New Challenges to International Marketing (Advances in International Marketing, Volume 20)

NEW CHALLENGES TO INTERNATIONAL MARKETING ADVANCES IN INTERNATIONAL MARKETING Series Editor: S. Tamer Cavusgil Recent...

Author: Tamer Cavusgil | Rudolf R. Sinkovics | Pervez N. Ghauri

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NEW CHALLENGES TO INTERNATIONAL MARKETING

ADVANCES IN INTERNATIONAL MARKETING Series Editor: S. Tamer Cavusgil Recent Volumes: Volume 5:

Industrial Networks

Volume 6:

Export Marketing: International Perspectives

Volume 7:

Marketing in Asia Pacific and Beyond

Volume 8:

Parts I & II

Volume 9:

International Marketing and Purchasing

Volume 10:

Globalization, the Multinational Firm, and Emerging Economies

Volume 11:

Reassessing the Internationalization of the Firm

Volume 12:

New Directions in International Advertising Research

Volume 13:

Study Abroad: Perspectives and Experiences from Business Schools

Volume 14:

Reviving Traditions in Research on International Market Entry

Volume 15:

Research on International Service Marketing: A State of the Art

Volume 16:

Relationship Between Exporters and their Foreign Sales and Marketing Intermediaries

Volume 17:

International Market Research: Opportunities and Challenges in the 21st Century

Volume 18:

Cross-Cultural Buyer Behaviour

Volume 19:

Michigan State University Contributions to International Business and Innovation

ADVANCES IN INTERNATIONAL MARKETING

VOLUME 20

NEW CHALLENGES TO INTERNATIONAL MARKETING EDITED BY

RUDOLF R. SINKOVICS Manchester Business School, Manchester, UK

PERVEZ N. GHAURI King’s College London, London, UK

United Kingdom – North America – Japan India – Malaysia – China

JAI Press is an imprint of Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2009 Copyright r 2009 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84855-468-9 ISSN: 1474-7979 (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS LIST OF CONTRIBUTORS

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PART I: INTERNATIONALIZATION INTRODUCTION Rudolf R. Sinkovics and Pervez N. Ghauri THE PROPENSITY TO CONTINUE INTERNATIONALIZATION: A STUDY OF ENTREPRENEURIAL DECISION-MAKING IN AUSTRALIAN SERVICE FIRMS Pieter Pauwels, Paul G. Patterson, Ko de Ruyter and Martin Wetzels

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FACTORS INFLUENCING THE INTERNATIONALISATION PROCESS OF UK FIRMS IN ASIA Kannika Leelapanyalert

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TOURISM AS A LEVERAGE OF INTERNATIONALIZATION FOR CONSUMER GOODS FIRMS: A CASE STUDY APPROACH Konstantinos Poulis and Mo Yamin

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PART II: ENTREPRENEURSHIP AND FUNCTIONAL ADVANCEMENTS RELATIONSHIPS BETWEEN THE DIMENSIONS OF INTERNATIONAL GROWTH ORIENTATION, ENVIRONMENTAL TURBULENCE, AND STRATEGIC ORIENTATIONS Sanna Sundqvist and Olli Kuivalainen v

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CONTENTS

INTERNATIONALISATION AND TECHNOLOGICAL INNOVATION: EMPIRICAL EVIDENCE ON THEIR MUTUAL RELATIONSHIP Diana A. Filipescu, Alex Rialp and Josep Rialp

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THE ROLE OF INNOVATIVE AND ENTREPRENEURIAL BEHAVIOR IN INTERNATIONALIZATION PROCESSES Arild Aspelund and Tage Koed Madsen

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BRAND IMAGE PERCEPTIONS ACROSS CULTURES: A STUDY OF SYMBOLIC AND FUNCTIONAL ASSOCIATIONS Laura Salciuviene, Pervez N. Ghauri, Audra I. Mockaitis and Claudio De Mattos

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PART III: COLLABORATIVE RELATIONSHIPS DO FIRMS CREATE VALUE THROUGH INTERNATIONAL STRATEGIC ALLIANCES? Chia-Ling ‘Eunice’ Liu

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WHAT CAUSES BREAK-UPS? FACTORS DRIVING THE DISSOLUTION OF MARKETING-ORIENTED INTERNATIONAL JOINT VENTURES Mehmet Berk Talay and M. Billur Akdeniz

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GEOGRAPHIC MARKET DIVERSIFICATION: A PREMIUM OR DISCOUNT IN FIRM’S VALUE Z. Seyda Deligonul

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PART IV: METHODOLOGICAL ADVANCES THE USE OF PARTIAL LEAST SQUARES PATH MODELING IN INTERNATIONAL MARKETING Jo¨rg Henseler, Christian M. Ringle and Rudolf R. Sinkovics

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Contents

ADVANCING THE UNDERSTANDING OF CONSTRUCT VALIDITY AND CROSS-NATIONAL COMPARABILITY: ILLUSTRATED BY A FIVE-COUNTRY STUDY OF CORPORATE EXPORT INFORMATION USAGE Thomas Salzberger, Hartmut H. Holzmu¨ller and Anne Souchon THE DYNAMICS OF TECHNOLOGICAL READINESS IN MARKETING UNITS: WHY CROSS-CULTURAL EXAMINATION IS NECESSARY R. Glenn Richey, Daniel G. Bachrach, Michael G. Harvey and Hui Wang METHODOLOGICAL RIGOR OF ORDINARY LEAST SQUARES REGRESSION STUDIES IN MAINSTREAM MARKETING: AN ASSESSMENT OF RESEARCH REPORTED IN THE JOURNAL OF MARKETING Z. Seyda Deligonul, Brian R. Chabowski, Steven H. Seggie, Shichun Xu and S. Tamer Cavusgil

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389

LIST OF CONTRIBUTORS M. Billur Akdeniz

Michigan State University, East Lansing, MI, USA

Arild Aspelund

Norwegian University of Science and Technology, Trondheim, Norway

Daniel G. Bachrach

The University of Alabama, Tuscaloosa, AL, USA

S. Tamer Cavusgil

Georgia State University, Atlanta, GA, USA

Brian R. Chabowski

The University of Tulsa, Tulsa, OK, USA

Z. Seyda Deligonul

St. John Fisher College, Pittsford, NY, USA

Claudio De Mattos

Manchester Business School, Manchester, UK

Ko de Ruyter

Maastricht University, Maastricht, The Netherlands

Diana A. Filipescu

Autonomous University of Barcelona, Barcelona, Spain

Pervez N. Ghauri

King’s College London, London, UK

Michael G. Harvey

The University of Mississippi, Oxford, MS, USA

Jo¨rg Henseler

Radboud University Nijmegen, Nijmegen, The Netherlands

Hartmut H. Holzmu¨ller

University of Dortmund, Dortmund, Germany

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LIST OF CONTRIBUTORS

Tage Koed Madsen

University of Southern Denmark, Odense, Denmark

Olli Kuivalainen

Lappeenranta University of Technology, Lappeenranta, Finland

Kannika Leelapanyalert

Birkbeck College, University of London, London, UK

Chia-Ling ‘Eunice’ Liu

National Chung Cheng University, Chia-Yi, Taiwan

Audra I. Mockaitis

Victoria University of Wellington, Wellington, New Zealand

Paul G. Patterson

University of New South Wales, Sydney, Australia

Pieter Pauwels


Konstantinos Poulis

University College Cork, Cork, Ireland

Alex Rialp


Josep Rialp


R. Glenn Richey

The University of Alabama, Tuscaloosa, AL, USA

Christian M. Ringle

University of Hamburg, Hamburg, Germany

Laura Salciuviene

Lancaster University Management School, Lancaster, UK

Thomas Salzberger

Wirtschaftsuniversita¨t Wien, Wien, Austria

Steven H. Seggie

Ozyegin University, Istanbul, Turkey

Rudolf R. Sinkovics


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List of Contributors

Anne Souchon

Loughborough University, Loughborough, Leicestershire, UK

Sanna Sundqvist

Lappeenranta University of Technology, Finland

Mehmet Berk Talay

HEC Montreal, Montreal, Canada

Hui Wang

Guanghua School of Management, Beijing, China

Martin Wetzels


Shichun Xu

The University of Tennessee, Knoxville, TN, USA

Mo Yamin


PART I INTERNATIONALIZATION

INTRODUCTION Rudolf R. Sinkovics and Pervez N. Ghauri Labelling this volume ‘‘New challenges’’ proved to be a challenge in itself, as we have to visualize what we mean by ‘‘New’’. On the one hand, it is the very nature of our academic investigations that we are aiming to continuously push frontiers and explore phenomena which have been underexplored. On the other hand, there is nothing ‘‘new’’ in the fact that the economic, physical, cultural and political environment within which international marketers operate is continuously changing. Given this pretext, we still chose to label this volume ‘‘New challenges’’. This is because in the recent years we have seen a number of phenomena which have been emerging that we had not seen before. The anxieties regarding increasing prices of commodities, spatial reorganization of production processes (Buckley & Ghauri, 2004), outsourcing and offshoring of vital supply chain activities are some of the factors that are creating new challenges and are transforming the landscape of international marketing. Globalization, the all-encompassing force which transforms the fabric of our socio-cultural and economic interactions (Giddens, 2000, 2002) continues as a topic on the rise (Miller, Hartwick, & Le Breton-Miller, 2004) and is influencing marketing strategies of internationally active firms. Adding to this, developments such as the advancement in technology and modernity (Levitt, 1983) are heating up and revolutionizing the way companies do business in the international marketing arena (Jean, 2007). In fact, we see a faster pace of technological innovation and technological connectivity is transforming the way people live and consume. Mega-trends such as the rise of firms from China and India (Doh, 2005; Lewin & Peeters, New Challenges to International Marketing Advances in International Marketing, Volume 20, 3–10 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020003

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RUDOLF R. SINKOVICS AND PERVEZ N. GHAURI

2006) as mature and valid competitors to Western firms (Aulakh, 2007; Dunning, 2006) require international marketers to reframe their traditional thinking. In the call for papers we encouraged submissions around these trends, e.g. the changing nature of technology-enabled international marketing research, the impact of environmental degradation, global warming and scarcity of resources on international marketing strategies, global account management, procurement and international supplier networks, internationalization of small and entrepreneurial firms, implications of outsourcing and offshoring, reliability and validity issues for construct measurement and advanced methodologies. The submissions selected for this volume cover some of these areas, while some of the topics remain open for future research. The book is organized in four parts; Part I presents a selection of papers that focus on the internationalization process of the firm. Part II combines studies with a small firm perspective and a focus on entrepreneurship. In Part III we offer three studies which examine value creation in strategic alliances, investigate reasons for international joint venture dissolution and finally a conceptual contribution on diversification and the controversy within the literature which either suggests that diversification results in a firm’s value premium or a firm’s value discount. The final part in this edited book is devoted to methodological advancements. This part provides good examples of methodological challenges faced by today’s scholars and managers alike.

INTERNATIONALIZATION The first chapter by Pieter Pauwels, Paul G. Patterson, Ko de Ruyter, and Martin Wetzels is entitled ‘‘The Propensity to Continue Internationalization: A Study of Australian Service Firms’’. The authors build on the process theory of internationalization and the theory of planned behavior and investigate a firm’s propensity to continue internationalization. They develop a theoretical model and test this using structural equation modeling using a sample of international service providers using partial least square (PLS). Their model confirms the pivotal role of attitudes towards internationalization, relevant behavioral norms, and behavioral control factors as contributors to the propensity to continue internationalization. In the chapter ‘‘Factors Influencing the Internationalisation Process of UK Firms in Emerging Markets’’, Kannika Leelapanyalert explores the

Introduction

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Marks & Spencer case and their entry into Hong Kong and Thailand. Building in rich interview and archival data, the author examines the contribution of ‘‘matching’’ in the firm internationalization. This concept, which builds and extends beyond the micro-level networking concept, apparently is very relevant in the context of firm internationalization and the achievement of a strong market position, specifically in emerging markets. Konstantinos Poulis and Mo Yamin present a case study within the tourism industry. In their examination of seven Greek firms with an existing export activity, they find that international tourist encounters within their domestic home market helped them as a leverage to internationalize, expand into formally unknown markets, and learn about international markets in a kind of ‘‘follow the client’’ approach.

ENTREPRENEURSHIP AND FUNCTIONAL ADVANCEMENTS In the first chapter, Sanna Sundqvist and Olli Kuivalainen empirically explore the relationships between international growth orientation, environmental turbulence, and strategic orientations. In their study of 783 Finnish exporters they find that five different international growth orientations (IGO) exist. There are firms which emphasize export profits, exporters highlighting export volume and profitability, firms with no special growth focus, exporters growing by entering new foreign markets, and finally exporters emphasizing volume. Significant differences can be detected across environmental factors and strategic orientations among different IGO patterns. In the second chapter, ‘‘Internationalization and Technological Innovation: Empirical Evidence on Their Reciprocal Relationship’’, Diana A. Filipescu, Josep Rialp, and Alex Rialp analyze internationalization and technological innovation through a multiple-case-study method. They propose a conceptual framework of reciprocal relationships between technological innovation and firm internationalization. Firms in this study, innovated more in products than in processes, and their technological innovations were more of incremental than radical nature. Additionally, the reciprocal relationship was reinforced in their empirical results, with technological innovation being an important ingredient for internationalization as well as being an international helping in the innovation process.

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Arild Aspelund and Tage Koed Madsen, in their chapter on ‘‘The Role of Innovative and Entrepreneurial Behavior in Internationalization Processes’’ present two strands of literature, the innovation-related internationalization model and the international entrepreneurship studies. They explore how these concepts have contributed to our understanding of internationalization processes of firms. Their conceptual deliberations also offer suggestions of how knowledge on innovative and entrepreneurial behavior from early research can be transferred to contemporary international marketing issues. Laura Salciuviene, Pervez N. Ghauri, Audra I. Mockaitis, Claudio De Mattos study brand image perceptions across cultures and examine consumer values on brand image perceptions in the mobile telephone market. Based on data from Lithuania and Denmark, they conclude that consumers perceive brand image differently depending upon their cognitive characteristics. While Danish consumers determine the value of brand based on its functional and symbolic image, the Lithuanian consumers perceive the brand value based only on its symbolic image. The chapter provides useful implications for managers.

COLLABORATIVE RELATIONSHIPS In this part the first chapter, Chia-Ling ‘‘Eunice’’ Liu asks the question, ‘‘Do Firms Create Value Through Strategic Alliances?’’ investigates factors influencing the relationship between knowledge acquisition and capability enhancement. She develops a conceptual model and links alliance research, organizational learning, and network theory. The author then employs a structural equation model and examines a cross-section of 160 firms from the Taiwanese IT industry. Both antecedents of knowledge acquisition and its effect on firm’s capability and network position enhancement are tested. Her work is interesting in that while previous research on alliance learning has typically focused on knowledge acquisition per se, this study highlights the role of knowledge application in an intra-organizational context. Firms enhance their competences not only by acquiring knowledge but also integrating knowledge from alliance partners into the firm’s organizational routines. The second chapter by Mehmet Berk Talay and M. Billur Akdeniz examines causes for break-ups of firms and factors driving international joint venture dissolution. In their empirical analysis of a large sample of 3,038 IJVs in 63 different countries over a 21-year time period, they examine conceptualized antecedents of the dissolution of IJVs and reveal positive

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Introduction

significant effects of cultural distance and market potential as well as the negative significant effects of equally shared ownership on the likelihood of IJV dissolution. Interestingly, their results reveal that competition between partners does not have a significant effect on IJV dissolution. The third chapter in this part by Seyda Deligonul, ‘‘Geographic Diversification: A Premium or Discount in Firm’s Value’’ extends the scope of marketing function to multiple geographical locations and comes up with two contradictory conclusions, that the firm strategy may result in (1) value premium, or (2) value discount. It discusses a number of controversies and ‘‘errors’’ in the existing literature and calls for an analysis with appreciation of organizational skills, resources, and knowledge assets that can be transferred across geographies to improve performance. It thus highlights the relationship between diversification and performance and suggests that idiosyncratic aspects of different locations and business units must not be overlooked.

METHODOLOGICAL ADVANCES The first chapter in this part, ‘‘The Use of Partial Least Squares Modeling in International Marketing’’, by Jo¨rg Henseler, Christian M. Ringle, and Rudolf R. Sinkovics reviews the PLS applications in the international marketing domain and comments on strengths and weaknesses of PLS. The authors provide guidance on this technique for international marketing work, discuss formative and reflective measurement differences and offer insights into PLS and multi-group analysis. PLS appears well suited for certain research situations and with the advancement of software such as SmartPLS, the methodology offers its strengths in a much more accessible way. The intriguing chapter by Thomas Salzberger, Hartmut H. Holzmu¨ller, and Anne Souchon, ‘‘A New Perspective of Construct Validity and CrossNational Comparability’’, explores export information use and its crosscultural equivalence in a five-country study (United Kingdom, United States, New Zealand, Austria, and Germany). Not only they provide an impressive data set, but they also offer a highly promising methodology, based on item response theory (IRT) and the Rasch model of measurement. The Rasch model, named after the Danish mathematician Georg Rasch, is an exciting framework which lends itself particularly well to the investigation of measurement equivalence, because it strongly emphasizes invariance. The analysis shows partial invariance for export information use, allowing

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for valid comparisons within and across cultures and offering a basis for the assessment of individual companies as well. The third chapter by R. Glenn Richey, Daniel G. Bachrach, Michael G. Harvey, and Hui Wang is called ‘‘The Dynamics of Technological Readiness in Marketing Units: Why Cross-Cultural Examination is Necessary’’. The authors follow recent literature and embrace the view that technological readiness in marketing is a key driver to operational efficiency, specifically for international supply chain and marketing managers. Yet, they contend that technological readiness will be a function of task interdependence and unit-level performance. To examine this notion, they conduct an experiment in the United States and the People’s Republic of China and measure ratings of technological readiness from a total of 383 evaluators. Their results via cross-cultural experimental examinations support a three-way interaction effect of task interdependence, unit performance, and culture on technological readiness estimations. They thus provide insights into dynamic differences in the management of units in both the United States and Peoples Republic of China. The final chapter addresses the question: How methodologically rigorous is the empirical research reported in a major journal – the Journal of Marketing? This study makes a comprehensive effort at characterizing the strengths and weaknesses in the preparation, analysis, and reporting of empirical research by marketing scholars. As an example of a statistical technique, Deligonul and his colleagues investigate practices associated with the use of Ordinary Least Squares (OLS) regression – by far the most widely-used technique reported in the Journal of Marketing. The study explores trends in the use of OLS regression over a decade and a half, and also seeks to identify patterns associated with single versus multiple authors. An overall objective is to delineate the extent to which consensus exists in the use of a popular statistical technique by leading marketing scholars. This is important because consensus on the means of scholarship signals the degree of maturity of a field.

ACKNOWLEDGMENTS Special thanks go to the Advances in International Marketing editor-in-chief, S. Tamer Cavusgil whose support for this initiative has helped to make this project happen. Furthermore, we are indebted to colleagues who were prepared to invest time and effort to review the chapters submitted to this special volume. Their contribution has been vital to the development of the

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Introduction

chapters and to the overall coherence of this special volume. The reviewers are listed in alphabetical order. Billur Akdeniz, Michigan State University, USA Nigel Barrett, University of Technology, Sydney, Australia Talay Berk, Michigan State University, USA Francisco Jose´ Molina Castillo, University of Murcia, Spain Ulf Elg, Lund University, Sweden Georg Fassott, Technical University Kaiserslautern, Germany Richard Fletcher, University of Western Sydney, Australia Arne Floh, Wirtschaftsuniversita¨t Vienna, Austria Alexandra Ganglmair, University of Otago, New Zealand David Griffith, Michigan State University, USA Anna Jonsson, Lund University, Sweden Tim Kiessling, Bond University, Australia Gary Knight, Florida State University, USA Glenn R. Richey, University of Alabama, USA Sami Saarenketo, Lappeenranta University of Technology, Finland Arnold Schuh, Wirtschaftsuniversita¨t Vienna, Austria Per Servais, University of Southern Denmark, Denmark Carl-Arthur Solberg, BI Norwegian School of Management, Norway Carlos Sousa, University College Dublin, Ireland Lawrence Welch, Melbourne Business School, Australia Mo Yamin, Manchester Business School, UK Attila Yaprak, Wayne State University, USA Anna Zueva, University of Bradford, UK

REFERENCES Aulakh, P. S. (Ed.) (2007). Editorial: Emerging multinationals from developing economies: Motivations, paths and performance. Journal of International Management, 13(3), 235–240. Buckley, P. J., & Ghauri, P. N. (2004). Globalisation, economic geography and the strategy of multinational enterprises. Journal of International Business Studies, 35(2), 81–98. Doh, J. P. (2005). Offshore outsourcing: Implications for international business and strategic management theory and practice. Journal of Management Studies, 42(3), 695–704. Dunning, J. H. (2006). Comment on dragon multinationals: New players in 21st century globalization. Asia Pacific Journal of Management, 23(2), 139–141. Giddens, A. (2000). The Runaway World Debate [Online]. Available at http://www.lse.ac.uk/ Giddens/RWDdefault.htm (accessed on January 20, 2005). Giddens, A. (2002). Runaway world: How globalisation is reshaping our lives. London: Profile Books.

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Jean, R.-J. ‘‘Bryan’’ (2007). The ambiguous relationship of ICT and organizational performance: A literature review. Critical Perspectives on International Business, 3(4), 306–321. Levitt, T. (1983). The globalization of markets. Harvard Business Review, 61(3), 92–102. Lewin, A. Y., & Peeters, C. (2006). Offshoring work: Business hype or the onset of fundamental transformation? Long Range Planning, 39(3), 221–239. Miller, D., Hartwick, J., & Le Breton-Miller, I. (2004). How to detect a management fad – and distinguish it from a classic. Business Horizons, 47(4), 7–16.

THE PROPENSITY TO CONTINUE INTERNATIONALIZATION: A STUDY OF ENTREPRENEURIAL DECISION-MAKING IN AUSTRALIAN SERVICE FIRMS Pieter Pauwels, Paul G. Patterson, Ko de Ruyter and Martin Wetzels Although behavioral in nature, internationalization process literature has long ignored the impact of strategic management and managerial decisionmaking. Internationalization has been explained as an incremental process of experiential learning that builds upon the reciprocal relationship of a firm’s growing international market commitment and its increasing foreign market knowledge (Johanson & Vahlne, 1977). Yet, ‘‘once it has started, [this process] will tend to proceed regardless of whether strategic decisions in that direction are made or not’’ (Johanson & Vahlne, 1990, p. 12). More than a decade later, however, an emergent perspective emphasizes entrepreneurial behavior as a new and complementary explanatory platform for internationalization (Knight, 1997; McDougall & Oviatt, 2000; Zahra, 2005). International entrepreneurship highlights the dominant role of innovative, proactive, and risk-seeking behavior in searching, selecting, entering, and

New Challenges to International Marketing Advances in International Marketing, Volume 20, 11–36 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020004

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PIETER PAUWELS ET AL.

managing cross-border markets (Covin & Slevin, 1991; Jones & Coviello, 2005). Human volition, decisions, and mainly actions have become the units and focus of analysis (Jones & Coviello, 2005). To date, this approach has contributed considerably to the explanation of, for instance, apparently untypical internationalization processes of ‘‘Born Globals’’/‘‘International New Ventures’’ (Jones & Coviello, 2005; Knight & Cavusgil, 2004; McDougall & Oviatt, 2000). The empirical focus of international entrepreneurship literature is on the evidence of internationalization behavior: country selections and choices of entry modes, both with a specific timing in a continuous process of change (Le´vesque & Shepherd, 2004). However, managerial decision-making is not investigated as such it ‘‘may be determined post hoc from interpretation of internationalization behavior patterns and profiles’’ (Jones & Coviello, 2005, p. 16). The analysis of event-patterns and behavioral profiles is indeed a first and important analytic step. We argue, though, that the explanation of internationalization on the basis of behavioral outcomes is incomplete without a close investigation of the antecedents of managerial choice and behavior in the internationalization process (Ucbasaran, Westhead, & Wright, 2001). Therefore, the further integration of international entrepreneurship in internationalization process theory requires a better understanding of managerial information-processing and (entrepreneurial) choice-making in the context of the internationalization process. Towards this goal, the present chapter focuses on the relationship between managerial attitudes and behaviorial intentions (i.e., the propensity) to (continue) internationalization. Extant literature on entrepreneurial decision-making legitimizes this focus on managerial attitudes, as it indicates that entrepreneurs are more susceptible to the use of decision-making heuristics (Brockhaus, 1980; Busenitz & Barney, 1997; Manimala, 1992; Mitchell et al., 2004). Lacking other information, an entrepreneur tends to rely on his/her own overall attitude to the general issue (i.e., internationalization) as an anchor while making decisions and is inclined to adjust perception and interpretation of new information to this attitudinal anchor (Slovic, Fischhoff, & Lichtenstein, 1977; Tversky & Kahneman, 1974). Hereafter, we argue that the overall attitude towards internationalization is a critical antecedent to behavioral outcomes in the internationalization process. Therefore, this study contributes to the literature as it formalizes this attitudinal perspective, and identifies its sources and effect on the intentions towards internationalization. This results in a model of internationalization propensity that is rooted in the classic attitude-based psychological Theory of Planned Behavior (TPB) (Ajzen, 1991).

The Propensity to Continue Internationalization

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The model is operationalized and tested on a sample of 193 Australian internationalizing service firms. This choice for service firms is waranted as cross-border marketing and delivery of services is lagging behind. Over the period 2001–2006, the global export of commercial services has increased by a stable average of 11% per year to an estimated $2.71 trillion in 2006 (WTO, 2007). While this is a significant growth, commercial services’ exports expanded less rapidly than global cross-border merchandise trade – 15% per year to $11.76 trillion in 2006 (WTO, 2007). The Australian service sector is no exception to this trend.

1. DECISION-MAKING IN THE INTERNATIONALIZATION PROCESS To investigate a firm’s propensity to continue internationalization, the socalled Uppsala internationalization process model is a logical point of departure (Johanson & Vahlne, 1977, 1990). Building upon a behavioral theory of the firm (Cyert & March, 1963) and Penrose’s (1959) theory of the growth of the firm, the basic logic of the Uppsala or U-model is quite straightforward: The allocation of resources to foreign activities holds a certain risk yet induces experiential learning, which results in market-specific knowledge. The increasing stock of market-specific knowledge reduces this risk and stimulates additional allocation of resources (Eriksson, Johanson, Majkga˚rd, & Sharma, 1997). The U-model builds upon four (implicit) assumptions. First, firms maximize the expected future rent of their resources by allocating these to markets where doing business is judged to be least risky (Andersen, 1993). Second, risk reduces only through increasing market-specific knowledge. Third, firms acquire new market-specific knowledge through experiential learning (Johanson & Vahlne, 1977). Fourth, experiential learning and the reciprocal relationship of accumulating knowledge and market commitment are efficient processes. Internationalization processes would not embark and/ or continue if experiential learning were an inefficient process, i.e., when the cost of experiential learning would outweigh the benefits reaped from increasing market commitment. In sum, the U-model explains internationalization as an incremental and risk adverse process that is solely driven by an efficient experiential learning process (Johanson & Vahlne, 1977; Pedersen & Petersen, 1998; Forsgren, 2002). Since its conception in the mid-1970s, the impact of the U-model on international business research has only increased, both in product and service

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contexts. To date, the U-model remains a popular theoretical – almost paradigmatic – point of reference (Johanson & Vahlne, 2006). Nevertheless, the model and its underlying logic have been challenged on theoretical (e.g., Andersen, 1993; Hadjikhani, 1997; Bjo¨rkman & Forsgren, 2000) as well as on empirical grounds (e.g., Sullivan & Bauerschmidt, 1990; Millington & Bayliss, 1990). For instance, apparently it cannot explain observed firm behavior such as leapfrogging, discontinuity, and (temporal) withdrawal (Benito & Welch, 1997; Pedersen & Petersen, 1998). One of the main grounds for critique is that the U-model actually fails to cope with managerial discretion that goes beyond the optimization of the experiential learning process (Buckley, 1996). As Johanson and Vahlne (1990) conclude: ‘‘The [U-Model] is rather skeptical in regard to strategy. Nevertheless, we think that internationalization processes are the result of a mixture of strategic thinking, strategic action, emergent developments, chance and necessity. We believe it is worthwhile to analyze the internationalization of firms with an open mind with regard to these factors’’ (Johanson & Vahlne, 1990, p. 22). Therefore, a focus on decision-making in the context of the internationalization process is warranted. Strategic decisions do not only affect the current course of a firm in international waters, they also outline if not define the learning process that underlies a long-term internationalization process (e.g., Bell, 1995; Chetty & Campbell-Hunt, 2004; Johanson & Vahlne, 1990; Larimo, 2001). 1.1. Internationalization through Heuristics The internationalization process of firm defines an enter- or intrapreneurial setting that is characterized by a sense of urgency, lack of information, and relatively high perceived risk (Knight & Cavusgil, 2004; Johanson & Vahlne, 1990). In this challenging environment, managers have to decide on investments, strategies, and priorities in overseas ventures. Preliminary findings on these decisions demonstrate their outspoken entrepreneurial nature. More in particular, decision related to the internationalization process seems to rely heavily on simplifying heuristics (Chetty & Campbell-Hunt, 2004; Etemad & Lee, 2003; Ibeh, 2003; Jones & Coviello, 2005; Le´vesque & Shepherd, 2004). Because of (perceived) lack of information, percieved risk, and a sense of urgency, fully elaborated decision-making may simply be impossible (Ellis & Pecotich, 2001). In this situation, an entrepreneur may still come to a decision based on heuristics whereas a non-entrepreneurial stance may obstruct any decision at all (Brockhaus, 1980; Busenitz & Barney, 1997; Manimala, 1992; Mitchell et al., 2004).


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Studying heuristics, Slovic, Fischhoff, and Lichtenstein (1977) and Einhorn and Hogarth (1981), among others, have shown that entrepreneurial decisionmakers typically manifest overconfidence, which mainly emanates from anchoring and adjustment (Hogarth, 1987; Schwenk, 1988). Lacking other information, the entrepreneur tends to rely on his/her own overall attitude towards the general issue (i.e., internationalization) as a pivotal anchor while making decisions and is inclined to adjust perception and interpretation of new information to this anchor (Slovic et al., 1977; Tversky & Kahneman, 1974). To understand a firm’s propensity to continue internationalization in the context of extant internationalization process theory, it is therefore imperative to focus on a decision-maker’s overall attitude towards internationalization. In the following sections, we elaborate on the attitudinal component of the U-model and accommodate entrepreneurial decisionmaking to explain the propensity to continue internationalization.

1.2. Attitudinal Commitment in the U-Model In the U-model, market commitment is composed of two factors – the amount of resources committed and the degree of commitment (Johanson & Vahlne, 1977). The amount of resources points at the economic factors allocated to a particular market. Market commitment increases when a firm allocates more inputs to manage and support foreign operations. The degree of commitment represents the difficulty of finding alternative uses for these resources (Andersen, 1993). Hadjikhani (1997) extends this conceptualization and argues that the amount of commitment points at the short-term tangible (i.e., financial and institutional) forms of commitment, whereas the degree of commitment captures more the intangible long-term elements of commitment. Focusing on tangible and intangible commitment as separate constructs does not refute the U-model’s logic, yet promises a more dynamic perspective on internationalization. For instance, it could help explaining market withdrawal (decreasing tangible commitment) as a decision of product/ market portfolio optimization in the context of a progressing (increasing intangible commitment) internationalization process (Douglas & Craig, 1996; Pauwels & Matthyssens, 1999). Hadjikhani’s (1997) two-dimensional conceptualization of market commitment corresponds with an established understanding of commitment that distinguishes between attitudinal commitment and behavioral commitment (Meyer & Allen, 1991; Gundlach, Achrol, & Mentzer, 1995). Doing so, we upgrade the theoretical role of managers’ attitude and discretion in the

16


U-model. This paves the way for the explanation of the propensity to continue internationalization within the logic of the U-model.

2. THE PROPENSITY TO CONTINUE INTERNATIONALIZATION: A MODEL In line with the aforementioned logic, we argue that the propensity to continue internationalization is the outcome of a heuristics-based decisionmaking process that highly relies on the decision-makers’ attitude towards internationalization. To model and test this statement, we build upon classic TPB (Ajzen, 1988, 1991; Fishbein & Ajzen, 1975). This theory proposes that behavior is determined by behavioral intention as an outcome of attitudes, subjective norms, and perceived behavioral control (Ajzen, 1991; Ajzen & Fishbein, 1980). On its turn, the attitude towards a behavioral intention is determinent by salient beliefs about the consequences of the behavior multiplied by the evaluation of the consequences. This attitude equation represents an information-processing view of how attitudes are formed and change with the influence of external stimuli on the structure of the outcome beliefs (Ajzen & Fishbein, 1980). The more one beliefs that performing the behavior will lead to desired outcomes, the more favorable the attitude will be. As a second antecedent of behavioral intention, subjective norms are determined by normative beliefs. The latter rely on expectations of certain reference groups, and the motivation to comply with these expectations (Fishbein & Ajzen, 1975). Thirdly, perceived behavioral control captures the perception of ease or difficulty of performing this behavior (Ajzen, 1991). Behavioral intention is strongly influenced by the confidence or belief in the ability to perform a behavior (Bandura, 1991). In line with TPB, we hypothesize that the overall attitude towards internationalization is a central antecedent to the propensity to continue internationalization. Hence, H1. The propensity to continue internationalization is positively related to the overall attitude towards internationalization. This attitude captures the subjective1 desire to continue internationalization and develops from salient beliefs: outcome beliefs and normative beliefs (Fishbein & Ajzen, 1975). Referring to Patterson, Cicic, and Shoham (1997) and Wang and Olsen (2002), it is expected that the disconfirmation of expectations of the outcomes of internationalization is a prime antecedent of


17

a firm’s attitude and, eventually, of its intention to continue internationalization. Active internationalizing firms have at least implicit expectations about what benefits internationalization might bring. These expectations shape the outcome beliefs as they serve as a benchmark against which subsequent performance is compared and (dis)confirmed. Negative (positive) disconfirmation occurs when actual performance is perceived as falling short of (exceeding) expectations. Current performance that lags behind expectations mitigates future outcome beliefs. To the contrary, current performance that surpasses expectations strengthens future outcome beliefs. This disconfirmation process feeds the overall attitude towards a particular behavior (Anderson, 1973; Oliver, 1980; Oliver & DeSarbo, 1988). Hence, Hypothesis 2 summarizes the effect of outcome beliefs: H2. The overall attitude towards internationalization is positively related to the disconfirmation of expectations about past internationalization performance. Next to outcome beliefs, the overall attitude to internationalization builds on normative beliefs, which reflect a feeling of intrinsic obligation (Meyer & Allen, 1991). We conceive a structural and a strategic notion of these normative beliefs. The structural notion encompasses the degree of organizational institutionalization of a firm’s internationalization process (Selznick, 1957; Boeker, 1989; Sullivan, 1994). The more the internationalization process is ingrained in the organization, the more positive the overall attitude towards internationalization. The intensity of internationalization is suggested as a proxy variable to confine the structural part of this normative belief. The strategic component relates to the perceived fit between the strategic option to continue internationalization and the firm’s corporate strategy and goals. The better the internationalization route and its related consequences fit with the corporate course, the more positive the attitude towards internationalization (Nelson & Winter, 1982; Boeker, 1989; Hamel & Prahalad, 1989). Accordingly, we propose: H3a. The overall attitude towards internationalization is positively related to the intensity of internationalization. H3b. The overall attitude towards internationalization is positively related to the perceived fit between internationalization and the corporate strategy. In line with TPB, the overall attitude towards internationalization is complemented with subjective norms (Fishbein & Ajzen, 1975). Jointly, they affect the propensity to continue internationalization. In fact, these

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subjective norms represent the acceptability of the intended behavior given current organizational routines, procedures, and structures and, as such, captures, organizational and strategic inertia (e.g., Kelly & Amburgey, 1991; Ross & Staw, 1993). Organizational inertia is conceived as the institutionalization of past behavior. It is expected that the mere intensity of the firm’s current international program contributes to a subjective norm that affects a firm’s intention to continue internationalization. Likewise, strategic fit represents strategic inertia to affect behavioral intention to continue internationalization. Hypotheses 4a and 4b summarize the expected impact of the subjective norm: H4a. The propensity to continue service internationalization is positively related to the current intensity of internationalization. H4b. The propensity to continue service internationalization is positively related to the perceived fit between internationalization and the corporate strategy. Consequently, the firm’s current internationalization intensity and the perceived strategic fit play a double role in the model. First, they act as (proxies of ) normative belief structures that shape the attitude towards internationalization. Second, they capture the subjective organizational and behavioral norms to continue internationalization. This conceptualization is in line with Davis, Bagozzi, and Warshaw (1989), among others, who model normative belief structures to affect the intermediate attitudinal construct as well as behavioral intention directly. Apart from the overall attitude towards internationalization and extant subjective norms, the propensity to continue internationalization also depends upon perceived behavioral control (Ajzen, 1991). In the present study, we focus on both internal and market inhibitors to represent this behavioral control. This way, we capture a firm’s perception of the feasibility of internationalization in a certain business context. If one perceives high barriers within the firm (e.g., limited resources or a lack of relevant capabilities) or in the foreign market (e.g., level of competition), the propensity to continue internationalization is expected to be attenuated. Managers may claim that they are very much in favor of internationalization (i.e., a positive attitude), yet forgo the opportunity to commit resources to this strategic option because they perceive it to be unfeasible. In line with Sheppard, Hartwick, and Warshaw (1988), we model internal and market inhibitors as moderators that affect the relationship between attitude and the two normative constructs on the one hand, and the firm’s propensity on


19

the other. Hence, Hypothesis 5 presents the expected impact of behavioral control as follows: H5a,b,c. The higher (lower) the degree of perceived internal and market inhibitors, the weaker (stronger) the direct impact of (a) intensity, (b) attitude, and (c) perceived strategic fit on the propensity to continue internationalization. To complete and to further contextualize the model, we acknowledge the moderating effect of personal interaction with foreign customers during product/service delivery on the development of an attitude. In line with perception–knowledge–belief theory (Dretske, 2000), it is expected that a higher degree of personal interaction during product/service delivery enhances the relationship between salient beliefs and the emerging attitude. The more cross-border delivery is mediated by domestic or foreign channels, the less the internationalizing firm has personal contacts with its local market, the less salient beliefs impact upon the overall attitude towards internationalization. These interactions provide a higher perceived sense of expertness, which inflates the perceived truthfullness of extant beliefs. Accordingly, we propose: H6a,b,c. The higher (lower) the degree of personal interaction with the local market, the stronger (weaker) the impact of (a) intensity, (b) disconfirmation of expectations, and (c) perceived strategic fit on the overall attitude towards internationalization. Fig. 1 summarizes the model graphically. It presents a contextualized understanding of a firm’s propensity to continue internationalization. The model builds upon TPB (Ajzen, 1991). It complements the U-model as it conceives the propensity to continue internationalization as the outcome of an entrepreneurial decision that highly relies upon simplifying heuristics with a pivotal role for the overall attitude (i.e., attitudinal commitment in the terminology of the U-model) towards internationalization (Slovic et al., 1977; Tversky & Kahneman, 1974).

3. RESEARCH DESIGN To test the hypotheses related to our model (Fig. 1), we studied data from 193 Australian service firms currently involved in international operations. Although in literature the internationalization of service firms has been studied largely apart from product firms (Buckley, Pass, & Prescott, 1991;

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Personal Interaction Internationalization Intensity

H6a,b,c Internal Inhibitors

H3a H4a

Disconfirmation Of Expectations

H2

Propensity to continue Internationalization

Attitude to Internationalization H1

H4b H3b

H5a,b,c

H5a,b,c Market Inhibitors

Strategic Fit

Fig. 1.

The Propensity to Continue Internationalization.

Winsted & Patterson, 1998), we see no particular reason why the present model would not be valid in both a service and product setting. The underlying logic does not touch upon particularities of service or product markets. The Australian service sectors provide an ideal context for a study such as this. It has produced thriving service economies (especially professional services such as engineering, business consultancy, legal, and medical firms). Moreover, this sector has been especially aggressive in capitalizing on overseas market opportunities, especially in the Asia-Pacific region. Today, the Australian exports of commercial services amounts to US$32 billion in 2006, with an average yearly increase of about 6%. However, as in the rest of the world, the dramatic increase of cross-border service delivery is lagging. Indeed, Australian exports of merchandized goods leveled off at US$123 billion in 2006 with an average yearly increase of 16% over the last six years (WTO, 2007). We employed a three-stage research design. The first stage consisted of 15 semi-structured in-depth interviews with service firms involved in international operations. The purpose of this qualitative phase was twofold. First, we aimed at understanding how the antecedents of a firm’s propensity to continue internationalization were interrelated in practice. Second, the interviews provided a glimpse on the decision-making process that underlies


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this model. While this knowledge enhanced the interpretation of the analytical results, a discussion of the process elements of this model goes beyond the ambition of this chapter. Stage two involved a cross-sectional survey of service organizations. We mailed pre-tested, self-administered questionnaires to a non-probability sample of 1,264 organizations. The questionnaire was directed to the senior executive officer responsible for the organization’s internationalization process or, in case no such officer existed, to the senior marketing person. After one follow-up reminder letter and the incentive of receiving an executive summary of the findings, 347 usable questionnaires were returned, 183 were unusable due to incorrect address or incomplete information, and 67 reported they were only involved in marketing goods. The remaining 667 questionnaires were not returned and could not be traced. Of the 347 usable replies, 154 firms were considering export as strategy for growth, but were currently not operational across borders. After excluding these, the usable response was 193 service export cases, which means a response rate of 34.2%.2 An analysis of the questionnaires returned from a second wave mailing were compared with the first wave, as recommended by Armstrong and Overton (1977), and revealed no statistically significant differences (a ¼ 0.05) on any of the measures. Stage three of the analysis was organized after the statistical analysis of the survey. We asked experienced top managers of four internationally operating service firms to comment extensively on the outcomes of the survey and to assess alternative interpretations. This stage significantly helped us to upgrade the managerial logic of the discussion section as well as the identification of remaining study topics.

3.1. Measures Table 1 gives an overview of the indicators and scales used in the questionnaire. The intensity of internationalization is measured using a formative ratio of international to total sales (Sullivan, 1994). The measurement of the disconfirmation of expectations construct relies upon Anderson (1973), Oliver (1980), and Oliver and DeSarbo (1988). Strategic fit is measured following Van de Ven and Drazin (1985). Measures for the attitude towards internationalization and the propensity to continue internationalization build upon instruments discussed in Sheppard et al. (1988). The moderating variables personal interaction and internal and external inhibitors were measured by use of three or four self-constructed items. Except for

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Table 1. Label (type) Intensity of internationalization (Open)

Disconfirmation of expectations on internationalization (5-point Likert type)

Strategic fit between internationalization and corporate strategy (5-point Likert type)

Attitude towards internationalization (5-point Likert type)

Personal interaction with customer base (5-point Likert type) Internal inhibitors to internationalization (5-point Likert type) Market inhibitors to internationalization (5-point Likert type) Propensity to continue internationalization (5-point Likert type)

Measures. Indicators

% of annual sales from international operations most recent fiscal year % of annual sales from international operations past three financial years Overall performance of internationalization compared to expectations Accrued benefits from internationalization compared to expectations Problems in internationalization compared to expectations Internationalization is consistent with our organization’s mission Financial returns to the company are greater if we internationalize International operations are potentially more profitable than domestic operations Our mind-set towards internationalization is high Commitment to internationalization is high Internationalization is a desirable path Degree of overall interaction Degree of face-to-face interaction Frequency of interaction Lack of expertise Inappropriate services Inadequate resources Difficulty of gaining entry Lack of contacts Underdeveloped markets Competition abroad Likelihood of continuing internationalization Possibility of continuing internationalization Chance of continuing internationalization

Anchor Points n/a

Much worse/ much better

Strongly disagree/ strongly agree

Strongly disagree/ strongly agree

High/low

Hinder to great extent/not hindering at all

Very unlikely/ very likely


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internationalization intensity, which is a construct with two formative indicators, we measured the remaining non-moderating latent variables with multiple reflective indicators. When the dependent and independent variables are obtained from a single key informant, common method bias is a potential problem. We have examined the extent of any potential bias using Harman’s one-factor test. In the unrotated factor structure, we identify five factors with an Eigenvalue greater than 1. We find no evidence of a general factor. Those five factors explain 72% of the total variance and the first factor accounts for less than the majority of the variance explained. Following Podsakoff and Organ (1986), common method variance does not appear to be a concern.

3.2. Method We used Partial Least Squares (PLS) Path Modeling to estimate both the measurement and structural parameters in our structural equation model (Chin, 1998; Wold, 1985). PLS Path Modeling is a component-based structural equation modeling (SEM) approach that does not require multivariate normal data, places minimum requirements on measurement levels, and is more suitable for small samples (Chin, 1998; Fornell & Bookstein, 1982; Wold, 1985). In this study, covariance-based SEM approaches (e.g., LISREL, EQS) are less appropriate due to the existence of a construct with formative indicators (intensity).3 PLS Path Modeling allows assessing the psychometric properties of the measurement instruments. More in particular, we can examine reliability, convergent validity, and discriminant validity (Chin, 1998; Fornell & Larcker, 1981). For the structural model, we use the R2 value for the endogenous latent variables as a measure of model fit (Chin, 1998). Tenenhaus, Vinzi, Chatelin, and Lauro (2005) have developed a global fit measure for PLS, goodness of fit (GoF). GoF is defined as the geometric mean of average communality and average R2 (0pGoFp1), or more formally: qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi GoF ¼ communality R2 (1) Since communality equals average variance extracted (AVE) in the PLS approach, we propose a cut-off value of 0.5 for communality as suggested by Fornell and Larcker (1981). Moreover, in line with the effect sizes for R2 (small: 0.02; medium: 0.13; large: 0.26) proposed by Cohen (1988), we derive

24


the following GoF criteria for small, medium, and large effect sizes of R2: 0.1, 0.25, and 0.36. To test for the significant effects of the moderator variables, we established two groups for each moderator on the basis of a median split as suggested by Duxbury and Higgins (1991). Subsequently, we use PLS to obtain parameter estimates and bootstrapping to provide the standard errors of the estimates and the accompanying t statistics. The equality of the path coefficients for the two groups can be tested for significance using a t test (Duxbury & Higgins, 1991; Howell & Aviolo, 1993). A conservative value of 0.01 is used for the significance level.

4. ANALYSIS This section discusses the analytical results in four steps. First, we assess the psychometric properties of the measures. Second, we present the outcomes of the PLS analysis of the model as specified in Fig. 1. Third, we discuss the results of the moderator analysis. To assess the psychometric properties of the measures, we test a measurement model without structural paths in PLS-Graph Version 3.0 (Chin, 2001), which is analogous to confirmatory factor analysis in covariance-based SEM. Convergent validity can be evaluated by inspecting the factor loadings of the measures on their respective constructs (Chin, 1998; Hulland, 1999; Tenenhaus et al., 2005). If we assume a minimum loading of 0.7 item reliability will be approximately 0.5 (Hulland, 1999). Reliability of the measures was assessed using composite reliability (CR) and AVE. For CR a threshold value of 0.70 is suggested (Chin, 1998; Hulland, 1999; Nunnally & Bernstein, 1994), whereas for AVE, Fornell and Larcker (1981) propose a threshold value of 0.50. Discriminant validity can be assessed by examining the crossfactor loadings of the measures (Chin, 1998; Howell & Aviolo, 1993; Hulland, 1999). The measures should not exhibit any loadings substantial in magnitude on constructs for which we have not hypothesized so. Moreover, the correlations of residual terms (Y) across blocks should not exceed 0.20 in absolute terms (Falk & Miller, 1992; Fornell & Bookstein, 1982). Additionally, a construct should share more variance with its measures than it shares with other constructs in the model (Chin, 1998; Hulland, 1999). Consequently, the square root of the AVE should exceed the intercorrelations of the construct with the other constructs in the model. In our study, all reflective measures show factor loadings exceeding 0.7 and no factor cross-loadings substantial in magnitude. The between-block

25


correlations of the residual terms (Y) do not exceed 0.2 in absolute terms. Moreover, none of the intercorrelations of the constructs exceeds the square root of the AVE for the constructs. To assess the reliability of the measures, we calculated the composite scale reliability and the AVE (Chin, 1998; Fornell & Larcker, 1981; Hulland, 1999). As far as composite scale reliability is concerned, all reflective measures exceed a value of 0.90 and for AVE all reflective measures are higher than 0.60. Moreover, the square root of the AVE exceeds the intercorrelations of the construct with the other constructs in the model indicating discriminant validity (Chin, 1998; Hulland, 1999). Table 2 summarizes the psychometric properties of the measures. Next, we estimated the parameters in the structural model using PLS analysis as implemented in PLS-Graph Version 3.0 (Chin, 2001) and tested the substantive relationships as laid down in the conceptual model. Fig. 2 summarizes the parameter estimates. All relationships are significant at a ¼ 0.01 except for the relationship between internationalization intensity and the propensity to continue internationalization, which is weaker yet significant at a ¼ 0.05. The findings show that the propensity to continue internationalization relates significantly to the overall attitude towards internationalization (H1 supported), to the internationalization intensity (H4a supported), and to the perceived strategic fit between internationalization and the corporate strategy (H4b supported). The overall attitude to internationalization, on its turn, significantly relates to salient beliefs on the disconfirmation of performance expectations (H2 supported), to the internationalization intensity (H3a supported), and to salient beliefs about the congruence between internationalization and the corporate strategy (H3b supported). Since PLS estimation does not generate standard errors for the parameter estimates, we resort to resampling procedures (Chin, 1998; Efron & Tibshirani, Table 2. Composite Reliability and Intercorrelations of Latent Variables. # of Items Composite Reliability

1. 2. 3. 4. 5.

Intensity Disconfirm Strategic fit Attitude Propensity

2 3 3 3 3

0.92 0.91 0.90 0.91 0.96

Intercorrelations of Latent Variables 1

2

3

4

5

0.92 0.24 0.40 0.49 0.38

0.88 0.22 0.45 0.26

0.79 0.63 0.57

0.85 0.59

0.95

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Internationalization Intensity 0.14* 0.21**

Disconfirmation Of Expectations

0.30**

Attitude to Internationalization R2=0.54

0.48**

0.31**

Propensity to continue Internationalization R2=0.42

0.31**

Strategic Fit

Fig. 2.

PLS Parameters Estimates of the Model. Note: * po0.05; ** po0.01.

1993). To test the effects and the statistical significance of the parameters in the structural model, a bootstrapping procedure with 250 and 500 resamples was used. The resulting t statistics for both the 250 and 500 resample revealed a consistent pattern. In general, the model shows a more than acceptable variance explained for attitude (R2 ¼ 0.54) as well as for internationalization propensity (R2 ¼ 0.42). As a point of reference, Sheppard et al. (1988) indicated that models of planned behavior explain between 20 and 30% of the variance in behavioral intention. Finally, Tenenhaus et al.’s (2005) GoF measure for this model is 0.58, which clearly exceeds the proposed cut-off value of 0.36. Furthermore, we compared our model with the nested, fully mediated model. In the latter, we assume that the propensity to continue internationalization is only explained by attitude towards internationalization and no direct relations between the normative antecedents (i.e., intensity and strategic fit) and propensity are postulated. The R2 of propensity in the fully mediated model is significantly lower than the R2 of propensity in the partially mediated model (R2partial ¼ 0:42 vs. R2full ¼ 0:34; F2,189 ¼ 13.03, po0.001). This further supports the validity of our model. Table 3 indicates the standardized path coefficients of the moderators as presented in Fig. 1. The moderator effects on the relationship between attitude and propensity (ATT-PROP) are significant and attenuate or

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Table 3.

Results of Moderator Analysis a.

Relationships

Unmoderated Moderated Internal inhibitors Market inhibitors

Unmoderated Moderated Personal interaction

Standardized Path Coefficients

Low (n ¼ 101) High (n ¼ 92) Low (n ¼ 114) High (n ¼ 79)

Low (n ¼ 86) High (n ¼ 50)

ATT-PROP

INT-PROP

FIT-PROP

0.31**

0.14*

0.31**

0.48** 0.20** 0.40** 0.19*

0.11 0.18** 0.32** 0.03

0.22* 0.38** 0.25** 0.44**

INT-ATT

DIS-ATT

FIT-ATT

0.21**

0.30**

0.48**

0.26* 0.40**

0.30** 0.41**

0.47** 0.27*

* po0.05. ** po0.01. a All t tests for the moderator analyses are significant at ao0.01.

strengthen as expected. Compared to the non-moderated model, the relationship between attitude and propensity becomes significantly stronger in case of low internal inhibitors (bIL ¼ 0.48 vs. b ¼ 0.31; po0.01) and significantly weaker in case of high internal inhibitors (bIH ¼ 0.20 vs. b ¼ 0.31; po0.01). The same counts for the effect of market inhibitors on the relationship between attitude and propensity. These results support Hypothesis 5b, which postulated that the higher (lower) the degree of perceived internal and market inhibitors, the weaker (stronger) the direct impact of the attitude towards internationalization on the propensity to continue internationalization. As indicated in Table 3, the moderator effects on the relationship between intensity and propensity (INT-PROP) are insignificant for low internal and high market inhibitors and are opposite to the proposed direction in the case of internal inhibitors, albeit insignificantly. As such, these findings do not support Hypothesis 5a which stated that higher (lower) internal and external inhibitors attenuate (strengthen) the impact of intensity on propensity. The moderator effects on the relationship between strategic fit and propensity (FIT-PROP) are all significant, but opposite to the expected direction. This finding is interesting and will be addressed in the discussion section of this chapter. Nevertheless, the analytical results do not support Hypothesis 5c.

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Finally, the lower part of Table 3 presents the results of the moderator effect of the degree of personal interaction with customers during service delivery (Hypothesis 6). Concerning the impact on the relationships between intensity and attitude (INT-ATT) and between disconfirmation and attitude (DIS-ATT), the results are significant and support Hypotheses 6a and 6b, respectively. With respect to the impact on the relationship between strategic fit and attitude (FIT-ATT), Table 3 shows significant yet unexpected results. Contrary to what was postulated in Hypothesis 6c, a higher (lower) degree of personal interaction attenuates (strengthens) the impact of strategic fit on attitude. Therefore, Hypothesis 6c cannot be supported. In sum, although some of the hypotheses related to the moderating variables cannot be supported, overall the moderators have a significant impact on the model.

5. DISCUSSION The findings largely confirm the validity of our model. All hypotheses related to the core model as well as the majority of the hypotheses related to the moderator effects are supported by the data. This way, the present study confirms the viability of the TPB (Ajzen, 1991) in the context of the internationalization process. As expected, the propensity to continue internationalization is partially explained by the overall attitude towards internationalization, which, on its turn, relies on decision-makers’ normative and outcome beliefs. Complementary to the overall attitude towards internationalization, the propensity to continue is also enhanced by structural and strategic inertial forces. Both the core model and the moderating effects shed light on the entrepreneurial nature of managerial decisions in the course of the internationalization process. The relatively high variance explained supports the idea that managerial decision-making in this context is largely heuristicsbased, with the overall attitude to internationalization as a central anchor (Hogarth, 1987; Schwenk, 1988). Even some unexpected findings in the moderator analysis shore up this conclusion. Contrary to what was expected in Hypothesis 5c, higher internal and market inhibitors seem to strengthen the relationship between strategic fit and propensity and, again contrary to what was put forward in Hypothesis 6c, the analysis shows that less personal interaction during service delivery strengthens the impact of strategic fit on attitude. Although unexpected, both findings may possibly be explained in line with the comment of one respondent collected in the qualitative third stage our empirical study: ‘‘As long as we can play our own game, [ . . . ] the


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more barriers we see, the more we go for it. If we can cross the river in our way, we might be alone on the other side.’’ This interpretation concurs with Hamel and Prahalad (1989) who argue that strategic fit materializes more strongly in case of perceived obstruction. The unexpected yet significant findings on Hypotheses 5c and 6c point at apparent risk-proneness in decision-making on the internationalization process (Hogarth, 1987; Schwenk, 1988). More in particular, it can be expected that enterpreneurs are willing to bear risk with respect to their ability uncertain in new international ventures. It is, in cases of perceived strategic fit, enterpreneurial decision-makers are expected to be overconfident with respect to their abilities (March & Shapira, 1987; Wu & Knott, 2006). More analysis is required to investigate this interpretation. In all, the findings characterize the entrepreneurial and semi-volitional nature of the internationalization process. The decision-by-heuristics to continue internationalization is complemented with normative (i.e., inertial) antecedents outside the scope of entrepreneurial discretion. Both the institutionalization of the internationalization process and the perceived fit between the internationalization course and the corporate strategy have a direct effect on the firm’s propensity to continue internationalization. The central role of managerial attitude warrant the integration of our model in the Uppsala model and, at the same time, upgrades the latter’s entrepreneurial perspective (Chetty & Campbell-Hunt, 2004; Johanson & Vahlne, 1990).

6. MANAGERIAL IMPLICATIONS This study is among the first to unveil the entrepreneurial nature of decisionmaking in the internationalization process. More in particular, it highlights the pivotal role of the decision-maker’s attitude towards internationalization. Given its importance, it is crucial to understand how this attitude is formed and changes. We learned that the decision-makers’ attitude emerges from highly interpretative – and therefore subjective – insights on the fit of internationalization with the strategic course of the firm. Even more challenging is the relevance of the disconfirmation of earlier expectations as an antecedent of this attitude. Apparently irrelevant and outdated expectations on the outcomes of earlier decisions do affect managers’ attitude that guides future decision-making. Finally, we show that accumulating commitment to internationalization (i.e., represented by the current intensity) increases perceived structural inertia on the future of internationalization.

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In all, the nature of these antecedents highlight the subjectivity, instability, and fragility of decision-makers’ attitude towards internationalization – the main mental anchor to ground decisions on the future of the internationalization process of the firm. Accordingly, this attitude might not be shared equally within the organization. Disagreement on the future international course of a firm may be highly related to discrepancies that exist among decision-makers on the general attitude towards internationalization. At the same time, perceived strategic and structural inertia on the internationalization process may dramatically reduce the perceived degrees of freedom on future internationalization decisions. This calls for managerial efforts in building shared interpretations on past internationalization performance, on the strategic relevance of internationalization, as well as on the perceived level of current commitment to internationalization. In absence, managerial decision-making on the future of internationalization may be troublesome and full of conflict. At the same time, management should be aware of increasing blindness that emerges from a decision-by-heuristics process as well as from inertial structural and strategic forces. We suggest avoiding amnesia by regularly inviting outsiders into this decision-making process; preferably lower level personnel that operates at the outer limits of the firm. Needless to say, it is challenging to accommodate this need for stability in the perceptions on the antecedent of the overall attitude with a need to fight inertial forces.

7. CONCLUSIONS Based upon Ajzen’s (1991) TPB, we model the propensity to continue internationalization as an outcome of the overall attitude towards internationalization, relevant behavioral norms, and behavioral control factors. The findings support the pivotal role of the overall attitude towards internationalization, which largely depends upon the disconfirmation of expectations on the outcome of earlier internationalization decisions as well as on normative beliefs that internationalization fits the strategy and current course of the organization. These findings emphasize the volitional nature of the model. Complementary, the data demonstrate the explanatory power of structural and strategic inertial factors – in disregard of managerial discretion. The importance of the institutionalization of internationalization as well as of the perceived fit between the internationalization process and the corporate strategy emphasize the evolutionary nature of the model.


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The findings imply that the propensity to continue internationalization – and by extension the internationalization process – is neither the result of an extensive decision-making process, as implicitly assumed in some earlier work on internationalization (e.g., Young, Hamill, Wheeler, & Davis, 1989), nor is it the outcome of a purely endogenous process as assumed in the (more dominant) U-model (Johanson & Vahlne, 1977, 1990). To the extent that ongoing internationalization is the result of managerial discretion, the findings support the idea that internationalization results from compensatory interactions among belief structures, which shape the overall attitude towards internationalization. This general attitude serves as a pivotal anchor for entrepreneurial decision-making on the basis of simplifying heuristics (Kahneman, Slovic, & Tversky, 1982; Krabuanrat & Phelps, 1998).

7.1. Limitations and Future Research The present study has limitations that should be taken into consideration when judging its merits. First, we used cross-sectional data which prevent from testing causal relationships. More in-depth case study research would allow a more profound investigation of the decision-making heuristics. Indeed, the current model presumes rather than tests the existence of these heuristics. Second, the generalizability of the study remains restricted as our sample was limited to Australian service providers. While our model does not include service-specific variables that may hinder the interpretation and validity in a manufacturing goods business, replication of the model in different settings remains necessary. Finally, although a promising interpretation is provided, the unexpected findings for two of the hypotheses indicate that the current model may be improved when risk propensity and risk perception are included explicitly (Busenitz, 1999; Forlani & Mullins, 2000; Sitkin & Weingart, 1995). The findings of the present study invite future researchers to investigate the relative impact of and interaction between discretionary and non-discretionary antecedents of internationalization in high- and low-risk environments.

NOTES 1. The Theory of Planned Behavior (Ajzen, 1988, 1991) focuses on the individual person as the level of analysis. In the presents study, we abstract from internal consultation and political processes that might precede an executive manager’s

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intention to continue internationalization. As such, we simplify the internationalization process and related decision-making as if it were the intended action of one individual. 2. To assess whether this sample is large enough, we take into account the effect size, significance level (a) and desired level of power (1b). Based on Cohen (1988), a medium effect size ( f 2 ¼ 0.15) would require a sample of 76 cases. A large effect size ( f 2 ¼ 0.35) requires a sample size of 34 (assuming a ¼ 0.05 and (1b) ¼ 0.80). Using the approach suggested by Green (1991) under the same assumptions, a medium effect size ( f 2 ¼ 0.15) would require a sample size of 73 and 31 for a large effect size ( f 2 ¼ 0.35). As generally medium effect sizes are adopted for behavioral research (cf. Cohen, 1988), our sample size appears to be adequate for this study, even allowing for moderator analysis using a multigroup approach. 3. In fact, to ensure model identification in the presence of a construct with formative indicators in covariance-based SEM, two requirements are to be satisfied (Jarvis, MacKenzie, & Podsakoff, 2003; MacCallum & Browne, 1993). The first concerns establishing the scale of measurement for the construct by either fixing one of the paths leading from the indicators to the construct to one or equivalently by constraining the disturbance term of the construct to one. The second requests a solution to the factor indeterminacy of the disturbance term of the construct with the formative indicators. To achieve this, the construct with the formative indicators needs to emit at least two paths to constructs with formative indicators or to contain at least two reflective indicators (or a mix of both). Since our conceptual model cannot accommodate for these requirements, the use of PLS Path Modeling seems imperative.

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FACTORS INFLUENCING THE INTERNATIONALISATION PROCESS OF UK FIRMS IN ASIA Kannika Leelapanyalert A number of studies have been performed on the internationalisation of manufacturing and industrial product firms (Dunning, 1981; Johanson & Vahlne, 1977; Buckley & Ghauri, 1999; Ford, 1990). Many of these studies use network approach and relationship marketing as the starting point (Ha˚kansson & Johanson, 2001; Ha˚kansson & Snehota, 1989; Johanson & Mattsson, 1988; Sheth, 1995), while others use marketing strategies and management of unfamiliar environments through internal and external factors (Cavusgil, Ghauri, & Agarwal, 2002; McGoldrick, 2002; Root, 1992). Although some earlier studies have incorporated political actors in the network (Hadjikhani & Ghauri, 2001), these studies often deal with the management of political environments or with lobbying activities of multinational enterprises (Lenway & Murtha, 1994; Murtha, 1991). This study, however, will provide a better insight into factors that influence the internationalisation process of firms that deal directly with consumers in a foreign market and how these firms manage this process to achieve a solid foothold in a new market. This study explains the management of the internationalisation process through behavioural theory (Cyert & March, 1963). We endeavour to extend the network theory partly by extending it to retail firms and partly by bringing in a wider network of relationships that influence international activities of a firm. There is a need for New Challenges to International Marketing Advances in International Marketing, Volume 20, 37–67 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020005

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KANNIKA LEELAPANYALERT

a fundamental understanding of the internationalisation process of the retail industry. Previous international retailing literature provides the allinclusive conceptualisation of the process models (Akehurst & Alexander, 1995; Alexander & Myers, 2000; Vida & Fairhurst, 1998). However, there are few retail studies which focus on networking and the matching activities. The focus is on the retail sector, especially during the retail internationalisation process. Previous matching concept studies focus on international expansion to Baltic States (Ghauri & Holstius, 1996), and to Eastern European countries (Rogers, Ghauri, & George, 2005), however, less on retail firms in developing countries in Asia. The existing gap in the literature on which this research aims to focus, is the study of networking and matching concepts during the international expansion of the retail sector, mainly in the Asian emerging market. This research seeks to explore this area in detail in order to develop a conceptual framework, which could provide useful insights and a valid approach to the various processes of retail internationalisation. The project aims to determine and analyse the factors that are crucial for successful establishment. This research studies the overall internationalisation process. The reasons for developing a specific framework for retail internationalisation are that retailers have been aggressively pursuing international expansion in the past decades, retail is the sector which has contact with customers directly and it provides product and service directly to its customers. The reason why this research focuses on matching and networking is because retailers do not produce anything by themselves, but subcontract the work out to their suppliers to produce the goods. Hence, the retailers rely heavily on their suppliers. It is interesting to study how retailers use matching/networking with their suppliers and stakeholders. Retail is also the industry which faces customers directly so it is interesting to study its relation to the consumer. It is not only necessary to understand customers’ needs but also to understand the risks, which are beyond firm’s control (Ghauri, Elg, & Sinkovics, 2004; Rogers et al., 2005). The main research questions in this research are presented below: What roles do networking and matching play during the internationalisation process of Western firms in emerging markets? How can dissimilarities in market environments be managed during the internationalisation process? How could different adaptation levels affect performance in different countries?

Factors Influencing the Internationalisation Process of UK Firms in Asia

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Based on the literature on the internationalisation process and entry strategies (Buckley & Casson, 1976; Buckley & Ghauri, 1999; Cavusgil, 1990; Cavusgil & Robert, 1990; Cavusgil et al., 2002; Root, 1987), networking (Johanson & Mattsson, 1987; Ha˚kansson & Snehota, 1989; Elg & Johansson, 1996; Johanson & Vahlne, 2006) and matching (Ghauri & Holstius, 1996; Holstius, 1991), a framework is developed to study the research questions. It is assumed that networking could be affected by matching factors and market characteristics, allowing retailers to better understand consumers and facilitate business activities, leading to a better performance.

RESEARCH BACKGROUND AND THEORETICAL FRAMEWORK Internationalisation leads to a radical process of change through which an organisation modifies the focus of its operations, value system and cognitive framework so as to achieve a more internationally responsive structure (Whitehead, 1992). Earlier studies have investigated the internationalisation process considering the internal and external factors of the company and its market (Cavusgil et al., 2002; McGoldrick, 1998, 2002; McGoldrick & Davies, 1995; Treadgold & Davies, 1988). The internationalisation literature based on Uppsala studies about the internationalisation process of Swedish firms, (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977) identified four different internationalisation stages called the ‘‘establishment chain’’, which also applied to the retail context (Davies & Fergusson, 1995, p. 99). The results show that different stages demand different resource commitment from the company (Johanson & Vahlne, 1977). It is assumed that a company initially lacks knowledge of the local market. The level of local market knowledge affects the company’s commitment decisions and its activities. The network approach (Johanson & Mattsson, 1988) could be applied to the study of vertical international relationships. It is, therefore, useful for the international sourcing activities of retailers (Dawson, 1994, p. 270) and provides a competitive advantage as well as flexibility, in which each of the organisations in the network is working towards a common objective (McGoldrick, 2002, p. 571). In the past 20 years, many researchers have paid more attention to network relationships, which have become the main marketing strategy. They agree that the study of network relationships between companies, suppliers and customers is more important than the marketing mix (Ghauri, 1999).

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Akehurst and Alexander (1995) developed a framework of internationalisation of retailing by asking what, who, why, how and when retail internationalisation happened. Vida and Fairhurst (1998) suggested that decision-maker characteristics, firm characteristics and external environment are antecedent factors influencing retailers’ decisions on degree of involvement, mode of entry and market selection (Vida & Fairhurst, 1998). This research considers an important local market environment (Alexander & Myers, 2000; Vida & Fairhurst, 1998) and brings networking and matching activities to apply during the retail internationalisation process. Some of these studies, their theoretical underpinning and focal concerns are presented in Table 1. Matching allows an understanding of how the development of successful business relationships can be facilitated by initiating and developing relationships at different levels beyond firms’ immediate contacts (Ghauri & Holstius, 1996; Ghauri et al., 2004). Matching refers to activities of the firms and governments, where they try to match with each other to gain mutual benefits. Companies try to match governments (home and host) to get preferential treatment to facilitate their entry into the particular market (Rogers et al., 2005). For instance, there might need to be an understanding between two countries to facilitate business between firms from each other’s country. According to Ghauri and Holstius (1996), there are three phases of a company’s international establishment process: the search phase, the project phase and the establishment phase. Actors, activities and resources play different roles in different stages. Actors relate to the companies involved in the relationship. The link existing between actors has an impact on the company’s profit, cost control and strategic development. Activities concern the action taken to run company’s business and the effect it would have on each other. Resources involve company’s asset, skill, production output and capability (Ford, Gadde, & Ha˚kansson, 1998, p. 76). The search phase is about the company trying to get as much information as possible in that market and environment. It might be difficult to get information from emerging market regarding undeveloped market research. The company builds on relationship with the local market in this stage (Ghauri & Holstius, 1996). The project phase is the stage in which the company creates network and relationship (Johanson & Mattsson, 1988). The company will analyse and make a decision about entering the new market and preparing to implement the project. The establishment phase is when the company understands its market and environment, and then the company begins its operation in that market.

Positive environment could be driving force but negative environment is obstacle for international growth

Relationship of two or more independent companies that take advantage of mutual resources and sharing of information

Business performance can be Performance involves three measured by two different key fields: Annual revenue approaches: judgmental/ growth, annual profit subjective and objective growth and average return measurement on total assets. It is an evaluation of the perceived performance

Market environment

Networking approach

Performance

Areas of Concern

Judgmental perception is likely to enhance bias, due to the high degree of personal views involved

A network approach involves Company might focus three factors: Actors, only on short-term resources and activities benefits and ignore long-term benefits

Difficult to implement in Processes that facilitate the terms of building trust development of business and commitment relationship between firms in dissimilar countries, at a global, macro and micro level Environmental factors (legal, Factors beyond cultural, political and company’s control economical factor) have impact on the companies’ activities and outcomes

Understanding of how to facilitate the development of successful business relationships

Matching

Focal Aspect

Underlying Logic

Alexander (1990), Dunne, Lusch, and Gable (1995), Ha˚kansson and Snehota (1989), Hollander (1970), Kacker (1985), Morganosky (1993), Salmon and Tordjman (1989), Sybrandy, Pirog, and Tuninga (1991), Treadgold (1990), Vida and Fairhurst (1998) and Williams (1992) Anderson, Ha˚kansson, and Johanson (1994), Coviello & McAuley (1999), Ford et al. (1998), Ghauri and Prasad (1995), Ha˚kansson and Snehota (1989), Johanson and Mattsson (1988) and Meyer and Skak (2002) Clark (2002), Day (1990), Dunne et al. (1995), Jaworski and Kohli (1993), Jennings and Young (1990), Katsikeas and Morgan (1998), Kohli and Jaworski (1990) and March and Sutton (1997)

Ghauri and Holstius (1996), Holstius (1991), Ghauri et al. (2004) and Rogers et al. (2005)

Examples of Studies

Theoretical Underpinnings to Develop Conceptual Framework.

Theory and Concept

Table 1.

Factors Influencing the Internationalisation Process of UK Firms in Asia 41

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Matching at the global level relates to international organisations involved in agreements, relationships and communication. It includes international activities that could assist the international operation among different countries (Holstius, 1991, p. 179). Institutions establish relationships through membership of global organisations, such as the World Trade Organisation (WTO) and International Bank of Reconstruction and Development (IBRD), and by working together to develop mutual benefits for member countries. Matching at this level is beyond the control of the organisation; nevertheless, it still has an impact as organisations are subject to regulations resulting from international agreements. The IMF and the World Bank provided assistance to the Baltic States in 1992, so their financial system illustrates matching at the global level. The European Union giving economic aid to each of the Baltic countries is another example of matching at the global level (Ghauri & Holstius, 1996). At the Macro level, matching relates to the level of support provided by governments towards business activities. Matching at these two levels, although outside the domain of the organisation, is orchestrated and planned by it. At the Micro level, matching refers to the activities the company needs to carry out in order to achieve a successful market entry. Matching at the micro level is closely related to networking. Johanson and Mattsson (1987) introduced a network approach to explain the international production process. The network approach looks at the inter-firm relationship, rather than the network itself. Also, it enhances the understanding of the strategies used in different markets. Different types of relationships exist between companies in the network; one is the member of a group or network. In contrast, a company also plays the role of the competitor to provide products to consumers. Companies in a network create competitive advantages by developing relationships with other companies. As long as each partner benefits, the relationship will be pursued and grow stronger (Johanson & Vahlne, 2006). Ha˚kansson and Johanson (2001) mentioned the importance of personal contact and networking in market expansion. The buyer and seller networks might initially face a lack of knowledge about each other due to physical distance and culture differences. These gaps could be reduced by regular two-way communication and learning from each other, which lead to develop strong relationships and commitment. Matching is crucial, as internationalising companies’ problems are more pronounced in the earlier stages of the process. According to Ghauri and Holstius (1996), matching creates specific advantages for entering a new foreign market, as well as determining the process required to achieve a successful position after the establishment phase.


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Market characteristics: The changing nature of the environment – legal factors, political forces, economic climate and cultural issues – amplifies uncertainty in international retailing expansion (Salmon & Tordjman, 1989; Treadgold & Davies, 1988). The level of international expansion is increasing within emerging markets. As the European market is now saturated and has reached mature growth, many companies are expanding to developing countries throughout Asia. The nature of the developing countries, Asian economic growth and the level of high demand are attracting Western companies’ investment. The global market development and increasing sophistication of customer demand have made the world a more complex place (Brown & Burt, 1992). Consequently, firms have to develop strategies to respond quickly to different customers’ needs. Companies that are entering a foreign market have to take into consideration each of the environmental factors, as they have a potential impact on the companies’ activities and performance (Alexander, 1990; Kacker, 1985; Morganosky, 1993; Salmon & Tordjman, 1989; Treadgold, 1990; Vida & Fairhurst, 1998; Williams, 1992). Several countries have strict legislations concerning some industries such as retailing (Butler, 2007). For instance, there could be limitation on expansion, termination of employees, regulation about hours of operation and pricing. It is important to understand consumer perception and acceptance in order to determine an appropriate degree of standardisation or differentiation needed. The closer the culture between two countries, the greater the chance of success during retail expansion (Sternquist, 1988). This indicates that customers’ perception is very similar in countries with cultural proximity, requiring a relatively higher level of standardisation rather than a high level of adaptation. Business performance can be measured mainly by two different approaches: judgemental/subjective and objective measurement (Jaworski & Kohli, 1993). The first one is viewed as a judgmental approach, which includes the view of all participants concerning the overall performance of the business and refers to an evaluation of the perceived performance (Jennings & Young, 1990). This subjective measurement is often adequate for research on a firm as a whole as well as research on Strategic Business Units (Narver & Slater, 1990). The second approach relates to the performance of the organisation in terms of objective measures. This includes the market share, market value, return on investment and profitability (Ghauri et al., 2004; Kohli & Jaworski, 1990). This research aims at understanding how the performance of the business operations is affected by the company’s networking, matching and market characteristics. The above-mentioned studies of these variables have led us to a conceptual

44


Matching • Global level • Macro level • Micro level

Networking Actors Performance Resources

Activities

1. Search Phase Market Characteristics • Legal • Culture • Political • Economic

Fig. 1.

2 Project Phase 3 Establishment Phase

Factors Influencing Internationalisation Process of UK Firms in Emerging Markets. Source: Based on Ghauri et al. (2004).

framework (Fig. 1) that we intend to use to analyse our studies. The research will focus mainly on subjective measures as the research has been conducted using qualitative methods. Nevertheless, objective measurement has also been looked at through secondary data such as sales and other performance indicators.

RESEARCH METHODOLOGY The methodological approach is based on qualitative research by using multiple case studies and interviews to allow an in-depth study of factors that influence firms while entering foreign markets. In-depth interview provides access to rich information. It allows the researcher to get a holistic picture of research problems (Ghauri, 2004). The case study approach has been selected because it provides a clear description of the management situation, which is suitable for theory development (Yin, 1994; Ghauri & Grønhaug, 2005). It is a suitable method to use when it concerns explaining how and why questions, when there is little control over events by the researcher, and when the emphasis is on a modern phenomenon within a real-life context (Yin, 1994). Case studies are also used in retailers and their internationalisation efforts in order to explore the issue in the specific organisation (Burt, Davies, Mcauley, & Sparks, 2002a; Burt, Davies, Mcauley, & Sparks, 2005). Case studies are suitable for this cross-cultural research; however, arguments are raised about the comparability of


45

information between different countries. In fact, interviews allow the researcher to understand the information in depth, and understand points that could not otherwise be explained through numbers and statistics (Sinkovics, Penz, & Ghauri, 2005). This method provides with an opportunity to ask further questions and check if all has been understood correctly. This method allows researcher to have a deeper understanding and to come across the issue of cultural differences (Ghauri, 2004). This research involves the study of a firm’s matching during the internationalisation process. We choose to study retailers because of the sector’s growth and aggressive international expansion. In addition, challenges faced in terms of local responsiveness, close customer contact requirements, localised decision-making and establishing relationships with stakeholders provides specific challenges. Marks & Spencer (M&S) has been selected as a suitable company to study, mainly due to its international activities in several markets as well as the importance of customer orientation and adaptation in this industry. M&S is a large organisation that has been established internationally for a long time. Also, the fact that the company has a record of both international successes and failures makes it an interesting company to study. Several multinational retailers are potential source of study but the access to the company is limited. The selection criteria were set towards large Western retailers that had invested in Asia. Thailand was chosen for study due to its rapid growth and market attractiveness and due to the researcher’s capability regarding the language and local market understanding. Hong Kong is interesting to study because of the very developed consumer markets in Asia. Comparative case studies between two countries have been conducted, as similar questions could be raised from each case and common outcomes could lead to draw conclusions (Miles & Huberman, 1994). This process allows a systematic comparison of the phenomenon studied within different cases and explores different dimensions of our research issues (Ghauri, 2004). Data is collected through various sources such as in-depth interviews, event attendance and observation, local offices and local stores visits. Fifteen interviews were conducted with M&S staff including senior managers, middle managers and frontline employees at the head offices in United Kingdom. Also, eight interviews were conducted with company representatives in Hong Kong and five in Thailand. All interviews have been tape recorded and fully transcribed. Some interviews have also been translated from Thai to English. As one of the researcher is a native speaker of Thai language as well as completely fluent in English, the equivalence issues were properly dealt with before data collection and while translating

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the questions and answers. The data has been cross-checked with the secondary reports, media sources, company reports, brochures and newspaper articles. NVivo software is used to code the data and corroborate the analysis. The software is used to manage interview transcript, encode data and manage themes in order to analyse numerous qualitative data in more systematic way (Richards, 2000; Sinkovics et al., 2005). Triangulation occurred when data was collected in different ways, such as asking the same questions to different managers and cross checking the interviews with secondary data. By conducting case studies, it is intended to point out detailed, valuable and useful insights into the firm’s internationalisation process, which could not have been achieved by a survey method alone (Ghauri, 2004).

