The Relationships Among Advertising, Economic Development and Consumer Welfare: an Examination of Recent World-Wide Evidence

Citation:

Anthony F. McGann and Nils-Erik Aaby (1975) ,"The Relationships Among Advertising, Economic Development and Consumer Welfare: an Examination of Recent World-Wide Evidence", in NA - Advances in Consumer Research Volume 02, eds. Mary Jane Schlinger, Ann Abor, MI : Association for Consumer Research, Pages: 643-654.

Advances in Consumer Research Volume 2, 1975      Pages 643-654

THE RELATIONSHIPS AMONG ADVERTISING, ECONOMIC DEVELOPMENT AND CONSUMER WELFARE: AN EXAMINATION OF RECENT WORLD-WIDE EVIDENCE

Anthony F. McGann, University of Wyoming

Nils-Erik Aaby, University of Wyoming

[Anthony F. McGann, Associate Professor and Nils-Erik Aaby, Graduate Assistant, Department of Business Administration, College of Commerce and Industry, University of Wyoming. The authors are grateful for the substantive comments of Professors Frank K. Reilly and Raymond A. Marquardt in the development of this manuscript. The authors also wish to thank Mary Lee Cadwell, Graduate Research Assistant, for her extensive assistance.]

In the research reported here, the relationships among advertising, economic development and consumer welfare are examined using data from 47 countries in the period 1970-1972. Aggregate advertising was found to be significantly associated with gross national product, with foreign trade and with per capita GNP in the overall group of countries.

Attention was then focused on the relationships among these variables in the less-developed countries of the sample. In this group, advertising was found to be strongly associated with aggregate indices of economic development, but virtually uncorrelated with variations in per capita GNP. The authors infer that the uncontrolled growth of population in the less-developed countries prevents advertising from playing its usual role as the institution which distributes wealth to individual consumers.

INTRODUCTION

In 1958, Drucker noted a global phenomenon which he regarded as a new and major threat to international tranquility, namely, the growing discrepancy between the economic well-being in industrialized and "underdeveloped" countries. More recently, Ward (1968) has advanced this same thesis. Economists prefer to discuss the problem of this discrepancy under the name "terms of trade" (e.g., Kindleberger, 1956). By either name, the investigators of this phenomenon can be divided into two camps; those who are pessimistic about the prospects for closing, or at least diminishing, the gap and those who are optimistic over solutions to this problem.

An example of the pessimistic view is expressed by Prebisch (1966) who argues that the underdeveloped countries, essentially selling commodities in extremely price-competitive markets, are at a long-term disadvantage relative to the industrialized nations which trade differentiated goods in markets characterized by less-intense price competition. In contrast, the optimists argue that global discrepancies in economic well-being can be reduced. Recent experience has shown that underdeveloped nations selling energy commodities can achieve dramatic changes in foreign trade balances by embargoes, quotas and concerted price increases. More fundamentally, increased marketing activity by underdeveloped nations offers these countries the prospect of a better "deal" in world marketplaces and subsequent improvements in the economic well-being of their populations. Drucker ascribes to marketing this significant role:

. . . in every 'under-developed' country I know of, marketing is the most underdeveloped--or least developed--part of the economy . . . these countries are stunted by inability to make effective use of the little they have. Marketing might by itself go far toward changing the economic tone of the existing system--without any change in methods of production, distribution of Population, or of income. (Drucker. 1958).

This study was conceived as a partial test of the optimistic view toward the solution of international economic disparities. The authors adopt the position that recent benefits to underdeveloped nations which result from restrictions in trade (e.g., embargoes and quotas) are of a short-run nature. Alternatively, the benefits from intensified marketing activity hold the promise of more permanent improvements to economic progress and social welfare in the underdeveloped areas of the world. Specifically, this study examines the apparent relationships which have existed in recent years between advertising and national economic development, and between advertising and individual consumer welfare.

It is recognized, of course, that advertising is only one aspect of marketing activity. In this respect, the present study is not a test of the effect of overall marketing activity. Nevertheless, advertising has three properties which make it an intellectually-attractive point from which to begin the assessment of contemporary marketing effects:

1. Functionally, advertising is generally recognized as a stimulant to demand. Thus, any nation engaged in international trade, but particularly the underdeveloped countries would benefit from the effects of advertising. [Some would argue that this benefit of stimulated demand is not available to underdeveloped countries in that they primarily sell undifferentiated commodities not amenable to advertising. The authors reject this argument for two reasons. First, it ignores advertising's potential for stimulating primary demand. Second, recent domestic experiences with salt and dressed chickens, and similar international experiences with coffee and wines suggests that some commodities are amenable to differentiation via advertising.]

