by the sourcing firm is positively related to its market performance.

Moderator Variables Despite the frequent announcements of SA sourcing used by firms, the discussions on performance implications are mostly anecdotal and sometimes with conflicting results. This might be due to a lack of direct effect of SA sourcing on market performance. Instead, the impact is contingent on certain factors. In developing hypotheses investigating contingency relationships, Schoonhoven (1981) cautioned that contingency arguments assume symmetrical effects. The symmetrical property of contingency arguments suggests a nonmonotonic effect of SA sourcing on performance over the range of the moderator variables, instead of the usual assumption of a constant effect. Thus, three hypotheses rather than one should be developed for each of the moderator variables. The following are the discussions on the moderator variables and the associated hypotheses.

Product Innovativeness Business success largely depends on innovations that enable firms to deliver more value to customers than do their competitors (Hunt and Duhan, 2002). In our study, product innovativeness is defined as the composite level of product and process innovations embodied in the product. Product- and process-innovative activities contribute to the overall product innovativeness such that continual improvements

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in manufacturing processes help the firm not only maintain product innovation-based competitiveness, but also improve its product innovative abilities in the future (Imai, 1986). Increasingly, “technological convergence” expands the scope of technical expertise necessary for technological innovation (Hagedoorn, 1993). Currently, most innovations involve combining components that draw from different knowledge bases (Dodgson, 1992). Therefore, the fundamental challenge that firms face in commercializing innovations is developing the multiple competencies required (Singh, 1997). Unfortunately, most firms possess limited capabilities to develop the various components related to the innovations or to rapidly learn and implement competencies and routine. Furthermore, innovations often are made up of dissimilar knowledge bases that are best maintained in separate organizations (Langlois, 1992). Researchers in strategic management have stressed that a firm is best described as a collection of sticky and difficult-to-imitate resources and capabilities which include product designs, production techniques, knowledge, or idiosyncratic “routine” (Mowery et al., 1998). Hagedoorn (1993) asserts that firms primarily establish technology-related alliances to access competencies and resources. This is because innovative technology rarely works initially, and it often takes a long time for the innovation to become viable (Dosi, 1988). Resource complementarities in terms of product innovativeness of the individual firms are of paramount importance to innovation success when alliances are the chosen mode (Harrison et al., 2001; King et al., 2003). Monczka and Trent (1997) reported that US firms rely increasingly on supplier design and technical capabilities to support new product design and development. These firms are able to take advantage of the technical expertise and resources of suppliers who have years of experience, thus lowering the number of quality problems (Burt, 1989). Many alliances are formed due to an increased pace of technological development and the need to share research and development costs. Similarly, Ragatz et al. (2002) found that, for firms that use the knowledge and expertise of suppliers to complement internal capabilities, the alliances help reduce concept-to-customer cycle time, costs, and quality problems. We expect product innovativeness to moderate the relationship between SA sourcing of major components and performance.

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When its product innovativeness is low, the sourcing firm that takes advantage of SA sourcing of major components to gain access to alliance suppliers’ innovative capabilities tends to enjoy higher performance. However, when its product is highly innovative, it is not as imperative or necessary for the sourcing firm to rely on its alliance suppliers for sourcing major components. In fact, one may argue that SA sourcing of major components could even have a negative impact on the sourcing firm’s market performance. This is due to the fact that alliance suppliers may gain access to the knowledge contained in the sourcing firm’s innovative product when allowed to manufacture major components contained therein for the firm. Thus, H2: The impact of SA sourcing of major components by the sourcing firm on its market performance is nonmonotonic over the range of product innovativeness. H2a: When product innovativeness is low, increases in SA sourcing of major components by the sourcing firm tends to positively influence its market performance. H2b: When product innovativeness is high, increases in SA sourcing of major components by the sourcing firm tends to negatively influence its market performance.

Product Differentiation According to Porter (1980), one of the generic firm strategies is differentiation, which involves a firm creating higher value than its competitors based on various elements; for example: brand image, product positioning, customer service, differentiated components in a product, etc. Despite its macro-environmental challenges, China has created lucrative sales and market potential, and has become an attractive target for global revenue opportunities (Carter, 1996). Recent empirical evidence indicates that Chinese organizational buyers hold products made by firms from the US and other Western countries in great favor (Kaynak and Kucukemiroglu, 1992). Generally, consumers in developing nations perceive developed foreign country-made products

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to be of superior quality over domestically made products and are willing to pay a price premium. From foreign firms’ perspective, it may be to their advantage in adopting a differentiation strategy in an emerging nation like China since few local competitors have established brands or other means of differentiation. Since a product consists of a bundle of attributes reflected in the components that make up a product, firms often use major components inside a product for differentiation purposes. For example: To enhance the image of a new vehicle, Sorento, Kia relied on brand-name suppliers for high-profile components (McBride, 2003). As major components are the main product elements that influence product differentiation, we would expect the sourcing firms to use SA sourcing for major components in a complementary manner, especially at a low level of product differentiation. Indeed, Dyer et al. (1998) have found that Japanese auto manufacturers relied on alliance suppliers to source strategic inputs as a source of product differentiation. When product differentiation is low, the sourcing firm can gain advantage by upgrading its product through sourcing major components from alliance suppliers. However, when product differentiation is already high without additional major components, if the sourcing firm relies on alliance suppliers to provide differentiation-enhancing major components, the firm may compromise its control over production and may lead to the erosion of its competitive advantage in possessing a differentiated product (Barney, 1997). Empirically, previous studies (Anderson and Coughlan, 1987) found that a higher control mode was used with a higher level of product differentiation. Therefore, it is hypothesized that: H3: The impact of SA sourcing of major components by the sourcing firm on its market performance is nonmonotonic over the range of product differentiation. H3a: When product differentiation is low, increases in SA sourcing of major components by the sourcing firm tend to positively influence its market performance. H3b: When product differentiation is high, increases in SA sourcing of major components by the sourcing firm tend to negatively influence its market performance.

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Uncertainty No one firm is self-sufficient in terms of the resources needed; therefore, firms are compelled to enter into exchange relations with other organizations in their environment. Resource dependence theorists have suggested that managers make strategic choices within constraints (Pfeffer and Salancik, 1978; Hrebeniak and Joyce, 1985), but they have discretion over how to structure organizational relationships to manage uncertainties (Oliver, 1990). Galbraith (1973, 5) defined uncertainty as “the difference between the amount of information required to perform the task and the amount of information already possessed by the organization.” In order to survive, firms must cope with uncertainty effectively (Pfeffer and Salancik, 1978). Many researchers consider uncertainty to be an important factor affecting major strategic decisions, such as the decision to vertically integrate (Williamson, 1975; Porter, 1980). However, empirical results from studies investigating the effects of uncertainty on vertical integration contradict one another (Sutcliffe and Zaheer, 1998). Empirical findings regarding the effect of environmental uncertainty on the degree of vertical integration range from a positive (e.g., Anderson, 1985) to a negative relationship (e.g., Eisenhardt and Schoonhoven, 1996; Hitt et al., 1998). The contradictory findings of the effect of uncertainty on the structure of an organization may be due to the different types of uncertainty faced by firms. Indeed, researchers (e.g., Sutcliffe and Zaheer, 1998) have stressed that uncertainty is a complex construct in that it may come from different sources, and different types of uncertainty may have different implications on strategy development. To better capture the effects of uncertainty on the sourcing–performance relationship, it is necessary to investigate different types of uncertainty separately. We examined two types of uncertainty: technological uncertainty and demand uncertainty, and we hypothesize that the two types of uncertainty may have different effects on the sourcing–performance relationship.

Technological Uncertainty is defined as the “uncertainty arising from changes in technology due to new inventions or discoveries” (Sutcliffe and Zaheer, 1998: 3). Thus, it

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is due to a lack of knowledge about the state of the technological advance. Previous studies examining how technological uncertainty affects the outcomes of supplier involvement is fragmented and confusing (Ragatz et al., 2002). Today, most goods contain components that incorporate wholly distinct and specialized technologies, and most services combine specialized skills (Gomes-Casseres, 1994). Increased uncertainty arising from competing technologies has contributed to a drastic increase in alliances. Mowery et al. (1996) assert that the use of alliances is effective in sourcing technological capabilities, and it has a positive effect on performance under technological uncertainty. This is because the commercial viability of a new technology is often unclear, and technological standards sometimes are set for political or social reasons, and not based on superior technology (David, 1985). Therefore, it is imperative to obtain legitimacy for pioneering technology, and alliances can assist firms gain this legitimacy by tying partner firms and their resources to the technology (Eisenhardt and Schoonhoven, 1996). However, due to the complex nature of technological uncertainty when compared to demand uncertainty, managers face situations that are more unclear, and that present fewer well-developed alternatives and fewer clear evaluation criteria by which to select alternatives (Li and Simerly, 1998). Thus, at high levels of technological uncertainty, it is increasingly difficult for firms to evaluate appropriate alliance suppliers, thus potentially contributing to lower levels of performance. When technological uncertainty is high and alliance suppliers are used, project outcomes might be diminished, due to the unexpected complexity related with this condition (Ragatz et al., 2002). However, this might not be the case at lower levels of technological uncertainty. Eisenhardt and Tabrizi (1995) found that the use of supplier involvement was effective in accelerating development time, only when the product involved was mature and with lower levels of technological uncertainty. In a stable technological environment (i.e., at low levels of technological uncertainty), the firm is able to obtain information regarding the direction of the technological advances. Hence, it is able to partner with appropriate alliance suppliers who have the technological know-how. At low levels of technological uncertainty, the firm can capitalize on the technological know-how of alliance suppliers without risking whether the technology involved would fail in the marketplace. Furthermore, the

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firm may even enjoy lower costs of sourcing and hence better performance if such a stable technological environment leads to overcapacity in China.1 Indeed, Ragatz et al. (2002) found that in cases when suppliers were providing technology in a stable technological environment, suppliers tended to be in tight-knit alliances with sourcing firms. Since the technological uncertainty of the product is reflected in major components, one would expect technological uncertainty to moderate the relationship of SA sourcing of major components and market performance. Hence: H4: The impact of SA sourcing of major components by the sourcing firm on its market performance is nonmonotonic over the range of technological uncertainty. H4a: When technological uncertainty is low, increases in SA sourcing of major components by the sourcing firm will positively influence its market performance. H4b: When technological uncertainty is high, increases in SA sourcing of major components by the sourcing firm will negatively influence its market performance.

Demand Uncertainty Scholars in China-related studies assert that the industry structure in transitional economies, such as China, is highly uncertain and dynamic. The uncertainty mainly arises from the transformational nature of national economies and the experimental nature of an array of new industrial policies (Luo, 1999). Demand uncertainty refers to rapid fluctuations in demand, thus making it difficult for firms to make accurate predictions (Achrol and Stern, 1988). Consequently, firms have to adapt their product, strategies, and tactics to the changing demand conditions. Increasingly, foreign firms in China form alliances with other firms to reduce vulnerability to local industry’s structural uncertainty (Luo, 1999). “Uncertainty prompts organizations to establish and manage relationships in order to achieve stability, predictability, and dependability in their relations with others” (Oliver, 1990: 246). Through the use of SA

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sourcing, firms can respond to the level of demand uncertainty by spreading the risk with their partners. Indeed, sourcing from alliance suppliers allows the firm to possess superior adaptation capabilities by mutually adapting and negotiating adjustments under demand uncertainty (Noordewier et al., 1990). Due to the less complex nature of demand uncertainty when compared to technological uncertainty, managers face situations that are less unclear, and that present more well-developed alternatives and more clear evaluation criteria by which to select alternate suppliers. Indeed, Dickson and Weaver (1997) found that alliance use was positively associated with key manager’s perceptions of demand uncertainty. Since standardized components are readily available in the market, demand uncertainty of a product would mainly affect the sourcing of major components and the resulting market performance. We expect firms to utilize SA sourcing at high levels of demand uncertainty, resulting in higher levels of performance. However, when demand uncertainty is low, it may be more efficient for firms to source major components using other ways than SA sourcing. H5: The impact of SA sourcing of major components by the sourcing firm on its market performance is nonmonotonic over the range of demand uncertainty. H5a: When demand uncertainty is low, increases in SA sourcing of major components by the sourcing firm will negatively influence its market performance. H5b: When demand uncertainty is high, increases in SA sourcing of major components by the sourcing firm will positively influence its market performance.

METHOD Data Collection Data for this study were collected from non-Chinese foreign executives of foreign multinational firms from the Triad regions (American, Japanese,

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and European firms) operating in China. Only those foreign multinational firms, either Sino-foreign joint ventures or foreign wholly-owned, that had manufacturing activities in China were included in the sample. The sample was limited to manufacturing firms in the following industries (based on the classifications used in China): ordinary machinery, special purpose equipment, transport equipment, electric equipment and machinery, electronic and telecommunications equipment, and instruments, meters, cultural and office machinery. These industries manufacture products that are made of easily identifiable and separable components, which facilitated the identification of the information needed. Other industries (e.g., chemical) were excluded due to the inherent difficulties in determining what constitutes major components and parts. Similarly, previous studies in global sourcing (e.g., Kotabe, 1992; Murray et al., 1995) have also restricted the data collection to firms that belonged to the above industries. The data were collected in two waves. As non-Mainland Chinese researchers might not be permitted to collect data in China, two national market-research companies in Beijing were commissioned for the two waves of data collection in China. This approach has often been used to collect data in China (Luo and Peng, 1999). Further, Ambler et al. (1999) cautioned that response rates to mail questionnaires are poor and that face-to-face interviews ensure that the questions are fully understood. Similarly, in He et al.’s (1998) study, they initially intended to mail the questionnaire to a large sample that would be randomly chosen from a list of Chinese manufacturing firms. Instead, they used face-to-face interviews and an adequate sample, following the recommendation by experienced Chinese researchers. Data were collected using face-to-face interviews by trained interviewers. A survey instrument was first designed in English. After finalizing the English version, the questionnaire was translated into Japanese by a bilingual Japanese who was fluent in both Japanese and English. Then, another bilingual Japanese business professor backtranslated the Japanese version into English; wordings that were confusing or inappropriate were corrected to ensure item equivalence in different languages. Since face-to-face interviewers were used, interviewers were able to identify the key informants who had knowledge of and access to the type of data needed for our study. Another benefit of

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using face-to-face interviews was that if the respondent was unsure of a particular question, the interviewer had the opportunity to clarify the question; if necessary, the respondent was able to obtain information from other informants in the company. The two marketing research firms conducting the data collection for this study reported that, in some instances, they had to conduct the interview for more than one round. In order to ensure quality of the data, field checks were conducted in China after the data collection concluded. The first wave of the data was collected by a national market research firm in China. The sampling frame consisted of the following directories in China’s four largest industrial cities: Beijing Foreign-Related Enterprises Databank, Shanghai Registry of Commercial Firms, Shanghai Statistical Bureau Firm Databank, Tianjin Foreign-Related Enterprises Databank, and Guangzhou Registry of Foreign-Related Firms. Of the 4500 foreign-related firms listed in these directories, 1600 firms were screened and contacted by telephone using the following criteria: the firm: (1) was a Sino-foreign joint venture or foreign wholly-owned company, (2) had a registered capital of 5 million yuan or above, (3) manufactured or assembled end products in mainland China, and (4) had senior managers sent from the overseas headquarters. Of the 1600 firms contacted, 449 firms were unreachable due to a change of telephone number and 283 did not meet the criteria listed above. Of the usable sample of 868 firms, 195 companies initially agreed to participate in the study. During the data collection period, 75 firms with senior managers who were unavailable for the interview could not participate in the study. Of the 120 interviews conducted, 15 companies failed to complete the whole survey. Therefore, the number of firms with usable questionnaires obtained in the first wave was 105 with mostly American and European firms. Afterwards, another wave of data collection (consisting of two parts) was conducted. In the first part, another national market research firm in China was commissioned for the data collection in China. The sampling frame used was the China Foreign Funded Enterprises Directory. The same four criteria used in the first wave of the data collection were used. Initially, the market research firm contacted 1200 firms by telephone, of which 358 firms did not meet the selection criteria. Of the usable sample of 842 firms, 122 firms agreed to

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participate in the study. Of this participating group, 122 firms provided responses to the questionnaire. Since 22 of them failed to provide all necessary information, consequently, 100 firms provided usable questionnaires. The second part of the data collection was conducted in Hong Kong, which is a Special Administrative Region of China. All the US (78 firms) and Japanese firms (133 firms) in the selected industries mentioned above were contacted via a mail survey with three mailings. The names of the American and Japanese companies were obtained from the directories compiled by the American and Japanese Chamber of Commerce in Hong Kong, respectively. As no information was provided on whether these firms had manufacturing activities in China, all the firms in the above-mentioned industries were contacted. Of the 211 firms surveyed, 41 surveys were undeliverable, resulting in a maximum usable sample of 170 firms.2 At this phase, 25 firms had completed questionnaires returned. To summarize, we had a total usable sample of 487 foreign-funded enterprises. Of these, 230 firms fully participated in the study, with an effective response rate of 47.2 percent. We compared the responding firms’ means on key characteristics in the two waves of data collection. There were no significant differences among the samples in the two waves. We also compared the responding firms’ mean on these key characteristics for the data collected in mainland China and Hong Kong. We also did not find any significant differences among them on their key characteristics. Therefore, it is unlikely that the sampling procedure would have introduced undue bias in the collected sample. Consequently, the data were pooled, and the analyses were subsequently performed using the pooled data. In all, 75% of the sample were managers directly in charge of product, project, and/or engineering; 10% were vice presidents or directors overseeing procurement activities; and the rest were undeclared. A total of 50% of the sample consisted of US firms operating in China, 29.6% were from Japan, and 18.3% were from Western Europe, and the remaining 2.2% were from other nations. Approximately 85% of firms have operated in China since 1991, with the remaining 15% with operations set up in or before 1990. In all, 66% of firms had 500 or fewer employees in China, 9% had between 501 and 1000, 17% had between 1000 and 5000, and 8% had more than 5000 employees.

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Measures Most of the measures of the constructs were obtained from the literature, thus ensuring construct validity and reliability. Furthermore, we took steps to ensure the validity of the measures. First, interviews were conducted with managers working in firms in China to test their understanding of the measures. Through their feedback, the questionnaire was revised. Second, as recommended by Kumar et al. (1993), we used the key informant approach in obtaining the data. We used interviews over mail surveys in collecting the data, thus providing us the opportunity of identifying the key informant. The multiple items and their Cronbach’s a for each of the variables are described in the following section and are shown in the appendix.

Market Performance Market performance, adapted from Moorman and Miner (1997), was measured by two items using a 5-point scale (5= much higher, 1= . . ., much lower) (Cronbach’s α = 0.86). We asked respondents to report on the product’s market performance in mainland China relative to its three largest competitors in the industry in the mainland Chinese market in the last 3 years on the following dimensions: sales growth rate and return on sales. Comparison of firm performance relative to the three largest competitors in the same industry would help minimize industry effects (Dess et al., 1990). In addition, firm performance based on a 3-year period would help minimize the effects of annual fluctuations (Roth, 1992).

SA Sourcing of Major Components Adapted from Murray et al. (1995), it was operationalized as the percent of the total value of all major components in the product sourced through strategic alliance members. As defined in the survey instrument, SA sourcing involves the sourcing of components from suppliers who have more than an arm’s-length relationship with the sourcing firm, which include independent suppliers that have long-term keiretsulike relationships with the sourcing firm as well as majority- or

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minority-owned affiliates and joint ventures of the sourcing firm (Terpstra and Simonin, 1993). Major components refer to those customized and crucial components that are technical in nature and affect product performance. This variable was measured as a multiple of the two-step questions: the percentage of the total value (in purchase price) currently sourced from the firm’s strategic alliance members times the percentage of the total value (in purchase price) of all components in the product that are classified as major components. This measure is designed to capture the extent of the value of proprietary components being supplied by strategic alliance members with respect to the sourcing firm’s overall procurement needs.

Product Innovativeness We measured product innovativeness by four items using a 5-point scale (Kotabe et al., 1998) (Cronbach’s α = 0.81). The items include: (1) the number of potential applications (or uses) of the product innovations in the product (i.e., the set of innovative ideas in the product itself), (2) the number of potential applications (or uses) of the process innovation in the product (i.e., the set of innovative ideas in the manufacturing process of the product), with both items measured with a 5-point scale (5= very many, . . ., 1 = very few), (3) to your firm, the level of product innovations in the product (i.e., the set of innovative ideas involved in the product), and (4) to your firm, the level of process innovations in the product (i.e., the set of innovative ideas involved in the manufacturing process of the product), with both items measured with a 5-point scale (5= very high, . . ., 1= very low).

Product Differentiation We measured product differentiation using three items (Aulakh and Kotabe, 1997) (Cronbach’s α =0.93). We asked respondents to indicate the degree to which they agree or disagree with each of the following variables relating to their parent company’s overall competitive strategy for the product: (1) to have the product maintain a technological edge over competitors’ products, (2) to have the product maintain higher

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quality standards than competitors’ products, and (3) to maintain a unique image for the product. All items were measured using a 5-point scale (5 = strongly disagree, . . ., 1 = strongly agree) and were reverse coded.

Technological Uncertainty We measured the level of technological uncertainty as the predictability of the general technological developments for the product in the mainland Chinese market (5 = very high, . . ., 1 = very low); the item was reverse coded.

Demand Uncertainty We measured demand uncertainty using four items (John and Weitz, 1989) (Cronbach’s α = 0.85). They include: (1) the stability of the company product’s market share, (2) the accuracy of the company product’s sales forecasts, (3) the stability of the industry sales of the product in the mainland Chinese market, and (4) the stability of the company’s sales of the product in the mainland Chinese market. All items were measured using a 5-point scale (5 = very high, . . ., 1 = very low) and were reverse coded.

Control Variables We controlled for a number of variables that may influence market performance. Nationality: We included nationality as a control variable since Japanese firms’ sourcing strategy may be different from that of American or European firms, thus their view of SA sourcing may be dissimilar. Dummy variables were used to represent nationality (or region for European firms): the US was coded as 0, Japan as 1, and western European nations as 2. Product category: Dummy variables were used for the four product categories, with consumer durable coded as 0, consumer nondurable as 1, industrial durable as 2, and industrial nondurable as 3. Firm size: was measured by asking the respondent the following question: “Approximately, your parent company has _____ employees in China” (Erramilli and Rao, 1993; Peng and Luo, 2000).

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To minimize the effects of common method variance, we took the following approaches. First, we reverse coded some items in the questionnaire. Second, after the data collection, we conducted Harman’s one-factor test to address the common method variance issue. If common method variance were a serious problem in the study, we would expect a single factor to emerge from a factor analysis or one general factor to account for most of the covariance in the independent and criterion variables (Podsakoff and Organ, 1986). Our factor analysis results showed that no general factor was apparent in the unrotated factor structure, with Factor 1 accounting for only 27.6% of the variance. Thus, the design of the questionnaire as well as the post hoc test suggests that common method variance is not a problem. Furthermore, the items used in our study are part of a large-scale questionnaire; therefore, “It is unlikely that respondents would have been able to guess the purpose of the study and forced their answers to be consistent” (Mohr and Spekman, 1994: 147). Finally, nearly all of the hypotheses tested in this study involve interaction effects. Strategy scholars (e.g., Doty et al., 1993; Dooley and Fryxell, 1999) and methodologists (e.g., Evans, 1985; Aiken and West, 1991) have observed that complex data relationships shown by predicted interaction effects are not explained by common method bias because respondents are unable to guess the researcher’s interaction hypotheses in order to respond in a socially desirable manner.

Validation of Measures To establish the reliability and validity of the measures, we performed exploratory factor analysis using principal component factor analysis on each of the constructs to determine the unidimensionality of its measurement items and underlying factor structure. After confirming the unidimensionality of the constructs, we used confirmatory factor analysis (CFA) to establish their validity. Each measurement item was restricted to load on its hypothesized factor. All items had significant loadings on their expected constructs, demonstrating the convergent validity. As shown in Table 1, the factor loadings and model fit indices (GFI = 0.92, RMSEA = 0.07, CFI = 0.96, and NNFI = 0.95) together showed that our model fit the data well.

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Confirmatory factor analysis results of measures

Market performance CR = 0.87, AVE = 0.77

Demand uncertainty CR = 0.85, AVE = 0.60

Product innovativeness CR = 0.81, AVE = 0.52

Product A’s market performance in the mainland Chinese market relative to its three largest competitors in the industry in the mainland Chinese market in the last 3 years on the following dimensions is:  Sales growth rate  Return on sales The stability of Product A’s market share in the mainland Chinese market (reverse coded)  The accuracy of Product A’s sales forecasts in the mainland Chinese market (reverse coded)  The stability of the industry sales of Product A in the mainland Chinese market (reverse coded)  The stability of your firm’s sales of Product A in the mainland Chinese market (reverse coded)

SFL

t-value

0.88 0.87

13.23 13.13

0.77 0.71

12.18 10.81

0.86

14.29

0.74

11.63

0.54

7.68

0.57

8.16

0.85

13.63

0.86

13.83



The number of potential applications (or uses) of the product innovations in Product A (i.e., the set of innovative ideas in Product A itself)  The number of potential applications (or uses) of the process innovations in Product A (i.e., the set of innovative ideas in the manufacturing process of Product A)  To your firm, the level of product innovations in Product A (i.e., the set of innovative ideas involved in Product A itself)  To your firm, the level of process innovations in Product A (i.e., the set of innovative ideas involved in the manufacturing process of Product A) 

(Continued )

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TABLE 1.

Continued.

Product differentiation CR = 0.94, AVE = 0.84

Your parent company’s overall competitive strategy for Product A is:  To have Product A maintain a technological edge over competitors’ products (reverse coded)  To have Product A maintain a technological edge over competitors’ products (reverse coded)  To maintain a unique image for Product A (reverse coded)

SFL

t-value

0.92

16.66

0.94

17.25

0.90

16.05

SFL, standardized factor loading; CR, composite reliability; AVE, average variance extracted.

Next, we examined the discriminant validity of the measures with a variance extracted test (Fornell and Larcker, 1981; Netemeyer et al., 1990). The average variance extracted assesses the amount of variance captured by the construct’s measures relative to measurement error and the correlations (φ estimates) among the latent constructs in the model. Estimates of 0.50 or higher indicate validity for a construct’s measure; all of our constructs achieved this criterion (see Table 1). The variance-extracted estimates for each pair of constructs were compared with the square of the correlations between the two constructs. Both variance-extracted estimates for each pair of constructs were greater than their squared correlations, demonstrating their discriminant validity. Finally, to establish the internal consistency of the measures, we computed both their Cronbach’s alpha and composite reliabilities. As reported previously, the alpha score for each construct was above the widely accepted threshold of 0.70. Also, as reported in Table 2, their composite reliabilities exceeded the level of 0.70. Table 2 presents the correlation matrix and descriptive statistics of the measures.

2

3.14 1.00

†

Logarithm of the number of employees. P < 0.10. * P < 0.05. ** P < 0.01. *** P < 0.001.

a

Mean Standard deviation

1. Market performance 1 2. Nationality 0.10 1 3. Product category 0.10 –0.03 4. Firm sizea 0.22** 0.21** 5. SA sourcing of major 0.04 –0.04 components 6. Product innovativeness 0.32*** 0.06 7. Product differentiation 0.09 0.18** 8. Demand uncertainty –0.50*** –0.09 9. Technological –0.21** –0.06 uncertainty

1

0.23*** –0.01 –0.20** –0.12†

–0.08 –0.10 –0.05 –0.06 5.82 1.95

1 0.14*

4

1 –0.06 –0.12†

3

Correlation matrix and descriptive statistics of measures

Variables

TABLE 2.

0.15 0.22

0.12† 0.05 –0.04 0.02

1

5

3.30 0.86

1 0.14* –0.26*** –0.33***

6

3.87 1.26

1 –0.11 0.06

7

2.65 0.81

1 0.33***

8

2.29 0.98

1

9

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ANALYSIS AND RESULTS We estimated the hypothesized relationships using moderated regression analyses (Sharma et al., 1981). The dependent variable was the level of market performance. We regressed market performance on the independent, moderator, and control variables, and the interaction between the independent and each of the moderator variables. Cohen and Cohen (1983) recommend mean-centering predictor variables to reduce multicollinearity that might occur with interaction terms. Therefore, we mean-centered the independent and moderator variables before creating the interaction terms. None of the variables in the study had a variance inflation factor above 2.0, suggesting that multicollinearity is not a problem. There were two models that included one full model and one reduced model. The full model consisted of the level of SA sourcing for major components (predictor variable), moderator variables (product innovativeness, product differentiation, technological uncertainty, and demand uncertainty), and the interaction terms between the level of SA sourcing and each of the moderator variables. The reduced model included all the above variables, except the interaction terms; the reduced model allowed us to test the main effect, as hypothesized in H1. The full model examined whether the moderator variables moderate the impact of SA sourcing on market performance. In testing the hypotheses for potential moderating effects, only the coefficients for the interaction terms were analyzed and interpreted. As shown in Table 3, the results show that the full model (i.e., the model that included all the direct effects and interaction terms) was significant (R2 = 0.39, P < 0.0001). Some of the moderator variables were found to be significant. When the full and the reduced models (i.e., the model that included all the direct effects only) were compared, there was a change in R2 of 0.03 (P < 0.05). H1 hypothesized that SA sourcing of major components had a direct effect on market performance; the result was insignificant (P = 0.60), so H1 was not supported. This insignificant finding suggests that the market performance implications of SA sourcing of major components could be indirect and completely moderated by the variables we will examine below.

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TABLE 3.

595

Hierarchical regression models for market performancea

Variables

Reduced model

Full model

Direct effects SA sourcing Product innovativeness Product differentiation Technological uncertainty Demand uncertainty

0.14 0.19* –0.00 0.02 –0.52***

0.45 0.12 –0.02 0.03 –0.55***

Interactions SA sourcing × product innovativeness SA sourcing × product differentiation SA sourcing × technological uncertainty SA sourcing × demand uncertainty Control variables Nationalityb (0) Nationality (1) Product categoryc (0) Product category (1) Product category (2) Firm sized 2 R ∆R2

–1.38** –0.02 –0.54† –0.50 –0.20 –0.56** –0.13 –0.42 0.00 0.05 0.36***

–0.17 –0.53** –0.01 –0.41 0.06 0.06† 0.39*** 0.03*

a

Standardized regression coefficients are reported. 0 = US, 1 = Japanese, 2 = European (as a base). c 0 = consumer durable, 1 = consumer nondurable, 2 = industrial durable, and 3 = industrial nondurable (as a base). d Logarithm of the number of employees. † P < 0.10. * P < 0.05. ** P < 0.01. *** P < 0.001. b

H2 hypothesized that product innovativeness had a moderating effect on the relationship between SA sourcing and market performance. The result showed that product innovativeness was a significant moderator (P < 0.005); thus, H2 was supported. Schoonhoven (1981, 363) cautioned that “[m]erely inspecting the signs and magnitudes of

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regression coefficients is insufficient analysis for contingency hypotheses.” Hence, we conducted further analyses to identify any differences in the form of the relationship between the predictor variable (SA sourcing) and the dependent variable (market performance) over the range of the moderator variable (product innovativeness). As recommended by Aiken and West (1991), the analyses were performed by computing the partial derivative of market performance in the regression equation for SA sourcing of major components using the following partial differentiation equation: ∂Y/∂X = 0.45–1.38 × (product innovativeness), where X = SA sourcing of major components and Y = market performance. The value of ∂Y/∂X is 0 when the meancentered value of product innovativeness is 0.33. Since the mean value of product innovativeness is 3.30, the value of ∂Y/∂X is > 0 when the uncentered value of product innovativeness is 3.63. It means that the effect of SA sourcing for major components on market performance is positive when product innovativeness is < 3.63 (i.e., measured to be somewhat higher than average), but it is negative when product innovativeness is >3.63. Therefore, H2a and H2b were supported. The result shows that 62.1% of firms had a value below the cutoff point of 3.63 for product innovativeness, and 37.9% above it. H3 explored the moderating effect of product differentiation on the relationship between SA sourcing of major components and market performance. The result showed that none of H3 and its derivative hypotheses (i.e., H3a and H3b) was supported (P = 0.91). H4 hypothesized that the moderating effect of technological uncertainty was significant on the relationship between SA sourcing of major components and market performance. The result showed that the coefficient was significant. The partial differentiation equation is: ∂Y/∂X = 0.45–0.54 × (technological uncertainty). The value of ∂Y/∂X is 0 when the mean-centered value of technological uncertainty is 0.83. Since the mean value of technological uncertainty is 2.29, the value of ∂Y/∂X is 0 when the uncentered value of technological uncertainty 3.12 (i.e., measured to be somewhat higher than average). It means that the effect of SA sourcing for major components on market performance is positive when technological uncertainty is <3.12, but it becomes negative when technological uncertainty is >3.12 (i.e., measured to be somewhat higher than average). Thus, H4 and its related

≤

≥ ≤

≥

≥

≤

≤

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hypotheses, H4a–H4b were supported. The data show that 88.8% of firms had a value below this cutoff point of 3.12 for technological uncertainty, and 11.2% of firms above it. H5 hypothesized that demand uncertainty had a significant moderating effect on the relationship between SA sourcing and market performance. The result showed that the coefficient was insignificant; therefore, none of H5 and its related hypotheses (i.e., H5a and H5b) was supported (P = 0.25). Although we did not develop hypotheses examining the effects of control variables (nationality, product category, and firm size), we suspected that these variables might have an impact on market performance. The results showed that nationality and firm size were significant. The relationship between nationality and market performance will be discussed in the next section.

