World Development. Vol. 20, No.3, pp. 321-334, 1992.Printed in Great Britain.

Buyer-Seller Links in Export Development

Bendick and Egan Economic Consultants, Inc., Washington, DC",

and , .ASHOKA MODY*

The World Bank, Washington, DC "

Swnmary. - Export development benefits are genera~d by links"between developed countrybuyers and developing country suppliers. These relationships reduce barriers to entry intodeveloped country markets by acting as condu.its for information about marketing and productiontechnology and by providing aocess to larger industry networks. Benefits are maximized when the

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relationships are collaborative and long term. In this paper, bicycle and footwear imports into theUnited Sl\!.tes are used to illustrate the formation, maintenance, and effects on developingcountry reputations of buyer-seller relationships. Public efforts to support developing countryfirms in fonning and maintaining long-term. collaborative relationships are also discussed.

1. INTRODUCTION

Rising wage rates in newly industrialized eco-nomies (NIBs - Hong Kong, South Korea,Taiwan, Singapore) are diminishing their longstanding competitiveness in lower end, price-sensitive product segments. Firms in developedcountries are looking for new sourcing relation-shipSMth lower wage firms in less developedcountries. (LDCs). A window of opportunity isbeing created for some LDCs to enter internatio-nal markets. .

Even for the lowest cost products within aproduct segment, consistently meeting that pro:.duct's quality specifications at a competitive priceand adhering to reliable delivery standards areminimum requirements for selling in internatio-nal markets. Many LDC firms cannot meet theseminimum requirements. Skepticism about LDCcapabilities and buyer's reluctance to replaceNIB business partners with whom they have asatisfactory. long-term and collaborative rela-tionship also slow LDC efforts to achieve therapid increase in exports that would be expectedon the basis of their low labor costs.

Two analytical themes run through the paper.First. for developing country suppliers, long-termcollaborative relationships with developed coun-try buyers are often an essential source ofinformation about developed country marketsand production technology as well as productquality and delivery standards. Such. specialized

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industry infonnation for narrowly specified mar-ket segments is not easily acquired. For manydeveloping country firms that cannot afford othermeans. to acquire this infonnation - such ashiring internationally experienced management,sending management abroad to study developedcountry markets and production technology oracquiring an experienced export firm - collabor-ative relationships may be the only source.l

The second theme concerns the fonnation andmaintenance of these valuable relationships.Although in some cases the primary reasonbuyers invest in collaborative relationships isstrategic, the majority of buyers participate toobtain reliable deliveries of the product theyneed at a competitive price. Collaborative, long-term relationships continue if they are of mutualbenefit to each party. Over the life of therelationship, a system of mutual obligation andtrust develops incrementally. Buyers in suchrelationships are reluctant to change satisfactori.Iy performing suppliers because of the stock ofmutual obligations, trust and learning that hasbeen created over the length of the relationship

-For comments and help. the authors are grateful toNam;y Barry, Marc Bendick. Jr., Carl Dahlman.Stephanie. Gerard, Arvind Gupta, Don Keeling, San-jays LaD, Yung Rhee, Robert Wade and Kevin Young.The views expressed in this paper are those of theauthors and should not be attributed to the World Bankor its affiliates.

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to produce and sell products that meet the threeminimum requirements of price, quality anddelivery reliability. This reluctance to changepartners creates a barrier to entry for LDC firmsin the formation of relationships with buyerswhich in turn prevent entry into valuable industrynetworks.

Firms that are not a part of industry networksrisk losing sales opportunities in the short runand access to innovative technologies and prac~tices in the longer run (Hakansson and IMPgroup, 1982). Moreover, being part of a networkbenefits not only individual suppliers but also,through recommendations, other firms in thesupplier's country. These networks, narrowlyspecialized by industry and even market niche,are considered one of the most reliable sources ofinformation about the performance of suppliers.

How can less developed countries attractcollaborative business relationships? How canexisting relationships with buyers be deepened tomaximize the transfer of information?

We address these questions through the ex-perience offootwear and bicycle imports into theUnited States. Each of these product groups hasmore than a 20-year history of relationshipsbetween developed country buyers and develop-ing country suppliers.

The paper is written from the perspective ofbuying firms in the United States. These firmsinclude manufacturers, retailers, importers,buyers' agents, and joint venture partners. Tradeassociation staff, consultants, and other industryexperts (including specialists from the US Inter-national Trade Commission) were also inter-viewed. In these various organizations, we inter-viewed mid-level and senior managers respon-sible for international sourcing and investmentdecisions. The distribution of the 28 intervieweesis given in Table 1 (two specialists interviewedwere common to the two industries).

Throughout the paper, we emphasize that thetransfer of benefits through buyer-seller relation-ships occurs firm to firm within narrowly definedproduct groups and industry networks. Broader

Table 1. Number of US buyers in~rliiewed

Buyers Bicycle Footwear

Retailers I 0Importcrs/Wholesalers 2 4Manufacturers 4 2Trade association representatives 4 4Other industry representatives 6 3

Total 17 13

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public measures, however, can support develop-ing country firms in forming and maintainingcollaborative, long-term relationships. We dis-cuss some promising public measures in theconcluding section of the paper.

2. US BUYERS

In 1988, retail sales of footwear in the UnitedStates amounted to about US$27 billion for 1.1.billion pairs of shoes. 2 Imports represented about80% of the amount (m million pairs). Taiwan(38% of the quantity), South Korea (21%) andBrazil (13%) accounted for almost 75% ofnonrubber footwear imports into the UnitedStates in 1988 (U.S. Industrial Outlook 1989).

Beginning in the late 19708, the US bicyclemarket began to rely heavily on imports as so-called baby-boomers embarked on fitness reogimes and US producers were unable to meet theincreased demand. Imports of bicycles for adultsrose from 20% ofthe bicycles sold in 1978 to 54%of the 12.6 million sold in 1987. Taiwan basdominated bicycle imports into the UnitedStates; its share of imports in 1987 was 76%.Higher value bicycles are imported from Italy,France and Japan. In the low- and medium-quality segments, Taiwan's emerging competitoris South Korea, which has been a late entrant inthis industry. Among low-wage countries, Chinaappears a serious contender.