2. Operationally, advertising expenditures are measurable and available. In contrast, other aspects of international marketing, e.g. relative strengths of distribution channel members, represent, at best, qualitative data.

3. Philosophically, advertising has been described in domestic terms, as the institution of abundance; more precisely, the institution by which abundance is broadly distributed among populations of the industrialized western world (Sandage, 1972). If advertising can distribute "abundance" in the industrialized areas of the world, perhaps it can be expected to contribute, in the underdeveloped areas of the world, to the economic progress of consumers, or at least to their survival.

DESIGN OF THE STUDY

In order to assess the relationships among advertising, economic development and individual consumer welfare, data from two sources were collected. First, conventional indices of the national economy (Gross National Product, Exports, Imports and Population) were obtained from the International Monetary Fund (International Financial Statistics, 1974), for the period 1970-1972. This period was chosen since it represents the most recent three-year period for which complete data were commonly available. Second, by-country advertising expenditures ("Advertising Sales") were collected from annual special editions of Advertising Age (1973, 1972, 1971). After excluding those countries for which complete data were not available for at least two of the three years under study, a group of 47 countries were available for investigation. Using IMF designations, about 28% of this group can be considered "industrialized;" almost 22% are characterized as "other developed areas;" the remaining half are described as "less developed areas." (See Appendix 1 for country list and designations).

All financial data were converted to U.S. dollars using contemporaneous exchange rates for that year. The United States was intentionally excluded from this analysis; many of the centrally-directed economies and some of the newest nations had insufficient data to be included. For the countries included in the study, two substantive hypotheses were proposed:

HR1: Across nations, variations in economic activity are positively and significantly related to variations in advertising expenditures.

HR2: Across nations, variations in individual consumer welfare are positively and significantly related to variations in advertising expenditures.

WORLD ECONOMIC CONDITIONS DURING THE PERIOD

During the period under study, economic conditions in the sample countries can be characterized as expansive. Table 1 shows consistent increases in mean values for GNP, Exports and Imports. It can also be seen that mean values for aggregate advertising and for "advertising per employee" [Advertising sales per employee refers to the "sales productivity" of those in the advertising industry of each country. This figure was calculated by dividing the combined billings of those agencies reporting the number of their employees by the number of employees. Billings of agencies not reporting their employment figures are excluded from this calculation.] have increased each year. However, the substantial variations about these mean values suggests a more disaggregated analysis.

TABLE 1

OVERVIEW OF INTERNATIONAL ECONOMIC ACTIVITY: 1970-1972

It has already been suggested that the level of industrialization within a country is associated with its economic development. Table 2 shows the results of different levels of industrialization on both aggregate and per capita GNP. In the industrialized countries both aggregate and per capita GNP have increased each year. For the remaining countries, both figures increased slightly from 1970-71 and then decreased in the subsequent year. Table 2 also details the effects of different levels of industrialization on foreign trade as well as differences in the advertising industry across groups of countries. In the advertising industry, for both gross billings and billings per agency employee, the major differences exist between the industrialized countries and all other countries in the sample. For national product, foreign trade and the advertising industry, the between-group differences in economic activity are highly significant.

A second method of reducing heterogeneity among the sample countries is to form subsamples of countries on the basis of their common membership in economic unions. Approximately half of the countries studied belonged to one of four major unions. Table 3 presents differences for these "member" countries on aggregate and per capita GNP, foreign trade and the advertising industry respectively. Again, there are generally significant between-group differences.

By either method of disaggregation, the variances noted about mean values in Table 1 are translated into stark differences between countries which presently enjoy the benefits of past industrialization and those which are not (yet) industrialized. Using the IMF country categories, sharper differences are revealed between the "have" and the "have not" nations than are shown by use of membership in economic unions. It is clear that the discrepancies Drucker (1958) hoped marketing activity would alleviate have not disappeared in the ensuing 15 years.

GENERAL RELATIONSHIPS AMONG ADVERTISING ECONOMIC DEVELOPMENT AND INDIVIDUAL CONSUMER WELFARE

For the period under study one measure of advertising, aggregate billings, was examined for its relationship to national product and foreign trade. Table 4 shows a summary of the results when gross billings are used, in bivariate regression, to explain variation in national product and in foreign trade for the entire sample of 47 countries. These regression results suggest that aggregate advertising billings vary directly, positively and significantly with both economic activity and with individual consumer welfare. Further, the variation explained in these "dependent" variables ranges from a high of better than 80% for GNP to a low of about 20% for per capita GNP; better than 60% of the by-country variance in foreign trade (exports and imports) is accounted for by variance in the by-country aggregate advertising expenditures. Finally, the authors are inclined to note that the almost perfect correspondence between national sales and national advertising is no more a guarantee of maximized GNP than it is a guarantee of a firm maximizing sales in the analogous micro setting.