CASE STUDY 1: MARKS & SPENCER IN HONG KONG M&S is a leading UK clothing retailer. The company has diversified into food, housewares, beauty and financial services in the United Kingdom. The company was established as partnership between Michael Marks and Tom Spencer in 1884. Company operates 219 stores managed under franchise in 34 countries including Europe, the Middle East, Asia, the Far East and Republic of Ireland, and 8 wholly owned stores in Hong Kong (Company Report, 2007). M&S entered to Hong Kong by franchise; Dodwell department store in 1980s. The company decided to establish their own subsidiary in 1988. In 1999, it became apparent that M&S’s global ambitions have failed and the company decided to return to its home market. By 2002, M&S has failed to sell its 10 Hong Kong stores to a local party and retained direct ownership of the stores. Despite the issues previously faced, M&S still operates wholly owned stores in Hong Kong. The business in Hong Kong is at a mature stage but considered as success in Hong Kong (Company Report, 2007). Customers perceive M&S as British, Western, traditional, reliable, good quality but high price. The positioning of M&S in Hong Kong is in the top-middle segment of the market.

Matching At the global level, the company does not seem to do matching with any international organisation. They do not have any section/people working on


47

these issues. ‘‘We don’t believe that we get any benefit, support or influence from international organisations’’ (Asia Regional Manager). At the macro level, the relationship with the British Embassy is much more important than the government; however, M&S works closely with the Department of Trade and Industry (DTI). M&S has a strong network relationship with the DTI, British Consulate and British Embassy. M&S tend to work through the embassy’s trading office, which understands and provides the sort of details on day-to-day information they need. The first time M&S visited the country; they began to contact the DTI in the British embassy in each territory. The DTI could facilitate the collection of information on macro and micro economic, regulative or legislative environment including tariffs and duties, legal contracts, banking contracts, general knowledge of investment and background of consumers as well as the advice on local partners. The government of Hong Kong has a policy to stimulate the Hong Kong tourist department. Hong Kong Tourism Board tried to build Hong Kong to be the shopping destination in Asia as they offer tax-free shopping. Hong Kong government also introduced the new ‘‘individual visit’’ policy (IVS scheme) in July 2003, allowing the mainland Chinese tourists to enter Hong Kong easier. As a result, the total of 100 million mainland Chinese are eligible to travel to Hong Kong (Fig. 2). The total number of mainland

12000 10000

('000)

8000 6000 4000 2000 0 1997

1998

1999

2000

2001

2002

2003E

Year Mainland China

Fig. 2.

Others

Visitors Arrivals to Hong Kong. Source: Hong Kong Tourism Board (2003).

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tourists travelling under the IVS scheme has passed 6.6 million since the scheme was introduced. Mainland Chinese are the major tourists visitors, which represented 53.8% of total visitors in Hong Kong in 2006 (Hong Kong Tourism Board, 2006). This created a boost in the spending in the retail industry in Hong Kong (Hong Kong Trade Development Council, 2003). At the micro level, M&S is involved with different actors. The company gained information of the market from property companies and consultants. M&S also employed external consulting companies to conduct market research in the local market. It means that networking could facilitate the generation of market information. In terms of gathering information, external actors, suppliers and state institutions are used. The main market research was conducted to identify M&S customers and their needs. The recent market research conducted is about mainland China customers in Hong Kong, which has been seen as strong potential market for M&S products. M&S acknowledges the importance of supplier knowledge, as they are more experienced and specialised. For example, they discuss the trends in fashion, size fitting and consumer needs with Triumph, the market leader in the lingerie sector in Asia. M&S also networks and is part of Hong Kong Retail Management Association (HKRMA). To generate information about the market environment, M&S is part of the retail management association so it could facilitate on retail environment information. The company also obtains market information from the local government statistics, secondary data, such as newspapers and databases. Landlords are the most important actor for M&S Hong Kong because it is very competitive to get a prime location. The company needs to reveal to the landlord that they perform well enough and maintain their brand image, therefore persuading the landlord to keep them in the mall. However, they need to balance so as not to reveal that they are doing too well, otherwise the landlord might increase the rent. The saying, Location Location Location has never been more accurate than here in Hong Kong . . . You need to be here in Tsim Sha Tsui, central, Admiralt, and Time Square. These 4 districts are the key selling points in Hong Kong. If you are in 4 locations, you got a chance, try to open in malls other than that is a risk. (Managing Director, M&S Hong Kong)

They maintain a relationship with the landlord by inviting them for business lunches, or to M&S events in order to show a positive brand image. M&S uses local managers to negotiate the rent with the landlord. As the UK

49


operation was not doing well in the home market, this affects the brand image in the international market. The HKRMA provides information, shares the information among the members and consults on business issues (HKRMA, 2004). The main discussion is to share factual information about the retail environment and give advice on current issues. Severe Acute Respiratory Syndrome (SARS), the disease that was widespread in Asia from March 2003 (Department of Health & Human Services, 2004), had a negative impact on the Hong Kong economy, leading to a drop in the level of tourists coming to Hong Kong in that year. As a result, all network members got together to negotiate a decrease in rent due to the outbreak. ‘‘Retail is an industry that was significantly affected because few tourists were coming to Hong Kong. In Hong Kong people also did not go out for shopping so they negotiated with the landlord, asking to cut the lease rents’’ (Marketing Manager, M&S Hong Kong).

Performance

10000 8000 6000 4000 2000

HK$/sq.ft/p.a.

12000

1400 1200 1000 800 600 400 200 0 01/02

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0 88/89

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From 1988 to 1997, the company initially experienced fast growth and gradually increased its retail sales. The Asian crisis in 1998 affected the financial performance dramatically (Fig. 3). The UK market was also facing the business recession period. The company considered whether to sell its Hong Kong subsidiary in 2001. However, by introducing a new strategy of cutting costs and improving its brand name, the company managed to become profitable again and contribute significantly to the operating profit

Year Total Sales

Fig. 3.

RPF

The Total Sales and Return per Square Foot (RPT): M&S Hong Kong. Source: Company Report (2005).

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to the group in 2004. The 2004/2005 overall turnover of M&S international is d675.6 million which increased by 1.6% on the year (Company Report, 2005). M&S still has been a reactive company as their product trend often follows their competitors such as Hennes & Mauritz, Zara and French Connection. Due to problems in the domestic market, M&S changed their product design and introduced the ‘‘Per Una’’ womenswear range in order to attract a younger customer profile. The ‘‘Per Una’’ merchandise has been developed to be more fashionable. The company promotes its brand image through advertisements on billboards, bus stop ads, fashion magazines and newspapers. Although, M&S continues to make a profit in Hong Kong, the major challenge in the local market is to improve brand equity in order to keep the store in the prime locations. ‘‘M&S strategy is to focus on markets where there’s a strong demand for our products from a growing middle class’’ (Company Report, 2007). A few years after re-structuration, the international operating profit increased from d60.7 million 2004/2005 to d87.5 million in 2006/2007. The wholly owned international business has increased by 14.0% in sales between 2006 and 2007 and operating profit has increased to 26.8% reaching d45.4 million. Hong Kong contributed significantly to this success (Company Report, 2007).

CASE STUDY 2: MARKS & SPENCER IN THAILAND M&S entered the Thai market in 1993 through franchising with the Central Department Store (CDS), a major retail player in Thailand. The CDS established 12 stores in Bangkok, Chiangmai, Haadyai and Phuket. In 2003, the store’s total revenue was over US $420 million (Company Brochure, 2005). M&S began to operate two of the department stores in 1994; six stores in 1997 and 10 stores in 2001 (Burt, Mellahi, Jackson, & Sparks, 2002b, p. 208). They currently operate 10 stores covering over 7,000 m2. The format of the M&S shop in Thailand vary from concession stands within CDS to stand-alone shops in the prime shopping centre in Bangkok.

Matching The franchisee does not do any matching at the global level. At the macro level, a network relationship with British Embassy and local government are useful as they provide information about the local market during the project


51

and the establishment phases. The company build their relationship with the local government office through CDS, not only from the point of view of benefiting from the relationship but sometimes for obtaining a license to import, or when the trading office demands a lot of information and take long process in order to register a product to sell, for example toiletries. At the micro level, M&S Thailand does not have an issue dealing with the landlord because the CDS owns majority of assets. The major actor involved the relationship between M&S and other brands in CDS, because they need to share resources with other brands in store. The meeting between different brands in the department store is useful to share information and best practices. M&S can get an idea and adapt into its brand. We use the intranet a lot. We put our information in there to share with other departments. For example we announce which product will be launched in this season and how will we launch it, what do we have in the catalogue and so on. (Buying Manager, M&S Thailand)

The M&S corporate level do share some information and discuss about local promotion in Asian markets, through emails, meeting at annual events, and some intranet. ‘‘We contact Singapore about what they are doing and we can learn from each other. When we have seen the best practice, we learn and bring it to improve ourselves. We contact each other in selling events and we also contact by email, for example, when we want to implement bra measurements’’ (Buying Manager, M&S Thailand ). M&S Thailand networks with customers by issuing loyalty cards so they have already established a system of collecting information about customers: ‘‘The Company improves the relationship with customers specifically by using a loyal customer base. We use marketing campaigns aiming at this group. We create activities for them and give special treatment to them, i.e. a gift set. We emphasise on that’’ (Marketing manager, M&S Thailand ).

Market Characteristics According to the Switzerland-based Institute for Management Development, the overall country competitiveness is high, ranked 27th in the world. The report showed the positive political environment by its flexibility of policy towards business operation and efficient policy achievement. Thailand also has low taxes: 7% consumption tax rates compared with the

52


average of 17.17% worldwide (Nivatpumin, 2005). M&S experience difficulties with the food and drugs administration with regards to importing products due to delays in obtaining authorisation. The problem is that the shelf life of the food is often expired by the time the food arrives to the store. Hence, the company has appointed one employee to deal with the food regulations and to network with the government. Thailand has been particularly focusing on creating a favourable legal environment for foreign firms (Country Viewswire, 2002). The country has been launching incentives and tax concessions from 2002 to 2004, thus encouraging foreign investment. In the period 2002–2004, tariffs have been reduced within the structure of the Association of South-East Asian Nations (ASEAN) and the Asian Free Trade Area (AFTA). In order to protect Thai small businesses, the Thai government financed 359 million baht ($9.45 million) to establish the Allied Retail Trade Company (ART). The purpose of this non-profit organisation is to help family-owned retailers to compete with large foreign retailers like Tesco and Carrefour (Country Viewswire, 2002; Mass Market Retailers, 2002). The ART aims to build a national retail network, combining orders from members in order to reach a lower price from suppliers, provide low interest in financing for store redecoration and give free management training. Later, in November 2002, Thailand confirmed it had dropped the plans, which would discriminate foreignowned shops with a large share of the Thai retail market, because it feared retaliation under international trade rules (Wong-Anan, 2002). In the culture perspective, M&S uses local people who select the products for the local customer. It is a crucial role to select the right product to respond to a customer’s need; hence they need local people with experience. Economic factors are one of the major factors. Bangkok represents 50% of gross domestic product. It is the major reason why the retailing industry in Bangkok has developed and modernised, whereas the rest of the country still remains backward in style (Feeny, Vongpatasin, & Soonsatham, 1996).

Performance M&S’s entry into Thailand is considered successful. As we can see from the Fig. 4, the sales figure increased from the entry year from 398 million to 454 million Thai baht in a couple of years. ‘‘I think people open up to M&S because it is a good brand, well known. The economy in Thailand was booming at that time. Many factors influence M&S’s success. When M&S entered, there were not many competitors. People bought basic and comfortable

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Year Local Retail Sales in Thailand (Million Thai Baht)

Fig. 4.

Local Retail Sales in Thailand (Million Thai Baht). Source: Company Report (2005).

clothes. Nowadays, the clothing industry really emphasises fashion and we can see it clearly’’ (Buying Manager, Thailand). However, the company’s retail sales dropped from 2001 to 2003. This is because the increasing competition in clothing market from both small boutiques and international brands such as Mango and Zara. M&S offer a high price with less attractive products compared with its competitor ‘‘M&S always is a little bit behind others. Our competitors follow fashion trends about 3–6 months faster than us . . . Do not forget that we are not a trendsetter. We are not like MANGO and Zara that you have to launch only products in fashion trend immediately’’ (Buying Manager, M&S Thailand). Customers think that the price of the M&S products is too high in Thailand. M&S thus communicates with customers to explain about the quality and value of the brand: ‘‘Customers said we are expensive. When we put the advertisement, we change and try to show that we are premium and we have something to add, we have better service, we improve the customer relationship’’ (Marketing Manager, M&S Thailand).

DISCUSSION: CASE COMPARISON Comparing the similarities and differences in both markets, it is clear that both markets are fragmented. There are several small competitors providing cheap and cheerful products without a major brand. Both markets are, however, different in terms of the market characteristics (Table 2).

Small food and drug regulation issue Asian consumer behaviour Use experienced buyer and sales history

Do not have import duties, tax free

Buyer picks suitable range for local customers Focus on younger customer

Do not have issues in Asia

Deliver product and franchisees select them

Market characteristic: Legal factor Market characteristic: Cultural difference

Franchise – Use local expertise to build network

Landlord – Money talk, improve brand image Retail Association – Rarely share information due to business competitor

External consultant to conduct market research

Some contact with embassy -W marketing and promotion Local Government for speedy clearance of goods

Government supports tourism, mainland China entry to Hong Kong easier -W boost sales

Little or no impact

Matching – Micro level

Matching – Macro level

Little or no impact

‘‘We do not believe that they get any beneficial support or influence from international organisations’’ (Asia Regional Manager) Department of Trade and Industry (DTI) Local government

Marks & Spencer Thailand

Matching – Global level

Marks & Spencer Hong Kong

The Influencing Factors to a Successful Business Operations Abroad.

Opinion from United Kingdom Towards International Expansion

Table 2.

54 KANNIKA LEELAPANYALERT

Performance

Networking in establishment phase

Market characteristic: Economic factor Networking in search phase and project phase

Company use British embassy, property company, and consultant to get information about local market such as economic Network with supplier to develop local adaptation product Network with M&S in other countries to share information and best practices through meeting, emails, intranet Network with local customer by royalty card to gain customer loyalty Use experience local staff to pick right product for the market Successful entry due to economy, Western brand but sales go down

Successful entry but encounter Asian crisis in 1997 Turn loss into profit in 2003 Well-established in Hong Kong

Use British embassy to get information about potential franchisee

Economic growth and GDP increase

Use experience local staff to pick right product for the market

British embassy is the first contact to get local knowledge about local market

Impact of SARS on economy in 2003

Factors Influencing the Internationalisation Process of UK Firms in Asia 55

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Legal aspect: Hong Kong does not have issues in legal matters or regulation. Hong Kong does not have import duties and is tax-free so it attracts customers to shopping in Hong Kong. The impact of the SARS outbreak made tourist and retail sales drop, but it has now improved. The HKRMA has been seen in a strong network to be able to succeed and negotiate the rent with the landlord at that time. The Thai regulation towards import duty is stricter, as compared to Hong Kong regulations. For instance, the standard tax rate in Hong Kong is very low in comparison with Thailand or other developed countries. The food and drug regulations might delay transport time so it could be negative for the shorter shelf life of food products. As a consequence, M&S in Thailand needs to network with the customs department in order to facilitate customs clearance procedure. Due to complex customs clearance procedures present in the Thai market, it is critical for business to take advantage of network with local customs actors. Culture: Thai people are more conservative and highly respect superiority. People do not give direct feedback to protect themselves against the concept of ‘‘loosing face’’. On the contrary, in Hong Kong, people are more openminded and independent. The approach towards networking was different because of the differences in culture. Hong Kong uses a direct approach and people clearly say what they want. However, Thai people use a more suggestive and indirect way to communicate. Political: After the SARS disaster, which affected the Hong Kong economy and tourism industry, more assistance was provided by the government. This policy to stimulate the tourism industry and economy included the promotion of Hong Kong as the Asian shopping destination. This was an element which helped to boost retail sales. On the contrary, there was little government assistance for the retail industry in Thailand. Matching: As illustrated in Table 3, M&S in both countries stated that they do not do much matching activities at the global level. At macro level, The British embassy is useful in providing local market information at the early stage of the process (search phase). The tourist policy from Hong Kong tourist board has stimulated purchasing power and increased retail sales in Hong Kong. In Thailand, the Thai government aborted the antiMNC retail law, which has been beneficial for M&S. At micro level, the main important network actors were different in the two countries (Table 4). The landlord was the main influencing actor in the Hong Kong business as the retail premises in prime location were very important. The company is networking with the landlord through meeting, business lunch and inviting landlord to the brand events. However, the landlord was not an issue in Thailand because CDS owns its land and building. The main important


Table 3.

The Network Activities during M&S Expansion to Hong Kong and Thailand: Search Phase and Project Phase. Search Phase

Actors

Activities

Resources

Table 4.

57

Project Phase

Department of Trade and Industry (DTI) in the British embassy, consultant company M&S collect local market information about local economy, regulation, competitor, potential franchisee before entering to the market Business development manager contact DTI in the first visited in each market

Local government

Local government intend to promote tourism industry and focus on shopping/the Thai government has recently aborted the anti-MNC retail law M&S is a member of retail association. The company create activities and follow the government policy

The Network Activities during M&S Expansion to Hong Kong and Thailand: Establishment Phase. Establishment Phase M&S Hong Kong

Actors

Landlord

Activities

Company build relationship through regular meeting, submit sales taken to the landlords and building the positive brand image to landlord in order to keep store footage in the prime location. M&S also be able to negotiate with the landlord to reduce the rent after SARS outbreak Managing director invite landlord to business lunch and company events such as fashion show

Resources

M&S Thailand Network with other brands under Central Department Store (CDS) M&S need to corporate and share resources and information with other brands in CDS

M&S share resources with other brands such as using main staff who works with different brands

actor in Thailand was the relationship with the M&S brand and other brands in the Central store, because M&S is one of the many brands that operate in Central store and they need to share resources. One of the reasons that M&S operates through franchising is to be able to use the franchisee’s local expertise, such as local market knowledge and network relationship at the macro and micro level.

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M&S Hong Kong has been more networks oriented as compared to Thailand. It is because the entry mode and organisation is different. As Hong Kong is a M&S subsidiary, they are more committed in the market, the size of the business is bigger and hence there are more people who are dedicated to the brand. Hong Kong uses external partners to conduct market research, and conduct some in-house but ad hoc market research, such as competitor shopping and mystery shopping. However, there is little systematic market research conducted in Thailand due to high costs and the small size of the business operation. M&S operate as one brand under CDS and share resources and people with other brands. There is smaller team dedicated to M&S in Thailand as it is a small department. As a result, networking with the external is less specific in Thai market. Both countries use network with local employees who have extensive experience in buying to select the product to respond to the local customer needs. Sales assistants play the role of collecting information not only about customers but also competitors. Customers would suggest what they like and do not like about M&S as well as suggesting which competitor’s product they like. The buying team always shop at the competitor’s places. The company adjusts the sizes, styles and colours of products to the local needs, such as offering Asian fit bras and shorter sleeves on men’s shirts. Impact of the recession in the UK market: M&S, at the time of the study, was not doing very well in the UK market. M&S retail sales were 4% compared to the average British retail performance, which reached an annual percentage growth of 2% (Financial Times, 2004). This situation had a major impact on the Hong Kong business and less on Thailand. As Hong Kong operates as a subsidiary, the recession in the domestic market had a negative impact on M&S’s Hong Kong operation. However, M&S Thailand operates under a franchise to the CDS, and therefore customers perceive M&S as being under Central’s operation in Thailand ‘‘If you ask me whether the situations in UK affect us? It is very little, not much. People know that M&S here is only one part of Central. Customers do not really feel it to be a separate company’’ (Buying Manager, M&S Thailand). The issue, which the company is currently working on, is price. As the result of market research, Asian customers perceive M&S as expensive, not a high volume retailer like in the UK market. The M&S price is at the top of the middle end of the retailing market in both Thailand and Hong Kong, and the company is currently working together with their subsidiary and franchise partners to minimise costs and bring prices down. In Singapore, prices were reduced by 10 per cent and they also plan reducing prices in Hong Kong.


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Research Propositions The intention of this research is to build a conceptual framework for directing future research. Hence, this research suggests the conceptual framework needs further development and presents some propositions developed from previous studies and this study. The future research suggested will test these propositions (Fig. 5).

A A higher level of matching would drive the company to become more network orientated The studies show that the matching company actively use market characteristics in order to understand local market (Rogers et al., 2005). Matching is one of the methods to assist company access customers and competitors’ information. Ghauri and Holstius (1996) introduced the role of matching which could facilitate international market entry. The company essentially networks with other companies and key stakeholders in the market (Johanson & Mattsson, 1987) as each company’s activities rely on each other within the network (Buckley & Ghauri, 1999). Ghauri and Holstius (1996) identify the actors, activities and resources in three stages of international entry process. They found that efficiently matching and networking with the right actors at different stages; global, macro and micro level; could benefit companies during the entry process.

Matching • Global level • Macro level • Micro level

B Networking

A

Actors Performance

C

Resources

Activities

1. Search Phase Market Characteristics • Legal • Culture • Political • Economic

2 Project Phase

E

3 Establishment Phase

D

Fig. 5. Factors Influencing the Internationalisation Process of UK Firms in Emerging Markets: Propositions. Source: Based on Ghauri et al. (2004).

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B A higher degree of matching activities would facilitate a better performance in the host market M&S Thailand uses macro matching with local customs to facilitate the custom clearance process so the goods arrive to the store at the right time, which affect sales positively. In Hong Kong, M&S uses micro matching with local landlords through regular communication, report store performance and inviting them to company events in order to keep M&S stores in prime shopping locations.

C The higher degree of matching activities would better equip the company to overcome different market environments The result of Ghauri and Holstius’ (1996) studies shows that matching facilitates the company’s activities during the internationalisation process in emerging countries. Matching with local government helps the company to overcome the political issues. There is no study identifying the relationship between matching and company’s performance, so it is interesting to look at it in the further research.

D The more a company becomes embedded in the local network, the better equipped the company will be to overcome different market environments A dissimilar market environment between the host and home market, such as cultural differences (Hofstede, 1994), physic distance (O’Grady & Lane, 1996) and attitude of the foreign government, could become a barrier to international expansion (Ghauri & Holstius, 1996; Buckley & Ghauri, 1999).

E The higher level of networking in different stages would lead to better performance in the host market Government contacts need to be established at the early stage of internationalisation. Matching with government helps company to access to information, up-to-date information about policy and get permission (Rogers et al., 2005). The use of networking with external factors including suppliers assisting the company to access know how and perform better. This study agrees with Rogers et al.’s (2005) finding that network relationships with suppliers can allow a company to build a supply chain network. Networking with suppliers helps the company to provide low priced products for customers. As a result, the brand image of M&S has changed to become a more affordable brand image.


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CONCLUSION There are several studies that have investigated the internationalisation of M&S particularly its de-internationalisation and withdrawal of M&S stores from several international markets (Burt et al., 2002a; Burt et al., 2002b; Jackson, Mellahi, & Sparks, 2004; Mellahi, Jackson, & Sparks, 2002). Mellahi et al. (2002) explained how the most successful retailers like M&S turned to the critical situation in 1997. These studies found that both internal and external factors influenced company performance. The company faced difficulty because of the external environment such as tough competition and changing consumer behaviour. To answer the question: What roles do networking and matching play during the internationalisation process of Western firms in emerging markets? This study confirms that matching would assist the company to understand more about the local environment thus enabling it to adapt to the local market (Ghauri & Holstius, 1996). It also confirms that the company finds it difficult to adapt and respond to the changing environment. Management style and hierarchy are the main problem as the decision-making is very slow (Vida & Fairhurst, 1994). Company is not able to respond to the customer needs in providing the right product at the right price. It has been expected to find a relationship between matching and networking. In these cases, it has been found that crucial networking with the right actors, such as suppliers’ associations, allow the company to access the market and customer information. This research further confirms that the ability of understanding customers, which can be done through matching, are the main factors that influence performance in international operations. Companies in networks create competitive advantages by developing relationships with other companies. A company in the network could reduce its risk and uncertainty and create a more efficient network (Elg & Johansson, 1996). How dissimilarities in the market environment can be managed during the internationalisation process? Effectively, the selection of a specific market to enter will be strongly influenced by environmental factors and company characteristics (Ghauri & Cateora, 2006; Vida & Fairhurst, 1998; Root, 1987). These environmental issues can encourage or deter entry into foreign markets (Cavusgil et al., 2002, p. 41). This study found that matching helps at many levels to reduce and avoid the risks involved with international operations (Ghauri & Holstius, 1996; Holstius, 1991). Although matching at different levels might vary in terms of importance, it is evident that it contributes positively to the performance of M&S in Hong Kong. This is illustrated by the networking taking place with the right actors including the

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local government, retail association and the landlord. Using matching and networking helped the company to manage the dissimilarities of the market environment between the host and home country and also uncontrollable factors (Rogers et al., 2005). The example is the retail association asking landlord and local government for assistance after the SARS outbreak in Hong Kong so the landlord reduced the rent and government has policy to promote tourist and retail industry in order to gain tourists confident. How could different adaptation levels affect performance in different countries? Market environment has significant impact on retail internationalisation (Akehurst & Alexander, 1995; Alexander & Myers, 2000; Vida & Fairhurst, 1998). The study showed that reacting to the market environment allows the company to understand local market and be able to adapt to local markets. Western firms establish a market position in emerging markets through the use of matching with authorities, suppliers of goods and local actors. This is facilitated through influencing local actors through the British Embassy, Property Company and other officials. Hong Kong is a subsidiary; therefore they have more resources and are more committed to the market. However, the franchise operation is dependent on its franchise partner to operate the business locally. The evidence of M&S Hong Kong confirms Johanson and Vahlne (1977) that the more local knowledge a company has, the more committed to the market it is. Hong Kong expanded stepwise, first through franchises and later by setting up its own subsidiaries. In addition, this study found that networking helps company to understand more about market and customers and therefore enhance that market knowledge. Buckley, Newbould, and Thurwell (1988) also studied the evolution approach of internationalisation and found that the company started direct export and used intermediate agency and own subsidiaries later. The purpose of that was to learn from the experience. The second purpose was to pulling out the operation in case of unsuccessful results in specific market. In these cases, the company used franchisee’s expertise in the market to help organisation learn about local market. In M&S Hong Kong case, company began from direct export to franchisee and finally when they saw the profit and successful operation in Hong Kong, they set up their own subsidiary. After the 1997 Asian crisis combined with the recession of M&S brand in home market, the company tried to reverse the internationalisation process by announcing the sale of the Hong Kong business to its franchise partner. This process revealed less commitment by the company when its local operations showed negative results and also because the policy of the headquarters was to focus on improving the home market operations rather


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than international operations. These were the major reasons for M&S’s withdrawal from most markets in Europe. As regards the managerial implications, this study will benefit companies engaged in activities abroad, as well as those planning to engage in activities in international markets. It focuses on influencing factors, thus providing a better understanding of the requirements and conditions necessary for a successful foreign operation. It has been demonstrated that building relationship with key actors in the local market is crucial; also a better understanding of the customer’s needs helps significantly in attracting more customers. From the theoretical point of view, this chapter re-evaluates Ghauri and Holstius’ (1996) matching concept in the context of international business operations and extends the scope of the analysis, using cases of UK retailer in the two emerging markets. This research also contributes towards theory development in this field by providing a framework that could be a basis for future empirical investigations of international expansion. The findings also suggest how foreign market operations can be managed, thereby providing a way to achieve an improved understanding of the internationalisation process.

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TOURISM AS A LEVERAGE OF INTERNATIONALIZATION FOR CONSUMER GOODS FIRMS: A CASE STUDY APPROACH Konstantinos Poulis and Mo Yamin 1. INTRODUCTION Large-scale incoming tourism potentially creates a multinational market within the domestic economy of the recipient countries. More specifically, in a number of countries, there is a large influx of ‘foreign’ consumers, or tourists, from many countries and for a significant part of the year. As can be seen from Table 1, for countries such as France, Spain, Austria, or Greece the annual influx of tourists exceeds the population of these countries by very large margins. For such countries, tourism transforms a nationally homogeneous consumer market into a multinational or multicultural consumer market during the tourist season, which can be most of the year. This is likely to be particularly significant for FMCG firms in the tourist-receiving countries. For example, tourists consume beers, soft drinks, shampoos, and ice creams while on holiday and thus, the size of the market for FMCGs will expand significantly over the tourist season. Additionally, it is likely that in their consumption decisions, tourists from particular countries reflect traits of their


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KONSTANTINOS POULIS AND MO YAMIN

Table 1.

France Spain Italy Austria Greece

Incoming Tourism and Domestic Population.

Tourists Arrivals (Millions of Tourists)

Population of Country (Millions of People)

% of Tourists to the Domestic Population

77 50 40 18 13

60 40 57 8 11

128 125 70 225 118

Source: World Tourism Organization.

nationality and hence be somewhat distinct from not only the ‘native’ populations but also from each other. Consequently, companies not only face a much larger market but one that is also likely to be highly heterogeneous in terms of consumer tastes and preferences; FMCG firms essentially operate in a multinational consumer market during the tourist season. This study seeks to explore the implications of this fact for the internationalization of firms domiciled in the tourist-receiving countries.1 The aim of this chapter is to contribute to the internationalization literature by considering the possible influence of inward tourism in stimulating the internationalization of SMEs headquartered in the tourist-receiving countries. The insights of this chapter rely on the existing literature and findings from case studies of internationalizing SMEs in the FMCG sectors in Greece. The structure of the chapter is as follows. Section 2 considers the implications of tourism for internationalization in the context of the existing literature on internationalization, particularly the literature on the relevance of knowledge. In this section, we attempt to show how in responding to the presence of tourist as a significant component of their domestic markets, SMEs effectively gain information/knowledge that is also ‘international’ in character. For example, they may be able to gain brands with significant international appeal or equity even before they operate in foreign countries (or even advertise) there. Section 3 explains the case selection methodology and reports findings on the link between internationalization and inbound tourism revealed by the experience of firms included in the study. Section 4 develops five propositions, based on the extant literature and our case study findings, relating to the impact of incoming tourism on the internationalization of SME in the tourist recipient countries. The propositions emphasize knowledge development; the leveraging of local, ‘ethnobrands’ and the key role played by the Internet to maintain communication with tourist customers and the role that this plays in firms’ internationalization.

Tourism as a Leverage of Internationalization for Consumer Goods Firms

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Section 5 concludes the chapter indicating the limitations of the present study and drawing out implications for future research.

2. KNOWLEDGE AND INTERNATIONALIZATION Lack of knowledge about foreign markets is recognized as a key impediment to firms’ internationalization. This is because the accumulation of necessary knowledge is very time-consuming, country-specific with significant differences of needed information across markets and depends on the degree of the firm’s internationalization (Johanson & Vahlne, 1977, 1990; Luostarinen, 1979; Denis & Depelteau, 1985; Johanson & Wiedersheim-Paul, 1975; Eriksson & Chetty, 2003). Research, focusing specifically on export barriers also highlights the importance of knowledge. Leonidou (2004), by pulling together results from 32 empirical studies, ranked a number of barriers in terms of the overall impact. Lack of knowledge is invariably ranked as the factor with the highest negative impact on SME internationalization. However, once achieved, market knowledge can provide a platform for further internationalization of the firm. Researchers highlight both internal and external knowledge accumulation and how these lead to international growth of the firm by internalizing information. An increasing number of studies dealing with the issue of knowledge creation in the internationalization literature suggest, therefore, that the knowledge variable is of critical importance for MNEs (Kogut & Zander, 1993; Yang, Leone, & Alden, 1992; Liesch & Knight, 1999). As a result, knowledge gained through market screening and involvement is an essential driver of internationalization, which can define its degree and pace (Hadley & Wilson, 2003). Slow rates of generating this experiential knowledge can lead to reduced internationalization pace and vice versa (Johanson & Vahlne, 1977), while empirical results show that knowledge as a result of being exposed to a variety of market knowledge sources, creates more opportunities than relying solely on internal capabilities (Inkpen, 1996; Osland & Yaprak, 1995).

2.1. Incoming Tourism: Reduction in the Knowledge Barrier to Internationalization Given the importance of market knowledge for export development and internationalization, it is somewhat surprising that the relevance of incoming tourism for firm internationalization has not been seriously

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considered in prior research. Extant research on the barriers to exports and internationalization specifically indicates that lack of contact with foreign consumers is a major barrier to export initiation and development. The study by Leonidou (2004), classifies this as a ‘very high impact’ export barrier; more specifically he pointed out that Identifying customers in overseas markets constitutes a serious impediment for many would be and current exporters. This can be attributed to three major factors (1) large geographic distances separating sellers and buyers in foreign markets, hampering communication between them; (2) the characteristically half hearted approach taken by many firms towards carrying out market research in overseas markets and (3) the limited exposure to sources listing potential customers.

Clearly firms in tourist-receiving countries have an unusual opportunity to become acquainted with (some) foreign consumer behaviors, attitudes, and needs without actually having to move beyond their borders or having to invest as much in international market research and screening as would otherwise be necessary. Firms in tourist-receiving countries can assess the attractiveness of their offerings/brands among foreign consumers; they can gain knowledge of what kind of product categories are usually purchased by which ethnic or demographic groups helping define the product portfolio by which they may enter a specific foreign market; similarly, they may gain knowledge that enables them to specify standardized or adapted promotional campaigns and product attributes. Additionally, research findings that a firm’s exposure to culturally diverse markets can facilitate its ability to conduct international operations (Hadley & Wilson, 2003; Eriksson & Chetty, 2003; Ghoshal, 1987) suggest that firms operating in a tourismreceiving country can capitalize on this influx of an additional consumer base which is multicultural in character. In general, a key feature of macro-environment in countries with largescale inbound tourism is the opportunity to create firm-specific knowledge, relating specifically to consumer behavior that is simultaneously both domestic and international. This is a valuable potential advantage compared with the environments in which tourism is not an important feature; in the latter context the relevance of domestic knowledge for international expansion is usually highly uncertain and risky (Johanson & Vahlne, 1977). 2.2. Tourism and the Brand Enhancement SMEs, especially those in small economies such as Greece, usually carry a strong country-of-origin image on their shoulders unlike their global


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counterparts, which often have a seamless entity that is not anchored on specific countries. This national rather than global image is often perceived as an inherent drawback of local firms in their effort to internationalize their operations. While there is an assertion in the literature that all firms strive to develop a global image for their brands (Yu, 2003; Craig & Douglas, 2000), inadequate financial resources usually impedes SMEs to further enhance their brand equity among foreign consumers who could otherwise provide a platform of demand for international expansion. However, the branding disadvantage of SMEs may only be valid for a firm selling in a foreign country to consumers within their country of residence. In this case, there are inherent problems for foreign SMEs associated primarily with the lack of brand awareness, financial scarcity, and the lack of access to distribution channels. However, in cases when the international consumers are within the country of operation of the firm – where it has an established access to distribution channels, i.e. in the case of foreign (tourists) consumers in the home country of the SME – the ‘locality’ of the brand may not be as great a disadvantage and may even become an advantage. There is an opportunity for firms to address to an increasing number of foreign consumers domestically in a way that would otherwise cost enormous amounts of money, i.e. launch an international promotional campaign to develop brand awareness and enhance international brand equity. After all, a main premise behind the alleged brand superiority of global brands is the familiarity concept (Cheng, Blankson, Wu, & Chen, 2005). Consumers are familiar with the properties of a brand and this leads to favorable purchasing. We do not know yet though whether the familiarity concept is equally applicable for a foreigner consuming products in a country beyond his/her usual habitat. Familiarity may be replaced by other constructs and attitudes, such as experimentation, curiosity, culturally oriented exploration, or simply a deliberate get-away from the normal daily routines back home. After all, the essence of being a tourist according to one of the most cited sociologists of tourism, MacCannell (1976) is to find reality ‘out there’ through authentic experiences. If this is the case indeed and this unitary type of tourist exists, local firms not only have an edge for local consumption over their multinational rivals who enjoy an established brand reputation but also this consumption can lead to satisfaction, repurchasing, and even loyalty when the tourist gets back home. Therefore, the opportunity for the firm lies in the fact that there is low cost way (compared to the ‘usual’ internationalization process) to develop and enhance the international brand equity and consequently, create and retain a significant number of customers abroad.

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3. METHODOLOGY AND INTERVIEW ANALYSIS Seven Greek firms with an already existing exporting activity were approached to serve as case studies. Following Patton (1990), sampling was based on a maximum variation logic trying to include firms from a diversified range of industries such as food, beverage, and cosmetics since the nature of the industry is an ubiquitous factor in the international business literature (Theodosiou & Leonidou, 2003). Four of these firms have never really thought of tourism as a leverage to internationalize their activities. They exploit tourism as a sales opportunity domestically but they have not specifically targeted incoming tourists as qualitatively distinct segments. In particular, respondents in these four companies were quite explicit that they were not particularly interested or focused on tourist segments of their respective markets. In effect, these firms treated sales to tourists as an additional bonus to their main business. Although these firms had significant export activity, such activity was overwhelmingly in the Balkans and they have minimal or no export activities in countries where the majority of tourists to Greece emanate (e.g. Western Europe and, increasingly, Asian countries). These firms’ export activity exactly mirrors the dominant pattern of exporting in Greece. The remaining three are firms who have realized the importance of tourism and they do implement programs towards a better exploitation of tourism as a platform of internationalization. One firm is active in the beverages sector and two firms in the cosmetics sector. All are SMEs based in Greece, an archetypal tourism destination for international tourists. Greece was chosen as the field of study due to the fact that it is a mature tourism destination with a relatively stable tourism clientele every year, it has a huge tourism population compared with the domestic market, has a large number of SMEs striving for internationalization, and is the home country of one of the authors, something which assisted towards the implementation of a deliberate, maximum variation sampling logic. Semi-structured interviews took place with key people in the firms resulting to seven interviews. An official request was made indicating that we would like the firm to decide who is the ideal person to answer our question with respect to the research problem under scrutiny. Due to the fact that all three cases are SMEs, only a few number of people deal with this issue. Table 2 describes the key characteristics of the three sampled firms.


Table 2.

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Cases Descriptive Information. The Cases

Case X Industry: cosmetics International activity: 13 countries Interviews: 2 Respondents: Human Resources and Export Marketing Managers

Case Y Industry: beverages International activity: 30 countries Interviews: 3 Respondents: Trade and Marketing, Area Sales and Senior Brand Manager

Case Z Industry: cosmetics International activity: 21 countries Interviews: 2 Respondents: Marketing Manager, Group Product Manager

3.1. Inbound Tourism and Firm Internationalizations: Interview Analyses In this section, based on responses of the managers interviewed, we consider the role tourism plays for the international activity of the firms; additionally, we highlight the active reliance on the Internet by these firms in order to maintain communication and build relationship with their tourist customers. 3.1.1. Tourism and Export Development The key benefit of tourism presence in the mother country of the cases is the knowledge factor. This knowledge covers several issues ranging from preferable brand strategies to consumers’ needs and behaviors. As an executive from firm X stressed: . . . for all these (strategic decisions of international scope) tourism was the source. The source of information . . .

Tourists are a convenient way to get feedback on foreign consumers’ needs and behaviors. This feedback generates knowledge that leads to necessary improvements for competition in the international arena. We certainly use the feedback . . . especially us who are not in the position to quantify any info we would like due to lack of available research findings . . . feedback is something we use a lot as a means of improvement . . .

A main theme from the interviews is how this knowledge may help to develop international product strategies. The question was whether to standardize the brand and its attributes across all markets or adapt it in several of them. And if adapted, what is the decisive feature of this

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adaptation. How is the brand going to be positioned in these markets? Interaction with and responses from tourists was a key factor leading to the exploitation of the national heritage of the brand. In other words, the firms customized their brand positioning strategy for the tourism population and then extended this ‘tourist’ logic abroad. Therefore, now, there is a uniform, purely standardized image of the brands all over the world, which aims to communicate the message of ‘Greekness’ as a source of differentiation in foreign markets. The following excerpt is characteristic of this A basic element of Z brand is the word [ . . . ] which reflects the whole concept of Greece. It is something we use everywhere, in communication, advertising, the brands themselves, packaging. It is a conscious choice of the firm that is not predicted to change. It is an element of the brand and has made all tourists visiting Greece to associate the brand with something Greek. And this is something we aim for, that Z is a Greek firm . . . we have built all our brand and communication on that.

We can call such brands as Ethnobrands since they capitalize on the ethnic origin of the company and its accompanying properties and thus, promote culture-specific values communicated by the product. Such Ethnobrands are perceived by firms as powerful sources of differentiation whose market power was empirically tested through both the domestic, ‘tourism-loaded’ market and the international operations. International tourism generated the knowledge on what foreign consumers value most, something which otherwise would demand extensive international market research, probably several failures through experimentation and huge costs associated with research and analysis of foreign cultures. Our case interviews clearly indicate that these firms were actively engaged with the tourist segments of their markets and saw promotional communications among tourists as a vehicle to help their internationalization: Tourism is used as a means of promotion abroad since our orientation is entirely and clearly towards exporting . . . It is an opportunity for communicational approach of potential customers abroad.

An interesting insight yielded by the case studies is the utilization of domestic distribution as a means of international promotional strategy. Distribution within Greece was adapted to a more ‘tourist’ logic both in order to increase domestic sales and in order to serve the purpose of the exporting orientation of the firm. So, channels of distribution were integrated within the already existing network to work in favor of the promotion of the corporate and brands’ image. Two of the firms created


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their own distribution outlet and became retailers themselves in order to exploit tourism as a powerful means of communication abroad. They opened two flagship stores in areas of high tourism mobility. It is a spot near the city center’s hotels and where the tourists go for their morning stroll, coffee or shopping. We had to do something like it, too . . . as promotion, as image. An investment of tens of thousands of euros . . . but you are obliged to do it. In order to show your unified image you need to take them to a good spot.

The companies made large investments to open these stores even though they expected them to be unprofitable; they did so to enhance their exporting orientation by having a high-quality promotional platform that would serve the global product policy of the firm (i.e. a retail channel that would reinforce the high-quality, Greek brand concept). The reason was clearly communicational. We knew it beforehand that it would be a loss for us in terms of money. The target was to lose as less as possible and we believed that all this investment could be worth it through the communicational benefits we would have . . . Our target was to promote the brand and everything that this represents abroad; when you have the possibility to develop the brand the way you want in such a premium area and with such a large mobility of tourists, then it would be crazy to let it go.

The importance of such a strategic deviation in the trade policy of the firms in order to serve the internationalization goal is highlighted by the fact that such actions were implemented despite the fact that they damaged enormously long-established relations with their already existing network of retailers domestically. You may not believe it, but we lost around 100 customers (retailers) when we opened the store at . . .

Another distribution channel was the hotels sector and the amenity products they offer to their guests in the rooms. Firms create a whole range of product categories specifically aiming the hotel market in order to promote their image among tourists. The interesting point is that again this channel is not worthwhile in terms of profit margins and the only reason was to enhance their position within the tourists segment. . . . the most important (issue) is communication . . . we wanted to exploit the channel of hotels and respectively tourists in order to communicate the brand.

The third firm also adapted its distribution strategy within Greece in order to serve the purpose of additional sales and communication abroad. The intensification of distribution in tourist areas so as to increase the

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degree of contact tourists have with the product was deemed essential in order to increase brand awareness abroad and thus create an initial platform demand for further consumption in their home countries. We try to have high distribution in tourists’ areas so as to have an eponymous demand created but also to be able to respond to that by being at the place where tourists will ask for us.

3.1.2. Internet-Based Communications with Tourists Last but not least, tourism was also the reason the firms standardized their Internet promotional strategy. After creating the initial connection with the consumer, this relationship had to be further enhanced when tourists went back home. And the best possible way to achieve that is through the Internet. This means of communication presented an excellent opportunity for the firm to retain the customers ‘gained’ in the tourism destination abroad. There is a special category of emails; an amazing number of 70% of these emails was from tourists. Not from our regular consumer in e.g. Hong Kong but from a tourist who visited Greece and wanted to ask something.

With such an increasing number of tourists communicating with the firm, the firms had to take respective actions. We decided to re-activate and upgrade the level of the site which was inactive until then, fill it with information in English only . . . there is no Greek site . . . and give information in which country we are, in which shop we are, by which ways the consumers can buy the product etc. . . . serve the tourists who needed information but they couldn’t find. So, we had a demand that wasn’t in our plans and that’s why we reactivated the site. To give the information needed and create a selling point we didn’t have. We can now serve a Swiss tourist. But we don’t have a selling point in Switzerland.

Tourism, therefore, altered the whole logic through which foreign markets are served and gave the impetus to internationalize firms’ activities after having a platform demand created within Greece. Internet became the medium for this new form of internationalization of the firm. They (tourists) made us sell through Internet . . . to have in www.x.com a special place to sell because we lose sales at this point. Moreover, in Germany we don’t have a selling point in Munich, only in Berlin and Frankfurt. And especially from Munich we had mails asking for foam baths, other from Paris, other from Italy etc. So, this is in our plans now because we lose sales. We said . . . People who happened to come in contact with X while on holidays in Greece, what do we do with them afterwards?

Firm Y exploited the opportunities presented by the Internet even more by utilizing it as a bridge of communication and relationship development


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with prospective tourists before coming to Greece. They adapted their promotional strategy by utilizing online channels in order to integrate tourism with their exporting orientation in the best possible way. The phases through which a tourist passes pre (e.g. information search), during, and post trip were used as steps for the implementation of a holistic customer relationship management program which aims both to increase sales domestically and serve the purpose of internationalization. The question is how we catch them here (pointing abroad – at tourists’ home). Not when they are already here but before they are . . . This must be combined with the exporting budget so even if he does not come you will make him consume there.

Therefore, there is a circular line of focused, adapted promotional actions taken by the firm which start at the country of residence of tourists and the market where the firm is active through exports, within Greece while tourists take their holidays and finally when tourists return home through Internet. We get a lot of emails from foreign tourists who tell us congratulations, I drank your beverage, etc. We have communication with them, we send them gifts and we combine it with our exports . . . we tell them where they can find the product so as to continue consuming it.

So, the trial level within Greece does not stop but is retained abroad in addition to the already existing customers who reinforce their relationship with the company even further when they return back home. the volume (of emails) is huge . . . either by people abroad who want to come to Greece for holidays and want to know where they will find the products . . . or by people who have been to Greece, met the products here and ask where they can find them abroad.

Therefore, the Internet may serve as a tool for companies to overcome environmental uncertainty and may help improve strategic and operational performance for the Greek companies in pursuit of their international customers (Jean, Sinkovics, & Kim, 2008; Yamin & Sinkovics, 2007). Summarizing, we saw that tourism worked along several lines. It created an initial platform of demand, it enhanced the corporate image, it made firms become knowledgeable of foreign needs and behaviors and altered the channels through which products are distributed by utilizing the Internet as the next step along the continuum between tourism destination and home country. It assisted to evaluate current business practices and improve them, assess levels of critical demand abroad, value the importance of knowledge for foreign operations, and tunnel the creativity of individuals towards innovative ways of thinking.

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Table 3.

Tourism–Exports Linkage. Tourism–Exports Linkage

Contribution of tourism

Respective actions towards international operations

Knowledge Creation of an additional Enhancement of about foreign international consumer base International consumers’ domestically and customer Brand Equity needs and retention abroad behaviors Standardized Standardized Customized Customized brand website utilized promotional tourismpositioning as a tool for a strategies related and product holistic within channels of strategy – The customer Greece distribution Ethnobrand relationship and promotion management within Greece program

Table 3 summarizes the contribution of tourism towards the internationalization of firms and the respective actions that were implemented to exploit the tourism-exporting linkage.

4. DISCUSSION AND PROPOSITIONS Existing research indicates that the dominant pattern of internationalization in Greece (the country context for the present study) is towards countries considered to be at a relatively low psychic distance from Greece, notably in the Balkans (Louri, Papanastassiou, & Lantouris, 2000), rather than countries that most incoming tourists emanate from. Thus, while tourism can facilitate internationalization through enhanced knowledge of foreign consumer behavior and through brand enhancement, the majority of firms do not necessarily take advantage of these opportunities. This can be explained by the fact that market knowledge is clearly much broader than knowledge of consumers, and the presence of foreign tourists does not per se reduce (and certainly does not eliminate) other types of knowledge barriers with respect to foreign markets such as knowledge relating to institutional aspects, distribution systems and the business environment of foreign countries more generally (Evans & Mavondo, 2002). Secondly, as our cases appear to indicate, knowledge of ‘foreign’ customer needs to be acquired, through the SMEs engaging with the tourist


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segments and is not necessarily generated automatically or through the mere presence of foreign tourists in the domestic market. Our case interviews indicate that firms treating incoming tourists as simply an additional ‘bonus’ and a source of ‘effortless’ additional revenue without incorporating tourism in their marketing strategy and practice are unlikely to gain sufficient insight into tourist behavior or gain knowledge beneficial to develop exports to the tourists’ home countries. For these firms, an internationalization pattern based on low psychic distance may be perceived as being much less risky than that based on ‘following’ tourists to the home countries. We can thus put forward the following propositions with regard to the relationship between inbound tourism and firm internationalization: Proposition 1. Inbound tourism can create firm knowledge relating to foreign consumer behavior that can help reduce barriers to developing exports to the home country of tourists. Proposition 2. The more firms focus on tourist segments in their domestic marketing, the more likely it is that they will gain knowledge beneficial to developing exports to the tourists’ home countries. Our case studies also suggest that SMEs can leverage the ‘locality’ of their brands in their export development; in fact, in the context of our study, the development and use of ‘Ethnobrands’ is the concrete manifestation of firmspecific knowledge acquired by SMEs through their interactions with their tourist consumers. Thus: Proposition 3. Inbound tourism provides an opportunity for local brand enhancement and internationalization. An interesting and rather unexpected aspect of our findings is the firms reliance on Internet communication to build and maintain relationship with their tourist customers; this finding is particularly interesting, in the light of recent discussions of Internet-enabled ‘disintermediation’ and the effective bypassing of middlemen who are usually cited as a major obstacle for the success of internationalizing firms (Tiessen, Wright, & Turner, 2001; Mahadevan, 2000). By a focused use of the Internet, SMEs can circumvent previously unavoidable channels of promotion and distribution in a foreign country, which made the internationalization process either extremely costly or not feasible due to the inadequacy to reach these channels. This is particularly relevant in the present context. As noted above, although, incoming tourism can reduce knowledge gap with respect to

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foreign consumer behavior, it does not reduce knowledge gaps with respect to the business and distribution system of foreign countries. However, our interviews indicate that by reliance on Internet-based communications with tourists, firms can positively leverage their internationalization (Yamin & Sinkovics, 2006). Reflecting on our findings, it is perhaps not a coincidence that firms that developed their exporting activity in the home countries of tourists use the Internet extensively as a communication and transaction medium. However, the four firms that do not utilize tourism as a vehicle for internationalization do not emphasize the use of the Internet in any thing like the same degree. Thus, we put forward the following propositions: Proposition 4. Tourism-based firm internationalization is likely to be hampered by lack of knowledge about the distribution system in the tourists’ home countries. Proposition 5. Reliance on e-commerce can benefit tourism-based internationalization by reducing dependence on the distribution system in the tourists’ home countries.

5. CONCLUDING REMARKS Empirical findings support the notion that internationalization processes are situation-specific and influenced by the context in which they originate, although it is also generally accepted that the pace of internationalization is increasing (Zafarullah, Ali, & Young, 1998; Coviello & McAuley, 1999). The present study is an exemplar of the ‘peculiar’ environment of a touristoriented economy that may generate significant opportunities for SMEs that otherwise face significantly more arduous barriers to internationalization; a tourism-oriented economy is clearly such a ‘peculiar’ context that deserves closer scrutiny. A particularly interesting insight generated from this study is how the combination of ‘mobile’ consumers and the development of the Internet as a medium for online internationalization (Yamin & Sinkovics, 2006) may be reinforcing each other to positively impact opportunities for rapid internationalization by otherwise ‘disadvantaged’ SMEs. Another interesting finding is perhaps the identification of ‘Ethnobrands’ and their impact on SME internationalization. Despite the fact that local SMEs address to a multicultural audience, the Ethnobrand seems to have an edge over its global counterparts in specific product categories. The rise of such


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ethnic products in music, health treatments, garments, and food among others supports a prediction that Levitt’s (1983) thesis regarding the supremacy of a global brand may be at stake. Needless to say, this research is an exploratory one and does not aim to generalize findings to other contexts or product categories. The selection of cases was purposeful in order to highlight a not-cited phenomenon so, further research is needed which would include more firms in more product categories such as food which is a heavily culture-bound product category and would yield very interesting results. Additionally, Greece may be an archetypal tourism destination with a lot of internationalizing SMEs but it is a country which carries a strong and specific country-of-origin image among foreigners and this may affect their stance towards a Greek product. It is necessary to include firms originating in countries with diverse country and product images among visitors in order to test the effect of such a factor on the effectiveness of the effort to exploit the qualitative impact of tourism on consumer goods firms.

NOTE 1. It is also possible that firm may internationalize by ‘following their customers abroad’. The manufacturer of ‘Iron Brew’ – a popular soft drink in Scotland apparently first developed its exports following Scottish holidaymakers to Mediterranean resorts – we are grateful to Stephen Young for this anecdote.

REFERENCES Cheng, J. M. S., Blankson, C., Wu, P. C. S., & Chen, S. S. M. (2005). A stage model of international brand development: The perspectives of manufacturers from two newly industrialized economies – South Korea and Taiwan. Industrial Marketing Management, 34, 504–514. Coviello, N., & McAuley, A. (1999). Internationalisation processes and the smaller firm: A review of contemporary empirical research. Management International Review, 39(3), 223–256. Craig, C. S., & Douglas, S. P. (2000). International marketing research (2nd ed.). Chichester, UK: Wiley. Denis, J. E., & Depelteau, D. (1985). Market knowledge, diversification and export expansion. Journal of International Business Studies, 16, 77–89. Eriksson, K., & Chetty, S. (2003). The effect of experience and absorptive capacity on foreign market knowledge. International Business Review, 12(6), 673–695.

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Evans, J., & Mavondo, F. T. (2002). Psychic distance and organizational performance: An empirical examination of international retailing operations. Journal of International Business Studies, 33(3), 515–532. Ghoshal, S. (1987). Global strategy: An organizing framework. Strategic Management Journal, 8(5), 425–440. Hadley, R. D., & Wilson, H. I. M. (2003). The network model of internationalisation and experiential knowledge. International Business Review, 12(6), 697–717. Inkpen, A. C. (1996). Creating knowledge through collaboration. California Management Review, 39(1), 123–140. Jean, R. J. B., Sinkovics, R. R., & Kim, D. (2008). Information technology and organizational performance within international business to business relationships – a review and an integrated conceptual framework. International Marketing Review, 25(5), 563–583. Johanson, J., & Vahlne, J.-E. (1977). The internationalisation process of the firm – a model of knowledge development and increasing foreign commitments. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Vahlne, J.-E. (1990). The mechanism of internationalisation. International Marketing Review, 7(4), 11–24. Johanson, J., & Wiedersheim-Paul, F. (1975). The internationalisation of the firm-four Swedish cases. Journal of Management Studies, 12(3), 305–322. Kogut, B., & Zander, U. (1993). Knowledge of the firm and the evolutionary theory of the multinational corporation. Journal of International Business Studies, 24, 625–645. Leonidou, L. C. (2004). An analysis of the barriers hindering small business export development. Journal of Small Business Management, 24(3), 279–302. Levitt, T. (1983). The globalization of markets. Harvard Business Review (May–June), 92–102. Liesch, P., & Knight, G. (1999). Information internationalization and hurdle rates in small and medium enterprise internationalization. Journal of International Business Studies, 30(2), 383–394. Louri, H., Papanastassiou, M., & Lantouris, J. (2000). FDI in the EU periphery: A multinomial logit analysis of Greek firm strategies. Regional Studies, 34, 419–427. Luostarinen, R. K. (1979). The internationalization of the firm. Helsinki: Acta Academic Oeconomicae Helsingiensis. MacCannell, D. (1976). The tourist: A new theory of the leisure class. New York: Schocken. Mahadevan, B. (2000). Business models for Internet based e-commerce: An anatomy. California Management Review, 42(4), 55–69. Osland, G. E., & Yaprak, A. (1995). Learning through strategic alliances: Processes and factors that enhance marketing effectiveness. European Journal of Marketing, 29(3), 52–66. Patton, M. Q. (1990). Qualitative evaluation and research methods. Newbury Park, CA: Sage. Theodosiou, M., & Leonidou, L. C. (2003). Standardization versus adaptation of international marketing strategy: An integrative assessment of the empirical research. International Business Review, 12(2), 141–171. Tiessen, J. H., Wright, R. W., & Turner, I. (2001). A model of e-commerce use by internationalizing SMEs. Journal of International Management, 7, 211–233. Yamin, M., & Sinkovics, R. (2006). Online internationalization, psychic distance reaction and the virtuality trap. International Business Review, 15(4), 339–360.


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Yamin, M., & Sinkovics, R. (2007). ICT and MNE reorganization – the paradox of control. Critical Perspectives on International Business, 3(4), 322–336. Yang, Y. S., Leone, R. P., & Alden, D. L. (1992). A market expansion ability approach to identify potential exporters. Journal of Marketing, 56, 84–96. Yu, L. (2003). The global brand advantage. Sloan Management Review (Spring), 13. Zafarullah, M., Ali, M., & Young, S. (1998). The internationalization of the small firm in developing countries – exploratory research from Pakistan. Journal of Global Marketing, 11(3), 21–38.

PART II ENTREPRENEURSHIP AND FUNCTIONAL ADVANCEMENTS

RELATIONSHIPS BETWEEN THE DIMENSIONS OF INTERNATIONAL GROWTH ORIENTATION, ENVIRONMENTAL TURBULENCE, AND STRATEGIC ORIENTATIONS Sanna Sundqvist and Olli Kuivalainen The topic of organizational growth as a focus of entrepreneurship study has attracted considerable attention over the years (see, e.g. Delmar, Davidsson, & Gartner, 2003). However, after a plethora of studies stemming, e.g. from Edith Penrose’s (1959) work on growth of the firm, theoretical development of the field remains fragmented. No consensus has been reached regarding the factors that lead to firm growth (e.g. Weinzimmer, 2000). It is generally accepted that growth is a multidimensional and, alas, a challenging phenomenon as changes in marketing environment, technological development, global competition, and changing global customer preferences create new challenges for international marketers, for example, and firms need to adjust their growth strategies and objectives accordingly. Today we know that organizational growth can be achieved in a number of different ways (e.g. in the form of organic growth, acquisitions, etc.) and that the pattern of firm growth over time can look very different across firms (see, e.g. Delmar et al., 2003). In this chapter we focus on the organic growth in foreign markets, i.e. on international growth (see also Yli-Renko, New Challenges to International Marketing Advances in International Marketing, Volume 20, 89–123 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020007

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Autio, & Tontti, 2002), as in many cases the internationalization of the firm is part of and inseparable from the overall growth and development process of the firm (Jones, 1999). However, the heterogeneity of firm characteristics suggests that also internationalization process may be unique to individual firms (ibid.), and therefore it should be acknowledged that internationalization and international growth can happen in many different ways. For example, there is a difference between the internationalization of so-called born-global firms that internationalize rapidly after the foundation and sell their outputs in multiple countries and traditionally internationalizing firms in terms of pace and degree of internationalization with regard to antecedents and firm characteristics, respectively (see, e.g. Knight & Cavusgil, 1996, 2004). Also knowledge-intensive firms are reported to have different growth objectives than so-called traditional firms (Bell, Crick, & Young, 2004). Furthermore, Bell et al. (2004) studied the patterns, processes, and pace of internationalization of smaller knowledge intensive and traditional firms within the manufacturing sector, and found that even growth objectives and international orientations of firms differed across these firms. Correspondingly, previous research suggests that the industry and the orientation and experience of entrepreneurs influence the nature of internationalization (see, e.g. Jones, 1999). In general, situational variables are known to affect the strategy choice and growth strategy. Several studies have emphasized the fact that growth orientation is a precondition to growth (see, e.g. Autio, Sapienza, & Almeida, 2000). So firms with modest growth aspirations may also show modest growth figures, making growth orientation a critical element of firm growth. Already Penrose (1959) linked firm’s growth with managerial aspirations (i.e. growth orientation) by saying that: ‘‘the growth of firms is connected with the attempts of a particular group of human beings to do something’’. Taken that there exist several routes for a firm to grow in export markets, and the fact that growth orientation precedes growth, we highlight here the importance of identifying different patterns of growth orientation, as they may well determine the actual growth patterns of the firm and thus have significant role in understanding firm growth behavior in general. Surprisingly, there does not exist to our knowledge any studies focusing on this important topic. Also Thomas A. Stewart, the editor of Harvard Business Review (HBR), has highlighted the challenges that relate to growth decisions. As he put it: ‘‘Tell an experienced manager to cut costs 10%, . . . and he’ll know exactly what to do. He might not like the job, but he’ll know what tools to use, and their handles will feel familiar in his grip. Give a manager the order to grow 10%, however, and he’ll be on alien ground, with few recognizable

Dimensions of IGO, Environmental Turbulence, and EO and MO

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landmarks or well-marked paths. In part, this is because cause-and-effect relationships are inherently less clear-cut on the upside than on the downside. A search for new customers may come up empty; but a cut in ad spending affects the bottom line immediately. It’s easier to reduce inventory than to increase sales. As Jeffrey Immelt, the CEO of General Electric, says in this month’s lead article, the decisions that produce growth are harder to identify – and harder to make – than the decisions that improve productivity’’ (Stewart, 2006, p. 12). What makes identifying firm’s growth orientation even more critical is the notion that firms are likely to select a strategy that best exploits its resources and capabilities relative to external opportunities (see, e.g. Grant, 1991). As different growth patterns require different sets of resources and capabilities, it might be that for a firm some growth aspirations are totally inappropriate taken its resources and capabilities. For example, a firm may wish to increase its market share on its main foreign target market (which may also be a very competitive one). It may have size (and thus resource) disadvantage to other larger players in the market, and thus its growth orientation pattern may not be ideal taken the firm’s internal factors and market external factors. It has been suggested that in situations like this, small firms should rely more on market niche strategy (see, e.g. Pelham & Wilson, 1996) and they should not challenge market leaders in their game (see Moore, 1998), because in these latter cases firms just end up wasting their scarce resources. Thus, present study not only identifies the different patterns of international growth orientation (IGO), but explores the internal and external factors that relate to these patterns. Additionally this study will increase our understanding of differences across international firms’ growth orientations, for example, along their international experience. Interesting question here is whether there exist some common growth patterns that vary over time (or along the firm experience). We might expect that start up firms are first looking at mainly ways how to enter new foreign markets, and only later will focus more on increasing their export volumes or improving their profitability in these markets (see, e.g. Madsen, 1989). Additionally, this type of thinking is in line with the behavioral or so-called Nordic school of internationalization (cf. e.g. Johanson & Vahlne, 1977) that emphasizes learning-by-doing, and subsequently new knowledge gained from international market operations increases market commitment and internationalization. This, in turn, should make a firm change its international growth objectives. Consequently, the purpose of the present study is to explore what kind of IGO dimensions exist and are utilized by exporting firms, and how these

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patterns relate to a set of external (environmental) and internal (managerial) factors. In this chapter we propose that the relationship between IGO and actual growth may be dependent on both situational variables and managerial perceptions of drivers of international growth. Although it was only recently that researchers started to identify managerial perceptions of drivers of international growth beside the factors (e.g. small home markets, market niche, knowledge intensity) that ‘‘force/drive’’ companies to internationalize their operations, their role may be influential. First, the IGO is thought to be a useful construct for differentiating companies according to their motivation to seek growth in international markets, and also for identifying the factors behind the chosen growth strategies. Second, strategic orientations such as market orientation (MO) and entrepreneurial orientation (EO) may also provide a firm foundation how a firm should grow. Such orientations can be seen as capabilities on that a firm builds its international competitive strategy or even key determinants of success (see, e.g. Knight & Cavusgil, 2004). By recognizing the differences in firms’ IGO patterns and their links with several internal and external factors of the firms, the chapter aims to enrich the further development in the field of internationalization research. The rest of the chapter is organized as follows: First the multidimensional nature of growth orientation and IGO are discussed. Second, the links between growth orientation and international environment and two important strategic orientations, EO and MO are analyzed. In this section of the chapter three research propositions are presented. Third, the research methodology and results of the empirical study focusing on 783 exporting firms are explained. Finally, we will conclude with the discussion and future research directions.

MULTIDIMENSIONAL INTERNATIONAL GROWTH AND GROWTH ORIENTATION Linking International Growth Orientation and Firm Growth A common weakness of most growth models is the assumption that growth is a desired objective for entrepreneurs (see, e.g. Bird, 1989). However, not all entrepreneurial firms seek growth as their primary objective (Covin, Slevin, & Covin, 1990; Porter, 1996), and further there is no reason to expect that all entrepreneurs want their businesses to grow in similar ways


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(Liao & Welsch, 2003). Thus, in many cases researchers have separated growth orientation from actual growth. In previous studies growth orientation has been defined as precondition to growth (see, e.g. Autio et al., 2000). Growth orientation is an attitudinal concept based on subjective evaluation (Nummela, Puumalainen, & Saarenketo, 2005) and is considered to be particularly important for international growth (Yli-Renko et al., 2002). IGO is thought to be a useful construct for differentiating companies according to their motivation to seek growth in international markets, and also for identifying the factors behind the chosen growth strategies (Nummela et al., 2005). Another common weakness in growth research is the fact that growth is either defined vaguely or operationalized differently across studies making it difficult to make theoretical or empirical generalizations (see, e.g. Birley & Westhead, 1990; Delmar et al., 2003). The most often used indicators of growth are based on sales data (see, e.g. Weinzimmer, 2000; Weinzimmer, Nystrom, & Freeman, 1998); other measures that have been used include employment, profits, and assets (see, e.g. Birley & Westhead, 1990; Weinzimmer et al., 1998). In many cases growth is seen as an absolute figure. However, it is important to note that growth rate measures focus on change over time, for example, relative changes in size of the firm or revenues. If the growth rate measure is used instead of absolute growth, smaller firms tend to show higher growth figures than larger firms and vice versa (Weinzimmer et al., 1998). Research field on the growth orientation is heterogeneous, and across studies various different growth orientation-related concepts are applied: growth orientation (Yli-Renko et al., 2002), growth aspiration (Liao & Welsch, 2003), growth intention (Hay & Kamshad, 1994), growth motivation (Davidsson, 1991), goal orientation (Paswan, 2003), and attitudes toward growth (Wiklund, Davidsson, & Delmar, 2003). These concepts have been operationalized very differently in the extant research, making the comparison of different studies very challenging. For example, Wiklund et al. (2003) have studied the relationship between expected consequences of growth and overall attitude toward growth. They used a single item measure to illustrate the business managers’ attitude toward growth, and operationalized attitudes toward growth by asking the respondents to evaluate whether a 100% increase in the number of employees in 5 years time would be mainly negative or positive. Liao and Welsch (2003) studied the growth aspiration of the technology-based new ventures. They operationalized growth aspiration by entrepreneurs’ projected revenues of the new venture for the first year and fifth year of

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operation. Both Wiklund et al.’s (2003) and Liao and Welsch’s (2003) growth orientation measures focus on motivational factors behind the firm growth. Wiklund and Shepherd (2003) measured growth aspiration with four questions. Their measure covers two dimensions of growth: growth in number of employees, and growth in sales, and assess whether managers consider certain growth rates as positive, and their view of the ideal size of the company, i.e. ideal growth. In their study of international growth of Finnish electronics firms, Autio et al. (2000) included growth orientation as a control variable. They measured growth orientation by combining two statements on the absolute importance of growth to the firm with the relative measure of the importance of growth in comparison to four other strategic goals. In the relative measure, respondents were asked to allocate 100 points between 5 typical strategic goals to indicate how important they had been to the firm in the recent past. The goals include maximizing sales growth, profitability, technical superiority, maximizing the values of the firm for a potential acquisition, and the stability and longevity of the firm. Yli-Renko et al. (2002) have adapted the growth orientation measure presented by Autio et al. (2000) in their study of international growth of technology-based new firms. To sum up, in the extant literature the importance of growth orientation is noticed but heterogeneity prevails when the measures are concerned. It has to be pointed out that prior empirical research on IGO is even more limited than research focusing on general growth orientation. Nummela et al. (2005), in their study of IGO of Finnish knowledge-intensive small- and medium-sized enterprises (SME), introduced a multi-item measure for IGO, and found that companies with high orientation were more internationalized than others. However, the measure developed was unidimensional, and measurement items represented managerial mindset, and focused mainly on the fact whether the managers aspired growth from international markets in general. Thus, their measurement items did not cover the dimensions of IGO, i.e. we do not know whether the growth-oriented entrepreneurs are looking for organic growth, or what is the desired way they want to grow internationally. Thus, we propose that IGO research should go a step further, and not only identify whether entrepreneurs and their firms are internationally growth oriented, but also study the dimensions of international growth intentions, i.e. how do they want to grow. Taken together, although there is a reasonably large group of studies focusing on growth and growth orientation; there is no clear consensus on what are the best single or composite measures of growth and growth orientation. In this study, we use a relative measure to capture the growth


95

orientation: consequently respondents had to prioritize their objectives of the international growth.

Identifying the Patterns of International Growth and Growth Orientation As mentioned earlier, one additional weakness of the growth models is the assumption that there is only one route to growth. Recent research on the topic has confirmed that growth is a multidimensional concept, and that even among high growth firms there is heterogeneity in growth patterns (Delmar et al., 2003). If we agree that growth is a multidimensional concept, we should critically evaluate whether our current measures for growth orientation are valid, as they do not capture this multidimensional nature of growth and growth orientation but treat growth (orientation) as unidimensional. This view is supported by Hay and Kamshad (1994) who found that the factors that affect the ability of the firm to grow or earn profits differ from the courses that affect the desirability of growth and profits. Delmar et al. (2003) have noted that the causes and consequences of growth may be different for different forms of growth. As all firms do not grow in the same way, different forms of growth should be measured with different growth measures. In his extensive review Madsen (1987) classified the export growth/performance into four groups: exports profitability (the amount of profits), export volume (the absolute value of exports or exports as a percentage of total sales), export growth (the absolute or percentage value of export growth), and various other indicators (e.g. perception of success). Thurik (1993) has suggested that there exist many different kinds of winning strategies for penetrating or developing foreign markets. Additionally, Pelham (1997) has proposed that firm performance should be operationalized as a multidimensional concept consisting of three dimensions: (a) firm effectiveness, (b) growth/share (sales level, growth rate, and market share), and (c) profitability. Also in marketing literature, some of the more commonly used growth measures include market effectiveness, sales growth, market share, and profitability (Narver, Jacobson, & Slater, 1999; Pelham, 2000). However, in entrepreneurship studies, the traditional aspect to examine the growth of firm relates, e.g. to product innovation, market differentiation, or market breadth. In their study of small firms’ growth strategies, Hay and Kamshad (1994) found diversifying growth patterns among UK firms. Their study indicated that profit maximization was the single most important objective, while sales growth came in second. Thus, based on the discussion earlier, we adopt

96


a marketing perspective, and focus on the four most important dimensions of international growth: (a) profitability (see, e.g. Autio et al., 2000; Hay & Kamshad, 1994; Madsen, 1987; Narver & Slater, 1990; Pelham, 2000), (b) volume (Madsen, 1987), (c) market share (Pelham, 1997), and (d) market entry (Thurik, 1993).

Linking Growth Orientation to Firm International Environment and Strategic Orientations Firms do not end up with particular growth patterns at random. Even though the underlying causes of growth may be the same, the situational and managerial/internal factors may determine the specific form of growth a firm engages in. Firms are likely to select a strategy that best exploits its resources and capabilities relative to external opportunities (see, e.g. Grant, 1991). In other words, firms’ growth patterns are related to characteristics of the firms and their environments (Delmar et al., 2003). Delmar et al. (2003) explored the differential representation of growth pattern for firms of different demographic affiliation in terms of firm size, firm age, industry, and ownership/governance. Demographic variables were clearly related to certain growth patterns as large and older firms from traditional industry sectors dominated the cluster that had grown through acquisitions, for example. As they (Delmar et al., 2003, p. 192) note ‘‘if firms grow in different ways we can also assume that the reasons leading to growth and the outcome of growth may also be different’’. Instead of just studying demographics, we focus on situational and managerial factors, i.e. on the role of external environmental turbulence and the two most commonly studied forms of strategic orientations (i.e. EO and MO). Role of External Environment To some extent the growth of the firm will be determined by the growth opportunities in the firm’s markets, and changes in the business environment can offer new growth opportunities (Drucker, 1985). Dynamic environment is likely to generate opportunities, which the growth-oriented businesses can take advantage of (Covin & Slevin, 1991; Zahra, 1993). In their study of independent Swedish small businesses, Wiklund and Shepherd (2003) found that environmental dynamism magnifies the effect the managers’ growth aspirations have on the realization of growth. The less growth-oriented businesses, however, are less alert to opportunities in dynamic environments and can thus even face negative growth in such


97

environments (Wiklund & Shepherd, 2003). Also Hay and Kamshad (1994) have found that growth aspirations differ across external environments, like across different industries. Thus, it is proposed here that: P1. Firms under different environmental conditions will seek export growth differently. Role of Strategic Orientation of a Firm Firms’ internal drivers of growth orientation have been studied earlier. Wiklund et al. (2003) studied the expected consequences of growth on attitude toward growth among a sample of small firms, and found that small business managers’ overall attitude toward growth was influenced by the consequences they expected from growth. However, Atuahene-Gima and Ko (2001) argue that an alignment of market and EO processes and practices enables the firm to adapt to and manage its market environment to meet current and emerging customer needs. They build their argument on Child’s (1972) notion of strategic choice, and Chakravarthy’s (1982) framework of organizational adaptive states. It is believed that firms have different adaptive orientations based on their pattern of choices with respect to strategy and structure and, as a consequence, adopt different operational procedures and activities (Conant, Mokwa, & Varadarajan, 1990; Miles & Snow, 1978). These adaptive orientations can be called strategic orientations of the firm (see Gatignon & Xuereb, 1997). The needed orientation may differ depending on the challenges a firm faces in its marketing environment. A chosen strategic orientation provides a foundation of guidelines for firms upon which to compete and improve performance (Sinkovics & Roath, 2004). As pointed out earlier the two focal orientations in this chapter are MO and EO. The latter (EO) is an environmental management capability by which firms embark on proactive and aggressive initiatives to alter the competitive landscape to their advantage. MO, in contrast, is an adaptive capability by which firms react or respond to conditions in the market environment (Hunt & Morgan, 1995; Kohli & Jaworski, 1990). These strategic orientations are approached here from the international business perspective, i.e. we focus on international EO and export market-oriented behaviors. EO can be seen as a multidimensional construct (consisting of innovativeness, autonomy, risk taking, proactiveness, and competitive aggressiveness (cf. e.g. Covin, Green, & Slevin, 2006; Lumpkin & Dess, 1996). Interestingly, although the EO has often been measured as a single construct, Lumpkin and Dess (1996, 2001) argue that many of the

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dimensions are independent. Thus, it is important to study the independent relationships between different EO dimensions and IGO as it is possible that a firm would only demonstrate one or two dimensions of EO. And, as some of the dimensions are independent, their effect may vary across different types of external environments and contexts (Kreiser, Marino, & Weaver, 2002). Thus, this study focuses on the following three dimensions of EO: (1) risk taking, which represents managers’ willingness to pursue opportunities that carry a reasonable risk of costly failure (Miller & Friesen, 1982); (2) proactiveness, which refers to a posture of anticipating and acting on future wants and needs in the market and would enable a firm to gain a first mover advantage vis-a`-vis its competitors (Lumpkin & Dess, 1996); and (3) competitive aggressiveness, which in its turn reflects the intensity of a firm’s operations in creating the ability to outperform rivals within the industry. The characteristics of this type of behavior can be seen in the way the firm responds to competitors’ actions (Lumpkin & Dess, 2001). MO represents a set of activities that reflect an organization’s degree of adoption of the marketing concept philosophy (Atuahene-Gima, 1996). MO is conceptualized by both Kohli and Jaworski (1990) and Narver and Slater (1990) as a multidimensional organizational phenomenon, where each dimension represents a different feature of MO. It has been proposed that MO’s most critical manifestation is in the form of market-oriented behaviors (Cadogan, Cui, & Li, 2003). Specifically, market-oriented behaviors comprise the generation of information about the firm’s markets, the dissemination of this information to relevant decision makers within the firm, and development and implementation of appropriate responses to the information (Kohli & Jaworski, 1990). MO involves generation and dissemination of market intelligence that is composed of information about the external environment confronting an organization, sharing of this information among all functions in an organization, and rapid managerial action in response to this information (Kohli & Jaworski, 1990). Hence, the use of intelligence is the key to MO (Kumar, Subramanian, & Yauger, 1998). Already in the seminal papers of MO, it is linked with firm growth, and Slater and Narver (1994a) found the MO significantly influenced firm growth. The theoretical linkage between MO and firm behavior (like growth and performance) is based on the concept of sustainable competitive advantage (see, e.g. Day & Wensley, 1983), i.e. on market-oriented firms’ ability to create long-term superior value for their customers. The concept of sustainable competitive advantage provides a strong base for expectation


99

that MO can offer a firm the ability to outperform its competitors (Pelham & Wilson, 1996), and thus achieve higher growth rates. Furthermore, Pelham and Wilson (1996) claim that MO leads to more effective marketing decision making, and greater customer retention, which result in greater sales growth and market share. Although main evidence of the firm growth – MO relationship is positive, also contradictory views are presented. For example, Golann (2006) and Pelham (2000) have proposed that especially for small firms it might be impossible to achieve high levels of MO during the rapid growth phase of the firm. It is believed that different growth patterns require different sets of resources and capabilities, and that firms’ external environment may have an effect on the chosen growth strategy. For example, in growing markets it is relatively easier to increase sales volume, especially if the competition is limited. Increase in volume can thus be achieved by simply selling more to current customers or to new customers. Whereas increasing market share may require firms to make more effort. Additionally, we propose that different dimensions of international EO and export market-oriented behaviors may relate differently to growth orientation patterns. MO is generally believed to have a positive effect on firms’ profitability (see, e.g. Greenley, 1995; Jaworski & Kohli, 1993; Slater & Narver, 1994b), and conceptually market-oriented behaviors are based on understanding customer needs. Thus, market-oriented behaviors may be more critical for firms whose growth aspirations relate profitability and volume. However, international EO is believed to be especially beneficial for firms seeking growth. It is assumed here that proactiveness and competitive aggressiveness could be essential if firms are looking for new market entries or increases in market shares. Based on the discussion earlier, following exploratory propositions are presented: P2. The dimensions of international entrepreneurial orientation applied by firms differ along the international growth orientation patterns. P3. International growth orientation patterns may vary along the different dimensions of export market orientation. In Fig. 1 the three research propositions are presented. It is suggested that international EO and export MO and the environment firms operate and vary across the IGO patterns. To test these propositions, a survey using mailed questionnaires was conducted. The method of the study is explained in the following section of the chapter.