(a) Three types of buyers

Three types of buyers account for the majorityof US purchases of manufactured goods fromdeveloping nations (Kotler. 1988):

(i) Retailers. Many 'lar2e US retailers buyfinished products directly from foreign maRufac.turers. Large retailers often maintain networks ofin'ternationa1 representatives to both seek outpotential suppliers and maintain overseas buyingoffices. It is estimated that about 20% ofdeveloping countries' manufactures are exportedthrough buying offices of large retailers. Forsome products, such as garments and textiles,buying offices account for more than 50%(Kirchbach, 1988). Retailers have contributedgreatly to the development of many LDC firmsby allowing them to make export sales withouthaving to do market research, product develop-ment, and design. Retailers may also providefinancing, quality control, and distribution sys-tems. Large retailers are important US importersof low- and intermediate-price bicycles andfootwear (Table 2).

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Smaller US retailers are less likely than largeones to engage in direct importing or to investresources in deveioping new sources of supply.Instead, they more typically participate in buyinggroups or rely on importers/wholesalers.

(ii) Importers/wholesalers. US importers andwholesalers buy from foreign manufacturers forresale either to US retailers or to other inter-mediaries. They specialize in importing. marketidentification, and development of new sourcesof supply. Some importers also develop designspecifications for products.

Large importers generally have greater reosources than small importers for investing in thedevelopment of new sources of supply - aprocess that can often take 6--18 months beforean exportable product is ready. Large importersare also more likely to employ designers, en.gineers. and marketing experts who can providetechnical assistance to suppliers.

(iii) Manufacturers/Producers. Many USmanufacturers also buy from foreign manufac-turers, either finished goods (which they resell toretailers or other intermediaries) or components(which they incorporate into their own productsbefore resale). Goods imported directly bymanufacturers may well exceed the amountaccounted for by retailers' buying offices(Kirchbach, 1988). They often bring substantialtechnical expertise to these purchasing relation-ships that other US buyers do not offer, especial-ly in production technology.

Importing functions once performed and con-trolled by many independent importers are shift-ing to manufacturers or retailers, who hire agentsto take over smaller independent importingfirms. In shoes, for example, volume retailersand domestic producers account for 15% ofimports. Of the two, domestic producers seem tohave become the largest direct importers.

(b) N IE firms as partners and intermediaries: Anew trend

Relationships between LDC finns and those inNIB economies are becoming another route bywhich products enter the US market. Ai, HongKong, Taiwan, Singapore. and South Korea facerising production costs, they risk losing buyers toless expensive (low wage, low production costs)sources of supply in Thailand, Indonesia, and

Malaysia.In response to these circumstances, two types

of intermediation are developing. The mostdirect occurs when a long-term NIE supplier to aUS firm goes to an LDC for goods it oncesourced for its US partner in the NIB. For

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example, a Taiwanese finn might begin to sourceinexpensive footwear in Thailand instead of inTaiwan. In spite of the change in tbe source ofsupply, the NIE supplier's relationship with theUS partner remains basically the same.

A second type of intermediation occurs whenthe US buying finn seeks an equity partnershipor assistance from its NIE supplier in locating,selecting, managing, or training a manufacturingpartner in an LDC. One US importer inter.viewed for this study and its Taiwanese partnerlocated a promising but new-to-export manufac-turer in a low-cost LDC. In exchange for exportorders, the NIB finn provided on-site training,supervision, and assistance to the LDC manufac-turer while the US firm supplied loans andassured orders from major retailers and pro-ducers.

In one formal joint venture agreement,Schwinn Bicycle Company entered an ongoingjoint venture, China Bicycles Co., betWeen awen-known NIB bicycle producer. Hong KongLink Bicycles Ltd., and an LDC partner, SheD'wen Light Industry Co. in China. (Hong KongLink Bicycles, which had been producing andexporting bicycles since 1969, moved operationsto China to avoid the rising land and labor costsof Hong Kong.) As one of the largest importersand distributors of bicycles in the middle to upperend of the US market, Schwinn offers access tothe US market through its established channels,provides technical assistance for its US orders,and brings capital to the partnership. Anotherexample of a formal joint venture is among someChinese, German and Hong Kong firms. Theycreated the firm Xiamen Euro-Bike to produceframes and bicycles for export (Cycle Press.1989).

(c) The inseparable triad.. Price, quality anddelivery

For US firms, purchasing decisions - includ.jng whether to import from a developing country- are typically major, multilevel corporated~isions. The average industrial firm in theUnited States spends about 60% of its salesrevenues on purchases of services, materials, andcapital equipment (Reck and Long, 1988). Pur-chasing also interacts with other major corporatedecisions, including product development. mar-keting, and financing. As a result. such decisionsare an important part of a firm's overall competi-tive strategy.

Regardless of a firm's place in the distributionchannel or its market niche, virtually all USbuying firms have minimum product criteria for~

suppliers: an inseparable triad of price, quality,and delivery. If these criteria are not met, thebuyer loses revenue on the particular'transaction;moreover, the buyer's reputation with the even-tual customer is damaged.

(i) Price. Most US buyers are not nai:ve aboutthe implication of a low initial price quotation.Buying firms typically express their objective as a"competitive" price, Thus, a developing countrysupplier offering a very low price should expectclose investigation of how that low oost will bea.chieved without sacrificing product quality ortimely delivery. One US buyer, for example,r~alJed that to save a few cents per bicycle, theiroverseas .supplier used poor packing material,resulting in costly damage to 100 bicycles.

