What are the challenges in implementing a global alliance. Once an alliance is reached, what steps are involved in strategic implementation of the venture?

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

VOLUME 7, NUMBER 1 2012

ISSN 193 1-0285 CD

ISSN 194 1-9589 ONLINE

Honolu lu , Hawaii , US Januar y 3 -6 , 2012

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

Welcome to Hawai i L e t t e r f r o m t h e E d i t o r

On behalf of the Staff and the IBFR, I welcome you to Honolulu, Hawaii and the 2012 Global Conference on Business and Finance. We hope you have a productive conference and enjoy your time in Hawaii. If we can be of any assistance to you during your time in Hawaii please do not hesitate to contact us.

We all know that college professors must balance their teaching, research, and service obligations. Finding the right forum to share and obtain feedback on our research, new teaching techniques, and innovative administrative processes can be challenging at times. The Institute for Business and Finance Research was created to facilitate your work by providing an environment conducive to knowledge and experience sharing. We encourage the academic community to come and share their work at our conferences and Journals. We welcome articles which are of interest to scholars and practitioners in all fields of business, economics and related fields.

The 2012 Hawaii GCBF represents a long term commitment to bring individuals from around the world together to share their ideas and promote research on business and finance. The response to the conference has been outstanding. We wish to thank you for selecting the GCBF as your research outlet. We also wish to thank the many people that have contributed to making the conference a success. We are delighted to report that the conference is truly a global conference. We have participants from all corners of the globe at this event. These individuals come from a variety of high quality institutions and will present work on a broad mix of academic issues.

We are proud to announce two upcoming conferences. Our 13th conference will be held in San Jose, Costa Rica, May 22-25, 2012 at the Ramada Plaza Herradura Hotel and Conference Center. Our 14th conference will be held in Las Vegas, Nevada, USA at the Flamingo, Las Vegas Hotel from January 2-5, 2013. We hope that you are able to join us at these events.

We hope you take the time to enjoy the hotel facilities as well as to take in Honolulu and the surrounding countryside. Hawaii is a wonderful destination with much to offer. We recognize that in addition to presenting research and participating in the conference activities, it is also important to relax and rejuvenate yourself. Have some fun! You deserve it! We hope that you will go home refreshed and with a sense of accomplishment.

Warmest Regards,

Mercedes Jalbert Conference Chair

Welcome

Bienvenidos

Bi enveni d os a Hawai i C a r t a d e l E d i t o r

El Instituto y su personal les da la bienvenidos a Honolulu, Hawaii y al 2012 Global Conference on Business and Finance. Esperamos que su participación sea productiva y que disfruten Hawaii.

Todo profesor de educación superior debe encontrar un balance entre su rol como educador, investigador y como servidor a su comunidad y su universidad. Encontrar un foro donde podamos compartir y obtener retroalimentación sobre nuestra investigación, nuevas técnicas de educación, procesos administrativos innovadores es retador. El Institute for Business and Finance Research (IBFR) fue creado para facilitar el trabajo del profesional en educación superior, profesional del sector públicos y profesional del sector privado al crear una plataforma global conducente al enriquecimiento de nuestro conocimiento a través de:

1. La exposición de trabajos investigativos en todas las áreas académicas de las

ciencias administrativas, ciencias económicas, financieras, etc.;

2. La exploración de nuevos avances tecnológicos, teóricos, pedagógicos;

3. El intercambio de conocimiento en una plataforma verdaderamente global.

Los Congresos GCBF representa un compromiso a larga plazo para unir a nuestros colegas de todos los continentes en nuestros congresos y compartir nuestras ideas, investigación y cultura en una plataforma bilingüe. Deseamos agradecer su participar, la cual hace realidad nuestro objetivos; el realizar un Congreso realmente Global con participación de educadores y profesionales de todos partes del mundo.

Con gran alegría anunciamos nuestros próximos Congresos . Nuestro congreso de inverno se realizara en San Jose, Costa Rica del 22 al 25 de mayo y en Las Vegas Nevada del 2 al 5 de enero de 2013. Será un placer el contar con su participación nuevamente.

Deseamos que disfruten su estancia en el Hotel y que tengan la oportunidad de explorar Las Islas de Hawaii. Sabemos que además de exponer sus trabajos, es también importante tomar tiempo para relajarse, rejuvenecerse y conocer sobre otras culturas, tradiciones, etc. Esperamos que al regresar a sus hogares e instituciones se sientan rejuvenecidos y satisfechos con sus alcances y aprendizaje durante el Congreso.

Estamos para asistirles durante el congreso y el futuro.

Saludos Cordiales, Mercedes Jalbert Conference Chair

Welcome

Bienvenidos

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TABLE OF CONTENTS

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

RISK ANALYSIS VIA REGRESSION QUANTILES - EVIDENCE FROM INTERNATIONAL EQUITY MARKETS .................... 2

HONGTAO GUO, SALEM STATE UNIVERSITY MIRANDA S LAM, SALEM STATE UNIVERSITY GUOJUN WU, UNIVERSITY OF HOUSTON ZHIJIE XIAO, BOSTON COLLEGE

CONVENIENCE YIELDS IN BULK COMMODITIES: THE CASE OF THERMAL COAL .................................................... 12

JASON WEST, GRIFFITH UNIVERSITY

AN ANALYSIS OF FIRM CREDIT ACROSS THE WORLD ............................................................................................ 24

RUDOLF SIVAK, UNIVERSITY OF ECONOMICS IN BRATISLAVA ANETTA CAPLANOVA, UNIVERSITY OF ECONOMICS IN BRATISLAVA JOHN HUDSON, UNIVERSITY OF BATH CHRIS HUDSON, JRH ECONOMICS CONSULTING

COULD PEER-TO-PEER LOANS SUBSTITUTE FOR PAYDAY LOANS? ........................................................................ 39

LYNDA S. LIVINGSTON, UNIVERSITY OF PUGET SOUND

CONNECTING CAPITAL BUDGETING PRACTICE WITH THE MILES-SNOW STRATEGIC TYPE: A NOVEL MANEGERIAL ACCOUNTING APPROACH .................................................................................................................................... 45

NUBUMASA SHIMIZU, WASEDA UNIVERSITY AKIKO TAMURA, HOSEI UNIVERSITY

AN EXAMPLE OF EXCELLENCE: WHY BUSINESS SCHOOLS ARE BRINGING MILITARY HISTORY BACK TO THE CURRICULUM ....................................................................................................................................................... 57

MARY H. KELLY, TEXAS A&M UNIVERSITY-CENTRAL TEXAS MARGARET BRITT; UNIVERSITY; MOUNT VERNON THOMAS G. HARDENBERGH; THE UNIVERSITY OF MICHIGAN WILLIAM E. HARDENBERGH; UNIVERSITY OF MICHIGAN

BALANCED SCORECARD PRACTICES AND DETERMINANTS: AN EMPIRICAL STUDY OF LISTED COMPANIES IN THAILAND ............................................................................................................................................................ 58

WASATORN SHUTIBHINYO, CHULALONGKORN UNIVERSITY

VALUE OF RISK OF OPTION PORTFOLIOS USING MONTE CARLO SIMULATION UNDER A RISK-NEUTRAL STOCHASTIC IMPLIED VOLATILITY MODEL ........................................................................................................... 72

PENG HE

DOES TECHNOLOGICAL OVERSHOOTING EXIST IN THE JAPANESE MINIVAN MARKET? ........................................ 80

GO SHIONOYA, KOBE UNIVERSITY

THE IMPORTANCE AND BENEFITS OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN THE LIBYAN CONTEXT: EVIDENCE FROM MANAGERS............................................................................................................................... 84

NAGIB SALEM BAYOUD, THE UNIVERSITY OF SOUTHERN QUEENSLAND, AUSTRALIA MARIE KAVANAGH, THE UNIVERSITY OF SOUTHERN QUEENSLAND, AUSTRALIA

THE PRICE OF STOCKS IN LATIN AMERICAN FINANCIAL MARKETS: AN EMPIRICAL APPLICATION OF THE OHLSON MODEL................................................................................................................................................................. 96

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PEDRO MARTÍNEZ, INSTITUTO TECNOLÓGICO Y ESTUDIOS SUPERIORES DE MONTERREY DIEGO PRIOR, UNIVERSIDAD AUTÓNOMA DE BARCELONA JOSEP RIALP, UNIVERSIDAD AUTÓNOMA DE BARCELONA

DO YOU KNOW WHERE YOUR DERIVATIVES ARE? ............................................................................................. 101

ANN GALLIGAN KELLEY, PROVIDENCE COLLEGE

CALIBRATION AND COMPARISON OF SPECTRAL RISK MEASURES FOR A PRACTICAL IMPLEMENTATION ........... 109

STEPHAN THOMAS, PHAST SOLUTIONS & UNIVERSITY OF PARIS SORBONNE

A COMPARATIVE STUDY OF CORPORATE ACCOUNTING MALFEASANCE AND RESTATEMENTS FOR 100 COMPANIES WITH FINANCIAL AND MARKET IMPACT AND ANALYSIS OF MONITORING CHARACTERISTICS ...... 110

LIZ WASHINGTON ARNOLD, THE CITADEL PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY

THE VALUATION OF THE SMALL LOCAL BUSINESS IN A DIVORCE: A CASE STUDY ............................................... 111

HANNA SAVOLAINEN, UNIVERSITY OF EASTERN FINLAND

THE DEFENSES OF LIFO AS AN ACCEPTABLE ACCOUNTING METHOD .................................................................. 121

PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY LIZ WASHINGTON ARNOLD, THE CITADEL

A CROSS-CULTURAL COMPARISON OF ONLINE CUSTOMER REVIEWS ................................................................ 122

PENG HE, UNIVERSITY OF MARYLAND, BALTIMORE COUNTY JIANWEI LAI, UNIVERSITY OF MARYLAND, BALTIMORE COUNTY HSIEN-MING CHOU, UNIVERSITY OF MARYLAND, BALTIMORE COUNTY LINA ZHOU, UNIVERSITY F MARYLAND, BALTIMORE COUNTY

CASE STUDY ON SUCCESSIVE PLANNING ............................................................................................................ 134

PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY KATHERINE KINKELA, NEW YORK INSTITUTE OF TECHNOLOGY STEVEN SHAPIRO, NEW YORK INSTITUTE OF TECHNOLOGY

ORGANIZATIONAL LEARNING AS COMPETITIVE ADVANTAGE ............................................................................ 135

DIEGO FERNANDO SANTISTEBAN ROJAS, UNIDADES TECNOLÓGICAS DE SANTANDER (UTS) JORGE DEL RIO CORTINA, UNIVERSIDAD TECNOLÓGICA DE BOLÍVAR (UTB)

OPTIMALIZATION OF LIQUIDITY STRATEGY: POLISH NONPROFIT ORGANIZATIONS CASE .................................. 136

GRZEGORZ MICHALSKI, WROCLAW UNIVERSITY OF ECONOMICS

THE UNCERTAIN FUTURE OF LIFO ...................................................................................................................... 142

PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY KATHERINE KINKELA, NEW YORK INSTITUTE OF TECHNOLOGY

FOREIGN DIRECT INVESTMENT IN AFRICA: SECURING CHINESE’S INVESTMENT FOR A LASTING DEVELOPMENT IN AFRICA ............................................................................................................................................................... 143

PAULIN HOUANYE, UNIVERSITY OF INTERNATIONAL BUSINESS AND ECONOMICS SIBAO SHEN, UNIVERSITY OF INTERNATIONAL BUSINESS AND ECONOMICS

INTEREST RATE RISK: SEVERAL STATISTICAL ANALYSES ...................................................................................... 157

PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY K. KALLIANOTIS, NEW YORK INSTITUTE OF TECHNOLOGY K. KASIBHATLA, NEW YORK INSTITUTE OF TECHNOLOGY

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SCOTT LIU, NEW YORK INSTITUTE OF TECHNOLOGY J. MALINDRETOS, NEW YORK INSTITUTE OF TECHNOLOGY STEVEN SHAPIRO, NEW YORK INSTITUTE OF TECHNOLOGY

CASE STUDY ON INVENTORY MANAGEMENT..................................................................................................... 158

LESLIE. BOBB, NEW YORK INSTITUTE OF TECHNOLOGY JAMES DUNNE, NEW YORK INSTITUTE OF TECHNOLOGY PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY

COMPARING FINANCIAL SYSTEMS IN A GLOBALIZED WORLD ............................................................................ 159

DENIS WENDT, UNIVERSITY OF GOETTINGEN, GERMANY

IS THE IRS A SORE LOSER? .................................................................................................................................. 160

LAURA LEE MANNINO, ST. JOHN’S UNIVERSITY

THE IMPACT OF IFRS FOR SMES ON THE ACCOUNTING PROFESSION, EVIDENCE FROM FIJI ............................... 166

FAZEENA FAZNEEN HUSSAIN, THE UNIVERSITY OF THE SOUTH PACIFIC PRIYASHNI VANDANA CHAND, THE UNIVERSITY OF THE SOUTH PACIFIC PRENA RANI, THE UNIVERSITY OF THE SOUTH PACIFIC

PREFERENCES FOR PERFORMANCE BASED EMPLOYEE REWARDS: EVIDENCE FROM SMALL BUSINESS ENVIRONMENTS ................................................................................................................................................ 168

SUSAN J. KOWALEWSKI, D’YOUVILLE COLLEGE SUZANNE L. PHILLIPS, D’YOUVILLE COLLEGE

THE EVOLUTION OF THE MARKETING CONCEPTS: THEORETICALLY DIFFERENT ROADS LEADING TO PRACTICALLY SAME DESTINATION! ......................................................................................................................................... 173

SOLOMON A. KEELSON, TAKORADI POLYTECHNIC

MANAGERIAL INCENTIVES FOR EARNINGS MANAGEMENT AMONG LISTED FIRMS IN EMERGING ECONOMIES, EVIDENCE FROM FIJI .......................................................................................................................................... 184

PRENA RANI, THE UNIVERSITY OF THE SOUTH PACIFIC FAZEENA FAZNEEN HUSSAIN, THE UNIVERSITY OF THE SOUTH PACIFIC PRIYASHNI VANDANA CHAND, THE UNIVERSITY OF THE SOUTH PACIFIC

WEB-BASED CORPORATE SOCIAL RESPONSIBILITY REPORTING IN EMERGING ECONOMIES: EVIDENCE FROM FIJI .......................................................................................................................................................................... 188

PRIYASHNI VANDANA CHAND, THE UNIVERSITY OF THE SOUTH PACIFIC FAZEENA FAZNEEN HUSSAIN, THE UNIVERSITY OF THE SOUTH PACIFIC

OPTIMAL DIVERSIFICATION - DOES IT EXIST? ..................................................................................................... 190

CHIEN-CHIH LIN, TAMKANG UNIVERSITY YUNG-SHUN TSAI, ASIA UNIVERSITY HSIAO-YIN CHEN, KAINAN UNIVERSITY

BALANCED SCORECARD FOR ENTREPRENEURIAL STRATEGIC MARKETING IN COLOMBIA .................................. 199

SANTIAGO GARCÍA CARVAJAL, UNIVERSIDAD MILITAR NUEVA GRANADA

DECODING THE REGULATORY SYSTEM FOR ADVERTISING IN CONTEMPORARY CHINA ..................................... 200

LUDING TONG, MARIETTA COLLEGE

TEACHING INTERNATIONAL BUSINESS BY USING FICTION: HOW AND WHY I WROTE AN INTERNATIONAL BUSINESS NOVEL ............................................................................................................................................... 213

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MARK BAGSHAW, MARIETTA COLLEGE

SCENARIOS AND UNINTENDED CONSEQUENCES................................................................................................ 224

KATHLEEN WILBURN, ST. EDWARD’S UNIVERSITY RALPH WILBURN, ST. EDWARD’S UNIVERSITY

RECOGNIZING COMMON SENSE LEADERSHIP WITHIN THE 21ST CENTURY ORGANIZATIONAL CONTEXT ............ 239

JON K.WEBBER, UNIVERSITY OF PHOENIX GREGORY W. GOUSSAK, ASHFORD UNIVERSITY ELLIOT M. SER, FLORIDA ATLANTIC UNIVERSITY

CULTURAL PLURALISM: A CRITICAL NEEDS PLAN FOR GENERAL MOTORS ......................................................... 249

GREGORY W. GOUSSAK, ASHFORD UNIVERSITY JON K.WEBBER, UNIVERSITY OF PHOENIX ELLIOT M. SER, FLORIDA ATLANTIC UNIVERSITY

THE EFFECT OF INVESTOR BIAS AND GENDER ON PORTFOLIO PERFORMANCE AND RISK .................................. 257

KEVIN LEE, CALIFORNIA STATE UNIVERSITY – FRESNO SCOTT MILLER, PEPPERDINE UNIVERSITY NICOLE VELASQUEZ, PEPPERDINE UNIVERSITY CHRISTI WANN, UNIVERSITY OF TENNESSEE CHATTANOOGA

RE-EXAMINING THE CONCEPT OF BOUNDARY OBJECTS WITHIN COMMUNITIES OF PRACTICE .......................... 258

W. DAVID HOLFORD, UNIVERSITY OF QUEBEC AT MONTREAL

MULTI-CRITERIA ANALYSIS AND OPTIMIZATION OF FINANCES IN WATER RESOURCES: LESSONS LEARNT FROM PRACTICE ........................................................................................................................................................... 271

BOJAN SRDJEVIC, UNIVERSITY OF NOVI SAD ZORICA SRDJEVIC, UNIVERSITY OF NOVI SAD RATKO BAJCETIC, PUBLIC WATER MANAGEMENT CO JOVANA DRAGINCIC, UNIVERSITY OF NOVI SAD BOSKO BLAGOJEVIC, UNIVERSITY OF NOVI SAD

THE ASSOCIATION BETWEEN TECHNOLOGICAL CAPABILITIES AND EXPORT SALES IN SMALL AND MEDIUM-SIZED ENTERPRISES OF METALWORKING INDUSTRY IN THE CENTRAL REGION OF THE STATE OF COAHUILA, MEXICO 272

ELVIRA VELARDE LÓPEZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA ZÓCHITL ARAIZA GARZA, UNIVERSIDAD AUTÓNOMA DE COAHUILA EUNICE CORONADO ROJAS, UNIVERSIDAD AUTÓNOMA DE COAHUILA

GLOBALIZATION PROCESS AND THE IMPACT OF IT GROWTH IN ALBANIA ......................................................... 277

KOZETA SEVRANI, UNIVERSITY OF TIRANA KLODIANA GORICA, UNIVERSITY OF TIRANA

AN EXPLORATORY STUDY ON BRAND PERSONALITY IN MEXICO ....................................................................... 286

MARÍA DE LA PAZ TOLDOS ROMERO, TECNOLÓGICO DE MONTERREY CAMPUS GUADALAJARA

THE CRISIS OF TEACHER TURNOVER. A THREAT TO PUBLIC SERVICE STABILITY .................................................. 293

PM MAMPANE, TSHWANE UNIVERSITY OF TECHNOLOGY

THE IMPACT OF MECHANICAL GUIDANCE AND JUSTIFICATION REQUIREMENT ON JUDGMENT OF AUDITORS OF DIFFERENT RANKS IN MATERIALITY DETERMINATION ....................................................................................... 302

JUTHATHIP AUDSABUMRUNGRAT, CHULALONGKORN UNIVERSITY SOMPONG PORNUPATHAM, CHULALONGKORN UNIVERSITY

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TIMED CORE PERFORMANCE INDICATORS: THE ROAD TO THE COMPANY’S OPTIMALPERFORMANCE .............. 315

BERNARD MORARD, UNIVERSITY OF GENEVA (UNIGE) ALEXANDRU STANCU, UNIVERSITY OF GENEVA (UNIGE) JEANNETTE CHRISTOPHE, UNIVERSITY OF GENEVA (UNIGE)

EXPLORING THE IMPACT OF THE LABOR DISPLACEMENT ON THE HOUSING MARKETS ...................................... 333

MEIHUA LIAO, ASIA UNIVERSITY

A CO-OPETITIVE FRAMEWORK FOR ACCOUNTING HARMONIZATION: THE CASE OF THE FASB AND IASB CONVERGENCE AGREEMENT ............................................................................................................................. 334

ANNE-SOPHIE FERNANDEZ, UNIVERSITY OF MONTPELLIER FRANCE FRANCOISE PIERROT, UNIVERSITY OF MONTPELLIER FRANCE

ECONOMIC ASSESSMENT OF THE USE OF SOLAR ENERGY IN KUWAIT ............................................................... 343

MOHAMED A. HADI, TECH. DEPT., COUNCIL OF MINISTERS, KUWAIT. REFAAT H. ABDEL-RAZEK, ARABIAN GULF UNIVERSITY, BAHRAIN. WALID M. CHAKROUN, KUWAIT UNIVERSITY, KUWAIT.

IMPORTANT KNOWLEDGE FOR STRATEGIC INTELLECTUAL PROPERTY MANAGEMENT ...................................... 354

KOICHIRO KATO, KANAZAWA INSTITUTE OF TECHNOLOGY MEGUMI SAKO, KANAZAWA INSTITUTE OF TECHNOLOGY

HOUSING FINANCE BY THE COMMERCIAL BANKS IN INDIA : GROWTH, CHALLENGES AND PROSPECTS ............. 360

JAGPAL SINGH BENIPAL, MATA GANGA KHALSA COLLEGE FOR GIRLS,KOTTAN (LUDHIANA)

ASSESSING INDIVIDUAL PERFORMANCE ON INFORMATION TECHNOLOGY ADOPTION: A NEW COMPETING MODEL............................................................................................................................................................... 365

DIAH HARI SURYANINGRUM, UNIVERSITY OF BRAWIJAYA

A CLOSER LOOK AT CURBING FRAUD AMONG TAX RETURN PREPARERS ........................................................... 380

RICHARD LAI, ST. JOHN’S UNIVERSITY, JAMAICA, NEW YORK MARIA PIRRONE, ST. JOHN’S UNIVERSITY, JAMAICA, NEW YORK

BEAUTY IN THE AGE OF MARKETING ................................................................................................................. 383

BINGQING YIN, WASHBURN UNIVERSITY SUSIE PRYOR, WASHBURN UNIVERSITY

“INTRAPORTFOLIO CORRELATION”: AN APPLICATION FOR INVESTMENTS STUDENTS ...................................... 389

LYNDA S. LIVINGSTON, UNIVERSITY OF PUGET SOUND

CHALLENGES OF IMPLEMENTING AND ENFORCING OF ENVIRONMENTAL LAW IN MALAYSIA ........................... 395

MOHAMMADREZA AGHAEI, MANAGEMENT AND SCIENCE UNIVERSITY AMIN MOAZAMI, MANAGEMENT AND SCIENCE UNIVERSITY MEHRDAD SALEHI, MANAGEMENT AND SCIENCE UNIVERSITY AMIR HOSSEIN VAZIRIFAR, MANAGEMENT AND SCIENCE UNIVERSITY MARZIEH DJADIDI, MANAGEMENT AND SCIENCE UNIVERSITY MOJTABA SAEIDINIA, MANAGEMENT AND SCIENCE UNIVERSITY

BIVARIATE EXTREME DEPENDENCY BETWEEN STOCK MARKET AND OIL RETURNS ............................................ 404

GÖZDE ÜNAL, BOGAZICI UNIVERSITY DERYA KORMAN, BOGAZICI UNIVERSITY

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WHAT IS PROPELLING THE AMERICAN WORKER TO GO THE WAY OF THE HORSE? THE CHANGING ANATOMY OF U.S. EXPORT INDUSTRY ...................................................................................................................................... 414

TONY MUTSUNE, IOWA WESLEYAN COLLEGE

RISK FACTORS INFLUENCING THE SURVIVAL OF STRATEGIC ALLIANCES AMONG SMALL AND MEDIUM ENTERPRISES IN KENYA: EVIDENCE FROM KISUMU DISTRICT ............................................................................ 419

CHARLES M. RAMBO, UNIVERSITY OF NAIROBI, KENYA

FORGIVENESS AS A LEADERSHIP TOOL ............................................................................................................... 432

ILKKA VIROLAINEN KYMENLAAKSO, UNIVERSITY OF APPLIED SCIENCES, KOUVOLA, FINLAND

CROSS-BORDER EDUCATION: FACTORS INFLUENCING CANADIAN STUDENTS’ CHOICE OF INSTITUTIONS OF HIGHER EDUCATION IN THE UNITED STATES ...................................................................................................... 446

ERIN E. MCCARTHY, D’YOUVILLE COLLEGE, BUFFALO, NEW YORK ARUP K. SEN, D’YOUVILLE COLLEGE, BUFFALO, NEW YORK BONNIE FOX GARRITY, D’YOUVILLE COLLEGE, BUFFALO, NEW YORK

COMPETITIVITY OF RURAL TOURISTIC DESTINATIONS: PROPOSAL OF AN EVALUATION MODEL ....................... 458

ADALBERTO AVELAR GARCÍA-ROJAS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ARIEL MOCTEZUMA HERNÁNDEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

THE IMPACT OF MANAGEMENT CONTROL ON PERFORMANCE IN SMALL AND MEDIUM-SIZED ACCOMODATION ENTERPRISES: A LITERATURE REVIEW AND SUGGESTIONS FOR FUTURE RESEARCH ........................................... 467

GUACIMARA JIMÉNEZ-GARCÍA, UNIVERSITY OF LAS PALMAS DE GRAN CANARIA ROSA M. BATISTA-CANINO, UNIVERSITY OF LAS PALMAS DE GRAN CANARIA

DEMOGRAPHIC PROFILE OF ADVENTURE TOURISTS IN PRETORIA ..................................................................... 476

MELISSA J. LÖTTER, TSHWANE UNIVERSITY OF TECHNOLOGY (TUT) SUE GELDENHUYS, TSHWANE UNIVERSITY OF TECHNOLOGY (TUT) MARIUS POTGIETER, TSHWANE UNIVERSITY OF TECHNOLOGY (TUT)

DOES SEXUALITY IN ADS WORK FOR EVERYONE/ANYONE? AN EXPLORATORY RESEARCH OF MUSLIM CONSUMERS’ REACTIONS TO SEXUALITY IN ADS ............................................................................................... 490

AHMET BAYRAKTAR, RUTGERS UNIVERSITY

EMPLOYEE STOCK OWNERSHIP PROGRAM (ESOP) PHENOMENA ON PUBLIC COMPANIES IN INDONESIA ........ 499

I PUTU SUGIARTHA SANJAYA, ATMA JAYA UNIVERSITY YOGYAKARTA, INDONESIA

THE PERFORMANCES OF THE ORGANISATION IN THE CONTEXT OF THE ECONOMIC CRISES .............................. 512

IONICA ONCIOIU, TOMIS UNIVERSITY OF CONSTANTA FLORIN RAZVAN ONCIOIU, UNIVERSITY OF AGRONOMIC SCIENCES AND VETERINARY DAN BALAMACI, FREE INTERNATIONAL UNIVERSITY OF MOLDOVA

PROMOTION A MORE RAPID GRADUATION PROCESS FOR UNIVERSITY STUDENTS ........................................... 516

HARRI VIROLAINEN, TURKU UNIVERSITY, SCHOOL OF ECONOMICS, PORI UNIT

CONVERGENCES AND DIVERGENCES REFFERING TO THE CONCEPT OF FAIR VALUE ........................................... 526

IONICA ONCIOIU, TOMIS UNIVERSITY OF CONSTANTA FLORIN RAZVAN ONCIOIU, UNIVERSITY OF AGRONOMIC SCIENCES AND VETERINARY DANIELA SIMONA NENCIU, DIMITRIE CANTEMIR UNIVERSITY OF CONSTANTA

ARE THE DEMOGRAPHIC CHARACTERISTICS OF STUDENTS RELATED TO THEIR PREFERENCES FOR ONE UNDERGRADUATE COURSE DELIVERY MODE OVER ANOTHER? ......................................................................... 530

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ROBERT J. KOENIG, NEW YORK INSTITUTE OF TECHNOLOGY

THE FACTORS OF INNOVATIVE ORGANIZATION: SOME EVIDENCE IN THAILAND ............................................... 531

WANNAPA WICHITCHANYA, CHULALONGKORN UNIVERSITY SUPOL DURONGWATANA, CHULALONGKORN UNIVERSITY PAKPACHONG VADHANASINDHU, CHULALONGKORN UNIVERSITY

THE GLOBALIZATION AND EUROPEAN UNIQUE MARKET – A NEW CHALENGES FOR THE ROMANIAN ECONOMY .......................................................................................................................................................................... 537

IONICA ONCIOIU, TOMIS UNIVERSITY OF CONSTANTA FLORIN SORESCU, TOMIS UNIVERSITY OF CONSTANTA

THE INFORMATION CONTENT OF GOODWILL IMPAIRMENTS ARISING FROM THE ACQUISITION METHOD TREATMENT FOR BUSINESS COMBINATIONS ..................................................................................................... 541

