2. LITERATURE REWIEW
2.4 Overview of Advertising Industry in China
2.4.1 Spending Types Aspect
Advertisement investments in China divided into three product types: production material, life material and others types. The advertisement investments of life material took the lead and increased rapidly. The leading for products in the
regards in life material are food, household appliances, medicine and cosmetics which dominated the industry since late 1990s. In the spending on medicine advertising valued 12.74 billion Yuan, an increase of 222.63% compared to 1997, accounting for 11.82% of the total amount; spending on foods valued 10.04 billion Yuan, increasing by 53.01% compared to 1997, accounting for 9.31% of the total amount; for household appliances and cosmetics, the value are 8.8 billion Yuan, 7.3billion Yuan, an increase of 8.16%, 6.77% compared to 1997. The four main types are reached 36.05% in the whole real martial category.
The Types of Spending on Life Material
0
Figure 2 The types of spending on life material 2.4.2 Geographical Aspect
Due to the unbalanced geographical development, difference cultures and policies, the advertising industry is also having non-equilibrium development.
Since the reform and opening up, economy in coastal areas has developed
relatively fast, and its degree of development was remarkably higher than middle and western areas. Development of the advertising industry mirrored this trend, and this gap is becoming more apparent. According to statistics, among the 10 leading provinces, municipalities and directly affiliated cities regarding advertisement turnover, there are eight which are in coastal areas. In 2003, the sum of advertisement turnovers in Beijing, Guangdong, Shanghai, reached 55,551 billion Yuan, accounting for 51.5% of the total turnover in the whole
country. Moreover, advanced advertisement technologies and talents are also concentrated in these economically-developed areas.
2.4.3 Economically-Composed Aspect
According to operation units, advertising companies could divide into six classifications: state-owned enterprise, collective enterprise, private-owned enterprises, foreign-invested enterprises, affiliated enterprise and others. In 2003, the turnovers of affiliated enterprise are the fast growing in whole classifications, their units increased by 11.35% and their turnover increased by 54.75%. However, advertising market is composed by private-owned enterprise, state-owned and foreign-invested enterprise. To sum up, it can be concluded that the advertisement operation of state-owned and collective units were experiencing slight
fluctuations, while the private and co-operation enterprises were still maintaining their dynamic growth.
Advertising Operation Units in China
private-owned
Figure 3 Advertising operation units in China
The advertising agencies connected with the government units are the ones with a close relationship with government-owned media. It is also argued that many agencies engage in creating advertising, but cannot provide a full range of marketing services (Guo et al., 1995). However, Luk et al. (1995) point out that relationship management, a crucial marketing function in the Chinese cultural context, can be provided by many agencies. Because media firms are in “a
superior political position to advertising agencies,” in many cases they decide with whom they will deal and what kinds of advertising they will accept.
Therefore, in-house media agencies provide good connections to media, but most of the time they are unable to provide other marketing services (Luk et al., 1995).
Many multinational advertising agencies operate in China, serving mainly foreign-funded or joint-venture companies (Cheng and Frith, 1996,). They provide internationally skilled marketing services, but consider as their main problem connections to media organizations. For example, media rates vary according to how ‘foreign’ the advertised product is (Cheng and Frith, 1996).
Since WTO membership foreign advertising agencies are no longer required to operate in China through joint-ventures.
2.4.4 The Relative Issue of Advertising in China Table 3
The Impartment Issue in Advertising Industry in China
Year Issue
archae-society Yangshao culture
z Use pictures depict history Warring States
Period
Hang billings which relative with its own business in store
1883 The first magazine is published in Guangzhou
1942 The first media reform
1945 The second media reform
1949 Mainland China is unsettled and advertising industry is stagnant
1956 The hired media reform
1958 Television was introduced into China
1965 Cultural Revolution began
1950s-1960s Advertisement as a tool of political propaganda 1978
The watershed for Chinese politics
z Open doors and embarked on a market-oriented economy
1979 The first TV advertisement was broadcasted by CCTV 1980 10th National Broadcasting Working Forum was
convened
1982 The China Advertisement Association was founded 1989 Foreign Advertisement companies set up offices in
large cities in China 1992
The watershed for the Chinese advertising industry
z The advertising expenditure in the whole country broke through the 6 billion Yuan market
1994
The Advertising Law of the People’s Republic of China
The Internet has been the most rapidly adopted medium
2001 China joined into WTO officially
2002 China’s television advertising market was around $2 billion dollars
Source: edited by this research
2.5 Overview of Mass Media in China
Ideologically, the Communist Party sees mass media as tools in propagating socialist ideals and in executing Party Policies. The modern times media reform was preceded by three reforms in the history of the Chinese Communist Party (Staff Commentator, 1986). The first reform was launched on April 1, 1942, by the Liberation Daily in the Chinese in Communist guerrilla base of Yanan. The second reform was spearheaded in October 1945 by the New Chin Daily in Chonhqing, wartime capital of the Nationalist government. The third reform was led by an editorial in the People’s Daily on July 1, 1956.
