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Journal of Global Marketing
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The Persistence of Brand Value at Country, Industry, and Firm Levels
Yi-Min Chenaa Department of Asia-Pacific Industrial and Business Management, National University of Kaohsiung,
Nanzih, Kaohsiung, Taiwan
Online publication date: 25 June 2010
To cite this Article Chen, Yi-Min(2010) 'The Persistence of Brand Value at Country, Industry, and Firm Levels', Journal of Global Marketing, 23: 3, 253 — 269
To link to this Article: DOI: 10.1080/08911762.2010.487426 URL: http://dx.doi.org/10.1080/08911762.2010.487426
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ISSN: 0891-1762 print / 1528-6975 online DOI: 10.1080/08911762.2010.487426
The Persistence of Brand Value at Country, Industry,
and Firm Levels
Yi-Min Chen
ABSTRACT. Identifying the sources of a brand’s added value to improve the efficiency of marketing
activities has long been of central interest to international marketing and consumer behavior researchers since the 1990s. Meanwhile, studies of persistence have advanced our understanding of the antecedents of firm profitability. However, a study dedicated to persistent analysis on the determinants of long-term brand value has not yet been proffered. This study uses brand value as an economic performance measure to estimate relative persistence rates and test hypotheses on incremental country, industry, and firm effects in the context of Interbrand’s brand valuation formula. A persistence partitioning model is fitted to a new data set, and findings indicate that each effect is able to generate positive incremental benefits on brand value. Our results also show that each incremental firm, industry, and country effect has an equal persistent impact on brand value. This study concludes with a discussion of the results and offers some implications to international marketing strategy.
KEYWORDS. Persistence, brand value, international marketing strategy, MNCs
INTRODUCTION
Since the 1980s, an emerging trend of grow-ing foreign markets has pushed multinational corporations (MNCs) to introduce branded prod-ucts on a global basis. Brand management has been considered as a necessity of benefiting from scale and scope economies across bor-ders because of increasing global competition. What drives international marketing strategy in MNCs? What determines the success and fail-ure of brands around the world? These are some of the most fundamental questions confronting
An earlier version of this article was presented at the 2009 World Marketing Congress of Academy of Marketing Science (AMS). The author would like to thank two anonymous Journal of Global Marketing reviewers; the editor, Erdener Kaynak; and the AMS conference reviewers for their thoughtful comments on previous drafts of this article.
Yi-Min Chen is affiliated with the Department of Asia-Pacific Industrial and Business Management, National University of Kaohsiung, Nanzih, Kaohsiung, Taiwan.
Address correspondence to Yi-Min Chen, Department of Asia-Pacific Industrial and Business Manage-ment, National University of Kaohsiung, 700 Kaohsiung University Road, Nanzih, Kaohsiung 811, Taiwan. E-mail: ymchen@nuk.edu.tw
the international business and international mar-keting fields (Katsikeas, Samiee, & Theodosiou, 2006; Srinivasan & Hanssens, 2009). Thus, iden-tifying the sources of a brand’s added value to improve the efficiency of marketing activities has long been of central interest to international marketing and consumer behavior researchers since the 1990s (Aaker, 1991; Agarwal & Rao, 1996; Keller & Lehmann, 2006; Park & Srini-vasan, 1994; Rust, Lemon, & Zeithaml, 2004; Srinivasan, Park, & Chang, 2005). Although Keller and Lehmann (2009), following the cur-rent brand equity literature, conceptualize the
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drivers of long-term brand value in the context of Interbrand’s brand valuation formula, a study dedicated to persistent analysis on the determi-nants of long-term brand value has not yet been proffered.
Studies of persistence, the convergence process, on firm performance have been a key theoretical and empirical issue in the fields of industrial organization economics (IO) and resource-based view of the firm (RBV) since the 1970s. Although both the IO and RBV demonstrate the existence of industry and firm effects on firm performance (Bowman & Helfat, 2001; McGahan & Porter, 1997, 2002; Misangyi et al., 2006; Roquebert et al., 1996; Rumelt, 1991; Schmalensee, 1985; Short et al., 2007), the variance components studies have different perspectives about explaining the sources of firm performance that vary from the norm. Due to the existence of industry heterogeneity, IO adherents argue that industry effects are enduring, and that observed firm effects arise because industrial structure characteristics like impeding entry and limiting rivalry among participants favor business development. On the other side, recognizing rapid changes in industry concentration caused by changed cost conditions and not by alterations in the height of entry barriers, RBV adherents argue that firms achieve extraordinary profits in a line of busi-ness when they operate efficiently through skill or luck than their competitors do, and that ob-served industry effects may arise when they are transient compared to differences among firms. Therefore, the IO and RBV adherents have dis-agreed over the question of what persists longer to firm performance at industry and firm levels.
Although studies of persistence have signif-icantly advanced our understanding of the an-tecedents of firm profitability, they have tended to focus on firms with diversified business seg-ments in a single country context (i.e., the United States), treating country effects as external to firm performance (Makino et al., 2004). Recog-nizing the contributions of IO and RBV to com-petitive advantage, scholars have highlighted the importance of economic, political, social, cul-tural, and institutional differences across coun-tries and claimed that councoun-tries do matter in explaining the variation in behavior and
per-formance of MNCs in the field of international business and international management (Makino et al., 2004; Peng et al., 2008). While some have found important differences across coun-tries in the extent to which profit differences persists (Geroski & Mueller, 1990; Odagiri & Yamawaki, 1990) and shifted the focus of re-search from multiple-business firms within a single country to MNCs to explore the extent to which country effects explain the variation in the performance of foreign affiliates (Makino et al., 2004), few researchers compare persis-tence rates across countries in the international competitiveness especially when the globaliza-tion of markets has raised quesglobaliza-tions about the influences of national environments, including the impact of national cultures, and the appro-priateness of domestic industrialization policy toward competition. Therefore, this study exam-ines whether country effects explain more varia-tion in the persistence on firm performance with respect to industry and firm effects.