NINA DORATA, ST. JOHN'S UNIVERSITY

MANAGING THE FUZZY FRONT END OF INNOVATION ........................................................................................ 543

LINDA L. NAIMI, PURDUE UNIVERSITY BRIAN S. GLASSMAN, PURDUE UNIVERSITY

TURNOVER AND JOB EMBEDEDDNESS IN TIJUANA, MEXICO ............................................................................ 544

BLANCA ROSA GARCÍA RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA IGNACIO ALEJANDRO MENDOZA MARTINEZ, UNIVERSIDAD LA SALLE SONIA ELIZABETH MALDONADO-RADILLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MA. CONCEPCION RAMIREZ BARON, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

GREAT WAR LEADERS’ SUCCESSFUL MEDIA STRATEGIES FOR BUSINESS: HOW FRANKLIN DELANO ROOSEVELT AND JOHN CURTIN WON JOURNALISTS’ SUPPORT ............................................................................................ 555

CARYN COATNEY, CURTIN UNIVERSITY

THE FASB ACCOUNTING STANDARDS CODIFICATION AND ACCOUNTING QUALITY............................................ 567

CHIA-LING CHAO, NATIONAL CHUNG CHENG UNIVERSITY

DISCLOSURE LEVEL, STOCK MARKET LIQUIDITY, AND EARNINGS QUALITY: ....................................................... 568

EVIDENCE FROM TAIWAN .................................................................................................................................. 568

HORNG-CHING KUO, NATIONAL CHENGCHI UNIVERSITY, TAIWAN HSIU-CHIN LIN, DELOITTE, TAIWAN

CAPITALIZING WOMEN’S HUMAN RESOURCES THROUGH MICROENTERPRISE DEVELOPMENT IN RURAL AREAS: ROLE OF MICROFINANCE ................................................................................................................................... 569

POORNIMA GAYANGANI WASANA JAYAWARDANA, RITSUMEIKAN ASIA PACIFIC UNIVERSITY

ANTECEDENTS OF ORGANIZATIONAL DOWNSIZING IN THAILAND'S TOURISM AND HOSPITALTIY INDUSTRY: THE ROLE OF BUSINESS IDEOLOGY ............................................................................................................................ 574

POR-NGARM SAENGRATWATCHARA, SRINAKHARINWIROT UNIVERSITY THEERAPONG SUBSUPANWONG, SRINAKHARINWIROT UNIVERSITY

AN EXPLORATION OF THE CURE FOR DISSATISFACTION AMONG CUSTOMERS OF MEDICAL SERVICES .............. 579

JUNGKI LEE, KOREA UNIVERSITY AT SEJONG, JOCHIWON, SOUTH KOREA

THE CROSS-BORDER REGIONAL GOVERNANCE OF THE GLOBAL AUTOMOBILE PRODUCTION NETWORKS IN ASIA .......................................................................................................................................................................... 580

viii

KATSUHIRO SASUGA, TOKAI UNIVERSITY, UNIVERSITY OF WARWICK

GLOBAL LINKAGE OF FINANCIAL SECTOR STOCK PRICES DURING US FINANCIAL CRISIS: EVIDENCE FROM INDONESIA ........................................................................................................................................................ 581

ALDRIN HERWANY, UNIVERSITAS PADJADJARAN, INDONESIA ERIE FEBRIAN, UNIVERSITAS PADJADJARAN, INDONESIA

EXCHANGE RATE VOLATILITY AND CORPORATE PERFORMANCE IN NIGERIA: A PANEL REGRESSION APPROACH .......................................................................................................................................................................... 582

IKECHUKWU KELILUME, LAGOS BUSINESS SCHOOL DOYIN SALAMI, LAGOS BUSINESS SCHOOL

EXAMINATION OF ETHNIC AND POLICY ISSUES IN GROOMING PREFERENCES AND ETHNIC HAIRSTYLES OF AFRICAN AMERICAN WOMEN IN CORPORATE AMERICA ................................................................................... 593

ANGELA RENEE PAYNE, ARGOSY UNIVERSITY – CHICAGO, IL BHARAT S. THAKKAR,, ARGOSY UNIVERSITY – CHICAGO, IL

COST AND VALUE ADDED COMPETITIVENESS: CHINA VS. MEXICO .................................................................... 594

JUAN ESPAÑA, NATIONAL UNIVERSITY

SUPPLY CHAIN PROBLEMS CREATED BY A CHINESE MANUFACTURER IN AN E-COMMERCE MARKETING ENVIRONMENT .................................................................................................................................................. 595

RONALD E. MILLIMAN, WESTERN KENTUCKY UNIVERSITY

A PROPOSED ARCHITECTURE FOR DYNAMIC ELEARNING ENVIRONMENTS BASED ON STUDENT ACTIVITY AND LEARNING STYLES .............................................................................................................................................. 596

JOHN A. KALISKI, MINNESOTA STATE UNIVERSITY QUEEN E. BOOKER, MINNESOTA STATE UNIVERSITY PAUL SCHUMANN, MINNESOTA STATE UNIVERSITY

PROPOSALS FOR MARKETING STRATEGIES FOR OPTICAL CENTERS BASED ON THE CONSUMER ........................ 601

LUCILA ZÁRRAGA CANO, UNIVERSIDAD DEL CARIBE ENRIQUE CORONA SANDOVAL, UNIVERSIDAD DEL CARIBE MIGUEL ÁNGEL OLIVARES URBINA, UNIVERSIDAD DEL CARIBE

PRODUCTIVE CHAINS CONFORMATION OF OSTREICULTURE IN THE MUNICIPALITY OF ENSENADA BAJA CALIFORNIA ....................................................................................................................................................... 607

RAMÓN GALVÁN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ENSELMINA MARÍN VARGAS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

ORGANIZATIONAL LEARNING, MARKETING STRATEGIC CHANGE AND PERFORMANCE OF WHOLLY-OWNED AND INTERNATIONAL JOINT VENTURES IN THAILAND ............................................................................................... 618

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

CUSTOMER PERCEPTIONS OF E-SERVICE QUALITY IN ONLINE APPAREL SHOPPING ........................................... 629

ZUI CHIH (RICK) LEE, SUSQUEHANNA UNIVERSITY PAUL, DION, SUSQUEHANNA UNIVERSITY

PERCEIVED SERVICE QUALITY IN RESTAURANT SERVICES ................................................................................... 630

PRABHA RAMSEOOK-MUNHURRUN, UNIVERSITY OF TECHNOLOGY, MAURITIUS

ix

AN EMPIRICAL ANALYSIS OF COMPANY SURVIVAL/RECOVERY AFTER CORPORATE ACCOUNTING MALFEASANCE .......................................................................................................................................................................... 644

LIZ WASHINGTON ARNOLD, THE CITADEL PETER HARRIS, NEW YORK INSTITUTE OF TECHNOLOGY

AN INVESTIGATION OF USERS’ CONTINUOUS USE INTENTION OF E-LEARNING SYSTEMS .................................. 645

HUICHIH WANG, NATIONAL CHIAO TUNG UNIVERSITY HERSEN DOONG, NATIONAL CHAIYI UNIVERSITY

RESIDUAL INCOME VS. DISCOUNTED CASH FLOW VALUATION MODELS: AN EMPIRICAL STUDY ....................... 646

ALI ATILLA PEREK, MARMARA UNIVERSITY, TURKEY SEDA PEREK, ISTANBUL BILGI UNIVERSITY, TURKEY

UNDERSTANDING FACTORS THAT INFLUENCE SOUTH AFRICAN CONSUMERS TO USE ONLINE SHOPPING......... 654

JOB DUBIHLELA, VAAL UNIVERSITY OF TECHNOLOGY-SOUTH AFRICA NOBUKHOSI DLODLO, VAAL UNIVERSITY OF TECHNOLOGY SOUTH AFRICA

A STUDY ON THE INFLUENCES OF KOREAN EARLY ADOPTERS' PROPENSITY AND LIFESTYLE FOR IT PRODUCTS' PURCHASE DECISION ......................................................................................................................................... 655

YEO HWAN LEEP, KYUNGPOOK NATIONAL UNIVERSITY HAN JANG HYUP, KYUNGPOOK NATIONAL UNIVERSITY KIM PANSOO, KYUNGPOOK NATIONAL UNIVERSITY

CREATING JOINT VENTURE PROJECTS BETWEEN SME’S AND UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA IN TIJUANA, MEXICO .............................................................................................................................................. 662

EDUARDO AHUMADA-TELLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JUAN MANUEL ALBERTO PERUSQUÍA VELASCO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OLGA LIDIA GUTIÉRREZ GUTIÉRREZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

THE VIRTUOUS CIRCLE OF COOPERATION .......................................................................................................... 663

ZÓCHITL ARAIZA GARZA, UNIVERSIDAD AUTÓNOMA DE COAHUILA ELVIRA VELARDE LÓPEZ, UNIVERSIDAD AUTÓNOMA DE COAHUILA DARIELA SÁNCHEZ CAMPOS, UNIVERSIDAD AUTÓNOMA DE COAHUILA

TRANSPARENCY REPORT AS RED FLAG FOR QUALITY CONTROL OF THE AUDIT FIRMS – THE REPUBLIC OF MACEDONIA EXPERIENCES ................................................................................................................................ 668

ZORICA BOZINOVSKA LAZAREVSKA, FACULTY OF ECONOMICS, UNIVERSITY SS CYRIL AND METHODIUS MAJA STOLEVSKA, AUDIT AUTHORITY FOR AUDITING THE INSTRUMENT FOR PRE-ACCESSION ASSISTANCE (IPA)

CRITICAL ANALYSIS OF THE EFFECT OF MERGERS AND ACQUISITIONS ON CORPORATE GROWTH AND PROFITABILITY ................................................................................................................................................... 684

SYLVESTER FEYI AKINBULI, UNIVERSITY OF LAGOS AKOKA-LAGOS, NIGERIA

EVALUATION OF FINANCIAL ACCOUNTABILITY IN THE PUBLIC SECTOR: A NECESSARY CONCEPT FOR GOOD GOVERNANCE .................................................................................................................................................... 698

SYLVESTER FEYI AKINBULI,UNIVERSITY OF LAGOS, AKOKA LAGOS-NIGERIA

MODELING FOR LEARNING ORGANIZATIONS: MOLECULAR INTERACTION FRAMEWORK APPROACH ............... 711

MATEJ JANEŽIČ, UNIVERSITY OF LJUBLJANA-SLOVENIA VLADO DIMOVSKI, UNIVERSITY OF LJUBLJANA-SLOVENIA MILAN HODOSCEK, NATIONAL INSTITUTE OF CHEMISTRY, LJUBLJANA, SLOVENIA

MARKET RESPONSE TO THE COMPOSITION CHANGE OF ISLAMIC INDEX: THE CASE OF INDONESIA ................. 712

x

ERIE FEBRIAN, UNIVERSITAS PADJADJARAN, INDONESIA ALDRIN HERWANY, UNIVERSITAS PADJADJARAN, INDONESIA ADI PRIMADHI, UNIVERSITAS PADJADJARAN, INDONESIA

ZAKAH PERSPECTIVES AS A SYMBOL OF INDIVIDUAL AND SOCIAL PIETY: DEVELOPING A REVIEW FROM THE MEADIAN SYMBOLIC INTERACTIONISM ............................................................................................................. 713

FIDIANA, UNIVERSITY OF BRAWIJAYA – INDONESIA IWAN TRIYUWONO, BRAWIJAYA UNIVERSITY AKHMAD RIDUWAN, SCHOOL OF ECONOMIC INDONESIA SURABAYA (STIESIA)

CHINESE CONSUMERS ACCEPTANCE OF LABELED SEAFOOD .............................................................................. 714

PEI XU, CALIFORNIA STATE UNIVERSITY, FRESNO YC ZENG, RENMIN UNIVERSITY OF CHINA Q FONG, UNIVERSITY OF ALASKA FAIRBANKS Y LIU, RENMIN UNIVERSITY OF CHINA

THE IMPACT OF BRAND PLACEMENT AND BRAND RECALL (IN MOVIES) ON BRAND PREFERENCE, LOYALTY AND INTENTIONS TO PURCHASE AMONG YOUNGER CONSUMERS: EMPIRICAL EVIDENCE FROM MALAYSIA ............ 716

BAMINI KPD BALAKRISHNAN, UNIVERSITI MALAYSIA SABAH P. YUKTHAMARANI PERMARUPAN, INTI INTERNATIONAL UNIVERSITY AZLINDA SHAZNEEM MD. SHUAIB, UNIVERSITI MALAYSIA SABAH OSCAR DOUSIN, UNIVERSITI MALAYSIA SABAH

TYPOLOGY OF EMPLOYEE IMPROVEMENT-ORIENTED VOICE: EXPLORING WHAT EMPLOYEES SUGGEST TO UNDERSTAND HOW MANAGERS PASS ON EMPLOYEE VOICE ............................................................................ 717

NANCY L. LAM, SAINT MARY’S COLLEGE OF CALIFORNIA

AN INVESTIGATION OF ANTECEDENTS AND CONSEQUENCES OF CONSUMERS ATTITUDES TOWARD AN APPAREL WEBSITE ............................................................................................................................................................ 718

ZUI CHIH (RICK) LEE, SUSQUEHANNA UNIVERSITY NANCY HODGES, UNIVERSITY OF NORTH CAROLINA, GREENSBORO

FINANCE AND ECONOMIC GROWTH IN AFRICA: A META-ANALYSIS................................................................... 735

SENIA NHAMO, UNIVERSITY OF SOUTH AFRICA

RUSSIAN STATE FINANCIAL CONTROL: DISTINCTIONS AND DEVELOPMENT ....................................................... 736

TATYANA ANTIPOVA, THE INSTITUTE OF CERTIFIED SPECIALISTS

BALANCED SCORECARD ATTRIBUTES: KEY DETERMINANT AND THE PERCEIVED BENEFITS ................................ 748

WASATORN SHUTIBHINYO, CHULALONGKORN UNIVERSITY

CONTINOUS AUDIT CONTINOUS MONITORING – ANALYTICS ON MANUAL JOURNAL VOUCHER ....................... 755

RAKESH NAREDI, HEWLETT PACKARD SARIKA MUKUNDA KURUP, HEWLETT PACKARD SATYANARAYANA T, HEWLETT PACKARD

THE RELEVANCE OR IRRELEVANCE OF CORPORATE SOCIAL RESPONSIBILITY (CSR) TO ENHANCE GOVERNMENT- BUSINESS RELATIONS IN SOUTH AFRICA: A THEORETICAL EXPOSITION. ............................................................ 759

ABEL J. DIALE, TSHWANE UNIVERSITY OF TECHNOLOGY

AMERICAN HIGHER EDUCATION AT A CROSSROAD ........................................................................................... 765

MASKOOKI, KOOROS, WESTERN NEW MEXICO UNIVERSITY KEVIN MASKOOKI, UNIVERSITY OF MINNESOTA – TWIN CITIES

xi

STRATEGIES FOR IMPROVING YOUR RESEARCH QUALITY .................................................................................. 766

TERRANCE JALBERT, UNIVERSITY OF HAWAII-HILO

SPANISH PROCEEDINGS ..................................................................................................................................... 775

CARACTERIZACIÓN Y MODELADO DE REDES: ÍNDICES FINANCIEROS MUNDIALES ............................................. 776

LINDA MARGARITA MEDINA HERRERA, TECNOLÓGICO DE MONTERREY CCM. ERNESTO PACHECO VELÁZQUEZ, TECNOLÓGICO DE MONTERREY CCM.

DESARROLLO DE UN MODELO PARA LA MEJORA TANTO DE LA OFERTA DE PRODUCTOS COMO DEL SERVICIO AL CLIENTE A TRAVES DE UN CALL CENTER BANCARIO PROPIO COMO UN CANAL NO TRADICIONAL DE SERVICIO Y VENTA DE PRODUCTOS FINANCIEROS ............................................................................................................... 782

RUTH CAVAZOS ARROYO, UNIVERSIDAD NACIONAL AUTÓNOMA DE MÉXICO CUAUHTÉMOC PUENTE MUÑOZ, UNIVERSIDAD PANAMERICANA

IMPACTO PUBLICITARIO DEL MARKETING MÓVIL EN UN ENTORNO TRADICIONAL: CASO CIBERNAUTAS DE LA REGIÓN COSTA SUR DE JALISCO, MÉXICO .................................................................................................. 787

ROBERTO GONZÁLEZ MONROY, UNIVERSIDAD DE GUADALAJARA CÉSAR AMADOR DÍAZ PELAYO, UNIVERSIDAD DE GUADALAJARA

LA EMPRESA MEXICANA EN EL EXTERIOR. UN PRIMER ACERCAMIENTO............................................................ 796

JORGE LUIS ALCARAZ VARGAS, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO RUBÉN MOLINA MARTÍNEZ, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO OSCAR HUGO PEDRAZA RENDÓN, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO

PROPUESTA DE REFORMA FISCAL INTEGRAL EN MÉXICO ................................................................................... 802

FIDEL ANTONIO MENDOZA SHAW, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA ROSA ISELA LOPEZ CUEVAS, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA JOSE EZEQUIEL ROBLES ENCINAS, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA

ANALISIS DEL IMPACTO DE CRECIMIENTO EN LAS PYMES QUE SE DESARROLLARON BAJO UN ESQUEMA DE INCUBACION. CASO ENCUBADORA EMPRESER – SONORA ................................................................................. 805

EMMA VANESSA CASAS MEDINA, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA ERIKA OLIVAS VALDEZ, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA LUIS ENRIQUE IBARRA MORALES, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA

ANÁLISIS DEL IMPACTO DE LA APLICACIÓN DEL PROGRAMA GUÍAS ESCOLARES EN LA UNIVERSIDAD: CASO CESUES HERMOSILLO. ........................................................................................................................................ 812

EMMA VANESSA CASAS MEDINA, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. NORMA LORENA ARENAS MOZQUEDA, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. SUSANA AYDE SENDER ÁVILES, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. LUIS ENRIQUE IBARRA MORALES, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA.

PLANES NACIONALES DE DESARROLLO Y LOS SECTORES PRODUCTIVOS DE MÉXICO ......................................... 818

OMAR ERNESTO TERÁN VARELA, CENTRO UNIVERSITARIO UAEM AMECAMECA ENRIQUE ESPINOSA AYALA, CENTRO UNIVERSITARIO UAEM AMECAMECA RANULFO PÉREZ GARCÉS, CENTRO UNIVERSITARIO UAEM AMECAMECA MARÍA DE LOURDES HERNÁNDEZ ARAGÓN, CENTRO UNIVERSITARIO UAEM AMECAMECA

ENTORNOS VIRTUALES APLICADOS A LA EDUCACIÓN SUPERIOR BASADOS EN LA METACOGNICIÓN ................ 825

OMAR ERNESTO TERÁN VARELA, CENTRO UNIVERSITARIO UAEM AMECAMECA MONSERRAT ALONSO GALICIA, CENTRO UNIVERSITARIO UAEM AMECAMECA MARTHA ELBA RUÍZ RIVA PALACIO , CENTRO UNIVERSITARIO UAEM AMECAMECA

xii

RANULFO PÉREZ GARCÉS, CENTRO UNIVERSITARIO UAEM AMECAMECA

PROYECCIÓN DEL PERFIL DE VALORES DEL LIC. EN NEGOCIOS INTERNACIONALES ............................................. 830

OLGA LIDIA GUTIÉRREZ GUTIÉRREZ, UABC MARÍA BELÉN MURILLO PEDRAZA, UABC ANA CECILIA BUSTAMANTE VALENZUELA, UABC SANDRA JULIETA SALDÍVAR GONZÁLEZ, UABC IGNACIO ALEJANDRO MENDOZA MARTÍNEZ, LA SALLE

LOS VALORES EN LOS ESTUDIANTES UNIVERSITARIOS, UN COMPROMISO DE LAS INSTITUCIONES DE EDUCACIÓN SUPERIOR EN MÉXICO .CASO: ALUMNOS DE LA CARRERA DE LICENCIADO EN INFORMÁTICA, FACULTAD DE CIENCIAS ADMINISTRATIVAS ............................................................................................................................. 831

SANDRA JULIETA SALDÍVAR GONZÁLEZ,UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA MARÍA BELÉN MURILLO PEDRAZA, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA ANA CECILIA BUSTAMANTE VALENZUELA, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA OLGA LIDIA GUTIÉRREZ GUTIÉRREZ, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA IGNACIO ALEJANDRO MENDOZA MARTÍNEZ, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA PATRICIA GUADALUPE GARCÍA CABRALES, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA

SEGUIMIENTO A LOS EGRESADOS, FUNCIÓN SUSTANTIVA DE LAS DEMANDAS DE UN MERCADO LABORAL ..... 836

HILARIO DE LA TORRE PÉREZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA RAQUEL OLIVIA ROA RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SANDRA JULIETA SALDIVAR GONZÁLEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA GLORIA MUÑOZ DEL REAL, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA REYNA ISABEL ROA RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA PATRICIA GUADALUPE GARCÍA CABRALES, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

EVALUACIÓN DEL MEJORAMIENTO DE LOS INDICADORES FINANCIEROS EN LAS EMPRESAS DEL SECTOR CARBÓN Y SUS DERIVADOS EN COLOMBIA ...................................................................................................................... 842

TOMÁS FONTALVO HERRERA, UNIVERSIDAD DE CARTAGENA JOSÉ MORELOS GÓMEZ, UNIVERSIDAD DE CARTAGENA JUAN CARLOS VERGARA SCHMALBACH, UNIVERSIDAD DE CARTAGENA

PROYECTO DE MERCADOTECNIA TURÍSTICA PARA LA CREACIÓN DE UN AERÓDROMO DEPORTIVO EN LA REGIÓN VITIVINÍCOLA EN BAJA CALIFORNIA, MÉXICO .................................................................................................... 847

FRANCISCO ADRIÁN GARFIAS GARCÍA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JOSÉ GABRIEL RUIZ ANDRADE, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OMAIRA CECILIA MARTÍNEZ MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

PLAN DE MERCADOTECNIA PARA DIVERSIFICACIÓN DE MERCADOS EN SERVICIOS LEGALES AMBIENTALES ..... 850

PATRICIA BLANCO VARGAS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA JOSÉ GABRIEL RUIZ ANDRADE, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA RICARDO VERJÁN QUIÑONES, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

ESTUDIO DE FACTIBILIDAD PARA LA COMERCIALIZACIÓN DE ZARZAMORA EN MERCADOS INTERNACIONALES 854

LUIS ENRIQUE IBARRA MORALES, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. NATALIA GUADALUPE ROMERO VIVAR, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. ROSALINA JAIME MEULY, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. BEATRIZ ALEJANDRA HURTADO BRINGAS, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA.

CONFIANZA, COMPROMISO E INTENCION PARA COMPARTIR: ¿VARIABLES INFLUYENTES PARA TRANSFERIR CONOCIMIENTO DENTRO DE LAS ORGANIZACIONES? ....................................................................................... 867

AURORA I. MÁYNEZ GUADERRAMA, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ

xiii

JUDITH CAVAZOS ARROYO, UNIVERSIDAD POPULAR AUTÓNOMA DEL ESTADO DE PUEBLA SANTIAGO IBARRECHE SUÁREZ, UNIVERSIDAD DE TEXAS EN EL PASO JOSÉ PABLO NUÑO DE LA PARRA, UNIVERSIDAD POPULAR AUTÓNOMA DEL ESTADO DE PUEBLA

PLATAFORMA MOODLE: INNOVACION EDUCATIVA EN ESTUDIOS DE POSGRADO....................................... 873

EDELMIRA SÁNCHEZ DELGADO, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ SALVADOR ANIBAL OCHOA RAMÍREZ, UNIVERSIDAD AUTÓNOMA DE CIUDAD JUÁREZ

ESTRATEGIAS Y RENDIMIENTO DE LAS MICRO, PEQUEÑAS Y MEDIANAS EMPRESAS FAMILIARES (AGUASCALIENTES MÉXICO) .............................................................................................................................. 877

LUIS AGUILERA ENRÍQUEZ, UNIVERSIDAD AUTÓNOMA DE AGUASCALIENTES MARTHA GONZÁLEZ ADAME,UNIVERSIDAD AUTÓNOMA DE AGUASCALIENTES

MEDICIÓN DEL POTENCIAL DE ASOCIATIVIDAD ENTRE EMPRESAS EMPLEANDO EL MÉTODO MACTOR ............ 884

JUAN CARLOS VERGARA SCHMALBACH, UNIVERSIDAD DE CARTAGENA JOSÉ MORELOS GÓMEZ, UNIVERSIDAD DE CARTAGENA TOMÁS JOSÉ FONTALVO HERRERA, UNIVERSIDAD DE CARTAGENA

EL GRADO DE COMPETENCIAS DEL EGRESADO DE LA LICENCIATURA EN TURISMO VERSUS LAS CAPACIDADES GENÉRICAS EXIGIDAS POR EL MERCADO LABORAL ............................................................................................ 894

CLAUDIA LETICIA PRECIADO ORTIZ, UNIVERSIDAD DE GUADALAJARA, CENTRO UNIVERSITARIO DE LA COSTA SUR CRISTINA ZEPEDA IBARRA, UNIVERSIDAD DE GUADALAJARA, CENTRO UNIVERSITARIO DE LA COSTA SUR ALFREDO CASTAÑEDA PALOMERA, UNIVERSIDAD DE GUADALAJARA, CENTRO UNIVERSITARIO DE LA COSTA SUR ALFREDO TOMÁS ORTEGA OJEDA, UNIVERSIDAD DE GUADALAJARA, CENTRO UNIVERSITARIO DE LA COSTA SUR

VICIOS Y VIRTUDES DEL MODELO DE ACREDITACIÓN EN EL SISTEMA DE EDUCACIÓN SUPERIOR CHILENO ........ 906

JUAN CAMEL TALA JAPAZ, UNIVERSIDAD DE SANTIAGO DE CHILE PAULINA HIDALGO PÉREZ, UNIVERSIDAD DE SANTIAGO DE CHILE

ESTRATEGIAS DE COMERCIO EXTERIOR PARA LA INTRODUCCIÓN DE UNA PYME DE EXPORTACIÓN DE TAMALES, EN CIUDAD JUÁREZ CHIHUAHUA ....................................................................................................................... 920

JULIO CESAR BRIONES BENAVENTE, UNIVERSIDAD TECNOLÓGICA DE CIUDAD JUÁREZ PERLA IVETTE GÓMEZ ZEPEDA, UNIVERSIDAD TECNOLÓGICA DE CIUDAD JUÁREZ NIDIA GISELA NAFARRATE ROBLES, UNIVERSIDAD TECNOLÓGICA DE CIUDAD JUÁREZ FELIPE CHONTAL RAMOS, UNIVERSIDAD TECNOLÓGICA DE CIUDAD JUÁREZ RENE MELÉNDEZ SEPÚLVEDA, UNIVERSIDAD TECNOLÓGICA DE CIUDAD JUÁREZ

PANORAMA DE LA PARTICIPACIÓN DE LAS MICRO, PEQUEÑAS Y MEDIANAS EMPRESAS BAJACALIFORNIANAS EN PROCESOS DE GESTIÓN DE LA CALIDA ............................................................................................................... 931

PATRICIA VALDÉS FLORES, CETYS UNIVERSIDAD

VIOLENCIA Y DESERCIÓN DE ESTUDIANTES DE EDUCACIÓN SUPERIOR .............................................................. 932

MARÍA GUADALUPE DURAZO BRINGAS, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. BERTHA GUADALUPE OJEDA GARCÍA, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA.

