Solving Market Imperfections: How can EU Governmental Institutions offer Market Information to Developing Countries?

(1)

Solving Market Imperfections: How can EU Governmental

Institutions offer Market Information to Developing Countries?

Faculty of Management & Organization and Economics

Author:

Arne Heutink

Student no.:

1257145

Supervisor:

Dr. K.S. Mühlfeld

2

nd

Supervisor: Dr. M.P. Timmer

Doctoral Thesis International Economics & Business

Rijksuniversiteit Groningen, The Netherlands

(2)

Consumers in the European Union (EU) will benefit from increased product variety and lower prices when imports from developing countries are stimulated. However, information barriers cause problems of entry to the EU market for producers from developing countries. This thesis will look at the way market information on the EU can be offered to SMEs in developing countries willing to export to the EU. The role of European governments will get particular attention. I will develop a systematic analysis illustrating the many dimensions this research question has.

Governmental institutions in the EU intervening in the market for market information to the benefit of developing countries have to make choices on how they can offer their services most effectively. Besides understanding the information needs of the SMEs, governments in the EU will have to cooperate with governments in developing countries to improve knowledge and achieve structural change in the information infrastructure. Five hypotheses will be tested based on data gathered in interviews with users of EU market information offered by the Centre for the Promotion of Imports from Developing Countries (CBI). In order to achieve positive social welfare effects in both the EU and the developing countries, investments in familiarising the (potential) clients of the offered market information seem necessary. Furthermore, differentiating the information in terms of types of clients for a number of information categories (particularly market access requirements) is desirable.

(4)

1. Introduction

A manufacturer of electronic components from Bangalore in India told me during the Hannover Messe Trade Fair in April 2006 that he is ready to export his product to Europe. He has an innovative product which he can sell at a good price. After a long and complicated search, he found information on required certifications which he has got by now. However, the interest of buyers in his product was really low during the whole week of the trade fair. I asked him why he thought that was the case. He answered to me that he did not know what applications electronic components are used for in Europe and how business is done with Europeans, because he was struggling to find information about demand, consumer preferences and business culture. According to him, European customers cannot expect competitive and innovative products from developing countries on their market as long as no effort is made to make the market more transparent.

Context

One of the reasons for the establishment of the European Economic Community (EEC) in 1958 was to remove existing trade barriers between countries within the community and create a large market based on unrestricted competition (European Parliament UK Office, 2004). The EEC formed the foundations of what we know as the European Union (EU) these days. Whereas the aim was to remove trade barriers between markets inside the community, parties who try to enter the market from outside the community did not benefit from the removal of barriers. Moreover, new trade barriers have been created to the outside of the EU market. In a competitive market, players who are already active in the market can be expected to try to deter entrance from new competitors (Martin, 2001). This is particularly a problem for competitors who are located at a distance from the home market. These potential competitors face more problems to get access to the market, because they are unlikely to be aware of opportunities arising in the home market. Acquiring and assessing information on the market is one of the problems related to market access.

(5)

suffer the negative consequences of the barriers in place. Their possibilities to export successfully to the EU are significantly decreased. This issue forms a serious problem for developing countries. The protectionist measures taken by the EU put developing countries in a disadvantaged position in international trade (Pollard et al, 2003).

The World Trade Organisation (WTO) has recognised this problem for developing countries and has suggested some commitments from its member countries (which include all EU member states) (Hoekman et al, 2003). It suggests unilateral actions by all industrial countries for preferential market access for developing countries. The WTO demands industrial countries to give development assistance in order to improve the trade capacity of developing countries. One of the ways through which this assistance can be achieved, is giving competitors from developing countries access to information on home markets of industrial countries. This will decrease the informational barriers to entry for firms in developing countries who wish to export their products. The international competitiveness of those firms can be expected to improve as a result.

Contribution of this thesis

A lot of literature has been devoted to markets with imperfect competition and the nature of the imperfections. One of the imperfections that have received a lot of attention in recent years is imperfect information. I will focus on this imperfection in this thesis, because removing this imperfection has significant positive welfare effects both in the home and foreign country. The focus will be on the reduction of information asymmetries between sellers.

(6)

should be offering market information to developing countries at all is very interesting, it will not be the focus of this thesis.

It is important to know what kind of information imperfectly informed parties need in order to be able to remove information imperfections. Identification of market information needs has been done through a range of empirical studies. Those studies have mainly focused on Small and Medium Sized Enterprises (SMEs) as they tend to have most difficulties in acquiring and using market information (Julien and Ramangalahy, 2003). The information needs are mostly studied on the level of an individual country like in a study by Blessing and Parker (2000). They studied the information needs of SME manufacturers in the United Kingdom by conducting interviews with several departments within SMEs. However, studies on market information needs of exporting firms are rarer. Leonidou and Adams-Florou (1999) study the information behaviour of 80 exporting firms from Cyprus, but the case of exporters from developing countries who try to enter the market of a major trading block like the EU is not specifically considered. However, collecting export market information is a very prominent problem for SMEs. SMEs have fewer resources available than large firms to search and analyse information. Furthermore, SMEs in developing countries require particular attention, because the information infrastructure is still lagging behind in those countries (Smith, 1995). I have also experienced this problem while conducting interviews with exporters from developing countries. They face major problems in getting hold of useful information when they attempt to export to Europe. This thesis will try to close the gap that exists on the role of government bodies in the EU as information providers to exporting firms from developing countries.

Research objectives

This thesis will look at how a major trade barrier in international trade – imperfect information – can be decreased. It is in the interest of consumers in the EU to have as much product variety as possible at the lowest possible price. Trade barriers and transaction costs in trade cause prices to be higher than desirable for the buyer. Moreover, entry deterrence by firms that have already settled in the market decreases the opportunity for product variety in the market. This has a negative influence on social welfare in the EU. Decreasing the informational trade barrier for producers outside the EU market will increase their chances of successful entry into the market.

