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International market selection process: an investigation of the relevance of business operating environment.
Subject:
Business enterprises (Research)
Author:
Rahman, Syed H.
Pub Date:
01/01/2006
Publication:
Name: Journal of International Business Research Publisher: The DreamCatchers Group, LLC Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2006 The DreamCatchers Group, LLC ISSN: 1544-0222
Issue:
Date: Jan, 2006 Source Volume: 5 Source Issue: 1
Topic:
Event Code: 310 Science & research
Product:
Product Code: 9912200 Venture Analysis
Geographic:
Geographic Scope: United States Geographic Code: 1USA United States

Accession Number:
166823581
Full Text:
ABSTRACT

Different researchers have recommended different decision frameworks for international market selection. As parts of those decision frameworks, most researchers have recommended for the evaluation of macro-environmental and business operating environmental variables. However, few attempts have been made so far to empirically test those frameworks. This study provides a partial test of those frameworks. Specifically, it looks at the host country's business operating environmental variables recommended by different researchers. Using both exploratory and confirmatory factor analysis techniques it identifies the operating environmental factors considered by the successful Australian international businesses in their international market selection process. Three constructs and their measurement variables identified through literature review has been tested. The constructs are: target country's cost indicators; structutral compatibility indicators and policy indicators.

INTRODUCTION

International marketing researchers (Kumar et al, 1993; Douglas and Craig, 1989 and 1992) have stressed the importance and the need for systematically evaluating and selecting potential foreign markets. A number of researchers have either developed decision frameworks (frequently referred as models in the literature) and methodologies for international market selection or applied existing ones (Moyer, 1968; Walvoord, 1980; Cavusgil, 1985; Vargas-Carcamo, 1986; Root, 1987; Walsh, 1993; Kumar et al 1993; Hoffman, 1997; Daniels and Radebaugh, 1998). These decision frameworks present the international market selection process as gradual and necessarily sequential. There is general agreement in the literature that: a screening process is desirable; and market size and level of economic development should be considered early on in the decision process for identifying potential opportunities (Goodnow and Hansz, 1972; Litvak and Banting, 1973; Cundiff and Hilger, 1984; Cavusgil, 1985; Connolly, 1987; Young et al., 1989; Ball and McCulloch, 1993; Papadoupoulos and Jansen, 1994; Daniels and Radebaugh, 1998; Rahman 2001).

Sources of macro-level criteria to be used in screening potential international markets as recommended by the above decision frameworks are primarily the macro-environment and the operating environment of the international market. The primary element of the macro-environment recommended for screening international markets are economic in nature. Most of the other evaluation criteria recommended are related to the market's operating environment, ie. existing infrastructure, accessibility, taxes and duties, and costs of entry.

However, limited empirical testing of these frameworks has been undertaken (Aulakh and Kotabe, 1992; Rahman 2001), with not much reported research having been carried out in Australia. As a part of the overall pursuit of developing a decision framework for international market selection process, this article attempts to identify the international market's operating environment constructs that are part of the overall framework. Specifically, the present study aims to address the following research questions: What, if any, international market's operating environment constructs are considered by the successful Australian international businesses in their international market selection process? What are the measurement scales of those constructs? Answers to these questions will be useful to corporate policymakers, and facilitate theory advancement in the field, particularly in developing an integrated overall decision framework for international market selection.

CONCEPTUAL FRAMEWORK

As Russow and Okoroafo (1996) states, " While descriptions of screening techniques exist, there is a good deal of disagreement about which criteria to use." (pp.47-64). The operating environmental constructs generally recommended by the researchers (Cavusgil, 1985; Walvoord, 1980; Root, 1994; Rahman 2001) can be grouped into three categories: (1) target country's cost indicators, (2) target country's structural compatibility indicators, and (3) target country's policy indicators.

All countries control exports and imports to some degree, providing both barriers to trade and support for certain domestically as well as foreign-produced goods and services. Barriers to trade include tariffs, non-tariff barriers and trade embargoes or sanctions. Tariffs have traditionally been used as barriers to international trade. International trade liberalisation during the last decade of this century has led to a significant reduction of tariff barriers. Therefore, governments have been increasingly using non-tariff barriers to protect some of their countries' industries, which they have identified as being unable to withstand free international competition. Both tariff and non-tariff barriers are designed to increase cost of marketing by an overseas marketer. In addition to the tariff and non-tariff barriers, there are other marketing costs that needs to be assessed including distribution and sales costs.

