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Globalization effects and firm performance.

ABSTRACT

This paper advances prior knowledge on globalization and business by empirically investigating how this phenomenon affects firm performance. Building on environment-organization literature, this study explores globalization-performance relationships. The results of the analyses provide considerable support for literature arguing that globalization acts as a two-edged sword, one that can be beneficial and detrimental to business. Therefore, innovative and effective strategies should be designed and implemented to enable firms to capitalize on global market opportunities while carefully managing its inherent threats in order to attain long-term victory in today's globalized business environment.

INTRODUCTION

In the past two decades, the world has gone through the process of globalization, one that causes increasing economic, financial, social, cultural, political, market, and environmental interdependence among nations. Yet, limited empirical studies have been conducted to investigate how globalization actually affects firms. International business scholars (e.g., Clark & Knowles, 2003; Eden & Lenway, 2001) point out the need to explore further the effects of globalization on firms. Therefore, we aim to investigate the effects of globalization on firm performance. In this study, globalization is defined as the process of increasing social and cultural inter-connectedness, political interdependence, and economic, financial and market integrations (Eden et al., 2001; Molle, 2002). At the macro level, globalization is found to undermine autonomy in domestic airline competition policy (Clougherty, 2001). At the micro level, globalization (operationalized as trade liberalization) is found to improve the performance of U.S. multinational enterprises (Oxley & Schnietz, 2001). From these two studies, we have learned that globalization is a multi-faceted construct. Therefore, the classification of its effects into different dimensions and the study of their impact on firms prove to be worthwhile.

Based on the aforementioned discussion, the purpose of this study is twofold. We aim to classify and define the effects of globalization based on a review of globalization-related literature. Furthermore, we operationalize such effects and conduct an empirical test on the relationships between each of the key globalization effects and the performance of exporting firms in two distinct economic contexts, the developed markets (the U.S.) and the emerging markets (Thailand). Hence, this research attempts to answer two research questions: 1) Does globalization affect firm performance? and 2) Is the relationship between global market opportunities and performance stronger than the relationship between global market threats and performance?

GLOBALIZATION EFFECTS

According to Harvey and Novicevic (2002), various factors that drive increasing globalization can be grouped under four broad categories: 1) Macro-economic factors, 2) political factors, 3) technological factors, and 4) organizational factors. Macro-economic factors include, for example, an acceleration of technology transfer among countries and a rapid increase in populations in emerging economies (Harvey & Novicevic, 2002). Political factors refer to privatization, deregulation and trade liberalization of many nations in favor of free flows of trade and investments (Eden et al., 2001; Hafsi, 2002). Technological forces such as advance development in communication and transportation technologies, which promote growth in international business transactions, are also key drivers of rapid globalization (Graham, 1996; Knight, 2000). Organizations such as multinational enterprises are another major agent of this process (Eden et al., 2001; Harvey et al., 2002). Shifting organizational strategic attention towards a more global mindset is an example of organizational forces of globalization. Consequently, these forces have inevitably caused changes in the global marketplace. Such changes can be viewed as effects of globalization, which ultimately have impact on firms. These effects are discussed in detail in the following sections.

Since the 1980s, we have witnessed dramatic changes in the international and global marketplace. Liberalization of world trade and capital markets led by globalization has created a new and challenging competitive arena for all firms (Nolan & Zhang, 2003). With the trend towards more interdependence among nations, several changes in the business environment have emerged. There has been an emergence of global markets for goods, services, labor and financial capital (Deardorff & Stern, 2002; Hansen, 2002). Consumers' demands around the world have converged (Fram & Ajami, 1994; Levitt, 1983). Increasing trade and investment liberalization evoked by advances in transportation and communication technologies has resulted in larger volumes of international business transactions (Deardorff et al., 2002; Fawcett, Calantone, & Smith, 1997; Fawcett & Closs, 1993). These aforementioned trends have brought about two key effects of globalization, global market opportunities and global market threats (Hitt, Keats, & DeMarie, 1998; Molle, 2002; Sanchez, 1997). It is obvious that globalization not only presents more opportunities to firms, but also higher levels of threats (D'Aveni, 1994; Jones, 2002; Oxley & Yeung, 1998). While opportunities can arise from globalization, competition and uncertainty are inevitable. Although frequently mentioned in past literature, empirical studies relating these effects to firm performance are still scarce. This calls for a need to study globalization-performance relationships. These two dimensions along with our theoretical framework and hypotheses are discussed next.

