Direction of exports under increasing globalization of markets: a longitudinal examination.

ABSTRACT

A commonly predicted trade effect of globalization is the creation of an environment in which exporters of all nations are venturesome enough to shed progressively the relative comfort of familiar markets and increase their share of distant ones. To test this contention, export direction of 59 countries in four trade organizations was analyzed for the period between 1988 and 1997. The findings indicate that, based on the geographic proximity or language similarity criterion, globalization failed to lead to the predicted shift in focus from familiar markets to distant ones. Indeed, ALADI, APEC, and ECOWAS countries reinforced their trade with other countries within a short geographic distance. Only the EU countries increased their penetration of both geographically and psychically distant markets over the decade of analysis.

1. INTRODUCTION

Long before "globalization" achieved a buzzword status, Levitt (1983) proclaimed that a globalization of markets was already taking place. He predicted that, for the most part, cultural preferences, national tastes and standards, and business institutions would quickly become vestiges of the past. This proclamation was based on the capacity for technology (the driving force of globalization) to force convergence in consumer demand following repeated exposure to products and lifestyles from abroad. Almost two decades later, a question is whether the current increasing globalization has had the predicted effect. Conceptually, increasing homogeneity may result from either pure convergence (products originating from any country are increasingly accepted universally), or copycat convergence (consumer culture actually spreads from a few center countries to the periphery). In either case, globalization is expected to lead companies (whether from everywhere or only from center countries) to becoming more daring enough to capitalize on the increasing acceptability of their products abroad. In other words, geographic proximity and language barriers should become meaningless as companies that used to export only to nearby countries may decide to go farther the safe compounds of their traditional markets.

Did the bulk of trade in goods from the late 80's to the late 90's tend to occur within the comfort and security of geographic proximity and language similarity, or did globalization succeed in making exporters venturesome and daring toward the end of the decade? The purpose of this research was to determine the impact of globalization on the direction of exports. Specifically, the study focuses on variations in exports based on geographic and/or psychic distance between importer and exporter. It investigates the hypothesis that deepening globalization leads to trade taking place over increasingly longer geographic distances and involving significantly different languages. Export data of 59 countries over the time-period between 1988 and 1997 were used.

2. EXPORT DESTINATION LITERATURE

Exporting is the preferred mode of entry of foreign markets by American companies, especially for those at early stages of the internationalization process. The popularity of exporting over other modes of entry and operations in foreign markets (e.g. foreign direct investment) stems from the relative low commitment of resources it requires from the exporting company. A question, however, for companies electing to use the export mode of market entry is where to export (destination country).

A stream of research in the export literature that focuses on "anxiety" reduction and "convenience" exploitation rationalizes that choice of destination country will be influenced by both psychic and geographic distance between importer and exporter.

2.1 Psychic (or cultural) Distance

First used by Johanson and Wiedersheim-Paul (1975) "psychic distance" is a perceptual concept that refers to any environmental factor with a potential to create risk or fear in the mind of exporters and prevent them from undertaking entry into a given market. In most the export literature, "cultural distance" and "psychic distance" are interchangeably, though "psychic distance" encompasses aspects other than culture (Fletcher and Bohn, 1998). Empirically, Nordstrom and Vahlne (1992) have used such factors as level of economic development, education, differences in business language and the existence of trading channels to measure psychic distance. Reid (1981) suggests that the ability to speak a foreign language, extent of overseas travel, foreign nationality and level of education will influence the perception of psychic distance and choice of foreign markets. Kogut and Singh (1988) indicate that psychically close countries are easier for companies to learn about because there is less uncertainty when firms initially export to countries in their backyard (Johanson and Wiedersheim-Paul, 1975). Thus, Johanson and Vahlne (1992) recommend that companies export their goods and services to countries that are close in terms of psychic distance before venturing to more distant ones because an incremental internationalization process, owing to the progressive reduction of psychic distance, would improve their chances for Success.

2.2 Geographic Distance

Geographic distance is generally presented to be a determinant of export from transportation costs standpoint. Walther (1975), for example, argues that geographical distance, by adding to transportation costs and increasing imperfection in market knowledge, is an impediment to export. Should exports be undertaken anyway, Root (1994) shows that they will have a difficult time competing against domestically produced products in the target country. Ceglowski (1998) shares the same view when he predicts trade flows should be larger between markets that are geographically close to one another in cases where transportation and information costs increase with distance. In examining other forms of market entry, Grosse and Trevino (1996) indicate that geographic distance may also act as a deterrent to foreign direct investment due to the greater cost of obtaining information about the foreign market.

