Forthcoming in the Journal of World Business
ANTECEDENTS OF INTERNATIONAL PRICING ADAPTATION
AND EXPORT PERFORMANCE
Carlos M. P. Sousa and Frank Bradley
University College Dublin
Carlos M. P. Sousa
Lecturer in Marketing
UCD Michael Smurfit School of Business
University College Dublin
Blackrock, Co. Dublin
Ireland
Tel: + 353 1 716 8811
Fax: + 353 1 716 8019
Email: carlos.sousa@ucd.ie
Frank Bradley
R&A Bailey Professor of Marketing
UCD Michael Smurfit School of Business
University College Dublin
Blackrock, Co. Dublin
Ireland
Tel: +353 1 716 8949
Fax: + 353 1 716 8977
Email: frank.bradley@ucd.ie
Forthcoming in the Journal of World Business
ANTECEDENTS OF INTERNATIONAL PRICING ADAPTATION
AND EXPORT PERFORMANCE
Abstract
In this study, using data collected from over 300 firms price adaptation and export
performance were measured at the export venture level and analyzed by way of structural
equation modeling. The manager’s international experience and the characteristics of the
foreign market were found to influence price adaptation and export performance, which
itself was influenced by price adaptation. We concluded that international pricing
strategies should reflect the environmental characteristics of the foreign market. A price
standardization strategy had a positive impact on the export performance of the firm and,
a surprising result, firms appeared to perform better in countries that were very different
from their home country.
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1. Introduction
To overcome the difficulties experienced by firms in their attempt to expand beyond
home markets, Samiee and Roth (1992) urge firms to develop effective global strategies
in their endeavor to achieve sustainable competitive advantage in international markets.
The focus of most studies in the literature, however, is on providing guidance on product,
promotion, and distribution strategies but the central role of price decisions is ignored
(Theodosiou & Katsikeas, 2001). Despite the calls for an increased research focus on
export pricing, little tangible headway has been made (Myers, Cavusgil, &
Diamantopoulos, 2002). Two possible reasons for this neglect are cited: the complex
nature of international pricing and the reluctance of managers to discuss the issue (Myers
& Cavusgil, 1996) and the second refers to the absence of suitable international pricing
theories (Clark, Kotabe, & Rajaratnam, 1999).
The absence of theoretical guidance may encourage managers to use domestic prices
inappropriately as a basis for establishing international prices. The difficulty is
exacerbated by the recognition that pricing in export ventures can play a key role in
achieving superior performance (Stöttinger, 2001) and may be an essential ingredient in
achieving sustainable competitive advantage in international markets.
The purpose of this study is to identify the factors that influence a firm’s export price
adaptation and export performance. Following Theodosiou and Katsikeas' (2001)
argument, we consider international pricing strategy along the standardization-adaptation
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continuum. A major problem that limits existing research and its future development is
the unit of analysis (Morgan, Kaleka, & Katsikeas, 2004). The fact that most studies
adopt a firm-level unit of analysis and aggregate firms’ various product-market export
ventures (Sousa, 2004) makes it difficult to identify and isolate specific antecedents of
export performance (Morgan et al., 2004). To avoid this problem, we use the export
venture, a particular product exported to a specific export market, as the primary unit of
analysis. This approach is corroborated by Cavusgil, Zou, and Naidu (1993) who argue
that any study of international marketing strategy standardization conducted at the overall
firm level is likely to produce confounded, and thus unreliable, results.
In the next section, the conceptual background to the research is presented, along with the
development of specific research hypotheses. This is followed by a description of the
research methodology. After presenting the results and a discussion of their implications,
the paper concludes with limitations and suggestions for future research.
2. Theoretical background and research hypotheses
Three literature streams provide the theoretical foundation for assessing the exporting
behavior of firms (Francis & Collins-Dodd, 2000): the resource-based paradigm, the
relational paradigm, and the contingency paradigm. The resource-based paradigm
suggests that a firm’s export performance is based on firm-level activities such as size,
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firm experience, and competencies (Zou & Stan, 1998). As a result, little emphasis is
placed on environmental factors as determinants of export performance and strategy.
The relational paradigm focuses on the network of business interactions and views export
expansion as the sequential development of relationships with foreign buyers (Styles &
Ambler, 1994). Within this paradigm are a number of models such as IMP group
interaction model (Turnbull & Valla, 1986), channel relationship models (Anderson &
Narus, 1990), and buyer and seller relationships (Dwyer, Schurr, & Oh, 1987). The
general aim of these models, however, is not to explain marketing performance but to
analyze and predict relationship processes and outcomes.
The theoretical perspective adopted in this study, the contingency paradigm, suggests that
environmental factors influence the firm’s strategies and export performance. The effects
of various firm characteristics on export performance are dependent on the specific
context of the firm. According to Cavusgil and Zou (1994), this theory has its roots in the
structure-conduct-performance framework of industrial organization and rests on two
premises: (1) that organizations are dependent on their environments for resources
(Pfeffer & Salancik, 1978), and (2) that organizations can manage this dependence by
developing and maintaining strategies (Hofer & Schendel, 1978).