(7)

European governments can reach their targeted customers and what market information they have to offer publicly to SMEs in developing countries in order to stimulate competition from developing countries. This will be addressed by considering models and previous empirical studies. The methodology used in this thesis will be compared with a study by the International Trade Centre (ITC) (2005) which tries to answer a similar question. The framework will be empirically tested through interviews.

In order to provide an answer to the research question, I will assess literature on three different themes and try to inter-relate this literature; first, imperfect information from an international trade perspective; second, how can market information be offered and, third, what market information is demanded. These three themes together will make it possible to assess in what way European consumers - and producers in developing countries - can benefit from EU governmental institutions offering market information to SMEs in developing countries. An empirical analysis will be brought into the thesis to find support for choices these institutions have to make. I will work this out in the following structure.

Structure of the thesis

(8)

Chapter 3 will be devoted to the actual demand for market information. I will look at literature that tries to identify what kind of market information is demanded by SMEs. This creates the setting for an empirical assessment of how governments can act as providers of market information which will be done in chapter 4. I will look at this from the perspective of the user which is the (potential) exporter from a developing country, because it only makes sense to offer market information that is relevant to the user in order not to waste resources. Five hypotheses will be introduced in this chapter relating to the way market information services can most effectively be offered to developing countries.

The data for the empirical analysis in chapter 4 come from interviews that I conducted during my internship at the Centre for the Promotion of Imports from developing countries (CBI), which is an agency of the Netherlands Ministry of Foreign Affairs located in Rotterdam. I conducted a total of 74 personal interviews in the period from February to April 2006. The goal was to identify the most important market information needs of exporters and export facilitating organisations (so-called Business Support Organisations) in 24 developing countries. Furthermore, the participants were asked whether their demands match with the information that CBI offers and they were asked to indicate gaps. I will explain the data used, test the hypotheses in chapter 3 and provide links with relevant literature. The collected data will be used to test the hypotheses based on findings at CBI. However, I will try to draw broader conclusions.

Chapter 5 is a short chapter with some additional considerations based on the empirical analysis. The conducted interviews revealed some interesting points of discussion which could be empirically assessed in future research. The role of procedural knowledge and the lack of awareness in developing countries of market information offered by EU governments will need further attention. I will formulate two hypotheses for future testing based on these observations.

Finally, conclusions and recommendations will be provided in chapter 6. In the appendices, the data gathered in the empirical study, and some example interviews are attached.

2. Literature Review

(9)

impact of asymmetric information between producers inside and outside the EU market. The associated information costs increase the overall trade costs leading to less trade than desirable for the buyers. In the market, the costs resulting from information imperfections are not corrected through a market mechanism. This can be a justification for interference to reduce the distortion.

There are several ways through which market information can be offered. The main interest in this chapter is to highlight the role of government, as it will be outlined that government interference might be desirable. Furthermore, attention will be drawn to the particular situation of developing countries, because producers from developing countries tend to be most backward in access to market information. Finally, the supply of market information by governmental institutions will also get attention, because it is interesting to assess the choices that have been made by governments and to compare this with theoretical considerations.

2.1 Reasons for the existence of information asymmetries

2.1.1 Imperfect competition

In order to understand in what way market information can best be offered to developing countries, it is essential to understand where the problem of lack of availability of market information stems from. David Ricardo laid the foundations of international trade theory in his book On the Principles of Political Economy and Taxation in 1817. His model based on comparative advantage of countries was based on one factor of input: labour. The later Heckscher-Ohlin (HO) model also considered capital as a factor of input. The HO-model has a lot of influence in the way researchers think about the directions of international trade (Bhagwati and Srinivasan, 1983). It predicts that in a world with two goods and two countries, the country that is relatively labour abundant will have a comparative advantage in the labour-intensive good and imports the capital-labour-intensive good and vice versa. However, both the Ricardian model and the HO-model make important assumptions that put these models under pressure. The models assume perfect competition and a market that is free of distortions. The existence of those distortions causes the models to wrongly predict the directions of trade. As such, it is important to consider the nature of those distortions. Table 1 gives an overview of distortions in international trade.

(10)

Structural Imperfections Strategic Imperfections

Technology Differences Control over Resources

Economies of Scale and Scope

Marketing Advantages of Incumbency Asymmetric Information

Strategic Trade Policy Entry Deterrence Price Manipulation Asymmetric Information

Source: built on Grossman (1992) and Besanko et al (2003).

Grossman (1992) makes a distinction between structural and strategic imperfections in international trade. Table 1 depicts this distinction in a static way, although in reality the imperfections are dynamic and can belong to both categories. The structural imperfections stem from the existence of market structures that are not based on perfect competition and the existence of technology differences between countries. Monopoly, oligopoly and monopolistic competition are all common forms of competition in international markets. Besanko et al (2003) also study structural imperfections. They distinguish three structural entry barriers responsible for the existence of these types of market structures: control of essential resources, economies of scale and scope and marketing advantages of incumbency. In the market for gas, for example, there is a natural monopoly on the extraction of gas. Perfect competition is not efficient in such a case. Furthermore, Besanko et al (2003) identify asymmetries in information between firms to account for a structural barrier to entry. Physical barriers between firms and the existence of market structures based on imperfect competition make asymmetric information a structural imperfection. These structural imperfections might induce strategic behaviour.

(11)

price signals or using their reputation. As such, asymmetric information is also a strategic imperfection. This discussion illustrates that the imperfections are interrelated.

2.1.2 Asymmetric information

The situation in which a certain party has information that other parties do not have is known as asymmetric information (Akerlof, 1970). Asymmetric information is an important cause of imperfections in trade. As no transaction can take place without the exchange of information, it has a significant impact on the volume of trade. Parties hardly ever have perfect information when making decisions. Williamson (1985) links imperfections with transaction costs. He indicates that transaction costs are a result of frictions in an economy. According to Williamson (1985), the concept of transaction cost economics can be a good way to look at economic organisation. The problem in economic organsation is to write contracts to cover the lack of perfect information. This makes asymmetric information an important issue to study further, because of the impact this particular imperfection has on trade and, as a result, the welfare of the people.

