Title

Frugal innovation to customers in developed
markets : a conjoint analysis

Author(s)Lu, Zhonghua; Wirawan, Dony Dahana

Citation

大阪大学経済学. 2024, 73(4), p. 30-51

Version Type VoR
URL

https://doi.org/10.18910/94747

rights
Note

Osaka University Knowledge Archive : OUKA
https://ir.library.osaka-u.ac.jp/
Osaka University

Vol. 73 No. 4

OSAKA ECONOMIC PAPERS

March 2024

Frugal innovation to customers in developed markets:a conjoint analysis
Zhonghua Lu† and Wirawan Dony Dahana‡

Abstract
The onset of the twenty-first century witnessed “frugal innovation” gain prominence in thescientific and practical field. However, most studies focused on emerging markets, such as
China, India, or the bottom-of-pyramid markets. A few studies focused on customersʼ attitudes indeveloped markets towards frugal innovation. This study focuses on the representative propertiesof frugal innovation in emerging markets, such as substantial cost reductions, concentration oncore functionalities, and optimized performance. Specifically, we addressed how customers indeveloped markets weigh frugal innovation properties and investigated several corporate andenvironmental factors that affect frugal innovation purchase decisions. A questionnaire survey
was conducted among company buyers in Japanʼs chemical, pharmaceutical, and food industries
to collect data on how customers assess frugal innovation in emerging markets. The results revealthat customers in developed markets prefer frugal innovation properties differently. Furthermore,company buyersʼ purchase intentions for frugal innovation are significantly influenced by
performance (capacity and durability) and not by side function and cost reduction in emerging
markets. This study provides critical insights into company buyersʼ perspectives on innovation in
emerging markets and hints at business strategies for introducing frugal innovations in developed
markets.
JEL Classification: O33, O39
Keywords: reverse innovation, exploration, exploitation, sustainability, substantial cost reduction,function concentration, optimized performance

1. Introduction
In recent years, different types of innovation developed in emerging markets have gained significant
attention in the scientific and practical literature, especially frugal innovation (Weyrauch and Herstatt, 2017).
Unlike sophisticated top-down Research and Development (R&D)-driven innovation created with abundant†‡

Graduate Student, Graduate School of Economics, Osaka University
Professor, Graduate School of Economics, Osaka University

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Frugal innovation to customers in developed markets: a conjoint analysis－ 31 －

resources, frugal innovation is developed under limited consumer affordability and resource scarcity. The
main idea is to develop products and services that fit the unique needs and requirements of emerging markets
at low prices to enable consumption by non-affluent customers (Prahalad, 2012). In other words, instead of
considerable financial and human resources, premium pricing, and abundance, innovation in emerging markets
may be driven by local environmental factors, especially low consumer affordability, social problem-solving
requirements, and sustainability requirements (Lu and Nakagawa, 2022). Considering these environmental
factors, innovation in emerging markets should have its properties. The most widespread definition of frugal
innovation includes three criteria: substantial cost reduction, concentration on core functionalities, andoptimized performance levels (Weyrauch and Herstatt, 2017).
Compared to R&D-driven innovation, few resources are used throughout the life cycle of frugal innovation.
Frugal innovation, complying with sustainable development, is increasingly practiced by scientists, politicaldecision-makers, and different companies due to limited resources. Recent studies suggest that in addition to thesales potential in emerging markets, developed countries also require frugal innovation (Tiwari and Kalogerakis,
2019; Winkler et al., 2020; Wohlfart et al., 2021). For instance, portable ultrasound machines developed andinitially marketed in China have been successfully introduced in Western markets. Natural ingredients used inIndia for centuries have been synthesized and sold as Food and Drug Administration (FDA)-approved medicines
to consumers in the USA and Europe. Moreover, given the recent developments, including the financial andeconomic crisis (2008-2009), recession, stagnating income, rising inflation, conflicts among countries, andhigh unemployment (Eurostat, 2017; McCollum et al., 2018), the potential demand for frugal innovation indeveloped markets could increase in the future.
However, people living at the lower end of the income scale in developed countries have a significantly
higher income level than those in bottom-of-pyramid (BOP) countries (Angot and Ple, 2015). The potential
demand for frugal innovation may increase, and customers in developed markets may recognize frugal
innovation differently; properties may differ from those in emerging markets. For example, traditional
studies suggest that consumers in developed countries use prices to infer quality, as superior quality typicallycommands a higher price, and price signaling of quality is common for new products whose quality level is still
unclear. (Gerstner, 1985; Tellis, 1986). Additionally, attributes may act as quality signals because consumers
in developed countries may be particularly skeptical about quality when products originate from emerging
countries. (Govindarajan and Trimble, 2012; Giannetti and Rubera, 2020). Few studies have analyzed whether
and how consumers in developed markets view frugal innovation properties differently, especially regarding
company buyers. However, the factors affecting consumersʼ viewpoints toward frugal innovation are yet to beinvestigated.
This study aimed to fill this gap in the literature. Specifically, we addressed how organizational buyers
value frugal innovation and its properties. We aligned this with Weyrauch and Herstatt (2017) by assumingthat substantial cost reduction, concentration on core functionalities, and optimized performance are themain properties of frugal innovation. In addition, corporate and environmental factors were assessed fortheir influence on company buyersʼ attitudes towards frugal innovation. At the corporate level, sustainability
practices and ambidextrous strategy (exploitation and exploration orientations) were investigated. At theenvironmental level, environmental dynamism and institutional distance were assessed. Further, we developed