DISCUSSION AND IMPLICATIONS One of the most critical decisions for managers in manufacturing firms is to evaluate how components are sourced for the assembly of final products. In our study, we integrated the theoretical perspectives of resource complementarity and resource dependence theory in examining the sourcing–performance relationships. Theoretical and managerial implications of our study are discussed below.

THEORETICAL IMPLICATIONS Although studies on alliances have suggested that interfirm linkages were positively related to firm performance (e.g., Ahuja, 2000), we found that the direct effect of SA sourcing of major components by the sourcing firm on market performance was insignificant. We believe that our study has made contributions in the theory development in sourcing in that we have demonstrated that the integration of resource complementarity and resource dependence theory contributes to theory in the sourcing literature by uncovering that the indeed certain product- and uncertainty–related factors affect the sourcing–performance relationships. Also, using a

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multidimensional view of uncertainty, we found that indeed technological and demand uncertainty exerted differential impact on the sourcing– performance relationship. In addition to confirming the moderating effects of certain productand uncertainty-related factors on the sourcing–performance relationships, we made contributions to the strategy literature in general, and to the sourcing literature in particular, by emphasizing the necessity of examining the symmetrical property of contingency arguments. Indeed, as cautioned by Schoonhoven (1981), we found a nonmonotonic effect of SA sourcing on performance over the range of production innovativeness and technological uncertainty, even though the coefficients of these two moderator variables are negative. If we simply looked at the negative coefficient of product innovativeness and technological uncertainty, we would have concluded that these two moderator variables exerted a constant negative effect on the sourcing–performance relationship. Consequently, we would have drawn an incorrect conclusion and would have ignored the complex nature of these relationships. Another contribution of our study lies in the confirmation of the predictions by both resource complementarity and resource dependence theory relating to sourcing in a transitional economy. Most empirical studies on sourcing examined the strategy-performance linkage in the context of an industrialized nation. This study uses China, a drastically different type of nation both in terms of its political and economic development, in investigating the linkage. Our findings provide some support of our theoretical arguments, based on both resource complementarity and resource dependence theory, that productand uncertainty-related factors influence the sourcing–performance relationships in a transitional economy, thus have helped build a theory in sourcing.

MANAGERIAL IMPLICATIONS Our findings have important managerial implications. First, the results of this study demonstrate to managers that SA sourcing of major components is not an effective strategy in all instances, even in a transitional economy like China. Hence, managers should question the

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blanket need for SA sourcing in the context of achieving high market performance. Second, our results point to the importance of a thorough evaluation of the appropriate role of alliance suppliers. Our results suggest that, at low levels of product innovativeness, the use of SA sourcing of major components by the sourcing firm is positively related to market performance. However, at higher levels of product innovativeness, the sourcing–performance relationships become a negative one. This finding provides support for the resource complementarity argument that since resources cannot be instantaneously developed, firms form alliances to have access to factors of production that provide them with a competitive advantage over their rivals (Ahuja, 2000). This is because value can be created through accessing and integrating key strategic resources and know-how that are transorganizational (Achrol and Stern, 1988). Thus, alliances provide the opportunity to leverage external resources. Our findings suggest that, at low levels of product innovativeness, the sourcing firm would resort to relying on alliance suppliers to develop major components in order to supplement its limited capabilities with its suppliers’ technological expertise in providing major (i.e., customized and crucial) components and help differentiate itself in component technology/uniqueness from its competition. Commercial necessity often forces firms to obtain innovative competencies, mostly within a short span of time (Ahuja, 2000). Since sources of innovation do not reside exclusively inside firms but are instead commonly found in the interstices between firms, and suppliers and customers (Powell et al., 1996; Sarkar et al., 2001), firms would seek out partners that would provide the needed customized expertise (Ahuja, 2000). Sourcing from alliance suppliers is preferable to procuring based on market exchange because market exchange may not allow enough coupling to guarantee close configuration of components (Langlois, 1988; Kotabe et al., 2003). Indeed, an unbridled open market exchange would result in an early commoditization of innovative components, as observed in the components market for personal computers (Ferelli and Glatzer, 2000). And, specialization by the firm and its suppliers reduces the degree of structural variety that they have to embody (Burns and Stalker, 1961; Lawrence and Lorsch, 1967). In addition, specialized skills that result from socially complex phenomena unique to the firm are more likely

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to lead to advantages that are difficult for competitors to duplicate (Barney, 1995). However, we found that, at high levels of product innovativeness, the use of SA sourcing of major components by the sourcing firm tends to be negatively related to market performance. From the resource complementarity perspective, when the sourcing firm is not lacking in the area of product innovativeness, sourcing major components from alliance suppliers may not contribute to higher market performance. Worse still, the sourcing firm may put itself at a competitive disadvantage through unnecessary technological spillover to its suppliers, thus potentially creating direct competitors out of its suppliers (Buckley et al., 2002; Okabe, 2002).3 We found that product differentiation did not exert a significant moderating effect on the sourcing–performance relationship. We offer the following explanations for this result. Unlike product innovativeness, which includes specific product and process innovations, product differentiation represents resources that are more intangible in nature. In our study, we measured product differentiation in terms of quality and image, as identified in the literature (Aulakh and Kotabe, 1997). The results may suggest that based on a resource complementarity point of view, it may be quite difficult to ally with suppliers to upgrade intangible and abstract resources such as overall quality and brand image. Our study also affirms the necessity of examining different types of uncertainty confronted by firms when making sourcing decisions. We found that technological uncertainty, but not demand uncertainty, moderates the relationship between SA sourcing of major components and market performance. Specifically, at lower levels of technological uncertainty, SA sourcing of major components had a positive effect on market performance. However, at higher levels of technological uncertainty, the sourcing–performance relationship was a negative one. Indeed, technology shifts may destroy the continued relevance of existing competencies; therefore, firms that can form links with partners that possess new and complementary competencies may enjoy an increase in potential pay-off (Hagedoorn, 1993; Singh, 1997; Sarkar et al., 2001). However, the above-mentioned advantages would decrease under higher technological uncertainty since it is extremely difficult for sourcing firms to evaluate appropriate alliance suppliers due to the fact

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that the sourcing firms do not know which technological advances would work. Furthermore, when “managers are forced to develop novel strategic responses, the efficacy of which can only be assessed after an extended period of time” (Li and Simerly, 1998: 170). Even though a firm is faced with high levels of technological uncertainty, it must still incorporate new technology into products that customers want if it is to thrive in the industry (Henderson and Clark, 1990). Such product developments often involve combining different knowledge components. During the period of experimentation and trial-and-error and learning that takes place during product development, it is imperative to have frequent interactions with suppliers. Technological uncertainty is usually high in the early life of a technology, and so is the tacit content of the knowledge; therefore, firms are better off integrating vertically into supply components than relying on alliance suppliers. As individuals with different knowledge work in the same firm interact, they have knowledge on how to exercise each option as uncertainty unfolds. As product development proceeds, they may not agree on what and how to proceed at each option point. By having these individuals working for the same firm, the problems of haggling that may raise costs, delay or terminate the project can be avoided (Conner and Prahalad, 1996). At lower levels of technological uncertainty, the sourcing firm has more information on which technological advances would be prevalent in the marketplace. Hence, at lower levels of technological uncertainty, the sourcing firm is able to ally with the appropriate suppliers with the technological know-how, thus contributing to higher levels of market performance. It should be noted that lower levels of technological uncertainty do not necessarily mean that the technology involved is of a standardized nature. Similarly, higher levels of technological uncertainty should not be equated with “better” know-how. The level of technological uncertainty refers to the access to or the lack of information regarding the technological developments faced by the sourcing firm. The results showed that demand uncertainty did not moderate the relationship between SA sourcing of major components and market performance. As mentioned in previous sections, demand uncertainty refers to rapid fluctuations in demand, thus making it difficult for firms to make accurate predictions (Achrol and Stern, 1988). However,

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demand uncertainty is less complex and less ambiguous than technological uncertainty. Technological uncertainty may involve a radical change in the product, and firms often do not know what the prevailing technological standard may be. Demand uncertainty is much easier for firms to handle, since the uncertainty often relates to the number of units demanded, instead of a drastic change in the product itself. In other words, demand uncertainty often affects firms in their ability to meet a sudden surge in demand, thus forcing some firms to forego the extra demand in the marketplace. Or, demand uncertainty may involve a sudden drop in demand, thus making some firms to have to contend with idle capacity or additional inventory. Firms increasingly set up manufacturing facilities in different nations and shift production among different locations, instead of relying on alliance suppliers to deal with demand uncertainty. Although not included as part of the study, the result showed that nationality was significantly related to market performance, with Japanese firms having much lower market performance than western European and American firms. This finding may be surprising to some, due to the highly perceived product quality and success of Japanese firms in the global market. Some plausible explanations can be proffered for the lower market performance of Japanese firms in the Chinese market. First, due to the historical events that led to WWII, Chinese consumers’ animosity toward Japan may be related to their unwillingness to purchase Japanese products. More importantly, this effect is independent of their judgment about Japanese product quality (Klein et al., 1998). Second, when compared with competitors of Japanese firms, recent empirical evidence indicates that Western-made products are held in great favor by Chinese organizational buyers (Kaynak and Kucukemiroglu, 1992). Similarly, McGuinness and Campbell (1991) studied suppliers from six nations in China and concluded that Japanese received the highest ratings on customer relationships but gained only moderate buying preference ratings. In other words, Japanese firms might be admired more for their business acumen than for their products. Third, Anand and Delios (1996) found that in investing in China, Japanese firms aspire to the goal of developing a globally integrated production system. In other words, China is used by Japanese firms mostly as a production, instead of a marketing location. Consequently,

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Japanese firms may not have made adequate efforts in the development of effective marketing strategy in China.

Limitations and Future Research Although our study provides insights into how product-and uncertaintyfactors affect the relationship between SA sourcing of major components and market performance, it has several limitations. First, as we used a broad operational definition for SA sourcing, we might not have been able to fully detect fine-grained differences in the way strategic alliance suppliers would behave in their relationships with the sourcing firm. Our pilot study prior to the survey execution had shown that (1) participating executives could easily tell “independent suppliers on a short-term (spot-contract) relationship” and “100% owned subsidiaries’ apart from the rest of suppliers (i.e., strategic alliance suppliers, as per our definition) and that (2) the executives’ view of the role of alliance suppliers as ‘affiliates’ was fairly consistent irrespective of the sourcing firm’s equity position. Another operational reason was that as we would need to aggregate the purchased value of components from a range of strategic alliance suppliers, participating executives as well as we had difficulty separating the alliance-sourced volume by equity position categories. As a result, our study, as well as other similar alliance-related studies (c.f., Klein et al., 1990; Aulakh and Kotabe, 1997), resorted to using a broad definition of alliances as an entity between market transaction (arm’s-length transaction) and pure hierarchy. Second, the subjective measures of market performance may potentially be a limitation. Although objective performance measures may have been more desirable, respondents were reluctant to provide such information. Also, as reported by Lukas et al. (2001), financial and accounting data are not available to the Chinese public in China. Therefore, these researchers also used perceptual measures of performance. Although market performance was measured using perceptual scales, we believe that these measures provide valid and reliable results. First, we used the scales that had been used in the literature by Moorman and Miner (1997). Second, we measured market performance as the product’s market performance in mainland China

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relative to its three largest competitors in the industry in the mainland Chinese market in the last 3 years. Comparison of firm performance relative to the three largest competitors in the same industry would help minimize industry effects (Dess et al., 1990). In addition, firm performance based on a 3-year period would help minimize the effects of annual fluctuations (Roth, 1992). Furthermore, the often-heard criticism against subjective performance measures may be overrated. As Starbuck and Mezias (1996) have reported, even archival objective data (if available) are reported by someone presumably as uniquely qualified as the respondents in this study. In addition, research has found that subjective, self-reported performance measures are highly correlated with objective performance measures (cf. Dess and Robinson, 1984; Venkatraman and Ramanujam, 1987). Third, although an attempt was made at the data collection stage to measure technological uncertainty using a two-item measure, these two items failed to load on a factor. Despite the limitation of using a one-item measure for technological uncertainty, we included it in our study since the literature has stressed the importance of examining different types of uncertainty. In addition to addressing the limitations of this study, there are other avenues for future research in the area of SA sourcing. Future research should be devoted on how firms can identify potential alliance suppliers with complementary resources. Additionally, research is needed on how best to manage alliance suppliers by examining the role of trust and commitment among the sourcing firm and its alliance suppliers. Also, examining the impact of other dimensions of Dess and Beard (1984)’s definition of the external environment (i.e., munificence and complexity) on sourcing will enrich our knowledge in this area. Lastly, the study of SA sourcing from the supplier’s perspective will further extend our understanding in an area as complex as sourcing.

ACKNOWLEDGMENTS We thank the JIBS Departmental Editors, G Tomas M Hult, and the three anonymous reviewers for their helpful comments. Janet Y Murray and Nan Zhou gratefully acknowledge the financial support provided by the City University of Hong Kong (Grant No. 7100124) for this research project.

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NOTES 1 2

3

This cost-based explanation was suggested by an anonymous reviewer. This was the most conservative estimate for a usable sample size. It was suspected that many firms that did not respond to the survey might not have any manufacturing activities in the selected industries in mainland China. However, due to the scarcity of information, there was no way of confirming or disconfirming it. One such classic example is Apple Computer’s alliance sourcing arrangement with Sony in the early 1990s. In 1989, Apple Computer enlisted Sony to design and manufacture a new notebook-size Macintosh computer called the PowerBook 100. In this arrangement, Apple gave Sony the basic blueprint, and Sony engineers, who had little experience building personal computers, developed Apple’s smallest and lightest machine from drawing board to factory floor in less than 13 months. This is a strategic alliance in which Apple’s basic design ability was complemented by Sony’s miniaturization technology. It also became apparent, however, that Apple could lose manufacturing capabilities for the next generations of notebook-size computers without Sony’s participation. On the other hand, Sony, having mastered engineering and manufacturing of Apple’s notebook computers, gradually increased its role upstream to assisting Apple in product designing. Such a relationship could prove to be detrimental to Apple’s competitiveness if Sony were able to take over most of what it takes to develop a notebook computer. Later, being concerned about this possibility, Apple decided to sever its relationship with Sony (Schlender, 1991).

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APPENDIX Measurement Market Performance (Cronbach’s α = 0.86) (Much Lower 1–5 Much Higher) Product A’s market performance in the mainland Chinese market, relative to its three largest competitors in the industry in the mainland Chinese market in the last 3 years on the following dimensions, is  

sales growth rate; return on sales.

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SA Sourcing of Major Components SA Sourcing × Major Components SA sourcing: Strategic alliance members of the parent system include majority- or minority-owned affiliates and joint ventures of your parent company, and independent suppliers that have long-term strategic alliance relationships with your firm. Of all the components in Product A, the percent of the total value (in your purchase price) currently sourced by your firm from strategic alliance members is: _____% of total value. Major components (nonstandardized components): Nonstandardized components are those components contained in Product A that are customized for use in Product A. Nonstandardized components are not off-the-shelf standard components; they are crucial components that are technical in nature and affect the performance of Product A. The percent of the total value (in your purchase price) of all the components in Product A that are classified as nonstandardized components is: _____% of total value.

Product Innovativeness (Cronbach’s α = 0.81). (Very Few/Very Low 1–5 Very Many/Very High) 



 

the number of potential applications (or uses) of the product innovations in Product A (i.e., the set of innovative ideas in Product A itself); the number of potential applications (or uses) of the process innovations in Product A (i.e., the set of innovative ideas in the manufacturing process of Product A); to your firm, the level of product innovations in Product A (i.e., the set of innovative ideas involved in Product A itself); to your firm, the level of process innovations in Product A (i.e., the set of innovative ideas involved in the manufacturing process of Product A).

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Product Differentiation (Cronbach’s α = 0.93). (Strongly Agree 1–5 Strongly Disagree) Your parent company’s overall competitive strategy for Product A is   

to have Product A maintain a technological edge over competitors’ products (reverse coded); to have product A maintain higher quality standards than competitors’ products (reverse coded); to maintain a unique image for Product A (reverse coded).

Technological Uncertainty (Very Low 1–5 Very High) The predictability of the general technological developments for Product A in the mainland Chinese market (reverse coded).

Demand Uncertainty (Cronbach’s α = 0.85). (Very Low 1–5 Very High)    

the stability of Product A’s market share in the mainland Chinese market (reverse coded); the accuracy of Product A’s sales forecasts in the mainland Chinese market (reverse coded); the stability of the industry sales of Product A in the mainland Chinese market (reverse coded); the stability of your firm’s sales of Product A in the mainland Chinese market (reverse coded).

Control Variables Nationality: 0 = the US, 1 = Japan, and 2 = Western European nations. Product category: 0 = consumer durable, 1 = consumer nondurable, 2 = industrial durable, and 3 = industrial nondurable. Firm size: Approximately, your parent company has _________ employees in China.

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ABOUT THE AUTHORS Janet Y. Murray is an associate professor of international business at the Boeing Institute of International Business at the John Cook School of Business, Saint Louis University. Her research interest includes global sourcing and competitive strategies, international alliances, and international knowledge transfer. Her research has appeared in JIBS, Journal of Marketing, Strategic Management Journal, and other journals. This article is Professor Murray’s third contribution to JIBS. Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected] Nan Zhou is Head and Associate Professor at the Department of Marketing, City University of Hong Kong. He has published extensively on China marketing/management in Journal of Advertising, Journal of Advertising Research, Journal of Business Research, Journal of Consumer Research, Journal of International Business Studies, and others.

Section 5

Emerging Issues

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Chapter 5.1

Positioning Terrorism in Management and Marketing Research Propositions Michael R. Czinkota, Gary A. Knight, Peter W. Liesch, and John Steen

While terrorism has existed throughout history, it has become more salient in recent years. The attacks in the United States (US) on September 11, 2001, killed more than 3000 people from a total of 78 countries (U.S. Department of State, 2002, p. v), and demonstrated the ubiquity and immediacy of terrorism on a global level. This event altered the attitudes and outlook of people worldwide and contributed to a decline in the global economy (e.g., European Commission, 2001). It affected the long-term fortunes of entire industries, such as aviation, tourism, and retailing. Global economic recession deepened and buyer demand declined. For the first time in decades, the growth of global trade dipped below the growth of domestic economies (Czinkota, 2002). Definitions of international terrorism are manifold and reflect various dimensions. It implies “the threat or actual use of force or violence to attain a political goal through fear, coercion, or intimidation” (Alexander et al., 1979, p. 4), “criminal acts intended or calculated to provoke a state of terror” (United Nations, 1999), “premeditated, politically motivated violence perpetrated against non-combatant targets by subnational

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groups or clandestine agents” (Witschel, 2004),” the typical desire to “communicate a political message” (Crenshaw, 2001), and the “involvement of citizens or territory from more than one country” (U.S. Department of State, 2002, p. xvi). Drawing on all these streams we offer a comprehensive definition of terrorism as “the systematic threat or use of violence, often across national borders, to attain a political goal or communicate a political message through fear, coercion, or intimidation of non-combatant persons or the general public” (Czinkota et al., 2004). Terrorist acts have demonstrated deleterious effects on buyer demand and market supply, as well as on marketing strategy. For most firms, government policies intended to quell terrorism will affect company operations more than the precipitating terrorist acts themselves. Such far-reaching results presage an increased attractiveness of terrorism as a tool for those who presume to change the course of business and, ultimately, of humankind. The potential targets for terrorism are numerous and cannot all be consistently protected. Even small terrorist groups with minimal resources have the ability to achieve major effects. Terrorism has become a familiar scourge of the contemporary world and is likely to remain a key factor in business if not daily life. Typically, the cost–benefit equation is in favor of the terrorist and against the target. For instance, the bomb that caused $550 million in damages in the 1993 World Trade Center attack cost about 400 dollars to make (Hoffman, 1998). The cost of protecting ourselves and averting terrorist acts is many billions of dollars, against terrorists’ costs of millions or less. Terrorists direct their attacks against businesses far more than any other target (U.S. Department of State, 2002). The most common type of event is bombing, followed by armed attack, kidnapping, arson, and vandalism (U.S. Department of State, 2002). Most victims are randomly targeted civilians (Council on Foreign Relations, 2002; U.S. Department of State, 2002). The great majority of businesses are unprepared to meet such risks and decision makers remain relatively complacent (e.g., Council on Foreign Relations, 2002). In our discussions with practitioners and academicians we concluded that very few firms have devised plans or restructured operations to deal with terrorism. For example, in interviews at various

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multinational firms, such as Tech Data and Office Depot, top managers told us that they had no specific plans to safeguard against terrorism. Our research uncovered foreign subsidiary managers who shunt any terrorism concerns to headquarters. We encountered top-level executives who frame terrorism only in direct, local terms and look for local managers to address possible repercussions. In Europe and Japan, we even encountered managers who see terrorism as strictly an American problem. Our findings reveal, however, that these perspectives are false. While during the days following a terrorist event there is always the “it could have been to me” feeling, which heightens the feeling of vulnerability, over time, this may give way to “it will not happen to me”. Since most businesses have limited information on terrorist risk and no new terrorism has occurred in the US since 2001, managers may underestimate the likelihood of future attacks. After 9/11/01, concern about damage from terrorism has assumed a “back seat” in most people’s minds. Most firms now believe that if an attack occurs it will not affect them (Kunreuther et al., 2003). However, 9/11/01 showed existing or would-be terrorists how vulnerable the US and other countries can be. Low-cost and low-tech acts have achieved terrorist goals of inflicting extensive damage and profound disruption in the world economy. Consequently, as long as terrorism is likely to yield tangible, far-reaching results, it will be attractive to those who wish to create fear, coercion, or intimidation. There does not yet exist an established body of theory on terrorism and there has been virtually no research published on the relationship between terrorism, management, and marketing. However, terrorism holds the potential to threaten organizational activities in various ways. Our research is driven by the need to investigate terrorism’s effect on company activities and uncover approaches for minimizing or mitigating the threat. In the next section we summarize key theoretical perspectives, terrorism concepts, and the role of management and marketing. We then explore terrorism’s effects on company activities and introduce a series of propositions. In the final section we offer managerial implications and suggestions for future research. Because there has been such a paucity of research on this topic in business, we focus on devising concepts and theory specific to our field.

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1 CONCEPTUAL BACKGROUND The management literature identifies three views of strategy—the situation-specific view, the universal view, and the contingency view. The situation-specific view implies that conclusions about organizational strategies can be understood only in light of firms’ unique situations and sees organizational performance as stemming from the environment (e.g., Hannan and Freeman, 1977; Scherer and Ross, 1980). Therefore, firm performance will tend to decline with decreasing favorability of the external environment. By contrast, the universal view holds that universal laws of strategy apply to some degree to all situations (Hambrick and Lei, 1985). It suggests that the external environment is relatively irrelevant, as long as management develops some all-encompassing strategy. We frame our investigation within the contingency view or contingency theory. It takes a middle ground between situation-specific and universal views by expressing that optimal strategy is subject to a certain set of environmental and organizational conditions (Ginsberg and Venkatraman, 1985; Hofer, 1975). It implies that optimal structure and methods of the firm depend on a number of contingencies in both the internal and external environments (e.g., Ginsberg and Venkatraman, 1985; Hofer, 1975; Zeithaml et al., 1988). Environmental conditions determine the nature of the organizational responses required for superior performance and therefore firms should adapt to their environments (Donaldson, 2001; Lawrence and Lorsch, 1967). Success in developing and applying strategies to deal with environmental contingencies hinges on capabilities that the firm develops over time (Barney, 1991; Davis et al., 1991). Performance is determined not strictly by the environment in isolation or by the firm’s actions in isolation; rather, it is determined by the congruence of the two. While contingency theory has been criticized (e.g., Schoonhoven, 1981), it offers a useful way to conceptualize relationships between organizational structure and strategy and certain contingency variables. Managers are not helpless in the face of environmental conditions and should develop organizational structures and strategies to deal with them accordingly. In addition, management must regularly reassess strategies, especially during periods of significant change in the external environment that potentially affect the firm. This need arises because

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currently applied strategies tend to develop their own momentum. The firm’s administrative heritage (e.g., Miller and Friesen, 1980) may delay or prevent the development and application of needed strategic change (Hofer, 1975). Among the contingencies over which organizations have little or no control are variables in the cultural, social, political, legal, and economic environments, as well as general environmental complexity (e.g., Biggadike, 1981). The institutional or regulatory context (e.g., the body of governmental regulations and policies) in which the firm finds itself is also an environmental contingency (Child et al., 2003). Various institutional levels exist in countries around the world, thereby affecting transaction costs and the predictability of the environment within which terrorism occurs. Institutional factors known to affect company performance and relevant to terrorism include the adequacy of legal protection, national security policies and measures, the nature of governmental relationships, and so forth. Researchers have adopted a broader meaning of contingency by considering factors inside the firm as contingency variables (Ekeledo and Sivakumar, 1998). For instance, the firm’s knowledge base, organizational strategy, and technology all have been identified as contingency variables (Birkinshaw et al., 2002; Hambrick and Lei, 1985). Marketing strategy and related activities might be viewed similarly and are critical to maintaining and enhancing firm performance (e.g., McKee et al., 1992). A proposed conceptualization of strategies and tactics in response to terrorism benefits from adopting a contingency approach because terrorism engenders (often sudden) shifts in the business environment to which firms respond with strategic and tactical variables. Managers deal with the external business environment by devising and implementing strategies and tactics, across supply and value chains often of considerable complexity. Business is increasingly global, with more than nine trillion dollars worth of goods and services traded internationally in 2003 (United Nations, 2004). In addition to general management and marketing activities conducted in foreign markets, international business comprises value chain activities related to sourcing, supply chain management, and the distribution of goods and services, across national borders. International business is particularly susceptible to terrorism because terrorism is especially disruptive to international supply chain and

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distribution activities and their accompanying information flows, as well as the demand for both industrial and consumer goods by buyers worldwide. For example, the 9/11/01 terrorist attacks in the US contributed to a significant decline in consumption around the world and to the imposition of government policies and regulations that have impeded the operations of transportation and logistical systems (e.g., Liebmann, 2004; Curtin, 2003). Falling demand can have various consequences including loss of customers or contracts, reduced market share, declining profitability and sales, and ultimate business failure.

2 KEY CONSTRUCTS IN TERRORISM RESEARCH 2.1 The Actors Actors and other key constructs in terrorism research are summarized in the conceptual framework in Fig. 1. It is useful to distinguish the major actors relevant to research on terrorism. In addition to the terrorists themselves, firms are affected by terrorism and employ managers who devise approaches to deal with terrorism. Buyers reflect all consumers of goods and services whose purchasing behavior may be affected by terrorist events. Public entities are state, national, and supranational governments, as well as other public and semi-public entities (e.g., port authorities, trade associations, the United Nations) that may respond to terrorism in various ways. Overall, firms, buyers, and public entities are influenced by, and will usually respond to, the actions of terrorists (Czinkota et al., 2004).

2.2 Antecedent Factors Contemporary terrorism is particularly onerous, due to factors characteristic of the modern era. Terrorism’s intended impact is the fear and stress that it engenders among people around the world, a psychological response with consequences for buyers’ spending patterns, managerial behavior, and the macroeconomy. The media report on terrorism in ways that engender fear and a sense of the ever-present

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General and Business Environment Antecedent Factors: -urbanization -media -modern communications systems -modern transportation systems Units of Analysis Primary-level Micro-level Macro-level

Terrorists

Direct Effects

Direct Effects

Indirect Effects

Firms

Buyers

Public Entites

Declines in Buyer Demand

Unpredictable Shifts or Interruptions in Supply

Policies, Regulations, and Laws

Macroeconomic Phenomena

Source: Adapted from Czinkota, Knight, and Liesch (2004) FIGURE 1

A Conceptual framework for the analysis of terrorism and international business

Source: Adapted from Czinkota, Knight, and Liesch (2004)

possibility of local attack. Television and other instant communications allow people worldwide to learn about a terrorist incident within minutes of its occurrence. Terrorist group members can communicate with each other with great efficiency, using modern communications systems, such as the Internet and international telephony, facilitating the planning of attacks with maximal efficiency (Crenshaw, 1990; Seger, 1990). At the same time, terrorists also may use old-fashioned communications

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methods that are impervious to detection or interception. Modern transportation systems provide the means for terrorists to efficiently arrive at, and depart from, the sites of attacks. They also facilitate the movement and delivery of weapons and other supplies used in terrorist attacks (Crenshaw, 1990; Schlagheck, 1988; Czinkota et al., 2004).

2.3 Direct and Indirect Effects Direct effects comprise the immediate business consequences of terrorism, as experienced by individual firms. For example, the bondtrading company Cantor Fitzgerald was destroyed and lost 658 of its 960 employees in the 9/11/01 attacks (Henriques, 2002). While the harm is clearly tragic for individually affected people and firms, in terms of the US and world economy, however, the direct effects of even the 9/11/01 attack were relatively small. Our main focus, therefore, is on the indirect effects of terrorism. These include declines in buyer demand; unpredictable shifts or interruptions in value and supply chains; new policies, regulations and laws; as well as harmful macroeconomic phenomena and deteriorating international relations that affect trade. It is these indirect effects that pose the greatest potential threat to the activities of countless firms. Specifically, indirect effects include declines in buyer demand that occur due to the fear and panic that result from terrorist acts. Unable to predict future events, buyers may delay or discontinue purchases. Industrial demand is derived from retail buyer demand. A widespread psychological response of individuals, therefore, may trigger a decline in demand for industrial goods. Buyers’ tendency to reduce consumption in the wake of terrorist events can be modeled within research on the tendency for incidental emotion to color normatively unrelated judgments and decisions (e.g., Eagly and Chaiken, 1993; Forgas, 2001; Loewenstein et al., 2001). Negative emotions may trigger relatively pessimistic assessments of perceived phenomena, even if the source of the emotion has no direct relation to the target judgments (Forgas, 2001; Slovic, 2000). The severity of a harmful event determines the extent to which it is available, salient, and emotionally impactful in peoples’ memory (Sunstein, 2003; Tversky and

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Kahneman, 1974). Fear is a particularly salient emotion. It arises from and evokes appraisals of uncertainty and lack of control, two key determinants of the perception of risk (Forgas, 2001; Janis and Feshbach, 1953; Slovic, 2000). In addition, fear also impacts the behavior and reactions of managers. Fear is likely to moderate the nature of decisions that managers make, and the actions that they take, in the wake of terrorist events. The correlation between emotion and behavior also has roots in economics research (e.g., Tversky et al., 1990). Fear and other emotions can negatively affect buyer behavior, even when they arise from prior, remote events. People may have a disproportionate fear of risks that seem unfamiliar and outside of their control (Leventhal, 1970; Slovic, 2000). Because terrorism is so “terrifying,” buyers have a tendency to overestimate the likelihood of its occurrence (Sunstein, 2003). Managers may experience a similar effect. The tendency to overreact to terrorism drives people to demand substantial and sometimes excessive remedies from governments and other sources (Sunstein, 2003). As buyers and public entities respond to terrorism, giving rise to various types of indirect effects, firms may experience reduced revenues from falling buyer demand, and expenses may rise from a variety of causes directly and indirectly related to terrorism. Firms may attempt to recoup decreasing sales by reducing prices or via increased advertising and other communications activities, all of which engender reduced revenues or unplanned expenses. Unpredictable shifts or interruptions in the supply of needed inputs, resources, and services is another indirect effect of terrorism. They hold the potential to induce serious problems for the firm’s value chain operations and other activities. For multinational firms, interruptions may result from delays in the supply chain as increased security measures and other factors lessen the efficiency of global transportation and logistical systems. Short-term shortages of input raw materials, parts, and components may occur if, as a result of attacks, certain externally obtained resources are delayed or become unavailable. Policies, regulations, and laws may be enacted by public entities in response to terrorist events. While intended to improve security conditions, such actions may have unintended consequences of hindering efficient business operations. They can manifest themselves as market imperfections that increase business costs and may alter the environment

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in ways more harmful to business interests than the terrorist events that provoked them. Public entity actions make the terrorist intent come true by transmitting effects across the world, far beyond the industries and regions that were the original targets of terrorist acts (Czinkota et al., 2004). Moreover, public remedies may not reduce risks by a degree commensurate with the severity of the original terrorist events (Sunstein, 2003). For example, the Patriot Act and other policy shifts are dissuading international travelers from visiting the US. Increased inspections of containers used in international shipping, new security programs to protect ports, and various other new policies are decreasing the efficiency and effectiveness of international shipping and logistics. These and other policies, generated both by public entities and firms themselves in response to actual and potential terrorist threats substantially increase friction in international business, as well as the costs of value chain and supply chain activities. Macroeconomic phenomena, such as (real or perceived) declines in percapita income, purchasing power, or stock market values, are exacerbated by terrorism. Such trends affect the extent of buyer uncertainty about the state of national economies. In the long run terrorism can induce declines in international trade, with associated consequences for GDP, tax revenues, and living standards.

2.4 Levels of Analyses To clarify the research task, it is useful to distinguish three levels of analysis—the primary level, the micro-level, and the macro-level. The primary level refers to research conducted on terrorist threats at the level of the individual person and firm. It emphasizes actual or threatened damages or destruction of brick-and-mortar facilities or equipment, and/or injury or death. Thus, a primary-level terrorist attack directly affects the ability of people or firms to carry out business activities along established patterns. This level of analysis is useful for gaining very detailed knowledge about the immediate effects of terrorism. On the opposite extreme, the macro-level refers to the effect of a terrorist attack on the global environment, and emphasizes the impact on

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variables such as the world economy, buyer demand for goods and services, and reactions by supranational organizations such as the United Nations. One shortcoming of the macro-level is that it may be too broad, with the effects of terrorism difficult to distinguish from those of other macro-events, such as economic downturns, wars, and large-scale environmental disasters. The micro-level is the intermediate level of research. It examines terrorism with regard to its effect on specific regions, industries, or crossindustry levels in value chains. It is perhaps the most useful unit of analysis because here the effects of terrorism are more aggregated than at the primary level, but can be distinguished and analyzed more readily than those of the macro-level (Czinkota et al., 2004).