Besides contract costs, there are more costs attached to asymmetric information. It can also be a cause for strategic behaviour by governments. Grossman and Horn (1987) argue that information barriers stimulate governments to use protective measures. Because potential entrants from outside the home market will have problems to get well-informed about the market, the infant-industry argument is used as a means of protection. Upcoming industry in the home country is protected from foreign competition until the industry is mature enough to compete with foreign competitors. However, national welfare would have been better off without this kind of protection, because consumers are only left with the choice of home production which might not be as good as or more expensive than products from foreign competitors. Moreover, international welfare is also likely to suffer, because the potential entrants lose profit opportunities.

(12)

Directions of trade

According to Holzhey (2003), transaction costs can have such a major impact on trade that their nature needs to be studied more closely. The exchange of goods and services takes place in what he calls the transaction sector. He builds a formal model of the transaction sector to show the impact of transaction costs. The degree of liberalisation of the transaction sector influences the patterns of trade between countries. Holzhey (2003) continues by showing that patterns of trade predicted by classical models of international trade may change due to the effect of transaction costs. Less trade or trade in opposite direction as in the HO-model might be a result. This illustrates that transaction costs can have a major impact on international trade. Information costs are a component of the transaction costs. Another study on transaction costs and information asymmetries by Tavares de Araujo (1998) illustrates that these transaction costs lead to a contemporary trend towards regional integration. According to him, information costs together with technical progress are the main driving forces for regional integration. Bilateral trade between two countries within the same continent has grown rapidly in the 1980s, much more rapidly than trade between continents because of information costs. This finding suggests that asymmetric information remains a prominent problem when distance is involved. We can observe regional integration inside the EU, but outsiders are still left with high transaction costs.

Market efficiency

Transaction costs are not only important for the directions of trade, but also for the efficiency of markets. Market efficiency is important for consumers in the EU whose perspective I am taking in this thesis. Consumers can benefit from the lowest price when a market operates efficiently. Prices are often higher than the efficient levels, because private information cannot be captured. Besides pricing problems, inefficiency can be caused by incomplete contracts. Asymmetric information makes it virtually impossible to write complete contracts. This has an impact on transaction costs in two ways. First, the pure fact that it is necessary to make contracts implies a cost. Second, contractual incompleteness gives rise to rents (Malin and Martimort, 2000). Those rents arise due to the impossibility to capture perfect information in contracts. It can be argued that it is in the interest of consumers that contractual incompleteness is reduced as much as possible.

(13)

information. The sample consists of patients who have experienced some kind of damage from treatments in Florida hospitals. As a result, a bargaining game starts between the patients and agents on the amount of compensation. He finds that bargaining which becomes necessary due to asymmetric information significantly increases transaction costs. As we are dealing with a market imperfection here, the market itself is unable to remove this imperfection.

Although forming the EU has achieved reductions of transaction costs within Europe (for example removal of border duties and a more uniform contract law), reductions of transaction costs for transactions with non-EU parties will also have positive effects on social welfare in the EU. This would mean that there is room for interference by governments in the EU which can be done in two ways. Governments can interfere by determining the rules of the market or through direct interference in the competitive environment (Williamson, 1985).

2.2 Potential remedies for information asymmetries

Although it is unlikely that the consequences of asymmetric information can be fully taken away, a certain degree of interference in the market is worth considering. As stated before, protectionist measures in the EU put developing countries in a disadvantaged position in international trade (Pollard et al, 2003). The existence of asymmetric information is one of the reasons why firms from developing countries face problems to enter the EU market. Firms from the EU do not have an incentive to remove the information asymmetries, because less competition gives them a certain degree of market power. However, interference to the advantage of producers from developing countries makes sense from the perspective of the consumer. The market for market information seems to operate imperfectly.

There are several authors who argue in favour of interference in the market of information. Hoekman et al (2003) argue on behalf of the World Bank in favour of preferential treatment by the World Trade Organisation (WTO) when it comes to market access for developing countries to developed countries. They suggest that national governments in developed WTO member states should take unilateral action to give entrants from developing countries a chance on their market. Without direct interference of national governments, developing countries will remain backward in international trade which is argued to be bad for world welfare.

(14)

of trade, so there is a lot to gain from a reduction of those costs. Like Hoekman et al (2003), the Policy Brief indicates that interference by WTO member states is desirable, but it stresses that the benefits will be highest when this is done at a multilateral level. The world of international trade has become too complex for unilateral action to be effective. As long as the benefits outweigh the costs, trade facilitation has the potential to create significant positive welfare effects for both developed and developing countries.

Some other authors make a distinction between interference at the level of the home government and target government. Abdel-Latif and Nugent (1996) empirically study the nature of transaction costs in international market penetration amongst producers of manufactured goods and trade intermediaries in Egypt. They indicate that it is a major step for exporters from developing countries to overcome transaction-based costs. The empirical study shows that interference by the home governments of Western countries in the transaction market is able to account for significant improvements of the trade volume in international trade of the producers in the target countries. However, it is also suggested that there is a role for the target government to assist the efforts of Western governments by creating a local market for information services. This is expected to stimulate the creation, storage and dissemination of market information and decrease information costs.

Gençtürk and Kotabe (2001) take the perspective of the target government. They build a model to show that export marketing involvement and the use of government export promotion assistance programmes by target governments are critical variables affecting export performance of firms. Both variables are suggested to have a positive effect on export performance. This illustrates that policies of the government of the country in which a company willing to export is located, might have a significant impact on export success. As such, interference is considered desirable when growth in exports is considered as an important determinant of economic welfare.

(15)

will look at the main focus of this thesis: the way market information can be offered to developing countries once we accept that there is an interfering role for government.