Though the focus of these studies tends to be on physical geographic distance, it may be argued that the regulatory trade environment may be as important a barrier than physical geographical distance. In an era of frequent government intervention in trade, the existence of an economic integration agreement between the exporting and importing countries to reduce tariff and non-tariff barriers may prove more meaningful in fostering trade than sheer physical geographic proximity.

Do most exports still tend to occur within the comfort and security of geographic proximity and language similarity, or has globalization resulted in companies being venturesome and more daring? The purpose of this research was to determine whether exports of the countries studied varied according to the geographic and psychic distance that exists between buyer and seller.

3. METHODOLOGY

3.1 Operationalization of the Constructs

Psychic Distance: In this study, psychic (or cultural) distance was equated with language similarity between the exporting and importing countries. The choice of this working definition derived not only from the fact that language plays such an important element in the manifestation of culture, but also because of its preponderant role in the conduct of business across national boundaries. Practically, when the exporter and exporter country had the same official language, the psychic distance between them was deemed SHORT. Otherwise, it was deemed LONG. To illustrate, a US company's export to Canada was classified as SHORT (both countries share the English language) in the same way as a Canadian company's export to France (both countries share the French language). Conversely, the US was considered psychically distant from France (LONG psychic distance) given their differences in official languages.

Geographic Distance: Regarding the concept of geographic distance, an exporter and importer were considered geographically close if both had membership in the same trade/economic organization, and geographically distant otherwise. The rationale for this classification is based on the fact that an economic integration agreement between the exporting and importing countries to reduce tariff and non-tariff barriers is more meaningful in fostering trade than sheer physical geographic proximity. Practically, when the exporter and importer nations were members of the same free trade area, customs union, common market, or economic union, any trade among them was deemed taking place over a geographically SHORT distance. To illustrate, a Brazilian export to Mexico was classified geographically SHORT distance (they are both ALADI members), in the same way as a Nigerian export to Cote d'lvoire (both nations are members of ECOWAS). Conversely, a Peruvian export to the United Kingdom would be classified as geographically LONG distance since the two nations do not belong to a common trade organization.

3.2 Design

To investigate how, under increased globalization, country export destination evolved from the late 1980's to the late 1990's, a 2x2 factorial design was employed. The first factor in this analysis was GEOGRAPHIC DISTANCE (membership in the same trade/economic organization), while the second factor was PSYCHIC DISTANCE (official language similarity). Two levels of the first factor were further specified (short vs. long geographic distance). Similarly, two levels of the second factor were also set (short vs. long psychic distance). As indicated in Table 1, this design led to the identification of four potential cells to study the destination of a nation's export:

Cell A: exports are directed to geographically close and psychically similar countries.

Cell B: exports are directed to geographically close, but psychically distant countries.

Cell C: exports are directed to geographically distant, but psychically similar countries.

Cell D: exports are directed to both geographically distant and psychically distant countries.

3.3 Country Selection

A total of 59 countries were selected for inclusion in this study. All were members of four trade and economic organizations: the Latin America Association (ALADI, 11 countries), the Asia Pacific Economic Cooperation (APEC, 18 countries), the Economic Community of West African States (ECOWAS, 16 countries), and the European Union (EU, 14 countries).

While membership in the APEC spreads across Asia and America, that of most other trade and economic organizations included herein is more geographically concentrated (e.g. ALADI, ECOWAS, EU).

Some trading blocs comprise essentially developed countries (i.e. EU) while others are made of emerging and developing market countries (ALADI, ECOWAS).

The four trade and economic organizations included in this study have membership that spans the globe (i.e. North and South American, European, African, and Asian continents).

3.4 Hypotheses of the Study

To understand how globalization of markets may have impacted export direction in ALADI, APEC, ECOWAS, and EU countries over time, two hypotheses were formulated.

Exports Destination before Globalization:

Ho1: In 1988, exports will be more constrained by the geographic or psychic distance between exporting and importing countries (Cell A will be greater than cell D).