(ii) QUQ/ity. Quality is the second key demandof US buyers. Quality reqwrements exist forevery product niche whether or not it is a high-priced product. If the quality of the product doesnot meet the defined standards the product isusually not marketable, regardless of price or on-time delivery. In addition, for aU product seg-ments, "quality not only makes money, it savesmoney." The cost of inadequate quality includesproduct returns, price concessions, service costs,excessive inspections, inventory waste, andmanufacturing slowdowns.3

The definition of product quality, however,varies according to product niche or price range.This variation in definition is well exemplified byfootwear. Inexpensive leather, vinyl or plasticshoes (retailing for US $15 or less per pair) arenot expected to be the latest style, nor of topgrain leather, nor are they expected to lastthrough replacement heels or soles. They aregenerally not required to be stocked in half sizesor in widths other than medium or wide. Incontrast, shoes at the higher end of the retailmarket must embody fashion elements that varyby season, year and function. A man's leatherdress shoe that retails for over USSIOO must beperfect in terms of fit and finish, must wear well,and be available in a variety of sizes and widths.

For bicycles, quality is defined in terms ofperformance and appearance. These features arereflected in the components and materials in theproduct and the care with which the product ismade. In the low-end range (less than US$250) ofadult lightweights and children's bicycles, "goodquality" is achieved if the bicycle runs properly,is made of carbon steel, uses nonbrand namecomponents, and has a reasonable appearance(the finish is perfect, but welding may be visiblealong joints). For bicycles in the premium range,however, standards are higher on all counts. Forexample, one US manufacturer guarantees itsframes for life, requiring the frame to be made of

UNKS 325BUYER-SELLER

aluminum, chromally, titanium, or carbon fiber.The joints are finished with perfect smoothness,the paint finish is also perfect, the paint itself is ofthe highest quality so that it does not bubblewhen expo8ed to the sun, decals and graphics areapplied flawlessly, and components are of thehighest quality.

(Hi) Delivery. Goods must be delivered whenagreed upon, and an order must be completeevery time.4 The importance of on-time deliverystems from the need to meet manufacturingproduction schedules and from fashion cycles andseasonal sales peaks. For example, the stock ofbicycles for sale during the US summer seasonmust be in tbe warehouses of importers!wholesalers by April. Delay, even by a month,can cause the peak season to be nUssed, resultingin extra costs of carrying inventory to the nextseason or substantially marking down price. Forfashion-dependent products, such as certaintypes of shoes and garments, delays of even a fewdays are critical.

3. THE IDEAL RELA TlONSHIP; THEBUYER VIEWPOINT

Empirical research confirms that buying firmsin developed countries often are willing toengage in long-term relationships (Table 3).Indeed. they frequently prefer them (Hakansson,1987; Yoon, 1986).

Most US buyers interviewed for this studypreferred long-term, stable and direct relation-ships with both developed and developing coun-try suppliers. Footwear importers spoke of rela-tionships in Taiwan and South Korea that havelasted 10-20 years. Several small bicycle impor-ters reported buying from the same factories formore than 10 years. .

(a) Buyer motivation in long-term relationships

Buyers prefer long-term, stable, and directrelationships because they "make good businesssense," according to buyers interviewed. Thecosts of finding and evaluating new suppliers areavoided. Moreover, through repeated transac-tions with a supplier, buyers can reduce variousbusiness uncertainties (and resulting costs) asthey learn each other's demands and capabilities.Furthermore, relationships tend to become moreefficient as buyers and sellers work togetherthrough several buying cycles and confrontvarious problems. In exchange for larger, moreregular orders from buyers, suppliers collaboratewith buyers' product designers and may playacritical role in developing manufacturing tech-

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France 21 10 10 3 8Germany 7 15 20 6 11Italy 7 12 20 7 12Sweden "6 12 24 12 10United Kinadom 6 15 14 30 12Weighted average 7 12 16 7 11

Source: Adapted from HakanssoD (1987), based on SOO firm-la-fIrm, buyer-seller relationships.

nologies. Collaboration in design and manufac-turing at the early stages of product developmentcuts costs and improves quality.' Such mutualteaming is cumulative, and buyers are thereforereluctant to lose this advantage and start overwith new partners.

Even when buyers work through trading com-panies to identify a source of supply and tofinance the trade, they often deal directly withthe supplier to correct defects and bandle prob-lems with specification or quality control. Bicycleimporten, for example, send designs and specifi-cations to the foreign factory and work with thefactory to solve problems with shipments. Forthese reasons, buyers often want relationshipsthat are 8S direct as possible.

(b) The ideal supplier

US buyers speak of "ideal" suppliers as thosewith the right "business attitude." Such suppliersdo everything to get products out on time andmeet quality expectations. They correct mistakesquickly and assume the cost, understand thatretailers face severe price competition and timeconstraints, and understand US consumer de-mands for variety and quality. 6 It is also seen asimportant that suppliers "do what they say theywill do." Some suppliers, especially those tryingto penetrate a new market, promise quantities.delivery dates, or prices which they cannotachieve, and tben are surprised at the buyer'sangry reaction (Vernon.Wortzel, Wortze1 andDeng. 1988). .

In describing ideal partners, US firms alsoemphasize the Importance of strong managementwithin prospective supplier firms. Buyers lookingfor either new sources of supply or joint venturepartners search for suppliers who manage theirfactories efficiently, often regardless of the levelof technology those factories currently employ;

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interviewees commonly felt that new machinescould easily be installed so long as workersalready had the ability to use them efficiently andabsorb training readily. For many buyers, man-agement was the most important factor in defin-ing an ideal supplier. It was also the main reasonto visit a factory before forming a relationship: toobserve management in action. As one buyerphrased it, "I do not invest in plant X but in Mr.Y. It all depends on the people."

Another essential element of successful long-term relationships is close communication amongpartners. Reliable communication services andequipment (fax. telephones. and telex) are oneprerequisite. Frequent contact and openness arealso important. Smaller importers, particularlythose without representatives overseas, also indi-cated that it was helpful if a supplier or jointventure partner spoke technical English.