The international trade policy of a country's government provides a framework for exports, imports and foreign investment and therefore needs to be closely analysed by the international marketer. A government may also support or deter international business through its investment policy, ie, through the general rules governing legislation concerning domestic as well as foreign participation in the equity or ownership of firms of the country, pricing of products, and profit repatriation. One major contemporary concern of international marketers is the protection of their intellectual properties. The extent of such protection within the international target market has also been proposed as a consideration for international market selection process (Cavusgil, 1985).

The legal environment of a country, that is, the set of laws and systems to enforce those laws established by a society to govern its members behaviour, must also be assessed by the international marketer as this determines the political and legal viability of potential international market. Generally, important consideration is given to the structure of the existing legal system, relevant agreements and conventions that the country's government has signed, and a country's competition regulations. Overall, the compatibility of the legal system with the firm's home system needs to be closely analysed.

Cavusgil (1985) and Walvoord (1980) have recommended for assessment of political and legal environment and its compatibility to the home market for evaluating international market attractiveness. Most firms are unable to influence the political and legal environment of their markets directly, yet their opportunities for successful business conduct largely depend on the structure and content of that environment. A marketer serving international markets or planning to do so, therefore, has to assess carefully the political and legal environments of the markets served or under consideration to draw the appropriate managerial consequences.

Culture, defined as the standards of beliefs, perceptions, evaluation and behaviour shared by the members of a social group, strongly influences the behaviour of firm's consumers. Business people are also members of a national culture, which strongly influences the basic values they share with others. In addition, they follow norms of behaviour, which are part of the industrial culture to which their firm belongs. Each firm develops an organisational culture, that is, a set of behavioural norms specific to the firm. All those values and norms, potentially combined with a functional culture, influence the behaviour of potential business partners and stakeholders in international marketing. Assessment of business culture compatibility has been recommended for international market selection.

Among other operating environmental variables recommended for international marketing to be possible are compatibility of business system and distribution structure of the target country with the firm's requirements. A certain standard of transportation, communication and commercial infrastructure has to be in place for an international market to be selected as a target.

Overall, table 1 shows the operating environment constructs and their measurement scales for international market selection, as recommended by the current international market selection literature:

METHODOLOGY

As recommended by Churchill (1979), a widely used process for developing measurement scales in marketing involve the following steps: (1) defining a theoretical construct; (2) generating a list of items from literature and/or qualitative research that relate to this construct; and (3) purifying these measures using exploratory factor analysis and coefficient alpha.

In this research all the above three steps have been followed. Further, the third step has been supplemented with confirmatory factor analysis using structural equation modelling (SEM) technique. Theoretical constructs have been defined and lists of items that relate to the constructs have been identified from the literature.

In the quantitative research phase both exploratory and confirmatory factor analysis techniques have been used. Exploratory factor analysis has been used to test dimensionality of data with the aim to produce a set of items that reflect a single underlying factor or construct, and confirmatory factor analysis using structural equation modelling (SEM) program EQS to achieve a more rigorous estimation of reliability, and formally test the unidimensionality of the scales.

The use of multi-item scales to measure a construct is considered superior to single item scales as it increases reliability and decreases measurement error (Churchill, 1979). These sets of items are generally reflective in that they all measure the same theoretical construct. Coefficient alpha is used to measure the reliability of the scale. Exploratory factor analysis is considered a test of dimensionality, with the aim to produce a set of items that reflect a single underlying factor or construct (Norusis, 1992). This method is particularly suitable where no prior knowledge on measurement are reported. This traditional approach has since been expanded with the use of confirmatory factor analysis.