Export Destination with Globalization:

Ho2: In 1997, exports will no longer be constrained by geographic or psychic distance between exporting and importing countries (cell A will decrease and cell D will increase).

4. RESULTS AND FINDINGS

4.1 Export Patterns of ALADI Nations (1988 vs. 1997):

The percentage of exports made by ALADI countries to psychically close nations rose from 6% in 1988 to 8.68% of total group exports in 1997 while the percentage of exports to geographically close countries rose from 8% to 14.64% over the same period. Despite the increase in exports to geographically close nations, an analysis of variance (ANOVA) shows that, overall, neither psychic distance nor geographic proximity is determinant of export direction in ALADI countries in 1988 or 1997.

As an indication of whether ALADI nations ventured beyond their comfort zone during the decade of study, changes in Cell A (close geographic and close psychic) and those in Cell D (distant/distant) were analyzed (see Table 1). The analysis shows that the percentage of exports to close/close doubled from 3% to 6.67% (proof of retrenchment) and distant/distant decreased from 89% of total exports in 1988 to 83.35% in 1997 (also an indication of retrenchment). Thus, countries in this group did not become more daring/venturesome with globalization.

4.2 Export Patterns of APEC Nations (1990 vs. 1997):

Percentage of exports by APEC nations to those psychically close to them rose from 34.25% in 1990 to 36.39% in 1997. The percentage of exports to geographically close countries on the other hand went from 78.09% to 82.22%. The ANOVA shows that neither psychic distance nor geographic proximity is determinant of export direction in APEC countries in 1990 and 1997.

Percentage of exports to close/close went from 30.86% to 33.37% while the distant/distant decreased from 18.52% to 14.76%. Overall, countries in this group did not become more daring with globalization.

4.3 Export Patterns of ECOWAS Nations (1988 vs. 1997):

Percentage of exports to psychically close countries declined from 47% in 1988 to 45.42% in 1997. At the same time, the share of exports to geographically close countries rose from 6% to 9.34%. The analysis of variance shows that neither psychic distance nor geographic proximity is determinant of export direction in ECOWAS countries.

Percentage of exports to close/close was almost constant from 4% to 4.74% like the distant/distant 51% to 49.98%. Countries in this group did not become more daring with increased globalization.

4.4 Export Patterns of EU Nations (1988 vs. 1997):

Percentage of EU nations' exports to psychically close countries declined slightly from 22% in 1988 to 20.82% in 1997. Percentage of exports to geographically close countries declined also from 75% to 72.23%. Here, analysis of variance shows that psychic distance that was only a marginally significant factor of export direction in 1988, became a significant one in 1997. Geographic proximity has not been a significant factor in either year.

To determine whether EU nations became daring during the decade of study, the "close/close" cell was contrasted with the "distant/distant" one. The analysis shows that exports to "close/close" fell from 16% to 14.18% and "distant/distant" rose from 19% to 21.13% indicating that EU countries still prefer to trade heavily among themselves. Globalization did not change that trend.

5. CONCLUSION AND DISCUSSION

The currently observed failure of globalization to lead to its hypothesized trade effects leads to a number of qualitative interpretations and comments: Levitt (1983) stated that one of the key drivers of the current globalization phenomenon is technology; this, in reference to technology's capacity to create exposure and awareness (i.e. via travel, internet, etc.) at the consumer level. Proponents of such a process typically assume a hierarchy of effect dependent format where Awareness would occur globally [thanks to technology, consumers from any country are equally exposed to products from all countries]. Following this exposure process, Attitude [like or dislike on the part of consumers] then develops, which eventually leads to Behavior [products from every country potentially purchased in any country].

Unfortunately, technological developments that fuel globalization have not touched most countries yet. Most countries are not at the age of the Internet (thus, global exposure does not exist): low GNP/capita in most developing nations still represent a significant barrier (i.e. price of a computer and telephone or cable connection). In addition, even when such technological developments as the Internet are available in a country, globalization and consumer culture may still be resisted. Even when globalization is not resisted, just the creation of Awareness may not be lead to Behavior in the present. For example, people in a given country may certainly be exposed to what is produced and consumed elsewhere; but even positive Attitude does not always lead to Behavior (e.g. when economic ability to purchase is lacking). Finally, when globalization leads to spread of consumer culture within a country, the adoption process may be more localized (i.e. youth segment) or the demand only latent (not yet actualized). Perhaps even more revealing is a stream of research (Gnepa and Petrosky, 2001) suggesting that in the current globalization process, not all countries are born equal; and that products from certain "center" nations are likely to be preferred by consumers globally because consumption values actually follow a diffusion process that goes from "center" countries to "peripheral" ones.

