Firms managing international marketing channels face

Transcription

1 Zhilin Yang, Chenting Su, & Kim-Shyan Fam Dealing with Institutional Distances in International Marketing Channels: Governance Strategies That Engender Legitimacy and Efficiency Firms doing business in foreign institutional environments face pressures to gain social acceptance (commonly referred to as legitimacy) and difficulty in evaluating market information, both of which undercut firm performance. In this article, the authors argue that firms can design governance strategies to deal with foreign institutions to secure both social acceptance and firm performance. Using a Chinese sample of manufacturers that export products to various foreign markets through local distributors, the authors develop and test a model that bridges the effects of institutional environments and governance strategy on channel performance. Specifically, they find that firms can use two governance strategies, contract customization and relational governance, to deal with both legitimacy and efficiency issues and to safeguard channel performance. Thus, international channel managers are advised to maintain an integrated management of legitimacy and efficiency in foreign marketing channels. Keywords: institutional distance, legitimacy pressure, market ambiguity, contract customization, relational governance, firm performance For years, we have attempted to learn the business practice in our clients country through the lengthy, sometimes painful contracting process. You know, once we build up good relationships with our local distributors, they usually are willing to help us understand the local market environments and adapt our business practice to the local standards for survival. Chinese export manager Zhilin Yang is Associate Professor of Marketing ( mkzyang@ cityu. edu.hk) and Chenting Su is Professor of Marketing ( mkctsu@ cityu. edu.hk), College of Business, City University of Hong Kong. Kim- Shyan Fam is a Professor, School of Marketing & International Business, Victoria University of Wellington ( kim.fam@vuw.ac.nz). The authors thank Daniel Bello, Thomas Kramer, Thomas Madden, Shaohan Cai, Michael Hyman, David Tse, and Jan Schumann for their helpful comments on previous versions of this article. They also thank the three anonymous JM reviewers and Ajay Kohli for their invaluable guidance. The first two authors contribute equally. The authors gratefully acknowledge two grants from the Research Grant Council of Hong Kong SAR ( and ) and a grant from City University of Hong Kong (CityU SRG Project No ) for financial support. Ajay Kohli served as area editor for this article. Firms managing international marketing channels face different institutional environments that necessitate firm conformance to local business practices to gain social acceptance (commonly referred to as legitimacy) (Eden and Miller 2004; Scott 2008). In addition, foreign institutions blur market information, which leads to firm difficulty in evaluating foreign markets (Martinez and Dacin 1999). Gaining social acceptance, however, may undercut firm efficiency (i.e., firm performance) because firms must invest to understand the local market and develop cooperative relationships with local distributors (Eden and Miller 2004; Zaheer 1995). Thus, firms doing business in foreign markets face a managerial challenge namely, how to gain legitimacy while safeguarding efficiency. Prior research has not investigated this managerial dilemma in an international marketing context. Neoinstitutional theorists provide a one-sided solution that is, firm conformity to gain social acceptance for survival, regardless of firm self-interests (Oliver 1991; Scott 2008). In this article, we provide a governance solution and argue that firms can design novel governance strategies to deal with foreign institutions. We address two essential research questions: (1) What are the effects of institutional distances (i.e., the differences between the host and home institutional environments) on firm pursuit of local social acceptance? and (2) Can governance strategies, such as contracts and relational governance, function to gain both social acceptance and firm performance? To answer these research issues, we introduce the notion of institutional distance as being based on the subdimensions of regulatory, normative, and cultural-cognitive distances in the context of international marketing channels. Our key finding is the identification of interfirm governance strategies that can serve the dual purposes of enhancing legitimacy and efficiency in host marketing channels. Specifically, we find that firms facing legitimacy pressure and market ambiguity are motivated to use contract customization and/or relational governance to cope with their legitimacy and efficiency concerns. Both contractual and relational governances function to facilitate organizational learning and relational closeness with local partners, 2012, American Marketing Association ISSN: (print), (electronic) 41 Journal of Marketing Volume 76 (May 2012), 41 55

2 leading to social acceptance. We also find that a given governance strategy can independently or jointly with other governance strategies safeguard firm performance. Thus, we link transaction cost economics (TCE) to an institutional perspective to shed light on such a legitimacy efficiency challenge in international marketing channels. We organize this article as follows: First, we present our conceptual framework and research hypotheses that bridge institutional and efficiency-based effects on channel performance. Second, we describe the research method and test our model using a Chinese sample of manufacturers that export products to various foreign markets through local distributors. Finally, we discuss the implications of the findings and provide directions for further research. Conceptual Framework and Hypotheses Firms engaging in foreign marketing channels are constrained by a set of foreign institutions encompassing rules, routines, conventions, and normative pressures (Oliver 1996; Scott 2008). They face two main challenges that undercut firm efficiency. First, they cannot foresee what will happen in the market because they are unfamiliar with the foreign institutional environments and are unable to evaluate market-related information (Eden and Miller 2004). Second, their potential host partners do not recognize them as socially fit partners because the locals do not know and trust them (Kostova and Zaheer 1999; Kumar and Das 2007). In other words, institutional distances in a foreign market give rise to market ambiguity and legitimacy pressure, both of which directly or indirectly affect firm efficiency. How to cope with both legitimacy and efficiency issues in foreign markets represents an underresearched area in international marketing. Typical institutional solutions emphasize firm conformity to gain legitimacy, regardless of firm self-interests (Scott 2008); in this article, we argue for governance solutions because they address the issue of efficiency (Williamson 1991). Theorists in TCE have proposed three governance strategies: hierarchy, contract, and relational governance (Heide 1994; Ouchi 1980). Hierarchy involves firm vertical integration, which separates the firm from market uncertainties. It is primarily an intrafirm solution and thus is not applicable to governance between firms. Contract customization refers to the extent to which transaction terms and clauses are tailored according to market conditions and transaction characteristics with a particular partner (Poppo and Zenger 2002; Zhou, Poppo, and Yang 2008). Relational governance relies on trust and social identification, which creates shared behavioral expectations, such as flexibility, information sharing, and solidarity (Heide and John 1992). This study posits that the latter two interfirm governance strategies that aim to secure external support and resources for firm performance can each function to mitigate both the perceived legitimacy pressure and market ambiguity in a host market. We present our conceptual framework in Figure 1 and develop research hypotheses in light of the framework. Institutional Distance and Its Key Consequences Scott (2008) maintains that institutions possess three pillars: regulatory, normative, and cultural-cognitive. The regulatory pillar pertains to a nation s laws and regulations and delineates what organizations can or cannot do. It uses legal sanctioning as the basis of legitimacy (Scott 2008). The normative pillar consists of beliefs, values, and norms that define desirable goals and expected behaviors to achieve them in a society. The legitimacy of normative institutions relies on societal beliefs and norms that specify what people should or should not do (Eden and Miller 2004; Scott 2008). Rooted in cognitive psychology, the cultural-cognitive institution emphasizes two important aspects of the shared knowledge, taken-for-granted conventions, and customs in a specific industry: (1) managers internal interpretive business practices, which is shaped by external cultural frameworks, and (2) their business knowledge, which is developed over time through repeated social interactions (DiMaggio and Powell 1991; Kostova and Roth 2002). The legitimacy of this pillar is anchored in cultural orthodoxies that specify what people will typically do (Scott 2008). Using Scott s (1995) institutional framework, Kostova (1997) advances the concept of institutional distance and FIGURE 1 Conceptual Model Institutional Distance Governance Strategy Regulatory Legitimancy Pressure Contract Customization Normative Channel Performance Cultural- Cognitive Market Ambiguity Relational Governance 42 / Journal of Marketing, May 2012

