√Spillover_effects

Spillover effects of foreign hypermarkets on domestic suppliers in Malaysia Shivee Ranjanee Kaliappan Department of Economics,Faculty of Economics and Management,Universiti Putra Malaysia,Serdang,Malaysia Rokiah Alavi
Department of Economics,
Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia,Kuala Lumpur,Malaysia
Kalthom Abdullah
Department of Business Administration,
Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia,Kuala Lumpur,Malaysia,and
Muhammad Arif Zakaullah
Department of Economics,
Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia,Kuala Lumpur,Malaysia
Abstract
Purpose –Since the mid-1990s,there has been a rapid expansion of large-scale foreign retailers in many countries across Southeast Asia,Central Europe and Latin America.This emerging trend has triggered a number of research interests on the issue of retail globalization.The research aims to consider the entry of foreign hypermarkets in Malaysia and their impact on the development and growth of domestic suppliers and manufacturers.
Design/methodology/approach –This study uses both primary and secondary data.Secondary data were drawn from industry sources which included government departments,economic reports,retailing magazines and companies,web sites.Meanwhile,primary data are collected using mail survey questionnaire and face-to-face interviews.
Findings –The findings of this study indicate that foreign hypermarkets play a very important role in the development and growth of the domestic suppliers via backward linkages.The main forms of linkages are product supply,informational linkages,assistance with inventory management,technical support and quality assurance and procurement systems.A majority of the firms indicated that they benefited substantially from the presence of foreign hypermarkets;however,they also face several challenges brought about by imposition of several unfair terms and procurement policy.
Originality/value –The findings are largely derived from the experience encountered by domestic firms who participated in the survey.Thus,it is believed that their views could definitely help all the parties including the policymakers and researchers to better understand the impact of foreign hypermarkets on local businesses and take appropriate policy measures.
Keywords Retailing,Globalization,Hypermarkets,Malaysia
Paper type Research paper
The current issue and full text archive of this journal is available at
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IJRDM
37,3
226
Received 29November 2007
Revised 21April 2008
Accepted 13June 2008International Journal of Retail &Distribution Management Vol.37No.3,2009pp.226-249q Emerald Group Publishing Limited 0959-0552
DOI 10.1108/09590550910941508
Introduction
During the last two decades there has been a significant growth in the internationalization of the services sector due to tremendous progress made in the development of telecommunications and information technology,the deregulation of services industries and also the liberalization of foreign trade and investments regimes world-wide following the establishment of the World Trade Organization’s General Agreement on Trade in Services in1995(Organization for Economic Cooperation and Development(OECD),2002).One of the services sectors that grew impressively was the retail sector.The intensified globalization of the retailing industry has brought retail multinationals–mostly food and general merchandise operators–such as Wal-Mart,IKEA,Courts Mammoth,Carrefour,Tesco,Ahold,etc.into various developed and emerging markets(The McKinsey Quarterly,2004;Currah and Wrigley, 2004;AT Kearney,2005;Wrigley et al.,2005).
These trends have been spurred by both push and pull factors.It is claimed that the mature character of the industry in developed countries characterized by high competition and low profitability(market saturation),as well as domestic regulation restricting large store development and low growth in the domestic market,has generally encouraged the expansion of major retailers into the market of developing and emerging markets(Dawson,2003;Global Production Network(GPN),2003; UNCTAD,2005).Meanwhile,the pull factors are related to growing business opportunities,rapid urbanization,high population growth rates,rising incomes or levels of affluence,westernization of lifestyles,increasing demand for fast food and the relaxation of investment rules and restrictive trade policies in other countries(Dawson, 2003;Reardon et al.,2003;Reardon and Berdegue´,2006).
In line with global development,Malaysia’s retail environment has also undergone marked changes since mid-1990s.The retail sector in Malaysia initially consisted of a large number of small shops offering a limited variety of goods and services. However,as the economy developed and consumers became more mobile and affluent, the retail sector underwent rapid transformation whereby small traditional shops were later complemented by large department stores and supermarkets offering a wide range of merchandise and services.Additionally,the relatively open Malaysian retail sector and the impressive growth of the economy also attracted the entry of major international retailers such as Makro,Carrefour,Tesco,Giant,Jaya Jusco,IKEA, Courts Mammoth,etc.into the country.The increasing presence of foreign retailers has further changed the structure as well as the competition environment of the domestic market(Mad Nasir and Jinap,2005).
