discuss 7/8

T he In st i tute for Bu siness and Finance Res earch

VOLUME 9, NUMBER 1 2014

ISSN 216 8-0612 FL ASH DRIVE

ISSN 194 1-9589 ONLINE

Honolu lu , Hawaii Januar y 6 -9 , 2014

The IBFR .ORG

GLOBAL C ONFERENCE ON BU SI N E S S A N D F I NA NC E P RO C E E DI NG S

GCBF ♦ Vol. 9 ♦ No. 1 ♦ 2014 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 1

TABLE OF CONTENTS

ENGLISH PROCEEDINGS ......................................................................................................................................... 1

GAINING KNOWLEDGE POST-DISASTER: THREE CASE STUDIES .............................................................................. 2

JULIE JEWELL, UNIVERSITY OF NORTHERWESTERN OHIO AND KIRKWOOD COMMUNITY COLLEGE

PEDDLING BY POD: MOBILE MARKETING FOR REAL ESTATE PROFESSIONALS ....................................................... 8

JOHNELL WOODY, KENNESAW STATE UNIVERSITY

USE OF DEPRECIATION AS A TAX POLICY DEVICE TO CONTROL INFLATION .......................................................... 16

NISHA SINGH, LIVINGSTONE COLLEGE, SALISBURY R.D SHARMA, LIVINGSTONE COLLEGE, SALISBURY

PRICING STRATEGY FOR THE URBAN TOURISM AREAS: A TOOL FOR REGIONAL TOURISM DEVELOPMENT AND SUSTAINABILITY ................................................................................................................................................... 21

MALEFANE STEPHEN MONYANE, TSHWANE UNIVERSITY OF TECHNOLOGY

THE DEVELOPMENT OF A PROMOTIONAL STRATEGY FOR THE URBAN TOURISM AREA ....................................... 29

MALEFANE STEPHEN MONYANE, TSHWANE UNIVERSITY OF TECHNOLOGY

LOCAL COMMUNITY TOURISM DESTINATION EXPERIENCE AS ELECTRONIC CONNECTIVITY ............................... 36

MALEFANE STEPHEN MONYANE, TSHWANE UNIVERSITY OF TECHNOLOGY

CRITICAL PRACTICES FOR INCREASING BUSINESS PROCESS ORIENTATION: CASE STUDY OF 20 COMPANIES ....... 45

NADIA ZAHEER, NATIONAL UNIVERSITY OF SCIENCES AND TECHNOLOGY, PAKISTAN

US POST COLD WAR GRAND STRATEGY AND MULTILATERAL NATIONAL INTEGRATION IN EUROPE AND EAST ASIA ..................................................................................................................................................................... 50

BENEDICT E. DEDOMINICIS, CATHOLIC UNIVERSITY OF KOREA

“THE YOUNG AND THE RESTLESS”: GRAPPLING WITH THE YOUNG CHINESE CONSUMER’S MINDSET .................. 56

LUDING TONG, MARIETTA COLLEGE

MICROFINANCE AND POVERTY REDUCTION IN GHANA: EVIDENCE FROM POLICY BENEFICIARIES .............................................................................................................................................. 68

GILBERT O. BOATENG, TAKORADI POLYTECHNIC, GHANA AKWASI A. BOATENG, CAPE COAST POLYTECHNIC, GHANA HARRY S. BAMPOE, JAYEE UNIVERSITY COLLEGE, GHANA

FINANCIAL PERFORMANCE OF FOREIGN OIL COMPANIES IN THE KURDISTAN REGION OF IRAQ .......................... 79

NAJI MASEEHO ODEL, SORAN UNIVERSITY, KURDISTAN-IRAQ & UNIVERSITY OF WOLVERHAMPTON

INFLUENCE OF COLLECTIVIST AND INDIVIDUALIST CULTURAL ORIENTATION AND REGULATORY CONSTRUAL FIT ON BRAND ATTITUDES ......................................................................................................................................... 91

MIGUEL A. ZÚÑIGA, MORGAN STATE UNIVERSITY IVONNE M. TORRES, NEW MEXICO STATE UNIVERSITY

JOB BURNOUT AND THRIVING IN CHINESE PUBLIC SECTOR ................................................................................. 94

LONGLONG HOU, BEIJING NORMAL UNIVERSITY, BEIJING

SOCIAL RESPONSIBILITY IN LATIN AMERICAN BUSINESS SCHOOLS: A TOPIC OF REAL INTEREST .......................... 98

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GABRIELA REYNA GARCÍA, UNIVERSIDAD AUTÓNOMA DE COAHUILA MARÍA DEL CARMEN ARMENTEROS ACOSTA, UNIVERSIDAD AUTÓNOMA DE COAHUILA MARÍA DE LA LUZ TRASFI MOSQUEDA, UNIVERSIDAD TECNOLÓGICA DE TORREÓN MARCELA CASAS MEZA, UNIVERSIDAD TECMILENIO

PATHS TO INSPIRE DEVELOPMENT OF A KNOWLEDGE-BASED INDUSTRY IN THE TRANSITIONAL ECONOMY ..... 108

MAJA BAŠIĆ, UNIVERSITY OF ZAGREB MARINA DABIĆ, UNIVERSITY OF ZAGREB & NOTTINGHAM TRENT UNIVERSITY

THE POSSIBILITY OF DEVELOPMENT OF FINANCIAL INDICATORS AT HIGHER EDUCATION INSTITUTIONS – CROATIAN CONTEXT .......................................................................................................................................... 118

VESNA VAŠIČEK, UNIVERSITY OF ZAGREB IVANA DRAŽIĆ LUTILSKY, UNIVERSITY OF ZAGREB MARTINA DRAGIJA, UNIVERSITY OF ZAGREB

SIMULATING THE TRANSMISSION OF EPIDEMICS THROUGH COMPLEX SYSTEMS: A CLASSIC MODEL ................ 125

SANDIP C. PATEL, MORGAN STATE UNIVERSITY GANESH BHATT, MORGAN STATE UNIVERSITY

DEVELOPING CORPORATE CULTURE IN A TRAINING DEPARTMENT: A QUALITATIVE CASE STUDY OF INTERNAL AND OUTSOURCED STAFF .................................................................................................................................. 132

QUERUBIN S. YAP, UNIVERSITY OF PHOENIX JON K. WEBBER, UNIVERSITY OF PHOENIX

STUDENT ETHICAL AWARENESS AS EFFECTED BY GENDER AND GRADE POINT AVERAGE .................................. 146

DON ALTMYER, BLACK HILLS STATE UNIVERSITY SHENG-PING YANG, GUSTAVUS ADOLPHUS COLLEGE KEN SCHALLENKAMP, BLACK HILLS STATE UNIVERSITY RON DEBEAUMONT, BLACK HILLS STATE UNIVERSITY

THE STRATEGY OF MARKETING THE CULTURAL CREATIVE COMMODITIES ......................................................... 159

WILLIAM S. CHANG, MING CHUAN UNIVERSITY

POSITIONING FOR INTERNATIONAL MARKET SEGMENTS: A CASE STUDY OF SALMAN BIN ABDULAZIZ UNIVERSITY ........................................................................................................................... 167

YASINE A. QANDILE, SALMAN BIN ABDULAZIZ UNIVERSITY NATALIA OGANESYANTS, AL-YAMAMAH UNIVERSITY

INCREASING YOUR CULTURAL AWARENESS ....................................................................................................... 177

WILLIAM A. STAHLIN, STEVENS INSTITUTE OF TECHNOLOGY PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY

THE PRESENT AND FUTURE OUTLOOK OF THE LAST IN FIRST OUT INVENTORY METHODS ................................. 183

PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY KATHERINE KINKELA, IONA COLLEGE WILLIAM STAHLIN, STEVENS INSTITUTE OF TECHNOLOGY LIZ WASHINGTON ARNOLD, THE CITADEL

INTERNET FINANCIAL COMMUNICATION ON UNREGULATED MARKETS: QUALITATIVE AND QUANTITATIVE APPROACHES ..................................................................................................................................................... 188

LAETITIA POZNIAK, UNIVERSITY OF MONS

PERFORMANCE MEASUREMENT IN PUBLIC SECTOR .......................................................................................... 204

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TATIANA ANTIPOVA, INSTITUTE OF CERTIFIED SPECIALISTS, RUSSIA ANDREY ANTIPOV, INSTITUTE OF CERTIFIED SPECIALISTS, RUSSIA

WHAT IMPACT DOES THE APPLICATION OF IFRS 11 HAVE ON (EUROPEAN) COMPANIES? AN EMPIRICAL STUDY OF THE IMPACTS ON SELECTED FINANCIAL STATEMENT FIGURES AND KEY FINANCIAL RATIOS ......................... 208

MARKUS STOCKINGER, JOHANNES KEPLER UNIVERSITY LINZ SUSANNE LEITNER-HANETSEDER, JOHANNES KEPLER UNIVERSITY LINZ

BUILDING AN ETHICAL CIVIL SERVICE IN THE PACIFIC: EXPLORING THE EFFECTIVENESS OF FIJI’S PUBLIC SERVICE CODE OF CONDUCT ............................................................................................................................................ 215

RAZEEN ALI, UNIVERSITY OF THE SOUTH PACIFIC DESMOND AMOSA, UNIVERSITY OF THE SOUTH PACIFIC

EXPORTS AND ECONOMIC GRWOTH IN SAUDI ARABIA NEW EVIDENCE FROM NONLINEAR AUTOREGRESSIVE DISTRBUTED LAG (NARDL) .................................................................................. 219

RAJEH ALRAGAS, SWANSEA UNIVERSITY, UK OSMAN OUATTRA, SWANSEA UNIVERSITY, UK T.K. MISHRA, SWANSEA UNIVERSITY, UK AYMEN ALFI, SAUDI ARABIAN MONETARY AGENCY, SAUDI ARABIA

PERSONAL FINANCIAL DECISIONS: A STUDY OF CHANGES IN HOMESTEAD EXEMPTION LEVELS AND CONSUMER BANKRUPTCY CHOICES ...................................................................................................................................... 223

BENJAMIN B. BOOZER JR., JACKSONVILLE STATE UNIVERSITY, JACKSONVILLE, AL S. KEITH LOWE, JACKSONVILLE STATE UNIVERSITY, JACKSONVILLE, AL ROBERT J. LANDRY III, JACKSONVILLE STATE UNIVERSITY, JACKSONVILLE, AL

INDIA’S SATYAM SCANDAL: SOME EVIDENCE THAT THE TOO LARGE TO INDICT MINDSET OF ACCOUNTING REGULATORS IS A .............................................................................................................................................. 233

KALPANA PAI, TEXAS WESLEYAN UNIVERSITY THOMAS D. TOLLESON, TEXAS WESLEYAN UNIVERSITY

IMPROVE THE TARGET PRICE PERFORMANCE BY THE ENHANCED COMPANY VALUATION TECHNIQUES ........... 242

YANFU LI, LINCOLN UNIVERSITY

EXPORT MARKET ORIENTATION, INTERFIRM COMMUNICATION, INTERFIRM COOPERATION AND EXPORT PERFORMANCE .................................................................................................................................................. 244

OLIMPIA C. RACELA, MAHASARAKHAM UNIVERSITY, THAILAND AMONRAT THOUMRUNGROJE, ASSUMPTION UNIVERSITY, THAILAND

UNDERPRICING THE PRIVATIZED STATE-OWNED EGYPTIAN ENTERPRISES: WAS IT MISLEADING?................................................................................................................................................ 255

DENA SALAMA, CAIRO UNIVERSITY YOSRY HUSSEIN KHALIFA, CAIRO UNIVERSITY

THE GAME-CHANGERS: EXPLORING RADICALLY TRANSFORMATIONAL CHALLENGES CONFRONTING EDUCATION BUSINESS LEADERSHIP ....................................................................................................................................... 265

KAREN STARR, VICTORIA TEACHERS MUTUAL BANK

THE INFLUENCE OF CULTURE, GENDER AND EDUCATIONAL LEVEL ON ESCALATION OF COMMITMENT: COMPARISON JAPAN AND INDONESIA .............................................................................................................. 277

MASAKO SAITO, OSAKA SANGYO UNIVERSITY, JAPAN SEKAR MAYANGSARI, TRISAKTI UNIVERSITY, INDONESIA

CHANGING PERSPECTIVES OF POLITICS MARKETING IN NIGERIA ....................................................................... 280

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VINCENT AGHARA, NNAMDI AZIKIWE UNIVERSITY IRENEUS NWAIZUGBO, NNAMDI AZIKIWE UNIVERSITY EMMANUEL CHUKWUEMEKA,NNAMDI AZIKIWE UNIVERSITY

CRM AND CUSTOMER SATISFACTION IN A SOUTH AFRICAN AGRICULTURAL BUSINESS: A DIFFERENT PERSPECTIVE .......................................................................................................................................................................... 291

LIEZEL ALSEMGEEST, UNIVERSITY OF THE FREE STATE, SOUTH AFRICA JOHAN VAN ZYL, UNIVERSITY OF THE FREE STATE, SOUTH AFRICA

THE ROLE OF ENERGY CONSUMPTION IN ENVIRONMENTAL KUZNETS CURVE IN SOUTH KOREA ....................... 303

SUKWAN JUNG, PUSAN NATIONAL UNIVERSITY DO-HWAN WON, PUSAN NATIONAL UNIVERSITY

CAUSALITY TEST OF BUSINESS RISK AND CAPITAL STRUCTURE IN A PANEL DATA OF NIGERIAN LISTED FIRMS .. 314

DAUDA MOHAMMED, BAYERO UNIVERSITY, KANO, NIGERIA

USING QUANTILE REGRESSIONS TO EXAMINE THE CAPITAL STRUCTURE DECISION OF US FIRMS ...................... 321

WILLIAM NELSON, INDIANA UNIVERSITY NORTHWEST BALA ARSHANAPALLI, INDIANA UNIVERSITY NORTHWEST

SYNERGISTIC SOLUTIONS TO MILITARY VIABILITY AND ECONOMIC EQUALITY .................................................. 329

MICHAEL MAHONEY, WAGNER COLLEGE, STATEN ISLAND, N.Y., USA DONALD L. CROOKS, WAGNER COLLEGE, STATEN ISLAND, N.Y., USA CATHYANN TULLY, WAGNER COLLEGE, STATEN ISLAND, N.Y., USA

THE CASE FOR INCLUDING VARIABLE ANNUITIES IN YOUR RETIREMENT PORTFOLIO ........................................ 337

MICHAEL F. MAHONEY, WAGNER COLLEGE

THE STRATEGIC MANAGEMENT OF THE UNIVERSITY ......................................................................................... 338

TATIANA ANTIPOVA, PERM STATE UNIVERSITY, RUSSIA DMITRII KRASILNIKOV, PERM STATE UNIVERSITY, RUSSIA

COLLABORATION AND PERFORMANCE OF GREEN INNOVATION: INVESTIGATING THE MODERATION EFFECTS OF GREEN KNOWLEDGE INTEGRATION MECHANISMS ............................................................................................ 344

JUNG-JUNG CHANG, NATIONAL CENTRAL UNIVERSITY MING-JI JAMES LIN, NATIONAL CENTRAL UNIVERSITY

ON-LINE REVIEWS’ IMPACT ON TRUST BUILDING .............................................................................................. 350

SELCEN OZTURKCAN, ISTANBUL BILGI UNIVERSITY GUL GURSOY, ISTANBUL BILGI UNIVERSITY

STRESS AND PSYCHOLOGICAL STRAIN AMONG UNIVERSITY LECTURERS IN SAUDI ARABIA ............................... 361

MALEK T. JDAITAWI, UNIVERSITY OF DAMMAM ABDUL-AZIZ AL-MUTAWA, UNIVERSITY OF DAMMAM FOUA'D MUSALLAM, UNIVERSITY OF DAMMAM FERAS TALAFHA, UNIVERSITY OF DAMMAM

CROWDFUNDING: A NEW PARADIGM IN START-UP FINANCING........................................................................ 369

KARISH MANCHANDA, BIRLA INSTITUTE OF TECHNOLOGY & SCIENCE PILANI, DUBAI CAMPUS PUSHKALA MURALIDHARAN, BIRLA INSTITUTE OF TECHNOLOGY & SCIENCE PILANI, DUBAI CAMPUS

EXAMINING THE RELATIONSHIP BETWEEN TRADING VOLUME AND EQUITY MARKET VOLATILITY: EVIDENCE FROM BRIC COUNTRIES ..................................................................................................................................... 375

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PRAMOD KUMAR NAIK, INDIAN INSTITUTE OF TECHNOLOGY BOMBAY, INDIA PUJA PADHI, INDIAN INSTITUTE OF TECHNOLOGY BOMBAY, INDIA

AN EMPIRICAL APPROACH TO RISK ASSESSMENT IN AN INVESTMENT PROJECT: CASE STUDY "FINANCIAL COMPLEX AND BUSINESS CENTER AT TECNOLÓGICO DE ANTIOQUIA" .............................................................. 377

JORGE ANÍBAL RESTREPO MORALES, TECNOLÓGICO DE ANTIOQUIA LORENZO PORTOCARRERO SIERRA, TECNOLÓGICO DE ANTIOQUIA JULIETH FERNANDA USME, TECNOLÓGICO DE ANTIOQUIA

INTEREST RATE AND CREDIT SENSITIVITY OF SECTORAL OUTPUT IN NIGERIA ...................... 386

IKECHUKWU KELIKUME, LAGOS BUSINESS SCHOOL

THE STUDY ABOUT THE INFLUENCE OF CORPORATION GOVERNANCE STRUCTURE ON INTERNAL CONTROL AUDIT REPORT LAG-BASED ON EMPIRICAL DATA OF LISTED COMPANIES IN CHINA ..................................................... 393

YUEDONG LI, SOUTHWESTERN UNIVERSITY OF FINANCE & ECONOMICS XINGYU WANG, SOUTHWESTERN UNIVERSITY OF FINANCE & ECONOMICS

AN EMPIRICAL ASSESSMENT OF THE INTEREST RATE CHANNEL OF MONETARY TRANSMISSION MECHANISM IN NIGERIA ............................................................................................................................................................. 394

IKECHUKWU KELILUME, LAGOS BUSINESS SCHOOL

1IMPROVEMENT OF HEALTH CARE SYSTEMS FUNCTIONING AS AN ELEMENT OF ALLIVIETING POVERTY .......... 407

MATO GRGIĆ, UNIVERSITY OF ZAGREB VLATKA BILAS, UNIVERSITY OF ZAGREB SANJA FRANC, UNIVERSITY OF ZAGREB

IMPACT OF EMPLOYEE EVALUATION ON EMPLOYEE PERFORMANCE: A STUDY OF BANKING SECTOR OF PAKISTAN .......................................................................................................................................................... 413

TAYYABA MIR , GREEN KINGDOM INDUSTRIES, JEDDAH SAUDI ARABIA MOEZZA MIR AHMED , MARKETING SPECIALIST JEDDAH SAUDI ARABIA

DETECTION AND PREDICTION OF MANAGERIAL FRAUD IN THE FINANCIAL STATEMENTS OF TUNISIAN BANKS 421

SALEM LOTFI BOUMEDIENE, MONTANA STATE UNIVERSITY BILLINGS

STRATEGIC IMPLICATIONS OF DIFFERENT CRITERIA FOR PROJECT PORTFOLIO SELECTION ................................ 427

GUILHERME VITOLO, UNIVERSITY OF SÃO PAULO FLAVIO CIPPARRONE, UNIVERSITY OF SÃO PAULO

THE ASSESSING OF GOING CONCERN FOR THE ITALIAN LISTED COMPANIES: RELEVANCE AND IMPLICATIONS . 435

ROBERTA PROVASI, UNIVERSITY OF MILAN-BICOCCA PATRIZIA RIVA, PIEMONTE ORIENTALE UNIVERSITY.

SELF-ASSESSED RESPONSES VS. RESEARCHER-IDENTIFIED STAGES: THE CASE OF BALANCED SCORECARD IMPLEMENTATION ............................................................................................................................................. 444

WASATORN SHUTIBHINYO, CHULALONGKORN UNIVERSITY

CREDIT RATINGS AND BANK’S LEVERAGE: SOLICITED VERSUS UNSOLICITED ..................................................... 456

YU-JEN HSIAO, NATIONAL DONG HWA UNIVERSITY, TAIWAN CHING-HO CHAN, NATIONAL DONG HWA UNIVERSITY, TAIWAN

BARRIERS TO YOUTH ENTREPRENEURSHIP IN RURAL AREAS OF GHANA: A CASE STUDY OF KOMENDA- EDINA- EGUAFO-ABIREM (KEEA) IN THE CENTRAL REGION OF GHANA .......................................................................... 460

GILBERT O. BOATENG, TAKORADI POLYTECHNIC, GHANA

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AKWASI A. BOATENG, CAPE COAST POLYTECHNIC, GHANA HARRY S. BAMPOE, JAYEE UNIVERSITY COLLEGE, GHANA

NO KENYAN LEFT BEHIND: THE CASE OF FINANCIAL INCLUSION THROUGH MOBILE BANKING .......................... 472

TONY MUTSUNE, IOWA WESLEYAN COLLEGE

AN EXPLORATION OF POTENTIALS TO GREEN BUILDING ADOPTION IN KENYA AND INDUSTRIAL IMPLICATIONS .......................................................................................................................................................................... 480

PETER KHAEMBA, UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT TONY MUTSUNE, IOWA WESLEYAN COLLEGE

VALUE AND COST OF MULTINATIONALITY: COMPARING INTERNATIONAL DIVERSIFICATION AND REAL OPTIONS EFFECTS ............................................................................................................................................................. 489

SANGCHEOL SONG, SAINT JOSEPH’S JOSEPH

CORPORATE SUSTAINABILITY INVESTMENT AND OVER-INVESTMENT OF FREE CASH FLOW .............................. 491

QI SUN, CALIFORNIA STATE UNIVERSITY SAN MARCOS

A COMPARATIVE ANALYSIS OF REVERSE MORTGAGES: EVIDENCE FROM PUERTO RICO.................................... 493

ROGELIO J. CARDONA, UNIVERSITY OF PUERTO RICO-RÍO PIEDRAS KAREN C. CASTRO-GONZÁLEZ, UNIVERSITY OF PUERTO RICO-RÍO PIEDRAS

DETERMINANTS OF BALANCED SCORECARD USAGE: INDIRECT CORRELATION THROUGH ATTITUDINAL FACTORS .......................................................................................................................................................................... 498

WASATORN SHUTIBHINYO, CHULALONGKORN UNIVERSITY

REGULATION AND BANK DEFICIENCY................................................................................................................. 503

DALENDA KHOUAJA, UNIVERSITY OF TUNIS, TUNISIA SALEM LOTFI BOUMEDIENE, MONTANA STATE UNIVERSITY BILLINGS

HOW TO IDENTIFY DISRUPTIVE NEW BUSINESSES ............................................................................................. 510

ELIZABETH ROBLES MALDONADO, UNIVERSITY OF PUERTO RICO

THE ANALYSIS OF COMPANY LIQUIDITY USING CCC APPLICATION: EVIDENCE FROM TAIWAN .......................... 521

LI-HUA LIN, TRANSWORLD UNIVERSITY SZU-HSIEN LIN, TRANSWORLD UNIVERSITY YI-MIN LIN, TRANSWORLD UNIVERSITY

THE EFFECTS OF FINANCIAL FACTORS ON FOREIGN DIRECT INVESTMENT AND RESEARCH & DEVELOPMENT .... 531

SZU-HSIEN LIN, TRANSWORLD UNIVERSITY CHIA-HAO LEE, MING DAO UNIVERSITY AI-CHI HSU, NATIONAL YUNLIN UNIVERSITY OF SCIENCE AND TECHNOLOGY HUNG-YI SU, TRANSWORLD UNIVERSITY CHUN-SHENG CHEN, TRANSWORLD UNIVERSITY

STATISTICAL MODEL PREDICTING FREIGHT TRANSPORT FUEL EFFICIENCY ......................................................... 537

ROSA AMELIA ALCÁNTAR-RUIZ, UPAEP FERNANDO ORUE-CARRASCO, UPAEP JOSÉ LUIS MARTÍNEZ-FLORES, UPAEP

EMPIRICAL ANALYSIS OF RESIDENTIAL MORTGAGE BACKED SECURITIES: .......................................................... 543

MOHAMMED HARIRI BAKRI, UNIVERSITI TEKNIKAL MELAKA ROSALAN ALI ,UNIVERSITI TEKNOLOGI MARA

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SHAFINAR ISMAIL,UNIVERSITI TEKNOLOGI MARA

MAKING BUDGET MANAGEMENT WORK: PERCEPTIONS OF UK HIGHER EDUCATION MANAGERS REGARDING THE THEORY AND REALITY OF BUDGET MANAGEMENT EXPERIENCES ...................................................................... 553

ALAN PARKINSON, UNIVERSITY COLLEGE LONDON LYNSIE CHEW, UNIVERSITY COLLEGE LONDON

STUDENT PERCEPTIONS OF INFLUENCES ON THEIR STUDY EXPERIENCES IN A PART-TIME ACCOUNTING MODULE: IMPLICATIONS FOR EDUCATORS ....................................................................................................................... 560

ALAN PARKINSON, UNIVERSITY COLLEGE LONDON

THE EFFECTIVENESS COMPARISON BETWEEN MOBILE BASED LEARNING TECHNOLOGY WITH FACE-TO-FACE AS A TEACHING METHOD OF ACCOUNTING INFORMATION SYSTEM ......................................................................... 570

DIAH HARI SURYANINGRUM, UNIVERSITAS PEMBNGAUNAN NASIONAL VETERAN JAWA TIMUR ENI WURYANI, UNIVERSITAS NEGERI SURABAYA INTAN YUNIAR PURBASARI, UNIVERSITAS PEMBANGAUNAN NASIONAL VETERAN JAWA TIMUR

INNOVATION AND TECHNOLOGY AS A FACTOR OF COUNTRIES’ COMPETITIVENESS: A MULTIDIMENSIONAL AND MULTIVARIATE ANALYSIS .................................................................................................................................. 577

AMÉRICA I. ZAMORA-TORRES, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO JUAN CARLOS GARCÍA ARCHUNDIA, NGLOBAL LOGISTICS

PROFESSIONAL JUDGMENT EFFECTIVENESS: A STUDY OF TAX AUDITORS IN THAILAND .................................... 585

KANYAMON WITTAYAPOOM, MAHASARAKHAM UNIVERSITY, THAILAND

COMMUNITY PERSPECTIVES ON ACCOUNTABILITY AND TRANSPARENCY IN THE MANAGEMENT OF LOCAL AUTHORITY TRANSFER FUND IN KENYA: A CASE OF SIAYA MUNICIPAL COUNCIL ............................................. 594

JACKSON ONGONG’A OTIENO, MINISTRY OF DEVOLUTION AND PLANNING, KENYA CHARLES M. RAMBO, UNIVERSITY OF NAIROBI, KENYA PAUL A. ODUNDO, UNIVERSITY OF NAIROBI, KENYA

INFLUENCE OF LOCAL AUTHORITY TRANSFER FUND ON SERVICE DELIVERY BY LOCAL GOVERNMENT AUTHORITIES IN KENYA: A CASE OF SIAYA MUNICIPAL COUNCIL ...................................................................... 611

JACKSON ONGONG’A OTIENO, MINISTRY OF LOCAL GOVERNMENT, KENYA PAUL A. ODUNDO, UNIVERSITY OF NAIROBI, KENYA CHARLES M. RAMBO, UNIVERSITY OF NAIROBI, KENYA

CONTRIBUTION OF LOCAL AUTHORITY TRANSFER FUND TO DEBT REDUCTION IN KENYAN LOCAL AUTHORITIES AND INSTITUTIONAL VULNERABILITIES TO FURTHER DEBT: A CASE OF SIAYA MUNICIPAL COUNCIL ................. 625

JACKSON ONGONG’A OTIENO, MINISTRY OF DEVOLUTION AND PLANNING, KENYA CHARLES M. RAMBO, UNIVERSITY OF NAIROBI, KENYA PAUL A. ODUNDO, UNIVERSITY OF NAIROBI, KENYA

MESSAGE TRANSMISSION EFFECT BETWEEN DIFFERENT FIRM SIZE INDICES: EVIDENCE FROM TAIWAN STOCK MARKET ............................................................................................................................................................. 638

SHIH-YUNG WEI, ZHEJIANG UNIVERSITY OF FINANCE & ECONOMICS SZU-HSIEN LIN, TRANSWORLD UNIVERSITY JEN-TSENG CHEN, TRANSWORLD UNIVERSITY HSIEN-BIN WANG, TRANSWORLD UNIVERSITY

U.S. SUPREME COURT WILL RESOLVE CIRCUIT CONFLICT REGARDING TAXATION OF SUPPLEMENTAL UNEMPLOYMENT BENEFITS ............................................................................................................................... 647

LAURA LEE MANNINO, ST. JOHN’S UNIVERSITY

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THE DO’S AND DO-NOT’S OF PUBLISHING PEER-REVIEWED RESEARCH .............................................................. 648

TERRANCE JALBERT, THE UNIVERSITY OF HAWAII-HILO

OMNICHANNEL RETAILING: THE MERGING OF THE ONLINE AND OFF-LINE ENVIRONMENT............................... 655

MARIETTE FRAZER, UNIVERSITY OF JOHANNESBURG SOUTH AFRICA BEATE ELIZABETH STIEHLER, UNIVERSITY OF JOHANNESBURG SOUTH AFRICA

CULTURAL SHOCK, ACCULTURATION AND REVERSE ACCULTURATION: THE CASE OF MEXICAN CITIZENS TRAVELING TO AND BACK FROM CHINA AND THEIR COMPETITIVENESS LEVEL ................................................. 658

SUSANA BERENICE VIDRIO BARÓN, UNIVERSIDAD DE COLIMA ALMA RUTH REBOLLEDO MENDOZA, UNIVERSIDAD DE COLIMA MONTSERRAT SARAÍ OCHOA RÍOS, UNIVERSIDAD DE COLIMA

IASB AND FASB CONVERGENCE PROJECT: WHERE ARE THEY NOW? .................................................................. 665

AIDA R. LOZADA RIVERA, UNIVERSITY DE PUERTO RICO HEDLIAM J. ROBLES ARBELO, UNIVERSITY OF PUERTO RICO ALEJANDRA D. ÁLVAREZ RUIZ, UNIVERSITY OF PUERTO RICO JORGE L. VEGA RODRÍGUEZ, UNIVERSITY OF PUERTO RICO WILFREDO CAPARRÓS GARCÍA, UNIVERSITY OF PUERTO RICO KEVIN A. BULTRÓN CLEMENTE, UNIVERSITY OF PUERTO RICO CARLOS J. CASTRO PÉREZ, UNIVERSITY OF PUERTO RICO SCARLETT J. FIGUEROA TOLEDO, UNIVERSITY OF PUERTO RICO JENNIFER MARTÍNEZ, UNIVERSITY OF PUERTO RICO DIOMEL CASTILLO BATISTA, UNIVERSITY OF PUERTO RICO ANDRÉS N. ROSA APONTE, UNIVERSITY OF PUERTO RICO ALICE H. ABBOUD CHALHOUB, UNIVERSITY OF PUERTO RICO MANUEL A. CECILIO GONZÁLEZ, UNIVERSITY OF PUERTO RICO ERICK D. HERNÁNDEZ DELGADO, UNIVERSITY OF PUERTO RICO ELIEZER A. JULIÁN, UNIVERSITY OF PUERTO RICO OMAR BARRETO, UNIVERSITY OF PUERTO RICO JESÚS CALDERÓN, UNIVERSITY OF PUERTO RICO LUIS CABRERA, UNIVERSITY OF PUERTO RICO YANET G. VÁZQUEZ, UNIVERSITY OF PUERTO RICO ALICIA LOZADA, UNIVERSITY OF PUERTO RICO RODOLFO A. RIVERA, UNIVERSITY OF PUERTO RICO ENARA LORENZO, UNIVERSITY OF PUERTO RICO ANDREA DEL VALLE, UNIVERSITY OF PUERTO RICO BERENICE MORALES ROSARIO, UNIVERSITY OF PUERTO RICO ALEXIS IZQUIERDO, UNIVERSITY OF PUERTO RICO JONATHAN FARDONK, UNIVERSITY OF PUERTO RICO

BIDDING IN THE TREASURY AUCTIONS AND THE EFFECT OF THE SELLER´S STRATEGY ........................................ 675

MICHAL BRESKY, CENTER FOR ECONOMIC RESEARCH AND GRADUATE EDUCATION, CHARLES UNIVERSITY & ECONOMICS INSTITUTE, ACADEMY OF SCIENCES OF THE CZECH REPUBLIC

SPANISH PROCEEDINGS ..................................................................................................................................... 686

INNOVANDO LA EDUCACIÓN EN MEXICO: FACTORES INTERNOS QUE IMPACTAN AL EMPRENDIMIENTO UNIVERSITARIO ................................................................................................................................................. 687

EDUARDO GAJÓN GÓMEZ, ITESM CAMPUS LAGUNA GABRIELA MARGARITA REYNA GARCÍA, UNIVERSIDAD AUTÓNOMA DE COAHUILA MARÍA DEL CARMEN ARMENTEROS ACOSTA, UNIVERSIDAD AUTÓNOMA DE COAHUILA MAYETH MIJARES VILLARREAL, ITESM CAMPUS LAGUNA

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AFECTACIONES POR EL SERVICIO DE CONSOLIDACIÓN Y DESCONSOLIDACIÓN DE CARGA DE LOS RECINTOS FISCALIZADOS DEL PUERTO DE MANZANILLO, COLIMA, MEXICO ....................................................................... 694

OSCAR BERNARDO REYES REAL, UNIVERSIDAD DE COLIMA AURELIO DÉNIZ GUIZAR, UNIVERSIDAD DE COLIMA ARIEL GUTIÉRREZ ORTIZ, UNIVERSIDAD DE COLIMA MANUEL RUBIO MALDONADO, UNIVERSIDAD DE COLIMA

AVAPRENEURS JÓVENES: UNA COMBINACIÓN DEL BUEN USO Y MANEJO DE LAS `TICS´ CON UNA VISIÓN ESTRATÉGICA SOBRE LOS NEGOCIOS ................................................................................................................. 705

NATACHA GENTILE, UNIVERSIDAD NACIONAL DE MAR DEL PLATA

TURISMO DE INTERESES ESPECIALES: INVESTIGACIÓN DE MERCADO SOBRE LAS MOTIVACIONES DESDE LA PERSPECTIVA DEL CLIENTE.................................................................. 716

CRISTÓBAL FERNÁNDEZ ROBIN, UNIVERSIDAD TÉCNICA FEDERICO SANTA MARÍA JORGE CEA VALENCIA, UNIVERSIDAD TÉCNICA FEDERICO SANTA MARÍA PAULINA SANTANDER , UNIVERSIDAD TÉCNICA FEDERICO SANTA MARÍA ROBERTO MELO ORREGO, UNIVERSIDAD TÉCNICA FEDERICO SANTA MARÍA

CLIMA ORGANIZACIONAL EN LAS UNIDADES DE VENTA DE LAS TIENDAS DEL ISSSTE DEL MUNICIPIO DE DURANGO ......................................................................................................................................................... 728

JESÚS GUILLERMO SOTELO ASEF, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO ERNESTO GEOVANI FIGUEROA GONZÁLEZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO DELIA ARRIETA DÍAZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO SELENE BERENICE CUPICH FLORES, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO JOSÉ ALBERTO BUSTAMANTE CURIEL, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO

MODELO DE SATISFACCIÓN DE LOS ESTUDIANTES POR MEDIO DE ECUACIONES ESTRUCTURALES .................... 734

MARÍA FERNANDA CASTRILLÓN BARBOSA, UNIVERSIDAD SERGIO ARBOLEDA MARTHA LUCIA CORRALES BOSSIO, UNIVERSIDAD SERGIO ARBOLEDA

POLÍTICA DE FIJACIÓN DE PRECIOS: UNA NUEVA METODOLOGÍA BASADA EN LA ESTRUCTURA DE COSTOS-COMPETENCIA DE LA EMPRESA ............................................................ 740

MARTÍN ALBERTO RODRÍGUEZ BRINDIS, UNIVERSIDAD ANÁHUAC OAXACA

LA INDUSTRIA DEL BACANORA, COMO PROPUESTA DE DESARROLLO ENDOGENO EN LA REGION DE DENOMINACION DE ORIGEN............................................................................................................................. 749

EMMA VANESSA CASAS MEDINA, UNIVERSIDAD ESTATAL DE SONORA VIDAL SALAZAR SOLANO, CENTRO DE INVESTIGACIÓN EN ALIMENTACIÓN Y DESARROLLO, A. C.

DESARROLLO TECNOLÓGICO DE DETECTOR DE CO/HUMO CON PROTOCOLO INALÁMBRICO DE COMUNICACIÓN I4 ....................................................................................................................................................................... 755

JORGE BERRELLEZA RAMOS, HONEYWELL SYSTEM SENSOR DE MÉXICO JORGE HERNÁNDEZ PALOMINO, ITESM GUILLERMO GONZÁLEZ TREVIÑO, HONEYWELL SYSTEM SENSOR DE MÉXICO GABRIEL CARRASCO PÉREZ FRANCO, HONEYWELL SYSTEM SENSOR DE MÉXICO

DESARROLLO DEL LIDERAZGO EN TIEMPOS DE CAMBIO RADICALES .................................................................. 765

JORGE HERNÁNDEZ PALOMINO, INSTITUTO TECNOLÓGICO DE CIUDAD JUÁREZ JOSÉ DE JESÚS ESPINOZA MEDINA, INSTITUTO TECNOLÓGICO DE CIUDAD JUÁREZ MANUEL AGUILAR ARELLANO, INSTITUTO TECNOLÓGICO DE CIUDAD JUÁREZ CARMEN ACOSTA, INSTITUTO TECNOLÓGICO DE CIUDAD JUÁREZ

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CAPACITACIÓN: FACTORES QUE AFECTAN EL DESARROLLO DEL PERSONAL ADMINISTRATIVO EN UNA INSTITUCION DE EDUCACION SUPERIOR ............................................................................................................ 770

JORGE ARMANDO CÁRDENAS MORALES, UNIVERSIDAD TECNOLÓGICA DE CD. JUÁREZ ALBERTO CÁRDENAS VALENZUELA, INSTITUTO TECNOLÓGICO DE CD. JUÁREZ ELVIRA MORA LUJAN, INSTITUTO TECNOLÓGICO DE CD. JUÁREZ KAREN DE LA ROSA ANDAZOLA, GOBIERNO DEL ESTADO DE CHIHUAHUA

IMPACTO DE LAS HERRAMIENTAS TECNOLÓGICAS EN LAS EMPRESAS DE TURISMO MÉDICO EN MEXICALI Y SU VALLE ................................................................................................................................................................. 776

SALVADOR LEYVA ESCALANTE, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA SANDRA JULIETA SALDIVAR GONZÁLEZ, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA MAYDA GONZÁLEZ ESPINOZA, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA GLORIA MUÑOZ DEL REAL, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA NICOLASA VALENCIANA MORENO, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA ALBERTO JABALERA OVIDEO, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA

FACTORES QUE INFLUYEN EN LA DECISIÓN DE COMPRA DE LOS CLIENTES A TRAVÉS DE LAS ESTRATEGIAS DE MARKETING CON REDES SOCIALES EN EL SECTOR HOTELERO ............................................................................ 786

ANA MARÍA MIRANDA ZAVALA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JOSÉ GABRIEL RUIZ ANDRADE, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

FACTORES DE CONTINGENCIA QUE INCIDEN EN LA PROFESIONALIZACIÓN DE LAS EMPRESAS FAMILIARES DEL SECTOR COMERCIO EN TIJUANA, B.C., MÉXICO .......................... 792

MARÍA VIRGINIA FLORES-ORTIZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ALFONSO VEGA-LÓPEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA EDGAR ARMANDO CHÁVEZ-MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

POLÍTICAS PÚBLICAS E INTEGRACIÓN DE LA SOCIEDAD CIVIL EN LA TRANSPARENCIA Y ACCESO A LA INFORMACIÓN GUBERNAMENTAL EN MÉXICO .................................................................................................. 805

MARÍA DEL CARMEN MORALES TOSTADO, UNIVERSIDAD DE SONORA

INTEGRACIÓN DE LA CADENA DE VALOR DE LA OFERTA DE PROVEEDORES DE SERVICIOS PARA EL TURISMO DE REUNIONES DEL MUNICIPIO DE TIJUANA, BAJA CALIFORNIA ............................................................................. 817

KAREN GARDENIA RAMOS HIGUERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ONÉSIMO CUAMEA VELÁZQUEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

UN MODELO DE NEGOCIO PARA LA CERTIFICACIÓN DE RESIDENCIAS GERIÁTRICAS .......................................... 823

SERGIO VILLACOBOS GRANADOS, UNIVERSIDAD AUTONOMA DE COAHUILA ESTEBAN PEDRAZA FLORES, UNIVERSIDAD AUTONOMA DE COAHUILA MELCHOR DAVID ELIZONDO SANDOVAL, UNIVERSIDAD AUTONOMA DE COAHUILA

EL MARKETING SUSTENTABLE COMO ESTRATEGIA DE POSICIONAMIENTO GLOBAL EN LAS FRANQUICIAS MEXICANAS QUE OPERAN EN LA CIUDAD DE HERMOSILLO, SONORA ............................................................... 835

LUIS ENRIQUE IBARRA MORALES, UNIVERSIDAD ESTATAL DE SONORA EMMA VANESSA CASAS MEDINA, UNIVERSIDAD ESTATAL DE SONORA ERIKA OLIVAS VALDEZ, UNIVERSIDAD ESTATAL DE SONORA KARLA MARÍA BARRAZA MARTÍNEZ, UNIVERSIDAD ESTATAL DE SONORA

LA INFLUENCIA DE LA INNOVACIÓN Y LA INFORMACIÓN FINANCIERA EN LA COMPETITIVIDAD DE LA PEQUEÑA Y MEDIANA EMPRESA MANUFACTURERA ............................................................................................................ 847

JORGE ANTONIO RANGEL MAGDALENO, UNIVERSIDAD AUTÓNOMA DE AGUASCALIENTES LUIS AGUILERA ENRÍQUEZ, UNIVERSIDAD AUTÓNOMA DE AGUASCALIENTES

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MARTHA GONZÁLEZ ADAME, UNIVERSIDAD AUTÓNOMA DE AGUASCALIENTES SILVIA POMAR FERNÁNDEZ, UNIVERSIDAD AUTÓNOMA METROPOLITANA-UNIDAD XOCHIMILCO

CASO DE LA EMPRESA DE B & B, INC.: ANÁLISIS DE LA COMPETITIVIDAD DE LA INDUSTRIA ELECTRÓNICA DE TIJUANA, B.C., MÉXICO ...................................................................................................................................... 859

SONIA MATA-NARANJO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA, MÉXICO MARÍA VIRGINIA FLORES-ORTIZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA, MÉXICO AGRESIVIDAD - ADMINISTRACIÓN

MODELO MATEMÁTICO DE INTELIGENCIA DE ENJAMBRE ................................................................................. 870

ROLANDO GARNICA ARIAS, UNIVERSIDAD CATÓLICA DE COLOMBIA ALFONSO LOZANO MONTAÑO, UNIVERSIDAD CATÓLICA DE COLOMBIA CARLOS ALBERTO GONZÁLEZ CAMARGO, UNIVERSIDAD CATÓLICA DE COLOMBIA

DISEÑO DE UNA METODOLOGÍA PARA LA CONSTRUCCIÓN DE ESTUDIO DE CASOS EN SITUACIONES DE SOPORTE LOGÍSTICO PARA LA ATENCIÓN DE DESASTRES .................................................................................................. 878

OSWALDO GONZÁLEZ YAZO, UNIVERSIDAD CATÓLICA DE COLOMBIA CARLOS ALBERTO GONZÁLEZ CAMARGO, UNIVERSIDAD CATÓLICA DE COLOMBIA FEIZAR JAVIER RUEDA VELASCO, UNIVERSIDAD CATÓLICA DE COLOMBIA

ANALISIS COMPETITIVO DE LAS PEQUEÑAS Y MEDIANAS EMPRESAS EN CUENCA ECUADOR ............................ 888

LUIS TOBAR PESÁNTEZ, UNIVERSIDAD POLITÉCNICA SALESIANA DEL ECUADOR CONOCER SI EL PERSONAL HA RECIBIDO CAPACITACIÓN.

ANÁLISIS DE LAS ESTRATEGIAS DE MERCADEO DE LA EXPERIENCIA IMPLEMENTADAS POR LAS MARCAS DE PRENDAS DE VESTIR DIRIGIDA AL TARGET JOVEN, EN DOS CENTROS COMERCIALES DE LA CIUDAD DE CALI – COLOMBIA ......................................................................................................................................................... 900

CARMEN ELISA LERMA CRUZ, UNIVERSIDAD AUTÓNOMA DE OCCIDENTE CALI – COLOMBIA

CARACTERIZACIÓN DE LAS PEQUEÑAS Y MEDIANAS EMPRESAS EN LA REGIÓN COSTA SUR DE JALISCO, MÉXICO .......................................................................................................................................................................... 912

MYRIAM ARIAS URIBE, UNIVERSIDAD DE GUADALAJARA MARCELA DE GUADALUPE PELAYO VELÁZQUEZ, UNIVERSIDAD DE GUADALAJARA

RELEVANCIA VALORATIVA DE LA INFORMACIÓN FINANCIERA EN LAS EMPRESAS QUE COTIZAN EN LOS MERCADOS EMERGENTES DE MÉXICO Y BRASIL ................................................................................................ 920

MARCELA DE GUADALUPE PELAYO VELÁZQUEZ, UNIVERSIDAD DE GUADALAJARA

INDICADORES DE DESEMPEÑO CON ENFOQUE DE EFICIENCIA Y EFICACIA APLICADOS A LA PEQUEÑA EMPRESA AGRICOLA MEXICANA BENEFICIADOS CON FINANCIAMIENTO DEL GOBIERNO .................................................. 929

SANDRA COBIÁN VELASCO, UNIVERSIDAD DE GUADALAJARA

LA RELACION DE LA GESTION DE LA CADENA DE SUMINISTRO Y LAS TECNOLOGIAS DE LA INFORMACION Y COMUNICACIÓN EN LOS PROCESOS PRODUCTIVOS PARA UNA MAYOR COMPETITIVIDAD DE LA PYME MANUFACTURERA EN MEXICO .......................................................................................................................... 936

LUIS AGUILERA ENRÍQUEZ, UNIVERSIDAD AUTÓNOMA DE AGUASCALIENTES OCTAVIO HERNÁNDEZ CASTORENA, UNIVERSIDAD AUTÓNOMA DE AGUASCALIENTES OSCAR PÉREZ VEYNA, UNIVERSIDAD DE ZACATECAS

ASPECTOS CONCEPTUALES Y METODOLÓGICOS PARA MEJORAR LAS HABILIDADES DE COMUNICACIÓN DE LOS ALUMNOS COMO PARTE DE UNA EDUCACIÓN INTEGRAL .................................................................................. 944

BEATRIZ EUGENIA FLORES HAHN, UNIVERSIDAD AUTÓNOMA DE QUERÉTARO MARGARITA ESPINOZA ARREOLA, INSTITUTO TECNOLÓGICO DE QUERÉTARO

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FACTORES DE RETENCIÓN DE CAPITAL HUMANO EN LOS HOTELES DE CUATRO ESTRELLAS DE LA CIUDAD DE ENSENADA, BAJACALIFORNIA. ........................................................................................................................... 950

PERLA TERESA VALENZUELA COSIO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MA. ENSELMINA MARÍN VARGAS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

LA CONTINUACIÓN VOLUNTARIA EN EL RÉGIMEN OBLIGATORIO DE LA LEY DEL SEGURO SOCIAL ..................... 958

CRISÓFORO ÁLVAREZ VIOLANTE, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS SILVIA CARTUJANO ESCOBAR, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS ROQUE LÓPEZ TARANGO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS SELENE VIRIDIANA PÉREZ RAMÍREZ, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS PAULA PONCE LÁZARO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS

ESTUDIO DEL IMPACTO DE LOS VALORES ÉTICOS EN EL DESEMPEÑO DE LAS EMPRESAS FAMILIARES ............... 964

MARÍA DE LOS ÁNGELES MONTERDE VALENZUELA, UNIVERSIDAD ESTATAL DE SONORA.

INDICADORES ECONÓMICOS, AMBIENTALES Y SUSTENTABILIDAD DEL ECOTURISMO EN MÉXICO................... 975

ROSA MARÍA VELÁZQUEZ-SÁNCHEZ, UNIVERSIDAD AUTÓNOMA BENITO JUÁREZ, OAXACA JESÚS GÓMEZ-VELÁZQUEZ, UNIVERSIDAD AUTÓNOMA BENITO JUÁREZ, OAXACA LAURA IRENE GAYTÁN BOHÓRQUEZ, UNIVERSIDAD AUTÓNOMA BENITO JUÁREZ, OAXACA ADRIANA FLAMENCO HERNÁNDEZ, UNIVERSIDAD DE LA CIUDAD DE MÉXICO CARLOS ABDIEL NÚÑEZ CONTRERAS, UNIVERSIDAD AUTÓNOMA BENITO JUÁREZ, OAXACA

DIFERENTES REDES SOCIALES EN LAS MIPYME LOCALIZADAS EN PUEBLA, MÈXICO ............ 986

MARÍA ANTONIETA MONSERRAT VERA MUÑOZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA RAFAELA MARTÍNEZ MÉNDEZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA JOSÉ GERARDO SERAFÍN VERA MUÑOZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA

DISEÑO Y VALIDACIÓN DE UNA METODOLOGÍA PARA EVALUAR EL NIVEL DE MADUREZ DE LA ALINEACIÓN ESTRATÉGICA DE LAS TECNOLOGÍAS DE LA INFORMACIÓN .............................................................................. 1000

RODOLFO PÉREZ ESTRADA, UNIVERSIDAD AUTÓNOMA DE COAHUILA MANUEL MEDINA ELIZONDO, UNIVERSIDAD AUTÓNOMA DE COAHUILA LILIANA ANGÉLICA GUERRERO RAMOS, UNIVERSIDAD AUTÓNOMA DE COAHUILA JOSÉ LEONEL GARCÍA SÁNCHEZ, UNIVERSIDAD AUTÓNOMA DEL CARMEN MARCELA CASAS MEZA, UNIVERSIDAD TEC. MILENIO

GRADO DE FAMILIARIDAD QUE TIENEN LOS PROFESORES, ESTUDIANTES Y PROFESIONALES CON RELACIÓN A LA POSIBLE ADOPCIÓN DE LAS NORMAS INTERNACIONALES DE INFORMACIÓN FINANCIERA .............................. 1011

RAFAEL MARRERO DÍAZ, UNIVERSIDAD DE PUERTO RICO, RECINTO DE RÍO PIEDRAS

LA DISCREPANCIA FISCAL Y SU CONSECUENCIA COMO DELITO FISCAL EN MÉXICO .......... 1025

SILVIA CARTUJANO ESCOBAR, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS CRISÓFORO ÁLVAREZ VIOLANTE, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS SELENE VIRIDIANA PÉREZ RAMÍREZ, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS PAULA PONCE LÁZARO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS ROQUE LÓPEZ TARÁNGO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS

LIDERAZGO FEMENINO Y CLIMA ORGANIZACIONAL, EN UN INSTITUTO UNIVERSITARIO ................................. 1031

PAULA PONCE LÁZARO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS SELENE VIRIDIANA PÉREZ RAMÍREZ, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS SILVIA CARTUJANO ESCOBAR, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS ROQUE LÓPEZ TARANGO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS CRISÓFORO ÁLVAREZ VIOLANTE, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS

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BRAIAN MISAEL REAL BAHENA, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS

LOS BENEFICIOS DE LA CONTABILIDAD AMBIENTAL EN UNA EMPRESA CON SISTEMAS DE PRODUCCIÓN DE BUENAS PRÁCTICAS AGRÍCOLAS ...................................................................................................................... 1037

MÓNICA ARACELI REYES RODRÍGUEZ, UNIVERSIDAD DE GUADALAJARA GENOVEVA ROSANO ORTEGA, UNIVERSIDAD POPULAR DEL ESTADO DE PUEBLA MARTHA SHEILA GÓMEZ GONZÁLEZ, UNIVERSIDAD DE GUADALAJARA

EXPERIENCIAS Y DESAFÍOS EN LAS UNIDADES DE INFORMACIÓN PÚBLICA EN EL ESTADO DE MORELOS, MÉXICO ........................................................................................................................................................................ 1048

ROQUE LÓPEZ TARÁNGO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS. CRISÓFORO ÁLVAREZ VIOLANTE, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS. SILVIA CARTUJANO ESCOBAR, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS. SELENE VIRIDIANA PÉREZ RAMÍREZ, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS. PAULA PONCE LÁZARO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS.

COMPETITIVIDAD DE LAS EMPRESAS FAMILIARES DEL SECTOR ALIMENTOS DE TIPO GOURMET EN LA CIUDAD DE ENSENADA, BAJA CALIFORNIA ......................................................................................................................... 1055

SANDRA MILLÁN NÚÑEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MA. ENSELMINA MARÍN VARGAS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

CULTURA ECOLÓGICA AMBIENTAL, RESIDUOS SÓLIDOS BASADO EN LA LEGISLACIÓN MUNICIPAL CASO: MUNICIPIO DE AYAPANGO ESTADO DE MÉXICO .............................................................................................. 1061

OMAR ERNESTO TERÁN VARELA, CENTRO UNIVERSITARIO UAEM AMECAMECA UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MÉXICO RANULFO, PÉREZ GARCÉS, CENTRO UNIVERSITARIO UAEM AMECAMECA UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MÉXICO NOÉ ZÚÑIGA GONZÁLEZ, CENTRO UNIVERSITARIO UAEM AMECAMECA UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MÉXICO

PERSPECTIVAS DE REFORMA HACENDARIA AL IMPUESTO AL VALOR AGREGADO 2013, EN MÉXICO ............... 1067

ROSSANA PALOMINO CANO, UNIVERSIDAD ESTATAL DE SONORA FRANCISCO JAVIER PESTAÑO URUCHURTU, UNIVERSIDAD ESTATAL DE SONORA JOSÉ EZEQUIEL ROBLES ENCINAS, UNIVERSIDAD ESTATAL DE SONORA ERIKA OLIVAS VALDEZ, UNIVERSIDAD ESTATAL DE SONORA

CONSTITUCIONALIDAD Y LEGALIDAD DEL PROCEDIMIENTO ADMINISTRATIVO EN MATERIA ADUANERA ....... 1077

MARÍA DEL MAR OBREGÓN ANGULO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JACOBO JOSPHATT CASTRO SÁNCHEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SANTIAGO ALEJANDRO ARELLANO ZEPEDA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JOSÉ DE JESÚS MORENO NERI, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

EL COMISARIO, DESCONOCIMIENTO DE SU RESPONSABILIDAD LEGAL DENTRO DE LA SOCIEDAD MERCANTIL EN EMPRESA FAMILIAR ......................................................................................................................................... 1085

ROSA HILDA HERNÁNDEZ SANDOVAL, UNIVERSIDAD AUTÓNOMA DE COAHUILA LAURA LETICIA GAONA TAMEZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA SANDRA PATRICIA DE LA GARZA CIENFUEGOS, UNIVERSIDAD AUTÓNOMA DE COAHUILA IRINEO SÁNCHEZ LUNA, UNIVERSIDAD AUTÓNOMA DE COAHUILA

POLÍTICA PÚBLICA BASADA EN EL MARKETING 3.0 EN EL MUNICIPIO DE AYAPANGO ESTADO DE MÉXICO ..... 1093

JASSER HUMBERTO NERIA GARCÍA, CENTRO UNIVERSITARIO UAEM AMECAMECA OMAR ERNESTO TERÁN VARELA, CENTRO UNIVERSITARIO UAEM AMECAMECA RANULFO PÉREZ GARCÉS, DEL CENTRO UNIVERSITARIO UAEM AMECAMECA JULIETA ANDRADE CARBALLAR, CENTRO UNIVERSITARIO UAEM AMECAMECA MARTHA ELBA RUIZ RIVA PALACIO, CENTRO UNIVERSITARIO UAEM AMECAMECA

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DETRIMENTO PATRIMONIAL POR HURTO VEHÍCULOS EN COLOMBIA ............................................................. 1100

JORGE ANÍBAL RESTREPO MORALES, TECNOLÓGICO DE ANTIOQUIA SANTIAGO MEDINA HURTADO, UNIVERSIDAD NACIONAL DE COLOMBIA ALEJANDRO BEDOYA, UNIVERSIDAD NACIONAL DE COLOMBIA

INVESTIGACIÓN DE MERCADOS PARA IMPLEMENTAR A TRASPATIO UN SISTEMA DE PRODUCCIÓN ACUA- AGRÍCOLA SUSTENTABLE EN LA COMUNIDAD EN BENITO JUÁREZ, SONORA, MÉXICO ...................................... 1109

DANIEL PAREDES ZEMPUAL, UNIVERSIDAD ESTATAL DE SONORA ROBERTO QUINTANA JAIME, UNIVERSIDAD ESTATAL DE SONORA LIZETH ALEJANDRA GONZÁLEZ MARTÍNEZ, UNIVERSIDAD ESTATAL DE SONORA ZULEMA EDITH CALDERÓN CAMPAS, UNIVERSIDAD ESTATAL DE SONORA PAUL GERARDO ESPINOZA MERCADO, UNIVERSIDAD ESTATAL DE SONORA

LA ESTRATEGIA DE COOPERACIÓN EMPRESARIAL: UNA ALTERNATIVA PARA FORTALECER LA VENTAJA COMPETITIVA EN LA MIPYME-CASO INDUSTRIA METAL MECÁNICA DEL SURESTE DE COAHUILA .................... 1120

BALTAZAR RODRÍGUEZ VILLANUEVA, UNIVERSIDAD AUTÓNOMA DE COAHUILA ROSALVA DIAMANTINA VÁSQUEZ MIRELES, UNIVERSIDAD AUTÓNOMA DE COAHUILA YOLANDA MEJÍA DE LEÓN, UNIVERSIDAD AUTÓNOMA DE COAHUILA

SOCIAL MEDIA MARKETING COMO HERRAMIENTA DE POSICIONAMIENTO PARA UNIDADES DE PRODUCCION DE LACTEOS DEL MUNICIPIO DE AYAPANGO, ESTADO DE MEXICO .................................................................. 1131

NURIK ROSALES ORTIZ, CENTRO UNIVERSITARIO UAEM AMECAMECA INGRID JOCELYN LÓPEZ RODRÍGUEZ, CENTRO UNIVERSITARIO UAEM AMECAMECA MARTHA ELBA RUIZ RIVA PALACIO, CENTRO UNIVERSITARIO UAEM AMECAMECA MARÍA ISABEL QUIROZ MENDOZA, CENTRO UNIVERSITARIO UAEM AMECAMECA OMAR ERNESTO TERÁN VARELA, CENTRO UNIVERSITARIO UAEM AMECAMECA

UN ACERCAMIENTO AL PROCESO DE CONSTRUCCIÓN, DECONSTRUCCIÓN Y RECONSTRUCCIÓN DEL PENSAMIENTO ADMINISTRATIVO .................................................................................................................... 1136

MARY LUZ ORDOÑEZ SANTOS, UNIVERSIDAD DE PAMPLONA LUZ STELLA ARENAS PÉREZ, UNIVERSIDAD FRANCISCO DE PAULA SANTANDER

RELACIÓN ENTRE EL PERFIL DE LAS MUJERES EMPRENDEDORAS Y EL ACCESO A LOS MICROCRÉDITOS: UN ANÁLISIS EN MICRO EMPRESAS DE SALTILLO, COAHUILA ............................................................................... 1145

ELIZABETH LOURDES GÓMEZ GUTIÉRREZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA, MÉXICO LILIANA ANGÉLICA GUERRERO RAMOS, UNIVERSIDAD AUTÓNOMA DE COAHUILA, MÉXICO MARÍA DEL CARMEN ARMENTEROS ACOSTA, UNIVERSIDAD AUTÓNOMA DE COAHUILA, MÉXICO SANDRA LÓPEZ CHAVARRÍA, UNIVERSIDAD AUTÓNOMA DE COAHUILA, MÉXICO

ESTUDIO SOCIO ANTROPOLÓGICO DE LAS CONCEPCIONES, VALORES, PRÁCTICAS Y ACTITUDES SOBRE SEXUALIDAD Y GÉNERO DE LOS PRESTADORES DE SERVICIOS TURÍSTICOS DEL ESTADO DE SONORA PARA LA ATENCIÓN A CLIENTES DISIDENTES DE SEXO Y GÉNERO ................................................................................... 1155

LAURA ELENA WOOLFOLK GALLEGO, UNIVERSIDAD ESTATAL DE SONORA

RELACIÓN DEL CLIMA ORGANIZACIONAL Y LA SATISFACCIÓN LABORAL EN UNA PEQUEÑA EMPRESA FAMILIAR ........................................................................................................................................................................ 1165

MARICELA CAROLINA PEÑA CÁRDENAS, UNIVERSIDAD AUTÓNOMA DE COAHUILA-MÉXICO MA. GUADALUPE DÍAZ DÍAZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA-MÉXICO ALEJANDRA CARRILLO PUENTE, UNIVERSIDAD AUTÓNOMA DE COAHUILA-MÉXICO

ESTUDIO DE FACTIBILIDAD FINANCIERA EN UNA EMPRESA MAQUILADORA DE PLÁNTULAS DE SANDÍA EN EL VALLE DEL YAQUI ............................................................................................................................................. 1173

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ROBERTO QUINTANA JAIME, UNIVERSIDAD ESTATAL DE SONORA DANIEL PAREDES ZEMPUAL, UNIVERSIDAD ESTATAL DE SONORA ARTURO SANDOVAL MARISCAL, UNIVERSIDAD ESTATAL DE SONORA

INVESTIGACIÓN COMERCIAL: POSICIONAMIENTO DEL GRUPO SUPERMERCADOS EROSKI .............................. 1182

FRANCISCO JAVIER MAQUEDA LAFUENTE, UNIVERSIDAD DEL PAÍS VASCO JOSÉ DANIEL BARQUERO CABRERO, ESCUELA UNIVERSITARIA DE NEGOCIOS ESERP SANDRA LÓPEZ CHAVARRÍA, UNIVERSIDAD AUTÓNOMA DE COAHUILA LILIANA ANGÉLICA GUERRERO RAMOS, UNIVERSIDAD AUTÓNOMA DE COAHUILA

MULTIMEDIA EDUCATIVA COMO MEDIO DE INSTRUCCIÓN EN LA ENSEÑANZA DEL DISEÑO GRÁFICO ............ 1192

GLORIA AZUCENA TORRES DE LEÓN, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA ISABEL SALINAS GUTIÉRREZ, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA HILDELISA KARINA LANDEROS LORENZANA, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA

LA EVALUACIÓN Y ACREDITACIÓN DE LOS PROGRAMAS ACADÉMICOS Y SU IMPACTO DESDE LA PERCEPCIÓN ESTUDIANTIL .................................................................................................................................................... 1199

EDNA ISABEL DE LA GARZA MARTÍNEZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA-MÉXICO NIDIA ESTELA HERNÁNDEZ CASTRO, UNIVERSIDAD AUTÓNOMA DE COAHUILA-MÉXICO VANESSA MARMOLEJO FABELA, UNIVERSIDAD AUTÓNOMA DE COAHUILA-MÉXICO ELVIRA VELARDE LÓPEZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA-MÉXICO

DISCRIMINACIÓN SALARIAL POR GÉNERO DEL SECTOR TURÍSTICO DE MÉXICO: UNA REVISIÓN ...................... 1208

DENISSE GÓMEZ BAÑUELOS, UNIVERSIDAD ESTATAL DE SONORA LUIS HUESCA REYNOSO, CENTRO DE INVESTIGACIÓN EN ALIMENTACIÓN Y DESARROLLO JORGE ENRIQUE HORBATH CORREDOR, EL COLEGIO DE LA FRONTERA SUR

EL SISTEMA DE GESTIÓN DE CALIDAD BAJO LAS NORMAS ISO 9001:2008 COMO ELEMENTO ARTICULADOR DE LOS LINEAMIENTOS DE LA EVALUACIÓN Y ACREDITACIÓN DE PROGRAMAS EDUCATIVOS DE CIENCIAS SOCIALES Y ADMINISTRATIVA DE LA UNIVERSIDAD ESTATAL DE SONORA ...................................................................... 1213

JESÚS MANUEL VELÁZQUEZ CASTELLANOS, UNIVERSIDAD ESTATAL DE SONORA ROSARIO TERRAZAS VERDUGO, UNIVERSIDAD ESTATAL DE SONORA LUZ MERCEDES RUIZ GARCÍA, GMA

PROPUESTA METODOLÓGICA PARA EL DISEÑO DE UN MODELO DE DIAGNÓSTICO DE INTERVENCION ORGANIZACIONAL, BASADO EN LA NORMA ISO 9001:2008 Y EL ENFOQUE SISTÉMICO ................................... 1227

LUZ MERCEDES RUIZ GARCÍA, GMA JESÚS MANUEL VELÁZQUEZ CASTELLANOS, UNIVERSIDAD ESTATAL DE SONORA

REVALOREMOS LA UNIVERSIDAD AUTÓNOMA “BENITO JUÁREZ” DE OAXACA, UNA PROPUESTA DE RESPONSABILIDAD SOCIAL UNIVERSITARIA ..................................................................................................... 1240

ABRAHAM ESPEJO MARTÍNEZ, UNIVERSIDAD AUTÓNOMA “BENITO JUÁREZ DE OAXACA CARMEN ELOÍSA CRUZ ROBLES, UNIVERSIDAD AUTÓNOMA “BENITO JUÁREZ DE OAXACA ANA LUZ RAMOS SOTO, UNIVERSIDAD AUTÓNOMA “BENITO JUÁREZ DE OAXACA

ANÁLISIS COMPARATIVO DE FACTORES COMPETITIVOS DE LAS PYMES DEL ESTADO DE COLIMA, DURANGO Y VERACRUZ ....................................................................................................................................................... 1250

NIDIA ESTELA HERNÁNDEZ CASTRO, UNIVERSIDAD AUTÓNOMA DE COAHUILA EDNA ISABEL DE LA GARZA MARTÍNEZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA LEONOR MIRELES FALCÓN, UNIVERSIDAD AUTÓNOMA DE COAHUILA MA. ZÓCHITL ARAIZA GARZA, UNIVERSIDAD AUTÓNOMA DE COAHUILA

LA COOPERACIÓN INTEREMPRESARIAL EN MICROEMPRESAS DE AGUASCALIENTES....................................... 1258

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TERESA VALDEZ SILVA, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES MARÍA DE LOS ANGELES SILVA OLVERA, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES CARMEN ESTELA CARLOS ORNELAS, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES MA. ZÓCHITL ARAIZA GARZA, UNIVERSIDAD AUTÓNOMA DE COAHUILA

COMPETITIVIDAD DE LAS PYMES EXPORTADORAS DEL ESTADO DE COLIMA ........................ 1264

JESÚS OTONIEL SOSA RODRÍGUEZ, UNIVERSIDAD DE COLIMA ÓSCAR BERNARDO REYES REAL, UNIVERSIDAD DE COLIMA NOÉ LÓPEZ ALVARADO, UNIVERSIDAD DE COLMA

PROPUESTA PARA APLICACIÓN DE LA METODOLOGÍA DE SEIS SIGMAS EN LOS PROCESOS DE LA UNIVERSIDAD ESTATAL DE SONORA ....................................................................................................................................... 1271

JESÚS MANUEL VELÁZQUEZ CASTELLANOS, UNIVERSIDAD ESTATAL DE SONORA

ASPECTOS FISCALES EN MÉXICO, DEL DERECHO A LA SALUD COMO DERECHO HUMANO ................................ 1283

RIGOBERTO REYES ALTAMIRANO, UNIVERSIDAD DE GUADALAJARA.

TURISMO, ACTIVIDAD ECONÓMICA QUE COADYUVA A ELEVAR LA CALIDAD DE VIDA DE LOS SONORENSES .. 1292

ADRIALY PEREZ GAXIOLA, UNIVERSIDAD ESTATAL DE SONORA MARIO CAMBEROS CASTO, CENTRO DE INVESTIGACIÓN EN ALIMENTOS Y DESARROLLO, A.C. EMILIO HERNÁNDEZ GÓMEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

CARACTERIZACIÓN DE LAS PRÁCTICAS DE TALENTO HUMANO EN EMPRESAS DEL VALLE DEL CAUCA ............. 1302

BEATRIZ EUGENIA AGUDELO ORREGO, UNIVERSIDAD AUTÓNOMA DE OCCIDENTE

HISTORIA INDUSTRIAL Y EMPRESARIAL ........................................................................................................... 1313

CARLOS RENÉ DE LEÓN MEZA, UNIVERSIDAD DE GUADALAJARA PATRICIA GUTIÉRREZ MORENO, UNIVERSIDAD DE GUADALAJARA

EXPORTACIONES HORTOFRUTÍCOLAS MEXICANAS EN EL TLCAN: ¿VENTAJA COMPARATIVA? ......................... 1318

JAIME MEULY ROSALINA, UNIVERSIDAD DEL ESTATAL DE SONORA

ENTRE LA FORMACIÓN RACIONAL Y EL APRENDER A APRENDER ..................................................................... 1327

MARIO LUIS PEROSSA, UNIVERSIDAD MAIMÓNIDES ALEJANDRA ELENA MARINARO, UNIVERSIDAD MAIMÓNIDES

LA INNOVACION DE PROCESOS COMO VENTAJA COMPETITIVA EN LA INCUBACION DE PYMES: CASO DITEMCO S.A. DE C.V. ...................................................................................................................................................... 1335

BLANCA ESTHELA ZAZUETA VILLAVICENCIO, INSTITUTO TECNOLÓGICO DE AGUA PRIETA NAHÚM LEDEZMA MERCADO, INSTITUTO TECNOLÓGICO DE AGUA PRIETA EDUARDO RODRÍGUEZ LEYVA, INSTITUTO TECNOLÓGICO DE AGUA PRIETA VÍCTOR MANUEL VALENZUELA ALCARÁZ, INSTITUTO TECNOLÓGICO DE AGUA PRIETA AGENCIAS ADUANALES

CAMPAÑA DIGITAL COMO ESTRATEGIA DE EDUCACIÓN CONTINUA PARA EL MANEJO ADECUADO DE MATERIALES DE REÚSO PROVENIENTES DEL PROCESO DE RECICLAJE .............................................................. 1345

LOURDES AIDE PINTOR RODRÍGUEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA HILDELISA KARINA LANDEROS LORENZANA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA NORMA CANDOLFI ARBALLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA CAROLINA TREJO ALBA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

EDUCACIÓN SUPERIOR EN BAJA CALIFORNIA: ANÁLISIS DE LAS NECESIDADES FÍSICAS Y HUMANAS PARA UNA MATRÍCULA EN CRECIMIENTO ......................................................................................................................... 1353

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MANUEL MUÑOZ AGUILERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MARÍA BELÉN MURILLO PEDRAZA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OLGA LIDIA GUTIÉRREZ GUTIÉRREZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

DESAFÍOS DE LA MUJER EMPRESARIA Y SU RELACIÓN CON FACTORES CULTURALES FAMILIARES ................... 1355

MA. DEL CARMEN LIQUIDANO RODRÍGUEZ, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES CARMEN ESTELA CARLOS ORNELAS, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES MARÍA DE LOS ÁNGELES SILVA OLVERA, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES YOLANDA GONZÁLEZ ADAME, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES

EL PERFIL DEL EMPRENDEDOR DE LA ZONA SUR DEL ESTADO DE YUCATÁN: CARACTERÍSTICAS, FACTORES DE VOCACIÓN Y FUENTES DE INSPIRACIÓN........................................................................................................... 1361

MARIO RENÉ CHAN MAGAÑA, UNIVERSIDAD TECNOLÓGICA REGIONAL DEL SUR

GESTIÓN E IMPACTO DEL COMERCIO ELECTRÓNICO ........................................................................................ 1374

EMILIO PADRÓN CANTÚ, UNIVERSIDAD AUTÓNOMA DE COAHUILA VÍCTOR MANUEL MOLINA MOREJÓN, UNIVERSIDAD AUTÓNOMA DE COAHUILA ADRIANA MÉNDEZ WONG, UNIVERSIDAD AUTÓNOMA DE COAHUILA

ANALISIS DE RIESGO EN LAS EMPRESAS DEL SECTOR TURISTICO DE LA ZONA SUR DEL ESTADO ...................... 1385

MARIO RENÉ CHAN MAGAÑA, UNIVERSIDAD TECNOLÓGICA REGIONAL DEL SUR FERNANDO JORGE GAMEROS CÁMARA, UNIVERSIDAD LATINO JUAN FRANCISCO BALAM MENA, UNIVERSIDAD TECNOLÓGICA REGIONAL DEL SUR

IMPACTO DE LA GESTIÓN DE LA CADENA DE SUMINISTROS SOBRE EL DESEMPEÑO COMPETITIVO DE EMPRESAS MANUFACTURERAS DE AGUASCALIENTES, MÉXICO ........................................................................................ 1396

CARMEN ESTELA CARLOS ORNELAS, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES JORGE ALBERTO RODRÍGUEZ STEFFANI, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES MA. DEL CARMEN LIQUIDANO RODRÍGUEZ, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES MARÍA DE LOS ANGELES SILVA OLVERA, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES YOLANDA GONZÁLEZ ADAME, INSTITUTO TECNOLÓGICO DE AGUASCALIENTES

LA ELABORACIÓN DE BEBIDAS ESPIRITUOSAS COMO ACTIVIDAD PRODUCTIVA EN LAS COMUNIDADES MARGINADAS CASO ZAPOTITLÁN DE VADILLO ............................................................................................... 1402

ADRIANA DEL CARMEN BAUTISTA HERNÁNDEZ, UNIVERSIDAD DE COLIMA JESÚS OTONIEL SOSA RODRÍGUEZ, UNIVERSIDAD DE COLIMA YESBEK ROCÍO MORALES PAREDES, UNIVERSIDAD DE COLIMA

ANÁLISIS DEL RÉGIMEN DE PEQUEÑOS CONTRIBUYENTES EN RELACIÓN A SU ELIMINACIÓN EN MÉXICO PARA 2014 ................................................................................................................................................................. 1408

EDUARDO ACEVES HARO, UNIVERSIDAD DE GUADALAJARA PATRICIA GUTIÉRREZ MORENO, UNIVERSIDAD DE GUADALAJARA RAMIRO TORRES TORRES, UNIVERSIDAD DE GUADALAJARA

LA GESTION DEL CONOCIMIENTO EN LA PEQUEÑA Y MEDIANA EMPRESA MANUFACTURERA DE MORELIA MICH., MEXICO ........................................................................................................................................................... 1415

GERARDO GABRIEL ALFARO CALDERÓN, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO. VÍCTOR GERARDO ALFARO GARCÍA, UNIVERSIDAD DE BARCELONA

PERSPECTIVA ECONÓMICA PARA EL CRECIMIENTO SUSTENTABLE EN LOS ORGANISMOS PÚBLICOS OPERADORES DE AGUA POTABLE........................................................................................................................................... 1426

MA. HILDA RODALES TRUJILLO, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO FRANCISCO JOSÉ VILLAZÁN OLIVAREZ, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO

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MARIO CHÁVEZ ZAMORA, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO

LA IMPORTANCIA DE LA EDUCACIÓN EN EL PROGRESO SOCIAL ....................................................................... 1435

JUAN MANUEL CHÁVEZ ESCOBEDO, UNIVERSIDAD AUTÓNOMA DE NUEVO LEÓN JUAN GUADALUPE MARTÍNEZ MACÍAS, UNIVERSIDAD AUTÓNOMA DE NUEVO LEÓN JESÚS OSORIO CALDERÓN, UNIVERSIDAD AUTÓNOMA DE NUEVO LEÓN

ANÁLISIS DE LA RENDICIÓN DE CUENTAS EN MÉXICO Y PAÍSES DE LATINOAMÉRICA ....................................... 1440

MARISA ESCOBEDO OZUNA, UNIVERSIDAD ESTATAL DE SONORA MARÍA ANGÉLICA GARCÍA JARAMILLO, UNIVERSIDAD ESTATAL DE SONORA LUIS LEY CHAN, UNIVERSIDAD ESTATAL DE SONORA KAREN AMANDA CELAYA PINO, UNIVERSIDAD ESTATAL DE SONORA

TURISMO SOSTENIBLE Y EL USO DE ENERGÍAS RENOVABLES COMO ALTERNATIVA DE APOYO A LOS PUEBLOS INDÍGENAS DE MÉXICO .................................................................................................................................... 1450

ZELTZIN MINERVA GUTIÉRREZ RIVERA, UNIVERSIDAD NACIONAL AUTÓNOMA DE MÉXICO LUIS ENRIQUE VILLALOBOS CONTRERAS, UNIVERSIDAD NACIONAL AUTÓNOMA DE MÉXICO

LA NUEVA REFORMA EDUCATIVA MEXICANA UNA OPCION PARA EL CRECIMIENTO DE MEXICO EN INNOVACION Y RESPONSABILIDAD SOCIAL ............................................................................................................................ 1458

IRMA JUDITH RUIZ RODRÍGUEZ, CEDES INSTITUTO TECNOLÓGICO DE CHIHUAHUA II MANUEL RICARDO CAMPOS SANDOVAL, CEDES INSTITUTO TECNOLÓGICO DE CHIHUAHUA II MARÍA SUSUKY SOTO ARMENDÁRIZ, CEDES INSTITUTO TECNOLÓGICO DE CHIHUAHUA II

FACTORES QUE IMPACTAN LA COMPETITIVIDAD DE EMPRESAS CONSTRUCTORAS DE VIVIENDAS EN MEXICALI, BAJA CALIFORNIA, MÉXICO .............................................................................................................................. 1466

SANTIAGO PÉREZ ALCALÁ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA CRUZ ELDA MACÍAS TERÁN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA LEONEL ROSILES LÓPEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JULIO CESAR LEÓN PRIETO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

CULTURA DE INNOVACIÓN EN LAS PEQUEÑAS EMPRESAS CONSTRUCTORAS DE PUEBLA, MÉXICO .............. 1478

RAFAELA MARTÍNEZ MÉNDEZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA MARÍA ANTONIETA MONSERRAT VERA MUÑOZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA JOSÉ GERARDO SERAFÍN VERA MUÑOZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA SANTIAGO PÉREZ ALCALÁ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA LEONEL ROSILES LÓPEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA CRUZ ELDA MACÍAS TERÁN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JULIO CESAR LEÓN PRIETO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

LA ASOCIACIÓN COMO ESTRATEGIA, EN LA MICRO Y PEQUEÑA INDUSTRIA EN MEXICALI, BAJA CALIFORNIA, MÉXICO ........................................................................................................................................................... 1495

LORETO MARÍA BRAVO ZANOGUERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA PLACIDO VALENCIANA MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SÓSIMA CARRILLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ANA CECILIA BUSTAMANTE VALENZUELA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

PERCEPCIÓN DEL EMPLEADOR SOBRE LA COMPETITIVIDAD LABORAL DE ESTUDIANTES DE PROGRAMAS ACREDITADOS .................................................................................................................................................. 1505

LEONEL ROSILES LÓPEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA CRUZ ELDA MACÍAS TERÁN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SANTIAGO PÉREZ ALCALÁ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JULIO CESAR LEÓN PRIETO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

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IMPACTO DE LOS RESULTADOS DEL EGEL-CONTA DE LOS EGRESADOS DE LICENCIATURA EN LOS EMPLEADORES DEL SECTOR SERVICIOS .................................................................................................................................... 1512

ANA CECILIA BUSTAMANTE VALENZUELA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SÓSIMA CARRILLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA LORETO MARÍA BRAVO ZANOGUERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA PLÁCIDO VALENCIANA MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ¿QUÉ ACCIONES SON INDISPENSABLES QUE LLEVE A CABO EL PROFESIONISTA PARA REALIZAR LA ACTIVIDAD? VERBO EN PRESENTE + SUJETO + COMPLEMENTO (CONTEXTO O CONDICIÓN)

EL EMPRENDIMIENTO DESDE UNA INSTITUCIÓN DE EDUCACIÓN SUPERIOR EN MÉXICO ................................ 1523

ROSA MARTHA ORTEGA MARTÍNEZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO CLAUDIA BERENISE CANO LÓPEZ DE NAVA, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO CLAUDIA NORA SALCIDO MARTÍNEZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO MARÍA DEYANIRA VILLARREAL SOLÍS, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO FRANCISCO VILLARREAL SOLÍS, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO

EXPORTACIÓN DEL MEZCAL DE DURANGO A TOKIO JAPÓN ............................................................................. 1538

CLAUDIA NORA SALCIDO MARTÍNEZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO CLAUDIA BERENISE CANO LÓPEZ DE NAVA, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO ROSA MARTHA ORTEGA MARTÍNEZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO JOSÉ MELCHOR VELÁZQUEZ REYES, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO CÉSAR GURROLA RÍOS, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO

EL TRABAJO COLABORATIVO EN LA EDUCACIÓN SUPERIOR MEDIADA POR LAS TECNOLOGÍAS DE INFORMACION Y COMUNICACION ........................................................................................................................................... 1551

PAUL ANDRÉS RUGELES CONTRERAS BEATRIZ MORA GONZÁLEZ, UNIVERSIDAD SAN BUENAVENTURA PIEDAD MARÍA METAUTE PANIAGUA JAIRO ÁNGEL DÍAZ, FUNDACIÓN UNIVERSITARIA SAN MARTÍN

NUEVA LEY DEL IMPUESTO SOBRE LA RENTA EN MÉXICO. RÉGIMEN DE INCORPORACIÓN FISCAL PARA PERSONAS FÍSICAS ........................................................................................................................................... 1560

EDELMIRA SÁNCHEZ DELGADO, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ

FACTORES DEL COMPORTAMIENTO DEL CONSUMIDOR QUE INFLUYEN EN LA COMPRA POR MEDIO DE INTERNET ........................................................................................................................................................................ 1565

OMAIRA CECILIA MARTÍNEZ MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JOSÉ GABRIEL RUIZ ANDRADE, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA RICARDO VERJÁN QUIÑONES, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MA CRUZ LOZANO RAMÍREZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

COMPETENCIAS DIRECTIVAS PARA PYME: UNA EVALUACIÓN DIAGNÓSTICA EN EL SECTOR SERVICIOS EN SALTILLO COAHUILA ........................................................................................................................................ 1571

MELCHOR DAVID ELIZONDO SANDOVAL, UNIVERSIDAD AUTÓNOMA DE COAHUILA. MÉXICO MARÍA DEL CARMEN ARMENTEROS ACOSTA, UNIVERSIDAD AUTÓNOMA DE COAHUILA. MÉXICO VÍCTOR MANUEL MOLINA MOREJÓN, UNIVERSIDAD AUTÓNOMA DE COAHUILA. MÉXICO

SELECCIÓN BAJO INCERTIDUMBRE DE PORTAFOLIOS DE GENERACIÓN ELÉCTRICA .......................................... 1583

ROBERTO JOSÉ TABOADA GONZÁLEZ, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO GERARDO GABRIEL ALFARO CALDERÓN, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO FEDERICO GONZÁLEZ SANTOYO, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO

MERCADOS INFORMALES: ALBERGUE DE MICROEMPRESAS? .......................................................................... 1593

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JESÚS VELÁZQUEZ VALADEZ, UNIVERSIDAD AUTÓNOMA DE CHIHUAHUA (UACH) JESÚS CARLOS MARTÍNEZ RUIZ, UNIVERSIDAD AUTÓNOMA DE CHIHUAHUA (UACH) ANTONIO SALAS MARTÍNEZ, UNIVERSIDAD AUTÓNOMA DE CHIHUAHUA (UACH) JESÚS FRANCISCO HINOJOS CALDERÓN, UNIVERSIDAD AUTÓNOMA DE CHIHUAHUA (UACH)

POLÍTICAS DE APOYO A LA INVERSIÓN DIRECTA AL EXTERIOR DE EMPRESAS MEXICANAS .............................. 1603

JORGE L. ALCARAZ VARGAS, INSTITUTO TECNOLÓGICO DE MONTERREY CAMPUS PUEBLA

ANÁLISIS MULTIDISCIPLINARIO DEL PROYECTO DE EFICIENCIA ENERGÉTICA Y RENDIMIENTO DE COMBUSTIBLE PROY-NOM-163-SEMARNAT-ENER-SCFI-2012 .................................................................................................. 1610

KARLA LILIANA HARO ZEA, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA JUAN CARLOS MERLO GUZMÁN, UNIVERSIDAD POPULAR AUTÓNOMA DEL ESTADO DE PUEBLA BLANCA HORTENCIA MORALES VÁZQUEZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA

DETERMINACIÓN DE LAS DIFERENCIAS DE GÉNERO USANDO LAS ESCALAS DE LIMITACIONES EN EL TRABAJO (WLQ), COMPROMISO ORGANIZACIONAL (OC) Y MBI DE MASLACH EN UN GRUPO DE SERVIDORES PÚBLICOS DEL SECTOR SALUD .......................................................................................................................................... 1620

BLANCA ROSA GARCÍA RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MÉXICO SONIA ELIZABETH MALDONADO-RADILLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MÉXICO MARÍA CONCEPCIÓN RAMÍREZ BARÓN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MÉXICO

VIAJANDO CON MIS ABUELOS ......................................................................................................................... 1631

OSCAR ALFREDO QUINTERO TAPIA, CENTRO UNIVERSITARIO DE LOS VALLES UNIVERSIDAD DE GUADALAJARA ADRIANA DEL CARMEN RODRÍGUEZ GUARDADO, CENTRO UNIVERSITARIO DE LOS VALLES UNIVERSIDAD DE GUADALAJARA LILIA FRANCISCA SÁNCHEZ MORENO, CENTRO UNIVERSITARIO DE LOS VALLES-UNIVERSIDAD DE GUADALAJARA

USO DE LAS TECNOLOGÍAS DE INFORMACIÓN Y COMUNICACIÓN. UNA CONTEXTUALIZACIÓN DESDE EL CASO DE LAS PYMES MEXICANAS. .................................................................................................................................. 1639

MARÍA DEL ROSARIO DEMUNER FLORES, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MÉXICO OSVALDO URBANO BECERRIL TORRES, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MÉXICO ROSA MARÍA NAVA ROGEL, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MÉXICO

INDUSTRIAL SECTOR EXPORTS IN COLOMBIA: EFFICIENT FRONTIER ANALYSIS ................................................ 1651

JORGE A. RESTREPO MORALES, I.U. TECNOLÓGICO DE ANTIOQUIA LORENZO PORTOCARRERO SIERRA, I.U. TECNOLÓGICO DE ANTIOQUIA JUAN GABRIEL VANEGAS LÓPEZ, I.U. TECNOLÓGICO DE ANTIOQUIA

COMPETITIVIDAD DEL TRANSPORTE AÉREO Y MARÍTIMO DE MÉXICO EN EL MARCO DEL COMERCIO EXTERIOR ........................................................................................................................................................................ 1660

AMÉRICA IVONNE ZAMORA TORRES, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO JOSÉ CÉSAR LENIN NAVARRO CHÁVEZ, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO JOEL BONALES VALENCIA, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO

PERCEPCIÓN DE LA CALIDAD DEL SERVICIO EDUCATIVO DOCTORAL ................................................................ 1672

OSCAR REYES SÁNCHEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MARCELA REYES PAZOS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

IDENTIFICACIÓN DE NUEVOS COSTOS DE OPORTUNIDAD DEL DESPERDICIO AUTOMOTRIZ CON DAÑO AMBIENTAL ..................................................................................................................................................... 1680

ADRIANA PATRICIA SOTO AGUILAR, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA

PSICOLOGÍA DEL INTRAEMPRENDIMIENTO: UNA APROXIMACIÓN DESDE UN ESTUDIO DE CASO EN LA INDUSTRIA MAQUILADORA DE CD. JUÁREZ, MÉXICO ......................................................................................................... 1689

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OSCAR JAVIER MONTIEL MENDEZ, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ ALEJANDRA GONZÁLEZ GONZÁLEZ, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ DIANA IRASEMA CERVANTES ARREOLA, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ

RELATOS DE VIDA DE GERENTES DE PRODUCCIÓN EN LA INDUSTRIA MAQUILADORA DE CD. JUÁREZ, MÉXICO ........................................................................................................................................................................ 1700

OSCAR JAVIER MONTIEL MÉNDEZ, UNIVERSIDAD AUTÓNOMA DE CD. JUÁREZ ADIER RAMÍREZ GALDÁMEZ, UNIVERSIDAD AUTÓNOMA DE CD. JUÁREZ VÍCTOR MANUEL ESPARZA ESPARZA, UNIVERSIDAD AUTÓNOMA DE CD. JUÁREZ ANGÉLICA GUERRERO, UNIVERSIDAD AUTÓNOMA DE CD. JUÁREZ

METAMORFOSIS: RELATOS DE VIDA DE TRES DOCTORES ................................................................................ 1710

OSCAR JAVIER MONTIEL MÉNDEZ, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ LUIS ALBERTO SALCIDO RAMÍREZ, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ BRENDA IVONNE CENICEROS TRINIDAD, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ ISAMAR CRISTINA BATRES GUTIÉRREZ, UNIVERSIDAD DE OCCIDENTE

EL COMPORTAMIENTO DEL CONSUMIDOR DE SERVICIOS CULTURALES OFRECIDOS POR LAS ENTIDADES PARAESTATALES EN LA CIUDAD DE TIJUANA, B.C. ........................................................................................... 1720

CLAUDIA KARINA GARCIA VARGAS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OMAIRA CECILIA MARTÍNEZ MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

DEFINICIÓN DE UN MODELO DE GESTIÓN DE CALIDAD PARA PROMOVER EL DESARROLLO ACADÉMICO Y LA EVALUACIÓN DEL DESEMPEÑO DE LOS PROFESORES DE LA UNIVERSIDAD CATÓLICA DE COLOMBIA .............. 1725

CAMILO JIMÉNEZ BARRERA, UNIVERSIDAD CATÓLICA DE COLOMBIA CARLOS ALBERTO GONZÁLEZ CAMARGO, UNIVERSIDAD CATÓLICA DE COLOMBIA JORGE ENRIQUE CELIS GIRALDO

IMPACTO SOCIOECONOMICO DE LOS NEGOCIOS INTERNACIONALES ...................................... 1736

JUAN CORTÉS BOTELLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OLGA LIDIA GUTIÉRREZ GUTIÉRREZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MARÍA BELÉN MURILLO PEDRAZA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

COMPETITIVIDAD Y SUPPLY CHAIN MANAGEMENT EN LA INDUSTRIA EXPORTADORA DE AGUACATES EN MÉXICO ......................................................................................................................... 1745

MARCO ALBERTO VALENZO-JIMÉNEZ, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO EVARISTO GALEANA-FIGUEROA, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO JAIME APOLINAR MARTÍNEZ-ARROYO, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO

PERCEPCIÓN ACTUAL DE LA SEGURIDAD DE LA INFORMACIÓN EN LAS ORGANIZACIONES DEL MUNICIPIO DE TECOMÁN, COLIMA. ........................................................................................................................................ 1759

ARQUÍMEDES ARCEGA PONCE, UNIVERSIDAD DE COLIMA JESÚS MARTIN SANTOS VIRGEN, UNIVERSIDAD DE COLIMA OSCAR MARES BAÑUELOS, UNIVERSIDAD DE COLIMA ALFREDO SALVADOR CÁRDENAS VILLALPANDO, UNIVERSIDAD DE COLIMA

MÉXICO: POLÍTICA FISCAL Y SISTEMAS TRIBUTARIOS QUE GARANTICEN LA PROGRESIVIDAD FISCAL .............. 1769

PATRICIA CARMINA INZUNZA MEJÍA, UNIVERSIDAD AUTÓNOMA DE SINALOA

ANÁLISIS DE LAS TÉCNICAS DE MOTIVACIÓN EMPLEADAS EN LAS EMPACADORAS DE LIMÓN DE LA CIUDAD DE TECOMÁN, COLIMA ......................................................................................................................................... 1784

ARQUÍMEDES ARCEGA PONCE, UNIVERSIDAD DE COLIMA ALFREDO SALVADOR CÁRDENAS VILLALPANDO, UNIVERSIDAD DE COLIMA

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VÍCTOR APARICIO ROSAS, UNIVERSIDAD DE COLIMA ENRIQUE MACIAS CALLEROS, UNIVERSIDAD DE COLIMA JUAN ALFREDO LINO GAMIÑO, UNIVERSIDAD DE COLIMA

DISEÑO Y APLICACIÓN DE UN MODELO DE MEDICIÓN DEL RIESGO OPERACIONAL UTILIZANDO REDES BAYESIANAS .................................................................................................................................................... 1794

FERNANDO ESTEBAN POSADA ESPINAL, UNIVERSIDAD DE ANTIOQUIA SERGIO BOTERO BOTERO, UNIVERSIDAD NACIONAL DE COLOMBIA

LOS ABOGADOS, SUS PERCEPCIONES Y ACTITUDES HACIA LAS NUEVAS TECNOLOGÍAS DE INFORMACIÓN Y COMUNICACIÓN. ESTUDIO DE CASO: INSTITUTO PROFESIONAL DE LA REGIÓN SUR DE LA UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS .......................................................................................................... 1804

SELENE VIRIDIANA PÉREZ RAMÍREZ, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS PAULA PONCE LÁZARO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS ROQUE LÓPEZ TARÁNGO, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS CRISÓFORO ÁLVAREZ VIOLANTE, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS SILVIA CARTUJANO ESCOBAR, UNIVERSIDAD AUTÓNOMA DEL ESTADO DE MORELOS

PROTECCIÓN DEL PATRIMONIO CULTURAL DE LAS TRADICIONES OAXAQUEÑAS: UN CASO PRÁCTICO LA CALENDA ......................................................................................................................................................... 1813

SANDRA BEATRIZ ZAVALETA HERRERA, UNIVERSIDAD AUTÓNOMA “BENITO JUÁREZ” DE OAXACA PEDRO ANTONIO CANSECO LÓPEZ, UNIVERSIDAD AUTÓNOMA “BENITO JUÁREZ” DE OAXACA MIRYAN CASTILLEJOS ALLARD, UNIVERSIDAD AUTÓNOMA “BENITO JUÁREZ” DE OAXACA

GESTIÓN DE COMPETENCIAS DIRECTIVAS EN UN HOSPITAL DE SALUD PÚBLICA.............................................. 1819

LAURA DE LOURDES CANO LÓPEZ DE NAVA, UNIVERSIDAD AUTÓNOMA DE COAHUILA CLAUDIA BERENISE CANO LÓPEZ DE NAVA, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO. ROSA MARTHA ORTEGA MARTÍNEZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO. CLAUDIA NORA SALCIDO MARTÍNEZ, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO. JOSÉ GERARDO IGNACIO GÓMEZ ROMERO, UNIVERSIDAD JUÁREZ DEL ESTADO DE DURANGO.

INFLUENCIA DEL PLACEMENT EN LAS PELÍCULAS SOBRE LA MEMORIA EXPLÍCITA E IMPLÍCITA: ESTUDIO DESDE LA PERSPECTIVA DE LOS CONSUMIDORES ............................................................................................................ 1820

LESLIER VALENZUELA FERNÁNDEZ, UNIVERSIDAD DE CHILE CAROLINA MARTÍNEZ TRONCOSO, UNIVERSIDAD FINIS TERRAE FELIPE YÁÑEZ WIELAND, UNIVERSIDAD DE CHILE

LOS EFECTOS DEL EMPLAZAMIENTO DE LA MARCA EN ADVERGAMES DE PROMOCIÓN TURÍSTICA SOBRE LA RECORDACIÓN, LA CONSCIENCIA DE LA MARCA Y LA ACTITUD HACIA LA MARCA ........................................... 1838

ALEJANDRO ALVARADO HERRERA, UNIVERSIDAD DE QUINTANA ROO CÉSAR AUGUSTO PINEDA CERVANTES, UNIVERSIDAD DE QUINTANA ROO

CONTRATOS INTERNACIONALES: RESPONSABILIDAD CONTRACTUAL .............................................................. 1849

GABRIEL ALFONSO RODRÍGUEZ GONZÁLEZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA

RUTA SEDUCTORA HACIA LA CONVERGENCIA DIVULGACIÓN: NIIF PARA PYMES............................................. 1856

AIDA R. LOZADA RIVERA, UNIVERSITY DE PUERTO RICO

INDEX OF AUTHORS ...................................................................................................................................... 1870

UNIVERSITIES AND INSTITUTIONS REPRESENTED .................................................................................... 1876

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ENGLISH PROCEEDINGS

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GAINING KNOWLEDGE POST-DISASTER: THREE CASE STUDIES

Julie Jewell, University of Northerwestern Ohio and Kirkwood Community College

ABSTRACT

This study was an examination of what small business owners could learn from disaster and how the local community support services could encourage this effort. The owner-managers in the study gained personal insight and growth while they learned from other small businesses owners, survivors of previous disasters, and their communities. The examination included why, during interviews, small business owners questioned about recovering from disaster seemednot to have gained transferable business knowledge post-disaster, yet stated they had learned a great deal. In the small qualitative study, Jewell (2012) applied Weick’s theory of sensemaking to determine perceptions of learning in three small business owners during disaster recovery. The study findings indicated the small business owners gained learning post-disaster, but they did not discuss transferable business acumen when remembering their recovery processes following the disaster. Instead, their focus was on personal and employee spiritual growth, which they believed was more important. The article clarifies how managers learned post-disaster and how local community support programs could help businesses plan for future crises. JEL: International Journal of Management and Marketing KEYWORDS: Sensemaking, Crisis, Disaster, Small Businesses INTRODUCTION The qualitative research by Jewell (2012) looked at three small businesses, each having recovered from disasters: an internal flood, a city-wide flood, and an accidental fire. This article discusses the learning mentioned by owner-managers within their interviews,whichsuggestedthat only personal learningand not transferable business acumen took place. Though the data from interviews suggested only personal growth, the ability to rebuild offeredevidence that real business knowledge might have been gained by owner-managers but was discarded or overlooked during the interviews.This article contends small business owners do learn post-disaster but do not discuss learning that could help other businesses in their prevention planning or disaster recovery processes. Instead, theowners focus on the spiritual growth, which they feel is more important.The article suggests owner-managers can learn from several sources, including other business professionals, survivors of previous disasters, and their communities. LITERATURE REVIEW Learning Needs of Small Business Small companies are a major source of growth in free market economies and their survival is an issue of concern (Lussier & Pfeifer, 2001). Without proper disaster plans or the tools to rebuild, small businesses could fail following a crisis.Survival research by Dobrev and Caroll (2003) indicated smaller businesses mightlack the bureaucratic restraints found in larger companies,which might provide them the flexibility necessary to achieve rapid recovery. If small companies plan for potential disastersand utilize their available resources, they may be better able to overcome and succeed post-disaster. Therefore, small businesses need to learn from other

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small business owners who have experienced and recovered from disasters.The ability to learn during the demands of crisis is considered difficult, yet crisis provides learning opportunities (Moynihan, 2008). Why Small Businesses Lack Learning Learning can be operationally defined as the modification ofbehavior through practice, training,or experience.Small business respondents have indicated learning was not a priority for them (Matlay, 2000). Small business managers, who often deal with more daily activities than do managers of larger firms, may be hampered by a plethora of activities and thus not beable to focus on the need to prepare for potential disasters. This oversight not only hurts the managers, but also may harm others, such as suppliers and customers. By failing to make time to train pre- crisis, managers may rely heavily on outside support as they determine how or if they will recover from a disaster. Organizations have been found to lack learning post-disaster because they believe the disaster was aone-timeevent (Hale,1997;Roux-Dufort, 2000).Organizations have taken a defensive stance about their isolated disaster events and have been reluctant to consider the situations as learning opportunities(Roux-Dufort, 2000). Businesses maylack motivation in learningpost-crisis in order to maintain collective self-esteem and may be prone to be defensive,evidenced by rationalizing, idealizing, fantasizing, or symbolizing to keep their corporate identity intact (Brown & Starkey, 2000). This article contends thatowner-managers can learn and that organizations can change post-disaster. How Small Businesses Can Learn Even though small businesses are crucial to the economy, little research has been done on training program effectiveness or on educating management (Huang, 2001). While small business owners need to take the time to search out resources to ensure proper knowledge of potential hazards, insurance needs, and local resources that can offer help if a disaster were to strike, educating the owners might be challenging due to lack of time or resources available. Learning post-disaster involves the assimilation of information obtained during recovery and the ability to apply the knowledge to other situations (Cope & Watts, 2000). Small businesses willing to encourage a learning atmosphere may be at an advantage during recovery and rebuilding because they already have plans in place. Crisis events can be the catalyst for organizational learning (Sitikin, 1992). Optimal learning following a crisis requires being open to ideas, understanding the crisis situation, and nurturing the ability to access problems surrounding the crisis while being aware that problems happen anywhere (Jaque, 2008). The ability to look at a given set of circumstances and redefine a company’s goals helps managers to focus on the current situation of their organization. This strategy needs to be used pre-disaster to ensure managers can access where or when a disaster could produce problems for the organization. After a disaster has struck is not the ideal time to learn where organizational resources are or who can help deal with the stress of recovery. Preparing a disaster plan well in advance of a crisis may enhance recovery and provide assistance to managers who feel stress following a disaster. Small business owners may feel too busy to learn, yet many owners report they are willing to take courses if the training facility location is close and information is applicable (Walker,Redmond, Webster, & Le Clus,2007). Local government agencies, insurance providers, and small business organizations should focus on training for small business managers to ensure recovery from or potential prevention of crises.

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Outside support following a crisis may be crucial for small organizations, especially for those that have not prepared for disaster situations. Organizations need to build support prior to crises by joining local networking groups and attending community and governmental meetings to ensure they have the needed resources in place if crisis were to strike. Outside financial and physical support can come from other business owners willing to provide temporary accommodations following a disaster and from community programs structured to offer financial support for rebuilding. Small businesses must make the time to network with their community and peers to ensure they know who they can call if they have a need. Small business leaders feel a benefit from peer networks and can learn come from the experiences of others (Zhang & Hamilton, 2009). Local organizations may be able to provide access to training opportunities for small companies that are willing to take classes on crisis prevention and disaster planning. The benefit for small businesses of a peer network is the support post-disaster, both emotionally and financially. The network and other small business managers can offer them the desire and means to rebuild. Peer networks may support small business learning and recovery post-disaster because they offer expert advice from individuals who have gone through and recovered from a crisis situation. Small business owners may prefer to learn only what seems relevant in crisis recovery and disaster rebuilding. Training specifically directed to the needs of small organizations can seem relevant to small business leaders as they hear the stories of peers’ rebuilding efforts. Many small business owners may not spend time focusing on potential disaster; therefore, training and advicefrom other small business owners or experts in the field must encourage them to create a preparation plan. Zhang and Hamilton (2009) suggested that small business managers could learn by heeding the perceptions of others, such as employees, suppliers, competitors, and other associates in the industry. Survivors of disaster may support by helping small business owners create prevention plans and disaster recovery plans. Having local small business organizations support each other may provide the guidance needed during extreme situations such as disasters. Management education literature mentioned that collaborative learning increased the knowledge of business owners (Bruffee, 1994).Such individuals, who understand the stress and the sense of being overwhelmed that happens post-disaster, can provide not just sympathy and a listening ear but also resources. Crisis victims can offer supplies for rebuilding, for example, or needed insight into paperwork requirements for insurance or government funding. Small business owners need to be able to locate other business owners who have survived a similar disaster and to seek their valuable insight in rebuilding. Weick Sensemaking Theory Sensemaking has been defined asan ongoing creation by individuals of situations or actions in an attempt to rationally comprehend them (Weick, 2001).Sensemaking and learning can coordinate the actions of individuals (Allard-Poesi, 2005). Sensemaking helps people construct meaning out of past situations (Gioia & Chittipeddi, 1991), allows individuals to determine what is significant within a situation, and helps them decide what is important enough to remember. Retrospective sensemaking allows individuals to look back on their experiences to make sense of the event through their own individual perspectives (Weick, 1988).Knowledge gained from studying recovery sensemakingmay provide disaster planning and prevention strategies for small businesses.

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METHODOLOGY IreviewedJewell’s (2012)researchto study the transcripts. I wanted to see where small businesses could learn and why they believed they had learned yet were unable to provide transferable knowledge when asked directly. Interviews were conducted with owner-managers and employees of three small organizations in a small Midwestern city and nearby town. Each organization had overcome a crisis: an internal flood, an external flood, and a fire. Since the disasters, which occurred in 2008 and 2010, all three businesses hadrebuilt and the owner- managers and employees had ample time to reflect upon the knowledge gained during and after the recovery process. The researcher asked management directly what they learned from their individual crises and then asked employees what management had learned following the crises. Potential transferable knowledge for other small business managers was, therefore, an important element of the study. Jewell’s (2012) study was an examination of how small businesses learned from their disaster situations.The investigation asked how small business could learn from disaster.The study sample was three small businesses in which the owner served as the only manager and in whichthe staff numbered15 or fewer. Companieschosen were located within small communities, with two cases from a small town with a population of less than 2,000, and one case from a small city of around 130,000. Each of the owner-managers and their employees had endured an internal or an external flood or fire and were able to rebuild their company in 2008 or 2010. RESULTS AND DISCUSSION Owner-managers gained knowledge of a personal nature: spiritual growth, understanding what was socially and emotionally important, and the true nature of stress. One manager discussed how the crisis allowed the company to do things they had not expected to accomplish until10 years in the future. A second manager learned a new understanding for what “busy” really meant, while a third manager discussed no longer looking at monetary things in the same way and coming to understand what was “really important.” All of the owner-managers in Jewell’s(2012) research felt they learned substantially from their situations, yet none of them were able to provide clear advice for other small businesses. On further investigation of Jewell’s (2012) interview questions related to the rebuilding process and the answers given during employee interviews, it seemed actual knowledge that could be transferred to other business owners was realized. This underlying knowledge seemed to have been gained by owner-managers but not discussed when the owner-managers were asked what they learned. The information surfaced only as details about the recovery process, such as the truly helpful actions of insuranceagents, new decisions to rebuild outside of a flood zone, and the importance of a supportive community. All owner-managers discussed the stress post-disaster and the feelings of being overwhelmed.Owner-managers also discussed the help provided to them by other local professionals who opened their businesses to them or supplied them with materials for clean-up and rebuilding. Employee interviews indicatedowner-managers must have gained useful insight because employees discussed what owner-managers learned, such as backing up computer files, working together, and no longer using extension cords. Behaviors changed; thus learning must have taken place, yet owner-managers preferred to focus their attention on personal growth rather than discussing insightful information that could help other small business managerswithcrisis prevention or planning. The reluctance impliedthat small Midwestern business owners in general might not be willing to share advice unless directly asked,which places other business owners at a disadvantage in disaster prevention and planning.

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Managers’ Learning Of the three owner-managers interviewed,all believed they learned from going through a disaster. All three focused on personal growth and asserted that their company was better following the crisis. Two of the three of the owner-managers stated they felt they were ahead by several years in improvements to their companies. While all three owner-managers indicated that they had received help from the community or from local professionals, none reported they learned from the community or the professionals. Employees’ Learning Interviews with all seven employees indicatedthey also believed owner-managers or the company learned from the crisis and rebuilding. Six of the seven employees believed the company learnedthe value of teamwork and coming together. Four of the seven employees believed the company learned how to prepare better for future disasters. CONCLUSION The results of interviews from both owner-managers and employees displayed knowledge about how to rebuild: building outside flood zones, having back-up files secured off site, and purchasing better equipment. The results also indicatedwhich resources were helpful during the process: community driven classes, peer networks,and speaking directly with survivors of disaster.This type of transferable information is what other small business managers planning for disaster or trying to prevent a crisis need to know. REFERENCES Allard-Poesi, F. (2005). The paradox of sensemaking in organizational analysis. Organization,12, 169-196. doi:10.1177/1350508405051187 Brown, A. D., & Starkey, K. (2000). Organizational identity and learning: A psychodynamic perspective. Academy Of Management Review, 25(1), 102-120. doi:10.5465/AMR.2000.2791605 Bruffee, K. A. (1994). The art of collaborative learning: Making the most of knowledgeable peers. Change, 26(3), 39-44. doi:10.1080/00091383.1994.9940647 Cope, J., & Watts, G. (2000). Learning by doing: An exploration of experience, critical incidents, and reflection in entrepreneurial learning. International Journal of Entrepreneurial Behavior & Research, 6(3), 104-124. doi:10.1108/13552550010346208 Dobrev, S. D., & Carroll, G. R. (2003). Size (and competition) among organizations: Modeling scale-based selection among automobile producers in four major countries, 1885-1981. Strategic Management Journal, 24, 541-558. doi:10.1002/smj.317 Gioia, D. A., & Chittipeddi, K. (1991). Sensemaking and sensegiving in strategic change initiation. Strategic Management Journal, 12, 433-448. doi:10.1002/smj.4250120604 Hale, J. (1997). A layered communication architecture for the support of crisis response. Journal of Management Information Systems, 14, 235-255.

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Huang, T. C. (2001). The relation of training practices and organizational performance in small and medium enterprises. Education &Training, 43, 437-444. Retrieved from http://www.emeraldinsight.com/journals.htm?articleid=837700&show=html Jaques, T. (2008). A case study approach to issue and crisis management: Schadenfreude or an opportunity to learn? Journal of Communication Management,12(3), 192-203. doi:10.1108/13632540810899399 Jewell, J. P. (2012) Small business management and employee perceptions of disaster impact.(Doctoral dissertation). ProQuest Dissertations and Theses. Retrieved from http://search.proquest.com Lussier, R. N., & Pfeifer, S. (2001). A cross-national prediction model for business success. Journal of Small Business Management, 39, 228-239. doi:10.1111/0447-2778.00021 Matlay, H. (2000). Organizational learning in small learning organizations: An empirical overview. Education & Training, 42(, 202-211. Doi:10.1108/004009100103 73642 Moynihan, D. P. (2008). Learning under uncertainty: Networks in crisis management. Public Administration Review, 68, 350-365. doi:10.1111/j.1540-6210.2007.00867.x Roux-Dufort, C. (2000). Why organizations don't learn from crisis: The perverse power of normalization. Review of Business, 21, 25-30. Sitikin, S. (1992). Learning through failure: The strategy of small losses. In B. M. Staw & L. L. Cummings (Eds.), Research in organizational behavior (Vol. 14, pp. 231-266).Greenwich, CT: JAI Press. Walker, E., Redmond, J.,Webster, B.,& Le Clus, M. (2007). Small business owners: Too busy to train? Journal of Small Business and Enterprise Development, 14, 294-306. doi:10.1108/14626000710746718 Weick, K. E. (1988). Enacted sensemaking in crisis situations. Journal of Management Studies, 25,305–317. doi:10.1111/j.1467-6486.1988.tb00039.x Weick, K. E. (2001). Making sense of the organization. Oxford, England: Blackwell. Zhang, J., & Hamilton, E. (2009). A process model of small business owner-managers’ learning in peer networks. Education & Training, 51, 607-623. doi:10.1108/00400910911005181 Julie Jewell is an adjunct instructor at the University of Northern Ohio and Kirkwood Community College. She also works with local small businesses in consulting and teaching business seminars. She can be reached at [email protected] or [email protected].

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PEDDLING BY POD: MOBILE MARKETING FOR

REAL ESTATE PROFESSIONALS Johnell Woody, Kennesaw State University

ABSTRACT

The use of podcasts to convey educational materials to a public that is mobile, on the go, and continually multitasking has grown exponentially over the past few years (McDonald & Hawcrot, 2011; Scott, 2009). With the growth of technology and its appeal to younger and younger users, mobile learning has become the new learning medium. Now comes the question of business values and applications for incorporating podcasting in consumer sales to a growing techno-savvy and younger consumer population (Ferrel, Gonzalez-Padrom, & Ferrel 2010). Previous research had indicated that there is educational, business, and creative value in podcasts (McDonald & Hawcroft, 2011; Nath, Singh, Iyer, & Ganesh, 2010; Ferrell, et al., 2010). Other research found focus, creativity, content, and aesthetics to be necessary elements to create effective podcasts (Palmer & Devitt, 2007; Villano, 2009; McDonald & Hawcroft, 2011). The data that appeared to missing from existing literature was the value of creating effective podcasts designed specifically to market a product. The lack of such specific research was the inspiration for this literature review. The question posed for this study was how to create an effective podcast for use by real estate professionals to market fixed real property to a mobile community. JEL: G14, G29 KEYWORLDS: Podcast, Real Estate Professional, Mobile Marketing, Marketing Tool INTRODUCTION Mankind is attached to his music literally. As far back as the 1970’s and the advent of the stereobelt and the Walkman (Conti, 2009), portable music has become an integral part of a proper wardrobe. In the quest for more music and less bulk, came the MiniDisk, then MP3 players, followed by the iPod. From there improved technology has resulted in the iPod Nano with 16 gigabytes of storage, a radio, camera, video camera, and pedometer in a tiny 3.6 x 1.5 x .24 inches case that weighs 1.28 ounces. It is no wonder that with such convenience and size ownership has become another Apple status symbol. The largest demographic using iPods was reported in 2009 to be in the 13-17 years-old bracket (Baker, 2009; Johannes2006) with use beginning in toddlers and continuing through geriatrics. New technology, new users (younger users), and the potential to store vast amounts of digital data is the perfect storm for new applications. Younger users are without fear of the new technology. New technologies, growing populations, aging campuses, and innovate teachers and teaching methods are expanding the use of educational mobile technology (Rosell-Aguilar 2007; Ng’ambi and Lombe 2011). With the internet came e-learning (Gaden, 2010), – distance learning from home or job either in synch or at-your-own-pace. Next generation learning is m-learning technology (Rosell-Aguilar 2007; Ng’ambi and Lombe 2011), – mobile applications for enumerable teaching opportunities. College students are faced with choices of traditional class-room, online, or hybrid (one-half traditional classroom and one-half online) courses. Online and hybrid courses reduce the load of students on campus, but fail to meet, in certain cases, the learning style needs of the student

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(Gaden, 2012; Ng’ambi and Lombe 2011; Rosell-Aguilar 2007). Further examination of e- learning course structures is needed to address reaching across learning styles to best service the tactical and/or relational learner. Now comes m-learning. Mobile learning is that which occurs via mobile technology, iPods, MP3 players, smart phones or iPads (Sahilu, Ahmed, and Haron,). Hand held, wireless mobility allows the user easy access to learning almost anywhere, at any time, and therefore popular connectivity tools (Kant 2012). From third grade math (Sahilu, Ahmed, and Haron, 2012) to political, organizational and business applications, m-learning is the next generation of delivering educational materials (Crittenden, Peterson and Albaum, eds. 2010; Gaden 2010; Kant 2012; Sahilu, Ahmed, and Haron, 2012). Organization communication requires delivery of uniform information across all departments and locations. Inherent in multi-location, multi-national corporations, consistent delivery of intra- organizational training is difficult, and costly. Technology is flattening the world, the internet is connecting the farthest corners of divergent cultures, and the amount of available knowledge grows daily. The speed of change in technology and information demand rapid transfer of information. Delivery of training modules, policy and procedure manuals, and other corporate messages may find podcasts a uniform, economical mode to quickly deliver complex information. Still another application of podcasts in is business-to-consumer selling. Today’s consumer makes decisions on the go. Transportation prices are continually increasing with gasoline currently hovering around three dollar and fifty cent price with projection price as high as five dollars a gallon by 2014 (Ausick and McIntyre, 2012) add traffic congestion that is burdensome and irritating. These factors alone are sufficient to change purchasing patterns. With digital technology, stereoscopic 3D advertising, and wireless mobile devices, the consumer can view, if not try before-you-buy merchandise, thereby often replacing a trip to the retailer (Yim, Cicchirillo, & Drumwright, 2012). Additional research on the use of mobile media in direct sales is needed to more fully understand the potential of this technology in direct sales. It is the combination of factors, younger consumers accustomed to the digital age, increasing costs of going from point A to point B and back again, the speed of change in society, the market place, and the world, that informs this research. The days of driving around looking for a deal are longer financially practical, while looking for the perfect purchase online offers a practical, faster, and cheaper alternative. That having been said, let’s look at an industry that could make better use of digital technology to increase sales and profitability. The real estate industry has not been the most eager to take up new technology (Crittenden, et. al 2010; Yuan, Lee, Kim, and Kim 2013). Notwithstanding the reluctance of agents to engage the new technology, buyers are eager to ‘shop online’ before hopping in the car. The new technology is described as the process by which humans modify nature to meet their needs and wants (National Academy of Engineering 2009). The new home search once involved meeting at the real estate office to look at the listing book (yes, a book of tiny black and white photos and an abbreviated list of features), narrowing the search to a list of suitable properties, jumping in the car with the agent and driving to each. Changes in society, violent acts against realtors, increased transportation costs, and wider sales territories, that process began to change. With improving technologies and the ability to e-mail listing information with color photos to prospective purchasers, the process of discovering suitable properties began to change. The agent and buyer(s) then met at a selected property, then caravan to the next properties. Color photos

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online were a great improvement over the listing books, providing more vivid detail and saving time. Now, even newer technology offers the realtor more effective means of exposing a client to a property via guided tour with audio descriptives to a enhance the photos, pointing out details that might otherwise be overlooked. A picture may be worth a thousand words; a picture with a well-designed message is worth much more. Therefore, this study poses the following questions: RQ1: What elements constitute an effective podcast? RQ2: How can the real estate profession prepare an effective podcast to inform a potential buyer of the most pertinent features of a property? RQ3: How can the real estate professional deliver property podcasts to target audiences? RQ4: Are there particular features of a property that appeal differently to different cultures? Previous research focuses on the use of podcasting and mobile technology as an effective teaching platform (Palmer, & Devitt, 2007). Businesses and organizations are finding podcasts an efficient way to deliver training and organizational communication across departments and across a global marketplace at times and places best suited to the target audience Crittenden, Peterson & Albaum, 2010). Businesses are beginning to study direct sales employing mobile technology (Ferrell, Gonzalez-Padron, & Ferrell, 2010). This study proposes that informational podcasts of real properties listed for sale are a useful sales tool for the real estate professional in the age of mobile technology. LITERATURE REVIEW Web 2.0 has revolutionized societies, allowing the exchange of information to become almost instantaneous around the globe (Darwish & Lakhtaria, 2011; Nath, Singh, & Iyer, 2010). The internet is now more than an information source. Web 2.0 provides a participatory platform in which prior consumers of content (downloading content) to also be contributors of new content (upload content) (Darwish and Lakhtaria 2011). Web 2.0 is a set of innovations that provides a platform for the storage of applications and files not on the user’s desktop, where software becomes a service, not a product. Web 2.0 also allows participation. Social sites, such as facebook, Wikipedia, YouTube, blogs, video sharing, and podcasts, permit formation of diverse communities without borders of affiliated ideas that might otherwise never have the opportunity to interact. Web 2.0 applications are diverse including education, academic libraries, geographic information systems, e-banking, commerce, and political change. For the purposes of this study, the focus will be limited to consumer education along the lines of product information and commerce, in the context of real estate professionals marketing to more technologically advanced, generally younger buyers. To understand the impact of Web 2.0 (Darwish & Lakhtaria, 2011; Nath, Singh, & Iyer, 2010), it is necessary to understand the rate of increase of internet users, and the distribution of information like rhizomes connecting a living network (McNeill, 2011). Internet usage worldwide has grown 566.4% from 2000 to 2012. Over 34% of the world’s population is online. (Internet User Stats 2012 Q2). Logically, consumers are online, therefore, further research on ways to employ new technology to sell a particular product or service may be the difference between success and failure. Similarly, the US mobile subscriber base neared 330 million by early 2013 (US Mobile Market Insights, Statistics and Forecasts, 2013) From third grade math to politics and international relations, podcasting has been proven as a developing platform for

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delivering education (Kant, 2012; Kiger, Herro, and Prunty 2012; Ng’ambi and Lombe, 2011;Ralph, Head, and Lightfoot, 2010; Rosell-Aguilar 2007). Podcasting, or m-learning, differs from e-learning in that m-learning is mobile in that m-learning and podcasts are mobile platforms. The restrictions of location and time are eliminated. E-learning may require both time and space restrictions, in that the class may meet online at the same time (synchronous class meetings – everyone joins an instructor or facilitator led virtual classroom) and may require interaction with the instructor and classmates via “live,” albeit online discussions. This interaction limits user convenience, as meeting time is controlled by the instructor and/or the university. Another limitation of e-learning in a synchronous condition is the inability to view and review the discussion portion of the class. Other e-learning courses are asynchronous, with the learner engaging the material at times most convenient to the learner. The future of education, especially higher education, may rest on the shoulders of digital delivery of courses, materials, and learning modules (Sahilu, Ahmed, & Haron, 2012; Kiger, Herro, and Prunty 2012). More complex and knowledgeable consumers compound the complexities of the marketplace driven by digital media and more sophisticated technologies (Crittenden, Peterson, and Albaum, 2010). Sales oriented businesses have embraced the use of certain technologies in sales and inventory management, yet there is limited research on the impact of technology on direct sales, with more interaction via technology with less traditional face-to-face sales interaction (Ferrell, Gonzalez-Padron, and Ferrell, 2010). There appears to be a gap in the body of knowledge of direct sales using different technology tools. Therefore there is a need for further research in consideration of the increasing use of mobile technology by a population that appears to prefer the freedom of mobility and instant information. Regardless of the intention, e-learning, m-learning, organizational communication, or marketing tool, a listener preference framework (Tsagkias, Larson and de Rijke, 2010; Villano, 2008) has been constructed in which the following elements were shown to be critical to listener preference: (1) strong, topically focused content; (2) fluent, articulate, conversational speech; (3) podcast context; and (4) technical execution (Tsagkias, Larsen and de Rijke 2010). The first element, strong, topical content requires consistency of structure, contains factual information, cites resources where appropriate (in the case of the real estate professional, tax records, school districts, etc.), and is of a reasonable length. The second element, the podcaster, must exhibit a fluent, non-hesitant, and articulated speech pattern. Conversational style with inflection is also preferred. Third the podcast context must address the listener directly, and have a real world context. Lastly, the technical execution is important to the listener. Background music, if any, should match the content and be unobtrusive. The address and description should be accurate, with careful attention to editing effects and studio quality sound. The feed should be reliable, and have a logo and links to the multiple listing site. Note podcasts originating from the real estate professional’s website my contain contact information for the REP, however a podcast embedded in the multiple listing site may not identify the real REP or his/her firm (National Association of Realtors, 2013b). Another important feature in preparing marketing podcast for real estate properties is to include home features that appeal to different cultures. For example, Asian purchases generally prefer homes facing north, while Latin Americans have a preference for tile. There appears to be little, if any, existing research on the features preferred by prospective home buyers of diverse cultural backgrounds. This topic is ripe for research and would add to the body of knowledge on cultural preferences, and add insight to cross cultural marketing of real properties. DISCUSSION

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Research by Tsagkias, et al. (2010) satisfied RQ1: regarding the elements necessary for an effective podcast as being (1) strong, topically focused content; (2) fluent, articulate, conversational speech; (3) podcast context; and (4) technical execution (Tsagkias, et al., 2010). Based on those findings, the real estate professional can prepare an effective podcast by observing the four elements reported by Tsagkias, et al. (2010). The real estate professional must first draft and incorporate scripts that are consistent with the property (a bungalow is not the Tal Mahal), including factual demographic property information, organized in a logical, sequential manner. The second and third elements are consistent with all podcasts, and presentations, in that articulated delivery in a conversational manner with inflection, addressed directly to the buyer in language understandable to all. The forth element is the most difficult for the low-tech preferences of REPs (Yuan, Lee, Kim & Kim, 2013) relates to technical execution, including quality photos and/or videos, attention to sound quality and sound quantity (Tsagkias, et al., 2010). To assist the low-tech REP a google.com search for “user friendly podcast software” yields numerous software programs, applications, sites, and resources to record podcasts (google.com) which satisfies RQ2: How can the real estate profession prepare an effective podcast to inform a potential buyer of the most pertinent features of a property? The National Association of Realtors (NAR Handbook, 2013a) limits certain advertising through the multiple listing services, however a podcast may be linked to properties entered into the multiple listing services, with certain limitations. The National Association of Realtors (2008) reported Google, Zillow, Trulia, and Yahoo began working together to craft an exchange that would permit the multiple listing services to share property listing date with numerous search engines at once, therefore each REP’s properties offered for sale are, in essence, broadcast over the Internet. Normal and ordinary REP business practices include a website acknowledging that sixty-five (65%) percent of realtor business generated from some form of purchaser/internet interactions (National Association of Realtors, 2013b). Ninety (90%) of home buyers use the internet to begin a home search; ninety-one (91%) of that ninety (90%) percent use a real estate professional to make the home purchase; and thirteen of the ninety (90%) percent use mobile applications (Molony, 2012). Prior research and current statistical data support and facilitate RQ3: How can the real estate professional deliver property podcasts to target audiences? A thorough search of prior literature failed to provide studies of culturally specific preferred property features, therefore, the data failed to provide support for RQ4: Are there particular features of a property that appeal differently to different cultures? This lack of research is an area of sales and marketing for real estate professionals calls for additional research to add to the body of knowledge on culturally specific residential preferences, if any. CONCLUSING COMMENTS Prior research suggests that podcasts, as well as other digital means of delivery, have and will continue to impact the use of technology in delivering entertainment, education, and new methods of marketing various products. The number of internet home buyers that first engage in home searches using the internet demand real estate professionals seeking maximum economic performance employ more technology to reach buyers (Acharya, Kagan, and Zimmerman, 2010; Dermisi, 2010; Yuan, Lee, Kim, & Kim, 2013). This study suggests that podcast may provide a useful tool for real estate professionals and adds to the body of knowledge supporting podcast as a medium to deliver information to prospective purchasers of real property. The absence of podcasts used by real estate professionals at this writing suggests that real estate professionals have little or no knowledge and/or interest in preparing podcasts of the properties offered for sale, or that they find the technology inhibiting. The literature supports the use of podcasts to market

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real property to the growing tech-savvy population of buyers that are comfortable with and enjoy using technology in pre-purchase searches. A series of focus groups using separate samples of real estate professionals and younger buyers is recommended to assess perception of podcasts as a marketing tool and as an early search tool. Additionally, a longitudinal test study of prepared podcasts linked to listed properties would be a source of data to compare the effectiveness of podcast enhanced listed properties against properties marketed without podcasts. REFERENCES Acharya, R. N., Kagan, A., & Zimmerman, T. (2010). Influence of email marketing on real estate agentperformance. Journal of Real Estate Literature, 19(2), 329-343. Ausick, P., & McIntyre, D. A. (2012). 8 reasons why gas will hit $5 a gallon this year. NBCNEWS.com. Retrieved from the Internet April 25, 2013 at: http://www.nbcnews.com/business/8-reasons-why-gas-will-hit-5-gallon-year-201947 Baker, C. (2009). Notes on usability and related things by a project manager who manages electronic publishing projects. Retrieved from the internet April 18, 2013, at by a project http://usabilitynotes.typepad.com/usabilitynotes/2009/10/demographics-age-data-for-iphone-and- iphone-touch-users.html Conti, J. P. (2009). A sound move. Engineering and Technolog, 24 October – 6 November, 63- 65. www.theiet.org/magazine Crittenden, V. L., Peterson, R. A., and Albaum, eds. (2010). Technology and business-to- consumer selling: contemplating research and practice. Journal of Personal Selling & Sales Management, XXX(2), 103-109. doi:10.2759/PSS0885-3134300201 Darwish, A. & Lakhtaria, K. (2011). The impact of the new web 2.0 technologies in communication, development and revolutions of societies. Journal of Advances in Information Technology, 2(4), 204-216. doi:10.4304/jait.2.4.204-216 Dermisi, S. (2010 ). Real Estate Information Technology. Journal of Real Estate Literature18(2), 329-434. Ferrell, L., Gonzalez-Padron, T. L., & Ferrell, O. C. (2010). An assessment of the use of technology in the direct selling industry. Journal of Personal Selling & Sales Management, 30(2), 157-165. Gaden, G., (2009). Podcasting: thinking about new opportunities for pedagogy and activism. Thirdspace: a journal of feminist theory & Culture, 9(1), 1-5. Internet Users in the World Distribution by World Regions – 2012 Q 2. Retrieved from the internet at http://www.internetworldstats.com/stats.htm. Johannes, A. (2006). I Pod Nation. Promo Magazine, 19(4), 26-31. Kant, K. (2012). The future of higher education: m-learning. Indian Streams of Research Journal, 2(11), 1-7.

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Kiger, D., Herro, D., & Prunty, D. (2012). Examining the influence of a mobile learning intervention on third grade math achievement. Journal of Research on Technologyin Education, 45(1), 61-82 Molony, W. (2012). NAR Survey of Home Buyers and Sellers Shows Dual Income Couples Fueling Market. National Association of Realtors. Retrieved from: http://www.realtor.org/news- releases/2012/11/nar-survey-of-home-buyers-and-sellers-shows-dual-income-couples-fueling- market McDonald, D., & Hawcroft, R. (2011). Sound selection: podcasts prove positive. The Australian Library Journal, 60(3), 231-235. McNeill, S. J. (2011). Digital Symbiosis: New Media in Transition. El Cajon, CA: National Social Science Press. Nath, A. K., Singh, R., Iyer, L. S., & Ganesh, J. (2010). Web 2.0: capabilities, business value and strategic practice. Journal of Information Science and Technology 7(1), 22-39. National Association of Realtors (2008). Getting your listings out there. Retrieved March 27, 2013, from Internet at: http://crt.blogs.realtor.org/2008/05/05/getting-your-listings-out-there/ National Association of Realtors (2013a). Handbook on multiple listing policy. Retrieved March 27, 2013, from Internet at: http://www.realtor.org/2013-handbook-on-multiple-listing- policy/appendices/appendix-1-history-and-background National Association of Realtors (2013b). Realtor Statistics. Retrieved March 27, 2013, from Internet at: http://www.realtor.org/field-guides/field-guide-to-quick-real-estate-statistics Palmer, E. J., & Devitt, P. G. (2007). A method for creating interactive content for the iPod, and its potential use as a learning tool: technical advances. BMC Medical Education, 7, 32. Ralph, J., Head, N. & Lightfoot, S. (2010). pol-casting: the use of podcasting in the teaching and learning of politics and international relations. European Political Science, 9, 13-24. doi:10.1057/eps.2009.38 Rosell-Aguilar, F. (2007). Top of the pods-Insearch of a podcasting “podagogy” for language learning. Computer Assisted Language Learning 20(5), 471-492. doi:10.1080/09588220701746047 Sahilu, W., Ahmad, W. F. W., & Haron, N. S. (2011). Development and usability evaluation of platform independent mobile learning tool (MLT). World Academy of Science, Engineering and Technology 80, 1310-1321. Tsagkias, M., Larson, M. and de Rijke, M. (2009). Predicting podcast preference: an analysis framework and its application. Journal of the American Society for Information Science and Technology, 61(2), 374-391. Doi:10.1002/asi.21259 Villano, M. (2008). Building a better podcast. T.H.E.Journal, 35(1), 31-35. Yuan, X., Lee, J.-H., Kim, S.-J., & Kim, Y.-H. (2013). Toward a user-oriented recommendation system for real estate websites. Information Systems 38, 231-243.

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Yim, M. Y.-C., Cicchirillo, V. J., & Drumwright, M. E. (2012). The impact of stereoscopic three-dimensional (3-D) advertising: the role of presence in enhancing advertising effectiveness. Journal of Advertising, 41(2), 113-128. doi: 10.2753/JOA0091-3367410208. BIOGRAPHY Johnell Woody is a graduate student in the Master of Arts in Integrated Global Communications program at Kennesaw State University. She is a licensed by the Georgia Real Estate Commission as a real estate broker and owns a state approved real estate school. She is a real estate industry consultant, trainer, and coach. She writes leadership articles for an e-magazine, VOICES, which is distributed nationally. She can be reached at Kennesaw State University, 1000 Chastain Road, Kennesaw, Georgia 30144, [email protected].

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USE OF DEPRECIATION AS A TAX POLICY DEVICE TO CONTROL INFLATION

Nisha Singh, Livingstone College, Salisbury

R.D Sharma, Livingstone College, Salisbury

ABSTRACT The Internal Revenue Code contains many provisions providing credits, deductions, and other tax advantages intended to achieve various economic goals considered desirable by Congress (I.R.C. §§ 38, 46-48 (1986),. The depreciation allowance is one such deduction (The Treasury Department, The President’s Tax Proposals to the Congress for Fairness, Growth and Simplicity, Section 4, 160-161 (1985). The government uses depreciation extensively as part of a tax incentive program based upon the theory that tax benefits stemming from depreciation reduce the cost of doing business, and thus stimulate capital formation (Frederic W. Hickman,1975). Capital formation, in turn, induces economic growth for the following reasons: (1) Capital formation increases productive capacity by providing resources to those who can use them to expand business operations. (2), By enhancing productive capacity, capital formation increases productivity. (3), Increased productivity results in more goods, more services and more wages. (4) As increased productivity and more goods keep prices down and help suppress inflation (Ways and Means Committee, H. Rep. No. 350, 67th Congress, 1st Sess.10-11 (1921).

Congress realized the importance of capital formation and extended significant tax benefits to business to stimulate economic growth (Ways and Means Committee, H. Rep. No. 350, 67th Congress, 1st Sess.10-11 (1921). The purpose of this paper is to examine the appropriateness and effectiveness of depreciation as a means of stimulating capital formation and controlling inflation. EVALUATION OF DEPRECIATION The main purpose of depreciation deduction is to recover original cost of depreciable assets. To fulfill this purpose, actual depreciation must correspond to the economic depreciation. It was assumed that straight-line depreciation was a correct method to measure economic depreciation (I.R.C. § 168 (West 1992). In fact, until 1954 Congress relied upon the appropriateness and justification of the straight-line depreciation (The Treasury Department, supra note 3), as a proper method. The Congressional approach changed in 1954 with the adoption of accelerated depreciation methods for motivating economic growth (Fredric W. Hickman, supra note 4 at 286). To achieve this objective, Congress made several changes in depreciation system during the period between 1954 and 1985. Besides income measurements, other paramount reasons for these changes included controlling inflation and stimulating savings and investment. However, the following discussion reveals that the Congress failed to achieve these objectives. Control of Inflation In 1981, Congress believed that the existing depreciation methods did not correctly account for inflation. For many assets, depreciation methods in use understated real economic depreciation, resulting in over- taxation of the income derived from such assets. In addressing this problem Congress allowed an alternative depreciation method, the Accelerated Cost Recovery System

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(ACRS) Allen Sinai, et al., 1983). The implementation of ACRS did not; however, provide an effective cure for inflation due to the following reasons:

Unstable Rate of Inflation The rate of inflation is not always constant. At a low-inflation rate, accelerated depreciation provides an excessive depreciation allowance where as at a high inflation rate it provides an insufficient allowance for cost recovery. For example, high inflation in the 1970’s eroded the value of the depreciation deduction. After 1981, inflation declined sharply creating negative effective tax rates on income from many assets (Charls W., 1987).

Nature of Depreciable Property Depreciable assets in a given class may not have the same rate of economic depreciation. Many assets are more sensitive to improvement in technology and shifts in market structure than other assets. ACRS does not differentiate between assets with varying economic depreciation rates. Rather, it applies the same rate of depreciation for all assets in a particular class. Depreciation Base Accelerated depreciation such as ACRS and MACRS, base depreciation deduction on historical rather than current replacement cost. The present value of fixed depreciation deductions varies with changes in the rate of inflation. Accelerated depreciation methods fail to take this important factor into account (FRBNY Quarterly Review, Winter 1991, Volume 15 No. 3-4 at 4.). Income Measurement Income is the basis of all accounting and, therefore, accuracy in its measurement is a prerequisite for the success of economic and financial programs, including the control of inflation. Accelerated cost recovery methods by creating inaccuracy in the measurement of income, tend to defeat programs based on real income accounting. Effects on Savings and Investments It were expected that low effective tax rates due to faster recovery periods available under ACRS would provide incentives for investment in depreciable property. But accelerated depreciation failed to provide the expected savings and investment incentives. According to the Treasury Department, ACRS fails to account for inflation as a real replacement costs. Therefore, the benefits of ACRS, including incentives in depreciable property, decrease. CONCLUSION The stated purpose of depreciation allowance in the Unites States is to facilitate accurate measurement of taxable income. In order to encourage investment in certain desired assets, the United States’ Congress made extensive use of depreciation deduction. The existing empirical

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studies do not conclusively prove the success of depreciation deduction in stimulating investments in desired channels. The need for accuracy in income measurement is very important therefore, tax laws regulating the depreciation deduction need to insure that taxpayers receive a deduction equal to the real economic depreciation of depreciable assets. Until a method which correctly measures economic depreciation is devised, straight-line depreciation indexed for inflation should be treated as real depreciation for financial reporting purpose. REFERENCES Alvin C. Warren, Jr., and Alan J. Auerbach. Transferability and the Function of Safe Harbor Leasing,95 Harv. L. Rev. 1752-1786 (1982). Alan J. Aurbach and Dale W. Jorgenson, Inflation- Proof Depreciation of Assets, Harward Business Review, 113-118 (1980); Congressional Budget Office, Revising the Corporate Income Tax, 107-117 (1985); D. Majumdar, Investment Allowance Reserve in an Age of Changing Price, The Chartered Accountant, 644-650 (1986). Allen Sinai, et al., Taxes, Savings and Investment: Some Empirical Evidence, 3 National Tax Journal, pp.321-345 (1983). Barry P. Bosworth, Taxes and the Investment Recovery, Brooking Institution, 1-45 (1885) Charls W. Swenson, An Analysis of ACRS During Inflationary Periods, Accounting Review 117- 136 (1987). Carl Heyel, The Encyclopedia of Management, 208 (1982). Carl Heyel, supra note 8. Dan Throop Smith, Federal Tax Reform, (1961). Douglas Greenwald, Encyclopedia of Economics, 238 (1982). Frederic W. Hickman, Tax Equity and the need for capital, 28 National Tax Journal 282, No. 3 (1975). Frederic W. Hickman, supra note 4, at 286. Franklin M. Fisher and John J. McGowan, On the Misuse of Accounting Rates of Return to Inter Monopoly Profits, American Economic Review, 82-85 (1983); Paul A. Samuelson, Tax Deductibility of Economic Depreciation to Insure Invariant Valuations, Journal of Political Economy, 604-606 (1964) and Robert N. Anthony, Accounting Rates of Return Notes, 76 American Economic Review, 244-246 (1986). Glen A. Munn, Encyclopedia of Banking and Finance, 262 (1983).See Report of Joint Committee on Taxation, General Explanation of the Economic Recovery Act of 1981,H.R. No. 4242, 97th Cong. (1981).

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George A. L uscombe II et. Al., Faster, simpler depreciation rules available for all properties under new tax legislation, J. Tax’n 194 (October 1981).16. H.R. Rep. No. 1937, 83rd Congress, 2nd Session, (1954) Hiromitsu Ishi, The Japanese Tax System, 38-55 (1989). The postwar Japanese tax policy was based upon two considerations: 1.An incentive tax policy to achieve specific policy goals. 2. A successive tax- cutting policy to maintain a lower level of income tax.

Internal Revenue Service. Statistics of Income – 1997 Corporation Income Tax Returns Washington, D.C.: U.S. Government Printing Office, 2000. I.R.C. §§ 38, 46-48 (1986), providing for the Investment Tax Credit. The Investment Tax Credit was initially enacted in 1962 and has been a significant fiscal policy tool for controlling the economy. The main purpose of the Investment Tax Credit was to stimulate capital formation. The Tax Reform Act of 1986 has repealed the Investment Tax Credit for property placed in service after December 31. 1985. I.R.C. §§ 167,168 and 179 (West 1992). I.R.S. § 167 permits a deduction of a reasonable allowance for the exhaustion, wear and tear of property used in trade or business or for property held for the production of income. I.R.S. § 167 (1986). I.R.C. §167 (b) (1954). I.R.C. § 167 (1954) provides for the following alternative description methods: Straight – line method, treas. Reg. § 1,167(b)-1 (as amended in 1960).Declining- balance method, Treas. Reg. § 1.167 (b)-2 (as amended in 1964).Sum-of-the years digits method, Treas. Reg. § 1.167-3 (as amended in 1964) any other consistent method that does not result in greater total depreciation being claimed during the first two-third of the useful life than would have been allowable under the double decline balance method. Permissible method, I.R.C. § 167 (b) (4) (1954). Jefferson and Clearfield Coal and Iron Co. v. U.S., 14 F. Supp. 918, 920 (1936). John P. Steines, Income Tax Allowance for Cost Recovery, 40 Tax L. Rev. 521 (1985). Kieso and Weygandt, Intermediate Accounting, 525 (1983) Karen Mathias, supra note 33 p. 521-522. Mertens, Law of Federal Income Taxation, 31 (1982). Manyek, The New ADR Proposed Regs. “How to Use Them For Maximum Advantage,” 34 J. Tax’n 307. Portland General Elec. Co. v. U.S.’ F. Supp. 290, pp. 307-308 (1969).

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Portland General Elec. Co. v U.S., 189 F. Supp. 290, pp. 307-308 (1960). Revenue Act of 1909, section 38 (2d), 36 Stat. II (1909). The Treasury Department, The President’s Tax Proposals to the Congress for Fairness, Growth and Simplicity, Section 4, 160-161 (1985).Treas. Reg. $ 1.167 b (a) (as amended in 1972). The Treasury Department, the President’s 1978 Tax Program-Detailed Description and Supporting Analysis of the Proposals, 82 (1978). Two of the three elements in the depreciation equation (useful life and salvage value) are merely estimates. Therefore, the resulting depreciation of an asset is also an estimate. United States v. Ludey, 61 Ct. Cl. 126 (1925), rev;d 274 U.S. 295, 300-301 (1927). U.S. Bureau of Internal Revenue, Department of the Treasury, Bulletin F 26-27 (1920). The Useful lives were determined on an individual basis, according to all the “facts and circumstances” relating to particular assets as they were used by each taxpayer. Ways and Means Committee, H. Rep. No. 350, 67th Congress, 1st Sess.10-11 (1921). William A. Klein, ET Al., Federal Income Taxation, 635 (1987). William A. Klein, Et. Al., supra note 8.

BIOGRAPHY Nisha Singh, Livingstone College, Salisbury, N.C. 28144. [email protected] R.D Sharma, Livingstone College, Salisbury, Livingstone College, Salisbury, N.C. 28144 [email protected]

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PRICING STRATEGY FOR THE URBAN TOURISM

AREAS: A TOOL FOR REGIONAL TOURISM DEVELOPMENT AND SUSTAINABILITY

Malefane Stephen Monyane, Tshwane University of Technology

ABSTRACT

This paper reports on the development of a pricing strategy for the urban tourism areas. The focus is on the Tshwane Tourism region in South Africa. South Africa's scenic beauty, sunny climate, cultural diversity and reputation for delivering value for money have made it one of the world's fastest growing events, leisure and business travel destinations. The country is highly diverse in terms of its climate, culture, tourist activities and infrastructure, catering for every tourism niche, from business, eco and cultural tourism through to adventure, sport and events. A literature review was conducted where the general tourism trends internationally, national and in the urban tourism business world was examined. The literature review also identified the strategies for successful pricing in the urban tourism areas like the Tshwane Tourism area. The paper presents a practical solution of how urban tourism areas can formulate pricing strategies. JEL : M10 KEYWORDS: Price, Cost, Customer, Discounts, Urban, Tourism INTRODUCTION The Tshwane Municipality is the Capital of South Africa and has fine heritage sites, museums and art galleries. These include the Union Buildings and its spectacular gardens, as well as the Diamond Hill Battlefield, Voortrekker Monument and Freedom Park. Other must-sees include the Pretoria Botanical Gardens, the Zoo, and museums and galleries such as Melrose House, the Pioneer Museum, and Sammy Marks museum (Tshwane 2012). The City is particularly proud of its natural heritage and is world renowned for its many trees. Affectionately known as the Jacaranda City, Tshwane is home to the Pretoria National Zoological Gardens, the largest zoo in the country and the botanical gardens are spread over 76 hectares. Outdoor activities include bird watching, nature reserves, golf and adventure sport. The City not only caters for the casual tourist; business visitors have access to superb conference and hospitality facilities at hotels and conference centres. This paper attempts to discuss the pricing strategy for the Urban Tourism areas like Tshwane Touris Area in South Africa. Urban Tourism Destination as a Product The tourism product can be defined as, “an amalgam of many components, the attractions of the destination, the facilities at the destination and the accessibility of it” (Bennet, 2005). This shows that the tourism product is not just a hotel, airline or sunny beach; rather it is the combination of different components constituting a comprehensive product. In addition to this, tourists view the product experience as a price-based experience, and from this, it follows that the price and product image are the basic components of the tourist product. Tourists choose a destination based on the following considerations:

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appeal of facilities and attractions; accessibility by any mode of transport they prefer; affordability(Price); and The image that corresponds with their preferences and needs (Bennet, et. al 2005).

The following discussion will be based on the theoretical background of pricing: Price The effective way for a company to generate maximum profits is to get its pricing right. This will boost profit in the organisation and wrong price can minimise profits. Many Managers should realise that profits are generated at the transaction level, the point where the product meets the consumer, (see also Jain, 2000, Bennet, 2000). The consumer should be regarded as a central factor in the process of setting prices. In the tourism industry, setting prices could be a complicated task, because tourists buy the total product, including hotels and restaurants jointly, which are all part of a packaged price. It is important to know the entire product. Strydom, (1992) suggests, “[p]rice fixing meaning the determination of a price by a company must recognise facets such as the quality of tourist’s offerings, peak seasons and competitors”. According to Jain, (2000) there are typical pricing problems that include:

product line price imbalances. Different companies offer the same product at different prices, making it difficult for a business to decide upon a proper price;

competitors’ prices are higher or lower than those of the challenger. When the competitor’s prices are higher, customers may choose to go to the challenger where prices are lower; middlemen exert excessive pressure to generate sales. This will cause a loss if the prices have to be lowered to sell the product in large numbers since the business may run at a loss; sales decline. Declining sales make it difficult to determine a proper price for the product since the organisation has to allocate more money to strategies for improving sales percentages; an effect by environmental realities due to frequent price changes. Changing prices frequently makes it difficult to determine a stable price that will suit customer expectations; and the customer’s perceptions of price offering vis-à-vis distortion. If the price does not meet the customer’s willingness to pay, he/she will be discouraged from buying the product (Lambin, 2000).

Pricing Strategy for New Products According to Lambin, (2000), experts suggest various pricing strategies that the organisation may implement, and these are discussed as follows:

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Market skimming strategy: Market skimming occurs when the organisation targets a small market with a relative high-priced product. High demand for a product in most markets results in market skimming. The high demand leaves customers insensitive to prices since there is no choice but to obtain the product from the service deliverer (Johnson, 2000; Kotler, et. al. 2003 and Lambin, 2000). Market penetration strategy: According to Lumsdon, (2002), a penetration strategy is common when the market is sensitive to price and the competitor is challenged by lower prices. The market penetration strategy offers lower prices on products similar to those of the competitor in order to gain a share of the competitor’s markets (Holden and Nagel, 2002). Price Strategies for Existing Products The following discussion is based on price strategies for existing product. Maintenance of the price: If a market segment, which is responsible for a significant portion of a region’s product sales, is not affected by a change in the environment, existing prices can be maintained. Such a strategy is appropriate where a price strategy is difficult to determine because the reaction of customers and competitors to price change cannot be predicted (Kotler, et. al. 2003). Price increase: Increase in prices can be conducted during periods of high inflation, high prices may be useful to keep profitability (Holden and Nagel, 2002). Price reduction: There are three reasons for deciding to lower prices:

it can occur as a strategy for defence against competitors; price lowering can take place based on aspects such as extended experience and technological progress and price lowering can be a reaction to client’s needs. If low prices are a prerequisite for market growth, clients’ needs must be seen as a pivotal point in the marketing strategy (Holden and Nagel, 2002).

The company should take into account the following considerations if a price reduction strategy is decided upon:

price reduction may have a long-term impact, such as the perception of inferior products in comparison with competitors’ products; and a superior and exclusively positioned image can be damaged in the process.

If price lowering destroys the enterprise’s financial position, the strategy must be avoided even if it may be the best option under the circumstances (Kotler, et. al. 2003; Holden and Nagel, 2002). Price flexibility strategy: According to Jain, (2000) a price flexibility strategy means that a product with similar features may be offered to different markets at different prices. For example, SAA offers different classes with various price fares on the same airline. Single price strategy: A single price strategy occurs when a product is priced to accommodate a specific market segment. According to Strydom, (1992) a single strategy may be applied in the following circumstances:

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students or aged markets can receive special prices; a group of people utilising a tourism product may be granted a price reduction; and regular tourism product users may receive price reductions.

Product line price strategy: A company price competitive products in its product line differently. Price leadership strategy: According to Jain, (2000), price leadership is applied when one organisation emerges as the leader and indicates the price. Bundling pricing strategy: Marketers who use this pricing strategy combine several of their products in a package and reduce their prices in this manner. A restaurant may introduce an all- inclusive price for a starter, dessert, meal, and juice, or include a salad bar. The product bundle adds an advantage for the customer who can benefit from a product that he/she might not have bought. No matter how minimal the benefits are regarding the products, the customer might be influenced to buy them. For example, an airline might include on-board services such as refreshments, in-flight movies or magazines in the ticket price. Premium pricing: According to George, (2008), tour operators, restaurants and resorts make use of premium pricing to position themselves as upmarket offerings within a certain type of market. The reflection of value and quality complemented by promotional messages should however match customers’ expectations. Physical evidence should reflect the price of the product complemented by current technology used for information systems and online bookings. Discriminatory pricing: Tourism prices can be adjusted to suit different consumers, locations and times. This means that the same product may be priced at two or more different prices, although the costs are the same. For example, a hotel may charge more for a room during busy times and charge less for the same room when it is not busy. Marketers may also use yield management to apply price discrimination to the target market. Tactical pricing (based on volume and time of purchase): Companies that buy large numbers of rooms in a hotel pay certain rates, either for a single period or throughout the year. For example, tourism associations organising a conference at a hotel may receive one free room per night for every 20 room-nights booked (George, 2008). Psychological pricing: Here, the price is slightly adjusted to attract consumers. Psychological pricing avoids using prices such as R20, R50, or R100. Instead, prices are set slightly lower to reflect the perception of added value to customers. For example, to jump from R9, 95 to R10, 00 may look like a big increase, and instead, a marketer uses prices such as R19, 95 or R99. 00 (Morrison, 2002). Pricing methods: Kotler, et. al. (2003) recommends the following pricing methods in the service industry: Cost-orientated price determination: For profit purposes, the variable cost and average fixed cost of a product are calculated and a certain percentage is added to the cost (Kotler, et. al. 2003). Competitor-orientated price determination: The organisation takes its pricing cue from the competition and may not necessarily implement equal price fixing. The organisation should have reserve finances that will enable it to survive price war periods. The organisation should not focus

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on one pricing strategy, but must have alternative strategies in place to keep up with the competition. Value-based price determination: The value of a product’s price is determined by the customer’s willingness to pay for the product. Price is based on what consumers think an offering is worth, and therefore marketers should first find out how much consumers are willing to pay for an offering with or without certain benefits. Marketers should also look at cost, competitor’s prices and the customer’s willingness to pay, and then decide on the price. The price should always be set around what the customer is willing to pay (George, 2008). When the organisation’s pricing strategy is in place, the distribution strategy may follow. Problem Statement Before 1994 South Africa was a white only Government system. The African majority were oppressed and not allowed legally to have living wages in their work. The white dominated the work environment areas and this influenced the pricing to discriminate against the Black South Africans not to be able to travel or engage in the tourism activities. After 1994 the first Black South African government under the leadership of Dr Nelson Mandela emerged and one of the challenges was to make sure the majority of the population being Black people have Jobs in the country. Part of the restoration was to give living waged Jobs to Black South Africans and majority of the Black South Africans. However the main challenge still remains the higher prices that pushed the majority of the population to be involved in VFA travelling more than participating in the tourism holidays. The Research Question Main research question: The paper research question is: What are the best pricing approaches for the Urban Tourism areas like Tshwane Tourism Area ? Sub-Questions

What are the different methods of pricing that Urban Tourism area can implement as part of affordability? What is the best price and impact on tourism area in the Tshwane area? What are the best pricing strategies that can be followed by Tshwane Tourism area for the sustainability of Urban Tourism area?

The Research Design And Methodology This paper is based on the ethnographic methodology and literature review in nature. Population: Population is the entire study subject. In this case, population refers to Tshwane Municipality area (Jennings, 2001). Sample size:Sample size is the total numbers of selected individuals that will be privileged to partake in a study (Plowright, 2011). The sample size is however considered as a fraction of the entire population. The sample size will be selected with the aid of non-probability, selective sampling and purpose sampling (Jennings, 2001).

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Data Collection For the data collection purposes the following sources were consulted:

a. South African Tourism Website; b. South African Tourism Satellites; c. Tshwane Tourism Website; d. Literature on pricing and e. National Department of Tourism South Africa Domestic Tourism Growth.

Research Inferences and Discussions The following discussion makes conclusion and recommendations on the Urban areas like Tshwane Tourism area in terms of pricing strategies: Pricing Strategy That Should Be Implemented in the Tshwane Tourism Area The tourism products the Tshwane Tourism are not all owned by the Tshwane Municipality and this makes it difficult to formulate common prices for all tourism products. The following recommendations may be used by Tshwane to determine prices for individual product owners:

Tshwane Tourism area should collect information about prices of accommodation, restaurants, entertainment and attractions in competing areas. The collected information should be updated from time to time and be made available to all stakeholders. It will assist stakeholders to identify the dangers of overpricing. Tshwane should encourage stakeholders to offer special prices as part of a package to tour groups or delegates to conferences and

Tshwane should host workshops with stakeholders aimed at developing their skills to determine prices. Table 1 demonstrates the correct price determination for guesthouses in Tshwane area:

Table 1: Correct Pricing Determination

Stride 1 Determine what tourists are prepared to pay per night for a double room, for example R 400. This information may be collected through research in the form of satisfaction questionnaires that clients are required to complete before departure.

Stride 2 Determine the costs per double room per night at the guesthouse. For example, total monthly expenses of the guesthouse amount to R 15 000. Divide by 30 to determine the cost per day = R500. Divide by the number of double rooms (for example 3) to determine costs per double room per day = R 167.

Stride 3 Determine the average price at competing guesthouses, for example R 430 per night. Stride 4 Make use of the concept of psychological pricing, in other words rather determine a price of R 390 than R 400 per

night. It creates a favourable perception in the minds of customers. Stride 5 Determine the appropriate price for the double room for the guesthouse. In this example a good price to ask may be R

389. It is marginally lower than what customers are prepared to pay as well as lower than prices at competing institutions. In this example, a profit margin of 132% will still be materialized. Be aware of the risk of charging too low prices since it may create a perception of inferior quality.

Adapted from Van Lill (2006)

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Furthermore the Tshwane area should engage with all the stakeholders to determine the best pricing strategy for the Tshwane area for sustainable tourism growth. This can be done through the Tshwane Municipality organizing inter tourism stakeholders ones a in there months to assist the stakeholders in terms of correct pricing methods. The Tshwane Municipality can involve expertise from Universities in Tshwane area to assist with best pricing practices. CONCLUSION The paper focused on the importance of pricing strategies in the Urban areas like Tshwane Tourism area. If the Urban areas can implement the recommendations tabled in this paper then they will be one step closer in achieving sustainable growth and development. Urban areas like the Tshwane Municipality should therefore adopt these strategies which will in turn assist in terms of developing a unique pricing system in Tshwane and create a harmonised tourism business environment for sustainable tourism growth. REFERENCES BENNET, J.A. 2005. Managing tourism services: A South African perspective. 2nd edition. Pretoria: Van Schaik. BENNET, J.A. 2000. Managing tourism services: A South African perspective. 2nd edition. Pretoria: Van Schaik. BENNET, J. A, JOOSTE, C. J, and STRYDOM, L. 2005. Managing Tourism Services. A Southern African Perspective. 3rd edition. Pretoria: Van Schaik Publishers. GEORGE, R. 2008. Marketing Tourism in South Africa. Cape Town: Oxford University Press. HOLDEN, R. K and NAGEL, T.T. 2002. The strategy and tactics of pricing: A guide to profitable decision making. Upper saddle, NJ: Prentice-Hall. JAIN, S. C. 2000. Marketing planning and strategy. 6th edition. Cincinnati, Ohio: South-Western College publishing. JOHNSON, D. 2000. Sales and marketing in the tourism industry. Sydney: Dawn Johnson. KOTLER, P., BOWEN, J.T. and MAKENS, C.J. 2003. Marketing for hospitality and tourism. New Jersey: Pearson Education. KOTLER, P., BOWEN, J.T. and MAKENS, C.J. 2006. Marketing for hospitality and tourism. New Jersey: Pearson Education. LAMBIN, J.J. 2000. Market-driven management: Strategic and operational market. Basingstoke: Macmillan. LUMSDON, L. 1997. Tourism marketing. London: International Thompson Business Press. MORRISON, A.M. 2002. The tourism system. 4th edition. Dubuque, Iowa: Kendall/Hunt Publishers.

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SOUTH AFRICA. South African Tourism. 2011. Annual report. Pretoria: Government printer. SOUTH AFRICA. South African Tourism. 2011. Highlights of Tourism Performances. Pretoria: Government Printer. SOUTH AFRICA. TSHWANE 2012. municipality official web site. [ONLINE] Available at www.tshwane.co.za. Accessed 19-10-2013 STRYDOM, A.J. 1992. A strategic plan for the effective utilisation of tourism in the Orange Free State. PhD Thesis, University of the Free State: Bloemfontein. VAN LILL, D. 2006. Guest House management in South Africa. 2nd edition. Bloemfontein: Central University of Technology.

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THE DEVELOPMENT OF A PROMOTIONAL

STRATEGY FOR THE URBAN TOURISM AREA Malefane Stephen Monyane, Tshwane University of Technology

ABSTRACT

This article reports on the development of a promotional strategy based on the case of Tshwane Tourism region in Gauteng Province, South Africa. A literature review was conducted where the general tourism trends internationally, national and in the Tshwane tourism area was examined. The literature review also identified the elements of a promotional strategy. Data was collected in the Tshwane Tourism area and their tourism activities were reported. The article presents a practical solution to Urban Tourism areas in terms of developing an effective promotion strategy to take economic advantage of the growing tourism industry. The conclusions recommend an innovative business ideology integrating marketing concepts that could contribute towards developing an effective promotion strategy for the urban tourism areas. JEL: M10 KEYWORDS: Promotion, Advertising, Sales Promotion, Publicity, Personal; selling, Merchandising INTRODUCTION According to the South Africa Tourism annual report (2011) most of the foreign visitors’ purpose of visit was recreation and leisure with spending on shopping. Recreational and Leisure Tourism is a major foreign and domestic visitor’s motivation to travel factor in South Africa. The South African Cabinet in October 2010 approved South African New Growth Plan identifying tourism as one of the six core pillars of economic growth in South Africa. The South African Government Tourism Medium-Term Strategic Framework (2009) election manifesto identifies the following overall priorities in order of importance:

creating decent work and sustainable livelihoods; education; health; rural development, food security and land reform and the fight against crime and corruption, and building cohesive and sustainable communities.

For the South African Government to achieve this strategy so that to take advantage of the growing tourism globally a serious promotional strategy is needed. This paper reports on the perceptions of development of a promotional strategy for there in Tshwane Tourism area in South Africa. LITERATURE REVIEW The literature view will discuss the theory based on promotion as follows: Promotion

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The promotional mix is a powerful tool used to make people aware of the existence of the product. The promotional mix consists of the following aspects: advertising, personal selling, sales promotion and publicity.

Determining Promotional Objectives and Strategy Determining promotional objectives and tasks follows the target audience identification. Objectives should reflect strategies that the organisation needs to take and should take into account which responses are legitimate (Wells, et. al. 2000 and Briggs,2001). According to George, (2008), the organisation should consider the following factors influencing promotional strategy:

markets and products. The organisation should promote relevant products to the relevant markets; the product life cycle. Promotional budgets can be more expensive in the growth stage than in the maturity stage of the product life cycle; buyer behaviour. The manner in which the customers purchase the products influences the promotion timing. During the low demand periods, more promotional strategies are needed to increase the level of product demand; and competitors’ activities. The competitors should be monitored and evaluated from time to time in terms of promotional strategies that they apply. This will help the organisation to keep up with the competitor promotion strategies.

Middleton (2008) points out that promotion consists of methods that within limitation are interchangeable, with some standing at a better position to obtain the envisaged results. Promotional methods include the following:

advertising; personal sales; sales promotion; and publicity.

Advertising According to George:2008), “[a]dvertising is the means by which we make known what we have to sell or what we want to buy.” Advertising is popular in the tourism industry, with heavy cost requirements. Organisations should exercise care and efficiency when approaching and formulating advertising strategies. Marketing services have a contemporary purpose dictated by size, distance, cost, scale and convenience. Advertising seeks to address the need to communicate a message for private purposes or for commercial service and to inform and persuade. Advertising is diversified and must therefore be focused on a specific audience. Personal selling: According to Kolb (2006), “[p]ersonal selling is an interpersonal process that involves the seller engaging in some kind of face-to-face or direct contact with prospective consumers in order to persuade them to make a purchase or a booking”. Kolb, (2006:285) indicates that when anyone in the office tells the tourists about what a city can offer that forms part of personal selling. Sales promotion: According to George, (2008), sales promotion is an element of the marketing mix other than advertising, selling, or public relations. Yenship, (2006) indicates that sales

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promotion is “a planned and implemented marketing activity that both enhances product or service appeal and changes customer behaviour positively in return for an additional benefit for purchase or participation”. Sales promotion can be anything to do with special offers. This happens when the business has conducted its market research and results in relevant messages being developed for a specific target market.

Publicity: According to Kolb, (2006) publicity: “[i]ncludes all the activities designed to build and maintain mutual understanding between a tourism and hospitality company and public.” An example is the Sun International financial sponsorship to the Nelson Mandela Foundation in South Africa. E-marketing: According to Reedy, et. al. (2000), electronic marketing is all the online or electronic-based activities that facilitate the manufacturing of the products according to the customer needs and wants and the selling of the products to the customers. It is the network technology focused on market research, product development, strategies of effectively selling the product to the customers, ways in which the product can be distributed to the customer, keeping the customers’ records, researching the customer satisfaction survey and keeping records of customers’ feedback. Forms of E-Marketing According to Smith and Kotler, (2003), forms of e-marketing include the following: Internet

The World Wide Web (internet) is the software and hardware communication tool that is very critical for the success of the e-marketing inside the company. The internet connects universities, government laboratories, businesses, and individuals around the world. The company can use the internet to send information to customers and customers can immediately reply and purchase the product. The internet domains include the following (Rayport and Jaworski, 2004 and Smith and Chaffey, 2005):

business to consumer (B2C) e-commerce. The companies design websites and load product details that they need to sell directly to the consumer. For example, the pricerunner.com website; business to business (B2B) e-commerce. This type of electronic selling is normally used by the suppliers to market their products to tourism organisations. Example, the EC21.com website; customer to customer (C2C) e-commerce. The customers contact each other and exchange information about goods and products. For an example, the ebay.com website; and customer to business (C2B) e-commerce. Customers can contact the companies with suggestions, questions or also give feedback on their experiences during their involvement with the company. For example, the priceline.com website (Smith and Chaffey, 2005).

The Case of Tshwane Tourism Area Region.

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The Tshwane Municipality is the Capital of South Africa and has fine heritage sites, museums and art galleries. These include the Union Buildings and its spectacular gardens, as well as the Diamond Hill Battlefield, Voortrekker Monument and Freedom Park. Problem Statement The study is geared in finding out the promotional strategies that urban areas like Tshwane Tourism area can implement aimed at taking advantage of the growing tourism globally. Research Question Main research question: What are the best strategies that regional tourism areas can apply when promoting their tourism products. Sub Research Questions

What are the best strategies that regional tourism areas can apply when advertising their tourism products.; What are the best strategies that regional tourism areas can apply when using personal selling for their tourism products.; What are the best strategies that regional tourism areas can apply when using sales promotion for their tourism products and What are the best strategies that regional tourism areas can apply when using publicity for their tourism products.

RESEARCH METHODOLOGY Research Data Collection For the data collection purposes the following sources were consulted: a. South African Tourism Statistics Services b. South African Tourism Satellites c. South African Tourism Website d. Literature on promotion strategies e. National Department of Tourism South Africa F. Tshwane Tourism websites. RECOMMENDATION AND CONCLUSION The promotion of the Tshwane Tourism area’s products: There are four promotional tools on which the Tshwane Tourism area can base their promotion efforts, namely: advertising, sales promotion, personal selling and publicity.

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Advertising billboards and brochures are two of the most effective tools that can be used by the Tshwane Tourism area. However, the researcher would like to make the following recommendations within the framework of budget implications:

upgrading of the Tshwane Tourism area website. The Tshwane Tourism area needs to upgrade the current website by updating the database and information about attractions and accommodation; e-mail marketing (also SMS). The Tshwane Tourism area should also consider using e-mails to promote the Tshwane Tourism area’s attractions to the prospective and existing target markets; radio advertisements. Radio advertising is a relatively expensive method of advertising. magazines and Newspapers. In terms of newspapers, the option of advertising to the local residents (for weekend-breakaways, the local leisure market and the pensioners’ market) in the Sunday Times, Sowetan, Pretoria news should be considered;

brochures. Brochures should be loaded with information like shopping facilities, medical facilities and educational facilities; and

outdoor advertisements. Road side signage is one of the best ways to give directions. Signage should be allocated on the roads of the Tshwane Tourism area to indicate the direction of tourist products, for example next to the road leading to Johannesburg city from the airport. Personal selling:The researcher recommends exhibitions like the annual Tourism Indaba in Durban as a good way of selling the Tshwane Tourism area’s products. The researcher would like to add the following recommendations:

personal visits to retirement villages in the Free State in order to penetrate the pensioners’ market; personal visits to selected sport clubs/associations for the purpose of attracting sports events; personal visits to selected schools for the purpose of attracting sports events; personal visits to selected businesses for the purpose of attracting business events and to market the region in general to business communities in the selected target markets; and personal visits to selected conference organizers for the purpose of attracting conferences.

Sales Promotion Radio jingles and competitions will be good options to consider in order to sell the Tshwane Tourism area’s products. However, the following tools are also recommended: exhibitions at trade shows. The Tshwane Tourism area’s officials should visit trade shows like the annual Tourism Indaba in Durban and exhibitions at selected shopping centers (e.g Menlyn Shopping Center) to create a bigger tourism awareness amongst the local population. Publicity

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The Tshwane Tourism area should use media releases, press statements and print and electronic media as the preferred method of publicity. CONCLUSION The paper focused on the development of a promotional strategy for Urban areas like Tshwane Tourism in South Africa. The implementation of these strategies will ensure that the Urban Tourism areas are able to promote their products efficiently at the same keeping the customer. This study was based on literature review however the researcher further suggest a study that could compare the current Urban tourism studies with the new literature view and its performance. REFERENCE BLOCK, T.B. and ROBINSON, W.A. 1994. The sales promotion handbook. Chicago: Dartnell Corporation. BRIGGS, S. 2001. Successful web marketing for the tourism and leisure sectors. London: Kogan Page. CUMMINS, M., HAAG, S. and DAWKINS, J. 1998. Management information systems for the information age. Boston: Irwin McGraw-Hill. KAY, K.H. 2003. Selling tourism. New York: Thompson Delma Learning. KLEINDL, B.A. 2003. Strategic electronic marketing: Managing e-business. Ohio: Thompson/South-Western. KOLB, B.M. 2006. Tourism marketing for cities and town: Using branding and events to attract tourists. Jordan Hill: Elsevier Inc. KOTLER, P., BOWEN, J.T. and MAKENS, C.J. 2003. Marketing for hospitality and tourism. New Jersey: Pearson Education. KOTLER, P., BOWEN, J.T. and MAKENS, C.J. 2006. Marketing for hospitality and tourism. New Jersey: Pearson Education. MERSHAM, S.V.E. 2001. Handbook of public relations. 6th edition. Cape Town: Oxford University Press. MIDDLETON, M. R. 2002. Information management: A consolidation of Operations, Analysis and Strategy. Lansdawne: Juta. MIDDLETON, V.T.C. and CLARKE, J. 2001. Marketing in travel and tourism. 3rd. edition. Oxford: Elsevier Butterworth-Heinemann. RAYPORT, J.F. and JAWORSKI, B.D. 2004. Introduction to e – commerce. 2nd edition. Boston: McGraw-Hill Irwin. REEDY, J., SHAUNA, S. and ZIMMERMANN, K. 2000. Electronic marketing: Integrating electronic resources into the marketing process. Fort Worth: Dryden Press.

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SMITH, P.R. and CHAFFEY, D. 2005. E-marketing excellence. Oxford: Butterworth- Heinemann. SOUTH AFRICA. South African Advertising and Research Foundation [online]. 2008. Available on: http://www.saarf.co.za/ (Accessed on 01.07 2012). SOUTH AFRICA. South African Tourism. 2012. Annual report. Pretoria: Government printer. SOUTH AFRICA. South African Tourism. 2012. Highlights of Tourism Performances. Pretoria: Government Printer. SOUTH AFRICA. Statistics South Africa. 2011. Mid-year population estimates statistics [online]. Available on http://www.statssa.gov.za/publications/asp (Accessed on 01.07. 2012). SOUTH AFRICA. Tshwane Municipality Website. 2012. [Online]. Available at www.tshwane.gov.za. Accessed on 01 -07-2012. WELLS, W., BURNETT, J. and MARIORTY, S. 2000. Advertising principles and practices. 5th edition. Upper Saddle River: Prentice-Hall. YENSHIP, T. 2006. Sales promotion. London: Thompson Learning.

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LOCAL COMMUNITY TOURISM DESTINATION

EXPERIENCE AS ELECTRONIC CONNECTIVITY Malefane Stephen Monyane, Tshwane University of Technology

ABSTRACT

The paper focus on the local residents experiences of a tourism destination by means of electronic connectivity. South Africa is one of the countries that attract tourists in major cities like Tshwane area. Tourists activities, such as need for social life, entertainment, curiosity about the destination attraction and family and friends visits, are likely to attract electronic activities and are regarded to be generating income for the tourism destination at the same time. Tourists visit to a destination lead to electronic connectivity experimentation in search for the activities in a destination with adequate facilities and resources for tourism. Questionnaires were distributed amongst the local residents in the Tshwane area. One hundred percent of the questionnaires were returned and data analyses were performed by means of the statistical analyses. The paper further made recommendations and conclusions based on the findings. JEL: M10 KEYWORDS: Local community, Tourism, Information Technology, Destination INTRODUCTION Over the last few decades, the progress in information technology has revolutionized both the global economy and enterprises. The development and application of computerized systems has accelerated rapidly and enabled their use in a wider range of functions and activities. More importantly, the development of powerful personal computers (PCs) in the late 1980s provided individuals with reliable and affordable computing without having to invest in mainframes or mini-computers, which were expensive to acquire and maintain. In addition, the emergence of the Internet towards the end of the twentieth century enabled the networking of computers globally and the access to multimedia information and knowledge sources free of charge. (Buhalis, 2003:2). Information and communication technology (ICT) enhanced the ability of organizations to manage their resources, increase their productivity, communicate their policies and market their offerings, and develop partnerships with all their stakeholders, namely consumers, suppliers, public sector organizations, interest groups. ICT also enabled organizations to expand geographically and coordinate their activities regionally, nationally and globally (Buhalis, 2003:6). The paper views how ICT can be applied within the tourism industry, how the public or consumers can utilise technology more effectively; in addition allow organizations to gain an overall understanding of ICTs and how they can benefit from such technological innovations, which can be classified as: growth, protection, differentiation, management of change and developing trust. Tourism firms, operate in a business environment where innovation is important for their survival. Globalization of tourism activities, the application of information technologies in tourism firms and the changes in tourism demand and attitudes, all create a dynamic sector where innovation has become of central importance. Innovation in tourism has been in the recent past secondary and capital scarce and for this reason was excluded from the scope of government interest and actions. However, there has been a shift, with European Union leading the way but

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also national governments following suite, TOUREG Project: Global SWOT Analysis. Tourism is one of the biggest and fastest growing industries in the world. It has been growing rapidly, is ‘exportable’ by all countries, and uses large quantities of labour, and a range of skills. Tourism is a major foreign exchange earner for many low-income countries, and was a principal early contributor to foreign exchange South Africa South Africa’s largely semi-arid land of 1.2 million square kilometres is unusually rich in flora and fauna and the country is well known for its large game, including elephant, lion, leopard, rhinoceros and buffalo. It has one of the highest levels of bio-diversity in the world due to the broad range of climate, geology, soil and landscape forms found in South Africa. Some ten per cent of South Africa’s land area is conserved (WTTC, 2002:15). The public or consumers can be seen as the driving force in the tourism industry-they purchase the services provided by suppliers. The major suppliers in the tourism industry in South Africa are airlines, hotels, non-hotel tourist accommodation, catering, restaurant and food service, inbound tour operators, outbound tour operators, car rental, coach operators, trains, the conference industry and casinos. Each of these sectors is co-ordinate by organizations that act in the interest of that particular type of supplier as well as the consumer (Lubbe, 2000:30). Gauteng Province Gauteng, the Place of Gold, is the economic powerhouse of South Africa. It is characterized by a cosmopolitan, multicultural mix of people from all walks of life. The province’s unique cultural and social legacy is evident from the many excellent museums, theatres, and cultural precincts and craft markets. The Vaal Dam, which supplies water to most of Gauteng’s residents, covers some 300km2 and is a popular venue for watersport. Numerous resorts line the shore. The dam also attracts a great diversity of birds (South Africa Yearbook, 2005/06:596). Gauteng offers an amazing array of historical, cultural and natural attractions-Tshwane (Pretoria), Johannesburg, Ekurhuleni (the East Rand), the West Rand, Metsweding (Cullinan) and Sedibeng (Vaal). All these regions are linked by Gauteng’s vast and efficient road and rail networks and ell developed infrastructure. Africa’s most modern international airport (O.R Tambo (Johannesburg) International) is situated in Ekurhuleni- firmly establishing the region as the gateway to the continent (Getting There Tourism Info Pages, 2007:380). The Gauteng ICT sector contributes more than 6% to regional gross domestic product (GDP) and the province is home to more than two-thirds of South Africa’s IT companies. The City Of Tshwane: Tshwane is home to Pretoria, the administrative capital and seat of power in South Africa. Pretoria, a stately jacaranda-lined city, is characterized by the dignity and charm of ages past, and the city prides its self with great heritage. Tshwane’s eastern suburbs are dominated by the historic Union Buildings, a masterpiece of colonial architecture designed by Sir Herbert Baker and complete in 1913. Pretoria is renowned for its educational facilities, monuments, museums and old buildings (Getting There Tourism Info Pages, 2007:410). Problem Statement: With advances in technology there is a lack for a well-structured ICT in the tourism industry to facilitate the access of tourist information by the users and many organizations lack the funds to constantly upgrade their systems and equipment. Accessing information through internet is an intelligent mean of getting the information, but many times, the information is highly fragmented, on the other hand time consuming and may mislead in the process. With more user-friendly systems and equipment, organizations can motivate employees more effectively and offer consumers quality services and products more efficiently.

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Objectives Primary Objectives The primary objective for this study is to investigate technology used by Tshwane residents to experience tourism services. Secondary Objectives: The secondary objectives for the purpose of this study are: to identify residents’ level of awareness of technology for tourism purposes; to determine the type of tourism-related technology used by residents; to identify the reasons why residents use tourism technology and, to identify the reasons why residents do not use tourism technology. RESEARCH METHODOLOGY Research design: According to Welman and Kruger (2001), in the tourism context the quantitative approach starts off with theories, hypotheses or research questions about a particular tourism phenomenon. From here the researcher proceeds to gather data from the real-world setting and then analyses the data statistically with a view to support or reject the research question.. Data collection: The paper will use a survey research method. Surveys are methods of data collection in which information is gathered through oral or written questioning. The broad area of the survey research encompasses any measurement procedures that involve asking questions of respondents. A questionnaire is a research instrument consisting of a series of questions and other prompts for the purpose of gathering information from respondents. Although they are often designed for statistical analysis of the responses, this is not always the case. Questionnaires have advantages over some other types of surveys in that they are cheap, do not require as much effort from the questioner as verbal or telephone surveys, and often have standardized answers that make it simple to compile data. Therefore questionnaires were used to gather data. Sampling and population: Sampling is the means by which subjects or study units from the target population are included in the research project (Sarantakos 2005:152). Sampling is concerned with the selection of a subset of individuals from within a population to estimate characteristics of the whole population. The three main advantages of sampling are that the cost is lower, data collection is faster, and since the data set is smaller it is possible to ensure homogeneity and to improve the accuracy and quality of the data. The population can be defined as including all people or items with the characteristic one wish’s to understand. Because there is very rarely enough time or money to gather information from everyone or everything in a population, the goal becomes finding a representative sample (or subset) of that population. The target population is the units in the population that the researcher wishes to target for the study (Neuman 2006:224). For the purpose of the study the total sample for this study is 125 people in the Tshwane area. There was an option to study either all of the study units or participants or only some of the study units or participants. For this study probability sampling method was used because only the residence of Tshwane area will be the participants of the study. Data Analysis

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Statistical Package for the Social Sciences (SPSS) is a software package that enables researchers to conduct statistical analyses of quantitative data. It is one of the most frequently used software packages for quantitative data analysis. SPSS allows researchers to: Enter and store data, Analyse data using univariate, bivariate and multivariate statistics and inferential statistics, Generate data files, output files and graphics, Print tabular results, Prepare graphs and charts (Jennings 2010:297). Research Results and Discussions The results will be discussed as follows: Gender Question wanted to know about the gender of the respondents. The gender of the respondents it is important for the study to be able to know the majority of the respondents. Figure 1 indicates the gender of the respondents. Figure 1: Genders

According to Figure 1, sixty-four percent of respondents were male and 36 percent were female. This indicates more male respondents participated in the survey. Majority of the people using technology in Tshwane area are male, the Tshwane Municipality as well as Tshwane Tourism should therefore target males in terms of promoting and marketing tourism products in Tshwane area. Electronic advertising should be utilized to reach more males in the area of Tshwane, to keep people updated as well as get new customers who are in possession of electronic devices that are capable of utilizing the internet/www to obtain tourism-related information. Access to Electronic Hardware The question asked whether the respondents have access to electronic hardware. Access to electronic hardware is important for the study to be able to understand the different types of electronic hardware accessible to the respondents. Figure 2 indicates access to electronic hardware of respondents.

16

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36

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Percentage

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Figure 2 indicates that 76 percent of the respondents have access to Smartphone with internet connection, while the other 76 percent have access to social networks, 60 percent have access to personal computer/laptop and the other 60 percent have access to the internet/www. Thirty-two percent of the respondents indicated that they have access to cell phone without internet connection, 8 percent have access to tablet (Kindle) and 4 percent have access to I-phone with various apps. Furthermore, indicates that 88 percent of the respondents do not have access to I-phone with various apps, the other 88 percent do not have access to I-pad, while 80% do not have access to Tablet (Kindle). According to the data collected, the majority of respondents have access to electronic hardware include smart phones with internet and social networks, the internet/www as well as personal computer/laptop and majority of respondents do not have access to I-phone with various apps, I-pad, Tablet (Kindle) as well as Cell phone without internet connection. The following are recommendations: Figure 2: Accesses to Electronic Hardware

tshwane Municipality and Tshwane Tourism should utilise social networks in marketing tourism products to the residence of Tshwane;

due to the majority of residence using smart phones with internet accessibility, Tshwane Tourism and Tshwane Municipality should encourage the residence to use their smart phones to access tourism products through the internet at the same time websites should be compatible for smart phones to access;

tshwane municipality should provide means of residence accessing electronic hardware especially those in townships by providing internet cafes that residence could access as well as encourage those with personal computer/laptops to utilise these electronic hardware to access information about tourism products within Tshwane and

0 10 20 30 40 50 60 70 80 90

100

Frequency Yes

Frequency No

Percentage Yes

Percentage No

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because the majority of respondents do not have access to I-phone with various apps, I-pad, Tablet (Kindle) as well as Cell phone without internet connection, Tshwane municipality and Tshwane Tourism should encourage these people to utilise public internet cafes as well as internet at the workplace, schools and tertiary institutions to access tourism-related information. Access of the Internet/Www Question asked where the respondents access the internet/www. Knowing where the internet/www is accessed is important for the study to be able to understand the frequent access point of the internet/www by the respondents. Figure 4 indicates the access points of the internet/www by the respondents. Figure 3: Access of the Internet/WWW

According to Figure 3 seventy-six percent have access points of the internet/www from anywhere with their cell phones and 60 percent of the respondents have access points of the internet/www from public internet cafes. Thirty-six percent of the respondents indicated that they have access of the internet/www at home, 32 percent access the internet/www at work, and 24 percent of the respondents access the internet/www from WiFi-spots, while 16 percent access the internet/www anywhere with a 3G card. Table 3.8 also indicates that 48 percent of the respondents do not have access of the internet/www from anywhere with a 3G card, while 40 percent do not have access of the internet/www from WiFi-spots and 36 percent of the respondents do not have access of the internet/www at home. residents can access the internet/www anywhere from their cell phones, the Tshwane Municipality and Tshwane Tourism should make accessibility of information easier by utilizing

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At home At work Public internet Cafes

WiFi-spots Anywhere with my cell phone

Anywhere with a 3G card

Frequency Yes

Frequency No

Percentage Yes

Percentage No

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internet gateways that will be compatible with variety of phones no matter the model of the phone to be able to supply information about the tourism products to the residents of Tshwane;

tshwane Municipality should engage with residents with regard to infrastructure developments in terms of having public internet cafes especially in townships where there is a limitation of internet/www accessibility and

the majority of those who are unable to access the internet from anywhere with a 3G and WiFi- spots should be encouraged to utilise the internet/www from their phones, public internet cafes, schools, workplaces and tertiary institutions. Use Technologies to Obtain Information Question asked whether the respondents use technology to obtain information about tourism. Usage of technology to obtain information is important for the study to be able to understand whether the respondents use technology to obtain relevant information with regard to the tourism industry. Figure 4 indicates the usage of technology by the respondents to obtain relevant information: Figure 4: Use Technologies to Obtain Information

*N (never), S (seldom), O (often), F (frequently) According to Figure 4, twenty percent have never used technology to obtain any tourism related information, 16 percent have never used technology to obtain information about transportation and another 16 percent have never used technology to obtain information regarding attractions (things to do and see), and eight percent of the respondents have never used technology to obtain information regarding accommodation.

tshwane Municipality and Tshwane Tourism should make accessibility of tourism-related information easier as well as inform people of the means of accessing the information;

0

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N S O F N S O FFrequency Percentage

Transportation

Accommodation

Attractions (things to do and see)

Obtain tourism-related information

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the accommodation sector should also have strategies formulated that will encourage people to use technology to access any information with regard to accommodation and any other related services within the industry as well as tourism-related information and

tshwane Tourism should employ means of providing information regarding attractions (things to do and see) and tourism-related information by utilizing technology as their means of informing people.

CONCLUSION This paper is based on the eTourism and destination service experience as electronic connectivity for Tshwane Tourism area in terms of the residence utilizing technology that is at their disposal to access information about tourism services and information. The implementation of these recommendations will assist in formulating strategies by Tshwane Tourism and Tshwane municipality to inform people regarding the use of technology in tourism as well as to have knowledge of their target market with regard to the use of technology within the tourism industry. Furthermore the use of technology will enhance the Tourism area ability to attract more customers and this will result in long term relationships and profitability. LIST OF SOURCES BUHALIS, D. 2003. eTourism: Information technology for strategic tourism management. Financial Times Prentice Hall BUHALIS, D, 2003, E-tourism: Information Technology for Strategic Tourism Management. Pearson (Financial Times/Prentice-Hall). Forrester Research (2009) ‘Global online population to hit 2.2 billion by 2013’ Available from: www.forrester.com/er/press/release/0,1769,00.html (24.6.10). GAUTENG COMPANIES, 2012 [Online] Available from: http://www.gautengcompanies.co.za/pls/cms/ti_secout.secout_prov?p_sid=14&p_site_id=128.Ac cessed:30May2012. GCIS, 2005/06. South Africa Yearbook. 13th Ed. Pretoria, South Africa: GCIS. GCIS, 2005/06. South Africa Yearbook. 13th Ed. Pretoria, South Africa: GCIS. JENNINGS, G. 2010. Tourism research. 2nd Ed. 42 McDougall Street, Milton: John Wiley & Sons. Australia. LUBBE, B. 2000. Tourism distribution: managing the travel intermediary. Cape Town: Juta and Company Ltd. LUBBE, B. 2000. Tourism distribution: managing the travel intermediary. Cape Town: Juta and Company Ltd. SARANTAKOS, S. 2005. Social Research. 3rd ed. Melbourne: South Melbourne: Palgrave. SA-venues, Pretoria, 2012 [Online]. Available from: http://www.SA- venues.com/attractionsga/pretoria-metro.htm. Accessed: 23 March 2012.

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UNWTO. 2001. eBusiness for tourism: Practical guidelines for destinations and businesses. Madrid: World Tourism Organisation. UNWTO TOURISM HIGHLIGHTS, 2011 Edition [Online], Available from: www.unwto.org/pub [Accessed 01 June 2012] UNWTO World Tourism Barometer, 2011 Edition [Online]. Available from: www.unwto.org/facts/eng/barometer.htm. [Accessed 01 June 2012] WTTC, 2002, South Africa: The impact of the Travel and Tourism on jobs and the economy. Available from: http://www.wttc.org. Accessed 24 April 2012. Welman, J. C. & Kruger, S. J. (2001), Research Methodology - for the Business and Administrative Sciences, 2. edn, Oxford University Press Southern Africa, Cape Town, South Africa. WORLD TOURISM ORGANIZATION (WTO). 2009, World Tourism Barometer. Volume 7, Nr 1, January 2009 World Tourism Organisation, 2006. UNWTO World Tourism Barometer. [Online] available at: http://www.world-tourism.org/facts/eng/barometer.htm World Tourism Organisation, 2001. W.T.O Tourism Vision 2020 (International Arrivals). Available from: http://www.unwto.org/facts/eng/vision.htm. Accessed 30 May 2012 WTTC, 2002, South Africa: The impact of the Travel and Tourism on jobs and the economy. Available from: http://www.wttc.org. Accessed 24 April 2012 World Tourism Organization, 2008. Tourism Highlights 2008 Edition.

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CRITICAL PRACTICES FOR INCREASING BUSINESS PROCESS ORIENTATION: CASE

STUDY OF 20 COMPANIES Nadia Zaheer, National University of Sciences and Technology, Pakistan

ABSTRACT

Many companies strive to improve their business process orientation; yet it is unclear which practices are most beneficial or critical in each particular case. Often companies are not focusing on critical practices such as Strategic Alliance, Employee Training, and Information Systems. The research empirically evaluates the business process maturity levels of 20 companies by using Skrinjar and Trkman (2012) conceptual framework. On 20 cases, critical processes were identified and people who were part of the critical process were asked to take the cross-sectional survey. 349 usable responses were collected. Results are that out of 20 companies: 16 are on a process maturity level two (means defined process); 3 are on maturity level one (means their processes are ad-hoc) and only 1 company is on maturity level three (means processes are linked). Once the maturity level is known, targeted efforts to improve can be made to improve the critical practices to improve the business orientation for better growth prospects. JEL: L60 KEYWORDS: Business Process Orientation; Critical Practices; Case Studies INTRODUCTION Critical practices, when implemented, have a significant positive effect on improvement in an organization’s Business Process Orientation level. Business process management (BPM) can increase the business process orientation (BPO) in the organization. Thus, Critical Practices (CPs) (derived from critical success factors), which are actionable items for managers, may be used to increase BPO levels. In this research, we use the CSFs and CPs identified by Skrinjar and Trkman (2012) to measure the BPO level of the 20 cases. This will also give an idea and understanding of the business process orientation of Pakistani companies. Skrinjar and Trkman identified below five critical success factors and their critical practices:

1. Strategic Alignment 2. Top management is actively involved in process improvement efforts 3. Business process goals are derived from and linked to the organization’s strategy 4. Business process improvement is frequently on the agenda of top management meetings 5. Process changes are communicated to all employees 6. Employees from different departments feel that the goals of their departments are aligned

2. Performance Measurement 1. Performance results are used in setting improvement targets 2. Performance indicators are communicated within the organization on a regular basis

3. Organizational Structure 1. The organizational structure supports processes across departments 2. Process owners are appointed

4. Information System

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1. Information system development is based on business processes (not business functions) 2. Information systems provide relevant management information on the performance of

business processes 3. Our organization uses a CRM system 4. A business process management system/suite is used 5. E-procurement, EDI, or another type of SCM is implemented to connect with suppliers

5. Employee Empowerment and Training 1. People are trained to operate new or changed processes prior to their implementation 2. Employees view the business as a series of linked processes 3. Process terms such as input, output, process, and process owners are used in

conversations 4. Policy and strategy are communicated and cascaded throughout the organization

Skrinjar and Trkman (2012) show how the survey scores of these critical practices can be used to measure the four business process maturity levels of the companies according to McCormack and Johnson’s Maturity Model (Also see McCormack’s work in McCormack et al., 2009). This mapping is explained in the Table 1. Table 1: Author’s Adaptation of Skrinjar and Trkman’s (2012) Mapping of BPO Scores to Measure the Mccormack and Johnson’s Business Process Maturity Level (2001) of Organizations

BPO Scores

Business Process Maturity Level

Name of Maturity Model Level (McCormack and Johnson, 2001) Description of Model Level

1 to 4 One Ad-hoc Temporarily defined processes and traditional organization structure

4 to 5.5 Two Defined Processes are defined in flow charts and a formal process to change them has to be followed.

5.5 to 6.5 Three Linked Breakthrough level where processes are linked from end to end 6.5 and above Four Integrated

Processes are integrated through process and performance management systems and organization structure is majorly based on processes.

For example, if a company has a BPO score of 1.53, it’s business process maturity level is One i.e. Ad-hoc Level which means the company’s processes are temporarily defined and it follows a traditional organization structure. Once the maturity level is known, targeted efforts to improve can be made. The structure of paper is as follows: section two shows data and methodology used, section three shows analysis and results, followed by the conclusion section. DATA AND METHODOLOGY The objective of this research was to measure the business process maturity level of different companies via the 18 identified critical practices (derived from Critical Success Factors). 20 companies were chosen randomly. These companies are based in Pakistan. Details of company size and industry type are mentioned in columns 4 and 5 of Table 2, respectively. Critical processes of each of these companies were identified that are shown in column 3 of Table 2. Total 400 employees i.e. 25 per company, who were specifically involved in the identified critical process from these 20 companies, were requested to take the survey. 349 responses (refer to column 6 of Table 2 for response details) i.e. 87.25% response rate were received. Two mediums were used for survey data collection: Googledocs online form that was emailed. 250 usable responses were received from this channel and 99 hardcopies of survey. Hardcopies were filled in person. Hardcopies were later incorporated to the spreadsheet. This survey was carried out in April-May 2013.

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Skrinjar and Trkman’s (2012) survey (mentioned in their appendix) containing questions for 53 critical and non-critical practices was floated. However, following their research, only 18 CPs part of the five CSFs mentioned in the introduction section were used to carry out the below analysis.

S no. Company Critical Process Size of

company Industry No of Survey Samples

BPO CP Avera ges

BPO Level

1 Construction Technology Training Institute (CTTI)

Admission Process (Operations) Small Education 23 3.64 1

2 EFU Life Insurance Life Insurance Claim Large Financial and Insurance Activities 16 4.86 2

3 CSD (Canteen Stores Department) Inventory Management Large Wholesale and Retail

Trade 16 5.12 2 4 Pakistan Telecomunication

Company Limited Fiber Cable Cuts Large Information and Communication 16 4.99 2

5 Fauji Cereals Distribution Process Medium Manufacturing 16 4.93 2 6 Daewoo Pakistan Express

Bus Service Daewoo Logistics Large Transportation and Storage 18 3.97 1

7 Telenor Pakistan Logistics Large Information and Communication 27 4.88 2

8 Muhammadi Flour mills Supply and Demand Small Manufacturing 15 4.86 2 9 Coca Cola, Pakistan Logistics/supply chain Large Manufacturing 16 4.4 2 10 NUST Business School Security Process Large Education 15 4.54 2 11 Olive Garden Restaurant Catering Small Food Service

Activities 19 4.13 2

12 Islamabad Police Logistics Large Public Administration and Defense, Compulsory Social Security 17 4.13 2

13 Shell Oil Company Supply Operations Large Transportation and Storage 19 5.69 3

14 State Bank Of Pakistan Operations Large Financial and Insurance Activities 13 5.17 2

15 Pearl Continental Hotel Front Office Process for New Guests Large Accommodation 20 4.69 2

16 AIESEC International Student Body Recruitment Large Student Organization 15 4.95 2

17 Master Pipe Fittings Production process: molding and mixing Medium Manufacturing 12 3.87 1

18 Werrick pharmaceutical Manufacturing Medium Manufacturing 23 4.5 2 19 AH Automation Manufacturing Medium Manufacturing 21 4.81 2 20 Qarshi Industries Supply Operations Medium Manufacturing 12 5.01 2

ANALYSIS AND RESULTS Once the survey was collected, 18 CPs questions were filtered out and the responses for each company against these were averaged using MS Excel. These averages were used to calculate the average BPO CP score for each case, which is mentioned in the column 7 of Table 2. Mapping criteria, shown in Table 1 was employed at this stage to find the Business Process Maturity Level of these cases. Mapping result of each case is mentioned in the column 8 of Table 2. These results are summarized below in Table 3. 16 out of 20 i.e. 80% of the companies are on level two i.e. they have defined processes and have a formal procedure to bring in change in the processes Table 3: Results of This Research Showing 16 Out Of 20 Companies Are On Level Two of Business Process Maturity

Business Process Maturity Level

Name of Maturity Model Level (McCormack and Johnson, 2001)

Out of 20: Number of Companies on Maturity Level

Percentage of Companies in this Level

One Ad-hoc 3 15 Two Defined 16 80 Three Linked 1 5

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Four Integrated 0 0

CONCLUDING COMMENTS This research undertook the task of empirically measuring McCormack and Johnson’s (2001) Business Process Maturity Levels of 20 companies. This measurement was based on Skrinjar and Trkman’s 2012 conceptual framework. This framework derives the five critical success factors (CSFs) from theory (Trkman, 2010), and based on these five CSFs, identify 18 critical practices. The CPs were surveyed on 349 respondents of the 20 companies and were contained to those who were involved in the critical processes. The survey analysis maps the BPO CP levels from the survey to the maturity levels. 80% companies were found to be on level two of process maturity. This research had many constraints. It was focused on respondents involved in critical processes. A survey without this focus might reveal that companies are focusing on non-critical processes. Case studies with semi-structured interviews from these organizations should be conducted to understand the deeper issues to identify other critical practices and advance the process maturity levels of these companies. A longitudinal case study might also be helpful in this regard. Another constraint is that although, 53 critical and non-critical practices were measured during the survey, but only 18 critical were used in mapping. It will be interesting to factor-in the remaining practices. It seemed during the analysis of survey results that to reach the break-through Level 3: Linked processes, companies are lacking the basic infrastructure and might be focusing on inefficient allocation of resources to non-critical practices. As a next step, future work of this research should be on identifying CPs for each of these companies where they need to focus on improving their process maturity level to improve their business growth REFERENCES McCormack, K., & Johnson, W. (2001). Business process orientation: Gaining the E-business competitive advantage. Delray Beach: St Lucie Press. McCormack, Kevin , Willems, Jurgen , Bergh, Joachim van den , Deschoolmeester, Dirk, Willaert, Peter, Štemberger, Mojca Indihar , . . . Vlahovic, Nikola. (2009). A global investigation of key turning points in business process maturity. Business Process Management Journal, 15(5), 792-815. doi: 10.1108/14637150910987946 Skrinjar, Rok, & Trkman, Peter. (2012). Increasing process orientation with business process management: Critical practices. International Journal of Information Management, in press. Trkman, P. (2010). The critical success factors of business process management. International Journal of Information Management, 30(2), 125-134. doi: 10.1016/j.ijinfomgt.2009.07.003 ACKNOWLEDGEMENTS I would like to acknowledge: 1. Dr. Peter Trkman for his continued support every step of the way. 2. Dr. Irfan Manarvi who pushed me to undertake research projects. 3. NUST Business School’s BBA students who inspire and instill new ideas in me. 4. My University (NUST), my bosses and my family for being extra accommodative and understanding.

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BIOGRAPHY Nadia Zaheer is a Doctoral Student of Engineering Management as well as a Faculty of Operations and Technology Management at National University of Sciences and Technology (NUST), Pakistan. She has 6 years of corporate and 2 years of teaching experience. She can be contacted at: [email protected].