3 defines it as the dissimilarity/similarity of the regulatory, normative, and cultural-cognitive institutions between two countries. Consistent with Martinez and Dacin (1999) and prior studies (Scott 2008; Williamson 1985), we identify the two key consequences of institutional distances as (1) legitimacy pressure to achieve acceptable business practice and (2) market ambiguity caused by foreign institutional environments. Legitimacy pressure. First, institutional distances give rise to legitimacy pressure, which, as perceived by the entrant firms, is the degree to which firms are pressed to adopt acceptable business practices for survival in a host market (Scott 2008). Lack of legitimacy implies a lack of social support and resources from the local stakeholders because of a low recognition (Scott 2008). Thus, when considering firm social acceptance, the foreign channel managers are concerned about unfamiliar aspects of the foreign legal codes and practices to avoid misbehaviors in the host country (Grewal and Dharwadkar 2002). For example, Chinese managers must be cautious about gift giving because it may violate antibribery laws in Western markets. Second, normative distance may influence entrant firms normative legitimacy by affecting the way they embrace socially accepted norms and behaviors to avoid societal and professional sanctions (Selznick 1984). For example, Chinese managers may try to gain long-term developments by sacrificing short-term profits in their pricing decisions, which may affect their cooperative relationships with the host partners (Luo 2005). To gain normative legitimacy, therefore, a firm is pressed to participate in local channel decision making and share local business standards and practices. Third, cultural-cognitive distance may affect firms social legitimacy through social interactions in which cultural cognitions and knowledge are embedded (Scott 2008). Although a firm s boundary agents may hold different beliefs, they are strongly motivated to gain social legitimacy by developing friendships with local channel partners. For example, although many Western managers doing business in China find it difficult to assimilate the implicit doctrine of the mean that underlies the practice of guanxi (i.e., interpersonal relationships) (Park and Luo 2001; Su and Littlefield 2001), they may not hesitate to adopt guanxi strategies to gain broader access to the vibrant China market. Field interviews with Chinese exporting managers attest to such concerns with survival associated with the perceived legitimacy pressure in foreign markets. Specifically, labor policies, environmental protection regulations, industry norms, relationship building, working habits, and professional knowledge about channel management in a host market are among the more difficult things for these managers to understand. Therefore, we propose the following: H 1 : Legitimacy pressure is positively affected by (a) regulatory distance, (b) normative distance, and (c) cultural-cognitive distance. Market ambiguity. Institutional distances also increase market ambiguity, which in turn affects firm efficiency (Williamson 1985). To differentiate such institutionally induced market ambiguity from other types of market uncertainties, we define it as the degree of difficulty in identifying, analyzing, and interpreting market-related information in the host institutional environments (Martinez and Dacin 1999; Scott 2008). Note that such market ambiguity arises when firms lack knowledge and understanding of the foreign institutional environments; it represents one type of firm-specific uncertainty in which firms may differ in their perceptions of the same institutional environments (Beckman, Haunschild, and Phillips 2004). Specifically, market ambiguity occurs when a manufacturer conducts business with a foreign distributor with different, seemingly unclear regulations, norms, and culturally distinctive business practices. Thus, the firm is unable to evaluate market-related information such as market trends and partner behavior. For example, Chinese managers may be less confident in interpreting and evaluating market information and predicting future market trends in a host country because they are unclear about how the foreign regulations and laws shape economic transactions (Luo 2005). Similarly, the foreign norms and codes of behaviors in a host market add to market ambiguity and make it difficult for the entrant to judge the local channel member s market actions and behaviors (Williamson 1985). For example, as mentioned, Western managers may be puzzled by guanxi practices and thus unable to determine the proper relationship behavior in China (Park and Luo 2001). Furthermore, foreign cultural-cognitive structures may hinder the managers ability to understand local consumer behavior and interpret market information. Thus, we propose the following: H 2 : Market ambiguity is positively affected by (a) regulatory distance, (b) normative distance, and (c) cultural-cognitive distance. Governance Strategies Perceived legitimacy pressure and market ambiguity due to institutional distances invoke interfirm governance strategies, such as contract customization and relational governance, to safeguard firm performance in a host market. Contract customization enhances organizational learning, thus facilitating cultural assimilation (Luo 2002). Relational exchange helps build trust that transforms foreign firms into insiders to gain both legitimacy and market information (Martinez and Dacin 1999). We argue that the two interfirm governance strategies can function to deal with both efficiency and legitimacy issues in international channel management. Contract customization. Lack of legitimacy in a host market implies conflict in business conduct with significant stakeholders because of distrust (Oliver 1996), which incurs additional transaction costs for entrant firms (Eden and Miller 2004; Zaheer 1995). A customized contract with the local partner creates tailored obligations, responsibilities, benefits, and arbitration arrangements ex ante to ward off risks of misunderstandings (Joskow 1990; Luo 2005). In practice, managers of entrant firms tend to co-opt the source of the pressure by forming contractual bonds with the local distributors and significant stakeholders to enhance social acceptance (Oliver 1991). For example, an interviewed Chinese manager commented that such customized contracts Institutional Distances in International Marketing Channels / 43

