Editor Picks - China Business Knowledge

New study finds “green consumerism” is alive and well in China, with consumers willing to pay more for sustainable food

The 17 Sustainable Development Goals (SDG), which form the United Nations’ Post-2015 Development Agenda, are designed to provide a blueprint for achieving global peace and prosperity by 2030. Central to the agenda is the second SDG, which aims to “end hunger, achieve food security and improved nutrition, and promote sustainable agriculture.”

Meeting such policy objectives is critical to the prospects of many developing countries, as well as emerging economic powerhouses such as China, but they also pose a formidable challenge. Global food production is predicted to more than double by 2050, to meet growing demand that comes mainly from developing countries, as the world’s population, which reached eight billion in 2022, expands by around 0.8 percent per year.

“The government should work together with other agencies to boost consumers’ trust in sustainable food by ensuring that the information provided is scientifically-based, accurate, comprehensive and communicated effectively.”

Prof. Francisco Cisternas

Not only does the speed of population growth make the goal of food security hard to achieve, but demand for carbon-intensive meat products in developing countries tends to increase as they become richer. This trend, which is accelerating in China, following decades of rapid economic growth, can result in significant environmental damage, thereby frustrating the goal of making agriculture more sustainable.

A Growing Demand of Animal Protein

As populations switch to a Western-style diet, there is also a growing demand from consumers for beef and dairy products instead of other forms of animal protein. However, previous research shows that cattle farming results in eight times more greenhouse gas emissions per 100g of protein than the production of chicken or fish.

beef-greenhouse-gas — Previous research found that cattle farming results in higher greenhouse gas emissions than the production of chicken or fish.

So how can food production be made more environmentally sustainable and resilient, while also feeding more people more effectively? A novel approach to cracking this conundrum that has emerged over recent years is focused on changing consumption patterns away from carbon-intensive foods such as meat and dairy products and towards sustainable foodstuffs. But can consumers actually be motivated to change their behaviour?

A timely new study from the Chinese University of Hong Kong (CUHK) has addressed this question by investigating the factors that motivate consumers in China to purchase food which is produced in a way that protects the environment, conserves natural resources such as air, energy and water, and uses less energy.

Entitled The future of sustainable food production in China, the study was conducted by Francisco Cisternas, Assistant Professor in the Department of Marketing at CUHK Business School; in partnership with five other CUHK academics. They are Prof. Lam Hon Ming and Dr. Carolina Andrea Contador Sariego of School of Life Sciences; Prof. Shelly Lap-Ah Tse, Dr. Shuyuan Yang and Dr. Zhiguang Liu of the Jockey Club School of Public Health and Primary Care; Scholars from other universities in China, Canada and the UK also took part.

Attitudes and Social Norms Affect Consumer’s Choice

The researchers theorised that consumers’ willingness to purchase environmentally friendly food is determined by their intentions, which in turn are affected by their attitude towards such purchasing behaviour; the social norms to which they are exposed; the degree of perceived control over their ability to make such purchases; and their perceptions of the food’s quality.

green-consumption — The study finds that “green consumerism” is alive and well in China.

To test out the theory, they conducted a face-to-face survey of 2,422 Chinese consumers in rural and urban districts across five provinces, spanning northern and southern China, who formed a representative sample of the whole population. The five cities involved – Beijing, Nanchang, Xi’an, Taiyuan, and Shenyang – were chosen to reflect different income levels across China.

Respondents’ behavioural attitudes were measured in terms of their degree of concern about deforestation, drying lakes and rivers, and other damage caused by the use of land and water resources for agricultural production; while social norms were assessed by examining the extent to which participants were influenced to buy sustainable food by pressure from government bodies, the media, experts, international agencies, and social media commentators.

Perceived behavioural control was measured in terms of the cost and convenience of making purchases and participants’ views on certification systems and purchase conditions. The perceived quality of sustainable food was assessed by examining their views on the ingredients, nutritional values and health benefits of the food, plus their degree of trust in certification schemes. Certification agencies involved in the study included international agencies, the Chinese central government, and local universities and scientific institutions.

Consumers Prioritise Environment in Food Purchases

green-consumer — The results confirm that Chinese consumers are inclined to purchase sustainable food.

“The results confirm that Chinese consumers are inclined to purchase sustainable food,” says Prof. Cisternas. “Among the four factors, behavioural attitude contributed most to people’s willingness to buy sustainable food.

“These consumers are highly concerned about the impact of their food consumption on the environment, rather than simply considering personal benefits such as food safety. They limit their demand for non-sustainable food and replace their needs with sustainable alternatives.”

Prof. Cisternas says this willingness to spend more for sustainable food may be a form of the sort of “green consumerism” that prompts people to buy fair trade products, which cost more without necessarily offering better quality, yet still provide consumer satisfaction.

The second biggest impact on people’s willingness to purchase sustainable food was from social norms, with government promotions, and information in the media and on social media from experts, academics and commentators all influencing their readiness to pay more for environmentally friendly food, the study found.

Perceived quality also played a part, with nutritional values, and health and nutritional benefits having more impact than the simple ingredients of the food, while lower levels of perceived behavioural control – partly measured by the distance between a participant’s home and markets stocking sustainable food – had the expected negative impact.

Enhancing Food Certifications Builds Trust in Sustainable Consumption

“The result showed that greater difficulty in accessing sustainable food reduced participants’ willingness to purchase such food,” says Prof. Cisternas. “This indicates that making it more convenient to purchase sustainable food would boost consumers’ intention to buy these items.”

sustainble-food — Consumers” willingness to buy sustainable food is affected by the type of its certification scheme.

The study also found that participants’ willingness to buy sustainable food was affected by the type of certification scheme it was covered by, with consumers placing most trust in certification by the Chinese central government. However, compared to consumers in other countries, Chinese consumers had a lower level of trust in food certification schemes overall.

Prof. Cisternas says the findings, which can be generalised to the whole population of China – and similar countries and regions – due to the representative nature of the survey, have implications for food policy.

“Information disseminated through the media and social media by government bodies, experts, international agencies, and commentators is more likely to influence consumers, when the organisations concerned are considered trustworthy,” he says.

“The government should work together with other agencies to boost consumers’ trust in sustainable food by ensuring that the information provided is scientifically-based, accurate, comprehensive and communicated effectively. Further improvements to certification schemes and better regulation and compliance monitoring may also help to build trust.”

On this page...

CUHK scholar shares insights on U.S. interest rate outlook and how to forecast it through a structural framework

By Pan Jingyi, Principal Writer, China Business Knowledge@CUHK

Following a series of 10 consecutive hikes, the U.S. Federal Reserve voted to pause its aggressive campaign of interest rate increases in mid-June. The Federal Open Market Committee (FOMC) decided to maintain its benchmark lending rate at a range of 5.0 to 5.25 percent. However, the rate-setting committee also hinted at the possibility of further monetary tightening before the end of the year.

Given that the United States is the world’s largest economy and the U.S. dollar is the world’s primary reserve currency, fluctuations in the U.S. interest rate have immediate effects on global markets. Acting as the central bank of the nation, the Federal Reserve’s primary objective is to maintain a stable U.S. economy. When the economy booms, issues such as inflation and asset bubbles can arise and threaten economic stability. To cool down an overheated economy, the Fed has traditionally stepped in and raised interest rates. When interest rates are raised, the costs of borrowing money (e.g., mortgage, car loans, and credit cards) increase, and consumers tend to pull back on spending. This can reduce the supply of money in circulation, which is a way to lower inflation.