¿POR QUÉ HIZO CRISIS EL SISTEMA EDUCATIVO CHILENO?: EVIDENCIA Y ESPECULACIÓN ................................. 938

PAULINA HIDALGO PÉREZ, UNIVERSIDAD DE SANTIAGO DE CHILE

INSEGURIDAD Y CONSUMO: CASO AUTLÁN DE NAVARRO, JALISCO. MÉXICO ................................................... 952

CESAR AMADOR DÍAZ PELAYO, UNIVERSIDAD DE GUADALAJARA CLAUDIA LETICIA PRECIADO ORTÍZ, UNIVERSIDAD DE GUADALAJARA ELSY CLAUDIA CHAN GAMBOA, UNIVERSIDAD DE GUADALAJARA CARLOS MANUEL OROZCO SANTILLÁN, UNIVERSIDAD DE GUADALAJARA

xiv

WEB EDUCATIVA PARA EL REFORZAMIENTO DE LAS CIENCIAS MATEMÁTICAS, EN LA FACULTAD DE CIENCIAS ADMINISTRATIVAS, UABC MEXICALI .................................................................................................................. 963

OSCAR MANUEL MADRIGAL LIZÁRRAGA, UNIVERSIDAD AUTONOMA DE BAJA CALIFORNIA

EFICIENCIA EN LAS INSTITUCIONES EDUCATIVAS PÚBLICAS DE LA CIUDAD DE SANTA MARTA CON “DATA ENVELOPMENT ANALYSIS” ................................................................................................................................ 964

DELIMIRO VISBAL CADAVID, UNIVERSIDAD DEL MAGDALENA ROLANDO ESCORCIA CABALLERO, UNIVERSIDAD DEL MAGDALENA JOSÉ MARIO AGUDELO TOLOZA, UNIVERSIDAD DEL MAGDALENA

IMPLEMENTACIÓN DEL SIMULADOR FISCAL DESDE LA PERSPECTIVA DEL ALUMNADO EN EL PROCESO DE ENSEÑANZA APRENDIZAJE EN LA FACULTAD DE CIENCIAS ADMINISTRATIVAS DE LA UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ......................................................................................................................................... 965

GLORIA ALICIA NIEVES BERNAL, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MARÍA BELÉN MURILLO PEDRAZA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA CLAUDIA VIVIANA ÁLVAREZ VEGA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ERNESTO ALONSO PÉREZ MALDONADO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

DETECCIÓN DE LOS FACTORES DE RESILIENCIA COMO SITUACIONES MOTIVACIONALES PARA EL ÉXITO EN LOS ALUMNOS DEL INSTITUTO TECNOLÓGICO DE MEXICALI .................................................................................... 970

GLORIA ALICIA NIEVES BERNAL, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA RAFAEL CRUZ CASANOVA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MANUEL MUÑOZ AGUILERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA LEONEL ROSILES LÓPEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

EL IMPUESTO AL VALOR AGREGADO EN MÉXICO, SUS EXENCIONES Y LAS DIFERENTES TASAS: FACTORES QUE AFECTAN LA RECAUDACIÓN ............................................................................................................................... 980

MARTHA SHEILA GÓMEZ GONZÁLEZ, UNIVERSIDAD DE GUADALAJARA MÓNICA ARACELI REYES RODRÍGUEZ, UNIVERSIDAD DE GUADALAJARA

FUENTES DE FINANCIAMIENTO EN LAS PYMES EXPORTADORAS DEL ESTADO DE COLIMA MÉXICO ................... 992

JESÚS OTONIEL SOSA RODRÍGUEZ, UNIVERSIDAD DE COLIMA. AURELIO DENIZ GUIZAR, UNIVERSIDAD DE COLIMA. ÓSCAR BERNARDO REYES REAL, UNIVERSIDAD DE COLIMA.

RECICLAJE DE RESIDUOS SÓLIDOS MUNICIPALES EN TIJUANA; UNA APROXIMACIÓN A LOS ASPECTOS AMBIENTALES, SOCIOECONÓMICOS, INSTITUCIONALES Y JURÍDICOS ................................................................ 999

CELSA GUADALUPE SÁNCHEZ VÉLEZ, CETYS UNIVERSIDAD, CAMPUS TIJUANA

EL PROCESO DE SUCESIÓN EN LAS EMPRESAS FAMILIARES: GARANTÍA DE CONTINUIDAD, LEGADO Y COMPETITIVIDAD ............................................................................................................................................ 1000

MA. DE LOS ANGELES MONTERDE VALENZUELA, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA

EVOLUCIÓN DEL CENTRO DESARROLLO EMPRESARIAL-UABC EN EL VALLE DE MEXICALI ................................. 1010

MARCELA REYES PAZOS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA, CAMPUS MEXICALI

EL COMPORTAMIENTO EMPRENDEDOR DE FRANQUICIADOS A TRAVÉS DE LA INFLUENCIA DE RASGOS PSICOLÓGICOS ................................................................................................................................................. 1018

HÉCTOR PRIEGO HUERTAS, UNIVERSIDAD DE COLIMA, MÉXICO ROBERTO ESPÍRITU OLMOS, UNIVERSIDAD DE COLIMA, MÉXICO HUGO MARTÍN MORENO ZACARÍAS, UNIVERSIDAD DE COLIMA, MÉXICO

xv

INSTRUMENTOS DE GESTIÓN PARTICIPATIVA EN LA ADMINISTRACIÓN PÚBLICA: PROPUESTA DE UN SISTEMA DE INDICADORES PARA LA PLANEACIÓN ESTATAL EN BAJA CALIFORNIA .............................................................. 1030

SHEILA DELHUMEAU RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ANDREA SPEARS KIRKAND, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MÓNICA LACAVEX BERUMEN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

INDICADORES DE DESEMPEÑO Y PERCEPCIÓN CIUDADANA. REFLEXIONES SOBRE EL CASO DE SEGURIDAD PÚBLICA EN ENSENADA, BAJA CALIFORNIA ..................................................................................................... 1036

ISABEL ADRIANA ESCOBEDO FUENTES, PRONATURA SHEILA DELHUMEAU RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ANDREA SPEARS KIRKAND, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

RELACIONES INTERGUBERNAMENTALES TRANSFRONTERIZAS. UN INSTRUMENTO DE ANÁLISIS PARA LAS INTERACCIONES ENTRE CALIFORNIA Y BAJA CALIFORNIA ................................................................................ 1042

SHEILA DELHUMEAU RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

EL INVENTARIO DE BAR-ON EN EL DEPARTAMENTO DE ASIENTOS DE DESARROLLO TÉCNICO DE VOLKSWAGEN DE MÉXICO ........................................................................................................................................................... 1048

RAFAELA MARTÍNEZ MÉNDEZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA JOSUÉ ALDO MACHORRO VÁZQUEZ, BENEMÉRITA. UNIVERSIDAD AUTÓNOMA DE PUEBLA MARIANA NOCEDAL DE LA GARZA, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA SANDRA OLIVERA POMPOSO, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA

MÉTODOS MIXTOS PARA EL ESTUDIO DE LAS DECISIONES ESTRATÉGICAS EN LAS PYMES ............................... 1060

FABIOLA BALTAR, UNIVERSIDAD NACIONAL DE MAR DEL PLATA NATACHA GENTILE, UNIVERSIDAD NACIONAL DE MAR DEL PLATA

LA RESPONSABILIDAD SOCIAL CORPORATIVA .................................................................................................. 1072

JUAN MANUEL ALBERTO PERUSQUÍA VELASCO ,UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OLGA LIDIA GUTIÉRREZ GUTIÉRREZ , UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

ANÁLISIS DE LA PRESCRIPCIÓN FISCAL EN MÉXICO .......................................................................................... 1076

LEONEL ROSILES LÓPEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA NELSON ISAAC PADILLA CASTRO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA CRUZ ELDA MACÍAS TERÁN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SANTIAGO PÉREZ ALCALÁ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

ESTUDIO DEL COMPROMISO ORGANIZACIONAL EN UN COLEGIO PARTICULAR, EN ENSENADA, B.C. ............... 1081

ROCIO GUTIERREZ ALANIS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MARÍA CONCEPCION RAMIREZ BARON, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA BLANCA ROSA GARCÍA RIVERA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

ESTRATEGIAS DE COMERCIALIZACIÓN INTERNACIONAL DEL QUESO COTIJA REGIÓN DE ORIGEN .................... 1092

OSCAR HUGO PEDRAZA RENDÓN, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO RUBÉN MOLINA MARTÍNEZ, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO MARÍA SOLEDAD RAMÍREZ FLORES, UNIVERSIDAD MICHOACANA DE SAN NICOLÁS DE HIDALGO

FACTORES QUE INTERVIENEN EN EL DESARROLLO Y CONTINUIDAD DE LAS EMPRESAS FAMILIARES DE TEHUACÁN ........................................................................................................................................................................ 1097

HILARIO DÍAZ GUZMÁN, UNIVERSIDAD POPULAR AUTÓNOMA DEL ESTADO DE PUEBLA GABRIELA SÁNCHEZ BAZÁN, UNIVERSIDAD POPULAR AUTÓNOMA DEL ESTADO DE PUEBLA

xvi

HABILIDADES SOCIALES, FACTOR DETERMINANTE EN LA TOMA DE DECISIONES EN EL SECTOR SERVICIOS: RESTAURANTES TURÍSTICOS, EN ENSENADA, B. C. ........................................................................................... 1098

KARLA RAMÍREZ-BARÓN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OMAIRA CECILIA MARTÍNEZ MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MARÍA CONCEPCIÓN RAMÍREZ BARÓN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

LA IMPORTANCIA DE UN SISTEMA DE EDUCACIÓN VIRTUAL EN EL CENTRO UNIVERSITARIO DE LA COSTA SUR DE LA UNIVERSIDAD DE GUADALAJARA (CUCSUR) ................................................................................................ 1109

OSCAR GUZMÁN VARGAS, UNIVERSIDAD DE GUADALAJARA MARTHA SHEILA GÓMEZ GONZÁLEZ, UNIVERSIDAD DE GUADALAJARA

MOVILIDAD HACIA LOS MEDIOS MASIVOS DE INFORMACIÓN ......................................................................... 1117

HELBERT ELI GAZCA SANTOS, INSTITUTO TECNOLÓGICO DE MÉRIDA ANDRÉS MIGUEL PEREYRA CHAN, INSTITUTO TECNOLÓGICO DE MÉRIDA KARINA CONCEPCIÓN GONZÁLEZ HERRERA, UNIVERSIDAD TECNOLÓGICA METROPOLITANA

IMPACTO DEL BURNOUT Y LA SATISFACCIÓN LABORAL EN LOS GERENTES DE LAS MAQUILADORAS EN TECATE, B.C. MÉXICO .................................................................................................................................................... 1129

SILVIA HERNÁNDEZ SOLIS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA OMAIRA CECILIA MARTÍNEZ MORENO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA LOURDES EVELYN APODACA DEL ANGEL, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

DE LA MOVILIDAD A LA MIGRACIÓN: FACTORES ASOCIADOS .......................................................................... 1130

KARINA CONCEPCIÓN GONZÁLEZ HERRERA, UNIVERSIDAD TECNOLÓGICA METROPOLITANA ADRIAN GONZÁLEZ ROMO, EL COLEGIO DE TLAXCALA A.C

ESTRATEGIAS DE COMERCIALIZACION DE LA MICRO Y PEQUEÑA EMPRESA AGROINDUSTRIAL EN LA CIUDAD DE ENSENADA BAJA CALIFORNIA .......................................................................................................................... 1134

SANTIAGO GONZÁLEZ VELÁSQUEZ, UNIVERSIDAD TECNOLÓGICA DE TIJUANA MARÍA DE LOS ÁNGELES REYES NEVARES, UNIVERSIDAD TECNOLÓGICA DE TIJUANA IMELDA YÁÑEZ RUIZ,UNIVERSIDAD TECNOLÓGICA DE TIJUANA

LA INTELIGENCIA COMPETITIVA EN LAS EMPRESAS DE LA CIUDAD DE TIJUANA B.C. ....................................... 1142

NORMA LETICIA VIZCARRA VIZCARRA, UNIVERSIDAD TECNOLÓGICA DE TIJUANA VIRGINIA GUADALUPE LÓPEZ TORRES, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA DORA ROCÍO GUERRERO MUÑOZ, UNIVERSIDAD TECNOLÓGICA DE TIJUANA

ESTRATEGIAS DE MERCADOTECNIA EN EMPRESAS MANUFACTURERAS DE LA ZONA METROPOLITANA DE LA CIUDAD DE PUEBLA 2010 ................................................................................................................................. 1150

MARIA DEL CARMEN DOMÍNGUEZ RÍOS, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA MARICELA RESENDIZ ORTEGA, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA MICHELE ALEXANDRA CORONA DOMÍNGUEZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA

CONDICIONES DE LOS FACTORES QUE INFLUYEN EN LA COMPETITIVIDAD DE UN MUNICIPIO FRONTERIZO ... 1159

OSCAR OMAR OVALLE OSUNA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SILVIA HERNÁNDEZ SOLÍS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SERGIO VALE SÁNCHEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

LAS PYMES FAMILIARES VS. LAS NO FAMILIARES EN EL CONTEXTO DE UNA ECONOMÍA EN CRECIMIENTO: UN ESTUDIO DE CASOS SOBRE LA CONTRIBUCIÓN DE LA INNOVACIÓN AL DESEMPEÑO ....................................... 1160

LUIS ANTONIO MORENO SEGURA, TECNOLÓGICO DE MONTERREY CAMPUS LAGUNA

xvii

LA PROFESIONALIZACIÓN COMO FACTOR DE COMPETITIVIDAD: UN ANALISIS DE LAS EMPRESAS FAMILIARES DEL SECTOR INDUSTRIAL, EN TIJUANA, B.C., MEXICO ............................................................................................. 1167

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

OPCIÓN LEGAL PARA EVITAR LA EVASIÓN DEL PAGO DE IMPUESTO SOBRE LA RENTA EN LA INDUSTRIA DE LA CONSTRUCCIÓN EN MÉXICO ............................................................................................................................ 1177

CRUZ ELDA MACÍAS TERÁN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA LEONEL ROSILES LÓPEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SANTIAGO PÉREZ ALCALÁ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA CAROLINA ADAME MÁRQUEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA GLORIA ALICIA NIEVES BERNAL, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

EL EFECTO ECONÓMICO DE LA MIGRACIÓN INTERNACIONAL EN EL CRECIMIENTO ECONÓMICO DE MÉXICO . 1183

MARTINA RODRÍGUEZ DOMÍNGUEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA EMILIO HERNÁNDEZ GÓMEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

COOPERATIVA SANZEKAN TINEMI: PROMOTORA DE ALTERNATIVAS DE TRABAJO EN BASE AL DESARROLLO ORGANIZACIONAL GUERRERENSE, MEXICO ..................................................................................................... 1189

ADRIANA PATRICIA SOTO AGUILAR, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA ELÍAS SOSA SÁNCHEZ, BENEMÉRITA UNIVERSIDAD AUTÓNOMA DE PUEBLA

ANÁLISIS ECONÓMICO DEL COMERCIO AL POR MENOR EN LA CIUDAD DE MÉRIDA ........................................ 1193

ROQUE HUMBERTO MARTÍN GAMBOA LEÓN, UNIVERSIDAD TECNOLÓGICA METROPOLITANA LUCIA TRINIDAD PÉREZ CERVERA, UNIVERSIDAD TECNOLÓGICA METROPOLITANA KARINA CONCEPCIÓN GONZÁLEZ HERRERA, UNIVERSIDAD TECNOLÓGICA METROPOLITANA

LA COMPETITIVIDAD COMO FACTOR DE DESARROLLO SUSTENTABLE INDICADORES PARA LA EVALUACION DE LA INDUSTRIA MAQUILADORA ............................................................................................................................. 1199

MARÍA ESTHER IBARRA ESTRADA, INSTITUTO TECNOLÓGICO DE TIJUANA, MÉXICO MARIO JIMÉNEZ SUÁREZ, UNIVERSIDAD POPULAR AUTÓNOMA DEL ESTADO DE PUEBLA, MÉXICO SOFÍA ELBA VÁZQUEZ HERRERA, UNIVERSIDAD POPULAR AUTÓNOMA DEL ESTADO DE PUEBLA, MÉXICO

EL IMPACTO QUE TIENE LA BIBLIOTECA DEL CICESE, EN RELACIÓN CON LA PRODUCTIVIDAD DE LOS INVESTIGADORES DEL DEPARTAMENTO DE ACUICULTURA (DA) ...................................................................... 1210

ELIZABETH AVILÉS BECERRIL, UABC/CICESE MARÍA CONCEPCIÓN RAMÍREZ BARÓN, AUTÓNOMA DE BAJA CALIFORNIA SONIA ROCHA MALDONADO, AUTÓNOMA DE BAJA CALIFORNIA

LIDERAZGO POLÍTICO: CARACTERÍSTICAS Y PARTICULARIDADES. UN ESTUDIO DE CASO ................................. 1217

JORGE ACOSTA TILLERÍAS, UNIVERSIDAD DE SANTIAGO DE CHILE

INTENCIÓN DE EMPRENDIMIENTO EN ESTUDIANTES: EL CASO DE UNA UNIVERSIDAD PÚBLICA EN CIUDAD JUÁREZ, MÉXICO .............................................................................................................................................. 1231

OSCAR JAVIER MONTIEL MÉNDEZ, UNIVERSIDAD AUTÓNOMA DE CD. JUÁREZ (UACJ) BLANCA LIDIA MÁRQUEZ MIRAMONTES, UNIVERSIDAD AUTÓNOMA DE CD. JUÁREZ (UACJ) ZOILA ARÁMBULA MONREAL, CENTRO DE BACHILLERATO TECNOLÓGICO INDUSTRIAL Y DE SERVICIOS 114 (C.B.T.I.S. NO. 114) LARISA ORDOÑEZ MOLINAR, UNIVERSIDAD AUTÓNOMA DE CD. JUÁREZ (UACJ)

INNOVACIONES TECNOLÓGICAS APLICADAS EN LA ENSEÑANZA DE LAS CIENCIAS ADMINISTRATIVAS ............ 1244

xviii

CLAUDIA VIVIANA ÁLVAREZ VEGA, UABC MARÍA BELÉN MURILLO PEDRAZA, UABC GLORIA ALICIA NIEVES BERNAL, UABC

FACTORES DETERMINANTES DE LA CALIDAD DEL SERVICIO DE UNA CAFETERÍA EN EL CAMPUS DE UNA UNIVERSIDAD PÚBLICA .................................................................................................................................... 1250

SONIA ELIZABETH MALDONADO-RADILLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ANA MA. GUILLÉN JIMÉNEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA RAFAEL ERNESTO CARRANZA PRIETO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

EVALUACIÓN DEL NIVEL TECNOLÓGICO DE LAS PEQUEÑAS Y MEDIANAS EMPRESAS (PYMES) DEL SECTOR SERVICIO EN MEXICALI, BAJA CALIFORNIA ....................................................................................................... 1256

ADELAIDA FIGUEROA VILLANUEVA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SÓSIMA CARRILLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MANUEL ALEJANDRO IBARRA CISNEROS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA RICARDO CHING WESMAN, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

LA EDUCACIÓN CONTINÚA COMO MEDIO PARA APOYAR LA COMPETITIVIDAD DE LAS PYMES Y LA VINCULACIÓN EMPRESARIAL CON LAS INSTITUCIONES DE EDUCACIÓN SUPERIOR ................................................................. 1257

JULIO CÉSAR LEÓN PRIENTO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SÓSIMA CARRILLO, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ANA CECILIA BUSTAMANTE VALENZUELA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ADELAIDA FIGUEROA VILLANUEVA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

REALIDADES Y OPORTUNIDADES DE EMPLEO EN MÉXICO ............................................................................... 1262

RAÚL GONZÁLEZ NÚÑEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ALMA DELIA INDA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ELSA LOURDES SALAZAR RUÍZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA ADELAIDA FIGUEROA VILLANUEVA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

CENTRO ECO-TURÍSTICO EXCAMÉ .................................................................................................................... 1266

ANA KAREN FRAIRE, UNIVERSIDAD DE GUADALAJARA MARÍA DE LA LUZ MORA SALAS, UNIVERSIDAD DE GUADALAJARA KAREN YURIDIA ESTUPIÑAN PÉREZ, INSTITUTO TECNOLÓGICO SUPERIOR NORTE

COACHING PARA EL DESARROLLO DEL ALTO DESEMPEÑO PARA EMPRESAS PUBLICITARIAS: CASO ISA CORPORATIVO S.A. DE C.V. .............................................................................................................................. 1267

OMAR ERNESTO TERÁN VARELA, CENTRO UNIVERSITARIO UAEM AMECAMECA GILBERTO CERVANTES MORENO, EGRESADO DE LA ESCA UNIDAD TEPEPAN IPN ENRIQUE ESPINOSA AYALA, CENTRO UNIVERSITARIO UAEM AMECAMECA NAYELI JUÁREZ MONTOYA, CENTRO UNIVERSITARIO UAEM AMECAMECA

LA CRISIS FINANCIERA, EL RACIONAMIENTO DE CRÉDITO Y LA RELACIÓN BANCARIA DE LAS PYME EN ESPAÑA ........................................................................................................................................................................ 1268

ALAITZ MENDIZABAL ZUBELDIA, UNIVERSIDAD DEL PAÍS VASCO AITZIBER LERTXUNDI, INSTITUTO DE ECONOMÍA APLICADA A LA EMPRESA JESÚS GARMENDIA IBÁÑEZ, UNIVERSIDAD DEL PAÍS VASCO

PERCEPCIÓN DE LA CALIDAD DEL SERVICIO DE LA EDUCACIÓN UNIVERSITARIA DE ALUMNOS Y PROFESORES 1274

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

xix

LA PERSPECTIVA CUALITATIVA DE LA MATERIALIDAD EN AUDITORÍA: EVIDENCIA EMPÍRICA EN MÉXICO Y COLOMBIA ....................................................................................................................................................... 1275

SERGIO IVÁN RAMÍREZ CACHO, UNIVERSIDAD DE COLIMA, MÉXICO MARIO DE JESÚS NARANJO GONZÁLEZ, UNIVERSIDAD DE COLIMA, MÉXICO

EL EMPLEO Y SALARIO QUE SE PAGA EN BAJA CALIFORNIA, ¿CONTRIBUYEN AL BIENESTAR SOCIAL DEL SER HUMANO? ....................................................................................................................................................... 1285

ALMA DELIA INDA, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA GLORIA MUÑOZ DEL REAL, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA RAÚL GONZÁLEZ NÚÑEZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

COMPRADORES MIGRANTES Y NO MIGRANTES DEL SUPERMERCADO A LA TIENDA DE BARRIO EN CARTAGENA DE INDIAS – COLOMBIA ................................................................................................................................... 1298

EMPERATRIZ LONDOÑO ALDANA, UNIVERSIDAD DE CARTAGENA MARÍA EUGENIA NAVAS RÍOS, UNIVERSIDAD DE CARTAGENA JAIRO OROZCO TRIANA, UNIVERSIDAD DE CARTAGENA CLAUDIA ESTHER TORRES HERRERA , UNIVERSIDAD DE CARTAGENA

SISTEMA DE GESTIÓN INTEGRAL DE PROVEDORES DE LA CORPORACIÓN DE CIENCIA Y TECNOLOGÍA PARA EL DESARROLLO DE LA INDUSTRIA NAVAL, MARÍTIMA Y FUVIAL EN COLOMBIA .................................................. 1309

JOSÉ MORELOS GÓMEZ, UNIVERSIDAD DE CARTAGENA TOMÁS JOSÉ FONTALVO HERRERA, UNIVERSIDAD DE CARTAGENA JUAN CARLOS VERGARA SCHMALBACH, UNIVERSIDAD DE CARTAGENA

ASPECTOS ÉTICOS EN LA FORMA DE EJERCER LOS INGRESOS PÚBLICOS EN MÉXICO ....................................... 1315

ERIKA OLIVAS VALDEZ, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. ROSSANA PALOMINO CANO, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA. FRANCISCO JAVIER PESTAÑO URUCHURTU, CENTRO DE ESTUDIOS SUPERIORES DEL ESTADO DE SONORA.

LOS RETOS DE LA INDUSTRIA DEL SECTOR METALMECÁNICO EN EL DESARROLLO ECONÓMICO DE BAJA CALIFORNIA ..................................................................................................................................................... 1321

LOURDES EVELYN APODACA DEL ANGEL, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA MARÍA DEL CARMEN ALCALÁ ÁLVAREZ, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA SILVIA HERNÁNDEZ SOLÍS, UNIVERSIDAD AUTÓNOMA DE BAJA CALIFORNIA

LAS PRÁCTICAS DE ALTO RENDIMIENTO INFLUENCIA DE LA AUTORIDAD NO FORMAL EN LA ADMINISTRACION DEL TALENTO HUMANO Y SU IMPACTO EN LOS RESULTADOS EMPRESARIALES .............................................. 1322

JUAN NICOLÁS MONTOYA MONSALVE , UNIVERSIDAD NACIONAL DE COLOMBIA SANTIAGO GUTIÉRREZ BRONCANO, UNIVERSIDAD REY JUAN CARLOS ALVARO MONCADA NIÑO , CONSULTOR ORGANIZACIONAL

INDEX OF AUTHORS ...................................................................................................................................... 1335

UNIVERSITIES AND INSTITUTIONS REPRESENTED .................................................................................... 1339

COUNTRIES REPRESENTED ............................................................................................................................... 1342

ENGLISH PROCEEDINGS

Global Conference on Business and Finance Proceedings ♦ Volume 7 ♦ Number 1 2012

GCBF ♦ Vol. 7 ♦ No. 1♦ 2012♦ ISSN 1941-9589 ONLINE & ISSN 1931-0285 CD 2

RISK ANALYSIS VIA REGRESSION QUANTILES - EVIDENCE FROM INTERNATIONAL EQUITY

MARKETS Hongtao Guo, Salem State University

Miranda S Lam, Salem State University Guojun Wu, University of Houston

Zhijie Xiao, Boston College

ABSTRACT

In this paper we study risk management based on a robust method via quantile regression. Unlike the traditional VaR estimation methods, the quantile regression approach allows for a general treatment on the error distribution and is robust to distributions with heavy tails. The empirical application to five international equity indexes confirms this. JEL: G110; G150; C18 KEYWORDS: Value at risk, international equities, risk analysis INTRODUCTION The Value-at-Risk (VaR) is the loss in market value over a given time horizon that is exceeded with probability p, where p is often set at 0.01 or 0.05. In recent years, VaR has become a popular tool in the measurement and management of financial risk. This popularity is spurred both by the need of various institutions for managing risk and by government regulations [see Dowd (1998), Saunders (1999)]. Although VaR is a relatively simple concept, its measurement is in fact a challenging task. In particular, there is little research on how good these VaR estimates are. Currently there are two broad classes of methods in estimating VaR [see Beder (1995) and Duffie and Pan (1997) for surveys on this topic]. The first approach is based on the assumption of a conditionally normal stock return distribution. The estimation of VaR is equivalent to estimating conditional volatility of returns. Since there is a large and growing literature on volatility modeling itself, this class is indeed a large and expanding world. There has been accumulated evidence that portfolio returns are usually not normally distributed. In particular, it is frequently found that market returns display negative skewness and excess kurtosis in the distribution of the time series. These findings suggest that VaR estimation by a more robust method is needed. The second class of VaR estimators is based on computing the empirical quantile nonparametrically; for example, using rolling historical quantiles. Other approaches in estimating VaR include the hybrid method by Boudoukh, Richardson and Vhitelaw (1998), and the method based on the extreme value theory [see, for example, Boos (1984), McNeil (1998), and Neftci (2000)]. We believe that the quantile regression method is well suited for estimating VaRs. Quantile regression was introduced by Koenker and Bassett (1978) and has now become a popular robust approach for statistical analysis. Just as classical linear regression methods based on minimizing sums of squared residuals enable one to estimate models for conditional mean functions, quantile regression methods offer a mechanism for estimating models for the conditional median function and the full range of other

Global Conference on Business and Finance Proceedings ♦ Volume 7 ♦ Number 1 2012

GCBF ♦ Vol. 7 ♦ No. 1♦ 2012♦ ISSN 1941-9589 ONLINE & ISSN 1931-0285 CD 3

conditional quantile functions. In recent years, quantile regression has been extended to time series models. In particular, Koul and Saleh (1992) studied quantile regression methods for autoregressive processes and Koul and Mukherjee (1994) studied quantile regression in long-memory models. Koenker and Zhao (1996) extended quantile regression to ARCH models. Engle and Manganelli (1999) propose a CaVaR model based on the regression quantiles. In this paper, we estimate VaR via quantile regression ARCH models. This model has the advantage that its statistical property and computation methods are well developed and are very efficient. The estimation procedure can be easily implemented on a regular personal computer. The estimation programs are available in standard statistical packages such as S-Plus, and can also be easily written in other programming languages. In addition, since GARCH models can be asymptotically represented by ARCH processes, an ARCH model with an appropriate chosen number of lags can practically provide a good approximation. The SEC requires that for each category for which VaR disclosures are required, an institution must provide not only information about the level of estimated VaRs, but also the distribution of the value at risk amounts [see Blankley, Lamb and Schroeder (2000) for more detailed description of the SEC disclosure requirements]. Current VaR estimation methods generally do not provide a systematic way to measure how good the VaR estimates are. Mostly they assume that the estimated parameters have asymptotically normal distribution and symmetric confidence bands are constructed around the VaR point estimate. Pioneering work in this area includes Kupiec (1995), Hendricks (1996), Lopez (1998) and Dowd (2000). In a limited sample, however, this method may not be appropriate. Beder (1995), for example, applied different VaR estimation methods to three hypothetical portfolios and found huge variations in estimated VaR for the same portfolios. Accurate estimation of the conditional probability distribution of portfolio returns is very important in risk management. Obviously, a robust method for estimating VaR and the associated confidence bands are necessary if these estimates are to be useful for risk management purposes. The remainder of the article is organized as follows. Section 2 motivates and describes the quantile regression approach to VaR, estimation. Section 3 provides data descriptions and conducts the estimation. Empirical results regarding estimated VaR and model performance are reported and discussed. Finally, Section 4 contains the concluding remarks. ESTIMATING VAR BY REGRESSION QUANTILES In this paper, we consider a return process {rt} generated by the following regression model with conditional heteroscedasticity 𝑟𝑡 = ⍺𝛼′𝑥𝑡 + 𝑢𝑡 (1) where the error term satisfies 𝑢𝑡 = ( 𝛾0 + 𝛾1 |𝑢𝑡−1| + . . . +𝛾𝑞 �𝑢𝑡−𝑞�) ℇ𝑡, (2)

. with 𝛾0 > 0, (𝛾1, . . . , 𝛾𝑞) ′ ∊ ℜ+

𝑞 then this is a time series with ARCH effect. Here we assume that the innovations {ℇ𝑡 } have a general distribution F. In model (1), 𝑥𝑡 is the vector of regressors which may include lag values of the dependent variable 𝑟𝑡

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. By definition, the conditional value at risk (VaR) at p-percent level is -Va𝑅𝑡(𝑝) = 𝛼⍺′𝑥𝑡 + ( 𝛾0 + 𝛾1 |𝑢𝑡−1| + . . . +𝛾𝑞 �𝑢𝑡−𝑞�)𝐹−1(𝑝) = ⍺α′𝑥𝑡 + 𝛾(𝑝)′ 𝑍𝑡, (3) Where 𝑍𝑡= (1, |𝑢𝑡−1| , . . . , �𝑢𝑡−𝑞� )′ and 𝛾(𝑝)′ =( 𝛾0,𝛾1, . . . ,𝛾𝑞)𝐹−1( 𝑝).

