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This paper investigates the diffusion process in developing countries, applying the well-known Bass' Diffusion Model and Shamlen's Model. The empirical data were gathered from a developing country, namely Burma (Myanmar).

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Innovation Diffusion in Developing Countries

Innovation Diffusion in Developing Countries:An Extension of Bass-Model in the Context of International Marketingby Dr. Sein Min Research Fellow

UNIVERSITT PASSAULehrstuhl fr Betriebswirtschaftslehre mit Schwerpunkt Absatzwirtschaft und Handel Prof. Dr. Dr. h.c. Helmut Schmalen

August 2001

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Innovation Diffusion in Developing Countries

Innovation Diffusion in Developing Countries:An Extension of Bass-Model in the Context of International Marketing

Introduction Innovation diffusion has been interested by many academic disciplines including anthropology, (rural-, and medical -) sociology, education, economics, communication, geography, etc.1 Martketing is also one of the disciplines being much interested in the nature of innovation diffusion. as it has to deal with introducing new technological products into the markets. Understanding it can help marketing managers to forecast sales of new products and to formulate their marketing strategies. Todays, international marketing is executed by many firms and hence markets of developing and least developed countries are more and more interesting. For the task of internatioanl marketing which has a special interest in developing markets, studies of innovation diffusion can help a lot. The phenomena of innoation diffusion is studied at two levels: micro individual level (adoption process) and macro aggregate level (diffusion process).2 Diffusion process is observed with the help of models, i.e. modeling approach is used to capture the reality of diffusion process. Diffusion models used in marketing area are particularly interested in how diffusion occurs in the consumer domain.3 Thus, these models can or should relate to the theoretical aspects of consumer behaviour in adopting innovations. Gatignon and Roberston pointed out that an integration of the behavioural and modeling literatures on diffusion could be benieficial to both constttuenices.4 In modeling the pattern of innovation diffusion, the Bass model was very successful showing the high magnitude of fitness of the model.5 The Bass model reflects the individual adoption behavior in two different ways: innovation and imitation. The models parameters p and q represents the external influence to adopt (in other words, the propensity to innovate) and the internal influence to adopt (in other words, the propensity to imitate) respectively.61

Mahajan, V. and M:E.F. Schoeman, Generalized Model for the Time Pattern of the Diffusiom Process, IEEE Transactions on Enginerring Management, Feb. 1977, pp. 12-18., p. 12. See also Gatignon, H. and T.S. Robertson, A propositional Inventory for New Diffusifon Research, Journal of Consumer Research, Vol. 11, March 1985, pp. 849-867, p. 849. 2 The lengthy discussion about this is found in: Rogers, M. Diffusion of Innovations, New York , The Free Press, 1995. 3 Gatignon, H. and T.S. Robertson, Ibid, p. 849. 4 Ibid. 5 Bass, F. M. A New Product Growth Model for Consumer Durables, Management Science, 15(1969), pp. 215-2127. 6 Gatignon, H., J. Eliashberg and T.S. Robertson, Modeling Multinational Diffusion Patterns: An Efficient Methology, Marketing Science, 8(1989, pp. 231-247, p. 232. The discussion on interpretation of the parameters 2

Innovation Diffusion in Developing Countries

The Bass model was tested in the actual diffusions of products, mostly consumer durables.7 It was also extended or modifed to overcome its assumptions by introducing such variables as market potential, marketing-mix (advertising, price), effects of multiple products, etc.8 Diffusion researches via modeling which involve both Bass type and non-Bass type models were increasing. The Bass model was earlier applied in a single market, mostly of U.S. Later the application was extended to include European (industrialzed countries). There were also investigations of the Bass-model in international setting. Nowadays, the diffusion research covers almost the entire world and it has reached even the stage of global diffusion research. For example, Dekimple et al conducted the research on diffusion of cellular phone comprising 184 countries, although their approach used a differnt modeling method by employing a hazard function.9 Although the diffusion research becomes an international and global research, little attention has been paid to the distinct nature of diffusion process in developing countries. Dekimpe et al. criticized this point sharply as: The set of countries considered in most international diffusion research is not only limited in scope, but also severely biased towards the study of industrialized countries.10 Little is known, however, about the nature of the diffusion process in developing countries.11 ..more research is needed on the extent of an internatioanl learning effect (cf. Infra) both among developing countries, and between developed and developing countries.12 Developing countries should be paid attention by intrnational and global marketers as well as diffusion researchers, because the developing countries (and also least developed countries) are the major part of world market at least in terms of population. Due to market saturation in domestic markets and increased competition among suppliers of industrial products the markets of developing countries play increasingly an important role. Thus, it is