“The most difficult but rewarding strategy to forecast the U.S. interest rate is to ‘do your own economic analysis’, which would help people ‘beat the market’ and gain more significant returns.”

Dr. Andrew Yuen

New-York-U.S.-economy — Acting as the central bank of the nation, the Federal Reserve’s primary objective is to maintain a stable U.S. economy.

As the U.S. interest rate directly affects people’s spending habits and investment returns, it would be helpful to forecast whether the U.S. government will increase or decrease it in the coming month. An educated forecast can help consumers find clues and make wiser investment decisions.

Andrew Yuen, Senior Lecturer at the Department of Decision Sciences and Managerial Economics, The Chinese University of Hong Kong (CUHK) Business School, shared his thoughts on these questions in a masterclass for the school’s EMBA programme titled “U.S. Interest Rate Outlook 2023” which took place in May 2023 .

Utilising Public Information Effectively

According to Dr. Yuen, people with varying degrees of economic knowledge can use different methods to forecast the U.S. interest rate. “The easiest and most effective way for those who don’t have any knowledge about economics is to look at the financial market data and follow the predictions of investment analysts,” he said. To obtain the latest probabilities of the U.S. interest rates, he recommended using the CME FedWatch Tool.

Andrew-Yuen-cuhk — During an EMBA master class, Dr. Yuen shared his insights regarding the outlook of U.S. interests.

However, rather than just obtaining information passively from the market, people can pursue a more advanced strategy. Dr. Yuen proposed analysing information from the FOMC. The FOMC is the branch of the Federal Reserve System that determines the U.S. interest rate. By analysing the information on the FOMC website, such as their meeting dates, after-meeting statements and projection materials, people can gain insights into the future trends of the U.S. interest rate.

Dr. Yuen illustrated how people can extract key information by comparing different statements from the committee. He highlighted a sentence in the March statement: “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy.” He explained that this sentence indicated a further increase of the interest rate in FOMC’s May meeting. This was confirmed when the committee members met in May. Noticeably, the same sentence was deleted in the May statement, which suggested that the FOMC would not increase the interest rate in the upcoming meeting. As he anticipated, the Fed voted to maintain the interest rate in June, validating the initial inference.

Besides information from the FOMC website, people should also pay attention to what the FOMC members say in news reports. “The views of the voting members are quite important, especially [those of] Jerome Powell, the Chair of the Federal Reserve,” Dr. Yuen said.

Understanding the Causes of Interest Rate Fluctuations

U.S.-Feceral-Reserve — The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System that determines the U.S. interest rate.

In addition to the two strategies mentioned above, Dr. Yuen noted that the most difficult but rewarding strategy to forecast the U.S. interest rate is to “do your own economic analysis”, which would help people “beat the market” and gain more significant returns.

Before attempting to make a forecast, however, one must first understand the primary objectives of the FOMC — maximum employment and stable prices. Therefore, Dr. Yuen said, individuals should examine the labour market and inflation trend to forecast the interest rate. “If the unemployment rate is very high, the interest rate will be reduced, and if the inflation rate is very high, the interest rate will be increased,” he explained.

food-price-inflation — As an abstract concept, inflation can be reflected in commodity prices.

While the FOMC’s decision-making process is theoretically straightforward, conducting one’s own forecast can be quite challenging. “When you forecast the interest rate, you need to forecast the inflation rate and unemployment rate in the future, just like the Fed would,” said Dr. Yuen. He further explained that interest rate decisions are forward-looking because any monetary policy takes time to become effective.

Dr. Yuen then discussed some indicators that individuals can use to analyse inflation trends. As an abstract concept, inflation can be reflected in commodity prices. He noted that housing, food and services are three major factors influencing inflation. More specifically, if the latest rental cost is trending down in the coming year, inflation is likely to also decrease. As such, the Fed would not increase the interest rate hastily. Likewise, decreasing food prices is also a sign of lowering inflation. Other indicators of U.S. inflation include the U.S. Producer Price Index (PPI) and China’s inflation figures. In general, interest rates will likely decrease if inflation rates decrease, Dr. Yuen summarised.

“Besides commodity prices, the U.S. labour market trends also affect the interest rate,” he said, adding that people should pay attention to U.S. salaries. If salaries decrease, people can expect lower inflation and lower interest rates.

In the masterclass, Dr. Yuen shared his latest forecast of the U.S. interest rate for the end of 2023. After his sharing, he emphasised the importance of adjusting the figure based on the latest developments in the market. “The most important thing here isn’t for me to tell you my conclusion, but to show you how to conduct your own analysis.”

Dr. Yuen also encouraged attendees to put theory into practice. “Practice makes perfect. Try to apply what you have learned in this class and see if those methods are effective,” he advised.

On this page...

New research examines and quantifies the causal link between air pollution and various categories of online consumption

By Pan Jingyi, Principal Writer, China Business Knowledge@CUHK

As a major and pressing public health threat, air pollution is responsible for around one third of deaths from stroke, chronic respiratory disease, and lung cancer, as well as one quarter of deaths from heart attack. Adding to all of that, air pollution also takes its toll on the economy in several ways, such as reduced workforce productivity, lower crop yields, and the massive cost of restoring the ecosystem.

Previous studies found that air pollution can change investment behaviour, cause behavioural bias and increase defensive expenditures. However, there is no direct evidence linking air pollution to household consumption in existing literature. “Household consumption is crucial to the national economy, and understanding factors that impact online household consumption is particularly important in this e-commerce era,” says Yang Yang, Assistant Professor at the School of Hotel and Tourism Management at The Chinese University of Hong Kong (CUHK) Business School.

“Our findings provide important implications on the role of environmental degradation in developing countries such as China and offer new insights that air pollution could generate much broader consequences than previously realised.”

Prof. Yang Yang

So, how does air pollution affect various kinds of online consumption? Will the effects persist over time? Why can air pollution induce different consumption responses? Prof. Yang and her collaborators sought to answer these questions in their latest study. She notes that air pollution is a significant issue in China, and its e-commerce has been seeing tremendous growth recently, which provides an ideal context for them to examine their research questions.

The study titled Online Consumption Response to Sustained Exposure to Air Pollution: Evidence from a Quasi-experiment in China, was conducted by Prof. Yang in collaboration with Prof. Sumit Agarwal at the National University of Singapore and Prof. Long Wang at the Fudan University.

Differences in Air Quality between South and North Cities

The researchers obtained a proprietary dataset from the largest e-commerce company in China, containing transaction information of sellers and consumers between 2017 and 2019. “The extensive coverage of 291 major cities in China is crucial as it can help identify the influence of air pollution,” Prof. Yang says. She also notes that detailed information on sellers enables them to categorise the consumption into three groups (health-related, necessities and non-essential products), which can help gain further insights into the consumption responses across product types.

Northern cities in China are affected by the coal-based centralised heating systems, which leads to drastic changes of PM10 concentrations during the winter.

In their research, Prof. Yang and her co-authors first examined the general relationship between air pollution and online spending on different product categories. They found that purchasing health-related products and necessities is positively associated with air pollution. More specifically, health-related products refer to medicine or healthcare, and necessities include products such as food, drinks and mother-care items. On the flip side, a negative correlation exists between non-essential goods consumption and air pollution. For example, when experiencing air pollution, people decrease their purchase of products related to entertainment, accessories, sports, and education, etc.

However, online consumption and air pollution may be spuriously correlated because of ignored variables such as regional characteristics. Researchers then moved to explore whether air pollution can be causally linked to online consumption by conducting two tests. Firstly, they compared situations in northern and southern cities divided by the Qinling-Huai River Line. Cities north of this line are affected by the coal-based centralised heating systems, which leads to drastic changes of PM10 concentrations in these cities during winter and creates different levels of air pollution between the northern and southern cities.