THEORETICAL FRAMEWORK AND HYPOTHESES

We draw from environmental organization literature since our study attempts to establish the link between the external environment (i.e., globalization effects) and firm performance. Due to the multi-level and multi-dimensional nature of the environmental construct, the level and dimension of the environment to be studied must be clearly specified to minimize conceptual ambiguity and overabstraction (Castrogiovanni, 1991). Among the five levels of environmental conceptualization (i.e., resource pool, subenvironment, task environment, aggregation environment, and macro environment), this paper focuses on investigating the macro environment (i.e., globalization), which is the highest level of environmental conceptualization and encompasses all the other lower levels of environmental construct mentioned above. It is the context containing forces, which significantly influence organizational characteristics and outputs (Osborn & Hunt, 1974).

The environment in which firms operate provides resources that influence their survival and growth and the ability of new entrants to join the environment (Randolph & Dess, 1984). This refers to one of many environmental dimensions, the environmental munificence, which can be defined as the scarcity or abundance of critical resources needed by firms operating within an environment (Castrogiovanni, 1991; Dess & Beard, 1984a; Pfeffer & Salancik, 1978). Three sub-dimensions of environmental munificence include: 1) growth/decline, 2) capacity, and 3) opportunities/threats. Amid globalization, firms are affected by the changes in both market opportunities and threats (Frenkel & Peetz, 1998; Hitt et al., 1998; Kulmala, Paranko, & Uusi-Rauva, 2002). These opportunities and threats are two dimensions of the macro environment emphasized in this study. They can also be regarded as forces, which affect organizational outputs, i.e., firm performance. Hence, we hypothesize that there is a direct relationship between these two dimensions of globalization effects and firm performance (see Figure 1).

Global market opportunities can be defined as increases in market potential, trade and investment potential and resource accessibility resulting from globalization (Contractor & Lorange, 1988; Fawcett et al., 1993; Jones, 2002; Levitt, 1983). Developments in information technology, removal of trade and investment barriers, privatization, and deregulation of trade and investment policies have provided firms seeking international markets with tremendous opportunities (Scully & Fawcett, 1994). Such changes in the business environment enable firms to not only access new markets but also lower costs by relocating their operations and exploiting cheap resources around the world (Czuchry & Yasin, 2001). Firms can outsource their production in various locations to lower their costs (Chimerine, 1997). Market transactions have also become more efficient due to globalization of technology (Peterson, Welch, & Liesch, 2002). These new market opportunities have eventually fostered rapid growth in various economic sectors in many regions around the world (Graham, 1996). A large volume of cross-border flows of trade, investment, and technology during the 1990s and early 2000s is excellent evidence of increasing opportunities driven by globalization (UNCTAD, 2003).

[FIGURE 1 OMITTED]

As discussed earlier, globalization increases market potential, trade and investment potential and resource accessibility of firms. It has become easier for firms to outsource their production to different locations to gain benefits from location advantage since less trade and investment barriers are present in today's global marketplace (Chimerine, 1997; Czuchry et al., 2001). Firms are able to reach out and serve many new untapped markets around the globe. Liberal movements of financial and human capital also facilitate their business transactions. Moreover, advances in communication technology and information systems also lower search costs and improve efficiency (Peterson et al., 2002). Hence, it is clear that globalization makes resources necessary for a firm's growth and success more abundant. Given that these opportunities are likely to enhance the firm performance, the first hypothesis of this study can be stated as:

H1: Firm performance is positively influenced by global market opportunities.

Global market threats can be further categorized into 1) global competitive threats and 2) global market uncertainty. Global competitive threats are defined as the intensified competition in global markets resulting from larger numbers of competitors in the global marketplace (D'Aveni, 1994; Hafsi, 2002). Along with higher competition, another threat posed by globalization is global market uncertainty, which refers to the increasing complexity and demand uncertainty in the market (Burgers, Hill, & Kim, 1993; Chimerine, 1997; Courtney, 2001; Oxelheim & Wihlborg, 1991). These two types of global market threats and their hypothesized relationships are discussed in detail in the following sections.