2.3 The level at which intervention is desired

The role of international political institutions

It is at this stage clear that decreasing price levels and transaction costs has a positive effect on welfare of European consumers (ceteris paribus). However, this may not hold for employment, but I will not focus on the employment question in this thesis. As information barriers are a cause of high transaction costs, eliminating (part of) the information barriers is desirable for the consumers. However, mechanisms are required through which more information on the market becomes available to producers who are facing the information barriers.

(16)

The earlier cited studies by Hoekman et al (2003) and OECD policy brief (2005) also envision a role for international political institutions. However, they view the WTO as the key organisation. Whereas the OECD policy argues in favour of internationally coordinated activities to offer public market information, Hoekman et al (2003) stress that individual member states have to take unilateral actions.

The role of national governments

Besides the role of international political institutions, researchers have conducted research into the need to establish public market information services by national governments. Access to information has always been a problem for producers, but developments in Information Technology (IT) sheds new light on the problem. IT has been the driving force for increased availability of information around the world. As such, the position of government as a potential provider of information is evolving. According to King and Kraemer (1995), IT plays an increasingly important role in the focus of national policy. They study the National Information Infrastructure (NII) in the US. According to them, the focus in public offering of information should be on keeping local industry up-to-date, stimulating institutional learning and assessing the fit of country business with international standards and practises. Government can achieve this through formulating pro-active policies without being too much involved in the market. An example of this could be the development of information sharing portals through which national industry is informed about trends and developments in the international market. This study does not focus on developing countries, but stresses the important role of IT in offering market information which is also relevant to developing countries.

(17)

Governments are recommended to take this into account when supplying market information to external parties.

Kagami et al (2004) have a somewhat different view on the way market information can most effectively be offered to developing countries. The authors suggest that there is a role for national governments to bundle their strengths (for example at EU-level) in helping developing countries to get access to market information. Availability and accessibility of information is crucial but often problematic for developing countries in the world of increasing importance of IT. The example of South-Africa shows that the information infrastructure is still relatively underdeveloped especially due to affordability of connections. Investments will have to be made to catch-up with developed countries, but South-Africa suffers from a lack of resources to do so. Governmental bodies could provide some help by offering prepared information packages or easy-to-use solutions on the internet for which slow connections are no problem. My own experience from interviewing two information managers from South-Africa is that they indeed see a role for foreign government to provide direct assistance in building up capacity for information reception and assistance in acquiring information (see appendix E for the interviews, no. 1 and 2).

Striking the balance

Governments in the EU have to take the developments in IT into consideration when thinking about offering market information to outside competitors. A simple transfer of information through internet can be regarded as insufficient. Governments will have to convince the foreign competitors to be selective with the information and incorporate the available information in their business strategy, instead of just taking for granted what becomes available through internet.

(18)

2.4 The needs of developing countries

Much of the problem with not having access to market information on international markets stems from developing countries themselves. Producers from developing countries tend to be poorly informed about opportunities that arise on foreign markets. However, this is not only caused by the existence of asymmetric information. It is important to understand and tackle the problems inside developing countries in order to achieve a system of effective market information provision.

The developments in IT are in literature often considered to open up new opportunities for developing countries to catch-up with Western countries. Morales-Gomez and Melesse (1998) look at the impact of information and communication technologies (ICTs) on economic and social development and their potential to transform developing countries into “modern” knowledge-based societies in their descriptive study. They warn that the long-term impact of ICTs is unclear and that assuming that it will automatically benefit developing countries to catch-up is unrealistic. Simple transfers of technology from the West are insufficient to boost development. Both national governments of developing countries and international agencies have the task to develop appropriate policies and programmes that focus on long-term development. Results can only be expected when international agencies are willing to invest in training and education of the new generation. Simply offering market information from a European perspective is not enough to increase competition from developing countries on the home market. Morales-Gomez and Melesse (1998) state that integration of national information, communication and education policies are necessary in developing countries before it is useful to provide market information on the EU to them.

Cases from Asia and Africa considered

(19)

interpretation skills. Being connected to the internet is not sufficient to overcome the problems, which is in accordance with the findings by Kagami et al (2004) about South-Africa. According to Smith (1995), dealing with online market information requires skills in working with internet and knowledge about market mechanisms. If improvement of these skills is not stimulated, many users in developing countries will remain information-isolated, due to the lack of education in interpretation of information. Cooperation with developed countries in this respect and investments in improvement of the national information infrastructure are considered to be potential remedies for this problem.

Problems of access to information for firms also exist in Africa. One of the reasons for the failure of agriculture in Africa is maltreatment of information delivery by African governments (Ozowa, 1995). Agricultural information is often not integrated with other development programmes that address related problems of farmers. Ozowa (1995) monitored the information gathering behaviour of Nigerian farmers by conducting visits and interviews to the farmers and concludes that poor dissemination of information accounts for the lack of access to vital information. The information that becomes available does not take the practical use and needs of farmers into account, but remains exclusively focused on policy-makers and researchers. These two case studies have the advantage over this thesis that the empirical tests were conducted inside the countries of focus and give, as such, a thorough insight into the problems encountered by producers in developing countries. However, the lack of an assessment of the information needs make them different in terms of methodology.

Room for interference

(20)

2.5 Current supply of market information

Despite the fact that there are differing opinions on the desirability of offering market information to developing countries, there are a few institutions having the goal to do so. The United Nations (UN) has taken some initiatives on a global level to make sure that market information on Western markets becomes available for producers in developing countries. On the EU level, there are not many public institutions active in offering market information. CBI in The Netherlands and the Swedish Chambers of Commerce are in fact almost the only EU governmental institutions left from a previously larger population of organisations in this field. In the non-EU countries Switzerland and Norway, two partner organisations with the same goal on a national level exist: Swiss Import Promotion Programme (SIPPO) and Norad (agency of Norwegian Ministry of Foreign Affairs).