4 with a local partner helped legitimize his company s behavior and enhance interfirm trust. From the viewpoint of organizational learning, a customized contract also helps the suppliers learn acceptable business practices in a foreign market. When facing high legitimacy pressures, firms are motivated to gain local knowledge through the interactions embedded in contract drafting and negotiations. Such face-to-face communication often provides good opportunities for firms to learn local business norms, beliefs, and thinking styles. One Chinese manager commented that a detailed contract with customized terms and clauses helped her prevent wrongdoings and mistakes in the host market. In this sense, Argyres and Mayer (2007) argue that designing a customized contract produces a competitive capability by knowing how to adapt to each partner s needs and conditions. Thus, legitimacy pressures in a host market motivate contract customization, which functions to facilitate mutual adaptation, mitigate dissimilarities between the entrant and the local partner, and ensure the former s conformance to secure legitimacy. Thus: H 3 : Contract customization is positively influenced by legitimacy pressure. Next, we hypothesize that market ambiguity also affects contract customization. As we noted previously, market ambiguity in a host market arises when foreign firms lack institutional knowledge about the host market. This lack of knowledge and understanding by the entrant firm implies an information asymmetry between the firm and its local partners because the local partners are better informed about the institutional aspects of the local market (Heide 1994). Such market ambiguity encourages opportunism because the foreign firm is unable to observe and/or verify its local partners actions. Thus, its partners have incentives to limit their efforts to fulfill the agreement, leading to undetected self-interest-seeking behavior (Williamson 1989). In the presence of market ambiguity, a customized contract functions as an ex ante safeguard against partners opportunism because it legitimizes monitoring and adds more term specificity and contingency adaptability to the contract (Carson, Madhok, and Wu 2006; Luo 2002; Wathne and Heide 2000). For example, a customized contract enables firms to accurately measure and reward productivity (Mooi and Ghosh 2010; Poppo and Zenger 2002) and avoid performance risk by modifying goals, activities, and arbitration arrangements in advance (Oliver 1991). Our field interviews indicated that a majority of Chinese channel managers, who perceived ambiguous market conditions and practices in a host market, proactively solicited a customized contract from their host partners to avoid performance ambiguity and safeguard their interests. Thus, we propose the following: H 4 : Contract customization is positively influenced by market ambiguity. Relational governance. Envisioning the disadvantage of doing business in a host market, the foreign channel managers may try to establish relational bonds with the local partner to enhance social legitimacy. As strangers in a foreign country, firms bear the predetermined liability of foreignness that prevents them from doing business in an efficient way (Eden and Miller 2004; Zaheer 1995). To become insiders, firms, particularly manufacturers from emerging markets, are strongly motivated to build relationships with foreign distributors through cooperative actions, such as joint planning and the hiring of local personnel, to develop trust and gain local knowledge (Peng 2003; Xu and Shenkar 2002). Moreover, relational behaviors, such as information sharing, flexibility, and solidarity, provide a foundation for both sides to internalize and formalize their operations into legitimized practices (Heide and Wathne 2006; Poppo and Zenger 2002). Such embedded ties enhance the entrant firms ability to learn, understand, and adapt to the business practices of their trading partners country (Oliver 1996). For example, Western firms doing business in China are motivated to adopt guanxi practices to become friends with their local partners. In other words, relational governance can facilitate the process by which firms mimic their channel partners to gain social acceptance. H 5 : Relational governance is positively influenced by legitimacy pressure. Finally, market ambiguity may also encourage relational governance. As we mentioned previously, such institutionally induced market ambiguity is firm specific because firms may possess different levels of knowledge about the same foreign institutional environments. Typically, when firms enter a new market or deal with an external partner, they experience uncertainty that is unique and internal to them (Greve 1996). Previous empirical studies indicate that these firms are motivated to develop more extensive relational bonds, such as interlocking and alliance networks, with local partners to explore additional information (Beckman, Haunschild, and Phillips 2004). New information helps them make more informed decisions to deal with firm-specific uncertainty. This logic is consistent with Ouchi s (1980) argument for clan-based governance, in which firm goals are aligned and cooperation is motivated on the basis of trust. In this clanlike dyad, partners are insiders that exchange tacit knowledge and private information to shed light on each other s ambiguous areas (Ouchi 1980). As such, foreign firms experiencing market ambiguity may become insiders by adopting relational governance to foster interfirm information sharing, flexibility, and solidarity. Our field interviews indicated that Chinese exporting managers are strongly motivated to build guanxi with their local distributors to develop trust, which provides them with more access to the tacit knowledge and information about the local market, such as market trends and conventions of channel operations. Therefore, we propose the following: H 6 : Relational governance is positively influenced by market ambiguity. Channel Performance Given that perceived legitimacy pressure and market ambiguity affect efficiency, firms may also use governance strat- 44 / Journal of Marketing, May 2012

5 egy to safeguard firm performance. A customized, formal agreement between channel members can exert a positive influence on performance outcomes. As we argued previously, the process of creating the agreement assists in developing more robust interfirm communication based on a set of shared rules, procedures, responsibilities, and expectations, which in turn help clarify institutional misunderstandings and reduce adaptation costs (Mooi and Ghosh 2010). With a contact, both parties are likely to devote attention to contractual arrangements and work out any issues before they become serious, thus saving transaction costs (Williamson 1985; Zhou, Poppo, and Yang 2008). Conversely, relational governance leads channel members to relational norms, in which they solve problems together, share fine-grained information, and provide flexibility or make adequate adaptations for conditions in which unusual events might occur (Heide and John 1992; Zhou, Poppo, and Yang 2008). Consequently, economic transactions in a host market may reduce both negotiation and contract costs by enhancing shared expectations and market information costs by providing insider status (Luo 2002; Mooi and Ghosh 2010). We further argue that contract customization and relational governance may serve as complements in a foreign market (Poppo and Zenger 2002). Prior research has postulated that trust may supplant contracts in suppressing opportunism, whereas contracts may also undermine relational norms. Thus, contracts and relational governance function as substitutes (Gulati 1995; Macaulay 1963). However, as we argued previously, the two governance strategies both function to facilitate organizational learning and secure external support and resources for firm performance. Contract customization facilitates cultural assimilation through organizational learning (Luo 2002); relational exchange transforms foreign firms into insiders to gain both legitimacy and market information (Martinez and Dacin 1999). When trust develops, foreign distributors are more willing to comply with terms contained in contracts, and when contracts are well customized, opportunism is less likely to occur. Thus, the effect of a given governance strategy on firm performance is greater when it functions in conjunction with another governance strategy rather than in isolation (Poppo and Zenger 2002). Specifically, when the contractual terms and clauses are well specified and articulated, firms operate in a context of information symmetry and perceived fairness; a trusting, interfirm relationship coupled with such a customized contract leads to a lower likelihood of contract breach and/or renegotiation, saving ex post transaction costs (Luo 2002; Mooi and Ghosh 2010). In contrast, when firms develop relational bonds with their local partners, a customized contract coupled with relational norms provides a roadmap for fulfilling mutually agreed-on responsibilities and dealing with necessary adaptations in an exchange, leading to lower opportunism and saved monitoring costs (Luo 2002; Williamson 1991). Studies have also shown that customized contracts function to reduce opportunism only in conjunction with relational closeness (e.g., Mooi and Ghosh 2010). In other words, in a foreign market, contract customization and relational governance may combine to better safeguard firm performance. H 7 : Channel performance is positively affected by (a) contract customization, (b) relational governance, and (c) their interaction effects. Methodology Data Collection We tested the hypotheses using a sample of Chinese manufacturing firms that export products to various countries through foreign distributors. We undertook a systematic random sampling of 1480 manufacturers, based on a list of manufacturing firms in the four-digit Standard Industrial Classification codes and located in Beijing, Guangzhou, and Shanghai. A national market research firm headquartered in Shanghai with nationwide branches and affiliates was commissioned to conduct the survey through personal interviews. For the purpose of this research, we established three criteria to select qualified companies. First, the company must be neither foreign owned nor a joint venture, and its senior managers must be native Chinese. We thus reduced the dual effect that might result from cross-cultural management on evaluations of institutional distances (Kostova and Roth 2002). Second, the company should have an overseas distributor that purchases parts or components at least twice a year. Third, the distributor should not belong to the same company/group or parent company to exclude vertical integration. Qualified senior managers were first contacted by telephone to solicit their cooperation. Of the 600 companies whose managers verbally agreed to participate, 436 managers from 218 firms were successfully interviewed on-site. For each firm, we selected two senior managers (e.g., chief executive officer, vice president of sales, export manager) as key informants because of their revealed heavy involvement with their firms major distributors. These informants first selected the overseas distributor with which their firm conducted the greatest volume of business. They then answered the survey questions according to their relationships with the chosen distributor. All subjective information, such as perceived institutional distances, relational governance mechanisms, and the performance measure, was based on multiple informant data. In line with Kumar, Stern, and Anderson (1993), respondents provided data only on the attributes they believed they had the ability to evaluate. The mean confidence scores for knowledge about the institutional environments of the country in which their distributor was located and the interfirm relationships were 4.21 (on a five-point scale; SD =.68) and 4.29 (SD =.68), respectively. For items with data from two informants, we pursued the response data-based weighted mean approach to determine a value for each item (for detailed procedures, see Van Bruggen, Lilien, and Kacker 2002). Through preliminary data screening, we deleted 13 firms because the respondents did not know or held back vital information related to either their interfirm relationships or the institutional environments of the distributor s country. Thus, we had 205 useful responses, for a response Institutional Distances in International Marketing Channels / 45