Increased or Decreased Purchases?

The results indicated that necessity consumption increased by 7.7 percent due to the heating season.

The results indicated that health-related consumption increased by 7 percent and necessity consumption increased by 7.7 percent due to the heating season. Meanwhile, the consumption of non-essential goods decreased by 3.6 percent. Additionally, the team found that the substantial increase in health-related products and necessities consumption reverted back to a normal level in the non-heating season, whereas the purchase of non-essential goods presented an opposite trend.

Secondly, she and her collaborators applied a different approach to testing the robustness of the above findings. They aggregate the Seller-BuyerCity-Month data to the BuyerCity-Year level, and found substantially larger causal effects. Moreover, the team examined the pollution effects separately in the heating and non-heating seasons. As expected, the effects were statistically significant only in heating seasons.

“The results support that air pollution caused by the coal-based heating system affects online consumption, and address the concerns of omitted variable bias,” says Prof. Yang, emphasising that both results of the above two tests support a causal interpretation of the impact of air pollution on online consumption.

Joint Mechanisms Behind the Causal Relationship

After establishing the causal relationship between air pollution and online consumption, Prof. Yang and her collaborators sought to explore the mechanism behind it. The team proposed two potential explanations: the “avoidance behaviour” hypothesis and the “negative mood” hypothesis. The study pointed out that the former refers to the change of people’s consumption paradigm toward online retail to avoid outdoor air pollution and increased willingness to pay for better air quality; the latter refers to negative emotions caused by long-term exposure to air pollution, which could reduce online consumption of some products.

The “negative mood” hypothesis helps explain the decreased purchase of non-essential items.

To test these two hypotheses, the researchers collected search frequencies on two sets of keywords via Baidu (the most prominent Chinese search engine), including those related to air pollution and negative mood. Specifically, air-pollution-relevant words include haze, air quality, mask, air purifier, etc. At the same time, anxiety, depression, stress, and annoyance are some examples of negative-mood-related keywords.

The findings indicated that individuals increase spending on health-related products and necessities due to “avoidance behaviour”, and the “negative mood” helps explain the decreased purchase of non-essential items. Present results showed that the consumption of some goods increased while others decreased, “We cannot simply say whether air pollution stimulates or suppress online consumption as the effects are complex,” says Prof. Yang, adding that they categorised consumption into different groups to examine whether they respond to air pollution differently.

“Our research suggests that instead of the influence from a single mechanism, the avoidance behaviour and negative mood jointly contribute to explaining the various effects of air pollution on online consumption,” she says.

Takeaways for Consumers and Sellers

People may not have thought through why they increase or decrease the purchase of certain kinds of products during days of severe pollution. Prof. Yang notes that their findings can help consumers better understand the reasons behind these phenomena and realise the significant influences of air pollution. “Meanwhile, our findings may also be helpful to sellers, enabling their understanding of buyers’ preferences and then adjusting the stock accordingly,” she adds.

The researchers note that they contribute to the existing literature by first investigating the causal impact of air pollution on online consumption. While most studies about China’s heating systems and the Qinling-Huai River Line focus on their health-related influences, “Our findings provide important implications on the role of environmental degradation in developing countries such as China and offer new insights that air pollution could generate much broader consequences than previously realised,” Prof. Yang says, adding that their research is still ongoing and may have further discoveries on air pollution’s economic consequences by using individual-level data.

Finally, Prof. Yang emphasises again that their data shows a significant influence of air pollution on how people spend their money, which is worthy of attention. “As consumption is a fundamental component of economic activity, policymakers and government authorities should consider the influences of air pollution when implementing policies and strategies to promote sustainable consumption patterns.”

On this page...

CUHK study finds that when faultlines form amongst a team of diverse entrepreneurs, it can significantly hurt performance

By Raymond Ma, Managing Editor, China Business Knowledge@CUHK

In the modern business landscape, diversity is hailed almost as a universal good, so much so that organisations of almost every stripe and colour tout their diversity credentials, be it based on gender, age, ethnicity or sexual orientation. Supposedly, being an organisation that embraces diversity carries with it a slew of benefits, from improved productivity and creativity, to lower turnover and better access to a wider talent pool, and even better optics for the brand.

That may be so. However, this well-acknowledged consensus comes with it an important caveat: If not properly managed, diversity has potential to hamper decision making and damage organisational performance. That’s the idea behind the study United or divided? Entrepreneurial passion and faultlines in new venture teams, which sought to look at whether and how diversity affects the performance of teams in an entrepreneurial setting.

“Strong entrepreneurial passion helps teams to overcome the formation of faultlines.”

Prof. Dora Lau

The paper was written by Dora Lau, Associate Professor (Teaching) at the Department of Management at The Chinese University of Hong Kong (CUHK) Business School, in collaboration with Prof. Qin Su at Xi’an Jiaotong-Liverpool University, Prof. Lingli Luo at Zhejiang University, and Prof. Bart de Jong at the Durham University.

Prof. Lau notes that on the one hand, diversity in start-ups is believed by some to be generally beneficial as it enables a fledging business organisation to gain from the complementary skills and resources of its individual members. However, this very same diversity can also lead to the formation of a conflict-laden work environment that damages the ability of start-up teams to make effective decisions.

A Multi-Attribute Approach

Past research into the topic, however, has tended to focus on specific single attributes (such as gender, age or race), while failing to account for the fact that in an actual start-up environment, team members would differ in multiple attributes and that this jumble of attributes may align to create factions within the team. Prof. Lau says the majority of previous studies tend to neglect that the entrepreneurial process is dynamic in nature, with teams facing continuous evaluation and selection both from the market and investors.

To address these shortcomings, the researchers chose to examine the issue from the perspective of demographic “faultlines”. Faultlines form when individuals in a group share and align themselves along attributes such as gender, age and ethnicity, leading to problems from challenges in communication and lack of trust, to increased conflict.

“We propose that the formation of strong demographic faultlines can and in many cases do hinder the performance of teams in new ventures above and beyond the impact of any one single attribute,” says Prof. Lau. “When faultlines form within a team because of divergent individual attributes, its effect on start-ups would be especially salient given the environment is one where fewer organisational or group norms have been established,” the professor adds.

“On the other hand, these very same teams still must make critical decisions that draw on their collective and complementary strengths,” Prof. Lau says, adding that faultiness within start-up teams may hinder key tasks such as the generation of new ideas, or the sharing of information or resources quickly enough to respond to rapidly evolving business situations.

The Effect of Entrepreneurial Passion

Faultlines form when individuals in a group share and align themselves along attributes such as gender, age and ethnicity.

While researchers have in recent years identified the level of entrepreneurial passion amongst founders as something that can significantly impact start-up performance, there has been scant research on how this interacts with more traditional demographic attributes in the functioning of entrepreneurial teams.

To go about their study, the researchers studied 48 entrepreneurial teams that participated in a one-year incubation programme in Hong Kong organised jointly by search giant Google in collaboration with CUHK and held in 2014. They pored through the demographic information of the participants of the programme, and conducted surveys to find out how team entrepreneurial passion interacted with other demographic attributes to affect how well they performed during the incubation programme.

They found that the strength of faultlines that form within an entrepreneurial team had a significant and negative effect on performance. On the other hand, when all the members of a team in a start-up are equally and highly passionate about their new venture, then their shared passion tends to be successful in uniting individual members to work together to improve performance. This can effectively help to moderate the detrimental effect of faultlines on team performance within start-ups.