The variance decomposition studies have used two types of dependent variables as per-formance measures, raw accounting values such as return on assets (ROA) and value-based man-agement concepts such as economic profit, or economic value added (EVA) and market value added (MVA). While previous studies have mostly relied on conventional accounting value ROA to measure performance, the adoption of value-based measures, such as the consultancy Stern Stewart & Co.’s EVA, has been pioneered by Hawawini et al. (2003) to reflect increas-ing pressures from capital markets and corpo-rate control markets for managers to focus their strategies on value creation, such as economic performance (Haspeslagh et al., 2001), and de-compose the variance in firm profitability into components associated with industry and firm effects. The difference between ROA and EVA (or MVA) is that examining what drives ROA is not equivalent to examining what drives value creation or economic performance, as Hawawini et al. (2003, p. 1) argued that “raw accounting values of measures such as ROA account nei-ther for the cost of capital nor for the accounting policies that may distort the true value of the un-derlying measures, for instance, the value of as-sets.” Value creation occurs only when firms earn
returns greater than the cost of capital, which im-plies that value creation is a reasonable proxy for economic performance.
By overcoming the shortcomings of ROA measure, EVA indicating economic profit or op-erating performance in a given year reflects the concept of intangible earnings that are gener-ated by all of the business’ intangibles such as brands, patents, and R&D and management ex-pertise, which is a prudent and conservative ap-proach as it only rewards the intangible assets after the tangible assets have received their re-quired return. MVA indicating market-to-book value reflects the market’s expectation of the firm’s future operating performance (Hawawini et al., 2003). Similar to EVA and MVA meth-ods, brand value is a measure that indicates the economic profit of the brand, most valuable in-tangible asset, to its owner (Raggio & Leone, 2007).
Brand value is a measure of the output from a series of brand investments and initiatives not only from financial and economic perspectives used in EVA and MVA, but also from market-ing perspective over a long period of time (Ba-hadir, Bharadwaj, & Srivastava, 2008; Mizik & Jacobson, 2008; Simon & Sullivan, 1993). For example, brand value has three key elements— financial forecasting, role of brand, and brand strength—that fit with current corporate finance, branding, and marketing strategy theory and practice (Interbrand, 2007). Since the market capitalization represents the value of all tangible and intangible assets owned by the company, less all the debt owed by the company, brand value is a percentage of market’s valuation of a company. Despite the advances and new ap-proaches regarding to the issue of performance differences, the generality of results has been limited by the sparseness of data and the nar-rowness of conventional performance measures (McGahan & Porter, 2002). Acknowledging the increasing important role of brands (Keller & Lehmann, 2009; Madden, Fehle, & Fournier, 2006), this study therefore uses brand value as the performance measure to reflect the true value of brand assets that have direct shareholder value impact not only from economic profit but also from branding and marketing perspectives. In light of these important performance
connec-tions, exploring the persistence of brand value differences among firms is a salient issue in in-ternational marketing and strategic management research.
This paper is organized as follows. In the next section, a brief literature review considers the debates in strategy focused on the determi-nants of performance differences among firms. Previous research examining the persistence of industry and firm effects largely followed the model used in Mueller (1986) and McGahan and Porter (1999); the next section proposes a simi-lar decomposition model. The following section discusses adjustments necessary to account for capital costs, accounting conventions, and mar-keting principles when calculating the alterna-tive performance measure, the dollar value of a brand. The data sample used is discussed in the same section. Following the most commonly sta-tistical methodology discussion, this work uses the decomposition procedure to examine the per-sistence of country, industry, and firm effects on brand value. Although the empirical results show that each effect is able to generate positive incre-mental benefits on brand value in the future, the findings indicate that firm, industry, and country effects do not differ significantly regarding rates of convergence of long-term brand values. These findings cannot support the suggestions of the IO and RBV schools. Finally, this study concludes with a discussion of the results and offers final remarks.
IDENTIFYING THE DETERMINANTS OF FIRM PERFORMANCE For industrial organization economics and strategic management, a key theoretical and em-pirical issue is what determines the performance of a firm. Rumelt et al. (1996), discussing the historical evolution of strategic management re-search from its initial case-based orientation in the 1970s to a more theoretical basis, suggests that the field has shifted from an IO perspec-tive to a more recent RBV of the firm. From the resource-based perspective, a firm’s unique organizational practices, or firm factors, shapes its performance. Beginning with Schmalensee (1985), many studies, particularly those
published in the Strategic Management Journal, have focused on the relative importance of indus-try vs. firm factors on how well a firm performs. Industry Effect Versus Firm Effect
Traditionally, industry has been treated as the basic unit of analysis when evaluating firm and market performance. IO has generally viewed industry as a homogeneous unit and assumed that firms are alike in all economically important dimensions except for their size. In this context, industries are often characterized as having mar-ket power that is shared among the firms in the same industry (Bain, 1956; Scherer, 1970). In the late 1930s, Ed Mason, the originator IO, ar-gued that market structure contributed greatly to profitability (Mason, 1939; Roquebert et al., 1996).
IO models theoretically assume that industry structure shapes firm conduct, which in turn de-termines firm performance. Recently, the results of the IO research suggest that there is likely a reciprocal relationship between the external en-vironment and the firm’s strategy that affects the firm’s performance (Henderson and Mitchell, 1997; Oliver, 1997; Stimpert & Duhaime, 1997). However, all firms in a typical industry are clearly not alike, because they follow very dif-ferent strategies along a variety of dimensions, including degree of vertical integration, level of fixed costs, breadth of product line, extent and media composition of advertising, outlays on re-search and development (R&D) as a percentage of sales, geographically served markets, nature of distribution channels used, and presence of in-house servicing capacity (Caves & Porter, 1977). These variations reflect differences in the com-petitive strategies of the firms in that industry.