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hypotheses on company buyersʼ preferences for different frugal properties and how corporate and environmental
factors influence these preferences for frugal innovation properties. A survey using conjoint analysis was
conducted with companies in Japanʼs chemical, food, pharmaceutical industries.
This study contributes to understanding how customers in developed markets value frugal innovation
properties differently than those in emerging markets. This explains why some frugal innovations successfully
spread to developed markets, whereas others failed. It also gives practitioners, especially from emerging
markets, a direction about the frugal innovation they should provide for developed markets and the potential
customers they should approach.
2. Literature review and hypothesis development
2.1 Background of frugal innovation
2.1.1 Frugal Innovation Definition
Many scholars have attempted to compare frugal innovation with other innovation types and characterize
it. For example, frugal innovation differs from mainstream innovation in (1) geographical context, (2) diffusion
patterns, (3) business models, and (4) distribution channels. (Zeschky et al, 2014; Herstatt & Tiwari, 2020;
Weyrauch & Herstatt, 2017). Hossain (2016) compared frugal innovation with mainstream innovation in termsof input, success factors, impeding factors, and output by applying a systematic literature review approach.
Agarwal et al. (2016) described frugal innovation as “good enough” and affordable products that satisfy theneeds of resource-constrained consumers and have vast characteristics. Hossain (2018) offered a definition
for frugal innovation as a “resource-scarce solution” where the final solution is significantly cheaper thancompetitive offerings and is good enough to meet basic needs. Weyrauch and Herstatt (2016) reviewed theliterature and used three criteria to define frugal innovation: substantial cost reduction, concentration on corefunctionalities, and optimized performance. Winkler et al. (2020) argued that for frugal innovations to succeed
as products in developed nations, they need to meet Weyrauch and Herstattʼs (2017) optimal performance
criterion by adapting to match user-specific characteristics (personal, market, or legal requirements).
2.1.2 Theoretical background for frugal innovation
Given that the concept and term frugal innovation have emerged relatively recently (the first scientificpaper on frugal innovation was published in 2005), theoretical discussions are still limited. In the literature,
disruptive innovation theory, institutional theory, and resource-based view are frequently cited directly andindirectly. Disruptive innovation theory was used to examine frugality in frugal innovation. Frugal innovation
is often disruptive because it is a complex and expensive product that creates an affordable version (Soniand Krishnan, 2014; Slavova, 2014). Such disruptive innovations are intended for new or less demanding
applications, primarily targeting non-mainstream customers (Ahlstrom, 2010). Institutional theory has beenused to understand the institutional context shaping frugal innovation development. For example, scholars
have discussed the role of weak innovation infrastructure or institutional voids in emerging markets in shaping
frugal innovation (Bhatti, 2012; Zeschky et al., 2014a). Lu and Nakagawa (2022) applied a quantitative method
to investigate consumer affordability, institutional voids, and resource availability in developing countries.

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This greatly influences three innovation properties developed by emerging markets: frugality, sociality, andtechnological sophistication. The resource-based view explains how companies develop their innovations
under resource constraints. Cai et al. (2019) highlight institutional leverage and bricolage in overcoming
environmental constraints and developing more affordable frugal products. By integrating with local actors toco-create products or develop collaborations with non-traditional stakeholders, companies in emerging markets
managed to reduce resource dependence to fit local income markets (Schuster & Holtbrugge, 2014). Moreover,scholars suggest that frugal innovation is a source of market capability and supply chain sustainability (Shibin
et al., 2018). In addition to the theories discussed in the literature, such as diffusion, resource dependency,
network, and international product life cycle theories, transaction theory is quoted to explain frugal innovation.
2.2 Frugal innovation in developed markets
Frugal innovation is mostly associated with applications in the BOP or in emerging markets (Brem &Wolfram, 2014; Schleinkofer et al., 2019). However, there are also some examples of frugal innovations thathave been successfully introduced to advanced economies, for example different types of frugal cars (Beetle,
2CV, old Mini, Japanese Kei) and various models of reliable, low-cost household appliances that meet withoverwhelming demand, despite the availability and affordability of more fashionable solutions. Some scholars
suggest demand for frugal innovation in developed nations may exist for several reasons (Govindarajan andRamamurti, 2011; Govindarajan and Trimble, 2012).
1. Innovations developed in emerging markets may have a ready market among people with less income in richcountries.
2. Dramatic cost and price reductions of 70%-90%percent achieved to succeed in emerging markets can help
expand demand in rich countries.
3. New features incorporated for emerging markets, such as sturdiness, portability, or ease of use, may create
new market segments in rich countries.
4. Technology of “good enough” products developed for emerging markets may improve over time to satisfy
high-end applications in rich countries.
5. Emerging markets may leapfrog to the latest technologies, especially if they have large internal demand, areunencumbered by legacy technologies, and face fewer regulatory obstacles.
Meanwhile, developments in recent years, such as the economic crisis (2008-2009), recession, stagnating
income, rising inflation, conflicts among countries, and high unemployment, could increase the potential
demand for frugal innovation. For example, research on consumer attitudes in the USA and Europe has indicateda growing willingness to purchase cheaper, in-house brands, which seems to have persisted even as consumer
confidence has begun to return following the 2008 financial crisis (European Commission, 2016). Secondly, it
is suggested that consumers are becoming increasingly ʻvalues-consciousʼ (Radjou and Prabhu, 2015). These
values include a rejection of rampant consumerism and a preference for environmentally sustainable products.
Frugal innovation has significant attributes of resource scarcity, which means that few resources are used during
a productʼs life cycle (from production to use to disposal). In some sense, this attribute aligns with the conceptof sustainable development, which is popular for global development, especially in developed countries. It is

