Local versus global brand portfolio strategy and firm performance in China

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Local versus Global Brand Portfolio Strategy

and Firm Performance in China

Master Thesis

Petya Karamanova

Student Number: 10708405

University of Amsterdam

Faculty of Economics and Business

MSc Business Administration: International Management

Supervisor: Dr. Vittoria Scalera

Date: 23 June 2017

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Statement of Originality

This document is written by Student Petya Karamanova who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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3 ABSTRACT

Extensive research has been conducted on the topic of brand portfolio strategy and its impact on the firm performance. Namely, there are two main opposing streams in the literature, either supporting the notion that the global, or that the local brand portfolio leads to better firm performance. However, most of the current research has focused on the developed economies, even though different strategies might be more successful in emerging markets. Hence, this study aimed to shed light on the issue of whether employing a local brand portfolio would bring about superior results to the firms operating in the emerging market of China. Furthermore, this research examined the moderating effects of cultural distance and market size, and included controls for several firm and industry characteristics which could impact the firm performance. The data for the purposes of this research consists of a sample of firms operating in the beer, wine and spirits industry in China, for the period 2006-2015. Linear regression models were used to obtain the results, which were, however, not statistically significant. However, it can be

inferred from this thesis that the traditional theories could not be directly applied to the context of the emerging market of China. In addition, several managerial implications, regarding the firm’s brand strategy and brand portfolio diversification are proposed, specifically for China’s market, and taking into account the industry specifics.

Keywords: brand portfolio strategy; brand management; firm performance; local brands; global brands; cultural distance; market size.

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Introduction

Multinational companies (MNCs) face a number of important decisions that their management needs to take whenever they start operating on any foreign market, or when expanding their domestic operations.During the process of their international expansion, it becomes critical that they adapt their business strategy and management practices to the external conditions in the marketplace, in order to sustain growth and increase their market share (Rondinelli, Rosen & Drori, 2001). The nexus of such integrated strategic decisions ultimately paves the path for the success or failure of the MNCs. However, it is difficult to disentangle the particular choices leading to the company success or failure, therefore a number of factors influencing the MNC performance should be taken into account. As the firm’s primary goal is to maximize the value for its shareholders (Doyle, 2009), we can derive that the firm performance is a result of the successful coherence of such decisions, driving the firm value up and results in better returns. Therefore, when a firm operates on multiple markets, careful evaluation of the strategy for each different market is needed, depending on the national context and distance between the home and host country (Ghemawat, 2001).

As a result, firms consider a diversity branding strategy alternatives, from local branding, to regional, multiregional, or global branding strategy (Talay, Townsend & Yeniyurt, 2015), aiming to implement the most appropriate one, according to the firm’s goals. Multinational firms often own many products and brands that can vary in scope across different markets, depending on the brand portfolio strategy. The brand portfolio reflects the various brands marketed by a company, within a particular product category (Rosenbaum-Elliott, Elliott, Percy & Pervan, 2015). It consists of a set of different brands, which the firm owns and markets (Morgan & Rego, 2009).

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6 The structure of the brand portfolio and the scope, roles and interrelations between brands within the portfolio, are specified according to the brand portfolio strategy (Aaker, 2009). This strategy depends on three aspects: 1) scope, related the number of brands owned and marketed by the firm and the number of market segments in which these brands compete; 2) competition, related to the extent to which brands within the firm's portfolio compete with one another by being positioned similarly and by appealing to the same consumers; and 3) positioning, related to the perceived quality and price of the brands by the consumers (Morgan & Rego, 2009). In order to manage their brands portfolios, firms are increasingly implementing specific international brand architectures, where product range and geographic scope are strategically employed to facilitate both brand consistency and differentiation across international markets (Douglas, Craig & Nijssen, 2001). Hence, the brand architecture is both the process and the outcome, providing strategic direction for the brands, and outlines the way brands are utilized, coordinated and extended across product lines and the national borders (Douglas et al., 2001).

Nowadays the world is becoming increasingly globalized but it is worth noting that certain factors can pose barriers for MNCs’ operations on different markets, such as the cultural, administrative geographic, and economic distance (Ghemawat, 2001) between them. Therefore, an important decision that an MNCs take is determining their global operations strategy, taking into consideration the impact of distance. Consequently, whenever an MNC intends to compete in multiple national markets, it should first develop an understanding of its brands’ positions in those markets and point out the national characteristics that could have impact on these brands (Hsieh, 2002).Moreover, with the increasing competition on a global level, the success of the MNC is contingent on its ability to position and manage brands across all the countries where it

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7 operates (Usunier & Lee, 2005). In the context of their international marketing activities, that would imply reinventing their brands and establishing the scope, measured in terms of the number of brands (Morgan & Rego, 2009), and breadth of their brand portfolio, in terms of the number of entries in a specific product line (Bordley, 2003).

However, little is known so far about the way in which the choice between local and global brand portfolio strategy affects the firm performance. The local brands are the ones that exist in one country or in a limited geographical area (Wolfe, 1991), while global brands are defined as brands that use the same marketing strategy and mix in all target markets (Levitt, 1983) and they are present in every major market region in the world, and take an integrated approach to

standardization across markets (Talay et al., 2015). The brand portfolio’s local orientation was defined by Aaker (2004) as the ‘striving to connect in tangible and intangible ways to the local environment and customers’ (p. 9), while the global orientation is related to ‘having global visibility, aspirations, and reach’ (Aaker, 2004, p. 9). The differences between local and global brands have been studied in the context of consumer attitudes toward global and local products (Steenkamp & De Jong, 2010), brand extensions of global or local origin (Iversen & Hem, 2011), and global brand purchase likelihood and perceived quality (Özsomer, 2012).

Previous research has focused on the brand expansion into international markets (Townsend, Yeniyur & Talay, 2009; Aaker & Joachumsthaler, 1999) and on the global brand architecture (Douglas et al., 2001; Talay et al., 2015). The brand portfolio strategy has been investigated in terms of scope, competition and positioning (Morgan & Rego, 2009). However, researchers have not concentrated so far on the relationship between the choice of local versus global brand portfolio strategy and the firm performance. In this research, I examine this relationship and

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8 hypothesize that there is a positive relationship between the choice of local brand portfolio and firm performance. This paper contributed to the international business and global branding literature by investigating the abovementioned relationship and the factors that may have a moderating effect on strength of this relationship. Namely, I considered the moderating effects of cultural distance and market size, which had not been previously studied in this context, and hypothesized that they would have a positive effect on the main relationship. In order to fill the gap in the existing research, I focused on the beer, wine and spirits segment of the consumer products industry in China, in order to examine these effects in an emerging market economy. The practical implications of this research topic could be used by brand and marketing managers when developing brand strategies for the product portfolios, when considering the specific characteristics of China’s market and positioning themselves in the aforementioned industry. This thesis is structured as follows. Firstly, the relevant literature about the brand portfolio strategy, its impact on firm performance, and the importance of the type of brand portfolio in emerging markets and in China, is discussed in the next section. Secondly, the theoretical framework and hypotheses development are presented. Next, I included the section about the data and method of this research, followed by the results from the empirical investigation. Lastly, I included the discussion and conclusions section for this empirical research.