Quantile regression provides a direct approach of estimating the γ(p) and other parameters, thus delivering an estimator of VaRt(p). In particular, the ARCH parameters, γ(p) can be estimated by the following problem

𝛾� (𝑝)= arg 𝑚𝑖𝑛 𝛾 ∊ ℜ𝑘

[ ∑

𝑡 ∊ {𝑡:𝑢𝑡 ≥ 𝑧𝑡′𝛾} 𝑝|𝑢𝑡− 𝑧𝑡 ′ 𝛾| +

∑ 𝑡 ∊ {𝑡:𝑢𝑡 < 𝑧𝑡′𝛾}

(1 – p)|𝑢𝑡 − 𝑧𝑡′ 𝛾|] (4)

In practice, we can replace 𝑢𝑡 and 𝑍𝑡 by their (say, OLS) estimators and, under mild regularity conditions, the resulting 𝛾�(p) is still a root-n consistent estimator of 𝛾 (p). Given the models (1) and (2), if the lags are correctly selected we should have Pr { 𝑟𝑡<Va𝑅𝑡(p)} = p at the true parameter. As a result, {𝑒𝑡 :𝑒𝑡 = I [rt <-Va𝑅𝑡 (p)] - p} should be i.i.d. In contrast, when the lags are incorrectly chosen, {𝑒𝑡} will be serially dependent. Therefore, to test the adequacy of lag choice, it suffices to check whether {𝑒𝑡} is i.i.d. There have been several statistical procedures for testing the i.i.d. assumption. In the case of Gaussian time series, the standardized spectral density captures all serial dependencies. Consequently, any deviation of the spectral density from uniformity is an evidence of serial dependence and thus we can test serial dependence in {𝑒𝑡} using the standardized spectral density approach (Hong 1996). More generally, for non-Gaussian time series, the higher order spectral method or the generalized spectral method may he used in testing serial dependence (Hong 1999). [see also Cowles and Jones (1937), L.jung and Box (1978), etc., for related topics.] Another popular method that is frequently used in selecting lag length is to conduct sequential tests for the significance of the coefficients on lags. Such an approach also provides a model selection strategy which chooses between a model with, say, k lags and a model with q=k + l lags. Koenker and Zhao (1996) show that a 𝑥2 test can be constructed for hypothesis of the type 𝐻0: 𝑅𝛾= 0. Under Ho, the following Wald statistic converges to a centered chi-square distribution with s degrees of freedom (where s is the number of restrictions) 𝑇𝑛 = n𝜔�−2(R𝛾�(p))′[𝑅𝐷�1−1𝐷�0𝐷�1−1𝑅′]−1R𝛾�(p), (5) where ω2 = p(1— p)/ f(𝐹−1(p))2, D0 = EZZ' and D1 = EZZ'/σ. This procedure can be applied to testing the significance of lag coefficients. If we are choosing between k lags and q = k +1 lags, let R be a diagonal matrix with the k+1 to q-th diagonal elements equal to ones and others equal to zeros, R= diag[0,. . .,0,1,. . ., 1], (6)

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then the corresponding statistic 𝑇𝑛 in (5) can be used in testing the significance of coefficients 𝛾𝑘+1 ,. . . ,𝛾𝑞. In practice, we generally select a priori a big enough number𝑞𝑚𝑎𝑥 , then we choose the lag length from possible values {1, . . . , 𝑞𝑚𝑎𝑥}. The procedure starts with the most general model which has 𝑞𝑚𝑎𝑥 lags and tests whether the last lag coefficient is significant. If it is, then 𝑞𝑚𝑎𝑥 is chosen. Otherwise, we estimate the model with 𝑞𝑚𝑎𝑥- 1 lags. This is a sequential procedure which is repeated until a rejection occurs. EMPIRICAL ESTIMATION AND RESULTS Data and Estimation Procedure The data used in the following empirical analysis are the weekly return series, from September 1976 to August 1999, of five major world equity market indexes: the U.S. S&P 500 Composite Index, the Japanese Nikkei 225 Index, the U.K. FTSE 100 Index, the Hong Kong Hang Seng Index, and the Singapore Strait Times Index. The FTSE 100 Index data are from January 1983 to September 1999. Table 1 reports some summary statistics of the data. Table 1: Summary Statistics of the Data

S&P 500 Nikkei 225 FTSE 100 Hang Seng SingaporeST

Mean 0.0016 0.0011 0.0023 0.0029 0.0015

Std. Dev 0.0211 0.0242 0.0218 0.0393 0.0326

Max 0.0818 0.1214 0.0982 0.1542 0.1096

Min -0.1666 -0.1089 -0.1782 -0.3497 -0.4747

Skewness -0.5343 -0.2873 -1.0405 -1.1830 -2.6771

Excess Kurtosis 3.3987 3.1968 8.4345 7.0583 37.9887

AC(1) 0.0045 -0.0366 0.0534 0.1162 0.0685

AC(2) 0.0005 0.0971 0.0523 0.0922 0.0072

AC(3) 0.0084 0.0247 -0.0181 -0.0016 0.0324

AC(4) -0.0082 -0.0417 -0.0190 -0.0677 0.0101

AC(5) -0.0215 -0.0057 -0.0084 -0.0470 0.0448

AC (10) -0.0256 -0.0167 0.0125 -0.0241 -0.0213

This table shows the summary statistics for the weekly returns of five major equity indexes of the world. AC(k) denotes autocorrelation of order k. The sample period is from September 1976 to August 1999, except for FTSE 100 which starts in January 1983. The source of the data is the online data service Datastream. The mean weekly returns of the five indexes are all over 0.1% per week, with the Hang Seng Index producing an average return of 0.29% per week, an astonishing 32-fold increase in the index level over

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the 24-year sample period. In comparison, the Nikkei 225 index only increased by 3-fold. The Hang Seng's phenomenal rise does not come without risk. The weekly sample standard deviation of the index is 3.93%, the highest of the five indexes. In addition, over the sample period the Hang Seng suffered four larger than 15% drop in weekly index level, with maximum loss reaching 35%, and there were 23 weekly returns below -10%! As has been documented extensively in the literature, all five indexes display negative skewness and excess kurtosis. The excess kurtosis of Singapore Strait Times Index reached 37.99, to a large extent driven by the huge one week loss of 47.47% during the 1987 market crash. The autocorrelation coefficients for all five indexes are fairly small. The Hang Seng Index seems to display the strongest autocorrelation with the AR(1) coefficient equal to 0.116 and AR (2) coefficient equal to 0.092. For each time series, we first conduct model specification analysis and choose the appropriate lags for the mean equation and the ARCH component. Based on the selected model, we use Equation (1) to obtain a time series of residuals. The residuals are then used in the ARCH VaR estimation described in (4). The estimated VaRs are plotted and analyzed. Model Specification Analysis We conduct sequential tests for the significance of the coefficients on lags. The inference procedures we use here are asymptotic inferences. For estimation of the covariance matrix, we use the robust HAC (Heteroskedastic and Autocorrelation Consistent) covariance matrix estimator of Andrews (1991) with the data-dependent automatic bandwidth parameter estimator recommended in that paper. First of all, we choose the lag length in the autoregression, 𝑟𝑡 = 𝛼0 + 𝛼1𝑟𝑡−1+. . .+ + 𝛼𝑠𝑟𝑡−𝑠+𝑢𝑡, (7) using a sequential test of significance on lag coefficients. The maximum lag length that we start with is s = 9, and the procedure is repeated until a rejection occurs. The t-statistic of the coefficient with the maximum number of lags does not become significant until s =1, the 9th round. The preferred model is an AR(1) model. Our next task is to select the lag length in the ARCH effect 𝑢𝑡 = (𝛶0+ 𝛶1 |𝑢𝑡−1|+. . .+ 𝛶𝑞�𝑢𝑡−𝑞�)𝜖ɛ𝑡. (8) Again, a sequential test is conducted using the results of (5). To calculate the t-statistic, we need to estimate 𝜔2=p (1-p)/f(𝐹−1(p))2. There are many studies on estimating f(𝐹−1(p)), including Siddiqui (1960), Bolinger (1975), Sheather and Maritz (1983). Notice that 𝑑𝐹

−1(𝑡) 𝑑𝑡

= 1 𝑓(𝐹−1(𝑡))

, (9)

following Siddiqui (1960), we may estimate (9) by a simple difference quotient of the empirical quantile function. As a result, f (𝐹−1� (t))= 2ℎ𝑛

𝐹�−1 (𝑡+ ℎ𝑛)− 𝐹�−1 (𝑡− ℎ𝑛) , (10)

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where 𝐹�−1(t) is an estimate of F-1(t) and ℎ𝑛 is a bandwidth which goes to zero as n→∞. A bandwidth choice has been suggested by Hall and Sheather (1988) based on Edgeworth expansion for studentized quantiles. This bandwidth is of order 𝑛−1 3⁄ and has the following representation ℎ𝐻𝑆 = 𝑧𝛼

2 3⁄ [1.5s(t)/𝑠"(t)]1 3⁄ 𝑛−1 3⁄ , (11) where 𝑧𝛼⍺ 𝑠atisfies Φ(𝑧𝛼⍺) = 1-α / 2 for the construction of 1 - α confidence intervals. In the absence of additional information, s(t) is just the normal density. Starting with 𝑞𝑚𝑎𝑥 =10, a sequential test was conducted. We see that in the fourth round, the t-statistic on lag 7 becomes significant. The sequential test stops here, and it suggests that ARCH(7) is appropriate. Based on the model selection tests, we decide to use the AR(1)-ARCH(7) regression quantile model to estimate 5% VaR for the S&P 500 index. We also conduct similar tests on the 5% VaR models for other four indexes and on the 1% VaR models for all five indexes. To conserve space we do not report the entire testing process in the paper. The results are available from the author. The mean equations generally have one or two lags, except the Hang Seng Index, which has a lag of 4 and displays more persistent autoreggressive effect. For the ARCH equations, at least 6 lags are needed for the indexes. The longest lag, at 10, is for the 10% ARCH VaR model for the S&P 500 index. The 1% VaR models require at least as many lags in the ARCH equation as the 5% VaR model. For the Nikkei 225 and FTSE 100 indexes, the lengths of the ARCH lags are the same for the 1% and 5% VaR models. Since the estimation program for the regression quantile VaR model is very efficient, lags up to 10 in the ARCH equation are very easy to handle. Estimated VaRs The estimated parameters for the constant term for the five indexes is between 0.1% for the Nikkei to 0.26% for the Hang Seng. The Hang Seng seems to display the strongest autocorrelation and this is reflected in the 4 lags chosen by the sequential test. The coefficients on the lagged absolute residuals are mostly positive. The negative coefficients are all statistically insignificant, with the exception of one. U.S. — S&P 500 INDEX Based on our model, for the 5% VaR, the estimated VaRs generally range between 2.5% and 5%, but during very volatile periods they could jump over 10%, as happened in October 1987. The 1% VaRs lie above the 5% VaRs. The two series overlap each other most of the time, but they are very much separate from each other from 1992 to 1994 when overall market volatility is relatively low. During high volatility periods, there is high variation in estimated VaRs and 5% and 1% VaRs overlap each other more often. Certainly on a particular date, the 1% VaR lies above the 5% VaR. JAPAN-NIKKEI 225 INDEX The estimated weekly 5% and 1% VaRs for the Nikkei 225 Index are quite stable and remain at the 4% and the 7% level from 1976 till 1982. Then the Nikkei 225 Index took off and appreciated about 450% over the next eight years, reaching its highest level at the end of 1989. This quick rise in stock value is accompanied by high risk, manifested here by the more volatile VaR series. In particular, the VaRs fluctuated dramatically, ranging from a low of 3% to a high of 15%. This volatility in VaR may reflect both optimistic market outlook at times as well as worry about high valuation and the possibility of a market crash. That crash did come in 1990, and ten years later, the Nikkei 225 Index still hovers around at a level which is about half off the record high in 1989. The 1990s is far from a rewarding decade for investors in the Japanese equity market. The mean annual return from the Nikkei

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225 Index is negative and risk is at a high level. Average weekly 5% VaR is about 5%, and about 7% for the 1% VaR. The variation in both series is also very high, bouncing between 13.5% and -1%. U.K. — FTSE 100 INDEX The estimated 5% and 1% VaRs for the U.K. Financial Times 100 Index appreciated 7-fold over the 16-year sample. The 5% VaR is very stable and averages about 3%. They stay very much within the 2% - 4% band, except on a few occasions, such as the 1987 global market crash. The 1% VaR is also more stable than that of the Nikkei 225 Index, mostly ranging between 4% and 8%. Compared with the SP 500 Index and the Nikkei 225 Index, the overlap between the 5% VaR and the 1% VaR is minimal. HONG KONG — HANG SENG INDEX The Hang Seng Index produces an average return of 0.29% per week, an astonishing 32-fold increase in the index level over the 24-year sample period. The Hang Seng's phenomenal rise does not come without risk. We mentioned above that the weekly sample standard deviation of the index is 3.93%, the highest of the five indexes. In addition, the Hong Kong stock market has had more than its fair share of the market crashes. If we define a market crash as having the main index drop at least 15% in a week, then Hong Kong experienced four market crashes in 24-year sample period. The average 5% VaR over the sample is about 7%, and the average 1% VaR is about 12%, both the highest among the five indexes. The variation in the estimated VaR is huge, in particular the 1% VaRs. It ranges from 0% to 34%, the largest of the five indexes. SINGAPORE — STRAIT TIMES INDEX Interestingly, the estimated VaRs display a pattern very similar to that of the U.K. FTSE 100 Index, although the former is generally larger than the latter. The higher risk in the Singapore market did not result in higher return over the sample period. Among the five indexes, the Singapore market suffered the largest loss during the 1987 crash, a 47.5% drop in a week. The market has since recovered much of the loss. Among the five indexes, the Singapore market only outperformed the Nikkei 225 Index over the entire 24-year sample period. Performance of the ARCH Quantile Regression Model In this section we conduct empirical analysis to help us understand the difference in dynamics between VaRs estimated by regression quantiles and those by volatility models with the conditional normality assumption. There are extensive empirical evidences supporting the use of the GARCH models in conditional volatility estimation. Bollerslev. Chou, and Kroner (1992) provide a nice overview of the issue. Furthermore, Engle and Ng (1993), Glosten. Jagannathan, and D. E. Runkle (1993), Bekaert and Wu (2000), and others have demonstrated that asymmetric GARCH models outperform those that do not allow the asymmetry, i.e., negative return shocks increase conditional volatility more than the positive return shocks. Therefore we estimate asymmetric GARCH(1,1) models and then produce VaR estimates by assuming conditional normality of the return(We also estimated several other ARCH models, with and without the asymmetric volatility specification. The regular GARCH(1,1) and asymmetric GARCH(1,1) produce similar performances in terms of the VaR test described below. Other models tend to underperform.) We estimated the 5% VaRs of the S&P 500 Index estimated by the ARCH regression quantiles. and the Asymmetric GARCH(1,1) model with the conditional normality assumptions. We see that these two series actually track each other pretty well, although the VaR series estimated by regression quantile seem to be higher than the GARCH VaR during low volatility periods. However, during very volatile markets, as during the 1987 market crash, the GARCH plus normality approach produces much higher VaR estimates. This could be due to the fact that large return shocks produce large volatility estimates in the

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GARCH setting. Value at risk after a market crash could be too high based on this approach. The quantile regression approach seems to generate an increased VaR at a more reasonable level. To measure the relative performance more accurately, we compute the percentage of realized returns that are below the negative estimated VaRs. For the 1% VaR, the regression quantile method produces the percentage that is closer to the 1% mark for all five series. The GARCH approach seems to underestimate the VaRs consistently. For the 5% VaR, the regression quantile method produces the percentage that is closer to the 5% mark for all series, except for the FTSE 100. But now the GARCH approach seems to overestimate the VaRs consistently. To look at this more closely we extend the analysis for the S&P 500 Index. We estimate VaRs using the two methods at 2%, 4%, 6%, 10%, 15%. Now we have a total of 7 percentage levels. The regression quantile method produces the closest percentage at all percentage levels, and the percentages scatter around the true value. However, the GARCH method seems to underestimate VaRs for the smaller percentages (1% and 2%), and overestimate VaRs for the larger percentages (larger than or equal to 4%). The five indexes we analyzed are quite different in their risk characteristics as discussed above. The ARCH quantile regression approach seems to be robust and can consistently produce very good estimates of the VaRs at different percentage (probability) levels. The asymmetric GARCH model, being a very good volatility model, is not able to produce good VaR estimates with the normality assumption. The ARCH quantile regression model does not assume normality and is well suited to hand negative skewness and heavy tails. CONCLUSIONS In this paper we estimate value at risk using the quantile regression approach pioneered by Koenker and Bassett (1978). This method does not assume a particular conditional distribution for the returns. We apply the model to five major equity indexes and found the method to be robust. These results regarding VaR estimation may have important implications for risk management practices.

REFERENCES Andrews, D.W.K., (1991) "Heteroskedasticity and autocorrelation consistent covariance matrix estimation," Econometrica, 59, p. 817-858. Beder, T. S., (1995) "VAR: seductive but dangerous," Financial Analysts Journal, September-October 1995, p. 12-24. Bekaert, G., and G. Wu, (2000) "Asymmetric volatility and risk in equity markets," Review of Financial Studies 13, p. 1-42. Blankley, A., R. Lamb, and R. Schroeder, (2000) "Compliance with SEC disclosure requirements about market risk," Journal of Derivatives 7, Spring 2000, p. 39-50. Bollerslev, T., R. Y. Chou, and K. F. Kroner, (1992) "ARCH modeling in finance.” Journal of Econometrics 52, p. 5-59.

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Boos, D., (1984) "Using Extreme Value Theory to Estimate Large Percentiles," Techno-metrics 26, p. 33- 39. Boudoukh, J., M. Richardson, and R. F. Whitelaw, (1997) "Investigation of a class of volatility estimators," Journal of Derivatives, Spring 1997, p. 63-71. Boudoukh, J., M. Richardson, and R. F. Whitelaw, (1998) "The best of both worlds." Risk 11, p. 64-67. Buchinsky, M., (1994) "Changes in the U.S. wage structure 1963-1987: application of quantile regression", Econometrica 62, p. 405-458. Cowles, A., and H. Jones, (1937) "Some a posteriori probabilities in stock market action", Econometrica, 5, p. 280-294. Duffie, D., and J. Pan, (1997) "An overview of value at risk”, Journal of Derivatives. 4, 7-49. Dowd, K., 1998, Beyond Value at Risk: The New Science of Risk Management. John Wiley Sons, England. Dowd, K., (2000) "Assessing VaR accuracy," Derivatives Quarterly. Spring 2000, p. 61-63. Engle, R. F., and V. K. Ng, (1993) "Measuring and testing the impact of news on volatility,” Journal of Finance 48, p. 1749-1778. Engle, R. F., and S. Manganelli, (1999) "CAViaR: Conditional autoregressive value at risk by regression quantiles," working paper, University of California, San Diego. Glosten, L. R., R. Jagannathan, and D. E. Runkle, (1993) "On the relation between the expected value and the volatility of the nominal excess return on Stocks," Journal of Finance 48, p. 1779-1801. Gutenbrunner, C. and J. Jureckova, (1992), "Regression quantile arid regression rank score process in the linear model and derived statistics." Annal of Statistics. 20, p. 305-330. Hall, P., and S. J. Sheather, (1988) "On the distribution of a studentized quantile." Journal of Royal Statistical Society B. 50, 381-391. Hendricks, D., (1996) "Evaluation of value at risk models using historical data." FederalReserve Bank of New York Economic Policy Review 2, p. 39-69. Hong, Y., (1996) "Consistent testing for serial correlation of unknown form," Econometrica 64, p. 837- 864. Hong, Y., (1999) "Hypothesis testing in time series via the empirical characteristic function: a generalized spectral density approach," Journal of American Statistical Association 94, p. 1201-1220. Koenker, R.., and G. Bassett, (1978) "Regression quantiles," Econometrica 84, p. 33-50.

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Koenker, R., and Q. Zhao, (1996) "Conditional quantile estimation and inference for ARCH models," Econometric Theory 12, p. 793-813. Koul, H., and Mukherjee, (1994), "Regression quantiles and related processes under long range dependence," Journal of Multivariate Statistics, 51, p. 318-337. Kupiec, P., (1995) "Techniques for verifying the accuracy of risk measurement models," Journal of Derivatives 2, Winter 1995, p. 73-84. Ljung, G, and G. Box, (1978) "On a measure of lack of fit in time series models." Biometrica, 66, p. 265- 270. Lopez, J., (1998) "Methods for evaluating value-at-risk estimates," Federal Reserve Bank: of New York Economic Policy Review, 4. McNeil, A., (1998) "Calculating (quantile risk measures for financial time series using extreme value theory." working paper, University of Zurich. Neftci, S., (2000) "Value at risk calculations, extreme events, and tail estimation,” Journal of Derivatives 7, Spring 2000, p. 23-37. Parzen, M. I., L. J. Wei. and Z. Ying. (1994) "A resampling method based on pivotal estimating functions," Biometrika 81, p. 341-350. Portnoy, S. L., and R., Koenker (1997) "The gaussian hare and the Laplacian tortoise: computability of squared-error vs. absolute-error estimator," Statistical Science 12, p. 279-300. Powell (1986), "Censored regression quantiles"„Journal of Econometrics 32, p. 143-155. Saunders, A., (1999) Financial Institutions Management: A Modern Perspective, Irwin Series in Finance. Sheather, S.,J., and J. S. Maritz, (1983) "An estimate of the asymptotic standard error of the sample median," Australian Journal of Statistics 25, p. 109-122. Siddiqui, M., (1960) "Distribution of quantiles in samples from a bivariate population," J. Res. Nat. Bur. Standards 64B, p. 145-150.

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CONVENIENCE YIELDS IN BULK COMMODITIES: THE CASE OF THERMAL COAL

Jason West, Griffith University

ABSTRACT

This study advances the research on the convenience yield of bulk commodities with particular emphasis on thermal coal. We extend the option model of Milonas and Thomadakis (1997) to estimate thermal coal convenience yields using forward prices. We examine the business cycle of thermal coal in the presence of both demand and supply shocks and find that the convenience yield for thermal coal exhibits seasonal behavior. Convenience yields are negatively related to the inventory level of thermal coal despite the inventory not being co-located at the point of consumption while convenience yields are positively related to interest rates due to the business cycle. Our estimates of convenience yields for a bulk commodity such as thermal coal is consistent with results for other commodities such as base metals and oil where spot prices are more volatile than forward prices at low inventory levels. The result implies that the costs of storage are generally less than the operating costs associated with changes to production capacity so thermal coal producers prefer to stockpile the commodity rather than adjust production in response to changes in demand. JEL: C53, G14, Q41 KEY WORDS: Commodities, convenience yield, forward markets, thermal coal, storage, options, contango. INTRODUCTION The ability to trade financially settled contracts for seaborne thermal coal has undoubtedly increased the efficiency of the global coal market. Annually more than 560 million tonnes of coal are traded on the seaborne market and the growth in the volume of forward contracts for this commodity since 2002 has enabled producers and consumers of thermal coal to smooth out fluctuations in price exposure. This capability is critical for the highly seasonal European power market and the liquid trading of forward electricity contracts. Over 180 million tonnes of thermal coal is imported to Europe annually from the producing regions of South Africa, Colombia, Indonesia and Russia and consumers are able to hedge their exposure through coal swap contracts whose prices are subsequently tracked via a number of key price indexes. Thermal coal is a strategic resource which is primarily used for power production, although it is also consumed in cement manufacturing and other industries. The security of supply of thermal coal is critical for the efficient operation of Europe’s electricity market. The purpose of this study is to analyze the spot and forward market for thermal coal and provide estimates of convenience yield and volatility through time, while correcting for major sources of seasonality. We find that the observed convenience yield is a surrogate for the volatility level in the thermal coal spot market and changing dynamics in the supply of, and demand for, the commodity. The concept of convenience yield originates from Kaldor (1939) and was further developed under the theory of storage in Brennan (1958). The theory claims that goods in stock not sold forward have an

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unobservable value from the flexibility of use, since a market participant owning these goods has the ‘convenience’ to make use of them. For this reason the observable cost of carry of a stored commodity (foregone interest and the cost of physical storage) must be reduced by a so-called availability premium. Since buying on the spot market and selling forward is a riskless trade (cash and carry), the (net) cost of carry must equal to the difference between the forward price and the spot price. When we differentiate the existing body of convenience yield literature by commodity type we discover that bulk commodities such as thermal coal have so far received little attention. This is important to note since comparable studies for other commodities are of limited value for the bulk commodity market. This is because thermal coal is a resource with particular features and even the comparison to other energy commodities such as oil or natural gas, are of limited value. Transportation costs for seaborne thermal coal are generally higher and require significant infrastructure through the value chain. This can lead to persistent demand-supply imbalances when the capacity limit of the transport system is reached resulting in regional price differentials. Besides this, storage of thermal coal is not necessarily co-located with the thermal coal consumer and may therefore incompatible with the notion of convenience. Convenience yield studies in other commodity markets are thus not directly transferable to the coal market due to these unique characteristics. This study uses detailed data on the capacity of the transport network, local production volumes and operating costs for the storage, loading and transport nodes at mine and port facilities. Unlike other empirical studies of supply curves and the production smoothing of inventories we employ actual costs as reported by asset operators which avoids a broad analysis of inventory management where the cost structure is simply assumed. Most studies that estimate convenience yields use a cost-of-carry model where the convenience yield is treated as an exogenous variable. Brennan (1986) showed that convenience yields follow a mean- reverting process while Gibson and Schwartz (1990) used a cost-of-carry model with stochastic mean- reverting convenience yields, assuming the presence of an exogenously defined measure of convenience. Generally, models for convenience yields assume that storage costs are zero (Fama and French, 1988) or are simply assumed (Milonas and Henker, 2001). In particular Fama and French (1988) used the interest- adjusted basis as a proxy which avoids the need to estimate storage costs, to develop the relationship between convenience yield and inventory levels. Taking an alternative approach Milonas and Thomadakis (1997) extended the option approach of Heinkel et al. (1990) using a formulation of the Black–Scholes model to estimate convenience yields. Although they model convenience yields as call options they ignore storage costs which can result in theoretically unjustified negative convenience yields. Extending the option model of Milonas and Thomadakis (1997) to value convenience yields, we find that convenience yields are negatively related to the inventory level of the underlying thermal coal and are positively related to interest rates due to the business cycle. A positive convenience yield can be best represented as a long position in an embedded call option on the commodity. Our convenience yields estimates are consistent with Fama and French (1988) which illustrates that the spot price of thermal coal is more volatile than the forward price at low inventory levels which verifies the Samuelson (1965) hypothesis for bulk commodities. COMMODITY MARKETS AND THERMAL COAL Because a commodity can be consumed, its price is a combination of future asset and current consumption values. However, unlike financial assets, storage of energy products is costly and sometimes constrained by infrastructure design. Physical ownership of the commodity carries an associated flow of

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services and the agent has the option of flexibility with regards to consumption as well as reduced risk of commodity shortages. On the other hand the decision to postpone consumption implies a storage expense. Thermal coal producers operate in an environment where production cannot be altered easily and storage of the commodity is not necessarily co-located at the point of consumption. Furthermore the supply response to changes in demand is notoriously ‘sticky’ implying that production generally continues at a similar rate for some time despite medium-term changes in demand. In equilibrium, backwardation implies that immediate ownership of the physical commodity entails some benefit or convenience which deferred ownership (via a long forward position) does not. This benefit, expressed as a rate, is termed the ‘convenience yield’. A convenience yield is natural for goods, like art or land, that offer exogenous rental or service flows over time. However, substantial convenience yields are also observed in bulk commodities, such as coal which are consumed at a single point in time. Intuitively, the convenience yield corresponds to the dividend yield for stocks. The theory of storage (Brennan, 1958) explains convenience yields in terms of an embedded timing option. In particular, the holder of a storable commodity can decide when to consume it. If it is optimal to store a commodity for future consumption, then it is priced like an asset, but if it is optimal to consume it immediately, then the commodity is priced as a consumption good. Thus, a commodity’s spot price is the maximum of its current consumption and asset values (Routledge, Seppi and Spatt, 2000). Inventory decisions are important for commodities because, by influencing the relative current and future scarcity of the good, they link its current (consumption) and expected future (asset) values. This is unlike equities and bonds where outstanding quantities are generally fixed. We adapt a version of the Milonas and Thomadakis (1997) option pricing model to examine the behavior of convenience yields with supply and demand shocks for thermal coal using free on board (FOB) prices from Richard’s Bay, South Africa. Figure 1 illustrates the weekly average spot price of the price index for thermal coal from Richard’s Bay, known as API4, from 2003 to 2010. A plot of Newcastle FOB prices from Australia is also provided to illustrate the global nature of the seaborne thermal coal market and the relationship between coal prices from different exporting regions. Figure 1: Mean of API4 (Richards Bay, South Africa) and Newcastle (Australia) thermal coal FOB 2003-11 US$/Mt.

