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A hybrid model for export market opportunity analysis

Shirley Ye Sheng
Andreas School of Business, Barry University, Miami, Florida, USA, and

Export market opportunity analysis 163

Received October 2009 Revised October 2010 Accepted December 2010

Michael R. Mullen
Department of Marketing, The College of Business, Florida Atlantic University, Fork Lauderdale, Florida, USA
Abstract
Purpose The purpose of this paper is to propose a new model for export market opportunity analysis by combining the marketing-based overall market opportunity index (OMOI) with the economic-based gravity model in order to more accurately assess export market potential, in total and for specific industries. Design/methodology/approach Variables from the gravity and OMOI models are used to analyze export market opportunities for specific industries. Findings Market size, economic intensity, geographic and language distance, and regional trade agreements (RTAs) are found to be strong predictors of export market attractiveness from a US firms perspective. Foreign direct investment (FDI) is found to act as both a substitute for and a complement to exports. Cultural distance, based on Hofstede, is not a significant predictor for exports. Originality/value The authors hybrid model extends previous OMOI models and is applied to industry-level analysis. Keywords International trade, Marketing opportunities, Export markets Paper type Research paper

Introduction Foreign-market opportunity analysis is the most frequent objective of international market research (Czinkota and Ronkainen, 2010, p. 243). Expansion into new markets provides opportunities for survival and growth. Yet, an international market selection model that is flexible, comprehensive, and cost-efficient enough to accommodate the diversity across industries is still rare (Cavusgil et al., 2004; Green and Allaway, 1985; Papadopoulos et al., 2002). We propose a new theoretical base for export market opportunity analysis by combining the marketing-based overall market opportunity index (OMOI) (Cavusgil, 1997; Cavusgil et al., 2004; Mullen and Sheng, 2007) with the economic-based gravity model of international trade. As compared to aggregate export models, our hybrid model moves from analysis of overall market opportunity to analysis of industry market opportunity. Fortunately, previous studies of market screening and market selection have pointed out directions for future work. According to Cavusgil et al. (2004), cultural distance and participation in regional trade blocs should be included. The OMOIs in Cavusgil and colleagues and Mullen and Sheng (2007) are calculated using linear compensatory models, with the weights determined by expert opinion. Because the linear compensatory models are sensitive to the values of the weights, more precise weights should improve the accuracy of OMOI models and allow for differences across industries (Mullen and Sheng, 2007).
The authors thank the Special Issue Guest Editors and the anonymous reviewers for their constructive comments, and Professors Dow and Karunaratna for sharing their data on language and religious indicators.

International Marketing Review Vol. 28 No. 2, 2011 pp. 163-182 r Emerald Group Publishing Limited 0265-1335 DOI 10.1108/02651331111122650

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The purpose of this study is to refine market assessment methods by developing a new hybrid model that incorporates theory and the literature from both economics and marketing. The new model offers a more accurate evaluation of export market potential, in total and for specific industries. Literature review Scholars have studied ways to help firms screen and select foreign markets for opportunities beyond their home market (e.g. Cavusgil et al., 2004; Green and Allaway, 1985; Papadopoulos et al., 2002; Sakarya et al., 2007). Three major quantitative approaches to market potential assessment are market grouping, market estimation, and market ranking (Papadopoulos and Denis, 1988). Market grouping is closely linked with country/market clustering, segmentation, and country classification methods (Papadopoulos and Denis, 1988; Steenkamp and Ter Hofstede, 2002). International country clustering has been recognized as an important tool for analyzing a large number of countries with varying market potential. Firms already in international markets are likely to be more comfortable entering countries in the same cluster in which they have been successful. Such an approach is intuitive and appealing, but the limitations are obvious. Rather than assess market potential, clustering merely forms groups based on some set of variables, and quite often it relies on general country indicators, not product-specific market indicators (Kumar et al., 1993; Sakarya et al., 2007). Market estimation aims to differentiate and evaluate foreign markets according to criteria that measure market potential (Papadopoulos and Denis, 1988; Papadopoulos et al., 2002; Sakarya et al., 2007). Country-level methods attempt to assess and screen all possible countries, regions, or sets of countries (e.g. Cavusgil et al., 2004; Green and Allaway, 1985; Papadopoulos et al., 2002; Russow and Okoroafo, 1996). For example, shift-share analysis (Green and Allaway, 1985) identifies export market opportunities by tracking the change in growth of a selected product for each importing country. Shift-share analysis is flexible and product related, but it limits the quantity of information (Papadopoulos et al., 2002). It reveals only relative opportunities (the change in the market), termed the amount of market potential, but the underlying factors are unknown. Root (1994) points out that too often managers start with assumptions or prejudices that rule out certain countries or regions as possible target markets. To minimize error, preliminary screening should be applied to as many countries and markets as possible. Similarly, Douglas et al. (1982) suggest that screening secondary data be used to compare a large number of countries before deciding which ones to investigate in depth. More recent market estimation literature (e.g. Ojala and Tyrvainen, 2008; Papadopoulos et al., 2002; Sakarya et al., 2007; Swoboda et al., 2009) includes product-specific indicators in market selection. Papadopoulos et al. (2002) developed an industry-level tradeoff model intended to overcome the shortcomings of shift-share analysis, and tested it using three products, 17 importing countries, and two very different exporting countries. Sakarya et al. (2007) also advanced shift-share analysis with a focus on emerging markets. Ojala and Tyrvainen (2008) used a sample of 100 US small- and medium-sized software firms to study foreign market selection decisions. They found that the market size of a specific industry in a target country is the best single indicator for international market entry decisions. More recently, Swoboda et al. (2009) explored foreign market potential at an industry level by examining how garment firms choose international sourcing and sales markets.

