Can Modernization Explain the Consumption of Durables in Emerging Markets?

1. Can Modernization Explain the Consumption of Durables in Emerging Markets? Dr. A. N. M. Waheeduzzaman

2. Presented byGroup No.5 Lin Chieh Fan Warisorn Phalahan Thawicha Sanguanwaipanichkul Oluwakemi Somoye Pamela Villafuerte Hong Yang

3. A Brief introduction of the Author

4. Introduction • Emerging markets, such as India and China, play an important role as an impressive buying power. • Emerging marketsare growing faster than developed economies. • China has a 9 % GDP growth and India has a 8.4 % GDP growth.

5. Introduction Cont. • Consumption in the developing countries affected by the modern lifestyle and the economic growth. • Consumers in these countries are increasingly becoming global. • The multinational corporations have to reconsider their international marketing strategies.

6. Introduction Cont. • There were six consumers’ durables and twenty emerging markets during 1977-2000. • Implementing democracy, and freedom to choose to the consumers brought a societal modernization in those countries.

7. Literature Review 1. Consumption of Durables and Study Focus. 2. Understanding Modernization 3. Model Specification and Method 4. Findings 5. Conclusion and Future Direction

8. 1. Consumption of Durables and Study Focus • Three approaches in the studies of durables. - Diffusion studies - Consumer behavior studies - Demand estimation and forecasting studies.

9. 1. Consumption of Durables and Study Focus Cont. 1.1 Diffusion Studies • - An assumption that current consumption can be categorized into 2 groupswhich are innovators and adopters. • - The purpose is to estimate the coefficient of innovation and the coefficient of imitation and understand the nature of growth, peak and decline of diffusion.

10. 1. Consumption of Durables and Study Focus Cont. 1.2 Consumer Behavior Studies • Durables purchases = High involvement purchases • Constructs Needs Lifestyles Beliefs and attitudes Family Motives Social Class Personality Culture Perceptual process Social influences Learning .

11. 1. Consumption of Durables and Study Focus Cont. 1.2 Consumer Behavior StudiesCont. • Problem of use • Variables, model specifications, samples, time periods, product and country choices -> ‘VARIED’ • Questions arisen • Preferences • Necessity VS. luxury • Pattern of acquisitions • Economic development • Income/price • Saturation & global consumption

12. 1. Consumption of Durables and Study Focus Cont. 1.3 Demand Estimationand Forecasting Models • “Stock adjustment models” + “time series growth components” -> Aggregate demand • Demand • First-time demand • Replacement • Secondary markets Stock adjustment models • Durables = Any other product • Macro

13. 1. Consumption of Durables and Study Focus Cont. 1.3 Demand Estimationand Forecasting ModelsCont. - Variables • Consumer income (permanent & transitory) • Long-term view to acquire • “Stream of income” • Price or inflation • Credit • Consumer debt • Business cycles • Real interest rate • Unemployment rate • Utility • Product characteristics • Promotions efforts

14. 1. Consumption of Durables and Study Focus Cont. Focus of the Study • Diffusion + consumer behavior models • Consumer behavior models -> household level • Diffusion -> specific products (or product categories) using time series estimation • External macro environmental influences • Societal modernization • Variables = income, energy consumption, urbanization, education, life expectancy, working female, availability of credit, interpersonal communication, and economic freedom

15. 2.Understanding Modernization • What is “Modernization”? - An independent variable, a process, a continuum, and a product (Stearns 1980). • The purpose to understand modernization - Apply it to the real world

16. 2.Understanding Modernization Cont. • The classification of modernization -Individual modernity • The modern people’s attributes and their characteristics A “learned value” in being a part of the modern society • Personal (and social) values of the individuals

17. 2.Understanding Modernization Cont. • The classification of modernization -Social modernity • Related to social and cultural features of a society • Equal to progress or development

18. 2.Understanding Modernization Cont. • Measurement of modernization -Basic assumption: More power ----More opportunity ----make a modern society -Mathematical formula • M=(GNP/E)[(GNPCAP)2+(ECAP)2]1/2

19. 2. Understanding Modernization Cont. • Variables

20. 2. Understanding Modernization Cont. • Variables (Cont.)

21. 3. Model Specification and Method • Specification 1 Cijt= α0+ β jtMjt+ ε Cijt: Proportion of households owning durables in country j at time t. Mjt: Modernization score of country j at time t.

22. 3. Model Specification and Method Cont. • Specification 2 Cijt=α0+ β jtYjt+NjtELECjt+UjtURBjt+EjtEDUjt+ LjtLFXPjt+FjtFEMjt+CjtCRDjt+TjtTELEjt+RjtEFjt+ε Cijt: Proportion of households owingn durable I in country j at time t. Yjt: Income of the individual in country j at time t. ELECjt: Energy consumption in country j at time t. URBjt: Urbanization in country j at time t. LFXPjt: Life Expectancy in country j at time t. FEMjt: Proportion of Female Working in country j at time t. CRDjt: Credit Availability in country j at time t. TELEjt: Telephone lines in country j at time t. Efjt: Economic Freedom in country j at time t.