All three reforms were aimed at better executing the Party’s policies and goals, the policies and goals themselves differed in different reform periods. The first two reforms coined with the Chinese Communist’s united front against the Japanese and the Nationalist government. Thus, the first one called for
unswerving loyalty to the Communist Party and the people; the second placed the people over the Party, with a view to rallying greater popular support against the Nationalist government. The third one was coordinated in response to Chairman Mao’s call for more criticism.
In contrast, the present one initially was launched to restore the public’s confidence in the Party and the media after the arrest of the Gang of Four and the conclusion of the Cultural Revolution in the mid-1970s. It was later crystallized to promote the Party’s “reform and open-door” policies. In short, the present reform differs from the previous ones in that it has been engaged in promoting economic reforms and greater openness.
2.5.1 Print Media
The growth of print media in China closely follows changes in Chinese politics.
The Culture Revolution began in 1965; the media seems to be at a standstill. In 1970, after then president, Liu Shaoqi, and a number of prominent “revisionist”
Party leaders were purged, only 21 magazines were published and newspaper titles were reduced to 21(Paul, 1994).
In China, publishing is tightly controlled by the Communist Party. Regular news-work meetings are held between newspaper editors and Communist leaders in some cities such as Shanghai and Wenzhou (Du, 1992; Wu, 1992).A great deal and types of print were determined by official rather than consumer needs.
Consequently, the print media faced great challenges when China embarked on a market-oriented economy in 1978. According to Editorial Department of PRC Yearbook (2002), the combined circulation of newspapers and magazines reached a peak of 310 million copies but down to 232 millions from 18 to 1991. The drop may be explained by the liberalization or loosening of official control in the print market in recently years.
2.5.2 Radio and Television
A number of radio and television receivers have became increasing fast in the 1980s. In 1980, there was less than 1 television receiver per 100 persons. By 1990, the figure had risen to 16.2 per 100 persons. A national survey conducted by China Central Television in 1987 showed that of the 1.07 billion people, 590 million (55%) were able to watch television. Among them, 370 million lived in cities, comprising 93% of the urban population, whereas 220 million lived in villages, accounting for only 33% of the rural population (Chen, 1992).
Wired broadcasting is a major communication link between the government and the rural populace. The wired broadcasting stations not only relay radio programs of central and provincial stations but also produce their own programs.
Wired broadcasting in China is a mass medium with a distinctive local flavor. The decline of wired broadcasting in China was due to the growth of television.
Since the middle of 1990s, the media in China has a series of changes. First of all, media tended to be multi-variant. TV stations increased their channels and columns, local cable TV stations were founded, economy channels were opened and programs were transmitted via satellite. All these changes gradually
weakened the monopoly post of television media, forming a competition environment. Newspaper is the second largest media body in China. The
emergence of newspaper groups changed newspaper agency’s operation organism, enabling multiple newspapers in one agency and multiple periodicals in one agency. Central newspaper agencies were supplemented with local versions.
Competition in newspaper market became more intensive.
2.6 Advertising in Consumer’s Market in China
2.6.1 Consumer behavior on advertisement in China
In China, television is the most exposure medium in China, as Table 4 and Table 5 show. After television, consumers are most exposed by printed advertisements and followed by radio and outdoor advertisement. The strata with least education, the working poor, spend the most time in listening to the radio. The effect of
television advertising is further strengthened by the fact that TV advertisements are the one that are the most accurately memorized by the audience.
Table 4
Audience exposure to advertising media Frequency of
exposure Daily Often Rare Never
TV ad 60.7 % 25.0 % 6.6 % 7.7 %
Radio ad 14.0 % 36.0 % 41.4 % 8.5 %
Printed ad 17.7 % 50.9 % 15.0 % 16.4 %
Outdoor ad 10.5 % 40.0 % 23.6 % 26.0 %
Source: O.G.Guo, F. Tong, H.Niu & L.S.C. Yip (1995), “Firms’ media Strategy in the Advertising Industry of China, in eds. K.Basu, A. Joy, & Z. Hansheng,
Proceeding of the Fifth International Conference of Marketing and Development, June 22-25, Beijing, p. 405
Table 5 Media use per consumer segment Media time per
day
Consumer segment
Working poor Salary class Little
rich Yuppies
Television time 136 min 139 min 143 min 146 min
Radio time 57 min 40 min 41 min 42 min
Newspaper time 44 min 43 min 52 min 60 min
Magazine time 46 min 52 min 67 min 61min
Source: Cui G. and Liu Q. (2001), “Emerging Market Segments in a Transitional Economy: A Study of Urban Consumers in China”, Journal of International Marketing, vol. 9, no. 1, pp. 91
Table 6 shows that consumers remember advertisement from radio better than from printed advertising. Outdoor advertising has a less long-lasting effect on audience. When the actual purchasing decision is made, the effect of TV advertising is still strong, but does indeed vary in different product groups.
