Spring 2009 Group 5 Atlee Dubose Robert Franklin Priscilla Gonzalez Patrick Singleton

1. Can Modernization Explain the Consumption of Durables in Emerging Markets? by A.N.M. Waheeduzzaman Spring 2009 Group 5 Atlee Dubose Robert Franklin Priscilla Gonzalez Patrick Singleton Michael Zimmermann

2. Article discussion • Introduction • Consumption of Durables and Study Focus • Understanding Modernization • Model Specification and Method • Findings • Conclusion and future Direction

3. Introduction • Emerging Markets/Impressive buying power • India 8.4% GDP • China 9% GDP • They make up 40% of the world’s population • Middle class makes up U.S. market • Brazil and Mexico: 53% of Latin America • South Africa represents 45% of Africa’s GDP • Poland and Turkey fastest growing

4. Durables Dishwasher Microwave Refrigerator Television VCR Washing machine Countries studied Argentina -Malaysia Brazil -Mexico Chile -Peru China -the Philippines Colombia -Poland Egypt -Singapore Hungary -South Africa India -Thailand Indonesia -Turkey Israel -Valenzuela Introduction

5. Introduction “A multidimensional concept reflecting political, economic, social, and cultural changes in a society.” Societal Modernization defined:

6. Consumption of Durables and Study Focus • 3 categories of study • Diffusion Studies • Consumer Behavior Studies • Demand Estimation and Forecasting Models

7. Consumption of Durables and Study Focus • Diffusion Studies • Estimating Demand • Conducted by Frank Bass (1969) • Concludes that consumers are divided into two groups: 1) innovators and 2) imitators. • Used to determine the nature of growth, peak and decline of diffusion by finding the estimation of the coefficient of innovation and the coefficient of imitation. • The coefficient of innovation and imitation are partial to various interpersonal and market factors.

8. Consumption of Durables and Study Focus • Diffusion Studies • Study found that word of mouth influences consumers more than innovativeness. • Study found that in European countries the adoption of durables is less risky.

9. Consumption of Durables and Study Focus • Diffusion Studies • European & American coefficients of imitation are not so different. • Industry and Medical innovations have higher coefficients of imitation than others. • Diffusion process accelerated by marketing activities. • Coefficient estimation affected by estimation methods. • The parameters of the model explained 1/3 to ½ of the model variations.

10. Consumer Behavior Studies Attributes that affect the consumption of durables: Needs Beliefs and attitudes Motives Personality Perceptual process Learning Lifestyles Family Social class Culture Social influence Consumption of Durables and Study Focus

11. Consumption of Durables and Study Focus • Consumer Behavior Studies • Typical questions presented in studies • Why do consumers prefer particulars over others? • Does ordering vary by the utility of durables (necessity vs. luxury)? • Is there any pattern in durables acquisitions? • Does this pattern vary by the level of economic development? • How does income/price affect acquisition? • What effect saturation has on global consumption?

12. Income Income of Distribution/Social Class Race Household size Family life cycle Education Wife’s employment Consumer sentiment Consumer confidence Liquidity constraints Order of acquisition Consumption of Durables and Study Focus Conditions posed in questions in study

13. Demand Estimation and Forecasting Model Components used to estimate demand: “Stock adjustment models” and “Time series growth components” Durables explored: Autos, TVs, VCRs, CD or DVD players, cameras, refrigerators, washers, dryers, microwaves and dishwashers Consumption of Durables and Study Focus

14. Demand Estimation and Forecasting Model Consumer income was the most notable variable in determining demand Durables are assets. Consumers takes a “long-term view” to purchase them. Other variables used in determining inflation include: price/inflation, credit conditions, consumer debt, real estate interest, unemployment rate, product characteristics and promotion efforts. Consumption of Durables and Study Focus

15. Focus of the Study Economist models used to estimate demand are applied to modernization theory. To support theory that modernization in emerging countries can be predictors for the demand of durables. Nine variables: Income Energy consumption Urbanization Education Life expectancy Working female Availability of credit Communication Economic freedom Consumption of Durables and Study Focus

16. Understanding Modernization • “Modernization” is a controversial concept in social science literature. • The term may be interpreted as an independent variable, a process, a continuum or a product. • Individual and societal perspectives.

17. Understanding Modernization • Individual modernity • Outlook toward society • Occupation • Residency • Education • Family • Lifestyle • Societal modernization • Social component • Cultural component

18. Understanding Modernization M = (GNP/E){(GNPCAP)2 + (ECAP)2}1/2 M = Modernization Score GNP = Gross National Product E = Energy Consumption GNPCAP = Per Capita GNP ECAP = Per Capita Energy Consumption

19. Understanding Modernization • Importance of nine variables • Income • most important of variables • Industrialization/urbanization • One can result from other • Industrialization results in migration • Urbanization is the growth that occurs in the areas where migration settled. • Education • Increases skills and efficiency • Increases chance of better lifestyle

20. Understanding Modernization • Importance of nine variables (cont’d) • Life expectancy • The longer the life expectancy, the more the demand for durables. • Working females • Increase in family income • Both spouses working requires more efficient durables.