p and q, see Schnmlen, H. and H. Xander, Produkteinfhrung und Diffusion, in S. Albers and A. Hermann (ed.),Handbuch Produktmanagement: Strategieenwicklung Produktplanung Organisation Kontrolle, Gabler, 2000.The criticism on Bass Model was discussed in many literatures. For examples, see Schmalen, H. Das Bass-Modell zur Diffusionsforschung: Darstellung, Kritik und Modifikation, ZfBf 41(3/1989), pp. 210 226, Tanny, S.M. and N. A. Derzko, Innovators and Imitators in Innovation Diffusion Modelling, Journal of Forecasting, Vol. 7, 1988, pp.225-234. 7 Mahajan, V. E. Muller and F.M. Bass, New Product Diffusion Models in Marketing: A Review and Directions for Research, Journal of Marketing, 54(1990), pp. 1-26, p.16 (Table 4) 8 See Ibid, p. 10-15. 9 Dekimpe, M.G., P.M. Parker and M. Sarvary, Comparing Adoption Patterns: A Global Approach, Working Paper (96/37/MKT), INSEAD; 1996. 10 Dekimpe, M.G., P.M. Parker and M. Sarvary, Multi-Market and Global Diffusion, Working Paper, INSEAD, 1998, p.3. 11 Ibid. 12 Ibid. p.4. 3

Innovation Diffusion in Developing Countries

necessary to pay a close attention towards the diffusion process in developing countries. This effort should include specific theoretical consideration about the developing countries and diffusion there and then the development of appropriate models for them. Moreover, we need to pay attention towards these countries because of the changing condition in the world such as globalization. In this paper, we are going to present the development of a diffusion model which is extended from the popular Bass model based on behavioural argument of adoption in these countries. Before we present our model, there will be a review about the international difusion research and cross-country diffusion models. After the extended model for developing counties has been described, we will continue to test the model by using data of a developing country. We have selected Myanmar for this purpose compiling data of computer, room airconditioner, TV-set and telephone for the period 1985-2000. As required in the model, we will use Japan as a lead country. For this, we have collected the statistics of per capita TV and telephone possession extracting out of the UN Statistical Yearbooks. In the empirical study, we first plot the data and estimate the parameters using OLS method and nonlinear least square (NLS) estimation method with the help of SPSS software. Finally, we present the conclusion and implications from our study.

Review of International Diffusion Research The very well.known Bass model has been used to study diffusion of innovations including new ideas, new products and new technologies. These studies focused on each individual country. It is interesting however to compare and conclude whether there are some systematic djfferences in characteristics of diffusion process of countries under study. This task was done by the estimation and analysis of parameters of Bass diffusion model. Some scholars applied a form of econometric model to include some exogeneous variables. A new phase of international diffusion research began with incorporating lead-leg effect into a basic diffusion model.13 Heeler and Hustad studied in 1980 the Bass model with international data.14 They believed that the use of Bass model in international setting cannot guarantee its success because of environmental differences like government policy and trade restrictions. They

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Summary of International Diffusion Studies is found in; Dekimpe, M.G., P.M. Parker and M. Sarvary, MultiMarket and Global Diffusion, Working Paper (98/73/MKT), INSEAD, 1998. 14 Heller, R. M. and T.P. Hustad Problems in predicting New Product growth for Consumer Durables, Management Science, 26 (1980), pp. 1007-1020. . 4