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also likely that the circular economy and sustainability considerations will play a greater role in the developed
countries (Kroll, H & Gabriel, M., 2020). Given the relevance of frugal innovation to sustainable development,
frugal innovation may be increasingly welcomed in developed markets.
However, frugal innovations that succeed in developed markets may have different properties, Firstly,
consumers in developed markets have a much higher income level compared with consumers from emerging
markets. Moreover, consumers in developed markets typically care more about product quality and functions.
Consequently, customers may welcome frugal innovation differently depending on product properties. For
example, frugal innovation is expected to include digital and high-tech elements. Schneider (2020) suggested
that consumers in Germany weigh factors such as quality, features, and price. In addition to the price/performance ratio, consumers also consider energy efficiency or sustainability when purchasing. His most recent
study verified that frugal household appliances are also relevant and accepted in industrialized countries like
Germany.
If we canʼt have a fixed and measurable definition or criterion to define frugal innovation, it would be very
difficult to investigate how customers in developed markets view frugal innovation. In this study, we will keep
in line with Weyrauch and Herstatt (2017), three criteria are suggested to define frugal innovation including (1)significant cost reduction, (2) concentration on core functionalities, and (3) optimized performance level.
Substantial cost reduction is the first criterion to distinguish frugal from conventional innovation.
Customers in emerging markets usually have much lower income levels than those in developed markets. In
addition, manufacturers in emerging markets have limited resources for investing in new product development.
Given these factors, substantial cost reduction is considered the first criterion for frugal innovation fromemerging markets. Cost reduction was firstly discussed from the perspective of the manufacturer and service
provider and gradually from the customer perspective, as consumers will only be satisfied when the total cost ofownership is minimized. (Bahadur & Doczi, 2016; Cappelli et al., 2010)
However, specifying the extent of cost reduction is always challenging. For example, in the literature review,descriptions such as minimum cost, much lower price, significantly lower costs, or ultra-low cost indicate thatcost reduction must be significant for an innovation to be considered frugal. Rao (2013) suggests a 58%-97%
cost reduction could be considered a standard. Weyrauch and Herstatt (2017) also proposed that cost reduction
must be at least one-third that of comparable products but admit that the cost reduction level should depend on
the user context. When it comes to developed markets, cost reduction levels may tend to be different as the user
context is significantly different from that in emerging markets. In this study, we will apply the comparison
approach of frugal products to alternative products originating from developed markets, so customers indeveloped markets can have a correct understanding of frugal innovation.
Core function concentration is seen as the second criterion for frugal innovation. Concentrating on theessential characteristics that provide the most value to customers is the concept of core function concentration(Bahadur & Doczi, 2016). In other words, streamlining a product or service places the most crucial components
at the forefront, this can make the product easier to use, conserve resources, have a smaller influence on
customer behavior, or match a particular lifestyle or environment (Barclay, 2014; Basu et al.2013; Flatters andWillmott 2009; Wooldridge 2010). In order to identify the core functions, unnecessary and undesired functionsof a product or service, function analysis is used as a systematic approach and as a tool for determining the mainMarch 2024

Frugal innovation to customers in developed markets: a conjoint analysis－ 35 －and side functions of the innovation (VDI.2010).
However, traditional research suggests that product attributes also act as quality; customers in developed
countries may be particularly skeptical of quality when products come from emerging countries. (Haubl andElrod 1999; Giannetti, V., & Rubera, G.2020). Meanwhile, some side functions may be considered as notimportant in emerging markets, while in developed countries, these side functions are considered important due
to regulations and laws. Hence, the customers in developed markets may hold different viewpoints towards corefunctionalities concentration.
Optimized performance level is another criterion for frugal innovation. Fulfilling the required levelof performance and quality by using appropriate, cost-effective processes should be the concept of frugal
innovation (Bahadur & Doczi, 2016; Agarwal et al, 2017). Typically, engineering and functional properties, suchas precision, durability, power, and speed are included in the definition of performance (Akbar & Subramaniam,2019).
Traditional R&D-led innovations from developed markets are sometimes over-engineered. For example,
Wyman (2013) provided one example showing that Western manufacturersʼ premium and high-priced
construction equipment do not meet the requirements of the global construction equipment markets, with its
growing demand for machines with technically simple and robust technologies that allow for do-it-yourself
repairs. Winkler (2020) suggests that it is not enough to only focus on the technical performance (productrelated performance), user-related performance should be also included. Aesthetic functions are subjectively
perceptible user-related effects of an object (VDI,2019); there are less quantifiable but subjectively perceivable
aspects of innovation performance. For example, consumers may not just care about the technical performanceof a car, while at the same time, the performance in terms of prestige, comfort, and security could also be
important. However, as user-related performance canʼt be quantified and differs from industry to industry, evenfrom person to person. In this study, we will focus on product-related performance by applying a comparison
approach to quantify the performance.
2.3 Research model and hypotheses
Aiming to empirically investigate the attitude of consumers (company buyers) in developed markets
towards the properties of frugal innovation, and how the attitudes can be affected by corporate andenvironmental factors, we keep in line with Weyrauch and Herstatt (2017) and developed a model to identify
customersʼ attitude towards substantial cost reduction, core function concentration, performance optimization.
In the survey, we use a comparison approach to quantify the cost reduction level, side function reduction level,and performance optimization level. we use price level compared to alternative products from Japan to represent
cost reduction level, side function level compared with alternative products from Japan to represent functional
concentration level, and production capacity level and durability level compared to alternative products fromJapan to represent the performance level of frugal innovation. By measuring company buyersʼ importance placedon specific frugal innovation properties, we could measure the attitudes of customers towards frugal innovation.
In terms of corporate factors, organizational adaptation strategy, that is, exploration orientation or exploitation
orientation, sustainability practice, are to be explored, while at the environmental level; environmental
dynamism, and institutional distance are to be investigated. Figure 1 illustrates the conceptual model of this－ 36 －OSAKA ECONOMIC PAPERS

