APJML 19,1. The current issue and full text archive of this journal is available at

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1 The current issue and full text archive of this journal is available at APJML 19,1 22 Received December 2005 Revised April 2006 Accepted June 2006 development and channel evolution in The People s Republic of China Ling Yi ChongQing Commercial and Technology University, ChongQuin, China, and Eugene D. Jaffe Department of Marketing, Copenhagen Business School, Frederiksberg, Denmark Abstract Purpose The objective of this study is to develop a model for analyzing the relative importance of facilitating and constraining factors that determine changes in the structure of distribution channels as a country progresses along the path of economic development. Design/methodology/approach Data on channel structure were collected on national, regional and municipal levels. The hypotheses in this study were tested by using time series and crosssectional data. The ordinary least squares method was used for multiple regression and correlation analyses. Findings The most significant findings from the above research are that channel structure is determined by economic development and, to some extent, by government policy. Both of these factors work hand-in-hand to affect distribution reform. First, economic development provides the need for more efficient channels, first as more privately-owned intermediaries enter the distribution system, and later as the number of channel intermediaries contracts, partly stemming from vertical integration and from a shakeout of less efficient enterprises. Second, government policy can be formulated to encourage these developments. In order to promote distribution reform, the government s open policy, which allows for market access by foreign firms as well as local ones, should be continued. Research limitations/implications More cross-sectional data for China are needed in order to better analyze the impact of different economic sectors (at different levels of development) on channel evolution. As more data become available, these analyses will be possible. Originality/value Very little is known about the factors that shape a nation s channel system. Improvements in distribution systems are crucial to upgrading marketing systems in developing countries. Understanding how improvements in distribution systems contribute to economic development can aid decision makers in developing countries to improve resource allocation. This study has contributed to the theory of channel evolution in developing countries. Keywords China, Channel flow, development, Government policy, Marketing Paper type Research paper Asia Pacific Journal of Marketing and Logistics Vol. 19 No. 1, 2007 pp # Emerald Group Publishing Limited DOI / The objective of this paper is to examine the relationship between economic development and channel structure. A number of studies have raised the proposition that a country s distribution channel structure is a function of economic development (Douglas, 1971; Mallen, 1975; Kaynak and Hudanah, 1987; Olsen and Granzin, 1990; Samiee, 1993; Mallen, 1996). Identifying and explaining the factors that influence channel structure is one of the most important tasks of channel research (Anderson, 1985; Bucklin et al., 1996; Dwyer and Welsh, 1985; John and Weitz, 1988; Klein et al., 1990; Stern and Reve, 1980). As the economy evolves from a planning orientation to a The authors wish to acknowledge the helpful comments of Gorm Gabrielsen, Klaus Meyer, Tony Pecotich and Hans Stubbe Solgaard.