(c) Not all relationships are long-term; Not alllong-term relationships are close

Although US buyers generally prefer stable,long.term relationships with suppliers, the way inwhich this preference is expressed in practice isoften subtle and comple"x. Relationships tend togrow incrementally, with their duration anddepth more. evident ex post than ex ante. Arelationship often begins with a short-term agree-ment - perhaps a one-year production contract- and continues with annual renewals; tl:Jis is byfar the most common arrangement in bothbicycles and footwear. Thus, a close, long-termrelationship may arise with no more formalstructure than a continuing series of renewedshort-term contracts.

While performance is the glue of buyer-senerrelationships. the trust that is built as partnersgain experience with each other is the lubricant.Trust implies a moral contract and long-term

commitment which "reflects a condition ofmutual dependency where both client and sub-contractor are in a position to influence the otherby their behavior" (Lorenz, 1988, p. 206). Buyersfiod trust important because it facilitates infor~mation exchange. It also encourages incrementalinvestments on each side for which there is noguaranteed immediate return. It allows partnersto adapt to unexpected contingencies. In theseroles, some buyers consider trust an essentialadjunct to formal legal agreements, and someeven use trust as a substitute. For example, oneexperienced buyer stated that the only feasiblecourse is to choose partners with great care andthen proceed "based on a handshake,"

If buyer and supplier work for each other'sbenefit, over time a system of mutual obligationand trust develops. A relationship often beginswith each side committed to a limited range ofresponsibilities, but gradually the relationshipdeepens as each party goes slightly beyond itscontractual commitments. Thus, the collabora-tion deepens in small increments. Each side helpsthe other in many ways. For example, if ex-change rates fluctuate outside a certain range,the buyer and seller may share the cost. If acompeting supplier offers a lower price, thebuyer goes to the long-term supplier first to see ifthe latter can match the offer. The buyer main-tains a certain level of product orders to keep thesupplier going regardless of the buyer's immedi-ate demand. One large importer of low-pricedshoes spoke of the necessity of "keeping his goodsuppiiers happy."

It is not unusual, however, even in close, long~term relationships to have each side seek toreduce its risks. Several situations in particuiaroften cause buyers to feel vulnerable and moti-vate them to develop protective arrangements,Prominent among these is one in which the buyerhas only one source of supply. To both preservecredibility in negotiating prices and to protectagainst nonperformance, a buyer may maintainrelationships with two or more alternative sup-pliers. Relatedly, some buyers limit the percent-age of a supplier's total production that they arewilling to buy. An example involved a firm thatwas willing to support a good supplier withregular orders but would never buy more than10% of any supplier's production. Buyers alsoinsert clauses in letters of credit which protectthem against late or defective orders.

Buycrs value the flexibility to change supplierswithout losing invested capital and so are often infavor of maintaining relationships through aseries of short-term contracts. On the otherhand, under these arrangements, the buyer doesnot fully control the producer's factory, produc-

BUYER-SELLER LINKS m

tion priorities. or internal management. Thebuyer's ability to control the producer firm islimited to negotiating future orders. price, andaccess to markets and information. Such control,in practice. is often sufficient. Willingness tocommit to and to invest in formal joint venturesoften arises when a buyer firm is seeking accessto complementary assets or is trying to capture agood source of supply in a country with few goodsuppliers.

In short, the commitment of each side to thedepth of the relationship often is implidt ratherthan explicit, revealed in practice rather than instated policy. The corollary is that the legal formsof buying arrangements are not necessarily accu-rate indicators of the depth or duration of abuyer-seller linkage. Many arrangements basedon annually renewed contracts will last longer,grow larger, transfer more infonnation, andinvolve greater commitment by each partner thanmany formal joint ventures.

4. GAINS TO THE SUPPLIER

(a) MarkeJing information

For suppliers, buyers provide a crucial link intothe maze of product varieties and marketchannels.

A marketing channel is a chain of firms orother actors that handle the physical and legaltransfer of products as well as the flow ofinformation regarding products, markets, andtechnology. As illustrated throughout this paperand in Table 2, channel structures tend to evolvein response to industrywide changes and varyconsiderably amont! industries. OnlY bv focusin2on a specific market segment within an Industry isa supplier able to identify market access andrelated competitive strategies (see Rosson andReid, 1987).

Bicycles and footwear readily illustrate indus-try variations. In Table 2 market segments aredelineated by price range. The discount bicyclemarket segment (less than $250) accounts forabout 70% of all bicycles sold in the UnitedStates, of which over 50% are imported. Themain retai[ outlets are mass merchandisers anddiscount chains such as Sears, K-Mart andWalmart. The other 30% of bicycles. of which73% are imported, are sold through over 6,000independent bicycle dealers that comprise thepremium market segment. Within each segment,there are several subsegments defined by size,adult/child, and end-use (e.g., leisure, racing).

The footwear industry may also be divided intomarket segments based on retail price. For

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example. about 25% of the total pairs of shoessold in the United States are sold throughmscount retail outlets. Of these shoes, it isestimated that about 95% are imported. Withineach price segment, the footwear market can befurther divided according to male/female. adult!child, use, physical components (leather, vinyl,canvas. plastic), and style.

Mapping the channel structure of an industry isnot an easy task because information is not oftenregularly ~ collected or found in one place.

Channel structures are typically pieced togetherby talking to industry analysts, channel members,and consultants specializing in a particular m~!.ket segment. Buyers may assist sellers in thisprocess by providing marketing infonnation as towhat products are selling in a particular seasonand product specifications. Buyers also reducesuppliers' needs for such information by them-selves taking most of the risks of selling theproduct.

(b) Production information

Buyers also render long-term benefits to sup-pliers in the fooo of infoooation on productiontechnology. This occurs principally throughvarious fooos of in-plant training. The buyer maysend international experts to train local workersand supervisors. During development of theTaiwanese shoe industry, for example, a USimporting firm brought in Italian shoemakers anddesigners to train Taiwanese technicians, some ofwhom have since become plant technical super-visors.

Buyers may also arrange short-term workertraining in a developed country plant. To empha-size differences in expectations about productionquality, one importer had his supplier visit a USplant to observe production. At the end of theweek, the supplier conceded that only one in 10of his components would be acceptable for thebuyer's needs. Such appreciation is crucial inmotivating quality improvement in LDC factor-ies.