I will provide some further details on the way the market information is offered without getting too much into detail. The focus will mostly be on CBI as it is the institution for which data has been retrieved in the empirical analysis. Some background information on the supply is needed here in order to create the setting for the hypotheses in the next chapter.

UN/WTO initiatives

The International Trade Centre (ITC) (2005) has developed a methodology for assessing the demand and supply of trade information services focused on developing countries. It has implemented the so-called Business Information Review (BIR) methodology in fifteen developing countries. As the study of ITC (2005) is conducted in the same field as this thesis, its methodology and outcomes get further attention in the next chapter. ITC (2006) is also responsible for offering market information on Western countries to developing countries. ITC is a WTO initiative. Market information is offered through its Market Analysis Services (MAS). Altogether, the MAS have the goal to enhance competitiveness of producers in developing countries in international trade.

(21)

enhancing national and international competitiveness of SMEs in developing countries. An example of this is HORTINET in The Philippines (Payot et al, 2004). The local government has created an online information network that addresses information needs of producers in the horticulture industry with UNCTAD support. This kind of online information network will improve dissemination of information amongst horticulture stakeholders in order to enhance global competitiveness of the sector.

CBI

Getting back to the level of the EU, CBI (2006) is the organisation of focus. CBI is an agency of The Netherlands Ministry of Foreign Affairs and is, as such, not an EU-broad institution. However, it covers the interests of all EU markets. Its goal is to promote exports from developing countries to the EU. One of the activities of CBI is offering online market information on the EU markets to currently 40 developing countries targeted by the Dutch government. The main tool this is done through is the Market Information Database (MID) for which registration free of charge is necessary for SMEs and Business Support Organisations (BSOs) in the developing countries.

In the MID, Market Surveys, Market Access Requirements and Market Briefs are offered. The Market Surveys deeply analyse selected market sectors on an EU-broad level and a country-specific level. The Market Access Requirements section covers all kinds of issues related to market access to the EU per sector like quality requirements, technical standards, health and safety requirements, legal information, environmental regulation etc. Finally, the Market Briefs are published as an addition to the Market Surveys with updated information on developments within a sector. Besides the online information, CBI offers training in using and searching for market information during seminars in developing countries or seminars for which exporters and staff of BSOs come to The Netherlands.

On the way to satisfy the information needs of developing countries

(22)

information can be offered to developing countries has received attention, I will to turn to the assessment and satisfaction of the market information demands. In the next chapter, a framework for the assessment of those needs will be developed.

3. A Framework to Identify How to Offer Market Information

This chapter will be devoted to the identification of market information needs of SMEs in developing countries in particular. In order to find out in what way market information can be offered to these SMEs, it is important to understand the needs. Studies by Leonidou and Adams-Florou (1999), Prince and Laird (2002) and ITC (2005) will be centrally placed in this chapter, because these studies try to answer a similar question as this thesis. Furthermore, five hypotheses will be introduced related to the market information demands and the way to satisfy those demands. The hypotheses will be tested in chapter 4 with data from interviews conducted at CBI seminars.

It is relevant to clarify why to focus on SMEs in particular. Large firms have a lot of resources that can be devoted to the acquisition of information and their size usually also means that they are so well-represented in the market that they have good knowledge about the market. On the other hand, SMEs face problems to acquire market information. This is a reason for many SMEs not to start exporting activities (Darling and Postnikoff, 1985). As such, it is most important to target public market information at SMEs. This is reflected in literature, because most of the studies that identify market information needs focus on SMEs. Targeting SMEs in developing countries with market information will create potential for exports to developed countries. The desirable effect on welfare in the EU could be a justification for targeting this group of firms.

3.1 Market information needs of SMEs

General considerations

(23)

to this is in almost all cases the major problem. Larger firms do not suffer from this problem. This makes studying the information needs of SMEs in particular important.

The information needs of SMEs are mostly studied through empirical studies where interviews are conducted with staff of the SMEs. In the United Kingdom (UK), the topic of information needs of SMEs has received quite a bit of attention. It is recognised that most demanded market information is available in the market without any interference, but SMEs have problems finding the right sources of information. Trott and Martyn (1986) identify this important concept as the information gap. They executed a project on behalf of the Suffolk County Information and Library Service (SCILS). The purpose was to identify information needs of SMEs, acquaint firms with information services and assess the ability of the public library to satisfy the needs for 43 manufacturing and service SMEs in the country. In descending order of importance, marketing information, technical information on standards, information on business contacts, legal information and market research were identified. According to Trott and Martyn (1986), governmental institutions can act as brokers and awareness creators of the available information. This role would require regular contact with users through company visists, representation at exhibitions and seminars. Trott and Martyn (1986) advise governmental institutions intervening in the information market to be aware of their responsibilities in this role.

Information needs of exporting SMEs

(24)

onto that, interviewees for this research are asked to give a judgement on their feelings about offered market information services. Leonidou and Adams-Florou (1999) stick to the pure identification of needs in order of importance.

The quantity of data gathered by Leonidou and Adams-Florou (1999) is similar to this research. Their main findings on information need identification are in descending order: information on foreign customers, product aspects, market preference and pricing. Furthermore, they find that personal contacts are a more important source than impersonal sources when exporters are gathering information. This is a finding which goes beyond the methodology of this research. However, it is a relevant finding when dealing with market information needs. The outcomes do not differ substantially from the findings from Trott and Martyn (1986) in the previous section, but market orientation plays a more important role for exporting SMEs as the new markets are usually unknown.