2 market orientation, distribution structure reform is a critical factor in this process (Luk and Li, 1997; Cundiff and Hilger, 1988; Olsen and Granzin, 1991). The focus of this paper is The People s Republic of China (PRC). The PRC is in transition from a planned to a market economy. Over the last 20 years the PRC economy has undergone significant transformations in the form of privatization, liberal trade policies and a movement away from a centrally planned distribution system (Garten, 1998; Jiang and Prater, 2002; Taylor, 2003). Distribution reform has been a key element in the government s objective of decentralizing the economy. The evolution of distribution structures of developing countries has been the subject of a number of studies, the objectives of which have varied significantly (Samiee, 1993). Some have focused on a single nation or particular channel member, while others have provided cross-cultural insights. However, an examination of the literature devoted to the evolutionary process of distribution structures shows little progress in theory development ( Jain, 1990; Olsen and Granzin, 1991; Mueller et al., 1993; Bucklin et al., 1996). Very little is known about the factors that shape a nation s channel system (Sharma and Dominguez, 1992). Improvements in distribution systems are crucial to upgrading marketing systems in developing countries (Samiee, 1993). Understanding how improvements in distribution systems contribute to economic development can aid decision makers in developing countries to improve resource allocation. Therefore, the development of theory in channel evolution is a necessary condition for the implementation of marketing reform. Channel structure A study of channel structure may focus on one or more of three dimensions: the types of channels used, the number of channel levels and the type and number of institutions that comprise the channel (Bello and Williamson, 1985). Studies of channel structure have also investigated channel length (Dwyer and Welsh, 1985; Olsen and Granzin, 1990, Sharma and Dominguez, 1992; Couglan and Lal, 1992), bureaucratization ( John and Reve, 1982; Boyle et al., 1992) and ownership patterns. In this paper, channel structure is conceptualized as the number and size of marketing intuitions in the channel. Channel structure is important from a public policy perspective as many governments in developing countries have put in place vertical distribution systems, bypassing traditional channels. And distribution reform plays a very crucial role in a country s economic development. The failure of Gorbachev s perestroika was primarily due to a breakdown in the economy s distribution system (empty store shelves, widespread hoarding of goods, etc.). Such a breakdown in distribution was actually both a cause and effect of a general loss of public confidence in the former Soviet Union s economy ( Holtzman, 1991), which finally contributed to the fall of Gorbachev and the collapse of the Soviet Union. Some studies focus on the dimension of government economic policy and have demonstrated its influences on market entry decisions (Karakaya and Stahl, 1989; Root, 1994). In addition, several marketing scholars have studied the effects of the economic role of government and associated policy factors on distribution systems in different countries ( Fubara, 1991; Mahmoud and Rice, 1991; Mitchel, 1991). In addition to its importance at the macro level to researchers and public policy officials trying to better understand the forces that shape the organization of the exchange system, channel structure is strategically significant also at the micro level to individual firms and hierarchies attempting to enhance profits and lower costs. development and channel evolution 23

3 APJML 19,1 24 Most studies of channel evolution have attempted to determine a relationship between economic development and channel length. However, as Olsen and Granzin (1991, p. 61) assert, the few empirical investigations have been severely limited in scope. Only about half of the studies reviewed in Sharma and Dominguez (1992) were tested empirically, resulting in conflicting findings. Wadinambiaratchi (1965) and Olsen and Granzin (1991) found that channels lengthen as economic development occurs. On the other hand, Livesay and Porter (1969) found that channels shorten. Forman and Riegelhaupt (1970) and Douglas (1971) found that the function is U-shaped, i.e. channels first lengthen and then shorten as was also the case in Olsen and Granzin s (1991) empirical study of agricultural channels. Other difficulties in interpreting the findings stem from the diverse methodologies used. Some researchers focused on developed countries; others on developing countries. Most relied on crosssectional data, while only Layton s (1989) and Livesay and Porter (1969) analyze timeseries data. Such differences in methodology may account for the apparent differences in empirical findings (Boddewyn, 1981; El-Ansary and Liebrenz, 1982). Determinants of channel structure Sharma and Dominguez (1992) proposed that channel evolution is a function of economic development and consequent changes in shopping behavior, management style, government intervention and the degree of urbanization. Samiee (1993) proposed similar variables for studying distribution structures in developing economies. Neither Sharma and Dominguez nor Samiee empirically tested the propositions raised in their articles, but gave some suggestions as to how the constructs might be measured. Based on the literature of channel structure and distribution reform, we posit that channel structure is a function of economic development, mobility and environmental variables, which include government policy and urbanization. A test of these relationships is reported below. Research model Our research model posits that channel length is a function economic and environmental variables as conceptualized in Figure 1. development It is believed that channel structure evolves with economic development (Kaynak, 1986; Olsen and Granzin, 1991). Growth in retail and wholesale institutions are attributed to a country s level of development. Higgins (1959), Samli and Mentzer (1981), Slater (1970) and Wadinambiaratchi (1965, p. 77) associate more levels of distribution and retail outlets with higher economic development. In economies where the producer is also the consumer, or merchandise is exchanged with others in the vicinity of its production, as in agrarian economies, channel functions are transferred to specialists who can perform them more efficiently ( Mallen, 1973, 1996; Olsen and Granzin, 1991; Coughlan and Lal, 1992). At low levels of development there is little specialization between distribution and non-distribution functions ( Mallen, 1975, 1996). As market size grows, distribution becomes more specialized, competitive intensity increases and as a result, distribution firms become larger while less efficient firms exit the distribution system (Olsen and Granzin, 1990; Sharma and Dominguez, 1992; Kim and Frazier, 1996). Thus, it is expected that channels become more productive as measured by average sales per establishment (wholesale and retail) as economic development progresses.