Literature Review

Global and local brands: strategic choices

In order to remain competitive, MNCs carefully consider their branding strategy in the global context (Chabowski, Samiee & Hult, 2013). A key decision for an MNC’s marketing strategy is

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9 whether the latter should be adapted to the conditions of the foreign market (Douglas & Craig, 1989). Many MNCs have shifted away from a multi-domestic marketing approach, where each country represents a separate sub-division(Jeannet & Hennessey, 2005), and have adopted a global marketing approach, consistent with the trends of globalization (defined as ‘the

international integration of markets in goods, services, and capital’ (Garrett, 2000, p. 941).In addition, the global integration of markets has stimulated an increasing level of similarity in consumer tastes (Townsend et al., 2009). As the consumer preferences are becoming more homogeneous, a market for standardized consumer products has emerged, allowing corporations to decrease their relative costs (Levitt, 1983). As a result, the MNC’s branding strategies have changed and became more concentrated on creating and developing international brands (Schuiling & Kapferer, 2004). The brand has been defined as ‘a name, term, sign, symbol, or design, or a combination of them, intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of competition’ (Keller, 2008, p. 2). Kapferer (2008) put forward a definition of brand that has value, i.e. strong brand equity: ‘a name that influences buyers through the value it offers and is backed by a profitable economic formula’ (p. 509). Therefore, it can be argued that the brands in the firm portfolio can have direct impact on its performance.

There are two opposing views outlined in the current literature investigating the brand portfolio strategy, namely the choice that a company needs to make of whether it would have local or global brands on a given market.

Firstly, nowadays the global (or international) brands are becoming progressively more

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10 brand strategy can be seen as attractive since it has been linked to achieving economies of scale and scope in manufacturing, research and development, and marketing (Kapferer, 2001; Roth, 1992; Yip, 1995) and to affirm higher levels of brand equity (Kapferer, 1997; Shocker,

Srivastava & Ruekert, 1994).

The international and global brands can bring a number of important advantages for international companies, especially in the current context of market globalization. The globalization process and the increasing competition have driven multinational companies to progress from strategies focused on individual markets towards portfolio management strategies that are more complex and go beyond national boundaries (Talay et al., 2015). Global brands can create barriers to entry due to their size, as well as benefit from having a unique image worldwide, and can generate important economies of scale, which makes their development attractive for companies

(Schuiling & Kapferer, 2004). Firms which have decided to implement global brand strategy, can benefit from a number of advantages, including economies of scale, cost reduction due to

standardized brand images (Schuiling & Kapferer, 2004). Therefore, these cost reductions can allow the firm to offer lower prices and to increase their business performance (Schuiling & Kapferer, 2004). Another advantage of global brands is their standardized and recognizable brand image across markets (Schuiling & Kapferer, 2004). As a result, global brands have become pivotal to firms’ global marketing strategies (Strizhakova, Coulter & Price, 2008) and firms’ international growth efforts (Allman, Fenik, Hewett & Morgan, 2016).

The process of brand globalization is determined by a number of endogenous and exogenous factors, such as the brand’s position in the firm’s global brand architecture, a phenomenon referring to the firm’s different options regarding its geographic range strategy, from local

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11 branding to regionally- or globally-oriented branding (Talay et al., 2015). The global brand architecture is the portfolio of brands controlled by a firm in terms of geographic scope and degree of consistency (Douglas et al., 2001; Townsend et al., 2009). As such, the global brand architecture is considered to be an important strategic consideration of a brand’s position and stage of internationalization (Townsend et al., 2009). Townsend et al. (2009) contributed to the literature by considering the global brand evolution by exploring the evolutionary nature of brand globalization through international expansion, or namely, how does a brand globalize. Their findings included that the presence of foreign competition and the presence of parent firm brands have a positive effect on the propensity of brand introduction in a new country, and that the cultural distance has a negative effect. However, an MNC’s global presence on the major world markets contributed to obtaining additional experiential learning, and mitigated the effects of cultural distance on international expansion. This finding was consistent with previous

literature related to internationalization, and began to further extend the concepts to brand globalization as well (Townsend et al., 2009).

Nevertheless, Aaker & Joachimsthaler (1999) argued that developing global brands should not be the company’s strategic priority, but companies should focus on global brand leadership and on creating strong brands in all markets. They also suggested that MNCs need to actively engage in global brand management in order to be successful. They argued that unconnected local brand strategies would lead to mediocre results. Talay et al. (2015) suggested that a brand’s

performance in the global marketplace is affected by the global brand marketing strategy, so that brands which are higher in the global brand architecture hierarchy are more likely to perform better in individual country markets. Therefore, the international brand architecture is considered

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12 to be an essential element of the firm's global marketing strategy, since it helped structure the brands and strengthen and gear brands into foreign markets, integrate new brands, and

consolidate strategy across markets (Douglas et al., 2001). However, a portfolio of global brands only is considered riskier, and hence local brands could help minimize the risk (Schuiling & Kapferer, 2004), since they contribute to the company’s brand portfolio diversification. Douglas & Craig (1989) investigated the firm’s global marketing strategy and its decisions to adapt the strategy to the local market as a part of this strategy. They argued that at the time of entry in the new market, the firm aims to gear its domestic position on a global level in order to achieve economies of scale. After having successfully entered the market and being more familiar with the local market peculiarities, the firm could take advantage of different marketing and strategic options and to leverage them across a broad range of products and services, in order to maximize its returns (Douglas & Craig, 1989).