6 rate of 34.2% (205 of 600). A comparison of the respondents and nonrespondents using t-tests indicated no significant differences in terms of key firm characteristics (i.e., industry types, locations, number of employees, and annual sales revenues), suggesting that nonresponse bias is not a major concern for this study. The final sample consisted of 205 firms across the major Standard Industrial Classification groups within the manufacturing division, spanning various industrial sectors. Of the companies, 82% had annual sales revenues of more than US$3 million, and 62.3% employed between 100 and 500 people. In addition, 35.6% of the sampled firms were state owned, 48.2% were private, and 16.2% were listed stock companies. These companies exported to 14 regions/ countries, including Germany, Japan, South Korea, Taiwan, the United States, Hong Kong, Singapore, Malaysia, the United Kingdom, Australia, Canada, France, Thailand, and the Philippines. The first 9 countries are among China s top trading partners. Measures Except for institutional distances, legitimacy pressure, and market ambiguity, we adapted all the multi-item measures used in the survey from established studies. Two researchers educated in both the United States and China translated and back-translated all the measures to ensure conceptual equivalence (Hoskisson et al. 2000). To further ensure content and face validity of the measures, we made personal trips to conduct five in-depth interviews with senior export managers arranged by the market research firm. On the basis of their responses to the relevance and completeness of the measures, we revised a few questionnaire items to enhance clarity. In addition, we conducted a pilot study with 50 export managers, in which the respondents both answered the questionnaire and provided feedback on the design and wording of the questionnaire. As a result, we modified several items in line with the feedback from the export managers. We present these measures in the Appendix. Institutional distances. Institutional profiles tend to be issue specific and difficult to generalize across domains (Busenitz, Gomez, and Spencer 2000; Kostova 1997; Kostova and Roth 2002). Thus, we adopted Kostova s (1997) approach and developed an instrument to measure the three perceived institutional distances in the eyes of the channel managers. First, regulatory distance pertains to laws and rules that influence business strategies and operations in marketing channels, reflecting regulatory processes such as rule setting, monitoring, and sanctioning activities (Scott 1995). We drew a list of ten regulatory-related institution items from the Global Competitiveness Report, which is published annually by the World Economic Forum and has been increasingly used in studies on international business (Delios and Beamish 1999). Using feedback from the personal interviews with senior managers, we selected six items most relevant to the regulatory aspects of channel management. These items pertain to enforceability of business laws, impartiality of arbitration, disputes settlement, intellectual property protection, institutional stability, and number of regulatory bodies of enforcement. Second, normative distance refers to the differences in values and norms toward practices of channel management between two countries. Although prior research has used Hofstede s (1980) dimensions of culture as a proxy of the normative environment, we concur with Kostova s (1997) claim that it is better to develop a measure specific to channel management. Drawing from the findings of our focus group studies and literature review, we adapted five items to represent norms and values relevant to channel management practice: norms of cooperation among channels, societal-level trust, association intensity, moral obligation to provide quality products and services, and standards of business conduct. Third, cultural-cognitive distance refers to social knowledge and skills that professionals possess and share in operating channels (Busenitz, Gomez, and Spencer 2000). To measure the channel professionals knowledge and skills, we used the following aspects: channel management practice, ability to implement programs of efficient channel management, customs of channel operations, business environment related to channel management, and shared beliefs in the area of transnational channel management. All items of the three distances except one reached a factor loading of.70 or greater. We eliminated the item with a low factor loading (i.e., institutional stability from the regulatory perspective) from further analysis. Legitimacy pressure. In line with the definition of legitimacy (Suchman 1995), we measured legitimacy pressure by asking export managers to evaluate the degree to which their trading partners pressure them for (1) desirability, (2) properness, and (3) appropriateness of business practice in accordance with the institutional environment in a foreign market. We conceive market ambiguity as being institutionally induced. 1 Following Martinez and Dacin (1999), we operationalized market ambiguity as the difficulty of processing market information because of the host institutional environments. We explicitly asked the respondents to consider this construct in the host institutional environments to capture the tacit nature of such uncertainties. Three items measure the essential aspects of market ambiguity: information analysis, interpretation, and evaluation. Governance strategies. We measured contract customization using three items, adapted from Cannon and Perreault (1999), that reflect the specificity, formality, and details of contractual agreements between manufacturers and their foreign distributors. Relational governance is based on the use of shared norms to monitor and coordinate the behaviors of the exchange partners (Macneil 1980), and therefore we operationalize it as a three-dimensional construct consisting of information sharing, flexibility, and solidarity (Heide and John 1992; Jap and Ganesan 2000; Zaheer and Venkatraman 1995). Consistent with Jap and Ganesan (2000), we measured relational governance as a higher-order factor. 1To ensure an unbiased measure, we conducted follow-up telephone interviews with 65 managers who had previously participated in our study. We asked them to indicate the degree of market ambiguity using our measurement items but without mentioning due to the host institutional environments. The correlation between the two measures is.83, indicating measurement validity. 46 / Journal of Marketing, May 2012