4 Development GDP/ per capita development and channel evolution 25 Channel Structure Environment Urbanization Government Mobility Figure 1. Research model An increase in the standard of living of a developing country is often equated with the consumption of material goods by the private sector. However, while governments expend much effort to increase the production of consumer goods, the distribution sector of the economy is frequently ignored or superficially treated ( Holton, 1953). The principle of convergence ( Bartels, 1981) suggests that the entire marketing system is significantly influenced by the country s level of development (Samli, 1964; Samli and Mentzer, 1981; Slater, 1970). In addition, the increased sophistication of consumer demand stimulates the growth of the service sector (Taylor, 2003). Developing countries go through a number of stages of economic growth (see, for example, Rostow, 1960). While the PRC as a whole may be close to the takeoff stage according to Rostow s terminology, vast parts of the country are still at the traditional and preconditions for takeoff stages. Thus, markets in the PRC are diverse, and becoming more so (Veeck and Veeck, 2000), so that any study of marketing reform in the PRC must use cross-sectional data. That is the approach used in this paper as explained below. The relationship between economic development and channel structure suggested by H1 is similar to an inverted U. As a country s economy develops there is a concomitant increase in the demand for channel services resulting in increasing numbers of intermediaries, given an absence of administrative entry barriers. The point where the direction of change in channel structure is reversed occurs when a society has begun to achieve a high level of income and wealth accumulation (Sharma and Dominguez, 1992). In the case of the PRC, the inverted U shape may take the form as shown in Figure 2.

5 APJML 19,1 Channel Structure 26 c d Figure 2. Hypothesized channel structure dynamics as a function of economic development or time a b Development or Time Figure 2 shows a hypothesized change in channel structure for the PRC as a function of economic development or time. We expect that the number of intermediaries increases with economic development, and then at some point, the increase slows while average size (as measured by sales) increases. This inverted U-shape function may be explained by looking at several points on the curve in Figure 2. The least developed areas in China should be at area a on the curve, developing areas at areas b and c and the most developed at area d, when average firm size is greatest. Using cross sectional data, time (t) is constant. In time series data of a single region, the economy develops over time. In mixed cross-sectional and time series data together, at each t, different regions are at different points on the curve and move along it over time. To summarize, the inverted U relationship stems from the following:. In a developing economy, there is a need for more intermediaries to accumulate and re-sort goods from different suppliers. Demand for a greater variety of products will lead to an expansion in the merchandise-mix ( Luk and Li, 1997). As such, more intermediaries enter the distribution system.. The evolution toward larger intermediaries may be explained by two phenomena: (a) As the economy further develops and becomes more service oriented, there is less of a need for indirect channels leading to the development of vertically integrated, larger intermediaries. (b) The growth of urban centers encourages vertical integration in channels in order to improve efficiency. The preceding discussion proposes that the level of economic development significantly influences the structure of distribution channels. Observations and case studies of markets in the PRC also support this notion ( Xu, 1990; Veeck and Veeck, 2000). Using GDP per capita (GDP/n), a U-shaped function is expected between GDP/n and channel length. Therefore, Hypothesis 1: H1. As GDP/n increases, channel structure takes on a U-shaped function.