100


ENVIRONMENTAL CONDITIONS

ENTREPRENEURIAL ORIENTATION

P3

Fig. 1.

P1

DIMENSIONS OF INTERNATIONAL GROWTH ORIENTATION

MARKET ORIENTATION

P2

The Research Model and Propositions.

METHODOLOGY Data Collection The sample of this survey was drawn from the Kompass Finland database. Companies involved in exporting and employing more than 50 persons were chosen. The database contained 1,205 companies that met the earlier-mentioned requirements. Each firm was contacted by telephone to (a) determine eligibility and (b) elicit cooperation in the study. The informant in the firm was either export director/manager, CEO, marketing director/manager or some other person who had the best knowledge of the export function. Of the original 1,205 contacts, 237 proved to be ineligible, leaving a total of 968 eligible. Of these, 21 refused to participate in the study. The questionnaire, together with a cover letter, was mailed within 24 h of the telephone call to those who agreed to participate in the study. Ten days after the initial mailing, a reminder card was sent to non-respondents (the questionnaires were stamped making the identification of non-respondents possible). Seven days after the reminder card was mailed, a second questionnaire with a modified cover letter was mailed to non-respondents. In total, 783 usable responses were obtained, corresponding to the effective response rate of 81% (i.e. 783/968). To test for non-respondent bias the results obtained from the late responses were compared to those of early responses (Armstrong & Overton, 1977). No significant differences were found between these two sets of respondents on the variables of interest.


101

Measurement Items IGO was measured by asking respondents to illustrate the weight of importance, which they attached to achieving the export growth objectives by sharing 100 points across these objectives (export sales volume, export market share, export profitability, and market entry). The reasoning behind multiple-indicator measures is that different indicators of growth are attributes of the same underlying theoretical concepts of growth and therefore tend to be correlated. The use of this kind of relative measure is recommended as it avoids the tendency of respondents to give the socially desirable responses that all of the goals are extremely important. Three environment measures were adapted from Cadogan, Diamantopoulos, and Siguaw (1998), who used measures initially developed by Jaworski and Kohli (1993), and subsequently modified them for use in an export setting. Specifically, the scales captured technological turbulence (to capture changes and opportunities occurring in the firm’s export markets as a result of technology), competitor intensity (which assessed the ease with which a firm can differentiate in its export markets), and customer dynamism (capturing changes in export customer preferences and needs, customer demand and market growth). Technological turbulence scale consisted of four items, customer dynamism was captured with five items, and competitor intensity scale included six items. All the environmental turbulence items were measured with 7-point Likert scales. The scale anchors ranged from 1 ‘‘very strongly disagree’’ to 7 ‘‘very strongly agree’’. As we were interested to study the effect of separate international EO dimensions, Jambulingam, Kathuria, and Doucette (2005) EO scale was applied. First, we used Jambulingam et al.’s (2005) proactiveness scale, adapted for the international business (exporting) context and extended to identify the degree that managers seized the opportunities in the anticipation of future market conditions. Proactiveness was measured with three items. We then assessed the degree to which managers took risks using items drawn from Jambulingam et al.’s (2005) risk-taking scale, again adapted to gauge the role of risk taking as part of the firm’s internationalization strategy. Our risk-taking scale consisted of three items. The competitive aggressiveness measure was based on items from Narver and Slater’s (1990) competitor orientation scale, and Jaworski and Kohli’s (1993) market responsiveness scale, and included four items. International EO variables were all measured with 9-point Likert scales. Scale anchors varied from 1 ‘‘strongly disagree’’ to 9 ‘‘strongly agree’’.

102


The measures of export MO were adopted from Cadogan, Diamantopoulos, and de Mortanges’ (1999) export MO scales. Three measures were used here to capture the quality of the firms’ export market intelligence generation, dissemination and responsiveness behaviors, respectively. Intelligence generation scale was based on five items, intelligence dissemination scale consisted of nine items, and responsiveness scale had nine items. All items were measured using 7-point Likert scales with scale anchors 1 ‘‘strongly disagree’’ and 7 ‘‘strongly agree’’. In order to test for unidimensionality, all the items were subjected to an exploratory factor analysis (principal factor analysis with varimax rotation). Those that cross-loaded above the 0.40 level, or that did not load on any factor above that level, were eliminated from the scale. The final score for each scale was an average of all the items included in it. The final factor loadings for export MO, international EO and environmental turbulence are reported in Tables 1, 2, and 3, respectively. The reliability assessments showed (see Table 4) that all the final scales exceeded the level of 0.70 recommended by Nunnally (1978). Furthermore, we control for firm size and their experience. Firm size has long been associated with a variety of important individual and organizational characteristics (see, e.g. Schminke, Ambrose, & Cropanzano, 2000), and is thought to be an approximation of firm resources that also relate with the probability of international activity (Aaby & Slater, 1989; Katsikeas, 1994). Firm size was measured by the turnover (mh). The role of firm’s experience has long been acknowledged in theories of experiential learning and stages theories of internationalization (Johanson & Wiedersheim-Paul, 1975; Welch & Luostarinen, 1988). Thus, we expect that more experienced firms are more likely to seek export profits as they have already grown internationally, and are now at the phase of improving their export market positions. Firm’s experience was measured by the years in business, years exporting, and the number of export countries.

Analyses and Results First the two-step cluster analysis was applied to identify the different dimensions of IGO. Two-step cluster analysis was performed using the four measures describing the importance of each growth dimension as the clustering variates. Five distinct set of export growth patterns were identified. As Table 5 reveals cluster 1 consists of firms that are very profit oriented, and they consider export profits as the most important element of

.455 .571 .584 .490 .544

.593 .701 .746 .660 .704

.414

.483

.580

.629

.699

.738

.725

.803

.527

.483

.564

.691

.714

.835

PC3

.400

PC2

Communalities

.491

PC1

Rotated Pattern Loading

Factor Analysis of Export Market Orientation Items.

In this company, we generate a lot of information concerning trends (e.g. regulation, technological developments, political, economy) in our export markets We are slow to detect fundamental shifts in our export environment (e.g. regulation, technology, economy) (reversed) We periodically review the likely effect of changes in our export environment (e.g. regulation, technology) We do not generate enough reliable/relevant information concerning our competitors’ activities in our export markets (reversed) We generate a lot of information in order to understand the forces which influence our overseas customers’ needs and preferences There is minimal communication between the export and other departments concerning foreign market developments (e.g. regulation, technology) (reversed) When one department finds out something important about foreign market competitors, it is slow to alert other departments (reversed) Too much information concerning our export market competitors is discarded before it reaches decision-makers (reversed) All information concerning our export competition is shared within this company Information which can influence the way we serve our export customers takes forever to reach export personnel (reversed) Important information about our export customers is often ‘‘lost in the system’’ (reversed) Information about our export competitors’ activities often reaches relevant personnel too late to be of any use (reversed) Important information concerning export market trends (regulation, technology) is often discarded as it makes its way along the communication chain (reversed)

Item

Table 1.

Dimensions of IGO, Environmental Turbulence, and EO and MO 103

8.315 34.645 34.645

.538

PC1

.486 .353 .434 .431

.524 .625 .577 .512

.592 .505 .577 .479

.679 .767 .754 .638 2.168 9.032 43.677

.332 .346

1.589 6.622 50.300

PC3

Communalities

.460

PC2


Note: Extraction method: principal component (PC) analysis. Rotation method: Oblimin with Kaiser normalization.

Export sales personnel rarely share their experiences of dealing with customers with others (reversed) For one reason or another, we tend to ignore changes in our foreign customers’ product or service needs (reversed) We periodically review our product development efforts to ensure that they are in line with what foreign customers want The product lines we sell to foreign markets depend more on internal politics rather than real market needs (reversed) When we find out that export customers are unhappy with the quality of our service, we take corrective actions immediately Several ‘‘departments’’ get together periodically to plan a response to changes taking place in our foreign business environment (e.g. regulation, technology, etc.) Our export business strategies are driven by our beliefs about how we can create greater value for export customers Our export strategy for competitive advantage is based on our understanding of export customer needs Our export business objectives are driven primarily by customer satisfaction We give close attention to after-sales service in our export markets Eigenvalue Percentage of variance Cumulative percentage

Item

Table 1. (Continued )

104 SANNA SUNDQVIST AND OLLI KUIVALAINEN

2.114 21.144 57.812

Note: Extraction method: principal component analysis. Rotation method: Oblimin with Kaiser normalization.

3.667 36.668 36.668

.521 .680 .449 .699

.712 .811 .635 .790 1.301 13.014 70.826

.806 .798

.757

.825

.896 .887

.792

.867

.794

.787

PC3

.856

PC2

Communalities

.860

PC1


Factor Analysis of International Entrepreneurial Orientation Items.

Export managers in this company usually take action in anticipation of future export market conditions Export managers in this company try to shape our business environment to enhance our presence in the export market Export managers in this company continually seek out new opportunities, because export market conditions are changing Export managers in this company see taking gambles as part of our strategy for export success Export managers in this company take above average risks Export managers in this company see taking chances as an element of our export strategy If a major competitor were to launch an intensive campaign targeted at our foreign customers, we would implement a response immediately We are quick to respond to significant changes in our competitors’ price structures in foreign markets We take forever to decide how to respond to our export competitors’ price changes (reversed) We rapidly respond to competitive actions that threaten us in our export markets Eigenvalue Percentage of variance Cumulative percentage

Item

Table 2.

Dimensions of IGO, Environmental Turbulence, and EO and MO 105

1.844 12.296 56.569

.701 .844 .609

.796 2.678 17.856 44.273

.522 .726 .402

.777 .604

.882 3.962 26.416 26.416

.594 .423 .597 .458 .264 .443 .642 .367

PC3

.776 .741 .733

.769 .630 .766 .652 .503 .664

PC2

Communalities

.870 .858 .833

PC1


Factor Analysis of International Environmental Turbulence Items.

Industry competition in our export markets is cut-throat In our export markets, there are many ‘‘promotion wars’’ In our foreign markets, price competition is a hallmark of our industry One hears of a new competitive move in our export markets almost every day Our export competitors are relatively weak (reversed) In our foreign markets, aggressive selling is the norm Our export customers’ product preferences change quite a bit over time New export customers tend to have product-related needs that are different form those of our existing export customers Our export customers tend to look for new products all the time Our export customers tend to have stable product preferences (reversed) We are witnessing changes in the type of products/services demanded by our export customers The technology in our industry in changing rapidly Technological changes provide big opportunities in our industry A large number of new product ideas have been made possible through technological breakthroughs in our industry Technological developments in our industry are rather minor (reversed) Eigenvalue Percentage of variance Cumulative percentage

Item

Table 3.



Table 4. Scale

107

Scale-Reliability Analyses. Cronbach’s Alpha

Number of Items

Mean Score

Standard Deviation

Environment Competitor environment Customer environment Technology environment

.748 .772 .896

6 5 4

4.946 4.306 4.334

1.024 1.174 1.504

Entrepreneurial orientation Proactiveness Risk taking Competitive aggressiveness

.856 .872 .750

3 3 4

6.056 3.979 4.930

1.509 1.775 1.095

Market orientation Intelligence generation Intelligence dissemination Intelligence responsiveness

.807 .869 .839

5 9 9

4.883 5.115 5.114

1.129 1.049 .943

their international growth. Firms in cluster 2 put also a strong emphasis on export profitability, but compared to firms in cluster 1, these firms will also seek for high export volume. Firms who did not emphasize any particular growth dimension formed the third cluster. Thus, cluster 3 consists of firms who did not have a specific growth orientation focus, but considered all dimensions equally important. They seek simultaneously high export volume and profits, and want to enter new markets and have large market shares. However, compared to their exporting counterparts, these firms seem to have a bit stronger emphasis on increasing their export market shares. Firms in cluster 4 consider new market entries as the most important dimension of international growth. These firms do not want to be market leaders, i.e. firms in this cluster are probably firms entering into the new market areas with steady growth strategy. Whereas firms in cluster 5 are the ones seeking mainly export volume. In the next stage, we explored demographical variables separating these firms. General examination of demographics (Table 5) revealed that growth rate among firms in cluster 1 (i.e. firms emphasizing the export profitability) was the most modest (9.4%), and that their international EO was the lowest among the studied firms. Additionally, the external environment of these firms appeared to be quite stable. Firms in cluster 2 represent ‘‘safe mediocrity’’. Whereas firms in cluster 3 stand out based on their international experience-related demographics: These firms have the longest

72.333 8.350

export profitability (%) international market

9.988 7.576

8.249 7.067

Standard deviation

1.046 1.536 1.018 1.315 1.126

4.843 4.317 4.690 4.207 3.113

28.842

20.96

5.158 4.364 5.058 4.373 3.138

5.078

21.20

12.8 26.67

29.497

9.4 27.13

.999

52.2

4.588

6.318 7.667

9.218 7.400

Standard deviation

.844 1.443 .984 1.176 1.166

1.008

19.817

24.356

Food, drinks, tobacco (4.8%) Textiles (4.8%) Forest (15.7%) Chemical (11.3%) Metal (14.3%) Machinery (20.9%) Electronics (10.4%) Other manufacturing (7.4%) Services (10.4%) Industrial goods (71.1%)

46.369 12.661

28.291 12.584

Mean

45.0


12.368 6.863

export volume (%) export market shares

Type of product (industrial versus consumer goods) Percentage of sales from international markets (%) Growth (% during the past 3 years) International experience (years exporting) Scope of international activities (number of export countries) International entrepreneurial orientation International market orientation Technology environment turbulence Competitor environment turbulence Customer environment turbulence Regulatory environment turbulence

Importance of Importance of (%) Importance of Importance of entry (%) Industry

Mean

Cluster 2: Export Volume and Profitability Emphasized N ¼ 232

7.971 9.746

8.810 9.273

Standard deviation

5.241 4.503 5.031 4.296 3.209

5.183

30.86

14.7 28.84

54.0

.724 1.467 1.012 1.128 1.284

1.008

30.062

32.907


25.540 16.269

28.761 29.043

Mean

Cluster 3: Not a Specific Growth Focus N ¼ 186

10.929 13.961

10.962 6.239

Standard deviation

4.770 4.433 5.802 4.196 3.057

4.883

13.15

15.3 16.61

32.2

.933 1.640 1.121 1.059 1.227

1.149

17.998

16.967


25.811 44.833

21.333 8.022

Mean

Cluster 4: Market Entry Focused N ¼ 90

Cluster Solutions of International Growth Orientation Dimensions.

Cluster 1: Export Profitability Focused N ¼ 117

Table 5.

12.382 7.989

9.554 6.762

Standard deviation

4.915 3.952 4.981 4.381 2.953

5.040

21.11

11.0 28.64

47.3

.823 1.495 .995 1.173 1.085

1.055

21.214

32.879


29.726 8.702

54.664 6.661

Mean

Cluster 5: Export Volume Focused N ¼ 146


109

international experience (they have been exporting almost for 29 years), the scope of their international activities was widest (they operated in almost 30 countries), and they derived 54% of their turnover from foreign markets. Furthermore, they seem to be the most entrepreneurially oriented and market oriented. Additionally, their external environment appears to be quite turbulent (especially their markets can be described with high technology turbulence). Contrary to cluster 3 firms, firms in cluster 4 have the least international experience (only 16 years exporting with 13 exporting countries). Firms in cluster 4 scored low on export MO. Their external environment can be characterized with high competitor environment turbulence and low levels of customer environment turbulence. Yet, these market entry focused firms experience the highest growth (15.3%). Export volume focused firms in cluster 5 did not have any particular demographic features, but their customer environment was the most turbulent. Examination of industry distributions did not reveal differences across firms in different clusters. Thus, it seems that so-called push effect from home markets may be similar for each cluster. One of the reasons for this result may be that all of the firms are from the small home market, i.e. Finland. The most interesting outcome here is that service firms seem to be more market entry focused. As an additional check, an analysis of variance (ANOVA) was performed to compare firm demographics (i.e. size, experience, international experience, and scope of international activities). As Table 6 reveals variables reflecting firm size and experience do not vary significantly across the five clusters. However, significant differences were detected for variables reflecting international experience and the scope of international activities. Especially, firms in cluster 3 that did not have any specific single growth objective but which put a slightly more emphasis on increasing their export market shares, appear to be more international than firms in other clusters. However, firms in cluster 4 emphasizing importance of market entries as their vehicle for export growth appeared to have the most limited international experience. Then, at the third stage we studied if there were significant differences across external (environmental) variables. In line with our expectations, it seems that environmental differences relate to different export growth patterns (see Table 7). Both competitive environment turbulence and technology environment turbulence were significantly different across clusters. Cluster 3 firms, which did not have any specific growth emphasis (although these firms highlighted relatively more the importance of gaining large export market shares), seem to operate in significantly more turbulent exports markets when it comes to technological developments. Whereas,

Size (number of employees) Size (turnover) Experience (years in business) International experience (years exporting) Number of export countries

678.90

204.33 53.09

27.13

20.96

115 116

116

116

Mean

116

N

28.84

29.50

867.60 41.45

2144.59

Standard deviation

Cluster 1: Export Profitability Focused

228

230

227 228

230

N

21.20

26.67

244.93 51.49

795.23

Mean

19.82

24.36

1253.26 55.66

3252.49

Standard deviation

184

184

184 182

185

N

30.86

28.84

205.12 56.79

1244.76

Mean

30.06

32.91

1051.86 48.32

5546.41

Standard deviation

Cluster 3: Not a Specific Growth Focus

88

88

88 88

90

N

13.15

16.61

75.51 42.30

440.71

Mean

18.00

16.97

141.85 34.12

867.29

Standard deviation

Cluster 4: Market Entry Focused

Comparison of Demographics across Clusters.

Cluster 2: Export Volume and Profitability Emphasized

Table 6.

144

146

145 145

146

N

21.11

28.64

210.57 57.96

938.82

Mean

21.21

32.88

1092.46 43.98

4221.24

Standard deviation

Cluster 5: Export Volume Focused

9.168

3.183

.424 1.854

.825

F

.000

.013

.791 .117

.509

Significance

ANOVA

Competitive environment turbulence Customer environment turbulence Technology environment turbulence

Mean

4.690

4.207

4.312

N

115

116

116

1.536

1.315

1.018

Standard deviation

232

232

231

N

4.364

4.373

5.058

Mean

1.443

1.176

.984

Standard deviation


185

185

185

N

4.503

4.296

5.031

Mean

1.467

1.128

1.012

Standard deviation


90

89

90

N

4.433

4.196

4.802

Mean

1.640

1.059

1.121

Standard deviation


145

145

145

N

3.952

4.381

4.981

Mean

1.495

1.173

.995

Standard deviation


F

3.064

.742

.016

.564

.010

Significance

ANOVA

3.343

Linking External Environmental Turbulence and International Growth Orientation Patterns.


Table 7.

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technology environment was most stable among firms in cluster 5, i.e. among firms that pursued to grow via increases in export volume. The competitive environment turbulence was highest among firms that emphasized both export volume and profitability in cluster 2, and lowest among firms that focused on export profitability (cluster 1). However, no significant differences were detected across customer environment turbulence. Thus, P1 is only partially supported. In the final stage of the analyses, we studied the relationships between internal factors to firm, i.e. strategic orientations and firms’ international growth patterns. As Table 8 reveals, strategic orientations differed across clusters, i.e. firms striving for different growth patterns utilized different strategies (which is a result that supports both P2 and P3). Significant differences can be detected in all other variables except proactiveness. Firms emphasizing export profitability appear to be least entrepreneurially oriented (no risks taken). Cluster 2 firms were the most proactive, and additionally they seem to be good at generating and disseminating export intelligence and in responsiveness. Firms in cluster 3 were aggressive in competition and what it comes to export market-oriented behaviors they generated most export market information and appeared to be very active in responding to the collected information. Market entry focused firms in cluster 4 scored relatively low in EO and their levels of export market intelligence generation and dissemination were the lowest among the studied companies. Firms emphasizing the export volume as their vehicle for international growth were the bold risk takers, but did not perform well in responding the market intelligence. This type of behavior may relate to the fact that firms may have to compete with the price and the focal customer segment may be large. In the following chapter, the demographics and external and internal factors of each cluster are summarized (see also Table 9). It appears that especially firms in cluster 3 and cluster 4 distinguished from others based on their past experiences in international markets, as firms in cluster 3 had significantly longer experience and as their scope of international operations was very wide, whereas cluster 4 firms were at the very beginning of their internationalization. Additionally, our results indicate that high levels of EO and MO relate to higher levels of international activities, and that firms with limited international experience do not behave entrepreneurially or in market-oriented way. Interestingly, the rest three clusters (cluster 1, cluster 2, and cluster 4) did not differ significantly based on their past international behavior. Thus, a detailed examination of their external and internal factors is needed.

Proactiveness Risk taking Competitive aggressiveness Intelligence generation Intelligence dissemination Intelligence responsiveness

Table 8.

5.802 3.431 4.547

4.602

4.945

4.979

116

115

117

Mean

116 116 117

N

1.077

1.254

1.241

1.617 1.622 1.213

Standard deviation


229

228

232

229 228 231

N

5.215

5.246

5.006

6.221 3.946 5.036

Mean

.890

.995

1.127

1.436 1.673 1.070

Standard deviation


184

185

185

186 185 185

N

5.307

5.223

5.197

6.143 4.189 5.199

Mean

.772

.896

.963

1.371 1.766 .986

Standard deviation


90

88

89

89 89 89

N

5.022

4.812

4.445

5.835 4.082 4.730

Mean

1.027

1.184

1.217

1.678 1.968 1.079

Standard deviation


146

146

145

145 144 146

N

4.887

5.097

4.779

6.044 4.208 4.875

Mean

.964

1.003

1.032

1.544 1.884 1.054

Standard deviation


5.732

4.055

10.205

2.170 4.141 8.093

F

.000

.003

.000

.071 .003 .000

Significance

ANOVA

Linking International Entrepreneurial Orientation and Export Market Orientation with International Growth Orientation Patterns.

High in responsiveness

Low

Entrepreneurial orientation

Most proactive

High

High Moderate High competitive environment turbulence

Moderate Low Relatively stable

Market orientation

Moderate


Low


High in intelligence generation and responsiveness Most entrepreneurially oriented. Very aggressive in competition

Very high High High technology environment and regulatory environment turbulence

High


Relatively low

Low High High levels of competitor environment turbulence and stable customer environment Low

Very low


Bold risk taking

Very low in responsiveness

Moderate Moderate High customer environment turbulence

High


Summary of the External and Internal Factors across International Growth Orientation Clusters.

International experience Export dependency Growth (%) Environment

Table 9.



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Cluster 1: Export Profitability Focused Firms These firms considered export profits as the single most important element of the export growth strategy. This is well reflected in their growth rates, which were the most modest (9.4%) of the studied firms. Additionally, the external environment of these firms appeared to be quite stable. There seems not to be that much competitive pressure and firms may be able to utilize skimming as their pricing strategy. And furthermore, as their international EO was lowest, it appears that for these firms internationalization may play a lesser role in their corporate strategy. Cluster 2: Firms Emphasizing Profitability and Volume Firms in cluster 2 put a strong emphasis on export profitability, but compared to firms in cluster 1, these firms seek also increase in export volume. Their international experience was on the average level (26 years exporting, and operation in 21 foreign markets). Also their growth rate was moderate (12.8%). These firms operate in export markets that can be described as highly competitive. Thus, it appears that firms in cluster 2 challenge their competitors by following proactive export behavior and strategies. Additionally, they seem to be good at generating and disseminating export intelligence and in responding to foreign market intelligence. This positive linkage between MO and high environmental turbulence has been reported previously by Day and Wensley (1988), and Kohli and Jaworski (1990) who proposed that the relationship between MO and performance will be moderated by the competitive environment. Cluster 3: Firms with No Clear Growth Focus These firms seek simultaneously high export volume and profits, and want to enter new markets and have large market shares. What separates them from other firms in the sample is their stronger emphasis on increasing their export market shares. Examination of their international experience revealed that these firms have long experience in exporting and thus their scope of international activities is also wide, as they operated in almost 30 countries, and as 54% of their turnover was generated from foreign markets. Maybe due to the wide scope of export markets, they felt that their external environment is very turbulent – especially the technology environment. This is a logical consequence of operating in many distant markets with different technology standards. Furthermore, they were the most entrepreneurially oriented and market oriented. Their entrepreneurial

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behavior is mainly characterized by aggressive competitive strategies. Whereas their market-oriented behavior can be described with active export intelligence generation and responsiveness. To sum up, with the objective of gaining larger markets shares and high EO and MO, many firms in this cluster seem to be in such a phase in their internationalization that they are challenging a market leader in some of their chosen key markets.

Cluster 4: Market Entry Focused Firms Firms in cluster 4 consider new market entries as the most important dimension in their international growth. This growth orientation can easily be explained by the fact that these firms were most inexperienced in international business. Yet, these market entry focused firms experienced the highest growth (15.3%), which is inline with the notion of Weinzimmer et al. (1998) who pointed out that smaller firms tend to show higher growth rate figures than larger firms. Their external environment can be characterized with high competitor environment turbulence and low levels of customer environment turbulence, i.e. it is difficult for these firms to differentiate in their export markets characterized with relative stable customer needs. This indicates that these firms are operating in relatively stable markets, with established products and competitive structures. Market entry focused firms scored relatively low in EO and export MO. Probably, partly due to the environmental stability of their technology and customer environment, firms in this cluster would not benefit of developing high levels of entrepreneurial or MO. An interesting outcome here is that service firms seem to be mainly market entry focused, although service firms are represented in other clusters as well.

Cluster 5: Export Volume Focused Firms Firms in this cluster are seeking mainly export volume. They do not have any particular demographic features, but can be described as having quite high levels of international experience, and moderate international growth. Their technology environment is the most stable across the clusters, but their customers’ needs are changing rapidly. Under these conditions, these firms will take above average risks. But, surprisingly they seem to neglect responsiveness, which should be the key for firms under such conditions. It may be that these firms operate with a standardized products and markets – volume is more important than adapting to local customer needs.


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DISCUSSION AND CONCLUSIONS Delmar et al. (2003) have noted that the study of firm growth is heterogeneous in nature, and that more research is needed here, as the extant empirical research on organizational growth has, with a few exceptions, failed to recognize this heterogeneous nature of growth and growth orientation. Consequently, the objective of this study was to explore what kind of IGO patterns exist and how these patterns relate to a number of internal and external factors reflecting firms’ behavior and strategies. It is of importance to note that our focus is on exporting, which is one of the most common ways to internationalize; as most of the small firms start their international operations and international growth through exporting. We do not suggest though that all exporting firms would grow in a same way; in line with Bell et al. (2004) among others, we propose that exporters are a heterogeneous set of firms, and that their international growth strategies, orientations, and patterns differ. In this research context (i.e. Finnish exporting firms and their IGO) probably one of the most surprising results is that firms within cluster 3, which did not seek any specific type of growth and thus competed on ‘‘all fronts’’ instead, were most entrepreneurially and market oriented. In other words, firms in cluster 3 seek to grow in multiple ways in international markets. Their export intensity and scope of internationalization were also higher than among firms in other clusters. Although this chapter does not focus on actual export performance, it can be speculated that these firms already know better what it takes to compete successfully in international markets. International EO and management and personnel motives have been emphasized in many studies (see, e.g. Autio et al., 2000; Knight & Cavusgil, 2004) as key determinants for success. Adoption of export marketoriented behavior is also seen as one of the possible route for superior export performance (Cadogan, Paul, Salminen, Puumalainen, & Sundqvist, 2001). Market-oriented behavior may also be linked to the wider geographic scope: there is a need to generate and utilize market information of distant markets as well when the number of markets increases. The distance concept implies that the greater the difference in consumer behavior, language, cultural standards, or purchasing power, for example, the greater the distance between the markets (see, e.g. Sto¨ttinger & Schlegelmilch, 1998); a firm operating in distant markets needs market information to overcome the influence of psychic or geographical distance. Bell et al. (2004) have, for example, noted that environmental variables (such as domestic and international market conditions) seem to be particularly important in initial business development. The significant effects

118


that became apparent in our study were higher technological turbulence among the firms in cluster 4 (market entry focused firms), and high competitive environment turbulence among firms in cluster 2 (i.e. among firms that emphasized export volume and profitability). As the industry distribution (see Table 1) was quite equal across the clusters, this result cannot be explained by the industry structure factors, although some of the previous studies have proposed that there is meaningful inference in international growth across, for example, high technology versus traditional manufacturing firms. As mentioned earlier these firms were operating in multiple markets, and the large number of markets may create more turbulence for these firms or it may be that some of the focal markets are more turbulent than the markets the firms in other clusters were operating in. Regarding other differences among the clusters, it is worthwhile to note that firms in cluster 3 were younger and smaller than firms in other clusters. These firms were focusing on market entry. Naturally this relates to the fact that their export intensity was still rather low (approximately 32.2%). However, it can also be pointed out that, for example, Madsen (1989) found that it would actually be better for very small firms to spread their efforts over several markets, as they may not have the resources to follow a market concentration strategy successfully. Thus, our results support Madsen’s study. To conclude, the present study confirms the findings of general growth studies suggesting that growth is a multidimensional phenomenon, and expands our knowledge in export growth studies by introducing four IGO patterns. One explanation to the results of this study seems to be that firms adapt their growth objectives and orientations in a way that these match the challenges the firms are facing. For example, high scores in the strategic orientations such as EO and MO are responses to internal and external challenges and problems. MO, and especially good exporting/foreign market intelligence, was seen of importance for firms that emphasized profitability, for example. To be able to follow high-price strategy in a competitive environment there is often a need to create extra value for one’s customers. In such a situation close relationships should help: to be able to build close customer relationships understanding customers’ needs and tailoring one’s offerings to those needs is often a necessity. Here market-oriented behaviors should be helpful. In line with Jones and Coviello (2005) we also suggest that the type of entrepreneurial internationalization is linked to various aspects of firm behavior. One explanatory factor to the question, what type of strategic orientation is of importance, is clearly the internationalization phase or stage a firm is in and what are the key challenges of that phase. This type of ‘‘matching behavior’’ found in our sample seems rather logical to us and


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consequently, practicing managers were wise to analyze the environment a firm is operating and to adjust their strategies accordingly. Here, the managers could do well if they would be capable to develop and foster an organizational culture that would be able to support the chosen growth objectives and growth strategy in the most efficient manner. The challenge lies in many cases in the ability to recruit the right people and in the ability to make changes in the organization in the right time. In summary, we believe that the primary value of this study is the insight that future firm growth research would benefit by recognizing differences in firm IGO patterns. The good understanding of firms’ capabilities and resources are also of importance as they provide a stable basis for firms to develop orientations and strategies that engender superior export performance (Knight & Cavusgil, 2005; Teece, Pisano, & Shuen, 1997). Limitations and Further Research There are some limitations concerning our study. First, it is important to note that our analysis is based on cross-sectional data and we do not know the future paths of the firms or possible changes in the IGO. Second, the cause–effect relationships were not studied in detail. Thus, present study probably provides more questions than it offers answers. Further studies should focus on investigating the reasons why firms have different growth aspirations, i.e. study the causal relationships between IGO patterns and their antecedents, as well as consequences. One explanation for the detected differences is offered by the firm life cycle theory: firms at different growth phases may need to adapt their growth orientation patterns, and thus future studies should control for firms’ international growth phase. Here the focus could also be on critical incidents or phases of growth (see, e.g. Greiner, 1998) and subsequent changes in IGO. Additionally, in this chapter we have left out the performance consequences. However, in future studies the focus should be on examining the relationships between external and internal factors, growth and growth orientation, and performance.

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INTERNATIONALISATION AND TECHNOLOGICAL INNOVATION: EMPIRICAL EVIDENCE ON THEIR MUTUAL RELATIONSHIP Diana A. Filipescu, Alex Rialp and Josep Rialp Internationalisation and innovation of the firms have been considered two of the most important factors determining business success over the last decade (Buckler & Zien, 1996; Wind & Mahajan, 1997; Zahra & George, 2002; Vila & Kuster, 2007). In fact, the scientific literature refers to ‘‘technoglobalism’’ for analysing the relationship between technological innovations and internationalisation of firms (Archibugi & Michie, 1995). Internationalisation is the process in which firms gradually increase their international involvement (Johanson & Vahlne, 1977) and also the process of adapting firms’ operations to international environments (Prashantham, 2005), this being an important issue for firms that often results in vital growth, useful learning outcomes and enhanced financial performance. Furthermore, it is also described as an innovation of the firm that often entails decision-making under conditions of uncertainty, where knowledge is vital. Innovation, as it is defined by Acs, Morck, and Yeung (2001), is the effort to create purposeful, focused change in a firm’s economic or social potential. According to Knight and Cavusgil (2004), the relevance of the internationalisation process in the last several years is likely powered by New Challenges to International Marketing Advances in International Marketing, Volume 20, 125–154 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020008

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two key trends that have reduced the transactions costs of foreign market expansion: globalisation of markets and technological advances. However, in the opinion of Jones and Coviello (2005), there are three questions that stand out concerning the internationalisation of the firm: the internationalmarket selection (where), the entry mode choice (how) and the pace of internationalisation (when). Recently, researchers have focused on the time aspect and some results indicate that time may not be the only explanation as to why firms start to internationalise (Rialp, Rialp, & Knight, 2005a). Today, many firms internationalise soon after their establishment, which has led to the emergence of the concept of born-global firms. International markets are also characterised by a greater competitive pressure than national markets (Lo´pez & Garcı´ a, 2005). Under these conditions, having competitive advantages allows firms to compete in a more active way in the markets, even more when they interact in different foreign markets (Eusebio & Rialp, 2002). In this context, both knowledge and experience obtained during firms’ international activities represent important competitive advantages, facilitating the internationalisation process (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975). However, technology represents another important factor in increasing the national and international competitiveness of firms (Lachenmaier & Wo¨ssmann, 2006). Patterson, Grimm, and Corsi (2003) suggest as well that consideration of new technologies and a willingness to adopt them are the starting point and definitely contribute to firm success. Nevertheless, as stressed by Parasuraman (2000) and later by Richey, Daugherty, and Roath (2007), as being the firm’s technological readiness, this implies not only to possess technology but also to be ready to use it. Being an innovative firm allows it, on one hand, to obtain products with superior characteristics than the ones offered by the competitors (product innovations) and, on the other hand, to reduce costs of production and, consequently, prices (process innovation). Furthermore, innovation helps explain firm-level heterogeneity in export behaviour of firms (Basile, 2001). In this way, the innovative firms obtain some competitive advantages that give them the possibility to compete in an active way in different markets. As stated by Hoffman, Parejo, Bessant, and Perren (1998), the firms’ innovative capability is a key driver for sustainable competitive advantage in today’s rapidly changing markets. Some authors (Grossman & Helpman, 1991; Young, 1991) state that an important cause of innovative activities may be represented by exports themselves, as predicted by global economy models of endogenous innovation and growth. Other possible sources of information for technological

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innovation are internal sources, market sources, research sources and generally available sources of information (Amara & Landry, 2005). In summary, technology is one of the most important factors in increasing the national and international competitiveness of firms, thus technological innovations represent competitive advantages that give firms the possibility to compete in an active way in different markets. However, the international activity that firms develop can embody more innovativeness, considering that firms’ presence in new markets offers new perspectives and, therefore, new knowledge acquisition (Prashantham, 2005; Jean, Sinkovics, & Kim, 2008). Hence, we argue that there seem to be a mutual relationship between technological innovation and internationalisation, where one process is feeding the other one and vice versa. Although this connection seems obvious, we believe it has not been fully addressed by academics and this constitutes the main purpose of our research: to determine the existence of a reciprocal, interdependent relationship between technological innovation and internationalisation of the firm and, if it exists, to establish what it is like and which factors impact on it. More precisely, by means of the casestudy approach, we will analyse some export firms in terms of patterns of technological innovation and internationalisation. We believe this investigation is useful both to academics as well as to managers. The former can observe how the intuitive relationship between both processes is produced and the latter can consider the study as a guide in order to improve their international activities by innovating and developing their technological, innovative behaviour through international activities. To achieve the above-mentioned objective, this chapter is structured as follows. The next two sections provide a short overview of the research on firm internationalisation and innovation and provide theoretical frameworks that could be considered for explaining the relationship among both processes. Then, the research methodology is described, having as a base a systematic application of the case-study approach. Each case is individually described and a cross-analysis is presented. Finally, several conclusions and future lines of investigation are outlined.

PREVIOUS RESEARCH ON FIRM INTERNATIONALISATION AND INNOVATION Broadly speaking, internationalisation means the entry to new-country markets. It may, therefore, be described as a process of innovation (Bilkey & Tesar, 1977;

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Andersen, 1993; Casson, 2000). Faced with increasing international competition, innovation has become a central focus in firms’ long-term strategies. Firms competing in global markets face the challenges and opportunities of change in markets and technologies. One important aspect within innovation management is the optimal integration of external knowledge, since innovation increasingly is derived from a network of companies interacting in a variety of ways (Veugelers & Cassiman, 1999). According to Lo´pez and Garcı´ a (2005), technological resources can generate a two-fold competitive advantage for a firm. On one hand, they confer competitive advantages in costs, via the development of new and more efficient productive processes. On the other hand, they generate competitive advantages based on differentiation, by means of product innovations, allowing firms to tailor products according to customer requirements, or develop products of a higher quality. Regarding this last point, Styles and Ambler (1994) point out that product strength – in terms of quality and uniqueness – is one of the key elements in export success. The role of innovation in export behaviour has already been analysed in the literature. Wakelin (1998), considering the UK case, finds that the number of innovations used at the sector level is positively and significantly related to the probability of exporting. Moreover, it is observed that firms with a large number of innovations are more likely to export, indicating heterogeneity even within the group of innovating firms. Following the same research line, Basile (2001) analyses and compares the relation between innovation capabilities and export behaviour of Italian firms in different exchange-rate regimes. The results of his study show that innovation is a very important competitive factor and helps explain firm heterogeneity in export behaviour among Italian firms. The product innovation strategies have a positive effect on the export intensity only after currency, before Euro, devaluation. The author also demonstrated that the relation between innovation strategies and export behaviour of southern Italian firms is weaker than that found for the national average. However, Castellani and Zanfei (2007) highlight how intra-industry heterogeneity in Italy is associated with different internationalisation modes. They show that firms with high engagement in foreign activities also exhibit better economic and innovative performances. Firms with the highest international involvement, namely those with manufacturing activities abroad, are characterised by both higher productivity and higher R&D efforts and innovative performances. Lachenmaier and Wo¨ssmann (2006) have the possibility to directly test whether innovation causes exports, by considering a sample of German


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firms. The authors mention that a causal relationship between innovation and export is expected, focusing on the product-cycle features and the endogenous-growth models. However, their results can only show one part of the relationship, the one in which the fact stands out of being innovative causes firms to have substantially larger export shares than non-innovative firms in the same sector. So, considering this evidence, it is obvious that more extensive research is needed in order to accomplish the objective of analysing the causal relationship between these two factors. According to Vila and Kuster (2007), firms start to think about innovation because they want to offer different things in different markets. The authors focus their attention on the assessment of whether more innovative and less innovative firms correspond to high internationalised and less internationalised firms. With this purpose, different degrees of internationalisation and kinds of innovation are described, defending the idea that greater degrees of internationalisation lead to more innovation. Although only partial support for the argument establishing that internationalisation is associated with some kinds of innovation is provided, the empirical results appear to confirm that the extent of a firm’s internationalisation influences innovation in terms of strategy and processes. In addition, Vila and Kuster (2007) state that many firms can be international or innovative, but only a small group is highly internationalised and has superior innovations, specifically those that invest abroad and use more resources to innovate in four dimensions (products, strategies, processes and markets). This statement is consistent with previous studies (Zou & Ozsomer, 1999) that also proposed that companies with high levels of innovation reflected a high degree of dependence on export markets and vice versa.1 Although the literature has presented different types of classification for the innovation process (Rothwell, 1994; Henard & Szymanski, 2001; De Propris, 2002) we shall focus on the one stated by De Propris (2002), according to whom innovation is classified into four types: product, process, incremental and radical innovation. Product innovation corresponds to the introduction into the market of a new or improved product, whereas process innovation relates to the sequences and nature of the production process. Process innovation is often more difficult to detect, but it is very important especially for buyer–supplier transactions. Freeman and Perez (1988) define radical innovations as discontinuous events, which are the result of a deliberate research and development activity. Incremental innovations refer to improvements due to use or experience; it can often take the form of smaller enhancements around major, radical innovations. Both radical and

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incremental innovations can be either in the product or process. This classification of innovation coincides with the one that the Oslo Manual (OECD, 1997) states as being technological innovation and is defined as an iterative process initiated by the generation of new products and processes or of significant technological improvements in current products and processes. In summary, the concept of innovation is another cornerstone in modern international marketing strategy because in today’s competitive market environment, many senior managers have become increasingly concerned with the need to be first, fast and on-time (Wong, 2002).

THEORETICAL FRAMEWORKS AND PRELIMINARY CONCEPTUAL MODEL Academics explaining firms’ internationalisation and innovation of firms have considered and used various theories. Among these, we can mention the gradual internationalisation theory of the firm (Andersen, 1993; Molero, 1998; Rialp, Rialp, Urbano, & Vaillant, 2005b), the resource-based view (Teece, Pisano, & Shuen, 1997; Knight & Cavusgil, 2004; Lo´pez & Garcı´ a, 2005; Galende, 2006; Hewitt-Dundas, 2006), transaction cost theory (Anderson & Gatignon, 1986; Galende, 2006) and the organisational capabilities dynamic perspective (Kogut & Zander, 1993; Day, 1994; Madhok, 1997; Knight & Cavusgil, 2004). Considering the purpose of this study, the gradual internationalisation theory of the firm, jointly with the resource-based view (referred to as RBV from now on), seem to be appropriate theoretical frameworks. The gradual internationalisation theory helps to explain when and how a firm begins to develop international activities, and RBV helps to explain how, in the context of an innovative culture, knowledge and the resultant organisational capabilities are developed and leveraged by enterprising firms. The gradual internationalisation theory of the firm, also known as the Uppsala Model (Johanson & Vahlne, 1977, 1990), develops the firms’ advantages, emphasising the knowledge of international markets, which can be considered as an advantage against competitors and the level of commitment with them from a perspective of greater personalisation of the managers of the firm. Hence, it posits that, as firms learn more about a certain market, they become more committed to it by investing more resources into that market. Johanson and Wiedersheim-Paul’s (1975) study


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identifies the lack of knowledge and/or resources, and the resulting uncertainty to the firm, as the principle obstacle to internationalisation. With time, the firm gradually progresses through a series of learning and commitment stages, also deemed as the ‘‘establishment chain’’, in the following order: beginning to export to a country via an agent, establishing a subsidiary, beginning production in the host country. Therefore, firms improve their foreign market knowledge through initial expansion characterised by low risk and indirect exporting approaches targeting ‘‘psychologically close’’ markets. Johanson and Vahlne (1977, p. 24) define the psychological distance as ‘‘the sum of factors preventing the flow of information to and from the market’’. Although this concept of psychic distance is being recently questioned due mostly to the new possibilities opened by the Internet and other similar on-line internationalisation mechanisms (Yamin & Sinkovics, 2006), many firms have gradually extended their foreign activities to markets of an increasingly greater psychological distance based upon the accumulation of experimental knowledge abroad over time. RBV has its origins in Penrose’s (1959) seminal work and suggests that the best way of understanding a firm is to consider it as a collection of productive resources, imperfectly imitable and specific to each firm, which allows it to compete successfully against other firms. The capacity of firms to generate sustainable competitive advantages depends on their particular set of resources. Barney (1991) mentions that resources that generate competitive advantages must fulfil four conditions: they must be valuable, scarce, inimitable and non-substitutable. Consequently, RBV helps to explain how, in the context of an innovative culture, knowledge and the resultant organisational capabilities are developed and leveraged by enterprising firms (Knight & Cavusgil, 2004). RBV also lends great importance to the firm’s technological capability. It points out that the innovative capability does not come from skill in exploiting external technologies, which are easily accessible for competitors and therefore insufficient for sustaining a competitive advantage (Barney, 1991). It rather comes from the generation of internal innovation, which implies the possession of heterogeneous and specific technological resources, and the capability to generate other new resources and to build basic technological capabilities. Considering the above-mentioned frameworks, we propose a model (Fig. 1) which is based on the assumption that internationalisation and technological innovation exist in a mutual, interdependent relation. This model is in line with the one of Lo´pez and Garcı´ a (2005), who suggest

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Firm’s technology

Knowledge acquisition

Fig. 1.

Innovation

Competitive advantage

Internationalisation

Preliminary Model of the Relation between Internationalisation and Innovation. Source: Self-Elaborated.

a conceptual model which also considers technological resources and export behaviour with a focus on their relationship, and reinforcing the importance of intangible resources as sources of sustainable competitive advantages. In addition, Lo´pez and Garcı´ a (2005) state that firms possessing these kinds of resources will have a superior competitive potential and hence a superior capacity to gain access to international markets. This idea is reinforced by Itami (1987) and Eusebio and Rialp (2002), who consider technological resources and export behaviour as the key resources for business success. Regarding the knowledge acquired by firms during their international activity and its role in developing and/or improving their technological resources, the proposal of Prashantham (2005), according to whom there would seem to be a mutually reinforcing effect between knowledge and organisational capabilities, is considered. Explicitly, on one hand, organisational capabilities enable firms to create and leverage knowledge (Eisenhardt & Martin, 2000), and, on the other hand, the creation of new knowledge by firms leads to the development of organisational capabilities (Nelson & Winter, 1982). Moreover, knowledge is the most important resource, and the integration of individuals’ specialised knowledge is the essence of organisational capabilities (Nelson & Winter, 1982). We will divide knowledge into two: product and market knowledge (Grant, 1996; Li & Calantone, 1998). The latter may refer to industry knowledge, competitor knowledge and macro-environmental knowledge. Bearing in mind Amara and Landry’s (2005) classification of information sources for technological innovation, we may also argue that knowledge acquirement represents an information source which has a certain degree of influence upon the technological innovation of firms. In conclusion, the proposed model is based on the assumption that internationalisation and technological innovation exist in an interdependent


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relation. This relation starts with the idea that the technology possessed by the firm helps to innovate in order to create the needed competitive advantages for competing and succeeding in an international market. Once the firm develops activities in international markets, it gains knowledge about the existing environment and competition, and this knowledge will be very helpful in maintaining competitive advantages and creating resource and market opportunities. Improving or creating competitive advantages implies more innovation. Consequently, the relation between innovation and internationalisation may be considered as a mutual one, and this is the core of our investigation. In reinforcing the idea of a mutual phenomenon, Edquist and McKelvey (2000) and Lundvall (1992) argue that the innovation process should rather be considered as a circular and complex system embracing interactive elements. In addition, Lewin and Massini (2003) contend that firms with superior innovation and knowledge-creation processes are more sophisticated, and have more highly developed and elaborated knowledge-creation routines and learning regimes.

METHODOLOGY The empirical part of this research is based upon a systematic application of the multiple-case study approach to an export context in which five Spanish exporters were first judgementally chosen and then individually examined. Consistent with several qualitative methodologists (Eisenhardt, 1989; Yin, 1994; Maxwell, 2005), multiple-case-based investigations serve as a basis for either empirically testing previous theories or building new theoretical explanations of the researched phenomenon. The sample selection was made taking into account two important facts: firms should be widely recognised for their intense international activity and they should also be highly innovative. Table 1 shows which the selected firms were and some of their characteristics. Concerning the percentage of the export sales of the total sales, it can be observed that in only one case is this number extremely high (Comexi), representing almost the entire revenue of the firm. The other four companies indeed show a good level of export activity, this being between 15% and 30%. The main source of information acquisition in case studies was the semistructured interviews with general managers, export/commercial department managers and/or R&D managers of the selected firms. The contact was

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Table 1.

Description of the Case Studies.

Europastry

Year of foundation 1963 Officially awarded for n.a. its international activity Industry products Baking industry: frozen dough

Indo

Pinturas Lobo/ Euroquı´ mica

Comexi

Tecnitoys/ Scalextric

1937 n.a.

1972 2003

1954 1998

1990 n.a.

Chemical Optical industry: industry: technical lenses, paintings eyewear, equipment, decorations 254,951,240 128,891,000 3,641,176

Operating revenue (h) Number of employees 2,150 Sales (h) 246,786,342 Foreign sales (%) 15

1,686 127,133,000 30

17 3,634,591 15

Converting Toy industry: sector: circuit, cars flexo-press

57,551,280

22,830,759

241 56,233,127 90

44 21,439,520 25

Note: n.a., not applicable. Source: Self-elaborated.

carried out by means of a telephone call, the potential interviewees being informed about characteristics of the investigation and being asked for collaboration. Later on, detailed information about the investigation and the protocol of the interview was sent. The interviews took 45 min, on average. They were recorded with the consent of the interviewees, and afterwards full write-ups were constructed on each company in the form of a detailed case study, focusing on the specific characteristics of each case situation. As a requirement to achieve construct validity (Rialp et al., 2005b), a combined use of multiple secondary sources of information (such as information from the company website, internal documentation provided by the company, product and firm brochures, etc.) was made. Also, reliability requirements were assured by the use of the same protocol for each specific company and by the development of a complete database in the data collection phase. Once the transcription of the interviews was made, they were sent to the interviewees for the approval of the received information. All data sources, applied for each company, were used in order to edit one report with all of the information of the firm. That purpose was to obtain a clearer analysis and to allow the comparison of the different cases (Eisenhardt, 1989). Furthermore, the triangulation process guarantees


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internal validity of the investigation (Yin, 1994). According to Rialp (1998), the quality of the design of the study should be guaranteed by introducing a series of methods and tests of validity and reliability along different methodological phases.

ANALYSIS OF THE CASES The analysis of the case information is divided into two different parts: the individual analysis of the companies and the crossed analysis among the companies. The analysis of each company is carried out by studying the information that each company provided us following the same order of the items that were taken into consideration in the interview, therefore according to the protocol of the interviews. The cross-case analysis allows us to see similarities or differences among the results of all of the interviewed companies.

Individual Analysis Europastry Europastry is a family business which has developed its activity in the baking industry since the 1950s. Nowadays, the company aims to transform the baking industry, providing agile solutions to satisfy the requirements of professionals and customers through the use of new refrigeration technologies, being the Spanish market leader in frozen dough. Frozen dough offers an optimum, non-perishable product, achieving high quality at the best price with maximum simplicity of use. Europastry can be considered an innovative company due to the fact that it has introduced a variety of new and very competitive products, having its own R&D department. Developing internal R&D allows the firm to be more flexible and to have greater barriers to imitation. Innovation within the firm is a product one, both incremental and radical. Regarding its internationalisation, the company started this process in 1998, creating an export department. The motivation to become international resides in the necessity of surviving in a hyper-competitive global world. The first export countries were Germany, France and Portugal. Geographic as well as cultural factors were important for market selection. It has used different types of entry modes depending on the maturity grade of markets: agent (Germany), branch (France) and joint venture (Portugal).

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Considering the effect that an entry mode in a foreign market could have on the innovation process, the interviewee mentions that when buying an existent firm the investments in R&D are discouraged. In this case, the buyer needs to absorb the innovation of the acquired firm and integrate it within its own innovation system. As for organic growth toward international markets, this compels greater innovation in order to enter in specific markets where competition exists and, in this way, the innovation is longer and more effective. The firm possesses great knowledge of foreign markets and must be able to adapt its products immediately to every single market, since product adaptability is vital for success in these markets. However, being international has helped the company to innovate more and more, becoming very competitive. Thus, the specialisation of the firm is a very important factor in order to maintain its competitiveness. Indo Indo is an optical firm founded in 1937. In 1939, it began manufacturing its own products and implementing its policy of technological and scientific development. The first industrial facilities for production of frames and sunglasses were built, and the manufacture of the first fused bifocal lenses began. It also took the first steps in the fusion of optical glass. Thus, we are dealing with an innovative firm from its inception. During the 1960s, the firm experienced a growth period in all areas of ophthalmic optics and technological development. Afterwards, the company began a process of decentralising its productive structure as the first step toward becoming a multinational company. For each of the three business units (lenses, eyeglasses and equipment-goods), a specific exporting department operates which has the role to reach the markets where neither the subsidiaries nor the distributors do. The innovation within the firm is both incremental and radical in product and process. On one hand, the company owns two special materials of lenses and puts an emphasis on the design geometry of eyeglasses (product innovation). On the other hand, it differentiates itself from the others by having an anti-reflex treatment whose properties are different from others (process innovation). The main reason for the company to start exporting was the idea of maintaining its stability and growth. Foreign markets are selected depending on their economic potential, more than on geographical or cultural factors (Germany, France and Morocco were the first countries where the firm exported). As the company has put a great emphasis on


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product differentiation it chooses entry modes which make it possible. For instance, it has several branches (Germany, France, USA, Chile and Morocco), foreign distributors in many countries and five factories (two in Spain, and one each in Thailand, China and Morocco). The firm has learnt from its international activity that the capacity to adapt its product to each market seems to be a valuable resource. The firm obtained a wider vision, a greater competitiveness, and a greater power of innovation, having a propensity for changes and being more agile, by becoming increasingly international. Taking into account the firm’s opinion, the key success factors are the continuous innovation that is realised, the proximity to the client, and also a great product experience since the firm has been working in the optical industry for a long time and has been a leader in the local market.

Pinturas Lobo/Euroquı´mica Pinturas Lobo is a chemical company that began its activity in 1972. It develops the chemical products according to the requirements of each customer, in order to respond to the need for aesthetics and for the most demanding performance (e.g. mechanical and chemical resistance, electrical resistance and conductivity, resistance to UV, etc.). It was purchased in 1998 by Euroquı´ mica, which has kept its ideology since the employees have continued to be the shareholders of the firm. As the products of the two firms were complementary (different types of industrial paints: paints for plastics, for glass, etc.), Euroquı´ mica decided to commercialise the whole range of products in an extensive way since new markets were opened. In terms of market share, although the company is a small one, it has always been a leader for two main reasons: its own R&D activities and self-financing capacity (it has never depended either technologically or financially on anyone else). An R&D department has existed within the company since its foundation, allowing for both incremental and radical product innovations. For instance, the company investigates in order to introduce a completely new product (radical innovation), but it also takes into account the clients’ opinions for improving the product (incremental innovation). The company began to export immediately after being purchased, that is, in 1998. The motivation for becoming international came with the idea of being competitive in the domestic market both economically and qualitatively. There were also some outside stimuli which showed their interest in the products. Moreover, being an innovative firm has helped in

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achieving new markets and become an international one. It mainly works with agents and foreign distributors. The first country where the company exported to was Portugal, but only because the Portuguese contact spoke Spanish. So the company had no intention to become international until its purchase. After that moment, an international department has begun to operate being endowed with different specialised persons. As the product is a very specific one, it is very difficult to find a market which needs it or which does not already have a supplier. Therefore, the selection of markets is made through the creation of some concentric circles, but also considering geographical distance. Comexi Comexi is a family business with leader spirit in the converting sector and specialised in printing and converting flexible packaging materials. Since its foundation in 1954, it has been characterised by the development of innovative and highly reliable technologies, adapted to client needs and market demands. Its expansion has never stopped since its foundation, becoming a leader at the international level and having only one serious competitor, from Germany. The company has always followed a policy of innovation, growth and leadership in the world market. Innovation has been achieved with creativity and flexibility. Being a leader implies continuous innovation, with the R&D team of the company having a very important role in this effort. It is stressed: ‘‘We listen to everybody in the company; the future depends on the ability to get ahead of it; our team has been the developer of many of the latest milestones of recent years in the sector’’. Actually, the company has a person who is responsible for the innovation that coordinates all innovation processes within the firm. Recently, the firm has carried out innovation not only in the internal processes, but also in products. This type of innovation is an incremental one due to the fact that a process is improved, not a new technology. But it also realised radical innovation like in 1996, when it produced a total revolution in the whole area of engines by introducing another way of doing work into the process. Basically, innovation is developed depending on the level of knowledge that the firm has acquired during its international activities. Put differently, once being present in many markets with an aggressive strategy, it was essential to improve the product by adding more innovative components. Thinking of having a stable activity and regular sales, it began to export in 1960s and rapidly achieved a level of 50% of its production for international


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markets. The first export countries were France and some countries of South America. As the founder had no skills for foreign languages, the selection of the markets was made taking into consideration the similarity of the languages and geographical proximity. Considering the entry modes, the company usually appeals to agents and branches (USA, Italy and Mexico). There is one case – Brazil – where it opened a subsidiary because of the high customs fees which made export there impossible).

Tecnitoys/Scalextric This company began its activity in the toy industry in 1990 and became international in 1992 once it purchased a well-known international brand from the same activity, Scalextric. Its main products are circuits, cars, tracks and accessories. The company has had an R&D department since the beginning of its activity. Two important characteristics of this department are that people who work there were hired in 1990s (they have great experience inside the firm) and are also very fond of the product. Every year, the firm introduces around 50 new and competitive products into the markets, so it is considered an innovative firm. Actually, it fulfils a quality rigor, meaning that not only are its products high-quality, but they are also environment friendly. Innovation within the firm is both in product and process, and both incremental and radical. The basis of these innovations stands out in the knowledge acquired, which can be product and market knowledge. For example, the digital version of the main product represents an incremental innovation since it is an improvement of the product. The remote control units that the firm has just introduced into the market represent a radical innovation. With the phenomenon of globalisation, exporting became important for the company in order to maintain stability and to grow. As it is a brand that can exist or not in other markets, the entry mode strategy is different: in the case that the brand already exists, the firm changes the name and competes directly through high quality; in the case that the brand does not exist but is it known, the firm competes through the brand; in the case that neither the brand exists nor it is known, the firm makes publicity for itself by means of public contests. Therefore, it has been able to select the entry modes in every foreign market, although the firm enters especially through agents and distributors.

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The selection of the international markets depends on both geographic and cultural distance, and the knowledge acquired has helped the firm to gain advantages in new markets. Since the company only offers a new and high-quality product in the markets where it enters, it is important to have a high innovation level. Therefore, innovation helps in achieving new markets. However, the firm has been able to internalise information which has helped it to keep innovating, thus the fact of being an international firm has helped it to continue innovating, bringing different and competitive products into the markets. In Table 2, information related to innovation and internationalisation of the five companies taken under consideration in this investigation is summarised.

Cross-Case Analysis and Discussion The five companies under analysis do not show a marked contrast regarding innovation and international phenomena. On the contrary, in spite of the fact that their activity is developed in completely different industries (baking, optical, toy industry, converting sector and chemical industry), they share almost the same opinion about the importance of innovation for becoming international and also the importance of being international for continuing the innovation process. Three of the five companies under consideration in this investigation were created around the middle of the past century and were leaders in the local market, two of them also being extremely innovative (Europastry and Indo); the other two firms are recent, one of them having the innovation process highly developed (Comexi), and the second beginning to innovate immediately after being present in other foreign markets. This last case is the one of Tecnitoys that, due to the fact that it became international almost immediately after its foundation by buying an existing international brand (Scalextric), it is difficult to affirm that the innovation was influenced by the internationalisation process of the firm. Nevertheless, it was emphasised by the interviewee that if the initial firm had been at least equally innovative, it surely would have helped more in beginning its international activities. As the international activities of the innovative firms from the chemical, optical and baking industries have begun after many years since their foundation, it was emphasised that being an innovative firm has helped in achieving other markets.

Motivation to begin exporting Export

Innovation

Export/innovation


Comexi

Tecnitoys/Scalextric

It began to export It began to export in 1992, when it also in 1960 and afterwards began began to innovate to innovate It has an R&D It has had an R&D department for department since the every firm inside beginning of its the group and a activity. Innovation person responsible allowed the firm to for innovation. It select the entry has the possibility modes in different to select different markets. It realises entry modes. It product and process realises process, innovation, product, incremental and incremental and radical ones radical innovation Necessity to survive Necessity to survive Desire to be Necessity to have a Important for the in a global world in a global world competitive in the stable activity and stability of the firm domestic market regular sales Export department Three export Export department Export department Export department since its beginning. departments. The since its beginning. since its beginning. since its beginning. Both the geographic markets are selected Geographic distance Both cultural and Both geographic and and the cultural depending on their is important in order geographic cultural distances are factors have been economic potential. to select new proximity are taken into account. important. It uses Emphasis on product markets. Agents and important. The The modes of entry different modes of differentiation. The foreign distributors entry modes used used are through

Indo

Case-Studies Results.

It began to export in It began to export in It began to export 1998. It has always 1998. It has always around 1950. It has been innovative been an innovative always been innovative firm It has an R&D It has an R&D&I It has an R&D department for every department. department which product family. Innovation allowed allows it to achieve Innovation allowed the firm to select the new markets and the firm to select the entry modes in different entry entry modes in different markets. modes. The different markets. The innovation innovation realised The innovation within the firm is is a product one, realised is a product, both in product and both radical and incremental and in process, both incremental radical one incremental and radical

Europastry

Table 2.

Internationalisation and Technological Innovation 141

Commitment/type of knowledge

Knowledge/ adaptation

Indo


Comexi

Tecnitoys/Scalextric

entry modes used agents and are the entry modes are agents, are: foreign used branches and own distributors distributors, subsidiary branches and factories The knowledge The firm has great The firm possesses Being for so many The knowledge acquired in foreign knowledge of the vast knowledge years on the acquired in other markets enables it to markets and it adapts about the markets. international markets has helped adapt its products its product The product cannot market, it has the firm to gain immediately to every be adapted too much gained experience advantages in new market because of its which helps in the ones specificity creation of new products Less and more Less and more Less and more Less and more Less and more commitment. commitment. commitment. commitment. commitment. Product knowledge Product knowledge Product knowledge Product Product knowledge and market/product and market/product and market/product knowledge and and market/product knowledge knowledge knowledge market/product knowledge knowledge

entry (agent, branch, joint venture)

Europastry


142 DIANA A. FILIPESCU ET AL.

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All five companies have well-developed R&D departments which have appeared since the beginning of their innovation process. This is an important issue since different firm-level studies have used R&D expenditures as a proxy to innovation (Kumar & Siddharthan, 1994). Employees in these departments are well-prepared and have superior qualifications and experience in the firm; thus, the rate of personnel rotation is quite low. Being innovative has had a strong influence in the five firms’ international activities, especially in the selection of entry modes. Step-by-step, considering their international activities, the firms has become more innovative, and this fact determines the commitment that they are willing to have towards foreign markets. This fact is consistent with Eusebio and Rialp (2002), according to whom the realisation of innovations, both product and process ones, is positively related to export behaviour. As can be seen in Table 3, all of the firms innovate more in products than in processes, and the type is incremental more than radical. So it can be said that firms prefer to develop their product more step-by-step, this being in conformity with the aspects revealed by the interviewees who emphasised the customers’ reactions and opinions about every new product in order to improve it. Consequently, firms from optical and toy industries and also the one from the converting sector develop a complete innovation process, meaning both radical and incremental, focused on both product and process. According to Hewitt-Dundas (2006), the development of radical new products is dominated by large, and typically, multinational enterprises. Our results coincide with this affirmation, since all three companies from this study

Table 3.

Types of Innovation within the Companies.

Company

Innovation Product and Radical Innovation

Product and Incremental Innovation

Process and Radical Innovation

Process and Incremental Innovation

X X X X X

X X X X X

n.a. X n.a. X X

n.a. X n.a. X X

Europastry Indo Pinturas Lobo Comexi Tecnitoys Note: n.a., not applicable. Source: Self-elaborated.

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which realise radical innovation are multinationals. In the other cases, the innovation process is a more specific one, with a preferred focus on product innovation. In four cases, the motivation to begin international activities is quite the same: in a global world it is compulsory to be global and have a stable activity in order to survive. Only Pinturas Lobo has begun to export, thinking about its competitiveness in the domestic market. Regarding the selection of markets, this decision is predominant due to cultural and geographic distance (four cases of five); as for the other case, Indo, the economic potential of the market is more important, although it sometimes considers geographic distance as well. The entry modes most used by all five companies are the ones by agents. Two of the five companies (Indo and Comexi) also use branches and own subsidiary in order to enter a market. Besides this, in the case of Comexi, the purchase of some other companies or the opening of a plant in countries where exporting is difficult is also used. Tecnitoys also uses foreign distributors for its products, depending on the markets. As for Pinturas Lobo, it is common to select markets through the creation of some concentric circles. With regard to the relationship between the commitment that the firms have to the new markets and the knowledge they acquire, Europastry and Pinturas Lobo choose modes of entry which imply basically less commitment. In the other cases, it is observed that firms enter the new markets by modes with less commitment and, when time goes by and/or the markets become different, they choose to act with more commitment to the markets. In this way, they obtain both product knowledge and market knowledge, being able to develop radical product and process innovations. Taking into consideration the Uppsala model (Johanson & Vahlne, 1977, 1990), it can be argued that two of the five companies have not followed a traditional process of internationalisation, beginning to export in the years immediately following foundation. Comexi started its international operations in 1960, only 6 years after being founded, and Tecnitoys started to export only 2 years after its foundation. Both of them have sought to gain a significant competitive advantage from its exporting activities, putting great emphasis on the quality of the product and, implicitly, on the innovation process. Based on previous research regarding the phenomenon of internationalisation, it could be affirmed that these are born-global firms. Nevertheless, due to firms’ regional restriction at the beginning of their operations, we have decided to call them firms which started with an international orientation.


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Once they have internationalised, the five firms have obtained great knowledge – product and market knowledge – as a consequence of the mode of entry chosen which can imply less and/or more commitment to markets, and they also have gained experience with the competition; the knowledge acquired has been very important in order to adapt their products so they may become more competitive and obtain a greater market share. As mentioned by one of the interviewees, product adaptability is vital for success in these markets, and only by knowing the environment is adaptability possible, being in conformity with Oviatt and McDougall (2005), who consider knowledge to be the core of the internationalisation process of the firm. Keeping in mind the objective of this investigation – if there is a mutual, interdependent relationship between internationalisation and technological innovation processes of the firms – it can be answered that in all of the cases this relationship is observed and confirmed, although one of the interviewees adds that innovation is not an indispensable condition for a firm to become international, but it is a very important factor. This assessment is coherent with Hall’s (1992) work, which emphasises the importance of innovation as a source of competitive advantage. However, after analysing the in-depth interviews, we are able to develop our initial model. We now argue that the mutual relationship supposedly existing between internationalisation and technological innovation processes are largely driven by the level of international commitment associated with different entry modes into the selected foreign markets. This conceptual development of our preliminary model is illustrated in Fig. 2. Therefore, according to the proposed model shown in Fig. 2, the potential alignment between the internationalisation and technological innovation processes can be more fully achieved when these two key sources of competitive advantage, instead of acting separately, actually expand and mutually reinforce each other: not only technological innovation, either in product or process, but also internationalisation itself, are on the basis of competitive advantage development. In addition, as demonstrated in some of the investigated firm cases, the higher the degree of internationalisation, in terms of both foreign market and entry mode selection processes, the more likely radical, and not only incremental, innovation can be. However, the investigated firms mostly differ in terms of the moment in time in which internationalisation and technological innovation jointly become two powerful and highly combinable sources of competitive advantage. This alignment or relationship can exist sooner or later.

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Competitive advantage

Technological Innovation

Technological Innovation

Internationalisation Radical Innovation

Incremental Innovation Entry mode selection

Less commitment/ risk (agents, foreign distributors)

More commitment/ risk (local branches, jointventure, sales/ production subsidiary).

Foreign knowledge acquisition (product/ market) Low

Fig. 2.

High

Revised Conceptual Relation between Innovation and Internationalisation. Source: Self-Elaborated.

In three out of the five firm cases analysed, those following a more slow and gradual pattern of internationalisation (the firms competing in the baking, optical and chemical industries, respectively) technological innovation preceded internationalisation and only after both were combined. However, for the other two firms which began with an international orientation from inception (the company competing in the toy industry and the one acting in the converting sector), this internationalisation and technological innovation alignment started nearly at the same time with the founding of these business. Accordingly, these two companies, Comexi and Tecnitoys, are international firms which have sought to exploit their technological competitive advantages and have been present at many different markets abroad almost from inception. This type of company, usually referred to as a born-global firm in the literature, (see Rialp et al., 2005a, for an extensive literature review) is mostly characterised by extending itself very soon and


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rapidly to the most significant markets worldwide, also generating significant value in this process and coordinating complex flows of knowledge, capital and products among its deeply interrelated units (Pla & Leoń, 2006). According to Acs et al. (2001), firms become multinationals because they see and capture profitable international opportunities. For a multinational to compete abroad, it needs an advantage of its own to offset local firms’ home-court advantage. Actually, a very important issue also highlighted by Acs et al. (2001) is that multinational firms can quickly and simultaneously introduce an innovation in many countries, greatly magnifying the innovation’s return, being able to do this without exposing or losing control over their intellectual property.

CONCLUSIONS The purpose of this investigation was to analyse the existence of a relationship between technological innovation and internationalisation processes of the firm, having as a theoretical background the internationalisation theory of the firm (Johanson & Vahlne, 1977, 1990), the RBV of the firm (Barney, 1991) and the literature review related to these phenomena. From RBV’s perspective, generating and sustaining competitive advantages resides in the set of strategic resources and capabilities available to the firm, among these strategic resources being the intangible ones. Among intangible resources, technological resources are particularly significant (Lo´pez & Garcı´ a, 2005). These provide the firm with an innovative capacity, for both products and processes, and are important for the creation of competitive advantages based on differentiation. These advantages give a firm a superior competitiveness to act in the international markets. This is consistent with the idea of Mahoney (1995), who stresses that differentiation is a fundamental strategy in order to achieve competitive advantages. Concerning the technological resource of the firms in this study, all firms showed a propensity for internationalisation due to the technological innovation developed within them. However, the fact of developing international activities has influenced, in a positive way, technological innovation. Actually, Basile (2001) emphasises the role of technology and innovation as one of the main factors contributing to facilitate entry into international markets, at the same time as boosting the firm’s export performance. As mentioned by Molero (1998), in the cases of Italy and Spain, the presence abroad of non-innovative firms suggests the existence

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of a relative divorce between the processes of innovation and internationalisation. Therefore, the results of our study are in line with the ones of Basile (2001) and Molero (1998), although this idea is not supported by Wakelin (1998), who finds that being an innovative firm in the UK has a negative impact on the probability of exporting, concluding that innovative firms are more inclined to use their innovation to exploit the domestic (UK) market rather than to enter foreign markets. It is also observed that the analysed firms use different entry modes, beginning with an agent, subsidiary and ending with owning a subsidiary. In this last case, it is emphasised that it discourages investments in R&D since the firm buys an existing company together with its innovation and/or its knowledge. We verified that when the firm chooses an entry mode which implies less commitment to the market, it is more common that an incremental and product innovation will be realised. This is the case of all of the five companies here analysed. However, when more commitment is chosen, then the radical innovations in products and also processes are more probable, and this happens to three of the five companies. In any case, it can be noticed that the predominant entry mode chosen by the firm is through agents and foreign distributors, representing the first step of the internationalisation process of the firm, as explained by Johanson and Vahlne (1977, 1990). Actually, three of the five firms have followed a traditional process of internationalisation, the remaining two beginning to export very soon after their foundation. However, it would be convenient to study this phenomenon more in-depth due to the fact that it is not easy to establish a sequential order of the entry modes. As mentioned in the cross-case analysis, the innovation that all five firms subsequently realise is the incremental product one by adapting their products for the international markets and expanding these markets due to the product knowledge they gain. As Fernańdez (2005) describes, this kind of innovation is based on the improvement of the current components of the product, maintaining the same structure of relationships among the components. The incremental innovation is not usually visible, since the external aspect of the product and the functions that it carries out are the same ones. However, it can have a fundamental incidence in production costs, providing the company an important competitive advantage in costs. Actually, the need to acquire foreign product and market knowledge and the importance of organisational learning for entering or expanding in the international marketplace were recognised by several scholars, such as Andersen (1993) and Zahra, Ireland, and Hitt (2000), among others. The motivation in most cases to extend their markets has appeared owing to


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the necessity of surviving in a global market and of having a more stable competitive position.

FUTURE RESEARCH LINES AND LIMITATIONS OF THE STUDY The main idea highlighted in the results of this investigation is that once the firms have entered the foreign markets through different entry modes, depending on the commitment level to markets, they have gained experience but, most of all, they have acquired knowledge – product and/or market knowledge – and with that knowledge the firms are able to realise more technological innovation. Furthermore, depending on the entry mode, the companies acquire a certain type of knowledge (product/market) which leads to a certain type of technological innovation (incremental/radical). For instance, if one company chooses less commitment to a market, it will gain mostly product knowledge, which will imply more incremental product/process innovation. On the contrary, if a company chooses more commitment to a market, it will gain market knowledge, which will imply more radical product/process innovation. Thus, besides the traditional sources of technological innovation mentioned at the beginning (Amara & Landry, 2005), there are also new sources among which the commitment of entry mode in a new foreign market is considered. In other words, the internationalisation of the firm, more precisely the commitment of the entry modes in new markets, is considered to be an important source for promoting technological innovation. Surely, it is at least equally important to focus not only on the commitment of resources associated with the different entry modes but also on the market driven factors such as geographic and cultural proximity, country/market size, competitors and other socio-economic factors. Hopefully, further studies which also approach this issue through quantitative and not only qualitative research methods will be highly relevant to verify the empirical soundness of the suggested model. Moreover, following Parasuraman (2000) and Richey et al. (2007), it is also essential to implement the technological capabilities developed by a firm, since only forging them does not guarantee success. This argument is also known as ‘‘firm technological readiness’’, which is defined as the ability of the firm to embrace and make use and effective of new technological assets (Richey et al., 2007). This, in our opinion, underdeveloped area focused on

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technology implementation issues, and their relationship with the internationalisation process of the firm, constitutes another stream of research in which much more effort should be definitely devoted in the near future. Referring to other limitations of this investigation, those fundamental characteristics of the methodology of the case-study stand out. This methodology produces a bias introduced by the same investigator in the collection process and analysis of the information (Rialp, 1998). The criticism regarding the lack of both statistical validity and representativeness is also assumed, but it is considered that the objective of the investigation is not the one to generalise but rather to study the knowledge of the theme of the study in depth, and, therefore, the methodology used is believed to be the right one.

NOTE 1. Other studies focused on Spain are: Buesa and Molero (1993), where different patterns of innovation and technological strategy are presented; Molero (1998), who presents patterns of internationalisation of innovative firms; Eusebio and Rialp (2002), who relate technological innovation and exporter result and finally Lo´pez and Garcı´ a (2005), who analyse technological export behaviour.

ACKNOWLEDGMENTS The authors would like to thank the reviewers of earlier versions of this chapter for their very helpful comments and suggestions as well as the General Manager of Europastry, R&D&I Manager of Indo, General Manager and International Division Manager of Pinturas Lobo, Commercial Manager and Corporate Marketing Responsible of Comexi and General Manager of Tecnitoys for their support in developing this research. Also the support received from the Universities and Research Comissioner from the Innovation, Universities and Firm Department of the Catalan Government and European Social Funds is especially acknowledged.