21. Understanding Modernization • Importance of nine variables (cont’d) • Available credit • Indication of banking system in place. • High priced durables need credit systems for purchase. • Communication • Influences purchase process. • Economic freedom • Society freedom leads to growth.

22. Model Analysis • Goal: Determine whether modernization influences consumption of durables in emerging markets. • Implications for marketers in developing marketing strategy in developing markets. • Process: Utilize macro-forecasting models based on economists’ approach. • Apply three regression models in backdrop of socioeconomic theory called modernization.

23. Model Specification and Method

24. Model Summary 1. Technology and energy consumption variable based (Irwin) regression model. 2. Multidimensionality of modernization focused, nine variable regression model. 3. Factor analysis approach reduces nine variables to three factors for regression.

25. Model 1 Specification • Two variable model, energy input/GDP output model. • Cijt = α0 + βjtMjt + ε • M = (GNP/E)[(GNPCAP)2+ (ECAP)2]1/2 • Ratio and pace of growth • Societal modernization operationalized by the modernization index (Irwin).

26. Findings • Model I – Regression Results • Beta-coefficients significant and positive for all six variables. • Irwin’s modernization score had positive relationship with durable consumption.

27. Model 1 Strengths/Weaknesses Model is limited to two variables Significant socioeconomic variables not incorporated Useful under time or data constraints

28. Model 2 Specification • Nine variable model indicating societal modernization • Energy consumption, income, urbanization, education, life expectancy, female workforce, credit availability, communication, economic freedom • Coefficients of determination, R-squared, improved over model 1 • Beta-coefficients show mixed results • Multi-collinearity problem • Variables in multiple regression are highly correlated

29. Model 2 Specification • Cijt = α0 + βjtYjt + NjtELECjt + UjtURBjt+ EjtEDUjt + LjtLFXPjt + FjtFEMjt + CjtCRDjt + TjtTELEjt + RjtEFjt + ε -C = Proportion of households owning durable -Y = Income of the individual in the country -ELEC = Urbanization in country -URB = Urbanization in country -EDU = Education in country -LFXP = Life expectancy in country -FEM = Proportion of females in workforce in country -CRD = Credit availability in country -TELE = Telephones lines in country -EF = Economic freedom in country

30. Model 2 Correlations Matrix

31. Findings • Model II – Regression Findings

32. Model 2 Findings • Improved coefficients of determination .53 to .81. Increased over Model 1 by .18 to .51 points. • Beta-coefficients contradictory • Multicollinearity problem

33. Model 2 Strengths/Weaknesses Modernization described in multidimensional format which increases explanatory power. Correlated variables show multicollinearity in beta-coefficients. Good for overall estimates, individual variable estimation troublesome.

34. Model 3 Specification • Derivative of Model 2 • Factor analysis, principal component analysis, with orthogonal decomposition • Goal to maximize the amount of variation in variables of the input matrix • Variables loaded on three factors • Industrialization, openness, quality of life

35. Model 3 Factor Loading

36. Model 3 Specification • Cijt = α0 + F1jtFACTOR1jt + F2jtFACTOR2jt + F3jtFACTOR3jt + ε • C = Proportion of households owning durable • FACTOR1 = First modernization factor (Industrialization) • FACTOR2 = Second modernization factor (Openness) • FACTOR3 = Third modernization factor (Quality of life)

37. Model 3 Regression Results

38. Model 3 Findings • Most variables load on Factor1 • Three Factors explained 80% of variability of data set • Factor1 – 38%, significant in six regression models • Factor2 – 21%, significant in four regression models • Factor3 – 21%, significant in five regression models • Free from collinearity • Coefficients of determination .49 to .79

39. Model 3 Strengths/Weaknesses Dimensions extracted from nine socioeconomic measures of modernization Good overall and individual estimates Multicollinearity eliminated, contradictory beta-coefficients of Model 2 also eliminated Factor pattern may change in the future or with inclusion of new countries

40. Conclusion and Future Direction Model 1: Single Variable Index Measure Result: All models significant. .18-.69 modernization index shows positive relationship with consumption Limitation: Only two variables/Ratio

41. Conclusion and Future Direction Model 2: Multivariate Socioeconomic Measure Result: All models significant. .53-.87 direction of beta coefficients show unexpected relationships. Limitation: Variables highly correlated. multicollinearity may produce inaccurate beta estimates

42. Conclusion and Future Direction Model 3: Factor Analytic Measure Result: All models significant. .38-.79 all 3 factors positive relationship with consumption. Provides good estimates Limitation: Factor pattern may change over time or with inclusion of more countries.

43. Conclusion and Future Direction Model 3: The Factor analysis model provides the best explanation. Single Variable Modernization Index: considers only two variables. Considers limited inputs. Multivariate Socioeconomic Measure variables are highly correlated leading to unexpected beta coefficients.

44. Conclusion and Future Direction Overall Study Conclusion Study supports idea that durables consumption increases with modernization.

45. Conclusion and Future Direction Questions?