6 Environmental variables Mobility. Automobile ownership enables consumers to shop further from home and to conveniently reach larger stores located in shopping centers. They also enable buying in larger quantities. The car extends both the distance accessed and the weight to be carried, thus reducing the number of shopping trips. China s private automobile ownership increased significantly mainly in urban areas. The number of private automobiles was 284,900 in 1985 and increased to 5,338,800 in Hall et al. (1961), Takeuchi and Bucklin (1977), Ingene and Lusch s (1981) measure mobility by the number of automobiles owned by the shoppers. Actually, their measure of mobility is imperfect, pointed out by Ingene and Lusch (1981) because public transport is not considered (Chow, 1995). In this study, consumer mobility is measured by the number of per-capita civil and private vehicle seats, which takes into account both privately-owned vehicles and public transport. Since much of China s individual enterprises are located in free market areas that may not be close to residential areas, transportation is necessary for these shoppers. If mobility is increased, shoppers can have a better comparison of the products that they would like to buy and their potential choice sets should move closer to their ideal ones. Consequently, shoppers are going to increase their purchases. Increased mobility may also contribute to greater consumer outreach. The concept of consumer outreach was developed by Goldman (1974). It is defined as the ability and willingness of consumers to venture out of traditional territories and activities (Goldman, 1974, p. 9). The lure of modern retailing institutions, such as supermarkets and discount stores, may not be sufficient to motivate consumers to change their shopping habits. On the one hand, consumers may lack the mobility to reach more distant, but larger stores, because of low incomes and/or the lack of convenient transportation. On the other hand, the habit of shopping in different stores for various consumption items several times a week may be so ingrained that it is difficult to change. If either or both cases prevail, then consumer outreach will be constrained. Therefore: H2. As mobility increases, the average size of channel intermediaries increases. Urbanization. The rapid pace of urbanization is one of the most significant aspects of contemporary economic geography, particularly so in the developing areas. Urbanization, and more specifically, concentration of population in large cities, has significant transactional cost implications. Large urban centers pose distribution challenges and opportunities that small ones do not. Small urban centers can be provisioned directly from surrounding areas, whereas large cities require a vast array of producers from farther distances (e.g. Forman and Riegelhaupt, 1970). Large urban centers afford producers and intermediaries the opportunity to achieve sufficient economies of scale. High urban concentration accentuates the advantages of internal governance to large producers and intermediaries. Large intermediaries are no longer content to rely on small suppliers; they prefer to work directly with large producers in order to be assured of supply continuity (Forman and Riegelhaupt, 1970). In addition to economic development and higher incomes, one of the factors facilitating the growth of supermarkets in China has been the rapid growth of urbanization ( Lo et al., 2001). In summary, it is expected that the presence of large urban markets will spur the growth of large-scale intermediaries, where there is already a sufficient level of development and competition. This leads to hypothesis 3: H3. As urbanization increases, the average size of channel intermediaries increases. development and channel evolution 27