The other mass-media promotion is not as important as information from the network of friends: the effect of friends’ opinions is the next most influential agent after TV advertising for all the product groups (see Table 5). This proves that traditional cultural influences on social relation still persist. In addition, the importance of exhibitions as a motivation for apparel purchase reinforces the principle that Chinese consumers want to investigate consumer durables before they purchase, rather than using the possibility to after-sales service or warranty.
Table 6
Buying motive, promotional media and product types TV ad Radio ad Print ad Outdoor
Source: O.G.Guo, F. Tong, H.Niu & L.S.C. Yip (1995), “Firms’ media Strategy in the
Advertising Industry of China, in eds. K.Basu, A. Joy, & Z. Hansheng, Proceeding of the Fifth International Conference of Marketing and Development, June 22-25, Beijing, p. 405
2.6.2 The relationship between Engel law and mass media spending The Engel law would suggest that increasing or decreasing changes in income translate into corresponding changes in mass media spending, but it does not imply that the share of income on mass media should be a constant. In hindsight, few economists would hypothesize a constant relationship between income and expenditures on a good over time, whether this good is inferior, a necessity, or a luxury (Landsburg, 1992). Basically, the share of spent on food is fewer, the money spent on improving life is more. The lower Engel’s coefficient reflects the developing of service industry is more prosperous.
However, the peasant still have 50% share of income on food expenditure；
That is, they don’t have extra money to spent on entertainment or others. On the other hand, the Engel’s’ coefficient of people living in cities is declining from 50% to 40% in the past 20 years.
Engel's cofficient
35 40 45 50 55 60 65
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
%
Rural Urban
Figure 4 Engel law between Rural and Urban in China
3. MODEL BUILDING AND HYPOTHESES
3.1Original PRC Models
Pointing out that multiple interpretation of what economic constancy means are possible, Wood (1986) introduced two regression equations, the time-trend constancy model and income-share constancy model.
The time-trend model, a regression version of the conceptualization used by McCombs (1972) and McCombs and Eyal(1980), is
Mt=βo+β1Dt+β2Ypt+ut (1) – Mt : money spending on mass media in year t
– β0 : constant term
– Dt : time variable equal to year t – Ypt : personal income in year t – ut : an error term
When,
– β1 = 0, there is no time trend in spending on mass media.
– β1 > 0, there is an upward trend in spending on mass media – β1< 0, there is a downward trend in spending on mass media.
The principle of relative constancy predicts that is equal to zero.
The income-share model describes the relationship between income and consumer spending on mass media directly, where the time-trend model expresses the relationship of consumer spending on mass media to time, controlling for disposable personal income. In detail, the income-share model is:
Mt=Ao+A1Ypt+ut (2)
– Mt : money spending on mass media in year t – A0 : constant term
– Ypt : personal income in year t – ut : an error term
When,
– A0 = 0, income-share is constancy
– A0 > 0, income share of media will fall with an increase in income – A0 < 0, income share of media will growth with an increase in income 3.2Hypotheses
From the idea of principle or relative constancy, these three hypotheses tested the long-term increasing growth of advertising expenditures (i.e., over 23 years). This study proposes the following hypotheses that one may expect:
First of all, it was hypothesized that, inconsistent with the principle of
relative constancy and the China advertising environment, advertising expenditure would be increasing fraction of yesteryear GNP over last two decades. The
hypotheses for the income-share constancy can be expressed as model 1.
The hypothesis 1 assumes that that change in national income —GNP, Rural Income, and Urban DPI—, will remain constancy with changes in the absolute amount of money pent on advertising.