Thus, in the contingency paradigm, exporting is considered as a firm’s strategic response
to the interplay of internal as well as external factors (Robertson & Chetty, 2000).
Universally valid prescriptions for firm success are unlikely to be found because the
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nature of the firm’s business position and the environmental context must be considered.
Perspectives that emphasize the importance of the exporter’s contextual situation,
therefore, offer a more fruitful approach in attempting to understand the determinants of
export success (Walters & Samiee, 1990).
A fundamental premise underlying this contingency theory is that no strategy can be
effective in all contexts. Global marketing decisions regarding product, price, promotion,
and distribution differ from those made in the home country since each country has a
unique environment (Jain, 1989). The extent to which the elements of the marketing
program should be standardized or adapted, however, is an ongoing debate. Proponents of
standardization emphasize the homogenization of world markets and the associated cost
savings. It is also argued that standardization facilitates economies of scale in all valueadding activities, and that this allows the firm to achieve a low-cost competitive position
in global markets (Cavusgil et al., 1993). This standardization perspective has been
criticized, however, as overly simplistic, myopic, and contrary to the marketing concept
(Douglas & Wind, 1987; Wind, 1986). Advocates of the adaptation approach view
markets as being heterogeneous, comprising consumers with different wants and needs.
Standardization and adaptation, however, may be viewed as two extremes of the same
continuum (Jain, 1989). The contingency perspective recognizes both advantages and
disadvantages associated with each of the two extremes (Lages & Montgomery, 2004).
No universal set of strategic choices can be considered optimal for all organizations and
circumstances (Ginsberg & Venkatraman, 1985). This perspective is empirically
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supported by most of the recent literature and informs theory building in this paper
(Theodosiou & Katsikeas, 2001; Sousa & Bradley, 2005; Özsomer & Prussia, 2000).
2.1. Development of hypotheses
Contextual factors determine the appropriate degree of standardization/adaptation in
contingency theory. Pricing decisions in international markets are influenced by internal
and external factors (Theodosiou & Katsikeas, 2001). Internal factors are organizational
characteristics such as the firm and the product, whereas external factors are usually the
characteristics of the foreign market. The degree of co-alignment of these factors with the
marketing strategy of the firm determines the level of export performance (Cavusgil &
Zou, 1994).
In the export literature it is argued that foreign markets pose both threats and
opportunities for firms. Researchers report that environmental differences between
markets are expected to affect the firm’s strategy and export performance (e.g. O'Cass &
Julian, 2003). This argument might be further explored using an institutional theory
perspective1. A key insight from this theory is the acknowledgment of the institutional
environment (North, 1990). The institutional environment, defined as the socially
constructed world that forces firms to conform to social rules and rituals (Orru, Biggart,
& Hamilton, 1991), includes macro-level aspects of society including the regulatory
system, cognitive beliefs and knowledge, and cultural norms (Carson, Devinney,
Dowling, & John, 1999). Institutional theorists argue that differences in the institutional
1
We thank a reviewer for drawing this point to our attention.
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environment between countries are expected to affect the firm’s strategy and performance
(Wan & Hoskisson, 2003).
Foreign market characteristics, such as economic and industrial development, marketing
and communications infrastructure, technical requirements, and legal regulations
influence export performance (Balabanis & Katsikea, 2003; O'Cass & Julian, 2003;
Baldauf, Cravens, & Wagner, 2000; White, Griffith, & Ryans, 1998). Furthermore,
uncertainty arises when a firm attempts to export to countries not deemed similar to the
home country (Erramilli & Rao, 1993) since the difficulty of obtaining and interpreting
information increases (Boyacigiller, 1990). Without adequate information, many firms
may encounter difficulties in predicting the consequences of their strategic decisions
(Achrol & Stern, 1988). This uncertainty and lack of information about the foreign
market may also increase the possibility of making wrong decisions and thereby reduce
the performance of the firm abroad (Lee, 1998). Addressing this possibility, Johanson and
Vahlne (1977, 1990) and Wiedersheim-Paul, Olson, and Welch (1978) suggest that, to
enhance their chances of success, exporters should select countries that are perceived to
be similar to the home market. The reasoning behind this advice is that similarities are
easier to manage than dissimilarities, thereby making it more likely for the firm to
succeed in similar markets. The following hypothesis is therefore suggested:
H1: Environmental differences between the home and foreign markets
negatively affect the export performance of the firm.
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Environmental differences influence the degree of price adaptation by firms in
international markets (Myers et al., 2002). Market similarity between the home and
foreign markets drives firms toward price standardization, whereas market diversity
drives them toward price adaptation (Jain, 1989; Sousa & Bradley, 2005). An adaptation
strategy is required when substantial differences exist in government regulations,
communications and marketing infrastructure, and technical requirements (Douglas &
Wind, 1987; Zou, Andrus, & Norvell, 1997; Chung, 2003). Furthermore, economic
conditions prevailing in the foreign market can influence pricing decisions since the
overall level of economic and industrial development of a country also influences the
prices consumers are willing to pay for certain products (Theodosiou & Katsikeas, 2001).
