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

1. Can Modernization Explain the Consumption of Durables in Emerging Markets?A.N.M. Waheeduzzaman Presented by Group 5 Jason McAffee, Scott Orrell,Ryan Taylor,  Matt McKinney, John Farris

2. Introduction • Why was this study conducted? • Potential of Emerging Markets – GDP growth • Global Consumer demands and preference of durables in emerging nations…. “cultural convergence.” • Marketers can estimate durable consumption/demand based on measures of modernization • Dishwasher, Microwave, Refrigerator, TV, VCR, Washing Machine

3. Understanding Modernization • Individual vs. Societal modernization • Measures • Energy Consumption to explain technological growth • Income – wealth production • Urbanization – industrial growth • Proportion of working female – • Credit availability – strength of banking system • Telephone lines (Cellular providers) – mass comm • Economic freedom – consumption behavior

4. Method • Ways to measure consumption • Consumer Behavior Studies • Diffusion Studies • Demand Estimation and Forecasting • This study borrows from models and applies them to modernization

5. Energy at the center of technological growth • Irwin (1975) • Provided energy consumption as a measure for societal modernization • M = (GNP/E)[(GNPCAP)² + (ECAP)²]^(1/2) • Where: • M = Modernization Score • GNP = Gross National Product • E = Energy Consumption • GNPCAP = Per captia GNP • ECAP = Per capita Energy Consumption

6. Durables and Modernization Variables • Durables • Dishwasher (DSW) • Microwave (MCW) • Refrigerator (RFG) • Television (TV) • VCR (VCR) • Washing Machine (WSM) • Variables • Urbanization(URB) • Education (EDU) • Energy Cons. (ELEC) • Income (PCI95) • Life Expectancy (LFXP) • Female Workforce (FEM) • Credit Avail. (CRD) • Telephone lines (TEL) • Economic Freedom (EF)

7. Relationship of growth between durables and variables

8. Specification 1 • Contribution of technology and energy consumption in modernization • Ratio of economic output to technological input

9. Specification 1 - Findings • Based on using the modernization index developed by Irwin • Consumption models for all six durables were significant • DSW and WSM have higher R-squares than other products • Due to higher income needed and higher energy usage

10. Specification 2 • Accepts the multidimensionality of modernization and uses all nine variables in a regression model

11. Specification 2 - Findings • Based on using all nine modernization variables • R-squares improved for each durable • Beta-coefficients showed mixed pattern

12. Specification 3 • This is a derivative of Specification 2 using a factor analysis to reduce the data set and determine the underlying dimensions of modernization

13. Specification 3 - Findings • Based on using Factor Analysis of Specification 2

14. Specification 3 – Findings • Regression Results • Industrialization – all significant • Openness – 4 out of 6 • Quality of life – 5 out of 6

15. Strengths and limits of each specification Assumption: The consumption of durables depends on the modernization score of the country Three models are used in this study, but which one is the best and why?

16. Specification 1 - Conclusion Single variable modernization index measure- • Advantage: useful for quick estimates with less data and time • Disadvantage: does not include socioeconomic variables and thus, limited to only two variables so produces less accurate estimates

17. Specification 2 - Conclusion Multivariate socioeconomic measure - • Advantages: uses nine variables defining modernization were used to determine consumption. Also useful in determining overall estimates • Disadvantage: the direction of beta estimates were not in line with the expected relationships. This indicates the problem of multicollinearity

18. Specification 3 - Conclusion Factor analytic measure- • Advantages: extracts the nine socioeconomic measures from specification 2 and reduces them into three factors that define modernization in a way that solves the multicollinearity problem • Disadvantage: Factors that determine the dimensions of modernization (openness, quality of life, and industrialization) could change as time progresses.

19. So which one is the best? • All models are good at predicting demand of durables based on the level of modernization of a country • However, the third specification (factor analysis) is the best • Why? • The second specification improves the first because it measures more variables • The third is the most accurate and therefore best because it uses the variables from the second but eliminates the multicollinearity problem

20. Future direction • Analyze the variance in the predictive power of the models with respect to specific variables • Product • Country • Time Period • Estimate the consumption of durables in other countries using the methods in this study

21. Future direction • Continue the study using different variables and durables that will be more relevant in the future • Use more general categories to shield against possible obsolescence

22. Questions • Elaborate the three models/specifications of consumption presented in the study. Which specification offers the best explanation and why? Explain. • How would you extend the study? What would you do? Offer future direction in the area.