The purpose of this paper is to research the relationship between terrorism and multinational enterprises (MNEs), focusing on operational costs, marketing planning, supply chain management, and distribution activities. Terrorism is a growing threat to internationally active firms, but there has been no empirical research to address the distinctive challenges that terrorism poses for the international marketing activities of firms.
The paper opted for an exploratory investigation, following a two-phase research design. In the first phase it was based on qualitative interviews with internationally active firms. In the second phase, an online survey of a large sample of international firms based in the USA was performed. All measures were developed specifically for the study.
The paper provides empirical insights about how terrorism affects MNEs, especially those operating in emerging markets. It suggests that terrorism accounts for significant costs in the international marketing budget of MNEs, as well as in planning, and the design of supply chains and distribution channels. Findings also reveal that firms with significant resources and international experience appear to cope better with terrorism’s effects.
Given the early stage of empirical research on terrorism and international marketing, this study was necessarily exploratory.
The paper includes implications and suggestions for multinational companies to increase the security of their businesses through the development of corporate preparedness.
Terrorism represents not only an organizational crisis at the level of a firm, but it affects the whole society.
This paper fulfills an identified need to study the relationship between the growing threat of terrorism and international business.
Zeneli, V., Czinkota, M. and Knight, G. (2018), "Terrorism, competitiveness, and international marketing: an empirical investigation", International Journal of Emerging Markets, Vol. 13 No. 2, pp. 310-329. https://doi.org/10.1108/IJoEM-03-2016-0065Download as .RIS
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Copyright © 2018, Emerald Publishing Limited
Terrorism has emerged as a salient threat to organizational competitiveness in international marketing (Czinkota et al., 2004, 2010). Drawing on various sources, we define terrorism as the premeditated use or threat of use of violence, usually across national borders, to attain a political or social goal or communicate a political message through fear, coercion, or intimidation of particular persons or the general public (e.g. Crenshaw, 2001; Czinkota et al., 2004; Enders and Sandler, 2012). Terrorism is the premeditated use or threat to use violence by individuals or subnational groups to obtain a political or social objective through the intimidation of a large audience beyond that of the immediate noncombatant victims (Enders and Sandler, 2012, p. 4). Terrorist attacks around the world have increased, spanning 92 countries and over 28,000 fatalities only in 2015 (excluding Iraq). Most attacks are directed at civilians, businesses, and business-related infrastructure (National Counterterrorism Center, 2016). The five countries most affected by terrorist attacks in recent years are Iraq, Afghanistan, Pakistan, India and Nigeria (National Consortium for the Study of Terrorism and Responses to Terrorism, 2016).
Emerging markets are particularly negatively affected by terrorism since their businesses and citizens have less of an opportunity to protect themselves. Among the possible environmental contingencies that can affect marketing organizations – weak economic conditions, rising energy prices, financial crises – terrorism is potentially the most serious threat for them. While firms seek competitive advantages through the expansion of production, distribution, and the marketing of products and services across multiple national boundaries (Czinkota et al., 2010), threats of terrorism negatively affect these activities. On the other side, measures to counter terrorism restrict freedom of movement and increase government regulation, both of which impair global commerce, and they primarily concentrate on border-crossing creating slowdowns for international transactions. The competitive advantages that arise from global sourcing and international supply chains are thus threatened by terrorism. International trade depends on the efficiency and cost-effectiveness of global transportation systems. Trans-oceanic water shipments account for over 90 percent of international merchandise trade by volume. Compared to their domestic counterparts, the complexity of international supply chains is often greater, consisting of numerous, relatively autonomous suppliers undertaking multifaceted, multilateral activities. Assessing the riskiness of global supply chains is complex when myriad suppliers are distributed among numerous countries (e.g. Czinkota and Knight, 2009).
Terrorism can increase the transaction costs of international commerce (e.g. Blomberg and Hess, 2006), and engender disruptions and delays in global supply chains and distribution channels. Terrorism’s main impacts result from the indirect effects that occur in national and global economies. These include widespread anxiety and uncertainty that affect buyer demand, shifts or interruptions in the supply of needed inputs, new government regulations and procedures enacted to deal with terrorism, and longer-term perceptions that alter patterns of global trade and investment (Abadie and Gardeazabal, 2003; Czinkota et al., 2004). Terrorism can also alter managerial attitudes toward risk, exceeding the risk absorption capacity of firms, and reducing the likelihood they will embark on international ventures or new investments abroad (Aggarwal, 2006; Bouchet, 2004; Jimenez et al., 2017).
We conducted a Google search shown in Figure 1, based on Google’s NGram viewer system. The search focused on the extent of terrorism-related writings, and checked their correlations with the key terms “trade,” “investment” and “risk.” The results indicate a rapid increase for terrorism since 1998. This development serves as an indicator of the growing preoccupation (in the English-speaking literature at least) with terrorism. Contemporaneously, and as expected in terms of theory-based expectations, risk increased while trade and investment interests declined.
For example, the September 11, 2001 (9/11) attacks in the USA precipitated a substantial decline in international trade and investment. Foreign direct investment (FDI) that had peaked in 2000 with about $1.4 trillion invested that year worldwide, fell sharply following 9/11, and multinational enterprises (MNEs) restructured their international operations and sharply curtailed new investments. New global FDI investments dipped nearly 60 percent to just $580 billion in 2003.
Despite the enormity of potential threats, there has been almost no research published on the relationship between terrorism and firms’ international marketing activities. Given terrorism’s emergence as a salient threat, research on these issues is important and useful. In this paper, we investigate terrorism’s relationship to marketing, particularly its effect on the cost of marketing operations, international marketing planning, supply chains, and distribution channels. We will also explore the effect of firm experience and resource availability to the firm.