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study.

Figure 1. Conceptual model of this study

2.3.1 Exploration & exploitation orientation
March (1991) pointed out the importance of "exploration" and "exploitation" for competitive advantage
and sustainable development. Exploration represents the novelty and particularity of the required knowledge.
It shows the characteristics of search, discovery, high risk, experiment, and flexibility, helpful to the adaptationof the environmental changes in the new market. On the other hand, exploitation precedes the progressive
adaptation of existing technology, products, and services to satisfy customer and market requirements (Jansen
et al., 2006). The exploitation strategy emphasizes satisfying customer needs by improving existing knowledge,
technology, products, and workmanship to enhance and expand product efficiency, production efficiency,
quality, leanness, and marketization.
Exploration and exploitation strategies accomplish diverse goals and require different risk-taking behaviors.
Some scholars suggest that the development of frugal innovation or the attitude towards frugal innovation could
be affected and facilitated by strategic and managerial approaches. For instance, Prahalad and Mashelkar (2010)
argue that firms within emerging markets have been able to develop radical business models by transforming
almost every element of the value chain, thereby building disruptive business models. These firms not only hone
existing capabilities but also acquire and build new capabilities to solve problems. George et al. (2012) use theterm inclusive innovation for innovation within the merging market context, examining the enacting of new
business models for doing such innovation as part of their exploration of organizational macro processes.
We think that the attitudes towards frugal innovation of company buyers should be influenced by themindset, and capacity to find out new solutions for the existing problems. under the current developments suchMarch 2024

Frugal innovation to customers in developed markets: a conjoint analysis－ 37 －

as the economic crisis (2008~2009), recession, stagnating income, rising inflation, conflicts among developed
countries, and high unemployment (Rao, 2018) world,
Firms, that apply an exploration orientation strategy may welcome the concept of frugal innovation: solve theproblem and provide optimized performance by reducing side functions. Furthermore, companies applying
an exploitation orientation strategy tend to emphasize the improvement of existing knowledge, technology,
products, and workmanship using existing methods. In other words, these firms would not expect totallydifferent solutions from emerging markets, even if the solution could be much cheaper, as such a frugal solution
could be very risky for them. Hence, we would like to propose.
H1a. Companies applying an exploration orientation strategy are more likely to welcome function concentrationand cost reduction of frugal innovation.
H1b: Companies applying an exploration orientation strategy are less likely to require the same performancelevel of frugal innovation compared with products from developed markets.
H2a. Companies applying an exploitation orientation strategy are less likely to welcome function concentrationand cost reduction of frugal innovation.
H2b: Companies applying an exploitation orientation strategy are more likely to require the same performancelevel of frugal innovation compared with products from developed markets.
2.3.2 Sustainability practiceSustainability is defined as meeting current needs without compromising the ability of future generations tomeet their needs (Hahn, T& Figge, F; 2018). Corporate sustainability involves expanding the financial bottom
line to a triple bottom line, which includes the environmental and social aspects of corporate performance.
Driven by increasingly pressing environmental, social, and economic issues, sustainability has become a highpriority for businesses in various production chains (Sancha et al., 2016). However, scholars have to finduniversality in the accepted understanding of corporate sustainability despite the increasing number of studies
showing a positive relationship between sustainability practices and corporate performance. Two competingtheories describe the impact of sustainability on corporate performance: value creation and destruction. The
value-creation approach theorizes that risk can be reduced by adopting environmental and social responsibilities.
In contrast, the value-destruction theory predicts that companies engaged in environmental and social
responsibility lose focus on profitability and instead pursue pleasing stakeholders at the expense of shareholders.
Although some firms do not actually weigh too much on sustainability practices as they do not provide
financial feedback in the short term, the influence of sustainability practices on a company in many aspects isclearer. For example, internal sustainability practices (pollution prevention and green supply chain management)
can help firms reduce costs and environmental risks, creating a long-term span. External sustainability practices(green product development) can help firms meet the expectations of external stakeholders, including customers,
suppliers, non-governmental organizations (NGOs), regulators, and communities, thereby improving the firmʼslegitimacy and reputation (Hart and Milstein, 2003).
Internal sustainability practices include waste and emission reduction in normal operations, allowing firms
to lower the cost of raw materials and waste disposal in the long term, thereby increasing production efficiency(Sampath, H. R. 2015; Nishitani et al., 2011). External sustainability practices aim to minimize the productʼs