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THE ROLE OF INNOVATIVE AND ENTREPRENEURIAL BEHAVIOR IN INTERNATIONALIZATION PROCESSES Arild Aspelund and Tage Koed Madsen During the past decade, the research streams focusing on entrepreneurship and internationalization have to some extent converged. This is a reflection of what has happened in business life. During the 1970s and 1980s, numerous empirical studies supported the notion that firms initially gain a strong foothold in their domestic market before they leap into international business. Accordingly, entrepreneurship occurred in domestic market settings. This is no longer the case. Newly established firms increasingly engage in international marketing right from their inception, a fact that has been reflected in the literature on entrepreneurship as well as on internationalization processes (for early contributions see Oviatt & McDougall, 1994; Knight & Cavusgil, 1996, for more extensive evidence see Rialp, Rialp, & Knight, 2005 and Zahra, 2005). This development has given rise to a lot of studies that have looked on various aspects of innovation and entrepreneurship in relation to international marketing. Especially, two lines of research have contributed with many of these studies, namely the early Innovation-Related Internationalization model (IM) and the more recent International Entrepreneurship model (IE). The objective of this study is to examine how ‘innovative behavior’ has been New Challenges to International Marketing Advances in International Marketing, Volume 20, 155–175 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020009

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treated in the IM model and how ‘entrepreneurial behavior’ has been treated in the IE model in order to gain new knowledge on the impact on both strands of research and to point out their relevance to new challenges in international marketing. Such examination is timely as the literature streams have existed virtually separated and the extensive body of research from the IM tradition has been largely ignored in the more contemporary research in IE. We believe that innovative behavior and entrepreneurship are valuable in order to solve the new challenges of international marketing. Environmental dynamics, new information and communication technologies as well as more open, global market conditions are drivers of challenges for international marketing mangers who have to deal with dynamic changes with regard to demand as well as processes and structure of competition and collaboration. Continuous change requires new solutions and other procedures and routines when designing marketing channels, communication with customers, servicing products, etc., i.e. innovative marketing behavior. The role of innovative behavior has been emphasized since the birth of behavioral internationalization research in the 1960s and the 1970s. This early literature on export development processes embodies theoretical models that attempt to explain how firms develop from domestically oriented to full-fledged internationally oriented organizations. One of the most prominent of the early models, The North American IM, conceptualizes internationalization processes as proceeding in gradual and sequential stages, with an explicit focus on management characteristics and their impact on the process and its outcome (e.g. Bilkey, 1978; Cavusgil, 1980). The IM researchers supplement the explicit focus on managers with the notion that internationalization should be regarded as an innovation and, hence, the internationalization process as a process of adopting an organizational innovation. An important part of this approach is therefore theories of how innovations are adopted by organizations. The IE model reflects the emergence of a new type of firms that target international markets right from their inception. Such ‘instant internationalization’ is recognized to represent a serious challenge to the existing internationalization models because the latter assume that the firm matures on the domestic market before starting international expansion (Oviatt & McDougall, 1994; Knight & Cavusgil, 1996). This evident inconsistency has triggered the interest of a broad range of researchers and consequently caused an increase in the academic literature on the phenomenon (Rialp et al., 2005; Zahra, 2005; Aspelund, Madsen, & Moen, 2007); consequently, international entrepreneurship has been established as a recognized research strand of its own with entrepreneurial behavior and internationalization of new firms firmly placed in the core (Fletcher, 2004).

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Here, we will present the IM and the IE models and show how they have used the concepts of innovative and entrepreneurial behavior. Second, we will discuss whether future research on internationalization processes of firms may benefit by drawing upon both strands of research to solve the new challenges of international marketing. Finally, we will discuss whether practitioners can improve their international marketing decisions by doing the same.

METHODOLOGY The study is based on reviews of the relevant parts of the IM and IE literatures. We only selected articles for review that explicitly deal with innovative or entrepreneurial behavior. The IM literature dates back from the mid-1970s. In order to identify relevant articles about this perspective and its theoretical roots, we searched for articles written by some of the founders and prominent authors of the perspective (Waren J. Bilkey, George Tesar, and S. Tamer Cavusgil). We searched for articles in which innovative behavior was mentioned explicitly and traced the theoretical roots through the references mentioned. The articles identified dated back to the early 1960s with regard to the theoretical roots, and we did not identify relevant articles after 1990 which is probably because the European perspective on internationalization processes of firms (see Andersen, 1993) became dominant. However, the rapidly declining interest in the IM perspective in the 1990s might also be related to the apparent incompatibility with the emerging IE perspective. With regard to the IE literature, we have used an identical list of studies as a recent literature review on International New Ventures (INVs) by Aspelund et al. (2007). This study reviewed a set of 21 core journals within the fields of management, marketing, and entrepreneurship yielding a total sample of 41 articles in the phenomenon of rapid internationalization of new firms published between 1995 and 2005. For this study, we have selected the studies that are related to innovative and entrepreneurial behavior and included them in our presentation of the IE model below.

THE ‘INNOVATION-RELATED INTERNATIONALIZATION MODEL’ The literature on internationalization processes of firms grew out of an attempt to describe empirically how individual firms become international.

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In Europe (starting in Sweden, see for example Johanson & Vahlne, 1977), basic ideas about experiential learning in neighboring countries with low so-called psychic distance were seen as the background for slow and incremental processes involving increasing international knowledge and commitments, a process during which the firm would attempt to avoid too much risk-taking. Researchers in North America, especially at the University of Wisconsin, conceived similar ideas. As Andersen (1993) notes, however, the latter group of researchers considered international marketing to be an innovation for the firm.

Theoretical Foundations The early models established in North America built upon the idea that an internationalization process would unfold itself in stages just like the adoption of an innovation. Different models involving alternative numbers and definitions of such stages were developed (see for example Bilkey & Tesar, 1977; Cavusgil, 1980). In one of his most important articles, Warren J. Bilkey (1978), one of the initiating researchers of American internationalization studies, refers to Rogers (1962) and Schumpeter (1961) as important theoretical roots. It is also clearly demonstrated in his article that the American approach was very much inspired by several empirical studies carried out in the UK during the 1960s, mainly by Simmonds and Smith (1968). In an early contribution, Simmonds and Smith (1968) suggested to analyze the first export order as a marketing innovation. They refer to other British studies (e.g. Tookey, 1964), which demonstrate that active, powerful, and aggressive top managers were often drivers of the first export activities. Apparently, Simmonds and Smith regarded these individuals as a kind of early adopters of innovative export marketing activities. They argue that opening up a new export market is just as innovative as the adoption of a new production process, for which reason they refer to Rogers (1962) when trying to identify a theoretical framework to understand the adoption of such new practices. Inspired by these ideas, the American scholars modeled internationalization processes as proceeding in stages just like the innovation-decision process developed by Rogers (1962). The IM researchers never explicitly explain how they developed the stages model. On the basis of their theoretical foundation, however, the export activity must be considered to be the innovation which the individuals and the organization initially have to


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regard as possible. Subsequently, the firm/manager must gain insights into the possibilities, at later stages form attitudes to them, and finally decide to adopt (or reject) them. Then, the manager may develop and implement the firm’s export and internationalization strategy. The authors behind the IM viewed the internationalization process as taking place at such stages in the individual firms. They also applied the stages as framework in crosssectional studies in which they categorized each firm in order to compare management characteristics, strategies, performance, etc. at the different stages of internationalization (e.g. Cavusgil, 1980). Simmonds and Smith (1968) note that exporting can only be characterized as an intra-firm innovation. This argument shows that the early internationalization literature drew upon the literature on adoption of innovations, but they did not adopt the view of an innovation proposed by Schumpeter (1961), according to whom innovative behavior is seen as being a new combination of known resources so that a new type of problem-solving is created, i.e. the ability of the organization to revolutionize products and processes. In order to regard exporting as innovative according to Schumpeter’s definition, it is a condition that decision makers in the firm have no prior experience with exporting and that the product exported should be new to the foreign market. As empirical research demonstrated, this was only rarely the case at that time. So, even though the IM formulated in the 1970s claims to build upon theories of diffusion and adoption of innovations, it does not deal with genuine innovative behavior in a Schumpeterian sense. Relying mainly on Rogers (1962), Bilkey and Tesar (1977) formulated a six-stage model of export development building on the ideas of adoption of innovations. The definition of stages was based on management characteristics (e.g. interest in exporting, exploration of the feasibility of exporting) and firm behavior (e.g. proactivity to exporting, geographical orientation). Also Lee and Brasch (1978) consider the adoption of export as an innovative strategy. They point out that technological innovations have been researched far more than innovations related to new services, strategies, and market opportunities. They investigate the initiating force for exporting which they hypothesize to be inside the firm (perceived problems or needs) rather than external. They also hypothesize that the adoption process is rational because the decision on exporting and its implications are potentially costly. In their study, they investigate the process leading to adoption, i.e. the stage at which the firm explores the feasibility of exporting. They do so with reference to the stages model developed by Bilkey and Tesar (1977).

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As it appears, the theoretical roots referred to (Schumpeter, Rogers) are reflected only partially in the IM literature. Exporting processes are innovative to the firm/manager and not to the market as such. We will proceed by examining how the empirical findings of the IM researchers fit with the theoretical approach.

Empirical Findings Simmonds and Smith (1968) expected that the generation of the innovation (the export activity) would be created by an innovator inside the firm. They carried out a number of empirical case studies to investigate this hypothesis, but in six of nine cases, however, they found that the initiative came from outside (parent companies or customers with international backgrounds). In the remaining three cases, the internal innovator originated from a foreign country and/or had substantial international experience. So, in fact the first export activities in these firms cannot be characterized as an innovation, and they did not seem to stem from any marketing orientation as assumed by the authors. Despite their initial ideas of modeling export development as an adoption of an innovation, Simmonds and Smith never really return to this issue, perhaps because their empirical evidence pointed in other directions. Lee and Brasch (1978) find results similar to those of Simmonds and Smith, i.e. about 65% of export activities are initiated by external change agents, and about the same percentage of firms seem to follow a non-rational decision-making process. Bilkey (1978) considered exporting to be a developmental process in which management characteristics are very important for success. This is very much in accordance with the stages model developed by Rogers (1962) in which he argues that prior conditions (such as previous practice, personality variables, and norms of the social system) are important factors in the initial stages of the adoption of an innovation. Bilkey (1978) refers to empirical results from studies involving surveys or interviews among a total of about 1000 firms in Wisconsin, Indiana, Georgia, Oregon, and British Columbia, carried out as part of six Ph.D. dissertations written during the years 1968–1976. He refers to a similar amount of studies reported in the business press and still other empirical studies conducted by departments of commerce, or similar public organizations. The empirical evidence suggests that the initiation of exporting is driven by external as well as internal change agents. Managerial experiences, attitudes, and expectations seem to be of decisive importance to the further development of the


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internationalization process of a firm. Cavusgil (1980, 1984) also stresses the importance of managerial and organizational characteristics. As a consequence of their focus on managers, the North American researchers carried out empirical studies in which they attempted to identify the top management characteristics typically associated with successful internationalization processes. Axinn (1988) notes, however, that the empirical work in relation to the IM has mainly focused on firm-related variables, attempting to explain export behavior. She examines six major studies in the period of 1964–1983 and finds that only one-third of more that 60 explanatory variables are manager-related. Most frequently, manager-related characteristics of exporters are compared with the same characteristics of non-exporters. In her own US-based study, Axinn examines managers’ perceptions of exporting as well as their level of education and overseas work experience. She also includes firm-related factors such as geographical scope, technology, size, growth, and profitability. Managers’ perception of export advantages and non-complexity as well as their overseas work experience are significantly related to the export performance of the firm.

Concluding Remarks and Formulation of Propositions The focus of the IM is on already existing firms with long experience on the domestic market, the innovation being the exporting process. As we have seen, the empirical studies show that only a minority of decision makers are innovators in a true sense. Most of them are simply reacting to external stimuli, e.g. a foreign customer that approaches them (e.g. Lee & Brasch, 1978). Only rarely they find new types of solutions to problem-solving. Most often they may even attempt to apply their existing problem-solving methods (Axinn, 1988). So, the IM focuses very much on processes that cannot be regarded as innovative in the marketplace as such. Rather, the export activity may be new to the firm and its mangers that have to adopt different ways of organizing and marketing their existing products. The exporting and internationalization process in the IM is mainly taking place as incremental developments based on existing knowledge. Therefore, managerial perceptions of exporting as well as their prior international experience become very important (Bilkey, 1978). The adoption of exporting typically involves the use of low commitment governance structures such as export agents or foreign distributors. We know from the literature (Bell, McNaughton, & Young, 2001; Rialp et al., 2005; Aspelund et al., 2007) that also many firms in present market

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conditions base their international marketing activities on previous experience and network relationships. Therefore, even firms with rapid and profound international development may rely very much on external stimuli and previous routines. Also low commitment entry modes are often reported to be used. This lead to the following propositions: P1. External stimuli and change agents are important for international market development even in today’s market conditions. P2. International marketing managers still attempt to apply existing experience and routines when they enter new markets. P3. Low commitment entry modes are still commonplace to use. P4. Even rapidly internationalizing firms may develop incrementally. If these propositions are reflected in real life, the IM model still has something to offer in the effort to meet and respond until the new challenges in international marketing.

THE ‘INTERNATIONAL ENTREPRENEURSHIP MODEL’ Firms that internationalize right from their inception represent the core phenomenon of the new theory building in international entrepreneurship. The new international firms have been given different names in the literature such as Innate Exporters (Granitsky, 1989), Global Start-Ups (Jolly, Alahutha, & Jeannet, 1992), Born Globals (Rennie, 1993; Knight & Cavusgil, 1996; Madsen & Servais, 1997; Moen, 2002), INVs (McDougall, Shane, & Oviatt, 1994; Oviatt & McDougall, 1994), and Instant Internationals (McAuley, 1999; Preece, Miles, & Baetz, 1999). With the introduction of ‘new ventures’ in the internationalization literature, the concepts of ‘entrepreneurship’ and ‘entrepreneurial behavior’ also emerges in the literature and to some extent replaces the traditional use of the terms ‘innovation’ and ‘innovative behavior’. This change of vocabulary is a natural consequence of the new focus on newly established firms as well as the crossing of the research paths of international business and entrepreneurship, which leads numerous entrepreneurship scholars to focus on issues related to international marketing. There exists a multitude of entrepreneurship definitions (Davidsson, 2004). However, there seems to be at least some agreement on the applicability


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of Lumpkin and Dess’ (1996) definition of entrepreneurship as new entry. This is also a definition of entrepreneurship that suits the internationalization scholars as internationalization deals with international new market entry and, hence, can be viewed as an act of entrepreneurship (Ibeh & Young, 2001). Hence, on the basis of Lumpkin and Dess (1996), we define entrepreneurial behavior as the conduct of processes, practice, and decisionmaking activities that lead to new entry. Under the influence of the entrepreneurship scholars and Lumpkin and Dess’ definition of entrepreneurship, the IE literature has shifted focus from the narrow definition of ‘innovative behavior’ as an act of adopting innovations to a far broader definition of ‘entrepreneurial behavior’ where internationally oriented entrepreneurs supply international markets with new innovations and use various entrepreneurial strategies to set up an innovative organization to exploit international opportunities. This broadening of perspectives has also lead to a broader focus in terms of research. On the one hand, IE model lifts the focus out of the organization and view the internationalization process as an engine to provide new innovations in international markets. On the other hand, there has been far more focus on the individual entrepreneurs (or entrepreneurial team) and their behavior and impact in the internationalization process.

Theoretical Roots The first serious effort to create a new model adapted to INVs was published by Oviatt and McDougall in 1994 in Journal of International Business Studies. This study has turned out to be a seminal work and is cited in all but one of the studies of INVs recently reviewed by Aspelund et al. (2007). It is also the study that forms the basis of what we refer to as the IE model in this study. The model is an integrative framework based on theories from strategic management, international business, and entrepreneurship. Basically, the model depicts four necessary and sufficient conditions for the existence of INVs. One of the conditions is taken from the entrepreneurship literature and deals specifically with entrepreneurial behavior in terms of resource management associated with the general resource poverty of new organizations. Owing to the lack of resources that is generally associated with new firms (Vesper, 1990), new ventures often employ alternative governance structures (or hybrid structures) to control productive resources. This is also the case regarding INVs, which frequently use hybrid structures for international market access (Gabrielsson & Kirpalani, 2004).

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Another condition for the emergence of INVs is unique resources. This argument stems from the resource-based view of the firm which has its roots in Penrose’s (1959) theory of the growth of the firm. Penrose’s perspective of looking at organizations as bundles of resources and capabilities is now being applied to a still higher degree in the entrepreneurship literature. Oviatt and McDougall (1994) apply resource-based arguments and argue that if the new firm want to survive, it must introduce an innovative market offer that is both valuable to the customer and hard for competitors to imitate or substitute. In conclusion, Oviatt and McDougall (1994) point to two features of entrepreneurial behavior that are preconditions for the existence of INVs. First, management must be entrepreneurial in their resource management in order to reach new business space rapidly. Second, the introduction of the new firm’s product and services must have innovative features on the market to secure a certain level of competitive ability.

Empirical Evidence In the following section, we will examine how this view of entrepreneurial behavior has been reflected in the empirical work of the IE researchers on three levels. First, we will present evidence on how the IE model views INVs as innovative change agents by spreading new innovations into new markets. Second, we will see how international entrepreneurs use entrepreneurial resource management in order to overcome resource constraints. Finally, we will see some findings on the role of the international entrepreneur as an individual influence the internationalization process.

INVs as Bearers of Innovations The IE model research brings forward a market-oriented view of innovations in comparison with the IM model that treats innovation only on the organizational level. Several studies in international entrepreneurship bring forward the role of new technologies in the internationalization process. First, the fact that many INVs are technology oriented, at least in terms of their competitive advantages (Aspelund & Moen, 2005), has brought many researcher to look at the role of new technologies in internationalization processes. The fact that a new firm is trying to introduce a new technology into a market influences the internationalization process in several ways.


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First, both Bloodgood and Sapienza (1996) and Aspelund and Moen (2005) found that a dominant part of internationalizing new ventures grew their competitive advantage out of technological innovation. Hence, the primary driver behind the international expansion of the firms is to profit from disseminating of new technologies in multiple markets. Zahra, Matherne, and Carleton (2003) found that new technologies in its own right facilitated internationalization as INVs frequently used their technological networks and technological reputation to push a more rapid and extensive international expansion. Oesterle (1997) also identified a push factor related to technology. In his case study of Daimler, he saw that Daimler’s innovative technologies represented such a destructive potential for domestic incumbents that the domestic market turned hostile toward the new entrant. Hence, domestic market hostility pushed the new technology entrant into less hostile international markets. Finally, Jolly et al.’s (1992) study of Global Start-Ups is a fine example of the role the INVs play in order to disseminate new technologies. They find that many INVs time their global market expansion in industry shifts where new technologies are replacing old and the incumbents’ competitive position is weakened. Even though few studies mention this specifically; the underlying motivation for studying INVs is INVs’ role as global change agents that increase efficiency in international markets by disseminating new technologies.

Entrepreneurial Resource Management One of the factors that distinguish the IE model from the IM model is that the former lifts the focus out of the expanding firm and into the network context in which it operates. Entrepreneurs in INVs need control of resources that are too expensive to internalize and, hence, seek to gain control of resources through entrepreneurial arrangements with business partners. Two examples are found in Coviello and Munro’s (1997) study of rapidly internationalizing Canadian software firms and in Eriksson and Chetty’s (2003) study. They both find that the experiential knowledge needed to conduct international business can be accumulated in business networks rather than solely internalized in the firm itself. This is an innovative approach to knowledge management and a feature that is closely tied to entrepreneurial behavior (Oviatt & McDougall, 1994). The latter study also points to another aspect frequently used by entrepreneurs, namely the

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tendency to use social relations rather than ownership to control the behavior of their business partners. Hence, international entrepreneurs tend to select trustworthy business partners from their social network. Another study exemplifying INVs’ use of entrepreneurial arrangements for market entry is Gabrielsson and Kirpalani’s (2004) study of new resource-constrained, knowledge-intensive firms. They identify and exemplify four alternative routes to international markets that are frequently used and well fitted for resource-constrained new firms with international ambitions. All these four arrangements are hybrid structures, which depend on either the involvement of an independent business partner or the extensive use of the Internet as a global marketing channel.

The Role of the Entrepreneurs Some of the recent studies of international entrepreneurship attempt to disengage from the traditional views of internationalization. For example, experiential market knowledge is treated only as one of many firm resources that form the internationalization process of firms. This perspective is often referred to as the holistic perspective because of the view that all firms form idiosyncratic internationalization patterns shaped by the resources and capabilities the firm possesses and the environmental opportunities and constraints it faces. Empirical studies such as McDougall et al. (1994), Bell (1995), Jones (1999), McAuley (1999), Crick and Jones (2000), and Moen and Servais (2002) have documented that new firms often exhibit far more heterogeneity in their manners of internationalization than the traditional, incremental internationalization models predict, and hence call for a holistic model of firm internationalization that incorporates the diversity of internationalization patterns. Basically, such diversity develops because the individual entrepreneur has such an important role to play. Good examples of how entrepreneurial behavior affects the internationalization process of the firm can be identified in studies of opportunity recognition. A pioneering study of that kind is McDougall et al.’s (1994) study of 24 INVs. They investigated three fundamental questions, namely who are INV founders, why are their new ventures international, and how do they organize their international activities. They concluded that INV founders are entrepreneurs that are able to see international opportunities from successful combinations of resources from different markets and that they tend to have this ability because of their extensive international experience. This finding is supported by a quantitative


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study by Harveston, Kedia, and Davis (2000), which concludes that managers in INVs have a more global mindset, more extensive international experience, and a higher risk tolerance than managers in gradually internationalizing firms. Both studies conclude that managers with international experience are more likely to perceive and act on international business opportunities. Three studies that take an holistic perspective and emphasize the role of the entrepreneur are McAuley’s (1999) study of firms in the Scottish arts and craft sector, Crick and Jones’ (2000) study of UK high-tech firms, and Crick, Chaudhry, and Batstone’s (2001) study of minority-owned firms in the UK clothing industry. All these studies conclude that the behavior of the entrepreneur is central in the internationalization process of new firms, both for the speed of internationalization and for the subsequent international behavior of the firm. They also conclude that unplanned internationalization is widespread and that entrepreneurs are often pulled into internationalization without initial strategic intent. It is interesting, however, to see the great variety of motivation for quick and extensive internationalization in these studies. Crick et al.’s (2001) minority-owned firms expanded early to exploit their international business network in the area of their ethnic origin. Crick and Jones’ (2000) high-tech firms exhibited often a more planned internationalization, but it was primarily motivated by the insufficient size of the domestic market. McAuley’s (1999) firms internationalized in an ad hoc manner, often through contacts made at trade fairs or through personal networks and seemed to be motivated by the opportunity for increased sales and profit.

Concluding Remarks and Formulation of Propositions The new theory building in the internationalization literature seems to have a strong foothold within the field of entrepreneurship. Especially three aspects of entrepreneurial behavior in the IE model are supplementary to the concept of innovative behavior. The first is the focus on market innovations as sources of competitive advantage and motivation for international expansion rather than innovations on the organizational level as new ways of doing business. Second, we see focus on international entrepreneurs’ tendencies to form hybrid structures of international resource and knowledge management to overcome resource constraints. Hybrid structures illustrate how international entrepreneurs are able to establish and use efficient international sales

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and marketing channels that they cannot afford to control by ownership. Furthermore, we see the tendency to rely on alternative governance strategies than ownership to control international market channel behavior. A major consequence of this development is that the research attention has been lifted out of the organization and into the business network in which it operates. The third is the effect of the behavior of the individual entrepreneurs and their tendencies for opportunity recognition, which is a concept that has migrated from the entrepreneurship literature. It exemplifies how both entrepreneurs’ former educational and business experience and ethnical and cultural background affect the cognitive processes of opportunity recognition and guides both the speed and direction of its exploitation. Hence, the characteristics of the entrepreneur or the founding team have consequences, both for the likelihood of establishing INVs and for the subsequent internationalization process of the firm. A result of this development is that the entrepreneur or the founding team has more frequently been used as the unit of analysis in studies of internationalization. These observations lead to the following propositions: P5. Genuine market innovations are presently important drivers of international competitive advantage. P6. In today’s market conditions, low commitment entry modes are supplemented by hybrid structures involving some degree of control with partners’ resources and competences. P7. The characteristics of the entrepreneurs and founding teams are of decisive importance for the firm’s response to international marketing challenges.

DISCUSSION AND IMPLICATIONS FOR INTERNATIONAL MARKETING As demonstrated earlier, the IM and the IE models have similarities, but they also have very different ways of studying behavior, especially in terms of motivation. IM researchers were focusing on the first international steps of existing firms with a strong foothold in their domestic markets. As a consequence, they primarily studied firm-related characteristics and

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Table 1.

Innovative and Entrepreneurial Behavior Studied. Innovation-Related Internationalization Model

Theoretical foundation

Unit of analysis Driver of development Decision-making process Entry modes Speed of development Degree of newness The effect of the innovation

Adoption of innovations in organizations (mainly Rogers, 1962) Existing firms Growth-driven, external agents Reactive Traditional governance structures Slow, gradual, incremental New to the firm Existing/slightly modified products in new markets

International Entrepreneurship Model Entrepreneurship, resource-based theory, and international business Entrepreneurs, new firms, and business networks Opportunity-driven, internal change agents Proactive Hybrid governance structures Often very fast Often new to the market as well as to the firm New products and technologies in new markets

included managerial characteristics only as a supplement. They focused on the adoption of innovations and had the firm, not the individual, as their primary unit of analysis. The IE researchers focus on the founder(s) of a new firm as well as the effects of introducing new technologies. For that reason, they build on entrepreneurship theories of the innovative, proactive, and risk-seeking individual that are able to recognize and exploit international market opportunities in collaboration with partners in their network. Table 1 summarizes some of the most important differences between the two approaches. In the ensuing we will discuss these special characteristics and relate them to new challenges in international marketing in order to give more ‘flesh and blood’ to the propositions developed earlier. We have structures the discussion according to behavior at the individual level, behavior at the organizational level, and finally, the effects of innovative and entrepreneurial behavior on international markets.

Innovative and Entrepreneurial Behavior at the Individual Level In a recent review, Aspelund et al. (2007) reported that one of the most consistent findings from their review of the INV literature is the vital and

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long-lasting effects of the international entrepreneurs and their strategic decisions in early phases of new international ventures. ‘‘Even though many studies have identified this phenomenon, few studies have been designed to go into depth on the strategic processes that occur near founding, . . . , in particular on how key decisions in the establishment process influence on the strategic and marketing related decisions of the firm and how these decisions influence on the development of the firm’’ (p. 1442). The undisclosed relationship between entrepreneurial acts in founding processes and international marketing strategies remains a challenge for both scholars and practitioners as consequences are apparent. The internal change agent as the driver of the internationalization process within the firm was a key concept within the IM as mentioned earlier. This ‘firm champion’ worked with the organization in order to make it adopt international business. Many IE researchers, however, redefined this concept into an entrepreneur that rather designed his/her organization for international business from the outset. They often consider the decisive role of the entrepreneur’s previous professional experience of international opportunity recognition and the importance of personal network for market selection and choice of entry modes. This resembles very much the empirical findings of the IM researchers with regard to the importance of managers’ perceptions of and experience with international markets. The role of the entrepreneur is to be the person that works with the organization to bring continuous change. Findings suggest that it is the organization’s ability to learn and change according to international market demands that ultimately bring international performance, not the decision to internationalize in itself (McDougall & Oviatt, 1996; Zahra, Ireland, & Hitt, 2000; Aspelund & Moen, 2005).

Innovative and Entrepreneurial Behavior at the Organizational Level Other recent reviews have pointed to challenges on the organizational level that should be sorted out. One of these is Rialp et al. (2005) that argues that focus should be put toward identifying organizational capabilities that ‘‘ . . . explain and interpret not only the emergence of early internationalizing firms but also its further development in the form of a rapid and sustained international growth’’ (p. 162). Along these lines, IM studies may supply new ideas to the study of established firms that suddenly go through rapid internationalization, often labeled Born-Again Globals (Bell et al., 2001). It is likely that managers in these types of firms may be reacting on external stimuli just as the IM


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researchers demonstrated was the case 30 or 40 years ago. Hence, the IM ideas of internal change agents and reactive behavior may prove to be relevant when studying all internationalization processes. Moreover, it might be very advisable for entrepreneurs to be more open toward possible external agents that may change the development path of the firm. Especially in today’s global market conditions where such external change agents are widely available. Furthermore, the focus of the IM model on the organizational level is highly relevant for INVs as well. During the first years of existence, the entrepreneurs themselves are very important for the development of the firm. Rapid growth is often the result, but after that many INVs do not grow very fast (Rennie, 1993). One reason may be that the entrepreneurs are not aware that the adoption of new innovations in the firm is depending on the norms and attitudes of the whole organization. Being alert with regard to forming attitudes among all employees is important in the process of adopting new products and processes. As Zahra (2005) concludes: ‘‘There is a dearth of empirical studies on the evolution of INVs, as most prior research has focused on the founding and operations of these firms’’ (p. 27). It may be argued that future research on innovative behavior and internationalization processes must combine the two approaches and have a dual unit of analysis, i.e. the individual as well as the firm. Where the entrepreneur traditionally has been ‘the lonesome wolf ’, it has been demonstrated that the foundation process of Born Global Firms in most cases involves several entrepreneurs as well as several other persons that play an active role. Therefore, it is relevant to study some kind of organization. It is also well documented (see e.g. Bell et al., 2001) that many firms nowadays experience quick and highly individual international marketing processes that resemble those of Born Global Firms. So, in order to completely understand the internationalization processes taking place under the present market conditions, it seems to be necessary to carry out analyses at both individual and firm level as well as the business network from which the internationalizing firm gain access to important resources.

The Effect of Innovative and Entrepreneurial Behavior on International Markets Finally, we would like to draw attention to a remaining gap in the literature on international marketing, namely that of the effects of the diffusion of managerial, organizational, and technological innovations that is embedded

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in the internationalization of firms. The IM primary view of innovation is that international business is a new way of doing things for the firm and for that reason an innovation that resides within the firm. It is recognized that exporting is not an innovative act in the marketplace as such; many firms have already international experience and are used to marketing similar goods on many international markets. However, one could also argue that all organizations bear with them distinct managerial and organizational routines that may be viewed as innovations in the markets which they enter and with time are adopted by local firms. The IE has another point of departure, namely a newly established firm, and oftentimes a firm that has developed a technologically advanced product. Hence, the innovation in this case is not only something internal to the firm. The product or technology is also new to the market, which implies that an innovation is taking place as new solutions or technologies are introduced. This perspective of international entrepreneurship has been all but neglected in the literature on international marketing and we know very little of the effects of dissemination of managerial, organizational, and technological innovations through internationalization of firms.

Directions for Future Research Observing the year of publishing of the reviewed articles in this study, the reader might be led to believe that the IM perspective has passed its expiry date and that the knowledge developed from this perspective is drowned in the extensive, recent IE literature on INVs. Actually, published contributions of the former strand are quite limited over the past 10–15 years. This is a loss to the debate, and we would like to conclude with some of the features of innovative behavior that may add to our understanding of challenges of international marketing and for that reason still deserve attention from academics. First of all, the IM literature’s focus on the organization as such should not be forgotten. The impact of the entrepreneurship literature has shifted the focus to the individual entrepreneurs and their networks in the marketplace. However, also INVs have to develop into ongoing concerns, so organizational issues are definitely important to incorporate into the research on the phenomenon. One excellent example of this is given in McDougall and Oviatt (1996) study of internationalization and performance of firms. They found that internationalization per se is not associated with performance. Only the companies that are capable of strategic change


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to adapt to international market conditions can turn their internationalization efforts into higher profits. This is even more the case if the models developed are more general, including also the phenomenon of Born-Again Globals. This type of firm is an existing organization that completely changes its scope from local to global. In that process, where managers seek to turn a purely domestic organization into a global player, organizational issues related to adoption of new ways of doing business are highly relevant. Second, we find that also the IM focus on reactive behavior may have merit to the international marketing challenges of INVs. The empirical work on the IM demonstrates that external change agents are often very important and that in their internationalization process decision makers in the firm often react to the behavior of such external agents. A similar situation often arises when small INVs react to competitive actions from large incumbents. This may be new products, other pricing strategies, or even an offer to take over the INV. Therefore, the idea of reactive behavior should not be forgotten, even if we are dealing with entrepreneurs that are mainly depicted as being autonomous, innovative, risk-taking, proactive, and strategically aggressive. We have formulated seven propositions that may be investigated in future research. In doing so, it is important to notice that empirical studies have to be carried out at multiple levels. As the propositions show, it may be the efforts of entrepreneurs, founding teams, the entrepreneurial organization, and its combined network relationships that are relevant when studying the best practices in the attempt to cope with the new challenges to international marketing.

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BRAND IMAGE PERCEPTIONS ACROSS CULTURES: A STUDY OF SYMBOLIC AND FUNCTIONAL ASSOCIATIONS Laura Salciuviene, Pervez N. Ghauri, Audra I. Mockaitis and Claudio De Mattos Long-term strategies aiming at a successful brand image positioning depend, in part, on how the unique attributes that correspond to the core values and tastes of consumers in different countries manifest themselves (Hsieh, Pan, & Setiono, 2006). Companies that match their brand image to consumer values will more easily attain a competitive advantage over those that do not (Hofstede, Steenkamp, & Wedel, 1999). A brand’s image creates associations with a consumer’s culture and his/her daily surroundings; managers need to know and understand those particular brand associations that best appeal to their consumers with respect to their values (Hsieh, 2002; Brangule-Vlagsma, Pieters, & Wedel, 2002). With the enlargement of the European Union, the debate about the convergence of consumer perceptions and tastes has become even more important (Shintaro, Charles, & Jonathan, 2007). Although previous studies have investigated factors of brand image management, few of them have explored the role of personal values in brand image perceptions of consumers. Moreover, as with many other marketing concepts, much of New Challenges to International Marketing Advances in International Marketing, Volume 20, 177–191 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020010

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what is known about brand image is based primarily on studies conducted in Western countries. As suggested by Patterson and Smith (2003), ‘‘while it is well understood that there is a high level of importance accorded the role Western cultures have played in building consumer behaviour models, it would seem there is little manifest interest in validating their explanatory powers in markedly different cultures’’ (p. 108). Indeed, little research exists on ‘‘consumer reactions in the new European Union member countries’’ (Vida & Reardon, 2008, p. 36). Hence, our study addresses this underresearched area. More specifically, it examines how personal values affect perceptions of brand image in relation to the functional and symbolic attributes of the brand in different cultural contexts. Specifically, our study aims to provide answers to the following questions: 1. How do consumers perceive a brand image and how these perceptions are related to consumer values? 2. Which specific consumer values correlate with specific attributes of a particular product and brand image in each country? 3. How perceptions of brand image attributes differ in each country? By assessing the extent to which personal values affect brand image perceptions in two EU countries, one in Eastern Europe (Lithuania) and the other in Western Europe (Denmark), our study responds to recent calls in the literature to foster cross-cultural research by testing existing marketing concepts in new countries (Burgess & Steenkamp, 2006; Yaprak, 2007). Thus, our study aims to further our understanding about how brand image attributes in different cultural contexts are perceived and how those perceptions, as a function of consumer personal values, differ. The chapter is structured as follows. We first review existing knowledge on key issues involving brand image and link this to consumer values. The methods, findings and discussion follow in the next section. The chapter ends with the conclusions, implications for international marketing practice and guidelines for further research.

THEORETICAL BACKGROUND Brand Image The concept of brand image has received considerable attention in marketing (Batra & Homer, 2004; Dhar & Wertenbroch, 2000; Roth, 1992; Thompson, Rindfleisch, & Arsel, 2006; van Reijmersdal, Neijens, & Smith, 2007;

Brand Image Perceptions across Cultures

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van Rekom, Jacobs, & Verlegh, 2006), yet there is still little agreement on its definition and operationalisation in the literature. As Dobni and Zinkhan (1990) observed, despite the frequent use by scholars of the term ‘‘brand image,’’ its definitions in the literature tend to focus on different elements. It is possible to group definitions of brand image into different categories. For example, brand image has been defined as (a) an attitude extending its meaning beyond the physical product (e.g., Reynolds & Gutman, 1984) and (b) perception, relating brand image to psychological aspects of a product’s tangible attributes (e.g., Keller, 1998). One generally accepted view is that brand image can be defined as perceptions regarding a brand as reflected by the cluster of associations that consumers connect to the brand name in memory (Herzog, 1963). This is consistent with an associative network memory model. Thus, ‘‘brand associations are the other informational nodes linked to the brand node in memory and contain the meaning of the brand for consumers’’ (Keller, 2003, p. 66). Drawing on Allen (2001) (holistic evaluation), Keller (1998) (strength, favourability) and Park, Jaworski, and MacInnis (1986) (functional, symbolic and experiential), we hold that a brand image consists of the collection of perceived functional and symbolic associations (attributes) that vary in strength and favourability in accordance with consumer values. Thus, as part of the overall branding strategy, a brand’s image must manifest itself by incorporating those attributes that consumers prefer in a specific cultural context. Attributes defining a brand have consequences for the individual, and these reinforce individual values. Symbolic brand image attributes are associated with symbolic and intangible benefits offered by a brand, such as status, group membership or self-image. Functional brand image attributes relate to the tangible benefits offered by the brand, such as the ability to perform certain functions or a high level of technical standards. Moreover, attributes allow consumers to achieve specific benefits, and consumers attach their personal values to brand benefits in considering what the brand can do for them (del Rio, Vazquez, & Iglesias, 2001). In other words, consumers prefer brands, the values of which correspond to their own values (de Chernatony, 2002).

The Role of Personal Values in Consumer Behaviour Consumer behaviour literature recognises values being a powerful force shaping consumers’ motivations, lifestyles and product choices. This topic has received extensive attention over the past three decades

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(Honkanen, Verplanken, & Olsen, 2006; Marandi, Little, & Sekhon, 2006; Gullestrup, 2006). However, value studies have also been constantly criticised for their fragmented nature and inadequate value conceptualisation. As Fulton and Lipscomb (1996) point out ‘‘few studies offer a clarification of the value concept and several researchers have noted ambiguity in the use of terms of value or values’’ (p. 25). One of the main difficulties in defining values is the disagreement on what constitutes a value and what value priorities are (Reisinger & Turner, 2003). For instance, Rokeach (1973) differentiated between ‘‘instrumental’’ and ‘‘terminal’’ value dimensions. According to Vinson, Scott, and Lamont (1977), values stimulate motivation for behavioural response in respect to product attributes. In addition, Schwartz and Bilsky (1987) suggest five central features of values: ‘‘values: (a) are concepts or beliefs, (b) about desirable end states or behaviours, (c) that transcend a specific situation, (d) guide the selection or evaluation of behaviour and events, and (e) are ordered by relative importance’’ (p. 551). On the basis of previous work, we hold that ‘‘values are generalised, relatively enduring and consistent priorities for how we want to live’’ (Zetterberg, 1998, p. 995) and how we want ourselves to be perceived.

Relating Brand Image Perceptions to Personal Values One stream of research suggests that consumer perceptions of brands are based on consumer needs (see Maslow, 1959). Needs are determined by personal values and certain values are considered as more important to consumers in one country than in others (Kim, Forsythe, Gu, & Moon, 2002). Consumers try to satisfy functional needs by searching for functional brands (Park et al., 1986). Functional brands, as asserted by Bhat and Reddy (1998), fulfil immediate and practical needs. Symbolic needs such as self-enhancement or self-image are fulfilled by symbolic brands (Thompson et al., 2006). Another stream of research proposes that brands can have different attributes to be related to perceived brand image benefits (Bhat & Reddy, 1998). Allen (2001) states that functional brand image attributes are of utmost importance for consumers. Thompson et al. (2006) go further and argue that a focus only on functional attributes of brands will not guarantee long-term competitive advantage in international markets as the brand should meet emotional consumer expectations as well. Therefore, perception of the brand image has become separated from its original use, and it is


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attached with new, emotional and symbolic perception such as heightened self-esteem, beauty or happiness (Firat, 1991; Zaltman, 2003). Two further points are important in the context of this study. First, D’Andrade (1986) outlines the contemporary shift in culture theory from the view of culture as patterns of behaviour to one of culture as knowledge, meanings and symbols. This shift has important implications. For example, Ricoeur (1969) reports that symbols do not simply arise from societal conventions or culture. Second, consumers might have different preferences for brands in different cultures. For example, Arnould, Price, and Zinkhan (2004) state that brands should reflect cultural meanings in concrete forms by providing associations with tangible benefits. On the basis of an investigation of studies addressing brand image and personal value issues, we assert that brand image perceptions are inextricably linked with the inner characteristics of consumers, namely personal values. Despite previous research in the field of brand management, scholars have rarely explored how brand image is perceived from the consumers’ perspective or offered explanations as to what is preferred by consumers in view of their personal values. Therefore, our study addresses these issues.

METHOD In respect to sampling procedures, the guidelines for two sampling levels namely the unit of analysis and the selection of countries (including the number of countries, market size and geographic distance) in cross-cultural studies were closely followed (Craig & Douglas, 2006; Reynolds, Simintiras, & Diamantopoulos, 2003; Sinkovics, Penz, & Ghauri, 2005; Sekaran, 1983; van de Vijver & Leung, 1997). We chose to conduct our study on mobile telephone brands. Mobile telephones are noticeable and visible consumer products and carry an element of fashion. These combined with technical product attributes may have an influence on brand choice. The products chosen contain associations of both a ‘‘symbolic’’ and ‘‘functional’’ attributes for consumers (Bhat & Reddy, 1998). Since price plays an important role in consumer perceptions (Kim & Kramer, 2006), this study intends to minimise the influence of price on consumer perceptions, as it includes only those respondents who purchased a mobile telephone for the negligible prices of 1Lt (0.33 Euros) or 1DKK (0.16 Euros) when signing a long-term contract with a telecommunication company.

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Table 1. Country

Lithuania Denmark

Sample Characteristics.

Sample Size

Percent of Females

Education

Age Range

150 140

52 54.3

Undergraduate students in business management and administration

20–23 20–24

We conducted surveys in both Lithuania and Denmark because both the countries have a relatively similar market size (populations of approximately three and a half million in Lithuania and five million in Denmark). Lithuania and Denmark are relatively close geographically (Dunning, 1993) and are relatively culturally homogeneous (Hofstede, 2001). Data were collected only from respondents who have had previous experience in purchasing these products and sufficient knowledge about leading brands, as they have tried more than one brand in the mentioned product group. To control for homogeneity of demographics, the sample is composed of university students. We wanted to survey consumers that are most attractive to the particular product and are between the age of 20 and 30. The use of students should ensure sampling equivalence that is usually required in cross-cultural research (Kumar, 2000). Students are representatives of typical mobile phones consumers (Lages & Fernandes, 2005). As suggested by Cunningham, Young, Lee, and Ulaga (2006) ‘‘while students might not be representative of the populations of their respective countries, they are representative of a consuming population with influences of their respective culture’’ (p. 197). Table 1 summarises sample characteristics. We distributed 800 questionnaires in each country under investigation. Before distributing the questionnaires, we explained the main purpose of the study to the students and gave them the opportunity to participate in a lottery. This can explain the relatively high response rates of 19.6% in Lithuania and 18.7% in Denmark. After a careful inspection, a total of 290 valid questionnaires, that is, 150 questionnaires from Lithuanian students and 140 from Danish students were deemed appropriate for use.

Measures The survey questionnaire was developed carefully following the requirements for conducting a cross-cultural study (Ghauri & Grønhaug, 2005). First, due to the risk of cultural accommodation when using English-language


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questionnaires in cross-national surveys (Harzing, Salciuviene, & 31 countries collaborators, 2005) and in order to avoid misinterpretation of some items, an original English version of the questionnaire was translated into both Lithuanian and Danish. The questionnaire was back translated by bilingual translators (Brislin, Lonner, & Thorndike, 1973). Second, in order to detect possible discrepancies in meaning (Nijssen & Douglas, 2004; Salzberger & Sinkovics, 2006) and ensure comprehension and conceptual equivalence (Craig & Douglas, 2000), all measurement items were carefully inspected by bilingual translators. Finally, a pre-test of the questionnaires was conducted with small groups of Lithuanian- and Danish-speaking respondents in both countries. Constructs were measured on 5-Likert scales ranging from 1 (completely disagree/completely unimportant) to 5 (completely agree/very important). A consumer personal values scale was derived from Lages and Fernandes (2005), and respondents were asked to indicate what use of their brand allows them to achieve in their lives. The items for the perceived brand image benefit scale were derived from Allen (2001), Allen and Ng (1999), Bhat and Reddy (1998), Martinez and de Chernatony (2004) and Sweeney and Soutar (2001). Respondents were asked to indicate the extent of importance they place on items pertaining to the functional and symbolic benefit of their own brand of mobile phone (Table 2). Our measures were purified by means of a series of confirmatory factor models (Gerbing & Anderson, 1998). Our initial analysis indicated that all items loaded significantly for the Danish sample. Few items did not load significantly for the Lithuanian sample. To continue the analysis, these items were eliminated. The results of confirmatory factor analysis for the final scales indicated a good model fit in both countries. All items had high loadings, and they all were statistically significant (po 0.05). The chi-square, goodness of fit index and root mean square error of approximation (RMSEA) indicated satisfactory fit for both countries. Cronbach’s alpha coefficients were acceptable for both countries and ranged from 0.74 to 0.76. Measurement invariance was tested with confirmatory factor analysis using multi-group analysis. The results indicate that the same factor structure is appropriate for either sample. Thus, configural invariance is established for the Danish–Lithuanian comparison (RMSEA ¼ 0.031; Bentler’s comparative fit index [CFI] ¼ 0.96). As expected, full metric invariance was not established in this study (Reardon, Miller, Foubert, Vida, & Rybina, 2006; Steenkamp & Baumgartner, 1998). As suggested by Stain, Lee, and Jones (2006), ‘‘in practice, full invariance of all parameters

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Table 2.

Operationalisation of the Variables.

Variables/Items

Source

Consumer personal value scale The use of my brand allows me to achieve More harmony and stability in life Greater family security More tranquility More respect from others The feeling that the world is more agreeable More social recognition Higher status An inspirational, exciting and adventurous life A higher integration into my group Better relationships (e.g. social and family) Stengthened friendship

Lages and Fernandes (2005)

Perceptions of functional and symbolic brand image attributes How important are each of the following aspects with regard to a brand of the mobile phone? I think that this brand gives me an image of someone important This brand changes my image in other people’s eyes This brand reflects my success in life My friends choose it Ability to send SMS Technical functions It is a good phone for a good price

Adapted from Allen (2001), Allen and Ng (1999), Bhat and Reddy (1998), Martinez and de Chernatony (2004), Sweeney and Soutar (2001)

Note: The table summarises items that were retained in the final scale. Deleted items are not included.

and even invariance of only key parameters is difficult to obtain’’ (p. 251). According to Horn (1991, p. 125), metric invariance is ‘‘a condition to be striven for, not one expected to be fully realized’’ (in Reardon et al., 2006, p. 125). Reardon et al. (2006) consider ‘‘full metric invariance as scientifically unrealistic’’ (p. 125). Since this study does not ‘‘compare means of measures across countries, scalar invariance was not tested’’ (Reardon et al., 2006, p. 125; Steenkamp & Baumgartner, 1998, p. 80). The study’s aim is not to compare absolute perceptions of brand image attributes in different countries; therefore, differences in stylistic responding (Reardon et al., 2006; Baumgartner & Steenkamp, 2001) were also not assessed. Finally, multicolinearity was assessed, and the results satisfactorily indicated


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that multicolinearity is not an issue here (variance-inflation factor [VIF] o5, as suggested by Hair, Black, Babin, Anderson, & Tatham, 2006).

ANALYSIS AND FINDINGS The effects of personal values on brand image perceptions were tested using regression analysis. For the Danish sample, the results indicate that the peaceful life value dimension has a significant effect on perceptions of both symbolic attributes (b ¼ 0.35, p o 0.05) and functional attributes (b ¼ 0.20, p o 0.05). This dimension explains 43% of variation in perceptions of both symbolic and functional attributes. This was not so for the Lithuanian sample. For the Lithuanian sample, the results indicate that the peaceful life value dimension has a significant effect on perceptions of symbolic attributes (b ¼ 0.21, p o 0.05) only. The total variance explained is 36%. The other two dimensions of personal values (social recognition and social integration personal values) have no significant effects on brand image attributes in each country. These values do not influence brand image perceptions possibly because brands of mobile phones do not aid towards social recognition or integration as other more expensive high involvement shopping goods might do (e.g., BMW automobiles). We also aimed to assess how brand image was perceived and whether the symbolic and functional attributes of brand image were truly perceived by respondents as distinct. Testing these perceptions values were not taken into consideration. As a result, t tests (p o 0.05) on the factor scores indicate significant differences between the perceptions of symbolic and functional brand image attributes of mobile telephones in each country. Additionally, for the Lithuanian sample, the symbolic brand image attributes of mobile phones are highly important, whereas functional attributes are moderately important. For the Danish sample, respondents report that they find symbolic attributes more important than functional ones.

DISCUSSION OF FINDINGS Despite the stream of research of brand management studies, consumer brand image perceptions that are a function of consumer personal values have received insufficient attention in the marketing literature. In addressing this shortcoming, we investigated the effect of consumer values on

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perceptions of brand image attributes in a context of two EU countries: one Eastern European-Lithuania and another Western European-Denmark. Our findings indicate that specific consumer personal values influence brand image perceptions in the market of mobile phones. Our findings suggest that the functional and symbolic attributes represent brand images of mobile telephones. The symbolic attribute explains consumers’ perceptions as regards intangible and symbolic benefits offered by brand of mobile phones (e.g., status, role in a group), whereas the functional attribute explains consumers’ functional evaluations of brand image of mobile phones (e.g., practicality, usefulness). In respect to the symbolic brand image attributes, the results indicate that respondents in each country score higher on symbolism without taking into consideration personal values. A high score on the symbolic attribute indicates a preference for recommendations by friends regarding what to buy and fashionable, expensive brands; these should also correspond to their selfimage. Although the functional brand image attributes are important in each sample, the respondents score lower on this dimension compared with the symbolic one. A lower score on the functional attribute indicates that a choice of practical and useful products is of secondary role. Although our finding of two distinct brand image attributes was expected, it is consistent with the notion that brand image comprises both symbolic and functional attributes (Allen & Ng, 1999; Kivetz & Simonson, 2002). Our results also reveal a significant effect of consumer values on perceptions of brand image attributes. On the one hand, Lithuanian students favouring peaceful life values over social recognition and social integration values expect brand image to convey the symbolic benefits. On the other hand, Danish students favouring peaceful life values over social recognition and social integration values expect brand image to convey both the symbolic and the functional benefits. The variations in effects indicate that brand image perceptions vary among respondents. These findings are in line with the notion that personal values play an important role in consumer perceptions and provide a deeper understanding of consumers (Kim et al., 2002; Marandi et al., 2006). In respect to the effect of personal values in brand image perceptions, we draw two conclusions on the basis of our findings. First, although the literature suggests diverse conceptualisations of brand image, our findings are similar to those of Bhat and Reddy (1998), Kivetz and Simonson (2002) and Martinez and de Chernatony (2004) that brand image consists of two brand image attributes and the symbolic and functional attributes of the brand may represent images of mobile telephone brands. Second, exploring


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the conceptualisations of personal values, our results support the notion that personal values influence perceptions (Brangule-Vlagsma et al., 2002; Honkanen et al., 2006; Marandi et al., 2006). An assessment of how specific values affect brand image perceptions of mobile telephone brands provides an indication of the extent to which those perceptions differ among respondents. Through the understanding of how brand image is perceived from the consumers’ perspective, companies can build a relevant brand image that will convey specific benefits offered by brands. Such knowledge will aid the process of strategic decision-making regarding the adaptation or standardisation of brand image and its maintenance in a cross-cultural context. Hence, the results of our study provide a more informed and systematic basis on which to develop brand image positioning strategy by providing a framework for selecting relevant brand image attributes.

MANAGERIAL IMPLICATIONS AND FURTHER RESEARCH SUGGESTIONS The relative impact of personal values on brand image perception can be of interest to brand managers, as the consideration of these factors can lead to more successful brand image formation strategies for the Lithuanian and Danish markets. Our results suggest that brands of mobile phones can be positioned in terms of the functional-symbolic reciprocity in view of consumer values for Danish market, whereas the symbolic positioning in view of consumer values is suggested for Lithuanian market. Understanding the issue that symbolic and functional attributes are perceived as multidimensional facets of brand image and that different attributes are influenced by specific consumer values may point to those variables that brand managers need to influence when managing brand image in the long run and developing more effective brand positioning strategies that are culturally adapted. Although it is difficult to predict all relationships between consumer values and perceptions of brand image attributes, to the extent that this has been done in our study, we have demonstrated that it is worth taking into consideration the application of other strategies than those of standardisation only, even in such small markets as Lithuania or Denmark. Value-based consumer segmentation can be an option. Another point is that three-attribute brand image management may not always be necessary (Park et al., 1986), as

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our study has reported that only two attributes are associated with the brand image of mobile telephones. If companies continually extend the geographical area of their business activities, the degree of acceptance by the local consumers should be one of the major determinants of the success or failure of their operations. Therefore, the decision by companies as to whether they standardise, and thus neglect cognitive characteristics of local consumers, or adapt brand image locally is a central strategic one (Hsieh et al., 2006). Our study has several limitations that suggest future research directions. First, our study focuses on well-known brands in one product category of high-involvement shopping goods. Thus, caution is warranted when attempting to generalise the findings to less familiar brands for different product categories. Next, our study was conducted in two countries and the targeted respondents were students. Thus, young people in the sample might bias the findings, as the older generation might hold different values that influence their perceptions of brand image attributes in different ways, especially in the region that was the Soviet Union. Finally, our study does not include a sender– receiver communication model, or a consideration of advertising design. Thus, further research would provide us with additional insights into the field. First, research needs to be extended to other Eastern European countries in order to generalise the results to these markets. Such a study would offer a deeper insight into the consumers’ perceptions and personal values in new countries that are joining the European Union. Second, our study includes relatively small and homogeneous countries; thus, future studies should include countries with significant ethnic minorities. Third, other studies could focus on other types of products and brands with which consumers are less familiar. Finally, cross-cultural studies that take into account consumer preferred communication modes or consumer response to advertising campaigns would also add to furthering our understanding of consumer brand image perceptions.

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PART III COLLABORATIVE RELATIONSHIPS

DO FIRMS CREATE VALUE THROUGH INTERNATIONAL STRATEGIC ALLIANCES? Chia-Ling ‘Eunice’ Liu In recent years, interfirm collaborations have inspired an abundant literature in marketing and strategy (Lambe, Spekman, & Hunt, 2002; Sarkar, Raj, Cavusgil, & Aulakh, 2001; Susan, Ron, & Bill, 2006). Alliances, collaborative arrangements between firms that comprise the exchange, sharing and codevelopment of products, services and knowledge, are now eagerly sought as a means of adding to firm’s value and integral part of the strategy (Contractor & Lorange, 2002a; Kandemir, Yaprak, & Cavusgil, 2006; Lorange & Roos, 1992). Moreover, these alliances are more and more knowledge-intensive and often involve competing firms (Duysters, Kok, & Vaandrager, 1999). Many researchers have suggested that an important explanatory factor for the growing trend toward alliances is that these provide a platform for organizational learning, giving firms access to the knowledge and resources of their partners (Chen & Chen, 2003; Inkpen, 2002; Inkpen & Beamish, 1997; Mol, van Tulder, & Beije, 2005; Norman, 2004; Weerawardena, O’Cass, & Julian, 2006). Small firms in a resource-limited country have a limited capacity to compete in the knowledge-intensive and highly globalized industries. However, the experience of Taiwan tells a different story. Taiwan has become the world’s biggest producer of notebook PCs and has established itself as a world-class supply source for various computer-related products, key components and New Challenges to International Marketing Advances in International Marketing, Volume 20, 195–225 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020011

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knowledge-intensive services (Einhorn & Burrows, 2003; Ernst, 2000). The size-related disadvantages have not prevented Taiwan from becoming a successful competitor in the IT industry, which requires a wide range of technological and organizational capabilities. Ernst (2000) argues that the answer to this puzzle is knowledge acquisition through various interorganizational linkages. As markets today have grown more and more fragmented, marketers related to each other increasingly in the roles of suppliers, customers, collaborators and competitors (Kandemir et al., 2006). The issue of how firms form meaningful collaborative relationship, how they maintain partnerships along the value chain and how they manage knowledge flows in such environments has become critical marketing skills in achieving better performance (Day & Montogomery, 1999). This research focuses on examining how these Taiwanese IT suppliers enhance their overall capabilities through cooperating with multinational corporation (MNC) buyers, which may shed light on the complicated issues of cross-border alliances. This research examines the factors influencing learning between crossborder alliance partners. The management and processing of knowledge among organizations are increasingly viewed as important determinants of innovations and the success of alliances (Frost & Zhou, 2005). I build on antecedents to knowledge acquisition, learning dimensions such as learning intent, absorptive capacity and protection on the one hand, and relational dimensions such as trust and interaction on the other. First, most of the literature on learning has restricted itself to learning within the organization. There is less understanding about how the alliances trigger learning when organizations collaborate and interact (Nonaka, Von Krogh, & Voelpel, 2006; Phan & Peridis, 2000). It has become more and more critical, especially in high-tech industries, to collaborate with other organizations to advance in new technologies and innovations (Frost & Zhou, 2005; Kandemir et al., 2006). Accordingly, this research develops a more comprehensive and integrative model to link inter-organizational and intra-organizational learning to investigate the determinants of the capability enhancement through cross-border alliances. Second, although most researchers have focused on alliance motivations, forms of collaborations and outcomes (Kandemir et al., 2006; Zineldin & Dodourova, 2005), process-related questions have received less attention. This research addresses determinants of the knowledge acquisition process by recognizing the role of inter-partner relationships. The framework for accomplishing this involves integrating the relational view, which emphasizes the inter-organizational interactions and mutual trust between partners (Cullen & Johnson, 2000; Dyer & Singh, 1998).

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Finally, conflicting results have been obtained for alliances in developing and developed countries (Ramamurti, 2004). Most research on developing countries adopts the perspective of the MNCs and excludes the view of the developing country’s partner (De Mattos, Sanderson, & Ghauri, 2002; Ernst, 2000; Yan & Gray, 1994). In recent years, the vertical link between the MNC buyers and their offshore suppliers in less-developed countries/ newly industrialized countries (LDCs/NICs) is particularly strong, but there has been little systematic research into this emerging relationship (Chen & Chen, 2003; Jao, 1996; Mol et al., 2005). Hence, I focus on the perspective of the resource-limited suppliers in NICs and examine whether they can enhance their capabilities and obtain competitive advantages through alliance learning. On the basis of the above rationale, this research considers the following questions: What factors influence knowledge acquisition between crossborder alliance partners? Do inter-firm relationships influence knowledge acquisition in alliances? From the suppliers’ perspective, can alliance learning enhance the capabilities of the firm in a quasi-market, and asymmetric alliances such as contract manufacturing alliances? Can the firm enhance its network position after alliance learning? I develop a theoretical model, build hypotheses and continue to test the model using structural equations modeling. I end by discussing the results and suggesting the directions for future research.

THEORETICAL MODEL Antecedents of Knowledge Acquisition Learning Intent Intent refers to a firm’s initial propensity to view collaboration as an opportunity to learn (Hamel, 1991, p. 90). Comparing the intent to form alliances between Western and Japanese firms, Hamel indicates that most Western firms possess substitution intent to substitute their competitiveness in a specific area for their own lack of skills, whereas the Japanese partners seem to have explicit learning intent to actually internalize their partners’ skills. When the internalization intent is strong in a company, the skills and knowledge acquired from the partner are important to the growth of the whole company (Hamel, 1991). However, if both partners possess equal intent to internalize the other’s skill, distrust and conflict may occur to threaten the stability of alliances (Hamel, Doz, & Prahalad, 1989; Madhok, 2006).

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Hamel (1991, p. 92) proposes the factors that might account for the observed differences in intent: (1) whether the firm views collaboration as a more or less permanent alternative to competition or as a temporary vehicle for improving its competitiveness vis-a`-vis its partners; (2) its relative resource position as compared to its partners and other industry participants’ position; (3) its calculation of the pay-off from learning; and (4) its preference for symmetric vs. asymmetric dependence within the alliance (Kemp & Ghauri, 2001). Many scholars agree that the organization must consider learning as an explicit objective, and collective learning in the organization will enhance the firm’s capability to survive (Andersson, Bjorkman, & Forsgren, 2005; Ghoshal, 1987; Hamel, 1991; Norman, 2004). Even though there may be both intentional and unintentional knowledge acquisition in an alliance process, studies have consistently found a positive correlation between ‘intent’ and ‘organizational learning’ (Kandemir, Ghauri, & Cavusgil, 2002; Schacht, 1999). Although strategic alliances are fundamentally considered as dyadic exchange relationships, alliance participation over time results in increasingly complex inter-firm networks (Ghauri & Prasad, 1995; Gulati, 1999; Zaheer & Bell, 2005). Embedded relationships with other partners in the network enable firms to acquire valuable information of new business opportunities, which can be particularly important in a global setting (Ghauri, Hadjikhani, & Johanson, 2005; Hakansson & Johanson, 2001). The explicit goal to learn from the partnership helps the firm to move quickly in a rich information exchange network. Nowadays, the firm’s position in the network is considered more critical because it channels knowledge transfer and technology sharing (Contractor, Kim, & Beldona, 2002; Contractor & Lorange, 2002b). Hence, I propose the following hypothesis: H1. Suppliers with higher learning intent will experience more knowledge acquisition from their foreign partners. Absorptive Capacity If intent establishes the desire to learn, receptivity determines the capacity to learn (Hamel, 1991, p. 96). In that context, absorptive capacity can be defined as a firm’s ability to ‘recognize the value of new, external knowledge, assimilate and apply it to commercial ends’ (Cohen & Levinthal, 1990, p. 128). It is argued that a firm’s absorptive capacity is ‘largely a function of firm’s prior related knowledge’ (Cohen & Levinthal, 1990, p. 128). The organization’s absorptive capacity will start at the individual level; hence, it depends not only on the interface with the external environment but also on the knowledge


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transfer across and within subunits (Scott-Kennel & Enderwick, 2004). The firm’s absorptive capacity results from a long process of investments in knowledge accumulation and is influenced by its participation in product development, research and development (R&D) and other technological activities (Frost & Zhou, 2005; Mowery, Oxlley, & Silverman, 2002). Without absorptive capacity, it will be difficult to learn from their partners and add value to the firm. Lane and Lubatkin (1998) propose that the learning partner’s absorptive capacity will depend on (1) what type of new knowledge is offered by the teaching partner; (2) the similarity between the student and teacher firm’s capability and organization structures and (3) the learning partner’s familiarity with the teaching partner’s organizational problems. A supplier’s absorptive capacity is expected to be positively correlated with knowledge acquisition from its partners. Therefore I propose: H2. The higher the level of the supplier’s absorptive capacity, the greater the amount of knowledge acquisition from the foreign partners. Protection Transparency refers to the ‘knowability’ or openness of each partner and thus the potential for learning (Hamel, 1991, p. 90). Transparency can be determined from two aspects: organization and skills (Hamel, 1991). Norman (2004) claims that transparency could be influenced through the design of organizational interfaces, the attitudes toward outsiders, the partner’s relative pace of skill-building and the protective behavior of individuals. However, the challenge is to share enough knowledge to create competitive advantages while preventing the whole transfer of core skills (Baughn, Denekamp, Stevens, & Osborn, 1997; Hamel et al., 1989). The role of gatekeepers, i.e. people who control the knowledge flow, is to protect the unintended and informal transfer of proprietary intellect assets. Szulanski (1996, p. 31) also identifies the lack of motivation of the source of knowledge (e.g., protective behavior) as a likely source of internal stickiness (Szulanski, 1996; Wu & Cavusgil, 2006). If there is a high competitive overlap, the firms may be unwilling to share their knowledge due to the risk of knowledge loss (Inkpen, 1998). Knowledge loss arises when valuable knowledge spills out to the partner who then may use the knowledge to gain competitive advantage (Cohen & Levinthal, 1990). Von Hippel (1994) indicates that certain attributes influence knowledge stickiness, e.g., specialized personnel such as technology gatekeepers, specialized organization structures such as transfer groups, the pricing and the access to proprietary information. These attributes are indicators of the degree of the

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protection requested by information transmitters vis-a`-vis their knowledge base (Simonin, 1999a, 2004). The foreign partners may put barriers to limit local partners to access their specific skill area (Inkpen & Beamish, 1997; Simonin, 2004). The loss of knowledge can expose them to the threat of a new and stronger competitor. The fear of losing competitive advantage and proprietary assets in an alliance will impede knowledge acquisition. The partner’s protective behavior will hinder knowledge acquisition. Hence H3. The more the protection by the foreign partner, the less the knowledge acquisition by the local partner. Trust Trust reflects the belief that a partner’s word or promise is reliable and that a partner will fulfill its obligations in the relationship (Boersma, Buckley, & Ghauri, 2003; Inkpen, 2000). Many researchers have indicated the important role of trust in the performance of a collaborative relationship (Dhanaraj, Lyles, Steensma, & Tihanyi, 2004; Inkpen, 2000; Schoorman, Mayer, & Davis, 2007). However, most of these studies focus on interpersonal trust; the way in which close relationships among managers, scientist and engineers develop and little attention is paid to interorganizational trust (Dodgson, 1993). One of the most ambitious global research projects on the next generation of computer chips united by over 200 scientists from Siemens AG of Germany, Toshiba of Japan and IBM of the US provides a good example of the significance of organizational trust in alliances (Browning, 1994). In principle, diversity in the cultural and scientific background is supposed to stimulate the creation of new technology. Nevertheless, language barriers, the lack of cross-culture training and the differences in management philosophy may result in mistrust of partners and terminate the alliance (Svejenova, 2006). Research has shown that trust and personal ties are more important than explicit contracts in the network relationship, and these features reduce monitoring costs and enhance ‘thick’ information exchange of tacit and proprietary know-how (Perry, Sengupta, & Krapfel, 2004; Smitka, 1991; Uzzi, 1997). Trust promotes the access to difficult-to-price resources that enrich the firm’s ability to compete and overcome problems (Boersma et al., 2003; Ghauri et al., 2005; Uzzi, 1997). High-level trust will eliminate unnecessary safeguarding mechanism and is expected to have a positive impact on knowledge acquisition. Hence H4. The greater the trust between the alliance partners, the greater the effect of knowledge acquisition.


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Interaction The level of knowledge acquisition will be enhanced if the partners get to know where the important expertise resides within each firm. In order to achieve this, the alliance partners can design interfirm routines that facilitate information-sharing and increase socio-technical interactions over time (Dyer & Singh, 1998; Eriksson & Chetty, 2003). The interaction between different value-added functions will encourage productivity and innovation (Chetty & Wilson, 2003; Jao, 1996). Various interaction modes such as on-site visits, product concept reviews, technical meetings and joint training programs are encouraged to improve the quality of relationships and facilitate knowledge acquisition. The transfer of tacit knowledge is very communication-intensive, involving several months of frequent interactions between alliance partners. Subramaniam and Venkatraman (2001) also indicate that rich informationprocessing mechanisms such as face-to-face contact with overseas managers will increase the effectiveness of transferring and deploying tacit overseas knowledge in MNCs. Therefore, the level of partner interaction is expected to be positively related with knowledge acquisition by the alliance partners. If suppliers interact continuously and closely with their MNC buyers, they obtain better intelligence about the buyer’s requirements and the competitors’ moves. The interaction of external activities and technologies becomes important in sustaining strategic advantages in global competitive battles in high-technology industries (Teece, Pisano, & Shuen, 1997). MNC buyers nowadays increasingly involve suppliers in the design process and technology development activities such as joint product development and joint technology sharing (Kandemir et al., 2002; Mol et al., 2005). These joint actions bind suppliers to MNC buyers. Suppliers learn about the buyers’ requests for products, culture, management practices and decisionmaking patterns, which enable them to adjust and apply their resources in the ways that have the greatest benefit (Vonderembse & Tracey, 1999). Relational capital not only facilitates learning through one-to-one interaction but also helps companies to balance the acquisition of new capabilities with the protection of proprietary assets between alliance partners (Ghauri et al., 2005; Kale, Singh, & Perlmutter, 2000). Hence, I propose H5. The level of partner interaction is positively related to knowledge acquisition from foreign partners. Knowledge Acquisition and Knowledge Application Knowledge allows the firms to develop their core competences from collective learning and enhance their ability to survive and grow (Hamel, 1991).

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Many studies have been concerned with knowledge acquisition but less is known about the process of knowledge application – the stage in which knowledge becomes institutionally available (Nevis, DiBella, & Gould, 1995; Rindfleisch & Moorman, 2001). The distinction between these two processes is crystallized in Demsetz’s (1993) observation. Knowledge acquisition requires that individuals are specialized in specific areas of knowledge, but knowledge application requires the combination of many areas of specialized knowledge. Learning may take place in planned or unintended ways. In some cases, knowledge acquired from foreign partners may exist only in certain functional teams such as R&D and product management. If knowledge is only acquired, but not processed and internalized in the organization, then its effect in enhancing a core competence is limited (Helleloid & Simonin, 1994; Kandemir et al., 2002). The firm needs to ensure that the routines continue to be carried out to leverage the learning of the individual members (Crossan & Berdrow, 2003; Miller, Fern, & Cardinal, 2007). A broader scope of organizational learning includes knowledge acquisition, information distribution, interpretation, and institutionalization (Crossan, Lane, & White, 1999). These processes should be integrated to support ‘actionable learning system’ to link the individual, group and organizational levels. Learning is not something that occurs in an organization only through ‘acquisition effort’ (Grant & Baden-Fuller, 2002; Nevis et al., 1995) but has to be looked at through all the phases simultaneously. Therefore, I suggest the following hypothesis: H6a. The greater the knowledge acquisition from the foreign partners, the greater the knowledge application by local partners. Knowledge Acquisition and Capability Enhancement It has been widely recognized that learning through alliances is the basis of a firm’s value creation (Helleloid & Simonin, 1994; Inkpen, 2002). Even though learning has been identified as an important motivation to form alliances in much research, few studies have seriously investigated the relationship between learning and alliance outcomes (Inkpen, 2002; Norman, 2004). If firms do benefit from alliance learning, how will the learning enhance their capability? How will a firm achieve ‘competitive advantages’ through inter-firm learning? There are thus many challenges to assess the learning and its impact more precisely. One reason for these shortcomings in the literature is that there is a lack of availability of measures of firm-specific capabilities (Mowery, Oxley, & Silverman, 1996).


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In this research, I use the ‘enhancement of capability’ as the indicator of learning outcome. Those capabilities that are fundamental to a firm’s competitive advantage and difficult to imitate by competitors – are the collective learning in the organization, especially about how to coordinate diverse production skills and integrate multiple streams of technologies (Prahalad & Hamel, 1990, p. 82). The firm’s ‘dynamic’ and ‘flexible-response’ capabilities have been deemed critical in responding to various changing market and environmental conditions (Grant, 1996; Miller et al., 2007). Learning opportunities from various inter-organizational linkages with MNC partners enable suppliers in resource-limited countries to upgrade rapidly from relatively simple to increasingly complex forms of international arrangements such as product design and product innovation. Hence, I hypothesize that H6b. Suppliers with a higher level of knowledge acquisition will experience more capability enhancement. Knowledge Application and Capability Enhancement Knowledge acquired from foreign partners may not directly fit the local firm (Lane, Salk, & Lyles, 2001). The firm needs to disseminate and adapt the knowledge learned from its foreign partners and apply it to organizational routines (Crossan et al., 1999; Kandemir et al., 2002). Huber (1991) asserts that ‘organizational memory’ is the means by which knowledge is stored for future use and is an important aspect of knowledge application. The organization members can quickly access knowledge through the use of an efficient storing and retrieving information system (Gold, Malhotra, & Segars, 2001). The assimilation and utilization process refers to the stage at which knowledge becomes institutionally available, as opposed to being the assets of select individuals or groups (Nevis et al., 1995). It takes time to transfer knowledge from individuals to groups and from groups to the organization. The sharing and dissemination of personal experiences will facilitate the creation of organizational knowledge (Gold et al., 2001; Inkpen & Dinur, 1998). Institutionalizing is the process of embedding learning that has occurred through individuals and groups into the institutions of the organization including systems, structures, procedures and strategy (Crossan & Berdrow, 2003). The institutionalizing process aims to apply the learning systematically and enables the organizational routines to be continually carried out (Crossan et al., 1999). The use of in-house conferences, symposia and

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product seminars encourage knowledge sharing between different departments and individuals. The training and development of the organization’s staff has a positive impact on the application of knowledge. Although individuals may come and go, what they have learned does not necessarily leave with them. Hence, I hypothesize that H7. Suppliers with a higher level of knowledge application will experience greater capability enhancement. Capability Enhancement and Network Position Enhancement The network approach has contributed to the development of theories in business research and resulted in several publications concerning inter-firm relationships (Anderson & Dahlqvist, 2002; Dhanaraj & Parkhe, 2006; Ghauri, 1999; Hakansson & Johanson, 2001). Strategic issues typically resolved in a networking context include the following: turnkey contracts, make-lease-buy decisions, joint ventures, strategic alliances, mergers and acquisitions, vertical integration and some forms of outsourcing (Brass, Galaskiewicz, Greve, & Tasai, 2004). The position is a location of power to create and/or influence networks and is decided by three major factors: the domain of the company, the position of the company in other networks and the power of the company relative to the participants in the focal network (Thorelli, 1986). Prior research indicates that alliance networks can be considered as conduits of information, learning and knowledge (Goerzen & Beamish, 2005; Zaheer & Bell, 2005). From the analysis of Toyota production systems, Kogut (2000) shows how capabilities were transferred in the network and how the increased knowledge in the supplier network forced a radical disintegration of American auto assemblers. Globalization in the electronics and IT industry has culminated in the concept of ‘global production network’ that captures the spread of the broader systems of international production which cut across different stages of the value chain (Ernst & Guerrieri, 1998). The main purpose is to exploit complementarities, and the participation in these networks may enhance the migration of knowledge across firm boundaries and national borders (Ernst, 2000). Most IT companies participate in global production networks and greatly enhance their capabilities through repeated interactions and the acquisition of skills between firms in the networks. Over time, the suppliers accumulate knowledge and evolve toward greater independence because of an increase in the scope of their product design activities in the network. This dynamic and continuous learning leads to improvement in capabilities


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and enhancement of the firms’ positions in the network. Thus, I suggest the following hypothesis: H8. The level of capability enhancement is expected to be positively related with the enhancement of the supplier’s network position.

METHODS Sample and Data Collection The sampling list was obtained from various sources such as Taiwan Electronics and Appliance Manufacturers Associates (TEEMA), Taiwan Computer Association (TCA) and the Top 1000 Manufacturing Firms List. There are three main criteria for selecting the firms from these databases: (1) manufacturing firms with a capital of over US$3 million in 2003; (2) companies with experience of cross-border alliances and (3) secondary data of the companies are publicly accessible to obtain more detailed information. The content and format of the questionnaire were developed on the basis of the preliminary interviews and a thorough literature review, which was pretested using several on-site meetings with experienced alliance managers (Ghauri & Gronhaug, 2005). A mixed-mode strategy (Dillman, 2000) of combining e-mail and paper surveys was chosen, which increased the flexibility and raised the response rate. The paper questionnaire was printed in a booklet that included a covering letter as its front page. A selfaddressed, pre-paid envelope was also included in the package to encourage the replies. Most of the electronic format questionnaires were sent to the people who agreed to answer by e-mail in the previous contact. Some companies with multiple alliance partners agreed to answer more than one questionnaire. The combined final sample included 609 firms from six primary categories in the IT industry: communication products, systems, peripherals, card/board, semiconductors and components. I adopted two selection criteria for the key informants in this research. The first criterion was the informant’s position to generalize ‘about patterns of behavior, after summarizing either observed or expected organizational relations’ (Seidler, 1974, p. 817). The second criterion was knowledge of collaborative phenomenon that respondents have been personally involved with alliances and were sufficiently knowledgeable to answer the questions. The majority of the respondents are top executives (i.e. presidents, CEOs,

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general managers, vice-presidents, directors and senior managers) and the others are functional or project managers.

Respondents and Alliance Profiles Throughout the three phases of follow-up, continuous effort and repeated contacts, 160 usable questionnaires were received; this sets the valid response rate at 26.3%. Of these 160 questionnaires, 97 (60.7%) were returned by post and the remaining 63 (39.3%) were sent back through e-mail. Much of the published research on inter-organizational relationships reports a lower response rate of around 15–20%. In terms of country of origin of the alliance partners, 58.8% were US firms, 17.5% were European firms, 16.9% were Japanese firms and the remaining 6.8% were firms based in other areas such as Korea, Israel, etc. In the review of empirical International Strategic Alliance (ISA) research, many researchers noted that the short lifespan of an ISA operation has become a limitation on sample generation. However, most of the ISA collaborations in this research have reached a satisfactory degree of stability. Over 70% of responding firms reported that their ISA operation duration was more than three years and 8.8% of the firms even maintained a long-term cooperative relationship for more than 10 years. Of the 160 responding firms, 125 (78.1%) firms not only manufacture but also design products for MNC buyers. They are usually labeled as original design manufacturing (ODM) suppliers. Most of Taiwanese IT suppliers already enhanced their capability in product design for the MNC buyers. Instead of only manufacturing or designing products for global buyers, 84 (52.5%) of the sample firms also market their own products under their own brand. Over 33% of the companies included in this research had a sales volume greater than US$300 million. Half the sample firms had a workforce larger than 1,000 employees. Following the procedure suggested by Armstrong and Overton (1977), I conducted two tests to examine the possibility of nonresponse bias. First, I compared the respondents’ characteristics (e.g., number of employees, annual sales revenue, capital and age of the company) to those of the original population sample. Second, I compared early with late responses. The first 75% of the returned questionnaires were defined as early responses and the last 25% were regarded as late responses. No significant differences were found from comparing the means of the nine constructs in two groups. Therefore, I assume that nonresponse bias was not a significant problem in the data analysis for this research.

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All of the measures used in this research were collected through the same questionnaire, which introduced the possibility of common method variance (Simonin, 1999a). Harman’s one-factor test (Konrad & Linnehan, 1995; Podsakoff & Organ, 1986; Scott & Bruce, 1994) was used to address the issue of common method variance. I performed principal components factor analysis on the questionnaire measurement items, extracting eight factors with eigenvalues greater than 1.0, which accounted for 71% of the total variance. Since factor one did not account for the majority of the variance (only 13%). The results of this test indicate that common method variance does not appear to be a problem in this study.

Measures This research adopts multiple indicators since they can offer a much finer distinction. Table 1 reports the descriptive statistics and correlations among all the constructs. Most of the items are measured using 7-point Likert Scales, which is a widely used method in organizational research (Bryman, 2000; Churchill & Iacobucci, 2004). The items used in each construct, along with their reliability and confirmatory factor analysis results, are outlined in Table 2. Antecedents of Knowledge Acquisition The measurement of learning intent is well developed and carefully operationalized in some research (see, e.g., Contractor et al., 2002). Hence, Table 1.