Lastly, firms are often required to adapt their pricing strategy abroad because of different
regulations on tariffs, taxes, and resale price maintenance (Cavusgil et al., 1993; Jain,
1989). We therefore advance the following hypothesis:
H2: Environmental differences between the home and foreign markets
positively affect the degree of price adaptation.
The number of countries to which a firm exports is another factor that influences the
degree of price adaptation. Specifically, we suggest that the greater the number of
countries to which the firm exports, the greater the pressure on the firm to standardize its
pricing strategy because improved communications technologies among buyers make it
increasingly difficult for exporters to maintain a differentiated pricing strategy in
different markets for similar products (Doole & Lowe, 2004). Moreover, the maintenance
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of different price strategies in different markets gives rise to gray market activities (Antia,
Bergen, & Dutta, 2004), and the larger the number of export markets served by the firm,
the higher the risk of gray market activity (Myers, 1999). This problem of gray market
activities is further exacerbated by the increased globalization of trade that leads
Cavusgil, Chan, and Zhang (2003) to argue that globalization has made it more difficult
for firms to use price discrimination strategies in different international markets. Price
variations for the same product across markets are also likely to alienate distributors and
customers when they discover these differences (Diller & Bukhari, 1994). Better
information systems allow customers to observe when differential pricing exists. The
introduction of the Euro and readily available information on worldwide prices through
the Internet, have greatly increased price transparency. In these circumstances customers
who pay different prices in different countries for essentially the same product can be
expected to press for a uniform price, allowing for taxation differences (Terpstra &
Sarathy, 2000). It is hypothesized, therefore, that:
H3: The greater the number of countries to which the firm exports, the lower
the degree of price adaptation.
The manager’s international experience may influence the firm’s export pricing strategies
(Myers et al., 2002). Ambiguity exists regarding the nature of the influence of experience.
Some managers with substantial international experience are more willing to adapt their
strategies to fit the idiosyncrasies of foreign markets (Cavusgil et al., 1993) than others
who are more inclined to standardize (Cateora, 1996). However, in the past decade,
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managers with international experience report that it is increasingly difficult to follow a
price adaptation strategy for similar products in international markets (Doole & Lowe,
2004). This leads Chung (2003) to conclude that firms with extensive export experience
should consider standardizing prices. By standardizing, the manager is able to maintain
consistent positioning, quality, and image in different markets while obtaining economies
of scale in all value-adding activities (Whitelock, 1987). This leads to the fourth
hypothesis:
H4: The greater the manager’s export experience, the lower the degree of
price adaptation.
The manager’s export experience may also have a direct influence on the performance of
the firm (Zou & Stan, 1998). The nature and direction of the impact is disputed however.
Some studies reveal a positive relationship between export experience and export
performance (Zou & Cavusgil, 2002; Madsen, 1989) whereas others discover a negative
relationship between these two constructs (Baldauf et al., 2000; Cooper & Kleinschmidt,
1985). Most studies report a positive effect of export experience on export performance
(Zou & Stan, 1998; Lages & Montgomery, 2005). Managers with more experience of
international business perform better because of their access to international networks and
a better understanding of foreign markets (Axinn, 1988). These managers are also more
open to export opportunities and are less hesitant to operate abroad (White et al., 1998);
this is in agreement with the finding of Dean, Menguç, and Myers (2000) and Madsen
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(1989) that the most important positive influence on export performance is export
experience. Based on the above discussion, the following hypothesis is proposed:
H5: The greater the manager’s export experience, the better the firm’s export
performance.
The degree of price adaptation is posited in our model as a key determinant of the export
performance of the firm. In a review of the literature on standardization and adaptation,
Shoham (1995) reports that the pattern of findings about pricing standardization and
performance is mixed. Some studies, Kirpalani and Macintosh (1980) and Leonidou,
Katsikeas, and Samiee (2002), for example, report that price adaptation positively
influences export performance. Others have shown that price adaptation is negatively
related to export performance (Shoham, 1999; Zou et al., 1997). Özsomer and Simonin
(2004) agree with this view and postulate a positive relationship between price
standardization and performance that concurs with Zou and Cavusgil (2002) who report a
significant positive relationship between global marketing strategy and performance.
Furthermore, as indicated previously, following a price adaptation strategy across
markets is likely to alienate distributors and customers when they discover these
differences (Diller & Bukhari, 1994) and thereby negatively influence the firm’s
performance in those markets. The use of a price standardization could also eliminate
parallel imports and the indirect cannibalization of the firm’s own product lines.
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In their study of the performance of Portuguese exporting firms, Lages and Montgomery
(2005) report that price adaptation is negatively related to export performance. Their
argument is that the Portuguese market, the location of their fieldwork, tends to have
lower prices than most of the foreign markets targeted. These authors argue that the use
of a standardized pricing strategy, by which they mean prices similar to those in the
domestic market, helps to penetrate the export market and improve export performance.
