Spillover_Effects_of_Foreign_Hypermarkets_on_Domestic_Suppliers_in_Malaysia

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0959-0552.htm IJRDM 37,3 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 226 Received 29 November 2007 Revised 21 April 2008 Accepted 13 June 2008 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 International Journal of Retail & Distribution Management Vol. 37 No. 3, 2009 pp. 226-249 q 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 in 1995 (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 IJRDM 37,3 228 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 50 per 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 1963 with 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 46 per cent of the hypermarket sector (Economic Report, 2005/2006). By 2005 there were around 400 foreign 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 18.3 per 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 1995 by MDTCA. A new guideline was enacted on April 2002 which is more stringent in terms of capital requirement. The minimum requirement was increased from RM10 million to RM50 million and the floor space was restricted not to be less than 8,000 m2. New hypermarkets were not allowed to be established within Group name 89 16 11 Hypermarkets and express stores 19 Hypermarkets 8 195 226 361 234 487 Ownership Retail formats Number of stores 2003 net sales (USD million) 2004 net sales (USD million) 647 401 263 151 204 Giant Jaya Jusco Carrefour Supermarkets/superstores and hypermarkets Superstore chain and shopping center operation Hypermarkets Tescoa Makro Cash & Carry Distributionb Dairy Farm International, Hong Kong (100 per cent) Jaya Jusco Stores Bhd; Aeon Group, Japan Magnificent Diagraph, France (100 per cent) 75.9 per cent: 24.1 per cent JV between Tesco, UK and Sime Darby Bhd, Malaysia 65 per cent: 35 per cent JV between SHV, the Netherlands and local company Notes: Recently Tesco announced that it plans to open two new outlets per year and revealed its strategy to open 15-20 outlets within the next five years especially in the northern and Southern Peninsular Malaysia; bon December 2006, Tesco Plc. bought eight Makro Cash and Carry stores in Malaysia where it already has 13 stores Sources: PricewaterhouseCoopers (2004/2005) and other sources from newspapers and retail magazines a Spillover effects of foreign hypermarkets 229 Table I. Major foreign hypermarkets in Malaysia (as of December 2007) IJRDM 37,3 230 a 3.5 km 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 2004 which requires foreign distribution service providers to reserve at least 30 per 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 90-95 per 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 500 local 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 RM100 million, increased from RM80 million in 2002 (Benjamin, 2005). In 2007, Tesco announced that it will purchase RM1 billion worth of Malaysian “halal” products to be sold at supermarkets in Britain over the next five years[2]. These products are expected to penetrate 40 Tesco outlets mostly in London and North London as there is an increase in demand for “halal” products from about 1.7 million 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 150 hypermarket and supermarket outlets, 3,000 mini-market and grocery outlets and 30 wholesalers 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 Tesco if the product is well accepted by the consumers. By 2004, there were 105 local 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 the firm; and (7) public policy framework (Appendices 1 and 2). 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 IJRDM 37,3 232 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 90-98 per 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 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 domestic firms, 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 the findings could contribute towards policy recommendations aimed at promoting the competitiveness of domestic products manufacturing and processing firms 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 of foreign hypermarkets 233 IJRDM 37,3 234 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 hypermarkets. Companies 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; (3) standard and requirement imposed; and (4) problems encountered in dealing with foreign hypermarkets and the performance of their firm. The questionnaire was designed using both close-ended (multiple responses) and open-ended questions. Spillover effects of foreign hypermarkets 235 Sampling procedure The main objective of the supplier survey is to investigate the impact of foreign hypermarkets on domestic suppliers in terms of the nature and extent of linkages as well as its impact on their business performance. Thus, the aim of sampling here is to capture a wide range of answer to various issues related to the impact of inter-firm linkages from the survey data. To achieve this objective, the sampling was carried out in five stages, incorporating elements of purposive and stratified random sampling. At the beginning stage, a field work was conducted at three foreign hypermarkets, namely: (1) Tesco. (2) Carrefour. (3) Giant. To