TP TP PT Columbia PT UCLA PT MARKETING AND INSTITUTIONS: An International Perspective * Bjorn N. JorgensenTP P and Raphael ThomadsenTP ** August 2008 * Business School, 3022 Broadway, 621 Uris, New York, NY 10027. bnj2101@columbia.edu. ** Anderson, 110 Westwood Plaza, Suite B411, Los Angeles, CA 90095-1481. thomadsen@ucla.edu. Authors are listed in alphabetical order.
MARKETING AND INSTITUTIONS: An International Perspective Abstract This paper presents descriptive empirical evidence of a link between country-level institutions on marketing sophistication and customer orientation. We find that stronger institutions are generally associated with greater marketing sophistication and greater customer orientation, although increased corruption is also associated with higher levels of both variables after controlling for a country s other institutions. Our results suggest that country-level institutional factors should be considered in marketing research analysis.
1. Introduction This paper uses a unique survey-based dataset of 116 countries to examine the link between country-level, non-marketing institutional settings and marketing strategies. In particular, we describe the cross-country relationship between a country s institutions and its firms marketing strategies, which we measure through the extent of marketing sophistication and the degree of customer orientation. This approach allows us to investigate the impact of institutions that are often held fixed in prior marketing research using micro data. 1 We are not the first to note that a country s non-marketing institutions can have an impact in the marketing decisions of managers. Macromarketing has long recognized the interaction between greater societal structure and marketing; Indeed, Hunt s (1981, 8) third definition of macromarketing is the impact and consequence of society on marketing systems. More recently, Layton and Grossbart (2006) note that a marketing system s environment includes the institutional settings (including the role of government, the financial institutions), the form of corporate governance, and the infrastructure of the society in which the marketing system is embedded. 2 In many ways, the focus of our study is closely related to the phenomena investigated by Carman and Dominguez (2001) who consider institutional reforms in transition economies and how these reforms will affect marketing. Carman and Dominguez (2001) hypothesize the effect on marketing outcomes of changes in the institutions, that we also consider. In general, our empirical results across a wide crosssection of countries are consistent with their theoretical hypotheses. 1 See, for example, Narver and Slater (1990), Jaworski and Kohli (1993), Slater and Narver (1994), and Han, Kim and Srivastava (1998). 2 For succinctness, we refer to all of these as institutions.
While previous empirical studies have compared marketing outcomes and culture or institutions across countries (e.g., Deshpandé, Farley, and Webster 1993, 1997), we are not aware of any study that linked these institutions to marketing outcomes across as many countries as we do. We acknowledge, though, that some other studies have looked at other macromarketing topics using large cross-sections of data, including Pan, Zinkhan and Sheng (2007) who study on the link between subjective well-being and marketing, which uses a cross-section of 55 countries. The approach taken in our paper is similar to that of recent papers in macroeconomics and finance including Barro (1991), La Porta et al. (1998, 1999), Bushman and Smith (2001), and Clayton et al. (2006) which document country-level variation between institutional characteristics and firms decisions regarding capital structure and corporate governance, investors decisions regarding dispersion of ownership, and governments decisions regarding regulation and trading of securities. While that line of research has had an impact on regulation, 3 an important caveat regarding endogeneity is well-understood and also applies to our study: When we document that firms marketing strategies vary with institutional factors, it might be tempting to infer a causality that the countries institutional factors cause the managers marketing decisions because the institutions we study were in place before firms made their choices. However, it is possible that the institutions were instead set up anticipating firms marketing decisions, or that both of these are correlated with a third causal variable. In this case, institutional factors and marketing choices are codetermined, leading to an endogeneity problem. As is the case with the papers above, we are unable to address this issue and establish causality. Rather, our aim is to document a link 3 See The World Bank (2002).
between a country s institutions and its firms marketing choices without ascribing causality. Nonetheless, our findings of a significant cross-country relationship between institutional variables and marketing decisions demonstrate an association between these variables, even if we cannot definitively establish causality from our analysis. Thus, we believe that our findings represent an important step towards fully understanding the relationship between a country s institutions and the marketing decisions of its firms. Overall, we find that stronger institutions are associated with greater marketing sophistication and customer orientation. However, our results also demonstrate that, controlling for a country s other institutions and structural attributes, increased corruption is also associated with a stronger marketing emphasis. The paper proceeds as follows. Section 2 describes the institutions we examine and their predicted effect. Section 3 summarizes our data. Section 4 presents and discusses the empirical findings. Section 5 concludes. 2. Effects of Institutions on Marketing In this section we describe the institutional variables and outline the channels through which each institution might affect the degree of customer orientation and marketing sophistication in different countries. While our primary goal is merely to establish a link between country-level institutions and firms marketing strategies, we also present potential reasons why each institution might impact marketing sophistication and customer orientation. While we consider a variety of sources in forming our hypothesis, many of the effects we consider are clearly consistent with the hypotheses of Carman and Dominguez (2001).
