Effect of Export Performance on Economy

CHAPTER ONE: INTRODUCTION

In this chapter, first we introduce the study by highlighting its background followed by a brief description of Malaysia’s economy and external trade based on relevant statistics related to economic growth trends and international trade, respectively. Next, we further proceed to look in detail at the export performance concept. Then, we indicate the current major products exported by Malaysian firms, and their main export destinations. Research problem, question, and objectives, followed by the significance, scope, limitations, and organization of the paper, are all discussed in the last part of the chapter.

1.1. Background of the Study

With the increasing trend of globalization, the arena of market and competition for business firms has expanded from domestic markets to the international markets. This has accentuated the importance of understanding the behavior of firms in foreign markets. Exporting represents a viable strategic option for firms to internationalize and has remained the most frequently used foreign market entry mode chosen (Zhao & Zou, 2002), as it provides the firm with the flexibility needed to penetrate and compete in new international markets.

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In 2001, the World Bank published the report Globalization, Growth and Poverty: Building an Inclusive World Economy. The report shows that 24 developing countries, which increased their integration into the world economy, achieved higher growth in incomes, longer life expectancy and better schooling (Van Dijk, 2002). Exporting is considered to be one of the most important ways for developing countries to link with the world economy. Therefore, it is identified by governments and public policy makers as a priority (Morgan, 1997).

1.1.1. Malaysia’s Economy and External Trade

The Malaysian economy has shown to be one of the most dynamic economies in the Asia Pacific region. The structure of the Malaysian economy had a dramatic transformation in the last five decades. Gradually over this period, it has displayed attributes of newly industrialized country and its economy has shown an impressive track record (Hamid, 2004).

The country had an impressive annual growth in the 1970’s reaching 7.8%, and continued to grow at a rate of 8.8% in the 1980’s except during recession in 1985 to 1986. The recovery started in 1988 and the economy sustained an annual growth of over 8% in the 1990’s. However, the Asian financial crisis had the worst impact when the economy shrank by 11.2% year on year in the fourth quarter of 1998 (The Economist Intelligence Unit, 2009). This led the Malaysian government to implement several economic policy adjustments which started in 1999 in order to speed up the recovery. Consequently, the economy recorded a positive growth in seven consecutive years. After a strong take-off of 5.3% in 2003, the second half of 2006 recorded a higher than expected growth of 5.9% (Malaysia Economic Report , 2006). Recently, as a result of the global recession, Malaysia’s real GDP contracted by 6.2% year on year in the first quarter of 2009 (The Economist Intelligence Unit, 2009). However, the economy recovered gradually later in the same year.

Malaysia’s trade policy focuses on greater integration into the world economy and enhancing its global position as a trading nation. The country has consistently maintained its position as the 18th largest global exporter and the 20th largest importer in the last few years (WTO, 2005). Malaysia’s trade with the world from 2000 to 2009 is illustrated in figure 1. The bar chart shows that Malaysia had a steady increase in total trade. The country reached a peak of approximately RM787.5 billion and RM643.1 billion in 2009 for exports and imports respectively, yielding a trade surplus of RM144.4 billion. This trend is expected to continue in the next few years as more economic reforms would take place, coincided with high growth rates expected.

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1.1.2. Export Performance

Export performance is broadly defined as the outcome of a firm’s activities in export markets (Shoham, 1996). The fundamental importance of export performance to international marketing has led to a substantial body of research. It is recognized that research on export performance is of vital interest to three major groups: public policy makers, managers and researchers.

First, export performance is important for public policy makers or governments as it contributes to the development of foreign exchange reserves, increases the level of imports a country can afford, provides a vehicle for job creation, improves employment opportunities, improves standards of living, and encourages better working conditions and more efficient business (Lages & Montgomery, 2004). Second, at a micro level, managers view exporting as a way to expand their firms’ access to international markets, benefit from economies of scale, reduce the dependence on their domestic markets, and enjoy faster sales, employment, and growth (Freeman & Lawley, 2005). Third, as a result of its importance for both policy makers and managers, researchers consider exporting a challenging and promising area for theory building in international marketing (Zou & Stan, 1997).