3 PROPOSITIONS ON TERRORISM’S LINK TO MANAGEMENT AND MARKETING Managers have limited mental energy and other resources. As with other threats in the business environment, they will focus resources to deal with terrorism to the extent they perceive it as relevant to their particular situation. When theorizing about terrorism and its effect on the firm, therefore, the degree to which managers take notice of and respond to terrorism will be a function of the extent to which it is salient to their firm, industry, markets, or location. Cast in this context, we now offer a series of propositions intended to clarify the linkage between terrorism, management, and marketing.

3.1 General Strategy Terrorism is a contingency, or it leads to the emergence of other contingencies. Its consequences occur particularly in the social, economic, political, legal, and institutional contexts of the external environment. It influences buyer psychology, consumption, and purchasing patterns. It induces public entities to impose restrictive regulations and policies (Alexander, 2004). These effects have implications for the effectiveness and efficiency of the operations of countless firms. Consistent with the

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contingency view (e.g., Ginsberg and Venkatraman, 1985; Hofer, 1975), managers will tend to devise strategies to deal with the emergent challenges of terrorism. In the long run at least, they will adapt to the direct and indirect effects of terrorism because evolving environmental conditions influence current and future firm performance. With increasing salience of terrorism, managers will tend to revise existing strategies or develop new ones to minimize the firm’s exposure and maintain its performance. Therefore, we propose: P1. As the salience of terrorism increases, managers will tend to include it in those factors that they consider when developing or revising strategy. Choosing target markets and market segments is a key marketing task. Choosing the right markets is critical. Because of opportunity costs, once particular markets are chosen, others are automatically eliminated from consideration. Choosing the wrong markets is costly because managerial time and other organizational resources are drained away in the pursuit of doomed ventures. When the target markets are located abroad, choosing well is particularly important because of the complexity and higher costs associated with international marketing. Entering foreign markets via direct investment and other highly committed modes sets in place a particular pattern of resource allocation that determines the direction and prospects for future ventures (e.g., Miller and Friesen, 1980; Root, 1994). It is best, therefore, to pursue markets only in the wake of research that clarifies which locations will maximize the likelihood of business success. Terrorism is a contingency that impacts the attractiveness of individual markets, especially when they are located in areas prone to its direct or indirect effects. Increasingly, therefore, terrorism will be seen as one of the factors that management considers in the pursuit of appropriate target markets. Therefore, P2. As the salience of terrorism increases, managers will consider it when evaluating markets. Terrorism increasingly will be employed as a segmentation base in the evaluation and selection of markets, in order to target markets relatively less affected by or vulnerable to terrorism or to its effects.

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3.2 Sourcing, Production, and Distribution Here we initially consider activities in the firm’s upstream value chain that lead to the development and production of products. Increasingly companies source from around the world. Global value chains are complex and affected by the reality or risk of terrorism. Terrorism may target individual firms, or their transportation and logistical systems directly. Indirect effects include new regulations, policies, and other actions imposed by public entities that, while well-intended, emerge as market imperfections that slow or constrain value chain activities. Where interruptions occur in supply chains, not only are factor inputs affected, but production activities at various locations may be involved as well. Distribution and logistics involve extensive interaction with countless suppliers, distributors, and customers (e.g., Robicheaux and Coleman, 1994). Producers rely on suppliers and supplier’s suppliers at locations potentially spread across the globe. Such systems involve considerable tangible facilities and equipment, including transportation infrastructure used in shipping via land, water, and air. Even firms perceived as having little international involvement may depend on imported input goods. The direct and indirect effects of terrorism, even as these arise at seemingly distant locations, induce shortages or delays of input goods, disrupting critical company operations (e.g., Council on Foreign Relations, 2002). Following 9/11/01, for example, tighter security at US Customs checkpoints prompted long shipping delays, disrupting the supply chain activities of numerous firms, including Ford, which was forced to temporarily close five of its US auto plants (Siekman, 2003). In the absence of contingent shipping and other logistical arrangements, manufacturers and suppliers will be faced with disruptions that can substantially affect normal operations. Among organizational activities, therefore, we conjecture that distribution and logistics are highly vulnerable to both direct and indirect effects of terrorism, and managers will incorporate this threat into their planning and organizing accordingly. Many companies have developed complex value chains that may involve purchasing raw materials, parts, and components from suppliers located throughout the world. This trend is facilitated by various

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emergent conditions, including the globalization of markets, falling trade barriers, better supply chain infrastructure, and facilitating technologies in communications and transportation (Mentzer, 2001). Terrorism engenders both direct and indirect effects that disrupt logistical arrangements and other delivery mechanisms of supplier firms. Moreover, the more globally extensive the firm’s various supply chains, the more vulnerable it is likely to be to terrorism. Accordingly, firms may devise various approaches to minimize supply chain shocks and other consequences that ensue from terrorism. Overall, in a complex world characterized by various contingencies, companies emphasize flexibility, in order to make available various alternatives for dealing more efficiently and effectively with emergent, harmful conditions. Flexibility refers to “versatility”—the ability to perform different activities and apply adapted capabilities in order to address the demands of a particular situation (e.g., Bahrami, 1992; Buckley and Casson, 1998; Ghemawat and del Sol, 1998). It allows the firm to redefine its positioning and re-focus its resources in the midst of dynamic circumstances. Flexibility also implies the ability to withstand shocks and survive traumas in the business environment (Evans, 1991). In short, flexibility reflects “the ability to do things differently or do something else should the need arise” (Hart, 1937). Product development and production involve decisions related to which input goods the firm should purchase from suppliers and what goods it should develop and manufacture on its own. For example, Dole Inc. lost most of its banana crop in Central America in the aftermath of Hurricane Mitch in 1998. Because the firm had made few arrangements for alternative sources of supply, it experienced a severe gap in its distribution of bananas for several months after the event (Biddle, 1998). By contrast, some firms establish continuity plans to deal with crises, emphasizing flexibility via the ability to shift production to different regions in the wake of unanticipated disruptive events. Compaq Computer, for example, has established assembly facilities in Asia, Europe, North America, and South America, allowing management to quickly shift production from one region to another in the event of a crisis. Compaq also has established secondary suppliers for all of its critical input components. Such flexibility provides Compaq with competitive advantages, relative to less flexible rivals.

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To achieve flexibility, firms source input goods from various suppliers. In an environment characterized by heightened terrorism, however, relying on a single or a limited number of suppliers, or on suppliers concentrated in a limited range of locations, is potentially risky. In order to reduce their vulnerability, therefore, managers at such firms may seek to source from a greater number of suppliers, or from sources located in a broader range of locations. Alternatively, to the extent appropriate suppliers located in safe areas are unavailable, managers at some firms may opt for another solution—they may seek to produce relatively more input goods themselves. This discussion leads to a series of related propositions. P3a. As the salience of terrorism increases, managers are more likely to consider it in the development of supply chains and distribution channels, as well as in the strategies in logistics, materials management, and distribution activities. In addition, as the salience of terrorism increases in the long-run, firms are more likely to: P3b. Diversify, or increase the number of, their suppliers, especially of critical input goods; and/or P3c. Make relatively more essential input goods themselves, as opposed to buying them from suppliers, in order to more flexibly manage the effects of terrorism. A key task in supply chain management is determining the proper level of inventory to hold so that a balance is maintained between customer service and inventory costs (Rinehart et al., 1989). Inventory stocks tend to be particularly vulnerable in international business because of the long distances that may separate suppliers from intermediaries (Mentzer, 2001). Maintaining appropriate inventory levels of essential goods is particularly important to minimize disruptions in critical value chain functions. In general, businesses are likely to hold higher inventory levels in the event of less reliable transportation and logistical systems, or other conditions of heightened uncertainty about the ability to maintain inventories at appropriate levels (Rinehart et al., 1989).

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Where firms might have emphasized just-in-time sourcing and other methods intended to minimize inventories and associated costs, terrorism’s direct and indirect effects may now pressure managers to increase inventory stocks, in order to minimize the harm of potential shipment delays or sudden interruptions in specific supplier channels. To the extent that terrorism threatens the operations of the firm, management might be inclined to keep larger safety stocks of inventory in order to be able to satisfy buyer demand without interruption. Therefore, in the long-run, as the salience of terrorism increases, P4. Firms will tend to establish larger safety stocks of inventory, or increase inventories, of essential input goods, as a cushion against the direct and indirect effects of terrorism.

3.3 Pricing Alongside other business functions, managers may revise pricing in the wake of certain types of environmental contingencies. For example, sellers of housing insurance charge higher prices for their service in regions that regularly experience floods or hurricanes. Transportation companies that must convey goods or people through high-risk areas tend to set higher prices to compensate for the risk of loss due to natural disasters, destructive weather, or other potential calamities. Construction and engineering companies charge higher prices where their services must be performed in risky areas. Similarly, some aspects of pricing may be adjusted in an environment of increasingly salient terrorism. Terrorist events negatively alter the assessment of future risk by both firms and buyers. Negative information spreads quickly in a global economy. The resulting deterioration in confidence reduces incentives to spend and increases incentives to save. Goods whose pricing is strongly affected by changing information flows and perceptions of risk are susceptible to the indirect consequences of terrorism. The risk literature indicates that firms increase prices in the face of uncertainty associated with new or rising threats to the performance or survival of the firm (e.g., Chen et al., 1986; Evans and Archer, 1968; Fama, 1971; Lubatkin and Chatterjee, 1994). Thus, actual or perceived terrorist threats will tend to

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create upward pressure on the pricing of particularly vulnerable offerings. For example, financial services, real estate, travel packages, international transportation, and similar services are vulnerable (Magnusson, 2004). Financial instruments involve commitments across time and are affected by perceptions of the future. Thus, while terrorism is usually directed at harming life and property, the indirect effect of terrorism on financial markets can be very substantial. In addition, certain commodities (e.g., oil, base minerals, agricultural goods) are subject to shortages and incur higher prices in the wake of terrorism. This has occurred, for instance, with gasoline prices in the US, leading to higher transaction costs in business. Managers will account for risk when setting prices for various offerings. In commodity markets information quickly affects the trade of goods and prices are likely to soften in the wake of terrorist events. For example, prices for coffee from Colombia have been affected in the past, in the aftermath of terrorism in that country. Prices for oil have experienced upward pressure due to increased risk in the Middle East and other oil-producing areas. While risk is usually considered harmful, however, some companies may benefit from the occurrence of harmful events in risk-prone areas (e.g., those that specialize in insurance, construction, and certain types of financial instruments). Rising terrorism can increase transaction costs and other expenses in international value chains, an especially salient outcome for multinational firms. These might include outlays associated with construction and repair, increased costs of recovery marketing activities, higher transportation costs, higher costs of input goods and supplies, rising insurance premiums, increased controls in customs clearance, and costs related to heightened security measures (from various terrorism-related factors). These added costs all put upward pressure on the pricing of goods to endusers. In the long run at least, terrorism can engender price markups equivalent to hidden tariffs or taxes (Anderson and Marcouiller, 2002; The Economist, 2004). In addition, pricing of goods and services might experience a certain “stickiness”. That is, managers will be unable to consistently predict the occurrence of terrorism or its indirect effects and, consequently, may be unwilling to decrease prices once raised. However, the nature of terrorism-related pricing effects is even more complex. In the aftermath of terrorism, firms in some industries may feel

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pressure to lower prices, in order to encourage reluctant buyers to maintain or increase their buying activities. For example, airlines, travel agencies, and other industries in the tourism sector may significantly reduce prices in order to lure buyers who reduce travel-related expenditures from the fear that they experience following terrorist events (e.g., Conant et al., 1988). Thus, managers at some firms will proactively lower prices as part of “recovery marketing”, that is, marketing integrated into crisis management activities (Clark, 1988; Smith and Bolton, 2002). Indeed, pricing can be used as an offensive weapon to lure reluctant buyers by lowering prices or offering discounts during difficult periods. Thus, a sort of tension is likely to develop as increased transactions costs and other factors encourage higher prices while efforts to mitigate falling demand tend to encourage price discounting. In the long run, therefore, as the salience of terrorism increases, it engenders various pressures in the firm’s external environment that have implications for pricing strategy. Accordingly, the perceived risk of terrorism, or actual terrorist events themselves.. . P5a. Create upward pressure on pricing, and lead managers to raise prices; P5b. Result in falling buyer demand, creating downward pressure on pricing, and lead managers to lower prices in order to stimulate demand. As noted, the pricing effects implied in P5a and P5b are complex. They are likely to vary by industry and by geographical location. We suggest the factors that engender higher prices occur more broadly from terrorism’s indirect effects, largely outside individual firm control, and appear to hold consequences for a wide range of industries. By contrast, price decreases are more explicitly within management’s control and tend to be initiated proactively in the wake of terrorist events, probably in a smaller collection of industries vulnerable to falling demand due to buyer psychological effects. If terrorism-induced pressures to increase prices are more broad based and generalized than pressures to decrease prices, we speculate that, on balance, more firms will raise prices than lower prices following salient terrorist events.

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3.4 Marketing Communications In the aftermath of a terrorist event, consumers may reduce consumption as a precautionary measure and industrial buyers may approach their task more cautiously. However, under certain types of conditions, some marketing-related activities are more useful than others for maintaining organizational performance. Marketing communication refers to the use of advertising, public relations, sales material, short-term promotions, media, and other informational means, to communicate the firm’s offerings and image to existing and potential buyers. Communication is a critical aspect of marketing strategy (e.g., Gotlieb and Sarel, 1992), and in the period immediately following terrorist events and the indirect effects that may ensue in their wake, it is likely to be particularly useful for restoring buyer confidence and spending. Following an earlier wave of terrorism, for example, Conant et al. (1988) found that managers engaged in “empathetic marketing” wherein they incorporated considerations of buyer anxiety into responses, emphasizing emergent fears and responding to individual buyer concerns to the greatest extent possible. Following terrorism, for example, travel agents might emphasize improved traveler safety and provide accurate, nonsensational information on terrorism-related topics. “Recovery marketing” involves an integrated, accurate, and consistent communications program integrated into crisis management activities and aimed at effectively managing events harmful to the firm (e.g., Clark, 1988; Smith and Bolton, 2002), such as those that result from terrorism. Marketing communications should be particularly useful for dealing with harmful market conditions in the aftermath of terrorist attacks. In other words, marketing communications can be effective for reducing the dissonance that buyers often experience in the wake of terrorist events. Therefore, P6. Among the marketing activities of the firm, marketing communication is particularly useful in dealing with the direct and indirect effects of terrorism. In the aftermath of terrorist attacks, marketing communications can contribute significantly toward reducing buyer dissonance in the purchasing process.

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3.5 International Business In international business, managers must ascertain how to “configure” and “coordinate” the locations and activities of foreign-based operations (Porter, 1986). “Multidomestic” strategy refers to the application of a relatively unique production and marketing mix that suits the specific needs and tastes of each foreign market entered. Firms that apply a multidomestic strategy tend to market a multiplicity of products via a wide range of marketing approaches abroad. Multidomestic strategy involves the firm in establishing a network of relatively decentralized business units in each target market, each configured with a high degree of independence. The opposite approach is “global” strategy wherein the firm applies a single, relatively standardized marketing mix to all its foreign markets, with production concentrated in the fewest number of locations (Baalbaki and Malhotra, 1995; Verhage et al., 1989). While the multidomestic approach implies widespread duplication and redundancy of international business activities, firms that employ this mode tend to have greater “slack” in their aggregate international value chains. “Glocalization” is a middle ground between multidomestic and global strategies. It refers to the creation of products or services intended for the global market, but which are somewhat customized to suit the needs and tastes of local cultures (Robertson, 1995; Thompson and Arsel, 2004). Glocalization approaches often leverage information technology and the Internet to improve the efficiency of providing local services on a global basis. Glocalization differs from global strategy because it explicitly recognizes the importance of local adaptations and tailoring in the marketplace of business activities. However, glocalization is relatively more in line with global strategy than with multidomestic strategy. Applying a range of strategic and tactical capabilities to deal with the wide-ranging needs of various foreign markets implies that “multidomestic” firms enjoy greater flexibility in their international operations and in dealing with varying environmental conditions. In turbulent environments, organizational structures that confer substantial flexibility provide operational and competitive advantages. Flexibility allows management to alter marketing and other tactics on relatively short notice and at low cost, thereby facilitating rapid adaptation to the uncertainty and newly evolving conditions that may accompany acts of

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terrorism (e.g., Buckley and Casson, 1998; Ghemawat and del Sol, 1998; Glazer and Weiss, 1993). Therefore, in international business, P7. Compared to relatively global strategic approaches, the more the firm pursues a multidomestic strategy, the less vulnerable it will be to the direct and indirect effects of terrorism. On balance, therefore, as the salience of terrorism increases, relatively greater emphasis on multidomestic strategies, as opposed to relatively global strategies, will prove more useful in dealing with terrorism’s effects. Pursuit of foreign markets offers a variety of benefits, including increased sales and profits, access to customers and factor inputs, as well as pursuit of other, strategic objectives (Bartlett and Ghoshal, 1989; Root, 1994). However, terrorism is a harmful environmental contingency that can threaten the achievement of these benefits. Managers must select appropriate entry modes for foreign markets, the two most common of which are foreign direct investment (FDI) and exporting (Root, 1994). Flexibility is valuable for enhancing competitiveness in complex markets, such as those characteristic of international business (e.g., Buckley and Casson, 1998; Rangan, 1998). Through FDI, the firm establishes brick-and-mortar subsidiaries or other relatively permanent facilities abroad, binding the firm to the market and to particular patterns of resource allocation (Woodcock et al., 1994). Location-specific resources, that is, resources highly specific to the needs of individual markets, may be difficult to separate from the organization that holds them and can reduce the flexibility with which the firm conducts its international business activities (Ghemawat and del Sol, 1998). Compared to exporting, FDI increases the visibility of the firm abroad. Evolving national events in the aftermath of terrorism can make the firm with substantial foreign assets more susceptible to risk. Firms with significant foreign operations hire local personnel, some of whom might support terrorist goals. In general, therefore, FDI makes the international firm more vulnerable to local events in those markets where it is most heavily invested (Kobrin, 1979; Robock, 1971). As compared to FDI, exporting is less committed, more flexible, and easier to reverse. It entails lower risk than other entry modes. It permits a broader and quicker coverage of world markets with the ability to

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respond rapidly to altering environmental conditions. It offers the ability to change course in, or to even quickly withdraw from, markets particularly affected by terrorism. Indeed, non-equity approaches are preferred by companies that enter high-risk or volatile markets (Agarwal and Ramaswami, 1992). As compared to FDI, therefore, exporting offers a broader range of advantages for dealing with terrorism. Therefore, P8. The type of foreign market entry mode (i.e., exporting versus FDI) affects the firms’ vulnerability to terrorism. FDI and exporting entail higher and lower degrees of vulnerability, respectively. As the salience of terrorism increases, therefore, in areas of increasing terrorist activity firms will prefer exporting over FDI as their entry mode. In light of this proposition, therefore, as the salience of terrorism in the firm’s international environment increases, it might be expected that FDI-based entry should entail a higher expected return on investment than exporting-based entry. Table 1 summarizes the key actors, factors, antecedents, and the potential remedies addressed in the above propositions. Managerial and research implications are discussed next.

4 DISCUSSION Key shifts in the magnitude of terrorism are increasing levels of uncertainty and complexity, especially for companies with extensive international linkages. Increased access to sophisticated weaponry and technology, the ability to communicate efficiently via the Internet and other advanced communications systems, as well as modern transportation systems that speed the delivery of death and destruction to intended targets, are among the contemporary factors that facilitate terrorists’ unthinkable ends. Ongoing tension between Western governments and various malcontents in the Islamic world and elsewhere suggests the likelihood of future attacks. For the foreseeable future at least, terrorism is likely to be of increasing salience in the management and marketing activities of the firm. History reveals that unexpected or prolonged crises can severely impact business performance. For example, when shipping ports on the US West

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Micro

Macro

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Primary

Public entities

Buyers

Firms

Terrorists

Major actors

Media

Modern communications system  Modern transportation systems

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Macro-environment facilitating factors

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New policies, regulations, laws enacted by public entities that affect marketing operations Macroeconomic phenomena that effect demand, supply, or both Deteriorating international relations that affect international trade

Unpredictable shifts or interruptions in value and supply chains

Direct harm to the firm, its employees, or other assets Declines in buyer demand

Effects of terrorism

Incorporate terrorism and its effects in the formulation of business strategy. Consider terrorism when choosing markets and market segments

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



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Increase inventories or establish larger safety stocks, especially of essential input goods Manage pricing proactively: resist pressures to increase prices; Consider decreasing prices to induce buying Employ marketing communications to deal with aftermath of terrorism Internationally, employ multidomestic strategies to reduce vulnerability to terrorism Internationally, emphasize exporting over FDI to increase flexibility and reduce vulnerability to terrorism

Consider terrorism in the development of supply chains, distribution channels, as well as strategy in logistics, materials management, and distribution  Diversity or increase input suppliers and/or make more essential input goods 

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

Potential marketing remedies

A framework for understanding terrorism’s linkage to management and marketing

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Levels of Analysis

TABLE 1.

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Coast were closed for 11 days during a labor dispute with the longshoreman’s union, the strike delayed the flow of more than 60% of US imports and cost the US economy as much as $16 billion in lost business (Siekman, 2003). More recently, the devastation produced by hurricane Katrina in New Orleans and the US Gulf Coast region is revealing an almost unprecedented level of destructiveness, albeit from largely natural causes. As these incidents suggest, if terrorists were to attack major ports or any of various other facilities with weapons of mass destruction, for example, the resulting harm could be very substantial indeed. The threat to businesses may be particularly elevated due to increased efforts of governments to protect public assets. As targets in the public sector (e.g., agencies, parliaments, embassies) are hardened, and in the absence of corporate-level vigilance and anti-terrorism preparedness, the vulnerability of private-sector assets should become increasingly apparent to terrorists. The response to hurricane Katrina has provided terrorists with considerable intelligence on the relatively limited progress that federal and local governments in the United States have made in preparation for devastating events. At present, most firms are ill prepared to defend against terrorism and represent, therefore, a sort of soft underbelly, vulnerable to attack. While bodyguards can safeguard individual top managers, lower level employees and other firm assets continue to receive little or no protection. Managers must be more alert than ever because terrorism will be a continuing threat.

4.1 Managerial Implications A central conclusion of our research is that while the potential for direct effects of terrorism is statistically insignificant, various indirect effects are likely and in fact are occurring and affecting the activities of countless firms. Indirect effects include declines in buyer demand, unpredictable shifts or interruptions in value and supply chains, new policies, regulations and laws, as well as harmful macroeconomic phenomena and deteriorating international relations that affect trade. Managers need to pay less attention to terrorism’s direct effects and focus instead on indirect effects, which surely are more harmful to the performance of countless firms.

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Companies should prepare to deal with the “before, during, and after” of terrorism by implementing superior strategies and practices. Managers must consider terrorism in overall strategic and portfolio planning. This implies scanning to anticipate the likely consequences of future terrorist events. Strategy and practice are best determined via ongoing assessments of each market entered, industry characteristics, and the level of risk that management is willing to tolerate. The threat level of terrorism should be used as a segmentation variable when targeting markets. Highly vulnerable markets should be avoided or assigned risk premiums. Terrorism should be considered as well in planning on the location of foreign subsidiaries, proposed target markets, and especially international distribution channels and supply chain management. Return on investment criteria may need to be re-calibrated. For multinational firms, risk premiums should be included in direct investment decisions for developing foreign-based facilities at relatively hazardous foreign locations. Products that depend heavily on inputs sourced from relatively terrorism-prone areas should be designed to facilitate production from easily substitutable ingredients, and multiple supply sources should be developed for especially critical input goods. Flexibility plays a larger role for firms with extensive international linkages. Relatively flexible firms will recover more quickly and can more readily sustain performance in the aftermath of terrorism’s direct and indirect effects. International business strategies and value chain activities should be evaluated increasingly in light of the flexibility they afford for handling terrorism. Ongoing intelligence gathering about the business environment is especially critical for companies with complex value chains or those that rely heavily on foreign-sourced raw materials and other input goods. Manufacturers should re-evaluate existing transportation arrangements, expand contingent shipping arrangements, and consider their inventory policies as part of efforts to combat terrorism. Consideration should be given to diversifying and increasing the number of suppliers in the event of rising input prices. Higher costs related to increased security measures, more complex international customs clearance, more expensive input goods (from various terrorismrelated factors), activities associated with recovery marketing, and so forth all put upward pressure on pricing. Terrorism’s indirect costs may pressure firms to increase prices to end-users. On the other hand, managers may

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feel compelled to lower prices or offer discounts in order to lure reluctant buyers in the wake of attacks that diminish buyer demand. Marketing communications play a strong role in recovery marketing activities. Short-term promotional activities and innovative marketing may help to encourage reluctant buyers. An integrated and consistent communications program can be leveraged to manage terrorism-induced crises. Cost–benefit analysis is helpful for determining the optimal balance between the cost of preparing for, and the cost of the consequences of, terrorism. Various firms have established crisis recovery plans and control centers to deal with potential disasters. For example, Daimler Chrysler, Home Depot, and Sears all have control centers equipped to deal with hurricanes, strikes, and other such calamities that threaten operations. Advance crisis planning emphasizes the development of contingency plans that identify the most vulnerable areas in organizational value chains. To the extent terrorism is more salient in the business environment, companies should incorporate it into their overall strategic planning. Environmental scanning is the first step that allows managers to evaluate and disseminate relevant information about developments in the external environment. This information is then provided to decision makers, allowing management to identify and respond to salient potential threats. Managers should identify the likely consequences of terrorism and specific actions to be taken in order to deal with the various contingencies. From the firm’s perspective, the worst type of attack is one that catches the firm completely off guard. Managers should not have to say: “Who would have thought . . . ” Organizational crisis management represents systematic efforts to avert crises or to effectively manage those that do occur. Organizational crisis management is effective when potential crises are averted or when stakeholders believe that successful outcomes of crisis-oriented management activities outweigh failure outcomes. Crisis management’s activities are effective when operations are sustained or resumed, that is, the firm is able to maintain or regain momentum in its core activities necessary for achieving normal business outputs and performance. At a broader level, managers should take a seat at the tables of public sector decision makers who devise policies on homeland security issues. Well-meaning governments often err on the side of national security and

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safety. They can overshoot the goal and saddle the private sector with excessive or unnecessary regulations and red tape. Managers are qualified to help judge policy decisions that affect business and participate in forums where important consequences are at stake. Managers also should cooperate with policy-making authorities. For example, public agencies know little about the 85% of physical infrastructure in the US that is owned by the private sector. Likewise, the private sector has little access to information on terrorist threats and activities held by the public intelligence community (General Accounting Office, 2003). Thus, both government and the private sector can benefit from increased information sharing and other forms of cooperation. Such cooperation, however, should be approached with caution. For instance, lobbying efforts that seek to benefit individual firms at the expense of broader, national interests should be avoided. Government officials should seek private sector involvement only to the extent conflicts of interest do not arise.

4.2 Future Research Implications It is noteworthy that governments have been able to define and investigate terrorism sufficiently to take action against it. Despite its potential impact, however, there is very little research on the linkage between terrorism, management, and marketing. The paucity of extant research is consistent with the beginning stage in the development of a scholarly body of work. The present paper, while relatively limited in terms of theory development, is an early effort to describe constructs and potential propositions relevant to terrorism and the international firm. As with any new research area, it is critical to develop theory, constructs, and conceptual frameworks that lay the foundation for knowledge development. Research is needed on how best to optimize managerial practice in the context of potential terrorist threats. Terrorism has been studied extensively in psychology, political science, technology studies, sociology, and other disciplines that can serve to underpin research relevant to international management. Scholars should investigate terrorism’s relationship to business in order to determine the nature of the terrorist threat and how to mitigate its effects. Table 2 presents a list of variables relevant to such research

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Low harm, moderate harm, severe harm

Retail consumers, industrial buyer

Direct firm impact

Indirect impact: decreasing buyer demand Indirect impact: supply chain

Indirect impact: government policies, laws, or regulations

Indirect impact: distribution channel

Bombing, kidnapping, armed assault, other large-scale, moderatescale, small-scale

Terrorist event

Severity of event interruption, shift closure Severity of event interruption, shift closure Light, moderate, severe

Variable levels

Cost or extent of physical damage, injury, or loss of life to the firm, extent of other direct harm Levels of sales volume, market share, or sales growth Efficiency/Effectiveness of supply chain operations Efficiency/Effectiveness of distribution operations Existence of new specific policy(s) or restriction(s), and evaluation of consequences, as imposed by local government, national government, supernational government, world body

Criteria established by US State Department, United Nations, or other public entity

Operationalization

Variables, operationalizations, and sources

Variable

TABLE 2.

Global economy, national economy, industry, firm, supply chain, distribution channel

Industry, firm, distribution channel

Industry, firm, supply chain

Industry, firm

Local level, national level, regional level, global level industry versus firm primary level, micro-level, macro-level pre-event, during event, post-event Firm, domestic firm operations, international firm operations

Unit of analysis

PS, FS, C, FG, Q, E

FS, C, FG, Q, E

FS, C, FG, Q, E

PS, FS, C, FG, Q, E

PS, FS, O, C, FG, Q, E

PS, FS, O, C, FG, E

Data sourcea

Light, moderate, severe

High, medium, low

Local level, country level, regional level, global level high, medium, low

Exporting, licensing, franchising, joint venture, FDI

Indirect impact: harmful macroeconomic phenomena

Risk of terrorism or actual vulnerability to terrorism

Level of security in firms’ external environment

Viability of international market entry mode

State of national/ international economy, growth rate of GDP, GNP, unemployment rate, supply shock, inflation, growth in debt levels Number of terrorist events in last 5 years; 10 years Evidence of state sponsorship of terrorism Buyer perceptions, manager perceptions, vulnerability at each stage of value chain History of local terrorism, existence of government programs to deal with terrorism, quality of national police force Manager survey, analysis of modes, performance of modes (profits, sales growth, etc.) Industry, firm, distributor, market

Industry, market, country/region

Retail buyer, industrial buyer, firm, market, country/region

Global economy, national economy, industry, firm

(Continued)

PS, FS, C, FG, Q, E

PS, C, FG, E

PS, FG, Q, E

PS, FS, C, FG, Q, E

Nature of: market selection, sourcing, production, product, pricing, communications, distribution, generic strategies, multidomestic versus global strategy High, medium, low; level relative to competitors, relative to before terrorist event High, medium, low

Business strategy

Actual number compared to earlier time, such as prior to terrorist event Actual quantity of lines, or goods compared to earlier time, such as prior to terrorist event

Number of suppliers

Level of inventory

Make, buy

Source of good

Quality of supply chain

Price

Variable levels

Continued.

Variable

TABLE 2.

Buyer perceptions, manager perceptions, analysis of vulnerability at each stage of value chain Manager survey, company records, expert opinion Actual number, manager survey, company records, expert opinion Manager survey, company records, expert opinion

Actual price

Manager survey, analysis of performance, quantitative measures of outcomes

Operationalization

Firm, supplier, distributor, industry

Firm, supplier, industry

Firm, industry

High upstream, medium upstream, low upstream

Industry, firm, supplier, distributor, market

Industry, firm, supplier, distributor, market

Unit of analysis

FS, C, FG, Q, E

FS, C, FG, Q, E

FS, C, FG, Q, E

FS, C, FG, Q, E

FS, O, C, FG, Q, E

FS, C, FG, Q, E

Data sourcea

High, medium, low

High, medium, low, no preparedness

Centralized, decentralized; independent, dependent

High, medium, low

Quality of logistics operations

Preparedness for dealing with terrorism

Configuration of international operations

Level of local responsiveness

Buyer perceptions, manager perceptions, analysis at each stage of value chain Buyer perceptions, manager perceptions, analysis at each stage of value chain, actual savings or expenditures on logistics operations, transportation costs as percentage of total sales Existence and/or quality of programs for market scanning, security programs, contingency plans Proportion of worldwide sales or sourcing done centrally, manager survey, company records, expert opinion Manager survey, company records, expert opinion Firm, distributor, industry

Firm, industry

Region, nation, industry, firm, unit or division

Upstream operations, production facility, downstream operations

High upstream, medium upstream, low downstream

FS, C, FG, Q, E

FS, C, FG, Q, E

PS, FS, C, FG, Q, E

FS, C, FG, Q, E

FS, C, FG, Q, E

All actors—terrorists, firms, buyers, and public entities—may play a role in the above variables, operationalizations, and units of analysis. a Data source: PS—public secondary data; FS—firm-provided secondary data (documents, files, reports, etc.); O—primary data via observational methods; C—primary data via case study with firm/manager; FG—focus group with managers; Q—questionnaire with firm or buyer; E—expert judgment.