Even though there is a widespread belief that the entry of large-scale foreign retailers would expand,modernise and improve the efficiency of the domestic retail industry,there are concerns about the potential negative impacts on local players such as small retailers,consumers and suppliers due to the competitive pressures created by these large retailers.Nevertheless,this issue is relatively under-explored in academic circles,especially in the case of Malaysia.Thus,the objective of this paper is twofold:
(1)The study intends to describe the development in the Malaysian retail sector
especially regarding the entry foreign hypermarkets.
(2)It will examine the impact of foreign hypermarkets on the development and
growth of domestic suppliers and manufacturers in Malaysia.Spillover effects
of foreign hypermarkets
227
The first section of the paper discusses the trends in the Malaysian retail sector especially regarding the entry foreign hypermarkets.This is followed by the discussion on the public policy related to the distribution services sector in Malaysia.The third section presents the research framework that highlights the major issues related to the presence of foreign retailers on domestic suppliers.The fourth section presents the research method used for this study.The fifth section discusses the findings on the
impact of the foreign hypermarkets on domestic suppliers in terms of intensity and nature of linkages,impact of linkages on domestic suppliers,benefits and challenges faced by local suppliers.The final section concludes with policy recommendations.Trends in foreign retailers in Malaysia
Modern retail channels have significant impact on the Malaysian retail scene in recent years,and at present account for 50per cent of the overall retail market (Economic Report,2006/2007).Most of these modern retail stores are located in major urban centre,especially in Kuala Lumpur and Selangor.The first modern retail format in Malaysia were introduced in 1963with the establishment of the Weld Supermarket in Kuala Lumpur.This was followed by a number of shopping complexes being opened up in Kuala Lumpur city centre until the mid-1980s when Malaysia was hit by economic recession.In the mid-1990s,the modern retail sector regained momentum as the economy pick up pace.
In the hypermarket segment,the main players are foreign owned retailers such as Carefour (France),Makro (Holland),Jaya Jusco (Japan),Tesco (United Kingdom)and Giant (Hong Kong)which account for 46per cent of the hypermarket sector (Economic Report,2005/2006).By 2005there were around 400foreign supermarkets and hypermarkets spread around the country including the sub-urban areas in Kuala Lumpur and Selangor,and other states such as Perak,Johor,Negeri Sembilan,Melaka,Kedah,Sabah and Sarawak.This retail segment was the best performers among the retail sub-sector with 18.3per cent growth during first month of 2006(Economic Report,2006/2007).The breakdown of the major foreign retailers in Malaysia is presented in Table I.
Public policy related to the distribution services sector
Even though there is an increasing trend in the presence of foreign retailers in the domestic market since mid-1990s,the numbers and types of foreign-owned retail outlets that are operating in the country is generally controlled by the government.Malaysia has very stringent rules in approving hypermarkets licenses (Mutebi,2007;Lim et al.,2003).The supervision of the distribution sector,which comprise wholesale and retail sector,largely falls under Malaysia’s Ministry of Domestic Trade and Consumer Affairs (MDTCA)and Foreign Investment Committee (FIC).Both MDTCA and FIC have introduced several guidelines to provide flexibility on foreign participation in the local distribution sector as well as to ensure an orderly development of the domestic distribution sector (MDTCA,2003).
The first guidelines on foreign participation in wholesale and retail trade were introduced in 1995by MDTCA.A new guideline was enacted on April 2002which is more stringent in terms of capital requirement.The minimum requirement was increased from RM10million to RM50million and the floor space was restricted not to be less than 8,000m 2.New hypermarkets were not allowed to be established within
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Table I.Major foreign hypermarkets in Malaysia (as of December 2007)
Spillover effects of foreign hypermarkets 229
a 3.5km radius of a housing area or city centre with a minimum population size of 350,000.Applicants are also required to submit a socio-economic impact study in the proposed area before their application could be considered.In addition,local content policy is obligated on foreign hypermarkets to stimulate the backward linkages in the economy.This policy was first introduced in December 2004which requires foreign distribution service providers to reserve at least 30per cent of shelf for locally
manufactured products (MDTCA,2005).This has resulted in a substantial increase in the procurement of local products,especially food based items.A survey on major foreign hypermarkets in the country provides evidence on this,where all of these hypermarkets source about 90-95per cent of their products locally.There are various agencies and ministries which are involved in enhancing the linkages between domestic suppliers and foreign hypermarkets,namely Majlis Amanah Rakyat,MDTCA,Malaysia External Trade Development Corporation and Federal Agricultural Marketing Authority (FAMA).