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negative environmental impact (Shahzad et al., 2020) by introducing bio-based, recycled materials. Frugal is
attributed to resource scarcity in the product cycle (from production to use to disposal). We suggest that firmsthat perform sustainability practices would show more interest in the concept of frugal innovation: solve theproblem and provide optimized performance by reducing side functions.
H3a. Companies performing sustainability practices are more likely to welcome function concentration and cost
reduction of frugal innovation.
H3b: Companies performing sustainability practices are less likely to require the same performance level offrugal innovation compared with products from developed markets.
2.3.3 Environmental dynamism
Environmental dynamism is the rate of change and the degree of instability in an industrial environment(Dess and Beard, 1984). Dynamic environments make current products and services obsolete and require thedevelopment of new ones (Jansen et al. 2005). In order to minimize this threat of obsolescence, organizational
units need to develop new products and innovations consistently. In other words, understanding a dynamic
environment and performing actions to adapt to it are required. However, investing in a new product or strategy
entails risk, especially in a dynamic environment. Companies may try to limit resources until the expectationof return is anticipated. Under such an environment, firms may have a trend to welcome frugal products fromemerging markets with much lower costs and features. Meanwhile, firms do not require the same productperformance compared with products from developed markets.
H4a. Companies in a sector with higher environmental dynamism are more likely to welcome function
concentration and cost reduction of frugal innovation.
H4b: Companies in a sector with higher environmental dynamism are less likely to require the same
performance level of frugal innovation compared with products from developed markets.
2.3.4 Institutional distance
The original definition of institutional distance (Kostova, 1996) drew from the perspective of Scottʼs (1995)"three pillars" conceptualization of institutions: regulatory (rules and laws that exist to ensure stability and orderin societies), cognitive (established cognitive structures in society that are taken for granted9, and normative(domain of social values, cultures, and norms). Accordingly, institutional distance between two countries was
defined as the difference between their regulatory, cognitive, and normative institutions (Kostova, 1996).
Some scholars suggest that the contextual attributes of emerging markets, such as environmental constraints(lack of institutions, infrastructure, and resources), in combination with strategic managerial decisions enable
the capabilities for frugal innovation. For instance, Ernst et al. (2014) report a quantitative study undertaken to
explain why the challenging environment of emerging markets with its lack of institutions can facilitate a firmʼsability to develop frugal innovation. If the institutional structure of the industry is quite different, the company
may be cautious about the frugal innovation concept from emerging markets.
H5a. Companies in the industry with a longer institutional distance from emerging markets are less likely towelcome function concentration and cost reduction of frugal innovation.
H5b: Companies in the industry with a longer institutional distance from emerging markets are more likely toMarch 2024

Frugal innovation to customers in developed markets: a conjoint analysis－ 39 －

require the same performance level of frugal innovation compared with products from developed markets.
3. Methodology
3.1 Sample
Data was collected through a conjoint experiment in Japan from November 2022 to April 2023.
As a developed market with an aging population, Japan is seeing significant cost increases, especially inthe manufacturing industry. Meanwhile, given Japanʼs close geographic and cultural distance from the biggest
emerging market (China), frugal innovation from emerging markets to Japan could be easier. We consider Japanas an appropriate choice to collect data in this study. A database owned by a Japanese survey company, whichcontains purchase persons from 1,000 companies in the chemical, petrochemical, and pharmaceutical, foodsectors, was used as a sampling frame. This database should be representative since it contains companies fromdifferent industries, different sizes, different establishment years.
Table 1. Descriptive statistics of the sample (n=165)

3.2 Experimental design
An experiment for conjoint analysis was designed to assess the extent to which subjects welcome thefrugal innovation properties. This tendency was measured by asking subjects to evaluate several centrifuge
and dryer product concepts; we chose centrifuge and dryers for three reasons: Firstly, as we conduct thisstudy to investigate corporate behavior towards frugal innovation from emerging markets, we need to find out
products which are widely used in the manufacturing industry, centrifuge, and dryer is widely used in chemical,
pharmaceutical and petrochemical industries. Secondly, the role of machinery is usually apparent, which meanspurchasing staff understand well what performance level and function will be needed. For example, a dryerʼs
purpose is to dry powder to certain moisture levels and in some specific capacity. Finally, compared with generalcommodities, machinery has a larger value, which means firms will make the purchasing decision carefully and－ 40 －OSAKA ECONOMIC PAPERS

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normally conduct a comparison with brands in terms of cost, function, and performance.
We designed the experiment by presenting same pictures of centrifuge and dryer from Chinese makers,
which have 4 different frugal innovation criteria to purchasing staffsʼ evaluation: firstly, cost reduction levelcompared with alternative products from developed markets (30~50% price level of alternative products fromJapan; 50~70% price level of alternative products from Japan; 70~90% price level of alternative products
from Japan), and side function level (except for main function, with only 30% of side functions of alternative
products from Japan; except for core function, with 50% side functions of alternative products from Japan;
except for main function, with 70% side function of alternative products from Japan); finally performancelevel which includes capacity level ((80~100% capacity level of alternative products from Japan; 60~80%
capacity level of alternative products from Japan; 40~60% capacity level of alternative products from Japan),and durability level (70~90% durability level of alternative products from Japan; 50~70% durability level ofalternative products from Japan; 30~50% durability level of alternative products from Japan).
3.3 Measurement model
Corporate factors and environmental factors are measured using measurement items from previous studies.
For exploitation orientation and exploration orientation, we keep in line with Lubatkin (2006), taking four
items for exploitation orientation measurement and four items for exploration orientation measurement. We
use six items from Bansal (2005) for sustainability practice, with more items for environmental, social, andenvironmental sustainability measurement.