During the 1970s and 1980s, there are major shifts in research focus and the units of anal-ysis in the fields of IO and strategic manage-ment perspective of RBV. The main reason for the shift is the inability of IO to explain in-traindustry heterogeneity in firm profitability. Additionally, the IO studies at the time were challenged in the 1980s by strategic manage-ment researchers, pointing out that the IO ap-proach tended to assume that industry structure was fixed independently of firm performance
and that any resource differences developing be-tween firms would be short lived due to highly mobile resources across firms (Rumelt et al., 1996). In other words, while IO is based on the structure-conduct-performance framework, its insistence on making industry the main unit of analysis would render purely deterministic theories irreconcilable. Strategic management, however, focuses increasingly on the individual firm factors to explain differences in intraindus-try performance.
Traditional strategy research has taken pri-marily an adaptive view of organizational and environmental change, and argued that many firms can adapt their strategies and capabili-ties as competitive environments change. Thus, in this view, the distribution of capabilities in any given industry reflects purposive manage-rial action (Ansoff, 1965; Miles & Snow, 1978; Porter, 1980). Based on the RBV, strategic man-agement researchers argue that firm-specific id-iosyncrasies in the accumulation of valuable, rare, and specialized resources create sustained competitive advantages (Amit & Schoemaker, 1993; Barney, 1991; Collis, 1991; Peteraf, 1993; Wernerfelt, 1984). In fact, as early as the late 1930s, Nourse and Drury (1938) suggested that firm-specific influences, such as management skills, basically determined firm advantages and performance. Since company strategies differ between firms within an industry, the bundle of idiosyncratic attributes that each firm possesses becomes different (Nelson, 1991).
Impressed with Schmalensee’s (1985) study, but dissatisfied with the unexplained 80 per-cent of the variance in industry rates of re-turns on assets in that study, Rumelt (1991) extends Schmalensee’s variance decomposition methodology by furthering decomposing the variance in profitability into not only cor-porate effects—what Schmalensee called firm effects—but also business-segment effects to adjust for Schmalensee’s large degree of er-ror. Rumelt’s results are very different from Schmalensee’s. Schmalensee (1985) found that industry effects played a central role, and business-segment effects played a negligible role, in determining the variance of firm per-formance. Rumelt (1991), on the other hand, found that industry effects could only explain
around 9% of the variance in long-term profits, but business-segment effects could explain more than 44%. These two studies reignite the debate over the relative influences of industry- and firm-level factors as determinants of firm profitability in cross-section studies.
Country Effect
Does country matter? By asking whether in-stitutions, tariffs, regulations, and rules mat-ter, or government makes a difference among economies across time and space, North (1990) constructs a theory of institutions and institu-tional change to specify exactly what institutions are, how they differ from organizations, and how they influence transaction and production costs and therefore the profitability of engaging in eco-nomic activities. Shifting the focus of attention from firm performance to the performance of the nation and industry, Porter (1990, p. 29) ar-gues that the influence of the nation on interna-tional competitive performance of firms occurs through the ways in which a firm’s proximate environment shapes its competitive success over time.
Since national institutions differ in creating an hospitable environment for cooperative so-lutions to complex transactions, as the stabil-ity and efficiency of such institutions determine the costs of doing business in a given country, the effects of institutions on the performance of firms varies significantly across countries (Delios & Henisz, 2000; Kostova & Zaheer, 1999; Makino et al., 2004; Westney, 1993; Za-heer & ZaZa-heer, 1997). For example, Knack and Keefer (1997) found that social capital and norms vary widely across countries and strong norms of trust and trustworthiness facilitate eco-nomic outcomes and development; then firms can lower the cost of monitoring and enforcing contracts and hence improve their performance (La Porta et al., 1997). In addition, differences in the relative cultural distance between coun-tries have not only been an important concern at the national level (Hofstede, 1980; Ghemawat, 2001), but also in the study of strategies and or-ganizational characteristics of MNCs (Brouthers & Brouthers, 2001). Whereas some studies have indicated a negative relationship between
cul-tural distance and MNCs’ performance (e.g., Luo & Peng, 1999), other studies have found a positive effect (Gomez-Mejia & Palich, 1997; Morosini et al., 1998; Park & Ungson, 1997). Prior research thus provides mixed empirical ev-idence regarding the specific influence of cul-tural distance.
While the above mainstream approaches, par-ticular strategic management perspective, have significantly advanced our understanding of the antecedents of what about country, industry and firm factors matter on firm performance. On the other side, from the perspectives of market-ing and consumer behavior, understandmarket-ing the determinants of brand value has also investi-gated at three levels of analysis: (i) firm effect (H¨aubl, 1996; Keller & Lehmann, 2009; Raggio & Leone, 2009; Srinivasan & Hanssens, 2009); (ii) industry effect (Ailawadi, Lehmann, & Neslin, 2003; Keller & Lehmann, 2009; Pappu et al., 2007); and (iii) country effect (G¨urhan-Canli & Maheswaran, 2000; Han, 1989; Han & Terp-stra, 1988; H¨aubl, 1996; Hong &Wyer, 1990; Leclerc et al., 1994; Pappu et al., 2007). For ex-ample, considering a strong brand benefiting to a firm’s growth, Nike revenue grew from $693 million in 1982, when it sold primarily running, tennis, and basketball shoes to teenage and adult males in the domestic market, to almost $18 bil-lion in 2007, when it sold many products across a wide variety of industries to all types of con-sumers in countries all over the world (Keller & Lehmann, 2009). Thus, the ability to improve the odds for success of new products that are launched as category extensions (firm effect), across many market segments (industry effect), and across geographical country borders (coun-try effect) is of significant importance to long-term brand value. In addition, from a specific firm’s perspective, Raggio and Leone (2009) ar-gue that brand value will vary depending on the firm that owns the brand, as different firms may be able to capture more or less of the potential value of the brand. In other words, the differen-tial impacts of each effect on brand value demon-strates the relevance of distinguishing between the possible strategic roles of brand, and long-term brand value that will depend on how well a firm understands and recognizes the potential of a brand, as well as how well a firm capitalizes on
that brand potential in the marketplace (Keller & Lehmann, 2009). Despite an extensive literature on firm, industry and country effects on brand value, a systematic examination for understand-ing the persistence of each effect on long-term brand value is lacking. In other words, with re-spect to the importance of each effect, what ac-counts for the persistence on brand value?