When the members of a team in a start-up are equally and highly passionate, then this tends to be successful in uniting individual members to work together to improve performance. — When the members of a team in a start-up are equally and highly passionate, then this tends to be successful in uniting individual members to work together to improve performance, the researchers found.

On the other hand, when there is a big difference in how the different members of a new venture team identify themselves (whether it be as an inventor coming up with new products, a founder launching new organisations, or a developer who seeks to grow start-ups beyond their initial size), then this tends to exaggerate the negative effect of faultlines on performance.

“When there is extreme dissimilarity in how individual members within a new venture team identify themselves as entrepreneurs, this can lead to increased sensitivity to emotional issues, worsened interpersonal relationships, and it lessens the chances that they can establish a common group identity they can unite themselves under,” says Prof. Lau. “What’s more, when the members strongly identify themselves with their specific passion domains, this further strengthens faultlines and weakens performance within entrepreneurial organisations.”

Passion Domains and Developmental Stages of Start-up Teams

By tracking the performance of start-up teams along the different stages of the incubation programme, the researchers also found that both the negative effect of faultlines on performance as well as the role of passion were strongest in the initial stages of the formation of a start-up team, and gradually decreased as time passed. This means that while teams with strong faultlines may suffer in the short-term, there is a good chance they can work to overcome internal polarisation given time, the Prof. Lau says.

The study found that passion for inventing had a bigger effect on moderating the negative relation between faultline strength and team performance during the initial stages of a new venture formation.

Finally, the researchers found that different types of entrepreneurial passion had different effects at the different stages of a new venture. For example, passion for inventing had a bigger effect on moderating the negative relation between faultline strength and team performance during the initial stages of a new venture formation, compared to passion for founding or developing. Furthermore, they found that during this stage, when start-up teams were highly passionate about the three different passion domains equally, the effect was actually weaker than if they were passionate about inventing only.

“Our findings imply that at any stage of a new venture, strong entrepreneurial passion helps teams to overcome the formation of faultlines, and the effect is stronger when the passion domain is consistent with the developmental stage of the start-up itself,” Prof Lau adds.

Lessons for Start-ups

From a practical perspective, Prof. Lau says the results highlight the importance of entrepreneurs choosing the right partners in forming a new venture. Those seeking to launch a new venture should take care to choose members to avoid strong faultlines on demographic attributes, which can impair team performance. “Given the traditional belief in the value of demographic diversity, entrepreneurs should deliberately consider each team member’s characteristics and how they fit in the team. They would also do well to avoid building a team where members may align on multiple attributes,” she says.

Also, the study’s findings suggest that in teams that are suffering from the detrimental effects of strong faultlines, the individual entrepreneurs themselves should seek to cultivate a high level of passion towards their venture, as this would allow them to find common ground and ultimately enhance their overall performance. On a similar note, investors or organisations seeking to guide or incubate the development of start-ups may consider providing consultation services to help teams deal with faultlines and cultivate entrepreneurial passion. “Conversely, if team members are passionate about different parts of the entrepreneurial process, then it’s not likely they would be able to start off as a cohesive team, and the differences could make things worse rather than improve the overall working environment,” says Prof. Lau.

On this page...

Study finds that the benefits of investment in information technology were significantly reduced during the pandemic

By Raymond Ma, Managing Editor, China Business Knowledge@CUHK

Faced with increasing competition and disruption in their industry from the likes of Airbnb, in recent years the hospitality industry has been quick to adopt new technologies, whether that be for customer facing roles or in the back office to streamline operations and cut costs.

At the most hardware-intensive of the spectrum, hotels are increasingly experimenting with and deploying robotic help to supplement its human workforce. On a less high-profile basis, many hotels are also opting to go “smart”, incorporating technologies such as voice control, facial recognition as well as automation into the customer experience where guests are also able to interact and control their hotel rooms remotely using mobile devices.

“If not carefully aligned with their specific business strategy, investments in technology can even backfire and damage a hotel operator’s performance.”

Prof. Choi Sungwoo

Lastly, hotels around the world are also using technology to accelerate their efforts to go green, adopting digital practices to help control their environmental footprint and while at the same time streamlining operations, such as by going paperless for guest check-in, for interacting with customers, as well as in their daily back-office management. A survey in 2022 by hotel sector service provider Duetto found that over 77 percent of hospitality industry respondents expect to increase their tech investment in the next three years.

“The adoption of technology in hotels has been accelerating in recent years as they look to boost efficiencies both in their customer-facing roles, as well as in their back-office operations,” says Choi Sungwoo, Assistant Professor at School of Hotel and Tourism Management at The Chinese University of Hong Kong (CUHK) Business School, and a co-author of a new study looking at whether hotel establishments benefit from splurging on technology investments during periods of high market volatility the same they do during periods of normal economic activity.

Adapting to the Pandemic

Many hotels are opting to go “smart”, incorporating technologies such as voice control and facial recognition into the customer experience.

Prof. Choi notes that the recent COVID-19 pandemic has further sped up the adoption of new technology. With many businesses in the hospitality and tourism industry hit hard due to the extensive curtailment of cross-border travelling, businesses in the sector have sought new and innovative ways to adapt to the new normal to boost performance, with a special focus on reducing operational costs and improving service productivity.

“There’s been a great deal of research, not to mention strong consensus, that during periods of normal economic activity, investment in information technology tends to yield a direct and positive impact on hotel performance,” he says. “However, what is less certain is whether pursuing this type of advantage will allow hospitality providers to reap similar benefits during a crisis such as what we experienced during the pandemic.”

Prof. Choi noted that on one hand, during the pandemic hotels operators around the world were quick to deploy technologies such as self-service kiosks to cater to heightened concerns over the risk of infection from person-to-person contact. However, owing to the high-touch nature of the hospitality and tourism sector, there was risk that this may put off customers expecting to see a friendly face in their service encounters.

Owing to the high-touch nature of the hospitality and tourism sector, there was a risk customers may be put off if hotels adopted technologies too quickly, the researchers say.

“Hospitality providers face substantial risk if they seek to make rapid decisions to invest in new technology in an attempt to respond to the changing operating circumstances posed by the pandemic. If not carefully aligned with their specific business strategy, investments in technology can even backfire and damage a hotel operator’s performance,” he says.

The latest study, detailed in the research paper titled Information Technology as a Buffer Against COVID-19, was conducted by Prof. Choi in collaboration with Prof. Yeon Jihwan at the University of Surrey, Prof. Song Hyoung Ju at the University of Central Forida, and CUHK Business School PhD candidate Hu Jihao. The researchers collected the financial performance information on nearly 7,000 hotels in the U.S. between the years 2017 and 2021. They then analysed this data to examine the effectiveness of investments in technology in boosting hotel performance before and during the pandemic.

Lifting Financial Performance

They compared three performance indicators, namely total revenue, EBITDA (earnings before interest, taxes, depreciation, and amortisation) and net income, against total expenditure as well as changes in information technology investment for a given hospitality provider during the years 2017 to 2019 (before the pandemic), as well as from 2020 to 2021 (during the pandemic).

The study found the pandemic had a significant and negative effect on the ability of spending on technology to lift the financial performance of hotel establishments. In another words, the positive impact of the same amount of investment on information technology was reduced during the COVID-19 pandemic.

On the other hand, the researchers found a positive and significant impact of changes in hotel investments in information technology between one year and the next, with financial performance. “The more a hotel overinvests in technology compared to the previous year, the better the organisational outcomes tends to be, on average,” says Prof. Choi. This positive relationship held when the pandemic was factored in, indicating that the positive impact of an increase in information technology expenditure on financial performance actually increased after the outbreak.