7 Channel performance. We adopted Bello and Gilliland s (1997) export channel performance measures, which encompass three aspects: strategic, selling, and economic performance. Strategic performance pertains to the firm s marketing, distribution, promotion, and pricing strategy for foreign markets. Selling performance involves maintaining contact with customers, calling on customers in person, and servicing customers after the sale. Economic performance consists of economic, sales, growth, and profit goals for foreign markets. Following Bello and Gilliland s approach, we averaged the items for each construct to form three performance scales, which served as the indicators of the export channel performance. We tested the unidimensionality of each performance construct and the model fit using a three-construct confirmatory factor analysis (CFA). Consistent with Bello and Gilliland s study, we find that the three-construct approach represents channel performance well (see the Appendix). Controls. We controlled for four sets of variables. First, we controlled for three types of exchange characteristics according to TCE: asset specificity, environmental volatility, and transaction frequency (Heide 1994; Poppo and Zenger 2002; Williamson 1985). We adapted items from Heide and John (1992), John and Weitz (1989) and Cannon and Perreault (1999), and Anderson (1985), respectively, to measure the three constructs. Second, we controlled for firm size, measured as the number of employees in a company, because it may significantly influence organizational behaviors and decisions. Third, prior studies have shown that transaction history is essential to the relationship between organizations and the development of cooperative norms (Gundlach and Murphy 1993). We used partners number of years in business together to indicate history of transaction. Fourth, we controlled for the effects of stateowned manufacturers, an important institutional factor in China (Park and Luo 2001), using a dummy variable that equals 1 if the firm is state owned and 0 if otherwise. Construct validity. We refined the measures and assessed their construct validity following the guidelines Anderson and Gerbing (1988) suggest. First, we ran exploratory factor analyses for each multiple-item variable, which resulted in factor solutions as theoretically expected. Second, reliability analyses show that these measures possessed satisfactory coefficient reliability. Third, we ran CFA for each of the three sets of constructs (i.e., institutional distances; legitimacy pressure, market ambiguity, and governance strategies; and performance and controls), as well as an overall 15-factor model with all the variables. The confirmatory models all fit the data satisfactorily (see the results of the CFA in the Appendix), indicating the unidimensionality of the measures (Anderson and Gerbing 1988). All factor loadings were highly significant (p <.001), and the composite reliabilities of all constructs were greater than.70 (Bagozzi and Yi 1988). Thus, these measures demonstrate adequate convergent validity. Table 1 presents the means, standard deviations, and correlations of the constructs. We assessed the discriminant validity of the measures in two ways. First, none of the confidence intervals of the crossconstruct correlations contained a value of 1 (p <.01), signifying the discriminant validity of these measures (Anderson and Gerbing 1988). Second, we ran chi-square difference tests for all the multiple-item scales in pairs (38 tests) to test whether the restricted model (the correlation fixed to 1) was significantly worse than the freely estimated model (the correlation estimated freely). All the chi-square differences were highly significant (e.g., in the test for distributor importance and contract customization: 2 (1) = , p =.000), providing additional evidence for discriminant validity (Anderson and Gerbing 1988). Overall, the measures in this study possess satisfactory reliability and validity. Common Method Bias Assessment For the subjective measures in our study, we used two informants to increase the reliability and validity of the measures (Kumar, Stern, and Anderson 1993). However, common method variance may still exist when, in some cases, one respondent provides answers to most of the variables (Podsakoff et al. 2003). When this happens, any unusual variance resulting from the respondent may be reflected in all the measures. In addition to the procedural controls for the survey, such as anonymous submission and minimization of the ambiguity of the measurement items, we employed the marker variable assessment technique approach that Lindell and Whitney (2001) recommend to assess common method bias. We added an item pertaining to product technical complexity (from not technically complex to extremely technically complex), which had either no significant or very low correlations with the variables in our study. The results of a partial correlation analysis after we controlled for the effect of product technical complexity show no significant change among the important constructs. Finally, of the 36 correlations between the nine constructs in the model, 8 were not significant, and 4 of these 8 were negative, indicating the validity of the other correlations (Lindell and Brandt 2000). Our collected evidence suggests that the effect of common method variance is unlikely to be significant. Level of Analysis Results Institutional distance involves two levels: national and organizational. We tested the proposed model by observing institutional distances at the organizational level, based on theoretical reasoning (Kogut and Singh 1988; Meziasa et al. 2002; Straub et al. 2002) and statistical implications (Hox 2002; Meziasa et al. 2002). Theoretically, institutional distances measured at the organizational level and reported by managers reveal the managers perceptions of their business environments and their account of national differences in institutions. Managers perceptions subsequently affect their decision making (Straub et al. 2002). Therefore, we view institutional distance as an organization-level construct (i.e., a manager s perception of institutional distances). Statistically, we collected one-sided data from only one context (China). Because there is only one type of variance, there are no contextual effects that bias ordinary least squares (OLS) results (Bickel 2007). Institutional Distances in International Marketing Channels / 47

8 TABLE 1 Means, Standard Deviations, and Correlations for the Constructs Construct Regulatory distance Normative distance Cultural-cognitive distance Asset specificity Environmental volatility Transaction frequency Contract customization Relational governance Distributor importance Legitimacy pressure Market ambiguity Channel performance Manufacturer type Location of partners Technical complexity History of transaction Firm size M SD Notes: p <.05 for r.150 (two-tailed); p <.01 for r >.210 (two-tailed). The reliability of each measure is depicted in boldface on the diagonal. Sample size N = / Journal of Marketing, May 2012