THE MODEL AND ITS OPERATIONALIZATION The Model
Recent researchers, including Mueller (1986), Jacobson (1988), Waring (1996), McGahan and Porter (1999), and Bou and Satorra (2007), have examined the persistence of firm profits, and be-ginning McGahan and Porter (1999), the indus-try and firm effects are decomposed into fixed components and incremental components. Since persistence is defined as the percentage of a firm’s profitability in any period before period t that systematically remains in period t (Waring, 1996), persistence is directly relevant to ques-tions of sustainability in the incremental com-ponents of effects (McGahan & Porter, 1999). Thus, this study defines persistence as the frac-tion of incremental component at time t− 1 that also rises at time t.
Investigating the persistence of firm, indus-try, and country effects relies on the follow-ing steps of persistence analysis, which is sim-ilar to McGahan and Porter (1999). The brand value of each firm is partitioned into firm, in-dustry, and country effects; we calculate the per-sistence in the incremental components of the effects on brand value; we test hypotheses that confirm to the IO and RBV views of relative rates of persistence. First, we partition the brand value of each firm into firm, industry, and coun-try effects by using the following descriptive model: rijt= µ+ it αitdit+ jt βjtdjt+ φijt (1)
In this model, rijt is the brand value on assets (BVA) of the firm in industry i in country j at
time t. BVA is equal to a firm’s brand value over its assets each year. µ denotes the average brand value over all firms in all years. αit represents the incremental brand value associated with par-ticipation in industry i in year t. The dummy variable, dit, is equal to 1 if the observation ap-plies to industry i at time t, and 0 otherwise. βjt represents the incremental brand value associ-ated with country-of-origin in country j in year t. The dummy variable, djt, is equal to 1 if the observation applies to country j at time t, and 0 otherwise. φijtis the residual in the regression and the incremental brand value specified to the firm in industry i in country j at time t.
Second, the earlier of the introduced effects tends to capture the increment that is jointly determined when partitioning the brand value (McGahan & Porter, 1999). In addition, the IO and RBV schools offer different predictions about the relative rates of persistence in coun-try, induscoun-try, and firm effects. For example, an IO view suggests that incremental country and industry effects should persist longer than incre-mental firm effects. In contrast, a RBV view suggests that incremental firm effects should persist longer than incremental country and in-dustry effects. Thus, the set of estimates is ob-tained by introducing the means in an order: country, industry, and firm effects, which is more consistent with an IO view; the set of es-timates is obtained by introducing the means in an order: firm, industry, and country ef-fects, which is more consistent with a RBV view.
Let’s first estimate the coefficients in equation (1) by introducing the means in an order: firm, industry, and country effects, and in the follow-ing procedures: (i) We estimate µ by usfollow-ing the average BVA of all observations on firms where the average is weighted by size in assets. (ii) The industry effects, αit, are obtained from the weighted average of residual BVA of firms in in-dustry i at time t after subtracting µ. (iii) The es-timates of country effects, βjt, are obtained from the weighted average of firm’s BVA in country j at time t after subtracting both µ and αit. (iv) The estimates of firm effects, φijt, are obtained from subtracting all of the, µ, αit, and βjt. Then, we use the following equation to calculate the BVA above or below the norm for each firm in
industry i in country j at time t: γijt= it αitdit+ jt βjtdjt+ φijt (2)
Following Muller (1986), Waring (1999), and McGahan and Porter (1999), we stipulate that, for each firm, the abnormal BVA, γijt, and each of the effects in Equation 2 consists of a fixed com-ponent and an incremental comcom-ponent. Thus,
γijt= F γ ij + I γ ijt (3a) αijt= Fijα+ I α ijt (3b) βijt= Fijβ + Iβijt (3c) φijt= F φ ij + I φ ijt (3d)
Equations 3a through 3d indicate that the ab-normal BVA and each of the effects of two terms. In each equation, the first term represents a fixed component (F ) that is constant over the entire period, and the second term represents an in-cremental component (I ) that is the amount of the effect in a specified year that does not arise in all of the other years in which the firm is represented in the data set (McGahan & Porter, 1999). Following the previous studies, we also stipulate that the incremental component of ab-normal BVA may follow a first-order autore-gressive process, which is of central interest in evaluating persistence: Iγijt= ρijI γ ijt−1+ k γ ijt (4a)
Iαijt= ρIn,ijIαijt−1+ kαijt (4b) Iβijt= ρCn,ijI β ijt−1+ kβijt (4c) Iφijt= ρFm,ijI φ ijt−1+ kφijt (4d) In Equations 4a through 4d, ρij, ρIn,ij, ρCn,ij, and ρFm,ijrepresents the persistence of each ef-fect, which is the fraction of the incremental component at time t − 1 that also arises at time t. The terms kγijt, kα
ijt, k
β
ijt, and k
φ
ijtare random dis-turbances drawn from normal distributions with a mean of zero and unknown variances. Substi-tuting the autoregressive values of Equations 4a through 4d into Equations 3a through 3d, we can
represent the abnormal BVA of each firm on the following expressions:
γijt= f
γ
ij + ρijγijt−1+ εijt (5a) αijt= fαij + ρIn,ijαijt−1+ ξijt (5b) βijt= fβij + ρCn,ijβijt−1+ ηijt (5c) φijt= f
φ
ij + ρFm,ijφijt−1+ θijt (5d)
Each of the intercept terms, fijγ, fijα, fijβ, and fijφ in Equations 5a through 5d is a sim-ple function of the fixed component, e.g., fijφ= (1− ρFm,ij)Fijφ. The objective of this study is to obtain the estimates of the persistence rate for each effect on BVA, ρij, ρIn,ij, ρCn,ij, and ρFm,ij. Judging whether there is a convergence process toward the mean BVA depends on the follow-ing criteria (takfollow-ing an example of the estimated rate of persistence in firm effects, ρFm,ij): (i) If ρFm,ij<|1|, then we have evidence to show that the incremental components of the firm effect converge to zero over time. While the estimates of 0 < ρFm,ij< 1 suggests that an especially good year at time t− 1 on brand value yields positive benefits in year t, the estimates of −1 < ρFm,ij<0 suggests that an especially year at time t − 1 has less-than average BVA at time t. (ii) If ρFm,ij>|1|, then we have evidence to show that the convergence process is incom-plete. While a finding of ρFm,ij> 1 imply an accumulation over time in incremental firm ef-fects rather than a convergence to zero, a finding of ρFm,ij<−1 imply an amplifying oscillation over time in incremental firm effects (McGahan & Porter, 1999).