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US POST COLD WAR GRAND STRATEGY AND

MULTILATERAL NATIONAL INTEGRATION IN EUROPE AND EAST ASIA

Benedict E. DeDominicis, Catholic University of Korea

ABSTRACT

East Asian liberal intergovernmental integration is unlikely to occur without formal engagement by the United States. An Asian Union is therefore improbable. The European Union model is not transferrable to East Asia in that the former is a multilateral organization that has emerged that can claim authoritatively to speak for Europe. The Cold War context for European liberal intergovernmental integration included US policies constituting the strategy of containment towards the USSR. US incentives to coordinate west European policies towards the Warsaw Pact targeted mid-range power allies. These European nation states were roughly equal in their national power capabilities. The USSR did not have the hard or soft power capabilities to claim irrefutable membership in the same European club. Even traditional Russian allies such as Bulgaria have sought affirmation of their European identity through accession to the EU. A similar US-led containment strategy towards China is unlikely. Creation of a multistate Asian regional organization that will persuasively claim to represent Asia in opposition to China is therefore unfeasible. Potential power disparities between East Asia states will be so significant that China cannot be a pole of opposition against which to construct Asia. Pan-regional integration should rather be Pacific-oriented rather than Asia-focused. JEL: F5 KEYWORDS: European Union, Trans Pacific Partnership, Japan, China, Russia, Bulgaria, East Asia, containment, liberal intergovernmentalism, nationalism INTRODUCTION In Fall 2009, the international media reported Asian agreements to pursue general initiatives for an East Asian-region integration movement with the European Union as its model (”Asian EU” 2009). These reports highlighted the new Japanese prime minister, Yukio Hatoyama, as the resuscitator of this proposal (Mulgan 2009). Disagreements emerged over the envisioned role of the US in Asian integration while China, Japan and South Korea were portrayed to be core prospective members (Brown et al 2009). While debating which state first made such a proposal, various media commentaries viewed the ASEAN states as candidate members of such an envisioned community (e.g. Xu 2009). The Hatoyama government fell in June 2010, and Japan then saw a series of short-lived governments that did not follow up on the Asian Union proposal. Meanwhile, in November 2009, the US President Obama announced his administration’s support for the Trans Pacific Partnership (Luce et al 2009). The US joined the TPP negotiations in March 2008, transforming what had been initially a trade pact between Brunei, New Zealand, Chile and Singapore (Trans Pacific Partnership 2013). It is now a prospective agreement that also includes Australia, Canada, Malaysia, Mexico, Peru, Vietnam and Japan. Japan’s formal accession to the negotiations in July 2013 under Shinzo Abe surprised some observers (Pilling et al 2013).

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The formally-named Trans-Pacific Strategic Economic Partnership Agreement raises the question as to the nature and direction of East Asian integration. An Asian parallel to the European Union is unlikely. US power and commitment have been critical independent variables shaping the EU’s integration. They will also be critical in shaping East Asian integration, but more so. China’s comparatively much greater hard and soft power capabilities relative to its regional neighbors mean that the US must be a formal leader of Asian integration strategies. China’s hard and soft power capabilities mean that China cannot be excluded from Asian integration, like the USSR was excluded from European integration during the Cold War. On the other hand, these same capabilities require US soft and hard power engagement of China to allow for the potential of Pacific regional integration on the basis of liberal intergovernmental initiatives (Buse 2012, 53). US-led strategic containment of the USSR was a critical factor shaping the environment of European integration. US strategic engagement of China will be necessary if not sufficient for Asian integration, meaning that Asian regional integration must be part of a broader Pacific integration orientation. European Nations and European Integration One popular introductory textbook on the European Union labels liberal intergovernmentalism as the predominant theoretical framework for conceptualizing European integration (Dinan 2012, 24). An explanation for the mutual cooperation of nation states within a liberal framework requires an appropriate theory of nationalism to analyze it. The group political psychological approach utilized here, developed by Cottam and Cottam (2001), provides a useful conceptualization of nationalism. It explains this behavior in terms of European Union membership having its foundation in soft power appeal to nationalist public opinion among the peoples of Europe. This soft power appeal derives from European integration appearing to validate the predominant European nations west of Russia as not being under particular national domination. This perceptual assumption prevails significantly due to success in creating persuasive EU institutional safeguards. These institutional safeguards prevent the coalescence of public perceptions of EU systematic biases favoring the influence of particular nation states over EU policy making processes. It generates this powerful perception of status equality despite obvious cultural, economic and political differences. Cottam and Cottam describe this psychological strategy for integration as promoting “social creativity” in national collective intergroup perception of self and other (2001, 266). Today, Europe is predominantly equated with the European Union (e.g. Jacobs, 2012). The EU has so far avoided mass public perceptual equation of national cultural differences with solid and immutable status hierarchy among its member states The institutions of European Union policy making help provide these collective perceptual psychological adaptation strategies. They do so despite the wide range in power capabilities among the 28 EU member states (Nugent 2010, 289-306). “[T]here are often no clear lines of authority or hierarchy between the different levels” of EU policy making (Nugent 2010, 291). These institutions are necessary for the economic and political liberalism-based approaches for European cooperation and integration. In sum, liberal intergovernmentalism in Europe has its basis in the mainstream predominant view among the respective national publics that they differ in their relative power capabilities. Yet they are not under national domination by one or an alliance of other nations. Maintenance of this prevailing perception is necessary for European integration to proceed. The Cold War conflict from the late 1940s until the early 1990s supported this social creativity collective perceptual psychological approach. The Cold War conflict supported social creatively insofar as west European nations more or less shared a common adversary, i.e. the enemy of my

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enemy is my friend. The decline and end of the Cold War generated additional challenges for liberal intergovernmentalism. EU Economic and Monetary Union chose to build more heavily on economic and governmental bureaucratic vested interests to continue the integration approach. The shared perceived challenge from Russia continues (“How do you solve a problem like Russia?” 2013). Challenges to East Asian Liberal Intergovernmentalism Liberal intergovernmentalism for social creativity strategies in Asia faces particular challenges that have been less prominent in Europe. The power potential base differential between China and the rest of Asia is the most important factor (Cottam et al 1978). China’s globally superlative power potential base is evident for all to see. European nations are roughly comparable in power capability. This awareness stems from the number of costly failures to establish hegemony over Europe by a European state since the Treaty of Westphalia in 1648. Moreover, unlike the predominance of comparatively homogenous nation states in Europe, a number of states in Asia are not nation states. Their populations consist of multiethnic communities within more or less arbitrarily created state territorial boundaries drawn by former European imperial powers. China, Japan and Russia are exceptions, not the rule. The existence of nations as state political communities represented by their respective governmental apparatuses underpins European liberal intergovernmentalism. In Asia, China has 20% of the world’s population, 94% of whom belong to the Han ethnic group (Levinson 1998, viii). They tend to view themselves as members of a political community thousands of years old despite great cultural diversity within the Han core group (Cottam and Cottam 2001, 83-84). Other such national groups are comparatively few: Japan, Vietnam, Korea (still bifurcated) and Russia. India and Pakistan are also in the multiethnic category. The assumption of relative equal power capabilities is harder to maintain cognitively and perceptually in Asia. Comparisons are made between the rise of China and the rise of Imperial Germany beginning in the late 19th century in terms of significance for international peace and stability (Liao 2010; Evans-Pritchard 2013). Germany was surrounded by other acknowledged Great Powers on its borders. China, on the other hand, is in effect a civilization pretending to be a state according to the oft-repeated observation of Lucian W. Pye (Zhang 2011, Pye 1990). Its humiliation by Japan and the European powers is explained as occurring during a comparatively brief period within the millennia of history during which China was paramount. This hostility to imperialism became a defining feature of modern Chinese nation-state identity (Cottam and Cottam 2001, 84). In sum, scholars debate over whether or not US hegemony has been necessary to create a permissive environment for postwar European integration (Schmidt 2008, 272-73). For East Asia, for liberal intergovernmentalism to succeed, it is less likely to be effective if led by the East Asian actors themselves. This political context of much greater state power inequality makes US regional leadership a necessary, but not sufficient condition, for it to occur. US leadership can override the security dilemma in Asia and provide the national security public goods that will allow the serious possibility for liberal intergovernmentalism (Dong 2013). Germany’s defeat in two world wars established that Germany did not have the power capability to integrate Europe within an imperial status hierarchy with Germany at the pinnacle. That the Chinese authorities of a developed nation state would be convinced that they are not the naturally preeminent power in

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Asia, solely by the power capabilities of only its own neighbors, is unlikely. The comparatively overwhelming power capability base of China in East Asia makes prospective Cold War-type containment of a belligerent Chinese government especially problematic. The Chinese authorities have achieved relatively intensive integration into the global capitalist economy in comparison with the USSR. These facts make the US adoption of an accommodation strategy more likely (e.g. Currie 2009). CONCLUSION China began to move towards a de facto alliance with the US at the midway point of the Cold War. Unlike NATO, the hub-and-spoke security system that the US created with its clients and allies in Asia avoided the creation of an anti-Chinese club of states (Cha 2010). It avoided the US allies’ horizontal integration around this raison d’etre. The consequences today include greater potential for integration of China into an evolving Pacific regional security and economic system in partnership with the US. The capacity to avoid promoting national social creativity and social mobility in Asia on the basis of Chinese-US rivalry is therefore greater than during the Cold War in regard to the USSR. REFERENCES “Asian EU a ‘long-term’ goal,” People’s Daily Online. November 3. http://english.people.com.cn/90001/90776/90883/6801613.html. Accessed November 9, 2013. Brown, Kevin and Tim Johnston (2009) “Asian leaders look to bolster regional ties.” Financial Times, October 25. http://www.ft.com/cms/s/0/9ac7f5f2-c190-11de-b86b-00144feab49a.html Accessed October 26, 2009. Buse, Mihaela (2012) "The European Political Model: Intergovernmental Federalism.” Strategic Impact vol. 45(4), December, p. 52-58. Cha, Victor (2010) “Powerplay: Origins of the US Alliance System in Asia.” International Security, vol. 34(3), Winter, p. 158-96. Ebsco. Cottam, Martha L. and Richard W. (2001) Nationalism and Politics: The Political Behavior of Nation States. Boulder: Lynne Rienner. Currie, Kelley (2009) “Opinion Asia: The Doctrine of ‘Strategic Reassurance’: What does the Obama formula for U.S.-China relations really mean?” Wall Street Journal, October 22. ProQuest. Accessed October 3, 2010. Dinan, Desmond (2012) “How Did We Get Here,” in The European Union: How Does It Work? Third Edition, edited by Elizabeth Bomberg, John Peterson, and Richard Corbett. Oxford: Oxford University Press. Dong, Wang (2013) “Addressing the US-China Security Dilemma” Carnegie Endowment for International Peace. January 17. Retrieved November 14, 2013 at http://carnegieendowment.org/2013/01/17/addressing-u.s.-china-security-dilemma/f2rv

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Evans-Pritchard, Ambrose (2013) “The dangerous drift towards world war in Asia,” Telegraph, 24 March. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9950791/The- dangerous-drift-towards-world-war-in-Asia.html. Accessed October 7, 2013 Global Times (2013) “Containment mentality in danger of becoming self-fulfilling prophecy.” July 10. http://www.globaltimes.cn/content/795234.shtml#.UnjBI5T-JZ9 Accessed November 5, 2013. “How do you solve a problem like Russia?” (2013) The Guardian. October 17. Retrieved October 26, 2013. http://www.theguardian.com/world/2013/oct/17/problem-russia-syria- greenpeace-kremlin-europe-eu. Jacobs, Frank. 2012. “Where is Europe?” New York Times, January 9. http://opinionator.blogs.nytimes.com/2012/01/09/where-is-europe/ Accessed October 10, 2013. Levinson, David (1998) Ethnic Groups Worldwide: A Ready Reference Handbook Phoenix: Oryx Press. Liao, Wen (2010) “Bismark’s lessons for Beijing,” Financial Times, April 13. http://www.ft.com/cms/s/0/1ae0ce3c-472c-11df-b253-00144feab49a.html. Accessed on April 14, 2010. Luce, Edward, Mure Dickie, Kevin Brown (2009) “Obama says China not a threat.” Financial Times. November 14. http://www.ft.com/cms/s/0/9ce6c576-d0da-11de-af9c-00144feabdc0.html Accessed on October 3, 2010. Mulgan, Aurelia George (2009) “Hatoyama’s East Asia Community and regional leadership rivalries” East Asia Forum. October 13. Retrieved October 29, 2013 at http://www.eastasiaforum.org/2009/10/13/hatoyamas-east-asia-community/ Nugent, Neill (2010) The Government and Politics of the European Union. New York: Palgrave Macmillan. Pilling, David and Shawn Donnan (2013) “Ocean's Twelve: Trans-Pacific Partnership.” Financial Times. 23 September. ProQuest. Accessed on October 29, 2013. Pye, W. Lucian (1990) “China: Erratic State, Frustrated Society.” Foreign Affairs, Fall.http://www.foreignaffairs.com/articles/45998/lucian-w-pye/china-erratic-state-frustrated- society Accessed November 7, 2013 Schmidt, Gustav (2008) “The Rise of the European Union and its Impact on the US-EU Partnership.” In Just Another Crisis?: The United States and Europe since 2000. p. 271-97. Edited by Geir Lundestad. Oxford: Oxford University Press. “Trans-Pacific Partnership (TPP) Negotiations” (2013) New Zealand Ministry of Foreign Affairs and Trade. Retrieved October 29, 2013 at http://www.mfat.govt.nz/Trade-and-Economic- Relations/2-Trade-Relationships-and-Agreements/Trans-Pacific/

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Xu Changwen (2009) “In search of a truly regional community,” China Daily, October 28, Retrieved on February 11, 2012 at http://www.chinadaily.com.cn/opinion/2009- 10/28/content_8859419.htm Zhang Weiwei (2011) “An apt example of 'civilizational-state'” China Daily, April 27. http://www.chinadaily.com.cn/opinion/2011-04/27/content_12401986.htm. Accessed on November 5, 2013. ACKNOWLEDGEMENT This article was produced with the support of the Catholic University of Korea research fund and through the support of the University of Illinois Summer Research Laboratory on Russia, East Europe and Eurasia. Any errors are solely the author’s. BIOGRAPHY Benedict E. DeDominicis is an assistant professor in the International Studies Department at the Catholic University of Korea. He came to CUK after 15 years at the American University in Bulgaria. He received his BA in political science and Russian from the Ohio State University and his MA and PhD in political science from the University of Pittsburgh. He can be reached at: The Catholic University of Korea, International Studies' office, room 260, 150th Anniversary Building, Songsim Campus (College of Humanities and Sciences), 43 Jibong-ro, Wonmi-gu, Bucheon-si, Gyeonggi-do, 420-743, Korea E-mail: [email protected], Office tel: +82- 2-2164-4393, Office tel/fax: +82-2-2164-4411, Korean cell: 010-2076-4401, US cell: 419-852- 1796. Skype display name: Benedict Edward DeDominicis

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“THE YOUNG AND THE RESTLESS”: GRAPPLING

WITH THE YOUNG CHINESE CONSUMER’S MINDSET

Luding Tong, Marietta College

ABSTRACT

China will boast a population of almost 500-million young people under age 30 by 2015. The sheer size of the Chinese youth market and young people’s discretionary income make this market one of the most sought-after in the world. The status and continuing development of Chinese youth culture is especially interesting to marketers and scholars worldwide. Recent media reports depict Chinese youth as “restless,” and as experiencing an internal psychological conflict between “private selves” and “public selves,” between “private identity” and “public identity”(Griffiths, 2012). Few studies have provided analysis of the causes of this seemingly “bi-polar” psychological state. The paper explores this situation by delving into the “core” values of Chinese tradition in the context of China’s contemporary socioeconomic realities— focusing on the paradoxical, conflicting, and even opposing cultural values that are rooted in China’s past and present. Among the dilemmas are “standing out and fitting in,” “individual freedom and society’s demands,” and “personal aspirations and limited opportunities.” This paper will demonstrate that the “restlessness” of contemporary Chinese youth is the logical outcome of feeling trapped and directionless at the crossroads of the culture’s unshakable Confucian values and group orientation, and the ever-shifting trends in individual consumerism that China is embracing. JEL: M31, M37, M38 KEYWORDS: China, Advertising, Global Marketing, Youth INTRODUCTION: THE RISE OF CHINESE YOUTH CULTURE The past three decades in China have witnessed the most rapid changes in society and the most drastic adjustments in its social structure. Consumption has become one driving force behind the country’s economic development. Having been banned for almost three decades, Chinese commercial advertising was resumed in the wake of the country’s economic reforms that started in late 1978. Since the ideological debates in the early 1980s on the “shoulds” and “should nots” in the so-called Chinese “socialist consumer advertising” advocated by the Chinese government, the advertising industry in China has grown to become the world’s second largest after the United States, in terms of ad spending. With the changes in societal values, Chinese masses, particularly young people, follow their own paths to pursue their dreams of happiness and success in different fields, from business to sports, from fashion design to entertainment, investing new meanings in their sense of self. Collectively, they have ushered in a multi-faceted new Chinese identity. In taking on this new identity, Chinese youth perhaps are one of the most fascinating groups, in terms of their cultural characteristics and their social, economic, and political impact on Chinese society, and they have attracted studies by scholars and business professionals both in China and abroad (Cingcade, 2008, Sun and Wang, 2010, Xi and Xia, 2006, and Jing Wang, 2005). The significance of the impact of Chinese youth culture on society is multi-dimensional, but most prominently seen in the following three areas: First is the vibrant Chinese youth market.

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Currently, in the explosive growth of consumption, 400 million Chinese teenagers and young adults who were born in the 1980s and 1990s have stood out as targeted groups for global marketers. Approximately a third of these 400 million young people are urban and are from households with relatively high income. It is reported that China will boast a population of almost 500 million people under 30 by 2015 (Bergstrom, 2012). The sheer size of the Chinese youth market and young people’s discretionary income make this market one of the most sought- after in the world. Second is the complexity of the Chinese youth culture. Penetrating the gigantic Chinese youth market requires insights and knowledge of the youth culture. The first generations of Chinese young people have experienced the country’s unprecedented economic boom, open markets, and capitalism (with “Chinese characteristics”). Similar to young people in Japan, South Korea, and the United States, these Chinese young people grew up drinking Coca Cola, listening to Rock and Roll, watching Hollywood movies, and wearing blue jeans. In other words, to many people, contemporary Chinese youth are “westernized.” But close studies reveal that there is no easy equation between the Chinese youth culture and that in other Westernized countries. Chinese young people may look and act like their foreign brothers and sisters and share certain cultural values, but as shall be shown later in the paper, Chinese youth, at heart, are still Chinese. Situated at the crossroads between Western modernity and Chinese traditions, Chinese youth culture provides insights for understanding trends and dynamics in the global youth culture. This young Chinese market demographic is exerting, and will continue to exert in the foreseeable future, a powerful influence in shaping global business and marketing strategies. The third area of impact is the significance of Chinese youth culture in shaping Chinese society, now and in the future. In 2010, nearly 30 percent of the 550 million industrial workers in China are under 30 (Malcolm Moore, 2011). The sheer size of the Chinese youth workforce is affecting Chinese society as a whole and shaping the direction of Chinese economic development. Currently, China is reported to have about 150 million migrant workers. They build China’s glittering skylines, clean restaurants and clubs frequented by the newly rich, and sew fashions sold around the world. Among them, an estimated 100 million-plus were born after 1980 (Cingcade, 2008). Chinese youth’s contributions to the country’s economy, however, are far beyond the construction and the service sectors. It is well known that the Chinese youth population is savvy in technology. Internet users in China increased from 33.7 million to 513 million at the beginning of 2012. Among them, 256 million were young people (Bergstrom, 2012). Being the main force of employment in science and technology, contemporary Chinese youth have become the backbone of scientific and technological industry, high-tech enterprises, information network and e-commence, and other new economic domains, playing a more and more important role in China’s economic development and in its social advancement. The present study is intended to facilitate further understanding of Chinese youth culture by highlighting the characteristics of Chinese youth culture observed in existing scholarship. Following that, the paper will closely examine the mindset of contemporary Chinese youth in the complex interplay between the persisting values of Chinese tradition and the realities of a society going through rapid changes. A Shift In Chinese Cultural Values Let us first take a brief overview of the characteristics of contemporary Chinese youth as highlighted by the work of contemporary scholars and business professionals. In 1979, as a step toward population control, the Chinese government enforced a policy limiting families to one

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child per family. This policy is known as the “one-child policy,” and this only child was later nicknamed “little emperor,” or xiao haungdi in Chinese. The little emperors grew up to become the first generation of consumers in China’s market economy following the country’s economic reforms. The book Advertising to Children in China begins with a vivid description of the shopping behavior of contemporary Chinese “little emperors” depicted in a drawing by a nine- year-old when he was asked to draw what comes to his mind when he thinks about going shopping:

The youngster’s drawing shows him stepping boldly up to the toy counter of a department store with a five-yuan note in his hand. It’s his money, and he is attracted to the sign above the salesperson that reads, “Ship models on sale.” The sign to his right beckons him with “Welcome. Visit Our Store.” What this youngster is saying in his drawing is that he has money and he wants to spend it, in this case, on play items (Chan and McNeal, 2004).

What the authors of the book try to tell the reader here is that Chinese youngsters today have the privilege to spend their “own” money on their “own wants and needs.” The “one-child policy” makes Chinese youth of special value in China’s consumerism. One survey shows that being the focal point of Chinese families with the structure of 4-2-1—one child, two parents, and four grandparents, this only child constitutes a large share of contemporary Chinese families’ consumption, resulting in a shift in China’s cultural values from traditional values to the values of a modern consumer society (Sun and Wang, 2010). A 2008 survey conducted by a group of business professors, headed by King-Metters and Metters, shows significant changes in the degree to which individuals are integrated into groups, as compared with the findings of the study of different cultures conducted by Geert Hofstede some twenty five years before. The result in Hofstede’s research showed Chinese cultures were very collectivist in the 1980s, while the recent survey by King-Metters and Metters indicates that China today is very individualist. In addition, the King-Metters and Metters survey also shows striking difference in “power-distance,” a cultural trend used by Hofstede to measure “the extent to which the less powerful people accept and expect that power is distributed unequally.” The power-distance in China today is scored in the King-Metters and Metters survey about the same in the United States (King-Metters and Metters, 2008). The increasing value in individualism and individuality is seen particularly in China’s post-1980 generations. Similar to young people in the countries influenced by the West, contemporary Chinese youth are generally characterized as being “open,’ “free,” and “individual.” To them, life is about “me.” Different from the older generations in China, they often say “I” instead of “we.” Self-realization is one salient characteristic of the new “Me Generation.” The 1996 national survey of youth by Chinese Youth and Children Research Center reveals that 77.5 percent of the youth consider the realization of self-value as their life goal. The sentiments of “what I want, what I like, and who I am” are rising among Chinese young people. They ooze confidence and a sense of superiority. They want to live their life according to their own ideas and dare to pursue success, excellence, and new things. Youngsters engage the world in new ways and pursue a “good life.” They search for personal fulfillment, enjoying a lifestyle their parents could not have imagined. The sense of individuality and self-consciousness of this highly “liberated” young generation is acutely reflected in the expressions of “personal taste,” “personal expression,” and “personal identity” (shihe wo, zhanxian wo, wo jiu shi wo) that are popular among contemporary Chinese youth. (Guo Jinjin, 2006)

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“The Young and The Restless”: the Complexity of the Young Chinese Consumer’s Mindset Yet, underneath the façade of being open, free, and individualistic, recent media reports depict Chinese youth as “restless” and as experiencing an internal psychological conflict between “private selves” and “public selves,” between “private identity” and “public identity” (Griffithis, 2012). While the phenomenon of “restlessness” among Chinese young consumers has been noted in general, few studies have provided in-depth analysis of the causes of this phenomenon. The present study delves into the “core” structures of Chinese traditional beliefs and values in the context of contemporary social-economic realities, and will demonstrate, in the sections to follow, that Chinese young people’s “restlessness” can be explained by the paradoxical, conflicting, and, sometimes, even opposing cultural values deeply rooted in Chinese tradition and its current realities. Among the dilemmas facing Chinese youth are “standing out and fitting in,” “individual freedom and society’s demands,” and “soaring aspirations and limited opportunities.” “Standing Out and Fitting In” In an advertisement published in Modern Advertising titled “Just Want to Stand Out,” a doggerel is printed on the T-shirt over a young man’s robust body. Faceless, the young body, however, is full of life and energy, with a flock of thick black hair anxiously growing out from the collar of the T-shirt. The doggerel reads:

Just Want to Stand Out! Use your head, night after night. Apply yourself, head down, buried between your shoulders. Creativity trampled, you bow your head, with secret hate. Are you willing to capitulate forever? Are you willing to work yourself until your head turns gray? Come, seize the opportunity to hold your head high, While you are still young.

Young and eager to emerge, the image and the doggerel advertisement capture the mentality of contemporary Chinese young people and their psychic need to seek identity. According to Jib Fowles, most advertisements can be understood as having two orders of content. “The first is the appeal to deep-running drives in the minds of consumers.” The second is information regarding the goods or service being sold—such as the product’s name, its manufacturer, and its functions. Fowles asserts that by giving form to people's deep-lying desires, and by picturing states of being that individuals privately yearns for, advertisers have the best chance of arresting attention and affecting communication (Folwes, 1998). Successful advertising plays with a product’s “emotional” functions to the consumer, by associating commodities with feelings and emotions that the Chinese consumer finds attractive. In anticipation of emerging customer needs, smart marketers search for the soul of Chinese young consumers in order to sell their products by interweaving the actual and the imagined and perpetuating the myth that consumption would make one’s dreams come true. Feeding on the eagerness of Chinese youth to “stand out,” contemporary Chinese advertising offers a world of success through consumption: The product is depicted as a symbol of wealth and status. The advertisement assures the audience that purchasing the product would bring power and self-worth and would provide a navigational guide for the voyage from the torturous present to the ideal

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future. Chinese love to win and admire big winners. Climbing society’s ladder to the top is the ultimate goal in life for contemporary Chinese, particularly for Chinese young people, at all social economic levels. Yet, seeking advancement in society and being successful is by no means a new aspiration for Chinese. In fact, success and advancement in society have been a primary drive for Chinese under Confucianism, and a noble calling by the government under Mao Zedong’s regime. However, the definitions and concepts of “success” have undergone changes over Chinese history. In Confucianism, being successful means mastering Confucian classics and passing civil service to secure a position at the imperial court. Communist ideology advocates adhering to Communist doctrines to serve the people and the country. Since the economic reforms, mandated by Deng Xiaoping’s proclamation to “let some people prosper first,” acquisition of wealth has become the newest and most worthwhile pursuit for Chinese men and women. Being held back for decades by Mao’s dictatorship, contemporary Chinese are eager to become the first in the brave new world of material wealth. Despite the changes in the definitions of success, seeking to become established in society is a primary purpose in life—this Chinese characteristic remains unchanged. Desire for attainment and a sense of urgency depicted in the “Just want to stand out” doggerel mentioned earlier is echoed in the famous Confucius accounts of the sage’s progress and attainment as man: “At fifteen, I set my heart on learning; at thirty, I stood firm; at forty, I had no doubts; at fifty I understood the Decree of Heaven; …” (The Analects, Book II). Likewise, life’s purposefulness and urgency are expressed in Mao Zedong’s ci poem composed in 1963: “Ten thousand years are too long. Seize the day, seize the hour.” What merits attention, however, is that the desire to “stand out” is not all we see in Chinese youth’s psychic search for identity and success. In his article “What the Chinese Want?” Tom Doctoroff, the North Asia director and Greater China CEO for J. Walter Thompson, succinctly points out that Chinese individuals “are driven by an ever-present conflict between standing out and fitting in, between ambition and regimentation” (Doctoroff, 2012). Chinese youth show a strong sense of belonging and social acceptance while seeking individuality from their peers. Research based on advertisements in the Chinese version of International Advertising, 2007-2009 by my Chinese visual culture class in 2009 found that the three most frequently appealed desires to Chinese during this period were: need for prominence or achievements, need for affiliation, and need for security. This phenomenon of seeking belongings is evidenced in Chinese youth’s fanaticism in joining clubs and online shopping. Cultural clubs have mushroomed in today’s China. Music clubs are particularly popular. However, as Jing Wang has pointed out, the majority of Chinese youth see music primarily as an entertainment rather than as a vehicle for serious self-expression. Music club culture flourishes in China’s first and second tiers of cities because young people use clubs as a networking venue where they party for fun and for “a quick accumulation of human capital” (Jing Wang, 2005). Online shopping is another new phenomenon in contemporary Chinese consumer culture, with about 300 million new shopping choices online. For Chinese youth, exploring online marketplace goes beyond the practical need to cut through the clutter in making purchase decisions. Online shopping is an emotional need to fit in and feel that one’s choices connect one to the right group of people, even as one tries to stand out with a style of his/her own. For young consumers in China, “the starting point for shopping is shifting from advertising, brands, and retailers … to people” (Caplan and Yu, 2012). While the attribute of being ambitious and competitive is a Confucian virtue mandated by society, Chinese people, on the other hand, consider another set of Confucian ideals also of the utmost importance—harmony in society and human relationships, being humble, and conformity. Confucius defined human relationships as “Ruler-Subject, Father-Son, Husband-Wife, Big

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Brother-Younger Brother, and Friend-Friend.” In these Five Relationships, the senior and the male set rules for the junior and the female, while the junior and the female must respect the senior and male, and must be obedient. In other words, Chinese are social beings and must know their places in society, their boundaries and duties, and must co-exist with each other in harmony. As the Japanese say that “the nail that sticks out gets hammered down,” the Chinese wisdom says “birds at the head of the pack get shot down.” Daoism is another school of philosophy in China and has significant influence on the Chinese way of life. The phenomenon of Chinese young people feeling impelled to go with the flow could be explained in the Daoist idea of non-action, or wuwei. Daoism believes that the ultimate Way of the Universe is to follow the course of Nature. “Water travels in its own way when it arrives at the head of the bridge.” Forcing things to happen will destroy the balance in Nature and will be catastrophic. In Jing Wang’s study, Jian Cui, the idol of Chinese linglei youth, or society’s radical outcasts, contradicts himself during the interview, saying “… Too much self- exposure is not good. I believe in an old Chinese saying, ‘whenever water comes, there is a channel for it,” after he has expressed his desire to become an established researcher on music. Another young music fanatic sees himself in a similar way, saying “Those who are content are happy. I don’t like big ups and downs.” Still another wants to learn “how to position himself in the middle for perfect balance” (Jing Wang, 2005). Being small is virtuous and beautiful. “My humble self,” or “my humble surname” are expressions commonly used by Chinese to refer to themselves, even by the imperial emperors and Mao Zedong. Individual Freedom and Society’s Demands Closer examinations of China’s reality today would show that new paths are hard to break. One daunting challenge for Chinese young people is how to balance their individual ambitions with their sense of family responsibilities and society’s demands. Tom Doctoroff has pointed out, “[Chinese] individuals have no identity apart from obligations to, and acknowledgement by, others” (Doctoroff, 2012). In pursuing success and self-satisfaction, China’s individuals cannot shake off regimented social structures. Ambitions are interwined with individuals’ irrevocable responsibilities to family and society. Contemporary Chinese—man, woman, old, and young— are, as ever before, under enormous pressure to bring honor to the family, or guangzong yaozu (glorify the ancestors). This Chinese “characteristic” has not changed. Parents are mandated to provide their children a bright future. A survey carried out by the Economic Situation Monitoring Center under the National Bureau of Statistics in 2001 revealed that education had become a significant part of household expenses, consisting of 10 percent of a Chinese family total household expenses. Education consumption has become a new hot spot for Chinese household investment (Xi and Xia, 2006). Little emperors and princesses are scared of being a disappointment to their families when they grew up. When China’s little emperors grow up, they eventually have to face challenges in the real world. The Frontline’s film Young and Restless in China tells the story of the emotional dilemma of a young market executive who comes from an affluent Beijing family. This successful business woman tells the interviewer that for years, she has struggled to find herself, to move out of the shadow of her parents, and to sort out who she is and what her values are. Her parents are renowned scholars and put pressure on her to succeed academically. She recalls that the atmosphere at home was so oppressive that when she was applying to college she only chose ones

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outside of Beijing. College is the opportunity to liberate herself and she could finally be herself (Young and Restless in China, 2008). At Marietta College where I teach, many international students from China feel equally oppressed, even though they are thousands of miles away from home. Quite a number of them come to Marietta College to fulfill their parents’ dreams. The family provides financial support for the young person’s education. The students choose their major and their career based on their parents’ wishes. One student told me that his heart was with the humanities, but, to please his parents, he majored in accounting, then switched to finance, then to international business—only to feel miserable. Recently, he decided to follow his heart and declared his major in Asian Studies, but without his parents’ knowledge. A number of female Chinese students at Marietta College are depressed because they are under pressure to drop out of college before they receive a college degree, and return home to get married to help with their family business. To an extent, education for young Chinese women is a double-edged sword. Girls still are distinctly second-class citizens, particularly in rural areas. When families with limited resources have to make a decision about which child to be sent to school, it is always the son, because, traditionally, when young women marry, they leave their natal families to live with their husbands’ families. Young girls are expected to sacrifice their own interests to support their family. Many women who do hold higher education degrees face another kind of dilemma: they are difficult to marry, because most Chinese men do not want to marry a “strong woman,” or nü qiangren. To put it in another way: many Chinese young women have their lives complicated several ways: First, they are facing the pressure (like their brothers) to be successful and to bring honor to their families. Second, in family decisions, they are more likely to be asked to make sacrifices and give the opportunities of education to their brothers, in the name of the family interest. Third, those who do get the chance to become educated, face the danger of becoming “unmarriageable,” which is equally unacceptable by China’s norms today. According to Confucianism, filial piety is the root of all virtues. However, taking care of aging elderlies has become increasingly challenging for Chinese young people. Aging population is another pressing problem in China and will have significant impact on Chinese youth, urban or rural. China is aging rapidly, largely due to the “one-child policy” enforced by the Chinese government since 1979. It is reported that by 2030, China will have more people over 65 than the entire population of the United States. China joined the world’s aging countries in late 1990s, with those over 60 reaching 126 million, accounting for 10 percent of the country’s population. It is predicted that by 2020, the percentage of China’s senior population will rise to 11.8 percent. In 1990, the percentage of the Chinese working population caring for the aged was 13.7 percent; in 2000, it rose to 15.6 percent; in 2025, it is estimated to grow up to 19.46 percent; and by 2050, 48.49 percent. In other words, the per capita burden has risen from 20 to 25 percent in the past to the present 50 percent; and will rise to 100 percent by 2050 (Xi and Xia, 2006). As a release from the pressure cooker of daily life, Chinese young people spend more time online than youth in many other countries. Marketers use products as relief of anxiety. Emotions are evoked in advertisements to offer the consumer a world of imagination, a utopia, or a world of spiritual transcendence and freedom from anxieties. Li Ning Corporation positions sports as relaxation, not a platform for competition. In their TV commercials, text floats across the screen: “Goodbye fatigue, goodbye toil, fear and fat…Yesterday’s worries are over”

(Doctoroff, 2005, p. 69). Pizza Hut’s ad asserts that Pizza Hut provides the number-one place for pastimes and for entertainment. Starbucks promotes the idea of its coffeehouse as a Third Place, or di san kongjian. This di san kongjian position plays with the word kong in Buddhism, which

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means “emptiness.” The Buddhist “emptiness” invokes detachment or being free from desires or worries. Thus the Third-Space motif is aimed to create peace and tranquility: a cup of Starbucks coffee drunk in situ will liberate your spirit from the mundane. In short, Chinese younger generations are highly restricted by the price of the new paths to success in their pursuit of material rewards, facing pressures in an increasingly competitive society. Soaring Aspirations and Limited Resources With the importation of Western-style advertising and foreign goods to China, life for the Chinese has been a dizzying whirl. China’s economic miracle since the 1980s has been widely acknowledged. China’s new middle-class consumers have enough disposable income to purchase non-essential goods. In other words, they can afford to make purchases based on what they “want,” not just on what they “need.” Emotions and attitudes of the men and women seek the Western Other as China’s possible alternative future. During the 1990s, China’s elites liked to gather on the Bund in Shanghai for Western food and at outdoor café’s, bistros, and boutiques that had a foreign cachet, and did not hesitate to show off their newly acquired products of Western brands, such as Armani and Louis Vuiton. With the liberation of retail law, China’s luxury market has ballooned to more than US$2 billion in annual sales in the first decade of the twenty-first ccentury, with 20 percent annual growth through 2008. Major luxury retailers, such as LVMH Louis Vuitton Moët Hennessy and Prada Group NV operate their own stores in China. A 300,000-square-foot Saks store started its operations in the historic waterfront Bund district of Shanghai in 2008. All these, says a report in The Wall Street Journal represent “a wave of development in China’s luxury sector—rich Chinese are seeking a greater appreciation of what their newly minted wealth can bring” (Ernst & Young, 2006). The phenomenon of excessive and competitive consumption, or dou fu in Chinese, can be explained by the Chinese belief in the role of luxury spending in social construction and class distinction. Consumption in post-Mao China does not sound as derogatory as it does in the West. It symbolizes modernity. Acquisition and consuming material goods tastefully have become an intrinsic part of modern living and a validation of one’s high social standing in China. To a certain extent, youth are encouraged to demonstrate their role as consumers. As previously explained, the 4-2-1 family structure has resulted in the current situation that six family members indulge over the only child in the consumption of luxury goods. Thanks to China’s booming economy over the past decades, the post-80s were given a broader spectrum of choice than their parents could have ever imagined possible. As China is transforming itself from a production- centered communist society to a capitalist consumer society, youth are encouraged to explore definitions of modern Chinese-ness by demonstrating their capabilities in consumption. When private cars, real estate, and luxury brands become available, youth are quick to claim them as their own status markers. Those commercial goods offer golden opportunities for marketers to explore ways in navigating young Chinese consumers in their move to the psychic haven of consumption, and to ensure that the marketers are in the driver’s seat in Chinese youth’s “Consumer’s Happy Express Train” (xiaofeiqun de xingfu banche). Commercial advertisements further validate Chinese youth’s belief that immediate success and luxury are consummated with goods and labels. In his book Foreign Advertising in China, Jian Wang describes a visual confrontation of an “upscale” and “cool” Hennessy brandy commercial displayed in downtown Beijing:

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Displayed on the billboard are three “heroes”—a Caucasian man, a Caucasian woman, and a Hennessy bottle set against the backdrop of a peaceful blue sea. The dark-suited man, glass in hand, is posed in the middle of the background. In the left foreground, barely visible in the scene, the woman is showing only a shoulder draped in a beautiful scarf. On the right is the big Hennessy bottle, with its shape and texture occupying almost a quarter of the billboard space. Between the back and the front is a row of Greco-Roman arches. The ad caption written in Chinese characters reads, “Hennessy. The original X.O.” (Jian Wang, 2000).

However, excessive consumption collides head-on with China’s tradition of frugality and with China’s reality today: not everyone can afford the price of success. The surreal world of tranquility, luxury, sophistication presented in the Hennessy commercial is a dream land for millions of Chinese. To be more accurate, it is a land that is beyond the imagination for ordinary Chinese men and women. While many Chinese are benefiting from the country’s booming economy, many are not. China’s highly competitive, consumption-driven environment inevitably forces many to the bottom. A Gallop survey shows that while Chinese buyers are many, and incomes are rising, most citizens remain too poor to purchase what they want. China today has the world’s widest chasm of “haves” and “have-nots.” Unlike their lucky 10 percent middle-class cousins, 1.2 billion out of the 1.3 billion Chinese lead a modest life, struggling through sweat and toil to cover just the basics at the time of the survey (McEwen, et.al. 2006). Underneath the façade of glory, freedom, and happiness portrayed in contemporary Chinese advertisements, there is tension between big dreams and lack of opportunities. A typical fairy tale conclusion is “… and they all lived happily ever after.” The happy-ending conclusion of the modern Chinese fairy tale, however, remains to be seen. China’s reality seems to allude to another type of fairy tale—the Cinderella story. When the midnight clock chimes, the coach will give way to a pumpkin; the beautiful princess in elegant attire will be dressed in rags and return to scrubbing floors on her hands and knees. A mirror image of the desire for the best and fear of the worst in the contemporary Chinese youth psyche is seen in the picture of a mirror image displayed on the NPR Morning Edition web site, depicting a young saleswoman showing a luxury apartment on the suburb of Shanghai. The picture juxtaposes a washing basin decorated with 24-carat gold in front of a mirror and a mirror reflection of an expressionless saleswoman in modest clothing staring at the basin. What is reflected in the mirror is not just the sales woman and the basin, but a glimpse of the disparity between the rich and the poor that is the reality in China today. Developers invested US$24 billion in residential housing in the first quarter of 2006, but only 3 percent of that was spent on low-income housing, as reported in the NPR Morning Edition report (Lim, 2006). The housing market in China today is not catering to the masses, but to the privileged few. This is illustrated in the caption on a billboard advertisement for Tomson Riviera Apartments that I passed in the heart of Shanghai’s prestigious Lujiazui financial district, which tempts the observers to join “the elite and own a [Tomson Riviera] apartment.” CONCLUSION It has been argued that “it is necessary to distinguish elements of a culture that are central and invisible (e.g., cultural values) from those that are peripheral and visible (e. g., behaviors) because the former are likely to be more resistant to change” (Rosenthaland and Feldman, 1992). In other words, a culture’s “core” values and its individual’s cultural identity may be less likely to change

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than the individual’s behavior, such as his or her hobbies, taste in food and fashion, or consumption. As illustrated in the present study, in contemporary China, aspirations are growing. Opportunities are limited. How to survive in a very competitive society preoccupies the Chinese mind. But the anxiety that contemporary Chinese are experiencing goes beyond the fierce competition in society. In this brave new world, millions of contemporary Chinese find that their privileges, values, education, work ethics—and the honor that they used to find in their lives and behaviors—are disappearing. Under these circumstances, all segments of Chinese society have been “restless”—struggling to find a new identity that will provide a new source of societal and personal stability and a new source of societal and personal purpose. The Chinese youth segment of society has experienced this restlessness primarily as a struggle to define their larger social role (“public identity”) and to define their individual selves (“private identity”). China’s “one-child policy”—under which, typically, six adults become the economic and social underpinnings for the launch of each new child into the society—has provided the impetus for the creation of contemporary Chinese youth culture. Chinese youth culture is grounded along two dimensions: the search for personal expression of individual identity, and the need to find one’s place in the larger society—“standing out” and “fitting in.” The dynamic created by the interaction of these two forces at work on the psyche of young Chinese has enabled a shift in cultural values among Chinese youth, away from traditional Confucian and Maoist values toward the values of a modern consumer society: knowing one’s social position by what one can afford to display, and knowing one’s self by the consumer products one chooses to acquire. This has resulted in a phenomenon in which Chinese young people find that while they relinquish some behavioral elements of their cultural origin with increasing acculturation to the Western consumerism, the “essence” of Chinese culture, or Confucianism, as represented in such characteristics as filial piety, family, and conformity persists over time. Often, they feel their individual desires are being overshadowed in their real- life situations and their voices are being silenced. Chinese youth’s “core” Confucian self demands Chinese young consumers be “collectivist” rather than “individualist,” and “interdependent” rather than “independent.” International consumer-goods companies—and more recently, their Chinese domestic counterparts—have recognized this psychic state in the Chinese youth demographic, and increasingly, have been focused on exploiting it. The lessons learned in the Chinese consumer market will be applied, with appropriate modifications, to other developing markets as well. REFERENCES Bergstrom, Mary (2012) “Consumer Pioneers: Understanding The Real Legacy of Chinese Youth.” Retrieved July 21, 2013 from http://rwconnect.esomar.org/2012/12/18. Caplan, Jay Mark and Helen Yu (2012) “Online Shopping Neighborhoods: How Young Chinese Consumers Navigate the Online Marketplace.” Retrieved July 1, 2012 from China Youthology Sept. 27, 2012 blog, http://chinayouthology.com/blog. Chan, Kara and James U. McNeal (2004) Advertising to Children in China, Hong Kong: Chinese University Press, 2004. Cingcade, Mary (2008) “Charter Their Own Course: Resources for Teaching About China’s Youth,” Education About Asia, vol. 13 (1), p. 44-51.

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Confucius, The Analects of, Book II. Doctoroff, Tom (2012) “What the Chinese Wants?” The Wall Street Journal, May 18. ----- (2005) Billions: Selling to the New Chinese Consumer. New York: Palgrave MacMillan. Ernst & Young (2006) “Saks Follow Luxury Brands Into China,” The Wall Street Journal, April 18, 2006. Fairclough, Gordon (2007) “McDonald’s Marketing Chief in China Preaches On-the-Ground Experience,” The Wall Street Journal, May 2, 2007. Fowles, Jib (1998) “The Fifteen Appeals,” Common Culture: Reading and Writing About American Popular Culture. Ed. Michael Petracca, Madeleine Sorapure. Upper Saddle River: Prentice Hall, 1998, P. 71-88. Griffiths, Michael B. (2012) Consumers and Individuals in China: Standing Out, Fitting In. New York: Routlege, 2012, p.5. Guo, Jinjin (2006) “Da shang qingshaonian xiaofeiqun de xinfu banche,” (Catching the Happy Express Train of the Young and Adolescent Consumers), Jiri caifu, vol. 5, p. 41-42. King-Metters, Kathryn and Richard Metters (2008) “Misunderstanding the Chinese Worker,” The Wall Street Journal, July 7, 2008. Lim, Louisa (2006) “Inside China’s Economic Boom,” part of the morning-report series “China’s Economic Challenges,” NPR.org. August 21. McEwen, William, et. al. (2006) “Inside the Mind of the Chinese Consumer,” Harvard Business Review, (March 2006), p. 74. Moore, Malcolm (2011) “China’s Workforce Dries Up,” The Telegraphy, March 27. Rosenthal, Doreen A. and S. Shirley Feldman (1992) “The Nature and Stability of Ethnic Identity in Chinese Youth: Effects of Length of Residence in Two Cultural Contexts,” Journal of Cross- Cultural Psychology, vol. 23 (2), p. 214-227. Sun, Jiaming and Xun Wang (2010) “Value Differences Between Generations in China: a Atudy in Shanghai,” Journal of Youth Studies, vol. 13 (No. 1, February), p. 65-8. Wang, Jian (2002) Foreign Advertising in China: Becoming Global, Becoming Local, Iowa: Iowa State University Press, p. 4. Wang, Jing (2005) “Youth Culture, Music, and Cell Phone Branding in China,” Global Media and Communication, vol1 (2), p.185-201. Xi, Jieying and Yan Xia (2006) “Introduction to Chinese Youth Culture With a Commentary.” Chinese Youth in Transition. Edited by Jieying Xi, Yuxiao Sun, and Jiang Xiao. Aldershot: Ashgate. P. 79-105.

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Young and Restless in China: Nine Stories (2008) PBS, Frontline. Retrieved July 23, 2009 from http://pbs.org/wgbh/pages/ frontline/ youngchina/ nine/. BIOGRAPHY Dr. Luding Tong is professor of Chinese at Marietta College. She also serves as director of the Asian Studies Program at the college. Her research appears in the book she co-authored with Xu Hui, Emotional Appeals and Strategies in Contemporary Chinese Advertising and in the journal Education About China. She can be reached at Marietta College, 215 Fifth Street, Marietta, OH 45750, [email protected].

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MICROFINANCE AND POVERTY REDUCTION IN GHANA: EVIDENCE FROM POLICY

BENEFICIARIES Gilbert O. Boateng, Takoradi Polytechnic, Ghana

Akwasi A. Boateng, Cape Coast Polytechnic, Ghana Harry S. Bampoe, Jayee University College, Ghana

ABSTRACT

Poverty is a concept that applies to all humans and more seriously people in the developing world. The deadly effect of poverty on the poor people necessitated a worldwide research into ways of reducing its impact. An important tool in fighting poverty is microfinance which has gain prominence over the last few decades in countries hardly hit by the menace. Studies have shown that microfinance has chalked certain successes regarding poverty reduction. Other school of taught argue that microfinance has not had the much touted impact. This study ascertained the impact of microfinance on poverty reduction in Ghana. The study employed economic and social variables such as individual income, household growth, access to education, housing and participation in social and religious activities as benchmarks for measuring the impact. Questionnaires were administered to 60 customers and beneficiaries of microfinance products of two major microfinance institutions in Ghana; Opportunity International Savings and Loans Ltd. and Sinapi Aba Savings and Loans Company Ltd. The study found a positive relationship between microfinance and the benchmark variables and recommended training for beneficiaries to ensure efficient use of funds and the creation of sound political and economic environment so microenterprises can thrive. JEL: O1, O2 KEYWORDS: Microfinance, Poverty Reduction, Impact Assessment, Ghana INTRODUCTION Poverty has become an albatross hanging on the necks of most countries and individual households on the globe especially in developing countries. About one billion people globally live in households with per capita incomes of less than one dollar per day (Morduch, 1999). The grave economic and social impact unleashed on the poor in developing countries led to the keen interest on the part of donors, policy makers and practitioners working hard to expand access of the poor to microfinance. Even though, microfinance disburse small amounts, if properly harnessed can have knock-on effect and contribute significantly to the wellbeing of the poor. Microfinance can increase investment among the poor and hence, empower them economically. Currently, the focus of microfinance is no longer on credit for investment in micro enterprises but the attention of the entire microfinance community is on the diverse needs of clients, the broader financial ecosystem and the transformational nature of technology (World Bank Handbook on Microfinance, 2013). The objective of microfinance is not only providing credit for the poor to fight poverty but it is to create institutions that will deliver financial services to the poor who are ignored by the conventional commercial banks (Otero, 1999).

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In Africa and other developing countries microfinance institutions (MFIs) are seen as the main source of finance for microenterprises (Anyanwu, 2004). In Ghana, microfinance institutions came up to fill a gap created by the refusal of the traditional commercial banks to give credit to microenterprises. While traditional commercial banks provided credit based on collaterals, microfinance institutions (MFIs) provide credit to the poor who do not provide collaterals. Adjei, (2011) observed that for most micro and small entrepreneurs in Ghana the lack of access to financial services is a critical constraint to the expansion of viable micro enterprises. According to Aryeetey, (1994, 1996) only six percent of the population have access to formal financial services with majority of the population denied access. Interestingly, about 91% of the economically active of the population in Ghana is employed in the informal sector (UNDP 2007), ironically it is this active and major part of the population that is denied credit. Given the devastating effect of poverty on the people of Ghana, successive governments since the 1980s have introduced medium-term national development policy framework to direct the implementation of development plans in sectors and districts aimed at reducing poverty and improving the social wellbeing of the people. There was the Economic Recovery Program (ERP) introduced in 1983 and backed by specific programs such as the Program of Action to Mitigate the Social Cost of Adjustment (PAMSCAD) and the Ghana Vision 2020. These programs were, however, unsuccessful (Asenso-Okyere et al, 1993). Further on, the Ghana Poverty Reduction Strategy (GPRS I, 2003-2005) was formulated to enable Ghana to benefit from a significant measure of debt relief under the Highly Indebted Poor Country (HIPC) and to position the country in an improved macroeconomic environment to address critical issues of poverty on an emergency basis. Under GPRS I, special social programs were put in place targeted at the vulnerable and the excluded. (IMF Report on GHANA July 2012). With respect to this, the GPRS I reflected a policy framework that was directed primarily at achieving the anti-poverty objectives of the UN's Millennium Development Goals (MDGs). The success of this social intervention program was mixed results on the impact of policy interventions to reduce poverty. These included service delivery constrains and the persistence of regional differences in the distribution of key outcomes in the health and educational sectors. Against this background the GPRS II was adopted and implemented over the period 2006 and 2009 with emphasis on growth as a means to accelerate poverty reduction and to eliminate the worst manifestation of poverty, social deprivation and economic injustice, from Ghanaian society (IMF, 2012). Following the GPRS II, the government introduced the Ghana Shared Growth and Development Agenda (GSGDA 2010-2013) to achieve a sustain macroeconomic stability while placing the economy on a higher path of shared growth, and poverty reduction. All these steps were attempts by the government of Ghana to fight poverty which has rendered 28.5% of the Ghanaian population poor and live below the poverty line (World Bank Report, 2006). Most of the poor are found in the informal sector characterized by lack of access to credit, which cripples the development and growth of that sector of the Ghanaian economy. IMF May, 2003 country report observed that weaknesses in the financial sector that restrict financing opportunities for productive private investment are a particular impediment to business expansion in Ghana. Microfinance is, therefore, seen as a financially sustainable instrument capable of providing capital for and ensuring growth and sustainability in the private informal sector ignored by traditional commercial banks. Microfinance in Ghana is, however, plague with a lot of challenges; poor recovery rate, lack of capital for sustainability, inadequate credit delivery and management, inability to reach the vulnerable and the marginalized, regulation and supervision problems as well as high turnover of MFI staff. As to whether microfinance has been able to reduce poverty among the beneficiaries of its products is the cap of this study. Social and

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economic variables that will be employed include individual income, household growth, and access to education, housing as well as participation in social and religious activities. Objectives of the Study 1. To assess the role of Microfinance Institutions in reducing poverty in Ghana. 2. To examine how the beneficiaries use the lending facilities. 3. To ascertain how microfinance products affect income levels, education and family growth of

beneficiaries. 4. To make recommendation for effective delivery of microfinance products and services in

Ghana.

Research Questions 1. What role do MFI's play in poverty reduction in Ghana? 2. How do beneficiaries use microfinance facilities? 3. Is there a significant relationship between microfinance and income levels, education and

family growth of beneficiaries? 4. Are the expectations of the poor met through microfinance interventions in Ghana? LITERATURE REVIEW According to Oterro (1999), microfinance is the provision of financial services to low-income poor and very poor self-employed people. To Ledgerwood (1999), these financial services are not limited to savings and credit but include other financial services such as insurance and payment services. Robinson (2001) defined microfinance as the supply of loans, savings and other basic financial services to the poor. To Irobi (2008), microfinance developed as an economic development model intended to benefit the low-income part of the society, both men and women. Schreiner and Colombet (2001) defined microfinance as the attempt to improve access to small deposits and small loans for poor household neglected by banks. Thus microfinance is the provision of financial services such as credit, savings, and insurance to the poor who cannot access such services from the formal financial sector. Microfinance has been credited with improving other financial outcomes including savings and the accumulation of assets as well as non-financial outcomes such as health, food security, nutrition, education, women's empowerment, housing, job creation and social cohesion (Afrane, 2002; Barnes, 1996; Barnes and Keogh, 1999; Beck, Demirguc-kunt, & Levine, 2004; Hietalahti & Linden, 2006; Hossain & Knight, 2008; Odell, 2010. Poverty is a concept that applies to all humans and more seriously people in the developing world. The deadly effect of poverty on the poor people has necessitated a worldwide research into ways of reducing its impact. Basically, poverty is defined as the deprivation of basic necessities of life such as food, shelter, accommodation, and clothing. At a UN Summit on social development 'the Copenhagen Declaration' (1995) poverty was described as a condition characterized by severe deprivation of basic human needs including food, safe drinking water, sanitation facilities, health, shelter, education and information. To the (World Bank, 2002), a person is said to be poor when his or her consumption level falls below the poverty line of $1 per day. Narayan et al (2000) identified poverty as being complex and interwoven, including a material lack and need for shelter, assets, money and often characterized by hunger, pain, discomfort, exhaustion, social exclusion, vulnerability, powerlessness and low-esteem. In Ghana,

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poverty is identified as a composite of both personal and community life situations where on the personal level, poverty is reflected in an inability to gain access to basic community services (Batse et al 1999, Nsiah-Gyabaah, (1998). The Ghana Living Standards Survey (GLSS) of 2005 to 2006 defines poverty using an economic index, where the poor are seen as those ''subsisting on a per capita income of less than two thirds of the national average'' (Ghana Statistical Service, 2006). Studies on poverty levels in Ghana reveal that poverty s multidimensional (Nkum and Ghartey, 2000) and vary from rural to urban people, the young and the old as well as men and women. To the rural people poverty means lack of food, insecurity, infertility, unable to participate in social activities while urban dwellers see poverty as lack of employment, inadequate social services, lack of capital as well as lack of skills training (Appiah, 1999, Nkum & Ghartey,2000). Men in Ghana associate poverty with lack of material assets, whereas for women, poverty is defined as food insecurity. The young in Ghana consider the ability to generate an income as the most important asset, whereas older men cite as most important the status connected to a traditional agricultural lifestyle (Ghana, 1995). Morduch (2002) carried out a study on microfinance and poverty reduction using independent variables such as assets, education, microcredit, family size and income of household as dependent variable. The study employed the Consultative Group to Assist the Poor (CGAP) poverty assessment tools. The findings revealed a positive impact of microfinance on poverty reduction. According to Littlefield, Morduch and Hashemi (2003) there have been increases income and assets, and decreases in vulnerability of microfinance clients. They made reference to projects in India, Indonesia, and Uganda that have been able to reduce poverty among the poor and improve their general wellbeing. Asemelash (2002) in Ethiopia confirmed a positive impact of microfinance on beneficiaries as compared to non-beneficiaries. He showed that microfinance has impacted positively income, asset building, and access to schools and medical facilities in the study area. Goldberg (2005) observed that with the introduction of microfinance in Bangladesh, the poor no longer remained as poor. Mawa (2008) confirmed that microfinance is an innovative step towards alleviating poverty. In Ghana, evidence exists on the positive impact of microfinance and generally on women empowerment, increase in respect and decision rights within the family as well as increased self-esteemed (Cheston and Kulhn, (2002). To other writers, microfinance is a poverty alleviating tool, though it cannot solve the problem of poverty overnight. Brownstein, Fleck, Shetty, Sorensen, & Vadgama (2007). Siddiqi (2008) was not sure whether microfinance has a positive or negative impact. DATA AND METHODOLOGY The research design employed in the study was the descriptive research with particular reference to the case study method. The study was conducted to ascertain the impact of microfinance products on beneficiaries of such lending facilities in the Sekondi-Takoradi Metropolis of the Western Region of Ghana. The population consisted of beneficiaries of microfinance products from two major microfinance institutions- Sinapi Aba Savings and Loans Company and Opportunity International Ghana Company Ltd operating in the metropolis. Opportunity International Ghana Ltd was chosen because of its strategic location in the area; it is branched at the Market Circle close to the market with a lot of the market women and petty traders as its customer base. Again, it is one of the world’s largest microfinance organizations with a very large

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client base. Sinapi Aba Savings and Loans Company previously Sinapi Aba Trust is also a microfinance institution noted for providing lending services to poverty communities in Ghana. A sample size of 60 beneficiaries was selected based on purposeful sampling technique with the help of operation officers of the microfinance institutions. This helped to ensure effective coverage and reduce time spent and cost as well. The main instrument used for gathering data was a structured questionnaire titled ‘’Microfinance and Poverty Reduction in Ghana; Evidence from Policy Beneficiaries.’’ The questions were structured with the objectives of the study in mind. It consisted of items that generated data for answering the research question. The questionnaire had three sections; Section A covered the demographic information, Section B captured questions on type, purpose, size, duration and motivation of the facility. Section C concentrated on the impact of microfinance on specific social and economic variables such as income levels, education, family growth as well as participation in social and religious activities among beneficiaries. Validity of the questionnaire was confirmed by relying on the comments of two experience experts. The reliability of the questionnaire was confirmed through the inter-rater reliability method. The demographic information of the respondents is presented in Table 1. Table 1: Demographic Information of Respondents

VARIABLES CATEGORY FREQUENCY PERCENTAGE (%)

FREQUENCY PERCENTAGE (%)

Gender Males Females

12 18

40 60

5 25

16.7 83.3%

Educational Level

Junior High School Senior High School Higher National Diploma Bachelors Master

19 5 2 4 -

63.3 16.7 6.7 13.3 -

16 10 4 - -

53.3 33.3 13.4 - -

Occupation/ Profession

Petty Traders Market Women Farmers / Fishermen Transport Owners Teachers.

13 8 2 3 4

43.3 26.7 6.7 10 13.3

18 7 1 1 3

60 23.4 3.3 3.3 10

Age 21 – 30yrs 31 – 40 Yrs 41 – 50yrs 51 – 60yrs

4 16 7 3

13.3 53.3 23.4 10

2 11 10 7

6.7 36.6 33.3 23.4

This table shows the demographic information of the respondents of the two microfinance institutions. On the left are those of Sinapi Aba Savings and Loans Company Ltd and on the extreme right are those of Opportunity International Savings and Loans Company Ltd. RESULTS AND DISCUSSION (SINAPI ABA SAVINGS AND LOANS COMPANY LTD.) Purpose of Loan When the respondents were asked of the purpose of the loan, 53% of the respondents reported business expansion and 37% said they contracted the loan to start their businesses. The remaining 10% used the loan for paying school fees of their children. This shows that a larger portion of the respondents depended on micro finance for business start-ups and expansion. Hence, their very survival depended on microfinance. This re-echoes the importance of microfinance to the vulnerable and the poor who cannot access funds from the traditional commercial banks.

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Table 2: Purpose of Loan

PURPOSE FREQUENCY PERCENTAGE Start a business 11 37 Expand a business 16 53 Pay school fees 3 10 Pay house rent - - Family upkeep & growth - - TOTAL 30 100%

Benchmark Variables: Education, Income Level, Family Growth, Asset-Housing, Level of Participation in Social & Religious Activities. The study found an improvement in the level of education and the general skill level of respondents and family after microfinance. 80% of the respondents confirmed this. The remaining 20%, however, said there were no changes in the education and general skill level for themselves and family after microfinance. None recorded a decrease in educational level and general skill level of respondents and family. Most of the respondents reported no change in their level of participation in social and religious activities after accessing microfinance. 83% of the respondents confirmed this. The respondent said that even though they access microfinance it has not impacted their level of participation in social and religious activities. Further, most of the respondents said they belong to one or two religious and social organizations and that their membership was not triggered by micro finance. 5 respondents representing 17%, however, said their level of participation in social and religious activities improved after microfinance. None of the respondents recorded a decrease in the level of social and religious participation. 28 out of the 30 respondents reported of an improvement in family growth rate after micro finance. This represents 93% of the total respondents. With regard to the specific areas of growth within the family, 47% recorded improvement in family health, 26.5% each reported improvement in housing as well as food and security. None of the respondents reported improvement in security. Table 3 further shows changes in income after the respondents accessed microfinance. 21 out of the 30 respondents representing 70% of the respondents confirmed an increase in their income levels after accessing microfinance. The remaining 30% said that their income levels did not change even after accessing microfinance. None of them recorded a reduction in their income. This data confirms the positive relationship between micro finance and income levels as found by Morduch (2003). With asset-housing, respondents were asked of changes in asset-housing after accessing microfinance. 23 out of 30 respondents reported an increased asset-housing. This represents 70% while 7 respondents reported no change in asset-housing. Table 3: Impact of Microfinance on the Benchmark Variables

SINAPI ABA SAVINGS & LOANS COMPANY LTD

OPPORTUNITY INTERNATIONAL SAVINGS & LOANS COMPANY LTD

VARIABLE %CHANGE/AFTER MICROFINANCE

% CHANGE AFTER MICROFINANCE

Income level 70% ( ) 80% ( ) Education and general skill level 80% ( ) 87% ( ) Level of participation in social and religious activities

17% ( ) 10% ( )

Family growth 93% ( ) 90% ( ) Asset housing 77% ( ) 47% ( )

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This table shows the changes that occurred to benchmark variables of the beneficiaries. On the left are those of the beneficiaries of Sinapi Aba Savings and Loans Company Ltd. and on the right are those of Opportunity International Savings and Loans Company Ltd. Results and Discussion (Opportunity International Savings and Loans Company Ltd.) Purpose of Loan Table 4: Purpose of Loan

PURPOSE FREQUENCY PERCENTAGE

Start a business 2 7 Expand a business 27 90 Pay school fees - - Pay house rent - - Family upkeep & growth 1 3 TOTAL 30 100%

The table shows how the respondents use the loans they borrowed from Opportunity International Savings and Loans Company Limited. It is interesting to note that 27 out of the 30 respondents representing 90% reported contracting the loan to expand their businesses while the 7% confirmed that they took the loan to start a business. The remaining 3% said the micro credit was used for family up keep and growth. This data confirms the importance of micro finance in helping to build and sustain businesses of the less privileged and acts as a livelihood to their very survival. Benchmark Variables: Education, Income Level, Family Growth, Asset-Housing, Level of Participation in Social & Religious Activities Table 3 shows changes to the income levels of respondents after accessing micro finance. 24 of the respondents representing 80% reported an increase in their income levels after micro finance. The remaining 20% confirmed no change in their income levels after microfinance. None of the respondent reported a reduction in their income levels. This data confirm the positive correlation between microfinance and income levels. The study reported an improvement in education and general skill level of respondents and family after microfinance. 26 out of the 30 respondents representing 87% confirmed this. 13% of the respondents reported no change in education and general skill level while none recorded a reduction. 90% of the respondents reported no change in their level of participation in social and religious activities. They confirmed that even though they belong to social and religious organizations, their membership was not triggered by access to micro finance. The remaining 10%, however, said their participation in social and religious activities improved after accessing micro finance. 27 out of the 30 respondents reported on improvement in the rate of family growth. This represented 90%. The remaining 10% reported no change in family growth. On the specific areas of family growth 43% reported accommodation and another 43% reported improvement in family health while 7% recorded improvement in food and another 7% reporting nutrition and security. The respondents further reported a relationship between microfinance and asset-housing. 16 of the respondents representing 53% reported no change in asset-housing whilst 47% reported increased asset-housing. The data revealed that even though the respondents access micro finance, a large portion of the loans go into businesses and family upkeep and not housing. General Scenario

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Generally, it came out that microfinance impacts positively on all the variables apart from the level of participation in religious and social activities which was triggered by other factors and not microfinance. These findings are consistent with what Asemelash (2002), Littlefield Murduch & Hashmi (2003), Mawa (2008), found. Again, majority of the respondents reported that their expectations were met and they were satisfied with the efforts of the microfinance institutions. They, however, asked for expansion in the amount given to them by the MFI’s. It is important to mention that future studies should look at expanding the sample size to give way for generalization of the results and consider how other institutions such as the Church, Municipal and District Assemblies and the Capital Market could play a role in poverty reduction. CONCLUSION AND RECOMMENDATIONS The population that access microfinance improves in income levels, skills and educational level, family growth as well as asset-housing. There is a general improvement in the lives of beneficiaries of microfinance products. Respondents reported improvements in the benchmark variables and a reduction in poverty level. The potential of microfinance in reducing poverty was glaring. To sustain microfinance and make it effective and fulfilling, the following recommendations are made.

Education and training should be provided for the microfinance beneficiaries on how to efficiently utilize the funds. Interest charged on the microfinance products should be reduced. Management and staff of microfinance institutions must be given the needed training and education to help build and strengthen the skill, competencies and abilities for effective service delivery. Efforts should be made to reach the poor who are the target of microfinance policies and programs. Furthermore, since the poor do not have collaterals, management and staff should make available to them tailor-made unsecured products. Beneficiaries of microfinance products must be given a longer duration to give them enough room to generate future income out of the borrowed money. Beneficiaries should not be asked to pay back in the middle of the business. Government should endeavor to create sound political and economic environment for smooth operations and performance. Without such an environment, no business will thrive. Borrowers need sound economic environment to make a return on their borrowed funds so they can pay back.

REFERENCES Adjei, K.J. (2011), Microfinance and Poverty Reduction: The Experience of Ghana. Adu-Okoree, B. I. (2012), Peri-urban poverty: Can microfinance be a panacea. International Journal of Sociology and Anthropology Vol. 4 (6) pp. 190-198. Afrane, S. (2002), Impact Assessment of Microfinance Interventions in Ghana and South Africa. A Synthesis of Major Impacts and Lessons “Journal of Microfinance Spring” pp. 37-58.

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Akram, M. (2011), The role of Microfinance in uplifting Income Level: A study of District Okara – Pakistan Interdisciplinary Journal of Contemporary Research in Business, Volume 2, No. 11. Anyanwu, C. M. (2004) Microfinance Institutions in Nigeria: Policy, Practice and Potential. Central Bank of Nigeria. Research Paper pp. 1-31. Apata et al (2010), Determinants of rural poverty in Nigeria: Evidence from small holder farmers in South-Western, Nigeria. Journal of Science and Technology Education Research Vol. 1 (4) pp. 85-91. Aryetey, E. (1994) Supply and Demand for finance of small enterprises in Ghana, World Bank Discussion Paper No. 251. Asemelash (2002). The impact of Microfinance in Ethiopia: The case of DCSI in Ganta Afeshum Woreda of Eastern Tigray M. A. Thesis, Department of RLDS AAU. Asenso-Okyere, K., et al (1993). “Poverty and Strategies for Poverty Alleviations in Ghana. Institute of Statistical, Social and Economic Research, University of Ghana, Accra Technical Publication No. 57. Barnes, C. and Keogh, E. (1999). An assessment of the Impact of Zambuko’s microenterprise program in Zimbabwe: baseline findings. Washington DC: Management Systems International Batse et al (1999). Integrating Capacity Building within the context of Social Policies for Poverty Reduction in Ghana. Berg. G. (2010). Evaluating the impacts of microsaving: The Case of Sewa Bank in India. Journal of Economic Development Vol. 35, No. 1. Brownstein, L., Fleck, P., Shetty, R., Sorensen, J., & Vadgana, V. (2007). Pathways out of Poverty, Microfinance to Empower Sub-Saharan Africa. Discussion Paper Series University of Minnesota 1-57. Chesten, S., & Kuhn, L. (2002). “Empowering Women through Microfinance” United Nations Food for women. Demirguc-Kunt, A. & Levine, R. (2004). Finance, Inequality and Poverty: Cross Country Evidence. NBER Working Papers 10979. Growth and Poverty Reduction Strategy GPRS II 2006-2009 Ghana Statistical Service (2005) Living Standard Survey GLSS 2005/2006. Goldberg, N. (2005). Measuring the Impact of Microfinance: Taking stock in what we know. Washington D.C: Grameen Foundation USA Hietalahti, J. & Lindin, M. (2006). Socio-economic impacts of microfinance repayment performance: A case study of the Small Enterprise Foundation, South Africa. Progress in Development Studies 6(3) pp. 201- 210

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Hossain, F., & Knight, T.(2008). Can microfinance improve the livelihoods of the poor and disadvantaged? International Development Planning Review International Monetary Fund Country Report (July 2012). No.12/204. Ghana Poverty Reduction Strategy Paper-Volume Irobi, N.C. (2008), Microfinance and Poverty Alleviation: A case study of Obazu Progressive Women Association Mbieri, Imo State – Nigeria. Uppsala: Department of Economics. Ledgerwood, J. (1999). Microfinance Handbook: An Institutional and Financial Perspective. World Bank Publication Littlefield Another Look., E., Morduch, J. & Hashemi, S. (2003). Is Microfinance an Effective Strategy to Reach The Millennium Development Goals? Focus Note Series No. 24 Washington. Mawa, B. (2008). Impact of Microfinance; Towards Achieving Poverty Alleviation. Pakistan Journal of Social Sciences, 5 (9), 876-882. Morduch, J. (2002), Analysis of the Effects of Microfinance on Poverty Reduction. NYU Wagner Working Paper No. 1014. Narayan et al (2000). “Microfinance Impact Report”, Trihcirappalli, India: The Activist for Social Alternatives. Nkum and Ghartey (2000), Livelihoods of the poor in Ghana (www.nkumandassociates.com) Odell, K. (2010), Measuring the Impact of Microfinance: Taking Gramean Foundation Report of The World Summit For Social Development; Copenhagen (1995) Robinson, M. (2001). The Microfinance Revolution: Sustainable Finance for the poor: Washington DC: The World Bank, 2001 pp. xlvii, 304 Schreiner and Colombet (2001) From Urban to Rural: Lessons for Microfinance for Argentina. Development Policy Review 19(3): 339-354 Siddiqi, K. (2008), Potential of Islamic Microfinance in Pakistan. Discussion Paper Series. Strategy to Reach the Millennium Development Goals? Focus Note Series No. 24 Washington. World Bank Report 2002 World Bank Report 2006 BIOGRAPHY Gilbert O. Boateng is a Lecturer at the School of Business, Takoradi Polytechnic. His research interest includes Development Economics, Monetary Economics, and Central Banking. He can be reached at [email protected] and by phone at +233242777480.

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Akwasi Addae-Boateng is a Lecturer at the Department of Accountancy, Cape Coast Polytechnic. His research interest includes SME’s financing, Corporate Governance, Regulation and Supervision of MFIs. He can be reached at [email protected] and by phone at +233205905219. Harry S. Bampoe is a Lecturer at Jayee University College. His research interest includes Small and Medium Scale Enterprises and Branding. He can be reached at [email protected] and by phone at +233247817565.

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FINANCIAL PERFORMANCE OF FOREIGN OIL COMPANIES IN THE KURDISTAN REGION OF

IRAQ Naji Maseeho Odel, Soran University, Kurdistan-Iraq & University of Wolverhampton

ABSTRACT

This research seeks to explore the financial performance of foreign oil companies taking part in oil production projects in the Kurdistan region of Iraq. This region benefits from huge oil reserves and this attracts foreign oil companies from around the world. Since 2004, 48 companies have entered the region, of which 40 are actively taking part in oil exploration and production projects. Four big international oil companies have recently signed contracts with the Kurdistan Regional Government and started operations there. Five foreign companies were examined based upon three financial ratios: Return on Capital Employed (ROCE), Return on Assets (ROA), and Return on Equity (ROE). WesternZagros is performing the best based on ROCE, this company also ranks third and fifth based on ROA and ROE respectively. Whereas DNO is best on ROA and ROE ratios which comes in the first rank on both of them, and ranks second on ROCE. The results of this study will be of interest to the boards of directors and decision makers in other oil companies (domestic or foreign) who are planning to invest in the Kurdistan oil industry but are not thoroughly aware of its risks and profits. JEL: M400 KEYWORDS: ROCE, ROA, ROE, Financial assessment, Oil companies, The Kurdistan Region of Iraq INTRODUCTION This study examines the financial performance of international oil companies investing and operating in the oil industry in Kurdistan Region of Iraq. Oil industry is one of the main industries in the world particularly in the Middle East; Iraq ranks top in terms of enormous oil production in the world. Kurdistan as an autonomy region which is located in the northern part of Iraq in the Middle East has approximately 50% of undiscovered oil in Iraq. Oil company managers and geologists have estimated between 10 to 45 billion oil reserves for the region which equals to total oil resources projected for Nigeria and Libya. The region is also rich in different mineral resources including Steel, Iron, Copper, Zinc, Lead, Pyrite, Silver, Gold, etc. (Kurdistan Board of Investment, 2012), but oil and gas industry is playing a key role in Kurdistan region of Iraq (genelenergy, 2011). A number of studies have tried to evaluate the performance of international oil companies operating in different areas of the world with respect to their financial and investment operations (Thompson et al., 1996; Han & Wang, 1998; Marcel & Mitchell, 2006; Osmundsen et al., 2006). Few reports have examined oil companies in Kurdistan region and no study has the coverage of the current study. In a research, three international oil companies including Vast Exploration Inc., Langford Energy Inc., and ShaMaran Petroleum Corp. were studied (Wylie, 2010). In another study, five companies operating in Kurdistan including Heritage Oil, Niko Resources, Talisman Energy, Vast Exploration and WesternZagros were examined, but they only presented a

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description of the company, its managerial team, operations, and the costs and risks of operations (Peters et al., 2009) and no study evaluated financial performance of the companies. Oil industries are mainly evaluated by financial indicators like Return on Average Capital Employed (RoACE), Return on Equity (ROE), Return of Assets (ROA), working interest, gross profit, production growth, and tax rates (Osmundsen, Asch, & Mohn, 2004). This study mainly aims to inform oil policy makers, administrators, and local and foreign companies and any authorities interested in oil industry progression in Kurdistan. The results will also help foreign oil companies’ managers to make a decision to take part in future oil investment plans in Kurdistan region. Furthermore, this study plays its role as a means to attract other companies around the world which is one of the purposes of the regional government to develop foreign investment in Kurdistan. To achieve the research objectives, some research questions are concerned to answer as follows: Which countries or continents of the world are predominantly taking part in oil production projects in Kurdistan? How have the foreign oil companies financially performed in Kurdistan since their entry to the region? Which company(ies) are performing better in terms of financial ratios explored in Question 2 over the all years examined? LITERATURE REVIEW A number of studies have examined the performance of oil companies from different aspects. Marcel and Mitchell (2006) investigated the operations of five oil titans in the Middle East. Oil titans are five countries including Saudi Aramco, Kuwait Petroleum Corp., the National Iranian Oil Co., Sonatrach of Algeria, and the Abu Dhabi National Oil Co. producing one quarter of the world's oil and hold half of the world's oil and gas reserves. They did 120 interviews with company executives and managers and found a number of great trends in these companies' strategy. They yield insight into how state-owned oil firms are striking a balance between their national mission and their commercial needs. In another study, fourteen international oil and gas firms were explored to seek for econometric relations between market appraisal and simple financial and operational indices. The study concluded that the company appraisal is mainly explained by the oil price, production and reserve replacement (Osmundsen et al., 2006). Thompson et al. (1996) also investigated fourteen major oil companies in US from 1980-1991 and analysed their efficiency and profitability. The study showed 21% inefficiency in the findings and a profit potential was found for the downside risk indicators. Magnan and Cormier (2002) showed that in Canadian oil and gas companies, the managerial advantages for earnings management can be affected by the intensity of external controlling. A number of studies have addressed the National Oil Companies (NOCs) and tried to examine them from different perspectives. Using macro-level data, Victor (2007) analysed oil and gas companies to compare the performance of NOCs with International Oil Companies (IOCs) including the global majors. The results of his study revealed that NOCs have great flaws in their performance and their performance is affected by government-dictated strategies which differ from IOCs. So, he concluded that the operations by NOCs are far less efficiently than by IOCs. He reported that a large amount of oil in NOCs territory is dead and ineffective. However, his

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study showed that some NOCs can perform rather as efficient as large OICs. In another study, Eller, Hartly and Medlock (2011) examined the efficiency of NOCs vs. OICs and came to this result that NOCs are less efficient than OICs. They claim that much of differences between these companies are awing to the different structural and institutional characteristics of the companies. A number of studies examined the interactions between different factors playing a role in the oil industry. For instance, Saleem and Rehman (2011) examined the influence of three different liquidity factors on profitability. The three factors include Return on Assets (ROA), Return on Investment (ROI), and Return on Equity (ROE). The findings of their study showed that there is a significant relationship between ROA and profitability in oil and gas companies in Pakistan. Chen and Lee (1993) examined the association between financial ratios and the endurance of oil firms. Using survival analysis, they came to this result that liquidity ratio, leverage ratio, operating cash flows, success in exploration, age, and size are significantly affecting the corporate endurance. Taheri Fard (2011) examined the effective factors on the market value of five major oil companies. Market value is an important indicator in oil and gas industry. The profit and oil and gas reserves of oil companies effectively influence the market value. The results of Taheri Fard’s study showed that oil and gas reserves of international oil companies are more effectively influencing market value than the oil and gas profit. Victor (2007) also examined the market value of NOCs and IOCs as a function of the total production, the company income and the company labour force, and came to this result that the size of labour force has no effect on the company market value. In their study, Talevski and Lima (2009) examined a national oil company in Brazil to measure its potential to create shareholders’ value and stock fail value by the end of 2008. Oil and gas companies have multidimensional performance, with earnings, cash flows and changes in reserves. Quirin, Berry and O'Bryan (2000) explored oil companies based on fundamental variables including cash flows, production efficiency, stock price appreciation potential, and growth. They identified nine fundamental signals as being instrumental during the equity valuation process. Misund, Osmundsen and Asche (2007) have also examined a number of oil companies in terms of structural shift in their valuation. They mentioned that financial figures such as net income, cash flows and accruals, and operational measures such as the size of oil and gas reserves have become more important in the equity valuation process for oil and gas companies during the 1990s and are instrumental in explaining this structural shift. Studies within Kurdistan Region A report by Wylie (2010) explored national oil companies and three foreign companies in Kurdistan. Three oil companies examined are Vast Exploration Inc., Langford Energy Inc., and ShaMaran Petroleum Corp. Vast’s main exploration is located in Qara Dagh Block. Vast has a 37% non-operated working interest in the Block and is liable for 46.25% of the initial exploration costs and 37% of total development costs. Langford Energy Company operates only in Chia Surkh block and possesses 40% of working interest in this block. ShaMaran Petroleum Corporation has operations in three blocks in Kurdistan. This company has a great working interest in Pulkhana block. Peters et al. (2009) provided an overview of five companies operating in Kurdistan including Heritage Oil, Niko Resources, Talisman Energy, Vast Exploration and WesternZagros. For each company, they presented a description of the company, its managerial team, the blocks it has operations in, and the costs and risks of operations. As can be seen, no previous study tried to compare the financial performance of foreign oil companies in Kurdistan

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with respect to the foremost financial indicators. Bearing in mind the limitations of prior research works and the gaps in the area, this study will address this issue to provide a wider overview of the performance of foreign oil companies in Kurdistan region of Iraq. METHODOLOGY This study is an empirical study and aims to assess a number of foreign companies investing in oil industry in Kurdistan region of Iraq. The companies’ websites found to be the best sources of information. According to a recent report, currently 40 companies are operating in oil and gas industry in Kurdistan which almost all of them are international oil companies. Four companies providing comprehensive information and statistics of their operations in Kurdistan were selected. In this study, secondary data was used including companies’ official websites, annual reports, KRG website, and some other financial databases were investigated. To calculate three financial ratios including ROA, ROE, and ROCE, the formulae below were used: Return on Assets (ROA): According to Johnston and Johnston (2006), Return on Assets gauges the profits that a company gain in relation to its total assets, it is calculated as follows:

𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Return on Equity (ROE): ROE reveals the profit attributable to the amount invested by the owners of the business and it measures a firm's efficiency at generating profits from every pound of net assets, and shows how well a company employs investment pound to generate earnings growth (Alexander & Nobes, 2010). It is calculated as follows:

𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

Return on Capital Employed (ROCE): Atrill and McLaney (2008) described ROCE ratio as a “fundamental measure of business performance”. This ratio implies the relationship between the operating profit generated by the business and the long-term capital invested in the business. ROCE is calculated as follow:

𝑅𝑂𝐶𝐸 = EBIT

𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑁𝑜𝑛 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

RESULT AND DISCUSSION 1. Which countries or continents of the world are predominantly taking part in oil production projects in Kurdistan? The foreign oil companies taking part in oil and gas projects in Kurdistan were identified. Based on the findings, 48 foreign companies are active in the region. As shown in Figure 1, the majority of companies are from the United States. The second-most active companies are Canadian. Oil companies from the United Kingdom and Turkey are also actively investing in the oil industry in Kurdistan. Table 1: Foreign Oil Companies Investing in Kurdistan Region of Iraq

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row company originality row company originality row company originality row company originality

1 addax china 11 gkp u.k 21 new age uk 31 reliance energy india

2 afren africa 12 heritage oil u.k 22 niko canada 32 repsol spain

3 chevron* u.s.a 13 hess u.s.a 23 oil search australia 33 shamaran canada

4 dno norway 14 hillwood u.s.a 24 omv austria 34 sterling u.k

5 exxonmobil u.s.a 15 hunt oil u.s.a 25 oryx malta 35 talisman canada

6 gas plus khalakan uk- turkey 16 komet group moldova 26 perenco france 36 keystone u.s.a

7 gazprom russia 17 knoc south korea 27 pet oil turkey 37 total france

8 genel energy turkey 18 marathon u.s.a 28 petroceltic int. ireland 38 ttopco turkey- china

9 general

exploration partners

u.s.a- canada 19 mol hungary 29 petroquest turkey 39 vast canada

10 groundstar canada 20 murphy u.s.a 30 prime natural u.s.a 40 westernzag ros

canada The name and originality of those companies which invest in oil exploration and development in the region and have signed contracts with Kurdistan regional government to work in one or more blocks *The companies in grey have very recently entered into KRG. Sources: (The oil and gas year, 2012; Amon, 2011; The websites of the companies) From a continental perspective, the majority of oil companies are from North America and Europe (Figure 2). The 48 identified countries are not all engaged in oil exploration and operation activities. 8 companies are only involved in research projects and geological investigations of the oil industry in Kurdistan and also a few companies are exclusively working in gas explorations. The other 40 companies are investing in oil exploration and development in the region and have signed contracts with KRG to work in one or more blocks (See Table 1). It should be noted that some companies among the 40 investing companies are among the top ten companies of the world (Table 2). Exxon Mobil, Chevron, Total, and Gazprom are the four top companies of the world that have very recently taken part in oil drilling projects in Kurdistan. The other 36 companies are smaller oil companies from around the world, the majority of which have entered into the region since 2007 (Kayalar, 2012). Table 2: The Top 10 Oil Companies in The World- 2011 Rank

Rank Company Market Cap $US billion

1 ExxonMobil 406.3 2 PetroChina 276.6 3 Royal Dutch Shell 234.6 4 Chevron 211.9 5 Petrobras 156.3 6 BP 135.5 7 Gazprom 122.6 8 TOTAL 121 9 Sinopec 97.4

10 ConocoPhillips 96.8 Four companies among the 40 which are investing in the oil sector in the Kurdistan region are among the top ten companies of the world-2011 rank , Source: PFC Energy (2012) Figure 1: Investing Countries and Their Number of Companies in Kurdistan Region Figure 2: Investing Continents and Their Number of Companies in Kurdistan Region

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This figure shows the investing countries and their number of companies in the Kurdistan region This figure shows the investing continents and their number of companies in the Kurdistan region. How have the foreign oil companies financially performed in Kurdistan since their entry to the region? To answer this question, the authors collected data from the companies’ annual reports. The entry date of companies to the Kurdistan oil industry is not uniform and different companies signed contracts with the KRG in different years. To assess the financial performance of each company, the total years of its presence in the region were taken into account. Three ratios including Return on Capital Employed (ROCE), Return on Assets (ROA), and Return on Equity (ROE) were gauged and their results were discussed. Korean National Oil Corporation (KNOC): Return on Capital Employed (ROCE): This is the most powerful ratio for investors, most of whom take ROCE into account before purchasing shares. Over the five years of operations in Kurdistan, the ROCE had major fluctuations but declined overall by 12% between 2007 and 2011. The main reasons for decreased ROCE are high liabilities and a decline in revenue. However, the ROCE increased by 37% from 2010 to 2011 which is a good indication that the company is heading to the right direction. The main reason for increased ROCE in 2011 is increased profit before tax by 71% in 2011; in the same period equity has increased by 6%, but increasing non-current liabilities had a major impact on increasing ROCE in 2011. As can be seen in the balance sheet, the non-current liabilities have increased by 43% in 2011 compared to 2010 and the main reasons are long-term increasing trade and non- current financial liabilities. It is sometimes necessary for the company to rely on long-term debits to improve its long-term assets or expansion and increasing long-term trade helps the company’s cash flow if they have a decent contract with a lower interest rate (Table 3). Return on Assets (ROA): The main purpose of this ratio is to evaluate how profitable KNOC is and how often their assets have been used to generate income; the higher the ROA, the more profitable the company. The ROA for 2011 is very small; between 2007 and 2011 the ROA declined by 122% which is not a good indication for investors and shareholders. Nevertheless, the profit before income tax increased by 208% in 2011, and the total assets increased by 21%. The

Africa, 1 Australia, 1 Austria, 1

Canada, 6

China, 1

France, 2

Hungary, 1

India, 1 Ireland, 1 Malta, 1

Moldova, 1

Norway, 1 Russia, 1 South Korea, 1 Spain, 1

Turkey, 3 Turkey- China,

1

U.K, 4

U.S.A, 9

U.S.A- Canada, 1

UK- Turkey, 1

Asia, 9

Europe, 13

Americ a, 16

Oceani a,1

Africa, 1

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main factor making loss between 2007 and 2011 is that the unpaid income tax expenses paid one year in arrears. On the other hand, the company is in a good financial position with revenue growing sharply over the past three years; the increase in fuel price over the past few years has greatly helped KNOC to generate more profits. Furthermore, in the long term KNOC will increase the value of total assets which will make the company more resistant to liability (Table 3). Return on Equity (ROE): The ROE sharply dropped between 2007 and 2011 almost from 3.56% to 1.41%. However between 2010 and 2011 this ratio declined by 2574% and neither the board nor the shareholders were satisfied with this result. The main factor in decreased ROE is the loss after tax and the main reason for this loss is a 317% increase in income tax expenses in 2011. Usually investors look at the ROE ratio to evaluate a company’s income and equity; they do not look at the balance sheet in more detail. However, although the profit before tax and equity to shareholders both increased in 2011, there are some other factors negatively affecting the ROE (Table 3). Table 3: Financial Ratios for KNOC

Ratios ROCE ROA ROE

2007 4.30% 2.19% 3.56%

2008 5.44% 1.53% 2.66%

2009 3.83% 2.46% 5.01%

2010 2.76% 0.022% 0.057%

2011 3.77% (0.48%) (1.41%)

This table shows the rate of financial ratios of the KNOC company (Source: Korean national oil corporation, 2007; 2008; 2009; 2010; 2011) DNO: Return on Capital Employed (ROCE): The ROCE sharply increased by 324% between 2004 and 2011. The main reason for this increase in ROCE was increased operation profits, although the non-current liabilities declined by 19% at the same time. The outcome certainly makes the company very attractive for new investors and will make its market value increase further in following years. The main ratio that new investors planning to purchase a company’s shares take into consideration is ROCE. As found here, the ROCE of DNO in 2011 brings high confidence and reputation for the company (Table 4). Return on Assets (ROA): DNO has gradually expanded its operations in Kurdistan since 2004. The ROA for DNO climbed sharply between 2004 and 2011 from 0.97% to 13%. The main factor behind the increased ROA is the increased net profit after tax. In 2010, the company made a big loss but they managed to recover the loss in 2011. This is a good indication for the investors and shareholders and it is pushing market capacity to grow further. According to the company’s annual report in 2011, the board of directors is expecting the growth to continue, particularly their activity in Kurdistan is going to be the main operation for the company in the coming year (Table 4). Return on Equity (ROE): ROE for DNO puts the company in a healthy financial position between 2004 and 2011 and it has sharply increased from 2.05 to 30.30%. The increase in ROE is noticeable between 2010 and 2011. The weak ROE in 2010 was due to the poor net loss after tax. Despite the weak ROE in 2010, the value of shareholders’ equity increased in 2011 by 2.3%.

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Shareholders can expect a good return in the coming years because DNO has started its operations in a new field in Kurdistan. The operation will lead to increased revenue from 2012 onwards (Table 4). Table 4: Financial Ratios for DNO

Ratios ROCE ROA ROE 2004 4.08% 0.97% 2.05% 2005 6.25% 10.03% 30.90% 2006 10.47% 1.85% 8.43% 2007 10.76% 19.96% 41.50% 2008 0.197% (17.6%) (42.5%) 2009 (4.32%) (6.13%) (17.07%) 2010 3.8% (5.2%) (13.4%) 2011 17.3% 13% 30.30%

This table shows the rate of financial ratios of the DNO company (Source: DNO,2004; 2005; 2006; 2007; 2008; 2009; 2010; 2011) Sterling Energy: Return on Capital Employed (ROCE): ROCE indicates the efficiency and profitability of the company’s capital. The ROCE for Sterling Energy kept growing for a second consecutive year and climbed by 60% between 2007 and 2011. The main reason for such a sharp growth is the increase in the operating profit and increased value of shareholders’ equity, combined with decreased value of non-current liabilities. Sterling Energy had a small ROCE in 2008 and early 2009 due to the sharp decline in revenue and the increase in the cost of production. However, the company is getting ready to fully operate in the region and the board of directors is very optimistic about increasing net profits in the coming years (Table 5). Return on Assets (ROA): ROA for Sterling Energy increased sharply from 0.36% to 12.20% between 2007 and 2011. The main factors associated with increased ROA are the increased net profit after tax, which climbed by 215% between 2007 and 2011. It is a positive sign for current shareholders and new investors. Moreover, it helps the company’s market value to grow further when the company is using their assets to generate revenue (Table 5). Return on Equity (ROE):ROE has also sharply increased by 1882% from 2007 to 2011. The main factor positively affecting this increase is the increased profit after tax. When the profit after tax grows continuously, it helps the company to stabilize for a long term. This kind of return to owners and shareholders will give high confidence to the board of directors and improve the relationship between the board members and the shareholders’ committee. Moreover, it will positively affect the market value of the company (Table 5). Table 5: Financial Ratios for Sterling Energy

Ratios ROCE ROA ROE 2007 7.46% (0.36%) (0.80%) 2008 (471.19%) (39.30%) (91.59%) 2009 (26.96%) (153.51%) (229.73%) 2010 6.14% 3.84% 6.10% 2011 11.91% 12.20% 15.86%

This table shows the rate of financial ratios of the Sterlimg Energy company (Source: Sterling Energy, 2007; 2008; 2009; 2010; 2011)

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Gulf Keystone Petroleum (GKP): Return on Capital Employed (ROCE): The ROCE significantly increased by 54% from 2007 to 2011 and caused a great loss to the company. Since the ROCE for this company is a very small proportion, it is not clear whether the company is using its resources to generate enough profits. New investors use capital employed to measure the total resources that a business has available, although it is not perfect measurement. For example, a business might lease or hire much of its production capacity (machinery, buildings, etc.) which would not be included as assets in the balance sheet (Table 6). Return on Assets (ROA): The ROA for Gulf Keystone is not a very positive return for current shareholders or new investors. The main reason for the company’s loss between 2007 and 2011 is limited activity but Gulf Keystone will fully operate in Kurdistan in the next years and the board of directors is optimistic about a quick recovery from loss. However the company managed to recover by 46% from 2007 and 2011, which is a relief for current shareholders and the board (Table 6). Return on Equity (ROE): The ROE has fluctuated over the past few years but the overall result shows a 54% increase from 2007 to 2011. The decreased ROA is due to a loss after tax (Table 6). Table 6: Financial ratios for Gulf Keystone Petroleum

Ratios ROCE ROA ROE 2007 (25.62%) (17.37%) (22.31%) 2008 (43.60%) (37.22%) (48.23%) 2009 (130.76%) (82.03%) (139.37%) 2010 (2.76% ) (0.48%) (1.41%) 2011 (11.8%) (9.26%) (10.3%)

This table shows the rate of financial ratios of the Gulf Keystone Petroleum company (Source: Gulf Keystone Petroleum, 2007; 2008; 2009; 2010; 2011) WesternZagros: Return on Capital Employed (ROCE): The ROCE ratio improved between 2006 and 2011, increasing by 93%. However, it is still in a negative position and this is not attractive for current shareholders or future investors. Although the operating profit also increased by 20% between 2010 and 2011, the company is still attempting to recover from the heavy loss they made when they first started their operations (Table 7). Return on Assets (ROA): Despite the loss between 2006 and 2011, the ROA increased by 92% during this period. The result is promising but the company is not able to make any profits after tax. WesternZagros is trying to expand its activities in Kurdistan, so it keeps expanding its assets; these have been increased by 35% between 2006 and 2011 while the net loss has reduced by 14%. WesternZagros is only operating in Kurdistan and the heavy loss does not mean that the company is not performing well. In reality, the major loss has resulted from the cost of research and zero revenue because the company is not fully operating in the region yet (Table 7). Return on Equity (ROE): Return on Equity increased by 100% between 2006 and 2011. On one hand, it is a good indication for the current shareholders and future investors who intend to purchase shares from the company. On the other hand, it is not very promising for the company regardless of the increasing value of shareholders; equity by 38% between 2010 and 2011. Actually, this ratio is not very reliable but it should be noted that the company is still seeking to expand its drilling operations in Kurdistan (Table 7). Table 7: Financial Ratios for WesternZagros

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Ratios ROCE ROA ROE 2006 (38.30%) (38.24%) (658.81%) 2007 (6.69%) (6.48%) (6.69%) 2008 2.68% (4.14%) (4.47%) 2009 3.06 (2.27%) (2.46%) 2010 (3.18%) (2.4%) (2.65%) 2011 (2.76%) (2.02%) (2.28%)

This table shows the rate of financial ratios of the WesternZagros company (Source: WesternZagros, 2006; 2007; 2008; 2009; 2010; 2011) Which company(ies) are performing better in terms of financial ratios explored in Question 2 over the all years examined? To answer the third research question, the financial ratios were averaged through all years of operations for each company. As shown in Table 8, WesterZagros is performing the best based on ROCE, this company also ranks third and fifth based on ROA and ROE respectively. Whereas DNO is best on ROA and ROE ratios which comes in the first rank on both of them, and ranks second on ROCE. As table 8 is showing, DNO and KNOC come in second and third rank on ROCE and first and second rank on ROA and ROE respectively. On the other hand Gulf Keystone and Sterling rank fourth and fifth on ROCE, and third and fourth on each ROA and ROE respectively. Table 8: Comparing Companies Based on Their Ratios

Company ROCE (Avg%) Company ROA (Avg

%) Company ROE (Avg%)

WesternZagros 42.96 DNO 2.11 DNO 5.03 DNO 6.07 KNOC 1.14 KNOC 1.98

KNOC 4.02 WesternZagros -9.26 Gulf Keystone -44.32 Gulf Keystone -42.91 Gulf Keystone -29.27 Sterling -60.03

Sterling -94.53 Sterling -35.43 WesternZagros -112.89 This table is showing comparing each company to others based on their ratios including ROCE, ROA and ROE CONCLUDING COMMENTS The current research examined the performance of five foreign companies operating in oil industry in Kurdistan region of Iraq. Based on the results, 40 companies have oil exploration projects in Kurdistan of which 4 companies have recently joined. The new comers including Exxon Mobil, Total, Chevron, and Gazprom are among big oil companies in the world. Geographically, the companies are mainly from USA, UK, Canada, and Turkey (North America and Europe regions). Five companies were examined financially based on three financial ratios including ROA, ROE, and ROCE. Financial ratios shed light on the relationships between individual values and how a company performed in the past, and will perform in the future. The ratios used in this study to evaluate the financial performance of the companies show that some companies successfully achieved their mission and have started their operations in Kurdistan. The current research could not take those big companies recently arrived to the region into consideration as no annual reports were available to scrutinize. Therefore, further studies are needed to include the new comers and investigate their performance in compare with the other existed companies in Kurdistan. Moreover, their performance can be compared with their performance in other countries. REFERENCES

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Alexander, D. and Nobes, C. (2010) ‘'financial accounting an international introduction. Harlow: Pearson Education limited. Amon, C. (2011) Iraqi Oil Industry, March 2011. Washington, DC: IAS Group Ltd. Atrill, P., and McLaney, E. (2008) Financial Accounting for Decision Makers. Financial Times: Pearson Education Limited. Chen, K.C.W. and Lee, C.W.J. (1993) Financial Ratios and Corporate Endurance: A Case of the Oil and Gas Industry. Contemporary Accounting Research, 9(2), pp.667-694. DNO. (2004-2011) Annual report 2004 [online] [Accessed 25 July 2012]. Available at: < http://www.dno.no/investor-relations/download-center/annual-reports/?year=all>. Eller, S, L., Hartley, P, R., and Medlock, K, B. (2011) Empirical Evidence on the Operational Efficiency of National Oil Companies. Empirical Economics, 40(3), pp.623-643. Genelenergy (2011) Annual report 2011 [online] [Accessed 29 July 2012]. Available at: <www.genelenergy.com>. Gulf Keystone Petroleum Ltd. (2007-2011) Annual report and accounts 2007 [online] [Accessed 25 July 2012]. Available at:< http://www.gulfkeystone.com/shareholder-communications.aspx>. Han, J, C, Y. and Wang, S. (1998) Political Costs and Earnings Management of Oil Companies During the 1990 Persian Gulf Crisis. The Accounting Review, 73(1), pp.103-117. Johnston, D., and Johnston, D. (2006) Introduction to Oil Company Financial Analysis. Tulsa: PennWell. Kayalar, A. (2012) oil rush in northern Iraq. Hurriyetdailynews, [online]. [Accessed at 29 August 2012]. Available at:< http://www.hurriyetdailynews.com/images/Documents/Oil-Rush.pdf>. Korean national oil corporation (2007-2011) Annual report 2007 [online] [Accessed 29 July 2012]. Available at: < http://www.knoc.co.kr/ENG/sub04/sub04_4_7.jsp>. Magnan, M., and Cormier, D. (2002) Performance reporting by oil and gas firms: contractual and value implications. Journal of International Accounting, Auditing & Taxation, 11 (2), pp.131– 153. Marcel, V., and Mitchell, J. (2006) Oil titans: National oil companies in the Middle East. Washington, DC: Brookings Institution Press. Misund, B., Osmundsen, P. and Asche, F. (2007) The Pricing of International Oil and GasCompanies 1990–2003—A Structural Shift in the EquityValuation Process. University ofStavanger, Institute for Research in Economics and Business Administration: Norway. Osmundsen, P,.Asche, F,.Misund,. B,.and Mohn, K,. (2006) Valuation of International Oil Companies. The Energy Journal, 27(3), pp.49-64.

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Osmundsen, P., Asch, F, and Mohn, K. (2004). Valuation of International Oil Companies- The RoACE era. Bergen: Institute for research in Economics and Business Administration. Working Paper No 32/04. Peters, T., Yee, C., Ahmed, Z., Kozak, F. and Clark, T. (2009) The Kurdistan Region of Iraq – Rewards for Risks. February 2009. Toronto: Canaccord Adams. PFC Energy (2012) The Definitive Annual Ranking of the World’s Largest Listed Energy Firms [online]. [Accessed 7 August 2012] Available at: < https://www.pfcenergy.com/~/media/Files/Public%20Files/PFC%20Energy%2050/Final_PFC_E nergy_50_2012.pdf>. Quirin, J. J., Berry, K. T. and O’Brien, D. (2000) A Fundamental Analysis Approach to Oil and Gas Firm Valuation. Journal of Business Finance & Accounting, 27(7), pp. 785-820. Saleem,Q., and Rehman, R. (2011) Impacts of liquidity ratios on profitability (Case of oil and gas companies of Pakistan). Interdisciplinary Journal of Research in Business, 1(7), pp.95-98. Sterling energy. (2007-2011) report and financial statements 2007 [online] [Accessed 25 July 2012]. Available at: < http://online.hemscottir.com/ir/sey/ar2007/download/pdf/ar2007.pdf>. TaheriFard, A. (2011) Evaluation of influential factors on market values of five major international oil companies using the method of panel data with two-way error components and its application in oil and gas industries of Iran. OPEC Energy Review. 35(3), pp. 220-226. Talevski, D. and Lima, A.D.L.D. (2009) Strategic and financial analysis in the oil industry: Petrobras shareholders value potential and fair value of stock. [online] [Accessed 25 August 2012]. Available at: <http://pure.au.dk/portal-asb-student/files/8058/M.THESIS.pdf>. The Oil & Gas Year (2012) the oil and gas year/ Kurdistan Region of Iraq. Istanbul: Wildcat international. Thompson, R.G., Dharmapala, P.S., Rothenberg, L.J. and Thrall, R.M. (1996) DEA/AR efficiency and profitability of 14 major oil companies in US exploration and production. Computers and Operations Research, 23(4), pp.357–373. Victor, N. M. (2007) On Measuring the Performance of National Oil Companies. Working Paper 64, Program on Energy and Sustainable Development, Stanford University. WesternZagros (2006-2011) Annual report 2006 [online] [Accessed 25 July 2012]. Available at:< http://www.westernzagros.com/investors/financial-reports/>. Wylie, G. (2010) Oil & Gas – International E&P Kurdistan – A Region Full of Ambition [online]. gbm.scotiabank. [Accessed 20 July 2012]. Available at: <http://www.scribd.com/doc/43943123/Kurdistan-Report>.

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INFLUENCE OF COLLECTIVIST AND INDIVIDUALIST CULTURAL ORIENTATION AND

REGULATORY CONSTRUAL FIT ON BRAND ATTITUDES

Miguel A. Zúñiga, Morgan State University Ivonne M. Torres, New Mexico State University

ABSTRACT

This research studies how the relationship between cultural orientation and construal level of the message will influence brand attitudes. We also examine the mediation role of engagement in this relationship. The results show that collectivist (individualist) participants had more favorable brand attitudes toward low-level (high-level) construal messages. Our experiment also showed that the relationship between cultural orientation and construal level of the message was mediated by engagement. KEYWORDS: Regulatory focus theory, Construal level theory, collectivist/individualist cultural orientation, regulatory fit, engagement INTRODUCTION Globalization has impacted the US consumer market making it a complex, melting-pot of consumers with distinct cultural orientations. Existing studies focused on cultural orientation show that cultural orientation significantly influences consumers’ persuasion processes (Aaker and Maheswaran 1997) and emotional patterns (Markus and Kitayama 1994). However, most individualism and collectivism research involves comparisons of cross-cultural individuals (Coon and Kemmelmeier 2001). Currently, a disproportionate number of studies focus on the influence that differences in cultural orientations of individuals of the same society has on evaluations of marketing messages. LITERATURE REVIEW Individualist and collectivist orientations are linked to the conceptions people have of the self (Markus and Kitayama 1991). Collectivist-oriented people use more low-level construal, concrete self-descriptions (e.g., brother, student) when describing the self;compared to individualist-oriented peoplewho use more high-level construal, abstract descriptions (e.g., kind, honest) (Trafimow, Triandis, and Goto 1991). Additionally, low-level construal messages were rated higher by collectivist-oriented people than individualist-oriented people (Morris and Peng 1994). In this study, we focus on determining whether participants who review a message featuring information construed at a level that fits their cultural orientation have more positive brand attitudes in relation to those who review a nonfit message. Therefore, we hypothesize: H1: Consumers with a dominant collectivist orientation will have more favorable brand attitudes when exposed to a low-level construal message versus a high-level construal message, while those with a dominant individualist orientation will have more favorable brand attitudes when exposed to a high-level construal message versus a low-level construal message.

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Important for this study is the fit from construal hypothesis, which revolves around the notion that engagement increases when the level of construal of messages matches the person’s regulatory focus. As a result, the increase in engagement is responsible for more positive brand attitudes. More specifically, for this study, we examine the role that engagement plays in the effect of cultural orientation and construal level fit on brand attitudes. Thus, we hypothesize: H2: The mentioned effects in H1 will be mediated by engagement DATA AND METHODOLOGY In this experiment, we examined the evaluation of a brand portrayed in a high- and low-level message. The high- (low-level) construal of the two advertising messages was manipulated by using either abstract (concrete) copy. A 2 (cultural orientation: collectivist vs. individualist) x 2 (construal level: high vs.low) between-subjects design was used. In this study, cultural orientation was measured and construal level was manipulated in the advertisement messages. In total, 353 undergraduate students from a large southwestern university participated in the study in exchange for extra-credit. Online surveys were used. Participants were randomly assigned to either the high- or low-construal advertisement. After exposure to the ad, participants responded to questions related to their brand attitude, cultural orientation, engagement experienced during evaluation of the ad as well as demographic questions. RESULTS AND DISCUSSION Two-way ANOVAs (analyses of variance) were used to examine the hypothesis for the brand attitude dependent variable. The degrees of freedom of the reported ANOVAs were 1, 349. Results of a 2 (cultural orientation) x 2 (construal level) ANOVA revealed that the main effect of construal level was not significant (F = 2.5, p> .10), but the main effect of cultural orientation was significant (F = 5.1, p< .05). This main effect was supported by the two-way interaction. As predicted, the cultural orientationxconstrual level interaction was significant, Fbrand attitude = 8.72, p < .01, χ2 = .99. As a result, H1 is supported. Next, we examined the role of engagement mediating the effect of fit on brand attitude. We found that the mean indirect effect from the bootstrap process was significant (a x b = .0623). The bias-corrected confidence interval (CI) of the bootstrapping mediation test did not include zero (CI95% =.0081, .1249; N = 353; 10,000 re- samples). The unstandardized regression coefficients are (a= .1130, p< .05; b= .5511, p<.001; c= .0663, p> .05). Because c is not significant, we find support for indirect-only mediation effect of construal fit on brand attitudes through engagement (Zhao, Lynch, and Chen, 2010, p. 204). CONCLUDING REMARKS This study highlights the strategy of segmenting consumers by collectivist or individualist cultural orientation. Studying how collectivist- and individualist-oriented people respond to high- vs. low-level construal messages will aid marketers in identifying the most effective marketing techniques to target the collectivist and individualist consumer market segments. REFERENCES Aaker, Jennifer and DurairajMaheswaran (1997), “The Impact of Cultural Orientation on Persuasion,” Journal of Consumer Research, 24 (December), 315-328.

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Coon, Heather M. and Markus Kemmelmeier (2001), “Cultural Orientations in the United States (Re) Examining Differences Among Ethnic Groups,” Journal of Cross-Cultural Psychology, 32 (3), 348-364. Markus, Hazel and Shinobu Kitayama (1991), “Culture and the Self: Implications for Cognition, Emotion and Motivation,” Psychological Review, 98 (April), 224-253. Markus, Hazel and Shinobu Kitayam (1994), “The Cultural Construction of Self and Emotion: Implications for Social Behavior,” in Emotion and Culture: Empirical Studies of Mutual Influence, ed. Shinobu Kitayam and Hazel Markus, Washington, DC: American Psychological Association, Chapter 4. Morris, Michael W. and Kaiping Peng (1994), “Culture and Cause: American and Chinese Attributions for Social and Physical Events,” Journal of Personality and Social Psychology, 67 (December), 949–71. Trafimow, David, Harry C. Triandis, and Sharon G. Goto (1991), “Some Tests of the Distinction between the Private Self and the Collective Self,” Journal of Personality and Social Psychology, 60 (May), 649–55. Zhao, Xinshu, John G. Lynch Jr., and Qimei Chen (2010), “Reconsidering Baron and Kenny: Myths and Truths about Mediation Analysis,” Journal of Consumer Research, 37, 197-206.

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JOB BURNOUT AND THRIVING IN CHINESE PUBLIC SECTOR

Longlong Hou, Beijing Normal University, Beijing

ABSTRACT

Chinese public sector is a very large hierarchy system. Many employees in public sector haven’t higher identification and belongings, and this paper is trying to discuss and solve this problem. This paper suggests the job thriving from the positive psychology perspective, and as a way to overcome the job burnout; and analyzes the occupation strength as one important element of occupation thriving. KEYWORDS: Job burnout, job thriving, Chinese public sector INTRODUCTION Chinese public sector is a very large hierarchy system. It includes not only the central and local government employees but also those affiliated public institutions and enterprises such as schools, hospitals, banks, trade associations etc... The institution which the writer of this paper belongs to is a public research university, also a typical public sector. The writer has interviewed several colleagues recently; I ask them like “Do you wish your children will do the same occupation like you in the future?” This question is designed like this: seemingly we ask the respondents’ job expectation on their children. Actually, we want to investigate their job satisfaction, identification and belonging. The relationship is like this: if the respondent has higher identification and belonging to his/her job, and gain job satisfaction, then he/she is more likely to expect his/her children to engage in the same occupation. So, through this indirect way we could get the respondents’ real ideas about the identification and belonging to their jobs (Of course, we could also directly ask the respondents“do you have higher identification and belongings to your job?. Whether strangers or colleagues the respondents are, we don’t think they will tell the real answer. So we adopt this indirect circuitous way to interview them.) Except for several colleagues give the positive answer (These colleagues, based on my personal observation, usually performed very well at work, and have extraordinarily teaching performance.), most people give the negative response. When I ask why, answers mainly focus on “high pressure, and low income” [US scholars Rumbley, Pacheco, and Altbach have made a 28 cross countries survey; Chinese college teachers who have just entered the job earn the least salaries among those countries, which is about 259 US dollars per month adjusted through PPP (purchasing power parity).] Maybe this is an only accidental finding. After that, the writer made two investigations in two different public sectors. The first one is a tax department in Beijing; in April this year we ask about 50 managerial personnel the same question “Do you wish your children will do the same occupation like you in the future?”, about 80% of the respondents made the negative answer, and some made no answers. When ask why, it’s same like “high pressure, and low income”. The second survey is done on April 11 this year. 50 core teachers from primary schools in Dandong city Liaoning province are asked the same question. Except for 2 teachers, others gave the negative answer, and when ask why, it is also same like above. Through these two investigations and one interview we find that there are problems in the salary system in Chinese public sector. Lower salary couldn’t afford most of the living needs, and this forces the employees in public sector have to find other ways to increase their income. The reform of salary system in Chinese public sector is not the focal point of this paper; the writer will discuss it in another article. Another finding through these investigations is the job burnout in

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public sectors. Many employees in public sector haven’t higher identification and belongings, and this paper is trying to discuss and solve this problem. The rest of the paper consists of 4 parts: the second section will review the literatures about job burnout in Chinese public sector. The third section suggests the job thriving from the positive psychology perspective, and this is a way to overcome the job burnout; the fourth section analyzes the occupation strength as one important element of occupation thriving. The fifth section sums up. Literature Review: Job Burnout in Chinese Public Sector The following part will review the literatures about job burnout in Chinese public sector. Which papers have made and what findings we have known. Wang weihua(2008) has made a survey on 339 government employees in Tianjin city in China, and found most of the respondents appeared medium degree of job burnout. And suggests improving the problem through personal, organizational and social level. ZHANG Hong-xia and CUI Ning (2009) investigated 150 college teachers in Tianjin University of Science and Technology, and found the emotional exhaustion has appeared. They suggest relieving and preventing job burnout through social, university’s and teacher’s ways. Pan xiaohua(2011) studied the job burnout of nurse, and recommended relieving it through organizational environment, social environment and personal ways. To sum up, the above researches about job burnout in public sector in china suggest some methods to relieve the problems. These methods may make people who are burnout normal, but it won’t unleash their potentials and make excellent performance. Positive Psychology Perspective: Job Thriving Professor Martin Seligman believes that traditional psychology has put too much attention on psychological diseases, and less on how to fulfill people’s potentials and make people work and live prosperously. As to the job burnout, the writer believes we should take the same way. Many studies on job burnout could relieve the problem, but it won’t unleash their potentials and make excellent performance. Following the thinking model of positive psychology, the writer believes that we should find the answer from the opposite side of job burnout, which are ideas of job thriving. Firstly, let’s take a look at positive organization behavior’s some points about thriving. Spreitzer et al. (2005) suggest that vitality and learning are two essential components of thriving. Vitality refers to the positive feeling of having energy available, reflecting feelings of aliveness. and learning means individual acquire knowledge and skills, meantime apply these knowledge and skills. So thriving registers the joint sense of vitality and learning, and it includes two sides, the affective factor of psychological experience and cognitive factor. According to Spreitzer et al.’s definition of thriving, the writer believes that job thriving means learning with vitality in some occupation. It is not thriving when someone has vitality without learning in his work. Likewise, either when someone learns without vitality. It is common employees learn without vitality in Chinese public sector. For example, there are lots of meetings in public sector to learn documents from superior government; it is common employees doze off, or play cell phone, absence of mindedness in these meetings. Then how to make employees in public sector more vigorous? Generally, there are several ways: first, from individual level, you need to improve in body strength, emotional energy and cognitive activity. Then, the leader of the public sector should adopt democratic style, and it is helpful to fulfill the potentials of subordinates. Third, the character of the work should be designed as autonomy, completeness, feedback; the tasks needs diversified skills and should be valuable and meaningful. Last, trust and higher cohesion based on values could engender more job vitality.

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Job Strength And Thriving Besides job vitality and learning, the writer suggests job thriving has another important element, which is job strength. In order to achieve job thriving, from internal side it is necessary to learn with vitality; moreover from external side to exert the certain job strength for different jobs. Job strength means comparing with other jobs what advantages specific job has. For example, teachers’ strength is its working time freely, and about three months holiday (In China, there usually are one month winter holiday and two months summer holiday in primary schools, secondary schools and colleges etc.) When analyzing the job strength, we will indicate the respondents write down three outstanding advantages comparing with other jobs. And then we will discuss together how to bring every advantage into play, with what methods, and what factors will hinder the play, how to overcome. For instance, teachers’ strength is winter and summer holidays, if teachers continue to work instead of relaxing on holidays then the strength is sacrificed. Why is that? One reason maybe the low income. And another important reason is that teachers can’t really enjoy the pleasure of leisure. For example, many leisure ways like self-help travelling, scuba diving, rafting, snorkeling, ski and so on which need skills that is not every teacher has. So the balance of work and life is broken, teachers become busy like other jobs in China. The ideas of job strength are put forward not very long time ago, so subsequent empirical and case studies are encouraged. Summary Through two surveys and one interview, this article suggests job burnout in Chinese public sector. Most studies on job burnout in Chinese public sector raise corresponding solutions for the job burnout. And from positive psychology perspective the writer proposes the opposite of job burnout, which is job thriving. How to realize job thriving are discussed from job vitality, job learning and job strength. More and more related empirical and case studies are needed and encouraged in the future. REVERENCES Wang weihua, Study on job burnout and countermeasure of Tianjin government employees, Tianjin University master dissertation (2008) Pan xiaohua study on nurse job burnout and organizational support, Fudan University master dissertation (2011) ZHANG Hong-xia, CUI Ning “Study on College Teachers’ Job Burnout and Its Strategies” Vol.16No.3 September2009 ，Journal of Tianjin Agricultural University Rumbley, Pacheco, and Altbach <International comparison of academic salaries: an exploratory study> Boston college, center for international higher education, Lynch School of Education, 2008 Seligman, Martin and Csikszentmihalyi, M. (2000) ‘positive psychology’, American Psychologist, 55,5-14. Gretchen Spreitzer; Kathleen Sutcliffe; Jane Dutton; Scott Sonenshein; Adam M. Grant. ‘A Socially Embedded Model of Thriving at Work’organizational science, 16(5), 537-550 BIOGRAPHY

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Hou Longlong Faculty of Education, Beijing Normal University, Beijing, China ，100875. Dr. Hou Longlong is an associate professor in Beijing Normal University, his main research interests focus on positive organization behavior, application of positive psychology, email address: [email protected]

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SOCIAL RESPONSIBILITY IN LATIN AMERICAN BUSINESS SCHOOLS: A TOPIC OF REAL

INTEREST Gabriela Reyna García, Universidad Autónoma de Coahuila

María del Carmen Armenteros Acosta, Universidad Autónoma de Coahuila María de la Luz Trasfi Mosqueda, Universidad Tecnológica de Torreón

Marcela Casas Meza, Universidad TecMilenio

ABSTRACT

The concept Social Responsibility has long been investigated and applied in the corporate sphere, but today, is starting to be considered of real interest to latin american business schools. Universities play an important role as channels to knowledge and link between community and business organizations. Today universities collaborate with society not only by being responsible for knowledge transfer, but also, for human and professional education under universal ethical values. Therefore, this work objective is to make a bibliometric analysis of major magazines on the studies related to social responsibility in universities, to analyze productivity levels and know if there is a real interest in the subject between the major research topics in the field of the scientific community. The results suggest that the social responsibility in universities is a subject of great and increasing interest in scientific communities at internationals level JEL: L14, L15, M14 KEYWORD: Social responsibility, University, bibliometric analysis, Research INTRODUCTION Today the "socially responsible" label has become an competitiveness indicator to companies struggling in international markets. The theme of social responsibility is becoming more important both at the corporate and educational levels. Investigations levels has been increasing, but still they are no deep enough, and it is necessary to differentiate between the study of Social Responsibility and the degree of awareness and commitment that higher education institutions have shown on the subject. Universities seek to form men and women of integrity, Remolina (2003), which are able to provide professional services under ethical and humanistic criteria, with solidarity and service excellence. It seems simple, but it is not easy to achieve, therefore, universities are bound, by the society and non-governmental organizations, to implement principles of Social Responsibility in the different key processes each day: training, research and extension. Within the analyzed literature we found contributions in where the action field of universities is being expanded in terms of sustainable development (Segalas, Ferrer-Balas , Svanström, Lundqvist, & Mulder, 2009); the integration of social responsibility concept to professionals, making an impact in education level, which includes ethical and social values (Bampton & Maclagan, 2005); some launches related to SRU initiatives (Lukman & Glavič, 2007); (Van Weenen, 2000) and those focused on the environment (Atakan & Eker, 2007; Hammond & Churchman, 2008); education commitment to peace seeking (Salgado, 2004). Universities are considered as main elements to, meet the requirements of production, social needs, with an active role on the society transformation (Parra, 2010; Pérez et al., 2003), identify the human capital and social capital as a key pieces to reduce poverty and injustice, that despite

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the advances in science and economic development, are still present (Kliksberg, 2005); focusing in social virtue and how to manage the operations involving economic, environmental and social sustainability; search for respect on moral values, beyond any particular interests, (Argandona, 2009); a commitment of university organizations to the society in which they interact (Aguirre, Pelekais, & Peace, 2012; Carneiro, 2004; Guédez, 2006), among others. However, universities have not received sufficient attention in the scientific field, which, generates the need to analyze the social and environmental impacts as well as the role that it should take within society and the risks involved when it sends professionals lacking of social values to the labor market, and the need of a preparation for their development in the globalized environments in which they develop in companies. This shows our interest in investigate the existing theoretical fundaments, and to achieve this we are running a bibliometric analysis on the theoretical development of the social responsibility in universities, to measure its activity and scientific repercussion REVIEW OF LITERATURE Social responsibility has its origin in the United States, in the wake of the Vietnam war in the late fifties. It grows on importance to the business world from the nineties when already abundant literature on the theme appears, where some authors speak of four components of social responsibility: the legal liability, ethical responsibility, economic and finally philanthropic responsibilities. (Fontaneda, Camino, Mariscal, & Jesús, 2007). At present times there is a growing interest in corporate social responsibility, so it is possible find a multitude of initiatives such as: the promotion of the Global Pact by the UN, in Spain the ASEPAM (Spanish Association of the Global Pact), the development of the ISO-26000 (guide to management of business social responsibility), Social Accountability 800 Standard (Code of socially responsible behavior), the publication of the green paper of the Social Responsibility of the European Council of Lisbon), the CRE (Association of Spanish companies), the white paper of the social responsibility, which contains 60 appearances of experts, among others Corporate social responsibility must be defined in terms of what the company is, where the social value is identified by taking into account the factors of improvement or deterioration in the peoples decision quality (the ethical dimension), the creation of better conditions, or at least not worse for future generations (environmental dimension) and conflicts, cooperation or the power in society and their consequences on the present and future generations (social dimension). Therefore, it should be addressed in terms of value creation and approach to the concept of social responsibility: origin and evolution. (Kochan & Osterwalder, 1994) Ana Díaz de Iparraguirre (2008) defines it as the joint action of the whole company (workers, managers and owners) aware of the role that it has as business unit that creates value, and that survives in a space that is lucrative. From this definition Iparraguirre highlights several features to limit the concept of Social Responsibility in Universities:

• Social Responsibility appears when the organization becomes aware of his environment and the impact that generates in it.

• Become aware not only of the economic but the ethical concerns. • The collective action of the organization where respond to the demands and needs of

those affected. • The definition of what is good and what is not, and should be left to do, depending on the

dialog between the concerned and affected by the organization services

Iparraguirre identifies the evolution that the companies have had to suffer to move from a

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philanthropic movement to a real social responsibility, it is now the turn of the universities to set aside their social projection and play the role of active players in the process of social responsibility parting from training within the University. The University, according to Morin et al (2003), from a holistic view should try to articulate the various parts that comprise it, as a project of social promotion of ethical principles and sustainable and equitable social development for the responsible production and transmission of knowledge and the training of teachers and citizens equally responsible. The University along the history has played a very important role in the process of transmission of knowledge and collaboration as a link between society and business. The Lisbon European Council (2000) makes the observation that the University should play a role not only of transmitting knowledge source to facilitate the professional development but also the ethical progress, the realization of its staff, and the solidary linking with the general interests of any nation. That is why it is of great importance the comprehensive training and the social commitment in the execution of the role of the University within the processes of university level education that contribute to sustainable development, now called Social Responsibility in universities (SRU). For Remolina (2003) it is important that universities provide professional services under ethical and humanistic criteria, of solidarity and service excellence. It seems simple, but it is not easy to achieve, therefore the universities each day are bound by the society and non-governmental organizations to implement principles of Social Responsibility in the different key processes: training, research and extension. For Aguirre et al (2012) universities in their internal and external dimensions must generate social responsibility as institutional commitment, not as an indicator framed in the governmental political principles, since such it should be an interpretation of the action and strategic voluntary attitude with their people, to ensure the competitiveness of significant quantitative facts, allowing ideas exchanging, integration of values, behaviors, and the internalize of social needs both internal and external. METHODOLOGY The methodology used is a descriptive and retrospective bibliometric analysis, conducted through the analysis of the number of published articles in different magazines registered in the database and in ISI Web of Knowledge database. Bibliometrics consists in the application of mathematical and statistical methods to measure quantitative and qualitative changes that occur in the scientific literature ((Suriñach, Duque, Royuela, & Ramos, 2002). Flores et al., (2004) Defines bibliometrics as a "tool that lets you develop a set of indicators referring specifically to the production of a scientific discipline, providing, in this way, a basis for discussion to estimate the degree of consolidation and development of the it". The bibliometric analyzes allow us to improve the electronic access to the repositories of scholarly publications through a greater number of databases. (De Bakker, Groenewegen, & Den Hond, 2005). We included in this analysis only original articles, that is, only those that provided their own results that had not been previously published. To start the investigation requires select and examine the indexes that allow conclusions on the situation in accordance with the proposals set out in the literature (Agudelo, Bretón-López, & Buela-Casal, 2004; Flores et al., 2004; Pérez et al., 2003). The articles were obtained from the database Web of Knowledge of the ISI( The Institute for Scientific Information) that was founded by Eugene Garfield in 1960 and acquired by Thomson (Thompson Reuters) one of the largest companies in information. ISI maintains Web of Knowledge, a platform based on web technology and formed by a wide collection of bibliographic databases, citations and references of scientific publications of any discipline of knowledge, both, scientific and technological, humanistic sociological. (Salvadores Santamaría,

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2012) For each material we took the number of authors per article, the nationality of the authors, quantity of bibliographical references, year of publication of articles, type of work performed. First we proceeded to look for those scientific journals that might relate to the area of knowledge, to this end, we used the virtual library of the Instituto Tecnológico de Estudios Superiores de Monterrey, in which are included the following databases: EBSCO and ProQuest. The next step was to include in the search engine of the virtual library those words, which could facilitate the search for scientific journals that addressed in its publication the university social responsibility. In this case, the search terms used were: "University Social Responsibility" "Business Ethics" "University" "Social Responsibility" "Survey of School" "Higher Education", teaching and research. It was subsequently analyzed the editorial line of the magazine. For this reason, our search enabled us to find a comprehensive listing of potential scientific journals, of which, we select those that, by the characteristics of its editorial line, will be adjusted with more precision to what we're looking for, i.e. scientific journals that include in their volumes of publication work of university social responsibility. The main electronic journals found were the following: Revista Internacional Administracion y Finanzas, Revista dÉconomie Financière, Revue Management et Avenir, Revue Reancaise du Marketing, Decisions Marketing, Review of Management & Economic, Business Ethics Quarterly, Academy of Management Learning & Education, Business Ethics Quarterly, Business Ethics: A European Review, Higher Education Policy, Journal of Studies in International Education, British Journal of Educational Technology, Research in Higher Education, Strategic Finance, Journal of Marketing Management, International Advances in Economic Research, Journal of Financial Service Professionals, Journal of Management Development, Journal of Property Management, Journal of Advertising, Journal of Marketing Research, Administrative Science Quarterly, Kiplinger´s Personal Finance, Communications of the ACM, Academic of Management Learning & Education, Journal of Financial Planning, Journal of Product Innovation Management, Strategic Finance, Economics of Innovation & New Technology, Russia & FSU General News, Financial Accountability & Management, Region Formation & Development Studies, International Journal of Technology Management & Sustainable Development, Advances in Management, Academy of Educational Leadership Journal. The analysis of the database ISI Web of Science Social Science Citation Index, in the branch of the social sciences, allowed us to know which magazines of those identified in the digital library of the ITESM are included in the ISI database, and therefore, are considered high-impact journals based in JCR (Journal Citation Report). For this purpose, the scientific journals of greater impact are: Business Ethics Quarterly, Business Ethics: A European Review, Journal of Business Ethics, Research in Higher Education, Research papers in Education, Revista Española Pedagógica. Finally, once identified and selected the scientific journals object of analysis, the selection of those that might relate to the university social responsibility is based on an analysis of the titles, keywords and summaries provided by them. Of the 325 titles that resulted from the search using the key words already mentioned, we reviewed the introduction, results and conclusions earning a total of 100 articles that describe the practices of study RESULTS A literature review was performed on the topic investigated, with a purpose to identify background of studies in University Social Responsibility. As a result we were able to see a growing development of the theoretical research in this area; however, in the ISI we could not found any bibliometric studies referred to the subject that will analyze the behavior of the scientific production in this area, which fundaments the need for this type of study. The

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bibliometric study identified 325 titles published in the ISI database during the period 2009 to 2013; 100 of them addressed University Social Responsibility at different levels in a straightforward manner. A literature review showed us an increase in the theoretical investigations in the field in 2013 as we can observe in the Figure 1, however no bibliometric study was found referred to this topic that analyzed the need for performing this type of study. Among the most prominent countries within the scientific production on the subject, we find USA with 30 articles, followed by England with 10 articles, Canada with 9, Spain with 7 and Turkey with 6 (figure 3). In a second block, with 5 articles, we find Australia, Malaysia and South Africa. In contrast with the level of publications by developed countries we find Latin America with only 10 articles, which represents 0.10 % of the total number of publications. Figure 1: % Publications Per Year (2009 – 2013)

Source: Own development

Figure 2 shows the distribution of papers according to the type of document, where the Journal Magazine is equivalent to 98 %. Figure 2: Type of Documents Evaluated

11 4 8 3

74

0

20

40

60

80

2009 2010 2011 2012 2013

Publications

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Source: Own development

Figure 3: Distribution of Articles on Social Responsibility University (2009 - 2013)

Source: Own development

0

20

40

60

80

100

120

Article Proceedings Paper

2009 - 2013

0

5

10

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PRODUCTION

%

USA

ENGLAND

CANADA

ESPAÑA

TURQUIA

AUSTRALIA

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SUR AFRICA

LATINOAMERICA

OTHERS

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Figure 4: Productivity by Institutions (2009 - 2013)

Source: Own development

Figure 4 illustrates the productivity of the institutions on the subject within the indicated period, where the most representative were California State University, University of Oxford and the University of London. The indicator of productivity by institution is consistent with the predominant language is English in 92 %. (Figure 5) Figure 5: Publications Per Language (2009 - 2013)

Source: Own development

3

3

3.5

2

2

2

2

2

2

2

2

2

0 1 2 3 4

University of London

University of Ozford

California State…

Florida State University…

Nanyang Technological…

Nanyang Technological…

National University of…

Stanford University

Universite Catholique…

University College Dublin

University of Plymouth

University of Sevilla

Organizations-Enhanced (%)

92%

8%

English Spanish

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The papers were cited 308 times of which 307 were not self-citations, that is to say, that the same author is referenced with other subsequent works. In summary, the average number of citations per article is 3.08. Another index is the h-index that tells us the number of publications containing more than 20 events, which in this study was 8. CONCLUSIONS From a scientific or research point of view, there is a clear upward trend in regard to the volume of scientific papers published on the university social responsibility, thus confirming the stipulated by López,J & Sanchez,M. (2009). It is noted that only have 100 registered jobs of a total of 10,000 publications that compose it, being the level of theoretical and experimental research in the topic still low. Of the 380 authors recorded only 2.08 % of them collaborate intra-institutional while their level of inter-institutional collaboration is almost zero. The Price Index tells us that the percentage of references used with at least 5 years of age is 4; we confirmed that there are very few publications on the subject. The indicator h-index confirms to us that the references used in average in each article are 8 being low to the importance of the issue raised in the present. BIBLIOGRAPHY Agudelo, D., Bretón-López, J., & Buela-Casal, G. (2004). Análisis bibliométrico de las revistas relacionadas con psicología de la salud editadas en castellano. Salud Mental, 27(2), 70-85. Aguirre, R., Pelekais, C. d., & Paz, A. (2012). Responsabilidad social: comromiso u obligación universitaria. TELOS Revista de Estudios Interdisciplinarios en Ciencias Sociales, 14(1), 11-20. doi: 1317-0570 Argandoña, A. (2009). El bien común de la empresa y teoría de la organización. España. IESE Business School. Atakan, M. S., & Eker, T. (2007). Corporate identity of a socially responsible university–a case from the Turkish higher education sector. Journal of Business Ethics, 76(1), 55-68. doi: 10.1007/s10551-006-9274-3 Bampton, R., & Maclagan, P. (2005). Why teach ethics to accounting students? A response to the sceptics. Business Ethics: A European Review, 14(3), 290-300. Carneiro, C. M. (2004). La responsabilidad social corporativa interna: la nueva frontera de los recursos humanos: ESIC Editorial. De Bakker, F. G., Groenewegen, P., & Den Hond, F. (2005). A bibliometric analysis of 30 years of research and theory on corporate social responsibility and corporate social performance. Business & Society, 44(3), 283-317. Díaz de Iparraguirre, A. M. (2008). La Responsabilidad social de la Universidad en la promoción del capital social para el desarrollo sustentable. (Maestría), Universidad de Carabobo, Naguanagua, Estado de Carabobo.

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Flores, L., M.V, Muñoz, S., V., & Cabañero, M., M.J. (2004, 5 y 6 de Mayo). Análisis bibliométrico comparativo entre tres disciplinas del ambito de la salud. Paper presented at the XV Jornadas de Interrelación de Enfermería, La Cañada. Fontaneda, G. I., Camino, L. M. A., Mariscal, S. M. A., & Jesús, G. A. O. (2007). Aproximación al concepto de esponsabilidad Social: origen y evolución, hitos e implicación para las empresas. Anales de mecánica y electricidad, 84(5). Guédez, V. (2006). Ética y práctica de la responsabilidad social empresarial. Editorial Planeta. Venezuela. Hammond, C., & Churchman, D. (2008). Sustaining academic life: A case for applying principles of social sustainability to the academic profession. International Journal of Sustainability in Higher Education, 9(3), 235-245. Kliksberg, B. (2005). La responsabilidad social universitaria. programa PNUD, BA. Kochan, T. A., & Osterwalder, A. (1994). The Mutual Gains Enterprise: Forging a Winning Partnership among labor, Management and Government. Harvard Business School Press, Boston. Lopez-Yanez, J., & Sanchez-Moreno, M. (2009). Women as change agents in the headship of higher education organizations. Revista De Educacion(348), 259-260. Lukman, R., & Glavič, P. (2007). What are the key elements of a sustainable university? Clean Technologies and Environmental Policy, 9(2), 103-114. Morin, E., Ciurana, E. R., & Motta, R. D. (2003). Educar en la era planetaria: Gedisa Barcelona. Parra, R. (2010). Hacia una cultura de responsabilidad social universitaria. CICAG, 11(2). Pérez, G., Anta, C., Badera, S., García, J., Pérez, M., & Sarrate, M. (2003). Análisis Bibliométrico en Educación. Incidencia en la calidad universitaria. línea en el sitio electrónico del Ministerio de Educación y Ciencia, España; http://wwwn. mec. es/univ/html/informes/estudiosanalisis/resultados_2003/EA2003–0007/EA2003–0007. pdf (consultado en 2007)[Links]. Remolina, G. (2003). La Responsabilidad Social de la Universidad. Nómadas (Col)(19), 239-246. Salgado, d. L. M. (2004). Pertinencia y Responsabilidad Social de las Universidades en el proceso de Construcción de la Paz. Segalas, J., Ferrer-Balas, D., Svanström, M., Lundqvist, U., & Mulder, K. (2009). What has to be learnt for sustainability? A comparison of bachelor engineering education competences at three European universities. Sustainability Science, 4(1), 17-27. Suriñach, i. C. J., Duque, C. J. C., Royuela, M. V., & Ramos, L. R. (2002). La investigación regional en España: un análisis bibliométrico. Investigaciones regionales(1), 107-138. Van Weenen, H. (2000). Towards a vision of a sustainable university. International Journal of Sustainability in Higher Education, 1(1), 20-34. BIOGRAPHY

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Gabriela Margarita Reyna García, Mexican. Bachelor of Law (1993), Master in Administration by Universidad Autónoma de la Laguna. Ph.D. Candidate in Administration and Top Management, Regional Manager in Operadora Wanb S.A. de C.V. del 2004 - 2012. Coordinator for the Committee on Social Responsibility for the zone 2 of ANFECA. Guest Professor at the Universidad Autónoma de la Laguna 2001 - 2012 Torreon, Mexico; Guest professor at ITESM- Campus Laguna Torreon, Mexico. Since 2011 Professor -Researcher in U. A. de C., Institutional Address: FCA-UAdeC, Unidad Torreón. Boulevard Revolución 151 Oriente. Colonia Centro CP: 27000. Torreón, Coahuila, México. E-mail: [email protected] María del Carmen Armenteros Acosta, Cuban. Bachelor in History (1966) and Bachelor on Politic Sciences (1977), Universidad de La Habana. Ph. D. Economic Sciences (1983) Universidad Estatal de Kiev, Ukraine. Research Professor in various programs at the University of Havana and Higher Institute of Applied Sciences and Technologies. Coordinator of the Master's Degree in Management Science and Innovation, and a master's degree in Business Administration and direction of the Institute. Superior Politecnico of Havana. Guest Professor at universities in Spain, Bolivia, Colombia and Mexico. Currently Professor UAdeC Researcher. Institutional Address: FCA-UAdeC, Unidad Torreón. Boulevard Revolución 151 Oriente. Colonia Centro CP: 27000. Torreón, Coahuila, México. E-mail: [email protected] María de la Luz Trasfi Mosqueda, Mexican. Bachelor in Business Administration (1993) Universidad Autónoma de la Laguna; Master in Administration, Universidad Autónoma de Coahuila (2002); Specialization in university teaching at the Universidad Autónoma de la Laguna (2002). Director of Planning and Evaluation at the Technological University of Torreón (1999- current); Academic Facilitator Technological University of Torreón (2000-2010); Instructor and Evaluator of Labor Competency Standards (2003 to date). Executive in Cristales y Lunas de la Laguna (February - October 1999); Account Executive in Bital (1997-1998); Manager in Coppel (1994-1997). Institutional Address: Universidad Tecnológica de Torreón, Blvd. Torreón Matamoros Km. 10 Ejido el Águila, CP 27400, Torreón, Coahuila, México. E-mail: [email protected] Marcela Casas Meza. Mexican. Bachelor in Computer Systems, Master in Administration and Top Management, Universidad Iberoamericana, Teaching at various universities in Mexico, in administrative areas, humanist and Graphic Design, currently Director of Postgraduate Studies in TecMilenio, Campus Torreón, Institutional Adress: Universidad TecMilenio, Ruta del Águila # 2121 Esq. Avenida TecMilenio, Fracc. Ejido La Unión, Torreón, Coahuila, México. C.P. 27367, E-mail: [email protected]

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PATHS TO INSPIRE DEVELOPMENT OF A KNOWLEDGE-BASED INDUSTRY IN THE

TRANSITIONAL ECONOMY Maja Bašić, University of Zagreb

Marina Dabić, University of Zagreb & Nottingham Trent University

ABSTRACT

This paper examines how intangible assets and cross-regional differences affect the revenue of the knowledge–based activities. A multilayer perceptron (MLP) analysis was conducted for 11 information technology activities in the Republic of Croatia for the period between 2002 and 2007 comprising 1.062 data. R&D expenditure, intellectual property rights, goodwill, other unclassified intangible assets and regions predict the change in revenues. The results show that the intangible assets and regional differences explain variations in revenues. The best predictor of the activity’s revenue performance is the value of activity’s intellectual property rights. The unit of analysis is the information technology activity within a county which limits the firm specific comparisons. Future research should incorporate firm level comparisons and a panel analysis in order to confirm the relationships provided by the MLP analysis. The findings suggest the strong impact of formal intellectual property rights protection by portraying regional discrepancies. These findings enable fostering innovation in the knowledge-based IT sector thereby providing recommendations for the developments of other sectors. This is especially meaningful for countries such as the Republic of Croatia, a new EU member state, which is experiencing continuous economic transition and which companies perceive formal intellectual property protection as less significant. JEL: C45, O31, O32, O34, O43, P31 KEYWORDS: Intangible assets, Intellectual property rights, Regional development, Information Technology INTRODUCTION A country’s economic development rests on the entrepreneurial potential of its companies. An entrepreneurial mind causes innovation and technological change (Schumpeter, 1934) leading to a short-term lock-in value within their regions of occurrence. Schumpeter asserted on the role of institutions as facilitators of entrepreneurship wherein the short-term effect is the result of the increased competition coming from the adoption of innovations by the companies’ rivals and imitators. A company must continuously innovate in order to achieve the competitive advantage given in its value added products and services. In this paper the illustration of the IT sector’s activity is done to describe the relationships between the determinants of its regional economic development given in the IT sector. The paper portrays the possible linkages and their strength between the value of the IT activities’ intangible assets and their impact on the sales revenue. LITERATURE REVIEW Schumpeter (1934) posed a premise that the innovation is driven by large companies. The drive is explained in their higher portion of resources and capital necessary to invest into research and development. If entrepreneurship is viewed from the behavioural perspective (Mcquaid, 2002),

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then it can lead to a variety of implications for policies which promote entrepreneurship of all companies’ sizes. Many studies assert onto a regional support for innovation and entrepreneurship (Dick and Payne, 2005), the agglomeration effects and the influence of clusters at the regional level (Collinson, 2010), state aid programmes for innovation and technology, and the role of the regions regarding adoptions of a necessary legislative framework (Rolfo and Calabrese, 2003). It can be stated that regional social capital originates from the embeddedness of companies into regional networks of social relationships in which beneficial collaboration is fostered by catalyst norms, values and customs. As innovation is increasingly considered a network effort, embeddedness and intangible assets help in explaining how and why networks of innovating companies are successful (Rutten and Boekema, 2007). The common way of introducing new technology pursues purchasing new machines and equipment to reduce costs and improve quality of production processes (Rolfo and Calabrese, 2003), while companies’ intangible assets determine how effective regional innovation networks function. Mcquaid (2002) states that the established entrepreneurial culture is embedded into locations. This notion is often pointed out when referring to the European clusters and the collaboration pattern of companies within it. If Schumpeter’s notions on innovation are translated into different units of observation such as regional contexts of the counties, it would suggest that bigger counties, according to the sales revenue of the IT sector companies, have higher R&D expenditures which lead to higher innovations observed in the value of their intellectual property rights (IPRs). Although global knowledge networks might render the regional environment less important, Tödtling, Grillitsch and Höglinger (2012) argue for the spatial effect of innovation activities founded in their patterns of knowledge relationships. Previous studies show that information and communication technology industries cluster geographically and have spatially clustered growth rates according to the innovating regions (in terms of patents) with a special reference to the concentration in larger urban areas (Maurseth and Frank, 2009). On the other hand, Tödtling, Grillitschand Höglinger (2012) found that that company location had less direct effect on ICT innovation by examining 110 ICT companies in three Austrian regions according to the extent they use particular knowledge sources from regional, national and international level and to what extent their innovativeness can be explained by the knowledge sourcing pattern and their location. Bramwell, Nelles and Wolfe (2008) studied the ICT cluster in Canada and found that many inter-firm linkages are non-local and that extra- firm institutional supports, such as the local university and industry association, are critical in sustaining and strengthening the cluster providing more support for the role of local and global knowledge flows and learning processes and the interaction effect of civic capital and local institutions for development of local economy. Hence, differences in regional social capital given in their intangible assets explain regional differences in economic development (Rutten and Boekema, 2007) where standards tend to be crucial for the creation of new industries and markets for novel ICT products and services (Williams et al., 2011). This research acknowledges a given assumptions and furthers them by examining the influence of R&D expenditures, IPRs and other intangible assets on the IT sectors’ activities’ sales revenues in the Republic of Croatia. DATA AND METHODOLOGY This research examines the link between intangible assets of IT sector companies of all sizes in the Republic of Croatia according to the type of the IT activity, region and time. The data for the IT sector are multi-dimensional. They are cross-sectional for a specific year for the period between 2002 and 2007. The data for this study is obtained from the Croatian Financial Agency.

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There was a total of 1.062 multi-dimensional data on the companies’ IT activity observed in the regions. Croatian IT sector comprises eleven different IT activities according to the National Classification of Activities: computer and equipment manufacturing, computer wholesale, peripheral and programming equipment (software), retail of computers and office equipment, leasing of office machines and other equipment (including computers), hardware consulting, software publication, other consulting services and software sourcing, data mining, database construction and management, office equipment and computer maintenance, and other similar computing activities (Croatian Statistical Bureau, 2011). The unit of observation is the IT sector’s activity within a NUTS II region, where each county belongs to a specific NUTS II region. NUTS II stands for the Nomenclature of Territorial Units for Statistics (NUTS) of the European Union based on the existing national administrative subdivisions divided according to the size of population that serves as a framework for the European Union's Structural Fund endowments. From 1st January 2013 there are 2 NUTS II regions in the Republic of Croatia: Continental Croatia and Adriatic Croatia. Continental Croatia comprises 14 counties, and is situated in the Northern part of Croatia. Adriatic Croatia contains 7 counties, and is located on the coastal front of the Adriatic Sea. The analysis is made according to the NUTS II classifications. The research explores the neural network structures of perceived predictors, company’s intangible assets and NUTS II regions, on the sales revenues of the IT activities within a county. For this purpose, the Multilayer percepton analysis was conducted. Radial Basis Function analysis was also performed. Insignificant differences were found between the two. Hence, the paper illustrates the Multilayer percepton analysis’ results (MLP). MLP uses feedforward architecture composed of non-linear data modelling tools which consist of input and output layers plus one hidden layer. The data are divided into training (an estimation set), testing (used to prevent the overtraining set), and holdout sets (used to independently asses the final network). Predictors in our MLP model include intangible assets as covariates and NUTS II regions as factors. Intangible assets are: Research and development expenditure (in the model: R&D projects), Concession rights, patents, commodity and service brands (in the model: IPR), Goodwill (in the model: Goodwill) and other intangible assets (in the model: Other unclassified intangible assets). The dependant variable is sales revenue of particular IT activity according to a year and a county. The values of intangible assets and revenues were observed in Croatian kunas (HRK). The data was standardized in order to minimize variations between different predictors and a dependant variable. The analysis controlled for the regional differences according to counties and the variations in IT activities. The following section presents the descriptive results and the results of the MLP analysis. EMPIRICAL RESULTS The analysis incorporated IT sector companies of all sizes in the Republic of Croatia according to the type of the IT activity, regional context and time. 1.062 multi-dimensional data were obtained for the period between 2002 and 2007 comprising 11 IT activities and 21 counties within two NUTS II regions. Internal descriptive analysis showed huge variations in the time-series change in values among R&D projects, IPRs and companies’ goodwill according to a particular NUTS region. The time- series variation in values among R&D projects, IPRs and companies’ goodwill are reduced by standardizing data. Hence, four predictors (R&D expenditure, IPR, Goodwill, Other intangible assets) and one dependent variable (Sales revenue) were standardized in order to define neural network structures by performing a multilayer percepton analysis. Table 1 shows the descriptive statistics of the standardized values used in the analysis. Variables NUTS II, counties and IT

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activity are nominal, and the time in years is the ordinal variable. The values of R&D projects, IPRs, goodwill, other intangible assets and sales revenues are scale variables. The MLP analysis results are displayed for all years in order to draw valid conclusions set for the future panel analysis (Appendix A). Approximately, 70% of cases were assigned to the training sample, and 30% to the testing sample with the choice of the records done in a random manner. No data were excluded from the analysis. The analysis comprised 1 hidden layer with 4 neurons to prevent overtraining and better network visibility and increase the computational efficiency (Haykin, 1998), while a hyperbolic tangent activation function is used for both hidden and output layers. The average overall relative errors are fairly constant across the training (0.02; 0.15; 0.09; 0.03; 0,20; and 0.10) and testing (0.37; 0.98; 0.89; 0.27; 0.41; and 1.38) samples from 2002 until 2007 respectively. Hence the models are not over-trained and the future cases’ error given by the network should be close to the reported errors. The yearly linear regressions between predicted and observed values are made to confirm their validity (Figure 1). It shows that the predictors, intangible assets' values and counties, explain the observed differences in revenues. The estimated equations are displayed in the Table 2 and given in Figure 2. Table 1: Descriptive Statistics of Standardized Predictors

N Minimum Maximum Mean Standard deviation

R&D projects 1062 -0.16 11.86 0 1 IPR 1062 -0.07 23.39 0 1 Goodwill 1062 -0.04 32.41 0 1 Other intangible assets 1062 -0.21 13.98 0 1 Sales revenue 1062 -0.20 14.47 0 1

Source: FINA, Authors’ calculation. Table 2: Estimated Yearly Regressions

Year Estimated regression R2 Intercept Standardized beta 2002 y = - 0.03 + 0.81 x 0.90 - 0.03 0.81 2003 y = - 0.06 + 0.83 x 0.82 - 0.06 0.83 2004 y = - 0.05 + 0.84 x 0.83 - 0.05 0.84 2005 y = - 0.01 + 0.94 x 0.96 - 0.01 0.94 2006 y = - 0.03 + 0.48 x 0.74 - 0.03 0.48 2007 y = - 0.03 + 0.92 x 0.90 - 0.03 0.92 Average 0.86 - 0.04 0.79

Finally, the MLP analysis shows the importance of the independent variable in predicting the observed or dependant variable (Figure 2). It is a sensitivity analysis done by measuring the extent to which the network's model predicted value modifications for altered values of the independent variable (Haykin, 1998). Figure 3 illustrates the highest importance of IPRs for all given years, while smaller importance is given to companies’ goodwill, R&D projects and other intangible assets. DISCUSSION AND CONCLUSION After 2002 the Croatian IT industry exhibited several negative trends such as the fall in value of the R&D projects’ expenditures and a decrease in investment in telecommunications. Conversely, the positive trends included the growth of the goodwill of IT companies, constant growth of sales, number of employed in the sector and number of companies. These trends could be explained in deliverance of various strategies for the IT sector after 2002 and their institutional enforcement.

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“The strategy for development of broadband internet access in the Republic of Croatia until 2008” aimed to decrease the lag in the broadband Internet access’ usage with the European Union member states. The strategy is being extended for the period between 2011 until 2015. In 2007 the program eCROATIA was based on the similar program of the European Union attempting to modernize public services such as public governance, education and healthcare. Hence, it can be stated that after 2002 the Republic of Croatia has continuously worked on the IT modernization in order to adjust to norms and technologies of the European Union and enhance its economy in trying to make it more efficient and competitive with the European Unions’. Particular lags exist due to lack of IT support in the public administration as well as the lack of IT literacy of low- skilled workers. “The Global Information Technology Report 2010-2011” illustrates the national IT sector’s competitiveness index, whereby Croatian IT performance continuously falls compared to other nations’. Nevertheless, the lack of market structure seems to be recognized by constant furthering of the given set of IT strategies. Figure 1: Predicted Values on the Observed Charts

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Source: FINA, author's calculation. The empirical analysis in this paper has shown the importance of high-technology intangible assets for the regional sales performance in the Republic of Croatia as about 86% of the variations in data are explained by the analysis. The most important observed positive intangible asset was the value of intellectual property rights, followed by the value of goodwill, R&D projects and other intangible assets. The positive effect of intellectual property rights on the regional activity’s sales revenue mark a plausible finding which relates successful innovation to higher added values captured by the rise in sales revenues. Although IT sector is led by efficiency increase, standardisation and task-orientation, it seems that it cannot evade the external isomorphic pressures bound by regional and professional activities’ specificities. Moreover, the study aligns to the Maurseth and Frank’s paper (2009) in illustrating that the values of the IT activities are more pronounced in the higher urban areas pointing to a significance of particular geographical clusters. The paper recognizes the drawback evident in differentiates the link between R&D project expenditures and IPRs generated by a company which could originate from acquiring technology. However, the nature of the obtained financial data could not account for this

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difference. The technology transfer and adoption which marked the transition process of the Central and Eastern European countries managed to successfully transcend into the rise in sales revenues in the IT sector regardless of the source of its initial productivity increase, from the sound technology adoption or the fall in the employment in the sector. Figure 2: Independent Variable Importance

Source: FINA, author's calculation. Finally, the IT sector and regions could profit from rearranging the regional institutional limitations often accentuated as administrative hurdles and excess bureaucracy damping every entrepreneurial aspiration including the regional institutional changes. The institutional changes and the environment that facilitates translation of R&D expenditures into innovations and consequently profit opportunities, should be the environment fostered by a strong knowledge network ties that allow the companies to easily integrate and focus their strategy towards global

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innovation networks while preserving regional support for their innovative practices in within region collaboration. This remains to be an ambitious task within the international, national and regional contexts asking for the emergence of efficient innovation systems found on the triple- helix networks and open innovation structures which effects are to be evaluated in the subsequent periods. APPENDIX Appendix A: Network Diagrams

Source: FINA, author's calculation. REFERENCES

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Central Government Office for eCroatia (2007), “Operativni plan provedbe Programa e- Hrvatska 2007. s pregledom aktivnosti u 2007.godini” [online]. Available at: http://www.e- hrvatska.hr/hr/Dokumenti/e-Hrvatska/Operativni-plan-provedbe-programa-e-Hrvatska-2007.-za- 2007.-godinu#document-preview [10th December 2011] Croatian Statistical Bureau (2011), http://www.dzs.hr/Hrv_Eng/publication/2011/SI-1454.pdf [11th December 2012] Dutta, S. & Mia, I. (2011), “The global information technology report 2010-2011: Transformations 2.0” Geneva: World Economic Forum. ISBN-10: 92-95044-95-9, ISBN-13: 978- 92-95044-95-1. Haykin, S. (1998), “Neural Networks: A Comprehensive Foundation”, Second edition. Prentice Hall, UK. Maurseth, P.B. & Frank, B. (2009), “The German Information and Communication Technology (ICT) Industry: Spatial Growth and Innovation Patterns” Regional Studies, Vol. 43 (4), pp. 605- 624. Mcquaid, R.W. (2002), “Entrepreneurship and ICT Industries: Support from Regional and Local Policies”, Regional Studies, Vol. 36 (8), pp. 909-919. Rolfo, S. & Calabrese, G. (2003), “Traditional SMEs and innovation: the role of the industrial policy in Italy” Entrepreneurship & Regional Development: An International Journal, Vol. 15 (3), pp. 253-271. Rutten, R. & Boekema, F. (2007), “Regional social capital: Embeddedness, innovation networks and regional economic development” Technological Forecasting and Social Change, Vol. 74 (9), pp. 1834-1846. Schumpeter, J.A. (1934), “Theory of Economic Development”. Cambridge: Harvard University Press. Tödtling, F., Grillitsch, M. & Höglinger, C. (2012), “Knowledge Sourcing and Innovation in Austrian ICT Companies—How Does Geography Matter?” Industry and Innovation, Vol. 19 (4), pp. 327-348. Williams, R., Graham, I., Jacobs, K. & Lyytinen, K. (2011) “China and Global ICT standardisation and innovation” Technology Analysis & Strategic Management, Special Issue: CHINA AND GLOBAL ICT STANDARDISATION AND INNOVATION, Vol. 23 (7), pp. 715-724. BIOGRAPHY Maja Basic, MBA, is a teaching and research assistant at the University of Zagreb, Faculty of Economics and Business, Department of International Economics. She currently pursues a Ph.D. research on the topic of internationalization and open innovation. She can be reached at: University of Zagreb, Faculty of Economics and Business, J.F. Kennedy Square 6, 10000 Zagreb, CROATIA, [email protected]

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Professor Marina Dabic, Ph.D., is a full professor at the University of Zagreb, Faculty of Economics and Business, Department of International Economics, and a visiting professor at the Nottingham Trent University, Nottingham Business School, United Kingdom. She is the editor- in-chief of the International Journal of Transition and Innovation Systems (IJITS) and has published in numerous peer-review journals such as Journal of World Business, Journal of International Business Studies, Management International Review, Management Decision and others. She was a grant holder of the European Commission’s Tempus project with 12 partners from 8 countries. She can be reached at: University of Zagreb, Faculty of Economics and Business, J.F. Kennedy Square 6, 10000 Zagreb, CROATIA, [email protected]

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THE POSSIBILITY OF DEVELOPMENT OF

FINANCIAL INDICATORS AT HIGHER EDUCATION INSTITUTIONS – CROATIAN

CONTEXT Vesna Vašiček, University of Zagreb

Ivana Dražić Lutilsky, University of Zagreb Martina Dragija, University of Zagreb

ABSTRACT

This paper presents development of financial indicators at higher education institutions in the Republic of Croatia and assesses the contribution of financial indicators for performance measurement. We examine relevant literature as well as current accounting systems of Croatian higher education institutions. Based on information that we obtained from financial statements of 33 public higher education institutions we develop financial indicators that can be calculated under existing systems. The results show that it is not possible to develop whole set of financial indicators because there is a lack of accounting information especially cost information. The authors argue that although financial indicators are extremely important part of performance measurement system, there are significant problems with its practical development. Therefore, authors propose changes that need to be done in order to develop quality financial indicators at Croatian higher education institutions and those suggestions can be also useful for all countries that are trying to improve performance management in higher education. JEL: I23, M41 KEYWORDS: Financial Indicators, Higher Education Institutions, The Republic of Croatia INTRODUCTION Higher education institutions (further in the paper HEIs) in the Republic of Croatia are mainly budgetary users (102 HEIs from total 135 HEIs are budgetary users) whose main objective is efficient and effective providing of higher education services while minimizing costs. However, Croatian higher education sector is presently facing with financial and institutional reforms because budgetary resources are reducing on the one side while on the other side we have increased demands for quality. So, there is a big problem of unbalance between available financial resources and financial need of HEIs. Even though HEIs are mostly non-profit organization they should introduce financial indicators from business sector in the area of effective management. In that context, the need for development of financial but also nonfinancial indicators, that would improve financial management and quality (Cullen et al, 2003) and would enable implementation of university strategy (Comaniciu, Bunescu, 2010) in higher education’s system, seems logical and necessary but still there is no legal requirement for performance measurement not just at HEIs but also at whole public sector institutions in the Republic of Croatia. So, in a view of the fact that Croatian HEIs are now facing severe financial and structural changes and that there is a need for reform, we think that HEIs in the Republic of Croatia firstly need to develop set of financial indicators that could improve lump sum allocation and introduce

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performance measurement in the higher education system.Countries forerunner of the idea of measuring performance in higher education systems that already have well developed performance measurement system in all public sector entities are Australia and the United Kingdom (Vašiček, Budimir, Letinić, 2007). So, it is important to investigate good practice of these countries as well as existing accounting system as a base for possible development of financial indicators in the Republic of Croatia. In this paper, we focus on key financial indicators at HEIs as an essential part of performance measurement system. Firstly, we examine relevant literature that deals with development of financial indicators in Australia and United Kingdom. Based on obtained data, we tried to develop set of financial indicators for Croatian HEIs by using basic financial statements of constituents of University of Zagreb. The paper closes with some concluding comments in which we propose changes that are necessary for development of quality set of financial indicators and improvement of financial management at HEIs in the Republic of Croatia. LIERATURE REVIEW Performance measurement in the higher education systems includes the set of financial and nonfinancial indicators (Budimir, 2010). While financial indicators put focus on financial structure of HEIs, nonfinancial indicators are connected with customers, internal processes, learning and growth. Even though for performance measurement of education services it is necessary to develop both, financial and nonfinancial indicators, we think that in the case were performance measurement system is not developed at all, like at Croatian HEIs, that it is necessary to start with development of financial indicators. Because of that, in this paper we examine exiting set of financial indicators in countries like Australia and United Kingdom that among first started with its development. The concept of indicators at HEIs in Australia is well established and consists from five groups of indicators (Department of Education, Science and Training, 2001): student indicators, staff indicators, finance indicators, research indicators and outcome indicators. For the purpose of this paper focus is just on key financial indicators which consists from (Department of Education, Science and Training, 2001, 2005): operating revenues as a share of total income %, operating expenses as a share of total expenses %, salaries and salary related costs as a share of total expenses %, remuneration per employee, expenses per equivalent full-time student units, by library expenses /other academic support services/student services, earned income as percentage of total income %. Performance indicators in the United Kingdom provide comparative data on the performance of institutions in widening participation, student retention, learning and teaching outcomes, research output and employment of graduates. They cover publicly-funded higher education institutions in the UK.They are intended as an objective and consistent set of measures of how a higher education institution is performing. According to HESA (Higher Education Statistics Agency in UK) the indicators are calculated using both financial and nonfinancial information. HESA (2009) listed on its web site key financial indicators for HEIs: total income in £000s, percentage ratio of total funding body grants to total income, percentage ratio of recurrent teaching grants from funding bodies for HE provision to total income, percentage ratio of recurrent research grants from funding bodies for HE provision to total income, percentage ratio of recurrent (other) grants from funding bodies for HE provision to total income, percentage ratio of total funding body grants for HE provision to total income, percentage ratio of tuition fees and

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education contracts to total income, percentage ratio of full-time home/EU student fees to total income, percentage ratio of non-EU he course fees to total income, percentage ratio of income from research grants and contracts to total income, percentage ratio of department for business, innovation and skills research council grants and contracts to total income, percentage ratio of UK industry, commerce and public corporations research grants and contracts to total income, percentage ratio of EU research grants and contracts to total income, percentage ratio of other income to total income, percentage ratio of total endowment and investment income to total income, percentage ratio of contribution from research grants and contracts to research grants and contracts income, ratio of current assets to current liabilities, ratio of liquid assets to current liabilities, days ratio of total general funds to total expenditure, days ratio of total general funds to total expenditure (excluding pension reserve and pension cost adjustment), days of current income (excluding funding body grants for he provision) represented by debtors, percentage ratio of total staff costs to total income, percentage ratio of total net cash inflow from operating activities to total income, gearing ratio, percentage ratio of premises repairs and maintenance to total expenditure, percentage ratio of interest and other finance costs to total income. From the presented indicators it can be concluded that the UK has well developed system of financial indicators that can be very useful for its development in the Republic of Croatia. METODOLOGY Research about possibility of development financial indicators in the higher education system in the Republic of Croatia was conducted through data from basic financial statements of 33 constituents University of Zagreb which is the largest and the oldest University in Republic of Croatia. Public HEIs are disclosing balance sheet, report about revenues and receipts, expenses and expenditures and all mentioned statements are prepared on modified accrual basis. Modified accrual basis implies narrowed scope of provided information, especially costs information considering that there is no information about depreciation costs, which is directly reflected on calculation of financial indicators. The data which were analyzed are from basic financial statements for 2011. Using the data, we tried to calculate the most significant financial indicators for Croatian HEIs which we propose based on review of key financial indicators in Australia and UK. Afterwards, we grouped by areas obtained financial indicators for the 15 biggest constitutes according to student’s number and we calculated mean and standard deviation for every area of the University. The indicators that we tried to calculate are presented in the table below as well as formula for its calculation. Table 1: Proposed Financial Indicators For University of Zagreb

FINANCIAL INDICATORS FORMULA total costs per student direct+indirect costs/ number of students total cost per graduated student direct+indirect costs / number of graduated students total cost of study direct+indirect costs of courses total burden of teaching staff number of hours per teacher average years of using equipment and other asset average time of usage of equipment and other asset average usage of library services number of issued book per students average cost of teaching staff salary costs of teaching staff/ number of teaching staff average cost of administration salary costs of administration/number of administration staff capital costs per student capital costs/ number of students percentage ratio of capital expenses in total expenses capital costs / total expenses percentage ratio of revenues from tuition in total revenues tuition revenues/ total own resources percentage ratio of revenues from state budget in total revenues revenues from state budget/ total revenues economy of total business total revenues/ total expenses gearing ratio total liabilities / total asset percentage ratio of interest expenses in the total expenses financial expenses/ total expenses percentage ratio expenses for employees in the total expenses expenses for employees/ total expenses percentage ratio of material expenses in the total expenses material expenses/ total expenses

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Source: Authors RESULTS AND DISCUSSIONS Calculated financial indicators for 15 constituents (Faculty of Science, Faculty of Electrical Engineering and Computing, Faculty of Chemical Engineering and Technology, Faculty of Transport and Traffic Science, Faculty of Mechanical Engineering and Naval Architecture, School of Medicine, School of Dental Medicine, Faculty of Veterinary Medicine, Faculty of Agriculture, faculty of Food Technology and Biotechnology, Faculty of Economics and Business, Faculty of Humanities and Social Sciences, Faculty of Teacher Education, Faculty of Law, Music Academy) are grouped by 6 areas. In table 2 average values of chosen financial indicators are shown for every area of the University of Zagreb. Table 2: Average Values of Financial Indicators For 2011 by Areas of Constituents of University of Zagreb

The biggest constituents of University of Zagreb

according to students number grouped by areas

average capital

costs per student

capital expenses/ total expenses

revenues from

tuition

fee/ ow n revenues

revenues from

state

budget/ total revenues

total revenues/

total expenses

total liabilities/

total assets

financial expenses/

total expenses

percentage ratio

expenses for em ployees

in the total expenses

percentage ratio

of m

aterial expenses

in th

t t

l

average capital

costs per student

capital expenses/ total expenses

BIOMEDICAL AREA

Mean 3849,08 0,05 0,50 0,80 1,01 0,12 0,00 0,75 0,24 1314,00 399,75

N 4 4 4 4 4 4 4 4 4 4 4

Std. Deviation

3769,84 0,03 0,24 0,06 0,02 0,17 0,00 0,03 0,03 800,51 272,28

BIOTECHNICAL AREA

Mean 1945,85 0,04 0,14 0,76 0,99 0,08 0,00 0,72 0,28 1675,50 347,00

N 2 2 2 2 2 2 2 2 2 2 2

Std. Deviation

537,48 0,00 0,01 0,05 0,01 0,04 0,00 0,04 0,04 811,05 127,28

SOCIAL-HUMANISTIC AREA

Mean 401,07 0,03 0,77 0,60 1,03 0,16 0,00 0,73 0,27 8114,00 389,50

N 4 4 4 4 4 4 4 4 4 4 4

Std. Deviation

85,32 0,02 0,14 0,17 0,02 0,15 0,00 0,05 0,04 4959,89 253,42

NATURAL AREA

Mean 709,24 0,02 0,56 0,84 1,07 0,03 0,03 0,75 0,25 4949,00 721,00

N 1 1 1 1 1 1 1 1 1 1 1

Std. Deviation

. .% .% .% . .% .% .% .% . .

TECHNICAL AREA

Mean 1739,74 0,05 0,37 0,68 1,04 0,10 0,00 0,70 0,30 2977,67 354,67

N 3 3 3 3 3 3 3 3 3 3 3

Std. Deviation

935,12 0,01 0,20 0,05 0,03 0,09 0,00 0,03 0,03 1165,21 155,36

ARTISTIC AREA

Mean 50666,19 0,42 0,59 0,70 0,81 0,73 0,00 0,76 0,24 544,00 145,00

N 1 1 1 1 1 1 1 1 1 1 1

Std. Deviation

. .% .% .% . .% .% .% .% . .

Total

Mean 5165,80 0,07 0,51 0,72 1,01 0,16 0,00 0,73 0,26 3699,27 385,40

N 15 15 15 15 15 15 15 15 15 15 15

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Std. Deviation

12785,42 0,10 0,26 0,12 0,06 0,20 0,01 0,04 0,04 3789,89 216,57

Source: Authors’ calculation. From the table it is visible that average capital expenses per student in 2011 are the highest in artistic and biomedical area. But, it should be taken into consideration that in biomedical area is the highest standard deviation or average variation then standard. While the lowest average capital expenses per student are in social-humanistic area and in natural science. Further, regarding the portion of capital expenses in total expenses the situation is the same. Artistic area has the highest portion of capital expenses in total expenses and in average it is 42%. Whereas, in other areas, average values of portion of capital expenses in total expenses are between 2 and 5%. Previously has been highlighted how constituents of University of Zagreb are budgetary users and that are mostly financed through state budget. This is visible through average values of revenues from state budget in total revenues. Average values of financing out of state budget in 2011 are from 60 to 85% with differences between areas. So, the lowest value of average indicator of financing out of state budget is in social – humanistic area. This would mean that constituents in that area are using and some other financing resources. Constituents in natural sciences are financed out in largest portion from state budget which is visible from average value of average indicator of financing out of state budget which is for 2011 around 84%. Regarding economics of business activities, or average value of total revenues and total expenses indicator it can be concluded that in some areas total revenues are higher than total expenses, based on calculated average values. Those areas are biomedical area, social –humanistic area, natural science and technical area. While in biotechnical and artistic area average coefficient of economics of business activities is negative and the total expenses are higher than total revenues. Further, in observed sample average values of ratio between total liabilities and total asset are somewhere from 4 to 16%, but only for the artistic area total liabilities are even 73% of total asset. Financial expenses are not so significant in total expenses for all areas. In structure of total expenses, the highest ratio has expenses for employees and the average value is between 72 and 76%. Material expenses are next and they are in average between 20 and 30%. Because of insufficient development of reporting system of HEI’s it was impossible to calculate most of the key financial indicators. From shown calculation of financial indicators for chosen constituents of University of Zagreb it is visible that external reporting system does not provide enough information for calculation of relevant financial indicators. Therefore, it was not possible to calculate following indicators:

1. Total cost per student/ total cost per graduated student/ total cost of courses – because of modified accrual basis and because the costs are not tracked per cost objects,

2. Total burden of teaching staff – there is not any detailed allocation of working hours of teachers on teaching, researching and professional activity,

3. Average years of using equipment and other asset – there is not systematical shown

depreciation costs based on objective time of usage,

4. Average usage of library services– the system of internal tracking to keep track with issued books per student should be implemented,

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5. Average cost of teaching staff – from external reports it is possible to get total expenses for employees which shown teaching staff and administration staff and it is not possible to divide those expenses on teaching staff expenses and administration,

6. Average cost of administration staff - from external reports it is possible to get total

expenses for employees which shown teaching staff and administration staff and it is not possible to divide those expenses on teaching staff expenses and administration,

7. Expenditures for paying off annuity of received loans as a part of total expenses and

expenditures – in external financial reports there is not any information regarding those expenditures.

The research result shows that under the existing accounting system it is not possible to develop key financial indicators in the higher education system of the Republic of Croatia. CONCLUSION The purpose of this paper has been to explore potential development of financial indicators at Croatian HEIs as a means of moving to the performance measurement. The calculation of financial indicators based on basic financial statements implies on a fact that in the existing reporting system of HEIs in the Republic of Croatia it is not possible to develop comprehensive performance measurement system. Moreover, the whole spectrum of information, especially cost information, is missing due to the fact that accounting system is based on modified accounting basis rather than full accrual basis. So, it was not possible to calculate some of the key financial indicators like costs per student of costs per programs. All before mentioned indicates on a need for implementation of cost and managerial instruments in existing accounting system of HEIs in the Republic of Croatia. We also propose development of full costing method by which all cost, direct and indirect, will be traced per cost object. However, this carries the problem of movement from modified to accrual basis of accounting for public HEIs. Therefore, our future research will be focused more detail on improvement of existing reporting system by introducing elements of cost and managerial accounting and creating an information base for the development of performance measurement in higher education of the Republic of Croatia. REFFERENCES Budimir (2010) Računovodstvene informacije i mjerenje uspješnosti u funkciji upravljanja proračunskim korisnicima, Zagreb: Ekonomski fakultet, Doctoral disertation, p. 275. Comaniciu, Bunescu (2010) Some considerations on the relationship between university strategies and financial indicators. Studies in Business and Economics, Vol 5(3) p. 137-146 Croatian Ministry of Science, Education and Sport (2013) List of Higher Education Institutions. Retrieved November 10, 2013 from the Web site: http://public.mzos.hr/Default.aspx?sec=2497 Cullen et al. (2003) Quality in higher education: from monitoring to management. Quality assurance in Education, vol 11(1), p. 5-14 Department of Education, Science and Training, Government of Western Australia (2001) Characteristics and performance indicators of Australian higher education institutions. Retrieved

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October 10, 2013 from the Web site: http://www.dest.gov.au/NR/rdonlyres/6812B85F-8C4E- 415D-9240AF3C35AFFB77/947/characteristics00.pdf HESA (2009) Key Financial Indicators. Retrieved October 10, 2013 from the Web site: http://www.hesa.ac.uk/index.php?option=com_content&task=view&id=1920&Itemid=233 Vašiček, Budimir, Letinić (2007) Performance indicators in higher education. Privredna kretanja i ekonomska politika, 110 (2007), p. 51-79 BIOGRAPHY Vesna Vašiček, Ph.D. is a full time professor of Accounting at the Faculty of Economics and Business, University of Zagreb. Since 2010 she is a Vice rector for business at University of Zagreb. She is author of many practical and scientific papers in area of accounting and finance and also a co-author of several books and handbooks. She can be reached at Faculty of Economics and Business, Kennedy Square 6, 10000 Zagreb, [email protected]. Ivana Dražić Lutilsky, Ph.D. is an associate professor of Accounting at Faculty of Economics and Business, University of Zagreb. She is author of many practical and scientific papers in area of accounting and finance and also a co-author of several books and handbooks. She can be reached at Faculty of Economics and Business, Kennedy Square 6, 10000 Zagreb, [email protected]. Martina Dragija, MA is a Teaching and Research assistant of Accounting at the Faculty of Economics and Business, University of Zagreb. She is author of several practical and scientific papers in area of accounting and finance and also a co-author of several books and handbooks. She can be reached at Faculty of Economics and Business, Kennedy Square 6, 10000 Zagreb, [email protected].

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SIMULATING THE TRANSMISSION OF EPIDEMICS THROUGH COMPLEX SYSTEMS: A

CLASSIC MODEL Sandip C. Patel, Morgan State University Ganesh Bhatt, Morgan State University

ABSTRACT

For health officials and policy-makers to control the spread of epidemics is the top priority. However, challenges to deal with the outbreak and the spread of epidemics are multifarious. Because epidemics are of different types and many of their transmission routes are different, the extant research has used various models for spread of epidemics. Most of these models are studied under complex systems. Computer simulations provide interesting and valuable opportunities in understanding how epidemics spread among individuals. In the present study, we simulate the spread of the epidemics by using a classic complex systems model. JEL: C610; C630; I00 KEYWORDS: Complex Systems, Epidemics, Government Health Policy, and Simulation INTRODUCTION Intervening in the spread of epidemics has been one of the central concerns of health officials and policy makers. Several sophisticated complex models have been proposed to conceptualize and analyze the transmission of epidemics (Breban, Vardavas, and Blower, 2005). Since the spread of epidemics is affected from a host of factors, we propose a complex systems classic-model to illustrate how microscopic activities —the spread of a disease from individuals— lead to the outbreak of large-scale epidemics at the macroscopic level. We simulate the spread of diseases using the software we developed to implement the proposed model and analyze the results of the simulation. In this paper, the term disease refers to an epidemic that is defined as a decrease in the threshold of host immunity to a parasite population (Calow, 1998). In the present research, we simulate the results of such an epidemic through a computer program (software). Our research is important for three reasons: First, by using complex systems approach in modeling the spread of the epidemics, we show why government policy makers and health officials face so many challenges in effective interventions of the spread of the epidemics. Second, the study shows that spread of epidemics is based on several mechanisms, such as the susceptibility of the individuals. Third, a hosts of other factors such as feedback mechanisms, types of epidemics, the rate of disease spread to others also create challenges in fully understanding the impact of the disease at the macro-level. In the next section, we briefly describe some of the characteristics of complex systems. Complex Systems The study of complex systems is emerging as an important area of interest for researchers and government policy makers that try to study the behaviors of “collectives” (Watts and Strogatz, 1998; Bhatt and Patel, 2012). Pipes connected through simple connections, networks, and assembly of randomly related actors- all point to the behavior of complex systems.

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Crowdsourcing, traffic-congestion, stock market fluctuations, spread of epidemic diseases, information diffusion, and assembly of neurons in the mind are some of the examples that are studied under complex systems. In complex systems, the heterogeneous behaviors of several actors create a dynamic pattern at the global level. Second, complex systems consist of several interacting agents that are connected through several mechanisms, such as pipe-lines (referred as classic case) or networks and whose effects at the global levels are non-linear. Nonlinearity means that the impacts caused by small changes can have proportionately large effects. Below we discuss classic and network models are described below: Classic Model This is the simplest kind of complex systems model in which agents interact in a series such as a pipe-line, connecting different homogeneous and heterogeneous sizes pipes. In the classic model, the spread of epidemics is based on the presumption that a person can initially be either sick or healthy. The disease can spread from an infected person to a susceptible individual. That is, if an individual is sick, the people who come in contact with this individual may or may not get sick. However, the sick individuals can eventually recover and become immune to the spread of the epidemics. This model is referred as the SIR (susceptible—infected—recovered) model of an epidemic. Network Model Networks, such as billions of brain neurons, a power grid, human social networks, where one person is connected to several other individuals, is the next level of complex system that is more sophisticated than the simple classic model. For studying epidemic transmissions under network models, social networks among people have often been analyzed. The process of intermingling between individuals is referred as “contagion,” depicting contagious dynamics (Hill et al., 2010). Most of these models have, however, been analyzed in highly abstract mathematical terms, quite difficult to understand for policy makers and health officials, who are in charge of preventing the outbreak of diseases (Galea, Riddle, and Kaplan, 2010; Barabasi, 2002; and Barabási and Albert 1999). In the network model, the spread of infection is based on the connections between individuals. The complexity of this model depends on the fact that one individual can be connected with many other individuals simultaneously (Galea, Riddle, and Kaplan, 2010). The infections such as sexually transmitted diseases can be effectively modeled and simulated using the network model. This kind of model is referred to SIS (susceptible-infected-susceptible). CURRENT RESEARCH Using a simplified classic model, we modeled layout of individuals situated in several rows to study the transmission of diseases. We developed probabilistic simulation software to study how quickly an infection spreads from sick individuals to the others, depending on the initial sick population and susceptibility of healthy individuals. That is, we examine how the microscopic events of infecting one individual to another leads to the macroscopic impact on the population. For example, if x% of population initially have flue and the probability that the flue gets transmitted from a sick individual to a healthy individual is y%, then what would the layout of individuals look like at every step of the spread, if no intervention has occurred to contain the infection? METHODOLOGY

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As mentioned above, in this paper we propose a probabilistic model to simulate the complex system of epidemic transmissions using simulation software we have created in Visual Basic.NET. In the proposed model, the contagion spread is through the classic model. That is, the model assumes that infection can spread, depending on the probability of the susceptibility, from one individual to other individuals who are situated adjacently to the left or the right of sick individuals. Thus, the susceptible individuals are those situated very next to the infected individuals. In a diversion from the traditional SIR model, we presume that once an individual gets infected, the individual stays infected, and he/she can spread epidemic to individuals who are next to the infected individual. The simulation program includes a graphical user interface (GUI) representing 21 rows of 21 individuals. That is, the GUI represents the population of 441 individuals. In our program, the GUI displays the sick and healthy individuals at the end of each state. We use the term state to refer to the layout of sick and healthy individuals at a given time. Different initial states are supplied by a user in terms of percent of randomly selected sick-individuals to produce different layouts. The initial state represents the start condition. State 1 signifies that the individuals who were sick in the initial state have passed their infection to their immediate neighbors. State 2 signifies that the individuals who were sick in state 1 have passed their infection to their neighbors, and so forth. In each subsequent state, sick individuals pass their disease to the healthy individuals, increasing the total number of sick individuals and making bigger clusters of sick individuals, which are measured in terms of blocks of consecutive sick-individuals. The more advanced a state, the larger the total number of sick individuals and greater the number of large blocks of sick individuals. Our goal was to observe the state at which either (1) a significant number of blocks or consecutive sick-individuals are formed, or (2) a substantial portion of population gets sick. In this study, the user-supplied values, which are percentages of initially sick population and susceptibility, act as independent variables and the specific state acts as a dependent variable. In addition to the state, the spread of an epidemic also depends on the interval between the states, which is the speed of the transmission. The interval depends on the type of disease for example, an interval between states for an epidemic that spread incredibly fast such as the 1918 flu pandemic, would be much shorter compared to the interval for AIDS. Since the model is based on finite-state machine essentials, it exclusively conceives the notion of states and does not account for the intervals between states. Design To run the simulation program, a user first chooses various the samples representing the initially infected individuals from the population. The user can input either the probability that an individual is infected or the total percent of infected population. If the user chooses to input the former, the program assigned the supplied probability to each individual and finds which individuals got the infection using the randomness programming-function. The program marks these sick individuals in green. We choose 5%, 10%, 15%, 20%, 30%, and 33% of the randomly selected individuals from the population as sick. Next, we decided the probability of susceptibility, which is the probability that an infected individual passes its infection to the individuals on its left or right. For example, a 50% probability of susceptibility makes an individual situated on the left-side of an infected individual 50% susceptible, and similarly, the individual on the right-side of the infected individual has a 50% probability of getting the infection from the infected individual. We ran each selected sample with 5%, 10%, 25%, 33%, 47%, and 70% susceptibilities. Once we supply the values of initially sick population percent and the probability of susceptibility, the program animates the spread of the epidemic at every state.

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The program also creates a text file listing the statistical data. These data include the total number of infected individuals, the number of consecutive sick-individuals and the number of such blocks, for example, “five occurrences of three consecutive sick-individuals.” RESULTS The Table 1 organizes the effects selected initial-states and susceptibilities on the layout of sick individuals. Table 1: Effects of Initially Infected Population and Susceptibility

Percent of Initial Population with Infection

Susceptibility Probability

States Number of Occurrences of infected consecutive individuals

Total Number Infected Individuals 1 to 5 6 to 10 11 to 15 16 to

21 10% 10% Initial Condition 42 0 0 0 44

1 42 0 0 0 47 3 40 0 0 0 64 5 39 0 0 0 74 7 39 0 0 0 90

33% Initial Condition 41 0 0 0 44 1 40 0 0 0 69 3 30 4 0 0 114 5 18 10 0 0 158 7 13 11 4 0 192

47% Initial Condition 40 0 0 0 44 1 35 1 0 0 76 3 22 8 0 0 133 5 13 10 3 1 179 7 6 12 2 4 221

70% Initial Condition 39 0 0 0 44 1 36 0 0 0 87 3 20 9 2 0 165 5 5 12 4 3 230 7 1 11 5 6 269

33% 10% Initial Condition 103 0 0 0 146 1 102 0 0 0 158 3 95 3 0 0 173 5 77 7 0 0 229 7 64 12 1 0 263

33% Initial Condition 109 0 0 0 146 1 73 6 1 0 223 3 45 12 6 0 293 5 24 9 5 8 355 7 8 7 2 15 389

47% Initial Condition 102 1 0 0 146 1 75 5 1 0 229 3 20 18 6 3 340 5 4 10 5 12 395 7 3 4 4 16 413

70% Initial Condition 98 0 0 0 146 1 44 10 3 1 259 3 13 9 11 5 364 5 2 5 5 18 411 7 1 3 2 18 427

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The above table shows the simulator-generated data for sample runs with different susceptibility-probabilities and different initial- states. A susceptibility probability is the likelihood that an infected individual passes its infection to the individuals on its left or right. An initial condition is the layout of initially sick individuals that have not transmitted their disease to anyone yet. The first column shows the initial populations of sick individuals supplied to the simulation software as the start state. The second column shows the susceptibilities supplied to the simulation software as the probability of a sick individual infecting its right and left immediate- neighbors. The third column shows the advancement of states. Initial condition is where the initially sick individuals have not transmitted their disease to anyone. State one is where the sick individuals have passed their disease to their neighbors. State two represents the stage at which the sick individuals’ neighbors’ neighbors have been infected, and so forth. The fourth column shows how many blocks of sick individuals were found. For the brevity of the table, we have grouped the blocks of consecutive sick individuals in four groups. For example, take the rows for the 10% initially sick population with 33% chances of passing their infection. During the initial condition, there were 41 blocks of either one, or two, or three, or five sick-individuals in-a-row. There was no case of six of more sick individuals located adjacently. However, in state 3, we found four blocks in which there were six to ten consecutive sick-individuals. The last column shows the total number of sick individuals in each state. Although we ran the simulation with the sample sizes of 5%, 10%, 15%, 20%, 30%, and 33% of the randomly selected sick individuals and each of these samples with 5%, 10%, 25%, 33%, 47%, and 70% susceptibilities, the table does not include the results for sample sizes 5%, 15%, 20%, and 30% for brevity. We are also omitting the results for the cases where the susceptibility for diseases is 5%, 25%, and 70%. Finally, we are not including the results for each state in this paper. For example, results for states two, four, six, and higher than seven are omitted for succinctness. In order to practically predict a disease spread, the simulator would have to run a larger number of times with the same user-supplied values to eliminate the variation in individual runs because of randomness. Instead of that approach, we have shown a breath of supplied values to illustrate the use and workings of the simulator without concentrating on a particular set of supplied values. Since the goal of the experiment is to find the state at which either a large number of blocks of consecutive sick-individuals are formed or a substantial percent of population becomes sick, we examine Table 1 for these criteria. The results show that for an initial value of 10% sick population, with 10% susceptibility, a large number of consecutive sick-individuals are not found until the state seven is reached. However, one fifth (90 out of 441) of the population gets sick at the end of state seven. Similarly, with the same initially sick population, assuming 33%, 47%, and 70% susceptibility respectively, we model how long it takes for the block of people to get sick respectively. The results show that the susceptibility increase hastens the rate at which more people get sick in the same and adjoining blocks. Significance of the Study Classics models are the simplest form of complex systems. Although for studying epidemic transmissions under classic models, a number of interaction effects are ignored, such models are still useful in case of airline transportation, class-room setting, and movie-theaters, where individuals have little choice of changing their seats. In such a model, if a certain number of individuals are infected with some kind of virus before boarding the plane, attending the class, or watching the movie in a theater, we examine how long it takes for all the individuals in that fixed location get sick. The classic model may be important for health officials and policy makers if

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the most important means of disease transmission is through local contacts between the individuals. CONCLUSION The results of the present study throw light how infections spread in a very confined an closed setting. Even though a large-scale mix of classic and network models are required for understanding the complexity of infection spread, the classic pipe-line model can still offer important clues to health officials for effective intervention. In addition, the classic model is simple to use and provides a clear picture of infection transmission to the policy makers, helping them to come with appropriate interventions to prevent the spread of the disease. REFERENCES Barabási, A. (2002). Statistical Mechanics of Complex Networks. Review of Modern Physics, 74(1): 47-97. Barabási, A., Albert, R. (1999). Emergence of Scaling in Random Networks. Science, 286(5439): 509-512. Bhatt, G. D. & Patel, S. (2012). An Exploratory Study of Complex Social Systems through Simulation. Proceedings of the 43rd Annual Meeting of the Decision Sciences Institute, San Francisco, November 17-20, 10901-10908. Breban, R., Vardavas, R., Blower, S. (2005). Linking Population-level Models with Growing Networks: A Class of Epidemic Models. Physical Review, 72(4): 1-8. Calow, P.P. (1998). The Encyclopedia of Ecology and Environmental Management, Blackwell Science. Blackwell Publishers, London, UK. Galea, S. Riddle, M. and Kaplan, G. A. (2010). Causal Thinking and Complex System Approaches in Epidemiology. International Journal of Epidemiology, 39(1): 97-106. Hill, A. L., Rand,D. G., Nowak, M. A. and Christakis, N. A. (2010). Infectious Disease Modeling of Social Contagion in Networks. PLOS Computational Biology, 6(11): 1-15. Watts, D., Strogatz, S. (1998). Collective Dynamics of “Small World” Networks. Nature (S0028- 0836), 393(4): 440-442. BIOGRAPHY Sandip C. Patel is an Associate Professor at the Graves College of Business at the Morgan State University. He received his Ph.D. from the University of Louisville and Master of Science from Georgia Institute of Technology. He has over ten years of industry experience. Dr. Patel is on the editorial board for six journals and has published over 37 papers. He can be contacted at INSS Department, Morgan State University, Baltimore, Maryland, 21251, by phone: (443) 885-3836 and by e-mail at: [email protected] Ganesh Bhatt is a professor in the Department of Information Science & Systems at Morgan State University. His publications have appeared in JMIS, CACM, Information & Management,

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OMEGA, Decision Support Systems, International Journal of Production & Operation Management, and many others. Currently, he is exploring the nature of economics and Information Systems. He can be contacted at INSS Department, Morgan State University, Baltimore, Maryland, 21251, by phone: (443) 885-3640 and e-mail at: [email protected]

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DEVELOPING CORPORATE CULTURE IN A TRAINING DEPARTMENT: A QUALITATIVE

CASE STUDY OF INTERNAL AND OUTSOURCED STAFF

Querubin S. Yap, University of Phoenix Jon K. Webber, University of Phoenix

ABSTRACT

This qualitative case study was conducted to investigate and analyze the perceptions and lived experiences of 20 training department staff at a New York-based early childhood multi-service healthcare company. The study was used to discover the leadership practices involved in creating a positive corporate culture in a work environment with outsourced and internal employees working concurrently together. There were six emergent themes that resulted from the study. It was discovered in the study that leaders who do the following activities continually engage the employees, whether they are internal or outsourced: (1) lead to the specific needs of each staff, whether internal or external, (2) create an environment of “fun”, (3) create an environment that purports familial ties with all team members, (4) ensure that learning exists continually, (5) honor the employees who have worked in the industry the longest, and most importantly, (6) lead as a socially and emotionally intelligent leader. JEL: L2, M1 KEYWORDS: Outsourcing, Training, Internal Employees, Outsourced Employees INTRODUCTION The challenge of leadership in an organization with an outsourcing arrangement continues to be more complex with the introduction of new technologies into the outsourcing solutions (Goolsby, 2010) as well as the increase in multi-cultural and multi-generational employees and contractors into the workplace (McCray, 2008). There are organizations that are able to navigate the complex outsourced-internal employee environments with success. In 2011, a Chief Financial Officer of the Year award was given to a New York-based early childhood multi-service healthcare company (Long Island Business News, 2011). The acceptance speech of the Chief Financial Officer (CFO) became the impetus to the current study since the CFO indicated a correlation between leader’s impact on corporate culture in an environment with outsourced and internal employees resulting in positive employee satisfaction and profitability of the company (G. Vellios, personal communication, November 22, 2011). The researchers in the current study identified the need to discover the leadership factors that can be cultivated to create a positive working environment when outsourced and internal employees co- exist. With the sensitive information and confidential files surrounding children's services, the organization will be anonymously identified in the study. The purpose of this qualitative case study was to identify the leadership culture of a New York-based early childhood multi-service healthcare provider training department with an outsource-internal arrangement. Leadership practice influencing the corporate culture of a training department with an outsourcing arrangement was uncovered in the study. The experiences of 20 training department staff were

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explored and analyzed through a convenience sample. The study can be used to examine: (a) leadership decision making, (b) management practices in relation to the workplace, and (c) the training department’s corporate culture. The remainder of the paper is organized as follows. The next section describes the relevant literature on outsourcing. Next, we will discuss the data and methodology used in the study. The results are presented in the following section. The paper closes with some concluding comments. LITERATURE REVIEW The literature in in the study covered four topics: (a) the development of training from traditional learning into corporate universities, (b) evolution of outsourcing and its link to training, (c) leadership and a leader’s role in a training environment, and (d) corporate culture. The focus of the current research was to discover linkages between the experiences and insights of a training staff and their leaders to determine how a positive corporate culture exists in a working environment with both outsource and internal employees working concurrently. The majority of literatures utilized for the purposes of this research were published between 2007 to 2012. Title searches included words and phrases to acquire the most comprehensive sources available on the subject of outsourced training. The key terms used were outsourcing, leadership, corporate culture, trainer, job satisfaction, performance, corporate belief systems, corporate tribal knowledge, training departments, training as business, leadership styles, management, training, learning, learning and development, training operations, training relationship management, learning consultants, and outsource-insource. Numerous sources resulted from the search including scholarly and peer-reviewed journal articles, general textbooks, book chapters, and non- scholarly articles. More than 296 literature resources and 131 relevant references resulted from the title search. While the field of training was evolving, the outsourcing industry emerged. The foundation for outsourcing can be traced to the Roman era where tax collection was systematic through contracting services (Jacques, 2006). The industrial revolution between the 18th and 19th centuries set the stage to the development of outsourcing. An increase in the production of goods accounted for externally-sourced tasks to be fulfilled; England contracted private companies for the operation of public street lights and highways, waste and prison management while France outsourced the development, management, and distribution of water storage and railways (Commonwealth of Australia, 1997). In the United States, it was not until the mid-1960s that computer service bureaus began providing outsourced support in the financial and operational departments of organizations (Aalders, 2002). The introduction of increased production of consumer technology created horizontal or cross-function enterprise-wide relationships between host organizations and outsourced companies (Kakabadse and Kakabadse, 2002). From an agency theory perspective, the governance of work given by the host company to the outsourced company becomes the basis for the outsourcing agreement (Eisenhardt, 1989). By the 1970s, vertical or single department function outsourcing arrangements were made as organizations identified the shift from horizontal to vertical outsourcing as more efficient for the host company (Jacques, 2006). In the 1980s, market competitiveness increased dramatically, and companies identified organizational core competencies and critical resources to ensure strategic advantages and competitive pricing with reduced costs resulting in increased outsourcing of departmental functions (DeRose, 1999). The streamlining of organizational focus provided a perspective that anything that was not considered core competency or critical to an organization’s

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strategic vision was to be outsourced (Gefen, 2010). The precipitous drop in information and communication technology costs enabled massive investment opportunities in international bandwidth and paved the removal of communication barriers across continents and enticed companies to outsource functions offshore (Bhagwati & Blinder, 2009). In 2001, the turning point was with the landmark contract between Nortel and PriceWaterhouseCoopers (PwC), where a high-end solutions provider received major attention from corporate executives to outsource training - a pivotal moment that showcased training outsourcing as a strategic component of business planning (Rosenthal, 2010). Companies like Accenture Learning contracted with Avaya University, Sun Microsystems, and General Electric’s Consumer Finance; and global consulting firms like Raytheon, IBM, Knowledge Planet, Productivity Point, Convergys Exult, and Intrepid and became forerunners and further expanded training outsourcing services to include training administration operations managing all of the staff, facilities, resources, and processes of clients (Trolley, 2004). Outsourcing expanded worldwide. Macrae (2002) forecasted ”global outsourcing growth to be 20% per annum within the Pacific Rim outsourcing market alone” (p.45). Robertson (2001) opined the market for outsourcing in Australia was A$1.3B in 1997 and jumped to A$6.4B by 2008 (Lui, 2009). Businesses in the shrinking global market experienced dramatic shifts in organizational structure and in the makeup of the employee workforce (Nilson, 2003). Outsourcing does not automatically mean offshoring, but offshoring can be part of an outsourcing contract (Gefen, 2010). Offshoring is a “geographical relocation of a job to another nation under the aegis of the same company’s foreign subsidiary or to a foreign contract provider” (Contractor, Kumar, Kundu, & Pedersen, 2011). In 1989, outsourcing officially became part of a business strategy and additional activities were outsourced, including accounting, human resources, data processing, security and maintenance (Mullin, 1996). By the 1990s, many factors contributed to the refinement of outsourcing contracts. Examples of these factors are (a) the aging population in North American and Europe creating a shortage of skilled technical and managerial personnel (Dobbs, et al., 2010), (b) technological change has accelerated dramatically resulting in organizations unable to keep up with the pace of their competition (Tan, 2012), modularized tasks and activities (Sanchez & Mahoney, 1996), and (c) the increase of knowledge repositories in organizations enabled tacit expertise to be codified in process templates, training materials, software, and expert systems (Balconi, Pozzali, & Viale, 2007). Outsourcing is a management tool that continues to be employed for a variety of reasons like financial, political, people, and product capability enhancement (Greaver, 1999). It is important that leaders understand the impact of a decision to restructure a company when the organization has outsourced and internal employees working concurrently (Contractor, Kumar, Kundu, & Pedersen, 2011). Leadership is a key enabler in affecting the corporate culture (Aitken & Higgs, 2010). Research shows that employees continue to be dissatisfied with an outsourcing arrangement (Rifkin, 1995; Gefen, 2010) and the discontent impacts performance (Morgan, n.d. ; Trolley, 2004; Klaas, Gainey, McClendon & Yang, 2005; Gainey & Klaas, 2005; Gareau & Lucia, 2010). Satisfied and committed employees are “fully engaged and exhibit high levels of discretionary effort in support of the mission and vision of the organization” (Marciano, 2010, p. 40). Leaders are critical players in creating an environment of positive corporate culture in their role as mentor, trainer, or coach (Hamel, 2012). Motivation, engagement, and ultimate satisfaction of employees are crucial for organizational survival in the current global dynamic environment of high competition (Marciano, 2010). The current qualitative research case study explored the impact of leadership to a corporate culture of a training department staff where an outsourcing arrangement was implemented. Outsourcing is a common phenomenon (Wankel & DeFillippi, 2008), which

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comes with many challenges, risks, and client complaints (Preimesberger, 2007). Concerns include hidden costs, unexpected outcomes, diminishing service levels (Lundby & Jolton, 2010), trust (Poitras, 2009), geographical and cultural disruptions (Farrel, 2006), and leadership cultures resulting in unintended low performance results (McCray, 2008). The complexity of leading a workplace with both internal and outsourced employees working concurrently continues to affect achievement of business goals (Contractor, Kumar, Kundu, & Pedersen, 2011). The trend of outsourcing job functions started with using external vendors to run company information systems (DeRose, 1999). Manufacturing and logistics departments were the next organizational function outsourced followed by human resources (HR) and training activities (Tipton & Nozaki, 2012). The role of the leader is crucial in creating a positive corporate culture when the working environment has both outsourced and internal employees (Stoddard & Wyckoff, 2009; Silzer & Dowell, 2010). The leader’s role becomes especially important when the outsourcing contract includes outsourced individuals from different countries with dissimilar experiences and professional credentials (Gurung & Prater, 2006; Oza & Hall, 2006; Metiu, 2006). Leadership’s impact in the corporate culture of training departments with an outsource- internal arrangement has been overlooked so far. There has been a shift from training department employees having shared team identities to employees challenging workplace roles due to an increase in engagement of outsource employees (Mortensen & Hinds, 2001; Hinds & Mortensen, 2005). Employees have also challenged organizational controls (Kosmala & Herrbach, 2006) and sense-making due to the organizational changes stemming from outsourcing arrangements (Elsbach, 2003). Instances of inconsistent instructor performance (Bowersox, Closs & Cooper, 2002) and diminished learner satisfaction have been attributed to training department outsourcing contracts (Worthington, 2002). METHODOLOGY A qualitative case study approach was appropriate in this research because the method allowed for the ability to identify specific data concepts for coding and determining categories and thematic patterns (Creswell, 2009). Leadership decision making is a defining aspect of leadership (Nohria & Rakesh, 2010) and the decisions made that translated into insights on corporate culture were explored and analyzed in the research. The research study used the following overarching research question: What role does leadership have on the corporate culture of a training department with internal and outsourced staff? A pilot interview was conducted as a trial run in preparation for the in-depth interview (Polit, Beck, & Hungler, 2001). The in-depth interviews provided an understanding of the factors that affect corporate culture. Interviewing both internal and outsourced employees yielded an understanding of the leadership factors impacting the corporate culture. Coding each interview identified trends in insights of the corporate culture. Interviews were analyzed through pattern recognition software, e.g. NVivo10®, of specific key words that were indicative of the subject’s trait or behavior. The current research investigated the occurrence of leadership influence on the working environment of a New York-based early childhood multi-service healthcare provider’s training department with an outsourcing arrangement. The research was conducted at a New York-based early childhood multi-service healthcare training department. The researcher documented the in- depth interviews using a web-based communication device called Skype™. There were 20 training department employees in various roles including outsourced employees interviewed in the study. The goal of the research study was to understand the factors of leadership practice’s motivational drivers towards a positive working environment with an outsourcing arrangement.