With our paper we aim to make four contributions: introduce the concept of terrorism and its effect on international competitiveness in a marketing context; suggest useful theoretical perspectives to explain terrorism’s effects; provide empirical findings on the effect of terrorism on firms’ international marketing activities; and provide implications and a roadmap of issues and questions for future research.
2. Theoretical background
Terrorism has existed throughout history. However, since the 1980s, it has become more salient and has assumed contemporary characteristics (Frey et al., 2007; Hoffman, 2006). New terrorists appear to be getting “more bang for their buck” by undertaking high-impact events in terms of intended targets and direct their violence at “soft targets” such as transportation systems and business facilities (Enders and Sandler, 2000; Rausch, 2015).
Terrorism is a type of crisis that occurs in the firm’s external environment, designed to create organizational confusion and environmental volatility. Pearson and Clair define an organizational crisis as “a low-probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly” (p. 60). Environmental volatility refers to rapid, abrupt changes in an organization’s external environment that are generally unpredictable (Achrol and Stern, 1988; Kim et al., 2009). Such environments may require firms to make frequent, sudden and often unexpected and untested adjustments to their business strategies and operations (Kim et al., 2009).
Terrorists deliberately target non-combatant citizens and insufficiently protected physical facilities. Terrorist attacks can occur anywhere. The globalization of commerce, travel, and information flows have enhanced the ease and sophistication with which terrorism can be carried out and increased the visibility of potential terrorist targets (Enders and Sandler, 2000). Port facilities, industrial clusters, shopping centers and financial districts are among numerous national assets attractive to groups that employ even low-tech approaches to wreak havoc via terrorism (Perrow, 2007). The threat is especially salient to firms with business facilities and infrastructure in various locations abroad. In particular, institutions and firms of industrialized nations are most vulnerable when they operate in emerging countries, since they can very easily become soft targets for terrorists. MNE supply chains are vulnerable to potential harm, particularly with firms whose first and second tier suppliers stretch around the world and into risky environments (Bakshi and Gans, 2010; McIntyre and Travis, 2006). The physical movement of goods is subject to disruptions and delays (McIntyre and Travis, 2006).
Perceptions of threats from terrorism can reduce the likelihood that firms will allocate assets abroad, particularly in emerging economies that could be terrorism-prone areas (Abadie and Gardeazabal, 2003; Frey et al., 2007). Companies spend billions annually to manage terrorism-induced risk and comply with emergent, terrorism-related government procedures and regulations (Barnes and Oloruntoba, 2005; Frey et al., 2007; National Counterterrorism Center, 2010).
2.1 International marketing and the effects of terrorism
International marketing is increasingly global. Uncertainty is an attribute of marketing environments (Read et al., 2009), particularly in international markets, whose attributes may differ in terms of culture, language, political and legal systems, and other factors.
The international marketing activity is also vulnerable to terrorism because it can disrupt international supply chain and distribution activities, accompanying information flows, and the demand for both industrial and consumer goods to buyers worldwide (Bakshi and Gans, 2010; Czinkota et al., 2004; Stecke and Kumar, 2009). The complexity of the linkages among terrorists, producers, buyers, and public actors suggests how terrorism might impose significant disruptions on firms’ marketing activities. Terrorism also engenders the imposition of new regulations and procedures that hamper company operations (Abadie and Gardeazabal, 2003; Czinkota et al., 2004). Security cannot eliminate terrorism or fully insulate the firm from terrorist attacks (Stecke and Kumar, 2009). Government regulations aimed at preventing terrorism generate delays and increase business transaction costs, affecting company competitiveness (Aggarwal, 2006; Spich and Grosse, 2005).
2.2 Organizational resources
The marketing organization comprises a bundle of strategic marketing resources heterogeneously distributed across organizations. High organizational resources and large capabilities are associated with superior performance in international marketing ventures (Ruiz et al., 2017). The potential value of strategic marketing resources is realized when management executes appropriate organizational actions and behaviors, aligning them with beneficial marketing organization and marketing strategy elements (Ketchen et al., 2007; Mingming et al., 2017).
The resource-based view (RBV) helps explain how firms develop and leverage organizational capabilities (e.g. Barney, 1991; Teece and Pisano, 1994; Grant, 1996). The manner in which management structures, bundles, and leverages resources determines the efficiency and effectiveness of company operations and organizational performance. The efficient allocation of available marketing resources and the creation of new marketing resources are fundamental to the creation and maintenance of sustainable competitive advantages (Hunt and Morgan, 1995; Hunt, 2000).
Our research has found that many firms are ill-prepared to deal with terrorism, especially those operating in the emerging markets. Often, other firms respond passively and only reactively to the effects of terrorism (e.g. Czinkota and Knight, 2009). By contrast, we focus on the proactive, innovative solutions that firms might develop to manage the threat of terrorism. In this way, innovation perspectives can provide important insights. Innovativeness is defined as the introduction of a new product, process, or idea in the organization. It has been linked to superior organizational performance in stable and turbulent environments (Hult et al., 2004). Undertaking preparative measures in advance of potential terrorist events represents a type of innovation in the firm.
An innovative organizational culture facilitates the acquisition of knowledge leading to capabilities that drive organizational performance (e.g. Lewin and Massini, 2003; Hult et al., 2004). Indeed, strongly innovative firms have highly developed and elaborated knowledge-creation routines and learning regimes. A strongly innovative culture supports the firm in developing particular types of knowledge that drive the development of organizational capabilities, which in turn support proactive development of strategies and reinventing the firm’s operations (Lewin and Massini, 2003). Thus, firms in which management possesses a strong innovative culture and substantive awareness of the threat of terrorism might be relatively inclined to proactively devise strategies and “improvement projects” that safeguard the firm’s interests.
In this paper, we investigate a frontier area – the effect of terrorism on the firm and its international marketing activities, and resultant implications for organizational competitiveness.