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The market ranking approach typically employs a linear compensatory model to rank countries or markets on some meaningful indicators of market potential. The models assume that market attractiveness is a linear (additive) function of a set of weighted factors. In this category is the OMOI introduced by Cavusgil (1997) to measure and rank the potential for 23 emerging markets. Cavusgil ranks the market potential of these countries on eight dimensions: market size, market growth rate, market intensity, market consumption capacity, commercial infrastructure, economic freedom, market receptivity, and risk. The weights are set by several rounds of a Delphi process among international business scholars and professionals before applying a linear compensatory model to rank market potential. This OMOI is updated annually on GlobalEdge (2009) at Michigan State University. Cavusgil et al. (2004) presented several new indicators of export potential and combined country market ranking and clustering. The OMOI was used to rank the best-to-worst prospects across 89 countries and within each cluster to identify the best market(s). Following Cavusgil (1997) and Cavusgil et al. (2004), Mullen and Sheng (2007) extended OMOI by adding and modifying indicators of market potential, using more recent data and adding more countries. To investigate the sensitivity of the OMOI modeling technique, Mullen and Sheng (2007) conducted two studies that held constant the indicators, dimensions, and sample while varying the weights. Results showed that weights do change country rankings, although the OMOI framework is a stable tool for assessing market potential. Thus, a meaningful weight on each dimension is necessary for a more accurate estimation. The principal limitation of current OMOIs is that they assess and rank markets for overall or aggregate demand, whereas it is reasonable to expect different drivers of demand for different industries. Therefore, industry analysis is generally required in practice for managerial decision making. The number and content of the OMOI dimensions are based on expert opinion and the literature but are not theory driven per se. Multiple indicators are used to measure each dimension, but rigorous measurement analysis is lacking. Another drawback is that the weights are set by expert opinion (Cavusgil, 1997; Cavusgil et al., 2004) or on an ad hoc basis (Mullen and Sheng, 2007). The use of expert judgment or the Delphi method can be cumbersome and subjective (Papadopoulos et al., 2002) and may limit the analysis to a smaller number of well-known markets. We identified the gravity model of international trade from the economics literature as a theoretical basis for extending OMOI models. The gravity model originated in the research on regional trade blocs. In its most basic form, the model estimates trade between country i and country j as a positive function of their market size and a negative function of the distance between them. Recent research on the relationship between trade and regional trade agreements (RTAs) has gone beyond the simple yes or no question of whether RTAs have a positive effect on trade (Greenaway and Milner, 2002). In recent years, gravity analyses have been used to evaluate market potential, especially trade potential (e.g. Egger, 2002). The focus is how much additional intraregional trade might be expected if countries are in a trade bloc, share borders, have a common language, and have economic or currency links. Abraham and Van Hove (2005) state that the gravity model not only is useful for identifying the determinants of bilateral trade flows but also can be used to predict future trade flows. Eaton and Tamura (1994) urge more analysis across different industries to provide insight into trade flows. In summary, the literature points to a good fit between the gravity model and the OMOI framework to develop our hybrid model.

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Hypotheses and model development Bearing the above concerns in mind, we examined both the marketing and economics literatures to find a theory that provides insights into bilateral trade flows in order to develop our hybrid model. The following paragraphs discuss the constructs and associated hypotheses of the model. Geographic distance Distance has always played an important role in international trade. Three categories of cost physical shipping, time-related costs, and costs of unfamiliarity are associated with doing business at a distance (Frankel, 1997). With less distance, timerelated costs such as just-in-time inventory are lower. Geographic proximity often can be equated with a familiar business environment and lower operating cost (Dow, 2000; Frankel, 1997; Ojala and Tyrvainen, 2008) because it implies more knowledge about the foreign market and greater ease in obtaining information (Papadopoulos and Denis, 1988). This is especially true for small- and medium-size firms and those with less international expertise and fewer resources when they expand abroad. Moreover, Bradner and Mark (2002) find that geographic distance negatively affects a persons willingness to cooperate with others and also makes people more willing to deceive business partners, both of which may lead to increased transaction costs (Williamson, 1981). Studies in the marketing (e.g. Ojala and Tyrvainen, 2008) and economics literature (e.g. Frankel, 1997) suggest that geographic proximity is an important factor when firms select target countries for expansion. Research indicates that the geographic distance between two countries is negatively related to bilateral trade. We hypothesize that: H1. Export market opportunity is negatively related to geographic distance. Market size International trade theories suggest a strong relationship between the market size of the host country and the hosts market potential (Root, 1994). That potential often has been operationalized in terms of the markets size and growth rate (Root, 1994; Russow and Okoroafo, 1996). Previous research (e.g. Rothaermel et al., 2006) argues that these are important criteria at the screening stage of international expansion. Furthermore, the basic gravity model estimates trade between country i and country j as a positive function of their market size (population). We hypothesize that: H2. Export market opportunity is positively related to market size. Economic intensity Foreign market selection is closely related to a countrys economic development. A nations economic strength is positively related to its export market attractiveness (e.g. Shankarmahesh et al., 2005). Economic size is a fundamental variable in almost all gravity models and is found to be a very strong factor for bilateral trade estimation (Frankel, 1997). Following Cavusgil (1997), Cavusgil et al. (2004), and the major gravity models (Bergstrand, 1985; Egger, 2002; Frankel, 1997), we hypothesize that: H3. Export market opportunity is positively related to economic intensity.