The second view of the literature supports the implementation of local brands. For instance, it is argued that whenever a firm enters a foreign market, the local competition could stimulate it to adapt its marketing strategies to the local market, and as a result can encourage the firm’s

development of local brands (Jain, 1989). Despite the concentrated effort that MNCs have had to developing international brands, new local brands could be successfully transformed into

international brands as a future opportunity. Furthermore, in a brand portfolio containing mainly international brands, local brands can help minimize the risk for the company, and it is therefore encouraged to develop international brand portfolios combining both strong local and

international brands (Schuiling & Kapferer, 2004). Another perceived advantage of the local brands is the opportunity for local brand franchises, which represent a key long-term asset

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13 (Schuiling & Kapferer, 2004). Moreover, the local brands are particularly responsive to the local needs, as they are closely connected to the national culture, and are tailored to the local needs and tastes (Steenkamp, Batra & Alden, 2003). These brands have built close relationships with the local consumers, and profit from a high level of awareness in their countries (Özsomer, 2012). On the other hand, there are also some disadvantages that the local brands have. In particular, they require many years of marketing investment, in order to become well-known in their markets, and to build strong relationships with the local consumers throughout the years. Besides, even though strong local brands represent strong brand franchises locally, they have been eliminated from multinational brand portfolios, as their relative sales volumes are insufficient to achieve economies of scale (Schuiling & Kapferer, 2004). Despite those disadvantages, however, strong brands create perceived benefits for the customers, such as association to the local environment, better responsiveness to local needs and culturally specific characteristics, and supporting the national economy (Winit et al., 2014).

Cultural differences and cultural distance

Cultural differences across markets should be taken into account when companies adapt their marketing strategies to the local market (Usunier & Lee, 2005). Therefore, culture should be considered when the different brand management decisions are taken (Eisingerich & Rubera, 2010), and it has been applied to foreign investment expansion, the choice of entry mode, and the subsidiary performance (Shenkar, 2001). Culture has been defined by Hofstede as ‘the collective programming of the mind which distinguishes the members of one group or category of people from another’ (1991, p. 5). Culture consists of different components, including language, religion, values and standards, which influence the individual’s decisions and behaviour (Hill,

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14 2002).

The national culture, which influences the firm’s strategic decisions, has been investigated in a number of studies. Examples for these are: the GLOBE project (House, Hamges, Javidan, Dorfman & Gupta, 2004); Hofstede’s Cross-cultural Dimensions (2003); The Survey of Values (Schwartz, 1999); the Study of Event Management (Smith, Peterson & Schwartz, 2002); and the World Values Survey (Inglehart, Basanez, Diez-Medrano, Halman & Luijkx, 2000). The most widely implemented research on cultural characteristics and distance is considered to be the one by Hosftede (1980, 2001) on the dimensions of culture, and it has been among the most

influential frameworks in the field of international business (Sousa & Bradley, 2006). Even though Hofstede’s measures of cultural distance have been criticized for being too simplistic (Shenkar, 2001), they have been widely implemented in the international business and marketing literature. In order to investigate the influence of national culture characteristics on the choice of entry mode, Kogut & Singh (1988) developed a composite index based on Hofstede’s cultural dimensions (1980): power distance, uncertainty avoidance, masculinity/femininity, and

individualism. Their study, however, is not limited to the choice of entry mode, but also suggests that cultural differences across countries are likely to have an impact on managerial decision-making.

In the context of marketing, it can be concluded that brands may be better perceived by the consumers of a particular culture, if the former are suited to the cultural perceptions of that culture (Foscht et al., 2008). Customer commitment, for instance, is dependent on the cultural peculiarities in the country where the brand operates. Furthermore, in some countries and product categories, local brands may be appealing in their home markets due to their perceived

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15 local iconness: the extent to which a brand is perceived as a symbol of the local culture and tradition (Depecik, Everdingen & Bruggen, 2014). Local iconness is defined as ‘the degree to which a brand symbolizes the values, needs, and aspirations of the members of the local country’ (Özsomer, 2012). Talay et al. (2015) concluded that some cultural values affect the way in the brands perform on various markets, namely because national culture and its different dimensions (Hofstede, 2003) have significant effect on market performance.

Culture has been employed in the branding literature as a moderator of a number of relationships, including that of global brand architecture and market-based performance (e.g. Talay et al., 2015). However, despite the fact that culture has been considered in the literature, there is

insufficient research on its impact in moderating the relationship between branding strategies and market performance (Talay et al., 2015).

Market size

The factors on a country level, such as the national culture, indeed have an influence upon the brand strategy, but regions within the country should be also investigated (Roth, 1995). The reason behind that is that the national characteristics could be too broad, and could not be sufficient to explain the intra-country differences (Roth, 1995). Exploring the latter is particularly important for the success of the firm, since it broadens the understanding of the market conditions.

The decision of a firm whether to standardize its global strategy, or to adapt it to the local preferences, depends on a number of factors: environmental, market, customer, competition, product/industry, organizational, and managerial (Theodosiou & Leonidou, 2003). The market size is one of the marketing characteristics, referring to the factors determining the ‘level of

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16 sophistication and development of a particular foreign market’ (Theodosiou & Leonidou, 2003, p. 154). The size of the market is an indicator for the potential demand on a foreign market. Additionally, it has had the most significant influence on marketing strategy, since a higher level of adaptation is needed the larger the size of the market is (Theodosiou & Leonidou, 2003). Furthermore, even though a higher degree of local adaptation would imply higher product adaptation costs, the larger markets offer a greater sales potential and therefore the higher sales on those markets are more likely to offset the additional adaptation costs (Chhabra, 1996). The size of the market could be related to the degree of heterogeneity within that market. As a result, larger markets imply intra-country heterogeneity, and therefore the regions within countries should be taken into account (Roth, 1995). An intriguing observation by Rugman & Verbeke (2004) was that the world’s largest firms are regionally-based, and not global, and that their sales are concentrated within a particular region. Therefore,the increasing globalization makes the international segmentation an ever more relevant concept in marketing, as it drives firms to reevaluate their international marketing strategies (Steenkamp & Ter Hofstede, 2002). Furthermore, the international segmentation of markets is a reason for companies to apply multi-domestic strategies, which in essence means selecting countries based on their local advantages (Steenkamp & Ter Hofstede, 2002). Firms decide to implement such multi-domestic strategies in order to target the groups of consumers within a country by tailoring the national brands to the local needs and developing local brands (Steenkamp & Ter Hofstede, 2002). However, the research on international brand strategies has still not stressed on the importance of investigating regionalization and differences stemming from the market size. Furthermore, the market size has not been used as a moderator of the relationship between brand portfolio strategy and the firm

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17 performance in previous empirical studies, even though it could be a factor which influences this relationship.

The impact of the brand portfolio on firm performance

The literature also investigated different aspects of the way in which the brand portfolio impacts the firm operations and its performance. That is, the brand portfolio strategy as a part of the marketing strategy of standardization or adaptation, is relevant, due to its influence on the firm’s performance outcomes: the economic or behavioral payoffs derived from its implementation (Jain, 1989). In the empirical literature on the relationship between strategy adaptation and firm performance, there appears to be consistent positive relationship between the adaptation of elements of marketing strategy and increased firm performance (Ryans Jr, Griffith & Steven White, 2003).