7 APJML 19,1 28 The role of government. Several marketing scholars have studied the effects of the economic role of government and the associated policy factors on the distribution system in different countries (Fubara, 1991; Mahmoud and Rice, 1991; Mitchell, 1991; Naor, 1990). Their findings suggest that the role of government in marketing could be regulatory, facilitative, or entrepreneurial (Mitchell, 1991). A government that assumes a regulatory role attempts to establish and maintain an orderly framework for economic activities, whereas the facilitative role requires more direct involvement in infrastructure projects and supporting marketing programs by the government. The entrepreneurial role requires the government to actively invest in and operate business projects. Therefore, the knowledge of the aims of a government and its economic policies is important as this could have profound impact on negotiations and transaction behavior ( Wells, 1977). The PRC implemented central planning more than 30 years ago. Before economic reform, China like other communist countries had a shortage economy. The production and distribution of commodities were centrally planned. Nearly all the existing marketing channels at that time were state-owned. The distribution system was established not according to economic functions, but according to political and administrative functions (Mun, 1998; Qiang and Harris, 1990). At least five problems resulted from this system: (1) The marketing channel was long and steeped in red tape. The final retail price that consumers paid was several times the initial price as the product had to pass through many government middlemen. Moreover, it was difficult for products manufactured in cities to reach consumers in rural areas; similarly, agricultural products also took weeks to reach consumers in nearby cities. (2) The system was highly rigid and impervious to changes. (3) All products were bought and sold by the state distribution system according to the price set by the planning bureau. There was no correlation between the profits or losses of the state distributors and their performance. (4) Products offered to consumers were of limited variety and were of inferior quality. Opportunities for enterprises to vary the quality or quantity of their products were highly restricted. Managers were also unwilling to allow for such opportunities because of the absence of incentives. (5) With insufficient and backward storage facilities, many of the goods were simply lost in storage or shipping processes. The problems that existed at that time were similar to what Gajewski (1992) and Iwinska-knop (1992) discussed in the case of Poland and the case of the Soviet Union mentioned by Holtzman (1991) under central planning. The whole system is basically driven by a central planner rather than by consumer sovereignty. Compounded by the monopolization of distribution by state enterprises, marketing simply has no role to play in such a shortage economy (Ennew et al., 1993; Hooley, 1993). The PRC s economic reform model emphasizes competition over privatization. The Chinese government at first did not attempt to privatize state-owned enterprises directly. Instead, it allowed or encouraged the non-state enterprises sector to compete with and gradually outgrow the state sector. The majority of these non-state enterprises are collective enterprises that are basically a communal organization or a vaguely defined cooperative ( Weitzman, 1993). The collective enterprises are exactly opposite the type of private organizations that are at the center of the East European

8 model. Although the performance of the state sector also improves under competitive pressure, it may not be enough to save them in the long run. In contrast to the East European model, the Chinese model places more stress on the design of a competitive market structure which, in turn, gradually exerts pressure on inefficient state enterprises that must improve their productivity in order to survive in the market (Chow, 1994). McMillan and Naughton (1992) report that the Chinese reform strategy followed three stages: (1) massive entry of non-state enterprises; (2) a dramatic increase in competition; and (3) improvements in the performance of state-owned enterprises resulting from state-imposed market-like incentives. The PRC has demonstrated how it has successfully used the fundamental market forces of entry and competition in moving its centrally planned economy toward a market economy (Chow, 1994). The evolution of PRC government reformist policy toward its distribution system may be divided into three stages: (1) Introduction of market forces 1978 to The distribution system was opened to individual businessmen, thereby encouraging private entrepreneurs to compete. Government distribution policy enabled the growth of small businessmen getihu in the distribution system. Greater autonomy was granted to enterprises, especially those run by the state, in managing their business activities ( Luk, 1998). (2) Introduction of market-driven incentives end of the 1980s. A dual distribution system was formed to establish horizontal connections between enterprises across different industries and/or provinces (Luk, 1998). The pricing of products was gradually left to supply and demand. Manufacturers were permitted to sell directly to retailers, bypassing state distributors. (3) Consolidation of wholesale markets mid 1990s. The government promoted supermarket chains in urban areas. In 1992, the retail sector was opened to foreign enterprises, in order to promote the state-owned enterprises reform. Most state-owned distributors were transformed to public companies listed on the stock exchange. Greater autonomy was granted to commercial enterprises and large manufacturers to import and export finished goods and components. By the end of 1996, the role of non-state enterprises had accounted for 73 per cent of consumer goods sales ( Xu, 2000). The above discussion leads to the following hypothesis: H4. As government policy becomes market driven, the average size of channel intermediaries increases. Variable measures Table I lists the criterion and predictor variables, hypotheses and variable measurement. The productivity of a nation s aggregate channel system is the composite of all channels. As a result, direct measurement is infeasible. Instead, proxy measures may be used (Sharma and Dominguez, 1992). In this study, we use a measure based on the ratio of the number of wholesale and retail establishments per Yuan development and channel evolution 29