get some information on the types of product available in the hypermarkets. This basically to get some idea on the product items and brands sold by all these hypermarkets. In the second stage, a list of 2,060 manufacturers was obtained from Federation of Malaysian Manufacturers (FMM) and Exporters Directory 2005. For this particular survey, the population of suppliers was identified as all grocery manufacturers in Peninsular Malaysia. While the sampling frames of the suppliers is the listing of food and beverages and non-food manufacturers which were selected randomly from FMM and Exporters Directory 2005. This directory contained a complete list of manufacturers and sufficiently detailed information about these companies including the names and addresses of companies, contact persons, type of products manufactured, number of employees, sales and names of subsidiaries. In the third stage the 2,060 manufacturer were screened on two criteria. First, only grocery manufacturers in Peninsular Malaysia with local ownership were included, while other types of manufacturers, foreign-owned companies and those located outside Peninsular Malaysia were excluded from the survey. Grocery manufacturers here includes both food and non-food producers. From 2,060 manufacturers, only 314 companies fulfilled the above mentioned criteria. From these, 162 food manufacturers and 152 non-food manufacturers were then selected randomly, which were widely located in the state of Penang/Butterworth, Klang Valley, Perak, Malacca and the industrial zones of Johor. In the fourth and final stage of sampling, the 314 selected companies were further screened to include only those companies that supply products to foreign hypermarkets. This screening process need to be done as it is generally believe that not all grocery manufacturers have business dealings with foreign hypermarkets. In order to ensure that the correct sample is selected, all 314 companies were contacted by telephone and e-mail to ask whether they supplied products to foreign hypermarkets. Overall, only 150 companies (both food ¼ 100 and non-food ¼ 50) initially responded IJRDM 37,3 that they supplied products to foreign hypermarkets and agreed to participate in the survey. Questionnaire administration The survey took place from the beginning of October 2006 to the end of January 2007. A total of 150 survey questionnaires were mailed to these companies. Due to the awareness of possibility of getting a low response rate by using mail survey, researcher has taken some efforts to ensure that the targeted companies respond to the questionnaire. As the first step, rather than sending the questionnaire to the companies that were selected randomly from FMM and Exporters Directory, the targeted companies were contacted through telephone to get the detail information on the right person (e.g. name, designation, telephone number, address and e-mail address) to whom the questionnaire will be sent. This is basically to avoid non-delivery of the questionnaire because of wrong company address or person in charge. This procedure was undertaken to contact all 314 companies, in which, 150 companies finally agreed to participate in the survey. Remaining companies did not participate because they do not supply products to foreign hypermarkets, while some gave reasons of “Too busy” and “Company Policy”. The next step that was taken to reduce non-response rate is by attaching information on sponsorship in the introductory letter to convince the respondents of the research legitimacy, appealing to the goodwill of the respondents by stating that the success of the research depends on their responses, doing follow-ups and promising to give them a copy of the research findings. A stamped, self-addressed envelope was also attached. As a whole, from 150 companies that agreed to participate in the survey, only 45 companies responded, representing a 30 per cent response rate. Even the response rate is low, it considered reasonable for a descriptive analysis. Of the 45 companies that responded to the survey, 34 were involved in the production of food products and 11 companies in the production of non-food products. Data analysis From the survey, only 45 questionnaires were available for data analysis. Various descriptive statistics were computed including frequencies, means, median, modes and standard deviations. These computations were done for all variables. Descriptive statistics were computed as these were meant to describe the phenomena of interest as well as summarize data (Sekaran, 2003). Meanwhile the data collected from interviews was transcribed and classified into similar categories before interpreting the findings. An advance quantitative assessment is not possible with the sort of data we collected as the main objective of the survey is to describe the impact of foreign hypermarkets on local product suppliers. Results and discussion In this section, the discussions on the findings are divided into five major parts: (1) The intensity and nature of linkages between foreign hypermarkets and domestic suppliers. (2) Standards and requirements imposed by the foreign hypermarkets. (3) The importance of linkages for domestic firms. 