Sample

As the research objective was to determine the operating environmental constructs considered by successful Australian international businesses in selecting their international markets, the target population was defined as Australian product/service marketing firms, who are active and successful in international markets. International business success has been measured in various ways by researchers, including international sales level (Madsen, 1989), international sales growth (Cooper and Kleinschmidt, 1985), international sales to total sales ratio (Axinn, 1988), and the increase in importance of international business to the total business (Cavusgil and Kirpalani, 1993). These varieties of measures indicate that, there is no uniform definition of success in international marketing research (Cavusgil and Zou, 1994). In this case, the critical issue of success was ascertained through the end result. Accordingly, two sample frames were selected. The first one represented the 145 Australian firms who were finalists and winners of the annual Australian Export Award during the 1990s. The judging criteria for this award includes: international sales level, international sales growth, quality of firm's international marketing strategy and level of internal support to international activity. The second frame comprised of the 500 Australian firms that were listed in the BRW Top 500 Australian exporter list. The judging criterion for this is level of international sales. As there were some firms whose names were in both the lists, the total number of firms to whom questionnaires were sent was 546. Each questionnaire was sent with personally addressed letter to the individual responsible for the international operations of the firm. A total of 195 completed questionnaires were returned.

One critical issue for this research was sample size. Even though individual observations are not needed as with all other multivariate methods, the sample size plays an important role in the estimation and interpretation of (SEM) results. 200 has been proposed as the critical sample size for SEM analysis (Boomsma, 1983; Hair et al, 1992). In a study of empirical research reports in international marketing, Aulakh and Kotabe (1992) found the mean sample size as 197.6 and response rate as 40.5 per cent. In this survey, out of the 546 companies 195 responded, giving a response rate of 35.7 per cent, which is close to the standard and expectations.

Data Collection

Deciding who will receive the questionnaire is done in conjunction with setting objectives for its results. In line with the research objectives in this study, the questionnaires were required to be completed by the managing director, international marketing manager, export manager or anybody selected by them as suitable to represent them and who is involved in the decision making process of international target market selection. Accordingly, a personalised letter giving background information on the research, along with a copy of the questionnaire and self addressed prepaid return envelop were sent to each selected firm. A great deal of importance was given and care taken on the construction of the questionnaire and the transmittal letter that accompanied it, as in mail surveys no personal interaction is available to advise respondents or encourage their participation.

After thorough editing of the 195 questionnaires returned, all of them were found satisfactory. Only four questionnaires had missing values (demographic data only). Demographic was included in the questionnaire for classification purposes only. As a result, all responses were acceptable for final analysis

Initially all data collected was codified and entered into a SPSS for WINDOWS release 6.0 spread sheet which was previously constructed and tested. Strict controls were enforced to ensure the integrity of the data. Measures taken included the examination of the value of each data cell independently by two research assistants who proof read the original data against a computer printout (Tabachnick and Fidell, 1996). Exploratory factor analysis was conducted on this data set. Based on the results obtained several variables were eliminated. The remaining data set was screened and entered into EQS (SEM software used) for final analysis.

Methods of Analysis

Confirmatory factor analysis using EQS, LISREL or other structural equation modelling (SEM) programs, gives a truer estimation of reliability and formally tests the unidimensionality of a scale (Hoyle, 1995). It is therefore considered a more rigorous scale development procedure. For the data analysis in this research EQS has been used as the preferred software, largely because of its user-friendly features.

The data set (N=195) with a univariate kurtosis value >0.512 was not normal. Several variables yielded values greater than this, indicating some non-normality of the data. Therefore, the ML robust estimation method was used to re-estimate the model, as the robust estimation is more suitable when data is suspected of being non-normal (Bentler, 1995).

RESEARCH RESULTS

As has been discussed before both exploratory and confirmatory factor analysis techniques have been used in this research. Exploratory factor analysis has been used to test dimensionality of data with the aim to produce a set of items that reflect a single underlying factor or construct, and confirmatory factor analysis using SEM program EQS to achieve a more rigorous estimation of reliability, and formally test the unidimensionality of the scales.