The first institution we consider is the quality of a country s financial institutions. Strong financial institutions can help firms raise the funds they need to execute profitable business plans and to access resources employees, know how and equipment needed to carry out their marketing objectives. Access to financing is especially important in determining a company s ability to purchase the resources needed to implement sophisticated marketing methods. Thus, one might expect that good financial institutions are associated with higher marketing sophistication. In contrast, we might expect the quality of financial institutions to have an ambiguous effect on customer orientation. While money can pay for technology to track customers through a CRM database or target profitable customers, reliance on less-sophisticated methods may force companies to focus directly on customer interaction. Our next institutional variable is the ease of regulatory compliance. Carman and Dominguez (2001) hypothesize that firms that allocate a smaller fraction of their resources to managing government regulation will instead allocate resources to firm performance. We would thus expect marketing sophistication and customer orientation to increase with greater ease of regulatory compliance to the extent that greater marketing sophistication and customer orientation are important ingredients for firm performance. While ease of regulatory compliance is one measure of governmental quality, lack of corruption is another measure. Mauro (1995) has previously demonstrated that corruption affects firms strategic decisions by finding that investments are lower in countries with greater levels of corruption. Similarly, the cost of corruption could be viewed as a cost of managing government regulatory affairs, and as noted above, Carman and Dominguez (2001) note that this could also hinder the allocation of resources to
profit maximization. Both effects suggest that corruption would lead to greater marketing sophistication and consumer orientation. However, firms benefiting from corruption may need to keep their customers satisfied in order to avoid a backlash against the corrupt system that protects them against competition. 4 Educational institutions can affect marketing because top management can learn both a set of best practices as well as how to use sophisticated methods. Hambrick and Mason (1984) postulate that firms whose management teams have more formal education use more complex and detail-oriented methods in running their businesses. Kohli and Jaworski (1990) hypothesize that companies with better educated executives are more likely to exhibit greater market orientation. Carman and Dominguez (2001) suggest that improved education and training systems will lead to increased resources for product improvement, brand marketing and supplier-customer-channel service. All of these papers suggest that we should expect that companies in countries with quality business education will exhibit greater marketing sophistication and customer orientation. The corporate culture within a country can also affect market orientation strategy. For example, the effectiveness of corporate boards affects whether a country s firms maximize profits. Given the links between market orientation and profits (e.g., Jaworski and Kohli 1993, Deshpandé and Farley 2004, Deshpandé, Farley and Bowman 2004), effective corporate boards will help ensure that managers focus on their customers and implement profit-maximizing strategies. Carman and Dominguez (2001) also suggest that stronger boards will lead to a better marketing strategy, although their focus is on board independence and whether banks or the government control the board. 4 The correlation between the competition and corruption indices is consistent with the idea that corruption reduces competition.
Managers willingness of to delegate is another dimension of corporate culture and perhaps national culture. Kohli and Jaworski (1990) suggest that firms with a greater concern for ideas of employees in other departments will exhibit a greater market orientation. This type of inter-departmental coordination requires a professional trust in the work of others that would also be observed among firms that delegate. Delegation of decisions empowers those employees who have contact with customers, which should increase customer orientation. Kohli and Jaworski (1990) also note that less centralized firms should have more intelligence generation and implementation, and Gebhardt et. al. (2006) find that firms with more market orientation are organized in a way that supports working together and keeping an honest and open channel of communication. In addition to a country s institutions, we include some variables that describe each country s business environment. These include the quality of competition among Internet Service Providers (ISP), the intensity of competition, and the country s Gross Domestic Product (GDP). The quality of competition in the ISP sector is measured by whether there is sufficient competition among Internet service providers to ensure high quality, infrequent interruptions, and low prices. This variable is included as a proxy for technological advancement, which could affect marketing sophistication. Carman and Dominguez (2001) would also predict that increased ISP quality is associated with improvements in marketing to the extent to which ISP quality could be classified as improved logistical infrastructure. Competition is included because Slater and Narver (1994) and Gatignon and Xuereb (1997) have shown that market orientation and customer orientation, respectively, have a stronger effect on firm performance under greater competition. Finally, GDP may matter for a number of reasons. Given the wide