9 Endogeneity Tests Because managers were not randomly assigned to various export-partner countries in which they reported their perceptions of legitimacy pressure and market ambiguity, both constructs may be correlated with unobserved factors (e.g., managers selection of exporting products) other than the three institutional distances. Such omitted variables cause endogeneity problems that produce biased and inconsistent coefficient estimators (Wooldridge 2003). To address this concern, we employed the instrumental variable (IV) method by introducing one variable, location of trading partners; we measured it as a dummy variable that equals 0 if the trading partner is located in Asia and 1 if otherwise. Location of trading partners meets the two requirements of a valid IV (Wooldridge 2003). First, it is correlated with all three distances (see Table 1). Conceptually, geographic distance is associated with institutional distances (Ghemawat 2001). Second, it is not correlated with error terms in the model. We followed Hausman s (1978) approach and compared the OLS and two-stage least square estimates of both legitimacy pressure and market ambiguity to determine whether they are consistent. Specifically, we regressed the three distances on the instrument and then plugged the fitted values into the main regression equations of legitimacy pressure and market ambiguity. Location of trading partner s country had a significant, positive effect on the three distances ( =.25,.32,.38, for regulatory, normative, and cultural-cognitive distance, and p <.05,.01, and.01, respectively). The comparisons of the OLS and IV estimates show that endogeneity exists for legitimacy pressure but not for market ambiguity. When we regressed legitimacy pressure on the three distances, the coefficients of IV estimates were significantly larger than those of the OLS estimates. Thus, to address the endogeneity of legitimacy pressure, we include the IV in the subsequent model test. We tested our hypotheses using path analysis for two reasons. First, there are two formative constructs, relational governance and export channel performance. Therefore, it is more suitable to use path analysis than the structural equation modeling approach. Second, our model consists of 13 constructs with 205 effective samples; the ratio is less than 15 per construct, the minimum number required for structural equation modeling. In the path analysis model, the constructs were represented with the average scores of their indicators. For relational governance and channel performance, we used the average score of each subconstruct as their indicator. The model also included the IV, location of trading partners, and the interaction between contract customization and relational governance. The fit indexes indicate satisfactory model fit for the path analysis model (see Table 2). As Table 2 shows, H 1 is supported, indicating that the three institutional distances significantly affect legitimacy TABLE 2 Results of Path Analysis Hypothesis Standardized Supported or Hypotheses Paths Expected Sign Coefficients Not Supported H 1 : Three institutional distances a Æ legitimacy pressure +.36*;.45*;.52* Supported H 2 : Three institutional distances Æ market ambiguity +.28*;.40*;.51* Supported H 3 : Legitimacy pressure Æ contract customization +.26** Supported H 4 : Market ambiguity Æ contract customization +.31* Supported H 5 : Legitimacy pressure Æ relational governance +.40* Supported H 6 : Market ambiguity Æ relational governance +.23** Supported H 7a : Contract customization Æ performance +.07 Not supported H 7b : Relational governance Æ performance +.46* Supported H 7c : Contract customization relational governance Æ performance +.28* Supported Location of trading partners b Æ three institutional distances.25**;.32*;.38* Control Variables Asset specificity Æ two governance strategies c.28*;.35* Market volatility Æ two governance strategies c.07;.19** Transaction frequency Æ two governance strategies c.01;.08 Distributor importance Æ two governance strategies c.18*;.27** Relationship length Æ two governance strategies c.06;.14*** Firm size Æ two governance strategies c.02;.07 Manufacturer type Æ two governance strategies c.03;.05 Model fit indexes 2 = (p =.00), 2 /d.f. = 4.01, RMSEA =.051, GFI =.93, CFI =.94, NNFI =.91 *p <.01. **p <.05. ***p <.1. athree institutional distances refer to regulatory, normative, and cultural-cognitive distance, respectively. binstrumental variable. ctwo governance strategies: contract customization and relational governance. Notes: GFI = goodness-of-fit index, CFI = comparative fit index, NNFI = nonnormed fit index, and RMSEA = root mean square error of approximation. Sample size: N = 205. Institutional Distances in International Marketing Channels / 49

10 pressure ( =.36,.45,.52, respectively; p <.01). H 2 predicts that all three distances have a significant impact on market ambiguity. The effect strength provides preliminary support for H 2 ( =.28,.40,.51, respectively; p <.01). H 3, which predicts that legitimacy pressure affects contract customization, is also supported ( =.26, p <.05). The effect of market ambiguity on contract customization is positive and significant ( =.31, p <.01), in support of H 4. The results also show a positive and significant effect of legitimacy pressure on relational governance ( =.40, p <.01), in support of H 5. Consistent with H 6, the results show that market ambiguity increases the use of relational governance ( =.23, p <.05). Finally, contract customization is not significantly related to channel performance ( =.07, p >.1). Thus, H 7a is not supported. Relational governance has a positive and significant effect on channel performance ( =.46, p <.01), in support of H 7b. In terms of a synergistic effect of contract customization and relational governance on performance, the results show a significant, positive interaction effect ( =.28, p <.01). Thus, contract customization and relational governance combine to enhance channel performance, in support of H 7c. In terms of the effects of the control variables, the most significant influence on relational governance comes from asset specificity, followed by environmental volatility, importance of the distributor, and relationship length. For contract customization, both asset specificity and importance of the distributor have significant and positive effects. Overall, the findings are consistent with TCE and institutional theory, in support of our position that both theories can contribute to the choice of governance mechanisms. Discussion Firms engaging in an institutionally different host market are pressed to gain social acceptance for survival; yet obtaining legitimacy may also incur additional costs of adaptation and market assessment that undercut firm efficiency (Eden and Miller 2004). Thus, firms doing business in a foreign market are challenged by the managerial dilemma of how to gain legitimacy while safeguarding efficiency. By combining TCE and institutional theory, we investigate this managerial dilemma. We argue that as strategic responses to foreign institutions, firms can design novel governance strategies to deal with both legitimacy and efficiency issues in a host market. In the context of international marketing channels, we find that institutional distances (i.e., regulatory, normative, and cultural-cognitive differences) lead to firms perceptions of legitimacy pressure and market ambiguity, which in turn invoke firm governance choices to safeguard performance. Specifically, we find that firms can use two interfirm governance strategies, contract customization and relational governance, to cope with both legitimacy and efficiency concerns and to safeguard firm performance. As such, we fill a gap in which firms facing legitimacy pressures in a host market have been provided with only institutional solutions, that is, conformity to gain social acceptance, regardless of firm self-interests (Oliver 1991). Our results indicate that firms also can use gover- nance strategies to safeguard performance while seeking social acceptance. Thus, we contribute to the emerging literature that tries to combine institutional theory and TCE to examine both firm legitimacy and efficiency issues in a host market (Martinez and Dacin 1999; Roberts and Greenwood 1997). A significant theoretical implication of this study is that a given governance mechanism can serve dual purposes, such as dealing with both legitimacy and efficiency issues. This is because both interfirm governance strategies, as we argued previously, function to build cooperative relationships with local partners in a host market. Such interfirm relationships facilitate local adaptation and add to firms access to social support and resources, thus enhancing both firm legitimacy and efficiency (Eden and Miller 2004; Oliver 1996). As such, our empirical results suggest a governance solution to a long-standing paradox faced by neoinstitutional theorists: In the pursuit of legitimacy, firms may give up their efficiency and heterogeneity, whereas in the pursuit of efficiency, firms may not attend to some stakeholder interests (Fernández-Alles and Valle-Cabrera 2006). Our results show that firms can use either interfirm governance strategy to address both legitimacy and efficiency concerns in a host market. For example, firms may choose to be legally or socially embedded by forming a legal or relational bond with their host partners. Both types of embedded ties function to mitigate dissimilarity and enhance interfirm trust through personal interactions and organizational learning (Granovetter 1985), thus adding to both firm legitimacy and efficiency. However, our results show a positive interaction effect of the two governance strategies on firm performance. Thus, firms can combine these two governance strategies to better attain both legitimacy and efficiency in a host market. Managerial Implications Channel managers are driven to establish legitimacy while pursuing efficiency in a host market. However, legitimacy and efficiency should not be contradictory objectives in firms management processes. In light of our findings, efficiency may follow legitimacy through greater access to local resources (Fernández-Alles and Valle-Cabrera 2006; Oliver 1996). As we noted previously, good relationships with stakeholders, through either legal or social embeddedness, can translate into new competitive advantages that lead to firm efficiency. Therefore, channel managers should maintain an integrated management of legitimacy and efficiency in a foreign market. Specifically, managers should pay close attention to the dual functions of the two governance strategies, particularly their legitimacy-building function. Given the legitimacy pressure and market ambiguity, channel managers may proactively solicit a customized contract to legitimize the transaction with the host partner to gain social acceptance. A highly customized contract provides a template for doing business in the market and leads to a low likelihood of violation (Luo 2005). Moreover, channel managers should use the contracting process to understand, learn, and make 50 / Journal of Marketing, May 2012