MDTCA introduced a programme called “Taste of Malaysia”to promote about 500local products manufactured by small and medium-sized enterprises (SMEs)for domestic and international markets.Tesco,for example,conducted a special project called “Bumiputra Entrepreneurs Product Marketing Project”with MDTCA to provide opportunities for potential and capable Bumiputera SMEs to become suppliers to the hypermarkets (MDTCA,2003)[1].Through this project domestic firms will be exposed to various means of marketing their products to hypermarkets.This provides an opportunity for local suppliers to improve the quality of their products and understand customer’s preferences and consumption behaviour to ensure that the products are included in the permanent procurement list of hypermarkets.This will eventually increase the competitiveness of locally manufactured products.
In addition,the MDTCA also collaborated with foreign hypermarkets in Malaysia to export Malaysian products to overseas markets (such as Hong Kong,Singapore and Indonesia).This is to take advantage of their extensive network and knowledge of the international market.For instance,recently Tesco in collaboration with MDTCA conducted “Seminar on Introducing the UK Standards and Best Practices”.The seminar was designed for Tesco’s suppliers who are supplying products to Tesco and also for those hoping to expand their businesses with Tesco in the British market.In 2004,the value of local products exported to UK through Tesco amounted to RM100million,increased from RM80million in 2002(Benjamin,2005).In 2007,Tesco announced that it will purchase RM1billion worth of Malaysian “halal”products to be sold at supermarkets in Britain over the next five years[2].These products are expected to penetrate 40Tesco outlets mostly in London and North London as there is an increase in demand for “halal”products from about 1.7million Muslim populations in these two areas (Star Biz ,2006).
FAMA on the other hand,provides marketing support services assistance to local farmers and SMEs to promote local food and agricultural products in both the domestic and international markets.In 2001,FAMA has marketed locally made products to a network of 150hypermarket and supermarket outlets,3,000mini-market and grocery outlets and 30wholesalers or agents nationwide (FAMA,2002).FAMA has also come up a special programme called as SMI “concessionaire”where local SMEs are given opportunity to display and promote their products in the hypermarkets for a period of one month.A particular product will be included in the permanent procurement list of
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Tesco if the product is well accepted by the consumers.By2004,there were105local entrepreneurs involved in the programme[3].Contract farming was also introduced where FAMA forged strategic partnerships between major hypermarkets in the country and local farmers(FAMA,2004).The objectives are:
.to increase the production of food through systematic approach;
.to ensure guaranteed market outlets for farmers;
.to ensure a consistent supply of quality produce;
.to ensure transfer of technology and implementation of a quality control programme;and
.to build successful agri-business entrepreneurs among contract farmers.
Research framework
The need to examine the impact of globalization of retail-industry was initially proposed by Wrigley(2000).It is argued that there are many important areas for future research in this subject because the rapid expansion of leading global retailers not only affects the elite retailers,their employees,shareholders and competitors,but also consumers,firms and workers involved in the supply chains as well as policymakers in the host countries(GPN,2003).The research framework for the present study was developed based on the work by Dawson(2003)and Coe and Wrigley(2007).Dawson (2003)and Coe and Wrigley(2007)proposed a model of the impacts of retail internationalization which comprise seven broad areas of impact,namely:
(1)impact on indigenous modern and traditional retailers;
(2)impact on competition in the emerging markets between the retail TNCS
themselves;
(3)impacts on supply chain dynamics through local sourcing and global sourcing
networks;
(4)impacts on consumption practices and consumer;
(5)changes in socio-cultural values;
(6)performance of thefirm;and
(7)public policy framework(Appendices1and2).