Morgan & Rego (2009) empirically examined the relationship between the brand portfolio strategy characteristics and the marketing and financial performance. Consistent with marketing theory regarding the intangible asset value of customer relationships, they found that the

consumer loyalty is positively associated with the firms’ Tobin’s Q, as a measure of the firm’s financial performance (Morgan & Rego, 2009). Conversely, the question related to brand portfolio strategy on what brand portfolio investments deliver the highest return, did not have only one answer. Rather, their results suggested that a firm’s brand portfolio strategy has a complex relationship to firm performance, with several directionally different effects on different aspects of marketing and financial performance (Morgan & Rego, 2009). For instance, the same portfolio strategy may have opposing results in terms of Tobin’s Q and market share, suggesting that whether a brand portfolio strategy can be deemed appropriate, will probably depend on the

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18 desired outcome.

Another perspective is the financial valuation of brands, which reflects the growth that brands can generate. Since the product or brand managers have the goal to achieve positive profits, the evaluation of the brand performance is done on an annual basis (Kapferer, 2008). This annual valuation, however, leads to marketing people taking short-term decisions about the brands, even though the advertising efforts can have both short- and long-term effects. This view is contrary to the perspective that Knowles (2003) outlined, stating that shareholder value had become the language of the boardroom but not of the marketing group. Another study incorporating the relationship between the marketing strategy and the shareholder value is that of Madden, Fehle & Fournier (2006). They investigated the way marketing affects firm performance, conducting research on the link between branding and the creation of shareholder value, and found that a strong brand portfolio displayed statistically and economically significant performance

advantages, compared with the overall market. They concluded that firms that have developed strong brands create value for their shareholders by yielding greater returns than a relevant market benchmark, and with less risk (Madden et al., 2006). Similarly, in line with that research, Kapferer (2008) investigated the brand equity concept, which is considered a result of combining the marketing and economic and financial perspectives of the brand. However, there has been some disagreement between experts, some of which differentiate between ‘consumer-based brand equity’ and ‘financial brand equity’ (Kapferer, 2008, p. 508).

Apart from the financial valuation of the firm or its brands, studies have employed other different measures of performance. Talay et al. (2015) examined the effect of the firm’s global brand architecture on it market performance, in terms of market share. They also investigated the

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19 moderating effect of national culture on the relationship between branding strategies and market performance. Namely, they empirically test whether cultural effects change the relationship between the brand’s position in the global brand architecture, and the brand’s market-based performance. However, Talay et al. (2015) noted that the brand’s market share may not encompass performance in terms of profit, shareholder value and return on investment. The foreign sales performance as a result of standardizing or adapting the products to the local market was also investigated, and a positive relationship between standardizing the core product and the foreign sales performance was found (Zou, Andrus & Norvell, 1997). However, this relationship is negative with respect to product peripherals (Zou et al., 1997).

An alternative strategy that can be implemented to improve the firm’s overall performance, is through brand divestitures. However, in most cases, brand divestments were found to lead to diminishing the firm value, especially brands that are part of the firm’s core business activities (Depecik et al., 2014). Thus, divesting only local or regional brands in non-core businesses could potentially have a positive effect on the firm value (Depecik et al., 2014). On the other hand, divesting a global brand is most likely going to lead to negative reactions from investors, regardless whether the brand is a core or non-core business brand. Divestitures of such global brands can lead to a decrease in firm value, due to the economies of scale in production, research and development (R&D), and marketing as well as the economies of scope, which are high for these brands (Hankinson & Cowking, 1996).

Brand portfolio in emerging markets

Nevertheless, marketing and the brand portfolios challenges are different in emerging

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20 favoring economic liberalization and a free market economy (Arnold & Quelch, 1998),

compared to industrialized countries. Due to the process of globalization, the multinational companies are able to bring their brands and products into more distant parts of the world. From the perspective of MNCs from developed economies, the emerging markets are particularly attractive for MNCs due to their high economic growth and their rapidly increasing demand for consumer goods (Meyer & Tran, 2006). However attractive the less developed countries are for MNCs, it should be acknowledged that they pose certain challenges in terms of their institutional frameworks and customer tastes, which are different than those in the industrialized economies. Therefore, foreign MNCs attend to the customer needs on these markets by adapting their strategies to the local context (Meyer & Tran, 2006). Douglas & Craig (1996) recognized the importance for companies to establish operations in emerging markets, due to their growth potential, while maintaining strong positions in mature markets. The increasing globalization, however, has brought about both opportunities and threats for the companies which strive to have successful operations not only on the mature markets, but also on the emerging ones (Burgess & Steenkamp, 2006).

It is important to note that the consumers in emerging and mature markets have shown different preferences regarding the brands that they prefer (Özsomer, 2012). The emerging market consumers could find the globally positioned brands more attractive than the local brands (Alden, Steenkamp & Batra, 1999). Furthermore, Batra, Ramaswamy, Alden, Steenkamp & Ramachander (2000) found that the consumers on emerging markets have a preference for nonlocal (foreign) brands compared to local brands, as they strive to be a part of the global community, and meanwhile downgrade the local brands in comparison with global brands.

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21 Eckhardt (2005) investigated the local branding in a foreign product category in an emerging market, namely how consumers in emerging markets perceived foreignness and localness and how that affected brand development and management. In order to take advantage of the popularity of many foreign product categories, local companies need to take into account the cultural and economic peculiarities if they seek to develop their own brands, which often they struggle with. As a result, the role of consumer interpretation of the product category and the brand will impact significantly the local company’s ability to instill its brand in a foreign product category in emerging markets (Eckhardt, 2005).

In regard to the brand strategies, Meyer & Tran (2006) specified three types of brand strategies between which foreign entrants choose on emerging markets: global, local or multi-tier, and suggested the suitability of the strategy depending on the type of industry, locality and core competences. According to their study, the global brand strategy in an emerging market is expected to be successful in technology-driven products, global lifestyle brands and in culturally open and rapidly changing environments. On the contrary, the local brands are suitable in

industries with culturally-embedded and context-specific products, tradition-orientated and nationalistic environments (Meyer & Tran, 2006). The multi-tier strategy combines global and local brands in order to achieve synergies, especially in emerging economies where markets that are highly segmented. The multi-tier strategy consists of global and local brands so that local brands provide for the medium or low-price segments of the market, while global brands target the upper end (Meyer & Tran, 2006).

