market exchanges, hierarchical exchanges or relational exchanges in export channels into emerging...

International Business Review 11 (2002) 707–723www.elsevier.com/locate/ibusrev

Market exchanges, hierarchical exchanges orrelational exchanges in export channels into

emerging markets

Lee Li ∗, Peggy NgSchool of Administrative Studies, Atkinson Faculty of Liberal and Professional Studies, York

University, 4700 Keele Street, Toronto, Ontario, Canada M3J 1P3

Received 20 August 2001; received in revised form 5 April 2002; accepted 15 April 2002

Abstract

This study draws from relational contracting paradigm, transaction cost paradigm, and inter-nationalization process paradigm and evaluates market exchanges, hierarchical exchanges, andrelational exchanges between Western manufacturers and their foreign intermediaries in emerg-ing markets. The study suggests that choices of exchange governance be determined by variousfactors in combination, including experiential knowledge, market conditions, activity comp-lementarity, brand power, and trust. Choices of exchange governance depend on the interactionamong these factors. 2002 Elsevier Science Ltd. All rights reserved.

Keywords: Relational exchanges; Hierarchical exchanges; Market exchanges; Export channels

1. Introduction

Market exchanges, or hierarchical exchanges or relational exchanges? This is oneof the highly important decisions for exporters when dealing with their foreign inter-mediaries (Anderson & Gatignon, 1986). Market exchanges can be defined as theexchanges between channel members with no past history and no future (Heide,1994). Market exchanges are mainly governed by price mechanism by which inde-

∗ Corresponding author. Tel.:+1-416-498-3355; fax:+1-416-499-2731.E-mail address: [email protected] (L. Li).

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708 L. Li, P. Ng / International Business Review 11 (2002) 707–723

pendent channel members work for unilateral interests. Hierarchical exchanges canbe defined as the exchanges between a parent company and its overseas sales subsidi-aries (Ghosh & John, 1999). Hierarchical exchanges are based on ownership mech-anism by which exporters can impose decisions on their subsidiaries (Williamson,1996). Relational exchanges can be defined as the exchanges between channel mem-bers who have an exchange history and plans for future interactions (Mudambi &Mudambi, 1998; Weitz & Jap, 1995). With relational exchanges, channel membersjointly develop policies directed toward the achievement of certain goals (Heide,1994).

In recent years there has been a resurgence of research favoring relationalexchanges within channels. Clearly, there are many channel contexts where strongchannel partnerships can thrive, representing a major source of competitive advan-tages for firms (Anderson, Hakansson, & Johanson, 1994). However, some experts onchannel management argue that relational exchange concept as applied to distributionchannels have been pushed too far as there are even more contexts in which marketexchanges or hierarchical exchanges are better types of exchanges (e.g. Anderson &Gatignon, 1986; Frazier, 1999). Unfortunately, no attempts have been reported todifferentiate these contexts in export channel literature.

Our purpose in this article is to differentiate these contexts. Our research departsfrom existing works in three significant ways. First, we examine the inter-relation-ships among the determinant factors. The importance of examining the effects ofinter-relationships derives from the fact that they may explain firm behaviors thatcannot be captured by the independent effects of the factors. For example, firms thatenjoy great brand names are expected to use hierarchical exchanges in order to pro-tect their brands. However, hierarchical exchanges can be difficult for those firmsthat do not have much experiential knowledge. This type of firm behavior can bebetter explained if the joint effect of brand names and experiential knowledge isexamined. Second, the study looks at channel exchanges between firms located indifferent countries. Most of existing studies on channel relationships are based ondomestic distribution channels. Export channels are fundamentally different fromdomestic distribution channels. Export channels run through different countries andare exposed to high environmental uncertainties, such as exchange rate fluctuations.Third, we examine export channels into emerging markets rather than mature mar-kets. An emerging market can be defined as a market that satisfies two criteria: arapid pace of economic development, and government policies favoring economicliberalization and the adoption of a free-market system (Arnold & Quelch, 1998).The primary impediments in emerging markets appear to be the environmental uncer-tainties and the lack of strong legal frameworks, which have allowed a large increasein opportunism and rent-shifting (Nelson, Tilley & Waler, 1998). Emerging marketsinclude transition economies, such as China, and rapid-growth developing countriesin Asia, Latin America, Africa, and the Middle East (Hoskisson, Eden, Lau, &Wright, 2000). Over recent years, the fast growth of some emerging markets, suchas China, has led to a considerable expansion of market seeking investments fromWestern manufacturers (Johansson, 2000).