236 (4) Impact on their firms’ performance. (5) Problems encountered by domestic firms. The intensity and nature of linkages between foreign hypermarkets and domestic suppliers The discussion on the intensity and nature of linkages between foreign hypermarkets and domestic suppliers incorporates the views from foreign hypermarket (Tesco), FAMA and domestic suppliers. In general, the extent to which foreign affiliates establish backward linkages with domestic supplier is usually measured by the local content of production or local content sourcing by foreign affiliates (UNCTAD, 2001). However, there is no consensus among scholars on the definition of local content. Following UNCTAD (2001), the local content could be defined as follows: . Indicates share of total outputs – components or intermediate products and ancillary products and services produced locally. This includes inputs produced local (foreign and domestic) suppliers, as well as those produced in-house by the foreign affiliates. . Share of inputs supplied by firms in a host country, but very often there is no information available on the ownership of suppliers. . Includes input from other countries belonging from same preferential trade area. For the purpose of the present study, local content or local sourcing is defined as share of outputs procured by foreign hypermarkets from local manufacturers or producers. Thus, the intensity of linkages is measured in terms of percentage of products or outputs sourced locally by foreign hypermarkets. Based on the interview conducted with Tesco and FAMA, it is found that foreign hypermarkets in general sourced almost 90-95 per cent of their products locally (mostly food-based products). Even though in the present study we discussed only the local products sourcing practices of Tesco, these actually can be generalized to other foreign hypermarkets that are operating in Malaysia as well such as Giant, Carrefour and Makro. Carrefour sources 95 per cent of their product locally while Giant and Makro buy 90 per cent locally. Meanwhile on the nature of the linkages, six different types of linkages were used. These six types of linkages were adopted with some modifications from Lall (1985). Modifications have to be made as the type of industry used in the present study is different from those used in Lall’s work. Lall (1985) discussed the issue of linkages on truck manufacturers by focusing on eight types of linkages that might be established between MNCs and domestic firms, namely: (1) establishment assistance; (2) locational assistance; (3) technical assistance; (4) informational assistance; (5) financial assistance; (6) raw materials procurement assistance; (7) management assistance; and (8) assistance in finding additional customers. Spillover effects of foreign hypermarkets 237 IJRDM 37,3 238 In this survey we focused on six different types of linkages namely: (1) products supply; (2) training for the improvement of products supplied; (3) technical support on production planning, quality management, inspection and testing; (4) assistance with inventory management and the use of just-in-time systems; (5) assistance in implementing quality assurance systems; and (6) exchange of information on business plans and future requirements. All firms that participated in this survey indicated that they have established business linkages with both local retailers and large-scale foreign retailers such as Giant, Tesco, Carrefour, Makro and Jaya Jusco. Forty-three firms (95.6 per cent) responded that hypermarkets are their main distribution channels or outlets for their products. Table II presents the types or nature of linkages established between domestic suppliers and foreign hypermarkets. All firms (100 per cent) in the sample have indicated that their main business relationship with foreign hypermarkets is largely focused on supplying their products to the hypermarkets. This is not surprising as the main function of retailers or hypermarkets in specific is to distribute products manufactured by producers to consumer or end-users. Foreign hypermarkets tend to source a substantial proportion of products locally to cater local consumers’ needs, taste, culture and lifestyle. The second most important linkage between foreign hypermarkets and domestic suppliers is the informational linkages, in which eight firms responded (17.8 per cent). An informational linkage is mainly related to an exchange of information on business plans and future requirements between foreign hypermarkets and local suppliers. It is claimed that the exchange of information between domestic suppliers and foreign hypermarkets is crucial to coordinate production and investment plans, reduce transaction costs and maximize the delivery of products. Since foreign hypermarkets Type of linkages 1. Supplying products to foreign hypermarkets 2. Training of local suppliers for the improvement of products supplied by foreign hypermarkets 3. Technical support to local suppliers on production planning, quality management, inspection and testing by foreign hypermarkets 4. Assistance provided by foreign hypermarkets for inventory management and the use of just-in-time systems 5. Assistance by foreign hypermarkets in implementing quality assurance systems 6. Exchange of