The Operationalization
Brands have the ability to create significant economic value for the businesses they serve, and brand valuation approach is a derivative of the way businesses and financial assets are eco-nomically valued (Das, Stenger, & Ellis, 2009). The economic model of value holds that share prices are determined by smart investors who care about just two things: the cash to be gen-erated over the life of a business and the risk of the cash receipts (Stewart, 1991). Value-based
economic measures of performance introduced by Stewart can reflect the concept of residual income, i.e., income that is adjusted for capital costs and hence risk as well as the time value of money. This study following the concept of value creation uses brand value on assets (BVA), a firm’s brand value divided by total assets, as a proxy of economic profitability for the brand-owning company.
BVAt = Brand Valuet/Total Assett (6) BVA is used as the dependent variable in the current study. Since the 1990s, market-ing practitioners and academics alike have pro-vided several definitions and diverse approaches for the measurement of brand value (Keller & Lehmann, 2009; Raggio & Leone, 2007). In gen-eral, the existing brand value research can be differentiated between the financial and the cus-tomer perspectives. Whereas the financial per-spective focuses on providing the financial esti-mate of a brand’s value as an asset on the balance sheet (Bahadir et al., 2008; Mizik & Jacobson, 2008; Simon & Sullivan, 1993), the customer-based perspective is more concerned with under-standing the nature of consumer decision making and identifying the sources of a brand’s added value to improve the efficiency of marketing ac-tivities (Keller & Lehmann, 2006; Rust et al., 2004; Srinivasan et al., 2005). Although differ-ent elemdiffer-ents, e.g., future earnings, replacemdiffer-ent costs, premium prices, consumer preference, and attitude, used in each perspective lead to a lack of consensus on brand valuation, both perspec-tives agree that brand value can contribute to firm performance by enhancing efficiency and effectiveness of marketing programs, prices and profits, brand extensions, and competitive ad-vantages, such as resilience against competitors’ promotional pressures, or creation of barriers to competitive entry (Zas et al., 2009). Therefore, to make brand value comparable to business around the world, the current study uses the Interbrand’s brand valuation methodology to reflect both the financial and marketing assessments, which is calculated according to the most widely accepted and used valuation principles in both corporate finance and marketing theory and practice, of a company’s brand.
Brand value is calculated as net present value (NPV) or today’s value of the earnings the brand is expected to generate in the future (Interbrand, 2007; Keller & Lehmann, 2009). The Interbrand involves three key elements to measure brand value: financial forecasting, role of brand, and brand strength. All of these elements are cen-tered on the intangible earnings, the earnings generated by all of the business’ intangibles such as brands, patent, and R&D. Since intangible earnings include the revenues for all intangibles used in the business, the Interbrand uses the role of brand to identify the earnings that are specif-ically attributable to the brand. Thus, the role of brand (R) is the percentage of intangible earn-ings that are entirely generated by the brand. To derive the NPV of the forecast brand earnings for five years, the Interbrand uses a discount rate to represent the risk profile of these earnings. This discount rate is called the brand strength (S). Following these assessments, brand valua-tion methodology can be expressed as:
Brand Valuet = Intangible Earningst×Rt+NPV × t+5 v=t+1Intangible Earningsv× Rv× Sv 5 (7) Intangible earnings are the operating profits less operating costs, applicable taxes, and the cost of all of the capital used to produce these earnings. The capital used is the sum of the eq-uity capital and debt capital. The adoption of in-tangible earnings is intended to reflect economic consequences of a firm’s strategic intangible as-sets, which is ignored by the traditional account-ing measures (Haspeslagh et al., 2001; Stewart, 1991). Based on balance sheets of the brand-owning companies and annual reports from fi-nancial analysts, the recognition of brands as intangible assets, revenues, and costs for cal-culating intangible earnings can be identified. Unlike other intangible assets, e.g., patents and R&D, that have an identifiable economic life, brands with an infinite economic life are con-sistent with several accounting standards—such as International Accounting Standards (IAS) 36 and 38, US GAAP, FASB 141, and UK FRS10
(Interbrand, 2007). Besides reflecting the finan-cial worth of a brand, the Interbrand assesses the in-depth marketing activities of the brands from a global perspective by referring to a wide array of primary sources, such as consulting val-uations from the networks of brand valuation ex-perts around the world, and secondary sources like Datamonitor, ACNielsen, Gartner, and Hall & Partners.
The risk profile, brand strength, of the future expected earnings includes two parts: the time value of money and the risk of the earnings ac-tually materializing. The time value of money is virtually “risk-free” and at a rate as low as government bonds or a similar risk-free invest-ment. The risk that the forecast earnings will actually materialize is an asset-specific risk rate that scores seven factors of brand strength with relative weights, leadership, stability, market, in-ternational presence, trend, marketing support, and legal protection. Therefore, the assessment of brand strength is a structured way of assessing the specific risk of the brand (Interbrand, 2007).
DATA AND STATISTICS Data
Since financial accounting standards for valu-ing intangible assets vary across countries, many different methods for brand valuation have been proposed. To examine the persistence of each effect on global brands, this study needs a reli-able brand value database—the Interbrand brand valuation methodology—as the economic profit of the firm. In 1988, the Interbrand developed and introduced the first valuation of a portfolio of brands that used a brand-specific valuation approach. With its pioneered technique of mea-suring brands as intangible business assets, In-terbrand has continuously updated and improved the valuation approach to make it the global in-dustry standard of brand valuation to publish the annual ranking of the Best Global Brands by brand value.
