Feeding the dragon - China's consumer story

New research conducted in China by Dr Robert Hoffmann has cast doubt on the widely-held belief that Chinese consumers are fiercely loyal to products made in China.

This may help both Eastern and Western businesses looking to invest in China.

A version of this article appeared in the FT's Investment Adviser on March 12 2012.

Feeding the Dragon

It has been suggested in some academic quarters that Chinese consumerism will replace its US counterpart as the engine of global economic growth by as early as 2014.

Such a landmark would have been unimaginable 30 years ago. Even more recently, when the potential scale of the repercussions of China’s economic and political liberalisation was still to be fully appreciated, the prospect might have seemed remarkable. Now it appears not only inevitable but in many ways essential.

China, after all, has become the epicentre of worldwide trade, the focal point of the financial and economic nexus, the superpower-elect, the shining yang to the West’s increasingly dismal yin. This being the reality, there can be no dispute that during the coming years its consumers will play a major part not just in powering the global economy but in shaping it.

There are, however, extremely complicated underlying issues that need to be considered when assessing the likely direction their role will take. Chief among them is the matter of Chinese consumer ethnocentrism, the precise nature of which, despite its manifest and enormous importance, has long remained unresolved.

Challenges for multinationals

Escalating domestic consumer incomes in China have fuelled a ravenous appetite for luxury and branded products – a demand that currently cannot be fully satisfied by domestic firms. Foreign companies can thus contemplate vast commercial opportunities to sell their products in China, whose worth to international marketers, especially amid the worsening crisis in the West, is plain.

Particular institutional conditions nonetheless present challenges for foreign multinationals. A politically motivated rejection of overseas products, such as was seen during the Beijing Olympics, can hamper the expansion of international businesses in China. Government policies that benefit local firms can be unfavourable. Compliance with international standards and quality controls – so insouciantly overlooked in the past – is now habitually implemented and deemed vital to boosting home-grown enterprises and bolstering consumer confidence.

Taking all of the above into account, the popular perception, on balance, is that Chinese consumers are moving away from foreign goods and towards domestic products. Along with the resurgent nationalism so fundamental to China’s modern history, Chinese companies’ nascent ability to compete with their foreign rivals by creating or reinventing their own brands apparently lends extra weight to this view.

This conclusion, however, must be set against the inherent inadequacies of the techniques routinely used to assess and measure consumer ethnocentrism. Work in this sphere has been hindered by the constraints of accepted methodologies, and it is perhaps only now that we are starting to appreciate how we might overcome these innate difficulties.

In the past many research studies have measured how well consumers’ ethnocentric attitudes predict their purchasing intentions of imported goods. However, this kind of approach does not tell Western firms about the chances of successfully penetrating markets in China with their imports compared with other Asian nations. What is needed is a gauge of how ethnocentric Chinese consumers are in absolute terms.

Consumer ethnocentrism

Moreover, elicited purchase intentions and product evaluations are less than dependable indicators of actual consumption behaviour. To the extent that consumer ethnocentrism is associated with moral and/or self-image considerations, the answers of survey respondents may be biased towards expressing socially acceptable sentiments such as social patriotism. Equally, standard experimental procedures in economics that have been designed to surmount this problem suffer in turn from a laboratory setting’s lack of realism.

New research by Nottingham University Business School took a notable step towards empirical clarity. It did so by adopting a field experiment approach and using experimental tools to naturalistically elicit the actual consumption decisions of Chinese consumers under conditions in which they had no reason not to disclose their true preferences.

Around 450 people participated in the experiment, which was conducted in a shopping centre in Ningbo, Zhejiang Province, China. The study took pairs of similar and identically-priced products – one made in China, the other manufactured overseas – and invited subjects to choose.

The first test used two scratchcards offering the chance to win a digital camera, one model Chinese and the other Japanese; the second used two small bags of sweets, one Chinese and the other South Korean; and the third used two T-shirts, one made in China and the other in Thailand. Some volunteers were told the products’ origins, others not, and all completed a survey that examined their choices and attitudes in greater detail.

At the end of the experiment everyone who took part was given the products they chose, and scratchcard winners were also subsequently presented with their prizes. As far as we are aware, this represented the first incentivised test of consumer ethnocentrism and, as such, provided an effective alternative to the flawed approaches commonly employed.

The key outcome of the study is that it uncovered no meaningful evidence whatsoever of Chinese consumer ethnocentrism. Indeed, the results question the phenomenon’s very existence. This leads us to posit that the widespread belief that Chinese consumers are fiercely loyal to products made in their own country may be mistaken.

Crucially, in contrast to previous claims that mainland China might be less open to foreign products than other Asian markets, our findings indicate Chinese consumers do not discriminate against foreign products in their consumption choices. They seem to make choices based largely on their individual preferences with regards to a product’s intrinsic characteristics, irrespective of its nationality.

It could be the case, then, that nationalism and its relationship with ethnocentrism and consumer behaviour are taking a different course in China than seen elsewhere. How do we begin to explain this?

Firstly, it should be noted that ethnocentric consumers believe the negative effect on the domestic economy – jobs in particular – makes it wrong or inappropriate to purchase foreign goods. The positive associations of “hybrid” products – for example, Apple computers designed in California and built in China – can help overcome this. It may be that Chinese consumers do not feel they are putting compatriots out of work by buying foreign goods, since most foreign-branded products are actually made domestically.

Chinese consumer patriotism

The question of patriotism is also worth bearing in mind. Patriotism in a Chinese context refers to the loyalty of all Chinese people towards the state for the benefit of the country as a whole, in which circumstances foreign sellers and promoting the consumption of their products is regarded not as anti-nationalistic but as a means to propel China on the global stage and foster economic growth.

The overarching inference is that Chinese consumers can be as pragmatic as they wish without threatening their allegiance to their nation or being condemned as unpatriotic.

This could have significant implications for both East and West, not least as the latter increasingly looks to China to reignite the global economy and in so doing deliver hope that Europe and the US can cling to its tail when the Dragon truly learns how to fly. Should this ultimately prove the case, Chinese consumers themselves might be far from alone in revelling in their new status.

Robert Hoffmann is an Associate Professor of Economics at Nottingham University Business School, where he is Director of the International Centre for Behavioural Business Research. His research interests include behavioural economics and decision-making; game theory; economics and culture; experimental economics; and computational and evolutionary economics.