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Thermal coal prices tend to peak in July in preparation for the demand growth for imports to Europe in winter as well as the easing of the monsoon in India where the major ports begin to re-open. The lowest prices for thermal coal generally occur in the northern winter. As with the crude oil and natural gas markets, the behavior of thermal coal is affected by both seasonality and business cycles. We employ an extension of the Milonas and Thomadakis (1997) option pricing approach because the behavior of thermal coal prices are affected by seasonal business cycles and so modeling price behavior using mean reversion and assuming convenience yields are an exogenous mean-reverting variable (Gibson and Schwartz, 1990) may not necessarily be appropriate. To estimate convenience yields we consider the presence of unexpected demand-supply shocks and the business cycle. We define the business cycle as the sequence of supply and demand equilibrium traced to a point of relative disequilibrium at the height of demand through to the restoration of equilibrium. The thermal coal business cycle is thus from around March to October. DATA AND OBSERVATIONS The main indexes used for the trading, clearing and settlement of thermal coal, jointly calculated and published by Argus and IHS McCloskey, are the API2 and API4 indexes. The API2 index is the international price benchmark for coal imported to north-western Europe while the API4 index is the international price benchmark for coal exported from the Richards Bay terminal in South Africa. The API4 forward curve is constructed as an average of the Argus FOB Richards Bay assessment and McCloskey’s FOB Richards Bay marker for coal with certain minimum quality specifications. The API4 index is the most appropriate proxy for Atlantic coal prices to the European market because it is more representative of the true cost of coal as a consumption good, it is immune to changes in the forward freight market and it is also immune to supply alternatives from producers that enjoy a freight cost advantage into Europe. The implied inclusion of freight costs in the API2 index are difficult to extract in a meaningful way and therefore a true FOB forward curve is a better representation for this analysis. Figure 2: API4 thermal coal 12-month forward price differential to spot price in US$ 2003-10. Source: McCloskey.

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Figure 2 shows the contango(+)/backwardation(-) relationship against spot prices from 2003-2011. The 12m rate is used here as a proxy for the longer end of the curve (12-month and 24-month forward prices are highly correlated: > 0.89 over 2003-2011) and the 24-month tenor contracts were relatively illiquid prior to 2005. If the convenience yield is high enough, the observed forward price will be less than the spot price. This occurs quite frequently in oil and gas markets where the premium for immediacy is very real. If however, this relationship does not hold and the forward price is much higher than spot when taking into account high working capital costs (funding and storage), the convenience yield converges to zero. In addition to the cost-of-carry theory, Brennan (1958) established an equilibrium model for commodity inventories which assumes that the marginal convenience value of a good is a decreasing function of its aggregate inventory in the economy. Brennan therefore suggests a negative relationship between convenience yield and stock levels, which has been verified empirically for some commodities (Fama and French, 1988; Gibson and Schwartz, 1990; Modjtahedi and Movassagh, 2005) and will be tested for the bulk commodity markets in the following analysis. THE MODEL Let 𝐹(𝑡,𝑇) be the forward price at time t for delivery of the commodity at time T and let 𝑆(𝑡) be the spot price. According to the theory of storage under an arbitrage-free framework the return from purchasing the commodity at t and selling it for delivery at T, 𝐹(𝑡,𝑇) − 𝑆(𝑡), will equal the net cost of holding the commodity computed as the interest forgone during storage 𝑆(𝑡)𝑅(𝑡,𝑇) plus the marginal storage cost 𝑊(𝑡,𝑇) minus the marginal convenience yield 𝐶(𝑡,𝑇): 𝐹(𝑡,𝑇) − 𝑆(𝑡) = 𝑆(𝑡)𝑅(𝑡,𝑇) +𝑊(𝑡,𝑇) − 𝐶(𝑡,𝑇). (1) This notation follows Fama and French (1987). In a normal market forward prices should exceed spot prices by an amount that is equivalent to interest costs and storage costs and any deviation from this is explained via the so-called convenience yield. This quantity is a marginal spread component which can be modeled as an option on a positive spread between spot and forward prices. The forward price at date t is determined by current storage levels and the expected demand and production levels at T. When the market experiences higher demand or reduced supply, storage falls to zero. If production at T is known with certainty then we expect a direct but negative relationship between the forward price and storage levels which sets an upper bound for the forward price. When supply and demand is in perfect equilibrium we expect the convenience yield to equal zero however when equation (1) holds we obtain 𝐶(𝑡,𝑇) > 0. A temporary shock in demand or supply conditions during the business cycle will cause a change in storage levels which in turn affects the spot price. This will give rise to a risk premium for possession of the commodity resulting in a positive convenience yield. Fama and French (1988) consider the behavior of the convenience yield on an interest-adjusted basis which avoids the need to directly estimate the convenience yield. But this approach fails to provide a complete picture of the true convenience yield. For thermal coal, the storage cost implied in (1) is not difficult to estimate and so observing the true convenience yield is feasible. Using the alternative approach of Milonas and Thomadakis (1997) who treat the convenience yield as an option, we set the spot price as the underlying variable and the price of a 3-month forward contract as the exercise price. Under a

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cost-of-carry framework with zero storage cost, the convenience yield is the difference between the net cost of carrying a nearby and a distant futures contract observed at time 0, 𝐶𝑌(0,𝑇) = Max(𝐹(0, 𝑡) − 𝐹(𝑡,𝑇), 0). (2) The convenience yield from t to T observed at 0 at the commencement of the business cycle ignores the cost of storage. Therefore including the storage cost 𝑊(𝑡,𝑇) permits equation (2) to be defined as 𝐶𝑌(0,𝑇) = Max(𝐹⋆(0, 𝑡) − 𝐹(𝑡,𝑇), 0). (3) where 𝐹⋆(0, 𝑡) = 𝐹(0, 𝑡) + 𝑊(0,𝑇) assuming 𝑡 = 0. Since both the spot price and the forward price (exercise price) are stochastic we assume they both follow standard diffusion processes which can be expressed as 𝑑𝐹(0, 𝑡) = 𝜇1𝑚𝐹(0, 𝑡)𝑑𝑡 + 𝜎1𝑚𝐹(0, 𝑡)𝑑𝑧1𝑚, 𝑑𝐹(𝑡,𝑇) = 𝜇3𝑚𝐹(𝑡,𝑇)𝑑𝑡 + 𝜎3𝑚𝐹(𝑡,𝑇)𝑑𝑧3𝑚, where the subscripts 1m and 3m represent the 1- and 3-month tenor for each forward contract respectively. We make the important assumption that the diffusion terms 𝑑𝑧𝑡 are uncorrelated. The associated boundary condition is defined as 𝐹(0, 𝑡)Max(𝐹𝑇 − 1,0), (4) where 𝐹𝑇 = 𝐹⋆(0, 𝑡) 𝐹(𝑡,𝑇)⁄ . Applying Ito’s lemma yields the following closed form solution 𝐶𝑌(0,𝑇) = 𝐹⋆(0, 𝑡)𝑁(𝑑1) − 𝐹(𝑡,𝑇)𝑁(𝑑2), (5) where 𝑑1 =

ln(𝐹𝑇)+σc2τ 2⁄ 𝜎𝑐√𝜏

,

𝑑2 = 𝑑1 − 𝜎𝑐√𝜏 = ln(𝐹𝑇)−σc2τ 2⁄

𝜎𝑐√𝜏 ,

and 𝜎𝑐2 = 𝜎𝐹⋆(0,𝑡)

2 + 2𝜎𝐹⋆(0,𝑡)𝜎𝐹(𝑡,𝑇)𝜌𝐹⋆(0,𝑡)𝐹(𝑡,𝑇) + 𝜎𝐹(𝑡,𝑇) 2 , (6)

where 𝜎𝑖 is the volatility of each forward contract i, 𝜌𝑖𝑗 is the correlation coefficient of both forward contracts and 𝜏 is the period between the 1-month and the 3-month contracts. This derivation relies on the price of a traded asset as the strike price which resolves the unknown variable problem of the option approach (Lin and Duan, 2007).

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RESULTS We use the 1-month API4 price to represent the spot price of thermal coal since it is the nearest contract for delivery. The 3-month forward API4 price is used to represent the forward price as it is the forward contract with the highest liquidity. For the risk-free rate we use 3-month US Treasury bill yields. We obtained actual storage costs at Richard’s Bay Coal Terminal (RBCT) for the storage cost component of the model. We also make a quality adjustment to the coal at a depletion rate of 120kcal/kg per 3-month period, which acts as a linear price discount for a parcel of coal. No other quality adjustments were made. A non-zero storage cost does not greatly alter the observed behavior in the implied convenience yield curve over time, since storage fees are a small portion of the total cost of thermal coal (US$2-3/t annually). Convenience yields are calculated on a daily basis throughout the observation month and then averaged over each month. We calculate the monthly convenience yields from January to December and use July, when spot prices peak, as the shock month to estimate convenience yields. We apply a simple regression analysis to examine the relationship between convenience yields and inventory levels, covariance and interest rates and the convenience yield computed using the option formulation of equation (5) and the convenience yield computed using the traditional cost of carry formulation of equation (1). The regression equations are 𝐶𝑌𝑡,𝑇

𝑂𝑝𝑡𝑖𝑜𝑛 = 𝛽0 + 𝛽1𝐼𝑡−1 + 𝜀𝑡, (7) 𝐶𝑌𝑡,𝑇𝐶𝑜𝐶 = 𝛽0 + 𝛽1𝐼𝑡−1 + 𝛽2𝜎𝑐,𝑡2 + 𝛽3𝑟𝑓𝑡 + 𝜀𝑡, (8) where 𝐼𝑡−1 is the one-month lagged inventory level, 𝜎𝑐2 is the covariance of the spot and forward contract prices as per equation (6) and 𝑟𝑓𝑡 is the risk-free rate at time t. The theory of storage suggests that holding inventory becomes more costly during periods of high interest rates and therefore, convenience yields should be positively related to the risk-free rate as well as the covariance of the spot and forward prices. Table 1 presents the convenience yields calculated based on the call option 𝐶𝑌𝑡,𝑇

𝑂𝑝𝑡𝑖𝑜𝑛 and cost-of-carry 𝐶𝑌𝑡,𝑇𝐶𝑜𝐶 models. The results show that the values of the convenience yields estimated from the options model are higher than those from the cost-of-carry model, implying the strategic and management flexibility valued using the options approach. These results give support to the hypothesis of Brennan (1958) and suggest that the convenience yield is highest when inventories are low. That is to say, the benefit of holding inventories is greatest during periods of relative scarcity or heightened demand. In efficient pure contango markets the convenience yield should be close to zero. If inventory levels are small relative to the amount consumed of the commodity, the risk of a supply shock raises the convenience yield. If such risks are high enough, it is expected that the forward market will revert to a backwardated market, often suddenly. Under such conditions, it is also possible that arbitrage conditions may weaken or may even break down. It is incorrect to assume, out of context, that rising inventories means an overhang of supply that translates into lower prices until the market clears. Note that forward markets are priced on the principle of equivalence. In a perfectly balanced market, a consumer is indifferent between buying a physical commodity now and storing it for later consumption, and buying it for future delivery and letting the producer pay for the storage costs.

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Table 1: Linear regression of convenience yields for thermal coal (API4) computed using the options estimate and the cost of carry estimate on inventory, volatility and the risk-free rate by month 2004-10. t- statistics in parentheses, * denotes significance at the 1 percent level.

Month Model 𝜷𝟎 𝜷𝟏 𝜷𝟐 𝜷𝟑 Adj 𝑹𝟐 F Jan 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.054 -0.017 0.300 46.780

(0.554) (-0.017) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.148* -0.009* 2.245* -0.006* 0.315 17.409

(10.866) (-2.116) (6.088) (-3.453) Feb 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.042* -0.010* 0.099 12.818

(5.633) (-3.580) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.123* -0.009* 1.150* -0.003* 0.304 16.579

(17.281) (-3.274) (4.283) (-2.679) Mar 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.012* -0.013* 0.079 10.233

(3.930) (-3.199) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.125* -0.003* 2.326* 0.004* 0.653 67.985

(18.829) (-10.194) (9.220) (6.782) Apr 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.017* -0.015* 0.252 34.060

(6.919) (-5.836) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.099* -0.009* 2.211* 0.011* 0.773 91.932

(12.972) (-10.730) (3.333) (15.299) May 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.001 0.000 0.004 1.158

(0.888) (-1.319) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.167* -0.026* 7.107* 0.014* 0.589 51.681

(7.934) (-6.043) (7.861) (11.406) Jun 𝐶𝑌1𝑚,3𝑚 𝑂𝑝𝑡𝑖𝑜𝑛 0.027* -0.046* 0.112 9.406

(2.773) (-3.127) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.114* -0.006* 4.331* 0.004* 0.947 63.253

(34.902) (-3.820) (29.445) (6.094) Jul 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.074* -0.021* 0.170 23.360

(5.264) (-4.833) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.056* 0.010 1.089* 0.006* 0.148 7.330

(2.021) (1.062) (4.593) (2.872) Aug 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.026* -0.046* 0.127 17.038

(4.867) (-4.128) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.073* -0.015* 4.852* 0.029* 0.431 28.718

(8.328) (-8.172) (7.004) (8.964) Sep 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.011* -0.061* 0.091 7.062

(2.264) (-3.248) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 -0.111* 0.017* -1.623* 0.007* 0.853 75.776

(-5.924) (9.480) (-10.525) (4.250) Oct 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.022* -0.035* 0.106 11.585

(3.797) (-3.404) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 -0.105* 0.018* 6.881* -0.015* 0.488 29.225

(-4.883) (6.965) (7.342) (-8.345) Nov 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 0.059* -0.059* 0.186 25.149

(5.806) (-5.015) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 0.269* -0.009* -1.481* 0.004 0.356 20.540

(3.958) (-2.548) (-6.897) (0.845) Dec 𝐶𝑌1𝑚,3𝑚 𝑂𝑝𝑡𝑖𝑜𝑛 0.015* -0.014* 0.156 20.611

(5.227) (-4.540) 𝐶𝑌1𝑚,3𝑚

𝐶𝑜𝐶 -0.048* 0.015* 1.553* 0.017* 0.737 99.975

(-4.466) (6.778) (6.442) (11.853)

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This situation, also known as full carry, seldom applies in practice. The world's thermal coal consumers, mainly power producers, cannot afford to run out of inventory and they therefore pay for the ‘convenience’ of having excess supplies available. This yield can be viewed as the commodity buyer's insurance payment for supplies. It also represents the producer's cost of hedging by selling forward contracts for the commodity. For bulk commodities such as coal where the cheapest place of storage is generally with the producer, the convenience yield measure could be quite high. Table 2 illustrates the convenience yields from the shock month of July to the final month of the cycle in November. The negative correlation between the convenience yield and the inventory level suggests that it is closely linked to business cycle, as the convenience yield is unrelated to the thermal coal stocks in Europe. Table 2: Estimated convenience yields of holding period from the shock month of July to October (final month of the cycle) for 2004-10. t-statistics in parentheses, ** and * denotes significance at the 1 percent and 5 percent levels respectively. Jul-Oct 𝑪𝒀𝟏𝒎,𝟑𝒎

𝑶𝒑𝒕𝒊𝒐𝒏 𝑪𝒀𝟏𝒎,𝟑𝒎𝑪𝒐𝑪 2004 0.07785 0.07101 2005 0.08735 0.08554 2006 0.11981 0.10407 2007 0.07554 0.07829 2008 0.02080 0.02515 2009 0.00729 0.02891 2010 0.06914 0.05949 Total 0.0654* 0.0646* (4.4478) (5.8763) Correlation 𝜌 -0.422** -0.123* p-value <0.001 0.043

The theory of storage also predicts that, at a low inventory level, forward prices vary less than spot prices while at a high inventory level, spot prices and forward prices exhibit similar variability. Fama and French (1988) supported Samuelson’s hypothesis by examining the interest-adjusted basis of base metals. The convenience yield declines at higher inventory levels and rises at low inventory levels. To test the Samuelson (1965) hypothesis, we adopt the same approach as Fama and French (1988) and perform a regression of forward prices against spot prices. Next we conducted a regression of forward prices against spot prices using 𝑙𝑛�𝐹𝑡,𝑇 𝐹𝑡−1,𝑇−1⁄ � = 𝛼0 + 𝛼1𝑙𝑛(𝑆𝑡 𝑆𝑡−1⁄ ) + 𝜀𝑡, (9) categorized by high and low convenience yields for both the full sample and also for the shock month (July) data. The data was split by periods of high convenience yield and low convenience yield and the regression analysis then applied to estimate the 𝛼1 coefficients. Table 3 shows the results.

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Table 3: Regression of forward prices against spot prices using ln�Ft,T Ft−1,T−1⁄ � = α0 + α1ln(St St−1⁄ ) + εt split by high and low convenience yields for 2004-10 for the full sample and for the July data. t-statistics in parentheses, * denotes significance at the 1 percent level. Sample 𝐶𝑌1𝑚,3𝑚

𝑂𝑝𝑡𝑖𝑜𝑛 level 𝐶𝑌����1𝑚,3𝑚 𝑂𝑝𝑡𝑖𝑜𝑛 𝛼1

Full High 0.0572* 0.818* (5.4199) (2.7031) Low 0.0086* 0.9149* (3.4971) (42.557) July as shock High 0.0600* 0.765* (4.3043) (34.677) Low 0.0063* 0.9855* (5.5945) (89.026)

We find that high convenience yields have smaller average values for the coefficients while low convenience yields have average coefficient values close to one. This implies that at a low inventory level the spot price of thermal coal varies more than the forward price with a high convenience yield derived using the option model approach, while at high inventory levels the spot and forward price of thermal coal have similar variability with smaller convenience yields. These results are consistent with the hypothesis of Samuelson (1965) and the results of Fama and French (1988). When contracts are far away from maturity they are thinly traded and exhibit low volatility. As the maturity nears, both trading volume and volatility increase. Specifically, spot contracts of thermal coal are usually used for balancing week-to-week needs and consequently exhibit high volatility. This result therefore suggests that the term structure of thermal coal forward volatility is monotonically decreasing. CONCLUSION We have shown that the convenience yield for thermal coal using an extended version of the Milonas and Thomadakis (1997) call option model (Lin and Duan, 2007) exhibits seasonality in the presence of the business cycle. The results show that the negative correlation between the convenience yields for API4 thermal coal and the inventory level at Richard’s Bay becomes more significantly negative when examined during periods of high spot prices during the business cycle. This demonstrates that the timing of the business cycle is critical to the calculation of the thermal coal convenience yield. These results also indicate that while interest rates are affected by economic activity they in turn affect convenience yields of thermal coal. We find evidence that supports the Samuelson (1965) hypothesis that spot and forward price variations of thermal coal are similar when a supply shock occurs during higher inventory levels and that spot prices will be more variable than the forward prices at lower inventory levels. Deferred forward contracts are less volatile than near maturity contracts because as a contract draws nearer to maturity, producers and consumers are forced to react more quickly to information shocks and thus the term structure of thermal coal forward volatility is monotonically decreasing. Estimated convenience yields using the options approach are shown to be higher at low inventory levels than at higher inventory levels. Thermal coal producers clearly prefer to stockpile the commodity rather than adjust production in response to changes in demand which implies that the costs of storage are less than the operating costs associated with changes to production capacity.

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REFERENCES Brennan, M.J. (1958) “The supply of storage,” American Economic Review, 48, 50-72. Carlson, M., Khokher, Z. and Titman, S. (2007) “Equilibrium exhaustible resource price dynamics,” Journal of Finance 62: 1663-1703. Fama, E. and French, K. (1987) “Commodity futures prices: some evidence on forecast power, premiums and the theory of storage,” Journal of Business 60: 55-74. Fama, E. and French, K. (1988) “Business cycles and the behavior of metals prices,” Journal of Finance 43: 1075-1793. Gibson, R. and Schwartz, E.S. (1990) “Stochastic convenience yield and the pricing of oil contingent claims,” Journal of Finance 45: 959-976. Heinkel, R., Howe, M. And Hughes, J.S. (1990) “Commodity convenience yields as an option profit,” Journal of Futures Markets 10: 519-533. Kaldor, N. (1939) “Speculation and economic stability,” Review of Economic Studies 7: 1-27. Lin, W.T. and Duan, C.W. (2007) “Oil convenience yields estimated under demand/supply shock,” Review of Quantitative Finance and Accounting 28: 203-225. Milonas, N.T. and Thomadakis, S.B. (1997) “Convenience yields as call options: an empirical analysis,” Journal of Futures Markets 17: 1-15. Milonas, N.T. and Henker, T., (2001) “Price spread and convenience yield behavior in the international oil market,” Applied Financial Economics, 11, 23-36. Miltersen, K. (2003) “Commodity price modeling that matches current observables: A new approach,” Quantitative Finance 3(1), 51-58. Modjtahedi, M. and Movassagh, N. (2005) “Natural gas futures: bias, predictive performance and the theory of storage,” Energy Economics 27: 617-637. Moison, D.L. and Sperry, D.R. (1992) “Influence of production costs and inventories on mineral prices,” Natural Resources Forum 16: 271-276. Routledge, B.R., Seppi, D.J. and Spatt, C.S. (2000) “Equilibrium forward curves for commodities,” Journal of Finance 55(3): 1297-1338. Samuelson, P.A. (1965) “Proof that properly anticipated prices fluctuate randomly,” Industrial Management Review 6: 41-50. Schwartz, E.S. (1997) “The stochastic behavior of commodity prices: implications for valuation and hedging,” Journal of Finance 52(3): 923-973.

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Working, H. (1949) “The theory of the price of storage,” American Economic Review 39: 1254-1262. BIOGRAPHY Jason West is a Senior Lecturer at the Department of Accounting, Finance and Economics at Griffith University. He also serves as a consultant to the global resources and energy sector. His research appears in journals such as Annals of Actuarial Science, Asia Pacific Financial Markets and the Electricity Journal. He can be reached at Griffith Business School, 170 Kessels Road, Nathan, QLD 4111 Australia, [email protected].

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AN ANALYSIS OF FIRM CREDIT ACROSS THE WORLD Rudolf Sivak, University of Economics in Bratislava

Anetta Caplanova, University of Economics in Bratislava John Hudson, University of Bath

Chris Hudson, JRH Economics Consulting

ABSTRACT We use the World Values data set to analyze firm´s access to both trade and bank credit. There are substantial differences between and within countries, which remain significant even when we allow for firm and industry characteristics such as size, ownership, industrial sector, location, the firm’s domestic orientation and managerial experience. Hence it would appear that some countries and some regions within countries have less developed credit systems. Regional variations are linked to variations in the courts and the transport and Internet infrastructure. We also present evidence that the market substitutes trade credit for bank credit. JEL: G21, M2 KEYWORDS: trade credit, bank credit regional infrastructure, courts. INTRODUCTION The paper focuses on credit. We analyse both bank and trade credit, but particularly the former. It is based on more than 51,000 firms from 115 different ‘countries’ (The list is given in appendix. In reality there are less than 115 countries as some countries have been surveyed twice). Most of these will be developing countries, but the data also includes transition countries in Central and East Europe as well as some of the richer developing countries. This, as far as we are aware, is the first time such a large and diverse data base, covering so many countries has been used to analyse credit. Credit access is a critical factor for the development of the market economy. Constrained access to credit, which may be particularly important for small firms, can present a serious problem for their development (Carpenter and Petersen, 2002, Hutchinson and Xavier, 2006). There are several kinds of credit, both formal from financial institutions, and less formal trade credit from supplier firms and customers. In this paper we will be examining the determinants of trade credit and also overdrafts and lines of credit from the banks. A line of credit is defined as an available amount of credit that the establishment can draw upon from an account up to a pre-approved limit. Lines of credit usually carry monthly interest rates, and tend to be repaid quickly. They may or may not have a defined date of expiration, but tend to be short- term. A line of credit may take several forms such as cash credit, demand loan, export packing credit, term loan, discounting or purchase of commercial bills etc. To a large extent an overdraft is simply a specific form of a line of credit, but one which tends to carry a high rate of interest. The paper will proceed as follows. In the next section we will review the literature and then specify a functional form which will form the basis of the estimation. This empirical analysis will be based on a recent sample of firms from the World Bank’s Enterprise Surveys. In section 4 we describe this data and then in section 5 present the empirical results. Finally we conclude the paper.

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LITERATURE REVIEW The literature has concentrated on identifying differences between firms in their access to credit and also on differences between geographical regions and countries. Not all firms need or want credit. Rodriguez- Rodriguez (2006) concludes that firms in the hospitality sector make less use of trade credit and those in industry and construction use it most and these results are probably linked to ‘need’. Nadiri (1969), Ferris (1981) and Emery (1987) argue that transaction costs for the debtor are reduced considerably with immediate payment on delivery. But this is not possible for all firms in all industries, i.e. some firms need credit. A key factor in obtaining it is the ability to reduce the degree of informational asymmetry between potential creditor and debtor. Because of this the creditor needs to evaluate in some way, the credit worthiness of the potential debtor who in turn needs to signal credit worthiness. Thus, access to credit may be denied because of high fixed costs in evaluating creditworthiness, particularly for small firms (Zecchini and Ventura, 2009). Two factors serve to facilitate credit in the presence of asymmetric information, one is equity or collateral (Hubbard and Kashyap, 1992), the second is reputation (Diamond, 1989). Collateral can lessen credit rationing and borrowing costs. Berger and Udell (1995) focus on collateral in the context of commitment loans, i.e. overdrafts. Cressy and Toivanen (2001) emphasise that collateral can be particularly important with respect to unlisted firms. But if the small firm, particularly a small new firm, has no collateral or the legal system is inadequate to protect creditors’ rights, problems may remain. Small firms often do not have audited accounts and thus formal debt covenants linked to financial ratios are costly to write and enforce (Ortiz-Molina and Penas, 2008). Similarly, Hutchinson and Xavier (2006) found that new firms and firms with long term debt and SMEs were most constrained and faced large difficulties in accessing external sources of financing. To an extent the relationship between creditor and debtor is based on a degree of trust and the greater is this, the lower are potential evaluation costs. Trust can be built up over time and in part may be based on the information the creditor gains about the debtor (Lapavitsas, 2007). Ortiz-Molina and Penas (2008) also conclude that the evidence is that stronger relationships increase credit availability and reduce collateral requirements. To the extent that these relationships are linked to distance, we would expect these to be weakest in rural areas. Carling and Lundberg (2005) refer to this as the ‘church tower principle’, reflective of the bank as the church tower, which can observe firms in its proximity. In the context of bank lending, information relevant for screening and monitoring firms may be more difficult to come by for the more distant firms. As a consequence banks should reflect this in more strenuous standards in assessing the creditworthiness of distant firms. However, their empirical results gave no support for the existence of geographical credit rationing on behalf of the bank. There is support in the literature for the substitutability of trade credit and institutional credit. Atanasova (2007), e.g., confirmed the hypothesis that trade credit is taken up by firms as a substitute for institutional finance at the margin when they are credit constrained. Love, Preve and Sarria-Allende (2007), Valverde and del Paso (2009) and Mateut, Bougheas and Mizen (2006) all report results which support this possibility. Rodriguez-Rodriguez (2006) also argued that difficulties in accessing institutional finance may be compensated for by the greater use of trade credit, although it tends to be more expensive than other forms of institutional credit due to the high risk of non-payment. Smith (1987), Petersen and Rajan(1997) and Burkart and Ellingsen (2004), amongst others, argue that there is a link between trade credit and informational asymmetry. That is, a firm’s suppliers may have an informational advantage over banks when assessing credit risk and also in clearing merchandise in the event of non-payment of debt.