3.1 Marketing costs and supply chain disruptions
Terrorism is associated with greater transactions costs of company operations in international marketing. Interruptions in global supply chains and distribution channels cause shortages or delays of critical inputs (Bakshi and Gans, 2010; Czinkota et al., 2004, 2010), which can severely affect company performance and reduce shareholder value (e.g. Stecke and Kumar, 2009). Following 9/11, firms experienced interruptions in value chains and supply chains, and general adverse phenomena such as reduced consumption of products and services (e.g. Blomberg and Hess, 2006; Frey et al., 2007). At airports increased security measures heighten the complexity of business travel which affects the management of international operations (Alden, 2009). Complying with government security mandates increases costs (e.g. Aggarwal, 2006; Barnes and Oloruntoba, 2005; Gori, 2004). New electronic scanning requirements for all US-bound maritime cargo at the point of export increase total exporting costs, much of which are borne by multinational firms (European Commission, 2010; Ledoux, 2006).
On the other side, the need to adapt strategies and operations due to environmental volatility may result in increased coordination costs, as suppliers and distributors will likely devote more resources to environmental scanning, information processing, and negotiating with their suppliers to ensure synchronized responses to rapid changes (Kim et al., 2009). Firms incur direct added costs of defending against terrorism. Some claim that security measures have increased the total US import shipping cost by more than ten percent (Autler, 2011). Costs related to augmenting security measures and activities associated with recovery marketing put upward pressure on organizational costs (Spich and Grosse, 2005). We assess these ideas in our first hypothesis:
The threat or occurrence of terrorism is associated with increases in the firm’s international marketing costs.
Technological advances, declining international transactions costs, growing entrepreneurship and the rapid economic development of emerging markets have stimulated enormous growth in global product sourcing since the 1980s (Kotabe and Murray, 2004). Firms undertake global sourcing to profit from disintegration advantages and location-specific resourcing advantages (Buckley and Casson, 1976; Dunning, 1995; Kedia and Mukherjee, 2009). Disintegration refers to reconfiguring the firm’s value chain by divesting non-core activities and increasing the focus on core areas that maximize organizational and customer value. Location-specific resourcing advantages refers to the comparative advantages that firms obtain by situating particular value-chain activities in favorable locations (Buckley and Casson, 1976; Dunning, 1995; Kedia and Mukherjee, 2009).
Global containerized shipping and transportation infrastructure are terrorism-susceptible as such events can induce shortages or delays of input goods that disrupt critical company operations (Kearney, 2003; Spich and Grosse, 2005; Stecke and Kumar, 2009). Government policy initiatives intended to increase security may lead to frictions that further reduce the efficiency of global transportation and logistical systems. The unintended consequences of such actions can increase market imperfections (e.g. Barnes and Oloruntoba, 2005; McIntyre and Travis, 2006; Frey et al., 2007). Firms that rely on just-in-time inventory systems are particularly vulnerable. Thus, a once famously new concept may have become limited in its usefulness due to environmental changes. We postulate:
The threat or occurrence of terrorism is associated with disruptions in the firm’s international supply chain.
3.2 Marketing planning, design, and organization
As the specter of terrorism has grown, international marketing managers may include it in decision-making on international marketing planning. Managers develop business strategies to minimize the firm’s exposure to risk. The perception of risk influences managers to exercise more caution in selecting markets and sites for value-chain activities (e.g. Abadie and Dermisi, 2008). Managers have avoided direct investment and the development of new infrastructure in terrorism-prone areas in the emerging economies (Abadie and Gardeazabal, 2003; Frey et al., 2007). New terrorist events in particular might engender marketing planning that omits doing business or expanding operations in higher-risk areas.
On the other side, terrorism appears to depress buyer psychology and consumption activities, particularly in the wake of large terrorist events (e.g. Blomberg and Hess, 2006; Lenain et al., 2002). Under environmental uncertainty, managers tend to diversify the sources from which they purchase input goods (e.g. Knemeyer et al., 2009; Stecke and Kumar, 2009). There is also much evidence that firms respond to anti-terrorism security measures that impose externalities on firms’ supply chains, channels, and general marketing activities (Barnes and Oloruntoba, 2005; Frey et al. 2007; National Counterterrorism Center, 2010). Thus, managers might increase forecasting for, and incorporation of, terrorism-related contingencies in their marketing planning. Therefore:
As the threat or occurrence of terrorism rises, management includes it as a factor in the firm’s international marketing planning.
Within the marketing mix, distribution and supply chains are particularly vulnerable to the direct and indirect effects of terrorism. Global logistics depends on networks of tangible facilities and equipment, including vehicles, ports, and other infrastructure in air, land, and water transport. Delays and interruptions due to terrorism give rise to shortages of critical input goods (e.g. Czinkota et al., 2010; National Counterterrorism Center, 2010). Terrorism is associated with increased regulation and new procedures imposed by public actors, which slow or constrain supply chain and distribution activities (e.g. Barnes and Oloruntoba, 2005; Frey et al., 2007; National Counterterrorism Center, 2010; The Business Roundtable, 2005).
In a globalized trading regime, firms source input goods from various locations worldwide. As terrorism’s salience grows, some firms reduce their vulnerability by emphasizing sourcing flexibility and diversifying supply sources in order to reduce exposure to interruptions in supply flow (Bakshi and Gans, 2010; Kearney, 2003; Stecke and Kumar, 2009). Increasingly, MNEs source from suppliers in emerging markets in Asia, Latin America, and the Middle East, which may become frequent sites of terrorist attacks (National Counterterrorism Center, 2010). In companies with long or complex global supply chains, particularly those who use lean inventory strategies, the replenishment of inventory stocks may require a redesign of strategy. Managers who ordinarily employ just-in-time sourcing may have to increase stocks and therefore costs in order to mitigate the threat of supply chain disruptions (Barnes and Oloruntoba, 2005; Stecke and Kumar, 2009; Knemeyer et al., 2009):
As the threat or occurrence of terrorism rises, management includes it as a factor in the design and organization of the firm’s global supply chains.