Results of Exploratory Factor Analysis

Factor analysis was applied using principal-axis factoring method, with eigenvalues set to 2. In most instances eigenvalues of 1.0 or greater represents the maximum number of factors that can be considered as stable (ie., replicable) (Diekhoff, 1992). However, when a large number of variables are being factor analysed, many unimportant factors will be associated with eigenvalues as large as 1.0, making it especially important to consider other indicators of the "correct" solution. Determining the correct number of factors is a matter of balancing comprehensiveness against parsimony. In practice, one is usually happy with a factor solution that explains 50-75% of the variance in the original variables (Diekhoff, 1992). In this case, the cut off point of eigenvalues of 2.0 gave factor solution that explained more than 60% of the variance. Another consideration in determining the cut off point was interpretability of factors. Factors are interpreted by examining their correlations, called loading, to the p original variables. This interpretation is often facilitated by factor rotation, the second stage of factor analysis, in which original factors are redefined. In this research, a varimax rotation of factor matrix was used.

Table 2 shows the factors extracted with the variables that explain each of the factors. Some variables from the original list of variables (see Table 1) whose factor loading fell below 0.3 were dropped from further analysis at this stage, as this level of loading has been considered insignificant and also because of their significant cross loadings. These variables include: availability of local business partners, potential to develop strategic alliances, and political stability in the country.

The resulting factors and the observed variables that explain those factors have been subjected to further analysis through application of the measurement model of SEM. Exploratory factor analysis is particularly suitable where no prior knowledge on measurements is reported or when underlying structure of measures is not well understood (Gerbing and Anderson, 1985). This traditional approach to scale development has since been expanded with the confirmatory factor analysis (Gerbing and Anderson, 1988). Confirmatory factor analysis gives a truer estimation of reliability and formally tests the unidimensionality of scale (Steenkamp and Van Trijp, 1991).

Measurement Models

Three measurements model, for the three factors identified through exploratory factor analysis, were tested. To determine the adequacy of the models several measures were used. This included the distribution of standardised residuals (Ullman, 1996), number of iterations required to converge (Bentler, 1995), multiple adjunct fit indexes, and t-ratios (Hair et al, 1992; Tanaka, 1993; Hoyle, 1995).

Target Country's Cost Indicators

Three measured variables, "tariff barriers", "non-tariff barriers" and "marketing costs" estimate this construct. As this construct contained only three items, to address the issue of "statistical identification" (Byrne, 1994) the value of the regression path between "tariff barriers" and the factor was set to one (1). Highly significant t-ratios for the measured variables as shown in Table 3 indicate the validity of this measurement model. The distribution of standardised residuals was symmetric and centred around zero suggesting good specification of the model. The model also converged quickly in four iterations. The Comparative indices showed a perfect fit (1.000). Wald test did not indicate the need to drop any of the parameters. Thus, all variables were retained. Table 3 shows the factor loadings and t-ratios.

Target Country's Structural Compatibility Indicators

The measurement model for the unmeasured factor "target country's structural compatibility indicators" was estimated by six measured variables as shown in Table 4. The distribution of standardised residuals was close to being symmetrical and centred around zero suggesting appropriate specification of the model. The model also converged quickly in four iterations. [c.sup.2] (27, N = 195) = 96.639, p < .001, the Comparative Fit Index (CFI) 0.966, Robust Comparative Fit Index (RCFI) 0.971, Bentler-Bonett Normed Fit Index (BBNFI) 0.954, and Bentler-Bonnett Nonnormed Fit Index (BBNNFI) 0.955, indicated a good fit for the model. Moreover, all the t-ratios, except for "level of government support", were highly significant. Wald test supported the dropping of "level of corruption" and "level of own government support". Thus, these two variables were dropped. Table 4 shows the factor loadings and t-ratios for this measurement

Target Country's Policy Indicators

This unmeasured factor was estimated by four observed variables, "international property right laws", "level of government control on business", "price restrictions" and "profit repatriation restrictions". The distribution of standardised residuals for this model as was symmetric and centred around zero suggesting good specification of the model. The model also converged quickly in five iterations. [c.sup.2] (5, N = 195) = 24.780, p < .001, the Comparative Fit Index (CFI) 0.990, Robust Comparative Fit Index (RCFI) 0.999, Bentler-Bonett Normed Fit Index (BBNFI) 0.988, and Bentler-Bonnett Nonnormed Fit Index (BBNNFI) 0.980, indicated a good fit for the model. Moreover, all the t-ratios were highly significant. Wald test did not indicate the need to drop any of the parameters. Thus, all variables were retained. Table 5 shows the factor loadings and t-ratios for this measurement model.