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In her empirical analysis of trade credit, Rodriguez-Rodriguez (2006) used profit (the more profitable the firm, the less likely it is to resort to trade credit), size, bank credit and industry sectors as explanatory factors in determining access to trade credit. The relevance of sectors is based in part on the advantage of firms over financial institutions in claiming back supplied intermediate goods in case of customer default. This possibility will vary across sectors depending upon the type of goods being supplied and their transformation by the customer (Petersen and Rajan, 1997). The age of the firm was also included in the analysis with the expectation that younger firms would experience the most difficulty in accessing bank funding. Most analyses find age to be significant in part because informational asymmetry tends to decline with age. Niskanen and Niskanen (2006) in their study of Finish firms found creditworthiness and access to capital markets to be important determinants of trade credit extended by sellers to small firms in a bank-dominated environment. Larger and older firms, and firms with strong internal financing are less likely to use trade credit, whereas firms with a high ratio of current assets to total assets, and firms subject to loan restructurings are more prone to using trade credit. There has been some analysis of regional differences in access to bank credit, but much less on trade credit. Roberts and Fishkind (1979) put forward several reasons for regional segmentation of bank credit markets. Firstly, the transaction costs of acquiring information about credit markets outside a region which would impact on isolated regions in particular. Secondly, non-homogeneity of regional assets making evaluation difficult. Finally, regional differences in liquidity preferences and risk aversion. Moore and Hill (1982) also pointed to differences in regional resources as a determinant of supply side credit availability. Rodriguez-Fuentes (1998) in an analysis of Spain concluded that banks may influence regional development by providing a regional pattern of credit availability that is likely to be spatially unbalanced. SPECIFYING A FUNCTIONAL FORM A firm will access a particular type of credit if the benefits outweigh the costs: Bij(Cij*) > Rij(Cij*) + TCij(Cij*) (1) Where Cij* represents the optimal amount of credit for the i’th firm to obtain from the j’th creditor. The benefits (B) relate to the increase in profits the credit can generate. These will vary from industry to industry and in particular relate to the production lead time, i.e. the time between starting production and receiving payment. For example, in the case of restaurants, the production lead time is relatively small and the gap between buying food and receiving payment from the customer is generally less than a week. Firms in other industries face more substantial problems. The lag, e.g. for the construction industry can be substantial, particular with respect to house building. The costs in equation (1) fall into two kinds. Firstly the repayment costs (R), which is basically the interest rate together with the amount of credit (C*), and secondly the transaction costs (TC) of acquiring a loan. The ‘interest rate’ may be implicit as in trade credit, or more explicit as with a bank loan. The transaction costs are in part incurred during the process of providing the information to the potential creditor that they are credit worthy. These costs need to be incurred whether or not credit is given and the possibility that credit may not be granted may make firms reluctant to apply for credit in the first place. The transaction costs relating to a specific credit type will be a function of the firm’s characteristics, i.e. age, size and assets, the sector it operates in and the amount the creditor could recover in the event of loan

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default. The latter will depend upon the sector, the country’s legal system and the rule of law and also the firm’s assets and possibly legal form. The transaction costs might also, on the church tower principal, depend upon location, i.e. whether the firm is located in a large town or city or a rural area. Asset values may also vary spatially. Repayment costs are likely to vary with firm and sector characteristics and the benefits of credit will relate to the firm’s need. The latter will be proxied by sector and also by ownership, with firms who are part of a group, either domestic or multinational, possibly less likely to need credit. We assume that the probability of accessing multiple credit sources, and hence any single form of credit, will increase with firm size and the amount of credit being sought. This is because the fixed, transaction costs of applying for credit will become relatively less important compared to the marginal cost as the amount being applied for increases. Given this, it might seem unlikely that a firm would seek multiple sources of credit. The fixed transaction costs will have to be incurred for each potential creditor and if the firm just has one source of credit they will need to apply only once (This ignores the fact that trade credit is likely to be from multiple sources.) Yet we know that firms do have multiple credit sources and in particular that this is the case for the firms in our sample. There are two possible explanations. Firstly, the repayment costs may increase with the amount borrowed as this represents increased risk to the creditor and increased likelihood of default. Secondly, the firm may wish to diversify the risk of losing a credit source by accessing multiple credit sources. One way of approaching the analysis is to assume that all firms can obtain credit from any source, provided they can meet the costs, but for some firms who have difficulty signalling creditworthiness, this may not be the case. Our functional form will be similar to that used by others in the literature. However, the literature has emphasized that different sources of credit may be substitutable. In particular a firm which cannot get credit from a bank may resort to trade credit. This too is clearly implicit in our analysis, albeit within the context of high transaction costs for acquiring bank credit driving firms to trade credit, where the transaction costs may be lower as suggested in the literature, but the interest payments substantially higher. This raises estimation problems as decisions to access different credit modes are jointly endogenous. Thus we will approach the issue of credit type substitutability in a different way, i.e. from a regional perspective. For example, if bank credit is relatively prevalent in a locality then this should lower the transaction costs of acquiring bank credit in that locality, in part because bankers will have experience in evaluating credit worthiness of local firms and perhaps also in recovering assets in the case of default. This should impact upon the probability of any one firm acquiring bank credit and, if the substitutability argument is valid, reduce the probability of accessing trade credit. Thus in addition to firm characteristics, as outlined above, and sector and country fixed effects, we will also include regional credit characteristics in the analysis. We only include regional access to bank credit and not trade credit. In part it is likely to be the former which drives the latter, i.e. trade credit will respond to a lack of bank credit. But in part too, the data on trade credit is not as full in its coverage as that for bank credit. More generally we also anticipate regional differences in the credit structure due to differences in accessing information which may vary with regional characteristics such as population density and regional history. Specifically we will include information on regional infrastructure, both physical linked to transport and electronic linked to communication. Finally, it is important to stress that the foundation for credit is trust, albeit trust conditioned with caution, and it is possible for trust to differ also between regions and not simply between countries. To an extent trust is fostered by a sound legal system where agents will have confidence that contracts will be enforced. Hence we will also include information on regional qualities of courts.

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THE DATA In the empirical analysis, we use the data from the World Bank’s Enterprise Surveys (More information is available and the data accessible at http://www.enterprisesurveys.org/). These are off 55,284 firms across the world, although not all the firms have data suitable for analysis. The surveys were carried out between 2006 and 2010 and some countries will have been surveyed twice in this period. The surveys are targeted at establishments with five or more full time employees. Geographical distribution is defined to reflect the distribution of the non-agricultural economic activity of the country and for most countries this implies including the major urban centers. The survey provides information about a country's business environment, how it is perceived by individual firms, and about the various constraints to firm performance and growth. Firms were asked about their access to sources of external financing, including overdraft facilities, whether they had a line of credit or a loan from a financial institution and the availability of trade credit in the previous fiscal year. The trade credit variable related to the proportion of the establishment’s working capital that was financed from suppliers’ credit and advances from customers. However, this data is not available for all the respondents as was largely the case with bank credit. In addition to the responses of the firms we were able to calculate from the data regional variables which, for the i’th firm, for instance, relate to the proportion of firms, other than the i’th firm, in the region who have access to different types of credit. This is based on 474 regions in the 166 countries. As mentioned earlier, we will also include other regional variables. These will relate to transport and electronic infrastructure and the perceived qualities of the court system. If these do factors do not vary within countries, but only between them, then the regional variables will not be significant, as the country dummy variables will capture this impact. All the data are defined in an appendix. Table 1: Regional Credit Variations Line of credit Overdraft Supplier credit Full sample 41.1 44.4 14.8 Sub Saharan Africa (SSA) 20.8 29.4 15.9 Latin America & Caribbean (LAC) 56.3 67.5 19.2 East European Central Asia (ECA) 48.2 42.1 6.74 South Asia (SA) 28.2 41.2 3.61 East Asia and Pacific (ESP) 37.6 19.4 5.12 Middle East& N. Africa (MEA) 12.2 17.0 10.2 Notes: The numbers in the first two columns relate to the percentage having access to the specified type of credit. The final column shows the average (with most responding 0) amount of supplier credit as a proportion of the firm’s working capital. For supplier credit, there were relatively few observations available for ECA. An alternative, more widely asked (for ECA), question asked whether they were given trade credit, of which 63.4% replied yes. Table 1 shows credit access for all firms in each region. There are substantial differences between these regions. The region where credit is most abundant is LAC, followed by ECA and the rest of Asia. However, supplier credit tends to be in short supply in all regions of Asia. This may reflect cultural attitudes and differing levels of trust. Asia apart, there tends to be slightly less variation in supplier credit than bank credit. EMPIRICAL ANALYSIS

The regression results are shown in Table 2. The first two and penultimate two columns were estimated by binomial probit as the dependent variable takes a value of either zero or one. The third and final columns

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have been estimated by Tobit as this variable has a lower bound of zero and an upper one of 100, with both being effective. We have used the robust or sandwich estimator of the standard errors. This estimator is robust to some types of misspecification so long as the observations are independent. Because they are continuous variables covering a fairly wide range, all the regional variables have been included in a quadratic manner, with both the variable and its square. This allows the relationship to be nonlinear and this was also the case for domestic share. For the firm’s age, a similar result was achieved by including the log of age. It is clear that firms’ access to credit is at least partially determined systematically by their characteristics and those of their industry. The first column relates to lines of credit. Foreign firms are less likely to access a line of credit as are small and then medium sized firms. Age, however is not significant. Of critical importance is whether the firm is an exporter or not. Access to lines of credit increase with the domestic share of the firm, although at a declining rate. Company legal form also has an impact on access to credit, with private limited companies being more able to access credit and sole traders less likely than other firms. Finally access to credit increases with managerial experience. Geography too is important. Lines of credit are more likely in rural areas than large cities. There is some evidence that industrial sector has an impact on firms’ access to credit with hotels, e.g., less likely to have access to lines of credit. We defer discussion of the impact of the regional variables until later. The second column shows the results for overdrafts. To a considerable extent the results are similar to those for lines of credit, but there are differences. Firstly, age is now very significant and the probability of accessing an overdraft increases nonlinearly with the firm’s age. Firms in rural areas are not more likely to access overdrafts, but those in towns are less likely. Foreign firms are not significantly different to other firms, but group firms are more likely to access an overdraft. Finally we turn to the results for supplier credit. Once more we focus on the differences with respect to column 1. Managerial experience is no longer significant and size is considerably less significant. In particularly medium sized firms are no less likely to have trade credit than large firms. Age is, however, again significant, with supplier credit increasing with the firm’s age. Hence there is some evidence that some firms who are disadvantaged in terms of accessing formal credit, are not so disadvantaged in accessing supplier credit. We turn now to the regional variables. As the problems caused to firms by the courts increase regionally, so access to credit declines but at a declining rate. However, this is compensated for by opposite patterns with respect to overdrafts and supplier credit. Figure 1 illustrates these impacts, together with the kernel density for regional courts. The probability of accessing a lines of credit declines initially as the ‘regional courts’ variable increases, but then increases. The latter may simply be because we are using a quadratic form and, as the kernel density shows, there are not many firms to the right of the turning point. This decline in the probability of accessing lines of credit is compensated for by increases in the probability of accessing overdraft facilities and supplier credit.

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Table 2: Regression Analysis of Access to Credit

2.1 2.2 2.3 2.4 2.5 2.6 Credit Overdraft Supplier Credit Overdraft Supplier Regional Variables Line credit Line credit

Courts -0.5996* 0.6127* 97.68** -0.7147** 0.2943 104.4** (2.35) (2.38) (7.96) (2.79) (1.12) (8.46) Transport -0.1796* -0.0952 6.787 -0.1177 -0.017 4.66 (2.27) (1.15) (1.91) (1.50) (0.21) (1.28) Electronic 0.4257* 1.673** -74.17** -0.2425 0.5101* -47.66** communication (2.18) (8.61) (9.36) (1.17) (2.43) (5.37) Courts2 0.7995* -0.394 -186.4** 0.9354* -0.0154 -194.3** (2.09) (1.01) (9.47) (2.43) (0.04) (9.84) Transport2 0.0405 0.0094 -3.223** 0.0254 -0.0103 -2.559* (1.57) (0.34) (3.06) (1.00) (0.39) (2.35) Electronic -0.3952* -1.607** 78.19** 0.1692 -0.6332** 52.80** communication2 (2.05) (8.15) (9.21) (0.83) (3.00) (5.65) Bank credit 1.814** 2.689** -73.78** (6.43) (9.32) (6.88) Bank credit2 -0.7635** -0.8975** 57.3** (3.04) (3.45) (5.22) Firm Specific Variables Managerial 0.0014* 0.0016* 0.0171 0.0014* 0.0015* 0.0207 experience (2.25) (2.40) (0.58) (2.16) (2.19) (0.70) Domestic 0.0154** 0.0108** 0.3961** 0.0152** 0.0105** 0.402** share (11.62) (7.85) (6.26) (11.51) (7.62) (6.35) Domestic -0.00014** -0.00011** -0.0031** -0.00014** -0.00011** -0.0032** share2 (12.50) (9.01) (5.80) (12.38) (8.76) (5.89) Log firm age 0.0176 0.0753** 1.527** 0.0159 0.0734** 1.522** (1.80) (7.43) (3.32) (1.63) (7.22) (3.30) Small firm -0.7656** -0.6899** -4.976** -0.7641** -0.6894** -4.947** (38.08) (33.02) (5.13) (37.97) (32.91) (5.10) Medium -0.3284** -0.2567** -0.522 -0.330** -0.2597** -0.4756 sized firm (17.70) (13.21) (0.60) (17.78) (13.32) (0.54) Rural firm 0.0827** -0.0395 2.526 0.0729* -0.0576 2.983 (2.65) (1.22) (0.93) (2.33) (1.77) (1.10) Town based 0.0248 -0.0586** 1.628 0.0267 -0.0544* 1.193 firm (1.18) (2.60) (1.26) (1.27) (2.42) (0.92) No -0.1684** -0.1436** -4.554** -0.1354** -0.0841* -4.533** Location (5.37) (4.36) (3.17) (4.25) (2.51) (3.14) Foreign -0.2734** 0.0131 2.144* -0.2723** 0.0145 2.167* firm (12.16) (0.58) (2.23) (12.11) (0.65) (2.25) Group firm -0.0337 0.0639** -0.9851 -0.0349 0.0639** -0.8763 (1.77) (3.29) (1.20) (1.83) (3.29) (1.07) Company Form -0.0232 0.025 -5.054** -0.0252 0.0242 -5.237** Partnership (0.64) (0.69) (3.31) (0.70) (0.67) (3.42) 0.0814** 0.108** -2.939** 0.0764** 0.0994** -2.946** Private Ltd. (3.49) (4.34) (2.61) (3.27) (3.99) (2.61) -0.0593 -0.0283 -7.227** -0.0632 -0.0393 -7.156** Publicly (1.70) (0.77) (3.68) (1.81) (1.07) (3.65) listed -0.0636* -0.1585** -10.15** -0.0646* -0.1596** -10.20** Sole (2.48) (5.86) (8.23) (2.52) (5.90) (8.26) proprietor 0.1562** 0.1369** -2.406 0.1528** 0.1282** -2.407 (4.28) (3.57) (1.43) (4.18) (3.33) (1.43) Industry/sector variables Textiles -0.3094 -0.0352 -3.96 -0.2953 -0.0283 -4.584 (1.01) (0.11) (0.70) (0.96) (0.08) (0.81) Food 0.2374** 0.190** -7.817** 0.2411** 0.1949** -7.760** (8.49) (6.57) (6.80) (8.61) (6.72) (6.74) Metals 0.1683** 0.204** -0.9936 0.1668** 0.2005** -0.9512 (5.23) (6.13) (0.72) (5.18) (6.01) (0.69) Electronics 0.0487 0.1723** -4.323 0.0479 0.1729** -4.278 (0.76) (2.59) (1.37) (0.75) (2.58) (1.35) Chemicals 0.2581** 0.3104** -2.474 0.2573** 0.3088** -2.374

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(7.50) (8.65) (1.68) (7.48) (8.57) (1.61) Wood 0.132* 0.2222** 4.403 0.1325* 0.2188** 4.335 (2.26) (3.68) (1.87) (2.26) (3.61) (1.84) Plastic 0.1679** 0.1982** -2.603 0.1686** 0.1974** -2.587 (4.58) (5.15) (1.52) (4.60) (5.10) (1.51) Auto 0.2355* 0.1988 -13.85* 0.2269* 0.1799 -13.89* (2.14) (1.52) (2.47) (2.06) (1.38) (2.48) Other 0.175** 0.2011** 0.3923 0.1775** 0.2061** 0.4797 manufacturing (6.12) (6.81) (0.34) (6.20) (6.96) (0.41) Retail 0.1945** 0.3181** -3.590** 0.1952** 0.3208** -3.503** (7.38) (11.76) (3.23) (7.40) (11.82) (3.15) Hotels -0.1302** 0.0279 -19.26** -0.1272** 0.03 -18.90** (2.85) (0.63) (10.91) (2.78) (0.67) (10.70) Other 0.1277** 0.2424** -12.92** 0.1284** 0.2441** -12.85** services (4.31) (8.01) (9.87) (4.32) (8.04) (9.81) Construction 0.1576** 0.2539** -3.388* 0.1577** 0.2552** -3.289* (4.58) (7.30) (2.13) (4.58) (7.32) (2.07) Observations 51180 51029 41417 51180 51029 41417 Log Likelihood -27672 -25940 -96610 -27610 -25760 -96587 Χ2 11225 13972 11251 14218

Note: The regression coefficients for 2.3 and 2.6 where estimated by Tobit with upper and lower bounds of 100 and 0 respectively. The remaining regressions were estimated using the method of binomial probit, (.) denotes t statistics and */** significance at the 5% and 1% levels respectively. Χ2 denotes the likelihood ratio statistic. Standard errors have been corrected for heteroscedasticty. This is reasonable as overdrafts are the most expensive form of bank credit (Streb et al, 2002) and of course, supplier credit, particularly from firms, tends to be more expensive still. Hence as the quality of courts decline, and the ability to enforce contracts also declines, so there is a switch from cheaper to more expensive forms of credits. However is this conclusion justified? The possibility exists that courts could pose problems for firms because they are effective in enforcing contracts, planning restrictions, and individual rights, that is ‘good courts’ theoretically pose problems for firms, just as much as ‘bad courts’. To examine this further we regressed, using binomial probit, individual attitudes to courts on perceptions as to whether the courts were (i) fair, impartial and uncorrupted (good courts), (ii) quick, (iii) affordable and (iv) able to enforce decisions (enforce). All four characteristics were significant, with enforce being most important, followed by quick, good and finally affordable. The signs were such that in all cases a lack of speed, inability to enforce decisions, etc, increased problems for firms. Hence, it would appear that the trends in Figure 1, correspond to courts which are poorly performing on a number of criteria.

Note The curve for suppliers credit has been scaled so that it can be included in this figure with the other curves.

-.2 -.1

0 .1

.2

0 1

2 3

4 K

er ne

l d en

si ty

0 .2 .4 .6 .8 1 Regional Courts (Increases with Court problems)

Kernel density. Suppliers Overdraft Credit Line

Figure 1: Kernel density function and the impact of Courts on Credit

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The impact of regional infrastructure is less ambiguous in its impact on bank credit. Both forms of credit decline as regional transport problems increase, with the two variables comprising the quadratic form, jointly significant at the 5% level in both equations. The impact on supplier credit is to an extent the reverse. Figure 2 shows these impacts. As regional transport problems become more common, so there is a decline in both types of bank credit, and again the turning point with respect to lines of credit may be a reflection of the use of a quadratic form. This decline is, however, compensated for by increased use of supplier and consumer credit. This is the first time we have evidence of a degree of substitutability between bank and other forms of credit.

Note The curve for suppliers credit has been scaled so that it can be included in this figure with the other curves. Finally, for these regressions, we turn to the impact of regional electronic communication for business on the different forms of credit. These impacts are very significant. As Figure 3 shows, as regional business Internet usage becomes more common, so there is an increase in the probabilities of accessing both types of bank credit. This increase is, however, accompanied by a decline in the use of supplier and consumer credit. This again provides evidence of a degree of substitutability between bank and other forms of credit. However, we note that beyond a certain point supplier credit too begins to increase, and the kernel density suggests that this may not simply be because of the use of a quadratic form.

Note The curve for suppliers credit has been scaled so that it can be included in this figure with the other curves.

-.3 -.2

-.1 0

.1

0 .2

.4 .6

.8 1

Ke rn

el de

ns ity

0 1 2 3 4 Regional Transport (Increases with transport problems)

Kernel density. Suppliers Overdraft Credit Line

Figure 2: Kernel density function and the impact of Regional Transport

-.2 0

.2 .4

0 .5

1 1.

5 2

Ke rn

el d

en sit

y

0 .2 .4 .6 .8 1 Regional Internet (Increases with business Internet usage)

Kernel density. Suppliers Overdraft Credit Line

Figure 3: Kernel density function and the impact of Regional Internet

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The final three set of regressions add regional bank credit to the regressions. This reflects for the i’th firm, the proportion of firms other than the i’th firm who had access to either an overdraft or line of credit. We can see from these regressions that the probability of a firm having access to either form of bank credit increases as bank credit becomes more common in the region. However, we also see that the probability of the firm accessing trade credit declines as regional bank credit becomes more common. This therefore provides further support for the substitutability of trade credit for bank credit. CONCLUSION Our analysis has shown that there are systematic differences within regions in terms of access to credit. These differences are related to the quality of courts, which we assume is because of their ability or otherwise to enforce contracts, and also to infrastructure. Faced with increasing difficulties of enforcing contracts banks are either switching to more expensive forms of loans or reducing the number and value of loans they give, with suppliers and consumers in part compensating with what is in effect trade credit. Good transport and Internet infrastructure facilitate a bank’s ability to keep a watch over client firms, as well as the firm’s ability to communicate with the bank. In the literature a form of this is known as the ‘church tower principle’, reflective of the bank as the church tower, which can observe firms in its proximity (Carling and Lundberg, 2005). We found no evidence for this within the context or the rural/urban distinction. But we have found evidence with respect to the quality of infrastructure. This emphasises that better quality transport and Internet can bring benefits to firms on several dimensions. Our results have also confirmed the findings of others with respect to the importance of firm size, age, legal form and sector for access to credit financing. In line with Rutkowski (2006) we found the evidence that foreign firms are less likely to access formal domestic credit markets, at least with respect to lines of credit. Thus, there is little evidence that they crowd out domestic firms from bank credit; indeed to an extent the reverse is the case. In almost all countries, some regions lag behind others in terms of credit access. These regions too will be disadvantaged and this may lead to uneven geographical development. This is both consistent with and extends the work of Samolyk (1994) and Rodríguez-Fuentes (1998) who suggest that banks may influence regional development by producing a regional pattern of credit availability that is likely to be spatially unbalanced. But we have also shown that the problem is not just with bank credit, but also trade credit. There are also substantial differences between countries, and between different regions of the world. This may be due to economic factors reflecting the stage of the development of firms or of the financial system. There are several reasons as to why credit access may differ within and between countries. Firstly, some countries may be more prosperous than others. This may affect both firms’ prospects and local supply side credit conditions. Differences in trust and the difficulties in evaluating firms’ creditworthiness may also be an explanatory factor. Trust can be generated over time and is also self perpetuating in that trust generates credit, credit facilitates economic success and this in turn increases trust. But whatever the cause of low credit availability, for the country as a whole and regions within the country, a key question is whether governments and aid agencies kick can start the process.

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APPENDICE Appendix 1: Definition of variables:

Endogenous variables Access to Credit: Coded 1 if the firm has access to credit otherwise zero. There are two different types of credit: line of credit and bank overdraft. Supplier credit: The proportion of the establishment’s working capital that was financed from advances from customers and credit from suppliers. Exogenous variables Regional variables These are averages of the views of firms with respect to: Electronic communication (internet) Binary variable, coded 1 if the firm used the Internet to communicate with clients or suppliers. Transport The extent to which transport presented an obstacle to the firm, responses ranged from no obstacle (coded 1) to very severe obstacle (coded 5). Courts: Whether the courts posed a major or severe problem to the firm’s operations (coded 1) Bank credit: Whether the firm had a bank line of either kind. Firm specific variables Age The age of the firm. Small firm Coded 1 if the number of full time employees is less than 20, otherwise Coded zero. Medium sized firm Coded 1 if the number of full time employees is between 20 and 100, otherwise Coded zero. Partnership Coded 1 if the firm has the legal status of a partnership, otherwise Coded zero. Private limited Coded 1 if the firm is a private limited company, otherwise takes company a value of zero. Publicly listed Coded 1 if the firm is a publicly listed company, otherwise takes company a value of zero. Sole proprietor Coded 1 if the firm has the legal status of a sole proprietor, otherwise Coded zero. Group firm Coded 1 if the firm is part of a larger firm, otherwise Coded zero. Foreign firm Coded 1 if the share of the company held by foreign individuals or companies > 49%, otherwise Coded zero. Rural Coded 1 if the firm’s location has less than 50,000 people Town Coded 1 if the firm’s location has between 50,000 and 1 million people (and is not a capital city) No location The location question was not asked of all firms. This variable takes a value of 1 for those not asked. Its use ensures that the coefficients relating to rural and town are in relation to larger towns and cities. Domestic share The % of the firm's sales which were national sales. Manager’s experience: The number of years experience working in the sector of the top In addition there are industry/sector and country indicator variables as discussed in the text.