Although globalization enhances a firm's market opportunities, it also increases the amount and level of competition faced by such firms. Trade liberalization, technological developments, and convergence of governmental macroeconomic policies associated with globalization have made it easy for firms around the globe to enter different geographic markets, and thus, intensify the competitive atmosphere for firms around the world (Hafsi, 2002; Harvey et al., 2002). Globalization has dramatically changed the competitive terrain faced by firms from both developed and emerging economies (Nolan et al., 2003; Scully et al., 1994). Firms operating at different levels--domestic, regional, international and global--are now competing against one another. Hence, it is obvious that globalization has brought about a new competitive landscape referred to as "hypercompetitive markets" (Hitt et al., 1998, 24), one that presents enormous threats to firms in every economic sector since it makes a firm's relative competitive advantage very time-sensitive (Harvey et al., 2002).

In addition, globalization also enables consumers to gather information easier, faster, and at lower costs. Thus, they become well aware of alternative products, and are ready to switch. Given a growing number of competitors, resources are becoming increasingly scarce (Castrogiovanni, 1991; Dess et al., 1984a; Porter, 1980). Such hypercompetitive situations coupled with scarce resources is harmful to firm performance (Beard & Dess, 1981). Firms are now faced with less pricing flexibility due to intensified competition and buyers' resistance, which have led to a lower rate of return (Chimerine, 1997). Therefore, we hypothesize that there is a negative relationship between global competitive threats and firm performance.

H2: Firm performance is negatively influenced by global competitive threats.

Global market uncertainty, which refers to the increasing complexity and demand uncertainty in the market (Burgers et al., 1993; Courtney, 2001; Oxelheim et al., 1991) is another threat confronted by firms operating in the global marketplace. Firms are faced with increasing difficulties in planning and making decisions (Chimerine, 1997; Hitt et al., 1998). Demand has become hard to forecast for various reasons. Since a growing number of firms now participate in the global marketplace, forecasting demand and/or competitors' responses has become increasingly difficult. Moreover, technology is changing at a rapid pace and information about new products is easily accessible by consumers. This has enabled consumers to shift between producers, making demand become less predictable and uncertain (Chimerine, 1997). Since operating in the global marketplace increases the level of uncertainty encountered by firms, their performance is affected. In addition, past studies found a negative relationship between perceived uncertainty and firm performance (Downey & Slocum, 1982; Gerloff, Muir, & Bodensteiner, 1991; Waddock & Isabella, 1989). Thus, global market uncertainty is hypothesized to affect firm performance negatively.

H3: Firm performance is negatively influenced by global market uncertainty.

RESEARCH CONTEXT

The two countries selected as the research settings for this study are Thailand and the U.S. These countries provide rich research contexts due to differences in terms of their degree of globalization (Foreign Policy, 2005), level of economic development, and national competitiveness (Porter et al., 2005). While the U.S. is highly globalized, Thailand is considerably less globalized. According to a survey conducted by AT Kearney in cooperation with Foreign Policy Magazine (2005), Thailand is ranked 46th, and the U.S. is ranked 4th on the globalization index. Thailand is classified as a lower-middle-income economy, one in which the Gross National Income (GNI) per capita is between $826 and $3,255, while the U.S. is considered a high-income-economy whose GNI per capita is above $10,066 (The World Bank Group, 2006). Furthermore, the national competitiveness of these two nations differs dramatically. The U.S. is the second most competitive country in the world whereas Thailand is ranked number 36 on the national competitiveness index (Porter et al., 2005). Given those sharp contrasts, it is perhaps worthwhile to examine whether the relationships between globalization effects and firm performance are similar or different. Moreover, using sample groups from two countries allows us to focus on the generalizability of this study in order to provide useful information for further research.