Value chains consist largely of supply chains and distribution channels. Especially for exporting firms, management depends substantially on both international supply chain and distribution channel partners (Bakshi and Gans, 2010; Grewal et al., 2007). Global distribution channels are the counterpart of global supply chains. Thus, we also expect that:
As the threat or occurrence of terrorism rises, management includes it as a factor in the design and organization of the firm’s global distribution channels.
3.3 Role of international experience
The acquisition, interpretation and distribution of knowledge are critical for optimizing performance in the management of global supply chains (e.g. Hult et al., 2004, Dau, 2016). Gaining experience and knowledge helps firms increase their competitiveness in international marketing (Qian and Delios, 2008). Accumulating experience strongly influences decisions about future foreign expansion. Growing experience enhances managerial skills in making judgments about which markets to enter and how to operate in them (Luo and Peng, 1999).
The attractiveness of emerging economies and direct experience in foreign markets provides managers with opportunities to learn about local developments and business and cultural aspects of host countries, and promotes superior organizational performance in terms of survival and market share (Qian and Delios, 2008; Alkire, 2014). Resulting knowledge reduces the firm’s “liability of foreignness,” decreases local market operational uncertainties, and contributes to management’s ability to minimize the risk of international operations (Luo and Peng, 1999). Organizational knowledge gained from substantial experience in numerous foreign markets is greater than the sum of its parts, and becomes a strategic asset that engenders enhanced competitiveness.
We argue that experience which engenders specific useful knowledge and capabilities increases international organizational competitiveness, particularly in the face of challenges posed by terrorism. Such abilities enhance managerial prowess for developing particular resources and strategies aimed at achieving company goals in foreign markets (Knight and Kim, 2008). Accordingly, firms with substantial international business experience will perform better when confronting terrorism in their global operations. Thus, we hypothesize that.
The more internationally experienced the firm:
The stronger the proposed relationship between terrorism and its inclusion as a factor in the firm’s international marketing planning.
The stronger the proposed relationship between terrorism and its inclusion as a factor in the design and organization of the firm’s global supply chain.
The stronger the proposed relationship between terrorism and its inclusion as a factor in the design and organization of the firm’s global distribution channels.
3.4 Role of organizational resources
Consistent with the critical role of resources and capabilities in the internationalizing firm, we next examine the effect of company resources on the firm’s management of terrorism. Company-level comparative advantages in resources result in marketplace positions of competitive advantage and superior financial performance (Hunt, 2000). The RBV explains how firms develop and leverage useful assets, both tangible and intangible, to accomplish desired objectives (e.g. Penrose, 1959). Resources that support organizational performance include such assets as in-house knowledge, skilled personnel, superior strategies, and financial assets (Hunt, 2000).
The ability of firms to succeed in international business is largely a function of the resources available to them. MNEs employ resources to conceive and implement important activities in international markets. The RBV significantly contributes to international business through its identification of specific knowledge and competences as valuable, unique, and hard-to-imitate resources that separate winners from losers in global competition (Peng, 2001). When skillfully leveraged, appropriate resources can engender effectiveness in the firm’s international operations (Peng, 2001).
Resource-poor firms face greater challenges in researching foreign markets and potential partners when planning for international operations, developing and managing foreign distribution channels, designing and organizing global supply chains and distribution channels, and generally ensuring operations are skillfully managed abroad. The resource-poor firm is less able to sustain unfavorable macro-events in their external environments. Conversely, well-resourced firms have a greater capacity to undertake international ventures that perform well (Collis, 1991; Peng, 2001). Therefore, we expect that firms with comparatively abundant resources will be better positioned to undertake relatively sophisticated international marketing planning, and to incorporate environmental contingencies such as terrorism into the planning and development of supply chains and distribution channels. Thus.
The more resources held by the firm:
The stronger the proposed relationship between terrorism and its inclusion as a factor in the firm’s international marketing planning.
The stronger the proposed relationship between terrorism and its inclusion as a factor in the design and organization of the firm’s global supply chain.
The stronger the proposed relationship between terrorism and its inclusion as a factor in the design and organization of the firm’s global distribution channels.
In light of the limited, extant empirical research, we undertook an exploratory investigation following a two-phase research design. Initially we conducted qualitative interviews with internationally active firms to develop a broad understanding of terrorism and to uncover key issues. Specifically, we conducted informal discussions, generally 45 to 60 minutes in length, via telephone and at company sites, with senior managers at nine firms with extensive international operations.
The managers expressed concerns about interruptions to supply chains, distribution channels, and logistics due to terrorism; concerns about trustworthiness and reliability of foreign suppliers and intermediaries; preparation for potential disruptions and delays due to terrorism; strategies for dealing with terrorism; and resources available to address terrorism. The interviews provided a clearer picture of managers’ concerns about, and response to, terrorism, and facilitated the creation of a survey used in the second phase of research.
In the second phase, we performed an online survey of a large sample of international firms based in the USA. The survey aimed to validate earlier findings, to better understand perceptions about terrorism and the types of planning and responses that managers are undertaking. The survey was developed in several stages, following standard procedures (e.g. Couper, 2000). The survey used five-point Likert scales and the unit of analysis was defined at the firm level. Company resources were assessed as “annual revenues per employee,” where total annual revenues were divided by number of employees for each firm. All measures were developed specifically for the study.