information between foreign hypermarkets and domestic suppliers a Frequency 45 4 5 6 4 8 Percentagea 100 8.9 11.1 13.3 8.9 17.8 Table II. Type of linkages between foreign hypermarkets and domestic suppliers Note: Percentages in sample where respondents could specify more than one category (multiple responses) have extensive knowledge of international and domestic market potential in terms of price trends and on the sources of products, they are able to inform domestic suppliers about new market developments or their future requirements to ensure that there is a balance between the capacities of suppliers with the requirements of foreign hypermarkets. This is followed by assistance with inventory management and the use of just-in-time systems. Six firms (13.3 per cent) responded that this type of assistance is important as this will ensure a continuous supply of products to suit the demand of the foreign hypermarkets. It is said that foreign hypermarkets will provide in advance the information on their annual purchasing orders which is very helpful for just-in-time arrangements. The just-in-time arrangement is regarded as a very strict delivery schedule demanded by most foreign affiliates in the host country which tends to entail additional costs for domestic suppliers (UNCTAD, 2001). This is because they have to build up a higher level of inventories to avoid late delivery penalties. The next most important linkages is in terms of technical support to local suppliers on production planning, quality management, inspection and testing by foreign hypermarkets (11.1 per cent). The weakest form of linkages between domestic suppliers and foreign hypermarkets is in terms of training for the improvement of products supplied, technical support on production planning, quality management, inspection and testing, and assistance in implementing quality assurance systems. This is provided through foreign hypermarket’s supplier development programme (SDP). The SDP only involves the main suppliers of the foreign hypermarkets, which aim to help them supply products that suit the standards and requirements of the foreign hypermarkets. Only 15 firms (33.3 per cent) out of 45 firms in the sample have indicated that they participated in the SDP organized by foreign hypermarkets. The SDP comprise training and assistance in various aspects such as technology development, human resource development, marketing development, financial assistance, pricing and management know-how. However, the finding revealed that not much assistance was provided by the hypermarkets for domestic suppliers except for financial assistance, pricing and marketing development. The following section presents the findings on the standards requirements imposed by foreign hypermarkets. Standards and requirements imposed About 43 firms (95.6 per cent) responded that foreign hypermarkets impose various standards and requirements which include product quality, implementation of house-brand, environmentally conscious product and packaging design, on-time delivery, payment and also on pricing (Table III). Among these various standards, foreign hypermarkets tend to emphasize largely on four major requirements, namely: (1) on-time delivery (91.1 per cent); (2) pricing (80 per cent); (3) product quality (75.6 per cent); and (4) payment (62.2 per cent). This is followed by request for house-brand and environmentally conscious packaging design (Table III). The standards and requirements imposed by foreign hypermarkets Spillover effects of foreign hypermarkets 239 IJRDM 37,3 Description Impose standard and requirements Yes No Product quality Implementation of house-brand Environmentally conscious product and packaging design On-time delivery Payment Pricing Frequency 43 2 34 24 24 41 28 36 Percentage 95.6 4.4 75.6 53.3 53.3 91.1 62.2 80.0 240 Table III. Standard and requirement imposed by foreign hypermarkets tend to differ between the house-brand and local manufacturer brand; and between the local market and international markets. Generally domestic suppliers are required to adopt good manufacturing practice and have a Hazard Analysis and Critical Control Point certificate. This requirement is largely imposed on products entering international markets, in particular. As for the house-brand, domestic suppliers are required to provide the best quality product that follows their product specifications and the prices must be lower than existing brands in their outlets. The prices fixed for house brands are normally less by 30-50 per cent than other brands in similar product categories. Standards and requirements are also imposed on perishable products such as fruit and vegetables that are being supplied to hypermarkets. According to FAMA, hypermarkets require that local farmers strictly follow good agricultural practices (GAP) and the Malaysian Farm Accreditation Scheme (SALM). It is said that both contracted farmers and those without contracts can apply to be accredited as “Malaysia Best”[3]. This accreditation is based on Euro-Retailer Produce Working Group GAP standards. Moreover, contracted farmers are required to follow written product specifications agreed between FAMA and the hypermarkets. In this regard, Tesco for instance, has a technical