High, medium, low

Quality of distribution channel

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and possible ways to operationalize them. Various methods can be employed to define terrorism and gauge its effects. Case studies and other qualitative approaches help to develop constructs and hypotheses. Exploratory research should aim to improve understanding of terrorism’s effects on marketing and the structures, strategies, and tactics appropriate for sustaining and improving company performance. Survey-based studies conducted among managers and buyers serve to confirm findings from exploratory research. Because research on these issues is at an early stage, new and multiple measures of relevant constructs, including terrorism itself, should be developed and tested for their explanatory and predictive power. Criteria might be developed to evaluate terrorism risk in particular markets, as well as its impact on specific industries or stages in value chains. Research is needed to standardize terrorist events and outcomes in order to facilitate development of an “index” of terrorism risk, which would assist managers calibrate and assess risk in their internal and external environments. Research should aim at helping manufacturers determine the ideal balance to achieve in “make-or-buy” decisions, and the ideal levels of inventory to hold. Research also might investigate the use of terrorism as a criterion for market segmentation. Findings can help managers settle questions regarding foreign market entry decisions. Research also is needed on the particular types of channel and supply chain configurations and information flow processes that minimize vulnerability to terrorism. Research might address the best approaches to follow, and the performance implications of, marketing communications. Other future research should investigate the effect of terrorism on services industries as some aspects of services are likely to vary from those of tangible products. For instance, it is known that airlines, hotels, travel agents, restaurants, financial institutions, and insurance companies all tend to be particularly affected by terrorism. Most services firms internationalize via FDI, a relatively inflexible mode that entails particular types of risks. The level of vulnerability will tend to be reflected in the “hardness” of the service (Patterson et al., 1997). That is, the vulnerability of services with a stronger tangible component is likely to vary. The contingency view has proven a useful theoretical basis for various research (e.g., Child et al., 2003; Ekeledo and Sivakumar, 1998).

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Contingency approaches by definition imply that the relationship between two variables is contingent upon some third variable (e.g., Arnold, 1982) and thus, scholars should investigate terrorism as a moderator variable and the nature of its interaction with antecedent variables in influencing important dependent variables. Organizational performance is an important dependent variable, as are findings leading to normative approaches that can be practically applied by managers. Such research should emphasize the effect of terrorism on firms’ productive activities (the supply side) and consumption (the demand side), as well as appropriate strategies and tactics for dealing with terrorism before, during and after its occurrence. When conceptualizing the effect of terrorism on business activities, it is useful to distinguish the most vulnerable links in the firm’s value chain. From the individual producer’s perspective, direct terrorism effects are relatively rare and it is more useful to view terrorism at the microlevel wherein market entry, sourcing, manufacturing, distribution, and shipping/logistics are likely to be the most vulnerable areas. The paucity of research in this area may be partially because terrorism is difficult to define and conceptualize. The concept itself and the various ways—at the primary-, micro-, and macro-levels—in which it affects value chain and business activities are undoubtedly difficult to investigate and model. Scholars might narrowly define terrorism as an act, to enable more theoretically objective approaches and quantitative analyses using empirical data. It is important to obtain data from a diverse set of companies, industries, and countries in order to enhance the external validity of findings (Lynch, 1999) and to examine the effect of various moderating factors. International research in particular requires considerable time, effort, and expense. Research challenges may arise to the extent terrorism is emotionally charged, potentially controversial, or difficult for respondents to explain. Managers may be reluctant to examine organizational failures and other negative experiences, or to share information on successful antiterrorism strategies and tactics. In the worst cases, evidence may dissipate or become distorted in heavily afflicted firms. Efforts aimed at averting terrorism can be difficult to measure and therefore may not be recognized or appreciated by organizational stakeholders. However, given the outcomes at stake, research on the linkage between terrorism and business

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is critically important and must emphasize a close fit with practice. Given terrorism’s potential impact, research in this area is imperative.

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Chapter 5.2

Foreign Market Entry Mode of Service Firms The Case of U.S. MBA Programs Michael R. Czinkota, David A. Grossman, Rajshekhar G. Javalgi, and Nicholas Nugent

1 INTRODUCTION Globalization, rising affluence in developing and transitional economies, improved infrastructure, and advancements in communication and information technologies have increased the opportunities for marketing services beyond borders (Ekeledo & Sivakamur, 1998; Javalgi & White, 2002). On a comparative basis, the service sector has become the most dynamic part of the global economy (Javalgi & White, 2002). Among services, the so-called knowledge-based sectors have been growing the fastest in developed economies, experiencing an average annual growth of 10–12% over the past several years (Styles, Patterson, & La, 2005). Knowledge-based services include management consulting, engineering, education, and information technology (Lovelock & Gummesson, 2004; Styles et al., 2005). Apart from general characteristics of services (e.g., intangibility and inseparability), knowledge-based services possess additional characteristics such as high customization, high uncertainty and resulting high risk. Within knowledge-based services, international education has taken on major economic importance and policy emphasis (Brown &

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Duguid, 2000). Education markets thrive in the developing world and through billion-dollar tutoring in Asia (Coulson, 2006). For example, at many U.S. universities, tutoring in quantitative fields is increasingly obtained via computer from abroad, rather than from the traditional graduate students in residence (Homework Tutoring, 2007). Beamish and Calof (1989) documented the significance of an internationally oriented education system for the future economic resilience of a nation. UNESCO reports that “better education contributes to higher lifetime earnings and more robust national economic growth.” (EFA, 2004). Many universities and colleges are seeking opportunities to offer their programs beyond domestic borders. Given the globalization of the world economy, business education appears to be particularly in demand. Universities are also seeking to find answers to the challenge of continued growth in the future, and attempt to position themselves to be attractive to students and faculty from around the world. Despite the importance of the service sector in both domestic and world markets, the existing empirical literature about market entry strategies of knowledge intensive service firms such as educational services is scarce (Lovelock & Gummesson, 2004). The reasons for a lack of development in the existing literature most likely relates to the complexities of the educational industry (e.g., the mode of delivery, service quality) (Scherer, Javalgi, Bryant, & Tukel, 2005), and the customary reluctance of experts on external issues to look at these same issues within their own professional internal environment. The focus of this research is two-fold. First, we aim to improve our understanding of the foreign market entry mode decisions by knowledge intensive service firms such as U.S. business schools. Second, we attempt to employ a popular international business theory, Dunning’s eclectic paradigm (1988), and test it in the context of knowledge-based service firms (U.S. business schools). Within business schools, we focus exclusively on Master of Business Administration (MBA) programs. We believe that simultaneous investigation of undergraduate and PhD programs would provide confounding elements for our analysis (e.g., links to other undergraduate fields and program size). MBA programs, however, tend to be stand alone activities which can be transferred easily and are in higher demand. For parsimony, we will limit our analysis to

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mode four of the World Trade Organization (WTO)—i.e. the mobility of an institution through a commercial presence abroad (Item 4 in Table 1). Within mode four, we will consider different forms of establishments, ranging from licensing and franchising to joint ventures and wholly owned investments. This study makes an important contribution to the international service marketing literature in that it identifies the key factors that bear on the mode of entry decisions. We believe it is one of the few articles that research market entry strategies used by U.S. business schools offering an MBA across the borders. The results of this study will help such schools to develop a comprehensive product/service market plan that includes investigating and choosing a foreign market entry mode. The organization of this research is presented in four sections. The first section covers the study background. The second section presents the literature review related foreign market entry mode of service firms. The third discusses development of hypotheses. The fourth section focuses on the findings, followed by discussion and conclusions.

TABLE 1.

1. 2. 3. 4.

The WTO framework for services trade

WTO Terminology

Higher Education Mobility Component

Example of Implementation

Consumption Abroad Delivery Abroad Cross-Border Supply Commercial Presence

Student Mobility Faculty Mobility Program Mobility Institutional Mobility

Such Abroad Fulbright Scholars Distance Learning University Formation

University Formation Licensing Investment

Franchising

Joint Venture

Full Equity Investment

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2 STUDY BACKGROUND Traditionally, international education has consisted of sending students from their home nation to another country. This approach allows local interaction between students in a new social setting, and has been heralded as “increasing international cooperation, enhancing national security and improving economic competitiveness” (Powell, 2004). Sending students abroad or hosting international students is only one of several possible approaches to the internationalization of higher education. In a knowledge-based economy, it would seem urgent that stakeholders investigate different alternatives to going international. Universities have not taken on a service sector leadership role in their own internationalization. Czinkota (2006) notes that while universities have internationalized their teaching content their internal vision and operational competence have not kept pace with globalization and the transformation of society. Student mobility is the education sector’s equivalent of what trade negotiators refer to as “consumption abroad.” All together, there are four modes of internationalization. A strategic type of cross-border activity of service industries identified by the World Trade Organization consists of delivery abroad, where a service is created and offered in another nation. Within the education sector, this approach would consist of faculty and academic mobility. Such delivery of educational services abroad is considered to work well in internationalizing both business education and business faculty (Clarke & Flaherty, 2003). The Association to Advance the Collegiate Schools of Business’ (AACSB) call for internationalized business education has resulted in incentives for faculty to venture abroad for teaching assignments in emerging markets (e.g., China, Brazil, and India) as they are undergoing dynamic levels of economic transformation (Clarke & Flaherty, 2003). A third strategic alternative refers to cross-border supply through program mobility, where the creation of the service remains in one country, but the delivery is transferred across borders. A typical education equivalent here is represented by distance learning. A fourth option then consists of commercial presence where service providers establish new subsidiaries and outlets in a foreign country. In academic circumstances, this approach would consist of institutional mobility, for example through

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the opening of a branch campus. For this last approach, in turn, there are different forms of equity-based participation. There can be licensing and franchising activities, joint ventures, or wholly owned subsidiaries. Table 1 summarizes the overall alternatives in the internationalization of services, and applies them to the academic sector. Similar to the internationalization of companies, which often relies on personal relationships or accidental linkages to provide the impetus and strategy for foreign market entry (Czinkota & Ronkainen, 2007), universities often enter into international markets through agitations of students or the personal contact of a faculty member. A more systematic approach, consisting of the employment of all four of these internationalization options in parallel, is crucial to successful expansion. After all, it may well be the international exposure of an institution which, over time, will determine where future students, future faculty members and future knowledge come from. No one country should assume that it is the sole font of supplies and participants. Even for a nation as large and as powerful as the United States, the exceptional contributors often come from abroad. For example, since 1990, almost half the U.S. Nobel laureates in Science and more than one third of laureates in Economics were foreign born (National Academies, 2005). With approximately 2400 MBA programs worldwide, there are a variety of reasons for students to enroll in an MBA program. Typically, the pre-experience student is entering a program with minimal prior business familiarity and expects to enhance personal knowledge and marketability in a competitive job market. The post-experience student typically has two-plus years of full-time work experience and now seeks to enhance personal knowledge in order to advance in position or to better understand the current environment (The Guardian, 2002). U.S. MBA programs rank high by global comparison, but they are not unique. European recruiters rank European business schools ahead of United States schools overall, citing cultural, linguistic, and relevance advantages (Richter, 1999). One survey ranked 11 non-U.S. schools in the top-30 executive education programs in the world (Industryweek.com, 2000). Over 1000 new business schools have recently sprung up in Russia and Eastern Europe (Bollag, 1997). Globalization continues to trigger economic transformation. The results are job creations, job layoffs, and an increased complexity of

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existing occupations. There is increasing international competition to recruit the best students, particularly in countries where English is the dominant language (OECD, 2003). In order to cope with these shifts around the globe, the option of entering an MBA program, that offers an understanding of leading edge of business knowledge, appeals to many people. This trend is seen in the increasing enrollment numbers of MBA students in the United States and abroad (Pohl, 2003). Like any multinational enterprise seeking to maintain its competitive advantage and earnings, U.S. business schools consider options for improving their reach and income by expanding their markets overseas. In many instances, the revenues raised by business schools have a major impact on the other colleges and departments of their home institution. For example, low revenue programs, which might have to close down due to limited enrollments or the need for high scholarship awards, can continue to exist due to internal surplus transfers from their business school. By the same token, a decrease in business school revenues, due to declining international competitiveness, may spell doom for other programs which have learned to depend on transfer payments. Finding new international markets from which to obtain new revenues, is therefore an important dimension of business school and institutional strategic planning. Foreign market entry mode is an institutional arrangement that makes possible the entry of a company’s products and services, technology, knowledge, human capital, management, or other resources into a foreign country (Root, 1987). The entry arrangement’s mode is among the most important strategic decisions that a school considering the international market will have to make (Root, 1994). Institutional arrangements with firms from different countries with different economic development involve complex factors such as host government policy, host country culture and risk, which complicate structural and resource dynamics of transactional activities (Ghoshal, 1987).

3 THE FOREIGN MARKET ENTRY MODE CHOICE OF SERVICE FIRMS LITERATURE Literature on choice of market entry mode in service firms is limited (Blomstermo, Sharma, & Sallis, 2006). Contractor, Kundu, and Hsu

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(2003) state that “. . . there is little research on the growth and internationalization of service firms . . . even though there are substantial differences among different types of services (p.9).” Since there are important differences within service types, it is critical to choose the correct foreign market entry mode. Service firms may enter foreign markets using a variety of entry modes, including exporting, licensing, joint ventures, and wholly owned operations. The key variables differentiating these entry mode choices include the varying levels of control, resource commitment, and risk (Anderson & Gatignon, 1986; Javalgi & Martin, 2007). In many instances, service firms have relatively low international switching cost which permits them to relocate activities more easily if risk conditions become too undesirable. Concurrently, a growing requirement and expectation for a local presence may entail large fixed investments and a resulting decrease in flexibility (Peinado & Barber, 2007). Control over foreign market entry mode allows service firms to deliver good quality services to international clients, which helps to build reputation. Therefore, research combining control and entry mode for the internationalization of services is important. Key direction is provided by Erramilli and Rao (1993) who found that in an institutional setting, “service firms generally tend to favor shared-control modes more when asset specificity is low than when it is high” (p.33). They also link control with country risk, cost, and firm size. The potential impact on entry strategy is clear. If a well-funded and highly successful domestic MBA program considers entering a low risk country, there might exist several successful entry strategies. Conversely, a less financially robust, marginal MBA program, considering entry into a higher-risk market, will not have the same options. When expanding internationally, a firm must make one of the most critical decisions with regard to the choice of the most appropriate entry mode (e.g., Erramilli & Rao, 1993). This decision is important because of three reasons: (1) the chosen mode requires a substantial commitment of resources, both in terms of time and money (Root, 1987), (2) the success of the firm depends on the amount of control it wants to enjoy, and (3) services are varied and service sector differences require the implementation of different international marketing strategies. Researchers make a distinction between hard and soft services (Erramilli, 1991; Erramilli & Rao, 1993). Hard services can be characterized as those

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services where production and consumption can be separated, by, for instance, placing a program on a diskette. Soft services, such as healthcare, cannot be decoupled because both production and consumption occur simultaneously. In examining the entry mode choice of service firms, both the internalization theory and the eclectic theory have been employed (see Ekeledo & Sivakamur, 2004). The internalization theory relies heavily on transaction-cost (TC) analysis. In dealing with international markets, a market transaction entails transaction costs associated with negotiating, monitoring, and enforcing a contract (Williamson, 1975 and Williamson, 1987). The TC model of entry mode argues that the threat of opportunism from licensees or other entry participants lead to a higher likelihood for firms to select high-control modes such as wholly owned ventures. (e.g., see Anderson & Gatignon, 1986). Some researchers argue that internalization theory or the TC analysis is not appropriate for comparing foreign direct investment (FDI) with exporting because it relies on conditions that lead to market failure (see Ekeledo & Sivakamur, 2004; Erramilli & Rao, 1993). To overcome such shortcomings of internalization theory, (Dunning, 1988) and (Dunning, 1980) presented an eclectic theory of FDI which is a holistic framework that brings together several thoughts in an attempt to explain the different choices to entering and serving foreign markets. This theory has been widely used in explaining the choice between FDI (e.g., joint ventures and wholly owned subsidiaries) and other forms of market entry modes (e.g., Agarwal & Ramaswami, 1992; Kim & Hwang, 1992). The primary theoretical framework underpinning this study is (Dunning, 1980) and (Dunning, 1988) eclectic theory of international production. In the following section, a detailed discussion of the eclectic paradigm is presented.

4 DEVELOPMENT OF HYPOTHESES According to the eclectic framework, the choice of entry mode during international expansions is influenced by three determinants (OLI advantages): Ownership advantages (O) of the firm, Location advantages (L) of the market, and the Internalization advantages (I) of integrating transactions within the firm.

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Ownership advantages may be characterized as firm-specific resources or capabilities that provide a unique capability to the firm (Dunning, 1988). When a firm (in our case a business school) serves a new foreign market, it is likely to encounter important liabilities such as the liability of expansion, the liability of newness, and the liability of foreignness (Cuervo-Czurra, Maloney & Manrakhan, 2007). It may be able to utilize these advantages to gain unique positions in that market. FDI type entry modes provide a firm with ownership control to protect these advantages (Anderson & Gatignon, 1986). Ownership advantages include the following: the size of the firm, the extent of international experience, and the ability of the firm to differentiate its products and services (Agarwal & Ramaswami, 1992; Brouthers, Brouthers, & Werner, 1999; Dunning, 1993). According to the theoretical developments found in the resource based view (RBV) of the firm (Barney, 1991), firm size is one of the indicators of managerial and financial resources available to the firm. To the extent that a firm possesses more resources, it will seek opportunities for expansion. While small firms are typically characterized as flexible and responsive, they are also seen as resource-constrained. Large firms, in turn, are likely to have a greater array of resources which allows them to buy their way into business life cycle changes (Miller & Friesen, 1984). Research examining large firm entry mode choice tends to suggest a positive relationship between the size of the firm and the likelihood of choosing an equity-based mode (Agarwal & Ramaswami, 1992; Brouthers et al., 1999 and Moini, 1995). A comparison of the internationalization strategy of smaller firms with that of larger firms indicates that larger firms are typically more likely to accumulate greater resources and tolerate the challenges of the internationalization effort (Pett & Wolff, 2003). Cavusgil and Naor (1987) explained that larger firms possess more flexibility in managerial and financial resources as well as production capacity. Calof (1994) noted that while smaller firms possess fewer resources than larger firms, they have appropriate resources and capabilities to be involved in international activities of lower intensity. For example, smaller firms tend to select less resource intensive, non-equity entry modes (Contractor, 1984). Translating the above discussion into our MBA focused research we hypothesize:

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Hypothesis 1 The larger the size of a business school, the greater the likelihood of a business school entering a foreign country using an equity-based strategic mode. A firm’s experience in international markets has been shown to be a very important ownership advantage with an impact on the choices of foreign entry modes (e.g., Agarwal & Ramaswami, 1992; Anderson & Gatignon, 1986; Nakos & Brouthers, 2002). A firm’s foreign market entry is explained as a process of increasing accumulation of experiential knowledge about business partners, technical factors, and human and administrative resources (e.g., Blomstermo et al., 2006). Because of this experiential knowledge, firms tend to prefer equity modes of entry (e.g., Agarwal & Ramaswami, 1992). Others note that prior experience is positively related to a firm’s preference for equity modes of entry (Davidson, 1983; Gatignon & Anderson, 1988). Thus, we hypothesize the following:

Hypothesis 2 The greater the multinational experience of a business school, the greater the likelihood of entering a foreign country using an equity-based strategic mode. Firms possessing a proprietary product or service will have more influence upon entering a country even where there are higher investment risks (Ting, 1988). Brouthers, Brouthers, & Werner (1996) examined the market entry mode choice of U.S. computer software firms, especially small and medium sized enterprises. They found that firms offering unique and differentiated products tend to prefer equity modes of entry, while firms offering more generic products tend to select non-equity modes. Osborne (1996) also supported this view. A firm that has developed and exploited a differentiated product and/or service in one market may be in a better position to exploit the same in other markets because it has already gained experience and has a system in place to better manage the operations abroad (Nakos & Brouthers, 2002). At the same time, the new market dimension may lead to a liability of newness (Cuervo-Czurra et al., 2007).

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If schools have patented and/or copyrighted their classroom approaches, processes and technology, information resources, and brand names, there could be proprietary advantages leading to the choice of a higher-risk control method. Such a higher-risk mode might yield better returns and allow a school to modify its investment so that the assets placed in the foreign country are less profitable to the host government in case they are expropriated. Therefore, the institution may have a greater tolerance for the higher risk which accompanies FDI. We hypothesize:

Hypothesis 3 The greater the product differentiation of a business school, the greater the likelihood of entering a foreign country using an equity-based strategic mode. Location advantage is another important determinant of the OLI framework. It influences the “where” decision in the internationalization process. Location advantages are due to economic differences among countries and may take different forms. Location advantages of a specific host country market can be conceptualized as market growth potential, combined with the stability of the political and economic factors (Dunning, 1993). The economic growth trend and the market size of the host country are critical for foreign investors, especially for market seeking investors. Gomes-Casseres (1993), finds economic growth trends in the host country to be positively related to the establishment of joint ventures. For foreign firms, the host country may offer such benefits as low-cost labor, access to unique skills (e.g., information technology related skills), and/or access to untapped markets. Although location advantages may be available to all firms (Dunning, 1988), not all firms may seek these advantages. As noted by Erramilli, Agarwal, and Kim (1997), location advantages can be exploited only in relation to the firm’s ownership advantages. The current level of market development is not necessarily decisive in terms of investment attractiveness. Business schools in particular are likely to look for markets with a growing, young population which is in the process of increasing the extent of business orientation. High market potential countries can be expected to have a higher likelihood of

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attracting foreign firms. For example, developing countries such as Vietnam and Brazil have sufficient potential and strategic importance to warrant consideration for the development of future capacity. Another benefit offered by some target markets is the opportunity for higher returns (in excess of the risks taken) due to the presence of greater market imperfections (Agarwal & Ramaswami, 1992). When firms enter high potential markets they may have a higher inclination to choose a sole venture such as a wholly owned subsidiary to satisfy their strategy to maintain global control (Prahalad & Hamel, 1990). Porter and Fuller (1986) suggest that firms should be more concerned with global strategic position than with the transaction costs associated with a market. Other modes, such as exporting and joint ventures may not be the most appropriate ones for entry if a firm wants to acquire long-term global market share and competitiveness (Agarwal & Ramaswami, 1992). Based on the above discussion, we propose:

Hypothesis 4 The greater the market potential perceived by a business school, the greater the likelihood of entering a foreign country using an equity-based strategic mode. In international operations, a key challenge faced by investors is external uncertainty, or the volatility of the firm’s environment. It can take many forms, including political instability, economic fluctuations, or a changing social environment (Ramcharran, 2000). Firms attempting to maximize their profits in certain countries will require tight control over their overseas ventures to reduce any threats to their investment. In countries where there is high investment risk, and high uncertainty, due, for example, to terrorism, it may not always be clear what mode of entry should be chosen for a school (Suder & Czinkota, 2005). Agarwal and Ramaswami (1992) speculate that in this situation the need to establish a market presence in a high potential country may be weighed against the need to minimize investment risks. Firms may not avoid a high-risk market, but rather choose to redistribute assets in a manner that ensures resilience in a crisis and that shares the risk. Therefore, a school entering a risky country may find that a joint venture may insulate it from

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investment risks while providing access to the market. In cases of globally well-established schools there may even be a shift to less risky investment modes such as franchising or licensing. This option is appealing because a part of the risk is shifted to the partner in the host country, which provides the U.S. school with some immunity from the investment risks in the host country. Thus, we propose the following hypothesis:

Hypothesis 5 The greater the investment risk perceived by a business school, the smaller the likelihood of entering a foreign country using an equity-based strategic mode. The third determinant of the OLI framework is the internalization advantage. The internalization theory, derived from Transaction Costs Economics, underscores the importance of firm-specific know-how when explaining the competitive advantage that international firms enjoy when compared to host country firms (Anderson & Gatignon, 1986). The internalization advantages arise from the capacity of the firm to manage and coordinate activities internally in the value-added chain (Dunning, 1988). These are related to the integration of the transactions into multinational hierarchies through FDI modes (e.g., joint ventures, wholly owned subsidiaries). Entry mode selection, therefore, must be determined by the requirements of internalization. When high integration is required, high-control entry modes such as equity modes are preferred. By contrast, low control modes may be appropriate for firms which do not wish or need to pursue integration with the target host country. One outcome of internalization advantage suggests that schools will not enter a country if their perceived risk of dissipation of knowledge, risk of deterioration of quality of services, and costs of writing and enforcing contracts with local partners is high. The perceived risks can be critical for those schools that have specialized knowledge, where protection is an important matter (Hill, Hwang, & Kim, 1990). On the other hand, these schools are also interested in market expansion and earning revenues based on their advantages. The school’s management is now faced with a decision scenario where it needs to weigh the need for protection against the potential for return. Without that protection there

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is risk to the specialized knowledge which limits the school’s future opportunities (Agarwal and Ramaswami, 1992). Lack of protection for the school would make partnerships or joint ventures risky in the long run. Therefore, the final hypothesis is stated:

Hypothesis 6 The greater the contractual risk perceived by a business school, the greater the likelihood of entering a foreign country using an equity-based strategic mode.

5 METHOD Churchill’s (1979) approach to questionnaire development was employed. We began our research with a review of the foreign market entry mode choice literature for service and manufacturing firms. Thereafter, we conducted qualitative interviews with business schools Deans/Associate Deans/Program Directors selected from the Association to Advance Collegiate Schools of Business AACSB membership schools. The purpose of the qualitative research was to seek knowledge on various aspects of the internationalization process of service firms (specifically educational institutions/business schools), the selection of foreign markets, and entry modes. In the next stage of the research design, results of the qualitative research were combined with the extant literature (Agarwal & Ramaswami, 1992) to develop a survey instrument. An initial draft of the questionnaire was tested through interviews with seven AACSB membership schools with international operations. Particular emphasis was given to clarity, validity, and relevance issues.

5.1 Sample The sample for this study includes schools that are members of AACSB International. AACSB is the professional association for college and university management education and a premier accrediting agency for

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bachelors, masters, and doctoral degree programs in business administration and accounting. This accrediting organization has 882 member schools (aascb.edu, 2007). As of September 2007, 551 member institutions held AACSB business accreditation, with 93 members from outside of the United States. It is important to note that AACSB International membership does not automatically imply AACSB accreditation. Schools that are included in the sample of this study are U.S. Graduate Business Schools that are AACSB members and have locations in overseas markets, for a total of 148 schools. They were contacted via telephone and electronic mail communications. Sixty-two schools responded to the questionnaire, a response rate of 42%. Since, many of the 62 responding schools have multiple locations overseas, the information presented here is based on 110 overseas campuses. 25% of the business schools reported fewer than 225 MBA students, 45% noted between 225 to 600 students, and the remaining 30% of the schools had over 600 students. Of the 110 campuses in the database, three out of four business schools were accredited by the AACSB International, with an average length of accreditation of 15 years. One half of the schools were public institutions. Based on the school’s mission and its general description, 11% of the schools noted a heavy emphasis on high quality research, nearly three-quarters emphasized a balance between research and teaching. The remaining schools placed a heavy focus on teaching. We examined non-response bias by using the size of the business school, since this variable could be independently confirmed for both responding and non-responding. We compared the average school size of the 62 responding schools to the average school size of the 86 nonresponding schools and found the difference between respondents and non-respondents to be statistically insignificant (F = 0.25; p = .62), indicating an absence of non-response bias based on the size dimension.

5.2 Operational Measures 5.2.1 Explanatory Variables A majority of the questions in this study use a five-point Likert scale and are taken from the existing studies (e.g., Agarwal & Ramaswami, 1992;

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Brouthers et al., 1999). The size of the business school was measured as the total number of students registered (both full-time and part-time MBA students) in a business graduate degree program. This is considered an acceptable indication of business school size because it is a common comparative measurement of all post-secondary U.S. schools (National Center of Educational Statistics online, 2003). All of the independent variables used in the study relate to one of three measurements: ownership advantages, location advantages, and internalization advantages, with each measurement representing a category from (Dunning, 1980) and (Dunning, 1988).

5.3 Reliability and Validity Issues Validity refers to the extent to which the survey instrument measures what it is intended to measure. Each scale employed in this study was based on the extant literature and a pre-test of the instrument. Construct validity was determined by examining the correlations among variables making up the constructs. Convergent validity was examined through factor analysis and simple correlations. Factor analysis was conducted with varimax rotation to determine how the selected measures loaded on expected constructs. Five factors—investment risk, market potential, multinationality, product differentiation, and contractual risk (see Table 2, Table 3 and Table 4) were extracted from the analysis. The Eigen value of each factor was greater than one. The total cumulative variation explained by the five factors was close to 70%. The reliability of each item was assessed by coefficient alpha, which ranged from .72 to .84. As recommended by Nunnally (1978), the alpha should be .70 or higher. The reliability score is a measure of the internal consistency of the items making up the construct. In our study, the alpha coefficients, representing the internal consistency of each of the five constructs, were considered to be good. Discriminant validity refers to the degree to which items of constructs are distinct. Discriminant validity is said to be satisfied if a 95% confidence interval of the inter-factor correlation between two factors does not include an absolute value of 1 (Anderson & Gerbing, 1988). In this study the 95% intervals for the inter-factor correlation were not found to

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TABLE 2.

Factor analysis of ownership advantage

A: Multinational orientation factor (Cronbach alpha = .82) How multinational do you perceive your institution to be? Scale used is: 1 = very low and 5 = very high

.759

How would you rate your institution’s technology infrastructure in handling international expansion? Scale used is: 1 = not strong and 5 = very strong

.858

How would you rate your institution’s administrative infrastructure in handling international expansion? Scale used is: 1 = not strong and 5 = very strong

.803

How would you rate your institution’s financial system in handling international expansion? Scale used is: 1 = not strong and 5 = very strong

.832

B: Product differentiation factor (Cronbach alpha = .80) How would you rate the level of difficulty in establishing an overseas graduate business program? Scale used is: 1 = not at all difficult and 5 = very difficult When considering overseas markets how would you rate the difficulty of obtaining accreditation of your home country accrediting organization? 1 = very easy and 5 = very difficult How strong has the motivation of your administrators been to seek overseas markets for the graduate business degree program? Scale used is: 1 = not strong and 5 = very strong

.858

.874

.777

include 1.0; thus, the interval test lends support to the discriminant validity of studied constructs.

6 EXAMINING THE OWNERSHIP, LOCATION, AND INTERNALIZATION DIMENSIONS 6.1 Ownership Advantages The ownership advantage variables developed were: multinationality of the business school, and the ability to develop differentiated products

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TABLE 3.

Factor analysis of location advantage

A: Market potential factor (Cronbach alpha = .73) How would you rate the demand for post-secondary education in (country)? Scale used is: 1 = not strong and 5 = very strong

.837

What growth do you project for post-secondary educational institutions in (country)? Scale used is: 1 = not favorable and 5 = very favorable

.759

What is your perception of (country) government’s attitude toward the entry of foreign graduate programs into the (country)? Scale used is: 1 = not favorable and 5 = very favorable

.840

What is your perception of the (country) government’s attitude toward the entry of foreign firms into the country? Scale used is: 1 = not favorable and 5 = very favorable

.786

B: Investment risk factor (Cronbach alpha = .83) What is your perception about the stability of political conditions in (country)? Scale used is 1 = volatile and 5 = stable

.869

What is your perception about the stability of social conditions in (country)? Scale used is: 1 = volatile and 5 = stable

.891

What is your perception about the stability of economic conditions in (country)? Scale used is: 1 = volatile and 5 = stable

.858

What do you think is the risk of converting and repatriating the income from (country)? Scale used is: 1 = no risk and 5 = very high risk

.802

What do you think is the risk of expropriation of your school in (country)? Scale used is: 1 = no risk and 5 = very high risk

.760

and/or services. They are shown in Table 2. The multinational factor consists of four dimensions, covering the orientation of the university, and the capability of its technology, administrative, and financial infrastructure to handle international expansion. The product differentiation factor covers the difficulties of establishing an overseas

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TABLE 4.

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Factor analysis of internationalization advantage

Contractual risk factor (Cronbach alpha = .72) Compared to your situation in the U.S., how would you rate the cost of making and enforcing contracts in (country)? Scale used is: 1 = much less expensive and 5 = much more expensive How sure are you that your academic standards will be maintained if you operate jointly with a local educational organization/ institution from (country)? Scale used is: 1 = no confidence and 5 = strong confidence What do you think is the risk of dissipation or misuse of your proprietary knowledge if you operate jointly with a local educational organization/institution in (country)? Scale used is: 1 = no risk and 5 = high risk

.674

.736

.783

program, the difficulties of obtaining accreditation and the motivation for the internationalization. The Cronbach alpha for these two factors is .82 and .80 respectively.

6.2 Location Advantages Location advantage variables consisted of two factors: market potential and investment risk. As shown in Table 3, market potential was measured using four Likert-scale items. They addressed, on a country specific basis, the demand for post secondary education, its projected growth, and the attitudes of government towards foreign market entry in general and that of graduate programs in specific. The investment risk factor consisted of five items, namely political, social and economic risk, currency repatriation risk and expropriation risk. These issues are important because the perception of the school’s administration relating to the safety of revenues and assets can reduce a school’s ambition to locate in riskier countries even though the market potential is positive. The Cronbach alpha for these two factors is .73 and .83 respectively.

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6.3 Internalization Advantages 6.3.1 Contractual Risk In order to measure the internalization dimension of a school entering overseas markets, the perceived risks involved in sharing assets and skills with local educational organizations were determined. Because these costs can be difficult to estimate (Buckley, 1988), researchers have recommended the measurement of contractual risks associated with sharing the (school’s) assets and skills (Dunning, 1980). The risks include costs of making and enforcing contracts in a foreign country when compared to the U.S., the risk of dissipation of proprietary knowledge, and the risk of deterioration in the quality of services if operating jointly with a host country partner or organization (Agarwal & Ramaswami, 1992). As shown in Table 4, contractual risk was measured with three five-point Likert type items that examined the cost of making and enforcing contracts, the uncertainty of whether academic standards of quality would be maintained in joint operations with a local educational institution/organization, and the risks of dissemination or misuse of proprietary knowledge by a local partner.

