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Influence of Artificial Entry Barriers on Innovativeness of Suppliers of Mexican Retailers

Carlos Rubn Torres Vera School of Management, Wuhan University of Technology, Wuhan, P.R.China, 430070 (Email: viteazul@hotmail.com)
Abstract The paper presents a cross-sectional exploratory study of Chinese and Mexican toy manufacturers regarding their marketing practices, organisational innovativeness and business performance seen from the perspective of their being affected Chinese firms or protected Mexican firms by artificial barriers of entry to the market countervailing dutie). It is found that Chinese firms outperformed their Mexican peers in all the measures analysed and consequently are preferred business partners of Mexican retailers. Contrary to the well-entrenched vision of Chinese firms competing based on low costs, it is found that Mexican retailers see beyond cost and value the organisational and innovation competences of their Chinese suppliers. Key words Artificial barriers, Innovation, Mexico, Retailing

1 Introduction
The present article analyses the interactions between retailer firms and their suppliers in the toy sector in Mexico with a specific focus in the effects of artificial entry barriers Mexican and Chinese supplier marketing and innovative behaviour. The main issues dealt in the article are: (1) Firms protected by artificial entry barriers would be less market-orientated and innovative than firms that must overcome such barriers to participate in such a market. (2) Retailers, even though striving to lower costs, also pay attention to other factors different from price/cost. The article is based on surveys of Mexican and Chinese companies who currently have participation in the Mexican toy market. The present article aims to identify key effects of artificial barriers erected by governments in the marketing and innovation capabilities of firms concerned, either protected or affected by such measure, and how these capabilities are related to their performance. Noting that governments usually tend to establish measures that interfere with the normal operation of business, it is important to see how these measures have an impact in marketing and innovation practices of firms in developing countries. In the literature review, we focus on existent research on value in business markets, the role of marketing in the firm, user innovation and the impact of governmental measures on innovation. Later, we introduce the hypotheses and the methodology used to collect and analyse data. In the last two sections, we present our results and the conclusions derived.

2 Literature Review
2.1 Value in business markets and the role of marketing in the firm As Lindgreen and Wynstra (2005)[8] point out, opportunities not to emphasise creating value are disappearing due to dramatic changes in the business environment that have led to fundamental transformations of what is important in marketing. However, value is not easy defined (see Blankenburg Holm et al., 1999; Lindgreen and Wynstra, 2005)[3,8] and therefore there are different research streams on the issue. Lindgreen and Wynstra (2005)[8] identify two main streams: value of goods and services and value of buyer-seller relationships. Value, however, can also be acquired by suppliers (Walter et al., 2001)[17]. Walter et al. (2001)[17] deem innovation and market as indirect functions of a (value-creating) customer relationship. Berghman et al. (2006)[2] argue that market-driven firms (responsive market orientation) would basically satisfy existing needs; on the contrary, market-driving firms (proactive market oriented) would focus towards the satisfaction of customers latent needs. They identify marketing practices for external knowledge absorption, general organisational competences and competences embedded in the supply/chain networks as the organisational competences and characteristics that suppliers need to enhance their capacity to create new customer value. They found that companies having marketing practices for recognition also apply practices for assimilation and that these practices are more often applied in organisations with an innovative, proactive and risk taking organisational culture. Another