Learning transferred to a supplier firm typi-caUy includes specific lessons on product details,such as correct paint finish, cutting stray wires offbicycle seats, and using appropriate packingmaterials - lessons learned in the course offulfilling many orders. For instance, on-linelessons about how far to tighten a bolt areimportant because excessive tightening mightstrip threads and prevent the bicycle from being"knocked down" for shipment. When a bicycleframe maker stacks too many finished frames ona dolly, the bottom frames become bent.

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Training in discrete production operations -such as teaching a production worker how toaccomplish a particular task or how to operate aspecific type of machinery - is not sufficient tomaximize the benefits of the relationship in thelong run, from both the producers' and buyers'perspectives. US buyers report that if suppliersunderstand what is required in developed coun-try markets, discrete production lessons take on .more meaning, and suppliers are able to extrapo-late from these lessons when faced with otherproduction decisions. For example, one bicyclebuyer said it was difficult for his developingcountry supplier who was unfamiliar with the USmarket to believe that white was an appropriatecolor for a bicycle, that US bicycle buyers wouldreturn a bicycle if it needed even a little tinkeringafter they bought it, or that the US ConsumerProduct Safety Commission would reject anentire shipment of bicycles because of one bicyclewith a loose wire. Until suppliers understand themarket for which they are producing, qualitycontrol might not consistently meet US stan.dards.

(c) Buyers willing to transfer what it take$ to getthe product out

Interviews suggest that buyers are willing totransfer to suppliers only the minimum informa-tion required to get the product out. Buyers arenot particularly motivated to transfer informa-tion that might help their suppliers bypass themin the distribution channel or even enter themarket as competitors. US producers and impor-ters typically feel that it is their exclusiveresponsibility to interpret the US market, fore-cast trends, and maintain control of relation-ships with the customers (such as retailers) nextin line in the channel. .

Accordingly, it is generally the responsibilityof the developing country supplier to go beyondproducing under specifications to take full advan-tage of the linkages developed through buyers.Creative and aggressive suppliers use their con-tacts to learn more than their buyers may offerdirectly. For example, one LDC footwear firmwas very successful at deepening relationshipswith buyers because it complemented the infor-mation received from them by upgrading its plantand providing its staff with job training in Italy.

Another developing country firm's manage-ment was interested in selling its product in theUnited States under its own brand name once itsproduct became technologically competitive.While acting as a supplier to a large US firm.company management traveled to the United

States often, went to trade shows, accompaniedits buyer's sales people on calls to US dealers,and sent its staff to the United States to learn themarket and the distribution system firsthand.This exposed the supplier and his staff to thedemands of the US market and to its distributionchannels. Eventually tbis supplier entered inter-national markets under his own brand name.

S. FORMATIONOFBUYER-SELLERRELATIONSHIPS

(a) Qarriers to entry for new suppliers

As indicated above, US buyers prefer to staywith suppliers they know. Collaboration over anextended period generates a cumulative. stock ofinformation not only for the supplier but for thebuyer as well. This stock includes both produc-tion details learned over the course of manyorders and information about the supplier'sresources and behavior. Buyers commonly reporttaking on new suppliers only when they foreseeincreased sales beyond current suppliers' capa.city or when existing suppl~ers cannot meetchanging quality or price requirements. Whilebuyers are always looking for information aboutgood suppliers in case a need arises, the numberof "windows of opportunity" for new supplierfirms may be limited. .

This circumstance is exacerbated by a generaltrend in US manufacturing to reduce the overallnumber of suppliers. As US manufacturers cometo rely more on external vendors. to providetechnology and design, as manufacturing proces-ses increasingly are based on just-in-time inven-tory management, and as standards of produc.tion quality are enhanced, many US firms arereducing their number of sl1Ppliers in favor ofcloser partnerships with a few of their bestsuppliers. Under these closer arrangements,buyers visit plants frequenily, engineers spendtime at each other's facilities, and buyer's man-agement invests time in building relationshipswith supplier's management. In consequence, thenumber of firms on supplier lists becomes fewer,and the barriers to entry for new suppliersbecome higher.

Advances in. data processing technology havepromoted the development of these closer rela.tionships between suppliers and buyers. Somefirms now closely manage worldwide suppliernetworks through real-time communication linksand sophisticated logistical programming. Com.puterization allows customer orders to be sentdirectly to suppliers, and frequent deliveries inresponse to actual. sales save on inventory

329BUYER-SELLER LINKS

carrying costs and reduce the amount of goodssold as "remainders" at discount. These sametechnological developments, however, tend torestrict supplier opportunities to firms alreadytied into these data processing systems.

As these trends continue, developing countryfirms may find it more difficult to enter relation-ships and thereby break into industry networks.Without the ability to compete on the basis oftechnology, quality, and delivery - as well asprice - developing country firms may find theyare increasingly unable to get their first orders.

(b) Sources of informtltion about suppliers

When evaluating potential suppliers, virtuallyall buyers first seek information within their ownnetwork.. This network is a tight system ofproduct-specific buyers and suppliers of bothfinished goods and components. The first sourceof information is the personal judgment of other

buyers.7Important information also. comes from watch.

ing and imitating veteran buyers noted forfinding good sources of supply. 8 Buyers also note

where component manufacturers locate newplants. For example. Shimano, a Japanese sup-plier of components for premium bicycles,opened a plant in Indonesia. (This move wasconsidered a point in favor of Indonesian sup-pliers in case Indonesian firms later decide toexport complete bicycles to the US market.)

"Following the leader" can be a relatively inex-pensive method of identifying suppliers, if doneeffectively. It saves on direct search costs. Themain cost is the timelag involved in trackingmarket developments. Watching too long is not agood strategy since the later a buyer enters amarket, the greater is the probability that thebest suppliers have already formed long-termrelationships.