The remainder of this paper consists of three parts. The first part discusses three

709L. Li, P. Ng / International Business Review 11 (2002) 707–723

different theoretical paradigms on exchanges between channel members. Drawingon these perspectives, we develop hypotheses. The second part details methodology,empirical data, and findings. The last part discusses theoretical and managerial impli-cations and the direction for future research.

2. Theoretical paradigms

As shown subsequently, different theoretical paradigms make somewhat differentassumptions about the nature of exchanges in export channels. They individuallyhighlight different factors that have important impacts on channel exchanges. Theseparadigms include relational contracting theory, transaction cost theory, and inter-nationalization process theory.

2.1. Relational contracting paradigm

Relational contracting paradigm views a transaction in terms of its history and itsanticipated future and takes enforcement of obligations as following from the mutu-ality of interest that exists between a set of complementary parties (Hakansson &Snehota, 1995; Macneil, 1980; Mudambi & Mudambi, 1998). Based on mutual trust,mutual benefits and planning for future collaboration, exchange participants writeand honor normative contracts to govern their long-term relational exchanges(Macneil, 1980).

Relational exchanges result from activity complementarity and mutual trustbetween exchange participants (Mudambi & Mudambi, 1998). Without activitycomplementarity exchange participants can hardly benefit from relational exchanges(Lusch & Brown, 1996). In the absence of mutual trust exchange participants mayend up being worse off if their counterparts do not honor the contracts (Macneil,1980). Activity complementarity can be highly prominent between a manufacturerand its distributors. First, due to the scarcity of financial and other resources, a manu-facturer cannot be efficient at all activities required in the distribution process(Porter & Fuller, 1986). With division of labor, both the manufacturer and its inter-mediaries can focus on the activities they are best at, acquire and pool differentknowledge and capabilities and consequently increase the effectiveness andefficiency of the whole process (Achrol & Kotler, 1999). Second, marketing oper-ation incurs high costs, including customer education and establishment of distri-bution infrastructures. By working with intermediaries manufacturers can spread thecosts and thus reduce the operational risks (Ohmae, 1989). Third, working with inter-mediaries enhances flexibility that is valuable with market jolts (Kogut & Kulatilaka,1994). When a firm focuses on doing just one functional unit within a channel, itcan tailor all aspects of its organization to this single task. This sense of focus trans-lates into low overhead, lean staff, and few middle managers. Decisions are made andexecuted quickly, so response time is short (Johnston & Lawrence, 1988). Relationalexchanges will only start and continue when each exchange participant trusts eachother (Hewett & Bearden, 2001). Trust can be defined as the perceived credibility


and benevolence of a target of trust (Morgan & Hunt, 1994). Without mutual trust,contracts can hardly be normative as exchange participants can hardly specify accu-rately in their contracts how to handle future contingencies (Lusch & Brown, 1996).

Relational exchanges provide exchange participants with substantial benefits(Anderson et al., 1994). Some relational exchange theorists even claim that relationalexchanges are replacing arm’s-length transactions and hierarchical exchangesbetween channel members (e.g. Webster, 1992).

2.2. Transaction cost paradigm

Transaction cost paradigm identifies various costs associated with transaction attri-butes (Rindfleisch & Heide, 1997) and provides insight into choices of cost-minimiz-ation exchange modes (Ghosh & John, 1999). These costs include transaction-spe-cific investments and opportunism. Transaction-specific investments are those thathave little or no value outside the focal relationships (Brown, Dev, & Lee, 2000).Keeping relational exchanges implies investments or commitments. These invest-ments are transaction-specific in that they are made primarily for the purpose ofcreating value in transactions between channel members involved in the particularrelationship and are difficult or impossible to redeploy for other purpose (Williamson,1985). In other words, if the relationship ends, the channel member who has investedin the relationship will lose much of the value of the investments. For example, anexporter who has trained its foreign intermediary can hardly recover the trainingcosts if the intermediary terminates the relationship and shifts to other suppliers.

Opportunism can be defined as self-interest seeking with guile (Williamson, 1985).Given the opportunity, channel members may unscrupulously seek to serve theirself-interests and it is difficult to know a prior who is trustworthy and who is not(Wathne & Heide, 2000). Opportunism can be frequent in export channels wherecultural gap and psychic distance retards communications between channel members(Root, 1994). Moreover, information asymmetry between channel members who arelocated in different countries makes opportunism difficult to be detected and thusencourages opportunism (Klein, Frazier, & Roth, 1990). Emerging markets, withhigh contextual uncertainties, make opportunism even more tempting, as channelmembers cannot be sure of the long-term benefits of mutual commitments (Brownet al., 2000). More importantly, firms from different culture may have different defi-nition of opportunism (Heide, 1994). Certain behaviors seem to be opportunistic insome countries but not in others.