RELATIONSHIPS AMONG ADVERTISING ECONOMIC DEVELOPMENT AND INDIVIDUAL CONSUMER WELFARE IN "LESS DEVELOPED" AREAS

This study has taken as its focus the economic conditions in the underdeveloped nations. Accordingly the role of advertising in the twenty-four countries identified by IMF as "less-developed" was analyzed in regression similar to that for the total country group. Table 5 shows the summary of the bivariate regression results when aggregate advertising is used to explain variance in national Product as well as in foreign trade.

TABLE 2

EFFECTS OF INDUSTRIALIZATION ON:

TABLE 3

EFFECTS OF MEMBERSHIP IN TRADE ASSOCIATIONS ON:

TABLE 4

BIVARIATE REGRESSION; ADVERTISING ON GROSS NATIONAL PRODUCT AND FOREIGN TRADE

In this portion of the analysis, the results are mixed. For the less-developed countries, aggregate advertising is positively, directly and significantly associated with GNP, exports and imports. For this subsample of countries, aggregate advertising explains about the same amount of variance in GNP and import values as it does for the overall sample; somewhat less variance in exports is explained than was the case for the overall sample. However, aggregate advertising values are not significantly related to variation in per capita GNP. Thus, while advertising bears a common relationship to GNP and foreign trade in both the overall sample and in the less-developed countries, it is not influential in accounting for differences in individual consumer welfare for the latter group.

For the subsample of "less developed" countries, a second measure of advertising was developed. This measure is the ratio of advertising to gross national product. This measure differs from the absolute advertising level used above and represents the proportion of national product value which is devoted to advertising.

Again regression was employed to test the relationship between this proportional advertising figure and per capita GNP. Table 6 contains the regression results for the three years studied. As before, there is virtually no relationship between advertising (relative to GNP) and per capita GNP. (See Table 7 for a summary of results relative to the research hypotheses.)

TABLE 5

BIVARIATE REGRESSION: ADVERTISING ON GROSS NATIONAL PRODUCT AND FOREIGN TRADE IN THE "LESS DEVELOPED" COUNTRIES

TABLE 6

BIVARIATE REGRESSION: DOLLARS OF ADVERTISING PER DOLLAR OF GNP ON PER CAPITA GNP IN THE "LESS DEVELOPED" COUNTRIES

TABLE 7

HYPOTHESES AND ANALYTIC RESULTS

LIMITATIONS AND CONCLUSIONS

The authors acknowledge several limitations to this study. First, about half the nations of the world were not available for study because they did not have sufficiently complete data. Notably-frequent exclusions for this reason occur in the Sino-Soviet countries and among the newest nations. Second, production and population figures are less reliable for some countries than for others. However, for purposes of this study, the published data from two independent, reputable sources were accepted at face value. Third, no attempt has been made to assess the effect of advertising in a given period with national product or foreign trade in later periods. Finally the authors elected to sacrifice the trend-fitting possibilities (of including earlier periods) in order to isolate any uniqueness which may have been a feature of the most recent international economic experience.

In spite of these limitations, it can be asserted that advertising bears a strong correlative relationship to the national economic condition in the countries studied. Yet, while advertising explains significant levels of variation in GNP and in foreign trade in the less-developed nations, its explanatory power with respect to individual consumer welfare is virtually nil. The discrepancy between good explanations of GNP and no explanation for per capita GNP must inferentially be attributed to population growth.

The authors acknowledge one more item of evidence on the effect of population to individual consumer welfare. We recognize that growth in per capita GNP does not guarantee equitable distribution of incomes across a national population; rather it merely serves as an economic prerequisite for the political decisions which would accomplish this distribution. Finally we conclude that in our partial test of Drucker's proposal, advertising of itself has not been significantly associated with individual consumer welfare in the less-developed nations.

REFERENCES

Drucker, P. Marketing and economic development.Journal of Marketing, 1958, 22 (3), 252-259.

International agency section.Advertising Age, March 26, 1973, 33+.

International agency section,Advertising Age, March 27, 1972, 29+.

International agency section.Advertising Age, March 29, 1971, 29+.

International financial statistics.International Monetary Fund, 27 (3), March, 1974.

Kindleberger, C.P. The terms of trade. a EuroPean case study. New York: John Wiley & Sons. Inc.. 1956.

Prebisch, R., In Root, F. R., et al. International trade and finance.(2nd ed.) Chicago: South-Western Publishing Company, 1966 441-442.

Sandage, C. H. Some institutional aspects of advertising.Journal of Advertising, 1972, 1 (1), 6-9.

Ward, B. J. The lopsided world. New York: W. W. Norton and Company, Inc., 1968.

APPENDIX I

COUNTRY LIST

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