This is supported by a number of observations made in many countries that have liberalized their retail sector(such as Chile,China,Japan,Brazil,Republic of Korea, Thailand,Taiwan,Mexico,etc.).The experience of these countries generally shows that the presence of foreign retailers would ultimately alter the function and the behaviour of each member in the distribution channel which includes consumers, retailers and suppliers(Dawson,2003;GPN,2003,2004).As the focus of the present study is on the impact on domestic suppliers,it is believed that the presence of the retail multinationals not only transformed the structure and the competitive environment of the retail sector in the host country,but has also exerted a significant impact on domestic supplier and the supply chain through their local product sourcing activities(Reardon and Berdegue´,2002;Dries and Swinnen,2004; Farina,2002;Weatherspoon and Reardon,2003;Reardon and Swinnen,2004;Neven et al.,2005;Hitoshi,2003;Tosonboon,2003;FAO,2005).There are two ways in which Spillover effects
of foreign hypermarkets
231
the development of retail multinational corporations (MNCs)and their local sourcing activities affect domestic suppliers or supply chain in the host country (GPN,2004;Coe and Hess,2005):(1)Multinational retailers may increase the levels of global sourcing for their home markets without establishing their operations in other countries.(2)Multinational retailers may increase the levels of local sourcing by establishing
their store operations in various markets in the region (GPN,2004;Coe and Hess,2005).
These developments offer a significant opportunity for domestic product suppliers or farmers in the host country.Their global procurement network,stringent quality requirements and financial capacity have generally brought a new approach to the food retail business and also created a number of challenges and opportunities for various participants in the supply chain (such as retailers,producers,manufacturers and consumers)(GPN,2004;Oxfam,2005;Arda,2006).Even though there are very few studies available on this issue,generally it is believed that the presence of foreign retailers and their local sourcing activities exerts both a positive and negative impact on domestic suppliers (including local farmers).
Past research findings report that there are high spillover effects contributed by foreign retailers on local suppliers and manufacturers.The major gain is in terms of local procurement.GPNs (2004)reported that large foreign retailers such as Tesco,Ahold and Carrefour commonly procure 90-98per cent of their product supplies from within the host country.The gainers are domestic suppliers,especially SMEs that are engaged in the production of consumer goods and services (Sarma,2005;Bala Subrahmanya,2006;Guruswamy and Sharma,2006).They also benefit from export links arranged through the global network and subsidiaries of the foreign retailers (Tosonboon,2003).For example,majority of the foreign retailers in China such as Wal-Mart,Carrefour,Jusco,Parkson and IKEA procure Chinese made products for their stores at home and in other countries (Shuguang,2003).
There are various other advantages gained by the local suppliers from their association with foreign hypermarkets.Domestic suppliers and farmers are compelled to improve the quality and safety of their products as they strive to meet the standards
and requirements set by foreign retailers (Reardon and Berdegue
´,2002;Dries and Swinnen,2004;Arda,2006).Eventually convergence between national and international standards materialises and this facilitates local suppliers to achieve international competitiveness and gain greater share of the global trade (Mukherjee,2002).They also learn about procurement system,appropriate storage and accounting systems and so on.However,it is important to note that there are possibilities of domestic suppliers to face threats of being pushed out of the market due to foreign retailers’discriminative business practices and dominant buying power (Dobson Consulting,1999;Basker,2007).They may also be displaced if they are unable to achieve the strict quality standards and requirements set by the foreign retailers
(Reardon and Berdegue
´,2002;Neven et al.,2005;Sarma,2005).On the whole,the entry of foreign retailers will exert both a positive and negative impact on domestic suppliers.On the positive side,the business linkages with foreign retailers could eventually lead to the development of domestic firms in terms of product quality,production capacity,increased sales volume,new product development and
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access to international markets.On the negative side,the stringent standards and requirements imposed by foreign retailers require more funds for investments in the upgrading of the production process which will eventually increase the operation costs of domestic suppliers.The situation is much worse for small farmers who do not have the financial resources to undertake product improvements as required by foreign retailers.
