Can Modernization Explain the Consumption of Durables in Emerging Markets?

1. Can Modernization Explain the Consumption of Durables in Emerging Markets? Team 5 Adam Balchik Chris Casey Candace Kessel Chanida Jangchaimonta Kitichote Sinhirunwiwat

2. Dr. Waheeduzzaman Biography

3. Dr. Waheeduzzaman Biography • Professor of Marketing and International Business in the College of Business, Texas A&M University-Corpus Christi • Former member of the faculty at Salisbury State University, Maryland and University of New Haven, Connecticut, North South University, and Dhaka University in Bangladesh

4. Dr. Waheeduzzaman Biography Honors /Teaching • Outstanding Teaching Award (2000-2001), College of Business, Texas A&M University-Corpus Christi • Distinguished Teacher Award (1995-96), by the President, University of New Haven, Connecticut

5. Dr. Waheeduzzaman Biography • Areas of research and interest include • International competitiveness • Standardization adaptation • Globalization • Consumer durables • Country branding • Business ethics. • Interested in theoretical and empirical works, individual and joint research • http://faculty.tamucc.edu/waheed/publications.htm

6. Article Summary • Egypt • Hungary • India • Indonesia • Israel • Malaysia • Mexico • The Philippines • Poland • Singapore • South Africa • Thailand • Turkey • Venzuela • 24 year period (1977-2000) • Focused societal modernization in 20 emerging economies • Argentina • Brazil • Chile • China • Columbia • Peru • Emerging markets growth faster than developed economies • Factors included that can affect consumption of durables • Industrialization, • openness and quality of life

7. Identification of Main Ideas • Five main article ideas • Consumption of durables and study flow • Understanding modernization • Model specification and method • Findings • Conclusion and future direction

8. Consumption of Durables and Study Focus • Diffusion studies • Consumer behavior studies • Demand estimation and forecasting models • Focus of the study

9. Diffusion Studies • Demand estimation diffusion model (Bass 1969) • Innovators and imitators • Consumption prediction • Diffusion model • Primary goal • Coefficient of innovation (internal influence) • Coefficient of imitation (external influence) • Influenced by interpersonal & market factors • Diverse studies / generalizations difficult

10. Consumer Behavior Studies • Consumption of durables affected by: • Needs, motives, personality, perceptual process, lifestyle, family, social influences, etc. • Attempt to find a pattern in buying behavior • Difficult to generalize due to varied inputs in each model

11. Demand Estimation and Forecasting Studies • Demand estimated from stock adjustment models • Demand for durables explained by macro-variables affecting consumption • Consumer income (most notable) • Inflation, credit conditions, debt, unemployment • Product characteristics and promotion

12. Study Focus • Predict the demand for durables • Forecasting models • Societal modernization in emerging countries • Key variables • Income • Energy consumption • Urbanization • Education • Life expectancy • Working female • Availability of credit • Interpersonal communication • Economic freedom

13. Modernization • Definition • Calculation of modernization • Classifications • Variables

14. Understanding Modernization • What is modernization? • An independent variable, a process, a continuum, and a product • Modernization Measurement M=(GNP/E)[(GNPCAP)2+(ECAP)2]1/2 where, M = Modernization Score GNP = Gross National Product E = Energy Consumption GNPCAP = Per capita GNP ECAP = Per capita Energy Consumption

15. Understanding Modernization (Cont.) • Classifications of Modernization • Individual modernity • Attributes and characteristics that make people modern, including outlook toward society, occupation, residency, education, family and lifestyle • Learned valve that is adopted by being part of the modern society • Social modernity • A multidimensional concept that has both social and cultural components • Equal to progress or development

16. Understanding Modernization (Cont.)

17. Understanding Modernization (Cont.)

18. Model Specifications and Methods • Model 1 • Modernization Index (Irwin) • Model 2 • Multivariate Socioeconomic Measure • Model 3 • Factor Analytic Measure

19. Model 1 – Economic Productivity and Energy Model • Cijt = αo + βjtMjt + ε • Cijt = Proportion of households owning durable • Mjt = Modernization score • αo = Intercept • βjt = Slope • ε = Error term • i corresponds to a specific durable • j corresponds to the specific country • t corresponds to time

20. Model 2 – Nine Societal Modernization Variables • C = Proportion of households owning durable • Y = Income of country • ELEC = Energy consumption • URB = Urbanization • EDU = Education • LFXP = Life expectancy • FEM = Proportion of female workforce • CRD = Credit availability • TELE = Telephone lines • EF = Economic freedom • CRD = Credit availability • αo = Intercept • ε = Error term

21. Model 2 - Nine Societal Modernization Variables • Cijt = αo +βjtY +NjtELECjt + UjtURBjt + EjtEDUjt + LjtLFXPjt+ FjtFEMjt+ CjtCRDjt +TjtTELEjt+ RjtEFjt + ε • i corresponds to a specific durable • j corresponds to the specific country • t corresponds to time • Njt, Ujt, Ejt, Ljt, Fjt, Cjt, Tjt, Rjt are all calculated slopes

22. Model 3 – Factor Analysis Model • Cijt = αo +F1jtFACTOR1jt + F2jtFACTOR2jt + F3jtFACTOR3jt + ε • Cijt = Proportion of households owning durable • FACTOR1jt = First modernization factor • FACTOR2jt = Second modernization factor • FACTOR3jt = Third modernization factor • Factor analysis utilized to determine the individual factors • αo = Intercept • ε = Error term

23. Findings, Conclusion and Future Direction • Results of the three models • Importance of the results • Future applications of this study

24. Findings • Model 1 – Irwin • Using only two variables, income and energy consumption • Between 1977-2000 modernization score had positive relationship with durable consumption

25. Findings • Model 2 – Nine variables indicating societal modernization • Greater R-squared values • Beta coefficients appear contradictory

26. Findings • Model 3 – Factor analysis applied to Model 2 • Three factors (% of variance explained) • Industrialization – 38% • Openness – 21% • Quality of Life – 21% • Industrialization – most significant factor

27. Conclusion • Emerging markets enjoyed growth due to societal modernization • Openness • Liberation • Structural reform • Consumption of durables increased due to modernization • Modernization Index (Irwin) • Multivariate Socioeconomic Measure • Factor Analytic Measure • All models found to be significant

28. Conclusion • Model 1 – Modernization Index • R2: 0.18 - 0.69 • Modernization positively related to consumption • Limited by use of only two variables • Economic output versus technology input • Model 2 – Multivariate Socioeconomic Measure • R2: 0.53 – 0.87 • Useful for overall estimations • Multicollinearity exists • Model 3 – Factor Analytic Measure • Three factors extracted from group of nine • R2: 0.38 – 0.79 • Best explanation of consumption based on R2 values • Modernization influence may be restricted by factor pattern changes

29. Future Direction • Test the stability of factors in Model 3 • Marketers may use level of modernization as starting point for predicting future market potential • Predictive power may vary • Product • Country • Period

30. Article Critique • Ideas generated from other researchers • Better explanation of how variables were actually determined (urbanization as a number) • Reproducibility • Estimation of demand of durables by nine variables • Prediction of nine variables • Why not simplify • Sales data of durable • Purpose of the study - assumptions • Predict demand of durables • Prove that modernization indicates demand

31. Questions