Table 1: Export Based on Geographic and Psychic Dimensions

Geographic Distance    Psychic Distance

                       Short     Long

      Short            Cell A    Cell B
      Long             Cell C    Cell D

Table 2: Functions and Membership of Key Trade Organizations

ALADI:

ESTABLISHMENT AND FUNCTIONS: The Latin American Integration
Association (ALADI) was established in 1980 in Uruguay. The
organization aims to pursue the integration process in the region
leading to its harmonious and balanced socioeconomic development. In
particular, the organization's duties include the promotion and
regulation of reciprocal trade, development of economic
complementarity, and support of actions for economic cooperation to
encourage market expansion.

COMPOSITION: 12 member countries: Argentina, Bolivia, Brazil, Chile,
Colombia, Cuba (6/11/98), Ecuador, Mexico, Paraguay, Peru, Uruguay,
and Venezuela.

APEC

ESTABLISHMENT AND FUNCTIONS: The Asia-Pacific Economic Cooperation
(APEC) was established in 1989 in response to the growing
interdependence among Asia-Pacific economies. Begun as an informal
dialogue group, APEC has since become the primary regional vehicle for
promoting open trade and practical economic cooperation. Its goal is
to advance Asia-Pacific economic dynamism and sense of community.
Today, APEC includes all the major economies of the region and the
most dynamic, fastest growing economies in the world. Its 21 member
economies had a combined Gross Domestic Product (GDP) of over US$16
trillion and 43 percent of global trade in 1998.

COMPOSITION: 21 member countries: Australia; Brunei Darussalam;
Canada; Chile; China; Hong Kong, China; Indonesia; Japan; Korea;
Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; Philippines;
Russia; Singapore; Chinese Taipei; Thailand; United States; Viet Nam.

ECOWAS:

ESTABLISHMENT AND FUNCTIONS: The Community was established by the
Treaty of Lagos signed in 1975. The principal objective of the Treaty
is the creation of an economic and monetary union. To this end, a
regional trade liberalization scheme has been adopted for the creation
of a free trade area by the end of 1999, and a study is under way for
the adoption of a common external tariff. A three-phase program has
almost been completed for establishing the free movement of West
Africans throughout the Community, the right of residence and
establishment. The Community has been pursuing the physical integration
of its Member States through the development and modernization of
regional highway and telecommunication networks. Member States have
committed themselves to the coordination and harmonization of national
economic and financial policies in order to enhance the effectiveness
of national structural adjustment and economic reform programs. This is
also to facilitate the regional approach to economic development and
the establishment of a monetary union.

COMPOSITION: 16 member countries: Benin, Burkina Faso, Cape Verde, Cote
d'lvoire, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali,
Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo

EU:

ESTABLISHMENT AND FUNCTIONS: The European Economic Community (re-named
European Community in the Treaty on European Union) was established on
January 1, 1958, when the Treaty of Rome came into force. Its aim was
to integrate, over a 12-year transition period, the members' economic
resources, other than coal and steel, into an economic union within
which goods, labor, services, and capital will move freely. Common
policies for foreign trade, agriculture, and transport will also be
implemented. The customs union between the original Six members became
effective July 1, 1968. Greece became a member of the EEC on January
1, 1981. Spain and Portugal became members in 1986. Austria, Finland,
and Sweden joined in 1995.

COMPOSITION: 15 member states: Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spain, Sweden, United Kingdom.

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Dr. Tahi J. Gnepa earned his Ph.D. at the University of Wisconsin-Madison in 1989. Currently he is a professor of international business and marketing at California State University-Stanislaus, Turlock, California. His research on the export strategies of small and medium-sized firms, and the international diffusion of consumption values has been published in the Journal of Marketing Theory and Practice, the Journal of Advertising Research, the Journal of International Consumer Marketing, and the Journal of Global Marketing, among others.