In conducting the survey, we collaborated with the International Council of the American Management Association (AMA; www.amanet.org). About one-third of the AMA’s 8,000 members are engaged in international marketing (O’Connor, 2006). In partnership with the AMA, we sent all members an e-mail and requested members active in international marketing to complete the questionnaire at a separate website. This approach limited the possibility of sampling and coverage errors, and ensured responses from a relatively random sample of US firms engaged in international marketing (Couper, 2000). Results were received from 551 AMA member firms, a response rate of about 21 percent of the AMA firms active in international marketing. We next refined the respondents to firms active in manufacturing (as opposed to services, such as consulting) in order to focus on companies working in the international marketing of goods. This step resulted in a final sample size of 151 manufacturing firms engaged in international marketing.
4.1 Ensuring the quality of data and analyses
We assessed respondent representativeness in two ways. We compared key variables in surveys from a sample of the earliest responding to those of a sample of the latest responding firms (Armstrong and Overton, 1977), and we compared randomly chosen samples of responding and non-responding firms. In both cases, the tested variables were: founding year, number of employees, total sales, and international sales as a percentage of total sales. No significant differences (p<0.05) were found in these tests and thus, nonresponse bias is not expected to significantly affect study results.
In terms of company characteristics, respondent firms had an average of 431 employees and $82,400,000 in annual revenues. The average firm obtained 17.7 percent of its annual revenues from international sales. About 59 percent of the respondents emphasized exporting, followed by 26 percent emphasizing FDI, and the remainder emphasizing other foreign market entry strategies. Regarding the firm’s top international business destination, about 39 percent cited Europe, 28 percent cited North America (Canada and Mexico), 23 percent cited Asia, and about 10 percent cited South America, Russia, the Middle East, or Africa.
Next, we purified the measurement scales using confirmatory factor analysis using LISREL8 (Jöreskog and Sörbom, 1997; Jöreskog et al., 2000). We estimated a single measurement model representing relations among all constructs and associated items, excluding company resources because it was a single item measure. The observed variables were restricted to load on their respective latent factors. Model fit was evaluated using χ2, comparative fit index (CFI) and the root mean square error of approximation (RMSEA) (Gerbing and Anderson, 1988; Jöreskog and Sörbom, 1997; Jöreskog et al., 2000). Fit was also assessed using the DELTA2 and relative noncentrality indices (RNI), which have been shown to be the most stable fit indicators by Gerbing and Anderson. The χ2 statistic was significant (χ2(143)=224, p=0.00), but is known to be sensitive even to moderately sized samples, such as the one used here (Jöreskog and Sörbom, 1997; Jöreskog et al., 2000). Results of analyses suggest that the model achieved adequate fit with CFI = 0.90, DELTA2 =0.90, RNI=0.91, and RMSEA=0.061 (Gerbing and Anderson, 1988; Jöreskog and Sörbom, 1997; Jöreskog et al., 2000). Standardized residuals in the measurement model were |2.95| or less, much below the recommended maximum level (Fornell and Larker, 1981).
The final measurement items, their associated composite reliability values, and standardized coefficients are presented in the Appendix. Composite reliability was calculated using the procedures outlined by Fornell and Larker (1981). The appropriate formulas specify that: , where CRη= is the composite reliability for scale η; λγi the standardized loading for scale item γi; and εi the measurement error for scale item γi. The CR values ranged from 0.68 to 0.79. Only one construct – Cost of International Marketing (CR=0.68) – had a CR value below 0.70, the level recommended for exploratory research. In the LISREL measurement model, all standardized coefficients were significant at p<0.01, confirming convergent validity. Discriminant validity was assessed in two ways. First, analysis of modification indices in the final LISREL results revealed no substantive cross loadings of questionnaire items intended to measure specific constructs. Second, using the method recommended by various scholars, we compared all possible pairs of construct measures by constraining and freeing the associated (ϕ) coefficients. For each test, the change in χ2(1) greatly exceeded the critical value 3.84. Models with the free coefficient were substantially superior to those with the fixed coefficient for all constructs. These tests confirmed the discriminant validity of all construct measures. In all, the measurement analyses indicated that the seven constructs and the 22 scale items achieved satisfactory reliability and validity. Table I presents the summary statistics and intercorrelations for all variables included in the study.
5. Study findings
Moderated regression analysis was used to assess the hypotheses. As part of initial data checks, we developed plots for each equation implied by the hypotheses. We found normal probability plots and no outlying observations, suggesting no violation of the normality assumption (Neter et al., 1989). Results of hypotheses testing are presented in Table II, showing standardized parameter estimates and associated t-values.
The moderation analyses were conducted by splitting the moderator variables at the median, and then retesting the hypotheses for each of the resultant high- and low- groups. A construct functions as a moderator to the extent that the relationship between the dependent variable and an independent variable changes as a function of the level of the moderator variable. We confirmed the significance of differences between respective coefficients across the high- and low- groups by using the approach suggested by Arnold (1982).
As shown in Table II, the coefficients for each of the independence variables are significant (p<0.01) in the hypothesized direction, indicating support for all the hypotheses. Thus, in internationalizing firms, it appears the threat or occurrence of terrorism is associated with increases in their international marketing costs and with disruptions in their international supply chains. As the threat or occurrence of terrorism rises, management becomes likely to include it as a factor in international marketing planning, and in the design and organization of global supply chains and global distribution channels. Furthermore, the more internationally experienced the firm, the stronger the proposed relationship between terrorism and its inclusion in international marketing planning and the design and organization of global supply chains and distribution channels. Finally, the more resources held by the firm, the stronger the proposed relationship between terrorism and its inclusion in international marketing planning and the design and organization of global supply chains and distribution channels.