METHODOLOGY

The electronics and chemical industries were found to have a large number of exporters in both Thailand and the U.S. due to lower manufacturing costs in the former and more advanced technology in the latter. For this reason, firms in these two industries were selected as the population base of this study. Recent lists of exporting firms in Thailand were identified from two sources: 1) Export-Import Bank, Thailand (2001-2003) and 2) Department of Export Promotion, Thailand (2003). These two sources are reliable and legitimate because they represent the authorities that oversee and support exporters in Thailand. Therefore, these sources provide the most complete set of exporting firms in Thailand classified by industries. A total of 1,050 firms (450 electronic exporters; 600 chemical and pharmaceutical exporters) are included in the sampling frame. The sample in the U.S. consists of firms in manufacturing sectors having the first three digits of the North American Industry Classification System (NAICS) of 334- and 325-. Lists of qualified firms were obtained from Harris InfoSource's (2001) database and Ward's Business Directory of U.S. Private and Public Companies by Gale Group (2001). We relied on these two directories because they classify firms based on the NAICS and provide information regarding a firms' export activity, necessary information for this study. Therefore, we randomly selected our samples from these lists. This yielded the final sample size of 692 U.S. exporters.

The main research instrument in this study was a questionnaire, initially designed based on previous studies. The questionnaire was designed in English and revised after discussing with fifteen experts and managers and a pretest with twenty firms. It was then translated into Thai and back-translated by two independent bilinguals using the method suggested by Douglas & Craig (1983). This involved original translation, back-translation, and extensive refinements until the translated instruments possessed both conceptual and functional equivalences (Cavusgil & Das, 1997; Mintu, Calantone, & Gassenheimer, 1994). The key informant technique (Campbell, 1955) was used to collect data. The targeted key informants included the presidents, owners, or middle-level managers (general managers or marketing managers) who are typically top decision makers of the firms and are most knowledgeable about the firms' overall activities. The questionnaires were mailed to 1,050 and 692 firms in Thailand and the U.S., respectively. In both countries, three waves of mailings were sent to the key informants in our sampling frame. In addition, a telephone follow-up was conducted one week after each of the mailings to request and encourage participation. After eliminating undelivered mail and firms that are no longer exporting or out of business, the total valid mailings were 767 in Thailand and 359 in the U.S. A total of 223 completed surveys were returned, and 208 were usable. The overall response rate was 20%.

Firm performance was measured using four self-reported items that reflect the level of a managers' satisfaction in terms of return on investment, sales goals, profit goals, and growth. These items were adopted from Grewal & Tansuhaj (2001) and were rated on a seven-point scale (1 = very unsatisfactory and 7 = very satisfactory). We used subjective performance measures in this study for two major reasons. First, past studies indicate that both perceptual and objective measures of performance yield consistent results (Dess & Robinson, 1984b; Hart & Banbury, 1994; Naman & Slevin, 1993). Next, the secondary financial data indicating the expenses and revenues of firms from emerging markets is either unavailable or difficult to obtain due to the size and non-public nature of their businesses (Sapienza, Smith, & Gannon, 1988).

Global market opportunities are defined as increases in market potential, trade and investment potential and resource accessibility resulting from globalization. Global market threats can be further categorized into 1) global competitive threats and 2) global market uncertainty. Global competitive threats refer to the intensified competition in global markets resulting from a larger number of competitors in the global marketplace. Global market uncertainty is defined as the increasing complexity and demand uncertainty in the market. Based on these dimensions of globalization effects, measurement items were generated based on a review of past literature (e.g., Archibugi & Michie, 1997; Fawcett et al., 1997; Morrissey & Filatotchev, 2000; Zou & Cavusgil, 2002). All items were rated on a seven-point Likert scale. Scale items anchored by "strongly disagree" (1) to "Strongly Agree" (7).