Low costs in the domestic market, achieved through scale economies or otherwise, may
allow the firm to charge the same low prices abroad. These circumstances, combined with
an elastic demand in the export market, permits the firm to price penetrate that market,
thereby positively affecting export performance (Bradley, 2005). This explanation is
consistent with Brouthers and Xu (2002), Julian (2003), and Christensen, da Rocha, and
Gertner (1987) who report that low competitive prices tend to be positively associated
with export performance. Furthermore, by pursuing such a price strategy, firms located in
less developed markets are more likely to achieve success because it is compatible with
consumer perceptions and expectations of products made in such countries (Aulakh,
Kotabe, & Teegen, 2000). This leads to the following hypothesis:
H6: The degree of price adaptation negatively affects the export performance
of the firm.
In summary, we propose that the degree of price adaptation is influenced positively by
the differences in the market environments and negatively by the number of markets to
which the firm exports. The export performance of the firm, we suggest, is affected
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positively by the international experience of the manager and negatively by differences in
the market environments and the degree of price adaptation. An overview of the
conceptual framework is presented in Figure 1.
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Insert Figure 1 near here
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3. Methodology
3.1. Sample and data collection procedure
The study was conducted using a sample of exporting firms based in Portugal. Portugal, a
member of the European Union (EU) since 1986 but an open economy, has long
depended on international trade because of the small size of the domestic market.
Because of the openness of the economy a strong export orientation exists among
Portuguese firms. We used a multi-industry sample to increase observed variance and to
strengthen the generalizability of the results (Morgan et al., 2004). The sample comprised
874 exporting firms from all parts of the country.
As the research base was located outside Portugal, questionnaires were sent with an
international postage-paid business reply envelope that was followed by a reminder letter
including a second reply envelope. The effective response rate, after two mail-waves, was
34.4 percent (301 usable questionnaires). This is a high response rate, considering that the
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average top management survey response rates are in the range of 15 to 20 percent
(Menon, Bharadwaj, & Howell, 1996), and that collecting data from firms located in a
foreign country is more difficult than collecting from a domestic population due to the
numerous obstacles encountered.
To explore the issue of non-response bias, we tested for differences between early and
late respondents (Armstrong & Overton, 1977). As recommended by Weiss and Heide
(1993), early responses were defined as the first 75 percent of returned questionnaires.
The last 25 percent were considered late responses and representative of firms that did
not respond to the survey. Using a t-test, early and late respondents were compared on all
the variables and no significant differences were found; this suggests that non-response
bias was not an issue. Moreover, since anonymity was guaranteed, bias associated with
those who did not wish to respond for confidentiality reasons was also reduced
(Bialaszewski & Giallourakis, 1985).
Particular attention was paid to the identification and selection of the most appropriate
person in each firm to participate in the study. Because of involvement and direct
responsibility in decision making, the manager was considered to be a major force behind
the initiation, development, sustenance, and success of a firm’s foreign activities. To
ensure the reliability of the data, the respondents selected were senior managers with
responsibility for foreign operations. The approach suggested by Huber and Power (1985)
of using a single key informant was also adopted, with the view to minimizing the
potential for systematic and random sources of error. In order to ensure that the most
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appropriate person would receive the questionnaire, each firm was contacted by
telephone beforehand.
3.2. Measures
The survey instrument used was developed following a comprehensive review of the
relevant literature. It was written originally in English and translated into Portuguese by a
bilingual expert. Four academic experts who were familiar with the topic under
investigation assessed the content and face validity of the survey. To evaluate individual
item content, clarity of instructions, and response format, we tested the questionnaire in a
series of face-to-face settings with 15 managers involved in export operations. The
questionnaire was then back-translated into English and checked for consistency with the
original version.
The items used to operationalize each construct were developed on the basis of existing
literature (see Appendix). We operationalized export performance using five items:
export sales growth, export profitability, export intensity, meeting expectations, and
perceptions of how competitors rate the firm’s export performance. The first four items
have been used frequently in previous studies (Zou, Taylor, & Osland, 1998; Brouthers &
Xu, 2002; Katsikeas, Piercy, & Loannidis, 1996; Robertson & Chetty, 2000). The fifth
item, based on Styles' (1998) work, asked respondents for their perception of how their
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competitors would rate the export venture’s performance. This item was assessed on a
ten-point unsuccessful/successful scale.
In relation to price we adopted the measures developed by Sousa and Bradley (2005).
Price strategy was measured by the level of adaptation of price discounts, margins, credit,
and payment security. The experience of the manager was measured by asking
respondents to indicate their level of overseas experience in terms of living and working
abroad and their degree of professional exporting experience (Das, 1994; Sousa &
Bradley, 2006). Number of markets was measured by a single item; respondents were
asked to indicate the number of countries to which they exported the product.
Environmental characteristics were measured using items that focused on
economic/industrial development, marketing infrastructure, communications
infrastructure, technical requirements, and legal regulations (Theodosiou & Katsikeas,
2001; Shoham, 1999; Klein & Roth, 1990).