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Cultural distance A key issue in internationalization is the need to adapt to cultural characteristics (Yeniyurt and Townsend, 2003). Culture is defined as the collective programming of the mind which distinguishes the members of one group or category of people from another (Hofstede, 1991, p. 5). Dow and Karunaratna (2006) argue that large cultural distance between two countries will increase transaction costs due to real and perceived misunderstandings and misinterpretations. The literature also suggests that cultural differences influence managerial decisions, such as market selection for both exporting (Dow and Karunaratna, 2006) and foreign direct investment (FDI) (Kogut and Singh, 1988). We hypothesize that: H4. Export market opportunity is negatively related to cultural distance. Language difference Language barriers are rarely studied in the marketing literature, possibly due, as noted by Dow and Karunaratna (2006), to the complexity of the construct and the lack of agreed measurements. However, these researchers found language differences to be a significant driver of bilateral trade. Language constructs are frequently analyzed in gravity models in the economics literature. Analysis of language distance suggests that two countries with a common language tend to trade roughly 55 percent more than they would otherwise (Frankel, 1997). Others have found that a shared language increases efficient communication and trade, whereas language barriers decrease trade volume due to higher transaction costs (e.g. Hutchinson, 2005). Thus, language is an important factor in export market choice. We hypothesize that: H5. Export market opportunity is negatively related to language distance. The effect of FDI Research shows that outward FDI may be a substitute for or complement to trade. The factor endowments theory of international trade supports both a positive and a negative relationship between trade flow and FDI. The complementary relationship refers to a case in which the main motivation of foreign investment is to produce for the host country market or for export to other countries in the same region, which may lead to exports of machinery and intermediate goods from the home country (Brenton et al., 1999, p. 108). The substitute relationship refers to the situation when the motivation of FDI is to outsource production to the host country and export products back to the home country. Brenton et al. (1999) claim that FDI as a substitute plays only a small role in total FDI. Eaton and Tamura (1994) find a strong positive relationship between outward FDI and exports for both the USA and Japan. Brenton et al. (1999) also show that an increase in bilateral FDI promotes bilateral trade. In light of this reasoning, we believe the outflow of FDI that country i places in country j is an important determinant of exports from country i to country j and hypothesize that: H6. Export market opportunity is positively related to FDI outflow (a complementary relationship). RTAs RTAs, which for this study we use to also refer to free trade agreements (FTAs) among non-contiguous countries, are a key variable in most gravity models. RTAs have been

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found to be a strong factor in determining the volume of economic transactions between countries (Ceglowski, 2006; Frankel, 1997). However, RTAs have not been incorporated into OMOI frameworks. Papadopoulos et al. (2002) used a related construct, trade barriers, with four dimensions: tariff and non-tariff barriers, geographic distance, and exchange rates. In their model, tariff and non-tariff barriers are reflected in the average annual tariff rate and composite quantitative index of 20 barrier items. Dow and Karunaratna (2006) include FTAs as a trade enhancement control variable (p. 587) in their model of bilateral trade. A number of RTAs were in force during the 1990s, and were found to be strongly related to bilateral trade (Ceglowski, 2006; Dow and Karunaratna, 2006; Frankel, 1997). We hypothesize that: H7. Export market opportunity is positively related to RTAs. Control variables In order to clarify the factors that affect foreign export market attractiveness, we control for physical infrastructure, market receptivity, and religious difference. Physical infrastructure is important in determining transport cost (Bougheas et al., 1999; Limao and Venables, 2001) and thus affects the intensity of international trade. Receptivity refers to the openness and accessibility of a market. Recent OMOI studies (Cavusgil et al., 2004; Mullen and Sheng, 2007) include market receptivity in the assessment of foreign market potential. Finally, religious differences are rarely included in OMOI models or the foreign market selection literature, but their importance cannot be ignored. Religion is a major component in international conflict and is also considered a major influence on how people communicate and interact (Dow and Karunaratna, 2006). The new model Our hybrid model extends market screening and selection methods by combining dimensions and measures from the marketing and economics literatures to predict bilateral trade flows, in total and by industry. Most gravity models are based on aggregate data. Only a limited number of studies have examined gravity equations at the industry level. They show that different types of products are differentially affected by gravity models (Gould, 1994; Hutchinson, 2005). Hutchinson, who studied the differential effect of linguistic distance on consumer and industrial manufactures, discovered that linguistic distance is significantly more important for imports of consumer goods as compared to producer goods. Similarly, a robustness test by Russow and Okoroafo (1996) suggests that the same factors can be used across products to identify potential markets because the factors are sensitive to productspecific differences. We employ the same factors in our model and expect the parameter estimates will vary across industries. In order to test how well our model fits at a disaggregated industry level, we estimate the model for several industries classified by the three-digit Standard International Trade Classification (SITC) system. Our hybrid model is written as follows: ym b0
11 X i1

bi xi e

where y is the exports to a specific country, m is the total exports or exports from an industry, and x i is the independent constructs in the model.