The literature outlined above proposed certain findings and their implications regarding the choice of brand portfolio strategy and the subsequent firm performance. However, not much

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22 research has been conducted so far about the way in which the choice between local versus global brand portfolio strategy affects the firm performance. Currently, the existing literature is focused on the firms pursuing global branding strategies, their implications and advantages, and on the global market conditions. However, the concentration of sales of MNCs is regional, and the largest firms’ market coverage is regionally-based, rather than global (Rugman & Verbeke, 2004). Therefore, it could be argued that the global brand strategy may not necessarily bring about a better firm performance. Therefore, I intend to research the relationship between the choice of portfolio type and the firm performance relationship, as this topic can both contribute to the theory and also have practical implications for companies. Moreover, the strength of the aforementioned relationship could be influenced by the moderating variables: cultural distance and market size, that were included as boundary conditions. As outlined in this section, both of these moderating effects have not been thoroughly investigated, while could have effects on the relationship.

Research question: How does the choice of local brand portfolio affect the firm performance.

Hypotheses Development

Type of brand portfolio and its impact on firm performance

Local brands bring about certain important strategic advantages, such as better response to local needs, flexibility of pricing strategy, possibility of responding to competition (local and global), and balancing the portfolio of brands (Schuiling & Kapferer, 2004). Kapferer (2002) suggested that the local brands have the means to compete with other brands on the market through local knowledge and flexibility. In addition, local brands may bring higher profits due to the flexibility of their pricing strategy, especially if the brand is strong in the specific market (Schuiling &

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23 Kapferer, 2004). As Steenkamp & De Jong (2010) concluded, there is a prevalence of attitude towards local products in certain markets, and proposed that MNCs should not rely too heavily on global brands, since this strategy may not work too well with large consumer segments. Moreover, in order to benefit from economies of scale, global brands need to cover similar segments in a number of markets, but if these segments are profitable and unique to certain countries, then important opportunities for local brands are provided.

However, possessing local brands or having a local brand portfolio does not always lead to better business performance. The local brands could be more cost-burdening for the firm, as economies of scale would be more difficult to achieve, in comparison with a scenario where global brands are utilized. Such cost reductions for the global brands could lead to better firm performance (Schuiling & Kapferer, 2004). Local brands could take significantly more time and effort to be introduced on the market, since additional research and product development could be necessary. It is also argued that in case the local brand strategies are uncoordinated, this will lead to

mediocre results (Aaker & Joachimsthaler, 1999).

Competition between local and global companies is another factor that can influence the performance of the company. In the context of China and the consumer goods industry, the toughest competition are the local companies (Walters & Samiee, 2003). In fast-moving consumer goods segment, the local brands in China are the dominating ones, in terms of sales, despite the efforts of foreign multinational enterprises. Furthermore, in many market segments, the Chinese consumers are not as willing to pay premium prices for heavily promoted foreign brands as foreign MNCs may expect, especially if those brands are not widely available and not adapted enough to the local tastes (Walters & Samiee, 2003). Therefore, it can be argued that the

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24 variance in firm performance as a result of global versus local brand portfolio implementation could vary by industry.

Given both the advantages and disadvantages of the local brands and the local brand portfolio strategy, and its possible impact on the firm performance, I consider that there will be overall predominance of the advantages, leading to better performance. Furthermore, companies that invest in the marketing of local brands thought the years of their existence, build strong

relationships with local consumers over the years and the brands become well-known (Schuiling & Kapferer, 2004). Therefore, I expect that the portfolio of local brands will lead to improved firm performance.

Hypothesis 1: Firms that employ a local brand portfolio achieve higher performance than firms that employ a global brand portfolio.

The moderating effect of cultural distance

Cultural distance is utilized to measure the extent to which different cultures are similar or different, in terms of social norms, religions, languages and ethnicities (Shenkar, 2001;

Ghemawat, 2001). The cultural differences across markets indicate that consumers in different nations may necessitate brand images adapted to their needs (Roth, 1995), and this could bring value to the consumers. In addition, Porter (1990) argued that a firm’s competitive advantage depends on its ability to organize, perform, and coordinate discrete activities so that they add value for customers. He asserted that creating and sustaining a competitive advantage is done through highly localized process. Furthermore, culture, as well as differences in national values, economic structures, institutions, and histories, contributes to competitive success (Porter, 1990). With regards to branding, competitive advantage can be achieved by brand managers by using

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25 local cultural capital and targeting and positioning the brand grounded on understanding of the local culture, creating ‘a sustainable unique value and offer the symbolism of authenticity and prestige’ (Ger, 1999, p. 70). Culture is therefore likely to have an impact on the customer perceptions of the brands which are being offered on a certain market. Thus, product and promotion adaptation could broaden the local customer base and be leveraged to the specific local preferences (Douglas & Craig, 1989). Despite the success that global brands have, local culture still influence the consumer behavior and individual identity (Samli, 1995), therefore leading to consumer preference for local brands. As argued by Talay et al. (2015), cultural values on the national market ‘moderate the signals brands send’ (p. 67). However, they found that culture amplifies the impact of the brand multi-nationality signal on market performance, and therefore culture moderates the signals brands send (Talay et al., 2015).

In addition, consumer tastes differ significantly across countries and product categories. Given that the marketing strategies and brand development are affected by the customer needs, I suggest that culture should be taken into account when the firm shapes the brand portfolio strategic choices, since it can influence the business performance. I expect that the brands which are adapted to the local taste of the consumers are more likely to generate higher sales, and to lead to higher firm performance, compared to global brands. As a result, I anticipate that the cultural distance is likely to positively impact the relationship between the choice of local brand portfolio and firm performance.

Hypothesis 2: The cultural distance has a positive moderating effect on the relationship between the choice of local brand portfolio and firm performance.

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26

The moderating effect of market size

The market size is an important characteristic of the environment that the brands operate in. The reason for this is that larger markets imply intra-country heterogeneity. Despite the fact that country-level factors are important influencers on brand image strategy (Roth, 1995), they do not explain regional differences. Therefore,regions within the countries should be examined, since they account for the intra-country heterogeneity (Roth, 1995). Thus, heterogeneity within countries complicates the development of brand image strategies with strong within-country appeal, while the micro-marketing and regional focus allows managers to develop strategies that target homogeneous markets (Roth, 1995). However, the approach in international brand

management research has been to investigate marketing strategy effectiveness and differences on a country level (Huszagh, 1986), but such analyses can be considered too broad and overlooking intra- and inter-country similarities, since homogeneity is higher within regions than in countries (Roth, 1995). Schaffmeister (2015) also supports the notion that diversity within countries needs to be taken into account when developing successful marketing and positioning strategies. Therefore, since targeting relevant consumer groups and regions is necessary and requires careful research and planning (Schaffmeister, 2015), the firm’s branding strategy is likely to be more successful if the market size is considered.

The market size has not been studied yet as a moderator of the relationship between the brand portfolio and firm performance. I suggest that firms operating in a larger market will achieve better performance if they use local brand portfolios, and therefore, the market size would be moderating this relationship. The reasons for that are that the local brands could be even more appealing if they are better tailored to the customer needs within each region of the host country.