consultant to audit the vegetable suppliers, to identify the deficiencies in the quality of supplied vegetables, and to recommend a number of initiatives for FAMA to take in order to meet the requirements. Nevertheless, in some cases where the products are of extremely high quality, hypermarkets do not even apply GAP and SALM. The importance of linkages for domestic suppliers It was extensively discussed in the literature that the linkages between MNCs and local firms are a key channel through which host countries and firms can gain substantially from the operation of MNCs (Lin and Saggi, 2003). Nevertheless, it is highlighted that the benefits will only occur if there is a right type of linkage between MNCs and local firms (Mohd Nazari, 1992). In this regards, various questions were asked in the survey related to their business relationship with foreign hypermarkets. The scope of the analysis has been confined to the importance of linkages for domestic firms and its impact on their company’s performance. From 45 firms that participated in the survey, 37 firms (82.2 per cent) indicated that they have benefited substantially from business linkages with the foreign hypermarkets (Table IV). The benefits are: an increase in Description Benefited from business linkages Yes No Type of benefits Increased sales Consistent year-round business Reliable payment Access to international market Improvement of product quality Increased profit Access to management know-how Others (show case for visiting foreign buyers) Frequency 37 8 32 25 21 16 13 10 5 2 Percentage 82.2 17.8 71.1 55.6 46.7 35.6 28.9 22.2 11.1 4.4 Spillover effects of foreign hypermarkets 241 Table IV. Benefit of business relationship with foreign hypermarkets sales (71.1 per cent of responses), consistent year-round business (55.6 per cent), reliable payment (46.7 per cent), access to international markets (35.6 per cent), improvement of product quality (28.9 per cent) and increased profit (22.2 per cent). One of the most cited benefits of having business linkages with foreign hypermarkets is access to international markets. It is widely acknowledged in the literature that the presence of foreign affiliates facilitate foreign market access for local products through their international distribution channels (UNDP, 2005; Sarma, 2005; Bala Subrahmanya, 2006; Guruswamy and Sharma, 2006). There is evidence that foreign firms with their greater knowledge of world markets and access to international marketing channels, tend to be more involved in exporting local products than local firms (UNCTAD, 2001; GPN, 2004). From the survey, only nine firms (20 per cent) in the sample reported that foreign hypermarkets help them to export their products into the international markets or their outlets in other countries, while the remaining 36 firms (80 per cent) do not have such arrangements in their business dealings with foreign hypermarkets. However, the total sales from exporting through foreign hypermarkets are not substantial as it accounts only for 5-10 per cent of their total revenue. Impact on the performance of the domestic firms Besides looking at the benefits of business linkages, this study also attempts to assess the impact of linkages on the performance of domestic firms. This is basically to see whether the performance of the domestic suppliers has been affected by having a business relationship with foreign hypermarkets. In the literature, it is suggested that financial profitability and growth can be used as the most common measures of firms’ performance (Mohd Khairruddin, 2002). However, the available literature did not reflect a single way in which the success of firms can be measured. Firms’ success, growth, performance and development are commonly measured using a range of indicators including an increase in production, sales, turnover, profit margin, return on asset, return on sales, return on equity, and number of employees (Mohd Khairruddin, 2002). In this study, we adopted six indicators to assess the impact on foreign hypermarket on the performance of domestic suppliers. These are: IJRDM 37,3 242 (1) (2) (3) (4) (5) (6) production capacity; annual sales revenue; annual sales of export; net profit; number of full-time employees; and product quality. The findings revealed that, to some extent, the performance of domestic firms are affected by having linkages with foreign hypermarkets (Table V). About 35 firms (77.8 per cent) claimed that both production capacity and annual sales have increased after establishing business linkages with foreign hypermarkets. As for sales of exports, five firms (from nine firms that have export arrangement with foreign hypermarkets) responded that their export sales increase while remaining four firms (8.9 per cent) reported as no changes. Even though the majority of the respondents (35 firms; 77.8 per cent) claimed that their production capacity and value of sales had increased, the increase in net profit is experienced only by 21 firms (46.7 per cent) in the sample. The main reasons provided for this outcome are the high operation costs to run promotions and listing of new products in the foreign hypermarkets. Very demanding terms and conditions imposed by foreign hypermarkets on