Under certain market conditions transaction costs can be substantial for manufac-turers. Manufacturers that enjoy great brand power should not use independent inter-mediaries, especially those in emerging markets, as independent intermediaries maynot maximize their efforts to protect the brand power and may even leak know-howinformation (Anderson & Coughlan, 1987). In a market of high market concentration,manufacturers should not use intermediaries either. Market concentration can bedefined as the existence of a small number of large accounts who dominate a market(Kotler & Turner, 1998). When transactions are of great amount, intermediary oppor-tunism can be frequent (Williamson, 1985). On the other hand, with high market


concentration, it is relatively easy for manufacturers and end users to locate andinteract with each other and contributions from intermediaries are limited (Stern, El-Ansary, & Coughlan, 1996). Consequently, manufacturers should by-pass intermedi-aries in order to reduce the risks of intermediary opportunism (Anderson & Gatig-non, 1986).

2.3. Internationalization process paradigm

The paradigm indicates that the internationalization of a firm is an incrementalprocess (Bilkey & Tesar, 1977; Johanson & Vahlne, 1977). The paradigm rests onthe assumption that firms have imperfect access to information and explains inter-nationalization as a process of increasing experiential knowledge (Eriksson et al.,1997). Experiential knowledge can be defined as the intensity of exposure to a certainhost country environment and the diversity of such an exposure (Erramilli, 1991;Luo & Peng, 1999). Experiential knowledge is acquired by operating in the hostcountry and cannot be transferred between firms (Eriksson et al., 1997). Inter-nationalization is a process of incremental interplay between knowledge developmentand market commitment. As a firm develops more and more experiential knowledgeabout a particular country, it will be increasingly committed to the market(Johanson & Vahlne, 1977). Experiential knowledge can be critical in the marketsof high turbulence (Johansson, 2000). Market turbulence can be defined as the highmarket velocity (Eisenhardt, 1989). In a high-velocity market, changes in demand,competition, and government policies are so rapid and discontinuous that informationis often inaccurate, unavailable and obsolete (Eisenhardt, 1989). Therefore, in a mar-ket of high turbulence, firms need experiential knowledge to predict and managemarket jolts (Root, 1994).

Internationalization process paradigm has been under attack in the last decade, asit ignores the influence of competition, technology development, and company stra-tegies (e.g. Hedlung & Kverneland, 1985). Nevertheless, its identification of theimportance of experiential knowledge in the internationalization process has contrib-uted significantly to our understanding on the dynamics mechanism of the process.

3. Research hypotheses

3.1. Experiential knowledge and market turbulence

Before manufacturers develop reasonable experiential knowledge in an emergingmarket, it is unlikely for them to resort to hierarchical exchanges or relationalexchanges with resident intermediaries. Emerging markets are characterized by highenvironmental turbulence. High environmental turbulence results from inconsistencyof laws and government policies, frequent changes in industry and market structure,and high competition uncertainties (Luo & Peng, 1999). Market turbulence is outof exporters’ control (Root, 1994) and consequently leads to high risks (Aulakh &Kotabe, 1997).


Hierarchical exchanges can be risky and inefficient for inexperienced exportingmanufacturers in high-velocity markets. Hierarchical exchanges require substantialinvestments and commitments. Macroeconomic stability, a precondition for invest-ments, is difficult to achieve in emerging markets (Hoskisson et al., 2000). Moreover,the development of market institutions, such as legal infrastructures, is slow anddifficult in emerging markets. Without market mechanism and well-established legalinfrastructures, corruption may prevail in emerging markets and slows down therecovery of investments (Luo & Peng, 1999). More importantly, managing hier-archical exchanges requires intensive skills and knowledge (Williamson, 1985). Withhierarchical exchanges manufacturers have to rely on themselves and can hardlyenjoy any assistance from resident intermediaries. In high-velocity markets marketjolts can be frequent. Without experiential knowledge, manufacturers can hardlymanage market jolts.

Relational exchanges are not appropriate either. Relationships with resident inter-mediaries require transaction-specific investments, including training, inventory hold-ing, and credit. These transaction-specific investments can hardly be recovered ifrelationships are terminated. Without experiential knowledge, exporting manufac-turers can hardly assess and evaluate intermediaries. Commitments to wrong partnerscan lead to high switching costs. Lack of strong legal frameworks in emerging mar-kets also has great negative impacts on relational exchanges, as Western manufac-turers can hardly resort to local legal infrastructures to protect their interests andresident partners are not bound by their agreements. High market turbulence makesit more difficult for the exporting manufacturers to assess intermediaries.