Adding the needs of experts

In another influential study in the field of market information needs identification, Prince and Laird (2002) go a step further than Leonidou and Adams-Florou (1999) and also take the information priorities of export marketers and export experts into account. These people are suggested to often have a more thorough knowledge of the export process than the exporters due to their specialisation in the field. According to Prince and Laird (2002), export marketers can be defined as people with an education or significant experience in the field of export marketing often employed by large companies to support the export process. However, SMEs often lack resources to employ this kind of specialists. Export experts are defined as people with expertise about the export process who provide services to exporting companies. The authors stress that it is not sufficient to only look at the information needs of exporters when trying to achieve upgrading of export capabilities of SMEs. The demands of experts can also be seen as a valuable indication of what information exporters need. This addition by Prince and Laird (2002) to a study of the type by Leonidou and Adams-Florou (1999) is in line with the framework in this thesis. In accordance with Prince and Laird (2002), this thesis adopts an approach in which the opinion of experts who provide supporting services to the SMEs is taken into account. The role of export marketers is not considered, because SMEs often do not employ this kind of specialists as is indicated by Prince and Laird (2002).

(25)

conducted to gain an insight into the priorities. In total, twenty listed exporters and ten registered export experts from the United States East-Coast were questioned. The authors find that distribution issues, market preference, marketing mix issues, documentation, financial arrangements and legal issues are perceived as most important by the combination of exporters and experts. The study does not explicitly distinguish the findings between exporters and exporting experts. Due to the similar framework of the empirical analysis, the results of this study are very relevant for my research. However, Prince and Laird (2002) do not ground their findings in an extensive theoretical framework.

As Prince and Laird (2002) indicated, it seems appropriate to incorporate the information needs of experts into the analysis of information needs of exporting SMEs. The experts play a supporting role in the acquisition and analysis of market information by exporters. As such, it seems important to know whether the information demands of those experts (for example market information managers or export promotion agents) are similar to the information demands of exporters. Zwier (1979) studied the information search behaviour of specialists and non-specialists in the US House of Representatives. Zwier (1979) defines a specialist as a representative who has the topic under consideration in his or her personal political basket. He found that specialists execute a much wider information search and base their decisions on more sources of information than non-specialists. Non-specialists rely more on colleagues and intuition.

(26)

3.2Market information needs in developing countries

Turning the focus to developing countries, there is one study which is comparable to the previous studies, but pays particular attention to developing countries. The International Trade Centre (ITC) (2005) developed a methodology for assessing the demand and supply of trade information services focused on developing countries. It has implemented the so-called Business Information Review (BIR) methodology in fifteen developing countries. A BIR is a survey-based review of the trade information situation in a given country. This methodology consists of a four step approach. Firstly, the information needs and preferences of a sample of end-users are assessed. Secondly, the available institutional trade information services in a country are assessed. Thirdly, an exercise to match the demand and supply is conducted by drawing maps and identifying gaps. Finally, the first three steps together lead to the formulation of new strategies to improve the flow of market information. According to ITC (2005), this structural approach is the most systematic way to evaluate market information provision. Although I have taken on a somewhat different approach, the study of ITC (2005) forms the main reference for the empirical analysis in this thesis.

The first step in the study of ITC (2005) is very similar to the chosen method in this thesis. ITC (2005) suggests drawing up a spreadsheet to collect answers of participants on pre-defined information categories. The information categories to be used depend on the country of consideration. This last part is not in line with the methodology in this thesis, because the information categories in the next chapter have been defined in such broad terms that testing exactly the same set of needs for a mix of developing countries can be done. This facilitates comparison of information needs on a multinational level. However, ITC (2005) is able to achieve a higher degree of detail in information needs. This thesis takes the second step of the BIR methodology into consideration as well. The supply of market information was shortly described in the previous chapter and the developed questionnaires have been based upon an assessment of the supply of information in the EU. The main difference in this step is that ITC (2005) pays more attention to the local supply of market information in a developing country. Moreover, their study serves a practical purpose, whereas this thesis looks at the theoretical perspective. As such, fewer details on the exact supply are provided.

(27)

organisational level. These differences are caused by the fundamental difference between the study of ITC (2005) and this study: practical implementation versus considerations on a remedy for the market imperfection. This thesis looks at solving a market imperfection from a theoretical point of view, whereas the BIR methodology aims at giving practical advise to organisations in the field.

Despite the differences, comparing the outcomes is still relevant, because a major part of the steps in the BIRs have been taken in this research as well. From those fifteen BIRs the eight most important trade information needs of exporting firms and trade facilitators in the selected developing countries can be derived. In descending order of importance, those are: price information, business opportunities, potential buyers/importers, sector-specific studies, technical/quality standards, credit rating information, trends and trade statistics. Although this research has used a bigger sample than the researches by Leonidou and Adams-Florou (1999) and Prince and Laird (2002) and studied multiple countries, the results are not much different. The most interesting differences are that ITC finds that standards and trends are important types of information.

The study by ITC (2005) also identifies common limitations for local SMEs and local suppliers of information. The information gap identified by Trott and Martyn (1986) is found to be a problem for SMEs in developing countries. Furthermore, information is often not up-to-date, local institutions lack knowledge to help finding information and information is not specific enough for the case of individual exporters. Local suppliers of market information tend to have problems to supply information on distribution channels, consumer preferences in the export market and credit worthiness and credit rating of foreign companies. SMEs are left to the hands of international assistance to get this kind of information.

Based on the assessment of the study from ITC (2005) and the suggested differences in information needs between types of organisations with a different role in the previous section, the following first hypothesis is introduced be tested in the next chapter:

HYPOTHESIS 1:

Significant differences exist between the information demands of exporting SMEs and export supportive organisations.

(28)

compare catergories. Figure 1 illustrates the outcome of the information need identification exercise in the next chapter based on adding up weighted answers per information catergory. Looking at the importance of market access requirements, I will test a separate sub-hypothesis for this information category. Business contacts and match-making are directly related to selling a product and were considered to be the basic interests of exporters in the previous section. As a consequence, it is also interesting to test for differences between exporting SMEs and supportive organisations for these information needs clustered together. Finally, a third sub-hypothesis will be formulated based on trends in the European market (trends being the third most important type of information demanded) which can be distillated not only from consumer behaviour/trends, but also from statistical information such as consumption figures, import figures, export figures and production figures. These five categories together are considered in the separate test of hypothesis 1C.