“Our findings suggest that while investment in technology had positive effects on the financial performance of hotels before the emergence of COVID-19, these very same advantages were significantly reduced during the pandemic,” says Prof. Choi, adding that a continuous and elevated level of spending on information technology can help provide hotel establishments with a certain amount of buffering from external economic shocks, such as the pandemic.

“We suggest hotel managers should try to sustain or even gradually increase their investments in information technology, even when times are tough, such as during the pandemic. It is only this way that they can most effectively reap the financial benefits that comes with keeping up with the latest developments in technology for the hotels sector,” he says.

On this page...

An entrepreneurial spirit can help people from all walks of life achieve self-improvement, says CUHK expert

By Pan Jingyi, Principal Writer, China Business Knowledge@CUHK

Everyone dreams of starting their own business and becoming an entrepreneur, but for many, reality may get in the way. It’s often quoted that more than 90 percent of start-ups fail, and out of that, around 20 percent don’t make it past their first year. Against this bleak backdrop, what can aspiring entrepreneurs do to improve their chances of success? Also, is entrepreneurial spirit hardwired into our DNA, and can anyone be a successful entrepreneur?

These are some of the questions that Joyce Iun, Professional Consultant at the Department of Management at The Chinese University of Hong Kong (CUHK) Business School, sought to address in a masterclass held in October 2022 for the school’s MBA programme titled “Is Entrepreneurial Decision-making a Rocket Science?”, in which she sought to demystify the decision-making processes that every entrepreneur must make and highlight the importance of adopting a growth mindset for everyone, including those without entrepreneurial leanings.

What Makes an Entrepreneur Tick?

An entrepreneur refers to an individual who creates a new business, bears most of the risks, and enjoys most of the rewards simultaneously. Dr. Iun notes that they also often tend to question the status quo, to seek growth and understanding, and to embrace challenges and opportunities.

Successful entrepreneurs are typically associated with being passionate leaders who possess the drive required to get new business ventures off the ground, but at the same time are willing to delay their gratification until their toils come to fruition.

Making good decisions is essential for entrepreneurs.

Some people may strike upon their entrepreneurial spirit early in their lives. To illustrate, Dr. Iun cited the example of Tony Fadell, the American engineer best known as the man behind the invention of the Apple iPod music player, who started his first business when he was just nine years old. Kicking off his entrepreneurial career, a young Mr. Fadell bought cheap eggs from a farmer and sold them in his neighbourhood, which gave him pocket money and the first taste of freedom.

“I believe an entrepreneurial trait is something that is potentially within our DNA,” says Dr. Iun, referring the young age at which many well-known successful businesspeople tend to display their interesting at starting new ventures. On the other hand, while creating a wildly successful business venture may bring fame and fortune, not everyone wants to be an entrepreneur, she says. “However, that doesn’t mean they can’t be an intrapreneur.”

What is an Intrapreneur?

An intrapreneur is someone who develops new and innovative ideas within an existing organisational framework. The term is widely credited to being coined by the American author and entrepreneur Gifford Pinchot III, who described in his book Intrapreneuring: Why You Don’t Have to Leave the Corporation to Become an Entrepreneur in 1985 that the concept of intrapreneurship is related to encouraging people in organisations to advocate, create and make changes. For example, today’s widely used Gmail is a successful outcome of Google’s 20 percent initiative, which encourages its employees to spend at least 20 percent of their time exploring or working on projects that are not expected to benefit the company immediately, but may lead to bigger opportunities. While people associate entrepreneurs to those who start businesses, intrapreneurs are often referred to as “change agents” within an organisation, Dr. Iun says.

Gmail is a successful outcome of Google’s 20 percent initiative, which encourages its employees to spend at least 20 percent of their time exploring or working on side projects.

According to Dr. Iun, a large part being an intrapreneur involves possessing sufficient drive and determination to improve and succeed. More specifically, she says intrapreneurs need to maintain a reflective and non-complacent mindset.

Staying reflective requires people to spend some time regularly to think about what they have learned, and which can positively influence their behaviour. Evidence shows people who spend 15 minutes everyday to think about what they can do to improve their own performance are often able to increase their effectiveness by 23 percent after ten days, compared to those who do not reflect, Dr. Iun says.

“Being non-complacent is having the feeling you aren’t quite satisfied with yourself. Someone like that would want to keep on challenging themselves,” says Dr. Iun, adding that a person with this mindset tends to spend time trying to figuring out where they want to be in the future and striving to improve incrementally every day.

Although entrepreneurs and intrapreneurs play different roles across the business landscape, they do share some common traits, such as the ability to think innovatively and being persistent. In Dr. Iun’s eyes, the most prominent similarity is having a growth mindset, which refers to a person’s interest in the pursuit of continuous and progressive growth. Dr. Iun notes that even for people who do not want to start their own businesses, a growth mindset can be highly beneficial, allowing them to strive for continued self-improvement.

Making Better Decisions

From food, clothing to career choices, people face thousands of decisions each day. Making good decisions is essential for entrepreneurs, but Dr. Iun argues that decision-making skills are necessary for everyone, including entrepreneurs and intrapreneurs. To make good decisions, she proposes that prospective entrepreneurs and intrapreneurs alike adopt a multi-level perspective. The multi-level perspective should include four levels: individual, group, organisational, and environmental.

“I believe an entrepreneurial trait is something that is potentially within our DNA.”

Dr. Joyce Iun

At an individual level, people need to consider their own personal business skills, networking skills and whether they have the confidence to pitch ideas, the ability to withstand uncertainty and resilience to overcome failures.

On a group level, people need to make wise decisions on whom they want to collaborate with. Particularly, Dr. Iun stresses the importance of finding appropriate team members. Rather than focus on finding like-minded friends, she suggests those looking to enhance their decision-making should seek out team members who possess strengths that complement their own weakness. “That way, they can develop a team that synergises, creating a scenario where one plus one equals three,” says Dr. Iun, emphasising that founding of teams should be based on the matching of complementary skills.

The third layer is the organisation level, which suggests that decision-makers pay close attention to factors such as a company’s core values, business model for generating revenues, as well as stakeholders in their deliberations. Last but not least, at the environmental level, people need to pay attention to considerations such as political and legal concerns, demographics, prevailing economic and sociocultural trends, as well as global issues such as the COVID-19 pandemic. “Addressing the decision-making process from a multi-level perspective is a good starting point if entrepreneurs want to increase their probability of success,” says Dr. Iun, adding that a multi-level lens provides clear guidance for people to examine what factors they need to take into consideration during the decision-making process.

Dr. Iun notes that although the operational decisions of entrepreneurs and intrapreneurs may differ, they both need to make quality decisions to achieve their respective goals. For intrapreneurs, having a multi-level perspective to guide them can potentially be the difference between success and failure. “It will help people to make better quality decisions with sense and sensibility,” she says, adding that passion, personal goals and persistence in continuous improvement will help people make better decisions as well.

On this page...

Study finds that companies with more geographically diverse operations outperformed during the peak of the outbreak

By Raymond Ma, Managing Editor, China Business Knowledge@CUHK

The COVID-19 pandemic has created havoc around the world. Not only did it exact a heavy toll in the loss of human life, but it also constituted one of the biggest shocks to the global economic order in modern history. Consider that in March 2020, as the world became increasingly aware of the spread of the pandemic, global stock markets fell by over 30 percent as investors panicked en masse. Its economic effects were felt everywhere, with neither emerging markets or developed economies spared.