9 APJML 19,1 30 Table I. Measurement criteria Variables Hypotheses Measures Channel structure development Mobility (M) Environment Urbanization (Ur) Government (G) As GDP/n increases, channel structure takes on a U-shaped function As mobility increases, the average size of channel intermediaries increases As urbanization increases, the average size of channel intermediaries increases As government policy becomes market driven, the average size of channel intermediaries increases CTI. Equal to the number of establishments per Yuan 100 million sales GDP/per-capita Mobility measured by total civil and private vehicle seats divided by regional population Population density in urban areas Dummy variable, before 1985 ¼ 0; from 1985 to 1992 ¼ 1; from 1992 to 1997 ¼ 2; after 1997 ¼ million sales as an indicator of distribution intensity, which we term channel throughput index (CTI). An increase in the CTI indicates that the average size of distribution intermediaries decreases, and vice-versa, a decrease in the index indicates that average size increases. Model specification and data used in the study The hypotheses in this study were tested by using time series and cross-sectional data. In a country the size of the PRC, regional economic differences are significant ( Jiang and Prater, 2003). This has resulted in uneven economic development between regions and variability in reform policy (Luk, 1998). The ordinary least squares method was used for multiple regression and correlation analyses. The linear regression function is given as: Cl t ¼ 0 þ 1 GDP=n t þ 2 Ur t þ 4 G t þ 6 Pa t þ t ð1þ t ¼ 1980, 1981, 1982,..., 1999 year where: (1) Cl t ¼ value of the dependent variable in the t th trial, or observation. Cl t is channel structure (CTI). (2) GDP/n, Ur,G, Pa¼ the specified value of the independent variable in the t th trial or observation. (3) GDP/n is GDP per-capita; Ur is the urbanization ratio; Pa stands for mobility (seats per-capita) and G is government. 0 ¼ intercept of the regression equation. 1 6 ¼ parameters of the regression equation, which indicates the contribution ratio of each factor.

10 Data set Two types of data are the source for hypothesis testing in this study. First, time series data on a national basis for China are available from 1980 to Partial time series data are also available for Shanghai from 1980 to 2001, for Guangzhou from 1980 to 1998 and for Beijing from 1995 to Cross-sectional data for 31 administrative regions and cities are available for 1995, 1996, 1998, 1999 and Thus, total sampling units comprise 155 (number of regions and cities times years) and 755 total data units (number of sampling units times variables). The large sample will reduce the influence of multi or co-linearity among independent variables. All data used in this study were culled from the China Statistical Yearbooks, 1980 to Findings Regression analysis results We first test for a relationship between channel structure and economic development using both time series and cross-sectional data. As shown in Table II, we find that from 1980 to 1984 (introduction of market forces, see above), average establishment size decreased and in 1985 onwards, average establishment size increased. Overall, there was a steady increase in the number of wholesaling and retailing establishments from 1.7 million in 1980 to 17.7 million in 1999, but as pointed out above, average establishment size increased from The relationship between GDP/n and the CTI was tested in a regression analysis that resulted in a low R 2, but a significant F ¼ 0.01[1]. Regression analyses by region using cross-sectional data showed (see Table III) similar results. GDP/n was a significant predictor of channel structure in every year except U-shaped quadratic functions resulted from both the time series and development and channel evolution 31 Year CTI GDP/n (unit: Yuan) Private automobiles (10,000 units) Urban population weight % Government policy , , , , , , , , , , , , , , , , , , , , , , , Table II. Time series data of China from 1980 to 1999