Buyers also use trade fairs and conferences assources of information. Since buyers inspectproducts at trade shows and product exhibitions,the burden is on potential suppliers to make goodpresentations. Lack of capability in makingeffective presentations limits the usefulness oftrade shows. A more direct method of identifyingsuppliers is to visit their factories to assess theirlogistical and human resource capabilities.Buyers also rely on intermediaries such as tradingcompanies or manufacturing representatives tolocate suppliers for them.

These approaches - relying on personal judg-ment by other buyers, watching leading firms,and visiting factories to evaluate supplier capabil-ity - make good sense for buyers for several

330

reasons. First. developed country buyers cannotrely on brand names in developing countries togive accurate signals about the marketability ofthese products in dev~loped countries. S~n<!, athese products in developed countries. Second, a perfonnance, positive natiOnal reputations aredeveloping country firm's perception of what found to benefit a broad range of industrialconstitutes a good supplier may differ from a US sectors, even industrial sectors that did notbuyer's perception. Experienced US buyers are warrant outstanding reputations (Turnbull,able to evaluate suppliers from a comparable 1987). In Germany, for example, the genera}

. point of view. Third, information from develop- reputation of its workforce for excellent technicaliog countries' trade press is not easily available to skills has helped manufacturers make inroadsforeign buyers, due to barriers of language and into product lines where they had no priordistance. Further, it is typically less technically' experience.sophisticated than trade press in developed It is common for buyers from developedcountries. Similarly, lists and directories from countries to assume a product quality hierarchytrade promotion organizations, recommenda- proportional to the economic level of the coun-lions from the supplying countries' embassies' try. Products from developing countries areand other advertisements from suppliers often perceived as less technologically advanced and ofhave little credibility (Deng, 1987, pp, 204-205). poorer quality than those produced in developed

US buyers do not necessarily approach only countries (Chiang and Masson, 1988; Yoon,other US buyers for information. One small 1986; Deng, 1987). According to many USindependent bicycle importer preferred asking buyers, in comparison with NIEs, LDCs do notJapanese buyers about suppliers because of their have production prerequisites such as access toproduct knowledge and influence among Asian the right components, raw materials, and skilledsuppliers. Although buyers typically do not teU labor, nor do they work in politically stableother buyers the details of particular deaJs with environments or have a good tran~ort infra-suppliers, they often will discuss the suppliers' structure. Such general skepticism causes aqualifications, demands, and past performance. buyer to be more cautious in expectations aboutWillingness to supply accurate supplier refer- specific products, especially if the products re-ences is a part of the mutual obligations within quire high-quality production or sophisticatedthe industry network. Over the years, one impor- technology (e.g., premium market bicycles).ter stated "One learns who to trust in terms of Such skepticism about LDC capabilities mani-information." fests itself in two ways. A single unfavorable

After consulting others in the network, buyers buying experience may have a major impact bytypically use several approachc:s to making a final confirming an importer's already cautious atti-choice on suppliers. One is to rely on affiliate tude and this exacerbates a perhaps negativeoffices and/or the firm's own employees in the view of a particular country's manufacturingsupplier country to make the final selection. ability. For example, one US bicycle importerSmall importers and retailers without representa- tested a supplier from a co\llltry not noted fortives on site may develop a short tist of several supplying quality bicycles. The first shipmentlikely candidate suppliers, order samples for from the LDC was of such poor quality that theevaluation, and even visit their plants. buyer decided not to order again. Word of that

No matter how careful the selection process, buyer's experience spread among other buyersthe real test of a buyer's decision comes when the and independent bicycle dealers. This "publicbuyer and supplier are working together. For this good" effect of individual experiences was takenreason, buyers tend to remain cautious after the into account by the Taiwanese government whenfinal selection. For example, buyers often begin Taiwanese firms began exporting bicycles. Thewith small orders. perhaps for a simple product, government was reported to have paid for theand let the relationship build gradually. Because return shipment of 300,000 defective bicycles topartners in the buyer-seller relationships are Taiwan rather than let them be sold in the Unitedconcerned with reducing uncertainty through States and damage the reputation of Taiwaneselearning and mutual assistance, initial poor ex- finns.periences or lingering doubts on the part of one A second way in which buyer skepticism isor the other will cripple their relationship. demonstrated is in the buyer's estimate of how. '- .--,.,-- &_1_- L_"'__- - :_.1~- _.~..I..~

(c) The role of country reputation in supplierchoice

Another infonnation source for

WORlD DEVELOPMENT

consumers is a country's general national reputa-tion, shared by almost any product produced inthat nation. In ~eys ~f ~ro~ export

fi~~~ ~ .

A second way in which buyer skepticism isdemonstrated is in the buyer's estimate of howlong it might take before a particular productreaches a level of quality that would allow theproduct to be marketed abroad. Buyers inter-viewed were especially skeptical of finding thequality and skilled labor to produce upper mar-buyers and

ket goods in Asian LDCs in the near future. Oneimporter said it would be 5-10 years ,before AsianLOCs could produce upmarket leather shoes, forexample. Another was doubtful that Asian LDCswould ever be able to produce a quality bicyclecomparable to what could be obtained currentlyfrom Taiwan. One buyer had no confidence at allin Asian suppliers' ability to interpret fashion ordesigns that would sell in the US market.

The reluctance to move to an LDC from AsianNIBs may also be a function of the buyer'sexperience in his or her current supplier marketsand unwillingness to invest in learning a newmarket. As one importer said, he had spent 20years in Asia and felt that he knew that marketbest. Even though other importers had suggestedgoing to Mexico because of low labor costs, hewas dissuaded from doing so by the commitmentin resources it would take to learn a new market.

Our interviews and other surveys, however,clearly indicate that although buyers are general-ly skeptical about the potential of LDCs, they areoften willing to work with specific firms. They.frequently scan low-cost countries for specificopportunities despite general reputations for lowproduct quality and delivery. Most buyers indi-cate in surveys that country reputation is, in fact,too broad a category to be useful in evaluatingspecific products for particular market niches(Yoon, 1986). Direct evaluation of an individualproduct remains an extremely important sourceof information to a buyer. Asked what it wouldtake for an experienced buyer to try a supplier ina specific LDC, one importer replied: a planeticket to the country to visit the factory, meet themanagement, and discuss samples. If the productand management of the firm were good, he mightput in a sman initial order. Excellent productionof other goods in an LDC, however, evenmanufactured items that require similar produc-tion skills as bicycles (e.g., tricycles) would notbe enough to entice buyers into placing orders. Inshort, evaluating industry capability throughproxies is not generally deemed valuable.