In addition to the variables specified in our theoretical model, we included the size of the
firm as a control variable. Previous research suggests that firm size has an influence on
pricing strategies (Myers & Cavusgil, 1996; Chung, 2003) and on the export performance
of the firm (Lado, Martinez-Ros, & Valenzuela, 2004; White et al., 1998). Myers (2004)
reports that firm size, represented as the number of employees and company sales, affects
the pricing decisions of the firm. As a result, we operationalized firm size using these two
items. We also controlled for export destination. Because of possible foreign currency
fluctuations, it was important to determine whether the firms were exporting to another
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EU country or if they were exporting to a non-EU country2. We, therefore, created the
variable, export destination, as a dummy variable.
4. Analysis and results
4.1. Reliability and validity
Content validity was established through the literature review and by consulting
experienced researchers and managers. On the basis of these procedures, it was
concluded that the measures had content validity. Discriminant validity, convergent
validity, and scale reliability were assessed by confirmatory factor analysis in line with
the paradigm advocated by Gerbing and Anderson (1988). Tables 1 and 2 show the
results obtained from the estimation of the CFA model. The overall chi-square for this
model was 270.955 (p < 0.00) with 98 degrees of freedom (df). Four measures of fit were
examined: the comparative fit index (CFI = 0.986), Tucker-Lewis fit index (TLI = 0.981),
incremental fit index (IFI = 0.986), and the root mean square error of approximation
(RMSEA = 0.077). The results suggest that the scale measures were internally consistent,
able to discriminate, and provided a good fit of the factor model to the data.
An inspection of these results shows that the items employed to measure the constructs
were both valid (convergent validity and discriminant validity) and reliable (composite
reliability, variance extracted, and internal reliability). More specifically, convergent
validity is evidenced by the large and significant standardized loadings (t > 1.96, p < .05)
of the items on the respective constructs. Discriminant validity, on the other hand, was
2
We thank a reviewer for drawing this point to our attention.
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assessed by observing the construct intercorrelations. These were significantly different
from 1, and the shared variance between any two constructs (i.e. the square of their
intercorrelation) was less than the average variance explained in the items by the
construct (Fornell & Larcker, 1981). The correlation matrix for the constructs is shown in
Table 2. Adequate discriminant validity is evident for all constructs since their diagonal
elements are greater than the off-diagonal elements in their corresponding rows and
columns in the upper triangle.
In regard to the reliability of the constructs, Table 1 presents the results of composite
reliability, and variance extracted. The values for composite reliability, ranging from 0.74
for experience to 0.85 for environment, considerably exceed Bagozzi and Yi's (1988)
recommended minimum level of 0.60. In terms of variance extracted, only export
performance fell slightly short of the 0.50 guideline, while all the others exceeded the
recommended level. We conclude, therefore, that for all constructs the indicators were
sufficient and adequate in terms of how the measurement model was specified.
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Insert Table 1 & Table 2 near here
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4.2. Testing of hypotheses
Because of the complexity of the model and the need to test the relationships between the
constructs simultaneously, structural equations were used by applying the maximum
likelihood (ML) method (Amos version 4.0). The overall chi-square for the model in
Figure 2 was significant (chi-square = 335.323, df = 153, p < 0.001), as might be
expected given the size of the sample (Bagozzi & Yi, 1988). Several researchers note the
sensitivity of this statistic to the size of the sample, such that tests involving large
samples generally lead to the rejection of the model even if it is appropriate (Bagozzi &
Baumgartner, 1994). To address this issue, we examined the structural diagnostics for
relative global fit suggested by Bollen (1989). As with the CFA model, the other
measures of fit were: comparative fit index (CFI = 0.987), Tucker-Lewis fit index (TLI =
0.982), incremental fit index (IFI = 0.987), and the root mean square error of
approximation (RMSEA = 0.063). Given that all the fit indices were inside conventional
cut-off values, the model was deemed acceptable (Browne & Cudeck, 1993; Vandenberg
& Lance, 2000). The relationships proposed in the model were examined next (Figure 2).
******************************
Insert Figure 2 near here
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Contrary to the expectations in H1, our findings suggested that the greater the
environmental differences between the home and the foreign market, the better the export
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performance of the firm (path coefficient = 0.222; p < 0.05). In relation to H2, the results
indicated that the greater the environmental differences, the more likely was the manager
to follow a price adaptation strategy in that foreign market (path coefficient = 0.581; p <
0.001). Supportive findings for H3 (path coefficient = -0.181; p < 0.05) indicated that the
number of markets affected price adaptation negatively. The results for H4 (path
coefficient = -0.141; p < 0.05) supported the notion that the manager’s international
experience was negatively related to price adaptation. Furthermore, the relationship
between the manager’s international experience and export performance was found to be
significant and positive (path coefficient = 0.170; p < 0.05), thus supporting H5. Finally,
in relation to H6, the results supported our contention that the degree of price adaptation
negatively affects the performance of the firm (path coefficient = -0.196; p < 0.05). In
sum, the findings show that all six hypotheses tested significantly, five hypotheses were
supported (H2-H6), while hypothesis (H1) was not.