11 APJML 19,1 Region CTI Number of establishments per 100 million Yuan sales GDP per capita unit: Yuan Total civil and private vehicle seats (unit: 10,000 seats) Urbanization population weight (over total population) % 32 Table III. CTI and economic/ environmental variables by region (1999) Beijing , Tianjin , Hebei , Shanxi , Inner Mongolia , Liaoning , Jilin , Heilongjiang , Shanghai , Jiangsu , Zhejiang , Anhui , Fujian , Jiangxi , Shandong , Henan , Hubei , Hunan , Guangdong , Guangxi , Hainan , Sichuan , Guizhou , Yunnan , Tibet 1, , Shaanxi , Gansu , Qinghai , Ningxia , Xinjiang , cross-sectional analyses as illustrated by the shape of the curves shown in Figure 3. These findings support H1. Environmental variables as modifiers of channel structure Now we determine to what extent variables other than economic development contribute to changes in channel structure. Both time series and cross-sectional data were used for this purpose. Using again the data contained in Table II, linear regression was used to determine the significance of the predictor variables. The significant F ¼ is smaller than 0.05 (normal significant F level), so we can conclude that the entire CTI function is significant. According to the results of the test for each independent variable s coefficients, urbanization is not significant. However, government policy, GDP/n and mobility are significant. Next, we use cross-sectional data for testing across regions. To illustrate, Table III shows the CTI, GDP/n, mobility and urbanization for 31 regions and cities in the PRC during Similar data were available for the years 1995, 1996, 1998, 1999 and In this case, a regression analysis shows that GDP/n, mobility and urbanization are

12 Channel Throughput Index 3000 development and channel evolution Observed GDP per capita Quadratic Figure 3. China s channel throughput index change as a function of GDP/n significant predictors of the CTI. A summary of the data analyses for the above five years in Table IV indicates that apart from GDP/n, urbanization and mobility, in that order, were predictors of channel structure. In essence, average size of wholesale and retail firms increased as economic development progressed. By region, the transformation to larger-sized intermediaries was greatest where economic development increased the most. This finding also buttresses H1. Because of its nature (dummy variable over time), government policy could not be included in the cross-sectional regression equations. Nevertheless, it was a predictor of channel structure in the time series analysis above. Thus, H4 is also accepted. However, contrary to expectations, wholesaling and retailing institutions did not increase in size as urbanization increased. Also, the mobility indicator, while having a positive influence on institution size, was only significant for These findings lead to a rejection of H2 and H3. Discussion The above analysis confirms that economic development and government policy influence channel structure. However, the question remains as to why urbanization and mobility were not significant predictors and why urbanization worked in the opposite direction as hypothesized. A possible reason for this is that China with more than 800 million people employed in agriculture has a very low urbanization rate. In 1980, only per cent of its people lived in cities or towns. In 1999 China s urbanization ratio increased to 30 per cent, but compared with the average urbanization ratio of more than 70 per cent in Western developed countries, its lower urbanization rate constrains the development of the market system. However, the situation in large cities like Shanghai is totally different. For example, Shanghai s urbanization ratio increased from 61 per cent in 1980 to 75 per cent in As the biggest commercial city in China, the urbanization ratio of Shanghai was the highest in China from 1980 to 2001.

13 APJML 19,1 Year Formula Significant independent variable Co-linearity 34 Table IV. Summary statistics of CTI as a function of economic and environmental variables cross-sectional data 1995 CTI ¼ GDP/n GDP/n No (T ¼ 8.785), (T ¼ 3.773) F ¼ , Significant F ¼ R ¼ 0.581, R 2 ¼ Adjusted R 2 ¼ 0.313, DW ¼ CTI ¼ GDP/n GDP/n No (T ¼ 0.743), (T ¼ 4.633), (T ¼ 2.783) R ¼ 0.666, R 2 ¼ Adjusted R 2 ¼ F ¼ , Significant F ¼ CTI ¼ GDP/n Ur GDP/n No (T ¼ 0.613), (T ¼ 3.587), (T ¼ 1.794) Ur R ¼ 0.613, R 2 ¼ Adjusted R 2 ¼ F ¼ 8.414, Significant F ¼ CTI ¼ GDP/n GDP/n No M þ Ur (T ¼ 9.324), (T ¼ 3.274), (T ¼ 1.853), (T ¼ 1.823) M R ¼ 0.656, R 2 ¼ 0.431, Adjusted R 2 ¼ Ur F ¼ 6.813, Significant F ¼ CTI ¼ Ur Ur No (T ¼ 5.725), (T ¼ 1.729) R ¼ 0.306, R 2 ¼ 0.093, Adjusted R 2 ¼ F ¼ 2.988, Significant F ¼ Urbanization became the most significant factor affecting channel structure, and in one of the first open cities in China, Shanghai s distribution structure developed faster. Many foreign retail companies entered this area in 1985, after local distribution was opened to the private sector. By the end of the 1980s, state-owned distribution companies began to vertically integrate and be converted to stock companies. So, after the 1990s many state-owned companies in the distribution system were converted to stock companies and subsequently listed on the stock exchange. The first supermarket chain was set up in the early 1990s in Shanghai. After that, many commercial corporate groups started to establish chain operations and large distribution groups developed. Supermarkets and chain operations were more integrated and needed fewer channel levels thus increasing channel productivity. For China as a whole, urbanization is still at a low level and the government s main strategy to foster urbanization is to develop small and medium towns and cities. When small and medium cities are developed, more retail and distribution companies will enter the distribution sector, but most of them are small in size. Thus, the average size of distribution establishments decreases when urbanization grows in China over beginning stages of economic development. As the growth of urbanization continues, it is expected that the average size of distribution intermediaries will increase. Summary and conclusions The most significant findings from the above research are that channel structure is determined by economic development and to some extent, by government policy. Both of these factors work hand-in-hand to affect distribution reform. First, economic