Methods Sampling This study focuses on the attractiveness of overseas markets from a US firms perspective, and therefore uses a j*1 bilateral setting where 1 refers to the USA and j refers to each target market or country. The USA has the largest economy in the world, accounting for about one-fourth of global gross domestic product (GDP), and is among the worlds top five exporters (IMF, 2008). However, it only ranks 148th globally in terms of its exports-to-GDP ratio, which, at 11 percent, is considerably lower than those of other large economies such as Germany (33 percent), China (26 percent), or the UK (27 percent) (World Bank, 2006). It is widely argued that this low ratio is largely due to the large size of the domestic economy, which on the one hand attracts foreign firms but, on the other, also does not encourage US firms to pursue overseas opportunities. Since the large US trade deficit contributes to destabilizing the world economy, examining international markets from the US perspective is relevant to the current environment. We deleted countries with data missing on two or more variables, which resulted in a sample of 93 countries (a full list of the countries is available from the authors). Measures and data Data were collected from several sources, with 2004 as the base year. Major sources were the World Bank, the US Census Bureau, and the academic literature. Total US exports to each country and their breakdown by selected industries at the three-digit SITC level are used as the dependent variables. Table I shows the 20 indicators used to capture the ten constructs of the model, along with the corresponding measurement units and their sources. The measurement of geographic distance has its problems, mainly because of meandering borders and countries occupying large areas, which makes the choice of a fixed point arbitrary. This study follows Frankels (1997) practice by using distance between capital cities as the measure. Population has long been used as proxy of market size in the literature (e.g. Cavusgil, 1997; Mullen and Sheng, 2007; Russow and Okoroafo, 1996; Sakarya et al., 2007). Total population gives a gross idea of market size, but the urban or market population (Mullen and Sheng, 2007) is most accessible (e.g. advertising, sales, and distribution). We also introduce a dynamic function of market size by using population projections for 2050 (Sakarya et al., 2007). Thus, total population, urban population, and population projections for 2050 are combined, using the factor score, to measure market size. Both GDP and GDP per capita are considered reliable indicators of economic development. The per capita data are preferred in most of the international market analysis models (e.g. Cavusgil et al., 2004; Ceglowski, 2006) because they capture economic intensity. Furthermore, we follow previous practice (Mullen and Sheng, 2007) by adding energy and electricity consumption per capita, which have been used as reliable indicators of economic and industrial development (Bollen, 1979). Several cultural frameworks are available in the business literature (e.g. Hofstede, 1991, 2001; Schwartz, 1994). Drogendijk and Slangen (2006) indicate that the Hofstede and Schwartz measures of national cultural distance explain the entry mode choices by multinational enterprises (MNEs) equally well. Hofstedes framework is by far the most widely used in the business literature, so we calculate cultural distance based on his four cultural dimensions and Kogut and Singhs (1988) index. Scholars have become

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Construct km

Geographic distance

Market size

Economic intensity Index 5-point scale 5-point scale 5-point scale Percentage Dummy variable km/rm2 km/rm2 Percentage Percentage 5-point scale 5-point scale 5-point scale

Cultural distance

Language difference

FDI

RTAs

Physical infrastructure

Market receptivity

Religious difference

Table I. Constructs, measures, units and sources Unit Source http://privatewww.essex.ac.uk/Bksg/ mindist.html WDI WDI US census WDI WDI WDI Kogut and Singh (1988) Hofstede (1991) Dow and Karunaratna (2006) WDI www.ustr.gov WDI WDI WDI WDI In thousands In thousands In thousands Current US$ kwh per capita kg of oil per capita Dow and Karunaratna (2006)

Indicator description

Geographic distance between countries measured by distance between capital cities

Total population Urban population Population projection in year 2050

GDP per capita Electric power consumption Energy consumption

Cultural distance

Distance between major languages of country i and the USA Incidence of country is major language in the USA Incidence of USAs major language in country i

Net outward FDI, percentage of GDP

RTAs

Length of railways/land Length of roads/land

Imports of goods and service as percentage of GDP Total trade in percentage of GDP

Distance between major religions of country i and the USA Incidence of country is major religion in the USA Incidence of the USAs major religion in country i

increasingly critical of that index (e.g. Shenkar, 2001), however, because the aggregated index may obscure the true cultural distance of each dimension. Therefore, our hybrid model is further examined with each cultural dimension independently. (Note: Hofstedes fifth dimension, long-term orientation, was not used because data for it are only available for 23 countries.) Cultural distance was the most problematic in terms of missing data. Hofstede (2001) provides data for 74 countries and four regional groups (Arab world, West Africa, Scandinavia and Latin America), which covers more than 70 percent of the world population. If a country with missing data belongs to one of those groups, we use Hofstedes values for the group in lieu of individual country data. The measures for language differences are adopted from Dow and Karunaratna (2006). Much of the gravity model research that includes the language construct uses either a dummy variable for a common language (Gould, 1994; Hutchinson, 2005) or a single scale of language distance (e.g. Frankel, 1997). This study adopts Dow and Karunaratnas (2006) language difference measure with three indicators. Two indicators focus on the reported incidence of the home countrys dominant language within the host country, and vice versa, and the third captures the difference in major languages between the home and host countries. Thus, Dow and Karunaratnas (2006) measure includes not only the distance between the languages but also the frequency of their being spoken in either country. An interesting finding by Eaton and Tamura (1994) is that the outward FDI of the USA is more highly correlated with earlier exports compared to Japan, where it is more highly correlated with later exports. This suggests that Japanese outward FDI may promote subsequent Japanese exports, but US exports are lagged by FDI, perhaps as a means of jumping over actual or threatened protection (p. 507). The simplest way to address this issue is to use lagged FDI as an explanatory variable (Frankel, 1997). Therefore, our FDI data are from 2002 and our trade data are from 2004. RTAs are operationalized in this study as a dummy variable indicating the presence of preferential trade agreements. A value of 1 was assigned to a trading partner that belonged to an RTA with the USA in or before 2004, and a 0 otherwise. Concerning the control variables, market receptivity, and physical infrastructure also are measured following Mullen and Sheng (2007), as with economic intensity, and religious differences are measured using three indicators, drawn from Dow and Karunaratna (2006) along with those for language differences. Measurement analysis We used two methods to examine the measurement properties, principal component analysis (PCA) and confirmatory factor analysis (CFA). First, PCA with varimax rotation was used to examine the factor loadings of the measures. The loadings of the indicators on their intended construct are at 0.76 or higher, with only one cross-loading at 0.42 (geographic distance with religious difference), as seen in Table II. The very clean factor structure from the PCA helps establish the convergent and discriminant validity of the constructs. We also performed CFA using AMOS 18.0 to test convergent and discriminant validity for the six multi-item constructs. Table III provides fit indices, standardized loading estimates, average variance extracted (AVE), and Cronbachs a. The fit of the data to the CFA model (i.e. CFI 0.88) is modest but is adequate to interpret (Hooper et al., 2008). The standardized l estimate for each item and