4.3. Tests of competing models
Although our model represented a good fit to the data, it is possible that there are better
models. To assess the quality of our model relative to other theoretically based models,
tests of competing nested models were conducted (see Anderson & Gerbing, 1988). We
compared the nested models using the sequential chi-square difference test (SCDT). The
occurrence of a significant chi-square difference value when a path is constrained to zero
would indicate a significant loss of fit, in which case the path should be retained in the
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model. In contrast, a non-significant value would indicate acceptance of the more
parsimonious of the nested models (James, Mulaik, & Brett, 1982).
The first alternative to be tested was a model in which experience of the manager and
environmental characteristics were constrained to have no effect on the export
performance of the firm. The chi-square value for this model was 349.650 and the
degrees of freedom were 155. The results, however, indicated that there was a significant
loss of fit between this model and the theoretical model, with a chi-square diff of 14.327
(df = 2, p < 0.001). This difference indicates that the paths from experience of the
manager and environmental characteristics to export performance should remain in the
model. The second alternative was a model that constrained to zero the paths to price
from experience of the manager and from environmental characteristics. The chi-square
for this model was 409.704 (df = 155). The SCDT again indicated a significant loss of fit
(chi-square diff = 74.381, df = 2, p < 0.001); this shows that these paths too should remain
in the model. The final alternative was to test a model that included a direct path between
the number of markets and export performance. The chi-square for this model was
335.322 (df = 152). This model yielded an insignificant chi-square difference when
compared to the theoretical model (chi-square diff = 0.001, df = 1, p > 0.1). The
insignificant SCDT suggests that the more parsimonious model, the theoretical model,
should be retained. Overall, these results indicate that our hypothesized model explained
the data better than these three alternative models.
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5. Discussion and implications
Despite the number of calls for a greater focus on export pricing research, little tangible
headway has been made. To contribute toward filling this void in the literature, we
identify factors that drive the export performance of the firm, with special emphasis on
the influence of price adaptation.
The results indicate that the degree of price adaptation is positively influenced by
environmental characteristics of the foreign market and negatively associated with the
managers’ international experience and the number of markets, thus providing support for
H2-H4. These findings are consistent with earlier research that has examined the
antecedents of marketing strategy adaptation and standardization.
Contrary to expectations, however, we discover that the relationship between the foreign
environment and export performance (H1) is positive and significant, indicating that firms
perform better in countries that are viewed as different from the home country. Although
surprising, O'Grady and Lane (1996), Morosini, Shane, and Singh (1998), and Evans and
Mavondo (2002) suggest that the belief that countries that are similar to the home country
are more easily understood and managed than distant ones may not necessarily be true. In
their study of 32 Canadian companies exporting to the United States, O'Grady and Lane
(1996) report that only seven were successful. These authors argue that perceived
similarity can cause decision makers to fail because they do not prepare for the
differences. As a result, perceived similarity may lead to managerial carelessness and
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failure. Thus, the intuitively appealing assumption that firms perform better in similar
markets than in distant ones should be questioned and is an issue that warrants further
empirical investigation.
As expected, managers with greater international experience positively influence the
performance of the firm in foreign markets. This supports H5 and is corroborated by the
findings of da Rocha, Christensen and da Cunha (1990) that international experience
enriches managerial expertise and increases the firm’s performance in overseas markets.
This finding is also supportive of the Zou and Stan (1998) view that the manager’s
international experience helps a firm to identify and leverage international opportunities
while avoiding international threats. Furthermore, our results provide evidence that there
is a negative relationship between price adaptation and export performance (H6), that is,
the smaller the degree of price adaptation, the higher the export performance of the firm.
This result is also in line with previous research findings (e.g. Zou et al., 1997; Shoham,
1999; Lages & Montgomery, 2005) and demonstrates that the presentation of a consistent
price image across markets leads to superior performance.
In addition to the relationships discussed above, it is noteworthy to mention that both
control variables display a significant influence on price adaptation and export
performance. The size of the firm positively influences price adaptation and export
performance. Since an adaptation strategy often requires a greater financial resource
commitment from the firm (Whitelock & Pimblett, 1997), it is expected that larger firms
tend to adapt their strategies more because they possess more resources. Examining the
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relationship between the size of the firm and export performance, we find that the larger
the firm, the higher the export performance. The reason for better performance among
larger firms than small firms derives from factors such as scale economies, production
capacity, R&D expenditure, and the ability and willingness to take risks. It may also be
argued that larger firms possess more unused and/or underutilized resources and,
therefore, are able to direct more efforts to export activities (Baldauf et al., 2000). Export
destination, on the other hand, was found to have a negative effect on the price adaptation
strategy of the firm, indicating that firms that export to an EU country follow a more
standardized price strategy, whereas firms that export to a non-EU country adapt their
price strategy. Firms that export to non-EU countries, in addition, have to deal with
different regulations on tariffs, taxes, technical requirements as well as foreign currency
fluctuations that often force them to adapt their price strategy.