Market exchanges with resident intermediaries can be the optimal option. Withmarket exchanges exporting manufacturers are not committed to any resident inter-mediaries. In other words, market exchanges do not incur much transaction-specificinvestment. Market exchanges do not incur much financial investment either andthus do not expose exporting manufacturers to high risks. Therefore, we propose:

H1: The less experiential knowledge exporting manufacturers possess and thehigher market turbulence they perceive, the more likely that they prefer marketexchanges to relational or hierarchical exchanges in their export channels intoemerging markets.

3.2. Activity complementarity and experiential knowledge

If an exporting manufacturer perceives high activity complementarity with a resi-dent intermediary, the former will be willing to work closely with the resident inter-mediary and take the risks of the transaction-specific investments. Activity comp-lementarity can be manifested in the intermediary’s superior distributing competence,superior financial reserves or superior marketing capabilities. Lack of experientialknowledge on part of the exporting manufacturer increases further its dependence onthe intermediary to enter and penetrate the market. Under these conditions, relationalexchanges can be appropriate.

Commitments of complementary resident intermediaries are important for


exporting manufacturers. First, inexperienced manufacturers can hardly enter andpenetrate emerging markets on their own and they need marketing and distributingassets from external sources. Second, inexperienced manufacturers wish to spread themarket entry and penetration costs between channel members. Operation in emergingmarkets incurs high costs. Emerging markets are characterized by introduction andearly growth stage of product life cycle (Vernon, 1966). At this stage, customereducation (Cravens, 2000), establishment of marketing and distribution infrastruc-tures (Johansson, 2000), brand establishment (Porter, 1990), and information collec-tion (Luo, 1999) all incur high costs. Great psychic distance adds to the expensesof all these efforts (Eriksson et al., 1997). Inexperienced exporters are not preparedto cover the full costs, as they are not sure about the operational risks and marketgrowth in the emerging markets. Covering all these costs incurs high switching costsshould undesirable events occur (Williamson, 1985).

Complementary resident intermediaries can provide superior distributing and mar-keting assets and simultaneously share market entry and penetration costs. Marketexchanges cannot motivate resident intermediaries to share the assets and costs. Hier-archical exchanges eliminate such possibilities. Therefore, we propose:

H2: The more activity complementarity exporting manufacturers perceive betweenchannel members and the less experiential knowledge they possess, the more likelythat they prefer relational exchanges to market or hierarchical exchanges in theirexport channels into emerging markets.

3.3. Experiential knowledge and market concentration

When exporting manufacturers have accumulated mature experiential knowledgeabout emerging markets, their dependence on resident intermediaries diminishes(Hakansson & Snehota, 1995). With experiential knowledge, exporting manufac-turers develop the skills to penetrate the emerging markets (Stern et al., 1996).

If there exist in a market some large customers who purchase large volume froman exporting manufacturer, the market is concentrated. These large-volume cus-tomers and manufacturers will trade directly without the involvement of intermedi-aries (Fein & Anderson, 1997). First, market concentration makes it relatively easyfor both exporting manufacturers and end users to locate each other and simplifiesthe distribution workloads (Kotler & Turner, 1998). In other words, intermediariesare redundant. Second, large-volume customers require intensive assistance fromexporters in terms of inbound logistics, R&D, and production (Kotler & Turner,1998). Indirect communications through intermediaries delay the information flow.Third, direct purchases save expenses, including intermediaries’ profits, negotiationcosts, and contract enforcement costs (Anderson & Coughlan, 1987). Last, bothexporters and customers wish to by-pass intermediaries in order to avoid opportunismby intermediaries. Intermediaries may twist or even hide the information betweenexporters and customers to maximize their own interests. Therefore, we propose:

H3: The more experiential knowledge exporting manufacturers possess and thehigher the market concentration, the more likely that the exporting manufacturers


prefer hierarchical exchanges to market or relational exchanges in their exportchannels into emerging markets.

3.4. Experiential knowledge and brand names

When exporting manufacturers develop mature experiential knowledge aboutemerging markets, they accumulate the competence to manage direct sales to cus-tomers. Moreover, with experiential knowledge, exporters have better perceptions ofrisks and returns and therefore become more confident and aggressive, which ismanifested in a willingness to commit more resources (Aulakh & Kotabe, 1997).