Figure 2. Illustration of the profiles presented to the experiment subjects

As for environmental factors, 4 item measurements from Li et al. (2014) were used for environmental
dynamism. We measure institutional distance by using two items, asking whether business is easily influenced
by government regulation and laws or industrial standards and whether the regulation, law, and industrial

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Frugal innovation to customers in developed markets: a conjoint analysis

standards are much different from emerging markets. We next confirmed the measuresʼ convergent validity
based on composite reliability and a variance-extracted measure, the results shows that the composite of thesefactors are reliable.
3.4 Segmentation method and latent class conjoint model
In the case of marketing research, researchers have used various descriptors to partition consumers into
several segments, including demographic and psychographic or lifestyle (Dahana et al., 2019) variables. We
assume that company buyers can also be sorted into different segments, and we aim to segment the companies
on their responses to frugal innovation attributes. We try to find several segments with different attitudes towards
frugal innovation from emerging markets. Companies in different segments are presumed to have different
organizational traits or businesses in different environments. The relationship between attitudes towards frugal
innovation from emerging markets at the segment level and these characteristics is modeled using a latent classanalysis. In what follows, we describe our analytical approach in detail.
We assume that attitude towards frugal innovation varies among company segments. Although we do
not directly observe the segments, we consider the existence of several "latent" segments whose members
have different propensities to purchase frugal innovation from emerging markets. The membership of eachconsumer in every segment is unknown, but we can make statistical inferences about it based on available
company information. In our analysis, we assume that the membership probability of companies to a particularsegment can be explained by their organizational characteristics and operating environmental variables. Leti (i=1,2, ・・. n)denote the suffix of a company, where n represents the number of companies. Further, let
us assume that K company segments are in the market. Denoting the probability that customer belongs
to segment

by, we use a logit-link function to allow the influence of organizational

characteristics and environmental variables on this probability as follows.
（1）
It can be verified thattakes a value between 0 and 1, where a higher value represents a higher

probability of belonging to the respective segment. Equation (1) implies that this probability depends, whichis defined as follows.
（2）Here, We Epra, Epit, Sust are company trait variables for exploration orientation, exploitation orientation,
sustainability practice. Meanwhile, Envi and Inst are the environmental variables for environmental dynamism
and institutional distance. Finally, Fsize is the firm size shown by employee numbers. Fage means years of
establishment, Sale means the companyʼs annual sales, and Hist is years since the companyʼs establishment.
The effect of these variables is captured by the parameter, where a higher (lower) value of

implies thatmembership probability increases (decreases) with the respective variable. For identification purposes, we
fix these parameters with respect to the first segment at a zero value (Gupta and Chintagunta, 1994). Thus,
this segment serves as a baseline segment to which the results for the remaining segments are compared and－ 42 －OSAKA ECONOMIC PAPERS

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interpreted.
As described in the above paragraph, we consider a situation where different companies evaluate a setof products or profiles. (machinery from emerging markets). Let J be the number of products and assume thatcompany i belongs to segment k. One companyʼs evaluation of the product j (j=1, 2,, J), denoted by, isgiven by:
（3）
Where

is a dummy variable taking a value of -1 if product j has a 30~50% price level compared withthe alternative product from Japan, and equals 0 if product j has a 50~70% price level compared with productfrom Japan, equals 1 if product j has a 70~90% price level compared with products from Japan? Similarly,
Function j, Capacity j, and Durability j are operationalized relative to their levels. In this specification, thedegree of customersʼ attitude is captured by the part-worth, where a higher value of the parameter implies

a higher importance placed on the attributes, and consequently, a higher likelihood of acceptance of the frugal
innovation from developing markets. (Eastman and Eastman, 2011). Finally,

denotes a random error

representing the influence of other factors not included in the analysis. We assume that

follows a normal

distribution with a mean of 0. Conditional on the membership of company i in segment k, we can define thecompanyʼs likelihood function in the model described in Equation (3); that is, the probability of obtaining theconsumer data under the modelʼs assumption. The likelihood function is given by:
（4）
Here

is the deterministic part of the right-hand side of Equation (3). The estimation of model

parameters for all segments is conducted based on the unconditional likelihood function. To obtain theunconditional likelihood function, we must marginalize the likelihood function over the distribution of segment
membership. This can be done by weight-averaging the conditional likelihood function in Equation (4) using themembership probability

as follows:
（5）

Where

Model estimation is

implemented by finding the parametersʼ value that maximizes Equation (5). Here, we used the expectationmaximization algorithm to obtain the estimates of the parameters, which can be easily implemented using theflexmix package in R software. Finally, using the estimates of

we can predict companiesʼ posterior

membership probability in each segment using the following identity.
（6）

3.5 Segment number
As the number of segments is unknown prior to the analysis, we estimated multiple models imposing
different numbers of segments and subsequently chose the one with the best explanatory power. We use aMarch 2024

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Frugal innovation to customers in developed markets: a conjoint analysis

Bayesian information criterion (BIC) to assess model accuracy. Figure 3 depicts the results of the models with
one to six segments. The BIC decreases when we move from the model with one segment to two segments,suggesting a significant improvement in model accuracy. However, when we add the number of segments, fromthree to six segments, the BIC increases, showing that two segments should be the best choice. Accordingly,
we selected the model with two segments and will use its results hereafter to examine the proposed hypothesesʼ
validity.