Means, Standard Deviations, and Correlations of the Constructs. Mean S.D. (1)

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Learning intent Absorptive capacity Protection Trust Interaction Knowledge acquisition Knowledge application Capability enhancement Network position enhancement

5.58 5.73 4.96 5.90 5.50 4.86 5.31 5.14 5.67

1.21 0.93 1.25 0.90 1.17 1.21 1.09 1.08 1.00

1.00 0.59 0.61 0.51 0.51 0.66 0.41 0.57 0.60

(2)

(3)

(4)

(5)

1.00 0.30 0.78 0.61 0.50 0.56 0.48 0.62

1.00 0.36 0.42 0.37 0.26 0.40 0.39

1.00 0.51 0.39 0.51 0.43 0.65

1.00 0.62 0.41 0.49 0.59

(6)

(7)

(8)

(9)

1.00 0.40 1.00 0.65 0.56 1.00 0.49 0.58 0.69 1.00

Notes: Correlations above 0.138 are significant at po0.05; correlations above 0.181 are significant at po0.01, based on n ¼ 160.

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Table 2.

Measurement Model and Confirmatory Factor Analysis.

Items Dimension: Learning intent The explicit goal to learn from partners was stated during cooperation This collaboration was very important for us to learn from the foreign partners Senior management commitment underscored the importance of learning during cooperation Dimension: Absorptive capacity We have enough in-house expertise to fully use our partner’s knowledge We know what can be learned from our foreign partner We know who knows what and where the critical expertise resides in our partner Dimension: Protection Our partner has intentional procedures, routines, and policies to restrict the sharing of relevant information concerning its technology/process know-how The partner is very protective of its technology/ process know-how The partner clearly identifies knowledge that is restricted in use Dimension: Trust A good faith relationship has developed over time in my firm’s dealings with the alliance partner My firm and this alliance partner understand each other well The partner and its employees are trustworthy; we would not break our promises in pursuit of our own interest Dimension: Interaction On-site visits and face-to-face communication Technology sharing Joint new product design Dimension: Knowledge acquisition New R&D expertise New product development Managerial practice Dimension: Knowledge application The firm makes efforts to establish formal policies, such as documentation, SOP, knowledge banks and expert systems, to facilitate the utilization of knowledge

l

t-Value

0.92

14.84

0.91

14.65

0.80

12.00

0.67

9.07

0.88

12.90

0.66

8.76

0.61

7.64

0.84

11.03

0.67

8.48

0.87

13.50

0.87

13.50

0.86

13.19

0.88 0.93 0.70

13.62 14.72 9.74

0.94 0.93 0.53

15.49 15.16 7.02

0.69

9.21

a

r

AVE

0.91

0.91

0.77

0.77

0.78

0.55

0.74

0.75

0.51

0.90

0.90

0.75

0.86

0.88

0.71

0.82

0.86

0.68

0.82

0.83

0.61

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Table 2. (Continued ) Items The firm offers on-job training The firm is able to locate and apply knowledge to change competitive conditions Dimension: Capability enhancement R&D capability in terms of product differentiation and functionality Speed to introduce new products Capability to perceive new technology development/market trends Dimension: Network position enhancement The firm gains more opportunities to form alliances with prominent global partners The firm increases the penetration of important growth markets The firm enhances its reputation

l

t-Value

0.86 0.79

12.46 11.05

0.83

12.55

0.90 0.89

14.28 14.08

0.84

12.79

0.88

13.72

0.88

13.78

a

r

AVE

0.90

0.91

0.76

0.90

0.90

0.75

Notes: l, factor-loading l; a, Cronbach’s a; r, Joreskog’s r; AVE, average variance extracted. Measurement fit: Satorra–Bentler-scaled w2 ¼ 373.76; df ¼ 288; po0.001; CFI ¼ 0.948; BBNNFI ¼ 0.936; Bollen’s IFI ¼ 0.949; RMSEA ¼ 0.059, N ¼ 160.

learning intent in this research is measured by the firm’s inherent inclination for learning, the strategic importance of learning and top-management commitment to the learning goals (Schacht, 1999; Simonin, 1999a). On the basis of previous studies that contribute to the measures of absorptive capacity, the following three indicators were developed (Dyer & Singh, 1998; Schacht, 1999): the available in-house expertise, knowing what can be learned and where the critical expertise resides in the partner. Protection was measured using a three-item scale that were adapted from alliance learning literature (Gold et al., 2001; Simonin, 1999a): the intentional policies to restrict information sharing, the protectiveness of technology/process knowhow and the restriction of knowledge in use. Trust is conceptualized as ‘the belief that a partner’s promise is trustworthy and that a partner will accomplish its obligations in the relationship’ (Cullen & Johnson, 2000; Inkpen, 2000). The exchange of information and interpersonal contacts are viewed as effective ways of facilitating knowledge acquisition. The measures of interaction involve selectively applying the items developed by Bresman, Birkinshaw, and Nobel (1999) and Subramaniam and Venkatraman (2001). Respondents were asked to indicate the frequency of three forms of interaction: on-site visits and face-to-face communication, technology sharing and joint new product design.

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Knowledge Acquisition and Knowledge Application Knowledge acquisition is decided by the extent to which you have learned from your partner. The scale was designed to assess knowledge acquisition from the foreign partner across various areas, including (1) R&D expertise, (2) product development and (3) managerial practice. Knowledge application is defined as the integration of learning, so it is broadly available and can be systematically exploited in the organization’s routines (Crossan et al., 1999; Nevis et al., 1995). Our research adapted their work on developing the measures of knowledge application as follows: the establishment of formal policies to facilitate knowledge utilization, on-job training and the ability to locate and apply knowledge to change competitive conditions. Capability and Network Position Enhancement Capability is defined as ‘the ability to consistently and successfully integrate internal and external knowledge to lead to the growth and survival of the firm’ in this research. Capability enhancement was measured with three items comprising (1) R&D capability in terms of product differentiation and functionality (Jao, 1996), (2) speed to introduce new products (Subramaniam & Venkatraman, 2001) and (3) capability to perceive new technological development/market trends (Thomas, 1993). Network position is defined as ‘the location of power to influence the decisions or actions of other firms and the base to provide development possibilities of the firm in the network’ (Ghauri et al., 2005; Hakansson & Johanson, 2001). The measurements were developed building on previous network studies by Johanson and Mattsson (1987) and Ernst (2000). Items include the better opportunities to form alliances with prominent global partners, the penetration of important growth markets and the enhancement of the firm’s reputation. A model of hypothesized relationships is presented in Fig. 1.

ANALYSIS Structural equation modeling (SEM) has become a popular methodology due to the flexible interplay between theory and data and because it bridges theoretical and empirical knowledge for a better understanding of the real world (Simonin, 2004). SEM was considered to be a suitable statistical technique because a series of separate but interrelated dependence relationships were estimated simultaneously in this research. Bentler and Wu’s (2003) EQS 6.1 program was used to estimate structural equation models in this research.


Fig. 1.

211

Diagram of Hypothesized Relationships.

Assessment of Measurement Model The first stage of the SEM analysis was concerned with the assessment of the measurement items and how well they specify the relations between the observed measures and their posited underlying constructs (Anderson & Gerbing, 1988). The results of the measurement model are reported in Table 2. An inspection of Cronbach’s a for nine constructs reveals that all the coefficients are greater than 0.70, which indicates acceptable reliability (Nunnally, 1978). Confirmatory factor analysis was used to assess convergent and discriminant validity. Convergent validity was computed following Fornell and Larcker’s (1981) formula and evaluated based on the significance of factor loading and shared variance. As shown in Table 2, factor loadings range from 0.53 to 0.94 (po0.01) and also share variance coefficients ranging from 0.51 to 0.77, thus the constructs demonstrate sufficient convergent validity. I adopted the procedure recommended by Jo¨reskog (1971) to assess discriminant validity. For example, the set of measures for learning intent was paired with absorptive capacity. I ran the model twice, once constraining the estimated correlation parameter between them to 1.0 and once freeing this parameter. A series of w2 difference tests were performed for one pair of

212


factors at a time. For example, the w2 difference for constraining absorptive capacity and trust increases by 36.70 (po0.01) and for learning intent and absorptive capacity it raises to 80.13 (po0.01). A significantly lower w2 value for the unconstrained models suggests that the constructs exhibit discriminant validity (Bagozzi & Phan, 1982). The Satorra–Bentler-scaled w2 test, which corrects for distortions of the normal theory method when data are non-normal (Satorra & Bentler, 1994), is statistically significant (Satorra–Bentler-scaled w2 ¼ 373.76, df ¼ 288; po0.001). The other goodness-of-fit indices suggest a good fit of the confirmatory measurement model: Comparative fit index (CFI) ¼ 0.948; Bentler–Bonett non-normed fit index (BBNNFI) ¼ 0.936; Bollen’s incremental fit index (IFI) ¼ 0.949; root mean-square error of approximation (RMSEA) ¼ 0.059. Although the overall w2 statistic for the measurement model is significant, this might be due to this test’s sensitivity to sample size (Bagozzi & Yi, 1988; Stump & Heide, 1996). However, the ratio of w2 to df (1.30, less than 3) corresponds to a satisfactory fit (Hair, Anderson, Tatham, & Black, 2002). Overall, the measurement model represents a good fit with the data.

Assessment of Structural Model The assessment of the structural model (see Fig. 1) provided a borderline model fit (Satorra–Bentler-scaled w2 ¼ 453.448; df ¼ 307; po0.001). An alternative model strategy was therefore applied to improve model fit, allowing the antecedent factors learning intent, trust and interaction to directly impact on the performance dimensions capability enhancement and network position enhancement. In our original model, these relationships were hypothesized to relate to the performance dimensions only in a fully mediated form through knowledge acquisition, i.e. I hypothesized no direct relationship. Model respecification to improve model fit is common in the social sciences because a priori models often do not adequately fit the data, but respecification is also controversial (Shook, Ketchen, Hult, & Kacmar, 2004). Anderson and Gerbing (1988) advocate the use of theory and content considerations for respecification. Chin (1998) asserts that respecification may be appropriate when validated with new samples. The additional introduction of direct relationships from learning intent to capability enhancement and network position enhancement, trust on network position enhancement and interaction on capability enhancement and network position enhancement resulted in a significantly improved fit

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Table 3. Structural Parameter Estimates and Model Fit Indices. Paths Learning intent - knowledge acquisition Learning intent - capability enhancement Learning intent - network position enhancement Absorptive capacity - knowledge acquisition Protection - knowledge acquisition Trust - knowledge acquisition Trust - network position enhancement Interaction - knowledge acquisition Interaction - capability enhancement Interaction - network position enhancement Knowledge acquisition - knowledge application Knowledge acquisition - capability enhancement Knowledge application - capability enhancement Capability enhancement - network position enhancement

Hypothesis (Expected Direction)

Standardized Coefficient

t-Value

H1 (þ) H1b (þ) H1c (þ)

0.106 0.074 0.058

5.169** 2.096* 1.276

H2 (þ)

0.237

0.057

H3 (–) H4 (þ) H4b (þ) H5 (þ) H5b (þ) H5c (þ)

–0.119 –0.177 0.079 0.099 0.075 0.061

–1.293 –0.600 4.609** 4.602** 0.498 2.102*

H6a (þ)

0.056

4.436**

H6b (þ)

0.086

3.367**

H7 (þ)

0.108

3.973**

H8 (þ)

0.072

5.278**

Notes: Model fit indices: Satorra–Bentler-scaled w2 (302) ¼ 413.63; po0.001; N ¼ 160; CFI ¼ 0.935; BBNNFI ¼ 0.925; IFI ¼ 0.936; RMSEA ¼ 0.064. * po0.05; ** po0.01.

(Satorra–Bentler-scaled w2 difference ¼ 39.818; df ¼ 5; po0.000). This is why I adopted the revised model. Table 3 reports the parameter estimates and goodness-of-fit indicators of the revised structural equation model. Although the w2 statistic is significant (Satorra–Bentler-scaled w2 ¼ 413.63; df ¼ 302; po0.001), the sufficiently low ratio of w2 to df (1.37, less than 3) reports a satisfactory fit. Furthermore, CFI, BBNFI and Bollen’s IFI all indicate an excellent fit for the structural model (CFI ¼ 0.935; BBNNFI ¼ 0.925; IFI ¼ 0.936). RMSEA ¼ 0.064 also exhibits adequate model fit. Of the five postulated antecedents, the data analysis result displays a significant effect on knowledge acquisition: learning intent (g ¼ 0.106, t ¼ 5.169) and interaction (g ¼ 0.099, t ¼ 4.602) in support of H1 and H5 respectively. That is, the greater (the smaller) the degree of learning intent

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and interaction between the alliance partners, the greater (the smaller) the level of the knowledge acquisition in the ISA. The result of H1b (g ¼ 0.074, t ¼ 2.096), which was introduced in the revised model, suggests that leaning intent has a positive influence on capability enhancement. Meanwhile, while H4 does not demonstrate a direct relationship between trust and knowledge acquisition, the direct support of H4b (g ¼ 0.079, t ¼ 4.609) plays out the importance of trust in enhancing alliance partner’s network position. Furthermore, H5c (g ¼ 0.061, t ¼ 2.102) affirms interaction between the alliance partners strengthen the supplier’s network position directly and not only through knowledge acquisition. The link between knowledge acquisition and knowledge application is significantly supported in H6a (b ¼ 0.056, t ¼ 4.436). The acceptance of H6b (b ¼ 0.086, t ¼ 3.367) and H7 (b ¼ 0.108, t ¼ 3.973) indicates that both knowledge acquisition and knowledge application contribute to capability enhancement. Last of all, the notable result of H8 (b ¼ 0.072, t ¼ 5.278) verifies that capability enhancement exerts a strong positive influence on the improvement of network position (see Fig. 2).

Fig. 2. Final Revised Model and Examined Relationships. Notes: * Significant at po0.05 Level; ** Significant at po0.01. Dotted Arrows Represent Relationship which were Originally Hypothesized to Zero, but Introduced in the Revised Model.


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DISCUSSION In recent years, marketing scholars have expressed a considerable degree of interest in the antecedents and consequences of collaborative relationships (Kandemir et al., 2006; Krishnan, Martin, & Noorderhaven, 2006; Tsang, Nguyen, & Erramilli, 2004), whereas others have linked the alliance form (horizontal vs. vertical) to knowledge sharing between partners (Rindfleisch & Moorman, 2001) or alliance outcomes (Si & Bruton, 1999). Other studies have focused on the nature of governance in interfirm relationship, especially in buyer–seller contexts (Heide & John, 1990; Nobeoka, Dyer, & Madhok, 2002). On the basis of past research, my study proposes a framework integrating different streams of theories to show how different factors affect interfirm collaborations through both knowledge acquisition from alliance partners and the application of such knowledge to enhance the firm’s capability and network position. In this section, I highlight the key implications of my findings.

Key Determinants of Knowledge Acquisition The results indicate that the most significant determinant of knowledge acquisition is learning intent, closely followed by partner interaction. A firm with ‘learning intent’ views collaboration as an opportunity for learning and competence acquisition from their alliance partners (Hamel, 1991). The SEM result is consistent with Tsang (2002), who states that a firm with strong learning motivation is more likely to allocate resource and commit management involvement to knowledge acquisition. The empirical results strongly support the conceptual postulations that inter-partner interaction has a positive effect on knowledge acquisition in the ISA context. This result emphasizes the importance of relationship marketing and management in dynamic environment. Relationship between local suppliers and foreign partners plays an important role on alliance success. This also confirms the relational view that the firms should establish an on-going relationship that can foster learning to create value with the alliance partners (Kotabe, Martin, & Domoto, 2003). The SEM results show that absorptive capacity is only weakly associated with knowledge acquisition. This suggests that prior knowledge acquired from their foreign partners did not significantly help the suppliers to acquire new knowledge. Although absorptive capacity theory is not supported, this finding is consistent with Lane et al. (2001), who found that the prior

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knowledge acquired by International Joint Ventures (IJVs) was of less help in facilitating current learning. One possible explanation is that prior knowledge expires quickly under the conditions of rapid technological change and short product life cycle in the IT industry. Another interesting finding is that knowledge protection is only marginally associated with knowledge acquisition. Most of the literature suggests that the firm must have an incentive to deploy shielding to prevent leakage of some of the core competences to the other partner (Simonin, 2004). However, this safeguard orientation may obstruct the development of mutually beneficial relationships and limit learning opportunities (Madhok & Tallman, 1998). One possible explanation is that knowledge protection impedes the achievement of alliance goals (Norman, 2004). Most alliances between foreign buyers and Taiwanese IT suppliers involve product development. If such goals are not fulfilled due to the limitation on sharing knowledge between partners, the alliance provides less value. The linkage between trust and knowledge acquisition is surprisingly negative. In most of the ISA literature, trust leads to a shared understanding between the alliance partners (Dhanaraj et al., 2004) and allows greater access to resources (Uzzi & Lancaster, 2003). However, our result suggests that the level of trust between buyers and suppliers does not seem to influence knowledge acquisition. It is possible that since this study focuses on the contractual relationships between MNC buyers and NIC suppliers, there is less risk of opportunistic behavior since the NIC suppliers are typically less powerful than the MNC buyers.

Integration of External and Internal Learning Organizational learning is a complex issue. Most studies of alliance learning focus on the acquisition of knowledge externally from partners and, to a lesser extent, on the utilization of knowledge internally in the organization (Nevis et al., 1995). Although some knowledge acquired externally can be acted on immediately, it is more likely that it will have to be adapted and disseminated internally before it can be applied to commercial ends (Lane et al., 2001). As McEvily and Zaheer (1999) note, knowledge acquisition is not a separate event but rather a part of a multistage process that includes the final utilization of this knowledge to achieve organizational goals. The marketing literature has also indicated the importance of information use activities (Baker, Simpson, & Siguaw, 1999; Bulent & Seigyoung, 2006; Kohli & Jaworski, 1990). Following these propositions, this research


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proposes a framework to connect knowledge acquisition, and knowledge application and examines the combined effects on capability enhancement. Network Position Enhancement Since the extant alliance learning literature is concerned with the dyadic relationship and suffers from what Gulati (1998, p. 307) called ‘dyadic reductionism’, this research makes a significant contribution by systematically examining the network perspective of collaborations. Many firms today are involved in a web of interorganizational arrangements. The firm’s position in the network is increasingly critical because this facilitates the acquisition of skills and knowledge from other members. However, unlike previous studies that were mostly focused on the impact of network position on alliance learning (Contractor et al., 2002; Goerzen & Beamish, 2005; Grant & Baden-Fuller, 2002), this research reverses the direction to examine the impact of the latter on the former. A positive relationship between capability enhancement and network position enhancement is significantly supported to affirm this notion.

LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH This chapter provides novel insights into a more comprehensive structure of the knowledge acquisition process and integrates the learning and relationship strands of the literature with knowledge acquisition and application. This inter-partner learning, in turn, demonstrates to be effective within the context of contractual collaborative partnerships between buyers and suppliers. Although the alliance structures and similarities between the alliance partners may facilitate knowledge acquisition, our empirical results suggest that learning opportunities are not limited by the mode or symmetry of the partnerships. This research complements prior studies by systematically examining the impact of alliance learning on the firm’s capability enhancement (Doz, 1996; Dussauge, Bernard, & Will, 2000). It takes a further step of linking with network-related research to consider the influence of alliance learning on the firm’s position in the network because many organizations are increasingly involved in a multi-partner web of alliances (Ghauri et al., 2005). The limitations that influence the interpretation of this study are also well recognized. First, several factors related to alliance learning in previous

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studies, such as alliance duration (Anderson & Dahlqvist, 2002; Simonin, 1999b), size (Kotabe et al., 2003), alliance experience (Lambe et al., 2002) and the country of origin of the alliance partner (Mowery et al., 1996) only received scant attention. Further work on these variables would be a natural extension of the current research. Second, a potential problem is caused by the one-sided survey that depends on the suppliers’ perceptions and judgments about the alliances. Dyadic data (including both sides of an alliance in the research) would have been more desirable. Future work will benefit by adding balancing views from the MNC buyers. Third, it is important to understand the evolutionary role of collaboration in order to advance the theoretical understanding of business strategy and alliance outcome (Dussauge et al., 2000). This study is cross-sectional, since all the variables included in this research were measured at the same time. Given the challenges involved in designing longitudinal research – which would certainly help to further explore the dynamic nature of the process and causes and effects of alliance learning – replications at other points in time and involving related industries are encouraged to raise confidence in the findings. The study involved SEM, which is a methodologically rigorous, yet challenging approach, particularly when a relative large number of variables and smaller sample sizes are involved. The integration of various streams of literatures in this study also involved issues of model respecification to improve model fit. Although this procedure is quite common in the social sciences (Shook et al., 2004), replication of results on other samples is encouraged to validate hypothesized relationships. Finally, the issue of ‘interface-design’ in ISAs seems promising for future work (Foss & Pedersen, 2004). As firms join forces to achieve mutually beneficial goals through their alliances, the relationship between the alliance partners plays an important role in knowledge management (Inkpen, 1996). Inter-partner interactions allow mutual information to be shared and joint actions to be specified. It may be useful to consider the multiple learning interfaces between and within organizations. It would be very useful to acquire a better understanding of the impact interface-design may have on knowledge flows in the learning process; and how interface-design co-evolves with the partnerships.

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WHAT CAUSES BREAK-UPS? FACTORS DRIVING THE DISSOLUTION OF MARKETINGORIENTED INTERNATIONAL JOINT VENTURES Mehmet Berk Talay and M. Billur Akdeniz In recent years, accelerating globalization of markets along with the breakdown of national barriers have rendered international joint ventures (IJVs) ubiquitous and strategically significant tools for managing international business operations (Anderson, 1990; Dhanaraj & Beamish, 2004; Geringer & Hebert, 1991; Harrigan, 1987; Lu & Beamish, 2006). As such they have become viable means of achieving economies of scale, critical mass, reducing risks, learning new skills and technologies, and facilitating effective resource sharing (Beamish & Berdrow, 2003; Bleeke & Ernst, 1993; Harrigan, 1988; Yip, 1992). These trends stimulated intensive research on IJVs in scholarly international business literature. An IJV involves two or more legally distinct organizations each of which shares the decision-making activities of the jointly owned entity (Geringer, 1988). Based on this definition, an IJV has to meet at least one of the three following criteria: (1) at least one parent firm is headquartered outside the IJV’s country of operation, (2) a joint venture has a significant level of operations in more than one country, and (3) parent firms are from different New Challenges to International Marketing Advances in International Marketing, Volume 20, 227–256 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020012

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countries (Geringer & Hebert, 1989). Since the early 1980s there has been an explosive growth of IJVs. Although, these inter-firm collaborations have become a critical part of corporate strategy and firm growth, they also entail serious competitive risks and managerial difficulties in implementing the cooperative relationships, which hinder the achievement of collective goals and lead to the dissolution of these entities (Park & Ungson, 2001). In addition, as a consequence of the globalizing world, businesses also choose to break-up as a more munificent strategic choice. A substantial literature has been materialized with the purpose of examining the motivations for IJV formation, the factors behind their strategic success, and measuring their performance. However, it is surprising that relatively less number of studies have been conducted on the dissolution of these entities despite the fact that the dissolution of IJVs is as likely as their survival. Parkhe (1993) indicates that at least 50 percent of equity joint ventures either fail or dissolve, which may cause various adverse outcomes for the partner firms. This relative lack of research drives our attention to the dissolution of these IJVs, which constitutes a new avenue for international business scholars and practitioners regarding the existing and newly arising challenges in the management of this specific entry mode. In this study, we aim to examine the firm- and country-level antecedents of IJV dissolution. This research sets out to shed light on two important research questions: (1) What is the role of competition–commitment relationship between parent firms on the likelihood of IJV dissolution? and (2) How do the country-level variables affect IJV dissolution? This study is expected to contribute to the IJV literature in several ways. First, IJV dissolution has been regarded as an outcome of bad performance, financial incapability, undesirable alliance partners, or organizational failure. However, this study conceptualizes dissolution from a more recent perspective in alignment with the developments in the international business. We do not necessarily define dissolution in terms of failure or bad performance but as a strategic choice of the parent firms to bring the IJV to an end. This can represent a successful achievement of preset goals for the IJV and/or changes in the corporate strategies of the parents that render the IJV redundant. Recently, the practice of associating dissolution with organizational failure or poor performance has become more questionable in line with the changes in the contemporary business environment. For instance, when the functional foods joint venture, Altus Food was formed by Novartis and Quaker Oats in 2000, the global market for functional foods was estimated to be growing by around 15 percent per year, against 3 percent for most of the food industry. At the time of its

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inception, the goal for Altus was to bring together Quaker’s mass marketing of food and beverages with Novartis’ research in nutrition science and to launch new products in this attractive business segment. However, the expectations about the functional foods business did not turn out to be as high as anticipated – just five percent in a good year; and Altus operations were ceased in 2002. In this case, the main reason for the termination of Altus can be attributed more to a strategy change in the partner firms due to disappointing environmental conditions rather than to the failure of the IJV. Second, we focus on marketing-oriented IJVs (i.e., the IJVs that are formed with the objective of joint selling, distributing, and promoting goods or services that are either jointly or individually manufactured by the partner firms). Among other knowledge management and transfer issues in cross-border alliances, marketing knowledge deserves a special attention for several reasons. One of them is that it has been relatively neglected and requires more attention compared to technology, manufacturing, know-how types of knowledge (Wong, Maher, & Luk, 2002). Another reason rises from the fact that marketing skills and expertise are more tacit than production, and technology (Shenkar & Li, 1999; Lane, Salk, & Lyles, 2001), are embedded and not easily codified in formulas (Zander & Kogut, 1995). Finally, in the literature, marketing knowledge is defined as idiosyncratic and cultural/social-context dependent (Hau & Evangelista, 2007; Zander & Kogut, 1995). Third, we test our hypotheses with a comprehensive set of IJV dissolutions formed by both U.S. and non-U.S. firms; on contrary to most of the studies, which are limited to only the IJVs formed by U.S. companies. The organization of the chapter is as follows. In the next section, we explicate the theoretical background and our hypotheses. Then, in the methodology section, we explain the data and the covariates used in the analyses. After we present the main findings, we elaborate on the major implications for IJV literature and practitioners along with the limitations and suggestions for future research.

LITERATURE REVIEW In tandem with the drastic increase of IJVs, the academic research regarding various issues about them has also augmented. Myriad of studies examining the antecedents and outcomes of partner/location selection, different control and safeguarding mechanisms, performance, and stability of IJVs have appeared in revered scholarly outlets. A review of the previous research on IJVs reveals that a vast amount of these studies is focused on their formation

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(e.g., Kogut, 1988) and the advantages of them as governance structures (e.g., Hennart, 1988). There has been a significant debate on the drivers of IJV formations in the literature. Scholars, particularly from the fields of economics, strategic management, and international business, have provided various conceptualizations of the IJV formations based on various theories. Among those conceptualizations, the ones based on transaction cost theory and resourcebased view (RBV) have received more interest in the literature (Tsang, 2000). Transaction Cost Analysis (TCA) has been extended by Williamson (1991) to explain the hybrid modes of governance among firms (e.g., joint ventures, strategic alliances, etc.), which are regarded as a compromise between the two ends of the market-hierarchy continuum. Williamson (1991) suggests that hybrid governance structures entail better incentives for partners to avoid opportunistic behavior and prove superior against uncertainty due to their more adaptive and flexible structure than hierarchies, while providing better control and monitoring than markets. In his seminal work on joint ventures, Kogut (1988) describes the conditions ‘‘best suited to a joint venture’’ as ‘‘high uncertainty over specifying and monitoring performance, in addition to a high degree of asset specificity.’’ As Tsang (2000) suggests due to the fact that the high degree of asset specificity rules out market transactions and that the high uncertainty precludes precise specifications – and hence ex ante stipulations – of the complications and contingencies regarding a) performance monitoring and b) safeguarding against opportunism, a joint venture becomes a viable option since it provides the partners with better alignment of incentives by mutual allocation of resources and sharing the residual value of the venture. However, according to the RBV of the firm, drivers of joint ventures are two-fold: joint development and mutual exploitation of resources (Tsang, 2000). RBV places particular emphasis on the significance of efficient development of resources as well as the efficient utilization of extant resources (Prahalad & Hamel, 1990). As Ohmae (1989) argues in today’s competitive environment, critical know-how content of products and services reached such levels that it is infeasible for many firms to retain cutting-edge sophistication in all of them, which obligates seamless access to external sources of know-how (Tsang, 2000). Due to the resources required for, and various drawbacks of, acquisitions, they may not be the best way to obtain a certain capability. Moreover, by their very nature, capabilities may not be readily available in the market (Teece, 1986; Kogut & Zander, 1992). These two factors may render a joint venture an optimum choice. According to the RBV, exploitation of complementary resources is another motive behind the joint ventures. Joint ventures entail sharing of


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complementary resources in order to create synergy (Tsang, 2000). The joint venture between General Motors and Toyota, New United Motor Manufacturing Incorporated (NUMMI) is a textbook example for sharing of complementary resources as each partner contributes to the joint venture with a distinct capability which is not only very costly to develop in-house, but also impossible to obtain from the market. Specifically, General Motors contributed to NUMMI with its vast distribution network, while Toyota contributed its superior capability to design small cars as well as cutting-edge manufacturing methods. In sum, firms utilize joint ventures (1) to gain quicker access to requisite skills to perform certain tasks that requires hefty and consequential investments, (2) to share investment risks, and (3) to decrease the total amount they invest (Kogut, 1991). Based on these drivers, Kogut (1991) argues that ‘‘due to its benefits of sharing risk and of reducing overall investment costs, joint ventures serve as an attractive mechanism to invest in an option to expand in risky markets’’ and offers an explanation of joint venture phenomenon based on real options theory. Originating in finance, real options theory has also received attention from strategic management researchers as well (Reuer & Tong, 2005). According to Kogut and Kulatilaka (2001) real options, which illustrate a firm’s investments in non-financial assets, enable the firm to safeguard against, and react to, future events, be favorable or unfavorable, in a contingent fashion. Therefore it is suggested that a portfolio of real options provide the firm with the right, rather than the obligation, to take a ‘‘future specified’’ action, and hence enabling the firm not only to decrease loss in case of a unfavorable situation, but also to increase its gains in an event of an unexpected opportunity in the future (Reuer & Tong, 2005; Bowman & Hurry, 1993; McGrath, 1997). Based on this rationale, real options theory represents a viable means to capture the recursive nature of managerial decision-making where managers amend their future strategies consistently with regard to changing market conditions (Trigeorgis, 1996). Joint ventures, from a real options theory perspective, can be regarded as mechanisms that provide the firm with the flexibility to proactively manage its long- and short-term strategies with regard to market uncertainty and risk (Kogut, 1991). Joint ventures are ‘‘real options’’ because partner firms can (1) limit their downside losses with the initial investment and/or with a limited amount as they can divest from the joint venture more easily than a wholly owned subsidiary in case of an unfavorable situation and (2) maintain an ‘‘option’’ to expand and increase their investment if the market conditions become unexpectedly favorable (Reuer & Tong, 2005). Kogut (1991) suggests and empirically shows that firms expand by using

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their option by fully acquiring the joint venture and making it a wholly owned subsidiary. This interest in the formation of joint ventures is indeed expected, when it is considered that the study of the motivation for corporate strategic choices is a milestone in business policy search (Park & Russo, 1996). However, what is unexpected is the relative lack of research on the failure and/or dissolution of these entities, although several studies report high failure rates such as 7 in 10 (Coopers & Lybrand, 1986), 2 in 3 (Auster, 1986; Kogut, 1989), and 1 in 2 (Harrigan, 1988). Based on these records, it is obvious that more thorough analyses should be conducted on the break-ups of IJVs. A fundamental idea about these entities is that they are not expected to last indefinitely. Kogut (1989) argues that dissolution of an IJV reflects a business failure or an irresolvable conflict among parent firms. Porter (1987) puts forward that dissolution is significant because companies generally do not shut down a successful IJV and dissolution happens only when the company is not financially viable. Lane and Beamish (1990) associate dissolution with less tangible adverse outcomes, such as loss of reputation and add that in the long-term dissolution can create political tensions. Franko (1971) also asserts that the reason for dissolution might be the parties being undesirable alliance partners for others or the host country that sponsors the local firm might not be considered a suitable place for investment. While recent studies have more comprehensive approaches, they maintain the same stance about IJV dissolution with their predecessors. Ring and Van de Ven (1994) suggest that ‘‘it is not only in the economic but also in the psychological best interests of the organizational parties to find ways to preserve their socially embedded relationship’’ (p. 107). Park and Ungson (1997) examine the effects of national culture, organizational complementarity, and economic motivation on the instability of IJVs and conclude that opportunistic threat and rivalry appear to be a stronger indication of the dissolution than organizational variables. In addition, Geringer and Hebert (1991) find that IJVs that are perceived to be successful by their parent firms live longer compared to the others evaluated to be unsuccessful. Recently, Dhanaraj and Beamish (2004) search for the relationship between equity ownership and survival of IJVs and confirms the declining, nonlinear, and asymmetrical relationship. Along with the studies that view IJV terminations as failures and undesirable outcomes, another line of scholarly inquiry takes a different stance and posits that the termination of an IJV may be due to a realized or prospective favorable context as well. For instance, Gomes-Casseres (1987) identify various ‘‘adaptive’’ drivers of joint venture termination. Specifically,


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he argues that joint ventures may be terminated when (1) one of the partners acquire or develop new capabilities, (2) one of the partners enhance their network which stimulates a change in the ownership structure of the joint venture to be able to exploit new economies of scope, and (3) a change in government occurs. Kogut (1991) reports that unexpected growth in the product market, which is a favorable prospect rather than a failure or undesirable outcome may lead to joint venture termination via acquisition; whereas, unexpected problems may have no effect on the likelihood of termination. While Kogut’s (1991) results reveal that the underlying dynamics of termination are more complex to be simplified to ‘‘undesirable outcome’’ or ‘‘failure,’’ Makino, Chan, Isobe, and Beamish (2007) enhances this view of termination by integrating the concept of ‘‘intended termination.’’ They also distinguish between intended termination, in which the initial purposes of IJV are either achieved or disappeared; and unintended termination, in which unexpected contingencies emerge that lead to the termination. The critical contribution of Makino et al. (2007) is the idea that the termination of an IJV might be a positive (i.e., intended termination) as well as a negative (i.e., unintended termination) outcome in contrast to most of the previous studies viewing the termination as a result of poor performance, undesirable alliance partners, or organizational failure (e.g., Franko, 1971; Kogut, 1988; Ring & Van de Ven, 1994). Prior to Makino et al. (2007), Park and Russo (1996) differentiate ‘‘failure’’ from instability by stating that, instability, which can be signaled through dissolution and acquisition, can be perceived as a positive outcome if the end status of the IJV is acquisition. In sum, undesirable outcomes and failures are not the only reasons triggering the joint venture terminations since partners may terminate the joint venture due to several reasons including unexpected success, change in firm strategy, development of new capabilities, and adapting to changes in the environment. In the arguments that follow, our main direction of research is on the dissolution of marketing-oriented IJVs (i.e., the IJVs that are formed with the objective of joint selling, distributing, or promoting goods or services that are either jointly or individually manufactured by the partner firms). In this study, we do not define dissolution in terms of failure or bad performance as most previous studies do but conceptualize it as a strategic outcome, which is contingent on the competition–commitment relationships between parent firms, cultural characteristics of both parties and IJV, and also the host country attractiveness. In doing so, we avoid the questionable practice of associating dissolutions with bad performing IJVs, which is not always the case in current global business world.

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THEORETICAL FRAMEWORK AND HYPOTHESES In this study, we adopt TCA and agency theory perspectives to examine the firm- and country-level antecedents of IJV dissolution. TCA has received substantial consideration in international economics, management (Anderson & Gatignon, 1986; Dunning, 1988; Caves, 1996), and marketing (Rindfleisch & Heide, 1997) fields. This view posits that IJVs are chosen when the transaction costs involved in an exchange are too high for using market mechanism, but not high enough to form a hierarchy (Hennart, 1991; Kogut, 1988; Teece, 1986). They can be explained as a form of hybrid governance structure that shares the attributes of markets and hierarchies in order to avoid and weaken the hazards of each. They are vulnerable to transaction hazards, which threaten the success of relationships between the parent firms (Park & Russo, 1996). Firm-Level Antecedents IJVs are designed to meet the goals of each parent and the collective undertaking in an international context, therefore, will be successful when the value of collective outcomes exceeds opportunity costs incurred by the parent firms, and when the sharing of both is fair (Jarillo, 1988). Given similar strategic objectives and resource bases, a partner can identify, appreciate, and then assimilate another partner’s know-how (Cohen & Levinthal, 1990). In the context of marketing-oriented IJVs, managers – when expanding to foreign countries – can choose to partner with those competitors having local marketing expertise, which can provide access to established distribution channels to market a new product (Beamish, 1993). Furthermore, companies can choose to form marketing collaborations with competitors to pursue short-term integration of similar product and market positioning strategies. Key to IJV survival is striking the right balance between individual competitive motives and cooperation to meet collective interests (Luo & Park, 2004). If this balanced and equitable-contributions system with its benefits and safeguards is jeopardized, so is the IJV. Incentives to deceive can be easily activated and partners may behave opportunistically to attain their own competitive goals instead of the collective goals of the IJV. In this context, we expect that IJVs are more likely to dissolve when the parental goals conflict directly (Kogut, 1988) due to the competition between the partner firms, who both seek to maximize their shareholder value. For example, in a setting where the parents of an IJV are competing


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in the same market, the opportunistic hazard is inevitable, because present friends can easily become future foes (Harrigan, 1988; Morris & Hergert, 1987). It is difficult to develop cooperation in the face of self-interest and competitive uncertainty (Park & Ungson, 2001). Luo and Park (2004) suggest that without cooperation, mutual forbearance becomes less appealing to the partners, as they lack a long-term view. Therefore, IJV becomes a costly governance structure to arrange inter-firm transactions due to increased safeguarding mechanisms against opportunistic hazards. Thus Hypothesis 1. International joint ventures are more likely to dissolve when the partner firms are direct competitors. Agency theory, together with TCA, forms another theoretical basis for this study. The combination of both theories is a good choice in examining the IJV dissolution since they form the theoretical background for the existence of firms. The ownership configuration of the IJV is also a variable of interest since it reflects the control and coordination issues. There has always been a debate on how inequality should affect the dissolution of an IJV. Since equity has been interpreted as a measure of control and dominance, the more absolute control implies the less potential conflict as decisions can be made easily by the majority partner (Killing, 1983; Blodgett, 1992). In the context of marketing-oriented IJVs, the ownership and control are particularly important regarding the development of new products for different countries. Especially, in high-technology industries, strategic flexibility to remove potential bureaucratic inferences in different countries has favored dominant equity ownership over equal equity partnerships (Calantone & Zhao, 2000; Ding, 1997). When there exists a dominant ownership of a single parent, the remaining parents have an a priori perception that the achievement of their individual interests may be jeopardized. Therefore, dominant ownership can, paradoxically, simplify the control process. However, the dominant ownership of a parent firm can cause agency problems. In an IJV, where the dominant parent firm plays the role of a principal and the other party as an agent, several agency costs might be incurred in the form of either adverse selection or moral hazard. Since these processes create an outcome uncertainty, neither control nor commitment can be maintained easily and therefore the likelihood of IJV dissolution increases. In the literature, there is also evidence that it is possible to control an IJV with an equally shared ownership structure (Geringer & Hebert, 1989; Mjoen & Tallman, 1997; Schaan, 1988). This perspective suggests equity as a measure of commitment and involvement, with the implication that as the ownership is equally shared, the likelihood of instability, allowing for

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a higher level of involvement by the parent firms (Beamish, 1985; Mjoen & Tallman, 1997). Moreover, the control and commitment interpretations need not be at the expense of another: a control perspective focuses on a singular point of majority ownership, whereas a commitment perspective treats equity as a continuum across the domain of possible ownership levels (Dhanaraj & Beamish, 2004). Thus Hypothesis 2. International joint ventures are more likely to dissolve when the partner firms do not have an equal equity ownership. The internal uncertainty in an IJV is, in part, a function of the parent firms’ cultural differences (Reuer, 2001), where culture refers to ‘‘patterns of beliefs and values that are manifested in practices, behaviors, and various artifacts shared by members of an organization or a nation’’ (Hofstede, 1980; Trice & Beyer, 1993). Since organizations are entities embedded in larger societies, it is assumed that the parent firms of an IJV represent the values and institutions of organized societies in boundaries defined by nationality (Ronen & Shenkar, 1985; Shan & Hamilton, 1991; Park & Ungson, 1997). A study by Child, Markoczy, and Cheung (1994) has shown that national culture affects managerial behavior, philosophy, and moderates the relationship between structural variables and the performance of IJVs. For an IJV to survive, parent firms should be able to work together, agree on goals, and re-agree on them with respect to ex-post changes in the internal and external environment (Doz, 1996); and these will be more difficult, when IJV partners are from culturally different nations (Hennart & Zeng, 2002). It is suggested that IJVs suffer from commitment and cooperation problems emerging from the differences in the values and behaviors of partners (Harrigan, 1988; Mohr & Spekman, 1994; Parkhe, 1991) that lead to differences in management philosophies, organizational and administrative practices, employee expectations, and responses to strategic issues (Kogut & Singh, 1988; Schneider & De Meyer, 1991). These challenges stem partly from the lack of shared norms or values (Park & Ungson, 1997), which can reduce effective communication (Rao & Schmidt, 1998), trust (Aulakh, Kotabe, & Sahay, 1996; Doney, Cannon, & Mullen, 1998), and knowledge sharing (Parkhe, 1991; Mohr & Spekman, 1994) between parent firms. This issue becomes even more significant in the case of marketing-oriented IJVs where the impact of culture on marketing practices is vital regarding the partner firms’ understanding of, and approach to, marketing orientation. When entered into an IJV, partner firms attempt to apply their own marketing policies regarding product differentiation, pricing and promotion, and selling strategies, which hinder the achievement

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of collective goals. While operating in a foreign market, partner firms’ standardization versus adaptation policies can also cause some problems regarding the marketing and selling of goods and services in that market. Child et al. (1994) find a significant relationship between partner firm nationality and IJV failure whereas Lane and Beamish (1990) conclude that cultural compatibility between partners is the most important factor for the endurance of an alliance relationship. Overall, the uncertainty due to cultural differences makes it costly to negotiate and transfer management philosophies and practices (Pothukuchi, Damanpour, Choi, Chen, & Park, 2002). IJV partners from different national cultures experience greater difficulty in their relationships (Lane & Beamish, 1990), which increases the likelihood of IJV dissolution. Thus Hypothesis 3. International joint ventures are more likely to dissolve when the partner firms have dissimilar management philosophies. Country-Level Antecedents As explained earlier, the impact of cultural similarity between IJV parent firms on the likelihood of IJV dissolution has been widely studied, and the extant literature unequivocally reports that IJVs between partners from different cultures, ceteris paribus, are more likely to dissolve than the IJVs between partners from similar cultures (Park & Russo, 1996; Park & Ungson, 1997; Hennart & Zeng, 2002). Nonetheless, the impact of the cultural differences between the host country and the IJV partners on the likelihood of IJV termination are yet to be analyzed despite the well-documented fact that this phenomenon is rather diagnostic in foreign market entry decisions (Barkema, Bell, & Pennings, 1996; Reuer & Koza, 2000; Zhao, Luo, & Suh, 2004; Tihanyi, Griffith, & Russell, 2005), subsidiary management (Boyacigiller, 1990; Roth & O’Donnell, 1996), performance (Mjoen & Tallman, 1997; Brouthers, 2002), and the impact of IJV on the shareholder value of the partner companies (Merchant & Schendel, 2000; Reuer, 2001; Hanvanich, Richards, Miller, & Cavusgil, 2003). In the IJV literature, it is suggested that the differences in the ‘‘cultures’’ between the host country and the IJV partners has a complicating impact on the ability of IJV to operate effectively in the host country (e.g., Barkema et al., 1996; Yan & Zeng, 1999). Some of the studies in the extant literature associate international operations of firms in culturally dissimilar countries with increased intra-organizational conflicts and limited realization of organizational plans due to the incongruities in norms, values, and

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institutions in the host country (Tihanyi et al., 2005). For instance, Root (1987) posits that higher information needs coupled with the operating costs from encoding and decoding gaps in languages due to the cultural distance between the partner firm’s home country and the subsidiary’s host country might lead to higher transaction costs. As such, managers shy away from operating in culturally distant markets due to the considerable difficulty in utilization of the extant operating routines (Kogut & Singh, 1988). We expect all these perplexities to have a detrimental impact on IJV. Specifically, an IJV operated in a culturally distant market entails the additional costs and risks due to the unfamiliarity with the local environment (e.g., differences in morals, manners, laws and regulations, and legal and political practices). Put differently, operating in a culturally distant market increases the ‘‘liability of foreignness,’’ which can be defined as all additional costs a firm operating in a market overseas incurs that a local firm would not incur (Hymer, 1976). Thus Hypothesis 4. International joint ventures are more likely to dissolve when the cultural distance between the host country and the IJV partners increases. While expanding to foreign countries, firms incur with a variety of complications which aggravate the risk of their investments including general political risk (e.g., risks due to the political instabilities), ownership and control risks (e.g., expropriation, intervention), operational risks (e.g., price and inventory control and local content requirements), and transfer risks (e.g., arbitrage risk and remittance control) (Hill, Hwang, & Kim, 1990). These risks reflect the ambiguity as to the stability of the current political and economic conditions and government policies, which might prove substantial for the profitability and survival of the investment in that country (Agarwal & Ramaswami, 1992). The entry mode literature submits that firms choose, ceteris paribus, licensing and joint venture to enter the foreign market, for they enable the firms to decrease its exposure to the risks associated with investing in a foreign country via limiting their transaction specific assets, and via enabling them to divest their investment relatively more easily without incurring consequential losses (Agarwal & Ramaswami, 1992; Brouthers, 2002; Hennart, 1991). Put differently, firms tend to limit their investments in a country with a risky environment despite the fact that this also limits their potential gains from that market (Reuer, 2001). However, countries with low investment risk and high potential, offer greater opportunities for the IJV partners. Such an environment facilitates the extraction of an IJV’s competitive potential (Merchant & Schendel, 2000) and

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secures the repatriation of earnings as well as expropriation of assets (Agarwal & Ramaswami, 1992). Firms not only have the opportunity to achieve economies of scale (Sabi, 1988) along with a willingness to establish a long-term presence in markets with high potential, but also seek ways to extract as much benefit as possible, which will be hindered in the presence of a partner. Firms in host country markets enter into marketing IJVs as a way of utilizing an established network (Contractor & Lorange, 1988). They seek to benefit from a partner’s sales forces, market information, and local knowledge necessary to operate in the host country. Since future success is contingent on the continued availability of such infrastructure, these firms may also prefer to internalize this knowledge and acquire their joint ventures (Lele-Pingle, 1998). As such, marketing IJVs located at markets with high attractiveness are expected to be provided with better opportunities in terms of competitive selling, advertising, promotion, etc. in a munificent environment. Thus Hypothesis 5. International joint ventures are more likely to dissolve when they are located in a country with low market potential. Along with the aforementioned firm- and country-level antecedents, we also control for possible industry effects that might affect the likelihood of IJV dissolution. Specifically, we differentiate between IJVs with parents (1) in high- vs. low-tech industries and (2) in manufacturing vs. non-manufacturing industries. When an IJV depends on know-how or technology that cannot be easily codified and requires intimate human contact for exchange, venture partners can appropriate firm-specific competitive advantages (Hamel, Doz, & Prahalad, 1989). We want to examine whether an IJV characterized as a high-tech firm is more vulnerable compared to the one that involves more discrete contributions like financing or physical resources (Teece, 1986). Moreover, we also look at the effect of parental firms’ coming from a manufacturing industry on the likelihood of IJV dissolution since these industries may differ significantly in terms of the types of resources they use, supply chain dynamics, and marketing practices. The conceptual framework of the aforementioned hypothesized relationships is represented in Fig. 1.

DATA AND METHOD Sample This study uses the dissolution of an IJV as the unit of analysis. IJV dissolution data are extracted from Thomson Financial Security

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Inter-partner Competition

Firmrelated variables

Equity Ownership Structure

Management Philosophy

Countryrelated variables

Likelihood of IJV Dissolution

Parent FirmsHost Country Cultural Distance

Host Country Potential

Manufacturing vs. Non-manufacturing Control variables

Fig. 1.

High-tech. vs. Low-tech

Conceptual Framework of the Dissolution of International Joint Ventures.

Database (TFSD). To be included in the study, an IJV has to meet three criteria. First, it has to involve a cross-border investment. A cross-border investment is defined as the one, which involves firms from the same country forming an IJV in a foreign country, or firms from different countries forming an IJV either in a third country or in one of the partners’ home country. Second, the joint venture has to involve a marketing aspect (e.g., an IJV with the objective of jointly selling, distributing, and promoting goods

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or services that are either jointly or individually manufactured). Third, following Park and Ungson (1997), Merchant (2000), Reuer and Koza (2000), Pothukuchi et al. (2002), and many others, IJVs with more than two partners are excluded to be able to more precisely capture and better measure key variables like inter-partner competition and inter-partner cultural differences. A search with these three criteria in TFSD for the period of 1980–2004 yields 5,196 IJVs in 123 different countries. This dataset is refined by excluding observations in which IJV is between a company and an international financial institution (e.g., IBRD and UN) and by eliminating IJVs formed in countries for which data are unavailable. For instance, an IJV between US and Liberian companies is excluded since cultural distance is one of the independent variables of this study and cannot be calculated for United States and Liberia because values of Hofstede’s cultural dimensions for Liberia do not exist (Hofstede, 1980). Final sample includes 3,038 observations complete in every aspect. Table 1 represents the yearly distribution of ‘‘non-dissolved’’ and dissolved IJVs. Once the sample has been identified, country-level data on the economic and demographic characteristics of 63 potential host-country markets have been added to the database. Although there exists more than 200 countries and territories during the sample period (i.e., 1980–2004), 63 countries included in the study represent more than 90 percent of the total domestic product and population of the world during the sample period.

Variables Dependent Variable The dissolution of an IJV is captured by a dichotomous variable which takes the value of 1 if the IJV dissolves during the observation period, and 0 if the IJV is still active at the end of the observation period. Independent Variables We define two categories for the independent variables: (1) parent firmrelated variables and (2) country-related variables. (1) Parent firm-related variables: In the previous section, we posit that an IJV is more likely to dissolve when (1) the competition among the parent firms diminishes their cooperation, (2) the parent firms do not have equal share ownership (i.e., 50 percent each) in the IJV, and (3) the partner firms have dissimilar management philosophies. Competition (COMP) is measured

1,979

1,494

Total

1,544

6 8 7 14 8 79 191 94 235 313 364 183 140 74 85 70 61 45 1

11 12 18 16 19 90 136 71 194 259 313 152 88 34 46 28 35 22

4 6 3 9 6 55 148 76 166 217 258 142 111 67 68 67 49 40 1

Low technology 1

Manufacturing

1

Nonmanufacturing

Formations

1,059

9 10 14 11 17 66 93 53 125 163 207 111 59 27 29 25 23 17

High technology

3,038

15 18 21 25 25 145 284 147 360 476 571 294 199 101 114 95 84 62 1

1

All

47

1 4 1 4 8 2 2 1 10 2 4 2 5 1

Nonmanufacturing

68

3 8 7 1 5 9 1 6 8 4 5 8 3

Manufacturing

79

4 6 2 5 11 5 3 4 14 3 6 7 7 1

1

Low technology

Terminations

Yearly Distribution of IJV Formations and Terminations.

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Table 1.

37

3 4 3 3 3 1

2 6

6 6

High technology

116

4 12 8 5 13 11 3 7 18 6 9 10 8 1

1

All

242 MEHMET BERK TALAY AND M. BILLUR AKDENIZ

243


by a dummy variable equal to 1 when the 4-digit SIC codes of the parents are equal and 0 otherwise. The ownership structure (OWN) is measured with a dummy variable coded as 1 for IJVs where each parent company has equal equity ownership in IJV, and 0 otherwise. The differences between management philosophies (MANPH) are captured via the cultural distance between the parents of the IJV. Cultural distance (CD) is measured using Kogut and Singh’s (1988) approach, where the distance is defined as the accumulated deviation between the variance-adjusted cultural scores of the IJV parents. Cultural scores were obtained from the scores reported by Hofstede (1980), where cultural sub-dimensions for uncertainty avoidance, individuality, power distance, and masculinity are provided. These scales are used in the following formula: CDjk ¼

4 1X ðI ij I ik Þ2 Vi 4 i¼1

where the left-hand side represents the cultural distance between the country j and k. Each cultural sub-dimension is represented by i, whereas Vi is the sample variance of scale i. Therefore, Iij and Iik denote the score of the parents of the IJV on cultural sub-dimension i, respectively. (2) Country-related variables: We also posit that an IJV is more likely to dissolve when (1) the cultural distance between the host country and the IJV partners increases and (2) the IJV is located in a country with low market potential. Cumulative cultural distance (CUMCD) is measured in the same way as the MANPH is calculated. Using Kogut and Singh’s (1988) method and Hofstede’s cultural dimensions, we first calculate the cultural distance between the home country of each parent firm and the host country (i.e., the country where the IJV was formed), then we add these two cultural distance values to find the cumulative cultural distance (CUMCD). According to the OECD (1983), the indicators of market potential (MARKPOT) include the size of the market, the level of GNP, the growth of GNP, manufacturing sales, value added in manufacturing industries, etc. (OECD, 1983). Moreover, a widely cited resource that employs an index approach to measuring market potential is Business International (Cavusgil, 1997), which uses three indicators for world geographic regions and individual counties: (i) market size, (ii) market intensity, and (iii) market growth. A recent example of significant factors of a market’s potential are size as measured by the population, economic well-being as measured by GDP per capita, and market dynamism as indicated by the annual GDP growth rate (Cavusgil, Kiyak, & Yeniyurt, 2004). Further

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a number of studies (Kwack, 1972; Ahmed, 1979; Agarwal, 1980) highlight the relationship between market potential and FDI inflow. Therefore, we also use the total FDI inflow as a percentage of GDP of that country in the year IJV as a proxy for the market potential in the country where the IJV is formed. The data are extracted from the World Development Indicators Database of the World Bank for the period of 1980–2004. Control Variables We control for a series of other factors that may have an effect on the likelihood of dissolution of IJV. In particular, two mutually exclusive dichotomous variables are defined: (1) high- vs. low-tech industries and (2) in manufacturing vs. non-manufacturing industries. Each company is categorized into 11 industry clusters based on their 2-digit SIC codes. Then, two different super-clusters are defined: high tech vs. low tech and manufacturing vs. non-manufacturing. Following the nomenclature of SIC code system, high-technology vs. low-technology classification is based on Calantone and Schatzel (2000) in which companies with two digit SIC codes of 28, 35, 36, 37, and 38 are named as ‘‘high tech’’ companies, hence the remaining are ‘‘low tech’’ companies. The companies with 2-digit SIC codes between 20 and 39 are classified as ‘‘manufacturing’’ companies whereas the remaining are classified as ‘‘non-manufacturing’’ companies. The descriptive statistics for, and the correlations among, the variables are presented in Table 2.

Method Since our dependent variable is dichotomous, binomial logit model is used to test for the probability of IJV dissolution. The regression coefficients estimate the impact of the independent variables on the probability of IJV dissolution. A positive sign of the coefficient indicates that the variable associated with that coefficient increases the probability of dissolution, and vice versa. The model can also be expressed as: Pðyi ¼ 1Þ ¼

1 1 þ expða X i BÞ

where yi is the dependent variable, Xi the vector of independent variables for the ith observation, a the intercept, and B the vector of regression coefficients (Hastings, 1986).

0.2472 0.6527 2.1730 2.3797 345.7204 12.6781 4.2641 2.3817 0.5086 0.3486 8.1158 6.6686

* indicates po.05.

COMP OWN MANPH CUMCD Population GDP per capita GDP growth FDI inflow MANU TECH CUMCD^2 MANPH^2

Mean

0.4315 0.4762 1.3954 1.5665 456.5144 9.7130 5.7124 2.6978 0.5000 0.4766 11.3116 8.2262

Standard Deviation

1.0000 0.0019 0.0375* 0.0449* 0.0011 0.0144 0.0361 0.0024 0.0444* 0.0388* 0.0236 0.0250

1

2

3

4

5

1.0000 0.3509* 0.3251* 0.1714* 0.0829* 0.0695* 0.1124*

6

1.0000 0.4188* 0.1268* 0.1306* 0.0334 0.0448*

7

Descriptive Statistics and Correlations.

1.0000 0.0536* 1.0000 0.0434* 0.8161* 1.0000 0.1166* 0.0623* 0.0317 1.0000 0.1541* 0.2047* 0.1702* 0.5396* 0.0816* 0.0926* 0.0839* 0.5781* 0.0941* 0.0330 0.0564* 0.3598* 0.0477* 0.0861* 0.0760* 0.1785* 0.0613* 0.0971* 0.0889* 0.1714* 0.0141 0.5938* 0.8801* 0.0296 0.0407* 0.8881* 0.7367* 0.0018

Table 2.

1.0000 0.0577* 0.0243 0.0415* 0.0280

8

10

11

12

1.0000 0.7191* 1.0000 0.0361 0.0441* 1.0000 0.0430* 0.0551* 0.6796* 1.0000

9

What Causes Break-Ups? 245

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RESULTS The results of a series of binomial logistic regression for the sample are presented in Tables 3 and 4. The estimated coefficients represent the likelihood of dissolution over non-dissolution: a positive coefficient indicates that the independent variable increases the probability of dissolution, whereas a negative coefficient indicates the opposite. In our first model (Model 1), where we test for the linear relationships, we find that direct competition between the parent firms (COMP) has no significant effect on the probability of dissolution (b ¼ .273, pW.10), therefore our Hypothesis 1 is rejected. Nevertheless, the relationship we find between the equal ownership (OWN) supports Hypothesis 2. In particular, we posit that if the firms share equal levels of equity ownership, the IJV dissolution will be more likely, and our result suggests that the equal ownership structure in an IJV significantly decreases the probability of dissolution (b ¼ 1.288, po.01). We find that the difference between management philosophies (MANPH) of the parent companies has no significant effect on the likelihood of IJV dissolution (b ¼ .170, pW.10), therefore Hypothesis 3 is rejected. Regarding the country-level variables the results provide partial support to the postulated relationships. We find no statistically significant evidence to Table 3. Partial Likelihood Estimates of the Covariates on the Likelihood of IJV Termination (Linear Effects). Variables COMP OWN MANPH CUMCD Population GDP per capita GDP growth FDI inflow MANU TECH Observations Log-pseudo likelihood LR-w2 df Significance

Coefficient

Robust Standard Error

z

PW|z|

0.273 1.289 0.170 0.056 0.001 0.039 0.050 0.073 1.068 0.655

0.226 0.213 0.140 0.124 0.000 0.013 0.032 0.055 0.272 0.277

1.210 6.060 1.210 0.450 2.980 2.940 1.580 1.320 3.930 2.370

0.227 0.000 0.226 0.654 0.003 0.003 0.113 0.187 0.000 0.018

2,324 382.123 87.940 10 0.000

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Table 4. Partial Likelihood Estimates of the Covariates on the Likelihood of IJV Termination (Linear and Quadratic Effects). Variables COMP OWN MANPH CUMCD Population GDP per capita GDP growth FDI inflow MANU TECH MANPH^2 CUMCD^2 Observations Log-pseudo likelihood LR-w2 df Significance

Coefficient

Robust Standard Error

z

PW|z|

0.272 1.295 1.083 1.136 0.001 0.041 0.057 0.076 1.066 0.678 0.129 0.195

0.227 0.213 0.539 0.588 0.000 0.013 0.033 0.055 0.272 0.278 0.092 0.101

1.200 6.080 2.010 1.930 3.060 3.040 1.750 1.370 3.920 2.440 1.390 1.920

0.231 0.000 0.044 0.053 0.002 0.002 0.080 0.169 0.000 0.015 0.163 0.054

2,354 379.738 92.710 12 0.000

support Hypothesis 4. Specifically, the relationship between the cumulative cultural distance of the partners to the host country of the IJV (CUMCD) and the likelihood of IJV dissolution is insignificant (b ¼ .056, pW.10). However, regarding the market potential (MARKPOT), we find that the population of a country has a significant negative impact (b ¼ .001, po.01), whereas the GDP per capita has a significant positive impact on the probability of dissolution. GDP growth rate and FDI inflow have insignificant effects on IJV dissolution (b ¼ .039, po.01; b ¼ .050, pW.10, respectively). Therefore, Hypothesis 5 is supported for population. As per control variables, we find that marketing IJVs in manufacturing industries are more likely to dissolve when compared to their nonmanufacturing counterparts (b ¼ 1.068, po.01). However, the results indicate that the marketing IJVs in high tech industries are less likely to dissolve (b ¼ .655, po.05) than the IJVs in low-tech industries. In our second model (Model 2), we test for the quadratic effects of the differences between the management philosophies (MANPH^2) and the cumulative cultural distance (CUMCD^2). Specifically, we find that the linear effects of the differences between management philosophies (MANPH) are negative and statistically significant (b ¼ 1.083, po.05), whereas the

248


quadratic effects of the same variable (MANPH^2) has a positive and significant effect (b ¼ .129, pW.10). In addition, the results indicate that both the linear (b ¼ 1.136, pW.10) and quadratic (b ¼ .195, pW.10) effects of cumulative cultural distance are significant. Positive sign of the linear effect (CUMCD), and the negative sign of the quadratic effect (CUMCD^2) indicate that the relationship between the cumulative cultural distance and the likelihood IJV dissolution can be characterized by an inverted U-shaped curve.

CONCLUSION AND DISCUSSIONS This research examines the impact of a set of firm- and country-related antecedents, which trigger IJV dissolution. Based on TCA and agency theory frameworks, we analyze the effect of the competition, the share of equity ownership, and the similarity of management philosophies between parent firms as firm-related variables; and the cultural distance between parent firms and the host country and host country potential as countryrelated variables. First, we find that there is no significant relationship between interpartner competition and the likelihood of IJV dissolution. This result is contrary to what we propose in relation with the TCA literature, which argues that direct competition between partner firms increases the likelihood of IJV dissolution. However, our finding implies that competition between parent firms, although it can create some detrimental impact on (1) exchanging firm-specific assets, (2) achieving collective goals of the independent entity, and (3) enabling the formation and maintenance of a trust-based relationship, does not significantly contribute to the explanation of IJV dissolution. This unexpected result is even more interesting when interpreted together with our second finding: the negative impact of equal ownership structure on IJV dissolution. This finding suggests that the equal equity ownership structure in an IJV significantly reduces the likelihood of dissolution. Although there are competing views in the literature regarding the effects of dominant versus equal ownership on the dissolution, our results support that when the ownership is equally shared, the involvement and commitment of parent firms for the achievement of the collective goals of the independent entity increase, and the likelihood of IJV dissolution decreases. Furthermore, since this structure leads to an increasing trust between partners, moral hazard decreases leading to reduced safeguarding costs as well. This highly significant result along with the insignificant result


249

of the impact of competition between parent firms can lead to a notable argument in the IJV literature. It can be asserted that commitment between parent firms tend to be more important than the competition in explaining the destiny of the IJV. Ceteris paribus, the extent of the parent firms’ cooperation efforts, regardless of the competitive nature, makes the difference in the likelihood of IJV dissolution. In a similar fashion, it might also be argued that parent firms tend to emphasize commitment over competition, which suggests that even the imperfect cooperation between competitors (Brandenburger & Nalebuff, 1996) can affect the end outcome of inter-firm collaborations significantly. The third result is the insignificant relationship between management philosophy and the dissolution of IJV. In the IJV literature, cultural differences between parent firms constitute a major block in the development of successful relationship whereas our result challenges this view. A plausible explanation might be the difference between our study and previous research in terms of the approach to the dissolution of IJVs. One commonly held perspective in most of the previous empirical studies is their conceptualization of the dissolution from a failure or poor performance point of view. However, as noted in the beginning, in line with the current global business world, we delineate dissolution as the partner firms’ strategic choice to bring the IJV to an end that can represent either a poor performance or a successful outcome. According to this conceptualization, an IJV relationship can dissolve when it accomplishes the targets set at the time of its inception or when the partners stop considering the host country as a potential market to invest due to some emerging contingencies; and under these circumstances, the similarity of partner firm cultures might not play a significant role any more. Another interesting result of this research is the inverted U-shaped relationship of the cultural distance between the nationalities of the IJV parent firms and the host country, which reinforces the role of cultural distance as an important covariate. Cultural distance represents the extent of dissimilarities between the IJV parents and the cultural context in the host country. These differences increase the transaction costs since IJV parent firms should bear extra costs and risks of unacquaintedness to differences in morals, manners, laws and regulations, and legal and political practices, along with an increased ‘‘liability of foreignness’’ in the host country. However, the negative quadratic effect found in the analyses reveals a diminishing impact of cultural distance, suggesting that the perplexities due to high cultural distance are likely to be less inimical to the dissolution of the IJV. This may be attributed to an increase in the awareness of IJV parents

250


towards possible ramifications of cultural distance as they operate in a country where culture is very different. In addition, some managerial practices will also be different as the cultural distance increases. As such, various business routines (e.g., distribution, advertising), which are considered as ‘‘norms’’ in one culture, might be considered impractical and even be censored in another culture (Hofstede, 1980, 1991; Parkhe, 1991). As an example, in a marketing IJV, partner firms and local entities in the host country might approach marketing issues and problems differently due to dissimilarities in their marketing orientation. However, operating in a culturally similar country, IJV partners might have the opportunity to work with local entities, which have analogous attitudes and similar business routines and therefore they will experience fewer, if any, communication difficulties. Obviously, the better IJV partners and local entities understand each other, the lower the likelihood of IJV dissolution since lower cultural distance between the IJV partners and the host country will not only facilitate better communication, but also enable more stable and long-term relationships. Finally, we find that there is a significant and positive relationship between the market potential and the likelihood of IJV dissolution. This phenomenon may be attributed several reasons. First, parent firms may wish to reap the benefits of the host country alone, instead of sharing them with a partner. Second, markets with high potential may also have easy-to-handle bureaucratic procedures and incentives, which diminish the investment risk as well as the need for a partner. For example, the IJV between GE Lighting and PT Sinar Angkasa Rangkut of Indonesia formed in June 1994 was terminated in 1995 when GE announced that it obtained 100 percent ownership of the joint venture and the new wholly owned company was named PT GE Lighting Indonesia. John Opie, the president and the chief executive officer of GE said that ‘‘Indonesia offers significant opportunity, which is important to GR Lighting’s overall Asia-Pacific growth strategy and gaining 100 percent ownership provides us the flexibility necessary to meet the needs of the rapidly growing Indonesian and Asian lighting markets.’’ Therefore, marketing IJVs located at markets with high potential are provided lucrative opportunities such as competitive selling, advertising, and promotion that sometimes partner firms might choose to terminate these relationships just to get the benefits of these markets individually. The negative, albeit insignificant, relationship between FDI inflow, which may be regarded as a proxy of economic, political, and investment risks, and parents’ propensity to dissolve the IJV supports this argument. Besides, as predicted by TCA, lower levels of such risks decrease


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the transaction costs, and hence facilitates hierarchical forms instead of arm’s length transactions. Overall, the findings of this study have specific methodological vantages as well. First, contrary to most of the studies, which are limited to the IJVs that involve at least one U.S. partner firm, this study examines these relationships with a more comprehensive dataset, which also includes IJVs formed by non-U.S. companies within the period of 1980–2004. Using only U.S.-based firms have long been acknowledged as a limitation in the IJV literature since IJV-related phenomena are as relevant to other companies as they are to U.S. companies (e.g., Park & Ungson, 1997; Merchant, 2000). Therefore, we believe that examining IJVs involving non-U.S. firms enhances our understanding of IJV dissolution. Second, our study is one of the few that report the quadratic effects of some factors on the likelihood of IJV dissolution. Analyzing the quadratic effects helps better capture the dynamics of IJV-related phenomena since it enables to detect any ‘‘ceiling effects’’ and optimal values. Third, as a result of using a vast dataset spanning 21 years and 63 countries, we also take into account the effect of the national culture similarity of partner firms and host country in addition to inter-partner cultural similarity as an indicator of IJV termination, since we have many IJVs formed by two partners from different countries (e.g., German and French firms) in another host country (e.g., China). As with any other study, this study has some limitations, which open further avenues of research. In this study, we only focus on marketing IJVs, which imply a more tacit and idiosyncratic knowledge transfer between partner firms. This aspect contributes to refine the analyses of our hypotheses via utilizing a comprehensive dataset comprising a significant portion of IJVs formed within the observation period. However, in the future alternative researches might consider the dynamics of other IJVs formed with different motivations (e.g., manufacturing IJVs or R&D IJVs). Second, using Hofstede’s cultural scores has its own ramifications. Hofstede’s cultural scores dimensions have not been updated since 1983, which raises serious doubts about their validity in the contemporary context. Moreover, Hofstede’s dimensions are based on the survey of the employees of a single company, which may not represent the characteristics of the entire population. Third, we employ an objective measure of dependent and independent variables since we derive our dataset from secondary sources. However, in the IJV literature, using objective versus subjective measures has always been debated (Park & Ungson, 1997; Parkhe, 1991, 1993). So, future research can examine ‘‘the inner workings,’’

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such as organizational complementarities and managerial basis of the IJVs including strategic fit between partner firms by using primary data.

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GEOGRAPHIC MARKET DIVERSIFICATION: A PREMIUM OR DISCOUNT IN FIRM’S VALUE Z. Seyda Deligonul Geographic diversification has been a topic of elusive conclusions in different research streams. International marketing and business studies strongly suggest that there is value in market scope expansion across national boundaries. In contrast, finance studies doubt the value and typically find diversification as value-destructive.1 Studies by Lang and Stulz (1994), Berger and Ofek (1995), and Servaes (1996) show unequivocally that diversified firms trade at a discount relative to nondiversified firms. Their findings are confirmed to be robust for different countries (Campa & Kedia, 2002; Lins & Servaes, 1999). To add to the pessimism, Errunza, Hogan, and Hung (1999) show that even a private investor can achieve better diversification than foreign direct investments, by forming a home-made portfolio from domestically traded foreign securities. There are several varieties of diversification: product, market, geography, and various possible combinations of these. Furthermore, diversification can be horizontal as in the typical case where technology-transfer is involved or vertical as exemplified by resource-seeking investments. Different levels of combinations are also possible. For example, a firm can diversify globally with a diversified line of products or regionalize its single product line in a restricted geography. In our discussion, we examine cross-border geographic market expansion and its possible augmentation by product diversification. New Challenges to International Marketing Advances in International Marketing, Volume 20, 257–274 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020013

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The main question is: why is there controversy regarding the outcomes of diversification? The concern is shared by many. Scholars find the results ‘conflicting’ (Annavarjula & Beldona, 2000), ‘inconclusive’ (Tallman & Li, 1996), ‘mixed’ (Hitt, Hoskisson, & Kim, 1997; Thomas & Eden, 2004), ‘inconsistent’ (Ruigrok & Wagner, 2003), ‘contradictory’ (Contractor, 2007; Ruigrok & Wagner, 2003), ‘conflicting’ (Annavarjula & Beldona, 2000), and ‘disappointing’ (Hennart, 2007). This study draws on the extant research to consider possibilities and generates an overview and commentary. Our analysis will not resolve the empirical issue of creating or destroying value by geographic spread, but will consider why there is a strong inconsistency in findings. The goal is to contribute to better theorizing and design of more robust studies. For a review of diversification and its value there are extensive reviews (e.g., Martin & Sayrak, 2003; Contractor, Kundu, & Hsu, 2003; Hitt, Bierman, Uhlenbruck, & Shimizu, 2006; Lu & Beamish, 2004). The rest of the chapter is organized in six sections. The first section reports from present literature, the background information regarding the geographic diversification with its rewards and burdens. In the next two sections extant findings are provided. Finally, the author presents the potential challenges of the research in this area and closes the discussion with the pertinent sections on recommendations and conclusions.

DIVERSIFICATION DECISION AND ITS OUTCOMES To explain why international market diversification is a viable strategy, a substantial portion of the past literature hinges its conclusions on mainstay perspectives. Some authors utilize internalization theory and transaction cost analysis (e.g., Teece). Others draw from the resource-based explanation of the firm (e.g., Chang, 1995), institutional theory (e.g., Davis, Desai, & Francis, 2000), organizational learning (Ruigrok & Wagner, 2003); a combination approach (e.g., Madhok, 1997) or eclectic paradigm (Dunning, 1988). These perspectives are widely discussed in the literature. For that reason we present the earlier work only in a brief summary.

Costs of International Market Diversification The disadvantages of diversification are typically attributed to a long list of reasons. Specifically, the author’s refer to inefficient allocation of

Geographic Market Diversification

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resources (Lamont, 1997; Rajan, Servaes, & Zingales, 2000), the difficulty of designing optimal incentives such as compensation systems (Aron, 1988; Rotemberg & Saloner, 1994), and Harris, Kriebel, and Raviv (1982) underscore the information asymmetries between headquarters and divisional managers. Scharfstein and Stein (2000) discuss incentives for rent-seeking by managers. Jensen (1988) argues for the link between cash payout to shareholders and managers’ value-destroying investments. Denis, Denis, and Sarin (1997) provide empirical evidence of the agency’s costs-of-diversification strategy. Given these burdens a firm will not see any incentive to expand geographically. The diversification will handicap the firm by offsetting costs of acquiring quasi-monopoly power and transferring rents away from focused rivals in the foreign markets. Equally, the firm will be disadvantaged at home as it accrues additional costs from foreign affiliations. Despite this unfavorable logic, many firms chose to geographically diversify and implicit in this decision are expected advantages from market scope expansion. The potential gains are discussed in the next paragraph.

Gains from International Market Diversification The literature favors diversification for mostly economic reasons and its potential for arbitrage opportunities. Early studies refer to gains including economies of scale (Chandler, 1977), market power, and increased debtcarrying capacity (Lewellen, 1971). Wernerfelt and Montgomery (1988) underscore firm-specific assets that can be transferred and exploited in other markets. Hadlock, Ryngaert, and Thomas (2001) argue for a firm’s gain from alleviating an adverse selection problem. Schoar (2002) concludes a higher productivity of a diversified firm than others within their industry in spite of their discounted status. Also, the diversification is recognized as a strategy to enable a firm to internalize market failures (Khanna & Palepu, 2000), to capitalize on tax benefit possibilities (Errunza & Senbet, 1981), activity sharing, and multipoint competition opportunities (Goerzen & Beamish, 2003; Kogut & Zender, 1993). Firms through diversification facilitate a more efficient resource allocation given the benefits of internal capital markets (Stein, 1997). Put together, economic advantage and disadvantage of geographic diversification leads to an explanation based on the premise of utilization of excess resources. In economics, excess resources include physical, financial, and knowledge-based assets and capabilities; they have zero

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or near zero opportunity costs, which creates incentives for the firm to move them freely. The firm looks for their alternative utilization through geographic, product, market or country strategies. The goal is to use them with low-risk ends at zero marginal cost. Hence the firm diversifies. This logic provides an explanation for the diversification, but does not explain the valuation discount stemming from geographic spread; on the contrary it only confirms it.2

A GENERAL MODEL OF GEOGRAPHIC DIVERSIFICATION AND PERFORMANCE RELATIONSHIP The clashing findings about value destruction or premium may stem from the understanding of the performance phenomenon. For that reason, it may be a good attempt to review the extant understanding of the topic. By consolidating the literature, a general model of geographic diversification and its performance consequence is given in Fig. 1. This figure consolidates the frameworks in the extant studies and displays the results in the flavor or structural-equation modeling. Below we discuss the model with its defining characteristics.

Hierarchical Antecedents (Individual to Country Level Factors) One of the characteristics in Fig. 1 and also in the extant research is the offering of multiple idiosyncratic factors as drivers of the diversification. From these, the exogenous types are divided between country- and firmspecific categories. (The respective bubbles in Fig. 1 are expanded in Fig. 2.) In addition to these factors authors propose a host of additional antecedents for diversification. Included in the set are market potential, host-country risk, cultural distance between the home and host markets (country), and institutional (government) transparency, restrictions as to foreign ownership, and intellectual-property protection. Similarly, a rich array of firm characteristics has been examined. Typically, their discussion is hinged on the firm’s assets, firm size, R&D, and marketing expenditures. The level of commitment and various types of experience are also part of this discussion.

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Others antecedents ROS

Country factors Institutional factors

ROE External Factors Industry / Country

Industry factors

Performance in Retrospect

ROA

Count Measures Composite Measures

Market scope diversification (depth / scope)

Value outcome Discount / Premium

Elemental Measures Forward looking performance Individual level factors

Treynor

Firm factors Jensen

Group level factors Sharp

Firm level Others (capabilities, commitment etc.)

Fig. 1.

Meta Analytic SEM Model to Summarize Past Findings.

Representing and Measuring the International Market Diversification The study attempts to measure market diversification both with its depth and scope.3 Many convenient measures are specified for geographic spread and the extent of asset commitments at business units. Such measures involve a host of proxy variables with the most popular being the number of foreign offices divided by the total number of offices (NNS), the number of nations in which a firm has foreign subsidiaries (NFS), and the total number of subsidiaries abroad. Additionally, more comprehensive indices as well as

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1. INDIVIDUAL LEVEL FACTORS 1.1 CEO experience (+) 1.2 CEO compensation (+) 1.3 CEO international experience (+)

TMT International Experience (+) TMT size (+) TMT diversity (+) TMT tenure (+) TMT education (+) TMT age (+)

FIRM FACTORS

2. TEAM LEVEL FACTORS 2.1 2.2 2.3 2.4 2.5 2.6

3 . FIRM LEVEL FACTORS 3.1 Size (+) 3.2 R&D intensity (+) 3.3 Advertising intensity (+) 3.4. Age (+) 3.5 International experience (+) 3.6 Relational capital (+) 3.7 Capital intensity (+) 3.8 Firm human capital (+) 4. INDUSTRY LEVEL FACTORS

5. COUNTRY LEVEL FACTORS 5.1 5.2 5.3 5.4

Host-country risk (–) Favorability of home environment (–) Cultural diversity (–) Favorability of host environment (+)

EXTERNAL FACTORS

4.1 Industry growth (+) 4.2 Industry competition (+) 4.3 Industry profitability (–)

6. INSTITUTIONAL FACTORS 6.1 Favorability of regulative aspects (+) 6.2 Favorability in the cognitive/cultural (+) 6.3 Favorability of normative aspects (+)

Fig. 2. Expanded View of Antecedent Variables Used in the Literature (These are Displayed Only With Main Titles in Fig. 1 for Brevity). Note: In this list the boxes numbered 1,2,3,4,5 are taken from Kirca et al. (forthcoming).