If experienced exporting manufacturers possess prestigious brand names, they willmaximize their efforts to protect their brand names. A brand’s positioning on qualityreflects the extent to which an exporter attempts to convey to consumers that thebrand has superior ability to perform its functions (Frazier & Lassar, 1996). Exporterspositioning their brands as high quality are likely to resort to hierarchical exchanges.First, strict channel control is required to protect the brand names from gray market-ing, fake products, and poor services. Gray marketing, fake products, and poor ser-vices can be common in emerging markets where market mechanism is not wellestablished and exporters can hardly resort to legal infrastructures for protection.Any opportunistic activities by intermediaries can damage seriously exporters’ brandnames. Second, the products are expensive and only a small proportion of potentialend users can afford the products. In emerging markets, customers do not earn asmuch as those in mature markets (Johansson, 2000). Consequently, market coverageis not an important issue for the exporters of high-end brands.

Neither market exchanges nor relational exchanges are appropriate for experiencedexporting manufacturers who enjoy prestigious brand names. Neither marketexchanges nor relational exchanges provide manufacturers with sufficient channelcontrol to protect brand names. Therefore, we propose:

H4: The more experiential knowledge exporting manufacturers possess and themore prestigious their brand names, the more likely that they prefer hierarchicalexchanges to market or relational exchanges in their export channels into emerg-ing markets.

3.5. Experiential knowledge and market turbulence

When exporting manufacturers have developed mature experiential knowledgeabout emerging markets, they accumulate the capabilities to assess and evaluate resi-dent intermediaries and they become competent to manage the cooperation with resi-dent intermediaries (Root, 1994). If they perceive high risks in the markets, theywill resort to relational exchanges in order to share the risks with trustworthy andcompetent intermediaries.

Market turbulence can be violent in emerging markets as market demands, govern-ment policies, and market structure may change fast in these markets. Environmentaljolts, such as sharp exchange rate fluctuations, make market demands and market


structure fairly volatile (Luo & Peng, 1999). In high-velocity markets, exporters arenot likely to resort to hierarchical exchanges. First, heavy investments associated withhierarchical exchanges are at high risks when export markets are changing rapidly(Williamson, 1985). Second, structural inertia caused by hierarchies makes functionalunits less sensitive to changes in customers’ needs, market structure and competition.Instructions through hierarchies have great authorities and consequently make marketlearning less important for functional units (Johnston & Lawrence, 1988). Moreover,hierarchy slows down responses to market changes. Functional units move deliber-ately and slowly. Hierarchical management calls for careful problem definition, fol-lowed by the development and evaluation of multiple decision alternatives, fromwhich a course of action would ultimately be chosen that has the highest probability.Such caution is not wise in highly volatile markets where the market conditions maychange before the deliberate actions are taken by people at the bottom of hierarchy(Webster, 1992). Market exchanges are not appropriate either with high environmen-tal uncertainties, as market exchanges can hardly motivate intermediaries and thusmake market learning and responses to market changes slow and inefficient(Johnston & Lawrence, 1988).

Relational exchanges can be appropriate with high market turbulence. First, part-nerships reduce the investment risks as the investments and costs are spread amongpartners (Mudambi & Mudambi, 1998). Second, partnerships enhance channels’adaptability and flexibility in responding to market turbulence (Mudambi &Schrunder, 1995). Third, partnerships reduce impacts of market turbulence. Marketdisturbances transfer imperfectly through coupled functional units and dissipate inintensity as they spread through partners (Achrol & Kotler, 1999). Therefore, we pro-pose:

H5: The more experiential knowledge exporting manufacturers possess and themore volatile the markets, the more likely that they prefer relational exchanges tomarket or hierarchical exchanges in their export channels into emerging markets.

3.6. Experiential knowledge and trust

In emerging markets, opportunism can be frequent. First, the inconsistency of lawsand host governments’ import policies can create temporary but attractive marketopportunities. Resident intermediaries can hardly wait for the deliberate joint actionsby channel members to exploit the opportunities, as the markets change fast. More-over, they may not be willing to share with their suppliers the abnormal profitsassociated with the temporary opportunities. Second, exporters experience great cul-tural and psychic distance in emerging markets. The distance leads to informationasymmetry, which makes opportunism difficult to be detected. The difficulty encour-ages opportunism.

Opportunism by intermediaries hurts the exporters’ profits and can even damagethe exporters’ reputation and image (Wathne & Heide, 2000). The effective way toblock opportunism is to bypass intermediaries and use employee sales forces tohandle sales and distribution (Anderson & Coughlan, 1987).