Figure 3. Segment number selection using BIC

3.6 Part-worth estimates and segment interpretation.
Next, we report the estimation results of part-worth utilities for each segment (Table 4). At first, we
computed the segmentsʼ size using the posterior membership probability given in Equation (6). Segment 1 isthe larger segment, with 95 companies (57%). The part-worth utility of Low cost (cost (= -0.37; P=0.80); Low functionality (= -0.53; P=0.71); Middle= -2.03; P=0.17), Middle functionality (= 0.64; P=0.66)

are insignificant, suggesting that these companies do take cost and side attributes as important parameters.
Traditional research suggests that consumers in developed countries use price to infer quality, as superior quality
typically commands a higher price. The price-signaling of quality is common for new products whose quality
level is still unclear. (Gerstner 1985; Tellis 1986). Functionality may also act as a signal of quality as well, as
consumers in developed countries may be particularly skeptical of quality when products come from emerging
countries. (Govindarajan and Trimble, 2012; Giannetti, V., & Rubera, G.2020). Suppose customers in developed
markets still suspect product quality and performance of frugal products from emerging markets. In that case,they may not take cost reduction and side attributes reduction as a reference factor when deciding whether toaccept the products.
On the other hand, the part-worth estimates of Low capacity (= -3.23; P=0.05); Low durability (= -6.33; P<0.01), Middle capacity (= -13.07; P<0.01), Middle durability (= -6.61; P<0.01) turns out to－ 44 －OSAKA ECONOMIC PAPERS

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be significant and negative, suggesting that customers in developed nations firstly value the performance ofthe frugal products from developed markets if the performance of the products is much worse than alternative
products from developed markets. They will not accept the products even with much lower cost.
Segment 2 is the smaller segment, with 70 companies (43%). The part estimate showed almost the same
trends. Firstly, Low cost (Low functionality (= -0.58; P=0.78); Middle cost (= -1.05; P=0.62);= -2.64; P=0.17) and middle functionality (= 0.58; P=0.66) are insignificant,suggesting that these companies take cost reduction and side attributes reduction level as a factor when deciding
whether to accept frugal innovation or not because they suspect the performance. Moreover, the part-worth
estimates of Low capacity (= -8.91; P<0.05), Middle capacity (-24.92; P<0.01), Middle durability (= -8.27; P=0.05); Low durability (== -21.49; P<0.01) turns out to be significant and negative. Comparedwith Segment 1, customers in Segment 2 are more negative over lower performance levels such as capacity anddurability.
Table 2. Estimation results of segment-level part-worth utilities (n=165)

3.7 Segment membership and hypothesis testing
Table (5) displays the estimation results of segment membership parameters or . As described in themethodology section, the parameters of the baseline segment are fixed at zero for identification purposes.
Hence, the effect of the covariates on the segment membership probability in each segment is interpreted
relative to the baseline segmentʼs value. As the results show that companies in both segments 1 and 2 do nottake cost reduction and side attributes reduction as an important factor for their acceptance of frugal innovation,
our hypotheses 1a, 2a, 3a, 4a, 5a are not supported. Explorative orientationʼ effect on membership in Segment
2 is negative and significant ( = -0.078, p<0.05). Therefore, companies applying an explorative orientation
strategy are less likely to belong to Segment 2. On the other hand, customers in Segment 2 are more negative
over lower performance levels, so companies applying an exploration orientation strategy are less likely to ask
for the same performance level of frugal innovation. Hence, our Hypothesis 1b is supported. On the other hand,the Exploitative orientationʼ effect on membership in Segment 2 is positive and significant ( = -0.088, p<0.01).
Therefore, companies applying an exploitative orientation strategy are more likely to belong to segment 2,

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Frugal innovation to customers in developed markets: a conjoint analysis－ 45 －

which means companies applying an exploitative orientation strategy are more likely to ask for the same
performance level of frugal innovation from emerging markets. Hence Hypothesis 2b is supported.
Sustainable practiceʼ effect on membership in Segment 2 is negative and significant ( = -0.95, p<0.1).
Therefore, companies applying sustainable practices are less likely to belong to Segment 2. In other words,
companies applying sustainable practices are less likely to ask for the same performance level of frugal
innovation to products in developed markets; hence Hypothesis 3b is supported.
Table 3. Segment membership parameters (n=165)

Environmental dynamismʼ effect on membership in Segment 2 is positive and significant (= 6.24,p<0.1). Therefore, companies facing great competition are more likely to ask for the same performance of frugal
innovation from emerging markets. Hence Hypothesis 4b is rejected. As machinery is normally a big amountinvestment, and it is the essential part for whole product lines, maybe within a high competition environment,
companies canʼt afford risk over production line. Consequently, companies in such an environment would
likely ask for close or similar performance levels of frugal products, especially products with great investment.
Institutional distanceʼ effect on membership in Segment 2 is positive and significant ( = -10.3, p=0.04),
therefore, companies in an institutional environment that is far from emerging markets are more likely to ask fora higher performance level of frugal products, consequently Hypothesis 5b is supported.
3.8 The demographic variables’ results
Finally, we examined how demographic variables affect the tendency toward customer perceptions offrugal innovation properties. First, the effect of company age and annual sales on membership in Segment 2 isinsignificant, indicating that age and annual sales do not influence companiesʼ viewpoints on frugal products.
However, the effect of company size on membership in segment 2 is negative and significant, suggesting thatlarger companies are less likely to demand the same performance level of frugal innovation from emerging
markets. Therefore, small companies are less likely to take risks, especially for machinery that requires
significant investment.