6.3.2 Dependent Variable The dependent variable is the mode of entry for each location overseas. Respondents were asked to provide a list of the overseas locations where they have established programs and to indicate the type of relationship that has been established (wholly owned, joint venture, license, or franchise). Based on Willis (2000) as well as on the feedback provided through the pilot study, the choices for mode of entry were divided into two categories: non-equity mode (e.g., franchising and licensing) and equity mode, which include both joint ventures and wholly owned subsidiaries.

6.3.3 Control Variables An AACSB accreditation variable, measured as yes or no, was included. Accreditation occurs at varying levels including geographic location (i.e.

675

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state and national) and the type of the degree offered (i.e. business, medicine). For business schools one of the most recognized and acceptable accrediting organizations is the Association to Advance Collegiate Schools of Business. Many member business schools are not accredited by AACSB due to varying circumstances ranging from institutional financing to academic eligibility (aacsb.edu, 2007). Typically those schools that are accredited are perceived as having achieved a high level of quality.

7 STATISTICAL ANALYSIS We examined the correlations of the variables used in the study (see Table 5) and found that none of the correlations appeared to be large enough to warrant concern about issue of multicollinearity (Hair et al., 1998). To test the hypotheses discussed above, logistic regression, a multivariate technique for estimating the probability that an event occurs was employed. This technique has been used extensively in studies dealing with the choice of market entry modes as a method to

TABLE 5.

Correlation matrix

Variables

1

2

1. Multinationality 2. Product Differentiation 3. Market Potential 4. Investment Risk 5. Contractual Risk 6. Size 7. AACSB Accreditation 8. Mode of Entry

1 .19a

1

.05 –.19a –.07 .29b .07

.23 1 .05 –.28b –.20a –.146 .29b .20a .13 .03

a b

.14

Significant at the .05 level. Significant at the .01 level.

.19a

3

.31b

4

5

6

7

8

1 .17 1 –.26b –.20a 1 .08 .24a .24a 1 .15

.17

.07

.01 1

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predict the occurrence of the dependent variable (e.g., Agarwal & Ramaswami, 1992; Erramilli & Rao, 1993; Gatignon & Anderson, 1988). It is recommended when the dependent variable is dichotomous; there are qualitative and quantitative explanatory variables; and the underlying assumptions of multivariate normality may not be met (Hair, Anderson, Tatham, & Black, 1998). The functional formulation of the logistic regression can be expressed as follows: p (mode choice = 1) =

1 (1 + e)–Z

where, Z = β + βX1 + βX2 + βX3 + . . . + βXk with X representing the explanatory variables. The model was estimated using the maximum likelihood procedure. The overall fit is assessed via the model’s likelihood ratio (χ2), which compares the likelihood of the model with and without the variables. For overall assessment, the likelihood ratio test can be complemented with the correct classification rate, which should be compared with the percentage of cases correctly classified by chance alone.

8 RESULTS The goodness of fit results, along with the significance of the explanatory variables is shown in Table 6. The overall percentage of cases correctly classified is 75%, which compares well with the 57.5% that can be expected with the proportional chance criterion (an improvement of 29%). The Wald statistic, also shown in Table 6, indicates the significance of each estimated coefficient, providing tests for individual hypotheses. A hypothesis is supported if the coefficients has the predicted sign and is statistically significant. The findings of the study are promising. Based on the logistic regression analysis results of the hypotheses, we obtain the following findings about the statistical significances of the hypotheses: under the ownership advantages, the variable size was not significant at the 95% confidence level (p < .09); thus, hypothesis H1 regarding the

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TABLE 6.

Logistic regression results

Variables

Ownership related variables Size Multinational experience Product differentiation Location variables Market potential Investment risk Internalization Contractual risk Control variable AACSB accreditation Chi-Square Correct Classification rate a b

677

Parameter estimates

Wald statistic

.001 .570 .931

2.74 3.56 9.43

.09 .05a .001b

1.01 .341

10.70 1.67

.001b .19

.534

4.01

.05a

0.043

.83 .0001

.134 33.7 75%

Significance level

p < .05. p < .01.

encouragement of international entry by size was not supported. The other two ownership variables namely multinationality (p < .05) and ability to differentiate products (p < .001) were statistically significant, thus, supporting hypotheses H2 and H3. Experience and the uniqueness of a school do matter when it comes to an equity-based venture. Under the location variables, market potential was significant (p < .001), supporting H4; however, the variable investment risk was not significant, indicating H5 was not supported. Finally, the variable contractual risk was significant (p < .05), thus supporting H6.

8.1 Additional Analysis Since our survey instrument did not elicit information on the rankings or reputation/prestige of the business program, we used the listings of the rankings of the business schools’ MBA programs published by Business

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Week. Business Week (2008) listed rankings of 200 business schools’ MBA programs in two categories: national and regional. According to this listing, there were top-30 MBA programs under the national category and the remaining 170 were listed under the regional category. We compared this national and regional listing/ranking of the MBA programs to our study sample and found a total of 34 business schools in common under the national/regional reputation category (7 under the national reputation and 27 under the regional reputation categories). We created a new dummy variable “reputation/prestige,” coded as 1 = national/regional prestige and 0 = all other schools. Using this variable, along with other variables listed in Table 6, we performed additional analysis using the logistic regression technique. Interestingly, the reputation/prestige variable was not found to be significant. Thus, in our study sample, we conclude that the international entry mode choice of U.S. business schools was not influenced by the reputation/prestige of the program.

9 DISCUSSION The size of a business school did not appear to be a significant variable when considering investing abroad. This conflicts with several studies (Buckley & Casson, 1976; Caves & Mehra, 1986; Cho, 1985 and Kimura, 1989; Terpstra & Yu, 1988; Vernon, 1966 and Yu and Ito, 1988), which have found size effects when looking at the entry decisions of a large corporation. Our results can feed directly into mode of entry strategy. A school of any size can consider the mode of entry which appeals to its particular situation. Small, medium and large schools will not necessarily be precluded from selecting from a variety of entry strategies. Success in the foreign markets that a business school of any size is intending to serve will mainly depend on managing collaborative relationships, developing customized, creative programs to meet the needs of the target country’s educational demands, estimating and meeting capital requirements, and mainlining educational and service quality. Smaller institutions that are aggressive in pursuing international markets tend to be more creative and innovative in their international marketing programs in order to adapt to the conditions of the local

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markets. International product innovativeness strategy underscores the importance of developing products or programs that respond to the needs of the new markets and not just retrofitting or modifying existing programs or curricula. Furthermore, those business schools that have sufficient resources may enter multiple countries faster by varying their market entry strategies. The size of the business school may not necessarily influence the scale and scope of its internationalization efforts. A business school such as the University of Pennsylvania with over 1800 business students, and Georgetown University where there are less than 650 graduate business students both have campuses in overseas markets grounded in foreign direct investment as well as other modes of entry. Based on the analysis performed, multinational experience of a school appears to play a significant role in determining the mode of entry of a school venturing overseas. Greater experience seems to increase a school’s willingness to invest. The news is good for the proliferation of higher education. Since the sharing of knowledge does not imply its loss, but rather its increased use, opportunities are available for both equity and non-equity players. Also, expansion mode decisions can be driven by market considerations rather than resources. Just as businesses increasingly develop different forms of alliances depending on the local opportunities, business schools should also be willing to use a variety of approaches in different markets. One size does not fit all. We also find an impact of a business school’s product differentiation on overseas market entry. A school that is perceived as having proprietary creations (e.g., case studies, reputation) needs to protect these properties by its choice of market entry. Rather than jeopardize its property rights, a school may determine that the best protection for a differentiated product is to use a mode of entry that involves more ownership by the institution. As a result of our finding, we agree with Ting (1988) who concluded that those firms possessing a proprietary product or service will have more influence on entering a country and bargaining even where there are higher investment risks. In our study, schools were perceived to have a differentiated product based on their characteristics, accrediting organization’s demands, and the motivation by school’s management to seek overseas markets. Therefore, where U.S. business schools perceive a higher product differentiation, choosing either a joint

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venture or a wholly owned subsidiary may promote the long-term success of that overseas location. In this study, the rankings of the business schools did not influence the choice of foreign market entry decisions. It may be that a business school’s prestige mainly influences the speed and scope of foreign market entry. It is worthwhile to undertake more research to investigate this relationship as more U.S. business schools are trying to invest more abroad and expend larger sums to improve the rankings of their MBA programs. Today, U.S. business schools are facing more challenges than ever before as more and more competitors are emerging from Europe and Asian economies. The U.S. is no longer the only place to go and pursue the dream of getting an MBA degree. Increasingly, the U.S. is only one location where one can select or establish collaboration with business schools (Scherer et al., 2005). In the next five to ten years, most MBAs awarded may well come from multi-country strategic collaboration, for example in emerging markets such as India and China or from corporate business teaching programs. Already the McDonalds Corporation has obtained approval from the British government to offer A-level degrees. This research has found that a school’s expansion into overseas markets will typically depend on the demand for the type of education offered, and on the willingness of the host country to accept this type of commerce. Higher market potential is likely to trigger an equity mode of entry. Not only do individuals realize the value of a graduate degree in business from an international school, but many governments also see the value of hosting a foreign school in their country. In several circumstances, schools have entered countries with support from government, which encourages these educational endeavors and decreases their constant risk. Governments also often support the consumers of higher education with grants and stipends. For a MNC entering a country with a profit-seeking venture, such consumption support is not common, and therefore unique to the higher education sector. In addition, education can be used as a mediating dimension for the attraction of additional foreign direct investment. Typically, regions trying to attract new investment highlight the existence of a dynamic and prestigious education system, since knowledge is seen to provide a network effect of added value. Encouraging investment in higher education can help create a new competitive

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platform. Attracting international MBA programs may therefore well become the initiation of future international clusters of expertise and production. WTO rules which restrict the encouragement of international products are focused on goods, and not on services (Adlung, 2006). Therefore, governments have a great amount of flexibility in promoting services without violating international agreements and can use their service support to generate better conditions for goods production. We believe that it is very likely for governmental support to increase. A school entering a country will be most interested in creating a program and attracting students who will become future anchors of support for their school. As citizens of a country become more educated, they will be able to obtain better jobs and therefore help create a society which can eventually encourage more education. Successful entry can therefore be critical to re-shape the local market, which permits further service growth. Business schools choosing foreign direct investment in countries with higher market potential are finding more security in a higher investment mode rather than using other modes of entry. Where business schools perceive a higher market potential, choosing either a joint venture or a wholly owned subsidiary may promote the long-term success of that overseas location. Given our findings, we therefore believe that universities should go beyond the traditional “box” of only sending students, faculty or programs abroad, but to also consider seriously the options of either greenfield investments, friendly acquisitions or even takeovers. The findings in this research did not show a significant relationship between greater investment risk and the choice of entry mode not involving foreign direct investment. Therefore, we can infer that increased investment risk may not play an important role in determining if an educational institution selects a non-equity mode of entry. Of course it could also be the case that the investment risk conditions are either neglected or too poorly understood by academic administrators and their advisors. However, an educational institution’s perception of higher contractual risk appears to play a significant role in choosing foreign direct investment as an entry mode into a foreign country. This finding is supported by Agarwal and Ramaswami (1992) who found that firms going overseas will choose to enter a country that has a higher contractual risk if they are able to exercise more control over their

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product. With business schools entering overseas markets where there is a perceived higher contractual risk, the school may be more successful with using a type of foreign direct investment mode in order to reduce the contractual risks. Foreign direct investment modes, such as joint venture or wholly owned subsidiaries, may help decrease dissipation of proprietary knowledge, maintain academic standards, and decrease the cost of enforcing contracts in a foreign country.

10 CONCLUSIONS AND DIRECTIONS FOR FUTURE RESEARCH This study makes several important contributions both to international services marketing practitioners and scholars. First, the research identifies and applies key constructs of mode choice from Dunning’s eclectic theory of international production and the entry mode literature to business schools. The implications of the findings in this research have shown that if a business school chooses to expand into overseas markets it should consider certain components such as market potential, product differentiation, and contractual risk. The present study focuses on higher education, especially management education delivered by U.S. business schools. As with many empirical studies, out study has several limitations and presents a number of future avenues for research. This study focuses on the foreign entry choice of education services offered by U.S. business schools. There is a need for more research and better understanding of the internationalization process of other types of knowledge intensive business services (e.g., medical services), from other nations as well. Although in this study we did not find any significant support for the relationship between school size and foreign market entry decisions, it is possible that other characteristics such as international experience of the business school may influence the choice of foreign entry mode decisions. We therefore call for future research to investigate the relationships between business schools’ years of international experience and the scale, scope, and speed of the internationalization by the business school’s MBA and other professional university programs. This study encourages researchers to investigate further determinants which might

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have significant impact on the foreign market entry mode choice of service firms. Given the increasingly rapid generation of knowledge and the improvements in technology useful for its dissemination, there is likely to be more activity and competition in the higher education sector. Increasing technological capability is also likely to generate academic “distance-jobbing”, where information dissemination can be distributed around the globe—coming from and going to everywhere. Understanding how entry modes are chosen and how they affect success is crucial both to the firms (in our case, universities), themselves, as well as the governments who are likely to expand their international education approaches. It must be noted that modes of internationalizations are complex within and between different knowledge-based service firms. In this study, we have concentrated mainly on the WTO mode 4—the foreign direct investment mode of entry. Clearly, the other three modes of student, faculty and program mobility also have large roles to play and are likely to require different actions by universities. Though our conceptual approach has been global, our data were obtained from only U.S. MBA programs— leaving room for additional findings from current and future programs in other nations. Focusing on these different modes, and also on different sectors and locations of knowledge-based service firms, researchers may be able to identify additional factors that are unique to the service sector. Much needs to be done to further enhance our understanding of the internationalization of knowledge-based service firms.

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F. Root, 1994. Entry strategies for international markets, Lexington Books, Lexington, MA (1994). R. Scherer, R. Javalgi, M. Bryant and O. Tukel, 2005. Challenges of AACSB international accreditation for business schools in the United States and Europe, Thunderbird International Business Review 47 (6) (2005), pp. 651–669. C. Styles, P. Patterson and V. La, 2005. Exporting services to Southeast Asia: Lessons from Australian knowledge-based service exporters, Journal of International Marketing 13 (40) (2005), pp. 104–128. G. Suder and M. Czinkota, 2005. Towards an understanding of terrorism risk in the MNE, Multinational Business Review 13 (3) (2005), pp. 3–23. V. Terpstra and C. Yu, 1988. Determinants of foreign investment of U.S. advertising agencies, Journal of International Business Studies 19 (1) (1988), pp. 33–46. The Guardian. 2002. To MBA or Not to MBA? www.educationguardian.co.uk, website accessed June, 2003. W. Ting, 1988. Multinational risk assessment, Greenwood Press, Westport, CT (1988). R. Vernon, 1966. International investment and international trade in the product cycle, Quarterly Journal of Economics 80 (2) (1966), pp. 190–207. O. Williamson, 1975. Markets and hierarchies: Analysis and antitrust implications, Free Press, New York, NY (1975). O. Williamson, 1987. The economics of organizations: The transaction cost approach, American Journal of Sociology 87 (3) (1987), pp. 548–577. Willis, M. 2000. How Chinese state universities and foreign universities cooperate in an international education market: The development and application of a four tiered sinoforeign higher education cooperation model. Proceedings of the Australian and New Zealand Marketing Academy Conference, Gold Coast, Queensland. C. Yu and K. Ito, 1988. Oligopolistic reaction and foreign direct investment: The case of the US tire and textiles industries, Journal of International Business Studies 19 (3) (1988), pp. 449–460.

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Chapter 5.3

How Government Can Help Increase U.S. Export Performance Testimony Before the House Committee on Small Business Michael R. Czinkota

Honorable Committee Members: Thank you for inviting me to testify today. It is a great pleasure to do so, since it allows me to use our three decades of research at Georgetown University on export issues and smaller sized firms in order to provide you with a frank and objective perspective on export promotion activities. I ask that my full statement be included in the record. Thank you. Exports are important. They increase the availability and choice of goods and services to individuals around the globe, and improve the standard of living and quality of life. Exports deserve government attention because they can affect currency values and the fiscal and monetary policies of governments, and determine the level of imports a country can afford. Exports also shape the public perception (both at home and abroad) of the competitiveness of a nation, which in turn influences the trust and confidence a nation experiences and can draw on. The impact of exporting has grown substantially during

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most of the past forty years, as the value of world exports of goods and services has risen from $ 200 billion to almost $ 19 trillion (WTO, 2010). On the level of the firm, exports offer the opportunity for economies of scale. By broadening its market reach and serving customers abroad, a firm can produce more and do so more efficiently, which is particularly important if domestic sales are below breakeven levels. As a result of exports, a firm may achieve lower costs and higher profits both at home and abroad. Through exporting, a firm benefits from market diversification, and can take advantage of different growth rates and different risk levels in different markets, and gain stability by not being overly dependent on any particular market. Exporting also lets the firm learn from the competition, makes it sensitive to different demand structures and cultural dimensions, and proves its ability to survive in a less familiar environment in spite of higher transaction costs. All these lessons tend to make the firm a stronger competitor both abroad and at home. A successful export performance is therefore typically proof of a firm’s special talents which enable it to prosper. Such a display of economic strength of the firm is, on an aggregate level, also a manifestation of the economic success and security of a nation. In spite of all these positive aspects of exporting, there are obstacles, both real and perceived, which often prevent firms from exporting. Many US businesses often are satisfied to remain local, because of the size and vitality of the domestic market. Many also see only the risks involved in exporting rather than the opportunities that the international market can present. The psychological distance of foreign markets, caused by a lack of familiarity with foreign markets and uncertainty about export processes, is a real barrier to many U.S. managers, particularly small business owners. As a result, the United States under-participates in exports when compared to other nations. On a per capita basis, German exports in 2009 were $ 13,670 for every man, woman, and child. The figure for Japan was $ 4,063; for the United States, it was only $ 3,238. Given our imports of $ 4,707 (an activity in sharp decline after the global financial crisis) we are encountering on an ongoing basis large trade deficits, which make us indebted to other nations and let them acquire leverage over us. It is

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therefore worthwhile and necessary to increase the export activities of US firms. President Obama has announced the goal of doubling US exports within the next five years. A noble goal, particularly since, for the time being, export growth has been halted on a global level. For example, in the United States, exports in 2009 were below the level of those in 2007. Although US exports had grown at an impressive rate in the 2006 to mid-2008 period, overall, in the ten years from 2000–2010, US exports grew only by about 50 percent. Doubling of exports in five years is an ambitious goal, but a goal which can bring much improvement to the nation. Key issues are: How we can achieve such a goal? What activities need to be rebalanced or restructured to set us on the right path? Which countries will reduce their participation in world trade in order to afford new opportunities to US firms? Where will the market growth for increased US exports come from? How can, with prudent use of government resources, US firms be enticed to export more? Particularly the latter question is crucial if we are to achieve major behavior modification by private sector firms. Our research has shown that as a firm starts to export, unusual things can happen to both risk and profit. In light of the gradual development of expertise, the many concerns, and a firm’s uncertainty with the new environment it is about to enter, management’s perception of risk exposure grows. In its previous domestic expansion, the firm has gradually learned about the market, and therefore managed to gradually decrease its risk. In the course of international expansion, the firm now encounters entirely new factors such as currency exchange rates and their vagaries, greater distances, new modes of transportation, new government regulations, new legal and financial systems, new languages, and often substantial cultural diversity. As a result, the firm is exposed to increased risk. At the same time, due to the investment needs of the exporting effort to provide for information acquisition, market research, and trade financing, the immediate profit performance may deteriorate. Our research has clearly found that export procedural expertise is crucial for successful performance. We find however that such expertise and managerial ability falls short even by experienced large exporters (Czinkota and Kotabe 1998).

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Eventually, a firm will become familiar with international markets, and the diversification effects of marketing internationally are likely to reduce the risk below the previous “domestic only” level. Over time, profitability is likely to increase as performance data of exporters have shown. Yet, in the short and medium term (typically during the first two years of exporting), managers may face the unusual and perhaps unacceptable condition of rising risk accompanied by decreasing rewards. Also, mistakes will happen during the export learning process, some of which can be particularly distressing to small businesses. In light of this reality, and not knowing whether there will be a pot of gold at the end of the rainbow, many executives either do not initiate export activities or discontinue them. A temporary gap in the working of market forces seems to exist. Government export assistance can help firms over this rough patch to the point where profits increase again and risk heads downward. Bridging this short-term market gap may well be the key role of export assistance, and the major justification for the involvement of the public sector. Export assistance can target the organizational characteristics and capabilities of the firm and try to improve them. It can also work on the managerial characteristics and contribute to the improvement of knowledge and competence. Government also needs to be continually involved in the international market environment, in terms of learning, tracking and negotiating the shape of the environment. Export assistance will be most effective when it reduces the risk to the firm and increases the rewards from export operations, particularly when the stage-specific experience and concerns of firms are taken into account. For example, providing information on market potential abroad is likely to decrease the risk (both real and perceived) to the firm. Offering low-cost credit is likely to increase the rewards. Macro assistance in the foreign market environment can consist of international trade negotiations designed to break down foreign barriers to entry. Micro assistance consists of learning from the foreign market and its customers, and passing on that knowledge to enable entering firms to adjust to that market. Export assistance should be concentrated primarily in those areas where profit and risk inconsistencies produce market gaps, and be linked directly to identifiable organizational or managerial characteristics that

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need improvement. Otherwise, assistance supports only exports that would have taken place anyway. There should be a clear demonstration of export additionality which occurs due to government support. In order to assess such effects, it is important to encourage and devise export performance measurements which don’t just evaluate issues such as governmental budget compliance, but assess bottom line performance shifts, not just in terms of profitability, but also in terms of major competitive achievements. There also needs to be consideration of international rules. The regulatory aspects of the trade environment have changed. Decades ago governments were virtually unrestrained in their export promotion activities. Today, international accords are very restrictive when it comes to such government intervention. NAFTA, for example, sharply limits the extent to which governments can encourage their exports, and provides for very specific and rapid remedies when violations are suspected. The World Trade Organization has taken a much closer look at export promotion activities, has identified trade distorting practices and has devised rules which circumscribe the permitted export promotion practices. These WTO rules are particularly opposed to export subsidization, though they are confined mainly to the export promotion of goods rather than services. Yet, export promotion support is necessary. Every day, new firms are beginning to learn about the international market and are running into barriers to international trade. For example, in any given year, 15 percent of US exporters will stop exporting, while 10 percent of non-exporters will enter the global market (Bernard and Jensen, 1997). The most critical juncture for firms is when it begins or ceases to export, which is where export promotion may have its greatest impact. Export assistance should emphasize those areas where government can bring a particular strength to bear such as connections and contacts, prowess in opening doors abroad, or information collection capabilities. Externally, programs should aim at the large opportunities abroad in order to also provide for economies of scale for the governmental assistance efforts. As far as firms are concerned, attention should not just concentrate on assisting or bailing out industries in trouble, but also on helping successful firms do better. There should also be some focus on

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the benefits triggered by increasing exports. For example, one important reason for export promotion is the creation of jobs and the strengthening of the economy. We know that different industries create different amounts of jobs when they increase their production activities. This difference in jobs created per billion $ of exports, is a function of competence, competition, automation and the labor intensity of an industry. In prioritizing national expenditures, it might help to consider the job creation as one criterion in the allocation of resources.

SOME SPECIFIC EXPORT ASSISTANCE PROGRAM CHANGES Traditionally, export promotion has aimed to please the local customer, the constituent—the exporting firm. Given the intent to increase exports, however, it may make sense to devote promotional funds to achieve a better understanding of the actual buyers of exports, namely the customers abroad. What it is they want and need, and what are their alternatives? The goodwill and interest of these customers is crucial, since any promotion of exports will fall short, if customers in the target market are not buying. Such a demand-oriented customer focus requires substantial research activities abroad. Findings could tell us about the weaknesses of export activities. In what areas does an industry or a firm need to improve its export product or export processes? How can it be more responsive to changing demand patterns? For example, is better/faster/safer transportation required? How can transport-tracking systems be linked to facilitate better global supply chain management? A better understanding and meeting of such customer driven needs can well help propel the potential exporter to become the winning bidder.

Making Accidents Happen Many firms become exporters by accident. Managers often receive unsolicited orders over the transom from abroad, and then have to make a choice as to whether or not to fill these orders. Such unsolicited orders

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have been found to account for more than half of all cases of export initiation by small and medium sized firms in the United States. (Czinkota 1982). Today, due to the growth of corporate web sites, firms can easily become unplanned participants in the international market. For example, customers from abroad can visit a web site and place an international order. Of course, the firm can choose to ignore foreign interest and lose out on new markets. Alternatively, it can find itself unexpectedly an exporter. In the services area, specialty retailers such as bookstores and fitness equipment sellers are examples of industries that in this way have become international. Export promotion can focus on such unsolicited orders and try to ensure that more of them reach a firm. Key questions are: In which ways can the offering of a firm be disseminated globally so that interested parties learn about the existence of a product? How can such parties then be guided in order to make it easy to submit unsolicited inquiries about such a product? How can both the buyer and seller exchange information and develop a trust level to such a degree that order placement and order fulfillment becomes possible? With regard to specific initiatives which are likely to increase exports, here are some suggestions: Exporting competence and confidence are crucial to our economy. The customer is particularly exposed to the procedural expertise of firms. The Department of Commerce could encourage, collaborate with, and sponsor a Professional Certification in Exporting. Such professional certification could be taught in Business Schools and Community Colleges. It also makes sense to encourage liberal arts students or language program participants to incorporate some international business education in their programs. Exporting must become part of the national game plan, just as it has been for decades in Japanese and German society. The time is right for such an initiative. In order to learn by example, each State could rally an annual competition for the best case study written on an export entry success by a company in the State. Such studies should present an export problem which needed to be addressed and was solved. A substantial prize for the winner (s) would encourage such work. Just like the peer reference power of adolescents, companies need concrete success stories they can read about to convince them that exporting is worth pursuing

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and problems can be solved. Preferably such case work would involve support from Export Assistance Centers and Chambers of Commerce. Hundreds of such short cases a year could be added to national resource centers and be made available on-line through the Department of Commerce Centers which would provide for a substantial data base which would help in training swaths of interested people. Today is an era of social responsibility and the awakening of personal participation in major issues. Discussions of public service abound—but, so far, have mainly been confined to issues such as climate concerns, sustainability and poverty relief. Social service is seen mainly in the context of doing good works for disadvantaged people. Yet, it would seem that exporting should also qualify as a highly desirable social goal. Business Schools should encourage their students to carry out unpaid internships in order to help stimulate export growth. Doing so can involve research for government and private sector reports, development of marketing campaigns, or even forming the vanguard for a group of companies in exploring markets abroad. Collaboration between Business Schools, Export Assistance Centers, and Chambers of Commerce should be much greater than it is now, and should be institutionalized rather than dependent on the initiative of individual professors etc. One could even envision a period of national service devoted to the achievement of national priorities, in this case, to export enhancement. Finally, it might be useful for Congress to consider the development and implementation of an “Export Impact Statement” in connection with major policy decisions. Export trade considerations should also become an integral part of foreign policy negotiations instead of just an afterthought. It must be recognized that successful international trade leads to a strong US economy, which in turn is a necessary prerequisite for this country to remain the guarantor of its political achievements.

REFERENCES Bernard, Andrew B. and J. Bradford Jensen, “Exceptional Exporter Performance: Cause, Effect or Both,” Census Research Data Center, Pittsburgh, Carnegie Mellon University, 1997.

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Czinkota, Michael R., Export Development Strategies: U.S. Promotion Policy, Praeger, 1982. Czinkota, Michael R. and Masaaki Kotabe, Trends in International Business: Critical Perspectives, Oxford, Blackwell Publishers, p.8. World Trade Organization (WTO) International Trade Statistics, www.wto.org, accessed April 26, 2010.

Chapter 5.4

Three Dimensional The Markets of Japan, Korea, and China are Far from Homogeneous Masaaki Kotabe and Crystal X. Jiang

Asia is one of the world’s most dynamic regions, and offers multiple opportunities for businesses and investors. In terms of its nominal gross domestic product (GDP) in 2005, Japan has the largest economy ($4.80 trillion), followed by China ($1.84 trillion) and Korea ($.72 trillion). China’s real purchasing power exceeds $7 trillion, Japan’s is estimated at $4 trillion, and Korea’s is estimated at $1 trillion. These giants’ combined purchasing power is comparable to the $12 trillion U.S. economy. One of the challenges faced by American and other Western multinational companies is a tendency to lump together these markets and assume that Asian consumers have similar tastes and preferences, moderated by different income levels. This is not only a very shortsighted view, but also a risky assumption when entering these markets. Asian countries have distinct cultural, social, and economic characteristics that affect consumer behavior, with consumers in Japan, Korea, and China differing in brand orientations, attitudes toward domestic and foreign products, quality and price perceptions, and technology feature preferences. A comparative analysis of consumer behaviors can help companies identify effective marketing strategies, and enable them to successfully tackle these Asian markets (see Exhibit 1).

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EXHIBIT 1.

Market characteristics of the three largest Asian economies

Population (2005) Nominal GDP (2005) GDP purchasing power parity (2004) GDP per capita purchasing power parity (2004) GDP real growth rate of country (2004) Degree of luxury brand consciousness Preference for foreign products Price/quality perception Importance of high-tech features on new products

Japan

Korea

China

127 million $4.80 trillion $3.7 trillion

48 million $ .72 trillion $ .92 trillion

1,306 million $1.84 trillion $7.3 trillion

$29,400

$19,200

$5,600

2.9%

4.6%

9.1%

Very strong

Strong

Varied

Strong (particularly for European products) Weak Very strong Extremely quality Polarization of Very demanding consumption price-conscious

Very high

Very high

Varied

Sources: Central Intelligence Agency, World Factbook, and Index Mundi

BRAND ORIENTATION Japan Of all the developed countries, this is the most brand-conscious and status-conscious. It is also intensely style-conscious: Consumers love high-end luxury goods (especially from France and Italy), purchasing items such as designer handbags, shoes, and jewelry. Since 2001, Hermes, Louis Vuitton (commonly referred to as LVMH), and Coach have opened glitzy flagship stores in Tokyo and enjoyed double-digit sales growth. And the country represents 20% of Gucci’s worldwide revenue,

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15% of LVMH’s, and 12% of Chanel’s. It seems that a slumping economy has not inhibited its consumers. Eager to “know who they are,” they prefer brands that contribute to their senses of identity and self-expression. These highly group-oriented consumers are apt to select prestigious merchandise based on social class standards, and prefer products that enhance their status. Accordingly, they attach more importance to the reputation of the merchandise than to their personal social classes. Noticeably, the country’s consumer markets have expanded to China and Korea. In Shanghai or Seoul, you can see the influence of Japan’s fashion trends and products. There’s even a Chinese word for this phenomenon: ha-ri, which means the adoration of Japanese style.

Korea Consumers have very sophisticated tastes, show immense passion for new experiences, and favor premium and expensive imported products. In 2004, the Korean Retail Index showed continuous growth of premium brands in certain product categories, such as whiskey, shampoo, and cosmetics. Consumers also demonstrate great interest in generational fads (expressions of their generations and cultures, not just of their economics or regions), thereby selecting products that follow their generations’ judgments and preferences.

China Roughly 10 million–13 million Chinese consumers prefer luxury goods. The majority of them are entrepreneurs or young professionals working for foreign multinational firms. Recent studies found that 24% of the population, mostly in their 20s and 30s, prefers new products and considers technology an important part of life. (Those in their 40s and 50s are price-conscious, brand loyal, and less sensitive to technology.) With higher education and purchasing power, this generation is brand- and status-conscious. It considers luxury goods to be personal achievements, bringing higher social status.

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Purchasing behavior tends to vary regionally. Consumers in metropolitan areas follow fashions/trends/styles, prefer novelty items, and are aware of brand image and product quality. These consumers live on the eastern coast—in major cities such as Shanghai, Beijing, Shenzhen, and Dalian. There, luxury brands such as Armani, Prada, and LVMH are considered prominent logos for high-income clientele. According to LVMH, this country is its fourth-largest market in terms of worldwide sales. It’s no wonder that many high-end firms label these consumers “the new Japanese”: a group of increasingly wealthy people hungry for brands and fanatical about spending.

DOMESTIC VS. FOREIGN Japan Although consumers are extremely demanding and have different perceptions of products made in other countries, they are generally accepting of quality foreign products. However, Japan is mostly dominated by well-established companies such as Canon, Sony, and Toyota. Many globally successful firms experience great difficulty gaining footholds. In this market, Häagen-Dazs Japan Inc. succeeded the exit of competitor Ben & Jerry’s, dominating the premium ice cream market with a 90% market share. It successfully delivered the message of a “lifestyle-enhancement product” with word-of-mouth advertising, garnering a flood of free publicity. The company flourished by promoting high quality with local appeal.

Korea These consumers hold negative attitudes toward foreign businesses; the majority believes that these businesses transfer local wealth to other countries, and crowd out small establishments. Consumers are very proud, and demonstrate a complicated love-hate relationship with foreign brands.