If exporting manufacturers cannot trust resident intermediaries, they will avoidrelational exchanges with resident intermediaries in order to minimize transaction-specific investments on the intermediaries and minimize the risks of opportunism bythe intermediaries. Market exchanges may not be appropriate for experiencedexporters. With market exchanges, exporters can hardly control the service qualitiesfor end users and the prices the end users pay. Hierarchical exchanges are appropriatefor experienced exporters who cannot trust resident intermediaries. Experiencedexporters can penetrate the emerging markets on their own and do not have to relyon resident intermediaries to manage market penetration. Therefore, we propose:

H6: The less trust exporting manufacturers have on their resident intermediariesand the more experiential knowledge the exporting manufacturers possess, themore likely that the exporting manufacturers prefer hierarchical exchanges torelational or market exchanges in their export channels into emerging markets.

4. Method

4.1. Research setting

In order to test the above hypotheses, we chose the China market as the researchfield and observed the exchange governance between Western manufacturers andtheir Chinese intermediaries. These intermediaries were located in Mainland Chinaor Hong Kong. The China market is one of the transition economies and has beencharacterized by lack of strong legal frameworks and a tremendous amount ofenvironmental turbulence.

4.2. Operational measures

Pre-study interviews with eight Western exporting manufacturers were instrumen-tal in devising the operational measures for this study. They were important in adapt-ing the measures used in previous literature to emerging markets. Relationalexchange governance was measured by partnership cooperation between exportersand their Chinese intermediaries. Hierarchical exchange governance was measuredby exporting through home-based or China-based employee sales force. Marketexchange governance was measured by transactions on basis of discrete sales con-tracts. All the following items were measured on appropriate 5-point bipolar scales.

Experiential knowledge was measured by contacts with Chinese end users, knowl-edge to run export business in China, readiness to take high risks, and informationabout the China market, such as customers’ needs, Chinese government’s policies,Chinese intermediaries’ performance and reputation, and the market structure.

Activity complementarity was measured using four items: how much the exporterrequired special skills from Chinese intermediaries; how much the exporter couldtrust its Chinese intermediaries; how much more efficient Chinese intermediarieswere in undertaking certain exporting functions in comparison with the exporter, and


how much the exporter believed the joint efforts by the exporter and its Chineseintermediaries could promote substantially the exports.

Market concentration was measured by the number of customers, volume of trans-actions with large accounts divided by the total exports in a particular country, theextent to which large accounts required direct sales, and the extent to which theexporter restricted its business to large accounts.

Brand power was measured by the extent to which the exporter attempted to pro-vide quality services to protect its brands, intermediaries’ ability to provide suchquality services, and the potential threats any information leakage might pose.

Market turbulence was measured using three items: the extent to which theexporter could manage market jolts, such as changes in Chinese government’s poli-cies, exchange rate fluctuations, and demand fluctuations, etc.; the exporter’s readi-ness to invest in face of environmental uncertainties, and the extent to which jointefforts by the exporter and its intermediaries, such as joint warehousing, could sub-due the impacts of market jolts.

Trust was measured using two items: the extent to which exporter could not trustits Chinese intermediaries, and the extent to which Chinese intermediaries attemptedto avoid certain obligations, such as inventory holding, after-sale services, credit forcustomers, etc.

4.3. Data collection

The preliminary questionnaire instrument was discussed with the managers ofeight Western exporting manufacturers. Based on their comments, some of the ques-tionnaire items were modified. We then approached Western exporters who attendedCanton Fair. China hosts Canton Fair twice a year and attracts many Western compa-nies. There were three reasons for us to distribute our questionnaires in Canton Fair.First, we believed informants needed intensive information to clarify the questionsin the questionnaire. By distributing the questionnaires in Canton Fair, we had thechance to discuss personally with informants. Second, by talking direct to informants,we could control the position of the informants. Only export managers or more seniormanagers who had intensive contacts with their China-based intermediaries werechosen as informants. Third, talking direct to informants could increase responserates.

Data collection took two steps. At the first step, we approached Western companieswho attended Canton Fair and discussed with them about their business and experi-ence in the China market. Exporters from North America and Western Europe wereidentified. Service exporters were excluded from the study, as the study aimed toassess manufacturing industries only. 366 Western exporters were qualified for thestudy and out of them 206 agreed to answer the questionnaires. The other 160exporters refused to answer the questionnaires, saying that they were busy or notinterested in the survey. Most of these 160 firms declined our survey request beforethey read the questionnaires. Therefore, they were not biased against our question-naires. At the second step, we presented the questionnaires to participating informantsand answered their questions.