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4. Discussion and conclusion
This study examines customersʼ attitudes toward frugal innovation properties in developed markets,company strategies, and environmental factors that impact these perspectives. By implementing a conjoint
experiment (industrial machinery), we confirmed and verified company buyersʼ viewpoints on frugal innovation
properties in developed markets (Japan) and how these viewpoints are affected by company strategies andenvironmental factors.
First, Previous study suggests lower-income consumers or company buyers require frugal innovation for
substantial cost reduction. For example, Govindarajan (2011, 2012) suggested that substantial cost reductions
may help expand demand in developed countrie\s because some customers in developed countries may require
frugal innovations;
In our study, the results show the trend that customers (company buyers) in developed markets may use
price and attributes to infer quality and performance (Gerstner, 1985; Tellis, 1986; Giannetti, and Rubera,
2020). If customers are uncertain about the performance and quality level of frugal innovation, they do notdecide whether to accept frugal innovation from emerging markets based on substantial cost reduction and corefunction concentration.
Second, the results support our hypothesis that companies applying different strategies would havedifferent attitudes towards the performance level of frugal innovation from emerging markets. Althoughcompany buyers in developed markets are negative toward lower performance levels, companies applying
an explorative orientation strategy are less likely to demand the same performance level of frugal innovationcompared with alternative products from developed markets. In contrast, companies applying an exploitativeorientation strategy are more likely to ask for same performance level. Previous studies suggest that explorationoriented companies are more open to novelty, experiments, and risk-taking, whereas exploitation-oriented
companies prefer a progressive adaptation to existing products (Jansen et al. 2006). Our results are consistent
with the opinion.
Our results also suggest that companies applying sustainable practices are less likely to seek the samelevel of frugal innovation in developed markets. As frugal innovation has the property of resource scarcity inthe life cycle of a product from production to disposal (Sampath, 2015), this property is realized by deleting
unnecessary side functions and having a customized performance level. Consequently, companies applying
sustainable practices are less likely to ask for same performance levels of frugal innovation compared withalternative products from developed markets.
Finally, we propose and confirm that environmental factors influence customersʼ perspectives of frugal
innovation properties. Although we propose that companies with businesses in a dynamic industry would be lesslikely to require the same performance level of frugal innovation, they would try to limit or reduce resources
invested in contending with technology updates and competition. However, the results suggest that companies
are more likely to seek same performance level of frugal innovation performance. This is because companies
do not prefer to take risks when faced with severe competition in the industry. Finally, for institutional distance,
we propose and confirm that companies operating in an industry, where the regulatory, cognitive, and normative
distance (Scott and Bruce, 1995) are far from the same in emerging markets, are more likely to demand the same

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Frugal innovation to customers in developed markets: a conjoint analysis－ 47 －

performance level of frugal innovation compared with alternative products from developed markets.
5. Implication and limitation
Frugal innovation is seen as a significant approach to fit emerging markets with special needs andrequirements so that non-affluent customers in developing markets can have opportunities for consumption(Prahalad, 2012). Some scholars suggest that frugal innovation can also find its market in developed countries,
as some customers in developed markets with lower income levels welcome frugal innovation. Moreover,scholars suggest that frugal innovation can help expand the original market in developed markets (Govindarajan,2012).
However, our results suggest that customers in developed markets have different perspectives towards
the properties of frugal innovation. Firstly, a substantial cost reduction through core function concentration is
critical for frugal innovation in BOP markets. However, customers (company buyers) in developed markets
do not consider cost reduction as an important factor to judge frugal innovation because they typically use
price and functionality to infer quality and performance; a much lower cost level makes customers suspect theperformance and quality of frugal innovation in developed markets. This result suggests that companies should
adopt a different strategy instead of just focusing on cost reduction if they want to promote frugal products todeveloped markets. In addition, our results show that company buyers are generally negative about the lower
performance levels of frugal innovation compared to alternative products from developed markets. Optimized
performance at least getting close to alternative products from developed markets may be needed.
Finally, different company strategies and business environments can influence customersʼ attitudes towards
lower performance levels. Consequently, finding suitable targets would be the second step or challenge forfrugal innovation to be sold to developed markets.
Few scholars focused on frugal innovation research in developed markets, and most of these studies are
based on case analysis, as a well-recognized definition of frugal innovation was proposed only a few years ago.
This study follows the definition of frugal innovation proposed by Weyrauch and Herstatt (2017), empiricallyanalyzed how customers in developed markets view frugal innovation properties. The totally different resultscompared with frugal innovation studies in developing markets may give us a hint that why most frugal
innovations canʼt succeed in developed markets. Our study also contributes to the practical field by suggestingthat if firms in emerging markets want to promote their frugal products to developed markets, a different
strategy should be considered.
However, this study has some limitations. First, we investigated company buyers over machinery products,
this may be a reason for some bias as machinery products typically require huge investments. Further studies
targeting general consumers and general commodities should be conducted to verify these results. Moreover, acomparative study on frugal innovation in different emerging markets should be done, totally different results
are expected so we can have a clear image over the diffusion patterns of frugal innovations in global markets.

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