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composite indices are offered (e.g., Capone, Hulber, Farley, & Martin, 1988). As an example of the latter kind, the Hirschman index gives more weight and the entropy index gives less weight to the larger businesses. The composite and weighted proxies have received considerable attention with their validity issues in the literature (Hoskisson, Hitt, Johnson, & Moesel, 1993; Boyd, Gove, & Hitt, 2005).

Measuring the Performance Performance is typically measured in two ways. The first is based on accounting indicators; these reflect the performance in retrospect. The other draws from strategic variety, which represents the forward look in performance. The accounting ratios include proxies such as return on assets, return on equity, and return on sales. The strategic indicators are captured by the use of the Sharp ratio, the Jensen model and others (Fig. 1). Hoskisson et al. (1993) discuss them in great detail. The literature expects that those firms that chose to create a larger and deeper footprint by geographic diversification will submit to extemporaneous forces emanating from the new environment. They will operate under the constraints of the firm’s realities as they strategize by choice. As indicated in Fig. 1, the result is the firm’s performance level, which in turn manifests in the market at a premium or discount. This logic is the main framework in the literature and is diagrammed in Fig. 1.

FINDINGS ABOUT GEOGRAPHIC DIVERSIFICATION The evidence from the extant literature suggests that the choice of measures affects the empirical relationship between the market spread and firm performance (Goerzen & Beamish, 2003; Thomas & Eden, 2004; Allen & Pantzalis, 1996; Table 1). Also, it is apparent from meta studies that geographic market diversification exhibits a stronger association with financial performance ratios, particularly when revenue and market-share components are involved (Inge Geyskens, Steenkamp, & Kumar, 2006; Kirca, Jayachandran, & Bearden, 2005). This is plausible given that the firm’s topline provides a more direct assessment of the rewards of international market expansion (Hitt et al., 1997; Lu & Beamish, 2004; Kirca, Deligonul, Perry, & Cavusgil, forthcoming).

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Table 1.

Diversification and Performance Relationship in the Literaturea.

Study Buckley, Dunning, and Pearce (1978, 1984) Buhner (1987) Fatemi (1984) Qian (1997, 2002) Geringer, Tallman, and Olsen (2000) Riahi-Belkaoui (1998) Ruigrok and Wagner (2003) Grant (1987) Geringer, Beamish, and daCosta (1989) Grant, Jammine, and Thomas (1988) Shaked (1986) Siddharthan and Lall (1982) Haar (1989) Michel and Shaked (1986) Miller and Pras (1980) Sambharya (1995) Tallman and Li (1996) Vernon (1971) Contractor, Kundu, and Hsu (2003) Daniels and Bracker (1989) Gomes and Ramaswamy (1999) Hitt, Hoskisson, and Ireland (1994) Morck and Yeung (1991) Riahl-Belkaoui (1996) Hitt, Hoskisson, and Kim (1997) Ramaswamy (1995) Sullivan (1994) Kohers (1975) Kim and Lyn (1987) Geyikdagi and Geyikdagi (1989) Errunza and Senbet (1981) Brewer (1981) Errunza and Senbet (1984) Gerpott and Jakopin (2005)

Diversification Variable

Performance Variable

FSTS

ROA

FSTS FSTS FSTS FSTS FSTS FSTS FSTS FSTS

Market return Risk adjusted ROE ROA, ROE ROA, ROS, Sales growth ROA ROA ROA, ROE, ROS ROA, ROS

FSTS FSTS FSTS FSTS FSTS FSTS FSTS, FATA FSTS, NNS FSTS, FATA, FETE, FETN PCA on FSTS, FETN, FOTO FATA FSTS, FATA, NNS NNS NNS, NFS NNS, E FATA FSTS, FATA, NNS FATA, FETE, FETN, FSTS FDI FBTB FATA, FETE, FSTS FETE AFS, FSTS, NFS, E FSTS, FETN, FATA, FCSC

ROA, ROE, ROS SD of ROE, Beta Sales growth ROA Risk adjusted return SD of ROS ROA, ROS, ROE ROS ROI, ROS ROA, ROS ROA, ROS Cost of sales/total sales, ROA ROA, ROS Market value ROA ROS ROA, ROS, ROA ROA, ROS Cost of capital Tobin’s q, excess market value Beta Excess return Stock return Excess return EBITDA, ROS, ROA

Note: FSTS, foreign sales/total sales; FETN, number of foreign employees/total number of employees; FETE, foreign earnings/total earnings; FBTB, foreign business units/total business units; FOTO, number of foreign offices/total number of offices; FATA, foreign assets/total assets; FCTC, foreign subscribers/total subscribers; NNS, number of nations which firm has foreign subsidiaries; NFS, number of subsidiaries abroad; FDI , foreign direct investment; AFS, absolute foreign sales; E , entropy measure; PCA. principle component analysis. a This table is built on one in Qian, Li, Li, and Qian (2002), where additional information about the details of this research stream is explored.


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Additionally, findings in the literature show weakening of the diversification–performance relationship as the cost component gets embedded in the performance measure. Specifically, profitability ratios for example, will be less strongly associated with the market scope. A plausible discounting of firm value will then take place due to the costs of running cross-border activities (e.g., governance, transaction, coordination costs). The relationship between international footprints and management effectiveness and efficiency will remain strong, although not at the level of revenue-based measures, since efficiency and effectiveness measures reflect the turnover in terms of revenue- and asset-utilization level (personnel, inventory, and so on). Financial strength is expected to be positively associated with global diversification when the market expansion facilitates risk-reduction (Kim, Hwang, & Burgers, 1993) which is consistent under the supposition that the firm internationalizes its marketing into uncorrelated markets. Furthermore, the scope of diversification is strongly associated with performance than with depth. Considering that expanding the potential demand-base for performance provides a better opportunity for the marketing function to appropriate higher benefits than full force investments and considering that the firms will seek the optimal degree of breadth and depth in internationalization (Allen & Pantzalis, 1996), a larger scope enables a firm to achieve a better fit with strategic resources in target markets. A better fit in turn, enables the firm to appropriate value from proprietary assets (Tallman & Li, 1996). Furthermore, a larger scope provides broader choices, while the opposite, higher depth, imputes into strategies deeper commitments, hence inflexibilities (Thomas & Eden, 2004). Also, the broader scope of global scale may provide a richer experience in organizational learning, flexibility, and the capacity to engage in multipoint competition than the depth of the multinational footprints (Goerzen & Beamish, 2003; Kogut & Zender, 1993). This is expected given that the studies suggest a stronger positive association of scope with the firm’s performance than with the depth of the global diversification.

EMPIRICAL CHALLENGES AND VALIDITY OF FINDINGS The findings in the literature stream will have higher meta value4 by improving on the number of issues. The following summarizes some of the weaknesses in this research stream.

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It is surprising that all studies use some geographic-sales-share (e.g., foreign-sales-to-total-sales (FSTS) which is the most popular (Table 1)) or some configuration of weighted revenue spread (such as entropy measures) to proxy the market diversification level. This choice is pathological when both the antecedent and the consequent contain the same term. Some authors have overlooked this elementary mishap as they correlated the (FSTS) ratio with sales turnover. In that case, both components of the correlation include the same term, revenue, which potentially generates a bogus relationship that appears significant. It is surprising that this research stream has not given much attention to problems of spurious linkages between the dependent and independent variables. For instance, such concern is certainly relevant for some of the studies presented in Table 1. The use of only financial variables for both the antecedents and consequents redefines the diversification–performance problem. If someone were to look at Table 1 after stripping off the title, that person may never be able to tell that this stream of literature is looking for a relationship between diversification and performance. The best guess would be closer to a hypothesis on the sales effectives driven by asset utilization. Such interpretation attests to the conclusion that Table 1 reduces diversification phenomena to an investigation of effectiveness of the finance manager. In that, we face the neglect of non-financial dimensions of diversification strategy (the cognitive, regulative, normative, social and polity issues). Also lack of indigenous measure may lead to erroneous conclusions about the diversification phenomenon. For example, the effect of diversification may be modulated by the unrelated financials. Selling a building which has nothing to do with diversification, will credit the diversification performance since it will boost the return on assets by shrinking the asset base. As in this case, the research findings may be influenced by reasons other than the intrinsic complexities of the diversification phenomenon. This concern may be relevant for a group of studies when they are considered in the context of a diversification–performance relationship. Another common practice in this stream of research is to use a combination of indicators. The use of combinatorial techniques to integrate simple measures for the degree of internationalization is geometrically sound, but theoretically flawed. For instance, Contractor et al. (2003) take the linear combination by principle component analysis of the FSTS, number of foreign employees/number of total employees (FETE), and number of foreign offices/number of total number of offices (FOTO). This generates a variable, which has no conceptual interpretation, but simply an eigenvalue weighted sum of three fractions. The outcome is a unitless and


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also conceptually ambiguous variable, produced by the angles between three vectors (variables). The study intends that it will measure the degree of diversification without reasons related to internationalization and without any theory. A better choice would be the incorporating of these three variables as manifest variables in a structured equation model. The use of only financial ratios for both the antecedents and consequents is substantially problematic for another reason. The ratios used for the antecedents may correlate with performance outcome, not because of the diversification decision, but because of their underlying relationships between intrinsic financial decisions typical for the host industry. In the result by selection bias, one can guarantee a preordained conclusion. For example, Kim and Lyn (1987) could possibly change their findings by opting for a manufacturing context, which show across the board cases including being richer in knowledge assets endowments together with physical-assetrich data units. Selection bias is a true investigative hazard and may be confounding given the earlier confirmation of the link between the capital structure and strategy (cf. Kochhar & Hitt, 1998). Table 1 reveals the researchers’ affinity towards return on assets (ROA) as a performance measure. Almost all investigations use this ratio. In financial circles, the ratio of return on assets is considered to be a financial management-effectiveness indicator. In that class, however, it is known to be more prone to financial manipulation in comparison to similar indicators. Managers can easily improve ROA ratio by adopting a divesting strategy of some of the assets, possibly the non-core assets. (Currently, Kodak case is a good example.5) For its openness to financial engineering, ROA’s use without auxiliary indicators will not generate robust results across the firms. An important feature of the antecedent array is that its content is layered from the individual level to the team and from the team to the firm. Likewise, at the environment side they extend from industry to country. Both sets of variables are situated to include lower level variables and, in turn, each is embedded within higher levels (Chan, 1998). The current research treats them as independent antecedents (Fig. 1 too shows them as independent) and possibly it concedes to level fallacy where the findings suffer from validity weaknesses. Also in the hierarchy of embedded variables the interactions between the layers impute distortions in results. In addition to level fallacy, it is common in this stream of research to display aggregation bias. Arregle, He´bert, and Beamish (2006) present an example of this problem along with its consequences in international business research. Brouthers (1998) discusses an example from his study on how the country effect masks the

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industry effect when these two effects are treated separately. When they are considered jointly, however, the explanatory power of the model increases 50 per cent. In passing, we may demonstrate some of these problems as an example. For instance, averaging individual performance to obtain team level performance (aggregation) may be invalid in a situation where the star player determines the performance outcome. Additionally, the patterns in each team may show the effect of personal incentives on collective performance, but collectively taken, the conclusion may demonstrate the opposite: personal incentives inhibit team performance (Simpson paradox). The interaction of team and personal effects may mask the motivational studies. All in all, there must be an increased concern regarding modeling, measurement, and analysis issues in hierarchical investigation. To eliminate the possible confounding effects, the antecedent variables that impact the diversification decision must be uncorrelated with the firm’s value. In reality, this requirement rarely holds. For example, industry attractiveness (antecedent) is clearly a factor on the performance outcome (consequent) without the mediation of diversification choice. This is an intrinsic problem and a matter of careful research design. For instance, Campa and Kedia (2002) show that in their example, the antecedent variables, which cause diversification, directly cause the value destruction. The studies must prevent the blurring of the result when a variable that motivates the diversification also drives the performance. Another argument about diversification conjures up characteristics that are overlooked but potentially decisive on the firm’s valuation (premium/ discount). For example, consider a firm facing technological obsolescences which adversely affects its competitive standing. It is not surprising that this poor performer will trade at a discount relative to other firms. Plausibly, such a firm will have a lower opportunity cost to switch its resources between the borders, products, or industries (Campa & Kedia, 2002). Entry to a new foreign market is value destructive in this case. In reality, the reason is technological deterioration, but on the surface the value discount may appear to be a result of expanded market scope. On the other hand, when the opportunity cost of market expansion considered, this firm’s diversification is economically justified. In another example, Campa and Kedia (2002) consider a firm with a unique capability. The incomplete information may require a costly search for the best market match at a level that compels the firm to forego the benefits of specialization (Campa & Kedia, 2002). This firm, as in Matsusaka’s (2001) model, will draw a diversification discount lagging behind the comparable non-diversified counterpart. The example shows that not taking into account the firm’s


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search, and its potential payback, a firm faces the diversification discount due to involved costs.

RECOMMENDATIONS The evidence is not clear whether the business-spread measures represent the intended concept in a way to lend itself to study the potential relationship between the geographic scope and performance. The basic problem is that business-count methods lack a theory about scope expansion and its effect on corporate functioning. There is no explicit appreciation in the businesscount measure that skills, resources, knowledge assets and so forth may be transferred across geographies to influence performance. The relatedness between the different environments and business units in different countries are overlooked. Specifically, these concerns can be addressed by better theorizing. On the operationalization side there is a need for better measurement proxies. In order to protect the analysis from spurious relationships the triangulation of variables is necessary. Some of the older measures fall short of these characteristics, therefore their use requires added caution. Also, the problem of diversification and performance relationship should not be displaced by a new problem in the financial make-up of a company. The problem has to be investigated in its genuine form by including economic and also regulative, normative, and cultural aspects. Finally, the hierarchical nature of the problem demands the use of such methods as hierarchically structured modeling in order to address the multi-level character of the problem.

CONCLUSION This study provides an overview and commentary about one of the most popular topics in strategic marketing, geographic market diversification for international firms. Despite the wide interest in the topic, the findings in different studies are deeply divided in their conclusions. The reasons for such disagreement may stem from the specifics of theorizing and also technical aspects in empirical treatment. In particular, it seems the research cannot clearly deal with firms that have other reasons to fail (succeed), eventually diversify and face the diversification discount (premium). Our discussion shows that, both in conceptualization and also operational

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implementation, the empirics of geographic diversification is challenging and requires more sophisticated approaches. Given the challenges on whether a firm performs better or whether it can create value will need a better lens to study, and improved modeling of contingent factors.

NOTES 1. The value destruction in this context refers to stock market valuation. 2. I thank the anonymous referee for pointing out the possibility of other explanations in addition to the economics explanation. Here, the selection is based on the reason that this explanation offers an integrative angle putting many other explanations under its umbrella. However, some others such as agency-theory-based motives like managerial hubris are certainly outside the scope of this explanation and also outside the scope of this chapter. 3. The depth of diversification refers to level commitment and related arrangements specifying the degree of control. The scope of diversification specifies the breath of the strategy in terms of geographic targets and/or products. 4. Meta value here refers to epistemological merit by being consistent across the different investigations. 5. As part of its poor strategic performance at a point of inflection in imaging industry Kodak is currently trying to improve its indicators by selling off its fixed assets. This divestiture strategy may be helpful to improve the indicators like ROA but it will not change the fundamentals. Then fundamentals will improve by innovation and by better adaptation to the discontinuity between film and digital imaging.

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PART IV METHODOLOGICAL ADVANCES

THE USE OF PARTIAL LEAST SQUARES PATH MODELING IN INTERNATIONAL MARKETING Jo¨rg Henseler, Christian M. Ringle and Rudolf R. Sinkovics The advent of structural equation modeling (SEM) with latent variables has changed the nature of research in international marketing and management. Researchers acknowledge the possibilities of distinguishing between measurement and structural models and explicitly taking measurement error into account. As Gefen, Straub, and Boudreau (2000, p. 6) point out, ‘‘SEM has become de rigueur in validating instruments and testing linkages between constructs.’’ They furthermore distinguish between two families of SEM techniques: covariance-based techniques, as represented by LISREL, and variance-based techniques, of which partial least squares (PLS) path modeling is the most prominent representative. PLS has been used by a growing number of researchers from various disciplines such as strategic management (e.g., Hulland, 1999), management information systems (e.g., Dibbern, Goles, Hirschheim, & Jayatilaka, 2004), e-business (e.g., Pavlou & Chai, 2002), organizational behavior (e.g., Higgins, Duxbury, & Irving, 1992), marketing (e.g., Reinartz, Krafft, & Hoyer, 2004), and consumer behavior (e.g., Fornell & Robinson, 1983). Since 1987, for instance, more than 20 studies using PLS have been published in five top-tier marketing journals (Eggert, 2007) – the majority in New Challenges to International Marketing Advances in International Marketing, Volume 20, 277–319 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020014

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the last six years. PLS is the method of choice for success factor studies in marketing (Albers, 2009) and for estimating the various national customer satisfaction index models (e.g., Fornell, 1992). The PLS methodology has also achieved an increasingly popular role in empirical research in international marketing, which may represent an appreciation of distinctive methodological features of PLS. As of March 2008, more than 30 articles on international marketing using PLS were published in double-blind reviewed journals. However, these publications show a rather large variability in the way how PLS is applied and how its outcomes are reported. In many instances, the rationale for choosing PLS among a possible set of alternative analytical techniques is not made explicit. Although several articles offer guidance for the use of covariance-based structural equation modeling (CBSEM) in international marketing (e.g., Steenkamp & Baumgartner, 1998; Malhotra, 2001; Iacobucci, Grisaffe, Duhachek, & Marcati, 2003), there are no similar subject-specific guidelines for the use of PLS. While there are general recommendations for the use of PLS (e.g., Hulland, 1999), the specific requirements and typical research problems of international marketing have not been addressed yet. Our main aims are to shed light on PLS path modeling as an SEM technique, to reveal the strengths and weaknesses of PLS in general, and to deliver guidelines for its use in international marketing in particular.

1. APPLICATIONS OF PLS PATH MODELING IN INTERNATIONAL MARKETING In order to determine the status quo of PLS path modeling in international marketing research, we conducted an exhaustive literature review. An evaluation of double-blind reviewed journals through important academic publishing databases (e.g., ABI/Inform, Elsevier ScienceDirect, Emerald Insight, Google Scholar, PsycINFO, Swetswise) revealed that more than 30 academic articles in the domain of international marketing (in a broad sense) used PLS path modeling as means of statistical analysis. We assessed what the main motivation for the use of PLS was in respect of each article. Moreover, we checked for applications of PLS in combination with one or more additional methods, and whether the main reason for conducting any additional method(s) was mentioned. Table 1 lists all the identified academic articles that use PLS as a method of analysis in the context of international marketing. Green and Ryans

Holzmu¨ller and Sto¨ttinger (1996, JIM)

Green and Ryans (1990, JPIM)

Festge and Schwaiger (2007, AIM) Gerpott and Jakopin (2005, SBR) Graham, Mintu, and Rodgers (1994, Mgmt.Sc.)

Calantone, Graham, and Mintu-Wimsatt (1998, IJRM)

Alpert, Kamins, Sakano, Onzo, and Graham (2001, IMR) Birkinshaw, Morrison, and Hulland (1995, SMJ)

Ainuddin, Beamish, Hulland, and Rouse (2007, JWB)

Acedo and Jones (2007, JWB)

Study

Table 1.

‘‘Parameters can be estimated independent of sample size’’ (p. 79), ‘‘PLS avoids parameter estimation biases inherent in regression analysis’’ (p. 80), ‘‘PLS provides the most flexibility regarding measurement of the constructs’’ (p. 80) ‘‘Given that the purpose of this study is to predict [ . . . ], PLS has thus been chosen as the structural equation modeling approach’’ (p. 53), ‘‘[PLS] is more robust with small sample sizes’’ (p. 53), ‘‘the data do not have to be multivariate normal because of the fixed point estimation’’ (p. 53) Not explicitly mentioned

‘‘The PLS technique is justified where theory is insufficiently grounded and the variables or measures do not conform to a rigorously specified measurement model, or fit a certain distribution’’ (p. 242) ‘‘Use of PLS is especially suited to exploratory studies such as this, where the measures [ . . . ] are new and the relationships [ . . . ] have not been previously tested’’ (p. 56) ‘‘Formative indicators can only be analyzed using partial least squares (PLS), and not by using the more common structural equation technique of LISREL’’ (p. 177–178) ‘‘PLS is most appropriate when sample sizes are small, when assumptions of multivariate normality and interval scaled data cannot be made, and when the researcher is primarily concerned with prediction of the dependent variable’’ (pp. 646–647) ‘‘The PLS parameter estimates better reveal the strength and direction (i.e., positive vs. negative) of the relationships among variables compared to correlation coefficients’’ (p. 28), ‘‘PLS avoids parameters estimation biases common in regression analysis’’ (p. 28) ‘‘The researcher’s focus is placed on the explanation of an endogenous construct’’ (p. 192) Not explicitly mentioned

Motivation for Using PLS Path Modeling

Analysis of subgroups

Multiple regression

N/A

N/A

LISREL

N/A

Logistic regression

N/A

N/A

In order to test path significances

Verify model for binary variables N/A

Path significances

Group comparison

Multiple regression and Chow test

LISREL

N/A

Group comparison

Reason for Additional Analysis

N/A

t-test

Additional Analysis

Studies Using PLS Path Modeling in International Marketing Research.

Partial Least Squares Path Modeling in International Marketing 279

Mahmood, Bagchi, and Ford (2004, IJEC)

Lee (2000, EJM)

Lee (2001, JBR)

Lee, Yang, and Graham (2006, JIBS)

Johnson, Herrmann, and Gustafsson (2002, JEP) Julien and Ramangalahy (2003, ETP)

Inkpen and Birkenshaw (1994, IBR) Johansson and Yip (1994, SMJ)

Holzmu¨ller and Kasper (1991, MIR)

Study

‘‘PLS avoids many of the restrictive assumptions imposed by other causal models that involve latent variables such as LISREL’’, ‘‘PLS provides measurement assessment’’, ‘‘A jack-knife procedure [ . . . ] generates an approximate t-statistic. This overcomes the disadvantage of the lack of formal significance tests for parameters resulting from non-parametric methods’’, ‘‘PLS enables the explicit estimation of the multiple item construct, which affords a comparison of [groups] at the construct level’’ (p. 196) ‘‘The PLS technique imposes minimal demand on measurement scales, sample sizes, and residual distributions. [It] is often used to test and validate exploratory models’’ (p. 20)

‘‘PLS is known to be particularly advantageous in the initial development and assessment phase of theory building,’’ ‘‘the PLS method is [ . . . ] more robust since its does not require either a large sample or normally distributed data’’ (p. 233) ‘‘PLS [ . . . ] is more appropriate for the exploratory nature of [a] study,’’ ‘‘[PLS] allows for formative indicators [ . . . ] and dichotomous constructs’’ (p. 632) ‘‘PLS [ . . . ] can accommodate a small sample size’’ (p. 153)

‘‘Fewer restrictive assumptions,’’ ‘‘ratio between sample size and the number of parameters to be estimated,’’ ‘‘exploratory intention’’ (p. 58) ‘‘All relationships are modeled simultaneously, eliminating concerns about multicollinearity’’ (p. 208) ‘‘Less stringent assumptions about the randomness of the sample and the normality of the distribution of variables’’ (p. 587), ‘‘smaller sample sizes, as each causal subsystem sequence of paths is estimated separately’’ (p. 587) Not explicitly mentioned

Motivation for Using PLS Path Modeling


AMOS

Confirmatory factor analysis t-test and ANOVA

Fit statistics

Examine unidimensionality Group comparison

Group comparison

N/A

N/A

t-test and ANOVA

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Reason for Additional Analysis

Additional Analysis

280 JO¨RG HENSELER ET AL.

Venaik, Midgley, and Devinney (2005, JIBS)

Singh, Fassott, Chao, and Hoffmann (2006a, IMR) Singh, Fassott, Zhao, and Boughton (2006b, JCB) Sto¨ttinger and Holzmu¨ller (2001, MIR) Tsang (2002, SMJ)

Pullman, Granzin, and Olsen (1997, IBR) Pinto, Rodrı´ guez Escudero, and Gutı´ errez Cillań (2008, IMM)

Money (2004, JBR) Money and Graham (1999, JIBS) Nakamura, Shaver, and Yeung (1996, IJIO) Nijssen and Douglas (2008, JIM) O’Cass and Fenech (2003, EJM) Pavlou and Chai (2002, JECR)

Mintu-Wimsatt and Graham (2004, JAMS)

N/A N/A

Group comparison

N/A

N/A N/A N/A t-test

N/A

Not explicitly mentioned

‘‘PLS is particularly suitable for data analysis during the early stage of theory development where the theoretical model and its measures are not well formed’’ (p. 841) ‘‘At an early stage of development [ . . . ] the regression based approach of PLS is considered more appropriate than covariance-based methods such as LISREL,’’ applicable when a multivariate normal distribution can not be assured, small sample size in combination with a complex model including second-order constructs, formative indicators (p. 665)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A Path significances group comparison N/A

N/A

N/A

N/A LISREL Regression & Chow Test N/A

N/A

‘‘PLS can deal effectively with formative scales, is distribution free, and is a powerful instrument for analyzing small samples’’ (p. 95) ‘‘[PLS] circumvent[s] the necessity for the multivariate normal assumption’’ (p. 377) ‘‘PLS allows [ . . . ] a simultaneous analysis of both whether the hypothesized relationships at the theoretical level are empirically acceptable, and also how well the measures relate to each construct,’’ ‘‘[t]he ability to include multiple measures for each construct,’’ ‘‘the nature of [ . . . ] measures,’’ ‘‘the small sample size’’ (p. 246) ‘‘The objective of PLS is explanation of the relationships and prediction of the criterion variables of the model’’ (p. 221) ‘‘Avoiding any distributional assumption of the observed variables’’ (p. 160), ‘‘the sample size required in PLS is much smaller’’ (p. 160), ‘‘PLS can handle both types of measurement models, reflective and formative’’ (p. 160) ‘‘PLS [ . . . ] uses distribution-free assumptions, [ . . . ] especially when independence of observations is not stipulated’’ (p. 89) Not explicitly mentioned

Not explicitly mentioned

‘‘PLS is a more rigorous approach [ . . . ] compared to correlation and regression analyses’’ (p. 351), ‘‘PLS [ . . . ] avoids small sample size problems,’’ ‘‘PLS minimizes biases associated with [ . . . ] dichotomous and ordinal measures’’ (p. 352) In order to validate regression results N/A

Partial Least Squares Path Modeling in International Marketing 281

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(1990) published the first study using PLS in international marketing. Although there were several articles in the 1990s, the popularity of PLS seems to have largely increased in the new millennium. Journals that published PLS applications in the international marketing domain are (journal abbreviation and number of studies in parentheses):

Advances in International Marketing (AIM; 1) Entrepreneurship Theory and Practice (ETP; 1) European Journal of Marketing (EJM; 2) Industrial Marketing Management (IMM; 1) International Business Review (IBR; 2) International Journal of Electronic Commerce (IJEC; 1) International Journal of Industrial Organization (IJIO; 1) International Journal of Research in Marketing (IJRM; 1) International Marketing Review (IMR; 2) Journal of Business Research (JBR; 2) Journal of Consumer Behaviour (JCR; 1) Journal of Economic Psychology (JEP; 1) Journal of Electronic Commerce Research (JECR; 1) Journal of International Business Studies (JIBS; 3) Journal of International Marketing (JIM; 2) Journal of Product Innovation Management (JPIM; 1) Journal of the Academy of Marketing Science (JAMS; 1) Journal of World Business (JWB; 2) Management International Review (MIR; 2) Management Science (Mgmt.Sc.; 1) Schmalenbach Business Review (SBR; 1) Strategic Management Journal (SMJ; 3)

Our first analysis of these 33 studies provides some evidence of the increasing popularity of PLS path modeling within the research community. The analysis also points to the authors’ motivation for the use of this particular statistical method. Many researchers argue that the goal of their studies is in line with particular strengths of PLS path modeling. The most important motivations are exploration and prediction, as PLS path modeling is recommended in an early stage of theoretical development in order to test and validate exploratory models. Another powerful feature of PLS path modeling is that it is suitable for prediction-oriented research. Thereby, the methodology assists researchers who focus on the explanation of endogenous constructs. The characteristics of PLS path modeling, which

Partial Least Squares Path Modeling in International Marketing

283

researchers regard as relevant for their studies on international marketing, can be summarized as follows: PLS delivers latent variable scores, i.e. proxies of the constructs, which are measured by one or several indicators (manifest variables). PLS path modeling avoids small sample size problems and can therefore be applied in some situations when other methods cannot. PLS path modeling can estimate very complex models with many latent and manifest variables. PLS path modeling has less stringent assumptions about the distribution of variables and error terms. PLS can handle both reflective and formative measurement models. However, there are several arguments regarding the characteristics of PLS path modeling that should be treated with caution: PLS path modeling does not have less stringent assumptions about the representativeness of the sample. Sometimes, PLS path modeling is implicitly presumed to be the only method that can cope with formative indicators (cf. Chin, 1998); however, LISREL also has this ability (cf. Jarvis, MacKenzie, & Podsakoff, 2003). Although comparisons of methods provide some evidence of PLS’ favorable behavior in light of multicollinearity (cf. Gustafsson & Johnson, 2004), PLS does not resist multicollinearity. Since PLS determines measurement models (in Mode B) as well as structural models by means of multiple regressions, PLS estimates can be subject to multicollinearity problems, too. Our review furthermore discloses that some studies use PLS path modeling in combination with other analysis techniques such as t-tests, ANOVA, and CBSEM. Yet, these methods are not always a suitable choice. If, for instance, PLS was selected because of its distribution-free character, it would be inconsequent to introduce distributional assumptions in another analysis such as t-test or ANOVA, or to rely on criteria derived from CBSEM’s chi-square statistic. This finding provides evidence that either PLS path modeling lacks important features, which makes the use of additional analyses necessary, or that researchers are not aware of the respective extensions of PLS path modeling. In particular, the findings underpin the strong need for a PLS-based approach to multigroup analysis (MGA) in international marketing in order to compare model parameters across groups such as countries or cultures. The remainder of this chapter is organized as follows: In the following Section 2, we describe the working principle of PLS path modeling and discuss the characteristics of PLS in detail in order to assist research of

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international marketing to distinguish between facts and fiction about PLS path modeling. Section 3 addresses the assessment of PLS path modeling results, which represents a key area of concern when applying the methodology. Five issues are covered: Sections 3.1 and 3.2 provide an overview of the use of PLS path modeling for the assessment of reflective and formative measurement models, respectively. Section 3.3 presents the available criteria for evaluating the structural model. Section 3.4 presents and discusses the use of bootstrapping for determining confidence intervals and the significance of PLS path modeling estimates. As a courtesy to international marketing’s need to compare model parameters across countries, Section 3.5 proposes a new PLS-based approach for group comparisons based on bootstrapping. Finally, Section 4 sums up the key findings and draws conclusions.

2. PLS PATH MODELING PLS is a family of alternating least squares algorithms, or ‘‘prescriptions,’’ which extend principal component and canonical correlation analysis. The method was designed by Wold (1974, 1982, 1985) for the analysis of high dimensional data in a low-structure environment and has undergone various extensions and modifications. This chapter builds on Wold’s (1982) basic algorithmic design and some extensions developed by Lohmo¨ller (1989).

2.1. The Nature of PLS Path Models PLS path models are formally defined by two sets of linear equations: the inner model and the outer model. The inner model specifies the relationships between unobserved or latent variables, whereas the outer model specifies the relationships between a latent variable and its observed or manifest variables. The various literatures do not always employ the same terminology. For instance, publications addressing CBSEM (e.g., Rigdon, 1998) often refer to structural models and measurement models or (observed) indicator variables; whereas those focusing on PLS path modeling (e.g., Lohmo¨ller, 1989) use the terms inner model and outer model or manifest variables for similar elements of the causal model. Fig. 1 depicts an example of a PLS path model. In order to simplify the notation of the model and in line with conventional descriptions of PLS, we assume that latent and manifest variables are

285


x11 x12

1

3 1

x13 x21 x22 x23

2

4 2

x24

Inner Model

Outer Model (Here: Formative Mode)

Fig. 1.

x31

31

x32

32

x41

41

x42

42

x43

43

Outer Model (Here: Reflective Mode)

Example of a PLS Path Model.

standardized so that the location parameters can be discarded in the following equations. The inner model for relationships between latent variables can be written as: x ¼ Bx þ z

(1)

where x is the vector of latent variables, B denotes the matrix of coefficients of their relationships, and z represents the inner model residuals. The basic PLS design assumes a recursive inner model that is subject to predictor specification. Thus, the inner model constitutes a causal chain system (i.e. with uncorrelated residuals and without correlations between the residual term of a certain endogenous latent variable and its explanatory latent variables). Predictor specification reduces Eq. (1) to: ðxjxÞ ¼ Bx

(2)

PLS path modeling includes two different kinds of outer models: reflective (Mode A) and formative (Mode B) measurement models. The selection of a certain outer mode is subject to theoretical reasoning (Diamantopoulos & Winklhofer, 2001). The reflective mode has causal relationships from the latent variable to the manifest variables in its block. Thus, each manifest variable in a certain measurement model is assumed to be generated as a linear function of its latent variables and the residual e: X x ¼ Lx x þ x

(3)


286

where L represents the loading (pattern) coefficients. The outer relationships are also subject to predictor specification – implying that there are no correlations between the outer residuals and the latent variable of the same block – that reduces Eq. (3) to: ðX x jxÞ ¼ Lx x

(4)

The formative mode of a measurement model has causal relationships from the manifest variables to the latent variable. For those blocks, the linear relationships are given as follows: x ¼ P x X x þ x

(5)

In the formative mode, predictor specification is also in effect, reducing Eq. (5) to: ðxjX x Þ ¼ Px X x

(6)

Moreover, it is important to see that the terms ‘‘formative’’ and ‘‘reflective,’’ as well as the connotation which is associated with the classification of ‘‘causal’’ and ‘‘effect,’’ point at a difference between the characterization of the latent variable measurement models’ mode. Although a latent variable was originally considered an exact linear combination of its indicators for formative indicator specifications, a causal indicator specification – the original term for these indicators – may be more general in that it holds both in the case of an exact linear combination, as well as when the indicators do not completely determine the latent variable (Bollen, 1989). In this chapter, we consistently use the terms ‘‘formative’’ and ‘‘reflective’’ measurement models – in the way they are described, for example, by Jarvis et al. (2003). It must be noted, though, that while we use the terms ‘‘reflective’’ and ‘‘formative’’ constructs to refer to latent variables that are measured with reflective or formative indicators, ‘‘strictly speaking, it is the (observable) measures (i.e. the indicators) that are being modeled as reflective or formative and not the (unobservable) constructs as such’’ (Diamantopoulos, 2006, p. 15). The following section introduces the basic PLS algorithm, which starts with the data matrix of manifest variables and successively computes the latent variable scores and all unknown relationships.


287

2.2. The PLS Path Modeling Algorithm The PLS algorithm is essentially a sequence of regressions in terms of weight vectors. The weight vectors obtained at convergence satisfy fixed point equations (see Dijkstra, 2009, for a general analysis of such equations and ensuing convergence issues). The basic PLS algorithm, as suggested by Lohmo¨ller (1989), includes the following three stages: Stage 1: Iterative estimation of latent variable scores, consisting of a four-step iterative procedure that is repeated until convergence is obtained: (1) (2) (3) (4)

outer approximation of the latent variable scores, estimation of the inner weights, inner approximation of the latent variable scores, and estimation of the outer weights.

Stage 2: Estimation of outer weights/loading and path coefficients. Stage 3: Estimation of location parameters. We draw on Tenenhaus, Esposito Vinzi, Chatelin, and Lauro’s (2005) description of the first stage of the PLS path modeling algorithm: Step 1: Outer approximation of the latent variable scores. Outer proxies of the outer latent variables, x^ n , are calculated as linear combinations of their respective indicators. These outer proxies are standardized; i.e. they have a mean of 0 and a standard deviation of 1. The weights of the linear combinations result from step 4 of the previous iteration. When the algorithm is initialized, and no weights are available yet, any arbitrary nontrivial linear combination of indicators can serve as an outer proxy of a latent variable. Step 2: Estimation of the inner weights. Inner weights are calculated for each latent variable in order to reflect how strongly the other latent variables are connected to it. There are three schemes available for determining the inner weights. Wold (1982) originally proposed the centroid scheme. Later, Lohmo¨ller (1989) developed the factor weighting and path weighting schemes. The centroid scheme uses the sign of the correlations between a latent variable – or, more precisely, the outer proxy – and its adjacent latent variables; the factor weighting scheme uses the correlations. The path weighting scheme pays tribute to the arrow orientations in the path model. The weights of those latent variables that explain the focal latent variable are set to the regression coefficients stemming from a regression of the focal latent variable (regressant) on its latent repressor variables. The weights of those latent variables, which are explained by the focal latent

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variable, are determined in a similar manner as in the factor weighting scheme. Regardless of the weighting scheme, a weight of zero is assigned to all nonadjacent latent variables. Step 3: Inner approximation of the latent variable scores. Inner proxies of inner the latent variables, x^ n , are calculated as linear combinations of the outer proxies of their respective adjacent latent variables, using the aforedetermined inner weights. Step 4: Estimation of the outer weights. The outer weights are calculated either as the covariances between the inner proxy of each latent variable and its indicators (in Mode A, reflective), or as the regression weights resulting from the ordinary least squares regression of the inner proxy of each latent variable on its indicators (in Mode B, formative). These four steps are repeated until the change in outer weights between two iterations drops below a predefined limit. The algorithm terminates after step 1, delivering latent variable scores for all latent variables. Loadings and inner regression coefficients are then calculated in a straightforward way, given the constructed indices and using Eqs. (4) and (5). In order to determine the path coefficients, for each endogenous latent variable a (multiple) linear regression is conducted.

2.3. Methodological Characteristics Methodological literature on PLS path modeling or publications on causal modeling applications that utilize the PLS path modeling approach usually refer to certain advantageous features of this technique (e.g., Fornell & Bookstein, 1982; Jo¨reskog & Wold, 1982; Dijkstra, 1983; Lohmo¨ller, 1989; SchneeweiX, 1991; Falk & Miller, 1992). The popularity of PLS path modeling among scientists and practitioners is rooted in four genuine characteristics: First, instead of solely drawing on the common reflective mode, the PLS path modeling algorithm allows the unrestricted computation of cause–effect relationship models that employ both reflective and formative measurement models (Diamantopoulos & Winklhofer, 2001). Second, PLS can be used to estimate path models when sample sizes are small (Chin & Newsted, 1999). Third, PLS path models can be very complex (i.e. consist of many latent and manifest variables) without leading to estimation problems (Wold, 1985). PLS path modeling is methodologically advantageous to CBSEM whenever improper or nonconvergent results are likely to occur (i.e. Heywood cases; see Krijnen, Dijkstra, & Gill, 1998).


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Furthermore, with more complex models, the number of latent and manifest variables may be high in relation to the number of observations. Fourth, PLS path modeling can be used when distributions are highly skewed (Bagozzi, 1994), or the independence of observations is not assured, because, as Fornell (1982, p. 443) has argued, ‘‘there are no distributional requirements.’’ All four characteristics are discussed in detail.

2.3.1. Reflective and Formative Measurement Models Structural equation models usually involve latent variables with multiple indicators. The measurement model or outer model specifies the relationship between indicators and latent variables. The direction of path relationships per measurement model and, thus, the causality between the latent variable and its indicators are either described by a reflective or a formative mode. The reflective measurement model has its roots in classical test theory and psychometrics (Nunnally & Bernstein, 1994). Each indicator represents an error-afflicted measurement of the latent variable. The direction of causality is from the construct to the indicators; thus, observed measures are assumed to reflect variation in the latent variable. In other words, changes in the construct are expected to be manifested in changes in all of its indicators. Fig. 2 provides an example of a reflective measurement model. In some situations, for instance in the early stages of model development, it is appropriate to determine causality from the measures to the construct, rather than vice versa (Blalock, 1971). This kind of situation represents a formative measurement model, which is adequate when a construct is defined as a combination of its indicators. A typical example would be marketing mix elements that are determined by a combination of variables (Fornell, 1982) and, hence, have to be modeled as a (typically linear) 1

Heart Rate x1

2

Lactate Level x2

3

Muscle Proportion x3

Fig. 2.

Cycling Fitness

Example of a Reflective Measurement Model.


290 Training x1

Nutrition x2

Drug Abuse x3

Fig. 3.

Cycling Fitness

Example of a Formative Measurement Model.

combination of its indicators plus a disturbance term (Diamantopoulos, 2006). Consequently, the latent variable is defined as a weighted score across all representative indicator variables, with each variable embodying an independent dimension in its own right. An increase in the value of one indicator translates into a higher score for the composite variable, regardless of the value of the other indicators. The formative measurement model exhausts the entire domain of the index, meaning that the indicators collectively represent all the relevant dimensions or independent underpinnings of the latent variable. One implication of this direction of causality is that omitting one indicator could omit a unique part of the formative measurement model and change the meaning of the variable (Diamantopoulos & Winklhofer, 2001). Fig. 3 presents an example of a formative measurement model. Although the inclusion of formative measures in CBSEM has been well documented (e.g., Jo¨reskog & Goldberger, 1975; MacCallum & Browne, 1993; Jo¨reskog & So¨rbom, 1996), analysts usually encounter identification problems. As a sort of ad-hoc remedy, formative indicators could be modeled in CBSEM by re-specifying the formative indicators as exogenous latent variables with single indicators, fixed unit loadings, and a fixed measurement error (Williams, Edwards, & Vandenberg, 2003). In contrast, similar problems do not arise in PLS path modeling. The PLS path modeling algorithm – as it is presented in Section 2.2 – is equally well suited for SEM with reflective and/or formative measurement models. The only problematic issue, however, is connected to manifest variables’ critical level of multicollinearity in formative measurement models. Researchers should carefully decide whether a measurement model shall be formative or reflective. Measurement model misspecification is an often observed phenomenon. According to Jarvis et al. (2003), 28% of top-level


291

marketing articles use misspecified measurement models in SEM applications. A substantial number of latent variables in these studies were inappropriately specified by treating formative measurement models as if they were reflective. Misspecification of measurement models can bias inner model parameter estimation and lead to incorrect assessments of relationships (Jarvis et al., 2003). The decision to use either formative or reflective indicators for a construct should be based on the nature of the causal relationship between the indicators and the latent variables in the measurement model (Bollen, 1989). The most suitable approach to avoid misspecification of measurement models in SEM is to consider the conceptual discussion of the differences between formative and reflective measurement models by, e.g., Howell, Breivik, and Wilcox (2000a, 2007b); Bagozzi (2007); Bollen (2007); Bollen and Lennox (1991); Diamantopoulos and Winklhofer (2001); Edwards and Bagozzi (2000), as well as the C-OAR-SE procedure (Rossiter, 2002) and the design rules for determining the specific type of measurement model put forward by Jarvis et al. (2003). Notwithstanding this theoretic foundation, there are only a few endeavors in the academic business literature that stress statistical techniques for the assessment of formative measurement models in PLS path models. For instance, Bollen and Ting’s (1993) confirmatory tetrad analysis (CTA) results are used in SEM (e.g., Bollen & Ting, 2000) to assess whether manifest variables in the measurement model are independent determinants of a latent variable rather than its reflections in an effect indicator scale. Gudergan, Ringle, Wende, and Will (2008) show that PLS path modeling assumptions are consistent with the CTA procedure and, thereby, provide a more rigorous foundation for evaluating whether or not empirical data support a reflective indicator specification rather than a formative indicator specification.

2.3.2. Sample Size The sample size argument has its roots in the considerable obstacles faced when conducting CBSEM with small samples. A substantial number of simulation studies on CBSEM compare alternative discrepancy functions and their estimation bias, accuracy, and robustness with respect to sample size. Boomsma and Hoogland (2001), for example, conclude that there are nonconvergence problems and improper CBSEM solutions in small samples (e.g., 200 or fewer cases). These authors provide evidence that CBSEM – depending on the selected discrepancy function and the model complexity – requires several hundred or even thousands of observations.

292


In contrast, the sample size can be considerably smaller in PLS path modeling. For example, ‘‘there can be more variables than observations and there may be a small amount of data that are missing completely at random’’ (Tenenhaus et al., 2005, p. 202). Wold (1989) illustrates the low sample size requirement by analyzing a path model based on a data set consisting of 10 observations and 27 manifest variables. A rule of thumb for robust PLS path modeling estimations suggests that the sample size be equal to the larger of the following (Barclay, Higgins, & Thompson, 1995): (1) ten times the number of indicators of the scale with the largest number of formative indicators, or (2) ten times the largest number of structural paths directed at a particular construct in the inner path model. Chin and Newsted (1999) present a Monte Carlo simulation study on PLS with small samples. They find that the PLS path modeling approach can provide information about the appropriateness of indicators at sample size as low as 20. This study confirms the consistency at large on loading estimates with increased numbers of observations and numbers of manifest variables per measurement model. As a result of these peculiarities, researchers and practitioners use PLS path modeling, instead of CBSEM, when the sample size is relatively low. However, this persistent belief in publications and research that support the claim that PLS is more efficient at small sample size is inadvertently misleading the research community as it asks for accuracy instead of statistical power. Goodhue, Lewis, and Thompson (2006, p. 9) argue that statistical significance is a primary consideration and accuracy a secondary one: ‘‘without statistical significance, accuracy contributes no scientific knowledge.’’ Their findings suggest that PLS does not have an advantage in terms of detecting statistical significance in small sample sizes. Furthermore, Goodhue et al. (2006) find no evidence that PLS with bootstrapping provides more statistical power than CBSEM with small sample sizes. The generally accepted ten times rule of thumb for the minimum sample size in PLS analyses can lead to unacceptably low levels of statistical power. It is only in the case of a strong effect size (and high reliability) that rule of thumb may lead to acceptable power. However, the authors provide strong evidence that the ten-times-rule does not take into account effect size, reliability, the number of indicators, or other factors which are known to affect power. Thus, the recommendations on acceptable PLS sample size might be misleading. The choice of an appropriate sample size depends on more than the magnitude of the relationship or the desired level of power. It is evident that ‘‘a researcher must consider the distributional characteristics of the data,


293

potential missing data, the psychometric properties of the variables examined, and the magnitude of the relationships considered before deciding on an appropriate sample size to use or to ensure that a sufficient sample size is actually available to study the phenomena of interest’’ (Marcoulides & Saunders, 2006, p. VI). Marcoulides and Saunders offer other warnings that clearly echo those presented in the CBSEM literature. For instance, SchneeweiX (2001) addresses the magnitude of standard errors in PLS path modeling estimators resulting from not using enough observations (consistency) and indicators for each latent variable (consistency at large). This research provides closed form equations to determine the magnitude of finite item bias relative to the number of indicators used in a model. SchneeweiX (2001, p. 310) indicates that item bias is generally small when reflective measurement models involve many indicators, ‘‘each with a sizable loading and an error which is small and uncorrelated (or only slightly correlated) with other error variables.’’ Goodhue et al. (2006) stress that even though PLS path modeling seems to have no special abilities at small sample size, its performance, in terms of statistical power, is equal to other techniques for normally distributed data. In their view, PLS path modeling is still a convenient and powerful technique that is appropriate for many research situations such as complex research models with sample sizes that would be too small for CBSEM techniques. They therefore note that ‘‘[u]nfortunately PLS does not provide researchers with a magic bullet for achieving adequate statistical power at small sample sizes’’ (Goodhue et al., 2006, p. 10). In a similar vain, Marcoulides and Saunders (2006, p. VIII) state that ‘‘PLS is not a silver bullet to be used with samples of any size!’’ Thus, researchers must ensure that the sample size is large enough to support the conclusions – the PLSrelated rule of thumb might work well in some instances, but in others it might fail miserably. 2.3.3. Model Complexity Some CBSEM discrepancy functions (e.g., GFI and AGFI) decline as model complexity increases (i.e. more observed variables or more constructs), and they may be inappropriate for more complex models (Anderson & Gerbing, 1984). For example, Boomsma and Hoogland (2001) experimentally varied the model complexity (number of estimated parameters) and the number of degrees of freedom and found that the more parameters to be estimated, the more nonconvergence and improper solutions will occur, or – from an information point of view – the larger the estimation requirements, the more information is needed. However, sample size has a primary effect: With

294


increasing numbers of observations, there is a decreasing occurrence of nonconvergence and improper solutions. According to these authors’ simulation study results, if the sample size and the factor loadings are about the same, more complications are expected regarding nonconvergence and improper solutions as model complexity increases: ‘‘It was shown that answers to these questions are conditional on data and model characteristics alike. In practice, however, applied researchers often do not know the data and the model characteristics before data collection and analysis. In new areas of applied research, especially when measurement instruments are in a developing stage, little is known about distributional characteristics of observed variables. Also, in phases of model exploration there are uncertainties about the complexity of the ‘‘final models,’’ about the number of reliable indicators and the size of factor loadings. It is evident that with better measurements and stronger theoretical foundations of model structures, it becomes much easier to make proper decisions on the choice of estimators and the planning of sample size’’ (Boomsma & Hoogland, 2001, p. 22). This quote stresses the complementary character of PLS in respect of CBSEM in theory testing, especially with respect to the issues of model complexity when the model building proceeds from simple to more complex models. PLS is considered better suited to explain complex relationships (Fornell, 1982; Fornell, Lorange, & Roos, 1990). Wold (1985, pp. 589–590) has therefore stated that ‘‘PLS comes to the fore in larger models, when the importance shifts from individual variables and parameters to packages of variables and aggregate parameters. [...] In large, complex models with latent variables PLS is virtually without competition.’’ Moreover, the PLS algorithm allows for a considerable increase in model complexity and, hence, a noticeable reduction in the distance between subject matter analysis and statistical technique in domains with continuous access to reliable data. 2.3.4. On the Robustness of Parameter Estimates Although several authors argue that the PLS path modeling approach offers certain advantages when compared to covariance-based methods (Chin, 1998; Fornell, 1982), others provide notes of caution on the subject of this discussion (Marcoulides & Saunders, 2006). However, literature on the formal comparison of CBSEM and PLS is rare (cf. Dijkstra, 1983; McDonald, 1996). Only few simulation studies analyze the parameter estimations of both methodologies, thereby uncovering certain peculiarities regarding their behavior in applications. Researchers and practitioners require this information when selecting an appropriate means for estimating a particular SEM with their collected data.


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A primary Monte Carlo simulation study by Vilares, Almeida, and Coelho (2009) analyzes the effects of two assumptions on the performance of CBSEM and PLS: the symmetry of the distribution and the reflective modeling of the indicators. These authors compare both methods’ performance when these assumptions hold and when they are violated; for instance, when the distribution of the observations is skewed and some indicators follow a formative scheme. In their base model (reflective model with symmetric data), the quality of the two estimation methods is very similar, especially for the estimation of outer loadings. The Vilares et al. (2009) study sustains the phenomenon of outer loading overestimation by PLS and more conservative outcomes for inner path model relationships, whereas the Maximum Likelihood (ML) method shows exactly the opposite tendency, with overestimation of the path coefficients and a general underestimation of the indicator loadings. However, when a formative latent variable is introduced, the PLS method demonstrates higher robustness compared to CBSEM. The same kind of finding holds with skewed data results. Accordingly, the authors conclude that in case of skewed data, PLS estimates are better than ML estimates, in terms of both bias and precision. The ML estimators seem to be more sensitive to the various potential deficiencies in the data and model specification. The research by Vilares et al. (2009) analyzes formative measurement models in that it draws on reflective loadings results, thus depicting a situation of measurement model misspecification (Jarvis et al., 2003). Another Monte Carlo simulation study by Ringle, Wilson, and Go¨tz (2007) compares the performance of CBSEM and PLS for formative exogenous latent variables in a causal model. Both methodologies provide estimates for the simulated sets of data that are very close to the population parameters when averaged. Although CBSEM estimates in the formative measurement and the structural model significantly decrease in accuracy and robustness in respect of nonnormal data, the performance of reflective measurement models’ estimations is not seriously affected by these changed data characteristics. Ringle et al. (2007) reveal similar results for PLS path modeling, but the decline in accuracy and robustness is considerably lower compared to CBSEM. On the basis of these findings, we can conclude that in the normal data scenario, CBSEM provides accurate and robust parameter estimates that are equal or superior in comparison to PLS estimates, no matter what measurement models are used. However, if the premises for the application of CBSEM are violated, such as regarding the required minimum number of observations for robust model estimations or the multivariate normality assumption for some CBSEM discrepancy


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functions, the PLS approach offers robust approximations. It must be noted though that, in general, PLS parameter estimates are less than optimal regarding bias and consistency. The estimates will be asymptotically correct under the condition of consistency at large, i.e. both a large sample size and large numbers of indicators per latent variable (Jo¨reskog & Wold, 1982).

2.3.5. Choice between the Covariance- and Variance-Based SEM Method Even though Wold (1974) developed the fixed-point estimation procedure for causal modeling as an alternative to CBSEM, the covariance-fitting-based SEM procedures (e.g., ML, GLS, ULS) and the variance-based PLS approach are complementary rather than competitive. According to Jo¨reskog (1982, p. 270) ‘‘ML is theory-oriented, and emphasizes the transition from exploratory to confirmatory analysis. PLS is primarily intended for causalpredictive analysis in situations of high complexity but low theoretical information.’’ The philosophical distinction between these approaches is whether to use CBSEM for theory testing and development, or PLS path modeling for predictive applications. As visualized in Fig. 4, in causal modeling situations where prior theory is strong and further testing and development is the goal, CBSEM is the most appropriate statistical methodology. Yet, due to the indeterminacy of factor score estimations, there is a loss of predictive accuracy. This occurrence, of course, is not of concern in theory testing where structural relationships (i.e. parameter estimation) between concepts is of primary concern. Moreover, hypothesis building and the assessment of CBSEM results through global goodness-of-fit

Theory Testing

LISREL PLS

ANN

Prediction

Fig. 4.

Purpose of the Analysis.


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criteria further emphasizes the theory-testing, rather than theory-building, character of this methodology (Anderson & Gerbing, 1988). In research settings with predictive scope, weak theory, and no need for an understanding of underlying relationships, artificial neural networks (ANN) may be useful. This approach creates artificial neurons and their interrelations in the hidden layer that connects the input and output data, in order, for example, to improve predictivity without necessarily creating a model of theoretical meaning. Yet, Hsu, Chen, and Hsieh (2006) find that their ANN-based SEM technique is similar to PLS path modeling. Using the iterative estimation technique as described in Section 3.2, the PLS path modeling approach calculates latent variable scores as exact linear combinations of the observed measures. Thereby, the approach avoids the indeterminacy problem and provides an exact definition of component scores (Fornell, 1982). The PLS approach is adequate for causal modeling applications whose purpose is prediction and/or theory building. Although PLS path modeling can be used for theory confirmation, it assumes that all measured variance is useful for explanation in applications (e.g., Sarkar, Echambadi, Cavusgil, & Aulakh, 2001) and indicates the causal relationships with significant effect. Thus, parameter estimates are obtained based on the ability to minimize the residual variances of dependent variables (both latent and observed variables). An assessment of these PLS estimation outcomes – for example, by standard errors that are obtained through bootstrapping (see Section 3.4) – builds on the evaluation of partial path model structures. PLS’ lack of a global optimization function and consequently measures of global goodness of model fit definitely limits the use of PLS for theory testing. A researcher must arrive at a decision on the causal model analysis with latent variables in order to select an appropriate statistical technique. Instead of using the model to explain the covariation among all indicators, which is the objective of CBSEM, PLS path modeling maximizes the explained variance of all dependent variables and, thus, supports predictionoriented goals. Although the CBSEM and PLS path modeling methodologies differ from a statistical point of view, PLS estimates may represent good proxies of the CBSEM results. If CBSEM premises are violated, such as distributional assumptions, minimum sample size, or maximum model complexity, and related methodological matters arise, such as Heywood cases, an inability to converge to a solution, parameters that are outside reasonable limits, and large standard errors regarding parameter estimates (Rindskopf, 1984), PLS path modeling may represent a reasonable methodological alternative for theory testing.


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3. EVALUATION OF PLS PATH MODEL RESULTS PLS path modeling does not provide any global goodness-of-fit criterion. As a consequence, Chin (1998) has put forward a catalog of criteria to assess partial model structures. A systematic application of these criteria is a two-step process, encompassing (1) the assessment of the outer model and (2) the assessment of the inner model. Fig. 5 depicts this two-step process. At the beginning of the two step process, model assessment focuses on the measurement models. A systematic evaluation of PLS estimates reveals the measurement reliability and validity according to certain criteria that are associated with formative and reflective outer model. It only makes sense to evaluate the inner path model estimates when the calculated latent variable scores show evidence of sufficient reliability and validity.

3.1. Assessing Reflective Measurement Models Reflective measurement models should be assessed with regard to their reliability and validity. Usually, the first criterion which is checked is internal consistency reliability. The traditional criterion for internal consistency is Cronbach’s a (Cronbach, 1951), which provides an estimate for the reliability based on the indicator intercorrelations. While Cronbach’s

Outer model assessment

Inner model assessment

Fig. 5.

• Reliability and validity of reflective constructs • Validity of formative constructs

• Variance explanation of endogenous constructs • Effect sizes • Predictive relevance

A Two-Step Process of PLS Path Model Assessment.


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a assumes that all indicators are equally reliable, PLS prioritizes indicators according to their reliability, resulting in a more reliable composite. As Cronbach’s a tends to provide a severe underestimation of the internal consistency reliability of latent variables in PLS path models, it is more appropriate to apply a different measure, the composite reliability rc (Werts, Linn, & Jo¨reskog, 1974). The composite reliability takes into account that indicators have different loadings, and can be interpreted in the same way as Cronbach’s a. No matter which particular reliability coefficient is used, an internal consistency reliability value above 0.7 in early stages of research and values above 0.8 or 0.9 in more advanced stages of research are regarded as satisfactory (Nunnally & Bernstein, 1994), whereas a value below 0.6 indicates a lack of reliability. As the reliability of indicators varies, the reliability of each indicator should be assessed. Researchers postulate that a latent variable should explain a substantial part of each indicator’s variance (usually at least 50%). Accordingly, the absolute correlations between a construct and each of its manifest variables (i.e. the pffiffiffiffiffiffi ffi absolute standardized outer loadings) should be higher than 0.7 ( 0:5). Moreover, some psychometrists (e.g., Churchill, 1979) recommend eliminating reflective indicators from measurement models if their outer standardized loadings are smaller than 0.4. Taking into account PLS’ characteristic of consistency at large, one should be careful when eliminating indicators. Only if an indicator’s reliability is low and eliminating this indicator goes along with a substantial increase of composite reliability, it makes sense to discard this indicator. For the assessment of validity, two validity subtypes are usually examined: the convergent validity and the discriminant validity. Convergent validity signifies that a set of indicators represents one and the same underlying construct, which can be demonstrated through their unidimensionality. Fornell and Larcker (1981) suggest using the average variance extracted (AVE) as a criterion of convergent validity. An AVE value of at least 0.5 indicates sufficient convergent validity, meaning that a latent variable is able to explain more than half of the variance of its indicators on average (e.g., Go¨tz, Liehr-Gobbers, & Krafft, 2009). Discriminant validity is a rather complementary concept: Two conceptually different concepts should exhibit sufficient difference (i.e. the joint set of indicators is expected not to be unidimensional). In PLS path modeling, two measures of discriminant validity have been put forward: The Fornell–Larcker criterion and the crossloadings. The Fornell–Larcker criterion (Fornell & Larcker, 1981) postulates that a latent variable shares more variance with its assigned indicators than with any other latent variable. In statistical terms, the AVE of each latent


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Table 2. Criterion

Description

Composite reliability (rc )

Indicator reliability Average variance extracted (AVE)

Fornell–Larcker criterion

Cross-loadings

Assessing Reflective Measurement Models. P P P rc ¼ ð li Þ2 =½ð li Þ2 þ Varði Þ, where li is the outer (component) loading to an indicator, and Varði Þ ¼ 1 l2i in case of standardized indicators. The composite reliability is a measure of internal consistency and must not be lower than 0.6. Absolute standardized outer (component) loadings should be higher than 0.7. P P P AVE ¼ ð l2i Þ=½ l2i þ Varði Þ, where li is the component loading to an indicator and Varði Þ ¼ 1 l2i in case of standardized indicators. The average variance extracted should be higher than 0.5. In order to ensure discriminant validity, the AVE of each latent variable should be higher than the squared correlations with all other latent variables. Thereby, each latent variable shares more variance with its own block of indicators than with another latent variable representing a different block of indicators. Cross-loadings offer another check for discriminant validity. If an indicator has a higher correlation with another latent variable than with its respective latent variable, the appropriateness of the model should be reconsidered.

variable should be greater than the latent variable’s highest squared correlation with any other latent variable. The second criterion of discriminant validity is usually a bit more liberal: The loading of each indicator is expected to be greater than all of its cross-loadings (Chin, 1998; Go¨tz et al., 2009). Although the Fornell–Larcker criterion assesses discriminant validity on the construct level, the cross-loadings allow this kind of evaluation on the indicator level. In summary, a reliable and valid reflective measurement of latent variables should meet all the criteria as listed in Table 2. If this is not the case, the researcher may want to exclude single indicators from a specific measurement model and eventually revise the path model.

3.2. Assessing Formative Measurement Models Bollen (1989) and Bagozzi (1994) emphasize that traditional validity assessments and classical test theory do not apply to manifest variables that are used in formative measurement models and that the concepts of reliability (i.e. internal consistency) and construct validity (i.e. convergent


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and discriminant validity) are not meaningful when a formative mode is employed. It is the assumption of error-free measures that renders the question of indicator reliability irrelevant. Diamantopoulos (2006, p. 11) concludes in respect of formative measurement that ‘‘reliability becomes an irrelevant criterion for assessing measurement quality.’’ The less important reliability becomes, the more pivotal it is to secure validity. A first examination of the validity of formative indicators should use theoretic rationale and expert opinion (Rossiter, 2002). A second assessment of the validity of formative constructs should consist of statistical analyses on two levels: the construct level and the indicator level. At the construct level, the question arises as to whether the formative index indeed carries the intended meaning. A first check could be the nomological validity: Does the formative index behave within a net of hypotheses as expected? Those relationships between the formative index and other constructs in the path model that are sufficiently referred to in prior research should be strong and significant. Moreover, researchers should be concerned about the construct’s error-term n, which represents the part of the construct that is not captured by any indicator. In order to estimate the size of this error, one can assess the external validity by means of regressing the formative index on a reflective measure of the same construct. The variance of the error n can be determined as follows: VarðnÞ ¼ 1

g2 relðxÞ

(7)

Here, x stands for the reflective measure of the focal construct and g for the correlation between the formative and the reflective measure of the same construct, which is equal to the standardized regression coefficient. The ratio of the equation includes a correction of the imperfect reliability of the reflective measure. The external validity can finally be calculated as 1 VarðnÞ. The current literature does not provide any recommendations for thresholds of external validity. We suggest a value of 0.8 as a minimum for external validity, which would mean that the formative index carries about 80% of the intended meaning. However, researchers should always take into account the particularities of their research fields and eventually ask for a higher external validity. At the indicator level, the question arises as to whether each indicator indeed delivers a contribution to the formative index by carrying the intended meaning. Besides face and content validity, which can both be assessed a priori, some statistical evaluations can be conducted a posteriori.


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There are two cases in which researchers should critically examine whether a particular indicator should enter into the index or not. An indicator can be irrelevant for the construction of the formative index because it either does not have a significant impact on the formative index, or because it exhibits high multicollinearity, which could mean that the indicator’s information is redundant. In order to check for the first case, the significance of the estimated indicator weights can be determined by means of bootstrapping (cf. Davison & Hinkley, 2003; Chin, 1998; Tenenhaus et al., 2005, and see Section 3.4). In order to check for the second case, researchers should assess the degree of multicollinearity among the formative indicators (Diamantopoulos & Winklhofer, 2001; Cassel, Hackl, & Westlund, 2000, Grewal, Cote, & Baumgartner, 2004), for instance, by calculating the variance inflation factor (VIF) or the tolerance values. A rule of thumb from econometrics states that VIFs greater than 10 reveal a critical level of multicollinearity. However, any VIF substantially greater than 1 indicates multicollinearity and should alert researchers to the typical problems of multicollinearity. The different steps and criteria for assessing the validity of formative indices are summarized in Table 3. A final note of caution: formative indicators should never be discarded simply on the basis of statistical outcomes. Such actions may substantially change the content of the formative index (Jarvis et al., 2003). Thus, the researcher should keep both significant and insignificant formative indicators in the measurement model as long as this is conceptually justified. Usually, PLS structural model Table 3. Criterion Nomological validity

External validity Significance of weights Multicollinearity

Assessing Formative Measurement Models. Description The relationships between the formative index and other constructs in the path model, which are sufficiently well known through prior research, should be strong and significant. The formative index should explain a big part of the variance of an alternative reflective measure of the focal construct. Estimated weights of formative measurement models should be significant. Manifest variables in a formative block should be tested for multicollinearity. The variance inflation factor (VIF) can be used for such tests. As a rule of thumb, a VIF greater than ten indicates the presence of harmful collinearity. However, any VIF substantially greater than one indicates multicollinearity.


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estimates hardly alter after performing an elimination of insignificant or highly collinear formative indicators, providing further support for the decision to retain such indicators in the PLS path model. In the case of multicollinearity, indicator weight estimates can be distorted. This fact requires researchers to be particularly cautious when interpreting indicator weights as a sign of indicator importance. 3.3. Assessing the Structural Model Reliable and valid outer model estimations permit an evaluation of the inner path model estimates. Table 4 provides an overview of the typical criteria. The essential criterion for this assessment is the coefficient of determination (R2 ) of the endogenous latent variables. Chin (1998) describes R2 values of 0.67, 0.33, and 0.19 in PLS path models as substantial, moderate, and weak, respectively. If certain inner path model structures explain a endogenous latent variable by only a few (e.g., one or two) exogenous latent variables, ‘‘moderate’’ R2 may be acceptable. However, if the endogenous latent variable relies on several exogenous latent variables, the R2 value should exhibit at least a substantial level. Lower results, on the contrary, cast Table 4. Criterion R2 of endogenous latent variables Estimates for path coefficients Effect size f 2

Prediction relevance (Q2 and q2 )

Assessing Structural Models. Description

R2 values of 0.67, 0.33, or 0.19 for endogenous latent variables in the inner path model are described as substantial, moderate, or weak by Chin (1998, p. 323). The estimated values for path relationships in the structural model should be evaluated in terms of sign, magnitude, and significance (the latter via bootstrapping). f 2 ¼ ðR2included R2excluded Þ=ð1 R2included Þ; values of 0.02, 0.15, and 0.35 can be viewed as a gauge for whether a predictor latent variable has a weak, medium, or large effect at the structural level. The Q2 is calculated based on the blindfolding procedure: P P Q2 ¼ 1 ð D SSED Þ=ð D SSOD Þ. D is the omission distance, SSE is the sum of squares of prediction errors, and SSO is the sum of squares of observations. Q2 -values above zero give evidence that the observed values are well reconstructed and that the model has predictive relevance (Q2 -values below zero indicate a lack of predictive relevance). In correspondence to f 2 , the relative impact of the structural model on the observed measures for latent dependent variables can be assessed: q2 ¼ ðQ2included Q2excluded Þ=ð1 Q2included Þ.

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doubts regarding the theoretical underpinnings and demonstrate that the model is incapable to explain the endogenous latent variable(s). The individual path coefficients of the PLS structural model can be interpreted as standardized beta coefficients of ordinary least squares regressions. Structural paths, whose sign is in keeping with a priori postulated algebraic signs, provide a partial empirical validation of the theoretically assumed relationships between latent variables. Paths that possess an algebraic sign contrary to expectations do not support the a priori formed hypotheses. In order to determine the confidence intervals of the path coefficients and statistical inference, resampling techniques such as bootstrapping should be used (cf. Tenenhaus et al., 2005, and see Section 3.4). Another important evaluation of direct and indirect relationships of the predecessor of a certain endogenous latent variable involves the analysis of mediating (Helm, Eggert, & Garnefeld, 2009) and moderating effects (Henseler & Fassott, 2009). Researchers and practitioners using PLS path modeling should first assess their hypothesized path model of direct effects and then conduct additional analyses involving mediating and moderating effects to learn, for instance, more about possible spurious effects or suppressor effects. Albers (2009) proposes a new paradigm for success factor studies in marketing. The significance of highly plausible direct inner path model relationships is no longer of interest to researchers and practitioners. Rather, the sum of the direct effect and all indirect effects of a particular latent variable on another (the total effect) should be the subject of evaluation for further interpretation. This new paradigm copes with a frequent observation in PLS path modeling that the standardized inner path model coefficients decline with an increased number of indirect relationships, especially when mediating latent variables have a suppressor effect on the direct path. Consequently, considerable direct relationships may become insignificant after including additional indirect relationships. In such instances, the total effect should remain at a relatively constant, sizeable level and thus provide more reasonable grounds for conclusions on the inner path model relationships. For each effect in the path model, one can evaluate the effect size by means of Cohen’s (1988) f 2 . The effect size f 2 is calculated as the increase in R2 relative to the proportion of variance of the endogenous latent variable that remains unexplained. According to Cohen (1988), f 2 values of 0.02, 0.15, and 0.35 signify small, medium, and large effects, respectively. Another assessment of the structural model involves the model’s capability to predict. The predominant measure of predictive relevance is


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Stone-Geisser’s Q2 (Stone, 1974; Geisser, 1975), which can be measured using blindfolding procedures (Tenenhaus et al., 2005). The Stone–Geisser criterion postulates that the model must be able to provide a prediction of the endogenous latent variable’s indicators. The technique represents a synthesis of function fitting and cross-validation. As Chin (1998) points out, ‘‘the prediction of observables or potential observables is of much greater relevance than the estimator of what are often artificial construct-parameters’’ (p. 320). Wold (1982) argues that the sample reuse technique – especially the blindfolding procedure to obtain the crossvalidated redundancy (instead of the cross-validated communality) – fits the PLS path modeling approach like ‘‘hand in glove.’’ The blindfolding procedure is only applied to endogenous latent variables that have a reflective measurement model operationalization. If this value for a certain endogenous latent variable is larger than zero, its explanatory variables provide predictive relevance. In analogy to the effect-size f 2 evaluation, the relative impact of the predictive relevance can be assessed by means of the measure q2 : values of 0.02, 0.15, and 0.35 reveal a small, medium, or large predictive relevance of a certain latent variable, thus explaining the endogenous latent variable under evaluation.

3.4. Bootstrapping The nonparametric bootstrap (Davison & Hinkley, 2003; Efron & Tibshirani, 1993) procedure can be used in PLS path modeling to provide confidence intervals for all parameter estimates, building the basis for statistical inference. In general, the bootstrap technique provides an estimate of the shape, spread, and bias of the sampling distribution of a specific statistic. Bootstrapping treats the observed sample as if it represents the population. The procedure creates a large, pre-specified number of bootstrap samples (e.g., 5,000). Each bootstrap sample should have the same number of cases as the original sample. Bootstrap samples are created by randomly drawing cases with replacement from the original sample. PLS estimates the path model for each bootstrap sample. The obtained path model coefficients form a bootstrap distribution, which can be viewed as an approximation of the sampling distribution. The bootstrapping analysis allows for the statistical testing of the hypothesis H 0 : w ¼ 0 (w can be any parameter estimated by PLS) against the alternative hypothesis H 1 : w a 0 at m þ n 2 degrees of freedom (where m is the number of PLS estimates for w in the original sample, which is 1; n is the number of


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bootstrap estimates for w, e.g., 5,000). The PLS results for all bootstrap samples provide the mean value and standard error for each path model coefficient. This information permits a student’s t-test to be performed for the significance of path model relationships. Chin (1998) proposes using the following test statistic for PLS: w (8) temp ¼ seðwÞ whereby temp represents the empirical t-value, w the original PLS estimate of a certain path coefficient, and seðwÞ its bootstrapping standard error. The student’s t-distribution table provides the critical t-value at given a-levels and the respective number of degrees of freedom. Instead of just reporting the significance of a parameter, it would be more valuable to report the confidence interval. If a confidence interval for an estimated path coefficient w does not include zero, the hypothesis that w equals zero is rejected. Testing with confidence intervals is advantageous, as it provides more information about the estimate of w. Shaffer (1995, p. 575) remarks that ‘‘if the hypothesis is not rejected, the power of the procedure can be gauged by the width of the interval.’’ In order to determine the confidence interval of a model parameter, say a path coefficient, one has to recognize that the bootstrapping procedure generates a distribution T of w. However, significance testing needs to account for the distribution of T under H 0 , which is the null distribution of T. This distribution is essential for performing the test since it provides the basis for determining the p-value. If the null distribution is unknown, the asymptotic normality of the test statistic is commonly assumed. Although nonparametric alternatives can be obtained through bootstrapping, this approach overlooks the possibility that the data could be generated under the alternative hypothesis H 1 : y a y0 . This problem can be addressed by examining the statistical correspondence between tests of significance and confidence intervals when the null hypothesis concerns a particular parameter value (Gudergan et al., 2008). Bootstrapping confidence intervals are well established (Efron & Tibshirani, 1993; Davison & Hinkley, 2003). If the bootstrap estimates of bias and variance are denoted by bB and vB , then the corresponding approximate 1 a (two-tailed) confidence interval is: 1=2

t bB vB z1a=2

(9)

where bB ¼ w B w, the difference of the mean value of w for all bootstraps and the original PLS estimation of that path coefficient. A null hypothesis


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H 0 : w ¼ 0 is accepted (or rejected) at a given level a, if the corresponding ð1 aÞ confidence interval includes (or does not include) the parameter value y0 . The bias-corrected bootstrap confidence interval in Eq. (9) provides a basis to account for the aforementioned problem and, thus, can be used as an appropriate means to test the significance of PLS-estimated path coefficients (Gudergan et al., 2008). In PLS path modeling, the latent variable scores may have different signs if, for examples, estimation A uses an alternative outer weights initialization of the algorithm (say, þLV 1 ) compared with estimation B (in this case, LV 2 ). Still, the absolute LV-values of both estimations usually represent equivalent solutions, i.e. jþLV 1 j ¼ jLV 2 j (for a discussion on this sign indeterminacy of PLS see Wold, 1985). This sign indeterminacy of PLS latent variable scores may also result in arbitrary sign changes during the bootstrap path model estimations. Such occurrence of sign changes ‘‘pull’’ the mean value of bootstrapping results (e.g., for parameter w) toward zero and, thereby, bias the bootstrap standard error upward. Arbitrary sign changes systematically reduce the value of temp and, thus, the possibility of the rejection of H 0 at a given a level. The standard error of estimates increases dramatically without any real meaning if the sign changes are not properly taken into account (Tenenhaus et al., 2005). Rather than not treating sign changes in the bootstrapping results, we suggest using the individual sign change option. The working principle is as follows: If a PLS path coefficient estimation for a bootstrap subsample shows a different sign compared with the original path model estimation, the procedure reverses the sign of that path coefficient in the bootstrapping subsample. Thus, the signs in the outer and inner models of each resample are made consistent with the signs in the original sample in order to avoid these sign-changerelated problems.

3.5. Group Comparisons and Other Advances in PLS Analyses A threat to the validity of SEM results may lie in the heterogeneity of observations. The level of observed or unobserved heterogeneity can lead to spurious or suppressor effects, and generally to misinterpretations. Typically, researchers in international marketing are well aware of the heterogeneity of observations; that is, different population parameters are likely for different subpopulations such as countries or cultures. Although cross-cultural or cross-national differences are related to observed heterogeneity, there can also be unobserved heterogeneity, which cannot be attributed to any

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predetermined variable. Similar to ignoring observed heterogeneity due to countries or cultures, unobserved heterogeneity represents a serious problem in respect of interpreting PLS results (Ringle, 2006). Our review of PLS path modeling applications in international marketing gives a mixed picture regarding the examination of heterogeneity. Although a significant number of studies take observed heterogeneity into account by means of multigroup comparisons, none of the studies accounts for unobserved heterogeneity. However, there are several PLS-based approaches to detect unobserved heterogeneity. Analytical techniques such as finite mixture partial least squares (FIMIX-PLS; Hahn, Johnson, Herrmann, & Huber, 2002; Ringle, Sarstedt, & Mooi, 2009a; Ringle, Wende, & Will, 2009b) or the recently developed PLS typological alternatives (e.g., Esposito Vinzi, Ringle, Squillacciotti, & Trinchera, 2007; Ringle & Schlittgen, 2007) are becoming mandatory for evaluating PLS path modeling results. Using these techniques, researchers can either confirm that their results are not distorted by unobserved heterogeneity or identify thus far neglected variables that describe the uncovered data segments. As soon as conceptual deliberations or methods such as FIMIX-PLS suggest different models for different subgroups, PLS-based multigroup analysis (MGA) should be conducted. In MGA, a population parameter b is hypothesized to differ for two subpopulations: bð1Þ a bð2Þ . Referring to PLS path modeling, researchers would for instance ask whether one could conclude differences in population parameters from the differences in path coefficients. The primary approach for group comparisons is a t-test, as described by Keil et al. (2000). These authors suggest using the standard errors obtained from bootstrapping as the input for a parametric test. After having exposed the subsamples to separate bootstrap analyses and having made parametric assumptions about the distributions of the parameter standard errors, one can calculate the following statistic for the difference in paths between groups (Keil et al., 2000): bð1Þ bð2Þ t ¼ sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffirffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ðnð1Þ 1Þ2 ðnð2Þ 1Þ2 1 1 ð1Þ 2 seðb seðbð2Þ Þ2 Þ þ þ nð1Þ þ nð2Þ 2 nð1Þ þ nð2Þ 2 nð1Þ nð2Þ

(10)

This statistic is asymptotically t-distributed with nð1Þ þ nð2Þ 2 degrees of freedom. The subsample-specific path coefficients are denoted as b, the sizes of the subsamples as n, and the path coefficient standard errors as resulting from bootstrapping as se.