14 development provides the need for more efficient channels, first as more privatelyowned intermediaries enter the distribution system, and later as the number of channel intermediaries contracts partly stemming from vertical integration and from a shakeout of less efficient enterprises. Second, government policy can be formulated to encourage these developments. In order to promote distribution reform, the government s open policy, which allows for market access by foreign firms as well as local ones, should be continued. Moreover, the government has permitted, since 1986, the sale of goods by manufacturers directly to retailers, thereby making some state distributors redundant. In addition, chain stores sell a wide range of goods from necessities to durables, with food products accounting for 63 per cent and clothing 4 per cent of sales (Taylor, 2003). An increase in the proportion of chain stores in distribution channels will increase their leverage over manufacturers, perhaps leading to backward vertical integration (Sun, 2000; Xu, 2000). Moreover, the larger size of distributors and retailers will afford them buying power over manufacturers, resulting in both lower prices to consumers and better quality goods. While the above examples of market access were a condition for China s entry into the World Trade Organization, it is expected that most of the restrictions affecting the distribution sector will soon be phased out. Removing such restrictions will encourage more foreign investment, which in turn, will contribute to China s economic development. As Wan (1992, p. 307) had pointed put, no matter whether the state firms should be privatized or revitalized, a thriving, self-confident private sector holds the key for reform. While these findings indicate that channel evolution for the country as a whole is a function of economic and environmental variables, some of the results of data analyses show that because a developing or emerging economy has sectors or regions that are in different stages of development, the effect of predictor variables may be different by region. As more cross-sectional data for China becomes available, this issue can be investigated further. Forty years ago, Bucklin (1965, p. 31) stated that the study of the structure of distribution channels was one of the most neglected areas of marketing scholars. Expanding our knowledge of the relationship between economic development and channel structure not only will contribute to the development of marketing theory, but also has practical implications. Understanding these relationships may aid in the more successful transfer of marketing techniques between countries at different stages of economic development. It may also reduce the reliance on trial and error in the implementation of marketing reform in emerging economies. Another question that can be investigated is the extent of efficiency in channels. As channels become shorter, how more efficient do they become? In order to answer these questions, more research of the sort presented in this paper should be carried out in additional countries, especially those in transition toward a market economy. In the case of China, follow-up research can be done as additional data becomes available. Such research would be a welcome addition to theories of channel evolution and structure. Note 1. The regression analyses may be obtained by contacting the authors. References Anderson, E. (1985), The salesperson as outside agent or employee: a transaction cost analysis, Marketing Science, Vol. 4, pp Bartels, R. (1981), Global Development and Marketing, Grid Publishing Company, Columbus, Ohio. development and channel evolution 35

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