Since gaining independence from Britain in 1957, Malaysia implemented a series of 5-year development plans in order to transform its economy from being an exporter of rubber and tin to emerge as one of the world’s largest producers of palm oil products, timber, oil and manufactured products (Wheeler & Mohamad, 1993). Additionally, due to its impressive growth, the manufacturing sector has replaced agriculture as the number one sector in the economy. Table 1 shows Malaysia’s major export products in January 2010.

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The manufacturing sector remains a dynamic engine of growth for Malaysia with an estimated share of 31.5% of GDP in 2005 (WTO, 2005). It is considered to be the most dominant sector with approximately three quarters of total exports. This is mainly due to the significant contribution of electrical and electronic products as they are Malaysia’s leading export earner with a value of RM21,372.3 billion, representing 40.75% of total exports in January 2010. Palm oil retained as the second largest export revenue earner with a total value of RM3,985 billion or 7.6% of exports. Third, liquefied natural gas (LNG) made up 6.5% of total exports with RM3,400.3 billion. Chemicals & chemical products were the fourth largest commodity accounting for 6% of total exports with RM3,173.9 billion. The remaining different products

Table 1:

Malaysia’s major export products in January 2010 (Billion Ringgits)

Source:

Department of Statistics Malaysia, January 2010,

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Malaysia External Trade Statistics.

Retrieved on 16/2/2010 from: http://www.matrade.gov.my/cms/documentstorage/com.tms.cms.document.Document_2c11596d-7f000010-584c584c-f259ef13/Press%20release%20Jan10%20Eng.pdfCalculated based on the values of the table.

including crude petroleum, refined petroleum products, and others, formed approximately 40% of total exports in the same period.

For export destinations, the People’s Republic of China (PRC) was Malaysia’s major export market in January 2010, with RM7,094.9 billion (13.53% of total exports), as shown in table 2.

Table 2:

Malaysia’s major export markets in January 2010 (Billion Ringgits)

Source:

Department of Statistics Malaysia, January 2010,

Malaysia External Trade Statistics.

Retrieved on 16/2/2010 from: http://www.matrade.gov.my/cms/documentstorage/com.tms.cms.document.Document_2c11596d-7f000010-584c584c-f259ef13/Press%20release%20Jan10%20Eng.pdf

Calculated based on the values of the table.

The next major export destination is Singapore (13.26%, RM6,953.5 billion), followed by Japan (11.15%, RM5,849.7 billion), USA (9.37%, RM4,917.2 billion), and Hong Kong (5.5.%, RM 2,876.2 billion). These top five export destinations accounted for more than half of Malaysia’s total exports.

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The statistics reflect the increasing significance of exporting as a key economic tool for growth and development in Malaysia. In addition, despite the downturn caused by the Asian financial crisis thirteen years ago, Malaysia has made rapid strides in economic development through the continuous adoption of appropriate policies and strategies to ensure sustainability of growth (WTO, 2005) as well as to transform the economic structure of the country into a manufacturing and export-based economy.

1.2. Problem Statement, Question, and Objectives of the Study

A problem is defined as any situation where a gap exists between the actual and the desired ideal state (Cavana et al., 2007). It is critical that the problem of the study is unambiguously identified, and followed by a clear, precise, and succinct statement of the question and objectives of the study.

1.2.1. Research Problem

Much of the knowledge about successful export activity is fragmented, and the tradition of building on previous findings is not well-established in the export marketing field (Aaby & Slater, 1989). Many export performance studies focused only on a single factor affecting export performance, while there have been only few attempts to come up with models that incorporate a wide range of relevant factors. These exceptions include, (Cooper & Kleinschmidt, 1985); (Cavusgil & Zou, 1994).

Some of the discrepancies in the literature might be attributable to differences regarding the way in which export performance has been assessed (Walters & Samiee, 1990). In this context, the vast majority of studies have utilized objective performance indicators (Katsikeas et al., 1996). However, there are two problems with the use of certain objective measures:

First problem is concerned with research methodology i.e. accurate objective indicators of export performance are not easy to obtain since formal company financial statements and reports often make no clear distinction between domestic and export business operations, partially due to the fact that many firms view exporting as an extension of their domestic activities (Yang et al., 1992). Second, a serious comparability caveat may arise as a result of inherent measurement weaknesses underlying most objective measures (Katsikeas et al., 1996). Differences among industries and product subsectors in terms of competition or technology could lead to incoherent comparison across the sample firms. In other words, objective indicators of export performance, such as sales volume, sales growth and market share, might have little meaning in those cases where the firms surveyed belong to different industry or product groups (Covin, 1991).

Accordingly, in order to fill this literature gap, it is important to use different indicators to measure the multi-dimensionality of export performance and increase the reliability of the results. In this research, we adopt three subjective indicators to measure export performance of Malaysian manufacturing firms by asking respondents three questions to indicate their perceptions in achieving objectives regarding export sales, export market share, and export profitability. We use this subjective composite indicator because, compared to other objective export indicators, it cancels the size effect and it also facilitates comparison between companies of different sizes and industries.

1.2.2. Research Question

Are firm’s characteristics, export marketing strategy, management perceptions, and export commitment associated with export performance? If so, which of these contributes most to the variance of the dependant variable?

1.2.3. Research Objectives

This study aims to contribute to the meager but growing literature on firm-level export performance for developing countries by using Malaysia as the empirical platform. The study was designed to reexamine some determinants of export performance mentioned in the export marketing literature, more specifically, certain firm’s characteristics, export marketing strategy adopted, management’s attitudes and perceptions, and export commitment are integrated factors that viewed as significantly influencing export performance. In a nutshell, the study seeks to achieve the following two objectives:

1. To investigate the relationships between export performance on one hand, and firm characteristics, export marketing strategy, management perceptions, and export commitment on the other hand.
2. Establish the relative importance of each of the independent variables in influencing export performance of Malaysian manufacturing firms.

1.3. Significance, Scope, and Organization of the Study

In the next few paragraphs, we address the approaches deployed in this paper that contribute to the significance of this research in the context of export marketing field. Further, the scope, limitations, and organization of the paper, are all discussed subsequently.

1.3.1. Significance of the Study

With the increasing global business competition, it has become important, particularly for firms in developing countries, to understand the determinants of export performance as firms’ survival and expansion, and consequent economic growth of many developing countries are strongly dependent on a better understanding of what determines the export performance (Sousa et al., 2008).

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In spite of the numerous empirical studies of export performance published since the 1960’s, the conclusions reached by researchers in this area have, however, varied widely. The significance of the present study is derived from its design to look anew at some determinants of export performance mentioned in the literature in order to examine their effect on export performance manufacturing firms in Malaysia where export marketing research is of extreme relevance for both practitioners and scholars, knowing that the country is considered to be the world’s eighteenth largest exporter, and the trend is growing significantly over time. For example, exports posted a double digit growth in December 2009, year-on-year, rising significantly by 18.7% to RM54.7 billion, compared with December 2008 (Department of Statistics Malaysia, 2010).

1.3.2. Scope and Limitations of the Study

The evidence reported in this paper should be interpreted in the light of several limitations. That is, in addition to the relatively low response rate of just 17%, the research effort was restricted to manufacturing firms within a specific country context, thus caution may be exercised in generalizing the present findings too broadly. Nonetheless, generalizations of the study findings may be applicable to those exporting frameworks with similar structural characteristics of export marketing. Furthermore, the cross-sectional nature of the data limits our ability to rule out cause-effect inferences (Katsikeas et al., 1996). Such one-shot study may not be suitable for a research that involves a dynamic phenomenon, therefore, the adoption of longitudinal studies in future studies can provide more insights into the dynamic aspects of export behavior and performance.

Other limitations were related to time constraint, specifically during data collection period which started in mid-February 2010. This stage of the research was coincided with celebrations of the Chinese New Year, on February 14th, the period during which most companies in Malaysia had at least a one week holiday. As a result, it took us a relatively longer time than expected to receive responds in order to proceed for further analysis.