23. 3. Model Specification and Method Cont. • Specification 3 Cijt= α0+F1jtFACTOR1jt+F2jtFACTOR2jt+F3jtFACTOR3jt+ ε Cijt: Proportion of households owning durable I in country j at time t. FACTOR1jt: First Modernization Factor of the individual in country j at time t (industrialization). FACTOR2jt: Second Modernization Factor of the individual in country j at time t (openness). FACTOR3jt: Third Modernization Factor of individual in country j at time t (quality of life).

24. 3. Model Specification andMethod Cont. Method • SAS, data form 1977-2000 • Income and modernization: World Development Indicators(2002) • Consumption of durables: Euromonitor • Economic freedom: Fraser Institude

25. 4. Findings • 3 Disparate Models • Contribution of technology and Energy consumption in modernization (Irwin’s modernization index ). • Regression, 9 variables • Factor Analysis, 3 factors • 6 Durables • 20 Emerging Markets

26. 4. Findings Cont. Irwin’s modernization index • Variables used: Income and Energy Consumption • R-squares varied from .18 to .69. • Beta-coefficients were significant and positive • Modernization score did have positive relationship with durable consumption in emerging markets.

27. 4. Findings Cont. Regression, 9 variables • 6 consumption models were significant • R-square improved over 1st model (ranged from 0.49 to 0.79) • Betas showed mixed pattern due to multicollinearity.

28. 4. Findings Cont. Factor Analysis, 3 factors • Factors explained 80% of the variability of the data set • First factor explained 38% of the variability • Industrialization Dimension: income, energy consumption, and urbanization. • Second factor explained 21% of the variability • Openness Factor: Proportion of working female, credit availability, telephone lines, and economic freedom.

29. 4. Findings Cont. Factor Analysis, 3 factors (cont.) • Third factor explained 21% of the variability • Quality of Life Dimension: Education and life expectancy at birth.

30. 4. Findings Cont. Factor Analysis, 3 factors (cont.) • Industrialization factor: • Significant in all six regression models • Significantly affected the consumption of durables in emerging markets. • Openness factor: • Significant in four out of six models. • Quality of life factor: • Significant in five out of six models.

31. 4. Findings Cont. • 3 models reveal that societal modernization significantly explain the consumption of durables in emerging markets. • Factor analytic estimates provide better estimates than multiple regressions and regression with modernization score given by Irwin.

32. 5. Conclusion and FutureDirection In the first model correlation was used, societal modernization was operationalized by the modernization index developed by Irwin In the second model regression was used in the nine variables indicating societal modernization was used for estimation. The third factor Analysis , the scores were used in regression models to determine consumption.

33. 5. Conclusion and FutureDirection Single Variable Modernization index measure Limitations Modernization is given by a ratio of economic output with respect to technological input. Despite its logical sense , measure is limited to two variable. It does not incorporate other social economic variables. Result and usefulness All consumer durables were found to be significant with R-squares ranging from 0.18 to 0.69. Modernization index does show positive relationship with consumption

34. 5. Conclusion and FutureDirection Multivariate socioeconomic measure Limitations Modernization is perceived as a multi dimensional concept with the use of nine variables. The variables are highly intercorrelated and result in accurate beta estimates. Result and usefulness All models were found to be significant with high R-square (0.53-0.87). The direction of beta coefficients did not show expected relationships indicating that multicollinearity is a problem.

35. 5. Conclusion and FutureDirection Factor Analytic measure Limitations This determined that underlying dimensions of modernization are industrialization , openness, and quality of life. Factors may change over time with the inclusion of more countries. Result and usefulness All models were significant with R-square ranging from 0.38 to 0.79. All three factors showed positive relationship with consumption. The model provides good estimates.

36. 5. Conclusion and FutureDirection • Model three offers the best explanation in this research. - Model is free from multicollinearity - It variables were grouped into 3 factors : industrialization, openness, and quality of life which was used to predict the consumption of durables. - This model reveals that societal modernization significantly explains the consumption of durables in emerging markets.

37. Limitations of this research Data for income and modernization were collected from the World Development Indicators (2002). Data for the consumption of durables were collected from the CD-ROM of Euro monitor. Data for economic freedom came from Fraser institute. World Development indicator and Euromonitor did not have historical data for variables under study for all 25 countries. Hong Kong, Czech republic, Russia and Taiwan were excluded.

38. Future Direction How would you extend the study? What would you do? Offer a future direction to the researches. -Ensure validity of results by continuously running test with new and old data from various countries developing markets. -Give specific explanation of each countries social modernization level in relation to durable consumption for each emerging market.