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Very few consumers understand or speak English, let alone the languages of their closest trading partners: Japan and China. Often, Korean campaigns require significant rebranding—use of localized brands—to influence local perceptions. According to an official at Carrefour (the world’s second-largest retailer), the company has difficulty expanding its investments into other provinces because of excessive regulations, and hasn’t done enough research to keep up with Korean consumers’ needs. Nevertheless, the country is increasingly comfortable with the presence of foreign companies in previously closed industries. (In fact, the society is much too uncritical and passive in the acceptance of foreign—especially American—products.) And consumers are far less brand-conscious than before, and will embrace new products from unknown companies.

China Attitudes toward foreign products differ, depending on consumers’ age groups. Companies can no longer view this country’s youth through the lens of traditional cultural values; this generation considers international taste a key factor in making decisions. Conversely, the mature generation (55 years and older) expresses a definite preference for locally made products. In general, consumers believe imported products under foreign brand names are more dependable. Many foreign companies (e.g., Nike, Nokia, Sony, McDonald’s) have replaced unknown local brands. The country retains more than 300 licensed Starbucks outlets, and chairman Howard Schultz says of this market: “In addition to the 200 million middle-to-upper-class segments of the population that are typically customers for upscale brands, there is a growing affinity from the younger, affluent consumer for Western brands.” However, some foreign companies—with an increased focus on local appeal—have lost their prominent brands’ images to domestic rivals, ultimately forfeiting their market share. After all, when this country’s consumers are inspired by design and function, they prefer domestic brands because of their good value for the money.

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QUALITY AND PRICE Japan These consumers are the world’s strictest when it comes to demand for product quality, and they clearly articulate their needs/desires about a product or packaging operation. They view information other than price (e.g., brand, packaging, advertising) as important variables in assessing quality and making decisions. Compared with Chinese and Korean consumers, they have much higher expectations for products—and are willing to pay premium prices for them. In agricultural produce, for example, they are less tolerant of skin blemishes, small size, and uniformity. Foreign companies that don’t fully understand and meet consumers’ needs/expectations struggle with their investments. Although Wal-Mart dwarfs the competition (with $285 billion in 2004 global sales) and owns 42% of all Japanese supermarket chains, it faces losses there. Its “everyday low prices” philosophy doesn’t seem to attract Japanese consumers, because they often associate low price with low quality: yasu-karou, waru-karou—cheap price, cheap product. To cater to these consumers, manufacturers have adopted a total quality approach. To survive fierce local competition, Procter & Gamble sought the best available materials for product formulations and packaging. In the process, it learned some invaluable lessons on how to improve operations, and obtained new product ideas from consumers. (Interestingly, the company took this education on the Japanese way of interacting with consumers and applied it globally.) Today, the country serves as Procter & Gamble’s major technical center in Asia, where it develops certain global technologies. And McDonald’s opened its first store in Tokyo’s Ginza district, which is identified with luxury brand-name goods. It purchased expensive land—not justified by the limited profits of a hamburger establishment— to boost the quality image of its product. Today, McDonald’s Japan has grown to become the country’s largest fast-food chain. In terms of cost, the younger generation prefers low-priced products— everything priced at 100 yen (similar to U.S. dollar stores). The “two extreme price markets” segmentation model explains how consumers

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value lower prices for their practical use while paying premium prices for self-satisfaction, social status, and the quality of products—especially those from Europe. As a result, anything that falls in the middle of the price range—such as the country’s designer brands—generates petty profits.

Korea Consumption has been sluggish since the Asian financial crisis of 1997–1999. However, the younger generation is at the forefront of a new and emerging pattern; it holds opposing expectations of/preferences for low-priced and high-priced goods. When purchasing high-tech or fashion-related items, these consumers prefer well-known brands, and tend to purchase expensive goods to attain psychological satisfaction. Yet they are willing to purchase unbranded goods with low prices, as long as the basic features are guaranteed. It has taken several decades for discount stores to surpass the retail market.

China Most consumers are price sensitive, and try to safeguard part of their income for investment. In 2005, many global automakers readjusted their strategies in this country, based on demand predictions that most consumers would purchase cars priced less than $12,000. One popular Chinese automaker, Chery, priced its QQ model between $5,500 and $7,500; another aggressive domestic automaker, Xiali, priced its cars at similarly affordable prices. Although this market is lucrative with growing demand, foreign brands (e.g., Honda, General Motors, Volkswagen Group) cannot compete with Chinese automakers’ competitive prices. And when the younger generation worships Western and luxury brands—in eagerness to establish its social identity—it might prefer pirated versions to domestic ones, making anticounterfeiting control a major issue for companies.

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TECHNOLOGY FEATURES Japan Because of the country’s harmonic convergence of the domestic market and the industrial sector, consumers have always preferred high-tech gadgets. According to an estimate by The World Bank Group, the country possesses 410,000 of the world’s 720,000 working robots (which perform useful chores and provide companionship). Its electronics companies create gizmos by borrowing new concepts from the computer industry, such as personal video recorders, interactive pagers, and Internet radios. Instead of looking for cost or value, consumers are willing to pay for better and cooler features and technological sophistication. Largely because of Japan’s small living quarters, manufacturers have become experts at miniaturizing and creating multifunction devices. For instance, Sony’s PlayStation Portable compacts the power of the original PlayStation into a palm-sized package. According to the company, it can deliver music and MPEG-4 video, can display photos, and even offers a Wi-Fi connection for wireless gaming and messaging. It’s also no wonder that the country welcomed Baroke, the first company to successfully produce quality sparkling and still wine in a can.

Korea The most wired country in the world is a leader in Internet usage and high-tech industries such as mobile phones, liquid crystal displays, and semiconductors. It also has widespread broadband, and high volumes of personal computer ownership. While mobile phone sales have cooled in Japan, these consumers continue to trade in phones for newer models about every six months. According to a Samsung Research Institute survey, consumers prefer to express themselves without following social conventions. The Cyworld virtual community Web site, for instance, provides a subscriber with a private room, a circle of friends, and an endless range of “home” decoration possibilities and cool music. Ever-widening cyberspace

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reaches more than one-fourth of the population. The younger generation in particular enjoys virtual shopping malls and e-commerce.

China It is imperative for companies to understand the major differences in consumer behavior between generations. Young Chinese consumers (typically affluent segments in the prosperous cities) are passionate about the latest developments. Recent studies found that 24% of the population—most with ages in the early 20s or 30s—prefer new products and consider technology an important part of life. Those in their 40s-50s, on the other hand, are price conscious, brand loyal, and less sensitive to technology.

ADVICE AND RECOMMENDATIONS Marketers need to tailor country-specific strategies to target consumers in Japan, Korea, and China. The existence of strategically equivalent segments (e.g., the younger generation, with its propensity to purchase high-quality, innovative, and foreign products) suggests a geocentric approach to global markets. These similarities allow for standardized strategies across national boundaries. By aggregating such segments, companies not only preserve consumer orientation, but also reduce the number of marketing mixes they have to offer—without losing market share, marketing, advertising, research and development, and production throughout Asia. Moreover, because product design, function, and quality determine consumers’ experiences, companies must simultaneously incorporate all areas—such as product development and marketing—to establish commanding positions in mature markets. Once they create positive images in these countries, success will be forthcoming.

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Japan 

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



This is the most profitable market for luxury goods companies. The key to success is promotion of high quality, local appeal, and a sense of extravagance. As one of the most volatile markets, it requires a steady flow of new stimuli with an improved rhythm of innovations. To survive, companies must continuously develop new products and establish prestigious brand value. If they can succeed there, then they can do so anywhere. Picky Japanese consumers clearly articulate their requirements about products or packaging operations. As a result, companies can use the country as their technical center—to gain firsthand experience in satisfying consumers in the region. These consumers are willing to pay for better and cooler features and technological sophistication. Companies can win their hearts by introducing gizmos. Because significant differences exist among generations, and those differences will translate into diverse consumer behaviors, segmentation marketing (identifying variations based on age, region, and gender) is best. Companies must be aware of these differences, and understand what kinds of products/services can meet the market segment’s needs. For example: Coca-Cola has introduced more products here than anywhere else, including coffee and green tea beverages that appeal to Japanese tastes. As a result, its net operating revenue represents more than 60% of the total Asian segment (20% of its worldwide revenue).

Korea 



A consumer-oriented approach is crucial for identifying tastes and blending in, rather than being viewed as foreign. Careful market, brand, and advertising testing is imperative. It can be difficult to enter this market alone; strategic alliances with domestic companies are a practical way to understand local preferences when introducing a global brand.

The Markets of Japan, Korea, and China





707

If foreign companies make greater efforts to intensify their involvements with—and long-term commitments to—the country’s economic development, then consumers’ perceptions of an “invasion” will dissipate over time. Product design directly affects a company’s competitiveness. This and brand power can overcome product quality, and even product functions. To present the best product design to its consumers, Samsung Electronics hired an influential British industrial designer. According to the company’s Economic Research Institute, a good design “provides a good experience for consumers”; it looks different, feels good, is easy to use, and has an identity.

China  









Foreign companies can no longer wait; the market for consumer goods is growing rapidly, stimulated by a strong economy. Its diversity and the vastness of its consumer base make it critical for companies to segment consumers based on demographic, geographic, and psychographic/lifestyle variations. Because of the younger generation’s brand orientation, promoting symbolic value is imperative for conspicuous and inconspicuous foreign products. Multinational companies can’t assume that their first-mover advantages will be rewarded for brand recognition and established distribution channels. Cost-conscious consumers are quite unpredictable, so companies should avoid a too-high premium price strategy. Instead, they should research quantitatively acceptable price/value trade-offs by category. Because local brands are on the rise, foreign companies must work harder to localize research and development and the contents of their products. They must also better evaluate the market and the potential for long-term growth. Without competitive pricing and world-class product design/quality, companies will have a tough time surviving.

Company executives must remember that not all countries are created equally. By understanding and learning to appreciate the differences and

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similarities between these three Asian purchasing giants, companies from other countries can immerse their organizations seamlessly.

ABOUT THE AUTHORS Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected] Crystal X. Jiang is a PhD candidate in strategy and international business at the Fox School of Business and Management. She may be reached at [email protected]. To join the discussion on this article, please visit www.marketingpower.com/marketingmanagementblog.

Chapter 5.5

Multinationality and Firm Performance The Moderating Role of R&D and Marketing Capabilities Masaaki Kotabe, Srini S. Srinivasan, and Preet S. Aulakh

Does multinationality ensure firm performance? This question has been of interest to international business scholars for a long time. The relationship between multinationality and performance in the contemporary environment of global integration has of late generated a flurry of empirical studies (Tallman and Li, 1996; Hitt, Hoskisson and Kim, 1997; Mishra and Gobeli, 1998; Gomez and Ramaswamy, 1999; Geringer, Tallman and Olsen, 2000). That is, increasing market liberalization around the globe, especially in erstwhile-protected economies, has made it easier and sometimes necessary for firms to expand into foreign markets (Aulakh, Kotabe and Teegen, 2000). This liberalization has coincided with economic integration, success of international organizations such as GATT/WTO and UNCTAD, and advances in information and communication technologies. These environmental trends and the popular buzzwords, such as “globalization of markets,” “global economy,” and “think global, act local,” found in both academic literature and popular press, point toward the growing necessity for firms to find international markets for their products and

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services as well as configure their value chain activities around the globe in order to achieve scale, learning and location economies—in essence, to increase their multinationality. Multinationality generally refers to the extent to which firms operate beyond their national borders and benefit from product and geographical diversifications through economies of scale and scope (e.g., Hitt, Hoskisson, and Kim, 1997). For firms that are becoming increasingly multinational by taking advantages of liberal trade regimes, some of the relevant normative issues that continue to be asked are: Does the increase in multinationality enhance performance? Do firms need to have some threshold of R&D or marketing intensity to benefit sufficiently from multinationality? How should they make the tradeoff in resource allocations between geographical expansion into several overseas markets on one hand and development of R&D and marketing on the other hand? The existing literature offers conflicting empirical findings on the performance implications of multinationality. We develop an argument that coherently piece together seemingly conflicting findings, empirically test and explain the reasons for those findings, and provide managerial implications.

PERFORMANCE IMPLICATIONS OF MULTINATIONALITY The literature on multinationality generally points to the thesis that multinational expansion allows firms to transfer “rent yielding” resources into foreign markets to achieve both economies of scale and scope (Tallman and Li, 1996), exploit market imperfections across countries (Dunning, 1988), expand market opportunities (Buhner, 1987), and maximize location economies by configuring value-chain activities (Kogut, 1985), among others. However, expansion into diverse foreign markets increases the costs (transaction, managerial, coordination) of managing far-flung operations, especially for those firms that are located in different cultural environments (Gomez and Ramaswamy, 1999). Thus, performance advantages of multinationality will reach their limit when “internal governance costs exceed the benefits provided by the economies achieved and thus, the range of resources used and scope of

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governance exceeds managerial capabilities” (Hitt, Hoskisson, and Kim, 1997, p. 773).1 Existing studies examining the performance implications of multinationality have used different theoretical arguments as well as diverse data sources, resulting in mixed and sometimes contradictory results (see Ramaswamy (1995) for an extensive review of this literature). The findings range from a positive and linear/curvilinear relationship between multinationality and performance (Daniels and Bracker, 1989; Geringer, Beamish and DaCosta, 1989; Tallman and Li, 1996) to negative impact (Al-Obaidan and Scully, 1995), along with some studies finding no impact of multinationality on firm performance (Buhner, 1987). More recent studies have examined a curvilinear relationship between multinationality and performance with the underlying argument that multinationality improves firm performance up to a certain point, beyond which the costs of multinationality outweigh the potential benefits, thus lowering performance (Hitt, Hoskisson, and Kim, 1997; Katrishen and Scordis, 1998; Mishra and Gobeli, 1998; Gomez and Ramaswamy, 1999). While the above-mentioned empirical studies have provided new insights into the performance impact of multinationality, most of the existing studies do not incorporate heterogeneity among firms’ ability to manage their respective multinationality. That is, these studies examined multinationality-performance linkages without incorporating the individual firm resources and capabilities that are required to effectively maximize the advantages of international expansion.2 The issue at hand is whether some firms are more capable of increasing their performance through multinationality than others. For instance, Hitt, Hoskisson, and Kim (1997) suggest that product-diversified firms are better able to achieve synergies across product markets and thus more effectively achieve profitability goals of international diversification. Accordingly, they found that the international diversification-performance relationship is positive and linear for high product-diversified firms, while single business firms reached an optimal point after which international diversification had a negative impact on performance. Similarly, Kim, Hwang and Burgers (1989) found that geographical diversification has a positive impact on performance for firms following certain types of global strategies. Daniels and Bracker (1989) found a positive association

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between dependence on foreign operations and profits. Though they posited that marketing intensity could affect this relationship, they could not test their hypothesis due to the lack of variance in marketing intensity in their data. These findings point to the fact that the multinationality-performance relationship is much more complex than is commonly presumed, since individual firm strategies moderate the strength and direction of this relationship. Also, many of the past studies investigating firm performance have been based upon the cross sectional data at one point in time period. However as noted by Geringer, Tallman and Olsen (2000), such relationships are likely to change over time, and hence one needs to use both a time series and cross sectional data to analyze the impact of multinationality on firm performance. The purpose of this study is to build upon existing research and to examine the role of firm-specific capabilities on the performance impact of multinationality. By drawing from the resource-based view of the firm, we suggest that internal capabilities allow firms to achieve differential advantages of multinationality. In particular, we examine the moderating role of R&D and marketing capabilities on the multinationalityperformance relationship. The main argument put forth in this article is that firms having marketing and/or R&D capabilities are better able to realize the inherent benefits of multinationality. In the following sections, we first discuss the role of R&D and marketing capabilities in enhancing performance benefits of multinationality. Next we describe our empirical analysis and interpret our model results. Finally, we discuss the implications and limitations of the current study.

THEORETICAL BASES According to the resource-based view, firms are bundles of resources and capabilities (Barney, 1991; Peteraf, 1993). When these resources are unique (i.e., there is heterogeneity among firms), valuable, rare, and inimitable, the deployment of these resources allows firms to achieve sustainable competitive advantage. Hitt, Hoskisson, and Kim (1997) and Tallman and Li (1996) use the implications of the resource-based view to understand the benefits of international expansion. In particular, these

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studies suggest that besides the ownership, location, and internalization advantages of international expansion (e.g., Buckley and Casson, 1976; Dunning, 1988), other motivations for geographical diversification stem from the resource-based view. That is, firms with unique internal capabilities will apply these in international markets to increase profitability by achieving economies of scale, rationalizing production, amortizing investments over broad market bases, and achieving greater organizational learning (Bartlett and Ghoshal, 1989; Hitt, Hoskisson, and Kim, 1997). Thus, the underlying theoretical underpinning is that firms with unique resources can leverage these resources across national markets. While unique resources as motivators of international expansion have been examined, existing research has paid relatively scant attention to the ability of internal capabilities and resources to facilitate in the implementation of firm strategies. However, as suggested by Peteraf (1993, p. 189), “firms are seen as adopting strategies that their resources can support. . . . For an individual firm, whether it is a single-line business or widely diversified, the critical task is to use its available resources to the greatest end they can support.” The argument made in this study is that certain internal resources and capabilities are needed to successfully implement various strategies, including that of geographical diversification. This view is alluded to by Hitt, Hoskisson, and Kim (1997) who point out that the performance enhancing properties of geographical diversification (i.e., the point where the benefits exceed the associated costs) will vary according to the managerial skills contained within the firm. In essence, firms will achieve differential benefits of international expansion based on their capability to maximize the gains of multinationality while minimizing the relevant costs of expansion. We posit that R&D and marketing capabilities of internationalizing firms are two factors that will allow firms to achieve greater benefits of multinationality. Marketing capability of a firm is reflected in its ability to differentiate products and services from competitors and build successful brands. Thus, a firm that spends money on advertising and promoting its products can increase sales both by expanding the sales of the product category and by getting customers to switch to their brands. Firms with strong brand names can charge premium prices in foreign markets to

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enhance their profitability as well. Given the globalization of markets and the presence of intermarket segments across countries for many products, firms that emphasize differentiation by heavy advertising and marketing activities are more likely to succeed in a multitude of diverse markets than those that do not (Helsen, Jedidi and DeSarbo, 1993). Thus, these firms can not only enhance the revenues in foreign markets because of a better fit and targeting to the customer needs of their products and services, but can also achieve greater efficiency by developing standardized marketing programs across foreign markets and having better bargaining power with both distributors and consumers (Levitt, 1983; Takeuchi and Porter, 1986). In essence, we propose that firms with higher marketing intensity will achieve greater gains from multinationality than firms with a lower level of marketing intensity since such firms could simultaneously increase revenues in foreign markets and have lower coordination costs than those with a lower level of marketing intensity. A similar logic applies to firms with strong research and development orientation. Several previous studies (e.g., Hufbauer, 1970; Mansfield, 1981; Kotabe, 1990b) have found positive relationship between R&D intensity and firm performance. Companies can improve their performance by focusing on product design/development and by improving their manufacturing processes (Kotabe, 1990a). A firm with superior product design gains advantage by differentiating its products from competitors, and can achieve greater returns. Similarly, a firm innovating on manufacturing processes can lower its production costs and improve product quality relative to competitors. Thus, innovativeness, as reflected in R&D intensity, allows firm to achieve efficiency in its operations (Hitt, Hoskisson and Ireland, 1994). This becomes important when it expands into international markets since it can either charge premium prices for its innovative products or further lower production costs by applying its manufacturing processes and achieving economies of scale (Porter, 1986). Thus, the more innovative firms are, the better they will be at leveraging the multinationality advantages. Based on the above discussion, we propose that marketing and innovation capabilities of firms accentuate the impact of multinationality on firm performance. Since marketing and innovative capabilities collectively allow firms to enhance their performance through premium

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pricing and superior products, we test the individual as well as joint moderating effects of R&D and marketing capabilities on the multinationality-performance relationship. Accordingly, we propose an overriding hypothesis: Hypothesis: The impact of multinationality on firm performance will be stronger for firms with higher R&D intensity and/or marketing intensity than those with lower R&D intensity and/or marketing intensity.

DATA To test the hypothesis, we need firm-level data on firms’ performance, their R&D intensity, and marketing intensity. In testing the hypothesis across different industries and over time, we used both time series and cross-sectional data. Using time series cross-sectional data allows for generalizability of results over time. In contrast, pure cross-sectional studies provide a “snapshot” picture specific to a given time period and inferences drawn from such data could potentially be biased by idiosyncrasies associated with that specific time period. As firm performances could vary across industries, and also over time, time series cross-sectional studies can capture both of these variations simultaneously (Dielman, 1983). The data used for this research were obtained from the COMPUSTAT database, which contains firm level data on different industries (at the 4digit SIC classification level). We chose SICs based upon the following two criteria: 1) data should be available for at least three companies in each SIC, and 2) for each company, data should be available for at least 7 years. Our study used data on 49 US companies in 12 different industries (over a 7-year time period ending in 1993) for which COMPUSTAT had complete data on all the variables of interest. The details of the industries and the number of time series and cross-sectional observations used are provided in Table 1. The variables used in the analysis were operationalized as follows. Performance was measured in both financial and operational terms in a manner similar to that of Gomes and Ramaswamy (1999). Financial performance was measured in terms of return on assets (ROA).

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TABLE 1.

SIC 2621 2670 2800 2851

3270 3570 3571 3640 3674 3822 3944 3950

Details of Industries Included in the Analysis

Description of the Industry

Number of Companies

Number of R&D Years Intensity (%)

Marketing Intensity (%)

Paper Mills Packaging Paper, Plastic Film Chemicals and Allied Products Paints, Varnishes, Lacquers, Enamels and Allied products Concrete, Gypsum, Plaster Computer and Office Equipment Electronic Computers Electric Lighting, Wiring Semiconductor, Related Devices Automatic Regulating Controls Games, Toys Pens, Pencils, Artistic Materials

5

7

1.2

0.4

4

7

3.1

1.8

5

7

5.9

3.7

3

7

2.4

3.1

3

7

0.7

0.0

5

7

9.5

1.3

3

7

10.5

1.3

3

7

4.5

0.5

9

7

9.1

0.7

3 3 3

7 7 7

2.4 3.5 0.7

0.0 16.8 6.6

Operational outcomes were assessed as a ratio of sales to operating costs (OPSALINV). Many researchers have indicated that variance in firm performance is partly explained by firm size (DeCarolis and Deeds, 1999). Hence, in the analysis of the data, we need to control for firm size, or else the parameters estimated might be biased. To avoid the confounding effect of firm size on firm performance, we used firm size (SIZE), measured as a logarithmic function of sales, as a covariate. Multinationality (MULTI) has been operationalized in a number of ways by different researchers. Some researchers have used sales/profit based measures, such as, ratio of foreign sales to total sales (Grant, 1987;

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Tallman and Li, 1996), foreign income to total income, ratio of foreign sales to total assets (Daniels and Bracker, 1989; Ramaswamy, 1995), number of foreign countries in which a firm has subsidiaries (Tallman and Li, 1996). Sullivan (1994) examined the different ways to measure multinationality and their associated problems. Based on his suggestion, and the availability of appropriate data, we measured multinationality as a ratio of foreign income to total income. Consistent with earlier studies (e.g., Hufbauer, 1970; Mansfield, 1981; Kotabe, 1990b), R&D intensity and marketing intensity are defined as the annual expenditure on R&D divided by sales and the advertising expenditure divided by sales, respectively.

METHODOLOGY To extend the generalizability of the findings of this research to a number of industries, we use data from different industries. Cross-sectional studies not taking into account variations across industries might lead us to wrong conclusions. For the sake of simplicity, let us consider the relationship between two variables X and Y across four industries as shown in Figure 1. The broken-line ellipses represent the point scatter for individual industries over time, and the broken straight lines represent the individual regressions for the different industries. The solid line represents the least-square regression using the data points for all the industries. As is illustrated by the solid line, even if the two variables are positively related, aggregating the data (without accounting for differences in the intercepts across industries) and estimating an aggregate model might lead us to wrongly conclude that the two variables are negatively related.3 Therefore, when we pool data from different industries, we need to control for the industry to avoid biased inferences about the impact of multinationality on firm performance. Examining the cross relationship between multinationality and firm performance over a single period of time does not allow us to generalize about the findings over time. Therefore, we used a Time Series CrossSectional (TSCS) data analysis to test our hypothesis. The TSCS analysis not only takes into account variation across industries and over time, but

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y

Firm Performance

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Multinationality (x) FIGURE 1

Mistaken Interpretation of the Relationship when the Heterogeneity in Intercepts is not Accounted for

also permits us to increase the degrees of freedom. It also increases the degrees of freedom available for estimation (analyzing m firms over t periods gives mt observations as opposed to m observations in the case of a cross-sectional study) (Dielman, 1983). To test the hypothesis that the impact of multinationality is moderated by both the marketing intensity and the R&D intensity, we estimated the following equation:

Yit = β0 + ∑ βi Di + β12 X2it + β13 X 3it + β14 X 4 it + β15 X5it + β16 X6 it 11

i =1

+ β17 X7 it + β18 X8 it + β19 X9 it + uit

(1)

Where: Yit = performance of firm i in time period t (ROA or OPSALINV) Di = dummy variable for ith SIC (11 dummies for 12 industries) X2it = size of firm i in time period t (SIZE) X3it = multinationality of firm i in time period t (MULTI) X4it = R&D intensity of firm i in time period t (RDINT)

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X5it = marketing intensity of firm i in time period t (ADINT) X6it = (X4it * X5it) of firm i in time period t (RDAD) X7it = (X3it * X4it) of firm i in time period t (MULTIRD) X8it = (X3it * X5it) of firm i in time period t (MULTIAD) X9it = (X3it * X4it * X5it) of firm i in time period t (MULADRD) β1 through β19 = parameters to be estimated µit = random error of firm i in time period t. Ordinary least square regression assumes that uit are independently and identically distributed with a constant variance. As we have data on a number of firms i(i = 1,2 . . . n), over a number of years t(t = 1, 2, ..,T), the assumption of constant variance of the error term is untenable. The error term uit can be decomposed as

uit = ν i + et + ε it

(2)

where the errors vi, ei and εit are independently distributed. The details of this popular TSCS model and estimation procedures are given in Fuller and Battese (1974).

ANALYSIS AND RESULTS We estimated equation 1 using the Fuller and Battese method (implemented by the TSCS procedure in SAS) and the results are given in Table 2.4 To ensure that the interaction effects indeed significantly add to the model fit, we ran the following two regression models: 1) Model with the main effects only, given by equation (3), and 2) Model with the main effect and two way interaction effects, given by equation (4).5

Yit = β0 + ∑ βi Di + β12 X2it + β13 X3it + β14 X 4 it + β15 X5it + uit 11

i=1

Yit = β0 + ∑ βi Di + β12 X2it + β13 X3it + β14 X 4 it + β15 X5it

(3)

11

i =1

+ β16 X6 it + β17 X7 it + β18 X8 it + uit

(4)

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TABLE 2.

Time Series—Cross Sectional (TSCS) Regression Analysis of Firm Performance* ROA

Variables

Parameter

Intercept SIZE (X2) MULTI (X3) RDINT (X4) ADINT (X5) RDAD (X6) MULTlRD (X7) MULTIAD (X8) MULADRD (X9) R2

OPSALINV Prob > |T| 0.0014 0.0001 0.6619 0.2396 0.7322 0.4904 0.6609 0.0405 0.0030

–0.1949 0.0332 –0.0097 –0.3191 0.2196 –6.3330 0.1013 –3.0723 100.0757 22.5%

Parameter

Prob > |T|

1.2971 0.0001 0.0114 0.6183 –0.0726 0.0284 1.4775 0.0514 –0.1150 0.9365 6.9012 0.7448 0.7601 0.0273 –1.6805 0.4757 132.3350 0.0131 21.3%

*Industry dummy variables are included in the models, but regression coefficients are not shown in this table.

Equation 3 is nested within equation 4, and equation 4 is nested within equation l. As suggested by Jaccard, Turrisi and Wan (1990), to test if the two-way interaction term indeed adds more power than the main effects model only we did the incremental fit test given by:

F=

( R − R ) / (k − k ) (1 − R ) / ( N − k − 1) 2 2

2 1

2 2

2

1

(5)

2

Where: R22 = Fit statistics for the model with the two-way interaction with k2 predictors 1 R 2 = Fit statistics for the model with the main effects model with k1 predictors Then we compared the incremental fit statistics of the equation 1 with the model without the three-way interaction. Our results indicated that the three-way interaction effect indeed significantly (p <.05) adds to the

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Predictive Power of the Three-Way Interaction Model Over the Main Effects and Two-Way Interaction Models TABLE 3.

Model Main Effects only (model 1) Main Effect + 2 Way Interaction (model 2) Main Effect + 2 Way Interaction + 3 Way Interaction (model 3)

ROA* R2

OPSALINV** R2

.1835 .1909 .2249

.1689 .1915 .2133

* Model 2 does not provide significantly incremental fit over Model 1 (F3,323) = 0.99; Model 3 provides significantly higher fit over Model 1 (F4,322) = 2.37 (p < .05) ** Model 2 provides significantly higher fit over Model 1 (F3,323) = 3.009 (p < .05). Model 3 provides significantly higher fit over Model 2 (F1,322) = 8.92 (p < .05)

predictive power of the model.6 The incremental fit statistics are provided in Table 3. First of all, firm size is found to have a positive impact on ROA (return on assets) (p <.0001) but no significant impact on OPSALINV (sales to operating costs). This finding is consistent with earlier findings (DeCarolis and Deeds, 1999). Our research objective is to investigate how multinationality, R&D intensity and marketing intensity jointly affect two of the popular measures of firm performance-ROA (return on assets) and OPSALINV (sales to operating costs). As equation 1 contains the interaction terms of MULTI with RDINT and ADINT, care should be exercised in interpreting the impact of MULTI on firm performance. Accordingly, the parameter estimate of the variable MULTI alone does not capture the impact of multinationality on firm performance. In the case of the regression with OPSALINV as the dependent variable, the independent variables MULTI, MULTIRD and MULADRD are significant. To understand the impact of multinationality on firm performance, we need to partially differentiate equation 1 with respect to X3it (MULTI). The partial derivative of Yit with respect X3it is given below:

∂Yit = β13 + β17 X 4 it + β18 X5it + β19 X4 it X5it . ∂X 3it

(6)

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As can be seen from the above equation, the impact of MULTI on firm performance depends on both the R&D intensity and marketing intensity of the firm.

IMPACT OF MULTINATIONALITY ON FIRM PERFORMANCE Equation 6 above is a general equation derived for isolating the impact of multinationality on firm performance, irrespective of whether we want to use ROA or OPSALINV to capture firm performance. Equation 77 and equation 88 give the marginal impact of multinationality on ROA and OPSALINV respectively.

∂ROAit = − 3.0723 * ADINT + 100.0757 * ADINT * RDINT ∂MULTI 3it ∂OPSALINVit = − 0.0726 + 0.7601 * RDINT ∂MULTI 3it

+ 132.3350 * ADINT * RDINT

(7)

(8)

As can be seen from equation 7 and equation 8, the impact of MULTI on firm performance depends upon both the RDINT and ADINT of the firm under consideration. The main effect of MULTI on firm performance (for an average firm) can be evaluated from equation 7 and equation 8 by substituting the average RDINT and ADINT values for all the firms in the data set. The average ADINT for all the firms in the data set is 0.025 and the average RDINT is 0.051. Substituting these values in equation 7 and equation 8, results in

∂ROAit = 0.05 and ∂MULTI 3it

∂OPSALINVit = 0.135. This confirms our expectations that, ceteris ∂MULTI 3it

paribus, multinationality leads to higher firm performance. The impact of multinationality on ROA depends both on the R&D intensity and advertisement intensity. As it is not possible to visually capture all the four dimensions in a single figure, we illustrate the same

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0.4

0.2

ROA

0 1.5 1 0.5 0 –0.5 MULTI –1 –1.5

–0.2 0.01

0.03

0.05 0.07 R&D Intensity

FIGURE 2

0.09

ROA as a Function of Multinationality and R&D Intensity

in two figures. In Figure 2 (Figure 3), we illustrate the impact of RDINT and MULTI on ROA (OPSALINV) after holding the ADINT at the average level. As can be seen from the above figures, at very low levels of R&D intensity, increasing MULTI does not have a positive impact on firm performance. However, at higher levels of R&D intensity, higher level of MULTI leads to higher firm performance. In Figure 4 (Figure 5), we illustrate the impact of ADINT and MULTI on ROA (OPSALINV) after holding the RDINT at the average level. This graph visually captures equation 1, when RDINT is held constant at the average value (0.051). As can be seen from the above figures, the impact of MULTI is higher at higher levels of ADINT than at lower levels of ADINT.

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1.95

OPSALINV 1.45

1.5 1 0.5 0 –0.5 –1 –1.5

0.95 0.01

0.03

0.05

0.07

MULTI

0.09

R&D Intensity FIGURE 3

OPSALINV as Function of Multinationality and R&D Intensity

NECESSARY CONDITIONS FOR POSITIVE MARGINAL IMPACT OF MULTINATIONALITY (MULTI) Marginal Impact of MULTI on ROA and OPSALINV. For the sake of brevity, we illustrate how to derive and visualize the marginal impact of MULTI on ROA. The same procedure can be used to explain the marginal impact of MULTI on OPSALINV. For an average firm, the RDINT required so that the marginal impact of MULTI is positive can be obtained by equating ADINT on

∂ROAit > 0. The impact of RDINT and ∂MULTI 3it

∂ROAit is shown in Figure 6. ∂MULTI 3it

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0.4

0.2

ROA

0

1.5 0.5 –0.5

–0.2 0.01

0.03 ADINT

FIGURE 4

0.05

MULTI

–1.5 0.07

ROA as a Function of Multinationality and Advertising Intensity

The partial derivative of ROA with respect to MULTI is given in equation 7, presented earlier. Setting equation 7 to > 0, and solving for RDINT, the partial derivative of ROA with respect to MULTI,

∂ROAit , is positive when RDINT exceeds 0.0306. As can be seen ∂MULTI 3it

in Figure 6, firms are required to spend at least 3.06% of their sales in R&D activities, so that the marginal impact of MULTI on ROA will be positive. Similarly, in the case of OPSALINV, the RDINT required so that the marginal impact of MULTI is positive can be obtained by solving

∂OPSALINVit > 0, and it equals .0178 (or 1.78%). In other words, ∂MULTI 3it

firms are required to spend at least 1.78% of their sales in R&D activities so that the marginal impact of MULTI on OPSALINV will be positive.