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This qualitative research study used the following research question: What is the role of leadership to the corporate culture of a training department where internal and outsourced employees work concurrently in the same environment? The sub-questions to the research question were: What is role of the leader to the employee’s perception of the work environment? What is the role of the leader to an internal employee’s perception of outsourced coworkers as it relates to the corporate culture of the work environment? What is the role of the leader to an outsourced employee’s perception of internal coworkers as it relates to the corporate culture of the work environment? To discover the reasoning behind the positive corporate culture of the researched organization, in- depth interviews focused on deliberated questions that directed study participants to the importance of the research study’s design based on observation, insight, and knowledge (Moustakas, 1994). A highly rich description, particularly of novel or unique experiences, of the study participants enabled the researchers a deeper understanding of the corporate culture (Swanson & Holton, 2005). There were seven assumptions made in the research process. First, it was assumed there is a possibility of gaining an insight about the culture of the organization in the study. Data was collected from the leadership phenomenon of a training department with an outsourcing agreement. The purpose of the research study was to uncover the experiences of the identified staff to explore the reasons behind the positive corporate culture in the workplace. In attempting to uncover the underlying essences and meaning of lived experiences of the study participants to arrive at a deeper, inter-subjective understanding of the phenomenon (Gibson & Hanes, 2003), the second assumption was that study participants identified the existence of a positive corporate culture in the company studied. A third assumption was that study participants were willing to participate in the study and responded honestly to the interview questions. It was believed that training staff participants would be engaged in volunteering to be part of the current study. The employees have all been part of the shift from a pure internal employee only organization to an outsourced and internal employee structure. The fourth assumption was that study participants were able to recall the experiences they had from the shift of internal employee only organization to an outsourced and internal employee structure. Due to the intensity and sensitivity of job satisfaction and employee motivation as a theme for the current study, the fifth assumption was that the research study topic would not bias the responses of study participants and potentially impact the results of the research data. The sixth assumption was that the qualitative case study research method was the suitable method to use within the circumstances of the research. The last assumption was that the results of the research study would contribute to the field of knowledge. A key component of research is to identify the most appropriate participant for the qualitative research study. Any potential participant falling within a high risk classification (i.e., pregnant women, children under the age of 18 years, residents of prisons or institutions, the elderly, terminally ill, comatose, cancer patients, individuals with AIDS, and mentally incompetent individuals) were not included in the current research study. Since the current qualitative study methodology is intended to deepen understanding more than to predict, participant selection were based on individuals who became the catalysts for dialogue about their lived experiences (Jemielniak & Kociatkiewicz, 2009). The criteria for the current research study’s population were (a) internal or contract employee, (b) employed by a New York-based early childhood multi-service healthcare provider, (c) a member of the training department staff, (d) currently working in an environment with internal and outsourced contract employees working concurrently, and (e) be at least 18 years of age.

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In order to fulfill the research study criteria, participants were selected by the researcher through purposeful sampling due to availability and willingness (Patton, 2002). There were 10 outsourced and 10 internal employees who participated in the study. Of the 20 members of the training department staff eight had direct reports and the rest of the participants were outsourced instructional designers, outsourced instructors, internal trainers, and training coordinators. The sample excluded employees of the organization who were not part of the training department. The current study participant invitation included a copy of the informed consent form. The contents of the informed consent form included (a) the researcher’s name, university affiliation, and mailing address; (b) the current study’s purpose; (c) the study participant’s eligibility criteria; (d) the risks and benefits of the study; and (e) the details of a contact for any additional information requested (Creswell, 2009). While at the consent stage, the participants were encouraged to reflect on the elements of the current study and to participate voluntarily in the research (Miller & Boulton, 2007). Each study participant was asked for an e-mail address or a fax number for purposes of presenting the informed consent form for their review and reference. The research study invitation also informed prospective participants that the study involved an in- depth web-based interview that lasted approximately 30 to 60 minutes. Voluntary participation and withdrawal any time with no consequence from the research interview process were included in the informed consent form. The informed consent form included a statement indicating that employment status was not impacted by volunteering in the current study. The informed consent form also indicated that study participants were not compensated nor there be any risk for their participation. Web-based interviews were recorded for accuracy and were part of the informed consent form. The study participants were informed that an audio-recording of the interview was to be made. There were an additional hand-recording and transcription by an external company of the audio-recordings to triangulate the data (Flick, 2002). In the event a participant refused to be audio-recorded, the researcher hand-recorded the interview. Participants were advised that interview questions were conducted for the purpose of research only and would be provided with a published summary without any reference to the participant’s personal information. The results of the research were triangulated by documentation on employee performance reviews of the study participants. The documentation and descriptive narrative from the interviews provided the necessarily support to strengthen the validity and reliability of the qualitative research (Yin, 2009). A copy of the transcribed in-depth interview was sent by e-mail to each of the respondents to review for accuracy. Every respondent was instructed to make any necessary transcription changes by using a different color of text from the original transcription and send the updated transcription to the researchers by e-mail. A deadline to return the updated transcription was given to all participants. Each participant was thanked for their participation to the current study. Updates given by the participants included spelling and grammar corrections or deletion of text. Any inaudible text provided by the transcription service were corrected by the researcher and confirmed by the study participant. The prospective participant was advised the research data will be secured in an offsite locked storage facility for the sole purpose of keeping the data private, confidential, and secure. Participants were informed that 3 years after the interview, any and all paper documents, audio and web-based camera recordings, as well as flash drives, will be discarded and destroyed. All paper documents and audio recordings will be frayed and shredded. A document shredding service will crush and discard web-based camera recordings embedded on flash drives. RESULTS AND DISCUSSION The in-depth interviews were conducted by a web-based communication device called Skype™ while the study participants were at a team bi-annual gathering at the organization’s main office

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in New York. Each study participant was asked to go to private room specifically setup with a laptop, a webcam, and internet access for the interview. No other individual was in the room. Upon completion of the interview of one study participant, the participant would leave the room and another study participant would come in to be interviewed. The resulting 20 in-depth interviews were transcribed by a third party. The third party signed a confidentiality agreement to ensure the anonymity and security of the study participants and their responses. To ensure anonymity, an identification code was given to each study participant starting with 6 to 26. The letters SP (study participant) were used to identify each participant to assist in determining participant responses in place of using the actual name of the participant. The population of the current case study included eight management level staff with roles like project manager, manager, director, and vice president and 12 department staff with roles like administrative assistant, training coordinator, instructional designer, facilitator, developer, and learning consultant. The criteria for the current research study’s population was (a) internal or contract employee, (b) employed by the current study organization, (c) a member of the training department staff, (d) currently working in an environment with internal and outsourced contract employees working concurrently, and (e) be at least 18 years of age. There was equal representation between internal employees and outsourced employees from all the participants interviewed. Of the 20 participants, 10 participants were current outsourced employees who held positions such as project management, trainers, instructional designers, learning consultants, developers, managers, and coordinator. The 10 internal employee study participants held similar roles including senior manager, director, and vice president. There were five participants who have been in their current position between 7-10 years, nine participants between 4-6 years, and six participants have been in their role for 1-3 years. The outsourced employees have a total of 47 years among the 10 study participants and the internal employees have a total of 49 years. The 20 participants have a total of 96 years in the current position and a total of 186 years in the industry. The study demographics included participant time in organization as well as the training industry. The demographics also incorporated questions on gender, ethnicity, and age. Each study participant was also asked to provide their academic background (see Table 1). Table 1: Current Study Demographics

This table shows the demographic information provided by both outsourced and internal employees in this study. The purpose of the current qualitative research case study was to uncover opportunities for leaders to create an environment of positive corporate culture in an organizational structure with internal and outsourced employees. Six emergent themes resulted in the current study. First, the employee’s expectation and experience was linked by a leader’s ability to understand each employee’s needs. Leaders need to be socially and emotionally intelligent at the core of their behaviour to develop and permeate a positive working environment. Second, it is imperative for a leader to engender a sense of belonging to a family in the corporate culture. Third, leaders need to have the capability to modify their leadership approach depending on individuals they are

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working with. Fourth, respondents with the highest adaptability rate are those who have been in the industry the longest. Fifth, it is important for leaders to create a work environment that is fun for all team members. Sixth, continuous learning is imperative to continually engage the employees (see Figure1). Figure 1: Emergent Themes from Current Research Study

This figure shows how five emergent themes are linked to the main theme of having a need to have socially and emotionally intelligent leaders. The research revealed a work environment that links leadership approaches to developing a positive corporate culture. It was discovered in the study that leaders who do the following activities continually engage the employees, whether they are internal or outsourced: (1) lead to the specific needs of each staff, whether internal or external, (2) create an environment of “fun”, (3) create an environment that purports familial ties with all team members, (4) ensure that learning exists continually, (5) honor the employees who have worked in the industry the longest, and most importantly, (6) lead as a socially and emotionally intelligent leader. The implication for organizational theorists is the importance of trust, openness, and the need for employees to articulate their specific needs to their leaders to impact the corporate culture positively. It is imperative for the leader to actively listen to the specific needs of each team member, modify the leadership approach to address those specific needs, and have a heightened social and emotional intelligence. The data from the current study interviews discloses the linkage between leadership approaches to work environment. The challenge in the current economic landscape is the overwhelming occurrence of financial issues, which result in rewarding training manager’s performance for fiscal reasons alone (Chartered Institute of Personnel and Development, 2012). Training department leaders need a holistic balance between financial status, employee satisfaction, and organizational performance. The current study shows how a leader’s approach impacts internal and external employee satisfaction. The leader also acts as a catalyst in fostering a positive corporate culture. Garmendia (2004) indicated that a positive corporate culture is correlated positively to organizational performance.The literature is rich in the areas of training, outsourcing, leadership, and employee

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motivation as separate fields of studies. Corporate training departments’ mission statements align with corporate vision and goals (Meister, 1998). With the growing operational costs of training, outsourcing became an option to continue supporting business requirements within the shrinking budgetary constraints of training departments (Contractor, Kumar, Kundu, & Pedersen, 2011). Leaders became more focused on running training departments like a business (Mumma, Todd, & Trolley, 2011) with the human side as a secondary lever (Brinkenhoff & Gill, 1994). Kehres (2011) indicated that companies with outsourcing arrangements could have a negative impact on their employees. Such an agreement can lead to disharmony, dissatisfaction, and low productivity in the workplace (Kehres, 2011). The literature on motivation in corporate environments, though in-depth, is not fully researched in the area of training and development staff motivation in a workplace of internal and external employees working concurrently. Studies show that high performing work units benefit companies through increased productivity and service quality, advanced levels of safety performance, and financial stability (Gareau & Lucia, 2010; Marciano, 2010). Employees’ level of trust and sense of ownership are the results of high performing work systems (Appelbaum, Bailey, Berg, & Kalleberg, 2000; Zacharatos, Hershcovis, Turner, & Barling, 2007). The impact of the current study relates to the linkage between the training department leader’s approach and employee satisfaction and motivation, whether internal or outsourced. CONCLUDING COMMENTS Karim (2008) indicated a strong correlation between emotionally intelligent leaders and the overall employee commitment to the organization; a commitment that includes employee satisfaction and motivation. The current study is significant to leadership as it reflects the linkage between socially and emotionally intelligent leaders and highly satisfied employees, whether internal or outsourced. Gefen (2010) indicated that in outsourcing arrangements, the external employees are part of the fabric of the host organization, and management should not differentiate the corporate culture accorded to outsourced and internal employees as the relationship has become a true, shared venture. The current study confirms the leadership approach to external employees, in relation to developing familial ties, does not differ from treatment received by internal employees. The current research differentiated relationship building with employee development. The caveat is for contractors to remain independent of the host company when it relates to personal development. The legalities of developing an outsourced employee can be viewed by leaders as a limitation to the complete engagement of all employees, but it is not the development that is an issue rather the leadership attitude and treatment (Gefen, 2010). As a result, the leadership approach could to be individualized to address specific employee needs and requirements, whether internal or external. Second, leaders could to create a fun environment. Third, it may be important for leaders to develop an environment that purports familial ties with all team members, whether they are internal or external. Fourth, it could be a key factor for leaders to create an on-demand training environment. Fifth, it may be imperative for leaders to encourage and support the participation of team members who have been in the industry the longest as they have the greatest capacity to adapt when the right work environment is in place. Sixth, it may be important for leaders to be socially and emotionally intelligent in their leadership approach. The basis of the recommendations stem from the themes from the current study linked to the responsibility of the training department staff, management, and the organization.

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Leaders have an impact to the corporate culture of an organization (Kaplan, 2011). The themes that emerged from the current study reflect the following recommendations to training department leaders with an outsourced and internal employee arrangement. The recommendations are as follows: When planning for an outsourcing engagement, it may be imperative for leaders to consider the impact to the employees and to create a strategic people plan. The people plan should include both internal and external employees. It may be important to identify the workplace environment after the outsourcing arrangement is implemented by conducting an impact analysis on individuals’ needs, behaviors and attitudes. Workplace fun may require planning from leaders. Fun goes beyond the existence of humor and play. Leaders may need to create an environment that engenders an emotional connection among the team members to allow them to feel that they are part of a family. Adaptability is not generational but individualized. There may be a need for leaders to create an environment where learning is addressed individually to the needs of each employee. Have different learning inputs: face-to-face, online, social networks like learning labs and communities of practice. This approach will address the needs of a multigenerational workplace. It may be important to incorporate social and emotional intelligence training not just for leaders but for everyone in the organization. This will assist in providing an environment of heightened respect, authenticity, and strengthen relationships amongst team members. REFERENCES: Aalders, R. (2002). IT Outsourcing: Making it work. Fujitsu [White Paper]. Retrieved from http://www.fujitsu.com/downloads/WWW2/whitepaper_IT-outsourcing.pdf Aitken, P. & Higgs, M. (2010). Developing Change Leaders: The Principles and Practices of Change Leadership Development. London, England: Taylor and Francis. Appelbaum, E., Bailey, T., Berg, P., & Kalleberg, A. (2000). Manufacturing Advantage: Why High Performance Work Systems Pay Off. ILR Press: Ithaca, New York. Balconi, M., Pozzali, A., & Viale, R. (2007). The “codification debate” revisited: a conceptual framework to analyze the role of tacit knowledge in economics. Industrial and Corporate Change, 16(5), 823-849. doi: 10.1093/icc/dtm025 Bhagwati, J. & Blinder, A. (2009). Offshoring of American Jobs: What Response from U.S. Economic Policy? Cambridge, MA: MIT Press. Bowersox, D., Closs, D., & Cooper, M.B. (2012). Supply chain logistics management (4th ed). New York: McGraw-Hill/Irwin. Brinkerhoff, R. & Gill, S. (1994). The learning alliance. San Francisco: Jossey-Bass. Chartered Institute of Personnel and Development (2012). More about us. Retrieved from http://www.cipd.co.uk/cipd-hr-profession/about-us/more-about-us.aspx Commonwealth of Australia. (1997). Industry Commission Annual Report 1996-97. Retrieved from http://www.pc.gov.au/ic/research/annualreport/96-97 Contractor, F. J., Kumar, V. Kundu, S.K., & Pedersen, T. (Eds). (2011). Global Outsourcing and Offshoring: An Integrated Approach to Theory and Corporate Strategy. [Books24x7 version] Retrieved from http://common.books24x7.com/toc.aspx?bookid=38001

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Creswell, J. (3rd ed.). (2009). Research Design: Qualitative, Quantitative, and Mixed Methods Approaches. Thousand Oaks, CA: Sage. DeRose, G. (1999). Outsourcing Training and Education. Alexandria, VA.: ASTD Press. Dobbs, R. Lund, S., Roxburgh, C., Manyika, J., Kim, A., Schreiner, A., Piotrowski, J. (2010, December). Farewell to cheap capital? The implications of long-term shifts in global investment and saving. San Francisco, CA: McKinsey Global Institute. Eisenhardt, K. (1989, January). Agency Theory: An Assessment and Review. The Academy of Management Review, 14(1). 57-74. Elsbach, K.D. (2003). Relating physical environment to self-categorizations: identity threat and affirmation in a non-territorial office space. Administrative Science Quarterly, 48(4): 622–50. Farrel, D. (2006, June). Smarter offshoring. Harvard Business Review, 85–92. Flick, U. (2002). An introduction to qualitative research. Thousand Oaks, CA: Sage. Gainey, T.W. & Klaas, B.S. (2005, Spring). Outsourcing Relationships between Firms and their Training Providers: Role of Trust. Human Resource Development Quarterly, 16(1), 7-27. Garmendia, J.A. (Nov 1, 2004). Impact of corporate culture on company performance. Current Sociology , 52 (6), 1021. Gareau, B. & Lucia, A. (2010). 180 ways to build employee engagement: how to maximize your team’s commitment, effort, and loyalty. [Books24x7 version] Retrieved from http://common.books24x7.com/toc.aspx?bookid=40329 Gefen, D. (2010). The art of successful information systems outsourcing. [Books24x7 version] Retrieved from http://common.books24x7.com/toc.aspx?bookid=40270 Gibson, S. & Hanes, L. (2003). The contribution of phenomenology to HRD. Human Resource Development Review, 2, 181. doi: 10.1177/1534484303254987 Goolsby, K. (2010). Outsourcing Buzz. Retrieved from http://www.outsourcing-buzz blog.com/search/Kathleen%2BGoolsby/page/3 Greaver, M. (1999). Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives. New York, NY: AMACOM. Gurung, A. & Prater, E. (2006). A research framework for the impact of cultural differences on IT outsourcing. Journal of Global Information Technology Management, 9(1), 24–43. Hamel, G. (2012). What matters now: how to win in a world of relentless change, ferocious competition, and unstoppable innovation. [Books24x7 version] Retrieved from http://common.books24x7.com/toc.aspx?bookid=45173 Hinds, P. & Mortensen, M. (2005). Understanding conflict in geographically distributed teams: the moderating effects of shared Identity, shared context, and spontaneous communication.

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Organization Science, 16(3): 290–309 Jacques, V. (2006) International Outsourcing Strategy and Competitiveness Study on Current Outsourcing Trends: IT, Business Processes, Contact Centers. Paris: Éditions Publibook. Jemielniak, D. & Kociatkiewicz, J. (2009). Handbook of Research on Knowledge-intensive Organizations. Hershey, PA: IGI Global Kakabadse, A. & Kakabadse, N. (2002). Smart Sourcing: International Best Practice. New York, NY: Palgrave Macmillan. Kaplan, R. (2011). What to ask the person in the mirror: critical questions for becoming a more effective leader and reaching your potential. [Books24x7 version] Retrieved from http://common.books24x7.com/toc.aspx?bookid=45555 Karim, J. (2008, December). The relationship between emotional intelligence, leader-member exchange and organizational commitment. Euro Asia Journal of Management, 36(18), 2, 153 171. Kehres. P. (2011). Understanding the Influence of Job Satisfaction on Intent to Leave for Offshore Call Center Agents. Retrieved from ProQuest Digital Dissertations. (UMI 3480400) Klaas, B. S., Gainey, T. W., McClendon, J. A., Yang, H. (2005). Professional Employer Organizations and Their Impact on Client Satisfaction with Human Resource Outcome: A Field Study of HR Outsourcing in Small and Medium Enterprises. Journal of Management, 31(2), 234 254. Lui, S. (2009, June 2). IDC: IT outsourcing market to grow by $1.6 billion to 2013. ARN. Retrieved from http://www.arnnet.com.au Lundby, K. & Jolton, J. (Eds). (2010). Going Global: Practical Applications and Recommendations for HR and OD Professionals in the Global Workplace. San Francisco, CA: Pfeiffer. Macrae, M. (2002). The outsourcing great divide. Managing Information Strategies, 11, 45-8. Marciano, P. (2010). Carrots and sticks don't work: build a culture of employee engagement with the principles of respect. [Books24x7 version] Retrieved from http://common.books24x7.com/toc.aspx?bookid=35902 McCray, C.R. (2008). Constructing a positive intrasection of race and class for the 21st Century. Journal of School Leadership, 18(2), 249-267. Meister, J. (1998). Corporate Universities: Lessons in Building a World-Class Work Force. New York, NY: McGraw-Hill. Metiu, A. (2006) Owning the code: status closure in distributed groups. Organization Science, 17(4): 418–36. Miller, T., & Boulton, M. (2007). Changing constructions of informed consent: qualitative research and complex social worlds. Social Science & Medicine, 65(11), 2199-2211. Morgan, C. (n.d.) Understanding and Developing Your (People) Assets. [White Paper]. Retrieved

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from http://www.b2binternational.com/publications/white-papers/employee-satisfaction Mortensen, M. & Hinds, P. (2001). Conflict and shared identity in geographically distributed teams. International Journal of Conflict Management, 12(3): 212–38. Moustakas, C. (1994). Phenomenological research methods. Thousand Oaks, CA: Sage. Mullin, R. (1996). Managing the outsourced enterprise, Journal of Business Strategy, 17(4), 28 36. Mumma, S., Todd, A., & Trolley, E. (2011) Running Training Like A Business: 2011 Research Update. Retrieved from http://www.corpu.com/documents/RTLAB_ebook_rev011311.pdf Nilson, C. (2003). How to Manage Training : A Guide to Design and Delivery for High Performance. New York, NY: AMACOM. Nohria, N. & Khurana, R.(Eds.) (2010). Handbook of Leadership Theory and Practice: An HBS Centennial Colloquium on Advancing Leadership. Boston, MA: Harvard Business Press. Oza, L.V. & Hall, T. (2006) Difficulties in managing offshore software outsourcing relationships: an empirical analysis of 18 high maturity Indian software companies. Journal of Information Technology Case and Application Research, 7(3): 25–41. Patton, M. Q. (3rd ed.). (2002). Qualitative evaluation and research methods. Thousand Oaks, CA: Sage. Poitras, J. (2009 July). What Makes Parties Trust Mediators? Negotiation Journal, 307-325. Polit, D.F., Beck, C.T. & Hungler, B.P. (5th Ed.). (2001). Essentials of Nursing Research: Methods, Appraisal and Utilization. Philadelphia: Lippincott Williams & Wilkins. Preimesberger, C. (January 9, 2007). Some companies hesitant to outsource. eWeek, 24(4) 28. Rifkin, J. (1995). The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era. New York, NY: Putnam Publishing Group. Robertson, R. (2001, February 28). Size dominates the IT outsourcing market. Australian Financial Review, 3. Rosenthal, B.E. (2010, October 15) Five Executives Remember Creating BPO at PwC [Online Article] Retrieved from http://www.outsourcing-center.com/2010-10-five-executives-remember creating-bpo-at-pwc-article-41467.html. Sanchez, R. & Mahoney, J. (1996). Modularity, Flexibility, and Knowledge Management in Product and Organization Design. Strategic Management Journal, 17(Special Issue), 63-76. Silzer, R. & Dowell, B. (2010). Strategy-Driven Talent Management: A Leadership Imperative. Hoboken, NJ: Pfeiffer. Stoddard, N. & Wyckoff, C. (2009). The Right Leader: Selecting Executives Who Fit. New York: NY: Wiley & Sons, Inc. Swanson, R. & Holton III, E. (Eds.) (2005). Research in organizations: foundations and methods

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of inquiry. [Books24x7 version] Retrieved from http://common.books24x7.com/toc.aspx?bookid=11859 Tan, J. (2012). Trends in Organizational Change. Retrieved from http://www.referenceforbusiness.com/management/Tr-Z/Trends-in-Organizational-Change.html Tipton, H. & Nozaki, M. (Eds). (2012). Information Security Management Handbook (6th ed). New York: Auerbach Publications. Trolley, E. (2004, January). Training Outsourcing-A Bit of History. Retrieved from http://www.trainingoutsourcing.com/exec_history.asp Wankel, C. & DeFillippi, R. (Eds). (2008). University and Corporate Innovations in Lifelong Learning. Charlotte, NC: Information Age Publishing. Worthington, A.C. (2002).The Impact of Student Perceptions and Characteristics on Teaching Evaluations: A case study in finance education. Assessment and Evaluation in Higher Education, 27(1). 49-64. Yin, R. K. (2009). Case study research: Design and methods. (4th ed.).Thousand Oaks, CA: SAGE Publications Inc. Zacharatos, A., Hershcovis, M.S., Turner, N., & Barling, J. (2007). Human resource management in the North American automotive industry: A meta-analytic review. Personnel Review, 36, 231 254. BIOGRAPHY Dr. Querubin Yap has lectured and spoke at conferences globally like USA (New York University, Columbia University), UK (Oxford Brookes), Spain (Universitat de Catalunya), Philippines (St. Anthony School System), Malaysia (IIUM University), Canada (Mount Saint Vincent University, George Brown College), Denmark (Aalborg University, Open University). His conference and lecture topics include Social Media Technologies in Learning, Mobile Learning, Leading Multi-Generational and Multi- Cultural Workplaces, Blended Learning, Leadership Styles. Find out more about Querubin Yap at http://robinyap.com and on Twitter @robinyap. Dr. Jon Webber is an Associate Professor at the University of Phoenix. His research appears in journals such as Advances in Management and Applied Economics, Global Journal of Business Research, International Journal of Gambling Business and Economics, International Journal of Management and Marketing, and the Journal of Business and Economics Review of Business and Finance Case Studies. He can be contacted at: 5015 Sunset Trail, Cumming, Georgia 30040. US Email: [email protected].

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STUDENT ETHICAL AWARENESS AS EFFECTED

BY GENDER AND GRADE POINT AVERAGE Don Altmyer, Black Hills State University

Sheng-Ping Yang, Gustavus Adolphus College Ken Schallenkamp, Black Hills State University Ron DeBeaumont, Black Hills State University

ABSTRACT

An ethics survey of business students was conducted over a nine semester period in a variety of business courses at a regional state university in the Midwest. The university’s business program has adopted an across the curriculum approach to ethical instruction and has mandated a one- semester ethics course for all business majors. The purpose of the study was to determine if gender or academic success, as measured by cumulative grade point average, affects ethical awareness scores. The results of the survey revealed that students who had completed the one- semester ethics course achieved higher ethical awareness scores than those who had not. Although no correlation between class level and ethical awareness was discovered, gender appeared to have a limited impact on ethical awareness. While all students demonstrated a significant increase in ethical awareness after completing the ethics course, the demonstrated increase in awareness was stronger for females. Finally, the survey revealed that both high and low GPA students demonstrated increased ethical awareness after completing the ethics course. This suggests that a stand-alone ethics course does improve ethical awareness for all students and that the benefit is not limited to females or high GPA students. JEL: I21 KEYWORDS: Ordered Logit Model, Student Ethical Awareness INTRODUCTION There is a longstanding controversy over whether business ethics can be taught, and if so, what methodology is most suitable to the task. Some argue that, desirable as sound business ethics may be, it simply can’t be taught in the classroom (Stape, 2002). Business ethics has been caustically referred to as being an oxymoron (Townley, 1992) and, during the 1970’s and 1980’s, writers as influential as Peter Drucker and Milton Friedman argued that it cannot be taught at all (Nguyen et. al., 2008). A study dealing with attitudes towards unethical behavior, Machiavellianism, and tolerance for risk identifies business students as being more likely to engage in unethical behavior than psychology students (Tang et al., 2008). The authors posit that corruption and scandals are caused, not by lack of intelligence, but by lack of wisdom or virtue. They also argue that social institutions, as well as business schools, CEO’s, corporate culture, and compensation systems have significant impacts on managers’ ethical behavior. This corroborates earlier studies which suggest that organizational culture and other organizational factors which occur after formal education play a major role in shaping the way individuals perceive moral responsibility (Frederick and Weber, 1987; Kelley et al., 1989). Similarly, Awasthi (2008) conducted a study which revealed that exposing students to a business ethics course influenced their managerial judgment and managerial intent, but did not directly influence moral judgment. However, the

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literature questioning the efficacy of teaching business ethics does not recommend abandonment of the discipline, nor does it condemn it as useless. For example, Tang et al. (2008) recommend that schools, organizations, and society as a whole need to work together to promote ethical behavior. In the initial portion of this study, the authors surveyed undergraduate business students to determine whether they demonstrate an increase in ethical awareness as they progress through the program and complete a required course in business ethics. The initial study was conducted over a five semester period from spring 2008 through spring 2010 at a regional state university in the Midwest, with students sampled from courses in accounting, economics, finance, and entrepreneurship. In addition to requiring a one-semester business ethics course, the business program has adopted an across the curriculum approach to ethical instruction. The objective of the original study was to test the hypothesis that students completing required business courses have higher ethical awareness scores than students who have not completed the business courses. The data used to test the hypothesis was obtained from surveys that asked students to rank the degree to which they believed an ethical issue was associated with a particular situation. The responses were then analyzed using an ordered logit model to determine what variables significantly affect student ethical awareness (Altmyer et. al., 2011). The results were somewhat surprising. The findings illustrated modest support for the premise that students who completed an ethics course were more ethically aware. However, the completion of the ethics course significantly affected ethical awareness only as measured by the questions relating to individual situations, and not for those relating to business situations. Furthermore, there appeared to be no correlation between class level and ethical awareness. Thus, business students understanding of ethical awareness did not significantly improve as they progressed toward graduation. Additionally, the study revealed that students who performed better academically, as evidenced by a higher GPA, has higher ethical awareness scores relative to individual situations. In addition, female students showed higher ethical awareness scores in both individual and business situations than their male counterparts. Overall, in the initial study, it appeared that most of the differences in ethical awareness between students were the result of factors unrelated to the curriculum, although a stand-alone ethics course did appear to have a modest impact (Altmyer et. al., 2011). The results suggested that further research of the relationship between gender, GPA, and ethical awareness might prove a useful addition to the literature. The findings also appeared to imply that further research was needed to determine more effective ways to teach ethics. Therefore a continuation of the study was initiated over a four-semester period from the fall of 2010 through the spring of 2012. The results of the expanded study are reported in this paper. The revised study adds several contributions to the original analysis. First, the current study finds a stronger link between ethical awareness and completion of the stand-alone ethics course. Beginning with the Fall semester of 2011, the lecture sections of the ethics course have changed to a hybrid format comprising a mix of lecture and online delivery. Although not conclusive from the data, perhaps the revised delivery method is more effective. Other studies suggest hybrid courses are more effective than pure lecture versions of the same course (i.e., Chan, 2011; Jones and Chen, 2008), although the research is not conclusive (Keller et.al, 2009). Second, the current study examines the effectiveness of the ethics course across genders. The results suggest both male and female students experience a significant increase in ethical awareness following completion of the ethics course. However, the response is stronger for females, perhaps partly explaining the higher level of ethical awareness experienced by females in general. Third, the current study examines whether the benefits of taking the ethics course depend on GPA. Surprisingly, both high and low GPA students demonstrate an increase in ethical awareness

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following completion of the ethics course. Overall, the current study suggests that a stand-alone ethics course does improve ethical awareness, and that this improvement is not limited to females or high GPA students. The paper is organized as follows: Section 2 provides a literature review, section 3 presents the data and methodology, section 4 discusses the empirical results, and the conclusion is presented in section 5. LITERATURE REVIEW There is a large body of literature indicating a positive correlation between teaching business ethics and changing student awareness of ethics in business. A study examining undergraduate student learning in business ethics, particularly ethical judgment, indicated that the more students learn about contractualism ethics the less likely they are to engage in unethical behavior (Nguyen et. al., 2008). Research also suggests that moral development continues during the college experience and that knowledge gained during this experience has a positive correlation to moral development (King and Mayhew, 2002; Williams and Dewett, 2005). In addition, while commenting on Williams and Dewitt’s work as part of their own study, Cox et. al. (2009) state that their review of the business ethics literature indicates “business ethics education can be effective in increasing students’ awareness of moral issues, promoting students’ moral development, and promoting students’ ability to handle complex ethical decision making.” In a work dealing with the subject of teaching ethics, Gilbert (1992) stated that exposure to business ethics is necessary in order to increase student’s awareness of the ethical components of business situations as well as to improve their ethical reasoning. Klugman and Stump (2006) posit that teaching ethics enhances student’s critical reasoning and therefore makes them better able to effectively deal with ethical dilemmas. Langan (1990) went so far as to state that exposure to business ethics courses prepares students to face ethical dilemmas in the workplace by broadening their knowledge base relative to business ethics, which in turn increases their analytical reasoning skills. Finally, Falkenberg and Woiceshyn (2008), while acknowledging a trend toward required ethics instruction in schools of business, state that the inclusion of business cases can facilitate the development of deductive, inductive and critical reasoning skills. A study involving undergraduate students demonstrated that the more students learn about ethics the less likely they are to report that they would engage in unethical behaviors as depicted in scenarios presented to them (Nguyen et al., 2008). Furthermore, research supports a link between changing ethical mores and educational accomplishments (Gundersen et al., 2008). As individuals progress through different levels of cognitive moral development, their ability to deal with ethical dilemmas improves (Christensen and Kohls, 2003; Goolsby and Hunt, 1992; Kohlberg, 1969). As a result, a pattern of increasing ethical standards should develop as individual’s progress educationally (Gundersen et al., 2008). Research has also linked business ethics education with changing student attitudes towards ethics in general, as well as with improving their understanding of the complexity of ethical decision making (MacFarlane, 2001). A statistical analysis of responses from 175 students who were pursuing master’s degrees in business supported the hypothesis that a comprehensive course with an ethical focus mitigated bias in judging the ethical standing of others (Cloninger and Selvarajan, 2010). It is generally agreed that ethics can and should be taught across the curriculum, and many believe such across the curriculum programs to be effective in developing student’s moral standards (Gundersen et al., 2008). Some have concluded that integration of ethical education across the curriculum is not possible in the short term without the inclusion of a stand-alone ethics course (Driscoll and Finn, 2005). However, as described by Cox et al. (2009), much of the support for across the curriculum efforts is based on anecdotal evidence.

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Furthermore, several studies cast doubt on the effectiveness of ethics instruction (Cole and Smith, 1995; Wynd and Maget, 1989). There are various rationales advanced for the belief that ethics cannot, or should not, be taught in schools of higher education. Kultgen (1988) suggests that efforts at ethical instruction are better left to institutions outside higher education. He suggests that the family or religious institutions are more adept at ethical instruction and the development of individual moral values. Others, like McDonald and Donleavy (1995) and Bishop (1992), suggest that many schools give only lip service to the teaching of ethics because they have adopted such programs for appearances sake only. They conclude that such programs are therefore ineffective. Our continuation of this study attempts to gather additional data to further clarify the link between ethics instruction in higher education and student awareness of ethical issues. DATA AND METHODOLOGY The original data for this study came from a classroom survey taken by students attending a regional state university. The survey was conducted in undergraduate classes that were either delivered in the traditional lecture classroom or via the internet during the semesters of spring 2008, fall 2008, spring 2009, fall 2009, and spring 2010. Following the publication of the initial results, the study was expanded to include the semesters of fall 2010, spring 2011, fall 2011, and spring 2012. Students completing the survey were business and non-business majors taking courses in accounting, economics, finance, or entrepreneurship as part of the general education, business core, or business specialization requirements. The survey respondents were asked questions concerning gender, year in college, cumulative grade point average, major, and completion of the business ethics course. The questionnaire also measured ethical awareness associated with personal situations and business situations. Table 1 provides the list of questions as well as sample statistics for each question, and Table 2 reveals the correlations between questions. Table 1: Survey Summary Statistics (N=737)

Variable Description Distribution* Individual Situations Q1 In preparing your income taxes, you claim charitable deductions that are not

valid. 1-4.48%; 2-4.48%; 3-7.73%; 4-23.34%; 5- 59.97%

Q2 You use your computer at work for personal reasons such as shopping online. 1-6.92%; 2-18.45%; 3-19.27%; 4-35.28%; 5-20.08%

Q3 You tell a potential buyer of your used car that it gets 30 mpg, but in reality the car gets less than 25 mpg.

1-4.34%; 2-6.24%; 3-8.14%; 4-35.28%; 5- 46.00%

Q4 You download music for free off the internet. 1-9.77%; 2-17.64%; 3-19.81%; 4-29.72%; 5-23.07%

Q5 You give a store clerk $20 to change and she gives you change for $30 and you keep the extra money.

1-4.88%; 2-6.78%; 3-6.92%; 4-24.15%; 5- 57.26%

QIS Sum of Q1 through Q5 Mean = 19.46, Std. dev. = 4.15 Business Situation Q6 A job candidate was rated poorly and would never be considered for a position

with your company but you tell her that you will hang onto her resume and consider her for future job openings.

1-9.91%; 2-29.31%; 3-27.82%; 4-22.93%; 5-10.04%

Q7 You smell alcohol on a valuable employee’s breath after his lunch hour. Company policy requires termination for drinking on the job. Instead, you give him a verbal warning and tell him never to get caught again.

1-4.34%; 2-15.47%; 3-20.35%; 4-34.19%; 5-25.64%

Q8 You fill a job in your department with someone you personally pick rather than posting the position for all employees to see.

1-4.61%; 2-12.48%; 3-24.56%; 4-30.53%; 5-27.82%

Q9 You make copies of copyrighted materials and distribute them in a business meeting.

1-5.43%; 2-10.18%; 3-23.47%; 4-28.49%; 5-32.43%

Q10 Your boss calls from out of town and instructs you to forge his signature on a purchase order and bring it to the purchasing manager for processing.

1-6.11%; 2-17.64%; 3-21.57%; 4-26.05%; 5-28.63%

QBS Sum of Q6 through Q10 Mean = 17.45; Std. dev = 3.72 QTS Sum of QIS and QBS Mean = 36.92; Std. dev = 6.96

This table shows the description of each of the questions contained in the survey and the distribution of the responses to each of the questions. *Coding applied to all survey questions is as follows: 1–Definitely not an ethical issue; 2–Probably not; 3–Maybe (not sure); 4–Probably; 5–Definitely an ethical issue.

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Table 2: Spearman Rank Correlation Matrix

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q1 1.00 Q2 0.37 1.00 Q3 0.54 0.39 1.00 Q4 0.23 0.33 0.31 1.00 Q5 0.53 0.39 0.57 0.33 1.00 Q6 0.07 0.17 0.19 0.24 0.21 1.00 Q7 0.18 0.30 0.23 0.27 0.30 0.29 1.00 Q8 0.25 0.29 0.32 0.22 0.35 0.18 0.29 1.00 Q9 0.39 0.33 0.35 0.31 0.33 0.17 0.26 0.32 1.00 Q10 0.21 0.22 0.21 0.23 0.24 0.13 0.28 0.25 0.35 1.00

This table shows the correlation between any two questions contained in the survey. The closer the number to 1 the more correlation between the two questions. Table 3 summarizes the characteristics of the respondents. The explanatory variables include the student’s class level (Year), cumulative grade point average (GPA), whether or not the students major is business (Business), gender (Gender), and whether or not students have completed the Business Ethics class (Ethic). In total 784 students were surveyed, 737 of which produced valid questionnaires. The majority of the respondents were majors in business (approximately 77 percent), and nearly three-quarters were in their junior or senior year. As business ethics was only recently added as a requirement in the college, only 27% had completed this course at the time of the survey. Table 3: Demographic Summary Statistics (N=737)

Variable Description Distribution

(%) Coding

Year 1. Freshman 9.50 As described 2. Sophomore 20.49 3. Junior 33.51 4. Senior 36.50 GPA Cumulative Grade Point Average As described Mean = 2.98 Std. dev. = 0.49 Business 0 if non-business major 22.93 1 if business major 77.07 Gender 0 if female 45.05 As described 1 if male 54.95 Ethic 0 if not taken Business Ethics Class 72.86 1 if completed Business Ethics Class 27.14

This table shows the demographic statistics of the respondents whose completed surveys are utilized in the study. Given the discrete, ordered, and multinomial nature of the survey data, the responses of the ethical awareness survey were modeled using an ordered logit model. It is assumed that the error term, εi, follows a logistic distribution (an assumption that the εi are normally distributed would result in an ordered probit model). Further, the model was used to evaluate the factors that influence the degree of ethical awareness which may be modeled as a linear function of the observable explanatory variables, xi, and unobservable factors, εi, according to Greene (2003) as 𝑦∗ = 𝑥𝑖𝛽𝑖 + 𝜀𝑖 (1) where y* is a continuous latent variable which is not observable, given that the respondents are only provided with j possible choices and will choose the one that best reflects the degree of their ethical awareness regarding the respective situation. The respondent’s ethical awareness concerning each situation can be segregated into thresholds αj, where j = {1, 2, 3, 4, 5}. Each student ranked his/her ethical awareness by classifying their response to each situation as

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definitely not an ethical issue, probably not an ethical issue, maybe an ethic issue, probably an ethical issue, and definitely an ethical issue. Hence, we observe: yi = 1 (definitely not an ethical issue) if 𝑦𝑖∗ ≤ 𝛼1 = 1 yi = 2 (probably not an ethical issue) if 𝛼1 < 𝑦𝑖∗ ≤ 𝛼2 yi = 3 (maybe an ethical issue) if 𝛼2 < 𝑦𝑖∗ ≤ 𝛼3 (2) yi = 4 (probably an ethical issue) if 𝛼3 < 𝑦𝑖∗ ≤ 𝛼4 yi = 5 (definitely an ethical issue) if 𝛼4 < 𝑦𝑖∗ ≤ 𝛼5 where the unknown αjs are estimated along with the βs. The αjs are restricted such that α1 < α2 < α3 < α4 < α5, which is required for positive probability estimates. If the error term, εi, is assumed to be logistically distributed, the probabilities that the students rank the degree of ethical issue are given as: 𝑃𝑟𝑖𝑗 = 𝑃𝑟𝑜𝑏⟨𝑦𝑖 = 𝑗|𝑥𝑖⟩ = 𝐹�𝛼𝑗 − 𝑥𝑖𝛽� − 𝐹�𝛼𝑗−1 − 𝑥𝑖𝛽� (3)

where i = 1 to 737 and j = 1 to 5. F(⋅) is defined as a cumulative logistic distribution function with mean zero and standard deviation 𝜎 = 𝜋/√3. The maximum likelihood parameter estimates (MLEs) are obtained by maximizing the log likelihood function with respect to β and α, 𝐿(𝛽,𝛼) = ∑ ∑ 𝛿𝑖𝑗𝑙𝑛�𝑃𝑟𝑖𝑗�

𝐽 𝑗=1

𝐼 𝑖=1

(4) where δij is an indicator variable equal to one if student i ranks the degree of j, and zero otherwise. Further, the constant term in the linear regression model is set to zero without any loss of generality in the estimation. As is the case with binary models, the marginal effects of the exogenous variables on the probabilities are not equal to the coefficients, thus only the signs are unambiguous. Accordingly, the marginal effects are computed by taking the first derivative of the probabilities in equation (3) with respect to xi. DISCUSSION AND EVALUATION The results of the ordered logit model are analyzed in terms of the overall significance of the model and the influence of each explanatory variable on ethical awareness. Table 4 presents the estimated ordered logit model for the degree of ethical awareness of the five predetermined scales. QIS in column 2 represents the cumulative scales of ethical awareness for each individual situation. QBS in column 3 represents the cumulative scales of ethical awareness for each business situation, and QTS in column 4 represents the cumulative scales of ethical awareness for both individual and business situations. For the estimations of all three situations, QIS, QBS, and QTS, the Likelihood Ratio tests show the regression models are highly significant, with the significance of the Chi-square statistics at the one percent level or higher. The results indicate that the explanatory variables are significantly related to the dependent variables in all three situations. For the ethical awareness estimate of individual situations, the variable representing the cumulative grade point average of respondents (GPA) is positive and significant (p < 0.01), thus suggesting that students who perform better in academics have more awareness of the given individual situation. The variable Gender, which is a binary variable with 1 indicating male and 0 for female, is negative and significant (p < 0.01), implying that female respondents have relatively more ethical awareness toward the individual situations.

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The positive and significant coefficient of Ethic (p < 0.01) suggests that students who have taken the Business Ethics class are more ethically aware with regard to the individual situations. For the ethical awareness estimate of business situations, only the Gender variable is significant at the one percent level or better. As is the case with individual situations, female respondents are relatively more aware of possible ethical issues in the given business situation. For the ethical awareness estimate of the two situations combined, both GPA and Gender are statistically significant at the one percent level or better. Similar to the estimates for individual situations, both cumulative grade point average and female status have a positive influence on over all ethical awareness. Table 4: Ordered Logit Model: Explanatory Variables Coefficient Values

Explanatory variables QIS QBS QTS Year 0.08 (0.07) -0.02 (0.07) 0.02 (0.08) GPA 0.67 (0.14)a 0.07 (0.14) 0.43 (0.14)a Business 0.004 (0.16) 0.09 (0.16) 0.05 (0.16) Gender -0.50 (0.14)a -0.81 (0.14)a -0.75 (0.14)a Ethic 0.48 (0.16)a 0.12 (0.16) 0.37 (0.17)b Log likelihood -1940.25a -1966.66a -2365.70a LR test 62.02 41.17 57.72 Pseudo-R2 0.08 0.05 0.08

This table shows the results of the ordered logit model with three general situations as explanatory variables, including individual situation, business situation, and the two situations combined. Standard errors are in parentheses where a indicates significant at 1%; b indicates significant at 5%; and c indicates significant at 10%. The marginal effects of the explanatory variables that are statistically significant to the probability of observing a positive ethical attitude are reported in Table 5. In an ordered logit model, a unit change in the explanatory variable will have marginal effects on each situation of the ethical awareness scales. For example, the marginal effect of a variable with a positive sign would imply a shift in the probability distribution of the scale variable to the right, i.e. toward a more positive view of an ethical issue, but the marginal effect on each situation will be different in magnitude and direction. For instance, the GPA variable has a marginal effect of 0.07 for individual situations and 0.08 for the combined situations. Therefore, students with a higher GPA are 7 percent more ethically aware of individual situations and 8 percent more ethically aware of both individual and business situations. Table 5: Marginal Effects Of Significant Variables At Means

Explanatory variables QIS QBS QTS GPA 0.07 0.08 Gender -0.05 -0.20 -0.14 Ethic 0.05 0.07

This table shows the marginal effects of the explanatory variables that are statistically significant to the probability of observing a positive ethical attitude from the estimation presented in Table 4. The marginal effects of female respondents on the ethical awareness scale are 5 percent, 20 percent, and 14 percent higher than male respondents for the individual, business, and combined situations, respectively. Students who have taken the Business Ethics class are 5 percent more ethically aware on the individual situations than those who have not taken the class. Table 6 presents the estimated ordered logit model for the degree of ethical awareness for each of the ten situations, and Table 7 presents the corresponding marginal effects of the significant explanatory variables. Students who are at higher year in college are more ethically aware of

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situation 1 (Q1), 2(Q2), and 7(Q7), while students who are at a lower year in college are more ethical aware of situation 6 (Q6). Further, students who maintain a higher cumulative grade point average tend to be more concerned with ethical issues in all situations except situations 6 (Q6), 7 (Q7), 8 (Q8) and 10 (Q10). Students who major in business are less ethically aware in situation 3 (Q3), but more ethically aware in situation 4(Q4), 9(Q9), and 10 (Q10). Female students are more likely concerned with an ethical issue in all situations except 1 (Q1), 3 (Q3), and 5 (Q5). Table 6: Ordered Logit Model: Explanatory Variables Coefficient Values

Explanator y variables

Q1

Q2

Q3

Q4

Q5

Q6

Q7

Q8

Q9

Q10

Year 0.21 (0.08)b

0.13 (0.07)c

0.04 (0.08)

-0.07 (0.07)

0.03 (0.08)

-0.21 (0.07)a

0.13 (0.09)c

-0.03 (0.08)

-0.09 (0.07)

0.11 (0.07)

GPA 0.78 (0.16)a

0.52 (0.14)a

0.35 (0.15)b

0.42 (0.14)a

0.35 (0.15)b

0.07 (0.14)

-0.14 (0.14)

0.04 (0.14)c

0.24 (0.14)c

0.01 (0.14)

Business 0.10 (0.18)

0.12 (0.16)

-0.34 (0.17)b

0.29 (0.16)

-0.21 (0.17)

-0.21 (0.16)

-0.10 (0.16)

-0.26 (0.16)

0.27 (0.16)c

0.39 (0.16)b

Gender -0.05 (0.15)

-0.49 (0.14)a

-0.18 (0.14)

-0.54 (0.14)a

-0.24 (0.15)

-0.43 (0.14)a

-0.49 (0.14)a

-0.61 (0.14)a

-0.46 (0.14)a

-0.54 (0.14)a

Ethic 0.23 (0.19)

0.31 (0.17)c

0.11 (0.17)

0.43 (0.17)

0.30 (0.18)c

0.02 (0.17)

0.02 (0.17)

0.15 (0.16)

0.07 (0.16)

0.13 (0.17)

Log likelihood

-807.55a -1085.89a -905.56b -1123.50a -860.19b -1103.29a -1070.59a -1067.43a -1061.21a -1103.24a

LR test 39.21 44.97 14.15 42.02 14.88 23.76 17.97 24.02 23.70 28.30 Pseudo-R2 0.05 0.06 0.02 0.06 0.02 0.03 0.02 0.03 0.03 0.04

This table shows the results of the ordered logit model with all ten survey questions as explanatory variables. Standard deviations are in parentheses, where a indicates significant at 1%; b indicates significant at 5%; and c indicates significant at 10% .

Table 7: Marginal Effects of Significant Variables At Means

Explanatory variables

Q1

Q2

Q3

Q4

Q5

Q6

Q7

Q8

Q9

Q10

Year 0.01 0.02 -0.04 0.03 GPA 0.03 0.06 0.07 0.08 0.07 0.06 Business -0.07 0.05 0.06 0.09 Gender -0.06 -0.10 -0.09 -0.12 -0.14 -0.11 -0.13 Ethic 0.04 0.08 0.06

This table shows the marginal effects of the explanatory variables that are statistically significant to the probability of observing a positive ethical attitude from the estimation presented in Table 6. Further Estimations on the Classifications of Gender and Gpa Differences In accordance with the findings and what is stated in the previous section, we further divide the results into two groups. The level of student ethical awareness was first analyzed for female and male students separately. Table 8 presents the mean responses to each situation for all the respondents, broken down by groupings of female and male students, along with the marginal effects of the explanatory variables that are statistically significant to the probability of observing a positive ethical attitude. Overall, the results were consistent with the findings including all survey respondents, yet the Likelihood Ratio tests show the regression models are not statistically significant for the questions regarding business situations. For female students, the GPA variable has a marginal effect of 0.07 for both individual and combined situations, implying that female students with a higher GPA are 7 percent more ethically aware of individual situations and overall situations. For individual and combined situations, the marginal effects of female respondents who have taken the course of business

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ethics on the ethical awareness scale are 5 percent and 8 percent higher than those female respondents who have not taken the course. On the other hand, male students who maintain relatively higher grade point average are 4 percent and 6 percent more ethically aware on the individual and overall situations than those whose grade points averages are relatively lower. Additionally, male students who have completed a required course in business ethics are 3 percent more ethically aware of individual situations than those who have not taken the course. Table 8: Ordered Logit Model: Gender Difference

Explanatory variables coefficient values Female Students (n=332) Male Students (n=405)

Explanatory variables QIS QBS QTS QIS QBS QTS Year -0.03(0.12) -0.02 (0.12) -0.05(0.12) 0.16 (0.10) -0.01(0.10) 0.08 (0.10) GPA 0.71(0.23)a 0.06 (0.22) 0.42(0.23)c -0.66 (0.20)a 0.07(0.18) -0.44 (0.20)b Business -0.03(0.24) 0.14 (0.22) 0.07(0.23) 0.02 (0.23) 0.04(0.24) 0.04 (0.23) Ethic 0.52(0.26)b 0.26 (0.24) 0.46(0.25)c 0.44 (0.22)b -0.00(0.23) 0.29 (0.23) Log likelihood -841.60a -854.89 -1030.55c -1089.67a -1096.06 -1317.38b LR test 17.07 2.11 8.81 24.86 0.18 10.42 Pseudo-R2 0.05 0.01 0.03 0.06 0.00 0.03 Marginal effects of significant variables at means Year GPA 0.07 0.07 0.04 0.06 Business Ethic 0.05 0.08 0.03

This table shows the results of the ordered logit model with three general situations as explanatory variables, including individual situation, business situation, and the two situations combined. Standard errors are in parentheses where a indicates significant at 1%; b indicates significant at 5%; and c indicates significant at 10%. We also dissect the sample respondents into two groups based on student academic achievement. Specifically, the level of student ethical awareness was analyzed separately for groups of students whose grade point average was above and below 3.00. The results are consistent with the findings including all survey respondents, and the Likelihood Ratio tests show the regression models are statistically significant for the questions with all three situations. The Gender variables are negative and statistically significant at 5 percent level or higher for all three situations in each group, implying that female respondents are more ethically aware of all three situations than male respondents, regardless of their academic achievement. According to the marginal effects, female students maintaining better academic records are 9 percent, 17 percent, and 15 percent more ethically aware of individual, business, and combined situations than male students, respectively, and female students who have lower-than-average academic records are still 17 percent, 26 percent, and 22 percent more ethically aware of all three situations than their male counterparts, respectively. Regardless of academic achievement, the marginal effects of students who have taken the stand alone business ethics course on the ethical awareness scale are 10 percent and 11 percent higher than students who have not taken the course. Interestingly, low- GPA students who major in business are 12 percent less aware of individual ethics situations than those not majoring in business. Table 9: Ordered Logit Model: GPA Difference

Explanatory variables coefficient values High-GPA Students (n=416) Low-GPA Students (n=321)

Explanatory variables QIS QBS QTS QIS QBS QTS Year 0.13 (0.10) 0.01(0.10) 0.06 (0.10) -0.001 (0.12) -0.08(0.12) -0.04 (0.12) Business 0.32 (0.21) 0.17(0.21) 0.29 (0.22) -0.52 (0.26)b -0.04(0.26) -0.34 (0.25) Gender -0.38 (0.18)b -0.68(0.18)a -0.60 (0.19)a -0.77(0.23)a -1.04(0.23)a -1.03(0.23)a Ethic 0.45 (0.22)b -0.01(0.22) 0.26 (0.23) 0.50 (0.27)c 0.38(0.26) 0.55 (0.28)b Log likelihood -1068.67a -1112.89a -1317.99a -864.23a -843.01a -1024.70a

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LR test 20.47 16.75 19.39 21.03 26.43 29.48 Pseudo-R2 0.05 0.04 0.05 0.06 0.08 0.09 Marginal effects of significant variables at means Year Business -0.12 Gender -0.09 -0.17 -0.15 -0.17 -0.26 -0.22 Ethic 0.10 0.11 0.12

This table shows the results of the ordered logit model with three general situations as explanatory variables, including individual situation, business situation, and the two situations combined. Standard errors are in parentheses where a indicates significant at 1%; b indicates significant at 5%; and c indicates significant at 10%. SUMMARY AND CONCLUSION The original objective of the study was to test the hypothesis that students have higher ethical awareness after completing required business courses in a business program which has adopted both an across the curriculum approach to ethical instruction as well as a stand-alone business ethics course. The data used to test the hypothesis was obtained from surveys that asked students to rank the extent to which they believed an ethical issue was associated with a particular situation. The responses were then analyzed using an ordered logit model to determine what variables significantly affect student ethical awareness. The expanded study supports the hypothesis that students who have completed an ethics course are more ethically aware, and the support for this hypothesis is slightly more significant in the second portion of the study than it was in the first portion of the study. There may be various explanations for this improvement but as noted in the introduction to this paper, the stand-alone ethics course has been revised since the first portion of the study and is now taught in a hybrid format. Perhaps this new delivery format is more effective than the traditional classroom or internet mode of delivery. Consistent with the earlier portion of the study, the completion of the ethics course most significantly affects the ethical awareness as measured by the questions relating to individual situations and not those relating to business situations. Once again, there appears to be no correlation between class level and ethical awareness. Gender appears to have an impact on ethical awareness. Both male and female students experience a significant increase in ethical awareness following completion of the ethics course. The response is stronger for females, which may be related the higher level of ethical awareness experienced by females in general. An examination of the responses dealing solely with business situations reveals an interesting phenomenon. Both high and low GPA students demonstrate an increase in ethical awareness following completion of the ethics course. Thus, overall, the current study suggests that a stand- alone ethics course does improve ethical awareness, and that this improvement is not limited to females or high GPA students. It should be emphasized that this is a continuation of an exploratory study conducted on campus in one small upper Midwestern university. It is possible that results gathered elsewhere, or results gathered using different sampling tools, may produce different results. However, the results suggest further study of the relationship between gender, GPA, and ethical awareness may prove a useful addition to the literature. Furthermore, it would be of interest to probe the link between other non-curriculum related variables and ethical awareness. Further research is also needed to determine potentially effective ways to teach ethics, including the effects of delivery modalities and student ethical awareness outcomes. REFERENCES

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Altmyer, D.J., Schallenkamp, K.A., Yang, S.P., DeBeaumont, R.C. (2011) “Student Ethical Awareness and Business Program Matriculation: Evidence from the U.S,” Journal of Business Education and Accreditation, 3 (1), 41-49. Awasthi, V.N. (2008) “Managerial Decision-Making on Moral Issues and the Effects of Teaching Ethics,” Journal of Business Ethics, 78(1-2), 207-223. Bishop, T. R. (1992) “Integrating business ethics into an undergraduate curriculum,” Journal of Business Ethics, 11, 291-299. Christensen, S. L., & Kohls, J. (2003) “Ethical decision making in times of organizational crisis,” Business & Society, 42, 328-358. Chan, D. (2011) “A Comparison of Traditional and Blended Learning in an Introductory Principles of Accounting Course,” American Journal of Business Education, September 2011, 1- 10. Cloninger, P.A. & Selvarajan, T.T. (2010) “Can Ethics Education Improve Ethical Judgment? An Empirical Study,” S.A.M. Advanced Management Journal, 75 (4), 4-11. Cole, B.C. & Smith, D.L. (1995) “ Effects Of Ethics Instruction On The Ethical Perception Of College Business Students,” Journal of Education for Business, 70(6), 351-356. Cox, P.L., Friedman, B.A., & Edwards, A. (2009) “Enron: The Smartest Guys in the Room- Using the Enron Film to Examine Student Attitudes towards Business Ethics,” Journal of Behavioral and Applied Management, 10(2), 263-290. Driscoll, C. & Finn J. (2005) “Exploring Discrepancies and Variability Among Professors and Students,” Journal of Business Ethics Education, 2 (1) 51-69. Falkenberg, L., Woiceshyn, J. (2008) “Enhancing Business Ethics: Using Cases to Teach Moral Reasoning,” Journal of Business Ethics, 79 (3), 213-217. Frederick, W., & Weber, J. (1987) “The values of corporate managers and their critics: An empirical description and normative implications,” In W. Frederick (Ed.), Research in corporate performance and policy (pp. 131-152). Greenwich, CT: JAI Press. Gilbert, J. (1992) “Teaching Business Ethics: What, Why, Who, Where and When,” Journal of Education for Business, 68(1) 5-8. Goolsby, J. R., & Hunt, S. D. (1992) “Cognitive moral development and marketing,” Journal of Marketing, 56, 55-68. Greene, W.H. (2003) Econometric Analysis (5th ed.), Upper Saddle River, NJ: Prentice Hall. Gundersen, D.E., Capozzoli, E.A., & Rajamma, R.K. (2008) “Learned Ethical Behavior: An Academic Perspective,” Journal of Education for Business, 83(6), 315-324. Jones, K., Chen, C. (2008) “Blended Learning in a Graduate Accounting Course: Student Satisfaction and Course Design Issues,” The Accounting Educator’s Journal, 18, 15-28.

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Kelley, S. W., Skinner, S. J., & Ferrell, O. C. (1989) “Opportunistic behavior in marketing research organizations,” Journal of Business Research, 18, 327-340. Keller et. al (2009) “A Comparison of Academic Performance in Traditional and Hybrid Sections of Introductory Managerial Accounting,” Journal of Accounting Education, 27(3), 147- 154. King, P.M. & Mayhew, M.J. (2002) “Moral judgment development in higher education: Insights from the Defining Issues Test,” Journal of Moral Education, 31(3), 247-270. Klugman, C. & Stump, B. (2006) “The effect of ethics training upon individual choice,” Journal of Further and Higher Education, 30(2), 181-192. Kohlberg, L. (1969) “Stage and sequence: The cognitive developmental approach to socialization,” In D. Goslin (Ed.), Handbook of socialization theory and research (pp. 347-480). Chicago: Rand McNally. Kultgen, J. (1988) “Ethics and Professionalism,” University of Pennsylvania Press. Langan, J. (1990) “The Ethics of Business,” Theological Studies, 51(1), 81-100. MacFarlane, B. (2001) “Developing reflective students: Evaluating the benefits of learning logs within a business ethics program,” Teaching Business Ethics, 5, 375-387. McDonald, G.M. & G. Donleavy (1995) “Objections to the teaching of business ethics,” Journal of Business Ethics, 14, 839-853. Nguyen, N.T., Basuray, M.T., Smith, W.P., Kopka, D., & McCulloh, D.N. (2008) “Ethics Perception: Does Teaching Make a Difference?” Journal of Education for Business, 84(2), 66- 75. Stape, A.L. (2002) “ Ethics: Area business schools are not rushing to add courses on ethical behavior as a result of the Enron scandal,” The Providence Journal, (April 7). Tang, T.L., Chen, Y.J., & Sutarso, T. (2008) “Bad apples in bad (business) barrels: The love of money, Machiavellianism, risk tolerance, and unethical behavior,” Management Decision, 46(2), 243-263. Townley, P. (1992) “Business Ethics . . . An Oxymoron?” Canadian Business Review, 19(1), 35- 37. Williams, S.D. & Dewett, T. (2005) “Yes, you can teach business ethics: A review and research agenda,” Journal of Leadership and Organizational Studies, 12(2), 109-120. Wynd, W.R. & Maget, J. (1989) “The business and society class, does it change student attitudes?” Journal of Business Ethics, 8, 486-491. BIOGRAPHY

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Don Altmyer is a Professor of Accounting at Black Hills State University. He can be contacted at: College of Business, Black Hills State University, 1200 University Avenue, Spearfish, South Dakota, U.S. Email: [email protected] Sheng-Ping Yang is an Associate Professor of Finance at Gustavus Adolphus College. He can be contacted at: Department of Economics and Management, Gustavus Adolphus College, 800 W. College Avenue, St. Peter, Minnesota, 56082, U.S. Email: [email protected] Ken Schallenkamp is an Associate Professor of Entrepreneurship at Black Hills State University. He can be contacted at: College of Business & Technology, Black Hills State University, 1200 University Avenue, Spearfish, South Dakota, U.S. Email: [email protected] Ron DeBeaumont is Professor of Economics at Black Hills State University. He can be contacted at: College of Business & Technology, Black Hills State University, 1200 University Avenue, Spearfish, South Dakota, U.S. Email: [email protected]

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THE STRATEGY OF MARKETING THE CULTURAL CREATIVE COMMODITIES ADDING TECH-FUNCTION IN THE NEW

PRODUCTION DEVELOPMENT William S. Chang, Ming Chuan University

ABSTRACT

In economy world, cultural creative product development should satisfy consumers’ physical or mental needs especially the firms need to develop a formal conceptualization of the process of customer knowledge development. By enhancing the fit between cultural creative commodities and customer preferences, the adoption of technical function fosters those cultural-based products success. This research focuses on the ingredients responsible for the successful factors of cultural creative commodities and consumers’ purchasing behavior in cultural creative industries. Relevant literature was utilized, as well as supporting information obtained by means of corporate interviews, physical questionnaires and online investigations. A final sampling is 421 and the overall response rate is 92%. Statistics and structural equation analysis were conducted to construct the relationship among tech-functions, cultural creative commodities and the consumers’ purchasing behavior. The results show that media technology which provided new material-functions to diversify the cultural creative product development and enhanced the interaction between the commodities and consumers. By interacting with cultural creative commodities, customers are able to achieve the purposes of causing his/her purchasing behavior. The author explores the theoretical and managerial implications that arise from the results and provides further research directions. KEYWORDS: tech-function, cultural creative industries, cultural creative commodities, structural equation model JEL: Classification: M00, M30 INTRODUCTION New product, such as cultural creative commodities, has become one of the most new product developments around the world. Customer knowledge development – that is, the development of an understanding of customer preferences – has been identified as the critical success factors for ensuring the new product development will be succeed (Cooper and Kleinschmidt, 1995). In cultural creative industry, one of the most important national industry development projects around the world, new product development (i.e. cultural creative commodity) mainly focuses on new elements embedded in the traditional commodities that artistic and creative cultural workers contribute their efforts into the product development. Unique creative and cultural commodities based on the main exhibits could also be used to prolong memories of the trip, helping to promote any specific objectives and induce repeat purchasing. The development of creative and cultural commodities not only encouraged the growth of small businesses, but also enabled the export of unique cultural facets on a global scale. By cooperating with other disciplines and fields, the diversification and popularization of culture and art could be used to achieve the objective of enabling everyone to enjoy and become part of cultural art. The 1980s was also an important landmark period for the development of digital multimedia technologies. Digital content companies not only helped to improve the basic foundation of the cultural creative industry’s overall economy by promoting the transformation of traditional

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industries into knowledge-based ones; they also provided a diverse selection of creative opportunities to art workers, enabling them to express their creative ideas while inducing a myriad of developments in other fields, such as visual and tech-art, as well as multimedia technologies. With the dawning of the information era, the value of the cultural creative industry and art workers will not be limited to tangible cultural assets, but also the utilization of knowledge, multiple disciplines and skills. This study seeks to investigate how cultural creative and artistic workers utilize art technologies and transform intangible cultural assets into tangible commodities. Accordingly, the study objectives in this research are to 1. Investigate how cultural creative and artistic workers utilize tech-functions creating the new

elements on the traditional products 2. Investigate how cultural creative and artistic workers remold brand images to improve their

identity with the general public, 3. Develop a formal construct to reflect consumers’ repurchasing behavior of cultural creative

commodities. The study begins by defining the rise of the cultural creative industry and by articulating the conceptual framework, including tech-functions, cultural creative commodities, and consumers’ purchasing behaviors. We then elucidate the methods and measures the study used to test the framework. Following presentation of the results, the study concludes the discussion of the results in terms of its theoretical, managerial, and further research implications. Conceptual Framewrok And Hypotheses Cultural Creative Industries: The term of ‘cultural creative industry’ were combined by two terms, ‘culture industry’ and ‘creative industry’. Cultural industry was provided by Horkheimer and Adorno (1976, original publication dated 1944) and the term, creative industry, was raised by a British specialist team in creative industries in 1997. Culture industries should lean toward theoretical thinking espoused and creative industry leaned toward the economic benefit of intellectual property rights and the social benefit of employment opportunities in culture industries. Accordingly, cultural creative commodities are conceived by the integration of the creativities, production and economy of intangible assets, and the contribution of cultural/creative concepts would be protected by intellectual property rights (Council for Economic Planning and Development, Executive Yuan, 2002). Tech-Function Tech-function, which is a platform, integrates simple media function into cultural artworks. Traditional cultural creative/artistic commodities could be linked with tech-function to provide new concepts or exhibition formats. Thus, cultural creative commodities, which integrate simple tech-function, herald more possibilities for new product development in cultural creative industries. Cultural creative commodities which not only enabled the use and integration of diverse materials and media, but presentation and content could now emphasize interactivity (Arango, 2005; Manovich, 2001; Tseng & Lee, 2006; Varnedoe & Gopnik, 1990; Zanni, 2004) to revolutionize the three-way relationship between cultural creative artists, cultural creative commodities and consumers. Interactive artwork presented by integrating tech-function could be defined as being a concept whereby artworks were completely presented in a format, which enabled consumers to interact with it. This means cultural creative commodities acted as an integrative vector of information, which could link people with different cultural backgrounds through purchasing behavior. Generally, these artworks provided an interaction involving the integrated processes of

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admiration, identification and transmission of concepts to result in consumers’ purchasing behavior. Hypotheses: Oliver (1997) believed that satisfaction was the consumer’s evaluation of a certain service or product. Woodruff (1997) further believed that ‘value’ derived from an individual perspective was the actual critical factor behind consumer satisfaction. For tech-art and cultural creative extension products, product image (Kotler, 1994) and visual value (Babin, Darden & Griffin, 1994; Babin & Attaway, 2000) provided to consumers would be critical factors to influence their repeat purchasing behavior. The product image represents the image of the tech- function or cultural creative commodity that persists in the mind, which reorganizes and links with other relevant objects in the environment as the individual accumulates more experience. The consumption image of cultural creative work could be viewed as consumers’ expectation before they experience their visit. This concept would also influence the actual experience and future desire to spend. Kotler, Bowen & Makens (1996) also pointed out that a cause and effect relationship exists between the variables of imagery, quality, satisfaction and post-purchase behavior. More positive imagery induces stronger behavioral objectives in the future (Alnemoud & Armstrong, 1996). Visual value could be considered as being an intermediate variable between service quality and satisfaction. The results of an investigation by Patterson & Spreng (1997) illustrated that visual value was an antecedent variable which was positively correlated to satisfaction, and would also positively influence the desire to make a repeat purchase. Petrick & Backman (2002) believed that, if consumers had greater sensory values, this would positively influence their future desire to make repeat purchases. On the other hand, further investigations by Murphy, Pritchard & Smith (1999) discovered that characteristics of purposeful products would also positively influence visual values, and thus, influence the desire to make purchasing decision because of service quality. Thus, the hypotheses of this research were based on the investigation results of Alnemoud & Armstrong (1996), Kotler et al. (1996) and Murphy et al. (1999): H1: Tech-function can directly influence consumers’ purchasing behavior. H2: Cultural creative commodity characteristics have a direct and positive influence on consumers’ purchasing behavior. Digital creative industries were the first to utilize new technology as a media to conceptualize their ideas. Interactivity was the main feature of cultural creative commodities made by creative artists by incorporating digital tech-function (Arango, 2005; Manovich, 2001; Tseng & lee, 2006; Varnedoe & Gopnik, 1990; Zanni, 2004). According to Ascott (2003), ‘emerging’ aesthetics from applied digital technologies have replaced the traditional ‘externalist’ aesthetics. Traditional aesthetics were concerned with the absolute value of the appearance and tangible features of an object, while emerging aesthetics attempted to interact with consumers by means of transformations in technological culture and evolving techniques. Borsook & Higginbotham (1991) proposed six points of critical elements for interaction, namely, immediacy of response, non-sequential access of information, adaptability, feedback, options and bi-directional communication. Hence, cultural creative commodities which incorporate tech-function revolutionized and broke the confines of the one-sided sensory interaction of traditional artwork and removed the barrier between consumers and artworks. Interaction enabled consumers to recognize their existence and position in the artwork, introducing new life to the work by means of their personal senses and experiences. Hence, cultural creative commodities which incorporate with tech-function provide additional connection under consumers’ personal control, and induce purchasing behavior by immersing them in the artwork. The third hypothesis for this research was derived from the above information:

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H3: Cultural creative commodities, which incorporate tech-function, can better induce consumers’ purchasing behavior. Empirical Results Sampling Frame and Sample: The sampling frame in this study included questionnaires and online survey in four major Cultural and Creative Parks located in Taipei, Taichung, Chiayi and Hualien. To enhance the response rate and accuracy, the questionnaire was delivered in the sampling frame to inform respondents of the study objectives and to solicit their participation. The survey required respondents to serve as key informants on the cultural creative commodities in which they purchased and that was typical of the tech-function embedded in the products. After deducting 32 invalid survey, the sampling is 328. The effective response rate is 91%. The online survey questionnaire receiving the effective survey are 93 after deducting 5 invalid responses ( they don’t have any purchasing experience). Consequently, the final valid questionnaires are 421 and the overall response rate is 92%. Descriptive Analysis: In order to verify the internal consistency reliability of the three major dimensions of the structural equation model, the study analyzes the relationships among those three major variables. The result (Table 1) shows Cronbach’s Alpha is 0.867 and  value of three major variables, tech-function, cultural creative commodities, and customers’ purchasing behavior, are highly significantly (0.864, 0.852 and 0.854 respectively). Furthermore, the value of each observing index is higher than 0.8 describing that the structural equation model with highly internal consistency reliability. Table 1: the Results of Internal Consistency Reliability

Mean Std. Deviation N Cronbach's Alpha if Item Deleted

Tech-function 4.8170 1.31508 421 .864 Cultural Creative Commodities Characteristics 5.0588 1.18230 421 .852 Customers’ Purchasing Behavior 4.9477 1.27109 421 .854 Cronbach’s Alpha 0.867

Factor Analysis: A confirmatory factor analysis (CFA) was conducted for tech-function, cultural creative commodities and the consumers’ purchasing behavior. The result shows the suitability indices of tech-function with a GFI of 0.9151, AGFI of 0.753 and an RMR of 0.110. The main components of tech-function as described by Borsook & Higginbotham (1991) include non- sequential access information, adaptability, feedback, options and other factors which can be used to evaluate the influence of tech-function on cultural creative commodities and determine whether or not it would directly or indirectly affect consumers’ purchasing behavior. For cultural creative commodities characteristics, the result shows the suitability indices of cultural creative artworks with a GFI of 0.955, AGFI of 0.082 and an RMR of 0.865. This shows that the characteristics of memory extension, product innovation, exhibition relationship, marketing strategy and product design are significant for cultural creative commodities and consumers, and these features can be used to evaluate the features of cultural creative commodities and determine whether those products will cause to consumers’ purchasing behavior. The results of survey shows the suitability indices of consumers’ purchasing behavior with a GFI of 0.916, AGFI of 0.181 and an RMR of 0.495 implicating that the variables of product influence and product uniqueness can be used as determining factors of consumers’ purchasing behavior. Table 2 shows the covariance matrix of variables in each category.

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The data shows that non-sequential access information and cultural creative commodities are highly correlated. Consumers will be willing to give cultural creative/artistic workers their opinion and feedback after purchasing experience. Memory extension, exhibition relationship and product design had significant positive correlations in the category of cultural creative commodities. In the category of consumers’ purchasing behavior, positive correlations were observed in the influence of cultural creative commodities on consumers’ purchasing behavior. The motives behind the purchase of cultural creative commodities are largely derived from consumers’ wish to procure products related to the ongoing experience, for instance those commodities can help to prolong the experience of their visit and expand the features and memory of the artwork. Thus, memory extension, product innovation and exhibition relationship would be important factors in deciding whether or not consumers would purchase. Table 2: Correlation Coefficient

1 2 3 4 5 6 7 8 9 10 11 12 13 14

FM1 FM2 FM3 FM4 FM5 PD1 PD2 PD3 PD4 PD5 PD6 CS1 CS2 CS3 FM1 1.000 FM2 .116 1.000 FM3 .137 .720 1.000 FM4 .182 .641 .484 1.000 FM5 .222 .596 .391 .594 1.000 PD1 .250 .308 .233 .194 .241 1.000 PD2 .230 .165 .144 .133 .289 .440 1.000 PD3 .134 .099 .117 .113 .063 .342 .387 1.000 PD4 .251 .171 .100 .172 .266 .497 .367 .257 1.000 PD5 .238 .174 .011 .233 .211 .237 .090 .203 .352 1.000 PD6 .516 .068 .084 .173 .155 .352 .223 .196 .388 .240 1.000 CS1 .158 .163 .209 .102 .164 .532 .611 .421 .374 .087 .252 1.000 CS2 .127 .150 .205 .174 .160 .283 .295 .462 .204 .062 .317 .435 1.000 CS3 .134 .099 .117 .113 .063 .342 .387 1.000 .257 .203 .196 .421 .462 1.000

FM1: Tech-function; FM2: Non-sequential access information; FM3: Adaptability; FM4: Feedback; FM5: Options. PD1: Cultural creative commodities characteristics ; PD2: Memory extension; PD3: Product innovation; PD4: Exhibition relation; PD5: Marketing strategy; PD6: Product design. CS1: Customers’ purchasing behavior; CS2: Product influence; CS3: Product unique. Structural Equation Model (SEM) Analysis Relationship between tech-function and cultural creative commodity characteristics The route between tech-function and cultural creative commodities characteristics was 0.33, with t-value attaining a significant (0.01). This shows that a direct correlation exists between tech-function and value-added to cultural creative commodity characteristics. The numerical data shows that cultural creative workers could provide consumers with a higher level of interactivity by using cultural creative commodities which were embedded tech-function. The economic value-added to these commodities will also be increased due to new characteristics providing by new adoption of technology. Relationship between tech-function and consumers’ purchasing behavior The direction between tech-function and consumers’ purchasing behavior was 0.05, but the result was failed to achieve significance (0.01). The results implied that tech-function does not have a direct relationship with the ability to induce consumers’ purchasing behavior. The above-listed data shows that, although tech-function can create new realms in art and aesthetics, it is insignificant in inducing consumers’ purchasing behavior.

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Therefore, this research concludes that, although tech-function can integrate the interface of art media, the main objective of interactivity of tech-function cannot be achieved if consumers lack relevant experience, sensory response and feedback about the extension product. Relationship between cultural creative commodity characteristics and consumers’ purchasing behavior The path between cultural creative commodity characteristics and consumers’ purchasing behavior was 0.61 and reached significant level (0.01). This shows that a direct correlation exists between cultural creative commodity characteristics which incorporate tech-function and consumers’ purchasing behavior. The data shows that cultural creative commodity characteristics which incorporate tech-function can significantly improve consumers’ motives of purchasing behavior. The results show that tech-function not only provides artistic workers with new material to develop new products, it also improves the diversity of cultural creative commodity characteristics and those characteristics providing more interactions with consumers. CONCLUSION On the one hand, cultural creative extension products which incorporate tech-art have the ability to resolve the financial crisis faced by museums, and on the other hand, they provide an opportunity for museums to transmit their culture and knowledge of their collection by the sale of these products. Repeat purchases by consumers could be induced by prolonging relevant experiences, and such measures have become the main creative language and marketing method utilized by modern cultural creative art workers. With this premise in mind, this research mainly focused on investigating the influence of extension products based on tech-art on consumers’ repeat purchasing behavior. This research firstly used interviews targeting cultural creative art workers in the country and investigated the model of value creation of cultural creative extension products, elaborating the means by which cultural creative art workers incorporate tech-art to create value and marketing models for extension products. Quantitative questionnaires coupled with a factor analysis and structural equation model analysis enabled an understanding of how the extension products developed by these art workers could resolve the financial difficulties of the cultural creative industries. A further analysis of the critical factors for the success of extension products from the consumer perspective proposed product concepts and relevant marketing techniques which the cultural creative industries in this country could rely on to expand their market, induce repeat purchasing behavior and resolve the issue of insufficient funding. This research utilized physical and online questionnaires and achieved an effective sample recovery rate of 75.2%. The results showed that a positive correlation exists between incorporating tech-art by art workers and extension products. Consumers’ repeat purchasing behavior would be induced as a result of the interactivity introduced by tech-art. From the perspective of extension products, those products which incorporate exhibition themes would not only help to provide a memory extension in their added value, but they would also improve consumers’ motivation to repeat purchase. Limitation and Future Research Directions The model of cultural creative commodities focuses on the adoption of tech-function and products’ characteristics that improving the willingness of consumers purchasing behavior. However, because cultural creative industries include 15+1 cultural creative categories, it is also necessary to examine the specific field in fostering this process. Further research should (1) concern the questionnaire design including different combinations and (2) study how the value- added process moderate the main effects of cultural creative commodity characteristics on new product development. REFERENCE

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Alnemoud, A.M. & Armstrong, E.G.(1996). Image of tourism attraction in Kuwait. Journal of Travel Research, 34(4),76-80. Arango, M. (2005). Vanishing Point, http://www.low-fi.org.uk/vanishingpoint/ Ascott, R. (2003). Telematic Embrace: Visionary Theories of Art Technology and Consciousness. Edited with an Essay by Edward A. Shanken, E. Berkeley: University of California Press. 427pp. Babin, B.J. & Attaway, J.S. (2000). Atmospheric affect as a tool for creating value and gaining share of customer. Journal of Business Research, 49, 91-99. Babin, B.J., Darden, W.R. & Griffin, M. (1994). Work and/or fun: measuring hedonic and utilitarian shopping value. Journal of Consumer Research, 20, 644-656. Barney, J. (1991). Firm Resources and Sustained Competitive Advantage, Journal of Management, Vol.17 (1), pp.99-120. Borsook, T.K. & Higginbotham-Wheat N. (1991). Interactivity: what is it and what can it do for computer-based instruction? Educational Technology, 31(5), 11-17. Caves, R. E. (2000). Creative Industries: Contracts between Art and Commerce, Cambridge, Massachusetts: Harvard University Press, pp.2-8, 178-200. Cooper, R.G. & Kleinschmidt, E.J. (1995). Benchmarking the Firm's Critical Success Factors in New Product Development. Journal of Product Innovation Management, 12, pp.374-391. Cooper, R.G. & Kleinschmidt, E.J. (2007). Winning businesses in product development: The critical success factors. Research Technology Management, 50(3), pp.52-66. Falk, P. and Campbell, C. (1997). The Shopping Experience Polity: Oxford. Kent, Y. (2010). The role of the museum shop in extending the visitor experience, International Journal of Nonprofit and Voluntary Sector Marketing, Vol.15, pp.67-77. Kotler, N.G. and Kotler, P. (2000). Can museums be all things to all people? In Museum Management and Marketing, Sandell R, Janes RJ (eds.). Routledge: London, pp.313-330. Kotler, P., Bowen, J. & Makens, J. (1996). Marketing for hospitality and tourism. New Jersey: Prentice-Hall. Lovelock, C.H. and Weinberg, C.B. (1984). Public and nonprofit marketing: Scientific Press, Palo Alto, California and New York. Manovich, L. (2001). The Language of New Media, Massachusetts: MIT Press. McLean, F.C. (1994). Services marketing: the case of museums, Service Industry Journal, Vol.14 (2), pp.190-203. Murphy, P., Pritchard, M.P. & Smith, B. (1999). The destination product and its impact on traveler perceptions. Tourism Management, 21, 43-52.

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Oliver, R.L. (1997). Satisfaction: A behavioral perspective on the consumer. Boston, M.A.: Irwin, McGrew-Hill. Parasuraman, A., Valarie A. Zeithaml, and Leonard L. Berry ( 1985 ). A Conceptual Model of Service Quality and Its Implications for Future Research, Journal of Marketing, 49, pp. 41-50. Patterson, P.G. & Spreng, R.A. (1997). Modeling the relationship between perceived value, satisfaction and repurchase intentions in a business-to-business, services context: an empirical examination. International Journal of Service Industry Management, 8(5), pp.414-434. Petrick, J.F. & Backman, S.J. (2002). An examination of golf travelers’ satisfaction, perceived value, loyalty, and intentions to revisit. Tourism Analysis, 6, 223-237. Skramstad H. (2004). An agenda for museums in the twenty-first century. In Reinventing the Museum, Anderson G(ed.). AltaMira Press: WalnutCreek CA; pp.118-132. Sobel, R. S. and A. Rothenberg (1980). Artistic Creation as Stimulated by Superimposed Versus Separated Visual Images, Journal of Personality and Social Psychology, Vol.39, pp.951-961. Taiwan Cultural & Creative Industries, Ministry of Culture, Excutive Yuan, Repoublic of Chian (Taiwan) , ttp://cci.culture.tw/cci/cci/news1_detail.php?p=2&sn=4339 Tseng, Y.C. & Lee, C.H. (2006). Flow- An Interactive AJAX-based Internet Information Requesting System?. ACM Multimedia 2006 Interactive Art Program " Remote", Short paper. UK DCMS，http://www.culture.gov.uk/ Varnedoe, K. & Gopnik, A. (1990). High and Low: Modern Art and Popular Culture. New York: Museum of Modern Art. Wernerfelt, B. (1984). A Resource-Based View of the Firm, Strategic Management Journal, Vol.5, pp.171-180. Woodruff, R.B. (1997). Customer value: the next source for competitive edge. Journal of the Academy of Marketing Science, 25(2), pp.139-153. Zanni, C. (2004). Average Shoveler. http://www.zanni.org/average/. Number of Pages in PDF File: 11

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POSITIONING FOR INTERNATIONAL MARKET

SEGMENTS: A CASE STUDY OF SALMAN BIN ABDULAZIZ UNIVERSITY

Yasine A. Qandile, Salman Bin Abdulaziz University Natalia Oganesyants, Al-Yamamah University

ABSTRACT

The purpose of this study was to identify target segments and positioning attributes for Salman Bin Abdulaziz University (SAU) to achieve objectives related to recruitment of high performance students and distinguished faculty. As a newly established institution, SAU strives to occupy a niche in the increasingly competitive academic marketplace of Saudi Arabia in response to globalization and quality assurance standards. Thus, positioning and brand building are important aspects of SAU strategic planning. The research followed a qualitative method based on internal survey. The sample size comprised 92 faculties with a representative diversity of international and local contracts. Positioning attributes aligned with SAU mission, vision, strategic goals and objectives were analyzed and compared to perceptions of internal stakeholders with regards to value categories designed to target segments of high performance students and distinguished faculty. The research yielded practical outcomes for the implementation of SAU Strategic plan. Findings proved that SAU has recognizable strengths to build distinctive brand assets for identified international segments. However, the University should strategize its internal values to capitalize on these advantages in the long run and benefit from stable enrollments, greater students’ retention and less faculty turn-over. JELM30 KEYWORDS:Positioning, Higher Education, Strategic Planning INTRODUCTION Within the new global environment characterized by increasing competition, higher education institutions are emerging as organizations driven by the commercial imperative of market-led forces. In a highly competitive educational market, differentiation and effective positioning appear to be key success factors pertaining to the choice of study and work destination. Universities all over the world compete to recruit international students and faculty in response to globalization and quality standards. Therefore, there is a need for higher education managers to build strong brands locally and globally, in both short and long term. Positioning an organization in the environment of its industry is one of the most important phases of the organizational strategic planning. Universities currently face complexities in external variable environments to which their internal structures are under pressure to adapt in an effective way. It forces universities to use strategic planning and strategic management to be responsive and supportive of stakeholders’ needs. Background and Problem Higher education sector in the Kingdom of Saudi Arabia has grown substantially since late 1990s in response to high demand for higher education and national development plans for a qualified workforce. The number of public universities increased from eight universities in 2000 to 25 universities in 2012. This expansion of the higher education sector went along with establishing of the National Commission for Assessment and Academic Accreditation (NCAAA) that

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obligates all universities to create a long-term strategic plan to meet national higher education quality standards that are consistent with international accreditation. Research Gap The boom in the number of Saudi Universities created competition for students, faculty, and financial support among higher education institutions. However, universities in the public sector of Saudi Arabia lack experience in positioning higher education institutions to forge strong and individual identities. As a newly established institution, Salman Bin Abdulaziz University faces a need to raise the quality of the educational process by means of recruiting professional employees and high achievement students to meet the criteria of NCAAA accreditation standards.SAU strives to occupy a niche and develop distinctive positioning strategy that enables to achieve its strategic goalsin the increasingly competitive academic marketplace of Saudi Arabia. Problem Statement The problem of this research is to identify potential international target segments and the specific positioning attributes that should be implemented as a part of the University strategic plan to achieve the objectives related to the recruitment of high performance students and distinguishedfaculty. This problem can be stated in the following research questions:

1. What potential positioning attributes can be aligned with SAU mission, vision and strategic goals?

2. What target segments can SAU reach to recruit high performance students and distinguished faculty?

3. What are the key positioning attributes SAU can capitalize on to recruit international students and faculty?

LITERATURE REVIEW The authors consider that it is important to highlight the following applicable ideas from the overview of the related literature. Branding of Higher Education Institutions There is a general consensus among scholars that branding is as important for educational institutions as it is for commercial businesses. However, marketing in education provoked a lot of discussions. Driscoll and Wicks (1998) point out differences between the markets for traditional commodities and the university education. Chapleo (2006) holds that the brand management in higher education is similar to nonprofit brands, but it may not necessarily be suited to the specific needs of the university sector due to greater competition in the market. Harrison-Walker (2009) emphasizes that strategic positioning which has a critical application to marketing in higher education, is often mismanaged. A substantial number of published studies address the subject conceptually (Aaker & Shansby, 1982; Lowry and Owens, 2001; Mashhadi et al., 2008; Harrison-Walker, 2009; Manhas, 2010). Positioning has been acknowledged as a core branding activity (Aaker & Shansby, 1982). By directing all of its marketing efforts towards a desired positioning, a university maintains a coherence and unity in its activities and establishes a specific image (Lowry & Owens, 2001). The characteristics of a good position for the brand are thought to be perceived uniqueness, prevalence, and strength (Aaker, 1991). A quality-oriented approach toward strategic positioning in higher education has been discussed by Mashhadi et al. (2008). Some researchers make attempts to differentiate service branding to

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avoid the danger of adopting product based branding strategy in developing positioning in higher education (Padgett & Allan, 1997; Morrison & Grane, 2007). Padgett & Allan (1997) emphasize that the experiential aspect of services play an important role in conceptualizing in a service brand image because it represents the customers’ perspective.According to Morrison & Crane (2007), emotional dynamics plays a powerful role in the customers’ selection, satisfaction and loyalty toward service brands. Branding builds an institution identity (Chapleo, 2005; Guzman et al., 2006; Goi Mei, 2010; Lockwood & Hadd, 2007). Chapleo (2005) argues that among universities insufficient effort has been done to clearly differentiate their institutions from competitors. Lockwood & Hadd (2007) reiterate that much of the branding work in higher education has been in peripheral areas, such as assessing logos, creating and disseminating marketing materials, or selling licensed merchandise. So, improvements should take place along dimensions of marketing communications, reputation, and public relations activities. Researchers emphasize that building brand identity begins within the organization and requires coordination of branding communication efforts (Schiffenbauer, 2001; Schultz, 2002; Judson & Aurand, 2009). Schiffenbauer (2001) contends that the brand message will lose its credibility if it is not supported by the employees within the organization. Hence, internal branding efforts are essential for employees to understand and take ownership in the brand. Brand messages conveyed to employees of an organization have been recognized as an important aspect of an organization’s positioning to ensure that the brand messages sent internally to employees closely match those sent to customers (Judson & Aurand, 2009). This becomes even more critical for service organizations because consumer loyalty is typically challenged by service quality, which is often much more variable and more difficult to control than product quality (Schultz, 2002). Another line of research has been evolving to help brands achieve differentiation with respect to social values. Guzman et al. (2006) present a reference group influence model which considers brand building with social values by leveraging brand equity with public services. Developing the brand identity is important for both public and private universities. Goi Mei (2010) explored the difference in service branding model between private and public higher educational institutions. The finding of the study showed that positioning of private universities is better developed than in public higher educational sector (Goi Mei, 2010). This observation confirms the author’s premise about the similar situation in Saudi public educational sector. Creating Customer-Based Brand Equity in Higher Education Within the context of higher education, customer-based brand equity is concerned with the ways prospective students, employees, legislators, other stakeholders, and general public perceive the value added to an institution by associating it with a brand name. Customer-based brand equity is a multidimensional construct. In general, customer-based brand equity comprises brand loyalty, brand awareness, perceived quality, brand associations, and other proprietary brand assets, such as trademarks and patents(Aaker, 1991). Taylor and Reed (1995) hold that marketing in higher education should not take a totally student-centric perspective, but ought to balance needs of various stakeholders. Although the key target for a university’s positioning program is prospective students, faculty and staff represent an important public (Lowry & Owens, 2001). McAlexander & Koenig (2010) situate brand community framework in the context of higher education marketing investments. As loyalty to the institution depends largely on a sense of belonging, it is one of the critical aspects to determine students’ choice.An effective brand management strategy can be maximized only if the brand carries a promise and if every member of the academic community is committed to fulfilling that promise (Lockwood & Hadd, 2007).

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The value of a brand image to attract prospectiveapplicants is a topic that has garnered most interest in recent years (Lowry & Owens, 2001; Rapert et al., 2004; Bennett & Ali-Choudhury, 2009; Judson et al., 2009). Bennett & Ali-Choudhury (2009) argue that branding facilitates decisions in selecting of an institution, particularly in the promise of outcomes. A strong brand increases the institution’s ability to compete for the best students, gain alumni membership and financial support from donors (Judson et al., 2009). Consequently, success in the educational marketing environment depends on the ability of an institution to recruit and retain the best students, faculty and staff (Jevons, 2006; Melewar & Akel, 2005). Rapert et al. (2004) argue that students are uniquely qualified to assess the quality of their educational experience. This aspect has acquired more significance due to the globalization of higher education associated with the creation of national and international brands by universities. Empirical studies focus on universities’ branding initiatives by institutions of higher education in United States (Judson, et al., 2009; Jevons, 2006), United Kingdom (Chapleo, 2007; Melewar & Akel. 2005). There is a body of research that deals with specific problems of positioning Asian (Gray et al., 2003) and Australian universities (Whyte, 2001; Shanka et al., 2005) for international markets. Based on the literature review, the author holds that internal branding is vital for educational institutions as service organizations where employee’ ownership in the brand should match customers’ needs. It is the premise that can be built upon to position SAU. METHODOLOGY AND DATA This case study follows a qualitative method to analyze data from primary and secondary sources, and the internal survey that offers descriptive statistics applicable to the study. Survey Design and Development: A survey using a structured questionnaire was developed to elicit responses within internal environment of SAU. The questionnaire contained multiple items related to two dimensions. First, it evaluated employment criteria for the current faculties at SAU, as well as problems they encountered while the job recruitment process. Second, it was used to investigate perceptions of SAU faculty with regards to thepositioning attributes applicable for SAU to attract prospective international students and faculty. The attributes were selected to identify perceived target regions to recruit high performance international students for SAU. A hand-delivered version of the survey was conducted for19 faculties as a pilot survey design. A necessary modification was made before administering the on-line and email final version based on the input from the pilot study response. Survey Implementation: The survey was distributed using two channels. An English version of the survey was posted online. An Arabic version was offered for additional convenience via the university website mail system. Survey Data Analysis: Analysis of data collected in the English version of the survey was done through the website summary and Excel charts that highlight trends displayed by the data collected. Statistic from the Arabic survey version was added manually to the online data. The overall sample size comprised 92 faculty at SAU. The only relevant personal data considered for the research was the type of contract the employees have. The overwhelming majority of the respondents (74%) have an international contract, while only 26% of the respondents were hired locally, which means that such a sample gives a representative diversity for the research purposes. Institution Documentation Analysis: Data in respect to SAU potential attributes to strategize the recruitment of high performance students and distinguished faculties were obtained from the primary sources, in particular SAU Strategic Plan 2012-2021 and Strategic Plan PMO report. Data comprised information on SAU mission, vision, and strategic goals that have been analyzed and compared to the perceived strength as viewed by the faculty.

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RESULTS AND DISCUSSION Job contract criteria were viewed as important by current SAU faculty. The majority of the respondents (78%) who filled out the survey placed salary at the top of the list, while professional development and research opportunities ranked second and third with corresponding 68% and 62%. This means that though financial benefits are the priority for the job seekers, employees in academia are very much concerned about a professional setting the university can offer. Other criteria such as career promotion, friendly and cooperative environment and satisfaction for family needs were ranked on average between 44% and 48%. As a conclusion drawn from the above mentioned data, offering opportunities to pursue professional growth in the contracts for prospective employees would be a positioning strength for SAU. International Target Segments for Students: 90% the respondents in this study strongly agreed that international faculty and students are important for the University. The chart below shows preferable regions for recruitment of high performance international students as perceived by SAU employees. Figure 1: Distribution of Geographic Regions For Recruitment of High Performance International Students

An important assumption can be made that SAU should attempt to recruit students from diversified locations around the world, rather than focusing on the Middle East. While the Middle East is still on the top position (3.61), it is narrowly followed by Asia (3.42) and Europe (3.26), which is in close proximity too. 92% of respondents unanimously agree that academic records is the most important criteria for admitting international students to a Saudi university, while 42% consider that majoring in Islamic studies and Arabic language is another significant factor. It should be added to these selective criteria, that 25% of the respondents consider religion and 17% - nationality as valid criteria for students’ recruitment. Income status and gender are rated equally low at 8.47%. These data present a perceived student’s profile targeting, to a large extent, international segments that are either affiliated with the Islamic world or pursue studies in the correspondent fields with no gender or income discrimination. Value Categories As Potential Positioning Attributes

Middle East

Asia

Europe

America

Africa

0 0.5 1 1.5 2 2.5 3 3.5 4

Geographic Regions

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Value categories of a Saudi University were appraised to indicate strength variables for positioning SAU. Three value categories were identified as intersecting for the purpose of categorization:

A. Quality standards/ quality of educations B. Tax free salary/ scholarships and financial aid C. Standard of life/ availability of housing and recreation activities

The charts below summarize value out of 5 points for the categories perceived as strength for attracting high performance international students and distinguished faculty to a Saudi University. Figure 2: Distribution of Value Categories For SAU Target Segments

As displayed by the chart, there are a few patterns among responses common for both target segments, such as quality of the educational process and living standards with a slight overarching significance for the student segment. The respondents also agree that financial benefits are the key attractive category for both target segments, and it is a dominant factor for prospective international students. The results of this cross-checking chart are consistent with the previous conclusion that faculty value equally financial benefits and professional opportunities with the ranking of the salary (3.44) and research facilities (3.33). Additionally, Islamic culture was rated at the value of 3.27 for the students, and security and safety at 2.82 for the faculty. It can be concluded that internal institutional factors are ranked above the advantages of the external environment. Finally, respondents suggested that the best way for advertising SAU is participation in educational fairs (87%) and the institutional website (74%), followed by utilizing advertising in media (53%) and social networks (55%).

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

quality salary/ scholarship

standard of life/ housing

security and safety

research facilities

Islamic culture reputation of KSA

Faculty

Students

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SAU Positioning Attributes Aligned with the Strategic Plan To evaluate positioning messages aimed at external and internal branding, a brief analysis of SAU Strategic plan has been done. The SAU strategic plan gives a holistic and shared understanding of how the University adapts to the education policy, environment and develops its activities. From SAU Vision: “To become a distinctive university in education and community partnership”, the perceived uniqueness of the brand revolves around social, communitarian and public values that underlie services in the educational sector. Thus, “community partnership” can be associated with values that could help develop SAU equity by relating to citizen’s concerns, as well as by establishing meaningful relationships with international customers. However, this most important aspect has been under communicated to SAU stakeholders. Interpretation of a community partnership should be extended broader to capitalize on its strength more. SAU mission suggests a promise to meet customer expectations: “Salman bin Abduaziz University endeavors to produce competitive graduates through internationally recognized education standards within an academic and research environment, distinguished human resources, effective community partnership and supportive administrative systems”.These promises correlate with the target needs of prospective students and employees as perceived by the respondents of the internal survey The perceived strength of SAU is highlighted in the adopted Core Strategic Values:

1. Quality: A level of performance that engenders stakeholder satisfaction and ensures future continuous improvement.

2. Justice and integrity: All employees are treated fairly and equally. 3. Teamwork and cooperation: A culture of teamwork and collaboration is highly

emphasized. 4. Transparency and accountability: The University’s performances, and any response to all

enquiries regarding that performance, are fairly published.

The Core Strategic Values give clear implications for unique assets that SAU can capitalize on to develop a distinctive positioning strategy with a clear message for internal stakeholders, prospective students and faculty, including international target segments. CONCLUSION AND IMPLICATIONS Within the limitations in the research scope, we encourage the expansion of this initial study to an approach that gives a better representation of customers’ needs involving the student body. Nevertheless, the internal survey yielded clear results regarding applicable positioning attributes to target international market segments at SAU. The findings of the research proved that SAU Strategic plan has recognizable positioning strength to build the University brand asset. However, as can be implied from the study, SAU should strategize its internal values rather than benefits of the external environment to capitalize on these advantages in the long run. Moreover, a need for aligning accurate positioning messages of SAU Strategic plan with perceptions of internal stakeholders has emerged. It will enable effective communication between employees and customers. If SAU pursues active positioning, the University will benefit from stable enrollments, including identified international segments, greater students’ retention and less faculty turn-over, and as a result, increased students’ achievement and quality assurance of the educational process. Finally, SAU has to develop clear advertising strategies to reach target segments of high performance students and distinguished faculty that will enable University to fulfill the promises delivered to the customers at the current stage of the implementation of the Strategic plan. REFERENCES

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Aaker, D. (1991), Managing Brand Equity: Capitalizing on the Value of a Brand Name. The Free Press, New York, NY. Aaker, D. andShansby, G. (1982), Positioning Your Product. Business Horizons, 25, 56-62. Aurand, T.; Gorchels, L. and Bishop, T. (2005),Human Resource Management’s Role in Internal Branding: an Opportunity for Cross-functional Brand Message Synergy. Journal of Product & Brand Management, 14(3), 163-169. Bennett, R. and Ali-Choudhury, R. (2009), Prospective Students’ Perceptions of University Brands: An Empirical Study. Journal of Marketing for Higher Education, 19(1), 85–107. Chapleo, C. (2006), Barriers to Brand Building in UK Universities? International Journal of Nonprofit and Voluntary Sector Marketing, 12(1), 23-32. Chapleo, C. (2005), Do Universities Have ‘Successful’ Brands? International Journal of Educational Advancement, 6(1), 54–64. Driscoll, C., and Wicks, D. (1998), The Customer-Driven Approach in Business Education: A Possible Danger? Journal of Education for Business, 73(1), 58–61. Goi Mei, T. (2010), Service Branding Model Difference between Private and Public HEIs. Review of Business Research, 10(2), 82-87. Gray, B.; Fam, K. and Lalnes, V. (2003), Branding Universities in Asian Markets. Journal of Product & Brand Management, 12(2), 108-120. Guzman, F.; Montaa, J. and Sierra, V. (2006), Brand Building by Associating to Public Services: A Reference Group Influence Model. Journal of Brand Management, 13(4/5), 353-362. Harrison-Walker, J. (2009), Strategic Positioning in Higher Education. Academy of Educational Leadership Journal, 13(1), 103-113. Jevons, C. (2006), Universities: a Prime Example of Branding Going Wrong. Journal of Product and Brand Management, 15(7), 466-467. Judson, K.; Aurand, T.; Gorchels, L. and Gordon, G. (2009), Building a University Brand from Within: University Administrators’ Perspectives of Internal Branding. Services Marketing Quarterly, 30 (1), 54-68. Lockwood, R. and Hadd, J. (2007), Building a Brand in Higher Education. Gallup Management Journal, 7, 1-6. Lowry, J. and Owens, B. (2001), Developing a Positioning Strategy for a University. Services Marketing Quarterly, 22(4), 27-42. Manhas, P. (2010), Strategic Brand Positioning Analysis Through Comparison of Cognitive and Conative Perceptions. Journal of Economics, Finance & Administrative Science, 15(29), 15-33.

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Mashhadi, M.; Mohajeri, K. and Nayeri, M. (2008), Quality-Oriented Approach Toward Strategic Positioning in Higher Education Institutions. International Journal of Social Sciences, 2(4), 237- 243. McAlexander, J. and Koenig, H. (2010), Contextual Influences: Building Brand Community in Large and Small Colleges. Journal of Marketing for Higher Education, 20(1), 69-84. McAlexander, J.; Koenig, H. and Schouten, J. (2006), Education: A Strategic Framework for University Advancement International. Journal of Educational Advancement, 6(2), 107-118. Melewar, T. andAkel, S. (2005), The Role of Corporate Identity in the Higher Education Sector: A Case Study. Corporate Communications: An International Journal, 10(1), 41-57. Morrison,S. andGrane, F. (2007), Building the Service Brand by Creating and Managing an Emotional Brand Experience. Journal of Brand Management, 14(5), 410-421. Padgett, D. and Allan, D. (1997), Communicating Experiences: A Narrative Approach to Creating Service Brand Image. Journal of Advertising, 26(4), 49-62. Rapert, M.; Villiquette, A.; Smith, S., and Garretson, J. (2004), The Meaning of Quality: Expectations of Students in Pursuit of an MBA. Journal of Education for Business, 80(1), 17–24. Rouse, W. and Garcia, D. (2004), Moving Up in the Rankings: Creating and Sustaining a World- Class Research University. Information Knowledge Systems Management, 4(3), 139-147. Salman Bin Abdulaziz University (2012), Strategic Plan 2012-2021. Salman Bin Abdulaziz University, Al-Kharj, Saudi Arabia. Schiffenbauer, A. (2001), Study all of a Brand’s Constituencies, Marketing News, 35(11), 17-18. Schultz, D. (2002), Study Internal Marketing for Better Impact: New Forum Researches What Motivates Workers. Marketing News, 36(21), 8-9. Shanka, T. ; Quintal, V. and Taylor, R. (2005), Factors Influencing International Students’ Choice of an Education Destination: A Correspondence Analysis. Journal of Marketing for Higher Education, 15(2), 31-46. Taylor, R. and Reed, R. (1995), Situational Marketing: Application for Higher Education Institutions. Journal of Marketing for Higher Education, 6(1), 23–36. Whyte, A. (2001), Positioning Australian Universities for the 21st Century. Open Learning, 16(1), 27-35. BIOGRAPHY Dr.Yasine A. Qandile is a Professor of Curricula & Educational Technology at Salman Bin Abdulaziz University, Saudi Arabia. He is also working as a Chief consultant for Academic Affairs and Executive Director for the University Center for Academia Development (CAD). He can be contacted at: Vice Rectorate for Educational & Academic Affairs, P.O. Box 173, Al- Kharj 11942, Saudi Arabia. Phone:+966-11-488-3332. Email:[email protected] or [email protected]

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Dr. Natalia Oganesyants is an Associate Professor of English Education. She is currently working as a Senior Instructor at Saudi INTERLINK Orientation Program, Al-Yamamah University, Saudi Arabia. She can be contacted at: INTERLINK, P.O. Box 45180, Riyadh 11512, Saudi Arabia. Phone: +966-11-224-2222 ext. 4619. Email:[email protected] or [email protected]

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INCREASING YOUR CULTURAL AWARENESS William A. Stahlin, Stevens Institute of Technology

Peter Harris, New York Institute of Technology Katherine Kinkela, Iona College

ABSTRACT

The world has become increasingly interrelated in the past three decades. Technology and the internet have dramatically facilitated communications, there is increased foreign investment, global trade barriers have been minimized and outsourcing of work is common. As Thomas Friedman says ‘the playing field is flattening.’ In order to service clients and subsidiaries in all parts of the world, CPAs need to know how to deal effectively with those from other cultures. According to the 2010 census, 13% of the US population is foreign born. The US workplace is becoming increasingly diverse. Understanding how cultures differ can enable us to interact more effectively with those from other cultural backgrounds. JEL: M49 KEYWORDS: Cultural Awareness, CPA INTRODUCTION This article will focus on several areas of cultural differences. The intent is to make the reader more aware of these differences and to heighten cultural awareness and sensitivity. Also, the implications of culture awareness on the CPA will be addressed. RESULTS Why it’s important to understand culture and how it impacts us Culture can be said to be the shared norms of a society based on values, beliefs and customs passed on over generations. Often people from other cultures will act differently and in ways we do not anticipate. Take the case of an American company that acquired a foreign subsidiary. It had a large receivable from a local company that was seriously overdue. A collection agency was hired and they promised quick action. The next week the collection agency indicated that the money would be arriving shortly. When asked how they got such quick results, the agency said ‘We kidnapped the president’s infant son.’ The Americans insisted the infant be returned immediately. They did collect their receivable within a month. The collection agency’s values were different from the American company’s in unanticipated ways. Past AICPA chairman Paul Stahlin says that thirty years ago it was the exception rather than the rule to have overseas dealings. Today it is the opposite. He believes that Americans are getting better at recognizing cultural differences. But he recommends that if you are to work with other cultures, it is important to invest time in studying the culture, history, political and business issues that the country faces.

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CPAs must deal with cultural differences not only when operating overseas but also when managing today’s more diverse workforce. Building relationships is even more important in many cultures than in US. In China, for example, the rule of law is not the practice. A strong relationship can be more important than a contract. Without a solid relationship between partners, it is difficult to do business successfully in the Chinese workplace. Developing such a relationship requires time and patience, something short term oriented Americans are not well accustomed to. Adapting to local culture is a must if you are to be successful working in another country. A hurried French-speaking American’s request for a Paris train ticket is likely to be met with a “Don't you want to say good morning?" Americans are too much in a rush to pay attention to the requisite niceties. There are many websites and books which provide insights to familiarize you with local customs. Sidebar An Expatriate’s Experience Bern Kuelker, a Canadian partner currently working in KPMG’s Short Hills, New Jersey, spent twelve years working in Germany and Russia. Bern found his international experience enjoyable and interesting, but not always easy. He had to learn to deal with unfamiliar situations and cultures. He improved his German-speaking ability but used translators in Russia. When dealing with complex accounting issues, there can be misunderstandings due to a translator’s lack of familiarity with the terminology. It is important to speak more simply, recap conversations and test for understanding to minimize the miscommunications. His spouse greatly encouraged him to take the first assignment abroad. For both husband and wife, the international assignment was a very rich life experience. Having a supportive spouse was essential in the decision to relocate overseas. Not only does the employee face the challenges of living abroad, but so does the family. He noted a difference in the balance between work and personal life while overseas. There was more of an emphasis on ‘working to live.’ Americans are said to’ live to work.’ While the Europeans were on vacation, it was easier for them to disconnect from work. Upon moving to Russia his found his expectations of the people were off the mark. He also found that there were significant changes happening quickly as the country moved to a market economy. He noted that CPAs must understand and deal effectively with people regardless of their culture. Bern says “It is essential to be open-minded, to show respect for the other culture and be observant of how people interact.”

Ethnocentrism One of the major problems when dealing with other cultures is the natural feeling that my way is better. We expect others to behave as we would behave. When we believe that our approach to management is the better way, it is known as ethnocentrism. However what works in one culture does not necessarily work in another. Attempting to motivate staff with individual rewards might work well in US, but would be poorly received in a collectivistic society, where the group rather than the individual is to be rewarded.

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Ethnocentricity can lead to a disregard or contempt for other cultures. Imposing our management approach in another culture may be ineffective. Some resistance to the adoption of IFRS may be the result of an underlying ethnocentrism. Especially for accountants, change brings on a significant set of issues and challenges. Sidebar

Tips for managing cultural differences Be culturally sensitive Respect cultural differences Be nonjudgmental Establish trust Understand that no culture is inherently superior Be patient and diplomatic Know before you go Expect the unexpected Be open to new experiences

Attitudes toward Time Americans tend to be deadline driven (monochronic.) They do one task at a time. Schedules are all important and strictly observed. Punctuality is essential. Time is money and is limited. Meetings should stay on topic and attendees should stick to the agenda. There is a sense of urgency in accomplishing what needs to be done. A monochronic person will be impatient with the perceived rudeness of the Brazilian sales clerk who is talking on the phone, while sipping a soda, and ringing up the sale. A Brazilian would have no problem with this behavior. People from time insensitive cultures (polychronic) see time as plentiful and have a more relaxed view of schedules. They are multi-taskers and easily distracted. Social relationships take precedence over adherence to a rigid schedule. Polychronics might consider strict adherence to the schedule as inflexible because it may interfere with their social relationships which are far more important adherence to schedule. Meeting times are not strictly observed. An American executive would be frustrated and angry when a Middle Eastern counterpart shows up for a noon lunch at 2:30 PM. The Middle Easterner doesn't understand why the American is mad. This is an example of a time-based culture clash. Sidebar Time Sensitivity Insensitive (Polychronic) Sensitive (Monochronic) Arabian Countries Germany France United States Latin Countries Scandinavian countries

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Communication Issues Even when the same language is spoken there are often differences in meaning. When a UK accountant talks about turnover, she is referring to revenue not how quickly inventory or receivables turn over. Idioms are often not understood in different cultures. When translated literally, ‘it's raining cats and dogs’ will confuse someone from another culture. Humor does not travel well across cultures and there are other complications with communications. Americans tend to be more informal and familiar in their communications and could offend someone from a more formal culture. Some cultures do not express feelings or thoughts explicitly. Another aspect of communication that differs among cultures is the amount of directness used. Directness of Communication - High context vs. Low Context Communication In the US, we tend to be direct and explicit communicators. Information is more readily available and straightforward. This is referred to as a low context culture. One says what one means. In indirect or high context communication, feelings and thoughts are not explicitly expressed. The context in which something is said says more than the words. People seem to talk around the issue. Asian and Middle Eastern countries tend to be high context communicators. When dealing with a high context person, a low context person may think to himself," why can’t I get a straight answer?" The high context person may be viewed as sneaky, hiding something and a time waster. The low context person must be sensitive to the subtle clues given by the high context speaker. This requires considerable effort on the part of the listener. Low context speakers focus on information rather than context. When a high context person says, "That will be difficult." It is a polite way of saying "no." The high context person views the direct speaker as unnecessarily talkative, rude, impatient and not a good listener. They may be seen as too aggressive to be trusted. Communication differences can make reaching an understanding a challenge. It is important for direct communicators to recognize that when you are dealing with a high context person you need to adjust expectations and to understand the context of what is said. Direct, embarrassing questions or statements should be avoided when dealing with high context people. Saving face is important to high context speakers. Sidebar

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Directness of communication Indirect (High Context) Direct (Low Context) Japan Switzerland Middle East Germany Latin America North America

Saving Face In many Eastern cultures, harmony is greatly valued. There is a desire to avoid embarrassment or to save face, even at the expense of being truthful. Many Westerners cannot appreciate the importance of saving face. In other cultures, disagreeing publicly or having a loud confrontation has severe consequences in a negotiation. Saving face is also related to a cultural disinclination to say no. Those who grow up respecting the need for harmony will seemingly agree even when they don't. Frustrations and hard feelings can ensue. Frequently in Eastern and Middle Eastern cultures, yes means ‘I understand what you're saying’ rather than’ I agree with you.’ When asked “Do we have a deal?" Responses such as: Yes, approval appears likely You will know soon That is a difficult question We can't answer that question at this time are all polite ways of saying no in many cultures. The speaker wants to maintain harmony and not cause the questioner embarrassment. A failure to respond is another way of saying no. This is understood in the high context cultures but not so well understood in low context cultures. Individualism vs. Collectivism Collectivism refers to the interdependence of community members. Do people think of themselves as I or we? Individualistic cultures are loosely knit. People look after themselves. They are expected to be self-reliant and display initiative. Collectivistic societies value the group over the individual. One doesn't want to stand out. It is viewed as disloyal to the group. The nail that sticks out is the first hammered. In a collectivistic society, one would not want to show up a fellow worker. Providing individual incentives to reward a collectivistic worker generally backfires. In the US, providing direct, frank feedback is viewed as an effective way of improving performance. In a collectivistic culture, such an approach would be viewed as disrespectful, insensitive, and disgraceful. In a collectivistic society, the family of an employee fired by an American boss might go to the boss to beg for the rehiring of the family member. The employee was too disgraced to face the boss himself. Sidebar

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Highly Individualistic Cultures Highly Collectivistic Cultures United States Singapore Australia Korea United Kingdom Pakistan

The Impact of Culture Awareness on the CPA In today’s ever expanding global business environment, the understanding, respect, interaction and adaption of different cultures is inherent for every CPA at all levels. At the staff level position, the CPA will be working with individuals from a multiple of cultures. At the senior and management levels, culture understanding is critical for the planning and testing phases of an assurance engagement. As an example, it would be unlikely to include the testing of a defined benefit plan of an Asian subsidiary, as these plans are basically existent only in USA. Bribery is quite common in many non US countries. The CPA must be aware of this potential in such countries. Additionally, managers supervise individuals with diverse cultural backgrounds. The manager thus needs to instill multi-cultural awareness and make the workplace a respectful, friendly, collegial environment. At the partner level, meetings with clients and prospective clients who come from differing cultures is commonplace. The partner needs to understand and adapt to differing cultural behavior if she wants to maintain good client relations. Successful and effective marketing strategies are culture related. In short, cultural understanding, respect and adaption is critical to every CPA firm in securing a good working environment, which will perform its services in a most efficient and effective manner, while ensuring a most profitable “bottom line”. It is also highly recommended that the CPA firm provide ongoing in house seminars for its most relevant cultures; describing its history, political and religious makeups, acceptable and unacceptable behavior, as well as an email domain for employee reference . CONCLUSION When John Kennedy went to Berlin he made his famous comment “Ich bin ein Berliner.” The crowd sheered and appreciated his attempt to relate to them, especially in their language. He should have said however, ‘eine Berliner.’ What he said was “I am a jelly doughnut.” People from other cultures appreciate the effort and are tolerant of a foreigner’s mistake. Cultural awareness is best used to explain behavior that is different than ours rather than to anticipate behavior. Cultural sensitivity can help us interact more effectively with the increasing number of cultural backgrounds in today’s workplace. It is imperative for the CPA firm to embrace cultural awareness as a critical aspect of its business model.

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THE PRESENT AND FUTURE OUTLOOK OF THE

LAST IN FIRST OUT INVENTORY METHODS Peter Harris, New York Institute of Technology

Katherine Kinkela, Iona College William Stahlin, Stevens Institute of Technology

Liz Washington Arnold, The Citadel

ABSTRACT Until very recently, the Last in First out Method (LIFO) was under severe scrutiny from the financial community, and its repeal as an acceptable accounting method seemed imminent. There were pressures from the Securities and Exchange Commission and the International Financial Accounting Standards Board to standardize accounting standards worldwide. In addition, there were political pressures imposed by US Congress to raise additional revenues. Both groups strongly oppose LIFO. However, an SEC Report issued in July 2012 has greatly renewed the lifeline of LIFO indefinitely. In the unlikely case of its ultimate repeal, the author presents some tax opportunities available in this transition period. JEL: M48, M49 KEYWORDS: LIFO, IFRS, US GAAP, SEC July 2012 Report INTRODUCTION The Last in First out (LIFO) method has been an acceptable, popular accounting method since its inception in 1939. Since then, many have and continue to argue against LIFO as a viable, economic accounting method. Until recently, LIFO faced a possibility of its elimination by the year 2015, as political forces coming from the International Financial Accounting Standards Board, the world financial community and the US administration strongly oppose this method. The International Financial Reporting Standards (IFRS) prohibits LIFO as an acceptable accounting method, and the Obama administration proposed in its 2010 budget to repeal LIFO altogether in the future. However, given a recent unprecedented report issued by the SEC in July 2012 , which questioned IFRS use altogether , stating that there are too many gaps inherent in this regime, LIFO's repeal is now very unlikely. Part 2 will give a literature review of LIFO's tax advantages and financial statement limitations. Part 3 will examine the current state of LIFO, and Part 4 will investigate the future of LIFO, while Part 5 will provide recommended tax planning opportunities assuming the possible repeal of LIFO. The conclusion section Part 6, will also recommend areas for future research. LITERATURE REVIEW The tax advantages associated with LIFO have been documented by tax laws, research, literature and Congress. Internal Revenue Code (IRC) 472 allows for the Last in First Out method of inventory since its inception date in 1939. Computationally, as the price of inventory increases, lower income will result under LIFO when compared to all other inventory methods, resulting in a lower tax payment. This tax advantage has led to the criticism of LIFO resulting in an unfair tax loophole advantage for a few beneficial industries; leading to poor and inefficient management of inventories, the need to maintain two sets of accounting records, and finally flawing the balance sheet presentation.

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White, Sondhi and Fried (2008), state that due to the tax advantages associated with LIFO resulting in greater cash flows, the choice of inventory method should point towards LIFO. Dopuch and Pincur (1988) found that the taxation effect was the primary reason a company chose LIFO. To obtain the tax benefit, three elements have to be satisfied. First, there has to be a scenario of; increasing inventory prices (inflation); second, a buildup or increase in inventory, known as a LIFO reserve; and finally, there has to be an income tax. LIFO use in an inflationary environment will result in expensing the most current higher cost inventory purchases against revenue, resulting in the lowest possible income total. The greater the inflation environment, the more pronounced is the tax benefit. This was observed in the early to mid-1970, a period of double digit inflation in the U.S, when more than 400 publically U.S companies elected to change their inventory method to LIFO. The tax advantage of LIFO is also dependent on inventory additions or buildups, known as reserves. This has resulted in poor inventory asset management and suboptimal business behavior as observed by Trackel and Trezevant (1994). The US government has estimated that presently less than 15% of publically traded companies use LIFO, and that the corporate tax rate of 35% can be reduced to 30.5% if all of the corporate tax loopholes such as LIFO were eliminated. The elimination of LIFO is expected to add 100 Billion Dollars in US tax revenue over the next ten years according to the US government. This figure is very optimistic and inflated when one considers that the overall LIFO reserve is 100 Billion dollars (Compustat) , so at a 35 percent tax rate , this LIFO reserve figure will have to triple over the next ten years to meet such projections. A more realistic figure will be 35 million dollars added to tax revenue to the US government over an eight year period. As a defense to LIFO users, non LIFO firms have the option to adapt the Lower of Cost or Market Method (LCM). LCM allows inventory to be valued below cost if cost exceeds market value. Market value is defined as replacement cost and such valuation can be made on an item by item basis. As an example, a company may use and to take a tax advantage prior to sale by the use of a non LIFO- LCM method. Given that LIFO adopters tend to experience increasing inventory market values, this benefit is not really viable to them. Additionally, I believe pressures in the future by Congress will eliminate this potential advantage if LIFO is repealed, as it represents yet another tax loophole, primarily for non LIFO users. This method is used by industries which have obsolete type inventories like computer, chip and food. The tax deferred argument under FASB 109 can be made in defense of LIFO. One may argue that this LIFO reserve represents a temporary tax difference which will be paid to the US government in the future, when this difference reverses causing higher taxable income. This then is similar to differences resulting in depreciation totals between book and tax purposes, which lead to a deferred tax liability. This is a weak argument as research has shown that when future earnings expectations are not available, companies opt out of LIFO and therefore, no reversal of this deferred tax liability is ever realized. Finally, one needs to question whether the elimination of LIFO will have any dent on the Federal Deficit which at present is 16.5 trillion dollars. Repealing LIFO will add per my projection, 35 billion in tax revenue which will reduce the deficit a meager one quarter of one percent. LIFO is not in any way the culprit of this deficit, and the regulators realize this, as they have eased their

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attack on LIFO in this most recent time. Too many tax loopholes exist, many of which are political in nature which adds to the problem of a fair tax code. A comprehensive tax policy is argued as a good starting point to address this lingering and critical problem. However, interest groups can put a quick end to this potential and hopeful development. Recent Developments and Current State of LIFO For the period 2006 to early 2012, LIFO was facing pressures from both: the International Reporting Standards Board in cooperation with the SEC, and the U.S. Congress for its possible complete elimination by the year 2014.On November 15, 2007, the Securities and Exchange Commission (SEC) exempted foreign firms from including reconciliation from International Financial Reporting Standards (IFRS) to U.S Generally Accepted Accounting Principles, (U.S. GAAP) when filing on U.S. Stock exchanges. Foreign public firms were permitted until 2010 to file using the International Financial Reporting Standards (IFRS) without reconciliation to U.S. GAAP as previously required. This move created a mandate to converge IFRS and U.S. GAAP and financial statement requirements (SEC, 2007). On June, 18, 2008 the SEC issued a press release stating that the world’s securities regulators are uniting to increase their oversight of international accounting standards. There were plans set forth by the SEC and the IFRS to standardize accounting standards, on a worldwide basis with a target date set for periods ending after December 31, 2014. IFRS convergence in the US seemed manifest .Under IFRS rules, LIFO is not a permitted acceptable accounting method. The Obama Administration had proposed in its 2010 budget to repeal LIFO altogether in an attempt to generate greater tax revenues. On January 1, 2011, more than 100 countries have adapted IFRS or a variation, including our neighboring country Canada. IFRS curriculum has also penetrated the college curriculum of US universities as the major testing agencies have greatly incorporated IFRS as required topic coverage. The Uniform CPA exam tests IFRS and the CFA examination has eliminated US GAAP altogether from the curriculum and solely tests IFRS. International Accounting courses have become the norm in US universities. So what happened to change this thinking? First, the development of a financial crisis in Europe questioned whether accounting information really causes economic downturns. The European Community adopted IFRS but it did not prevent a financial crisis. Secondly, different variations of IFRS were adopted for use by many countries, thus raising the issue of comparability. Third, and most importantly was a report issued by the SEC in July 2012 questioning IFRS as a viable accounting system, and stating that it has too many “gaps”? The SEC questioned a number of items, starting with adequate funding needs in there continued success. A lack of reporting consistency among IFRS users is also a major SEC concern. Significant accounting reporting gaps were cited such as the treatment of contingency losses. Additionally, the report noted that several items of accounting are too much removed from US GAAP treatment that convergence seems unlikely. These items include, inventory costing, contingencies, deferred income taxes, depreciation and the presentation of Fixed Assets. These differences seem irreconcilable and in the case of LIFO, the issue relates to taxation, rather than accounting policy.

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Most significantly in this report, the SEC announced that it has no target date, if any, for IFRS convergence. Clearly, the SEC is in no rush and non-enthusiastic about convergence, which is not likely to happen anytime in the intermediate future. These developments have put LIFO repeal on the backburner, and the result is that the political pressures against LIFO have eased in a significant manner and the likelihood of its eventual repeal anytime soon is very unlikely THE FUTURE OF LIFO In case 1, LIFO would continue as present. Although dual resistance from IFRS and Congress exist, recent developments and charges against senator Rangel, coupled with the continued weakness in the worldwide economy makes the status quo a reality. Although the continued use of LIFO will greatly and potentially hinder the goal of uniform financial reporting going forward, the ultimate goal here has moved to convergence and not uniformity, adding to the real probability of continued LIFO use in the USA. Compromises between US GAAP and IFRS in my opinion will be the norm rather than the exception going forward. There are four possibilities of LIFO going forward, and illustrated as follows:

Case Financial Reporting Purposes Tax Purposes 1 Yes Yes 2 No Yes 3 Yes No 4 No No

In case 2, allowing LIFO for tax purposes and not for financial reporting purchases represents the best of both world, as a company report the highest income for financial reporting purposes and pay the least amount of tax. The scenario would effectively eliminate the LIFO conformity requirement. The likelihood of this happening is most unlikely and not feasible. In case 3, the worst of both worlds for a company; that is, the lowest income for financial reporting and the highest tax payment. This scenario is also not feasible. Case 4 represents the complete elimination of LIFO. This will only occur if LIFO is eliminated at the tax level. If so, then it will be eliminated for financial reporting purposes, as the advantage for business purposes would not exist. Given the SEC’s non commitment to IFRS adaption in the US and the spiraling US deficit which now exceeds 16.5 trillion Dollars, LIFO is safe, and it is unlikely that any repeal will occur in the future. In addition, the continuing worldwide economic problems, LIFO at this time is just a footnote for the US regulators, which leads me to predict that this issue will not be addressed well beyond the next US election in 2016. My prediction then is a status quo on LIFO at this time and in the near foreseeable future. Tax Planning Opportunities Available for the Current Users of LIFO Assuming the repeal of LIFO, or a switch from LIFO voluntarily which is more suitable, what are some of the tax planning opportunities available to taxpayers to help ease in this transition? Extended Payment Adjustment Period: Under current tax rules, if a taxpayer charges its accounting period form LIFO to another acceptable method, and it results in a higher inventory value (income total), the difference in additional tax is payable over a period of four years. Under the current Obama Administration’s 2010 Budget Proposal, the difference would be spread to taxable income and payable over eight years. Consequently, the termination of LIFO would be

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mitigated as the resulting extra tax would be payable to the tax authorities over an eight year period. In an atmosphere of economic slowdown, many entities have chosen this route. Lower inventory amounts and switch to a Just in Time Inventory purchasing system. Lower inventory levels will somewhat insulate against increased income (added income tax payments), and will also lead to a better inventory management approach, resulting in lower carrying costs. CONCLUSION The probability of the elimination of LIFO as an acceptable accounting method is very unlikely any time in the foreseeable future. This paper addressed the present and future outlook of LIFO. In the author’s opinion, LIFO will continue as is in the indefinite future, and will not be addressed again until after the 2016 presidential election. Worldwide financial reporting will continue to have differences with the US, and whether SEC workings with the International Reporting Board continue remains to be seen. In the event of LIFO’s eventual repeal, the author recommends several tax strategies to help ease the burden of this change. Additional research examining the managerial, non-tax advantages of FIFO when compared to LIFO should be addressed, as well as the effect of the US deficit by the continued allowance of LIFO use. REFERENCES IRC 472 The SEC Report, July, 2012 The Analysis and Uses of Financial Statements, White, Sondhi, Fried, Wiley, 4rd Edition, 2012. BIOGRAPHY Peter Harris, CPA, CFA is a Professor and Chair of the Accounting and Finance department at the New York Institute of Technology. Previously, he had worked for Ernst and Young LLP. He is an author of over 60 refereed journal articles and 150 intellectual contributions. He has presented and continues to present seminars to nationally and globally audiences on topics relating to financial reporting and taxation. He is a member of several professional organizations. He can be reached at [email protected]. Katherine Kinkela, Iona College, can be contacted at [email protected] William Stahlin, Stevens Institute of Technology, can be contacted at [email protected] Liz Washington Arnold, The Citadel, can be contacted at [email protected]

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INTERNET FINANCIAL COMMUNICATION ON

UNREGULATED MARKETS: QUALITATIVE AND QUANTITATIVE APPROACHES

Laetitia Pozniak, University of Mons

ABSTRACT

Our doctoral research is interested in the voluntary effort of financial communication on the Internet realized by companies quoted on Brussels’ unregulated markets. In the absence of obligation of communication, are companies quoted on these markets proactive regarding financial disclosure on their website? What are the determiners of the level of internet financial communication? Have the characteristics of the SME an impact on this level? What brought the managers of these SME to disclose or not financial information on the Internet? Do companies quoted in Paris disclose more financial information on their websites than those quoted in Brussels? These questions are handled through four scientific papers mobilizing quantitative and qualitative methodologies. The general methodology of this thesis follows Grounded Theory’s principle. This paper aims at showing the contribution of an inductive positioning, the complementary of quantitative and qualitative approaches and the wealth of the results coming out from the ground. JEL: M15, G10, C50, 032 KEYWORDS: Financial communication – Websites analyses – Internet financial reporting (IFR) - not regulated financial markets - Linear Regression – OLS - voluntary disclosure – paired sample. INTRODUCTION The stock exchange of Brussels(The stock exchange of Brussels, created in 1801, called Euronext Brussels, is a part of the NYSE Euronext since the merger, in 2007, of the NYSE Group and Euronext NV. Euronext NV who, since 2000, included Paris Stock Exchanges, Amsterdam and Brussels, to which came to be added the stock exchange of Lisbon and the Liffe in 2002). accounts two unregulated markets: the Free market and Alternext. These two markets evolve in the side of a regulated market: Euronext. The study of these unregulated markets seemed to us interesting in several respects. First of all, the majority of the scientific papers are dedicated to the regulated financial markets and, to our knowledge; no research (except ours) was interested in the case of Belgium. Then, the unregulated markets address especially small and medium-sized enterprises (SME) which are an important part of the Belgian economic frame. These markets give to SME the possibility of a first stock-exchange experience, without satisfying all the obligations related to a quotation on a regulated market, and offer them to raise capital. The absence of obligation regarding internet financial communication leads to the question of the voluntary effort realized by these companies. Four scientific researches were led around this problematic. Quantitative and qualitative approaches were mobilized to answer at best the researches’ objectives. The general methodological approach of our doctoral thesis is inductive and joins the principle of Grounded Theory. The first point of this article exposes the stakes of financial communication and will lead to our research questions. Then we present the different methodology mobilized in our four papers. The

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results which these various researches allowed to bring to the foreground are developed in the point 4. Finally, the avenues of research, revealed thanks to our fundamentally inductive and exploratory approach, are exposed. LITERATURE REVIEW The financial communications had, originally, for function to answer a legal obligation compulsory for listed companies and aimed at a public of initiated. Since the 1990s, the approach of companies evolved well. Beyond the simple disclosure of financial information, the financial communications became one of the elements of the global strategy of the company (Westphalen & Libaert, 2009). The stock exchange is a market as the others where the exchanges take place according to the law of supply and demand. The product which sells the company, even if it is a share, requires a communication plan (Heldenbergh & Scoubeau, 2005). «For the listed companies, it is not any more a question of contenting itself with the compulsory financial information [] a real plan of financial communication must be developed according to the financial objectives that settled the company» (Malaval, Décaudin & Benaroya, 2009: 496). A distinction is made thus between financial information which ensues directly from legal obligations governing the publication of the annual accounts of companies and financial communication which is "any activity of financial information and promotion of the financial image of the company" (De Bruin, 1999: 16). The financial communications allow the companies to differ, it is the strategic element which becomes inseparable of any approach of financial and stock-exchange marketing (Léger, 2008). Several arguments are moved forward in favor of the financial information disclosure:

- Agency Theory: the context of agency finds its application within the framework of the financial information disclosure. According to Jensen & Meckling (1976), the disclosure of financial information allows to limit the agency conflicts and to reduce the agency costs. The transparency aims at reducing the information asymmetry and preventing the opportunist behavior, by a control and supervision increased (Chaher & Gnichi, on 2007). Schapiro-Neil (2011: 57) reminds that "financial communication aim at limiting the risks attached to the company and at managing the uncertainties of the market".

- Signal Theory: In a context of information asymmetry, signal allows the company to put

additional information on the market. For example, debt level and paying dividends are used to show the good health of the company (Leland & Pyle, 1977).

- Financial markets transactions: On financial markets, the investors ask for a risk premium

to compensate for the information asymmetry. By disclosing voluntary information, the company reduces the risk associated with its share and thus decreases the cost of the capital (Merton, 1987). However, several researches demonstrate that the decision of disclosing information is influenced by proprietary costs: costs affecting the holder of the information. Indeed, the disclosure of information can damage the competitive position of the company on the market (Verrecchia, 2001; Dye, 2001). These studies demonstrate that companies are incited not to communicate to preserve their competitive position, even if raising capital will be more expensive afterward and if the investors interpret the withholding of information as a signal of bad news. «The financial information is arbitration between disclosing information to the investors and to competitors» (Fasse & Schapiro-Neil, 2011: 57).

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Internet as a Tool of Financial Communication More than two billions 400 million persons were users of the Internet on the 30 of June 2012; against 360 millions in 2000, that is a 566, 4 % growth in 12 years (www.internetworldstats.com/stats.htm). Internet offers three types of tools: the website, the e-mail and the advertising banner. Other means of communication such as blogs, social networks, forums, virtual worlds, online videos, and wikies are also offered to companies (Westphalen & Libaert, 2009). Within the framework of this PhD research, we concentrate on the website of the company. Carrier in terms of image and sharp tool of direct marketing, the website is a " space created by the company to inform and to introduce a relation; the website is the starting point, the heart of the system" (Westphalen & Libaert, 2009: 98). In matter of financial information this new communication tool appeared near to other traditional support such as annual report, press release and shareholder assembly. The Internet gives to individual investors the access, at low cost, to the same information as other investors (Brissy, Guigou & Mourot, 2008). As Westphalen & Libaert (2009: 337) say, “The Internet participated in the democratization of the stock-exchange life: it offers to the shareholders the real equality of access to the information”. The internet communications tool presents several advantages (Geerlings et al. 2003; Branco & Rodrigues, 2006; Léger, 2008; Jahdi & Acikdilli, 2009):

- Spread a more important quantity of information, at a lower cost, at reduced time; - Reach several targets at the same time and send them specific information; - Archive the information, update them, and make them available at any time and

accessible at low-cost. Thanks to a financial space on its traditional website, the company can show the financial information and go away from the presentation of its activities and from its marks (Malaval, Décaudin, Benaroya, 2009: 481). Andrikopoulos & Diakidis (2007) explain that some possibilities are exclusively offered by the Internet as for example: the distribution of videos of shareholder assembly, of roadshows, a space of storage and archivings of documents over several years, the subscription to a newsletter, a space of dialogue via a forum of the shareholders or the possibility of raising questions. A company can choose to disclose financial information to all the Internet users, without distinction, so favoring the transparency. However, the communication of particular information with certain targets, such as institutional investors and particular investors, can be an asset for the company (Heldenbergh & Scoubeau, 2005: 196). The efficacy of a financial information website (Malaval, Décaudin, Benaroya, 2009: 482) can be evaluated by: referencing, user-friendliness, personalization, interactivity, information and links. A website ’stake is " to inform and to seduce, to explain and to convince, to attract and to develop loyalty " (Léger, on 2008: 92), to anticipate the questioning of the investors and to answer it in a clear and complete way, to supply to the financial community the necessary information to estimate the company’s value and especially feed a relation with the investors (Barredy and Darras, on 2008: 3). CONTEXT OF THE STUDY AND RESEARCH QUESTION

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The Free market and Alternext are legally considered as MTF (multilateral trading facility) since November 1st, 2007. They are unregulated markets in the sense of European directives or Belgian financial legislation. Listed companies on these markets are not thus forced to publish their accounts in the standards IAS / IFRS or to conform to the Belgian Code of governance. Rules are established by Euronext Brussels and approved by the Financial Services and Markets Authority (FSMA). On the unregulated markets, the conditions of membership and the obligations were voluntarily relieved to allow the companies to concentrate firstly on the development of the business (Euronext, 2006). To be listed on the Free market, the company has to satisfy no preliminary condition, except the approval of the IPO prospectus by the FSMA. To be listed on Alternext, firms have to exist for two years, raise a minimum of 2, 5 million euro on the market and choose a listing sponsor who will help the firm to prepare the IPO. Once quoted, the companies of the Free Market have no legal obligation of information, except the accounting obligations been imperative by their social shape, such as the disclosure of the annual report. On Alternext, companies have to disclose periodic account and information susceptible to influence the stock market price. Furthermore, the legislation regarding transparency plans that the Alternext shareholders who hold an important participation, have to let it know. They have to indicate to the FSMA and to the listed company the crossing of the thresholds of participation of 25, 30, 50, 75 and 95 %. Contrary to companies quoted on Euronext, companies evolving on the unregulated markets do not have to have a web site (FSMA, 2012). Pourtier (2004) explains that by defining what is required, we define by default what is voluntary. Given that no disclosure of financial information on the Internet is required, any internet financial communication from listed companies on unregulated markets results from a voluntary effort. From then on, in the absence of obligation of communication, are companies quoted on these markets proactive regarding financial disclosure on their website? The exploratory study of Arnone, Colot, Croquet, Geerts & Pozniak (2010) was the first to focus on this question: what is the level of internet financial communication of companies quoted on the Free market of Brussels? Thanks to a literature review highlighting the recommendations concerning financial communication on the Internet, the authors created an analysis grid of websites. This grid is used to evaluate the quantity of communication of every company quoted on the Free market at the end of 2008 (27 SME). For every items of the analysis grid available on the web site of the company, a point is awarded. A final score of financial communication is obtained for every company. The authors of this exploratory work discover that certain elements such as a press review or the board of director’s presentation are very present, whereas the stock market price and the dividends, for example, are rarely communicated. A certain disparity in the level of financial information disclosure between companies is observed. Some companies communicate a lot of financial information on their website whereas others present hardly their activity and some key figures. What elements explain these differences of Internet financial communication degree? What are the determiners of the Internet financial communication score?

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Then, no company shows all the elements of the analysis grid on its website and the average of obtained score is relatively low. We can wonder then if it is the due to the fact that they are SME. All are SME below what recommend the scientific papers in terms of Internet financial disclosure? Have the characteristics of the SME a link with the distribution of financial information on Internet? Or maybe it is the case for all the companies quoted on unregulated market, doesn’t matter in Brussels or Paris? These two stock markets are governed by the same rules; do the companies which are quoted there present the same degree of communication? Have the characteristics of the unregulated markets a link with the internet financial communication? Finally, the authors (Arnone and al., on 2010) underline the voluntary effort realized by these companies which are nevertheless hardly forced to disclose financial information on their website. What is the origin of this voluntary effort? What brought these SME to publish financial information on their web site? All these questions, raised up thanks to exploratory work of Arnone et al. (2010) are the start of our doctoral research. METHODOLOGY AND DATA This section presents the field we analyze in our doctoral thesis and the methodology we use in our four papers. Study Field in Evolution Through the articles which built this thesis dedicated to companies quoted on unregulated markets of Brussels, the field analyzed is evolutionary:

Article n° 1 (Pozniak, 2010) studies all the companies quoted on the unregulated markets of Brussels in 2009. Article n° 2 (Pozniak & Croquet, 2011) compare all the SME listed on the unregulated markets of Brussels to unlisted SME. Article n° 3 (Pozniak & Guillemette, 2013), 10 managers of SME listed on the Free Market of Brussels has been interviewed. Article n° 4 (Pozniak, 2013) compare companies listed on the unregulated markets of Brussels in April 2012 to companies listed in Paris.

Figure 1: Research Questions

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Figure 1 shows the questions, raised up thanks to a preliminary study, which are at the beginning of our doctoral research.

Table 1: Study Fields in Evolution

Article n°1 Article n°2 Article n°3 Article n°4 Analyzes of websites Feb 2009 Nov 2009 09-12 April 2012 Financial data 2007 2008 no 2010 Composition of corpus SME listed on the Free Market of Brussels 28 26 10 23 SME listed on Alternext Brussels 9 9 11 Unlisted SME 35 SME listed on the Free Market of Paris 23 SME listed on Alternext Paris 11 Number of SME studied 37 70 10 68

Table 1 shows the sample of firms studied in each paper of our doctoral thesis. It also mentions when the data are collected and when the websites are analyzed. The number of companies studied change in every article for two reasons:

On one hand, because the objectives of research sometimes required to widen the corpus of companies in the study. It was the case in article n°2 (Pozniak & Croquet, 2011) where unlisted SME were added and in article n°4 (Pozniak, 2013) where French companies were added; On the other hand, there are IPO and Bankruptcy on the unregulated markets as on other stock exchange.

Methodology

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Each articles of this thesis uses the most appropriate methodology to answer its research question. So articles n°1, n°2 and n°4 use a quantitative approach, indicated when the research aims at measuring, at explaining as well as at testing theories (Cooper & Schindler, 2006). These articles use two methodologies. First of all, the literature review relative to the recommendations in terms of internet financial communication (Pervan, 2006; Euronext, 2006; Dutta & Bose, 2007; Léger, 2008; Barredy & Darras, 2008) and elements discovered during the consultation of some websites allow the construction of an analysis grid. Thanks to this grid, we analyze companies’ websites and give one point for each item of the grid available on the website (Debreceny & Rahman, 2005; Khadaroo 2005; Paturel, Matoussi & Jouini, 2006; Abdelsalam, Bryant & Street, 2007; Jouini, 2007; Gabteni, 2011). The analysis of contents of websites aims at obtaining an Internet financial communication score (Allam & Lymer, 2003; Oyelere, Laswad & Fisher, 2003; Xiao, Yang & Chow, 2004; Gowthorpe 2004; Khadaroo, 2005; Lybaert, 2005; Abdelsalam, Bryant & Street, 2007; Oyelere & Mohamed, 2007; Gabteni, 2011) Then, this financial communication score is regressed by means of the explanatory variables stemming from research hypotheses (Debreceny & Rahman, 2005; Paturel et. al., 2006; Ben Rhouma & Cormier, 2007; Jouini, 2007). Futhermore, articles n° 2 and n°4 use the paired samples technique (Thietart, 2003; Evrard, Pras & Roux, 2009; Malhotra, Birks & Wills, 2012; Caby, 1994; Bughin & Colot, 2008). Paired sample means the two samples are similar with regard to certain characteristics (in this case, the size and the sector) who allow to assure that the observed effect came from the studied variable (in article n°2, the listing status; and in article n°4, the market of quotation) and not from the difference in sample composition. The structure of samples is a priori controlled to obtain samples presenting identical structures. From then on, the errors due to the differences of composition of the groups are reduced (Thietart, 2003). The article n°3 follows a qualitative approach, adequate when the understanding of the real-life experience of the persons is pursued (Paillé, 2007). Table 2: Methodology of Each Paper

Article n° 1 Article n° 2 Article n° 3 Article n° 4 Approach Quantitative Quantitative Qualitative Quantitative Methodology

Content analysis Linear regression

Paired sample Content analysis Linear regression

Interviews Paired sample Content analysis Linear regression

Tools Stata 10.1 SPSS Stata 10.1

WeftQDA Stata 10.1

This table shows the methodology used in every paper of our doctoral thesis. It also mention the software used. Our doctoral research clearly defend the complementarity between the quantitative and qualitative methodologies such as numerous methodology (Malhotra, Décaudin & Bouguerra, 2004; Evrard, Pras & Roux, 2009 ; Gauthy-Sinéchal & Vandercammen, 2010 ; Baines, Fill & Page, 2012 ; Lendrevie & Lévy, 2012 ; Malhotra, Birks & Wills, 2012). The general methodology of our thesis follows the Grounded Theory. Indeed, the methodological progress leading of an article to the following one is resolutely iterative and inductive. From an exploratory research, we let data talks and we follow avenues of research revealed by the ground. Every article had ambition to try to answer the questions raised by the previous article. As for the

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research problematic, it is defined only at the end of the study (Guillemette, 2006; Evrard, Pras & Roux, 2009; Guillemette & Luckerhoff, 2009; Luckerhoff & Guillemette, 2012; Plouffe & Guillemette, 2012). RESULTS AND DISCUSSION This section aims at finding answers to our research questions (presented in Figure 1) in the four thesis paper and demonstrate how rich and complementary both qualitative and quantitative approaches are. The first question asked was: what are the determiners of Internet financial communication level? Article n°1, dedicated to companies quoted on unregulated market of Brussels; reveal the negative impact of the performance and the positive impact of the membership in the IT sector on the Internet financial communication score. The market of quotation also influences the score: companies quoted on Alternext inform more that those quoted on the Free market. Article n°2, where SME unquoted were matched to SME quoted on Brussels’s unregulated market, establishes the positive effect of the size of the company and its quotation and the negative effect of the debts on the level of financial communication through the company’s website. Article n°4, where companies quoted in Paris were matched to companies quoted in Brussels, demonstrates the positive influence of the size, the membership in the IT sector and the market of quotation on the degree of financial information discloser on the Internet and the negative influence of the age of the company. Focusing on the Belgian sample, it is variables size, membership in the IT sector and the performance that show to have a positive influence on the Internet financial communication score. Focusing on the French sample, it is variables size and age of the company that turns out to have an impact, respectively, positive and negative on the level of financial information disclosure on the company’s website. Through our various researches, certain variables turn out to be recurring determiners of the Internet financial communication score: he size has a positive impact in the article n°2 and the article n°4: more the company is big more its Internet financial communication score is high. Besides, the managers met within the framework of the article n°3, talk about their low human and financial resources they can dedicate to the Internet financial communication. In most of the cases, the manager takes care himself of the company’s website. The membership in the IT sector has a positive impact in the article n°1 and the article n°4: the companies of the IT sector have a higher Internet financial communication score. Besides, the managers of IT companies, met within the framework of the article n°3, demonstrate a use more pushed by the Internet, among which it is Core Business. These companies presented the best scores, except when the manager explained that he fears to reveal information to competitors. The influence of the performance on the level Internet financial communication listed in Brussels seems to evolve in time: in the article n°1, its impact is negative, whereas in the article n°4, its impact is positive. The more successful companies in 2008 were rather suspicious and disclosed less financial information on their website. In 2012, the more companies are successful, the more they disclose financial information on the Internet. When we dive back into the data, we notice

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that the Internet financial communication score increases very slightly with an average of items of 12.76 in 2008 (standard deviation 6.13) and 13.21 (standard deviation 6.95) in 2012. On the other hand the average performance fell. The average ROE passes of 4,71 % in 2008 (standard deviation 45,85) to 3,28 % in 2012 (standard deviation 35,12) and the average ROA passes of 8,18 % in 2008 (standard deviation 11,96) to 2,27 % in 2012 (standard deviation 19,42). In this context of economic crisis, we can suppose that the more successful companies realized more financial communication efforts to distance itself from ailing firms and reassure the investors. The second question asked concerned the characteristics of the SME and the link with the level of Internet financial communication. Do listed SME inform more than unquoted SME? Article n°2 shows that SME have a higher level of Internet financial communication comparing to their unquoted peers. Although having no obligation of disclosing financial information on the Internet, companies quoted on unregulated markets of Brussels realizes a voluntary effort of communication. Then, we wondered if the characteristics of the unregulated markets had a link with the level of Internet financial communication. Do companies quoted in Paris inform more that those quoted in Brussels? Article n°4 allows answering negatively this question. Companies quoted on Brussels’ unregulated markets present an upper level of Internet financial disclosure than their peers quoted in Paris. The voluntary effort of financial communication on the Internet is thus upper within companies quoted in Brussels. This result is against our forecasts. The notices of the managers of companies quoted in Brussels (see article n°3) as well as the data of Euronext relative to the Brussels and Paris markets let us suppose an upper level of financial communication on the French companies’ websites. Figure 2: Results

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This figure shows the results of our PhD research and the answers to our research questions rose up thanks to our four-thesis paper. We were interested in what brought the managers of SME to publish or not financial information on the Internet. What relation can be established between the information with financial character available on the web site of a SME and the elements evoked by the managers? The results of article n°3 confirm the dominating place of the manager in his SME and his influence, in particular on the disclosure of financial information on the Internet. The elements which brought the managers to publish financial information on the website of the company are the respect for the investor and the visibility. The elements, which brought the managers not to publish financial information, are the threat of the competitors, the skepticism in front of the transparency, the lack of means, the priority in the business and certain characteristics of the Free market. Article n°3 reveals that the managers fearing the disclosure of information to competitors are the ones whose web site presents least financial information, whereas the managers mentioning their will to respect the investors are the ones whose web site presents most financial information. CONCLUSION The fundamentally inductive and iterative positioning adopted in this doctoral research allowed to reveal numerous avenues of research that could be exploited in our future works. The subject of the determiners of the Internet financial communication level could be improved in different ways. At the level of the explanatory variables: the growth potential, measured by the difference between market value and book value has not much sense for companies quoted on unregulated markets, which present a low liquidity level. This variable showed itself not significant in the article n°1 and was not any more used on articles which followed. The age of the company is used only in the last article and shows it significant only for companies quoted in Paris. It would be more appropriate to take into account the number of years since the IPO and not since the creation of the company. Indeed, several researches showed the impact of the listing status on the level of communication of the company. We could suppose that the voluntary effort of communication is more important first years which follow the IPO.

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The free float, used in articles n°1, 2 and 4 to measure the dispersal of the capital, is supposed to represent the percentage of the capital held by the public and thus the shares potentially exchanged quickly. However on the unregulated markets, the liquidity is lacking and the shares are exchanged with difficulty. The measure of the free float is thus not the most appropriate. We could take into account the percentage of the capital held by the manager and his family as the measure of the concentration of the capital. Indeed, some researchers (Labelle and Schatt, 2005) demonstrated that companies controlled by a family tend to disclose less information given that the majority of the shareholders already have the information but also given that the family is afraid of disclosing information to the competitors. At the level of the population studied then: The size of unregulated markets of Brussels is relatively small and thus even when we study all the population, the number of companies in the study exceeds hardly 30. In optics of extension of the ground in the study but also to continue on the way of the article n°4, we intend to add SME on AIM London and AIM Italia The understanding of the real-life experience of managers of SME quoted could be pursued at several levels. First, we could meet managers of SME quoted on other markets and compare their experience and their opinion about Internet financial communication. Second, in an objective of generalization, we could realize a survey with managers of SME quoted on unregulated markets to encircle their objectives and motivations. A typology could be defined and the link between the level of Internet financial communication and the reasons evoked by the managers, discovered in article n°3, could be statistically validated. The situation of the unregulated markets and their issues could be analyzed. A part of our survey proposed previously could contain questions relative to the quotation of the company: Is the manager satisfied by its quotation on an unregulated market of Brussels? Does he intend to transfer on another market? Why? If yes, which one? Would he like to leave the market? How? It would come to complete the positive and negative aspects connected to a quotation on an unregulated market, put forward by the managers of the Free market (met within the framework of article n°3). By collecting the opinion of managers of Alternext, a comparison could be realized. The same survey could be sent to companies quoted on unregulated markets in Paris. On one hand, in optics of continuity of the article n°4, we could pursue our comparison of the French and Belgian unregulated markets. Finally, the analyses grid of websites, used in articles n°1, n°2 and n°4, were built thanks to a literature review of papers making the inventory, of the financial information which should, in the ideal, be available on website. At no time, the opinion of the investors was requested. However, the targets of financial communication are varied and it is important to adapt a communication plan to each of them. In a future research, it would be interesting to meet the investors of the unregulated markets, to submit them our analysis grid and to try to understand what they are looking for on a company’s website. REFERENCES Abdelsalam, O. H., Bryant, S. M. & Street, D. L. (2007) «An examination of the comprehensiveness of corporate internet reporting provided by London-listed companies », Journal of International Accounting Research, vol. 6, no. 2, 33 p.

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Pervan, I. (2006) “Voluntary financial reporting on the internet – Analysis of the practice of Croatian and Slovene listed joint stock companies”, Financial theory and practice, vol. 30, n° 1, pp. 1-27. Plouffe, M.-J., & Guillemette, F. (2012), La MTE comme apport au développement de la recherche en arts. Dans J. Luckerhoff, & F. Guillemette (Éds), Méthodologie de la théorisation enracinée : Fondements, procédures et usages (pp. 87-114). Québec : Presses de l’Université du Québec. Pourtier, F. (2004) «La publication d'informations financières volontaires : un essai de synthèse », Cahiers électroniques du CRECCI, IAE, Cahier 08, N° ISRN IAE 33/CRECCI-2004-08-FR, 37 p. Pozniak, L. & Croquet, M. (2011) »Analyse des déterminants de la communication financière sur l’Internet. Le cas des Marchés non réglementés de la Bourse de Bruxelles », Journal of Small Business and Entrepreneurship, vol. 24, n° 3, pp. 329-344. Pozniak, L. & Guillemette, F. (2013), « Les dirigeants de PME et la communication financière sur internet », Revue Internationale PME, accepted for publication. Pozniak, L. (2010) “Financial Communication on the Web - Evidence from Belgium”, Accounting & Taxation, vol. 1, n° 2, pp. 47-58. Pozniak, L. (2013) «Internet Financial Communication. Evidence from unregulated markets in Brussels and Paris », International Journal of Business and Finance Research, vol. 7, n° 5, pp. 107-122. Pozniak, L., Ferauge, P., Arnone, L. & Geerts, A. (2011) “Determinants of internet Corporate Social Responsibility Communication”, Global Journal of Business Research, vol. 5, n° 4, pp. 1- 14. Thietart, R-A et coll. (2003), Méthodes de recherche en management, 2ème édition, Dunod, Paris, p. 537. Verrecchia, R. E. (2001) «Essays on disclosure », Journal of Accounting and Economics, vol. 32, n° 1, December, pp. 97-180. Westphalen, M-H. & Libaert, T. (2009), Communicator. Toute la communication d’entreprise, 5ème Editions, DUNOD, Paris, p. 493. Xiao, J., Yang, H. & Chow, C. (2004) “The determinants and characteristics of voluntary internet-based disclosures by listed Chinese companies”, Journal of Accounting and Public Policy, vol. 23, Issue 3, May-June, pp. 191- 225. BIOGRAPHY Laetitia Pozniak, Ph.D. is Research and Teaching Assistant at Warocqué School of Business and Economics (University of Mons). She works in the Finance Department. Her researches fields

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are financial communication, unregulated markets, internet communication, Small-Medium size enterprise and Grounded Theory. She can be contacted at University of Mons, 17, place Warocqué - 7000 Mons - Belgium. Email: [email protected]

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PERFORMANCE MEASUREMENT IN PUBLIC SECTOR

Tatiana Antipova, Institute of Certified Specialists, Russia Andrey Antipov, Institute of Certified Specialists, Russia

ABSTRACT

The paper acquaints the reader with the practice of evaluation in the public sector. Main research materials for this paper are based on data from a survey and follow-up interview of budgetary managers and accountants. In the survey of some of the indicators set priorities. KEYWORDS: Public Sector Entities, Key Performance Indicators of Public Sector INTRODUCTION It has been said that public sector can not improve what it does not measure. Performance measurement is only one of the management tools. The basis of this position is simple: if the organization is complex and consists of many different components, evaluation of this activity would be complex and multifaceted. The public sector KPIs need to be based on a comprehensive system of indicators and criteria for public sector, adapted to the strategic goals of the public policy. Budgetusers (public sector entities) are a special type of organizations, the effectiveness of which can be judged by special criteria for the public sector. As noted B. Stevens (1984), "most public organizations need a clear, precise statement of purpose and description of the work assignment in conjunction with readily identifiable responsibility for the quality of their work ... "In this case one of the main effectiveness criteria should be an assessment how well they manage to outcomes and/or outputs. From this point of view, the possible ineffectiveness of budget should be acknowledged to be admissible if they are coping with the features built-in stabilizer macroeconomic and social proportions. We have chosen to approach understanding changes in public sector reform by focusing on the performance-based budgeting in Russia. STUDY RESULTS For the purposes of this study, we have developed a questionnaire. The questionnaire consisted of several questions which were important to characterize the attitude of Russian public sector reforms. We made a relative short but informative one-page questionnaire. This questionnaire was composed from 16 questions, but in this paper we are considered seven of them only. The questionnaire was distributed to 17 participants during a workshop and follow-up interviews. The survey took place on July 11th 2013 in Perm (Russia) consisted of practicing managers and public sector accountants from different types of organizations such as educational establishments (e.g. colleges, universities, schools), health care institutions, employment institutes, etc. Finally, we received 13 completed questionnaires (76%). Basic information about respondents in this survey is provided in Table 1. Respondents mostly working in a budget area with between 5 and 15 years’ practical experience (46%), between 30 and 50 years (46%). It is important to notice that 77% of the respondents have taken higher economic education.

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Table 1: Number of Responses in the Survey

Age Experience in a budget area Type of entity Funding budget Scope

Yanger than 30

Between 30 and

50 Older

than 50 Less

than 5 years

Between 5 and 15

More than 15 years

Autono mous

Budgeta ry Agency Federal

Subject of

Federati on

Local Govern ment

Manage Healthy Culture Educati

on Employ

ment

3 6 4 2 6 5 4 8 1 2 3 8 1 2 2 7 1 We have asked about the significance of some indicators. These indicators were chosen as a result of many interviews with professional public sector accountants in the setting of a competence improvement course. In our opinion, there are following ten indicators: a) Social significance of the entity; b) Accessibility of rendering services to population; c) Quality of rendered services; d) Financial result; e) Duration of service delivery; f) Resource endowment; g) Share of the financing to buy fixed assets; h) Level of assets acquired by the budget; i) Share of unused fixed assets in total assets; j) Number of KPIs used to evaluation. These indicators we are marked in the questionnaire and then participants rated them on a 5-point scale. The average ratings of these indicators are shown in Figure 1. Figure 1: Rating of Entities' Kpis

We can see the highest rating of all is the quality of rendered services (4,5) and the second two are Social significance of the entity (4,3) and Financial result (4,3). It seems the public sector has to offer people more quality services and they have to start demanding from their government better opportunities. Social significance should be lead to encourage public sector entities to do their services better. But a term “Financial result” is not defined in Russian public sector policy and therefore we have some problem with this. CONCLUSION

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

The social significance of the entity

Accessibility of rendering services to population

Quality of rendered services

Financial result

Duration of service delivery

Resource endowment

The share of the financing to buy fixed assets

The level of assets acquired by the budget

The share of unused fixed assets in total assets

The number of KPIs used to evaluation

4.3

3.8

4.5

4.3

3.4

3.7

3.4

3.0

1.7

3.0

Average Rating

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Through the questionnaire we were able to deduce the weight of some performance indicators in the public sector. In particular, we found several obstacles while doing the survey: understanding of what is the essence of effectiveness; to the fact that the list of indicators was not always accurate. The result of this study will allow comparisons of the public sector KPIs among different budgetary areas. REFERENCES Calleros O.L., Rivera H., Serrato H., Delgado M.A., Leon C., Acevedo A., Gomez M.E., Cervantes P., Ramirez I.M. (2012). Development of the Mexican user satisfaction index to evaluate social government programs in Mexico: the case of the daycare social program. Journal of Consumer Satisfaction, Dissatisfaction and Complaining Behavior, Vol. 25, pp. 118 – 128. Curristine T., Lonti Z., Journard I. (2007). Improving Public Sector Efficiency: Challenges and Opportunities. OECD Journal on Budgeting, 7.1. Drucker P. (1963). Managing for business effectiveness. Harvard Business Review, May-June, pp. 58-65. Hughes J., Katwai M. (2012) Use of Key Indicators in the Government Sector. The Journal of Government Financial Management, 61, 3, pp. 24-28. Linna P., Pekkola S., Ukko J., Melkas H. (2010) Defining and measuring productivity in the public sector: managerial perceptions. International Journal of Public Sector Management. Vol. 23, N 5, pp. 479 – 499. Rhodes M.L., Biondi L., Gomes R., Melo A.I., Ohemeng F., Perez-Lopez G., Rossi A., Sutiyono W. (2012) Current state of public sector performance management in seven selected countries. International Journal of Productivity and Performance Management, Vol. 61, N 3, pp. 235-271. Stevens B.J. (1984) Comparing Public and Private-sector Productive Efficiency: An Analysis of Eight Activities, National Productivity Review. 1984. N 3. Stattev S., Daskalova T., Constantin D.L., Raleva S., Goschin Z. (2012) Development a Comprehensive System for Municipal Real Property Classification. Administration and public management, Vol.19, pp. 17 – 42. (1984) Indicative Guidelines on Evaluation Methods: Monitoring and Evaluation Indicators. The New Investment appraisal in the public sector: a technical guide for Government department. HMSO, London. BIOGRAPHY Dr. Tatiana Antipova is a Professor at the Institute of Certified Specialists. She has 10-years experience in education related to the Public Sector Accounting and Auditing, 6-years practical experience as the government auditor, 8-years practical experience as the chief accountant in private sector. She specializes in Governmental Accounting and Government Audit and has undertaken research regarding control issues across the public sector with integrated approach.

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She is interested in how management technologies are translated into national public sector practices and published extensively in refereed journals in Russia (about 100 publications). She can be reached at the Institute of Certified Specialists, 95A Lunacharskogo str., Perm, Russia, 614000, [email protected]. Andrey Antipov is an IT manager at the Institute of Certified Specialists. He has 2-years experience in information technology and methodology of management process. [email protected].

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WHAT IMPACT DOES THE APPLICATION OF IFRS 11 HAVE ON (EUROPEAN) COMPANIES? AN

EMPIRICAL STUDY OF THE IMPACTS ON SELECTED FINANCIAL STATEMENT FIGURES

AND KEY FINANCIAL RATIOS Markus Stockinger, Johannes Kepler University Linz

Susanne Leitner-Hanetseder, Johannes Kepler University Linz

ABSTRACT Following the adoption of IFRS 11 “Joint Arrangements”, IFRS reporting entities are facing new challenges regarding the classification and accounting of joint ventures. As a consequence of the short-term convergence project between the IASB and the FASB, the accounting option for joint ventures has been eliminated in the new standard in order to reduce the differences between these two major accounting principles. However, the abolition of the accounting option for joint ventures has affected financial statement figures and key financial ratios, as some (European) companies have to change from the proportionate consolidation method to the equity method. This paper examines how the transition from the proportionate consolidation method to the equity method will affect (European) companies. It describes the relevance and preferred accounting methods for joint venture investments and explores whether the effects on several financial statement figures and key financial ratios are material for (European) companies. Thus, this paper provides (European) companies as well as the users of financial statements – auditors, financial analysts, banks and investors – first evidence of these expected effects. JEL: M40, M41, M42, M48 KEYWORDS: IFRS 11, Joint Arrangements, joint ventures, proportionate consolidation, equity method, materiality INTRODUCTION To achieve economic goals, joint ventures have gained international importance in recent years. Therefore, the International Accounting Standards Board (IASB) published IFRS (International Financial Reporting Standard) 11 – a new standard for accounting for joint arrangements – to replace IAS 31, which was endorsed by the EU in 2012. With the goal of improving the quality of financial reporting, the revision of IAS 31 concentrated on two major aspects. First, the identification, classification and accounting requirements now focus on the rights and obligations of the parties as central criteria for demarcation. Second, the accounting option for joint ventures has been eliminated to reduce differences between IFRS and US-GAAP (United States-Generally Accepted Accounting Principles) and to improve the comparability of IFRS reports. Therefore, the proportionate consolidation (PC) method for joint ventures is prohibited, which means that all joint ventures have to be included in the consolidated financial statements using the equity method (IFRS 11.24 as well as Küting/Seel, 2011). Through this harmonization between IFRS and US-GAAP, as well as the new requirements of IFRS 11, European companies are facing new challenges in accounting for joint arrangements. On one hand, they have to apply the new classification rules and therefore have to re-evaluate all existing joint arrangements. Especially for companies in industries where the use of know-how

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and financial resources is an important factor (e.g. in the construction and food industries), re- evaluation causes a significant workload. On the other hand, the abolition of the accounting option affects financial statement figures and key financial ratios. These effects can be justified by a change from the PC method to the equity method. The structure of the paper is organized as follows to cover the aforementioned topics. In the first step, this paper shows the readjustments of IFRS 11 compared with the previously prevailing legal norm IAS 31, followed by a critical analysis of the abolition of the accounting option based on the general opinion in the literature and in practice. The empirical part of this paper analyses the practical relevance of joint ventures and consolidation methods. It then provides information about how many of the sampled European companies account for joint ventures using the PC method and consequently are concerned with the effects of the transition. In the main part, the effects of the abolition of the accounting option on selected financial statement figures and key financial ratios for European companies are analyzed and compared with the formulated hypotheses using a deductive empirical study. LITERATURE REVIEW Since the beginning of the 21st century, standard setters worldwide have called for research to investigate the impact of different joint venture accounting methods. Nevertheless, there is little extant literature on accounting for joint venture investments. According to the categorization of Biddle et al. (1995), the following studies explain the relative information content based on a multiple regression model. Therefore, the conformation content of an accounting method is measured by the predictive value of an elected earnings ratio. The study of Kothavala (2003) provided market-based evidence that financial statements based on the equity method are more relevant for bond ratings. Even based on the same regression model as Kothavala (2003), the results of Bauman (2007) showed that financial statements prepared under the PC method are more relevant for explaining bond ratings. However, the samples differ due to differences in reporting methods used in the financial statements (US-GAAP, Canadian GAAP), bond rating methodologies and sample composition (Bauman, 2007). The findings of the study by Stoltzfuss and Epps (2005) pointed out that the PC method for accounting for joint ventures should be used if there is evidence of guarantees and/or other agreements. These results indicated that financial data prepared under the PC method have a stronger association with bond risk premiums than financial data prepared under the equity method. For a set of Canadian firms, Graham et al. (2003) found evidence that financial statements prepared under the PC method have more relative information content for predicting future returns on shareholder equity than financial statements prepared under the equity method. Based on the same regression model, the study of Leitner-Hanetseder (2010) indicated that the PC method provides greater predictive power of future profitability than the equity method for German listed companies. The findings showed that the intended elimination of the PC method would not improve the relative information content for users of financial statements prepared under IFRS. However, the findings also proved that additional disclosures to calculate PC data would improve the relative information content of future profitability under the equity method. Richardson et al. (2011) found that the elimination of the choice of joint venture accounting method does have value relevance implications. Similarly, the findings of the study by Soonawalla (2006) proved that the separate recognition of the disclosure of joint ventures and associate companies provides value relevance. According to previous research, the elimination of the choice between the PC method and equity method decreases value relevance. Furthermore, the use of the PC method provides stronger information content than the use of the equity method. However, few studies investigate the relevance of the equity method or PC method for accounting for joint venture investments within single industries. The study of Keitz (2005)

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indicated, for example, that the equity method is preferred in the automobile and transport industry and that the PC method is preferred in the construction industry. Nölte et al. (2007) and Leitner (2009) investigated the impact of the change from the PC method to the equity method on financial figures and/or ratios. However, the studies mentioned were carried out only for German and/or Austrian listed companies. Similar results for listed companies in the EU are missing. METHODOLOGY As shown above, the transition from the PC method to the equity method affects financial statement figures and key financial ratios. However, the extent of these impacts has been analyzed to a limited degree for European companies. As potential effects are still known theoretically (see IASB, 2011; KPMG, 2011), this study provides a detailed descriptive overview and quantifies these impacts in practice using data on 350 European companies from different indices, industries and countries in the EU. The following cross-sectional study is characterized as a deductive analysis, which means that hypotheses introduced will be confirmed or rejected. Descriptive deviation analysis was elected as the methodology, whereby selected financial statement figures and key financial ratios are calculated twice, using the PC method and a fictitious equity method. For the fictitious calculation of the equity method, the impacts on assets, liabilities, income and expenses can be directly seen in the Notes. As the study examines the effects on total assets and liabilities as well as income and EBIT, these financial data were converted. To convert liabilities and sales under the equity method, the liabilities and sales of joint ventures had to be subtracted. To ascertain the fictitious equity in joint ventures, the share of liabilities decreases the amount of total assets. The fictitious total assets under the equity method are increased by the amount of the net book value of the joint venture. A calculation is only possible if European companies provide information about their jointly controlled entities in the Notes as required by IAS 31.56. Furthermore, the results are based on the assumption that jointly controlled entities under IAS 31 will be joint ventures under IFRS 11 otherwise an evaluation of the results is impossible. However, this will be expected in most cases (IASB, 2011; KPMG, 2011). The aim of this study is to answer the following questions:

1. What practical relevance do joint ventures have for European companies, i.e. how many European companies account for joint ventures in their consolidated financial statements?

2. Which accounting method do European companies use for joint ventures, i.e. what accounting method is relevant in practice and how many European companies account for their joint ventures

3. using the PC method and therefore were affected by the transition to the equity method?

4. How does the transition affect the selected statement figures according to the concerned European companies in point two, i.e. to what extent do financial statement figures change?

5. What quantitative impacts do the changes in financial statement figures have on key

financial ratios, i.e. to what extent do key financial ratios change due to the transition? RESULTS AND DISCUSSION

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This section evaluates the impacts on the consolidated financial statement figures caused by a change from the PC method to the equity method for the financial year 2010 (see Table 1). Based on the changes in financial statement figures, the impacts on key financial ratios can be derived. In this regard, each financial ratio was calculated twice, first using the PC data and second using the data from the conversion to the equity method. Thus, the analysis of the impact of conversion was possible. We concentrate on financial ratios according to the advanced DuPont model, as the cause and effects of the impacts can be shown with this model. Table 2 presents the differences in financial ratios based on the financial data for 2010.

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Table 1: Descriptive Statistics of the Effects of Conversion on Selected Financial Statement Figures

Impact on total assets in %

Impact on liabilities in %

Impact on sales in %

Impact on EBIT in %

n* 82 80 54 64 Mean -3.17 -5.75 -7.87 -16.51 Median -1.70 -3.13 -4.43 -2.75 Std. Deviation 5.24 9.20 9.38 83.70 Maximum -39.70 -58.21 -43.40 -662.50/+85.75 Null hypothesis rejected confirmed confirmed confirmed Impact according to industry

Oil & Gas immaterial material** immaterial material Basic Materials immaterial material material immaterial Industrials immaterial immaterial material material Consumer Goods immaterial immaterial immaterial material Health Care immaterial immaterial immaterial immaterial Consumer Services immaterial material immaterial material Telecommunications immaterial immaterial material material Utilities immaterial material material material Finance immaterial material material material Technology immaterial immaterial no information*** material

Based on financial data for 2010, Table 1 points out the relative differences between financial data under the equity method and under the PC method *n means the number of companies using the PC method and disclosing the data required for the financial year 2010 **material means that the impact was more than 5% on average ***no information means that none of the companies in the industry selected disclosed the information required Table 2: Descriptive Statistics of the Effects of Conversion on Key Financial Ratios

Impact on ROE II

Impact on profit margin I

Impact on profit margin II

Impact on asset turnover

Impact on financial leverage

n* 39 54 39 54 82 Mean -1.90 2.84 1.16 -2.05 -13.62 Median -0.88 0.39 -0.01 -0.85 -4.47 Std. Deviation 2.63 12.86 9.75 3.07 33.02 Maximum -11.00/+0.05 -0.21/+94.61 -4.34/+59.70 -13.76/+0.20 -272.72 Null hypothesis rejected rejected rejected confirmed Impact according to industry

Oil & Gas immaterial immaterial immaterial immaterial material Basic Materials immaterial immaterial immaterial immaterial immaterial Industrials immaterial immaterial immaterial immaterial material Consumer Goods immaterial immaterial immaterial immaterial immaterial Health Care immaterial immaterial immaterial immaterial immaterial Consumer Services immaterial immaterial immaterial immaterial material Telecommunications immaterial immaterial immaterial immaterial immaterial Utilities immaterial immaterial immaterial immaterial material Finance not material material** material immaterial material Technology no information*** no information no information no information material

Based on financial data for 2010, Table 2 points out the relative differences between financial data under the equity method and under the PC method *n means the number of companies using the PC method and disclosing the data required for the financial year 2010 **material means that the impact was more than 5 percentage points on average ***no information means that none of the companies in the industry selected disclosed the information required CONCLUSION As shown herein, the application of IFRS 11 influences European companies. First, they have to re-evaluate all their joint arrangements due to the new classification rules on rights and obligations. Second, European companies using the PC method are affected by the change in accounting method. Hence, financial statement figures and key financial ratios will change following the transition from the PC method to the equity method. The presented empirical results indicate that joint ventures are highly relevant in practice because approximately 70% of

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the European companies sampled account for at least one joint venture. In particular, in the materials, consumer goods, consumer services, utilities and finance industries, more than 75% of the European companies sampled account for joint ventures in their consolidated financial statements. The results also show that the equity method is preferred for accounting for joint ventures. Nevertheless, approximately 40% of sampled firms use the PC method, and therefore they are concerned with the impact of the change to the equity method. In particular, more than half of the companies listed on the Euronext 100 index and those from the basic materials, industrials, utilities and finance industries have to change their accounting methods and are facing impacts due to that fact. By analyzing the impacts on selected financial statement figures, H2, H3 and H4 were confirmed, which means that liabilities, sales and EBIT are all influenced materially by the discussed change. H1 was rejected, however, meaning that there is no material impact on total assets. These results also indicate that in several industries changing from the PC method to the equity method causes material impacts on selected financial statement figures. However, not all industries are affected in the same way. Owing to these changes in financial statement figures, the impacts on key financial ratios using an advanced DuPont model were then derived. The results show that these impacts are in the single-digit range on average, except for financial leverage. As a consequence, H5, H6 and H8 were rejected, which implies no material impact on profit margin I and II, asset turnover and ROE II. However, H7 was confirmed, suggesting that financial leverage changes materially due to an accounting change. It must be noted here that in single cases impacts were material on both financial statement figures and key financial ratios; therefore, these cases are relevant for the companies and stakeholders involved. Although the results of the present study provide the first evidence of the expected effects, the extent of the impact still depends on the year of transition. As this study was designed as a cross-sectional investigation, further research is thus necessary. For example, the methodology of this study could be changed to a longitudinal study design to measure, for example, the correlations between accounting methods and their predictive power, or to analyze the impacts of economic development on the accounting change. In summary, the results of this paper are highly relevant for practice and for scientific discourse. On one hand, they provide a first reference point on the impacts that can be expected when applying IFRS 11 for the first time. On the other hand, they open up further scientific discussion on the impacts of changing from the PC method to the equity method. REFERENCES BAUMAN, M. P. (2007): Proportionate consolidation versus the equity method: Additional evidence on the association with bond ratings, in: International Review of Financial Analysis, 5, p. 496-507. BIDDLE, G. C., SEOW, G. S., SIEGEL, A. F. (1995): Relative versus Incremental Information Content, in: Contemporary Accounting Research, 12, p. 1-23. GRAHAM, R. C./KING, R. D./MORRILL, C. K. J.(2003): Decision usefulness of alternative joint venture reporting practices, in: Accounting Horizons, 17, p. 123-138. IASB (2011): Effect analysis, IFRS 11 Joint Arrangements and disclosures for joint arrangements included in IFRS 12 Disclosure of Interests in Other Entities, www.ifrs.org/News/Announcements-and-Speeches/Documents/IFRS11_Effectanalysis.pdf (2013-05-13).

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KEITZ, I. v. (2005): Praxis der IASB-Rechnungslegung, Best practice von 100 IFRS-Anwendern, Praxis der IASB-Rechnungslegung, Stuttgart 2005. KOTHAVALA, K. (2003): Proportional consolidation versus the equity-method: A risk measurement perspective on reporting interests in joint ventures, in: Journal of Accounting and Public Policy, 6, p. 517-538. KPMG (2011): First Impressions: Joint Arrangements, http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/first- impressions/Documents/First-impressions-JA-IFRS11.pdf (2013-05-13). KÜTING, K./SEEL, C. (2011): Die Abgrenzung und Bilanzierung von joint arrangements nach IFRS 11. Änderungen aus der grundlegenden Überarbeitung des IAS 31 und Auswirkungen auf die Bilanzierungspraxis, in: KoR – Zeitschrift Internationale und kapitalmarktorientierte Rechnungslegung, 07-08, p. 342-350. LEITNER, S. (2009): Abschaffung der Quotenkonsolidierung nach ED 9 des IASB, Eine empirische Studie zur Prognosequalität und den quantitativen Auswirkungen für österreichische und deutsche börsenotierte Unternehmen, in: IRZ – Zeitschrift für Internationale Rechnungslegung, 1, p. 29-37. LEITNER-HANETSEDER, S. (2010): Relative Information Content of Alternative Joint Venture Reporting Methods – Is the IASB on the right Way?, Working Paper, EAA Conference, Istanbul 2010. NÖLTE, U./WEINREIS, M./MEZHOVA L. (2007): Praxis der Bilanzierung von Gemeinschaftsunternehmen nach IAS 31, in: PiR – Praxis der internationalen Rechnungslegung, 6, p. 164-167. RICHARDSON D, W. A./ROUBI, R. R./SOONAWALLA, K. (2011): Decline in Financial Reporting for Joint Ventures? Canadian Evidence on Removal of Financial Reporting Choice, in: European Accounting Review, p. 373-393. SOONAWALLA, K. (2006): Accounting for Joint Ventures and Associates in Canada, UK and US: Do US Rules Hide Information?, in: Journal of Business Finance and Accounting, 3-4, p. 373-393. STOLTZFUSS, R. L./EPPS, P. R. (2005): An empirical study of the value relevance of using proportionate consolidation accounting for investments in joint Ventures, in: Accounting Forum, 29, p. 169-190. BIOGRAPHY Markus Stockinger is a senior lecturer at the Johannes Kepler University Linz, Austria and a project staff member of the Austrian Financial Reporting and Auditing Committee (AFRAC). He can be reached at Johannes Kepler University Linz, Altenbergerstraße 69, A-4020 Linz, Austria, [email protected]. Susanne Leitner-Hanetseder is a post doc research and teaching associate at the Johannes Kepler Universtiy Linz, Austria. She can be reached at Johannes Kepler Universtiy Linz, Altenbergerstraße 69, A-4020 Linz, Austria, [email protected].

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BUILDING AN ETHICAL CIVIL SERVICE IN THE PACIFIC: EXPLORING THE EFFECTIVENESS OF

FIJI’S PUBLIC SERVICE CODE OF CONDUCT Razeen Ali, University of the South Pacific

Desmond Amosa, University of the South Pacific

ABSTRACT

In the Pacific region, public service codes of conduct often establish standards by which behavior is often judged proper, or otherwise, for public service officials. However, current research indicates there is very little evidence within Pacific Island Countries (PICs) to demonstrate whether approved Public Service Commission (PSC) codes of conduct are really ensuring that public service officials are able to maintain even minimal standards of professional and personal conduct. One of the promises of the early 1990’s civil service reform in Fiji was to build a highly ethical and professional civil service. A Code of Conduct for all public service officials in Fiji came into effect under the Public Service Act of 1999. This study aims to examine and describe the perceived effectiveness of code of conduct in Fiji’s public service. There are in fact external controls in place to keep public officials in line; however, there seems to be limited awareness and weak monitoring of the code in individual ministries and line departments to ensure it is strictly and constantly upheld. Special measure to support understanding, awareness and adherence to code of conduct also seems to be missing. INTRODUCTION Contemporary social psychological research indicates that proper codes of conduct can often guide behaviors in developing countries that are essential to a functioning civil service (White, 1999 cited in Gilman, 2005). In fact, such codes are often the first formal structure that is established and recognized when attempt is made to elevate the profile of an organization (Larmour, 2001). Within the Pacific region, public service codes of conduct establish standards by which behavior is often judged proper or otherwise. In this line, it is anticipated that an effective code of conduct will promote good governance, transparency, accountability and integrity among public officials of the Pacific Island Countries (PICs) whilst improving the reputation of the public service among the community and current and potential international partners, on who support for public officials depend. Previous studies on codes of ethics or codes of conduct, (Cressy & Moore, 1983; Mathews, 1987; Weave et al, 1999) have targeted private sectors in more developed economies like the United States of America (USA) or the United Kingdom. Only more recent studies (Svensson & Wood, 2004; Svensson & Wood, 2009) have targeted code of ethics studies in the public sector organizations of Sweden. While the above studies were carried out mostly in the developed economies, no study, to this date, has been carried out on the codes of conduct for public sector organizations in Fiji. Fiji’s civil service has been subjected to public criticism and humiliation for unethical acts in the past and in recent years. The Commodity Development Framework scandal in the late 1990s; the Agriculture scam in 2001; and the Water and Sewerage Department mishap in 2003 are some of the many incidents that reflect unscrupulous practices in the country’s public service. In aggravating the situation, most of those senior officials at the centre of these scams were spared while their junior colleagues were taken to task. It is evident that such an environment is conducive to encouraging unethical conduct in the country’s civil service. In light of the recurring dishonest practices in the country’s civil service in the past, the numerous declarations by successive governments including the present regime to build an ethical and professional civil

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service; what then are the changes that have been made in recent years to combat corrupt and unethical behavior in the civil service; and how effective are such measures? This is the query that is central to this investigation. It is beyond contention that unethical conduct is a concern in Fiji’s civil service and if the words of successive governments and the current regime are to take seriously, one would assume that this area should be one of the priorities. The main objective of this investigation is to examine and describe the perceived effectiveness of the Fiji’s public service code of conduct. It is hoped that the findings will provide the various Ministries and enforcing authorities with the necessary information to be able to strengthen and improve their internal control mechanisms to better enforce and promote the ethical values enshrined into their codes of conduct. METHODOLOGY An essential part of this task included carrying out interpersonal interviews with the senior officials of the Public Service Commission (PSC), Fiji and various other ministries that are bound by the Fiji public service code of conduct. Meeting appointments were made over emails and phone, and the researchers themselves were available to carry out the interviews at the scheduled times. Face to face interviews were mostly carried out with the deputy secretaries of the various ministries overseeing the affairs of the corporate and administration divisions. Where deputy secretaries were unavailable for the interviews, officials mainly responsible for the human resources and disciplinary sections were interviewed. Our target group was mostly deputy secretaries, as they are entrusted with the power by the Public Service Commission (PSC) of Fiji, to oversee the awareness, monitoring, consultation and enforcement of the public service code of conduct within their individual ministries. Each of the interviewees was briefly introduced to the research study to stimulate their interest and willingness to be interviewed. The interview questions were mostly semi-structured in nature, with both open and closed ended questions. Where there were closed-ended questions, respondents were requested to provide further explanations. For example, if an answer is restricted to “Yes / No / Don’t Know” then further “Why” or “Please Explain” questions followed. Some of the areas of questioning were: Year of establishment? What are the mechanisms used to enforce the code? Who is responsible for its enforcement? What oversight mechanisms are there to ensure this enforcement process within their ministry? How often is the code of conduct reviewed or re-adopted? What are the possible consequences of non-compliance or breach of the code by public officials? There are a total of eighteen (18) amalgamated government ministries in Fiji. This was our initial sample size for the interviews which later got reduced to twelve (12) because six (6) other ministries were unavailable for interviews despite repeated calls and emails. RESULTS AND DISCUSSION Mechanisms Used For Effective Enforcement of the Code Different mechanisms are employed by ministries to effectively enforce the code of conduct within their individual ministries. 67% of the ministries utilize disciplinary committees. The methods that organizations institute to enforce their codes tend to reveal their level of commitment to the process. If they adapt to existing processes, then it is indicative of their level of commitment and if new processes are created, then there is visibility of higher level of commitment towards implementation or enforcement of the code. Wood and Rimmer (2003) related existing processes to things like discipline, communication of the code to employees, induction, staff appraisal and strategic planning. A higher level of commitment, on the other

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hand, is associated with new initiatives like ethics committees, ethics education committees and ethics education. Dissemination of Information About the Code Respondents were asked to state the channels through which they disseminated information to their ministry staff on the requirements of the code of conduct. 50% of the respondents revealed that they do it by uploading the code of conduct on the ministry website or advise staff to visit the Public Service Commission (PSC) website for information about the requirements of the code. 42% of the respondents stated that a major way of dissemination of this information was by away of “issuing a copy of the booklet”. Many ministries seem to be more reliant on internet technology and most of their responses being “code is on the website” is a bit worrying. Follow- up trainings and discussions on the code of conduct with existing employees is also seems to be lacking. How an employee is then meant to know that their code of conduct is important, if it is not discussed or timely education not given or feedback taken? Consequence or Discipline For The Breach of the Code The most common consequence for breaching the code is suspension being at 40%. 15% of the ministries highlighted termination as the most common outcome of a breach of code, within their ministries, while 25% of the respondents also talked about prosecution as one of the consequences. Some 12% and 8% of the ministries highlighted most common consequence or disciplinary action as counseling and caution letters, respectively. Several studies, Sims (1991), Fraedrich (1992), and Stoner (1989) suggests that within a code, enforcement provisions for those that do not uphold the code should be outlined. The organization, by having these types of procedures will signal to the employees the significance of the need to abide by the code for both themselves and the organization. It seems that the code currently adopts a reactive rather than a pro-active approach. Whilst most employees get punished for breaching the code by way of suspension, termination and/or prosecution, no employee is rewarded for adherence to the code or reporting others on the breaches. CONCLUDING COMMENTS The results seem to indicate that while Fiji’s public service code of conduct has been in formal existence since 1999, it does not sufficiently detain a formalized periodic and comprehensive review process for a timely review and re-adoption of their code. Whilst more emphasis is placed on disciplining staff and employing basic means of communicating the code to employees, there is still an absence of other informal methods like social norms of the organization, ethics education committees and ethics education, which are likely to yield greater awareness about the code and its importance, and greater commitment by staff to its values. REFERENCES Cressy, D.R. and Moore, C.A. (1983). Managerial values & corporate codes of ethics. California Management Review, 25(4), 73-80. Dean, P. J. (1992). Making codes of ethics real. Journal of Business Ethics, 11, 285-290. Fraedrich, J.P. (1992). Signs and signals of unethical behaviour. Business Forum, 13-17.

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Gilman, S.C. ((2005). Ethical Codes & Codes of Conduct as tools for promoting an Ethical and Professional Public Service: Comparative Successes and Lessons. Washington, D.C: World Bank. Available at: http://www.oecd.org/dataoecd/17/33/35521418.pdf Larmour, P. & Wolanin, N. (2001). Corruption and Anti-corruption. Canberra. Asia Pacific Press. Logsdon, J.M. and Yuthas, K. (1997). Corporate social performance, stakeholder orientation and organisational moral development. Journal of Business Ethics, 16, 1213-1226. Mathews, M.C. (1987). Codes of ethics: organisational behaviour & misbehaviour. Research in Corporate Social Performance & Policy, 9, 107-130. Mcdonald, G. M. (2009). An anthology of codes of ethics. European Business Review, 21(4), 344-372. Public Service Commission. (2012). Role of the Public Service Commission. Retrieved November 16, 2012 from http://www.psc.gov.fj/index.php/about-us/role Sims, R. R. (1991). The institutionalization of organizational ethics. Journal of Business Ethics, 10, 493-506. Stead, E. W., Worrell, D.L., and Stead, J.G. (1990). An integrative approach model for understanding and managing ethical behavior in business organizations. Journal of Business Ethics, 9(3), 233-242. Stoner, C.R. (1989). The foundations of business ethics: a function of time and culture-cases and models. Management Decision, 41(4), 350-361. Svensson, G. and Wood, G. (2009). Implementation, communication & benefits of public sector codes of ethics. International Journal of Public Sector Management, 22(4), 364-377. Svensson, G. and Wood, G. (2004). Codes of ethics best practice in the Swedish public sector. The International Journal of Public Sector Management, 17(2), 178-195. Weber, J. (1993). Institutionalizing ethics into business organizations: a model and research agenda. Business Ethics Quarterly, 3(4), 419-436. Wood, G. (2002). A partnership model of corporate ethics. Journal of Business Ethics, 40(1), 61- 73. Wood, G. and Rimmer, M. (2003). Codes of ethics: what are they really and what should they be? International Journal of Value-Based Management, 16, 59-69.

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EXPORTS AND ECONOMIC GRWOTH IN SAUDI

ARABIA NEW EVIDENCE FROM NONLINEAR AUTOREGRESSIVE DISTRBUTED LAG (NARDL)

Rajeh Alragas, Swansea university, UK Osman Ouattra, Swansea University, UK

T.K. Mishra, Swansea University, UK Aymen Alfi, Saudi Arabian Monetary Agency, Saudi Arabia

ABSTRACT

This paper investigates the dynamic relationship between Exports and Economic growth, in addition to some other macroeconomic variables in Saudi Arabia, a major developing country and oil exporter. We use a non-linear ARDL approach to investigate the asymmetric relationship and the difference in the changes in economic growth rates due to the nature of macroeconomic shocks. We find evidence that the impact of changes in exports, and the other macroeconomic variables, varies given the nature of the change (whether positive or negative). Such asymmetry exists in both the long and short run. We also discuss the dynamics of the transmission of economic growth from one equilibrium point to another by constructing the cumulative multiplier effect for each explanatory variable. JEL: F140 KEYWORDS:Exports, Economic growth,Non-linear ARDL INTRODUCTION The role of export in economic growth in developing countries has become a major concern in the literature of international trade especially as degree of openness and market liberalization significantly increased during the last few decades. On first instinct, it was natural to refer to international trade theories when examining such relationship. Research, in deed, confirmed the argument that exports growth has a significant positive impact on output growth. However, that trade theories has not offered enough guidance in regards to the direction of the causal relationship between the two variables. Consequently, two streams of thoughts in regards to the causality direction emerged that are essentially opposite to each other. The export-led growth (ELG) claims that exports are a determinant of economic growth. That is, faster growth is an outcome of more exports. On the other hand, the growth-led exports hypothesis assumes the reverse and states that higher growth rates allow for more exporting activities. Our intention in this paper is to address the non-linearity issue between exports and economic growth in Saudi Arabia. We use a non-linear ARDL approach to investigate the asymmetric relationship and the difference in the changes in economic growth rates due to the nature of macroeconomic shocks. LITERATURE REVIEW The starting point of investigating the issue of exports and economic growth, in the literature, was to employ standard regression techniques and analyse the correlation coefficient between the two variables (see for example, Balassa, 1978; and Krueger, 1978). These studies however were still imposing a priori assumption on the direction of causality (mainly enforcing the ELG hypothesis). However with the introduction of time series analysis, researchers began to apply cointegration analysis and causality test to examine the validity of these hypothesis (see among

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others; Love and Chandran, 2005; Huang and Wang, 2007; Nain and Ahmad, 2010; Kubo, 2011; and Pistoresi and Rinaldi, 2012). Such, relatively, new approaches were able to reveal new evidence in regards to the causality direction between exports and output growth. Yet, they still suffered some shortfalls. First, most studies that followed these approaches were focused on bivariate correlation analysis between the two variables ignoring the possibility of some omitted variables and a multivariate relationships. This, as Edwards (1993) indicate, may result in misleading findings. Second, the time series data and techniques used in early studies were not capable of addressing both causality and reverse causality issues together. Last, but not least, it has been realized that up to the last few years, most, if not all, of the studies focused on a linear causality relationship avoiding the possibility that variables may be non-linearly related. Such linearity assumption may cause total invalidation of the any findings, had the assumption proved to be untrue. Consequently, the case of non-linearity must be considered or at least tested for before assuming otherwise. Some of the recent ELG studies have encountered the first two shortcomings by working within the framework of the neoclassical production functions as well as using econometric models that account for some time series properties such as cointegration and non-stationarity (see for example Marin, 1992; Yamada, 1998; Awokuse, 2003). However, the third critique was not explored in recent literature even though many, such as Ocampo (1986), Kohli and Singh (1989), and Edwards (1993), claimed that a possible nonlinear relationship, such as a diminishing return relationship, may very well exist between exports and economic growth. METHODOLOGY Following the work of Shin, Yu, and Greenwood-Nimmo (2011), the empirical analysis in this paper is based on the nonlinear cointegration framework and applies the asymmetric ARDL cointegration methodology. Model In the empirical analysis we apply dynamic time series methods for examining the linkage between Exports and economic growth. The basis of the model is the general aggregate production function:

𝑌 = [(𝐾, 𝐿)𝐸𝑋,𝐺, 𝐼𝑀)] (1)

where Y represents real GDP, K is real gross capital, L is labour force. Following the previous literature such as (Balassa 1978, Feder 1982, sheehey, 1992; Awokuse 2008), the export variable has been added. G is real government expenditure and IM is real imports. We test for nonlinear cointegration by estimating the following general form NARDL (p,q) models as follows:

∆𝐿𝑛𝐺𝐷𝑃𝑡 = 𝑐𝑜𝑛𝑠 + 𝜌𝑙𝑛𝐺𝐷𝑃𝑡−1 + 𝜃1+𝐿𝑛𝐾𝑡−1+ + 𝜃1−𝐿𝑛𝐾𝑡−1− + 𝜃2+𝐿𝑛𝐿𝑡−1+ + 𝜃2−𝐿𝑛𝐿𝑡−1−

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+𝜃3+𝐿𝑛𝐸𝑋𝑡−1+ + 𝜃3−𝐿𝑛𝐸𝑋𝑡−1− + 𝜃4+𝐿𝑛𝐺𝑡−1+ + 𝜃4−𝐿𝑛𝐺𝑡−1− + 𝜃5+𝐿𝑛𝐼𝑀𝑡−1 + + 𝜃5−𝐿𝑛𝐼𝑀𝑡−1

−

+ �𝜑𝑖

𝑝−1

𝑖=1

∆𝐿𝑛𝐺𝐷𝑃𝑡−𝑖 + �𝜋1,𝑖 + ∆𝐿𝑛𝐾𝑡−𝑖+

𝑞

𝑖=0

+ �𝜋1,𝑖 − ∆𝐿𝑛𝐾𝑡−𝑖−

𝑞

𝑖=0

+ �𝜋2,𝑖 + ∆𝐿𝑛𝐿𝑡−𝑖+

𝑞

𝑖=0

+ �𝜋2,𝑖 − ∆𝐿𝑛𝐿𝑡−𝑖−

𝑞

𝑖=0

+�𝜋3,𝑖 + ∆𝐿𝑛𝐸𝑋𝑡−𝑖+

𝑞

𝑖=0

+ �𝜋3,𝑖 − ∆𝐿𝑛𝐸𝑋𝑡−𝑖−

𝑞

𝑖=0

+ �𝜋4,𝑖 + ∆𝐿𝑛𝐺𝑡−𝑖+

𝑞

𝑖=0

+ �𝜋4,𝑖 − ∆𝐿𝑛𝐺𝑡−𝑖−

𝑞

𝑖=0

+�𝜋5,𝑖 + ∆𝐿𝑛𝐼𝑀𝑡−𝑖

+

𝑞

𝑖=0

+ �𝜋5,𝑖 − ∆𝐿𝑛𝐼𝑀𝑡−𝑖

−

𝑞

𝑖=0

+ 𝑒𝑡 . (2)

Where 𝐿𝑛𝐾𝑡+,𝐿𝑛𝐾𝑡− ,…..𝐿𝑛𝐼𝑀𝑡

+𝐿𝑛𝐼𝑀𝑡 −are partial sums of positive and negative changes in

lnK,….., lnIM respectively, where Ln is the natural logarithm. CONCLUSION The present paper investigates the dynamic relationship between exports and economic growth in Saudi Arabia, along with some other macroeconomic variables. We propose to the account for the asymmetric impact by applying the non-linear ARDL approach recently proposed by Shin et al (2011) on macroeconomic time series, to study the impact of such variables on the rates of growth in the Saudi Arabian economy. The data spans a forty year period from 1970 to 2010. Our investigation reveals that there is significant asymmetry in the reaction of economic growth to positive and negative shocks in major macroeconomic variables. in the short-run time, we find statistically significant evidence of asymmetric effects of several macroeconomic variables on economic growth. REFERENCES Awokuse, T.O., 2003. Is the export-led growth hypothesis valid for Canada? Canadian Journal of Economics 36, 126–136. Balassa, B. (1978). "Exports and economic growth: further evidence." Journal of Development Economics 5(2): 181-189. Balcilar, M. and Ozdemir, Z.A. (2013) The exports-output growth nexus in Japan: a bootstrap rolling window approach. Empirical Economics, 44, 639–660. Balke, N.S., Fomby, T.B., 1997. Threshold cointegration. International Economic Review 38, 627–645. Edwards, S., 1993. Openness, trade liberalization, and growth in developing countries. Journal of Economic Literature 31, 1358–1393. Feder, G. (1983)."On exports and economic growth." Journal of development economics 12(1-2): 59-73. Huang, T.H., Wang, M.H., 2007. A test for the export-led growth hypothesis in possibly integrated vector auto regressions. Applied Economics Letters 14 (13), 999–1003.