Since the year of 2000, the Interbrand has co-operated with BusinessWeek magazine to publish annual rankings of the top 100 global brands. From these annual rankings, the data set
of global brand values covers the 8-year period from 2000 to 2007. Followed by the Interbrand’s methodology, the data was screened in the fol-lowing criteria: the brand-owing company must have substantial publicly available financial data, the brand must have at least one-third of revenues outside of its country-of-origin, the brand must be a market-facing brand, the EVA must be pos-itive, and the brand must not have a purely B2B single audience with no wider public profile and awareness. These criteria exclude brands such as Wal-Mart, which is not sufficiently global. Wal-Mart is a valuable brand; however, it is not consistently branded in some international mar-kets. From the Best Global Brands database, the final sample contains 774 observations for 123 firms across 42 product categories and 16 coun-tries. The country-of-origins and the number of final sample firms are 1 firm from Bermuda, Denmark, Finland, Ireland, and Spain, respec-tively; 3 firms from Netherlands, South Ko-rea, and Sweden, respectively; 5 firms from Italy; 6 firms from Switzerland and the United Kingdom, respectively; 8 firms from Japan; 9 firms from France;10 firms from Germany; and 65 firms from the United States.
Statistics
To calculate the persistence in the incremen-tal components of the effects on BVA, we fol-low the previous assumption that the incremental component may follow a first-order autoregres-sive process, AR(1). McGahan and Porter (1999) show that the biased estimates of the persistence rate yielding from ordinary-least-squares (OLS) estimation can be corrected by using the formula developed by Nickell (1981), and concluded that the OLS estimation is more efficient than Nickell’s formula. Since there is no significant difference between the OLS estimates and un-biased estimates, we only adopt the OLS esti-mation, collect the estimates of persistence rate from the firms in our data set, and average across firms by weighting each persistence estimate by the inverse of the variance of the estimate.
In order to calculate the sampling variance of the estimate of ρFm,ij, for example, the cur-rent study follows the standard formula for the sampling variance, i.e., V ar(ρFm,ij)= σφ2/(n×
TABLE 1. Hypotheses About Relative Rates of Persistence in the Effects
Hypothesis Rationale
ρIn,ij> ρFm,ij, and ρCn,ij> ρFM,ij The IO view
ρFm,ij> ρIn,ij, and ρFm,ij> ρCn,ij The RBV view
Note. ρFm,ij, estimated rate of persistence in the firm effect; ρIn,ij,
estimated rate of persistence in the industry effect; ρCn,ij,
esti-mated rate of persistence in the country effect.
V ar(φijt)), and the standard formula for the pop-ulation variance with the inclusion of the es-timated persistence rate, esr(ρFm,ij), i.e., σφ2=
(nV ar(φijt)− est(ρFm,ij)2nV ar(φijt−1))/n− 2 , n represents the number of years of firm data. This approach is also expressed on McGahan and Porter (1999) study. Substituting the later formula of the population variance into the for-mer expression, the sampling variance of the per-sistence estimate of ρFm,ij<|1| is given by
Var(ρFm,ij)=
Var(φijt)− est(ρFm,ij)2Var(φijt−1) (n− 2)Var(φijt−1)
(8) From the previous literature, the IO and RBV schools have different views about the estimated rates of persistence on the incremental compo-nents of country, industry, and firm effects, i.e., between ρCn,ijand ρFm,ij, and between ρIn,ijand ρFm,ij. Table 1 shows the formal hypotheses un-der the IO and RBV views that the IO school suggests greater persistence in the incremental industry effects and in the incremental coun-try effects than in the incremental firm effects, i.e., ρIn,ij> ρFm,ij, and ρCn,ij> ρFn,ij. The RBV school suggests greater persistence in the incre-mental firm effects than in the increincre-mental in-dustry effects and in the incremental country ef-fects, i.e., ρFm,ij> ρIn,ij, and ρFm,ij> ρCn,ij. This investigation uses the t-statistic to test these hy-potheses of significant differences between the pair of persistence estimates as implied under the IO and RBV views. If empirical results are con-sistent in both sets of estimates, then we interpret the IO and RBV perspectives of the persistence of brand value as robust.
EMPIRICAL RESULTS
Table 2 shows the empirical results of the es-timated effects and persistence rates in two pan-els. The first section of each panel indicates the average estimates of the fixed and incremental components of the effects, and the second sec-tion of each panel shows the estimated rates of persistence of the effects. In partitioning brand values, the earlier of the introduced effects tends to capture the increment that is jointly deter-mined (McGahan & Porter, 1999). Thus, adher-ents to the IO view claim that the set of esti-mates is obtained by introducing the means in an order: country, industry, and firm effects. On the other side, adherents to the RBV view claim that the set of estimates is obtained by introduc-ing the means in an order: firm, industry, and country effects. After estimating the influences of each effect with these two sequences of in-troduction, this study focuses on the persistence in the incremental components of effects. As a result, panel a in Table 2 describes persistence when effects are estimated in an order that is more consistent with the RBV view, and shows that the incremental country, industry, and firm components are large in relation to the average absolute value of each effect. The fixed compo-nent of each effect is small in average absolute value. The second section of panel a reports the OLS estimates of persistence in the incremental effects, and shows that the incremental compo-nent of the firm effect is estimated to persist at an average rate of 35.8%, that of the industry effect is estimated to persist at 34.8%, and that of the country effect is estimated to persist at 23.4%. All of these estimated persistence rates are be-tween 0 and 1, which suggests that each effect at time t−1 year for a firm yields positive ben-efits on the next year t as well. In other words, the empirical findings show that the convergence process is complete and toward the mean brand value in the long run. To test hypotheses about the relative persistence rates of the RBV view in Table 1, an aggregated t-statistic of 0.09 can-not reject the null hypothesis that ρFm,ij= ρIn,ij, and an aggregated t-statistic of 1.22 also can-not reject the null hypothesis that ρFm,ij= ρCn,ij. The results cannot support the suggestions of the RBV school.