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3

2

OPSALINV

1

1.5 1 0.5 0 –0.5 MULTI

0 0.01

FIGURE 5

–1 0.03 ADINT

0.05

0.07

–1.5

OPSALINV as a Function of Multinationality and Advertising Intensity

CONCLUSIONS AND DISCUSSION The findings of this research suggest that the impact of multinationality on firm performance is not unequivocal. Rather, the impact of multinationality on firm performance depends on a number of firmspecific factors. Two such factors that moderate this relationship are the R&D intensity and the marketing intensity. While the existing literature amply provides evidence that R&D and marketing intensities positively influence firm performance, our study further advances knowledge that these two key factors moderate the impact of multinationality on firm performance. It sensitizes managers on the need to focus not just on overseas expansion activities, but also to focus on their R&D and marketing activities in order for their overseas expansion to be successful. However, care must be taken in interepreting the absolute values of threshold R&D intensity calculated from equation 7 and equation 8. These threshold values are calculated based upon the

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727

Marginal Impact of MULTI on ROA

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0.06 0.05 0.04 0.03 ADINT

–0.05 –0.1 –0.15 0.01

FIGURE 6

0.03

0.02 0.05 RDINT

0.07

0.09

0.01

Marginal Impact of Multinationality on ROA

average marketing intensity for all the firms in the sample. The threshold R&D intensity for any particular industry can be calculated by using the average marketing intensity for that particular industry. At the aggregate level (assuming away industry differences), the threshold R&D intensity level is 1.78% for the positive effect of multinationality on firms’ operational performance (OPSALINV), but it takes a threshold R&D intensity level of 3.06% for multinationality to exhibit a positive effect on firms’ financial performance (ROA). This finding implies that the increase in R&D intensity begins to affect the operational performance of multinationality much earlier than the financial performance of multinationality. In other words, companies tend to enjoy operational improvement (i.e., positional strengths) from foreign expansion before financial improvement as they increase their R&D intensity. This implication is consistent with the literature in strategic marketing and management that strategy (multinational expansion in our case) builds firms’ positional strengths and then

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subsequently leads to improved financial performance (e.g., Porter, 1986; Day and Montgomery, 1999). Our study has added empirical credence to the existing literature by examining the performance implications of multinationality with the time series data across industries. However, there are also limitations that would beg for further research inquiries on this issue. The conceptualization of multinationality of a firm has created enough controversy in the academic literature. Despite the wide body of research in the international business area, there is no single accepted method of measuring multinationality of firms. The range of measures includes percentage of sales that are from overseas operations, percentage of profit measures from overseas operations, number of countries in which firms operated, foreign assets as a percentage of total assets or a summated measure of these above indicators. Both Sullivan (1994) and Ramaswamy, Kroeck and Renforth (1996) discuss the limitations of these various measures. In this research we used percentage of overseas income to total income as an indicator of multinationality. As data on other measures of measuring multinationality were unavailable in the COMPUSTAT database, we were unable to replicate this study using these other possible measures of multinationality. However, future researchers could replicate this research using other measures of multinationality. The R&D intensity measure that we used measures the fraction of sales that are spent on the research and developmental activities of the firm. As disaggregate data on primary research expenditures and applied developmental expenditures are unavailable, we did not isolate the impact of research activities and developmental activities in this study. The marketing efforts of a multinational firm are routinely operationalized by their advertising intensity (Capon, Farley, and Hoenig, 1990), as firms are reluctant to disclose their total marketing expenditures. In this study we used advertising intensity as a surrogate for the marketing efforts of a multinational firm. As data on total marketing activities are unavailable, we could not use the ratio of marketing expenditures to total sales as an indicator of marketing efforts. Due to competitive reasons, organizations are reluctant to disclose finer accounting details of their operations and hence researchers have to contend with such limitations.

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The R&D intensity and advertising intensity measures used in this research are only limited proxies for the rent yielding capabilities of the firms. One possible extension of this research is to model how the R&D expenditures and marketing expenditures improve the rent yielding capabilities of multinational firms. The entry strategy and mode of operation of a multinational company also will have an impact on firm performance. Companies that aggressively source abroad through contractual arrangements, instead of just focusing on domestic suppliers, might show higher profitability, although the measure of multinationality used in this research could not capture this dimension. In this research we do not control for the entry strategies of multinational companies or how they operate in foreign countries. Assuming appropriate data availability, researchers could investigate if the impact of R&D and marketing intensities systematically differs across firms using different methods of operations in foreign countries. Another possible extension is to investigate the lagged effect of R&D intensity. As R&D activities might take several years to yield financial benefits, future researchers might want to investigate how the lagged effects of R&D intensity interact with multinationality of the firm in determining firm performance. Lagging the R&D activities by one or two periods when estimating the model implicitly assumes that all the R&D spending will uniformly have an impact after one or two years. This assumption hides the fact that some projects might take longer to yield results while some other projects might yield financial returns in a short term. Further lagging the independent variables by a couple of time periods will result in a loss of degrees of freedom. Future researchers with richer data set can try to estimate the optimal lag that could be used in modeling the impact of R&D intensity on firm performance.

NOTES 1.

Also, as noted by Daniels and Bracker (1989), the association between foreign operations and foreign performance need not be the same across all industries. As domestic markets are also an important source of revenues and profits for any company, one would normally not expect a company whose profits are entirely from abroad to out-perform a company with some combination of foreign and domestic profits. We thank an anonymous reviewer for pointing this out.

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2. 3.

4. 5. 6. 7. 8.

Masaaki Kotabe, Srini S. Srinivasan, and Preet S. Aulakh

Past studies have, at the most, incorporated firm-specific variables as control variables in the empirical analyses. Depending upon the intercept and slope of the individual industries, the pooled model, estimated without controlling for industry differences, might show positive, negative or no relationship between the dependent and independent variables. For the sake of brevity, the parameter estimates for industry dummies are not reported in the table. Readers interested in these parameter estimates can get them from the authors. Adding each of the three two-way interactions, one at a time, to the main effects model (equation 3) does not significantly increase the model fit. We thank the anonymous reviewer for suggesting the use of the incremental fit statistics to test for the impact of the interaction term. As β13 and β17 are not significantly different from zero, they are excluded from equation 8. As β18 is not significantly different from zero, it is excluded from equation 8.

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Dielman, Terry E. 1983. Pooled Cross-sectional and Time Series Data. A Survey of Current Statistical Methodology, 37 (2), 111–122. Dunning, John H. 1988. The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies, 19(1): 1–32. Fuller, W.A., & G.E. Battese. 1974. Estimation of Linear Models with Cross-error Structure. Journal of Econometrics, 2: 67–78. Geringer, J. Michael, Paul W. Beamish & Richard C. DaCosta. 1989. Diversification Strategy and Internationalization: Implications for MNE Performance. Strategic Management Journal, 10: 109–20. ——, Stepher Tallman & David M. Olson. 2000. Product and International Diversification among Japanese Multinational Firms. Strategic Management Journal, 21: 51–80. Gomes, Lenn & Kannan Ramaswamy. 1999. An Empirical Examination of the Form of the Relationship Between Multinationality and Performance. Journal of International Business Studies, 30(1): 173–88. Grant, Robert M. 1987. Multinationality and Performance Among British Manufacturing Companies. Journal of International Business Studies, 22: 249–63. Helsen, Kristiaan, Kamel Jedidi & Wayne S. DeSarbo. 1993. A New Approach to Country Segmentation Utilizing Multinational Diffusion Patterns. Journal of Marketing, 57 (October): 60–71. Hitt, Michael, Robert Hoskisson & Hicheon Kim. 1997. International Diversification: Effects on Innovation and Firm Performance in Product-Diversified Firms. Academy of Management Journal, 40(4): 767–98. ——, —— & R. Duane Ireland. 1994. A Mid-Range Theory of the Interactive Effects of International and Product Diversification on Innovation and Performance. Journal of Management, 20(2): 297–326. Hufbauer, G.C. 1970. The Impact of National Characteristics and Technology on the Commodity Composition of Trade in Manufactured Goods. In Raymond Vernon, editor, The Technology Factor in International Trade. New York: Columbia university Press. 145–231. Jaccard, James, Robert Turrisi & Choi K. Wan. 1990. Interaction Effects in Multiple Regression. Newbury Park, Calif: Sage Publications. Katrishen, Frances A. & Nicos A Scordis. 1998. Economies of Scale in Services: A Study of Multinational Insurers. Journal of International Business Studies, 29(2): 305–323. Kim, W.C., P. Hwang & W.P. Burgers. 1989. Global Diversification Strategy and Corporate Profit Performances. Strategic Management Journal, 10: 45–57. Kogut, Bruce. 1985. Designing Global Strategies: Comparative and Competitive Value Added Chains. Sloan Management Review, 27(Summer): 15–28. Kotabe, Masaaki. 1990a. Corporate Product Policy and Innovative Behavior of European and Japanese Multinationals: An Empirical Investigation. Journal of Marketing, 54 (April): 19–33. ——. 1990b. The Relationship Between Offshore Sourcing and Innovativeness of U.S. Multinational Firms: An Empirical Investigation. Journal of International Business Studies, 21(4): 623–638.

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Levitt, Theodore. 1983. The Globalization of Markets. Harvard Business Review, 61 (May–June): 92–102. Mansfield, Edwin. 1981. Composition of R&D Expenditures: Relationship to Size of Firm, Concentration, and Innovative Output. Review of Economics and Statistics, 63 (November): 610–615. Mishra, Chandra S. & David H. Gobeli. 1998. Managerial Incentives, Internalization, and Market Valuation of Multinational Firms. Journal of International Business Studies, 29(3): 583–597. Peteraf, Margaret A. 1993. The Cornerstones of Competitive Advantage. Strategic Management Journal, 14(3): 179–192. Porter, Michael E., editor. 1986. Competition in Global Industries. Boston: Harvard Business School Press. Ramaswamy, Kannan. 1995. Multinationality, Configuration, and Performance: A Study of MNEs in the U.S. Drug and Pharmaceutical Industry. Journal of International Management, 1(2): 231–53. ——, K. Galen Kroeck, & William Renforth. 1996. Measuring the Degree of Internationalization of Firms: A Comment. Journal of International Business Studies, 27(1): 167–77. SAS/ETS User’s Guide. Version 6. SAS Institute Inc. Cary, NC. Sullivan, Daniel. 1994. Measuring the Degree of Internationalization of a Firm. Journal of International Business Studies, 25(2): 325–42. Takeuchi, Hirotaka & Michael E. Porter. 1986. Three Roles of International Marketing in Global Strategy. In M.E. Porter, editor., Competition in GlobaI lindustries. Boston, MA: Harvard Business School Press: 111–146. Tallman, Stephen & Jiatao Li. 1996. Effects of International Diversity and Product Diversity on the Performance of Multinational Firms. Academy of Management Journal, 39(1): 179–196.

ABOUT THE AUTHORS Masaaki Kotabe holds the Washburn Chair of International Business and Marketing and is Director of Research at the Institute of Global Management at Temple University. He is a Fellow of the Academy of International Business and one of the most prolific authors in international marketing in the world. His Ph.D. is from Michigan State University. [email protected] Srini Srinivasan is an Associate Professor at Drexel University, Philadelphia. His research interests include international business, marketing strategy and marketing research.

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Preet S. Aulakh is Associate Professor of Strategy and International Business and the Washburn Research Fellow at the Fox School of Business and Management, Temple University. His research focuses on international technology licensing, cross-border alliance, interorganizational governance, and firm strategies in emerging economies.

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 20 1 2 3 4 5 6 7 8 9 30 1 2 3 4 5 6 7x

Index

Aaby, N. -E. 240, 245, 248, 283 Aaker, D. A. 369, 446, 447 Abrahamson, E. 553, 560 acculturation to global consumer culture (AGCC) 172 Achrol, R. 572, 582, 599, 601 Adams, R. J. 572 adapted etic approach 170 Adlung, R. 681 Admiral 511 advertising 148–50 aesthetic capability 398–400, 409, 428 Agarwal, S. 638, 662, 663, 664, 665, 666, 667, 668, 674, 676, 681 Aggarwal, A. 326 Ahlstrom, D. 326 Ahuja, G. 569, 597, 599 AIDS 8, 16 AIG 375 Aiken, L. S. 410, 590, 596 Aiwa 534 Akaike’s information criterion (AIC) 218 Alden, D. L. 289, 343, 344, 346, 350 Alexander, D. C. 627 Alexander, Y. 617 Allen, J. 620 allLearn.org 73 allocative flexibility 442 Al-Obaidan, A. 711 Alvarez, R. 252 Ambler, T. 584 American Council on Education 63 American Marketing Association 23

Americanization of Japanese corporations 374 Amsden, A. 328 Anand, J. 602 anarchism 8 Anderson, E. 441, 444, 579, 580, 661, 662, 663, 664, 667, 676 Anderson, J. 670 Anderson, J. E. 633 Anderson, J. G. 587 Anderson, R. E. 410, 675, 676 Annual Census of Chinese Industrial Firms (2001–2005) 253 anthrax antidote 8 antiglobalization 6 Apollo Group 75 Apple Computer 404, 526, 564 Applegate, L. M. 548 Aquinas, Thomas 56 Archambault, A. 345 Archbishop of Canterbury 107 Archer, S.H. 632 Armani 700 Armstrong, J. S. 548 Arnold, D. J. 289 Arnold, H. 648 Arpan, J. S. 437 Arregle, J-L. 325 ‘Arrow Core’ of a business model 208 Arruda, M. C. 311, 312 Arsel, Z. 636 Arvidsson, M. 403 Asia’s financial crisis 158, 383, 556 assets 245

Index

Assmus, Gert 443, 441 Association to Advance Collegiate Schools of Business (AACSB) 658; business accreditation 669; membership schools. 668 Athukorala, P. 434 Audio Research 524 Aulakh, P. S. 239, 240, 245, 247, 270, 302, 304, 323, 401, 433, 452, 588, 600, 603, 709 Baalbaki, I. 636 Bacon, G. 393 Bader Meinhof Gang 32, 44 Bahrami, H. 630 Baker, J. C. 433, 459 Balabanis, G. 347 Baldwin, R. 442 Baniak, A. 451 banks, global 113 Barber, J. 661 Barney, J. 575, 579, 600, 663, 712 Barney, J. B. 244, 247, 248, 316, 394, 398, 405, 506, 529, 530, 539, 620 Baron, R. M. 410 Barreau, A. 403 Bartlett, C. A. 637, 713 Batra, R. 343, 344, 346, 350 Battese, G.E. 719 ‘Battle of Seattle’ 5 Baum, J. A. C. 251 Beamish, P. W. 252, 268, 285, 294, 637, 656, 711 Bean, L.L. 386 Beard, D. W. 394, 409, 604 Beckman, S. 393 Beije, P. R. 505, 538, 549 Beijing Foreign-Related Enterprises Databank 585 Bell-47 helicopters 389–90 Bello, D. C. 441, 453 Ben & Jerry’s, 700 Benjamin, R. I. 561 Benvignati, A. 248 Berlin wall, fall of 98 Berman, S. L. 256 Bernard, A. B. 252, 692 Bertrand, M. 330 Bettis, R. 506, 530, 537 Bettis, R. A. 388, 391, 392, 394 Bhagwati, J. N. 434 Bharadwaj, S.G. 439

735

Bhattacharya, S. 391 Biddle, F. M. 630 Biggadike, E. R. 621 Bilkey, W. J. 462, 469, 472 Birkinshaw, J. 621 Bitner, M. 399 bivariate correlations 305 Black September organization 32, 44 ‘Black Swan’ phenomenon 98 Black, W. C. 410, 675, 676 Blalock, G. 252 Blattberg, R. C. 443, 451 Bloch, P. H. 398 Blomstermo, A. 660, 664 Boatwright, P. 346 Bollag, B. 659 Bollywood, 336 Bologna Declaration 60 Bolton, R.N. 634, 635 Borys, B. 568 Borza, A. 325 ‘bottleneck’ effect 442 Boulton, W. R. 285, 314 ‘boundary-spanning eclecticism’ 11 Bourgeois III, L. J. 420 Bracker, J. 711, 717, 729 Bradley, S. 506, 530, 537 brand equity 436, 446–7 brand globality: importance of 360–111; indirect effect of 361–4 brand orientation 698–700; China 699–700; Japan 698–9; Korea 699 brand origin recognition 132 brand prototype fit and product exemplar fit 345 Brandes, P. 324 Brazil 299 Brenes, E. 280, 281, 282, 317 Brouthers, K. 663, 664, 670 Brouthers, L. 663, 664, 670 Brouthers, L. E. 242, 243 Brown, J. 656 Bruton, G. D. 327, 328, 329 Bryant, M. 656, 680 Buck, T. 240, 242, 243, 254, 259, 271 Buckley, P. J. 251, 295, 600, 630, 637, 674, 678, 713 Bucklin, R. E. 443 Buhner, C. H. 710, 711 Bulow, J. I. 451 Burgers, W. P. 285, 294, 295, 711 Burnett, J. J. 634, 635

736

Index

Burns, T. 599 Burrows, P. 564 Burt, D. 572, 577 Burton, S. 592 Bush administration 14 business Groups as micro-institutions 328–32 business-to-business (B2B) 548 Cainey, A. 368 Calof, J. 656, 663 Calty Design Research 547 Cambridge University 76 Cambridge-MIT Institute (CMI) 76 Campa, J. 247 Campbell, N. 602 Canaves, S. 269, 270 Cannella, A. A. 328, 330 Canon 700 Cantor Fitzgerald 624 capabilities 245 capital flows 36 Capon, N. 439, 728 Carpano, C. 285, 286 Carrefour 701 Carter, T. 578 Cartwright 460 Casson, M. C. 295, 630, 637, 678, 713 Caves, R. 678 Cavusgil, S. T. 246, 286, 293, 297, 315, 433, 436, 437, 441, 453, 463, 464, 466, 467, 468 Cavusgil, T. 663 Cayseele, P. V. 325 Cecchetti, S. G. 453 Celestica 521 chaebols 331 Chaiken, S. 624 Chakravarthy, B. S. 391 Chandler, A. 510, 527 Chanel 699 Charles Schwab 375 Chartered Semiconductor Manufacturing 527 Chassagnon, R. 403 Chatterjee, S. 632 Chen, C. C. 249 Chen, G. 257 Chen, L. S. L. 360 Chen, N. -F. 632 Chen, X. 249 Cheng, J. M. -S. 360

Chery 703 Chesbrough, H. W. 558 Chetty 464 child labor 5 Child, J. 249, 250, 257, 268, 621, 648 Chile 299 China Foreign Funded Enterprises Directory 585 China: accession to the WTO 254; export policies 254; growth of 110; market 697–708; participation in world trade 7 Cho, D. S. 550, 551, 570, 572, 579 Cho, K. 678 Chow, G. C. 253 Chrisman, J. J., 285, 286, 314 Christensen, C. H. 280 Chu, W. 550, 551, 570, 572, 579 Chung, L. 621, 648 Chung, S. 573 Churchill, G. A. 406 Churchill, G. Jr. 667 City University of Hong Kong, The 72 Clark, K. B. 401, 601 Clark, T. 634, 635 Clarke, I. 658 classical test theory (CTT) 171 Clausing, D. 397, 403 Clegg, J. 251, 600 Clemons, E. 561 climate change 111 Clinton, Bill 14, 374 Coach 698 Coca-Cola 347, 359, 706 Codling, B. 324 Cohen, J. 312, 410, 594 Cohen, P. 312, 410, 594 Cold War 29, 34 Coleman, J. 629 Colgate 359 Collins, E. L. 548 Collis, D. J. 244, 246 Common Method Bias 217–19 Compaq Computer 630 competitive advantage 155; determinants of 244–5 ‘competitive analysis of firms’ 160 competitive exporting 450–1 competitive position 155, 464 competitive strategy 154–6 competitive symmetry 436, 448–50 computer-aided designs 30

Index

computer-aided manufacturing (CAD/CAM) 30 Conant, J. D. 621, 634, 635 confirmatory factor analysis (CFA) 217–18, 590, 591–2 Conner, K. R. 601 conservation 110–11 construct validity 670 consumer association with global brands 349–60 consumer behaviour 124–33 consumer electronics industry 504–42; increasing dependence on foreign suppliers 521–6; industry departure or reduction of outsourcing 526–9; offshore sourcing 513–17; phasing out 517–21 consumer ethnocentrism 133, 347 consumer heterogeneity versus homogeneity 129 contingency relationships 570 contingency theory 620 Contractor, F. 660, 663 convergent validity 670 Cooper 463, 465 Cooper, B. 631 Cooper, M. C. 572 coordination costs 552 Corbett, M. 554 Cordell, V. 288, 315 corporate ethical values (CEV) 167 corporate philanthropy 107 corporate social responsibility (CSR) programs 113 corruption 105 Corsello, B. 399 cost leadership 247, 283, 284, 287–91, 302; competencies 248 cost-plus policy 437 Coughlan, A. T. 444, 579 Coughlin 460 Coulson, A, 656 counterterrorism 101 Country of Origin (COO) 130–3; conceptual refinement 130; consumer information processing and 130–1; measurement issues 133; proof against robustness of 132–3; proof for robustness of 131–2 Covin, J. G. 577 Covisint 548 Cowling, K. 446

737

Craig, C. S. 317 Crampton, S. M. 406 Crenshaw, M. 618, 623, 624 Crest 359 Cristiano, J. J. 403 Crook, J. N. 245 cross-national research, analytical techniques 169–73 Crowley, A. E. 345 Cuervo, A. 324 Cuervo-Czurra A 663, 664 cultural adjustment 105–7 culture and consumer behaviour 128 Cundiff, E. 636 Curtin, R. 622 Cusumano, M. A. 536 cyberspace 36 Cyworld virtual community 704 Czinkota, M. R. 438, 462, 465, 466, 468, 472, 473, 482, 496, 499, 617, 618, 622, 624, 626, 627, 658, 659, 666, 691, 694 D’Aveni, R. 389, 507, 554, 555 Dacin, M. T. 325, 326 daCosta, R. C. 285, 294, 711 Daewoo 525 Dahringer, L. 636 Dai, X. 515, 527 Daimler-Chrysler 548, 642 Dalsace, F. 506, 529, 551, 552 Daniels, J. D. 711, 717, 729 Dankbaar, B. 535 Das, T. K. 569, 573 Datsun 30 David, J. S. 247, 256 David, P. 581 Davidson, C. 442, 446, 448 Davidson, W. 664 Davies, H. 621, 648 Davilar, K. 399 Davis, D. 620 Davis, P. S. 286 Dawar, N. 359 Day, E. 391 Day, G. S. 245, 247, 389, 432, 728 DeCarolis, D. M. 716, 721 decentralization 35 DeFillipi, R. J. 400 del Sol, P. 630, 637 Delios, A. 327, 602, 662 Dell 526

738

Index

Delphi technique 97, 98, 100, 116 Demand Uncertainty 582–3, 589, 598–602, 613 demand-side argument 121 DeMarie, S. 573, 580 Department of Trade and Industry (DTI) 76 deregulation 35 DeSarbo, W.S. 71 Dess, G. 286, 394, 409, 604 Dess, G. G. 300, 587, 604 Dharwadkar, R. 324 Diamantopoulos, A. 283, 347, 459, 463, 465, 466, 469, 481 Diamond District in New York 500 Dickson, J. P. 405 Dickson, P. 389 Dickson, P. H. 583 Dielman, T. E. 715, 718 differentiation 247, 283, 284, 287–91, 302–3; competencies 248–9 DiMaggio, P. 245, 251 direct value inference 171 discriminant validity 670 distance learning. 658 distribution 152–4 distribution policy 436 distribution system 441–5; channel length and integration 443–5; distribution intensity 442–3 Dixit, A. 433 Dobler, D. W. 572 Dodgson, M. 577 Doha Round of international trade negotiations 61, 78, 109 Doig, S. J. 506, 537, 552, 558, 560 dokuritsu kaisha 551 Dolan, R.J. 433 Dole Inc. 630 Domberger, S. 551, 553, 554 Domestic Private Enterprises vs Foreign Wholly owned Subsidiaries 262–3 domestic vs foreign markets 700–1; China 701; Japan 700; Korea 700–1 Dominguez, L. V. 280, 281, 282, 296, 317 Domoto, H. 599 Donaldson, L. 620 Dong Won Electronics 519 Donkers, B. 257 Dooley, R. S. 590 Doren, H. 399

Dornbusch, R. 433, 434 Dosi, G. 577 Doty, D. H. 590 double-loop learning 205 Douglas, S. P. 285, 292, 315, 317, 391 Downes, L. 561 Doyle, P. 439 Doz, Y. L. 535 drugs 8 Duguid, P. 656 Duhan, D.F. 433, 439, 441, 576 DuMont’s 511 Dunning, J.H. 295, 532, 662, 663, 665, 667, 670, 674, 710, 713 Durand, R. 594 Dyer, J. 570, 572, 575, 579 Dyer, J. H. 505, 540, 550, 551, 554 dynamic capabilities 530; India and Pakistan 195–229 Dyomina, N. 240, 254, 259, 271 Eagly, A. 624 Echambadi, R. 599, 600 eclectic paradigm 137, 656, 662, 681 e-commerce 139, 177, 546–65; dynamic perspective 557–9; global sourcing strategy 548–51; impact of 560–3; outsourcing and firm performance 551–5 economies of connectedness’ 336 ‘economies of scale’ 160 Eden, L. 245, 268 Egri, C. 325 Eisenhardt, K. 420, 421, 581 Eisenhardt, K. M. 245, 420, 573, 580, 581 Eisgruber, L. M. 399 Ekeledo, E. 621, 648 Ekeledo, I. 655, 662 Ekici, A. 348 Elango, B. 327 electronic learning market 73–4 Ellram, L. M. 572 e-mail as a data collection tool 116 Emerging Market Firms (EMFs) 195–229 emerging markets, marketing strategies 168–9 Emerson 30, 533, 538, 541 Emerson Radio (USA) 507, 509, 510–12, 513–17, 522, 526

Index

Emmelhainz, M. A. 572 empathetic marketing’ 635 employment-related discrimination 5 endowments, university 75–6 Eng, T. Y. 561 English as a business language 106 environment 110–11 environmental uncertainty 409, 429–30, 570 Eppinger, S. E. 396, 401, 403 equity joint venture (EJV) 133 Erramilli, M. 661, 665 Erramilli, M. K. 589, 661, 662, 676 Eshghi 466 Ethical Position Questionnaire (EPQ) scale 166 ethics 165–8 ethnocentric behavior 347, 348 Ettenson, R. 602 European Journal of Marketing 13, 87, 91, 93 European Union (EU) 34, 119, 176 Evans, J. S. 630 Evans, J.L. 632 Evans, M. G. 590 exchange rate pass-through and international pricing strategy 432–54; brand equity 446–7; competitive exporting 450–1; competitive symmetry 448–50; distribution system 441–5; channel length and integration 443–5; distribution intensity 442–3; exchange rate pass-through 434–5; exchange rate uncertainty 445–6; performance orientation 439–40; pricing policy 437–9;; role of international marketers 435–6; sourcing strategy 440–1 exchange rate uncertainty 436, 445–6 experiential learning 201 Export Assistance Program Usage on Export Performance 459–501 export diversification 303 ‘Export Impact Statement’ 695 export intensity 259–62 export involvement 462–3, 472; active involvement 462; committed involvement 462; experimental involvementc462; exploratory involvement 462; main effect 475–6; passive involvement 462

739

export market orientation (EMO) 139, 172–3 export performance 138–9, 287–94, 301–2, 464–5, 472–3 export performance scales 172–3 export promotion sssistance 466–9 export propensity 259–62 export strategies/performance of firms in Brazil, Chile, and Mexico 279–318; cost leadership, differentiation, and export performance 287–91; marketing standardization and export performance 292–4; marketings standardization and export performance 292–4; validity of responses 299–301 exporting 137–42; barriers to 140–1; conceptual foundation 137; determinants of 138; export performance 138–9; factors for export success 140; marketing mix and 137–8; small business and 139; strategic alliances and 141–2 Ezring, B. M. 399 fair trade 5 Fama, E.F. 632 Fang, E. 242, 243, 244, 245 Faraci, R. 328, 330 Farley, 439, 728 Farrell, D. 564 Faustian dilemma 537 Federal Express 386 Feinberg, R. M. 434 Ferdows, K. 532 Ferelli, M. 599 Fernández, Z. 240, 255 Feshbach, S. 625 Fichman, M. 576 Filatotchev, I. 240, 241, 245, 254, 259, 268, 271, 332 Filer, L. 256 ‘fire fighting’ 420 Firm Competencies 247–9, 255 firm orientation toward profit 436 firm size 304 Firth, M. 257 Fitzmaurice, G. M. 254 Flaherty, T. 658 Flexibility 630

740

Index

Flextronics 521, 541 Florida, R. 508 flow of know-how 36 ‘follow-the-leader’ in foreign direct investment 532 Fong, M. 269, 270 Forbes 511, 522 forced labor 5 Ford Motor Co. 27, 28, 548 Ford, L. D. 283 Foreign Corrupt Practices Act (USA) 106 foreign direct investment (FDI) 326, 637, 662 foreign market entry mode of service firms 655–83; internalization advantages 674–5; literature 660–2; reliability and validity issues 670–1; location advantages 673; OLI dimentions; ownership advantages 671–3 foreign market focus 303 Forgas, J.P. 624, 625 Fornell, C. 592 Fox, R. J. 391 franchising 143, 667 Frazier, G. L. 603 Frazier, G.L. 441, 444 free choice 50 free trade 50 freedom 46–55 Freeman, J. 620 French National Centre for Distance Learning (CNED) 72 Friesen, H. 663 Friesen, P. H. 284, 286, 621, 628 Fryxell, G. E. 590 Fujitsu 527 Fuller, M. 665 Fuller, W. A. 719 Funai Electric 520 functional capability 396–8, 408, 427–8 Gagnon, J.E. 434, 435 Galbraith, J. 580 Galen Kroeck, K. 728 Gao, D. N. 257 Gardiner, P. 388, 392 Garg, M. 327 Garten, J. E. 280 Garud, R. 388

Gatignon, H. 441, 661, 662, 663, 664, 667, 676 Geanakoplis, J. D. 451 General Agreement on Tariffs and Trade (GATT) 26, 709 General Agreement on Trade in Services (GATS), role in higher education 58–81 General Electric 36, 511 General Motors 27, 403, 548, 703 George, G. 324 Georgetown University 76–7 Gerbing, D. 670 Geringer, J. M. 252, 285, 294, 709, 711, 712 Gertler, P. J. 252 Gertner, R. K. 281 Ghemawat, P. 328, 630. 637 Ghosh, A.R. 453 Ghoshal, S. 637, 660, 713 Gillespie, K.289 Gilliland, D. I. 441 or GILLAND? Ginsberg, A. 620, 628 Giunipero, L. C. 554 Glatzer, H. 599 Glazer, R. 637 Glick, W. H. 590 global brand survey 351–6 global brands: concept, defining 344–5; consumer associations with 349–60; effect 343–68; reactions of USA consumers to 343–68 Global Business Policy Council 3 global business terrorism 32 global myth 343 global sourcing 158–61; benefits of 160–1; country of origin issues in 161; in a service context 159–60; strategy 547, 548–51 global strategy 154–63 global versus local brands pretest 349–51 globalization 102–5, 155 ‘glocalization’ 636 GNPT (global new product team) performance 147 Gobeli, D.H. 709, 711 gold standard 32 Goldberg, L. D. 247 Gomes, L. 709, 710, 711, 715 Gomes-Casseres, B. 581, 665 Gomez, H. 287

Index

Gotlieb, J. 635 Gottfredson, M. 552 government export promotion programs 296 government policies, and performance in firms: India and Pakistan 195–229; input supporting 203–4, 216–17; marketing supporting 204–5, 217 Govindarajan, V. 284, 317 Gracie, O. 594 ‘Grandes Ecoles’ 79 Grant, R. M. 716 Gray, B. 574 Greenaway, D. 2 Greene, W. H. 413 Greening, D. W. 574 Greenwood, R. 330 Gremyr, I. 403 Grenadier, S. 394 Grønhaug 467, 468 Groot, X. 394 Grossman, S. J. 534 growth, location and source of 109–10 Guangzhou Registry of Foreign-Related Firms 585 Gucci 698 Guillén, M. F. 250, 251, 328, 329 Guiltinan, J.P. 451 Gulati, R. 552 Gummesson, E. 655, 656 Gutierrez, I. 324 Häagen-Dazs Japan Inc 700 Haddock, R. 368 Hadjimarcou, J. 242, 243 Hafsi, T. 244 Hagedoorn, J. 577, 600 Hair Jr.. J. F. 410, 675, 676 Haire, M. 369 Hall, R. 575 halo effect 346, 348, 366 Hambrick, D. C. 620, 621 Hamel, G. 506, 530, 535, 537, 561, 576, 665 Hamilton 464 not in refs Hamilton, B. 413 Han, M. C. 346 Handfield, R. B. 577, 581, 582 Hannan, M. 620 Hargadon, A. B. 389