DISCUSSION

The literature review has identified key aspects of the operating environment that needs to be considered in selecting international markets. Three constructs and sixteen measurement variables identified through literature review has been shown in table 1. In this section findings relating to the successful Australian international businesses regarding those constructs and variables are discussed. Effective international market evaluation requires an accurate understanding of the cost drivers associated with competing in a specific market. One major and transparent cost factor for international marketers is tariffs. When products are transported across national borders, tariffs have to be paid unless a special arrangement exists between the countries involved. Tariffs place international marketers at a competitive disadvantage to local import-competing firms. Although tariffs have generally declined over recent years, they still influence the price competitiveness in international markets and, as such, are considered in the international market selection process. Tariffs also have strategic implications for marketers. Firms can adopt strategies such as local assembly to avoid tariffs, because tariffs on components are frequently lower than on finished products. While tariffs are generally declining, the use of nontariff barriers such as quotas is growing. Such nontariff barriers are also considered by the successful Australian international businesses for market selection purposes. The third cost variable considered is the marketing costs involved. Marketing costs may include distribution costs associated with channel length, gross margin, and logistics and transportation costs associated with the shipment of products over long distances.

Successful Australian international businesses also consider some structural aspects of international markets and assess their compatibility with their own objectives, and strategies. Such structural aspects include, host country's business culture and structure, distribution system and the legal system within which business operates.

The impact of host country policy indicators on market selection has been confirmed by this research. Though policy indicators tend to be more subjective than the quantitative indicators of market size, they are equally important in international market selection process. In some countries, government and regulatory agencies control various aspects of business, particularly the prices of products and services. There are cases where a competitor in the target market is a government owned enterprise. There are also restrictions in some countries on profit repatriation. All of these variables are considered by the successful Australian international businesses in selecting their markets. Host governments have a direct influence on the operation of a foreign subsidiary by imposing specific conditions on the firm's business practices and processes. The rules of conducting business may challenge the international firm. Operating conditions for international firms are of particular importance when they affect the freedom to run marketing programs. Host countries may restrict international firms in the area of pricing, advertising, promoting, selling, distributing, and many other elements. Where such operating restrictions apply to all firms, domestic and international, the competitive threat is lessened; however, firms might still find such restrictions a problem when the way they have to operate varies from what they are accustomed to. Where operating restrictions apply to foreign firms only, the result will be a lessening of competitiveness, and firms should seriously consider these constraints before entering a market.

One variable that is considered by the successful Australian international businesses is the international property right laws in the target country and the protection it offers to products, processes and symbols. Pirating products has been a significant problem since the 1980's. As a result, copyright laws and violations are becoming an increasing concern for international marketers and this is evident in its inclusion in the market selection criteria.

Overall, table 6 shows the operating environmental constructs and their measurement variables considered by successful Australian international marketers in their international market selection process.

MANAGERIAL AND THEORETICAL IMPLICATIONS

International market selection is a major step in the overall process of moving into international markets. Many international marketers play a leading role in the selection process; others take expert help from agencies, such as AUSTRADE, in Australia. Accordingly, the findings of this research will be of interest to international marketers in Australia and overseas. In selecting international markets managers must evaluate market potential not only on the basis of market size and growth but also market's operating environment.

This research has identified and tested specific constructs, and has developed multi-item measurement scales for those constructs. These constructs, and their measurement scales, can now form the basis for further research in the area both in Australia and overseas. Compared to internationalisation process theories, international market selection is not a well-researched area. There has been no reported study in Australia and such research has not been widely reported overseas. This research is study on an important, but overlooked, area of business importance.

LIMITATIONS AND FUTURE RESEARCH DIRECTIONS

This research has been conducted in Australia only. Australia with less than 2% share of the world GDP and less than 1% share of the annual international trade is relatively a small player internationally. Accordingly, the findings of this research may not be treated as an international phenomenon and needs to be tested with firms in other countries.