Appendix 2: Summary of country data

Country/year of survey Overdraft Credit Line

Supplier credit

Afghanistan2008 0.363 0.034 3.72 Albania2007 0.78 0.474 2.09 Angola2006 0.017 0.045 10.7 Angola2010 0.117 0.094 2.22 Argentina2006 0.706 0.420 19.5 Argentina2010 0.800 0.578 26.8 Armenia2009 0.425 0.449 . Azerbaijan2009 0.161 0.189 . Bangladesh2007 . . 3.67 Belarus2008 0.374 0.538 . Benin2009 0.613 0.393 7.5 Bhutan2009 0.544 0.528 6.63 Bolivia2006 0.434 0.550 12.7 Bolivia2010 0.564 0.558 16 Bosnia and Herzegovina2009 0.510 0.684 . Botswana2006 0.364 0.307 25.2 Botswana2010 0.537 0.515 14 Brazil2009 0.826 0.653 20.3 Bulgaria2007 0.344 0.435 3.29 Bulgaria2009 0.295 0.448 . BurkinaFaso2006 0.374 0.295 14.3

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BurkinaFaso2009 0.563 0.284 7.45 Burundi2006 0.256 0.348 10.4 Cameroon2006 0.412 0.419 16.1 Cameroon2009 0.559 0.344 15.6 CapeVerde2006 0.153 0.469 5.48 CapeVerde2009 0.301 0.385 9.31 Chad2009 0.740 0.187 7.64 Chile2006 0.869 0.737 15.8 Chile2010 0.855 0.766 22.6 Colombia2006 0.858 0.682 21.3 Colombia2010 0.854 0.732 35.3 Congo2009 0.497 0.106 8.47 Croatia2007 0.523 0.706 14.7 Czech Republic2009 0.536 0.492 . DRC2006 0.050 0.059 15 DRC2010 0.145 0.131 5.13 Ecuador2006 0.853 0.581 24.3 Ecuador2010 0.913 0.609 26.7 ElSalvador2006 0.597 0.618 12.7 Eritrea2009 0.358 0.162 0 Estonia2009 0.495 0.560 . Fiji2009 0.573 0.409 6.98 Fyr Macedonia2009 0.270 0.596 . Gabon2009 0.156 0.089 1.92 Gambia2006 0.310 0.167 34.8 Georgia2008 0.295 0.413 . Ghana2007 0.154 0.186 18.3 Guatemala2006 0.523 0.435 16.7 Guinea2006 0.086 0.058 21.1 GuineaBissau2006 0.013 0.031 8.52 Honduras2006 0.599 0.539 9.55 Hungary2009 0.488 0.454 . Indonesia2009 0.120 0.260 2.9 Ivory Coast2009 0.243 0.116 3.15 Kazakhstan2009 0.285 0.406 . Kenya2007 0.416 0.414 24.5 Kosovo2009 0.367 0.233 . Kyrgyz Republic2009 0.264 0.234 . LaoPDR2009 0.089 0.175 0.529 Latvia2009 0.258 0.601 . Lesotho2009 0.444 0.285 15.1 Liberia2009 0.093 0.207 4.51 Lithuania2009 0.207 0.601 . Madagascar2009 0.362 0.218 14 Malawi2009 0.553 0.400 10 Mali2007 0.088 0.082 13.5 Mali2010 0.456 0.158 5.05 Mauritania2006 0.160 0.148 21.8 Mauritius2009 0.626 0.520 6.29 Mexico2006 0.182 0.118 14 Micronesia2009 0.118 0.426 4.24 Moldova2009 0.306 0.468 . Mongolia2009 0.320 0.566 . Montenegro2009 0.336 0.586 . Mozambique2007 0.140 0.132 16.4 Namibia2006 0.517 0.267 29.8 Nepal2009 0.375 0.476 1.11 Nicaragua2006 0.310 0.407 11.1 Niger2005 0.504 0.480 5.59 Niger2009 0.713 0.393 16.1 Nigeria2007 0.080 0.043 25 Panama2006 0.629 0.553 9.21 Paraguay2006 0.625 0.467 13.7 Peru2006 0.728 0.701 19.3 Peru2010 0.687 0.801 23.8

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Philippines2009 0.225 0.345 9.68 Poland2009 0.519 0.481 . Romania2009 0.499 0.534 . Russia2009 0.421 0.438 . Rwanda2006 0.340 0.349 15.1 Samoa2009 0.606 0.495 6.99 Senegal2007 0.154 0.134 14.2 Serbia2009 0.593 0.686 . Sierra Leone2009 0.447 0.193 3.27 Slovak Republic2009 0.538 0.476 . Slovenia2009 0.652 0.775 . SouthAfrica2007 0.576 0.315 23 Swaziland2006 0.278 0.231 22.5 Tajikistan2008 0.178 0.308 . Tanzania2006 0.170 0.198 16.8 Timor Leste2009 0.153 0.067 0 Togo2009 0.645 0.239 4.68 Tonga2009 0.447 0.547 3.97 Turkey2008 0.686 0.609 . Uganda2006 0.139 0.169 18 Ukraine2008 0.479 0.335 . Uruguay2006 0.554 0.527 15.3 Uruguay2010 0.638 0.526 20.7 Uzbekistan2008 0.038 0.164 . Vanuatu2009 0.531 0.445 5.78 Venezuela2006 . 0.254 . Vietnam2009 0.123 0.634 4.68 Yemen2010 0.170 0.122 10.2 Zambia2007 0.390 0.157 23.5 Notes: Overdraft and credit line show the proportion of firms with access to this type of credit. The final column shows the average (with most responding 0) amount of supplier credit as a proportion of the firm’s working capital. REFERENCES Atanasova, C. (2007) Access to institutional finance and the use of trade credit, Financial Management, 36, 49-67. Berger, A.N. and Udell, G. (1995) Relationship lending and lines of credit in small firm finance, Journal of Business, 68, 351-81. Burkart, M. and Ellingsen, T. (2004) In-kind finance: a theory of trade credit, The American Economic Review, 94, 569-90. Carling, K. and Lundberg, S. (2005) Asymmetric information and distance: An empirical assessment of geographical credit rationing, Journal of Economics and Business, 57, 39–59. Carpenter, R.E. and Petersen, B.C. (2002) Capital market imperfections, high-tec investment and new equity financing, Economic Journal, 112, F54-F72. Cressy, R. and Toivanen, O. (2001) Is there an adverse selection in the credit market?, Venture Capital, 3, 1-16. Diamond, D.W. (1989) Reputation acquisition in debt markets, Journal of Political Economy, 97, 828- 62. Emery, G. (1987) An optimal financial response to variable demand, Journal of Finance and Quantitative Analysis, 22, 209-25.

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Ferris, J. (1981) A transactions theory of trade credit use, Quarterly Journal of Economics, 96, pp. 243- 70. Hubbard, R.G. and Kashyap, A.K. (1992) Internal net worth and the investment process: An application to US agriculture, The Journal of Political Economy, 100, 506-34. Hutchinson, J. and Xavier, A. (2006) Comparing the impact of credit constraints on the growth of SMEs in a transition country with an established market economy, Small Business Economics, 27, 169-79. Lapavitsas, C. (2007) Information and trust as social aspects of credit, Economy and Society, 36, 416-36. Love, I., Preve, L.A. and Sarria-Allende, V. (2007) Trade credit and bank credit: Evidence from recent financial crises, Journal of Financial Economics, 83, 453-69. Mateut, S., Bougheas, S. and Mizen, P. (2006) Trade credit, bank lending and monetary policy transmission, European Economic Review, 50, 603-29. Moore, C.L. and Hill, J.M. (1982) Interregional arbitrage and the supply of loanable funds, Journal of Regional Science, 22, 499-512. Nadiri M. (1969) The determinants of trade credit in the US total manufacturing sector, Econometrica, 37, 408-23. Niskanen, J. and Niskanen, M. (2006) The determinants of corporate trade credit policies in a bank- dominated financial environment: the case of Finnish small firms, European Financial Management, 12, 81-102. Ortiz-Molina, H. and Penas, M. F. (2008) Lending to small businesses: the role of loan maturity in addressing information problems, Small Business Economics, 30, 361-83. Petersen, M. and Rajan, R. (1997) Trade credit: theories and evidence, The Review of Financial Studies, 10, 661-91. Roberts R.B. and Fishkind, H. (1979) The role of monetary forces in regional economic activity, Journal of Regional Science, 19, 15-29. Rodríguez-Fuentes, C.J. (1998) Credit availability and regional development, Papers in Regional Science, 77, pp. 63-75. Rodriguez-Rodriguez, O.M. (2006) Trade credit in small and medium size firms: an application of the system estimator with panel data, Small Business Economics, 27, 103-26. Rutkowski, A. (2006) Inward FDI and financial constraints in Central and Eastern European countries, Emerging Markets Finance and Trade, 42, 28-60.

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Samolyk, K. (1994) Banking conditions and regional economic performance evidence of a regional credit channel, Journal of Monetary Economics, 34, pp. 259-78. Smith, J. (1987) Trade credit and informational asymmetry, The Journal of Finance, 42, 863-72. Streb, J.M, Bolzico, J., Druck, P.F., Henke, A., Rutman, J. and Sosa-Escudero, W. (2002) Bank Relationships: Effect on the Availability and Marginal Cost of Credit for Firms in Argentina, IDB Working Paper No. 156. Available at SSRN: http://ssrn.com/abstract=1814704 Valverde, S. C. and del Paso, R.L. (2009) Bank-lending channel and non-financial firms: Evidence for Spain, Spanish Economic Review, 11, 125-40. Zecchini, S. and Ventura, M. (2009) The impact of public guarantees on credit to SMEs, Small Business Economics, 32, 191-206. ACKNOWLEDGEMENT This paper/publication is the result of the project of Operational Programme Science & Research: Creation of excellent workplace of economic research for solving the challenges of civilization in the 21st century (ITMS 26240120032). We support research activities in Slovakia / Project is co-funded by EU funds". BIOGRAPHY Rudolf Sivak is Professor of Finance at the Department of Finance, University of Economics in Bratislava, the Slovak Republic. H e publishes extensively in Central and Eastern European region, but also internationally. He is active in national and regional professional organisations, member of several boards of scientific bodies and member of several editorial boards. His research appears in refereed journals such as Ekonomicky Casopis, Politicka Ekonomie and Post-Communist Economies. He can be reached at University of Economics in Bratislava, Dolnozemska cesta 1, 85235 Bratislava, [email protected]. Anetta Caplanova is Associate Professor of Economics at the Department of Economics, University of Economics in Bratislava, the Slovak Republic. She published extensively in refereed journals in Central and Eastern European region such as Politicka ekonomie, Ekonomicky Casopis, but also in international journals e.g. Post-Communist Economies, Economics of Governance, Journal of Common Market Studies, Journal of Policy Modeling. Author can be reached at University of Economics in Bratislava, Slovak Republic, Dolnozemska cesta 1, [email protected]. John Hudson is a Professor in Economic at the Department of Economics, University of Bath, United Kingdom. His research appears in journals such as Journal of Economic Perspectives, The Economic Journal, The European Journal of Political Economy, The Journal of Public Economics, Economics Letters, Kyklos, The International Review of Law and Economics, The British Journal of Political Sciences, Political Studies, The Journal of Banking and Finance and Journal of Economic and Behavioral Organization. He can be reached at the University of Bath, Claverton Down, Bath, BA2 7AY, United Kingdom, [email protected].

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COULD PEER-TO-PEER LOANS SUBSTITUTE FOR PAYDAY LOANS?

Lynda S. Livingston, University of Puget Sound

ABSTRACT Many consumer advocates consider payday loans—short-term, uncollateralized loans with high interest rates—to be predatory. The need for short-term funding has spurred the quest for an alternative, an effort encouraged and supported by regulators like the FDIC. In this paper, we evaluate the potential for online peer-to-peer markets to provide this type of credit. We conclude that while certain features of the P2P markets would be well suited (such as their loans’ longer terms, larger amounts, and multiple payments), the longer time to fund and the required minimum credit scores for borrowers present meaningful hurdles. JEL: G21, G28 KEYWORDS: Fringe Lending, Payday Loan, Peer-to-Peer Loan INTRODUCTION Payday loans have been called “one of the most expensive forms of credit in the world” (Skiba and Tobacman, 2008). A typical two-week payday loan costs $15 per $100 borrowed—a 391.07% APR, or 3,724% effective annual rate. Opponents accuse payday lenders of drawing borrowers into a “debt trap” of extremely high-interest loans. The industry counters that its rapid growth proves that it is providing a necessary, welfare-enhancing service to its customers. Demand for short-term loans does not imply, however, that payday loans are the best form of supply. In this paper, we evaluate a potential alternative, peer-to-peer (P2P) loans. In a P2P marketplace, potential borrowers post requests for loans, and potential lenders bid on the requests that interest them. A lender can bid as little as $25 per loan, so it may take many lenders to fully fund a successful loan request. This more “democratic” process may be able to meet borrowers’ needs for short-term, unsecured credit more effectively than can the payday industry. We focus primarily on the Prosper platform, the oldest P2P network in the United States. Since opening in 2006, Prosper’s evolution has made it a more viable payday alternative, as its minimum loan size, bid per loan, and term have all fallen. The biggest hurdles left are access, funding speed, and required credit score. However, we argue that these factors may not preclude at least some payday customers from being better served by the P2P market. P2P LOANS VERSUS PAYDAY LOANS In a peer-to-peer market, potential borrowers use an online forum to post “listings” requesting loans. Listings contain certain objective information verified by the P2P platform (such as the debt-to-income ratio), as well as any additional information volunteered by the borrower (perhaps pictures or a description of the loan’s purpose). Lenders browse listings and bid on those they like. Bids can be as low as $25. Most loans are funded by multiple lenders, and most lenders build diversified portfolios of loans. Only about 10% of listings are funded (see, for example, Herzenstein, et al., 2008; Freedman and Jin,

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2008b). In this section, we consider both the loan-specific features of this market (term, size, installment payments) and structural features (the ability of lenders to screen listings, accessibility of the platform, required credit score for borrowers) to evaluate the potential for P2P loans to substitute for payday loans. P2P loans are larger than payday loans. The minimum Lending Club loan is $1,000 ($2,000 for Prosper), while the maximum for payday loans is around $700. (80% of payday loans are less than $300, according to Stegman, 2007.) Being able to borrow more in the P2P market may actually alleviate a borrower’s underlying financial stress. There is extensive evidence that payday borrowers frequently roll over their loans multiple times per year. Smaller initial loans do not meet the needs of these customers—they just end up turning into much bigger loans. Larger P2P loans, with much lower interest rates (and with dollar costs that vary with the term of the loan) may be a more reasonable solution to the borrowers’ cashflow problems. In fact, Dobbie and Skiba (2011) show that relaxing the credit constraints on payday borrowers actually reduces the risk of default. Both fringe firms in their sample limit payday loans to half of a borrower’s net pay. This creates “discontinuities” in the schedule of loan size: these loans come in $50 increments, so the maximum loan amount rises with every $100 increase in pay. These jumps in maximum loan size are constraints for borrowers with paychecks just below the cutoffs. The authors show that relaxing these constraints—allowing borrowers to increase their loan size—actually decreases the default rate. The potential moral hazard (being more likely to default on larger loans) is mitigated. Thus, the greater flexibility and possibility for larger loan sizes in the P2P market could improve default rates for some constrained borrowers. Since lower-income borrowers may be more credit constrained (Dobbie and Skiba, 2011), P2P loans may be of the most use for just the people who might otherwise turn to payday lenders. P2P loans also offer borrowers more time to address their cashflow problems. Adams, et al. (2009) find that subprime borrowers’ demand for loans is much more sensitive to the loans’ terms than to their rates. The longer terms of P2P loans therefore are attractive to this group. The rollover evidence underscores this; customers roll over their payday loans because they really want longer-term loans. Another important distinction of P2P loans is that they are repaid in installments. This makes P2P loans a better vehicle for the “savings discipline” that Lawrence and Elliehausen (2008) ascribe to payday loans. In addition, because payment is automatic and systematic, loan performance will improve (FDIC, 2005). Having discussed the loan-specific features of the P2P market, we now turn to the structural features that may affect the loans’ suitability for payday borrowers. Supply in the P2P market depends upon the willing participation of many, probably amateur, individual lenders. Freedman and Jin (2008b) identify two possible information problems for these lenders. First, since they cannot see borrowers’ exact credit scores, they face the potential for adverse selection. Second, because they need not be professional lenders, they may not be able to screen loans effectively. Of course, the two possible problems are related: if lenders are somehow able to screen, they can mitigate any adverse selection. This appears to be the case in the P2P market, suggesting that it may be able to meet the needs of payday borrowers. The professional lenders in the payday market use an extremely streamlined screening process, to cut costs. Eligible borrowers whose credit score is above a threshold are approved; those below are not (Skiba and Tobacman, 2009). This thumbs up/thumbs down “discontinuity” does not exist in the P2P market. In fact, P2P lenders do not even see the borrowers’ credit scores. Instead, the P2P platforms

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separate applicants into risk groups based on their credit characteristics; lenders know only this risk assignment. Since higher- and lower-quality borrowers in a given risk class look the same, there is a “lemons” problem. This problem is not just hypothetical; adverse selection in these markets is real. Freedman and Jin (2008b) find that listings within a credit grade in fact have migrated toward the lower end of the credit-score range. The platforms address this problem both with loan caps, which they have always had, and by disclosing more borrower information, which they have done consistently as they have aged. However, the platforms cannot unilaterally mitigate the second potential information problem identified by Freedman and Jin. If lenders are poor screeners, all the information disclosure in the world will not lead to a viable market. However, lenders are not poor screeners. Several factors facilitate their effective screening. First, P2P lenders are using their own money. They therefore have a strong incentive to make careful decisions. Second, lenders learn. Freedman and Jin (2008a) conclude that loan performance on Prosper indicates that lenders exhibit dynamic learning— making better loan selections over time—and that new lenders benefit from that accumulated knowledge. Finally, P2P lenders turn out to be quite adept at interpreting the “soft data” in borrowers’ listings, perhaps even more skilled than traditional bankers (who instead rely heavily on collateral; Iyer, et al., 2009). There are still some structural features inhibiting screening. The small minimum bid per loan may lead lenders to substitute diversification for screening. Lenders also now have an “out”: both Prosper and Lending Club (another P2P platform) have introduced platforms for secondary-market trading. However, the most significant change affecting screening has been Prosper’s elimination of the borrower’s maximum rate. Borrowers used to post the highest rate they were willing to pay for a loan. Iyer, et al. (2009) found that this rate was the most informative soft indicator available to lenders, since it was a credible and costly signal of borrower quality. However, borrowers can no longer send this signal, since Prosper now simply assigns rates based on loan characteristics. (Lending Club has always done this.) This change has probably diminished the quality of screening in the P2P market. Nonetheless, screening is still possible, so the market is a viable payday alternative from the loan-supply side. On the demand side, there are more significant hurdles. First, we must consider borrowers’ ability to access the market. Payday borrowers highly value the long hours, convenient locations, and personal service they receive at payday shops (Buckland and Martin, 2005). The internet-based P2P platforms may be poor substitutes. However, as Buckland, Hamilton, and Reimer (2006) note, internet access is becoming increasingly available to low-income borrowers (through community organizations and libraries, for example). In rural areas, internet access actually may be much more convenient for small- dollar borrowers, since fringe lenders are less common outside of cities (FDIC, 2005). In addition, the increasing push by payday lenders into online lending suggests that an internet platform need not automatically preclude payday borrowers from P2P markets. Of course, internet access does not guarantee a timely—or any—loan. Payday borrowers leave the store with their money. P2P borrowers must create a listing, go through screening by the platform (for example, credit verification), then wait for bids. If there are not enough bids, there is no loan. Even if the loan receives enough lender interest to be funded, there is still a delay before the borrower gets her cash. Payday borrowers may not be the types who generally plan this far ahead. These sorts of borrowers may require significant education before being able to use P2P loans effectively—but they undoubtedly would require that education for any payday alternative.

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Another potential barrier between payday borrowers and the P2P market is credit score. Both Prosper and Lending Club require minimum FICO scores for borrowers. Prosper, in particular, is becoming more stringent (as Lending Club always was); so much so, in fact, that Freedman and Jin (2008a) assert that Prosper is moving from being a “comprehensive” market toward being one that simply serves traditional borrowers. If payday borrowers’ credit scores were too low, they would be shut out of the P2P market. FICO credit scores range from 350-800; the national median is between 700 and 750 (Adams et al., 2009). Only 27% of Americans have FICO scores below 650 (Curry, 2006). In February of 2007, after a year in business, Prosper raised its FICO cutoffs for its lowest two credit grades, E and HR, by 20 points each, while prohibiting borrowers with no credit or with credit scores below 520 from borrowing. In July of 2009, “to improve and optimize returns,” they raised the minimum credit score for borrowers to 640 (Larsen, 2009). Lending Club’s 660 minimum is even more stringent. The difficulty in assessing a payday borrower’s ability to meet the FICO requirements is that fringe lenders use a different credit score—the Teletrack score—when making loans. Teletrack scores incorporate information from subprime loans, and are eight times as effective in predicting payday loan default as FICO scores. However, the two scores are not highly correlated (only 0.26 in a matched sample; Agarwal, et al., 2009). Therefore, it is not obvious whether the typical payday borrower can meet the P2P market’s FICO thresholds. We do have some information on the FICO scores of fringe borrowers. Adams, et al.(2009) study subprime auto lending. Half of the FICO scores of borrowers in their sample were less than 500. These fringe borrowers were low-income; they rented or lived with their parents; one-third had neither checking nor savings accounts; more than half had a delinquency within six months before their auto loan. Their credit scores suggested “sparse or checkered” credit histories, and they had “problematic” access to credit. Over half of those loans ended in default; only 39% were paid in full. These, then, were not like the typical payday borrowers. We would therefore expect payday borrowers to have FICO scores greater than those in Adams, et al.’s sample. Additional evidence comes from Agarwal, et al.’s (2009) study of a sample of borrowers who have both credit cards and payday loans. The average FICO score for this group is 673, high enough for both Prosper and Lending Club (although the standard deviation is 68 points). 2,740 borrowers in their sample of 3,090 (89%) have FICO scores greater than 600 (1,906 above 650). The average Teletrack score for this group is 425 (σ = 283). In a more recent study of payday borrowers, Dobbie and Skiba (2011) find an even higher mean Teletrack score of 550. These values suggest that at least some payday borrowers would be able to use the P2P markets. CONCLUSION Herzenstein, et al. (2008) assert that payday loans are “extremely detrimental” to consumers. They also suggest that P2P lending can improve payday borrowers’ welfare. So do Iyer, et al. (2009), who say, “The uncollateralized nature of lending and the ability to lenders to partly screen suggests that peer-to- peer markets can indeed complement and add value to the existing lending models and improve access to credit, particularly for small individual borrowers who may otherwise be limited to costly sources of finance like payday lenders.” In this paper, we evaluate the potential for P2P loans to be a meaningful alternative. In some ways, they appear well suited. They are longer-term, which is a critical difference according to consumer advocates and regulators. They are accessible anywhere, around the clock, by internet. Their rates are magnitudes lower. Nonetheless, there are hurdles. One potential—though not insurmountable—hurdle is the required minimum FICO credit score of at least 640. The biggest problem,

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however, is probably the time to fund: P2P loans take as long to fund as a payday loan does to mature! Consumer advocates who wish to use the promising peer-to-peer platforms to offer alternatives to payday loans therefore should focus their efforts on speeding up the funding process. Harnessing the social network potential of P2P “groups” may be one way to shorten the actual bidding process (for example, if groups bid on members’ loans, facilitating funding). The verification and actual funding are the purview of the platforms; creating efficiencies there would require coordination between consumer advocates and the platforms. REFERENCES Adams, William, Liran Einav, and Jonathan Levin (2009) “Liquidity Constraints and Imperfect Information in Subprime Lending,” American Economic Review, Vol. 99(1), p.49-84 Agarwal, Sumit, Paige Marta Skiba, and Jeremy Tobacman (2009) “Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?” NBER Working Paper No. 14659 Buckland, Jerry and Thibault Martin (2005) “Two-Tier Banking: The Rise of Fringe Banks in Winnipeg’s Inner City,” Canadian Journal of Urban Research, Vol. 14(1), Summer, p. 158-181 Buckland, Jerry, Blair Hamilton, and Brendan Reimer (2006) “Fringe Financial Services, Inner-city Banking and Community-based Solutions,” Canadian Journal of Urban Research, Vol. 15(1), Summer, p. 109-128 Curry, Pat (2006). How Credit Scores Work, How a Score is Calculated. Retrieved October 6, 2011, from the Bankrate.com Web site: www.bankrate.com/brm/news/credit-scoring/20031104a1.asp Dobbie, Will and Paige Marta Skiba (2011) “Information Asymmetries in Consumer Lending: Evidence from Two Payday Lending Firms,” Vanderbilt University Law School, Law and Economics Working Paper No. 11-05 Federal Deposit Insurance Corporation (FDIC) (2005) Guidelines for Payday Lending. Retrieved June 21, 2010 from FDIC Financial Institution Letters Web site: www.fdic.gov/news/news/financial/2005/fil1405a.html Freedman, Seth and Ginger Zhe Jin (2008a), “Dynamic Learning and Selection: The Early Years of Prosper.com.” working paper Freedman, Seth and Ginger Zhe Jin (2008b), “Do Social Networks Solve Information Problems for Peer- to-Peer Lending? Evidence from Prosper.com,” working paper Herzenstein, Michal, Rick L. Andrews, Utpal M. Dholakia, and Evgeny Lyandres (2008) “The Democritization of Personal Consumer Loans? Determinants of Success in Online Peer-to-Peer Lending Communities,” working paper Iyer, Rajkamal, Asim Ijaz Khwaja, Urzo F.P. Luttmer, and Kelly Shue (2009) “Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending?” NBER Working Paper No. 15242

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Larsen, Chris (2009) Prosper is Back! (We Mean It This Time). Retrieved October 3, 2011 from Prosper.com Web site: blog.prosper.com/2009/07/13/welcome-back-lenders/ Lawrence, Edward C. and Gregory Elliehausen (2008) “A Comparative Analysis of Payday Loan Customers,” Contemporary Economic Policy, Vol. 26(2), April, p. 299-316 Skiba, Paige Marta and Jeremy Tobacman (2009) “Do Payday Loans Cause Bankruptcy?” working paper Skiba, Paige Marta and Jeremy Tobacman (2008) “Payday Loans, Uncertainty, and Discounting: Explaining Patterns of Borrowing, Repayment, and Default,” Working Paper Number 08-33, Vanderbilt University Law School Stegman, Michael A. (2007) “Payday Lending,” Journal of Economic Perspectives, Vol. 21(1), Winter, p. 169-190

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CONNECTING CAPITAL BUDGETING PRACTICE WITH THE MILES-SNOW STRATEGIC TYPE: A NOVEL

MANEGERIAL ACCOUNTING APPROACH Nubumasa Shimizu, Waseda University

Akiko Tamura, Hosei University

ABSTRACT This paper examines the management process for each strategic type of firm (namely, Defenders, Prospectors, Analyzers, and Reactors) as a new way of analyzing capital budgeting from a managerial accounting perspective. Using a 2009 survey of Japanese manufacturing firms, we reveal the following. To start with, Defenders seldom search for new investment projects because they establish a stable status in a limited operation domain. Therefore, the principal purpose of capital investment in this strategic type is to improve cost competitiveness. As a result, Defenders develop the investment project in their own way, and then evaluate profitability thoroughly following implementation. In contrast, Prospectors continuously search for market opportunities, and evaluate and select projects in order to pioneer new product markets and profit opportunities. Thus, the main purpose of capital investment in this strategic type is to produce new products. Consequently, Prospectors emphasize profitability and timing in the development phase, and then carefully compare the alternative projects available. Finally, Analyzers carefully deliberate and decide upon the optimum timing of investment in order to seize upon market opportunities using their existing technology. As a result, this strategic type does not aggressively pursue capital investment.

JEL: G31 M41

KEY WORDS: Capital budgeting, management process, Miles and Snow strategic type, mail survey

INTRODUCTION

Capital budgeting is a critical problem for firms in terms of restraining organizational activity and retaining a large amount of capital over the long term. The theoretical research on the capital budgeting decision began after World War II and has had a great influence on managerial accounting (Hiromoto [1993]). As a result, managerial accounting research on capital budgeting has been strongly influenced by finance theory, and so most discussion has concerned the use of common economic evaluation techniques, including the payback method, simple rates of return, net present value, the internal rate of return, and real options (Sugiyama [2002]). This tendency is especially clear in managerial accounting research on capital budgeting (also known as capital investment budgeting or the capital budgeting decision) in Japan (Shimizu [2004]). Unfortunately, where economic evaluation techniques have been the focus of capital budgeting decisions, there has been a corresponding neglect of managerial accounting (Northcott[1992]). The mail survey employed in this current research uncovered the following key features of capital budgeting management in Japanese firms (Shimizu et al. [2007]). First, economic evaluation techniques feature in most phases of capital budgeting, including development, proposal, deliberation, authorization, and postinvestment evaluation. Second, there is a ranking of the various capital budgeting projects available to the firm.

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Finally, economic evaluation techniques help to set capital budgeting targets in the firm and the limits to capital spending. Although these are only some of the many interesting details revealed in the survey, they do suggest that capital budgeting management in managerial accounting (that is to say, capital budgeting) includes many more factors than described in either the previous research or texts. Therefore, in order fully to explain capital budgeting as managerial accounting, we need to know not only about the investment decision but also about the series of management processes involved; that is, how capital budgeting projects in actual firms are developed, authorized, and implemented (Haka[2007], Maccarrone [1996], Toribe [1997], Yamamoto [1998], and Shimizu [2006]). Accordingly, the principal aim of this paper is to consider the management process fitted to each strategic type as a new way of clarifying capital budgeting as managerial accounting, and to describe the reality of capital budgeting in Japanese firms. Our chief motivations for the analysis are: first, that the firm’s strategy must affect capital budgeting management, and second, that capital budgeting should fit with each firm’s chosen strategy in order to improve business results. The remainder of the paper is organized as follows. In Section 2, we introduce the theory of Miles and Snow [1978] and describe the method used to group firms into strategic types. In Sections 3, 4 and 5, we analyze the stance and purpose of capital investment, capital budgeting management, and capital budgeting in the planning system for each strategic type using the results of our mail survey. We then extract the distinctive characteristics of capital budgeting as fitted to each strategic type. Finally, in Section 6, we present the implications of our work and suggest some possible future research directions. MILES AND SNOW THEORY AND THE TYPOLORY OF FIRMS Miles and Snow Theory In brief, and following Tsuchiya [1983], the theoretical framework of strategic types that Miles and Snow [1978] proposed is as follows. First, the organization develops a strategy in order to adapt to its environment and to choose and create an adaptive environment. Second, in order to implement the strategy effectively, an organizational structure adapted to this strategy is required. Third, the organization needs management processes adapted to the strategy to employ efficient behavior. Fourth, the structure and processes that the organization already has are conditions for the strategy developed next. Fifth, therefore, the subject of the dominant coalition of the organization is to adapt strategy, structure and process interactively for the organization to be effective and to behave efficiently. Finally, there are four forms of possible adaptive behavior for the organization: the Defender, the Prospector, the Analyzer, and the Reactor. Put another way, firms survive in a competitive environment by controlling the following series of processes: first, deciding upon the organizational domain in which they behave (the entrepreneurial problem), second, deciding upon what system they will use to operate the activity (the engineering problem), and third, formulating and implementing the management processes needed to operate these systems successfully (the administrative problem). There are four possible patterns of adaptation. Drawing on Miles and Snow [1978], these four environmental adaptations of organizations (strategic types) have the following characteristics.