Innovation Diffusion in Developing Countries

found that the results showed instability with limited data and systematic underreporting of estimated time to attain peak level of first purchase sales. 15 To search cross-national differences in diffusion processes between the home market and foreign markets, Takada and Jain conducted an investigation of parameters of Bass diffusion model in the Pacific Rim Region comprising US, Japna, Korea and Taiwan.16 The diffusion process starts usually in US and later the rest countries subsequently follow the process. Thus, there exists a phenomena of lead-lag effect. They explained the cross-national differences due to two types effects: country effect and time effect. Especially due to latter, they expected that lag countries would have a faster rate of diffusion. Their empirical study could confirm this proposition. As an application of diffusion knowledge into international marketing, Helsen et al. tried to segment the countries based on diffusion parameters.17 They investigaed whether diffusion parameters of one country-cluster differ from those of others. Their findings indicated that, for all practical purposes, little agreement exists between the traditionalderived country segements and diffusion-based segements.18 However, they proposed to actually segement the countries on the basis of how the diffusion process evolves within these countries for various consumer durables. 19 Attempts have benn also made to explain the differences in parameters of diffusion model among countries. Gatignon et al. developed an econometric model for the diffusion of innovations at the individual country level.20 In their model four factors were considered: cosmopolitanism, mobility and women in the labour force. Their studies included 14 European countries and adoptions of six consumer durables. The major finding was that cosmopolitansim is related positively to the population propensity to innovate for the six products studied. By determining the parameters values based on other exogeneous factors it makes possible to forecast sales of one country based on the experiences of other countries.21 There were also studies which extended the scope of the internatioanl diffusion research by relating one countrys diffusion with others. The relationship among countries in this respect can be classified into (1) reciprocal relationship (mutual effect) and (2) one way15

More specifically, they found that stable and reasonably accurate predictions of the peak year of sales only occur with at least ten years of input data, generally after the peak has already occured. 16 Takada, H. and D. Jain, Cross National Analysis of Diffusion of Consumer Goods in Pacific Rim Countries, Journal of Marketing, 55 (1991), pp. 48-57. 17 Helsen, K. K. Jedidi, K. and W.S. DeSarbo, A New Approach to Country Segmentation utilizing Multinational Diffusion Patterns, Journal of Marketing, 57(1993), pp. 60-71.. 18 Ibid. p. 69 19 Ibid. p. 62. 20 Gatignon, H., J. Eliasherrg and T.S. Robertson, Op. cit. 21 Ibid. p.245. 5

Innovation Diffusion in Developing Countries

relationship (lead-lag effect). The reciprocal relationship among countries in the international diffusion process was expressed by Mahajan et al. with special emphasis on unification of European community.22 Their study however did not empirically base upon the model. They produced the different parameter values among EU member countries which varied across countries The one-way effect in terms of led-lag relationship was explored by Ganesh and Kumar23 and Ganesh et al.24. They put forward the concept of learning effect which reflects that when a new product/technology is introduced in one country and with a time lag in subsequent countries, there exists an opportunity for consumers in the lag countries to learn from the experience of the lead country adopters.25 The learning effect was discovered by Ganesh and Kumar for industrial technological product (retail scanner). In this study the existence of learning effect was confirmed but the size was not homogeneous. In similar way, Ganesh et al. investigated empirically for consumer durables (Home Computers, Microwave Ovens, Cellular Phones and VCRs). This study, conducted for consumer durables in selected Euopean countries, showed that there existed a cross-country learning effect that was a function of cultural similarity, economic similarity, time-lag, type of innovation and existence of technical standard but not of geographic proximity.26 All these two studies used basically the model proposed by Peterson and Mahajan27 in order to systematically capture the learning effect. In their study of consumer durables, they linked the coefficient of lerning effect with covariables mentioned abouve. Dekimpe et al. had interestingly investigated the breadth of adoption or variabilityin adoption timing across countries.28 They distinguished the global diffusion process into breadtn and depth dimensions. The dynamic of diffuson within a country is termed as depth process. Their model used a hazard function, which gives the adoption rate of a country during a particular time interval. Subsequently they used a general relationship between a distributions hazard and survivor function. The parameters were estimated through maximum22

Mahajan, V. and E. Muller, Innovation Diffusion in Borderless Global Market: Will the 1992 Unification of the European Community Accelerate Diffusion of New Ideas, Products and Technologies, in Technological Forcasting and Social Change, 45 (1994), pp. 221-237. 23 Ganesh, J. and V. Kumar, Capturing the Cross-national Learning Effect: An Analysis of an Industrial Technology Diffusion, Journal of the Academy of Marketing Research, 24 (1996), pp. 328-337. 24 Ganesh, J., V. Kumar and V....