#CBKOnlinesSeries | How Investors Rewarded Diversification during the Pandemic

Given the massive economic impact of the pandemic, much effort has been focused on whether and how some companies were better able to weather the uncertainty it brought about, while others fell by the wayside. It is with this in mind that a group of researchers, including at The Chinese University of Hong Kong (CUHK) Business School, chose to look at the role of geographical diversification in allowing companies to outperform during the outbreak.

The study Geographic Scope and Real Estate Firm Performance during the COVID-19 Pandemic was conducted by Desmond Tsang, Associate Professor at the School of Hotel and Tourism Management and Co-Director of the Centre of Hospitality and Real Estate Research, at CUHK Business School, in collaboration with Dr. Chu Xiaoling at The University of Hong Kong and Prof. Lu Chiuling at National Taiwan University. It found that companies which spread their operations across a wider geographical region tended to be viewed by investors as being better able to withstand the volatility brought about by the spread of the virus, and this was reflected in their performances in the stock market.

“Our aim in this study is to look at how geographic scope and diversification allows firms to weather the economic volatility brought about by the spread of COVID-19 during the pandemic,” says Prof. Tsang. “Unlike other episodes in recent history such as the Global Financial Crisis of 2008, the pandemic affects different places in a different manner, depending on the severity of positive cases in a given region as well as the local government response. This served as an ideal backdrop for us to test out our theories.”

Focusing on the Chinese Real Estate Sector

To do this, the researchers looked specifically at the stock market performance of real estate firms in China from the beginning of February 2020 to the end of March that same year, a period which coincided with the implementation and subsequent lifting of a lockdown in the Chinese city of Wuhan in Hubei province, where initial reports of virus transmission appeared.

“Corporate diversification could be especially useful in mitigating negative stock market reactions that firms experience during times of crises, such as during the pandemic.”
Prof. Desmond Tsang

They chose China to study the impact of diversification on stock market returns because the country provided a “clean” timeline for study. As a result of the stringent measures that the government undertook to control the spread of COVID-19, including lockdowns not only in Wuhan but also in other cities throughout the country, China largely succeeded in suppressing the spread of the virus and avoiding a more widespread outbreak. Unlike other jurisdictions, the policies implemented there also largely prevented any large-scale flare-ups from further taking place.

The researchers chose China to study the impact of diversification on stock market returns because the country provided a “clean” timeline for study.

Moreover, by focusing on the real estate sector – where firms tend to invest in property assets in specific locations – the researchers were able to cleanly identify a company’s geographical scope. Chinese real estate firms were also easier to compare, since most firms tend to dabble in developing residential and commercial projects, unlike in some markets such as the U.S., where real estate firms focus on various forms of property operations. Finally, real estate developers had a shorter investment horizon than passive investment vehicles such as REIT, or Real Estate Investment Trusts, and thus they might be more likely to be affected by the short-term volatility brought about by the pandemic.

To go about their study, Prof. Tsang and his co-authors first examined the returns of A-share companies listed on the Shanghai and Shenzhen stock exchanges with the growth rate of the number of confirmed COVID-19 cases as a measure of exposure to the pandemic. This confirmed the onset of the COVID-19 pandemic caused equity prices for real estate firms in China to fall significantly. As expected, it found that firms that were bigger in size, which employed lower leverage and which had higher cash holdings were affected less.

Next, the researchers looked into their main research question at whether firms’ geographic scope affected their stock prices during the period. They found that those with broader geographic scope and more geographically diversified property allocations were better able to endure the crisis. “In other words, the results indicate that investors seemed to perceive that firms with a more geographically diversified portfolio as being better able to weather the COVID-19 pandemic,” says Prof. Tsang.

The Effects of Leverage and Firm Size

Pressing on, the researchers then turned their attention to whether this ability of geographical diversification to shield companies from negative stock market consequences of the pandemic was able to help firms with weak fundamentals. It found that firms with higher leverage reported lower returns during the pandemic no matter their levels of diversification, indicating that geographical diversification did little to soften the valuations hit that real estate companies took during the pandemic if they had high leverage, which in turn signalled a higher risk of bankruptcy especially at times of crises.

The study examined how the returns of A-share companies listed on the Shanghai and Shenzhen stock exchanges varied with the growth rate of the number of confirmed COVID-19 cases.

Interestingly, when examining firms with strong fundamentals, they found that larger firms were only able to lessen the adverse impact of the pandemic if they adopted a geographically diversified strategy. Conversely, larger firms may be actually be more seriously exposed to the pandemic if they were geographically focused. Prof. Tsang added that while smaller firms, by definition, may find it difficult to expand their portfolio geographically, investors only viewed larger firms in a favourable light if these companies recognised the importance of geographical diversification.

To conclude, Prof. Tsang says with the pandemic creating an unprecedented crisis for the world and for global stock markets, it has become increasingly important that firms and policymakers better understand the factors that can allow markets and individual businesses alike to become more resilient to such shocks. “Overall, our results do much to validate what many would consider common sense but not all firms have actually been doing. Corporate diversification, in this case geographical diversification, could be especially useful in mitigating negative stock market reactions that firms experience during times of crises, such as during the pandemic, though its effect is not almighty when it comes to firms with weak fundamentals,” he says.

“However, for larger organisations, which typically have access to better resources and are considered to be usually better at absorbing losses when the going gets tough, we show that diversification could actually become more essential, as these firms are expected by the market to be more diversified and to have put fewer eggs in one basket.”

On this page...

Research reveals consumers prefer straightforward and clear direction in service encounters

By Jaymee Ng, Principal Writer, China Business Knowledge@CUHK

The COVID-19 pandemic has accelerated the adoption of technology in the service industries. As hotels and restaurants increasingly turn to artificial intelligence and install robotic concierge and waiters, as well as service kiosks, what is the best way for them to communicate with customers?

For example, if a customer wants to know whether a tourist attraction is worth visiting, should a robot respond with the plain and informative “The view is excellent” or the more conversational “The views there will blow your mind away”?

This is basis of a new research study, titled “How May I Help You?” Says a Robot: Examining Language Styles in the Service Encounter. Looking at the use of language in service encounters, the researchers found that, more often than not, providing information in a clear and straightforward manner is better than the more colourful alternative.

#CBKOnlinesSeries | How Should a Robot Talk to a Customer

“Verbal communications plays a key role in customer service encounter evaluations, but we know very little about how language styles affect customer satisfaction,” says Prof. Sungwoo Choi, Research Assistant Professor in the School of Hotel and Tourism Management at The Chinese University of Hong Kong Business School and one of the co-authors of the study.

“Today’s service encounters are increasingly infused with innovative technologies, and most notably, smart service robots have become ubiquitous. However, we know very little about what is the best ways these robotic service providers should address customers.”

Prof. Choi and his co-authors, who are Prof. Stephanie Liu at Ohio State University and Prof. Anna Mattila at the Pennsylvania State University, specifically looked at whether literal or figurative language was superior in service encounters, and whether this was different depending on whether the information was being provided by a human being, a robot, or a service kiosk.

Literal vs Figurative Language

When people use literal language, they are being straightforward and saying exactly what they mean. On the other hand, figurative language refers to the use of metaphors, similes, hyperbole or personification to describe something, often by comparing it with something else. Figurative language are sometimes used to evoke an emotionally intense response.

The researchers recruited 173 adult consumers in the U.S. for the study. The participants were asked to imagine themselves in a scenario where they stayed at a fictitious hotel and had to get ideas for dining options from the hotel concierge, which was either human, a robot or a service kiosk. The concierge either used literal language such as “the restaurant has a nice interior design” or figurative language such as “the restaurant looks more stunning than a palace”. The participants then completed a series of questions to evaluate their service encounters.