Firms leverage organizational resources and innovativeness to acquire competitive advantages. Obtaining competitive advantages has attracted much scholarly attention because of their ability to engender superior organizational performance. Today, the effects of terrorism represent a significant threat to firms. Activities in international markets, especially in emerging economies, expose the firm to higher levels of uncertainty and risk. Managers understand the implications of growing threats, as terrorism translates into higher costs and disruptions for the international marketing organization. Among marketing-related endeavors, supply chains and distribution channels are particularly vulnerable to external shocks. Increased terrorism during the last decade has highlighted the vulnerabilities produced by global sourcing, international distribution, and reliance on independent agents abroad. Operating at a distance is compounded by the added complexity of foreign environments characterized by differences in culture, language, laws, customs, and allegiances. Unfamiliar settings complicate intelligence gathering and corporate governance.
At the same time, however, firms depend increasingly on the competitive advantages provided by configuring operations and value chains across a globalizing marketplace. The RBV illuminates how marketing organizations might develop and leverage in-house knowledge, skilled personnel, and superior strategies to enhance their effectiveness in international operations. The resources and capabilities developed by innovative managers increase the firm’s risk absorption capacity and help insulate it from emergent vulnerabilities. Skillful planning and strategy-making help maintain competitive advantages in a shifting and complex, global business environment.
Our collection of hypotheses were assessed in a survey of MNEs to explore the relationship between terrorism and international marketing. Our survey of 151 multinational manufacturing firms reveals the threat or occurrence of terrorism to be associated with increases in firms’ international marketing costs and with disruptions in international supply chains. Resulting imperfections diminish international competitive advantages and increase the friction of global commerce. Disruptions and increased costs are a factor in motivating management to include terrorism in decision-making within international marketing planning, particularly regarding the design and organization of global supply chains and distribution channels.
Our findings suggest how advanced planning and strategic action can provide the firm with greater resources and capabilities for managing external shocks and adverse events. In the face of heightened risks, experienced firms are leveraging accumulated knowledge to strengthen international marketing planning and global value chains. Well-resourced firms are augmenting international marketing planning and enhancing competitive advantages through skillful design and organization of the firm’s global supply chains and distribution channels.
Recent trends imply that terrorist attacks will continue to increase in quantity and severity. In many ways, terrorism is part of the “new normal” in international marketing. It has become an ongoing challenge that will continue to threaten firms for decades to come. A disturbing trend is the growing ease with which groups access and employ asymmetrically destructive power. In addition to loss of life and property, the growing ferocity of attacks sows panic and triggers new frictions for global commerce. Thus, operational, process, and strategic innovations that shield the firm are increasingly prudent. Managers who incorporate terrorism into the planning of channels, supply chains, and other operations will likely preserve and enhance competitive advantages of the firm. Especially if managed skillfully and cost-effectively, such innovations can more than pay for themselves in the long run.
Such investments can provide additional benefits as well. Terrorism is similar to other emergencies. Natural disasters such as earthquakes, fires, hurricanes, and floods, and man-made ones such as war, civil unrest, supply shocks in key resources, and macroeconomic crises, like terrorism, trigger declines in consumer demand, supply chain interruptions, new government regulations, or other such effects. Investing to guard against terrorism can protect the firm against these emergencies as well.
5.2 Managerial implications
A useful approach is contingency planning that incorporates terrorism as a regular part of the strategic planning process. Planning reduces the risk, surprise and punch of the system shock brought by sudden change. Risk management should be made an integral part in the planning processes of the firm.
Environmental scanning is a key step in the planning process. Initially, the most vulnerable areas in the firm’s value chains should be identified. Then, through ongoing scanning, managers can evaluate and disseminate intelligence on important developments, especially to key decision-makers in the firm.
Globalization exposes MNEs to interdependence risk and unanticipated exposure to perils across the extended enterprise beyond the individual firm’s direct control. At the same time, however, superior intelligence gathering alerts the firm to risks and vulnerable areas, and assists in forecasting as well as designing and managing channels, supply chains, and other operations abroad. Since 9/11, governments and risk consultants have refined approaches for forecasting where and how terrorists will likely strike next. International marketing organizations can employ these approaches as well.
Managers should identify the likely consequences of terrorism and actions to be taken in the event of various contingencies. Managers can then conceive and execute actual planning, which entails structuring, restructuring, strategy-making, and tactical maneuvers that help reduce risk. In the long run, terrorism should be included in decisions to establish production facilities, distribution centers, sales offices, and other new systems and infrastructure.
In international marketing, channels and supply chains are particularly vulnerable. Components subject to disruption include systems for communications and for transporting, transferring, and warehousing products. Spontaneous sourcing, just-in-time systems, lean production, decentralized planning, sole suppliers, and related strategies may need to be re-evaluated when critical vulnerabilities are uncovered. For firms that rely heavily on independent suppliers and intermediaries abroad, management may want to emphasize increased coordination, more reliable partners, and improving trust and communications.
Organizations need to restore normal operating conditions quickly demonstrating high resilience. Enterprise resilience refers to the firm’s ability to operate in risky environments and manage discontinuities (Sheffi, 2005). In global value chains, it reflects the ability to respond effectively to interruptions and recover quickly from adverse events. Firms that build resilience into their operations ensure flexibility and redundancy. The resilient firm undertakes risk-reduction planning and organizes its systems, strategies, operations, and communications to adjust to disruptions and emergent risks. Such a firm scans for current and potential risks, and organizes and restructures operations to appropriately manage harmful contingencies.
To the extent disruptions result in long-term shortages of needed materials and supplies, the firm may opt to produce essential inputs itself, as opposed to sourcing from suppliers. Alternatively, inputs can be sourced from a wider range of suppliers, from more locations, or from more familiar, safer sources. Skillful supply chain management is critical ensuring against stockouts of vital inputs.