TABLE 2. Empirical Results of Estimated Effects and Persistence Rates
Estimated effects Country (βjt) Industry (αit) Firm (φijt) Order of introduction: firm, industry, country
Average 0.930 0.000 0.570
Standard deviation 2.610 0.003 1.588
Average fixed component –0.001 –0.000 0.004
Average incremental component 0.931 0.000 0.566
Persistence rates ρCn,ij ρIn,ij ρFm,ij
Average OLS estimate 0.234 0.348 0.358
Std. dev. OLS estimate 0.006 0.007 0.008
Order of introduction: country, industry, firm
Average 0.368 0.278 1.759
Standard deviation 1.013 0.452 10.599
Average fixed component 0.001 0.000 –0.024
Average incremental component 0.367 0.277 1.783
Persistence rates ρCn,ij ρIn,ij ρFm,ij
Average OLS estimate 0.346 0.354 0.255
Std. dev. OLS estimate 0.001 0.008 0.006
Panel b in Table 2 describes persistence when effects are estimated in an order that is more consistent with the IO view, and shows that the incremental country, industry, and firm compo-nents are large in relation to the average abso-lute value of each effect. The fixed component of each effect is small in average absolute value. The second section of panel b reports the OLS estimates of persistence in the incremental ef-fects, and shows that the incremental component of the country effect is estimated to persist at an average rate of 34.6%, that of the industry effect is estimated to persist at 35.4%, and that of the firm effect is estimated to persist at 25.5%. All of these estimated persistence rates are between 0 and 1, which suggests that each effect at time t-1 year for a firm yields positive benefits on the next year t as well. In other words, the empiri-cal findings show that the convergence process is complete and toward the mean brand value in the long run. To test hypotheses about the rel-ative persistence rates of the IO view in Table 1, an aggregated t-statistic of 0.75 cannot reject the null hypothesis that ρIn,ij= ρFm,ij, and an ag-gregated t-statistic of 0.71 also cannot reject the null hypothesis that ρCn,ij= ρFm,ij. The results cannot support the suggestions of the IO school. Table 3 summarizes the results of the tests on the relative estimated persistence rates on brand value.
DISCUSSION, CONCLUSIONS, AND IMPLICATIONS
This study explores the persistence in the in-cremental country, industry, and firm effects on brand value and extends recent persistence de-composition research in two ways. First, this work uses brand value as an economic per-formance measure to reflect the importance of brand assets to firm profitability. Second, besides focusing on the effects of industry and firm, this investigation incorporates country factors as an additional determinant of global brand value cre-ation into the persistence decomposition model
TABLE 3. Results About Relative Rates of Persistence in the Effects
Hypothesis Rationale Finding
ρIn,ij> ρFm,ij, and
ρCn,ij> ρFm,ij
The IO view Unsupported in partitioning consistent with the IO view
ρFm,ij> ρIn,ij, and
ρFm,ij> ρCn,ij
The RBV view Unsupported in partitioning consistent with the RBV view Note. ρFm,ij, estimated rate of persistence in the firm effect; ρIn,ij,
esti-mated rate of persistence in the industry effect; ρCn,ij, estimated rate
of persistence in the country effect.
to advance our understanding of the antecedent of firm profitability. The analysis yields the fol-lowing theoretical and empirical implications about the competitive environments of top brand value companies in the world during the 2000s. Theoretical Implications
First, the estimated rates of persistence for each effect between 0 and 1 imply that short-run rents converge to the sample mean, which is in accordance with conclusions reported in the lit-erature (Bou & Satorra, 2007; Jacobson, 1988; Mueller, 1986). The empirical results show that each effect is able to generate positive incre-mental benefits on brand value in the future, which imply country, industry, and firm factors, the driving elements of brand management, will effectively increase the brand’s value. Even the United States has the most of top brands in the world, we confirm the primary role of the nation that firms based in particular home countries can achieve a superior performance in distinct industries because these countries have greater capacity to help their firms improve and innovate faster than foreign rivals in a particular industry, which is consonant with the findings obtained by Makino et al. (2004). Therefore, our findings suggest that country does matter, having a sig-nificant impact on individual firm’s long-term brand value. The evidence supports the argu-ment in conventional international business and marketing literature and institutional theory that national contextual factors do influence firm be-havior and economic performance.
Second, from the persistence analysis of su-perior brand values in our database, we have no evidence to reject the hypothesis that the speed of convergence is the same between industry and firm levels, which concurs with other empiri-cal research on persistence analysis on account-ing profit by Bou and Satorra (2007). However, this contrasts with the finding of McGahan and Porter (1999), who report the incremental indus-try effects persisting longer than the incremen-tal firm effects also on abnormal returns. The current finding of no different speeds of conver-gence between firm and industry levels can be explained by incorporating country factors into the decomposition model in this study.
Finally, this study has shown that the debate between the IO and RBV schools over which factors are more persistent to brand value has been resolved. The IO view holds to the idea that industry factors are the keys to economic performance and the RBV school ascribes more importance to management or organizational be-havior. However, the current findings lead to an equalization of persistence of industry and firm effects on brand value in the long run. In other words, when considering the relative importance of industry effects and firm effects, changes in industry structure and changes in firm capability have an equal persistent impact on brand value. Therefore, believing that businesses are neither simply collections of individual actors operating within market environments nor simply social organizations operating in culture environments, the empirical results imply that no differences in the size of these sustainable effects support the argument on calling for a dismissal of the di-chotomy between the IO and RBV schools, as suggested by Henderson and Mitchell (1997). Managerial Implications
Creating barriers to competition plays an im-portant role in strategic thinking and practice (D’Aveni, 1994; Porter, 1985). Much of com-petition strategy focuses on how to create and sustain barriers that make it difficult for com-petitors to succeed. Nelson (1991) argues that to some extent profitability differentials are the results of different strategies that are used to guide decision-making at various levels in firms. Thus, while corporate strategy in theory has some impact on, but do not complete control of, corporate-level factors that influence profitabil-ity (Bowman & Helfat, 2001), the current find-ings of determinants of long-term brand value represents types of corporate strategy that firms employ to create barriers for competitors and improve the firm’s performance.