domestic suppliers resulted in much higher investment funds than the return from the percentage increased in volume purchased by most of the hypermarkets. This eventually led to a reduction in net profits (in some cases there is no change in the net profits). The results suggest that domestic suppliers are significantly affected by the presence of foreign hypermarkets in terms on their overall performance. However, the extent of generalization of these findings is greatly hampered by the small sample size (n ¼ 45). A general question was also asked to assess the perceptions of domestic suppliers of the presence of foreign hypermarkets in Malaysia. Twenty-eight firms (62.2 per cent) perceived that foreign hypermarkets played a very important role in the development and growth of the domestic suppliers particularly in terms of product improvement and market opportunities. They believed that domestic firms can be competitive if they can upgrade their product quality and develop an effective pricing strategy. In addition Increased Decreased Unchanged Frequencies Percentage Frequencies Percentage Frequencies Percentage 35 35 5 21 24 17 77.8 77.8 11.1 46.7 53.3 37.8 – 2 – 6 – – – 4.4 – 13.3 – – 10 8 4 18 21 28 22.2 17.8 8.9 40.0 46.7 62.2 Indicators Production Annual sales revenues Annual sales of exportsa Net profits Product quality Number of employees Table V. Impact of foreign hypermarkets on the performance of domestic suppliers Notes: aThe frequency and percentages for annual sales of export refers only to firms that export through foreign hypermarket. Only nine firms (20 per cent) in the sample reported that they export their products through foreign hypermarkets while remaining 36 firms (80 per cent) did not they also stressed that domestic firms must be innovative and quickly adapt to the requirements and challenges of the international markets. However, there are some firms which disagree with the view. They are not in favour of the presence of foreign hypermarkets because they feel that domestic suppliers are losing out to bigger multinational companies who have more bargaining power in business dealings with the foreign hypermarkets. Despite the claims that the foreign hypermarkets are promoting local products, it is argued that in reality this situation does not exist because they tend to favour foreign suppliers. Problems encountered by domestic suppliers Another issue that is raised in connection with the presence of hypermarkets is their tendency to impose unreasonable trading terms on domestic suppliers. This is regarded as the major problem faced by domestic suppliers. Table VI shows that 32 firms (71.1 per cent) revealed that they encountered problems when dealing with foreign hypermarkets such as the imposition of additional costs (66.7 per cent of responses), the need to comply with stringent quality requirements and a decline in loyalty towards local supplier brands due to the promotion of hypermarkets’ house brand (22.2 per cent of responses, respectively), difficulty in meeting consistent supply of products (13.3 per cent), late payment (15.6 per cent) and unreasonable trading terms (8.9 per cent). In addition, there are several unfair terms that are considered detrimental to the performance of small suppliers such as listing fees, promotional fees, discount, rebates, display fees, advertising fees and other allowances. Some even highlighted that the profits of domestic suppliers, especially the SMEs, are negatively affected when these firms are subjected to severe penalties or ill treatment by the hypermarkets for failure to fulfil their delivery contractual agreement. This finding is consistent with the study conducted by Hitoshi (2003) on the presence of Carrefour in Taiwan. The overall perception of domestic suppliers is that they have benefited from the presence of foreign hypermarket as well as faced challenges due to the demanding nature of the business dealings with these foreign hypermarkets. Conclusion 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 Description Face any problem with foreign hypermarkets Yes No Nature of problems faced Need to comply with stringent quality and requirements Decline in consumers’ loyalty in local suppliers’ brand Difficulty of meeting consistent supply of products Required to pay various costs Late payment One sided agreement Frequency 32 13 10 10 6 30 7 4 Percentage 71.1 28.9 22.2 22.2 13.3 66.7 15.6 8.9 Spillover effects of foreign hypermarkets 243 Table VI. Problems faced by domestic suppliers IJRDM 37,3 244 management, technical support and quality assurance and procurement system. Majority of the firms benefited in terms of an increase in sales, consistent year-round business, reliable payment, expansion into international market, improvement of product quality, and increased profit. As a result of their dealings with the foreign hypermarkets, business practices especially on-time delivery, pricing, product quality and payment systems were improved. The performance of domestic suppliers showed improvement in terms of production capacity, sales, net profits and export sales. However, domestic suppliers also face several challenges in their dealing with foreign hypermarkets brought about by imposition of several unfair