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finding is that marketing practices for external knowledge absorption, organisational and network characteristics are strongly related to new customer value creation. Balakrishnan (1996)[1] highlights the importance of customer and competitive orientations in industrial markets. He identifies four latent dimensions in these orientations: basic market orientation, competitive benchmarking, customisation and international orientation. Basic market orientation and competitive benchmarking are building blocks that meet necessary requirements for a firm to grow but have insufficient impact without support from a customisation strategy or an international orientation. As for international orientation, its important to consider a long-term view before allocating resources in the short term (Balakrishnan, 1996). Theoharakis and Hooley (2008)[15] found evidence that customer orientation and innovativeness have a significant effect of performance measures and that innovativeness has a consistently stronger effect than customer orientation on sustainable competitive advantage and on financial performance. It was also found that customer orientation is more significant in an advanced economy whereas innovativeness is more significant in a less developed economy, reflecting the nature of the difference in development between economies in terms of room for improvements (Theoharakis and Hooley, 2008). Meyer and Utterback (1992)[10] identify market knowledge as one of the four basic components of a firms core competences. As these components are interrelated, it is important to note the finding of Song and Thieme (2006)[14] that the marketing information gap (between marketing and R&D in a firm) is negatively related to new product development success. In particular, in China they found that a small marketing information gap and a large marketing involvement gap lead to success and that higher environmental uncertainty creates a smaller involvement gap between marketing and R&D, which reflects the growing importance of the marketing function in China. 2.2 User innovation Klotz (2006) [7]warns that the new is not always the best as innovation should not be an end by itself but a means to deliver solutions. Furthermore, he adds that innovation goes beyond R&D since this activity not always yields innovations and innovations not always come from R&D. This implies that the participation of internal and external parties in a continuous innovation process is necessary. Several authors have pointed out the role of users in the innovation processes of the firm. Von Hippel (2005)[16]differentiates between user-centred innovation and a manufacturer centric model of innovation. Chesbrough (2003, in Piller, 2006)[12] differentiates between Open Innovation, where business, customers, R&D centres and competitors participate and Closed Innovation, based in the firms own ideas. Piller (2006) states that open innovation must act as a complement, not substitute. Reichwald et al. (2004) [13]talk about webbed customer innovation to refer to the systematical collection and preparation of information from customers and users to generate innovations, modifications or service specifications within a value web, which totally meet the customers requirements. According to Henkel and Von Hippel (2005) [6] there are several positive effects of user innovation on social welfare. First, user innovation complements manufacturer innovation (niche vs. mass innovation). Second, they complement each with respect to knowledge and capabilities so that user innovation helps to reduce information asymmetries and increase efficiency of the innovation process. Third, business stealing (diverting sales from competitors by introducing a new product) is absent for user innovation. Fourth, user innovations tend to be freely revealed more often than manufacturer innovations. This has several implications for innovative manufacturers. A positive outcome is that costs can be saved when a manufacturer develops a product after a user innovation has been made available due to its access to free market research regarding product prototyping, product use and product adoption activities. However, a negative implication is that manufacturers may experience a reduction of market share, pricing power and profits as a result of the increased market competition resulting from the co-existence of a user-developed product and a commercial substitute (Henkel and Von Hippel, 2005). Lthje and Franke (2003) [9] found that retailers seem to play an important role as innovators of the products they sell; however, most ideas are minor improvements of existing products and often incorporate low-tech solutions. It was also found that quite a few managers assign a high market potential to the inventions with a notable percentage of innovations being or expected to be marketed either by the retailer himself or by the manufacturer: one of two ideas reaches the stage of commercialisation. 2.3 Government regulations and innovation Osterloh et al. (2006) [11] identify the following main consequences of government regulations in the innovation activities of the firms:

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Government regulations can increase the opportunity costs of innovating, discouraging innovation. The regulations can increase the costs of innovating activities, which not all firms will be able to bear or to pass on to customers. This would likely reduce the incentives to innovate and even place the firms at risk due to the increased operation costs. The regulations regarding intellectual property protection increase the costs to protect innovations due to the procedures and monetary expenses a firm must follow to get their innovations registered at the appropriate government offices to prevent and protect itself from piracy.

4 Data and Methodology

Two questionnaires were developed based on items found in previous literature. Both questionnaires were pre-tested with Mexican retailers and Chinese and Mexican toy manufacturers to come with a final version of both. The final survey was carried out using a web application that enable the participants to fill in the questionnaires on-line and had a specific sequence to avoid incomplete responses. This is, participants would not be able to send the questionnaire if it was not completely answered. The retailer firms who were invited to participate in the survey consisted of 25 Mexican firms engaged in retailing who were also importers. These firms were identified and contacted through Asociacin Nacional de Tiendas de Autoservicio y Departamentales (ANTAD). These same firms were asked to provide information on their Chinese suppliers of toys; 37 firms were identified and invited to participate in the survey. The Mexican manufacturers were identified and contacted through the Asociacin Mexicana de la Industria del Juguete (AMIJU). A total of 19 firms were contacted and invited to participate in the survey. We have developed the following hypotheses: Firms whose market is protected by countervailing duties would have fewer incentives to innovate and would therefore show a weaker performance. Firms facing countervailing duties would show higher levels of innovation and market orientation. In particular, these firms would be more likely to use customers as source of market information. Consequently, these firms would have a better performance despite of being subjected to these artificial barriers of entry.

5 Results
A total of 23 surveys were received: 6 Chinese manufacturers, 9 Mexican manufacturers and 8 Mexican retailers. The response rate was 16.2%, 36% and 42.1%, respectively. This rate compares favourable with the rates reported by Harzing (1997) for Mexico, 15.2%, and Hong Kong, 7.1%. Given that Harzing (1997) does not report any finding for China, we take Hong Kong as benchmark. More specifically the sample can be deemed as representative given that Chinese manufacturers have a market participation of 46%, Mexican suppliers of 23% and retailers of 76%. 75% of the respondents in the retailer sector are buyers and 25% are purchase managers. From the side of manufacturers, 26.67% are account managers (50% for Chinese and 11.11% for Mexican firms) and 73.33% are sales managers (50% for Chinese and 88.89% for Mexican firms). The information provided by retailers, presented in table 1, show that Chinese manufacturers perform better than their Mexican peers. One surprising finding is that Chinese suppliers place higher emphasis in other aspects different than price than Mexican firms do, which counters the popular belief that these firms compete based on low price. Also important is that 62.5% of retailers ranked quality as the 1st attribute variable they evaluate in a supplier and only 37.5% ranked price/cost; 37.5% ranked quality as the 2nd most important attributes, 37.5% price/cost and 25% on-time delivery. In table 2 we compare Chinese and Mexican manufacturers according to their responses. Despite of the higher degree of risk aversion of Chinese firms, these firms have higher means in all constructs as compared with their Mexican peers. The only exception is the construct gap of information sharing between Marketing and R&D, which reflects the close integration between these areas in the Chinese firms (a lower gap).

