Governance of Export Channels to Governance of Export Channels to Eastern Europe:Eastern Europe:

Impact of Market Characteristics on Impact of Market Characteristics on Business PerformanceBusiness Performance

Cristian Chelariu, York UniversityDaniel C. Bello, Georgia State UniversityDavid I. Gilliland, Colorado State University

Environment in Transitional EconomiesEnvironment in Transitional Economies

Central Central

Planning Planning MarketCompetition

Poor infrastructure

Obsolete production facilities

Need for institution building / law enforecment

Unstable political environment

Unethical business climate

Few local firms with Western business skills

Sampled Export Country-MarketsSampled Export Country-Markets

Russia Russia 40%40% PolandPoland 20%20% Czech RepublicCzech Republic 9%9% HungaryHungary 5%5% Less than 5% of sample:Less than 5% of sample:

RomaniaRomania BulgariaBulgaria Baltic (Estonia, Latvia, Lithuania)Baltic (Estonia, Latvia, Lithuania) Slovakia, SloveniaSlovakia, Slovenia Others from former Yugoslavia, Kazahstan, Others from former Yugoslavia, Kazahstan,

UkraineUkraine

EnvironmentalUncertainty

ExportChannelGovernance

Performance:MarketDevelopmentGoals

Environmental UncertaintyEnvironmental Uncertainty

Unanticipated changes in circumstances surrounding an exchange

Williamson 1981

Fundamental Facets:•Volatility•Munificence•Complexity

Sharfman and Dean 1991

Market Volatility Unexpected change reducing partners ability to predict outcomes, renders agreements incomplete

Demand Munificence Certainty that potential for product is & remains high

Regulatory Complexity Diversity of trade regulations & institutions implementing trade rules

Market DevelopmentMarket Development

Not just sporadic export salesNot just sporadic export sales

Systematically developing Eastern Systematically developing Eastern European market for exporter’s brandEuropean market for exporter’s brand

Increasing Operational InterdependenceIncreasing Operational Interdependence Increasing Non-market governanceIncreasing Non-market governance

Operational Integration Continuum

Discrete

Increasing Operational Interdependence

Joint Actionby exporter& importer

Operations interdependent and complex

Exporter Importer

Sets wholesale price

Designs products

Calls on F. customers

Attends Trade Fairs

Pre-sale market analysis & promotion

Modified product for local conditions

Salesforce training, Post-sale services

Joint Actions

Complexity requires GovernanceComplexity requires Governance

OperationalInterdependence

Non-marketGovernanceMechanisms

Governance resolves increasingly complex decisions

•Resource allocation

•Role responsibility

•Operational issues

GovernanceGovernance

““the approach employed by parties to the approach employed by parties to organize and regulate exchange conduct”organize and regulate exchange conduct”

Unilateral: One partner establishes rules & rewards to elicit compliance by target

Bilateral: Parties collaborate & share control based on mutual interests

Heide 1994

Gundlach 1994Gundlach 1994

Research QuestionsResearch Questions

Does intensified governance improve Does intensified governance improve business performance?business performance?

Do facets of uncertainty intensify Do facets of uncertainty intensify governance?governance?

Does governance mediate the UncertaintyDoes governance mediate the Uncertainty—Performance relationship?—Performance relationship?

MarketVolatility ξ1

DemandMunificence ξ2

RegulatoryComplexity ξ3

BilateralRelationalism η1

UnilateralIncentives η2

BusinessPerformance η3

MethodsMethods

USA export managers; from J. of USA export managers; from J. of Commerce & Dept. of Commerce listsCommerce & Dept. of Commerce lists

747 firms phoned; only 353 export to 747 firms phoned; only 353 export to Eastern EuropeEastern Europe

188 questionnaires back (180 useable, 188 questionnaires back (180 useable, 51% response rate)51% response rate)

Volatility1. Environment changes Slowly…changes Fast2. Stable Environment…Erratic Environment3. Certain Environment…Uncertain Environment(scale: 7-point Semantic Differential )

Demand Munificence1. In that country, there is a high potential for our products

2. The customer demand for our product category is increasing in that country

3. In that country, the demand in our industry is growing(scale: 1= Strongly Disagree to 7= Strongly Agree)

Regulatory Complexity1. Doing business is complex because many entities (agencies,

courts, bureaucrats) are involved in regulating business

2. Various government bodies with divergent agendas regulate business in that country

3. Doing business is subject to many approvals from a variety of officials at various levels

(scale: 1= Strongly Disagree to 7= Strongly Agree)

Bilateral Relationalism

1. Problems that arise in this relationship are treated by the parties as joint rather than as individual responsibilities

2. Both parties share in the problems that arise in the course of our dealings

3. When some unexpected situation arises, the parties would rather work out a new deal than hold each other to the original terms

4. Both parties are flexible in dealing with each other

Unilateral Incentives

1. When interacting with our partner, we provide incentives to motivate our partner to follow our suggestions

2. We offer specific incentives to our partner to encourage changes in its marketing and/or operating procedures

3. We emphasize what we will offer in return for their cooperation or participation

Business Performance

How effectively do you and your partneraccomplish your firm’s market developmentgoals in this Eastern European country:

1. Sales Goals 2. Profit Goals3. Growth Goals

(scale: 1= Very Poor to 7= Very Well)

Linkages in the Model Hypotheses Theoretical Model

Number Sign Parameter Estimate t-value

Exogenous Endogenous Variables Volatility Relationalism H1a γ 1,1 .28 2.58

Volatility Unilateral Incentives H1b γ 2,1.26 2.41

Demand Relationalism H2a γ 1,2 .13 1.55

Demand Unilateral Incentives H2b γ2,2 .17 2.02

Regulatory Relationalism H3a γ 1,3 .03 0.31

Regulatory Unilateral Incentives H3b γ 2,3 .26 2.46

Demand Business Performance .32 4.09

Between Endogenous Variables Relationalism Performance H4a 3,1 .31 4.12

Unilateral Incentives Performance

H4b 3,2 .16 2.06

χ2(140)= 299.09; GFI= .85; RMSEA= .073; RMR= .063; CFI= .94; TLI (NNFI)= .92

MarketVolatility ξ1

DemandMunificence ξ2

RegulatoryComplexity ξ3

BilateralRelationalism η1

UnilateralIncentives η2

BusinessPerformance η3

ImplicationsImplications

Channel management positively Channel management positively associated with performanceassociated with performance

Governance matters; has performance Governance matters; has performance consequencesconsequences

Both U, B contribute uniquelyBoth U, B contribute uniquely

ImplicationsImplications

Volatility weakens B (close collaboration), Volatility weakens B (close collaboration), U (mfg. incenting)U (mfg. incenting)

Uncertain, erratic environments are not Uncertain, erratic environments are not “overcome” by stronger channel “overcome” by stronger channel managementmanagement

Unpredictability a key public policy problemUnpredictability a key public policy problem

ImplicationsImplications

Exporter incentive-investing in E. Exporter incentive-investing in E. European partner:European partner:

Encouraged by demand potentialEncouraged by demand potential

Encouraged by regulatory complexityEncouraged by regulatory complexity• Do exporters rely more on local partner?Do exporters rely more on local partner?