First, by using the firm level of analysis, this study offers a differentiated brand man-agement strategy to the evaluation of impact on long-term brand value. As we study competition around the world, it is not surprising that the firms in the developed countries, mostly in the United States, became the first appetite for firm
behavior difference on competition because of a relatively stable, market-based institutional framework in these economies. However, even among developed countries, the world is differ-ent because there are significant differences in terms of how competition is organized (Lewin & Kim, 2004; Redding, 2005; Ring et al., 2005; Whitley, 1994). The results imply that differ-ent industry structures and country environmdiffer-ents can make brand management more or less dif-ficult, and other exogenous factors can impact individual firm’s long-term brand performance. Significant intraindustry conflict can occur be-cause the potential effects of brand value may differ for the individual firms in the industry, thereby creating the potential to use differenti-ated brand management strategy as a means to establish competitive advantage vis-`a-vis com-petitors. Thus, the current study of specific coun-try, induscoun-try, and firm effects would increase our understanding of the relative influences of each effect on long-term brand value and how the brands are managed among top-ranking firms in the world.
Second, by investigating how country, indus-try, and firm-level differences affect long-term brand value, we can also gain insight into how these factors associated with international mar-keting strategy may compare with the other strategic options that firms pursue to improve their competitive positions in the domestic and foreign markets. Although there have been re-peated calls for studies on the performance im-plications of international marketing strategy (Jain, 1989; Keegan et al., 1987), there are but a limited number of such studies (Katsikeas et al., 2006). Our persistence results provide strong ev-idence that country-level influences (e.g., institu-tions and cultures), industry-level influences (in-dustry structural characteristics), and firm-level influences (e.g., resources and capabilities) are equally important in shaping brand strategy and economic performance. Thus, in addition to the firm’s position in the home market, the posi-tions of home industry and country on world markets is an important driver to capture long-term brand value in overseas markets. Recently, various research on MNCs’ global marketing strategies provides the consistent evidence of the deployment of standardized marketing
strate-gies, e.g., pursuing a consistent global corpo-rate and brand image (Hewett & Bearden, 2001; Katsikeas et al., 2006; ¨Ozsomer & Simonin, 2004). For example, the subsidiaries of large MNCs like Goodyear and Energizer from the United States adopt the standardized interna-tional marketing strategy, e.g., following the par-ent’s product specifications and branding poli-cies, because their products satisfy the same cus-tomer needs across countries and are seemingly impervious to cultural differences (Katsikeas et al., 2006, p. 882). Therefore, international mar-keting strategy that promotes the development of brand loyalty focuses on the market factors that create barriers and the potential to gener-ate economic profits. The findings from this re-search broaden and deepen our understanding of how international marketing strategy is linked to economic performance and underscore the need to reconsider current thinking regarding the deployment of effective international marketing strategies in global markets.
Finally, the concept of strategic fit or coalign-ment provides one of practical implications for this study. The strategic fit paradigm asserts the importance of matching international marketing strategy to the context in which the firm operates (Venkatraman, 1989). For example, marketing applications of strategic fit have centered on the influence of environmental factors, exogenous variables, on the suitability of international marketing programs (Jain, 1989), and adjusted the firm’s marketing strategy to match the environment (Walker & Ruekert, 1987). Recently, the solid conceptual support for the appropriateness of strategic fit within a marketing context is linked closely to marketing performance (Katsikeas et al., 2006; Lukas et al., 2001; Vorhies & Morgan, 2003). Although the strategic fit paradigm posits that coalignment of international marketing strategy with the environment in which it is implemented leads to enhanced performance (Katsikeas et al., 2006), the literature offers little guidance for pinpointing specific contextual factors that have significant positive implications for perfor-mance in international markets. Therefore, the current results yield more evidence to support the idea of strategic fit that top brand value com-panies gained global competitive advantages by
deploying their fairly sound organizational capa-bilities, or microeconomic fundamentals, along with very strong macroeconomic contextual factors in directing brand management activities across industry and country boundaries.
LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH
Despite our emphasis on the persistent anal-ysis of country, industry, and firm effects on long-term brand value, in concluding we point out some important limitations of our study and suggest avenues for future research. First, we consider the dominant nature of top brand value firms concentrated in the United States as the main limitation of our research. The data may not be well suited to uncover paths of dynamic internationalization processes, which are subject to the fact of many international new ventures at the product level being radically and quickly im-plemented in all developed markets (Bell, 1995). Given the range of countries worldwide, caution should be exercised in attempts to generalize too broadly from our findings.
A second limitation is the restriction of our data to the top 100 brands surveyed by Inter-brand each year. Although our model may be easily generalized to the brands that are not cho-sen by Interbrand, application of the model in a different database would necessitate modifica-tion of the current findings. Future comparative research using data on other databases would bring out such similarities and dissimilarities. In addition, the picture emerging from our per-sistent analysis on superior brand value is thus quite different from that presented by main-stream variance decomposition and brand value studies. It is our hope that this different under-standing of global brand development will help shed light on how potentially country, industry, and firm factors may influence the conditions for brands across countries to find common ground as they work to build an internationally competi-tive brand. To develop a more fine-grained study of various factors driving international market-ing strategy and brand performance, future re-search may examine the same effects in
eco-nomic performance measures other than brand value calculated by Interbrand.
Finally, concerning the aggregation bias of summing over different product markets suggest that future research on the persistent analysis of each effect on brand value should attempt to an-alyze this relationship at the product level, rather than at the firm level. Hence, any study of inter-national marketing strategy and economic per-formance at the individual brand level, rather than aggregating all product-market domains at the overall firm level, would likely result in con-founded findings.
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