Data of 2007 as provided by survey respondents.

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Table 2. Comparison of Mexican and Chinese manufacturers: data from supplier survey M inimum M aximum M ean Std. Deviation M exican Chinese M exican Chinese M exican Chinese M exican Chinese 123 260 1150 1200 406.44 698.33 320.196 307.337 13 2 37 4 25.89 3.17 8.838 0.753 7 2 1 1.75 3 2.67 2 1.75 1 1 1 1 1.33 2.4 2 4 1 1 1.33 1 1.5 1 1 2 5 4.33 3.5 4.75 4.33 4.7 4.58 4.25 3 4.25 4 5 4.8 4.5 0.33 4 2.43 5 4 4.5 3.83 4 15 11 2.33 2.75 4 3.67 3 3 3.25 3 2 1 2.33 3.6 2.75 4 2.5 1.43 2 1.5 2.5 1.17 1.5 3 12 5 4.75 5 5 5 4.92 5 5 5 5 5 5 5 0.67 4.5 3.57 5 5 5 4.5 5 11.78 4.78 1.6667 2.1389 3.3889 3.2233 2.4222 2.25 1.6389 1.67 1.5833 1 1.7033 3.1556 2.2778 4 1.5 1.1911 1.5533 1.0556 1.9444 1.1133 1.0556 2.5 8.5 2.863 2.728 0.548 2.739 0.28089 0.44721 0.1291 0.27272 0.10954 0.13546 0.31623 0.632 0.2582 0.5164 0 0.10328 0.20917 0.17558 0.27386 0.4816 0 0.54772 0.27386 0.29964 0.40825

Full-time employees Years selling in M exico Years supplying M exican retailer Participation in the M exican market as % General organisational competences M anagement risk aversion M anagement emphasis in market and customer orientation Basic market orientation M arket orientation: external customer M arket orientation: competitor International orientation Emphasis in elements different from price Core competences Sustainable competitive advantage M kt external knowledge absorption Intelligence generation Intelligence dissemination Gap of information sharing between M kt and R&D Success of M kt and R&D integration Use of customer as source of innovation Organisational innovativeness Product differentiation Customer service performance General business performance Firm profitability

4.4983 0.47112 4.25 4.8333 0.30901 0.356

4.7783 0.37343 4.8 4.765 4.75 4 0.28626 0.41842 0.88487 0.707

4.5833 0.35355 4.6667 5 0 0.35182

4.9333 0.40961 4.875 0.29167 0.4433 4.25 0 0.55902

3.0217 0.14461 5 4.5 4.75 4.1667 0.335 0.16667 0.52705 0.085

4.3333 0.16667

6 Conclusion This study has surveyed Mexican and Chinese manufacturers as well as Mexican retailers who are customer of the former firms. It is important to note that indirect measurements were developed for the questionnaire due to the concern of the survey participants of the confidentiality of the information.

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Therefore, no direct, longitudinal and quantitative measurements were available to perform a deeper analysis. As we have observed in the exploratory analysis, Chinese firms outperform their Mexican counterparts. Especially relevant are the constructs related with marketing orientation and practices, intelligence generation and dissemination, organisational innovativeness and use of customer as a source of innovation, all of which show an important gap between both types of firms. We can conclude that firms protected by artificial barriers have fewer incentives to improve their overall organisational competences whereas firms facing such barriers are encouraged to develop their organisational capabilities to be able to take part in markets having such barriers. However, the lack of longitudinal and quantitative data prevents us from analysing the causal relationship that might exist between the existence of such barriers and the evolution of the firms distinct marketing- and innovation-related competences. One of the major shortcomings of our study, as has been already noted, is that it measures the respondents perceptions on the different variables, which are not a direct measure. However, as Brennan and Turnbull (1997) report in the case of adaptations, these have been measured more frequently by the respondents perceptions rather than by objective measures due to their complexity, which makes the accurate observation and account of adaptations extremely difficult. To overcome this shortcoming, it may be necessary to compare similar markets and firms, where one group would face a free-trade environment and another group would have artificial barriers of entry. In the case of the Mexican market it is not possible due to the absence of local firms producing the kind of toys not subject to countervailing duties, as per the manufacturer list obtained from the AMIJU.

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