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Factors/ indicators GEO_DIST TTLPOP URBANPOP POP2050 GDP per capita ENER_USE ELEC_USE CULT_DIST Language 1 Language 2 Language 3 FDI RTAs RAILWAYS RDS IMP_PCTGDP TRD_PCTGDP Religion1 Religion2 Religion3 VIFs

Geographic Market Econ. Cultural Language distance size intensity distance difference 0.851 0.066 0.010 0.022 0.111 0.018 0.044 0.059 0.163 0.083 0.328 0.001 0.061 0.089 0.002 0.026 0.053 0.105 0.097 0.133 2.176 0.086 0.932 0.947 0.902 0.153 0.087 0.123 0.035 0.038 0.071 0.025 0.156 0.100 0.000 0.038 0.352 0.321 0.218 0.135 0.154 2.577 0.145 0.168 0.010 0.246 0.911 0.949 0.940 0.385 0.068 0.031 0.169 0.090 0.032 0.207 0.303 0.033 0.166 0.054 0.106 0.046 1.617 0.052 0.024 0.028 0.028 0.061 0.094 0.099 0.797 0.027 0.153 0.022 0.036 0.129 0.156 0.014 0.006 0.025 0.103 0.200 0.083 1.619 0.106 0.014 0.015 0.066 0.035 0.039 0.140 0.305 0.905 0.949 0.762 0.011 0.013 0.123 0.031 0.072 0.107 0.093 0.141 0.116 1.807

FDI

RTAs

Physical Market infra. receptivity 0.110 0.042 0.042 0.055 0.239 0.113 0.179 0.188 0.098 0.045 0.291 0.073 0.147 0.873 0.867 0.135 0.061 0.058 0.020 0.065 1.602 0.070 0.223 0.224 0.213 0.008 0.127 0.066 0.023 0.019 0.057 0.154 0.157 0.089 0.024 0.217 0.906 0.902 0.004 0.035 0.082 1.969

Religious difference 0.421 0.185 0.161 0.232 0.067 0.024 0.018 0.009 0.230 0.025 0.155 0.047 0.055 0.103 0.007 0.055 0.084 0.912 0.877 0.911 1.157

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Table II. Factor loadings and VIFs

0.006 0.091 0.080 0.027 0.085 0.071 0.050 0.040 0.047 0.086 0.060 0.091 0.016 0.041 0.060 0.220 0.075 0.120 0.049 0.000 0.062 0.252 0.9650.013 0.011 0.957 0.062 0.140 0.027 0.044 0.096 0.070 0.110 0.044 0.005 0.007 0.070 0.029 0.010 0.100 1.826 1.665

the AVE for each construct are all higher than 0.70, which suggests convergent validity (Bagozzi and Yi, 1988). All AVE estimates are greater than the squared correlation between all pairs of constructs (a range from 0.001 to 0.264), providing strong evidence of discriminant validity of the constructs (Fornell and Larcker, 1981). Cronbachs as are all greater than 0.80, which indicates excellent reliability. Taken together, these results provide evidence of construct reliability and validity, and therefore greatly reduce concerns about the adverse potential effects of multicollinearity. Verifying assumptions Several variables (population, GDP/capita, energy/capita, trade percentage of GDP, and FDI) that had non-normal distributions were log transformed. After transformation, skewness and kurtosis were within acceptable ranges, suggesting that the variables are now normally distributed. Scatter plots of residuals indicate homoscedasticity and linearity between dependent and independent variables. Multicollinearity is a potential problem, especially when modeling closely related secondary data. The correlation matrix in Table IV shows correlations between several measures are high, however, we expect that the factors evaluated with PCA and CFA have resolved concerns of excessive collinearity. We used two collinearity diagnostics, the variance inflation factor (VIF) and condition index. The VIF value of each construct is below 2.6 and the condition index ranges from 1 to 3.3 (see Table II), which raises no concerns that multicollinearity is a problem (Belsley et al., 1980). We employed three techniques to detect outliers: casewise diagnostics, Mahalanobis distance, and DfBETA (Belsley et al., 1980). These indicated that Iran and Luxemburg are outliers. We estimated the model with and without those outliers to assess their influence (Mullen et al., 1995). The signs and significance of the parameter estimates

Construct indicator Market size Total population Urban population Population 2050 Eeonomic intensity GDP per capita Energy consumption Electric power consumption Language difference Language 1 Language 2 Language 3 Physical infrastructure Railway per land Road per land Market receptivity Imports as percentage of GDP Total trade in percentage of GDP Religion difference Religion 1 Religion 2 Religion 3 w2 w2/df CFI RMR Note: ap-valuep0.01

Standardized loading

Standard error

AVE 96.0%

Cronbachs a 0.986

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1.006 0.966a 0.967a 0.931 0.948a 0.988a 0.861 0.991a 0.714a 0.765 0.934a 0.995 0.967a 0.937 0.831a 0.926a 400.60 4.50 0.88 0.08

0.026 0.025 91.4% 0.055 0.049 74.4% 0.100 0.100 72.9% 0.195 96.3% 0.045 80.9% 0.076 0.067 0.926 0.981 0.834 0.882 0.969