1.3.3. Organization of the Study

In this study, an attempt is made to synthesize and empirically test a model of export performance focusing on exporters from an ASEAN member. Specifically, the sudsy constitutes indigenous Malaysian manufacturers trading with overseas distributors. The paper is formatted into several sections. First, an in-depth literature is presented including key theoretical and measurement problems. Next, a conceptual framework of export performance is developed through the statement of several hypotheses. Then, the research design approach and methodological procedures including data analysis are described. Lastly, we present the findings of the study followed by a discussion, conclusions, and recommendations.

Summary of Chapter One

Through its external trade policy, Malaysia aims primarily for a greater integration into the world economy in order to maintain its position as one of the largest global exporters, specifically exports of manufactured products. At a micro level, export performance refers to the outcome of a firm’s activities in export markets. It is a way to expand access to international markets, benefit from economies of scale, reduce the dependence on domestic markets, and enjoy faster sales, employment, and growth.

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Studies within the export marketing field are characterized by the discrepancy and fragmentation of the findings. In this context, most export performance studies utilized objective export performance measures. However, this might result in the fragmentation of findings due to some issues related to research methodology and comparability caveat among firms. Therefore, subjective indicators are employed to measure the dimensionality of export performance in the Malaysian context. The objective is delineate the relationship between export performance (dependent variable) on one hand, and firm characteristics, export marketing strategy, management perceptions, and export commitment (independent variables) on the other hand.

CHAPTER TWO: LITERATURE REVIEW

In this chapter, a conceptual background of export performance is coherently addressed; starting with a relevant review of the export marketing performance literature and their main characteristics including the way in which export performance has been measured. We further proceed to identify and classify the multiple independent variables that have been frequently used in past studies. At the end of the chapter, some examples of the discrepancies in the findings of some studies are highlighted.

2.1. Export Marketing Performance Literature

The classical economic view tries to explain why it is beneficial for a country to engage in international trade based on the assumption that countries differ in their abilities to produce goods efficiently. The comparative advantage theory, for example, helps to explain the pattern of international trade that we observe in the world economy (Heckscher & Ohlin, 1991); (Ricardo, 1817); and (Smith, 1776). However, the assumptions underlying the principle of comparative advantage are unrealistic in many countries and industries. That is because competitive advantage depends on the capacity to innovate and upgrade. It also depends on the extent to which a home environment is dynamic, challenging, and forward looking. Therefore, competitive advantage is not inherited; in other words, it does not grow out of a country’s natural endowments, its labor, its interest rates or its currency’s value, as classical economics insist (Porter, 1990).

A plethora of studies have been published in the past 30 years on the determinants of export performance. This is mainly due to the increasing relevance of export marketing as an area of inquiry. Existing literature shows that the United States is the most researched country in export performance studies. However, an increasing number of studies have been conducted by European researchers from non-English-speaking countries who published in English-language journals. Examples include, (Bijmolt & Zwart, 1994), (Holzmuller & Kasper, 1991), and (Madsen, 1989). Some other studies have also been conducted in developing countries in Asia and Latin America. Characteristics of the studies reviewed are summarized in table 3. The main characteristics that we focused on are:

2.1.1. Size of the Sample

Except for one study which used a data base of 20,161 Indonesian firms from different manufacturing sectors, the size of the samples used in the studies reviewed ranges between 51 and 783. Most of them were drawn from multiple manufacturing industries, while just few such as (Cavusgil & Kirpalani, 1993), (Singer & Czinkota, 1994), and (Sriram & Manu, 1995), had included in the sampling, reselling and service firms in addition to manufacturing firms.

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2.1.2. Industry Context of Studies

The vast majority of the reviewed studies employed samples drawn from multiple manufacturing industries. Only few have included in addition to manufacturers, reselling and service firms. Examples include (Cavusgil & Kirpalani, 1993), (Singer & Czinkota, 1994), and (Sriram & Manu, 1995). This reflects the importance of manufacturing firms in the world economy. However, findings cannot be generalized to other industry contexts.

Table 3:

Characteristics of the reviewed articles