Further, professional buyers are often lessconcerned about the country of origin than arefinal consumers. They are able to "hide" compo-nents sourced from a developing country (e.g.,leather uppers stitched in Costa Rica) byempha-sizing the country in which the components wereassembled (the United States). Finished goodssourced from developing countries thus can beshielded through US brand names that conveypositive signals about quality, performance orfasbion levels. Goods also can be sold throughretailers who have strong reputations for goodreturn policies, after sales service, and forhonoring warranties.

..-............---.-....-.......-----

331BUYER.SELLER UNKS

It is clearly difficult for developing countrysuppliers to establish their own retail brandnames. For example, even a Taiwanese finD withlong experience in marketing bicycles underforeign brand names faces an uphill battle inconvincing retailers to stock identical bicyclesunder its brand. An intermediate strategy em-ployed by some NIE firms is to buy well-knowninternational brand names. Toy producers inHong Kong, for example, have bought brandnames from established British companies, as ameans of taking advantage of the links betweenthose companies and their buyers. Brand names,however, do not playa role in improving LDCcountry reputations in most cases, particularlyoutside the relatively limited cases where the goalis direct retail sales. Improving reputations in-stead requires greater emphasis on worker train-ing, management practices, and internationalstandards of quality and de1ivery - elementsimportant to professional buyers.

6. IMPLICA nONS FOR PUBLIC SUPPORTOF BUYER-SELLER LINKS

Throughout this paper we have emphasizedthat developing country exports need specializedindustry information on product market require-ments and production techniques. For manydeveloping country firms, such information is noteasily or costtessly acquired. One means ofovercQming this informational barrier is (ong-term collaborative relationships with developedcountry buyers. Developing country firms,however, face barriers to entry in the formationof these sought-after relationships. For entry andmaintenance of buyer-seller relationships, USfirms require a combination 'of price, productquality and reliable delivery. In addition, turn-over in existing buyer-seller relationships tendsto be slow because partnprs are reluctant tothrowaway their stocks of learning and mutualob1igations.

Much of the burden of overconUng thesebarriers necessarily falls on supplier firms. Theymust be ready to do whatever is required to meetbuyers' demands and must maintain the "rightbusiness attitude:' Once involved in a buyer-seller relationship, a supplier is more likely tomaximize benefits if he or she proactively takesadvantage of opportunities presented indirectlythrough the relationship and is willing to investresources in his or her own operation.

Public efforts at export promotion will be mosteffective when they supplement and supportdevelopment of these linkages within the contextof well-defined, narrow markets. Historically,

332

many public efforts at export promotion havebeen highly ,general, seeldng to serve a range ofdiffering industries or emphasizing general ty\>esof support. It is not surprising, therefore, thatpublic sector institutions have a disappointingreputation for expanding their countries' exp'ortsand encouraging successful new exporters. to

How can public efforts be recast to support thedevelopment of buyer-seller linkages? How canpublic institutions become the ally of supplier firmsin identifying marketing channels, increasing sup-pliers' attractiveness to buyers, and helping sup-pliers maintain relationships that allow transfers ofmarket and production information to occur? .

Some. public approaches operate directly toencourage long-term relationships with deve-loped country buyers. Rhee and Belot (1989)have suggested that the demonstration (or cataly-tic) effect of a single, high-visibility relationshipis very strong. The spillovers from this relation-ship occur through movement at trained workersand orders from that relationship to other firms. in the supplier's country. The public role in such

situations can be quite limited.. For example.investment incentives may encourage foreigninvestment. but empirical evidence on how pub.lie efforts can identify, attract, and encourage theUcatalytic agents" described by Rhee and Belotremains quite limited. Wheeler; Cole and Iriani.wati (1989) hold a contrary view. They havesuggested that a policy of "benign neglect"worked in the development of garment exportsfrom Bali: Italian and other buyers there hadgreat freedom to link up with suppliers withoutfacing restrictive investment and labor laws.

A more activist public approach invites expertsto work with developing country firms for ex-tended periods of time to "fill in the gaps" intheir current capabilities (Keesing and Lan,1988). Lack of information about product designmay be an important entry barrier for a particularproduct; for another, manufacturing technologymay be the crucial missing input; for a thirdproduct, poor delivery reliability may be aconstraint. .These gaps can be self-reinforcing:lack of information results in low export activity,which in turn perpetuates poor information flow.

These "gap.filling" experts may include cur.rent or retired staff of large international buyers,industry consultants, faculty from design insti-tutes, manufacturing specialist and informationtechnology specialists. They might provide work-shop clinics for a selected number of firms wherethey provide lessons on how to meet internatio-nal market specification and quality standards.An example of this approach is the ProductSpecialists Program managed by the Departmentof Trade and Industry in the Philippines. The

. . .DEVELOPMENTWORLD

program is focused on export priority sectors andfeatures seminars and firm-level cC)nsultancyservices. These clinics convey design and manu-facturing information to Philippine suppliers aswell as market information support such assurveys of market trends and help with planning,design and implementation of specific marketingevents.. In addition to specific training, theexperts provide some linkages into the interna-tional network for that industry.

Public support of technical certification institu-tions to upgrade local production standards issometimes suggested as a way to improve thequality or technology reputation of firms in adeveloping country. India. for example. hasestablished an Export Inspection Agency underthe Export Inspection Control Order. This agen-cy has been plagued by problems of inefficencyand delays. Its capability to provide diagnosticassistance is limited. Even if such systems arebasically sound, US buyers interviewed in thisstudy either knew little about such institutions orwere skeptical of their value. One joint-venturepartner was aware of a standards institutionwithin the developing nation in which he had aplant but still sent local components back to theUS parent plant for testing. Certification strate-gies are therefore better pursued by forming 1inkswith standards and certification institutions indeveloped nations. since they provide greatercredibility.