741

Harich, K.R. 346, 361 Harman’s one-factor test 218 Harris Publishing Company database 470 Harris, A. 554 Harrison, J. S. 569, 573, 574, 577, 599, 600 Hart, A. G. 630 Hart, O. D. 534 Harvard Business Review 87 Hastings, G. 361 Hauser, J. 397, 399 He, Z. 584 Heath, P. S. 249, 571 Heckman, J. J. 264 Hegarty, W. H. 577 Helsen, K. 71, 293, 389, 396, 410, 435, 441 Henderson, R. 601 Hendry, J. 554, 556 Henriques, D. 624 Hermes 698 hierarchical regression analysis 305 higher education: academic mobility 71–2; future business leaders 113; General Agreement on Trade in Services and 58–81; global negotiations and 60–77; higher expectations 67–8; institution mobility 75–7; productivity and 64–7; cost data perspective 65–7; time transformation perspective 64–5; program mobility 72–5; student mobility 69–71; types of 68–77 Hill, C 667 Hill, C. W. L. 291 Hinings, C. R. 330 HI-Ovis, 386 Hippocrates 44 Hirschman, A. O. 535 Hitt, M. A. 285, 294, 295, 296, 297, 304, 305, 316, 324, 325, 326, 332, 388, 391, 392, 394, 409, 568, 569, 573, 574, 577, 580, 587, 604, 709, 710, 711, 712, 713, 714 Hoenig, S. 439, 728 Hofer, C. W. 285, 314, 620, 621, 628 Hoffman, B. 618 Holden, R.K. 432 Holland, C. P. 561

742

Index

Holt, D.B. 343, 344, 346, 348, 350, 365, 367 Home Depot 642 Honda 30, 393, 703 Hong, J. 331 Hong, S.-T.347 Hoskisson, R. E. 241, 245, 268, 285, 290, 294, 295, 296, 297, 304, 305, 316, 328, 330, 331, 332, 409, 569, 573, 574, 577, 709, 710, 711, 712, 713, 714 Hrebeniak, L. 574, 580 HSBC 107 Hsee, C. 624 Hsieh, Ming-Huei 366, 367 Hsu, C. 660 Huber, G. P. 300, 406, 471, 590 Hufbauer, G. C. 1970. 714, 717 Hughes, K. R. 345 Hulland, J. 289 Hult, G. T. M. 554 Hult, T. M. 570, 603 Hunt, S. D. 389, 417, 421, 576 hurricane Katrina 640 Huszagh, S. M. 391 Hutchinson, J. W. 417 Hwang, P. 285, 294, 295, 662, 667, 711 Hwang, Y. 247, 256 Hyundai 30, 331

Intel 402 intellectual property rights 15, 62, 257, 530 intensity flexibility 442 internalization theory 137, 295, 662, 667 international information integration in marketing 84–6 international marketers, role of 435–6 International Monetary Fund (IMF) 3, 26, 104, 322 international negotiations 125–6 international product cycle (IPC) 54, 137, 531, 536 International Trade Administration 466 International Trade Organization (ITO) 26 internationalization 137 Internet 163–5, 177; performance and 164–5; standardization versus localization 164 inverse Mills ratio 264 investment risk 673 Ireland 568, 569, 573 Ireland, D. 324 Ireland, R. D. 290, 569, 573, 574, 577, 587, 604, 714 item response theory (IRT) model 171 Ito, K. 252, 268, 435, 678

idealism 127 Imai, M. 577 ‘implementation issues’ 563 incremental cost export pricing 438 India: dynamic capabilities and government policies 195–229; growth of 110 Indian Federation of Export Councils 204 indirect values 171 industry export orientation 257 industry instability 257 industry-based perspective 244, 246–7 information 108; cross-fertilization 83–94; flows 36 Inglis, K. 283, 463, 465, 469, 481 Ingram, P. 246 insourcing 549, 557, 550 institutional environment 249–50, 256 institution-based view 244, 246 integration–responsiveness framework 154

Jabil Circuit, Inc. 519 Jaccard, J. 720 Jacobides, M. G.534 Jacobson, R. 439 Jain, S. C. 392 Janis, I. L. 625 Japan: corporations, Americanization of 374; foreign firms’ entry and distribution strategies 372–86; impediments to foreign firms 377–9; market 697–708; recession 383; structural changes in next five years 380–3 Jatusripitak, S. 239, 280, 281 Javalgi, J. 656, 680 Javalgi, R. 588, 655, 661 Jedidi, K. 71 Jemison, D. B. 568 Jensen, J. B. 252, 692 Jiang, Y. 240, 241, 242, 244, 245, 246, 265, 268 Joachimsthaler, E. 369

Index

Johanson, J. 239, 280, 295, 296 Johansson, J.K. 343, 344, 360 Johansson, P. 403 John, G. 583, 589 Johnson, G. 324 Johnson, L. 64 Johnson, R. A. 330, 331 Johnston, M. W. 592, 462, 468, 472 joint ventures 142–3; failing 143; performance 142; selection of 143 Jones, T. M. 256 Joplin, Janis 32, 44–56 Jørgensen, J. J. 244 Journal of International Business Studies 87, 93 Journal of International Marketing 87, 91, 93 Journal of Marketing 13, 87, 92, 93 Journal of the Academy of Marketing Science 87, 93 Journal of World Business 87 journals, analysis of international contributions to 86–92 Joyce, W. 574, 580 Kahneman, D. 625 kaisha 551 Kale, P. 324, 330, 332 Kalra, A. 346 kankei 551 Kapferer, J.-N. 344, 346, 360 Karnani, A. 284, 290, 291, 451 Katrishen, F. A. 711 Katsikeas, C. S. 239, 252, 259, 463, 468 Kaynak, E. 578, 602 Keats, B. W. 573, 580 keiretsu 378, 383, 520, 551 Keister, L. 328, 330 Keller, K. L. 447 Kennedy, John F. 47 Kennedy, P. 413 Kenney, M. 508 Kenny, D. A. 410 Kerner, N. 349 Khalifa, M. 584 Khanna, T. 317, 328, 330, 331 Khosla, A. 434 Kiggundu, M. N. 244 Kim, H. 285, 290, 294, 295, 296, 297, 304, 305, 316, 331, 409, 709, 710, 711, 712, 713 Kim, L. 314, 317

743

Kim, S. 665 Kim, W. 662, 667 Kim, W. C. 285, 294, 295, 711 Kimura, Y. 678 King, D. R. 577 Kirpalani 464, 467, 468, 473 Klein, J. G. 602 Klein, N. 349 Klein, S. 441, 444, 603 Kleinschmidt 463, 465 Klemperer, P. D. 451 Kmart 4 Kneller, R. 252 Knetter, M.M. 434, 435, 442 Knickerbocker, F. T. 251, 532 Knight, G. A. 618, 622, 624, 626, 627 ‘knowledge management’ 160 knowledge-based services 655–6 Kobi, A. 403 Kobrin, S. J. 637 Kock, C. J. 328 Kodak-Fuji case 374 Kogut, B. 294, 295, 296, 325, 332, 391, 413, 710 Kohli, C.S. 346, 361 Konings, J. 325 Koput, K. W. 599 Kordupleski, R. E. 403 Korean market 697–708 Kostova, T. 245 Kotabe, M. 239, 240, 245, 247, 270, 286, 292, 293, 302, 304, 311, 312, 389, 396, 401, 402, 409, 417, 433, 435, 438, 439, 441, 452, 464, 465, 466, 472, 473, 482, 499, 506, 530, 536, 537, 538, 548, 549, 555, 557, 559, 569, 570, 571, 572, 584, 587, 588, 599, 600, 603, 691, 709, 714, 717 Kotha, S. 256, 389 Kotler, P. 239, 280, 281, 399 Kraljic, P. 571, 572 Kreinin, S. M. 434 Kriauciunas, A. 324, 330, 332 Kripalani, M. 564 Krishna, V. 391 Krishnan, H.S. 345 Krugman, P. 433, 434, 435, 436, 441, 446, 447, 450, 558 Krupp, C. 442, 446, 448 Kucukemiroglu, O. 578, 602 Kuemmerle, W. 248

744

Index

Kumar, N. 587 Kumaraswamy, A. 388 Kundu, S. 660 Kunreuther, H. 619 Kusy, M. 584 La, V. 655 Lacity, M. C. 556 LAFTA 35 Laird, N. M. 254 Lambert, D. M. 572 Lambert, D. R. 399 Langlois, R. 577, 599 Lanzillotti, R. F. 1958. 437 Larcker, D. F. 592 Lau, C. M. 245, 268 Lau, Y. 327, 328, 329 Lawrence, P. R. 391, 599, 620 Lawrence, R. Z. 452 lean manufacturing 199, 202–3, 207 Lecraw, D. J. 289 Lee, K. 573 Lei, D. 394, 620, 621 Leiblein, M. J. 506, 529, 551, 552 Leonidou, L. C. 239, 252, 259, 463, 468 Leontiades, J. 602 Leroy, G. 536 Lesch 466 Lessard, D. 433 Leuthesser, L. 346, 361 Leventhal, H. 625 Levin, A. 443. Levinthal, D. A. 576 Levitas, E. 325, 326 Levitt, T. 391, 392, 714 Levy, D. L. 547 LG group 331 Li, H. 257, 268 Li, J. 285, 294, 295, 709, 710, 711, 712, 717 Li, K. 242 Li, M. 581, 601 Li, S. 253 Li, S. X. 251 ‘liability of localness 333 licensing 133, 667 Liebmann, W. 622 Liesch, P.W. 618, 622, 624, 626, 627 Liker, J. K. 403 Likert scales 211, 215 Lim, Y. 314, 317

Lin, J. Ying-Chao 360 Lindell, M. K. 406 linked emic approach 170 Linux 402 Lioukas, S. 247 Litschert, R. J. 256 Liu, H. 242 Liu, X. 242, 243 ‘living wage’ requirements 5 local market expansion 144–54; global standardization vs. local responsiveness 144–5; marketing mix 145–54 Lockett, A. G. 561 Loewenstein, G. 624 logistic model 259 Lohtia, R. 441 Lopez, R. A. 252 Lorentzen 467, 468 Lorsch, J. W. 391, 599, 620 Louis Vuitton see LVMH Lovelock, C. 655, 656 Lowe, J. H. 496 Lu, J. W. 252, 268 Lubatkin, M. 632 Lukas, B. A. 570, 603 Luo, Y. 240, 249, 269, 325, 570, 575, 582, 584, 589 LVMH 698, 699, 700 Lynch, J. G. Jr. 366, 417, 648 MacCormack, A. 394 Machiavellianism 127 Macintosh 464, 467, 468, 473 MacKay, P. 255 Maclachlan, D. L. 405 macroeconomic phenomena 626 macro-environmental issues 122–4 Madsen, T. K. 283, 297 Maesincee, S. 240, 280, 281 Magnavox 509, 518 Magnusson, P. 633 Mahajan, V. 391 Mahoney, J. 389, 391, 396, 401, 417, 421 Major Corp 510 Major Electronics 521 ‘make-or-buy’ decisions 648 Makino, S. 637 Malhotra, N. 636 Malone, T. W. 561 Maloney, M. 663, 664

Index

Manrakhan, S. 663, 664 Mansfield, E. 714, 717 manufacturing flexibility 202–3, 207–8, 216 Mao, H. 345 Marantz (Marantz Japan Inc or MJI) 524 March, A. 396 March, J. G. 394 Marcouiller, D. 633 market entry decisions 133–43; initial mode of entry 134–6; specific modes of entry 137–43 market performance 587 market potential 673 marketing management 122 marketing standardization 284–5, 303; export performance and 292–4; geographical diversification by firms 283 Mars Climate Orbiter missions 53 Marsh, S. J. 401 Marston, R.C. 434 Martin, C. 661 Martin, J. A. 245 Martin, X. 251, 599 Massachusetts Institute of Technology (MIT) 73, 76 Matsushita 508, 509, 512, 518, 519 McBride, S. 579 McCullough, J.M. 445 McCutcheon, D. 569, 572 McDermott, G. 325, 332 McDonald’s 680, 701, 702 McGuinness, N. 602 McKee, D. O. 391, 409, 621 Mehler, M. 522 Mehra, S. 678 Mehta, P. 330 Meng, L. 257, 268 Menon, J. 434, 452, 459 mental maps 205 Mentzer, J.T. 630, 631 Mercedes 359 MERCOSUR (Mercado Común del Sur) 119, 176 Mexico 299 Meyer, K. E. 242, 323, 332 Mezias, J. M. 604 Michel-Kerjan, E. 619 micro-context of research 124–43 micro-institutions, business groups as 328–32

745

Microsoft 396, 401, 402, 528 Miles, R. E. 391 Miller, D. 284, 286, 314, 317, 398, 410, 621, 628, 663 Minebea 520, 524, 525 Miner, A. S. 394, 587, 603 Mintzberg, H. 247 Mishra, C. S. 709, 711 Mitchell, W. 251 MITI (Ministry of International Trade and Industry, Japan) 508 Mitsubishi 522 Mohr, J. 590 Moini, A. 663 Mokwa, M. 621 Mol, M. J. 505, 538, 549, 559 Monczka, R. M. 577 Montgomery, C. A. 417 Montgomery, D. B. 432, 728 Montoya-Weiss, M. M. 570 Mooney, S. 399 Moore’s Law 410 Moorman, C. 394, 587, 603 Morgan, N. A. 405 Morgan, R. M. 389 Morris, M. 620 Morris, M. D. 602 Mowery, D. 393, 577, 581 Mui, C. 561 Mullainathan, S. 330 multidomestic strategy 636 multinational enterprises (MNEs) 119–21, 133, 196, 322 multinational performance 161–3 multinationality 709–29; conditions for positive marginal impact of 724–5; impact on firm performance 722–4; performance implications 710–12 Murray, J. Y. 440, 548, 549, 569, 570, 571, 584, 587, 588 Nachum, L. 269 Nagle, T.T. 432 Naidu, G. M. 246 Nair, A. 256 Nakos, G. 664 Naor, J. 663 Narver, J. 391 national research, anaytical techniques 169–73 National Union Corp. (NUC) 510 National Union Electric 509

746

Index

NatSteel Electronics 521 Naughton, B. 254 Nee, V. 249 Netemeyer, R. G. 592 Network Rail 506 network-based focus 20 Nevin, J. R. 463, 583 New Balance 345, 359 new product adaptation 147–8 new product development 146–7 new product performance (NPP) 147 Newman, K. 323, 324, 330, 332 Nickerson, J. A. 413 Nieto, M. J. 240, 255 Nike 4, 345, 359 Nissan 30, 36 Nivea 359 Nixon, President 32 Nobel, R. 621 Nokia 36, 701 non-government organizations (NGOs)123 Noordewier, T. 459, 583 Nooteboom, B, 529, 530, 532, 556 North American Free Trade Agreement (NAFTA) 35, 119, 176, 310, 311, 692 North, D. C. 245 Nothdurft 460 not in refs NTT DoCoMo’s i-mode cell phone 396 Nunnally, J. C. 670 O’Donnell, C. 345 O’Donnell, E. 242, 243 Oak Technology 525 Obama, Barack 690 OECD 106 Office Depot 619 offshore insourcing 551 offshore outsourcing (or offshore sourcing) 551 Okabe, M. 600 Oliver, C. 574, 580, 582 Olsen, D. M. 252, 709, 712 Open Courseware System (OCW) 73 ordinary least squares (OLS) 221, 305 Organ, D. W. 300, 302, 406,588 organizational behaviour 124–33 organizational buying behaviour 124–5 organizational crisis management 640–3 organizational learning 201, 205–6, 215–16, 295

organizational performance 205–6, 649 Osborne, K. 441, 664 Otani, I.281 outsourced percentage 409 outsourcing 549, 550–1, 551–5; case against 555–7; case for 553–5 Overton, T. 406 ownership-related resources 410, 430 Oxley, J. E. 577, 581 Page, S. A. B. 445 Pakistan Technology Development Institutes (TDI) 203–4 Pakistan, dynamic capabilities and government policies 195–229 Palepu, K. 317, 328, 330, 331 Palihawadana, D. 239 Pan, Y. 253 Panasonic 522 Pandian, J. 421 Park, S. H. 269 Parker, P. 359 Parkhe, A. 573 Parmigiani, A. 560 partial-privatization 326 Partner, S. 508, 509, 512 Patterson, P. 648, 655 Pattnaik, C. 327 Pei, B. K. W. 247, 256 Peinado, E. 661 Peng, M. W. 240, 241, 242, 244, 245, 246, 249, 253, 254–5, 265, 268, 271, 325, 326, 327, 336, 570, 571, 584, 589 Penrose, E. T. 415, 421 Pepsi 359 performance orientation 439–40 Perlow, L. A. 420 Peteraf, M. 398, 712, 713 Petersen, K. J. 577, 581, 582 Pett, T. 663 Pfeffer, J. 569, 573, 574, 580 Philips Electronics (The Netherlands) 507, 509–10, 512, 513–18, 523–7, 533–40 Philips, L. W. 406 Phillips, G. M. 255 Phillips, S. 552 Phlips, L. 451 Piercy, N. 437, 447, 463, 464, 465, 468, 481 Pilling, D. 528

Index

Pioneer 518, 520 Pisano, G. 244, 245, 246, 389, 529, 530 Pitt, L. F. 552 ‘Platform projects’ 393 Podsakoff, P. M. 300, 302, 406,588 Pohl, O. 660 Polygram 527 Poppo, L. 559 Porter, B. 619 Porter, M. E. 245, 246, 247, 248, 251, 256, 257, 284, 285, 290, 292, 302, 304, 530, 535, 551, 571, 578, 580, 636, 665, 714, 728 Porter–Dunning Diamond model of international competitiveness 155 poverty 17 Powell, C. 658 Powell, W. W. 245, 251, 599 Power, D. J. 300, 406, 471 Prada 700 Prahalad, C. 665 Prahalad, C. K. 576, 601 Prasad, V. K. 246 Pressman, G. 349 pricing 150–2 pricing policy 437–9 Pride, W. M. 391, 409 principal component factor analysis 590 privatization 35, 324–6 Procter & Gamble 702 product differentiation 578–9, 588–9, 613 product innovativeness 576–8, 588–90, 612 product policy 146–8 product-related resources 410, 430 Professional Certification in Exporting 695 profit-contribution pricing policy 438 ‘Proglobals’ 355, 356 Puryear, R. 552 quality and price 702–3; China 703; Japan 702–3; Korea 703 quality-based capability 402–4, 409, 429 Quart, Alissa 349 Quelch, J. A. 289, 343, 344, 346, 348, 350, 365, 367 Quinn, J. B. 505, 506, 529, 534, 538, 551, 554

747

Ragatz, G. L. 577, 581, 582 Rajan Varadarajan, P. 620, 621 Ralston, D. A. 325 Ramachander, S. 344, 346, 350 Ramamurti, R. 323, 324 Ramanujam, V. 604 Ramaswami, S. 638, 662, 663, 664, 665, 666, 667, 668, 674, 676, 681 Ramaswamy, K. 256,. 709, 710, 711, 715, 717, 728 Ramaswamy, V. 344, 346, 350 Ramcharran, H. 666 Ramsay, J. 569 Rangan, S. 637 Rao, C. P. 589, 661, 662, 676 Rao, V. R. 453 Rath, G. A. 399 Raven, P. V. 445 Ravenscraft, D. J. 507, 554, 555 RCA 509, 511 ‘recovery marketing’ 635 Reddi, S. P. 561 Reed, R. 400 Reeds, D. L. 716, 721 regional affiliation 171 regionalization 155 ‘relational rent’ 160 relative firm performance 408, 394, 427 relative speed to market 394, 408, 427 relativism 127 Renforth, W. 728 Repenning, N. P. 420 resource dependence theory 573, 574 resource-based view (RBV) 137, 244–5, 398, 530, 663 return on equity (ROE) 551, 553 Reuer, J. J. 506, 529, 551, 552 reverse engineering 201–2, 206–7, 216 Richter, K. 659 Ridderstrale, J. 621 Rinehart, L. 631 Ritter, R. C. 506, 537, 552, 558, 560 Rivkin, J. 328, 330 Robertson, R. 636 Robicheaux, R. 629 Robinson Jr, R. B. 300, 604 Robock, S. H. 637 robust aesthetic product capability 396 robust design 388–421; items 427–8 robust functional product breadth capability 396 robust quality-based capability 396

748

Index

Rocha, A. 280 Rodriguez, R. M. 445 Roli, R. 632 Roman Empire 59 Ronkainen, I.A. 343, 344, 360, 496, 659 root mean squared error of approximation (RMSEA) 217–18 Root, F. R. 239, 437, 628, 637, 660, 661 Rose, E.L.. 435 Rosenkopf, L. 553 Ross, D. 246, 620 Ross, S. 632 Rosson, P. J. 283, 460 Rota, A. 399 Roth, K. 245, 284, 285, 286, 292, 315, 587, 604 Roth, V.J. 441, 444, 603 Rothwell, R. 388, 392 Rottman, J. W. 556 Rover 538 Rowe, M. C. 561 Royal Philips Electronics 510 Rui, O. M. 257 Rumelt, R. P. 391, 415, 417, 421 Rust, R. T. 403 Ryans, J. K. 433 Sahay, A. 401 Sakakibara, M. 247, 251, 257 Salancik, G. (1978) 569, 573, 574, 580 Sallis, J. 660, 664 Salomon, R. 248, 251 Samiee, S. 252, 284, 286, 292, 315, 347, 437, 447, 464, 465, 466, 468, 473 Samsung 30, 520, 707 Sanchez, R. 389, 391, 392, 396, 401, 417 Sandikci, O. 348 Sarel, D. 635 Sarkar, M. B. 599, 600 Saunders, J. 439 Scailia, B. 403 Schendel, D. 421 Scherer, F. M. 246, 620 Scherer, R. 656, 680 Schlagheck, D. M. ,22 Schlegelmilch, B. B. 245 Schlender, B. R. 605 Schoonhoven, C. B. 570, 573, 576, 580, 581, 595, 598, 620 Schott, P. K. 269 Schuiling, I. 360

Schyns, P. G. 345 SCI systems 521 Scordis, N.A. 711 Scott, W. R. 245, 250 Scully, G. 711 Sears 642 Seattle summit 6 ‘second tier cities 114 Seger, K. A. 623 Seligman, S. D. 240 semi-globalization marketing strategy 155 September 11, 2001 7, 70, 158, 617 Sequeira, C. G. 280, 296 Seringhaus 460, 468 Seven-Eleven Japan, 376 Shamsie, J. 398, 410 Shan, W. 413 Shanghai Registry of Commercial Firms 585 Shanghai Statistical Bureau Firm Databank 585 Sharia in British life 107 Sharma, D. 660, 664 Sharma, S. 347, 356, 594 Shaver, J. M. 248, 251, 264 Sheehey, E.J. 434 Sheffet, M.J.. 433, 441 Shenkar, O. 241, 251 Shenzhen Advanced Science and Technology Development Company 519 Shenzhen Shen Fei Laser of China. 519 Shimp, T.A. 347, 356 Shin, J. 347 Shoham, A. 252 Shortell, S. M. 552 Shuen, A. 244, 245, 246, 389, 529, 530 Siekman, P. 629, 640 Siemens and Telefunken 509 Sikora, E. 433, 441 Silicon Valley 500 Silverman, B. S. 246, 577, 581 Simerly, R. L. 581, 601 Simon, H. 433 Simonin, B. L. 572, 588 Singh, H. 294, 505, 540, 555, 573 Singh, K. 577, 600 Sinkula 459 Sivakamur, K. 621, 648, 655, 662 Slater, S. 84, 211, 240, 245, 248, 283, 391

Index

Slovic, P. 624, 625 small and medium-sized enterprises (SMEs) 139–40, 176 Smith, A.K. 634, 635 Smith, S. 324 Smith, W.R. Jr. 452 Smith-Doerr, L. 599 Smoot-Hawley Act USA 7 Snow, C. C. 391 social responsibility 343 Socrates 21 Solectron 520, 521 Song, M. X. 570 Song, X. M. 394 Sony Corporation (Japan) 395, 396, 507–11, 512–13, 513–17, 520–9, 533–7, 541, 700–1; Betamax 509, 510; PlayStation 2 (PS2) 401, 528, 704 Souchon 459, 466 Souder, W. E. 394 sourcing decision-making 549 sourcing strategy 436, 440–1 Spangenberg, E. R. 345 Spanish National University of Distance Education (UJNED) 72 Spanos, Y. E. 247 Speckhals, K. 506, 537, 552, 558, 560 Spector, P. E. 408 Spekman, R. 590 Spicer, A. 325, 332 Spreng, R. 648 Spyropoulou, S. 239 Stalker, G. M. 599 Stan, S. 240, 242, 246, 247, 248, 252 Starbuck, W. A. 604 Starbucks 701 Starling, S. L. 572 Statement on Behalf of Higher Education Institutions Worldwide 63 Stead, M. 361 Steenkamp, J. -B. E. M. 343, 344, 346, 350 Steensma, H. K. 409 Stern, L. W. 572, 582, 587, 599, 601 Stock, G. N. 401 Strachen, H. 328 strategic alliances 156–8 strategic choices during institutional transitions. 326 ‘strategic focus’ 160

749

Strategic Impediments Initiative (SII) of the 1980s 384 strategic substitutes 448 ‘strategy tripod’ perspective on export behaviors 239–72 Stuart, F. I. 569, 572 Styles, C. 584, 655 suboptimality costs 552 Suder, G. 666 Sugden, R. 446 Sullivan, D. 717, 728 Sun Tzu strategy 6 Sunstein, C.R. 624, 625, 626 supply-side argument 121 sustainability 110–11 Sutcliffe, K. M. 580 Svobodina, L. 326 Swamidass, P. M. 440 Swaminathan, A.251 Swan, K. S. 402, 409, 417, 549 Sylvania 518 Szymanski, D.M. 439 Tabrizi, B. N. 581 tacit knowledge 207 Taguchi, G. 403 Takeuchi, H. 714 Tallman, S. 252, 285, 294, 295, 709, 710, 711, 712, 717 Tan, J. 253, 254–5, 271 Tan, J. J. 570, 603 Tansuhaj, P.S. 445 Tatham, R. L. 410, 675, 676 Taylor, E.L. 343, 344, 346, 348, 350, 365, 367 Tech Data 619 technological capability 400–2, 409, 428, 429 technological uncertainty 580–2, 589, 598–602, 613 technology features 704–5; China 705; Japan 704; Korea 704–5 technology flow 36 Teece, D. J., 244, 245, 246, 389, 421, 529, 530, 532, 558 Teegen, H. 239, 240, 245, 247, 270, 709 Tellis, G. 438 Teng, B. -S. 569, 573 Teng, W. 528 Teranishi, J. 434 Terpstra, R. H. 325

750

Index

Terpstra, V. 433. 572, 588, 678 Terpstra-Tong, J. 325 terrorism 8, 44, 51, 101–2, 617–50; actors 622; antecedent factors 622–4; direct and indirect effects 624–6; international business 636–8; link to management and marketing 627–38; marketing communications 635; pricing 632–4; sourcing, production, and distribution 629–32; see also September 11th, 2001 Tesar, G. 462, 469, 472 Thomas, A. S. 256 Thompson, C. 636 Thomson 509, 525 Thorelli, H. B. 568 Tianjin Foreign-Related Enterprises Databank 585 Tihanyi, L. 328, 330, 331, 332 Time Series Cross-Sectional (TSCS) data analysis 717 time-to-market dimension of new product development (NPD) 147 Ting, W. 664, 679 tobit model 259 Todino, H. S. 289 Tokyo Tsushin 512 Tokyu Department Store Group 375 Tong, T. W. 254–5 Toshiba 520, 524, 527 Toyota 30, 403, 547, 700 Trade Development Authority of Pakistan 204 transaction-cost (TC) analysis 137, 662, 667 Trent, R. J. 577 Tschang, C. 270 Tse, D. 249, 250, 253, 257, 268 Tse, E. 368 Tukel, O. 656, 680 tunneling 330 Turrisi, R. 720 Tversky, A, 625 Tyler, B. B. 409 Tz’u-hsi, Empress Dowager 7 Uhlenbruck, K. 332 Ulrich, K. T. 396, 401, 403 uncertainty 394, 580 UNCTAD 709 unemployment 17

UNESCO 59, 106, 656 United Microelectronics Corp 527 United Nations 26, 627 United Nations Industrial Development Organization (UNIDO) 213 university endowments 75–6 University of Phoenix 75 Urban, G. L. 399 USA: current account balance, 1970–2002 490; current account components, 2002 490; export performance, government help for 688–95; manufactures exports, imports, and deficits, 1978–2002 493; manufactures trade imbalances for top surplus & deficit 493; manufactures tradeiImbalances by commodity group, 2002 494; manufacturing as a percentage of GDP, 1970–2000 496; manufacturing, global position of 489–503; MBA Programs 655–83; merchandise exports, imports, and deficits, 1978–2002 491; merchandise trade, composition 2002 492; trade deficits 36 Usher, J. M. 251 Vahlne, J. E. 1977. 239, 280, 295, 296 validity 217–19 Valton, D. 617 value 52–5 value creation 530 Van der Valk, W. 548 van Tulder, R. J. M. 505, 538, 549 Varadarajan, P. R. 391, 409,. 439, 459 variance extracted test 592 variance inflation factors (VIFs) 305 Venkatraman, N. 604, 620, 628 Verganti, R. 394 Verhage, B. 636 Vernon, R. 1966. 280, 532, 536, 678 Vernon-Wortzel, H. 280, 287, 296 ‘versatility’ 630 Verwaal, E. 257 Veryzer, R. W. 394, 399, 405 vicious outsourcing cycle 531 Vietnam War 29 Viettronics Tan Binh 525 Vilalong, B. 324 Villanueva, D. 281 virtual bundling 451

Index

Volkswagen Group 703 Vorhies, D. W. 405 Wada, T. 413 Wagenheim, G. 631 Wagner, A. K. 417 Wagner, J. A. 406 Wald statistic 676 Walder, A. 250 Walker, G. 413 Wal-Mart 702 Walters 464, 465, 466, 468, 473 Wan, C.K. 720 Wan, W. P. 268, 269 Wang, C. 251, 600 Wang, D. Y. L. 240, 241, 242, 244, 245, 246, 265, 268 Wang, Edward Shih-Tse 360 Wang, X. 325, 584 Ware, J. H. 254 Warzynski, F. 325 Watson, R. T. 552 Weaver, K. M. 583 Webb, J. 361 Weber, E. 624 Wegner, D.M. 345 Wei, Y. 242, 243 Weiss, A. 394, 637 Weitz, B. 589 Welch, E. 624 Wensley, R. 389 Wenzlaff, R. M. 345 Werner, S. 663, 664, 670 Wernerfelt, B. 244, 245, 389, 398, 415, 417, 451, 530, 573 West, S. G. 410, 590, 596 Western Electric 512 Westinghouse Electric 511 Westphal, J. D. 552 White, C. C. 403 White, D. 655 White, R. E. 290, 330, 331 White, S. 325 Whitney, D. J. 406 wholly owned subsidiary (WOS) 133 Wicks, A. C. 256 Wiersema, M. 569 Wiese, C. 433, 441 Wildt, A. R. 549, 569, 570, 571, 584, 587 Wilkinson, P. 617 Williamson, N. C. 453

751

Williamson, O. E. 506, 555, 580, 662 Williamson, P. J. 251 Willis, M. 674 Wilson, D. 521 Wilson, E. 393 Wind, J. 391 Wind, Y. 285, 292, 315, 391 Winter, S. G. 534 Wisniewski, K. J. 451 Witschel, G. 618 Wolf, H.C. 453 Wolff, J. 663 Woodcock, C. P. 637 Woolson, D. 506, 537, 552, 558, 560 World Bank 26, 104 World Car approach of Ford Motor Company 293 World Trade Center attack (1993) 618 World Trade Organization 3, 17, 35, 53, 58, 60, 61, 104, 123, 322, 374, 657, 658, 681, 692, 709 Wortzel, L. H. 280, 287, 296 Wright, L.A. 439 Wright, M. 240, 241, 245, 254, 259, 268, 271, 332 Wyer Jr., R.S. 347 Wynstra, F. 548 Xiali 703 Xu, K. 242, 243 Yamaoto, M. 399 Yates, J. 561 Yellowless, D. 389 Yip, G. S. 292, 389 Yiu, D. 327, 328, 329 York, A. S. 271 Young & Rubicam’s (Y&R’s) Brand Asset Valuator model 344, 360 Young-Ybarra, C. 569 Yu, C. 678 Yu, S. 528 Zaheer, A. 580 Zaheer, S. 269, 433 Zahorik, A. J. 403 Zahra, S. A. 324 Zajac, E. 575 Zander, I. 391 Zander, U. 295, 296 Zank, G. 634, 635 Zaralis, G. 247

752

Index

Zeithaml, C. 620 Zeithaml, V. 620 Zeng, M. 251 Zenger, T. 559 Zenith 509 Zhang, J. 257, 268 Zhang, W. 346

Zhao, H. 240, 242, 243, 255 Zhao, S. 242, 243, 244, 245 Zhao, T. 584 Zinkhan, G. M. 552 Zou, S. 240, 242, 243, 244, 245, 246, 247, 248, 252, 255, 286, 293, 297, 315, 453, 464, 465