Terrorism responders can learn much from the ideas embodied in organizational crisis management which represents systematic efforts by managers to avert crises or to effectively manage those that occur. Crisis management is effective when disasters are averted or when operations are sustained or resumed, so the firm can maintain or regain momentum in the usual activities core to its performance. The most effective crisis management minimizes potential risk before the occurrence of events. Advance preparation is critical to successful survival in adverse circumstances.
The calculus of planning for terrorism is akin to “rebalancing” perspectives in financial theory, according to which investors rebalance portfolios periodically to optimize returns and reduce risks to acceptable levels. In this way, management might divest risky investments or reduce holdings in others. Resources liberated in this way are then re-allocated in keeping with the firm’s risk absorption capacity. The goal is to move the firm’s current allocation of activities back in line to match preferred levels of risk.
As innovations give rise to new safeguards in global operations, management will need to develop metrics that assess the costs and benefits of risk mitigation measures in the emerging markets that are more affected by these risks. For example, while the use of multiple and flexible suppliers is a useful approach, it must be balanced against increased costs. Planning and decisions should be evaluated in cost-benefit analyses. Management will want to evaluate the effectiveness of existing supply chain practices under disruptions. The task can be particularly complex when marketing internationally, because the foreign context introduces diverse variables and contingencies that complicate analyses. Available strategies will depend on the location of facilities, customer preferences, local legal constraints, and other characteristics of foreign markets.
5.3 Directions for future research
Initially, three areas are appropriate for research: how terrorism affects the firm’s value chain activities, especially regarding marketing in the emerging economies; what aspects of international marketing are particularly vulnerable to the effects of terrorism; and what approaches optimize company performance, before, during, and after terrorist events. As a starting point, future research should investigate the most effective approaches for firms to organize and manage operations to reduce the impact of terrorism. Terrorism-induced shocks can produce market failures. Future research might identify value-chain operations that demand strategic responses and extend existing models of global marketing management and strategy to assist firms to confront terrorism more effectively.
More research is needed on the particular types of channel and supply chain configurations in developing and emerging markets, and information flow processes that minimize vulnerability to terrorism. Work is needed on the role of targeting and sourcing from a diversity of countries in order to protect against terrorism. Redundant supply chains provide a cushion when any one supply channel is compromised. Future scholars might investigate how firms develop flexibility and redundancy in global channels and supply chains, to attenuate the harm of terrorism. Research might aim to ascertain which approaches are most effective and how they influence organizational performance in risky environments.
One potentially fruitful area is real options theory, which focuses on risk uncertainty and emphasizes creating and then exercising or not exercising certain options. Although developed in the context of financial investing, scholars can use real options theory to examine how managers invest in marketing-related assets and undertake specific marketing actions in the future. Real options theory advances decision-making beyond net present value analysis to consider the value of the options offered by strategic alternatives potentially available to the firm. Real options theory can be useful for examining exogenous uncertainty in international markets that lie beyond the reach of managerial control. It can examine the viability of waiting, as opposed to deepening involvement in given strategic directions, or of exiting particular strategic paths. Real options theory is useful for examining the flexibility that international marketers often have in adapting decisions in response to unexpected market developments or possible future contingencies. The real options approach applies financial options theory to help quantify and measure the value of management flexibility in uncertain environments. Thus, the approach is helpful for conceptualizing and communicating the strategic value of proposed investment projects.
Future research might also examine the role that systems theory might play in helping managers examine the areas where the firm is most vulnerable. Systems theory proposes that every system consists of multiple, interconnected elements (e.g. Bertalanffy, 1972; Kast and Rosenzweig, 1972). In this context, the approach examines the interdependence of networks of firms, affiliates, and agents within larger systems. A business system emphasizes the scope of the firm’s activities, how they are conducted, and how individuals behind these activities relate to each other and interface with other actors in the socio-political sphere. Research in a systems context provides an opportunity to investigate the role of network relationships and social networks in reducing the harm of terrorism. A systems perspective encourages multi-level, multidimensional conceptualizing of potential problems and helps minimize the potential for management to under-specify marketing strategy models. Potential systems-related variables to investigate include the geopolitical environment, terrorism networks, specific sources of risk, and business systems themselves, with a focus on the vulnerability of specific network nodes.
We anticipate that market orientation might represent a type of organizational resource that firms can employ to develop the kinds of approaches critical to detecting or averting terrorism and its effects. For example, a strong market orientation is likely to be a factor in designing and managing secure channels and supply chains. Entrepreneurial orientation might also play an important role in driving novel strategic and operational approaches in risk-prone markets abroad.
In this study, we investigated the effects of terrorism on the international operations of manufacturing firms. Compared to manufacturers, however, firms in the services sector are often more vulnerable to terrorism’s effects. Substantially affected industries include airlines, transportation, and hospitality, as well as banks, insurance firms, and others in the financial sector. Most service-providing firms enter foreign markets via FDI, which implies particular types of risks within target markets. Services represent the fastest growing sector in international business and usually constitute the largest proportion of economic activity in advanced economies and emerging markets. Thus, future research should investigate the effect of terrorism on services industries as some aspects of services, particularly for international markets, may vary from those of traditional products.
5.4 Study limitations
Highlighting the limitations of our study can illuminate superior approaches for future research. First, our cross-sectional research design provides only a broad snapshot of company resources and responses to terrorism. Future research might benefit from a longitudinal approach that can more precisely track causal relationships of key constructs over time.
Second, the firms that responded to our survey (with just 431 employees and $82,400,000 in revenues, of which 18 percent were from international sales) were smaller and less international on average than many of the large MNEs common to international business today. Hence, our findings might under-represent the outcomes of potentially more “typical” international firms. Future research might target larger firms with more extensive international operations.
Third, given the early stage of empirical research on terrorism and international marketing, our study was necessarily exploratory. Future scholars will benefit from developing complex models that can be assessed using confirmatory research or other approaches that more fully portray the complexity of a wider range of constructs and the relationships among them.