5.1. Managerial implications
In addition to providing useful insights into the literature, our research has implications
for managers. Specifically, our results indicate that decisions regarding price
standardization or adaptation should be based on the environmental characteristics of the
foreign market. A thorough analysis of the foreign market is necessary in order to be able
to develop appropriate export pricing strategies. This is not a novel recommendation for
managers, since previous research (e.g. Theodosiou & Katsikeas, 2001; Myers et al.,
2002) repeatedly stresses the importance of this factor in developing the firm’s
international pricing strategies. A surprising and interesting result in this study is that
24
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firms appear to perform better in countries that are very different from their home
country. When exporting to similar countries, some firms often fall into the trap of
ignoring small but important differences that exist between them. Advice for managers,
based on our results, is that in order to be more successful, they should consider exporting
to countries that are not very similar to their own country.
Our findings further indicate that the manager’s international experience is important in
explaining pricing decisions as well as explaining the export performance of the firm.
Managers that have considerable international experience are more likely to follow a
standardization approach in setting prices in foreign markets since, as we have seen, a
standardized strategy permits scale economies, synergies, and efficiencies (Hamel &
Prahalad, 1985; Levitt, 1983; Yip, 1995), simplifies planning, and provides the firm’s
brand with a consistent image (Zou & Cavusgil, 2002). Managers that have more
international experience are also more likely to perform better than less experienced
managers. Hence, firms should place considerable effort in increasing the export
experience of their managers. Moreover, the fact that managers’ skills and knowledge are
resources that are difficult to imitate can create a competitive advantage for the firm. In
the case of managers that are already working in the company, the firm should encourage
further training in coping with international issues. Frequent participation in either
government sponsored exhibitions or industry-specific international trade fairs, for
instance, can be a reasonably cost effective means of giving managers greater overseas
experience. Managers can also be exposed to other managers and experts who may be
able to coach them on doing business in foreign markets, thus avoiding the delay of
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Forthcoming in the Journal of World Business
normal learning over time. Another alternative that firms should consider is to hire
managers with experience of international markets rather than attempting to build up the
entire body of experience in-house. This may be difficult, however, as poaching
managers in this way is increasingly difficult.
A key determinant of export performance and a vital issue for managers is to determine
whether to adapt or standardize their pricing strategies in foreign markets. Managers with
more international experience perform better by choosing to standardize prices. Our
results also indicate that price standardization has a positive impact on the export
performance of the firm. As a general rule, however, following a standardized low price
strategy in international markets is something to be discouraged. In the case of the firms
in the sample, low price strategies may become increasingly less viable for Portuguese
firms in the international arena. Competitive advantages based on low prices are not
sustainable over time as other low cost countries, China for example, can be significantly
more price competitive. Ultimately, in order to be able to survive in the long term,
Portuguese exporters that compete on low price are likely to be forced to develop
alternative strategies as their price advantage erodes. We encourage these exporters,
therefore, to develop strategies where quality and brand image and other non-price issues
may be more important than price in the eyes of the customer.
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5.2. Limitations and directions for further research
There are a number of research limitations in this paper. First, the research instrument
used may have created common method variance that could have inflated the construct
relationships. This could be particularly worrisome if the respondents were aware of the
underlying conceptual framework. Respondents were not informed of the specific
purpose of the study, however, and all construct items were separated and mixed so that
no respondent should have been able to detect which items were associated with which
factors (Jap, 2001). Moreover, allowing respondents’ answers to be anonymous and
assuring them that there were no right or wrong answers should have further reduced
method biases (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). Hence, the possibility
of introducing bias through common method variance was minimized. Nevertheless, two
statistical tests were conducted to determine the extent of possible method variance in the
data. The Harman one-factor test (Podsakoff & Organ, 1986) demonstrated that the risk
of common method variance was unlikely to be significant in this case because the
exploratory factor analytic results showed that a single general factor did not account for
most of the variance. To confirm these results, additional analyses were performed to test
for common method variance following the procedure recommended by Podsakoff et al.
(2003) and used by Conger, Kanungo, and Menon (2000). In this approach, we reestimated the model with all the indicator variables loading on a general method factor.
The goodness-of-fit indices (CFI=0.922; TLI=0.904; IFI=0.922; RMSEA=0.145) indicate
a poor fit; this suggests that bias arising from common method variance was unlikely.
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Forthcoming in the Journal of World Business
Finally, a test of discriminant analysis in the confirmatory factor analysis also provided
evidence that the constructs were distinct.
The somewhat high RMSEA reported in this study may represent another potential
limitation. It should be noted, however, that the interpretation of any fit index in isolation,
the RMSEA included, can be problematic because of trade-offs between Type I and Type
II errors. To address this issue, McQuitty (2004) uses the concept of statistical power.
Therefore, “recommendations regarding the relationship between model fit and goodnessof-fit-statistics must be considered in light of statistical power and should not be absolute,
because “… the conclusions one draws regarding the adequacy of one’s model for
explaining a phenomenon are dependent on statistical power (Kaplan, 1995: 117).
Situations in which power is overly great (i.e. π>0.90) may require a more relaxed
interpretation of fit than is typical. Conversely, a more stringent interpretation of fit
statistics is required when power is low, especially when goodness-of-fit statistics are not
exemplary” (McQuitty, 2004: 182). To address this issue we analyzed the statistical
power in our study and it was well above 0.9. Therefore, the high statistical power and
the exemplary values for the CFI, IFI, and TLI in both cases appear to mitigate the
somewhat high RMSEA value.