“When customers deal with human service personnel, the use of literal language led to marginally higher service encounter evaluation. This was also the case when customers were dealing with service robots.” says Prof. Choi. “The results also revealed that, when customers are dealing with human service representatives, using literal language also led to higher credibility. This effect again extended to service robots.”

“When customers deal with human service personnel, the use of literal language led to marginally higher service encounter evaluation.”

Prof. Sungwoo Choi

According to the study, service kiosks were unaffected by language style because they resembled objects rather than people. Language didn’t matter in this case because service kiosks didn’t look human and thus the expectations that govern human-to-human communication didn’t apply.

“The main difference between service robots and kiosks is their external shape. A service robot is designed to have an appearance or character resembling a human being, whereas a service kiosk looks more like an object. Past research have suggested that people tend to apply their beliefs and knowledge about humans to non-human objects when they have humanlike features,” Prof. Choi explains.

The researchers suggest hospitality managers to recognize the importance of language styles used by frontline employees and develop their training protocols accordingly.
“We show that literal language is more appropriate in face-to-face service interactions. Guests often inquire about places to visit. They would ask for recommendations for shopping, restaurants, or tourist attractions or about hotel facilities. Similarly, servers often give customers recommendations on menu items. In such service interactions, frontline employees should avoid using figurative expressions. Rather, providing straightforward and clear information tends to improve service encounter evaluation,” Prof. Choi comments.

Future Research Directions

Prof. Choi said it would be interesting to explore language styles in failed service encounters as the current study focused on the effect of language styles in a successful service encounter.

“Would people still expect a service provider to use literal language when offering explanations or an apology since service recovery perceptions are driven by competency and reliability? Or, would people expect the service provider to use emotionally intense language as a means to recover a damaged relationship?” Prof. Choi asks.

In addition, Prof. Choi said it would be worth extending the investigation to loyal customers who have an existing relationship with the service provider and to test the theory in the field and collect data from real interactions between guests and service robots. In addition, he said it would also be interesting to examine how language styles influence consumers’ brand perceptions, social media engagement, and loyalty.

“There are many other language styles that are worth exploring in the context of service encounters, such as assertive vs. nonassertive language, informal vs. formal language, and abstract vs. concrete language. It would be interesting to gain insight into consumer reactions to service robots employing such language features. Testing the effects could deepen our understanding of customer evaluation with technology-infused service encounters,” says Prof. Choi.

On this page...

Research suggests that an enjoyable experience may only make unhappy people feel better if they do not think extensively about doing it beforehand

By Guy Haydon

Unhappy people often take part in enjoyable activities to try to improve their mood. Yet if sad people are encouraged to adopt a so-called positive mood-repair strategy – where they imagine something uplifting, such as booking a holiday at a stunning beach resort in Hawaii, for example – it can spark conflicting emotions.

The contrast between their negative mood and the idea of the idyllic holiday can make it more difficult for them to imagine the positive experience, leading them to be less attracted to the activity.

#CBKOnlineSeries | Why Sad People Avoid Purchasing Happy Experiences

Hao Shen, Professor at the Department of Marketing and the Director for the MSc Programme in Marketing at The Chinese University of Hong Kong (CUHK) Business School, investigated this possibility – and the reasons why it may occur – to offer a fresh understanding of the impact of mood on the behaviour of consumers, which could, for example, help advertisers to better tailor marketing campaigns to potential customers in the future.

His research, carried out with Prof. Aparna Labroo at Northwestern University, and Prof. Robert Wyer from the University of Cincinnati, was part of the paper, “So Difficult to Smile: Why Unhappy People Avoid Enjoyable Experiences”.

Bodily Feedback

“Our findings confirmed that when unhappy people imagine having an enjoyable activity it ends up reducing their appreciation of the experience rather than increasing it,” Prof. Shen says.

“People who are experiencing negative feelings often tend to frown automatically, leading to sensory feedback from nerve endings which is inconsistent with the natural inclination to smile if they were to repair their mood by doing an enjoyable experience.

“This incompatibility makes the happy activity more difficult for sad people to imagine doing and consequently has a negative impact on the activity’s attractiveness, so they evaluate the enjoyable experience less favourably than they would have done otherwise.”

Prof. Shen says the research, in contrast with previous studies, provides new insights into understanding the effects of imagining an experience on judgments of it.

The effects of the nerve ending feedbacks from facial expressions such as smiling or frowning spontaneously brought about by imagining a happy or sad experience, the difficulty of imagining activities that are incompatible with their mood, in combination with the mood the person is experiencing at the time, have not been examined before, he says.

“Unhappy people may have difficulty responding to an advert that encourages them to imagine a positive experience … such as having a holiday in Hawaii. The advert might have a detrimental effect on evaluations of the holiday.”

Prof. Hao Shen

“Our findings suggest that an enjoyable experience may only make unhappy people feel better if they engage in this experience without thinking extensively about it beforehand.”

When participants imagine having an experience before they actually do so, metacognitive experiences – the act of thinking about thinking something – may override the effects of mood repair, Prof. Shen says.

“Such thinking might mean, for example, that people who were thinking about going on a holiday to Hawaii would be less disposed to make any travel plans if they were feeling unhappy at the time, rather than if they were not.

“People who are feeling unhappy may have difficulty responding to an advert that encourages them to imagine having a positive experience with a product featured in a promotion, such as a holiday in Hawaii. In such cases, the advert might have a detrimental effect on evaluations of the holiday.”

He and his colleagues carried out six different tests, which they completed in a laboratory in Hong Kong with the help of 1,022 undergraduate participants.

They used a variety of methods to influence the mood of participants before the start of the tests, including asking some of them to imagine a sad experience or watch a sad video, so that they could examine how it might affect their behaviour.

The tests typically involved asking students their preferences for a comedy or action film, or popular Hong Kong songs, or whether they would be happy to sing the song, We Wish You a Merry Christmas.

Some of the studies looked specifically at the effect of people’s facial expressions on their preference for an imagined experience.

Simulating Facial Expressions

In one of them, the researchers subtly influenced the expression of participants’ mouths while they imagined the pleasant experience, so that they had to form either a smile, by holding a biscuit between their teeth, or a frown, by holding the biscuit between their lips.

“We found that a frown-like expression reduced participants’ relative preference for an enjoyable activity to a greater extent than a smile-like expression did,” Prof. Shen says.

“We replicated this effect for participants who experienced a negative mood. Moreover, activating muscles associated with smiling among unhappy participants who imagined engaging in a pleasant activity eliminated the negative effect of any difficulty they find in imagining the said experience.

“These studies showed that feeling unhappy decreased a participant’s preference for a pleasant experience compared with a neutral one.”

The study also found that unhappy people are less likely to engage in a happy experience when they focus on the actual doing of the said activity rather than imagine the outcome of it, i.e., feeling better as a result of doing something enjoyable.

It was also found that unhappy people find it easier to imagine doing an unpleasant activity, presumably because it elicited facial expressions that were consistent with what they were already experiencing.

Finally, the study found that people who habitually visualize doing something before actually doing it (as opposed to others who usually skip this imaginative process) are also less motivated to engage in an enjoyable activity when they are unhappy.

Although the research supported the role of facial expressions in driving the effect that the studies had observed, this was clearly not the only way that a negative mood could make people avoid embracing an enjoyable experience, so further research could help to examine these other possibilities, he said.

“Although we did not expect the effects we observed might be moderated by the cultural background of the participants, future research could be done to test whether our effects can be generalised to participants from other areas or countries as well.”

On this page...