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Chin and Dibbern (2009) cast doubt on whether this approach of multigroup comparison with its inherent distributional assumptions fits to PLS path modeling, which is generally regarded as being distribution-free. In line with these doubts, we present an alternative approach to PLS-based group comparisons that does not rely on distributional assumptions, as initially proposed by Henseler (2007). The working principle of the novel PLS-MGA approach is as follows: First, the subsamples to be compared are exposed to separate bootstrap analyses, and the bootstrap outcomes serve as a basis for the hypothesis tests of group differences. Instead of relying on distributional assumptions, the new approach evaluates the observed distribution of the bootstrap outcomes. Given two subsamples with parameter estimates (e.g., a path coefficient), bð1Þ and bð2Þ , the conditional probability Pðbð1Þ 4bð2Þ jbð1Þ bð2Þ Þ has to be determined. Here, bð1Þ and bð2Þ represent the true population parameters of population 1 and 2. A researcher would like to be sure that P is below a specified a-level before concluding that bð1Þ is greater than bð2Þ . If researchers know the parameter estimates of two subsamples from bootstrapping, they can easily verify how probable a difference in parameters between two subpopulations is and hence test their hypothesis with the following equation: ð1Þ ð2Þ ð1Þ ð2Þ X Y 2b bj 2b þ bi (11) Pðbð1Þ 4bð2Þ jbð1Þ bð2Þ Þ ¼ 1 J2 8j;i ð2Þ In this equation, J denotes the number of bootstrap samples, bð1Þ j and bi ð1Þ ð2Þ the bootstrap parameter estimates, b and b the means of the focal parameters over the bootstrap samples, and Y the unit step function, which has a value of 1 if its argument exceeds 0, otherwise 0. The superscript in parentheses marks the respective group. This equation states that J 2 (i.e. all possible) comparisons of bootstrap parameters have to be made. In fact, this approach can be seen as a Mann–Whitney–Wilcoxon test (Wilcoxon, 1947; Mann & Whitney, 1947) applied to the bootstrap-values corrected for the original parameter values. PLS-MGA does not require any distributional assumptions and is simple to apply by using the bootstrap outputs that are generated by the prevailing PLS implementations such as SmartPLS (Ringle, Wende, & Will, 2005). The way of determining the probability whether a population parameter differs across two sub-populations is unique to this new approach. Researchers can easily conduct the final calculations with available spreadsheet software such as MS Excel (a sample spreadsheet can be obtained from the first author).

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Besides the aforementioned methodological advances for addressing the requirement to capture unobserved heterogeneity, recent developments in the evaluation of PLS path modeling results focus on the problem of measurement model misspecification. Bucic and Gudergan (2004) use a PLS application to demonstrate the significant consequences of misspecification for path model estimates. The seven criteria that have been put forward by Jarvis et al. (2003) permit an a priori examination of the outer mode. In addition, a confirmatory tetrad measurement model analysis of PLS (CTA-PLS; Gudergan et al., 2008) provides a statistical test to evaluate the outer measurement model a posteriori. Statistical support is there for specifying not only the measurement model but also the structural model. Research by Marcoulides (2003) and Wilson, Callaghan, Ringle, and Henseler (2007) addresses the inner path model specification search to uncover superior structures and more appropriate inner relationship directions. Additional advances on the subject of evaluating path modeling results involve the development of global goodness-of-fit criteria. The PLS goodness-of-fit proposal by Tenenhaus et al. (2005) is the geometric mean of the average communalities (outer measurement model) and the average R2 of endogenous latent variables, and is normed between 0 and 1, where a higher value represents better path model estimations. However, while this criterion has only been applied in few applications (e.g., Esposito Vinzi et al., 2007) and has not been systematically analyzed in simulation studies, it is restricted to reflective outer models and may be subject to systematic improvement by means of path model modifications/manipulations. Future developments in this line of research may combine PLS and ML CBSEM global goodness-of-fit criteria. This procedure is well established in CBSEM for the asymptotic distribution-free estimators (ADF), which—like PLS— does not follow distributional assumptions that allow the global goodnessof-fit to be computed. Consequently, researchers and practitioners should note the substantial link between CBSEM and PLS path modeling for which the literature has called over the last decades.

4. SUMMARY AND CONCLUSION In international marketing research, both CBSEM and PLS provide a powerful framework for estimating causal models with latent variables and systems of simultaneous equations with measurement errors. CBSEM and PLS path modeling constitute two complementary, yet distinctive,


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statistical techniques for estimating parameters of conceptual models. A critical review of the PLS application in international marketing reveals that this methodology has increased in popularity, especially for multigroup analyses of PLS results for different nations. Our paper illustrates the PLS path modeling methodology and typical criteria for the assessment of results. Moreover, we introduce several advances in evaluating PLS model estimations, such as a novel approach for multigroup comparison (PLS-MGA). PLS is based on least squares estimation with the primary objective being to maximize the explanation of variance in a structural equation model’s dependent constructs. Jo¨reskog and Wold (1982, p. 270) suggest that ‘‘PLS is primarily intended for causal-predictive analysis in situations of high complexity but low theoretical information’’. In contrast, the primary measures used in CBSEM are overall goodness-of-fit measures that assess how well the hypothesized model fits the observed data. The model estimation is theory-oriented and emphasizes the confirmatory, rather than the exploratory, analysis. Consequently, in international marketing research, CBSEM should be used either to empirically confirm a system of hypotheses that underlie a causal model or to test and compare results for alternative theoretically established causal models. The prediction-oriented PLS method, on the contrary, does not require strong theory and can be used as a theory-building method (Gefen et al., 2000). PLS offers excellent capabilities for work with small samples and formative measurement, as the methodology is sufficient for most success factor (cause indicator) analyses in international marketing research. Moreover, complementary analytical techniques such as FIMIX-PLS for uncovering unobserved heterogeneity or multigroup PLS analysis may provide further differentiated path modeling results that allow for more precise interpretation. The review of PLS studies in international marketing reveals that few studies conduct multigroup analyses to identify differences in path coefficients across subgroups. No study has addressed the potentially serious problems of ignoring unobserved heterogeneity (Ringle, 2006). Owing to the severity of the consequences of neglecting unobserved heterogeneity, such additional analyses should become a standard means of evaluating PLS path modeling results, especially in international marketing research. A final concern refers to the choice of SEM method. There may be situations in which CBSEM is preferable, in other situations PLS may be preferable. Moreover, there may be situations where using CBSEM is desirable but unobtainable, for example, due to violations in some key CBSEM assumptions (e.g., regarding sample size, distribution, and model


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identification); in such cases, PLS may provide a realistic alternative to CBSEM. Some authors also critically point out that both CBSEM and PLS follow the classical test theory paradigm, while especially for international marketing applications alternative methodologies following the probabilistic test theory may be advisable (Ewing, Salzberger, & Sinkovics, 2005). All in all, the findings of our paper are deemed to help researchers in international marketing to adopt a more holistic perspective and to make informed decisions about the SEM method based on the nature and key objectives of their study.

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ADVANCING THE UNDERSTANDING OF CONSTRUCT VALIDITY AND CROSS-NATIONAL COMPARABILITY: ILLUSTRATED BY A FIVE-COUNTRY STUDY OF CORPORATE EXPORT INFORMATION USAGE Thomas Salzberger, Hartmut H. Holzmu¨ller and Anne Souchon As far as the measurement of latent variables is concerned, research in international business incurs all methodological problems and is susceptible to all pitfalls which generally characterize research in the social sciences. However, international research, by its very nature, attracts further intricacies as a consequence of crossing cultural borders (e.g. Winter & Prohaska, 1983; Craig & Douglas, 2000, 2002; Okazaki & Mueller, 2007; Zhang, Beatty, & Walsh, 2008). The huge body of literature concerned with cross-cultural1 research demonstrates how complicated comparative research actually is. However, even within a culturally homogeneous population, the measurement of latent variables represents a tremendous New Challenges to International Marketing Advances in International Marketing, Volume 20, 321–360 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020015

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challenge, which we often do not awake to because of the apparent ease with which we measure highly abstract concepts in marketing and business research. The measurement of latent variables by means of manifest indicators involves the hypothesis that the latent variable really exists and that it does so in the same way for all respondents in the population (Michell, 1997, 1999). Furthermore, the manifest indicators have to operate in the same way for all individual respondents to justify any sort of aggregate statistics and comparisons across individuals. In other words, the meaning of the latent variable and the metric of the measures we estimate have to be invariant. If the respondents all have the same cultural background, we usually take invariance for granted. However, sociodemographic variables such as age or gender may very well have an impact on the way items in a questionnaire are interpreted. In fact, the very meaning of the latent variable may differ, e.g. between men and women, or young and old. In principle, all personal characteristics we can conceive of may affect the measurement of latent variables. Currently, measurement equivalence is hardly ever addressed in this case. In part, this is due to the predominant measurement theory in marketing, i.e. classical test theory (CTT; Lord & Novick, 1968). CTT is mainly concerned with distributions and aggregate statistics. Key concepts such as reliability (Traub, 1994) are defined in terms of variances. The quality of an item is assessed and judged on the basis of its correlation with the latent variable or the total score. The evaluation of validity also depends heavily on evidence based on correlations. Consequently, we focus on the behavior of items and measures within the given population rather than questioning the homogeneity of the population. Although reliability refers to a population, the estimate from a particular sample does not transcend that sample. This is certainly a major weakness of CTT getting in the way of properly investigating invariance. The focus on the population level also implies a rather weak foundation of measures at the individual level. Although invariance may at least be a plausible assumption in intracultural studies, in cross-cultural research full invariance of manifest items and, consequently, of the measures of the latent variable, is rather unlikely. It is a problem that has to be tackled explicitly (Salzberger, Sinkovics, & Schlegelmilch, 1999). In the following, we will illustrate how the Rasch model (Rasch, 1960) helps investigate measurement equivalence. Since the property of invariance lies at the very heart of the Rasch model, crosscultural invariance does not involve extra complexity in the analysis over and above scale assessment in culturally homogenous studies. Insofar any sort of research involving the measurement of latent variables may benefit

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from contributions aimed at solving problems of equivalence testing in international business research. The higher likelihood of invariant item meaning and item functioning in culturally homogenous settings does not discharge us from empirically addressing this issue. Appropriate psychometric data analyses, which assess the invariance of items and establish a common metric across cultures, are important and indispensable. Without doubt equally important is the investigation of sources and factors responsible for a potential lack of equivalence. In this respect, Bauer (1989, 1995) offers a comprehensive framework of factors that need to be considered in order to design a measurement instrument and to devise the process of data collection that ultimately lead to comparable measures. Bauer’s scheme emphasizes the interrelationships between various building blocks of cross-culturally equivalent research. Important concepts were also suggested by Poortinga (1975), Adler (1977, 1983), Berry (1980), Douglas and Craig (1983), Sekaran (1983), Malpass and Poortinga (1986), Toyne and Walters (1989), Usunier (1996), Holzmu¨ller (1995), van de Vijver and Leung (1997), and Cavusgil and Das (1997). Although a discussion of these concepts is beyond the scope of this contribution, we strongly emphasize the importance of addressing these qualitative issues whenever cross-cultural research is undertaken. Psychometric analyses aim at disclosing problems in the data, e.g. a lack of measurement invariance. They do not represent a cure for bad data. This is particularly true for the Rasch model, which requires data to withstand the model’s properties.

COMPARABILITY OF MEASURES ACROSS NATIONAL BORDERS Measures are comparable if and only if measurement equivalence has been demonstrated. Although comparability and equivalence of measures are sometimes used interchangeably, we advocate a subtle but important difference in meaning. Comparability implies that measures from one group can be compared with measures from another group. It is a property of the measures, which is given or not. In particular, comparability presumes valid measures within each group compared. Measurement equivalence, by contrast, refers to the way measures are derived and estimated. It is intrinsically tied to the underlying theory of measurement. Thus, measurement equivalence cannot be dealt with in isolation. Its assessment has to be incorporated into the theoretical framework of measurement. Measurement

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equivalence is closely connected to construct validity for it refers to the way manifest indicators are related to the latent variable, within a particular culture and across different cultures. From this it follows that equivalence cannot, or should not, be treated as a separate issue but as a constitutive element of validity. A discussion of measurement equivalence without addressing validity would be incomplete. In terms of the measurement theory referred to in marketing and business research, CTT (Lord & Novick, 1968) is still the predominant paradigm, whereas item response theory (IRT; Lord, 1980; Hulin, Drasgow, & Parsons, 1983; Hambleton & Swaminathan, 1985; Hambleton, Swaminathan, & Rogers, 1991; van der Linden & Hambleton, 1997; Embretson & Reise, 2000) has been slowly attracting more interest in the past one or two decades. Obviously, it does not make sense to assess the properties of a measurement instrument based on CTT and then assess measurement equivalence based on IRT, and vice versa. The choice of the measurement model has to be motivated by more fundamental considerations than the assessment of measurement equivalence. When Schaffer and Riordan (2003) identify two best practices for assessing equivalence (one is based on covariance structure analysis, i.e. multigroup CFA, the other is IRT), they actually acknowledge two different paradigms for tackling the problem of measuring latent variables. However, it is true that IRT much more easily accommodates the assessment of measurement equivalence, whereas in the CFA approach an extension has to be made which is (apparently) irrelevant in intra-cultural studies.

Measurement Equivalence and Validity As argued earlier, measurement equivalence and validity are closely related. Since validity is one of the most complicated, controversial, and contentious concepts in research in the social sciences (see Borsboom, Mellenbergh, & Van Heerden, 2004), measurement equivalence is bound to be a disputative issue as well. The commonly accepted state-of-the-art understanding of validity in marketing is the threefold view of validity comprising three different ‘‘types’’ of validity (e.g. Churchill & Iacobucci, 2005). Content validity refers to the question whether the domain of the characteristic is captured by the scale. Construct validity is concerned with whether the manifest indicators work the way the substantive theory of the construct suggests. Finally, we are interested in high criterion-related validity, e.g. how well an export information usage scale explains variations in export


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performance. In terms of the actual assessment of validity, these types differ significantly. Content validity is typically evaluated qualitatively. It is strongly associated with the substantive theory that has given rise to the postulation of the latent construct. By contrast, construct validity is typically a quantitative issue allowing for a more rigorous investigation. It is closely connected to the measurement theory. In CTT, fit of the data to a factor analytic model would be important evidence of construct validity, whereas in IRT the fit of the data to the particular IRT model is deemed necessary. Finally, criterion-based validity actually requires a sound operationalization. In other words, measurement has to be substantiated before measures can be related to other variables and other measures. For this reason, criterion-related evidence as justification of validity has been criticized (Kane, 2001). Borsboom (2005) suggests concentrating on construct validity as the core of the very concept of validity. Sijtsma (2006), however, advocates nomological validity, whereas Rossiter (2002) in a recent, and controversially discussed, contribution emphasized content validity. Measurement equivalence relates to construct validity as well as content validity. Since full invariance of all manifest indicators is the exception rather than the rule, a limited, sometimes very small, set of invariant items is typically considered sufficient to establish a common metric across cultures and thereby justifying measurement equivalence (Steenkamp & Baumgartner, 1998). However, the minimal requirements from a statistical point of view (e.g. in the multigroup CFA, the identification of one invariant item in addition to the one defining the metric of the latent variable is technically sufficient, see Steenkamp & Baumgartner, 1998) have to be distinguished from qualitative considerations of what the latent variable actually means in different cultures (Salzberger et al., 1999). In terms of the required number of invariant items, there can be no rule applicable under all circumstances. It strongly depends on theoretical considerations as to why particular items work differently. Consequently, the assessment of measurement equivalence should never be regarded as a purely quantitative exercise no matter what measurement theory is referred to. Measurement equivalence is also a qualitative issue. Finally, there is no point in ‘‘enforcing’’ comparability by discarding the majority of the items during the assessment of measurement equivalence, which work very well within cultures. In this case, very little (i.e. the technical comparability) would actually be won but much (in terms of content validity) would be lost, a situation that is not dissimilar to the attenuation paradox (Loevinger, 1954). A rigorous procedure of testing measurement equivalence may or may not

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provide evidence of comparability of a latent variable’s quantification across cultures but it will always yield valuable qualitative insight.

Methodological Approaches to Assess Cross-National Equivalence As outlined earlier, the choice of the methodological approach toward the problem of measurement equivalence cannot be seen in isolation. Depending on the measurement theory, there is a different best practice approach. In CTT, the multigroup CFA approach is the most powerful way to assess equivalence, whereas in IRT the investigation of differential item functioning (DIF) addresses the issue of equivalence. Classical Approaches Since the vast majority of quantitative studies in international marketing are based on CTT, regarding measurement equivalence, approaches embedded in CTT are most popular. Early attempts to meet the potential threat of comparing measures that are not comparable have concentrated on the concept of reliability (Davis, Douglas, & Silk, 1981). Since reliability depends as much on the variances of the measures (i.e. the true score variances) as it depends on error variances, equal reliability is neither necessary nor sufficient evidence of measurement equivalence. With the rise of factor analysis and, subsequently, the accelerated diffusion of structural equation modeling, tests for equivalence have improved significantly. In particular, the multigroup CFA allows for estimating the measurement model simultaneously for multiple groups while imposing equality constraints on selected parameters (Meredith 1964, 1993; Bollen 1989; Horn & McArdle 1992). Mullen (1995) and Singh (1995) suggested equality constraints on the salient factor loadings across cultures (non-salient loadings are fixed to zero anyway), thereby testing for metric equivalence. Steenkamp and Baumgartner (1998) further advanced the approach by pointing out that comparisons of means of latent variables across groups require equal item intercept parameters in addition to equal loadings. The consideration of item intercepts represents an extension of the CFA which is hardly ever considered in intra-cultural studies. However, the multigroup CFA with item intercepts would lend itself perfectly as a way to test measurement equivalence based on, e.g. gender or any other observed person factor. In marketing, Steenkamp and Baumgartner’s (1998) seminal contribution is still an excellent introduction into multigroup CFA.


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The multigroup CFA-based approach has some noteworthy limitations. Any shortcoming of CTT/CFA in general (e.g. the sample dependence of factor loadings) evidently affects the multigroup CFA approach. Particularly relevant to measurement equivalence is the effect of the mismatch of continuous and unbounded latent variable measures on the one hand and discrete and bounded manifest indicator scores on the other. Therefore, item intercepts and factor loadings are not independent (see Salzberger et al., 1999). Profile analysis (Morris & Pavett, 1992; Pavett & Morris, 1995) is another approach that compares item scores from different groups graphically. It aims at identifying additive biases by checking whether lines connecting the item means within a group are parallel. Mullen (1995, p. 579) notes that ‘‘even if the lines in the graph are parallel, the differences in means may not all be due to response bias.’’ Mullen further concludes that ‘‘there has been no diagnostic method available to assess cross-national differences in scalar equivalence with confidence’’ before the introduction to multigroup CFA. From a more fundamental point of view, the comparison of item raw scores, which are not interval scaled and certainly not linear, is problematic anyway. Item Response Theory IRT is a collective term for many different models designed to explain measurement. All IRT models primarily refer to the individual response rather than aggregate statistics. In the simplest case, the Rasch model (Rasch, 1960), the dichotomous item, the probability of agreement is modeled as a logistic function2 of a person parameter (the measure we are ultimately interested in) and an item parameter. The latter is the counterpart to the person measure. In achievement testing, this parameter is easily interpreted as the item difficulty, whereas in attitude measurement its meaning is less straightforward. On an abstract level, the item parameter captures the amount of the property the item represents and which is to be measured. Consequently, with attitudinal constructs, a larger item parameter implies a stronger attitude, i.e. its endorsability is smaller compared to an item which is ‘‘easier to agree with.’’ Hence Ewing, Salzberger, and Sinkovics (2005) suggest using the term endorsability. Alternatively the item parameter could be referred to as item location. Thus, there is nothing that rules out the application of IRT models in attitude measurement. It should be noted that the item location parameter, or endorsability, has a counterpart in CTT/CFA, namely the item intercept parameter (Wright, 1996), which is modeled in multigroup CFA. In contrast

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to CFA, the item location parameter in IRT does not depend on the sample. Furthermore, in IRT, item and person parameters are placed onto the same latent dimensions, i.e. they share a common metric and are directly comparable. ebv di 1 þ ebv di

(1)

eai ðbv di Þ 1 þ eai ðbv di Þ

(2)

Pðavi ¼ 1Þ ¼

Pðavi ¼ 1Þ ¼

There is, however, a qualification on the claim of sample independence of the item parameter, which is related to the type of IRT model. A fundamental distinction exists between models providing for equal item discrimination [e.g. the dichotomous Rasch model by Rasch (1960), see Eq. (1) with bv being the location parameter of respondent v, di being the location of item i and avi being the response by person v to item i] and those allowing for variation in item discrimination [e.g. the Birnbaum model (Birnbaum, 1968) for dichotomous responses, see Eq. (2) with an additional parameter ai modeling the item’s discrimination]. Therefore, the Birnbaum model, or the two-parameter logistic model, features an item discrimination parameter, whereas in the Rasch model the item discrimination is fixed at 1 for all items. This distinction generalizes to polytomous models, which are much more suitable in marketing research for most of our measurement instruments feature multicategorical response scales. All models with equal item discrimination are summarized as Rasch models (Fischer & Molenaar, 1995). Models with equal item discrimination have several elegant and advantageous properties. Since person and item parameters are linked additively, the model complies with additive conjoint measurement (Luce & Tukey, 1964) and satisfies cancellation conditions as set out by axiomatic measurement theory (see Karabatsos, 2001, pp. 398ff. for details). Item and person raw scores are sufficient statistics allowing for separability of parameter estimates by conditional maximum likelihood estimation (Molenaar, 1995) or pairwise parameter estimation (Andrich & Luo, 2003). A more tangible consequence of these technical properties is the mutual invariance of item and person parameters. Rasch (1961) referred to this characteristic of the model as specific objectivity. Objectivity implies that item locations do not depend on the respondents used to estimate them and, vice versa, person location parameters are independent of the specific


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items which are instrumental in their estimation. Thus, there are no distributional assumptions involved in parameter estimation in contrast to the strong, and in many cases unrealistic, assumption of normally distributed respondents in CFA and more general IRT models. There are two important restrictions of objectivity. First, objectivity is confined to a frame of reference; hence, it is called specific objectivity rather than general objectivity. The frame of reference comprises all factors that are relevant in the measurement process, most noteworthy the population of respondents and the conditions of data collection. Second, specific objectivity, or invariance, is a requirement. It is neither an untested assumption nor a property that would be independent of data. From this it follows that invariance has to be tested empirically. Item location parameter estimates from different samples of respondents have to be equal up to random variation. In fact, it is a very powerful way to test the fit of the data to the model. All factors, internal ones such as the grouping of low versus high raw scores, and external characteristics such as sociodemographic or psychographic variables qualify as criteria to test for invariance. The need to test for cross-cultural or cross-national equivalence fits nicely in this framework of assessing invariance and represents no extra burden in terms of testing the measurement model. Despite the favorable properties following from equal item discrimination, the latter might be seen as overly restrictive. More general IRT models [see Singh (2004) for an introduction in a marketing context and De Jong, Steenkamp, and Fox (2007) for a recent application in cross-cultural measurement] are certainly more flexible in this respect. However, although variation in item discrimination allows for better describing data, we no longer test the structural requirements of quantity in the data. The Rasch model does not aim at best accounting for given data. It rather sets out the structure in the data which indicates quantitative person and item location parameters. Thus, the Rasch model addresses what Michell (1999) calls the ‘‘scientific task of measurement,’’ i.e. the provision of evidence of the existence of a quantitative latent variable. Neglecting the scientific task ‘‘sounds a warning to us about the nature of measurement in the social sciences’’ (Balnaves & Caputi, 2001, p. 51). Finally, it should be noted that Churchill (1979) originally asked for items representing an ‘‘equal amount of the core of the construct.’’ The parallel model in CTT/CFA comes much closer to the Rasch model compared to the congeneric model which prevails in contemporary quantitative research in marketing. Thus, in the following we concentrate on the Rasch model as a suitable measurement model and its strong potential to test for measurement equivalence.

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RASCH MODEL FOR MEASUREMENT Two factors have made the Rasch model more amenable to applications in marketing research. First, the dichotomous model (Rasch, 1960) has been generalized to the polytomous response format (Andrich, 1978, 1988; Masters, 1982). Second, accessible, user-friendly software has become available (e.g. RUMM2020 by Andrich, Sheridan, & Luo, 2003a; WINSTEPS by Linacre, 2007; or ConQuest by Wu, Adams, & Wilson, 1997). For users of the open-source statistical software R, a special package for the estimation of Rasch models has been provided by Mair and Hatzinger (2007). The importance of convenient software for the acceptance and dissemination of statistical and psychometric models cannot be underestimated. Without LISREL (Jo¨reskog & So¨rbom, 2003), EQS (Bentler, 2003), AMOS (Arbuckle, 2005), or MPLUS (Muthen & Muthen, 2007), the widespread application of structural equation models (SEM) and models beyond SEM would be inconceivable. In marketing applications, we typically use multicategorical response scales. Dichotomization of originally polytomous data is disadvantageous because of the loss of information. Even more problematic are theoretical concerns as fit to a polytomous Rasch model mathematically rules out fit of dichotomized data to a dichotomous Rasch model (see Andrich, 1995a, 1995b, on this issue). As outlined earlier, in the dichotomous Rasch model, there is only one item location parameter.3 If a particular person matches the item location exactly, then the probability of agreement amounts to 0.5 and equals the probability of disagreement. Respondents located further down the scale have a smaller chance to respond positively, whereas those located further up the scale have a higher probability of agreement than disagreement. Consequently, the item location parameter can be thought of as a threshold between disagreement and agreement as the most likely response. This principle generalizes to polytomous items. With k categories, we need to specify k – 1 threshold parameters. Consequently, the first threshold marks the point on the latent continuum where the first and the second category are equally likely. The mean of all threshold parameters stands for the overall location of the item. In the Partial Credit Model (Masters, 1982; Andrich, 1988), the thresholds are modeled for each item individually, i.e. each item has its own threshold structure. In this case, items with different numbers of categories can be mixed. Alternatively, the Rating Scale Model (Andrich, 1978) specifies a common threshold structure across all items. Then the


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relative distances between thresholds are the same across items while the overall item locations vary, of course. Since the special properties of the Rasch model apply to both polytomous models, there is no need to constrain the threshold structure across items. Eq. (3) (Andrich, 1988, p. 366) states the probabilities for all response categories as a function of the model parameters bv (person location parameter), di (item overall location, mean of thresholds), and tij (threshold j for item i). The denominator g is the sum of all numerators. The numerator for the first category (scored 0) is 1. Fig. 1 displays the category characteristic curves of a five-category item. Each curve describes the probability of a particular response as a function of the person location. m P Pðavi ¼ xjbv ; tij ; j ¼ 1 . . . m; 0oxomÞ ¼

e

tij

þ xðbv di Þ

j¼1

g

(3)

It is important to notice that in the Rasch model, the thresholds only model the transition point (equal probability) of two adjacent categories (e.g. between categories 2 and 3) but not between all categories below or above that point (e.g. probability to choose category 0, 1, or 2 versus category 3 or 4). The latter are referred to as Thurstone thresholds (Linacre, 1998), whereas in the polytomous Rasch model, Rasch–Andrich thresholds

Fig. 1.

Category Characteristic Curves for a Polytomous Item Under the Rasch Model.

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(Linacre, 2001) are modeled. This implies that empirical estimates of category thresholds can take any order. If their order does not correspond to the order of categories, the thresholds are said to be disordered. Although the threshold order is not an explicit requirement in the Rasch model (the data may still fit the model), disordered thresholds are often seen as problematic as they provide evidence that the presumed order of the response scale might not hold (see Andrich, 1995a, 1995b). Disordered thresholds imply a lack of discrimination between two categories. There are some typical situations leading to disordered thresholds. First, too many categories may ask too much of the respondents, who might not be able or willing to distinguish between all categories offered. Second, oddly verbalized categories may cause problems. The widely used option of neither agree nor disagree is particularly prone to malfunctioning. It attracts not only respondents in the middle of the item but also the undecided or respondents to whom the item is not applicable. Third, negatively worded items often result into threshold disorder as it is even more difficult to discriminate between categories in this case. Positively worded items usually sustain more response categories than negatively worded indicators. Regardless of the actual reason of disordered thresholds, in the end, the researcher has to decide how to react. Ideally, a change of the item wording or the number of categories should be considered. With existing data, a post-hoc collapsing of adjacent categories is a manageable remedy. It should be noted that in this case no loss of information occurs since the threshold reversal indicates that the distinction between the categories that are collapsed is not informative at all.

Applying the Rasch Model A Rasch analysis of a measurement instrument requires several steps. Each set of items indicating a unidimensional latent variable has to be treated separately. Although there is a meaningful order in which these steps should be taken, problems in the data may require an iterative approach and returning to an earlier step might be necessary at any time. Insofar, the flow chart in Fig. 2 is an idealized scheme. The analysis should start with an investigation of the threshold order since these not only contradict the presumed order of the response options but also often cause item misfit. Thus, in an iterative process, categories with reversed threshold parameters should be collapsed until all thresholds are properly ordered.

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Within-culture data sets

Pooled data

Cross-cultural data set

#1: Examination of thresholds

Reversed

Collapse categories/ split item * A - Rating scale functioning analysis

#1: Examination of thresholds

Reversed

Collapse categories *

Properly ordered remaining items

#2: Examination of item fit

Misfit

Number of cultures?

=1

Discard item *

remaining items

Properly ordered

#2: Examination of item fit

Misfit

Discard item *

>1

Fit

Fit

#2a: Test of DIF

DIF

Split item *

Input for cross-cultural analysis

No DIF Split item *

D - Supplementary analyses B – Item compatibility analysis

Number of cultures?

>1

#3: Test of DIF

DIF

Split item *

No DIF

=1

C – DIF analysis

#4: Estimation of final indicator and respondent locations

#4a: Investigation of person fit

#5: Mean comparison across cultures

* Whenever item thresholds are reversed, items show misfit or display DIF, at any one time only one action (collapsing categories, splitting or discarding item) should be undertaken due to the potential interaction of threshold reversals, misfit and/or DIF. to : see annotations to this chart

Cross-culturally equivalent scale

Fig. 2.

Rasch Analysis Flow Chart for Cross-Cultural Research.

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ANNOTATIONS TO THE RASCH ANALYSIS FLOW CHART FOR CROSS-CULTURAL RESEARCH In the analysis of the pooled data set, culture has to be included as a person factor. Separate analyses of the scale for each culture (hereafter referred to as supplementary analyses) should be carried out simultaneously as they can provide input for subsequent decisions on category collapsing and/or item splitting. See 2 . 2 The supplementary analyses are carried out separately for each culture. The sequence of steps undertaken mirrors the course of the main analysis of the pooled data except for being one-group analyses. After examining the thresholds (see also 3 ), item fit is assessed (compare 5 ). The results (which items fit, which don’t; which items display disordered thresholds, which don’t) provide a guideline for actions during the main analysis of the pooled data. 3 Step 1 of the main analysis (rating scale functioning analysis). The analysis starts with the examination of the threshold ordering. Neither can item fit be assessed meaningfully nor can the results be interpreted appropriately unless all thresholds are in proper order. 4 If reversed thresholds occur, a combination of category collapsing and item splitting should be considered as a post hoc remedy. Which specific action is suitable can be derived from insight gained by the supplementary analyses. If, e.g. the thresholds of one item are disordered in the same way across all cultures, a common rescoring of the item will very likely be sufficient. However, a different functioning of the item response scale in the cultures involved will require item splitting in order to accommodate cultural idiosyncrasies. After collapsing categories, tantamount to a rescoring of the item responses, the thresholds have to be re-examined. Since malfunctioning of items compromises the estimation of model parameters, at any one time, only one action should be undertaken. Items with most severely disordered thresholds, e.g. those for which only the extreme categories seem to work, should be targeted first. Any post-hoc provisions should be considered preliminary. Only new data, gathered by applying altered response scale formats, can confirm proper response scales. However, since a 1


5

6

7

8

9

10

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non-uniform format across all items is prone to confuse respondents, a common response scale is advisable. Step 2 of the analysis (item compatibility analysis). The second important element of the analysis is the assessment of the compatibility of the items to the Rasch model. This is done by an item-fit analysis. Again, only one item, starting with the one displaying the worst fit, should be considered at one time. In a one-group analysis, a misfitting item has to be discarded. In a multicultural setting, however, item misfit may be the result of misfit in some but not all cultures, or it may be due to DIF. That’s why, an item should only be discarded if no further splitting of the item is possible (see 7 ). In case of misfit, a test of DIF is advisable. If no DIF prevails, the item should be split up based on input from the supplementary analyses (see 2 ). In this case, misfit in some of the cultures is expected. If the item displays DIF, item splitting has to be considered, as well. However, DIF may be the sole reason of misfit in this case. Thus, the DIF analysis should be carried out, even though the consequences, i.e. item splitting, are the same. But the rationale might be different. Step 3 of the analysis (DIF analysis). The investigation of DIF is a central element in any cross-cultural study. Severe DIF usually becomes manifest in item misfit. Therefore, DIF is also a matter of investigation at the second step of the analysis (compare 7 ). Since items can be affected by minor, though significant, DIF even when fitting the model over-all, tests of DIF should be carried out at this stage. Item splitting is necessary whenever DIF occurs. Items displaying no sign of DIF and items confined to one culture (as a result of item splitting) directly enter the final phase during which the final indicator and respondent locations are estimated. Step 4 (estimation of model parameters) and step 5 of the analysis (mean comparison). After scale purification, the cross-culturally valid and comparable indicator locations as well as the respondent locations can be estimated. Based on these interval scaled parameters, mean comparisons across cultures can validly be carried out at step 5 (see also 10 ). Step 4a of the analysis (person fit investigation).

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The second step of the scale analysis pertains to item fit (see Andrich, Sheridan, & Luo, 2003b for the statistics described). One way to look at item fit is the comparison of expected responses (the expected item score depending on the person location) and actual responses. The differences of what is the observed minus what is expected are assessed in score groups of respondents and eventually lead to an approximately w2 distributed fit statistic. This test of fit can be carried out for every individual item but can also be summed over all items to get a summary test of fit for the whole instrument. Another item fit statistic is based on each respondent’s residual resulting in an approximately z-distributed statistic (fit residual) indicating whether the indicator is discriminating as expected (fit residual between 2.5 and þ2.5), whether it is overdiscriminating (fit residual less than 2.5) or underdiscriminating (fit residual greater than þ2.5). The third step should investigate invariance empirically. If an item lacks invariance, it shows DIF. DIF may be the sole reason for item misfit as assessed on the previous step but it should also be tested when items fit properly. As this test is of utmost importance in checking for measurement equivalence, it will be discussed in more detail in the subsequent chapter. Although the distribution of respondents has no impact on the item estimates as such due to specific objectivity, precision and fit assessment do depend on a sufficient matching between respondents and items. This issue is referred to as targeting. The person separation index (PSI; Andrich, 1982), which is defined analogously to classical reliability, is helpful in this respect. Unlike reliability in CTT, the PSI in Rasch modeling is not as crucial. However, a low PSI is of concern for various reasons. Insufficient targeting may result in a low PSI, compromising the power of the test of fit as standard errors for item as well as person estimates increase. Poor targeting means that a higher number of items is required to achieve the same precision that is provided by a properly targeted instrument. So, from an economical point of view, a high PSI is desirable. If the targeting is satisfactory and item fit statistics are inconspicuous (i.e. non-significant), a low PSI may indicate multidimensionality (values less than about 0.6 almost certainly imply severe problems in the data).

Using the Rasch Model to Assess Measurement Equivalence The application of the Rasch-model to cross-cultural or cross-national data is straightforward in theory but might get complicated in practice, particularly if many cultures are involved and thresholds are partly


337

disordered. As a general recommendation, the number of response categories should be kept rather small (no specific number can be given, though, as it depends on the particular countries as well as on the construct and respondent characteristics such as their involvement) and the verbalization of the categories should be confined to the extreme categories as translations of response category qualifiers rarely correspond perfectly resulting in different threshold structures and possibly threshold disorder. The analysis should start with an investigation of item fit within each country, in particular if there are more than two groups involved (see supplementary analyses in Fig. 2). These analyses point out which items do not work properly in which countries and help identify items that function differently. The main analysis refers to the pooled data set, and all items are tested for their model compatibility. At step 1, as in any analysis of polytomous data, the threshold order should be scrutinized. Disordered thresholds can be resolved by scoring adjacent categories identically. As soon as all thresholds are ordered, the fit of the items is assessed (step 2). Within one culture, misfitting items are discarded. In cross-cultural studies, such a conclusion might be premature. The item might not work in one culture (causing overall misfit) but function perfectly in another. Alternatively, the item may work differently in the groups analyzed. In other words, the indicator has a culture-specific location. Then, the item is said to display DIF. In any case, a DIF-analysis has to be carried out (step 2a). Strictly speaking, specific objectivity calls for excluding items which do not have the same location in all countries. The reason is that the interpretation of the scale depends on the cultural affiliation of the respondent. Therefore, the measures for respondents with equal raw scores but from different cultures are not the same. Desirable as complete specific objectivity may be, in cross-cultural research, it is highly unlikely that all items are functioning the same way across cultural borders. Excluding deviating items would result in to a small number of items representing a serious threat to criterion-based validity. Fortunately, the trade-off between criterion-based validity and specific objectivity can be accommodated for by relaxing the latter. If an item is affected by DIF, it can be split into two or more ‘‘versions’’ for analytical purposes. Each version is associated with one or more cultures. This allows for culture-specific estimation of the indicator location. This procedure does not require the item to fit in each culture under scrutiny. If an item fails to work properly in one culture, it can easily be discarded for that group but retained for all other cultures.

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Accounting for cultural idiosyncrasies in the way described parallels the concept of partial invariance outlined by Steenkamp and Baumgartner (1998) in the context of CTT-based assessment of equivalence. The crucial point is that common items, which function equivalently across countries, i.e. identical location and identical threshold distances, define the scale. These items can be referred to as (at least derived) etics compared to emic items that are linked to the common scale. Invariant items act as a bridge between countries. It is clear intuitively that the more items are invariant the more stable the bridge becomes and the easier it is to interpret the construct cross-nationally. There are different approaches to test for DIF. In this study, we make use of an ANOVA-based method implemented in RUMM 2020 (a windowsbased Rasch program by Andrich et al., 2003a). To this end, the respondents are first grouped into classes of similar location along the continuum like in the general test of fit. The factor possibly leading to DIF, i.e. country in our case, is another criterion to define the groups in the ANOVA. The class interval is one main effect which is of no particular interest in this case as it is just another general test of fit. So, misfitting items typically exhibit a significant class interval main effect. More interesting is the DIF factor representing the other main effect. If there is no DIF, the mean residuals between countries should be the same (i.e. zero) within each class interval. If, however, the item is consistently easier to endorse in one country compared to another, then the mean residual in the former group is positive, whereas it is negative for the latter resulting in a significant main effect for the DIF factor. This sort of DIF is referred to as uniform DIF. The empirical item response functions (IRF; the mean item score for respondents from a particular country) are still parallel. A different type of DIF is given, if an item is easier (or harder) to agree with for some country compared to another at the bottom end of the scale, whereas the reverse is true for the top end of the scale. In this case, the empirical IRFs intersect. In the ANOVA, this sort of DIF is captured by the interaction term of class interval and DIF factor. It goes without saying that items displaying DIF need special attention. Deleting DIF items in cross-cultural studies would be the most rigorous procedure, but it may result in a very small number of items questioning the whole measurement process. In fact, with many countries, not a single item may be equivalent across all countries. That’s why items affected by DIF should better be retained provided they fit within each culture for which they are used. This can be done by splitting the item into virtual versions of the same items for each country or a group of countries. For the other countries,


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the item is scored missing. Input from the supplementary analyses carried out before should help identify countries for which common item estimates are reasonable. This procedure is most likely to succeed in case of uniform DIF. Non-uniform DIF, by contrast, implies more severe problems as the item misfits in at least one culture but may generally be a problematic item. If all items fit and no indication of DIF prevails, the final estimation of item and respondent locations can be carried out. Finally, mean comparisons can be conducted by referring to the interval-scaled measures which are comparable across all cultures that have been investigated. The question how many items should be invariant in order to establish a common metric across countries cannot be answered absolutely. Technically two invariant items provide sufficient empirical evidence to justify a common metric across two countries. However, from a qualitative point of view, a larger number is certainly desirable. When accounting for DIF by splitting the item, we always incur the risk of capitalizing on chance. This is particularly true if there is no plausible explanation why DIF occurs. Ideally, a scale development process should include expectations in terms of DIF from the outset. From a puristic point of view, accounting for DIF violates specific objectivity (see Molenaar, 1997). It is no longer sufficient to know the raw score to estimate a person measure but we need to take the country into account. Once again, a plausible theoretical explanation of DIF seems to be a reasonable compromise in this respect. Kreiner and Christensen (2007) speak of essential objectivity in this context. In case of more than two countries, no item has to be completely invariant. If a set of items is invariant for countries A and B, and another set of items is invariant for countries B and C, then the links between A and B, and B and C also established a link between A and C. Hence, keeping item splitting to an absolute minimum strengthens overall measurement equivalence. An additional examination of person fit is advisable in conjunction with stage 4. Although respondent characteristics theoretically do not bear on indicator characteristics, this principle does not apply in case of misfitting persons. However, compared to the number of items, the number of persons is usually large, and consequently, person misfit has a smaller impact on the item estimates than item misfit has on the respondents estimates. There is no straightforward remedy for person misfit. Excluding deviant respondents can change aggregate statistics, like the group mean, and should therefore be considered with caution. The quantitative analysis alone cannot provide a definite answer but only points out where problems lie. Qualitative considerations should be made to trace the reasons for misfitting persons.

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If systematic person misfit occurs, it might be caused by DIF due to variables other than culture. Alternatively, the frame of reference of the instrument, i.e. the set of admissible respondents allowing for specifically objective measurement, requires re-definition.

EMPIRICAL ILLUSTRATION: EXPORT INFORMATION USAGE The main purpose of the empirical example is the demonstration how the analysis based on the Rasch model helps derive measures of export information usage across cultures. As more and more industries are interrelated internationally, for many companies export performance is a crucial factor. Companies typically aim at compensating uncertainty and a lack of information that is almost inevitably connected to exporting by collecting information (Katsikeas, 1994; Leonidou, 1995). Less attention has been paid to the problem of how information is processed within the company. Companies gather information – and never use it in decision making (Knott & Wildavsky, 1981). Companies make decisions – and collect information afterward in order to justify the decision (March & Shapira, 1982). Thus, the key to success is not mere information collection but the way companies use information effectively (Hart & Diamantopoulos, 1993). Diamantopoulos and Souchon (1998, 1999) suggested a measurement instrument (comprising 28 items in total) designed to assess export information utilization as a multidimensional construct to distinguish between three distinct sorts of information usage (Souchon & Diamantopoulos, 1996). First, instrumental use of information (covered by nine items) refers to situations in which information is collected for a specific purpose and then actually used to make a decision (Deshpande´ & Zaltman, 1982). Second, conceptual use of information (measured by eight indicators) covers indirect application of information. In this case, information broadens the managerial knowledge base in general. There is no clear relationship between a piece of information and a particular project or decision, however. Both, instrumental and conceptual use of information are ‘‘reasonable’’ ways of dealing with information positively related with corporate success. By contrast, the third type of information use, symbolic use (Knorr, 1977), refers to fundamentally different patterns of information usage. Information is said to be used symbolically, if information is distorted to support the decision maker’s opinion or selectively used to justify previously made decisions.


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Finally, symbolic use occurs when information is collected merely to maintain good relationships with information providers. Symbolic use is operationalized by 11 items. This study aims at assessing the validity of the multidimensional construct of export information usage across country and language borders. In particular, the cross-national equivalence of the items in the UK, the USA, New Zealand, Austria, and Germany is examined by the Rasch model. The scale is applied to three different modes of information acquisition (for details, refer to Souchon & Diamantopoulos, 1999). Export marketing research (EMR) is a formalized, planned, and more or less objective process of collecting information. Export market intelligence (EMI), by contrast, covers the constant flow of incidental information. It is less systematic and more subjective. Finally, export assistance (EA) refers to institutional information provided mostly by official bodies. It is assumed that the company’s propensity to use information in a certain way may depend on the source. In other words, a company may use information from formal EMR more strongly instrumentally than information gathered from EMI. However, for a different company, the opposite could be true. The data underlying the empirical example has been provided by Salzberger et al. (2002). The measures were developed by Souchon & Diamantopoulos (1996, 1999). The cross-cultural study was conducted in five countries, in the UK (n ¼ 198), the US (n ¼ 161), New Zealand (n ¼ 239), Austria (n ¼ 220), and Germany (n ¼ 171). The countries were selected on comprehensive theoretical considerations (see Diamantopoulos, Souchon, Durden, Axinn, & Holzmu¨ller, 2003). In our context, it is interesting to investigate to what extent culturally relatively close countries such as the UK and New Zealand safeguard measurement equivalence and how different languages bear on item invariance. Undoubtedly, the range of countries does not come anywhere near a comprehensive coverage of world cultures. However, in this contribution, we focus on methodological issues. In fact, vastly different cultures would not issue a real challenge to a method to reveal measurement invariance. By contrast, comparatively subtle differences between closely related cultures, like the UK and New Zealand or Austria and Germany, are more suitable as they put the sensitivity of the method to the test. The questionnaire was initially developed in the UK and has been translated into German deploying appropriate forward–backward procedures. A verbally comparatively labeled, five-point ordered response scale was provided for each item. The total population was restricted to manufacturing companies engaged in exporting. As the sampling frame data from Dun and Bradstreet has been used.

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The data set has been scrutinized repeatedly in terms of cross-cultural invariance (Diamantopoulos et al., 2003; Souchon et al., 2003). However, measurement equivalence was based exclusively on traditional approaches. Souchon et al. (2003) investigated the scale reliability coefficients as suggested by Davis et al. (1981). A multigroup CFA was not carried out because of the large number of missing values as many companies did not respond to all items applied to all three information sources (Souchon et al., 2003). Diamantopoulos et al. (2003) also referred to reliability coefficients but mainly relied on profile analysis (see Mullen, 1995) as a means of testing metric equivalence. No lack of invariance was identified. This is to some extent a surprising finding as one would certainly expect some degree of non-invariance with five countries involved. From a Rasch point of view, these procedures are unsatisfactory as no rigorous testing for item fit and item invariance has been carried out. Moreover, mean comparisons across countries require scalar invariance, i.e. absence of additive biases or, at least, biases have to be taken into account. In the following, we will investigate measurement equivalence based on the polytomous Rasch model. All analyses have been carried out using RUMM 2020 (Andrich et al., 2003a). As there are three different styles of informational usage, namely instrumental, conceptual, and symbolic use, and three sources of information, namely EMI, EMR, and EA, nine applications would have to be tested. Since we focus on the demonstration of the analysis, we decided to concentrate on the instrumental use of information collected through EMI. This source is widely used and, consequently, the sample size is the largest. Subsequently, we will briefly deal with the stability of the scale across sources of information.

RESULTS Instrumental Use of Export Marketing Intelligence At first, the scales have been tested within each country sample in order to identify problematic items and threshold disordering. The most striking result at this stage was that, in general, German companies tended to use the answer scale most often in an unanticipated way leading to reversed thresholds requiring rescoring in the sense of collapsing adjacent categories (Andrich, 1995a, 1995b). Subsequently, the data sets have been pooled in order to assess DIF. Items displaying DIF were split up to allow for country-specific estimates. For the sake of parsimony, all efforts have been


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undertaken to specify as few as possible location parameters for one and the same item. This means that, e.g. one item parameter was estimated for three countries and one parameter for the remaining two countries. For instrumental use of information, only one of nine items (item /uioutdaS: information loses its value over time) showed misfit in every culture and has therefore been discarded entirely. It is quite plausible that the mere fact that the temporal value of information is limited does not necessarily mean that information is used for a specific problem. Five of the remaining eight items are fully invariant across countries except Germany (invariant items are indicated by shaded cells in Table 1 covering more than one culture). Interestingly, these items explicitly pertain to information collection behavior and usage (/uispeciS: information is actively sought . . . in response to a specific decision; /uipartiS: information . . . is used specifically; /uindeciS: no export decision would be made without information . . . ; /uinouseS: information . . . not used (reverse coded); /uitransS: information . . . is translated into . . . practical action). These items represent a strong link between countries and constitute a solid basis of cross-national measurement equivalence. In contrast, the items showing DIF are related rather indirectly to information usage in that they address perceived consequences such as /uiaccurS: decisions based on information are more accurate than intuitive ones or /uiconfiS: our confidence in making export decisions is increased. For both items the location parameters for UK companies are significantly smaller. This means that, conditioned on the same level of instrumental usage, UK companies claim to have more confidence in their decision-making behavior, and they consider their decisions more accurate. Even when there is no invariant item across all five countries, Germany can be linked to the common scale because of sharing two items that are invariant across all countries except the UK and one item that has the same location in Germany and Austria (/uidiffrS: decision would be different without information of this type). For two other items, the overall item location of Germany is similar to the other countries, but the scoring format differs due to initially reversed thresholds in Germany. However, the link between Germany and the other countries is not as strong as it is between the remaining countries. Table 1 contains the results of the Rasch analysis of the items indicating instrumental usage of information across all five countries. The first value at the top in each cell represents the indicator location estimate, e.g. the location of the item coded /uispeciS is 0.072. In terms of all items in the scale, this item has an about average endorsability. The locations stated in Table 1 are means of all threshold

Information collected by this method is often used specifically to make a particular export decision

Decisions based on information collected in this way are more accurate than wholly intuitive ones

Our confidence in making 1.181 export decisions is increased (SE ¼ 0.122; as a result of information w2 ¼ 18.95, collected in this way df ¼ 9, p ¼ .03)

uiparti

uiaccur

uiconfi

–1.107 (SE ¼ 0.113; w2 ¼ 11.74, df ¼ 9, p ¼ .23)

Information is actively sought out from this method in response to a specific decision at hand

uispeci

misfit

UK (n ¼ 187)

Information gathered in this way for a specific problem loses its value over time

Item Content (Abbreviated)

2

misfit

USA (n ¼ 141)

misfit

NZL (n ¼ 224)

GER (n ¼ 166)

0.405 (SE ¼ 0.13; w2 ¼ 2.16, df ¼ 9, p ¼ .99)

0.251 (SE ¼ 0.13; w2 ¼ 5.58, df ¼ 9, p ¼ .78)

misfit

0.445 (SE ¼ 0.063; w2 ¼ 32.13, df ¼ 9, p ¼ .0001)

0.005 (SE ¼ 0.055; w2 ¼ 8.86, df ¼ 9, p ¼ .45)

0.135 (SE ¼ 0.049; w2 ¼ 8.67, df ¼ 9, p ¼ .47)

0.072a (SE ¼ 0.046; w ¼ 11.11, df ¼ 9, p ¼ .27)

misfit

AT (n ¼ 218)

Item Location Estimates for Instrumental Information Usage (Export Marketing Intelligence).

uioutda

Item Code

Table 1.

344 THOMAS SALZBERGER ET AL.

The majority of information gathered by this method is not used. (reverse coded)

Information collected in this way is translated into significant practical action

uinouse

uitrans

1.29

0.785

w2 ¼ 194.81 (df ¼ 141), p ¼ .002

1.27

0.04 (SE ¼ 0.057; w2 ¼ 17.29, df ¼ 9, p ¼ .04)

0.221 (SE ¼ 0.05; w2 ¼ 17.11, df ¼ 9, p ¼ .05)

1.29

0.074 (SE ¼ 0.059; w2 ¼ 8.89, df ¼ 9, p ¼ .45)

1.018 (SE ¼ 0.056; w2 ¼ 10.54, df ¼ 9, p ¼ .31)

0.421 (SE ¼ 0.073; w2 ¼ 6.10, df ¼ 9, p ¼ .73)

1.48

0.809 (SE ¼ 0.11; w2 ¼ 12.7, df ¼ 8, p ¼ .12)

0.386 (SE ¼ 0.13; w2 ¼ 11.8, df ¼ 8, p ¼ .16)

0.874 (SE ¼ 0.13; w2 ¼ 11.25, df ¼ 8, p ¼ .19)

0.421

a The parameters can roughly be interpreted as follows: a parameter of 0.072 means that a company with a score of 1, e.g., has a probability of p ¼ exp (10.072)/[1þexp (10.072)] ¼ .72 for endorsement while a parameter of 0.251 means that the probability amounts to .68. However, for actual category probabilities, the threshold parameters (not presented here) have to be taken into account.

Person separation index

Model fit:

0.85

No export decision would be made without information collected by this method

uindeci

Country mean ANOVA: p o.0001 UK vs. AT, USA, NZL, GER

Without information gathered 0.074 by this method, decisions made would be very different

uidiffr

Understanding of Construct Validity and Cross-National Comparability 345

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parameters. In parenthesis, the standard error of the location estimate is presented, as well as the w2 fit statistic with its degrees of freedom and the associated p-value. At the bottom of Table 1, overall fit statistics and the country means are given. The overall model fit is marginal, but given the large number of individual tests of item fit, it can be considered satisfactory. The same applies to the PSI. Turning to the scores of companies, the mean of companies from the US, New Zealand, and Austria are virtually identical. The mean of Germany is slightly higher but the difference is not significant. By contrast, UK companies have a significantly (p o.0001) lower tendency to use information gathered from EMI in an instrumental way. As the Rasch analysis has identified one misfitting item and for all remaining items at least some degree of DIF, the comparison of the results based on Rasch measures with an analysis of variance applied to raw scores is of interest (see Table 2). The raw scores have been computed by adding all items except the item /uioutdaS, which misfits in the Rasch analysis and also shows a consistently low loading in factor analytic analyses. The original scoring function has been employed. Consequently, the ‘‘naı¨ ve’’ raw score differs from the raw score as the sufficient statistic in the Rasch model. Furthermore, the country means reported by Diamantopoulos et al. (2003) are considered. It should be noted that Diamantopoulos et al. (2003) as well as Souchon et al. (2003), in their analyses, did not differentiate between instrumental and conceptual use of information because of a lack of discriminant validity according to standard factor analytic procedures. In other words, items from both scales were analyzed conjointly. Still, the results from the Rasch analysis and the measures by Diamantopoulos et al. (2003) are, in principle, comparable since both claim to measure one and the same latent variable. If the latent variable comprising instrumental and conceptual use of information is different from instrumental use, only then instrumental and conceptual use items could not have been mixed in the first place. The differences between the measures are striking. In the Rasch analysis, UK companies score lowest and German companies highest. However, there are no significant differences between Germany and the US, Austria, and New Zealand. For the last three countries, the means of the Rasch measures are virtually identical. The raw scores provide a similar picture, but the UK significantly differs only from Germany. The same applies to companies from the US. Thus, the Rasch measures indicate the corporate usage of export information much more precisely demonstrating vividly that conclusions based on simple raw scores are inappropriate.

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Table 2. Sort of Measures

Analysis of variance Countriesb

UK (n ¼ 187) USA (n ¼ 141) AT (n ¼ 218) NZL (n ¼ 224) GER (n ¼ 166) Significance within subgroup

Mean Comparisons of Instrumental Usage of Export Information. Rasch Measures

Raw Scores

Raw Meansa (Diamantopoulos et al., 2003, p. 29)

F ¼ 7.33, df1 ¼ 4, df2 ¼ 931, p ¼ .00001

F ¼ 5.72, df1 ¼ 4, df2 ¼ 931, p ¼ .0001

ANCOVA F ¼ 18.075, df ¼ 4, po.0001

Homogeneous subgroup 1


0.85

p ¼ 1.0

1.27 1.29 1.29 1.48 p ¼ .57

Homogeneous subgroup 1 27.87 28.36 28.89 28.90 p ¼ .14


28.89 28.90 29.66 p ¼ .43

3.43 3.45 3.49 3.74 3.58 n.a.c

a

In the study by Diamantopoulos et al. (2003), a common scale was derived for instrumental and conceptual use of information. b AT stands for Austria, NZL for New Zealand, GER for Germany. c In the study by Diamantopoulos et al. (2003), no multiple group comparisons are reported.

This is due to three reasons. First, the Rasch analysis performs a non-linear transformation of Rasch raw scores to measures taking the boundaries of item responses into account. Second, the Rasch raw scores differ from ordinary raw scores by the adjusted scoring functions that were applied as a consequence of the investigation of the threshold ordering. Third, the different functioning of the items for different countries, assessed by the DIF analysis, has also an impact on the transformation of raw scores to measures. Although the last issue could, in principle, be accounted for by invariance testing based on traditional measurement procedures (multigroup CFA), the other two procedures are unique to Rasch analysis. The raw means in Diamantopoulos et al. (2003) fail to reveal the large difference between the UK, and the US and Austria, respectively, for which highly similar means are reported. By contrast, New Zealand scores highest while, according to the Rasch analysis, there is no real difference to the US and Austria.

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Cross-Source Stability Since the items have been applied to other sources of information, namely EMR and EA, the scale has also been analyzed referring to these information sources. EMR as a source of information appears to entail a more consistent interpretation of the indicators across cultures. However, sample sizes are considerably lower, ranging from n ¼ 73 (US) to n ¼ 132 (New Zealand) leading to much less power in detecting lack of item invariance. The same applies to information based on EA where the sample sizes lie in the same range. In principle, data from all three information sources could be analyzed simultaneously. First, a more stringent model, a so-called multifacet model (Linacre, 1989), could be set up according to which a common structure of the items prevails over all three sources (i.e. there is only one item location parameter per item) with an additional information source parameter accounting for mean differences in the item locations between sources. However, there is no theoretical basis for this assumption to be viable. We expect some similarity in scale usage across information sources but such a rigorous degree of stability is very unlikely. Moreover, the dependence of the degree of instrumental usage of information on its source between companies is not expected to be identical. A multifacet model would assume a constant difference between information sources. In fact, all attempts to estimate such a model failed. Second, we could conjointly analyze the complete data by stacking response data from all three sources. Technically, the information source would become a person factor, for which a DIF analysis could be carried out. In contrast to the multifacet model, for each company multiple location parameters would be estimated (provided the company supplied data for more than one source of information). Since companies appear up to three times in the data, there is some dependency in the response patterns which may cause problems. Consequently, results should be interpreted with caution. This sort of analysis identifies DIF for one variable only, the item /uindeciS: no export decision would be made without information collected by this method. It is easier to endorse the question for information from marketing intelligence than for information from marketing research, for which the item, however, shows unsatisfactory fit. Given the comparatively small sample sizes for EMR and EA, we also address the problem by looking at the correlations of item location estimates from separate calibrations within each source (see Table 3 for results).

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Table 3. Country

Correlations of Item Locations across Sources of Information, Instrumental Use of Information. Type of Use: Instrumental Use

United Kingdom Source: Source: Austria Source: Source: United States Source: Source: New Zealand Source: Source: Germany Source: Source:

export export export export export export export export export export

marketing assistance marketing assistance marketing assistance marketing assistance marketing assistance

Source: Export Source: Export Assistance Marketing Research

intelligence

.90

intelligence

.93

intelligence

.89

intelligence

.89

intelligence

.62

.88 .96 .89 .97 .73 .96 .73 .96 .83 .85

For Austria and the UK, all correlations are very high, ranging from .88 to .97. For the remaining countries, some correlations clearly fall short of this level. This, however, is exclusively due to the variable no export decision would be made without information collected by this method. After excluding this variable from the analysis, all correlations are greater than 0.85, demonstrating a strong stability of the scale across information sources. This is an important finding because otherwise the construct of information processing could not be conceptualized in the same way.

Correlations of Respondent (Company) Locations Although the stability of the scales across sources of information is a problem of item location invariance, the dependence of information usage on the specific source is a question of correlations between respondent locations. Corporate information processing behavior may be independent of the source of information, i.e. companies use information instrumentally to a certain degree across sources. Then person locations as measures of instrumental use based on different sources of information should be highly correlated. Alternatively, companies may show specific patterns of information usage depending on the source, i.e. some companies use information from EMR more instrumentally than information from EA,

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whereas the opposite is true for other companies. In this case, the person locations should be uncorrelated. Table 4 displays the correlations for instrumental use of information. They are in the range of (non-significant) 0.07–0.58. This suggests that instrumental use of information does not resemble a ‘‘corporate trait,’’ implying information is used in the same way irrespective of its source. Since correlations are insensitive to mean differences, high correlations only indicate similar patterns across countries but do not imply equal means. Mean differences between sources have therefore been tested by analyses of variance for repeated measures. For instrumental use, throughout samples from all countries information collected through EMI is most strongly used in an instrumental way. With the exception of New Zealand, EMR and EA yield information that is used instrumentally to the same extent. New Zealand companies use marketing research–based information more instrumentally than information from EA. In summary, instrumental use of information depends on the company and the source of information though there are systematic differences between sources. Surprisingly, it is the less systematic EMI as a source of information that yields market knowledge that is used most intensively in a rationale, i.e. instrumental way.

Table 4. Country

United Kingdom Austria United States New Zealand Germany

Correlations of Company Measures across Sources of Information, Instrumental Use of Information. Instrumental Use of

Export Export Export Export Export Export Export Export Export Export

marketing marketing marketing marketing marketing marketing marketing marketing marketing marketing

* A correlation significant at a ¼ 0.05. ** A correlation significant at a ¼ 0.01.

research assistance research assistance research assistance research assistance research assistance

Instrumental Use of Export assistance

Export marketing intelligence

.54**

.16* .26** .31** .42** .23* .22* .07 .27** .41** .30**

.34** .58** .41** .36**


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Other Types of Information Usage Besides instrumental use of information, conceptual and symbolic use have been referred to in the study. The items intended to measure conceptual use consistently fail to meet minimum requirements of fit to the Rasch model. By contrast, for EMI as the source of information, all items in the scale for symbolic use fit fairly well.4 However, only two items are invariant across all five countries, four items are invariant for the Anglo-Saxon countries and equivalent between Austria and Germany but not across the different languages. This suggests there being a stronger language-related DIF for items of symbolic use. From a theoretical point of view, this is not unreasonable as the exact meaning of these items is much harder to maintain when translating the instrument. There might also be a different propensity to admit that information is used in a non-reasonable way between the Germanic and the Anglo-Saxon countries. Fortunately, the two fully invariant items are relatively neutral in this respect providing confidence that a comparable scale metric has been defined correctly. As Diamantopoulos et al. (2003) did not detect any violations of item invariance and, consequently, no corrective action was undertaken, differences in the mean country scores are to be expected. In fact, there is some agreement as both analyses identify Austrian companies as most reluctant to use information in a symbolic way whereas US companies score highest. However, a closer look reveals noteworthy nonconformity as far as distances between Germanic and Anglo-Saxon countries are concerned. For instance, Diamantopoulos et al. (2003) report an equal distance between the UK and New Zealand on the one hand and the UK and Austria on the other. The Rasch analysis, accounting for DIF in the usage of the items, shows that the distance between UK and Austria is 2.98 times as large as that between UK and New Zealand. Similarly, the distance between the UK and the US is 6.5 times the distance between the UK and Germany using raw scores while according to the Rasch analysis the distance between the UK and the US is actually smaller with the mean difference between the UK and Germany being 2.89 times as large. Thus, the non-invariance of many items is all but negligible.

DISCUSSION OF CONCLUSIONS AND IMPLICATIONS In international research in marketing, it is now standard to address the problem of measurement equivalence one way or another. However, the

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complexity of item invariance requires sophisticated approaches such as multigroup CFA or DIF-testing in Rasch analysis. Conventional methods such as the investigation of reliability coefficients or the profile analysis may point at severe problems in the data, but they suffer from, at least, three major shortcomings. First, there are serious theoretical limitations. Reliability informs us of the amount of error given the true variance in the data. The latter need not be invariant across countries, and additive biases will not affect reliability directly anyway. Second, they are not sensitive enough to provide positive evidence of measurement equivalence. Consequently, these methods entail a confirmative bias. Third, no corrective actions are advised in order to account for incomplete measurement equivalence if a lack of invariance is indicated. The empirical study confirms these concerns. Neither a thorough analysis of reliability coefficients nor a profile analysis could reveal limitations in terms of cross-country measurement invariance. The Rasch model not only uncovers DIF but also provides for appropriate adjustments. Comparisons of Rasch measures and raw scores across countries demonstrate that the impact of DIF is substantial. Hence, one should not expect selective DIF to cancel out when measures are estimated from multiple item scales. Although, in principle, DIF for one item may work in the opposite direction compared to DIF for another item, such ‘‘auto-corrective’’ circumstances must not be presumed without empirical evidence. Furthermore, the study confirms once again that the Rasch model is applicable to attitudinal constructs. Although there are no theoretical concerns anyway, marketing scholars have been reluctant to submit their non-achievement constructs to Rasch analysis, or to more general IRT models. In marketing, the Rasch model has been applied to constructs as diverse as brand image (Mazanec, 1979), brand attitude (Bechtel and Wiley, 1983, Bechtel, 1985), consumer acquisition patterns for durable goods (Soutar, Bell, & Wallis, 1990), ownership patterns for durable goods and financial assets (Soutar & Cornish-Ward, 1997), people’s leisure activities (Soutar & Ryan, 1999), perception of advertisements (Ewing et al., 2005), technophobia (Salzberger & Sinkovics, 2006), cognitive dissonance (Koller & Salzberger, 2007), affective response to consumption (Ganglmair & Lawson, 2003a, 2003b; Ganglmair-Wooliscroft, 2007) and audience engrossment (Scott, Harris, & Craig-Lees, 2007; Scott & Salzberger, 2008). This study demonstrates that the Rasch model can also be applied to variables at the firm level rather than at the level of individual traits. Strictly speaking, the main conclusions are not confined to cross-national or cross-cultural research, although measurement equivalence and appropriate


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ways to test for and deal with DIF are particularly important in studies involving this sort of heterogeneity. However, even in intra-cultural measurement, DIF may be an issue and a more thorough testing for invariance is advisable. It is to be hoped that methodological contributions in international marketing will eventually have a repercussion on measurement in marketing in general. Compared to multigroup CFA, the Rasch model offers some fundamental advantages, which are attractive from both a theoretical and a practical perspective. In terms of the theoretical underpinning of measurement in the social science, we should keep in mind that the measurement of latent variables implies a strong hypothesis, namely that a latent variable really exists and that manifest indicators are suitable to quantify that variable. The Rasch model meets the requirements that follow from this in a much more rigorous way than CFA does. The non-linearity of bounded item raw scores is taken into account by estimating linear, interval-scaled person and item measures in the Rasch model. The item measures, i.e. their locations, inform us about the structure of the construct in a way that goes considerably beyond what CFA tells us. The structure of the threshold estimates helps us identify malfunctioning response scales advising us to apply a proper scoring scheme and improve response scales in future research. Particularly convenient for international research is the ease with which measurement equivalence can be assessed. Since invariance is a fundamental property that is to be investigated in any Rasch analysis, international research does not imply increased complexity. Finally, the powerful way of establishing indirect links between countries allows us to compare measures across groups even without a single item that is invariant for all countries or the two countries in question. This is particularly appealing in the case of many cultures or very different cultures. Finally, more trustworthy measures of latent constructs also increase our confidence in tests of structural hypotheses and the conclusions drawn. This promises a favorable effect on the application of scientific findings to practical marketing problems. In particular, the consideration of each individual item response pattern in the Rasch model allows for a considerably enhanced assessment of measures at the individual level, i.e. the firm level in the present context. This applies to the precision of a measure as expressed by its standard error, as well as its foundation due to the availability of person fit statistics (Hulin et al., 1983; Smith, 1986; Klauer, 1995; Molenaar & Hoijtink, 1996; Meijer, 2001; von Davier & Molenaar, 2003).

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At present, we are far from exploiting the potential that lies in the Rasch model as far as measurement of latent variables in international marketing, and in marketing in general, is concerned.

NOTES 1. In this contribution, the terms cross-cultural and cross-national are used virtually interchangeably, since we focus on the methodological consequences of measurement across multiple groups. It goes without saying that we strongly advocate a sound operationalization of culture and that we are aware of the problems of using country as a proxy for culture. A deep understanding of culture facilitates theoretically well-founded expectations as to how the measurement instrument would behave. 2. Originally, IRT models employed the cumulative normal distribution (normal ogive models). Since the cumulative logistic function deviates only insignificantly (if a normalizing constant is used) from the cumulative normal but is much easier to handle, modern IRT models are based on the logistic function. 3. The Rasch model, as discussed in this contribution, is confined to unidimensional measurement. Although multidimensional Rasch models do exist, applications of Rasch models typically involve unidimensional scales. This does not mean that multidimensional constructs could not be measured on a Rasch basis. We simply need separate unidimensional models for each dimension, and no item can be indicative of more than one dimension. 4. Detailed results (item location estimates, fit statistics, etc.) are available from the first author on request.

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THE DYNAMICS OF TECHNOLOGICAL READINESS IN MARKETING UNITS: WHY CROSS-CULTURAL EXAMINATION IS NECESSARY R. Glenn Richey, Daniel G. Bachrach, Michael G. Harvey and Hui Wang Research on interorganizational relationships in marketing is increasingly focusing on the ability of marketing managers to effectively adopt and/or implement new technology with relational partners (Anderson & Tushman, 1990; Bharadwaj, 2000; Bower & Christensen, 1995; Calantone, Griffith, & Yalcinkaya, 2006; Charitou & Markides, 2003; Cooper & Zmud, 1990; Johnson & Selnes, 2004; Leonidou, Katsikeas, & Hadjimarcou, 2002; Pflugheoft, Ramamurthy, Soofi, Yasai-Ardekani, & Zahedi, 2003). Increasingly, marketing managers must consider both simple and advanced technological tools to improve information sharing systems based on productivity and profitability of an entire marketing channel or supply chain. Marketing managers need to assess technology as a tool for improving overall performance and lowering operating and transaction costs in the channel of distribution (Brynjolfsson & Hitt, 1996; Devaraj & Kohli, 2000;


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Gove, Sirmon, & Hitt, 2003; Howell & Higgins, 1990; Lee & Bose, 2002; Song & Xie, 2000). As such, technological innovations such as Automatic Replenishment Systems, Enterprise Resource Planning Systems, RFID reading and tracking systems, etc. are being implemented with the hope of advancing the speed and accuracy of joint work in channel systems (Clemons & Gu, 2003; Kumar & Zhao, 1999; Song & Xie, 2000) and ultimately marketing performance (Sanayei & Jamshidian, 2004; Wright, 2002). However, empirical results regarding the manifest utilities of technological innovations have been mixed and marketing managers have thus been hesitant in adopting new technologies (Iansiti, 1998; Globerman, 1975; Henderson & Clark, 1990). Recent research in marketing decision-making has focused on the centrality of technological readiness for effective implementation and use of technology (Froehle, 2006; Parasuraman, 2000; Parasuraman & Colby, 2001), which has been argued to play a pivotal role in the development of competitive advantage (Bahouth, 1994; Colby & Parasuraman, 2003). Parasuraman (2000) defined technological readiness as ‘‘people’s propensity to embrace and use new technologies for accomplishing goals . . . The construct can be viewed as an overall state-of-mind resulting from a gestalt of mental enablers and inhibitors that collectively determine a person’s (group’s or firm’s) predisposition to use new technologies’’ (p. 308). However, despite the apparent significance of technological readiness (Widgery, Tubbs, & Nicholson, 2004), little is known regarding its management, antecedents, or contextual moderators in a marketing context. This research examines two drivers of marketing work unit technological readiness, as well as a potential contextual moderator of its incidence. Specifically, this research examines the role of work unit performance and task interdependence such as found in channels of distribution or global strategic alliance relationships (Thompson, 1967) across two distinct cultural context in the United States and the People’s Republic of China (PRC) (Hofstede, 1980). Consistent with recent research examining perceptions of the utility of information management systems (Bendoly, Bachrach, Wang, & Zhang, 2006), the current analysis supports striking differences in marketing managers’ technological readiness that appear dependent on the interaction between culture and task interdependence, key to decision-making as found in channel relationships and strategic alliances (Bhagat, Kedia, Harveston, & Triandis, 2002; Kotabe, Martin, & Domoto, 2003; Tse, Lee, Vertinsky, & Wehrung, 1988). We note specific variables that key decision makers must account for when selecting the ‘‘appropriate’’ work unit(s) for technology implementation in a marketing context.

The Dynamics of Technological Readiness in Marketing Units

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THEORETICAL FOUNDATION The Resource-Based View of the Firm Technology is often defined as a valuable firm resource particularly relative to marketing functions in the organization (Barua, Kriebel, & Mukhopadhyay, 1995; Bharadwaj, 2000; Christensen, Johnson, & Rigby, 2002). When resources are customized to match a marketing strategy, they become firm specific, and thus central to firm performance. Marketing employees also may be defined as an essential resource, in the context of key marketing activities that need to be accomplished (Barney, 1986, 2001; Coff, 2002; Dess & Picken, 1999). Because both employees and technology play key roles, we ground this study in the resource-based view (RBV) of the firm (Barney, 1991, 2001; Peteraf, 1993; Wernerfelt, 1984). The RBV has a historic foundation in the study of internal human interactions impacting firm performance (Penrose, 1955, 1959). The Penrose focus was revived by Wernerfelt (1984), who expressed the importance of analyzing firms from the ‘‘resource perspective’’ and criticized extant research as a ‘‘black box’’ economic view largely ignoring the human dimension. Current conceptualizations of the RBV assume the following: asset/resource heterogeneity (firms must have resources that differ from other firms), imperfect mobility of assets (firm assets must not be able to move easily between firms), ex post limits on competition, and ex ante limits on competition (environmental temporal limitations exist on competitive resource position and valuation) (Peteraf, 1993). These RBV assumptions allow for the development of a framework for resource outcome valuation that compares complex resource ‘‘bundles’’ (e.g., a skilled marketing unit vs. unskilled marketing unit; a highly taskinterdependent marketing unit vs. a highly task-independent marketing unit). This comparison is based on resource dimensions of convertibility, rarity, imitability, and substitutability (Srivastava, Shervani, & Fahey, 1998). Effective work units (particularly in a marketing context) and their firm-specific abilities (e.g., technological readiness) are argued to be valuable, rare, inimitable, and organizationally specific resources when managed correctly. This is similar to the resource-based prescriptions drawn by international marketing researchers examining learning exploration and exploitation (O¨zsomer & Genctu¨rk, 2003). The goal of RBV (Barney, 1991, 2001) is the creation of rents for the firm (Peteraf, 1993). In a business-to-business context, exchange value is created as a product or service moves down the supply chain (Bowman, 2001;

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Morash & Lynch, 2002). Under conditions of effective deployment, (e.g., assignment of specially trained or selected marketing expertise to a specific set of marketing tasks), a firm may generate superior value (Priem & Butler, 2001a, 2001b). Inputs include raw factors (e.g., people, technological hardware) and assets (e.g., technological abilities, managerial abilities). Raw factors are generic resources that can be easily acquired. Assets are more complicated, and thus are the key to the development of a competitive advantage. When applied by key decision makers to an operational context, assets are transformed into capabilities (Griffith & Harvey, 2001). Assets are both tangible (visible) and intangible (invisible) resources controlled by the firm (Bogaert, Maetens, & van Cauwenbergh, 1994). Marketers often deploy assets such as employees, technological ‘‘knowhow,’’ brand equity, patents, and specific knowledge (Schultze, 1994). Assets become capabilities in combination with matched organizational processes (cf. Day, 1994). These marketing utility ‘‘bundles’’ include skills and knowledge that create firm-specific asset resource combinations (Amit & Shoemaker, 1993; Coff, 2002; Dess & Picken, 1999). When firms develop the ability to adjust capabilities to match the competitive environment, they become dynamic (Srivastava et al., 1998; Griffith & Harvey, 2001; Helfat & Peteraf, 2003). Thus, when a capability is matched to a cultural context, a task-structure context, and a performance context, it becomes a dynamic capability (Day, 1994). The managerial goal from the RBV model is the development of core competencies for leveraging a firm’s strategic marketing weapons and tactics towards sustainable competitive advantage. As such, a discrete technology or skill is not a core competency. Rather, a core competency is a set of skills that influence a set of capabilities. Core competencies are defined by Prahalad and Hamel (1990) as ‘‘the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies’’ (p. 79). When capabilities, such as superior unit performance and/or high task interdependence (Wageman, 1995) are achieved in combination, a higher order capability may be formed and thus become a core competency. For a firm to develop a core competency in ‘‘technological readiness’’ there must be a matched combination of managerial marketing skills and assets to be found in the marketing area of the firm (Coff, 2002). When culturally matched, a dynamic core competency may help firms develop marketing performance advantages and/or superior rents (Day, 1994). Technological readiness helps predict the benefits of adopting a technology at a dynamic level (Brooke, 1997). If a marketing work unit is


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ready to utilize a technology, this becomes a deployable resource of the firm, and, if matched appropriately, ultimately a dynamic capability when fit to the environment. If the marketing unit is not ready for implementation, the asset may be wasted. If firms adopt technologies for which units are not ready, this compromises effective asset management and firm performance (Day, 1994; Dierickx & Cool, 1989; Drury & Farhoomand, 1999). Thus, we argue that readiness for implementation and use of a technological resource may be a better predictor of marketing performance than adoption (Gopalakrishnan & Damanpour, 2000).