Even though the presence of retail multinationals would contributes to the development of domesticfirms,there are not many studies available to support the claim.It is not known how extensive the linkages are between foreign hypermarkets and local suppliers and also to what extent these hypermarkets have contributed to the improvement and development of local industry,especially in the case of Malaysia. Against this background,the main objective of this paper is to examine the impact of foreign hypermarket on domestic suppliers by focusing on the intensity and nature of linkages between foreign hypermarket and domestic suppliers,the standard and requirements imposed by foreign hypermarkets,the effects of these linkages on the performances of domestic suppliers,the importance of linkages and problems encountered by domestic suppliers in their business linkages with foreign hypermarkets.This study aims to highlight various issues that arise from the presence of foreign hypermarkets on domestic suppliers that could be used as a foundation to understand the potential costs and benefits of liberalization of the retail sector.It is generally hoped that thefindings could contribute towards policy recommendations aimed at promoting the competitiveness of domestic products manufacturing and processingfirms and minimize the potential negative effects of foreign hypermarkets.
Research method
Sources of data
This study uses both secondary and primary data.Secondary data were compiled from various sources such as the economic reports of various departments of the Government of Malaysia(i.e.MDTCA,Ministry of Finance and FAMA),retailing magazines and companies’websites(i.e.Euromonitor Report and PricewaterHouseCoopers Report).Meanwhile,primary data were collected using two major tools,namely:
(1)mail survey questionnaire;and
(2)face-to-face interviews.
Given the objectives of the present research,data requirement and the availability of resources,this study uses a cross-sectional survey research,whereby the data are gathered at one point of time.The interviews and survey were conducted in 2005-2006.The following sections describe in detail the research design adopted for the present study,data collection method and analysis that were used to achieve the objectives of this study.
Collection of primary data
As mentioned in the previous section,the primary data were collected using two major tools,namely:
(1)mail survey questionnaire;and
(2)face-to-face interviews.Spillover effects
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233
In order to determine the intensity and nature of linkages between foreign hypermarkets and domestic suppliers and its impact on domestic firms,data were collected from the following three groups of respondents:(1)foreign hypermarkets;(2)domestic products suppliers/manufacturers;and (3)FAMA.
In the context of the present study,local suppliers refer to Malaysian product manufacturers,producers and processors who supply products directly to foreign hypermarkets operating in the country.At the initial stage,all four hypermarkets (Tesco,Makro,Carrefour and Giant)were contacted by telephone,fax and e-mail requesting them to participate in the survey.Out of the four hypermarkets contacted only Tesco agreed to participate in the survey interview.However,the information provided by Tesco was neither substantial nor complete.Therefore,a structured survey questionnaire was developed and distributed to domestic suppliers through mail to gather more information on the extent and nature of the linkages between local suppliers and foreign hypermarkets.These domestic suppliers were identified first through direct telephone contact and e-mail and were asked whether they supply products to foreign panies that supply to the foreign hypermarkets were selected in this study.
In addition to mail questionnaire,face-to-face interviews were also conducted with three officers at FAMA to gather information on the intensity of linkages between foreign hypermarkets and local farmers (vegetables and fruits).FAMA was selected based on the information provided by Tesco that they largely buy perishables (vegetables and fruits)through FAMA besides dealing directly with local wholesalers or farmers.However,not much information was obtained from the interview as the issue of linkage between local farmers and foreign hypermarket was not extensively conducted and relatively new for FAMA.The three FAMA officers could only provide some general information on the process of establishing linkages,the vendor programme and problems faced by local farmers.Unfortunately,there are no statistics available on the number of farmers who have a business relationship with hypermarkets nor is there a list of farmers who have any kind of dealings with hypermarkets.This is because some farmers deal through FAMA while a vast majority deal directly with hypermarkets.Questionnaire design
Since there is not much past research on the extent of the linkages between local suppliers and foreign retailers,it was necessary to develop the questionnaire to gather information and assess the extent of linkages that occur between local suppliers and foreign hypermarkets.A number of efforts have been taken to ensure the reliability of the research instrument.Research themes have been carefully selected based on existing literature and the objectives of the survey.Questions were carefully designed to make sure it is clear to the respondents.The first section of the questionnaire was used to obtain general information concerning the profile of the firms.The remaining sections focused on four major areas,namely:
(1)the extent and type of linkages,assistance received from foreign hypermarkets;
(2)importance of linkages;
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