CUHK research looks at the rise of social influencers and its implications for companies seeking to maximise profits by offering more product variety

By Raymond Ma, Managing Editor, China Business Knowledge @ CUHK

We live in the age of the social influencer. Nowadays, with the development of the internet and the growth of social media, it is increasingly easy for consumers to post a comment or a picture of a product and to notice whether somebody else uses or praises a product or a brand, making word of mouth and opinion leader recommendations more important than ever.

Online, a recommendation may come in a form of a selfie on Instagram, a short Tweet, a “like” on Facebook, or the fact that an opinion leader uses certain products. An entire cottage industry has seemingly risen overnight where internet celebrities – people who acquired or developed their fame online – make their entire livings from corporate endorsement, using their relative notability to peddle products or experiences to their followers.

#CBKOnlinesSeries | How to Tailor Product Variety to Leverage on Influencer Marketing

However, using social influencers to market a company’s products or services can be tricky. Consumers nowadays are savvy enough when they encounter a product endorsement to consider not only that it is likely sponsored, but also whether the recommendation is purely based on high product quality. It is highly likely they would also think about whether it was because the social influencer selected a specific product (from a variety of offerings) that suited their particular taste, says Chenxi Liao, Assistant Professor at The Chinese University of Hong Kong Business School’s Department of Marketing.

Under such a scenario, is there an ideal number of varieties of a product a company could offer to maximise profits? This is what drove a group of researchers to look at the impact of product variety when consumers rely on the product evaluations of opinion leaders or experts to make purchase decisions. Entitled Opinion Leaders and Product Variety, the study was conducted by Prof. Liao in collaboration with Prof. Dmitri Kuksov of the University of Texas at Dallas.

“Absent costs of variety, to increase profit, an intuitive solution is to increase product variety. With more alternatives available, it is more likely that an expert can find a variant that fits their personal preference, and post a positive product opinion,” says Prof. Liao, adding that since consumers expect quality to be higher when the expert opinion is positive than when it is negative, they are willing to pay a higher price.

When More Variety is Bad

From this perspective, increased assortment can benefit the firm. However, when many product variants are available, consumers may expect an expert to find a better fit, and this consideration would then reduce consumer expectations of the product quality, leading to lower profits.

There is also the issue of market noise. Consider that opinion leaders are likely to be more knowledgeable and have a greater desire to educate themselves about a certain product, since this is typically how they gain popularity and the trust of their followers in the first place. These experts are likely to be able to better understand and choose which variant fits them best.

On the other hand, the everyday consumer may not be as familiar with the product or are not willing to spend the time and effort. This means they may not be able to choose the best-fitting alternative and may benefit less from having many alternatives.

“The idea is that the promotion of a smaller number of products makes communication easier and clearer.”

Prof. Chenxi Liao

Taken all of this into consideration, the researchers formulated a complex mathematical model and found that there does exist a point beyond which increasing product variety netted no significant benefits to a company.

Prof. Liao explains that two opposing forces come into play when a company increases the variety. First of all, when product variety increases, it raises the probability of getting a positive expert opinion and therefore the product being recognized by consumers as of high quality. On the other hand, it also decreases certainty by the consumer that the product received a good review because of its inherent high quality.

Although the first effect is positive, the second is negative. It turns out that for a small number of variants, the first effect dominates the second, and for a large number of variants, the second effect dominates the first.

“We further find that the optimal number of product variants increases if the importance of fit for the expert or the expert’s unwillingness to provide a positive recommendation is higher,” Prof. Liao adds.

Another consideration is whether the company has a good grasp of how consumers would rate the quality of its products. The researchers cite as examples two similar products in recent years – the Apple iPod and the Microsoft Zune music players. Whereas the second flopped, the first became a phenomenal success, but because they were both conceptually new products, it was difficult to tell how consumers would rate their quality.

The research also found that, unsurprisingly, when the firm has a good understanding of how consumers will perceive the quality of its products, the firm with the lower quality product may seek to hide its inferiority by limiting the information transmitted through expert opinions and mimic the variety provided by a firm with a similar product but of a higher quality.

Real World Implications

Relating the findings to real world business practices, Prof. Liao notes that it is not uncommon for a company to introduce a product line with a small number of products, or even just one, promoted to opinion leaders.

“The idea is that the promotion of a smaller number of products makes communication easier and clearer,” she says, citing a successful promotional campaign by the U.S. luxury department store chain Lord & Taylor. In introducing its Design Laboratory collection, the company chose to promote a single dress to many influencers on Instagram.

The fact that a number of social influencers all agreed to create a post on Instagram with the same dress signaled to their followers that the choice was based on the quality of the dress itself, rather than because it complimented a specific fit or complexion.

Another prediction of the model is that when opinion leaders are more likely to be happy with the product regardless of the exact quality they see, a firm should prefer to offer a smaller product selection, says Prof. Liao. For example, Apple does not provide as many customization opportunities in iOS for iPhones as Android systems usually do. However, since many opinion leaders like Apple products more, they are likely to give a positive review.

Prof. Liao adds that one important assumption was that consumers are unable to tell exactly how much of a positive product review is because the product is suited to the reviewer’s tastes. This is changing in that many websites, such as the American NGO Consumer Reports, are providing more detailed information regarding the reviewer’s context. In these circumstances, the negative effect of having a large number of product variants will be diminished.

Looking at opportunities for future research, Prof. Liao notes that another assumption is that the expert always posts a product evaluation. “In practice, opinion leaders could be silent on many products. An absence of a recommendation may be interpreted as a negative opinion, as in the expert did not find it worthwhile to choose the product, or could be reducing the informativeness of the recommendations,” she says.

One interesting avenue is to consider the uncertainties facing the expert before and after the purchase, and how it affects the likelihood of a positive review, she adds.

New study finds “green consumerism” is alive and well in China, with consumers willing to pay more for sustainable food

A Growing Demand of Animal Protein

Attitudes and Social Norms Affect Consumer’s Choice

Consumers Prioritise Environment in Food Purchases

Enhancing Food Certifications Builds Trust in Sustainable Consumption

CUHK scholar shares insights on U.S. interest rate outlook and how to forecast it through a structural framework

Utilising Public Information Effectively

Understanding the Causes of Interest Rate Fluctuations

New research examines and quantifies the causal link between air pollution and various categories of online consumption

Differences in Air Quality between South and North Cities

Increased or Decreased Purchases?

Joint Mechanisms Behind the Causal Relationship

Takeaways for Consumers and Sellers

CUHK study finds that when faultlines form amongst a team of diverse entrepreneurs, it can significantly hurt performance

The Effect of Entrepreneurial Passion

Passion Domains and Developmental Stages of Start-up Teams

Study finds that the benefits of investment in information technology were significantly reduced during the pandemic

Adapting to the Pandemic

Lifting Financial Performance

An entrepreneurial spirit can help people from all walks of life achieve self-improvement, says CUHK expert

What Makes an Entrepreneur Tick?

What is an Intrapreneur?

Study finds that companies with more geographically diverse operations outperformed during the peak of the outbreak

Focusing on the Chinese Real Estate Sector

The Effects of Leverage and Firm Size

Research reveals consumers prefer straightforward and clear direction in service encounters

Literal vs Figurative Language

Future Research Directions

Research suggests that an enjoyable experience may only make unhappy people feel better if they do not think extensively about doing it beforehand

Bodily Feedback

Simulating Facial Expressions

CUHK research looks at the rise of social influencers and its implications for companies seeking to maximise profits by offering more product variety

When More Variety is Bad

Real World Implications

Want even more insights?

Subscribe to our digest