CONCEPTUAL DEVELOPMENT Readiness for Technological Implementation As early as 1974, researchers noted the importance of operational and strategic preparedness or readiness (Delbecq, 1974; Froehle, 2006). Despite the growth of readiness research in strategy, marketing, and public policy, existing research on managing technology generally ignores ‘‘readiness.’’ Research typically falls into two broad categories: adoption of technology (Lippman & McCardle, 1991; Lee, 1985) and management (or manipulation) of technology (Banker & Kauffman, 2004; Dolinsky, Vollmann, & Maggard, 1990; Gruber & Niles, 1975; Levi & Nault, 2004). While central to the success of marketing decision-making, too often technology is adopted without decision makers attending to the readiness of the marketing unit(s) exposed to the technology. Ultimately, researchers and key decision makers may be putting the ‘‘cart before the horse,’’ by expecting adoption per se to drive performance or use of the technology (Christensen et al., 2002; Christianson, 2003; Damanpour, 1991; Davis, 1989). We suggest that if key decision makers do not know the competencies of the marketing employees manipulating the technology, especially in cross-cultural contexts, it is impossible to realize full effectiveness in adoption, implementation, and/or market dissemination decisions. The concept of technological readiness is different from adoption. It focuses on marketers’ readiness to utilize technology, and the application of technology to improve marketing performance (Damanpour, 1987; Jassawala & Shashittal, 1998; Parasuraman, 2000). This is an important issue for marketing managers to consider as they attempt to match technologies to work unit and business needs. Often, unit-level technological application decisions take place after adoption. For instance, SAP was adopted by a number of firms in the

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1990s in both marketing and supply chain units. Following adoption, many of those units and (in turn) firms struggled with implementation (Liberatore & Breem, 1997; Garvin & March, 1997; Ross, 1998; Tornatsky & Klein, 1982). Thus, our chief research question is: can marketing managers improve technological readiness, given an a priori knowledge of work unit characteristics? The characteristics we focus on in this study are task interdependence (such as found in channel and strategic alliance relationships), past performance, and the moderating role of national culture. The technology itself need not be sophisticated for technological readiness to matter (e.g., purchasing on the Internet from e-tailers). With this in mind operationally, recent research has adapted the readiness construct to fit firm level readiness in the study of business partners and in business units for application in marketing strategy and international business (Richey, Daugherty, & Roath, 2007). Both technological optimism and technological innovativeness are strong positive sub-dimensions of technological readiness that may contribute to firm-to-firm contact quality, order release flexibility, information quality, order requisitioning efficiency, accuracy and condition, timeliness, overall customer satisfaction, and financial and market-based performance (Bucher, Birkenmeier, Brodbeck, & Escher, 2003).

Direct Effects of Decision Makers: Task Interdependence It is argued that marketing unit task interdependence may play a role in unit-level technological readiness in channels of distribution or global strategic alliances. Task interdependence has several different conceptualizations. Some marketing researchers (e.g., Johnson & Johnson, 1989; Wageman, 1995) distinguish task from resource interdependence (e.g., Thompson, 1967; Van de Ven & Ferry, 1980), while others focus on the processes by which inputs are combined to create outputs. Early on Thompson (1967) viewed interdependence as a characteristic of work tied to a specific technology while Shea and Guzzo (1989) viewed interdependence as an attribute of employee behavior in project completion. For the purposes of our study, task interdependence is the extent to which marketing managers and employees depend on other members of their unit to carry out their work (Brass, 1985; Kiggundu, 1983; Van der Vegt, Emans, & Van de Vliert, 2001; Van der Vegt & Janssen, 2003). Task interdependence has been shown to increase communication, helping, and information sharing of tacit knowledge (Crawford & Haaland, 1972; Johnson, 1973) that is vital to the unit and inter-unit’s understanding


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of new technology. Task interdependence also influences group cooperation, which contributes to group success when inter-unit cooperation is essential to successfully complete interrelated tasks (Feldman, 1984; Kiesler & Kiesler, 1970; Shaw, 1981). Task interdependence makes mutual helping and other cooperative behaviors, such as learning, important in the completion of tasks (Organ, 1988; Wageman, 1995). Task interdependence also influences feelings of responsibility for work outcomes (Pearce & Gregersen, 1991; Van der Vegt, Emans, & Van de Vliert, 1998), team identification (Van der Vegt, Van de Vliert, & Oosterhof, 2003), and firm innovativeness (Van der Vegt & Janssen, 2003). Thus, task interdependence may result in the development of norms of marketing cooperation, including coordination and learning that increases marketing employees’ preparedness for changes in operating norms important to issues in global channels of distribution (Edmondson, Winslow, Bohmer, & Pisano, 2003; Feldman, 1984; Thomas, 1957). Past research has supported the fact that work units and marketing managers can differ highly in their readiness for the implementation of technology (Agarwal & Prasad, 1999). Work units that are optimistic about technology express a belief that it offers increased control, flexibility, and efficiency (Richey et al., 2007). Cooperative, interdependent, helpful employees are likely to see technology as a tool to both break down bottlenecks and take advantage of firm and/or market opportunities. Since task interdependence influences cooperation, learning, innovativeness, and team identification it is predicted that: H1. Task interdependence is positively associated with technological readiness. Unit Performance Marketing managers in global supply chain settings continually seek ways to increase unit and inter-unit performance (Brandyberry, Rai, & White, 1999). Yet, research on the topic of productivity and profitability related to technological innovation in work units is mixed (Bharadwaj, 2000; Brynjolfsson & Hitt, 1996; Mata, Fuerst, & Barney, 1995). Analyses often result in insignificant or negative correlations, possibly caused by issues including but not limited to unit learning errors (Sawhney & Prandelli, 2000). Increasing customer pressure to dispense quality products to the right markets, in the right shape, at the right time complicates the management of these units (Levitt, Thomsen, Christiansen, & Kunz, 1999). As such, complexity drives marketing managers to rely increasingly on the marketing

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unit itself to take the lead and deliver on promises to channel members as well as customers (Richey & Bachrach, 2004). Deductively, better past performance may be a signal to marketing decision makers of higher levels of technological readiness. Marketing units with a history of superior past performance likely possess flexibility with resource tools and agility with the work process. Superior marketing performers may also possess the confidence to implement new technologies and the innovativeness to make technology work properly (Damanpour, 1987; Damanpour, Szabat, & Evan, 1989; Davis, 1989; Dewar & Dutton, 1986). Unit performance acts as a signal for marketing employees within the unit, and influences how they respond to challenges and change (Coff, 2002; Dyer & Singh, 1998). High performing marketing units develop a culture of performance (Gotwon & DiTomaso, 1992; Reid & Hubbell, 2005), and seek out tools to help them maintain their status over other units (Gaertner & Insko, 2000; Huddy, 2004). Further it is also reasonable to expect that marketing managers and employees in high performing units will have higher motivation and ability than comparable marketing managers and employees in lower performing units (Locke, Mento, & Katcher, 1978). Thus, performance signals, out-group competitiveness, and motivation and ability in high performing marketing units are all stronger than in lower performing units. Given this discussion, it is suggested that: H2. Unit performance is positively associated with technological readiness. Interaction Effects of National Culture: Individualism/Collectivism The lack of inclusion of culture in many studies of technology management and implementation in a marketing context is a noteworthy limitation, given its deep contextual role (Hampden-Turner & Trompenaars, 1998; Tse et al., 1988). Hofstede’s (1980) research has identified a dimension of culture which we argue may be central in understanding the impact of task interdependence and unit performance on technological readiness: Individualism– Collectivism (IC). This continuum of belongingness reflects the level of social interconnectedness among members of a society and tends to vary in systematic ways across societies and individuals within those societies (cf. Hofstede, 1980; Earley & Gibson, 1998). Collectivism shapes the extent to which individuals view and identify themselves through membership in in-groups (Triandis, 1988), which tends


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to have systematic effects on social behavior within group settings (Earley, 1989, 1993; Tajfel & Turner, 1986). Some cultures, such as that found in the PRC, develop citizens who are decidedly collectivistic in orientation and others, such as that found in the United States develop citizens who are primarily individualistic (Hofstede, 1980). Within collectivistic contexts, when an out-group member gains in-group status (e.g., trust) this member achieves acceptance and is expected to abide by group norms (Gudykunst, 1983). Once an out-group member is accepted, the relationship becomes more intimate than typical relationships formed within individualistic contexts (Griffith, Hu, & Ryans, 2000; Gudykunst, 1983). An important attribute of contexts characterized by a collectivistic culture is that individuals within those contexts view and identify themselves less as individuals and more as group or unit members (Earley, 1989, 1993; Tajfel & Turner, 1986; Triandis, 1988). The defining distinction between contexts that vary along the IC continuum, and individuals within those contexts whose behaviors are influenced by the dominant social character, is that, for individualists personal interests are more important than the interests of the (in)group, as are the attainment of individual (as opposed to group) goals. In contrast, for collectivists the interests of the group are paramount (Triandis, 1989; Yamaguchi, 1994), and as noted by Earley (1989), ‘‘a driving force within a collectivistic culture is cooperation so as to attain group goals and safeguard welfare’’ (p. 567). Empirical research, dealing with the moderating effects of IC on social loafing on one end of the IC continuum (Earley, 1993), and the effects of IC on citizenship behaviors on the other end of the performance continuum (cf. Moorman & Blakely, 1995), support these characterizations of individuals within contexts dominated by individualistic or collectivistic cultures. Individuals in contexts-characterized principally by collectivistic cultural values are more likely to expect cooperative behaviors from individuals in their in-unit (cf. Earley, 1989; Lam, Hui, & Law, 1999) than individuals in more individualistic contexts. There is a higher level of social interconnectedness amongst in-unit members in collectivistic contexts than in individualistic contexts (Hofstede, 1980; Earley & Gibson, 1998) as well as a greater emphasis on interpersonal harmony (Leung, Au, Fernadez-Dols, & Iwawaki, 1992). Collectivists tend to expect in-unit members to be focused on the accomplishment of group goals (Triandis, 1989; Yamaguchi, 1994), to have feelings of mutual dependence (Triandis, 1989), and feel bound to one another by common goals, interests, and mutual commitment (Earley & Gibson, 1998). Although there is some empirical evidence that the nature of

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interdependence relationships amongst tasks may affect self-definitions in the short-term (Breer & Locke, 1965) these effects appear to be temporally bounded (Wagner, VanDyne, LePine, & Hollenbeck, 1997). Thus, although past unit performance is expected to influence technological readiness, its effects should depend on the cultural context within which readiness is measured. Specifically, as noted earlier, there are differences in the importance placed on the achievement of group goals (i.e., unit performance) in individualistic vs. collectivistic cultures. Further, in collectivistic contexts, although there is a premium placed on goals among members of the ingroup, no such premium exists in ‘‘out-group’’ contexts, where there is a significantly higher level of mistrust and social distance (Earley, 1993). Although in the United States it is expected that past unit performance will influence technological readiness (irrespective of the level of task interdependence in the unit), the effects of past unit performance on technological readiness in the PRC are expected to depend on the level of task interdependence within the unit. In the United States, within a single work unit, the idea of ‘‘in-group’’ vs. ‘‘out-group’’ is not an explicit cultural phenomenon. Although inter-group identification plays a role in self-construal in the United States (Huddy, 2004), this phenomenon exists between groups. However, in the PRC, even within a single work unit, the idea of ‘‘in-group’’ vs. ‘‘out-group’’ has a fundamental influence on how unit members define their social relationships, their performance expectations, and loyalties. We argue that among evaluators in the PRC, performance will have the same positive effect on technological readiness as it is predicted to have in the United States, in units characterized by high levels of task interdependence. However, in units characterized by low levels of task interdependence, unit members will not characterize their functionally independent coworkers as members of their ‘‘in-group,’’ and so their perceptions of technological readiness will be less subject to the influence of performance feedback. Based on the following arguments, the following is hypothesized: H3. The positive relationship between unit performance and technological readiness is similar for evaluators from the United States and PRC in conditions characterized by high task interdependence. However, the relationship between unit performance and technological readiness is mitigated for evaluators in the PRC in conditions characterized by low task interdependence.


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RESEARCH METHODOLOGY Design and Participants Following Chen, Chen, and Meindl’s (1998) caution regarding appropriate designs when IC is employed as an exogenous factor, we used a 2 2 2 ‘‘factorial experimental design, with IC having the status of an independent variable, crossed with a second [and third] independent variable’’ (p. 299) in this case, with task interdependence (high vs. low) and unit-level performance (high vs. low) which were manipulated factors. In the U. S. sample, participants were 209 graduate and undergraduate business students, 21.91 years of age (SD ¼ 2.48); 52% were male, 96% were born in the United States, and English was the first language of 97%. Participants had 3.53 years of undergraduate education (SD ¼ .68), 1.21 years of full time work experience (SD ¼ 2.27), 1.65 years with their immediately previous organizations (SD ¼ 2.21), and 1 year in their most recent positions (SD ¼ 1.43). Participants had been direct supervisors of 2.51 (SD ¼ 5.70) and indirect supervisors of 4.34 employees (SD ¼ 13.64). In the sample from the PRC, participants were 174 graduate and undergraduate business students, 21.35 years of age (SD ¼ 2.64); 47% were male, 98% were born in the PRC, Chinese was the first language of 97%. Participants had 3.25 years of undergraduate education (SD ¼ 1.69), three-quarter years of full time work experience (SD ¼ 2.27), 1.14 years with their immediately previous organizations (SD ¼ 3.61), and .47 years in their most recent positions (SD ¼ 1.55). Participants had been direct supervisors of 2.94 (SD ¼ 6.09) and indirect supervisors of 15.25 employees (SD ¼ 48.53). It should be noted that no response bias was found across groups. A student sample and lab setting was selected to heavily control external biasing conditions. This is consistent with many recent top studies examining a cross-cultural issues (Allen, Takeda, & White, 2005; Chan, Li, Diehl, & Terlutter, 2007; de Pillis, Kernochan, Meilich, Prosser, & Whiting, 2008; Ford, Nonis, & Hudson, 2005; Gefen, Geri, & Paravastu, 2007; Jung & Sung, 2008; Martz Jr., Biscaccianti, Neil, & Williams, 2005; Ross, Broyles, & Leingpibul, 2008; Shiloh, Gu¨venc- , & O¨nkal 2007; Wright & Drewery, 2006). Similar to these studies, we were interested in isolating a basic employee process. The use of a student sample establishes the presence of this process in an isolated setting. Moreover, the results we obtain from this sample establish the presence of a basic process that will be present in all people at some level. If we are able to find the process in a student sample with limited professional experience, this will further

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reinforce the issue of its foundational characteristics. Once we have established the presence of this basic process in an examination using a student sample, researchers may then move our test to an organizational context where one may more systematically examine processes within the organization (including characteristics of the sample itself ), that affect the process we observe in the current study. With this in mind – and identify any potential confounds to the study design – we include an analysis of the demographic characteristics of our samples. Such an analysis should determine whether the study variables had systematic effects on the measured variable in the study. Consistent with recent cross-cultural experimental research in the PRC and the United States exploring basic process perceptions with applicability to organizational settings (e.g., Bachrach, Wang, Bendoly, & Zhang, 2007), the current study made use of two equivalent student samples in the PRC and the United States. Consistent with the protocol reported in previous experimental research in the domain (Bendoly et al., 2006), the two samples used in the current study were matched with respect to a range of demographic characteristics to facilitate cross-cultural comparisons. Given the basic-process character of the relationships we examine, and the goal of the current study to develop structurally derived causal inferences derivative of these conceptually exogenous structural factors, the use of student samples is widely recognized in the experimental psychology domain as appropriate to the stated objectives of current study (Berkowitz & Donnerstein, 1982; Campbell & Stanley, 1963; Gordon, Slade, & Schmitt, 1986; Greenberg, 1987).

Procedure In both the United States and the PRC, subjects participated in a behavioral lab where they were randomly assigned to an interdependence (high or low) and a performance (high or low) condition taking the form of a written case (Bachrach, Powell, Bendoly, & Richey, 2006). Once assigned, participants were asked not to communicate with one another, and were read a set of instructions wherein they were informed they were participating in a decision-making task, the goal of which was to examine the technological readiness of employees in production settings. Participants were asked to indicate the extent to which employees in the production unit described in the case demonstrated the attitudes described later. Following appropriate forward and back translation methodology, participants were given


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a chance to ask questions, were exposed to the manipulations, provided ratings, were debriefed, and released (see appendix).

RESULTS We used Van der Vegt and Janssen’s (2003) five-item scale to measure task interdependence. Examples of these items include: Employees in this unit ‘‘ . . . need information and advice from their colleagues to perform their jobs well,’’ and ‘‘need to collaborate with colleagues to perform their jobs well.’’ Previous research using this scale has shown it to have acceptable reliability (a ¼ .85) (Bachrach et al., 2006). To determine the manipulation’s effectiveness, an independent-samples t-test was conducted. Results indicated that interdependence reported for the high (6.15, SD ¼ .85) and low (4.32, SD ¼ 1.78) conditions was significantly different [t (382) ¼ 13.01, po.001] and in the expected direction. The five-item scale used by Bachrach et al. was used to measure overall performance. Examples of items used to measure overall performance in this study included, ‘‘This unit is indispensable to the organization,’’ and ‘‘This unit is extremely valuable to the organization.’’ The reliability of this scale in the current study was (a ¼ .89). Results from an independent-samples t-test indicated that the high (5.40, SD ¼ 1.28) and low (3.97, SD ¼ 1.49) performance conditions were significantly different [t (381) ¼ 10.01, po.001] and in the expected direction. IC was measured with Wagner and Moch’s (1986) five-item values scale, which measures specific prescriptions for the behavior of work group members. Examples of these items include: Employees in this unit ‘‘ . . . should realize that they are sometimes going to have to make sacrifices for the sake of the work group as a whole,’’ and ‘‘ . . . should do their best to cooperate with each other instead of trying to work things out on their own.’’ To determine whether there were differences in the IC values across the two groups, an independent-samples t-test was conducted. Results indicated that the IC values reported for the United States (3.88, SD ¼ 1.02) and the PRC samples (5.04, SD ¼ 1.15) were significantly different t (377) ¼ 10.29, po.001 and in the expected direction. Subjects completed these checks immediately following exposure to the manipulations. Construct Means, Standard Deviations, Reliabilities, and Correlations Means, standard deviations, reliability estimates, and correlations are reported in Table 1.

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Table 1. Variable

Means, Standard Deviations, Internal Consistency Reliabilities, and Correlations. Mean

SD

1

2

3

4

5.28 4.67 4.41 4.44

1.65 1.56 1.23 1.02

(.89/.80) .01 .17** .09

(.89/.80) .04 .31**

(.84/.71) .09

(.84/.74)

Interdependence Unit performance IC Values Technology readiness

Note: Reliability estimates appear in parenthesis along the diagonal. The first entry inside the parenthesis is Cronbach’s index of internal consistency (a) and the second entry is Fornell and Larcker’s (1981) r. ** po.01, one-tailed.

Table 2. Means, Standard Deviations, and Ranges of Technological Readiness Across Eight Conditions. Minimum

Maximum

Mean

SD

U.S.

PRC

U.S.

PRC

U.S.

PRC

U.S.

PRC

High performance condition High interdependence Technological readiness Low interdependence Technological readiness

1.71

3.00

5.71

6.86

4.79

4.73

.89

.98

2.71

1.71

7.00

6.43

4.71

4.65

.88

.94

Low performance condition High interdependence Technological readiness Low interdependence Technological readiness

1.71

1.57

7.00

5.86

4.11

4.21

.97

1.05

1.71

2.29

5.71

6.43

3.69

4.71

.93

1.03

Hypothesis Tests for the Effects of Interdependence, Performance, and Culture on Technological Readiness The means, standard deviations, and ranges of technological readiness across the eight experimental conditions are presented in Table 2, and the technological readiness means are plotted in Fig. 1. As one can see in Fig. 1, the pattern of interaction between unit performance and task interdependence on the technological readiness ratings provided by evaluators in this study appear to be different across the two culture conditions. The most notable difference between these two conditions appears to be a substantially stronger main effect of unit performance on perceptions of technological


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Technological Readiness in the PRC Ratings of Employee Technological Readiness

5.5

5 4.73 4.71

4.65

4.5 4.21 4

3.5

3 Low Unit Performance

High Unit Performance

Unit Performance High Task Interdependence

Ratings of Employee Technological Readiness

5.5

Low Task Interdependence

Technological Readiness in the U.S.

5 4.79 4.71 4.5 4.11 4

3.69 3.5

3 Low Unit Performance High Unit Performance Unit Performance High Task Interdependence

Low Task Interdependence

Fig. 1. Technological Readiness in the U.S. and the PRC Across Unit-Level Performance and Task Interdependence Conditions – Manipulation Checks.

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readiness in the United States across the low task interdependence conditions. Unit-level performance appears to have very similar effects on technological readiness at high levels of task interdependence across the two culture conditions. In order to test H13, analyses of variance were executed to examine the main effects of interdependence and performance on ratings of technological readiness. Consistent with the visual data reported in Fig. 1, and in support of H1, these analyses revealed significant main effects of performance for technological readiness [F (1, 357) ¼ 24.90, po.001]. However, these analyses failed to reveal a significant main effect of task interdependence, [F (1, 357) ¼ .20, n.s.] on technological readiness, providing no support for H2. We continued this analysis in order to test the three-way interaction effects proposed in H3. In support of H3, these analyses revealed significant interaction effects between task interdependence, performance, and culture on technological readiness, [F (1, 357) ¼ 8.53, po.01].

DISCUSSION AND MANAGERIAL IMPLICATIONS The results from this research indicate significant complexity in marketing decision-making concerning technology and human resources both domestically and abroad in marketing operating systems. The findings presented here may exert limitations on our ability to generalize all industries, due to the sample and controlled environment. Yet, it does provide a strong empirical and theoretical basis for summary conclusions and extended research in (global) resource-based analysis in a marketing management context. This study embraces the importance of technological readiness in marketing as a driver of operational efficiency as supported by recent research. Moreover, this study examines the influence of task interdependence and unit-level performance on unit technological readiness. In doing so we offer a suggested experimental design methodological approach that future researchers should employ to isolate individual behavioral conditions in future cross-cultural research. This approach should assist in reducing the large amount of environmental and response error present in may crosscultural studies – especially if the researchers are looking for the existence of three-way interaction effects. Summarizing our results, we suggest that marketing managers should proceed with care when using extant knowledge about task interdependence, past performance, and technological readiness in an environment similar to global channels of distribution. Overall, we show that past performance has


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a direct and significant positive impact on a work unit’s technological readiness. Conversely, we find that no significant impact is revealed for task interdependence. Highly successful marketing units are likely to be more ready for the implementation and use of a new technology than less successful units. Weaker marketing managers will be less optimistic and innovative about technology, making implementation more difficult. Decision makers looking to adopt and integrate technology into extant processes should match these initiatives with high performing units. The past performance–technological readiness relationship is important for domestic marketing decision makers attempting to match work units with technologically oriented tasks. However, it is also important in this context to understand the role of culture. Decision makers should not discount the impact of national culture in the management of work units. Depending on a cultural context, managers must consider past performance and task interdependence to evaluate unit technological readiness. The results from our study suggest that culture plays a moderating role on the relationship between work unit performance and technological readiness. Marketing managers hoping to effectively implement new technology must evaluate both past performance and task interdependence. In the U.S. cultural context, more of each is better, such that higher performing units that are more task interdependent are likely to be more optimistic and innovative in their readiness to use technology. On the contrary, lower performing units, with fewer interdependent tasks, are likely to be less ready for implementation and use of a technology. This linear effect should be easy for marketing managers in the United States to understand and manipulate to their advantage. Yet, the effect takes on an entirely different profile in emerging economies with collectivist cultures like that found in the PRC. This discovery can complicate global expansion of channels of distribution market entry decisions/strategies and the management of culturally different marketing employees (cf. Burgel & Murray, 2000). The growing interest in the emerging Chinese economy was a primary driver of our research (Calantone et al., 2006). As marketers attempt to develop strategies in the PRC, and other emerging markets, they must account for the dynamic impact culture has on global managerial decisionmaking concerning technological implementation. In our comparison of the United States and the PRC, we find one such important example in that the linear ‘‘higher is better’’ result for marketing units in the United States becomes a complex crossover effect for marketing units in the PRC. Surprisingly, this research reveals that Chinese units with weak past performance, that are less task interdependent, will be superior in terms of

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their technological readiness relative to units with similar past performance that are more task interdependent. This result may be a product of the influences within collectivist contexts. Unlike the United States, for weaker units, less task interdependence is preferred when targeting new technologies. In such instances, low task interdependence may allow for the development of a group leader or technological champion that can assist in the learning of how to use the technology (Beath, 1991; DeGregori, 2005). Conversely, units that are weak performers, but highly task interdependent, are likely to be less ready for technological implementation and use than others. This very well could be the product of groupthink (Janis & Mann, 1977) causing the unit to stay mired in a stage of weak readiness and unable to learn at a sufficient rate. In the future, researchers should look to the moderating impact of uncertainty avoidance in an attempt to further explain these behaviors.

CONCLUSION This study develops an economic super power vs. emerging market grounding for future research in the management of marketing functions. Overall, this study uncovers a very dynamic trend in the management of resources and specifically global human resources and taps students who will be the managerial leadership of tomorrow. When crossing borders, marketing managers must examine both unit task-interdependence and past performance if they hope to match technologically ready units to technological implementation initiatives. This study provides an explanation for why technological readiness may differ when moving from the United States to a collectivist emerging market – or more specifically – to the potential future master of the world economy, the PRC. Global firms hoping to integrate existing technology into new cultures and new technology into existing marketing processes in collectivist emerging markets will need to adapt their resource decision-making strategy. The findings of this study suggest that, if marketing managers use a strategy of implementing technology through their most task-interdependent units in collectivist cultures, as they would in the United States, the initiative will likely fail. Marketing managers should be encouraged to target less task-independent units in collectivist contexts where a leader or champion can emerge to drive technological readiness across the unit (Beath, 1991). As the competitive contexts within which organizations initiate the implementation of technology increasingly demand the flexibility implied by


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self-managing teams, understanding the implications of task interdependence in this equation is essential (Langfred, 2005). Recognition that the implications of task interdependence for readiness to utilize technology may be different for teams in different cultural contexts facilitates the effective management of culturally distinct work groups. As the use of autonomous work groups across cultural boundaries increases, systematic understanding of the interactions between the variables examined in the current study can only increase the potency of allocations of scarce resources.

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APPENDIX. INTERDEPENDENCE AND PERFORMANCE MANIPULATIONS (SEE BACHRACH ET AL., 2006) High Interdependence A production unit in a small factory produces several cellular phone models for Nokia. The 10 members of the production unit rotate responsibility for


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each of 10 sequential operations. Factory policy allows no buffer stocks of work-in-process to be maintained between operations. Although the unit’s members are required to work 8 h each day, they must work together to determine work schedule because of the buffer-stock policy. Workers at this factory have to communicate information regarding color, stock, and equipment to each other because the phone that they make leaves the factory in five colors and cabinet styles with 10 functionality packages. Because half of the workers at this factory share equipment, they have to coordinate their use of production facilities. Over the past several years, both the design of the product and the production process has changed extensively.

Low Interdependence A production unit in a small factory produces a single cellular phone model for Nokia. Each of the 10 members of the production unit is responsible for one of 10 sequential operations. Factory policy allows large buffer stocks of work-in-process to be maintained between operations. Although all 10 individuals are required to work 8 h each day, they can begin and end their activities according to a flexible work schedule because of the buffer-stock policy. Workers at this factory do not have to communicate information regarding color, stock, or equipment to each other because the phone that they make leaves the factory in only one color, cabinet style, and functionality package. All of the workers at this factory have their own equipment, and so do not have to coordinate their use of production facilities. Over the last several years, neither the product design nor the production process has changed.

High Unit-Level Performance Last year, this production unit was the most productive unit in its region, producing at a rate 25% higher than the next closest factory. Of the 15 other factories producing similar products, this unit had the lowest materials cost percentage (waste), highest operating efficiency, fewest customer complaints, highest customer satisfaction, and fewest returns (added to the end of the interdependence manipulation).

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Low Unit-Level Performance Last year, this production unit was the least productive unit in its region, producing at a rate 25% lower than the next closest factory. Of the 15 other factories producing similar products, this unit had the highest materials cost percentage (waste), lowest operating efficiency, most customer complaints, lowest customer satisfaction, and most returns (added to the end of the interdependence manipulation).

METHODOLOGICAL RIGOR OF ORDINARY LEAST SQUARES REGRESSION STUDIES IN MAINSTREAM MARKETING: AN ASSESSMENT OF RESEARCH REPORTED IN THE JOURNAL OF MARKETING Z. Seyda Deligonul, Brian R. Chabowski, Steven H. Seggie, Shichun Xu and S. Tamer Cavusgil Marketing, as a field of inquiry and practice, has gained increasing importance since the beginning of the 20th Century (Bartels, 1951) and the Journal of Marketing (JM) has been the most consistently influential marketing journal in the field. Since its inception in 1936, JM has progressed toward publishing more scholarly works (Kerin, 1996), as the field matured in its scientific approach (e.g., Bartels, 1951; Hunt, 1976, 2002; Sheth, Gardner, & Garrett, 1988; Sheth & Sisodia, 1999; Taylor, 1965). This emphasis on marketing as a science ensures that rigor in marketing studies remains central for the entire scholarly community from contributors and gatekeepers to journal editors and scholars. But, if marketing knowledge has New Challenges to International Marketing Advances in International Marketing, Volume 20, 389–418 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1108/S1474-7979(2009)0000020017

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advanced, how well is this progress reflected in research methodology? How competent have marketing scholars been in their use of methodological tools? In the past, the issue of methodological rigor has been investigated, in part, by capturing a snapshot of rigor in the application of a single tool (McCloskey & Ziliak, 1996; Ziliak & McCloskey, 2004). Others have offered critiques on the use of specific techniques. Examples of the latter include structural equation modeling (SEM) (Jarvis, MacKenzie, & Podsakoff, 2003; Shook, Ketchen, Hult, & Kacmar, 2004) and cluster analysis (Ketchen & Shook, 1996). Such efforts are indispensable if the field is to enhance its overall value. Knowledge consolidation may be inhibited if the results are based on poor use of investigative means. This study seeks to explore the status of methodological rigor in marketing studies. In an effort to investigate rigor in the use of a very common tool employed by marketing researchers, we analyzed all studies that were published in JM between 1990 and 2005 using Ordinary Least Squares (OLS) regression. The choice of JM is driven by its generally accepted position as the premium mainstream marketing journal (Hult, Neese, & Bashaw, 1997; Mort, McColl-Kennedy, Kiel, & Soutar, 2004; Theoharakis & Hirst, 2002). As such, we would expect manuscripts published in JM to be examples of best practices in their use of methodology. The choice of OLS is driven by its relative prominence as a trackable application in the most widely recognized, mainstream outlet in the field of marketing. In addition, OLS has been a nucleus for developing other fundamental techniques. Between 1990 and 2005, there were 147 OLS regression equations in 83 separate studies published in the JM. Over the same time period, 53 articles used SEM, and 23 studies employed logistic regression. With its frequent and consistent application, OLS provides us with the opportunity to explore a number of epistemological issues about its application by marketing scholars. This study intends to make several contributions. First, we aim to address the issue of rigor as a disciplinary ideal. Specifically, we investigate the strengths and weaknesses in the preparation, analysis, and reporting of empirical research in the use of OLS regressions. We focus on variations and deficiencies that may have escaped the attention of gatekeepers in the review process. The objective here is not to critique any individual study but to be able to comment on the degree to which marketing scholars, collectively, demonstrate ‘‘proper’’ application of a fundamental research technique. Second, we examine emergent patterns in the application of this research tool. Included in this analysis is the issue of whether the application of OLS

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has improved over time. Third, we attempt to characterize the nature of consensus over the use of OLS. This is important because the extent to which consensus prevails with regard to conduct – agreement on the means of scholarship – signals the degree of maturity of a field. Fourth, with this study, we aim to offer insights for gatekeepers and editors of marketing journals to ensure a high level of rigor in studies that employ OLS. Finally, this study can serve as reference point if investigations of this nature are to be conducted periodically over time. The remainder of this chapter is organized as follows. We begin by discussing the analytical method we employed to investigate each OLS study. Next, we present the results with a focus on general reporting, sample size, testing rigor, and overall interpretation. We then offer post-hoc analyses and offer selected prescriptions.

DESCRIPTION OF THE METHOD Scope of the Study We searched JM from 1990 to 2005 to identify all studies that employed OLS regression.1 The search resulted in 83 articles with 147 OLS regressions. Many authors specifically state that they used OLS and these were promptly included in the sample. Other authors acknowledged regression as a methodological procedure without explicitly specifying an estimation technique. To inquire whether OLS was used, we communicated with all of these authors. In all, 51 authors were contacted, with 44 responding. Of the 44 that responded 43 had used OLS; the only exception was subsequently excluded from the analysis. The remaining seven articles were checked once more, and consensus was reached that OLS had most likely been used. Therefore, they were also included in the study.

Assessment Format The overall analytical approach follows similar analyses of methodological rigor in marketing and related fields (Jarvis et al., 2003; McCloskey & Ziliak, 1996). Some assessment criteria were adapted to address issues specific to OLS applications, while additional criteria were developed also to accomplish this task. These assessment criteria were then presented to four separate methodological experts in OLS. These experts offered various

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refinements before a final set of 24 criteria were developed. These are presented in Table 1. The assessment criteria encompass issues from the application of the technique to producing useful results with full power. Briefly, the investigation explored: the type of the regression (Criteria 1, or C1); distributional assumption (C10); problems of fit (C6, C9); sample and sample size (C7); and testing, power, and reporting (C3, C4, C8). Additional criteria were directed to issues of: multicollinearity (C11); relevance and practicality (C20); needs for standardization and units of measurement (C2, C21–C24); and moderation analysis (C13–C18). Some criteria addressed objective issues (C1, C5, C7–C10, C12), while others required subjective assessment.

Description of the Assessment Process Three marketing scholars with an extensive knowledge of the OLS technique served as raters. Each rater first read each article to gain a comprehensive understanding of the research issues addressed in the study. Then, the researchers independently coded each article against the assessment criteria. Next, all three met to compare and finalize the decisions on each article. A fourth rater was brought in to resolve any disagreements. The inter-rater agreement was calculated to be 92%. This is comparable to similar studies (Ketchen & Shook, 1996). Finally, statistical analyses were performed to delineate the significance of and patterns in the findings. Table 2 reveals the percent of regression analyses that meet each of the 24 assessment criteria.

Unit of Analysis and Coding As there were often more than one OLS regression used in each of the 83 JM articles (and each may warrant different judgments to assessment criteria), each of the 147 regression analyses is coded separately. As an example, Kotabe (1990) used more than one regression. However, only one of them included interaction effects, which renders C17 not applicable to other regressions in the same article. Therefore, this regression was coded separately from other regressions in that study. The complete set of 83 studies included in the analysis is provided in Table 3.

Criterion 8: For null hypotheses not rejected, do the authors state the power of the test?

Criterion 7: If the sample size is large, do authors acknowledge that significance may be an artifact of the large sample size?

Criterion 6: Based on a combination of the number of independent variables and sample size, are readers assured that the authors are not guilty of overfitting?

Criterion 4: Does the paper report all ‘‘t’’ statistics, standard errors, or p-values? Criterion 5: In a multiple regression, did the authors report adjusted R2?

Criterion 2: Are the first and second moments for all regression variables included? Criterion 3: Does the paper report ‘‘f’’ statistics or p-values for the general linear relation?

Remarks

Marketing scholars have reported R2 and/or adjusted R2. Traditionally R2 was reported. However, we know that, as a measure, it is sensitive to the number of independent variables. R2 increases as independent variables are added even if the variable is not meaningful (Hair et al., 1998; Kutner et al., 2004). Therefore, researchers have proposed the use of adjusted R2 as it adjusts for the number of independent variables. This is another issue of sample size. One of the problems with a small sample is the danger of overfitting (Hair et al., 1998). Based on previous research, ten data points per independent variable is sufficient for us to be confident that there is no overfitting. While a large sample size is an advantage for statistical power considerations, very large samples are overly sensitive to tests of statistical significance may be over sensitive. For very large sample sizes, we suggest more than 1,000 observations (Hair et al., 1998). A very large sample may lead to a test finding all relationships to be statistically significant. Generally, the null hypothesis in marketing research is that of no relationship, with the stated hypothesis being the alternate. It may be the case that in instances where the null hypothesis is not rejected, the regression model may not have had sufficient statistical power.

Clearly there is more than one type of regression and we felt that in the interest of full reporting, marketing scholars should clearly state which type of regression they use. If we are using OLS to explain marketing phenomena then the reporting of means and standard deviations is essential. It is not enough for us to provide information on the individual parameters without also providing fundamental information regarding the significance of the overall model. It is a standard expectation for at least one of these to be reported.

Assessment Criteria Used in Study.

Criterion 1: Do the authors state what type of regression they used?

Criteria

Table 1. Methodological Rigor of OLS Regression Studies in Mainstream Marketing 393

Criterion 13: For articles using split sample to test moderation effects, are the authors clear on the criterion used to split the sample?

Criterion 12: If the data covers a span of time, have the authors dealt with longitudinal considerations?

Criterion 11: If theoretically supported hypotheses are not supported statistically, have tests been conducted for multicollinearity?

Criterion 9: Do the authors provide evidence of the model’s goodness of fit? If not, do they at least indicate that they performed such tests and were satisfied with the results? Criterion 10: If using a small sample and relying on t-, F-, or w2 tests, have the authors established that the residuals are normally distributed, or at least close to normally distributed?

Criteria

Remarks There are various goodness-of-fit tests that can and should be employed by the researcher. These can include (but are not limited to) tests of linearity, homoscedasticity, and residual diagnostics. One of the assumptions of OLS is that the residuals are normally distributed (Kennedy, 2003; Kutner et al., 2004). If we have a large enough sample this is not an issue. However, with a small sample, there are some concerns. The definition of a small sample size is arbitrary in many respects and there is disagreement among researchers. It has even been stated that less than 20 data observations per independent variable constitutes a small sample (Hair et al., 1998). However, this is quite constricting. Thus, we defined a small sample size as a sample with less than five data points per independent variable. An assumption of OLS is that there is no multicollinearity in the model. High levels of multicollinearity lead to estimation problems including parameter estimates with the incorrect sign among other issues (Kennedy, 2003; Kutner et al., 2004). One reason for theoretically supported hypotheses lacking support may be the existence of multicollinearity. One point to note here is that a correlation matrix does not show the existence (or lack) of multicollinearity. It is able to show the correlation between two variables but cannot detect the situation where three variables are collinear with no two variables exhibiting signs of collinearity (Kennedy, 2003). Thus, we require the use of variance inflation factors or some other test beyond the correlation matrix to detect the existence of multicollinearity (Kutner et al., 2004). Included in this are (among other factors) adjustments for inflation where necessary, testing residuals for autocorrelation, and adjusting for population size. Authors must establish how the subgroups in the moderation analysis are determined. Providing enough information and justification on the cutoff value (median, mean, etc.) has both theoretical and practical implications.

Table 1. (Continued ) 394 Z. SEYDA DELIGONUL ET AL.

Criterion 19: Do the authors either refrain from making assertions about main effects when they have a significant interaction or provide additional evidence of main effects?

Criterion 18: When moderation analyses are conducted on categorical interaction variables, do the authors establish that there are equal error variances across subgroups?

Criterion 17: When moderation analyses are conducted on categorical interaction variables, do the authors establish that there are equal sample sizes across levels?

Criterion 16: For articles using interaction to test moderation effects, do the authors take into consideration any possible reduced statistical power?

Criterion 15: For articles using split sample to test moderation effects and to claim moderating effects, do the authors conduct a formal Chow test or tests of similar effect?

Criterion 14: For regressions using split sample by median to test moderation effects, do the authors establish that the groups are statistically different on means of the moderating variable?

When two subgroups in the moderation analysis are split at the median, the means of the moderating variables may not significantly differ across the two groups due to the distribution properties of the pooled group. As a consequence, the moderation analysis result may not be reliable. To establish the existence of the moderating effect, it is essential to prove that the slopes of the regressions are statistically different across different subgroups. Stating a moderation effect based on the presence of different coefficients across two groups is not sufficient. A formal test such as Chow test is required. When moderated multiple regression suffers from the limitation of low statistical power Type II error rates can increase. This leads researchers to conclude a non-existent interaction effects when there actually is such an interaction effect. Therefore, it is important to take into consideration the power of the statistical test when discussing findings of this kind. In moderated multiple regression analysis, an unequal subgroup sample size will be inadequate to detect some moderating effects. Typically, this limitation cannot be overcome by using a large sample (StoneRomero, Alliger, & Aguinis, 1994; Aguinis & Stone-Romero, 1997). When the assumption of equal error variances across groups is violated, it has been shown that tests of the differences in the regression slopes cannot be clearly interpreted. As a result, the F test could be either too conservative or liberal (Stone & Hollenbeck, 1989). Researchers often avoid the use of multiplicative interactive terms due to problems of interpretation (Friedrich, 1982). In fact, those that use multiplicative interactions must be careful in interpretation (Friedrich, 1982; Kutner et al., 2004). When there is a significant interaction term, the meaning of the main effect is no longer the same as if no interaction effect was detected. The main effect is now dependent on the level of the other, multiplicative interaction predictor variable(s) in the interaction (Kutner et al., 2004).

Methodological Rigor of OLS Regression Studies in Mainstream Marketing 395

Criterion 24: Do the authors avoid making assertions of practical significance based on coefficients that are not statistically significant?

Criterion 23: Are the authors clear on and able to express what constitutes practical – rather than statistical – significance?

Criterion 22: If standardized coefficients are reported, do the authors interpret them within the model?

Criterion 21: Do the authors report standardized coefficients within the model when necessary?

Criterion 20: Are the coefficients of the model managerially interpretable?

Criteria

Remarks Claims have been made that much marketing research has sacrificed relevance at the expense of rigor (Sheth et al., 1988). Therefore, it is incumbent upon researchers to use coefficients that can be interpreted by managers in a meaningful way. We have argued here that treating non-metric scales such as a Likert scale in the same fashion as metric scales is not a valid practice as the interpretation of the coefficients based on non-metric scales are not easily interpretable. Some marketing scholars report unstandardized coefficients, others report standardized coefficients, and still more report both. If coefficients are in different units, then it is essential to use standardized coefficients to enable comparison. Standardized coefficients allow for comparison of coefficients within a model. Therefore, one would expect reporting standardized coefficients would interpret them within the context of the overall model. The argument has been made that a statistically significant coefficient is not necessarily practically significant. In interpreting results, author should bear in mind that a statistically significant coefficient only indicates the influence on the dependent by one unit increase in the independent variable as different from zero. This does not necessarily mean that the effect is practically significant. Even though statistical significance does not necessarily mean practical significance, we cannot infer that insignificant coefficients imply practical significance.


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Table 2. Results of Consensus Evaluations across Assessment Criteria. Assessment Criteria Do the Authors:

C1. Specify what type of regression was used? C2. Report the first and second moments for all regression variables included? C3. Report ‘‘F ’’ statistics or p-values for the general linear relation? C4. Report all ‘‘t’’ statistics, standard errors or p-values? C5. Report adjusted R2 in multiple regressions? C6. Use enough sample size to avoid overfitting problem? C7. Acknowledge possibility of sample size artifact when n is greater than 1,000? C8. State the power of the test? C9. Provide evidence of the model’s goodness-of-fit? C10. Establish residual normality when sample size is small? C11. Conduct tests or control for the problem of multicollinearity? C12. Properly address longitudinal considerations? C13. Clarify splitting criteria when using split sample to test moderation? C14. Establish significant difference of means on moderating variable when split sample by median? C15. Conduct a Chow test to establish the difference of slope of regression? C16. Take into consideration possible reduced statistical power when using interaction terms to test moderation? C17. When using interaction terms involving categorical variables, establish the equality of sample size across levels? C18. When using interaction terms involving categorical variables, establish the equality of error variances across levels? C19. Refrain from making assertions about main effects when they have a significant interaction effect or provide additional evidence of the main effects?

Total Number of Articles for which the Question is Applicable

Percent of Articles Meeting the Criterion

83 83

37.3 49.4

83

62.7

83

97.6

81

53.1

82

87.8

12

0

46 83

10.9 7.2

2

0

45

51.1

12

66.7

7

100.0

6

33.3

7

28.6

26

15.4

12

8.3

12

0

31

41.9

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Table 2. (Continued ) Assessment Criteria Do the Authors:

C20. Use coefficients that are managerially interpretable? C21. Report standardized coefficients within the model when necessary? C22. Interpret the standardized coefficients within the model? C23. Clarify and express what constitutes practical (rather than statistical) significance? C24. Avoid asserting practical significance when coefficients are statistically insignificant?

Total Number of Articles for which the Question is Applicable

Percent of Articles Meeting the Criterion

82

19.5

21

61.9

42

28.6

81

28.4

79

100.0

KEY ISSUES IN THE APPLICATION OF OLS REGRESSION On the basis of previous assessments in the literature, we focus on five key issues in the use of OLS regression (Mason & Perreault, 1991; McCloskey & Ziliak, 1996): (1) unambiguous reporting of model fit and hypothesis testing; (2) sample size and power; (3) use of diagnostic tests; (4) moderation analysis; and (5) interpretation of results. All require analysis of both subjective and objective criteria.

Unambiguous Reporting of Model Fit and Hypothesis Testing Certain minimum requirements exist with regard to reporting that are essential in regression studies. We contend that these minimum requirements include: estimation technique, descriptive statistics, model goodnessof-fit (via F-statistic and adjusted R2), and individual significance statistics for coefficients. Only 37% of the articles reveal the estimation procedure used (C1). Though the JM authors state that their study was based on regression, precise specification of the estimation method was neglected in two-thirds of the analyses. JM authors chose not to be generous in the provision of descriptive statistics, with only 49% of articles providing basic descriptive


Table 3. List of Journal of Marketing Articles Studied. 1990 Aaker and Keller Noordewier, John, and Nevin Kotabe Narver and Slater 1991 Walters Takada and Jain Bolton and Drew Tanner, Hunt, and Eppright 1992 Goolsby and Hunt Oliva, Oliver, and MacMillan 1993 Bucklin and Sengupta Jaworski, Stathakopoulos, and Krishnan Jaworski and Kohli Helsen, Jedidi, and DeSarbo Moorman, Deshpande, and Zaltman Cravens, Ingram, LaForge, and Young 1994 Heide Ganesan Slater and Narver Kohli and Jaworski 1995 Venkatesh, Kohli, and Zaltman Gundlach, Achrol, and Mentzer Anderson and Robertson Robertson, Eliashberg, and Rymon Agrawal and Kamakura Bhattacharya, Rao, and Glynn 1996 Challagalla and Shervani Polly, Siddarth, Siegel, Haddix, Merritt, Giovino, and Eriksen Narasimhan, Neslin, and Sen Zeithaml, Berry, and Parasuraman Urbany, Kalapurakal, and Dickson Ramaswami Frazier and Lassar

1997 Song and Parry Eliashberg and Shugan Smith and Cooper-Martin 1998 Mittal, Ross, and Baldasare Murry and Heide Henderson and Cote Sparks and Hunt Moorman and Miner Money, Gilly, and Graham 1999 Homburg, Workman, and Krohmer Capron and Hulland Kraft Weiss, Anderson, and MacInnis 2000 Reinartz and Kumar Sethi Sivadas and Dwyer Matsuno and Mentzer Lehmann and Weinberg Brown, Dev, and Lee 2001 Wathne, Biong, and Heide Sarin and Mahajan Antia and Frazier Hewett and Bearden 2002 Geyskens, Gielens, and Dekimpe Atuahene-Gima and Li Balasubramanian and Cole Joseph and Richardson Goldenberg, Libai, and Muller McAlexander, Schouten, and Koening Srinivasan, Lilien, and Rangaswamy 2003 Basuroy, Chatterjee, and Ravid Ailawadi, Lehmann, and Neslin Bendapudi and Leone Heide

399

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Table 3. (Continued ) Maxham and Netemeyer Sprott, Manning, and Miyazaki Vorhies and Morgan

Atuahene-Gima and Murray Joshi and Sharma Rao, Agarwal, and Dahlhoff

2004 Inman, Shankar, and Ferraro Wathne and Heide Johnson, Sohi, and Grewal Klein, Smith, and John Lichtenstein, Drumright, and Braig

2005 Fox and Hoch Vorhies and Morgan Klein and Ahluwalia Wernerfelt Kirca, Jayachandran, and Bearden

statistics (C2). Space limitations may have impacted the exclusion of first and second moments (mean and standard deviation) for variables included in regression equations. However, inclusion of these key indicators is not only good practice for intuitive assessment of models employing OLS, but it is also important in its replication – an important characteristic in scientific inquiry. Goodness-of-fit in the form of the F-statistic was reported in 63% of the articles (C3). However, only 53% report adjusted R2 values (C5). As compared to our findings concerning goodness-of-fit measures, JM authors seem to pay greater attention to statistics related to hypothesis testing. Almost all articles (98%) report t-statistics, p-values, or standard errors, thus allowing for interpretation of statistical significance (C4). This evidence may lead to the conclusion that researchers were more focused on individual hypotheses than on overall models. This may explain the greater frequency in reporting of t-statistics as compared to the reporting of F-statistics. This is most likely not a reflection of hypotheses becoming the centerpiece of empirical research in marketing, but rather a focus to establish the relevance of hypotheses. Scholars should be aware that the basis of any hypothesis testing has to be the existence of a strong model reflecting the underlying theory. Without a strong model, only a set of conjectures are stated in a bundle of hypotheses.

Sample Size and Power Two principal issues were addressed with respect to samples: the actual size of the sample and the power of the test. Sample size is one of the most important elements within a researcher’s control (Hair, Anderson, Tatham, & Black, 1998). Indeed, ‘‘too large’’ or ‘‘too small’’ of a sample constitute


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potential problems for the researcher. On the one hand, researchers aim to avoid too large of a sample in their statistical testing so that statistical significance does not become an automatic outcome of resultant variance reduction. On the other hand, scholars attempt to work with a sizable sample in order not to degrade the estimation and testing methods while they improve the model’s overall statistical power.2 Our analysis reveals that most JM authors (88%) protected their study from overfitting by using a sample size at least ten times as large as the number of independent variables (C6). Only two featured sample sizes that are ‘‘too small’’ (less than 5 data points per independent variable). At the other extreme, 12 articles had very large samples (greater than 1,000). Neither of the two articles with a small sample expressed concern about the quality of results, and none of the 12 OLS articles with a very large sample acknowledged that their findings might be an artifact of the sample size. Of the articles with null hypotheses not rejected, only 11% mentioned the power of the test (C8). To draw attention to the problem, Wathne, Biong, and Heide (2001) caution readers that, ‘‘Although the relative importance measures are unaffected by sample size, careful attention should be paid to the various significance tests, because a lack of hypothesis support may be attributable to a lack of statistical power’’ (p. 62). Without pointing out the potential influence of statistical power in results section of the model’s hypothesis testing, readers may reach an erroneous conclusion with respect to the practical significance of the findings. There is no easy resolution to the sample size selection and power issue. The issue is a consideration of a trade-off and not a problem of using a ‘‘small’’ or ‘‘large’’ sample size per se. Such a balance needs to be addressed either by interpretation of the results or by adding more statistical tests to demonstrate the robustness of the findings. For a small sample size, this means that the authors must be cautious about the residuals of the regression and the automatic assumption of distributional characteristics such as normality. In addition, they should acknowledge that they might be overfitting the data. More data points imply more information. The advantage of a large sample should not blind authors. In the reflexive penchant for abundance, the investigation must also recognize the resultant defects. A good study is cognizant of ill consequences from every favorable element so that the resultant view will enable readers to judge each trade-off as an imperfect decision choice. The issue of not specifying the power of the test is noteworthy. Lack of power may limit the ability of tests to find statistical significance and may

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explain why theoretically supported alternate hypotheses are not ‘‘accepted.’’ The fact that only 11% of articles with unsupported hypotheses discuss the topic of statistical power suggests that the authors may not have tested for power. If, in fact, those authors did calculate statistical power and overlooked the issues related to power, then the possibility that power-loss could be a potential reason as to why significance was not found in the study. These findings with respect to sample size and power implementation produce two warnings. First, for every benefit in a research process, there is a cost involved. For example, when an extraordinarily large sample is employed, the price is the almost automatic rejection of the null hypothesis. Researchers must adopt a dialectical approach and view every decision as a double-sided choice. Second, results concerning the power and sample size criteria employed are revealing about the use of OLS in the marketing literature. Their effective levels are deemed critically important based on careful consideration of the underlying scientific (not statistical) goals of the study. Statistical considerations typically should be used to identify a plan that is effective in meeting scientific goals.

Use of Diagnostic Tests The Gauss–Markov theorem outlines the five main assumptions underlying OLS as follows: (1) the parameters of the model are linear; (2) the sample used is randomly drawn; (3) the expected value of the overall error term is zero; (4) there are no exact linear relationships among the independent variables; and (5) the variance of the overall error term is the same regardless of the different combinations of independent variables possible (Wooldridge, 2003). These assumptions necessitate the use of certain diagnostic tests to confirm that the assumptions hold. However, when the JM studies are analyzed with respect to the use of diagnostics to fulfill the assumptions of parameter linearity and homoscedasticity, we find that only 7% of the articles provided examples of the appropriate diagnostic tests (C9). We then examined JM articles with hypotheses lacking empirical support to discover whether tests of multicollinearity were conducted.3 Only 51% of the applicable articles addressed multicollinearity in an appropriate manner (C11). This typically would be accomplished through the use of variance inflation factors or the tolerance values.


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Though some researchers resorted to the use of the correlation matrix for this purpose, the correlation matrix does not show the existence (or lack) of multicollinearity. Such an examination only exhibits the correlation between any two variables, and cannot detect the collinearity of three or more variables in the absence of indications showing a lack of collinearity between two variables (Kennedy, 2003). Finally, for those studies that make use of longitudinal data, we explored whether appropriate diagnostic measures are taken. The results show that of the 12 articles that employ time-series data, 67% took into consideration issues pertaining to sequential dependence (C12). Multicollinearity is a major reason for failing to provide support for theoretically supported hypotheses. Potentially, it may inflate the standard errors (Mason & Perreault, 1991) in OLS regression which, in turn, may cause a coefficient to lack statistical significance. In addition, the presence of multicollinearity may lead to coefficients in a direction opposite of established theory. In either form, clearly multicollinearity can distort results. Therefore, it is incumbent upon scholars to test for the existence of multicollinearity using either variance inflation factors or tolerance values. We caution that the research process must be perceived as a two-level process. At the first level, data analysis techniques are performed, and at the second level, they are doubted and critiqued. Researchers may be too quick to assume robustness without the use of suitable tools to tighten their analysis. The studies surveyed typically do not discuss techniques such as a residual scatter-plot analysis to test for non-linearity of the model parameters (Hair et al., 1998). Similarly, neither the Goldfeld–Quandt test nor the Breusch–Pagan test is employed widely for variance homogeneity (Kennedy, 2003; Kutner, Nachtsheim, & Neter, 2004; Wooldridge, 2003). A good study should be made to deliberate effort toward dialectical thinking and a two-tier analysis in order to avoid these types of problems.

Moderation Analysis OLS regression is also a powerful and dominant tool to detect effects in which a moderator variable interacts with independent variables to explain the variance in the dependent variable (Stone-Romero & Anderson, 1994). Two general approaches are popular in testing for moderation effects using OLS regression. The first involves splitting the sample observations into subgroups according to the score of the moderator variable. Another approach employs product terms in the regression and establishes

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moderation effects by examining the statistical significance of the product term’s coefficient. Of the studies that used the split-sample approach, all clearly stated their splitting criteria (100%). Of the six articles that used the median-split approach to test for moderation, only 33% established the significance of the means in the subgroups along the moderating variable scores (C14). In such cases, a formal Chow test is typically required to establish the statistical significance of the slope parameters of the different subgroups. Of the seven articles that used the split-sample approach, 29% conducted a Chow (or similar) test to claim the existence of the moderating effects (C15). Detecting moderation effects by employing product terms in the regression equations has its own problems. The most notable one is the loss of statistical power in which case a high Type II error rate will occur (Aguinis, 2002). Of the 26 articles that employed a product term to analyze the moderation effect, only 15% explicitly considered the power function of the analysis (C16). When the product term involves categorical variables, the equality of sample sizes and error variances across the different levels of the moderating variable is an important requirement to ensure the power of the test. Of the 12 articles with a product term involving categorical variables, only one provided sufficient information on the equality of the sample size across subgroups and no articles checked for the equality of the error variances (C18). To build theories, most marketing scholars adopt a vantage point close to the contingency school. The contingency school is a class of theories that contend significance of situational factors in moderating the relationships between variables. In other words, there is no one universal relationship between A and B, but the relationship is shaped under the effect(s) of C and other effects. Such an approach to address contextual complexity is a suitable method for a scientific discipline. Techniques to implement this view, however, are deeply problematic in practice. It seems that marketing scholars are on the right track with their choice of the contingent perspective as part of their conceptualization.

Accurate Interpretation of Results Interpretation issues are addressed in two ways: those with methodological considerations and those with practical considerations. On the methodological side, we examined the interpretation of results involving interactions, and the reporting of standardized versus unstandardized coefficients. On the


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practical side, we were concerned with analyzing how managerially interpretable the coefficients are, and whether or not the authors were clear as to the differences between practical and statistical significance. In the study, 31 articles had a statistically significant interaction effect. However, in only 42% of these cases did the author(s) refrain from making assertions about main effects only when they have a statistically significant interaction, or provide additional evidence of the main effects (C19). Also, 62% of the regressions reported standardized coefficients to compare the relative importance of independent variables (C21). However, of the 42 articles in which standardized coefficients were provided, only 29% were actually used for comparison. In addition, the analysis shows that only 20% of the OLS regressions had a set of managerially interpretable coefficients (i.e., as those variables that were objectively measured; that is, not through the use of a Likert scale), while another 41% of the OLS regressions had some managerially interpretable and some non-interpretable coefficients. Finally, the results reveal that only 28% of the articles in the study clearly differentiate between practical and statistical significance (C23). The careful interpretation of interaction effects is crucial to ensure that proper conclusions may be reached from the analysis. If an interaction effect is found to be statistically significant, then the meaning of the main effect is now in the context of the interaction. That is to say, the main effect is dependent upon the level of the other variable in the interaction (Kutner et al., 2004). Thus, in the presence of statistically significant interactions, it is typically not appropriate to interpret the related main effects without referring to the interaction effect. Rather, the complete influence of an independent variable must include both the main effect as well as the interaction effect (Hair et al., 1998). The second issue is that of standardized versus unstandardized coefficients. When authors try to compare the relative importance of the independent variables in explaining the variation of the dependent variable, an unstandardized coefficient is problematic unless all independent variables are measured in the same units. Authors that use standardized coefficients render the scale of individual predictor variables irrelevant by standardizing the coefficients based on each variable’s standard deviation. Thus, independent variables may be compared without regard for the units originally employed at data entry (Wooldridge, 2003). The first of the practical issues that we analyzed related to how managerially interpretable the coefficients were. We believe that the issue of managerial interpretability is crucial to bridge the gap between scholars and practitioners. Often, research in marketing appears to be overrun with

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abstract constructs. As a result, the applicability of the models to the marketing practitioner may be limited. The last issue of interpretability that we examined is the issue of statistical significance versus practical significance (McCloskey & Ziliak, 1996). This concern stems from researchers perhaps being overly reliant upon statistical significance in deriving their conclusions without devoting enough attention to the practical significance of the coefficient. Statistical significance tells us whether a coefficient’s distance from zero is probabilistically sizable in comparison to the variance in the sample. The potential flaw of relying only on statistical significance is that the researcher can arrive at insignificance or significance by, for example, selecting an appropriate sample size. With a large sample, the variance will be small, forcing the test results toward significance. Practical significance, on the other hand, examines how substantial the magnitudes are from a practical point of view. It considers if these magnitudes matter in terms of outcomes of pertinent decisions. The current study suggests a certain amount of ambiguity with regard to this issue.

POST-HOC ANALYSIS We analyzed the data for trends in the use of OLS regression over time using Poisson means over four distinct time periods4 (Tarone, 1982). In testing, our motivation for employing Tarone’s approach is two-fold: (1) the data are historical in nature and (2) we cannot presume distributional characteristics and form of trend for our compiled information. This approach is considered robust given that it is known to be asymptotically optimal against any smooth monotone alternative (Tarone, 1982). The test statistic Y2 is computed for each criterion (see Tarone, 1982, for the exact steps to follow; Aczel & Sounderpandian, 2002). Given that the statistic is asymptotically distributed as a w2 random variable with one degree of freedom (Tarone, 1982, p. 458), we tabulated the results in Table 4. Also presented are some special cases, which result from the nature of the data. Tests with sparse count data often lead to inconclusive statistics. Due to a lack of observations, Y2 statistic was not computable for C7, C10, and C18. In addition, Y2 statistic calculations are inconclusive resulting from only affirmation of specific criteria (C13 and C24) with little variation across the time surveyed. As can be seen in Table 4, only two upward trends were identified in our study: C2 and C12. Thus, we can conclude that the use of first and second

C1. Do the authors state what type of regression was used? C2. Are the first and second moments for all regression variables included? C3. Does the paper report ‘‘F ’’ statistics or p-values for the general linear relation? C4. Does the paper report all ‘‘t’’ statistics, standard errors, or p-values? C5. In a multiple regression, did the authors report adjusted R2? C6. Based on a combination of the number of independent variables and sample size, are readers assured that the authors are not guilty of overfitting? C7. If the sample size is large, do authors acknowledge that significance may be an artifact of large sample size? C8. For null hypotheses not rejected, do the authors state the power of the test? C9. Do the authors provide evidence of the model’s goodness-of-fit? If not, do they at least indicate that they performed such tests and were satisfied with the results? C10. If using a small sample and relying on t-, F-, or w2 tests, have the authors established that the residuals are normally distributed or at least close to normally distributed?

Criteria

Time Dimension Analysis.

2/13 (15.4%) 2/20 (10.0%)

0/0

0/0

0/1 (0%)

0/2 (0%) 1/9 (11.1%) 2/16 (12.5%)

10/20 (50.0%) 11/20 (55.0%) 17/20 (85.0%) 20/20 (100%) 10/20 (50.0%) 19/20 (95.0%)

1994–1997

7/16 (43.8%) 3/16 (18.8%) 5/16 (31.3%) 16/16 (100%) 7/15 (46.7%) 15/16 (93.8%)

1990–1993

0/1 (0%)

1/13 (7.7%) 2/20 (10.0%)

0/2 (0%)

4/20 (20.0%) 12/20 (60.0%) 14/20 (70.0%) 19/20 (95.0%) 11/20 (55.0%) 16/19 (84.2%)

1998–2001

0/1 (0%)

1/11 (9.1%) 0/27 (0%)

0/7 (0%)

10/27 (37.0%) 15/27 (55.6%) 16/27 (59.3%) 26/27 (96.3%) 15/26 (57.7%) 22/27 (84.2%)

2002–2005

‘‘Yes’’ Count/Total Number of Articles (Where Applicable) Period Covered

Table 4.

Upward trend No trend No trend No trend No trend

6.68 3.46 2.08 2.91 0.90

No trend

1.20

No value

No trend

0.17

No value

No trend

Trend

0.06

Significance Test (Y2)


C11. If theoretically supported hypotheses are not supported statistically, have tests been conducted for multicollinearity? C12. If the data covers a span of time, have the authors dealt with longitudinal considerations? C13. For articles using split sample to test moderation effects, are the authors clear on criterion used to split the sample? C14. For regressions using split sample by median to test moderation effects, do the authors establish that the groups are statistically different on means of the moderating variable? C15. For articles using split sample to test moderation effects and to claim moderating effects, do the authors conduct a formal Chow test or tests of similar effect? C16. For articles using interaction to test moderation effects, do the authors take into consideration any possible reduced power? C17. When moderation analyses are conducted on categorical interaction variables, do the authors establish that there are equal sample sizes across levels?

Criteria

0/1 (0%)

0/5 (0%)

1/1 (100%)

0/1 (0%)

1/1 (100%)

0/3 (0%)

3/9 (33.3%)

1990–1993

0/2 (0%)

2/5 (40.0%)

0/3 (0%)

2/3 (66.7%)

3/3 (100%)

1/2 (50.0%)

6/14 (42.9%)

1994–1997

0/4 (0%)

1/7 (14.3%)

1/3 (33.3%)

0/2 (0%)

3/3 (100%)

1/1 (100%)

6/12 (50.0%)

1998–2001

1/5 (20.0%)

1/9 (11.1%)

0/0

0/0

0/0

6/6 (100%)

8/10 (80.0%)

2002–2005

‘‘Yes’’ Count/Total Number of Articles (Where Applicable) Period Covered


1.33

0.05

No trend

No trend

No trend

No trend

o0.01

0.18

No trend

Upward trend

No trend

Trend

0.21

5.39

1.00

Significance Test (Y2)

408 Z. SEYDA DELIGONUL ET AL.

C18. When moderation analyses are conducted on categorical interaction variables, do the authors establish that there are equal error variances across subgroups? C19. Do the authors either refrain from making assertions about main effects when they have a significant interaction or provide additional evidence of main effects? C20. Are the coefficients of the model managerially interpretable? C21. Do the authors report standardized coefficients within the model when necessary? C22. If standardized coefficients are reported, do the authors interpret them within the model? C23. Are the authors clear on and able to express what constitutes practical – rather than statistical –significance? C24. Do the authors avoid making assertions of practical significance based on coefficients that are not statistically significant? 2/9 (22.2%) 6/19 (31.6%)

5/9 (55.6%) 6/16 (37.5%) 19/19 (100%)

3/20 (15.0%) 4/7 (57.1%)

4/16 (25.0%) 5/6 (83.3%)

15/15 (100%)

4/5 (80.0%)

0/2 (0%)

4/5 (80.0%)

0/1 (0%)

18/18 (100%)

4/19 (21.1%)

3/11 (27.3%)

2/19 (10.5%) 2/4 (50.0%)

2/8 (25.0%)

0/4 (0%)

27/27 (100%)

7/27 (25.9%)

2/13 (15.4%)

7/27 (25.9%) 2/4 (50.0%)

3/13 (23.1%)

0/5 (0%)

3.1

0.01

No trend

No trend

No trend

No trend

0.94

1.07

No trend

No trend

0.80

2.52

No value


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moments (mean and standard deviation, respectively) for all regression variables (C2) has improved over the 15-year time period. Also, progress has been made in the application of longitudinal studies (C12). However, while no trend was found for the rest of the criteria used in our assessment of the marketing literature, it is important to note that tests for multicollinearity (C11) have improved from 33% to 80% over the time surveyed. This indicates an increased awareness concerning the required diagnostics associated with implementing OLS regression models. Also, promising results may be discussed for criteria already in high compliance (e.g., above 80%) with the parameters of this study: C4, C6, C13, and C24. Though we did not find an upward trend with these criteria, we can infer that proper implementation has been conducted when reporting the statistical significance of coefficients in a model (C4), fitting data (C6), providing clear reasons for testing moderation by split sample (C13), and avoiding practical inferences based on statistically insignificant coefficients (C24). Three criteria have shown a marked decline: discussion concerning main effects in interaction models (C19), reporting standardized coefficients when necessary (C21), and interpretation of standardized coefficients (C22). Even though the Y2 statistic was not found to be significant, the decline observed for these two criteria suggest that particular improvement is needed in these criteria for future research.

PRESCRIPTIVE SUGGESTIONS The present analysis is based on what has appeared in the published articles of the JM. It is possible that many cases discussed above conducted certain tests. However, due to space limitations, these methodological details may have been excluded. Nevertheless, we propose a set of guidelines for assessing OLS regression analysis. Though not completely comprehensive, these suggestions address topics of highest priority for future studies employing OLS (Hair et al., 1998; Kennedy, 1998; Kutner et al., 2004; Mason & Perreault, 1991; Pindyck & Rubinfeld, 1998; Wooldridge, 2003). While improvement has been noted on some of these topics, a comprehensive set of steps is included for reference. These steps may be categorized into five separate groups addressing particular topics related to the use of regression: (a) general reporting of empirical contents; (b) sample size; (c) diagnostic tests and remedies; (d) moderation; and (e) interpretation.


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Reporting The distribution of variables included in an OLS model is generally described by their means and standard deviations (Pindyck & Rubinfeld, 1998). Since each of these two descriptive statistics is a representation of the sample derived for a particular study, their inclusion is important for understanding the underlying distribution properties of any variable included in the model (Pindyck & Rubinfeld, 1998). Therefore, each of these descriptive statistics must be included to assess the average of the outcomes obtained and dispersion of both independent and dependent variables in an OLS model. Reporting the t-statistic of an independent variable is equally important when employing OLS as an estimation technique. Since it notes the statistical significance of a single parameter within an estimated model, this statistic is necessary to determine whether a particular hypothesis is supported by the estimated model (Pindyck & Rubinfeld, 1998; Wooldridge, 2003). Generally accepted significance levels are 0.01 and 0.05 (Pindyck & Rubinfeld, 1998; Wooldridge, 2003), though less stringent models include 0.10, as well. Pindyck and Rubinfeld (1998) indicate that including exact p-values (e.g., 0.07) in a model may be more useful to the researcher than indications of statistical significance at particular levels (e.g., 0.01 or 0.05). Whether the statistical significance of a parameter is reported by p-value, standard error, or t-statistic, is not paramount. However, the researcher must give some indication of a parameter’s statistical significance to assist with the interpretation of an OLS model. Likewise, reporting the F-statistic is equally essential with an OLS regression. Since it indicates a general statistical significance test of the overall model, the F-statistic (or, its p-value) is typically included together with the R2 or adjusted R2 (Wooldridge, 2003). Thus, by displaying this statistic, researchers are better able to assess the overall significance of the model itself. While the R2 of an OLS equation should always be included (Wooldridge, 2003), there are limitations to using only R2 as the coefficient of determination (Kutner et al., 2004; Pindyck & Rubinfeld, 1998). Adjusted R2 should not necessarily be used to replace the R2 statistic (Wooldridge, 2003), but an important reason to use the adjusted R2 statistic with an OLS model is that – contrary to R2 – it penalizes OLS models employing more independent variables (Hair et al., 1998; Kennedy, 1998; Kutner et al., 2004; Pindyck & Rubinfeld, 1998; Wooldridge, 2003). Since marketing researchers typically provide multiple variations of independent variables and compare

412


OLS models as a result, the inclusion of both a model’s R2 and adjusted R2 would allow researchers to more directly evaluate separate models.

Sample Size Recommendations regarding sample size address issues with small samples, large samples, and the power of tests that may be performed on a model. Considered one of the most important elements within a researcher’s control (Hair et al., 1998), the role of a project’s sample size may have important influence on the findings discovered. We recommend that researchers clearly report sample size for their tests. This is especially important when authors use different sample sizes in the same study to test more than one regression equation. Simply reporting the overall sample size is not sufficient for proper interpretation of results. In addition, future researchers should provide further evidence of normal (or, near-normal) distribution of the data used or its residuals (Hair et al., 1998; Kutner et al., 2004; Pindyck & Rubinfeld, 1998).

Diagnostic Tests We also propose that authors need to address the diagnosis issue of an OLS model for a model’s lack of linearity, heteroscedasticity, multicollinearity, and autocorrelation (Hair et al., 1998; Kennedy, 1998; Kutner et al., 2004; Pindyck & Rubinfeld, 1998; Wooldridge, 2003). This topic is covered extensively in the traditional marketing methods literature. As such, we will not consider the topic in great detail here.

Moderation When a moderation effect is tested by means of a split sample, authors should clearly elaborate on the criteria used to create the subgroups and preferably provide some theoretical justification for the choice. As mentioned earlier, a median split and a mean split approach may well result in both different subgroup sample sizes as well as different moderation effect conclusions. When split by median is employed, it is essential to test for the significance of the means of the moderating variables across groups so to ensure enough power to detect the moderating effect.


413

When product terms are used in a moderated multiple regression, authors must check the equality of both the sample sizes and the equality of error variances across the subgroups so to ensure the statistical power of the study. When a moderating effect fails to emerge through this approach, caution should be added in the model’s interpretation.

Interpretation Particular interpretation of OLS models may be categorized into two distinct topics concerning standardized coefficients and interaction effects. Important with the use of different units among independent variables, standardized coefficients allow for the description of relative importance of the independent variables included (Hair et al., 1998; Pindyck & Rubinfeld, 1998). By rendering the scale of individual predictor variables irrelevant with standardized coefficients, independent variables may be compared more definitively (Wooldridge, 2003). In addition, the interpretation of interaction effects in OLS models is important for researchers. Once an interaction term is introduced that originally had only main effects, the original independent variable(s) cannot be interpreted alone (Pindyck & Rubinfeld, 1998). Rather, the complete influence of an independent variable must include both the main effect as well as the interaction effect (Hair et al., 1998).

CONCLUSION We conclude by commenting on four main topics. First, we offer some thoughts about the general status of OLS-related research. Second, we briefly discuss improvements in the application of OLS in marketing research. Third, we introduce some possible areas for improvement. Finally, we provide some concluding thoughts with regard to OLS in marketing research.

General Status Overall, scholars in marketing tend to use OLS competently. In fact, the present results closely follow those from other fields – specifically economics (McCloskey & Ziliak, 1996). While the time period of this study differs,

414


a comparison of related survey items shows remarkable similarity in results. For example, akin to marketing scholars, economists report power in less than one-sixth of the sample. In addition, the distinction of statistical and practical significance is recognized by one-third of the studies in both fields. Also, articles in economics report descriptive statistics in one-third of the sample. Such resemblance between these fields may be attributed to the origin of the two disciplines, the background of each field’s scholars, or a similar level of rigor inherent in each field. These parallels are curious observations which deserve further investigation.

Usage Transformation OLS as a methodological tool appears to be used more effectively in marketing. The reporting of interpretative aspects has evolved over the years particularly with regard to basic considerations. Over the time period studied (1990–2005), an upward trend was noted for the application of multicollinearity tests with unsupported hypotheses (C11) in OLS studies. In addition, considerations pertaining to longitudinal relationships (C12) tended to have an upward trend. Such interest and improvement in time series studies may be a result of having access to more sophisticated statistical techniques and of improved data gathering.

Improvement Opportunities The remaining criteria showing considerably less change and may be grouped in three different categories: (a) fundamental reporting concerns; (b) moderation study topics; and (c) various OLS model interpretation issues. First, less improvement has been made on a wide array of criteria ranging from the clear statement of the type of regression used (C1) to an indication of the OLS model’s power when theoretically posited hypotheses are not supported (C8). In addition to these two particular criteria, general improvement is called for in the indication of the statistical significance of general linear relationships (C3), of a model’s adjusted R2 (C5), that significance may be a result of large sample size (C8), that goodness-of-fit tests were performed (C9), and that residuals are normally distributed (C10). In fact, with nearly 98% of articles utilizing this criterion, the reporting of coefficient statistical significance (C4) has remained quite high. Also, we observed that almost 88% of the marketing studies avoided overfitting.


415

Taken together, these two findings in themselves indicate marketing scholars seem to be applying OLS reasonably well. With respect to studies employing moderation, an equally compelling issue relates to the use of precise information concerning split samples (C13). This indicates a fundamental understanding of OLS. However, we offer caution on several issues: a requirement is that groups resulting from split samples have statistically different means (C14); a Chow or similar statistical test has been performed to establish that the slopes of the groups are different (C15); reduced power has been considered in contexts using moderation (C16); and equal sample sizes (C17) and error variances (C18) are established with categorical interaction variables. By considering and improving on these issues, marketing scholars will be better equipped to enhance the rigor of OLS studies employing moderation analyses. The third category addressing various OLS model interpretation issues has one criterion that has been implemented well thus far. The avoidance of assertions concerning practical significance with statistically insignificance coefficients (C24) indicates that there is a firm understanding of the basis for discussion in OLS studies: statistical significance. However, we call on authors to make adjustments in their application of OLS in two areas: (1) by including managerially interpretable coefficients (C20) and (2) being much more clear on the relevance of statistical and practical significance (C23). In general, this call follows recent discussion in the marketing literature to structure future studies to be more relevant to practitioners.

Final Thoughts From the Kuhnian perspective, normal science (with marketing as an exemplar) is a science where knowledge gradually accumulates as scholars generate solutions to extant puzzles. Theories respond to peculiarities of a current dilemma posed by previous and current studies. However, as time progresses, scientific inquiry focuses on anomalies which end up becoming mismatches between the current best models available and tangible observation. The tensions that arise from this failure to predict results become equally potent in driving new adjustments to the dominant views of the field. Although the nature of knowledge advancement in normal science has long been under scrutiny, techniques that drive the progress of science have received undeservedly less attention. As knowledge accumulates in a normal science, what happens to the techniques of inquiry? Over time, do they

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improve, worsen, or remain the same? This study argues and demonstrates that similar progress occurs in research methodologies employed by marketing scholars. In their quest for scholarship, investigators start from generic techniques. A tool such as OLS regression is sufficient for most early empirical work. Further theorizing and resulting anomalies in knowledge compel scholars to adjust the modus operandi. Thus, in time, adaptations and alterations from the core method drive contingent questions and emergent methods with increased rigor. For example, SEM has become an attempt to resolve the quest for causality, logistic regression for scale problems with the dependent variable, and partial least squares regression for particular cases of small sample sizes and non-linearity. Simply put, derivations from a generic technique such as OLS multiply with the needs of the field. In a discipline such as marketing, the tools available to scholars continuously improve and develop to fit the demands of scholarship. However, as newer tools such as SEM appear, the generic version does not vanish. Based on this study, OLS remains as a pervasive tool with staying power in the field of marketing. Moreover, its use tends to be more selective to target its best application. OLS will continue to occupy an important place in empirical work. With ongoing refinement of its use, adherence to the prescriptive guidelines offered here, and the precision of its application, the marketing discipline will continue to benefit from its use.

NOTES 1. We chose not to include other forms of estimation methods (e.g., maximum likelihood estimation, generalized least squares, etc.) partly due to the lack of frequency of use and to avoid comparison difficulties. 2. The power of a test is defined as the probability of rejecting the null hypothesis given that the null hypothesis is false. If the power of a test is .9 then the likelihood of choosing H1 (alternative hypothesis), given that H0 (null hypothesis) is false is .9. A lack of power in OLS testing may hamper selecting the alternative hypothesis when the alternative should be selected. 3. We treated each OLS article as one, assuming that any test of multicollinearity would be conducted for all variables in the equation. 4. Testing of sparse data for trends is most challenging. In our case, it was appropriate to use a special test, which has its origins in Cochran’s (1954) work about trends in Poisson count processes. When sequential data need to be analyzed, this test deals with the hypothesis of ‘‘no change in the mean’’ over multiple time windows. To derive a statistic, the test assumes each count is distributed as a Poisson random variable with mean l that conforms to any twice-differentiable


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monotone-function over a closed interval. In other words, the test recognizes any trend that can be expressed as a function of a linear function. By requiring twice differentiable, the analysis excludes some cases such as a step function, but includes a wide variety of forms including curves. The use of this test in our study is easily justifiable because the test is designed for count processes and is relatively effective with sparse data sets. In addition, the test is known to be asymptotically optimal against any smooth monotone alternative (Tarone, 1982).

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