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Kohli, I., Singh, N., 1989. Exports and growth: critical minimum effort and diminishing returns. Journal of Development Economics 30, 391–400. Love, J. and R. Chandra (2005)."Testing export-led growth in Bangladesh in a multivarate VAR framework." Journal of Asian Economics 15(6): 1155-1168. Nain, Z., Ahmad, W., 2010. Export-led growth hypothesis in India: some further evidences. Ocampo, J.A., 1986. New developments in trade theory and LDC's. Journal of Development Economics 22, 129–170. Shin Y, Yu B, Greenwood-Nimmo M (2011) Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. Yamada, H., 1998. A Note on the causality between export and productivity. Economics Letters 61, 111–114.

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PERSONAL FINANCIAL DECISIONS: A STUDY OF CHANGES IN HOMESTEAD EXEMPTION LEVELS

AND CONSUMER BANKRUPTCY CHOICES Benjamin B. Boozer Jr., Jacksonville State University, Jacksonville, AL

S. Keith Lowe, Jacksonville State University, Jacksonville, AL Robert J. Landry III, Jacksonville State University, Jacksonville, AL

ABSTRACT

This study examines the impact of changes in homestead exemption levels upon the consumer bankruptcy filing rate. This relationship is examined through the creation of an interrupted time- series multiple regression model. Regression analyses were implemented using several predictor variables to detect any relationship between changes in homestead exemption levels and their effect on the applicable dependent variable. Four dependent bankruptcy variables were employed: per capita total consumer-bankruptcy filings, per capita Chapter 7 consumer- bankruptcy filing rate, per capita Chapter 13 bankruptcy filing rate, and Chapter 7 consumer- bankruptcy filings as a percentage of aggregate consumer-bankruptcy filing rates. Analyses indicate that consumers clearly prefer utilizing a Chapter 7 discharge method over Chapter 13. Additionally, these consumers do not find changes in homestead exemption levels as a source of wealth insurance to the extent that filings are significantly increased. Finally, consumer filing rates do not appear to be positively affected by the wealth effect that a risk-averse consumer might choose in bankruptcy choice. JEL: G, K KEYWORDS: Bankruptcy, Chapter 7, Chapter 13, Homestead Exemption INTRODUCTION Exemptions laws occupy a long and varied history as state and federal laws developed in America. These laws grew from a basic protection of a debtor’s property from legal collection practices during the 1800s to myriad additions developed and implemented at the state level during the 1900s (Hansen & Hansen, 2012). Sullivan, Warren, and Westbrook (1989) identify exemption laws as a method of protecting a debtor such that he or she has the necessary property for survival, although this is subjective across states and other jurisdictions. (Buckley & Brinig, 1998). Bankruptcy exemption laws follow largely the same logic in protecting and supporting the basic premise of survival and are intended to protect debtor assets from liquidation with the intent of allowing the debtor and family a sustainable basis for emerging from discharge (White, 2007; Fay, Hurst, & White, 2002). Exemption protection is normally 100 percent for basic items such as clothes, but varies widely from state to state for homesteads (White, 1998). Federal exemption levels are constant across all states. Most states require that debtors use state exemption levels but some states allow the use of the federal exemption (Sullivan, Warren, & Westbrook, 1989). The fact that state laws are not uniform and offer higher or lower levels of debtor protection, especially when expressed in terms of the value of the home (Landry, Boozer, & Lowe, 2012), suggests that variations in homestead exemption levels may affect consumer decision-making. Logically, consumers make financial decisions that maximize their financial benefit relative to cost. The decision to file consumer bankruptcy or to what extent that a consumer will file chapter 7 as opposed to chapter 13 rests in part on these financial incentives. In fact, when considering the process of filing bankruptcy as a consumer choice, homestead exemption levels appear to

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impact behavior as a major financial incentive. Higher homestead exemption levels apply to both chapter of consumer bankruptcy and are positively correlated with higher filing rates (Domowitz & Sartain, 1999a). Households as well as individuals are impacted by this incentive in individual states and in the aggregate (Fay, Hurst, White, 2002). A point of discussion, however, is to what extent the incentive shifts filing between bankruptcy chapters, especially when a change in the exemption level occurs. Several states increased their homestead exemption levels in the early to mid-1990s and have often increased again in the 2000s or been indexed. Financial incentives may be static at an initial level or may change over time, thus affecting the relative benefit of bankruptcy protection. A key component of this argument is to what extent changes in financial benefits affect consumer decision-making not only after the incentive changes, but also preceding and during the change. Homestead exemption levels are normally relatively static but have been increased in several states (White, 1998), allowing for measure of this changing incentive on the decision to file consumer bankruptcy. Ample research has identified homestead exemption levels in relation to consumer bankruptcy filing rates (Domowitze & Sartain, 1999a; Shepard, 1984), but relatively sparse research in changes in the level of homestead exemption. From this aspect this research analysis proceeds. The research questions are as follows: 1) To what extent do changes in homestead exemption levels impact consumer bankruptcy filing rates in selected states? 2) To what extent do changes in aggregate homestead exemption levels impact aggregate consumer bankruptcy filing rates? For each research question these relationships will be explored in terms of total consumer filings for each chapter (chapter 7 and chapter 13) and as a percent of chapter 7 and percent of chapter 13 for a period of time before and after a change in state level exemptions. The next section reviews prior literature pertaining to the measurement of homestead exemption levels in emphasizing consumer choice. To follow an interrupted time series model is developed that measures changes in filing rates before, during, and after a change in homestead exemption levels for selected states and in the aggregate. Lastly, findings of the research are expressed and concluding remarks are offered. LITERATURE REVIEW Consumer bankruptcy filings have maintained a steady increase over the last several decades. Numerous studies have examined the relationship between filing rates and legal changes surrounding bankruptcy code amendments, while others introduce socio-economic variables in explaining the increase (Buckley & Brinig, 1998). Chapter 7 and Chapter 13 are the two primary procedures by which consumer debtors address obligations that they have to their creditors. The primary difference between the two chapters is that Chapter 13 requires debtor repayment from future income, while Chapter 7 only requires repayment from assets or relinquish through discharge. Provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 replaced the debtor’s freedom to choose either chapter with a means test for determining eligibility (White, 2007). Financial incentives drive and promote behavior to the extent that consumer choice impacts bankruptcy filing, especially regarding the choice of chapter and the level of resources at stake (Domowitz & Sartain, 1999a). For Chapter 7 cases the financial benefit of filing is the difference between the value of the outstanding debt that will be discharged and the cost of the non-exempt assets that must be relinquished. Homeownership is only protected to the extent of the homestead exemption relative to home equity, with no limit on the amount of debt that may be discharged (Domowitz & Sartain, 1999a). Conversely, Chapter 13 cases do not require that debtors relinquish assets but as part of their plan they must repay a portion of their debts from future income over a time period of up to five years. Debtors have a financial incentive to choose Chapter 7 over Chapter 13 if debtor assets are less than the level of exemption allowed within their state of filing (Faye, Hurst, & White, 2002). Individuals or households will only file

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bankruptcy if the amount of debt discharged exceeds the amount of non-exempt assets that they must relinquish. Before changes in bankruptcy law in 2005 consumers had a choice and thus this logic applied to both chapters 7 and 13, while after 2005 the choice of chapter is based on the ability to repay debt. When considering this financial benefit to filing over a ten year period from 1984 to 1994, about 18 percent of households would experience a financial benefit of up to $2500 to filing, while ten percent would gain between $2500 and $10,000. Three percent would gain more than $10,000 from filing. In each case the relationship was statistically significant and indicated that financial incentives guide bankruptcy decision-making (p. 712). Two primary approaches to measuring exemptions are by the use of dichotomous variables or by using the actual dollar amount of the exemption, with the former limited in capturing the change in dollar amounts of the exemption level (Fisher, 2001). Hynes (1998) concurred with this measure and favored the use of dummy variables, although with reservations about shortcomings surroundings the use of either a dummy variable or a continuous variable. Shifting the incidence of Chapter 13 filing relative to Chapter 7 is a desirable trend before 2005 but gained traction when means testing factors were applied (White, 2007). Nevertheless, property exemption levels may be used as a tool to manipulate the choice, with lower exemption levels associated with higher incidences of Chapter 13 filings. In fact, if exemption levels were lowered across the board by 50 percent, the result suggests that the probability of choosing Chapter 13 over Chapter 7 would increase by 18 percent (Domowitz & Sartain, 1999b). METHODOLOGY For the model six states are considered, AK, CO, MN, MS, and NH, where changes in the level of homestead exemption were made. AK and MN allow filers to choose the federal exemption, but in each state the state level exemption is larger; thus, filers would choose the state exemption. In four of the five states the level of homestead exemption was increased; the only exception is MN, where the level decreased from unlimited to $200,000. For each state the year that the homestead exemption changed was in the early 1990s, thereby minimizing the effect of national economic trends across different periods of time. For each state chosen other changes in state exemption levels did not occur within a six year period of time before or after the change indicated in the early 1990s. Additionally, this selection was made to avoid factors associated with the tremendous jump and subsequent decline in the number of consumer bankruptcies filed leading up to and after the Bankruptcy Reform Act of 2005 (Evans & Lewis, 2008). Representing a broad footprint of the U.S., through the dispersion of states the model tests each research question for each state and compares to aggregate totals. Table 1 offers a summary of each state chosen that includes the following: the name of the state chosen; the change year for exemption allowed; and exemption levels for six years before and six years after the change year. The nominal exemption level listed represents the amount of each state level exemption. Table 1: Nominal State Exemption Levels Analyzed

State Pre-change exemption Change year exemption Post-change exemption level AK $27,000 1991 $54,000 CO $20,000 1992 $30,000 MN unlimited 1993 $200,000 MS $30,000 1992 $75,000 NH $5,000 1993 $30,000

Source: U.S. Courts This study employs a methodology that is similar to the interrupted time-series analysis model used by Kellough (1990); Netter, Wasserman, and Kutner (1990, pp. 370-375); and Miller and Pierce (1997). As Kellough noted, the limited number of pre and post data points suggests that

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time-series is preferred to another modeling technique known as autoregressive integrated moving average (ARIMA). The interruption in the model for this study is the change in homestead exemption levels for the selected states as illustrated in Table 1. The model examines if the change in homestead exemption changes the bankruptcy filing rate or shifts the filing rate from one bankruptcy chapter to another. Changes to the applicable bankruptcy filing rate may be short or long-term depending on the impact of changes in homestead exemption on consumer personal financial choice. Data are entered as cases in a year-by-year format for a total of 13 years for each state: six years before the change in homestead exemption; the contemporaneous year of the change in homestead exemption; and six years after the change in homestead exemption. Each state is considered independently. Four independent variables are employed. A counter variable is employed that is coded one for the first year of the analysis, two for the second year, and three for the third year, four for the fourth year, etc. This counter variable is called BEFORE. The second independent variable is dichotomous in nature and is coded zero for the six years of analysis before and including the year of the change in homestead EXEMPTION (Table 1), and one for observations for the six years immediately after the change year. This variable is called CHANGE. The remaining independent variable is a post-intervention counter that is also coded in the following manner: coded as zero for observations six years prior to and including the contemporaneous year of change of homestead exemption, one for first year after change in homestead exemption, two for the next year, three for the next year, and so forth. This variable is called AFTER. The intercept for the multiple regression equation describes the value of the dependent variable at the beginning of the time period. The coefficient, or slope, for the BEFORE variable describes the annual increase or decrease in the dependent variable that was happening before the change in homestead exemption. The estimated increase or decrease in those years is unaffected by the counter AFTER variable, as that variable is coded zero for all years prior to the change in homestead exemption. The coefficient for the policy variable (CHANGE) estimates the one-time increase or decrease in the value of the independent variable that came about in the first year following the change in exemption levels. The coefficient, or slope, of the AFTER variable estimates the increase or decrease in slope that occurred after the change in homestead exemption. The coefficient for the counter AFTER variable must be added to the coefficient for BEFORE to get the estimated slope after the change. For the analysis four interrupted time-series regression analyses were run for four dependent variables: per-capita total consumer filings, per capita Chapter 7 consumer-bankruptcy filing rate, per-capita Chapter 13 bankruptcy filing rate, and Chapter 7 consumer-bankruptcy filings as a percentage of aggregate consumer-bankruptcy filing rates. The bankruptcy filing rates were collected from the Administrative Office of U.S. Courts and population data from various editions of the Statistical Abstract of the United States. Autocorrelation may be present in a model when serial data is utilized (Miller & Pierce, 1997). The existence of autocorrelation violates a basic assumption of Ordinary Least Squares (OLS) regression. Autocorrelation leads to an underestimation of the variance of the error terms and an overestimation of the significance of the coefficients. The Durbin-Watson statistic is a test statistic used to detect the presence of autocorrelation in the residuals from a regression analysis (Durbin & Watson, 1950) and is used in this study to indicate if autocorrelation is present. If the Durbin-Watson statistic is outside an acceptable range, transformation of the data, through the Cochrane-Orcutt (CORC) estimation procedure, is necessary to take into account the correlation of the error terms (Cochrane & Orcutt, 1949). Research Findings & Analyses

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The results of this study are grouped and presented in an analysis for the four multiple regression analyses performed. Each individual multiple regression equation employs the same four predictor variables and compares them to a different dependent variable. Table 2 reports the regression results for the interrupted time-series analysis of the reform act and the per-capita total consumer-bankruptcy filings employing Kellough’s regression model. Both the BEFORE and CHANGE coefficients are statistically significant at the 5% level, one tail, in the model. The EXEMPTION and AFTER variables are not statistically significant. The Durbin-Watson statistic (1.4695) is within an acceptable range.

Based on the BEFORE coefficient the per-capita total consumer-bankruptcy filing rate was increasing .314 per one thousand people per year prior to the change in homestead exemption. This is expected and consistent with the trend of increasing rates most years from the 1990s until today. The CHANGE coefficient reflects a large drop in the per-capita total consumer- bankruptcy filing rate of -1.356. This decline is unexpected in that more individuals would be expected to seek bankruptcy relief in anticipation of financial benefits to be gained from an increase in homestead exemption. Although the AFTER variable is not significant, the coefficient is negative and this is slightly inconsistent with an expected upward trend in filings after the one time drop. However, this negative trend is very small. Table 3 reports the regression results for the interrupted time-series analysis of changes in homestead exemption and the per- capita Chapter 7 consumer-bankruptcy filings. Both the BEFORE and CHANGE coefficients are statistically significant at the 5% level, one tail, in the model. The EXEMPTION and AFTER variables are not statistically significant. The Durbin-Watson statistic (1.5356) is within an acceptable range. Table 2: Time-Series Regression – Total Consumer Filings (Per 1000)

Regression Variables Coefficient t-statistic p-value Durbin- Watson

R-square

Consumer Filings (per 1000) p < .01* 1.4695 .225 Constant 1.518 3.18 p < .01 EXEMPTION 0.000 0.23 .822 BEFORE 0.314 3.05 p < .01* CHANGE -1.356 -2.15 .035 AFTER -0.033 -0.20 .845

* significant at the .05 level Table 3: Time-Series Regression – Chapter 7 Bankruptcy

Regression Variables Coefficient t-statistic p-value Durbin- Watson

R-square

Chapter 7 Bankruptcy p < .01* 1.5356 .330 Constant 1.164 4.09 p < .01 EXEMPTION -0.000 -0.09 .927 BEFORE 0.236 3.84 p < .01* CHANGE -1.047 -2.79 p < .01* AFTER -0.010 -0.10 .919

* significant at the .05 level Based on the BEFORE coefficient the per-capita Chapter 7 consumer-bankruptcy filing rate was increasing .236 per one thousand people per a year prior to the change in homestead exemption. This is expected and consistent with the trend of increasing rates most years from the 1990s until

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today. The CHANGE coefficient reflects a large drop in the per-capita Chapter 7 consumer- bankruptcy filing rate of -1.047. Like the analysis of total consumer filings, this decline was not expected. Although the AFTER variable is not significant, the coefficient is negative. Although this is slightly inconsistent with an expected upward trend in filings after the one time drop, this coefficient is quite small. Table 4 reports the regression results for the interrupted time-series analysis of changes in homestead exemption and the per-capita Chapter 13 bankruptcy filing rate. Overall, the multiple regression model was found to be statistically insignificant. The high p-value (.537) indicates the four independent variables used in the model are not valid predictors of explained variance in per- capita Chapter 13 bankruptcy filing rates. This analysis is strengthened in that none of the predictor variables are individually significant and contribute to a robust regression model. Additionally, the Durbin-Watson statistic (0.2918) is near an acceptable range at the 10% level. As such, it is possible that autocorrelation exists in the model. These results are contrary to the expected results. It is logical for Chapter 13 filing to be increasing before a change in homestead exemption, but at a rate less than increases in Chapter 7 filings that allow discharge of the entire debt. We expected the CHANGE coefficient and the AFTER coefficient to be positive and reflect increases in filing with a higher level of homestead protection afforded. Chapter 7 filers typically experience greater benefit from higher homestead exemption levels. Therefore, we are not surprised that these variables were found to be insignificant, essentially not adding to the robustness of the regression model. Chapter 13 filing would not necessarily be expected to change greatly with changes in homestead exemption, so the lack of statistical significance for CHANGE and AFTER is logical. Table 4: Time-Series Regression – Chapter 13 Bankruptcy

Regression Variables Coefficient t-statistic p-value Durbin- Watson

R-square

Chapter 13 Bankruptcy .537 0.2918 .050 Constant 0.356 1.35 .181 EXEMPTION 0.000 0.51 .610 BEFORE 0.078 1.39 .170 CHANGE -0.309 -0.90 .373 AFTER -0.022 -0.25 .806

* significant at the .05 level Table 5 reports the regression results for the interrupted time-series analysis of changes in homestead exemption and Chapter 7 consumer-bankruptcy filings as a percentage of aggregate consumer-bankruptcy filings. The regression model was not found to be statistically significant at the 5% level. The high p-value (.594) indicates the independent variables used in the model are not valid predictors of explained variance in per-capita Chapter 7 filings as a percentage of aggregate consumer-bankruptcy filings. Often in a multiple regression model that is insignificant, certain variables could be individually significant and strengthen the overall model. Unfortunately, none of the four independent variables were found to be significant. The Durbin- Watson statistic (0.1999) is far outside an acceptable range indicating that autocorrelation among the four independent variables is almost certain. Table 5: Time-Series Regression – Chapter 7 Bankruptcy Percentage

Regression Variables Coefficient t-statistic p-value Durbin-Watson R-square Chapter 7 Bankruptcy Percent .594 0.1999 .045 Constant 82.411 16.73 p < .01

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EXEMPTION -0.000 -1.48 .143 BEFORE -0.530 -0.50 .619 CHANGE -0.999 -0.15 .878 AFTER 1.304 0.76 .449

* significant at the .05 level CONCLUSIONS AND FUTURE RESEARCH The purpose of this study was as follows: 1) To examine to what extent do changes in homestead exemption levels impact consumer bankruptcy filing rates and 2) To what extent do changes in aggregate homestead exemption levels impact aggregate consumer bankruptcy filing rates? These relationships were explored in terms of total consumer filings for each chapter (Chapter 7 and Chapter 13) and for Chapter 7 as a percent of aggregate consumer bankruptcy filing rates. Homestead exemptions offer a level of protection to debtors that protect the value of the home (Landry, Boozer, & Lowe, 2012) in similar ways that exemption laws in general protect and support debtor survival after discharge by offering a level of financial sustainability (White, 2007). Finding that a positive correlation exists between homestead exemption levels and consumer filing rates (Domowitz & Sartain, 1999a), it is logical to expect consumers to find a financial benefit from higher levels of homestead exemption. Whether changes in state-level homestead exemption levels produce an incentive for consumers to change filing behavior as a consequence was a key area to this analysis. Results of this analysis reflect that total consumer filings in the aggregate were increasing before the change in bankruptcy exemption, but then decline during the change in exemption and slightly thereafter. The decline in coefficient both during and after the change in exemption was not statistically significant as a predictor but should be addressed, nonetheless. These results are consistent with increases in aggregate filing rates (White, 2007), but do not explain why filing rates do not maintain the level of increase or even accelerate after a higher homestead exemption level was implemented (Faye, Hurst, & White, 2002). Domowitz and Sartain (1999a) offer a possible explanation in that the consumer choice of filing or not filing bankruptcy is a function of the level of equity protected. Thus, homeowners with more equity experience a greater benefit from higher homestead exemption levels. Landry, Boozer, & Lowe (2012) introduced a novel approach for considering this variable from the perspective of a rational consumer and found that the value of the home protected increases the validity of empirical results by offering a more accurate measure of what is actually protected. The logic extends to this analysis, but is not reflected statistically when measuring changes in homestead exemption levels over time. Although this analysis avoided the changes in bankruptcy reform and filing by considering states that made changes in their homestead exemption levels more than a decade before implementation of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, one of the major provisions of the Act was addressed in our analysis of selection of bankruptcy chapter before, concurrently, and after changes in state-level homestead exemption levels. White (2007) found that the implementation of a means test replaced the debtor’s freedom to choose whether they would seek discharge of all debts through a Chapter 7 or make repayment of a least some level of future income through a Chapter 13. Our analysis considers changes in consumer filing rates by chapter to the extent that consumers have a financial incentive to file Chapter 7 as opposed to Chapter 13. The results of our analysis reflect that consumers were filing more Chapter 7 petitions before the change in homestead exemption. However, in a manner similar to aggregate effects, filing rates declined during the change in exemption and after. The fact that no variables in the model were statistically significant when considering Chapter 13 filing rates shows that consumers clearly prefer a

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Chapter 7 discharge of consumer debt but that consumers do not find changes in homestead exemption levels as a source of wealth insurance (Fay & White, 2003) to the extent that they file more actively. These findings are consistent with Domowitz and Sartain (1999b) in that if exemption levels were lowered consumers would file Chapter 13 rather than Chapter 7 in increasing numbers. That our analysis of consumer bankruptcy filing rates as a function of changes in homestead exemption levels did not indicate a strong association between consumer choice and assets protected indicates that this variable (i.e. changes in homestead exemption levels) may not capture other financial incentives surrounding this issue. It is clear that borrowers will act rationally and make financial decisions for their benefit. Gropp, Scholz, and White (1997) show this through the supply and demand for credit, where higher exemption levels redistribute assets from borrowers with fewer assets to borrowers with more assets. Thus, our analysis offers evidence that consumer bankruptcy filing rates are not positively affected by the wealth effect that a risk-averse consumer (Fan & White, 2003) would seek when making consumer choices, but establishes a foundation for future research. Prior research shows that aggregate economic and financial conditions play a role in consumer filing rates (Berkowitz & Hynes, 1999; Domowitz & Sartain, 1999b) that may validate the expected positive relationship with higher homestead exemption levels. From our model that established the role of homestead exemption levels as a predictor variable, future research could address cross-sectional changes in filing rates after the 2005 Act. Other opportunities are beginning to materialize to analyze if the Act has increased the level of Chapter 13 petitions relative to Chapter 7 over time. Comparisons of post 2005 reforms with homestead exemption changes in the 1990s could offer a method for testing and isolating individual states, by controlling for state level effects and capturing if bankruptcy reform initiatives to change consumer behavior are challenged by homestead assets protected. REFERENCES Berkowitz, J., & Hynes, R. (1999). Bankruptcy Exemptions and the Market for Mortgage Loans. Journal of Law and Economics, 42(2), pp. 809-830. Buckley, F.H., & Brinig, M.F. (1998). The Bankruptcy Puzzle. Journal of Legal Studies, 27(1), pp. 187-207. Cochrane, D. & Orcutt, G. H. (1949). Application of Least Squares Regression to Relationships Containing Autocorrelated Error Terms. Journal of the American Statistical Association, (44), pp. 32-61. Domowitz, I.,& Sartan, R.L. (1999a). Incentives and Bankruptcy Chapter Choice: Evidence from the Reform Act of 1978. Journal of Legal Studies, 28(2), pp. 461-487. Domowitz, I., & Sartan, R.L. (1999b). Determinants of Consumer Bankruptcy Decision. Journal of Finance, 54(1), pp. 403-420. Durbin, J. and Watson, G. S. (1950). Testing for serial correlation in least squares Regression. Biometrika (37), pp. 409-428. Elias, S. (2006). The new bankruptcy: Will it Work for You? Nolo Press. Evans, T., & Lewis, P.B. (2008). An Empirical Analysis of the 2005 Bankruptcy Reforms. Emory Bankruptcy Developments Journal, 24, pp. 327-360.

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Fan, W., & White, M.J. (2003). Personal Bankruptcy and the Level of Entrepreneurial Activity. Journal of Law and Economics, 46(2), pp. 543-567. Fay, S., Hurst, E., & White, M.J. (2002). The Household Bankruptcy Decision. American Economic Review, 92(3), pp. 706-718. Fisher, J.D. (2001). Personal Bankruptcy Filings: The Effects of Government Transfer Programs and Bankruptcy Exemptions. Ph.D. dissertation. University of Kentucky. Grant, C., & Koeniger, W. (2009). Redistributive Taxation and Personal Bankruptcy in U.S. States. Journal of Law & Economics, 52, pp. 445-465. Gropp, R., Scholz, J.K., & White, M.J. (1997). Personal Bankruptcy and Credit Supply and Demand. Quarterly Journal of Economics, 112(1), pp. 217-251. Hansen, M.E., & Hansen, B.A. (2012). Crisis and Bankruptcy: The Mediating Role of State Law, 1920-1932. Journal of Economic History, 72(2), pp. 448-468. Hynes, R.M. (1998). Three Essays on Consumer Bankruptcy and Exemptions. Ph.D. dissertation. University of Pennsylvania. Kellough J. E. (1990). “Federal Agencies and Affirmative Action for Blacks and Women,” Social Science Quarterly, 71(1), pp. 83-91. Landry, R.J. III, Boozer, B.B.Jr., & Lowe, S.K. (2012). Measurement of Homestead Exemption Utilizing Home Values. Journal of International Finance Studies, 12(3), pp. 84-93. Landry, R. J. III, & Yarbrough, A. (2007). Global Lessons from Consumer Bankruptcy and Healthcare Reforms in the United States: A Struggling Social Safety Net. Michigan State Journal of International Law, 16(2), pp. 343-383. Miller, D. E. & Pierce, P.A. (1997) “Lotteries for Education: Windfall or Hoax?” State and Local Government Review, 29 (1), pp. 34-42. Netter, J., Wasserman, W., & Kutner, N.H. (1990). Applied Linear Statistical Models (3rd edition), Burr-Ridge, Illinois: Richard D. Irwin, Inc. Peterson, B.M. (2003). Exemption Stacking in Montana bankruptcies – Windfall or Fresh Start. Montana Law Review, 64, pp. 543-561. Shepard, L. (1984). Personal Failures and the Bankruptcy Reform Act of 1978. Journal of Law and Economics, 27(2), pp. 419-437. Sullivan, T.A., Warren, E., & Westbrook, J.L. (1989). As We Forgive our Debtors: Bankruptcy and Consumer Credit in America. NY: Oxford University Press. White, M.J. (1998). Why Don’t More Households File for Bankruptcy? Journal of Law, Economics, & Organization, 14(2), pp. 205-231. White, M.J. (2007). Bankruptcy Reform and Credit Cards. Journal of Economic Perspectives, 21(4), pp. 175-200.

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AUTHOR PROFILES Dr. Benjamin B. Boozer, Jr. earned his Ph.D. from Auburn University in 2008. Currently he is an Assistant Professor of Finance at Jacksonville State University in Jacksonville, AL. Dr. Boozer has published in several scholarly journals including the Journal of Business and Economics Perspectives, Journal of Business Management and Entrepreneurship, the Journal of Healthcare, Leadership Management and Research, and International Journal of Business and Public Administration. Dr. Keith Lowe earned his Ph.D. from The University of Alabama in 2001. Currently he is an Associate Professor of Statistics at Jacksonville State University in Jacksonville, AL. Dr. Lowe has published in several scholarly journals, including the Journal of International Finance Studies, International Journal of Business Accounting, & Finance, Journal of Legal, Ethical, and Regulatory Issues, E-Business Review, International Journal of Business Research, and Business Journal for Entrepreneurs. Dr. Robert J. Landry, III earned his Ph.D. from Auburn University in 2005 and his J.D. from The University of Alabama in 1994. Currently he is an Associate Professor of Finance at Jacksonville State University in Jacksonville, AL. and he is the editor-in-chief of the Journal of Legal Studies Education. Dr. Landry has published in several academic journals including Virginia Law & Business Review, Policy Studies Journal, and Municipal Finance Journal.

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INDIA’S SATYAM SCANDAL: SOME EVIDENCE

THAT THE TOO LARGE TO INDICT MINDSET OF ACCOUNTING REGULATORS IS A

GLOBAL PHENOMENON Kalpana Pai, Texas Wesleyan University

Thomas D. Tolleson, Texas Wesleyan University

ABSTRACT

This paper examines the capture of government regulators using the case of Satyam Computer Services Ltd., one of India’s largest software and services companies, which disclosed a $1.47 billion fraud on its balance sheet on January 7, 2009. The firm, which traded on the New York and Bombay Stock Exchanges, was required to file financial reports with the SEC. Price Waterhouse of India, the local member of PricewaterhouseCoopers (PWC), served as its auditor. After news of the scandal hit the airwaves, Price Waterhouse of India issued a press release and stated that its audit was conducted in accordance with applicable auditing standards and was supported by sufficient audit evidence. Because Satyam shares were quoted on Wall Street, SEC rules prohibited auditors from having business relations with their clients. U.S. regulators failed to take action against PWC. Is this lack of enforcement related to PWC’s size and the impact that the failure of a Big 4 firm would have on the global financial marketplace? We question whether government regulators have been captured by the key market players in the auditing services market. One outcome of this “capture” is moral hazard, which implies that the Big 4 accounting firms, or their local affiliates, may place less emphasis on quality audits. Such an approach to the audit function places the self-interests of the audit firm above the public interest. We also question whether foreign companies that are listed on US Stock Exchanges fall under the purview of US Laws and if these companies and their auditors face the same regulatory scrutiny as publicly-traded US Corporations. In addition, the paper provides suggestions to protect the public interest while citing lessons learned from this scandal. JEL: M42, M48, M41 KEYWORDS: Auditing, Capture theory, accounting regulation INTRODUCTION Regulation of business has always been a topic of considerable debate. Regulatory proponents call for more regulation of the private sector in order to protect the public good, while regulatory opponents claim that additional regulation further damages a free-market economy by unduly constraining business. The theory of regulatory capture posits that regulators, including government bureaucrats who oversee the regulatory process and legislators who write the regulations, are routinely and predictably “captured” and manipulated to serve the interests of those who are supposed to be subject to them. For public choice theorists, regulatory capture occurs because groups or individuals with a high- stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies to gain their preferential policy. Meanwhile, members of the public, each with an insignificant individual stake in the regulatory outcome, will either ignore or pay scant attention to the regulatory process altogether. Regulatory capture results when this imbalance of focused resources devoted to a particular policy outcome is successful at “capturing” influence

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with elected officials or regulatory agency bureaucrats so that the preferred policy outcomes of the special interest(s) are implemented. A captured regulatory agency serving the interests of its invested patrons and wielding the power of the government behind its decisions is often worse than no regulation. Galbraith (1955) posited that captured regulators were part of the problem rather than the solution. He suggested that regulators were vigorous in their youth, moving to complacency in middle age, until they became in old age either senile or arms of the sector they are supposed to regulate. Ample evidence suggests that regulatory capture is indeed widespread and takes a variety of forms. The Big 5 accounting firms were reduced to the Big 4 with the criminal indictment of Arthur Andersen in 2002 and the firm’s ultimate collapse. The vacuum created by the demise of Arthur Andersen and, ironically, the constraints of the Sarbanes-Oxley Act of 2002 (SOX), i.e., the unlinking of audit and consulting services, have contributed to increased market power for the remaining Big 4 firms. One negative aspect of this increased market power is the reluctance of government regulators to indict any of the Big 4 for criminal actions, creating moral hazard. Corporate executives, government regulators and politicians have all expressed concerns about the lack of choices that large public companies have when selecting a public accounting firm. In response to these concerns, the U.S. Congress, as part of the Sarbanes-Oxley Act of 2002, required the General Accounting Office, now the General Accountability Office (GAO), to examine the effects of the consolidation on competitive forces, audit costs and quality, and audit independence in the public accounting industry. Since the initial charge by Congress for the GAO to examine the market structure of audits for large public companies, the GAO has issued two reports, the first Public Accounting Firms: Mandated Study on Consolidation and Competition (GAO, 2003) and a second Audits of Public Companies: Continued Concentration in Audit Market for Large Public Companies Does Not Call for Immediate Action (GAO, 2008). Among other findings, both of these reports stated that the Big 4 audit 97% of all public companies with sales between $250 million and $5 billion dollars (GAO, 2003, 2008). Dominance by the Big 4 is global in scope, not just a U.S. phenomenon. Affiliates of the Big 4 are also the largest auditing firms in Turkey, South Korea, India and the Philippines. The Big 4 audit all of the Financial Times Stock Exchange (FTSE) 100 companies in England (Simms & Oram, 2002). They also audit more than 80% of the public companies in Japan and two-thirds of those in Canada. According to the International Accounting Bulletin, they hold over 70% of the European market by fee income (The Economist, 2004). Although the collapse of one of the Big 4 firms could have dire consequences for participants in the financial markets, it appears that the GAO has discounted the impact of not only the current lack of competition facing the Big 4 but also the possible capture by the Big 4 of government regulators charged with the oversight of the accounting profession. The authors provide anecdotal evidence that the capture of accounting regulators by special interests is a global phenomenon. The Satyam case is presented as an example. Societal implications of moral hazard are discussed and in the last section, the authors discuss the implications for the public interest and propose alternatives for accounting regulators and their “captured” mindset. Evidence of Regulatory Capture: Too Large to Indict When the U.S. government deems that a company’s failure would have significant ramifications for the national economy, elected officials make the argument that the company is “too big to fail.” This reasoning is used to justify government bailouts and, in some cases, the loosening or repeal of regulatory policies. The bailouts of Chrysler in the late 1970s and Long Term Capital Management in the late 1990s provide examples (Cunningham 2006). More recently, the U.S.

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Treasury loaned in excess of $700 billion to several of the nation’s largest financial institutions and other large non-banking companies such as American Insurance Group, General Motors and Chrysler. Once again, government officials argued that the failure of these large corporations, either together or individually, would have a dire negative impact on the economy. Once the “too big to fail” mentality becomes the modus operands of government, large firms may get a “leg up” on their smaller competitors. In other words, government regulators give the special interests favorable differential treatment. In July of 2002, the Financial Economists Roundtable met to discuss the crisis in corporate governance, auditing and accounting that followed the scandals at Enron, Adelphia and WorldCom. As part of their deliberations, the attendees asked…“might they [the Big 4] perceive that they were ‘too-big-to-fail’ and, consequently, have incentives to engage in moral hazard behavior?” (Journal of Applied Finance, 2002) Perhaps the engagement in moral hazard behavior came sooner rather than later. Recently, global financial markets were sent into a tailspin by the subprime mortgage crisis. One of the first investment banks to fail as a result of this crisis was Lehman Brothers. On December 21, 2010, Andrew Cuomo, New York Attorney General, filed a lawsuit accusing Ernst & Young (E&Y) of helping Lehman Brothers hide its declining financial health for several months before its implosion in September 2008. Cuomo’s suit against E&Y is a civil suit, not a criminal indictment like the one brought against Arthur Andersen, and may, as many suggest, be settled out of court. E&Y responded by stating that the Lehman bankruptcy resulted from a series of unprecedented adverse events in the financial markets. A spokesman stated that E&Y stood by its December 31, 2007 audit of the company (Frean and Spence, 2010). A couple of observations are in order. First, the Arthur Andersen (AA) effect appears to be impacting regulators. Once AA was served with a criminal indictment, SEC rules prohibited the firm from auditing SEC registered companies. As a result, most of its large clients (and some partners) left AA in search of one of the other four international audit firms. Regulators learned their lesson. Repetition of this scenario with E&Y would create turmoil in global financial markets which are just now beginning to show signs of recovery from the subprime mortgage crises. Regulators have decided to bring a civil indictment against E&Y rather than a criminal indictment, allowing the firm to continue auditing its SEC clients. Second, the disintegration of one of the remaining Big 4 firms would result in an audit services market that would be even more concentrated than it is today. An increase of just 50 points in the Herfindahl-Hirschman Index (HHI) would put the accounting industry in violation of antitrust guidelines (Sloan 2010). Feldman (2010) estimated that the failure of E&Y would add 733 points to the HHI, unacceptable to the Department of Justice’s Antitrust Division. Regulators may punish E&Y with significant monetary fines and perhaps suspend them from accepting new clients for a short period of time, but regulators and those clients seeking the services of one of the Big 4 accounting firms want E&Y to survive. Once again, it appears that one of the Big 4 accounting firms is too big for a regulator to protect the public interest, i.e., serve E&Y a criminal indictment. Global Phenomenon: the Satyam Case The Satyam scandal highlights the importance of securities laws and accounting regulation in emerging markets. It provides insight into the problems that emerging markets face when they transition from locally controlled corporations to globally traded corporations. There is wide consensus that emerging markets must strive to create a regulatory environment in their securities markets that fosters effective corporate governance. India has managed its transition into a global economy well, and although it suffers from corporate governance issues, it is not alone as both developed countries and emerging countries experience accounting and corporate governance scandals (Winkler 2010).

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In October 2009, the World Bank accused Satyam of installing spy systems on its computers and stealing assets and issued an eight-year ban against the company. In December 2008, Ramalinga Raju, the Chairman of Satyam, announced that Satyam would spend $1.6 billion to purchase Maytas Properties and Maytas Infrastructure, two companies unrelated to the information technology field. Efforts in this direction were withdrawn under pressure from shareholders who viewed the transactions as an attempt to siphon money out of Satyam into the hands of the Raju family since the Raju family held a larger stake in Maytas Properties and Maytas Infrastructure than it did in Satyam. On December 30, analysts with Forrester Research advised clients to stop doing business with Satyam because of the fear of widespread fraud. Satyam hired Merrill Lynch to advise it on ways to increase shareholder value. On January 7, just hours before Mr. Raju disclosed the fraud, Merrill Lynch sent a letter to the stock exchange indicating that it was withdrawing from its engagement with Satyam because during the course of its representation it learned of material accounting irregularities (Winkler 2010). Mr. Raju claimed that he overstated assets on Satyam's balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own was nonexistent. Satyam also underreported liabilities on its balance sheet. Satyam overstated income nearly every quarter over the course of several years in order to meet analyst expectations. The results announced on October 17, 2009 overstated quarterly revenues by 75 percent and profits by 97 percent. For the third quarter, Satyam reported 50.4 billion rupees ($1.03 billion) of cash and 3.76 billion rupees of earned interest that were fictitious. Receivables were overstated and liabilities were understated by 4.9 billion rupees and 12.3 billion rupees, respectively.1 Numerous bank statements were created to advance the fraud and bank accounts were falsified to inflate the balance sheet with balances that did not exist. The income statement was inflated by claiming interest income from the fake bank accounts. Fake salary accounts were created and the money in them was appropriated after the company deposited the salaries. The company's global head of internal audit created fake customer identities, generated fake invoices against their names to inflate revenue, forged board resolutions and illegally obtained loans for the company. It also appeared that the cash that the company raised through American Depository Receipts (ADRs) in the United States never made it to the balance sheets (Kahn 2009). Global auditing firm PWC audited Satyam's books from June 2000 until the discovery of the fraud. PWC signed Satyam's financial statements and was responsible for the numbers under Indian law. Cash is one of the easiest accounts to audit. The question of how the audit of a cash account failed to disclose a shortage of $1.03 billion dollars remains unanswered. The auditors also did not independently verify with the banks in which Satyam claimed to have deposits (Winkler 2010). Suspiciously, Satyam also paid PWC twice what other firms would charge for the audit, which raises questions about whether PWC was complicit in the fraud. Furthermore, PWC audited the company for nearly 9 years and did not uncover the fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days. Missing these red flags implied either that the auditors were grossly inept or in collusion with the company in committing the fraud. PWC initially asserted that it performed all of the company's audits in accordance with applicable auditing standards (Winkler 2010). Immediately following the news of the fraud, Merrill Lynch terminated its engagement with Satyam, Credit Suisse suspended its coverage of Satyam, and PWC came under intense scrutiny and its license to operate was revoked. Coveted awards won by Satyam and its executive management were stripped from the company (Agarwal and Sharma 2009). Satyam’s shares fell to 11.50 rupees on January 10, 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. In the New York Stock Exchange, Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. Thus, investors lost $2.82 billion in

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Satyam (BBC News, 2009). Criminal charges were brought against Mr. Raju, including: criminal conspiracy, breach of trust, and forgery. Although Mr. Raju initially asserted that he acted alone in perpetrating the fraud, the Indian authorities also charged Mr. Raju's brother, the company's CFO, the company's global head of internal audit and one of the company's managing directors. Indian officials acted quickly to try to save Satyam from the same fate that met Enron and WorldCom, when they experienced large accounting scandals. The Indian government appointed a new board of directors for Satyam to try to save the company. The Board worked diligently to bring stability and confidence back to the company to ensure the sale of the company within the 100-day time frame assigned by the Indian Government. The Securities and Exchange Board of India (SEBI) appointed a retired Supreme Court Justice, Justice Bharucha, to oversee the process of an auction for Satyam and instill confidence in the transaction. Several companies bid on Satyam on April 13, 2009. The winning bidder, Tech Mahindra, bought Satyam for $1.13 per share—less than a third of its stock market value before Mr. Raju revealed the fraud—and salvaged its operations (Dagar 2009). There were also several civil charges filed in the U.S. against Satyam by the holders of its ADRs. Both civil and criminal litigation cases continue in India and civil litigation continues in the United States. The SEC and the PCAOB fined the affiliate, PW India, $7.5 million in what was described as the largest American penalty ever against a foreign accounting firm (Norris, 2011). According to President of the Institute of Chartered Accountants of India (ICAI), “The Satyam scam was not an accounting or auditing failure, but one of corporate governance. This apex body had found the two PWC auditors prima-facie guilty of professional misconduct.” The Central Bureau of Investigation (CBI – India), which investigated the Satyam fraud case, also charged the two auditors with “complicity in the commission of the fraud by consciously overlooking the accounting irregularities”. The Registrar of Companies report in India, stated that the directors and senior officials at Satyam, sold shares ahead of the fraud revelation by Mr. Raju. The firm, which trades on the New York and Bombay Stock Exchanges, is required to file financial reports with the SEC. After news of the scandal hit the airwaves, PW India issued a press release and stated that its audit was conducted in accordance with applicable auditing standards and was supported by sufficient audit evidence. In 2008, the Public Company Accounting Oversight Board of the U.S. (PCAOB) had inspected selected audits of PW India, but the PCAOB’s findings were not released.2 The Big Four – Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP – have long distinguished themselves from second- and third-tier assurance services firms by marketing themselves as global entities with specific-industry skills that international companies need in highly competitive markets. The Big Four boast of their numerous global affiliates and tout the efficiency and responsiveness of these affiliate offices to current and potential clients. These global professional services firms state that their affiliate offices provide a global network with tens of thousands of employees who can meet the accounting, auditing and consulting needs of the world’s largest companies. In essence, the Big Four sell the idea of a global affiliate network as “we are family,” with each affiliate office working together to take care of the needs of their international clients. Ironically, the Big Four quickly disavow this “we are family” concept when a problem surfaces in one of their affiliate offices. When an audit failure occurs, the international offices of the Big Four issue public statements reminding accounting regulators that the numerous firms which comprise their affiliate networks are legally independent. In Satyam’s case, the PWC affiliate was PW of India. When news of the Satyam scandal broke, PWC’s international headquarters office in London quickly distanced itself from PW of India and stated that local Indian affiliate offices had conducted the Satyam audit.

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These PW India affiliates were Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta and Price Waterhouse & Co. Calcutta. The US Securities and Stock Exchange Commission (SEC) eventually sanctioned these five PWC affiliates and fined them $10 million, the largest fine the SEC has ever issued to a foreign-based accounting firm (www.indianexpress.com). Upon payment of the fine, PW India stated that it neither admitted nor denied wrongdoing in the Satyam case. The PWC affiliate emphasized that no American accounting regulator “found that PW India or any of its professionals engaged in any intentional wrongdoing or was otherwise involved in the fraud perpetrated by Satyam management.” The PCAOB barred two PW India accountants from taking part in audits of American companies but said it did so because they had refused to cooperate with its investigation. The $10 million fine, however, pales in comparison to the losses suffered by Satyam investors and creditors. PWC’s affiliate gladly paid the fine. PWC still has its Indian affiliates in spite of the fact that “PW India failed to conduct even the most fundamental audit procedures” (Scarboro 2011). PWC still advertises the expertise and skill set of its global affiliates found in 159 countries and 776 cities. Given the “slap on the wrist” that PWC received from accounting regulators, a skeptic might ask if PWC and its global affiliate network, which comprise the world’s largest professional services firm, have become too big of an international player to indict for its audit of India’s Enron. Further compounding PWC’s troubles, was the business relationship between PWC and Satyam in the U.S. Both firms worked on a major IT contract for Idearc, a spinoff of telecom firm Verizon. Because Satyam shares are quoted on Wall Street, SEC rules prohibit auditors from having business relations with their clients. U.S. regulators have yet to take action against PWC. Once again, is this lack of enforcement related to PWC’s size and the impact that the failure of a Big 4 firm would have on the global financial marketplace? Moral Hazard Behavior: Societal Implications One form of moral hazard behavior may be less quality audits. The absence of quality audits increases the probability of audit failures. Auditor silence in the face of inordinate corporate risk taking may also imply moral hazard behavior on the part of auditors. Such actions by auditors are more than a social issue such as the environment or sustainability. The failure of one large, publicly traded bank or brokerage house may set up a chain reaction that brings global financial markets to the brink of ruin (Roth, 2008). The collapse of The Bank of Credit and Commerce International in 1991, Barings Bank in 1995, and Bear Stearns and Lehman Brothers both in 2008 provide examples. Each of these collapses rattled the financial markets and spurred global anxiety. Governments and financial regulators around the world coordinated their efforts to prevent panic and to resolve the financial crisis (Nanto, 2009). The attitude of the Big 4 toward their social responsibility for quality audits or alerting a board of directors to an unhealthy level of financial management risk is more than just about the reputational capital of the Big 4. It has implications for world-wide financial stability. Writing on the great financial crash of 1929 in the United States, J.K. Galbraith saw the crash as a symptom of a wider problem. Galbraith believed that the world of finance was incapable of expressing even the most basic and necessary self-criticism. “The sense of responsibility in the financial community for the community as a whole is not small,” he observed, “it is nearly nil” (Galbraith, 1955). Turner (2006) noted the fact that Big 4 firm-on-firm peer reviews never resulted in a negative or qualified report on one of the major international accounting firms, and had engrained a culture in which one firm had agreed not to tell on the other. When Galbraith’s observation is combined with Turner’s statement, marketplace stakeholders could question if the Big 4 view audit quality with a critical eye.

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Neither the global community nor government regulators can afford for the Big 4 to disregard legal, regulatory and ethical standards. Galbraith (1955) also posited that regulators were part of the problem rather than the solution. They were, he thought, vigorous in their youth, moving to complacency in middle age, until they became in old age either senile, or arms of the sector they are supposed to regulate. A major concern in the marketplace is over the possible demise of one of the remaining Big 4 firms, especially if one of the firms faces a criminal indictment. Friedland (2004) noted that the break-up of Arthur Andersen unfolded in a relatively smooth manner. With this in mind, the authors posit that rather than forming the mentality of “too concentrated to indict,” government agencies, particularly the SEC, should inform the Big 4 and large corporations that the agency has formed a mentality of “here is the plan” in case one or more of the Big 4 are brought to court on criminal charges. Endnotes 1 http://www.economist.com/businessfinance/displayStory.cfm?story_id=12898777 2 http://www.bloomberg.com/apps/news?sid=aov_laRpSmno&pid=20601109 REFERENCES Agrawal, S. and Sharma, R. (2009) Beat this: Satyam won awards for corporate governance, internal audit. VCCircle. Retrieved on March 30, 2013 from http://www.vccircle.com/news/technology/2009/01/09/beat-satyam-won-awards-corp- governance-internal-audit Big4Firms.com. The big four firms: market domination. Big4Firms.com. Retrieved September 27, 2009 from http://www.big4firms.com/index_files/Page431.htm. Blackely, Rhys. “Investors Raise Questions over PwC Satyam Audit.” Times Online. 8 January 2009. Retrieved from business.timesonline.co.uk/tol/business/industry_sectors/technology/article5476010.ece Bloomberg.com. (2009, January 13). India’s Enron puts auditors back under scrutiny. Bloomberg.com. Retrieved September 19, 2009 from http://www.bloomberg.com/apps/news?sid=aov_laRpSmno&pid=20601109 Cunningham, L. (2006) “Too big to fail: Moral hazard in auditing and the need to restructure the industry before it unravels” Columbia Law Review, 106, 1698-1748. Dagar, S.S. (2009) How Satyam was sold The untold story: How the IT services major was rescued against all odds. Business Today reconstructs the events of the 14 crucial weeks that led up to the sale. Business Today, July 21, 2009. Etzioni, Amitai. (2009) “The Capture Theory of Regulations – Revisited,” Society, 46, (4), 319- 323. Feldman, E. (2010) in “Ernst & Young: Too big to fail” Allan Sloan, Ed., Fortune Online, December 21, 2010. Retrieved May 20, 2011 from http://finance.fortune.cnn.com/2010/12/21/ernst-young-too-big-to-fail

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“Financial economic roundtable: statement on “The crisis in accounting, auditing, and corporate governance” (2002) Journal of Applied Finance, Fall/Winter, 61-65. Frean, A. and Spence, A. (2010) “Linklaters and Ernst & Young face action over Lehman Brothers collapse” The Times, March 13, 2010. Retrieved May 20, 2011 from http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article70604 24.ece Friedland, J. (2004). time to end the big 4 accounting cartel. International Journal of Disclosure and Governance, 1(3), 211-213. Galbraith, J. K. (1955). The great crash 1929. New York: Houghton Mifflin. Governmental Accountability Office. (2003). Public accounting firms: mandated study on consolidation and competition, GAO publication 03-864. Governmental Accountability Office. (2008). Audits of public companies: continued concentration in audit market for large public companies does not call for immediate action, GAO publication 08-163. “India’s Enron” (2009) Retrieved September 19, 2009 from http://www.economist.com/businessfinance/displayStory.cfm?story_id=12898777 “India’s Enron puts auditors back under scrutiny” (2009). Retrieved September 19, 2009 from http://www.bloomberg.com/apps/news?sid=aov_laRpSmno&pid=20601109. Kahn, J. (2009, January 19) The Crisis exposes all the flaws. Newsweek, 153 (3), 4. Nanto, D. (2009, October 2). The global financial crisis: analysis and policy implications. Congressional Research Report for Congress. Retrieved November 30, 2010 from http://www.fas.org/sgp/crs/misc/RL34742.pdf. Norris, F. (2011) Indian Accounting Firm is Fined $7.5 million over fraud at Satyam. The New York Times, April 5, 2011. Retrieved on March 30, 2013 from http://www.nytimes.com/2011/04/06/business/global/06audit.html?_r=0 Public Company Accounting Oversight Board. (2008, June 27). Report on 2007 inspection of PricewaterhouseCoopers LLP. Retrieved September 3, 2009 from http://www.pcaobus.org/Inspections/Public_Reports/2008/PricewaterhouseCoopers-0627.pdf. Roth, K. H. (2008, December 21). Global crisis – global proletarianisation – counter-perspectives. Retrieved November 30, 2010 from http://www.wildcat-www.de/en/actual/e068roth_crisis.html Scarboro, C. (2011). “Satyam scam: US finds PwC ‘India’ guilty” The Indian Express, April 6, 2011. Retrieved March 4, 2013 from http://www.indianexpress.com/news/satyam-scam-us-finds-pwc-india-guilty/772584 Senate Committee on Government Affairs, Permanent Subcommittee on Investigations, Minority Staff (2003) “U.S. Tax Shelter Industry: The Role of Accountants, Lawyers and Financial Professionals: Four KPMG Case Studies: FLIP, OPIS, BLIPS, and CS2” S. Prt. 103-34, 18 November 2003, 22.

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Senate Committee on Government Affairs, Permanent Subcommittee on Investigations, Minority Staff (2003) “U.S. Tax Shelter Industry: The Role of Accountants, Lawyers and Financial Professionals: Four KPMG Case Studies: FLIP, OPIS, BLIPS, and CS2” S. Prt. 103-34, 18 November 2003, 22. Simms, A. & Oram, J. (2002). Five brothers: the rise and nemesis of the big bean counters. London: The New Economics Foundation. Sloan, A. (2010) “Ernst & Young: Too big to fail” Fortune Online, December 21, 2010. Retrieved May 20, 2011 from http://finance.fortune.cnn.com/2010/12/21/ernst-young-too-big-to-fail The Economist. (2004, November 20). Called to account: the auditing industry has yet to recover from the damage inflicted by an era of corporate scandals. The Economist, 373 (8402), 71-73. The Indian Express (2011, April 6). “Satyam scam: US finds PwC ‘India’ guilty.” Retrieved March 4, 2013 from http://www.indianexpress.com/news/satyam-scam-us-finds-pwc-india-guilty/772584 The Satyam Scam Case (2009). Retrieved March 30,2013 from http://cbi.nic.in/fromarchives/satyam/satyam.php Turner, L. (2006). Learning from accounting history: Will we get it right this time? Issues in Accounting Education, 21, (4), 383-407. Winkler, David (2010). India’s Satyam Accounting Scandal. Retrieved March 30, 2013 from http://blogs.law.uiowa.edu/ebook/content/uicifd-briefing-paper-no-8-indias-satyam-accounting- scandal BIOGRAPHY Kalpana Pai is Associate Professor of Accounting at Texas Wesleyan University. Her research appears in journals such as Journal of Applied Business and Economics, International Journal of Business, Accounting and Finance, Journal of Applied Financial Research, Competitiveness Review and Southwestern Journal of Economics. She can be reached at Texas Wesleyan University, 1201 Wesleyan St., Fort Worth, TX 76105, [email protected]. Thomas D. Tolleson is Professor of Accounting at Texas Wesleyan University. He is currently serving as President of Federated Business Disciplines. His research appears in journals such as Accounting, Auditing and Accountability, International Journal of Business, Accounting and Finance, Journal of Accounting and Finance, Journal of Applied Business and Economics, Journal of Applied Case Research, Perspectives in Business and Research in Accounting Ethics. He can be reached at Texas Wesleyan University, 1201 Wesleyan Street, Fort Worth, TX 76105, [email protected].

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IMPROVE THE TARGET PRICE PERFORMANCE

BY THE ENHANCED COMPANY VALUATION TECHNIQUES

Yanfu Li, Lincoln University

ABSTRACT

The target prices issued by analysts have often been suspected by the market participants and most of them actually have been found unachievable. This study investigates the underlying reasons for the underperformance of the target price and attempts to improve its reliability via the enhanced valuation methods. First, this study improves the performance of the target price by enhancing the discount rate estimation method. An expanded CAPM model which contains the shrunk beta, beta-adjusted size premium and firm-specific risk premium has been suggested to estimate the cost of equity. In this model, the sum of the risk-free rate and the industry systematic risk premium is actually the average required return on large-cap public equity in a particular industry, then adding an beta-adjusted average size premium to reflect the average incremental return on micro-cap peer group, finally the premium to represent the firm-specific risk is added to arrive at the cost of equity for a particular (smaller) company. In addition, this study recommends a target price-based multistage Gordon growth model as another cost of equity estimation method. This method adapts the consensus target price as a proxy of the intrinsic value per share to better consistent with the assumption of basic Gordon growth model. Second, due to the limits of absolute and relative valuation models and the different industries have differing characteristics, this study proposes a so-called industry-specific combined valuation approach which not only takes advantage of the benefit from the combination of the absolute and relative models, but also consistent with the unique features of different industries. Third, this study presents an enhanced target price setting method and provides effective solutions to the common but unsolved question faced by many equity analysts: how to combine a range of value estimates when more than one model are used in the valuation. The partial least square regression approach has been recommended to combine various value estimates, this approach is more logical than the recent weighted average method and easy to use, automatically generates time-varying weights and allows the users to customize it by adding or removing any model to satisfy specific valuation needs. Besides, the Bayesian triangulation approach has also been suggested as an alternative method to deal with a range of value estimates. After that, the case- by-case adjustments of combined value estimate have been emphasized and recommended to better reflect the expected highest price level. Fourth, this study distinguishes the value estimate with target price (the target price is actually the value estimate after qualitative adjustment), a reliability testing technique has been introduced to test the performance of both value estimate and target price. This technique measures the performance of the value estimates based on their accuracy and explanatory power, and tests the reliability of the target prices by classifying them into five explicit recommendation groups and then measure their reliability respectively. This reliability testing technique can also be used to test the reliability of target prices issued by equity analysts, it helps investors to better understand the information contained in the equity reports and better measure the performance of equity analysts. JEL: G12, G14, C10 KEYWORDS: Target Price Performance, Enhanced Valuation Methods

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EXPORT MARKET ORIENTATION, INTERFIRM

COMMUNICATION, INTERFIRM COOPERATION AND EXPORT PERFORMANCE Olimpia C. Racela, Mahasarakham University, Thailand

Amonrat Thoumrungroje, Assumption University, Thailand

ABSTRACT

The purpose of this study is to assess the role of export market orientation on interfirm communication and cooperation, and ultimately, on export performance. Drawing upon the resource-based view, cognitive structures in social psychology, and relationship marketing theory a conceptual model is developed and relationships are tested empirically from a sample of 242 exporters based in Thailand exporting products that represent 10 industries. Structural equation modeling was used to analyze the data and to determine the relations between these major constructs. The results show that exporter market orientation is strongly related to communication frequency and communication quality. However, only communication quality is related to cooperation, which in turn is positively related to export performance. These results have significant theoretical implications for academics of international business and practical implications for Thai exporters. KEYWORDS: Export market orientation, exporters, communication quality, communication frequency, interfirm cooperation, emerging market INTRODUCTION Exporting is a key activity in most economies, particularly in emerging markets. Many academics and practitioners have encouraged exporting firms to become more market orientated so as to develop the necessary organizational capabilities that can lead to better knowledge of export markets. In addition, with the emergence of the relationship marketing paradigm, relational behaviors of the exporter-importer dyad have been given a significant amount of academic attention in the past decade (e.g. Lages et al., 2005, Lages et al., 2009, Nguyen & Nguyen, 2010, Racela et al., 2007). Although valuable insights have been gained from such prior studies, there has been very limited attention given to relationship determinants, such as those relevant to interfirm communication. Communication has long been recognized as a relational driver in seller-buyer relationships (Griffith, 2002, Palmatier, 2008). However, much of the relationship marketing research literature has downgraded the role of communication to a minor component of relational behaviors. There is prior research to suggest that interfirm communication serves as a primary driver to sustaining business relationships, with empirical support found from studies conducted in manufacturer- retailer contexts (e.g. Holden and O’Toole, 2004), industrial marketing settings (e.g. Denize and Young, 2007) and business partnerships (e.g. Gray, 2005). Consideration of interfirm communication in export market ventures has only recently been posited in the international marketing literature (e.g. Oh and Moon 2010). A deeper understanding of the communication— relationship behavior link in an exporter-importer context would be worthwhile, especially since engaging in such behaviors may involve considerable organizational resources. This paper aims to fill this void in the marketing literature by examining the role of interfirm communication and relational behaviors in the export market orientation—export performance relationship. Although the export marketing literature has identified numerous relationship

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constructs (e.g. Leonidou and Kaleka, 1998, Sutton-Brady, 2001), we specifically focus on examining the role of communication quality, communication frequency and the relational aspect of interfirm cooperation. Our selection of these behaviors is based on their noted significance in the existing literature, and the sparse attention they have been given in the exporter-importer business relationship. The context of this study is Thailand, which is an emerging market that is highly dependent on exports. The country’s exports account for roughly two-thirds of the country’s GDP. As a result of the global economic slowdown that began around mid-2012, Thailand’s export growth from January-August 2013 reached a mere one percent, well below the target of 7.0-7.5 percent (Sriring and Thaicharoen, 2013). Given the importance of the export sector to Thailand’s growth and the challenges Thai exporters face under a dynamic and fast changing global environment, this study is not only timely, but provides valuable insights into firm resources and behaviors that influence the export performance of Thai firms. Thus, our study contributes to the international marketing literature in two major ways. First, it delineates the concept of communication from that of relationship, in line with a more detailed perspective of the two distinct sets of behaviors. Second, our study empirically examines the mediating effects of communication and relational behaviors that have received little attention in the export market orientation literature. Conceptual Model and Hypotheses Development The development of the conceptual model shown in Figure 1 takes an interdisciplinary approach, integrating several different theoretical perspectives, including the resource-based view (RBV) of the firm, cognitive psychology and relationship marketing theory. The model conceptualizes exporter market orientation as an antecedent of communication frequency and communication quality, which then lead to interfirm cooperation, which in turn has an influence on export performance. Figure 1: Conceptual Model

Export Market Orientation Export market orientation refers to the activities that firms perform in their efforts to incorporate the marketing concept into their export operations (Cadogan, Kuivalainen and Sundqvist, 2009). Behaviors that are associated with an export market orientation include export-focused intelligence generation, intelligence dissemination, and responsiveness to export market intelligence, which influences the firm’s ability to develop and offer superior value for its export customers (Cadogan, Diamantopoulos and Siguaw, 2002). Much of the strategy and marketing literature recognizes market orientation as an essential marketing capability or strategic marketing resource that has the potential to enable a firm to gain a positional advantage and to achieve superior firm performance (e.g. Hult and Ketchen, 2001). According to the resource-based view (RBV) of firms, resources that are valuable, rare, inimitable, and nonsubstitutable enable the firm to better perform strategic actions that create a competitive advantage and ultimately enhanced firm performance (Wernerfelt, 1984, Barney 1991). When an organization adopts and implements a market orientation, albeit an export market orientation, it adopts an information processing

H1b

H2

H3

H4

H1a

Export Market Orientation

Communication Quality

Interfirm Cooperation

Communication Frequency

Export Performance

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perspective, thereby making a market orientation an indigenous key market-based asset in the form of unique customer and competitor market intelligence that enable the firm to achieve superior performance (Morgan, Vorhies and Mason, 2009). A review of prior research on the export market orientation—export performance link reveals that the relationship is generally a positive one. More recent studies of export market orientation have focused on examining specific organizational processes through which it influences performance. For instance, Murray, Gao and Kotabe (2011) found that marketing capabilities (i.e. pricing capability, new product development capability, and marketing communication capability) mediate the export market orientation-performance relationship while competitive advantages (i.e. low-cost advantage, differentiation advantage) partially mediate it. Similar studies have been conducted to examine the mediating role of relational behaviors (i.e. relationship distance, cooperation, dependence) (Racela et al., 2007), and relationship quality (e.g. Lages et al., 2009, Nguyen & Nguyen, 2010). This paper follows this line of inquiry and considers the exporter’s market orientation as an antecedent of other organizational behaviors rather than as a direct determinant of export performance. Interfirm Communication Interfirm communication, therefore, can be defined broadly as the amount, frequency, and quality of information shared between exchange partners (Mohr and Sohi, 1996). Successful interfirm exchanges, which are highly contingent upon good, frequent communication (Bleeke and Ernst, 1993). Generally, communication as a concept is often described as a multidimensional global construct. However, much of the prior research examines only the dimension of communication frequency. Although this dimension has been defined in several ways, in this paper, interfirm communication frequency refers to the number of contacts made between members of the different parties (Mohr and Nevin, 1990). ‘Good’ communication corresponds mainly with the concept of communication quality. Many studies in relationship marketing have identified communication quality as a dimension of a relationship construct. For instance, in the context of supplier-buyer relationships, Roehrich, Spencer and Florence (2002) find the emergence of a ‘communication quality’ dimension as part of their exploratory study of the relationship atmosphere construct. Inadequate communication with exporters has long been identified as a major problem facing importers (Katsikeas, 1995). Views of cognitive structures from the field of social psychology may be useful to explain the communication interaction between an exporter and its overseas distributors. Cognitive structures describe the basic mental processes people use to make sense of information and give meaning to it. When people with different cognitive structures engage in interpersonal communication, their differences in knowledge and of meanings often necessitates greater communication effort to ensure sufficient encoding and decoding of transmitted messages. In a study of manufacturer-retailer relationships, Hakkio and Laaksonen (1996) found that differences in the product meanings between manufacturers and those of its retail customers facilitated more meaningful and frequent communication for the purpose of clarifying and reconciling product meanings into a shared and common understanding. In an exporter-importer relationship where cognitive knowledge structures may differ, greater communication quality and more frequent communication interaction could be more prevalent. Firms with a strong export market orientation would engage in a form of organizational information gathering and processing that enhances information quality and information utilization. This information processing enables the exporter to familiarize itself with the general cultural peculiarities and specific social exchange norms of its importers. Highly export market oriented firms are not likely to keep their key importers at arms-length, but rather, would engage

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in more relevant and frequent communications and interactions with them in order for both parties to gain a common understanding of the foreign market in which the importer is more knowledgeable and the exporter is less familiar. Therefore, the following is hypothesized:

H1a: Export market oriented firms will have a higher degree of communication frequency with their overseas distributor.

H1b: Export market oriented firms will have a higher degree of communication quality with their overseas distributor.

Communication Quality, Communication Frequency and Interfirm Cooperation Cooperation can be broadly described as the process of several parties working together to the same end. Definitions of cooperation found in the marketing literature are consistent with this broad description (e.g. Morgan and Hunt, 1994, Leonidou, Katsikeas, and Hadjimarcou, 2002). The underlying themes of these definitions of interfirm cooperation are that it is a process by which individuals, groups and organizations come together, interact and that they form psychological relationships for mutual gain or benefit (Smith, Carroll and Ashford, 1995). Cooperation is often included in marketing studies as a component or an item of a higher-order relationship construct, such as relationship quality (Lages et al 2005, Lages et al. 2009) or relationship atmosphere (Roehrich et al., 2002), implying that cooperation is distinct from other relationship marketing constructs such as power, conflict, coordination, trust, and commitment. Communication between two firms is a necessary element of relationship-building. Based on the relationship marketing paradigm (Morgan and Hunt, 1994), communication helps to build trust between firms and provides the information and knowledge that is required in order for cooperative activities to take place. In exporter-importer relationships, cooperation is shaped by particular norms of behavior, which may differ between the two parties, particularly when cultural or psychic distance is large. Such differences present major challenges in exporter- importer relationships to achieving a productive level of cooperation. However, in a study of international trade intermediaries, it was found that frequent, bi-directional and informal communication between firms improves cooperation (Balabanis, 1998). Based on this discussion, the following hypotheses are advanced:

H2: Exporter-importer communication frequency has a positive relationship with interfirm cooperation.

H3: Exporter-importer communication quality has a positive relationship with interfirm

cooperation.

Interfirm Cooperation and Export Performance Interfirm cooperation reflects expectations that the parties have about working together in order to achieve mutual and individual goals jointly. Firms may be motivated to cooperate with their business customers or strategic partners in order to gain certain benefits such as stretching their resources, enhancing their knowledge, reducing their costs and improving their performance in general. Based on the RBV, a firm that is resource-constrained may engage in interfirm cooperation to overcome related barriers to the firm’s growth (e.g. Zhang et al., 2010). In an exporter-importer context, an exporter may be resource constrained in terms of market or financial resources, while an overseas distributor may lack its own manufacturing resources. In essence, the exporter and their overseas distributor share their resources, with the exporter sharing its inventory and the importer sharing its market knowledge or financial resources. Accordingly,

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the RBV encourages interfirm cooperation as a means for firms to grow with the aid of a partner firm’s resources (Combs and Ketchen, 1999). In terms of the influence of cooperation on firm performance, much of the empirical evidence supports a positive influence, with a few exceptions of studies that find mixed results. For instance, Horta, Brito and Brito (2009) find that a firm’s cooperation with its customers positively influenced firm growth (i.e. market share), but cooperation did not have any influence on the firm’s profitability. However, in the international marketing literature, the view that exporter- importer cooperation would have a positive influence on the exporter’s firm performance has been supported by several prior studies (e.g. Jungbok, 2011, Racela et al., 2007). As a result, it is hypothesized that: H4: Interfirm cooperation has a positive relationship with export performance.

RESEARCH METHODOLOGY The Thailand Exporter Directory, which lists over 4,000 firms, was used as the sampling frame for this study. Our questionnaire was sent to identified informants of a randomly selected 445 export firms, most of which were situated in the greater Bangkok metropolitan area. From the initial mailing, 253 questionnaires were returned for a response rate of 56.8 percent. Six questionnaires had excessive missing values and were dropped from further consideration in the analysis. The final sample is 247 SBUs within 174 companies representing over 10 industries. A comparison between ‘first-two weeks’ and ‘after-two weeks’ responses on several firm characteristics indicated that nonresponse bias was not a concern in this study (Armstrong and Overton, 1977). Table 1 presents the sample characteristics. Table 1: Sample Characteristics

Characteristic Proportion (no.) n=247 Functional Area of Respondent Top-management (e.g. Owner, SBU head, GM, MD, V.P.) Export Marketing Sales Logistics International Other (e.g. IT, Accounting, Product design)

47.8% (118) 23.1% (57) 14.2% (35) 9.7% (24) 1.6% (4) 1.6% (4) 2.0% (5)

No. of full time employees 1 to 60 61 to 120 More than 120

38.1% (94) 18.6% (46) 43.3% (107)

Industry Garments, Textiles, and Clothing Automotive Parts/Accessories Electronics, Electrical Products and Parts Construction/Industrial//Machinery & Equipment Products Chemicals/Medical Supplies/Hygiene Products Household/Consumer Products Agriculture/Food Products All others (i.e. Gems/jewelry, Gifts/Handicrafts)

44.1% (109) 15.0% (37) 13.8% (34) 7.7% (19) 5.7% (14) 5.7% (14) 4.4% (11) 3.6% (9)

Questionnaire Development and Construct Operationalization

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A back translation procedure was employed to translate the original English language scales to Thai in order to ensure conceptual and functional equivalence (Cavusgil and Das, 1997). The question sequence and item wording in the questionnaire were refined by a pretest of 10 managers and marketing experts. Existing measures were sought and adapted for this study. All multi-item constructs were measured using a 7-point scale. Export Market Orientation (EXPORTMO) was measured from the 32-item MARKOR scale of Kohli, Jaworski and Kumar (1993), with the items being adapted to suit the context of an export firm. The EXPORTMO scale was used as a second-order construct, with three first-order factors: Export intelligence generation (EXPINTGEN) comprising 10 items, Export Intelligence Dissemination (EXPINTDISS) comprising 8 items, and Export Responsiveness (EXPRESP) comprising 14 items. For the exporter’s interfirm interactions, the respondent was instructed to refer to a key overseas distributor (i.e. importer) of the firm. Communication Frequency (COMMFREQ) was measured by a single-item ratio scale in terms of the average number of personal contacts the exporter makes with the importer within a year. Communication Quality (COMMQUAL) was measured using the 5-item scale of Roehrich et al. (2002), which indicates the degree to which communications with the importer are amiable and clear. Interfirm Cooperation (INTERCOOP) was measured by the 6-item cooperation scale developed by Roehrich and Spencer (2003), which indicates the extent to which the exporter works closely, shares technical and commercial information and has compatible goals with the importer. Export Performance (EXPPERF) was measured using 4-items to assess the exporter’s performance in terms export sales, export market share, export profits, and rate of new market entry in relation to the exporter’s major competitors. Data Analysis and Results An initial check of the data revealed five outliers, which led to the omission of those responses from the analysis. From confirmatory factor analysis (CFA), items with factor loadings below 0.50, mostly items that were reverse-worded, were dropped from further analysis. Four items were used to measure EXPINTGEN. Four items were used to assess EXPINTDISS. Five items were used to measure EXPRESP. Each of these three refined components shows acceptable internal consistency: EXPINTGEN (α = .71), EXPINTDISS (α = .81), and EXPRESP (α = .78). The measures of each component were summated and used as indicators for the EXPORTMO latent construct. In aggregate, the EXPORTMO construct has adequate internal consistency (α = .62). Of the six items used to measure INTERCOOP, two were dropped. The CFA measurement model including EXPORTMO, COMMQUAL, COMMFREQ, INTERCOOP and EXPPERF was estimated using AMOS v.17. The factor loadings of each individual indicator on its respective construct are statistically significant (p < .001), presenting support of the dimensionality and convergent validity of the constructs (Anderson & Gerbing, 1988). Additional analysis of correlations between items satisfied the r = .85 cutoff (Garson, 2001), indicating the model demonstrates adequate discriminant validity. Overall, the results indicate that the measurement model fits the data well and the constructs possess adequate measurement properties for further analyses. The construct descriptive statistics and correlations are presented in Table 2. Table 2: Construct Descriptive Statistics and Correlation Matrix

Construct Items Used Mean Std. Dev 1 2 3 4 5 1. EXPORTMO 3 4.80 .87 0.62 2. COMMQUAL 5 4.96 1.10 0.35*** 0.81

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3. COMMFREQ 1 13.95 22.21 0.09 0.12* -- 4. INTERCOOP 4 4.91 1.17 0.46*** 0.62*** 0.14** 0.78 5. EXPPERF 4 4.51 1.22 0.36*** 0.22*** 0.10 0.31*** 0.87

*** p < 0.01; ** p < 0.05; * p < 0.10 Cronbach’s alphas are placed in the diagonal. Structural Model Estimation and Results Having achieved satisfactory fit in the measurement model, the structural model was then analyzed. A direct path from EXPMO to INTERCOOP was included in the model although it is not hypothesized. The EXPMO-INTERCOOP parameter estimate is intended to serve as a baseline to compare direct and indirect effects of EXPMO on INTERCOOP. Path coefficients were estimated using maximum likelihood estimation. The overall fitness indices suggest good fit for the construct model (χ2

(111) = 230.36, p < .01; GFI = .90; TLI = .91; CFI = .93; RMSEA =.067). Table 3: Summary of Results for Hypotheses Testing

Hypothesis Expected

Sign Standardized

Regression t-value Results H1a: EXPORTMO -> COMMQUAL + 0.45 4.21 Supported H1b: EXPORTMO -> COMMFREQ + 0.16 2.07 Supported H2: Commqual -> Intercoop + 0.64 6.87 Supported H3: Commfreq -> Intercoop + 0.02 0.47 Not Supported H4: Intercoop -> Expperf + 0.39 5.23 Supported

Empirical support was found for all but one of the proposed hypotheses. Specifically, H1a, which predicted that export market orientation would have a positive relationship with communication quality, is supported with a highly significant effect (0.45, p < .01). H1b predicted that export market orientation would have a positive relationship with communication frequency. Moderate support is found for H1b (0.16, p < .04). H2 predicted a positive relationship between communication quality and interfirm cooperation, which is supported with a highly significant effect (0.64, p < .01). H3 predicted a positive relationship between communication frequency and interfirm communication. The data provided no support, with a nonsignificant effect (0.02, p > .10). Finally, H4 predicted a positive relationship between interfirm cooperation and export performance. H4 is fully supported through a highly significant effect (0.39, p < .01). The results of the hypotheses testing are presented in Table 3. The additional path of the direct effect of export market orientation on interfirm cooperation is highly significant (0.35, p < .01). DISCUSSION AND CONCLUSION This study was motivated by a desire to gain a better understanding of the relationships between export market orientation, interfirm communication, interfirm cooperation, and export performance. In doing so, we integrated the resource-based view, perspectives of cognitive structures from social psychology, and relationship marketing theory to justify the relationships among our constructs of interest. Our interdisciplinary approach contributes to the fields of strategic management, international marketing, and relationship marketing. Our study found that highly export market oriented firms engage in higher levels of communication frequency and communication quality with their major overseas distributor. This indicates that exporters with a strong market orientation have fewer misunderstandings, easily reach agreements on contract terms, provide sufficient attention to and conduct a higher number of personal meetings per year with their overseas distributor. While interfirm communication quality has a strong positive relationship with cooperation in terms of the exporter and importer working more closely

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together, the importer more willingly sharing technical or commercial information, setting compatible goals with one another, and putting cooperation before one another’s short-term profits, communication frequency did not. In other words, our data indicate that the number of personal meetings that the exporter has with its overseas distributor is in no way related to interfirm cooperation. Lastly, our findings are consistent with much of the prior research, revealing a strong positive relationship between cooperation and firm performance, at least in terms of the Thai exporter achieving export sales, export market share, export financial performance, and export market entry at a level higher than their competitors. These results also present two additional meaningful practical insights for Thai managers. One implication of the results is that exporters should establish a high level of cooperation with their overseas distributor since cooperation positively contributes to firm export performance. An exporter’s cooperation with their overseas distributor can be improved when the exporter focuses on communication behaviors that foster clear and relevant information exchanges, which are based on the exporter’s acquired and utilized market intelligence. The other implication of these results is that exporters must focus on ‘quality’ rather than ‘quantity’ in communication behaviors and interactions with their overseas distributors. Export market oriented firms are better off engaging in purposeful personal meetings (i.e. quality communication) rather than making personal contacts with their overseas distributor perhaps merely for the sake of ‘keeping in touch.’ Excessive or unnecessary personal meetings between the exporter and the importer may simply increase the exporter’s administrative or selling costs as well as serve as a misallocation of resources (i.e. time, effort) that could be better spent elsewhere in the export operation. Limitations and Directions for Future Research Although the findings of this study have provided useful insights for academics and managers, several limitations should be kept in mind. First, although the empirical evidence provided support for most of the hypothesized relationships between the variables, the cross-sectional nature of the data cannot be used to establish such relationships over time. Replications of this study and longitudinal research methods can help to determine the existence of any temporal impacts. Second, the nonsignificant result of the relationship between interfirm communication frequency and interfirm cooperation should be given further attention. Though our study could not identify why the data refutes theory, future consideration of other potential moderating variables, such as those relating to cultural differences (e.g. psychic distance) or industry characteristics (e.g. industry type) may lend valuable insights. Third, the study has only examined the perspective of the exporter. A multiple response method from both parties would provide a richer understanding of the dyad relationship. REFERENCES Anderson, J.C. & Gerbing, D.W. (1988) “Structural Equation Modeling in Practice: A Review and Recommended Two-Step Approach,” Psychological Bulletin, vol. 103(3), p. 411-423. Armstrong, J. S. & Overton, T. S. (1977) “Estimating Nonresponse Bias in Mail Surveys,” Journal of Marketing Research, vol. 14(3), p. 396-402. Balabanis, G. (1998) “Antecedents of Cooperation, Conflict and Relationship Longevity in an International Trade Intermediary’s Supply Chain,” Journal of Global Marketing, vol. 12(2), p. 25-46. Barney, J.B. (1991) “Firm Resources and Sustained Competitive Advantage,” Journal of Management, vol. 17(1), p. 99-120.

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Jungbok, H. (2011) “Cross-cultural Importer-exporter Relationship Model,” Advances in Management, vol. 4(6), June. Katsikeas, C. & Dalgic T. (1995) “Importing Problems Experienced by Distributors: The Importance of Level-of-Import Development,” Journal of International Marketing, vol. 3(2), p. 51-70. Kohli, A.J., Jaworski, B.J. & Kumar, A. (1990) “MARKOR: A Measure of Market Orientation,” Journal of Marketing Research, vol. 30(4), p. 467-477. Lages, C., Lages, C.R. & Lages, L.F. (2005) “The RELQUAL Scale: A Measure of Relationship Quality in Export Market Ventures,” Journal of Business Research, vol. 58(8), p. 1040-1048. Lages, L.F., Silva, G. & Styles, C. (2009) “Relationship Capabilities, Quality, and Innovation as Determinants of Export Performance,” Journal of International Marketing, vol. 17(4), p. 47-70. Leonidou, L.C. & Kaleka, A.A. (1998) “Behavioral Aspects of International Buyer-Seller Relationships: Their Association with Export Involvement,” International Marketing Review, vol. 15(5), p. 373-97. Leonidou, L.C., Katsikeas, C.S. & Hadjimarcou, J. (2002) “Building Successful Export Business Relationships: A Behavioral Perspective,” Journal of Marketing, vol. 10(3), p. 96-115. Mohr, J. & Nevin, J. (1990) “Communication Strategies in Marketing Channels: A Theoretical Perspective,” Journal of Marketing, vol. 54(4), p. 36-51. Mohr, J. & Sohi, R.S. (1996) “Communication Flows in Distribution Channels: Impact on Assessments of Communication Quality and Satisfaction,” Journal of Retailing, vol. 71(4), p. 393.416. Morgan, R.M. & Hunt, S.D. (1994) “The Commitment-Trust Theory of Relationship Marketing,” Journal of Marketing, vol. 58(3), p. 20-38. Morgan, N.A., Vorhies, D.W. & Mason, C.H. (2009) “Market Orientation, Marketing Capabilities, and Firm Performance,” Strategic Management Journal, vol. 30(8), p. 909-920. Murray, J.Y., Gao, G.Y., Kotabe, M. (2011) “Market Orientation and Performance of Export Ventures: the Process through Marketing Capabilities and Competitive Advantages,” Journal of the Academy of Marketing Science, vol. 39(2), p. 252-269. Nguyen, T.T. & Nguyen, T.D. (2010) “Learning to Build Quality Business Relationships in Export Markets: Evidence from Vietnamese Exporters,” Asia Pacific Business Review, vol. 16(1/2), p. 203-220. Oh, H. & Moon, B. (2011) “Key Factors Affecting Positional Advantage of Export Partnerships,” Journal of Global Scholars of Marketing Science: Bridging Asia and the World, vol. 21(4), p. 167-181. Palmatier, R.W. (2008) Relationship Marketing, Cambridge, MA: Marketing Science Institute,

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Racela, O.C, Chaikittisilpa, C. & Thoumrungroje, A. (2007) “Market Orientation, International Business Relationships and Perceived Export Performance,” International Marketing Review, vol. 24(2), p. 144-163. Roehrich, G., Florence, P.V. & Spencer, R. (2002) “The nature of relationship atmosphere and links with the value of relationships: The Case of Asia and Europe,” 18th Industrial Marketing and Purchasing (IMP) Group Conference, Perth, Australia. Roehrich, G. & Spencer, R. (2003) “Relationship Atmosphere: In Search of a Sound Structural Model,” 19th Industrial Marketing and Purchasing (IMP) Group Conference, Lugano, Switzerland. Smith, K.G., Carroll, S.J. & Ashford, S.J. (1995) “Intra- and Inter-organizational Cooperation: Toward a Research Agenda,” Academy of Management Journal, vol. 39(1), pp. 7-23. Sriring, O. & Thaichareon, K. (2013) “Thailand May Step Out of Recession as Exports Rebound,” Rueters, http://www.reuters.com/article/2013/09/26/us-thailand-economy-exports- idUSBRE98P06920130926, accessed on October 10, 2013. Sutton-Brady, C. (2001) “Relationship Atmosphere - The Final Chapter,” paper presented at the 17th Annual IMP Conference, Oslo, Norway. Wernerfelt, B. (1984) “A Resource-Based View of the Firm,” Strategic Management Journal, vol.5(2), p. 171-180. Zhang, H., Shu, C., Jiang, X. & Malter, A.J. (2010), “Managing Knowledge for Innovation: The Role of Cooperation, Competition, and Alliance Nationality,” Journal of International Marketing, vol. 18(4), p. 74-94. Olimpia C. Racela earned her D.B.A. in Marketing from Thammasat University, Thailand. She is a faculty member of the Mahasarakham Business School, Mahasarakham University, Thailand and a strategy consultant at ArtVScience. Her main research interests include international business and marketing strategy, new product development, and consumer behavior. She can be contacted through [email protected]. Amonrat Thoumrungroje earned her Ph.D. in Business Administration from Washington State University, U.S.A. She is assistant professor of international business at Department of International Business Management, Assumption University, Thailand and a research consultant at ArtVScience. Her current research interests include entrepreneurship, institutional impact on business, international marketing strategy, strategies in emerging economies, and cross-cultural research and methodology.

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UNDERPRICING THE PRIVATIZED STATE- OWNED EGYPTIAN ENTERPRISES: WAS IT

MISLEADING? Dena Salama, Cairo University

Yosry Hussein Khalifa, Cairo University

ABSTRACT

According to the poor performance of the State-owned Privatized Egyptian enterprises. And, as many studies proved the negative influence of underpricing these initial public offerings on the Enterprises value. This study therefore, examined the relationship between Underpricing and the informational content of the Initial Public Offerings enterprise's statements. We conducted this study on 53 State-owned Egyptian Enterprises Privatized during the period (1994/2010) and, collected All Data needed from Published Statements. By using Correlation and Multiple Regression, we found: (1) the key determinants interpreting Initial returns were: Volatility, Proceeds, Offer Ratio, and Timing. (2) The Egyptian Government attracted and compensated investors to participate by Underpricing to cover the whole offer. (3) Signaling, Winner Curse Explanation, and Timing participate at interpreting Initial returns respectively. JEL: G020, G120, G240, G320 KEY WORDS: IPO stock price, Underpricing, Information Asymmetry, Winner curse, Timing, Signaling, Offer Ratio, Privatization, IPO’s Poor Performance INTRODUCTION By 1990, The State-Owned Egyptian Enterprises portfolio consisted of 260 enterprises making profits and 56 enterprises making losses. It is worth mentioning that this portfolio financed from the government budget. Despite achieving LE 1.2 Billion as a superficial profit, the accumulated losses were LE 47 Billion (PSCU, 2002). So, this poor performance of The Egyptian public enterprises prompted the Government to improve it by carrying out the Privatization program at the early of 1991. However, not only had the program made a slow progress, but it also couldn't get the consent of the public opinion. Then, many voices rose and referred the program failure to the reduced prices these enterprises have sold by. So, this created a long and serious controversy over the effectiveness of this program. This argument was that we used to draw our main research question: Does the Initial Public Offering stock price reflect the informational content of the Initial Public Offerings enterprises’s financial statements? To answer this question, this study mainly focuses on the initial public offerings or IPOs as an effective tool for privatization. Any entity wants to issue its capital or part of it; firstly it must value its performance to reveal it to the potential investors in the market. Many studies showed the issuing firms underpriced their stocks before issuing. So, at the first day of trading on their stocks, they have found achieving high initial returns. These high initial returns began to decline as time passed and finally, causing sharp declines in performance at the long run (Ritter, 1998, Matecon, Poon, 2009). Regarding to the privatized state-owned enterprises, it have found to achieve high initial returns too ( Perotti, Oijen, , Tinbergen Ins 1999, Al-Gezeri, 2001). Many studies showed several explanations interpreting these initial returns. For example; (Rock, 1986) interpreted the underpricing and initial returns as remuneration for the ex-anti uncertainty of the issuing firm. Benvensite, Wilhelm (1997) backed them to the desire of the issuing firm or

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the desire of the underwriter for compensating the informed investors who revealed their information. Reuter (2004) interpreted the underpricing using the agency concept. He found the issuing firm had to underprice its stock when selling it to the underwriter considering it as a proxy of the cost of this relation regarding to the agency problem. None of these studies addressed the full explanation for why the issuing firm underprices their stock before issuing direct. The value of this study lies in two main contributions. The first is interpreting the short run phenomenon which has a bad impact at the long run in the Egyptian context. In other word; why the issuing enterprise underprices its issue resulting in high initial returns which declines after a while and causing the poor performance at the long run. And the second is examining the actual reason lies behind the ineffectiveness of the Egyptian privatization program. We put four goals to answer the main research question. First, measuring the initial returns as a proxy for underpricing for the state-owned enterprises privatized by issuing IPOs. Second, determining the key factors which may interpret the initial returns. Third, testing the relationship between the initial returns measured in the first goal and the key factors explored in the second goal. Fourth, exploring practices that took place in the Egyptian market and the extent of its agreement with the theory of finance. We find that: (1) the initial returns of the privatized companies is .036%. (2) The key determinants interpreting Initial returns were: Volatility, Proceeds, Offer Ratio, and Timing. (3) The Egyptian Government attracted and compensated investors to participate by Underpricing to cover the whole offer. (4) Signaling, Winner Curse Explanation, and Timing participate at interpreting Initial returns respectively. The remainder of the paper is organized as follows. The next section discusses the relevant literature to the theories interpreting the underpricing phenomenon. Next in the third section we discuss the data and methodology used in this study. The fourth section next we discuss the results .Ending our paper with our conclusion. LITERATURE REVIEW There were many theoretical explanations interpreting the underpricing phenomenon. Ljungqvist (2006) divided them into two main approaches; one imposes information asymmetry as a condition. And the other approach does not need that. The first approach addressed the information asymmetry between the main participants in the issuing process, in other word the issuing firm, the investors, and the underwriter. Rock (1986) introduced the Winner curse Explanation and argued the issuing firm underpricing to compensate the two types of investors; the informed investors and non-informed investors. It underpriced to compensate the informed investors to make them stop doing efforts and producing information about the value of the issue. It compensated the non-informed investors by underpricing because of their lack of information about the value of the issue. From another perspective, (Benvensite, Wilhelm, 1997) interpreted the underpricing as a compensation for the informed investors who revealed their private information about the potential demand of the issue. Consequently the issuer could make changes in the price range according to this information in the preliminary prospectus as the Information Revelation Explanation. Reuter (2004) interpreted the underpricing using the agency concept. He found the informed participant here was the underwriter so, the issuing firm had to underprice its stock when selling it to the underwriter considering it as a proxy for the cost of this relation regarding to the agency problem. Another explanation introduced by (Welch, 1989) argued the issuing firm was the informed participant. So, it did know its performance well and underpriced its issue to give the market positive signs about its solid performance. So, he linked between the level of underpricing and the existence of succeeding secondary offerings. He found them related positively. The other theoretical explanations do not impose existence of information asymmetry as a condition. Ljungqvist (2006) pointed out to the Tonic's explanation (1988). He argued that

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investment banks became after passing a banking law at 1933 more cautious in case of accepting the underwriting of small offering, they seemed avoiding any Legal accountability in case the offering became overpriced. Another explanation provided by (Ruud, 1993) who found the initial return consisted of two parts. One represented the real initial return and the second was resulting from the price supporting activity. The underwriters tended to support the price when falling under the issuing price. All theoretical explanations discussed above imposed that all participants in the issuing process are rationale. So, (Welch, 1992) introduced the cascades explanation. The issuing firm or the underwriter underpriced the offering more for the earliest investors who participated and subscribed first to affect with their optimistic opinion about the issue on the next investors. Then the later investors affected in their turn with their opinion on investors next to them. Loughran and Ritter (2002, 2004) pointed out to the prospect theory as it can predict the increases in the level of underpricing for the next periods. This explanation tried to interpret changes in the level of underpricing as time passes. So, (Loughran, Ritter, 2004) showed the higher the market returns raise, the higher the initial returns achieved for a period ranging between one to two months after issuing. The investor sentiment was introduced by (Ljungqvist, Nanda, signs, 2006) as another behavioral explanation for underpricing in which the issuer exploited investors optimism about the future of the issuing company performance and picked up their demand which driven under the demand curve and thus set a high price for the issue. According to that a large number of investors buying in large quantities until the price had risen and thereafter, they sold their shares. It is noted from the previous discussion the essential role played by the underwriter of the IPO. But it is worth mentioning that the role of underwriter in the Egyptian market differs from his counterpart in other markets. The only role of the underwriter in the Egyptian market is being a broker who markets the offer. If the offer is not fully covered, he must turn it back to the issuer as in the case of this study. These underwriters are under control of the government and thus the interpretation of the agency problem does not exist here. Therefore, the study will focus on testing the winner curse hypothesis, the signaling hypothesis and the Timing hypothesis. DATA AND METHODOLOGY Hypotheses Ritter (1998) found that most initial public offerings issued in more than 25 countries around the world as America, Canada, Brazil, Singapore, Germany underpriced. And all achieved initial returns at the first day of trading. In the context of privatization, the issues were underpriced and the level of underpricing is much higher than the other IPOs. ( Perotti, Oijen, , Tinbergen Ins, 1999 and Al-Gezeri, 2001). So, we can draw the first hypothesis: HA: there is a significant differentiation between the mean of initial returns of Egyptian Sate- owned privatized Enterprises and the mean of Market returns. Loughuran and Ritter (2004) proved the positive relationship between Returns on Equity before issuing and initial returns, while (Barber, Lyon, 1997) used returns on Assets to capture the operating performance avoiding any effect from the capital structure decisions. Su (2004) also, found a negative relationship between the initial returns and the degree of leverage, but he did not interpret it as a signal of a solid performance of the issuing firm. On the contrary, he interpreted this negative relation as a signal of the poor performance of the issuer. To capture the operating efficiency of the issuing firm and as once the firm issue completed successfully it will be a market oriented after issuing, so we can measure its operating efficiency through examining the relationship between its size as a proxy to the operating efficiency.

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Despite the consensus of most studies on the negative relationship between the issuer size and the initial returns, (Al-Gezeri, 2001) argued that size cannot interpret the initial returns in the context of privatization. Jovanic, Rousseau (2003) examined the purpose of issuing and found that if the purpose from issuing was to raise a new capital, the Tobin Q ratio then, can interpret the issuing behavior especially the secondary issue. Adding to these potential proxies the book value of equity to the market value of equity ratio, as (George, Huang, 2009) proved that despite the lower degree of leverage and the lower potential of financial distress, the book value of equity to the market value of equity ratio remained keeping its significance in interpreting the initial returns. And they argued this ratio can capture the risks of exposure about existing financial distress rather than risks of the financial distress itself. As for the age of issuer, despite agreeing most studies the older the issuer was, the lower the ex-ante uncertainty was (Lewellen, 2006,); age cannot interpret the initial returns of the state- owned privatized enterprises (Al-Gezeri, 2001). Type of industry also could interpret the initial returns as if the industry was new, the issuer expected to underprice more to remunerate the potential investors the inability of gathering information about the industry (Sherman, Titman, 2002). Adding to all proxies mentioned above what (Lie, Masulis, 2007) founded. They found investors have different beliefs about paying out dividends which affect the returns to become a high volatile. So, we can expect a positive relationship between volatility and initial returns as (Kumar, 2010) founding's. Despite all factors discussed above were used as proxies for the ex- ante uncertainty, none of these studies introduce a full explanation for underpricing. This prompted others to think about the ex-post uncertainty as (Falconieri, Murphy, Weaver, 2009) and found a significance relation. So, we can draw the second hypothesis: HB: Basic IPO Enterprises’s Characteristics have a significant impact on Initial Return of the Egyptian Sate-owned privatized Enterprises HB1: Profitability has a significant impact on Initial Returns. HB2: Solvency has a significant impact on Initial Returns. HB3: Operating efficiency has a significant impact on Initial Returns. HB4: TQ has a significant impact on Initial Returns. HB5: BM: EM has a significant impact on Initial Returns. HB6: Industry Classification has a significant impact on Initial Returns. HB7: Volatility has a significant impact on Initial Returns. HB8: Age has a significant impact on Initial Returns. Beatty and Ritter (1986) found the positive relationship between the inverse of proceeds and the initial returns. And (Kumar, 2010) interpret that as the higher the issue size, the higher the analysts following it, the lesser the guessing side of the returns manipulation, the higher possibility of issuing a secondary offerings. Chemmanur (1993) pointed out to the issuer as the most informed participant in the issuing process, so, it tended to underprice as a positive signal of its solid performance. Perotti and Oijen (1999) , Al-Gezeri (2001) and found the higher the Offering ratio was, the higher the solid performance of the issuing firm. And this had its reflection on the government desire to expand the ownership. Kenourgrous, Papathasiou, Rafail (2007) used the coverage ratio as a proxy which reflected the investors perception about the offering was underpriced. So, we can draw the third hypothesis: HC: Basic IPO Offering’s Characteristics have a significant impact on the initial returns of the Egyptian Sate-owned privatized companies. HC1: The size of the offering has a significant impact on Initial Returns. HC2: The offer Ratio has a significant impact on Initial Returns. HC3: The existence of secondary offering has a significant impact on initial returns.

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The issuer may exploit the times the market is nourishing to issue his offering. In other word there were times the investors were optimistic about the future returns in the market. As these optimism increases, the price of the issue became away from the fair price and rose. Then the issuer carried out the issuing. And it can be inferred through the accumulated returns achieved by the market during month before the issuance. (Loughran, Ritter, 2004). So, we can draw the third hypothesis: HD: Timing has a significant impact on Initial Return of the Egyptian Sate-owned privatized companies. The dependent variable of this study is the initial return was computed for 60 trading days beginning from the first day of trading as all previous studies did as follows: Initial Return IRi,t=

{ Pi,t − Pi,t−1 } Pi,t−1

(1) Where; Pi,t = the closing price for the firm I , at date t Pi,t-1 = the offer price at first then ,Using the closing price of the firm I , at date t-1 The Accumulated Initial Return Acc.IRi,t=

{ Pi,t − Pi,0 } Pi,0

(2) Where; Pi,t = the closing price for the firm I , at date t Pi,0 = the offer price The Adjusted Initial Return with Change in Market Index computed firstly, by using the Egyptian financial supervising authority Index we computed Percentage of Change in the Capital Market Index by: IRCMI=

{ Ii,t − Ii,t−1 } Ii,t−1

Where; IRCMI = Percentage of Change in the Capital Market Index Ii,t = The Capital Market Index at date t Ii,t-1 = The Capital Market Index at date t-1

Second, we computed the adjusted initial Return with change in Market Index by: Adj.IRCMI = IRi,t - IRCMI (3) The Adjusted Initial Return with Change in Sector Index First, by using The Egyptian financial supervising authority Sector Index we computed Percentage of Change in the Industry Sector Index by:

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IRISI= { Ii,t − Ii,t−1 }

Ii,t−1

Where; IRISI = Percentage of Change in the Industry Sector Index Ii,t = The Industry Sector Index at date t Ii,t-1 = The Industry Sector Index at date t-1 Second, we computed the adjusted initial Return with change in Sector Index by: Adj.IRISI = IRi,t - IRISI (4) The study has 3 independent variables; Basic IPO Enterprises’s Characteristics, Basic IPO Offering’s Characteristics, Timing. We measured the basic IPO enterprises’s characteristics by using the following: Profitability: ROE= Return on Equity= % (Net Profit ÷ Book Value of Equity) ROA= Return on Assets= % (operating profits ÷ Book Value of Equity) Sales= Annual Sales= Natural Logarithm for net sales Net Income= Natural Logarithm for net income Operating Income = Natural Logarithm for operating income Solvency: Liquidation Ratio = (Current Assets÷ Current Liabilities) Degree of Financial Leverage= DOL1= (Book value of debt before issuing ÷Book Value of Equity) DOL2= (Book Value of debt before issuing ÷ Net Assets); Net Assets= (Total Assets-(Accounts Payable+ any other current liabilities) DOL3= ( {Book value of debt }

{Book valu of debt+Market 𝑣𝑎𝑙𝑢 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦} )

Market Value of Equity= total number of common shares × the annual closing price Operating Efficiency: Assets Turn over= AT1= %[ operating Sales÷ (Book value of equity + Long term Debt) ] AT2=%[ operating Sales÷ (Market value of equity + Long term Debt) ] Total Assets = Natural Logarithm of Book value of total assets = Market Capitalization for assets= (number of issued stocks× annual closing price) Tobin Q= TQ=[ Market value of Equity÷ substitution cost of Equity ] ; Where substitution cost of Equity is the Book value of Equity. Book Value of Equity: Market Value of Equity [BE: ME ] =

Total Assets − (Total liabiliteis + 𝐷𝑒𝑓𝑓𝑒𝑟𝑒𝑑 𝑇𝑎𝑥𝑒𝑥) Total number of common stocks × 𝑡ℎ𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒

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Age: the natural logarithm for the difference between issuing data and the birth date for the issuer Industry Classification: we talked in to account the industry classification by computing the adjusted initial return with Change in the Sector Index. Volatility : as a proxy of the ex-ante uncertainty and computed as the standard deviation for the initial returns for 30 trading days after beginning the trading on the stock Liquidity: Stock turn over as a proxy for the ex-post uncertainty = the value (number) 𝑜𝑓 𝑡ℎ𝑒 𝑡𝑟𝑎𝑑𝑒𝑑 𝑠𝑡𝑜𝑐𝑘𝑠 𝑓𝑜𝑟 𝑎 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑓𝑖𝑟𝑚 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡

Total Value (Number) 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑎𝑚𝑒 𝑠𝑝𝑖𝑐𝑖𝑓𝑖𝑐 𝑓𝑖𝑟𝑚 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡

The second independent variable: Basic IPO Offering’s Characteristics: Proceeds: Natural Logarithm for the proceeds of the offerings (kimaz, 2000, Khalid, Nasr, 2007), The inverse of the proceeds (Beatty and Ritter, 1986) Offering Ratio = the value (number) 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑠𝑠𝑢𝑒𝑑 𝑠𝑡𝑜𝑐𝑘𝑠 𝑓𝑜𝑟 𝑎 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑓𝑖𝑟𝑚 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡

Total Value (Number) 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑡𝑜𝑐𝑘𝑠 𝑓𝑜𝑟 𝑠𝑎𝑚𝑒 𝑠𝑝𝑖𝑐𝑖𝑓𝑖𝑐 𝑓𝑖𝑟𝑚 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡

Dummy Variable for existing of any secondary offerings: talked value of (0) if the firm did not issue any secondary offerings, and value of (1) if the firm issued a secondary offering The third independent variable: Timing: The standard deviation for the market return for 30 trading days before the issuing direct began with the day thirty and ended with the day before issuing. We used the Capital Market Index of The Egyptian financial supervising authority. This study conducted on the Egyptian state-owned enterprises privatized between (1994-2010). Issuing a public offering was the basic condition for any state-owned enterprise to be considered in the community of this study. Despite the total numbers of the state-owned enterprises issued public offerings was 64 enterprises, we used 53 state-owned enterprises due to the availability of data needed to Make the necessary statistical analyzes. All data needed was a secondary data in published statements for each enterprise and in its prospectus which we obtained from the Egyptian Stock Exchange and from the Egyptian financial supervising authority. To test the hypotheses drawn above and perform the statistical analysis such as Pearson correlation analysis and Stepwise Multiple regression, we used the statistical software SPSS 18.0. RESULTS AND DISCUSSION Results of testing the first hypothesis showed there was a significant differentiation between the mean of initial returns of Egyptian Sate-owned privatized Enterprises and the mean of Market returns at (0.05) significance level. The initial returns mean were (0.036%) and this consisted with the previous studies conducted in the privatization context. When testing the second hypothesis we found Volatility contributed mainly in interpreting the initial return. The enterprise size, turnover rates and degree of financial leverage registered serious consequences which may predict with an existence of a serious internal problem in the enterprise. But this effect disappeared after controlling for the industry sector effect. This result pointed out to a conclusion there are certain sectors affect the overall performance of the market. We cannot consider the enterprise age a measurement interpreting the initial return. We also found sales, return on equity and return on assets contributed to the interpretation of the initial return. This result suggests doing a future research examining the existence of any earning management in these enterprises. We may say that the winner curse explanation could be considered appropriate in interpreting the initial return. For the third hypothesis, we found

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that no relation between conducting secondary offerings and the initial return. But we can consider the proceeding is the second key determinant after Volatility interpreting the initial return and thus the underpricing phenomenon. As the higher the proceeding was, the higher the risks were of being the government not able to cover the whole issue. So, many marketing efforts will be required. We can conclude from the low offering ratio and its significant relation with the initial return the government carried out the privatization program gradually. Last, we found a significant and a positive relationship between timing variable and the accumulated initial return only. All results are significant at level of (0.05%) or less. CONCLUSION This study aimed to address the real reasons behind the poor performance of Privatized state- owned enterprises in the Egyptian market. Our foundation was (1) the initial returns of the privatized companies is .036%. (2) The key determinants interpreting Initial returns were: Volatility, Proceeds, Offer Ratio, and Timing. (3) The Egyptian Government attracted and compensated investors to participate by Underpricing to cover the whole offer and to reduce the uncertainty of these offerings because of their ex-ante poor performance in other word before issuing. (4) Signaling, Winner Curse Explanation, and Timing participate at interpreting Initial returns respectively. REFERENCES Al-Gezeri (2001) ‘‘Studying pricing the IPOs in the context of Privatization program,’’ studies in finance and investments, published Studies, Cairo University, Egypt p. 188-232. Barber, Lyon (1997) ‘‘Firm Size, Book-to-Market Ratio, and Security Returns: A Holdout of Financial Firms,’’ The Journal of Finance, Vol.52, p. 875-883. Beatty, Ritter (1986) ‘‘Investment Banking, Reputation, and The Underpricing of Initial Public Offerings, ’’Journal of Financial Economic, Vol. 15, p. 213-232. Benvensite, Wilhelm (1997) ‘‘Initial Public Offering Going By The Book, ’’The Journal Of Applied Corporate Finance, Vol. 10, p. 98-108. CHEMMANUR (1993) ‘‘the Pricing of Initial Public Offerings: A Dynamic Model with Information Production,’’ Journal of Finance, Vol. 48, p. 285- 304. Ellul, Pagano, (2006) ‘‘IPO UnderPricing and After-Market Liquidity,’’ Review of Financial Studies, Vol. 19, p. 381-421. Falconieri, Murphy, Weaver (2009) ‘‘Underpricing and Ex Post Value Uncertainty,’’ Financial Management, Vol.38, p. 285-300. George, Hwang (2009) ‘‘A Resolution of the Distress Risk and Leverage Puzzles in the Cross Section of Stock Returns,’’ Journal of Financial Economics, Vol. 96, p. 56-79. Jovanic, Rousseau (2003) ‘‘ the Q-Theory of IPOs, ’’ NYU Working Paper No S-MF-03-17 Available on SSRN:http://ssrn.com/abstract=1300220 Kenourgios , Papathanasiou , Rafail (2007) ‘‘Initial Performance of Greek IPOs , Underwriter’s Reputation and Oversubscription,’’ Vol.33 , p.332-343.

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Kumar (2010) ‘‘Is Book building an Efficient IPO Pricing Mechanism? – The Indian Evidence,’’ International Research Journal of Finance and Economics, Vol. 38, p. 173-189. Lewellen (2006) ‘‘Risk, Reputation and IPO Price Support,’’The Journal of Finance, Vol.61, p. 613-653. Li, Masulis (2007) ‘‘ How do Financial Institutions affect The IPO underwriting Process When They Are Venture Investors?,’’ [Electronic Copy ] Available at SSRN: http://ssrn.com/abstract=891738or Ljungqvist (2006) ‘‘Handbookk of Corpotate Finance: Empirical Corporate Finance,’’ Eckbo, B., Espen, Elsevier/ North Holland, Vol. A, Ch.7 Loughran, Ritter (2002) ‘‘Why Don’t Issuers Get Upset About Leaving Money on The Table in IPOs?’’ Review of Financial Studies, Vol.15, p.445-454. Loughran, Ritter (2004) ‘‘Why Has IPO Underpricing Changed Over Time?,’’ Financial Management, p.5-37. Matecon, Poon (2009) ‘‘An Analysis of Liquidity Benefits Provided by Secondary Markets,’’ Journal of Banking and Finance, Vol.33, p.335-346. Perotti, Oijen , Tinbergen Ins (2001) ‘‘ Privatization , Political Risk and Stock Market Development in Emerging Economics,’’ Journal of International Money And Finance , Vol.1, p.43-69. Reuter (2004) ‘‘Are IPO Allocations For Sale?: Evidence from The Mutual Fund Industry,’’ Journal of Finance , Vol.61, p.2289-2324. Ritter (1998) ‘‘Initial Public Offering,’’ In Contemporary Finance Digest, Vol. 2, p.5-30. Rock (1986) ‘‘Why New Issues Are Underpriced?,’’ Journal of Financial Economics , Vol.15 , p.187-212. Ruud (1993) ‘‘Underwriter Price Support and the IPO Underpricing Puzzle,’’ Journal of Financial Economics, Vol.34, p.135-151. Sherman, Titman (2000) ‘‘Building the IPO order Book: Underpricing and Participation Limits with Costly Information,’’ Journal of Financial Economics, Vol. 65, p.3-29. Su (2004) ‘‘ Leverage, Insider Ownership, and The Underpricing of IPOs in China,’’ Int. Fin. Markets, Inst. and Money, Vol.14, p.37-54. Welch (1989) ‘‘Seasoned Offerings, Imitation Costs, and The Underpricing of Initial Public Offerings,’’ Journal of Finance, Vol.44, p.421-449. Welch (1992) ‘‘Sequential Sales, Learning and Cascades,’’ Journal of Finance, Vol.47, p.695- 732. ACKNOWLEDGEMENT

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The authors acknowledge funding from Cairo University. The authors also acknowledge the helpful comments of the reviewers. BIOGRAPHY Dena salama is assistant lecturer at Business department, Faculty of Commerce, Cairo University, has Master Degree (MSc) in Finance, 2012. Yosry Hussein Khalifa, a professor of finance, Faculty of Commerce, Cairo University.

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THE GAME-CHANGERS: EXPLORING RADICALLY TRANSFORMATIONAL

CHALLENGES CONFRONTING EDUCATION BUSINESS LEADERSHIP Karen Starr, Victoria Teachers Mutual Bank

ABSTRACT

This paper highlights the radical and rapid changes occurring at all levels of education that are having a profound impact on educational leadership, governance, business and administration. These far-reaching transformations include: competition from a rapidly expanding unregulated private sector; the international impact of de-regulation; the demise of union power, secure education jobs, time-honored hours and working conditions; constant, rapid education policy change and the proliferation of open access technologies which are rendering physical education campuses less relevant or obsolete. The paper suggests that at this stage in history we are witnessing game-changing forces that are fundamentally altering educational provision, the nature of education work, the education workforce, educational outcomes, educational leadership, governance and business. Most importantly, it argues that educational leaders and education business managers need to be ready for them and more instrumental in policy debates arising in their wake. The paper concludes with ideas for responsive action from education business leaders. JEL: H830; I210; O33 KEYWORDS: Education Game-Changers; Education Business; Educational Change INTRODUCTION

Worldwide, education is BIG BUSINESS. From kindergarten to higher education, from basic training to the most sophisticated professional learning, from knowledge transfer to knowledge creation – no matter what form it takes, where it is conducted or at what level – education globally is a multi-trillion dollar industry (Everett, Johnson and Madden, 2007). Education employs millions of people and entails countless assets to supply the world’s insatiable appetite for learning consumption and production. With formal education requirements expanding to subsume much of our individual lives and knowledge being in constant need of updating, education is now an ongoing, lifelong pursuit. The overwhelming scale of demand for education across the globe is staggering, heightening the impetus for significant transformation at a time when universal primary education for all the world’s children has still not been achieved (Brown, 2011). There will never be a time when education ceases to be an expanding and integral component of life and work (Starr, 2012). Right now, however, educational institutions are experiencing enormous flux and change, the likes of which have never been so wide reaching and disruptive. Powerful and pervasive impetuses for change are significantly altering the status quo, prevailing customs, current thinking, long-held traditions and assumptions, and the way societies work and do things. Concomitantly we are witnessing education policy and practice transformations that may be colloquially referred to as ‘game changers’ or ‘rule breakers’. For the purposes of this paper a ‘game-changer’ is defined as: “an event, idea, or procedure that effects a significant shift in the

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current way of doing or thinking about something” (Oxford Dictionary). Education is a globalized activity, and the impact of globalization provides a rationale for the game-changers and their rapid emergence. Globalization has intensified international economic competition spurring governments to increase national growth, productivity, efficiency and knowledge yield via a well-educated, innovative workforce and citizenry. Education is seen to play a major role in enhancing the nation’s competitiveness and productivity in a global marketplace (e.g. Productivity Commission, 2013). As a result, education policies throughout the developed world have increasingly subsumed economistic imperatives. As a result of globalization, governments of all persuasions have instigated structural reforms to align national education agendas with the demands of intensified international competition. Education policy is, therefore, consistent with the needs, values and underlying philosophy of market economics and neo-liberal political agendas that valorize a clear set of premises and values: sovereign individualism, competition, consumer choice, institutional differentiation, innovation/entrepreneurialism, cost efficiency, user-pays principles, small government and institutional autonomy. In this context, governments (state and federal) and education “consumers” (parents and students) require greater transparency and more information to aid choice and accountability in autonomous, locally managed institutional arrangements, hence the introduction of comparative education websites (e.g. Australia’s My School website that broadcasts the statistics and test results of every school in the nation). After the catastrophic and ongoing effects of the global financial crisis (GFC) in 2008, education has been even more clearly in the sights of governments as a major vehicle for economic reform, national productivity and growth. A reinvigorated and fortified laissez-faire free market economic and neo-liberal policy hegemony is rapidly changing the operations and behaviors of educational programs and institutions. Education’s role in national economic fortunes has assumed primacy over its individual, civic or social benefits (Reid, Gill & Sears, 2010; Smyth & Shacklock, 2004). Education is a contested and highly political realm of social life. Reforms are “deeply political”, and raise questions about the fundamental purposes of education (Woods, 2008, p. 80). Globalization has had a profound effect, forcing education institutions to rethink their operations and behaviours as the world becomes smarter, faster and smaller (Bush, 2008). In the face of globalization, education is as fallible and vulnerable, yet as propitiously and opportunely placed to benefit as any other essential human enterprise. Through the forces of globalization, education everywhere confronts new challenges and uncertainties (Held & McGrew, 2004), although there are opportunities: decisions about what to do, how and when rest with educational leaders. In order to achieve positive outcomes, there are ‘wicked’ determinations to be made at the local level (Kets de Vries, 2001). LITERATURE REVIEW A general literature search will attest to the assertion that ‘the business of education’ yields very little – mostly texts about Business Education. A literature review revealed research that relates to aspects of the current study, but none that traverses the same territory in its entirety.Researchers covering complementary terrain include Bonk (2009) whose book The World is Open: How Web Technology is Revolutionizing Education discusses developments in e-learning and e-demand. This phenomena raises questions as to how much, if any, physical infrastructure in the way of campuses and buildings, and features such as rigid timetables and on-site teaching staff may be necessary for education to occur. In similar vein, Kamenetz (2010) suggests that e-learning and e- demand are producing the DIY U (do-it-yourself university), with ‘edupunks’ and ‘edupreneurs’ creating coming shifts in higher education. Kamenetz’s research raises issues concerning educational access and costs associated with traditional universities while focusing on inevitable transformations created through interactive technologies while providing advice about DIY education.

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Knight (2008) extends this theme by exposing the rapid changes that are occurring as universities embrace internationalization and its attendant accouterments such as commercialization, international institutional competition and quality assurance. Globalizing tendencies are changing educational leadership, business and governance irrevocably, with universities traversing uncharted territory as they respond to rampant change. Rothstein, Heywood, Adams & Scott’s (2009) research focuses on the schooling sector and challenges current strictures around teachers’ employment, including remuneration, employment conditions, vacations, health and retirement plans, as well as teaching mores, dominant education cultures and the practices of teacher unions (see also Maslen, 2113). This book discusses increasing needs for educational performance accountability and its implications, including methods of evaluating teacher performance and payment by results. Likewise, Meister & Willyerd’s (2010) research on future work and impending workforce needs canvass emerging employment/employee trends and the challenges they present for employers. Like Rothstein et al (2009), the authors argue for drastic employment changes, including increasing mobility, 24/7 global accessibility, flexible hours, work location, contractual arrangements, and shifts in expectations around entitlements, promotion and retirement age. Darling-Hammond (2010) raises the issue of closely the achievement gaps between various classes and segments of American society, finding that current policies and practices for educational equity in USA – including incessant testing regimes - are failing and creating further problems. She posits why this is the case and proposes strategies for educational reform based on improvements achieved elsewhere in the world. While not solely focused on education, there is much research from the fields of economics and finance describing their social influences that are also of relevant to this study. For example: Shiller (2012) describes how finance can be used to create social good. He focuses on re-defining and re-thinking finance and its role for a good society and interrogates the meaning of social stewardship for positive social outcomes. Chomsky (1999) analyzes current policies underpinned by neoliberalism and economic rationalism, the interests they serve and their social and ecological consequences. Chomsky suggests that transformation towards equality will require organized social and political activitism. To achieve similar ends, Sukhdev (2012) proposes new business models to redress ‘market-centricity’ and problems associated with social inequalities, environmental degradation and political interference in corporate life. Watson & Freemand (2012) study the trends, opportunities and challenges presented by relentless, rapid major change. They ponder possible future scenarios and potential problems while suggesting social actors must actively shape the future to overcome looking problems and to generate constructive, positive change. Winter (2012) writing on the same theme argues that organizations must be nimble – adaptive, innovative and high-performing to survive in a volatile, unpredictable global business environment and provides a ‘blueprint’ for coping with fast, frequent change to achieve business agility. Currently, the “business of education” is not a common research area. However, as education both recognizes and seeks to confront unprecedented business challenges, there is a rapidly growing recognition of its importance by governments, education systems and policy makers, educational boards and councils, students and parents and the media. DATA AND METHODOLOGY This research involved interview and focus group data gathered from 2010 to 2013. Face-to-face, semi-structured interviews and focus groups were conducted with 199 participants, digitally recorded and transcribed.This study originally occurred in Australia but was broadened to include information from the United Kingdom, the United States, Canada, South Africa and New Zealand, through participation in international conferences for education business managers, and

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through the Association of School Business Officials’ International Aspects Committee.The research is an exercise in grounded theory building (Glaser and Strauss, 1967), which supports examination of individual standpoints within complex contexts. Grounded theory research considers the inextricability of the macro- (international and national), meso- (state and district) and micro- (institutional) connections and their effects on the experiences of individuals and groups. Real life experience is the starting point, connecting individuals with broader structural arrangements, such as global economics, government policies, national social issues and historical events. In other words, large-scale social structures affect tangible realities that are inseparable from contextualized practice or history (Ball, 1994). In this case, for example, micro- level experience is where the business effects of macro and meso actions, innovations and decisions are sensed and site-based responses instigated, with institutional experience being influenced by local, systemic, national or global decisions and events. In grounded theory building, theory is generated from the data gathered through an inductive process - a process whereby emerging research insights are analyzed and continually tested, producing further evidence and/or new theoretical insights (Corbin and Strauss, 2008). Data were categorized and analyzed, with similarities and differences enabling the construction of propositions. As themes emerged ‘loudly and clearly’ through the data, a theory or picture of the actual situation could be produced. Thus a recursive relationship between data collection, analysis, and theory occurs until the data are ‘saturated’ - that is when similar instances appear and re-appear over and over again (Glaser and Strauss, 1967). Hence the iterative processes of developing claims and interpretations within a grounded theory approach is responsive to research situations and the multiple levels of meaning produced by the people in them (Gray, 2009). Finally, emerging theories were compared with extant literature from across the world. RESULTS AND DISCUSSION The most often-cited game-changing challenges raised by interviewees are described below under thematic headings and include the implications for educators and educational institutions. As will be demonstrated, these game-changers are inextricably inter-linked and mutually influential and often comprise paradoxical, inconsistent and contradictory tendencies. They are altering or will alter education such that it will never be the same again, providing much grist for important decision making in educational leadership, business and governance. The major themes include the impact of increasing de-regulation in education, constant rapid policy change and disruptive technologies. De-Regulation and Default Autonomy Increasingly governments are devolving authority and responsibility to the education site level. Greater de-regulation and policies of ‘default autonomy’ refer decision-making, risk management, accountability and liability to site leaders and governors. Proponents of expanding ‘devolution’ include those claiming such policies aid educational improvement, increasing student learning attainment and raising standards (e.g. OECD, 2010). Opponents are cynical about ‘default autonomy’ occurring simultaneously with downwards pressures on budgets and upwards pressures on standards after governments themselves have failed on both counts – in other words, ‘pushing problems down the line’ (e.g. Marginson, 2010). Fewer government impediments to operations, however, come at the price of increasing interventions in the form of new accountabilities, regulatory compliance and mandatory audit reporting. Governments promoting autonomous educational institutions, “steer at a distance” (Kickert, 1995), mandating policy agendas and quality assurance mechanisms, devolving all operational activities to individual sites and averting risk through intensive regulatory, compliance, audit and accountability schemes. Therefore, while bureaucracies may be smaller,

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government interventions in education are increasing. The current education funding focus is on outputs rather than inputs; public-private partnerships and sponsorship; a ‘hand up’ rather than a ‘hand out’. Public investment in education is squeezed with constant Treasury pressures to reduce education spending, while value-for-money (VPM) and return-on-investment are highlighted. Previously dominant social democratic agendas have been marginalized, including overt equity and social justice policies in education (although lip service is paid to them). A corollary impact of de-regulation is the arrival of new players in the education market - a burgeoning ‘for-profit’ sector with an escalating market share and a new labor supply of non- qualified or semi-skilled and casually-employed staff. Some governments are contemplating increasing this movement by appointing non-educators to be educational CEOs, replacing school principals and academics in top education leadership posts (e.g. Preiss, 2013). The rise of nimble, flexible, low cost, low bureaucracy, ‘for profit’ education providers in a deregulated market with online or low rent changeable premises, movable product & incentivized enrollments are challenging traditional educational institutions which are highly regulated, expensive to operate, with extensive premises and infrastructure; tenured, unionized staff; rigid operational hours and standard program offerings In the United States alone, this growing sector represents 8% of all post-secondary enrolments as online education services burgeon (The Economist, 2010a). Unregulated education markets such as the private tutoring industry, charging fees from $25 to $100 per hour, are flourishing (Australian Broadcasting Corporation, 2011). Sponsors clamber for naming rights and corporate social responsibility recognition, seeking reputational benefits and future custom. There are public-private partnerships, cross-level education provisioning and multi-service hub developments, which are changing the way education is delivered and operationalized. De-regulatory activities have also fuelled the internationalization of education, including the enrolment of full-fee paying international students and a concomitant movement of students and teachers across the globe. Education has thereby become a tradable commodity as international student markets become critical to nations’ gross domestic product. International education testing regimes and league tables for schooling and higher education (a huge education industry in itself), provide measurable and comparable outputs as a barometer of educational effectiveness. This exercise also assists potential international students in making choices about where to study, which is significant in countries such as Australia where education is the nation’s third largest export earner, and for the state of Victoria, the largest income earner. Constant Rapid Policy Turnaround Incoming governments focusing on short-term political agendas change the education policies of their predecessors, often appealing to populist concerns through negative political and media commentary. A general distrust of educators is perpetrated with criticisms generally concerning ‘provider capture’, inadequate standards, the need for “back-to-basics” programs or poor returns on education investments. These disparagements serve to legitimate educational policy reforms amongst education ‘consumers’ whose expectations are constantly growing. Politically appointed bureaucrats ensure education policy aims and their implementation are pursued (a major change since the days of permanent bureaucratic appointments serving the government of the day irrespective of its political persuasion). Government funded ‘think tanks’ and independent consultants assist the pursuit of goal achievement, policy legitimation and cost savings, amidst a distrust of educational research emanating from independent university researchers. A consequence is that education policy changes constantly which makes full implementation impossible and policy effects inestimable while ensuring that educational institutions are constantly responding to externally imposed change.

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With rapid technological innovation and stakeholders at every level and angle, emerging educational responses are often un-tested and disruptive to conventional practices and assumptions within educational leadership, business and governance. The longevity of formal policies, business models and governance cycles has never been shorter and the work of educational leaders, education business managers and governing councilors has never been more uncertain, experimental and equivocal. Fluidity and constant major change is the new norm making leadership and governance challenging, demanding and inherently riskier. Most frustrating for educators are policies that “come and go”, wasting enormous amounts of energy and taking time and focus away from teaching and learning. Further criticisms arise when policy mandates paradoxically contradict each other and produce unintended consequences. For example, interviewees spoke about cost-cutting policies (“efficiency dividends”) such as re- engineered education workplaces, replacing people with DIY technology with the result that efforts to raise productivity are frustrated. The use of technology in rapid policy upheaval provides a segue into the final major game-changer – that of disruptive technologies. Disruptive Technologies This game-changer represents the largest challenge and concern for the educational leaders interviewed. Research respondents were concerned about a general inability in education to quickly adopt and adapt quickly enough to emerging disruptive technologies. Costs, capacity and the adaptability of staff are hindrances to the current ‘Old World’ (industrial thinking), which is increasingly outmoded and outdated, being replaced with New World, digital thinking and networked behaviors. Education can’t keep up with constant change and innovation and is seen to be still deep-rooted in the industrial factory age, with government policies reinforcing this business model. Research commentators referred to the difficulty of promoting creativity, problem-solving, critical thinking and teamwork in schools – New World skills – while politicians are calling for ‘back-to-basics’ reforms and reinvigorated standardized testing regimes that narrowly focus the curriculum on Mathematics, Reading and Science. Unwittingly an insatiable appetite for testing and comparative world rankings is creating a ‘core- and options’ curriculum, with the three test areas being ‘core’ and all other learning areas ‘optional’. This reversion to the 1960s elides arguments and constrains educational aims. These aims include providing a broad and balanced education in all areas of knowledge during the compulsory years of schooling, leaving specialization until senior secondary and tertiary years; meeting the learning needs to diverse talents and interests; and developing students’ capacity to apply knowledge to real world problems through interdisciplinary learning applications. The proliferation of technologies enabling education to occur anytime, anywhere, on any device make physical attendance in classrooms and lecture theaters unnecessary, although educators concede that on-site attendance is beneficial, especially for the compulsory schooling years. One professor said: A new lecture theater has been built right next to the building where my office is located. It’s beautiful – a magnificent piece of architecture and the technological equipment is amazing. It’s a joy to be in and work in. BUT, last week was the first week of Semester. Of the 123 students in my course, only 32 turned up… Why would they turn up when the lecture is recorded and can be downloaded at any time? And it’s down hill from here because attendance goes down as the semester progresses. Why are we are still building lecture theaters and wasting millions of dollars? Our students are in a different era…Kurzweil’s (2005) prophecy about ‘singularity’ whereby technology and biology merge to augment our physical lives, senses and experiences, is almost complete. We carry or wear digital devices that have transformed the world in every way, providing constant access to reality and virtual reality. Technologies such as Google Glass, the hands-free multi-function internet device worn like eyeglasses enables simultaneous reality and

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virtual reality experience, challenging the usefulness or necessity of traditional textbooks and the didactic rote learning of facts. At the time of writing the release of this amazing development is imminent, with global demands expected to rival the advent of smart phones and i-pads. Take-up will no doubt be speedy as Google Glass becomes the next ‘must-have’ device. Social media enables anyone with a web 2.0 enabled device to create, share and comment on content from anyone anywhere else. Interviewees referred to Tumblr, Gowalla, Foursquare, Posterous, Quantcast, Friendster, Fromspring, Quora.com, Hunch.com, Facebook and Twitter which are consuming increasing amounts of students’ time while creating anxiety for many educators who feel overwhelmed and out-of-date. Educators were aware of emerging technologies that will be commonplace in no time. The advent of 3D printing challenges traditional manufacturing, providing the means by which a massive range of physical objects can be created onsite, tailored and individualized, as needed by anyone, anywhere. The specter of 4D printing that enables material objects to change their properties like chameleons to suit varying conditions (for example, glass could become opaque or transparent, clothing could become cooler or warmer as required) will have even more impact. The first generation of quantum computers are appearing - computers based on quantum mechanics that have such enormous capacity, are so fast and powerful, they will challenge human intelligence as they solve problems in seconds that would require eons through conventional computers. The developers of this D-Wave technology admit themselves that it is difficult to imagine how quantum computers or ‘genius machines’ will be used or their effects, but there is no doubt they will and the impacts will be astonishing and inconceivable in terms of current understandings about the world. The Kahn Academy offers free self-paced online courses, materials, resources and assessment tools in a wide range of subjects at varying education levels and offers ‘badges’ for achievement. Massive Online Open Courses (MOOCs) are open-license e-learning courses offered free of charge to anyone (without pre-requisites), anywhere in the world via the internet that have rapidly swept through the global higher education landscape. MOOCs are credited with opening up Ivy-league universities and high-profile professors to the masses (Bohle, 2013). The take-up of these self-directed courses has quickly run into the millions – faster than Twitter or Facebook (Lewin, 2013). The business model behind MOOCs might appear perplexing because the courses on offer cost around $50,000 to produce (with videography being the biggest cost), still require staff to monitor discussion forums, yet they are free to students. However, revenue streams can be generated through licensing, assessment fees, fees for certificates of completion, provision of recruitment data to potential employers, kick-backs from recommended text book sales, and through generating recruits into degree courses through MOOC credits. Further revenues are being canvassed through advertising or sponsorships on MOOC sites and through the development of paid introductory and remedial courses. MOOCs enable students to ‘dip in and out’ of education courses and coordinate the attainment of education credentials around their life events and activities. Friedman (2013) sums up the fears of many interviewees when he says:

I can see a day soon where you'll create your own college degree by taking the best online courses from the best professors from around the world … paying only the nominal fee for the certificates of completion. It will change teaching, learning and the pathway to employment. There is a new world unfolding and everyone will have to adapt.

While universities are currently the most affected by MOOCs, there are moves for their introduction for school age children as a means of providing education in developing countries. For example, Mitra (2013) asks, “What is going to be the future of learning?” to which his answer

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is free, open courses in the cloud. These enabling technologies are democratizing, empowering networks and friendship groups and supporting people power. But there are downsides. Educators speak of increasing problems with cyber-bullying and rising litigation for technologically created problems. Many young people are living hyper-connected lives. Educators are concerned about continuous connectivity and ‘always-on’ tech-savvy lifestyles that are influencing students and their learning. Concerns include students becoming easily bored or impatient with traditional teaching and learning activities, needing ‘quick-fixes’, instant gratification and being disinclined towards deep-thinking and time-consuming lengthy learning tasks. This new generation of students is challenging the technological capabilities of many teachers, a fact highlighted by the OECD (2010). The cost of technological provisioning which is quickly out-of-date is taking increasing percentages of education budgets. Further worries for education business leaders concern privacy and data security that are enormous new realms of risk to be managed. Finally educators are aware that these game-changers raise the question – are educational institutions necessary? For example, Michigan state is enabling students from Grades 5 – 12 to take two online subjects per semester through Michigan Virtual University. And if we decide that schools, training colleges and universities are necessary, how many are necessary? Implications In the high-stakes environment of educational leadership, business management and governance, the overwhelming sense derived from the interviews was a sense of the demise of ‘the way we were’ amidst concerns about ‘the way we are’ and ‘are becoming’. There is much fear and anxiety about rapid, complex change and uncertainty. At the same time, there is optimism and amazement about the possibilities inherent in these game-changing forces. It would be fair to say, however, that feelings about being pushed outside of ‘comfort zones’ are having corporeal effects. Interviewees mentioned the need for educational institutions to collaborate more in order to survive. Viability is strengthened through networks, federations, amalgamations amidst a larger number of educational institutions going into receivership or closing; or the closure of less popular courses or having to implement staff redundancies. Ironically, this need arises as there is more competition between educational institutions and less co-operation as they battle for market share and as educational leaders are consumed with issues about individual sites and not about ‘the system’. Simultaneously there are increasing calls for individualized student programming (while the curriculum and assessment instruments are standardized) and for specializations across education facilities. Interviewees argue that implementing ‘individuation’ policies is frustrated by educators having less time and focus on teaching and learning as more time and effort is spent on test ranking attainment and compliance mandates. Educators believe that this testing emphasis is ‘dumbing down’ the curriculum and, ironically, causing standards to drop. Teaching is being de-professionalized in the process with respondents arguing that teachers are well aware of what students know and do not know – standardized tests produce information that is already known within educational institutions. There were concerns raised about the diminishing worth of education qualifications as the numbers of unemployed graduates grow. Cheaper ‘efficient’ provisioning makes education ‘mean and lean’ but staff cuts and redundancies are occurring at the same time as education work is intensifying, with expectations of 24/7 availability, more unpaid out-of-hours work and reduced work-life balance. Educational institutions are becoming more flexible to cater for twenty-first century lifestyles (for example,

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Free Schools in England establish operational hours and school calendars based on the needs of working parents). Teleworking is being promoted in universities as a means of relieving car parking and office space provisions and utilities costs. Ironically, devolved authority, responsibility and default autonomy at the site level is perceived to create a center – periphery power structure, relegating the position of educational leaders to that of perfunctory middle managers with little time or incentive to pursue institutionally inspired major change. CONCLUSION Many ideas about responding to game-changing challenges were recorded in the research. These mostly concerned areas for contemplation and action. These ideas are summarized below under three main organizing themes for educational business leadership: discover, educate, advocate. Discover:

• How worldwide pervasive changes are affecting and are likely to affect education. • What the challenges will mean for education business, education business models. • The short, medium and longer term implication of challenges for educational institutions. • Imminent and current education policy and take a position on how policy agendas should

change.

Educate

• Work alongside educational leaders and their national professional associations to form alliances for policy change.

• Educate educators about education business and business implications. • Overcome the education business ‘backlash’ (business is a ‘dirty’ word in education): re-

brand ‘business’ as the means by which education happens and demonstrates how education business can improve education.

• Promote distributed leadership in education and demonstrate how the business side of schooling can create more time for teaching, learning and educational leadership

Advocate

• Re-think the purposes of education: the economistic/vocational vision needs to be balanced by notions about the intrinsic worth of education.

• Take a proactive stance on education policy. • Develop alternative measures of institutional and student success and educational

‘quality’. • Question the equity impact of education policies. Denounce assumptions about a ‘level-

playing field’ that underpin testing, rankings and institutional funding. • Promote ‘prosumption’ in its broadest sense so that educational facilities, knowledge and

resources are more evenly shared and costs lowered. • Create commercial partnerships and networks for school sustainability. • Broadcast education’s good news and great achievements. • Refuse to implement policy that we know to be ‘bad’ – en masse. • Take political action, including making public pronouncements, political lobbying, press

statements and media announcements – telling it as it is and what is required to fix problems (and pushing for fewer interventions, greater trust and not simply more money).

• Stick up for education, educators, students – everywhere.

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The educational business leaders in this research argue most emphatically for a re-thinking of educational leadership and education business, including the need for wrestling education out of political realm and the short-term agendas of politicians, to pursue education business ‘for good’. REFERENCES Australian Broadcasting Corporation (2011). The interview. Sunday Nights with John Cleary, ABC local radio, Melbourne, 14 August, 2011. Ball, S. (1994). Education reform: a critical and post-structural approach. Buckingham, UK: Open University Press. Bohle, S. (2013). Librarians and the era of the MOOC. Scilogs. Available at: http://www.scilogs.com/scientific_and_medical_libraries/librarians-and-the-era-of-the-mooc/ Retrieved 23 August 2013. Brown, G. (2011). Beyond the crash: overcoming the first crisis of globalization. Keynote address delivered to the World Council of Credit Unions international conference, Scottish Exhibition and Conference Centre, Glasgow, 24 – 27 July, 2011. Bush, T. (2008). From management to leadership: Semantic or meaningful change? Educational Management, Administration and Leadership, 36(2), 271 – 288. Chomsky, N. (1999). Profit Over People: Neoliberalism and Global Order. New York, NY: Seven Stories Press. Corbin, J. & Strauss, A. L. (2008). Basics of qualitative research: techniques and procedures for developing grounded theory. Los Angeles, CA: Sage. Bonk, C. J. (2009). The World is Open: How Web Technology is Revolutionizing Education. San Francisco, California: Jossey-Bass. Darling-Hammond, L. (2010). The Flat World and Education: How America’s Commitment to Equity will Determine Our Future. New York, NY: Teachers College Press. Everett, R. E., Johnson, D. R. and Madden, B. W. (2007). Financial and managerial accounting for school administrators: Tools for school. Lanham, MD: Rowman and Littlefield Publishing Group. Friedman, T. L. (2013). “Revolution hits the universities”: MOOCs. The Daily Riff, 28 January 2013. Retrieved on 29 August 2013 from: http://www.thedailyriff.com/articles/revolution-hits- the-universities-tom-friedman-declares-1010.php Glaser, B. G. & Strauss, A. L. (1967). The discovery of grounded theory: strategies for qualitative research. Chicago, Ill: Aldine Publishing Company. Gray, D. E. (2009). Doing research in the real world, 2nd edition. Sage: London. Held, D. and A. McGrew (2004). Global Transformations: Politics, Economics and Culture. Stanford. Stanford University Press.

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Kamenetz, Anya (2010). DIY U: Edupunks, Edupreneurs, and the Coming Transformation of Higher Education. White River Junction, Vermont: Chelsea Green Publishing. Kets de Vries, M. (2001). The Leadership Mystique: a user's manual for the human enterprise. FT Press. Kickert, W. (1995). Steering at a distance – a new paradigm of public governance for Dutch higher education. Governance, 8(1), 135 – 157. Knight, J. (2008). Higher Education in Turmoil: The Changing World of Internationalization. Rotterdam, The Netherlands: Sense Publishers. Kurzweil, R. (2005). The Singularity is Near. London: Penguin. Lauder, H., Brown, P., Dillabough, J. & Halsey, A. H. (2006). Education, Globalization and Social Change. Oxford: Oxford University Press. Lewin, T. (2013). Colleges Adapt Online Courses to Ease Burden. The New York Times, April 29, 2013. Available at: http://www.nytimes.com/2013/04/30/education/colleges-adapt-online- courses-to-ease-burden.html Marginson, M. (2010). How universities have been positioned as teams in a knowledge economy world cup. In Blackmore, J., Brennan, M. and Zipin, L. (Eds.) Re-positioning university governance and academic work. Rotterdam, The Netherlands: Sense Publishers. Maslen, G. (2013a). Fury over evaluation process. The Age, 21 October 2013. Available at: Read more: http://www.smh.com.au/national/education/fury-over-evaluation-process-20131020- 2vv64.html#ixzz2iK4ZT3DE Meister, J. C. & Willyerd, K. (2010). The 2020 Workplace: How Innovative Companies Attract, Develop, and Keep Tomorrow’s Employees Today. New York, NY: Harper Collins. Mitra, S. (2013). Build a school in the cloud. TED Talk, February 2013. Available at: http://www.ted.com/talks/sugata_mitra_build_a_school_in_the_cloud.html Organization for Economic Cooperation and Development (2010). The high cost of low educational performance: the long-run economic impact of improving PISA outcomes. Paris, France: OECD. Preiss, B. (2013a). Shake-up to hit state school principals. The Saturday Age, 28 September 2013, p. 1. Retrieved on 28 September 2013 from: http://www.theage.com.au/national/education/shakeup-to- hit-state-school-principals-20130927-2uk28.html#ixzz2g8lTwchw Productivity Commission (2013). Productivity Update, May 2013. Canberra, ACT: Productivity Commission, Australian Government. Reid, A., Gill, J. & Sears, A. (2010). Globalization, the Nation-state and the Citizen: Dilemmas and directions for civics and citizenship education. New York: Routledge. Rothstein, R.; Heywood, J. & Adams, S. J. (2009). Teachers, Performance Pay, and Accountability. Washington, DC: Economic Policy Institute.

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Smyth, J. & Shacklock, G. (2004). Teachers doing their ‘economic’ work. In S. J. Ball (ed.). The RoutledgeFalmer Reader in Sociology of Education (pp. 240-256). London: RoutledgeFalmer. Shiller, R. J. (2012). Finance and the Good Society. Princeton, New Jersey: Princeton University Press. Starr, K. (2012b). Above and Beyond the Bottom Line: The extraordinary evolution of education business management. Camberwell, Victoria: ACER Press. Sukhdev, P. (2012). Corporation 2020: Transforming Business for Tomorrow’s World. Washington, DC: Island Press. The Economist (2010). For profit colleges: Monsters in the making? The Economist, 24 July 2010, p. 38. Watson, R. & Freemand, O. (2012). Futurevision: Scenarios for the World in 2040. Brunswick, Victoria: Scribe Publications Pty Ltd. Winter, Graham (2012). First Be Nimble: A Story About How to Adapt, Innovate and Perform in a Volatile Business World. Milton, Queensland: Jossey-Bass. Woods, C. (2008). Remodelling and distributed leadership: The case of the school business manager. In Chapman, C. & Gunter, H. M. (2008). (Eds.). Radical reforms: Perspectives on an era of educational change. Hoboken: Routledge, pp. 80 – 90. BIOGRAPHY Professor Karen Starr, PhD, FAICD, FACE, FACEL, FIEDRC is the Inaugural Chair, School Development and Leadership, Deakin University, Australia. She is a Director of Victoria Teachers Mutual Bank.

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THE INFLUENCE OF CULTURE, GENDER AND EDUCATIONAL LEVEL ON ESCALATION OF COMMITMENT: COMPARISON JAPAN AND

INDONESIA Masako Saito, Osaka Sangyo University, Japan

Sekar Mayangsari, Trisakti University, Indonesia

ABSTRACT

This study explores the effects of national culture, educational level and gender on willingness to escalate commitment. Using samples of students in undergraduate of Japan and Indonesia, we confirmed that the influence of culture were significant in explaining escalation of commitment. Respondents from Indonesia are more likely to escalate their decision than Japanese. The other results also show that gender and educational level also influence on escalation commitment. Moreover, even the gender, based on regression, does not show the influence, however, we find significantly different. We found that female tend to take riskier decision, compared it with male after we compare the choices between male and female. KEYWORDS: Escalation of Commitment, Hofstede’s Culture, Nationality, Gender, Educational Level INTRODUCTION We extend the prior research by testing for the influence of culture and gender on an economical behavior for judgment, which is escalation of commitment, between accounting students. They would be the preliminary managers to make a decision for investment as well as auditors to advise for their activity. If we can find the cultural influence on how people make decision in this paper, it might give the possibility to develop good method to teach logical and ethical thinking for students. The prior research regarding with the behavior of decision makers over incremental resource to failing investments (“escalation commitment”), still limited in their generalizability. One of the reasons is why it depends on truly differentiating the national culture of decision makers. Prior studies have compared North America with Asian countries (such as Hong Kong, Singapore and Taiwan) and US and Canada (Salter & Sharp, 1996), and found that agency and framing effects were significant in explaining escalation of commitment. Curtis, Conover & Chui (2012) examines the significance of national culture on ethical decision making and finds that eastern countries consisted of Japan and China are higher than western countries, US and Mexico in power distance as suggested by Hofstede. But that study does not give empirical evidence based on differentiation between countries. THEORY AND HYPOTHESIS This study is organized by examining the effects of national culture, educational level and gender on willingness to escalate commitment between Japan and Indonesia. Historically, Indonesian education has been influenced by Japanese culture and tradition, because during the World War II most Japanese teach Indonesian people the significance of education. Indonesian people still remember in their minds the spirit of “education for all,” as a kind of ‘historical commitment’ based on the Japanese legacy. We suppose that Indonesian people might still remain the similar spirit to Japanese. This paper is based on prospect theory. Prospect theory is a behavioral economic theory and describes decisions between alternatives that include risk where the

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probabilities of outcomes are known (Kahneman & Tversky, 1979). The theory indicates peoples’ decisions based on the potential value of losses and gains rather than the final outcome, and that people use interesting heuristics to evaluate these losses and gains. Rietveldt (2012) suggests that there is no significance differences between women and men on the contestant’s decision, but our suspicions are that the semifinal might play a role in this result. Five cultural dimensions by Geert Hofstede (Hofsted & Hofsted, 2005) are taken in our research. RESEARCH METHOD Experiment is used to collect the data in this research. Several variables have manipulated to fit with the research objectives. We have dependent variable, Escalation Commitment, and independent variables are framing, adverse selection and culture. Those variables are measured by certain measurements through the instrument. Each subject was given to indicate their preference for making a choice on a ten scale point. 1 is strongly agree to stop X project (A choice); and 10 is strongly agree to continue the X project (B choice). Dependent variable was the score of escalation commitment from 1-10. The higher score shows the willingness respondent to escalate their commitment. RESULTS We conclude that gender, nationality and level of education give significance influence on escalation commitment. Moreover, the decision makers from Indonesia tend to continue to invest time, money of effort into a bad decision or unproductive course of action but decision makers from Japanese will took the other choice. The results are in line with the Hofstede. It means that Japanese has the stronger feeling to avoid the uncertainty than Indonesia. The other result in riskier decision is statistically shown between two nationalities. We also tested the significance difference between male and female choices and the result supported our prior argument that female like to escalating their decision.

REFERENCE Curtis, B. Mary, Teresa L. Conover & Lawrence C. Chui (2012). A Cross-Culture Study of the Influence of Country of Origin, Justice, Power Distance, and Gender on Ethical Decision Making, Journal of International Accounting Research, 11(1): 5-34. Hofsted, Geert, Gert J. Hofsted (2005). Cultures and Organizations: Software of the Mind (2nded.), New York: McGraw Hill. Hofstede, Geert (2001). Culture's Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations (2nd ed.), Thousand Oaks, CA: Sage Publications. Hofstede, Geert. (1980). Culture's Consequences: International Differences in Work-Related Values (2nd ed.), Beverly Hills CA: Sage Publications. Kahneman, Daniel & Amos Tversky (1979). Prospect Theory: An Analysis of Decision under Risk, Econometrica, 47(2): 263-291. Salter, B Stephen & David J. Sharp (1996). The Determinants of Escalation of Commitment: National Culture and Experience Effects, Working Paper, Social Science Research Network. Rietveldt, R. (2012). The Influence of Personal Characteristics and Reference Dependence in Risky Decision-Making for A High-Stakes Game Show, Erasmus University.

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CHANGING PERSPECTIVES OF POLITICS

MARKETING IN NIGERIA Vincent Aghara, Nnamdi Azikiwe University

Ireneus Nwaizugbo, Nnamdi Azikiwe University Emmanuel Chukwuemeka,Nnamdi Azikiwe University

Chinedu Onyeizugbe, Nnamdi Azikiwe University

ABSTRACT Politics marketing in recent years has attracted increasing attention from politicians all over the world, though not much from the academia. The fact that politics is about power and the distribution of scarce resources has created more concern on the subject of politics marketing. For a third world economy like, Nigeria the challenges are enormous, and can play a major role on how good leaders can be elected and invariably, how the scarce resources of the nation are distributed to achieve voter/consumer satisfaction and overall economic development. The paper looked at politics marketing from the perspective of the more developed economies and the model of a market-oriented party thus: use of market intelligence; adaptation of behaviour; organizational implementation and conveyance of new behaviour, and its implications for Nigeria. The paper also examined the evolution and development of party politics in Nigeria, where the political structure, with ethnic and religious slant were handed over by the British Colonial masters, leading to instability, military intervention and still an evolving political culture, after over 53 years of independence. For the way forward the paper recommended among others, an independent electoral body; an incorruptible judiciary; enlightened electorate and de-registering mushroom parties. JEL: L8, L89 KEYWORDS: Politics, Marketing, Electorate, Market-Oriented Party, Democracy. INTRODUCTION The current interest in the field of politics by marketers may not be unconnected with the recent definition, importance, world view of politics in our daily life, and the misapplication of power politics by those in authority. Heywood (2007) defines politics as the activity through which people make, preserve and amend the general rule under which they live. However, looking at politics as power and the distribution of resources, he said that at its broadest sense, politics concerns the production, distribution and use of resources in the course of social existence. Politics therefore is, in essence, power: the ability to achieve a desired outcome, through whatever means. From this perspective, Lasswell (1936), summed it up by saying that, politics is about diversity and conflict, but the essential ingredient is the existence of scarcity: the simple fact that, while human needs and desires are infinite, the resources available to satisfy them are always limited. He also viewed the elite as the primary holders of power. Politics can therefore be seen as a struggle over scarce resources, and power can be seen as the means through which this struggle is conducted. From the above one can easily understand why the former president of Nigeria, Chief Olusegun Obasanjo described the 2007 general elections in Nigeria as: a matter of life and death, and a military warfare without weapons. Marketing therefore, is increasingly becoming an inseparable aspect of politics since both marketing and politics have identical ultimate goal of attracting, holding and sustaining customers (voters and consumers) to their specific product or brand. The infiltration of politics by business

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therefore, has attracted increasing attention of political commentators in recent years. According to Lee–Marshment (2001), research has been conducted into how politics marketing has permeated political communications with political parties making increasing use of professional advertising from the world of business as well as polling agencies to inform their campaign design. They equally use political marketing to inform all aspects of party behaviour and not just campaigning. Political parties also use marketing instrument as part of their electoral campaign activities (Kotler and Kotler, 1999; Scammell,1999). The literature on politics marketing has contributed considerable insight into how specific marketing instruments have been utilized to optimize tactical and strategic aspects of political campaigns (Newman,1994; Kavanagh,1995;Scammell,1995; Wring,1999; Wring,2002b). Besides parties and individual candidates, the employment of political marketing instruments can be noted for grass–roots organizations within a party (Franklin and Richardson (2002), single–issues groups (Lindsay,1999),or governments and executive bodies (Newman,1995; Nimmo ,1999; Buurma, 2001;Newman,2001; Harris,2001a). Les-Marshment further explored the full potential of political marketing on a theoretical level, integrating both management and political science literature to create a model of how a political party can use marketing and become market-oriented. She also examined the extent to which Thatcher and the Conservatives in 1979 exhibited behaviour in line with this model and compared this with Blair and Labour in 1997.It showed how Thatcher used marketing to inform policy design, a model which Blair followed but to a greater extent, using results from market intelligence to push for changes in the role of party membership and further centralization of power to ensure a clear organizational structure within the party. Contributing, Nkamnebe (2003), reviewing Gamble (1990) said on their part, particularly in a developing country context like Nigeria, marketers are often occupied with increasing demand for basic needs to the extent that often they forget to think about the synergistic potentiality of studying marketing as a veritable tool for productive political process. Most importantly perhaps is the general weak political behavior occasioned by frequent truncated democracy, which in the main is characterized by military dictatorship and pseudo–military democracies. He further discussed the similarities of marketing and politics on the basis of the obvious interface between the two, mentioning attempts made to conceptualize their resemblance. He then attempted to identify and discuss some of the obvious similarities between marketing and politics under the following themes: market problems; product development; purchasing; distribution and market communications. The differences include market, structure market periodicity and organizational objective. He also identified some factors that will influence the development of politics marketing in third world countries like Nigeria to include: illiteracy; poverty; corrupt bureaucracy; sit-tight syndrome; among others. Citing (Beard, 2000; Chang and Park, 1998), Opeibi (2006) said that political advertising in the past two decades in Nigeria has assumed a new dimension with the increasing use of negative political advertising during electioneering campaigns. Continuing, he said that prior to this period in Nigeria, political candidates concentrated more on selling themselves and their programmes to the people with very few instances of the use of negative adverts. However, with the resuscitation of democratic activities in 1998, leading to elections in 1999, the competitive nature of electioneering campaigns and the ‘winners-take-all-syndrome’ that characterized that election and especially the 2003 elections, where many of the political candidates abandoned positive, issue- focused, image-building adverts for direct attacks on their opponents. Concluding, he said that based on data, taken from selected Nigerian newspapers, factors such as: level of education of voters; political literacy; content and structure of adverts; personality of the sponsor (and/or the political candidate) among others may influence the effect of negative campaign on the electorate. Other contributors on this topic of politics marketing include, Hennerberg (2003), using two

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different perspectives of instrumental and functional views to analyse political marketing management. The analyses used existing instrumental (means-oriented) interpretations of political marketing activities and drive, as an alternative to ‘managerial’ orientation, an ends-oriented categorization of generic functions that will provide a new way of describing and characterizing political marketing management. Also Henneberg (2004), political marketing theory: hendiadyoin or oxymoron. This paper however, in the main will look at the topic of politics marketing, first from the conceptual context and perspective of the developed economies of Europe and the United States of America (USA), with particular reference to how a party can achieve electoral victory through the use of marketing techniques to become a truly market-oriented party. Thereafter, the paper will look at the concept of politics marketing from the Nigerian perspective, through the evolution and development of party politics in the country and how the emerging political parties have embraced this concept in their quest for electoral victory. The paper will also take a holistic look at the Nigerian electoral process/umpire since it forms part of the changing perspectives of politics marketing especially for a third world country like Nigeria. Politics Marketing: A Theoretical Discourse According to Lees – Marshment (2001), marketing, itself is a form of management or approach used primarily by business organizations. It has evolved to include the design and promotion of a product to ensure that the goals of the organization, the prime one, being to make profit in the case of a business, are met, though marketing is not just about selling, or, in political terms, campaigning. Citing Levitt, (1960), Les-Marshment, observed that the difference between marketing and selling is more than semantics. Selling focuses on the needs of the seller, while marketing is focused on the needs of the buyer. Selling is preoccupied with the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering, and finally consuming it. The current marketing–philosophy focuses on how firms can satisfy customers and adopt what is called a market–orientation as this is deemed the most effective way to meet the firms goals and also applies to politics marketing and political parties. Other researches which had attempted to apply the theoretical basis of marketing for business to politics include (Niffenegger, 1989; Newman, 1994; O’Shaughnessy, 1990; Wring, 1994), among others, even though they focused more on the marketing functions of communications and selling. According to Kotler, Armstrong, Saunders, and Wong (1999), the selling concept is also practiced in the non–profit area. A political party, for example, will vigorously sell its candidate to voters as a fantastic person for the job. The candidate works hard at selling himself or herself– shaking hands, kissing babies, meeting donors and making speeches in addition to the use of public media like radio and television advertising, billboards, posters and mailing. Bovee and Thill (1992) may have been thinking in that direction when they posit that, a political party markets its people and its ideas. It produces candidates with distinct political points of view, and it promotes them through a variety of advertising techniques. The target market is registered voters, and marketing goals is to sell voters on the politician and the kind of re-presentation he or she would provide. The price is a vote. Lees–Marshment (2001) seems to toe this line of marketing concept in politics marketing by arguing that if a political party implemented the marketing philosophy, it will seek to meet voters’ needs and wants, thus producing voter satisfaction, and in doing so, satisfies its own goals. A market–oriented party, is not concerned with changing peoples’ mind, but rather, in following them; instead of investing heavily in advertising, in order to convince voters that their party is the best one, or engage in arguing their particular ideology. A party would act in line with the

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rational-choice notion as put forward by Downs (1957) that, parties need to move to a median position to win enough electoral support to get into office. The organizational focus of the party is on voter’s needs and wants, and on the best way to satisfy those. A major party in Britain for instance would thus design its product or determine its behavior in a way that will attract support from those it needs – thus enough of the electorates to win office in a general election. Model of a Market-Oriented Party Lee – Marshment identified four main activities that a party attempting to use marketing in determining all aspect of its behavior would engage in, which include: use of market intelligence; adapting its behavior to suit those whose support it seeks; implementing this new behavior at all levels of the party organization; and conveying this to the electorate. (i) Use of Market Intelligence: A party will invest significant efforts in discovering the needs, wants, behavior and the demands of the voters whose support it seeks. It is concerned with party- voter communication in its broadest sense, and can be derived from many sources and in different ways. All or any of these research methods formal/informal, quantitative/qualitative, primary/secondary may be employed by parties. The party leadership might create committees or task-forces to examine the party’s problems, and look into what marketing could offer which should include both professionals with marketing expertise or outright Integrated Marketing Communication (IMC) Consultants. Today’s, marketing is leaning towards seamless communication (viz, polling and advertising agencies, direct mail consultants, market analysis/statistical experts). These could either be outsourced, or from within the party or an admixture of both. This will help ensure the acceptance and thus the success of marketing as party members can also be made to become aware of the results of research by professionals. In seeing result of opinion polls, party members will accept that, despite the perceived value of the party’s current policies, voters will not support them, if such policies do not match voter satisfaction, needs and wants. (ii) Adaptation of Behaviour: The party would then adapt its behaviour or design its ‘product’ according to the findings from its market intelligence. A party’s product would include more than just the slogans and posters it produces in a campaign, and should also include all aspects of its behavior at all times ( not just at election time), and at every level of the party ( not simply the leadership). A party is a more complicated entity than a business, however, and thus needs not to simply follow voters but adjust this new product design to take into account various factors. First it will consider whether the product design is achievable. A market-oriented-party would not “promise- heaven on earth”, but as much as possible; ensure that it can ‘deliver’ its promised product especially where policy proposals are concerned. Compare this with the ruling party Peoples Democratic Party (PDP) in Nigeria that promised zero power outage after six months it won an election in 1999. Eight years thereafter the power outage had gotten worse, but the party still contested and won elections in 2007 and 2011, and still preparing to contest and win in 2015. Interestingly, what is akin to a party adapting its behaviour or designing its product according to the findings from its market intelligence is evident as: The PDP, Nigerian ruling party’s sudden investment of significant effort and financial resources in electric power generation and distribution, to achieve zero power outage in 2014, before the 2015 general election. Power supply is critical to winning electoral votes in 2015. Secondly, a party should estimate what likely reaction of internal support will be to the proposed changes in behavior. A political party will normally engage in competition and support analysis. It will take into account the strengths and weakness of the opposition parties and should alter its design to ensure

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that it has strength where the other party/parties are weak. The party may also adopt target marketing, if it already has long-term, loyal support from one section of the society, it may then reduce the aspect of the product design that suits its demand and alter its behavior to suit another section of the society which makes different demands but whose support the party does not yet have but needs to win powers as long as it can make these changes without alienating its existing support base. This is true for any party wanting to win electoral votes in the South-South/Niger- Delta region of Nigeria in all elections. One of Nigeria’s political parties, the Action Congress f Nigeria (ACN), which has now merged with other opposition parties, to form the All Progressive Congress (APC), probably had this in mind due to the strategic nature of the South-South or Niger-Delta, where the party does not seem to have electoral strength. The party in the alternative, promised to set up a ministry of the Niger-Delta to more effectively tackle the problems of this region that produces more than eighty percent (80%) of the nations resources in terms of crude oil resources. (iii) Organizational Implementation: The party will then ensure that the new product design is implemented at all levels of the party. This is essential, if it is to be effective and attract support from voters, but this will necessitate careful organizational handling. The greater the degree of change in behaviour required, the harder the task for the party leadership to attract support for such change. Thus the party leadership will be aware of the potential problems and either take measures to avoid it or be ready to respond to such problems, while planning to carry the electorate or voters along in the implementation. Failure of organizational implementation is evident in the zero tolerance for corruption or anti graft policy and due process of the ruling party in Nigeria the PDP. It is rather embarrassing that a top party hierarchy, in fact the fourth in government could not adapt to such strategic and important party policy as was the situation some time ago,in the lower National Legislative House. How then can the party intend to carry the electorate along in future behaviour adaptation. However, the emergence of APC, has changed the political landscape and the need for all parties especially the ruling party to adapt a market- oriented party policy as the 2015 election approaches. (iv) Conveyance of New Behaviour: A party should naturally communicate its new behavior or new product design in a positive way to voters. As Kotler and Andreasen (1987), argued that everything about an organization–its products, employees, facilities and actions communicate something. Not only could the nature of the leaders, but the behavior and rights of a party’s members be influential in attracting or propelling voters. Shaw (1994), contended that the British labour party failed to win the 1992 general election because (amongst other factors), despite policy changes, Kinnock (party leader) has lacked the time and support to transform the party itself… its ethos, its language and rituals, and its close association with the unions, all alienated the electorate. So a party using marketing would attempt to display behaviour in line with the new product design at all levels and at all times. Generally speaking, if a party engages in these four activities, the model contends that such party will win power, and then it would also deliver the product to voters and thus carry out its promise through into government. This though is arguably the most important and difficult part of marketing, though still a subject of much debate due to varying levels of success. From a pragmatic point of view, there are also arguments as to whether the use of marketing in this way can help to increase party’s standings.Thatcher’s Conservative Party successfully used the four models to win election in Britain in 1979. However by 1997, Blair’s Labour Party through the use of a more effective combination of the four models took over the government from the conservatives. The Democratic Party in the USA, also effectively used the model to win the last two presidential elections. Evolution of Party Politics in Nigeria

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Serious party politics started in Nigeria in the 1950s in anticipation of independence from Britain in 1960. Then politics revolved around the major tribal leaders. Though there were other parties, the three major tribes Hausa, Igbo and Yoruba, formed the three major parties. The Northern Peoples Congress (NPC) with Alhaji Ahmadu Bello as the leader was the major party in the north; the National Congress of Nigeria Citizens (NCNC) with Dr. Nnamdi Azikiwe as the leader was the dominant party in the east while after some realignments Action Group (AG) with Chief Obafemi Awolowo as the leader was the major party in the west. As the nationalists’ struggle for political power gathered momentum in the 1950s, Omoweh and Boom (2005), said that it was obvious that sooner than later, Nigeria would become politically independent. Consequent upon this, the colonialist handed over the reign of government to a class of politicians believed to be capable of protecting its economic interest in the post-colonial period. It was a political class not groomed for the political administration of the country, explaining its preference to continue with colonial policies, politics and structures of exploitation instead of changing them. Once in power, the dominant political class exhibited the features of the colonial state, relying on violence, repression and coercion to manage the polity, thereby attaching too much importance to political power, since their security and survival depended largely on it. Political competition then became very deadly, and those who had political power defended it at all cost and by all means, while those seeking to replace current holders of political power deployed all means within their reach. That was the foundation on which the Nigerian politics was built that eventually saw it through a series of military intrusions, civil war and few years of civilian administration since the year of independence in 1960. Analysing Political Market Opportunity Having evolved through stages of colonial, military and civilian administrations, the current dispensation is the longest democratic administration the country had experienced since the 1960 independence. This political period tagged 4th Republic came into being in 1999 following a keenly contested presidential election between the Peoples Democratic Party (PDP) and the merged party, Alliance for Democracy (AD) and All Peoples Party (APP). Since then, three successive elections have been held; and political observers have opined that each successive election was an improvement on the previous one, especially the 2011 election which even international observers acknowledged to be credible. The PDP emerged the winning party in the 1999 election, and has remained the leading party since then controlling in all instances, more than 50 percent vital political positions in the nation. Table 1 below presents a picture of the results of presidential elections since 1999. Table 1: Analysis of Voting Results and Voters Participation During Various Presidential Elections in Nigeria (1999 – 2011)

1999 2003 2007 2011 Number of registered Political Parties 3 28 63 63 Percentage of votes won by: Leading Political Party 62.78

(PDP) 61.94 (PDP)

69.82 (PDP)

58.89 (PDP)

2nd Leading Political Party 37.22 (AD/APP)

32.19 (ANPP)

18.72 (ANPP)

31.98 (CPC)

3rd Leading Political Party - 3.29 (APGA)

7.49 (AC)

5.41 (ACN)

Total Percentage of votes controlled by the three (3) leading 100 97.42 96.03 96.28

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parties Turn out rates of voters 52.3 N.A 57.5 53.7

Source: Authors’ compilation from various public sources. It is easily observable from the table that although the PDP has remained the leading party all through this period but its market share, from the percentage of electoral votes has not been stable and actually declined by more than 10 percent in 2011 election which was adjudged to be the fairest of all elections so far. More interesting is the performance of the challenging parties. ANPP which had 32.19% in 2003 declined to 18.72% in 2007. It is clear therefore that while PDP is likely to retain its leadership position in 2015, but its share of the market is likely to reduce to the advantage of other contending parties. Table 2: Percentage of Political Party Control of Seats in National Assembly and State Governorship Positions In 2011

Political Party Senate House of Representative Governorship position PDP 66 59 64 ACN 17 19 17 ANPP 6 9 8 CPC 6 8 3 LP 4 2 3 APGA 1 - 5 Others - 3 -

Source: INEC records. It is pertinent to note that more than 60 political parties are registered in Nigeria but not all participate in National elections. For instance, in 2011, only 56 out of the 63 registered political parties participated in the general election, and only 20 parties contested in the presidential election (INEC, 2011). Table 1 shows also that the number of participating political parties not- withstanding, only three parties control more than 95% of the votes cast in all the presidential elections; and in fact, only six of the parties are represented in the National Assembly as well as occupy governorship position in the States as shown in table 2 below. Implications of the Study It is evident from the above presentation that the political environment is growing in maturity and competitiveness. This is a clear sign that the nation is likely to experience yet another keenly contested 2015 general election, especially with the merger of ACN, ANPP, CPC and a faction of APGA, to form the APC, (see appendix 1). As in other strong competitive situations, only the fittest survive. In marketing environment, it is known that companies that adopt marketing orientation usually survive and perform better than others who did not. Consequently, for any party to survive and remain active in Nigeria, the party must understand in content and context the principles guiding Market-Oriented-Party (MOP); and deliberately adopt and operate it as its organizational culture. Just like in conventional market where the consumer through his power of choice determine which manufacturer remains in the market; the political market has the power to reshape or prune out undeserving political parties, leaving only those that can dance to the tune of the marketplace. Presently, some parties are merging with others, while some are being reorganized for better results. Others who cannot attune themselves to cope with realities of the time have no choice but to face natural extinction.

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Doghudje (1992:19) studied likely factors to influence voting decisions of voters in their choice of candidates during 1993 general election and reported that 70% would be influenced by tribe and religion and only 5% by party manifesto. Current development in the environment shows that people are gradually rejecting the ethnicity and religious influences and are giving more rational consideration to the candidates’ attributes and party programmes. This means that political campaign that emphasizes tribe and religion may not get much attention. The implication is that parties would need to carefully package their brands for effective delivery to the market (the electorate). This will require parties to develop a market oriented manifesto and a candidate who can display a high degree of commitment to the party’s manifesto. By doing so, parties would be developing their own brands rather than just accepting and supporting any person who thinks he has what it takes to contest an election. The environment of marketing is ever changing but astute marketers continually adapt to and exploit the opportunities presented by the contemporary environment as they skillfully develop their marketing program based on the strengths and weaknesses of the organization in the context of the opportunities and threats of the environment. In the same vein, the political marketers should have a strategic team that analyzes the market with a view to discovering opportunities and strategies for winning them. For instance, table 2 above shows that the turn out rates of voters during previous elections were less than 60%; leaving more than 40% of untapped market each time. A creative and innovative party can target that opportunity and convert at least a portion of it to become its customers. Also there is high rate of brand switching in the politics market both among the political candidates and the electorate. Creative exploitation of these opportunities can significantly improve the returns (number of votes gained) of the political party. The use of political advertising is quite high in Nigeria given the level of various types of advertising that displayed during political campaigns. Studies have shown that quality of message content is important and critical to the effectiveness of the message. This means that political advert messages, rather than based on attacks on political opponents; should be based on trustworthy, relevant and realistic information correctly packaged and delivered to the target audience. This will likely generate acceptance and build better customer loyalty for the party than messages filled with empty promises and irrelevant bickering. CONCLUSIONS AND RECOMMENDATIONS It is clear to see from the on-goings that Nigerian Political Market is due for change. Change, they say, is constant but it behooves the players in the market to follow this change in order to remain relevant. The challenge is that parties and political institutions who do not appreciate this changing political scene; and think that it is ‘business as usual’ will have so much to lose. Already the country is witnessing structural changes in legal/regulatory frameworks as well as the infrastructure to put the next general election in a good pedestal. For example, the electoral commission (INEC) and the electoral system as well as the judicial systems are being strengthened. This obviously is an opportunity for market oriented parties that would focus on the needs of the market rather than on the selfish ends of individuals. Parties should therefore set up machinery to analyze, develop and implement strategies in accordance with the current market perspective of political market in the country. This will help them to compete strongly in the next election.Professional institutions like the National Institute of Marketing of Nigeria (NIMN) as an umbrella Marketing Body in Nigeria has a very pioneering and vital role to play in all this. The CNN, the Internet and all the other Interactive Media have changed the world of Politics Marketing in the USA and the other advanced economies of Europe. The last American election was virtually won during the live debate by the CNN. We are all aware of the influence of the live

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broadcast by African Independent Television (AIT), in shaping Politics Marketing in Nigeria, especially during the National Assembly’s Constitutional debate and tenure elongation of the former government of President Obasanjo. NIMN leadership, should partner with AIT and other virile media to put this issue in the front burner. NIMN should present a position paper/conference on: ‘Politics Marketing and Election Process’. Anybody who wants to be President, Governor, etc, must face Nigerians and tell them where he is coming from. The resources of this country are so enormous, and since politics is about power and distribution of resources, it cannot be left in the hands of just anybody. Merger and acquisition are common practices in the business environment and can be adopted in politics. The current trend towards merger or some kind of fusion of political parties to present a common formidable offer to the target market is generally welcome, provided the terms of such partnership is clearly spelt out and respected. Such re-engineered party and in fact any party that desires to survive should rather build itself into a very strong and vibrant party, rather than using all sorts of tactics, at times unethical, just to win in the 2015 general election. A more sustainable approach therefore is the concept of market-oriented party which will build a party of tomorrow. APPENDIX Full Names Of Major Political Parties, In Nigeria.. 1. AD - Alliance for Democracy. 2. ACN - Action Congress of Nigeria. (Formerly AD). 3. ANPP – All Nigerian Peoples Party. (Formerly APP) 4. APGA – All Progressive Grand Alliance. 5. APP – All Peoples Party. 6. CPC – Congress for Progressive Change. 7. LP – Labour Party. 8. PDP – Peoples Democratic Party. 9. APC – All Progressive Congress. (A new party registered in 2013, which is a merger of CAN, ANPP, CPC and a faction of, APGA). REFERENCES Anyabolu O.I. (2000).Nigeria: Past to the Present, (From 500 B.C. to the Present). Enugu, Classic Publishing Company Ltd. Beard,A. (2000).The Language of Politics. London, Routledge. Bovee C.L and Thill J.V.(1992). Marketing, New York,McGraw-Hill Inc. Buurma, H. (2001) Public Policy Marketing: Marketing Exchange in the Public Sector, European Journal of Marketing, Vol. 35, N. 9/10, pp. 1287-1300 Chang,W.H. and Park.J. (1998). Effectiveness of Negative Political Advertising. Doghudje, C. A. (1992). Political Advertising: Thoughts and non-thoughts. In Okigbo , C. (ed) Marketing Politics: Advertising and Tactics, APCON, Lagos, Nigeria. Downs,A.(1957).An Economic Theory of Democracy. Harper and Row.

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Henneberg,S.C.M,(2003) Generic Functions of Political Marketing Management . Working Paper Series, University of Bath. Henneberg,S.C.M,(2004). Political Marketing Theory, Unpublished Working Paper Series, University of Bath, School of Management. Heywood A, (2007). Politics. India, Replika Press Pvt. Ltd. INEC, (2011). Report on the 2011, General Election. Independent National Electoral Commission, Abuja, Nigeria. Kavanagh,D.(1995).Election Campaigning: The New Marketing of Politics.Blackwell, Oxford. Kotler P.and Andreasen A.R.(1991).Strategic Marketing for Non-profit Organizations. Prentice- Hall. (4th ed.). Kotler P and Kelly K.L, (2006). Marketing Management, New Jersey Pearson Prentice Hall. Kotler P and Kotler N.(1999).Political Marketing in B.I.Newman (ed) Hand-Book of Political Marketing, Sage,Thousand Oaks, pp.3-18. Kotler P,Amstrong G, Saunders J and Wong V,(1999).Principles of Marketing, New York McGraw-Hill Inc. Lasswell,H. (1936). Politics: Who Gets What, When, How? New York, McGraw-Hill. Lees-Marshment J.(2001).Political Marketing and British Political Parties, Manchester, Manchester University Press. Lindsay B.(1999). Interest Groups and the Political Process in B.J.Newman, (ed) Handbook of Political Marketing Sage,Thousand Oaks,pp 643-660. Newman,B.I. (1994). The Marketing of the President: Political Marketing as Campaign Strategy. Sage, Thousand Oaks. Newman,B.I.(1995).Political Marketing as a Governing Tool. Werbeforschung & Praxis,Vol.5,pp.163-167. Newman,B.I.(2001).Image-Manufacturing in the USA: Recent US Presidential Elections and Beyond. European Journal of Marketing, Vol.36, N. 9/10, pp. 966-970. Niffenegger,P.B. (1989).Strategies for Success from the Political Marketers. Journal of Consumer Marketing, 6(1): pp. 45-61 Nimmo,D.(1999).The Permanent Campaign: Marketing as a Governing Tool in B.I. Newman (ed), Handbook of Political Marketing,Sage,Thousand Oaks, pp. 73-86. Nkamnebe,A.D.(2003).The Nature and Characteristics of Political Marketing, in Nwosu I.E.(ed) Polimed: Media and Politics in Nigeria, ACCE Nairobi, Kenya, Nigeria Chapter, pp.184-195. Ngige N. (2007). What Yar’ Dua Represents. Sun Newspapers, September,14.

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Omoweh D.A and Boom D.(2005). Blocked Democracy in Africa: Experiment with Democratization in Nigeria, 1999-2003.Lagos, Mbey & Associates (Nig.) Ltd. Opeibe T.(2006). Political Marketing or Political Macheting?: A Study of Negative Campaign in Nigerian Political Discourse. (Internet Series) Oriavwote, P.E. (2000). Marketing Communications Strategy and Voting Behaviour in Nigerian Local Council Election. Thesis Submitted to St. Clements University, Turks and Caicos Islands for the Award of Ph.D in Politcal Marketing. O’Shaughnessy,N.J,(1990).The Phenomenon of Political Marketing,Basingstoke, Macmillan. Shaw,E.(1994). The Labour Party Since 1979: Crisis and Transformation. Routledge. Wring, D. (1999). The Marketing Colonization of Colonization of Political Campaigning, in B. I. Newman (Ed.), Handbook of Political Marketing, Sage, Thousand Oaks, pp. 41-54. Wring, D. (2002b). Images of Labour: The Progression and Politics of Party Campaigning in Britain, Journal of Political Marketing, Vol. 1, N. 1, pp. 23-37 BIOGRAPHY Vincent N.O. Aghara, is a Senior Lecturer in Marketing, and also doubles as the Head of Department. His research interest is in Services Marketing and Consumer Behaviour. He can be reached at the Department of Marketing, Nnamdi Azikiwe University, PMB 5025, Awka, Anambra State, Nigeria. e-mail:[email protected]; [email protected] Ireneus C. Nwaizugbo is an Associate Professor of Marketing. His research interest is in Consumer Behaviour and Entrepreneurship. He can be reached at the Department of Marketing, Nnamdi Azikiwe, PMB 5025, Awka, Anambra State, Nigeria. e-mail: [email protected] Emmanuel E. Chukwuemeka, is an Associate Professor of Public Administration. His research interest is in Development Studies, Human Resources Management and Foreign Studies. He can be reaches at the Department of Public Administration, Nnamdi Azikiwe University, PMB 5025, Awka, Anambra State, Nigeria. e-mail: [email protected] Chinedu Onyeizugbe, is a Senior Academic staff of Business Administration. His research interest is in Production and Operations Research. He can be reached at the Department of Business Administration, Nnamdi Azikiwe University, Awka, PMB 5025, Awka, Anambra State, Nigeria. e-mail: [email protected]

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CRM AND CUSTOMER SATISFACTION IN A SOUTH AFRICAN AGRICULTURAL BUSINESS: A

DIFFERENT PERSPECTIVE Liezel Alsemgeest, University of the Free State, South Africa

Johan van Zyl, University of the Free State, South Africa

ABSTRACT

Traditional customer satisfaction studies have focused typically on service quality, even though there are three other drivers of customer satisfaction. This study includes these three drivers in testing customer satisfaction of an agricultural business in Central South Africa with various business units with a mailed questionnaire to all of the active customers contributing more than R100 000 worth of business to the agricultural business. By using a simplified method in determining the customer satisfaction of the overall business, each individual business unit, the overall drivers, as well as the drivers inherent in each business unit, it was possible to establish an improved understanding of what satisfy customers in this unique industry. It was found that if customers are satisfied, they would have a higher overall level of satisfaction than when the business units’ drivers are averaged; indicating that customers would fall back past experiences, rather than decrease their satisfaction due to a service failure. JEL: Q13 KEYWORDS: CRM, customer satisfaction, business units, agribusinesses INTRODUCTION The importance of customer relationship management (CRM) cannot be contested, as the critical benefits gained are customer satisfaction and loyalty (Krasnikov, Jayachandran and Kumar, 2009). CRM, as an important focus within relationship management, can be defined as an approach used in collecting customer information and using this information in building improved relationships with different customers (Ernst, Hoyer, Krafft and Krieger, 2011). It has been proven that when CRM enhance both trust and commitment in the company, customers become more satisfied (Palmatier, Jarvis, Bechkoff and Karded, 2009) and more loyal. Customer satisfaction is the number one antecedent to retaining customers (Bodet, 2008). Traditional customer satisfaction studies focus mainly on using the well-known SERVQUAL method that is specifically focused on satisfaction towards service (Parasuraman, Zeithaml and Berry, 1994). However, there are three other factors, namely price, product and personnel, which also impact on customer satisfaction and should not be left by the wayside. If a customer perceives a business’s price to be fair, it is positively correlated towards customer satisfaction (Martin-Consuegra, Molina and Esteban, 2007). The qualities of products provided by the business, as well as the quality of service, are both critical factors in establishing customer satisfaction (Nowak and Washburn, 1998). One of the strategies used by a business to compete more effectively is to improve personnel efficiency in an attempt to improve service delivery in order to maximize the satisfaction of the customer (Kotler, 2000). One of the main reasons agricultural businesses were formed initially was to generate greater profits for farmers by obtaining services and inputs at lower cost and marketing of inputs at better prices (Ortmann and King, 2007[a]). An agricultural business is unique in the sense that the members of the organization can also be regarded as the owners, the customers, as well as the

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suppliers - which creates a distinctive value-chain relationship between the organization and the customer. Because of these different and interrelated roles of the owners, customers and suppliers, the importance of customer satisfaction is multiplied. Government support in the form of tax concessions and subsidized interest rates made cooperatives a viable and lucrative business option up until 1994, for then the newly elected South African government decided to discontinue financial and developmental support. Due to this contraction in agricultural support, major cooperatives were converted to investor-oriented firms (IOFs) or companies, which ushered in a new era for agriculture (Ortmann and King, 2007[b]). Although the business format of agricultural businesses changed from conventional cooperatives to companies, in many cases the expectations of the farmers are still the same. Therefore, the main focus of agricultural businesses has shifted dramatically from being farmer-oriented to being corporate-oriented. However, with the conversion of these agricultural cooperatives to IOF’s, the focus is primarily on profit and share price maximization (Harvey and Sykuta, 2006). Problem Statement and Objectives According to Olson and Boehlje (2010) rivalry among agribusinesses is one of the fundamental factors affecting the survival of these firms. Also, it has been established that agribusiness firms would only be able to obtain customers from competitors and retain existing customers by competing on price and non-price factors, i.e. keeping customers satisfied. Customer relationship management therefore becomes an integral part in the organization in ensuring that customers are satisfied and loyal towards the organization (Liou, 2008). Business units, such as retail shops, grain marketing and financing within an agricultural business provide a unique opportunity to test customer satisfaction, as the customers, making use of the various business units, are relatively homogeneous. Also, the customers making use of the business units are business owners themselves (farmers), with the effect that this analysis becomes a business-to-business research study. Therefore, each business unit will be regarded as a business in its own right, under the ‘umbrella’ of the agricultural business. Because of the unique nature of agribusinesses, it will be possible to determine customers’ satisfaction with the overall business, as well as each individual business unit. Moreover, it will be possible to establish customers’ satisfaction towards the various drivers of customer satisfaction (price, product, service and personnel) for the business as a whole, but also inherently in the various business units. The objectives of this paper are two-fold. The first objective is to test customers’ satisfaction towards all of the business units and the organization as a whole, as well as all of the drivers inherent in the business units and the overall organization; and establish an improved understanding of what satisfy customers in the business units but also in this unique industry. The second objective is to determine whether customers rate a business unit on average better or worse than an average of all of the drivers inherent in each business unit. LITERATURE REVIEW The objective of CRM strategies is to identify customers (customer segmentation), acquire knowledge about these customers, use the knowledge to build quality relationships (customer relationship management) and influence these customers’ perception of the organization positively (customer satisfaction) (Richards and Jones, 2008). By making use of customer relationship management strategies and approaches it is possible to gain a competitive advantage in the market place (Torres, Akridge, Gray, Boehlje and Widdows, 2007) as the expectations of customers can be reached due to the manner in which the product and/or service are presented to the customer (Hardeep and Amandeep, 2011). When there is a difference between customers’

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expectations and customers’ perceptions, a customer gap emerges. Therefore, to manage customer relationships, it is necessary to decrease the gap between the customers’ expectations and their perceptions (Zeitham, Bitner and Gremler, 2009). The focus of relationship marketing is on the customer, and ensuring that the relationship with the customer is enhanced in an effort to expand trust and commitment from the side of the customer, which would lead to customer loyalty and satisfaction (Brink and Berndt, 2009). The expectancy-perception model of satisfaction (Arnould, Price and Zinkhan, 2004; Zeithaml, et al., 2009) establishes that when pre- consumption expectations are not reached, or when it is indeed reached or even exceeded is a major component of customer satisfaction. On the one hand, if the perception of performance of a product or service exceeds the expectation, then customer satisfaction would be increased. However, two types of satisfaction might emerge. The customer might have assimilation tendencies, which would mean that he/she would try to ignore the discrepancy between expectations and perception of performance, or the customer might have contrast tendencies, where he/she exaggerates the discrepancy and makes it larger than reality. On the other hand, when the expectation of a customer exceeds the perception of performance, customer dissatisfaction would increase. If the customer has assimilation tendencies, he/she would try to ignore the discrepancy and, maybe, attempt to explain away the discrepancy. If the customer has a contrast tendency, then he/she would exaggerate the dissatisfaction actually experienced. If however, the perception of performance of the product or service is equal to the expectations of the customer, there would be a neutral confirmation and neither satisfaction nor dissatisfaction would prevail. Therefore, just meeting the expectations of the customer is not enough to lead to customer satisfaction (Wu, 2011). Customer relationship management (CRM) has been commended as a technique to ensure that customers experience richer encounters with the organization, become satisfied and loyal. Loyalty towards the organization will increase the likelihood that customers would maintain a relationship with the organization (retention) and also urge new customers to the organization through positive word-of-mouth. The organization then has the opportunity to sell more products and/or services to the new and existing customers, which increase customers’ profitability and eventually business profitability (Kumar, Pozza, Peterson and Shah, 2009). Customer satisfaction is the result of effective customer relationship management. Agricultural businesses could therefore customize products and services to suit customer needs and increase their perception of the service, product and/or experience (Mithas, Krishnan and Fornell, 2005:202). This would increase their trust and commitment towards the agricultural business and ultimately their satisfaction. Through building and maintaining relationships with customers, customer satisfaction can be increased. The field of customer satisfaction is one of the most important factors in any organization (Prabhakar, 2007). Customer satisfaction has been found to impact on purchase intentions, customer retention, reduced customer defections, share of wallet, increased responsiveness to cross-selling efforts, reduced complaints and word of mouth (Aksoy, Cooil, Groening, Keiningham and Yalçin, 2008). Satisfied customers could become loyal customers; and every opportunity to interact with the customer provides the business with the prospect of creating value due to a long-lasting relationship (Richards and Jones, 2008). A long-term relationship with customers could be even more important in agricultural businesses because of the rivalry amongst these companies (Olson and Boehlje, 2010). In a long-term relationship a client will have overall satisfaction, as well as transaction-specific satisfaction. Very importantly, overall satisfaction acts as a moderator between transaction- specific satisfaction and repurchases intention. Previous studies (Parasuraman, et al., 1994; Anderson, Fornell and Lehmann, 1994) worked on the premise that transaction-specific satisfaction leads to overall satisfaction, which leads to repurchase intention. Also, it was found

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that even though customers might experience a service failure occasionally, they will still continue to have a high repurchase intention. The model explains this phenomenon on the basis that overall satisfaction intercedes in the event of a transaction-specific dissatisfaction (or service failure) and the customer is retained due to their overall satisfaction as a result of previous experiences. Overall satisfaction is thus a better indicator of satisfaction than transaction-specific satisfaction, as it has a stronger influence on repurchases intention (Jones and Suh, 2000). An individual that has made use of the business over an accumulated time will use the performance history of the business when judging satisfaction and therefore would concentrate on a summary of all past transactions and service encounters, which could lead to a positive attitude and loyalty towards the business on the part of the customer. On the whole, customers’ satisfaction also centres upon the average satisfaction experienced, as well as how the company ranks alongside competitors. High satisfaction rates could lead to increased profits and share prices (Oliver, 2009). According to basic economic theory, if prices increase, a customer would just alter his/her consumption or usage, as displayed by the well-recognized downward-sloping demand curve. Basically, a higher price means less demand for a product. When prices increase, the product or service might become less attractive to the consumer and sales might fall. These negative consequences can, however, be made less substantial if customer satisfaction was high before the price increased. In essence, when a price increase occurs, there will be a negative effect on the consumers, but this negative effect will be weaker if the customers are satisfied and stronger if the customers are dissatisfied (Homburg, Hoyer and Koschate, 2005). A company should thus provide a product with the right quality at the right price in an effort to make customers feel that the price is fair for the quality that they receive. Consumers might perceive price as an external measure of quality. Price is linked to customer satisfaction in the sense that a customer has to feel satisfied that the investment made is equal to or less than the product or service received. If customers perceive the price of a product or service as fair, then customer satisfaction will increase (Yieh, Chiao and Chiu, 2007). A decisive determinant of customer satisfaction is whether the customer perceives the performance of the product to be adequate during consumption, in other words, to be of quality (Blackwell, Miniard and Engel, 2006). A study done by Anderson and Sullivan (1993) confirmed that those firms that provide a consistently good quality product should have highly satisfied customers and those customers would be more likely retained within the company. If service quality is low, customer satisfaction will also be low and vice versa (Söderlund and Rosengren, 2010:162). For some time, SERVQUAL has been described as being an incomplete measure of the entire service experience. One of the main problems mentioned is that the product concept is excluded (Miller and Brooks, 2010). This study thus aims to include all the main drivers of customer satisfaction in order to improve understanding of customer satisfaction of an agricultural business. This is vital, specifically because agricultural businesses provide both products and services to customers and SERVQUAL as a customer satisfaction measure would therefore be lacking. Employee-customer interaction plays an indispensable role in the foundation of customer satisfaction (Yieh, et al., 2007). Employee satisfaction is significantly related to customer satisfaction, specifically if the employee is provided with a manageable workload, lower stress and opportunities for training and development. If the employee is happy and performs to the best of his/her abilities, then the probability that customer would be satisfied is very high (Brown and Lam, 2008). It is essential that there must be a solid and loyal relationship built on trust between the customer and the service-provider in order for the customer to make a purchase decision (Yieh, et al., 2007). RESEARCH METHODOLOGY

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The research methodology employed in this study was of a quantitative nature. Structured questionnaires were distributed to the respondents by mail. The questions included in the questionnaire were mainly Likert-scale type questions where respondents had to rate the company as a whole, each business unit, the drivers of customer satisfaction for the company as a whole, as well as the drivers inherent in the business units on a scale from one to nine. The 9 points were divided into three main levels, namely poor (1 – 3), average (4 – 6) and good (7 – 9). The questionnaire was simplified in order to obtain streamlined information with regard to each driver of customer satisfaction and drivers inherent in each business unit. The target population was all active customers of a major agricultural business in Central South Africa that contributes more than R100 000 in business per annum to the agricultural business. A questionnaire was mailed to each of the customers and a return envelope was included in an effort to increase the response rate. The target population consisted of 963 customers and to make provision for non-response, the whole population that met these geographical and turnover criteria was used. A total of 345 useable questionnaires were returned; therefore the response rate was 35.8%. The specific agricultural business that was examined has a variety of business units that aim to support all their customers. The main business units available (which can also be found in the majority of agricultural businesses in central South Africa) are retail shops, grain marketing, grain storage, financing, mechanization (workshops), mechanization (spare parts), mechanization (whole goods) and insurance. Reliability was tested through internal consistency, which provided a very high Cronbach Alpha of 0.982. Construct validity was tested and the results of the Kaiser- Meyer-Olken (KOM) and Bartlett’s test for item validity were used. The results indicate that the KMO is very high for each question (all above 0.788) and the results are all statistically significant – indicating a high level of validity. RESULTS Demographic Profile of The Respondents The respondents were asked to indicate the farming activity they are mainly involved in, the total years’ of farming experience they have, as well as their age. The agricultural business provided information that made it possible to classify the respondents according to the size of their operation. The results indicated that the overall majority of the respondents were mainly grain farmers (45.0%), while a lesser percentage (31.0%) are mainly livestock farmers and the remaining 24.0% an even split. Respondents were asked to indicate the number of years that they have been farming to give an indication of their experience. The majority of the respondents (21.2%) have more than 41 years’ experience, while a minority of 2.6% has less than 5 years’ experience. It was found that the average years’ experience is 29.4 years. It could therefore be assumed that the respondents have adequate knowledge with regard to agricultural businesses. The majority (79%) of the respondents were above the age of 46. The average age of the respondents was established to be 53.6 years. It is worth noting that less than 2% of the respondents were 30 and younger. This could be an indication that younger people might be avoiding farming as a career choice or that the younger customers are not yet big enough to contribute R100 000 and more volume of business to the organization. The respondents were classified according to the size of their contributions to the agricultural business into small customers (between R100 000 and R250 000 volume of business), medium customers (between R250 001 and R650 000 volume of business) and big customers (more than R650 000 volume of business). The three groups were roughly equally distributed with small customers being the

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biggest group (38.8%), while 33.3% were medium customers’ respondents and 27.8% small customers’ respondents. Company and Business Unit Results Respondents were asked to indicate their level of satisfaction with regard to the performance of the various business units provided by the agricultural business on a nine point Likert scale. The table below gives an indication of the percentage of respondents that indicated whether they perceived the business unit to perform poorly, average or good. The last column gives an indication of the order of business unit performance according to the mean value. The mean were calculated according to the values of the Likert scale (1 - 9); therefore the nearer to 9, the better the performance of the business unit with 5.00 as the middle value. It is important to note that all the business units have mean values above the middle value of 5.00, indicating that all units’ performance are above average to good. Grain storage performed the best of all of the business units with a mean of 7.3333. This is due to the fact that 80.4% of the respondents indicated that this business unit performs well. This is also a good result as the majority of the respondents (almost 75%) make use of this specific business unit. All three mechanization business units (workshops, spare parts and farm equipment) performed the worst of all the services provided by the agricultural business and these three business units also have the highest percentage of respondents indicating that they perform poorly. This could be a concern as mechanization (spare parts) is used by almost 90% of the total sample. Financing and insurance both performed relatively well since approximately 68% of the respondents that make use of these business units have the perception that they perform well. The last row gives an indication of how the respondents rated the agricultural business’ performance as a whole. The results indicate a very good satisfaction level of performance by the majority of the respondents (81.7%). The mean is high (6.9354) in comparison to the majority of the services provided, therefore it can be assumed that the respondents regard the company as a whole to perform well above average. Table 2 presents the results for the performance of the four drivers of customer satisfaction, namely price, product, personnel, and service. The average mean for each driver were calculated and the last column indicates in rank order the performance of the various drivers. Table 1: Satisfaction of Performance of Business Units and Company As a Whole

Business units Poor Average Good Mean Rank Retail shops 3.8% 33.1% 63.0% 6.7278 4 Grain storage 2.0% 17.6% 80.4% 7.3333 1 Grain marketing 6.8% 33.7% 59.5% 6.5895 5 Financing 7.9% 23.6% 68.5% 6.7879 3 Mechanization (workshops) 10.9% 44.6% 44.6% 5.9657 8 Mechanization (spare parts) 12.7% 38.8% 48.5% 5.9799 7 Mechanization (farm equipment) 11.0% 33.1% 55.8% 6.2652 6 Insurance 2.4% 30.2% 67.5% 6.9206 2 Agricultural business as a whole 4.1% 14.2% 81.7% 6.9354

Table 2: Perception of the Performance of the Drivers of Customer Satisfaction for the Company As A Whole

Drivers Poor Average Good Mean Rank Price 14.3% 54.8% 31.0% 5.4940 4 Product 2.6% 60.2% 37.2% 6.0310 3 Personnel 0.9% 17.9% 81.2% 7.4164 1

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Service 1.8% 23.6% 74.6% 7.1829 2 The performance of the personnel of the agricultural business scored the highest with roughly 81% of the respondents indicating that the personnel perform well. Service scored the second highest, while product came third. Price scored the lowest, with more than 14% of the respondents indicating that they perceive price to be poor, almost 55% indicating that price are perceived as average and only 31% perceive price to be good. Even though price is rated well below the other drivers, it is still above the average of 5 (on a 9 point Likert scale). In addition to testing the drivers of the agricultural business as a whole, the drivers inherent in each business unit were also tested. For simplicity sake, only a summary of the results are provided in Table 3. Note that grain storage, grain marketing and mechanization (workshops) are service-based business units and could therefore not have been tested for product. Table 3: Summary of drivers inherent in business unit

Business units Price Product Personnel Service Average Mean Dif Retail shops 4 3 1 2 6.2661 6.7278 -0.462 Grain storage 3 -- 1 2 6.8144 7.3333 -0.519 Grain marketing 3 -- 1 2 6.7276 6.5895 0.138 Financing 4 3 2 1 6.9294 6.7879 0.142 Mechanization (workshops) 3 -- 1 2 5.9355 5.9657 -0.030 Mechanization (spare parts) 3 4 2 1 5.9711 5.9799 -0.009 Mechanization (whole goods) 4 3 1 2 6.3196 6.2652 0.054 Insurance 2 4 1 3 6.8304 6.9206 -0.090 Agricultural business 4 3 1 2 6.5311 6.9354 -0.040 Weighted Averages 5.8307 5.8695 6.9827 6.7576 6.3601 Agricultural drivers 5.4940 6.0310 7.4164 7.1829 6.5311 Difference 0.337 -0.122 -0.434 -0.425 -0.171

Table 3 presents a summary of the main findings with regard to each individual business unit, as well as the company as a whole. The price, product, personnel and service columns indicate the ranking order each driver occupy in each business unit (according to performance). The Average column provides a calculated average of the performance of all the drivers inherent in each business unit. The Mean column gives an indication of the performance of each business unit, as indicated by the respondents. The Difference column provides the discrepancy between the average and the mean columns. If the value is positive, then the customers’ perception of the performance of the business units is lower than that of the averages of the drivers. If the value is negative, then the customers’ perception of the performance of the business unit is better than that of the averages of the drivers. It is clear that personnel occupies the first spot in the majority of the business units, with service second, product third and price last, which corresponds with the results from Table 2 for the company as a whole. The only exceptions are financing, mechanization (spare parts) and insurance. The business units that do not have a physical product to test, namely grain storage, grain marketing and mechanization (workshops), all indicated personnel to be ranked first, service second and price last. The third last row indicates the averages of all of the business units’ price, product, personnel and service. The second last row provides the results from Table 2 in order to compare the two with each other. The results indicate that all of the drivers are perceived to perform better by averaging all of the business units’ drivers, except in the case of price, where the respondents perceived price to perform worse that the averages. Interestingly, the Difference column indicates that the majority of the business units’ drivers averages performs inferior compared to the means of the various business units, except in the case of grain marketing, financing and mechanization (whole goods). The finding that the business

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units’ means performs better than the drivers’ averages, indicates that the customers have a better perception of the business units overall than when their drivers’ averages are tested. This result could also signify that the means of the business units that performs the worst – mechanization (workshops, spare parts and whole goods) did not differ a great deal from the averages of the drivers. Therefore, the perception of the customers with regard to the worst performing business units were approximately the same as the average performance of their inherent drivers. Also, the means of the other (better performing business units) show a greater difference than the average performance of the drivers. These results could indicate that better performing business units have a bigger impact on how customers perceive the business as a whole. CONCLUSION The ultimate survival strategy of agricultural businesses should be customer satisfaction through the use of customer relationship management practices. To keep customers satisfied, would ensure loyalty and establish a long-term relationship with the customer, which would lead to financial benefits through retention. Service is not the only driver of customer satisfaction, but also satisfaction towards price, product and personnel. Therefore, this study aimed to include these variables in testing customer satisfaction in a simplified manner. Due to the unique business format of agricultural businesses, it made it possible to measure customers perceived satisfaction towards the business as a whole, the business units independently, the overall drivers, as well as the drivers inherent in each business unit. From the literature it was determined that overall satisfaction is a better indicator of satisfaction than transaction-specific satisfaction, as it has a stronger influence on repurchases intentions. However, by not focusing on transaction-specific satisfaction, but rather inherent driver satisfaction, it is clear that the majority of the business units are perceived to perform better as a whole when compared to a calculation of the drivers’ averages. Therefore, it could be presumed that a customers’ overall perception of performance of a business unit would yield a better result than when each driver in the business unit are examined individually. Also, according to the expectancy-perception model of satisfaction, if there is a gap between perception and expectations, a customer can either have assimilation tendencies or contrast tendencies, where he/she exaggerates the discrepancy and makes it larger than reality. The customer would therefore communicate more satisfaction than is really the case. It seems that in the case of the better performing business units, contrast tendencies are displayed, while in the case of the worst performing business units, either assimilation tendencies or neutral confirmation are displayed, as the two values are very close to each other. So, with the better performing business units, the results thus indicate that there was a positive confirmation that leads to the ultimate satisfaction. However, in the case of the worst performing business units, there were either low expectations or low perceptions (neutral confirmation) or the customers adjusted their perceptions downwards when it differed from their expectations (assimilation tendency). The first objective of this paper was to test customers’ satisfaction towards all of the business units and the organization as a whole, as well as all of the drivers inherent in the business units and the overall organization; and establish an improved understanding of what satisfy customers in this unique industry. The second objective was to determine whether customers rate a business unit on average better or worse than an average of all of the drivers inherent in each business unit and the results indicated that for the better performing business units, the business units were perceived to be much better than their averages. Also, the worst performing business units’ results indicated that their overall perception and the averages of the drivers performed more or less the same. It seems therefore, that when customers are satisfied, they would exaggerate their satisfaction and even if they experience a service failure, they would fall back on their satisfaction levels of past experiences (overall satisfaction) rather than decreasing satisfaction.