11 sense of the institutional environments. Though often used to circumvent institutional barriers, we find that contract customization does not exert significant direct influence on channel performance, perhaps because of the high cost of concessions in a contract. Channel managers should be aware of the limits of drafting a customized contract for achieving channel performance. As our results show, only when it is combined with relational governance can contract customization enhance channel performance in a foreign market (Mooi and Ghosh 2010). Alternatively, relational governance helps firms mitigate legitimacy pressures and market ambiguity through information sharing, flexibility, and solidarity. Managers should build relational bonds with the local partners to become insiders to gain both legitimacy and accurate market information, which lead to enhanced firm performance. In a Chinese context, guanxi plays an important role in transforming outsiders into insiders (Su and Littlefield 2001). Thus, firms should empower their boundary spanners to develop friendship with local distributors to gain trust and inside market information. Further Research This study has several limitations that deserve further research. We collected data only from the manufacturer side of a channel dyad. Future studies might gather data from both manufacturers and distributors. This bilateral approach would provide more information about the dynamic nature of international channel management. In addition, the generalization of our findings should be viewed with caution because the manufacturers in our sample are primarily engaged in indirect exporting from an emerging market. To verify the current model in a more complicated institutional environment, studies should sample manufacturers that pursue direct exporting or manufacturers that face dual institutional pressures (i.e., business market and consumer market) in foreign countries. As previously mentioned, we tested the model using the organizational-level measure of institutional distances. Further research might collect data from various countries with a large sample to aggregate data at the national level. In doing so, both the direct and cross-level effects of institutional distances on the relationships in the model could be examined thoroughly. Another concern with generalization of our findings pertains to the relationship stage of the trading partners. Although we controlled for the length of business relation- ship and the strength of the relationships varied among the sample, the manufacturers we surveyed tended to have good business relationships with their distributors. Because of this, the export managers, as our pretest revealed, were able to answer questions related to various, often deep levels of institutional environments. However, these incumbents perceptions of institutional environments and resultant consequences may differ from those of new entrants or less important partners. Thus, research might further explore the influence of institutional distances on channel governance strategies from the perspective of different types of channel members in various stages of the relationship cycle. Three limitations related to measures are also worth mentioning. First, we attempted to use a variety of methods to capture the essential domain of institutions, but new and different approaches would be desirable to fully uncover cultural-cognitive institutional models (Scott 1995). Furthermore, although we believe that the instrument developed in this study reflects the essential differences in terms of the three institutional dimensions, future studies might devote efforts to uncovering the full picture of channel-specific institutional profiles through, for example, unconventional methods such as semiotics and narrative analysis (see Scott 1995). Second, we measured market ambiguity as institutionally induced. A more general measurement without specifying such institutional inducement might generate more robust effects of the institutional distances on market ambiguity. 2 Third, we measured legitimacy pressure as a unidimensional construct for two reasons: (1) The focus groups indicated that channel managers understood the concept as a whole rather than in parts, and (2) although there is much theorizing on the topic of legitimacy, empirical measures of the construct are rare in marketing channels. However, decomposing legitimacy into several aspects related to institutional constraints might reveal more insights into its influence on the choice of governance strategies. 2We conducted an additional test by replacing the current market ambiguity measure with the new measure, as described in note 1, in the model. The empirical results showed similar patterns except for slightly different coefficients. Specifically, the sizes of the coefficients of the three distances on market ambiguity are slightly smaller for regulatory (.22, p <.05), normative (.29, p <.01), and cultural-cognitive (.42, p <.01) distance than those in the current model. In addition, the effects of market ambiguity on contract customization (.49, p <.01) and relational governance (.32, p <.01) are relatively larger than those in the current model. APPENDIX Measures Institutional Distances ( 2 (45) = 71.25, p <.001; GFI =.95; CFI =.96; IFI =.97; RMSEA =.051) Regulatory Distance Please indicate the magnitude of difference of the following regulatory aspects related to CR =.87, AVE =.71 channel management between your distributor country and your home country: New scale 1. Enforceability of business laws. (.78 a ) (1 = not different at all, 2. Impartiality of arbitration. (.76) and 5 = completely 3. Effectiveness of dispute settlement. (.75) different ) 4. Intellectual property protection. (.81) 5. Institutional stability. b (.48) 6. Number of regulatory bodies that enforce channel management. (.71) Institutional Distances in International Marketing Channels / 51