terms and procurement policy. These include various charges such as listing fees, promotional fees, discount, rebates, display fees, advertising fees and other allowances that affect their overall profit. Small suppliers are the most affected by the imposition of double standard policy for failure to comply with procurement and delivery contractual agreement. Numerous policy measures taken by the government has enhanced the linkages between foreign hypermarkets and domestic suppliers substantially, especially the local sourcing policy. Steps have to be undertaken to further nurture the linkages as well as to safeguard the interests of local suppliers with respect to the discriminative and domineering business practices of foreign hypermarkets. It is recommended that government should support the development of domestic firms or suppliers by providing various incentives or subsidies for foreign hypermarkets to undertake training or vendor development programmes. This would be a good a platform to educate and increase awareness among local suppliers on the standards required by foreign hypermarkets. To curb the discriminative business practices and abuse of dominant purchasing power of foreign hypermarkets, a competition policy as well a system of monitoring their practices should be introduced and implemented. In this regards, findings also revealed that the majority (30 firms; 66.7 per cent) of the firms did not receive any assistance from government in establishing business linkages with foreign hypermarkets. Most of these firms asserted that they deal directly with foreign hypermarkets rather than going through government agencies. Thus, it is suggested that the government should play a more aggressive role in order to promote the linkages between hypermarkets and domestic suppliers as well as protecting local suppliers from unfair trading terms imposed by foreign hypermarkets. Notes 1. Bumiputera refers to indigenous ethnic groups in Malaysia. 2. Halal implies food that is permissible according to Islamic law. 3. www.tesco.com.my References AT Kearney (2005), “Emerging market priorities for global retailers: the 2005 global retail development index”, available at: www.atkearney.com/main.taf'p ¼ 5,3,1,171 Arda, M. (2006), “Food retailing, supermarkets and food security: highlights from Latin America”, available at: www.wider.unu.edu/publications/rps/rps2006/rp2006-107.pdf Bala Subrahmanya, M.H. 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(2003), “The rise of supermarkets in Africa: implications for agrifood systems and the rural poor”, Development Policy Review, Vol. 21 No. 3, pp. 333-55, available at: www.msu.edu/course/aec/841/Discussion/DPR_Weatherspoon-ReardonRise_African_Supermarkets.pdf Wrigley, N. (2000), “The globalization of retail capital: themes for economic geography”, in Clark, G.L., Gertler, M. and Feldman, M. (Eds), The Oxford Handbook of Economic Geography, Oxford University Press, Oxford, pp. 292-313. Wrigley, N., Coe, N.M. and Currah, A.D. (2005), “Globalizing retail: conceptualizing the distribution-based transnational corporation (TNC)”, available at: www.andrewcurrah. com/PHG2005.pdf Further reading The Malay Mail (2006), “Tesco opens up more space for local traders”, The Malay Mail, 25 February. Retail Asia (2002), “Tesco jostles for position in Malaysia’s hypermarket industry”, Retail Asia, June. (The Appendix follows overleaf.) Spillover effects of foreign hypermarkets 247 IJRDM 37,3 Appendix 1. A proposed model of types of impact of retail internationalization in host country 248 Market liberalization Rise of hypermarkets and other modern retail formats *innovation affecting channel structure *new relationships in the chain *changes in behaviour in chain *new functions introduced into the channel *innovation in competitive activity *additional investment *improved productivity of assets *catalyst for sectoral restructuring *new competitive behaviours 1. Changes in the effectiveness demand chains 2. Change in sectoral competitiveness *loss of old value *transfer of culture 3. Changes in socio-cultural Values 4. Public policy reactions national and international agencies *limits on ownership *barriers to entry *limits on corporate behaviours Impacts of Retail Internationalization 5. Performance of the firm 6. Increased consumer literacy *new market profitability *changed cost functions *profit remitted to head office *new managerial knowledge *increased scale of operation Source: Adapted from Dawson (2003) *wider product knowledge by consumer *better understanding of marketing *new consumer solution *appreciation of cultural differences and variety Figure A1. Appendix 2. Host markets impacts of retail TNCS HOST MARKET 1 Other Retail TNC Subsidiaries Institutional and Regulatory Frameworks Spillover effects of foreign hypermarkets 249 Subsidiary of Retail TNC Suppliers Consumers and Society Local retailers Retail TNC Subsidiary of Retail TNC HOME MARKET Intra-corporate networks Inter-corporate networks Extra-corporate networks Source: Adapted from Coe and Wrigley (2007) HOST MARKET 2 Figure A2. Corresponding author Shivee Ranjanee Kaliappan can be contacted at: deivanai5040@hotmail.com To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints