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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Young, S. Hamill, J, Wheeler, C. & Davis, J. R., (1989),
International Market Entry and Development, Englewood Cliffs, NJ:
Prentice-Hall.
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