Given the scarcity of prior empirical research, the scale to measure the effects of globalization was newly generated. Since observed variables were manifestations of underlying construct, reflective measures were used to assess the constructs of interest in this study (Bagozzi & Baumgartner, 1994). Therefore, confirmatory factor analysis by means of AMOS 4.01 (Arbuckle, 1999) was used to assess the psychometric properties of the scales to validate the measures (Anderson & Gerbing, 1988; Fornell & Larcker, 1981). Before merging two national sub-samples for measurement validation, an assessment of measurement invariance was conducted to ensure cross-cultural equivalence of the constructs (Steenkamp & Baumgartner, 1998). Following the procedure suggested by Steenkamp and Baumgartner (1998), configurational invariance and metric invariance must be achieved. While the former refers to the cross-cultural equivalence in the factorial structure underlying a set of observed measures, the latter implies equivalence in the scale intervals. Applying multiple group confirmatory factor analysis, the results revealed full configurational invariance and metric invariance. Hence, it can be concluded that merging the two national sub-samples is valid. The chi-square (x2) of the measurement model was 104.278 (degree of freedom = 82). The comparative fit index (CFI), normed fit index (NFI), non-normed fit index (NNFI), and goodness of fit index (GFI) were .98, .95, .98, and .94, respectively. These fit indices of above .90 are considered acceptable (Bentler, 1992; Byrne, 2001; Diamantopoulos & Siguaw, 2000; Joreskog & Sorbom, 1993). Root mean square of error approximation (RMSEA) was .036. This value of RMSEA is indicative of good fit since it is less than .05, which is commonly regarded as the threshold (Browne & Cudeck, 1993; MacCallum, Browne, & Sugawara, 1996). Construct reliabilities were assessed using squared multiple correlation (R2), Cronbach alpha and composite reliability ("c). Every indicator was a reliable measure of its designated construct since each squared multiple correlation was substantial, i.e., greater than 0.5 (Diamantopoulos et al., 2000). The Cronbach alphas of all constructs were greater than 0.7, the minimum acceptable level suggested by Nunnally & Bernstein (1994). In addition, the composite reliabilities of the constructs exceeded 0.6, the benchmark recommended by Bagozzi & Yi (1988).

RESULTS AND DISCUSSION

We initially assessed the differences in the mean of the dependent variable--firm performance--between two national sub-samples and two industry sub-samples by using one-way ANOVA. The result revealed that there is no difference in the mean of firm performance between Thai and the U.S. exporters (F-statistics = 2.226 at p > .10) or between electronics and chemical industries (F-statistics = 0.336 at p > .10). Therefore, there is no significant difference in firm performance between firms from these two countries and industries. This is not unexpected since the performance of firms in similar industries (i.e., high-tech industries such as chemical and electronics) may be very similar.

Since there is no difference in the mean of dependent variable across industries and countries and the results of measurement invariance have confirmed equality in the constructs across these two countries, data were pooled for model estimation. Maximum Likelihood Estimation (MLE) was used to fit the structural model presented in Figure 2. Fitting the structural model after the measurement model has been purified is the procedure suggested by Anderson and Gerbing (1988) and is commonly practiced by many academic scholars such as Li and Calantone (1998) and Zou and Cavusgil (2002). The estimates were computed using AMOS 4.01 (Arbuckle, 1999). The structural proposed model of globalization effects and firm performance is presented in Figure 2 along with parameter estimates and fit statistics.

[FIGURE 2 OMITTED]

As shown in Figure 2, the [x.sup.2] of 145.889 (degree of freedom = 84) is significant at .05 level. However, [x.sup.2] is very sensitive to sample size (Marsh, Balla, & McDonald, 1988). Larger sample size tends to yield significant [x.sup.2]. Therefore, it should not be used alone in evaluating model fit (Bollen, 1989). Other fit indices included goodness of fit index (GFI), normed fit index (NFI), non-normed fit index (NNFI), and comparative fit index (CFI). The GFI of .915, NFI of .931, NNFI .961, and CFI of .969 were above .90, the minimum desirable level recommended by Bentler (1992), Byrne (2001), Diamantopoulos and Siguaw (2000) and Joreskog and Sorbom (1993). Moreover, all the standardized residuals were small. Thus, we conclude that the model fits data well.

To test the hypothesized relationships between globalization effects and firm performance, we used the estimates of the path coefficients. The path coefficients in Figure 2 indicate that firm performance is affected positively and significantly by global market opportunities (t = 2.704, p < .01). As hypothesized, global competitive threats negatively influence the firm performance. The path coefficient between the global competitive threat and firm performance is positive and significant (t = -2.139, p < .05). Thus, H1 and H2 are supported. Nonetheless, we found no support for H3 since firm performance is not significantly influenced by global market uncertainty (t = .652, p > .5). Overall, the structural model fits the data adequately, and the hypothesized relationships between two effects of globalization--global market opportunities and global competitive threats--and firm performance are significant, and supported by the findings. The insignificance of hypothesis 3 suggests that there is no direct relationship between global market uncertainty and performance. This is not surprising since the causal relationship between uncertainty and performance has been debatable (Khatri & D'Netto, 1997). As alluded to by Khatri and D'Netto (1997), it is the complex nature of the uncertainty construct per se that obscures the causal relationship between uncertainty and performance. Frequently, studies have treated uncertainty as a moderator because it is difficult to establish a direct causal link between uncertainty and performance. However, we did not find a significant moderating effect of global market uncertainty on performance when the variable was added as an interaction term in the model. Another possible way to establish an indirect relationship between uncertainty and performance is by including some mediating variables. As shown in a recent study, the relationship between uncertainty and performance can be indirect, i.e., mediated by networking activities (Sawyerr, McGee, & Peterson, 2003). The results of their study show that as uncertainty increases, firms engage more in networking activities, which finally enhances firm performance. This implies that uncertainty alone can be harmful for firm performance unless certain strategies, such as networking activities and alliance participation, are implemented to mitigate its negative impact. Therefore, the investigation of an indirect relationship between global market uncertainty and performance in future research proves to be worthwhile.