Table 1Internal reliability measured by Cronbach’s alpha

Construct Alpha coefficient

Experiential knowledge 0.78Activity complementarity 0.82Market concentration 0.87Brand power 0.58Market turbulence 0.74Trust 0.90

4.4. Data analysis

Questionnaires were examined using frequency and descriptive statistics. An inter-val measurement of each construct was used. The polarity of the items was adjusted;the higher value represents a stronger position in favor of the variable. The sum ofall the recoded items of the construct was used as the scale score for the construct.For a four-item construct, the range of the scale score was 4–20. A score of 20meant most agreeable to the rationale. Cronbach’s alpha coefficient was calculatedto assess the internal consistency reliability. Results of alpha coefficient are shownin Table 1. Correlation between, and among, summarized scores of the scales wascalculated and are displayed in Table 2. Each scale was then compared by F-testsamong firms that selected different exchange modes. Table 3 shows the average (andstandard error) scale scores of the various determinant factors under each of theexchange modes. The postulated hypotheses were tested using logistic regressionanalyses to evaluate the interaction effect of the above constructs on the choice ofmarket exchanges, relational exchanges, or hierarchial exchanges when dealing withtheir foreign intermediaries. Results were reported in Table 4. All analyses wereperformed using Statistical Analysis System.

Table 2Correlation coefficients

Market Activity Brand power Trust Marketturbulence complementarity concentration

Experiential 0.08 0.02 0.04 �0.05 0.05knowledgeMarket 0.37∗ �0.75∗ 0.76∗ �0.74∗

turbulenceActivity �0.36∗ 0.44∗ �0.37∗

complementarityBrand power �0.71∗ 0.75∗

Trust �0.66∗

∗ Significant at the 0.01 level.


Table 3Mean scores of different determinant factors among exchange modes

Determinant factors Market exchanges Relational Hierarchical F-test comparingexchanges exchanges among exchange

modes

Mean SE Mean SE Mean SE P-values

Experiential 4.88 0.15 5.26 0.19 6.48 0.26 �0.001knowledgeMarket turbulence 8.87 0.25 11.05 0.19 5.31 0.17 �0.001Activity 14.53 0.22 16.83 0.14 11.24 0.52 �0.001complementarityBrand power 9.00 0.20 9.12 0.11 12.94 0.23 �0.001Market 8.03 0.44 7.48 0.13 12.27 0.28 �0.001concentrationTrust 5.90 0.13 7.67 0.11 3.96 0.22 �0.001

Table 4Logistic regression parameter estimates (standard error) and P-values for hypothesis testing

Experiential Market Activity Market Brand power Trustknowledge turbulence complementarity concentration

Hypothesis 1 �0.43∗ 0.05(0.05) (0.03)P � 0.001 P � 0.13

Hypothesis 2 �0.15∗ 0.55∗

(0.05) (0.07)P � 0.003 P � 0.001

Hypothesis 3 �0.17 1.15∗

(0.15) (0.18)P � 0.24 P � 0.001

Hypothesis 4 0.007 2.27∗

(0.17) (0.43)P � 0.69 P � 0.001

Hypothesis 5 0.16∗ 0.38∗

(0.05) (0.05)P � 0.001 P � 0.001

Hypothesis 6 �0.12 �1.68∗

(0.16) (0.28)P � 0.46 P � 0.001

∗ Significant at the 0.01 level


5. Results and discussion

H1 is supported. The less experiential knowledge exporting manufacturers possess(b̂ � �0.43; P � 0.001) and the higher market turbulence they perceive (b̂ �0.05; P � 0.13), the more likely that they will choose market exchanges. After

adjusted for market turbulence, the increment of each unit knowledge leads to a 0.65times as likely for the choice of market exchange option while after controlling forknowledge, an unit increase in market turbulence will increase the likelihood ofmarket exchange option in 1.05 times. H2 is also supported. The less experientialknowledge exporting manufacturers possess (b̂ � �0.15; P � 0.003) and higher theactivity complementarity (b̂ � 0.55; P � 0.001), the more likely that exportingmanufacturers will choose relational exchanges. Experiential knowledge decreasesthe likelihood of the choice for relational exchange to 86% of the times but theknowledge adjusted effect of activity complementarity increases the likelihood ofthis option by 73%.

Our data do not lend support to H3. Experiential knowledge does not play a sig-nificant role when exporting manufacturers choose hierarchical exchanges (b̂ � �0.17; P � 0.24) after adjusting for market concentration. However, market concen-tration does have great positive impacts on the selection of hierarchical exchanges(b̂ � 1.15; P � 0.001). Knowledge adjusted effect of market concentration increasesthe likelihood of the selection of hierarchical exchange mode by 2.16 times. Onepossible explanation is that exporting manufacturers prefer hierarchical exchangeswhen they perceive high market concentration. Experiential knowledge is not neces-sary when a foreign market is highly concentrated. With high market concentration,it is relatively easy for exporting manufacturers to handle distribution and cus-tomer education.