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27 (+)

(+)

Since I expect larger variations in customer tastes the larger the host market, I believe that this moderating effect would bring valuable insights.

Hypothesis 3: The market size has a positive moderating effect on the relationship between the choice of local brand portfolio and firm performance.

The hypotheses stated above, as part of the conceptual model for the purposes of this research, were illustrated in Figure 1.

Figure 1. Conceptual model

Data and Method

Sample and Data collection

The research paper investigated the relationship between the choice between local versus global brand portfolio strategy and the firm performance. In order to test the developed hypotheses, I employed a panel dataset, including 95 companies operating in the beer, wine and spirits industry

Local Brand Portfolio Firm Performance

(H1)

Cultural Distance (H2) Market Size (H3)

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28 in China, over the period 2006-2015. This industry is fast-growing and competitive, and is

employing different strategies to attract a larger customer base. The total sales of alcoholic beverages in China in 2009 were 105.0 bln US dollars, a rise of 8.1% compared to 2008 (Agriculture and Agri-Food Canada, 2010). China’s spirit market growth has been a result of a number of factors: an increase in the Gross Domestic Product (GDP) per capita, the increasing population of women and female consumers, and a higher disposable income per capita

(MarketReportsOnline.com, 2016). The rise in alcohol consumption in China has resulted from a number social and cultural changes taking place in the last decades, such as China’s integration with the world markets, and consumer preferences changing towards more internationally known brands and products, including beer and wine, as opposed to traditional beverages

(MarketReportsOnline.com, 2016). Moreover, China joined the World Trade Organization (WTO) in 2001, which in turn led to reduction in import duties on foreign alcohol, and

simultaneously the increasing consumer demand resulted in higher imports and a rise in sales of imported spirits and wine (China Business Review, 2011).

The initial sample included 910 observations, 703 of which were excluded due to missing data for some of the variables. The final number of observations in the sample is 207. The level of analysis of this empirical study is company-year.

In order to obtain the sample, I used the Passport global market research database, owned by Euromonitor International. The Passport database provides statistics, analysis, and reports on industries, countries and consumers globally (Giarratana & Perri, 2014), and it has already been used in marketing research (e.g. Chandrasekaran & Tellis, 2008). The data published in

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29 and provides standardized and cross-comparable statistics (Euromonitor International). It

contains data for a number of industries and geographies, including the consumer products industry in China. Therefore, the Passport database is a reliable source of data for that industry, and is hence suitable for the purposes this research. Yearly panel data from Passport has been used in previous research in international business and marketing literature (e.g. Giarratana & Perri, 2014).

Variables

Dependent Variable

The dependent variable is the firm performance (performance), and my initial preference was to measure it in terms of return on assets (ROA). The ROA is a ‘measure of the success of a firm in using assets to generate earnings independent of the financing (debt versus equity) of those assets’ (Selling & Stickney, 1989, p. 1). The ROA is considered the common measure of firm performance in management research (Gomez-Mejia & Palich, 1997). It has been employed as an accounting measure of firm performance in a number of studies in the international business literature (Lu & Beamish, 2004; Kotabe, Srinivasan & Aulakh, 2002; Hitt, Hoskisson & Kim, 1997). The ROA is computed as a ratio of the firm’s net income to its total assets (Lu &

Beamish, 2004). However, the data source for the dependent variable is Orbis dataset, and ROA is not available for any of the studied companies, despite it being source for comprehensive information on both public and private companies worldwide. As an alternative, I decided to operationalize the firm performance using return on equity (ROE) instead, as it is a similar measure of performance. The ROE is computed by dividing the net profits by the average

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30 in the distribution and outliers in the data.

Inependent Variable

In this research, I differentiated between the type of brand portfolio: global or local. The

independent variable is the local brand portfolio (denoted as local brand portfolio). The data are derived from the Orbis database, since it has a worldwide coverage and the variables needed are for the market in China. Orbis was used to determine whether the company is domestic or international, the location of the headquarters, and the global ultimate owner. Based on that information, it the brands were categorized as local (present in one country only), regional (available in more than one country within the same region), and global (marketed in more than one region). I used dummy variables to indicate the percentage of global, regional, and local brands in the portfolio of the total brands the company owns. The independent variable is operationalized as a ratio of the local brands in the firm portfolio compared to the total number of brands in the portfolio for the respective year.I used the common logarithm of the ratio of the local brands in the firm’s brand portfolio to control for the effects of skewness in the data

distribution.

Moderating Variables

The moderating variables employed to test the hypotheses H2 and H3, are cultural distance and market size. The research on cultural characteristics and distance by Hofstede (1980, 2003) on the dimensions of culture: power distance, uncertainty avoidance, masculinity/femininity, and individualism, was used in this research. Hofstede’s framework has been among the most

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31 for the four dimensions for the home and host countries were obtained from Hofstede’s website (Geert-hofstede.com, 2017).

Kogut & Singh (1988) developed a composite index based on Hofstede’s framework (1980) of four cultural dimensions. Therefore, in order to operationalize for cultural distance, I used the Kogut & Singh (1988) formula = ∑ ( − ) / /4, where CDj denotes the cultural distance between country j and country i (country i being the home country), Iij is country j’s score on the ith cultural dimension, Iiu is the score of country u on the ith dimension, and Vi is the variance of the score of the dimension. Therefore, the Kogut & Singh (1988) formula first takes the difference between the four Hofstede’s dimensions between two countries by squaring each difference across the dimensions, and dividing it by the variance of the scores of the dimension. Further, the amounts are added up and divided by the number of dimensions (4). The data for the market size moderating variable was derived from the Passport database, measured in terms of US dollars. It denotes the value of size of the market in the host country (China) per year. In order to improve the symmetry and homoscedasticity in the data, I used the common logarithmic transformation to transform the market size variable.

Control Variables

Several control variables, which may affect the firm performance, were included in this research in order to obtain more robust results. These control variables are: Nationality of the firm

(nationality), Firm size (firm size), Firm age (firm age), GDP of the host country (GDP),

Population of the host country (population), the Year (each year included as a dummy variable), whether the firm is a State-owned enterprise (SOE), the Language differences (language), the

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32 level of Industrial development (industrial development), the firm’s Global brand portfolio (global brand portfolio), the Political stability (political stability), the Government effectiveness (government effectiveness) and the Rule of Law in the host country (rule of law). The data for country-level variables (GDP and population) were derived from the World Bank database, and from The Worldwide Governance Indicators (WGI) dataset for the political stability, the government effectiveness and the rule of law in the host country.

An important driver of brand management strategies is the firm’s nationality, and even brands with a global approach are guided by the principles derived from the national heritage of the brand (Talay et al.,2015). Thus, I included a control variable for the nationality of the firm in the models, in order to control for any variance in the global or local orientations and strategies, which brands from different countries employ (Chryssochoidis, Krystallis & Perreas, 2007). The nationality of the firm takes into account the country of origin (home country) of the firm. I operationalized the nationality of the firm by using a set of 41 dummy variables for Argentina, Australia, Belarus, Belgium, Bermuda, Brazil, Cayman Islands, Chile, China, Denmark, France, Germany, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Kazakhstan, Malaysia, Mexico, the Netherlands, New Zealand, Pakistan, Panama, Philippines, Portugal, Russia, Singapore, South Africa, South Korea, Spain, Sweden, Taiwan, Thailand, Ukraine, the United Kingdom, the United States, Uzbekistan and Vietnam. Each of these dummy variables is equal to 1, in case the home country of the company is the country which the dummy variable denotes, and equal to 0, if it does not.

The firm size is operationalized in terms of the firm’s total assets, the data for which is derived from the Orbis database. As for the impact of the firm size on performance, researchers have

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33 proposed that variance in firm performance may be partly explained by firm size (DeCarolis & Deeds, 1999). Namely, larger firm size can be linked to the firm’s capabilities of exploiting economies of scale, leading to higher ROA (Chao & Kumar, 2010) and therefore, better performance.

The firm age, measured in terms of number of years after incorporation, was also included as a control variable, as it could influence both short- and long-term performance. The reason for that can be that older firms could have implemented management techniques that are now considered outdated, or obsolete technology, leading to decreased performance compared to younger firms (De Jong & Van Houten, 2014). Therefore, I expect that the firm age could have a negative effect on the firm performance.

The GDP of the host country, as an indicator of its level of development, was used as another control variable. The GDP can affect the firm’s market performance, and has been used as a control variable in previous research (Talay et al., 2015). The data for the GDP were derived from the World Bank database. I used the natural logarithm of GDP to control for the effects of skewness in distribution and outliers in the data.

The population of the host country was included as a control variable, since it can indicate the potential size of the market (Talay et al., 2015). The data for the population were derived from the World Bank database.

A dummy variable denoting whether the firm is a SOE or not, was included as a control variable. I expect that the state-owned enterprises will demonstrate lower performance due to their rigid organizational policies compared to the privately-owned firms. Furthermore, studies suggest that

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34 SOEs tend to have inferior performance when compared to privately-owned companies (Vining & Boardman, 1992). Thus, I predict that the fact that the firm is state-owned will have a negative effect on its performance.

In addition, I expect that the psychic distance, defined as ‘the sum of factors preventing the flow of information to and from the market’ (Johanson & Vahlne, 1977, p. 24), could negatively affect the firm performance. According to Johanson & Wiedersheim-Paul (1975, p. 308), the distance between countries should account for a number of factors such as the ‘differences in language, culture, political systems, level of education, level of industrial development’. The language differences are included as a country-level control variable which operationalize the psychic distance between countries in this research. Whenever the two countries do not share a common language, misunderstandings can occur and the communication effectiveness can decrease (Evans & Mavondo, 2002). In order to operationalize the differences in language, I employed the Dow & Karunaratna (2006) measure, developed in order to incorporate a larger sample and provide more accurate indicators of language differences. The literature investigating the relationship between psychic distance and organizational performance suggests that this relationship is negative (Johanson & Vahlne, 1977; Evans & Mavondo, 2002). Therefore, since language is used to measure the psychic distance between the home and host country, I expect that such differences in language between the countries will have a negative effect on the firm performance.

The industrial development represents another measure of psychic distance stimulus between the home and host country. For the purposes of this research, I used the Dow & Karunaratna (2006) measure to operationalize the differences in industrial development. Since the greater psychic

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35 distance between countries leads to decreased organizational performance (Johanson & Vahlne, 1977; Evans & Mavondo, 2002), I expect that the differences in industrial development between the home and host country will negatively affect the firm performance.

The firm’s global brand portfolio is included as a control variable in order to account for the variability in performance that can be caused by the firm’s pursuit of a global branding strategy. It is measured as a ratio of the firm’s global brands to the total number of brands which it possesses in the host country. For the purposes of this research, I expect that adopting a global brand portfolio strategy will have a negative effect on the firm performance. I expect this effect since the global brand strategy may not be successful with larger consumer segments due to stronger consumer preferences of local products in certain markets (Steenkamp & De Jong, 2010).

The political stability is employed as a measure of the institutional quality in the host country. The data were derived from the Worldwide Governance Indicators dataset, which is a research dataset, reporting individual and aggregate governance indicators, based on a large number of enterprise, citizen and expert survey respondents in industrial and developing countries (Worldwide Governance Indicators, 2017). This variable was used to measure the level of political stability and the likelihood of absence of terrorism, and therefore I expect it will

positively affect firm performance. The existing literature proposed that the higher the quality of institutions in the host country, the higher the firm performance is likely to be (Yasar, Paul & Ward, 2011).

The data for the government effectiveness in the host country were also obtained from the

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36 public services and policy implementation, high levels of which can influence the firm

performance (Yasar et al., 2011). Therefore, I expect that the government effectiveness should influence the firm performance in a positive way.

The rule of law in the host country accounts for the property rights, contract enforcement and the likelihood of crime. The data were derived from the Worldwide Governance Indicators dataset. This variable is likely to have a positive impact on the firm performance at its high values, denoting strong governance performance. Evidence from the literature on institutions also suggested that the firm performance is expected to increase whenever there are higher quality institutions, especially when they more supportive of competition among firms (Yasar et al., 2011).

Year dummy variables were also included as control variables, in order to mitigate any year-on-year macroeconomic effects that can influence the firm performance. Year dummies have been incorporated into previous models in the literature investigating the firm’s market performance (e.g. Talay et al., 2015).

All the variables described in this section, and used in this research, were presented in Table 1. The latter includes the variable name, definition and data source, and distinguishes between the dependent, independent, moderating and control variables.