Figure 1: Weighted identified information categories

0 100 200 300 400 500 600 700 Cou ntry info Impo rt fig ures Exp ort f igur es Con sum ptio n fig ures Pro duct ion figur es Con sum er b ehav iour /tren ds Tarif fs Mar ket a cces s re quire men ts Impo rt do cum ents Pack agin g Pre fere ntia l agr eem ents Com petit ive info rmat ion Bus ines s co ntac ts Dis tribu tion chan nels Logi stic s Pric e de velo pm ents Bus ines s su ppor t Inve stm ent p ossi bilit ies Fina ncia l sup port Prom otio n Trad e Fa ir in form atio n Org anis atio nal m atte rs Mat ch-m akin g Oth er: T imin g pr oduc t lau nch Factors W e ig h t

Source: CBI Research Report: Market Information Needs of BSOs and Exporters (2006)

HYPOTHESIS 1A:

Significant differences exist between exporting SMEs and export supportive organisations in the demand for information on market access requirements.

HYPOTHESIS 1B:

(29)

HYPOTHESIS 1C:

Significant differences exist between exporting SMEs and export supportive organisations in the demand for information on market trends in the EU.

The influence of cultural background

The demand for information in ITC (2005) does not show significant differences between the fifteen BIRs. The developing countries are located in four different continents: Africa, Asia, South-America and Eastern-Europe. This is another methodological equivalence with the current research. Only the number of countries considered (24) is larger in my methodology. Along the cultural dimensions of Hofstede (2001), it can be expected that differences exist between developing countries in the way market information is acquired and interpreted. Hofstede (2001) identifies five dimensions for which cultures can differ: power distance, individualism/collectivism, masculinity/femininity, uncertainty avoidance and long-term orientation. In particular, the dimensions uncertainty avoidance and long-term orientation are interesting in this case. Uncertainty avoidance relates to the degree that people in a society feel uncomfortable in a situation where the outcome is unknown. Long-term orientation is defined as behaviour of persistence, ordering relationships by status, thrift and having a sense of shame. Asian cultures tend to be rather willing to take risks and relatively long-term oriented. On the contrary, in Latin-American countries people generally are less willing to take risks. In Africa, uncertainty avoidance can be scaled somewhere in between Asia and Latin-America, but people are very much short-term oriented. These differences could have an impact on the way these cultures deal with market information demands. When uncertainty avoidance is an important aspect of a culture, actors can be expected to want as many details as possible about a new market to be sure that it is not too risky to enter. For this kind of people, detailed information on trends, developments of prices and logistics will have a higher value than for a person who is willing to accept more uncertainty when exporting. These cultural differences can be expected to manifest themselves in differences in information demands.

(30)

students from US, Spain and the Philippines. The findings suggest that high-context audiences like in the Philippines tend to overemphasise the importance of the visual effect. Although Callow and Schiffman (2004) do not focus on market information, their illustration of cultural differences in advertisement interpretation suggests that cultural background matters for the way information is acquired and interpreted. Hence, the following second hypothesis will be introduced to test for the role of cultural background in demanded information:

HYPOTHESIS 2:

The composition of information demands depends on the cultural background of the user of the offered market information.

When offering market information services to developing countries, it is important to know whether hypothesis 1 and 2 hold. This has an impact on the decision to offer the same market information to all recipients or to offer tailor-made solutions. The assessment of hypothesis 2 clearly differentiates this thesis from the work done by ITC (2005) as well as Prince and Laird (2002) and Leonidou and Adams-Florou (1999). This is mainly due to the fact that all three studies look at the level of individual countries. However, this research focuses on a broader picture in which offering market information to developing countries is approached from a “helicopter view”. The role of differences in cultural background is relevant within this framework. Another factor influencing the way market information can be offered to developing countries is the degree of familiarity with the provider of the market information in the next section. Three more hypotheses will be introduced adding the supply side of the market information to the analysis.

3.3The fit between demand and supply of market information

This section considers the match between supply of market information at the institutional level and the demand in developing countries as was suggested in the third step of the BIR methodology of ITC (2005). However, the aim of this thesis is findings ways to offer market information and not to look what information has to be supplied in order to satisfy the needs. The latter is the aim of ITC (2005). For this thesis, it is sufficient to understand the requirements to fit the supply to the demand. The degree of familiarity of a demander with the supplied market information is a factor in this.

(31)

In literature, it is suggested that differences in familiarity with supply may be expected between people with different roles. It is also argued that the export success of companies depends on availability and familiarity of information. Baum et al (2005) associate difference in familiarity with the aspiration level of organisational decision-makers and their role levels. The authors analysed the Canadian investment banks’ underwriting syndicate ties from 1952 to 1990 in order to test whether there is empirical support for this suggestion. The analysis reveals that the role of a certain person in an organisation has an impact on the efforts spent on getting familiar with information. Managers of SMEs do usually not have much time to spend on the search for information and familiarising themselves with institutions. On the other hand, staff of BSOs provides facilitating services to the SMEs. This means that it is part of their job to do research and establish links with institutions like public market information providers. According to Baum et al (2005), the different roles and accompanying different aspirations of decision-makers influences how much time a decision-maker spends getting familiar with information and the source of it. In line with this role differentiation, it seems reasonable to predict that staff of BSOs spend more energy on familiarising themselves with the services of a market information provider than managers of exporting SMEs do.

Export success of SMEs is often hard to quantify. It seems particularly difficult to quantify the contribution a supplier of market information has to the export success of an SME. Numerous studies have measured export success in terms of sales, but there are more ways to express this success. For example, increased employment and improved access to new markets are other factors to measure export success. Unfortunately, I do not possess quantitative data on either of these factors. However, due to the described importance of the relationship between familiarity with an information supplier and export success, I will use a proxy to measure the export success. The degree of satisfaction a user indicates to have with the provider of market information can be considered as such a proxy, because an exporter who has achieved significant export success can be considered more likely to feel positive about the services offered to him in becoming successful.