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The managerial implications of this study are that it is essential to test customer satisfaction not just by focusing on service, but also the other three drivers of customer satisfaction. By concentrating on a more simplified method (as was used in this study), it would be easier to pinpoint problem areas within a specific business unit, in an effort to increase customer satisfaction of the entire business unit and ultimately that of the organization as a whole. When a business unit is perceived to perform well, customers would tend to remain satisfied, even when service failures do occur. This paper contributes to the limited research available on customer satisfaction of agricultural businesses, as well as to consider the expectancy-perception model of satisfaction and the link between transaction-specific and overall satisfaction with repurchase intention from another standpoint, i.e. by including the drivers of customer satisfaction. By knowing your customers and their perceptions, it would be possible to not only survive, but flourish in an industry with fierce rivalry. REFERENCES Aksoy, L., Cooil, B., Groening, C. Keiningham, T.L & Yalçin, A (2008) “The Long-Term, Stock Market Valuation of Customer Satisfaction,“ Journal of Marketing, vol. 72, p. 105-122. Anderson, E.W, Fornel, C & Lehmann, D.R (1994) “Customer Satisfaction, Market Share and Profitability: Findings from Sweden,” Journal of Marketing, vol. 58, p. 53–66. Anderson, E.W & Sullivan, M.W (1993) “The Antecedents and Consequences of Customer Satisfaction for Firms,” Marketing Science, vol. 12(2), p. 125–143. Arnould, E, Price, L & Zinkhan, G (2004) Consumers, 2nd ed. New York: McGraw-Hill Irwin. Blackwell, R.D., Miniard, P.W & Engel, J.F (2006) Consumer Behaviour, 10th ed. Mason: Thomson South-Western. Bodet, G (2008) “Customer satisfaction and loyalty in service: Two concepts, four constructs, several relationships,” Journal of Retailing and Consumer Services, vol. 15, p. 156–162 Brink, A & Berndt, A (2009) Relationship Marketing and Customer Relationship Management, Lansdowne: Juta and Co. Ltd. Brown, S.P & Lam, S.K (2008) “A Meta-Analysis of Relationships Linking Employee Satisfaction to Customer Responses,” Journal of Retailing, vol. 84(3), p. 243–255. Cooper, D.R & Schindler, P.S (2006) Business Research Method, 9th ed. New York: McGraw- Hill/Irwin. Du, X., Jiao, J & Tseng, M.M (2006) “Understanding customer satisfaction in product customization,” International Journal of Advanced Manufacturing Technology, vol. 31, p. 396– 406. Ernst, H., Hoyer, W.D., Krafft, M & Krieger, K (2011) “Customer relationship management and company performance – the mediating role of new product performance,” Journal of the Academy of Marketing Science, vol. 39, p. 290–306. Godson, M (2009) Relationship Marketing, Hampshire: Oxford University Press.

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Hardeep, S & Amandeep, K (2011) “Customer Relationship Management: A Dynamic Tool for Customer Satisfaction, Customer Retention & Customer Loyalty,” Asia Pacific Journal of Research in Business Management, vol. 2(5), p. 166–180. Harvey, S.J & Sykuta, M.E (2006) “Farmer Trust in Producer- and Investor-Owned Firms: Evidence from Missouri Corn and Soybean Producers,” Agribusiness. vol. 22(1), p. 135–153. Hausknecht, J.P., Trevor, C.O & Howard, M.J (2009) “Unit-level Voluntary Turnover Rates and Customer Service Quality: Implications of Group Cohesiveness, Newcomer Concentration and Size,” Journal of Applied Psychology, vol. 94(4), p.1068–1075. Homburg, C., Hoyer, W.D & Koschate, N (2005) “Customers’ Reactions to Price Increases: Do Customer Satisfaction and Perceive Motive Fairness Matter?,” Journal of the Academy of Marketing Science, vol. 33(1), p. 37–49. Jones, M.A & Suh, J (2000) “Transaction-specific satisfaction and overall satisfaction: an empirical analysis,” Journal of Services Marketing, vol. 14(2), p. 147–159. Kotler, P (2000) “Marketing Management. The Millennium Edition,” New Jersey: Prentice-Hall Inc Krasnikov, A, Jayachandran, S & Kumar, V (2009) “The Impact of Customer Relationship Management Implementation on Cost and Profit Efficiencies: Evidence from the U.S. Commercial Banking Industry,” Journal of Marketing, vol. 73, p. 61–76. Kumar, V., Pozza, I.D., Peterson, J.A & Shah, D (2009) “Reversing the Logic: The Path to Profitability through Relationship Marketing,”. Journal of Interactive Marketing, vol. (23), p. 147-156. Liou, J.J.H (2008) “A novel decision rules approach for customer relationship management of the airline market,” Expert System with Application, vol. 36(3), p. 4374–4381. Martin-Consuegra, D, Molina, A & Esteban, A (2007) “An integrated model of price, satisfaction and loyalty: an empirical analysis in the service sector,” Journal of Product & Brand Management, vol. 16(7), p. 459-468. Miller, R.E & Brooks, N.G (2010) Class Service Quality: Moving Beyond SERVQUAL, Paper read at Information Systems Educators Conference. Nashville, Tennessee. Retrieved September 15, 2011from http://proc.isecon.org/2010/pdf/1394.pdf. Mithas, S., Krishnan, M.S & Fornell, C (2005) “Why Do Customer Relationship Management Applications Affect Customer Satisfaction?,” The Journal of Marketing, vol. 69(4), p. 201–209. Nowak, L.I & Washburn J.H (1998) “Antecedents to client satisfaction in business services,” The Journal of Services Marketing, vol. 12(6), p. 441-452. Oliver, R.L (2009) Satisfaction: A Behavioral Perspective on the Consumer, 2nd ed. New York: M.E. Sharpe, Inc. Olson, K & Boehlje, M (2010) “Theme Overview: Fundamental Forces Affecting Agribusiness Industries,” Choices: The Magazine of Food, Farm and Resource Issues, vol. 25(4), p. 1–4 Retrieved October 28, 2011from: http://www.choicesmagazine.org/magazine/pdf/block_53.pdf.

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Ortmann, G.F & King, R.P (2007) “Agricultural Cooperatives I: History, Theory and Problems. Agrekon, vol. 46(1), p. 40–68. Ortmann, G.F & King, R.P (2007) “Agricultural Cooperatives II: Can they facilitate access of small-scale farmers in South Africa to input and product markets,” Agrekon, vol. 46(2), p. 219– 244 Palmatier, R.W., Jarvis, C.B., Bechkoff, J.R & Kardes, F.R (2009) “The Role of Customer Gratitude in Relationship Marketing,” Journal of Marketing, vol. 73(5), p. 1–18. Parasuraman, A, Zeithaml, V.A & Berry, L.L (1994) “Alternative Scales for Measuring Service Quality: a Comparative Assessment Based on Psychometric and Diagnostic Criteria SERVQUAL: A Multiple-Item Scale for Measuring Consumer Perceptions of Service Quality,” Journal of Retailing, vol. 70(3), p. 201–230. Prabhakar, A (2007) “Customer Satisfaction,” Journal of the Quality Assurance Institute, vol. 21(3), p.:5-9. Richards, K.A & Jones, E (2008) “Customer Relationship Management: Finding Value Drivers,” Industrial Marketing Management, vol. 37, p. 120–130. Söderlund, M & Rosengren, S (2010) “The happy versus unhappy service worker in the service encounter: Assessing the impact on customer satisfaction,” Journal of Retailing and Consumer Services, vol. 17, p. 161–169. Torres, A., Akridge, J.T., Gray, A., Boehlje, M & Widdows, R (2007) “An Evaluation of Customer Relationship Management (CRM) Practices Among Agribusiness Firms,” International Food and Agribusiness Management Review, vol. 10(1), p. 1–16. Yieh, K, Chiao, Y & Chui, Y (2007) “Understanding the Antecedents to Customer Loyalty by Applying Structural Equation Modeling,” Total Quality Management, vol. 18(3), p. 267–284. Wu, L (2011) “Beyond Satisfaction: The relative importance of locational convenience, interpersonal relationships, and commitment across service types,” Managing Service Quality, vol. 21(3), p. 240–263. Zeithaml, V.A (2000) “Service Quality, Profitability, and the Economic Worth of Customers: What We Know and What We Need to Learn,” Journal of the Academy of Marketing Science, vol. 28(1), p. 67–85 Zhao, L, Lu, Y, Zhang, L & Chau, P.Y.K (2012) “Assessing the effects of service quality and justice on customer satisfaction and the continuance intention of mobile value-added services: An empirical test of a multidimensional model,” Decision Support Systems, vol. 52(3), p. 645–656 BIOGRAPHY Liezel Alsemgeest is a lecturer in Financial Planning Law at the University of the Free State, South Africa. She focuses mainly on research pertaining to agricultural businesses and financial management. She can be reached at [email protected].

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Johan van Zyl is a senior lecturer in Business Management at the University of the Free State and specializes in marketing and entrepreneurship. He can be contacted at [email protected].

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THE ROLE OF ENERGY CONSUMPTION IN

ENVIRONMENTAL KUZNETS CURVE IN SOUTH KOREA

Sukwan Jung, Pusan National University Do-Hwan Won, Pusan National University

ABSTRACT

This study examines the integrative relationship between per capita energy consumption, per capita income and per capita carbon dioxide emissions during 1971–2010 in South Korea. The short-run and long-run relationships are estimated using the autoregressive distributed lag approach. Per capita carbon dioxide emissions are then forecasted for the next decade, using the estimated model. The results indicate (i) an inverted U-shaped relationship between income and carbon dioxide emissions (the Environmental Kuznets Curve), (ii) energy consumption is a major contributor to such emissions, and (iii) the long-run elasticity of carbon dioxide with respect to energy consumption is larger than its short-run elasticity. The forecast also shows that managing energy consumption would curb carbon dioxide emissions. JEL:Q2, Q3, Q4 KEYWORDS: Carbon Dioxide Emissions, Energy Consumption, EKC INTRODUCTION

The Intergovernmental Panel on Climate Change report (IPCC, 2007) identified the risks associated with climate change as some of the most significant environmental concerns of our age. Economic growth and energy consumption have the potential to increase greenhouse gas (GHG) emissions, particularly carbon dioxide (CO2) emissions. In an effort to mitigate these risks, several industrialized countries, including South Korea, agreed to sign the Kyoto Protocol, which set binding obligations on these countries to decrease their GHG emissions levels. South Korea has the ninth highest level of carbon dioxide emissions in the world, and hence, it is critically important that the South Korean government decrease these emissions. The nature of the relationship between output and environmental pollution and the relationship between output and energy consumption have been controversial issues. The empirical findings are equivocal (Ang, 2008). More recent studies have examined a combination of both relationships (Zanag and Cheng, 2009; Acaravci and Ozturk, 2010). The first strand, which examines the relationship between environmental pollutants and income, has been studied extensively. Whether economic development increases, environmental pollution is critically important to designing policy strategies. Most empirical studies have attempted to test the Environmental Kuznets Curve (EKC) hypothesis, following the work of Grossman and Krueger (1995), Selden and Song (1994), who proved the inverted U-shaped relationship between per capita income and environmental degradation. According to the EKC, during the initial phase of economic development, environmental degradation increases with per capita income, but then decreases with per capita income after reaching a threshold. Stern (2000) and Dinda (2004) provide extensive reviews of the EKC, and Agras and Chapman (1998), Schmalensee et al. (1998), and Zaim and Taskin (2000) have all attempted to prove the EKC. More recent studies on this topic include those of Ang (2008), Shabaz et al. (2013), and Pao et al. (2012). However, the empirical findings from these studies are mixed and are dependent on factors such as econometric methods and data, industry structures, times, and governmental interventions. Thus,

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an increase in per capita income does not necessarily guarantee a reduction in environmental pollution. The second strand examines the relationship between energy consumption and output and suggests that output and energy use are jointly determined. This is because greater economic development is expected when energy consumption increases. However, more efficient energy use may also contribute to economic development (Halicioglu, 2009). Following Kraft and Kraft (1978), an increasing number of studies have employed both a cointegration approach and Granger causality to examine the relationship between these two factors. Recent examples include the studies of Narayan et al. (2005), Belloumi (2009), and Pao (2009), but they have yielded contradictory results. The disparate empirical findings might be due to different approaches and data. For example, Glauser and Lee (1997) have demonstrated that failing to explain non-stationary and cointegration may lead to incorrect conclusions. The third strand integrates the above two approaches and examines the dynamic relationship between income, energy consumption, and environmental pollutants. Soytas et al. (2007) and Ang (2007) made an initial attempt to use this integrative approach. Recent studies include those of Halicioglue (2009), Soytas et al. (2009), Pao et al. (2011), Pao et al. (2012), and Chandra and Tang (2013). This study examines the integrative relationship between per capita energy consumption, per capita income and per capita CO2 emissions. The model estimated from the results is then employed to determine how per capita CO2 emissions change in response to changes in energy consumption, given other variables. To this end, we adopt the autoregressive distributed lag (ARDL) approach suggested by Pesaran et al. (2001), Pesaran and Shin (1998). The ARDL approach has a number of advantages over the standard Engle and Granger (1987) procedure: (i) the bounds test does not require the same order of integration for time series data because the test allows a mixture of I(1) and I(0) variables; (ii) the test is appropriate for a small sample size; and (iii) the ARDL approach manages endogeneity between the variables by using lagged variables. Furthermore, the Zivot–Andrew (1992) unit root test and the Gregory–Hansen (1996) cointegrating test are employed to examine whether structural breaks affect the stability of the data and our model. To the best of our knowledge, this is the first study to examine the dynamic relationship between per capita energy consumption, per capita income and per capita carbon dioxide emissions, while considering structural changes in South Korea. This case study provides general ideas that can be used to guide policy strategies. The rest of this paper is organized as follows: Section 2 discusses the basic EKC model and outlines the econometric method. Section 3 presents the data analysis and empirical results. Finally, Section 4 describes potential policy implications and concludes the paper. Material and Methods We use the double log form to examine the long-run relationship between per capita carbon dioxide emissions, per capita energy consumption and per capita real gross domestic product (GDP) because the log-linear specification provides consistent empirical findings (Shabaz et al., 2013): lnCOt = α0 + α1lnEt + α2lnYt + α3lnYt2 + εt (1) where COt represents carbon dioxide (CO2) emissions (measured in metric ton per capita), Et represents energy consumption (measured in ton of oil equivalent per capita), Y represents income per capita (real GDP per capita), Y2 is the square of Y, and εt is the error term. The relationship between per capita income and per capita carbon dioxide emissions can be mixed. If α1 > 0 or (α1 < 0) when α3 = 0, there is a monotonically increasing (or decreasing) relationship between per capita income and per capita CO2 emissions. The EKC hypothesis indicates an inverted U-shaped relationship between per capita carbon dioxide emissions and per capita

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income (i.e., α2 > 0 and α3 < 0). This means that, if income per capita increases, carbon dioxide emissions first increase, but then decrease after reaching a certain threshold. The energy consumption parameter is expected to be positive(α1 > 0) because rising energy consumption stimulates CO2 emissions. We employ the ARDL cointegrating approach developed by Pesaran and Shin (1998) and Pesaran et al. (2001) because it has certain advantages over the standard Engle–Granger (1987) and Johansen (1988) approaches. First, it allows a mixture of I (1) and I (0) variables, unlike the traditional approaches that need the same order of integration for time series data. Second, the ARDL approach is appropriate for small samples. Third, the ARDL approach allows parameters of variables with different lags, and fourth, endogeneity problems can be managed by including lagged variables. However, the ARDL approach is invalid if the order of integration of any variable is greater than one. Therefore, we use a unit root test to ensure that all variables are less than I (2). We conduct the Phillip–Perron (PP) (1988) test since it corrects for serial correlation and heteroskedasticity. The Kwiatkowski–Phillips–Schmidt–Shin (KPSS) (1992) test and Zivot– Andrews (ZA) (1992) test complement the PP test. Unlike the PP test, the KPSS test assesses whether the stationary of the time series is suitable for a small sample size. The ZA test also considers structural changes in the data. The ARDL cointegrating approach, suggested by Pesaran and Shin (1998) and Pesaran et al. (2001), is conducted as follows: (i) a Wald or F-test on the unrestricted error correction model in Equation (2) tests whether a long-run relationship between the variables exists; (ii) the ARDL model in Equation (3) is used for the long-run relationships; and (iii) the dynamic error correction model derived by the ARDL model is used to examine the short-run relationships among the variables and the speed at which lnCO2 recovers to a long-term equilibrium. The unrestricted error correction model shown in Equation (2) is used to test for a cointegration relationship between income, energy consumption, and CO2 emissions (Pesaran et al. 2001; Narayan, 2005).

ttttt

it d

i i b

i

c

i titi a

i itit

εEδ)Y(δYδCOδ

EΔβ)YΔ(βYΔβCOΔββCOΔ

114 2

131211

1

1 4 1

0

1

0 2

1312 1

1 10

lnlnlnln

lnlnlnlnln

++++

+++++=

−−−−

−== = −−= − ∑∑ ∑∑ (2)

The variables are the same as those in Equation (1), and Δ is the difference operator. An appropriate maximum lag is selected based on an Akaike information criterion (AIC). To ascertain the existence of cointegration, the null hypothesis of no cointegration (i.e., H0: δ1 = δ2 = δ3 = δ4 = 0) should be rejected. The F-statistic obtained by the Wald test has a non- standard distribution, and hence, it is compared against the critical values generated by Pesaran et al. (2001). If the F-statistic is greater than the upper critical bounds value, then the null hypothesis is rejected, indicating cointegration. If the F-statistic is below the lower critical bounds value, this indicates no cointegration. If the statistic lies within the bounds, the results become inconclusive. However, the critical values provided by Pesaran et al. (2001) are inappropriate when a sample size is small. Thus, this study employs the critical values provided by Narayan (2005) for small samples (30 to 80). The Gregory–Hansen (1996) cointegrating test will complement the ARDL bounds test by managing a structural break. Once there is evidence of cointegration, the following long-run ARDL (p1, q1, q2, q3, q4) model is specified (Dergiades and Tsoulfidis, 2008):

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t q

i iti

q

i

q

i

q

i itititi p

i itit

E

YYYCOCO

2 4

0 4

0 0 0 3

3 2

12111 10

ln

)(ln)(lnlnlnln 1 2 31

εγ

γγγφγ

++

++++=

∑ ∑ ∑ ∑∑

= −

= = = −−−= −

(3) The long-run multipliers can be obtained by the following equation: a0 = γ0/(1− ∑ ϕ1i

p1 i=1 ), aj = γm/(1− ∑ ϕ1i

p1 i=1 ), with j=2, 3, 4, 5 (4)

m=2, 3, 4, 5 The optimal lag lengths (p1, q1, q2, q3, q4) are determined from an AIC or other suitable model. The long-run multipliers represent the long-run elasticity of carbon dioxide emissions with respect to each variable. The ARDL model in Equation (3) can be represented as the error correction model in Equation (5), which integrates short-run dynamics with the long-run stable equilibrium.

tt d

i iti

c

i ti b

i itiit a

i it

ECTEb

YbYbCObCO

31 1

0 4

1

0 2

12 1

0 1 1

1 10

ln

)(lnlnlnln

εψ

φ

++∆

+∆+∆+∆+=∆

−= −

= −= −−=

∑ ∑∑∑

(5)

Here, 1−tECT is an error correction term, which is employed by the residuals estimated from the ARDL model in Equation (3), and ψ is the coefficient of the error correction terms. The latter term measures the speed at which the previous disequilibrium recovers to equilibrium, and should be significant with a negative sign. The coefficients of the differenced variables represent the short-run elasticity of carbon dioxide emissions with respect to each variable. RESULTS South Korea is suitable for a case study since the government is urgently trying to mitigate the levels of carbon dioxide emissions in the country, as it is among the top ten generators of carbon dioxide in the world. The country’s industries are energy intensive, and thus, energy consumption may contribute to producing carbon dioxide emissions. The hypothetical scenario depicted here can add to planners’ and policymakers’ knowledge of carbon dioxide emissions and its determinants, which, along with accurate forecasting, can help them make more informed decisions. The annual data used in this paper (1971 to 2010) are per capita real GDP (Y) (in constant US$ in 2005), per capita energy consumption (EC) (TOE per capita), and CO2 emissions (tCO2 per capita). The annual time series data are obtained from World Development Indicator (WDR) database. For modeling purposes, all variables were converted to their natural logarithm form, which reduces heteroskedasticity and serial correlation. Table 1: Descriptive Statistics of Variables

Variables Mean Std. Dev. Min Max Y (US$ per capita) 12112.02 7508.58 2633.14 25525.10 E (TOE per capita) 2.41 1.47 0.52 4.70 CO2 (tCO2 per capita) 5.95 3.05 1.67 10.63

As stated earlier, we conducted PP (Test 1), KPSS (Test 2) and ZA (Test 3) tests to ascertain the amount of integration. The KPSS and the ZA tests complement the PP test because the KPSS test is useful for small samples, and the ZA test manages a structural break by determining the break

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point endogenously from the data. The results in Table 2 show that the series (lnCO, lnE, lnY, lnY2) are all nonstationary in their levels, but are stationary in their first differences (i.e., I(1)). The ARDL bounds test is implemented for the variables in Equation (2), and for comparative purposes, the Engle–Granger and the Johansen approach, as per Gregory and Hansen (1996), are conducted as well. Table 3 shows the results. Table 2: Unit Root Tests

Test 1 (PP) Test 2 (KPSS)

Test 3 (ZA)

Levels 1st diff. Levels 1st diff. Levels 1st diff. lnCO -1.039 (1) -6.474 (0)** 0.345 (1) 0.048 (0)** -2.676 (1) -7.988 (0) ** lnY -0.164 (1) -4.762 (0)** 0.421 (1) 0,078 (0)** -1.771 (1) -6.621 (0) ** lnY2 -1.981 (1) -5.138 (0) ** 2.020 (1) 0.449 (0) ** -2.206 (1) -6.675 (0) ** lnE -0.016 (1) -5.143 (0)** 0.359 (1) 0.115 (0)** -1.496 (1) -7.373 (0) **

* and ** indicates significance at the 1% and 5% significance levels and the values in parentheses indicate the number of lags determined by the AIC or SIC. The KPSS test has a null hypothesis of a stationary variable, while the other tests have a null hypothesis of a unit root. Before conducting the ARDL bounds test, a suitable lag length is determined using the AIC, which is suitable for a small sample (Shahbaz et al. 2013). The null hypothesis of no cointegration is rejected at the 5% significance level because the F-statistic is 3.240 greater than the critical value provided by Narayan (2005). The standard Engle–Granger and Johansen approaches support the existence of cointegration, which means the variables are linked in a long- run relationship. In addition, the Gregory–Hansen (1996) test is performed for cointegration with regime shifts. The null hypothesis is that there is no cointegration. The alternative hypothesis is that cointegration exists with a single shift at an unknown point in time. The null hypothesis is not rejected. Thus, we can confirm that the variables are cointegrated in case of South Korea. Table 3: Cointegration Test Results ARDL Engle–Granger Johansen Gregory–Hansen 3.240** -3.508** 68.706 Rank 0 -5.60** (-2.964) 27.228* Rank 1 8.195 Rank 2 The optima lag lengths are selected using AIC or SIC, and ** p < 0.05 Table 4 shows the results of the ARDL (1, 1, 0) and ARDL (1, 1, 1, 1) models, based on the AIC and setting the maximum lags to two. These models fulfill several diagnostic tests, including heteroskedasticity, serial correlation, and normality. The likelihood-ratio test was conducted for the null hypothesis of the restricted ARDL (1, 1, 0) model versus the unrestricted ARDL model (1, 1, 1, 1). Based on the results, the unrestricted ARDL (1, 1, 1, 1) model is preferred because the likelihood-ratio test statistic (6.61) is greater than the critical value and the hypothesis is rejected at the 5% significance level. Table 4: Ardl Results

Variables Model-1 Model-2 lnCO2(-1) 0.600*** 0.778***

(0.135) (0.156) lnE 1.025*** 1.047***

(0.097) (0.119) lnE(-1) -0.633*** -0.803***

(0.157) (0.206) lnY -0.007 -3.107**

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(0.061) (1.489) lnY(-1) 2.629*

(1.412) lnY2 0.171**

(0.082) lnY2(-1) -0.148*

(0.077) Constant 1.019** 2.709**

(0.549) (1.052) R-squared 0.999 Normality (Skewness/Kurtosis) 13.04/0.04 4.05/1.08 Serial Correlation 1.426 0.317 Heteroskedasticity 0.37 0.02

*** p < 0.01, ** p < 0.05, * p < 0.1, and the values in parentheses indicate standard errors. The estimated ARDL model (Model-2) is used to measure the long-run elasticities, using Equation (4). The error correction model in Equation (5) is used to measure the short-run effects and the speed at which the previous disequilibrium recovers to equilibrium. The results are shown in Table 5. The long-run energy consumption elasticity is 1.09, which means that a 1% increase in per capita energy consumption leads to a 1.09% increase in per capita carbon dioxide emissions. The parameters of per capita income (-) and square of income (+) fulfill the EKC hypothesis. The significance of the coefficient of the error correction term (ECT) (-0.99) implies that short-term deviations in equilibrium between variables adjust quickly back to the long-run equilibrium. Following Pao et al. (2011), the variables take one year to recover to equilibrium when the inverse of the absolute value of the ECT coefficient is calculated. As expected, the energy consumption has significant and positive effects on carbon dioxide emissions, and the long-run energy consumption elasticity is larger than short-run energy consumption elasticity. The short-run effects of income terms are not significant. This is because energy consumption and income do not change radically in the short-run, and the long-run effects are stronger than the short-run effects. Table 5: Long-Run and Short-Run Effects: Error Correction Models

Variables Coefficients t-statistics ∆lnCOt−1 0.74*** 2.82 ∆lnEt 1.12*** 10.19 ∆lnEt−1 -0.85*** -3.05 ∆lnYt -1.04 -1.44 ∆lnYt−12

t 0.05 1.33 ECT -0.99*** -3.11 Constant -0.00 -0.04 Long-run Relationship ECT = lnCO2 − 1.09lnE − 2.15lny + 0.1lnY2 R-squared 0.999 Normality(Skewness/Kurtosis) 4.05/1.08 Serial Correlation 0.317 Heteroskedasticity 0.02

t-statistics in parentheses, and *** p < 0.01, ** p < 0.05, * p < 0.1 The model fulfills the diagnostic tests for non-normality and serial correlation (heteroskedasticity). One possible concern with the ECM model is that the estimated parameters may change over time. If a structural break exists, the parameters are then unstable (Pao et al., 2011). We check the stability of the parameters using the cumulative sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests, as suggested by Brown et al. (1975). Unlike the Chow test, which requires a predetermined break point, the CUSUM and CUSUMSQ tests do not need to know where the structural break occurs. Figure 1 provides the plots of the CUSUM and

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CUSUMSQ test statistics, which fall inside the 95% confidence band. This means that the estimated parameters are stable over the period shown. Figure 6: Cusum and Cusumsq Test Results

C U

S U

M

time

CUSUM

1981 2009

0 0

C U

S U

M s

q u a re

d

time

CUSUM squared

1981 2009

0

1

Next, the carbon dioxide emission scenarios are forecasted based on the estimated long-run equilibrium model. The three scenarios hypothesize what will happen to changes in carbon dioxide emissions per capita in response to changes in energy consumption, given other variables: (i) no change (scenario 1: co0); (ii) a 3% increase in energy consumption (scenario 2: co3); and (iii) a 6% increase in energy consumption (scenario 3: co6). We assume a 3% growth in per capita income and forecast per capita carbon dioxide emissions from 2010 to 2020. Figure 2 shows the results for each of the three scenarios (co0, co3, co6). These results indicate that per capita carbon dioxide emissions are elastic with respect to energy consumption, which ranges from 4% to 100% in 2020. Therefore, managing energy consumption will contribute to curbing carbon dioxide emissions, ceteris paribus. Figure 1: Forecasts of Carbon Dioxide Emissions in South Korea (2010–2020)

CONCLUSIONS AND POLICY IMPLICATIONS

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This study examined the dynamic effects of per capita energy consumption and per capita income on per capita carbon dioxide emissions in South Korea. The ARDL approach was employed to examine the dynamic relationship. The estimated model was then used to forecast carbon dioxide emissions for 2010–2020, depending on certain scenarios. The empirical results suggest the following findings. First, a long-run stable equilibrium relationship exists, and short-term deviations from this equilibrium quickly readjust, taking approximately one year to do so. Second, the long-run elasticity of per capita carbon dioxide with respect to per capita energy consumption is elastic. Third, the inverted relationship between per capita income and per capita carbon dioxide emissions (the EKC hypothesis) is supported. Fourth, the forecasted carbon dioxide emissions from certain scenarios range from 4% to 100% in 2020.

The results of this study suggest important policy implications for public planners in South Korea who want to curb carbon dioxide emissions. First, the evidence of EKC indicates that economic growth or higher income does not mean higher carbon dioxide emissions. Thus, there is much scope for developing other options, such as energy conservation strategies. Second, the evidence also suggests that energy consumption is a major contributor to carbon dioxide emissions. Therefore, managing per capita energy consumption could be an important policy strategy to restrain per capita carbon dioxide emissions. The forecasts of carbon dioxide emissions based on certain scenarios underlines the significance of managing energy consumption. The main contribution of this paper is that it is the first attempt to examine the dynamic relationships between per capita energy consumption, per capita income and per capita carbon dioxide emissions in South Korea. This paper also considers structural changes within the data and models. Even though this study considers small samples and endogeneity, the results should be interpreted with caution. REFERENCES Agras, J., Chapman, D. (1999) “A Dynamic Approach to the Environmental Kuznets Curve Hypothesis,” Ecol. Econ., 28(2), p. 267–277. Ang, J. B. (2008) “Economic Development, Pollutant Emissions and Energy Consumption in Malaysia,” J. Policy Model, 30(2), p. 271–278. Asafu-Adjaye, J. (2000) “The Relationship between Energy Consumption, Energy Prices and Economic Growth: Time Series Evidence from Asian Developing Countries,” Energy Econ., 22(6), p. 615–625. Beckerman, W. (1992) “Economic Growth and the Environment: Whose Growth? Whose Environment?”World Dev., 20(1), p. 481–496. Belloumi, M. (2009) “Energy Consumption and GDP in Tunisia: Cointegration and Causality Analysis,” Energy Policy, 37(7), p. 2745–2753. Chandran, V.G.R., Tang, C.F. (2013) “The Impacts Of Transport Energy Consumption, Foreign Direct Investment And Income On CO2 Emissions In ASEAN-5 Economies Renew. Sustain,” Energy Rev. 24, p. 445–453. Dickey, D.A., Fuller, W.A. (1981) “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root,” Econom., 49, p. 1057–1072. Dinda, S. (2004)” Environmental Kuznets Curve Hypothesis: A Survey,” Ecol. Econ., 49, p. 431–

455.

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De Bruyn, S.M., Van den Bergh, J.C., Opschoor, J.B. (1998) “Economic Growth and Emissions: Reconsidering the Empirical Basis of Environmental Kuznets Curves,” Ecol. Econ.,. 25(2), p. 161–175. Engle, R.F., Granger, C.W.J. (1987) “Co-integration and Error Correction: Representation, Estimation, and Testing,” Econom,. 55, p. 251–276. Glasure, Y.U., Lee, A.R. (1998) “Cointegration, Error-Correction, And The Relationship Between GDP And Energy: The Case Of South Korea And Singapore,” Resour. Energy Econ., 20(1), p. 17–25. Gregory, A.W., Hansen, B.E. (1996) “Tests for Cointegration in Models with Regime and Trend Shifts,” Oxf. Bull. Econ. Stat., 58(3), p. 555–560. Grossman, G., Kruger, A. (1995) “Economic Growth and the Environment,” Q. J. Econ,. 110(2), p. 353–377. Halicioglu, F. (2009) “An Econometric Study Of CO2 Emissions, Energy Consumption, Income And Foreign Trading In Turkey,” Energy Policy, 37(3), p. 1156–1164. Johansen, S. (1988) “Statistical Analysis Of Cointegration Vectors,” J. Econ. Dyn. Control, 12(2), p. 231–254. Jones, L.E., Manuelli, R.E. (2001) “Endogenous Policy Choice: The Case of Pollution And Growth,” Rev. Econ. Dyn., 4(2), p. 369–405. Kraft, J., Kraft, J. (1978) “On the relationship between energy and GNP,” J. Energy Dev., 3, p.

401–403. Kwiatkowski, D., Phillips, P.C.B., Schmidt P., Shin, Y. (1992) “Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root: How Sure are We that Economic Time Series Have a Unit Root?” J. Econom., 54, p. 159–178. Narayan, P.K. (2005) “The Saving and Investment Nexus for China: Evidence for Cointegration Test,” Appl. Econ., 37, p. 1979–1990. Newey, W., West, K. (1987) “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix,” Econom., 55, p. 703–708. Oh, W.K., Lee, K. (2004) “Causal Relationship between Energy Consumption and GDP Revisited: The Case Of Korea 1970–1999,” Energy Econ. 26(1), p. 51–59. Ozturk, I., Acravci, A. (2010) “Emissions, Energy Consumption Economic Growth In Turkey,” Renew. Sustain. Energy Rev., 14(9), p. 3220–3225. Panayotou, T. (2003) “Economic Growth and the Environment,” Econ. Surv. Eur., 2, p. 45–72. Pao, H.T., Yu, H.C., Yang, Y.H. (2011) Modeling the Emissions, Energy Use, and Economic Growth in Russia,” Energy., 36(8), p. 5094–5100.

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Pao, H.T., Fu, H.C., Tseng, C.L., 2012. Forecasting of emissions, energy consumption and economic growth in China using an improved Grey model. Energy. 40, p. 400–409. Pesaran, M.H., Shin, Y. (1998) “An Autoregressive Distributed Lag Modelling Approach To Cointegration Analysis,” Econ. Soc. Monogr., 31, p. 371–413. Pesaran, M.H., Shin, Y., Smith, R.J. (2001) “Bounds testing approaches to the analysis of level relationships,” J. Appl. Econom., 16(3), p. 289–326. Perron, P., (1997) “Further Evidence on Breaking Trend Functions in Macroeconomic Variables,” J. Econom., 80 (2), p. 355–385. Phillips, P.C.B., Perron, P. (1988) “Testing for a Unit Root in Time Series Regression,” Biom., 75, p. 335–346. Schmalensee, R., Stoker, T.M., Judson, R.A. (1998) “World carbon dioxide emissions: 1950– 2050,” Rev. Econ. Stat., 80(1), p. 15–27. Selden, T.M., Song, D. (1994) “Environmental Quality and Development: Is There a Kuznets Curve for Air Pollution Emissions? J. Env. Econ. Manag., 27(2), p. 147–162. Shahbaz, M., Lean, H.H., Shabbir, M.S. (2012) “Environmental Kuznets Curve Hypothesis in Pakistan: Cointegration and Granger Causality,” Renew. Sustain. Energy Rev., 16(5), p. 2947– 2953. Shahbaz, M., Mutascu, M., Azim, P. (2013) “Environmental Kuznets Curve in Romania and the Role of Energy Consumption,” Renew. Sustain. Energy Rev., 18(C), p. 165–173. Soytas, U., Sari, R., Ewing, B.T. (2007) “Energy Consumption, Income, and Carbon Dioxide Emissions in the United States,” Ecol. Econ., 62(3), p. 482–489. Soytas, U., Sari, R. (2009) “Energy Consumption, Economic Growth, and Carbon Dioxide Emissions: Challenges Faced By an EU Candidate Member,” Ecol. Econ. 68(6), p. 1667–1675. Stock, J.H. (1987) “Asymptotic properties of least squares estimators of cointegrating vectors,” Econom., 55(5), p. 1397–1417. Zaim, O., Taskin, F. (2000) “A Kuznets curve in environmental efficiency: An Application on OECD Countries,” Environ. Resour. Econ., 17(1), p. 21–36. Zhang, X.-P., Cheng, X.-M. (2009) “Energy Consumption, Carbon Dioxide Emissions, and Economic Growth in China,” Ecol. Econ., 68(10), p. 2706–2712. Zivot, E., Andrews, D.W.K. (1992) “Further Evidence On The Great Crash, The Oil-Price Shock, And The Unit-Root Hypothesis,” J. Bus. Econ. Stat., 20(1), p. 25–44. BIOGRAPHY Sukwan Jung is researcher at Pusan National University of Economics. His research appears in journals such as Journal of Solid Waste and Technology and Environmental and Resource Economics. He can be reached at Economics, Pusan Notional University Jangjeon 2-Dong, Geumjeong-gu, Busan, Korea, [email protected] or [email protected]

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Dohan Won is Professor of Economics at Pusan National University. His research appears in journals such as Energy Economics and Energy Policy. He can be reached at Economics, Pusan Notional University Jangjeon 2-Dong, Geumjeong-gu, Busan, Korea, [email protected].

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CAUSALITY TEST OF BUSINESS RISK AND CAPITAL STRUCTURE IN A PANEL DATA OF

NIGERIAN LISTED FIRMS Dauda Mohammed, Bayero University, Kano, Nigeria

ABSTRACT

In economic sense, some events may be subject to spill-over from economy-wide or world- wide shocks. For instance a country’s fiscal policy, such as government spending, taxation, and borrowings, influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Therefore, causal relationship may flow from business risk to financing structure of companies and vice versa. The objective of this study is to show that Granger (1969) Causality test can be conducted on a panel data comprising of time series and cross-sectional data set. This study used a dynamic panel data of publicly listed firms in Nigeria for the period of 2000-2006, to analyse the direction of causality between our measures of leverage and business risk using the causality approach described by Granger (1969). The overall, results indicates that increases in either business risk or total liabilities as a proportion of total assets do not Granger-cause or predict higher future values of both variables over the short-to-medium term. The implication is that an analysis of the relationship between capital structure and business risk in Nigeria could be estimated in a dynamic panel framework JEL: 320 KEYWORDS: Capital structure, business risk, Granger causality, Nigeria INTRODUCTION Financial researchers have often use contemporary pair-wise correlation coefficients to analyse of the degree of correspondence of directional movement in the variable of interests. However, such estimated pair-wise correlation coefficients do not indicate whether the assumed relationship is unidirectional or bi-directional. For instance, it does not often show whether the dependent variable is causing change in the independent variable or vice versa Nwachukwu and Mohammed (2012). In other words some global events may be subject to spill-over from economy-wide or world-wide shocks. For instance a country’s fiscal policy, such as government spending, taxation, and borrowings, influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. It is therefore important to realize that changes in fiscal policy affect both aggregate demand (AD) and aggregate supply (AS) including that for a company’s capital. In order to capture the impact of these changes in aggregate demand and aggregate supply researchers such as Granger, et al.(2000) and Koop (2006) employ econometric method to statistically detect the direction of the causal relationship between two time series variables using the Granger causality test. Similarly, previous studies on capital structure including Morley (2006) and Berger and Patti (2006), have utilized the Granger causality test in their panel data analysis. The aim of this paper is to use causality test as described by Granger (1969) to examine the directional relationship between business risk and capital structure of Nigerian listed firms. For brevity, we limit our analysis of the direction of causality by assuming that the ratio of total liabilities to total assets (LEV) and earnings risk (STDEV) form a simple two-variable model

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without the necessity of controlling for the effect of the other factors influencing the capital structure decisions of Nigerian companies. DATA COLLECTION The data for our study were obtained directly from the Nigerian Stock Exchange and to check the authenticity of data, we compared it with those made available by some of the companies on their respective web sites. Further, we excluded firms with less than 8 years of continuous time series data on their total liabilities, total assets, and earnings before interest and tax between 2000 and 2006. We also dropped firms that were cross-listed on both the domestic and overseas capital markets. This helped to avoid the confounding implications of disparities in economic structure, exchange rates, legislation, and the level of development of local and foreign markets. The sample of our study comprises seven annual observations for 94 companies, thus 658 observations. On the whole, they make up more than three-quarters of shares traded on the Nigerian Stock Exchange (NSE). We examine the relationship between these variables using annual data over the period 2000-2006. The last seven years were chosen in order to avoid the uncertainties associated with the Nigerian elections in 1999 and in 2007. Theoretical Framework of Bi-Variate Granger Causality Test The theoretical framework of the bi-variate Granger-causality test is based on the premise that a causal series contains information about the response variable that is unavailable from any other source (Pesaran et al. 2001). A variable ( itΧ ) for example, is said to cause another ( itΥ ) if the forecast for the current value of itΥ is significantly improved by the inclusion of the past value of

itΧ after controlling for the past value of itΥ (Pesaran et al. 2001). Given the challenges of Nigeria’s business environment, it would not be impossible to have a causality relationship between capital structure and earnings volatility (business risk) running in both directions. It therefore follows that causation may run negatively from earnings risk to the total leverage ratio, providing that company managers are more inclined to retain a larger proportion of a marginal increase in earnings rather than distribute them to shareholders during periods of economic uncertainty. Thus, the additional retained profit is then substituted for debt capital. This implies that a forecast of changes in earnings variability would be followed by changes in the total leverage ratio in the opposite direction. Previous studies on capital structure including Morley (2006) and Berger and Patti (2006), have utilized the Granger causality test in their panel data analysis. The perceptive ideas for bivariate causality are usually investigated by isolating the impact of the two variables of interest, in this case the leverage ratio of our sampled firms and our measure of earnings variability (business risk) assuming other variable are held constant. Hence, we regressed lags of the two variables of interest using the following specifications:

y ti

j i

m

j

n

j jti

y jjti

y jti fY ,

1 1 ,,0, εβαη ++Χ+Υ+= ∑ ∑

= = −−

(1)

x ti

m

j

n

j

x ijtijjtijti f ,

1 1 ,,0, εβαη χχ ++Υ+Χ+=Χ ∑ ∑

= = −−

(2)

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where the term 0η is an overall group constant, if is the company-specific effect and ε is the error term. We assume that the disturbance terms for the two equations are uncorrelated with the observable variable on the right hand side and that they are normally identical and independently distributed. The coefficient y

jβ in equation 2.1 is utilized in our assessment of whether Granger- causality runs from the variable Χ toΥ , while the coefficient x

jβ in equation 2 is employed in our computation of Granger-causality running in the opposite direction from Υ toΧ . METHODOLOGY The variables used in this paper are the natural logarithm of debt ratio and the volatility of the ratio of total earnings before interest and tax (EBIT) relative to total assets. The natural log as opposed to untransformed ratios allow us overcome the problem of skewed distribution as a result of the inclusion of companies with varying dimensions in their sales variability and asset structure. Harris, et al. (2005) has suggested that some skewed data can be transformed to normally distributed data and then analysed using more accurate parametric testing. In addition, the use the natural log was also based on the result of a nested test. The non-nested test of linear versus log linear equations is obtained by estimating the linear equations and saving the predicted value of the dependent variables. We then ran the log-linear regression equation and include the fitted dependent variable from the linear model. The decision criterion is that if this additional predicted variable is significant at the conventional five per cent, then the log-linear equation is the wrong specification for analysing the data. The test result rejects the significance of the fitted dependent variable, thus implying that the log- linear equation is an acceptable specification for analysing our data. Furthermore, dynamic heterogeneous models require selecting the appropriate lag length for the individual company equation. There are two methods of information criteria (i) Akaike Information Criterion (AIC), and (ii) Schwarz Criterion (SC). The AIC is often used in model selection for the non-nested alternative, while the Schwarz Criterion is an alternative to the AIC that imposes a larger penalty for additional coefficients. Again, following the empirical approach in dynamic panel study by Gaud et al. (2005) and Nwachukwu (2009) among several other studies, we settled for specifications with four-year lags for each explanatory variable that is . This is represented in equation 4.1 and 4.2 below. We first experimented with longer time lags of five and six years but our data proved too short to accommodate such lag periods. We begin with a max lag of 6 and slowly eliminated the ones that are insignificant using the Schwarz Bayesian criterion. Subsequently, the Granger causality test in equations 4.1 and 4.2 were estimated using four annual lags of the percentage changes in the total debt ratio and the standard deviation of total earnings relative to total assets (business risk). The regression analysis deploys a total of 609 observations generated from the panel data of our ninety-four companies over the period 2000 – 2006. The use of annual observation means that we can consider separately short and long-run Granger causality effects (Elbadawi and Mwega, 1998; Attanasio et al. 2000). Consequently, equations 4.1 and 4.2 above are estimated using the three instrumental variables techniques of GMM-IV, SURE and 3SLS mentioned above and the results presented in Table 1. CONCLUDING COMMENTS The study tests for the direction of causality between our measures of leverage and business risk using the causality approach described by Granger (1969). Overall, the results in Table 1 suggest that increases in either business risk or total liabilities as a proportion of total assets do not Granger-cause or predict higher future values of both variables over the short-to-medium term. The results show that the previous debt ratios lag 1, 2 and 4 are statistically significant under the

4== nm

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SURE estimation. The implication is that an analysis of the relationship between capital structure and business risk in Nigeria could be estimated in a dynamic panel framework. Nonetheless, we recognised that the causal predictions of such a simple two-variable empirical analysis may be biased because of the effect of omitted firm-specific variables that may impact on the capital structure choices of companies. Table 1: Result of Granger Causality Analysis Between Capital Structure and Business Risk in Nigeria During the Period 2000-2006

number of observations 609 hods gmm-iv sure 3sls

column 1 column 2 column 3 column 4 column 5 column 6 dependent (y) variable dllev stdev dllev stdev dllev stdev

independent (x) variables constant -0.238

[-0.102] 1.102 [0.906]

0.178 [1.269]

0.070 [4.961]

0.556 [0.281]

1.220 [0.876]

dllev (-1) -0.138 [-0.194]

-0.294 [-0.805]

-0.109 [-1.728]

-0.006 [-0.939]

-0.476 [-0.789]

-0.318 [-0.752]

dllev (-2) -0.252 [-1.315]

0.087 [0.663]

-0.139* [-2.161]

0.008 [1.288]

-0.228 [-1.116]

0.093 [0.644]

dllev (-3) -0.173 [-1.304]

-0.029 [-0.354]

-0.049 [-0.819]

-0.005 [-0.879]

-0.190 [-1.382]

-0.034 [-0.349]

dllev (-4) -0.700 [-0.552]

-0.476 [-0.738]

0.136 [1.913]

0.002 [0.304]

-1.026 [-0.886]

-0.525 [-0.646]

stdev (-1) 0.011 [0.002]

2.243 [0.940]

0.464 [0.752]

0.311 [5.033]

2.719 [0.682]

2.330 [0.832]

stdev (-2) -1.030 [-0.443]

-0.858 [-0.615]

-0.438 [-0.600]

0.200 [2.727]

-1.082 [-0.487]

-0.773 [-0.496]

stdev (-3) 0.383 [0.0393]

3.647 [0.718]

-0.173 [-0.214]

0.124 [1.531]

5.544 [0.661]

3.836 [0.651]

stdev (-4) 3.589 [0.134]

-11.004 [-0.821]

-0.178 [-0.231]

-0.087 [-1.127]

-9.069 [-0.403]

-12.110 [-0.767]

sum beta coefficients5 wald test 1:

2χ [5];(probability value)

2.953 [0.840]

-5.971 [0.444]

-0.326 [0.483]

-0.001 [0.961]

-1.887 [0.880]

-6.717 [0.443]

sum of alpha coefficients5 wald test 2:

2χ [5];(probability value)

-1.264 [0.495]

-0.711 [0.429]

-0.162 [0.260]

0.548 [0.001]

1.920 [0.244]

-0.785 [0.498]

implied long-run granger-causality coefficients wald test 3:

2χ [7] ];(probability value)

1.304 [0.918]

-3.489 [0.435]

-0.280 [0.010]

-0.002 [0.001]

-0.646 [0.784]

-3.764 [0.443]

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null no serial correlation up to lag order one ljung-box q-statistics

2χ [1];(probability value) null no serial correlation up to lag order two ljung-box q-statistics

2χ [1];(probability value) sargan test

[0.658] [0.903] [0.97]

[0.359] [0.522] [0.999]

[0.935] [0.993]

[0.349] [0.619]

[0.295] [0.554]

[0.300] [0.470]

Notes: 1. The estimated coefficients in bold italics are significant at the conventional five percent level 2. The figures in brackets[…] are the t-statistics unless otherwise stated 3. The equations estimated in columns 1 and 3 and 5 are of the form in equation 4.1 while the models in columns 2, 4 and 6 are of the

form in equation 4.2 4. The sum of beta coefficients is the sum of the coefficients on the lagged explanatory (x) variable in the respective equations. The

sum of the alpha coefficients is the sum of coefficients on the lagged dependent (y) variables in the equation concerned 5. The probability value of the sum of beta and alpha coefficients are associated with a Chi-square statistics obtained from a Wald

test of the null hypothesis that such additions of the estimated causality are equal to zero. 6. The long-run Granger-causality coefficient is calculated as the sum of beta coefficients divided by one minus the sum of alpha

coefficients. The probability value is for a Chi-square statistics following results of a Wald test of the hypothesis that all the beta coefficients are jointly equal to zero.

7. The probability values of the Ljung-Box statistics are obtained by applying view-residual-test function in the EViews version 6.0 to the residual of each specification 6 and 7. The results show that the null hypothesis of no first and second-order serial correlation in the difference residuals cannot be rejected at the five percent confidence.

8. The Sargan test for the GMM model in column 1 and 2 is not significant at the 5% confidence level and hence accepts the validity of our instruments.

REFERENCES Arellano, M., & Bond, S. (1991). Some Test Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies, 58, 277-297. Arellano, M., & Bover, O. (1995). Another look at the Instrumental Variable: Estimation of Error-Component Model. Journal of Econometric Analysis, 68, 22-51. Attanasio, O., Picci, L., & Scorcu, A. (2000). Saving Growth and Investments: Macroeconomic Analysis using A Panel of Countries review of Economics and Statistics, 82(2), 182-221. Baltagi, B. H. (Ed.). (2004). Panel Data - Theory and Application. New York: Physica-Verlag Heidelberg. Berger, A. N. (1995). The Relationship between Capital and Earnings in Banking Journal of Money, Credit, and Banking, 27(2), 432-456. Berger, A. N., & Patti, E. B. d. (2006). Capital Structure and Firm Performance: A new Approach to Testing Agency Theory and Application to the Banking Industry Journal of banking and Finance, 30, 1065-1102.

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Bun, M. J. G., & Carree, M. A. (2005). Bias-Corrected Estimation in Dynamic Panel Data Models. Journal of Business and Economics, 23, 200-210. Brooks, C. (2002). Introductory Economics for Finance, Cambridge: Cambridge University Press Carkovic, M., & Levine, R. (2002). Does Foreign Direct Investment Accelerate Economic Growth? Mimeo University Retrieved October 2006 Elbadawi, I., & Mwega, F. (1998). Can Africa's Savings Collapse be reverted? Paper presented at the World Bank Conference on 'Savings Across the World: Puzzles and Policies available on the interntet http://worldbank.org/research/project/savings/africa. Gaud, P., Jani, E., Hoesli, M., & Bender, A. e. (2005). The Capital Structure of Swiss Companies: Empirical Analysis using Dynamic Panel data. European Financial Management, 11(1), 51 - 69. Granger, C. W. J. (1969). Investigating causal reations by Econometric Models and Cross- Spectral Methods. Econometrica, 37, 424-438. Granger, C. W. J., Huang, B.-N., & Yang, C.-W. (2000). a Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asian Flu. The Quarterly Review of Economics and Finance, 40, 337-354. Green, W. (2003). Econometric Analysis. London: Prentice Hall. Gujarati, D. N. (2004). Basic Economics: McGraw-Hill Companies. Harris, M., Tylor, G., & Tylor, J. (2005). CatchUp Maths and Statistics. Kent UK: Scion Publishing. Hasio, C. (2003). Analysis of Panel Data: Cambridge University Press Second Edition Hausman, J. A. (1978). Specification Tests in Econometrics. Econometrica, 46(6). Hayakawa, K. (2005). Small Sample Bias Properties of the System GMM Estimator in Dynamic Panel Data Models. Paper presented at the Hi-Stat Discussion Paper, No.82, Hitotsubashi University Koop, G. (2006). Analysis of Financial Data. Chichester UK: John Wiley and Sons. Morley, B. (2006). Causality between Economic Growth and Immigration: An ARDL Bound testing Approach. Economic Letters, 90, 72-96. Mukherjee, C., White, H., & Wuyts, M. (1998). Econometrics and Data Analysis for Developing Countries. London and New York: Routtledge. Nickell, S. (1981). Biases in Dynamic Model Models with Fixed Effects. Econometrica, 49, 1417-1426. Nwachukwu, J. (2009). Foreign Capital Inflows, economic Policies and Real Exchange Rate in Sub-Saharan Africa: Is there an Interaction Effect? Journal of Financial Decision Making, 5(1). Nwachukwu, J; and Mohammed, D (2011) Business Risk, Industry Affiliation and Corporate Capital Structure: Evidence from Publicly Listed Nigerian Companies. Journal of African Business, 13(1), 5-15 Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bond testing Approach to the Analysis of Level Relationships. Journal of Applied Econometrics, 16(289-326).

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Zellner, A. (1962). An Efficient Method of Estimating Seemingly Unrelated Regression and Test for Aggregation Bias. Journal of American Statistics Association, 57, 348-368. ACKNOWLEDGEMENT The author acknowledge funding from Bayero University Kano- Nigeria. The author also acknowledge the helpful comments of two anonymous reviewers. BIOGRAPHY Dauda Mohammed has an MSc and PhD in Finance from The University of Salford, Greater Manchester UK. He teaches Finance and Statistics at Bayero University Kano Nigeria. He is also a Financial and Management Consultant in Nigeria. His research appears in journals such as, Journal of African Business, Journal of Accounting and Taxation and IOSR Journal of Business and Management among others. He can be reached at Bayero Univerisity, PMB 3011 Kano Nigeria. [email protected].

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USING QUANTILE REGRESSIONS TO EXAMINE THE CAPITAL STRUCTURE DECISION OF US

FIRMS William Nelson, Indiana University Northwest

Bala Arshanapalli, Indiana University Northwest

ABSTRACT

The paper examines the capital structure decision of 3432 US companies in the year 2006 and 2011. The paper employes quantile regression to explore the predictions of the trade-off and pecking order models. We find evidence of heterogeneity in the capital structure and the determinants of capital structure. We find the data more consistent with the trade-off theory than the pecking order theory in 2006 but find that only economic conditions matter in 2011. JEL: G32 KEY WORDS: Quantile Regression and Capital Structure INTRODUCTION Ever since the groundbreaking work of Modigliani and Miller (1958) empirical capital structure research has been abundant. Yet a successful explanation of the wide variety of capital structures remains elusive. For example Frank and Goyal (2003) note “there is a surprising lack of consensus even about many of the basic empirical facts.” Most of the research focused on testing two competing theories. Since neither of the theories claimed to provide an explanation of the capital structure decision for all circumstances this state of affairs is perhaps understandable. This paper’s contribution is twofold. First, Korajczyk and Levy (2003) show that economic conditions along with firm specific variables determine the capital structures. Thus we will examine the capital structure determinants for two very different years. The first year, 2006, was just before the recent US recession. A period some observers (most well-known Shiller (2005)) classified as a period of “irrational exuberance”. The second year, 2011, a period shortly after the recession, is a period characterized by low interest rates and considerable risk aversion. This allows us to study the capital structure decision in different economic environments. Second, it has been shown that the distribution of leverage ratios is highly skewed with considerable kurtosis. These observed statistical properties may result in an incomplete picture of the relationship between the leverage ratio and the firm specific variables when least square regressions are used. A better suited methodology under these circumstances is quantile regressions. Introduced by Koenker and Bassett (1978), quantile regressions allow us to examine the impact of capital structure determinants across the whole distribution rather than only at the mean of the distribution. The paper opens with a brief explanation of the two models of capital structure determination. The predictions of each model for the various determinants of capital structure are spelled out. The next section explains one quantile regression. The following section describes our data source. Then the results are presented and discussed. The paper’s conclusions are presented in the final section. LITERATURE REVIEW Modigliani and Miller (1958) show that assuming away taxes, bankruptcy costs, agency costs and asymmetric information in an efficient market financial policy is irrelevant. Thus the trade-off theory focuses upon when these conditions are violated. The trade-off theory argues that firms

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way the benefits of taxes and certain incentive effects against the direct and indirect costs of bankruptcy. The optimal capital structure precisely balances the costs and benefits of additional debt. Corporate taxes in the Modigliani and Miller (1958) model provide a strong incentive for debt financing. Miller (1977) shows that personal taxes can mitigate or at least lessen this effect. DeAngelo and Masulis (1980) developed a model in which the benefits of the tax deductibility of interest are greater for profitable firms. They argue higher levels of nondebt tax shields may render the deductibility of the interest payments superfluous and thus lower the tax benefit of debt. They posit a negative relationship between the size of nondebt tax shields and book leverage. Because the tax shields may affect the market value of the firm the impact on market leverage is ambiguous. Furthermore their analysis implies that an increase in profitability allows a corporation to issue more debt. If leverage is measured using book values we may conclude there is a direct relationship between profitability and the debt ratio. The situation becomes more complex if we measure leverage using market values. Since increases in profitability may increase the market value of the firm, the effect on leverage is uncertain. Jensen and Meckling (1976) and Jensen (1986) focus on the conflicts of interests between managers and stockholders. They argue that managers have a tendency to spend excess free cash flow on their interests at the expense of stockholder’s interest. If a company choses a higher debt ratio the fixed obligations from debt commitments can reduce the free cash flow available for managerial self-dealing and help realign the interests of the managers and stockholders. These are also called agency costs. To the extent a firm has more investment opportunities it has less need for debt to control managerial behavior. In the trade-off theory increased investment opportunities are associated with a lower debt ratio. On the other hand, there are also negative effects of debt on firm value. That is, leverage creates incentives for risk shifting, another type of agency costs. This is the tendency for stockholders to accept high risk projects to profit on the upside potential and allow bondholders to suffer the losses if the project fails. This reduces the willingness of lenders to supply funds. To the extent the firm’s assets are tangible and can serve as good collateral this lessens the lender’s risk and increases their willingness to provide funds. Thus firms with high levels of net fixed assets should employ more leverage. Warner (1977) found that the direct costs of bankruptcy were about 5.5% of the asset value of the firm and only 1.4% of the value five years prior to bankruptcy. When we consider the probability of bankruptcy this suggests the expected costs of bankruptcy are not large. However, the indirect costs of bankruptcy such as the effects on customers, suppliers, and employees may be quite substantial. Since the possibility of bankruptcy rises when profitability falls, this provides another rationale for a negative relationship between leverage (measured by book values) and profitability. To the extent a firm a firm relies on tangible assets which can serve as collateral, the costs of bankruptcy and the costs of agency should be lower. Lenders should more willingly provide debt financing. Therefore, the greater the proportion of tangible assets, greater the expected leverage. The Pecking order model of Myers and Majluf (1984) claims the high costs associated with issuing equity securities are the supreme consideration. There are two types of costs: transactions and asymmetric information. The transactions costs are the fees associated with issuing new securities. These are highest with new equity; debt securities are next, and retained earnings has no fees. The asymmetric information costs arise from the investors believe that the managers have better information about the firm’s prospect than investors. Thus, if prospects are good the management is unlikely to issue equity to share the profits with investors. Thus investors will interpret an equity issue as a negative signal and will underprice it. This problem is present for debt but in a much smaller degree. Since management understands investor’s

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perception and wishes to avoid the underpricing they set a hierarchy of financing. The first choice is retained earnings. Next is debt and new equity is issued reluctantly. In a single period pecking order model debt rises when investment needs exceed the retained earnings. Controlling for profitability, leverage is directly related to retained earnings. Similarly, controlling for investment needs, profit is inversely related to debt. In a dynamic model the relationships are less clear. In this case even if investment needs exceed retained earnings a firm may not wish to issue debt if it anticipates more profitable projects and a shortage of retained earnings in the future. This possibility is less likely for a firm paying dividends as they could lower their payout rate to preserve retained earnings. Nevertheless it cannot be dismissed. Table 1 which draws from Fama and French French (2002) summarizes our discussion. It contrasts predictions of the trade-off and pecking order theories and lists the proxies that we employ. It allows us to pull together our predictions of the determinants of leverage in the two models. First we examine predictions concerning profitability. In the pecking order model increases in profitability will lower the leverage ratio (for both book and market value measures of leverage). In the trade-off model increased profitability results in higher levels of leverage. The effect of profitability on market value measures of leverage is ambiguous as we discussed above. Second, we consider the impact of the availability of investment opportunities on leverage. The single period Pecking order model predicts the book leverage increases with the availability of investment opportunities. In the dynamic model the theory predicts that investment opportunities is inversely related to market leverage. Third, we consider the impact of tangible assets. The pecking order theory offers no prediction on their effect. The trade-off theory predicts the higher the proportion of tangible assets the greater is both book and market leverage. Finally, we consider nondebt tax shields. The pecking order theory offers no prediction of their impact on leverage. The trade-off theory suggests they will negatively impact the leverage and have ambiguous effect on market value. Table 1: Summary of Predictions and Proxies of Pecking Order Models and the Trade-Off Model

Pecking Order Model Dynamic Pecking Order Trade-off Model

Determinants Proxies Book Market Book Market Book Market Profitability ET/A - - - - +

Investment Opportunities V/A + + - - Proportion of Tangible Assets NFA/A

+ +

Non-debt Tax Shields Dep/A - - This table draws heavily from Fama and French (2002)

ET/A, Preinterest, pretax earnings divided by assets V/A The ratio of market to book value of assets NFA/A Net fixed assets divided by total assets Dep/a depreciation divided by total assets

DATA AND METHODOLOGY The Data Set Comes From Damodaran’s Website, http://pages.stern.nyu.edu/~%20adamodar/New_Home_Page/data.html. This data is free of survivorship bias. It covers 6176 companies in 101 industries. We considered the 3432 companies for which we had complete data for both of the time periods, 2006 and 2011. The use the pre- interest after-tax earnings divided by the book value of assets is our proxy for profitability. This

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measure of profitability is not influenced by the company’s choice of leverage. Our proxy for the availability of investment opportunities should reflect the firm’s expectations for high future growth. Following Myers (1977) we use the ratio of the market to book value of assets as a proxy for expected future growth opportunities. The proportion of net fixed assets total assets measures the tangibility of the firm’s assets. Finally we measure non-debt tax shield as the ratio of depreciation expense to total assets. Table 2 provides basic descriptive statistics of the key variables for 2006 and 2011 periods. It is interesting that the leverage (market value of the debt to capital) in 2011 of 27% exceeds the ratio in 2006 of 16%. Couple of reasons could be offered for the growth in the leverage. First, the interest rates in 2011 were extremely low and may have encouraged firms to take on more leverage. Second, since we are using market leverage ratio, low interest rates could have pushed the market value of debt higher. The table 2 shows the mean profitability measure was negative in both periods. In both periods the median value of profitability was positive and in both periods negatively skewed. This means some firms with large losses lowered the mean value. The median profitability in the 2011 period was lower than in 2006. This reflects the incomplete recovery from the recession. The remaining variables have significant skewness and kurtosis. The Jarque-Bera statistic strongly rejects the null hypothesis that any of the variables are normally distributed. The Table 2 illustrates the heterogeneity of data on both the capital structures and the proposed determinants of capital structure Table 2: Descriptive Statistics For 2006 and 2011

2006 descriptive statistics

market debt to capital profitability

investment opportunity

net fixed assets to total assets

non- debt tax shield

mean 0.1576 -0.0908 0.5054 0.2063 0.0370 median 0.0913 0.0400 0.0013 0.1179 0.0288 maximum 0.9961 3.5256 380.0400 1.0000 3.0000 minimum 0.0000 -17.5000 0.0000 0.0000 0.0000 std. dev. 0.1861 0.7734 7.9840 0.2338 0.0674 skewness 1.5025 -10.0654 35.6388 1.3238 26.4247 kurtosis 5.1232 149.9036 1552.8160 3.8929 1101.4600

jarque-bera 1935.9180 3143984.0000 343000000.0000 1116.4420 173000000 probability 0.0000 0.0000 0.0000 0.0000 0.0000

2011 descriptive statistics mean 0.267296 -0.079322 2.918 0.213531 0.038909

median 0.172126 0.036444 0.0061 0.117335 0.030543 maximum 0.99997 3.92 2081.665 1 1.6 minimum 0 -74 1.33e-08 0 0 std. dev. 0.288647 1.51834 48.55 0.24267 0.055195 skewness 1.065328 -38.43958 34.891 1.306307 12.56956 kurtosis 3.108585 1738.198 1355.88 3.707823 290.3395

jarque-bera 650.4832 4.31e+08 2.62e+08 1047.118 11890092 probability 0 0 0 0 0 observations 3432 3432 3432 3432 3432

definition of variables

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profitability pre-interest, after-tax earnings divided by book value of assets investment opportunities the ratio of market to book value of assets

non-debt tax shield depreciation expense divided by book value of assets

Most of the empirical tests of capital structure determinants focus on testing the implications of the two competing theories we outlined above: the trade-off model and the pecking order theory. These theories suggest many factors to explain the determinants of leverage. Frank and Goyal (2003) proposed 39 factors. Fama and French (2002) narrowed them down to 4 factors; profitability, investment opportunities, the tangibility of assets, non-debt tax shields and volatility. In their analysis volatility is measured over time as log of assets and it is not included because our analysis is over cross-section of firms. Previous studies have used different definitions of leverage. As noted by Frank and Goyal (2003) book values are determined by past economic activity whereas market values are determined by expected future economic activity. They note that while early studies employed book value definitions, more recent studies have focused on the market value. In this study we will focus on the market value. As in the previous studies the market value of leverage is defined as the ratio of market value of debt to market capitalization. Quantile Regression We test the predictions of the two models using the quantile regression developed by Koenker and Bassett (1978). The aim of simple classical regression analysis is to minimize the sum of squared errors given by

min 𝛼,𝛽

�(𝑦𝑖

𝑡

𝑖=1

− 𝛼 − 𝑋𝑖𝛽)2

where,

𝑦𝑖 is the dependent variable 𝑋𝑖 is the independent variable

and 𝛼 𝑎𝑛𝑑 𝛽 are the estimated intercept and slope parameters. The objective is to find values of 𝛽 that would minimize the error. While the idea of quantile regression is similar, it aims at minimizing absolute deviations from τth conditional quantile and it is given as:

min 𝛽𝜖𝑅𝑝

�𝜌𝜏

𝑇

𝑖=1

(𝑦𝑖 − 𝜉(𝑋𝑖,𝛽)

Where

ξ is the conditional quantile ρτ is the so-called check function which weights positive and negative values asymmetrically (giving varying weights to positive and negative residuals)

For example to obtain conditional median parameter estimates, τ should be set at 0.5 (since this is the quantile that represents the median) and an optimization model is employed to find values of β that minimizes the weighted sum of absolute deviations between the dependent variable and the independent variable. However the constraints imposed require that a linear programming

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must be used. In a regression format the relationship between the dependent and independent variable can be summarized as:

min 𝛼𝜏𝛽𝜏

� |𝑦𝑖

𝑇

𝑖=1

− 𝛼𝜏 − 𝑋𝑖𝛽𝜏 |

Where 𝛼𝜏 is the intercept for a specified quantile and

𝛽𝜏 is a slope coefficient

𝛽𝜏 shows the relationship between Xi and yi for a specified quantile. A linear program is used where different values of α and 𝛽 are plugged into the above equation until the weighted sum of the absolute deviations are minimized. RESULTS AND DISCUSSION Table 3 presents both the OLS and quantile regression estimates of the leverage ratio for 2006 and 2011. The impact of profitability on leverage in 2006 is positive accept at low levels of leverage. In particular the impact of profitability was insignificant at the 20th quantile and positive with statistical significance at all of the other quantiles. In addition the coefficients increased monotonically as we moved to higher quantiles. This was not consistent with the Pecking Order model which predicted a negative coefficient and potentially consistent with the Trade-Off model which made no prediction. The investment opportunities were statistically insignificant determinants according to OLS. At the lower end of quantiles investment opportunities were also insignificant. However, at the higher end of quantiles, the investment opportunities exerted a statistically significant downward influence on leverage. This implies that the firms with higher leverage would invest in new opportunities by using equity. Moreover, the order of magnitude of the coefficients generally increased as we moved to higher quantiles. This is consistent with both the dynamic Pecking Order theory and the trade-off model. This illustrates the advantage of the quantile regression. OLS would simply have assigned no significance to investment opportunities. The proportion of tangible assets has a strong statistically significant positive impact on leverage both in OLS and across all of the quantiles. This is not predicted by the pecking order model but is predicted by the Trade-Off theory. Finally non-debt shields are negatively statistically significant in OLS. In quantile regressions non-debt tax shields have no statistical significance across the distribution. The results of 2006 are more supportive or consistent with the tradeoff model. In 2011 profitability had a negative marginally significant impact on leverage in the OLS model. However, as we examine the impact across the quantiles we observed no statistically significant impact but the sign of the coefficient is negative. Because the Trade-Off theory makes no predictions the result is not inconsistent with the theory. The OLS results are consistent with the Pecking Order theory but they are not confirmed across the quantiles. Since the median profitability is lower in 2011 and further the economy was in the process of coming out of a deep recession the firms made no attempt to alter their leverage. The investment opportunities, unlike 2006, are marginally significant in OLS. But, the coefficient obtained statistical significance only in the highest (80th) quantile. In 2011 investment opportunities do not seem to be important determinants of capital structure. The proportion of tangible assets again enters positively and is statistically significant in OLS and all of the quantiles except the highest quantile. Perhaps in economically uncertain times, highly leveraged firms were unable to increase their leverage even with additional collateral. This result is consistent only with the Trade-off theory. Finally, the non-debt tax shields failed to obtain any statistical significance in either OLS or across the

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quantiles. Soon after the great recession, we find little support for either theory. It makes sense because in an uncertain economic time period, the only thing that matters is having good collateral. Table 3: Ordinary Least Squares and Quantile Regression Results For the Capital Structure

results for 2006

ols q(.20) q(.40) q(.50) q(.60) q(.80)

independent variables constant 0.1373 -0.0003 0.0182 0.0621 0.1085 0.2576

31.6067 -0.1924 7.0065 9.2798 16.1615 21.6165

profitability 0.0098 0.0000 0.0027 0.0062 0.0108 0.0214

2.3058 -0.0338 2.2724 3.3199 4.7090 6.9315

investment opportunities -0.4267 0.00185 -0.022826 -0.280969 -0.2216 -0.5621

-1.0763 0.0307 -0.3070 -1.0079 -2.2556 -7.1422

net fixed assets/total assets 0.1298 0.0563 0.1861 0.1963 0.2006 0.1580

9.4051 4.9456 11.6524 10.1283 8.6294 5.2321

non-debt tax shield -0.1451 -0.0531 -0.1264 -0.2515 -0.2180 -0.1425

-2.9408 -1.0209 -1.6610 -1.6889 -1.7181 -0.5107

results for 2011

ols q(.20) q(.40) q(.50) q(.60) q(.80)

independent variables constant 0.2400 -0.0011 0.0400 0.1079 0.2049 0.4884

34.4447 -0.2790 7.3695 10.1224 14.3750 26.8421

profitability -0.0070 -0.0003 -0.0019 -0.0075 -0.0365 -0.1648

-1.7629 -0.0928 -0.4342 -0.5260 -0.4710 -0.6241

investment opportunities -0.2290 -0.011063 -0.111778 -0.245036 -0.4431 -0.2030

-1.9235 -0.0843 -0.5590 -0.9717 -1.5794 -3.1680

net fixed assets/total assets 0.1488 0.1291 0.3034 0.2971 0.2778 0.0683

7.0410 6.5653 14.9796 10.0698 8.5389 0.8393

non-debt tax shield -0.1116 -0.1201 -0.1656 -0.2270 -0.5282 -0.2675

-1.1454 -1.0014 -1.1713 -0.9291 -1.4465 -0.3093

CONCLUSION This paper examines capital structure in the US for 2006 and 2011. The paper employs quantile regression analysis to explore the determinants of capital structure. We find convincing evidence of heterogeneity in the debt ratios of firms. There is also strong evidence of heterogeneity in the determinants of capital structure. In 2006 we find profitability had a positive statistically significant impact on capital structure across the distribution. The investment opportunities had a statistically negative impact on capital structure as predicted by the Trade-off theory only in the highest quantiles. Relying only on only OLS would have missed this evidence that supports the Trade-off theory. The proportion of tangible assets had a statistically significant positive impact on the capital structure consistent with the trade-off theory. The non-debt tax shields had a statistically significant negative impact on capital structure only in OLS. Examining the impact of non-debt tax shield across the distribution reveals that there is marginal statistical significance only in the middle of the distribution and no significance at the extreme. The OLS results are consistent the trade-off theory whereas the quantile regressions while supportive suggest a more mixed picture. In 2011 the only determinant of capital structure was the tangible asset ratio. The recession and the accompanying economic uncertainty were probably important considerations in setting capital structure than the usual determinants. The capital structure theories work well in

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normal economic conditions but not as well when the economy is coming out of a distressed economic period. REFERENCES DeAngelo, H., & Masulis, R. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8: 3-29. Fama, E., & French, K. (2005). Testing trade-off and pecking order predictions about dividends and debt. Review Financial Studies 15: 1-33. Frank, M., & Goyal, V. (2009). Capital Structure Decisions: Which Factors Are Reliably Important? Financial Management 38, 1-37. Jensen, M.C., (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76, 323-329. Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3:305-360. Koenker, R., & Bassett, G. (1978). Regression Quantiles. Econometrica 46, 33-50. Korajczyk, R.A., & Levy, A. (2003). Capital Structure Choice: Macro Economic Conditions and Financial Constraints. Journal of Financial Economics 68, 75-109 Miller, M., (1977). Debt & Taxes. Journal of Finance 32: 261-275. Modigliani, F., & Miller, M. (1958). The Cost of Capital, Corporation Finance and the theory of Investment. American Economic Review 48: 261-297. Myers, S., (1977). Determinants of corporate borrowing. Journal of Financial Economics 5: 147- 175. Myers, S., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13: 187-221. Schiller, R. (2005). Irrational Exuberance, Second Edition, Princeton University Press. Warner, J., 2007. Bankruptcy Costs: Some Evidence. Journal of Finance. May 32, 337-347

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SYNERGISTIC SOLUTIONS TO MILITARY VIABILITY AND ECONOMIC EQUALITY

Michael Mahoney, Wagner College, Staten Island, N.Y., USA Donald L. Crooks, Wagner College, Staten Island, N.Y., USA Cathyann Tully, Wagner College, Staten Island, N.Y., USA

ABSTRACT

Throughout history, empires have been built through the development of a superior military. Many of these empires experienced slow decline and collapse through a conjectured lack of passionate and loyal conscripted individuals who made up these armies. Others argue that individuals enlist out of internal compulsions ranging from ancestral pressures, loyalty and civic pride; or to a quest for citizenship. Historical and economic literatures document that it becomes more difficult for a society with high and increasing prosperity to maintain a sufficient number of dedicated individuals to serve in its military because of other career choices. The problem, then, is how does a country structure an economic package attractive enough to ensure sufficient enlistment for an effective military? This paper: 1.) examines pressures that draw these dedicated individuals to other pursuits, 2.) proposes economic and other benefits to attract a sufficient number of them to a military career; 3.) considers the cost to the United States Government of implementing these benefits; and 4.) estimates whether these changes could become law. INTRODUCTION At the moment of his inauguration, the next U.S. President will face a myriad of crises: difficult times for the economy, major deterioration of many critical foreign alliances, emerging Arab spring, Iranian nuclear bomb controversy, totally inept Congress and illegal immigration are only a few. The events of the past decade may have come full circle. Could the same circumstances that removed Russia as a global player visit itself on the United States? We find ourselves in the "Perfect Storm" of Murphy’s Law; an iteration beyond the simplistic description to the exponential result of "everything that can go wrong is going wrong—all at the same time’". In times of severe stress, emotional decisions tend to become the norm and almost always result in the absolute wrong decision being made [1] [2] [3] [4]. Time will tell whether the economic bailout of 2008 will be one of these wrong decisions. Nonetheless, given the time that they had to consider it, it is clear that whether or not to vote for past packages and bailouts were emotional decisions for many U.S. lawmakers and one in which many of these lawmakers could not get beyond partisan politics when the times and the legislation demanded rational and not emotional decisions. In such a climate as the one in which the U.S. finds itself, problems must be addressed systematically, rationally, and unemotionally. In this climate, where many issues must be addressed and the money to fund the solutions found, it will be very easy to cut funds from the Defense budget and use them to fund new economic solutions assuming that the Democrats retain control of Congress. This paper is not a knee- jerk defense to maintain military funding at its current levels, nor does it enter into the debate of which programs to cut and which to retain. However, it does look at one feature of our defense posture; the all voluntary army concept, and the difficulties currently encountered in attracting enough individuals who are of a caliber to maintain U.S. Armed Forces at a level as high, if not higher, than any other military in the world. This quality of force is essential not to advance an American imperialism but to assure that those bent on harming the country do not misinterpret our national resolve. We do not want to become victim of a financial mentality or an even worse military “Guns of August” mentality [5]. This paper: 1.) examines pressures that draw these

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dedicated individuals to other pursuits, 2.) offers a favorable income tax alternative to the ever growing issue of signing and reenlistment bonuses; 3.) considers the cost to the United States Government of implementing these benefits; and 4.) estimates whether these changes could become law. What Draws These Individuals to Other Pursuits For most of its history, the U.S. has mustered an all volunteer army. Its only exceptions were: 1. the Civil War; 2. World War I; 3.World War II; and 4. the Korean conflict through Viet Nam. World Wars I and II were considered patriotic endeavors and all "did their part" to win the Wars. Winning, and progress toward winning (after 1942 for World War II), helped with national morale as well. Korea was much the same way and U.S. citizens were enthusiastic to fight the communists; at least at the beginning. A majority of the populace saw the necessity of maintaining a large standing army during the Cold War. In all of these wars, hot and cold, enough people were motivated by patriotism and winning to make sure that there were enough men conscripted and no significant dissent against the draft existed. They supported the military at the beginning of the Viet Nam conflict until it became apparent that the military and the government were lying about its conduct and results. At this point, a popular movement began, fueled by many in college who would go to war if they lost their educational deferment. This had not been an issue in the Civil War either as the wealthy and educated class (then one and the same) could "buy their way out" of serving by paying $300 to a substitute who would fight in their place[6]. Nor was it an issue during World Wars I and II when patriotism drove neither war support nor Korea when those in college had a military deferment. [7] Since moving to the concept of an all voluntary army subsequent to Viet Nam, the U.S. Congress has been loath to return to the conscription system. However, our largest potential adversaries have huge human resources for very large standing armies, and we find ourselves stretched so thin around the globe that we need to send National Guard personnel for multiple tours of duty in Iraq and Afghanistan. These individuals volunteered for domestic service, did not expect to be billeted abroad, and, indeed, would have been very useful here at home during the Katrina debacle of 2007. Had separations not been suspended, it is reasonable to assume that many of these individuals would not have reenlisted since they were not doing what they signed up to do. Economic issues. As the United States economy has grown and prospered we have become a nation of profligate consumption. Subsequent to the Regan Revolution, armed with the [now] false security of increasing housing prices, easy money and a non- sustainable rise in the stock market, many U.S. residents eschewed saving, especially for a "rainy day". Swayed by the belief that interest rates would stay low forever, millions of consumers tapped the equity in their homes and injected additional discretionary spending into the economy. Studies will be written for decades about what happened here and how this became the latest and most dangerous "black swan" in over 70 years. U.S. consumers, along with members of the U.S. financial community, collectively forgot the lessons of the past; whether it was the worldwide currency crisis of the early 1990’s, the Long Term Capital Management collapse, or, at the beginning of the new millennium, the bursting of the dot.com bubble. As a nation we spent, consumed, and ran up staggering amounts of household debt as our savings rate plunged to zero [8]. The Federal Reserve Board, under the direction of Alan Greenspan for nearly two decades, kept interest rates too low for too long as the money supply exploded resulting in more and more dollars chasing fewer and fewer safer investments. Adjustable rate mortgages, no document and NINJA [9] loans, coupled with teaser rates and interest only payments, led to an explosion of housing prices and home construction that far out striped historical norms. Fannie Mae and Freddie Mac found themselves in the position that they were losing their rank and business to the

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independent investment banks. Both corporations came under intense scrutiny from their large shareholders as they saw their profit and revenue base shrink; the victims of competitive disintermediation. This environment made high paying jobs plentiful in many industries. Why enter the army when you could get a high paying position without the potential risk to life and/or limbs. This increased competition for human resources and with the military more stressed than at any time in U.S. history due to simultaneous wars in Iraq and Afghanistan, it became necessary for the Pentagon to relax enlistment standards and explode it budget for enlistment and reenlistment bonuses. These ranged for $3000 to $15000 depending upon the arm of the service and the position [10]. This competition led these government sponsored entities to take larger and larger risks to maintain their competitive position; risks with which they were unfamiliar and did not know how to control. At the same time, the U.S. Government continued to spend unprecedented amounts of revenue on its military as a response to the 9/11 calamity.[11] As shown with President Johnson's effort to pay for the Viet Nam conflict, a guns and butter approach could not be successful long term and, ultimately, seriously hurt the U.S. economy. Waging two wars at the same time in Iraq and Afghanistan was not only ill advised from a military perspective and almost fraudulently from an economic slant in that these adventures were never factored into President Bush’s ongoing budgets. This recession makes it increasingly difficult to fund reenlistment bonuses and maintain an all volunteer army. Some countries, like China, North/South Korea, Russia, and Germany, either maintain a conscripted military or have returned to one. However, as noted above, the U.S. population finds the draft an unacceptable alternative as does the Congress; although Representative Charles Rangel (D, N.Y.) has sponsored a fact finding proposal regarding reinstating the draft. Mark B. Cohen in his blog has argued that the draft would cost upwards of one trillion dollars and be disruptive to the economy [12]. Yet, should the U.S. continue to maintain its current military commitment, it must maintain high levels of financial incentive to U.S. citizens, lower its educational standards for recruits, and continue to intensify its recruitment to aliens with the promise of citizenship to meet its enlistment goals. These have been the solutions that the Pentagon found and adhered to in recent years in its not always successful efforts to maintain U.S. armed forces at their preferred levels. In 2008 a new and more comprehensive GI bill became law which helps veterans with education after separation from the military [13]. Despite this, and the increased costs for recruiting bonuses, and promises of citizenship, the US still is not drawing the numbers of recruits that are needed to maintain the best armed forces in the world [14]. The all-volunteer concept has proven to be very expensive and the pay scale alone has increased $24,000 per person for active personnel or 33% in real terms from 1999 to 2005 [15]. Couple this with a housing allowance of 66% and health care at 69%, the compensation system is unsustainable [16]. To increase the military by just 40,000 troops will add an additional $4 billion per year to the service budget [17]. In fact, a recent survey showed that average military compensation now exceeds the 70th percentile threshold for comparable civilians [18]. Indeed, the average enlisted member earned $5400 more and the average officer $6,000 more, than comparable civilians [19]. Incentives have grown six fold since 2003 when the above numbers were recorded and some bonuses can range as high as $150,000 for very senior Special Forces soldiers who re-enlist for six years. All told, the Army and Marines spent $1.03 billion in 2008 on reenlistment bonuses, compared with $174 million in 2003, the year the war in Iraq began [20]. This program is extraordinarily costly and will become even more so as it is revised. A comprehensive new program needs to be passed and implemented to help recruit quality personnel while providing severally needed financial help to veterans and their surrounding collateral society. Right now the Army has lowered its standards by accepting up to 25% of new recruits without a high school diploma; again lowering the quality of the armed forces [21].

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A New Proposal to Attract and Fund The All-Volunteer Armed Forces While Providing on the Ground Immediate Local Stimulus As noted earlier, the savings rate in the United States has fallen to zero. We have also seen multiple stimulus packages to various economic sectors to lower the severity of the current recession in this country. Instead of enlistment and reenlistment bonuses, we propose that upon honorable discharge, all military personnel with a minimum of five years service in any military service be granted a life time exemption from federal taxes; up to a maximum of $100,000 a year for household income. We believe that an additional incentive of increasing that level by $5000 for each additional two years served up to $150,000 annual income would help to keep soldiers in the service longer. They would only pay on the income above the thresholds as described below. Based on the 2012 Federal Tax form 1040-es [22] the tax due on $100,000 is as follows: Married filing jointly: $70,700 to $142,700 = Tax liability of $9,735 plus 25% of income over $70,700 $9,735 + ($100,000 - $70,700 x .25) = $9,735 + ($29,300 x .25) = $9,735 + $7,325 = $17,060 If we use the 75th percentile of all living vets the numbers become more revealing. The 75th percentile is $52,000. Married filing jointly $17,400 to $70,700 = Tax liability of $1,740 plus 15% of income over $17,400 $1,740 + ($52,000 - $17,400 x .15) = $1,740 + ($34,600 x .15) = $1,740 + $5,190 = $6,930 Thus, a direct inflow of available capital totaling $6,930 from each veteran will be injected into the economy where each of the veterans live. Average salaries of veterans fall into a normal distributive pattern as shown in Table 1.

Table 1 < $21,840 25% $ 21,840-35,359 25% $ 35,360-51,999 25% > $ 51,999 25% [23] The next question to consider is how much will this proposal cost in comparison to the current $500 million per year (and increasing rapidly) budgeted for enlistment and reenlistment bonuses? This is addressed below. Assuming an ongoing pool of veterans eventually totaling 5 million over the next twenty five years we can make some assumptions as to the amount of shortfall to the U.S. Treasury from this proposal. Take into consideration an aggressive stance as to the economic/monetary stress to the government by using the 75th percentile as a guideline, in 2038. 5,000,000 retired veterans x (6,930) = Annual cost 5,000,000 retired veterans x (6,930) = $34,650, 000,000 This cost would not be reached until 2038 as noted in the computations below. To see a more immediate effect we will use recruit numbers to keep our military at a stable number. The armed forces goal is to recruit 100,000 soldiers, sailors and airmen each year. For illustration we will double that number to accelerate an appreciation of the overall impact. Since our program would

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not be implemented until 2015, we would not see veterans entering into the all volunteer non taxed force until 2020. Therefore, the costs are more than offset by the saving in enlistment and ultimately re enlistment bonuses. A secondary saving would be the entire recruitment apparatus as a more efficient advertising using the Internet will provide additional cash flows. 2015 200,000 eligible veterans’ treasury shortfall/direct infusion into the local community would be: 200,000 x 6930 = $1.39 billion 2020 1,200,000 x 6930 = $8.32 billion 2025 2,200,000 x 6930 = $15.25 billion 2030 3,200,000 x 6930 = $22.18 billion 2035 4,200,000 x 6930 = $29.11 billion 2040 5,400,000 x 6930 = $37.42 billion These numbers are estimates at twice the attrition rate that now exists. This amount would go directly back into the neighborhoods where the retired veterans live. It could also entice veterans to start saving money which, in itself, could foster more growth in the mortgage and banking areas. Through an aggressive social networking and more efficient advertising campaign, several hundred million dollars can be saved. The enlistment bonus could be totally revoked for new recruits and the re-enlistment award cut back and only used to maintain a force of highly qualified individuals in competitive demand from civilian endeavors. This proposal should provide for an adequate flow of new foot soldiers because of the inherent lifelong benefit. Based upon the figures quoted earlier in the paper, at least $500 million in enlistment bonuses would be eliminated, leaving an annual cost of roughly $22.18 billion in 2030. This is an insignificant amount when compared to the $ 700 billion financial services industry bailout passed in 2008 and will not be reached for 17 years. Even if this were not enough justification, the following could be argued. Based upon the zero savings rate in the U.S. noted earlier in the paper, it might not be reasonable to expect that these tax exemptions would be saved. Rather, we would expect that this savings of the tax burden by these veterans would be injected directly back into the economy as stated, exemplifying the ultimate "invisible hand." While it could also be argued that enlistment bonuses go back into the economy, this proposal should be significantly more attractive to enlistees because it is an ongoing lifetime benefit rather than a one- time event. This proposal would not supplant the provisions and or pensions now in place for current veterans but would go into effect in 2015 for new recruits only. To be fair to the 24 million living veterans, a plan would also be to be considered to include these individuals in some form. However these calculations are too complicated for this paper and will be considered elsewhere. Besides helping our veterans and stimulating the economy, this proposal will assure a greater pool of acceptable recruits, the incentive for them to stay in the military, and save the U.S. Government untold billions in training and retraining. As noted earlier, by instituting this dynamic change the armed forces could greatly reduce, or eliminate completely, the enlistment and reenlistment bonuses. In today's political and economic environment it is incumbent upon both political parties to lay aside partisan differences from the far left and far right. Rather, they must work in a bipartisan way so that proposals which have merit, such as this one, have an opportunity to pass. This proposal, besides providing a solution to a serious military problem, can become a template to deal with other economic issues. For example, it could also be applied to those advocating for civilian volunteerism to serve the social needs of those less fortunate. CONCLUSIONS In the political environment that existed before the near collapse of the U.S. financial system in 2008 this proposal would have had little, if any, chance of passage. With the recent $700 billion

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bailout of the financial services industry, however, there is now a recent example of the center of each party working together in both houses of Congress for the good of the country. As a nearly revenue neutral proposal, this reform of the enlistment system is a great deal less risky and controversial than the financial services solution. Now is the time to find answers to problems that we will find facing ourselves in the future. This does not have to be a zero sum game but proposals such as this can lead to a duplicative process by which several areas of the economy, national safety and security can find safe haven in a synergistic fashion that we have not seen since the end of World War II. Endnotes 1 In order to get a better perspective on the costs and programs now in existence we need to look back at the history of the armed forces and the advent and continued unabated growth of the bonus budget for enlistment and re-enlistment is all branches of the service. Post -Vietnam and ending of the Cold War led to increasing numbers of young lesser educated males enlisting in the armed services. A more secure world made the possibility of entering into an armed conflict more remote, coupled with an increasing level of unemployment saw enlistments grow. The problem still remained: could we maintain a military large enough to face an armed conflict. A study sanctioned by the Foreign Affairs and National Defense Division in 1981 summarized that the armed forces would continue to experience quantitative and qualitative recruiting problems [24]. These problems become especially acute when referring to critical technical and medical areas such as pilots, nurses and doctors. The Department of Defense is pouring greater and greater sums into the bonus pool in essence creating standing mercenary armed forces. The bonus budget has been growing at an alarming rate which shows no signs of abating. The Department of Defense [DOD] re-enlistment budget for the Selective Reenlistment Bonus Program has more than tripled in recent years--from $235 million in fiscal year 1997 to an estimated $789 million in fiscal 2002 [25]. There are many factors contributing to the difficulty in recruiting high quality servicemen. During the Clinton years, especially from 1997-2002 there was a downsizing of U.S. military forces, a decline in recruiting budget and fewer reenlistment [26]. The above- mentioned fact helped to reduce the government deficit and balance the budget but left the military woefully lacking in preparation for an armed conflict. Secondly a growing economy lured young eligible recruits away from the military and into civilian pursuits. The bonus budgets have already begun to grow well before the 911 attacks and subsequent military incursions into Afghanistan and Iraq. It is ironic to see that while there was a conscious effort to downsize the military there was a concurrent rise in budgets for all branches of the armed forces for reenlistment bonuses. Army from $30 million to $72 million and exceeded this amount by $49 million Navy, the largest Selective Reenlistment Bonus Program from $78 million to $234 million and exceeded that amount by $121 million Marines $8 million to $25 million Air Force $13 million to $123 million, an 846% and exceeded that number by $57 million [27]All in all a very dangerous trajectory if one assumes exponential growth during times of stress, indeed during the second Iraq War the numbers and amounts of bonuses skyrocketed including tax free payments for those in harm’s way [28]. REFERENCES University College London (2008, April30) ‘Emotional Inflation’, Science Daily [email protected]. “Why Getting in Touch with Your Feelings Makes Good Business Sense” (10/24/2008)

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Center for the Study of Brain, Mind and Behavior, Princeton University, Princeton, N.J. Bosman, Ronald and van Winden, Frans, “Emotional Hazard: The Key Role of Emotions in Economic Decision-Making”, Economic Journal (January 2002) Tuchman, Barbara, “Guns of August”, Random House Publishing Group, New York, 1962 Current, Richard N. William, T.Harry & Freidel, Frank “American History: a Survey,” Alfred A. Knopf, New York (1964) Ibid. Marks, Alexandra and Scherer, Ron. “U.S. Savings Rate Falls to Zero”, Christian Science Monitor, (June 2005) “Ninja Loans”, No Income, No Job or Assets. www.About.com, Armed Forces Enlistment Bonus Levels, (10/08/2008) Acrononym Institute, “International Developments”, (May 1- June 10, 2003) Cohen, Mark, B, I Power Blogger.com “Military Draft”, (May 18, 2007) www.Military.com, “G.I. Bill”, (10/08/2008) Ibid. United States General Accounting Office, “Reenlistment Bonus Program” (2002) Department of Defense Financial Management Regulation, “Factors Influencing Growth”, Volume 7A, Chapter 9 (2001) U.S. Government Accountability Office,” Military Personnel: DOD Needs to Improve Transparency and Reassess the Reasonableness, Appropriateness, Affordability, and Sustainability of the Military Compensation Systems,” GAO#05-798, July 2005, pp4-5, (June 10, 2008) Report of the Tenth Quadrennial Review of Military Compensation, p.24 Williams, “Transforming the Rewards for Military Service,” p.31 (2008) Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, The Defense Science Board Task Force on Human Resources Strategy, February 2000, p.69, at http://www.acq/osd.mil/dsb/reports/humanresources.pdf (June 10,2008) Baldor, Laura C. “Military Re-Enlistment Bonuses Soar”, Associated Press, www.BNET.com (2008) Dickinson, Tim, “The Return of The Draft,” www.Rolling Stone.com, (January 27, 2005) Department of the Treasury, “2008 Tax Rate Schedule, Schedule Y-1, Married Filing Jointly” Goldrich, Robert L. “Military Manpower Policy and the All-Volunteer Force,” The Library of Congress Congressional Research Service Major Issues System, (September, 1981) United States General Accounting Office, “Reenlistment Bonus Program” (2002) Department of Defense Financial Management Regulation, “Factors Influencing Growth,” Volume 7A, Chapter 9 (2001) Ibid. www.BNET.com Baldor, Lolita C., Associated Press (2008)

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Global Conference on Business and Finance Proceedings ♦ Volume 9 ♦ Number 1 2014

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THE CASE FOR INCLUDING VARIABLE ANNUITIES IN YOUR RETIREMENT PORTFOLIO

Michael F. Mahoney, Wagner College

ABSTRACT While most employer-sponsored 401(K) plans and 403(B) plans include a vast selection of bond and stock investment options, a strong case exists for placing variable annuities in the asset mix. With the uncertainty of future social programs and the turbulence of today’s financial markets, variable annuities can be designed to meet retirement and other long term goals. Today, many employees are deferring their retirement and are concerned about preserving capital and yet seeking a guaranteed income for life. In brief, investors near retirement can be protected from outliving their assets, through the investment options offered with variable annuities. This paper will address the characteristics and benefits of variable annuities, namely the guarantees of minimum withdrawals over the life of the annuities. In addition variable annuities may also contain a variety of death benefits, including stepped-up benefits, for the next generation. The presentation will also highlight the potential shortcoming of variable annuities namely the charges for the various benefits and charges for surrenders and administration fees. This study will conclude by synthesizing the powerful investment options and guaranteed death benefits available with variable annuities. The limitations and administration fees will also be summarized.

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THE STRATEGIC MANAGEMENT OF THE UNIVERSITY

Tatiana Antipova, Perm State University, Russia Dmitrii Krasilnikov, Perm State University, Russia

ABSTRACT

It is necessary to analyze the present condition the State University management. Accordingly, the purpose of this study is to analyze the present condition and issues of the strategic management of the State University and examine ways to improve the result of University development. KEYWORDS: Strategic management, university INTRODUCTION Adequate management should be based on finding and setting goals. Anybody often has achieved nothing if takes up everything. More importantly seriously concentrate on a few achievable goals. In selecting these goals can be two-way, two strategies: strategy to overcome bottlenecks and unmissed chance strategy. Narrow interpretation strategy based on the identification of the main bottleneck, after the liquidation of which, all processes are fuller. Overcoming bottlenecks provides a solution to the problem, in principle, to expand the organization. Unmissed chance strategy to select and use the most favorable of the available options. STUDY RESULTS Strategic plans include approaches by which management intends to achieve its goals. The strategy helps to identify cause-and-effect relationship. The strategy reflects the three points in time: yesterday, today and tomorrow. A sound and well- conceived strategy, mobilizing and directing the limited resources of the organization, can lead to tremendous results. The strategy is not developed only financial indicators. It has long been known that the organization is not simply to make a profit in the short term, therefore, there is a need for not only financial, but also non-financial indicators, such as communications with contractors, staff efficiency, quality indicators of activity. Such non-financial indicators can be any number . But the most optimal and sustainable recognized four elements of the strategy. (Kaplan, R. S. and Norton, D. P., 1992). Schematically, the main elements of University’s strategy are presented in Figure 1. Figure 1: The main elements of University’s Strategy

Communication

HR Management Performance measurement

Financial Management

Communication

University Strategy

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Communication means how the university conducts its affairs. The task of managing communications is that the properties of the services provided have changed in the least. To do this, a sufficient level of communication should ensure the timely provision of services and to promote closer integration with the university environment. External (competitive) environment of any organization, the results of the research of many scientists, consists of the five competitive forces. With regard to higher education are the following competitive forces: the influence of the state, the impact of consumer services, threat of new competitors, threat of new products and services; rivalry between existing universities. Among the measures to improve the communication mechanism is necessary to clarify those areas that are overloaded connections. It is necessary to take into account the fact that not all links are equal in complexity management. All management communications with customers is to provide the consumer with the highest quality product, i.e. a product with minimal loss of quality. The highest level of communication is characterized by information connectedness of all university elements. There should be present not only an analysis of the competitive environment , but also the analysis of the customer base, and the analysis of relationships with government agencies (in particular , the optimization of taxation). Organizations, who have reached a high level of communication, claim the dominant role in the market, because the quality of processing of orders and release dates of new services to the market reach unprecedented levels. In education, seeks to increase the number of students in parallel with the qualitative change in the structure of education - increasing the number of graduate and post-graduate students, including foreign ones. There is an active involvement of the graduates of the University and its partners in the activities of the Board of Trustees and the Board of Supervisors, an alumni association. Endowment Fund with the support of the business community and the public is becoming an important tool for the development of the University. The transition to a system interaction with employers will create educational programs that meet today's requirements of social and economic development, education and advancing the principles of "learning through life». Forced scenario involves a significant change in the social and public component of the University as a whole and of individual employees in the public space, especially in the region, by strengthening the public, expert and analytical activities of the University, including regardless of the order by the government, business, and his ability to make the results of this activity in a public context. Hr Management It is well known that "cadres decide everything." In the face of global competition can not continue to base education on the use of cheap labor. Principles of formation and staffing of personnel policy are determined by the new requirements of the university in terms of improving the quality of the educational process and scientific research, its results and the reflection in the social activities of the public university. To achieve quality education, it is necessary to develop and effectively implement operations throughout the value chain organization, and this will require the development of knowledge, skills and abilities of the teaching staff. In this important role played by the level of remuneration. It is advisable to develop a scheme for premium pay for educational services, depending on their quality, meeting deadlines. There is no need for initiatives to award or the number of procedures performed. There should be rewarded for results. There is another issue in designing the reward - is the choice of the number of criteria. Indicators formulated in accordance with the strategy should be consistent with two or three strategic areas (such as more efficient use of assets).

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In education, the priority is given to scholars, educators, who can draw a general picture of the cause-and- effect relationships that unite the various factors to achieve results. Activated involvement in faculty research activities related to the priority areas, increasing the number of scientists and teachers is changing the structure of the load in the direction of its greater focus on research. Activities in the field of science should be judged by the number of high-level scientific publications, with income derived from the research, commercialization of intellectual activity. The result of the intensification of scientific activity is reaching the level of the leading research institutions of Russia in terms of publications and income from research activities and 30 % of the total revenues of the University. The effectiveness of human resource management can also help and a clear allocation of responsibilities and accountability. In addition, the leadership of the university needs to keep track of the passage of the regular training of the teaching staff. It is also very important to include measures to reduce the potential for conflict of interest in the educational and scientific environment. This is important for the creation of a positive atmosphere in the team with the approved policies and procedures. Performance Measurement University must decide what he means for efficiency and performance. The definition of these concepts should be clear and simple. And the strategy in the future it will be based on a new definition of performance. Most importantly, the evaluation of the effectiveness of the university in four areas: 1) the external environment - customer service and satisfaction of demand , optimizing relations with the state ; 2) in the internal environment - improving the efficiency and productivity; 3) down in the organizational hierarchy - the spread and adaptation of the overall strategy of the company to all the lower levels of the organizational structure, incentives for change; 4) bottom-up in the organizational hierarchy - the growing influence and expand freedom of action of employees. System performance evaluation of educational activities should be aimed not only at the implementation of the strategy, but also on the development of corporate culture that recognizes the constant advance usual lifestyle. The advanced nature of education is to be achieved through the implementation of the principle of the unity of scientific and educational activities of teachers and students, to raise the profile of research in shaping educational programs incorporating research findings into the public sphere, strengthening language training graduates to the level of the requirements of international certification centers. The structure of the educational process in terms of its levels, subject specialization will be determined by the strategic goals of the University, faculties, institutes and branches, reflecting the needs and challenges. System and technology training range in the required quantities to improve the quality of education, strengthen the scientific foundation of education, obtaining the necessary competencies that best meets the needs of students, employers and society. In the scientific field, this strategy involves determining research priorities that reflect the long- term direction and pace of development of the University as a scientifically and educationally and speakers "points of growth" in general. An important factor in the development of the university is to improve the methodology. The key here is to develop a detailed internal research and educational standards that improve the work of scientists and teachers. In addition, considerable emphasis is flexible response, which means the ability to respond to changes in the external environment (customers, competitors, government installations). Flexibility is becoming increasingly important to the extent that the university has to deal with an increasingly diverse clientele and customers.The strategy should clearly define and represent a sequence of hypotheses

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and the concept of cause-and-effect relationship between the indicators that measure the results of operations, and those internal dynamics that led to these results. Each indicator is included in the strategy should be a link in the chain of cause-and- effect relationships that links the strategy of the business units and the strategy of the company as a whole. From this it follows that the indicators included in the strategy should be characterized as the results achieved, and determine their main factors. It is necessary to constantly review the achievement of certain criteria and indicators. An analysis of some university indicators is given in Table 1.

Table 2: Indicators Analysis

N Name of the indicator 2010 2011 2012 1 Average number of students, people. 11396 11634 11750

2 The average annual number of the teaching staff, person. 1249 1097 982

3 Full funding per teaching staff (thousand ruble per month) (1USD ~ 32 Ruble) 101,3 146,5 149,8

4 The utilization of classroom fund (teaching space per student ), m2 3,0 3,0 4,0

5 Utility costs per 1 student , thousand ruble per year 4,0 5,0 5,0

6 The total area of teaching and laboratory buildings , per students, m2 8,0 10,0 12,0

Table 1 Analysis shows that the steady the number of students is increased by steadily declining of teachers. Withal the total area of teaching per student has increased by a slight increase in the cost of utilities per student. We can improve the system performance so that they more accurately reflect the organization's success in attracting new customers; improve processes, development of new services, etc. in the long run. For this it is necessary to maintain a certain level of competitiveness of the corresponding organization's ability to respond to changes in the external environment and the ability to maintain its position in the selected direction. The strategy of the university is also designed to focus on those aspects of the activities that are really the most important in the present and in the future. Timing considerations allow us to estimate the effectiveness not only in the short and medium term, but in the long-term perspective. For example, it is possible to recognize an effective organization based on the criteria of performance, quality and flexibility, but count it inefficient in terms of competitiveness. Maintaining the right balance is the need to balance the results in time. CONCLUSION The results of development Strategy for University in the medium term should be: 1) the achievement of positive dynamics of the number of students and, as a consequence, the financial support of the University; 2) changes in the structure of the load of the faculty in favor of scientific research , improving its efficiency and effectiveness for different spheres of socio- economic , socio-political and socio-cultural development; 3) increasing the role of research in providing revenue diversification of the University, attracting highly of the teaching staff , including the leading Russian and foreign scientific and educational centers, the commercialization of research results; 4) development of the property complex of the University to meet the employment and social needs of University employees and students at the leading universities of the standards ; 5) Ensure that the educational programs of the University of actual and future needs of the economy and society , the organization of advanced education in priority areas of the University; 6) the deployment range of public relations and the establishment of the

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University as an active and authoritative information of a subject that dominates in a number of intellectual and public spheres and subject areas. Development strategy for University: strengthening the position in the ranking of Russian Higher Education, improving competitiveness, transformation of the University in the center of the integration of education, science and culture, and public life. REFERENCES Chen Shun-Hsing &Yang Ching-Cho &Shiau Juin-Yan (2006). Scorecard in the performance evaluation of higher education. The TQM Magazine, Vol. 18, No.2, pp.190-205. Cullen, J., Joyce, J., Hassall, T. and Broadbent, M. (2003). Quality in higher education: from monitoring to management. Quality Assurance in Higher Education, Vol. 11 No. 1, pp. 30-40. Drucker P. (1963). Managing for business effectiveness. Harvard Business Review, May-June, pp. 58-65. Gadinabokao, W.L. and Vermaak, F.N.S. (1997). The Balanced Scorecard: Application as Management system at a university, Meditari. pp.243-260. Kaplan, R. S. and Norton, D. P. (1992). The balanced scorecard - measures that drive performance. Harvard Business Review, Vol.70, No.1, pp.71-79. Linna P., Pekkola S., Ukko J., Melkas H. (2010) Defining and measuring productivity in the public sector: managerial perceptions. International Journal of Public Sector Management. Vol. 23, N 5, pp. 479 – 499. Olve, N., Roy, J.R. and Wetter, M. (1999). Performance Drivers: A Practical Guide to Using the Balanced Scorecard. John Wiley &Sons, Chichester. Pursglove, J. and Simpson, M. (2000). ‘A Balanced Scorecard for University Research’. Proceedings, 2nd International Conference on Performance Measurement and Management, Boston, USA, pp. 767-772. Rhodes M.L., Biondi L., Gomes R., Melo A.I., Ohemeng F., Perez-Lopez G., Rossi A., Sutiyono W. (2012) Current state of public sector performance management in seven selected countries. International Journal of Productivity and Performance Management, Vol. 61, N 3, pp. 235-271. Ruben, B.D. (1999). ‘Toward a Balanced Scorecard for Higher Education: Rethinking the College and University Excellence Indicators Framework’’. The Hunter Group White Paper Series, October.

BIOGRAPHY Dr. Tatiana Antipova is a Professor at Perm State University. She has 10-years experience in education related to the Public Sector Finance and Control, 6-years practical experience as the government auditor, 8-years practical experience as the chief accountant in private sector. She specializes in Governmental Management, Accounting and Government Audit and has undertaken research regarding control issues across the public sector with integrated approach. She can be reached at [email protected]. Dr. Dmitrii Krasilnikov is a Vice-Rector for Strategic Development of Perm State University.

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Global Conference on Business and Finance Proceedings ♦ Volume 9 ♦ Number 1 2014

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COLLABORATION AND PERFORMANCE OF GREEN INNOVATION: INVESTIGATING THE

MODERATION EFFECTS OF GREEN KNOWLEDGE INTEGRATION MECHANISMS

Jung-Jung Chang, National Central University Ming-Ji James Lin, National Central University

ABSTRACT

In the wake of environmental deterioration, green innovation is now considered a key factor to achieve economic success. The use of green standards offers an opportunity for green innovation to be relevant not only to the host organizations but also to their collaborative partners, while the use of green knowledge integration mechanisms can also drive green innovation. This paper examines how collaboration (i.e. cross-functional collaboration and environmental collaboration) interacts with green knowledge integration mechanisms (i.e. external green knowledge acquisition and internal green knowledge sharing) to affect the performance of green innovation. The results of a survey on 128 Taiwanese electronics companies show that, in the process of cross-functional collaboration, a high level of internal green knowledge sharing strengthens green innovation performance, while a high level of external green knowledge acquisition weakens such performance. In contrast, in the process of environmental collaboration, a high level of external green knowledge acquisition strengthens green innovation performance, while a high level of internal green knowledge sharing weakens such performance. The results of this study offer managers a greater insight into the effects of green knowledge integration mechanisms on the collaboration and performance of green innovation, whereby organizations can further improve their relevant practices. JEL: M10 KEYWORDS: Cross-Functional Collaboration, Environmental Collaboration, Green Knowledge Integration Mechanisms, External Green Knowledge Acquisition, Internal Green Knowledge Sharing, And Green Innovation Performance INTRODUCTION Escalated by the impact of global warming and climate change, sustainable development with environmental thinking and strategies has become a key task faced by firms. McKinsey and Company (2008) pointed out that, in practice, 60% of managers take into account the climate change factor when developing new products. While in recent years, the subject of green product innovation has also been widely discussed in academic researches. (Chang, 2011; Chen, 2008; Chiou, Chan, Lettice, & Chung, 2011; Schiederig, Tietze, & Herstatt, 2012) Many signs point to the growing importance of green product innovation and development, and such topics have become popular with researchers and practitioners alike. This “green wave” has, in turn, forced firms to change their thinking and approaches to products, technologies and manufacturing processes, to proactively launch green products, and to create green innovation performance. However, there is no shortage in the market of failed attempts in this regard (Pujari, 2006). How to create green innovation performance is thus a shared focus among academics and managers. Cross-functional collaboration has long been identified as a key contributor to new product success (Griffin & Hauser, 1996; Tsai, Fang, & Hsu, 2012).

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However, such collaboration has increasingly become a necessity, as few firms can independently create green products for better green performance, despite the growing attention paid to environmental problems. Because the impact to the environment by green products is driven by the inputs of these products (Lee & Kim, 2011), therefore, to develop successful green products, companies must collaborate with their suppliers. This collaboration begins with the distribution of end product to end users (customers), and goes back to the manufacturing, the procurement of raw materials, and finally to the suppliers of materials and services. Therefore, the integration of both intra-organizational (i.e. cross-functional) and inter-organizational (i.e. environmental) collaboration is required in the process of developing green products (Stank, Keller, & Daugherty, 2001). It is thus necessary to look into cross-functional collaboration and environmental collaboration concurrently, in order to help firms take actions that enable their products to do the least harm to the environment. Despite the development and implementation of various collaboration-enhancing models, it is not clear how cross-functional collaboration affects the development of new products. (Tsai, Fang, et al., 2012) At the same time, studies regarding the effects of environmental collaboration on the development of new products have turned out inconclusive results. Specifically, some studies show that environmental collaborations with suppliers result in positive performances of new product development (Frohlich & Westbrook, 2001; Petersen, Handfield, & Ragatz, 2005), whereas other studies show insignificant or no effects whatsoever from such collaborations (Belderbos, Carree, & Lokshin, 2004; Freel, 2003; Ledwith & Coughlan, 2005). A logical explanation for these conflicting findings may be the omission of the factors that affect the relationship between collaboration and new product performance (Tsai, Tsai, & Wang, 2012). In other words, additional consideration must be taken into account in the attempt to understand the relationship between collaboration and the performance of innovative green products. At the same time, knowledge integration mechanisms ensure a smooth flow, as well as formal procedures and structures, for knowledge to be shared across functional departments. Hence, knowledge integration mechanisms determine the impact of collaboration on the strength of innovation performance (De Luca & Atuahene-Gima, 2007). Failing to properly manage the moderation effects of collaboration and knowledge integration mechanisms may be a key contributor to the failure of developing innovative green products. As such, this study aims to further understand the moderation effects of green knowledge integration mechanisms on both cross-functional collaboration and environmental collaboration, as well as on the performance of green innovation. Based on the above-discussed topics, the purpose and the expected contributions of this study are as follows: first, to explore, concurrently, the effects of cross- functional collaboration and environmental collaboration on the performance of green innovation; secondly, to examine the impact of external green knowledge acquisition and internal green knowledge sharing on the performance of green innovation; finally, to investigate how collaboration (both cross-functional and environmental), after the use of green knowledge integration mechanisms, can drive the performance of green innovation, so as to explore the moderation effects of green knowledge integration mechanisms on such performance. DATA AND METHODOLOGY This study is based on quantitative data collected from questionnaires. These questionnaires were designed from interviews and by referencing past literature, and they were also pre-tested and modified by business practitioners experienced in green product development. The subjects were Taiwanese electronics companies with research capabilities on innovation. As Taiwanese electronics products are highly export-oriented, Taiwanese electronics manufacturers are subject to the same stringent environmental regulations as faced by their customers abroad. These regulations include: Montreal Convention, Kyoto Protocol, Restriction of the Use of Certain

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Hazardous Substances in EEE (RoHS) Directive, Waste Electronics and Electrical Equipment (WEEE) Directive, Energy Using Product (EuP) Directive, and Integrated Product Policy (IPP) Directive. This reality has driven the Taiwanese electronics industry to focus its efforts on the development of green products in order to satisfy its customers’ environmental needs and requirements (Chen & Chang, 2013). Presently, the environment-focused trends have become a great challenge faced by the Taiwanese electronics industry, and exploring how this industry utilizes collaboration and green knowledge integration mechanisms to achieve green innovation performance is both an interesting and useful study. Because the questionnaires were designed to explore green innovation performance in the process of collaboration, which involved green knowledge integration mechanisms used in the process of developing innovative green products, these questionnaires were mainly given to staff from R&D departments which were more experienced in knowledge integration as compared with other departments. A total of 128 valid questionnaires were collected after excluding incomplete ones, representing an effective response rate of 38.3%. This study used several statistical tools to evaluate the relationships among the performance of green innovation, collaboration, and green knowledge integration mechanisms. First, AMOS 7 was used for structural equation modeling (SEM) and for measurements on the reliability and validity of each item in the questionnaire. This was followed by using SPSS data analysis to perform hierarchical regression; the relevant variables were entered into the models sequentially in order to test the hypotheses of this study. To reduce multicollinearity, this study followed the recommendations of Jaccard and Turrisi (1990), which was that all dependent variables as well as independent variables in the regression models were mean-centered. RESULTS AND DISCUSSIONS Regression Analysis and Hypothesis Testing A hierarchical regression analysis was used in order to understand the effects of different combinations of variables on the performance of green innovation. The results show that cross- functional collaboration and environmental collaboration both have a significant positive effect on the performance of green innovation (β = .63, p <.001; β = .17, p <.05, respectively). Green knowledge acquisition has a significant positive effect on the performance of green innovation (β = .33, p <.01), whereas green knowledge sharing has no significant effect on the performance of green innovation (β = .18, p> .10). “cross-functional collaboration*green knowledge acquisition" has a significant negative effect on the performance of green innovation (β = -.35, p <.05), whereas "cross-functional collaboration*green knowledge sharing” shows a significant positive effect (β =. 53, p <.01). In contrast, "environmental collaboration*green knowledge acquisition" shows a positive effect on the performance of green innovation (β = .54, p <.05), while "environmental collaboration*green knowledge sharing" shows a negative effect (β = - .41, p <.10). In short, the findings are consistent with the hypotheses made in this study: cross- functional collaboration and environmental collaboration both have a direct effect on the performance of green innovation, while green knowledge acquisition and green knowledge sharing have a moderating effect. CONCLUSION This study supports the concept proposed by Lee and Kim (2011), namely, successful development of green products may depend on effective intra-organizational and inter- organizational collaboration. Effective cross-functional (intra-organizational) collaboration enhances problem-solving skills (Sherman, Souder, & Jenssen, 2000), and these skills can be used to solve environment-related challenges faced by the products, thus improving the performance of green innovation. At the same time, in light of an increased awareness of environmental compliance, more and more environmentally proactive organizations have been

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observed to include suppliers in their development of new products (Geffen & Rothenberg, 2000; Pujari, Wright, & Peattie, 2003) in order to develop new products that can boost their performance on green innovation. According to the findings of this study, firms should attach importance to both cross-functional and environmental collaboration concurrently, when attempting to successfully develop new products of high green performance. Furthermore, the results of this study show that, in the process of developing green products, both cross-functional collaboration and environmental collaboration are influenced by external green knowledge acquisition and internal knowledge sharing, which resulted in different effects on the performance of green innovation. In the process of cross-functional collaboration, uncertainty is reduced because of a high level of internal green knowledge sharing which, for example, reduces the gap between the amount of green information possessed by a firm and that which is understood by the firm. This, in turn, improves the performance of green innovation. However, in the same process of cross-functional collaboration, a high level of external green knowledge acquisition seems to weaken the performance of green innovation. The reason may be that, for firms with knowledge diverse enough, acquisition of additional green knowledge may be counterproductive after all. This finding is consistent with the argument proposed by Miller, Fern, and Cardinal (2007), which states that interdivisional knowledge is more effective when used to increase the impact of an invention rather than for uses outside of the host organization. In contrast, in the process of environmental collaboration, a high level of external green knowledge acquisition results in better performance of green innovation. This is because a widened range of knowledge acquisition often enables technological breakthroughs which may lead to the development of new green products, thus improving the performance of green innovation. However, in this kind of collaboration, a high level of internal green knowledge sharing weakens the performance of green innovation. The reason may be that, while knowledge sharing allows various functional units within a firm to combine and/or find new uses for otherwise disparate knowledge in order to advance the development of innovative green products, the act of sharing knowledge may reinforce existing expertise and operational routines, which may actually lead to inertia that interferes with innovative efforts and performance. REFERENCES Belderbos, R., Carree, M., & Lokshin, B. (2004). Cooperative R&D and Firm Performance. Research Policy, 33(10), 1477-1492. Chang, C. H. (2011). The influence of corporate environmental ethics on competitive advantage: The mediation role of green innovation. Journal of business ethics, 104(3), 361-370. Chen, Y. S. (2008). The driver of green innovation and green image - Green core competence. Journal of business ethics, 81(3), 531-543. Chen, Y. S., & Chang, C. H. (2013). The Determinants of Green Product Development Performance: Green Dynamic Capabilities, Green Transformational Leadership, and Green Creativity. Journal of business ethics, 116(1), 107-119. Chiou, T. Y., Chan, H. K., Lettice, F., & Chung, S. H. (2011). The influence of greening the suppliers and green innovation on environmental performance and competitive advantage in Taiwan. Transportation Research Part E-Logistics and Transportation Review, 47(6), 822-836. De Luca, L. M., & Atuahene-Gima, K. (2007). Market Knowledge Dimensions and Cross- Functional Collaboration: Examining the Different Routes to Product Innovation Performance. Journal of Marketing, 71(1), 95-112.

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Freel, M. S. (2003). Sectoral Patterns of Small Firm Innovation, Networking and Proximity. Research Policy, 32(5), 751-770. Frohlich, M. T., & Westbrook, R. (2001). Arcs of Integration: An International Study of Supply Chain Strategies. Journal of Operations Management, 19(2), 185-200. Geffen, C. A., & Rothenberg, S. (2000). Suppliers and Environmental Innovation - The Automotive Paint Process. International Journal of Operations & Production Management, 20(2), 166-186. Griffin, A., & Hauser, J. R. (1996). Integrating R&D and Marketing: A Review and Analysis of the Literature. Journal of Product Innovation Management, 13(3), 191-215. Jaccard, J. J., & Turrisi, R. (1990). Interaction Effects in Multiple Regression (2 ed.). CA: Sage Publications. Ledwith, A., & Coughlan, P. (2005). Splendid Isolation: Does Networking Really Increase New Product Success? Creativity and Innovation Management, 14(4), 366-373. Lee, K. H., & Kim, J. W. (2011). Integrating Suppliers into Green Product Innovation Development: An Empirical Case Study in the Semiconductor Industry. Business Strategy and the Environment, 20(8), 527-538. McKinsey&Company. (2008). How companies think about climate change: A McKinsey global survey The McKinsey Quarterly (pp. 18). Miller, D. J., Fern, M. J., & Cardinal, L. B. (2007). The Use of Knowledge for Technological Innovation within Diversified Firms. Academy of Management Journal, 50(2), 308-326. Petersen, K. J., Handfield, R. B., & Ragatz, G. L. (2005). Supplier Integration into New Product Development: Coordinating product, Process and Supply Chain Design. Journal of Operations Management, 23(3-4), 371-388. Pujari, D. (2006). Eco-Innovation and New Product Development: Understanding the Influences on Market Performance. Technovation, 26(1), 76-85. Pujari, D., Wright, G., & Peattie, K. (2003). Green and Competitive - Influences on Environmental New Product Development Performance. Journal of Business Research, 56(8), 657-671. Schiederig, T., Tietze, F., & Herstatt, C. (2012). Green innovation in technology and innovation management: An exploratory literature review. R & D Management, 42(2), 180-192. Sherman, J. D., Souder, W. E., & Jenssen, S. A. (2000). Differential Effects of the Primary Forms of Cross Functional Integration on Product Development Cycle Time. Journal of Product Innovation Management, 17(4), 257-267. Stank, T. P., Keller, S. B., & Daugherty, P. J. (2001). Supply Chain Collaboration and Logistical Service Performance. Journal of Business Logistics, 2(1), 29-48.

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Tsai, K.-H., Fang, W., & Hsu, T. T. (2012). Relinking Cross-functional Collaboration, Knowledge Integration Mechanisms, and Product Innovation Performance: A Moderated Mediation Model. Canadian Journal of Administrative Sciences-Revue Canadienne Des Sciences De L Administration, 29(1), 25-39. Tsai, K.-H., Tsai, M.-L., & Wang, J.-C. (2012). Supplier Collaboration and New Product Performance: A Contingency Model. Industrial Management & Data Systems, 112(1-2), 268-289. ACKNOWLEDGEMENT This study was supported by the National Science Council of Taiwan under grant NSC 101-2410- H-008 -061 -. BIOGRAPHY Jung-Jung Chang is a Ph. D Candidate of Department of Business Administration at National Central University of Taiwan. She can be reached at [email protected] Ming-Ji James Lin is a Professor of Department of Business Administration at National Central University. He can be reached at [email protected]

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ON-LINE REVIEWS’ IMPACT ON TRUST BUILDING

Selcen Ozturkcan, Istanbul Bilgi University Gul Gursoy, Istanbul Bilgi University

ABSTRACT

An on-line consumer review, which is a popular form of consumer created information, is provided by previous consumers. It often includes information and recommendation. This novel type of the electronic word-of-mouth communication has recently been emerging as a crucial factor in trust building during on-line shopping. Our research investigates the influences of on- line consumer reviews impact on trust-building process with regard to quality‚ quantity, proportion of negative/positive on-line consumer reviews as well as consumers’ purchasing intentions. On-line questionnaire has been implemented to a convenience sample of 73 respondents. Our findings provide important managerial implications for better-informed e- tailing marketing strategy design. JEL: M30, M31 KEYWORDS: on-line consumer review, trust building, e-retailing, on-line shopping. INTRODUCTION Belkin, a computer and consumer electronics company, has been accused of paying for positive reviews of its products on the worldwide infamous e-tailer Amazon. Belkin’s President Mark Reynoso said the solicitations had been "an isolated incident;" (Meyer, 2009) however, questions have started to rise about the trust the on-line reviews build. Spending on the Internet is expected to reach $327 billion by 2016, up from $200 billion in 2011, a 10.7 percent average annual growth rate (Woo, 2012). Though this fast emerging business channel has similarities with the offline channel, there are certain exclusive challenges included. On-line shopping has a unique nature when compared to traditional channel as it is not possible for the consumer to directly experience the approached product by touching‚ seeing‚ and tasting. Thus‚ on-line environment is significantly different in many ways from traditional shopping environment (West et al., 1999). During on-line shopping, although decision maker may find more information and a wider variety of alternatives‚ credibility of information source and trustworthiness of retailer often present important bottlenecks (Kim and Benbasat, 2003). Previous research shows that marketers, who maintain high level of trust, also achieve satisfactory transactions via elimination of perceived risk and uncertainty. In the appearance of uncertainty, trust becomes a major agent of what individuals expect from their activity (Awad and Ragowsky, 2008). High levels of trust have been reported to increase both purchase intention and customer loyalty (Chen and Barnes, 2007). E-tailers aim to build brand loyalty and trust by the provision of a proxy for reviews of previous customers through the use of e-commerce-based word-of-mouth (eWOM) systems (James, 2008, McWilliams, 2000). On-line recommendation resources‚ which range from other consumers reviews (eWOM) to personalized recommendations provided by recommender systems, prove to be useful for both consumers and on-line retailers (West et al., 1999) in terms of eliminating or reducing

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uncertainty. In the case of e-retailing, consumers have limited opportunities for judging the trustworthiness of the remote vendor and the performance of the offered service/product (Reichheld and Schefter, 2000, Gefen et al., 2003). On-line consumer reviews provide means for prospective consumers to build their judgements. Accordingly, we define on-line consumer review as the consumer-created information presented from the perspective of consumers who have purchased and used the good (Park et al., 2007). In comparison to endorsements by retailers and manufacturers, on-line consumer reviews have been claimed to have a powerful credibility advantage (Wagner, 2008). Moreover, current reports indicate that many customer demand e- tailers to have on-line customer reviews (Grau, 2008). Given the complex nature of on-line consumer reviews’ impact in building trust, this paper aims to examine the effects trust levels in terms of respondent’s purchase intentions, and evaluations of review quality, quantity and negativity. This study focuses on eWOM communicated via Web-based consumer-opinion platforms (quasi−spontaneous) while other forms of eWOM might involve spontaneous‚ independent or third party sponsored‚ and corporate sponsored (Kiecker & Cowles‚ 2001) types. We believe that web-based consumer-opinion platforms are widely used compared to other forms, easier to operate, and require less Internet literacy. According to a survey by PowerReviews, 65% of on-line shoppers read on-line consumer reviews prior to purchase decision, while 86% of these find customer reviews helpful (McKeefery, 2007, Aaronson, 2007). On-Line Trust Trust is defined as one’s willingness to rely on a trading partner with confidence (Moorman et al., 1993b, Liu et al., 2002). Trust improves commitment and customer satisfaction (Bauer et al., 2002), therefore trust building is not only crucial for traditional businesses but for on-line businesses as well (Handy, 1995). Trust building involves behavioural intentions that develop from (a) general belief in the e-tailer, (b) a combination of e-tailer’s trustworthiness, integrity, ability and benevolence, and/or (c) certain beliefs about competence, integrity and benevolence (Awad and Ragowsky, 2008). Consumers shopping on-line have been reported to lack trust in the legitimacy of on-line stores (Novak et al., 1999). As a commercial vehicle, the Internet offers many advantages to both businesses and consumers. Traditional face-to-face shopping offers opportunities of touching, seeing and even tasting the goods. On-line shopping, on the other hand, is mostly hindered with regards to such opportunities. Limitations involved in directly experiencing goods create major disadvantages in building and developing on-line trust (de Kervenoael and Aykac, 2008). It is believed that on-line customers have to establish trust before they involve in business relationships with on-line sellers (Cheung and Lee, 2006, Salam et al., 2005). Although, the Internet offers variety of attractive advantages as a medium, the lack of faith and trust between businesses and consumers is still a critical obstacle to the success of on-line shopping (Salam et al., 2005). Lee and Turban (2001) define consumer trust in Internet shopping as “the willingness of a consumer to be vulnerable to the actions of an Internet merchant in an Internet transaction, based on the expectation that the Internet merchant will behave in certain agreeable ways, irrespective of the ability of the consumers to monitor or control that Internet merchant” (p. 79). Notion of trust have been previously studied in bargaining (Schurr and Ozanne, 1985), industrial buyer–seller relationships (Doney and Cannon, 1997), distribution channels (Dwyer and Oh, 1987), partner cooperation in strategic alliances (Das and Teng, 1998), and marketing research (Moorman et al., 1993a) context. According to Lewicki and Bunker (1995), three perspectives involved in the literature that investigated on-line trust are (1) the views of social psychologists, (2) the views of personality theorists, and (3) the views of sociologists.

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On-line trust is defined as a combination of four elements, namely reputation, technology, expertise and relationship (Patokorpi and Kimppa, 2006). Reputation is considered as an influential factor in building trust for first-time consumers. For instance, strong brands are considered trustworthy (Ahn et al., 2004). Reputation is accompanied by technology for a web site to build trust. Giving credentials of the responsible people and offline contact information, publishing policy and providing links to reputable sites are some indicators of trustworthiness for consumers. Customers who enjoy their visits and feel in control while using a particular web site report the web site as useful and easy to use (Koufaris and Hampton-Sosa, 2002). Web sites that provide value added information such as product reviews and recommendations have been shown to offer a more positive and enjoyable experience (Koufaris et al., 2002, Koufaris, 2002). Expertise integration with perfect product, service, transaction and delivery also features trust building. Lastly, the most crucial factor in building trust is the relationship. In on-line environment, the trustor (customer) can uncover the trustworthiness of the trustee (company) by building a relationship. Subsequent to the establishment of the relationship, customer can judge whether the trustee deserves her/his trust (Tuomela and Hofmann, 2003). The on-line consumer review, which is a one type of electronic word-of-mouth, involves positive and negative statements made by previous customers of a retailer often for a specific product/service offer. This type of consumer-created information is reported as helpful during decision-making, since it provides consumers with indirect experiences of previous customers (Park et al., 2007). Half of the consumers who visit on-line retailers report that consumer reviews are crucial in their buying decisions (Piller, 1999). In this regard, on-line consumer review plays two crucial two roles: (1) functioning both as an informant and as a (2) recommender. This might be due to the fact that consumer-created information tends to be more consumer-oriented than seller-created information (Bickart and Schindler, 2001). While seller-created information focuses on product attributes, consumer-created information reflects the actual consumer experience(s). Familiarity with the type of information and the ease of understanding it, are some crucial factors that make on-line consumer reviews effective in trust-building (Chen and Xie, 2005). Consumers shopping on-line are overwhelmed by the amount of the digital information provided to them. They tend to prioritize the delivered content for processing. In this regard, on-line customer reviews have become an indispensable part of product research during on-line shopping (Grau, 2008). Since on-line consumer reviews are perceived as sincere sources of information, they are favoured among other sources. The credibility of attributed to on-line consumer reviews is extremely high. These reviews ease identification by providing a peer review especially for utilitarian consumers. When consumers are provided with a trustworthy peer recommender’s review, they do not only use the information provided to evaluate alternatives but also for decreasing their degree of search effort for the entire decision making process (Smith et al., 2005). In this regard, peer or editorial recommendations are reported as more trustworthy than sponsored ads. On-line consumer reviews operate as informant and recommender, simultaneously. In more detail, provision of user-oriented product information is coupled by recommendations of previous consumers. As an informant, on-line consumer reviews give user-oriented product information, while as a recommender, they provide positive, negative or neutral signal of product popularity (Park et al., 2007) as well as the performance evaluation of the e-tailer in keeping his/her promises. Although sellers also provide product related information, on-line consumer reviews differ in two important points in terms of provided information. The first difference is the trustworthiness of the information source. Consumer-created information is reported as more

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credible than seller-created information in terms of trustworthiness (Dellarocas, 2003). Information credibility is referred as a crucial factor of information source trustworthiness (Bickart and Schindler, 2001). There might be various reasons for consumers to favour on-line consumer reviews over seller reviews. Consumers’ honesty in stressing products’ strengths and weaknesses with a better balance as opposed to seller’s natural motivation to hide the weaknesses while exaggerating the positive aspects might be one such reason (McKnight et al., 2002). Alternatively, consumer on-line reviews often describe actual consumption practice, which might be easier for prospective consumers to identify with (Chen and Xie, 2004). The two roles on-line consumer reviews play, the informant and the recommender, might sometimes exhibit conflicts in the presence of numerous reviews (Park and Lee, 2009, Park and Lee, 2008). As recommenders, the more the on-line consumers reviews are, the better the effect in trust building. Yet, as informants, high numbers of on-line consumer reviews complicate information processing and result in an information overload. Therefore, a range should be determined for an optimum number of on-line consumer reviews. Previous research emphasizes that there is a positive relationship between the ratio of negative on-line consumer reviews and trustworthiness of the overall information delivered (Lee et al., 2008). On-line consumer review sets that only contain positive reviews tend to raise questions about on credibility and trustworthiness. A reason for this might be the suspicion that arises whether the e-vendor has eliminated the negative reviews or there are really no bad consumer experiences for real. Or, as it was in the case of Belkin, a brand with only positive reviews might be perceived as paying for these reviews. We support the idea that customers will find a pool of positive and negative on-line reviews more credible (Martin, 2007, Grau, 2008). Quality and quantity of on-line consumer reviews are important factors, which may affect consumers' final decision. High quality on-line consumer reviews that are credible, understandable, logical and persuasive, with sufficient reasons based on specific facts about the product, have a strong positive effect on purchasing intention. Low quality on-line consumer reviews‚ on the other hand‚ are irrelevant‚ unreliable and difficult to understand with insufficient reasoning (Lee et al., 2008). Since people are inclined to believe what the majority believe (Deutsch and Gerard, 1955), the more the number of reviews is, the higher is the signaled product popularity. This is an important fact which eliminates the undesirable feeling of risk exposure. Therefore, the number of on-line consumer reviews is a crucial instrument used by consumers to justify their own choices. DATA AND METHODOLOGY An on-line questionnaire has been implemented to a convenience sample. Questionnaire consisted of thirty-seven questions, of which six were general demographics questions and thirty-one were Likert−type items scored on a six−point format ranging from strongly disagree (1) to strongly agree (6). We purposefully have chosen an even Likert-type scale that is consisted of 6 points to eliminate neutral evaluations as suggested by (Park et al., 2007, Bearden and Netemeyer, 1999). General attitudes towards on-line consumers’ reviews have been first questioned. Subsequent to questions related with general attitude, respondent have been introduced to the chosen product for the study. The chosen product is the New Digital Media Player (MDP), which is used for listening to music and radio, viewing photos and videos and/or recording voice or video. MDP is chosen in this study due to several reasons. First, MDP is an electronic product and electronic products are known as the most demanded product category in on-line shopping. Second, electronic products are often regarded as complicated and most consumers find comments from previous users as favorable.

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Third, MDP is a category extension, therefore we expect respondents to keep their reliance on prior similar category related knowledge at minimum in their evaluation of MDP. In this study‚ high proportion of negative on-line consumer reviews was designed as five negative on-line consumer reviews within a total set of eight on-line consumer reviews. The quality of the on-line consumer reviews was assessed in terms of the quality of the information, which includes factors of relevance‚ trustworthiness‚ clarity and sufficiency (Park et al., 2007). In our study, the high quality on-line consumer reviews included trustworthiness and persuasive product relevant information with a prominence on understandability and sufficiency of reasons. The quality of positive on-line consumer reviews was kept at the same level by mixing high quality positive and negative on-line consumer reviews. Additionally‚ on-line consumer reviews were arranged according to the order of three negative followed by one positive. Even though we have designed a ratio of positive and negative reviews in our design, the degree of negativity should be measured to ensure the validity of design. We also measure respondents’ evaluations regarding the product related information since issues of objectivity, understandability and credibility are important parameters that could influence trust building. These questions have been directed after an introduction to a set of on-line consumer reviews. This set of on-line consumer reviews have been articulated from real on-line consumer reviews from an on-line opinion forum, namely www.epinion.com. It included five negative and three positive high quality on-line consumer reviews. The reason for giving a total of eight on-line consumer reviews was grounded to the previous research which reports subjects' general preference of reading about six to eight reviews of about three to four lines each (Park et al., 2007). Each on-line consumer review included a title‚ the contents and the reviewers' nickname. The length of one on-line consumer review was designed as three to four lines to eliminate the effect of changing lengths since the length can affect the information quality and quantity (Chevalier and Mayzlin, 2006). Though similar uses in business might sometimes involve also a star based summary, we refrained from such design in our questionnaire due to several reasons. First, including stars together with reviews could have prevented exploration of the reviews’ effects on trust building. Second, we chose to keep parsimony in our design as being frontier research in this domain. Seventy-three subjects participated in the questionnaire (Error! Reference source not found.). Table 3: Descriptive Demographics of Sample

Variable(s) N (total 73) Valid % Variable(s) N (total 73) Valid %

G en

de r Female 39 53,4

Av r.

in co

m e

pe r

m on

th less than 2.000TL 20 27,4

Male 31 42,5 2.000-6.000 TL 46 63 Missing 3 --- more than 6.000TL 3 4,1

Ag e

18-25 17 23,3 Missing 4 -- 26-35 45 61,6

D eg

re e

La st

Ea

rn ed

High School 4 5,5 36-45 7 9,6 Undergraduate 45 61,6 46-55 2 2,7 Graduate 23 31,5

Missing 2 --- Missing 1 --

O cc

up at

i on

Employed 63 86,3 Student 7 9,6 Unemployed 2 2,7 Missing 1 -- RESULTS AND DISCUSSION Trust variable has been dichotomized in two polar as high and low. Significant differences have been determined between respondents with high level of trust and low level of trust in all four factors (Table 4).

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Table 4: Effects of High and Low Levels of Trust (ANOVA)

Sum of Squares df

Mean Square F Sig.

Review Quantity 18,338 1 18,338 25,096 0,000 Purchase Intention 6,669 1 6,669 9,382 0,003 Review Quality 32,101 1 32,101 32,353 0,000 Review Negativeness 5,942 1 5,942 5,179 0,026

Reliability of used scales has been reported in Table 5. Principal component analysis has been conducted to further analyze the data. Varimax with Keiser Normalization converged to a rotation in 7 iterations (Table 6). Five factors have been extracted. These explain 75,6% of variation in the whole dataset. First component reveals presence of a major group that highly appreciates on-line consumer reviews for both building trust and proceeding with on-line shopping. This component explains 29,4% of variation and uncovers importance of on-line consumer reviews for on-line shoppers. Second component indicates another group that understand the benefits of on-line consumer reviews for reducing anxiety in decision making both offline and on-line. Third component stresses that on-line reviews that has been designed for this study were reliable. According to forth component, these reviews led respondents to further stages in consumer decision-making process. Lastly, fifth component underlines that consumers appreciate the presence of negative reviews as well as adequate length. Table 5: Distribution of Perceptions of Respondents

Variable / Statement ANOVA Mean Std.Dev. F Sig. 1. General Attitude (cronbach’s alpha = 0,707) 25,63 0,000 When I purchase a product on-line‚ I always read reviews that are presented on the Web site 4,4167 1,68464 When I buy a product on-line‚ on-line consumer reviews displayed on the Web site are beneficial for my product choice

4,2917 1,54225

When I buy a product on-line‚ the reviews displayed on the Web site make me feel secure while purchasing the products

3,9861 1,40916

I get benefit from using on-line consumer reviews very often while I purchase the product offline 3,3944 1,58095 I prefer to use on-line consumer reviews for purchasing of high tech products such as laptop‚ digital camera and mobile phones rather than buying clothes‚ shoes etc.

4,3889 1,61468

The reputation & trustworthiness of a Web site displayed on-line consumer reviews‚ are extremely important for me while choosing a product

4,9718 1,39358

If I do not read the on-line reviews displayed in the Web site when I am shopping on-line‚ I am anxious about my decision

3,0423 1,61632

When I buy a product on-line‚ I feel overloaded with information while reading the on-line reviews displayed on the Web site

2,8451 1,43076

When I buy a product on-line‚ reading the reviews displayed on the Web sites annoys me 2,4167 1,53595 Variable / Statement ANOVA

Mean Std.Dev. F Sig. 2. Trust Level (cronbach’s alpha = 0,352) 3,025 0,052 Each review has sufficient reasons to supporting the opinions 3,2571 1,31530 Each review is rational 3,6761 1,23952 The number of reviews is large enough to persuade me about the source credibility 3,1781 1,51238 Variable / Statement ANOVA

Mean Std.Dev. F Sig. 3. Purchase Intention (cronbach’s alpha = 0,903) 1,906 0,172 According to above information I am willing to buy this product 2,1806 1,22562 According to above information I am willing to recommend this product 2,0694 1,06581 Variable / Statement ANOVA

Mean Std.Dev. F Sig. 4. Review Quality (cronbach’s alpha = 0,654) 24,406 0,000

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Each review is objective 3,0959 1,48291 Each review is product relevant 3,9452 1,41314 Variable / Statement ANOVA

Mean Std.Dev. F Sig. 5. Review Quantity (cronbach’s alpha = 0,572) 8,765 0,000 The length of review information is great 4,0580 1,38143 I always prefer to buy a product which has the highest number of consumer reviews 3,2464 1,50885 The existence of negative on-line reviews increases the source credibility 3,8406 1,35715 Variable / Statement ANOVA

Mean Std.Dev. F Sig. 5. Review Negativity (cronbach’s alpha = 0,608) 4,113 ,046 The reviewers in the given page negatively evaluate the product 3,6986 1,38127 In general‚ the reviewers in the given page do not recommend the product 4,0274 1,22443

Table 6: Principal Component Analysis

Component Variance Explained

(%) Statement

1 2 3 4 5 When I buy a product on-line‚ reading the reviews displayed on the Web sites annoys me

-,791

29,429

The reputation & trustworthiness of a Web site displayed on-line consumer reviews‚ are extremely important for me while choosing a product

,769

When I purchase a product on-line‚ I always read reviews that are presented on the Web site

,768

When I buy a product on-line‚ on-line consumer reviews displayed on the Web site are beneficial for my product choice

,749

When I buy a product on-line‚ the reviews displayed on the Web site make me feel secure while purchasing the products

,699

When I buy a product on-line‚ I feel overloaded with information while reading the on-line reviews displayed on the Web site

-,663

If I do not read the on-line reviews displayed in the Web site when I am shopping on- line‚ I am anxious about my decision

,856

15,791 I get benefit from using on-line consumer reviews very often while I purchase the product offline

,765

I always prefer to buy a product which has the highest number of consumer reviews ,686 Each review is rational ,849

12,691 Each review is product relevant ,846 Each review is objective ,786 According to above information I am willing to recommend this product ,940 9,732 According to above information I am willing to buy this product ,940 The length of review information is great ,841 6,965 The existence of negative on-line reviews increases the source credibility ,710

We believe that on-line reviews with a mix of negative and positive reviews are more influential in building trust as opposed to on-line consumer reviews that only includes positive reviews. A reason for this might be the suspicion that arises whether the e-vendor has eliminated the negative reviews or there are really no bad consumer experiences for real. Or, as it was in the case of Belkin, a brand with only positive reviews might be perceived as paying for these reviews. We support the idea that customers will find a pool of positive and negative on-line reviews more credible (Martin, 2007, Grau, 2008). CONCLUSIONS As on-line consumer reviews impact trust building, managing these reviews becomes crucial. Our findings indicate that type, number and proportions of on-line consumer reviews can deteriorate or enhance trust to the e-vendor and/or product. Specifically, we contend that negative on-line consumer reviews should be managed for improving their effects in trust building. Marketers should not eliminate negative on-line consumer reviews for all, but have a purposeful action plan for exhibiting them together with the positive ones. Since negative on-line consumer reviews have more powerful impact on purchasing intention, product choice and establishing trust than positive on-line reviews‚ on-line marketers should more carefully scrutinize the proportion‚ quality and quantity of negative on-line consumer reviews than positive on-line consumer reviews. Thus the proportion and the order of each on-line consumer reviews need to be controlled before they are presented.

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Doney, P. M. & Cannon, J. P. (1997) An examination of the nature of trust in buyer-seller relationships. Journal of Marketing, 61, 35-51. Dwyer, F. R. & Oh, S. (1987) Output sector munificence effects on the internal political economy of marketing channels. Journal of Marketing Research, 24, 347-358. Gefen, D., Karahanna, E. & Straub, D. W. (2003) Trust and TAM in online shopping: An integrated model. MIS Quarterly, 27, 51-91. Grau, J. (2008) Consumer Interactions: Social Shopping, Blogs and Reviews, pp. 1-19. eMarketer Inc., New York, NY. Handy, C. (1995) Trust and The Virtual Organization. Harvard Business Review, 73, 40-50. James, A. (2008) More online shoppers take the word of anonymous product reviewers. Kiecker, P. & Cowles, D. (2001) Interpersonal Communication and Personal Influence on the Internet: A Framework for Examining Online Word-of-Mouth. Internet Applications in Euromarketing, 71-88. Kim, D. & Benbasat, I. (2003) Trust-related arguments in Internet stores: A framework for evaluation. Journal of Electronic Commerce Research, 4, 49-64. Koufaris, M. (2002) Applying the Technology Acceptance Model and Flow Theory to Online Consumer Behavior. Information Systems Research, 13, 205-223. Koufaris, M. & Hampton-Sosa, W. (2002) Customer Trust Online: Examining The Role Of The Experience With The Web Site. CIS Working Paper Series Zicklin School of Business Baruch College, New York. Koufaris, M., Kambil, A. & LaBarbera, P. A. (2002) Consumer Behavior in Web-Based Commerce: An Empirical Study. International Journal of Electronic Commerce, 6, 115-138. Lee, J., Park, D.-H. & Han, I. (2008) The effect of negative online consumer reviews on product attitude: An information processing view. Electronic Commerce Research and Applications, 7, 341-352. Lee, M. K. O. & Turban, E. (2001) A Trust Model for Consumer Internet Shopping. International Journal of Electronic Commerce, 6, 75-91. Lewicki, R. J. & Bunker, B. B. (1995) Trust in relationships: A model of trust development and decline (ed. by Bunker, B. B. & Rubin, J. Z.), pp. 190-211. Jossey-Bass Publishers, San Francisco. Liu, F., Dixon, M. & Murphy, J. (2002) Exploring Online Buying and Online Trust in China (ed. by Ramizwick & Ping, T.), pp. 336-342. Association for Consumer Research, Valdosta, GA. Martin, J. A. (2007) The Good News About Bad Reviews. McKeefery, K. (2007) Customer reviews helpful for e-commerce: survey.

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McKnight, D. H., Choudhury, V. & Kacmar, C. (2002) Developing and validating trust measures for e-commerce: An integrative typology. Information Systems Research, 13, 334. McWilliams, G. (2000) Building strong brands through online communities. MIT Sloan Management Review, 41, 43-54. Meyer, D. (2009) Fake reviews prompt Belkin apology. London. Moorman, C., Deshpande, R. & Zaltman, G. (1993a) Factors Affecting Trust in Market Research Relationships. Journal of Marketing, 57, 81-101. Moorman, C., Deshpande, R. & Zaltman, G. (1993b) Factors Affecting Trust in Market Research Relationships. Journal of Marketing, 57, 81-101. Novak, T. P., Hoffman, D. L. & Peralta, M. (1999) Building Consumer Trust in Online Environment: The Case for Information Privacy. Communications of ACM, 42. Park, C. & Lee, T. M. (2009) Information direction, website reputation and eWOM effect: A moderating role of product type. Journal of Business Research, 62, 61-67. Park, D.-H. & Kim, S. (2008) The Effects of Consumer Knowledge on Message Processing of Electronic Word-of-Mouth via Online Consumer Reviews. Electronic Commerce Research and Applications, Volume 7, 399-410. Park, D.-H. & Lee, J. (2008) eWOM overload and its effect on consumer behavioral intention depending on consumer involvement. Electronic Commerce Research and Applications, 7, 386- 398. Park, D.-H., Lee, J. & Han, I. (2007) The Effect of On-Line Consumer Reviews on Consumer Purchasing Intention: The Moderating Role of Involvement. International Journal of Electronic Commerce, 11, 125-148. Patokorpi, E. & Kimppa, K. K. (2006) Dynamics of the key elements of consumer trust building online. Information, Communication & Ethics In Society, 4, 17-26. Piller, C. (1999) Everyone is a critic in cyberspace. Reichheld, F. F. & Schefter, P. (2000) E-loyatly: Your secret weapon on the web. Harvard Business Review, 78, 105-113. Salam, A. F., Iyer, L., Palvia, P. & Singh, R. (2005) Trust in e-commerce. Communications of the ACM, 48, 73-77. Schurr, P. H. & Ozanne, J. L. (1985) Influences on exchange processes: Buyers’ preconceptions of a seller’s trustworthiness and bargaining toughness. Journal of Consumer Research, 11, 939- 953. Smith, D., Menon, S. & Sivakumar, K. (2005) On-line Peer and Editorial Recommendations, Trust, and Choice in Virtual Markets. Journal of Interactive Marketing, 19, 15-37.

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Wagner, M. (2008) The Power of Customer Reviews. West, P. M., Ariely, D., Bellman, S., Bradlow, E., Huber, J., Johnson, E., Kahn, B., Little, J. & Schkade, D. (1999) Agents to the rescue? Marketing Letters, 10, 285-300. Woo, S. (2012) Online-Retail Spending at $200 Billion Annually and Growing. WSJ, The Wall Street Journal Tech. BIOGRAPHY Selcen Ozturkcan is an Associate Professor of Marketing at the Istanbul Bilgi University. She can be reached at Istanbul Bilgi University, Social Sciences Institute, Santral Campus L1-101B, Sutluce Eyup, Istanbul 34060 Turkey, [email protected] Gul Gursoy is an MBA Graduate of the Istanbul Bilgi University.

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STRESS AND PSYCHOLOGICAL STRAIN AMONG UNIVERSITY LECTURERS IN SAUDI ARABIA

Malek T. Jdaitawi, University of Dammam Abdul-Aziz Al-Mutawa, University of Dammam

Foua'd Musallam, University of Dammam Feras Talafha, University of Dammam

ABSTRACT

This paper is an examination of the role of stress roles in psychological strain among university lecturers in an institution of higher learning in Saudi Arabia. The study objectives included the examination of the relationship of individual role stressors (role overload, role conflict and role ambiguity) with psychological strain. The study also identified the predictor factors of role stressors on psychological strain. The sample comprised of 217 university lecturers from various faculties in the University of Dammam. Statistical tests including Pearson correlation and multiple regressions were used for the hypotheses testing. The results showed the existence of a significant relationship between independent variables and the dependent variable. On the basis of the results, discussions were conducted and future recommendations were provided. JEL: M10 KEYWORDS: Stress, Psychological Strain, Role Overload, Role Conflict, Role Ambiguity. INTRODUCTION Prior decades have garnered a small body of research dedicated to stress and psychological strain (Kebelo, 2012). Nevertheless, studies of this caliber are still few and far between in Asia (Kebelo, 2012). Therefore, the present research is an attempt to investigate the stressors-psychological strain relationship among lecturers in Saudi Arabia. The exogenous variables include work overload, work ambiguity, and work conflict while the endogenous variable is psychological strain. Fisher (1994) stated that academic staff members come across role stressors in reaction to job demands requiring them to be a teacher, researcher, organizer, and administrator at the same time. On top of this, owing to the changes in higher education, a considerable increase in the administrative burden was also experienced by academic staff members (Azeem and Nazir, 2008). Studies concentrated on this topic showed that occupational stress may result in several negative outcomes for both the individual and the workplace (Oginska-Bulik, 2006). An educator’s work is generally becoming more complex and demanding (Jackson and Rothmann, 2006). The educators’ role is not without boundaries and the variables coming into play are increasingly becoming complex (Jackson and Rothmann, 2006). Additionally, the more recent global research concerning stress among academics shows that the institutions of higher learning are rife with the phenomenon of occupational stress (Winefield, 2000). Studies also revealed that occupational stress among academic as well as administrative staff of these institutions is high in general (Michailidis, 2008; Thorsen, 1996). In the Saudi context, the scenario is the same where several studies evidenced that university staff displayed job stress ranging from moderate to high levels (Iqbal and Kokash, 2011). On the basis of Houtman and Kornitzer’s (1999) study,

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occupational stress refers to a pattern of reactions occurring when employees are faced with work demands that they are not able to cope with and they perceive an imbalance between demands and environmental/personal resources. Stress was also defined by Cooper, Dewe and O’Driscoll (2001) as a non-specific reaction to environmental demand and work related stress is generally referred to as psychological strain. Psychological strain is defined as psychological outcomes that surface in reaction to organizational demands. These outcomes include lack of concentration, loss of sense of worth, and depression and this situation reflects what is generally considered as stress in such scenarios. On the other hand, Winnubst (1993) described strain as a multiple process of behavioral, physiological and psychological elements that appears under the influence of stress and it disturbs routine. Hence, it can be stated that stress is conceptualized as a process that occurs in individuals being under the influence of stressors that cause strain, and eventually result in adverse outcomes including cynicism, lack of professional efficacy, minimized organizational commitment and intention to leave (Idris, 2011). LITERATURE REVIEW Stress A stressor, as defined by Lazarus and Folkman (1984), is an environmental element that is perceived by the individual as threatening to his/her well-being. In their proposed model, they postulated personal and situational factors as significant in shedding a light on the impact of stressors (Lazarus, 1999). The optimism that the individual holds concerning his/her control over the stressor may impact his/her appraisal and behavior towards it. Threatening environmental elements may appear as barriers that cause additional work, time pressure or monotonous routines (Greiner, Ragland, Krause, Syme and Fisher, 1997). Both work environment and poor job design are factors that may prevent the individual from performing his tasks in the organization which could limit workplace role performance. In this study, the occupational stresses identified include role overload, role ambiguity and role conflict. Strain Strain is defined as affective, feeling states of the individual that involved depletion of emotional resources and lack of energy. Idris (2011) further explained that psychological strain is a specific form of emotional distress appearing in reaction to a perceived threatening situation. Moreover, Winnubst (1993) described strain as a multi-process comprising of behavioral, physiological and psychological elements that appear under the influence of stress and disturbs routine function. Hence, stress is considered to be a process that appears in individuals facing stressors that cause strain, which eventually results in several adverse outcomes such as cynicism, lack of professional efficacy, lack of organizational commitment and intention to leave (Idris, 2011). Relationship between Stresses and Psychological Strain A review of literature reveals that the stress-strain relationship has been thoroughly examined by authors, particularly in the Western countries. However, in Asia, studies of this caliber are still rare (Achour and Boerhannaoeddin, 2011). In addition, literature has also clarified the relationship between stressors and the feeling of strain (in Lee and Ashforth, 1996; Fogarty, Singh, Rhoads and Moore, 2000; Peiro et al., 2001, Posig and Kickul, 2003). Specifically, Posig and Kickul (2003) claimed that strain happens primarily owing to fatigue resulting from pressure to adhere to the set of demands. As for role stressors in the context of academics, literature reveals clear evidence that academics do experience role overload, role ambiguity and role

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conflict (Taris et al., 2001; Dua, 1994; and Gillespie et al., 2001). Idris (2011) stated that role overload and role ambiguity are both predictors of psychological strain but not role conflict. Studies also revealed that role conflict, role ambiguity and role overload can lead to the development of stress symptoms (Huda, Rusli, Naing, Tengku, Winn and Rampal, 2004). In a similar study, Kinman (2001) showed that a great number of academicians have the tendency to quit working in higher education institutions or they regret selecting academics as their career. Also, Sun, Wu and Wang (2011) revealed that role overload is a predictor of occupational stress among Chinese university teachers. Moving on to Australia, Gillespie, Walsh, Winefield, Dua and Stough (2001), and Winefield and Jarrett (1998) enumerated factors including lack of research finance, lack of support, task overload, poor leadership and job insecurity as the primary stress sources. In the context of New Zealand, Chalmers (1998) stated that dissatisfaction owing to work overload was the primary cause behind university staff stress. A similar contention also came from Tytherleigh, Webb, Cooper and Ricketts (2005) who found that job insecurity, lack of control and communication issues were liked to higher job stress among UK university staff. These studied evidently overlooked the examination of stress related outcomes among lecturers in institutions of higher learning in a developing country like Saudi Arabia. Thus, this study aims to examine the association between each role stressors (role overload, role conflict and role ambiguity) and psychological strain and to identify the predictor factors of role stressors on psychological strain. Therefore, this study hypothesizes that;

1. There is a positive relationship between role ambiguity and psychological strain among university lecturers in the University of Dammam, Saudi Arabia.

2. There is a positive relationship between role conflict and psychological strain among university lecturers in the University of Dammam, Saudi Arabia.

3. There is a positive relationship between role overload and psychological strain among university lecturers in the University of Dammam, Saudi Arabia.

4. Role overload, role conflict, and role ambiguity predict psychological strain among university lecturers in the University of Dammam, Saudi Arabia.

METHODOLOGY Study Design The present study employed the survey design. This design involves a large number of individuals that provides a description of the characteristics of the population through an unbiased sample selection. Study Sample This study’s target population comprised of lecturers teaching in a higher learning institution in Dammam, Saudi Arabia. The sample comprised of PhD and Master Degree holders who were chosen through stratified sampling method from the University of Dammam. After obtaining the go ahead to conduct the survey through a written informed consent, the questionnaires were distributed to the lecturers. A total of 217 lecturers were chosen for the study whose ages ranged from 25-51. There were 168 male respondents in the sample and 49 female respondents as shown in Table 1. Table 1: Descriptive Statistics of Participants

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Gender Male 168 77.40%

Female 49 22.60%

Age 25-30 Year 60 27.60%

31-40 years

105 48.40%

41-50 years

24 11.10%

Above 51 28 12.95

Outcomes Measurement The current study’s variables are measured through the following instruments; role overload was measured through Spector and Jex’s (1998) QWI, role ambiguity was measured through Rizzo, House and Lirtzman’s (197) six-item scale, role conflict was measured through Rizzo et al.’s (1970) eight-item scale, and strain was measured through Goldberg’s (1978) GHQ12. The instrument was categorized into two. The first one (Section A) contained the demographic characteristics while the second one (Section B) contained 30 items whereby the lecturers were required to indicate by ticking their degree of agreement or disagreement. The scales ranged from 1-strongly disagree to 5- strongly agree. The produced initial items were examined by nine experts in education who contributed to the study. The final copy of the items was proven to have content validity. As for the items reliability, the Cronbach Alpha for the variables are strain = 0.93, role overload= 0.86, role ambiguity= 0.84 and finally role conflict = 0.93. RESULTS Correlation Analysis The mean value and correlation among the variables are presented in Table 2. According to the results, all the stress variables (role overload, role conflict and role ambiguity) are related to psychological strain. Specifically, role overload positively relates to psychological strain with (r=.847**, p<.000), role conflict positively relates to psychological strain with (r=.808**, p<.000) and role ambiguity is related to psychological strain with (r=.773**, p<.000). It can therefore be concluded that role stressors are all related to psychological strain among university lecturers in the University of Dammam, Saudi Arabia. Table 2: Correlation of the Variables

variables Mean 1 2 3 4 Psychological Strain 3.34 1

217

Role Overload 3.18 0.847** 0.000

1 217

Role Conflict 3.15 0.808** 0.000

0.850** .000

1 217

Role Ambiguity 3.21 0.773** 0.000

0.821** 0.000

0.831** 0.000

1 217

Regression Analysis

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The researcher made use of multiple regression analysis to investigate the variation of role stressors (role overload, role ambiguity and role conflict) on psychological strain. The predictor variables of role overload, role conflict and role ambiguity presented in Tables 3, 4 and 5. The results revealed that they are all predictors of psychological strain. The overall model explained 74.6% of variance in psychological strain at a statistically significant level of F (212.546; P=.000). Table 3: Model Summary (b)

Model R R Square Adjusted R Square Std. Error of the Estimate

1

.866(a)

.750

.746

.45023

Predictors: (CONSTANT), Role Conflict, Role Ambiguity, Role Overload Dependent Variable: Strain Table 4: ANOVA (b)

Model Sum of Squares

df Mean Square F Sig

1

Regression Residual Total

129.198 43.176 172.374

3 213 216

43.066 .203

212.456

.000(a)

Predictors: (CONSTANT), Role Conflict, Role Ambiguity, Role Overload Dependent Variable: Strain Table 5: Coefficients

Model Unstandardized Coefficients Standardized Coefficients

t Sig.

B Std. Error Beta .000 .000 .042 .001

1 (Constant) R-Ol R-AMB RC

.681 .485 .133 .221

.114 .066 .065 .064

.520 .137 .252

5.986 7.347 2.047 3.473

a. Dependent Variable: Strain R-OL: Role Overload; R-AMB: Role Ambiguity; RC: Role Conflict

DISCUSSION AND IMPLICATION On the basis of the results, role stressors are highly correlated with psychological strain. This result is consistent with those of prior studies (e.g. Idris, 2011; and Keelo, 2012) revealing that role overload, role conflict and role ambiguity are significantly correlated to psychological strain.

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This indicates that work environment of university lecturers play a role in strain level experienced by the lecturers. This is further reinforced by the result found by Kebelo (2012) who stated that 24.6% of total strain stem from role overload, role ambiguity and role conflict. Also, Idris (2011) contended that role stressors are related to psychological strain. With regards to study implications, this study serves as a preliminary research dedicated to stress and psychological strain among university lecturers in Saudi Arabia. It explains the relationship between stresses and psychological strain among the said lecturers. The study revealed that stress roles are significantly correlated with psychological strain. From the perspective of management, this study urges university leaders to facilitate better working environment in order to minimize the conflict in lecturer’s work. Management should employ steps to control stress and strain in the university environment, which would lead to improving the conditions of lecturers and improving their depleted performance. Limitation and Recommendations Not unlike other studies, the present study has some limitations. First, the study sample is not a representative of the bigger population as it was chosen only from one institution of higher learning. This indicates that generalization across geographical and demographical areas was not confirmed. On the basis of this limitation, future studies could make use of the same design and framework but include all Saudi public and private universities in their study sample. Second, this study employed the quantitative data though self-report measures which provide the participants a great chance to manipulate their answers. This may have occurred owing to the boredom of the participants, their eagerness to get over the test battery or to just satisfy the researcher. Hence, the answers may not reflect the true experience of the respondents (Creswell, 1994). Future studies could make use of qualitative methods to explain the perceptions of lecturers about their actual work environment. REFERENCES Achour, M. and A.B. Boerhannoeddin. (2011), The role of religiosity as A Coping Strategy in Coping With Work-Family Conflict and Achieving Employees' Well-Being. Paper Presented in International Conference on Social Science and Humanity. Singapore: IACSIT Press, Singapore. Azeern, S. M., and Nazir, N. A. (2008), A Study of Job Burnout Among University Teachers. Psychology and Developing Societies, 20(1), 51-64. Chalmers, A. (1998), Workload and Stress in New Zealand Universities. New Zealand Council of Educational Research and the Association of University Staff of New Zealand: Wellington, New Zealand. Cooper CL, Dewe P and O'Driscoll M. (2001), Organizational Stress: A Review of Critique of Theory. Research and Applications. Thousand Oak, CA: Sage. Creswell, J. W. (1994), Research Design Qualitative & Quantitative Approaches, London: SAGE Publications. Dua, J. K. (1994), Job Stressors and Their Effects on Physical Health, Emotional Health and Job Satisfaction in a University. Journal of Educational Administration, 32, 58-78.

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Fogarty, T. J., Singh, J., Rhoads, G. K., and Moore, R. K. (2000), Antecedents and Consequences of Burnout in Accounting: Beyond the Role Stress Model. Behavioral Research in Accounting, 12, 31-67. Fisher, S. (1994), Stress in Academic Life: The Mental Assembly Line. Buckingham: Open University Press. Gillespie, N. A., Walsh, M., Winefield, A. H., Dua, J., and Stough, C. (2001), Occupational Stress in Universities: Staff Perceptions of The Causes, Consequences and Moderators of Stress. Work & Stress. 15. pp. 53-72. Goldberg, D. P. (1978). Manual of the General Health Questionnaire. Slough, England: National Foundation for Education Research. Huda, B., Rusli, B., Naing, L., Tengku, M., Winn, T., and Rampal, K. (2004), A Study of Job Strain and Dissatisfaction Among Lecturers in the School of Medical Sciences. Southeast Asian J Trop Med Public Health, 35(1), 210-218. Houtman, I.L.D. and Kornitzer, M. (1999), The Job Stress, Absenteeism and Coronary Heart Disease European cooperative study (the JACE-study) . Design of a Multi-centre Prospective Study, EJPH, Vol.9, pp.52-57. Idris, M. (2011), Over Time Effects of Role Stress on Psychological Strain Among Malaysian Public University Academics. International Journal of Business and Social Science, 2(9), 154- 161. Iqbal, A., and Kokash, H. (2011), Faculty Perception of Stress and Coping Strategies in a Saudi Private University: An Exploratory Study. International Education Studies, 4(3), 137-149. Jackson, L and Rothmann, S. (2006), Occupational stress, Organizational Commitment, and Ill- Health of Educators in the North West Province. South African Journal of Education, 26(1), 75- 95. Krause, N., Ragland, D., Greiner, B., Syme, S., Holman, B., and Fisher, J. (1997). Psychosocial Job Factors Associated With Back and Neck Pain in Public Transit Operators. Scandinavian Journal of Work, Environment & Health, 23(3), 179-186. Kebelo, K. (2012), Occupational Role Stressors as Predictors of Psychological Strain Among Academic Officers of Higher Educational Institutions. Pakistan Journal of Psychological Researc, 27(2), 173-186. Kinman, G. and Jones, F. (2004), Working to The Limit: Stress and Work-Life Balance in Academic and Academic Related Employees in the UK. Association of University Teachers. Lazarus, R. S. (1999), Stress and Emotion: A New Synthesis. New York: Springer. Lazarus, R.S. and Folkman, S. (1984), Stress, Coping and Adaptation. New York: Springer. Lee, R.T., and Ashforth, B.E. (1996), A Meta-Analytic Examination of the Correlates of the Three Dimensions of Job Burnout. Journal of Applied Psychology, 81, 123-133. Michailidis, M. P. (2008), Gender-Related Work Stressors in Tertiary Education. Journal of

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Human Behavior in the Social Environment, 17(1/2): 195-211. Oginska-Bulik, N. (2006), Occupational Stress and its Consequences in Healthcare Professionals: The Role of Type D Personality. International Journal of Occupational Medicine and Environmental Health, 19(2): 113-122. Peiro, J. M., Gonzalez-Roma, V., Tordera, N., and Manas, M. A. (2001), Does Role Stress Predict Burnout Over Time Among Health Care Professionals? Psychology & Health, 16(5), 511- 525. Posig, M., and Kickul, J. (2003), Extending Our Understanding of Burnout: Test of an Integrated Model in Nonservice Occupations. Journal of Occupational Health Psychology, 8(1), 3-19. Rizzo, J. R., House, R. J. and Lirtzman, S. I. (1970), Role Conflict and Ambiguity in Complex Organizations. Administrative Science Quarterly, 15, pp. 150-163. Spector, P. E., and Jex, S. M. (1998), Development of Four Self-Report Measures of Job Stressors and Strain: Interpersonal Conflict at Work Scale, Organizational Constraints Scale, Quantitative Workload Inventory, and Physical Symptoms Inventory. Journal of Occupational Health Psychology, 3(4), 356-367. Sun, W., Wu, H., and Wang, L. (2011), Occupational Stress and its Related Factors Among University Teachers in China. J Occup Health, 53, 280-286. Taris, T. W., Schreur, P. J. G., and Van Iersel-Van Silfhout, I. J. (2001), Job Stress ,Job Strain, and Psychological Withdrawal Among Dutch university staff: Towards a Dual Process Model for the Effects of Occupational Stress. Work & Stress, 15, 283-296. Thorsen, E. J. (1996), Stress in Academe: What Bothers Professors? Higher Education, 31(4):471-489. Tytherleigh, M. Y., Webb, C., Cooper, C. L., and Ricketts, C. (2005), Occupational Stress in UK Higher Education Institutions: A Comparative Study of All Staff Categories. Higher Education Research & Development, 1, 41-61. Winefield, A. H. (2000), Stress in Academe. In D. T. Kenny, J. G. Carlson, F.J. McGuigan, & J. L Sheppard (Eds.), Stress and Health: Research and Clinical Application (pp. 437-446). Sydney: Harwood. Winnubst, J. (1993), Organizational Structure, Social Support, and Burnout.In W. B.

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CROWDFUNDING: A NEW PARADIGM IN START-

UP FINANCING Karish Manchanda, Birla Institute of Technology & Science Pilani, Dubai Campus

Pushkala Muralidharan, Birla Institute of Technology & Science Pilani, Dubai Campus

ABSTRACT

This research seeks to examine the concept of crowdfunding, which is relatively a new trend in alternative financing. This work follows a theoretical analysis of literature to describe crowdfunding and its advantages and disadvantages with the chief focus on equity crowdfunding investment. In addition, since skepticism and apprehension has been growing in financial circles regarding the impact that equity crowd-funding might bear on venture capital industry, we have provided a theoretical reasoning describing how both these financing mechanisms - venture capital and equity crowdfunding - can go together in future complimenting each other. JEL: G24, M13 KEYWORDS: Crowdfunding, Venture Capital, Entrepreneur, Start-ups, Financing INTRODUCTION It is a fact that the reasons for failure of an established business may be attributed to poor product offering, lack of vision or a weak business model but the death of a budding entrepreneurial venture is largely a matter of inadequate financing. These new businesses are in a great need of financing from investors but face challenges in securing this one most important resource.Start-up capital has played a major role in many of the present day entrepreneurial endeavors.This area has caught the attention of many of the economists and researchers. Capital requirement and their ability to attract such financing is largely influenced by the stage of maturity a business is currently in. Each business follows a cycle of maturity and therefore, it becomes imperative to look at business maturity cycle that includes the following seven stages: - 1) Seed Stage, 2) Start- Up Stage, 3) Growth Stage, 4) Established Stage, 5) Expansion Stage, 6) Mature Stage and 7) Exit Stage (Thierry Janssen, 2013). This research is restricted to capital requirement at the Seed Stage where in crowdfunding comes in. At the seed stage, the business is still a concept or an idea. The seed stage is characterized by the initial capital that is used to do product and/or service development, patent filings, market surveys and research and business partner recruitment. At this point, no commercial operations have been started and the company is still testing waters. The biggest hurdle faced by the companies in this stage is the capital requirement to convert this business idea into a successful commercial venture. Until now, very few of the wealthy investors have been shaping up the world of innovation. Angel investors and venture capitalists have always been regarded as gatekeepers of the creative world. They have been very selective and many of the businesses are left out in their stringent selection process of investing. Many innovative ideas have been lost in their fight for realization (Scott Steinberg, Rusel deMaria, 2012). At this juncture, a very new concept of crowdfunding is coming up which can go a long way in helping the entrepreneurs raise the capital. LITERATURE REVIEW

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Kickstarter.com being one of the first and most successful crowdfunding platforms helped raise $942,578 from 13,512 investors for a business idea promoted by Scott Wilson and his team against their pitching target of $15,000 (Siegler, 2010, Kickstarter, 2010). By these statistics, we get a glimpse of how rapidly this funding platform is expanding. Schwinbacher and Larralde (2010) have described crowdsourcing and how crowdfunding has emerged from crowdsourcing; the definition being “Crowdsourcing enables a firm to outsource specific tasks essential for the making or sale of its product to the general public (the crowd) with the aid of an open call over the internet and consumers volunteer to contribute to production processes and create value. Crowdfunding: can be viewed as combining concepts of crowdsourcing (i.e. seeking financing from the crowd) and microfinance (small amounts contributed; no collateral)”. Crowdfunding is a new and emerging type of funding (Larralde & Schwienbacher, 2010), with very little academic literature available on it. Larralde & Schwienbacher (2010) in their book have discussed crowdfunding with the chief focus being on small, entrepreneurial ventures. A description of crowdfunding and existing research on the topic has been provided, putting crowdfunding into the perspective of entrepreneurial finance and thereby describing factors affecting entrepreneurial preferences for crowdfunding as a source of finance. Larralde & Schwienbacher (2010) have also researched upon different business models used to raise money from the crowd and have elaborated upon the structure of the crowdfunding process. Devashis Mitra (2012) has analyzed crowdfunding from the point of view of crowdsourcing. Burtch G., Ghose A. and Wattal S. (2012) have discussed the contributing patterns in crowdfunding market and they clearly point out that all crowdfunding transactions are facilitated through internet-based crowdfunding platforms, which also provide a convenient means for all exchanges of funds. Kerr, Lerner and Scholar (2010) conducted their research on entrepreneurial ventures funded by angel investors and proved that such ventures had higher survival rates over an initial 4 year period than the firms not backed by angel investors. They further concluded that appropriate financing and managerial guidance play a big role in the success rate of new ventures. Dahlqvist, Davidsson & Wiklund (2000) argued that the availability of financial capital and sound human resource were essential for new venture growth. Venture capital financing is a necessary evil that provides not only funds but managerial know- how best suitable in situations of high strategic uncertainty, relatively low average profitability and skewed chances of firm’s success (low success probability, but extremely high pay-off in case of firm’s success) (Winton & Yerramilli, 2004). De Bettignies & Brander (2007) further supported these arguments and findings with reasons as to why venture capital funding is mostly found in high-tech or biotechnology start-ups. RESEARCH DESIGN We have primarily focused on the structured review of relevant literature. It began with proper selection of research papers and articles which could throw a light on our research topic. Once the literature was selected, it was thoroughly analyzed with respect to the concept of crowdfunding as an alternative source of financing. This helped us form opinions on crowdfunding’s future relationship with venture capital industry, with suitable reasoning. The relevance of selected literature was ensured by choosing the latest articles and picking them up only from authentic sources. The Crowdfunding

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Do you hold an idea as profitable as present day innovations of Google, Facebook or Youtube? Can you create another multi-million venture? If yes, the answer is crowdfunding. “Crowdfunding is like posting a classified advertisement on a website with the difference that, through crowdfunding sites, entrepreneur can also advertise a business concept and request for funding from the crowd” (Griffin, 2012). Crowdfunding is basically pitching a business idea to the general public and asking for donations to help bring your idea into reality. An entrepreneur can bypass the venture capitalists and angel investors and get directly in contact with the regular internet users asking for small amounts of capital from many of them. Creators use certain websites such as Kickstarter and indiegogo to pitch their ideas, business plans, product offerings, etc and the investors in return are awarded in terms of discounts, free services or product offerings, once the company starts commercial operations (Scott Steinberg & Rusel deMaria, 2012). For example, all the persons pledging their money in support of a movie might be given free DVD copies and premier night tickets, etc. Initially, the funding benefits to the investors were in the form of merchandize benefits but very recently the concept of ‘Investment Crowdfunding’ is coming up where in the investors will hold an ownership stake in the new venture in the form of equity known as ‘Equity Crowdfunding’ or will receive interest payments from the entrepreneur known as ‘Debt Crowdfunding’. However, this concept of investment crowdfunding is in its nascent stage and is considered illegal in most countries. In Europe, different countries have different rules. On 4 September 2013, French Finance Minister Pierre Moscovici presented a draft law, which aimed to adapt the legal status of the participative financing platforms while Italy, UK and Austria are working on crowding regulations (Europe’s New Crowdfunding Regulations, 2013). Only recently was it legalized in U.S.A through U.S Jumpstart Our Business Start-ups (JOBS) Act, 2012 (U.S Government Printing Office, 2012). According to the (crowdsourcing), digital applications, high-tech projects, computer games, films, music or literature can easily attract equity-and lending-based platform where as donation based and merchandize rewards based crowdfunding models are best suited for cause- based promotions and projects attracting the interest of philanthropists. Advantages of Crowdfunding Crowdfunding is being regarded not just a source of raising capital but also as a mode of validation of the creator’s business idea as it gives a projection of target markets. The area of investment in this model is vast as the idea may not be worth millions of dollars but still can receive investments from philanthropists for art exhibitions, charity fundraisers, etc. It can act as a marketing tool for a start-up firm as it increases product or brand awareness among the general public. One gets to test and prove the popularity of the model, similar to beta testing in a software industry. Also, it provides genuine feedback regarding the idea and if the funding received is nowhere close to the target capital, the idea must be given another thought. In case of basic crowdfunding, where equity is not transferred, the cost is almost zero. Disadvantages of Crowdfunding In spite of the numerous benefits it enjoys, the cons cannot be ignored. The biggest disadvantage is limited capacity for raising the money. The maximum limit for raising capital is US $1 million according to U.S.A JOBS Act, 2012 (U.S Government Printing Office, 2012). Also, there is always a fear of loss of confidentiality as the idea is shared with many others and a risk of the idea being stolen and implemented before the pioneer does. Additionally, a lot of time and effort is required to promote an idea through campaigns and promotions.

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Discussion: Future Relationship Between Equity Crowdfunding and Venture Capital (Vc) Industry Since the legislation of Jumpstart our Business Start-up or JOBS Act, 2012 in U.S.A, speculative talks have been going around assessing the impact that equity-based crowdfund investing might have over venture capital industry (a traditional financing vehicle). Historically, angel investors usually came into the picture in start-up stage with a very few of them targeting early stage whereas venture capital firms have been a dominant force in seed financing and early stage financing So some skepticism and apprehension has been around about equity crowdfunding affecting the venture capital industry. In recent years, VC industry has largely been criticized for their investment operating models, poor performance and low return on investments. VC industry has not been able to outperform the capital markets in more than a decade (Cambridge Associates LLC, 2013). Venture capitalists have been blamed for leading the companies to premature Initial Public Offerings (IPO) that is affecting the companies heavily. Due to these factors, VC industry has been losing their trustworthiness in the market. This Current Situation Raises a Question: Will Crowdfunding Be a Direct Competitor for Vc Industry? The answer is ‘Not Necessarily’. There are key features shared by both these financing vehicles that make both the funding avenues complementary to each other for the future. Venture capitalists can benefit through crowdfunding as it can help identify promising startups much easily and simultaneously gather public reviews giving a long-term picture of any business future. In fact, some of the VC firms in the U.S. have already invested millions into crowdfunding platform ‘Funder’s Club’ while other VC’s are looking to launch their own crowdfunding websites. One of the start-ups getting a lot of publicity is ‘IPO Village’, which is offering NASDAQ IPOs from investment banking firm ‘First Line Capital’ directly to the public (http://www.ipovillage.com/). This has created a lot of sensation in the capital markets as it has made such IPO market, which was once a privilege of the institutional investors, accessible to common man. In instances such as IPO Village, venture capital industry is also benefitting due to more time efficient and cost effective initial public offerings for firms whose portfolio’s IPO is backed by venture capital firms. VC firms are not merely a financing option but also equip the start-up companies with an industry expertise, help make introductions to key industry players and assist in overall company’s management. Crowdfunding will be beneficial to venture capitalists by maintaining a suitable control process over the valuation of the companies held by venture capitalists. Crowdfunding can strategize the IPO process in an efficient manner backed by the support of general public, thus maximizing the returns on investment. Also, some big players in the VC industry have or are in the process of creating their own crowdfunds that can enhance the network and provide a holistic view of VC exit strategies from their start-up portfolios e.g. ‘IPO Village’. Additionally, it is impossible for all the new firms to bypass the VC firms as JOBS ACT,2012 has limited the maximum capital raising limit to U.S $1 Million (U.S Government Printing Office, 2012) which is much lesser than the financing needs of many of the new companies. CONCLUSION This research has attempted to explain the concept of crowdfunding with a main focus on equity crowdfunding. We have also endeavored to put forward the relationship that can be shared between VC and equity crowdfunding. Thus, in the light of the reasons described above, we

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argue that the future growth in equity crowdfunding will not come at the cost of VC industry. While venture capitalists are known to gain access to the best deals, these internet-based financing platforms will make it easier for them to learn of any opportunities they might have missed and both the industries will go hand in hand. REFERENCES Thierry Janssen (2013) “The Seven Stages of Business Life Cycle,” White paper published by Just in Time Management Group Scott Steinberg, Rusel deMaria (2012) “The Crowd Funding Bible,” published by Read.me, May, p. 1-90 Siegler, MG (2010). The ipod nano watch nears $1 million in crowdsourced funding. Retrieved October 10, 2013 from TechCrunch Website: http://techcrunch.com/2010/12/16/ipod-nano- watch-million/ Kickstarter (2010) “TikTok Lunatik.” Retrieved October 10, 2013 from Kickstarter Website: http://www.kickstarter.com/projects/1104350651/tiktok-lunatik-multi-touch-watch-kits Larralde, B. & Schwienbacher, A (2010). Crowdfunding of Small Entrepreneurial Ventures. Book chapter for Entrepreneurial Finance (Ed. D.J. Cumming), Oxford University Press. Retrieved October 12, 2013 from Social Sciences Research Website: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1699183 Devashis Mitra (2012) “The Role of Crowdfunding in Entrepreneurial Finance,” Delhi Business Review, vol. 13(2), July-December Burtch, G., Ghose, A. and Wattal, S (2012). An Empirical Examination of the Antecedents and Consequences of Investment Patterns in Crowd-funded Markets. Retrieved October 14, 2013 from Social Science Research Website: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1928168 Kerr, W.R., Lerner, J., & Schoar, A (2010). The consequence of entrepreneurial finance: a regression discontinuity analysis. Working paper, National Bureau of Economic Research, Cambridge, Massachusetts, USA. Retrieved October 15, 2013 from Website: http://www.nber.org/papers/w15831 Dahlqvist, J., Davidsson, P., & Wiklund, J (2000) “Initial conditions as predictors of new venture performance: A replication and extension of the cooper et al. Study,” Enterprise & Innovation Management Studies, vol. 1(1), p. 1-17. Winton, A., & Yerramilli, V (2004). A model of entrepreneurial finance. Unpublished manuscript, Finance Department, University of Minnesota, Minneapolis, USA. Retrieved October 15, 2013 from Website: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=566921 De Bettignies, J.E., & Brander, A (2007) “Financing Entrepreneurship: Bank Finance versus Venture Capital,” Journal of Business Venturing, vol. 22(6), November, p. 808-832

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Griffin, Z.J (2012). CrowdFunding: Fleecing the American Masses. Forthcoming in Case Western Reserve Journal of Law, Technology & the Internet. Retrieved October 13, 2013 from Social Science Research Website: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2030001 Europe’s New Crowdfunding Regulations (2013) retrieved October 12, 2013 from European Union Information Website: http://www.euractiv.com/innovation-enterprise/france-wants-help- crowdfundingco-news-530277 U.S Government Printing Office (2012) “U.S Jumpstart Our Business Start-ups (JOBS) Act,” retrieved October 11, 2013 from Website: http://www.gpo.gov/fdsys/pkg/BILLS- 112hr3606enr/pdf/BILLS-112hr3606enr.pdf Crowdsourcing Information retrieved October 11, 2013 from Website: www.crowdsourcing.org Cambridge Associates LLC (2013) “U.S Venture Capital Index and Benchmark Studies,” retrieved from http://www.cambridgeassociates.com/pdf/Venture%20Capital%20Index.pdf BIOGRAPHY Karish Manchanda is an MBA student at BITS Pilani, Dubai Campus. He is currently a Financial Management Consulting intern at KPMG, Dubai. He can be reached at BITS Pilani Dubai Campus, International Academic City, Dubai, UAE – 345055, [email protected] Pushkala Muralidharan is presently working as Senior Lecturer (Management) with BITS (Birla Institute of Technology and Science) Pilani, Dubai Campus. Emerging trends in finance and business management constitutes her research interests. She can be reached at BITS Pilani, Dubai Campus, Dubai International Academic City, Dubai, UAE – 345055, [email protected]

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EXAMINING THE RELATIONSHIP BETWEEN TRADING VOLUME AND EQUITY MARKET

VOLATILITY: EVIDENCE FROM BRIC COUNTRIES

Pramod Kumar Naik, Indian Institute of Technology Bombay, India Puja Padhi, Indian Institute of Technology Bombay, India

ABSTRACT

Literature of financial time-series documented several stylized facts about the stock return series such as fat tail distribution or leptokurtosis, volatility clustering, asymmetric news effects etc. The introduction of autoregressive conditional heteroskedasticity (ARCH) model by Engle (1982) and its extension of Bollerslev’s (1986) GARCH model provide a systematic framework for volatility modelling. Specifically, GARCH model is widely used in the literature and regarded as the bedrock of time-varying volatility model. However, the conventional GARCH model do not able to capture an important stylized fact known as volatility asymmetry, first detected by Black (1976)[ The asymmetric effects refers to an unexpected drop in stock price (bad news) increase predictable volatility more than unexpected increase in stock price (good news) of similar magnitude. Black (1976) and Christie (1982) on one hand provide the leverage effect explanation, and Pindyck (1984), French et al. (1987), Campbell and Hentschel (1992) on the other, provide the volatility feedback hypothesis explanations, that are well documented in the finance literature.] EGARCH model of Nelson (1991) and GJR GARCH model of Glosten, Jagannathan and Runkle (1993) are among the widely used volatility models that capture the asymmetric effects. The presence of ARCH/GARCH effects in the financial asset returns is appealing to be explained through the knowledge of the rate of information flow into the market. The seminal study of Lamoureux and Lastrapes (1990) demonstrate that the presence of GARCH effects is negligible once trading volume as a mixing variable for information flow is incorporated into the conditional volatility model. The conclusion of the recent empirical literature however is unclear, thus raising more in-depth studies. Recently, stock markets around the world have been experiencing volatility. The empirical evidence on trading volume-volatility relationship are largely based on mature and developed stock markets and studies in emerging and less developed markets are on the rise. Moreover, the information flow into the market are subject to institutional set up of the respective countries and varies from countries to countries both in developed and emerging markets. The present study aims to revisit this issue considering data of four relatively advanced emerging market economies - Brazil, Russia, India and China (BRIC) during the period of 2008-2013(These four countries are originally grouped by James O’Neal of Goldman Sachs based on their significant economic weights in the world economy). The commonalities among these four countries are that they represent relatively large in the class of middle–income group of emerging markets economies. However, these countries are different from each other and also from other emerging economies with respect to their economic policies, structural and institutional factors. Having revisited volume-volatility relationship for the BRIC countries, it is expected that the present study would extend the literature by providing more insight into the emerging stock market behavior. In what follows we list the objective of this paper. First, we empirically

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examined the asymmetric volatility for the BRIC stock markets using EGARCH model. During the period from 2008 to 2012, the global economy has experienced two major economic crises viz. the global financial crisis and the Euro zone crisis. The BRIC countries also felt them eventually(The stock markets of BRIC countries were declined significantly after the US crisis although they rebounded gradually. Especially, volatility in Brazil and Russia increased followed by India and China relatively lesser however, with the effect of the Lehman Brothers collapse (see, Bianconi et al. 2013). Second, we examined the impact of information flow on the equity market volatility for BRIC stock markets by considering trading volume as a proxy for rate of information into the markets. Particularly, at what extend the trading volume helps to explain equity market volatility is examined. Third, the degree of volatility persistence or the GARCH effect in the volatility model is verified before and after inclusion of trading volume as an exogenous variable in the conditional volatility model. Using daily data of their respective stock market indices we first estimate EGARCH (1, 1) model to confirm the volatility asymmetry, and then we examine the volume-volatility relationship by augmenting contemporaneous and lagged trading volume in the EGARCH model. In order to test the presence of asymmetry in the estimated volatility model, we have also estimated Engle and Ng (1993) diagnostic tests viz. the Sign Bias Test (SBT), the Negative Size Bias Test (NSBT), Positive Size Bias Test (PSBT) and the Joint Test by combining all the tests together. The news impact curves of the estimated volatility model for the respective countries are also drawn to graphically represent the asymmetric relationship. The results indicate substantial volatility asymmetry across the BRIC equity markets. We find that contemporaneous trading volumes are significantly associated with equity market volatility for all the four market studied supporting the mixture of distribution hypothesis. Lagged trading volumes are found to be insignificant in explaining conditional volatility. However, it is evident that trading volume fails to attenuate the degree of volatility persistent. The persistence level remains high across the BRIC markets even after incorporating trading volume. JEL: G110, G120, C580 KEYWORDS: Asymmetric volatility, Trading volume, EGARCH, BRIC, Volatility persistence Pramod Kumar Naik, Indian Institute of Technology Bombay, India Puja Padhi, Indian Institute of Technology Bombay, India The full paper may be presented upon request. Emal: [email protected]

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AN EMPIRICAL APPROACH TO RISK

ASSESSMENT IN AN INVESTMENT PROJECT: CASE STUDY "FINANCIAL COMPLEX AND BUSINESS CENTER AT TECNOLÓGICO DE

ANTIOQUIA" Jorge Aníbal Restrepo Morales, Tecnológico de Antioquia

Lorenzo Portocarrero Sierra, Tecnológico de Antioquia Julieth Fernanda Usme, Tecnológico de Antioquia

ABSTRACT

This paper establishes an investment project's risk by using estimated net profit variability for each period. Net profit variability is determined through the average net profit dispersion rate. Then, based on net cash flow variability, NPV variability, and consequently the measurement to establish the level of risk taken are determined. NPV and its explanatory variables are modeled using the Monte Carlo simulation and a pilot study to determine the likely distribution of profit, costs and expenses associated to cash flow. The social discount rate is used to counterbalance the IRR's fundamental re-investment case, since all the cash flow generated by a project may actually be re-invested at a rate adjacent to the capital cost. Likewise, confidence intervals are established to quantify risk. The case study is used as an empirical approach to risk quantification in an investment project for Complejo Financiero y Centro de Negocios —Coficen (Financial Complex and Business Center) at Tecnológico de Antioquia-Institución Universitaria (TdeA IU). INTRODUCTION The proposal “Educación sin fronteras” (Education without Borders), advanced by Tecnológico de Antioquia University Institution, is based on strengthening research and academia with an emphasis on the quality of the programs offered. For this purpose, and based on the Institutional Development Plan, the creation of a financial complex and business center was included in order to support academic training for both undergraduate and graduate students, professors, alumni, and the community in general. They will get support in everything related to stock-market management, understanding and operations; portfolio valuation, business valuation, management of associated risks, technical and fundamental studies, accounting for operations in capital markets, and knowledge about operations in the mercantile and BVC (Colombia Stock Exchange) stock markets. This paper is divided into four sections. The first one focuses on reviewing the basic concepts and definitions for the business center. The second one deals with a few factors the project's financial evaluation should take into account, and briefly describes ways to quantify risk. The third one focuses on defining the model to use, and on analyzing pilot study's consistency, as well as the data gathered. Finally, the results are presented, along with some recommendations for the investment project. Risk and Financial Assessment Techniques Net present value: The Net present value (NPV) method is one of the most widely used economic criteria to assess investment projects. It is based on determining, at the very beginning of the project, the equivalence of future cash flows generated by a project, and comparing such

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equivalence to the initial investment. The difference shall be the additional (positive or negative) amount a project will add to (or subtract from) the company's current value. If the project generates (positive) value for the company, then the project is approved. If, on the contrary, the NPV is negative, this means the project would destroy the company's value, and it must be rejected (Bu, 1981). The condition —that the project must be approved provided NPV is positive— is valid to forecast future cash flows based on a historical context when there is certainty enough about future tendencies. However, it does not work when estimates for those cash flows are based on multiple assumptions about what the future might bring (Gómez, 2005). This paper has, due to its own nature, a high degree of certainty regarding forecast flows. The general expression to calculate NPV is: NPV = initial investment + ∑ NCFt

(1+Ka)t Equation

Where: NPV = Net Present Value NCFt = Net Cash Flow for year t Ka = Capital Cost It is important to underline that capital cost used in this project will be the social discount rate represented by the opportunity cost the country incurs when using its resources to finance projects (Ministerio de Planificación, 2011). For Colombia, it stands at 12% (Aldunate, 2006). NPV Profiles: An investment project's NPV, and capital cost behave in an inversely proportional way. That is to say, as the capital cost rises, NPV drops, and vice versa. Financially speaking, companies intend to keep the capital cost at the lowest possible level to get a greater number of profitable projects. Internal Rate of Return Internal Rate of Return (IRR) is defined as the annual percentage return generated by the resources invested in a project. Formally, IRR can be defined as the rate of return (or discount) that makes the NPV equal to $0. The general expression to calculate IRR is: NPV = I0 + ∑ NCFt

(1+Ka)t Equation 8.2

IRR is obtained when NPV = 0. Therefore: 0 = I0 + ∑ NCFt

(1+IRR)t

Where: I0 = Initial Investment, and IRR = Internal Rate of Return Both the IRR criterion and the NPV are techniques rooted in cash flows deducted from a focal date, which is usually the very beginning of the project. Therefore, the results will depend on a logical and correct application of the elements that make it up. In this particular case, the most precise and concrete decision is achieved using the NPV, since it implies no confusion (Restrepo,

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2009). For some analysts and executives, the IRR criterion is better than the NPV method, which contests the assumption that the latter is easier to understand. These are the significant flaws of the method. Inexperienced users, especially, may be thus misled in their decisions to invest (Bolten & Pérez, 1981). In this paper, a Modified Internal Rate of Return (MIRR) is obtained. Thus, the IRR flaws can be overcome. The method used for calculation solves the problem of multiple rates, as well as the problem of having no solutions because there will always be an MIRR. NPV assumes that it will be possible to re-invest positive cash flows generated by the project in projects with a similar rate to the company's capital cost. In turn, the IRR assumes that said positive cash flows will be re-invested in projects with an internal rate of return similar to that of the project evaluated (Van Horne, Pando & Martínez, 1988). Applying Monte Carlo Simulation to the Assessment of Projects Using @Risk Risk analysis may be defined as the systematic use of available information to establish how frequently some events may take place, and the scale of consequences (Medina, S. & Restrepo, J., 2013). It is normal to associate risk with negative events like losing money in an investment. However, opportunities can be found in the risk analysis process because it requires that all the possible results of a given situation be explored. Risk Analysis With Monte Carlo Simulation The restrictions posed by single point estimates are corrected by using a more robust and refined quantitative risk analysis with Monte Carlo simulations (SM). The variables that are random, or have a degree of uncertainty are incorporated into the model using their probability distribution. It represents the values that the variables are likely to take. By using probability distributions, the SM approaches reality to describe the uncertainty of the variables in a risk analysis. Probability Distributions In business phenomena analyses, a wide variety of probability distributions can be found. Below are described the distributions used in this study. Normal distribution: When the data are not normal, it is possible to transform them, or use other statistical methods that do not require this kind of restrictions, such as the so-called non- parametric methods (Pértegas Díaz & Pita Fernández, 2001). Uniform distribution: it is very versatile because the analyst only needs to define the minimum and maximum values. Production costs, revenue from the sales of a new product, inventory loss, among others, can be placed in this category. Triangular distribution: This distribution is used in economics when the subject under study involves analyzing the length of private projects using optimistic, pessimistic, and most likely estimates (Olivares et al., 2009). The analyst defines the minimum, maximum, and most likely values. PERT distribution: It is similar to triangular distribution. Minimum, maximum, and most likely values are defined. In practice, the PERT method requires that the analyst allocate three different values to optimistic, pessimistic and most likely scenarios (Pérez, 1998). The previous distributions are used in the Monte Carlo simulations employed in this paper. The events are the result of a probability distribution function, such as those described in the previous section, which represent the simulated stochastic process (Johnson, 2000). When an SM is carried out, values are

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sampled randomly according to the distribution probabilities defined. Every set of samples is iteration, and its result gets recorded. Monte Carlo Simulation (SM) carries out this operation n times, generating a theoretical probability distribution that provides a more complete view of what might happen, and the likelihood of it happening (Aragonés & Blanco, 2000). SM generates information fundamental to make decisions in project analyses. It will reflect the project's profitability either through the NPV or the IRR. Using the SM, a significant number of cases is obtained to find out the probability distribution (Restrepo & Medina, 2012). Project Risk It has been established that there is a risk factor when evaluating a project. Therefore, one of the purposes when measuring risks is maximizing NPV or IRR expectation (Tufféry, 1972). Below, an explanatory model is developed to calculate NPV and IRR expectation. Since several risk sources co-exist in a project, for this paper's purposes, estimated cash flow variability will be considered the most relevant risk. This implies that the rest of the variables are considered risk- free: capital cost, service life, investment, etc. NPV and IRR Probability Distribution Npv Distribution: For risk analysis, cash flows in a project feature a random behavior. This means that for a thorough analysis, it is essential to know NVP’s probabilistic behavior. The evaluation is generally carried out on a monthly basis and at a discount rate. The more periods the project's service life takes into account, the higher the normality of the NPV random variable, notwithstanding the probability distribution of the respective cash flows. Once the problem of NPV probability distribution is solved, and based on a normal distribution, it is possible to carry out hypothesis tests, and build confidence intervals. Data and Methodology Investment budget for civil works: In order to carry out financial forecasts for investing in civil works, the market price quotations were obtained. By means of a uniform distribution, the items to determine the average budget were simulated. The initial investment and the project's service life are directly dependent, and independent from the rest of the variables. Likewise, the unit cost, and sales have an inverse relation: the higher the sales volume, the lower the unit cost. Initially, the random variable that explains the project's profitability (IRR), and the random variables that make it up are defined. With a 44% confidence level, the NPV for the project stands between 0 and 51,680 dollars for the evaluation period. There is a 51% chance for the value to be below 0. The minimum value obtained from the simulation was US$ -76.482, and the maximum, US$79.875. In turn, the IRR, with a 90% confidence level stood between 7,47% and 12,22% for the period of evaluation. There was a 5% chance for the value to be below 7,47. The minimum value obtained from the simulation was 6,4%, and the maximum, 13,3%. The IRR and NPV dispersion chart. CONCLUSIONS shows the simulation summary of the main variables that make up cash flow. It is important to note that the project's total investment has a mean value of US$370.774, a minimum value of US$343.475, and a maximum value of US$400.126. It has a 95% chance of ranging between

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US$355.172 and US$386.399; a 5% chance of being below US$355.172, and a 5% chance of being above US$386.399. With an investment of about US$370,000, which may generate an average NPV of US$70,000, the institution's fundamental pillars of research, scope and teaching will be enhanced. The reason is that the academic community, as well as importers and exporters, are provided with technical and practical tools in the context of international business for trade treaties and agreements between Colombia and other countries around the globe. With a 44% confidence level, the NPV for the project stands between 0 and 51,680 dollars for the evaluation period. There is a 51% chance for the value to be below 0. The minimum value obtained from the simulation was US$ -76.482, and the maximum, US$79.875. In turn, the IRR, with a 90% confidence level stood between 7,47% and 12,22% for the period of evaluation. There was a 5% chance for the value to be below 7,47. The minimum value obtained from the simulation was 6,4%, and the maximum, 13,3%. The IRR and NPV dispersion chart Not a valid bookmark self-reference. shows that 47,9% of the simulations got a NPV value above 0, and an IRR between 10% and 15%. The NPV was negative 47,1% of the times, and the IRR fluctuated between 5% and 10%. CONCLUSIONS shows the simulation summary of the main variables that make up cash flow. It is important to note that the project's total investment has a mean value of US$370.774, a minimum value of US$343.475, and a maximum value of US$400.126. It has a 95% chance of ranging between US$355.172 and US$386.399; a 5% chance of being below US$355.172, and a 5% chance of being above US$386.399. With an investment of about US$370,000, which may generate an average NPV of US$70,000, the institution's fundamental pillars of research, scope and teaching will be enhanced. The reason is that the academic community, as well as importers and exporters, are provided with technical and practical tools in the context of international business for trade treaties and agreements between Colombia and other countries around the globe. With a 44% confidence level, the NPV for the project stands between 0 and 51,680 dollars for the evaluation period. There is a 51% chance for the value to be below 0. The minimum value obtained from the simulation was US$ -76.482, and the maximum, US$79.875. In turn, the IRR, with a 90% confidence level stood between 7,47% and 12,22% for the period of evaluation. There was a 5% chance for the value to be below 7,47. The minimum value obtained from the simulation was 6,4%, and the maximum, 13,3%. The IRR and NPV dispersion chart shows that 47,9% of the simulations got a NPV value above 0, and an IRR between 10% and 15%. The NPV was negative 47,1% of the times, and the IRR fluctuated between 5% and 10%. Figure 2 shows that 47,9% of the simulations got a NPV value above 0, and an IRR between 10% and 15%. The NPV was negative 47,1% of the times, and the IRR fluctuated between 5% and 10%.

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Figure 1: Histogram and Frequency Distributions For NPV and Improved IRR

CONCLUSIONS shows the simulation summary of the main variables that make up cash flow. It is important to note that the project's total investment has a mean value of US$370.774, a minimum value of US$343.475, and a maximum value of US$400.126. It has a 95% chance of ranging between US$355.172 and US$386.399; a 5% chance of being below US$355.172, and a 5% chance of being above US$386.399. With an investment of about US$370,000, which may generate an average NPV of US$70,000, the institution's fundamental pillars of research, scope and teaching will be enhanced. The reason is that the academic community, as well as importers and exporters, are provided with technical and practical tools in the context of international business for trade treaties and agreements between Colombia and other countries around the globe. With a 44% confidence level, the NPV for the project stands between 0 and 51,680 dollars for the evaluation period. There is a 51% chance for the value to be below 0. The minimum value obtained from the simulation was US$ -76.482, and the maximum, US$79.875. In turn, the IRR, with a 90% confidence level stood between 7,47% and 12,22% for the period of evaluation. There was a 5% chance for the value to be below 7,47. The minimum value obtained from the simulation was 6,4%, and the maximum, 13,3%. The IRR and NPV dispersion chart shows that 47,9% of the simulations got a NPV value above 0, and an IRR between 10% and 15%. The NPV was negative 47,1% of the times, and the IRR fluctuated between 5% and 10%. Figure 2: IRR and NPV Dispersion Chart

$0 $51.680 51,0% 44,0% 5,0%

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REFERENCE Aldunate, E. (2006). La Evaluación Social de proyectos en América Latina. Uso y desafíos. Cepal. Aragonés, J. R., & Blanco, C. (2000). Valor en riesgo: aplicación a la gestión empresarial (Ediciones Pirámide.). España: Ediciones Pirámide. Recuperado a partir de http://dialnet.unirioja.es/servlet/libro?codigo=139593 Bolten, S. E., & Pérez, R. C. (1981). Administración financiera. Limusa. Recuperado a partir de http://dspace.ucbscz.edu.bo/dspace/handle/123456789/11499 Bu, R. C. (1981). Analisis y evaluacion de proyectos de inversion/Analysis and Evaluation of Investment Projects. Editorial Limusa. Recuperado a partir de http://books.google.es/books?hl=es&lr=&id=XfVvR- TwcbEC&oi=fnd&pg=PA15&dq=Valor+presente+neto&ots=atV7cmXn65&sig=mAQh nyfJ1yjRAI75TYnHOKJpMt8 Gómez, L. D. V. (2005). Un juicio sobre el valor presente neto como criterio de decisión. UNIVERSIDAD NACIONAL DE COLOMBIA SEDE MEDELLIN. Recuperado a partir de http://ideas.repec.org/p/col/000418/009018.html Johnson, C. A. (2000). Métodos de evaluación del riesgo para portafolios de inversión. Central Bank of Chile. Recuperado a partir de http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc67.pdf

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11 %

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VPN US$ vs TIRM%

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Medina, J. R., Romero, R. L., & Pérez, G. A. (s. f.). Toma de decisión en inversiones de capital: Fundamentos para el uso exclusivo de la TIR Modificada. Recuperado a partir de http://www.fcai.uncu.edu.ar/upload/26qtc-medina-fiq-unl.pdf Medina S., & Restrepo J. (2013, junio). Estimación de la Utilidad en riesgo de una empresa de transmisión de energía eléctrica considerando variables económicas. Cuadernos de economía, XXXII(59). Recuperado a partir de http://www.fce.unal.edu.co/media/files/documentos/Cuadernos/art_publicar/v._prelimina r_medina_15.04.13.pdf Ministerio de Planificación. (2011). Precios Sociales para la Evaluación Social de Proyectos. Gobierno de Chile. Olivares, J., Elal-Olivero, D., Gómez, H., & Bolfarine, H. (2009). A reparametrization of Triangular Distribution based on the Skew-Symmetric Distributions. Revista Colombiana de Estadística, 32(1), 145-156. Pérez, J. G. (1998). El método de subasta como complemento al PERT clásico. Estudios de economía aplicada, (10), 71–88. Pértegas Díaz, S., & Pita Fernández, S. (2001). La distribución normal. Unidad de Epidemiología Clínica y Bioestadística. Complexo Hospitalario Universitario de A Coruña (España), CAD ATEN PRIMARIA, 8, 268–274. Restrepo, J. (2009). Evaluación Financiera de Proyectos - Restrepo Morales, Jorge Anibal | Librero Online (1.a ed., Vol. 1). Tecnológico de Antioquia. Recuperado a partir de http://www.libreroonline.com/libros/3050/restrepo-morales-jorge-anibal/evaluacion- financiera-de-proyectos.html Restrepo, J., & Medina, S. (2012). Estimation of Operative Risk for Fraud in the Car Insurance Industry. Global Journal of Business Research, 6(3), 73-83. Selowsky, M. (1963). La Evaluación Social de Proyectos. Un ensayo en Planificación. Recuperado a partir de http://eco3147.facea.puc.cl/economia_puc/docs/004seloa.pdf Tufféry, A. (1972). El Cálculo del riesgo de los Proyectos de Inversión (Vol. 3-B). Recuperado a partir de http://cdi.mecon.gov.ar/cgi- bin/pppp.exe?rec_id=108738&database=pppp&search_type=link&table=alls&lang=spa &format_name=SFALL Van Horne, J. C., Pando, J. S. C., & Martínez, L. M. (1988). Administración financiera. Prentice Hall. Recuperado a partir de http://www.publidisa.com/PREVIEW-LIBRO- 9786074429497.pdf

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Wisecarver, D. (1988). El Calculo de los Precios sociales en Chile. Cuadernos de economía, 25(74), 29-37. BIOGRAFIA Jorge Aníbal Restrepo M, Management Engineer, Universidad Nacional, Medellín, Colombia. MBA, Universidad EAFIT, Medellín, Colombia. Master of Advanced Studies, Universidad San Pablo CEU, Madrid, España. Ph.D. Candidate, Universidad San Pablo CEU, Madrid, España. Research Professor, Tecnológico de Antioquia. Management Faculty, Research Group RED, TdeA. E-mail: [email protected]. Lorenzo Portocarrero Sierra, Business Manager, Universidad Cooperativa de Colombia, M.A. in Management, Universidad EAFIT. Expert in Public Finance, Escuela Superior de Administración Pública. Expert in Banking and Finance, Instituto de Estudios Bursátiles - IEB, Universidad Complutense de Madrid. Current President of Institución Universitaria Tecnológico de Antioquia, Associate Professor and Researcher. Correo. [email protected]. Julieth Fernanda Usme Technologist in commercial management, Member of the hotbed of research in business management.

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INTEREST RATE AND CREDIT SENSITIVITY OF

SECTORAL OUTPUT IN NIGERIA Ikechukwu Kelikume, Lagos Business School

ABSTRACT

The Keynesian framework for analysing the transmission of monetary policy to real sectors of the economy, proposes that changes in the cost of capital will lead to changes in investment culminating to a change in output measured in Gross Domestic Product (GDP). Standard conclusion from theory states that a reduction in interest rate will stimulate economic activities but the existence of structural rigidities in developing economies has often distorted the link between interest rates sectoral output performance. This study seeks to investigate the relative responsiveness of sector output to changes in interest rate and credit in Nigeria. The study will make use of quarterly time series data spanning over a period of 23 years 1980:Q1-2013:Q2, sourced directly from the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS). The method used in carrying out the study is the auto-regressive distributed lag modelling technique. Our intention is to understand the dynamic behaviour of sector output in relation to interest rate and credit allocations. Results obtained from the study will track the relative effectiveness of monetary policy on various sectors and help monetary authorities understand and adopt appropriate monetary policy mix to achieve the macroeconomic short term and long term goals. JEL: E43, E51, E23 KEYWORD: Interest Rates, Credit Sensitivity, Sector Output INTRODUCTION Prior to the great depression, the mainstream economic thought was based on the say’s law – supply creates its own demand – that is the economy consumes whatever it produces so that the economy is always in a state of equilibrium. The Keynesian theory argues that the economy cannot maintain itself at full employment as a result of some structural deficiencies in the system. Keynes therefore, postulated that a combination of monetary and fiscal policy will stimulate the economy by inducing investment. He reasoned that a reduction in interest rate will automatically stimulate investment which will have a positive impact in the various sector output. The transmission mechanism of monetary policy with regards to sector output has been subject to controversial and divided opinion. An understanding of this mechanism is tantamount to a strong policy stance for the monetary authority as the success of any monetary policy hinges on its ability to contribute to economic growth. In Nigeria, monetary aggregates have experienced significant stability in the last three years. The Central bank of Nigeria has set the monetary policy rate at 12 percent between Q1: 2012 and Q3: 2013. Stability in monetary policy rate is reflected in the positive growth in real GDP and an inflation rate that has been tending towards a single digit. Notwithstanding the current stability in monetary aggregates, the period of stable interest rates has failed to drive growth of the various sectors contrary to economic theory. This point lead to the conclusion that sectors that boost growth does not respond to changes in the interest rate.

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Since the evolution of the financial sector, the impact of monetary policy on economic growth has been greatly altered through discretionary monetary policy. This has impeded the ability of banks to fund their businesses (innovation in funding practices) in the face of tight monetary policy. This probably may be the reason for slow reaction of sector output to interest rate and credit changes in the economy. In the empirical literature, the monetary transmission mechanism is considered broadly without taking into account the grass root impact of policy on the various sector of the economy. The mechanism via which interest rate and credit affect growth is indirect as any change in interest rate will first hit the investment in different sectors before affecting the gross domestic product as a whole. Considering the sector output responsiveness to monetary policy will help understand the monetary policy mix to be adopted to ensure steady growth in the economy (Nwosa and Saibu, 2012). Not much has been done in the area in interest rate and credit sensitivity to sect oral output in Nigeria but in recent times, some studies have shown discrepancies in the response of different sectors to monetary policy. This difference observed has significant implication in macroeconomic management since monetary authority must evaluate the varying consequences of its actions on different sectors. According to Bernanke and Kuttner (2005), the tightening of monetary policy may be viewed as mild aggregately, but it may be excessive for specific sectors. Thus, monetary authorities should have strong distributional effects within the economy. In addition, information on the sector that react first to monetary policy changes and the sectors worse hit by monetary policy shocks, provide valuable assessment tool for designing appropriate monetary policies. The stylized fact on the various sectors output growth is presented in Figure 1. Figure 1: Sector Growth Rate In Gross Domestic Product

Figure 1 shows the growth in the various sectors in the fourth quarter between 2009 and 2012. Note: Each color signify the fourth quarter of each year from 2009 to 2012 The statistics as reported by the Central Bank of Nigeria (CBN) Statistical Bulletin show that on aggregate basis the Gross Domestic Product (GDP) in Nigeria grew by 6.99 per cent in the fourth quarter 2012. But a quarter-wise comparison between the fourth quarter of 2011 and 2012 show a downward trend as total GDP growth fell from 7.76 per cent to 6.99 per cent indicating a 0.77 per cent decline. Agriculture records a slow growth a rate of about 3 per cent but it is the major sector, contributing over 38 per cent to aggregate GDP in 2012Q4 – This indicate a decline of over 1 per cent when compared against 2011Q4. This decline can be attributed to the incidence of flooding in the second half of 2012 (National Bureau of Statistics 2013). Although the Service sector is the fastest growing sector with over 14 per cent followed closely by the Building and Construction Sector with over 12 per cent in 2012Q4 but both sector taken together contribute over 21 per cent

Percentage Growth

Se ct

or s Q4 2012

Q4 2011

Q4 2010

Q4 2009

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to aggregate GDP which is about 17 per cent lower than the contribution of Agriculture sector in the same period. The research question that this paper seeks to address includes, which sector is the most sensitive sector to interest rate and credit changes in the Nigerian economy? What is the direction of causality between credit and output? And what is the short run and long run impact of sector output to changes in interest rate in Nigeria. The rest of the paper is structured as follows: Section II reviews related literature Section III is the methodology and theoretical framework while section VI is the empirical analysis. In section V, we conclude the study. LITERATURE REVIEW Series of studies have established a link between real gross output and monetary policy. Stating that the sector allocation of credit should stimulate productivity of the country but this effect has been questioned since the financial evolution. Although studies have shown the existence of positive correlation between the financial system and economic growth (King and Levine 1993b and De Gregorio and Guidotti 1994) but, differences have been identified in the response of sectorial output and aggregate output to monetary policy measures (Gelter & Gilchrist 1993; Granley & Salmon 1997; Farès & Srour 2001; Raddatz & Rigobon 2003 & Saibu & Nwosa 2011). Therefore, with differences in theory and conclusion, researchers have made effort to determine the interest rate and credit sensitivity of various sectors. The marginal efficiency of capital proposed by the Keynesians states that monetary policy impact on output through changes in interest rate (Molho 1986 and Athukorah 1998). The Keynesians suggest that monetary policy affect output through the market forces of demand and supply (Mishkin, 2004). Two main hypotheses have evolved in linking output to interest rate and credit. The finance-led growth hypothesis (Schumpeter, 1969; McKinnon, 1973; Shaw, 1973; Greenwood & Jovanovic, 1990; Benciverga & Smith, 1991; Jappelli and Pagano, 1993; King and Levine, 1993a and Fernandez and Galetovic, 1994) and the growth-lead finance hypothesis (Robinson, 1952; Kuznet 1955; Jung, 1986; Lucas, 1988 and Ireland, 1994). The finance-lead growth (supply leading) hypothesis states that financial liberalization that reduces interest rates will transfer idle resources from the surplus to the deficit sector thereby stimulating growth (McKinnon, 1973 and Shaw, 1973) while the growth-lead finance (demand following) hypothesis state that demand for financial services induced by real economic growth will result in an expansion of the financial sector (Gold Smith 1969). Some researchers have contended that there exist a bi-directional causality between financial development and economic growth (Wood, 1993; Calderon & Liu, 2003; Chuah & Thai 2004). Many studies have employed different methods in analysing the interest sensitivity of output. Josephine (2008) employed the simple regression analysis to investigate the impact of monetary policy shock. While Deodola & Lippi 2000; Hayo & Uhlenbrock 2000; Irvine & schuh 2004 and Christino, Eichenbaum & Evans 1999, used the Vector Auto-Regression (VAR) to approach the effect of monetary policy shock on output and drawing stylized fact and causation, the Auto- Regressive Distributed Lag (ARDL) model and Error Correction Model (ECM) were used by Adebiyi 2006; Majid 2008; Saibu & Nwosa 2011 and Haruna, Yahya & Nasiru 2013 to examine the disaggregate effect and dynamic response of output to monetary policy shock. Irvine and Schuh (2004) adopting the Vector Auto-Regression (VAR) model, conclude that improved monetary policy explains the decline in Gross Domestic Product (GDP) volatility.

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Adopting the same method of analysis, Ganley and Salmon (1997) found the effects of monetary policy tightening to be unevenly distributed across sectors of the economy. Stating that, Manufacturing responds sharply to a monetary tightening. Shabri Majid (2008) found the Malaysia economy to support the finance-led growth hypothesis. Using VAR for six sectors in Pakistan, Alam, and Waheed (2006) found manufacturing, wholesale and retail trade, and finance and insurance sectors were sensitive to interest rate shocks while agriculture, mining and quarrying, construction, and ownership of dwellings were insensitive to interest rate changes. Furthermore, in Nigeria, evidence of sector responsiveness to credit has been inconclusive and scanty. The Nigerian economy can be broadly classified into five (5) main activity sectors namely: Agriculture, Industry, Building and Construction, Wholesale and Retail Trade and Services. The relationship between monetary policy and growth has concentrated on the aggregate output growth relegating sector-specific analysis to the background (Ajayi 1974; Ajisafe & Folorunso 2002; Adebiyi 2006; Akinlo 2007; Chimobi & Uche 2010). Using ARDL, Haruna & Yahya (2013) found the relationship between private sector credit and economic growth to support the growth-lead finance hypothesis in the long-run. On the basis of VAR model, Nwosa & Saibu (2012) conclude that interest rates are the most effective channel of transmitting monetary policy to agriculture and manufacturing sector. METHODOLOGY AND DATA In the context of the Nigerian economy, this research is carried out using secondary data sourced from the Central Bank of Nigeria and the National Bureau of Statistics. The date covers the period of 1990Q1-2012Q4 for the major activity sector. Following the Keynesian framework for analysing monetary policy impact, an expansionary monetary policy will impact sector output through an increase in investment induced by a fall in interest rate. This will further increase credit to the private sector and decrease exchange rate but the extent to which monetary policy impact output depends on the extent to which main activity sector responds to changes in monetary policy tool. Adopting model from the work of Shabri Majid (2008), Haruna et al (2013) and Nwosa & Saibu (2011), the functional model for sector output sensitivity to the private sector credit and interest rate is stated as follows; 𝑌𝑡𝑖 = f (INT, CPS) (1) Where Y is the real gross domestic product (RGDP), INT is the prime lending rate. The prime lending rate is considered to be appropriate because it is the lowest rate offered to creditworthy customer and this has a direct bearing on investment. The CPS is the credit to the private sector. The RGDP is the endogenous variable while INT and CPS are the exogenous variables. In an attempt to investigate the sector sensitivity to interest rate and credit, we proceed to state the econometric form of equation 1 below 𝛥𝑌𝑡𝑖 = 𝛽0 + 𝛽1ΔINTt + 𝛽2ΔCPSt + 𝒰𝑡 (2) From equation 2, 𝑌𝑡𝑖 is the sector specific RGDP, 𝒰 is the error term; 𝛽0 is the intercept; while 𝛽1−2 represents the co-efficient of the RGDP determinants (INT and CPS) incorporated in the models. The Greek capital letter delta (Δ) represents change. On a-priori, β1 ˂ 0 and β2 ˃ 0

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In the time series analysis, the exogenous variables may affect the endogenous variable with a time lag. This often necessitates the inclusion of lags of the exogenous variables in the regression. Similarly, the endogenous variable may be correlated with its lag suggesting an inclusion of lag of the dependent variable in the regression. This motivates the use of Auto Regressive Distributed Lag (ARDL) model defined below as; Δ𝑌𝑡𝑖 = 𝛽1∆𝑌𝑡−1𝑖 + 𝛽2∆𝐶𝑃𝑆𝑡−1 + 𝛽3∆𝐼𝑁𝑇𝑡−1 + ∑ 𝛼∆𝑌𝑡−𝑚𝑖𝑛−1

𝑚=1 + ∑ 𝜑∆𝐶𝑃𝑆𝑡−𝑚𝑛−1 𝑚=1

+ ∑ 𝛾∆𝐼𝑁𝑇𝑡−𝑚𝑛−1 𝑚=1 + 𝒰𝑡

(3) Equation 3 is the autoregressive distributed lag (ARDL) modelling approach which allows robust and a reliable estimate of the short run and long run relationship between growth in sector output and growth in other exogenous variables. The term in summation signs represent the short run dynamics while the term with the coefficient β’s represents the long run relationship. The choice of the lag length is an empirical issue which can be resolved using Akaike information criterion (AIC) and the Schwarz Bayesian Criterion (SBC). SBC gives more parsimonious model, selecting the smallest possible lag length and AIC selects the maximum relevant lag length (Shrestha, 2005). The Error Correction Model (ECM) is as follows; Δ𝑌𝑡𝑖 = ɸ∈�𝑡−1 + ∑ 𝛼∆𝑌𝑡−𝑚𝑖𝑛−1

𝑚=1 + ∑ 𝜑∆𝐶𝑃𝑆𝑡−𝑚𝑛−1 𝑚=1 + ∑ 𝛾∆𝐼𝑁𝑇𝑡−𝑚𝑛−1

𝑚=1 + 𝒰𝑡 (4) REFERENCES Adebiyi, M. A., (2006), Financial Sector Reforms and the Transmission Mechanism of Monetary Policy in Nigeria. A Vector Auto-regression Mechanism, China Finance Research Network (CFRN). Ajayi, S. I. (1974). An Econometric case study of the relation importance of Monetary and Fiscal Policy in Nigeria. The Banladesh Economic Review, 2(2):5595-5667. Ajisafe, R.A and Folorunso, B.A., (2002), Relative Effectiveness of Fiscal and Monetary Policy in Macroeconomic Management in Nigeria. The African Economic and Business Review , Vol. 3, N0. 1 Akinlo, A. E. and Akinlo, O.O (2007), “Financial Development, Money, Public Expenditure and National Income in Nigeria”. Journal of Social and Economic Review. Athukorah P.C., (1998), Agricultural Trade Reforms in the Doha Round: A Developing Country Perspective Division of Economics Research School of Pacific and Asian Studies Bencivenga, V. R., and Smith, B., D (1991),“Financial Intermediation and Endogenous Growth,” Review Of Economic Studies 58, 195–209. Calderon & Liu, 2003; Calderón, C., & Liu, L. (2003), The Direction of Causality Between Financial Development and Economic Growth. Journal of Development Economics, 72(1), 321- 334.

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Chimobi, O. P. and Uche, U. C. (2010), Money, Price and Output: A Causality Test for Nigeria. American Journal of Scientific Research, 8(4):78-87. Christino, L. J., Eichenbaum, M. & Evans, C.L., (1999), Financial Development, Growth, and the Distribution of Income. Farès, J., & Srour, G. (2001), The Monetary Transmission Mechanism at the Sectoral Level. Bank of Canada. Gertler, M., & Gilchrist, S. (1993), The Role of Credit Market Imperfection in the Monetary Transmission:Arguments and Evidence. Scandinarian Journal of Economic, Vol. 95 (1) pp 43- 64. http://dx.doi.org/10.2307/3440134 Goldsmith, R.,W. (1969), Financial Structure and Development. New Haven, CT: Yale University Press Granley, J., & Salmon, C. (1997), The Industry Impact of Monetary Policy Shock. Some Stylised Facts. Working paper No. 68. Bank of England. Greenwood, J., and Jovanovic, B., (1990), Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy∗ The Journal of Political Economy, Vol. 98, No. 5, Part 1. pp. 1076- 1107 Haruna, M. & Yahya , Z. A., (2013), Interdisciplinary Review of Economics and Management Analysis of the Relationship between External Debt and Economic Growth in Nigeria Hayo, B., & Uhlenbrock, B., (1999), Industry Effects of Monetary Policy in Germany. ZEI. Irvine,O., & Schuh, S., (2004), The Role of Comovement and Inventory Investment in the Reduction of Output Velocity. Working Paper, Federal Reserve Bank of Boston King, R. G., and Levine, R., (1993a), “Financial Intermediation and Economic Development,” in Colin Mayer and Xavier Vives, eds., Capital Markets and Financial Intermediation. London: Centre for Economic Policy Research, pp. 156-89 King, R. G., and Levine, R., (1993b), “Financial Intermediation and Economic Development,” in Colin Mayer and Xavier Vives, eds., Capital Markets and Financial Intermediation. London: Centre for Economic Policy Research, pp. 156-89 Kuttner (2005), "What Explains the Stock Market's Reaction to Federal Reserve Policy?" The Journal of finance 60.3: 1221. . Kuznets, S., (1955),“Economic Growth and Income Inequality,” The American Economic Review 451–28.L McKinnon, R, I. (1973), Money and Capital in Economic Development. Washington, DC: Brookings Institution. Mishkin, F. S. (2004), Can Inflation Targeting Work in Emerging Market Countries? (No. w10646). National Bureau of Economic Research.

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Molho, L. E. (1986). Interest Rates, Saving, and Investment in Developing Countries: A Re- examination of the McKinnon-Shaw Hypotheses. IMF Staff Papers, 33(1), 90-116. Nwosa, P. F., and Saibu, M. O., (2012), The Monetary Transmission Mechanism in Nigeria: A Sectoral Output Analysis. International Journal of Economics and Finance Vol. 4, No. 1; Pagano, M., and Jappelli, T (1993), “Information Sharing in Credit Markets,” Journal of Finance 43, 1693-1718. Raddatz, C., & Rigobon, R. (2003), Monetary policy and sectoral shocks: did the Federal Reserve react properly to the high-tech crisis?. World Bank Policy Research Working Paper, (3160). Robinson, J., (1952), The Rate of Interest and Other Essays, London: Macmillan Schumpeter, J. A., (1969),The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Cambridge, MA: Harvard University Press (1911) Shaw, E. S. (1973), Financial Deepening in Economic Development (Vol. 39). New York: Oxford University Press. Shrestha, B., (2005), Economics Working Papers, School of Economics, University of Wollongong, NSW, Australia. Wood, D. O. S. (1993), The Expansion Rate Of And Distance To G5.8920.39 in ASP Conf. Ser. 35, Massive Stars:

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THE STUDY ABOUT THE INFLUENCE OF CORPORATION GOVERNANCE STRUCTURE ON

INTERNAL CONTROL AUDIT REPORT LAG- BASED ON EMPIRICAL DATA OF LISTED

COMPANIES IN CHINA Yuedong Li, Southwestern University of Finance & Economics

Xingyu Wang, Southwestern University of Finance & Economics

ABSTRACT Corporation governance and internal control are generated in response to Principal-agent problems as well as the internal control audit report lag. This paper examines whether internal audit report lags is associated with corporation governance. The study is based on a sample of 1244 publicly-listed companies from Year 2008 to Year 2011, obtained from Shenzhen Stock Exchange in China. Regression analysis indicates that firms, with less directors but more supervisors and members in audit committees as well as frequent board meeting, are more likely to produce internal control audit report lag. In contrast, this study also demonstrates factors as the independence of supervisors and board of directors, the frequency of board meetings together with duality of CEO, hardly exerts influence on the internal control audit report lag. The contribution of this paper is to empirically analyze data in relevant to internal control information, aiming at assisting in the improvement of corporation governance. KEY WORDS: internal control, audit report lag, corporation governance BIOGRAFIA Yuedong Li, Associate Professor, School of accountancy, Southwestern University of Finance & Economics. E-mail: [email protected] Cell phone:+86 13980436234. Mail address: No.555 of Liutai Road, Wenjiang, Chengdu, Sichuan, P.R.China 610041 Xingyu Wang, Graduate Student. The School of Accountancy, Southwestern University of Finance & Economics

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AN EMPIRICAL ASSESSMENT OF THE INTEREST RATE CHANNEL OF MONETARY TRANSMISSION

MECHANISM IN NIGERIA Ikechukwu Kelilume, Lagos Business School

ABSTRACT

The interest rate channel of monetary transmission mechanism is the link through which variations in real interest rate by the Central Bank (CBN) influences the level of aggregate output and prices. In the past three years, the Central Bank of Nigeria in a bid to check fluctuation in prices has kept the monetary policy rate (MPR) stable at 12 percent with the view that stability in interest rate will provide the much needed incentive for domestic investment to thrive. The long run linkage between real interest rate, inflation and output in a developing country like Nigeria calls for empirical investigation. The aim of this study is to test the interest rate channel of monetary transmission in Nigeria to establish the stickiness or otherwise of interest rate in realizing the goals of macroeconomic policy. The method used is the cointegration and error correction mechanism since we are interested in investigating the channel through which nominal interest rate influences long run economic aggregates. The study will make use of secondary time series data with the data frequency dated quarterly from Q1:1996 to 2013:Q3. Result obtained from the paper will be used to track the speed with which monetary policy changes is transmitted to the economy and the relative speed of adjustment from the short run to the long run. JEL: E42, E43, E52 KEYWORD: Monetary Policy, Interest Rate, Monetary Transmission Mechanism INTRODUCTION The interest rate channel of monetary transmission mechanism is the link through which changes in monetary aggregates (money supply and nominal interest rate) is transmitted to the economy through its effect on aggregate output and prices. According to Taylor (1995), monetary transmission mechanism is the process through which changes in monetary policy decision affects the level of economic activities measured by output and inflation. The channels through which monetary policy changes affect the level of economic aggregates vary from one country to the other. However, the established channels through which monetary policy changes influences output and prices include the interest rate channel, the credit channel, exchange rate channel, the asset price channel and more recently, the risk taking channel (Bernanke and Kuttner 2005; Borio and Zhu 2012; Adrian and Shin 2009; and Gambacorta 2009). Although, extensive studies has been carried out in both advanced economies and emerging market economies on the monetary transmission mechanism, recent evidence from some studies show that there exists a relatively low level of long-term interest rate in the world today which has significantly altered the level of output and prices (Greenspan 2005 and Bernanke 2005). This low level of interest rate according to Bernanke has created a significant increase in global supply of savings-a global savings glut.

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Most countries have responded to this global saving glut by varying significantly monetary policy tools without recourse to the other channels through which monetary policy affects output and prices. In Nigeria, effort to maintain a stable exchange rate, a positive growth in output and a single digit inflation level has been the sole objective of the Central Bank of Nigeria (CBN). Maintaining these objectives has led the Central Bank of Nigeria to maintain a fixed monetary policy rate of 12 percent between 2011:Q1 and 2013:Q2. Maintaining a fixed monetary policy rate has however, not reflected in interbank rates movement, inflation and output growth over the periods 2005:1 to 2013:2. Figure 1 shows the trend behavior of interest rate, inflation and output in Nigeria. The behavior of interest rate in relation to changes in macroeconomic aggregates raises some fundamental research questions. Of particular interest to us is how quickly does the interest rate channel of monetary transmission mechanism work in Nigeria? How reliable is the interest rate channel? And how large are the effects of interest rate changes on output and prices? We seek to explore only the interest rate channel of monetary transmission for Nigeria because of the implicit assumption that the Central Bank has the ability to influence long term interest rate through the manipulation of short-term real interest rate. But, is the interest rate pass-through complete in Nigeria? The study will attempt to provide answers to some of these research questions. Following the introduction section, the rest of the paper will be structured into four sections. Section two reviews the empirical literature while section three deals with the methodology and data. In section four we present the empirical analysis while section five concludes the paper. Figure 1: Monetary Policy Rate, Interest Rates and GDP Growth Rate in Nigeria

The figure shows quarterly data of interest rate, inflation, and output growth in Nigeria during the period 2005Q2-2012Q2. The trend shows monetary policy rate to be relatively flat over the period while prime lending rate (PLR) and inflation (INF) appear to track the relatively fixed MPR. Output growth rate as measured by GDP shows very high volatility rising and falling every 4 quarters. Of particular interest to us is the correlation between GDP and MPR which is 1 percent, an indication that MPR does not track GDP in Nigeria. LITERATURE REVIEW

Pe rc

en t

Trend relationship between Macroeconomic Indicators

PLR MPR RGDP Growth INF

Correlation Coefficient RGDP Vs PLR = -10%, RGDP Vs MPR = 1%, RGDP Vs INF = 6%

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Two major economic theories that tend to explain monetary policy via the role of money in the economy are the classical quantity theory and the Keynesian theory (Luckett, 1984). The quantity theorists believe that changes in the quantity of money directly affect the real sector and that monetary policy alone is sufficient to stabilize the economy. The Keynesians believe that money supply affect output and the general price indirectly through the monetary policy transmission mechanism. The Central Bank or the Fed in the case of the United State of America affects inflation and output mainly through short-term nominal interest rates which is carried out either through a tight monetary policy or an expansionary monetary policy. In Nigeria, the monetary transmission mechanism occurs through changes in monetary policy rate. The notable channels through which monetary shocks influences the level of economic aggregate other than interest rate channel includes the credit channel, exchange rate channel, asset channel and wealth channel (Kuttner and Mosser 2001; Bernanke and Gertler, 1995; Rotemberg and Woodford, 1997; and Clarida, Gali, and Gertler, 1999). Several studies have been conducted in both developed and developing countries on the monetary policy transmission mechanism with the studies using different modeling techniques. Most of the studies examined all the channels through which changes in money supply and interest rate affect output and prices with very few studies focusing on specific channels of monetary transmission mechanism. The study by Kuttner and Mosser (2001), Raddatz and Rigobon (2003); Gertler and Gilchrist (1993) attributed the retrogressive effect of the impact of the monetary policy on interest rate in the past ten years to the weak institutional framework and the emergence of the financial innovations in the United States of America (Bernanke and Gertler, 1995). This study is similar to the investigation carried out by Jayaraman and Sharma (2003). According to their findings, the drawback in financial sector development gave rise to high interest rate spread in the Pacific Island Countries. Borio and Zhu (2008) considered the risk-taking channel of the monetary policy in developed economies and observed that adequate attention has not been given to risk-taking channel of the monetary transmission mechanism. The authors conclude that changes in financial sector regulation could be accounted for increase in risk-taking channel. Studies on emerging economies have shown that interest rate channel of monetary transmission mechanism have the tendency to impact more on economic activities in Central and Eastern Europe (Egert, 2006, Ganley and Salmon, 1997). Disyatat and Vongsinsirikul (2003) examined the level of pass through in Thailand from the money market rates and found that investment is sensitive to monetary policy shocks. In a similar study, Perri and Pablo (2001) investigated the empirical relation of interest rate among emerging economies (Brazil, Mexico, Philipines and Korea) and observed that consumption is more volatile than output. Hence they concluded that interest rate is crucial to explaining business cycle in emerging economies. The authors found out that over 50% of fluctuation in the business cycle was accounted for by the shocks in the interest rate in Argentina.

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The study carried out in developing economies by Jankee (2003) on interest rate revealed that the Irvin Fisher theory of interest rate parity effect does not hold in Mauritius. In a related study Sergio, Schmukler and Serven (2004) showed that interest rates of the countries with more flexible regimes adjust more slowly to changes in international rate. Mishra, Montiel and Spillimbergo (2010) and Davoodi and Dixit (2013) noted that, deficiency in institutional framework as well as the imperfection in the banking industry has aggravated the cost of lending in most developing economies. Other research studies carried out in developing economies include Uanguta and Ikhide (2002); Romer and Romer (1990); Morsink and Bayoumi (1999). In the study conducted for the Namibian economy, Mishra, Montiel and Spillimbergo (2010), observed that interest rate have the tendency to increase while private investment is tending lower. Furthermore, cross country survey by Dedola and Lippi (2005); Giacinto (2002); Fratantoni, Schuh and Mae (2001) and DeFina, (1999); gave a useful insight in analyzing reaction to monetary policy on interest rate in selected economies across the globe using disaggregated data. The earliest study on monetary policy transmission mechanism conducted for Nigeria was the survey by Uchendu, (1997). Other recent studies that have attempted to establish the impact of interest rate on monetary transmission mechanism include (Oyaromade, 2002; Ogun, 2006; Adebiyi, 2006). In all, the study by Nwosa and Saibu (2012) pointed out that interest rate channel is the most effective channel transmitting monetary policy in Nigeria. THEORETICAL FRAMEWORK AND MODEL The empirical approach adopted for this study is the cointegration and error correction method. The literature review has shed light on the model to be used in estimating the interest rate channel of the monetary transmission mechanism. There exist two distinctive channels of monetary policy transmission mechanism-the old or the traditional approach to measuring monetary transmission mechanism and the new approach to measuring monetary transmission mechanism (Rummel 2012). The old approach focuses on interest rate, exchange rates and asset pricing channel while the new approach focuses on credit market friction. Based on the information given and the objectives of this study, our focus is strictly on the interest rate channel of monetary transmission mechanism. The interest rate channel exists only on the condition that monetary policy action affect interest rate that causes individual and business decision making units to alter their spending decision which in turn, produced variations in the level of aggregate output and prices. This channel which is built on the Keynesian intertemporal framework links monetary policy changes to changes in aggregate output and price in the following order. ( ) ( ) ↑Π↑⇒⇒↑↑↓⇒↑⇒ AggDICRMS An expansionary monetary policy (MS) reduces real interest rate which in turn has positive effects on aggregate consumption and aggregate investment. An increase in investment translates into higher output and ultimately increased prices or inflation (Π ).

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On the contrary, a tight monetary policy will produce a channel that links rising cost of credit induced by contraction in money stock to contraction in aggregate output and the price level as indicative of the following order; ( ) ( ) ↓Π↓⇒⇒↓↓↑⇒↓⇒ AggDICRMS Although, Bernanke and Gertler (1989) suggestion that “macroeconomic response to policy- induced interest rate changes is considerably larger than implied by conventional estimates of interest elasticity of consumption and investment,” still holds true with the implication that mechanism other than interest rate channels of monetary transmission should be explored. The need to examine the interest rate channel of monetary policy transmission mechanism in Nigeria is borne out of the Monetary Policy Council (MPC) continued insistence in holding monetary policy rates (MPR) fixed at 12 percent in the last 3 years. Although current evidence of published macroeconomic data of the central Bank of Nigeria (CBN) shows inflation has been trending downwards at a current single digit figure of 8.2 percent and exchange rate has been largely stable, there is need to track the interest rate channel and the speed with which this channel influences aggregate output and prices. In formulating a model, we make use of the cointegration and error correction mechanism (ECM) developed to overcome the problem of spurious regression associated with nonstationary time series data. The theory of cointegration as propounded and propagated by Granger (1981 and 1986), Hendry (1986), Pagan and Wickens (1989) and Mills (1991), provides and integration between short-run dynamics and long run equilibrium. In general, the cointegration theory involves two steps, the first step is the identification of the order of integration of the variables with the aid of the Dickey Fuller (DF) or the Augmented Dickey Fuller (ADF) set of unit root test. The second step is a test of the existence of long run (cointegrating) relationships between the endogenous and exogenous variables of the model. This test is based on the Engle and Granger two-step procedure Engle and Granger, (1987). Based on cointegration theory, we estimate a long run relationship between interest rate and output (measured by real GDP) on the one hand, and interest rate and price level on the other

hand. The models are expressed in linear estimation form are as follows;

µαα ++= tt INTRLRGDP 10 (1)

On a priori, 01 α Where, LRGDP stands for the log transformation of real Gross Domestic Product and INTR

stands for real interest rate. 0α is the constant term while 1α is the long-run coefficient. To estimate the short-run and long-run dynamics of monetary transmission mechanism, we employ the single equation error correction model. After testing for unit root, and establishing the long-run relationship via Engle and Granger cointegration test, we obtained an error correction model using Kremers et al (1992) which takes the form;

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( ) ttt n

i iti

n

it INTRLRGDPINTRLRGDPLRGDP ∈+−−+∆+∆+=∆ −−=−= ∑∑ 1011011 ααγθφλ

(2) Where; γ represents the speed of adjustment, measured as the percentage of the disequilibrium that is

corrected quarterly. The coefficient 1α represents the long-run output elasticity with respect to interest rate. By eliminating insignificant variables and lags from equation 2 (using Hendry’s general-to- specific-modeling approach), we obtained the short-run model below.

( ) tt

ttttt

INTRLRGDP LINTRdLINTRLRGDPLRGDPdLRGDP

∈+−−+ ∆+∆+∆+∆+=∆

−

−−−−

101

22114211 )()( ααγ

ββααλ

(3) EMPIRICAL ANALYSIS To estimate the interest rate channel of monetary transmission mechanism we began by testing the unit root properties of the variables with the aid of the Augmented Dickey Fuller test. The result of the ADF test is summarized in Table 1 while the Mac-Kinnon critical value for rejecting the null hypothesis of the presence of unit root is reported in Table 2. Table 1: Unit Root Test for the Variables

The table shows the result of the Augmented Dickey-Fuller (ADF) set of unit root test at the levels of the individual variables and at their first difference with I(0) indicating integrated of order 0 and I(1) indicating integrated of order 1. From the ADF test reported in Table 1, the t-statistics is compared with specific values constructed by Dickey and fuller (1979, 1981) and Engle and Granger (1987). From the result, the two variables used for the study (prime lending rate and output variable) had strong evidence in favor of the null hypothesis of non-stationarity at their individual levels. This is so because all the test statistics (absolute values) were less than the critical values at 1 percent, 5 percent, and 10 percent respectively. This justified the need to difference the variables to obtain stationarity. After the first difference of the variables, the test supports the rejection of the null hypothesis of non-stationarity of the series because all the variables became I (1) series. This is because after differencing once, all the test statistics in their absolute values were greater than the critical values at 1 percent, 5 percent, and 10 percent as reported in Table 2 for the interest rate variable and Table 3 for the Output variable. Table 2: Mac-Kinnon Critical Value for Rejecting the Null Hypothesis of Unit root

Augmented Dickey-Fuller Test Variables LINTR LRGDP

Levels -2.2883 -2.1354

Status I(0) I(0)

First Difference -9.0215 -9.2684

Status I(1) I(1)

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The table shows the Mac-Kinnon critical value for rejecting the hull hypothesis of unit root for the variable LINTR We reject the null hypothesis of no unit root if the critical Mac-Kinnon value greater than the observed ADF tau statistics at the 1, 5 and 10 percent levels respectively. By comparing the t-statistics obtained in Table 1 with that obtained in Table 2, the t-statistic values at the first difference of the variable was greater than the critical values at1, 5 and 10 percent levels respectively. Table 3: Mac-Kinnon Critical Value for Rejecting the Null Hypothesis of Unit root

The table shows the Mac-Kinnon critical value for rejecting the hull hypothesis of unit root for the variable LRGDP. We reject the null hypothesis of no unit root if the critical Mac-Kinnon value greater than the observed ADF tau statistics at the 1, 5 and 10 percent levels respectively. By comparing the t-statistics obtained in Table 1 with that obtained in Table 3, the t-statistic values at the first difference of the variable was greater than the critical values at1, 5 and 10 percent levels respectively. To examine the variables for long-run cointegrating relationship, we used the ADF test by examining if the residual of the variables is stationary at levels with no trend and zero mean. The ADF test for the residual is reported in Table 4. Table 4: Unit Root Test for the Residual of LINTR and LRGDP

The table shows the result of the Augmented Dickey-Fuller (ADF) test for long-run relationship between the variables used in the model. ECM is the residual obtained by regressing LRGDP with LINTR. Since we do not expect the residual to a trend or a nonzero mean, we estimate the ADF test at levels with no trend and intercept. The test shows the ECM variable to be integrated of order 1 only at the 10 percent levels. Having established the existence of long-run relationship between the variables we proceed to estimating the short-run and long-run cointegration model. The result of the long run interest rate output model is reported in Table 5. The result shows the interest rate coefficient to be well signed and highly significant at the 1 percent levels of significance. By all standards, the result shows output elasticity with respect to interest rate in the

Augmented Dickey-Fuller Test Criteria for LINTR Critical Values 1% 5% 10%

ADF at Levels -4.0966- -3.4762 -3.1656

ADF at First Difference 4.0987 -3.7727 -3.1661

Augmented Dickey-Fuller Test Criteria for LRGDP Critical Values 1% 5% 10%

ADF at Levels -4.1009 -3.4783 -3.1667

ADF at First Difference -4.1009 -3.4783 -3.1667

Augmented Dickey-Fuller Test Mac-Kinnon Critical Value for Rejecting the Null Hypothesis

Variables ECM

Levels -1.6827

Status I(1)

Critical Values 1% 5% 10%

ADF test at Levels -2.6010 -1.9459 -1.6135

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long-run to be 8 percent. Thus a 10 percent increase in lending rate will reduce output marginally in the long –run by 0.8 percent. The overall F-statistic value of 31.8, show the overall model has a very good fit. However, the low R2 value of 31 shows that only about 31 percent systematic variation of output is accounted for by changes in interest rate in the long-run. The DW statistics value of 0.22 shows the presence of serial correlation. Table 5: Estimated Long-run Static Output-Interest Rate Model

The Table reports result for static long-run output-interest rate model over the sample periods 1996:Q1-2013:Q2. The models reported includes:LRGD=α0+α1LINTR+U: where the dependent variable log of real GDP and the explanatory variable is prime lending rate (LINTR). The figures in parenthesis are the t-statistics and the symbol ***, indicate significant at the 1 percent level of significance. Table 6 shows the result of the dynamic error correction model. We began with the over- parameterized model with a maximum lag length of 4 lags with the lag length chosen on the basis of Akaike information and the Schwarz criterion. Thereafter, we obtained the more parsimonious short-run error correction model (using Hendry’s general-to-specific modeling approach) by deleting the insignificant variables. The estimated result of the ECM of output and interest rate is reported in Table 6. The coefficients of the short-run model are in line with stated theory with the exception of the monetary policy variable-interest rate. The four period lagged values of Real GDP are positively and significantly associated with current real GDP with the short-run elasticity being 10.4 percent. One period lagged GDP although positively related to current GDP in the short-run is statistically not significantly related to RGDP. Table 6: Short-run Error Correction Model

The Table reports result for short-run output-interest rate model over the sample periods 1996:Q1-2013:Q2. The models reported includes:dLRGD=α0+α1dLRGDPt-1 +α2dLRGDPt- 4+α3dLINTRt-1+ecmt-1+ Ut: where the dependent variable is the logdifference of real GDP. The ecm variable is the error correction term expected to capture the short run dynamics of the model. The figures in parenthesis are the t-statistics and the symbol ***, indicate significant at the 1 percent level of significance.

Dependant Variable LRGD C LINTR R-squared ( R2 ) Adj. R-squared F-statistic Durbin-Watson

13.3437 (46.4351)*** -0.0843 (-5.6405)*** 0.3187 0.3087 31.8161 0.2218

Dependant Variable dLRGD C dLRGDP(-1) dLRGDP (-4) d LINTR (-1) ECM(-1) R-squared ( R2 ) Adj. R-squared F-statistic Durbin-Watson

-0.0002 (-0.0584) 0.0365 (0.9687) 1.0458 (25.8159)*** 0.0114(2.8682)*** -0.0024 (-0.1550) 0.9204 0.9151 173.6476 1.9869

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The interest rate variable had a wrong sign but passed the test of significance at the 1 percent levels on the basis of the t-test. Specifically, the short-run interest elasticity of output (RGDP) is 1 percent showing that in the short-run, a 10 percent increase in interest rate increases output marginally by 0.1 percent. The value of the coefficient of the error correction term is less than unity and negative but not significantly so. The insignificance of the error correction term rules out the existence of a long- run equilibrium relationship and the value of the coefficient 0.0024 show that any deviation from the long-run equilibrium relationship will fade away by 2 percent within a quarter of a year. The equation yielded a very high R2 and adjusted R2 values of 0.92 and 0.91 respectively. This implies that over 91 percent systematic variation in output (RGDP) is explained by the explanatory variables and the error term. The F-statistic value of 173.6 shows the overall model has a good fit while the Durbin Watson statistic value of 1.986 indicates the absence of serial correlation in the short-run model. CONCLUSION The main objective of this paper has been to assess the interest rate channel of monetary transmission mechanism in Nigeria for the period 1996:Q1-2013:Q2. Theoretically, the interest rate channel is the link through which changes in money supply and nominal interest rate is transmitted to the economy through its effect on aggregate output and prices. Following the Central Bank of Nigeria (CBN) continuous insistence to hold monetary policy rate (MPR) constant at 12 percent over a period of 9 quarters, to check volatility in prices and exchange rate, we set out to investigate the reliability of interest rate channel in Nigeria. The paper adopted the cointegration and error correction modeling approach by first estimating the long run relationship between interest rate and output. Interest rate was found to be well signed and statistically significant in influencing long-run output. Specifically, a 10 percent increase in interest rate reduces output by 0.8 percent through its effect on investment and aggregate consumption. In the short-run model, interest rate had the wrong sign but was statistically significant in explaining variation in output however, the error correction coefficient had the right sign but failed the test of significance and indication of an unstable long-run relationship between interest rate and output. The major limitation of this paper is that it held other channels through which changes in monetary aggregates influences output and prices constant this does not go down well with the recent findings of Bernanke and Gertler (1989), that mechanisms other than interest rate channel may be responsible for the wide variation in interest elasticity of consumption and interest elasticity on investment that drives output and price changes in an economy. Further studies will attempt to incorporate other channels of monetary transmission mechanism to ascertain the most reliable monetary policy transmission mechanism channel in Nigeria. REFERENCES Adebiyi, M. A., (2006), Financial Sector Reforms and the Transmission Mechanism of Monetary Policy in Nigeria. AVector Auto-regression Mechanism, China Finance Research Network (CFRN).

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Adrian, T., and Shin, H. S. (2009).Money, liquidity, and monetary policy.The American Economic Review, 99(2), 600-605. Bernanke, B., and Gertler, M. (1989).Agency costs, net worth, and business fluctuations.The American Economic Review, 14-31. Bernanke, B. S. and Gertler, M. (1995).Inside the black box: the credit channel of monetary policy transmission (No. w5146). National Bureau of Economic Research Bernanke, B. S. (2005). The global saving glut and the US current account deficit.Board of Governors of the Federal Reserve System (US) Speech, (Mar 10). Bernanke, B. S., and Kuttner, K. N. (2005). What explains the stock market's reaction to Federal Reserve policy?.The Journal of Finance, 60(3), 1221-1257. Borio, C and H Zhu (2008): “Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?”,BIS Working Papers, no 268. Borio, C., and Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?.Journal of Financial Stability, 8(4), 236-251. Clarida, R., Gali, J., and Gertler, M. (1999).The science of monetary policy: a new Keynesian perspective (No. w7147). National Bureau of Economic Research Davoodi, H. R., & Dixit, S. V. S. (2013). Monetary Transmission Mechanism in the East African Community: An Empirical Investigation. International Monetary Fund. Dedola, L., & Lippi, F. (2005). The Monetary Transmission Mechanism: Evidence from the Industry Data of Five OECD Countriest, forthcoming European Economic Review. Defina, R. (1999), “The Differential Regional Effects of Monetary Policy: Evidence from the USA”. Journal of regional science, Vol. 39 (2) pp 339-358. De Fiore, Fiorella,(1998), “The Transmission of Monetary Policy in Israel,” IMF Working Paper, No. 98/114, (Washington: International Monetary Fund). Dickey, D. A. and Fuller, W. A. (1979).Distribution of the estimators for autoregressive time series with a unit root.Journal of the American statistical association, 74(366a), 427-431. Dickey, D. A. and Fuller, W. A. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root. Econometrica: Journal of the Econometric Society, 1057-1072. Disyatat, P., & Vongsinsirikul, P. (2003), Monetary Policy and the Transmission Mechanism in Thailand. Journal of Asian Economics, 14(3), 389-418. Égert, B., and MacDonald, R.,(2009), "Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable," Journal of Economic Surveys, Vol. 23, No. 2, pp. 277-327.

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Engle, R. F., and Granger, C. W. (1987). Co-integration and Error Correction: Representation, Estimation, and Testing. Econometrica: journal of the Econometric Society, 251-276. Fratantoni, M., Schuh, S., & Mae, F. (2001), Monetary Policy, Housing and Heterogeneous Regional Markets,Federal Reserve Bank of Boston, Working paper. Gambacorta, L. (2009). Monetary Policy and the Risk-Taking Channel. BIS quarterly review. Gertler, M., & Gilchrist, S. (1993), The Role of Credit Market Imperfection in the Monetary Transmission:Arguments and Evidence. Scandinarian Journal of Economic, Vol. 95 (1) pp 43- 64. Giacinto, V. Di. (2002). Differential Regional Effects of Monetary Policy: A Geographical SVAR Approach,European Regional Science Association conference paper 02-257. Engle, R. F., and Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: journal of the Econometric Society, 251-276. Granger, C. W. (1981).Some Properties of Time Series Data and Their use in Econometric Model Specification. Journal of econometrics, 16(1), 121-130. Granger, C. W. (1986).Developments in the Study of Cointegrated Economic Variables. Oxford Bulletin of economics and statistics, 48(3), 213-228. Granley, J., & Salmon, C. (1997), The Industry Impact of Monetary Policy Shock. Some Stylised Facts.Workingpaper No. 68.Bank of England. Greenspan, A. (2005). Risk Transfer and Financial Stability. In Federal Reserve Bank of Chicago Proceedings (No.May, pp. 1-9). Hendry, D. F. (1986). Econometric Modelling with Cointegrated Variables: An Overview. Oxford bulletin of economics and statistics, 48(3), 201-212. Jankee, K., (2003), Interest Rate Determination in the Post Liberalisation Period in Mauritius. Law Management and Social Sciences –Research Journal – Volume 5. Jayaraman, T.K. and Sharma, R. (2003). “Determinants of Interest Rate Spread in the Pacific Island Countries: Some Evidence from Fiji”, Journal of Fijian Studies, 1(1), 75-104. Kuttner, K. N., and Mosser, P. C. (2002). The Monetary Transmission Mechanism: Some Answers and Further Questions. Federal Reserve Bank of New York Economic Policy Review, 8(1), 15-26 Luckett, D. G. (1984), Money and Banking.McGraw-Hill. Mills, T. C. (1991). Time Series Techniques for Economists. Cambridge University Press. Mishra, P., Peter , J., Montiel, P., and Spilimbergo, A., (2010), Research Department and European Department Monetary Transmission in Low Income Countries . IMF Working Paper.

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Morsink, J. and Bayoumi, T., (1999), “A Peek Inside the Black Box The Monetary Transmission Mechanism in Japan,” IMF Working Paper No. 99/137 (Washington: International Monetary Fund). Nwosa, P. F., and Saibu, M. O., (2012), The Monetary Transmission Mechanism in Nigeria: A Sectoral Output Analysis. International Journal of Economics and Finance Vol. 4, No. 1; Ogun, T. P. (2006), Financial Structure, Bank Credit Channel and Monetary Policy In Nigeria (1970-2003).Unpublished P.hD Thesis.Department of Economics, Faculty of Social Sciences, ObafemiAwolowo University,Ile-ife, Osun –State. Oyaromade, R. (2002), Monetary Policy Transmission in Nigeria. A VECM Approach.The Nigeria Journal ofEconomic and Social studies, Volume 44, pp. 187-206. Pagan, A. R., and Wickens, M. R. (1989).A survey of Some Recent Econometric Methods. The Economic Journal, 99(398), 962-1025. Perri, F., and Pablo, A., (2001) Business Cycles in Emerging Economies: The Role of Interest Rates New York University and Princeton University. Raddatz, C., &Rigobon, R. (2003). Monetary Policy and Sectoral Shocks: Did the Federal Reserve React Properly to the High-Tech Crisis. Policy Research Working Paper Series, 3160.The World Bank. Romer, C. D. and Romer, D. H., (1990), “New Evidence on the Monetary Transmission Mechanism,” Brookings Papers on Economic Activity No. 1, pp. 149-213. Rotemberg, J. J., and Woodford, M. (1998). An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version. Rummel.O. (2012), Monetary Policy in Developing Countries. CCBS, Bank of England http://www.pftac.org/filemanager/files/Macro2/workshop/2.pdf. Taylor, J. B. (1995). The Monetary Transmission Mechanism: An Empirical Framework. The Journal of Economic Perspectives, 9(4), 11-26. Uchendu, O. A. (1997),The Transmission Mechanism of Monetary Policy in Nigeria, Central Bank of Nigeria.Economic and Financial Review, Vol.34, No.2 pp 606-625. Uanguta, E. and Ikhide, S., (2002), “Monetary Policy Transmission Mechanism in Namibia”. Bank of Namibia Working Paper No. 2/02. ACKNOWLEDGE The Author would like to thank the editor of the International Journal of Business and Finance Research, the anonymous reviewers and the management of the Lagos Business School for funding this research. BIOGRAPHY

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IkechukwuKelikume is currently a doctoral student of the Swiss University of Economics (SMC University, Switzerland) and leads sessions in Microeconomic and macroeconomic environment of business at the Lagos Business School. He researches and consults in areas which include macroeconomic modeling, financial and monetary economics as well as econometrics and quantitative methods in economics. +2348137978069, [email protected] .

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1IMPROVEMENT OF HEALTH CARE SYSTEMS FUNCTIONING AS AN ELEMENT OF

ALLIVIETING POVERTY Mato Grgić, University of Zagreb Vlatka Bilas, University of Zagreb Sanja Franc, University of Zagreb

ABSTRACT

Since the early beginnings of the civilization, people, in order to live and act normally, have been fighting illnesses, diseases and other threats to health. Despite decades of progress globally there is still an unacceptable level of preventable illness and death, and millions of people are denied their basic right to health. In many low-income countries health status indicators have either deteriorated or failed to improve. The principal cause is poverty and the poor bear the highest burden of sickness and ill health and have the least access to health services. Poor governance and weak capacity in the health sector have also hampered efforts to improve health. In this paper different factors that affect health, health care system functioning and economic well- being, that is, poverty around the world are studied as well as potential strategies of improving health care and mitigating poverty. By analyzing contemporary challenges facing global health care systems potential reform steps are presented. The conclusion of the analysis is that in order to fight poverty and improve health it is vital to include and connect different organizational, social, economic and legal elements and to provide adequate health services available to all. JEL: I15, F63 KEYWORDS: global, poverty, health, health care, economic development INTRODUCTION Since the early beginnings of the civilization, people, in order to live and act normally, have been fighting illnesses, diseases and other threats to health. Despite decades of progress globally there is still an unacceptable level of preventable illness and death, and millions of people are denied their basic right to health. In order to improve health it is vital to include and connect different organizational, social, economic and legal elements and to provide adequate public health services. As already stated, the social environment and life conditions are recognized as vital determinants having a direct and indirect impact on the population health. Absolute and relative income, employment, education and other factors directly affect the access to health services and selection thereof, but they also have an indirect psychological influence. Economic growth is one of the main determinants of the health status, especially when it comes to poor and underdeveloped countries where malnutrition and infective diseases are the most common cause of death of mothers, children and preemies. Also, health is one of the main prerequisites for people to be productive and productivity is one of the prerequisites of development and growth. Therefore, the connection among health and growth or poverty is twofold. Development is the process of improving health and quality of life, and health is a central component of the development process (World Federeation of Public Health Associations, 1996). In many low-income countries health status indicators have either deteriorated or failed to improve during the last years. The principal cause is poverty and the poor bear the highest burden

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of sickness and ill health and have the least access to health services. When drawing up strategies for poverty suppression and health care policies, it is necessary to focus on illnesses affecting the poor, ensure financial accessibility of health care services and to improve efficient use of services (Ostojić, Bilas, Franc, 2013). In this paper different factors that affect health, health care systems’ functioning and poverty around the world are being studied with the aim of drawing conclusions and giving recommendations for improving health care and mitigating poverty. In that order, by analyzing contemporary challenges facing global health care systems potential future reform steps are presented. LITERATURE REVIEW Since the world is becoming more and more connected and defined by complex relationships, the population health is considered to be an integrated result of ecological, social, economic and institutional determinants (Huynen, Martens, Hilderink, 2005). In poor countries a slight increase in the gross domestic product (GDP) is followed by an increase in the life expectancy, but as the GDP continues to grow, this connection gets weaker. In developed countries, a significant link between GDP growth and life expectancy has not been proven (Madovsky, Alin, Masseria, Hernandez-Quevedo, McDaid, Mossialos, 2009). Health and poverty are connected in more than one way. Economic growth not only needs healthy people but also education and other supplementary investments, proportion of labor force in public and private sectors, active market, sovereignty and institutional mechanisms of the society (Peykarjou, Gollu, Gashti, Shhahrivar, 2001). Health may have an impact on the rise of income at the micro-level and the macro-level by way of factors such as increased inclusion into the labor market, higher productivity, investments in human capital, savings, fertility, lifespan and population’s age structure (Bloom and Canning, 2000). In countries with a low level of income, health care results are worse than in the countries with high income. Poverty is associated with bad health, and bad health helps maintain the poverty. It can be concluded that health and a risk of falling ill are key features of poverty (WHO, 2006). It is a common viewpoint that the combat against poverty requires strategies which enable creation of welfare and provision of assistance to deprived population. This is possible by setting up a legal basis which will support the development of the society layers, by promoting public administration that will adopt objectives of economic development and equality, by promoting decentralization and development of a community, by promoting gender equality, and by eliminating various social barriers (Grgić, Bilas, Franc, 2012). Coordination of health care and social services is essential in the process of drawing up programmes for solving interrelated issues of poor and socially excluded society members (Koller, 2010). Disscusion: the Efficiency of Health Care Systems for Health and Well-Being Challenges to Health Care Systems’ Functioning and Health A high-quality health care system is supposed to establish a balance between people's wishes and needs in a way that it improves the health of individuals, families and community, protects citizens from different health hazards, determines reasonable treatment costs, ensures equal access to public health services to everyone, includes citizens in the process of building and managing the health care system (WHO, 2010b). Health care systems depend on a wider economic environment in which they function. The health care system personnel, institutions and funds necessarily reflect structural characteristics of the national economy (Saltman, 1997). It has become evident that the more developed a certain country is in terms of higher income per capita,

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the more it earmarks for health care (Maxwell, 1981). Finding funds is among most serious issues of health care systems functioning. An increase in health care system expenditures may be explained through an increased demand resulting from an altered way of living, larger number of retired people and longer lifespan. Moreover, it can be concluded that demographic changes are potentially the biggest challenge to the performance of health care systems. Simultaneously with the decline in fertility rates (in developed countries) and longer life expectancy, the number of inhabitants decreases, whereas the number of elderly people increases. That demand for health services disproportionally goes up with the age is a generally known fact. During the last 170 years, the life expectancy has been constantly rising (Münz, 2012). Considering population ageing trends, it is to be expected that in future there will be a decline in active workforce, an increase in public expenditures for pensions and in health care expenses. It is necessary to monitor demographic trends and to carry out longitudinal studies on ageing, and to pursue policies based on evidence and not on opinions (Čipin, 2012). Such changes significantly affect health care systems in developed countries, which are also faced with challenges caused by technological changes (Eckholm, 2010). In addition to the abovementioned, the creation of a welfare state has been influenced by an ever-growing role of developing countries, which causes not only a shift in orientation from developed countries to developing countries but also fiscal challenges when drawing up health care policies. Poverty As a Risk Factor to Sustaining Health Poverty is a multidimensional concept (WHO, 2006). It implies low income, lack of security, vulnerability, lacking access to skills and resources, social exclusion. Numerous economic, technical, natural, physical, human, social and politic factors affect the enhancement and maintenance of poverty. It is often associated with racial, religious or national affiliations. Poverty directly endangers human rights, limits possibilities of complete fulfillment of one’s potentials, jeopardizes health, causes high social costs and disturbs sustainable economic growth. At the individual level, the following key factors enhancing poverty risk have been recognized (WHO, 2006): unemployment; low level of education; size and characteristics of the family; sex; damaged health ; affiliation to a minority group; dwelling in a remote or underdeveloped areas. Decrease of poverty is a crucial development issue which global institutions tend to solve in cooperation with governments of countries all around the world, and especially the poor ones. Deprived people do not have resources at their disposal. Lack of physical and financial capital usually derives from the limited access to financial markets and impossibility to control and reduce consumption. Due to low education levels and poorly developed educational infrastructure, deprived population cannot have sufficient and appropriate human capital at its disposal. This problem is additionally aggravated by brain drain because those few with education very often leave their country in pursuit of better opportunities. Lack of natural capital is a consequence of rather frequent natural disasters which cause its decline. In addition, poor countries are characterized by fast population growth while the size of cultivated land remains the same. The issue of insufficient social capital can be associated with the shortage of social connections and relations among people. Furthermore, health is affected by different factors related to households and living communities. For example, at the household level, available income, possibility of purchasing necessary victuals, possibility of accessing necessary curative or preventive health care affect adults’ and children’s health. At the community level, health is affected by sanitary conditions, access to water, air quality and many other factors. Education and income have a direct impact both on

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health and poverty. Those with higher income can easier afford education, whereas better education and acquired knowledge enable making of more informed decisions and consequently, a potentially better health outcome. Education is therefore related to the level of use of health care services, selection of service providers, selection of private or public health care institutions, nutritional habits, etc. A reversed situation takes place in case of low income and deficient education, which is most often associated with poverty. It is an undeniable fact that the poor have a more difficult access to health care services. Transport to health care institutions, payment of health care services or medications require certain financial resources which many lack, especially in underdeveloped countries. On the other hand, as already mentioned, health may have an impact on the rise of income at the micro-level and the macro-level by way of factors such as increased inclusion into the labor market, higher productivity, investments in human capital, savings, fertility, lifespan and population’s age structure (Bloom and Canning, 2000). Getting employed and earning income are possible ways of reduction of poverty and social exclusion, but they cannot completely remove the risk. Employed population may be in danger of poverty if a person has a badly paid part-time job or a job below his/her qualifications so that he/she ends up underpaid. Unstable, short-term jobs increase the risk of unemployment and poverty. Health is one of the central components of different programmes for suppression of poverty. Health and poverty, being strongly connected and conditioned, require inclusion of the health concept in poverty suppression strategies and inclusion of poverty in health promotion strategies. If funds are properly allocated to health care, they may result in an improved health status and better quality of living of the population, which can in turn enhance working capacity and a possibility to generate added value as a consequence, and stimulates economic growth (WHO, 2006). In order to reduce poverty, health care systems should ensure the following (WHO, 2006): efficient prevention, disease control programmes and basic health programmes ; accessible and affordable health care services; efficient management systems so that the costs of accessible, high-quality and affordable services be sustainable for the economy. CONCLUSION The development perspective of health care systems depends on various factors and trends in the global environment. It is beyond any doubt that health care systems in the countries worldwide will face challenges related to human resources management, defining and reinforcing of patients’ rights, the need to better adapt to demographic trends, further developing and implementing of information technology systems, and increased concern about the health care quality. Health and economy are seemingly two separate and completely different categories. However, when taking into account different factors having an impact thereon, it may be concluded that people’s health is a basic motive and a prerequisite for the functioning of the economy. The development of policies which would support individual efforts and investments of the community into the health promotion and encourage laws on health protection and safety is of utmost importance. In terms of this it is necessary to ensure supervision over public procurement, plan the health care at the local level, conduct strategic planning, study household needs and include them in planning of the health care system, set up national and local committees for control of the health care, conduct food inspections and other activities influencing the people’s health.

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When defining strategies and programmes for poverty suppression and health care policies, it is necessary to focus on illnesses affecting the poor, to ensure financial accessibility of health care services and to improve efficient use of services by encouraging demand. However, although certain successes and improvements are showing through, the progress differs from country to country and it is different in various regions of the world. Non-realization of these goals means the continuation and strengthening of negative consequences which leave the economic, social and epidemiological burden of diseases in the community and the country in its entirety. Considering non-satisfactory progress in certain health care-related areas, changes which will ensure surmounting of the challenges and enable efficient health care interventions along with the provision of equality of health care services and access to them, are crucial. Ensuring indispensable financial resources and development of health care systems are necessary preconditions for meeting the set goals. REFERNCES Bloom, D. E., Canning, D. (2000) „The Health and Wealth of Nations“. Science, 287 (5456), pag1207-08. Čipin, I. (2012) „Demography of ageing in Croatia“. Conference: Innovative Health Initiative, Rovinj, 12-14 October, 2012, Collection of Papers. Eckholm, A. (2010) The future need for care: results from LEV project. Stockholm: Ministry of Health and Social Issues of Sweden Retrieved from: www.government.se/content/1/c6/15/36/57/d30b0968.pdf [8 January 2013] Grgić, M., Bilas, V., Franc, S. (2012) „Regional economic integrations in the world”. Zagreb: Sinergija. Huynen, M., Martens, P., Hilderink, H. (2005) „The health impacts of globalisation: a conceptual framework“. Globalization and health, 1 (14). Jack, W., Lewis M. (2009) „Health Investments and Economic Growth“. Policy research working paper 4877, Geneva: World Bank. Koller, T. (ed) (2010) „Poverty and social exclusion in the WHO European Region: health systems respond“. Copenhagen: WHO Regional Office for Europe. Madovsky, P., Alin, S., Masseria, C., Hernandez-Quevedo, C., McDaid, D., Mossialos, E. (2009) „Health in the European union. Trends and analysis“. Trowbridge: Cromell Press Group. Maxwell, R. (1981) „Health and Wealth“. Lexington: Addison Wesley. Münz, R. (2012) „Demographic trend in the world“. Innovative Health Initiative conference, Rovinj, 12-14 October 2012, Collection of Papers. Ostojić, R., Bilas, V., Franc, S. (2013) „Globalization, efficiency and sustainability of global health care systems“. Zagreb: Notitia Ltd. Peykarjou, K, Gollu, R.B, Gashti H.P., Shhahrivar R.B. (2001) „Studying the relationship between health and economic growth in OIC member states“. Interdisciplinary Journal of Contemporary Research in Business, 38 (2001) 8.

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Saltman, R. B., Figueras, J. (1997) „European health care reform: analysis of current strategies.“ Copenhagen: WHO Regional Office for Europe. WHO (2006) „Health financing: a basic guide“. Geneva: WHO. WHO (2010) „Health system financing: the path to universal coverage“. Geneva: WHO. World Federeation Of Public Health Asociations (1996) „Health, Economics, and Development: a People-Centered Approach“. WFPHA General Assembly. Retrieved from: http://www.wfpha.org/tl_files/doc/resolutions/positionpapers/global/HealthEconomicsDevelopme ntPeopleCenteredApproach.pdf. [1 August 2012]. BIOGRAPHY Mato Grgić is Professor at the Faculty of Economics and Business, University of Zagreb where he teaches the course International economics. His research appears in several international and domestic journals (the list of his papers is available at the link of the Croatian bibliography: http://bib.irb.hr/lista-radova?autor=14472). He can be reached at the Faculty of Economic and Business, University in Zagreb, J. H. Kennedy square 6, 10000 Zagreb, Croatia or via e-mail: [email protected]. Vlatka Bilas is Professor at the Faculty of Economics and Business, University of Zagreb where she teaches the courses International economics and Regional economic integrations. Her research appears in various international and domestic journals (the list of his papers is available at the link of the Croatian bibliography: http://bib.irb.hr/lista-radova?autor=265394). She participated at over 15 international scientific workshops and conferences. The author can be reached at the Faculty of Economic and Business, University in Zagreb at the address J. F. Kennedy square 6, 10000 Zagreb, Croatia or via e-mail: [email protected]. Sanja Franc is a senior assistant at the Faculty of Economics and Business, University of Zagreb where she teaches the courses International economics and Regional economic integrations. Her research appears in various international and domestic journals (the list of his papers is available at the link of the Croatian bibliography: http://bib.irb.hr/lista-radova?autor=265394). She participated at over 15 international scientific workshops and conferences. The author can be reached at the Faculty of Economic and Business, University in Zagreb at the address J. F. Kennedy square 6, 10000 Zagreb, Croatia or via e-mail: [email protected].

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IMPACT OF EMPLOYEE EVALUATION ON EMPLOYEE PERFORMANCE: A STUDY OF

BANKING SECTOR OF PAKISTAN Tayyaba Mir , Green Kingdom Industries, Jeddah Saudi Arabia Moezza Mir Ahmed , Marketing Specialist Jeddah Saudi Arabia

ABSTRACT

The purpose of this research is to pore over the employee evaluation influence on performance of the employees in Banking Sector. In this research the impact of employee evaluation on the Employee performance along with the impact on organizational performance was examined by accumulative information from banking sector of Pakistan. Data was collected through questionnaires from 150 employees and managers working in different Banks in Rawalpindi and Islamabad. Result indicates those appraisal blueprints incredibly affects the Employee Performance in Pakistan and Banking sector is intense to adopt it with all its factual/realistic features. Findings show that different practices of employee evaluation and employee performance have a burly relationship. INTRODUCTION Development is the basic need of every organization and employees wants to grow in their organization similarly organization wants to grow in the stream of competency. Competition is rising day by day and adaptation of new policies is a step towards new horizon of growth. To bring a change in any organization you have to work hard and need of loyalty from managers. Supervision needs to be vigilant concerning to the joint effort to the ramification of elevated technical integrity (chen, wu, leung, 2009). In old times organization works under the slow patterns where to bring a change must be very difficult for the management. To evaluate the work of any single employee was to deal with the dumb of heap, how much you investigate that deep dump you may find out. Now to get the accurate performance scale of the employee initiation of new modern procedures and even adaptation of spy services to look after whether organization is getting benefits from its employees or not. chen, wu & leung (2009) found that it has been disparage seeing that foremost to pessimistic team vibrant and upshots by personage performance appraising. As change brings benefits and perks for the middle management similarly it doubles the responsibilities and work load on the managers. The obligation of the supervisors by means to the main concern they situate on performance assessment and their expediency in mounting person resource within the corporation (Appelbaum, Nadeau, Cyr, 2008) Organizations culture becomes affected when cultural differences created and organizational culture becomes province culture apart. This is also another focused discussion or issue of the organizations and path to solve this problem comes in our mind is in hands of the managers. Managers are the stature who builds impression on the employee’s mind and its helps to eliminate this difference when they work out this practice along with their evaluation processes. Woodford & Maes (2002) argued that to remove cultural differences more supplementary exercises for administration to treat their employees. So change always brings positive improvement if it has a back of strong and affirmative school of thought. Major problems become minor and treated well by small effort.

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Evaluating a employee performance is in benefit of his growth along with the growth of the organization. It is considered as the most workable event in the organization in the part of year. The value support compensation on work ability and endorsement, perceptions of the evaluation system are synonymous in an organization (Mayor, Davis, 1999). In the appraising period employee show more performance to get optimistic remarks from the supervisors. This specific part of the time of year is similarly to the huge money making machine. Appelbaum, Nadeau & Cyr (2008) a manifold structure is able to present a milieu business through unswerving and steady parameters with which to compute its workers. If you notice the work graph would lead to upward direction in this part of the year when performance appraisal has to be done in the organization. Mayor & Davis (1999) found that in addition obligation that the worker was in attendance at job on every of the inspection supervision days. Educational institutes are highly keen to adopt the evaluation parameters similarly in practice of these parameters in Banks. Educational institutes are professionally treating this paradigm to fulfill their official requirements and also to improve their scheme of studies along with their management. Zhao (2009) argued that consideration to the instructors ‘association, rake monitoring, and advisory reactions and that persuade on instructors’ practiced presentation. We choose the banking sector in Pakistan because it is the most productive region in every country and in banking sector everyone has to perform more efficiently and according to the bank culture. Completion is high and they have to peruse more customers. Their behavior and treat-full attention to the customers shows organizations reputation. Our frame of work for this study in our research is for banking sector. As we know that these days the most complex structure of performance appraisal is in banking sector and even its become more hard for their teams because they invest on their employee. The investment on their employees is in terms of trainings and workshops for their employees to make them ready for the job. That’s why they become more cautious about this thing in case of hiring and firing the employees. we find out this instinct in different organizations than we find it out that how difficult for them to spend money on trainings of their employees and managers for their better performance. For the appraisal of the employees they make it more obvious whether it is harmful for the organization to keep unsatisfactory employees or not. They don’t take it for grant like some government organization where employees get their evaluation on the basis of their good contacts with their managers. LITERATURE REVIEW Employee Evaluation The employee evaluation process is the gradual process that any institute can take up to cultivate outstanding performances in the workplace. This method gives the magnificent tool to the institute to find out the strengths and weaknesses of the employees. Employee opinions about performance assessment rationale relatively than on definite projected purposes of the assessments, as selected by the institute (Youngcourt, Leiva & Jones 2007). Employee’s evaluation can have both positive and negative effects and rather it depends on the procedure of evaluation. Evaluation center first needs to explain the purpose of evaluation to the employees and to take them in confidence for their objectives. If evaluation is done in term of quality assurance then employees like to participate and give their feedbacks for the improvements and their satisfaction level. The information transference between administration and employees should be on personage basis even if they may achieve their objectives (Waal & Frijns, 2011). It leaves a positive effect in term of performance improvement, when an employee knows that he/she will be evaluated based on her performance then he/she tends to give better services to towards his/her job requirements. Liu & Batt (2010). By incorporate personal training, managing the activities of focus group and enticement, superintendent persuades individual performance after particular time period.

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It gives them an impression that there are some standards in the organization for the quality measurement with respect to their performance. And if they perform better, it will give them growing opportunities so they work better to prove their abilities. But this process works very well when decisions are taken on merits and people are given equal and fair chances. Youngcourt, Leiva & Jones (2007) argued that complete understanding of the strict manacles of in-servings, amendments of the locality and it’s formulate could dole out to achieve the administrative efficacy devoid of edifice uncomfortable strain on the plateful. For any organization the most important thing is to write a clear job description for each position and every employee should be clearly explained with their roles. Pater, Vianen, Bechtoldt & Klehe (2009) found that human resources should give preferences to the commotion selection which they formulate in their work and profession. They should be aware with the process of evaluation and also should know the minimum factors or criteria of the evaluation process. And also the process is done fairly in the interest of the organization to know if the person is suitable for the job/organization or not. And if there are few problems, he/she will be given an improvement plan with the clear feedback. Guerrero & Herrbach (2009) argued that Organizations that take peril by schooling their employees, mounting them and allocation of Information with them are performing measures that are professed generous, and consequently facilitation create conviction. This takes an employee into confidence and leaves a positive effect as well as a motivation towards better performance. But it is also observed that a sector of employees is dissatisfied with the evaluation process when it affects the hiring or firing rate of an organization. Meticulous occupation position may possibly dole out as a timely for human resources to imitate backside on peer or administrative rejoinder (Cob & Alfred, 2010). When all renewals are based on evaluations then it always pressures an employee as there can be many human personal factors involved in the process. Especially if an employee does not have a good relationship with the boss it would always feel pressured that no matter what he the boss will not gives him a good evaluation. And it is a subject of discussion for a long time. Farndale, Hailey & Kelliher (2009) argued that draw attention to the shrewd part of reliance in attaining worker perseverance and opinions of veracity. Also there are some jobs (more like technical or engineer based jobs) where many employees do not have right communication skills because by the time they get so technical that administration does not understand them and they a level of difference or gap in them. These people do not tend or work towards impressing their bosses and again it leads to a bad or incorrect evaluation. Employee Performance After myth of employee evaluation is impact on employee performance. It can affect the employee performance in both ways as we discuss it earlier in employee evaluation that it can be positive and it can be negative. The pressure on employee’s mind during the tough evaluation period can decrease the efficiency of the employee. According to Appelbaum, Roy & Gilliland (2010) budding conviction and unfasten associations between administrators and workforce is essential to attaining a valuable performance appraisal. We also find a conclusive discussion in another research paper which brought the clear picture. Wooford & Maes (2002) argued that the procedural performance appraisal can be used to make assurance that every worker is properly getting that his responsibility is part of the strategic planning in organization along with worker improvement is taking organization towards its goal. Employees are main figure of any organization who takes the organization towards the goal and man power is need of every organization. In fact every organization wants the best manpower for

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it and bears heavy mechanism to judge the employees either they are loyal to the organization or not. The conduction of such evaluating paradigm for the employees bring frustuation in employees occasionally in the work force when they don’t get the resultant feedback from the employer. The optimization may perhaps upshot in economize, even though this is not a crucial principal of the executive (Sitlington & Marshall, 2011). The most crucial decision can harm the manpower as well as the organization. For the benefit of organization and also increase the employee performance to get more positive results always try to give them healthy feedback. That can easily motivate the employees to give more attention to their job. Davis & Gibson (1994) proposed that requirements evaluation should aspire to make available an assortment of in sequence which will impinge on the blueprint of successive intercession. The pressure on employees can bring the unsupportive environment in the organization which can least the production or customization for the time being. To increase the production of the organization the atmosphere should be lean and calm as in the normal days for the employees as well as the administrators. It can bring mental stress to the administrator as well. Berman & McCabe (2006) found that directorial due development in the nonunion intercession stadium for the worker associations is a principled and very important. It is plausible that employees were no longer provoked to exercise improvement since there was no longer a connection flanked by progress and conclusions such as salary increases and promotions (Boswell & Boudreau, 2002). Intense environment can harm the organizational strategies and it may build the gap between the employees and administration, which is more harmful than the less productivity due to the malfunction of the organizational instruments. Carmeli & Thishler (2004) proposed that the insubstantial rudiments, jointly with environmental vagueness and geo graphical locality, robustly influence the performance of the confined establishment. The satisfaction level of the workers increased by suitable training sessions provided by the administration which enhances their working capabilities and professional skills. Employee’s productivity also increases after a positive feedback on their evaluation and appreciation. Bosewell & Boudreau (1999) proposed that measurements generally supports the workers work out together with enticement, support or extermination decisions, and resemblance and/or appreciation of finer or deprived performances. The perception of the appraisal automatically changes when it comes with the trust and productivity for the employee. He start believes that it is for his benefit along with the organization. The trauma which is generated be the stress of the appraisal system will be demolished. The after myth result will be the positive one. The assessment must be levelheaded and premeditated, and without predestined philosophies, it can be success of an assessment if it replicate of its plus points by the employees being evaluated (Appelbaum, Nadeau & Cyr, 2009). Najafi, Hamidi, Vatankhah & Purnajaf (2010) argued that the institutions which are persistently drawn in recognize their prospective by using a few scheming and upsetting apparatus, will definitely proceed more triumph copious in the exterior aggressive surroundings. So when an employee knows that a regular evaluation is done for the improvements, it gives an encouragement. Also evaluations are not worth if a proper feedback is not provided to an employee. It leaves an open loop and does not complete the whole process. Steel & Scotter (2003) argued that employees were capable to assess their own competency, and this self- knowledge spigot into supporting aspects in the performance procedure itself. Evaluation makes stress on employee’s mental status. Hypothesis 0 (Ho): Employee evaluation has positive relationship with employee performance.

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Theoretical Frame Work

RESULTS Table 1: Correlation Analysis

Employee Performance Employee Evaluation Employee Performance 1 .764** Employee Evaluation .764** 1

Correlation Analysis indicates a normal relationship between employee evaluation and employee performance. Table 2: Regression Analysis

beta t Sig Employee Performance 3.291 .001 Employee Evaluation .764** 13.551 .000

N=250, employee satisfaction. R square= .584, adjusted R square= .580 F=183.624, sig= .000 Regression analysis indicate value of .584 for R square which indicate that 58% covered by leadership while 42% remains unexplored. The value of F is 183.624 which are significant at 0.000 which indicates that the relationship of employee evaluation and employee performance. The beta value is .764**. Discussion and future work The result of calculated data is very much significant and it shows that there is very strong relationship with employee evaluation and employee performance. Significance result also shows that we select best sector to take the results for our research. It is for sure that employee performance in any organizations has many instincts to keep their moral high or low. To find out these instincts researchers have to study their behavior as well along with the environmental effects or cultural effects on their performance. Our selected instinct which has high impact on the employee performance is employee evaluation. Employee evaluation can bring the charging institution in employees either it may be in positive direction or in negative direction. Positive feedback always brings positive results in employees. These days banking sector of Pakistan is the most active sector which is trying to modify the old scheme of their development plans in their organizations and they are trying to adopt new developing paramounts in their organization so they can compete the market by bringing new line of products. We get the most significance results for our research in this sector that they are in actual trying to adopt the evaluation profiles for their employees to create best possible employees teams for their working environment.

Employee Evaluation Independent Variable

Employee Performance Dependent variable

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Our focus for future study in the similar research would be the comparison between private sector and government sector. As we already discuss in our research that in government sector the system followers are very few and even their paragons measures are in very bad condition. They never try to absorb the change in their official environment. They always prefer to work in a relaxing and conditional environment which is suitable for them. The working archetype of banking sector is totally different from the other sectors of Pakistan. The think tank of appraisal systems should develop implications of the theoretical explanation to adopt the evaluation system in companies in such way that system should not be disturbed and the effect of the performance of the employees during the assessment period. Pakistan has different culture and working environment form the west and they have many systems which need to be more refine and the evaluation system is one of them. Even though multinational companies bring many those systems in Pakistan which was not followed before. In terms of professional working environment those systems are likely adopt by the born companies of Pakistan. Evaluation system is one of the important and affecting figures of organization because many decisions are based on it. Employees look for their promotion and incentives through this evaluating Process and companies makes decision for the future prospect of employees after this comprehensive process of evaluation. Our result bring us almost 100% result for our studies which bring more vivid side of picture that employees are really get stressed because of this evaluation process and their performance fluctuate in different frames of periods. In the normal period of year they perform normal even some of them not perform good but in the season of assessment they perform more and show their hard work to get good evaluation results. REFERENCES Abraham, C., & Ashler, T. (2004). The Relationships Between Intangible Organizational Elements and Organizational Performance. Strategic Management Journal. 25, 1257-1278. Andre, D., & Miriam, F. (2011). Longitudinal Research into Factors of High Performance: The Follow-up Case of Nabil Bank. Measuring Business Excellence. 15, 1. Ann, D., & Lucy, G. (1994). Designing Employee Welfare Provision. Personnel Review MCB University Press. 23, 7. Debra, B., & Douglas, M. (2006). Compulsory Arbitration in Nonunion Employee Relations: A Strategic Ethical Analysis. Journal of Business Ethics. 66, 197-206. Eivina, I., & Mary, V. (2010). Learning From Evaluation by Peer Team: A Case Study of a Family Counseling Organization. International Journal of Training and Development. 14, 2. Elaine, F., Veronica, H., & Clare, K. (2009). High Commitment Performance Management: The Roles of Justice and Trust. Emerald Group Publishing Limited. 40, 1. Helen, S., & Verena, M. (2011), Do Downsizing Decisions Affects Organizational Knowledge and Performance. Management Decisions Journal. 49, 1. Irene, E., Annelies, E., Myriam, N., & Ute-Christine, K. (2009). Employees Challenging Job Experiences and Supervisors Evaluations of Promotability. Personnel Psychology. 62, 297–325.

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Kelly, W., & Jeanne, D. (2002). Employee Performance Evaluations: Administering and Writing Them Correctly in the Multi-National Setting. Equal Opportunities International Journal. 21, 4. Leila, N., Yadollah, H., Sudabeh, V., & Abdolhosein, P. (2010). Performance Appraisal and Its Effects on Employees Motivation and Job Promotion. Australian Journal of Basic and Applied Sciences. 12, 4. Roger, C., & James, H. (1999). The Effect of the Performance Appraisal System on Trust for Management: A Field Quasi-Experiment. Journal of Applied Psychology. 84, 1. Robert, P., & James, R. (2003). Organizational Performance Cycle: Longitudinal Assessment of Key Factors. Journal of Business and Psychology. 18, 1. Satoris, S., Pedro, I., & Robert, G. (2007). Perceived Purposes of Performance Appraisal: Correlates of Individual- and Position-Focused Purposes on Attitudinal Outcomes. Human Resource Development Quartly. 18, 3. Shuli, Z. (2009). 2+2 Program for Teachers’ Performance Appraisal in China. English Language Teaching Journal. 2, 2. Steven, H., David, N., & Michael, C. (2008). Performance Evaluation in a Matrix Organization: A Case Study (Part Two). Emerald Group Publishing Limited. 40, 6. Steven, H., David, N., & Michael, C. (2009). Performance Evaluation in a Matrix Organization: A Case Study Part 3.Industrial and Commercial Training: Emerald Group Publishing Limited. 41, 1. Steven, H., Michel, R., & Terry, G. (2010). Globalization of Performance Appraisals: Theory and Applications. Emerald Group Publishing Limited. 1. Sylvie, G., & Olivier, H. (2009). The Impact of Development and Information Sharing Practices on Employee Retention-Related Attitudes: Exploring the Mediating Role of Organizational Trust. Human Resource Management Journal. 18, 3. Tingting, C., Peiguan, W., & Kwok, L. (2009). Individual Performance Appraisal and Appraisee Reactions to Workgroups: The Mediating Role of Goal Interdependence and The Moderating Role of Procedural Justice. Emerald Group Publishing Limited. 40, 1. Wendy, R., & John, W. (2002). Separating the Developmental and Evaluative Performance Appraisal Uses. Journal of Business and Psychology. 16, 3. Xiangmin, L., & Rosemary, B. (2010). How Supervisors Influences Performance: A Multilevel Study of Coaching and Group Management in Technology – Mediated Services. Wiley Periodicals. Inc. 63. BIOGRAPHY Tayyaba Mir (MBA) Email: [email protected] , Project Coordinator Specialist (Green Kingdom Industries) Jeddah Saudi Arabia Contact No: 00966-567-763596

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Moezza Mir Ahmed (BBA) Email: [email protected] , Marketing Specialist Jeddah Saudi Arabia Contact No: 00966-595-660433

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DETECTION AND PREDICTION OF MANAGERIAL FRAUD IN THE FINANCIAL STATEMENTS OF

TUNISIAN BANKS Salem Lotfi Boumediene, Montana State University Billings

ABSTRACT

INTRODUCTION Garner (2009) defines fraud as “A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment”. Nevertheless, fraud in the financial statements is defined differently in the professional and academic literature. In fact, The International Federation of Accountants (IFAC), in the International Standard on Auditing (ISA) 240 -The Auditor’s Responsibilities Relating to Fraud in Audit of Financial Statements, 2009-, defines fraud as “an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage”. Moreover, the American Institute of Certified Public Accountants (AICPA) in the Statement on Auditing Standard (SAS) N°99 -Consideration of Fraud in a Financial Statement Audit- refers to fraud as “an intentional act that results in a material misstatement of the financial statements that are the subject of an audit”. In the SAS 99, two types of fraud are considered. First type of fraud are misstatements arising from fraudulent financial reporting such as falsification of accounting records or intentional omission from the financial statements of events, transactions, or other significant information. The second types of fraud are misstatements arising from misappropriation of assets such as theft of assets, embezzling receipts or causing an entity to pay for goods or services that have not been received. The results of the latest report published by the Association of Certified Fraud Examiners (ACFE) in 2012 are alarming. Indeed, the lighthouse observation of this report is that fraud costs 5% of total annual turnover of the companies affected. Our study is focused on the Tunisian banks since it came out that the banking sector had been subject to misuse of funds in form of granting large credits for projects without securing them or at an interest lower than it should be. LITERATURE REVIEW AND HYPOTHESIS The common motivations for companies to commit financial statements fraud are numerous. Economic incentives are common cases of fraud in the financial statements, as well as psychotic motivations, self-centered, or ideology. All these motivations can play important role of fraud in the financial statements. Pressures and economic incentives to match analysts' forecasts are fundamental motivations for listed companies subject to financial fraud. The psychological motivations associated with criminal behavior are very rare in our case. Egocentric motivations are outlined up in the fact that through fraud the person increases his personal prestige. In reality, this type of motivation can be seen as the desire of managers to fulfill a functional authority in

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society. Ideological motivations encourage executives to think that through fraud, they can become market leaders and consequently, improve their position in the society. Fraud in the financial statements are made, if the company has strong incentives, as well as economic reasons to announce a more favorable than it really should be, in accordance with Generally Accepted Accounting Principles (GAAP), financial performance. Empirical investigations (Carter and Stover (1991); Latham and Jacobs, (2000a, 2000b)) identified two fundamental variables, managerial ownership and the debt limit, which affect the extent of fraud in the financial statements. These studies have shown that when managerial ownership is between 5-25%, the opportunistic behavior of managers are expected and that the likelihood of engaging in financial statement fraud is higher. Previous research (Carcello and Palmrose (1994); Dechow et al. (1996); Lys and Watts (1994)) focused on examining measures of financial difficulties in terms of weak financial conditions and weak financial performance as motivational mechanisms. The conclusions reached by this researches, argue that the motivations of commitments of fraud in the financial statements increase when the firm encounter financial difficulties. Moreover, when the financial conditions of the company and its performance deteriorate, the chance to engage in fraud in the financial statements increase. Recent corporate governance scandals showed that in most companies, executives have incentives to increase profits to improve their bonuses. Giving shareholders the authority to choose the elements of bonuses to executives can eliminate these incentives. Studies developed on banks financial statements fraud are very rare, although the 2012 report of the ACFE shows that the banking and financial services are leading organizations victim by generating 16.7% of fraud cases. Moreover, according to the report, the managerial fraud ranks first and second in the ranking of fraudsters. Indeed, there is a strong correlation between the fraudster function within the company suffered from the fraud and the losses caused by the fraud. The median loss caused by the owner / manager is more than three times the loss caused by the managers, and more than nine times the losses caused by employees. Ramage et al. (1979) noted that financial institutions have different characteristics of errors than other sectors. Palmrose (1988) and Saint-Pierre and Anderson (1984) showed that about 30% of trials involved banks and loans institutions auditors. Kreutzfeldt and Wallace (1986, 1990) noted that the characteristics of inaccuracies in terms of error rate and false accounts vary across sectors. For example, banks are exposed to significantly higher error rates than other sectors companies in the liquidity accounts. In the same idea, Maletta and Wright (1996) examined 36 commercial banks and 14 savings and loan institutions. They showed that they are assigned the highest error percentage that overstated net income of about 68.8%. Following this review of the literature on the determinants of Fraud in the Financial Statements (FFS), which allowed us to discern the main reasons for it, we formulate now our assumptions and methodology that we will follow in the context of our empirical validation for Tunisian banks. The assumptions are classified into three groups, depending on the nature of ratios: Assumption relating to performance ratios H1 H11: banks with low performance ratios are exposed to a greater occurrence of managerial fraud. Assumption about growth ratios H2 H21: banks with high growth ratios are exposed to a greater occurrence of managerial fraud. Assumptions regarding capital ratios H3

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H31: banks with low capital ratios are exposed to an increased frequency of managerial fraud. METHODOLOGY The objective of this study is the prevention of managerial fraud before its occurrence. This is to test the predictive ability of a battery of ratios, one year, two years and three years before the occurrence of fraud. We adopt the methodology McAteer (2009). This choice is actually based on several arguments. Indeed, in addition to the scarcity of studies on the detection and / or prevention of fraud in banks financial statements, McAteer (2009) methodology uses three groups of financial ratios produced by the Federal Deposit Insurance Corporation (FDIC). Table 1 present the detail of the ratios used in our study. This methodology is based primarily on fraud prevention so; there is a concern for the prediction-detection and prevention of fraud, an issue that seems to be relevant in regards to the risk of banks failure. The period and selection of the sample The period chosen is based on the year of fraud; it generally extends from 1999 to 2010. For our analysis, we took into account three-year period prior to the occurrence of the fraud for fraudulent and non-fraudulent bank. We consider that a bank commit a fraud when the Financial Market Council (the Tunisian equivalent of the SEC) or the Government Accountability Office announced the occurrence of the fraud or its external auditors issued an adverse opinion to the financial statements. The data were collected directly from the web sites of the banks or from the printed annual reports available at the library of Central Bank of Tunisia (BCT). We conducted our empirical tests on a sample of 10 Tunisian universal banks, namely Attijari Bank (AT), Banque Internationale Arabe de Tunisie (BIAT), Banque Nationale Agricole (BNA) Tunisian Banking Company (STB), Banque de Tunisie (BT), Banque de l'Habitat (BH), Amen Bank (AB), Arab Tunisian Bank (ATB), Union Internationale de Banques (UIB), Union Bank for Trade and Industry (UBCI). The sample of fraudulent banks is composed of the BIAT, BH, BNA, STB, UIB, Amen Bank and Attijari Bank. This means that each bank perpetrated at least a fraud in one year. The control group or the control sample is composed of the remaining three banks namely BT, ATB and UBCI. Table 1 : Variables in the Study

Variable Definition Performance ratios

V1 (ASTEMPM) Assets per employee V2 (EEFFR) Efficiency ratio V3 (IDDIVNIR) Cash dividends to net income V4 (IDLNCORR) Net loans and leases to core deposit V5 (INATRESSR) Loss allowance to loans V6 (INLSDEPR) Net loans and leases to deposits V7 (INTEXPY) Cost of funding assets V8 (INTINCY) Yield on earning assets V9 (NIMY) Net interest margin V10 (NOIJY) Net operating income to assets V11 (NONIIY) Noninterest income to earning assets V12 (NONIXY) Noninterest expenses to earning assets

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V13 (ROA) Return on assets V14 (ROE) Return on equity V15 (ROEEINJR) Retained earnings to average equity

Growth ratios V1 (ASTEMPM) Assets per employee V16 (EQV) Equity capital to assets V17 (ROLLPS5TA) Growth ratio 1

Capital ratios V16 (EQV) Equity capital to assets V18 (RBC1AAJ) Core capital (leverage) ratio

The Model The McAteer (2009) methodology is adapted to the Tunisian context. The dependent variable is a dichotomous variable equal to 1 (probability of 100%) for fraudulent banks and is equal to 0 for non-fraudulent banks (probability of 0%). The independent variables are 18 financial rations out of the 26 ratios produced by the FDIC. Indeed, some data are not available for all banks and / or for the entire period, such as the ‘credit loss provision to net charge-offs’, ‘loan loss allowance to noncurrent loans’, ‘net charge-offs to loans’, etc. These ratios are classified into three categories, that is, performance ratios, growth ratio and capital ratio. Moreover, since the regression is to anticipate the managerial fraud before its occurrence on several time intervals, the fraud model can be rewritten as follows:

𝒀 = 𝑩𝟎 + 𝑩𝟏𝑿𝟏(𝒕−𝒚) + 𝑩𝟐𝑿𝟐(𝒕−𝒚) + ⋯+𝑩𝒌𝑿𝒌(𝒕−𝒚) + 𝜺 (1) Where P is the probability of occurrence, B0 is a constant and Bi are the coefficients associated with the independent variables, Xi are the independent variables, t is the year of occurrence, y there is the interval in years, and 𝜀 is the model error. The list of the financial ratios (independent variables) used our analysis summarized in table 1. The use of the logistic regression completes the predictive aspect of the study. In fact, logistic regression predicts or explains a nonparametric binary dependent variable by determining the probability of the independent variables that influence the dependent variable. THE RESULTS The examination of the correlation matrix presented in table 4, allows us to conclude the existence of multicollinearity. According to Kennedy (1998) multicollinearity in a data set is considered if at least one simple correlation coefficient between the independent variables is at least 0.8 in absolute value. This observation brings us to eliminate four variables from the model to avoid having a biased model. The eliminated variables are:

V5: Loss allowance to loans V9: Net interest margin V12: Noninterest expenses to earning assets V18: Core capital (leverage) ratio

The logistic regression estimates of the equation Fi = α0 + α1V1 + α2V2 + α3V3 + α4V4 + α5V6 + α6V7 + α7V8 + α8V10 + α9V11 + α10V13 + α11V14 + α12V15 + α13V16 + α14V17 + εi, where 𝑉i are defined in table 1. We created lagged variables for one year, two years and three year before the year when a bank perpetrates fraud. Hence, the structure of our variables is 𝑉𝑖,𝑡, 𝑉𝑖,𝑡−1, 𝑉𝑖,𝑡−2, 𝑉𝑖,𝑡−3, where i varies from 1 (V1) to 17 (V17). The results show that the eleven variables selected by the logistic regression procedure (Forward Stepwise) to be in the model, explain the fraud at 59.1 for Cox and

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Snell Pseudo R² and 71.1% for McFadden Pseudo R². Both measures are a good value for a logistic regression performed on a number of observations of 120 (10 banks observed over 12). Nine ratios out of eleven are significant. These ratios measure the performance. We can conclude that the hypothesis H11: banks with low performance ratios are exposed to a greater occurrence of managerial fraud is verified. The ratio V1 is also a measure of the growth (Growth ratio) and significant. We can conclude, also, that the hypothesis H21: banks with high growth ratios are exposed to a greater occurrence of managerial fraud is verified. The absence of significant Capital ratios allows us to rejects and hypothesis H31: banks with low capital ratios are exposed to an increased frequency of managerial fraud. The model for prediction and detection of fraud in the Financial Statements of Tunisian Banks can be written as follow:

𝐅𝐭 = −𝟒𝟏𝟑.𝟖𝟓𝐕𝟐,𝐭−𝟐 − 𝟔𝟏𝟏.𝟏𝟐𝐕𝟐,𝐭−𝟑+ .𝟕𝟐𝐕𝟑,𝐭 + 𝟒.𝟓𝟖𝐕𝟑,𝐭−𝟑 + 𝟏𝟒.𝟏𝟔𝐕𝟒,𝐭 − 𝟐𝟒.𝟎𝟑𝐕𝟒,𝐭−𝟏−.𝟑𝟖𝟐𝐕𝟔,𝐭 − 𝟐𝟒𝟖.𝟒𝟖𝐕𝟏𝟎,𝐭 − 𝟖𝟎𝟒.𝟏𝟑𝐕𝟏𝟏,𝐭 − 𝟗𝟕.𝟎𝟒𝐕𝟏𝟒,𝐭−𝟐 + 𝟐𝟓.𝟒𝟕

(2)

The percentage of correct classification banks as non-fraudulent is 93.4% and for the fraudulent banks is 82.8%. The Overall Percentage classification rate is 90%, which is considered as a good classification rate. From this analysis, we can conclude that Tunisian banks having low performance or high growth ratios are exposed to commit managerial fraud. However, Tunisian banks having low capital ratios are less exposed to commit managerial fraud. The logistic regression model developed is a good tool for detecting and predicting managerial fraud for Tunisian Banks. This model shows and confirms (McAteer (2009)) findings that managerial fraud is a process can take up to three before its occurrence and detection. CONCLUSION Fraud is defined by Garner (2009) as “A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment”. Nevertheless, fraud in the financial statements is defined differently in the professional and academic literature. The results of the latest report published by the Association of Certified Fraud Examiners (ACFE) in 2012 are alarming. Indeed, the lighthouse observation of this report is that fraud costs 5% of total annual turnover of the companies affected. Moreover, banks are ranked first among companies’ victims of fraud. This paper presents a model for prediction and detection of fraud for Tunisian banks. The methodology is to take a battery of financial ratios used by the Federal Deposit Insurance Corporation (FDIC) as indicators of the financial situation of a U.S. bank and tries to test their predictive power before the occurrence of fraud. The results we have achieved, obtained by performing a logistic regression, show that Tunisian banks having low performance or high growth ratios are exposed to commit managerial fraud while Tunisian banks having low capital ratios are less subject to increased frequency of managerial fraud. The logistic regression model developed in this paper explains the fraud at 59.1 for Cox and Snell Pseudo R² and 71.1% for McFadden Pseudo R². Both measures are a good value for our logistic

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regression. The Overall Percentage classification rate is 90%, which is considered as a good classification rate for the model. Many users, such as, the Financial Market Council (the Tunisian equivalent of the SEC), the Government Accountability Office, the auditors, among others can rely on the model developed in this paper and use it as a tool to detect and predict managerial fraud. BIOGRAPHY S. L. Boumediene Has a PhD in Business Administration (Accounting) from the University of El Manar, Tunisia. Before Joining Montana State University Billings, Dr. Boumediene taught both financial and managerial accounting in both undergraduate and graduate levels at the top business schools in Tunisia. Dr. Boumediene has been publishing his research work in academic journals such as Journal of Modern Accounting and Auditing and the Journal of Management and Business Research among others. Dr. Boumediene published a book on statistical characteristics and quality of accounting information in 2013. E-mail: [email protected]

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STRATEGIC IMPLICATIONS OF DIFFERENT

CRITERIA FOR PROJECT PORTFOLIO SELECTION

Guilherme Vitolo, University of São Paulo Flavio Cipparrone, University of São Paulo

ABSTRACT

This paper evaluates the relationship between corporate strategy and quantitative financial criteria for choosing the optimal set of projects for the Capital Budget. On the basis of the competitive dynamics of the industry and the corporate strategy, different sets of projects should be selected to compose the project portfolio. The choice of the best criteria for project selection is mandatory, even though it is hard to find in both corporate and academic literature recommendation about which criteria should be selected to fit a predefined strategy. In order to evaluate that, this paper analyzed several combinations of risk and return metrics to compare the resultant set of projects and their strategic implications. The results pointed out that while Net Present Value combined with Value at Risk provided the most relevant results in terms of long term value creation, it is important to figure out how different strategies can be best implemented through portfolios selected by other criteria – e.g., fast returns on investment obtained by the Adjusted Payback Period and high profitability based on the Profitability Index or Internal Rate of Return. Such results present a relevant contribution for managers who typically face with the Capital Budget problem. JEL: G11, G31 KEYWORDS: Capital Budget; Project Portfolio Management; Project Portfolio Strategy; Project Selection; Monte Carlo Simulation; Investment Decision Criteria INTRODUCTION The current globalized economy poses the challenges of increased competition among companies, and the mobility of capital and changeability of stakeholders (Bötzel and Schwilling 2000). Companies aim to create sustainable value in order to face such challenges. The long-term market value maximization of a company is the best criterion to equilibrate the tradeoffs among conflicting stakeholders, where value creation can be understood as the increase in a firm’s market value, that is, the expectation of present and future cash flow generation (Brigham and Ehrhardt 2007; Hawawini and Viallet 2007). According to Porter (1980), companies competing in high growth industries may establish their position and increase the firm’s market value through product development, marketing, innovation, acquisition of new clients, etc. Such companies are focused on growth; therefore, value creation is related to investments that aim for long-term cash flow generation. In addition to growth, if the industry is newly formed or emergent, risk appetite could increase because of the high level of uncertainties about the future. When competing in large revenue industries that are slow growing, companies look for economies of scale, cost efficiency, selective product improvements, retention and acquisition of profitable clients, etc. Value creation is related to efficiency in capital allocation, which means that investments are more selective, risk taking is an important concern, and profitability may be

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more important than simply growing revenues. On the other hand, if the industry’s market is shrinking, or competition is severely damaging profitability, the companies would have to maintain or mitigate the decrease of value. Among the options, companies could change business lines, client segments, divest and capture residual value, etc. When investing in such situations, companies look for short- or medium-term returns; therefore, concerns about investment payback and divestment options may drive the capital budgeting process. Companies implement their investments through projects that have to be managed in a portfolio structure. Only the most favorable investments have to be chosen, since companies have limited resources. According to Chen and Jiang (2004), Pennypacker and Dye (2002) and Almeida and Mota (2011), the main problems in project selection and portfolio management include the gap between strategy and investment selection, unprofitability, and unbalanced portfolios in terms of risk, schedule, and size of projects. The first step in facing such challenges is to improve the project selection methodology. The selection must consider quantitative financial metrics, such as Net Present Value (NPV), Internal Rate of Return (IRR), etc., and could be complemented by qualitative criteria, such as strategic alignment, company expertise and efficiency in resource allocation. For example, Archer and Ghasemzadeh (2000) evaluated a weighted average approach using several qualitative criteria (such as market suitability, resource limitation, and project interdependencies), and quantitative criteria (NPV and project timing). Such models aimed to solve the strategic alignment problem of investment in a qualitative way; however, qualitative judgments could lead to disputable results. In addition to these limitations, their conclusions ignored the intrinsic relationship between the financial criteria and corporate strategy. Although such studies apply quantitative financial criteria to select project for the Capital Budget, they do not present nor discuss the strategic implications of the different resultant set of projects. Thus, the objective of this paper is to evaluate the benefits of the different quantitative financial criteria and their strategic implications for project selection. Section 2 presents the criteria for project selection, implemented through a stochastic simulation method described in Section 3. Section 4 presents the major results from the simulations and Section 5 summarizes the conclusions of the study. LITERATURE REVIEW One of the most commonly used metrics is the Net Present Value (NPV), which is the sum of discounted cash flows of the project. Present Value is considered to be the metric that is most aligned to long-term value creation, since it measures the amount of present and future cash flows generated by an investment. Two other important metrics are the Internal Rate of Return (IRR) and the Profitability Index (PI). They measure the return of invested capital, that is, capital efficiency. The Payback Period (PBK) consists of the amount of time needed for cash flows to achieve breakeven. It is a measure of how fast the capital returns. Given that the traditional Payback Period criterion ignores the time value of money, Hawawini and Viallet (2007) recommended the Adjusted Payback Period (APBK), which uses discounted cash flow figures instead of non-discounted amounts. According to the same authors, each selection criterion takes into account a different aspect of an investment’s cash flow. While NPV “estimates how much the project would sell for if a market existed for it”, APBK focuses on how fast the investment delivers return. So, while the latter criterion is favorable for short-term investments, NPV selects high-value cash flows, which usually happens in the long term. The resultant portfolios are different and they support different strategies: fast return versus long-term value creation.

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Although return metrics alone can be used to define criteria for project selection, it is important to consider risk components when dealing with relevant uncertainties. Risk may be incorporated directly into the maximization objective function, or indirectly into the interest rate applied to discount cash flows. The composition of the discount rate may include three components: the risk-free rate, the additional cost of capital employed in the project and the additional risk given the cash flow uncertainties (Brigham and Ehrhardt 2007; Eschenbach and Cohen 2006; Hawawini and Viallet 2007). This method involves several complexities, since the third component is difficult to calculate because it represents the uncertainties in future cash flows. Moreover, the use of the third component implies a different discount rate for each project, which complicates project comparison. Another problem with this approach is the lack of historical data to compare the project’s discount rate with similar earlier projects (Eschenbach and Cohen 2006). The alternative approach that is implemented in this paper involves the consideration of a risk statistic directly in the maximization formula. There are three methods to implement this last approach. Better and Glover (2006) showed that the first method maximizes the mean NPV of portfolios, imposing a constraint that the standard deviation of NPV be smaller than a predefined value. The second method involves considering risk as a separate measure plotted on an axis different from that of the return metric, which leads to a frontier visualization as the standard Markowitz frontier. Such approaches are more complex to analyze, because the decision-making process involves complex questions, such as “what is the risk appetite of the company?” and “how much risk should we bear to achieve our strategic goals?” The third method consists of using an indicator that mixes the return metric and the risk statistic; for example, divide the mean of the return metric by its standard deviation, which implies that the company aims for the highest return per unit of risk. Another indicator that mixes risk and return is the Risk-Adjusted Return on Capital (RAROC), which consists of the mean of the return metric divided by its VaR (or CFaR). The expressions (1) and (2) present these indicators, as discussed in Better and Glover (2006) and Prokopczuk, Rachev, and Träuck (2004), respectively:

)( )(

X XSNR

σ µ

= (1)

)()( )(

)( )(

XpctX X

XCFaR XRAROC

i− == µ

µµ (2)

Where: SNR = Signal to Noise Ratio, the reciprocal of the Coefficient of Variation; RAROC = Risk- Adjusted Return on Capital; μ(X) = expected value of the distribution of the random variable X; σ(X) = standard deviation of the distribution of X; CFaR(X): Cash-flow at Risk of the distribution of X; pcti(X): ith percentile of the distribution of X (e.g., fifth percentile for 95% of confidence interval); X = any return metric (e.g., NPV, IRR, PI or APBK). DATA AND METHODOLOGY In order to analyze the strategic implications of each criterion for project selection, a Monte Carlo simulation model was implemented to compose portfolios from a total of ten projects. These projects’ cash flows were based on the projects under evaluation by a Brazilian electric energy company. Even though companies in general have hundreds of projects and the selection process

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must consider such larger amounts, this paper evaluated a small set of projects in order to test the metrics in all project combinations and to focus on the project selection criteria comparison. The simulation model calculated the return and risk statistics of all 1024 portfolios formed by any combination of the 10 projects. For a larger number of projects, optimization techniques such as mixed integer programming should be used to reduce the processing time (Kitanidis and Philbrick 1999). The structure of the simulated projects consisted of 4 phases: two initial investment phases, the operational phase, and the project closure phase. The model took into consideration uncertainties in revenues and costs (Hawawini and Viallet 2007). Revenues had two sources of uncertainties (i.e., the number and the price of sales), while costs had one source of uncertainty (i.e., the fixed cost amount). The uncertainties were modeled using two factors: intensity and randomness. Each project cash flow was calculated on a monthly basis according to expressions (3) to (6).

tttt IVCTRVCF −−= (3)

3

1)1()1( N

uuRBRV ppvvt ⋅⋅+⋅⋅+⋅= αα (4)

3

1)]1()1()1[( N

uuCBCT vvcct ⋅⋅+⋅+⋅+⋅−⋅= αϕαϕ (5)

 

 



> ≤<

≤ =

2

2122

111

, ,/ ,/

NtRI NtNNI

NtNI IVt (6)

Where: RVt = revenue of the project in time t; CTt = total cost of the project in time t; IVt = investment of the project in time t; RB = baseline of the total revenue of the project; CB = baseline of the total cost of the project; αv = uncertainty (intensity) factor related to volume of sales; αp = uncertainty (intensity) factor related to price of sales; αc = uncertainty (intensity) factor related to fixed costs; uv = random variable sample related to volume of sales; up = random variable sample related to price of sales; uc = random variable sample related to fixed costs; φ = a constant related to the ratio of variable per fixed costs; N1 = number of time units of the first investment period; N2 = number of time units of the second investment period; N3 = number of time units of the operational phase of the project (project’s total duration minus the duration of the investment phases); I1 = total amount of the first investment period; I2 = total amount of the second investment period; RI = Recurrent investments (during the operational phase of the project). The Appendix A presents the total investment amounts for the ten projects are presented. After the two investment phases, projects start their operational stage, during which there are revenues, costs, and recurrent investments. These first two cash flow components are calculated using the formulae in (4) and (5); the recurrent investments are presented in Appendix B. Uncertainty intensities (α values in (4) and (5)) were adopted as fixed values depending on each project component (see Appendix C). RESULTS AND DISCUSSION

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Based on the simulations, the 1024 portfolios were ranked for each selection criterion (presented in Appendix D). The results (Appendix E and Appendix F) show that portfolios ranked by NPV present long term value creation potential, since the resulting portfolios were composed of long lasting projects with largely positive cash flows. When risk is taken into consideration, the portfolios typically excluded risky projects. Portfolios ranked by the ratio of NPV/CFaR or NPV/Standard Deviation criteria present smaller NPV when compared to the portfolios selected without including risk. This happens because such criteria select projects with high return per unit of risk rather than high absolute return projects, as projects with highest returns may be riskier. When evaluating the portfolios optimized by the other criterion, IRR and PI selected portfolios that generate high return on investment, which does not necessarily mean portfolios with large cash flows. Small and very profitable projects may be selected, instead of large and not so profitable projects. Portfolios optimized by APBK focus on short-term returns, instead of long term value creation; this result was as expected. Portfolios optimized using the IRR or PI presented higher APBK than portfolios optimized by NPV, indirectly implying the reduction of the amount of time until the cash flow achieves break even. To evaluate how general are the conclusions, all simulations were repeated four times using 10 new projects each time. Each new project changed in size (investment amount and schedule), risk profile (degree of uncertainty) and economic feasibility (total revenue and total costs amounts). All above mentioned conclusions were verified on the additional simulations. CONCLUDING COMMENTS The choice of projects to make up the portfolio must be aligned with the corporate strategy and the context of the industry in which the company is competing. The researched studies in the literature usually compare only few metrics or frameworks for project selection but do not consider the strategic implications of each criterion. This paper deals with the most common frameworks and criteria for project selection, and also focuses on implementing transparent financial criteria, instead of complex models or “black-box” weighted average criteria. Comparing the portfolios ranked by each criterion, the relationship between project portfolio selection and corporate strategy becomes evident. The NPV criterion generates portfolios with long term large and positive cash flow streams, which could foster a company’s growth when competing in high growth industries. The IRR and PI criteria generate higher return on capital investment, which drive capital efficiency. Such properties are interesting for companies competing in slow growth but large revenue industries, where capital efficiency is required. Interestingly, portfolios optimized by these criteria selected both long term and short term projects. The APBK criterion generated portfolios that were focused on short term returns, which may be required by companies that are competing in shrinking industries or aiming to phase out a specific business line. The introduction of risk in the selection criteria, combined with NPV, generated portfolios with higher return per unit of risk. Thus, when operating in a critical economic environment, companies should use risk-return criteria to select their project portfolios. It is important to pay attention that risk-return criteria work when the discount rate does not consider the project inherent risk. When the cash flow discount rate considers the project risk, it is suggested not to use a risk return criterion to avoid double counting. The use of only 10 projects was a constraint imposed by the authors to test exhaustively all possible project combinations. For larger groups of

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projects, it is recommended to employ optimization techniques, even though there would be no guarantee to find the global optimum result. APPENDIX Appendix A: Duration And Investment of Each Project (Represented on Each Column)

project number

duration and investment 1 2 3 4 5 6 7 8 9 10

total duration (in months) 16 24 16 13 14 16 16 9 22 26

n1: duration (in months) 3 4 2 1 3 3 3 1 1 3

n2: duration (in months) 1 5 2 1 2 2 1 1 2 1

i1: investment (in $ million) 36,1 40,1 17,4 35,1 7,9 8,7 23,5 20,1 15,1 14,1

i2: investment (in $ million) 15,0 14,1 55,4 12,7 44,8 24,0 28,5 22,5 22,1 49,3 Each project was considered to have two investment phases: one related to a feasibility study and the second the investment to rollout the project itself. Appendix B: Revenues, Costs, and Other Characteristics of Each Project’s Cash Flow

project number

project characteristics 1 2 3 4 5 6 7 8 9 10 rb: revenues1 271.8 178.2 245.5 79.3 140.8 136.1 228.5 123.2 120.5 80.6 cb: cost2 30.7 56.3 81.6 45.9 65.9 26.1 43.1 42.2 30.5 53.9 ri: recurrent investments3 5.1 4.3 3.6 5.7 3.7 2.6 0.5 3.0 2.2 7.6 φ: variable/total costs4 60% 60% 60% 70% 70% 40% 50% 50% 60% 70% final investments as percentage of investment5 6% 8% 6% 7% 6% 7% 6% 7% 3% 10% revenues at the end of the project as percentage of revenue6 9% 17% 10% 10% 10% 17% 12% 24% 11% 14%

1 Total baseline revenue of the project, in $ millions 2 Total baseline cost of the project, in $ millions 3 Total monthly investments during operation phase (non-investment periods), in $ million 4 Relation between variable and fixed costs (percentage) 5 Final investments to close the project 6 Final revenues from selling non-depreciated assets Appendix C: Uncertainty (Intensity) “α” Factors of Each Cash Flow Component of a Project

PROJECT NUMBER

UNCERTAINTY FACTOR 1 2 3 4 5 6 7 8 9 10 Uncertainty of number of sales 3 1 4 4 4 2 4 3 2 3

Uncertainty of price of sales 2 1 3 2 4 3 4 3 1 4 Uncertainty of costs 4 3 3 3 3 4 1 2 3 4

These factors were multiplied by random variables u in the model to implement randomness. Appendix D: Criteria For Project Portfolio Selection Implemented in the Simulation Model

criteria for project selection criterion 1 maximize the mean of npv criterion 2 maximize the mean/cfar of npv criterion 3 maximize the mean/standard deviation of npv criterion 4 maximize the mean of irr criterion 5 maximize the mean/cfar of irr

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criterion 6 maximize the mean/standard deviation of irr criterion 7 maximize the mean of pi criterion 8 maximize the mean/cfar of pi criterion 9 maximize the mean/standard deviation of pi criterion 10 minimize the mean of apbk criterion 11 minimize the cfar/mean of apbk criterion 12 minimize the standard deviation/mean of apbk

Appendix E: Percentage of Participation of Each Project in the Top 8 Portfolios Selected by Each

Criterion

PROJECT NUMBER

SELECTION CRITERION 1 2 3 4 5 6 7 8 9 10

NPV 100% 90% 30% 10% 30% 100% 80% 60% 100% 20%

IRR 100% 70% 30% 30% 30% 100% 70% 20% 100% 0%

PI 90% 100% 20% 60% 40% 90% 60% 80% 100% 60%

APBK 70% 0% 0% 0% 0% 30% 40% 90% 20% 0% For example, the top 8 portfolios selected using the NPV criterion were composed basically by projects 1, 2, 6, 7 and 9, in general projects with long term positive cash flows.

Appendix F: Simulation Results For the Project Group Under Evaluation by a Brazilian Energy Company

return statistics of the portfolio optimization criteria μ(npv) μ(irr) μ(pi) μ(apbk) npv 708 17.6% 2.9 7.5 npv / cfar 577 17.9% 3.0 7.6 npv / std 603 18.7% 3.1 7.3 irr 318 27.3% 4.2 6.0 irr / cfar 534 18.4% 3.2 7.6 irr / std 492 18.0% 3.2 7.9 pi 363 26.7% 4.3 6.2 pi / cfar 525 15.1% 2.6 8.2 pi / std 492 14.0% 2.5 8.7 apbk 294 25.0% 3.6 5.8 apbk / cfar 225 10.1% 2.0 13.8 apbk / std 265 9.9% 2.1 11.6

The 10 projects were combined in all 1024 possible portfolios and the portfolios were ranked by the Optimization Criteria (in each line). For the top ranked 8 portfolios by each criterion, the table presents the average of the return statistics (in each column). For example, the gray cell (first line, first column) is the average NPV of the top 8 portfolios ranked by the NPV criterion. The right adjacent cell (first line, second column) presents the average IRR of the top 8 portfolios ranked by the NPV criterion, and so on.

REFERENCES Almeida, A. and Mota, C. (2011). “A multicriteria decision model for assigning priority classes to activities in project management”. Annals of Operations Research, available at http://www.springerlink.com/content/y2v7h623p6hu2784/about/ Archer, N. and Ghasemzadeh, F. (2000). “Project Portfolio Selection through Decision Support”. Decision Support Systems, Elsevier, 29, 73-88.

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Better, Marco, and Glover, F. (2006). “Selecting Project Portfolios by Optimizing Simulations”. The Engineering Economist, Institute of Industrial Engineers, 51, 81-97. Bötzel, Stephan and Schwilling, A. (2000). Managing for Value: Successful Strategies for Creating Company Value, 3rd ed., Oxford Capstone. Brigham, Eugene F., and Ehrhardt M. (2007). Financial Administration – Theory and Practice. 10th ed., Thomson, 70-103. Chen, Q. and Jiang, W. (2004). Positive hurdle rates without asymmetric information. Finance Research Letters, Elsevier, 1, 106-112. Dye, L. and Pennypacker, J. (2002). Managing Multiple Projects: Planning, Scheduling and Allocating Resources for Competitive Advantage. CRC Press. Gustafsson, J. and Salo, A. (2005). “Contingent Portfolio Programming for the Management of Risky Projects”. Operations Research, ABI/INFORM Global, 53(6), 946-1029. Hawawini, G. and Viallet, C. (2007). Finance for Executives: Managing for Value Creation, 3rd ed., Thomson South-Western. Kitanidis, P. and Philbrick, C. (1999). “Optimal Conjunctive-Use Operations and Plans”, Water Resource Research, 34(5), 1307-1316. Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors, Simon and Schuster, 2rd Edition. BIOGRAPHY Guilherme Ferracin Vitolo is MSc candidate at University of São Paulo, Escola Politécnica, Department of Electronic Systems Engineering. Guilherme is currently Project Manager at Ernst & Young, Advisory for Financial Services Companies and in the past has worked for Roland Berger Strategy Consultants and Promon Logicalis. He can be reached at University of São Paulo, Av. Prof. Luciano Gualberto, travessa 3, nº380. Edifício Eng. Mário Covas Júnior – 1 andar. CEP 05508-010 - São Paulo – SP, [email protected], [email protected]. Flavio Almeida de Magalhães Cipparrone is PhD and Associate Professor at University of São Paulo, Escola Politécnica, Department of Electronic Systems Engineering. Flavio has developed several projects in the field of System Optimization for Water and Infrastructure companies. Flavio’s current researches comprise the application of System Optimization techniques for asset valuation. He can be reached at University of São Paulo, Av. Prof. Luciano Gualberto, travessa 3, nº380. Edifício Eng. Mário Covas Júnior – 1 andar. CEP 05508-010 - São Paulo – SP, [email protected], [email protected].

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THE ASSESSING OF GOING CONCERN FOR THE ITALIAN LISTED COMPANIES: RELEVANCE AND

IMPLICATIONS Roberta Provasi, University of Milan-Bicocca Patrizia Riva, Piemonte Orientale University.

ABSTRACT

The research is aimed to carried out dual purpose. The first to investigate the going concern assumption for Italian listed companies by analyzing the contents of the audit reports issued by the independent auditors. For the definition of the statistical sample of companies we considered the following parameters: a) all the companies listed on the Italian Stock Exchange; b) it was excluded the foreign companies listed on the Italian stock market, c) it has been considered the report of the auditors on the 2012 consolidated financial statements; d) companies for which they are listed different types of shares were considered a single once. The results attest that 80% of Italian listed companies have no problems of business continuity but the remaining 20% showed significant problems. The second purpose to analyze the trend of the going concern assumption for Italian listed companies, by making a comparison over time between 2009 - 2012 using a research issued Italian Chartered Accountants Association. JEL: M41, M42 KEYWORDS: Going Concern, Audit’s Opinion INTRODUCTION The economic crisis has affected the whole world since 2008 and especially in Italy it is still ongoing and there seems. Emerging economies has slowed their growth economies also the "mature" have entered a downward spiral that led to a drastic deterioration of the macroeconomic indicators. In this difficult economic environment it is essential to stakeholders receive accurate information from companies on their health status and their ability to continue the business and to safeguard f going concern assumption. The problem of verifying the existence of the assumption of going concern is particularly relevant in the current period, not only in Italy but worldwide. The heightened importance is due to the slowdown of the world economy which led to recession. The standardization of accounting standards has allowed us to standardize the procedures for the preparation of financial statements in all its aspects. Even the assumption of going concern assumes a certain uniformity of measurement and presentation in the financial statements. The going concern assumption is a fundamental principle in the preparation of financial statements. Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations. The remainder of the paper is organized as follows. The next section describes the relevant review and the standards related to the scope of this research on going concern assumption. Next we describe and discuss the data of analysis and in the final section some concluding comments. LITERATURE REVIEW AND STANDARDS PRINCIPLE

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The going concern assumption is universally understood and accepted by accounting professionals, however it has never been formally incorporated into U.S GAAP ( Hahn, 2011). In the Italian system the main standard rules relating to going concern are contained in: 1) Civil Code, Article 2423-bis; 2) No OIC. 5 - Financial Statements for liquidation’s company 3) No OIC. 11 - Financial Statements, objectives and postulates; 3) IAS 1 - Presentation of Financial Statements; 4) Auditing Standard nr. 570 - Going Concern; 5) The Bank of Italy / Consob / Isvap. 2 of 6 February 2009; 6) Consob Communication no. 9012559 dated 6 February 2009 Particularly Article 2423-bis of the Civil Code entitled "Basis of preparation of Financial Statements" states that: "In preparing the financial statements, the following principles should be observed:" the evaluation of the financial statement must be made prudently and in a going concern basis, as well as considering the economic function of the assets and liabilities;” The principle of preparation of the financial statements on a going concern assumption is relevant for Italian companies. The OIC 5, entitled " Financial Statements for liquidation’s company”, in paragraph 7 defines a company in continuity ("going concern") as "company functioning and intended to continue the business for at least twelve months after the date of the balance sheet. The OIC 5, unlike the provisions set out under the Civil Code, defines a time-frame of 12 months to refer to evaluate business continuity. The OIC 11, entitled "Financial Statements - purpose and postulates", interprets and describes the main postulates and principles for annual financial statements, including the going concern assumption. The OIC 11, aims to describe the goals and assumptions in the preparation of the financial statements. Even before listing the postulates states that "the financial statements is the accounting document that provides financial and economic information relating to companies, characterized by business continuity. It 'obvious that the going concern basis, although not counted among the 11 OIC fundamental postulates, is mentioned even before the same, placing it in a prominent position. It is clear from reading the rules and principles just referred to as the going concern assumption should be considered an element of absolute dominance. Among the international accounting standards, there are numerous references to the assumption of going concern. First, the principle of going concern is included in the IFRS Framework as "underlying assumption" for the preparation of the financial statements. The theme is explored in IAS 1, the Paragraphs 23 and 24 entitled "Presentation of Financial Statements", which states: "In the process of preparing financial statements, management shall make an assessment of the entity's ability to continue as a going concern ..." In estimating the assumption of a going concern, management takes into account all available information about the future, which must be at least, but not limited to, twelve months after the date of the financial statements. The degree of consideration depends on the circumstances relating to each specific company. Three main considerations emerge by reading the paragraphs: a) In preparing the financial statements, the management must always assess whether the conditions for the company to consider in continuity of activities are respected. These assumptions must be adequately documented in financial reporting.

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b) The financial statements must be drawn up with a view to going concern. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which it was prepared and the reason why the entity is not regarded as a going concern. c) The period of twelve months is not to be considered as a limit for the assessment of going concern, but as a minimum threshold of reference. Even the international auditing standards show certain uniformity on the review of the principle of going concern: the ISA No. 570 Going Concern, led to a progressive homogeneity on the topics covered and the procedures that auditor must follow in its assessments. An additional element of "globalization" of the process review of the going concern basis has been introduced and pursued by the Big Four that made possible the homogenization of rules explained in the "guides" that auditors must follow. The purpose of ISA No .570 is to establish standards and provide guidance on the auditor's responsibility for the correctness of the going concern assumption used as a basis for the preparation of financial statements. Based on the considerations made by the directors on the going concern, the auditor expresses its opinions in the audit report on the financial statements. ISA 570, in the section "Conclusions of the review and drafting of the auditor's report," explains the different types of auditor's opinion which are summarized in the following table: Figure 1: Auditor’s Opinions The table shows the different audit’s opinions

The directors prepare their financial statements in accordance with the going concern assumption?

The going concern assumption is appropriate? NEGATIVE OPINION

YES

YES

NO

(situation A)

POSITIVE OPINION there are significant

uncertainties?

The disclosures are adequate?

OPINION WIT SURVEYS OR INABILITY TO

EXPRESS AN OPINION YES

NO

NO

(situation B)

(situation C)

(situation D)

POSITIVE OPINION WITH BULLETS OF INFORMATION

There are many significant

uncertainties???

DISCLAIMER OF OPINION

YES

(situation E)

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Analysis of Possible Situations

A) The auditor must describe the reasons why the use of the going concern assumption is not appropriate.

B) In this case no reference to business continuity will appear in the report.

C) This hypothesis is planned and regulated by the Standard on Auditing. 570 that in

paragraphs 37 and 38, says: "In certain circumstances [...] the auditor may find it necessary to ask management to make or extend its assessment. If management refuses, it is not the auditor's responsibility to correct the lack of such an analysis; in this case, it may be appropriate for the auditor to issue a report with an opinion other than unqualified because it may not be possible to obtain sufficient appropriate audit evidence about the correctness of the going concern basis in preparing the financial statements.

[...] In the absence of feedback from the management, the auditor may not be able to assess the existence of events or circumstances that cast significant doubt about the going concern of the company, or the existence of plans direction to cope with such events or circumstances or to assess other mitigating factors. In these cases, the auditor should express a qualified opinion for limitations to the review process or declare the impossibility of expressing an opinion. If the refusal by management to make or extend the evaluation of the going concern assumption constitutes a deviation from the applicable financial reporting framework applicable to the financial statements, the auditor should disclose this fact in its audit report in the same paragraph in describing the limitations to the review process, expressing a qualified opinion for limitations to the review process, or declaring it impossible to make a judgment”. D) According to the auditor's opinion there is significant uncertainty, but the going concern assumption is considered appropriate. The auditor has verified that the budget adequately describes the main events and circumstances that raise doubts about the business continuity and management's plans to deal with such events, the budget also shows clearly that a material uncertainty exists related to events or conditions that raise significant doubts about going concern and therefore that the firm may not be able to realize its assets and discharge its liabilities in the normal course of its business. In audit opinion it will be an emphasis about these aspects to attract the reader's attention E) With respect to this circumstance, the Standard on Auditing. 570, paragraph 33, states: "When the going concern assumption is subject to multiple relevant uncertainties, the auditor may conclude, in extreme cases, not to be able to express an opinion on the financial statements “ DATA AND METHODOLOGY In 2011, the ODCEC (Italian Association of chartered Accountants) carried out a research on the respect of the business continuity assumption of Italian listed companies, by analyzing the Auditors Report on the financial statements dated 2009. In accordance with the standards, the

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requirement to assess whether an entity is a going concern or not should rest with the management team, the independent auditors must to assess and analyze: 1) The process followed by management in assessing business continuity; 2) The assumptions underlying the process; 3) management's plans for future action. The auditor’s responsibility is to obtain appropriate audit evidence about the appropriateness of management’s use of going concern assumption in the preparation of the financial statement and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern. Each audit’s report has been classified according to the five possible types of opinion: 1) Unqualified Opinion ; 2) Unqualified Opinion with emphasis; 3) Qualified opinion; 4) Negative opinion; 5) Disclaimer opinion The research results are summarized in the table below: Table 1: The Going Concern Italian Listed Companies Opinions dated 2009

Opinion Number % Unqualified Opinion 254 87% Unqualified Opinion with emphasis 24 8% Qualified opinion 1 0% Negative opinion 2 1% Disclaimer opinion 9 3% Not available 1 0% Total 291 100%

The table shows that for 254 companies analyzed in 2009 the going concern assumption is respected for the remaining 37 there are problems. Considering this research data we performed the same analysis on 2012 financial statement in order to allow a comparison over time between the two years. The research investigates the only Italian companies listed on the Italian Stock Exchange, 272 listed companies in 2012 as reflected in the website of the Italian stock exchange (www.borsaitaliana.it ) with the exclusion of foreign companies admitted to listing in Italy (for their exclusion we have analyzed the registered office of the parent company) including only once the company for which they are listed different types of shares. The sample was selected including auditors reports of these companies identified. Table 2: the Going Concern Italian Listed Companies Opinions Dated 2012

Opinion Number % Unqualified Opinion 200 74% Unqualified Opinion with emphasis 50 18% Qualified opinion 0 0% Negative opinion 0 0% Disclaimer opinion 12 4%

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Not available 10 4% Total 272 100%

The table shows the results of the analysis of 272 Auditors Reports to the Financial Statements dated 2012 RESULTS AND DISCUSSIONS From table 2 we can deduce: a) Companies with a fully unqualified opinion are 200 (74% of the total); b) companies with an unqualified opinion with emphasis are 50 (18% of the total). This category can be further divided in two types: the one with emphasis on going concern assumption (35 companies, 13% of the total) and the others with emphasis related to other topics (15 companies, 5% of the total). The companies with explicit emphasis on going concern assumption are the following: Table 3: Listed Companies highlighted unqualified audit report with emphasis on going concern

A.S. Roma Eukedos Mediacontech Primi Sui Motori Aedes Fintel Energia Group Molmed Rcs Mediagroup Bastogi Spa Gabetti Moviemax Screen Service Borgosesia Hi Real Nova Re Sintesi Brioschi Imvest Olidata Snai Cape Live Industria E Innovazione Pierrel Stefanel Ceramiche Ricchetti Invest E Sviluppo Pininfarina Spa Telecom Italia Media Chl K.R.Energy Pms Tiscali Cobra Maire Tecnimont Prelios

The table shows the companies that according to auditors reports highlight doubts on going concern assumption For these companies, although differently, there are significant doubts about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of financial statements being audited. In these cases, the external auditors have considered positively the management deepening on the issue of going concern, inviting the stakeholders to consider carefully the section of financial statement where the topic is discussed. Table 4: Listed Companies Highlighted Unqualified Audit Report With Emphasis on Other Topics

Acea Falck Renewables It Way Acque Potabili Fiera Milano Mc-Link Autostrade Meridionali Finmeccanica Prysmian Banca Mps First Capital S.S. Lazio Dea Capital Impregilo Vita Società Editoriale

The table shows the companies that according to the auditors reports highlight emphasis on other topics The topics on which to turn the requests for information are manly: the related party transactions, ongoing litigation, changes in accounting standards compared with the previous year and assessment methods of fixed assets. For these companies according to the audit’s firms there

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aren’t problems of business continuity. c) The companies for which it has been notified of the impossibility of expressing an opinion by auditors (Disclaimer of opinion) are 12, corresponding to the 4% of all companies analyzed. In detail, the companies are: Table 5: Listed Companies Highlighted Disclaimer of Opinion

Antichi Pellettieri Dmail Group Beghelli Eems Biancamano Ikf Cdc Pramac Ciccolella Uni Land Cogeme Set Zucchi Spa

The table shows the companies without an audit opinions For these companies there are “significant and substantial” evidence of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. This situations led the auditor to express the impossibility an of audit opinion. It is therefore considered that for these companies the going concern assumption has been seriously compromised. d) For 10 companies, about the for 4% of the total, it has not been possible to obtain the auditors report because financial statements dated 2012 are not available. The following table shows the companies belonging to this category and the causes that didn’t allow to obtain the audit’s report. Table 6: Listed Companies without audit report available

Aicon bankrupt company dated 21/01/2013 Aion Renewables bankrupt company dated 18/03/2013 Arena creditors arrangement procedure from 08/08/2012 Banca Popolare di Spoleto extraordinary administration procedure from 12/02/2013 Crespi liquidation procedure from 29/04/2013 Rdb extraordinary procedure from 10/09/2012 Seat Pagine Gialle creditors arrangement procedure from il 28/06/2013 Sopaf Liquidation procedure from 01/07/2013 Montefibre Financial Statement not available either on the company's website or on the website of the Italian

stock exchange Valore Italia Holding Di Partecipazioni Financial Statement not available either on the company's website or on the website of the Italian

stock exchange The table shows the companies without an audit opinions and the causes For Montefibre and Value Italian Holding we haven’t the financial statement report. The documents do appear neither on the company website nor on the Italian Stock Exchange website. It can be reasonably assumed that the report of the independent auditors is not positive. This hypothesis is strengthened by the fact that for previous annual reports the auditors have communicated the inability to make an opinion. I should be noted that for the purposes of our research we considered appropriate to consider insert in the sample the companies just mentioned, as they were all operating and listed on the Italian Stock Exchange in the in 2012. The following table shows the results of two studies, a temporal comparison between the two researches both in absolute terms and in relative terms. Table 7: Final aggregate on going concern assumption

Opinion 2012 % 2009 % Δ

Opinion unqualified 200 74% 254 87% -14%

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Opinion unqualified with emphasis 50 18% 24 8% 10% Qualified opinion 0 0% 1 0% 0% Negative opinion 0 0% 2 1% -1% Disclaimer opinion 12 4% 9 3% 1% Not available 10 4% 1 0% 3%

Totale 272 100% 291 100%

The table shows the comparison between the data for 2009 and 2012 It is known primarily as the number of companies listed on the Italian Stock Exchange has declined over the next three years. This shows once again that Italian companies are reluctant to stock exchange. Changed the number of listed companies in the three years considered, the comparisons will be made on the deviations. Audit reports with unqualified opinion have decreased of 10% while those with unqualified opinion with emphasis increased by 10%. The results of ODCES search do not provide a detail of cases to emphasis if they refer to going concern or other aspects. It can therefore be assumed that these two variations reflect a worsening of the situation of Italian listed companies on their business continuity. Another significant negative aspect is the increase of the number company for which it was not possible to find the financial statements. We aggregated the data analysis to obtain a single parameter analysis of going concern assumption. Table 8: Final Aggregate on Going Concern Assumption

Categoria Numero %

Unqualified Opinion and Unqualified with emphasis on other topics 215 79%

Onpinion with emphasis on going concern 35 13%

Significant and substantial doubt the entity’s ability to continue as a going concern 18 7%

companies that have gone out of business activities 4 1%

Totale 272 100%

The table shows the final aggregate on going concern assumption The first group includes all companies with an unqualified opinion and c with an unqualified with emphasis related on other topics not to on going concern assumption. The second category all companies for which the auditors issued an unqualified opinion with emphasis on going concern. The third group includes companies for which the auditors have manifested the inability to express an opinion because there are conditions and events that indicate substantial doubt about the entity’s ability to continue as a going concern. Finally, the fourth group includes the two companies declared bankrupt (Aicon and Aion Renewables) and the two in liquidation procedure (Crespi and SOPAF). In conclusions we can attest the percentage of Italian listed companies with no problems on going concern assumption are about 80% which means a marked decline compared to 2009: the Italian listed companies decreased is not only in quantity but also the quality of their business activity. So the situation of the Italian economy is reflected in the performance of listed companies. This situation is true in absolute terms as one company every

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five listed company highlights problems of business continuity and in terms of temporal comparison it is clear worsening 2009-2012. REFERENCES Carson, E., Fargher, N. L., Geiger, M. A., Lennox, C.S., Raghunandan, K., Willekens, M., Auditing Reporting for going concern Uncertainty: A Research Synthesis, in Auditing 2013, Vol. 32, No. Supplement 1, pp. 353-384 Hahn , W. ( 2011). "Going-Concern Assumption: Its Journey into GAAP". The CPA Jornal: 26– 28 Standard on Auditing No.570 Going Concern Italian Civil Code, Article 2423-bis OIC No. 5 - Financial Statements for liquidation’s company OIC No. 11 - Financial Statements, objectives and postulates IAS 1 - Presentation of Financial Statements The Bank of Italy / Consob / Isvap. 2 of 6 February 2009 Consob Communication no. 9012559 dated 6 February 2009 ACKNOWLEDGEMENT We would like to thank the journal editors and the anonymous referees BIOGRAPHY Provasi Roberta, PhD in ‘Business Administration’ in Pavia University, is an Assistant Professor of Business Administration and Accounting. Aggregate Professor of Auditing and Corporate Governance in Milan - Bicocca University. Since 1992 is registered as a Chartered Public Accountants and Auditor. Since 2005 is a member of the Scientific Committee of thePhD in Business Administration and coordinator of Master in Business Administration. She has several publications to her name dealing mainly with accounting and auditing issues Patrizia Riva, PhD in ‘Business, Economics & Management’ in Milan Bocconi University is an Aggregate Professor of Accounting, Auditing and Corporate Governance in Piemonte Orientale University. Since 1994 is registered as a Chartered Public Accountants and Auditor. Since 1999 has been in charge as Chief Executive of the “High School of Certified Public Accountants Institute of Milan”. She has several publications to her name dealing mainly with accounting and auditing issues.

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SELF-ASSESSED RESPONSES VS. RESEARCHER- IDENTIFIED STAGES: THE CASE OF BALANCED

SCORECARD IMPLEMENTATION Wasatorn Shutibhinyo, Chulalongkorn University

ABSTRACT

Most existing research on management accounting application has relied on self-assessed responses although they could influence the research outcomes, as pointed out in this research paper. This research asked respondents to identify the BSC implementation stage (i.e. self- assessed responses) and the characteristics of firms’ performance measurement system (i.e. BSC attributes), the latter of which enable the determination of BSC implementation stages (i.e. researcher-identified stages). By the self-assessed responses and the researcher-identified stages, the BSC implementation rates are 44% and 64%, respectively, highlighting the existence of misclassification. Additionally, the determinant studies using the self-assessed responses and researcher-identified stages reveal conflicting views with regard to the key determinants in BSC implementation. In the self-assessed responses scenario, environment uncertainty, participation and top management support are uncorrelated with attaining a BSC implementation stage. Meanwhile, in the researcher-identified stages scenario, participation and top management support excluding environment uncertainty are positively associated with attainment of a BSC implementation stage. The findings reaffirm the existence of different interpretations of BSC implementation as implied in previous studies in that self-assessed responses lead to misclassification and thereby bias the outcomes. As such, it is imperative that proper classification of BSC implementation be made prior to determinant or consequence tests. JEL: M190, M490 KEYWORDS: Balanced Scorecard, Self-Assessed Responses, Balanced Scorecard Attributes, Researcher-Identified Stages INTRODUCTION Management accounting innovations have long been adopted by a variety of organizations to create or enhance their competitive advantages. Thus, it is of great interest and of use to conduct a research work. Previous research studies examined the implementation of certain management accounting techniques, the determinants of and the consequences following the implementation. A majority of previous research studies relied on firms’ self-assessed responses with respect to the stages of application (i.e. non-implementation or implementation) of management accounting innovations despite the fact that such reliance could lead to the issue of misclassification. It is possible that respondents may hold a different view on a particular management accounting innovation and thus misclassify the stage of application. Some respondents misperceive that their firms do not adopt any management accounting innovation, while others hold the incorrect belief that their companies have implemented the innovation. Self-assessed responses could bias the research results with respect to the stage of application and the determinants and consequences of management accounting implementation. Hence, it is of paramount importance that correct classification of management accounting application be made from the outset.

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Balanced Scorecard (BSC) is an important development in strategic performance measurement systems. BSC offers a balanced view of strategic non-financial and financial measures that can be illustrated in the cause-and-effect relationships (Kaplan, 2010). Due to its anecdotal cases of success, BSC has attracted interest worldwide. Prior research studies have examined the application rate, the determinants and the impacts of BSC implementation relying solely on the firms’ self-assessed responses with regard to BSC application. Surprisingly, some determinant studies (e.g., Chen, Duh & Lin, 2006) revealed that the vital determinant (i.e., top management support) is inversely associated with BSC implementation; in other words, top management support impedes the implementation of BSC. This phenomenon has cast doubt on the reliability of self-assessed responses. Only recently have researchers looked into the issue of awareness and then created a BSC classification framework for examination of the application levels of BSC (Soderberg, Kalagnanam, Sheehan, & Vaidyanathan, 2011; Shutibhinyo, 2012). Nevertheless, no study has attempted to investigate whether the self-assessed responses do influence the research results with respect to the application and the determinants of management accounting implementation. Thus, this study examines the influence of self-assessed responses on the research outcomes in the context of BSC implementation, i.e. BSC application rate and the determinant study. Specifically, this study intends to prove that the self-assessed responses scenario produces dissimilar outcomes from the researcher-identified stages scenario. The self-assessed responses on the application stage in this research work were gleaned with a Yes/No question. Meanwhile, for the researcher-identified stages, the BSC framework developed by Shutibhinyo (2012) is modified to determine the BSC attributes embedded in the firms’ performance measurement systems and subsequently the BSC application stages. This would allow for a direct comparison of the results employing the self-assessed responses with those basing on the stages as identified by the researcher. This paper contributes to the area of management accounting research by unveiling the distorting effects on the research outcomes of the sole reliance upon self-assessed responses. To mitigate the distorting effects researchers contemplate the key attributes of management accounting innovation under investigation prior to establishing the framework so that the application level could be accurately identified. This paper emphasizes the paramount importance of correct assigning of level of application of management accounting innovation from the outset of a research project, based on the stages as identified by the researcher (i.e. researcher-identified stages) rather than the self-assessed responses. LITERATURE REVIEW The Balanced Scorecard BSC was originally devised by Kaplan and Norton as the multi-dimensional performance measurement system with a collection of financial and nonfinancial measures (Kaplan & Norton, 1992). BSC has since then been transformed into a strategic performance measurement system (Kaplan & Norton, 2001, 2008). The key feature of BSC is translating a strategy into operational terms that incorporate three main attributes as shown in Table 1. Table 1: The BSC Attributes

Key attributes of BSC Explanation Multiple perspectives Grouping the financial and nonfinancial measures into multiple and interrelated

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dimensions to allow managers a comprehensive view of the business performance. Strategy-linked measures The measures should be derived from the organization’s strategy. Firm’s key measures

can infer firm’s strategy. Cause-and-effect relationships between or among the strategic objectives or measures.

The linkages between/among the strategic objectives or measures within and across perspectives inform of firms’ business strategy or illustrate the value-creation process.

These three attributes embedded in the operational terms eliminate a misunderstanding and build a consensus among concerned individuals about the firm’s strategy and thereby an environment conducive to the BSC application. Incorporating three attributes allows firms to properly align their organizational units to the strategy (i.e. Alignment), to effectively communicate the strategy to their employees (i.e. Communication), and to provide feedback and promote learning (Feedback). Identify the Stages of BSC Application In determination of the stages of BSC application (i.e. either non-implementation or implementation) among the target firms, the majority of existing research studies have solely relied on the self-assessed responses. A handful of research works have taken into account the characteristics of firm-level performance measurement systems in identification of the level of BSC application. Most of the previous research studies either asked the participating firms to indicate whether their firms were BSC users or required the participating firms to specify their organization’s stage of BSC application (e.g., Ittner, Larcker & Randell, 2003; Speckbacher, Bischof & Pfeiffer, 2003). Consequently, these researchers designated the participating firms as either non-BSC or BSC users according to the firms’ self-assessed responses. As shown in Table 2, for example, Ittner et al. (2003) classified the stages of BSC implementation into six stages. Table 2: Ittner Et Al.’S (2003) Classification Framework

BSC Stages Classification (1) Not considered (2) Implemented&abandoned (3) Considering (4) Implementing now Non-BSC firms (5) Used (6) Used extensively BSC firms

Firms in stages (1) – (4) are subsequently classified as non-BSC firms whereas those in stages (5) – (6) are regarded as BSC firms Some research studies further divided BSC firms into more specific types of BSC users according to the BSC attributes. Speckbacher et al. (2003), for example, classified the stages of BSC implementation into seven stages and assigned the participating firms as either a non-BSC or BSC firm according to the responses given by the firms. In case of BSC firms, they are specifically grouped in one of three sub-classifications on the basis of the BSC attributes. Table 3: Speckbacher Et Al.’S (2003) Classification Framework BSC Stages Classification Criteria (1) No contact with BSC thus far Non-

BSC firms

(2) Know BSC (3) Studied BSC, but no concrete steps taken (4) First steps already taken (5) BSC project has existed (6) BSC implemented in individual business units (7) BSC implemented for entire company

BSC firms Type I (1) Identify strategic measures/objectives

(2) Group strategic measures/objectives into perspectives Type II Type I with the additional criterion: (3) Employ cause-and-effect chains Type III Type II with some or all of the additional criteria: (4) Contain action plans/target (5) Link Measures to incentives

Participating firms were classified as non-BSC firms if they identified that they belonged in stages (1) – (5), whereas those in stages (6) – (7) were viewed as BSC firms. The BSC attributes of the BSC firms were subsequently examined to further categorize these BSC firms into three specific groups as shown in Table 3. BSC firms with strategic measures grouped into perspectives belong to Type I BSC users. If these Type I firms also have cause-and-effect chains, they are upgraded to Type II BSC users. Type II BSC users with

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action plans/target and/or incentive linked measures will advance to Type III BSC firms, accordingly. Conceptually, the key feature of BSC is translating the strategy into operational terms whereby measures are grouped into multiple perspectives, the measures are derived from the strategy, and the value-creation process are illustrated through causal links. Accordingly, only Type II and III BSC firms meet the criteria and could be regarded as firms at Implementation stage (or BSC users), whereas Type I firms are those at Non- implementation stage (or Non-BSC users). At this juncture, it is vital to call attention to the issue of differing interpretations of BSC as many academics and financial practitioners still base their understanding and thereby interpretation of the BSC concept on the original 1992 BSC article, which constitutes a less significant part of the current BSC concept (Kaplan, 2010). As previously mentioned, differing interpretations of BSC can have an impact on the firm’s self-assessed responses with regard to the BSC application and thereby bias the research outcomes. Interestingly, firms with similar BSC attributes could identify themselves with differing BSC stages. In addition, certain firms, even with all three attributes, perceive that they lack qualifications to be called BSC users due to the absence of an effective system. They probably opt for the “implementing now” or “first step has been taken”, thereby leading to the researchers’ classifying these firms as non-BSC users despite the fact that they are BSC users. In contrast, firms with only one or two of the three BSC attributes may misconceive that they are genuine BSC users as some BSC initiatives have been launched within their organizations. As such, they opt for a stage of BSC usage in the questionnaire, the phenomenon which invariably affects the correct classification of BSC application and thus distorts the research results. To mitigate the issues of misinterpretation and misclassification, it is advisable that researchers require respondents to characterize their firms’ performance measurement systems (PMS). The practice would offer some insights into the BSC attributes implemented in each participating firm and thereby properly identify the stages of BSC implementation. Generally, the characteristics of a firm’s PMS mirror the BSC attributes embedded in the PMS of that firm. Researchers are thus able to recognize the BSC attributes implemented in each firm and then properly identify the stage of BSC implementation. To date, only a handful of research studies, e.g. Soderberg et al., 2011; Shutibhinyo, 2012, have classified the BSC application taking into consideration the characteristics of firm-level PMS. Specifically, classification of firms as either BSC or non-BSC users is entirely based on the structure and use of PMS in lieu of the self- responses given by the participating firms. Soderberg et al. (2011), for instance, used the criteria in Table 4 for the stage classification. Table 4: Soderberg Et Al.’S (2011) Classification Framework

Classification BSC Level Attribute Criteria Non-BSC users None of the criteria is met. BSC users 1 Derived from

strategy (1) Business unit strategy is well defined. (2) Performance measures are derived from such a strategy.

2a Strategy + Balance BSC level 1 with the additional criteria (1) PMS contains financial and nonfinancial measures. (2) PMS contains driver (leading) and outcome (lagging) measures.

2b Strategy + Causal links

BSC level 1 with the additional criteria (1) PMS has measures that are linked through driver-outcome relationships (2) Business units understand the potential driver-outcome relationship among

individual measures 3 Strategy+ Balance

+Causal links Level 2a with Causal links, or Level 2b with Balance

4a Double Loop Learning

Level 3 with (1) Deviation from expected /planned results causing the business unit’s management

to question the unit’s business strategy. 4b Tied to

Compensation Level 3 with (1) Business unit using the PMS to compensate/reward some or all of unit’s

employees.

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Classification BSC Level Attribute Criteria 5 Level 4a with Tied to Compensation, or

Level 4b with Double Loop Learning Based on the key feature of BSC, business units at levels 3, 4a, 4b and 5 are categorized as BSC users, whereas those at levels 1, 2a and 2b are assigned to those at the non-implementation stage. In line with Soderberg et al. (2011), Shutibhinyo (2012) developed the framework for classifying the stages of BSC application as presented in Table 5. Table 5: Shutibhinyo’s (2012) Classification Framework

BSC Stages Conditions Non-Adoption None of the criteria is met. Adoption

Adoption firm = Firm with all following: (1) Financial and non-financial measures (2) Grouped into perspectives

Imple- mentation

Implementation firm = Adoption firm with the additional sub-attributes to satisfy Attribute 1: Translating strategy into operational terms (1) Well-defined strategy (2) Strategic objectives or measures (3) Cause-and-effect relationship Firms at this stage are classified as BSC firms, which can further be sub-classified as:

Partial BSC firms that have applied some of the following attributes: Attribute 2: Aligning the organizational units to the strategy Attribute 3: Communicating strategy to employees Attribute 4: Providing feedback and learning

Full BSC firms that have applied all of the above. The BSC application stages include Non-Adoption, Adoption, and Implementation. Firms that have met the first two criteria (i.e. firms with financial and nonfinancial measures grouped into multiple dimensions) are classified as BSC-adoption firms; otherwise, they are Non-adoption ones. Moreover, if BSC adoption firms have (1) Well-defined strategy, (2) Strategic objectives or measures, and (3) Cause-and-effect relationships, they are categorized as BSC-implementation firms. BSC-Implementation firms are those with all three characteristics of the translating strategy into operational terms attribute. Specifically, the first characteristic (Multiple perspectives) indicates the extent that financial and nonfinancial measures are grouped into multiple dimensions, while the second one (Measures derived from strategy) exhibits how well-defined the firms’ strategy as well as strategic objectives or measures are. The last one (Cause-and-effect relationships among the strategic objectives or measures) is concerned with the cause-and-effect relationships. Evidently, Attribute 1 of translating strategy into operational terms is a key to classification of the BSC application stages. This current research study has modified the existing framework developed by Shutibhinyo (2012) by taking into account BSC attributes to identify the stage of BSC application as presented in Table 6. Table 6: The Classification Framework to Identify BSC Stages of This Research Work

BSC Stages Conditions Non-Implementation None of all criteria are met.

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Implementation Implementation firm = Firm with all of the following attributes to satisfy Translating strategy into operational terms (1) Multiple perspectives 1.1 Financial and non-financial measures 1.2 Grouped into perspectives (2) Strategy-linked measures 2.1 Well-defined strategy 2.2 Objectives or measures derived from strategy (3) Cause-and-effect relationship

In this study, there exist two stages of BSC application: Non-implementation and Implementation. With the availability of the data pertaining to the self-assessed responses and the researcher-identified stages, the comparisons are made with regard to the application rate and determinant study. Influencing Factors of BSC Application According to the two related theories of the organizational innovation and the contingency theory, the key determinants of accounting innovations implementation are external factor, structural factor and executional factor. Environment uncertainty is the critical external environment for any contingency-based research (Chenhall, 2003). Previous studies revealed that firms in high environment uncertainty tend to rely more on both financial and nonfinancial measures (e.g., Gosselin, 2005) and BSC (Hendricks, Menor & Wiedman, 2004). Since BSC is an accounting tool providing strategic financial and nonfinancial measures as well as useful information for decision makers, it is anticipated that environment uncertainty would be positively correlated with BSC implementation. It is thus hypothesized that: H1: Environment uncertainty is positively associated with firm’s attaining the BSC implementation stage. Participation is one of the structural factors mirroring a firm’s characteristics and could influence innovation application (Damanpour, 1991; Roger, 2003) and refers to the degree of participation by organizational members in decision-making and the extent of delegation of decision-making authority throughout an organization (Aiken and Hage, 1968). Prior studies reported that the higher degree of participation is a significant predictor of innovation application (Damanpour, 1991; Chenhall, 2003). Although Braam and Nijssen (2008) found insignificant relation between decentralization and BSC application, Gosselin (2005) reported that decentralized firms tend to use both financial and non-financial measures, the practice of which is part of the “Multiple perspectives.” This leads to the following hypothesis: H2: Participation is positively associated with firm’s attaining the BSC implementation stage. Top management support is one of the executional factors which reflect mechanisms that support or drive the implementation process and is regarded as the most crucial variable in implementing any innovations (Damanpour, 1991; Roger, 2003; Chenhall, 2003) since top management has a dominant position in the organization. Kaplan and Norton also emphasized the significance of this factor as top management helps generate organizational support, both time and resources, for implementing BSC. Although Chen et al. (2006) reported negative effects of top management support on BSC application, many other studies have nonetheless reaffirmed the significance of this driver (e.g. Braam and Nijssen, 2008). This leads to the following hypothesis: H3: Top management support is positively associated with firm’s attaining the BSC implementation stage. RESEARCH METHODOLOGY

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Survey Instrument In this cross-sectional survey research, the samples were listed companies in the Stock Exchange of Thailand (SET) or the Market for Alternative Investment (MAI). A survey package, i.e. one questionnaire together with a cover letter and a postage-paid, self-addressed envelope, was posted to the chief financial officers (CFO) of the listed firms during the months of May – June 2011. The questionnaire consists of three parts. In the first part, the respondents are asked to answer a series of YES/NO questions concerning the characteristics of PMS and management processes of their organizations. Their responses help identify the following BSC attributes embedded in the PMS of their organizations: (1) using the financial and non-financial measures, (2) grouping the measures into multiple perspectives, (3) having the well-defined strategy, (4) linking the measures to the strategy, and (5) possessing the cause-and-effect relationships. Items (1) and (2) are indicative of the “Multiple perspective” attribute while items (3) and (4) are representative of the existence of “Strategy-linked measure” attribute. Item (5) suggests the “Cause-and-effect relationship” attribute. Firms are considered to possess a particular BSC attribute in their PMS if the response to the corresponding attribute is YES. In addition, firms with all three BSC attributes, i.e. multiple perspective, strategy-linked measure and cause-and-effect relationship, are regarded as firms at Implementation stage, whereas those with one or two BSC attributes are firms at Non-implementation stage. In the second part of the questionnaire concerns the self-assessment of BSC application. This makes possible the comparison of the outcomes with respect to the stages of BSC application according to the self-responses and those based on the BSC framework proposed in this study. The last part of the questionnaire contains the questions pertaining to determinants in this study, i.e. environment uncertainty, participation and top management support. As for the environment uncertainty and top management support determinants, respondents are required to give their responses in percent (from 0 – 100%) on the questions adapted from prior literature. In addition, the respondents are asked to specify the levels of participation in their respective organizations. Model Specifications and Variable Measurements For Determinant Study Once the BSC application stages are identified according to the self-assessed responses and/or the researcher (i.e. researcher-identified stages), the hypotheses of determinant study are tested with the binary logistic regression model. The binary logistic analysis is used to allow for comparison of two groups of firms, i.e. firms that implement BSC (Implementation) and those that do not (Non-Implementation). The model employed to test the hypotheses is as follows:

𝐿𝑛 � 𝑃𝑟𝑜𝑏(𝑌 = 1)

1 − 𝑃𝑟𝑜𝑏(𝑌 = 1)� = 𝛽0 + 𝛽1𝑋𝑖 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖 + 𝜀𝑖

where Y = 1 for implementation firm; 0 for otherwise

X is independent variable tested for each hypothesis. Controls are control variables.

Note that Prob(Y=1) is the probability of attaining the Implementation stage. The dependent variable (Y) is the stage of BSC application, consisting of Non-Implementation and Implementation stages. The measurement of environment uncertainty is adapted from

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Gosselin’s (2005) while that of participation is adapted from Pholnaruksa’s (2007). The top management support variable is based on prior works (e.g., Chen et al., 2006). Environment uncertainty and top management support are measured and presented in average percent (0- 100%) for each firm, while participation is determined by the level of participation adapted from prior studies. In line with prior studies, three variables are controlled, i.e. size (the total revenue in Year 2010), industry-finance/insurance (where 1 for finance/insurance firm and 0 for otherwise) and industry-manufacturing (where 1 for manufacturing firm and 0 for otherwise)). RESULTS The BSC Application Results Of the 81 returned questionnaires, eight showed missing data and one was an outlier for determinant study. The remaining 72 responded questionnaires were appropriate for both BSC application study and determinant study. Table 7 presents the BSC application stages according to the self-assessed responses vis-à-vis the stages by the selected BSC attributes (i.e. researcher- identified stages). Table 7: BSC Application Stages by Self-Assessed Responses Vs Researcher-Identified Stages

Stages of BSC application Self-assessed responses Researcher-identified stages Number of firms Proportion Number of firms Proportion Non-Implementation 40 56% 26 36% Implementation 32 44% 46 64% Firms with complete data 72 100% 72 100%

This table presents the BSC application based on self-assessed responses and on researcher-identified stages The results are differing in that the BSC application rates according to self-assessed responses and to researcher-identified stages are respectively 44% and 64%. The finding is however not surprising as academics have expressed their concerns about the understanding issue with regard to the BSC concept (e.g. Kaplan, 2010). In the case of self-assessed responses, 32 firms have perceived that they are at the stage of BSC implementation whereas 40 firms have perceived otherwise. In the case of researcher-identified stages, the PMS of 46 firms meet all three BSC attributes. These firms have a collection of financial and nonfinancial measures that are grouped into perspectives and their strategies are well-defined. In addition, the measures are derived from the strategies and exhibit a causal chain of the value-creation process. These attributes are key features of BSC in translating the strategy into operational terms. Thus, these 46 firms (out of 72) are BSC-implementation firms while the remaining 26 firms are non-implementation firms as not all conditions are met. The differing BSC application rates derived from the self-assessed responses and researcher-identified stages cast doubt on the reliability of self-assessed responses with respect to the actual implementation of BSC. This evidence indicates that relying solely on the self-assessed responses could lead to biased research results as respondents could incorrectly interpret the BSC concept and thus misclassify their firms’ BSC application stage. Table 8: The Analysis of Responses (N= 72)

Stages of BSC application Researcher-identified stages Non-Implementation Implementation Total Self-assessed responses Non-Implementation 19 21 40

Implementation 7 25 32 Total 26 46 72

This table presents the evidence of misclassification.

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Out of 40 Non-Implementation firms based on self-assessments, the researcher has identified 19 firms as Non-Implementation and 21 firms as Implementation firms. These 21 Implementation firms have unknowingly implemented BSC. In addition, out of 32 Non-Implementation firms based on self-assessments, the researcher has identified 7 firms as Non-Implementation and 25 firms as Implementation firms, the former of whom have just launched the BSC projects or display only some BSC attributes. Accordingly, 28 firms (i.e. 21+7) have misclassified themselves, thus leading to the misclassification rate of 39% (28 out of 72 firms). Although almost two-thirds (61%) of the responding firms are able to correctly classify themselves, the misclassification should be reduced. Incorrect classification of BSC application can misrepresent the research results and thereby lead to wrong research implications. As previously stated, relying solely on the self- assessed responses could bias the research results and therefore it is of paramount importance that classification of BSC application be accurate from the outset and prior to the determinant and the consequence studies. The Determinant Study Results Table 9: Variables For Determinant Study (N=72)

variables av

er ag

e

m in

m ax

cr on

ba ch

’s

al ph

a

pe rc

en t o

f va

ri an

ce

ex pl

ai ne

d

n of

qu

es tio

ns

dependent variables implementation specified by self-assessed responses i_self 0.44 0.00 1.00 n.a. n.a. 1 implementation specified by researcher-identified stages i_res 0.64 0.00 1.00 n.a. n.a. n.a. independent variables environment uncertainty env 63.51 6.67 97.50 0.836 55.96 6 participation part 7.38 0.00 10.00 n.a. n.a. 1 top management support top 75.79 14.00 100.00 0.960 86.35 5 control variables firm’s size size 15.21 0.18 147.57 n.a. n.a. n.a. industry - finance/insurance ind1 0.15 0.00 1.00 n.a. n.a. 1 industry - manufacturing ind2 0.39 0.00 1.00 n.a. n.a. 1

The descriptive statistics are presented in this table.

Table 10: the Results of Determinant Study (N = 72)

Panel A: Self-assessed responses Panel B: Researcher-identified stages ENV PART TOP ENV PART TOP Expected sign + 0.015 0.183 0.019 0.020 0.283 *** 0.036 ** Control Variables SIZE 0.009 0.006 0.008 0.018 0.010 0.015 IND1 -0.453 -0.535 -0.300 1.067 0.889 1.327 IND2 0.108 0.173 0.231 0.079 0.215 0.321 Intercept -1.295 -1.671 -1.830 -1.080 -1.782 ** -2.630 * ModelFittingInformation Chi-Square 3.263 5.391 3.495 7.192 12.522 10.104 p-value 0.515 0.249 0.479 0.126 0.014 ** 0.039 ** AIC 105.65 103.531 105.427 96.992 91.662 94.097 Cox&Snell R2 0.044 0.072 0.047 0.095 0.160 0.131

H1 is not supported

H2 is not supported

H3 is not supported

H1 is not supported

H2 is supported

H3 is supported

***, **, * indicate significance at 0.01, 0.05 and 0.10 levels, respectively. As seen in Table 10, the self-assessed responses and researcher-identified stages give differing determinant study results. In the case of self-assessed responses, p-values of the likelihood Ratio

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Chi-Square test are greater than the level of significance; α equals 0.10, leading to the conclusion that all regression coefficients in the models equal zero. The variable of interest in each model is not related to reaching the BSC implementation stage. Therefore, all hypotheses are not supported. On the other hand, in the case of researcher-identified stages, only the model with respect to the environment uncertainty is insignificant as no variable in this model is associated with attainting the BSC implementation stage. In other words, H1 is not supported. As for the models pertaining to participation and top management support, p-values of the likelihood Ratio Chi- Square test are less than the level of significance, leading to the conclusion that at least one of regression coefficients in the models is not zero. The variables of interest, i.e. participation and top management support, are positively associated with reaching the BSC implementation stage at 0.01 and 0.05 significance levels, respectively. Thus, H2 and H3 are supported. In short, Tables 7, 8 and 10 emphasize the fact that self-assessed responses could influence the research outcomes with regard to the BSC application and the determinant study. With the self-assessed responses as a dependent variable, all determinants exhibit no influence on firms’ reaching a stage of BSC implementation. However, with the researcher-identified stages, participation and top management support are found to be significantly positive at the conventional significance levels whereas environment uncertainty is found to be insignificant. The findings offer the conflicting evidence as to key determinants that could propel firms to higher stages of BSC application and thus cast doubt on the results of prior studies that relied solely on the self- assessed responses. CONCLUSIONS AND DISCUSSIONS This paper presents the evidence of influence the self-assessed responses has on research results, particularly the BSC application rate and the determinant study, in the context of BSC implementation. The BSC application rates according to self-assessed responses and to researcher-identified stages are enormously wide at 44% and 64% respectively, equivalent to the misclassification rate of 39%. Moreover, in the case of self-assessed responses, all determinants are not associated with reaching the BSC implementation stage. Nevertheless, when the researcher-identified stages are employed, participation and top management excluding environment uncertainty are found to be positively associated with reaching the BSC implementation stage. The difference in application rates support the notion that firms differently interpret the BSC concept (e.g., Kaplan, 2010), causing the erroneous categorization. Some firms perceive that they are BSC users even though they are not. On the contrary, several other firms believe that they are non-BSC users despite the fact that they are. Misclassification consequently biases the results of determinant study. Misclassification is perhaps one of the reasons for mixed evidence in prior studies and could distort the results of future research using self-assessed responses. Hence, this research study emphasizes the importance of accurately categorizing the stages of BSC application prior to performing any determinant or consequence analysis. Accordingly, in conducting innovation application research researchers should rely less on self- assessed responses but attempt to identify the stage of application by examining the attributes of innovation of interest. Doing so would help address the issue of differing understanding or at least control the factors of interest in the research. Moreover, this research study offers a systematic framework for the classification of BSC application by taking into consideration the key BSC attributes with the aim to solve the problem of differing interpretations with regard to the BSC concept. The proposed framework should be applied to future research to produce more reliable research outcomes. In addition, this research paper confirms the findings that Participation and Top management support are key determinants of BSC implementation.

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According to the implications for practice, a survey of SET and MAI listed Thai companies indicates that 64% of the responding firms have implemented BSC either intentionally or unintentionally. This research work complements the existing studies which were conducted mostly in large U.S. or European corporations in specific industries. Although appropriate for a large sample size at a relatively low cost, the post mail survey often encounters a low response rate and self-response bias. Moreover, the responses are usually given by one single person and thereby could not completely represent the actual behavior with regard to BSC of the entire organization. Since there is no way to determine how these data truly represent the firm’s behavior (Roger, 2003), this limitation could be overcome by collecting the data from the most knowledgeable person, i.e. CFO. Furthermore, some received questionnaires did not specify the percentage scores but selected the ranges of percentage scores; hence, following Pholnaruksa (2007), the midpoint of interval range has been assigned to each corresponding selected interval. The proposed BSC framework can also be employed as a starting point prior to testing the determinants or consequences of BSC application. Thus, prior BSC studies can be re-performed by employing this framework to verify the stages of BSC application. In addition, this research study can be replicated in the context of other management accounting innovations. Notwithstanding, researchers are advised to examine key attributes of the management accounting innovation and then develop the appropriate classification framework to properly identify the stage of application. REFERENCES Aiken, M., and Hage, J (1968) “Organizational interdependence and intraorganizational structure,” American Sociological Review 33, p. 912-930 Braam, G.J.M. and Nijssen, E.J (2008). Exploring the antecedents of balanced scorecard adoption as a performance measurement and strategic management system. Retrieved April 29, 2010, from: http://www.ru.nl/nice/workingpapers Chen, H., Duh, R., & Lin, J. C (2006) “The determinants of implementation stages of balanced scorecard,” International Journal of Management and Decision Making , p. 356-376 Chenhall, R.H (2003) “Management control systems design within its organizational context: Findings from contingency-based research and directions for the future,” Accounting, Organizations and Society 28, p. 127-168 Damanpour, F (1991) “Organizational innovation: A meta-analysis of effects of determinants and moderators,” Academy of Management Journal 34, p. 555-590 Gosselin, M (2005) “An empirical study of performance measurement in manufacturing firms,” International Journal of Productivity and Performance Management , p. 419-437 Hendricks, K., Menor, L., & Wiedman, C (2004) “The Balanced Scorecard: To adopt or not to adopt?” Ivey Business Journal (Nov/Dec), p. 1-7 Ittner, C. D., Larcker, D. F., & Randell, T (2003) “Performance implications of strategic performance measurement in financial services firms,” Accounting, Organizations and Society , p. 715-741

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Kaplan, R. S (2010). Conceptual foundations of the balanced scorecard. Retrieved July 6, 2010, from httlp://www.hbs.edu/research/pdf/10-074.pdf Kaplan, R. S., & Norton, D. P (1992). The balanced scorecard - measures that drive performance. Boston: Harvard Business School Press. Kaplan, R. S., & Norton, D. P (2001) “Transforming the balanced scorecard form performance measurement to strategic management,” Accounting Horizon , p. 87-104; p. 147-160 Kaplan, R. S., & Norton, D. P (2008). The execution premium: Linking strategy to operations for competitive advantage. Massachusetts: Harvard Business Review Press. Pholnaruksa, I (2007). Implementation levels of activity-based management and the effects on profitability of Thai manufacturing firms. Thailand: Doctural Dissertation. Department of Accountancy, Chulalongkorn University. Roger, E. M (2003). Diffusion of innovations (5 ed.). New York: The free press. Shutibhinyo, W (2012) “An exploratory study of balanced Scorecard practices: Preliminary evidence form Thailand,” Asia-Pacific Management Accounting Journal 7, p. 1-28 Soderberg, M., Kalagnanam, S., Sheehan, N., and Vaidyanathan, G (2011) “What is a balanced scorecard a balanced scorecard?” International Journal of Productivity and Performance Management 60, p. 688-708 Speckbacher, G., Bischof, J., & Pfeiffer, T (2003) “A descriptive analysis on the implementation of balanced scorecards in German-speaking contries,” Management Accounting Research , p. 361-387 ACKNOWLEDGEMENTS I would like to extend my gratitude and appreciation to Associate Professor Vorasak Toommanon, Ph.D. for his perpetual encouragement. Any errors or omissions remain my responsibility. BIOGRAPHY The author is a lecturer at Chulalongkorn Business School, Chulalongkorn University, Thailand, and can be contacted at [email protected]. Questions and comments are welcome.

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CREDIT RATINGS AND BANK’S LEVERAGE:

SOLICITED VERSUS UNSOLICITED Yu-Jen Hsiao, National Dong Hwa University, Taiwan

Ching-Ho Chan, National Dong Hwa University, Taiwan

ABSTRACT

This paper isolated the effects of solicited and unsolicited credit ratings changes (upgrade or downgrade) on bank’s leverage in ex-ante and ex-post. We found that banks near a credit rating changes issue less debt relative to equity than banks not near a change in rating, but mainly for unsolicited credit rating banks. Especially, these findings are most prominent around the change from investment-grade to speculative-grade status. In addition, the subsequent leverage decisions of unsolicited (solicited) credit rating banks would less (more) issue debt relative to equity when they were downgraded (upgraded) in previous year. Therefore, we conclude that the solicited or unsolicited credit ratings have significant different impact on bank’s leverage. KEYWORDS: Bank Leverage Levels, Unsolicited Ratings, Bank Ratings JEL CLASSIFICATION: G20, G21, G24 Managers appear to take credit ratings into account when marking capital structure.That is to say, if issuers care about maintaining better ratings, they will not only alter capital structure to avoid down-grades and obtain upgrades.( Friedman’s publication in New York Times is characteristic by claiming “There are two superpowers in the world today in his opinion. There's the United States and there's Moody's Bond Rating Service. The United States can destroy you by dropping bombs, and Moody's can destroy you by downgrading your bonds.) Kisgen (2006, 2009) show how non-financial firm’s ex-ante and ex-post capital structure decisions are affected by rating considerations. However, banks are often mentioned as the most opaque firms due to their complex asset and liability structures (Hirtle, 2006 and Morgan, 2002). Not only analyzing credit rating level differences seems to be of particular interest for the case of financial institutions, but also banks are more rely to issue financial bond recently (The U.S. nonfinancial corporate sector issued almost 90% of outstanding debt in the 1950s. The financial sector played a minor role, and its outstanding debt as a fraction of total debt was only about 1%. But, by the 1990s, debt issued by the U.S. nonfinancial corporate sector declined to only about 44%; the financial sector debt now exceeds the debt from the nonfinancial corporate sector (Frank and Goyal, 2008) ) Especially, the new international capital framework for banks, also known as Basel III, insists an additional risk-independent capital requirement that is proportional to the size of bank’s asset, a so-called a leverage ratio restrictio. The one purpose of this paper trying to complements Kisgen (2006) and Kisgen (2009) by examing the influence of credit rating on bank’s leverage decision in ex-ante and ex-post. Despite the expansion of services and seemingly growing importance of ratings, some disquiet is now being expressed about the activities of rating agencies. However, after the outbreak of the crisis there have been many studies and scientific analyses that deplore the role of CRAs in global financial credit crisis (e.g., Pagano and Volpin, 2010). The failure to predict corporate collapses have put rating agencies under fierce public scrutiny and has brought renewed attention to conflicts of interest in CRAs (Bolton, Freixas and Shapiro, 2012 and Stolper, 2009). The heavy dependence on client fee therefore raises questions about the independence of the agencies in assigning grades (Baker and Mansi, 2002). Recently, Jiang, Stanford and Xie (2012) find that the issuer-pay model would lead to high bond ratings and increase the conflicts of interest. Based on

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above mention, we offer “Conflict of Interest arguments” that issuer-pay model leads to higher ratings in order to maintain their market share and client fee income. For solicited credit ratings (SCRs), borrowers request ratings provide private information, and pay for the ratings. Rating agencies adding unsolicited credit rating (UCRs) without the consent of the issuers and therefore are not paid for these assessments. Thus, UCRs provide incomplete private information to CRAs. They are systematically lower than SCRs and possible reasons for this are controversial (Poon, 2003; Poon and Firth, 2005; Poon, Lee and Gup, 2009). To sum up, prevously researches contends that UCRs are lower than SCRs because UCRs are based on publicly available information rather than private information that is provided to the rating agency during a solicited rating process.( Golin (2001) argue that CRA invariably spends a lot of time in detailed discussions with the firm’s managers talking about the business plan, risk, funding plans and so on). Consequently, we offer “ Information Disclosure arguments” that UCRs are lower because they are based solely on public information and, as a result, tend to be more conservative than SCRs. Therefore, the other purpose of this paper argues that whether bank’s leverage decisions in ex-ante and ex-post are affected by credit rating which follows SCRs or UCRs concerns. At first, we follow Kisgen (2006) to construct two distinct measured that distinguish between banks close to having their debt downgraded or upgraded versus those not close to a downgrade or upgrade. Controlling for bank-specific variables, in overall samples, we find that concerns for the benefits of upgrades and cost of downgrades directly affect bank’s leverage decision, although staticially insignificant, which is consistent with Kisgen (2006)’s findings. Secondly, for UCRs banks, the results are both statistically and economically significant, with banks near a change in credit rating issuing annually approximately 1.0% less net debt relative to net equity as a percentage of total assets than banks not near a change in rating,while we do not find the same significant results in SCRs banks. These interesting findings can be explained by the Conflict of Interest and Information Disclosure arguments. UCRs would more concern their finance cost in the ex-ante because they not only give limited information to the CRAs but also feel unfairly treated by the CRAs. On the other hand, SCRs have confidence with their financial profiles under the full information and CRA highly dependence on their client fee, so they would not afraid near to rating changes in the ex-ante. Finally, we based on Kisgen (2009) method to examine the effect of the bank’s leverage behavior following SCRs or UCRs changes, respectively. For overall samples, bank increase leverage after upgrades, as they have lower distress costs, but responsing little to downgrades. This finding is inconsistent with Kisgen (2009) that he only consider non-financial firms. Besides, our ex-post results also indicate that bank react asymmetrically following SCRs or UCRs different rating changes. UCRs group would reduce their issue less debt relative to equity after they were downgraded and SCRs group would increase their issue less debt relative to equity after upgrades. These findings could also be explained by Conflict of Interest and Information Disclosure arguments. This paper contributes to a number of related literatures. Our primary contribution to capital structure literature is to show that the payment relationship between CRAs and issuers significantly affects the bank’s leverage decisions. To our knowledge, our study is the first attempt to inbestigate the relationship between SCRs and UCRs and bank’s ex-ante and ex-post leverage decisions. Second, our paper complements Kisgen (2006) and Kisgen (2009) by examing the influence of credit rating on bank’s leverage decision in ex-ante and ex-post. Third, our papers add to the bank’s leverage literature (e.g. Blum, 2008; DellʼAriccia, Laeven, and

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Marquez, 2013) by showing that credit rating of payment relationship between CRAs and issuers are an important determinant of bank’s leverage. Finally, according to Basel Ⅱ Accord from 2006 the financial institutions should comply with requirements that they use credit ratings in assigning assets to risk classes, but the accord do not require whether credit ratings should be solicited or unsolicited (Dale and Thomas, 2000). Our paper might provide some evidences for bank regulators and supervisors worldwide in relation to the calculation of the minimum capital requirements of Basel II (Behr and Güttler, 2008). In conclusion, our paper strengthens the financial industry evidences for Kisgen (2006) and Kisgen (2009) which are only including the nonfinancial firms. We hope that the research results presented here will support financial supervision of government and CRAs the information that they can adjust solutions about the conflict of interest. On November 23, 2009, the SEC adopted the following amendments: Rule 17g-2 and Rule 17g-5, that involve reporting format and additional disclosure and conflict of interest requirements on Nationally Recognized Statistical Rating Organizations. REFERENCES Baker, H. K. and S. A. Mansi, 2002, Assessing Credit Rating Agencies by Bond Issuers and Institutional Investors, Journal of Business Finance & Accounting 29 (9&10), 1367-1398. Behr, P., and A. Güttler, 2008, The informational content of unsolicited ratings, Journal of Banking & Finance 32, 587-599. Blum, J. M., 2008. Why ‘Basel II’ may need a leverage ratio restriction, Journal of Banking & Finance 32, 1699–1707. Bolton, P., X. Freixas, and J. Shapiro, 2012, The Credit Ratings Game, The Journal of Finance 67(1), 85-111. Dale, R. S. and S. H. Thomas, 2000, The role of credit rating in the Basel capital adequacy proposal, ECMI short paper, no.2. DellʼAriccia, G., L. Laeven, and R. Marquez, 2013, Real interest rates, leverage, and bank risk- taking, Journal of Ecnonmic Theory, forthcming. Frank, M. Z., and Vidahn K. Goyal, 2008, TRADE-OFF AND PECKING ORDER THEORIES OF DEBT, Handbook of Corporate Finance: Empirical Corporate Finance (Volume, 1, 2) Chapter12, 136-197. Golin, J., 2001, The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers, and Investors (John Wiley & Sons, Singapore). Hirtle, B., 2006, Stock market reaction to financial statement certification by bank holding company CEOs, Journal of Money, Credit, and Banking 38, 1263-1291. Jiang, J. X., Mary Harris Stanford, and Yuan Xie, 2012, Does it Matter Who Pays for Bond Ratings? Historical Evidence, Journal of Financial Economics 105(3), 607-621. Kisgen, D. J., 2006, Credit Ratings and Capital Structure, Journal of Finance 61(3), 1035-1072.

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Kisgen, D. J., 2009, Do Firms Target Credit Ratings or Leverage Levels?, Journal of Financial and Quantitative Analysis 44(6), 1323-1344. Morgan, D. P., 2002, Rating banks: risk and uncertainty in an opaque industry, American Economic Review 92, 874-889. Pagano M. and P. Volpin, 2010, Credit Ratings Failures and Policy Options, Economic Policy 25, 401-431. Poon, W. P. H., 2003, Are Unsolicited Credit Ratings Biased Downward?, Journal of Banking & Finance 27, 593-614. Poon, W. P. H. and M. Firth, 2005, Are Unsolicited Credit Ratings Lower? International Evidence from Bank Ratings, Journal of Business Finance & Accounting 32(9&10), 1741-1761. Poon, W. P. H., J. Lee, and B. E. Gup, 2009, Do Solicitations Matter in Bank Credit Ratings? Results from a Study of 72 Countries, Journal of Money, Credit and Banking 41, 285-314. Stolper, A., 2009, Regulation of credit rating agencies, Journal of Banking & Finance 33, 1266- 1273. BIOGRAPHY Yu-Jen Hsiao and Ching-Ho Chan are at the Department of Finance, National Dong Hwa University, Taiwan

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BARRIERS TO YOUTH ENTREPRENEURSHIP IN RURAL AREAS OF GHANA: A CASE STUDY OF

KOMENDA- EDINA-EGUAFO-ABIREM (KEEA) IN THE CENTRAL REGION OF GHANA

AUTHORS Gilbert O. Boateng, Takoradi Polytechnic, GHANA

Akwasi A. Boateng, Cape Coast Polytechnic, GHANA Harry S. Bampoe, Jayee University College, GHANA

ABSTRACT

The study examined the barriers to youth entrepreneurship in rural areas of Ghana specifically the challenges encountered by youths who want to set-up their own businesses. The study collected both primary and secondary data using semi-structured questionnaires, interviews and review of empirical and theoretical literatures. Youths in Komenda, Edina, Eguafo, Abirem Municipal Assembly was the target population. Purposive sampling technique was applied to select 240 respondents. Descriptive statistics which involves simple percentage, graphical charts and illustrations was purposefully applied in data presentations and analysis. The findings of the study reveal youths perceive lack of capital, lack of skill, lack of support, lack of market opportunities and risk as the main obstacles to entrepreneurial intention. It is recommended that Ghanaian youths be equipped with entrepreneurial skills to move them to the next level of development. JEL:015 KEY WORDS: Entrepreneurship, Barriers, Youth, Resources, Solutions, KEEA District INTRODUCTION The Ghanaian economy suffered its worst growth performance for about a decade in 2009 when real GDP growth slumped to 4.0 per cent. The fiscal and monetary positions deteriorated in response to poor domestic policies and external constraints. The rate of inflation rose sharply from 12.81% in January 2008, generating annual inflation rate of 19.3% in 2009, the cost of borrowing rocketed and the Ghana cedi also depreciated against the US dollar by 50 per cent from January 2008 to June 2009. These economic challenges worsened around year 2009 which was evidenced by high inflation, dramatic fall in gross domestic product, low productive capacity, loss of jobs through downsizing, restructuring, massive work scarcities. The overall economy continues to suffer from significant Ghana cedi depreciation, as a result of the combined political uncertainty, a growing external imbalance, accumulation of large public expenditure float from 2011, and delayed response from the central bank to mop excess liquidity in the economy as a result of the macro imbalance, the risk free interest rate rose from 10.9% in January to 23.1% in September 2012 causing commercial banks rush for government financial instruments instead of lending to the private sector coupled with the fact that business environment is engulfed with bureaucratic procedures, corruption and inefficiency makes job creation a mirage, thus fuelling youth unemployment especially among students exiting secondary and tertiary education (Amankrah, 2012).

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Youth unemployment can be seen as a form of deprivation robbing youth of the benefits of work and represents a dark era in their personal and social development (Chimucheka, 2012). This makes entrepreneurship indispensable in Ghana, especially when one considers the socio- economic challenges this nation has faced over the last two decades. Entrepreneurship including youth entrepreneurship improves the general standard of society as a whole, which leads to political stability and national security (Dei-Tumi, 2011; Shukla et al, 2001; UNDP, 2000). Taking this into account, developing the micro and small enterprise sector can be regarded as the seedbed for the development of large companies, and probably the life blood of commerce and industry (Kantis et al., 2002). Of the tools used to create employment micro and small enterprises (MSEs) has become the most popular in recent times across developing countries as a whole. The importance of small businesses, as the driver of sustainable job and wealth creation, has been confirmed by Abor et al., (2010) and Midfred, (2010). Mkhize (2010) adds that entrepreneurship, as a possible solution to the growing problem of youth joblessness, is necessary to ensure the success of small and micro enterprises (SMEs). Youth entrepreneurship reduces crime, poverty, drug addiction, and income inequality. This indirectly induces an environment for national and regional economic growth and development (Mutezo 2005; Curtain, 2004). Muchini et al (2011) argue that although various age and social groups have been hit in varying scales and degrees by the economic crisis in the sub-region including Ghana, the unemployed youths are the most affected. Considering the dwindling fortunes in the employment capacity of enterprises operating in Ghana, it can be accepted that youth entrepreneurship can play a vital role in reducing joblessness levels and contributing to economic growth (Kanyenze et al, 2000). An investigation of the possible barriers to youth entrepreneurship is very vital. This study focuses on the youths in the rural areas of Ghana. An analysis of studies on entrepreneurship in Ghana revealed that few studies have been made in the past to identify the barriers to youth entrepreneurship with a focus on rural areas of Ghana. The primary objective of this study is to examine the barriers to youth entrepreneurship in rural areas of Ghana. LITERATURE REVIEW Definition of Youth and Ghana’s Youth Profile For purposes of this study, a definition by Ministry of Youth and Sports (MOYS, 2010) as espoused in National Youth Policy was adopted. The policy defines “youth” as “persons who are within the age bracket of fifteen (15) and thirty-five (35)”. Unemployment and Underemployment Among Ghanaian Youth It is an indisputable fact that Ghana is one of the Sub- Saharan African countries with high levels of youth unemployment and underemployment. According to Mensah (2009), the problem of youth unemployment and under-employment in Africa poses complex political, socio-economic and moral policy issues. The author opines that supporting entrepreneurship through promoting the development of the micro and small enterprises (MSE) sector can be a solution to reducing unemployment levels in most Sub-African countries. Given that the majority of the Sub-Saharan African population is composed of the youth, this population group can be a potential resource for growth (NPC, 2006). Uneca and Ecowas (2010) argued that young people are a potential resource for growth and social development if gainfully and productively engaged. This implies that Ghana can boast of this if there is ability and capacity to productively engage the youths. One

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form of engagement would be the encouragement and support for youths to start own enterprises. The fact that youth unemployment is high in Ghana is incontestable hence the debate must be on the best approach to combat the problem. This study proposes youth entrepreneurship as a solution to the challenge of unemployment, underemployment and vulnerable employment. It is apparent that entrepreneurial activity is beneficial for Ghana both at a micro level - in terms of creating stable and sustainable employment for individuals - and at a macro level - where it significantly increases a nation's GDP. This would go a long way in tapping into the potential of the young population. Since the majority of African youths live in the rural areas, it is reasonable to argue that the youth programs be concentrated also in rural areas. Causes of Youth Unemployment in Ghana According to the Ministry of Employment and Labour Relations the causes of youth unemployment in Ghana include the following; 1. the introduction of the Junior High School and Senior High School system without adequate

planning for integration into the trades/vocations and job placement; 2. education and training have no link to the needs of the important sectors of the economy; 3. the near collapse of Ghana’s industrial base due to ineffective management; 4. the shrinking of public sector employment opportunities coupled with a relatively slow

growth of the private sector; and 5. the lack of a coherent national employment policy and comprehensive strategy to deal with

the employment problem. Entrepreneurship Entrepreneurship is considered the economic engine by many countries in the world (Carree et al, 2002). This is due to the fact that it involves the creation of new ventures that provide goods and services to people, creates jobs as well as enhancing the economic growth and development of any country. Involving youth in the formal sector through entrepreneurship is a way of gainfully engaging this population group. Furthermore, entrepreneurship help strengthen social networks, giving a sense of belonging and opportunity to add value to the local community and economy. Successful youth entrepreneurship is possible if the youths possess the characteristics of entrepreneurs. These characteristics include a desire to start own enterprise, readiness to undertake any venture and activity of which the outcome and result is shrouded in a state of uncertainty, vision, single-mindedness, perseverance, high need for achievement, initiative and responsibility (Zimmerer et al., 2008; Garfield, 1986). Resources Needed to Support the Youths Who Want to Start Businesses Every business needs resources to function and operate successfully. Abor et al (2006), and Aryeetey et al (1994), identified financial resources, physical assets, human resources and technological resources as some of the resources necessary for any business start-up and growth. Financial resources are needed for day to day operations of the business. These resources are needed to finance all other types of resources like physical resources, human resources and technological resources. Sutton et al (2007) point out that many businesses fail because of inadequate financial resources and failure to manage these resources. This implies that there is need to raise the finances and to properly manage business funds. Physical resources that are needed by businesses or by prospective entrepreneurs include buildings, equipment, raw materials and land (Aryeetey et al, 1994). These resources are essential for production. Human resources

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speak to the nature of people who are there to support in the running of the business. Their expertise, know-how and experience are very vital and can be developed through education and training. Technological resources include intellectual property (copyrights, trademarks and patents) and these can be a source of competitive advantage (Chimucheka, 2012). Goodwill can also be a crucial resource. Goodwill as a resource has more to do with the overall reputation of the business. It can also enhance brand loyalty and good name of a business venture. When looking at the barriers of youth entrepreneurship, it is very important to also look at the support structures that are set to promote youth entrepreneurship in Ghana. Support Structures That Promote Youth Entrepreneurship The government of Ghana has identified entrepreneurship as a major policy thrust to achieve economic growth (www.ndpc.gov.gh). Although there are some support structures that promote entrepreneurship in Ghana, there is still need to assess the extent to which their contribution can lead to sustainable entrepreneurship which generates jobs for the active population. This is evidenced by a number of institutions such as rural enterprise programs that have been established by the government to provide funding and improve operational efficiency in the micro and small enterprises sector (www.home.moti.gov.gh). The current structures that promote youth entrepreneurship in Ghana include the Ministry of Trade and Industry, Ministry of Youth and Sports, National Youth Authority, Ghana Youth Employment and Entrepreneurial Development Agency (GYEEDA), National Board for Small Scale Industries (NBSSI), vocational and technical training centres; and microfinance schemes such as Micro and Small Loans Centre (MASLOC). These agencies have reported some recent developments in funding, training and mentorship programs targeting youth in enterprises or those interested in starting their own enterprises. There are also other structures at regional and Metropolitan, Municipal and District Assembly (MMDA) levels. DATA AND METHODOLOGY Study Area The Central Region has thirteen (13) districts, three (3) municipalities and one (1) metropolis. Komenda, Edina Eguafo Abirem (KEEA) municipality is one of the municipalities in the region. It is bordered on the west by Mpohor-Wassa East district; on the north by Twifo-Hema-Lower Denkyira; on the east by the Cape Coast Metropolitan Assembly and on the south by the Gulf of Guinea. The municipality covers about 396 km2

. KEEA which has Elmina as the capital has a population of 144,705 constituting 6.6% of the total population in the region (Ghana Statistical Service, 2012). The sex distribution of the municipality shows that 69,665 are males whereas 75, 040 are females with sex ratio of 69:75. The rural-urban proportion is almost 64.28-35.72 in the municipality. The 2010 population and housing census show that 64.28% of the population of 144,705 dwells in the rural areas whereas 35.72% are urban dwellers. There is therefore significant difference between rural-urban settlements in KEEA Municipality. The urban settlement has 64.28% females and 35.72% males whereas the rural settlement has 51.86% females and 48.14% males. Data Collection

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Primary data was obtained using a semi-structured questionnaire that was interviewer- administered and interviews which was also conducted with the youths to obtain additional but necessary qualitative data. Secondary data was through review of the theoretical and empirical literatures sourced from books and scholarly journals, Internet and conference papers among others. The population of the study consisted of youths in the rural areas of the KEEA municipality. It was difficult to find an up to date database with all the youths in KEEA that could be used as a sampling frame. Purposive sampling technique was applied to select 240 respondents from the target population. The reasons for the purposive sampling was to enable the researchers choose participants randomly for their unique characteristics or their experiences, attitudes or perceptions. In this study, the researchers only selected sample elements that showed the desire and passion for entrepreneurship and those that started, or have tried to start their own enterprise. Respondents also had to be in the youth category as defined by National Youth Policy of Ghana. The return rate of completed questionnaire was 85 percent as we were able to get back 204 out of 240 questionnaires given to our respondents. Thus, only 204 questionnaires were used for final analysis in this study. In an effort of making the presentation of information clearer and easy to understand, tables, frequency counts and percentages were used. RESULTS AND DISCUSSION Table 1: Distribution of Respondents by Gender

SEX FREQUENCY PERCENTAGE (%) Male 149 73.04 Female 55 26.96 TOTAL 204 100

This table shows the gender of the respondents. The researchers sought to know gender of respondents, since sex is a determining factor in many economic decision making consideration. From the analysis, it was found that 149 (73.04%) were males whilst 55 (26.96%) are females. This was attributed to ethnic specialisation, willingness of females to engage in menial jobs and strength of respondents’ ‘informal social network’. Table 2: Impact of Unemployment on the Youth

RESPONDENTS FREQUENCY PERCENTAGE (%) Yes 198 97.05 No 6 2.95 TOTAL 204 100

This table displays results of respondents directly affected by unemployment. The researchers sought information from respondents as to whether unemployment was a real challenge confronting youth in both urban and rural areas. Table 2, reveals 198 (97.05%) responded ‘YES’ while 6 (2.95%) of respondents responded ‘NO’. Those affected directly by unemployment claimed the ignominy of relying on blood relatives for sustenance has forced a lot of them to lodge with friends because they can no longer contain family demands. Table 3: Unemployment a Challenge For Both Urban and Rural Youth

RESPONDENTS FREQUENCY PERCENTAGE (%)

Yes 204 100 This table shows results of unemployment as a real challenge to both rural and urban youth.

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As can be seen in table 3, all the respondents agreed that unemployment was a real challenge confronting both rural and urban youth. Table 4: Requisite Knowledge and Skills to Operate Own Business

RESPONDENTS FREQUENCY PERCENTAGE (%) Yes 142 69.61 No 62 30.39 TOTAL 204 100

The table displays results of respondents’ possession of skills, knowledge and attitude. The researcher sought information from respondents as to whether they believed they have the necessary knowledge, attitude and skills to start and manage their own businesses. From table 4, 62 of the respondents (30.39%), believed that they had the necessary knowledge, skills etc to run their own businesses, while 142 of the respondents (69.61%) said they did not have all the necessary skills, knowledge to start and run their own businesses. Table 5: Challenges Faced by Ghanaian Youths Seeking Employment

RESPONSE PERCENTAGE (%) Lack of experience 90 Corruption 76 Nepotism 60 Lack of training 70 Lack of relevant skills needed in the job market 60 Family needs and expectations 60

This table displays summary of respondents’ perceived challenges faced by Ghanaian youths seeking employment. The findings on this table are based on the question, “What are the challenges faced by Ghanaian youths seeking employment?” More than 90% of the interviewed youths that are seeking employment mentioned that they lacked experience for the jobs that they were seeking. They believed that they could not also establish their own businesses without experience in any industry. 76% of the respondents mentioned corruption as a challenge. This corruption is mainly by individuals serving in hiring organisations that have the tendency of accepting bribes from less qualified individuals. 60% of respondents cited nepotism also as a challenge. Nepotism involved hiring friends and relatives for positions that other youths are better qualified to occupy. Close to 70% of the respondents indicated that lack of training was also a challenge. These individuals mentioned that they lacked knowledge and skills that are needed for most of the advertised job vacancies. Most of these respondents either dropped out of school, or failed to obtain the required grades to enroll at any tertiary institution. This leaves them in a position where they can be exploited to work long hours yet they are underpaid. 60% indicated lack of relevant skills needed in the job market can also lead to youths failing to meet their personal and family needs and expectations. This in most cases force people into desperation, where they can accept any job offer allowing employers to take advantage of them. Table 6: Impediments to Youth Entrepreneurship in Ghana

RESPONSE PERCENTAGE (%) Corruption by local authorities 79.41 Lack of capital 100 Unstable and Unpredictable economic environment 50 Insufficient and unreliable government support 57 Poor location 63 Insufficient demand for the products and services 48 Others

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The table shows respondents perceived barriers to youth entrepreneurship in Ghana. The findings on the table are based on the question, “What are the impediments to youth entrepreneurship in Ghana. Corruption by local authorities was mentioned by 79.41% of the respondents. This was said to be affecting access to resources, especially those provided by the state to promote youth entrepreneurship. All respondents mentioned lack of capital as the main impediment to youth entrepreneurship in rural areas of Ghana. This is mainly because most youths in rural areas lack proper skills to be employed in order to save for capital. Although there are banks offering loans in Ghana, bank finance is not easily accessible to youths in rural areas for they, in most cases lack the required collateral needed to obtain a bank loan (Sowa et al., 1992; Aryeetey et al., 1994; Bigsten et al., 2000; Buatsi, 2002). Inaccessibility of financial resources by youths in rural areas of Ghana is also because of lack of connections, lack of the needed financial deposit and lack of knowledge pertaining to the sources of financing available. The unstable and unpredictable economic environment in Ghana was mentioned by close to 50% of the respondents as another factor discouraging youths to start and grow their own businesses. Insufficient and unreliable government support is said to be another impediment to youth entrepreneurship. Close to 57% of the respondents indicated that the government does not really support entrepreneurship as a career opportunity for youths as compared to other programs such as indigenization and black empowerment. 63% of respondents in business but operating in the rural areas indicated that poor location was a great challenge for it affected the sales and the performance of their businesses. 48% of respondents mentioned insufficient demand for the products and services offered on the market by most youths together with high production costs as an impediment to youth entrepreneurship. Other challenges that were mentioned and explained by the respondents as the impediments to successful youth entrepreneurship in the rural areas include lack of information technology. High transport costs, unattractive business environment, lack of relevant experience, lack of and inaccessibility to skilled labour, high registration costs, high costs to obtain licences to operate formally, poor roads, unreliable electricity, unreliable communication services and lack of networking opportunities were also stated as the impediments to youth entrepreneurship. This concurs with findings by Fjose et al (2010) that electricity and access to finance is considered by far the most important hindrance by MSEs in Sub-Saharan African. Benefits of Entrepreneurship to Youths in Ghana Entrepreneurship development, especially in the form of MSEs can ameliorate the problem of high youth unemployment, eradicate poverty and increase national propensity. This can be possible because MSEs usually have low start-up costs, low risk and can help exploit untapped knowledge and creativity (Mfaume et al, 2004). In short the benefits include: 1. Creating employment 2. Providing local goods and services to the community, thereby revitalizing it 3. Raising the degree of competition in the market, ultimately creating better goods and services

for the consumer 4. Promoting innovation and resilience through experience-based learning 5. Promoting a strong social and cultural identity 6. Continuously creating and growing diverse employment opportunities different from the

traditional fields available in a particular community. The Role of Government in Promoting Entrepreneurship Among Youths in Ghana

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The Government of Ghana still have a long way to go in supporting youth entrepreneurship. The following were suggested by the respondents as the roles of the government in promoting youth entrepreneurship in the rural areas of Ghana: 1. Enhancing access to finance for start-ups, growth enterprises, technology enterprises and

micro entrepreneurs. 2. Entrepreneurial training should be provided to the youths through entrepreneurship support

structures that were established by the government. Entrepreneurial training can help improve the entrepreneurship competencies of the youth and possibly the desire to start own businesses.

3. Promoting an eco-system for accelerating entrepreneurship, enhancing the flow of information on procedures and formalities to set up an enterprise by creating and strengthening one-stop-shop i.e. single-window system; and, ensuring ease of ‘entry and exit’.

4. The government should also foster ‘Social Entrepreneurship among Ghanaian youths. This may help in increasing information sharing, especially on opportunities available.

RESULTS AND DISCUSSION This study identified and discussed barriers to youth entrepreneurship in Ghana. The results reveal that the challenges faced by entrepreneurs in Ghana can be compared to those faced by entrepreneurs in Nigeria and South Africa, which are considered the economic engines of Africa. These challenges are not peculiar to Ghana only. A study conducted in South Africa by Odeyemi and Fatoki (2010) concluded that the problem of access and availability of finance to entrepreneurs in South Africa was ranked second after lack of entrepreneurial and management competencies in most aspiring and existing entrepreneurs (in the MSMEs sector) in South Africa. This is also supported by Atieno (2001), Yon et al. (2011) and Tadesse (2009) who also conducted their studies in Kenya, Ghana and Sub-Saharan Africa respectively. Quartey et al (2000) also found similar challenges as hampering entrepreneurial activity in Ghana and Malawi. These results also concur with the findings of Association of Ghana Industries (2010) which identified lack of collateral security resulting in inaccessibility to credit facilities, lack of managerial skills and challenges in business registration as some of the difficulties faced by both women and youths in business in Ghana. According to Bindu et al. (2011) availability and accessibility to finance and skills development are crucial for entrepreneurial success. CONCLUSION AND RECOMMENDATIONS This study concludes that entrepreneurship can be a solution to the challenges that are faced by the youth, particularly in rural areas of Ghana. Various stakeholders need to play various roles if youth entrepreneurship is to be a panacea to youth unemployment in rural areas of Ghana. Based on the findings, the following recommendations are suggested. The Government of Ghana should set up a National Commission on Entrepreneurship which will guide entrepreneurship crusade in the country, unleashing entrepreneurship and youth power in pursuit of wealth creation, employment generation and productivity improvement, by judiciously harnessing technology and resources. Also, entrepreneurship should be introduced into the national education system to orient and prepare students for an entrepreneurship career by imparting skills, knowledge and aptitude for entrepreneurship. This is because most of the respondents indicated they lacked the necessary

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skills and knowledge to set-up/start a business. The role of education in shaping the mind-set and thought process of youth can hardly be overstressed. Further, Local authorities should work with government agencies and ministries that support youth entrepreneurship in a way that will benefit the youths in their respective districts. They should work with the youths to come up with real solutions to the challenges faced by youths. Furthermore, the government should create district, regional and national level “Entrepreneurship Ambassadors” from amongst successful entrepreneurs to recognize their success and achievements. This can be modelled along the lines of National Farmers Award as pertains in Ghana. If entrepreneurship is treasured, it incentivizes the youth to consider entrepreneurship as a preferred career. There is a need to create role models at district, regional and national levels to inspire and attract entrepreneurial talent. In addition the study recommends implementation of entrepreneurship surveys and research and sharing findings to inform policy formulation and implementation. For without proper research and authentic data, policies passed may create unintended negative consequences according to Curtain (2004). Again, the government should strive to undertake mass campaign to promote entrepreneurship/self-employment among the rural dwellers by enlisting support of opinion leaders of such communities to encourage youth to look up to entrepreneurship and self- employment rather than seek employment or be dependent on government. They need to seek the necessary skills that are needed for the establishment and growth of their profitable businesses. The government should invest in specific micro enterprise development programmes for youth to build their capacities in terms of knowledge, skills and aptitude so that they are able to negotiate with the market forces successfully. REFERENCES Abor, J. and Biekpe, N., (2006) “Small Business Financing Initiatives in Ghana”, Problems and Perspectives in Management / Volume 4, Issue 3, 69-77. Abor, J. and Quartey, P., (2010). “Issues in SME Development in Ghana and South Africa”, International Research Journal of Finance and Economics ISSN 1450-2887 Issue 39, Euro Journals Publishing, Inc. [Online] Available at www.eurojournals.com/finance/htm[Accessed April 28, 2013] Amankrah, J.Y. (2012). “Youth Unemployment In Ghana: Prospects And Challenges”. Retrieved from www.cepa.org.gh/researchpapers/Youth73.pdf [Accessed May 10, 2013] Aryeetey E., Baah-Nuakoh A., Duggleby T., Hettige H. & Steel W.F. (1994), “Supply and Demand for Finance of Small Scale Enterprises in Ghana”, World Bank Discussion Paper No. 251. Atieno, R. (2001). Formal and informal institutions’ lending policies and access to credit by small-scale enterprises in Kenya: an empirical assessment. African Economic Research Consortium: AERC Research Paper 111. Retrieved from: http://www.aercafrica.org/DOCUMENTS/RP111.PDF. Bigsten A., Collier, P. Dercon, S., Fafchamps, M., Guthier, B., Gunning, W., Soderbom, M., Oduro, A., Oostendorp, Patillo, C., Teal, F. and Zeufack, A. (2000), Credit Constraints in

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Manufacturing Enterprises in Africa, Working Paper WPS/2000. Centre for the study of African Economies, Oxford University, Oxford. Bindu, S. Mudavanhu, V. Chigusiwa, L. and Muchabaiwa, L. (2011). Determinants of small and medium enterprises failure in Zimbabwe: A case study of Bindura. Int. J. Econ. Res. 2(5):82-89. Buatsi, S.N. (2002), ‘Financing Non-traditional Exporters in Ghana’, The Journal of Business and Industrial Marketing, 17(6), pp. 501-522. Carree, M., and Thurik, A. R. (2002), The Impact of Entrepreneurship on Economic Growth, in Zoltan Acs and David B. Audretsch (2003), International Handbook of Entrepreneurship Research, Boston/Dordrecht: Kluwer Academic Publishers. Chimucheka, T., (2012), “Impediments to youth entrepreneurship in rural areas of Zimbabwe”, African Journal of Business Management Vol.6 (38), pp. 10389-10395 Curtain, R. (2004). Indicators and measures of youth unemployment: Major limitations and alternatives. Paper for expert group meeting on” strategies for creating urban youth employment: Solutions for urban youth in Africa”, Division of Social Policy and Development, Department of Economic Affairs, UN in Collaboration with UNHABITAT and the Youth Employment Network, 21-25 June 2004, Nairobi, Kenya. Dei-Tumi, E. (2011), “National Youth Entrepreneurship Policy” Speech Delivered During a Workshop Organized by the Institute of Continuing and Distance Education, University of Ghana, on the Theme : “Policy Options for Youth empowerment in Ghana” at the Institute of African Studies on Friday, October 21, 2011. Economic Commission for Africa (ECA) (2002). Youth and employment in the ECA Region. Paper prepared for the youth employment summit, Alexandria, Egypt. Fjose, S. Grünfeld L. A. and Green C. (2010) “SMEs and growth in Sub-Saharan Africa” Identifying SME roles and obstacles to SME growth” MENON-publication no. 14/2010 Garfield, C., (1986), Peak Performers: The New Heroes of American Business. New York: Avon Books Ghana Statistical Service, (2012). “2010 Population and Housing Census: Summary Report of Final Results” The Ghana Statistical Service Publication, Accra, Ghana. Kantis, H.,Ishida M. and Komori M. (2002). Entrepreneurship in Emerging Economies: The Creation and Development of New Firms in Latin America and East Asia. Washington, DC: Inter-American Development Bank. Kanyenze, G., Mhone, G. C. Z., and Sparreboom, T. (2000). “Strategies to combat youth unemployment and marginalisation in Anglophone Africa”. ILO/SAMAT Discussion. p.14 Mensah C., (2009). Mainstreaming Youth Entrepreneurship in Ghana – Getting the Fundamentals Right. Retrieved from http://siteresources.worldbank.org/INTYTOYCOMMUNITY/Resources/MensahClement. Pdf

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Mfaume, R. M., and Leonard W., (2004).Small Business Entrepreneurship in Dar es salaam – Tanzania: Exploring Problems and Prospects for Future Development, African Development and Poverty Reduction: The Micro-Macro Linkage, Forum Paper [Online] Available: http://www.tanzaniagateway.org/docs/SME_Tz_Prbs_prospects.pdf [Accessed June, 2013] Midfred, P.,(2010). Strengthening Business Development Services Provision in Ghana, Draft report, Commonwealth Secretariat, London Mkhize, F., (2010). ‘Shaping the nation through small business: Focus on budget 2010’, Finweek, 25 February. Muchini, T. and Chirisa, I, (2011). Youth, Unemployment and Peri-Urbanity in Zimbabwe: A snapshot of lessons from Hatcliffe. Int. J. Politics Good Governance. 2 (2.2):1-15 Mutezo, A. T. (2005). Obstacles in the access to SMME finance: an empirical perspective of Tshwane. Unpublished Masters Dissertation, University of South Africa. National Population Council (NPC) Ghana, (2006). State of Ghana Population report: Investing in Young People – The Nation’s Precious Asset Odeyemi, A. and Fatoki, O. (2010). “Which New Small and Medium Enterprises in South Africa have access to Bank Credit?”, International Journal of Business and Management, 5 (10). Retrieved from www.ccsenet.org/ijbm. [April 11, 2013] Quartey, P., and Kayanula D., (2000), The Policy Environment for Promoting Small and Medium- sized Enterprises in Ghana and Malawi, Institute for Development Policy and Management, University of Manchester. Available at: Web: http://www.man.ac.uk/idpm/ [Accessed June 7, 2013] Shukla, S. and Awasthi, D. (2001), Study on Entry Barriers to Entrepreneurship, (Unpublished Report), New Delhi, Government of India, Ministry of Micro, Small and Medium Enterprises Sowa, N.K., Baah-Nuakoh, A., Tutu, K.A. and Osei, B. (1992), “Small Enterprise and Adjustment, The Impact of Ghana’s Economic Recovery Programme on Small-Scale Industrial Enterprises”, ODI Research Reports. Sutton, C. N. and Jenkins, B. (2007), “The Role of the Financial Services Sector in Expanding Economic Opportunity”. Economic Opportunity Series. Retrieved from: http://www.hks.harvard.edu/m-rcbg/CSRI/publications/report_19_EO%20Finance%20Final.pdf, 6. [Accessed May 5, 2013] Tadesse, A. (2009). Rethinking Finance for Africa’s Small Firms. Private Sector & Development: SME , Financing in Sub-Saharan Africa Retrieved from http://www.proparco.fr/webdav/site/proparco/shared/PORTAILS/Secteur_prive_developpement/ PDF/SPD1_PDF Private-Sector-and-development-En.pdf, 17. [Accessed March 15, 2013] The Youth Employment Network and The International Youth Foundation (July 2009). Private Sector Demand for Youth Labour in Ghana and Senegal: Ghana and Senegal Study Findings. http://www.ilo.org/public/english/employment/yen/ downloads/psi/psi_study.pdf UNDP (2000). World Development Report. United Nations.

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Uneca and Ecowas (2010). Unemployment, Underemployment and Vulnerable Employment in West Africa: Critical Assessment Strategic Orientations. http://www. uneca.org/wa/documents/RapportEco2010-%20Partie2ENG.pdf Yon, R. and Evans, D. (2011) “The Role of Small and Medium Enterprises in Frontier Capital Markets. [Online] Available at: www.netscience.usma.edu/publications/publications.htm [Accessed April 20, 2013] Zimmerer, T. W. and Scarborough, N. M. (2008), Essentials of Entrepreneurship and Small Business Management, New York: Person Prentice Hall BIOGRAPHY Gilbert O. Boateng is a Lecturer at the School of Business, Takoradi Polytechnic. His research interest includes Development Economics, Monetary Economics, and Central Banking. He can be reached at [email protected] and by phone at +233242777480. Akwasi Addai-Boateng is a Lecturer at the Department of Accountancy, Cape Coast Polytechnic. His research interest includes SME’s financing, Corporate Governance, Regulation and Supervision of MFIs. He can be reached at [email protected] and by phone at +233205905219. Harry S. Bampoe is a Lecturer at Jayee University College. His research interest includes Small and Medium Scale Enterprises and Branding. He can be reached at [email protected] and by phone at +233247817565.

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NO KENYAN LEFT BEHIND: THE CASE OF FINANCIAL INCLUSION THROUGH MOBILE

BANKING Tony Mutsune, Iowa Wesleyan College

ABSTRACT

The importance of widespread access to suitable financial services for the populace in fostering economic vitality is well recognized. Regrettably, much of the developing world experiences a relative scarcity of crucial financial services in rural and semi-urban areas. With estimated mobile devise ownership at over 700 million in Africa, innovative banking solutions such as mobile banking offer potential channels to advance the access frontier in the banking industry. This study examines Kenya’s highly successful money transfer model, M-pesa, in an effort to explore the nature and role of financial inclusiveness in stimulating economic activity. M-pesa allows ordinary Kenyans to send money across the country cheaply and reliably using mobile devises. As such, the stage appears set for a mass adoption by similarly situated countries in the region that are keen to enhance their financial services. Understanding the nature and role of economic dynamism dispensed through financial inclusiveness can be useful for policy prescription and future studies, among other things. To this end, we borrow from a combination of the ideas of velocity circulation of money and a simple diffusion model to develop a framework that can be usefully applied to appropriate data. JEL: G00, G20, E41, E42 KEYWORDS: Mobile banking, Branchless banking, Financial inclusion, Money velocity INTRODUCTION In much of the developing world, there is a relative scarcity of crucial financial services in rural and semi-urban areas. Ensuring availability of suitable financial services to as much of the population as possible is a requirement for economic vitality in these regions. The African Development Bank’s (AfDB) 2010 estimate of over 500 million people owning mobile phones in Africa appears to favor widespread adoption of Kenya’s money transfer model, M-pesa by countries keen to enhance access to financial services. M-pesa is a money transfer service, initially developed and deployed in Kenya by Vodafone, a European telecommunications giant in partnership with Safaricom, the leading Kenyan mobile operator. It allows ordinary Kenyans to send money across the country cheaply and reliably, using their mobile phones. “M-pesa” is a loose translation for “mobile money” in Kenya’s national language, Swahili. M-pesa is estimated to have at least some seven million registered customers, who are transferring an average of $2 million a day between themselves (OECD). Reports released by the Communications Commission of Kenya in the first quarter of 2012 show that Kenya’s mobile penetration is at 77.2 per cent with a market share of 30.4 million mobile subscribers as of September 2012. Given the above indications, a deduction can be made to the effect that new solutions will offer channels to advance the access frontier in the banking industry as more Kenyans are brought into banking solutions. At this point, a working definition of the meaning of mobile banking is appropriate: Generally if a bank is not directly involved in the instrumental gratification of a service offered, it is usually

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called a “mobile payment” (Cruz, Pedro, et al, 2010). Financial services that may be delivered through the mobile channel, are in some respects not different from those delivered through conventional banking channels, and can therefore be viewed as a form of branchless banking. Its popularity with customers and retailers alike in both developing and emerging markets is well documented. The case of Kenya, which has caught the attention of other mobile phone operators on the African continent, is of particular interest. Many view it as the model to be replicated throughout the continent as more countries seek to boost access to financial services among citizens. This study explores the nature and role of economic dynamism dispensed through branchless banking innovations in Kenya with the aim of shedding more light and developing a useful model framework for empirical investigation among other things. The rest of the paper follows a literature review, a methodology development, discussion of future research and potential policy interest areas. LITERATURE REVIEW Examining Suitability of Branchless Banking Innovations The experience of Kenya with M-pesa can serve to illustrate mobile banking’s potential for generating efficiencies in the financial economy. Low cost, money security, speed and user- friendliness are among such efficiencies. Generally, mobile banking costs to the customer are hardly more than the transaction fee. The usual added charges and other cumbersome details associated with conventional banking scarcely exist, or are absent altogether. Soon after the launching of Kenya’s M-pesa, the then Safaricom CEO Michael Joseph was quoted by Business Daily stating: “M-pesa is the first product in the world that allows the unbanked, with no banking details, no registration, no bank account, no credit card, to do banking.” We can therefore appreciate how Kenya’s M-pesa has steadily gained competitiveness in the money transfer market against customary channels, and is leading to enormous changes in the organization of economic activity, family relations, risk management and mitigation, among other things (Mbiti and Weil, 2011). For the purposes of this study, the case of Kenya is particularly meaningful because it represents the experience of many underdeveloped regions, particularly those in sub-Sahara African where significant sections of the population rely on informal finance solutions which are often highly inconvenient, invariably unsafe, and largely disconnected from the rest of the world. According to Paul Makin of the OECD, the United Nations Department of Economic and Social Affairs (Undesa) estimates that in Africa alone, there are 300 million (approximately the entire U.S. population) reachable adults with no current access to formal financial services. Ignacio Mass, (2009) asserts that financial markets are quite simply failing to meet the needs of majority of the society in such regions, who are typically poor and live in rural areas. He suggests that any viable mitigating solution must prioritize keeping fixed costs per customer extremely small and reducing unit transaction costs. In effect, Kenya’s experimentation with M-pesa has taken banking transactions out of bank branches and into retail stores in more neighborhoods and villages. The product concept is simple, but nonetheless powerful. Users can transfer money from their mobile phones quickly, safely, and across great distances to other mobile phone users. A bank account is not necessary. Users only need to register with Safaricom for an “M-pesa account.” However, recipients need not have an M-pesa account. Ignacio (2009) identified key elements that constitute the platform for branchless banking: (i) a retail network, composed of a collection of retail outlets where transactions are originated, (ii) the payment network, which aggregates the transactions from the

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collection of retail outlets and routes them to the appropriate issuer, and (iii) the account platform which manages the service logic by authorizing individual transactions and maintaining the value accounts. These elements are all evident in the M-pesa model, and present key tradeoffs that providers need to face. Ignacio (2009) adds that an understanding of the economic drivers helps establish roles of the value chain and types of partnerships that improve the likelihood of achieving the necessary scale, and ensuring that the service can be delivered at an end-to-end transaction cost that is affordable to poor customers. Evidence suggests that each market evolves slightly differently based on distinct customer needs and other unique considerations, even though service delivery is generally enabled by the core set of elements described above. Yet it is worth noting that branchless banking models follow the same underlying functionality to move funds conveniently for users (Mroueh, 2013). For example, in developing nations such as Kenya, branchless banking is mostly tailored to facilitate person-to-person payments. In more advanced economies, branchless banking is generally richer and largely convenience situated; often includes checking and maintaining account balances or making purchases electronically. Linking Financial Innovation Solutions to Economic Activity It can be taken for granted that economic competitiveness and growth are compromised in markets where information is poor, scarce, and inefficiently communicated (Geertz, 1978). Consider the importance of timely access to knowledge of commodity prices. This can be hard to obtain in remote villages with limited telephone connections. The effect is a restricted market access for traders (Lars-Hendrik and Waverman, 2001). Mobile services can effectively relieve such restrictions by replacing physical transportation or specific transactions. Also, increased flow of information is aided by mobile phone technology and can result in efficient commodity prices. Mbiti and Weil (2011) cite studies by Jensen (2007) and Aker (2010) which found that the introduction of mobile phones reduced price dispersion in fish markets in India and grain markets in Niger respectively. Transacting with mobile services can also generate a personal record that can act as a basis for assessing creditworthiness and accessing micro-loans or other financial services that are critical for a widespread vibrant economic activity. Pioneering projects in India, the Philippines or Kenya, focusing on domestic and international remittances, have shown the way (Comninos et al. 2008). Farmers in Kenya continue to enjoy benefits accorded by mobile banking since the adoption of M-pesa. According to a 2011 IRIS Report by Nagarajan and Haas, improvements in food security emerged as one of the four major effects of M-pesa. The connection between food security and the economic implications is understood. Given the unpromising report by USAID (2010) on Kenya’s food security situation in which recurrent seasons of failed or poor rains, sustained high food prices, environmental degradation, outbreaks of disease, and flooding are cited as causes, one can readily appreciate the significance of M-pesa’s role towards improving food security and the resultant economic implications. Though the link is not as straightforward as that of other M- pesa’s economic effects (which will be discussed shortly), it nonetheless helps create an environment conducive to vibrant economic activity via aiding time-sensitive farming activities. The effects on Kenya’s food security are noticed in improved food production, and in access to, and consumption of diversified foods among the households that receive remittances through M- pesa (USAID 2010). The other M-pesa effects with a more direct impact on economic activity revolve around money circulation, transaction ease, and security of money (Nagarajan and Haas, 2011). M-pesa account holders can convert cash into “e-money” through a Safaricom dealer, and then follow a simple menu of instructions on their mobile phones to make payments through their accounts. Users can

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withdraw or deposit funds at anyone of more than 20,000 outlets of a strong agent network. A 2011 Business Today report estimates the network to be 20 times the number of existing bank branches in Kenya. Thus, M-pesa is more than simply a money transfer mode. Its pseudo checking account separates it from many similar products. In a country where an estimated 60 percent of the adult population does not use formal banking services, the implications on the velocity of transactions could be profound. By some accounts, a quarter of Kenya’s GDP is processed on M-pesa. A 2010 AfDB Report linked M-pesa to increases in transactions. The bank believes that the efficiency and near universality of M-pesa has greatly increased the speed with which money moves through the Kenyan economy. The report’s findings suggest that M-pesa- induced transactions velocity may have risen by up to four times higher than the transactions velocity of other components of money. In turn, this velocity has impacted supply and demand patterns. It can be argued that because Kenyans now have an easier and convenient way to transfer and spend money, more transfers and purchases are occurring. Together, as a vehicle for financial inclusiveness, the economic dynamisms dispensed by M-pesa are considerable. Given that the volume of money supply and its speed of circulation link money to economic activity (Akinlo, 2012), in the case of Kenya, we can roughly infer that increases in money supply and its speed of circulation in the post M-pesa era is linked to changes economic activity that can be linked to liquid money settlements. Obviously, there are several other factors that typically impact money supply and its velocity. By and large, monetary policy is central. For instance, it is known that the velocity of money and interest rates have a positive correlation (Mankiw, 2000). It is also advisable to be mindful that monetary policy and its transmission mechanisms are subject to the influence of external factors such as, currency exchange rate considerations, existing liquidity rules (Mihaljek 2011), prevailing economic conditions, and arrangement of financial institutions among several others. To the extent that innovations in payment methods are one of such factors, we should be alert to the mitigating potential of monetary policy. However, as a starting point, this study confines itself with the assumption that changes in in the rate of transaction occurrences following the adoption of M-pesa largely explain changes in economic activity that can be linked to settlements with liquid money. METHODOLOGY If we assume that the frequency of use of M-pesa stimulates and disperses economic activity, via a velocity mechanism, we can then develop a thought process that can help us investigate the nature and role of vitality dispensed in the economy. To this end, we associate the ideas of the velocity of money concept rooted Fisher’s (1911) in the Quantity Theory of Money, which supposes a direct relationship between price (P) and money supply (M). Under this supposition, increase in the amount of money in circulation result in higher prices for goods and services. The theory builds up on the following simplified definitional relationship, generally referred to as the equation of exchange. (See appendix 1 for additional notes)

(1)

Where M = total amount of money in circulation during a period VT = transactions velocity of money(This reflects availability of financial institutions, economic variables, and choices made as to how fast people turn over their money) PT= price level associated with transactions for the economy during the period = index of the real value of aggregate transactions.

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Therefore, we can rearrange equation (1) to express transactions velocity of money as follows, VT = PT. T ∕M (2) Given that the quantity variable under investigation assume some form of flow process, (for example money circulation and economic dynamism are expressions of some type of flow) we can adopt our thinking to employ a series of scalar quantity equations into which we will incorporate equation (2) as one of the variables.

Disp. = (m-pesa + Δm-pesa)M (3)

Where, Disp. = measure of diffusion of M-pesa into the economy m-pesa = number of existing registered users of M-pesa

Δm-pesa = changes in number of M-pesa users over time M = level of money supply in the economy If we introduce a ( The multiplier is a composition known changes in M-pesa accounts registered over time and a multiplicative factor) composite multiplier ø, which is estimated to measure the multiplicative effect of changes in number of M-pesa accounts, we can re-write equation (3) as follows, (m-pesa + øt)M (4) Where, t = time, say number of years We now incorporate equation (2) into the process by taking it for granted that velocity of money describes the level of economic dynamism. We can then postulate the interactions between M- pesa adoptions over time under a given monetary regime, and economic activity using the equation below.

VT = ∫ 𝑑𝐸𝑐𝑜𝑛𝑉𝑡2 𝑡1 = ∫ (𝑚 − ø𝑡)𝑀𝑑𝑡𝑡=𝑖

𝑜 (5) Where, VT = estimate of level of economic dynamism t = period of time m = number of M-pesa users over time ø = composite multiplier M = Money supply in the economy EconV = speed economic activity CONCLUSION

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Discussion of Future Research and Potential Policy Implications This study focused on exploring a useful framework that can be used to estimate how financial inclusion in Kenya through mobile banking has impacted economic dynamism. The ideas presented are an innovative exploration that blends economic thinking and with aspects of natural science with the aim of developing a framework that can be applied to appropriate data. The study should be viewed as a broadening a conversation that is already taking place among scholars across diverse fields. We envision that a using blended thought process in our approach will add richness to our model by combining the complementary features that emerge across natural and social science perspectives. Future research will focus on improving the integrity of the model and identifying and collecting appropriate data to apply. The subject of financial inclusion through mobile banking can be explored in several contexts. Some considerations include money laundering (De Koker, 2013 and Olatunde, 2012), consumer behavior (Laukkanen et al, 2007), financial integration (Acharya and Bisin, 2005) and legal issues (Rolf and Darbellay, 2013) to name a few. One aspect that is common in each case is the flexibility demand this new form of technology application requires of policy makers. For example, in the case of M-pesa, with increasing velocity of transactions in Kenya, and the increasing assumption of banking services by mobile service providers, the monetary authorities are back to the drawing board to recalibrate rules on money supply and banking services respectively. In 2008, regulatory authorities in Kenya were tasked to conduct a risk assessment on M-peas to determine how it fits into the existing framework (AFI, 2010). It is our expectation that following an empirical study, emerging policy considerations will largely angle towards building flexibility under existing policy. We can accept that technology changes are here to stay, along with the attendant cycles of creative disruptions. APPENNDIX In its modern form, the quantity theory builds upon the following relationship.

Where

= the total amount of money in circulation during the period

= transactions velocity of money

and = the price and quantity of the i-th transaction.

= column vector of the , and the superscript T is the transpose operator. is = column vector of the . The equation of exchange is a simplified variation accepted in economics. REFERENCES Acharya, V. and Bisin, A. (2005),” Optimal Financial‐Market Integration and Security Design,” The Journal of Business, Vol. 78, No. 6 (November), pp. 2397-2434

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Aker, Jenny C. (2010). “Information from Markets Near and Far: The Impact of Mobile Phones on Agricultural Markets in Niger.” American Economic Journal: Applied Economics Akinlo, A. (2012) “Financial Development and the Velocity of Money in Nigeria: An Empirical Analysis,” The Review of Finance and Banking, Vol. 4 No. 2, p.97-113 Alliance for Financial Inclusion, AFI (2010) “Enabling Mobile Transfer: The Central Bank of Kenya’s Treatment of M-pesa,” a case study. Business Daily, (2012) November 8 ed. “Mobile Banking Revolution Gathers Pace, Opens New frontier for Profits,” available at: http://www.businessdailyafrica.com/Mobile-banking-revolution-gathers-pace/-/539552/1056156/- /p4aussz/-/index.html Business Today (2011), December 11 ed. “A New Velocity of Money,” available at: http://businesstoday.intoday.in/story/innovation-M-pesa/1/20189.html Cruz, Pedro, et al (2010) “Mobile Banking Rollout in Emerging Markets: Evidence from Brazil.” The International Journal of Bank Marketing,” 28.5 p. 342-71 Comninos, A., Esselaar, S., Ndiwalana, A. and Stork, C. (2008), “M-banking the Unbanked, in Towards Evidence-based ICT Policy and Regulation, Vol. 1, Paper 4, available at: www.researchictafrica.net/new/images/uploads/RIA_Mobile-banking.pdf Communications Commission of Kenya, 2012 “Quarterly Sector Statistics Report,” July- September, available at: http://www.cck.go.ke/resc/downloads/SECTOR_STATISTICS_REPORT_Q1_12-13.pdf De Koker, Louis (2007) "Aligning Anti-Money Laundering, Combating of Financing of Terror and Financial Inclusion." Journal of Financial Crime 18.4 (2011): 361-86. Fisher, Irving (1911)“The Purchasing Power of Money” New York: MacMillan Geertz, C. (1978), "The Bazaar Economy: Information and Search in Peasant Marketing", American Economic Review, Vol. 68 No. 2, p. 28-32. Jensen, Robert T. (2007). “The Digital Provide: Information (Technology), Market Performance and Welfare in the South Indian Fisheries Sector,” Quarterly Journal of Economics, 122(3), p. 879-924 Lars-Hendrik, R. and Waverman, L. (2001), "Telecommunications Infrastructure and Economic Development: a Simultaneous Approach", American Economic Review, Vol. 91 No. 4, p. 909-23. Laukkanen, Tommi, et al. (2013) "Innovation Resistance among Mature Consumers." The Journal of Consumer Marketing 24.7 (2007): p.419 Makin, Paul. “Regulatory Issues Around Mobile Banking,” OECD Report available at: http://www.oecd.org/ict/4d/43631885.pdf Mankiw, N. G. (2000).Macroeconomics (4th ed.). New York: Worth Publishers

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Mas, Ignacio (2009) “The Economics of Branchless Banking,” Innovations Vol. 4 No.2 p.57-75 Mbiti Isaac, Weil David (2011) “Mobile Banking: The Impact of M-PESA in Kenya,” NBER Working Paper Series, Working paper No. 17129 available at: http://www.nber.org/papers/w17129 Mihaljek, Dubravko (2011) “How have External Factors Affected Monetary Policy in the EMEs?” BIS Papers No. 57, October, available at: http://www.bis.org/publ/bppdf/bispap57a.pdf Mrouhe, Malek (2013) Total Systems Services Inc. White paper on Branchless Banking, available at: http://www.tsys.com/Downloads/upload/Branchless-Banking-WP-012913-print.pdf Nagarajan, G.., and Haas, S. (2011), “Measuring the Impact of Financial Services on the Developing World,” IRIS Report, July, available at: http://www.fsassessment.umd.edu/publications/mobile-money-kenya.html Olatunde, J. O., Omobola A. S. and Olajide O. E. (2013) "The Role of Financial Intermediaries in Elite Money Laundering Practices." Journal of Money Laundering Control 15.1 (2012): 58-84. Ondiege, Peter (2010) “Mobile Banking in Africa: Taking the bank to the People,” Africa Economic Brief, Vol. No.8 available at: http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/John%20brief%201_John% 20brief%201.pdf Rolf, H. Weber, and Aline Darbellay (2010). "Legal Issues in Mobile Banking." Journal of Banking Regulation 11.2: 129-45. USAID (2010), Situation report on “Kenya- Food Insecurity,” fact sheet No. 9, September. ACKNOWLEDGEMENTS The authors acknowledge the helpful contributions of Prof. Wei Xu of Wuyi University’s School of Applied Physics & Materials Engineering, Guangdong province, China, and Cody Bossio, a pre-engineering student in the Iowa Wesleyan College Mathematics program. BIOGRAPHY Tony Mutsune is an Associate Professor of Business and Economics at Iowa Wesleyan College. His research papers appear in journals such as Advances in Competitiveness Research, International Journal of Management and Marketing Research and Global Journal for Business Research. He can be reached at Iowa Wesleyan College, 601 N. Main Street, Mt. Pleasant, IA 52641, [email protected].

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AN EXPLORATION OF POTENTIALS TO GREEN BUILDING ADOPTION IN KENYA AND

INDUSTRIAL IMPLICATIONS Peter Khaemba, United States Agency for International Development

Tony Mutsune, Iowa Wesleyan College

ABSTRACT

Natural resources play an important role in economic development and sustainability. Several studies have demonstrated the connections between human economies and natural ecosystems. In fact, contemplated benefits from widespread adoption of renewable energies continue to energize the transition towards more efficient energy systems worldwide. Understanding the interactions between natural and economic systems can yield extensive applications that find use in industry. This study employs a transdisciplinary approach to explore the potential for adoption of energy efficient buildings and the industrial implications that are attendant. We select Kenya as a study case because of its combined geographic and economic suitability. Kenya is a leading economic hub in a region that is endowed with an abundance of natural resources, some of which could constitute renewable energy sources. Our exploration is based on a recent study that utilized select attributes of existing green building standards as a model to explore the potential of developing green building guidelines for the context of Kenya. Among other findings, this study identified green building attributes that have the highest potential for adoption in Kenya. This study is timely in providing a preliminary platform for developing green building guidelines and best practices that would be meaningful to the Kenyan building industry. As of the time of this study, there was no green building standard in Kenya. JEL: KEYWORDS: Kenya, Green Building, Construction Industry, Potential, Adoption INTRODUCTION In this paper, we explore and identify salient green building attributes that could be adopted as a platform for developing a meaningful green building rating system for the context of Kenya without necessarily reinventing the wheel of other green building rating systems. Essentially, the identified green building attributes are the ‘low-hanging fruits’ that would be adopted to frame green building guidelines for Kenya. Beyond Kenya’s boundaries, this study provides a template that could be used to create green building standards and best practices in countries where economic, environmental and social geographies are similar to those in Kenya. Additionally, the tenets of this study provide guidance for future research efforts dedicated to inquiry on similar subjects. In arguing that the construction industry has not done enough to reduce its environmental footprint, Horvath (1999) asserts that concerted national and international research and educational efforts are therefore needed to change the situation. As green building concept continues to permeate the construction industry globally, preliminary findings of this study revealed that there were no green building guidelines in Kenya as of that time. However, there was an apparent interest in green building practices among the stakeholders. The theme of this paper is, therefore, timely in attempting to address this problem.

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LITERATURE REVIEW AND RESEARCH DEVELOPMENT The increasing adoption of green building practices is primarily driven by global efforts to build resilience to the negative impacts of the built environment on economic, environmental and social systems. Liu (2011) proclaims that the built environment has huge impact on the natural and social environment, resource consumption, indoor environmental quality, human health associated with it, and land use. Kozlowski (2003) defines a green building as one “that uses a careful integrated design strategy that minimizes energy use, maximizes daylight, has a high degree of indoor air quality and thermal comfort, conserves water, reuses materials and uses materials with recycled content, minimizes site disruptions, and generally provides a high degree of occupant comfort.” Since the detrimental effects of the construction practices on the natural environment were highlighted, the performance of the buildings has become a major concern for occupants and built environment professionals (Cooper, 1999; Crawley & Aho, 1999; Kohler, 1999; Ding, 2008). The overarching implication is that the construction industry needs to pay heed to the triple bottom concept of sustainability – economic, environmental, and social. For example, the quest for green building can be seen as a contributing factor to the significant research that has recently been conducted to determine the financial benefit of adopting green building technologies (Fuerst, 2009; Miller, Spivey, & Florence, 2008; Wiley, Benefield , & Johnson, 2010). A study conducted by Kats (2003) found that the financial benefits of green buildings are ten times their initial cost premium. In response to growing trend toward embracing green building, various green building rating tools , or systems/standards, have been introduced into the marketplace to provide a systematic approach, or guidelines, to achieving sustainability in the built environment (Bebbington, & Gray, 2001); Hemphill, McGreal, & Berry, 2002; Wyatt, Sobotka, & Rogalska, 2000). These tools provide a way of showing that a building has been successful in meeting an expected level of performance in various declared criteria (Cole, 2005). This study was developed upon a solid premise of an extensive review of literature related to the theme of research. This included examination of green building standards that have been adopted for other countries, especially the U.S. Leadership in Energy and Environmental Design (LEED) system. In particular, the attributes of LEED standard were found to be a key baseline since the standard has been adopted as a template for developing green building standards in other countries, such as Canada, China, and India. Overall, the essence of the literature reviewed in this study was to provide a baseline understanding that is imperative for developing a green building standard and best practices that are relevant to Kenyan construction industry. DATA AND METHODOLOGY In an attempt to encompass as much of Kenyan construction industry as possible, all survey participants for this study were members of the Board of Registration of Architects and Quantity Surveyors of Kenya (BORAQS). This in Kenya’s nationally accredited body for building professionals and consists of industry stakeholders that are deemed likely to play an early and key role toward embracing green building concept in the country. As a way of conforming to appropriate research ethics, permission was obtained from BORAQS before contacting the participants. The study was in two phases of survey – a pilot and main survey. The pilot survey

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was guided by the research question, “What green building attributes are applicable to the construction industry in Kenya?” To pursue this objective, we utilized a combination of focus groups and personal interviews to generate and validate a list of green building attributes that would make sense to industry context in Kenya. The pilot findings revealed 26 green building attributes that were identified as having the potential to be adopted for the context of Kenyan construction industry. These attributes belong to 5 broad categories of green building: sustainable sites, water efficiency, energy and atmosphere, materials and resources, and indoor environmental quality (Table 1). Sample participants in the pilot survey consisted of 12 building professionals with international experience who were actively involved in managing construction projects in Kenya. Table 1: Green Building Rating Attributes That Are Applicable to Kenyan Building Industry

Category Green Building Rating Attribute Sustainable Sites Prevent construction activity from causing site and air pollution.

Protect or restore the natural state of the building site in terms of ecosystem, agriculture, plants and animal habitat. Build/construct on a previously developed site. Preferably locate the project site in a location with higher population density. Build/construct on a contaminated site such as brownfield. Preferably build/construct near to existing transport and utilities infrastructure. Provide secure bicycle storage space for building occupants/users. Encourage building occupants to use vehicles that are fuel-efficient and emit lesser pollutants. Minimize the number of car parking spaces on the building premises/site. Maximize open space on the building/site. Control the quantity of storm water runoff from the building/site. Control the quality of storm water runoff from the building/site. Preferably use roof and non-roof materials with higher heat reflection.

Water Efficiency Implement strategies to minimize the amount of water used in the building. Treat and re-use waste water in the building. Collect rainwater for use in the building.

Energy and Atmosphere

Implement strategies to minimize the amount of energy used in the building. Preferably use renewable energy that is generated on the building site (e.g., solar and wind). Implement strategies to measure and verify energy use in the building.

Materials and Resources

Preferably re-use an existing building structure instead of constructing a new one. Preferably use recycled or salvaged building materials. Preferably use materials that are available close to the building/site. Preferably use building materials that are rapidly-renewable or replenishable.

Indoor Environmental Quality

Prohibit smoking indoors. Provide walk-off mats, grills, or grates at building entries. Implement strategies to achieve maximum daylight entering the building.

The list of attributes was then used to develop a comprehensive and meaningful questionnaire research instrument for the main survey, which targeted all construction professionals listed on BORAQS list. However, convenience sampling technique was employed to limit the sample size to only 608 professionals that had an active email on their registration profiles. As a result, only 347 responses were received and analyzed for the purpose of the study. In order to ensure unbiased geographic representation across Kenya, and desire to be as environmentally friendly as possible, data for this phase of the study was only collected by means of an electronic survey. Also, all subjects that had participated in the pilot survey were not allowed to participate in the main survey. The main survey was guided by the question: ‘What is the likelihood of adopting certain green building rating attributes and what is their level of importance, as perceived by Kenyan building professionals?’ In attempting to answer this question, the participants were asked to rank each attribute based on perceived level of importance. A five point Likert scale ranging from 1 to 5 was employed; 1 being lowest and 5 being the highest score respectively. Responses garnered from the main survey were computed for results by means of using descriptive statistical tools for mean ratings of each attribute according to its level of importance, as perceived by industry stakeholders in Kenya. The mean ratings were then ranked according to their weighted

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importance, followed by a comparative analysis of the results, as displayed in Appendix 1. Each green building rating attribute corresponding to the survey items was identified with one of the following categories: ‘sustainable sites,’ ‘water efficiency,’ ‘energy and atmosphere,’ ‘materials and resources,’ and ‘indoor environmental quality.’ The following formula was then used to calculate and rank the importance of each attribute and corresponding category:

Mean rating = n

FW i

i∑ =

5

1 *

, where,

W = weight assigned or scale value of respondent’s response for the specified survey item (variable): W=1, 2, 3, 4 and 5;

Fi = frequency of the ith response; n = total number of respondents to the survey item (variable); and i = response scale value = 1,2,3,4 and 5 for no opinion/do not know, disagree, somewhat agree, agree, and strongly agree, respectively. For the purpose of this analysis, responses with variable means below 2.5 were considered low/not important; those between 2.5 and 3.0 were considered moderate; those between 3.0 and 4.0 were considered moderately high; while those above 4.0 were considered high. The results of data analysis for each green building ratting attribute and its corresponding category is are tabulated in Appendix 2. For ease of data interpretation, each green building attribute was assigned a unique code (e.g. Q**). Also, there were variations in response counts due to skipping of some questions by respondents. RESULTS The results of descriptive analysis in Appendix 1 reveal that all the 26 green building rating attributes identified and tested in this study were perceived to be important. This is because, according to the scale of importance that was employed in this study, their mean rating scores ranged from moderate, to moderately high, to high. In essence, this affirms that the green building rating attributes and corresponding categories identified in this research, and displayed in Table 1 and Appendix 1, have potential for adoption in Kenyan building industry. Analytically, all the three green building attributes that belong to the category of ‘energy and atmosphere’ were ranked by respondents as having top-most importance. Q17 (minimize the amount of energy used in the building) was ranked the most important overall with a mean rating of 4.88; Q18 (use renewable energy that is generated on the building site) had a mean rating of 4.63 was ranked 4th overall; while Q19 (measure and verify energy use in the building) was ranked 7th overall.Besides the ‘energy and atmosphere’ category, the ‘water efficiency’ green building attributes were also rated as highly important. Q14 (collect rainwater for use in the building) took 3rd place overall with a mean rating of 4.66; Q15 (treat and re-use waste water in the building) was 5th overall with a mean rating of 4.55; while Q16 (minimize the amount of water used in the building) was ranked 6th overall with a mean rating of 4.40. Out of the three ‘indoor environmental quality’ green building attributes, only one was rated as being highly important. This was Q24 (use strategies to achieve maximum daylight entering the building), and had a mean rating of 4.68. Second in this category was Q25 (prohibit smoking inside the building) which was rated moderately high in importance with a mean value of 3.71. Q26 (provide walk-off mats, grills, or grates at building entries) was rated as being moderately important and had a mean rating of 3.20. Among ‘materials and resources’ green building

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attributes, only Q20 (use materials that are closely available to the building/site) was rated as highly important, and had a mean value of 4.13. Both Q25 (build/construct using recycled o salvaged building materials) and Q22 (use building materials that can be renewed or replenished rapidly) were rated as being of moderately high importance with a mean value of 3.85. However, Q25 (re-use an existing building structure instead of constructing a new one) was rated as having moderate importance and received a mean rating of 3.15. Out of the thirteen green building attributes in the category of ‘sustainable sites,’ four were rated as being highly important. These were: Q1 (protect or restore the natural state of the building site in terms of ecosystem, agriculture, plants and animal habitat) which had a mean rating of 4.37 and was ranked 8th overall; Q2 (control the quality of storm water runoff from the building/site) which had a mean rating of 4.25 and was ranked 9th overall; Q3 (control the quantity of storm water runoff from the building/site) which had a mean rating of 4.22 and was ranked 10th overall; and Q4 (prevent construction activity from causing site and air pollution) which had a mean rating of 4.13 and was ranked 11th overall. Seven of the green building attributes in the category of ‘sustainable sites’ were rated as having moderately high importance. These were: Q5 (maximize open space at the building/site) which had a mean rating of 3.98 and was ranked 13th overall; Q6 (use roof and non-roof materials with higher heat reflection) which had a mean rating of 3.85 and was ranked 14th overall; Q7 (build/construct near to existing transport and utilities infrastructure) which had a mean rating of 3.76 and was ranked 17th overall; Q8 (encourage building occupants to use vehicles that are fuel- efficient and emit lesser pollutants) which had a mean rating of 3.68 and was ranked 19th overall; and Q9 (provide secure bicycle storage space for building occupants) which had a mean rating of 3.61 and was ranked 20th overall; Q10 (build/construct on a contaminated site (e.g., industrial site or brownfield)) which had a mean rating of 3.34 and was ranked 21st overall; and Q11 (build/construct on a previously developed site) which had a mean rating of 3.03 and was ranked 24th overall. Out of the entire list of twenty six green building attributes investigated, only two were determined to be of moderate importance to the context of building practices in Kenya. Both belonged to the category of ‘sustainable sites.’ They were: Q12 (minimize the number of car parking spaces at the building premises/site) which had a mean rating of 2.85 and was ranked 25th overall; and Q13 (build/construct in a densely populated neighborhood) which had a mean rating of 2.74 and was ranked 26th overall. CONCLUSION It would not be an overstatement to articulate that this research is one of the pioneer studies that attempts to create a platform for adoption and uptake of green building practices and green building rating system in Kenya. However, this paper unveils at least 26 green building rating attributes that can be potentially adopted for Kenyan construction industry. Essentially, the identified and validated green building rating attributes can – without modification – be used to frame a green building standard that would be meaningful to the country’s context. Additionally, this paper ranks the green building rating attributes according to the order of their importance, as perceived by Kenyan building professionals (Appendix 1). The rank-order revealed that the attributes which belong to ‘energy and atmosphere’ are generally rated highest in regard to likelihood, or potential, for adoption in Kenya. This means that, among other green building attributes, Kenyan building professionals perceive ‘energy and atmosphere’ green building attributes to be of topmost importance. ‘Water efficiency’ attributes were ranked second while

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‘indoor environmental quality’ were ranked third overall. In fourth place were ‘materials and resources’ while ‘sustainable sites’ attributes were ranked fifth. This rank order of potential green building attributes in order of their perceived importance is an invaluable foundation, or baseline, for framing a green building rating standard that is contextual to Kenya. Discussion of Industrial Implications Industrialized nations, particularly in Europe incur enormous replacement costs of existing energy grids and related production infrastructure; developing nations like Kenya can learn and avoid a similar experience in the future as they build their economies today. The costs of replacing or updating obsolete and inefficient energies can be burdensome, especially for developing nations. Besides, sustainable energy production has an important role in achieving the Millennium Development Goals targeted by Kyoto ( The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change, which commits its parties by setting internationally binding emission reduction targets. The protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005.) From an industrial perspective, better access to sustainable energy is necessary at macro and micro levels, to foster economic growth and stimulate income-generating activities respectively (KAS, 2007). Our steady has attempted to lay the foundation for future investigation by assessing the case of Kenya and arguing for the option of seizing the opportunity presented by the moment. Kenya’s 2030 vision projects a long-term development blue-print to create a globally competitive and prosperous nation on economy as one of its pillars. A part of the action plans for the vision involve major infrastructure projects such as the Dongo Kundu Freeport. It is possible that as the envisioned substantial growth unfolds, so can growth in energy inefficiencies and even pollution. It is a known fact that the rapid pace of industrialization in developing nations has also seen increases in the usage of unsustainable energy forms. Our findings seem to suggest the existence of potential for Kenya to adopt a more sustainable pathway to industrialization. Further details from a previously cited 2003 report to California’s Sustainable Building Task Force by Greg Kats estimates that minimal increases in upfront costs of about 2% to support green design would, on average result in life cycle savings of up to 20%of total construction costs, which is more than ten times the initial investment. Cost implications are further amplified with the incorporation of externalities. Anthony Owen (2006) argues that incorporating associated externalities would likely serve to hasten the transition process to green alternatives. Generally, it is accepted that green design adoptions are bound to have financial and externality impact, with implications to resource allocation patterns in industry. In this study, we have attempted to lay a background for more complete study to this end. The study has shown the potential and attributes of such adopts as is specific to Kenya. It is our recommendation that future studies focus on linking green design adoptions to financial costs, resource allocation patterns, and externalities. APPENDIX Appendix 1: Comparative Ranking For Green Building Attributes in Order of Importance

Survey Code

Green Building Attribute

Category*

Mean Rating Rank

Q17 Minimize the amount of energy used in the building EA 4.88 1 Q24 Use strategies to achieve maximum daylight entering the building IQ 4.68 2 Q14 Collect rainwater for use in the building WE 4.66 3 Q18 Use renewable energy that is generated on the building site EA 4.63 4 Q15 Treat and re-use waste water in the building WE 4.55 5

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Survey Code

Green Building Attribute

Category*

Mean Rating Rank

Q16 Minimize the amount of water used in the building WE 4.40 6 Q19 Measure and verify energy use in the building EA 4.39 7 Q1 Protect or restore the natural state of the building site in terms of

ecosystem, agriculture, plants and animal habitat SS 4.37 8 Q2 Control the quality of storm water runoff from the building/site SS 4.25 9 Q3 Control the quantity of storm water runoff from the building/site SS 4.22 10 Q4 Prevent construction activity from causing site and air pollution SS 4.20 11

Q20 Use materials that are closely available to the building/site MR 4.13 12 Q5 Maximize open space at the building/site SS 3.98 13

Q25 Build/construct using recycled or salvaged building materials MR 3.85 14 Q6 Use roof and non-roof materials with higher heat reflection SS 3.85 14

Q22 Use building materials that can be renewed or replenished rapidly MR 3.85 14 Q7 Build/construct near to existing transport and utilities infrastructure SS 3.76 17

Q25 Prohibit smoking inside the building IQ 3.71 18 Q8 Encourage building occupants to use vehicles that are fuel-efficient

and emit lesser pollutants SS 3.68 19 Q9 Provide secure bicycle storage space for building occupants SS 3.61 20

Q10 Build/construct on a contaminated site (e.g., industrial site or brownfield) SS 3.34 21

Q26 Provide walk-off mats, grills, or grates at building entries IQ 3.20 22 Q25 Re-use an existing building structure instead of constructing a new

one MR 3.15 23 Q11 Build/construct on a previously developed site SS 3.03 24 Q12 Minimize the number of car parking spaces at the building

premises/site SS 2.85 25 Q13 Build/construct in a densely populated neighborhood SS 2.74 26

* Categories of green building attributes include Sustainable Sites (SS), Water Efficiency (WE), Energy and Atmosphere (EA), Materials and Resources (MR), and Indoor Environmental Quality (IQ). REFERENCES Bebbington, J., & Gray, R. (2001). “An account of sustainability: Failure, success and reconceptualization.” Critical Perspectives on Accounting, 12, 557–587. Cole, R. J. (2005). Editorial: Building environmental methods: redefining intentions. Building

Research & Information, 35(5), 455–467. Cooper, I. (1999). “Which focus for building assessment methods: environmental performance or sustainability?” Building Research & Information, 27(4), 321–331. Crawley, D., & Aho, I. (1999). “Building environmental assessment methods: Applications and development trends.” Building Research & Information, 27(4/5), 300–308. Ding, C. K. C. (2008). “Sustainable construction: The role of environmental assessment tools.”

Journal of Environmental Management, 86, 451–464. Fuerst, F. (2009). “Building momentum: An analysis of investment trends in LEED and Energy Star-certified properties.” Journal of Retail & Leisure Property, 8, 285–297. Hemphill, L., McGreal, S., & Berry, J. (2002). “An aggregated weighing system for evaluating sustainable urban regeneration.” Journal of Property Research, 19(4), 353–373. Horvath, A. (1999). “Construction for sustainable development – A research and educational

agenda.”

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Construction Engineering and Management Program, University of California Berkeley, 1-7. Hunt Allcott, and Michael Greenstone (2012), “Is There an Energy Efficiency Gap?” Energy Institute at Hass Working Paper Series, available at: http://ei.haas.berkeley.edu/pdf/working_papers/WP228.pdf Kats, G. (2003). The costs and financial benefits of green buildings: A Report to California’s

Sustainable Task Force. Sacramento, CA: Sustainable Building Task Force. Retrieved May 1, 2011 from https://www.ciwb.ca.gov/GreenBuilding/Design/CostBenefit/Report.pdf. Kohler, N. (1999). “The relevance of Green Building Challenge: An observer’s Perspective.”

Building Research & Information, 27(4), 309–320. Konrad-Adenaur-Stiftung, KAS (2007) “Renewable Energy: Potential and Benefits for Developing Countries,” Conference Proceedings of a KAS-East West Institute Conference, available at: http://www.kas.de/wf/doc/kas_10993-1522-2-30.pdf?110504153825 Kozlowski, D. (2003). “Green gains: where sustainable design stands now.” Building Operating Management, 50(7), 26–32. Liu, X. (2011). Green construction management system for construction project. 2nd International Conference on E-Business and E-Government, ICEE 2011, May 6, 2011, May 8, IEEE Computer Society, Shanghai, China, 2290–2293.

Miller, J., Spivey, J., & Florence, A. (2008). “Does green pay off?” Journal of Real Estate Portfolio

Management, 14(4), 385–400. Owen, Anthony (2006) “Renewable Energy: Externality Costs as Market Barriers,” Energy Policy No. 34, 632-642, available at: http://www.ceem.unsw.edu.au/sites/default/files/uploads/publications/MarketBarriers.pdf Wienfield, Mark (2013), “Understanding the economic Impact of Renewable Energy Initiatives: Assessing Ontario’s Experience in a Comparative Context,” Working paper, available at: http://sei.info.yorku.ca/files/2012/12/Green-Jobs-and-Renewable-Energy-July-28-20131.pdf. Wiley, J., Benefield, J., & Johnson, K. (2010). “Green design and the market for commercial office space.” Journal of Real Estate Finance and Economics, 41(2), 228. Wyatt, D. P., Sobotka, A., & Rogalska, M. (2000). “Towards a sustainable practice.” Facilities,

18(1/2), 76–82. ACKOWLEDGEMENT We would like to thank Professor Musibau Shofoluwe of North Carolina Agricultural and

Technical State

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University for his advisory role and insightful contribution to the study upon which this paper has been

developed. BIOGRAPHY Dr. Peter Khaemba works at United States Agency for International Development in Washington

D.C. He holds a PhD in Energy and Environmental Science and Economics from North Carolina

Agricultural and Technical State University. Phone: 678-770-0169. Email: [email protected]. Tony Mutsune is an Associate Professor of Business and Economics at Iowa Wesleyan College. His research papers appear in journals such as Advances in Competitiveness Research, International Journal of Management and Marketing Research and Global Journal for Business Research. He can be reached at Iowa Wesleyan College, 601 N. Main Street, Mt. Pleasant, IA 52641, [email protected].

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VALUE AND COST OF MULTINATIONALITY:

COMPARING INTERNATIONAL DIVERSIFICATION AND REAL OPTIONS

EFFECTS Sangcheol Song, Saint Joseph’s Joseph

ABSTRACT

Thus far, international geographic diversification literature has addressed the question of why and how multinational companies (MNCs) expand their business scope internationally. The dispersion of operations across different countries (i. e. multinationality) is considered a primary driver of additional value for multinational companis. Existing literature on international geographic diversification suggests that operating in a greater number of countries leads firms to exploit their ability to arbitrage issues involving national differences (Contractor, 2002; Contractor et al., 2003; Rugman, 1982; Santis and Gérard, 2009), to be better able to access low-cost inputs (Annavarjula and Beldona, 2000; Daniel and Bracker, 1989; Rugman and Verbeke, 2005), to cross-fertilize knowledge across subsidiaries (Lu and Beamish, 2004; Tihany, Griffith, and Russel, 2005), to scan for market opportunities (Contractor et al., 2003; Strike, Gao, and Bansal, 2006), and to reduce the risk associated with the expansion of overseas operations across countries (Chung, Lee, Beamish, Southam, and Nam, 2012; Goldberg and Kolstad, 1995; Huchzermeier and Cohen, 1996; Lee and Chung, 2007). INTRODUCTION Real options perspectives on multinationality also argue for the benefits of international - geographic diversification. Real options logic specifically argues that multinational flexibility value comes from dispersed operation across countries when firms are vulnerable to unanticipated changes in exchange rates, demands, and institutions in foreign countries. Geographic diversification through foreign direct investment (FDI) enables firms to preserve huge upside potentials and limit downside risks by responding flexibly to and providing preferential access to future opportunities (Allen and Pantzalis, 1996; Kogut, 1991; Kogut and Kulatilaka, 1994; Lee and Song, 2012; Tang and Tikoo, 1999). Even though the international diversification and real options approaches share some common perspectives on the benefits of internationally-diversified operations, they take on divergent focuses and make contradictory assessments of FDI attributes. For example, while a high level of uncertainty is traditionally considered a factor increasing the cost of multinationality from the international diversification perspective, it is considered to enhance firm value jointly with multinationality from the real options perspective (Allen and Pantzalis, 1996; Chung et al., 2010; Huchzermeier and Cohen, 1996; Lee and Makhija, 2009b; Tang and Tikoo, 1999). Additionally, a high level of ownership helps a firm control and coordinate foreign operations and thus enhances the firm’s value (Carpenter, Sanders, and Gregersen, 2001; Sambharya, 1995; Makino, Beamish, and Zhao, 2004; Tong and Reuer, 2007), but does not increase growth options value for MNCs (Cuypers and Martin, 2010; Kogut, 1991; Tong, Reuer, and Peng, 2008). In spite of the differences between the international diversification and real options approaches, however, there is a paucity of research on distinguishing real options effects from other diversification effects. Mixing up values and costs based on different theoretical perspectives may lead to over- or undervaluing the impact of multinationality, and thus arriving at inconclusive or mixed results.

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In this paper, we attempt to compare real options effects with overall diversification effects by examining which effect is stronger in differing levels of multinationality in consideration of the moderated role of uncertainty and ownership. We predict that higher uncertainty may undermine the value of multinationality from the international diversification perspective, while it may strengthen the positive impact of multinationality from the real options perspective. We also expect that a high level of ownership will help parent firms manage their foreign operations from an international diversification perspective but undermine future growth opportunities embedded in FDI, and cause additional costs to be involved with high levels of multinationality. We test our predictions regarding this issue in a context involving varying levels of exchange rate uncertainty and network ownership in the FDI portfolios of Korean MNCs. Our sample consists of 2,310 observations of 148 publicly traded MNCs listed on the Korean Stock Exchange (KSE) during 1991-2008. RESULTS Through empirical testing, we find that as hypothesized, values and costs are affected differently by different levels of multinationality. At low levels of multinationality, uncertainty strengthens the negative value of multinationality, while ownership weakens it. Meanwhile, at high levels of multinationality, uncertainty strengthens the positive value of multinationality, while ownership weakens it. The first results indicate the commonality of theoretical predictions made from the international geographic diversification and real options perspectives, while the second results indicate the divergence of predictions made from these two perspectives. Our results related to multinationality support the findings of recent studies that increasing multinationality does not always enhance value, but instead involves a non-monotonic relationship depending on the different magnitudes of relevant values and costs. This result implies that managers should assess the optimality of their expansion into new countries in terms of the relative magnitudes of the values and costs involved. These findings imply that firms need to balance breadth and depth, as well as international diversification and focused strategy, considering the characteristics of host country environments, including uncertainty levels and types. Firms’ international strategies, including global and multi-domestic strategies, need to involve designing international investments to maximize the enhancement of value through multinational flexibility in growth options and switching options.

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CORPORATE SUSTAINABILITY INVESTMENT AND OVER-INVESTMENT OF FREE CASH FLOW

Qi Sun, California State University San Marcos

ABSTRACT

This study examines whether corporate sustainability leaders behave differently in internal resource allocation. Specifically, I investigate whether sustainability leaders constrain over- investment of free cash flow, thereby delivering more efficient use of internally generated resources, as compared to firms that do not meet the same corporate social and environmental criteria. Empirical evidence documented in this study test alternative hypotheses regarding why companies expend effort and resources to address social and environmental concerns. If sustainability investment is due to the higher ethical standards adopted by the management, the higher standards will also extend to other aspects of corporate behavior, such as a more responsible use of free cash flow. On the other hand, if corporate sustainability investment is driven by management’s pursuit of self-interest, the opportunistic behavior will extend to other discretionary decision making, such as overinvestment of free cash flow. JEL G30, G34 KEYWORDS Corporate Sustainability Investment; Free Cash Flow; Overinvestment INTRODUCTION Corporate sustainability investment is becoming more prevalent as stakeholders and regulators demand corporations to address social and environmental concerns while achieving economic growth. Although the financial impact of corporate sustainability investment is still under debate, prior research has provided theoretical background on why corporations invest in sustainability. Ethical theories suggest that there is a moral imperative for a firm to accept social responsibility, as it is the necessity to contribute to the good of society. Political theories believe that a firm needs to take into account the community where it is operating to get the “social license of operation”. Corporate sustainability investment, as a result, is a form of reputation formation and maintenance. Integrative theories view corporate sustainability investment as a resource that creates competitive advantage, and thus the means to achieve economic objectives. These theories suggest that the management has incentive to adhere to a high standard of behavior and thus are more likely to constrain overinvestment of free cash flow. Alternatively, corporate sustainability investment can be potentially driven by the pursuit of the management’s self interest, such as cover up the impact of corporate misconduct. If managerial opportunism prevails, we would observe that it also extends to management’s other discretionary decisions, such as overinvest of free cash flow. This study contributes to the literature of corporate sustainability investment with empirical evidence on how sustainability leaders use their free cash flow. Results will help test competing hypotheses regarding the motivation of corporate sustainability investment. DATA AND METHODOLOGY

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Corporate sustainability leaders are identified based on the annual sustainability review reports issued by Sustainable Asset Management Group in collaboration with the Dow Jones Indexes over years 2001 to 2011. Empirical analyses of the use of free cash flow are conducted based on information collected from COMPUSTAT annual database. All cash flow variables are normalized by the book value of total assets. To minimize the influence of outliers, I winsor the measure of growth opportunity, book-to-market ratio, by recoding observations less (greater) than the 1st (99th) percentile to the 1st (99th) percentile. Based on literatures that have examined firm level investment decisions (e.g. Barro (1990), Bates (2005), Hubbard (1998), Lamont (2000)), a firm’s expected total investment is measured as the fitted value from the regression of total investment against factors such as growth opportunity, financial leverage, cash level, firm maturity, year and industry indicators:

ITotal,t=�+β1BMt-1+β2Leveraget-1+β3Casht-1+β4Sizet-1+β5Returnt-1+β6ITotal, t-1+�Year/Industry Indicator Over-investment is measured as the difference between total investment expenditure and expected total investment. A negative difference presents under-investment while a positive difference represents over-investment and squander of capital. Sustainability leaders’ use of free cash flow (such as over-investment, distribution back to shareholders and creditors, increase of financial assets, and increase of other investments) is first compared and contrasted to their industry peers. A regression that allows asymmetric relationship between overinvestment and the sign of free cash flow further discloses whether sustainability leaders tend to constrain the opportunistic use of discretionary resources. BIOGRAPHY Dr. Qi Sun is an assistant professor of Finance at California State University San Marcos. She can be reached at [email protected].

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A COMPARATIVE ANALYSIS OF REVERSE

MORTGAGES: EVIDENCE FROM PUERTO RICO AND THE UNITED STATES

Rogelio J. Cardona, University of Puerto Rico-Río Piedras Karen C. Castro-González, University of Puerto Rico-Río Piedras

ABSTRACT

Reverse mortgages are frequently used by elderly consumers to raise cash during their pre and post-retirement years. This paper examines reverse mortgages originated in Puerto Rico and in the United States. The results are compared with other studies on reverse mortgages in the United States. We use data obtained from the Department of Housing and Urban Development- Puerto Rico Field Office and compare the reverse mortgage loans granted in the United States and Puerto Rico from 2010 to 2012 to examine the continued use of this product by senior citizens as a financial planning tool and determine whether differences exist between both jurisdictions and the possible reasons for the latter. We also use data provided by the Office of the Commissioner of Financial Institutions and from a Puerto Rico mortgage bank for 2010 and 2011 to develop an average profile of a reverse mortgage borrower in Puerto Rico. The next stage of this investigation will include regression and correlation analyses to examine the strength of the relationship between the generation of reverse mortgages and other economic and demographic variables. The investigation intends to develop possible public policy implications of the use of this instrument. KEYWORDS: Reverse mortgages, Home equity, Elderly consumers, Home Equity Conversion Mortgage INTRODUCTION From 2000 to 2005 there was an increase in housing prices (housing bubble) in the United States (U.S.) and in Puerto Rico (P.R.). The financial markets in the U.S. took advantage of that bubble to aggressively promote a product known as reverse mortgage. Reverse mortgages allow elderly consumers to obtain cash using their dwelling as collateral without having to abandon the property. As a result of the increase in housing values there was a significant increase in the demand for reverse mortgages in the U.S. Although reverse mortgages were initially offered in P.R. in 1993, demand for this type of financing did not increase until 2010. The objective of this investigation is to perform a comparative analysis of reverse mortgages generated in P.R. and the U.S from 2010 to 2012. This study contributes to the household finance literature by examining the characteristics of the reverse mortgages generated by elderly consumers during their retirement stage. The results are compared with other studies on reverse mortgages originated in the U.S. CONCLUSIONS The demand for reverse mortgages during the first half of the 2000-2010 decade increased in U.S. and P.R. because some retirees required additional sources of cash to absorb their increased cost

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of living expenses and mitigate their depleted savings and investments. Using data obtained from different sources we compare the reverse mortgage loans granted in the United States and Puerto Rico from 2010 to 2012. We identify the differences observed and provide possible explanations for them. In addition, we develop an average comparative profile for reverse mortgage borrowers in the United States and Puerto Rico.

The number of reverse mortgages reported in both jurisdictions decreased from 2010 to 2011. Average interest rates differ when comparing U.S. and P.R. rates and the average loan amount differs by almost 25% with U.S. loans having higher amounts. This gap decreases in 2011 to approximately 20%. The most common type of Home Equity Conversion Mortgage Loans (HECM) endorsed in the U.S. and P.R. during 2010 was Line of Credit. However, in 2011 the most frequently used HECM loan in the U.S changed to Lump Sum, whereas in P.R there was no change. The observed change in the U.S. might be due to changes in the required cash flow needs of the mortgagees or the entry of specialized (smaller) financial institutions generating reverse mortgages with limited infrastructure capabilities. The average age of reverse loan mortgagees decreased both in the U.S. and in P.R. in 2010 and 2011. This reduction seems to be associated with the fact that younger retirees are recurring to the use of reverse mortgages to offset the impact of several factors such as inflation, increased cost of living, depleted savings and investment portfolio accounts. According to the data provided by the local regulatory entity of financial institutions in P.R. (OCIF), there has been a reduction in the number of reverse mortgages closed and the average amount of reverse loans originated in P.R. during 2011 and the first quarter of 2012. At the same time, the number of financial institutions offering this product in P.R. has increased. According to the sample data obtained from a financial institution in P.R. that offers reverse mortgages, the average age of the mortgagees is 70, most of whom are women and unmarried, and approximately 50% of the funds from the approved reverse mortgages represent the net cash paid to the mortgagees for their needs. The reduction in the number of reverses mortgages granted in P.R., the average age of the mortgagee and the distribution of granted funds is consistent with other studies performed in the U.S. (Elmer, 2012, Michelangeli, 2008 and Detwiler, 2008). The next stage of this investigation will include regression and correlation analyses to examine the strength of the relationship between the generation of reverse mortgages and other economic and demographic variables. The investigation intends to develop possible public policy implications of the use of this instrument. This study has the following limitations. The data obtained from the Department of Housing and Urban Development (HUD) is for fiscal years ended on September 30, 2010 through 2012. The data obtained from OCIF, Consumer Credit Counseling Services of Puerto Rico (CCCS) and a mortgage bank in P.R. was for natural years 2010 and 2011 and for the first quarter of 2012. Another limitation is that we do not have the data related to the number of financial counseling sessions offered by authorized counseling entities in P.R. other than (CCCS). In addition, certain data is defined differently by each institution, for example HUD uses average interest rates while OCIF uses weighted average interest rates. This limits our comparison between the available data sets. Future research may address the benefits and implications of reverse mortgages on the financial health of retirees and the possible costs to society. The absence of a savings culture and the need for financial planning throughout our lifetime may impact our future financial health and quality of life. REFERENCES

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Bernard, T. S. (2011, June 18). 2 Big banks exit reverse mortgage business. The New York Times. Retrieved on May 4, 2012 from http://web.ebscohost.com/ehost/detail?sid=2a916d32- 6cfb-4220-8cb3- 595ed80518e3%40sessionmgr12&vid=1&hid=7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d #db=bft&AN=61341838 Bishop, T. B. & Shan, H. (2008). Reverse mortgages: A closer look at HECM loans. (Working paper). Retrieved on April 26, 2012 from http://www.nber.org/programs/ag/rrc/08- Q2%20Bishop,%20Shan%20FINAL.pdf Cardona, R.J. & Castro-González, K.C. (2012). Profile of Reverse mortgages originated from 2010 to 2011: Evidence from United States and Puerto Rico. Report submitted to the Office of the Commissioner of Financial Institutions of Puerto Rico on June 15, 2012. Carrns, A. (2012, May 2). Another big name exists reverse-mortgage lending. The New York Times. Retrieved on May 28, 2012 from http://bucks.blogs.nytimes.com. Del Vecchio, S., Hopson, J. & Hopson, P. D. (2009). Reverse mortgages and the alternatives: Weighing solutions for potential borrowers [Electronic version] CPA Journal, 79(9), 15-19. Detwiler, M. (2008). Powering into reverse-mortgage lending. Mortgage Banking, 69(3). Retrieved on April 26, 2012 from http://web.ebscohost.com/ehost/detail?sid=264a82ee-2cb1- 4227-b8a0- b1ff0a02aaa6%40sessionmgr4&vid=1&hid=7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#d b=bft&AN=510729235. DiVenti, T. R., Enriquez, J. C. & Szymanoski, E. J. (2007). Home equity conversion mortgage terminations: Information to enhance the developing secondary market. A Journal of Policy Development and Research, 9(1), 5-46. Donohue, R. (2011, January 26). A brief history of the reverse mortgage. The Reverse Mortgage Gazette. Retrieved on March 12, 2012 from http://richdonohue.typepad.com. Elmer, V. (2012, April 15). Reverse loans, pre-retirement. The New York Times. Retrieved on May 4, 2012 from http://web.ebscohost.com/ehost/detail?sid=753e9b52-d1c6-4d2c-b3ca- 290b388b83d8%40sessionmgr4&vid=1&hid=7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d# db=bft&AN=74242628. Godfrey, H. & Malmgren, E. (2006). Going forward with reverse mortgages. [Electronic version]. Journal of Accountancy, July, 35-40. Helm, H.M. (2008). When reverse is the right direction. Mortgage Banking, 68(9). Retrieved on April 26, 2012 from http://web.ebscohost.com/ehost/detail?sid=8eb3314b-b4ee-4c9e-bdb9- e67a4e3ec761%40sessionmgr4&vid=1&hid=7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d# db=bft&AN=510813021. Michelangeli, V. (2008). Does it pay to get a reverse mortgage? (Working paper). Retrieved on June 7, 2012 from http://irm.wharton.upenn.edu/S09-Michelangeli.pdf.

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McGarity, M. (2007). Moving Forward in Reverse. Mortgage Banking, 67(9). Retrieved on April 26, 2012 from http://web.ebscohost.com/ehost/detail?sid=16366370-f2b1-4077-9674- fc7eb0c2286f%40sessionmgr15&vid=1&hid=7&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d# db=bft&AN=510638878 Nakajima, M. (2012). Everything you always wanted to know about reverse mortgages but were afraid to ask. Federal Reserve Bank of Philadelphia Business Review, Q1, 19-31. Retrieved on April 26, 2012 from http://web.ebscohost.com/ehost/detail?vid=5&hid=7&sid=d20d1e27-2251- 4834-abcc- a9e8f039fb2c%40sessionmgr4&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bft&AN=74 030429 Nakajima, M. and Telyukova, I.A. (2013). Reverse Mortgage Loans: A Quantitative Analysis. (Working paper). Retrieved on June 7, 2013 from http://econweb.ucsd.edu/~itelyukova/rmlnt- paper.pdf Primary Mortgage Market Archives. (2012). 30-Year fixed-rate mortgages since 1971. Retrieved on May 30, 2012 from http://www.freddiemac.com/pmms/pmms30.htm. Puerto Rico. Law 164. (2011). Consumer Protection Law of Reverse Mortgages. Retrieved on May 9, 2012 from http://www.ocif.gobierno.pr/documents/L_164ReverseMortg.pdf Puerto Rico. Laws and Regulations. (2012). Regulation 8132 of the Consumer Protection Law of Reverse Mortgages. Retrieved on May 8, 2012 from http://www.ocif.gobierno.pr/documents/8132.pdf Reed, R.G. (2009). The increasing use of reverse mortgages by older households. (Working paper). Retrieved on June 8, 2013 from http://www.prres.net/papers/Reed_The_Increasing_Use_Of_Reverse.pdf Rose, C. C. (2009). The effective use of reverse mortgages in retirement. [Electronic version]. Journal of Financial Service Professionals, July 2009, 67-74. Shan, H. (2011). Reversing the trend: The recent expansion of the reverse mortgage market. Real Estate Economics, 39(4). Retrieved on April 26, 2012 from http://web.ebscohost.com/ehost/detail?vid=4&hid=7&sid=720f85ae-83fb-4725-a617- bdbb83dfe357%40sessionmgr14&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bth&AN= 67198046 Sinai, T. and Souleles, N. (2007). Net Worth and Housing Equity in Retirement (Working paper). Retrieved on June 7, 2012 from http://real.wharton.upenn.edu/~sinai/papers/RetirementHousing080707.pdf Tergesen, A. (2013, May 5). Reverse-Mortgage Defaults Increasing. The Wall Street Journal. Retrieved from http://online.wsj.com/article/SB10001424127887323982704578454740015215564.html United States Department of Housing and Urban Development. (2000). HUD Mortgagee Letter 00-10-Revisions to the Home Equity Conversion Mortgages (HECMs) Program. Retrieved on

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May 28, 2012 from http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmml United States Department of Housing and Urban Development. (2006). HUD Mortgagee Letter 06-25-Home Equity Conversion Mortgage Program: Home Equity Conversion Mortgage Counseling Requirements. Retrieved on May 28, 2012 from http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmml United States Department of Housing and Urban Development. FHA Reverse Mortgages (HECMs) for Seniors. Retrieved on June 28, 2013 from http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmabou Yeary, R. D. (2009). (Real) estate banking. Mortgage Banking, 70(2). Retrieved on April 26, 2012 from http://web.ebscohost.com/ehost/detail?sid=76253a82-a190-4e67-ba2b- 07b6f5d2d322%40sessionmgr14&vid=1&hid=7&bdata=JnNpdGU9ZWhvc3QtbGI2ZQ%3d%3d #db=bft&AN=5109220 ACKNOWLEDGMENTS This study was financially supported by a summer research grant from the School of Business Administration of the University of Puerto Rico-Rio Piedras. The authors also gratefully acknowledge the Department of Housing and Urban Development (HUD) Puerto Rico Field Office, the Office of the Commissioner of Financial Institutions of Puerto Rico, a Puerto Rico mortgage bank, and Mr. Jorge C. Cardona, Operations Manager of Consumer Credit Counseling Services of Puerto Rico for providing us with different data sets used in this investigation. BIOGRAPHY Rogelio J. Cardona, Ph.D., CPA, Esq., is an Associate Professor of Accounting at the School of Business Administration, University of Puerto Rico-Rio Piedras. He can be contacted via e-mail at: [email protected], or at (787) 764-0000, ext. 3326 or 3330. Karen C. Castro-González, Ph.D., CPA, is an Assistant Professor of Accounting at the School of Business Administration, University of Puerto Rico-Rio Piedras. She can be contacted via e-mail at: [email protected], or at (787) 764-0000, ext. 3326 or 3330.

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DETERMINANTS OF BALANCED SCORECARD USAGE: INDIRECT CORRELATION THROUGH

ATTITUDINAL FACTORS Wasatorn Shutibhinyo, Chulalongkorn University

ABSTRACT

Successful implementation of Balanced Scorecard (BSC) requires a positive attitude toward BSC. Specifically, BSC should be perceived as simple to use and of great usefulness. This study develops the measurement of BSC usage and examines whether the determinants impact the BSC usage through attitudinal factors. Most existing studies have quantified the BSC usage by identifying the stages of BSC application whereby the discrete step of usage is reflected rather than the degree of usage. This research work thus develops a measurement to reflect the degree of BSC usage by taking into consideration the key characteristics of BSC usage and their theoretical weights. In addition, this study examines the determinant-innovation relation by drawing on the organizational innovation theory and the technology acceptance model. In particular, this research article seeks to determine whether top management support and training are associated with the BSC usage through the attitudinal factors of perceived ease of use and perceived usefulness. Based on 73 complete questionnaires, it is found that top management support and training are indirectly associated with the BSC usage through the perceived ease of use and the perceived usefulness factors. These findings highlight the vital role of the attitudinal factors as the mediating factors. JEL: M190, M490 KEYWORDS: Balanced Scorecard, Attitudinal factors INTRODUCTION Balanced Scorecard (BSC), which was devised in 1992 by Kaplan and Norton, is an important development in strategic performance measurement systems as it offers a balanced view of strategic non-financial and financial measures that can be illustrated in the causal linkage (Kaplan, 2010). Most prior research studies which focused on the BSC application rate, the determinants and the effects of BSC implementation equated the BSC usage with the stages of BSC application. Meanwhile, this research study aims to develop the measurement to better reflect the degree of BSC usage by taking into account the key characteristics of BSC and their theoretical weights. The proposed measurement would allow researchers to further examine the determinant-innovation relationships in the BSC implementation context. This research article is expected to contribute to the existing body of knowledge in the area of BSC with the proposed measurement of BSC usage; and highlights the importance of attitudinal factors as the mediating variables. LITERATURE REVIEW The Balanced Scorecard

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Kaplan and Norton initially invented BSC as the multi-dimensional performance measurement system with a collection of financial and nonfinancial measures (Kaplan & Norton, 1992). BSC has since then been transformed into a strategic performance measurement system (Kaplan & Norton, 2001, 2008). Firms have implemented BSC to translate their strategy into the operational terms by which firms are able to properly align the corporate strategy with those of business and supporting units (i.e. Alignment), to effectively communicate the strategy to their employees (i.e. Communication), and to provide feedback and promote learning (Feedback). Based on the conceptual framework of BSC, Shutibhinyo (2012, 2013) summarized four key attributes of BSC as presented in Table 1. Table 1: The BSC Attributes

BSC Attributes Explanation Attribute 1: Strategy Translating a strategy into operational terms

Grouping the strategic financial and nonfinancial measures into multiple and interrelated dimensions. The linkages between/among those measures within and across perspectives illustrate firm’s value-creation process.

Attribute 2: Alignment Aligning the organizational units to the strategy

Aligning business units’ or support functions’ strategies to firm’s strategy to create synergy.

Attribute 3: Communication Communicating strategy to employees

Communicating vision and strategy throughout the company in order that employees understand and conduct their works corresponding to the strategy.

Attribute 4: Feedback Providing feedback

Linking strategy to operating plan and budgeting systems and reviewing the strategy.

Attribute 1 (i.e. Strategy) is the key characteristic of BSC as it not only clarifies and thereby builds a consensus among employees about organization’s strategy but also serves as a platform for the other three attributes (i.e., Alignment, Communication and Feedback). Influencing Factors of BSC Application Prior studies which were based on the organizational innovation and the technology acceptance model have suggested various factors relating to the BSC application (David, 1989; Damanpour, 1991; Hongratanawong, 2002; Roger, 2003). The factors include top management support, training and attitudinal factors, the third of which refer to the perceived ease of use and the perceived usefulness. The technology acceptance model has also implied that top management support and training may relate to the perceived ease of use and the perceived usefulness. In addition, these attitudinal factors, i.e. the perceived ease of use and the perceived usefulness, tend to be associated with the BSC usage. These suggest the mediating role played by the attitudinal factors and thereby lead to the following hypotheses: H1: Top management support is positively associated with the usage of BSC through the attitudinal factors.

H2: Training is positively associated with the usage of BSC through the attitudinal factors. RESEARCH METHODOLOGY Survey Instrument A survey package consisting of one questionnaire, a cover letter and a postage-paid self- addressed envelope was posted to the chief financial officers (CFO) of the listed firms during May – June of 2011. The questionnaire is comprised of two parts: The first part asks the respondents to assign a percentage value (i.e. 0 – 100%) to a series of questions concerning the

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performance measurement systems and management processes of their organizations. Their responses help identify the degree of each BSC attribute embedded in the performance measurement systems of their organizations. The second part of the questionnaire contains questions pertaining to top management support and training. Model Specifications and Variable Measurements A simple regression analysis was employed to test the proposed hypotheses. The model specifications and variables are presented in Table 2. Table 2: Models and Variables

Models for H1: Models for H2: M1.1

iii PUBSC εββ ++= 10

M1.2 iii PEBSC εββ ++= 10

M1.3 iii PEPU εββ ++= 10

M1.4 iii TOPPU εββ ++= 10

M1.5 iii TOPPE εββ ++= 10

M2.1 iii PUBSC εββ ++= 10

M2.2 iii PEBSC εββ ++= 10

M2.3 iii PEPU εββ ++= 10

M2.4 iii TRAINPU εββ ++= 10

M2.5 iii TRAINPE εββ ++= 10

Variables

iBSC = BSC usage, iTOP = Top management support,

iTRAIN = Training, iPE = Perceived ease of use,

iPU = Perceived

usefulness This table shows the regression models and related variables. Models 1.1-1.5 and Models 2.1-2.5 were employed to examine H1 and H2 respectively. BSC usage is the summation of the products of the degree of each BSC attribute and its respective theoretical weight as follows: BSC usage = (Degree of Attribute1 x 40%) + (Degree of Attribute2 x 20%) +(Degree of Attribute3 x 20%) + (Degree of Attribute4 x 20%) RESULTS Based on the 73 complete questionnaires, Figure 1 illustrates the indirect relationships through attitudinal factors. Figure 1: the Indirect Correlation Through Attitudinal Factors

Top management

Support

Perceived Usefulness

Perceived Ease of Use

BSC usage

0.70***

0.72***

0.91***

0.77***

0.74***

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*** indicate significance at 0.01 level The results on the determinant-innovation relationships reveal the mediating roles of the attitudinal factors. Both top management support and training factors correlate with the perceived ease of use and the perceived usefulness factors, which are positively associated with the degree of BSC usage. This underlines the importance of attitudinal factors in the context of BSC implementation. CONCLUSIONS This research paper develops the measurement of BSC usage by taking into consideration the key characteristics of BSC and their theoretical weights and presents the evidence of attitudinal factors as the key determinants and the mediating variables in the context of BSC implementation. Specifically, top management support and training factors enhance the BSC usage through attitudinal factors. This research article is believed to highlight the importance of attitudinal factors. In addition, the ratio measurements of BSC implementation, unlike the discrete measurements, enable researchers to further conduct the determinant and the consequence studies. Furthermore, this research work encourages researchers to measure the degree of any particular innovation by considering its key characteristics and theoretical weights. REFERENCES Damanpour, F (1991) “Organizational innovation: A meta-analysis of effects of determinants and moderators,” Academy of Management Journal 34, p. 555-590 Davis, F.D (1989) “Perceived usefulness, perceived ease of use, and user acceptance of information technology,” MIS Quarterly (Sep), p. 319-340 Hongratanawong, L (2002). Factors influencing users attitude and intention to use the automated balanced scorecard system: A case study of a Thai petrochemical manufacturer. Master’s Thesis, Information Technology in Business, Faculty of Commerce and Accountancy, Chulalongkorn University. Kaplan, R. S (2010). Conceptual foundations of the balanced scorecard. Retrieved July 6, 2010, from httlp://www.hbs.edu/research/pdf/10-074.pdf

Training

Perceived Usefulness

Perceived Ease of Use

BSC usage

0.63***

0.65***

0.91***

0.77***

0.74***

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Kaplan, R. S., & Norton, D. P (1992). The balanced scorecard - measures that drive performance. Boston: Harvard Business School Press. Kaplan, R. S., & Norton, D. P (2001) “Transforming the balanced scorecard form performance measurement to strategic management,” Accounting Horizon, p. 87-104; p. 147-160 Kaplan, R. S., & Norton, D. P (2008). The execution premium: Linking strategy to operations for competitive advantage. Massachusetts: Harvard Business Review Press. Roger, E. M (2003). Diffusion of innovations (5 ed.). New York: The free press. Shutibhinyo, W (2012) “An exploratory study of Balanced Scorecard practices: Preliminary evidence form Thailand,” Asia-Pacific Management Accounting Journal 7, p. 1-28 Shutibhinyo, W (2013) “Balanced Scorecard Attributes: Key Determinant and Perceived Benefits,” Global Journal of Business Research 7, p. 1-8 ACKNOWLEDGEMENTS I would like to extend my gratitude and appreciation to Associate Professor Vorasak Toommanon, Ph.D. for his perpetual encouragement. Any errors or omissions remain my responsibility. BIOGRAPHY The author is a lecturer at Chulalongkorn Business School, Chulalongkorn University, Thailand, and can be contacted at [email protected]. Questions and comments are welcome.

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REGULATION AND BANK DEFICIENCY Dalenda Khouaja, University of Tunis, Tunisia

Salem Lotfi Boumediene, Montana State University Billings

ABSTRACT

INTRODUCTION If the role of banks in economic growth is well established, however, their behavior is source of systemic risk. Regulators intervened through many reforms to eliminate or at least reduce this risk. Basel II imposed a minimum level of capital that reflects the risks (the ratio Mc Denough) and is also equipped with two additional pillars: banking supervision and market discipline. However, the "subprime" crisis revealed the failure of almost all control modes (rating agencies, accounting standards and prudential rules). This failure demonstrates a deficiency in the control system and a lack of rigor in the measures taken by regulators. This has raised the interest of researchers to examine the relationship between prudential regulation and banking fragility. Demirguc-Kunt & Detragiache (2010) have found a weakly relationship between BCP compliance and bank soundness proxied by the Z factor. Barth et al. (2001, 2004) used a previous survey of dataset to analyze the impact of a combination of regulation and supervision on bank stability. Using bank level data, Fonseca & Gonzalez (2010) found that regulation, supervision and institutions influence the bank risk. Studies on the risk failure of European banks remained limited with respect to the empirical literature on the U.S. or emerging market. This finding is mainly due to the low number of bank failures in Europe. Most of these studies focus on the cause of bank distress in Europe (Cihak & Poghsyan (2009) using CAMEL variables) or the impact of regulation on bank risk (Agoraki, Delis & Pasioura (2011)). Our research analyzes the role of regulation on bank failure by including financial and regulatory variables. The bank distress is taken in the large sense to include banks that have experienced serious financial difficulties. This paper proceeds as follows. Section 2 presents a brief overview of literature. Section 3 presents database and methodology. Section 4 presents results. Section 5 concludes. LITERATURE REVIEW Banks are financial institutions that collect deposits and provide credit. These operations enable them to perform the functions of financing, monitoring borrowers and reducing transaction costs. Given the role played by banks, any failure generates a dysfunction of banking system and of real economy (Laeven & Valencia (2010)). Furthermore, the frequency, the extent of losses and the severity of banking crises highlights the need to detect and prevent the bank failure. Banking instability has become a major polity concern. The empirical literature has focused on predictive measure to identify bank default risk and avoid systemic risk. These early warning models estimate the probability of bank failure at a given time horizon. These studies use either country-level data (Barth et al., 2004; Beck et al. 2006; Demirguc-Kunt et al. (2008)) or bank-level data (Lanine & Vennet (2006)). The use of individual data provides better estimates and avoids the loss of information that may be important.

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We divided predictive methods of bank failure into two types namely: the implicit method and explicit method. The implicit method Early warning models are used to assess the soundness of individual banks. Among the measures used, we quote Z-scores (Cihak, 2007) or financial strength ratings (Demirguc-Kunt et al. (2008)). Rating is used by some studies, like Gaganis, et al. (2006), Ioannidis et al. (2010), to predict individual bank failures. Based on accounting ratios, rating is considered as an accurate indicator of bank soundness. However, others (Reinhart (2001), Rojas-Suarez (2001)) have highlighted the irrelevance of rating agencies in anticipating emerging markets’ crises. First, they have sometimes difficulties to dispose confidential information from banks. Second, the rating agencies are paid by the issuers of securities they rate, which pose a structural conflict of interest and illegal insider trading. Finally, in order to improve the predictive power of this indicator, the accounting data must be supplemented by market data. Z-score indicator has been gaining popularity as a measure of bank soundness (Demirguc-Kunt, et al. (2008), Cihak & Hesse (2007); Cubillas, et al. (2012)). We can measure insolvency risk with Z-score. Cihak (2007) defined Zscore as the probability that the value of its assets becomes lower than the value of its debts. A higher Zscore implies a lower default probability. Despite its universality and its simplicity, Zscore has been criticized by Cihak (2007) especially since it is based on accounting data. The Zscore is modeled as follow:

Zscore = 𝛌+𝑹𝑨 𝝈𝑨

(1)

with λ = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

; RA is the return on assets and 𝜎𝐴 is the standard deviation of RA. The explicit model By using the logistic model, Demirguc-Kunt & Detragiache (2010) measured the probability of a systemic crisis. They note ( 𝑃𝑖𝑡∗ ) the probability in country i at time t, modeled as follows :

� 𝑷𝒊𝒕 = 𝟏 𝒔𝒊 𝑷𝒊𝒕∗ > 𝑪 𝑷𝒊𝒕 = 𝟎 𝒔𝒊 𝑷𝒊𝒕∗ ≤ 𝑪 (2)

where Pit∗ = β′Xit + εit, 𝑋𝑖𝑡 is the matrix of independent variables, C is the critical value of the probability of a crisis. The sign of the estimated coefficients of each exogenous variable explains its impact on the probability of crisis. METHODOLOGY AND DATA Our methodology is inspired by the article published by Ioannidis, Pasioura & Zopounidis (2010) using financial and regulated data. This study focuses on the role of banking regulation on the probability of default. We use the large definition of bank failure given by Demirguc-Kunt, et al. (2000), which includes the measures of emergency. Sample The database contains the five major European countries; namely, Germany, France, Italy, Spain and the United Kingdom; and Greece. In addition, selected countries (except Greece) represent 72% of GDP (Eurostat) of the entire European Union. This choice is also motivated by the

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financial dominance of these countries compared to other member states. The five countries alone contribute about 80% of the total assets of all European banks (Fitch-IBCA, Bankscope). We extracted distressed banks and accounting data from ‘Bureau Van Dijk’ Bankscope database. For consistency, we used unconsolidated commercial banks and we excluded banks that do not provide all information on the variables used by the model for six years (2003-2008). We used balance sheets and statements of income expressed in millions of U.S. dollars. To carry out our empirical study, we preferred to use individual rather than aggregated data. Individual data provide better estimators, do not lose information that may be important and provide higher degree of freedom. The final sample is composed of 152 commercial banks from six countries of Europe in activity between 2003 and 2008. Variables There is common agreement among credit agencies, researchers and bank regulators that the CAMEL indicators are useful to classify banks in terms of their financial vulnerability. We follow the same approach by using the five acronyms of CAMEL (Capital, Asset Quality, Management Quality, Earning and Liquidity) model to evaluate bank soundness. We combine these indicators with regulatory variables to study the role of regulatory tools on bank distress. We also use macroeconomic variables to take into account differences between European Union countries; bank size affects; bank soundness in term of diversification (Dietsch & Petey 2004), credit risk and performance. The size of banks varies from one country to another. It is the lowest in Greece (25 billion U.S. dollars) and the highest in the UK (215 billion U.S. dollars). We measure bank size using logarithm of total assets. CAMEL indicators The choice of the level of equity is a very important decision in bank management. In fact, bank equity is considered as a scarce and expensive source of funding. Myers & Majluf, (1984) have shown the reluctance of banks to increase their capital in order to avoid the risk of dilution of shareholders. So, shareholders demand higher yields in return for the risk they have to bear. However, bank regulators found that higher level of capital makes the bank more resilient to shocks and serves to protect depositors, creditors and investors (Le Bras & Andrews (2004)). We follow Cihak & Poghsyan (2009) by using the ratio of total equity to total assets because of practical and conceptual reasons. The practical reason is that Tier1 ratio is not provided for the European banks. The conceptual one concern the weights for risk weighted assets that are not objective. We expect a negative relationship between the ratio of equity and the probability of bank distress. Empirical studies (Cihak & Poghosyan (2009)) suggest that bad asset quality increase the probability of bank distress. We follow Ioannidis et al. (2009) by using loan loss provisions to net interest revenue ratio as a measure of asset quality. Bad quality assets indicate a greater exposure to credit risk and higher probability of bank failure. Managerial quality is approximated by efficiency or cost to income ratio. Lower values of costs show bad managerial quality and higher probability of distress. Performance is closely linked to risk and bank capital. Non-performing banks have an incentive to choose risky projects to increase their profitability while respecting the constraints of capital. We proxy, profitability by return on average equity ratio and we expect that it has a negative effect on the bank insolvency.

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Liquidity shocks play a key role in the current crisis. Shin et al. (2005) have defined illiquidity risk as the probability of a default generated by a run. They emphasize that “liquidity buffers may play a role similar to capital buffers”. Therefore, liquidity risk was integrated in the new regulations (Basel III). We measure liquidity by the ratio of liquid assets to deposits and short- term funding. Based on the previous literature, we expect higher liquidity to be correlated with lower probability of bank distress.

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Regulatory variables Banking regulation does not necessarily mean an improvement in bank stability. Most studies use country level data to investigate the influence of prudential regulation of the banking fragility. Barth, al. (2004, 2008); Cihak & Tieman (2008) found that regulation and supervision depend on institutional development of the countries. In addition to the CAMEL variables, we follow Ioannidis, et al. (2010) by including regulatory indicators such as the three pillars, namely capital requirements, supervisory monitoring and market discipline of Basle II and restrictions on bank activities. Econometric model The Logit regression shown below is used to examine the link between regulatory policies and the probability of default. This regression uses Risk = [Z-score, Rating, Intervention] as dependent variables. We consider state intervention as an emergency measure and the sign of bank default.

𝐑𝐈𝐒𝐊𝒊 = 𝜷𝟎 + �𝜷𝒌

𝑲

𝒌=𝟏

𝑿𝒌,𝒊,𝒕 +�𝜷𝒌′

𝑲′

𝒌′

𝑹𝑬𝑮𝒊,𝒌′ +�𝜷𝒌′′

𝑲′′

𝒌′′

𝑪𝒌′′,𝒊 + 𝜺𝒊,𝒕 (3)

Where i = (1, 2, ……, 151) banks and t = 2003-2008. 𝑋𝑘,𝑖,𝑡 represent CAMEL variables of the bank i at time t. The vector 𝑅𝐸𝐺𝑖,𝑘′ presents regulatory variables of the bank i. we include 𝐶𝑖 as control variables to capture macro economic variables (Inflation and GDP per capita) and the bank size measured by log(Assets). The coefficient β show the direction of correlation between the various measures of default probability with the financial and regulatory policies. 𝜀𝑖,𝑡 is the random error term. EMPIRICAL RESULTS The analysis of the descriptive statistics of the CAMEL variables shows a sharp drop in overall performance of European banks except Spain, whose decline is limited. We also see deterioration in asset quality for British and Greek banks. These two countries have experienced the greatest percentage of failed banks. Capital, asset quality, interbank liquidity and profitability are importance variables in bank failure. Regulatory variables are linked with the number of bankruptcy by country. We note that Spanish banking system has remained immune to failure given a more effective regulatory oversight. This implies that supervision have a significant impact on banking risk failure. Our results suggest that higher stringent equity requirements reduce banking risk default measured by rating, Z-score and intervention. This result confirms the statements of Barth et al. (2004) and Admati et al. (2010). We also find negative correlation between the level of bank capitalization and the risk of bank distress. Lanine & Vennet (2006), similarly, Berger & Bowman (2010) stated that better capitalized banks have less probability default. With regard to the second pillar of Basle II, we also found significant evidence in favor of supervision hypothesis. It seems to have a negative effect on the probability of bankruptcy. This is consistent to studies that higher state supervision results in lower risk of insolvency, measured by Z-score (Agoraki et al. 2011). The third pillar of Basle II relative to market discipline measured by subordinated debt, shows a positive and significant correlation with the default

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probability. Higher level in subordinated debt is associated with a greater risk-taking. Banks act recklessly when they increase their share of subordinated debt hoping for a higher profitability. This finding can be explained by ‘too big to fail” approach which influences the measures of market discipline and the probability of bankruptcy of large banks issuing subordinated debt. Bank size is also positively related to default risk (1% significance) when dependent variable is ex-post. This result is explained by the support provided by governments to large banks, which gives banks incentives to take excessive risks generating a higher probability of failure. Furthermore, stricter restrictions on bank activities increase insolvency risk. This finding is in line with the studies of Barth et al. (2008) and Angkinand (2009). This suggests that allowing banks to provide a large range of activities increase economies of scale and the franchise value of banks. Therefore, Diversification of activities provides banks with hedge against market uncertainties. This is in line with the view that more diversified large banks display a lower default risk CONCLUSION Using a sample of 152 commercial banks from six countries of Europe in activity between 2003 and 2008, we study the role of regulatory policies in reducing vulnerability bank. It was found that the regulation of banks has two implications. First, regulation imposes restrictions on capital adequacy to reduce bank risk taking. Second, regulation implement a monitoring system based on a form of control to allow inspectors to check whether the banks meet regulatory requirements. It is clear that the role of capital adequacy ratio in banking regulation is important to absorb losses against loan default. But the problem of the capital requirement during the subprime crisis is rather in the weighting of assets against the risks. Risk weighting asset calculation is not perfect, with low risk weights for loans to public services. We need a simple capital adequacy ratio that is easy to measure, to control and to understand. Furthermore, incentives for banks to increase their profitability are greater than those of regulators and result in excessive risk exposures to banking system. Some regulatory measures that aim to reduce banking instability become means to boost bank vulnerability. Our findings show that restrictions on bank activities increase bank distress by introducing subordinated debt in the Tier 2 and do not improve the stability of banks. In fact, subordinated debts play both the role of sensitivity to market risk and an indicator of market discipline. The results show a highly significant relationship between subordinated debts and the risk of failure. In other words, these debts as part of Tier 2 contribute to the increased risk of bank failure. This result demonstrates a significant sensitivity to market risk and market discipline failure. However, as a final remark it should be emphasized that alternative measures, such as rating and Z-score are not very strong. In fact, empirical results have pointed the relevance of ex-post measure. REFERENCES Upon request BIOGRAPHY S. L. Boumediene Has a PhD in Business Administration (Accounting) from the University of El Manar, Tunisia. Before Joining Montana State University Billings, Dr. Boumediene taught both financial and managerial accounting in both undergraduate and graduate levels at the top business schools in Tunisia. Dr. Boumediene has been publishing his research work in academic journals such as Journal of Modern Accounting and Auditing and the Journal of Management and Business Research among others. Dr. Boumediene published a book on statistical characteristics

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and quality of accounting information in 2013. E-mail: [email protected] - Corresponding author D. Khouaja has a PhD in business administration (Finance) from the University of El Manar, Tunisia. Dr. Khouaja is lecturer in the department of Accounting and finance at ESSEC, Tunis, Tunisia. Dr. Khouaja teaches financial management, bond management and financial theory in undergraduate levels. Dr. Khouaja teaches also research methodologies at senior level. E-mail: [email protected]

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HOW TO IDENTIFY DISRUPTIVE NEW BUSINESSES

Elizabeth Robles Maldonado, University of Puerto Rico

ABSTRACT In almost any industry, the most dramatic stories of growth and success were launched from a platform of disruptive innovation (Christensen et. Al, 2002). The probability of creating a successful, new growth business is 10 times greater if the innovators pursue a disruptive strategy rather than a sustaining one. Genuinely disruptive innovations are the ones that result in the creation of entirely new markets and business models. Few companies have introduced these innovations. Disruptive innovations appeal to customers who are unattractive to the incumbent companies. According to Christensen (2012) companies that want to create new growth businesses should seek disruptive opportunities because industry leaders will not be motivated to pursue them. The successful disruptive innovators always target customers who welcome simple products and affordable. The disruptive business model strategy needs to be sure that it is unattractive to every powerful incumbent. The purpose of this article is presenting the concept of disruption from the perspective of a Social E- Commerce company that is the leader in group buying daily deals in Puerto Rico. In four years, Social Media Group obtained 80% of the market share of the group daily deal companies in the island. It got sales of $12.5 million in 2011 and $25 million in 2012. The owners are three brothers of less than 30 years old! The chief of operations is only 26 years old. This is an example of young genius entrepreneurs. JEL CLASSIFICATION: M13, M19 KEYWORDS: disruptive innovations, disruptive new businesses, new businesses models, E commerce INTRODUCTION In almost any industry, the most dramatic stories of growth and success were launched from a platform of disruptive innovation (Christensen Et. Al, 2002). The probability of creating a successful, new growth business is 10 times greater if the innovators pursue a disruptive strategy rather than a sustaining one (Christensen, 1997). Genuinely disruptive innovations are the ones that result in the creation of entirely new markets and business models. Few companies have introduced these innovations. Disruptive innovations appeal to customers who are unattractive to the incumbent companies. According to Christensen (2012) companies that want to create new growth businesses should seek disruptive opportunities because industry leaders will not be motivated to pursue them. The successful disruptive innovators always target customers who welcome simple products and affordable. The disruptive business model strategy needs to be sure that it is unattractive to every powerful incumbent (Dewald and Bowen, 2010). Social E- commerce is growing at five times the rate of traditional retail channels. New avenues of e- commerce, such as daily deals offered by companies like Groupon and LivingSocial, have boosted the sector’s momentum since 2010 (Gridley and Company, 2011, p. 6). The group buying industry has an estimated value of approximately US $2.7 billion (Kessler, 2011). This translates into roughly 138% growth in 2011 alone (Kessler, 2011). The rapid growth

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that both of these companies have experienced in less than five years since their launch dates and the unparalleled pace of adoption and frequency of utilization by consumers, merits an investigation of this emerging business model (Hughes and Beukes, 2012). The purpose of this article is presenting the concept of disruption from the perspective of a Social E- Commerce company that is the leader in group buying daily deals in Puerto Rico. In four years, Social Media Group obtained 80% of the market share of the group daily deal companies in the island. It got sales of $12.5 million in 2011 and $31.3 million in 2012. The owners are three brothers of less than 30 years old! The chief of operations is only 26 years old. This is an example of young genius entrepreneurs. The organization of the article is as follows. The first section describes the relevant literature review of disruptive business models, identifying disruptive new businesses and Social E-Commerce. The next section presents Social Media Group. The last section includes concluding comments and recommendations according to Christensen’s disruptive theory. LITERATURE REVIEW Disruptive Business Model Disruptive business models introduce threats to existing ways, but also opportunities for new sources of competitive advantage (Markides, 2006). Christensen’s landmark disruptive theory explains how fringe ideas come to redefine entire markets, not only explains why new businesses emerge and maturecompanies fall. It actually helps to predict the future success of new ventures more accurately. Raynor (2011) argues that Disruption theory is the only theory which has been statistically proven to be an effective predictive tool. Despite the groaning shelves of books offering advice on innovation, most managers continue to struggle to create the profitable growth their companies need. The reason? The vast majority of management theories base their prescriptions on explanations of the past. When it comes to predicting successful innovation, a willingness to apply the empirical and theoretical rigor of the scientific method to prove what will work in the real world has been notable by its absence (Raynor, 2011). Established companies in industries as diverse as airlines, media and banking are seeing their markets invaded by new and disruptive business models. The success of invaders such as easyJet, Netflix and ING Direct in capturing market share has encouraged established corporations to respond by adopting the new business models alongside their established ones (Markides and Oyon, 2010). According to Markides and Oyon (2010) the markets that get created by new business models are not necessarily more attractive than existing markets. In addition, the new customers who are attracted to the new business models are not the kinds of customers that established corporations should necessarily pursue. For example, Internet brokerage created a huge market in the United States. Even though this market is big and growing, is it a market that all established brokers ought to go after? Most probably not. According to Markides (2006) researchers examined the theory behind disruptive technological innovation and identified a number of issues that require further and deeper exploration. The business-model innovation is one type of innovation that tends to be disruptive to established competitors. A Business-model innovation is the discovery of a fundamentally different business model in an existing business. Another type of innovation that tends to be disruptive to the established competitors is radical innovation, which creates new-to- the-world products. A radical innovation is disruptive to consumers because it introduces products and value propositions that disturb prevailing consumer habits and behaviors in a major way (Markides and Oyon, 2010). Christensen, Clayton M. (1997) in his original formulation of disruptive theory focused primarily on technological innovation and explored how new technologies came to surpass seemingly superior technologies in a market.

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Raynor suggests (2011), that all disruptive innovations stem from technological or business model advantages that can scale as disruptive businesses move upmarket in search of more- demanding customers. These advantages are what enable the extendable core; they differentiate disruption from mere price competition. “A disruptive innovation is an innovation that transforms the complicated, expensive services and products into things that are so simple and affordable that you and I can use them” (Christensen, 2002). According to Christensen, most always at the beginning of an industry, the services or the products that are available are so complicated and expensive that the only people who can participate are people with a lot of money (Richardson, 2010). Christensen (2012) explains that a disruptive technology is an innovation that transforms a product that historically was so complicated and expensive that only people with a lot of money and a lot of skill had access to owning and using it, into a product or a service that is so much more simple and affordable that a much larger population of people can now own it and use it.” It’s not a breakthrough. The meaning in Christensen’s work is simplicity and affordability. “A disruptive innovation describes a process by which a product or service initially begins as asimple application and then moves up market, eventually displacing established competitors.” “An innovation that is disruptive allows a whole new group of consumers’ access to a product or service that was originally only accessible to those who could afford it (Christensen, 2002, 2012). The characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. Because companies tend to innovate faster than their customers’ lives change, most organizations eventually end up producing products or services that are too good, too expensive, and too inconvenient for many customers. By only pursuing sustaining innovations that perpetuate what historically helped them succeed, companies unwittingly open the door to disruptive innovations (Christensen, 2002, 2012). Identifying Disruptive New Businesses The disruptive theory developed by Christensen (2002) indicates that most managers understand that significant, new, sustainable growth comes from creating new markets and ways of competing. But few of them make such investments in creating new markets because, first of all, when times are good and core businesses are growing robustly, starting new generations of growth ventures seems unnecessary. Secondly, when times are bad and mature businesses are under attack, investments to create new growth businesses can’t send enough profit to the bottom line quickly enough to satisfy investor pressure for a fast turnaround. The second problem is virtually insurmountable, thus, senior managers must rethink their reluctance to start new ventures in good times. After all, business units that are growing robustly today will become mature, and thus vulnerable, in the future. The only way a corporation can maintain its growth is by launching new growth businesses when the core units are strong. Christensen (2002, 2012) research indicates that “if senior managers pursue this path, and if the growth businesses they start or acquire are truly disruptive, companies will find it less difficult and risky than many have supposed to create wave after wave of new growth.” According to Christensen’s theory, disruptive innovations appeal to customers who are unattractive to the incumbents. Although they typically involve simple adaptations of known technologies, entrants almost always beat incumbents at this game because established companies

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lack the motivation to win. In the day-to-day internal competition for resources and attention within large companies, projects that target large, obvious markets, invariably get priority over disruptive ones. Although every major attractive market that exists today, was at its inception small and poorly defined, just as the major growth markets of tomorrow are small and poorly defined today. Therefore, companies that want to create new growth businesses should seek disruptive opportunities because industry leaders will not be motivated to pursue them. Christensen indicates that this approach applies to venture-backed startups, cash-rich giants and everything in between. According to Christensen’s research, the probability of creating a successful, new growth business is 10 times greater if the innovators pursue a disruptive strategy rather than a sustaining one (Christensen, 1997). Christensen suggests two general strategies for turning ideas into plans for disruptive growth businesses. The first idea requires the creation of a new market that can serve as a base for disruption; the second is based on disruption of the prevailing business model from the low end. The success of each strategy is predicated on managers’ ability to shape ideas that conform to a set of litmus tests. In creating a new market as a base for disruption companies should first search for ways to compete against nonconsumption: people’s inability to use available products or services because they are too expensive or too complicated. It’s much easier to target potential customers who aren’t buying at all than to steal customers from an entrenched competitor. Strategies that disrupt by creating new market applications for entirely new customers should meet the following three litmus tests (Christensen 2002). Test #1: Does the innovation target customers who in the past haven’t been able to “do it themselves” for lack of money or skills? Many of the most successful disruptive growth businesses give people direct access to products or services that had been too expensive or too complex for the mainstream. Test #2: Is the innovation aimed at customers who will welcome a simple product? If the innovation enables a new population of customers to consume for themselves, it can more easily be shaped to pass the second litmus test: The disruptive product must be technologically straightforward, targeted at customers who will be happy with a simple product. Successful disruptive innovators always target customers who welcome simple products. Test #3: Will the innovation help customers do more easily and effectively what they are already trying to do? It is important that innovators keep in mind one essential fact: At a fundamental level, the things that people want to accomplish in their lives don’t change quickly. According to Christensen, if an idea for a new growth business is predicated on customers wanting to do something that hadn’t been a priority in the past, because of this stability, it stands little chance of success. To succeed in disrupting the business model from the low end, this second strategy must meet two litmus tests. First, it must target the least-demanding tiers of a market in which prevailing products are so good they “overserve” customers. It means that there must be less demanding customers who would happily buy a good-enough product that is cheaper than those currently available. Second, the product must be made and marketed within a disruptive business model. In other words one that enables the entrant to compete profitably while pricing at deep discounts. According to Christensen, managers who shape a strategy to conform to these litmus tests can successfully create a new growth business within an existing market. Test #1: Are prevailing products more than good enough? If available products aren’t yet good enough, a disruptive innovation whose performance is even lower will not gain any traction in the market. Managers who are shaping a disruptive strategy can determine when a product’s performance has overshot what customers can use, by examining rigorously market tier by market

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tier and the extent to which customers are willing to pay premium prices for further improvements in the functionality, reliability or convenience of a product or service. According to Christensen, if companies can sustain price increases in a given tier when they introduce an improvement in one of these areas, customers are not yet over served and that tier cannot be disrupted. Test #2: Can you create a different business model? If the low end of a market is over served and thus, open to disruption, the second test requires managers to craft a new business model. This new business must be able to earn attractive returns at prices that can steal business at the low end. This disruptive business model consists of a cost structure, operating processes and a distribution system in which profit margins are thinner but net asset turns are higher. Thus, it creates the asymmetric motivation needed for disruptive success. Therefore, executives who are shaping a low-end disruptive business model strategy need to be sure it is unattractive to every powerful incumbent. To make the disruptive strategy work it needs nourishment to survive in the corporate environment. Its resources, processes and values need to be managed carefully. Managers need to determine which resources, processes and values to leverage to help the new business succeed. The counterintuitive point is that managers whom corporate leaders have learned to trust, because of their success in the mainstream business, probably cannot be counted on to lead a radical new venture. It needs a new team of managers with a disruptive thinking mind. Social E Commerce Web 2.0 is a phenomenon that has transferred internet and the W.W.W. to a social environment, creating platforms where people can interact and create content online (Hajli, 2013). This advancement has also elevated online communities to a level where new business plans can be developed and implemented (Hajli, 2013). The emergence of Web 2.0 applications transferred human approach to the web and interconnectivity among users (Mueller et al., 2011). This interconnectivity among users created a virtual world which enables people to interact on the internet (Mueller et al., 2011). These social interactions, especially in social networking sites (SNSs), created a new stream in e-commerce. This new stream is social commerce. Social commerce is the use of Web 2.0 and social technologies to support interactions in an online context to support consumers' acquisition of services and products on the internet (Liang and Turban, 2011). Marsden (2011) refers to social commerce as “a subset of electronic commerce that involves using social media to assist in online buying and selling of products and services.” Social e-shopping refers to merging shopping and social networking activities through online social media as an application of Web 2.0 in e-commerce (Kang and Johnson, 2013). It is typified as providing online spaces in which consumers collaborate, post product recommendations and reviews, post photos of themselves wearing products, acquire advice from reliable people, seek the right products, make purchases, and form social shopping communities (Kang and Johnson, 2013). Social e-shopping and social commerce are forms of internet-based social media that enable consumers to actively participate in the marketing and selling of products and services in online communities and marketplaces (Stephen and Toubia, 2010). The convergence of traditional and electronic business models, as well as traditional and new business practices, are changing the face of global business as we know it today. The group buying/local daily deals e-commerce platform represents the collective bargaining power that individuals can leverage to obtain daily deals on local products, services and “experiences” (Hughes and Beukes, 2012). These local discounted deals are distributed via e-mail and the

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websites of companies like Groupon and LivingSocial that have established themselves as the sector leaders. In Puerto Rico, the leader in this sector is Gustazos, a subsidiary of Social Media Group. Social E commerce “is a ‘disruptive’ innovation that is radically changing the traditional way of doing business” (Lee, 2001, p. 349). It has changed the nature of the value propositions that companies now offer to their customers. The convergence of content sites and social networks has resulted in emerging social e-commerce business models (Hughes and Beukes, 2012). Social E-commerce is growing at five times the rate of traditional retail channels. New avenues of e-commerce, such as daily deals offered by companies like Groupon and LivingSocial, have boosted the sector’s momentum since 2010 (Gridley and Company, 2011, p. 6). The group buying industry has an estimated value of approximately US $2.7 billion (Kessler, 2011). This translates into roughly 138% growth in 2011 alone (Kessler, 2011). Groupon has taken the established and unquestioned marketing tactic of utilizing discount coupons and brought it swiftly into the 21st century (Hughes and Beukes, 2012). LivingSocial has brought social interaction and life experiences online. In addition, these new technology platforms provide local businesses with access to their closest customers. Customers become co-creators of value. The emergence of daily deal social group buying sites challenges our traditional understanding of what it takes to build a business that is profitable. It is interesting from both a strategy perspective, as well as a development and growth perspective (Hughes and Beukes, 2012). According to Hughes and Beukes (2012) the term social e-commerce was coined in 2008 when companies, like Facebook, started to receive massive capital injections. Soon, other companies start to emerge when they realized the massive potential buying power of online social groups, thus they focused on capitalizing on this phenomenon. LivingSocial was one of the first companies of this nature to arise. LivingSocial (originally known as Hungry Machine; trading as LivingSocial since 2009) was launched in 2007 as a group buying social commerce site (CrunchBase, 2011). It offers customers “handpicked experiences that can be shared with friends” (LivingSocial.com, 2011). In December 2010, LivingSocial secured US$175 million investment from Amazon and an additional US$8 million investment from Lightspeed Venture Partners (LivingSocial.com, 2012). More than 60 million users and their acquaintances can save as much as 90 percent per day on everything from restaurant meals to hotels and sporting events (CrunchBase, 2011; LivingSocial, 2012; Gridley and Company, 2011). Groupon, the fastest growing and biggest daily deal social group buying site and LivingSocial’s biggest competitor, was launched in November 2008. It features a daily deal on “the best stuff to do, see and buy in more than 500 markets and 44 countries” (Groupon, 2011). Within a year, Groupon had one million adherents and today it has 143 million subscribers around the world (Anonymous, 2011). In the first 18 months it went from zero to US$500 million in sales. Social Media Group Social Media Group (SMG) is a social media company established in 2009 by the Villares brothers in Puerto Rico. SMG is the parent company of Gustazos, the group daily deals leading company in the island with 80% of the market share in that category and 738,401 Facebook Fans (as of October, 2013). Gustazos, as a group daily deals company sells any kind of discount coupons, from hotels, to Spas, restaurants, adventure tours, etc. The company has 80 employees in Puerto Rico. The organizational environment of Gustazos is open, relaxed and young. The age of its employees fluctuates between 25 and 35 years old. In addition, Gustazos has offices in Jamaica, Tenerife (Canary Islands), Dominican Republic and Canada. According to the Royal

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Academy of the Spanish Language Dictionary, “Gustazo” means great pleasure that someone gives himself doing something unusual, or even harmful, thus satisfying an aspiration, his own pride, or a desire for revenge. The basic idea behind Gustazos business is nothing new. The consumers sign up to receive offers from local firms by e-mail each day. The offers range from restaurant meals to dancing lessons, at discounts of up to 90%. What makes Gustazos really stand out, however, are its margins. Gustazos typically charges businesses half of the discounted price of a voucher. This goes a long way towards explaining why the start-up was able to raise $6 million in 2010, $12.5 million in 2011, and $25 million in 2012. In the group daily deals sector competition is fierce. Almost anyone can set up a daily-deals site. There are hundreds of clones in the United States of America alone, most specializing in certain product categories. To help overwhelmed consumers, there is even a service, The Dealmap, which lists all the daily deals available in a city. Big online firms have begun to enter the fray. In December, 2010, Amazon invested $175 million in LivingSocial, the market's number two, which is said to be in talks to raise a further $500 million. In addition, Facebook, the world's biggest social network, will soon start testing local discounts (Anonymous, 2011). Gustazos target market is high end businesses, five star hotels, restaurants, spas, etc. In order to improve its efficiency in the hotel services, Gustazos decided to create Guestserve. This is an independent division that manages everything regarding hotel reservations and payments, once the members buy a hotel coupon. In addition, Gustazos has SI3D, Search in 3D, a digital engineering division in charge of design. A new division still in development is 360 hang out. This new division records live concerts with special cameras, getting a 360 view of the place. This is going to be a smartphone application. Another microbusiness division is called Merodea.me. This division is dedicated to sell fashion design clothing and accessories from designers of Puerto Rico at great discounts. It works by invitation. Members need to register and get invited to be members, and then they are allowed to buy. JoinaJoin is a vacation rental microbusiness division. Anybody that has a vacation property that wants to rent for short time periods use JoinaJoin services. Hidden and secret places are spotted in JoinaJoin. All of these divisions even though they work independently, use Gustazos resources and membership. In exchange they share profits with Gustazos according to their contracts. In addition, they take advantage of the dynamic organizational culture of this company. The most valuable asset is the people that work in there. They have passion for what they are doing; all are young and have a sense of responsibility and commitment in their jobs. The company is the leader in this market because the owners know the idiosyncrasy of the Puerto Rican culture. Gustazos is disrupting the market with new ideas. All employees are welcome to bring wildest ideas to break the paradigms of social businesses. Gustazos’ mission statement is “Help and encourage people to experience the best life has to offer.”Gustazos offers to its business clients, “an efficient and cost effective way of obtaining what you've always wanted from publicity: new clients!” (This is the slogan written in their web page). The competitors of Gustazos in Puerto Rico are: Oferta del Día (from El Nuevo Día newspaper), Pero Qué Descuentos, Groupon, Cuponeando, Yupiti, Kiero Kiero, Shop PR and GrooPanda. All these competitors are fighting the 20% market share left by Gustazos. CONCLUDING COMMENTS

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The purpose of this article is presenting the concept of disruption from the perspective of Social Media Group and its subsidiary Gustazos. A social commerce company that is the leader in group buying daily deals in Puerto Rico. Gustazos strategies of disrupting the market with new divisions, new technology and developing new markets, have made them the leader in group daily deals in Puerto Rico, capturing 80% of the market in only 4 years. Christensen (1997) pointed out that the new markets created by the invading disruptive business model are different from the established market. In the disruptive business theory the most important rule is to adopt a strategy that breaks the rules of the game in that market. This is what Gustazos did. This generalization has been supported by many high-profile examples, including Canon's success in entering the copier market, IKEA's entry in the furniture retail business, Southwest's entry in the airline market and Enterprise's entry in the car rental market (Markides and Oyon, 2010). Established companies that succeed in entering the new markets do so by developing radically different business models, different from the one that the disrupters are using and different from the one it employs in its established market. They follow the same logic that disrupters used to attack them. The disrupters companies succeeded in attacking the main market because they used a disruptive business model. If the established corporations want to have the same success, they also need to utilize a disruptive business model to enter the market that the disruptive business model has created. In a sense, they need to "disrupt the disrupter," as Nintendo did in response to Sony and Microsoft in the video games console market. Instead of targeting teenagers and young men as Sony and Microsoft did, Nintendo developed the Wii specifically to target families. Instead of emphasizing functionality, speed and superior graphics (as the PlayStation and Xbox did), the Wii stressed ease of use and simplicity. The limitations of the study are lack of literature on this topic and lack of knowledge regarding other companies with a disruptive business model. There are very few studies of disruptive businesses. In addition, companies are reluctant to give information about their strategies and organizational environment due to competition “copycats.” This was the case of Gustazos. Further research could answer questions such as what is the impact of disruptive business models on solving social problems. How many cases like Social Media Group exist in Puerto Rico? What can we learn from them? recommendations according to Christensen’s Disruptive Theory In an increasingly volatile world it is imperative to develop a disruption of your own before it's too late to reap the rewards of participation in new, high-growth markets--as Procter & Gamble did with Swiffer, Dow Corning with Xiameter, and Apple with the iPod, iTunes, the iPad, and (most spectacularly) the iPhone (Wessel and Christensen, 2012). Companies need to create different processes for evaluating and shaping disruptive ideas (Christensen, 2002). The process starts with training. In most companies, the sales, marketing and engineering employees have the great ideas. Employees at all levels should be trained in the language of sustaining and disruptive innovation and understand the litmus tests so that they know what kinds of ideas they should channel into sustaining processes and what kinds they should direct into disruptive channels. Capturing ideas for new growth businesses from people in direct contact with markets and technologies is far more productive than relying on analyst-laden business-development departments. Front-line employees are also well positioned to scout for small acquisitions with disruptive potential. Christensen recommends, if the price is reasonable, it is often better to acquire a company whose strategy passes the litmus tests than to start from scratch internally. Creating processes for shaping disruptive business plans ideas with disruptive potential need a destination. Therefore, senior management should create a team at the corporate level that is responsible for collecting disruptive-innovation ideas and molding them into propositions that fit

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the litmus tests. The members of this team have to understand the litmus tests at a deep level and use them repeatedly. Such experience will help the team develop a collective intuition about how to shape disruptive business plans (Christensen, 2002). The process for selecting managers needs to employ very different criteria from those used to promote managers within established businesses. The team should coach each new venture’s management on techniques like discovery-driven planning that can speed the emergence of a winning strategy (Christensen, 2002). This team must also be the visible and vocal advocate of new growth businesses. (In Gustazos’ case management is seriously committed to this principle). Christensen recommends that twice a year or so, team members should hold refresher training sessions with sales, marketing and engineering personnel in each operating unit, in order to provide updates on how previous ideas had been shaped into plans for high-potential growth businesses, and to describe why other ideas could not pass the litmus tests. Processes are defined only when a group of people does something over and over again. These processes for creating disruptive growth businesses need to be honed in a dedicated group. Christensen proposes that starting successful growth businesses isn’t as random and failure-fraught as it has appeared. It is complicated, to be sure, but it only appears random, because managers haven’t understood the factors that lead to success or cause failure. Spending too much on the wrong strategy in an attempt to get big fast; putting people with inappropriate experience in charge; violating the litmus tests; and launching growth initiatives in an ad hoc manner when it is already too late; are reasons for failure that can be managed and avoided. The executives who understand the potential pitfalls and work to make the creation of disruptive new businesses a corporate process, an organizational capability that is constantly practiced, can start laying the groundwork for a company future blessed by continuous healthy growth (Christensen, 1997, 2002, 2012). REFERENCES Anonymous. (2011). Business: groupon anxiety; online-coupon firms. The Economist, Mar 19, p. 70-71. Christensen, C. (2012). Clayton christensen’s answer to sustainable and profitable growth. American Management Association MWORLD, 11(1), p. 2-8. Christensen, C.M. (2006). The Ongoing Process of Building a Theory of Disruption. Journal of Product Innovation Management , 23(1), p. 39-55. Christensen, C.M., Johnson, M.W. and Rigby, D.K. (2002). Foundations for growth: how to identify and build disruptive new businesses. MIT Sloan Management Review, 43(3), p. 22-31. Christensen, C.M. (1997). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press: Boston, MA. CrunchBase. (2011). LivingSocial profile. Retrieved from: http://www.crunchbase.com/company/livingsocial. Dewald, J. and Bowen, F. (2010). Storm clouds and silver linings: responding to disruptive innovations through cognitive resilience. Entrepreneurship Theory and Practice, 34(1), p. 197- 218. Gridley and Company. (2011). Billion Dollar Babies: Trends and opportunities in the new e- commerce world. Comprehensive Industry Overview, April. Retrieved from: www.gridleyco.com.

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Habtay, S. R. (2012). A Firm-Level Analysis on the Relative Difference between Technology- Driven and Market-Driven Disruptive Business Model Innovations. Creativity and Innovation Management, 21(3), p. 290-303. Hajli, M. (2013). A research framework for social commerce adoption. Information Management and Computer Security, 21(3), p.144-154. Hughes, S. and Beukes, C. (2012). Growth and implications of social e-commerce and group buying daily deal sites: the case of groupon and livingsocial. International Business and Economics Research Journal, 11(8), p. 921-935. Kang, J.Y.M. and Johnson, K.K.P. (2013). How does social commerce work for apparel shopping? Apparel social e-shopping with social network storefronts. Journal of Customer Behaviour, 12(1), p. 53-72. Kessler, S. (2011). LivingSocial says it will overtake Groupon in January 2012. Retrieved from: http://mashable.com/2011/03/24/livingsocial-says-it-will-overtake-groupon-in-january-2012/. Lee, C. (2001). An analytical framework for evaluation e-commerce business models and strategies. Internet Research, 11(4), p. 349-359. Liang, T.-P. and Turban, E. (2011). Introduction to the special issue social commerce: a research framework for social commerce. International Journal of Electronic Commerce, 16, p. 5-14. LivingSocial.com. (2012). A brief company timeline. Retrieved from: http://corporate.livingsocial.com/ourhistoryoverview/a-brief-company-timeline/2009. Markides, C.C. and Oyon, D. (2010). What to do against disruptive business models (when and how to play two games at once). MIT Sloan Management Review, 51(4), p. 25-32. Markides, C. (2006). Disruptive innovation: in need of better theory. Journal of Product Innovation Management, 23(1), p. 19-25. Marsden, P. (2011). Simple definition of social commerce. Retrieved from http:// socialcommercetoday.com/social-commerce-definition-word-cloud-definitive-definitionlist/. Mueller, J., Hutter, K., Fueller, J., Matzler, K. (2011). Virtual worlds as knowledge management platform – a practice-perspective. Information Systems Journal, 21, p. 479-501. Raynor, M. (2011). The Innovator's Manifesto: Deliberate Disruption for Transformational Growth. Random House: New York. Richardson, J. (2010). Disrupting how and where we learn: an interview with clayton christensen and michael horn. Phi Delta Kappan , 92(4), p. 32-38. Stephen, A.T., and Toubia, O. (2010). Deriving value from social commerce networks. Journal of Marketing Research, 47(2), 215-228.

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Wessel, M. and Christensen, C. (2012). Surviving Disruption. Harvard Business Review, 90(12), p. 56-64. BIOGRAPHY Dr. Elizabeth Robles is a marketing professor at the Management Department of the University of Puerto Rico. Her areas of research are consumer behavior, public relations, marketing in a noncapitalist system, fashion marketing, corporate social responsibility (CSR), and spirituality in the workplace. Dr. Robles has published her research in Revista Global de Negocios (IBFR), Review of Business & Finance Studies (IBFR), Marketing News, Forum Empresarial and Inter Metro Business Journal. She is available at [email protected].

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THE ANALYSIS OF COMPANY LIQUIDITY USING CCC APPLICATION: EVIDENCE FROM TAIWAN

Li-Hua Lin, TransWorld University Szu-Hsien Lin, TransWorld University

Yi-Min Lin, TransWorld University

ABSTRACT It’s extremely important whether or not firms are able to realize the assets within a short period to settle their liabilities when the debts are due. Generally, the most common indicators of measuring liquidity are "current ratio" and "quick ratio". However, the cash conversion cycle period (cash conversion cycle, referred to "CCC"), may be a better approach. This study chooses two Taiwan companies in food industries: a listed company (Uni-president) and a delisted company (Tsin Tsin) to compare the performance of the liquidity indicators. We adopt the financial data of the two companies from 1996 to 2005 (Tsin Tsin was delisted in 2006), to calculate their current ratio, quick ratio and cash conversion cycle respectively. The research results show that CCC indicators indeed better reflect the company's actual short-term debt- paying ability and liquidity. JEL: G33, G34 KEYWORDS: Liquidity, Working Capital, Current Ratio, CCC INTRODUCTION In general, for textbooks related to financial management or financial statements analysis, most people are familiar to the 5-major ratio analysis for financial ratios (Liu and Hsue, 2012; Hsieh, 2013); among which, the first basic and important ratio is the liquidity ratio, which is usually used to measure a company’s short-term liquidity. Such application is also known as the “liquidity”, and the length of period for realizing a company’s assets into cash or settling its liability when the debts are due (Tsao, 2013, 22). A company’s liquidity is also related to creditors, investors, securities analysts and accounting auditors. Creditors are usually demanding the borrowing company to maintain a certain level of liquidity. Investors and securities analysts will concern company’s ability to acquire cash, and whether or not has sufficient cash to handle the requirement for daily operation. Suppliers will care about company’s ability to pay cash to purchase necessary goods. In addition, for external auditors, the evaluation of a company’s liquidity is one of important points of auditing accounts. It is extremely important whether or not a company is able to realize the assets within a short period to settle their liabilities when the debts are due. As an enterprise which is not able to pay off these debts within a short period, then it may cause the conditions of forming bad debts, and encounters the risk of bankruptcy. Generally, the most common indicators of measuring liquidity are “current ratio” and “quick ratio” (also known as “acid-test ratio”). However, different industries may cause big difference in these two ratios, and it is difficult to determine the practical liquidity by directly using the ratio pitch, as well as hard to tell the good or bad according to the ratio description (Cagle et al., 2013). On the other hand, Richards and Laughlin (1980) firstly pointed out that CCC is a better approach than current ratio and quick ratio to evaluate corporate liquidity. It not only measures the outflow and inflow period of working capital, but also considers sales volume (sale scale), thus it is able to correctly evaluate whether a company’s working capital management policy is appropriate or not without the scale influence.

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A better working capital management policy shall strive for the reduction of CCC (Liu and Hsue, 2012). This study intends to use practical cases of Taiwan listed companies to show the advantage of CCC approach relative to current ratio and quick ratio, so as to provide general creditors, investors, securities analysts and accounting auditors with deeper understanding of company’s liquidity. In addition to this INTRODUCTION, the 2nd section is the LITERATURE and METHODOLOGY, in the 3rd section it compares the performance of liquidity indicators by focusing on Uni-president and a delisted company (Tsin Tsin), and the last section is the CONCLUSIONS. LITERATURE AND METHODOLOGY In terms of liquidity explorations, some of them stress the relationship between current assets and financing costs, such as Hoshi et al. (1991), John (1993); or the optimal level of current assets or other determinants, such as Schilling (1996), James and Doug ( 1998), Kim et al. (1998), Chen and Chen (2002), Yang, Ku, and Huang (2007); or the correlation between current assets and company’s profitability, such as Jose et al. (1996), Shin and Soenen (1988); or the correlation between financial ratios and corporate governance, such as Yu and Wang (2011), Lin et al. (2012). However, Cagle et al. (2013) pointed out that only using traditional current ratio and quick ratio to measure a company’s liquidity and short-term liquidity may mislead the determination of its liquidity, thus they suggested that the CCC is also a useful and auxiliary approach to evaluate a company’s liquidity and profitability; but it is usually neglected in accounting-related textbooks in U.S., so does in Taiwan. Therefore, this study follows the approach of Cagle et al. (2013) to choose a company with normal operation and a delisted company due to financial risk and bad operation, and compares their performance of these aforesaid liquidity indicators. This study chooses Tsin Tsin Corporation, a well-known company in foods industry but delisted currently, and Uni-President Enterprises Corporation, a listed company with excellent operation currently, as the research objects of case-control study, and uses the financial data of last decade (1996~2005) before Tsin Tsin’s delisting to calculate the current ratio, quick ratio and CCC for these two companies, the detailed calculating equations are as follows:

current ratio= current assets ÷ current liabilities (1) quick ratio = (current assets - inventory - prepaid expenses) ÷ current liabilities (2)

cash conversion cycle (ccc)

= inventory conversion period + average collection period– payable deferral period (3)

inventory conversion period (c1)= average inventory ÷ (cost of goods sold/365) (4)

average collection period (c2)= average accounts receivable ÷(net sales/365) (5)

payable deferral period (c3)= average accounts payable ÷(cost of goods sold /365)

(6)

Aforesaid (1)~(2), current ratio measure the relative sizes between current assets and current liabilities. Among which, current assets indicate the assets that can be converted into cash in a short period (within one year), including cash and cash equivalents, short-term investments, accounts and notes receivable, other accounts receivable, inventory, prepaid expenses and prepayments, and other current assets; current liabilities are the debts that need to be settled in a short period (within one year), including short-term borrowings, commercial paper payable, accounts and notes payable, expenses payable, advance receipts, other accounts payable, income tax payable, current portion of long-term liabilities and other current liabilities. Due to inventory need to be sold before converting into accounts receivable, and whether inventory is able to be sold or not that cannot be controlled by the company; and prepaid expenses and prepayments (such as prepaid rent or insurance premium) are belonged to the company’s current assets, but

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mostly will not be converted into cash in the future; therefore, their ranking of liquidity will be low for both these two items. Quick ratio deducts items, including inventory, prepaid expenses and prepayments, with bad liquidity from the current assets, to obtain quick assets, and then calculate the relative number between quick assets and current liabilities. Theoretically, the main advantage of current ratio and quick ratio is easy to calculate, and covers the effects of all current assets and liabilities; however, its weak point is unable to control the liquidity that is changing with time, and it is difficult to tell whether the higher value of these two ratios are good or bad; for example, higher current ratio and quick ratio, in general, are considered as good, but the ratios are too high to have efficiency in their assets usage. On the contrary, the low current ratio and quick ratio seem to be bad, but such low ratios are probably the result of effective application for working capital (Cagle et al., 2013). Equations (3)~(6) are described as follows:

1. Inventory Conversion Period (C1): it measures an average time needed to turn a company’s inventory into sales volume. Generally speaking, the C1 period is shorter, the company’s liquidity is better. If the product handling time from inventory to sales is too long, then it will reflect to the day number of CCC, that is, such company has a bad liquidity. On the other hand, the current ratio is a static equation, which contains inventory and accounts receivable into current assets; thus, it is difficult to see such liquidity level by suing current ratio only.

2. Average Collection Period (C2): it measures the time needed to convert a company’s accounts receivable into cash. After products sold, if the handling time of converting accounts receivable into cash is too long, then it will reflect to a more day number of CCC, that is, such company has a bad liquidity. On the contrary, it is difficult to see such liquidity level by suing current ratio (and quick ratio) only.

3. Payable Deferral Period (C3): it measures the time needing to defer the account payable

(without paying interest) for a company. The longer time of this period will be more beneficial to such company’s working capital. But the reduction of current ratio (and quick ratio) caused by the deferral accounts payable, may make people feel bad about such company’s liquidity instead.

Cash Conversion Cycle (CCC) is the summarization of these three aforesaid periods, which indicates the period of all operating cycle for cash inflow and outflow of a company from purchasing raw materials, settling cash expense resulted from all related production costs, to the product sales, yield of accounts receivable and converting accounts receivable into cash. In theory, the smaller CCC value, the better working capital management, if a company has an excellent working capital management, then its CCC value may even be negative. Ratios Analysis Introduction to Tsin Tsin and Uni-President <Tsin Tsin> Tsin Tsin Corporation founded in 1984 with a capital of NT$ 600,000. Mr. Wang, Chien-lang is its president. It initiated from a MSG factory at Dehua Street, Taipei City and originally named as Pacific Chemical Industry Co., Ltd. In 1956, it increased a capital of NT$ 3.5 million and merged Tunghai Chemical Industry Co., Ltd.; in 1959, it increased a capital of NT$ 5 million, and epoch-making innovated manufacturing method of MSG, and renamed as Tsin Tsin MSG Co., Ltd.; in 1964, it increased a capital of NT$ 30 million, and launched its stocks in the public market; in 1966, it increased a capital of NT$ 16 million, and expanded its exporting

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business, developed the canned foods market, built canned foods factory in Changhua, integrated the 2nd factory in Taipei with the 1st factory to implement a consistent operation of producing MSG, and then renamed as Tsin Tsin Food Industrial Corporation. In 1977, it increased a capital of NT$ 200 million, and expanded its Changhua factory and replaced semi-automatic juice production equipment with fully automatic equipment, as well as added automatic retort pouch packing machine system. In 1978, it increased a capital of NT$ 150 million, and continuously expanded its production equipment, and newly added the production equipment for ice and dairy products, freezing equipment and cold storage. In 1995, Changhua 1st factory obtained the GMP certificate for its asparagus juice product. Tsin Tsin once listed as the top three foods factories together with Wei Chuan and Ve Wong in Taiwan, and even occupied the top rank of stocks in food industry then. During its blooming, the annual production was more than 100 million cans, and the number of employees was exceeded 1400 personnel. In 1998, it reinvested in Hsieh Tsin construction Co., Ltd., and engaged in the construction of operation of leisure facilities; in 2005, it developed dairy products with launching Green Mountain Ranch Milk Yogurt. However, due to the loss in the reinvestment, in 2005, president Wang, Chien-lang and his younger brother Wang, Chien-hua have been accused to continuously arrange many false trades of real estate during 1997 to 2004 to embezzle about NT$ 800 million from their family businesses, Tsin Tsin and Union Leather & Printing, and their checks were even bounced on July 22nd, 2005, and then Tsin Tsin is delisted in June 2006 (Chen, 2005, Pang, 2011, Yan, 2005). <Uni-president> Established in 1967, Mr. Wu Hsiu-Chi was the first president of Uni-president, and Mr. Kao, Chin-Yen, the first general manager, who formally led Uni-president Corporation to build flour mill and fodder factory at Yongkang Village, Tainan County. In 1969, it increased a capital of NT$ 16 million, built foods factory to launch the production of Uni-president instant noodles; in 1974, it invested in Ton Yi Industrial Corp., and increased capital to NT$ 256 million. GM Mr. Kao, Chin-Yen was awarded the 4th Top 10 Entrepreneurs in Taiwan; in 1975, it established the dairy product department, and Uni-president awarded as the 1st To 10 Companies in R.O.C.; in 1978, it established HQ factory at Chongli to produce bread, cake and desert; in 1979, it signed contract with Southland Corporation to introduce the operating techniques of 7- ELEVEN, and then opened 14 Uni-president Convenience Stores at the same time island-wide; in 1987, it became a listed company; in 1996, awarded by “Common Wealth” Magazine as the “Most Admired Companies in Taiwan”; in 2012, awarded as the 2nd place of “2012 The most attractive company for the new generation- Top 100” by “Cheers” Magazine, “The benchmarking companies of digital service in 2012” by “Business Next” Magazine, and “2012 Most Admired Companies in Taiwan” by “Common Wealth” Magazine. Currently, Mr. Kao, Chin-Yen is its chairman, Mr. Alex C. Lo is its president, and its capital is NT$ 51.542 billion. Comparison of Liquidity Between Tsin Tsin and Uni-President We use data from Taiwan Economic Journal Database to compare the data of aforesaid equations (1)~(6) for the financial statements between Uni-president and Tsin Tsin within 10 years (1996~2005) before Tsin Tsin’s delisting (June 2006). First, the data shows that during this period (1996~2005), Tsin Tsin’s average current ratio is 1.32, which is higher than 0.90 of the excellent Uni-president, as well as their quick ratios, such as during this period, Tsin Tsin’s quick ratios are roughly higher than Uni-president’s (both average quick ratios are 0.97 and 0.58, respectively, refer to the following Figure 2 and Table 1); and it seems that Tsin Tsin’s liquidity is better than Uni-president’s. However, at the same period, Uni-president’s cash conversion cycle (CCC) is only 43.8 days, but 107 days for Tsin Tsin, refer to the following Figure 3 and Table 2. If based on the CCC indicators, Uni-president’s liquidity is significantly better than Tsin Tsin’s. Further, to view their subitems: Uni-president’s Inventory Conversion Period (C1) is 27

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days shorter than Tsin Tsin’s averagely; Uni-president’s Average Collection Period(C2) is 71 days shorter than Tsin Tsin’s; but Uni-president’s Payable Deferral Period(C3) is 23 days which is 35 days shorter than Tsin Tsin’s 58 days, it may be caused by Uni-president’s management policy of accounts receivable (Wei Chuan’s same C3 is 54 days, Ve Wong is 37 days), thus it is worthy to carry out follow-up research. In summay, CCC indicators show that Uni-president’s liquidity is significantly better than Tsin Tsin, but for the indicators of current ratio and quick ratio show that Tsin Tsin’s liquidity is better than Uni-president’s. According to the fact of delisting for Tsin Tsin in 2006 due to its financial issues, thus the CCC indicators can more certainly reflect the actual short-term liquidity and liquidity. In addition, the data show that during 2006~2012, Uni-president’s CCC value is continuously decreased to an average of 31 days, which is mainly the quick decrease of Average Collection Period (C2) with an average decrease of 10 days; thus, it can tell that Uni-president has more effective accounts receivable management. However, the CCC approach also has some limitations, including current liabilities, such as interest, wage and tax that are not considered in CCC, and these issues may cause significant effect on its liquidity. On the contrary, the current ratio indicators have considered all current liabilities. Therefore, it is better to observe the indicators of both current ratio and CCC to evaluate a company’s liquidity. Since investors, creditors, suppliers and accounting auditors need to understand a company’s working capital management, being familiar to CCC indicators should make important benefit for them to understand a company’s liquidity. Figure 1: The Comparison of Current Ratios Between Tsin Tsin and Uni-Presiden

This figure shows the comparison of current ratios between Tsin Tsin and Uni-presiden Tsin Tsin’s current ratio is higher than Uni- president’s. Figure 2 Comparison of Quick Ratios Between Tsin Tsin and Uni-President

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This figure shows the comparison of quick ratios between the two companies. Tsin Tsin’s quick ratio is higher than Uni-president’s. Figure 3: the Comparison of CCC Between Tsin Tsin and Uni-President

This figure shows the comparison of CCC between the two companies. Tsin Tsin’s CCC is longer than Uni-president’s. CONCLUSIONS

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We use Taiwan Economic Journal Database to compare Uni-president’s and Tsin Tsin’s financial statements within 10 years (1996~2005) before Tsin Tsin delisting in June 2006 for the current ratio, quick ratio and CCC performance. First, the data shows that during this period (1996~2005), Tsin Tsin’s average current ratio is 1.32, which is higher than 0.90 of the excellent Uni-president, as well as their quick ratios, such as during this period, Tsin Tsin’s quick ratios are roughly higher than Uni-president’s (both average quick ratios are 0.97 and 0.58, respectively, refer to Figure 2). It seems that Tsin Tsin’s liquidity is better than Uni-president’s. However, at the same period, Uni-president’s cash conversion cycle (CCC) is only 43.8 days, but 107 days for Tsin Tsin; thus, the CCC indicators show that Uni-president’s liquidity is significantly better than Tsin Tsin’s. According to the fact of delisting for Tsin Tsin in 2006 due to its financial issues, thus the CCC indicators can more certainly reflect the actual short-term liquidity and liquidity. However, the CCC approach also has some limitations, including current liabilities, such as interest, wage and tax that are not considered in CCC, and these issues may cause significant effect on its liquidity. On the contrary, the current ratio indicators have considered all current liabilities. Therefore, it is better to observe the indicators of both current ratio and CCC to evaluate a company’s liquidity. Since investors, creditors, suppliers and accounting auditors need to understand a company’s working capital management, thus it is important to enhance their understanding of CCC indicators, which should make important benefit for them to understand a company’s liquidity. Table 1: Comparison Between Current Ratio and Quick Ratio For Tsin Tsin and Uni-President

Year/Month Current Ratio Quick Ratio Tsin Tsin Uni-president Tsin Tsin Uni-president

1996/12 1.88 1.08 1.69 0.56 1997/12 1.67 1.32 1.15 0.82 1998/12 1.48 1.00 1.02 0.58 1999/12 1.37 1.06 0.86 0.74 2000/12 1.10 0.68 0.82 0.43 2001/12 1.36 0.87 0.92 0.67 2002/12 1.28 0.67 0.91 0.48 2003/12 1.20 0.81 0.91 0.56 2004/12 1.18 0.72 0.86 0.49 2005/12 0.73 0.83 0.52 0.49 2006/12 delisted 0.77 delisted 0.45 2007/12 1.04 0.68 2008/12 1.07 0.70 2009/12 1.12 0.78 2010/12 1.06 0.67 2011/12 1.05 0.67 2012/12 1.05 0.68

1996~2005 average 1.32 0.90 0.97 0.58 2006~2012 average - 1.02 - 0.66

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This table shows the comparison of current ratio and quick ratio for Tsin Tsin and Uni-president during 1996~2005. The figures are computed from the database of Taiwan Economic Journal (TEJ). Table 2: Comparison Between Tsin Tsin’s and Uni-President’s CCC

Year/Month Tsin Tsin Uni-president

CCC Inventory

Conversion Period

Average Collection

Period

Payable Deferral Period

CCC Inventory Conversion Period

Average Collection

Period

Payable Deferral Period

1996/12 96.28 81.68 81.23 66.63 36.86 39.07 19.94 22.15 1997/12 136.34 98.43 122.54 84.63 39.63 43.84 20.11 24.32 1998/12 125.34 82.64 115.63 72.93 28.47 39.31 16.74 27.58 1999/12 153.19 96.21 122.57 65.59 43.80 46.57 27.24 30.02 2000/12 117.40 67.20 91.85 41.65 64.20 51.31 32.90 20.01 2001/12 115.93 69.56 98.98 52.61 48.36 38.85 28.27 18.75 2002/12 79.35 52.82 76.34 49.81 49.50 38.66 33.90 23.06 2003/12 83.32 49.54 88.45 54.67 55.84 41.92 37.13 23.21 2004/12 66.26 37.75 72.18 43.67 55.45 40.29 34.04 18.88 2005/12 96.35 41.99 101.42 47.06 15.76 27.16 13.65 25.05 2006/12 delisted delisted delisted delisted 32.44 41.45 17.86 26.88 2007/12 34.48 41.31 17.18 24.01 2008/12 30.74 42.06 16.08 27.40 2009/12 31.49 42.86 16.57 27.94 2010/12 28.21 40.13 16.25 28.17 2011/12 31.42 43.06 17.04 28.67 2012/12 30.73 41.68 16.57 27.52

1996~2005 average 106.98 67.78 97.12 57.92 43.79 40.70 26.39 23.30 2006~2012 average - - - - 31.36 41.79 16.79 27.23

This table shows comparison of CCC for Tsin Tsin and Uni-president during 1996~2005. The figures are computed from the database of Taiwan Economic Journal (TEJ), and the units of the figures are days REFERENCES Chen, M.J., Chen, R.B. (2002), Decisive Factors of Company Liquidity, Taiwan Business Bank Quarterly, 25(2), 173-190. Chen, Y.W. (2005), TPC prosecutes Chien-lang Wang and Chien-hua Wang for the embezzlement case of Tsin Tsin and Union Leather & Printing, Epoch Times. Retrieved September 9, 2008 from Epoch Times Web site: www.epochtimes.com/b5/8/9/9/n2257603.htm Hsieh, J.P. (2013), Fundamentals of Corporate Finance (Add. 4th Edition), Taipei: Best-wise Publishing. Cagle, C.S., Campbell, S.N, and Jones, K.T., 2013, Analyzing Liquidity: Using the Cash Cycle, Journal of Accountancy, 215(5), 44-48. Hoshi,T., Kashyap, A. and Scharfstein, D. (1991), Corporate structure, liquidity, and investment: Evidence from Japanese industrial groups, The Quarterly Journal of Economics, 106 (1), 33-60. James, W. and Doug, D. (1998), Evaluating corporate liquidity, Treasury Management Association, 18, 28-31. John, T. A. (1993), Accounting measures of corporate liquidity, leverage, and costs of financial distress, Financial Management, 22(3), 91-100. Jose, M. L., Lancaster, C. and Steven, J.L. (1996), Corporate profitability and cash conversion cycle, Journal of Economics and Finance, 20(1), 33-46. Kim, C. S., Mauer, D. C. and Sherman, A.E. (1998), The determinants of corporate liquidity: Theory and evidence, Journal of Financial and Quantitative Analysis, 33, 335-359.

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Lin, G.C., Lai, M.Y., Lin, W.M., and Chen, F.S. (2012), Financial Ratios and Corporate Governance Effects in a Financial Distress Model, Journal of Tainan University of Technology, 31, 227-246. Liu, Y.C. and Hsue, L.Y. (2012), Financial Management (2nd Edition), Taipei: Hwa Tai Publishing. Pang, C.L. (2011), Tsin Tsin Asparagus Juice contained “Plastic” before 2008. FTV News. Retrieved June 4, 2011 from the Yahoo Knowledge Web site: tw.knowledge.yahoo.com/question/question?qid=1611060409389 Richards, V. and Laughlin, E. (1980), A cash conversion cycle approach to liquidity analysis, Financial Management, 9(1), 32-38. Schilling, G. (1996), Working capital’s role in maintaining corporate liquidity, Treasury Management Association, 16, 4-8. Shin, H. and Soenen, L. (1998), Efficiency of working capital management and corporate profitability, Financial Practice and Education, 8(2), 37-45. Tsao, S.L. (2013), Financial Management: Theory and Practice, New Taipei City: New Wun Ching Developmental Publishing. Yan, W.C. (2005), 50-year band collapsed? Tsin Tsin exploded embezzlement and mortgaged its trademark. Now News. Retrieved August 5, 2005 from the Now News Web site: www.nownews.com/2005/08/05/320-1827186.htm Yang, F.J., Ku, K.P., and Huang, P.C. (2007), The Management Implications of Liquidity Assets of Taiwan Listed Firms, Journal of Performance and Strategy Research, 2, 123-139. Yu, H.F. and Wang, Y.C. (2011), Financial Early-Warning Models and Corporate Governance- Evidence from Traditional Industries in Taiwan, Taiwan Journal of Applied Economics, 90, 209- 241. ACKNOWLEDGEMENT We are indebted to two anonymous referees for sowing the seeds for this research in many valued feedbacks and insightful comments. We also appreciate Professor Mercedes Jalbert (the editor) for numerous helpful suggestions. BIOGRAPHY Mrs. Li-Hua Lin is a lecturer of Department of Information Management, TransWorld University, Taiwan. She can be contacted at: 1221, Jen-Nang Rd., Chia-Tong Li, Douliou, Yunlin, Taiwan R.O.C. Email:[email protected] Dr. Szu-Hsien Lin, the corresponding author, is an assistant professor of Department of Finance, Transworld University, Taiwan. He can be contacted at: 1221, Jen-Nang Rd., Chia-Tong Li, Douliou, Yunlin, Taiwan R.O.C. Email: [email protected]

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Dr. Yi-Min Lin is associate professor of Department of Information Management, TransWorld University, Taiwan. He can be contacted at: 1221, Jen-Nang Rd., Chia-Tong Li, Douliou, Yunlin, Taiwan R.O.C.

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THE EFFECTS OF FINANCIAL FACTORS ON

FOREIGN DIRECT INVESTMENT AND RESEARCH & DEVELOPMENT

Szu-Hsien Lin, Transworld University Chia-Hao Lee, Ming Dao University

Ai-Chi Hsu, National Yunlin University of Science and Technology Hung-Yi Su, Transworld University

Chun-Sheng Chen, Transworld University

ABSTRACT

This study examines the effect of financial factors upon the foreign direct investments (FDI) and research & development (R&D) expenditure of Taiwanese listed companies. The internal financial factors include business performance, equity growth rate, gross margin and financial slack, etc. First, test how the internal factors affect FDI, and further explore the relationship between FDI and R&D. For a firm with more financial resources, higher operating leverage and higher equity growth, the firm will have more foreign direct investment. On the other hand, profitability and short-term financial resources as denoted by quick ratios can positively affect a firm’s decision of R&D expenditure. In addition, R&D expense ratios have significantly negative association with foreign direct investment, where long-term financial resources are concerned. That means when a firm’s investment in R&D expenditure increases, it may decrease future foreign direct investment. Overall, FDI and R&D are affected by financial factors such as debt ratio, and profitability. FDIs are more affected by potential financial resources while R&Ds are also affected by current financial resources. JEL: F56, G31, M2 KEYWORDS: Financial Factors, Foreign Direct Investment, R&D Expenditures, Cash Dividend Ratios, Quick Ratio, Debt Ratio INTRODUCTION This study aims to examine how financial factors affect foreign direct investment (FDI) and research & development (R&D). The literature provides various determinants of FDI and R&D from different perspectives. This study investigates FDI and R&D from the perspective of firm- level financial factors. Due to our previous studies (e.g. Lin, 2011), this study will rely more on resource-based view of the firm (Penrose, 1959), rather than the behavioral theory of the firm (Cyert and March, 1963), to empirically test the data in the Taiwan stock market to study a firm‘s FDI and R&D behavior and the relationship between FDI and R&D. This is an interesting topic for researchers or practitioners who are concerned about the foreign investment and innovation behaviors of the listed companies in Taiwan with FDIs in China. Conventional FDI theories use strategic or operational variables to explain FDIs. In contrast, Choi and Tsai (2006) shows that financial factors are no less important in explaining the prevailing FDI phenomena than strategic or operational variables. According to Lin (2011) and Chen and Miller (2007), corporate performance and financial slack plays an important role in FDI and R&D decisions. Dunk and Kilgore (2004) also show that an emphasis on financial factors in setting the size of R&D budgets is becoming a competitive necessity. According to the literature, internal financial factors include business performance, equity growth rate and financial slack, etc. This study also focuses on the relationship between FDI and R&D. We explores into the following issues: How financial factors

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of firms affect their FDI and R&D expenditure? What kind of financial resources are more likely affect FDI or R&D? LITERATURE The behavioral theory of the firm (Cyert and March, 1963:127) emphasizes the roles of the organizational processes of performance evaluation, search, and decision making. Applying the behavioral theory, some researchers (e.g. Greve, 2003; Chen and Miller, 2007) to examine the behavior of firms. Chen and Miller (2007) finds that in addition to firm-specific R&D investment patterns, R&D intensity also depends on a firm’s situations, including performance relative to aspirations, proximity to bankruptcy, and financial slack. In contrast, resource-based view of the firm (Penrose, 1959) suggests that sustainable competitive edge comes from employing the resources belonged to a firm. The firm is either viewed as a assembly of productive resources (Penrose, 1959) or a composition of tangible and intangible resources (Wernerfelt, 1984). In general, organizations with excess resources may tend to have more searches for innovation or investment opportunities. Greve (2003) suggests that organizations with spare resources have greater opportunities for experimentation and also have managerial patience needed to perform searches (Greve, 2003). Search triggered by abundant slack, like financial resources, are called slack search. With regards to financial factors, Choi and Tsai (2006) adopt the integrated model with both strategic and financial factors and shows that the integrated model is superior to either component model in explaining FDIs. They also indicate financial factors are no less important in explaining FDI phenomena than strategic or operational variables. Lin (2011) and Chen and Miller (2007) shows that corporate performance and financial slack plays an important role in FDI and R&D decisions. Dunk and Kilgore (2004) review the published literature and indicate that an emphasis on financial factors in setting the size of R&D budgets is becoming a necessity for competition. In addition, using a sample of Korean firms in R&D-intensive industries between 1998 and 2003, Kim, Kim, and Lee (2008) find that that financial slack has an inverted U-shaped relationship with R&D. The relationship may vary depending on the presence of different types of owners. As for the interrelationship between FDI and R&D, Lin and Yeh (2005) suggest that the two are mutually dependent and should be treated as endogenous variables in empirical studies. Their study focuses on the mutual effect of FDI and R&D in Taiwan's electronics industry, and shows that FDI and R&D are positively related and reinforce each other. They also suggest that the difference in R&D expenditures between FDI and non-FDI firms can be further examined. Using 1989-1996 panel data of FDI by Taiwan‘s SMEs, Li and Hu (2004) find that FDI reinforces the marginal benefit of R&D and that the R&D expenditure of multinational SMEs is far above that for domestic SMEs. On the other hand, Co (2000) suggests that the increase in R&D intensity of multinational firms may be attributed to foreign firms‘ R&D activities to acclimatize to local conditions. By dividing firms into R&D and non-R&D groups, Chuang and Lin (1999) find that local technology purchase and outward foreign investment are possible substitutes to R&D activity. Their empirical results suggest that the significant effect of industry-wide technology spillovers play an essential role. Data We obtain the data for this study from the database of the Taiwan Economic Journal (TEJ), which collects operational and financial information for all publicly traded companies in Taiwan. This study examines the listed companies since they are requested by the Taiwan government to disclose their investments in China. Since the Taiwan government still prohibited the financial

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industry from investing in China during some of the study period, we select manufacturing companies listed in TSE and OTC only. To examine FDI and R&D behavior over time, we use data from 2001 to 2011. We exclude extreme outliers that were more than four standard deviations beyond the yearly medians of the variables. The Regression model is as follows: FDIt+1 = a0 + a1FDIt + a2RDt + a3YOY-TEt + a4QRt + a5Lt + a6TATt + a7DOLt

+ a8CDt + a9GMt + a10ROAt + a11ROEt +ɛt (1)

RDt+1 = a0 + a1RDt + a2FDIt + a3YOY-TEt + a4QRt + a5Lt + a6TATt + a7DOLt + a8CDt + a9GMt + a10ROAt + a11ROEt +ɛt (2)

where FDIt+1=future foreign investment, FDIt=current foreign direct investment, RDt+1=future R&D expense ratio, RDt=current R&D expense ratio, YOY-TEt=current equity growth rate QRt=Quick ratio, Lt=current debt ratio, TATt=current total asset turnover, DOLt=current operating leverage, CDt=current cash dividend ratio, GMt=current gross margin, ROAt=current return on asset (ROA), ROEt=current return on equity (ROE) EMPIRICAL RESULTS AND ANALYSES This section analyses how R & D expenditure and financial ratios affects the future foreign direct investment of manufacturing companies listed in TSE, and how foreign direct investment and financial ratios affects future R & D expenditures. We adopt an integrated cross-sectional data and do stepwise regression upon some important financial factors, and the regression results are briefly summarized in this section. According to Table 1, the results show that the coefficient upon the equity growth rate, operating leverage, cash dividend yield and return on assets are significant, while the quick ratio is not significant. Research and development expense ratio (R&D) in Mode12, Mode13, Mode14 are not significant, but after adding debt ratio as a variable, R&D become significant; debt ratio in Model5, Model6, Mode17 are significant, but after adding the return on assets (ROA), debt ratio becomes insignificant at the 5% level (still significant at the 10% level). Therefore, the equity growth rate, operating leverage and ROA have significantly positive association with future FDIs, while R&D, debt ratio and cash dividend payout ratio have significantly negative association with future FDIs. Table 1: Regression of Future Foreign Direct Investment Upon R&D and Financial Factors variables model1 model2 model3 model4 model5 model6 model7 model8 fdit 0.2855*** 0.0986*** 0.0897*** 0.2899*** 0.2880*** 0.2768*** 0.2714*** 0.2686*** [0.0094] [0.0129] [0.0129] [0.0129] [0.0129] [0.0132] [0.0134] [0.0134] rdt -0.0001 -0.0001 -0.0001 -0.0001* -0.0001* -0.0002** -0.0002* [0.0001] [0.0001] [0.0001] [0.0001] [0.0001] [0.0001] [0.0001] yoytet 0.0000*** 0.0000*** 0.0000*** 0.0001*** 0.0001*** 0.0000** [6.6800] [6.6900] [6.6900] [6.6100] [0.0000] [0.0000] qrt 2.7500 1.4600 2.5800 3.1400 2.7300 [1.5500] [1.6600] [1.8600] [1.8200] [1.8200] lt -0.0001* -0.0001* -0.0001** -0.0000 [0.0000] [0.0000] [0.0000] [0.0000] dolt 0.0000*** 0.0000*** 0.0001*** [3.8100] [3.7100] [3.7000] cdt -0.0001*** -0.0001*** [0.0001] [0.0001] roat 0.0002*** [0.0000] n 4989 4987 4984 4984 4984 4767 4629 4629 f 502.93 266.53 198.23 149.53 120.67 94.53 73.57 67.41 r2 0.0916 0.0966 0.1067 0.1072 0.1081 0.1065 0.1003 0.1045 adj-r2 0.0914 0.0963 0.1061 0.1065 0.1072 0.1053 0.0989 0.1030 This table shows the regression of future foreign direct investment upon R&D and financial factors. The regression model is as follows: FDIt+1=a0FDIt+a1RDt+a2YOY-TEt+a3QRt+a4Lt+a5DOLt+a6CDt+a7ROAt . * indicates significance at the 5% level ** indicates significance at the 1% level *** denote significance at the 0.1% level. The figures in bracket denote standard errors.

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Once the debt ratio, which indicates future borrowing ability or long-term financial capacity, is controlled, R&D shows a competitive relationship with future FDIs. In addition, the fact that the inclusion of ROA changes the significance of debt ratio indicates that ROA, current profitability, seems to be even more important than debt ratio, long-term financial capacity, for the decision of launching future FDI. According to Table 2, the results show the coefficients upon quick ratio, debt ratio and return on equity (ROE) are significant, and those upon foreign direct investment, total asset turnover, cash dividend yield and gross margin are not significant. Therefore, quick ratio and ROE have positive association with future R&D, while debt ratio is negatively associated with future R&D expenditures. Accordingly, we may infer that current or short-term financial resources (indicated by quick ratio), long-term financial capacity (indicated by debt ratio) and current profitability (indicated by ROE) will affect the decision of future R&D. Table 2: Regression of Future R&D Expenses Upon Foreign Direct Investment and Financial Factors variables model1 model2 model3 model4 model5 model6 model7 model8 rdt 0.2531*** 0.8470*** 0.8410*** 0.8306*** 0.8307*** 0.8766*** 0.8759*** 0.8776*** [0.0059] [0.0075] [0.0076] [0.0077] [0.0077] [0.0086] [0.0086] [0.0086] fdit -0.5910 -0.5758 -1.1944 -1.1875 -0.9908 -0.8268 -0.9771 [1.2762] [1.2727] [1.2698] [1.2703] [1.3104] [1.3161] [1.3166] qrt 0.0001*** 0.0003* 0.0003* 0.0003* 0.0003* 0.0003* [0.0001] [0.0016] [0.0001] [0.0001] [0.0001] [0.0001] lt -0.0165*** -0.0168*** -0.0132*** -0.0130*** -0.0115*** [0.0023] [0.0024] [0.0025] [0.0025] [0.0026] tatt 0.0244 0.0196 0.0181 -0.0022 [0.0499] [0.0520] [0.0520] [0.0526] cdt -0.0029 -0.0034 -0.0094 [0.0124] [0.0124] [0.0126] gmt 0.0003 0.0002 [0.0002] [0.0002] roet 0.0031** [0.0012] n 7098 5023 5023 5023 5020 4873 4873 4873 f 1806.2 6253.3 4201.2 3193.3 2547.3 1969.0 1688.2 1479.7 r2 0.2029 0.7136 0.7152 0.7180 0.7175 0.7083 0.7084 0.7088 adj-r2 0.2028 0.7135 0.7150 0.7177 0.7173 0.7079 0.7080 0.7083 This table shows the regression of future foreign direct investment and financial factors. The regression model is as follows: RDt+1=a0RDt+ a1FDIt+a2QRt+a3Lt+a4TATt+a5CDt+a6GMt+a7ROEt. * indicates significance at the 5% level ** indicates significance at the 1% level *** denote significance at the 0.1% level. The figures in bracket denote standard errors. CONCLUSION The empirical result show that financial factors such as equity growth rate, operating leverage, and ROA have significantly positive associations with future foreign direct investments. Therefore, operating leverage and profitability can positively affect the decision of a firm’s long– term investment such as FDI. If a company increase its equity in the past few years, the firm may be more likely to launch more FDIs. The reason may well be that such firms have accumulated enough financial resources, making them more confident to make future investment and undertake possible risk. In contrast, R&D expense ratio, debt ratio, and cash dividend ratio have significantly negative association with foreign direct investment. The underlying rationale may be that the more investment in R&D expenses or more payouts in cash dividends, the fewer financial resources can be used for foreign direct investment; while the fewer investments in R&D or fewer payouts in cash dividend, the more investments in FDI firms can have. In addition, lower debt ratio means higher potential financial resources, and may lead to more future foreign direct investment. Among these, the competitive relationship between R&D and FDI occurs when the long-term financial resources, indicated by debt ratio, is concerned. On the other hand, quick ratio, profit margin and return on equity are positively associated with future R&D expense; whereas, foreign direct investment, debt ratio and cash dividend ratios are

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negatively associated with future R&D expense. Among these, only quick ratio, debt ratio, and ROE are significant. This means the decisive factors of R&D may lies in financial resources of a firm. Meanwhile, profitability also positively affects the decision of R&D expenditure. Overall, FDI and R&D are affected by financial factors such as quick ratio, debt ratio, and profitability. FDIs are more affected by potential financial resources while R&Ds are also affected by short- term financial resources. REFERENCES Chen, W.R., Miller, K.D. (2007) Situational and Institutional Determinants of Firms‘ R&D Search Intensity. Strategic Management Journal, 28, 369-381 Cyert, R.M., March, J.G. (1963) A Behavioral Theory of the Firm. Englewood Cliffs, Prentice- Hall, NJ. Choi, J.J., Tsai, E.C. (2006) Strategic and Financial Determinants of Foreign Direct Investments. International Finance Review, 7, 19-60. Chuang Y., Lin C. (1999) Foreign direct investment, R&D and spillover efficiency: Evidence from Taiwan's manufacturing firms. Journal of Development Studies, 35(4), 117 - 137 Co, C.Y. (2000) R&D, Foreign Direct Investment and Technology Sourcing? Review of Industrial Organization, 16, 385–397 Dunk, A. S., Kilgore A. (2004), Financial Factors in R&D Budget Setting: the Impact of Interfunctional Market Coordination, Strategic Alliances, and the Nature of Competition. Accounting and Finance. 44, 123 – 13844, 123-138. Greve, H.R. (2003) Organizational learning from performance feedback: A behavioral perspective on innovation and change. Cambridge University Press, England. Kim H., Kim H., Lee P.M. (2008), Ownership Structure and the Relationship Between Financial Slack and R&D Investments: Evidence from Korean Firms, Organizational Science, 19 (3), 404- 418. Li, Y., Hu, J. (2004) R&D, FDI, and efficiencies of small and medium-sized firms. mimeo. Lin S., Chen Y., Hsu A. and Liu Y.A. (2011), Foreign Direct Investment Behavior: Problemistic or Slack Search, African Journal of Business Management, 6(28), 8250-8260 Penrose, E.T. (1959). The Theory of the Growth of the Firm. Basil Blackwell, Oxford. Lin, H.L. and Yeh, R.S. (2005) The interdependence between FDI and R&D: an application of an endogenous switching model to Taiwan's electronics industry. Applied Economics, 37(15), 1789- 1799 Wernerfelt B (1984). A resourced-based view of the firm. Strategic Management Journal. 5(3), 171-180 ACKNOWLEDGEMENT We are indebted to two anonymous referees for sowing the seeds for this research in many valued feedbacks and insightful comments. We appreciate Professor Mercedes Jalbert (the editor) for

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numerous helpful suggestions. We also acknowledge funding from the National Science Council (Taiwan, NSC 101-2410-H-265 -004 -), and the help from our project assistants and some other students in Department of Finance at Transworld University. BIOGRAPHY Dr. Szu-Hsien Lin, the corresponding author, is an assistant professor of Department of Finance, Transworld University, Taiwan. He can be contacted at: 1221, Jen-Nang Rd., Chia-Tong Li, Douliou, Yunlin, Taiwan R.O.C. Email: [email protected] Dr. Chia-Hao Lee is an assistant professor of Department of Finance, Ming Dao University, Taiwan. He can be contacted at: 369 Wen-Hua Rd., Changhua, Taiwan, ROC, Taiwan R.O.C. Dr. Ai-Chi Hsu is an associate professor of Department of Finance, National Yunlin University of Science and Technology, Taiwan. He can be contacted at: 123, Sec.3, University Rd., Douliu City, Yunlin County, Taiwan, R.O.C. Mr. Hung-Yi Su is a student of Department of Finance, TransWorld University, Taiwan. He can be contacted at: 1221, Jen-Nang Rd., Chia-Tong Li, Douliou, Yunlin, Taiwan R.O.C. Mr. Chun-Sheng Chen is a student of Department of Finance, TransWorld University, Taiwan. He can be contacted at: 1221, Jen-Nang Rd., Chia-Tong Li, Douliou, Yunlin, Taiwan R.O.C.

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STATISTICAL MODEL PREDICTING FREIGHT TRANSPORT FUEL EFFICIENCY

Rosa Amelia Alcántar-Ruiz, UPAEP Fernando Orue-Carrasco, UPAEP

José Luis Martínez-Flores, UPAEP

ABSTRACT Fuel spending is a category of greater impact in the carrier companies’ costs structure. In Mexico, this represents up to 32.5% of the operating variable cost per kilometer of these companies. Determination of its spending is controversial, given that the method to establish a standard entails inconsistencies; ordinarily that referred by the vehicle manufacturer is considered, which is not helpful under the actual operation conditions, because of its theoretical determination and under ideal conditions. A view of the relevant literature indicates lines of inquiry generating models considering a maximum of three explicative variables, discriminating others relevant such as: soil contour and slopes, types of trailers and driving techniques. This article offers the design of a statistical model based on a multiple regression to predict standard fuel efficiency, considering the most affected factors and actual operating conditions seen in the Mexican transportation sector. KEY WORDS: Transportation, Fuel Efficiency, Statistical Model, Multiple Regression. JEL: C01, C03, C09 INTRODUCTION Transport is a key element in the supply chain, in Mexico constitutes a special window of opportunity, given the competitive edge representing its geographical location and the times of trade in regard to its main commercial partner: the United States of America. The economic relevance of this service sector in Mexico is evident, because it represents 7.0% of the Gross Domestic Product. Likewise, the cargo and passengers transportation jointly represent 76% of the gross value added of the transportation activity (INEGI, 2011). Against this background, the transportation sector must focus its efforts in an effective management of the moneys allowing it to strength its economic and operating structure, by representing a competitive advantage. One of the most important inputs in this area is the fuel, which represents up to 32.5% of the variable operating cost per kilometer of a freight company, (Jaime, Harald, & Newel, 2012). Efficiency of the fuel is a controversial topic in the field of transportation, due to the inconsistencies found with regard to the fuel control and measurement methods, let alone for establishing standards. Ordinarily, the standard considered by the decision makers of the freight companies is that referred by the vehicle manufacturers but the conditions for its determination is unknown as well, the standards used for experimental evaluation are specific of the country from which the vehicle comes from, and no frequency for updating has been established (Fuentes J, 2002), therefore it is almost impossible to obtain it because of its full theoretical ground and under ideal conditions.

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Considering the aforementioned background, this work reflects the progress in the development of a global statistical model to determine the fuel efficiency, taking into account most of the factors affecting consumption (mechanical characteristics of the unit, road, operator’s ability and cargo) under quantitative procedures (Design of Experiments and Analysis of Multiple Regression) which may become a management tool for company’s officers of the sector, allowing them to make objective decisions. LITERATURE REVIEW There are multiple factors affecting the fuel consumption which have been separately studied and it has been determined how much fuel is capable to be saved up if parameters of any of these variables are modified to make such expense as effective as possible:

Technical-economic level of competence of the operator to drive the unit. According to an investigation using experiments design, there was shown an improvement of 22.5% of efficiency. (Correa, Codollo, & Salazar, 2010) Unit’s mechanical features. Selection of the power mechanism (engine, transmission, differential, tires and clutch) of the carrier’s units directly affects the unit’s performance and therefore the fuel economy. (Morales, Cervantes, & Lozano, 2010). Operation conditions. This category entails, the type of road, size of the freighted cargo, maintenance policies, term of the service cycle, fleet standing. (Rafael, Sánchez, & Guzman, 1995). Environmental Conditions. Agents such as weather and the road traffic flow affect the fuel efficiency. By way of example, there has been determined that by travelling upwind the fuel consumption increases due to the aerodynamic effects for up to 8% with 18 km/h windflaws, and up to 18% with 36 km/h windflaws on a cab deflector vehicle. A drop of atmospheric temperature of 10 °C increases consumption in about 4% (IDEA, 2005).

Literature regarding investigations focused on fuel consumption forecasts, which is scarce, shows that the models resulting from such researches discard major explanatory variables such as winding travelling paths, slopes, trailers (Pérez, Fuentes, Codollo, & Toledo, 2010), as well as driving procedures and soil contour (Posada, 2012); likewise, there have been found a lot of deviations between the estimations of some models (Highway Development and Management) and the actual results (Altamira, 2003). On the other hand, fuel consumption predictive models arisen from the scientific research only consider one or a maximum of three explanatory variables. PROPOSED CONCEPTUAL MODEL This work is supported in the use of a powerful statistical method for modeling, and subsequently predict behavior of an interesting effect (fuel efficiency) in terms of several significant factors both quantitative and qualitative (weight, type of way, differential step, unit’s seniority, coupling mode, etc.): the multiple linear regression [1] (Gutiérrez y De la Vara, 2008). 𝑌 = 𝛽0 + 𝛽1𝑋1 + 𝛽2𝑋2 + ⋯ .𝛽𝑘𝑋𝑘 + 𝜀 (1)

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A multiple linear regression model is feasible to be obtained by means of arranged experiments, observation of non-controlled phenomena or historical records, being the last the application case addressed in this research. Products of the multiple linear regression application involving pretended variables (type of coupling, type of road) are the following:

1. Statistical model (regression equation) 2. Variation analysis 3. Correlation coefficient and multiples determination (R and R2) 4. Hypothesis tests in multiple linear regression

METHODOLOGY This investigation was developed in a Mexican carrier company rated as the largest of this sector, with a fleet comprised by 176 units. The historical information of a sample of 500 travels was made by such units within the period of June 1st, 2013 and June 31st, 2013, to obtain the multiple linear regression models with pretended variables. The activities made for such research were the following:

1. Design and implementation of an instrument to obtain the company’s energy performance.

2. Selection of explanatory variables to build the statistical model. 3. Obtaining of historical information of the journeys’ sampling, and its validation by means

of the company’s records consultation such as driving test reports, unit’s technical specifications, travels history, maintenance logs, personnel files and engine computer reset sheets, among others.

4. Obtaining of preliminary model. RESULTS There were selected as pretended variables of the fuel efficiency: freighted weight, differential step (power train configuration), coupling mode, type of road, standing and engine brand. Table 1 outlines level or treatment where factors may appear. Table 1. Detail of explicatory variables used in the linear regression model

Variable Type Level 0 Level 1 Net weight freighted

(tons) Quantitative NA NA

Coupling mode Qualitative Single truck Double decker truck Differential step Quantitative NA NA Type of engine Qualitative Caterpillar C-15 Cummins ISX Type of road Qualitative Greater distance

mileage with no slope Greater distance

mileage with slope Standing (years) Quantitative NA NA

This table describes the variables used in the regression models. Source: Research. After historical information of the 500 journeys sample was processed by Minitab, the following multiple linear regression model was obtained: Efficiency (Y) = 2.63 + 0.0487 road - 0.0213 weight - 0.023 differential step + 0.0344 type of engine - 0.0184 standing. The statistics of the multiple linear regression model, the variance analysis and the hypothesis tests are shown in Tables 2, 3 and 4, respectively.

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Table 2: Multiple Linear Regression Statistics

Regression Statistics Multiple correlation coefficient

0.69113735

R2 determination coefficient 0.477670837

Adjusted R2 0.403052385

Typical error 0.09654036

Remarks 500

This table shows the regression model statistics of the fuel efficiency variable. Source: Research. Table 3: Analysis of Model Variance

Degree of Freedom

Sum of Squares Average of Squares F F Critical Value

Regression 5 0.298311727 0.05966235 6.4015109 6

0.000254886

Residual 35 0.32620144 0.00932004

Total 40 0.624513167

This Table shows significance of the fuel efficiency variable regression model. Source: Research. Table 4: Hypothesis Tests for Predictive Variables

Coefficients Typical error Statistics t Probability

Intersection 2.517154825 0.570962436 4.40861722 9.43E-05

Road 0.142055451 0.071065507 1.99893671 0.05342787

Weight -0.020505304 0.004250382 -4.82434424 2.7242E-05

Differential step -0.026103204 0.117537134 -0.22208474 0.82553874

Engine 0.029044123 0.04186522 0.69375301 0.4924161

Standing -0.019153064 0.010807478 -1.77220478 0.08506621

This Table shows comparable parameters of the hypothesis tests applicable to the model. Source: Research. RESULTS Taken together, variables only explain 40.30% (R2 adjusted) of the fuel efficiency and keep a mutual interrelation of 69%. Notwithstanding that variables were taken to select the sample, for vehicles with a maintenance level completed according to the company’s policies and manufacturer’s advice, and which were driven by qualified and competent operators of the company, model fails to estimate at least 90% of the fuel efficiency behavior. It is important to highlight that the model has a statistical significance because the calculated F value is capable to be obtained and compared with the critical F (the latter is less than the calculated). In relation to the hypothesis test results it can be deduced that the exchange to differential and the type of engine with a confidence level of 90% are not significant variables for this model. This is

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because the company assumed as strategy to make the efficiency as effective as possible to request the heavy vehicles provider a vehicles’ configuration appropriate to the road and the speed the operational unit will be required to go through; also, path changes between the units were not agreed, keeping running the most of the vehicles in only one type of road. It is important to mention that, the failure in the implementation of such strategies or policies, would be likely very significant for a fuel efficiency estimation. As next step in this research, experiments design based on such variables will be applied and any others such as operator’s competence and maintenance conformance, under controlled conditions allowing that impact affecting any of such variables is determined and distinguish non- representative variables to build a fuel efficiency model entailing a greater explicative and predictive ability. REFERENCE Altamira, A (2003). Determinación del consumo de combustible de vehículos pesados sobre distintos tipos de pavimento. Tesis de Doctorado en Ciencias de la Ingeniería. Santiago, Pontificia Universidad Católica de Chile. Escuela de Ingeniería. 216 p. Correa A., Cogollo J. y Salazar J., (2010), Evaluación del efecto de la conducción eficiente en el consumo de combustible en vehículos de transporte de carga pesada usando diseño de experimentos. Producción+Limpia, Vol.5, (21), p. 96-112. Fuentes J. (2002) Selección, Evaluación y Renovación del Parque Vehicular, UCF, p. 190. Gutiérrez., De la Vara R. (2008).Análisis y Diseño de Experimentos. (2da. Edición). México:

McGraw-Hill.

IDEA, (2005), Manual de conducción eficiente para conductores de vehículos industriales. Recuperado el 10 de julio de 2011. http://www.uned.es/experto-profesional-conduccion racional/manual_conduccion_industriales.pdf INEGI, (2011), Estadística Básica del Autotransporte Federal. Jaime, E., Klein, H. y Newel, R. (2012). Los retos de la competitividad en México. Una agenda de reformas inmediatas. Recuperado el 02 de agosto de 2012, http://www.la.fnstfreiheit.org/uploads/1198/NaumanCompetitividad_final.pdf Pérez R., Fuentes J., Cogollo J., Toledo A. (2010). Evaluación de la eficiencia energética de vehículos pesados en el ciclo de movimiento básico modificado. Ingeniería Mecánica. Vol. 13, (1), 49-58 Posada, J. (2012). Efecto de la cantidad de carga en el consumo de combustible en camiones.

(Tesis de doctorado, Universidad Nacional de Colombia). Recuperado de

http://www.bdigital.unal.edu.co/8440/

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Rafael M. (2002), Diagnósticos Energéticos en Empresas de Autotransporte, Dos casos de

Aplicación. Publicación Técnica No. 171 Instituto Mexicano del Transporte.

Rafael, M., Cervantes J. y Lozano A., (2010), Eficiencia Energética del tren motriz de vehículos pesados con reducción de CO2. Memorias del XVI Congreso Internacional Anual SOMIN.

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EMPIRICAL ANALYSIS OF RESIDENTIAL

MORTGAGE BACKED SECURITIES: A CASE STUDY OF CAGAMAS Mohammed Hariri Bakri, Universiti Teknikal Melaka

Rosalan Ali ,Universiti Teknologi Mara Shafinar Ismail,Universiti Teknologi Mara

ABSTRACT

The objective of the study is to testify that the use of residential mortgage-backed securities by Cagamas to finance government staff housing in Malaysia has the ability to increase its net assets value even during global financial crisis 2007-2009. As a preliminary case study of Cagamas Mortgage-Backed Securities as an issuer the financial performance of its issues of Residential Mortgage Backed Securities is measured by key financial ratios in terms of profitability, capitalization and debt coverage for financial years of 2008-2012, and its key performance indicators as measured by net default and prepayment rates. For leverage effects, the firm shows higher debt coverage and higher earning capacities. Interestingly, its cumulative net default rate and prepayment rate for the percentage of principal balance on the purchase date for both conventional and Islamic securitization show lower than their indicative rates. The findings show that the use of securitization have demonstrated its remarkable ability to roll-over housing loans to the civil servants in Malaysia by securitizing its highly graded Residential Mortgage Backed Securities as long-term Cagamas bonds. The findings support past studies on benefits of asset securitization and interestingly verifying that residential Mortgage Backed Securities provides highly rated long-term investment to bank institutions, insurance companies and fund managers and increases its net assets value of securitization. Therefore, Residential Mortgage Backed Securities meets its principal activity for financing government staff housing loans successfully with its net default and prepayment rates show steady improvements on year to year basis. JEL : G2, R2, D2 KEYWORDS: Cagamas, Sub-Prime Crisis, Residential Mortgage-Backed, Earning, Ratio INTRODUCTION Securitization began in the United States in the 1970s with the initiation of government funding programs for residential mortgages, followed by private financings for mortgages and credit cards. Interestingly, since the beginning of the 1980s, it has become a global financing tool. As one of the fastest growing forms of corporate financing and investment portfolio, securitization is now a feature of most financial markets, including Malaysia. In 2001, the Securities Commission (“SC”) released its Guidelines on the Offering of ABS; this had paved the way for a CBO issuance by Prisma Assets Berhad, backed by a pool of ringgit-denominated bonds. Another CBO transaction backed by corporate bonds and a CLO backed by rehabilitated corporate loans followed suit the same year. Since then, an estimated 74 structured transactions have been approved under the SC‟s guidelines on private debt securities, ABS and other structured products, encompassing an array of asset classes. By end-2009, the Malaysian market had welcomed RM36.02 billion (rated and issued) of structured securities.

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Malaysia has, thus far, been somewhat insulated from the direct consequences of the American sub-prime credit crisis. Understandably, however, investors have become more cautious. In deliberating the future direction of the Malaysian structured finance market, we examine our origins as well as the key milestones achieved since the first securitisation issue here. The asset securitization technique, while complex, has won a secured place in corporate financing and investment portfolios because the consistence better performances of Cagamas from 2003 to 2008 are testimonies that asset securitizations provide lower financing costs and higher investment returns, particularly Islamic bonds (Rosalan, Shafinar and Hariri, 2013) and paradoxically, offer originators a cheaper source of funding and investors a superior return (Giddy, 2000; Ismail et al., 2008). Problem Statement and Significance of Study According to Rating Agency Malaysia (RAM), an established rating agency for debts in Malaysia, securitization is a process whereby homogenous assets are pooled and repackaged into marketable securities to be sold to investors. The process involves the issuance of private debt securities by special-purpose vehicle (SPV), known as the issuer (Ismail and Serguieva, 2009). As a matter of fact, the introduction of its guidelines by Security Commission in 2001 with only RM920 million in 2001 to phenomenal RM26 billion in 2006, for its five years of operations. Unfortunately, the following years of 2007 through 2010, Malaysian securitization market has been rather subdued. According to Rating Agency of Malaysia (2011), while the performance of the Malaysian securitization has been largely immune from 2008 US mortgage-crisis, nonetheless it has suffered from the spill-over effects that curbed domestic appetite for such structured finance products. On the extreme note, however, the authors believe that the Malaysian securitization loses its momentum due to the severe setbacks in global financial markets with the number of issues less than 10 and value less than RM10 billion per year. However, Islamic finance has got a wide attention as an alternative form of global financing and investment, particularly asset- backed securities. Therefore, the successful launchings of Malaysian Sukuk ABS in 2005 for its global Shariah acceptance will become a strong testimony for big Malaysian companies to issue it as a creative and cheaper debt financing in the near future (Shafinar, Hariri, Rosalan, and Azman, 2013) and which this study attempts to compare its key performance indicators with its conventional papers. On the cautious note, Cagamas which has been mandated by the Malaysian government to acquire its staff housing loans in 2004, has strong ability to manage sub-prime crisis effects in the Malaysian property market, and hence, the underlying theme of this study. More importantly, Cagamas has issued highly rated securities which were the first of its kind in the world bond market backed by a pool of housing government loans. On these premises, the authors are further motivated to measure the financial performance of Cagamas for the past five years in terms of its liquidity, profitability, leverage and net asset value, including the global spill- over effects of 2007-2009 subprime crisis. In fact, its stable outlook of RMBSs reflects that its trends in defaults and losses will continue to fall within rating expectations (RAM, 2012). LITERATURE REVIEW The empirical studies of asset-backed using statistical models, however, are very limited. The first published doctoral study was conducted by Holland (1989) who examined off-balance-sheet activities of the 100 largest U.S. banks. He noted that off-balance-sheet activities are various types of commitments and contingencies that are not recorded on the balance sheet of an organization. He reveals the increased involvement of banking organizations in off-balance-sheet activities and a more competitive economic environment in the banking sector. Likewise, Borgman (1996) documented that the assembly and analysis of a substantial dataset that describes the pricing and characteristics of over 700 ABS issues. His analysis finds that ABS pricing

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(absolute and relative yield spreads) is rational and prices reflect premiums for default risk, interest rate and reinvestment risk, and marketability. Thomas (2002) analyses effects on debt and equity claimants of as set of sales into securitizations. His early result shows that shareholders' returns are increasing in shareholder capitalization. Securitizes with actively traded bonds enjoy substantial and significant shareholder gains, and wealth transfer from bondholders to shareholders occurs in asset-backed securities among sellers with low credit ratings. In addition, Higgins and Mason (2003) use credit card securitization data to show that recourse to securitized debt may benefit short and long term stocks returns and long term operating performance of sponsors. It appears that the asset backed securities market according to him is like the commercial paper market, where a firm’s ability to issue is directly correlated with credit quality. Pelletier (2004) in his study provides an analysis of each step and aspect that is necessary to structure a securitization transaction. Securitization involves a multitude of legal, accounting and tax issues, and concentrates on the most central of such issues and his study concludes with some insight into what the future holds for the securitization market. Interestingly, several recent theories address the usage of securitization financing. Interestingly, Ayotte and Gaon (2005) show how ABS can reduce bankruptcy costs for some firms. These models make predictions regarding the conditions under which asset securitization can lower the firm’s overall cost of financing. However, in the wake of subprime mortgage crisis in the US in 2008, it is interesting to note that Islamic mortgage has received wide attention for its concepts and applications. According to Shahid (2008), moral hazard on the part of mortgage originators also played a part in the crisis, as it encouraged careless lending and allowed originators to get around their reserve capital requirement by increasing their leverage. He notes that credit guarantee in the form Credit Default Swaps proved worthless as the guarantors themselves did not have adequate capital reserve backing their risk exposure, or had reserve in Collaterized Debt Obligation (CDO) whose value deteriorated due to endemic uncertainty . On the above premises and legal Islamic observations, the authors are motivated to testify that Islamic securitizations perform better than their conventional issued by Cagamas MBS. Ultimately, the study attempts to verify that Islamic securitizations have the ability to act as risk sharing as the assets are real with genuine possession and transaction by originator, and hence avoiding any default risk and mortgage crisis, as suggested by Nienhaus (2011) that Islamic structured instruments, notably securitizations, must be able to act as shield against any economic crisis. Objective of the study The initial objective of the study is to measure the financial performance of Cagamas for 2008-2012, for its last five-year period. The Cagamas was chosen because it has complete financial statements at the time it initiated its residential assets’ securitizations, which were the first of its kind in the world bond market backed by a pool of housing government loans. In addition, Cagamas is the only originator in Malaysian securitization market that initiated its Real Mortgage-Backed Securities (RMBS) for both conventional and Islamic instruments. Likewise, both of its RMBS have been rated by both Rating Agency of Malaysia (RAM) and Malaysia Rating Corporation as the two local agencies in Malaysia with their highest grades, implying its strong quality of long-term debt securities, and hence unlikely default of regular interest payments and principal repayments. Likewise, the ultimate objective of this study is to testify the ability of Cagamas to perform superbly during global financial crisis as measured by its financial ratios and determine the better key performance indicators between conventional and shariah RMBS.