Table III. Convergent validity and discriminant validity

were the same for both models, and the changes in the size of the standardized b coefficients were very minimal (ranging from 0 to 0.02). Furthermore, the explained variance was the same. Although Iran and Luxemburg are identified as outliers, they are not influential and are retained in the analysis. In summary, missing data, normality, homoscedasticity, validity, reliability, collinearity, linearity, and outliers were examined and the results were found acceptable. Results We will examine the results for the model with total exports as the dependent variable, and then across 11 vastly different industries. Results are shown in Table V. The hybrid model predicting total exports is significant (F 39.2, po0.001), with a high R2 of 83 percent. Five out of seven independent variables and one control variable are statistically significant in the total exports model. As expected, geographic distance ( H1) and language difference ( H5) are both significant and negatively related to total exports. These results suggest that geographic proximity still matters and that language plays an important role in the success of exports. Positive, statistically significant parameter estimates for the effects of market size ( H2), economic intensity ( H3), and RTAs ( H7) on total exports provide

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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 1 0.97a 0.97a 0.31a 0.27a 0.28a 0.01 0.04 0.11 0.04 0.28a 0.02 0.04 0.52a 0.52a 0.37a 0.32a 0.30a 1 0.93a 0.13 0.11 0.11 0.04 0.09 0.07 0.03 0.27a 0.02 0.02 0.52a 0.49a 0.34a 0.29a 0.28a 1 0.39a 0.36a 0.39a 0.08 0.02 0.14 0.14 0.26b 0.15 0.13 0.52a 0.52a 0.39a 0.33a 0.36a 1 0.89a 1 0.92a 0.94a 1 0.41a 0.46a 0.41a 0.08 0.06 0.17 0.10 0.06 0.17 a 0.18 0.27 0.30a 0.18 0.19 0.15 0.40a 0.36a 0.39a a a 0.49 0.39 0.43a 0.18 0.20 0.17 0.23b 0.31a 0.28a 0.11 0.00 0.00 0.17 0.08 0.08 0.13 0.11 0.09

Notes: ap-valuep0.01, bp-valuep0.05

Table IV. Correlation matrix 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 1 0.33a 1 0.38a 0.85a 1 0.05 0.58a 0.71a 1 0.12 0.07 0.07 0.12 1 0.33a 0.01 0.12 0.36a 0.15 1 a a 0.31 0.08 0.06 0.31 0.15 0.72a 1 0.02 0.07 0.15 0.25b 0.30a 0.11 0.30a 1 0.01 0.11 0.19 0.29a 0.31a 0.08 0.27a 0.96a 1 0.06 0.29a 0.09 0.26b 0.09 0.12 0.06 0.01 0.03 1 0.05 0.28a 0.09 0.20a 0.11 0.07 0.02 0.03 0.05 0.78a 1 0.11 0.32a 0.15 0.22b 0.06 0.20 0.04 0.07 0.12 0.87a 0.77a 1

GEO_DIST TTLPOP URBANPOP POP2050 GDP per capita ENER_USE ELEC_USE CULT_DIST Language 1 Language 2 Language 3 FDI RAILWAYS RDS IMP_PCTGDP TRD_PCTGDP Religion 1 Religion 2 Religion 3

1 0.22b 0.15 0.23b 0.28a 0.16 0.21b 0.03 0.09 0.17 0.14 0.05 0.25b 0.12 0.06 0.08 0.46a 0.46a 0.53a

Industry/Hypotheses 0.28a 0.33a 0.22a 0.34a 0.26a 0.29a 0.28a 0.20a 0.28b 0.20a 0.22b 0.20a 0.05 0.21c 0.06 0.02 0.08 0.12 0.03 0.01 0.07 0.07 0.10 0.01 0.00 0.06 0.31a 0.17a 0.05 0.18b 0.15b 0.22a 0.14 0.16b 0.22a 0.09c 0.01 0.01 0.19a 0.18a 0.02 0.09 0.01 0.08 0.38a 0.06 0.11 0.10c 0.79a 0.31a 0.43a 0.78a 0.78a 0.63a 0.82a 0.69a 0.38a 0.51a 0.56a 0.69a 0.70a 0.67a 0.64a 0.68a 0.68a 0.77a 0.68a 0.66a 0.37b 0.72a 0.41a 0.75a 0.20a 0.30a 0.15b 0.19a 0.15b 0.31a 0.14 0.16b 0.25b 0.06 0.12 0.10 0.28a 0.46a 0.35a 0.35a 0.34a 0.31a 0.36a 0.32a 0.35a 0.23a 0.37a 0.34a

H1 Geographic H2 Market H3 Economic H4 Cultural H5 Language distance size intensity distance difference H6 FDI H7 RTAs Physical Market Religious () () () () () () () infrastructure receptivity difference R 2 0.18a 0.02 0.15c 0.21a 0.19a 0.12 0.21b 0.18b 0.15 0.05 0.17c 0.13b 0.01 0.22 0.15c 0.08 0.11 0.01 0.09 0.13c 0.05 0.14 0.00 0.04 0.83 0.63 0.72 0.77 0.78 0.75 0.73 0.74 0.45 0.67 0.55 0.81

Total exports SITC_111 Nonalcoholic beverages SITC_112 Alcoholic beverages SITC_581 Tubes and pipes (plastics) SITC_621 Materials of rubber, tubes, rods SITC_658 Made-up articles SITC_682 Copper SITC_727 Food-processing machines SITC_783 Road motor vehicles SITC_793 Ships and boats SITC_851 Footwear SITC_884 Optical goods

Notes: ap-valuep0.01, bp-valuep0.05, cp-valuep0.1

Export market opportunity analysis

Table V. Standardized parameter estimates for total export demand and by industry