Finally, some of our construct criteria were relatively parsimonious. Future research will benefit from more elaborate and precise assessments. Relatedly, our measures are perceptual in nature, which can give rise to systematic variation or random error. Although a limitation common to much empirical research, more objective measures of marketing phenomena are usually preferred.
Overall, these limitations do not jeopardize the integrity of the results, but they limit the conclusions that can be drawn from the results.
Terrorism will continue to be a significant factor in international marketing for decades to come. The rise of terrorism signals a new type of threat that both developed and emerging economies need to deal with in the future. As governments increase security of public facilities, the likelihood of attacks against firms’ international operations is likely to increase. Emerging economies need to find ways to increase their security to keep their attractiveness for foreign investors. Corporate preparedness for the unexpected is a vital task. Innovative managers develop appropriate resources, and undertake planning and strategy-making to accommodate dislocations and sudden shocks. Terrorism represents an organizational crisis whose ultimate effects may be unknown, posing a significant threat to the survival or performance of the firm. Terrorism presents the firm with a dilemma that requires decision-making and behaviors that will result in organizational change. Firms that neglect to devote resources and capabilities to respond flexibly to changes risk the loss of competitive advantage.
Variable means, standard deviations, and intercorrelations
|2. Cost of international marketing||0.30**||1.00|
|3. International supply chain disruption||0.25**||0.67**||1.00|
|4. International marketing planning||0.42**||−0.06||−0.14||1.00|
|5. Global supply chain organization||0.30*||−0.05||−0.14||0.53**||1.00|
|6. Global distribution channel organization||0.41**||0.07||0.08||0.52**||0.45**||1.00|
|7. International experience||−0.06||0.21*||0.22*||−0.24**||−0.14||−0.20*||1.00|
|Average variance extracted||0.53||0.44||0.68||0.59||0.55||0.52||0.48|
Notes: *,**Significant at 0.05 and 0.01 levels, respectively
Tests of hypothesized relationships
|Parameter estimate||t-value||Adjusted R2||Assessment|
|H1a. Terrorism → Costs of international marketing||0.30||3.51**||0.09||S|
|H1b. Terrorism → International supply chain disruption||0.25||2.90**||0.06||S|
|H2a. Terrorism → Inclusion in international marketing planning||0.42||5.08**||0.18||S|
|H2b. Terrorism → Global supply chain design and organization||0.30||3.53**||0.09||S|
|H2c. Terrorism → Global distribution channel design and organization||0.41||4.57**||0.17||S|
|H3a. Terrorism→ International marketing planning, moderated by international experience||0.27||S|
|Terrorism (independent variable)||0.21||2.14*|
|International experience (dummy variable)||−0.18||−2.24*|
|Terrorism × International experience||0.39||3.28**|
|H3b. Terrorism → Global supply chain design and organization, moderated by international experience||0.12||NS|
|Terrorism (independent variable)||0.16||1.33|
|International experience (dummy variable)||−0.07||−0.81|
|Terrorism × International experience||0.19||1.60|
|H3c. Terrorism → Global distribution channel design and organization, moderated by international experience||0.22||S|
|Terrorism (independent variable)||0.17||1.21|
|International experience (dummy variable)||−0.15||−1.69|
|Terrorism × International experience||0.27||2.00*|
|H4a. Terrorism → International marketing planning, moderated by company resources||0.17||S|
|Terrorism (independent variable)||0.30||2.58**|
|Company resources (dummy variable)||−0.59||−4.24**|
|Terrorism × Company resources||0.53||5.23**|
|H4b. Terrorism → Global supply chain design and organization, moderated by company resources||0.18||S|
|Terrorism (independent variable)||0.18||1.82|
|Company resources (dummy variable)||−0.40||−4.32**|
|Terrorism × Company resources||0.28||2.40*|
|H4c. Terrorism → Global distribution channel design and organization, moderated by company resources||0.18||S|
|Terrorism (independent variable)||0.28||2.30*|
|Company resources (dummy variable)||−50||−4.56*|
|Terrorism × Company resources||0.39||4.11**|
Notes: S, Supported; NS, not significant. *,**Significant at 0.05 and 0.01 levels, respectively
Appendix. Final Scale Items
Construct and Measurement Items
I am concerned about terrorism or threats of terrorism.
I believe there will be terrorist attacks in the coming years.
We have felt threatened by terrorism.
Stakeholders in my business are concerned about the threat of terrorism.
Cost of International Marketing:
Our costs of doing international marketing have increased.
Our global supply chain direct costs have gone up.
We have perceived costs going up in our firm’s international distribution operations.
International Supply Chain Disruption:
There have been unpredictable shifts or interruptions in our supply chain.
I am concerned about my company’s access to raw materials.
There have been delays in shipments in our supply chain.
International Marketing Planning:
Our company prepares international marketing plans that account for the possibility of terrorism.
The possibility of terrorism is a factor in devising our international marketing strategy.
We include terrorism as a factor in selecting supply chains and distribution channels.
Global Supply Chain Organization:
We have designed our global supply chain to be resistant to the effects of a terrorist attack.
We consider terrorism in developing our international supply chains.
My company is prepared for disruptions in international access to raw materials.
Global Distribution Channel Organization:
Our firm has considered moving distribution operations abroad as a response to possible terrorism.
We assign a terrorism risk premium to certain distribution channel locations abroad.
In light of the possibility of terrorism, our firm has increased flexibility in strategies for entering new markets abroad.
You believe your firm’s orientation to be: Local Regional National International Global.
What proportion of total sales are your firm’s international sales? (% ranging from 0 to 100).
How many years has your company been engaged in international business? (number ranging from 0 to “over 20”).
Except as indicated, all constructs were measured using five-point Likert scales.
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