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37 Table 1. Definition and source of the variables

Variable name Definition Data source

Independent variable

Local brand portfolio Measures the ratio of local brands in the firm’s total portfolio of brands

Passport database

Dependent variable

Firm performance Return on equity (ROE) Orbis database

Moderating variables

Cultural distance Measures the cultural distance on the 4 Hofstede dimensions of culture,

operationalized by the Kogut & Singh index

Hofstede

Market Size Denotes the size of the market in the host country

Passport database

Control variables

Nationality Dummy variable, if equalling 1 = the home country of the company is the country which the dummy variable denotes; if 0 = another home country

Orbis database

Firm size Measures the size of the firm by the firm’s Total assets, common logarithm

Orbis database

Firm age Number of years after incorporation, common

logarithm

Orbis database

GDP GDP of the host country, natural logarithm World Bank

Database Population Population of the host country, common

logarithm

World Bank Database

Year Dummy variable, if equalling 1 = the current

year is the year which the dummy variable denotes; if 0 = another year

Orbis database

SOE Dummy variable, if equalling 1 = the firm is a

state-owned enterprise (SOE); if 0 = it is not a SOE

Orbis database

Global brand portfolio Measures the ratio of global brands in the firm’s total portfolio of brands

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38 Language Measures the differences in languages as a

measure of the psychic distance between countries

Douglas Dow

Industrial development Measures the differences in industrial development as a measure of the psychic distance between countries

Douglas Dow

Political stability Measures perceptions of the likelihood of political instability and/or

politically-motivated violence, including terrorism, and ranges from -2.5 (weak) to 2.5 (strong)

Worldwide Governance Indicators dataset Government

effectiveness

Reflects perceptions of the public services quality, the civil service quality and the degree of its independence from political pressures, and ranges from -2.5 (weak) to 2.5 (strong)

Worldwide Governance Indicators dataset

Rule of Law Reflects perceptions of confidence and rules of society, quality of contract enforcement, property rights, the police, and the courts, the likelihood of crime and violence, and ranges from -2.5 (weak) to 2.5 (strong)

Worldwide Governance Indicators dataset

Empirical Strategy

The variables described in the section above have been quantified for the purposes of this research. Firstly, I ran collinearity diagnostics in order to control for multi-collinearity issues. Next, I ran descriptive statistics for all variables, followed by a correlation analysis. For the investigation of my research, I used linear regression models.

I used the following models in order to test my hypotheses:

1. Firm Performance = α + β1 nationality + β2 year + β3 GDP + β4 population + β5 firm size + β6 firm age + β7 language + β8 industrial development + β9 SOE + β10 global brand portfolio + β11 political stability + β12 government effectiveness + β13 rule of law

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39 + β14 cultural distance + β15 market size

2. Firm Performance = α + β1 nationality + β2 year + β3 GDP + β4 population + β5 firm size + β6 firm age + β7 language + β8 industrial development + β9 SOE + β10 global brand

portfolio + β11 political stability + β12 government effectiveness + β13 rule of law + β14 cultural distance + β15 market size + β16 local brand portfolio

portfolio + β11 political stability + β12 government effectiveness + β13 rule of law + β14 cultural distance + β15 market size + β16 local brand portfolio + β17 local brand portfolio x cultural distance

portfolio + β11 political stability + β12 government effectiveness + β13 rule of law + β14 cultural distance + β15 market size + β16 local brand portfolio + β17 local brand portfolio x market size

portfolio + β11 political stability + β12 government effectiveness + β13 rule of law + β14 cultural distance + β15 market size + β16 local brand portfolio + β17 local brand portfolio x cultural distance + β18 local brand portfolio x market size

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Results

The data analyses were performed using IBM SPSS Statistics software (version 24.0). I tested for any effects of multi-collinearity by checking Variance Inflation Factors (VIF). The values for VIF below 10 and tolerance level below 0.10 are considered acceptable (Kennedy, 1992). The collinearity statistics, presented in Table 2, reveal that three of the variables do not meet this criteria: market size, GDP and population. Since the market size is a moderating variable for the purposes of this research, the GDP and population control variables were excluded from the models. Furthermore, certain year dummy variables correlated highly with the market size moderating variable. Grouping the year dummy variables into two groups: years 2006-2010 and years 2011-2015 brought similar results. Therefore, it was only possible to include the year variables for the years 2008 and 2012. Similarly, the cultural distance moderating variable was highly correlated to the nationality dummy variables for nearly all countries. Thus, the only nationality control variable included, is the one for China, in order to allow to distinguish between domestic and foreign companies.

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41 Table 2. Collinearity Statistics

Tolerance VIF

local brand portfolio 0.66 1.52

cultural distance 0.13 7.46 market size 0.00 460.07 firm size 0.40 2.52 firm age 0.49 2.03 language 0.27 3.70 industrial development 0.24 4.19 SOE 0.35 2.85

global brand portfolio 0.40 2.48

political stability 0.72 1.38

government effectiveness 0.17 5.80

rule of law 0.34 2.94

GDP 0.00 1001.63

population 0.01 185.02

Descriptive Statistics and Correlations

Following the multi-collinearity diagnostics, I ran the descriptive statistics for the independent, dependent, moderating and control variables, presented in Table 3 below. It includes the number of valid observations, the minimum, maximum and mean value of each variable, and their standard deviations.

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42 Table 3. Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Valid

local brand portfolio 910 0 0.30 0.15 0.14

performance 410 0 3 2 0 cultural distance 850 0.00 6.92 1.09 1.84 market size 910 6.75 7.19 7.04 0.15 firm size 447 2.83 8.15 5.93 1.12 firm age 730 0 2 1.30 0.56 SOE 850 0 1 0 0.36 language 850 -2 1 -0.24 0.73 global brand portfolio 910 0 0 0.03 0.08 industrial development 360 -2 0 -1 1 political stability 910 -0.66 -0.43 -0.54 0.06 government effectiveness 910 0.00 0.42 0.15 0.13 rule of law 910 -0.55 -0.32 -0.40 0.08 Valid N (listwise) 207

Next, the correlation matrix is presented in Table 4. The table shows a significant positive correlation (p<0.05) between the firm performance and local brand portfolio, and a significant negative correlation (p<0.1) between the firm performance and the global brand portfolio. The other significant correlations (p<0.05) are between the dependent variable and the language, industrial development, and a negative correlation with SOE. The correlations between performance and cultural distance, market size, firm age are negative but not significant. The negative correlation is contrary to what was proposed in the Methodology section. The cultural

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43 distance may be negatively correlated to performance as it may serve as an obstacle for

organizational success and it has been studies as a success factor for MNCs in international markets (Shenkar, 2001). I can assume that the market size has a negative effect on performance, since the opportunities for growth in emerging markets bring more competitors (Roberts,

Kayande & Srivastava, 2015) and therefore the firm could be hurdled by the rival firms. The negative contribution of firm age to firm performance is as expected in the Methodology section. The correlations between performance and firm size political stability, government effectiveness and rule of law are positive, as expected, but not significant.

Consequently, I can derive that the firm performance is affected more by the brand strategy, psychic distance and ownership structure, rather than on host-country level factors and cultural distance. Likewise, organizational characteristics such as firm size and firm age cannot explain the firm performance.

Local versus global brand portfolio strategy and firm performance in China