Informational gap~filling activities may alsoinclude training for both managers and produc-tion workers. The Indian Export Marketing Fund(administered by the Export-Import Bank ofIndia) serves a simHar function to that of thePhilippine's Product Specialists Program, onlythis fund sends Indian exporters abroad ratherthan bringing specialists to them. The fund alsosupports market surveys and product develop-ment and adaptation. The fund has succeeded indeveloping new exporters, but it is too early tojudge its impact on entry of Indian firms intointernational networks or in developing internalnetworks of information.

A related information gap is a lack of creditmanagement institutions. Suppliers, particularlysmaller ones, need to assure themselves that theirbuyers have good credit histories. Similarly.buyers use the credit rating of potential suppliersto determine whether long-term relationships canbe sustained. Credit rating facilities are rarelyavailable in developing countries. The use ofinternational agencies, possibly in partnershipwith domestic firms, may be an efficient methodfor providing credit rating services. These mighthave further benefits in lowering the costs oftransactions.

A less direct, but possibly crucial method ofpublic support for firm-level exporting is throughprovision of public infrastructure to permit effi-cient channel operations. Basic communicationsystems (e.g., fax, telephone, telexes) and trans-portation facilities (allowing reliable, low-costmovement of goods to port, and storage andtransfer facilities at dockside) are highly relevant.

A final area for possible public support con-cerns a country's reputation. Since buyers tend toassume that the level of technological capabilityand product quality in LDCs matches their level

1. The experience of East Asian exporters clearlydemonstrates the development role played by businesslinkages in overcoming shortages of technical, market-ing and managerial information that hampers develop-ing country suppliers. See Morawetz (1981); Rhee,Ross-Larson and Pursell (1984); Keesing and Lan(1988); and Rhee and Belot (1989).

2. U. S. Industrial Outlook figure refers to nonrubberfootwear, SIC 314, which includes all footwear exceptrubber, rubber-soled, and fabric footwear.

3. See "Designing in Quality" (i989) and Mody,Susi. Sanders and Van Zoest (1990) for a discussion onhow quality control at every stage of the manufacturingprocess saves money.

4. Vernon-Wortzel, Wortzel and Deng (1988) foundthat suppliers in the People's Republic of Cbina weresurprised by US buyers' anger over incomplete deliver-ies on orders that "would be filled eventually." Basedon experience in their home market, Chinese suppliersmisinterpreted supply and delivery as specified in thecontract with the US firms as an indication rather thana literal statement of what US buyers expected toreceive.

.

5. See also Casson (1987) for a link between productquality and ownership structures.

Casson, M.. The Firm and the Market: Studies onMultina/ional Enterprise and the Scope of the Firm(Cambridge, MA: MlT Press, 1987).

Cayer, S.. "Building a world class supplier base is thenumber-one priority," Purchasi1Jg (April 14, 1988).pp. 51-55.

Chiang. S., and R. T. Masson. "Domestic industrialstructure and export quality," International Econo-mic Review, Vol. 29, No.2 (May 1988), pp. 261-269.

"Country Survey," World Footwear, Vol. 2. No.1(JanuarylFebruary 1989).

Cycle Press (December 1989). p. 25.Deng, S., Information Searching and Supplier Selection

BUYER-SELLER LINKS 333

of economic development, public efforts -especially if narrowly targeted at selected marketsegments - might be important in overcomingbuyers' initial negaUve expectations. Improve.ments in quality and technology could. be adver.ti-sed by inviting international buyers to tour modelfactories. Additional actions in support of thisobjective might include compensating buyers fordefective products sold by their suppliers and,at the same time, creating penalties for poorquality .

NOTES

6. One developing country representative in theUnited States complained to the authors that hiscountry's consumer products were not selling well inthe United States because the US consumer was "toopicky. " This was exactly the attitude that would conveyto buyers that the supplier would not cooperate inmeeting customer demands.

7. Deng (1987), who examined the informationsource preference of US buyers of shirts, watches, andchinaware from Asian NIEs. reached the same conclu-sion.

8. This circumstance, in turn, often requires these"(ead" firms to make arrangements to protect theiraccess to sources of supply they pioneered - forexample, through a joint venture in which they areguaranteed a percentage of production.

9. YOOR (1986) found that US purchasing managers'demographic characteristics (age. sex, purchasing ex-perience) or firms characteristics (size, volume offoreign sourcing, size and degree of centralization ofthe buying center) did not have an effect on theformation of country stereotypes.

10. For description of more enterprise-based exportpromotion programs, see Keesing and Lall (1988), andSeringhaus and Rosson (1991).

REFERENCES

in Import Purchasing from Developing Countries,PhD dissertation (Boston: Boston University, 1987).

"Designing in Quality." Appliance Manufacturer(February 1989), p. 46ft.

Egan, M. L., and A. Mady, "Buyer-seller links forexport development" (Washington, DC: WorldBank, 1990).

Footwear Industries of America, "Current highlights"(Washington, DC: Footwear Industries of America,1988).

Hakansson, H. (Ed.), Industrial TechnologicalDevelopmenr; A Network Approach (London:Croom Helm, 1987).

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G. Long, "Purchasing: AJournal of Purchasing and

WORW DEVELOPMENT

1985).Vemon-Wortzel, H., L. H. Wortzel, and S. Oeng,"Do neophyte exporters understand importers?"Columbia Journal of World Business, Vol. 23, No.4(Winter 1988), pp. 49-56.

Wheeler, D., W. Cole, and L. Irianiwati, "The boom inBali: In formation and enterprise development"(Boston, MA: Center for Asian Deve[opment Stu-dies, Boston University, 1989).

Yoon, H. D., Buying Decision Determinants of u.s.Purchasing Managers for Products from Newly In-dustrialized Countries, PhD dissertation (Columbus,OM: The Ohio State University, 1986).