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DATA AND METHODOLOGY As a preliminary case study on asset securitizations for both conventional and Islamic in Malaysia, the authors believe that it is justifiable and sufficient to employ significant financial ratios and key performance indicators. In addition, Cagamas as an originator will be used as a case study as it is the first company to issue residential mortgage backed securities (RMBS) since 2004. In fact, as noted earlier, RMSB were the first of its kind in the world bond market backed by a pool of housing government loans. For data collection, audited external annual reports of Cagamas Berhad for years of 2008 to 2012 will be extracted for its financial statements. For data analysis, a complete set of financial statements in terms of Balance Sheets and Income Statements will be used to analyse Cagamas financial performance and key performance indicators. Profile of Cagamas for Financing Housing Loans Cagamas Berhad was incorporated as a company in Malaysia in 1986 with a paid up capital of RM150 million. Until 2009, the RMBS sector had been dominated by Cagamas MBS, an entity incorporated to undertake the securitisation of the Government‟s portfolios of staff housing loans. To date, Cagamas MBS has issued 5 facilities valued at RM10.2 billion in aggregate. Its issuances account for a third of the value of all domestic structured finance products. The entity‟s fourth and fifth programmes were issued in 2007. Cagamas MBS‟ Series 2007-1-i Sukuk Musharakah, issued in June 2007, represented the first global offering of an Islamic RMBS. With an outstanding principal balance of RM26.7 billion on the housing loans extended by the Treasury Housing-Loans Division as at end- December 2009, we believe that RMBS still has upside potential, once ABS pricing normalises. RAM’s cashflow analysis has taken into consideration the potential cashflow losses as a result of delinquencies and prepayments that commensurate with the AAA rating. Based on the portfolio’s performance, our cashflow analysis indicates that it will be able to generate sufficient cash to cover the coupons on a timely basis, as well as the principal redemption by each maturity date. Table 1: Summary of RMBS Issued by Cagamas MBS

RMBS issued CMBS 2004-1 CMBS 2005-1-i CMBS 2005-2 CMBS 2007-1-i CMBS 2007-2 Issue date 20-Oct-04 8-Aug-05 12-Dec-05 29-May-07 21-Aug-07 Issue amount (RM million)

1,555 2,050 2,060 2,110 2,410

Initial collateralisation

124.5% 138.7% 140.7% 120.3% 125.2%

As for Cagamas, its role is to be an intermediary between primary lenders and investors of long- term funds. Its function is very much similar to unit trust companies but differ as Cagamas will pool debts or mortgages that it securitized for issuance of the unsecured but highly rated debt securities. Interestingly, Cagamas’ debt securities are seen to be assigned the highest ratings Rating Agency Malaysia and Malaysian Rating Corporation, the only two local rating agencies in Malaysia that denotes its strong credit quality of property market, and hence, researchers are motivated to study its financial performance and key performance indicators during sub-prime crisis rooted in USA in 2007 and spread all over financial centres, including Kuala Lumpur, till 2009. Based on the empirical result of this study, (Olaniyi & Sc, 2013) it can be concluded that, liquidity motive is the main driving force for bank engagement in securitization in Malaysia. The increasing demand for loan thus makes it necessary for the banks to embark on securitization activities to meet their liquidity requirement. Housing financing facilities disbursed by BPP formed around 10% of the outstanding housing loans in Malaysia as at end-2012. Outstanding housing financing facilities disbursed by BPP had

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expanded 5.7% to RM32.98 billion by the end of last year (end-2011: RM31.21 billion).1 During the same period, the amount of loans approved by BPP had risen 22.4% to RM8.32 billion (end- 2011: RM6.80 billion). As announced through Budget 2013, the GOM plans to outsource civil servants’ housing loan and financing schemes to commercial banks to help ease its financial burden. BPP had indicated to RAM that this plan was still in its infancy as of March this year. The outsourcing will involve new financing facilities and will encompass the entire financing process, i.e. from origination to servicing. The GOM will bear the difference between the commercial interest rate or profit rate and the subsidised rate of 4%. A gradual restructuring of functions and a reduction in workforce are expected to follow the outsourcing exercise. That said, we understand that the existing financing facilities originated by BPP will still come under its purview and the servicing of the existing securitised portfolios will remain unchanged. In Malaysian civil service, with a work-force of 1.4 million, the government is obligated to provide housing loans to its staff with a maturity of up to 30 years. Thus, with a mandate given to CMBS to acquire its government staff housing loans (GSHLs)) since 2004, the Malaysian government has better option to roll-over its housing loans which is about RM13 billion to RM26 billion as outstanding balance every year for the past 10 years (2001-2010) as shown in following the Table 1. Table 2: Outstanding Balance Per Year For Government Staff Housing Loans: 2001-2010

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Outstanding Bal (RM bil) 13.3 14.5 17.2 19.6

22.7 25.6 20.3 20.5 21.5 26.1

(Source: Bahagian Pinjaman Perumahan, Perbendaharan Malaysia, Ministry of Finance, 2011) RESULTS AND DISCUSSION As a sole mortgage agency in Malaysia, Cagamas is managing superbly its assets and liabilities as documented in the following Table 2. Table 3 : Assets And Liabilities of Cagamas For 2008-2012

Particular 2008 2009 2010 2011 2012 Conventional Mortgage Assets 9,697.50 11,898.00 11,384.60 10,511.00 9,659.00 Islamic Mortgage Assets 6,178.40 7,814.00 7,696.20 7435.00 7,124.00 Islamic Financing Debts 5,643.00 4,570.00 6,854.30 6879.00 8,076.00 Hire Purchase and Leasing Debts 0 30.00 26.10 21.30 16.8 Various Assets 13105.10 8582.20 6169.50 7291.70 6987.20 Total Assets 34,624.00 32,894.20 32,130.70 32,138.00 31,863.00 Unsecured Bearer Bonds and Notes 13,319.40 11,334.90 10,039.50 9868.00 9217.00 Islamic Bonds 8,487.20 9,070.00 10,651.30 10,585.00 11,707.00 Conventional Residential Mortgage-Backed Securities 5,220.00 4,880.00 4,135.40 3842.00 3,195.00 Islamic Residential Mortgage-Backed Securities 3,910.00 3,910.00 3,382.80 3382.80 2,865.00 Various Liabilities 1065.40 591.80 442.40 569.1 618.00 Total Liabilities 32,002.00 29,846.70 28,651.40 28,246.90 27,602.00 Paid-up Capital 150 150 150 150 150 Reserves 2,472.00 2,897.50 3,329.30 3741.00 4,111 Shareholders' Funds 2,622.00 3,047.50 3,479.30 3,891.00 4,261.00

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From the above table, as an underlying theme of this study is on assets securitization of Cagamas, its mortgage-backed securities show a strong growth from 2008 to 2012 with a steady growth and provide liquidity to the financial sector of RM265.5 billion as at 31 December 2012. Reflecting its quality assets and liabilities, with permanent paid-up capital of RM150 since its incorporation, Cagamas shows very strong reserves and shareholders’ funds with a superb growth of 66% and 63%, respectively. Its strong earning capacities and profitability are explained further in the following Table 3. Table 4: Revenues and Profits For 2008-2012

Revenues and Profits 2008 2009 2010 2011 2012 Gross Revenue 1214.3 1154.3 1119.4 1047.1 1005.2 Net Revenue 620.9 662.8 647.7 628.4 579.4 Profit Before Taxation and Zakat 564.3 559.2 610.5 591.4 551.9 Net Profit 419.7 414.7 455.7 442.1 413.6 Earnings Per Share (RM) 279.8 276.5 303.8 294.74 275.44

From the above table, despite its revenues from interest income kept on falling slightly 17%, it’s but the earning before tax and zakat are steady income which is RM552 million consider stable since 2008. In fact, at the peak of sub-prime crisis in 2008-2009, it managed to weather its impacts with increasing net income of RM663 million in 2009 from RM621 million in 2008, unexpected steady rise of 7%. Interestingly, its net profit recorded with only a negligible drop of 1% during global acute financial uncertainties of 2008-2009 periods. Reflecting its strong net profits from 2008-2012, its earnings per share also record good earning RM2.75 per share in 2012. As a sole mortgage agency in Malaysia, Cagamas has very heavy debt obligations with average of 92% of its debt ratio for 2008 but it shows improvement to 87% in 2012. Despite heavy interest regular payments, it still has steady payment capacities of 1.1 times in 2008 to 1.6 times in 2012. In fact, at the peak of global financial crisis in mid 2008 with capacity of 1.1 times, implying it did not default any contractual interest payment of RM699 million in its financial year of 2008. Interestingly, as an approved financial institution in Malaysia its risk weighted capital ratios were increasing from 21.6% in 2008 to 36.4% in 2012, representing a hefty increase of 71%, indicating it has sufficient capital adequacy ratio as stipulated by central bank of Malaysia. Moving forward favourably, Cagamas has a record of dividend payments to its shareholders for the past five years. Likewise, its returns on investment on shareholders’ funds and assets are well-documented in the following Table 4. Table 5: Debt and Profitability Ratios For 2008-2012

Type of Ratio 2008 2009 2010 2011 2012 Debt Ratio (%) 92.43 90.74 89.17 87.89 86.62 Return on Average Shareholders' Funds (%) 17.1 14.6 14.0 12.0 10.1

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Interest Coverage Ratio (Times) 1.1 1.6 1.6 1.6 1.6 Return on Average Total Assets (%) 1.2 1.2 1.4 1.4 1.3 Dividend Per Share (RM)

16.7 22.5 22.5

22.5

45 Risk-Weighted Capital Ratio (%) 21.6 21.6 26.8 35.7 36.4 Net Tangible Asset (RM per share) 17.36 20.21 23.10 25.86 28.35

From the above table, during global financial crisis of 2008-2009, Cagamas even had paid dividends of 17 sen and 23 sen in 2008 and 2009, respectively, a hefty increase of 35%. Following strong financial performances for 2008-2012, its satisfactory returns on investment in funds and assets, its net tangible asset were increasing steadily from RM17.36 to RM28.35, a superb growth of 63%. As such, the net value of Cagamas is growing stronger even during global financial crisis, a strong testimony that Cagamas is a way forward to appeal banking institutions, insurance companies, asset management companies, as well as government funds and public companies to be its primary mortgage lenders. Even though Cagamas was formed on the mortgage American model of Fannie Mae and Freddie Mac that both reported to lose at least US$10 billion in 2008, Cagamas still remains profitable till 2012 for both conventional and shariah RMBSs. The ability of RMBSs to have superb performance for both issues is testified by its key performance indicators. According RAM (2012), for cumulative net default rate for the underlying portfolio, conventional RMBS stood at 0.39% which is much below its benchmark rate of 1.69%, or 4.33 times coverage, while shariah stood 0.43% against its benchmark of 2.81%, that is 6.53 times coverage. Therefore, in term of percentage of principal balance on the purchase date, shariah RMBS performs better than conventional with higher coverage of its cumulative net default. For cumulative repayment rate, conventional RMBS recorded at 5.78% that is lower than its indicative rate of 8.35%, or 1.44 times of its coverage, while shariah RMBS posted at 3.85% against its indicative rate of 8.44%, or 2.19 times coverage. Therefore, as a percentage of principal balance on the date of purchase, shariah RMBS also performs better than conventional with a higher rate of coverage of cumulative prepayment rate. With its defaults and losses as well as prepayments of the GSHLs shall continue to fall from year to year, Cagamas is seen capable to provide funding to government staff housing loans (GSHLs) in Malaysia continuously and consistently. CONCLUDING COMMENTS As noted earlier, the establishment of the Cagamas enables the financial institution to secure fixed rate long-term fund to finance its long-term floating rate housing lending activities by collateralizing portfolio mortgage loans in the Malaysian debt market. This means Cagamas will be acquiring mortgage portfolios from the primary mortgage lenders directly with recourse which requires the domestic financial institutions to replace default loans with performing credits. As such, the existence of liquidity facilities of the Cagamas helps the financial institutions to facilitate more loans since can secure source of funds at the competitive cost and at the same time minimizing maturity disparity between mortgage loans and funds origin, and hence, increase liquidity position of lending and borrowing activities in the Malaysian debt market. The fact that Cagamas has been mandated by the Malaysian government to acquire its staff housing loans since 2004, it is seen capable of providing the liquidity of secondary mortgage market in Malaysia. From socio-economic perspective, Cagamas helps the government with a force of 1.4 million people to roll-over its housing loan facilities as it does not have to wait for about 20-30 years from its borrowers to repay their loans. From fund-investment perspective, Cagamas performs relatively excellent as measured by its better financial ratios for the past five years of 2008-2012

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and lower net default and prepayment rates. With these positive testimonies, Cagamas is not only be able but seen be able to perform superbly as the sole mortgage agency in Malaysia in issuing highly rated debt securities with unlikely defaults but likely strong earnings and profits. Therefore, Cagamas remains successful in promoting government staff housing loans in Malaysia to own their houses by securitizing residential mortgage-back securities even during global financial crisis in 2008-2010 REFERENCES Annual Reports of Cagamas Berhad (2008-2012) Arif Mian and Amir Sufi (2008), "The Consequences of Mortgage Credit Expansion: Evidence from the Mortgage Default Crisis", Retrieve from http:/ssm.com/ abstract = 1072304) Ayotte, Kenneth M, Gaon, S. (2011). Asset-Backed Securities : Costs and Benefits of “ Bankruptcy Remoteness ” The Review of Financial Study, 24(4), 1299–1335. Bahagian Pinjaman Perumahan, Malaysia (2001-2010), Kuala Lumpur Borgman, Richard H.(1994), “Asset-backed securities: The determinants of yield spreads”, Ph.D Thesis., University of Florida, 175 pages David S. Holland (1988), “An examination of the off-balance sheet activities of U.S.banks”, D.B.A., The George Washington University, 297 Engku Rabiah Adawiah Engku Ali (2006), “Islamic Asset-Backed Securities”, Workshop on Islamic Bonds, Sukuk and Securitization, 24 – 25 July 2006 Gangwani, S (1998), "Speaking of Securitization", Vol. 3 Issue 4-1, Delloite & Touche, New York, July 20 Gaon, S (2007), "Essays in Securitization", PhD Thesis, Columbia University Giddy,Ian (2000), “New Developments in Asset-Backed Securities”, Workshop, Host Excellante International, Johannesburg, South Africa Higgins, E. J., & Mason, J. R. (2004). “What is the value of recourse to asset-backed securities? A clinical study of credit card banks.” Journal of Banking & Finance, 28(4), 875–899. doi:10.1016/j.jbankfin.2003.10.011 Ismail, S., Ali, R., Serguieva, A. and Gregoriou, A., (2008), Asset backed securities as attractive financing and investment: The Malaysian experience, In Z. Haqq, Editor, The 8th International Business Research Conference, March 27-28, 2008, Crowne Plaza Hotel, Dubai, UAE (ISBN 978- 0-9804557-0-1)

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Ismail, S. and Serguieva, A., (2009) Investigating possible benefits of student loan-backed securitization in the context of the Malaysian Higher Education, Research in Higher Education Journal, Cabell Publishing, USA, Inc. Vol. 5, (pp 1-9), (ISSN: 1941-3432). Kau, J. B., Keenan, D. C., & Epperson, J. F. (1987). The Valuation and Securitization of Commercial and Multifamily Mortgages. Journal of Banking & Finance, 11(3), 525–546 Lemmon, M, Liu, Laura Xianolei and Mao Mike Qinghao (2010), "Asset-Backed Securitization in Industrial Firms- An Empirical Investigation", 22nd Australasian Finance and Banking Conference M. Umer Chapra (2008), "The Global Financial Crisis: Can Islamic Finance Help?", IIUM Journal of Economics and Management 16, no. 2: 118-124, UIA Malaysia. Muhammad Shahid Ebrahim (2008), "The Financial Crisis: Comments from Islamic Perspectives", IIUM Journal of Economics and Management 16, no. 2: 111-118, UIA Malaysia Muhammad Zahid Abdul Aziz (2010), "Islamic Perspective on the Conventional World Economic Crisis", MSc Term Paper, UIA Malaysia, March 28 Olaniyi, O. N., & Sc, M. (2013). What Drives Malaysian Bank’s Securitization Activities? International Conference on Information and Social Science (ISS) & International Symposium on Marketing, Logistic and Business (MLB) (pp. 780–791). Pelletier, Anne-Barbara (2003), “Understanding the concept of securitization in the Canadian context”, LL.M., McGill University (Canada), 139 Rating agency Malaysia (2012), “Credit Rating Rationale for Cagamas MBS Berhad”, April, Kuala Lumpur Rosalan Ali, Shafinar Ismail &Mohammed Hariri Bakri, (2013). Empirical Analysis of Securitizing Government Staff Housing Loans in Malaysia. Procedia - Social and Behavioral Sciences , International Islamic Business Conference 2013. (IIBSC 2013) (ISBN 987-967-0171-27-2) April 3 , 2013
Swiss-Garden Hotel & Residences Kuala Lumpur Securities Commission (2004), Guidelines for Asset Securitizations, Kuala Lumpur Shafinar Ismail , Mohammed Hariri Bakri, Rosalan Ali & Azman Mohd Noor (2013). Developing a Framework of Islamic Student Loan-Backed Securitization . Procedia - Social and Behavioural Science (Elsevier). International Conference on Innovation, Management and Technology Research 2013 (ICIMTR 2013) September 22-23, 2013, Kelana Resort Seremban.

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Thomas, H. (2001). Effects of Asset Securitization on Seller Claimants. Journal of Financial Intermediation, 10(3-4), 306–330. doi:10.1006/jfin.2001.0324 Volker Nienhaus (2011), "Building Blocks of Islamic Finance: Regulations and Shariah Perspective" , SC-UM Visiting Scholar, Malaysia, January 25

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MAKING BUDGET MANAGEMENT WORK: PERCEPTIONS OF UK HIGHER EDUCATION MANAGERS REGARDING THE THEORY AND

REALITY OF BUDGET MANAGEMENT EXPERIENCES

Alan Parkinson, University College London Lynsie Chew, University College London

ABSTRACT

This paper is located in the arena of management development of budget holders in the UK higher education sector. It is concerned with identifying and exploring participants’ perceptions of a) significant aspects associated with effective budget preparation and management, and b) influences impacting negatively or positively upon effective budget preparation and management. A literature review is employed to identify aspects considered relevant to effective budget setting and management. These are explored with twenty four managers from eight UK institutions in the context of the perceived realties of those managers of their experiences in preparing and managing budgets. Semi-structured interviews derived from the findings of the literature review are conducted in focus groups. Data collected are analysed using content analysis utilising rank scores. The analysis generates findings suggesting indicative associations between a lack of budget training in general, understanding of the nature of costs, understanding of the layout of the budget feedback sheet, and awareness of the links between unit planning and institutional planning. Conclusions are drawn for a) management development and b) a further study mining into data to establish typologies of groups of association. JEL: A KEY WORDS: Accounting Education, Budget Management Training, Management Development INTRODUCTION The broad thrust of this study is concerned with identifying and gaining insights into phenomena perceived by UK higher education institutions (HEIs) managers who are budget holders as influencing their ability to effectively set and manage budgets, and make appropriate associated financial decisions. For the purposes of this paper, budget setting, budget management, and associated decision making are referred to as the budgetary process. It draws upon consultations with focus groups exploring inter-relationships between a) the theoretical purposes and advantages of the budgetary process identified by a literature review, b) the perceptions of managers regarding the reality of their positive/negative experiences of the budgetary process, and c) perceptions of managers of the causes of their realities matching the theoretical advantages and purposes associated with a positive experience. This latter aspect facilitates the identification of the phenomena perceived by participants as impacting both positively and, by implication, negatively on the budgetary process experience. Considerations of findings lead to conclusions suggesting matters that higher education institutions may wish to take account of in equipping budget managers with attributes to facilitate good management of the budgetary process, not least through training and development.

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The primary data in this study is collected from twenty four managers from eight UK institutions, employing four focus groups, each of six members, assembled randomly. Each manager is a budget holder of at least two years standing in their own institution, with the spread of budget- size on a spectrum of circa £20,000 to £500,000, with experience of working in HEIs from two years to sixteen years. Regarding ethics, in this study, permission has been gained from all parties but individual institutions were reluctant to be identified. The conduct of this study complies with the BERA Code of Conduct. In seeking insights, a deductive approach is adopted in the enquiry, allowing ideas and theories to be identified and subsequently tested. The nature of this study builds upon themes reflected within a series of research questions employed as a departure point. The appropriateness of those questions is confirmed/amended by the literature review. The initial research questions are detailed below in Table 1 and are reviewed at the end of the literature review. Table 1: Research Questions as a Departure Point

1. What are the elements within the management of the budgetary process perceived by participants as being key components within the experience, and requiring successful engagement with? 2. What factors relating to their own characteristics and circumstances do participants perceive as providing advantage/disadvantage to them as they endeavour to engage with those elements identified as being key components within the budgetary process experience? 3. What lessons emerge with regard to improving the budgetary process experience through exposure to appropriate development?

THIS TABLE SHOWS THE RESEARCH QUESTIONS UPON WHICH THIS STUDY IS BASED. LITERATURE REVIEW The relevant literature covers a spectrum ranging from established management accounting texts identifying aspects of and issues associated with the effective, or otherwise, management of budgets. In establishing a foundation as a departure point, texts by Atrill and McLaney (2012), Drury (2009), and Proctor (2012) identify a number of purposes and advantages associated with an effective budgetary management process. These are shown in Table 2, summarising Atrill and McLaney, 2012: 196-197). Table 2: The Purposes and Advantages of Budgets (Annotated From Atrill and Mclaney, 2012)

Budgets tend to promote forward thinking and the possible identification of short-term problems. Managers must plan and the budgeting process tends to force them to do so. In doing so they are likely to encounter potential problems. If the potential problems van be identified early enough, solutions might be easily found. Budgets can be used to help co-ordination between various sections of the business. It is important that the plans of one area of the business fit in with those of other areas; a lack of co-ordination could have disastrous consequences. Having formal statements of plans for each aspect of the business enables a check to be made that plans are complementary. Budgets can motivate managers to better performance. It is believed that people are motivated by having a target to aim for. Provided that the inherent goals are achievable, budgets can provide an effective motivational device. Budgets can provide a basis for a system of control. Having a plan against which actual performance can be measured provides a potentially useful tool of control. Budgets can provide a system of authorisation. Many managers have ‘spending’ budgets such as research and development, staff training, and so on. For these people, the size of their budget defines their authority to spend.

This table shows an annotation of purposes and advantages of budgets as outlined by Atrill and McLaney (2012). The content of Table 2 reflects a more detailed discussion of the relevance of budgeting by Pilkington and Crowther (2007). In that discussion a range of contextual factors are identified, capturing tensions that exist between operational budget managers and institutional imperatives

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for new approaches to resource allocation within the arena of approaches to new public management. Ahmad, Sulaiman and Alwi (2003, p723) suggest that operational managers are interested in the logistics of budgeting practices. They divide these logistics into concerns of managers relating to i) budget setting, ii) budget participation, and iii) the use of budgets in performance measurement, and accentuate tensions with the views of senior management. These groupings of logistics concerns by managers echo the findings of Keen and Murphy (1996 p.40) reflecting the concerns of budget managers as being i) participation by budget holders in the budget setting process, ii) an appropriate performance measurement system derived from the provision of timely and accurate budget/actual information, iii) suitable advice, support and training for budget managers, and iv) alignment of financial and management accountabilities. Broad, Goddard and von Alberti (2007) assert that the culture of UK HEIs is driven not by the views of senior management but rather by the interpretation and operation of budget systems by managers. They note that there is not a ‘performance’ culture, with few financial performance measures (although it is observed that the ‘new’ universities – the former polytechnics, tend to be more receptive to the idea of harder financial performance measurements). They go further to cite UK HEIs without definable strategic initiatives leading to lack of accountability through effective budget management.

Regarding attributes required by managers to manage budgets effectively, a range of literature identifies those which may contribute to effectiveness. In contrast, Yuen (2004) suggests that managers should display honesty and trustworthiness in the context of not succumbing to the temptation to create budgetary slack. This concurs with assertions by Steele and Albright (2004) who write about the propensity of managers to play budgetary games. Jordan and Hackbart (2005) suggest that poor implementation of effective budgeting is influenced by poor attributes of some managers. Building on the idea of ‘beyond budgeting’, Libby and Lindsay (2007) debate the need to promote better budgeting rather than ‘beyond budgets’ and identify the role of managers as being key here. Beyond budgeting is the term applied to the idea of annual budgets being discarded and replaced by re-adjustments of budgets using rolling forecasts, often on a quarterly basis. Returning to the inductive approach suggested, this initial review suggests that it would be appropriate to retain the research questions in Table 1 without amendment. METHODOLOGY This study employs a semi-structured interview method, seeking to elicit views from participants regarding pre-determined themes derived from the literature review. Data is generated through the formulation and application of semi-structured interviews, using themes derived from the literature review. Records of interviews are compiled at the time of the interviews, and summaries agreed with participants for accuracy. Records are analysed via content analysis. The methodology thus comprises both quantitative and qualitative elements. The broad themes identified via the literature review provide a framework of themes within an interview schedule. In that context, an interview schedule appropriate for this enquiry is applied. Data collected through interviews requires analysis and the extraction of meaning. Bryman and Bell (2011) suggest this is in itself challenging, because unlike the analysis of quantitative data, there are few well established rules for the analysis of qualitative data. Hussey and Hussey (1997), building upon Miles and Huberman (1994), suggest that the process of capturing meaning is broadly concerned with content analysis. In this study the interview schedule contains a range of pre- determined themes derived from a literature review. Responses to themed questions may well themselves contain additional themes. Robson (2011) is of the view that the some form of content analysis is appropriate in such circumstances, at least initially.

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Data Collection, Analyses, and Findings

Data was collected through semi-structured interviews. Data collected was explored through a content analysis based on a primarily quantitative thrust. This provided sets of descriptives, acting as a base for subsequent analysis in a future study, possibly using explanatory analyses based upon aspects of repertory grid analysis, leading to the establishment of typologies, for subsequent discussion (endorsed by Saunders et al, 2012). In that context, an interview schedule appropriate for this enquiry is applied. This schedule draws upon the content of Table 2, presenting them as statements. Interviewees are asked to rank (1 = strongly disagree, 7 = strongly agree) a) the theoretical significance of each statement in the context of good budget practice, b) degree to which they agree with the ‘reality’ of each statement made. The theoretical aspect is demoted A in tables 2 and 3, and the reality perception demoted B. Thereafter, the distance between perceptions of the agreement with the theoretical significance and the reality is calculated. As a final question, participants were asked to rank their own confidence in their budget management skills. Table 3 details the statements, summarises the mean rankings, and shows the spread. The rankings present interesting associations. Where a positive score – above 3.5/7 for a theoretical significance is shown, in each case the perceived reality is lower. This is the case for statements 1, 2, 4, and 5. For statement 3, the theoretical significance is below 3.75 and the perceived reality even lower. This suggests that budget managers understand the theory underpinning budget co-ordination but perceive that the theory bears little resemblance to reality. This has potential implications for budget integration and cohesion, leading to lack of achievement of goal congruence. (Goal congruence is the term used by accountants to denote the lining of individual departmental targets in the context of achieving organisational goals.) For statement 6, the idea of theory vis-à-vis reality is not relevant for a matching of theoretical aspects in contrast to reality. Table 3: Results of Ranking by Managers Regarding Statements Derived From the Literature

Statement A Mean score

B Mean score

C Spread

Budgets tend to promote forward thinking and the possible identification of short-term problems. Managers must plan and the budgeting process tends to force them to do so. In doing so they are likely to encounter potential problems. If the potential problems can be identified early enough, solutions might be easily found.

6.1 4.1 2.1

Budgets can be used to help co-ordination between various sections of the business. It is important that the plans of one area of the business fit in with those of other areas; a lack of co-ordination could have disastrous consequences. Having formal statements of plans for each aspect of the business enables a check to be made that plans are complementary

5.9 2.9 3

Budgets can motivate managers to better performance. It is believed that people are motivated by having a target to aim for. Provided that the inherent goals are achievable, budgets can provide an effective motivational device

2.7 1.8 0.9

Budgets can provide a basis for a system of control. Having a plan against which actual performance can be measured provides a potentially useful tool of control.

6.4 4.3 2.1

Budgets can provide a system of authorisation. Many managers have ‘spending’ budgets such as research and development, staff training, and so on. For these people, the size of their budget defines their authority to spend.

5.9 3.8 2.1

I have confidence in my budget management skills. n/a 1.4 n/a This table shows the mean scores of rankings that the managers provided when asked about the degree to which they agree with each

statement

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The contents of Table 3 indicate that a) there is not universal agreement with the theoretical significance and b) the reality of the endeavouring to make the theory work is at best adequate (statements 1, 4 and 5), and at worst woeful (statements 2 and 3). Overall, the confidence expressed in budget management (reflected in statement 3) is worryingly low, at 1.8 out of 7. The output of this quantitative analysis is not a surprise in light of the discussions in each of the focus groups. Broad consensus is found with the theoretical significance of all statements apart from number 3 (motivation). Probing elicited views regarding motivation reflecting a view of budgets being more of a restraining/constraining tool rather than a motivational tool. Returning to the literature review, much of the conventional literature emphasises behavioural aspects in general and motivational aspects in particular.. Perhaps of greater concern is the comparison of ‘reality’ scores with ‘theoretical significance’ scores. Each of statements 1, 2, 3, 4 and 5 reflect perceptions which imply budgetary process experiences which for statements 1 and 4 are hardly inspiring, for statement 5 marginally acceptable, and for statements 2 and 3 potentially very worrying. Further probing, generated suggestions that perceptions of only adequate or poor budget management experiences are located in realities founded in lack of knowledge, understanding and skills. The broad views of managers’ views of the causes of negative experiences are summarised in Table 4. Statement 6 from Table 3 is not included as that perception is the consequence of influences reflected within statements 1-5.

Table 4: Perceptions of Causes of Low Rankings of Assessments of the Reality of Budgetary Process Management Experiences

Statement Managers’ perceptions as to causes of low ranked experiences

1 Budgets are often imposed even where unit plan proposals are encouraged. The world is changing so rapidly that it is often difficult to anticipate problems. Communication is poor and feedback in particular is often out of date or inaccurate.

2 The theory is sound but the reality is that units hold their own position, being reluctant to give way on their own position for

‘the good of the whole’. The idea often starts well but by about half way through the year co-ordination disappears as pressures to fight local battles

materialize.

3 Motivation viewed as being almost laughable. Budgets perceived as being similar to restraining a dog on a leash. Budget cuts promote nothing more than de-motivation.

4 Viewed with some acceptance in theoretical terms. Reality perceived as being hampered by complicated feedback systems and poor layout of feedback forms/spreadsheets. Lack of training in interpreting content of feedback forms perceived to be a major challenge. Lack of training in core concepts of cost and financial terminology impacted very negatively.

5 As with 4, broad agreement with the rationale of the theory. Reality perceived as managers playing games to inflate budgets, then spending money when ‘money left in the pot’. Tensions between views of managers owning resources and views of the institution as to who owns resources. Often not enough cost code categories to cover all necessary expenditure.

This table shows the assessments of the reality of budgetary process management experiences in relation to each statement. It must be noted that not all discussions were of a negative nature. A consensus regarding the best efforts of many unit financial managers, who were willing helpers but had little time to promote training and education other than in the most broad-brush sense. The matter of the overall ranking of 1.8 out of 7 for the overall budgetary process experience reflects a very unsatisfactory position. Participants’ perceptions carried with them a ‘roller-coaster’ effect, it being apparent that the whole is much greater than the sum of the parts. This may be linked potentially to a sense of frustration that emerged in each set of interviews, tinged on occasions with an air of resignation. A final but telling point is that of the cohort of twenty four managers only four (16.7%) had received any form of budgetary process related training. CONCLUSIONS AND NEXT DIRECTIONS

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This study indicates a mis-match between the theory of an effective budgetary process and the reality of experiences. The initial indications are that better and more training and development are necessary if managers in UK HEIs are to manage the budgetary process effectively. That said, these are merely initial indications. The study requires a broader base of managers and the collection of further data concerning the realities of experiences. A logical next step is the identification of characteristics and attributes required by managers to enable a positive budgetary process experience. These may be identified via a deeper and broader literature review. The views of managers should then be elicited as to which characteristics and attributes they consider significant. The possession or lack of these may be identified and inter-relationships further analysed through a technique such as repertory grid analysis. This may add richness and illumination, facilitating consideration by HEIs and, where appropriate, management development educators. BIOGRAPHY Alan Parkinson Is Director Of Studies In The Department Of Management Science And Innovation (Ms&I), University College London. He Is A Qualified Accountant (Acca And Cima), With A Doctorate In Education. His Current Research Interests Are In The Areas Of Accounting History, Accounting Education, Management Accounting For Sustainability. He Can Be Reached On [email protected] Lynsie Chew Is Director Of Elective Teaching Portfolio And Teaching Fellow In Accounting Also Within The Department Of Ms&I, University College London. Her Doctoral Studies Focus On The Field Of Learning Technologies. Her Current Research Interests Are In The Areas Of Accounting History, Learning Technologies Within Higher Education And Accounting For Sustainability. She Can Be Reached On [email protected] BIBLIOGRAPHY AND REFERENCES Atrill, P. and McLaney, E. (2012). Management Accounting for Decision Makers, 7th ed. Pearson. Harlow: Pearson Education Black, T. (1999). Doing quantitative research in the social sciences: An integrated approach to research design, measurement, and statistics. London: Sage. Broad, Goddard and von Alberti (2007) Performance, strategy and accounting in local government and higher education in the UK’ Public Money and Management (April) 119-126. Bryman, A., Bell, E. (2011) Business Research Methods, 3rd ed. Oxford: Oxford University Press Cohen, L., Manion, L. and Morrison (2000) Research Methods in Education 5th Edition. London: Routledgefalmer Drury, C. (2009). Management Accounting for Business.4th ed. London: Thomson Hussey, J. and Hussey, R (1997) Business Research: A Practical Guide for Undergraduate and Postgraduate participants. London: Macmillan Press Ltd. Jankowicz, A. D. (2000) Business Research Projects. 3rd ed. London: Business Press

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Keen, L.A. and Murphy, M.P. (1996) Devolved Budgetary Management in Local Government, Financial Accountability and Management, Vol. 12, No. 1, pp. 37-52. Robson, C. (2011) Real World Research. 3rd ed. Oxford: Blackwell Publishing. Jordan, M. & Hackbart, M. (2005) The Goals and Implementation Success of State Performance- Based Budgeting, Journal of Public Budgeting, Accounting & Financial Management, Vol. 17, No. 4, pp. 471-487. Libby, T. & Lindsay, M. (2007) Beyond Budgeting or Better Budgeting? Strategic Finance, August, pp. 47-51. Pilkington, M. & Crowther, D. (2007) Budgeting and Control, Financial Management, March, pp. 29-30. Proctor, R. (2012). Managerial Accounting: Decision Making and Performance Management, 4th ed. Harlow: Pearson Education. Saunders, M., Lewis, P. and Thornhill, A. (2012) Research Methods for Business Participants. 6th ed. Essex: Pearson Education Limited. Steele, R. & Albright, C. (2004) Games Managers Play at Budget Time, MIT Sloan Management Review, Spring, pp. 81-84. Yuen, D. C. Y. (2004) Goal characteristics, communication and reward systems, and managerial propensity to create budgetary slack, Managerial Auditing Journal, Vol. 19, No. 4, pp. 517-532.

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STUDENT PERCEPTIONS OF INFLUENCES ON THEIR STUDY EXPERIENCES IN A PART-TIME ACCOUNTING MODULE: IMPLICATIONS FOR

EDUCATORS Alan Parkinson, University College London

ABSTRACT

This paper is located in the arena of a part-time accounting module, studied by working managers seeking i) an academic qualification as part of a bachelor’s degree in business management, and ii) knowledge and understanding in a vocational context. It identifies and explores students’ perceptions of influences upon their study experiences. These are drawn from elements of the module design, characteristics of the students, and their inter-action. Data collection is through semi-structured interviews (n = 36), involving students from two past cohorts. The data are explored using the techniques of content analysis, repertory grid analysis, and laddering. Findings concerning the most significant influences suggest indicative associations between sets of student characteristics and elements of module design and module achievement measured through academic scores. Typologies of groups of students are identified and linked to those scores. Particularly influential are domestic circumstances, nature of work in relation to budget management and financial decision making, and levels of maths and PC skills. Further exploration reveals a gender divide, with females performing less well than males, with domestic circumstances and nature of work being of great significance. The study provides insights into the student experience, with implications for educators and curriculum design. JEL: A KEY WORDS: Accounting education, curriculum design, academic performance,. INTRODUCTION This study seeks to identify and gain insights into phenomena perceived by part-time students, all working managers, as influencing their study experience when studying a first level accounting module (referred to as ACC-M) as part of a Business Management degree. The primary data is collected from thirty six students who have all studied ACC-M. They comprise twenty four male (67%) and twelve female (33%) students managers from across the private, public and voluntary sectors, with an overall mean age of twenty nine years (29.67 years), with a mean male age of thirty one, and a female mean of twenty seven years. This is a stratified sample of a body of one hundred and forty four students, a body providing initial data through an on-line questionnaire derived from themes identified in a literature review. In seeking to identify phenomena impacting positively and negatively upon the study experience of managers as students on a part-time accounting module, and assessing the implications for curriculum design, this paper adopts a deductive approach, allowing ideas and theories to be identified and subsequently tested. The appropriateness of those questions is confirmed/amended by the literature review. Those research questions are set out in Table 1.

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Table 1: Research Questions as a Departure Point

1. What are the elements with the module design perceived by students as being key components within the student study experience, and requiring successful engagement with? 2. What factors relating to their own characteristics and circumstances do students perceive as providing advantage/disadvantage to them as they endeavour to engage with those elements identified as being key components within the study experience? 3. Are there typologies of characteristics of students which are associated with helping or hindering the study experience and contribute towards higher/lower academic scores? 4.What lessons emerge with regard to improving the student study experience through amendments to the curriculum design, with a view to more successful academic outcomes as evidenced through module scores?

LITERATURE REVIEW The relevant literature covers a spectrum ranging from established research concerning face to face undergraduate accounting studies, through studies relating to distance learning aspects, to considerations of specific aspects of curriculum design, in the context of determinants of academic performance in accounting modules. Much of that relevant prior research relating to the identification of major determinants upon performance in accounting studies focuses on the USA, South East Asia and the Pacific Rim with relatively little focus on the UK, with relatively little on part-time education undertaken by working managers. In the geographical areas where much research is focused, Accountancy is perceived as a desirable profession to enter, with consequential high demand for relatively few places on Accountancy degrees. This accounts for the focus on undergraduate accounting modules in full-time degrees. In that arena, education researchers have sought to identify what can affect student academic performance and/or what can predict academic success in undergraduate accounting degrees. Examples, on a non-exclusive list basis, include Dockweiler and Willis (1984) Doran (1991), Gul and Fong (1993), Wong and Chia (1996), Koh and Koh (1999). Relatively little research of substance exists concerning Accountancy modules in which the emphasis is on equipping working managers with the knowledge, understanding and skills to better manage budgets and make financial decisions. Studies such as those detailed above, and others including Eskew and Farley (1988), Doran et al. (1991) and Rebele et al., (1991), focus on what might be considered a logical but perhaps somewhat limited range of variables as potential factors impacting upon academic performance. Later studies build on those prior studies, often through replication, and thus continue the focus on that limited range of variables. Lane and Porch (2002) and Lipe (1989) produce conflicting results concerning gender. Furthermore, the research is primarily quantitative, linking factors to academic scores through empirical analyses and lacking the illumination often emerging from interviews and other qualitative investigations. Koh and Koh (1999) provide a summation of major pieces of work in this area. They note that the majority of work is characterised by a common focus on a limited number of variables, comprising six potential factors: gender, prior accounting knowledge, academic aptitude, mathematics background, previous working experience, age. Bartlett et al., (1993) and Koh and Koh (1999) agree that of the six factors, previous working experience and age have received the least attention in the literature. These limitations enhance the drivers for the inclusion of these two factors in this study. The results of six factor model-related research are, in the main, relatively inconclusive and, indeed, conflicting, suggesting that more comprehensive

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research needs to be conducted, employing more complete models, particularly ones that reflect a more qualitative element. Examples of conflicting findings are to found in, illustratively, Dockweiller and Willis (1984), Moses (1987). Bartlett et al. (1993) Koh and Koh (1999). Little work appears to have been undertaken in the context of mature students returning to study after a period away from study, or indeed in that they have never engaged in post-secondary school study at all. Additionally, some mature students may have greater financial commitments and/or domestic responsibilities, potentially distracting from study time. An earlier study on part-time students/working managers (n = 94) by the author (Parkinson 2002), albeit in a distance learning context, identified a number additional influences, facilitating the construction of indicative links between influences and academic scores. The analysis identified strong associations between a range of factors and scores achieved. This study confirmed the value of going beyond the six factors, and using interviews and a combined qualitative/quantitative approach. METHODOLOGY, DATA COLLECTION, ANALYSES, FINDINGS AND DISCUSSION

Data was collected through semi-structured interviews, interviews amended slightly following pilots. The tapes (n = 36) were transcribed and generated Microsoft Word documents. Data collected was explored through an electronic-based content analysis using, first, a primarily quantitative thrust concerning occurrence of themes, and, second, a deeper exploration through illustrative quotes from the interviews. This provided sets of descriptives, acting as a base for explanatory analyses based using repertory grid analysis. The content analysis involved, within each individual transcript, a sequential order of indexing each paragraph, labelling key words/phrases/terms relating to the themes, and then counting theme references within the whole interview. Accordingly, words sought included: gender, age, work experience, previous academic attainment, maths ability, financial work experience, face to face sessions, experience of academic study, family/domestic circumstances, PC/spread sheet skills, financial training, e- Learning components, and prior accounting study. The analyses identify the elements within the module curriculum which students perceive as being significant within their study of the module. These elements are (with notation for reference): E1: Time taken to read and study; E2: Experience of face-to-face sessions; E3: Assignments; E4: Exam; E5: Overall study experience. The analyses additionally identify the characteristics and circumstances of students, as perceived by students, which most impact either positively or negatively upon the elements. These perceptions – their constructs - are C1: Domestic circumstances; C2: Length of work experience; C3: Degree of financial nature of work; C4: Maths Skills; C5: PC Skills; C6: Design of module; C7: e-Learning Materials; C8: Motivation to pass exams; C9: Motivation to gain financial skills. The constructs impacting to the greatest extent are C1: Domestic circumstances; C2: Length of work experience; C3: Degree of financial nature of work; C4: Maths Skills; C5: PC Skills. The participants’ perceptions of the significance of the identified themes are shown in Table 2, providing a base for further exploration. The themes reflect those directly asked about or alluded to during the interview, as reflected in the interview protocol. The significant/not significant classifications are derived from specific rankings on a scale of 1-7 made by interviewees, with 1 being not significant and 7 being highly significant. When mapped against females, these themes impact negatively on module scores, reflecting a reality of the lives of females. When mapped against males, those same constructs have little or no impact in the negative sense. Across both males and females, the analyses indicate that males benefit from length of work experience, financial nature of work, maths and PC skills. They are less affected by domestic circumstances than females. Females suffer from

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shorter lengths of work experience, linked to domestic circumstances. As a consequence, they are likely to have fewer financial responsibilities, with lower levels of spread-sheet skills given that lack of financial responsibilities. A further consequence is less application of maths skills at work. Overall, the findings reflect two common groupings of themes. One captures those elements of the curriculum design viewed by students as being significant within the study experience. The other captures perceptions held by students concerning the degree to which certain characteristics within their profiles are important in the degree of interaction with, and thus impact, upon the identified significant elements of the curriculum design. Participant perceptions represent constructs: beliefs by participants about aspects of their study experience environment and their interaction with elements of the module they hold to be significant. Table 2: Participant Perceptions of Significance of Themes

Theme Number of interviewees saying Theme- related issues are significant

n = 36

Number of interviewees saying Theme- related issues are not significant

n = 36

Total Male Female Total Male Female

Gender 18 50% 10

27.8%

8

22.2%

16

44.4%

12

33.3%

4

11.1%

Age 22

61.1%

13

36.1%

9

25%

12

33.3%

8

22.2%

3

8.3%

Nature and length of work experience 22

61.1%

14

38.9%

8

22.2%

12

33.3%

8

22.2%

4

11.1%

Previous academic attainment 14

38.9%

7

19.4%

6

16.7%

20

55.6%

15

41.7%

5

13.9%

Level of maths ability 22

61.1%

13

36.1%

8

22.2%

12

33.3%

8

22.2%

4

11.1%

Nature and length of financially-related work experience

24

66.7%

15

41.7%

9

25%

10

27.8%

7

19.4%

5

13.9%

Attendance at optional face-to-face sessions 22

61.1%

13

36.1%

9

25%

12

33.3%

9

25%

3

8.3%

Prior (or lack of) academic study 8

22.2%

4

11.1%

4

11.1%

6

16.7%

4

11.1%

2

5.6%

Family and domestic circumstances 22

61.1%

11

30.6%

11

30.6%

12

33.3%

11

30.6%

1

2.8%

Level of PC/spread-sheeting ability 20

55.6%

11

30.6%

9

25%

14

38.9%

11

30.6%

3

8.3%

Previous training in/exposure to financial skills/knowledge acquisition, includes prior accounting knowledge category

8

22.2%

4

11.1%

4

11.1%

26

72.2

18

50%

8

22.2%

Typical elements cited included, perhaps, not surprisingly, the exam, along with the coursework assignments, the usefulness of the face to face sessions, and the length of time taken/needed to engage with the study of the text materials. Based on mean scores and selected on the basis of being above 3.5, two lists were derived. One shows the elements scoring above 3.5. Added to this

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was the generic element of the overall study experience. These elements are detailed in no particular order of mean score of rank in Table 3. The other list in Table 4 shows the factors identified as providing advantage/disadvantage to them as they engaged with the module. These are shown in no particular order of mean score of rank. The reason for not ordering in terms of mean score is because the significance of ranking via mean scores is embedded not in individual elements and factors but in their inter-relationships within the grid analysis. Such inter- relationships are detailed shortly. Table 3: Identified significant elements

Elements perceived by participants to be key components of the curriculum design Time taken to read and study Experience of face-to-face sessions Assignments Exam Overall Study Experience

Table 4: Identified Key Constructs Expressed as Contrasts

Key constructs perceived by participants to be impacting on the significant elements of the module study experience, expressed on a spectrum Domestic circumstances did/did not hinder progression via…specific elements Length of work experience helped a lot/ hindered a lot with…specific elements Financially-related work experience existed and helped a lot/did not exist and hindered a lot with…specific elements Maths Skills more than adequate to cope with demands/not adequate enough to cope with demands of…specific elements PC Skills more than adequate to cope/less than adequate to cope with demands of…specific elements Design of module helped a lot/hindered a lot…specific elements e-learning materials helped a lot/did not help a lot with…specific elements Motivation to pass exams helped a lot/did not help a lot with…specific elements Motivation to gain financial skills helped a lot/did not help a lot with...specific elements

The repertory grid matrix is used to record scores on a scale of 1 indicating a particular issue/factor has very little negative impact/very positive impact on engaging with a particular element, and 7 indicating a very significant negative impact/no positive impact at all. This provides a picture of the degree of association as perceived by each interviewee. The individual scores are entered on individual spreadsheets, totalled in summary form, divided through by, respectively, the number of male or female participants, and a mean obtained. The relativity of means when compared gives indications of patterns of associations. The overall means for the total of participants are grouped into male and female means, accompanied by the medians. They are presented in light of indications within the initial content analysis of noticeable distinctions between those groupings. Table 5 shows male means and Table 6 the female means. Table 5: Mean Rating Scores and Medians: Males

Median Males Scores E1 E2 E3 E4 E5 C1 2.1 1.2 2.2 1.7 2.1 2 C2 2.7 2.6 1.8 5.4 2.5 3 C3 4.1 1.9 2.1 3.9 2.2 2 C4 1.2 2.1 1.9 1.8 2.1 2 C5 1.3 2.2 4.2 1.9 2 2 C6 1.5 2.1 1.9 2.2 1.8 2 C7 2.1 6 2.3 3.1 1.4 2 C8 4.2 5.4 3 2.1 2.4 3 C9 2.1 3.1 4.8 3.8 2.9 3

The key for this table: Elements - E1: Time taken to read and study; E2: Experience of face-to-face sessions; E3: Assignments; E4: Exam; E5: Overall study experience. Constructs - C1: Domestic circumstances; C2: Length of work experience; C3: Degree of

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financial nature of work; C4: Maths Skills; C5: PC Skills; C6: Design of module; C7: e-Learning Materials; C8: Motivation to pass exams; C9: Motivation to gain financial skills Table 6: Mean rating scores and medians: females

Median Females Scores E1 E2 E3 E4 E5 C1 4.3 5.3 5.1 5.3 6.1 5 C2 4.2 4.7 5.2 5.1 5.4 5 C3 5.6 5.3 5.9 5.8 6.1 6 C4 5.2 4.4 5.1 5.3 5.4 5 C5 5.3 4.1 5.6 4.2 5.4 5 C6 3.1 3.8 2.8 2.9 2.7 3 C7 1.8 3.1 2.2 2.8 2.3 2 C8 2.9 2.4 2.8 2.6 2.7 3 C9 2.7 2.9 2.7 5.8 2.9 3

The key for this table: Elements - E1: Time taken to read and study; E2: Experience of face-to-face sessions; E3: Assignments; E4: Exam; E5: Overall study experience Constructs - C1: Domestic circumstances; C2: Length of work experience; C3: Degree of financial nature of work; C4: Maths Skills; C5: PC Skills; C6: Design of module; C7: e-Learning Materials; C8: Motivation to pass exams; C9: Motivation to gain financial skills A visual assessment based on a laddering perspective – identifying locations of higher and lower ratings, in this case the means - reveals a skewing between the male and female students. Additionally, the median scores for C1 – C5 show consistently more support for the propositions from male students with median scores of two and three compared with medians of five and six for the female students. The differences can be summarised with the different responses to the overall learning experience (E5). Scores for C1 to C5 show apparent significant differences. This indicates that in respect of a number of elements of the module study experience, males view the impact of their characteristics as expressed through their constructs as being somewhat different to those of females. To establish significance regarding the two male/female groups, a t-test was applied to establish treatment as a homogenous group, or as two distinct groups demanding separate consideration. Assuming the hypothesis that the two groups represent the same population the t-test application to the data in Tables 5 and 6 as a whole returns a probability of less than 0.5%, and thus the hypothesis that the male and females represent a homogenous group may be rejected. To delve further, the test was applied to each construct in each of the two tables. These results indicate for constructs C1 to C6 there are strong indications that there is a distinct difference between the two groups but in constructs C7 to C9 there is no evidence of difference. The medians for constructs C1 – C5 inclusive show differences between males and females – and thus disagreement. Derived from their median scores, an analysis captures the relativity of the differentials between male and female medians in the context of individual constructs across all elements, revealing:

• the degree of disagreement between the male and female groups regarding constructs C1 to C6, and

• the degree of agreement between the male and female groups regarding constructs C7 to C9.

The characteristics and circumstances reflected by each individual construct in C1 to C6 are felt by females to have a greater negative impact upon perceived elements of the module experience. Conversely, males do not feel this. As a group, females have greatest concerns over the negative impacts of lack of financial nature work, domestic circumstances, maths skills and PC skills. There are clear indications that there is agreement between males and females regarding the

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positive contribution of each individual construct in C7 to C9. It would appear that both groups are in agreement regarding the positive impacts of the e-Learning materials and the drivers of seeking to gain financial skills and pass the module. Further interrogation of the grid suggests, among other matters: Males have longer work experience than females and usually the nature of their work is of a more financial, and thus they may well have a greater natural empathy with the nature and context of the content of ACC-M.

Through more work of a financial nature, males may well have better spread-sheeting skills than females. This may also account for male perceptions that maths skills are less worrying, given their experience of financial work. Most males, even where they are parents, felt that their domestic circumstances did not impact negatively on the identified module elements. In contrast, females felt that they were often torn between family and other commitments and attention to the module. This was particularly so regarding challenges in attending face to face sessions. This has an enhanced negative impact on their module experience as such attendance is seen by both males and females as being a significant component of their module experience. The analyses immediately preceding have generated discernable patterns. These patterns may be matched against academic scores to ascertain whether or not it is possible to identify groups of typologies. Given the marked differences between males and females revealed by the analyses, it is appropriate to commence with a broad typology based on gender. That is then followed by other sets of typology. The gender-based academic mean scores for assignments and coursework. Table 7: Gender-Related Mean Scores and Standard Deviations

Male (N=24) Female (N=14)

Mean Standard deviation

Mean Standard deviation

Assignment 01 score 58.1 3.8 55.2 4.3 Assignment 02 score 63.9 6.8 57.2 6.2 Assignment 03 score 70.4 8.1 62.2 8.9 Overall Assignment score (weighted) 65.0 6.0 58.9 5.9 Exam score 62.1 9.3 51.5 11.0 Overall score 63.3 7.3 54.9 8.1

At first glance, males appear to be outperforming females in each of the different assessments. A one-sample Kolmogorov-Smirnov test was used to test for normality in each of the ACC-M assessments, and an F-ratio calculated to test for homogeneity of variance. There is one significant result in the Kolmogorov-Smirnov test (Assignment 01: score for males). However, the t-test is robust and will tolerate some non-normality (Black, 1999: 419). Results indicate that gender is a significant factor in ACC-M assessment performance. This suggests the distinctions that exist between the study experiences of males and females, and, possibly, a poorer experience produces poorer assessment results. Linking each of the five constructs with gender-related score bands produces clearly discernable patterns. The linking is based on the rankings by students of the degree of perceived impact of each construct on the overall study experience. The original rankings were based on a scale of 1 to 7, with the lower end reflecting more positive/less negative impacts upon the study experience, and the upper end reflecting less positive/more negative impacts upon the study experience. The numbers of people with individual rankings above and below 3.5 for each of the five constructs are matched against the overall score. These indicate that

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the less positive/more negative impacts of the constructs analysed appear to have some greater degree of association with lower performance by females. CONCLUSIONS The conclusions here are linked directly to the research questions in Table 1. Regarding Question 1, there are five elements identified by students as being key components within the study experience are E1: Time taken to read and study; E2: Experience of optional face-to-face sessions; E3: Assignments; E4: Exam; and E5: Overall study experience. The implication of such identification is that curriculum designers should take account of these as they set about designing modules. They do not, however, exist in isolation. They are connected to the factors sought by asking Question 2. For that question, the aspects students perceive as being very significant in engaging successfully with the module are, in rank order; C1: Domestic circumstances; C2: Length of work experience; C3: Degree of financial nature of work; C4: Maths Skills; C5: PC Skills. Students believe that they must engage with these. Their views on what helps or hinders such engagement must also be known by designers. In response to Question 3, this study shows how and to what degree the elements and constructs interact. When groupings are linked to academic scores, typologies may be identified. Females score below males and appear to be impacted by a combination of factors. In general, a combination of demanding domestic circumstances and a shorter length of work experience suggest that females will have a less positive experience than males, evidenced in part by lower academic scores. When a lack of financial experience at work and lower confidence regarding maths skills are also combined, these four aspects suggest a marked impact on the experience and lower scores. A response to Question 4 emerges from the insights into the student experience, provided by the study. Students are content with the overall quality of the text materials. The e-learning materials are highly thought of. Students value the face to face sessions but some, particularly females, face challenges in attending what are perceived as being important module components. This is linked to a perception that the university does not take into account domestic circumstances in particular. Perhaps a major contribution is to be found in the duality of gender and related domestic circumstances; it is clear from this study that the student experience is shaped significantly by such circumstances. Accordingly, the findings of this study suggest that Gender is an issue of great significance. This study suggests that females are challenged by a number of factors, particularly those concerned with the need to combine domestic roles and parenting with employment responsibilities, all impacting on the time available to study. It is clear that the literature referred to earlier are accurate in that females are challenged by family responsibilities. Additionally, females in this study tended to have less managerial experience and associated budgetary and other financial responsibilities. The study indicates a divide between males and females, providing a platform for further and future work regarding gender issues. These findings may inform the design of improvements to the curriculum. BIOGRAPHY Alan Parkinson is Director of Studies in the Department of Management Science and Innovation (MS&I), University College London. He is a qualified accountant (FCCA and CGMA), with two Masters degrees, and a Doctorate in Education. His current research interests are in the areas of Business and Accounting History, Accounting Education, Management Accounting for Sustainability. He can be contacted via [email protected]

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BIBLIOGRAPHY AND REFERENCES Bartlett, S., Peel, M.J., and Pendlebury, M.W. (1993) From Fresher to Finalist: A Three Year Analysis of Student Performance on an Accounting Degree Programme. Accounting Education, 2 (2), pp111-122. Black, T. (1999). Doing quantitative research in the social sciences: An integrated approach to research design, measurement, and statistics. London: Sage. Butt, T. and Burr, V. (2004) Invitation to personal construct psychology. 2nd ed. London: Whurr, London Dockweiler, R.C. and C.G. Willis. (1984) On the Use of Entry Requirements for Undergraduate Accounting Programs. The Accounting Review, 59 (3), pp496-504 Doran, B. M., Bouillon, M. L. and Smith, C. G. (1991) Determinants of student performance in Accounting Principles I and II. Issues in Accounting Education, 6 (1), pp74-84 Eskew, R. and Faley, R. (1988) Some determinants of student performance in the first college- level financial accounting module. The Accounting Review, 63 (1), pp137-147. Gammack, J.G. and Stephens, R.A. (1994) Repertory grid technique in constructive interaction. In: Cassell, C. and Symon, G. (eds.) Qualitative Methods in Organizational Research: A Practical Guide, London: Sage, pp72-90. Gammie, E., Paver, B., Gammie, B. And Duncan, F. (2003). Gender differences in accounting education: an undergraduate exploration. Accounting Education, 12 (2), pp177-196 Gul, F.A. and Fong, S.C.C. (1993) Predicting Success for Introductory Accounting Students: Some Further Hong Kong Evidence. Accounting Education, 2 (1), pp33-42 Kelly, G.A. (1955) The Psychology Of Personal Constructs. New York: W.W. Norton & Company Inc. Koh, M. and Koh, H. (1999) The determinants of performance in an accountancy degree programme. Accounting Education, 8 (1), pp13-29 Lane, A. and Porch, M. (2002) The impact of background factors on the performance of nonspecialist undergraduate students on accounting modules – a longitudinal study: a research note. Accounting Education, 11 (1), pp109-118 Lipe, M. G. (1989) Further evidence on the performance of female versus male accounting students. Issues in Accounting Education, 4 (1), pp144-152 Moses, O.D. (1987) Factors Explaining Performance in Graduate Level Accounting. Issues in Accounting Education, 2, pp281–291 Parkinson, A (2002) Determinants of performance in a distance learning accounting module (2003) Institution Focus Study EdD Stage 2, Institute of Education, University of London

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Rebele, J.E., Stout, D.E. and Hassell. J.M. (1991) A review of empirical research in accounting education: 1985-1991. Journal of Accounting Education, 9, pp167-231. Spender, D. and Sarah, S.E. (1980) Learning to Lose: Sexism and Education. London: The Women’s Press. Stewart, V. and Stewart, A. (1982). Business applications of repertory grid. London: McGraw- Hill. Wong, D. S. N. and Chia, Y. M. (1996) English language, mathematics and First-year Financial Accounting Performance: A Research Note. Accounting Education, 5 (2), pp183-189.

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THE EFFECTIVENESS COMPARISON BETWEEN MOBILE BASED LEARNING TECHNOLOGY WITH

FACE-TO-FACE AS A TEACHING METHOD OF ACCOUNTING INFORMATION SYSTEM

Diah Hari Suryaningrum, Universitas Pembngaunan Nasional Veteran Jawa Timur Eni Wuryani, Universitas Negeri Surabaya

Intan Yuniar Purbasari, Universitas Pembangaunan Nasional Veteran Jawa Timur

ABSTRACT

The fast developments of information and communication technology (ICT) today not only have an impact on the world of industry, but also in the world of education. In the world of education, the useage of ICT is expected to improve the performance, especially the performance of students with regard to their academic matters. The need to improve the quality of accounting graduates who have personal skills has long been a concern of accounting education. This study aims, first to provide empirical evidence that the approach to learning with mobile learning will improve student performance not only in technical skills but also in personal skills. Second, to prove and test the effectiveness of mobile learning as a means of supporting the learning process in improving the competence of accountants in accordance with the standards established by the Indonesian Institute of Accountants (IAI) and the national education goals. Method of learning with mobile technology is expected to support the learning process of the present method so as to improve the competence of accountants in terms of technical competency skills, personal skills, business knowledge and extensive expertise. And third, to understand the students’ motivation and factors that affected the use of mobile technology. This study is an exploratory research to develop a mobile learning application of Accounting Information Systems and tests on the application made by using the quasi-experimental research design. Research results of the pre-test score indicate that before the student use mobile technology, their performance is not as expected. JEL: M49 KEY WORDS: Mobile Learning Applications, Quasi-Experimental, Accountants’ Competency INTRODUCTION The fast developments of information and communication technology (ICT) today not only have an impact on the world of industry, but also in the world of education. In the world of education, the useage of ICT is expected to improve the performance, especially the performance of students with regard to their academic matters. Basically the development and use of ICT can be grouped into two learning systems, ie the system of e-learning as a form of learning that utilizes electronic devices and digital media and mobile learning (m-learning) as a special form of learning that utilize devices and communication technologies such as mobile phone (smart phone). This new concept will influence the educational learning process transformation from conventional education into digital form. The need to improve the quality of accounting graduates who have personal skills has long been a concern of accounting education. The American Institute of Certified Public Accountants (AICPA) published a framework of core competencies (Core Competency Framework) that must be possessed by students entering the accounting profession, both in the public sector, industry, government, or other service business, which was also adopted by the Indonesian Institute of Accountants / IAI (AICPA, 2004; IAI, 2008). The competency

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framework supports the concept of continuous learning that starts from the academic environment and continuing (life-long) through professional education and experience. Learning accounting requires more than knowledge transfer which include the active role of accounting students in their learning process. Quality of learning is not something that can be given away by educators, but need to be developed by the students through the process of interaction between students, educators and other students. In addition to developing technical knowledge and skills of accounting, accounting education programs must be designed to be able to develop computer competency and information systems, communication, interpersonal, intellectual, critical thinking, problem solving, integrity, and othe generic (soft) skills (Holcomb and Michaelsen, 1996 ; Boyce, 1999). Accounting education is also expected to develop a level of expertise that can be applied in a variety of contexts, including skills that enable students to understand and criticize accounting information and its role in economic and social, as well as the role of accountants in creating and re-creating the social reality (Hines, 1988). Supporting learning methods such as mobile learning appears to be an ideal solution to improve the quality of accounting graduates. One of the benefits of mobile learning is the life-long learning as indicate on the Core Competency Framework (from AICPA) which supports the concept of continuous learning that starts from the academic environment and continuing (life- long) through professional education and experience. Therefore, this study aims to provide empirical evidence that the approach to learning with mobile learning will improve student performance not only in technical skills but also in personal skills. In addition, by adopting mobile learning technology in accounting education, accounting students not only understand the importance of personal skills in the accounting profession, but they also learn to accept and use ICT as part of the accounting profession. In other words, mobile learning that support conventional learning will drive the achievement of the overall competence of accountants: the technical competence, personal competence and a broad business perspective competency. This research also aims to prove and test the effectiveness of mobile learning as a means of supporting the learning process in improving the competence of accountants in accordance with the standards established by the Indonesian Institute of Accountants (IAI) and the national education goals. Method of learning with mobile technology is expected to support the learning process of the present method so as to improve the competence of accountants in terms of technical competency skills, personal skills, business knowledge and extensive expertise. The Importance of the Research Important issue in accounting education is how to have a qualified accounting graduates competencies in line with the expectations and the needs of the community. Indonesian Institute of Accountants (IAI) has adopted the core competencies of accountants based Core Competency Framework issued by the AICPA. IAI also stated that although the curriculum / syllabus of accounting education S1 and Accountants Professional Education (PPA) in terms of skills, values, ethics and professional attitude is subjected to International Education Standard (IES) no. 3 - professionals contents and no skills. 4 - professional values, ethics, and attitudes, but still need to balance the percentage of the knowledge, skills, values, ethics and professional attitude, and assessment of methods and techniques of teaching (IAI, 2008). This study is important for several reasons: first, this study tried to carry out a review of the methods and techniques of teaching by providing a solution that is more sophisticated learning methods in accordance with the advancement of technology, the mobile technology-based learning methods. Second, although mobile technology has developed very rapidly, up to date positive impact of mobile learning is still questionable, considering there are positive and negative impacts of the emerging mobile

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technologies. Finally, the application of mobile learning in accounting education and its impact to date, to the author's knowledge has not been done. LITERATURE REVIEW State of the Art The education system has been and until now mostly done by traditional face-to-face between educators and students in one classroom. The development of ICT has an important role in changing education method. Teaching and learning processes which was originally dominated by the role of the teacher - the area of teacher, and then the process started much dominated by the role of the teacher and books - the area of teacher and book. Furthermore, this role began to shift with the dominant role of teachers, books, and technology – the area of teacher, books, and technology (Soekartawi, 2003; Haythronthwaite et al., 2011). Thus there is a shift in learning paradigm from conventional learning to sophisticated learning with digital technologies such as mobile learning. In the world there are more than 5 billion people who bring a very powerful tool in their pocket or bag that is mobile device. Of these people, 500 million people use the internet in 2009. The amount will be doubled within five years in which mobile technology replaces the Personal Computer (PC) as a means to get into the web (Cumavo, 2011). In Indonesia alone, there are 68 million mobile users at the end of 2006, 94.7 million in 2007, and this number will increase to 133 million by 2010. In other words, nearly half the Indonesian population (about 250 million people) will be mobile users (Bahar, 2009). Indonesia is the world's three biggest users after China and India. Guild Research results regarding the adoption of mobile learning in the organization showed that in the world of education 14.5% had used mobile learning, 10.3% started to build a business case based mobile learning, 47.6% began researching how other organizations use mobile learning, and 22 , 1% do not have any plans with mobile learning. Based on these data, although there was an extraordinary development in mobile learning, but research on mobile learning in accounting education in Indonesia is scarce or even not yet done. Research on learning using information and communication technology (ICT) has been conducted by researchers whose focus is on learning or electronic learning methods are more commonly known as e-learning (Suryaningrum et al, 2009). The research results prove that despite the ease of use of e-learning, but until now the use of e-learning in accounting education is not developed as expected. In accordance with the development of ICT, learning models shift towards the use of mobile technology that can be accessed anywhere and anytime. Ramli (2011), a senior adviser at the Ministry of Communication and Information of the Republic of Indonesia, said that based on market research in 2010 in the Indonesian cellular telecommunications penetration (full mobility) of 84.5% (± 203 million), much larger than the penetration of fixed wireless (limited mobility) which only amounted to 13.3% (± 8.3 million), and the remaining 9.3% for fixed wirelines and broadband penetration. Ramli further revealed that in the field of education, the government plans to networking with relation (link) to 40 million students. The factors driving the expanding opportunities of the use or application of mobile learning as a new trend in the study are the level of development of mobile devices is very high, the

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level of use is relatively easy, and the price of the device is more affordable around $ 100, compared to personal computers around $ 500 (Ramli 2011). This has formed a new learning paradigm that can be done anywhere (where ever) and anytime (when ever). RESEARCH METHOD To find out how important the material content in the curriculum / syllabus is taught to accounting students, I conducted preliminary interviews with several professors and students of accounting at the Universitas Pembangunan Nasional "Veteran" jawa Timur, particularly on the learning materials of Accounting Information Systems (AIS). Preliminary results of this interview suggest that learning AIS especially with regard to capabilities in the areas of technology and information systems are still very weak. There are two reasons why it happened. First, accounting educators are to focus on the material that will improve practice skill competency (or technical skills) with the hope of accounting graduates to be an expert accountant in applying accounting practices. Second is the limited time in learning with face-to-face teaching methods in the classroom. In accordance with the system of semester credit (SKS), accounting courses, which generally have 3 credits given face-to-face teaching time in the classroom (face-to-face) about 2.5 hours (50 minutes x 3 credits = 150 minutes). Face-to-face time in the classroom is generally focused on learning technical skills that do not allow providing or discussing matters relating to ethics, behavior, or technology as learning to improve personal skills. Supporting learning methods such as mobile learning appears to be an ideal solution to solve that problem. One of the benefits of mobile learning is the life-long learning as indicated in the Core Competency Framework (from AICPA) which supports the concept of continuous learning that starts from the academic environment and continuing (life-long) through professional education and experience. Therefore, this study aimed to provide empirical evidence that learning with mobile learning approach to improving the performance of accounting students. This study is an exploratory research program to develop a mobile learning application of Accounting Information Systems. Once the AIS mobile learning application is completed, tests on the application made by using the quasi-experimental research design. There are two things that will be measured: 1) student learning outcomes in the domain of knowledge (cognitive) knowledge of AIS. Knowledge was measured using MCQs (Multiple Choice Question) conducted in pre-test and post-test. 2) students' attitudes and motivation were measured after students attend one lecture or teaching methods by using a mobile learning. MSLQ (Motivated Strategies for Learning Questionnaire) developed by the National Center for Research University of Michigan to improve postsecondary teaching and learning (Pintrich et al. , 1991; Garcia and Pintrich, 1995; Duncan and McKeachie, 2005) is used in this research. Research subjects are fifty students of the Faculty of Economics majoring in Accounting who has passed the AIS courses. Students are grouped into two randomized groups. Each group will follow the learning process of AIS with a certain topic of data warehaousing with different methods: 1) face-to-face classes are held at the Laboratory of accounting and 2) mobile learning that can be done by students anytime and anywhere. The pilot study of mobile technology-based learning applications is done at the user level (accounting student who has completed an AIS course). Design research is quasi-experimental control group pre-test and post-test non-equivalent (non-equivalent pre-test and post-test control group design) testing pre-post test, attitude assessment, and student motivation to use mobile learning.

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a) Pre-post test was conducted to measure the impact of behavioral changes in students after the students utilize mobile learning application program with their cell phone. Pre-test conducted before students take advantage of mobile learning applications program, which aims to measure the ability of students before the beginning of the use of technology-based learning mobile applications. Post-test was performed after an application program utilize in the student learning. Students were given for 6 days to try and take advantage of learning applications. Test post-test is intended to measure the ability of students after using the mobile technology-based learning application.

b) Assessment of attitude and motivation of accounting students is done to seek information from students after the students get a chance to try and make use of mobile technology-based learning application.

RESEARCH RESULTS Implementation of the pre-test done at the user level, the accounting students who have completed Accounting Information Systems (AIS) courses. Number of students who are willing to follow the pre-test are as many as 50 students. Pre-test questions are multiple choice questions with topic of data warehouse that consists of 20 questions randomly selected from the 30 available questions. In the pre-test, the students were grouped into 4 grup to distinguish given multiple choice questions. This is done so that each student can not imitate each other answers. The average pre-test score of students is 55 (fifty-five). The pre-test scores will then be compared with the post-test scores, the value after the student got to the topic of AIS data warehouse learning. Comparison of pre-test and post-test was conducted using paired sample t-test. At the post-test activities, students were also asked to complete a questionnaire about the attitude and motivation of the use of mobile technology in learning. The mobile technology for the learning application is currently still in progress and the research will be completed on the first week of December 2013. ACKNOWLEDGEMENT This research is founded by the Directorate General of Higher Education, Ministry of Education Republic of Indonesia (DIKTI) with SKIM Competition Grant (Hibah Bersaing) for the implementation year of 2013. REFERENCES AICPA, 2004. Core Competence Framework and Educational Competency Assessment Web Site, on line available http://www.aicpa.org/interestareas/accountingeducation/resources/pages/corecompetency.aspx accessed 18 Januari 2012. Bahar, I.M.A., 2011. “Mobile learning: Indonesian Perspective,” The APAC Mobile Learning and Edutainment Conference.

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Boyce, G., 1999. “Computer-assisted teaching and learning in accounting: pedagogy or product?” Journal of Accounting Education, 17, p.191-220. Conolly,Thomas dan Begg Carolyn (2009). Database systems – A Practical Approach to Design, Implementation and Management, edisi-3. Addison Wesley Longman.Inc., USA Cumavo, W., 2011. “Mobile learning made simple: mobile technologies creating new ways to learn and train,” Fourth APAC Mobile Learning Conference, 8-9 June, Bandung – Indonesia. Duncan, T.G. and W.J. Mckeachie, 2005. “The making of the motivated strategies for learning questionnaire,” Educational Psychologist [internet], Lawrence Erlbaum Associates, Inc. available http://web.ebscohost.com [accessed 8 May 2009]. Fatansyah (2002). Buku Teks Ilmu Komputer – Basis Data, cetakan-4. Informatika Garcia, T. and P.R. Pintrich, 1995. “Assesing student motivation and learning strategies: the motivated strategies for leraning questionnaire.” Paper is presented at the annual meeting of the American educational research association [internet]. San Francisco California. Available http://www.eric.ed.gov [accessed 8 May 2009]. Haythronthwaite, C., R. Andrews, C. Jones, S. Castell, R. Goodfellow, C. Jewitt, dan D. Barton, 2011. Internet and Learning: A Decade of Transformation in Learning Practices, online available http://ssrn.com/abstract=1894934 [accessed 19 January 2012]. Hines, R.D., 1988. “Financial accounting: in communicating reality we construct reality,” Accounting, Organization, and Society, 13 (3), p. 251-261. Holcomb, T., dan R. Michaelsen, 1996. “A Strategic plan for educational technology in accounting,” Journal of Accounting Education, vol. 14, No. 3, p. 277-292. IAI (Ikatan Akuntan Indonesia), 2008. Standar Pendidikan Internasional IFAC (International Federation of Accountants), online available http://www.iaiglobal.or.id/ppa.php?id=5, [accessed 20 March 2012]. Pintrich, P.R., D.A.F. Smith, T. Garcia, and W.J. McKeachie, 1991. “A manual for the use of the motivated strategies for learning queastionnaire (MSLQ)” [internet]. Ann Arbor: University of Michigan, National Center for Reasearch to Improve Postsecondary Teaching and Learning. available http://www.eric.ed.gov [accessed 27 April 2009] Poe, Vidette(1998). Building Data Warehouse for Decision Support, edisi-2. Prentice Hall. Ramli, K, 2011. “M-learning: how are we getting ready – Indonesia perspective,” Fourth APAC Mobile Learning Conference, 8-9 June, Bandung – Indonesia. Soekartawi, 2003. *”Prinsip Dasar E-Learning: Teori dan Aplikasinya di Indonesia,” Jurnal Teknodik. Edisi No.12/VII/Oktober/2003, p. 10-19. Suryaningrum, D.H., Harymami, E. Sulistyowati, 2009. “Arti Penting Perceived of Use dalam Pengadopsian Sistem Informasi: Suatu Studi terhadap Penguunaan E-Learning,” Seminar

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Nasional V Call for Paper Universitas Teknologi Yogyakarta, 18 Juli 2009, Prosiding Buku 3, ISBN: 978-979-1334-25-9 Wilkinson, J. W., Michael J. Cerullo, Vasant Raval, Bernard Wong-on-Wing. 2000. Accounting Information Systems, 4th Edition, John Willey and Sons, Inc., New York.

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INNOVATION AND TECHNOLOGY AS A FACTOR OF COUNTRIES’ COMPETITIVENESS: A

MULTIDIMENSIONAL AND MULTIVARIATE ANALYSIS

América I. Zamora-Torres, Universidad Michoacana de San Nicolás de Hidalgo Juan Carlos García Archundia, Nglobal Logistics

ABSTRACT

Today, innovation and technology are the main sources of competitiveness. This study addresses two research questions: 1. Which economies are competitive in terms of innovation and technology? 2. What are the variables that determine competitiveness in innovation and technology? Analysis Factorial of Correspondences (AFC) through the analysis of principal components methodology is employed in this article. The analysis is divided into five phases as follows: a) reliability testing, b) the calculation of a matrix that expresses the joint variability of the variables, c) extraction of the optimal number of factors, d) the rotation of solutions for the ease of interpretation, e) the estimation of the scores graphically, and f) the determination of the competitiveness index (IMD, 2009). KEYWORDS: Innovation, Technology, Competitiveness, AFC, Multivariate Analysis INTRODUCTION Innovation and technology are key pieces that define competitiveness strategy. Competitive forces such as intense global competition, fragmented and demanding markets, and diverse and rapidly changing technologies make it vital to define public policies centered on knowledge in order to transform them for the well-being of society. The aim of this work is to measure the impact of different variables that affect innovation and technology, as well as the real economy. The overall goal of this research is to obtain an index for competitiveness of innovation and technology. Specifically, the economies under study were thirty four (34), taking as a parameter the study of principal economies made by the Bank of International Settlements (2007). The economies considered were as follows: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Cyprus, Korea, Estonia, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, Malta, Mexico, Netherlands, Norway, Portugal, Singapore, Slovakia, Slovenia, Spain, Switzerland, Sweden, United Kingdom, United States, and the Euro-zone. The hypothesis for this work is that the competitiveness of countries in innovation and technology is determined by high technology development and innovation, global investment in innovation and development, percentage positioning of investment and development in technology and innovation, and the complementary indicators of technological development. Thirteen indicators were considered in the study: Exports of products of high technology (in dollars to current prices), exports of products of high technology like percentage of exports of manufacture, requests of patents of non residents, requests of residents' patents, expense in research and development as percentage of the Gross Domestic Product (GDP), researchers dedicated to innovation and development (million persons), payments for copyright and licenses, articles in

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scientific and technological publications, specialists - technical personnel - in innovation and development, trademark applications by non-residents, trademark applications from residents, conclusion of college education as a percentage of education, and researchers as a percentage of population. These indicators were collected from the World Bank and International Monetary Fund data base for the year 2010. Factorial Analysyis of Correspondences Factorial Analysis is a multivariate statistical technique whose main objective is the definition of the underlying structure in a data matrix. Factorial analysis allows one to solve the problem of analyzing the structure of interrelationships (correlations) present in a large number of variables and cases, defining a common number of underlying dimensions called components (Guillermo et al., 2010). Because the hypothesis consists of four variables accounted for thirteen indicators, it is necessary to apply a method to see the dependency between each of the indicators. It is also necessary to observe the weight of each variable regarding the problem to be addressed. An ideal tool for this analysis is the Factorial Analysis of Correspondences An analysis of attraction- repulsion among types of different attributes (indicators) allows studies of proximity (similarity/dissimilarity) between the modalities of a single indicator; i.e. it allows the evaluations of homogeneity or substitution thereof (Miquel et al., 1997). For this, the projection of the modalities is presented on a metric space which applies the Analysis of Principal Components to aid simple causal interpretation of similarity-attraction behaviors (Kim & Mueller, 1978). RESULTS The Communalities Table shows the degree of extraction that the study represents for each of the indicators or the proportion of the variance that can be explained by factorial analysis (Perez, 2006). The method of principal components assumes that one hundred per cent of the variance can be observed, so that all indicators are based on the extraction level of 1 (Kim & Mueller, 1978). It is important to note that if the indicator does not have a score above 0.500 it cannot be considered in the study because the indicator will not be representative for the analysis. In the study, herein, all the indicators are well represented. The indicator with the highest level of extraction was exports of products of high technology with a value of 0.883, followed by requests of residents' registered trademarks and requests of patents of non residents with 0.875 and 0.854 respectively (see Table 1). Table 1: Table of Communalities

Indicators Initial Extraction Exports of prod. high technology (US$) 1.000 .883 Exports of prod. high technology (% of exp. of manufacture) 1.000 .827 Patent applications, non residents 1.000 .854 Patent applications, resident 1.000 .757 Spending on Research & Development R & D (% of the GDP) 1.000 .831 Researchers R & D (million people) 1.000 .840 Royalty payments, copyright and license 1.000 .529 Scientific and technological publications. 1.000 .755 Specialists in R & D (per million people) 1.000 .812 MR applications, non residents 1.000 .782 MR applications, residents 1.000 .875 Conclusion of educ. top level. (% pobl.) 1.000 .730 Researchers (% population) 1.000 .797

Method of extraction: Analysis of principal components. Source: Authors' calculations based on the results of the Factorial Analysis of Correspondences.

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The scree plot shown in the graph illustrates the percentage of the variance represented by each one of the factors or dimensions (Kruskal, 1981), as well as the overall contained degree of reliability. A total of 77.50 percent of the variance is represented, where the first component shows 38.48 percent, the second component 20.50 percent, the third factor 10.63, and the fourth 7.87 percent (graph 1). Graph 1:Scree Plot

Source: Authors’ calculations based on the results of the Analysis Factorial of Correspondences. The solution of the Rotated Components Matrix shows each of the indicators into a single component. The solution is in a form that demonstrates a clear understanding of the space on which the variables are positioned as the relation between the variables and their correlation (for those that are reproduced in the same component). In the first component, the indicators are exports of products of high technology, patent applications residents and non residents, articles in scientific and technological publications, and trademark applications-residents and non residents. The second set of components are spending on research and development (R & D), R & D researchers, and the top level of education in percentage of the population. The third set of components deal with the exports of products of high technology, such as the percentage of exports of manufacture and researchers as percentage of the population. Finally, the fourth factor involves royalty payments, copyrights and licenses, and technical specialists in R & D. Table 2: Rotated Components Matrix

Indicators Components 1 2 3 4 Exports of prod. high technology (US$) .884 .050 .283 .133 Exports of prod. high technology (% of exp. of manufacture) .106 .049 .901 -.042 Patent applications, non residents .857 .306 .072 -.144 Patent applications, resident .802 .314 .126 .001 Spending on R & D (% of the GDP) .192 .853 .188 .177 Researchers R & D (million people) -.036 .885 .128 .197 Royalty payments, copyright and license .256 .173 .333 .451 Art. in scientific and technological publications. .794 .346 .000 -.073 Specialists in R & D (per million people) -.172 .111 -.107 .871 MR applications, non residents .801 -.212 .057 -.303 MR applications, residents .908 -.195 .110 -.007 Conclusion of educ. top level. (% pop.) .119 .821 -.190 -.072

38.48

20.50

10.63

7.87

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Researchers (% population) -.201 .058 -.651 .574 Extraction Method: Principal Components Analysis. 4 components extracted. Varimax with Kaiser Normalization. The rotation converged in 6 iterations. Source: Authors’ calculations based on the results of the Analysis Factorial of Correspondences. According to the first results obtained, variables are grouped based on those that are most associated with one another and their degree of the variance. The degree of variance is such that the indicators can be integrated in four dimensions. The first factor contains the variables related to technology and innovation development. These are represented by a 38.48 percent of the variance. The second factor gathers the variables that show global investment in R & D with 20.50 percent. The third factor explains, with a variance of 10.63 percent, the positioning of investment and development in technology and innovation. The fourth factor concentrates the variables that relate to complementary indicators of technological development with 7.87 per cent of the variance (see Table 4). Table 4: Proportion of the Variance Explained by Each Factor

Factor

Sub-dimension

Proportion Variance Explained

Factor 1 High development on technology and innovation 38.48 % Factor 2 Global investment in R & D 20.50 % Factor 3 Percentage positioning of the investment and development in technology

and innovation 10.63 %

Factor 4 Complementary indicators of the technological development 7.87 % Soucer: Author based on the results of the Analysis Factorial of Correspondences. Chord to the positioning of the indicators within the multidimensional space of the X-axis represents the degree of current development in technology and innovation of each economy, grouping the variable exports of products of high technology to current prices, patent applications of residents and non residents, articles in scientific and technological publications, and trademark applications of residents and non residents. Because the scores are positive (in the rotated components matrix) among the right, most countries will be better positioned. The best placed countries in respect of this axis are China, The United States, Japan, Germany, France, Korea, Switzerland, Mexico, Brazil and Australia while the worst positioned are Cyprus, Finland, Slovakia, Sweden, Portugal, and Estonia. The Y axis represents the level of global investment in R & D, this is due to variables such as spending on R & D as percentage of the GDP, researchers dedicated to R & D (a million people), and the top educational levels as percentage of the education. As in the X-axis factors of this axis, the further up economies are located the better located they will be, such as is the case of Finland, Japan, The United States, Sweden, Canada, Korea, Norway, Australia, United Kingdom, Ireland, Germany, France, Belgium, Singapore, Luxembourg, and Spain, in this order. In contrast, Chile, Argentina, Mexico, Cyprus, Brazil, Slovakia and Malta are located further down (see graph 3). Graph 3: Scores Plot Factors 1 and 2

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Source: Authors' calculations based on the results of the Factorial Analysis of Correspondences. Graph 4 represented in the X-axis (component 3) shows the percentage positioning of investment and development in technology and innovation. It contemplates the exports of products of high technology like percentage of the exports of manufacture and the number of researchers as percentage of the population. The complementary indicators of technological development are located in the Y-axis (component 4). These are royalty payments for copyright and licenses and technical specialists in innovation and development. Because component 3 has negative and positive values, the best placed countries in respect of the X-axis will be those that tend to zero, such as Japan, United Kingdom, United States, Netherlands, Austria, Sweden, and France. The top-ranked countries respect of the Y-axis will be those who are located at the top of this axis, such as Luxembourg, the Euro-zone, Slovenia, France, Germany, Netherlands, Austria, Singapore, Ireland, China, and Spain (see graph 4). Graph 4: Scores Plot Factors 3 And 4

Source: Authors' calculations based on the results of the Factorial Analysis of Correspondences. The competitiveness index obtained accounts for the position of each one of the countries analyzed to combine the results for each of the dimensions. The index reveals the countries that have better ranking or are more competitive in innovation and technology. The economy with the highest index of competitiveness is the United States followed in descending order by China, Japan, Korea, Germany, Singapore, France, the Euro-zone, Canada and United Kingdom. The

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minor indexes find Chile, Slovakia, Cyprus, Greece, Argentina, Sweden, Estonia, Portugal, Malta, Hong Kong, and Mexico; being the sample mean of 2.6 (graph 6). Graph 6: Competitiveness Index Dimension of Technology

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Source: Authors' calculations based on the results of the Factorial Analysis of Correspondences. CONCLUSIONS Though four variables that explain the hypothesis - high development of technology and innovation, global investment in R & D, percentage positioning of investment and development in technology, and innovation and complementary indicators of the technological development - have important roles in determining the competitiveness of innovation and technology, the first two components are the most relevant. By integrating the results of components one and two that explain the degree of development in technology and innovation (X-axis) and the investment in research and development (Y-axis), it is observed that the top-ranked countries are located in the first quadrant, i.e., The United States, Japan, Korea, Germany, France, and United Kingdom. Whereas the countries worse placed are Cyprus, Malta, Argentina, and Chile. The United States is not only the country best placed in terms of development in technology and innovation but also in investment in research and development. China, according to the results of the study, is considered to be the country with a high degree of development in technology and innovation but a low degree of investment in research and development Among the best positioned economies in an international context, according to the index of competitiveness of innovation and technology, are the United States followed (consecutively) by China, Japan, Korea, Germany, Singapore, France, and the Euro-zone. Mexico locates at position number 13 in terms of competitiveness in innovation and technology with 1.91 points, what places it below the average (2.93). It is important to point out that the indicators which place

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Mexico at a lower level are the number of researchers in R & D, articles in scientific and technological publications, and patent applications of residents, where Mexico shows a value far below of the average. Developed countries seek to support links between the development of educational and scientific systems with the ability to innovate in the real sector of their economies. This is still not on the agenda of many developing countries such as Mexico. This study identified elements that can lead to strategies aimed at the promotion of innovation and technological development, emphasizing strategies directed to the formation of researcher-driven innovation and technology, promotion of publications and creation of magazines related to science and technology; strategies that link the academic and business sectors, as well as the use of patents generated in order to boost competitiveness and development in Mexico. REFERENCES Bank for International Settlements. (2008, n.d). Bank for international settlements. Retrieved December 21, 2010, from http://www.bis.org/forum/research.htm Batista, J., & Joan, S. (1997). Correspondence analysis and classification techniques: The interest for research in social and behavorial sciences. Barcelona: Universidad de Barcelona. Callealta, F. J. (2005). A new measure of dissimilarity between distributions: Application to the analysys of income distributions convergence in the European Union. Madrid: Departamento de Estadísitca, Estrucutra Económica y O.E.I. Castillo, W., & Rodriguez, O. (2002). Algorithm implementation of factorial correspondences analysis (pp. 8-20). Costa Rica: Universidad de Costa Rica, School of Mathematics. Cox, T. F., & Cox, M. A. (1994). Multidimensional scaling. London: Chapman and Hall. Guillermo, S., et al. (2010). Competitiveness index for the city of Puebla. Puebla: Universidad Autónoma de Puebla. IMD. (2009, n.d.). IMD world competitiveness yearbook (WCY). Retrieved October 17, 2010 from http://www.imd.org/research/publications/wcy/wcy_online.cfm Kendall, M., & Buckland, W.R. (1990). A dictionary of statistical terms. Edinburgh: Oliver and Boyd. Kim, J., & Mueller, C. (1978). An introduction to factor analysis: What it is and how to do it. Beverly Hills, CA: Sage. Krugman, P. (2008). International economics, theory and policy. Spain: Pearson Prentice Hall. Kruskal, J., & Wish, M. (1981). Multidimensional scaling. Beverly Hills, CA: Sage Publications. Pérez, L. C. (2006). Multivariate analysis techniques data. Barcelona: Pearson Prentice Hall.

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PROFESSIONAL JUDGMENT EFFECTIVENESS: A STUDY OF TAX AUDITORS IN THAILAND

Kanyamon Wittayapoom, Mahasarakham University, Thailand

ABSTRACT

This paper aims to examine the professional judgment effectiveness of tax auditors (TA) in Thailand under circumstances of work commitment and degree of industry and business knowledge. Therefore, this research study examines the relationships between 1) work commitment and professional judgment effectiveness and 2) industry and business knowledge and audit judgment effectiveness. Seventy-seven questionnaires completed by 77 TAs in Thailand were received from a mail survey. The statistical method used to analyze data was ordinary least square (OLS) regression. The results show that work commitment and industry and business knowledge have a strongly significantly positive relationship with professional judgment effectiveness. All of the hypotheses are supported and a thorough discussion is effectively presented as part of this paper. Further implications of theoretical and managerial contributions are explicitly provided. Conclusion, limitations, and suggestions for future research are also highlighted. KEYWORDS: Work commitment, professional judgment effectiveness, ethical culture, tax auditor, Thailand INTRODUCTION Increasingly, professional judgment effectiveness in an auditing context is very important for the tax auditor (TA), who is regarded as a professional in assurance and consulting services. Professional judgment effectiveness is related to a TA’s decision making according to perspectives of competitive advantage. The depth of the information process during data gathering of an audit affects professional judgment that TA’s commitment to their objective. Thus, professional judgment effectiveness of the TA to support and service their client and to provide conclusive recommendations can be justified (Kerler and Brandon, 2010). The role of work commitment has a direct effect on the audit decision making process that is expected of the TA to maintain individual and firm reputations and to deliver audit quality services to clients. This study defines work commitment as the degree of professional service behaviors that the TA exerts in consideration of the effort for professional judgment effectiveness (Hilton and Souhgate, 2007). In some cases, the TA will make a preferred judgment, which is likely to put pressure on the client (Kerler and Brandon, 2010). Therefore, the TA must possess the required industry and business knowledge in order to avoid and mitigate associated risks of audit work by having and/or obtaining appropriate and sufficient industry and business knowledge of their client. Industry and business knowledge are a few of the business process information needed for the auditing process (Neito and Perez-Cano, 2004). The business process can help the TA to make better decisions (Kopp and O’Donell, 2005) because the TA is the person who possesses more skill in evaluation of their audit approach. Industry and business knowledge enables the TA to achieve professional judgment effectiveness that is relevant information to audit (Sarens et al., 2009). The TA uses industry and business knowledge for interpreting and integrating evidence by

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developing and accumulating knowledge (Kaplan et al., 2008) as part of their professional judgment. Based on the discussion above, the main research question of this paper addresses how work commitment and industry and business knowledge relate to professional judgment effectiveness. This research builds upon previous research to address in the area of professional judgment effectiveness based upon contingency theory to develop and create the conceptual model of this study. This research involves the collection of data that is analyzed as a quantitative approach. Therefore, the objectives of this research are examine the relationships between work commitment and audit judgment effectiveness as well as that of industry business knowledge and professional judgment effectiveness.

This paper is organized as follows. The first part details a literature review and the theoretical foundations to develop the conceptual framework. The second part deals with the research methodology, including the questionnaire design and measurements of variables. The next section describes the statistical analysis and results. The final part presents the discussion of findings, limitations of the study, future research, and conclusions. LITERATURE REVIEW This section presents the conceptual model and depicts professional judgment effectiveness and its antecedent variables. This paper clarifies how the antecedents of work commitment and industry and business knowledge relate to professional judgment effectiveness of the tax auditor (TA) in Thailand. Figure 1: Professional judgment and its relationship model As part of the theoretical development, the contingency theory was applied in this study because the concept of this theory suggests that organizational effectiveness is related to corporate characteristics of contingencies (Chenhall, 2003). In a professional judgment effectiveness context, especially in this paper, the application of contingency theory stems from the fact that certain contingency factors influence professional judgment effectiveness. Therefore, Figure 1 presents the links between the contingent variables and professional judgment, are to be empirically examined (Bernard and Sweeny, 2006).

Work Commitment The TA can develop a work commitment to the client’s needs during the auditing process (Jeffrey et al., 1996). In this research study, work commitment refers to the degree of professional service behavior that the TA exerts a considerable amount of effort to (Storch and Northcott, 1989), mainly in terms of work compliance, confidentiality, transparency, punctuality, and striving for excellence in the long-term aspirations of the clients (Hilton and Souhgate, 2007). Work commitment is encouraged by personal TAs though professional experience to benefit TA

Professional

Judgment Effectiveness

Work Commitment

Industry and Business Knowledge

H1+

H2+

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judgment effectiveness. Previous research of work commitment in an audit context has included work in turnover intentions (Bline et al., 1991), auditor’s attitudes (Jeffrey et.,al 1996), ethical orientation (Clikeman et., al 2001), job satisfaction, work stress, and burnout (Lu et., al 2007) Therefore, commitment is a human behavior that reflects compliance and duty to one’s professional practice. Hence, this study assumes that work commitment is positively related to professional judgment effectiveness. Moreover, work commitment can indicate a TA’s acts in audit service through their beliefs, acceptances, goals, values, efforts, and professionalism towards clients. As described above, this study assumes that work commitment is positively related to audit judgment effectiveness, which leads to the hypothesis below.

Hypothesis 1: The greater the work commitment is, the more likely that tax auditor will gain greater audit judgment effectiveness. Industry and Business Knowledge At present, every professional TA is required to possess industry and business knowledge in order to avoid and mitigate risks associated with typical audit work (Hart and Banbury, 1994). Audit knowledge, particularly industry and business knowledge, is primary and important information for the audit process (Neito and Perez-Cano, 2004) that the TA relies on for decision-making during audit work. Therefore, industry and business knowledge consist of the TAs’ style and his/her philosophy linked with the audit process and the stated objectives in the audit operations (Arena et al., 2010) in order to achieve professional judgment effectiveness. This is due to the TA acquiring industry and business knowledge that is relevant information for auditing (Sarens et al., 2009). TAs use industry and business knowledge for interpreting and integrating information to present evidence from the audit process by developing and accumulating knowledge (Kaplan et al., 2008) as part of their professional judgment effectiveness. Kopp and O’Donell (2005) suggest that the business process can help TAs to make better decisions. In essence, TAs who has more skill in evaluation during their audit approach will help them to achieve professional judgment effectiveness. As described, this study focuses on and expects a positive relationship between industry and business knowledge and audit judgment effectiveness. Thus, it leads to the hypothesis posited below.

Hypothesis 2: The greater the Industry and business knowledge is, the more likely that tax auditor will gain greater audit judgment effectiveness.

RESEARCH METHODS

Sample Selection and Respondents The sample selection and respondents for this research were composed of tax auditors (TAs) in Thailand. The total number of questionnaires mailed was 500. Deducting the undeliverables from the original mailing, the valid number of mailed questionnaires was 450, from which 95 responses were received. Of the surveys completed and returned, only 77 were usable. Thus, the effective response rate was approximately 17.11%. The non-response bias (Armstrong and Overton, 1977) was evaluated after the third week of the initial mailing of questionnaires. So, the pre-notification by postcard was used as a follow-up to respondents. This procedure assumes that late respondents are not different from non-respondents

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comparing relatively early and relatively late responses in each mailing by use of a t-test of the regression analysis method. The regression results reveal that no significant differences between early and late respondents existed, at α=0.05. In addition, this study applied a test to compare the demographics of the respondents (e.g. numbers of years of audit experience of the TA). Hence, there is no significant difference between early and late respondents in terms of the numbers of years of audit experience of the TA, and the effect of non-response bias on the results of this study were considered minimal. QUESTIONNAIRE DESIGN AND CONSTRUCT MEASUREMENTS Questionnaire Design For this study, the mail questionnaire was developed using a two-stage procedure that included both pretests and the refinement of the scales developed for all variables in the study. The pretest was used to understand the context and the result after pretest was used to assess the internal audit quality-organizational effectiveness relationship. Then the questionnaires were modified and developed to increase the appropriateness and validity of sentences or words used for construct items. The final surveys were administered by a cover letter that included an explanation of the objective of study along with the questionnaire and a prepared envelop. Questions to the respondents were provided in the Thai language, with five-point Likert-type scales ranging from ‘1 = strongly disagree’ to ‘5 = strongly agree’. The first part of questionnaires deals with external factor details. The next part of the questionnaire deals with personal information of the respondent, such as in gender, age, education, personal status, internal audit experience, professional, and position. In each part, questions deal with the variables of work commitment, industry and business knowledge, and professional judgment effectiveness. The final part of the questionnaire included open-ended items for respondents to provide any further suggestions and opinions. Potential respondents received a cover letter to provide the objectives of the research. The conduct of questionnaire survey is complied with the ethics and confidentiality rules to preserve the rights, liberties and safety of the participants. The respondents were informed under the ethical rules that participation was voluntary and they were not being exposed to any risks, i.e. psychological, moral, and legal. The characteristics of the sample are based on gender; age range, marriage status, education levels, years of experience, years of tenure, and monthly income. The sample includes 60.5% female, who provided the majority of respondents’ based on the demographic of gender. Moreover, the majority (78.9%) of the age of respondents was over 40 years. In terms of marital status, 47.4 % were married. As for respondent education level, a majority (56.6%) had bachelor’s degree or higher. Sixty-one of the respondents (i.e. 80.3% of the sample) had more than 15 years of experience and 35.4% of the respondents had between 5 to 10 years of experience in their current position. Finally, 86.8% of the sample had more than 30,000 baht monthly income Measurement Reliability and Validity In the survey instrument, all scale items were scored by existing developed scales and underwent a complex task by pretest of the scales from various accounting, auditing, and internal audit and control studies to reduce the mitigation of errors (Morales et al., 2007). The principal component analysis was used to check whether all items belonged to their respective construct. To ensure

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scales were reliable and valid, Cronbach’s alpha coefficient was obtained to test the reliabilities (higher than 0.7 as satisfactory) (Cronbach, 1951). Therefore, in this research the measurements of the constructs work commitment were obtained via four items indicating the extent of the TAs behavior to participate in audit work. Industry and business knowledge was measured using four items concerning industry and business environment data such as internal control systems and competitive ranking. Finally, professional judgment effectiveness was measured by eight items asking respondents to rate the extent of his/her judgment and decision making. In this research, reliability is estimated using Cronbach’s alpha, the most common method accepted by researchers (Francis, 2001). The Cronbach’s alpha coefficient indicates the degree of internal consistency among items in the questionnaire (Nunnally and Bernstein, 1994). In this research, the Cronbach’s alpha coefficients are in the range of .740 - .855. To conduct a validity check of the questionnaire items, the construct validities need to be assessed by factor analysis, which was therefore conducted as part of this study. A principal component factor analysis using Varimax rotation was performed for each construct using the 0.40 criterion as a significant item loading. All factor loadings greater than the cut-off value of 0.40 are adopted based on Hair et al. (1992) who interpreted the significance of factor loadings of 0.30, 0.40 as being more significant, and 0.50 as being very significant. Here, the construct factor loadings are in the range from .577 - .869. As described above, all results of factor loadings and Cronbach’s alpha coefficients show the statistics in terms of average scores and the range of key variables and also the overall reliability of all key variables (Francis 2001). Thus, Table 1 shows the results of the factor analysis, with the factor loadings and Conbrach’s alpha coefficient of the multi-item measurement scales used in the questionnaire. Table 1 Results of Factor Loadings and Cronbach’s Alpha Coefficients

Variable Factor Loadings Cronbach’s Alpha

Work Commitment (WCM) .637-.854 .806

Industry and Business Knowledge (IBK) .683-.842 .740

Professional Judgment Effectiveness (PJE) .577-.869 .855

STATISTICAL ANALYSIS AND RESULTS In this research, the correlation matrix is used for the initial analysis then ordinary least squares regression (OLS) for supplemented hypotheses tests from the data (Aulakh et al., 2000). The OLS is a linear-regression and responsive to the pooling closer of the categories that permit the parameters in the model so that the researcher can interpret the model parameters when it is not true (Samelson et al., 2006). Thus, we perform an appropriate and statistical analysis of the data collection employing the ordinal regression with two equations as follows:

εββ ++= WCMPJE 101

(1) εββ ++= IBKPJE 202

(2)

Table 2 Descriptive Statistics and Correlation Matrix

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Variables WCM IBK RME

Mean 17.25 15.54 29.96 Standard Deviation 1.84 2.35 3.61 Work Commitment (WCM) . Industry and Business Knowledge (IBK) .481** Professional Judgment Effectiveness (PJE) .522** .517**

**P<.05 Table 2 shows the results of descriptive statistics and correlation matrix. Descriptive statistics are described by the mean and standard deviation of each variable. The correlation matrix shows the relation among all variables and also reveals multicollinearity. The muticollinearity shows the relationships exist among independents variables in the model. In this case, the overall relation between all variables is under .80, meaning multicollinearity problems are not a concern (Neter et al., 1985).

Table 3 Results of Regression Analysis ª

Independence Variables Dependence Variable

Adjusted R² Professional Judgment Effectiveness

Work Commitment (WCM) .481*** (.102)

.221

Industry and Business Knowledge (IBK) .522*** (.099)

.263

*** P<.01 ª Beta coefficients with standard errors in parenthesis Table 3 summarizes the results of the OLS regression analysis for Hypotheses 1 and 2 (Equations 1 and 2) and reveals the relationships between 1) work commitment and professional judgment effectiveness and 2) industry and business knowledge and professional judgment effectiveness. The Equation 1 (Model 1) addresses the relationships between work commitment and professional judgment effectiveness. The results show that work commitment ( ,481.1 =β p<0.00) has significant positive relationship with professional judgment effectiveness. Therefore, Hypothesis 1 is supported. Model 2, on the other hand, addresses on industry and business knowledge relationship with professional judgment effectiveness. The results reveal a significant positive relationship ( ,522.2 =β p<0.00). Therefore, Hypothesis 2 is also supported. DISCUSSION, LIMITATIONS, AND FUTURE RESEARCH Discussion of Findings This study examines professional judgment effectiveness and its antecedences by developing a model based on theory and a review of relevant literature. The results show that work commitment has a significant strong positive relationship with professional judgment effectiveness. Furthermore, this study found that industry and business knowledge also has a significant strong effect on professional judgment effectiveness. This suggests that if a TA lacks commitment regarding audit engagement, the TA will loosen his/her professionalism and reputation. On the other hand, industry and business knowledge is important to TA decision making in the audit process. This implies that if a TA did not to put much effort to gather relevant information about the industry and the business of their client, decision- and judgment- making will be less efficient and effective. Thus, this study provides some evidences that in the context of

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Thailand, work commitment and industry and business knowledge are necessary to enhancing TAs’ judgment effectiveness. Limitations and Future Research This research has a limitation that the objectives under professional judgment effectiveness framework may only be suitable for TAs in Thailand. Future research may be amended as necessary to suit specific circumstances due to particular audit activities into their framework. Moreover, future research can verify the objectives pursued here or extend this study to different professional accounting areas, such as those involving the CPA or the CIA. It would be beneficial, particularly to assert the views of clients’ acceptance, stakeholders, and third-parties to understand the professional judgment of TAs’ and their professionalism. This study provides evidence supporting the importance of a holistic research approach that considers the behavior of TAs within the context of the auditing process. Future research may consider benefits from views of several disciplines and to explore in decision making or judgment effectiveness in other contexts. Implications The objective of this research was to examine professional judgment effectiveness and its relationship to select antecedent factors. The findings can be generalized to a survey of tax auditors in Thailand. The generalizability is assumed by this empirical study under the content of internal audit and control, accounting, and auditing effectiveness. The theoretical development is based on contingency theory used to describe the relationships between the context and the structure of professional judgment effectiveness. This empirical study suggests that TAs who are specialized and higher in assurance services will provide a strong benefit and achieve professional judgment effectiveness analysis and that the audit firm will benefit in terms of organizational effectiveness via professional judgment mechanism efficiency. The overall results found significant support for the hypotheses. CONCLUSION The professional judgment effectiveness is important to all kinds of auditors, including managers, internal auditors, stakeholders and all staff members of the firm involved in decision making and controlling firms to achieve organization performance. Therefore, professional judgment effectiveness provides work commitment and information cues of the customer environment such as industry and business knowledge to conduct audit work. REFERENCES Arena, M., Arnaboldi M. and G. Azzone (2010) “The Organizational Dynamics of Enterprise Risk Management,” Accounting, Organizations and Society, vol 35, p. 659-675. Armstrong, J. Scott. and T.S. Overton (1977) “Estimating Non-Response Bias in Mail Surveys,” Journal of Marketing Research, vol 14 (3) p.396-402. Bernard P. and B. Sweeny (2006) “Perceived Adverse Consequences of Quality Threatening Behavior in Audit Firms,” International Journal of Auditing, vol 10 (1) p.19-39.

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Bline, Dennis M., Duchon Dennis and Meixner Wilda F., “Measurement of organizational and professional commitment: an examination of psychometric properties of two commonly used instruments”, Behavioral Research in Accounting, 3(2): 79-96, 1991. Chenhall R. H.(2003) “Management Control Systems Design Within Its Organizational Context: Findings from Contingency Based Research and Directions for Future,” Accounting, Organizations and Society, vol 2003 (28) p.127-168. Clikeman, P. M., B. N. Schwartz and H.L. Malcolm (2001) “The Effect of The 150-Hour Requirement on New Acountants’ Professional Commitment, Ethical Orientation, and Professionalism,” Critical Perspectives on Accounting, vol 12(5) p. 627-645. Cronbach, L.J. (1951) “Coefficient Alpha and Internal Structure of Tests,” Psychometrika, vol 6(3) p. 297-337 Francis, G. (2001) “Introduction to SPSS for Windows,” 3rd ed, Pearson Education Australia: Sydney. Jeffrey, C., N. Weatherholt., and S. Lo. (1996) “Ethical Development, Professional Commitment and Rule Observance attitudes: A Study of Auditor in Taiwan,” The International Journal of Accounting, vol 31(3) p. 365-379. Hair, J. F., Rolph, E. Anderson. and L. T. Ronald . (1992) “Multivariate Data Analysis: with Readings,” New York, New York: McGraw-Hill. Hilton, Sean and L. Southgate. (2007) “Professionalism in Medical Education,” Teaching and Teacher Education, vol 23(3) p. 265-279. Kaplan, S.E., E.F. O’Donnell., and B.M. Arel. (2008) “The Influence of Auditor Experience on The Persuasiveness of Information Provided by Management,” Auditing: A Journal of Practice & Theory, vol 27(1) p. 67-83. Kerler, W.A. and D.M. Brandon. (2010) “The Effects of Trust, Client Importance, and Gold Commitment on Auditors’ Acceptance of Alient-Preferred Methods,”Advances in Accounting, Incorporating Advances in International Accounting, p. 246-258 Kopp L. S., O’Donnell Ed., “The Influence of a Business-Process Focus on Category Knowledge and Internal Control Evaluation”, Accounting, Organizations and Society, 2005, 30: 423-434. Lu, Kuei-Yun., Liang-Chin Chang and Hong-Lan Wu. (2007) “Relationships between Professional Commitment, Job Satisfaction, and Work Stress in Public Heal Nurses in Taiwan,” Journal of Professional Nursing, vol 23(2) p. 110-116. Morales, G.V., F.J. Llorens-Montes., and A.J. Verdu-Jover. (2007) “Influence of Personal Mastery on Organizational Performance Through Organizational Learning and Innovation in Large Firms and SMEs,” Technovation, vol 27 p. 547-568. Nannally, J.C. and I.H. Berstein. (1994) “Psychometric Theory,” 2nd ed. New York: McGraw-Hill. Nieto and Perez-Cano. 2004. “The Influence of Knowledge Attributes on Innovation Protection

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Metchanisms”. Knowledge and Process Management. 11: 117-126. Nieto and Perez-Cano. (2004) “The Influence of Knowledge Attributes on Innovation Protection Metchanisms,” Knowledge and Process Management, vol 11 p. 117-126. Sarens, G., I.D. Beelde and P. Everaert. (2009) “Internal Audit: A Comfort Provider to The Audit Committee,” The British Accounting Review, vol 41 p.90-106. Skaife H.A., D.W. Collins and W.R. Kinney Jr. (2007) “The Discovery and Reporting of Internal Control Deficiencies Prior to SOX-mandated Audits,” Journal of Accounting & Economics,vol 44 p. 166-192. Smith and G. Lawrence. (2005) “Medical Professionalism and Generation Gap,” The American Journal of Medicine, vol 118 (4) p. 439-442. Storch, L. Jannet and C.H. Northcott. (1989) “Hospital Administrators as Professionals: A Study of Occupational Role Identity,” Hospital & Health Services Administration, vol 34(4) p. 507-523 ACKNOWLEDGEMENTS The authors would like to thank Dr. Olimpia C. Racela, all kindness in editing the draft of my work and thank you Mahasarakham Business School, Mahasarakham University, Thailand, to funding and financial supported.

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COMMUNITY PERSPECTIVES ON ACCOUNTABILITY AND TRANSPARENCY IN THE

MANAGEMENT OF LOCAL AUTHORITY TRANSFER FUND IN KENYA: A CASE OF SIAYA

MUNICIPAL COUNCIL Jackson Ongong’a Otieno, Ministry of Devolution and Planning, Kenya

Charles M. Rambo, University of Nairobi, Kenya Paul A. Odundo, University of Nairobi, Kenya

ABSTRACT

The Local Authorities Transfer Fund (LATF) is one of the funds that the Kenyan Government has decentralized to local authorities to supplement the financing of service delivery, enhance financial management and accountability, as well as reduce debts accumulated by the authorities. The purpose of this study was to assess and document community perspectives on accountability and transparency in the management of LATF resources. We sourced primary data from 162 community members, including opinion leaders and civil servants. The study found that participants were satisfied with community involvement in the planning and budgeting process (48.8%), enhancing accessibility of external auditor’s reports (42.0%) and liability management (34.0%). However, they expressed dissatisfaction with indicators such as transparency in the procurement process (58.0%), management of Council assets (57.4%), publicization of expenditure reports (44.0%), cash flow management (42.0%), budget execution discipline (35.2%), accounting system (30.9%) as well as internal control and audit system (30.2%). The success of LATF largely depends on the Government’s enforcement of existing regulations, identifying gaps and formulating additional controls, as well as taking public officers and political leaders through the change process. This will provide necessary safeguards against political interference and corruption in the management of LATF projects. JEL: 016 KEYWORDS: Accountability, Transparency, Local Authority, Service delivery, Decentralization, Fiscal decentralization INTRODUCTION The Local Authorities Transfer Fund (LATF) was established through the Local Authorities Transfer Fund Act, No. 8 of 1998 (GoK, 1999), to achieve three objectives - improve service delivery, enhance financial management and accountability as well as reduce outstanding debts accumulated by local authorities (Kibua & Mwabu, 2008; Mboga, 2009). LATF is one of the public funds devolved to peripheral governance units, within the decentralization framework. As noted by Rondinelli (1999), decentralization entails the transfer of authority and responsibility for public functions from the central government to subordinate or quasi-independent public institutions as well as the private sector. Decentralization involves a combination of dimensions, including fiscal, administrative, political, and economic functions (Rondinelli, 1999; Cheema, 2007; Phillip, 2009). Public finance scholars have applied the concept in various fields, including public administration, economics, management science, law, and public finance, among others.

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Whatever the area of application, decentralization responds to limitations and challenges associated with centralized governance systems (Conyers, 2007). Fiscal decentralization is one of the components of decentralized government functions, whose purpose is to improve efficiency in handling, management, expenditure, and accountability for public funds. As noted by Menon, Mutero, and Macharia (2008), fiscal decentralization involves the passing of budgetary authority from centralized governance systems to elected sub-national governments in the form of the power to make decisions on matters revenue and expenditure. Fiscal decentralization has four key attributes, including assigning clear expenditure and revenue responsibilities; intergovernmental fiscal transfer mechanisms from central to local governments; as well as authorization for borrowing and revenue mobilization through loan guarantees from the central government (Phillip, 2009). According to Wachira (2010), governments pursue fiscal decentralization to facilitate the participation of citizens in identification of community priorities, planning and budgeting, implementation as well as monitoring and evaluation. According to Bonoff and Zimmerman (2010), fiscal decentralization stems from the premise that local communities have the ability to prioritize projects in line with their needs, and that, local resources are easily accessible where community members are involved in development processes. In view of this, fiscal decentralization strengthens citizens’ role in ensuring accountability and transparency in the management of public funds. Decentralization is not a new concept in Kenya. The Government first proposed decentralization in the Sessional Paper No. 10 of 1965 on African Socialism and its Application to Planning in Kenya, with a view to strengthening the fight against poverty, disease and illiteracy (Chitere & Ireri, 2008). The Sessional paper marks one of the key initial attempts to decentralize development agenda and resources to the districts and local government authorities across the country (Kibua & Mwabu, 2008; Chitere & Ireri, 2008). In 1983, the Government introduced the District Focus for Rural Development (DFRD) mechanism as its official decentralization policy (Alila & Omosa, 1996; Chitere & Ireri, 2008). Under the DFRD framework, districts became the planning units for decentralized service delivery. However, performance of the strategy was constrained by various factors including limited involvement of communities in project cycle management (Chitere & Ireri, 2008). As noted by Kibua and Mwabu (2008), decentralized development initiatives brings forth numerous benefits including increased community participation in decision-making, better governance, improved equity in resource sharing, improve the quality of government service delivery, as well as enhanced accountability in fund administration. More recently, decentralization was revisited in the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007, which stands out as the policy document providing a clear framework against which devolved funds are leveraged (Kibua & Mwabu, 2008; GoK, 2003). Fiscal decentralization framework is further set out in the First Medium Term Plan (MTP) 2008- 2012 (GoK, 2008), as well as Kenya’s Vision 2030 (GoK, 2010). These policy efforts culminated to the establishment of various devolved funds, including LATF. The fund draws from the national revenues - 5% of the annual national income tax collection (Kibua & Mwabu, 2008; Mboga, 2009). The allocation criteria are designed to ensure consistency, fairness and transparency, as follows: a basic minimum lump sum of KES 1.5 million (6.6%) is shared equally among the country’s 175 local authorities, while 60% of the fund is disbursed according to relative population sizes of local authorities. The Government allocates the remaining 35.4% subject to local authorities meeting set financial management and accountability criteria (Kibua & Mwabu, 2008; Mboga, 2009). The money disbursed through

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LATF supplements local authorities’ revenues; it forms about one-quarter of local authority revenues (Kibua & Mwabu, 2008; Mboga, 2009). In order to access LATF resources, local authorities are required to have action plans, known as Local Authority Service Delivery Plans (LASDAP), which are prepared through participatory processes, involving various stakeholder groups and community members. LASDAP specifies prioritized projects and activities for which the Government and local authority funds should finance. The participatory approach amplifies local communities’ voice in project identification, planning, monitoring, evaluation, and accountability processes, as well as nurture ownership of LATF projects (Kibua & Mwabu, 2008; Menon et al., 2008; Bonoff & Zimmerman, 2010). Furthermore, LASDAP anchors on key pillars focusing on poverty reduction line with the Poverty Reduction Strategy Paper (PRSP) and the Economic Recovery Strategy (ERS) whose priority areas include health, education, and infrastructure and upgrading of informal settlements (Mboga, 2009). The concept behind the LASDAP is to match all expenditure by local authorities to the needs of a local authority area; thus, avoid spending scarce resources on areas that are not of high priority (Institute of Economic Affairs [IEA], 2005). Local authorities adopt completed plans as a resolution, before submission to the Ministry of Local Government (MoLG). It is however, the responsibility of stakeholders to hold councilors and chief officers accountable for LASDAP’s implementation; hence, the primacy of their monitoring role (Kibua & Mwabu, 2008; Mboga, 2009). The MoLG encourages accountability and transparency by disbursing 60% of LATF upon submission of necessary budgetary and technical proposals. The Ministry further emphasizes performance by distributing the remaining 40% of the funds based on LASDAP’s performance metrics, such as revenue enhancement strategies (Bonoff & Zimmerman, 2010). In the event of delayed delivery of reports, local authorities are subject to penalties: 15% loss of allocated funds for late filing of returns of up to 30 days, 40% of allocations for lateness of between 31 and 60 days late, and complete loss of LATF for local authorities whose documents are more than 60 days late (GoK, 1999; Bonoff & Zimmerman, 2010). Furthermore, accountability improves through legal provisions for transparency to citizens. In this regard, local authorities are required to publicize funds received from the central government each year in national newspapers. Besides, local authorities are required to hold annual budget days in the month of June, which provide forums to discuss revenues and expenditures for previous financial years and planned budgets for subsequent financial years with citizens (GoK, 1999; Bonoff & Zimmerman, 2010). Accountability is the obligation of public officers and elected leaders to take responsibility for their actions and decisions (World Bank, 2005). On the same note, Jalal (1999) perceives accountability as a process of holding public office bearers responsible for their performance, actions, and consequences of their decisions. Accountability in the management of public resources is a right to citizens and an obligation to those bearing the responsibility of managing such resources (Jalal, 1999). A review of literature reveals a considerable variance in opinion regarding the point at which public officers and elected leaders should account to stakeholders. According to Ackerman (2004), whereas some scholars perceive accountability as an ex-post phenomenon, others argue that accountability measures should apply before, during and at the end of office tenure. Whatever the timing, accountability remains the cornerstone for good governance and democracy (World Bank, 2005). Social accountability mechanisms are potentially the most powerful tools against public sector corruption; involving citizens in the project cycle is an important strategy for

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initiating a strong oversight authority for the management of public resources in decentralized public institutions, including local authorities (World Bank, 2005). The World Bank Empowerment and Poverty Reduction Sourcebook, recognize that accountability is an important component of empowerment for poor community members, poverty reduction, and sustainable development. Shende and Bennett (2004) note that the level of poverty in developing countries significantly associates with poor governance, particularly where governments are less accountable and responsive to citizens’ needs. Besides, without accountable governance, poor citizens are likely to suffer most due to constrained service delivery (UNDP, 1996). Accountability is important because it imposes discipline among public officers in charge of public resources. Appropriate management of public revenue and expenditure is vital for expanding the menu of services provided, increasing the scope of beneficiaries, and ensuring consistency in service delivery (UNDP, 1996). Furthermore, improvements in accountability have the potential of stimulating economic development, which may manifest in terms of higher per capita income, higher adult literacy, lower infant mortality and reduced poverty (Shende & Bennett, 2004). Accountability in local authorities can be vertical or horizontal. Whereas vertical accountability involves being answerable to specific higher offices within institutional hierarchy of power, which extend to the central government, horizontal accountability involves being answerable to community members. It is particularly important where community services such as primary healthcare, education, water, sanitation, waste management and infrastructure are involved (Shende & Bennett, 2004). Horizontal accountability can apply at all phases of project cycle – planning, programming, budgeting, award of contracts, monitoring of progress and outputs, and evaluation. Community-based organizations often represent community members in the project cycle process, with a view to enhancing accountability. Where communities play an active role in projects, local authorities have proved to be more responsive to local needs and priorities (World Bank, 2005). As noted by Shende and Bennett (2004), communities can play a more critical role in enhancing accountability in local authorities than supervisory structures at the central government. In view of this, public institutions should develop horizontal accountability to supplement vertical accountability as well as build popular participation and self-reliance on the part of citizens (Shende & Bennett, 2004). Transparency denotes free access to all information about decisions, expenditures, revenues, and other activities of public institutions. Premchand (2001) notes that transparency enables stakeholders, including citizens, community-based organizations, service providers, civil servants, political leaders and development partners, among others to access and appreciate information published data on public finances, annual accounts as well as investigative and other general reports prepared by independent agencies (Shende & Bennett, 2004). Transparency is achievable in institutions where reliable information on government’s fiscal policy intentions and forecasts is accessible consistently at minimal or no effort (Premchand, 2001). According to Singh, Rahim & Ray (2006), transparency is closely connected to accountability. Enhancing accessibility of institutional information to stakeholders is a sure way of making public officers accountable and answerable for their decisions. Similarly, UNDP (1996) notes that the level of accountability depends on how much relevant information about public expenditure is accessible the general public, as well as how well members of the public can analyze the information and develop action-oriented conclusions. Access to such information enables citizens to evaluate the intentions of central or local governments, which in turn, reinforces discipline in handling and management of public resources (UNDP, 1996) The International Monetary Fund (IMF) has set out four principles that define what transparency should entail in public institutions. In this regard, public institutions may improve transparency

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by ensuring: public availability of comprehensive information on financial stocks and flows; public availability of information on budget preparation and execution; financial data meeting accepted quality standards and subjected to independent audit scrutiny (IMF, 2001). The audit process often results into financial reports, which should be available to the general public to improve transparency (Premchand, 2001). Fiscal transparency is essential for sound economic governance. As noted by Shende and Bennett (2004), transparency should result in better- informed public debate about the design and objectives of fiscal policies; thus, strengthen the credibility of macroeconomic policies. For this matter, Singh, Rahim, and Ray (2006) asserts that developing the culture of transparency is key for efficient allocation of resources and effectiveness of public fiscal policies. According to Premchand (2001), transparency helps the general public and market participants to hold public officers accountable for their policy decisions, while Shende and Bennett (2004) point out that an important underlying objective of improved transparency is to reduce corruption. According to Hondeghem (1998), public institutions characterized by high degrees of transparency have exhibited greater degree of fiscal discipline and have achieved robust economic performance. In Kenya, the demand for accountability and transparency in the management of public resources has been gaining momentum over the past two decades (Nyangena, Misati & Naburi, 2010). While the country’s budgetary portfolio has been increasing every financial year, accountability for the resources allocated to decentralized public institutions has been a key challenge (Mwawashe, 2010). In the financial year 2012/13, various public institutions, including local authorities could not account for about KES 300 million, particularly due to inadequate enforcement of regulatory frameworks, as well as politically-influenced corruption. A review of pertinent literature reveals that various studies, including Smoke (2000), IEA (2005), Kageri (2010) and Nyangena et al. (2010) have documented issues associated with financial management practices in Kenyan local authorities. However, none of the studies explicitly brought out information about community perspectives on the accountability and transparency in the management of LATF resources. This study adopted a social audit approach to assess community perspectives about various indicators of accountability and transparency in the management of LATF resources by Siaya Municipal Council. Analytical Framework A strong public financial management and accountability system is the key to achieving development objectives and an efficient service delivery system in public institutions, including local authorities (Singh et al. 2006). The public financial management and accountability framework, in Figure 1 indicates key linkages between legislative, budgeting, implementation, reporting and oversight processes in public institutions. Figure 1 suggests that special public funds such as LATF are established and regulated through various complimentary statutes, whose goal is to enhance accountability and transparency as well as improved service delivery. Although such statutes may provide a watertight framework for financial management and reporting, enforcement remains a key challenge in many developing countries, including Kenya. Community involvement in the planning and budgeting process is critical for fiscal accountability and transparency in public institutions. According to Wagle and Shah (2001), community involvement in the entire project cycle, including planning, budgeting, programming, implementation, monitoring and evaluation, provides an omnipresent oversight authority, which in turn, is likely to improve accountability and transparency in the management of public funds. Annual budgets are typically the legal authority for spending public funds; hence, involvement of community members in the budgetary process is paramount in enhancing accountability and

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control at various levels of operations (Shende & Bennett, 2004). Laws, regulations, and codes of conduct are insufficient on their own, unless public institutions translate them into action. Consequently, adherence to fiscal regulations is often a challenge to many local authorities (Wagle & Shah, 2001; Shende & Bennett, 2004). Changing social mindsets is important for laws, regulations and codes of conduct to facilitate the achievement of desired results (Hondeghem, 1998). An effective public financial management system should have in place measures to encourage strict implementation of budgetary items, monitoring and intermittent reviews. More still, public institutions require accounting systems that are complete, accurate, and valid. Such systems should facilitate the preparation of truthful performance reports and provide statements of financial status. For this matter, a computerized accounting system may be more advantageous in enhancing accountability than a manual system (Shende & Bennett, 2004). As noted by Singh et al. (2006), in a manual accounting system, the multiplicity of registers and limited capacity of staff generally often results in accounts remaining in arrears for several years. Furthermore, Andrea, Lucas and Pasteur (2000) point out that sound accounting control systems can make the greatest contribution to the reliability of fiscal data, and are the starting point for ensuring the integrity of the recording and reporting processes. The existence of strong cash flow management systems also improves accountability and transparency in public institutions. Whereas, excessive liquidity is likely to create opportunity for leakages and non-prioritized spending, cash constraints may cause discontinuation of projects and stifle service delivery. More still, procurement of goods, services and works is a key area that is vulnerable to abuse and loss of public funds. Strict adherence to procurement regulations is perhaps the most important indicator of accountability and transparency in public institutions (World Bank, 2005). Figure 1: Public Finance Management and Accountability Framework

This Figure shows that analytical framework, which we have adapted and modified from Singh et al. (2006). The Figure indicates linkages between the legislative framework that establishing and regulating public funds in a decentralization context; planning and budgeting processes, which often result to action plans; implementation, reporting and external oversight processes in public institutions. The Figure further outlines indicators of accountability and transparency.

Planning & budgeting -Community participation

Implementation -Budget execution -Cash management -Procurement -Accounting system -Internal control & audit -Assets and liabilities management

Reporting -Publicization of expenditure reports

L e g a l F r a m e w o r k

External audit & oversight -Accessibility of external audit reports

Improved accountability and service delivery

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Public institutions should have clearly defined and effective policies, systems and procedures for internal control and audit, which in most cases. Shende & Bennett (2004) indicates that internal control includes administrative procedures governing decision-making processes as well as accounting procedures for governing the reliability of financial records. Public institutions should have functioning internal audit departments and standing committees, whose functions should include scrutinizing fiscal accounts at each level and ensuring compliance with budgetary priorities. According to the International Organization of Supreme Audit Institutions (INTOSAI), the objectives of internal control systems are to promote orderly, economical, efficient, and effective operations as well as safeguard resources against mismanagement, errors, or fraud. Internal control systems also encourage adherence to laws and regulations, maintenance of reliable financial and management data, as well as timely disclosure of financial reports (Shende & Bennett, 2004). Effective internal control systems must be appropriate, consistent and cost- effective (Singh et al., 2006). Public institutions should also have in place proper policies, procedures, and database of assets, which should inform decision-making in capital investments. The management of institutional assets and liabilities is an indication of the level of accountability. Furthermore, accountability and transparency anchor on fiscal reporting and dissemination to stakeholders, including taxpayers and voters (Singh et al., 2006). Accountable and transparent institutions should have regular and consistent fiscal reporting as part of institutional culture. Furthermore, such institutions should have in place clearly defined systems for timely and independent external audit, whose reports should be accessible to stakeholders and partners (Singh et al., 2006). Besides, involving community members in the project cycle is important for external oversight, which associates with high levels of accountability in public institutions (Andrea at al., 2000). DATA AND METHODOLOGY We applied the cross-sectional survey design to guide the research process, including planning, training and pretesting, data sourcing, data processing and analysis, as well as reporting. The study targeted community members, opinion leaders and civil servants in Siaya Municipality. For a period of 10 days, we contacted up to 200 potential participants. However, only 162 (81.0%) met the inclusion criteria; hence were issued with self-administered questionnaires. We collected primary data in the month of June 2010 and the process involved identification and prequalification of potential participants, consenting, questionnaire issuance and follow-up. Whereas some participants completed the questionnaire on the spot, we gave others two days to provide their perspectives on various indicators of accountability and transparency in management of public funds. We applied purposive and snow-ball sampling procedures to select potential participants. In this regard we selected key opinion leaders and civil servants who demonstrated awareness about Local Authority Transfer Fund (LATF) and who had either participated in Local Authorities Service Delivery Plan (LASDAP) planning and budgeting processes or had ever engaged in formal business with Siaya Municipal Council, in their capacity as government officers or personal capacity as suppliers of goods, services or works. As part of prequalification for participation, we engaged participants in informal interviews to gauge their knowledge about operations of the local authority.

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We used a self-administered questionnaire with structured and semi-structured questions to source the data. Furthermore, we employed quantitative and qualitative techniques to process and analyze the data. Quantitative analysis generated frequency distributions with percentages and cross-tabulations, we also transcribed, clustered into nodes and explored qualitative data for perspective patterns about the selected accountability and transparency indicators. Detailed description of the design and approaches that we used in this study are available in following publications (Nachmias & Nachmias, 1996; Bryman & Cramer 1997; American Statistical Association, 1999; Owens, 2002; Rindfleisch, Malter, Ganesan & Moorman, 2008). RESULTS AND DISCUSSIONS We sourced the requisite information from 162 community members, including opinion leaders and civil servants. We present these results under two sub-sections, including information on participants’ background profile in the first sub-section as well as community perspectives about the accountability and transparency indicators in the second sub-section. In this regard, Table 1 provides a summary of participants’ socio-economic profile, where it may be noted that participants included 120 (74.1%) men and 42 (25.9%) women, suggesting that men were probably more aware and more involved in LATF activities than women. Besides, the participants reported ages ranging from 25 to 65 years, with majority, 56 (34.6%) being in the 40- 49 years bracket and about one-third, 49 (30.2%) falling between 30 and 39 years. The results in Table 1 further show that most participants had attained at least secondary education. More specifically, 81 (50.0%) reported having college training, 56 (34.6%) had attained secondary education, while 22 (13.6%) were university graduates. Regarding occupation type, the results show that most participants, 72 (44.4%), were businessmen and women, while 21 (13.0%) were politicians, including serving and retired councillors. In addition, among the participants were 12 (7.4%) civil servants sampled from MoLG, Municipal Council, District Treasury, Ministry of Water and Irrigation, District Tender Committee and Ministry of Health. Participants also include 12 (7.4%) primary and secondary school deputy and head teachers, 10 (6.2%) farmers, 8 (4.9%) health facility staff, and 7 (4.3%) faith leaders, among others. Furthermore, participants reported average monthly incomes ranging from KES 18,000 to KES 166,000. More specifically, 46 (28.4%) participants stated average incomes of at least KES 100,000, 44 (27.25) were in the KES 40,000 to 69,000 income group, while 34 (21.0%) stated average incomes ranging between KES 20,000 and 39,000. These results suggest that the study included participants with good educational, income background, as well as general awareness about functions of the Council vis-à-vis the management of LATF resources. Table 1: Socio-economic Profile of Participants

Participants attributes Frequency Percent Gender Male 120 74.1 Female 42 25.9 Total 162 100.0 Age 20-29 years 37 22.8 30-39 years 49 30.2 40-49 years 56 34.6 50 years+ 20 12.3 Total 162 100.0 Education level Primary 3 1.9 Secondary 56 34.6 College 81 50.0

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University 22 13.6 Total 162 100.0 Occupation Civil servants 12 7.4 Business 72 44.4 Faith leaders 7 4.3 Politicians 21 13.0 Teachers 12 7.4 Farmers 10 6.2 Lecturers 3 1.9 Healthworkers 8 4.9 Retired civil servants 6 3.7 Community health workers 7 4.3 NGO worker 4 2.5 Total 162 100.0 Average monthly income <KES 20,000 5 3.1 KES 20,000-39,000 34 21.0 KES 40,000-69,000 44 27.2 KES 70,000-99,000 33 20.4 KES 100,000+ 46 28.4 Total 162 100.0

Presented in this Table is the distribution of participants with regards to socio-economic attribute, such as gender, age, educational attainment, occupation and average income level. Participants included insiders such as Ministry of Local Government staff, Council staff as well as serving and retired councilors. The purpose is to show the caliber of the people whose perspectives about the financial management and accountability systems existing at the time of the study, we have documented in this paper. The next sub-section presents results related to community perspectives on the accountability and transparency systems for managing LATF resources at the Council. Involvement of community members in the planning and budgeting processes is important for ensuring that LATF projects match with pressing community needs; thus, set good footing for community ownership of such projects. In view of this, we requested participants to indicate their perspectives on community involvement in planning and budgeting processes. Figure 2 indicates that 76 (46.9%) participants rated community involvement as ‘good’, while 65 (4.1%) described the same as ‘fair’. Cumulatively, about one-half (48.8%) of the participants expressed affirmative perspectives about community involvement in the stated processes. Participants indicated that involvement of community members in LATF planning and budgeting processes was necessitated by guidelines provided by the MoLG, which require communities to be involved in the formulation of Local Authority Service Delivery Plans (LASDAP). Arguably, involving community members in the planning and budgeting processes is crucial for the understanding of LATF project priorities right from the start, which in turn, will provide a basis for holding public officers accountable at the end of implementation periods. Nonetheless, the Council should improve community involvement in terms of wider scope of representation of community-based groups and organizations, irrespective of their political inclination, as well as increase women’s representation in the process. Figure 2: Community Involvement, Budget Execution and Cash Flow Management

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This Figure presents participants perspectives on various indicators of accountability in public institutions, including community involvement in planning and budgeting processes, budget execution discipline and cash flow management. Cumulatively, about one- half (48.8%) of the participants expressed affirmative perspectives about community involvement in the stated processes; however, up to 35.2% expressed dissatisfaction with budget execution discipline, while 42.0% of the participants expressed negative perspectives about cash flow management. The LASDAP preparation process specifies priority projects, which local authorities should target with LATF resources. The main purpose of LASDAP implementation is to match expenditures with community priority needs. Thus, budget implementation process should focus on LASDAP priorities, to avoid potential deviations to activities outside the budgetary scope. Based on this, we requested participants to indicate their perspectives on budget execution discipline. In this regard, Figure 2 shows that 22 (13.6%) participants rated budget execution discipline as ‘good’, while 32 (19.8%) and 25 (15.4%) rated the indicator as ‘poor’, and ‘very poor’, respectively. Cumulatively, 35.2% expressed dissatisfaction with the indicator; thus, suggesting need for the Council to improve budget adherence to effectively deliver services that are responsive to community priority needs. Cash flow management is important for balancing incoming and outgoing cash. Whereas over liquidity bears the risk of cash leakage for unintended purposes and loss or earnings for the Council, under-liquidity may stifle service delivery or lead to discontinuation of LATF projects. The results in Figure 2 show that 29 (17.9%) participants were of the view that cash flow management at the Council was ‘good’; however, 56 (34.6%) rated the indicator as ‘poor’ and 12 (7.4%) said cash flow management was ‘very poor’. Cumulatively, 42.0% of the participants expressed negative perspectives about cash flow management, which indicates the need for appropriate action to minimize the risks associated with over and under-liquidity. The procurement is probably the heart of accountability and transparency in the management of LATF resources. Without optimal adherence to the existing regulations, procurement is highly at risk of abuse by public officers and elected leaders. It provides the avenue through which public institutions, including local authorities, can lose LATF resources that should improve service delivery. The results in Figure 3 indicate that 26 (16.0%) participants rated transparency of the procurement system as ‘good’; however, 35 (21.6%) and 59 (36.4%) were of the view that the process was ‘poor’ or ‘very poor’, respectively. Overall, 58.0% of the participants reported dissatisfaction with transparency in the procurement process.

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Figure 3: Perspectives on Procurement Process, Accounting System and Internal Control System

This Figure presents participants’ perspectives on three indicators of accountability and transparency in public institutions, including transparency of the procurement process, efficiency of the accounting system, as well as internal control and audit system. Overall, 58.0% of the participants reported dissatisfaction with transparency in the procurement process; about one-third (30.9%) expressed dissatisfaction with the accounting system, while the majority, 67 (41.4%) believed that the accounting system was ‘fairly’ efficient. The efficiency of accounting systems is a key pillar for enhancing accountability in the management of public resources. An efficient accounting system ensures ready availability of complete, valid, and accurate financial information to facilitate decision-making as well as inform stakeholders. In this regard, a computerized accounting system may be more advantageous in enhancing accountability than a manual system. The results presented in Figure 3 show that 37 (22.8%) participants rated the efficiency of the accounting system as ‘good’, while 36 (22.2%) stated that the system was ‘poor’ and 14 (8.6%) hinted that the system was ‘very poor’. Cumulatively, about one-third (30.9%) expressed dissatisfaction with the accounting system. Nonetheless, the study found revealed that the Council was in the process of computerizing its accounting system, albeit with numerous obstacles, including under-funding, high turn-over of technical staff, leading to discontinuation. Clear policies, systems, and procedures for internal control and audit are essential for enhancing accountability and transparency in the management of public resources. Effective internal control mechanisms should reveal issues such as over-expenditure or unnecessary expenditure, among others, to enable public officers to seek appropriate corrective measures in time. Besides, such a system should have appropriate safeguards against political influence, which may manipulate the system to cover-up expenditure irregularities. The results presented in Figure 3 show that 32 (19.8%) participants rated the effectiveness of internal control and audit systems as ‘good’, 38 (23.5%) felt the system was ‘poor’, while 11 (6.8%) said it was ‘very poor’. Overall, 30.2% of the participants suggested that the system was not effective. Issues surrounding the internal control and audit system included political influence and lack of independence, which often led to manipulation of financial reports to serve the interests of chief accounting officers and their accomplices. The management of institutional assets and liabilities is an indication of the level of accountability in public institutions. Besides, proper management of institutional assets is an important indication of good stewardship on the part of chief accounting officers. In this study,

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we requested participants to indicate their perspectives about management of the Council’s assets, including buildings, automobiles, furniture, and equipment, among others. The results in Figure 4 show that only 10 (6.2%) participants rated the management of Council’s assets as ‘good’, 47 (29.0%) and 46 (28.4%) indicated ‘poor’ and ‘very poor’ respectively. Overall, up to 57.4% of the participants, expressed outright dissatisfaction with the way public officers were managing Council assets; thus, suggesting the need for appropriate measures to enhance accountability. Figure 4: Perspectives on Management of Council’s Assets, Liabilities and Financial Reports

This Figure presents community perspectives on additional indicators of accountability, including management of Council assets and liabilities, publicization of periodical expenditure reports and accessibility of external auditor’s reports. The results show that overall, up to 57.4% of the participants expressed outright dissatisfaction with the way public officers were managing Council assets; about 34.0% were satisfied with liability management at the Council, while up to 44.0% were unhappy with the publicization of expenditure reports. Furthermore, liability portfolio is a key indicator of accountability in public institutions. Accountable management systems often have in place guidelines to ensure that the level of liability does not cripple institutional operations as well as service delivery. In this study, Figure 4 shows that 52 (32.1%) participants expressed satisfaction with liability management at the Council by rating it as ‘good’; contrastingly, 24 (14.8%) rated the indicator as ‘poor’, while 9 (5.6%) said it was ‘very poor’. Cumulatively, up to 34.0% of the participants hinted satisfaction with liability management at the Council. Nonetheless, the results suggest that the Council was making effort to control its liabilities, by servicing its debts. However, participants pointed out that improvement in liability management was due to the requirement that all local authorities in the country should addressed their outstanding debts by the year 2010, as a pre-condition for continued access to LATF resources. Furthermore, the MoLG requires local authorities to publish information about funds that they receive from the central government each year in national newspapers, while at the community level, the authorities should publicize expenditure, and external audit reports by holding annual budget days in the month of June. The authorities should also post such information on public notice boards and websites to enhance transparency. In view of these requirements, we requested participants to indicate their perspectives on the publicization of expenditure reports at the Council. The results presented in Figure 4 indicate that 22 (13.6%) were of the view that publicization of such reports was ‘good’. Contrastingly, 50 (31.0%) and 21 (13.6%) hinted that the indicator was ‘poor’ and ‘very poor’, respectively. Cumulatively, up to 44.0% of the participants were unhappy with the publicization of expenditure reports.

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Regarding the accessibility of external audit reports, the results in Figure 4 show that 68 (42.0%) participants expressed satisfaction by rating the indicator as ‘good’. However, up to 17 (10.5%) participants rated the same as ‘poor’, while 10 (6.2%) were of the view that accessibility of such reports was ‘very poor’. Overall, only 16.7% of the participants expressed their reservations about accessibility of such reports. Nonetheless, the results suggest that accessibility of external auditor’s reports was a significant achievement by the Council in efforts to enhance transparency in managing LATF resources. However, some participants noted that this is area where the MoLG put emphasis to make local authorities more accountable to communities which they serve. CONCLUSIONS The purpose of this study was to assess and document information on community perspectives on accountability and transparency in the management of LATF resources. The study found that participants were satisfied with indicators such as community involvement in the planning and budgeting process (48.8%), enhancing accessibility of external auditor’s reports (42.0%) and liability management (34.0%). However, higher levels of dissatisfaction emerged with regards to indicators such as transparency in the procurement process (58.0%), management of Council assets (57.4%), publicization of expenditure reports (44.0%), cash flow management (42.0%), budget execution discipline (35.2%), accounting system (30.9%) as well as internal control and audit system (30.2%). Community perspectives provide indications about key areas on which the Government and the local authority should focus to strengthen accountability and transparency in the management of LATF resources. Although the pursuit of decentralized development in Kenya started soon after independence in 1963 (Chitere & Ireri, 2008), these results suggest that the country has not fully reaped the benefits of the paradigm. LATF is one of the special funds that the Government has devolved to the peripheral local authorities, whose purpose is to enhance financial management and accountability, among other objectives (Kibua & Mwabu, 2008; Mboga, 2009). However, its success largely depends on the Government’s enforcement of existing regulations, identifying gaps and formulating additional controls, as well as taking public officers and political leaders through a change process. As noted by Hondeghem (1998), behavior change in public service is not just about enforcement of laws, regulations, and codes of conduct. It requires a change in the mindset, a process that one may not realize overnight. This will provide necessary safeguards against issues such as political interference and corruption in the management of LATF projects. Furthermore, the results suggest that participants were satisfied with indicators in which the Government had earmarked as pre-conditions for continued funding. This implies that enforcement of existing regulations is an approach that the Government should seriously to help nurture the culture of fiscal accountability and transparency, which are the cornerstones of successful decentralized funds. ACKNOWLEDGEMENT We are grateful to the University of Nairobi for granting the opportunity for to the first author to pursue Master of Arts degree in Project Planning and Management. Secondly, we thank all the participants who sacrificed their time to provide the requisite information. Thirdly, we are indebted to Mr. Tom Odhiambo, an independent research consultant for reviewing the manuscript.

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REFERENCES Alila, P.O. and Omosa, M. (1996). “Rural Development Policies in Kenya”. In: Ng’ethe, N., & Owino, W., eds., 1996. From Sessional Paper No. 10 to Structural Adjustment: Towards Indigenizing the Policy Debate. Nairobi: Institute of Policy Analysis and Research American Statistical Association (1999). Survey Research Methods Section Information. Andrea, C., Lucas, H., and Pasteur, K. (2000). “Accountability through Participation: Developing Workable Partnership Models in the Health Sector.” IDS Bulletin Vol. 31, No. 1, pp. 1-13. Bonoff, N., and Zimmerman, B. (2003). “Budget Management and Accountability: Evidence from Kenyan Local Authorities”. Public Administration and Development. Vol. 9, No. 2, pp. 132-141. Bryman, A., and Cramer, D. (1997). Quantitative Data Analysis with SPSS for Windows: a guide for Social Scientists. London: Routledge Cheema, G.S. (2007). “Devolution with Accountability: Learning from Good Practices.” In: Cheema, G.S. and Rondinelli, D.A., eds. 2007. Decentralizing Governance: Emerging Concepts and Practices. Washington: Brookings Institution Press. Chitere, P., and Ireri, O. (2008). “District Focus for Rural Development as a Decentralized Planning Strategy: An Assessment of its implementation in Kenya”. In: Kibua, T.N. and Mwabu, G. eds., 2008. Decentralization and Devolution in Kenya: New Approaches. Nairobi: University of Nairobi Press. Conyers, D. (2007). Decentralization and Service Delivery: Lessons from Sub-Saharan Africa. IDS Bulletin. Vol. 38, No. 1, pp: 18-32. Accessed on October, 24, 2013 from http://onlinelibrary.wiley.com/doi/10.1111/j.1759-5436.2007.tb00334.x/pdf Government of Kenya (1999). Local Authority Transfer Fund (LATF) Act No. 8 of 1998. Nairobi: Government Printers. Government of Kenya (2003). The Economic Recovery Strategy for Wealth and Employment Creation 2003-2007. Nairobi: Ministry of Planning and National Development. Government of Kenya (2008). First Medium Term Plan (2008-2012). Nairobi: Ministry of Finance. Government of Kenya (2010). Kenya Vision 2030: Abridged version. Nairobi: Ministry of Planning and National Development. Hondeghem, A. (1998). Ethics and accountability in a context of governance and new public management. Amsterdam: IOS Press. Institute of Economic Affairs (2005). “What Next for Kenya’s Local Authorities?” Bulletin of the Institute of Economic Affairs. Issue No. 59: July 2005.

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International Monetary Fund [IMF] (2001). Manual on Fiscal Transparency, New York: Fiscal Affairs Department. Accessed on 28/10/13 from http://www.imf.org/external/np/fad/trans/manual/index.htm Jalal, J. (1999). Democratic Decentralization in Urban Governance: A Comparative Study of Two Indian Cities, mimeo, IDS. Kageri, L.K. (2010). Effects of Local Authority Transfer Fund on Effective Service Delivery in Local Authorities in Kenya: A Case of County Council of Nyeri. MA Thesis Submitted to the Department of Extra-Mural Studies, University of Nairobi. Kibua, T.N., and Mwabu, G. (2008). “Introduction”. In: Kibua, T.N. & Mwabu, G. eds., 2008. Decentralization and Devolution in Kenya: New Approaches. Nairobi: University of Nairobi Press. Mboga, H. (2009). Understanding the Local Government System in Kenya: A Citizens’ Handbook. Nairobi: Institute of Economic Affairs. Menon, B., Mutero, J., and Macharia, S. (2008). “Decentralization and Local Governments in Kenya”. Paper Prepared for the Andrew Young School of Policy Studies, Georgia State University Conference on Decentralization ‘Obstacles to Decentralization: Lessons from Selected Countries’. Held on September 21-23, 2008 at Georgia State University. Mwawashe, K.M. (2010). “Youth as Drivers of Accountability: Conducting a Youth Social Audit.” Participatory Learning and Action. Issue No. 16, pp. 181-186. Nachmias, C.F., and Nachmias, D. (1996). Research Methods in the Social Sciences, 5thEdition. London: Arnold. Nyangena, W., Misati, G.N., and Naburi, D.N. (2010). How Are Our Monies Spent? The Public Expenditure Review in Eight Constituencies (2005/2006-2008/2009). Nairobi: ActionAid International Kenya. Owens, K.L. (2002). Introduction to Survey Research Design. SRL Fall 2002 Seminar Series http://www.srl.uic.edu Phillip, K. (2009). An Overview of decentralization in Eastern and Southern Africa. Munich Personal RePEc Archive Paper No. 15701. Accessed on October, 24, 2013 from http://mpra.ub.unimuenchen.de/15701/ Premchand, A. (2001). Fiscal Transparency and Accountability: Idea and Reality. Paper prepared for the UN-DESA Workshop on Financial Management and Accountability, Rome, Nov. 28-30, 2001. Rindfleisch, A., Malter, A.J., Ganesan, S. and Moorman, C. (2008). “Cross-Sectional Versus Longitudinal Survey Research”. Journal of Marketing Research, Vol. 45, No. 3, pp. 1-23. Rondinelli, D. (1999). What is Decentralization? In: Litvack, J., & Seddon, J., 1999. Decentralization Briefing Notes. World Bank Institute Working Papers, pp. 2-5. Accessed on

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October 24, 2013 from http://www.worldbank.org/servlet/WDSContentServer/WDSP/IB/1999/11/04/000094946991015 05320840/Rendered/PDF/multi_page.pdf Shende, S. and Bennett, T. (2004). Transparency and Accountability in Public Financial Administration. New York: UN-DESA. Singh, A., Rahim, A., and Ray, A. (2006). Public Financial Management and Accountability in Urban Local Bodies in India: A Synthesis Report. New York: the World Bank. Smoke, P. (2000). “Fiscal Decentralization in Developing Countries: A Review of Current Concepts and Practice” in Bangura, Y., ed. Public Sector Reform, Governance and Institutional Change. Geneva: United Nations Research Institute for Social Development. United Nations Development Programme [UNDP] (1996). Report on Human Development in Bangladesh: A Pro-Poor Agenda. New York: UNDP. Wachira, K., (2010). Fiscal Decentralization: Fostering or Retarding National Development in Kenya? In: Mwenda, A.K. ed. 2010. Devolution in Kenya: Prospects, Challenges, and Future. Nairobi: Institute of Economic Affairs, IEA Research Paper Series No.24, pp. 75-108 Wagle, S. and Shah, P. (2001). An Issue Paper on Participation in Public Expenditure Systems. New York: Social Development Department, World Bank. World Bank (2005). Empowering People by Transforming Institutions: Social Development in World Bank Operations. Washington, DC: World Bank. BIOGRAPHY Jackson Ongong’a Otieno is a senior economist at the Ministry of Devolution and Planning, Kenya. He holds a Master’s degree in Project Planning and Management from the University of Nairobi, Master of Economic Policy Management from Makerere University and currently pursuing his PhD in Economics at the University of Cape Town, South Africa. His areas of research interests include intergovernmental fiscal relations; nature-based tourism; valuation of non-market environmental amenities; climate change and adaptation; rural development and income distribution and poverty. He is reachable through telephone number: +254 724 532 522 or email address: [email protected] Dr. Charles M. Rambo is a Senior Lecturer and coordinator of Postgraduate programs at the Department of Extra Mural Studies, University of Nairobi, Kenya. His academic interests include financial management, small and medium enterprises, small-scale farming and education financing. His previous work appears in journals such as Journal of Continuing, Open and Distance Education, International Journal of Disaster Management and Risk Reduction and the Fountain: Journal of Education Research, African Journal of Business and Management, African Journal of Business and Economics, as well as International Journal of Business and Finance Research. He is reachable at the University of Nairobi through telephone number, +254 020 318 262; Mobile numbers +254 0721 276 663 or + 254 0733 711 255; email addresses: [email protected] or [email protected]

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Dr. Paul A. Odundo is a Senior Lecturer at the Department of Educational Communication Technology, University of Nairobi, Kenya. He has over 15 years experience in capacity building, teaching and supervising students’ projects at the University level. He became a Research Associate at Institute of Policy Analysis and Research (IPAR) in 2001. His academic and research interests include institutional capacity building, decentralized development, instructional planning and management, educational administration. His previous work appears in IPAR Discussion Paper Series, the Fountain: Journal of Education Research and African Journal of Business and Management. He is reachable at the University of Nairobi through telephone number, +254 020 318 262; Mobile numbers +254 0722 761 414; email address: [email protected]

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INFLUENCE OF LOCAL AUTHORITY TRANSFER FUND ON SERVICE DELIVERY BY LOCAL

GOVERNMENT AUTHORITIES IN KENYA: A CASE OF SIAYA MUNICIPAL COUNCIL

Jackson Ongong’a Otieno, Ministry of Local Government, Kenya Paul A. Odundo, University of Nairobi, Kenya Charles M. Rambo, University of Nairobi, Kenya

ABSTRACT The Local Authorities Transfer Fund (LATF) is an intergovernmental transfer system, supplementing the financing of service delivery within the framework of fiscal decentralization. LATF’s objectives are to improve service delivery, enhance financial management and accountability as well as reduce debts accumulated by local authorities. The purpose of this study was to establish the influence of LATF on service delivery by local authorities, focusing on Siaya Municipal Council. We gauged residents’ perspectives about improvement of water supply, garbage collection, and sewerage services. We sourced primary data from 188 household heads and 202 market traders. The study found that 63.2% of the participants believed that there was no change in water supply consistency, while 69.5% reported the same about adequacy of water provided by the Council. Besides, 55.6% of the participants indicated that garbage collection had deteriorated, while 63.8% said the same about sewerage services. The findings suggest that access to LATF resources over the preceding decade had not improved service delivery in Siaya Municipality. Delivery of services was constrained by political interference (57.4%), procurement malpractices (44.1%), weak revenue base (38.7%), and understaffing (33.1%), among other factors. In view of this, local authorities should shape up to meet the current service demand, as well as gear up to address the needs of urban population, which is set to grow over the coming years. JEL: 016 KEYWORDS: Local Authority, Service delivery, Municipality, Decentralization, Fiscal decentralization INTRODUCTION Decentralization is the process of dispersing functions, powers, or resources away from central governance systems to subsidiary or quasi-independent government structures at the regional, municipal, or local levels (Rondinelli, 1999; Cheema, 2007; Conyers, 2007). Its purpose is to enhance efficiency and increase community participation in decision-making, improve equity in resource sharing, improve the quality of service delivery, as well as enhance accountability in fund administration (Devas & Grant, 2003; Conyers, 2007). The transfer of such authority and responsibility may assume various dimensions, including fiscal, administrative, political, as well as economic powers and functions (Rondinelli, 1999; Phillip, 2009; Muriu, 2013). As noted by Conyers (2007), scholars have applied the concept of decentralization in various fields, including public administration, economics, management science, law, and public finance, among others. Whatever the field of application, the common denominator is that it responds to limitations and

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challenges associated with centralized governance and management systems (Conyers, 2007). The dispersion of authority and responsibility in the management of public funds is a key component of decentralization, whose aim is to improve efficiency, accountability, and better service delivery. Fiscal decentralization involves passing of budgetary, revenue and expenditure authority from centralized systems to quasi-autonomous government institutions (Menon, Mutero & Macharia, 2008). The key attributes of fiscal decentralization includes assigning clear expenditure and revenue responsibilities; initiating intergovernmental fiscal transfer mechanisms from central to local governments; and authorizing borrowing and revenue mobilization through loan guarantees from central governments (Phillip, 2009; Muriu, 2013). Since independence, the Government of Kenya [GoK] has been pursuing decentralized development policies, with a view to improving the quality of life for its citizenry. In this regard, the Sessional Paper No. 10 of 1965 on African Socialism and its Application to Planning in Kenya was the first policy document outlining the decentralization agenda, targeting districts and local government authorities across the country (Kibua & Mwabu, 2008). In 1983, the Government introduced the District Focus for Rural Development (DFRD) strategy to further the interests of decentralized development agenda (Alila & Omosa, 1996; Chitere & Ireri, 2008), with districts becoming the key planning units. However, Chitere and Ireri (2008) point out that DFRD’s performance was constrained by factors such as non-involvement of community members in project prioritization, implementation, monitoring, and evaluation. According to Bonoff and Zimmerman (2010), fiscal decentralization anchors on the premise that local communities can prioritize projects in line with their needs and that, local resources are easy to tap where community members are involved in development processes. The Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007 is perhaps, the government’s policy document providing the best framework for fiscal decentralization, within which subsidiary public institutions such as local authorities receive public funds (Kibua & Mwabu, 2008; GoK, 2003). Fiscal decentralization framework is further set out in the First Medium Term Plan (MTP) 2008-2012 (GoK, 2008), as well as Kenya’s Vision 2030 (GoK, 2010). These policy efforts culminated to the establishment of various devolved funds, including the Local Authorities Transfer Fund (LATF), which is founded on the Local Authorities Transfer Fund Act, No. 8 of 1998 (GoK, 1999). The objectives of LATF are to improve service delivery, enhance financial management and accountability, as well as reduce debts accumulated by local authorities. LATF draws from the national revenues and it replenishes from 5% of the national annual income tax (Kibua & Mwabu, 2008; Institute of Economic Affairs [IEA], 2009). The allocation criteria ensure consistency, fairness, and transparency. The criteria include the following terms: a basic minimum lump sum of KES 1.5 million (6.6%) is shared equally among the country’s 175 local authorities, while 60% of the fund is disbursed according to relative population sizes of local authorities. Accessing the remaining 35.4% depends on local authorities meeting set financial management and accountability threshold (Kibua & Mwabu, 2008; IEA, 2009). The money disbursed through LATF supplements local authorities’ revenues; it forms about one-quarter of local authority revenues (IEA, 2009). In this regard, article four of the Act indicates that LATF was established ‘to supplement the financing of services and facilities they are required to provide under the Local Government Act’ (GoK, 1999). In order to access LATF resources, local authorities are required to have action plans, known as Local Authority Service Delivery Plans (LASDAP), which are prepared through participatory processes, involving various stakeholder groups and community members. The participatory

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approach amplifies local communities’ voice in project identification, planning, monitoring, evaluation, and accountability processes. It also cultivates a sense of ownership of LATF projects (Kibua & Mwabu, 2008; Menon et al., 2008; Bonoff & Zimmerman, 2010). LASDAP specify prioritized projects and activities that should receive funding. Besides, they are founded on key pillars of poverty reduction, in line with the Poverty Reduction Strategy Paper (PRSP) and the Economic Recovery Strategy (ERS) whose priority focus include health, education, infrastructure, and informal settlement upgrading (IEA, 2009). Local authorities adopt complete plans as a resolution, before submission to the Ministry of Local Government (MoLG). It is however, the responsibility of stakeholders to hold councilors and chief officers in local authorities accountable for LASDAP’s implementation; hence, the primacy of their monitoring role (Kibua & Mwabu, 2008; IEA, 2009). The Ministry encourages transparency by disbursing 60% of LATF upon submission of necessary budgetary and technical proposals. The Ministry further emphasizes performance by distributing the remaining 40% of the funds based on LASDAP’s performance targets (Bonoff & Zimmerman, 2010). In the event of delayed filing of returns, local authorities are subject to penalties. For instance, delays of up to 30 days attracts 15% loss of allocated funds; 31 to 60 days leads to the loss of up to 40% of allocations, while delays of more than 60 days may lead to complete loss of LATF (GoK, 1999; Bonoff & Zimmerman, 2010). Furthermore, legal provisions for transparency to citizens enhance accountability. In this regard, local authorities are required to publish reports about funds received from the central government each year in national newspapers. The authorities are further required to hold annual budget days in the month of June, which provide forums for engagement with citizens about revenue and expenditure reports, as well as planned budgets for subsequent financial years (GoK, 1999; Bonoff & Zimmerman, 2010). A review of annual LATF reports reveal that disbursements have are increasing steadily from KES 1 billion in Financial Year (FY) 1999/2000, to KES 10.8 billion in FY 2010/2011, as indicated in Figure 1. Figure 1: National LATF Allocation Trend (1999/00-2010/11)

Presented in Figure 1 are data, which we obtained from the annual LATF reports for the period 1999 to 2011. The data shows that disbursements have are increasing steadily from KES 1 billion in Financial Year (FY) 1999/2000, to KES 10.8 billion in FY 2010/201. The data reveals significant increments between the FY 2005/06 and FY 2006/07.

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In Siaya Municipality, the data show that the amount allocated has increased from KES 11.7 million in the FY 1999/00 to KES 57.4 million in the FY 2010/11, with significant increment noted between the years 2004/05 and 2005/06. By the end of 2010, local authorities had received a total of KES 69 billion from the Government since the LATF’s inception in 1999. However, Oywa and Opiyo (2011) point out that most of them have nothing tangible to show for the amounts that local authorities have so far received. Instead, persistent complaints about poor service delivery have emerged repeatedly in the media and in public forums (Bonoff & Zimmerman, 2010; Oywa & Opiyo, 2011). Available literature suggest that local authorities are not only failing to provide a satisfactory level of services but are also poorly managed and have departments that are among the most corrupt within the Kenya public sector (IEA, 2005; Nyangena, Misati & Naburi, 2010). Unprecedented proliferation of residents’ associations also an indicator of growing dissatisfaction about the quality of services provided by local authorities. The purpose of such associations is to mobilize residents to demand quality services from local authorities as well as pursue legal actions against authorities that fail to improve services (IEA, 2005). Figure 2: Siaya Municipal Council LATF allocation trend (1999/00-2010/11)

Figure 2 shows the data obtained from the annual LATF reports about amounts allocated to Siaya Municipal Council. The data show that the amount allocated has increased from KES 11.7 million in the FY 1999/00 to KES 57.4 million in the FY 2010/11, with significant increment noted between the years 2004/05 and 2005/06. The decentralization of LATF resources to local authorities should improve services such as supply of clean water for domestic and industrial use, sanitation, waste management, as well as healthcare and education services, among others (IEA, 2005). A review of pertinent literature reveals that various studies, including Smoke (2000), IEA (2005), Kageri (2010) and Nyangena et al. (2010) have documented issues associated with services delivery in various local authorities in Kenya. For instance, Kageri (2010) found that water supply in Nyeri Municipality was inconsistent, while the amount supplied fell below the water demand by about 30%. In their study, Nyangena et al. (2010) found that four out of eight local authorities accessing LATF experienced difficulties providing necessary services to residents due to financial deficits. Such findings suggest that after a decade of LATF’s operation, a significant proportion of local authorities are yet meet the demand for quality services by their residents. Nonetheless, the literature reveals a paucity of information on the linkage between access to LATF resources and service delivery in Siaya Municipality. Against this constraint, we conducted this study to

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establish residents’ perspectives about the quality of essential services, including water, sanitation, and waste management over the preceding two-year period (2007-2009). Analytical Framework The quality of services delivered by local authorities within the decentralization framework depends on the available resources and institutional factors. Figure 3 shows our perception about the linkage between LATF resources and service delivery outcomes within a decentralized framework of service delivery. The central government influences the quality of services through resources disbursed in the form of LATF or other forms of devolved funds such as Constituency Development Fund (CDF), Constituency Bursary Fund (CBF), as well as direct disbursement to Government ministries at the district level. Central governments also provide guidelines for planning, budgeting, expenditure, as well as transparency and accountability measures. The central government further enforces the policy and legal guidelines to ensure compliance by all local authorities. As recipients, local authorities develop plans (LASDAP) in line with guidelines provided by central governments, which they submit for funding considerations. The planning process should be participatory, involving various stakeholder groups and community members. The participatory approach should amplify local communities’ voice in project identification, planning, monitoring, evaluation, and accountability processes, as well as cultivate a sense of ownership of LATF projects (Kibua & Mwabu, 2008; Menon et al., 2008; Bonoff & Zimmerman, 2010). Local authorities also compile and file expenditure returns with the central government. Figure 3: Perceived Linkage Between LATF and Service Delivery Outcomes

This figure shows the perceived linkage between LATF and service delivery outcomes, as adapted and modified from Muriu (2013). The figure LATF resources complement local authority revenues and expenditure should prioritize in line with expenditure guidelines within decentralized service delivery framework. Community involvement in planning and oversight of local authorities also influence service delivery outcomes.

Community participation

LATF allocations

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Decentralized service delivery framework -Allocation efficiency -Transparency & accountability measures - Equity - Quality

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-Political interference -Procurement malpractices -Staffing levels -Indebtedness

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Notably, community participation is important in the planning process, oversight of local authorities, which is likely to influence issues such as political interference, procurement malpractices, and staffing issues, such as inadequacy, motivation, and high turnover of technical staff. Community participation is also crucial in ensuring compliance with transparency and accountability guidelines, allocation efficiency, as well as equity. DATA AND METHODOLOGY We applied the cross-sectional survey design to guide the research process, including planning, training and pretesting, data sourcing, data processing and analysis, as well as reporting. The study targeted residents of Siaya Municipality, including household heads and market traders. The study focused on household heads, who had been residents of the municipality for at least three years from the time of the survey. Those excluded from the study were employees of Siaya Municipal Council and politicians. Market traders included those who had conducted their business activities within Siaya Municipal Market for at least three years from the time of the survey, must be owners of business premises within the market. Those excluded were traders who were employees of the Council and those who had ever vied for political positions. At the end of data collection, 390 people were successfully interviewed and this included 188 (48.2%) household heads and 202 (51.8%) market traders. We collected primary data in the month of June 2011 and the process involved identification of eligible participants, consenting and interviewing. We applied cluster random and purposive sampling procedures to select household heads and market traders. We also applied a survey questionnaire with structured and semi-structured questions to source the data. Furthermore, we employed quantitative and qualitative techniques to process and analyze the data. In this regard, quantitative analysis that we obtained frequency distributions with percentages and cross- tabulation, we also transcribed, clustered into nodes and explored qualitative data for patterns and meaning to the role of LATF in service delivery in Siaya Municipality. Detailed description of the design, approaches, and methods that we used in this study are available in various methodological publications such as Nachmias and Nachmias (1996), Bryman and Cramer (1997), American Statistical Association (1999), Owens (2002), Rindfleisch, Malter, Ganesan and Moorman (2008), among others. RESULTS AND DISCUSSIONS The study covered two groups of participants, including household heads residents of Siaya Municipality and market traders at the Siaya Municipal Market. Table 1: Socio-Economic Profile of Participants

Participants’ socio-economic attributes Household heads Market traders Total Frequency Percent Frequency Percent Frequency Percent

Duration of stay/trade at the market 3-5 years 26 13.8 23 11.4 49 12.6 6-10 years 51 27.1 51 25.2 102 26.2 >10 years 111 59.0 128 63.4 239 61.3 Total 188 100 202 100 390 100.0 Gender Male 91 48.4 91 45.0 182 46.7 Female 97 51.6 111 55.0 208 53.3 Total 188 100 202 100 390 100.0 Age

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<20 years 9 4.8 15 7.4 24 6.2 20-29 years 84 44.7 79 39.1 163 41.8 30-39 years 70 37.2 75 37.1 145 37.2 40-49 years 19 10.1 19 9.4 38 9.7 50 years+ 6 3.2 14 6.9 20 5.1 Total 188 100 202 100 390 100.0 Education level None 3 1.6 2 1.0 5 1.3 Primary 65 34.6 55 27.2 120 30.8 Secondary 96 51.1 115 56.9 211 54.1 College 18 9.6 24 11.9 42 10.8 University 6 3.2 6 3.0 12 3.1 Total 188 100 202 100 390 100.0 Average income <KES 20,000 11 5.9 28 13.9 39 10.0 KES 20,000-29,000 34 18.1 33 16.3 67 17.2 KES 30,000-39,000 24 12.8 41 20.3 65 16.7 KES 40,000-49,000 29 15.4 26 12.9 55 14.1 KES 50,000-59,000 17 9.0 24 11.9 41 10.5 KES 60,000-69,000 24 12.8 19 9.4 43 11.0 KES 70,000-79,000 21 11.2 16 7.9 37 9.5 KES 80,000+ 28 14.9 15 7.4 43 11.0 Total 188 100 202 100 390 100.0

This table shows the distribution of participants based on various attributes, such as duration of stay at the current place of residence, duration of trade at the Municipal Market, gender, age, educational attainment and average income level. The last column provides statistics for the whole lot of participants. The common factor about participants in the two groups is consumption of essential services provided by the Municipal Council, including water, sanitation, and garbage collection. Whereas household heads provided their perspectives about domestic services, we requested traders to provide their views about services provided at the Municipal Market. We sourced primary data from 390 participants, including 188 (48.2%) household heads and 202 (51.8%) market traders. The results presented in Table 1 show that most household heads, 111 (59.0%) had stayed in their residence for at least 10 years, while at the market, 128 (63.4%) traders had operated at the Municipal Market for the same duration. This shows that most participants were likely to be familiar with services provided by Siaya Municipal Council, making them better placed to provide accurate judgment about the quality of services provided by the Council. The household heads included 97 (51.6%) women and 91 (48.4%) men, while the traders included 111 (55.0%) women and 91 (45.0%) men. Most household heads, 84 (44.7%) were aged between 20 and 29 years, and so were 79 (39.1%) traders. Those indicating the 30 to 39 years age bracket included 70 (37.2%) household heads and 75 (37.1%) traders. Regarding educational attainment, 96 (51.1%) household heads and 115 (56.9%) traders had reported having secondary education; 65 (34.6%) household heads and 55 (27.2%) traders indicated primary education, while 18 (9.6%) household heads against 24 (11.9%) traders stated college education. In terms of average monthly income, 34 (18.1%) household heads and 33 (16.3%) traders were in the bracket of KES 20,000 to 29,000; another 24 (12.8%) household heads and 40 (20.3%) traders indicated KES 30,000 to 39,000, while those earning between KES 40,000 to 49,000 included 29 (15.4%) household heads and 26 (12.9%) traders. Regarding perspectives on the quality of services provided by Siaya Municipal Council, participants were requested to rate their judgment on a three-point scale on whether the quality of essential services, including water, garbage collection and sanitation had improved or not over the preceding two years period. In view of this, the results presented in Figure 4 show that out of 188

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household heads, 98 (52.1%) indicated that there was no change in the consistency of domestic water supply, 75 (39.9%) said the consistency had deteriorated, while only 15 (8.0%) participants were of the view that the consistency of water supply had improved over the reference period. Figure 4: Perspectives of Market Traders Regarding the Quality of Water Supply Services

This figure presents results about participants’ perspectives about water supply consistency, water adequacy, garbage collection, and sewerage services. The results suggest that more than two-thirds (63.2%) of the participants believe that there was no change in water supply consistency. Regarding water adequacy, up to 69.5% expressed indifference. At the market, the results suggest that no participant believed that water supply consistency had improved over the preceding two-years period, instead, 150 (74.3%) participants felt that there was no change on water supply consistency, while 52 (25.7%) were of the view that consistency had deteriorated over the reference period. Still on water supply, figure 4 shows that 143 (76.1%) household heads reported lack of change in the adequacy of water received at home, 29 (15.4%) others indicated that water adequacy had deteriorated, while 16 (8.5%) hinted that water adequacy had improved over the reference period. In addition, 127 (62.9%) market traders felt that there was no change on the adequacy of water received, vis-à-vis their family needs; while 47 (23.3%) felt that the quantity of water received at the market had deteriorated over the preceding two-years period. Only 28 (13.9%) were affirmative that water quantity had improved. Figure 5 further shows that up to 101 (53.7%) household heads indicated that collection of domestic garbage had deteriorated over the preceding three-years period, 78 (41.5%) had not seen any change, while only 9 (4.8%) felt that the service had improved. Among market traders, the results show that about two-thirds of participants, 116 (57.4%), were of the view that garbage collection at the market had deteriorated over the reference period; 74 (36.6%) said there was no change, while 12 (5.9%) believed that the service had improved. Figure 5: Perspectives of household heads regarding the quality of water supply services

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This figure presents results about participants’ perspectives about water supply consistency, water adequacy, garbage collection, and sewerage services. The results suggest that up to 55.6% of the participants indicated that garbage collection had deteriorated, while another 63.8% stated that sewerage services had also deteriorated. Furthermore, 103 (54.8%) household heads were of the view that sewerage services had deteriorated, 59 (31.4%) suggested no change, while only 26 (13.8%) believed that some improvement had been realized. At the market, most traders, 147 (72.8%), were of the view that the service had deteriorated, 45 (22.3%) said there was no change, while 10 (5.0%) thought that sewerage services at the market had improved. Furthermore, we requested participants to indicate factors influencing service delivery at the Council. The results presented in Table 2 show that out of 390 participants, 224 (57.4%) cited political interference as the main constraint. Participants noted that service delivery was impeded by interference by political leaders both from within the Council as well as from outside, including councilors, members of parliament, minister for local government and in some instances, the president. Since the Local Government Act (Cap 265) allows for the appointment of councilors by higher authorities such as the Minister or the President. Many times councilors appointed by higher authorities found it hard to submit to the authority of Council staff and other leaders. Where councilors are elected, participants cited political party influences infiltrating into the Council to determine who receives particularly services, when and how much. Under such circumstances, services are skewed in favor of areas perceived to be politically loyal to key decision-makers within the Council. Furthermore, 172 (44.1%) participants reported that service delivery in Council was affected by procurement malpractices, manifesting through situations where some tender committee members acted in favor of particular candidates, tendering documents designed in favor of particular bidders, including political loyalists, business associates or family members, as well as single sourcing of service providers. In addition, participants noted that some politically connected bidders often collude with tender committee officials to overprice materials and works. These practices often culminated to loss of millions of public funds. Table 2 shows that 151 (38.7%) participants indicated that service delivery was constrained by a narrow revenue base because the Council had not fully exploited available economic opportunities. This affected the amount of internally generated revenue, thus, constraining the Council’s capacity to meet the expectations of

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residents in terms of service delivery as well as meet its financial obligations to suppliers and contractors. It is important to note that LATF resources only supplements local authorities’ revenues to improve service delivery (IEA, 2009); thus, making it crucial for local authorities to initiate appropriate measures to generate additional resources. Table 2: Factors Influencing Service Delivery In Siaya Municipality

Valid responses Frequency Percent of response Percent of cases Political interference 224 22.4 57.4 Procurement malpractices 172 17.2 44.1 Heavy indebtedness 78 7.8 20.0 Weak revenue base 151 15.1 38.7 Revenue collection inefficiency 66 6.6 16.9 Understaffing 129 12.9 33.1 Other human resource issues 38 3.8 9.7 Unmotivated council workers 94 9.4 24.1 High turnover of professional staff 49 4.9 12.6 Total 1001 100.0 256.7

This Table presents multiple responses on factors influencing service delivery within Siaya Municipality. The results show that up to 57.4% (sample size = 390) indicated that delivery was impeded by interference by political leaders both from within the Council as well as from outside. Other factors influencing service delivery include procurement malpractices (44.1%), weak revenue base (38.7%), and understaffing, among others. Still tied to weak revenue base, some participants, 66 (16.9%), noted that the Council lacks effective internal control measures to prevent leakages of revenues collected at various stages, including in the hands of collectors, financial management department and chief accounting officers. In view of this, participants noted that the financial management system of the Council is grossly inefficient. More still, 129 (33.1%) pparticipants identified understaffing as one of the key human resource issues constraining service delivery at the Council. Understaffing was further linked to delayed replacement of professional and technical staff leaving the station through transfers as well as those absent due to prolonged illness or natural attrition. Instead, the Council encouraged available staff coped with the resultant heavy workload through multi- tasking, sometimes performing tasks for which they had no training at all. Moreover, up to 94 (24.1%) participants linked to service delivery with lack of motivation for Council staff, particularly due to low pay and delayed salaries, which at the time of the study, had run into several months. The results in Table 2 further indicate that 78 (20.0%) participants associated poor service delivery with heavy indebtedness to suppliers of goods, services, and works. Participants further attributed the debts to mismanagement of public resources due to political interference, limited enforcement of transparency and accountability regulations by the Minister. Participants also linked heavy indebtedness to the narrow revenue base and revenue collection inefficiencies. The results show that 49 (12.6%) participants cited high turnover of professional and technical staff as one of the key factors weakening service delivery by the council. We attributed this challenge to conflict between technocrats and councilors. Participants cited cases where councillors harassed, intimidated, assaulted and even manipulated the system to have technical staff standing on their way transferred to other stations, which in turn, affected the continuity of projects initiated to improve service delivery, as well as provide loopholes for diversion of funds to private accounts. Other human resource issues cited by 38 (9.7%) participants included hiring of unqualified people to perform technical duties and payment of ‘ghost’ workers. In this regard, participants cited instances where some Council workers were hired without due consideration of their ability to

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perform the tasks entailed in effective service provision. Participants also cited were cases where particulars of elected leaders’ relatives clandestinely found their way into the workers payroll; thus, siphoning out resources that could be used to improve the quality of services. CONCLUSIONS The purpose of this study was to establish the influence of LATF on service delivery by local government authorities, focusing on Siaya Municipal Council. We set the study to achieve this through residents’ perspectives about the quality of essential services, including water, garbage collection, and sanitation, over the preceding two years period (2007-2009). The study found that more than two-thirds (63.2%) of the participants believed that there was no change in water supply consistency, while 69.5% indicated that there was no change regarding the adequacy of water. Nonetheless, up to 32.8% believed that water supply consistency had deteriorated, while 19.3% reported the same about water adequacy. In addition, 55.6% of the participants indicated that garbage collection had deteriorated, while 63.8% stated the same about sewerage services. These findings suggest that the disbursement of LATF resources to Siaya Municipal Council for about ten years had not improved service delivery to the residents. Rather, service delivery is constrained by a number of factors including interference by political leaders, non-adherence to public procurement regulations, weak revenue base, and understaffing among other factors. As urban populations grow at an unprecedented rate, so is the demand for services from local authorities. There is no doubt that rapid growth of population will require a higher measure of infrastructural and capacity expansion to deliver services. Based on the findings of this study, it may be incorrect to state that Siaya Municipal council is prepared to accommodate the growth of its population, which the 2009 National Population and Housing Census analytical report placed at 2.4% per annum. Kenyan local authorities, including Siaya Municipal Council should shape up to meet the current demand for services, as well as gear up to respond to the challenges of the expected population in the coming years. Although local authorities have been clamoring for greater autonomy, public reactions regarding the quality of services and pervasive corruption militate against any move to amend the law to grant such autonomy. Without adequate adherence to the existing transparency and accountability regulations, Siaya Municipal Council, alongside other local authorities in Kenya, are likely to experience more aggression from members of the public, demanding for better services. The unprecedented proliferation of residents’ associations is a clear indication that members of the public are tired of paying taxes and not receiving value for their money in terms of services. This situation may culminate to public unrest and disruption of life and livelihoods in affected local authorities. Consequently, the Government should take necessary action in time to enforce accountability measures to improve service delivery by local authorities. The Government should give citizens more oversight power by opening up reporting channels, establishing hotlines and circulating these widely and decentralizing witness protection institutions to enhance accountability at Siaya Municipal Council and other local authorities. The Government should further enhance accountability by ensuring that local authorities comply with section 82 of the Local Authorities Act (Cap 265), which requires that all minutes of local authority proceedings should be available to all tax papers and voters. In addition, there is need for public engagements between the authorities and residents. Increased exchange of information is likely to cultivate as sense of responsibility and accountability. ACKNOWLEDGEMENT

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We are grateful to the University of Nairobi for granting the opportunity for to the first author to pursue Master of Arts degree in Project Planning and Management. Secondly, we thank all the participants who sacrificed their time to provide the requisite information. Thirdly, we are indebted to Mr. Tom Odhiambo, an independent consultant for reviewing the manuscript. BIOGRAPHY Jackson Ongong’a Otieno is a senior economist at the Ministry of Devolution and Planning, Kenya. He holds a Master’s degree in Project Planning and Management from the University of Nairobi, Master of Economic Policy Management from Makerere University and currently pursuing his PhD in Economics at the University of Cape Town, South Africa. His areas of research interests include intergovernmental fiscal relations; nature-based tourism; valuation of non-market environmental amenities; climate change and adaptation; rural development and income distribution and poverty. He is reachable through telephone number: +254 724 532 522 or email address: [email protected] Dr. Paul A. Odundo is a Senior Lecturer at the Department of Educational Communication Technology, University of Nairobi, Kenya. He has over 15 years experience in capacity building, teaching and supervising students’ projects at the University level. He became a Research Associate at Institute of Policy Analysis and Research (IPAR) in 2001. His academic and research interests include institutional capacity building, decentralized development, instructional planning and management, educational administration. His previous work appears in IPAR Discussion Paper Series, the Fountain: Journal of Education Research and African Journal of Business and Management. He is reachable at the University of Nairobi through telephone number, +254 020 318 262; Mobile numbers +254 0722 761 414; email address: [email protected] Dr. Charles M. Rambo is a Senior Lecturer and coordinator of Postgraduate programs at the Department of Extra Mural Studies, University of Nairobi, Kenya. His academic interests include financial management, small and medium enterprises, small-scale farming, and education financing. His previous work appears in journals such as Journal of Continuing, Open and Distance Education, International Journal of Disaster Management and Risk Reduction and the Fountain: Journal of Education Research, African Journal of Business and Management, African Journal of Business and Economics, as well as International Journal of Business and Finance Research. He is reachable at the University of Nairobi through telephone number, +254 020 318 262; Mobile numbers +254 0721 276 663 or + 254 0733 711 255; email addresses: [email protected] or [email protected] REFERENCES Alila, P.O. and Omosa, M. (1996). “Rural Development Policies in Kenya”. In: Ng’ethe, N., & Owino, W., eds., 1996. From Sessional Paper No. 10 to Structural Adjustment: Towards Indigenizing the Policy Debate. Nairobi: Institute of Policy Analysis and Research American Statistical Association (1999). Survey Research Methods Section Information. Bonoff, N., and Zimmerman, B. (2003). “Budget Management and Accountability: Evidence from Kenyan Local Authorities”. Public Administration and Development. Vol. 9, No. 2, pp. 132-141.

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Bryman, A., and Cramer, D. (1997). Quantitative Data Analysis with SPSS for Windows: a guide for Social Scientists. London: Routledge Cheema, G.S. (2007). “Devolution with Accountability: Learning from Good Practices.” In: Cheema, G.S. and Rondinelli, D.A., eds. 2007. Decentralizing Governance: Emerging Concepts and Practices. Washington: Brookings Institution Press. Chitere, P., and Ireri, O. (2008). “District Focus for Rural Development as a Decentralized Planning Strategy: An Assessment of its implementation in Kenya”. In: Kibua, T.N. and Mwabu, G. eds., 2008. Decentralization and Devolution in Kenya: New Approaches. Nairobi: University of Nairobi Press. Conyers, D. (2007). Decentralization and Service Delivery: Lessons from Sub-Saharan Africa. IDS Bulletin. Vol. 38, No. 1, pp: 18-32. Accessed on October, 24, 2013 from http://onlinelibrary.wiley.com/doi/10.1111/j.1759-5436.2007.tb00334.x/pdf Devas, N. and Grant, U. (2003). “Local Government Decision-Making: Citizen Participation and Local Accountability: Some Evidence From Kenya and Uganda.” Public Administration and Development, Vol. 23, pp. 307-316. Government of Kenya (1999). Local Authority Transfer Fund (LATF) Act No. 8 of 1998. Nairobi: Government Printers. Government of Kenya (2001). Kenya Poverty Reduction Strategy Paper, 2002-2007. Nairobi: Ministry of Planning and National Development. Government of Kenya (2003). The Economic Recovery Strategy for Wealth and Employment Creation 2003-2007. Nairobi: Ministry of Planning and National Development. Government of Kenya (2008). First Medium Term Plan (2008-2012). Nairobi: Ministry of Finance. Government of Kenya (2010). Kenya Vision 2030: Abridged version. Nairobi: Ministry of Planning and National Development. Institute of Economic Affairs (2005). “What Next for Kenya’s Local Authorities?” Bulletin of the Institute of Economic Affairs. Issue No. 59: July 2005. Kageri, L.K. (2010). Effects of Local Authority Transfer Fund on Effective Service Delivery in Local Authorities in Kenya: A Case of County Council of Nyeri. MA Thesis Submitted to the Department of Extra-Mural Studies, University of Nairobi. Kibua, T.N., and Mwabu, G. (2008). “Introduction”. In: Kibua, T.N. & Mwabu, G. eds., 2008. Decentralization and Devolution in Kenya: New Approaches. Nairobi: University of Nairobi Press. Mboga, H. (2009). Understanding the Local Government System in Kenya: A Citizens’ Handbook. Nairobi: Institute of Economic Affairs.

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Menon, B., Mutero, J., and Macharia, S. (2008). “Decentralization and Local Governments in Kenya”. Paper Prepared for the Andrew Young School of Policy Studies, Georgia State University Conference on Decentralization ‘Obstacles to Decentralization: Lessons from Selected Countries’. Held on September 21-23, 2008 at Georgia State University. Muriu, A.R. (2013). Decentralization, Citizen Participation and Local Public Service Delivery: a study on the Nature and Influence of Citizen Participation on Decentralized Service Delivery in Kenya. Schriftenreihe für Public and Nonprofit Management. Nachmias, C.F., and Nachmias, D. (1996). Research Methods in the Social Sciences, 5thEdition. London: Arnold. Nyangena, W., Misati, G.N., and Naburi, D.N. (2010). How Are Our Monies Spent? The Public Expenditure Review in Eight Constituencies (2005/2006-2008/2009). Nairobi: ActionAid International Kenya. Owens, K.L. (2002). Introduction to Survey Research Design. SRL Fall 2002 Seminar Series http://www.srl.uic.edu Oywa, J., and Opiyo, P. (2011). “Why Local Authorities May Miss Out on LATF Money.” The Standard, Tuesday, March 29, 2011. Phillip, K. (2009). An Overview of decentralization in Eastern and Southern Africa. Munich Personal RePEc Archive Paper No. 15701. Accessed on October, 24, 2013 from http://mpra.ub.unimuenchen.de/15701/ Rindfleisch, A., Malter, A.J., Ganesan, S. and Moorman, C. (2008). “Cross-Sectional Versus Longitudinal Survey Research”. Journal of Marketing Research, Vol. 45, No. 3, pp. 1-23. Rondinelli, D. (1999). What is Decentralization? In: Litvack, J., & Seddon, J., 1999. Decentralization Briefing Notes. World Bank Institute Working Papers, pp. 2-5. Accessed on October 24, 2013 from http://www.worldbank.org/servlet/WDSContentServer/WDSP/IB/1999/11/04/000094946991015 05320840/Rendered/PDF/multi_page.pdf Smoke, P. (2000). “Fiscal Decentralization in Developing Countries: A Review of Current Concepts and Practice” in Bangura, Y., ed. Public Sector Reform, Governance and Institutional Change. Geneva: United Nations Research Institute for Social Development.

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CONTRIBUTION OF LOCAL AUTHORITY TRANSFER FUND TO DEBT REDUCTION IN

KENYAN LOCAL AUTHORITIES AND INSTITUTIONAL VULNERABILITIES TO

FURTHER DEBT: A CASE OF SIAYA MUNICIPAL COUNCIL

Jackson Ongong’a Otieno, Ministry of Devolution and Planning, Kenya Charles M. Rambo, University of Nairobi, Kenya

Paul A. Odundo, University of Nairobi, Kenya

ABSTRACT Debt can be rewarding in case of moderate use, but can be disastrous in cases of imprudence. Excessive debt has been a key challenge to Kenyan local authorities, constraining service delivery and undermining financial sustainability. The Government established and decentralized the Local Authorities Transfer Fund (LATF) to enable local authorities reduce the debt burden. The purpose of this study was to assess and document information on the contribution of LATF towards debt reduction at the Council, as well as identify institutional vulnerabilities that may perpetuate further indebtedness. We sourced primary data from 162 community members, including opinion leaders and civil servants. The study found that the debt portfolio had reduced steadily from KES 157.4 million in the 1999/00 to KES 98.4 million in the 2010/11, while allocations to the Council had increased from KES 11.7 million to KES 57.4 million over the same period of time. The analysis found that LATF allocation significantly correlated with outstanding debts, suggesting up to 99% chance that access to LATF resources may have contributed to debt reduction. To achieve financial sustainability, the Government must address various institutional vulnerabilities, including corruption (76.5%), procurement malpractices (59.3%), revenue collection inefficiency (58.0%), outdated accounting systems (54.9%), political influence (39.5%), nepotism (38.9%), and weak internal audit and control systems (30.9%). The study emphasizes that County Governments must take a bold step to enforce key legislations, including Public Officers Ethics Act, as well as the Anti-Corruption and Economic Crimes Act to dismantle corruption cartels, as well as initiate appropriate reforms programs. JEL: 016 KEYWORDS: Local Authority, Transfer fund, Decentralization, Fiscal decentralization, Debt, Debt vulnerabilities INTRODUCTION Debt is an inevitable phenomenon for all existing and functional entities, be they individuals, corporate bodies or public institutions (Karazijiene & Saboniene, 2009). Debt can be rewarding when beneficiaries use it in moderation, but can be disastrous in cases of imprudent use (Das, Papapioannou, Pedras, Ahmed, and Surti (2010). In the public sector, over-borrowing or excessive accumulation of debt can lead to bankruptcy; thus, stifling the ability of public

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institutions to deliver essential services. For this reason, Cecchetti, Mohanty, and Zampolli (2011) metaphorically equate debt to a two-edged sword. Borrowing is important because it allows public institutions to smooth taxes in the face of variable expenditures (Barro, 1979). Without debt, economies cannot grow and macroeconomic volatility would be greater than desirable (Levine, 2005). As pointed out by Cecchetti et al. (2011), without debt, public institutions remain poor and may not cope with the growing population’s demands. With debt, public institutions can invest even when their revenues would otherwise not allow. However, borrowing can create severe financial crises when debt ratios rise beyond a certain level (Reinhart & Rogoff, 2009). Accumulation of debt is a risky economic circumstance that may stifle operations of public institutions and deny citizens essential services. In this regard, Cecchetti et al. (2011) note that as debt levels increase, borrowers’ ability to repay becomes progressively more sensitive to drops in revenues as well as increases in interest rates. In the event of shocks, the higher the debt the greater the probability of defaulting, and heavily indebted institutions may suddenly become less creditworthy. The consequences may be include non-completion of development projects, narrow revenue base, salary arrears, unmotivated workers, industrial action, court cases, which may bear heavy fines and increase debt stock. According to Bernanke and Gertler (1990), debt increases financial fragility and impairs financial stability. Furthermore, Das et al. (2010) as well as Maana, Owino and Mutai (2008) also warn that debt is bad for economic growth beyond a certain level. Cecchetti et al. (2011) suggest that public institutions should not have a debt stock beyond 85% of the Gross Domestic Products (GDP). In view of the consequences of heavy indebtedness, public institutions should have in place appropriate measures for debt management to prevent pile-up and facilitate the achievement of financial sustainability. Excessive debt has been one of the key challenges affecting local authorities in Kenya by constraining service delivery and undermining financial sustainability. By the end of 2012, the local authorities had accumulated a debt of KES 17,281,183,162 (Limo, 2012), in form of bank loans, salary arrears, among other statutory debts owed to National Hospital Insurance Fund, National Social Security Fund, Pensions Fund, Kenya Revenue Authority, SACCOs and suppliers (Limo, 2012). In response to the debt situation, the Government of Kenya (GoK) established the Local Authorities Transfer Fund (LATF) through the Local Authorities Transfer Fund Act, No. 8 of 1998 (GoK, 1999) to, among other objectives, enable local authorities reduce their debt stock and achieve financial sustainability (Kibua & Mwabu, 2008; Mboga, 2009). LATF is one of the financing facilities that the Government has devolved to local authorities within the decentralization framework. Decentralization entails the transfer of authority and responsibility for public functions, which may be fiscal, administrative, political, or economic, from the central government to subordinate or quasi-independent public institutions as well as the private sector (Rondinelli, 1999; Cheema, 2007; Phillip, 2009). Public finance scholars have applied the concept in various fields, including public administration, economics, management science, law, and public finance, among others. Whatever the area of application, decentralization responds to limitations and challenges associated with centralized governance systems (Conyers, 2007). Fiscal decentralization is one of the components of decentralized government functions, whose purpose is to improve efficiency in handling, management, expenditure, and accountability for public funds. Fiscal decentralization involves the passing of budgetary authority from centralized governance systems to elected sub-national governments in the form of the power to make decisions on matters revenue and expenditure (Menon, Mutero, & Macharia, 2008). Fiscal decentralization has four key attributes, including assigning clear expenditure and revenue responsibilities; intergovernmental fiscal transfer mechanisms from central to local governments; as well as authorization for borrowing and revenue mobilization through loan guarantees from the

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central government (Phillip, 2009). According to Wachira (2010), governments pursue fiscal decentralization to facilitate the participation of citizens in identification of community priorities, planning and budgeting, implementation as well as monitoring and evaluation. Besides, Bonoff and Zimmerman (2010) notes that fiscal decentralization stems from the premise that local communities have the ability to prioritize projects in line with their needs, and that, local resources are easily accessible where community members are involved in development processes. In view of this, fiscal decentralization strengthens citizens’ role in ensuring accountability and transparency in the management of public funds. In Kenya, the pursuit of decentralized development started soon after independence in 1963. In this regard, the Government first proposed the decentralization agenda in the Sessional Paper No. 10 of 1965 on African Socialism and its Application to Planning in Kenya, with a view to strengthening the fight against poverty, disease and illiteracy (Chitere & Ireri, 2008). The Sessional paper marks one of the key initial attempts to decentralize development agenda and resources to the districts and local government authorities across the country (Kibua & Mwabu, 2008; Chitere & Ireri, 2008). In 1983, the Government introduced the District Focus for Rural Development (DFRD) mechanism as its official decentralization policy (Alila & Omosa, 1996; Chitere & Ireri, 2008). Under the DFRD framework, districts became the planning units for decentralized service delivery. However, performance of the strategy was constrained by various factors including limited involvement of communities in project cycle management (Chitere & Ireri, 2008). As noted by Kibua and Mwabu (2008), decentralized development initiatives brings forth numerous benefits including, better governance, improved equity in resource sharing, improve the quality of government service delivery, as well as enhanced accountability in the administration of public resources. More recently, decentralization was revisited in the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) 2003-2007, which stands out as the policy document providing a clear framework against which devolved funds are leveraged (Kibua & Mwabu, 2008; GoK, 2003). Fiscal decentralization framework is further set out in the First Medium Term Plan (MTP) 2008-2012 (GoK, 2008), as well as Kenya’s Vision 2030 (GoK, 2010). These policy efforts culminated to the establishment of various devolved funds, including LATF, which draws from the national revenues - 5% of the annual national income tax collection (Kibua & Mwabu, 2008; Mboga, 2009). The Government designed allocation criteria to ensure consistency, fairness and transparency, as follows: a basic minimum lump sum of KES 1.5 million (6.6%) is shared equally among the country’s 175 local authorities, while 60% of the fund is disbursed according to relative population sizes of local authorities. The Government allocates the remaining 35.4% subject to local authorities meeting specified accountability criteria (Kibua & Mwabu, 2008; Mboga, 2009). The money disbursed through LATF supplements local authorities’ revenues; it forms about one-quarter of local authority revenues (Kibua & Mwabu, 2008; Mboga, 2009). In order to access LATF resources, local authorities are required to have action plans, known as Local Authority Service Delivery Plans (LASDAP), which are prepared through participatory processes, involving stakeholder groups and communities. LASDAP specifies prioritized projects and activities for which the Government and local authority funds should finance. The participatory approach amplifies local communities’ voice in project identification, planning, monitoring, evaluation, and accountability processes, as well as nurture ownership of LATF projects (Kibua & Mwabu, 2008; Menon et al., 2008; Bonoff & Zimmerman, 2010).

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Furthermore, LASDAP anchors on key pillars focusing on poverty reduction in line with the Poverty Reduction Strategy Paper (PRSP) and the Economic Recovery Strategy (ERS) whose priority areas include health, education, and infrastructure and upgrading of informal settlements (Mboga, 2009). The concept behind the LASDAP is to match all expenditure by local authorities to the needs of target communities; thus, avoid spending scarce resources on activities that are not addressing the immediate need so of target beneficiaries (Institute of Economic Affairs [IEA], 2005). Local authorities adopt completed plans as a resolution, before submitting to the Ministry of Local Government (MoLG). It is however, the responsibility of stakeholders to hold councilors and chief officers accountable for LASDAP’s implementation; hence, the primacy of their monitoring role (Kibua & Mwabu, 2008; Mboga, 2009). The MoLG encourages accountability and transparency by disbursing 60% of LATF upon submission of necessary budgetary and technical proposals. The Ministry further emphasizes performance by distributing the remaining 40% of the funds based on LASDAP’s performance metrics, such as revenue enhancement strategies (Bonoff & Zimmerman, 2010). In the event of delayed delivery of reports, local authorities are subject to penalties: 15% loss of allocated funds for late filing of returns of up to 30 days, 40% of allocations for lateness of between 31 and 60 days late, and complete loss of LATF for local authorities whose documents are more than 60 days late (GoK, 1999; Bonoff & Zimmerman, 2010). Furthermore, MoLG requires local authorities to publicize funds received from the Government each year in national newspapers. Besides, local authorities should to hold annual budget days in the month of June, which provide forums to discuss revenues and expenditures for previous financial years and planned budgets for subsequent financial years with citizens (GoK, 1999; Bonoff & Zimmerman, 2010). In spite of such measures, local authorities remain heavily burdened in excessive debts, which continue to rise by day. There are also indications that local authorities have been misusing LATF resources (Oywa & Opiyo, 2011). As noted by the former Permanent Secretary for Local Government, about 75% of the 175 local authorities in the country have been sinking in the abyss of corruption and indebtedness. In 2010, a survey conducted by Transparency International ranked local authorities/Ministry of Local Government as the second most corrupt public institution after the Kenya Police (Ngunjiri, 2010). In 2011, the National Taxpayers Association (NTA) revealed that the Government lost KES 444 million in Constituency Development Fund (CDF) and LATF in 28 constituencies and five local authorities. Siaya Municipal Council alone had a debt stock of close to KES 100 million. A little earlier in 2007, an independent study on the impact of the LATF in Kenya indicated that local authorities were reeling under the burden of debts, which prevented some of them from securing statutory clearance letters, a prerequisite for accessing LATF resources (GoK, 2007). The Government’s policy required local authorities to clear all debts by the year 2010; thenceforth, no institution would use LATF resources pay debts. Nonetheless, there is little documentation about how LATF resources have contributed towards debt reduction and achievement of financial sustainability by local authorities. Even though a number of studies, including Smoke (2000), IEA (2005), Kageri (2010), and Nyangena et al. (2010) have documented various issues associated with LATF, none has explicitly assessed the role of LATF in debt reduction and persistent vulnerabilities that may still fuel debt levels and undermine the financial sustainability. This study adopted a case study approach to assess the contribution of LATF towards debt reduction and vulnerabilities of Siaya Municipal Council to further indebtedness. Understanding debt vulnerabilities will enable County Governments, which have