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supporting evidence for H2, H3 and H7. No support is found for the hypothesized effects of cultural distance ( H4) and FDI ( H6 ). Only one control variable, market receptivity, is found to be a significant predictor of total exports. These results for total exports strengthen the supposition that it is necessary to assess drivers of foreign market demand at the industry level, rather than rely on an aggregate framework. Hence, we estimate our hybrid model for 11 different industries, classified by three-digit SITC (see results in Table V). R2 ranges from a modest 45 percent to a high of 81 percent. In contrast to the total exports model, all the hypotheses except cultural distance are supported by the parameter estimates for at least one of the 11 industries. The parameter estimates for geographic distance (H1), market size (H2), economic intensity (H3), and RTAs (H7) are significant and are in the same direction as hypothesized, which suggests they are strong predictors of export market potential for all the industries under study. Nonetheless, parameter estimates vary substantially by industry. The parameter estimates for language difference are negative and significant for seven of the industries, which indicate it is also an important predictor. FDI (H6) was expected to have a positive effect on exports, but this is only significant for copper. In contrast to H6, it has a significant negative effect on the exports of seven industries. The hypothesis of cultural distance (H4) is not supported for any of the industries under study. Its only significant effect is on exports of nonalcoholic beverages and is positive, opposite the hypothesized direction. This result is consistent with Dow and Karunaratnas (2006) finding of no significant influence for a composite cultural distance measure based on Hofstedes principal dimensions and Kogut and Singhs (1988) index. Separate models were estimated using the difference scores for Hofstedes four cultural dimensions in place of Kogut and Singhs composite index. Power distance and masculinity are not found to be significant predictors for total exports or for the exports of any of the disparate industries. Individualism is a significant predictor for only two unrelated industries, made-up articles and copper, but not for total exports or the exports of the other nine industries. Uncertainty avoidance has a significant effect for optical goods, not for total exports or for the other ten industries. The standardized regression coefficients are then used as weights to calculate an OMOI to rank overall export potential by country and an industry market opportunity index (IMOI) to rank export potential by industry. Table VI provides both OMOI and IMOI indexes for selected industries and compares the predicted exports generated from our model with the actual data for the top 25 export markets. Discussion This hybrid framework extends previous overall market opportunity models. Based on the gravity theory, in addition to the variables employed in OMOI research and the use of regression coefficients rather than expert opinion to set the weights, our hybrid model analyzes export market opportunities for specific products and industries. Previous methods (Cavusgil, 1997; Cavusgil et al., 2004; Mullen and Sheng, 2007) cannot guarantee accuracy for market screening and selection because they assess foreign markets only for total exports and without a theoretical base. The results of this study are consistent with previous findings (Bergstrand, 1985; Helpman and Krugman, 1985; Russow and Okoroafo, 1996), which enhances our belief that the same factors are sensitive to product-specific differences and that the model can be effectively applied to industry export market opportunity analysis.

Total export

SITC112 Alcoholic beverages

SITC727 Food processing machine

SITC884 Optical goods

Country 1 3 6 4 2 6 8 14 10 9 18 13 14 21 26 20 32 12 24 24 11 28 14 27 18 United Kingdom Canada Japan The Netherlands Germany Mexico Australia France Italy Spain Hong Kong Belgium Ireland Switzerland Denmark South Africa South Korea New Zealand Panama Singapore Greece Sweden China Philippines Finland 1 2 3 4 5 6 7 8 8 10 11 12 12 14 15 15 17 17 19 20 21 21 23 24 25 79 100 68 70 78 74 66 68 62 63 58 68 69 62 57 64 70 62 46 63 44 61 57 52 52 2 1 8 5 3 4 11 8 17 15 22 8 7 17 23 13 5 17 38 15 43 20 23 30 30 Canada United Kingdom Mexico China Australia The Netherlands Germany Japan Brazil Thailand Spain France Ghana Belgium Philippines Guatemala Italy Chile South Korea New Zealand Argentina South Africa India Ireland Malaysia 1 2 2 4 5 5 7 7 9 9 11 11 11 14 14 16 16 18 19 19 21 21 23 23 25 100 74 83 79 71 61 72 68 60 54 63 66 33 57 64 51 59 62 74 55 52 66 53 59 57 1 5 2 3 8 18 7 9 19 29 14 10 67 24 13 37 21 16 5 27 34 10 31 21 24 Japan South Korea Canada United Kingdom Mexico Singapore Germany China Hong Kong France Australia The Netherlands Brazil Italy Israel Belgium Switzerland Russia Malaysia Thailand Sweden Colombia Spain Ireland Czech Republic 1 2 3 4 4 6 7 8 9 10 11 12 13 13 15 16 16 18 19 19 21 22 22 22 25

Actual OMOI Predicted rank index rank Country 91 85 100 80 83 77 82 87 66 73 65 66 57 64 69 65 56 79 62 60 60 57 67 57 54

Actual OMOI Predicted rank index rank Country

Actual OMOI Predicted rank index rank Country

Actual OMOI Predicted rank index rank 2 4 1 7 5 9 6 3 13 10 15 13 25 18 11 15 29 8 19 20 20 25 12 25 32

Canada Mexico Japan United Kingdom China Germany South Korea The Netherlands France Singapore Belgium Hong Kong Australia Brazil Malaysia Italy Switzerland Israel Ireland Philippines Spain Thailand India Saudi Arabia Colombia

1 2 3 4 5 6 7 8 9 10 11 11 13 13 15 16 17 17 19 20 21 21 23 24 25

100 82 74 77 83 74 73 58 65 68 57 59 58 55 53 56 48 60 54 54 62 51 58 52 57

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Table VI. The 25 most attractive markets by total export and by selected industry

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Four very strong factors in determining the attractiveness of an export market from a US firms perspective are geographic distance, market size, economic intensity, and RTAs. Language difference also is fairly strong. Cultural distance, as calculated with Kogut and Singhs (1988) formula applied to Hofstedes measures, is not a significant strong predictor for either total exports or exports in any of the industries studied. In addition, cultural distance based on Hofstedes four dimensions was examined, one at a time. The difference in individualism between home and host markets appears to have some predictive power in a few industries, but the other three dimensions have little effect on US exports. Interestingly, market size (measured by population variables) has a stronger predictive power for exports of industrial inputs (copper, tubes) compared to consumer products (beverages, footwear). This suggests that compared with consumer goods, demand for industrial goods could be more sensitive to the market size. Thus, the industry level is important to address when assessing export market opportunities. Surprisingly, most of the exports by industry (except for copper) show a negative relationship with US FDI, contrary to the expected positive relationship. FDI is negatively related with exports of alcoholic beverages, tubes and pipes, road vehicles, ships, footwear, optical goods, and food-processing machines. Previous research notes that investment stock and trade flows can be both substitutes and complements (Brenton et al., 1999). Therefore, more investigation is needed on the interaction between FDI and exports. The control variables also reveal mixed effects among different industries. Welldeveloped physical infrastructure in the importing country positively affects the export of alcoholic beverages, whereas exports of road vehicles are negatively and logically affected by inadequate physical infrastructure. Market receptivity is found to be the most important control variable. It is significant for total exports and for more than half of the industries studied. Religious difference has no influence on either total exports or exports for nine of the 11 industries. This control variable only shows a marginally significant effect on the export of alcoholic beverages and food processing machines. Interesting findings emerge from the comparison of some similar industries. For instance, geographic distance, market size, economic intensity, language, and RTAs are significant in assessing export potential for both nonalcoholic and alcoholic beverages. The three control variables (physical infrastructure, market receptivity, and religion) are all significant or marginally significant for exports of alcoholic beverage, but not for nonalcoholic beverages. The hybrid model is not only theoretically important but also managerially useful. It can be employed to assess and rank markets at both aggregate and disaggregated levels. Marketing researchers and practitioners can rank the attractiveness of countries for specific industries by using the standardized bs estimated from the hybrid model for that industry, rather than rely on expert opinion or the weights from total export models. The outcome is an industry market opportunity index, the IMOI, which builds on and extends the OMOI literature (Cavusgil et al., 2004; Mullen and Sheng, 2007). Table VI lists both OMOI and IMOI and compares the predicted exports with the actual data. The model allows managers from various industries to focus their scarce resources on further analysis of the top-ranked markets for their industry. Furthermore, our industry-specific model not only is useful for assessing and indexing industry market potential, but also is applicable for identifying gaps between market potential and actual export sales. Gap analysis helps managers identify which markets are more attractive than others relative to unmet demand. This hybrid

framework can be used to estimate trade flows between two countries at the specific product level. The difference between the predicted and actual export volume provides a measure of relative export penetration. The larger the gap, the more likely it is that unmet demand exists. Limitations and future research The results suggest that the hybrid model works well for industry-level analysis. However, there is room for improvement. The limitations, concerns, and suggestions for future research are discussed below. A limitation of this study relates to the measures. While we were able to establish convergent and discriminant validity with PCA, the CFA was less robust with a modest fit (i.e. CFI 0.88), so results should be interpreted with caution and replicated in the future. Results show that cultural distance is not significant whereas economic intensity is a main predictor of export demand. The two are negatively related implying that culturally similar countries have more similar economic intensity. Future research might examine whether culture is more important between countries with similar economic intensity. Although Hofstedes cultural dimensions are most frequently used in international business studies, the Schwartz cultural framework and Ingleharts (1997) world value system might be adopted. Also, since this study models disaggregated export demand by industry, the FDI data may need to be disaggregated by industry too. Thus, more accurate results may be generated by looking at the relationship between the attractiveness of each industry and the specific FDI from the USA in that industry. The R2 for the industry-level analyses in this research ranges from a modest 45 percent to a high of 81 percent. Future studies may benefit from additional or different independent variables, depending on the specific industry. For example, if the industry is household durables, then the number of households rather than population per se is a more appropriate measure of market size (Mullen, 2009). The model has limitations in only using the USA as the base country, since export determinants and their importance may differ across countries. The generalizability of the model should be validated by applying it to new and different samples with other base countries, such as Brazil, Japan, or China. Besides, it would be insightful to examine the external validity of this model using construct weights based on expert opinion versus the standardized parameter estimates generated from our hybrid model. Future studies may also address the interesting effect of time on this model, since economic development and RTAs are dynamic processes that may result in changes in factors and indicators. This hybrid model can be estimated with time series data and analysis. We have used the hybrid model to assess the export potential of foreign markets. Future work could evaluate its effectiveness by assessing the potential for FDI or other modes of entry, such as joint ventures or franchising. As suggested earlier, analysis of gaps or unmet demand can be done with this hybrid model. The standardized regression coefficients for each construct provide scientific weights specific for each industry, rather than the one-size-fits-all method previously used to analyze markets. Conclusion Because it is difficult to develop international market selection models that are generalizable to various industries, the literature is overshadowed by general qualitative frameworks, market entry mode strategies, and operational models that have limited

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value to analyze industry potential. In addition, due to the costs and a lack of resources, many small- and medium-sized firms usually choose foreign markets without much systematic analysis (Papadopoulos et al., 2002). This study focuses on assessing export market potential and proposes a hybrid model that is theory based, flexible, and costeffective for evaluating a large number of countries or markets at the same time. Our research answers previous calls in the field of country evaluation for practical applications, method refinement, and industry-oriented market assessment. The study reveals that a forgotten factor, such as regional trade agreements, can be a very strong determinant in foreign market opportunity assessment procedures for total exports and in almost all industries. Other somewhat neglected aspects, such as language barriers, geographic distance and FDI, also are significant in various industries. In summary, the hybrid model extends previous market potential indicators, advances current market assessment methods and scope, and goes beyond the traditional aggregate-level country analysis by assessing export market potential at the industry level.

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