variation in the levels of GDP across the different countries, this variable is better thought of as a measure of a country s economic development rather than as a barometer of current economic strength (i.e., a boom or recession). Firms in lesser-developed countries may be credit constrained, limiting their ability to invest in advanced marketing technology. Similarly, poorer consumers may focus primarily on consuming basic products and be less affected by marketing. 3. Data Sources Our data comes from The Global Competitiveness Report for 2005-2006. This report summarizes the response to an international survey, sponsored by Harvard University and the World Economic Forum, which surveys executives and business leaders in 117 countries. The value of each of the variables (except for GDP) is the country average of responses from a total of 10,993 executives (an average of 94 responses per country). We omit the observation from East Timor because of missing GDP data. We present the exact wording of the questions used to measure our variables in the appendix. GDP, while obtained from this same source, is based on underlying data. We present the summary statistics for these variables in Table 1. Correlations between our marketing variables and each of the institutional variables are presented in Table 2. Our data set has the benefit of a large cross-section of over 100 countries, which allows us to make comparisons that cannot be made with other data sets. However, the data suffer from at least two shortcomings. First, because the data are based on survey questions that were not designed for this study, some questions are defined differently than we might have preferred. This applies not only to the institutional variables, but also
to customer orientation. Second, by focusing on country-level data, we cannot capture the nuances introduced by the heterogeneity of firms within each county. Similarly, we are unable to control for the fact that different industries may dominate in each country. We believe, however, that the benefit of analyzing a larger cross-section of countries and their diverse institutions offer new insights that outweigh the disadvantages of the data. This cross section of countries thus allows us to supplement the previous literature, which has approached this topic with more depth than our data allows, but because of this depth, has had to limit the international comparisons to a smaller set of countries. 4. Analysis Our empirical results generally support that marketing sophistication and customer orientation are higher in countries with better institutions. We show this by first noting the strong correlation between the marketing variables and the different country-level institutions. We then present multivariate regression results. The first two columns of Table 2 present the correlations between marketing sophistication or customer orientation and the country-level institutional variables. We find positive correlations between each of the marketing variables and the institutional variables. Further, these correlations are quite high, 0.7 or more, with the exception of the ease of regulatory compliance. Note that each of the institutional variables is measured such that higher values are associated with what is conventionally thought of as higher quality. For example, the corruption variable is scored such that countries with less corruption score higher. Thus, these positive correlations indicate that marketing sophistication and customer orientation are higher in countries with better institutions.
While the correlations support the idea that companies in countries with better institutions have a greater marketing emphasis, we use multivariate regressions to separate out the effects of each of the individual institutions. The regression results are presented in Table 3. 5 In general, these results reinforce the conclusions we reached from examining the correlations, and the regression results are consistent with the links between institutions and marketing described in Section 2. We were surprised by the negative coefficients on the corruption variable. The result in Table 3 reveals that companies in countries with lower levels of corruption have lower customer orientation. A similar result is found for marketing sophistication, although the result is not statistically significant, even if the coefficient appears sufficiently large in magnitude to be of economic importance. Perhaps these negative relationships reflect that firms that rely on corruption need to focus on customer satisfaction in order to decrease resistance to the corruption, which protects them from competition. As noted in Section 2, many of these effects are in the spirit of the theoretical hypotheses of Carman and Dominguez (2001), including the positive effects of ease of regulatory compliance, effective corporate boards, and competitive ISP supply on customer orientation and the positive effects of quality business schools and competitive ISP supply on marketing sophistication. While our regressions are merely descriptive, our results have implications for the well-being of society to the extent that good societal institutions and good marketing practices are tied together. For example, Peterson and Ekici (2007) analyze survey results to show that customer s attitudes towards marketing increased their reported 5 Regressions that include population and population density yield the same results.
subjective quality of life. While their study covers several dimensions of marketing, parts of their study are especially applicable to our paper. Peterson and Ekici ask customers about whether business provided goods, services and experiences that they wanted, as well as the quality of service they receive at retail outlets. These measures, which correspond fairly closely to our measure of customer orientation, are in general more correlated with subjective quality of life than their other marketing attributes. 6 Prior research points out that governments or benevolent organizations may use improved marketing techniques to better the quality of life of individuals. For example, Shultz (1997), in his study about improving the lives of the destitute in war-ravaged transition economies, notes that improvements in both advertising and supply channels can be used to implement techniques to fight malnutrition. This suggests that increasing marketing sophistication in a country can have dramatic effects, especially in countries where people are living in dire conditions. In a related vein, we find that investing in strong non-marketing institutions in a country should help bring out conditions under which increased marketing sophistication will occur. 5. Conclusion We conduct a cross-sectional country-level analysis of how national institutions relate to the marketing emphasis of companies located within each country. We find that a suite of better institutions are associated with greater marketing sophistication and customer 6 Peterson and Ekici (2007) find weaker correlations between quality of life and positive advertising or fair pricing which is consistent with the weak effects in Pan et. al. (2007) between marketing and subjective well-being, because the marketing activity they measure is advertising intensity and number of retail outlets per capita.
orientation, although the effects of specific institutions become more nuanced after controlling for other institutions.