(32)

satisfaction, because it relates the concept of satisfaction to the consumption of EU market information based on feelings of consumers of a seminar, expressed through pre-seminar and post-seminar judgements. As such, all the three elements of this definition are covered. This definition will be adopted to quantify satisfaction as a proxy for export success throughout the rest of this thesis.

The relationship between familiarity and satisfaction with a service is not so obvious. Olson and Schober (1993) studied the nature of the so-called “satisfaction paradox”. This is defined as the state in which an individual is satisfied with an objectively unsatisfactory living condition. This might be caused by a situation in which the individual is not exposed to “true” satisfaction, because the individual is not familiar with possible better living conditions. The theoretical analysis employed by Olson and Schober (1993) has the aim of finding a way around the satisfaction paradox. The apparent presence of the satisfaction paradox is argued to contribute negatively to the overall well-being of a society. The lack of understanding (familiarity) of better possibilities and a lack of assistance from government are underlying causes for the persistence of the paradox. This can be used as an argument why higher degrees of familiarity with a service might be responsible for increased satisfaction. When a user of public market information knows a lot about the services of the provider, the user is more likely to see the potential of it and respond positively on the degree to which the service satisfies the user’s needs. Putting the pieces of the above discussion together, this leads to the following two hypotheses which are closely related to each other:

HYPOTHESIS 3:

The degree of familiarity with the services of the market information provider depends on type of organisation.

HYPOTHESIS 4:

Higher degrees of familiarity with the services of the market information provider are positively associated with export success (indicated by higher levels of satisfaction).

(33)

attention to the variable export success. I argue that this is either because these studies only look at information demands or matching demand and supply, or because the authors have not found a proper proxy to measure export success.

Gaining knowledge through familiarity

In the previous chapter, it was argued that exporters in developing countries often lack availability of market information and that there is a gap between the knowledge of these exporters and the offered market information. Creating awareness might be a way to increase knowledge on part of these SMEs. Söderlund (2002) studied the relationship between customer familiarity with a product and customer expertise about the product. His empirical study of customer satisfaction in Scandinavia suggests that higher levels of familiarity indeed lead to increased knowledge on behalf of the customer. Moreover, his findings indicate that higher levels of familiarity before purchase cause more extreme responses on customer satisfaction after purchase. When the service performance of the product is perceived high, customers that were very familiar with the product before purchase indicate higher degrees of satisfaction than customers with hardly any prior familiarity and vice versa. This is in fact also support for hypothesis 4.

An earlier study by Johnson and Russo (1984) also tried to link up product awareness with knowledge about the product. The authors try to answer the question whether product familiarity improves the ability of shoppers to learn new product information. The analysis is based on an older study by Johnson and Russo (1984). The so-called “enrichment hypothesis” is accepted meaning that existing knowledge facilitates the learning of new information. This finding is in line with the results obtained by Söderlund (2002). However, an “inverted u” hypothesis is also accepted stating that highly familiar shoppers may search less for information than moderately familiar shoppers, because they believe that existing knowledge is sufficient. Overall, the authors conclude that product awareness stimulates learning of new information about the product.

(34)

have. This would mean that investing in awareness positively affects knowledge about the export process in developing countries.

HYPOTHESIS 5:

A higher degree of familiarity with the services of the market information provider on behalf of SMEs in developing countries is positively associated with knowledge about the export process to the EU.

The considerations of Söderlund (2002) and Johnson and Russo (1984) leading to hypothesis 5 have not been given attention in comparable studies like ITC (2005). The aspect of knowledge improvement is probably (although not explicitly stated) assumed to be present. However, I feel it is necessary to test the relationship between familiarity and export knowledge, because it is related to the choice of policy makers on how to supply market information to SMEs in developing coutries. Offering market information might not only be about satisfying demands, but also about familiarising demanders with what is considered important from the supply side.

Overall, it is relevant for consumers in the EU that the highest possible effectiveness in increasing the chances of SMEs in developing countries to enter the EU market with their products is achieved. Testing the formulated hypotheses will give an insight into how this effectiveness can be achieved. Of course, the SMEs in the end will have to make an own step to the EU market, but facilitation in the best possible way will be a tool to achieve this.

4. Empirical Analysis: The Road to Effective Market Information

Provision

(35)

4.1Research Design

Data collection

The data for empirical analysis were collected from interviews with members of staff from exporting companies and Business Support Organisations (BSOs) from 24 developing countries. While positioned at CBI as an intern, I conducted those personal interviews to find out what their market information needs were and to see how satisfied they were with the offered market information services by CBI. A total number of 74 interviews were conducted during 7 seminars held in Rotterdam in the period from February to April 2006. Each interview took about 25-30 minutes. In total, 62 of the interviewed people were working for BSOs and 12 were working for exporting companies. CBI (2006) cooperates with 40 developing countries; the interviewees came from 24 of those developing countries. As CBI offers market information to developing countries in four continents, data was obtained from all those four continents. Table 2 specifies the included countries and the amount of interviews per continent.

Table 2: Countries of origin of interviewed people

Continent N interviews Countries

Africa 29 Egypt Uganda

Kenya Mozambique Tanzania South-Africa Ethiopia Zambia

Asia 28 India Vietnam

Pakistan Philippines Bangladesh Nepal Sri Lanka Indonesia

Latin-America 10 Colombia El Salvador

Ecuador Peru

Eastern-Europe 7 Albania Macedonia

Bosnia & Herzegovina Serbia & Montenegro Source: Adapted from CBI Research Report: Market Information Needs of BSOs and Exporters.

Solving Market Imperfections: How can EU Governmental Institutions offer Market Information to Developing Countries?