This research identifies operating environment constructs or factors that are the part of the international market selection process and the measurement scales of each of those constructs. This research didn't endeavour to identify the relative importance of those constructs and measurement scales or the weight that may be assigned by individual firms to each of those constructs and measurement scales. While it was not an objective of this research to find out such relative importance, if any, future research may be conducted to establish whether individual firms will need to assign a firm-specific numerical weight to each factor and variable to indicate their relative importance in the international market selection process.

The aim of this research was to establish whether successful Australian international businesses do consider operating environment factors in their international market selection decisions and if they do, what those factors are and what are their measurement scales. Now that the operating environment factors and their measurement scales have been established, further research needs to be carried out to establish the overall decision framework of international market selection process and how these operating environmental factors identified through this research interact with other market related and organisational factors in the overall decision process.

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Syed H Rahman, University of Western Sydney
Table 1: Operating Environment Constructs and their Measurement
Scales

Constructs     Cost Indicators          Structural Compatibility
                                        Indicators

Measurement    1. Tariff barriers       Availability of local
                                        business partners
Variables      2. Nontariff barriers    Potential to develop
                                        strategic alliances
               3. Marketing costs       Business structure
                                        compatibility
                                        Distribution system
                                        compatibility
                                        Legal system compatibility
                                        Business culture
                                        compatibility
                                        Level of corruption
                                        Level of own government
                                        support

Policy Indicators

International property right laws
Level of government control on
business
Pricing restrictions
Profit repatriation restrictions
Political stability in the country

Table 2 Factors, Variables and Factor Loadings

Variables                             Factor 1:     Factor 2:
                                      Cost          Structural Compati-
                                      Indicators    bility Indicators

Tariff Barriers                       .8591
Non-tariff Barriers                   .8582
Marketing Costs                       .8524

Business Structure Compatibility                    .8496
Distribution System Compatibility                   .8548
Legal System Compatibility                          .8582
Business Culture Compatibility                      .8601
Level of Corruption                                 .3979
Level of Own Govt. Support                          .3088

International Property Right Laws
Level of Govt. Control on Business
Pricing Restrictions
Profit Repatriation Restrictions

Variables                             Factor 3:     Coefficient
                                      Policy        Alpha
                                      Indicators

Tariff Barriers
Non-tariff Barriers                                 .99
Marketing Costs

Business Structure Compatibility
Distribution System Compatibility
Legal System Compatibility                          .88
Business Culture Compatibility
Level of Corruption
Level of Own Govt. Support

International Property Right Laws     .8478
Level of Govt. Control on Business    .8436         .99
Pricing Restrictions                  .8501
Profit Repatriation Restrictions      .8608

Table 3 Target Country's Cost Indicators--Factor Loadings and
t-ratios

Target Country's Cost Indicators    Factor Loading    t-ratio (Robust)

Tariff barriers                         Fixed              24.895
Non-tariff Barriers                     1.576              24.002
Marketing costs                         1.535

Table 4: Target Country's Structural Compatibility Indicators--Factor
Loadings and t-ratios

Target Country's Structural Indicators    Factor Loading       t-ratio
                                                               (Robust)

Business structure compatibility              1.318              23.331
Distribution system compatibility             1.357              24.039
Legal system compatibility                    1.350              24.412
Business culture compatibility                1.365              22.496
Level of corruption                           0.797               7.252
Level of own government support               0.422               3.857

Table 5 Target Country's Policy Indicators--Factor
Loadings and t-ratios

Target Country's Policy              Factor      t-ratio
Indicators                           Loading     (Robust)

International property right laws    1.426       27.409
Level of government control          1.401       25.215
on business
Pricing restrictions                 1.412       26.185
Profit repatriation restrictions     1.353       25.113

Table 6 Operating Environmental Constructs and their
Measurement Variables Considered by Successful
Australian International Businesses

Constructs    Cost Indicators         Structural Compatibility
                                      Indicators

Measurement   1. Tariff barriers      Business structure
                                      compatibility
Variables     2. Nontariff Barriers   Distribution system
                                      compatibility
              3. Marketing costs      Legal system
                                      compatibility
                                      Business culture
                                      compatibility

Policy Indicators

International property right laws
Level of government control on
business
Pricing restrictions
Profit repatriation restrictions
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