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Appendix: Wording of Survey Questions. Variable Phrasing of Question Marketing Sophistication The extent of marketing in your country is (1=limited and primitive, 7=extensive and employs the world's most sophisticated tools and techniques) Customer Orientation Firms in your country (1=generally treat their customers badly, 7=are highly responsive to customers and customer retention) Financial Institutions This is the average of scores for 2 questions: 1. Banks in you country are (1 = insolvent and may require government bailout, 7 = generally healthy with sound balance sheets) 2. Raising money by issuing shares on the local stock market is (1 = nearly impossible, 7 quite possible for a good company) Ease of Regulatory Complying with administrative requirements (permits, regulations, Compliance reporting) issued by the government in your country is Low Influence of Corruption Quality Business Schools Effective Corporate Boards Willingness to Delegate Competitive ISP Supply Intensity of Competition (1=burdensome, 7=not burdensome) Do other firms' illegal payments to influence government policies, laws, or regulations impose costs or otherwise negatively affect you firm? (1=large impact distorting competition, 7=no impact on competition) Management or business schools in your country are (1= limited or of poor quality, 7 = among the best in the world) Corporate governance by investors and boards of directors in your country is characterized by (1= management has little accountability, 7 = investors and boards exert strong supervision of management decisions Willingness to delegate authority to subordinates is (1 = low; top management controls all important decisions, 7 = high; authority is mostly delegated to business head units and other lower level managers) Is there sufficient competition among Internet service providers (ISPs) in you country to ensure high quality, infrequent interruptions, and low prices? (1=no, 7=yes, equal to the best in the world) Competition in the local markets is (1=limited in most industries and price-cutting is rare, 7=intense in most industries as market leadership changes over time)
Table 1: Summary Statistics for Dependent and Independent Variables. Name Observations Mean Standard Deviation Minimum Maximum Marketing Sophistication 116 4.35 1.02 1.80 6.70 Customer Orientation 116 4.61 0.77 2.70 6.20 Financial Institutions 116 10.13 1.97 5.60 13.30 Ease of Regulatory Compliance 116 3.03 0.67 2.00 5.80 Low Influence of Corruption 116 4.37 1.13 2.20 6.80 Quality Business Schools 116 4.11 1.01 2.40 6.60 Effective Corporate Boards 116 4.57 0.62 2.80 6.10 Willingness to Delegate 116 3.69 0.94 2.30 6.00 Competitive ISP Supply 116 4.14 1.04 1.70 6.30 Intensity of Competition 116 4.76 0.76 3.10 6.30 Log(GDP) 116 8.93 1.11 6.34 11.06 17
Table 2: Correlation Table for Institutional Measures Customer Orientation Financial Institutions Ease of Reg. Compliance Low Influence of Corruption Quality Business Schools Effective Corp. Boards Willingness to Delegate Competitive ISP Supply Intensity of Competition Marketing Sophistication Customer Orientation 0.83 1.00 Financial Institutions 0.77 0.73 1.00 Ease of Regulatory Compliance 0.39 0.50 0.44 1.00 Low Influence of Corruption 0.76 0.73 0.79 0.61 1.00 Quality Business Schools 0.85 0.71 0.66 0.34 0.67 1.00 Effective Corporate Boards 0.72 0.75 0.70 0.41 0.76 0.68 1.00 Willingness to Delegate 0.84 0.84 0.72 0.46 0.82 0.75 0.85 1.00 Competitive ISP Supply 0.76 0.72 0.61 0.38 0.61 0.71 0.58 0.70 1.00 Intensity of Competition 0.81 0.81 0.82 0.44 0.76 0.73 0.69 0.72 0.72 1.00 Log (GDP) 0.79 0.70 0.66 0.36 0.77 0.62 0.57 0.72 0.51 0.68 18
RP Table 3: Multivariate Analyses Institutional Variable: Marketing Sophistication Customer Orientation Intercept -1.69*** -0.48 (0.47) (0.46) Financial Institutions 0.05** 0.03 (0.03) (0.02) Ease of Reg. Compliance -0.03 0.18*** (0.06) (0.06) Low Influence of Corruption -0.11-0.23*** (0.07) (0.07) Quality Business Schools 0.33*** -0.01 (0.06) (0.05) Effective Corp. Boards -0.02 0.18* (0.11) (0.11) Willingness to Delegate 0.27*** 0.33*** (0.09) (0.09) Competitive ISP Supply 0.14*** 0.09* (0.05) (0.05) Intensity of Competition 0.14 0.34*** (0.09) (0.09) Log(GDP) 0.27*** 0.14*** (0.05) (0.05) 2 0.89 0.82 Number of Observations 116 116 *, **, and *** denote significance at the 10%, 5% and 1% levels, respectively 19