CONTRIBUTIONS AND FUTURE DIRECTIONS FOR RESEARCH

Despite a large volume of literature discussing the effects of globalization, there is a scarcity of empirical research investigating its effects on business performance. We advance the literature by categorizing the effects of globalization into different dimensions, and develop a model to test the relationships between these effects and firm performance. The findings from this study support the argument that globalization not only benefits firms in terms of increasing opportunities, but also hurts business performance due to higher competitive threats (e.g., Contractor and Lorange, 1999, D'Aveni, 1994, Jones, 2002). In addition, we expand literature on globalization and environmental-organization interface by developing valid and reliable measures of globalization effects, and testing the scale across two distinct cultures. The measures were confirmed equivalent across cultures. We hope that these constructs generate venues for future research on globalization and related topics. The findings of our study have several implications for managers in the global marketplace. This study elaborated on the different effects that globalization has on business. The results indicate that such effects are not significantly different across cultures. This study also confirms that globalization is a universal phenomenon and that firms are inevitably affected. Globalization can affect firm performance positively and negatively. While global market opportunities are likely to enhance firm performance, global competitive threats tend to worsen it. Therefore, managers must be aware of such double-edged effects, and try to capitalize on opportunities while converting threats into opportunities. Appropriate strategies, such as developing networking relationships with other firms, must be carefully designed and implemented in order to take advantage of global market opportunities and minimize the threats from increasing competitive intensity.

LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH

Our study is among a very few empirical studies of globalization effects. Although the scales to measure globalization effects were developed from a careful literature review, they are new, and thus need further verifications and applications. Moreover, the model presented here is limited to the effects of globalization on business but not on society. In the short run, intense global competition may be deemed harmful for firm performance. However, in the long run, such competition will provide a healthier economy that benefits the overall society. Higher competition will eventually encourage firms to aim for continual improvements, which are good for both the firms and society. Therefore, the results of this study must be viewed with these limitations. Future research may attempt to find theories to explain the effects of globalization and investigate the role of different strategies and organizational structures in mediating the effects of globalization on firm performance. Alliance formation and strategic flexibility have been recommended as effective means to maneuver firms through globalization (Contractor et al., 1988; Hitt et al., 1998; Spekman & Sawhney, 1990). A study examining such relationships would provide useful information for managers operating in global industries on how to manage the effects of globalization more effectively. Furthermore, research on how the fit among different organizational structures (e.g., mechanistic vs. organic) and strategies (e.g., cost leadership, differentiation, diversification, etc.) may enhance firm performance in the presence of globalization effects and offers another fruitful venue for future studies.

CONCLUSION

In this paper, we have advanced our knowledge of globalization phenomenon by defining its effects and categorizing them into opportunities and threats. In doing so, we addressed the question of how globalization affects firm performance by empirically examining the influence that each globalization effect has on business performance. This study provides considerable support for literature arguing that globalization acts as a two-edged sword, one that can be beneficial and detrimental to business. Managers should be prepared to cope with such effects and try to capitalize on global market opportunities while carefully managing its inherent threats. Innovative and effective strategies should be designed and implemented to enable firms to gain competitive advantage and attain long-term victory. Building on our theoretical framework, further research should focus on how different strategies help firms navigate successfully through today's increasingly globalized condition.

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Amonrat Thoumrungroje, Assumption University Patriya Tansuhaj, Washington State University
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