Model1-1: Advertising expenditures1981-2003 =β0 +β1GNP + e
Model1-2: Advertising expenditures1981-2003 =β0 +β1Rural Income + e Model1-3: Advertising expenditures1981-2003 =β0 +β1Urban DPI + e
H0: β0= 0
Then, we add the lagged variable to test the regression in hypothesis 2. Model 2 is a representation of a dynamic regression model. A regression model is said to be dynamic if it contains a lagged dependent variable (i.e., variable at t-1, t-2) or lagged independent variable (Doran, 1989) Dynamic regression analysis was
performed to assess whether changes in mass media expenditures react
immediately to changes in GNP (or in other variables) or whether the effect of GNP (or in other variables) is spread over several time periods. In this study, dynamic regressions include both lagged dependent and independent variables;
they are aptly labeled autoregressive distributed-lag models. (Giffiths, Hill, &
Judge, 1993)
Model2: Advertising expenditures1981-2003 =β0 +β1 ad (t-1) +β2 GNP +β3 GNP
(t-1) + e
H0: β0=0
Third, it was expected that total advertising expenditures would not fluctuate significantly on the increase over time, holding national disposable income constant. The hypothesis for the time-trend can be expressed as model 3. This study also will divide to two periods to examine whether the time trend is happened or not in short term. Therefore, hypothesis 3 assumes that changes in proportion of spent on advertising in China will constancy over time.
Model3: Advertising expenditures =β0 +β1 time +β2 GNP +e H0:β1=0
According to 1992 was a milestone for China’s advertising industry, this study assumes that it is a path-diverting in 1992. Hypothesis 4 assumes that there is difference advertising expenditure between the year of 1992 before and after.
Therefore, we added the slope of trend dummy variable and the regression is model 4.
Model4: A advertising expenditures =β0 +β1 Dummy +β2GNP +e H0:β1=0
3.3Data Collection
The dependent variable is advertising expenditures, recorded in million of Yuan. The original intention of this article is to employ consumer expenditures as a dependent variable, but systematic data in China are unavailable. However, media products have an unusual characteristic which is their joint product nature.
Lacy & Simon (1993) provide that Media sell information and entertainment to consumers and space and time to advertisers. The products that service two markets with one production process are called joint products. McCombs noted (1972), “When they have more money, consumers and advertisers will spend more on mass media. When they have less, they will spend less on mess media. ”
According as the researches as above, therefore, this study uses the money spent in advertising as a dependent variable. This study would use the advertising expenditure included total expenditures and popular mass media in China (TV, radio, newspaper and magazine). The advertising data were prepared by China Advertising Almanac and data on money spent on advertising are available for the entire time series. The yearly data set, which contains data measured at yearly intervals from 1981 to 2003, for a total 23 observation.
In China, because the most of household’s income data are divided into two parts, countryside and city, and the imbalanced income between rural household and urban household, we decide to use the Gross National Product (GNP), the first independent variable, as a measure of general economic conditions to test all models. Besides, we also use rural income and urban DPI (disposable personal income) respectively to test the Model 1 in order to deal with especial stations in China. GNP is recorded in actual 100 millions of RMBs; rural income and urban DPI are recorded in actual Yuan. All three national income data were taken from China Statistical Yearbook (China Statistics Press, 2004).
3.4Data Analysis
This study used EViews5 fro all time-series regression analyses.
Specification-wise, all regression models were first log-transformed1 and then first-differenced. Mode l and model 2 were first run with aggregate advertising expenditures and then with each of the four mass media (TV, radio, newspaper and magazine).
1 Logarithmic transformation is a standard procedure in economic empirical analysis to alleviate problems of herteroscedasticity. An attractive characteristic of the double-log functional form —that made it widely popular in applied research—is that the slope coefficient b directly measure the elasticity of Y in respect to X (Gujarati 1988)
Because this study involved variables measured over time, it is necessary to test for the presence of auto correlation. If residuals at different time are
correlated, successive observations will then be related to each other (Ostrom, 1990).These result the so-called “spurious” regression, which may occur when the R2 is very high, but the Durbin-Watson (DW) value is extremely low. If the
Durbin-Watson value was larger then the upper bounds of dU, we assumed the absence of autocorrelation. If the Durbin-Watson value was larger then or equal to dL, but small than or equal to dU, then the test was inconclusive (Neter,
Wasserman, and Kutner, 1985). To control for autocorrelation, exact
maximum-likelihood regression is employed in the analysis (Kohn and Ansley, 1986), or Granger and Newbold (1974) recommended to first-order difference all variables (i.e., subtracting observations at t-1 from those at t) involved in the equation.
Moreover, the classical linear regression model requires that the error term be not serially correlated and variance must be the same. Heteroscedasticity is more likely to occur with cross-sectional data than with time-series data because
Moreover, the classical linear regression model requires that the error term be not serially correlated and variance must be the same. Heteroscedasticity is more likely to occur with cross-sectional data than with time-series data because