12 Normative Distance CR =.86, AVE =.68 New scale (response anchor same as for Regulatory Distance) Cultural-Cognitive Distance CR =.83, AVE =.64 New scale (response anchor same as for Regulatory Distance) For each of the following items concerned with social accepted norms and values channel professions are expected to hold, please indicate the magnitude of difference between your distributor country and your home country. 1. Norms of cooperation among channels in general. (.77) 2. Trust as a society-wide phenomenon. (.82) 3. The intensity of trade associations related to channel management. (.76) 4. Moral obligation for providing quality products/services. (.80) 5. Expectations for high standards of codes of conduct. (.72) For each of the following items concerned with shared beliefs, conventions, taken-for-granted customs related to channel management, please indicate the magnitude of difference between your distributor country and your home country. 1. Professionals knowledge about channel management practice. (.85) 2. Companies ability to implement programs of efficient channel management. (.73) 3. Conventions of marketing channel operations. (.75) 4. Professionals knowledge of business environment related to channel management. (.80) 5. Professionals shared beliefs of transnational channel management. (.73) Legitimacy, Ambiguity, and Control Mechanisms ( 2 (25) = 86.15, p <.001; GFI =.92; CFI =.95; IFI =.93; RMSEA =.071) Legitimacy Pressure Please indicate the degree to which your firm needs to adopt business practices to conform to CR =.92, AVE =.71 that of your distributor country in terms of the following aspects: (1 = no need at all, and 1. The desirability of business practice. (.82) 5 = completely need ) 2. The properness of business practice. (.78) 3. The appropriateness of business practice. (.83) Market Ambiguity CR =.90, AVE =.78 (1 = not difficult at all, and 5 = completely difficult ) Contract Customization CR =.88, AVE =.72 Adapted from Cannon and Perreault (1999) Relational Governance second-order indicator CR =.87, AVE =.69 2 (30) = 60.57, p <.001; GFI =.94; CFI =.91; IFI =.92; RMSEA =.054 APPENDIX Continued Please indicate the difficulty of processing information from the market in your distributor country due to its different institutional environments: 1. Market-related information analysis. (.87) 2. Market-related information interpretation. (.78) 3. Market-related information assessment. (.80) 1. We have specific, well-detailed agreements with this distributor. (.87) 2. We have customized agreements that detail the obligations of both parties. (.88) 3. We have detailed contractual agreements specifically designed with this distributor. (.72) Information sharing: CR =.89, AVE =.71; adapted from Cannon and Perreault (1999) and Mohr and Sohi (1995). 1. Proprietary information is shared with each other. (.88) 2. We will both share relevant cost information. (.79) 3. We include each other in product development meetings. (.73) 4. We always share supply and demand forecasts. (.81) Flexibility: CR =.87, AVE =.68; adapted from Heide and Miner (1992) 1. We are able to make adjustments in the ongoing relationship to cope with changing circumstances. (.77) 2. When some unexpected situation arises, we would rather work out a new deal than hold each other to the original terms. (.78) 3. Flexibility in response to requests for changes is a characteristic of this relationship. (.73) Solidarity: CR =.81, AVE =.72; adapted from Cannon and Perreault (1999) and Anderson and Narus (1990) 1. No matter who is at fault, problems are joint responsibilities. (.89) 2. No party will take advantage of a strong bargaining position. (.83) 3. Both sides are willing to make cooperative changes. (.75) 4. We must work together to be successful. (.86) 5. We do not mind owing each other favors. (.72) Channel Performance and Controls ( 2 (34) = 48.91, p >.10; GFI =.97; CFI =.96; IFI =.98; RMSEA =.043) Export Channel Performance Strategic performance: second-order indicator Please indicate how effectively various aspects of the channel s operational tasks were CR =.87, AVE = 0.68, performed in terms of the following aspects: 2 (51) = 62.57, p <.001; 1. Marketing strategy for foreign market. (.79) GFI =.93; CFI =.95; 2. Distribution strategy for foreign market. (.69) IFI =.94; RMSEA = Promotion strategy for foreign market. (.73) Adapted from Bello and 4. Pricing strategy for foreign market. (.75) Gilliland (1997) Selling performance: (1 = extremely poor Please indicate how effectively various aspects of the channel s sales tasks were performed in performance, and 5 = terms of the following aspects: extremely good 1. Maintaining contact with customers. (.77) performance ) 2. Calling on customers in person. (.74) 3. After-sale servicing of customers. (.81) 52 / Journal of Marketing, May 2012

13 APPENDIX Continued Asset Specificity CR =.89, AVE =.71 Adapted from Heide and John (1992) Environmental Volatility CR =.77, AVE =.52 Adapted from Cannon and Perreault (1999) Distributor Importance CR =.77, AVE =.62 Adapted from Cannon and Perreault (1999) Economic performance: Please indicate how effectively various aspects of the channel s economic goals were performed in terms of the following aspects: 1. Economic goals for foreign market. (.84) 2. Sales goals for foreign market. (.90) 3. Growth goals for foreign market. (.75) 4. Profit goals for foreign market. (.70) 1. We have made significant investments in tooling and equipment dedicated to our relationship with this distributor. (.76) 2. This distributor has some unusual technological norms and standards, which have required adaptation on our part. (.83) 3. Training and qualifying this distributor has involved substantial commitments of time and money. (.87) 4. Our production system has been tailed to meet the requirements of dealing with this distributor. (.71) 5. Our production system has been tailed to using the particular items bought from this distributor. (.78) Please indicate the significance of changes in the supply market with respect to the following factors: 1. Pricing. (.86) 2. Product features and specifications. (.81) 3. Vendor support services. (.75) 4. Technology. (.73) Compared to other purchases your firm makes, the product from this distributor is A. unimportant important (.80) B. nonessential essential (.89) C. low priority high priority (.75) Transaction Frequency How frequently has your company been placing orders with this distributor? (reverse coded) 1 = More than once a day ; 2 = Once a day ; 3 = Once a week ; 4 = 2 3 times a month ; 5 = Once a month ; 6 = 2 4 times a year ; 7 = 5 11times a year. History of Transaction How many years has your company been doing business with this distributor? (1) 1~2; (2) 3~4; (3) 5~6; (4) 7~8; (5) 9~10; (6) 11~12; (7) 13~15; (8) 16~19; (9) 20 or more. State-Owned Manufacturer 1 = State-owned; 0 = Non-state-owned. Firm Size Number of employees of the firm: 1 = less than 50; 2 = ; 3 = ; 4 = ; 5 = ; 6 = ; 7 = ; 8 = ; 9 = ; 10 = 2001 or more Overall Model Fit 2 (175) = , p <.001; GFI =.92; CFI =.93; IFI =.93; RMSEA =.056 astandardized factor loading. bitems deleted from further analysis because of low factor loading. Notes: CR = composite reliability, AVE = average variance extracted, GFI = goodness-of-fit index, CFI = comparative fit index, IFI = incremental fit index, and RMSEA = root mean square error of approximation. Unless otherwise specified, all items were scored on five-point Likert scales (1 = strongly disagree, and 5 = strongly agree ). REFERENCES Anderson, Erin (1985), The Salesperson as Outside Agent or Employee: A Transaction Cost Analysis, Marketing Science, 4 (3), Anderson, James C. and David W. Gerbing (1988), Structural Equation Modeling in Practice: A Review and Recommended Two-Step Approach, Psychological Bulletin, 103 (3), and James A. Narus (1990), A Model of Distributor Firm and Manufacturer Firm Working Partnerships, Journal of Marketing, 54 (January), Argyres, Nicholas and Kyle J. Mayer (2007), Contracting Design as a Firm Capability: An Integration of Learning and Transaction Cost Perspective, Academy of Management Review, 32 (4), Bagozzi, Richard P. and Youjae Yi (1988), On the Evaluation of Structural Equation Models, Journal of the Academy of Marketing Science, 16 (1), Beckman, Christine, Pamela Haunschild, and Damon Phillips (2004), Friends or Strangers? Firm-Specific Uncertainty, Market Uncertainty, and Network Partner Selection, Organization Science, 15 (3), Bello, Daniel C. and David I. Gilliland (1997), The Effect of Output Controls, Process Controls, and Flexibility on Export Channel Performance, Journal of Marketing, 61 (January), Bickel, Robert (2007), Multilevel Analysis for Applied Research: It s Just Regression! New York: The Guilford Press. Busenitz, Lowell W., Carolina Gomez, and Jennifer W. Spencer (2000), Country Institutional Profiles: Unlocking Entrepreneurial Phenomena, Academy of Management Journal, 43 (5), Cannon, Joseph P. and William D. Perreault (1999), Buyer-Seller Relationships in Business Markets, Journal of Marketing Research, 36 (November), Institutional Distances in International Marketing Channels / 53

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