Another possible limitation is that, since only firms based in Portugal were surveyed,
caution should be exercised in generalizing our findings too broadly. Future work should,
therefore, test this framework in other countries to provide a more generalizable
foundation for understanding these relationships. Nonetheless, generalizations of the
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Forthcoming in the Journal of World Business
findings may be applicable in countries that are in a similar stage of development and
experience structural characteristics and export contingencies comparable to those in
Portugal. Additionally, the study employed a cross-sectional research design, an approach
that cannot capture the dynamic aspects of the determinants of price adaptation and
export performance. Future work should, therefore, consider adopting a longitudinal
design to shed light on these relationships over time.
The institutional environment has been extensively studied in law and institutional
economics but its impact is largely unexplored in the international marketing and
business literature, with a few exceptions (e.g. Chelariu, Bello, & Gilliland, 2006; Kim &
Oh, 2002). Although we address the concept of institutional environment briefly in our
paper, we believe that future research should consider developing frameworks that
incorporate the institutional environment into the export literature.
It is hoped that this study will contribute toward a better understanding of price
adaptation in international markets and will encourage fellow researchers to continue
investigating this important topic.
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Figure 1: The Conceptual Model
H1 (-)
Environment
H2 (+)
Number of
markets
H3 (-)
Price
adaptation
H6 (-)
Export
performance
H4 (-)
Experience
H5 (+)
Control variable:
Control variable:
Export
destination
Size
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Forthcoming in the Journal of World Business
Table 1: Confirmatory Factor Analysis and Constructs Reliability
Constructs and items
Regression Standardized
Weights
Loadings
t-value
Export Performance (CR* = .80; VE** = .46)
Meeting expectations
How competitors rate firm’s export performance
Export intensity
Export profitability
Export sales growth
0.944
1.347
0.752
0.609
(set to 1)
0.795
0.570
0.596
0.610
0.774
12.220
9.032
9.505
9.746
Price (CR* = .83; VE** = .56)
Price discount policy
Margins
Credit concession
Payment security
0.825
0.843
0.934
(set to 1)
0.701
0.743
0.786
0.756
10.812
11.624
12.097
Environment (CR* = .85; VE** = .54)
Economic/industrial development
Marketing infrastructure
Communications infrastructure
Technical requirements
Legal regulations
0.784
1.046
1.002
0.976
(set to 1)
0.698
0.838
0.757
0.702
0.668
10.439
11.990
11.148
10.473
Experience (CR* = .74; VE** = .59)
Overseas experience
Export experience
1.349
(set to 1)
0.832
0.703
3.969
Model fit indices are as follows: chi-square = 270.955; df = 98 (p = 0.000); CFI=0.986; TLI=0.981;
IFI=0.986; RMSEA=0.077
Note:
*Composite reliability (CR) (Bagozzi, 1980)
**Variance extracted (VE) (Fornell & Larcker, 1981)
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Forthcoming in the Journal of World Business
Table 2: Correlation between Constructs
Construct
1
2
3
4
0.46
0.004
0.011
0.074
2. Price
-0.066
0.56
0.353
0.007
3. Environment
0.103
0.594
0.54
0.008
4. Experience
0.272
-0.084
0.091
0.59
1. Export performance
Note: Correlations in the lower triangle, shared variance in upper triangle and average variance extracted on
the diagonal
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Forthcoming in the Journal of World Business
Figure 2: Final Model
Control variable:
Size
0.222
Environment
2.303
-0.181
-2.554
-0.141
2.621
2.366
7.266
Number of
markets
0.237
0.222
0.581
Price
adaptation
-0.123
-2.118
-0.196
-2.003
Export
performance
-2.003
0.170
Experience
2.217
Control variable:
Export
destination
Chi-square=335.323, df=153
CFI=0.987; TLI=0.982; IFI=0.987; RMSEA=0.063
Note: Standardized parameter estimate above the lines and t-values below the lines
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Forthcoming in the Journal of World Business
APPENDIX: Constructs and Measures
ENVIRONMENT
Scale: 1 (very similar) to 5 (very different)
• Communication infrastructure
• Marketing infrastructure
• Technical requirements
• Legal regulations
• Economic/industrial development
PRICE ADAPTATION
Scale: 1 (very similar) to 5 (very different)
• Price discount policy
• Margins
• Credit concession
• Payment security
EXPORT PERFORMANCE
Scale: 1 (very unsatisfied) to 5 (very satisfied)
• Export sales growth
• Export profitability
• Export intensity
• Degree of meeting expectations
Scale: 1 (unsuccessful) to 10 (successful)
• How competitors rate firm’s export performance
EXPERIENCE
Scale: 1 (none) to 5 (substantial)
• Degree of professional exporting experience
• Degree of overseas experience: living/working abroad
NUMBER OF MARKETS
• Number of countries to which they export the product
SIZE OF THE FIRM
• Number of employees
• Company sales
EXPORT DESTINATION
• Country to which they export the product
40