H4 is reasonably supported. The more experiential knowledge exporting manufac-turers have accumulated (b̂ � 0.07; P � 0.69) and the more prestigious the brandnames (b̂ � 2.27; P � 0.001), the more likely that exporting manufacturers preferhierarchical exchanges. In fact, an unit increase of brand power leads to almost a10-fold (9.68) likelihood of hierarchical exchange option. The impacts of experientialknowledge are positive but not statistically significant after adjusted for brand power.Perhaps regardless of experiential knowledge, exporting manufacturers have to resortto hierarchical exchanges in order to protect their prestigious brand names.

H5 is strongly supported. The more experiential knowledge exporting manufac-turers have accumulated (b̂ � 0.16; P � 0.001) and more market turbulence theyperceive (b̂ � 0.38; P � 0.001), the more likely that they prefer relationalexchanges, by 17% and 46% respectively.

Our data do not lend support to H6. Experiential knowledge does not play a sig-nificant role when exporting manufacturers choose hierarchical exchanges afteradjusting for trust. However, the data confirm that lack of trust can lead to a higherlikelihood (5.37 times) of hierarchical exchanges (b̂ � �1.68; P � 0.001). One ofthe possible interpretations is that exporting manufacturers have to use hierarchicalexchanges if they can not trust resident intermediaries regardless of their experien-tial knowledge.


6. Conclusion

Findings from our research offer three theoretical implications. First, most existingstudies on channel management indicate that relational exchange governance is theoptimal choice for suppliers. The current study implies that such argument may notapply to export channels in emerging markets. In many contexts, both exporters andtheir foreign intermediaries can benefit from relational exchanges. However, in othercontexts, hierarchical or market exchanges can be better options. Second, selectionof export channel exchange governance is determined by a number of factors incombination, including experiential knowledge, market turbulence, degree of marketconcentration, brand power, market turbulence, and trust. It is the intersectionbetween these determinant factors that determines the selection of the exchangemodes. Third, lack of well-established market mechanism and strong legal infrastruc-tures in emerging markets leads to substantial environmental uncertainties and velo-city. Many existing studies indicate that internationalization process paradigm maynot be valid in mature markets. Findings from our current research indicate thatthe paradigm can be powerful in emerging markets. With high market uncertaintiesinexperienced manufactures prefer market exchanges while experienced manufac-turers prefer relational or hierarchical exchanges.

Our study provides following managerial implications. First, relational exchangegovernance, hierarchical exchange governance, and market exchange governancehave different advantages and disadvantages. A specific mode of governance maynot have absolute advantages over the others. Export managers should assess bothmarket environments and their internal assets when they are selecting export channelgovernance modes. Second, a specific mode of governance may not necessarilyremain optimal all the time. When market context changes or a firm develops newresources, an advantageous governance mode may become disadvantageous. In otherwords, exporting firms should shift between different governance modes when theirexport markets experience upheavals. Third, exporting into emerging marketsrequires substantial investments and skills and thus exposes exporting firms to highrisks. High environmental uncertainties associated with emerging markets add tothe risks. Western manufacturers should be careful with hierarchical and relationalexchange governance modes before they develop experienced knowledge. Withoutexperienced knowledge, financial investments associated with hierarchical exchangegovernance and transaction-specific investments associated with relational exchangescan be highly risky.

Discussion in this paper warrants further research. This paper is based on Westernmanufacturers’ experience in China. Findings from this study may or may not applyto export channels in other emerging markets. For future research, we need to lookat channel governance modes in other emerging economies. If the determinants wehave identified in this study can be confirmed and reconfirmed in other channelsettings, we have reasons to claim that the findings are representative. If we comeacross different determinants in other markets, we have chances to study how differ-ent mechanisms work under different settings and enrich our understanding on chan-nel exchange governance.


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Lee Li is an Assistant Professor of Marketing at York University, Canada. He has wide industrial experiencein the exporting sector and has research interests and publications in the area of exporting and joint ventures.

Peggy Ng is an Associate Professor of Management Science and Statistics at the York University, Canada.She has been researching quantitative methodologies for over 10 years and has published numerous papers onthe subject.

market exchanges, hierarchical exchanges or relational exchanges in export channels into emerging...

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