• Defender: This strategic type limits its operational area to a relatively narrow product market where it improves efficiency and cost competitiveness, and establishes firm status.

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• Prospector: This strategic type always searches for market opportunities to obtain profits. It aggressively creates change and uncertainty and develops new products and markets.

• Analyzer: This strategic type establishes firm status in existing product markets but also searches for market opportunities that it can cope with using its existing technology and rapidly seizes these if they appear promising.

• Reactor: The strategy in this strategic type is not functioning properly. It cannot adapt; rather, it merely reacts to environmental change and lacks consistent organizational activity.

The main objective of our 2009 mail survey is to distinguish clearly the characteristics of those strategic types whose strategy is functioning (Defenders, Prospectors, and Analyzers) (Many researches which are applied Miles and Snow strategic theory to managerial accounting only discuss two types, namely Defenders and Prospectors, instead of four types. See Simons [1987]. Fukuda [2008] discuss Defenders and Prospectors in Japanese firms). Outline of the mail survey We sent our mail survey to a sample of Japanese manufacturing firms in March 1, 2009 and received responses by April 30, 2009. We mainly addressed the questionnaires to the management planning sections of 853 Japanese manufacturing firms listed on the Tokyo Stock Exchange First Section, requesting them to respond concerning capital investment for their main product. Unfortunately, the response rate to the survey was only 11.72% (100 of the 853 companies). This response rate was significantly lower than our previous survey in 2005 (Shimizu et al. [2007]), one reason being that our request for a response coincided with an exceptionally busy period in accounting settlements associated with the so-called Lehman Shock. Table 1 provides the number of respondent firms by industry. Using a Chi-squared test, we confirm that the respondent firms’ distribution by industry is comparable to all manufacturing firms listed on the First Section of the Tokyo Stock Exchange. We also compare firm scale (total assets and capital stock) across respondent and nonrespondent firms, and find no significant difference. Table 1: Respondent Firms by Industry

Foods Textiles & apparel

Pulp and paper

Chemical s

Pharmaceutica ls

Oil and coal products

Rubber commodities

Glass & ceramics

6 (6%) 2 (2%) 1 (1%) 11 (11%) 1 (1%) 2 (2%) 0 (0%) 3 (3%) Iron& steel

Nonferrous metals

Metal products

Machinery Electric appliances

Transportatio n equipment

Precision instruments

Other Products

7 (7%) 4 (4%) 7 (7%) 13 (13%) 23 (23%) 13 (13%) 2 (2%) 5 (5%) Note: Number of firms and percentage of total responses in parentheses The Method Used to Measure Strategic Typology and the Results In order to classify the respondent firms into four strategic types, we adopted the measurement of strategic types described by Conant et al. [1990]. This method has been successful in many studies as a useful way of grouping firms into Miles–Snow strategic types (DeSalbo et al. [2005]). The classification procedure proposed by Conant et al. [2005] is as follows. To start with, we prepared 11 questions that explicated the three basic problems in Miles and Snow’s [1978] adaptive-cycle model. These comprised four questions regarding the entrepreneurial problem that develop the strategy, three questions concerning the engineering problem that creates the systems to operate the strategy, and four questions about the

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administrative questions in managing the system. We then constructed four distinct response options characterizing the four possible strategic types (Defender, Prospector, Analyzer, and Reactor) for each of the 11 questions. Next, an as a basic rule, the sample firms were classified into one of the four strategic types depending on the response option selected most often. For instance, we classified the firm as a Defender if it most often chose Defender response options. However, if the number of response options tied between Defender, Prospector, and/or Analyzer response options, the firm was classified as an Analyzer, while if they tied involving Reactor response options, the firm was classified as a Reactor. The results of the classification of the respondent firms by the procedure described as following.The largest number of firms are Analyzers (44 firms), followed by Defenders (21 firms), and then Prospectors (16 firms). We were unable to classify one firm because it did not respond to all of the questions in the survey. This reduced our sample size to 99 firms. We also do not examine Reactors (18 firms) in detail because they do not operate consistently, though we do list their responses for reference. Stance on Capital Investment and Its Purpose We first examine the firm’s stance on capital investment. The scale used for the questions on capital investment stance is a 5-point Likert scale (1 = withhold investment, 3 = neutral stance, 5 = invest aggressively). We questioned firms on their investment stance both at the time of the survey (2009) and three years ago (2006). Table 2 reports the results for this response. As shown, three years ago, more than half of firms responded either 4 or 5 on the scale; that is, the majority of firms were investing positively as business conditions were recovering. In contrast, in 2009, more than half of firms chose 1 or 2; that is, the majority of firms had a negative stance on investment going into the recession.

Table 2: The Stance on Capital Investment

Response option Stance at present (2009) Stance three years ago (2006) 1 Withhold investment 45 (45.5) 6 (6.1) 2 21 (21.2) 8 (8.1) 3 Neutral stance 10 (10.1) 16 (16.2) 4 17 (17.2) 33 (33.3) 5 Invest aggressively 6 (6.1) 36 (36.4) Total 99 (100) 99 (100)

Note: Percentage number of responses in parentheses

We next observe the results by strategic type. Table 3 reports the means and standard deviations of the response to the questions on investment stance on the 5-point Likert scale for each strategic type and all firms. As the differences in responses among the various strategic types are important, we emphasize the difference by halftoning the maximum mean and underlining the minimum mean if the difference between maximum and minimum mean is more than 0.3 (we undertake a similar procedure in the remaining tables). As shown, Prospectors invested most positively, both three years ago (2006) and at present (2009). This may indicate the Prospector’s attitude of taking risks to seek profit. Three years ago, Analyzers took the most negative stance towards investment, while at present, Defenders take the most negative stance. One contemporary argument is that the Japanese economy cannot recover from recession because capital investment is not increasing. Policy makers must then develop policy to stimulate investment for each

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strategic type depending on their characteristics, rather than applying the same policy for all firms by assuming that every firm displays identical behavior toward investment. Table 3: Stance on Investment by Strategic Type

Defender (21 firms)

Prospector (16 firms)

Analyzer (44 firms)

Reactor (18 firms)

Total (99 firms)

Stance at present (2009)

1.81 (1.078)

2.50 (1.673)

2.11 (1.298)

2.44 (1.338)

2.17 (1.333)

Stance three years ago (2006)

3.81 (1.250)

4.13 (1.360)

3.75 (1.144)

3.94 (1.056)

3.86 (1.178)

Notes: Upper value = mean, lower value = (standard deviation), the highest mean among 3 types is in halftone and the lowest mean among 3 types is underlined.

We also questioned firms on the frequency of capital investment by purpose using 5-point Likert scale (1 = never carry out, 5 = always carry out). Table 4 reports the means and standard deviations of the responses. The most frequent investment purpose was “(3) to improve production lines” (3.76). Table 4: Purpose of Capital Investment by Strategic Type

Question item Defender (21 firms)

Prospector (16 firms)

Analyzer (44 firms)

Reactor (18 firms)

Total (99 firms)

(1) Replace 3.38 (1.117)

3.75 (1.183)

3.32 0.934

3.61 (1.145)

3.45 (1.052)

(2) Increase Production

3.33 (0.966)

3.88 (0.957)

3.43 (0.873)

3.78 (0.732)

3.55 (0.895)

(3) Improve production lines

3.81 (0.981)

4.13 (0.885)

3.66 (0.745)

3.61 (0.979)

3.76 (0.870)

(4) Produce new Products

3.52 (1.078)

4.06 (0.854)

3.48 (0.952)

3.50 (1.150)

3.59 (1.010)

Notes: Upper value = mean, lower value in row = (standard deviation), the highest mean among 3 types is in halftone and the lowest mean among 3 types is underlined.

We now examine the purpose and frequency of capital investment by strategic type. As shown in Table 4, Prospectors invest most frequently for every purpose, while Defenders invest least frequently “(2) to increase production” and Analyzers invest least frequently for other purposes. Similarly, Defenders and Analyzers invest less frequently than Prospectors do, and this coincides with their more negative stance on capital investment in Table 4. What do the data suggest? In sum, Prospectors invest more frequently “(3) to improve production lines” and “(4) to produce new products”. Of these, investing relatively more “(4) to produce new products” may indicate the continuous seeking of market opportunities characteristic of Prospectors. Moreover, Prospectors invest more frequently “(1) to replace” and “(2) to increase production” than the other strategic types, and this reflects their attitude to increasing sales after entering the market. In contrast, Defenders and Analyzers invest more frequently “(3) to improve production lines” than for any other purpose. This appears to fit the theory in that Analyzers seek market opportunities that they can handle using existing technology, so they often develop products that they can produce using existing equipment. Likewise, Defenders produce the same kind of product, so they may not require frequent capital investment.

CAPITAL BUDGETING MANAGEMENT AND STRATEGIC TYPE In order to understand the firm’s actual capital budgeting process, we propose the following model. This is based on the strategic capital budgeting planning process presented by Maccarrone [1996, p. 44] of

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Development/evaluation → Selection → Authorization → Implementation and control → Postauditing Here “Development of the project” refers to the desirable capital investment being analyzed as a capital budgeting project. “Project proposal” is the project being proposed to headquarters. “Deliberation and authorization” indicates the capital budgeting project proposed from the subordinate section of the organization being discussed and finally approved at the highest level. Finally, “Implementation and postinvestment evaluation” refers to the capital expenditure phase and the ex post monitoring of the project.

We posed questions concerning each of the four phases of the management process described above, numbering 18 question items in total. The scale used for each question item is again on a 5-point Likert scale (1 = do not agree at all, 5 = strongly agree). Development of the project phase We included four questions concerning the “Development of the project” phase. We use Table 5 to analyze management in the “Development” phase. As shown, Defenders “(1) organize team” relatively less than Prospectors and Analyzers, while a smaller number of firms organize teams at the “Development” phase overall. This is because Defenders operate continuously in an existing organizational domain; thus, they can cope with project development using existing technology. This is generally a standing system, such as a department of production management. In contrast, Prospectors continually enter new organizational domains. As a result, Prospectors form new project teams consisting of members with detailed knowledge of the new technology to handle the new domain. In addition, Analyzers enter a new domain by combining existing technologies. To handle this, Analyzers form project teams consisting of members with different technology. Whether or not “(2) the developer of the investment project compares two or more ideas”, Prospectors are most likely to carry it out, followed by Analyzers, while Defenders are least likely to carry it out. As Prospectors invest to enter new product market domains, they more carefully develop their investment plans. Similarly, more Prospectors indicates that “(3) the developer of the investment project is recognizing the level of profitability that should be achieved”. Interestingly, more Analyzers, as well as Prospectors, respond that “(4) the developer of the investment project is recognizing the appropriate timing of investment”. This may be because investing with appropriate timing in response to demand is very important for both Analyzers and Prospectors. Table 5: Management Processes in the “Development” Phase by Strategic Type

Question item Defender (21 firms)

Prospector (16 firms)

Analyzer (44 firms)

Reactor (18 firms)

(1) Team organization 2.62 (1.024)

3.00 (0.966)

3.05 (0.939)

2.94 (0.998)

(2) Comparison of multiple projects 3.86 (0.727)

4.19 (0.911)

4.02 (0.832)

4.11 (0.832)

(3) Profitability check 4.14 (0.854)

4.50 (0.816)

4.30 (0.701)

4.61 (0.850)

(4) Appropriate timing 3.76 (0.889)

4.31 (0.873)

4.36 (0.685)

4.44 (0.705)

Notes: Upper value = mean, lower value in row = (standard deviation), the highest mean among 3 types is in halftone and the lowest mean among 3 types is underlined.

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Proposal phase Next, we employ Table 6 to observe the management in the “Proposal” phase by strategic type. As detailed, Analyzers respond more often that “(5) when the investment project is proposed, the item that should be deliberated upon is decided”. Because Analyzers may face some difficulty in adjusting deliberated items, they decide capital investment at the final deliberation. Conversely, Prospectors and Analyzers respond more than Defenders that they “(8) propose in exact timing with investment”. This is because Prospectors and Analyzers run a greater risk of losing from the incorrect timing of investment, while Defenders perform in a more stable domain. Table 6: Management Processes in the “Proposal” Phase by Strategic Type

Question item Defender (21 firms)

Prospector (16 firms)

Analyzer (44 firms)

Reactor (18 firms)

(5) Formalization of deliberation item 3.86 (0.910)

4.13 (1.088)

4.32 (0.639)

4.06 (8.02)

(6) Ranking of priority 3.90 (0.768)

4.00 (0.816)

4.14 (0.639)

4.06 (0.802)

(7) Profitability check 4.00 (0.949)

3.88 (1.147)

4.09 (0.772)

4.00 (1.138)

(8) Exact timing

4.00 (0.775)

4.44 (0.814)

4.32 (0.708)

4.06 (0.938)

Note: Upper value = mean, lower value = (Standard deviation), the highest mean among 3 types is in halftone and the lowest mean among 3 types is underlined, (if the difference between the highest and the lowest mean is more than 0.3). Deliberation and authorization phase

We examine the management of “Deliberation and authorization” by strategic type using Table 7. As shown, more Prospectors and Analyzers on average follow “(9) observance of deliberation procedure”; that is, Prospectors and Analyzers seldom allow exceptions. In addition, Prospectors and Analyzers tend to undertake the “(11) comparison of implemented plans” in the “Deliberation and authorization” phase. This may be because the right or wrong investment directly leads to business success or failure in Prospectors and Analyzers. As also shown, Analyzers most value timing, while Defenders act in a more stable domain.

This table also reveals the Analyzers’ strategy of seizing on promising market opportunities. In contrast, Prospectors have shorter deliberation periods, as they may essentially make almost all investment decisions before the “Deliberation and authorization” phase. Implementation and postinvestment evaluation phase Finally, we analyze management in the “Implementation and postinvestment evaluation” phase by strategic type. As shown, Analyzers most often undertake “(15) evaluation continuously”, unlike Prospectors. In addition, Defenders most often undertake “(16) a profitability check” after investment, unlike Prospectors. One characteristic of the Prospector’s planning sequence is that they evaluate investment projects in the development, proposal and deliberation phases, then move to develop a detailed operating plan; that is, Evaluate → Act → Plan (Males and Snow [1987], p. 62). Therefore, a characteristic of Prospectors is that they do not evaluate carefully after investment. As an alternative, Defenders continuously repeat the planning sequence of Plan → Act → Evaluate, then carefully evaluate following investment. This leads to continuity and thoroughness in evaluation and the postinvestment profitability check.

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Table 7: Management Processes in the “Deliberation and authorization” Phase by Strategic Type

Question item Defender (21 firms)

Prospector (16 firms)

Analyzer (44 firms)

Reactor (18 firms)

(9) Observance of deliberation procedure 4.57 (0.746)

5.00 (0.000)

4.89 (0.321)

4.61 (0.850)

(10) Deliberation on each project 4.38 (0.669)

4.63 (0.500)

4.59 (0.757)

4.17 (0.857)

(11) Comparison of implementation plans 3.29 (1.007)

3.81 (0.834)

3.61 (0.784)

3.78 (1.060)

(12) Profitability check 4.19 (0.750)

4.19 (0.629)

4.27 (0.899)

4.33 (0.970)

(13) Timing check 4.05 (0.805)

4.06 (0.929)

4.52 (0.590)

4.44 (0.856)

Note: Upper value = mean, lower value = (Standard deviation), the highest mean among 3 types is in halftone and the lowest mean among 3 types is underlined, (if the difference between the highest and the lowest mean is more than 0.3).

Table 8: Management Process in the “Implementation and Postinvestment Evaluation” Phase by Strategic Type

Question item Defender (21 firms)

Prospector (16 firms)

Analyzer (44 firms)

Reactor (18 firms)

(14) Monitoring of implementation 3.43 (1.028)

3.69 (1.014)

3.66 (0.939)

4.06 (0.998)

(15) Continuity of evaluation 3.57 (1.207)

3.38 (1.147)

3.73 (1.020)

3.61 (0.916)

(16) Profitability check 3.81 (1.078)

3.38 (1.147)

3.73 (1.042)

3.61 (0.979)

(17) Analysis of failed projects 3.24 (0.889)

3.44 (1.094)

3.59 (0.923)

3.67 (0.767)

(18) Relation with performance evaluation 2.86 (1.195)

3.50 (0.966)

3.00 (0.940)

3.28 (1.127)

Note: Upper value = mean, lower value = (Standard deviation), the highest mean among 3 types is in halftone and the lowest mean among 3 types is underlined, (if the difference between the highest and the lowest mean is more than 0.3). CAPITAL BUDGETING IN PLANNING SYSTEM AND STRATEGIC TYPE It is impossible for firms to implement all available investment projects, even if they recognize the necessity of investment. Firms are then subject to a budget constraint and have a limited ability to manage investment projects. Therefore, they need to coordinate investment projects by collecting and selecting information on each. In this mail survey, we asked how each investment project is coordinated across four stages. These are medium-/long-term budget plans, annual budget (plan), between medium-/long-term and annual budget, and deliberation just before implementing investment. The scale used for each question item is a 5-point Likert scale (1 = do not agree at all, 5 = strongly agree).

First, we examine the overall tendency of respondent firms using Table 9. Comparing registration, timing, and the priority of investment project across the medium-/long-term plan ((1), (2), (3)) and the annual budget ((4),(5),(6)), the mean values for each question are higher for the annual budget than for the medium-/long-term plan. For example, the mean value of registration of the project is 3.87 in the medium/long term and 4.55 in the annual budget, so it is clear that most firms register investment projects in the annual budget. Therefore, the investment project is recognized by the organization in the annual budget rather than in the medium-/long-term plan. In addition, firms consider investment timing and rank investment priority in the annual budget rather than in the medium-/long-term plan. In other words, there is every possibility that the coordination for investment projects is secured in the annual budget.

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From (7) and (8), the selection and addition of investment projects are incurred to some degree in the medium-/long-term plan and the annual budget. As the mean values of the responses for (9), (10), (11) and (12) are greater than four, it is clear that most Japanese firms perform deliberation on each project apart from the annual budget, and set budget limits and implement investment within the budget limits. Table 9: Capital Budgeting in the Planning System (All Firms)

# Content of question item Mean (Standard deviation)

(1) Register investment project in medium-/long-term plan. 3.87 (1.027)

(2) Timing of investment is written clearly in medium-/long-term plan. 3.79 (1.013)

(3) Priority for investment project is ranked in medium-/long-term plan. 3.43 (1.012)

(4) Register investment project in annual budget. 4.55 (0.659)

(5) Timing of investment is written clearly in annual budget. 4.39 (0.780)

(6) Priority for investment project is ranked in annual budget. 3.86 (0.958)

(7) Investment project that is registered in annual budget is selected from the projects that are registered in medium-/long-term plan.

3.71 (0.860)

(8) New capital investment project that is not in medium-/long-term plan can be added in annual budget. 3.75 (0.800)

(9) Detailed deliberation and authorization of investment plan takes place before implementation aside from annual budget.

4.09 (1.135)

(10) The deliberation of each project takes place separately. 4.18 (1.014)

(11) Budget limit for investment is set in annual budget. 4.49 (0.813)

(12) Capital investment is implemented within the annual budget limit. 4.20 (0.700)

Next, we examine capital budgeting by strategic type. In the medium-/long-term plan, Prospectors most respond “(1) register investment project” and “(2) write investment timing” and “(3) rank investment priority”, while Analyzers closely follow the practice of Prospectors, unlike Defenders. In the annual budget, although Prospectors similarly obtain higher mean values for these question items, Analyzers have as low a mean value as Defenders. Between the medium-/long-term plan and the annual budget, Prospectors most often “(7) select investment project” and “(8) add new investment project”, while Defenders do so least often, and Analyzers are similar to Defenders. On this basis, it is clear that Defenders tend not to seek new investment projects, while Prospectors collect information and select projects well. Analyzers most often “(9) authorize the project just before implementation aside from annual budget”, unlike Defenders and Prospectors. Analyzers need to evaluate and select the project just before implementation to seize market opportunities. However, Defenders and Prospectors complete project evaluation before deliberation, so authorization tends to be just a formality. Analyzers and Prospectors similarly place emphasis on “(10) deliberation on each project separately”, unlike Defenders. This means that Analyzers and Prospectors deliberate carefully on each project in order to enter new product market domains, while Defenders seldom do so because they operate in an existing product market domain. Finally, Prospectors most often “(11) set budget limit”, followed by Analyzers, and less like Defenders. Put differently, Prospectors and Defenders keep to a budget limit, unlike Analyzers. This is because

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Analyzers have to use their budget flexibly because they evaluate and select projects in the short term, while Prospectors actively manage investment projects. Table 10: Capital Budgeting in the Planning System by Strategic Type

Question item Defender (21 firms)

Prospector (16 firms)

Analyzer (44 firms)

Reactor (18 firms)

(1) Registration in medium-/long-term plan 3.57 （1.121）

4.13 (0.885)

3.89 (1.039)

3.94 (0.998)

(2) Timing written in medium-/long-term plan 3.48 (1.078)

4.00 (0.894)

3.84 (1.077)

3.83 (0.857)

(3) Priority rank in medium-/long-term plan 3.33 (1.111)

3.56 (0.892)

3.39 (1.061)

3.56 (0.922)

(4) Registration in annual budget 4.43 (0.676)

4.94 (0.250)

4.43 (0.728)

4.61 (0.608)

(5) Timing written in annual budget 4.19 (0.928)

4.88 (0.342)

4.34 (0.745)

4.33 (0.840)

(6) Priority rank in annual budget 3.76 (0.944)

4.31 (0.946)

3.75 (0.866)

3.83 (1.150)

(7) Selection of the projects

3.52 (0.928)

4.31 (0.602)

3.64 (0.780)

3.56 (0.984)

(8) Addition of the projects

3.43 (0.870)

4.00 (0.966)

3.73 (0.624)

3.94 (0.873)

(9) Authorization just before implementation 3.71 (1.309)

3.75 (1.390)

4.32 (0.857)

4.28 (1.179)

(10) Deliberation on each project 3.67 (1.317)

4.25 (1.238)

4.34 (0.776)

4.33 (0.767)

(11) Setting budget limit

4.29 (1.007)

4.81 (0.403)

4.45 (0.848)

4.56 (0.705)

(12) Keeping budget limit

4.43 (0.598)

4.44 (0.629)

4.05 (0.680)

4.11 (0.832)

Note: Upper value = mean, lower value = (Standard deviation), the highest mean among 3 types is in halftone and the lowest mean among 3 types is underlined, (if the difference between the highest and the lowest mean is more than 0.3). CONCLUSION Our principal motivations in this paper are that capital budgeting management must be affected by firm strategy and that capital budgeting should therefore be adapted to each firm’s strategy to improve business results. In the analysis, we describe the capital budgeting appropriate for each strategic type by illustrating the differences in stance and purpose, management process and budgeting for the three strategic types in Miles and Snow [1978]. The major capital budgeting characteristics of these three strategic types are as follows. First, Defenders seldom search for new investment projects because they establish a stable status in a limited operational domain. Therefore, their main purpose of capital investment is to improve cost competitiveness. They then develop investment projects in their own way, and then thoroughly evaluate profitability following implementation. Second, Prospectors continuously search for market opportunities, and evaluate and select projects in order to pioneer and to profit from new product markets. Thus, the main purpose of capital investment for these firms is to produce new products. In doing so, they address profitability and timing in the “Development” phase and carefully compare the alternative projects available. Finally, Analyzers deliberate carefully and optimally time investment to seize market opportunities using their existing technology. They are not aggressive in capital investment. We thus provide clear evidence that firm strategy affects capital budgeting management. Therefore, one potential future research topic is whether capital budgeting as fitted to strategic type leads to improvements in business performance. Although we leave this for future research, we briefly outline and discuss the return on assets for each strategic type.

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Table 11: Average Return on Assets by Strategic Type

Return on capital Defender Prospector Analyzer Reactor Total 4-year average （2005–08）

4.96％ (3.97) 21

7.43％ (5.03) 16

7.12% (4.51) 44

7.87% (4.93) 18

6.85% (4.61) 99

5-year average (2005–09）

4.16% (3.50) 21

7.20% (4.09) 15

6.22 (4.17) 43

6.81% (4.52) 18

6.03 (4.17) 97

Note: Upper value in row = mean, middle value in row = (standard deviation), lower value in row = number of sample firms. Source: NEEDS Financial QUEST

As shown in Table 11, by comparing the 4- and 5-year average returns on assets, we can see that the Japanese economy moved into recession from 2008 to 2009 because return on assets was worsening, both across all firms and for every strategic type. However, for both sample periods, return was highest for Prospectors, followed by Analyzers, and then Defenders. We therefore must take some care because a difference in return does not necessarily imply some relative superiority or inferiority in strategic type. Instead, we assume that return would improve only if each firm were to undertake capital budget management in line with its strategic type. Furthermore, although we only emphasize the capital budgeting management matched with strategic type, there will be necessary capital budgeting management for every strategic type. For instance, Shimizu et al. [2008] have extracted the appropriate capital budgeting management that has led to improvement in firm performance. These considerations remain an important subject for us to explore. REFERENCES Conant JS, Mokwa MP, Varadarajan PR.(1990), Strategic Types, Distinctive Marketing Competencies and Organizational Performance: A Multiple Measures- Based Study, Strategic Management Journal, Vol. 11, No. 5, pp. 365-383. ce for the translation” (Japanese translation for Miles R. Snow C.[1978], Organizational Strategy, StrucDeSarbo, W. S., C. A. Benedetto, M. Song and I. Sinha (2005), "Revisiting the Miles and Snow Strategic Framework: Uncovering Interrelationships between Strategic Types, Capabilities, Environmental Uncertainty, and Firm Performance”, Strategic Management Journal, Vol. 25, No. 1, pp. 47-74. Fukuda, Junji (2008) “Kanrikaikei-tantousha no yakuwari oyobi yakuwarisuikou ni hituyouna chisiki to sukiru” [The Role of Management Accountants and their Knowledge and Skills]” in Japanese, KEIEI SHIRIN (The Hosei Journal of Business). Haka, S. F. (2007), "A Review of the Literature on Capital Budgeting and Investment Appraisal: Past, Present, and Future Musings, in Chapman C. S., A. G. Hopwood and M. D. Shields ed. ", Handbook of Managerial accounting Research Volume 2, London, Elsevier, pp. 697-728. Hiromoto, Toshiro (1993) Beikoku kannrikaikeiron hattatsushi [History of the United States managerial accounting theory development] , in Japanese, Moriyama Shoten Maccarrone, P. (1996), "Organizing the Capital Budgeting Process in Large Firms", Management Decision, Vol. 34, No. 6.

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Miles R. and Snow C.(1978), Organizational Strategy, Structure and Process, McGrow-Hill. (Miles and Snow(2003), Organizational Strategy, Structure and Process （Stanford business Classi, Stanford University Press.) Northcott, D. (1992), Capital Investment Decision-Making, Cengage Learning Company.

Shimizu, Nobumasa (2004) "Nihon ni okeru setsubitoushiyosan kennkyuu no gennjyou to kadai [Current state and problem of capital budgeting research in Japan] " , in Japanese, Momoyama-gakuin daigakuin sogo kennkyuujo kiyo [Momoyama-gakuin University graduate school general institute bulletin] vol. 29, No.3 pp. 5-21. Shimizu, Nobumasa (2006) "Kannrikaikei to shiteno shihonnyosann kenkyu no kadai [Problem of capital budgeting research as managerial accounting] ", in Japanese, Sangyokeiri[Industrial accounting] , Vol. 65, No. 4, pp. 42-53. Shimizu, Nobumasa, Yutaka Kato, Junya Sakaguchi, Takaharu Kawai (2005) "Setsubi toushi manejimento purosesu to sono eikyou youin [Capital budgeting management process and its influential factor]" in Japanese, Genkakeisan kenkyu [Cost accounting research], vol. 29, No.2, pp. 56-65. Shimizu, Nobumasa, Yutaka Kato, Junya Sakaguchi, Takaharu Kawai (2007) "Setsubi toushi manegimento no jittai chousa: setsubi toushi manejiment no zentaizou [Research of the capital budgeting management: entire image of capital budgeting management]" in Japanese, Kigyoukaikei [Corporate accounting], vol. 59, No. 9, pp. 66-73. Simons, R. (1987) “Accounting control systems and Business Strategy: An Empirical Analysis,” Accounting, Organizations and Society, Vol.12, No.4. Sugiyama Yoshihiro (2002) Toushi kouritsu wo takameru shihon yosan [Capital budgeting that improves investment efficiency], in Japanese, Chuo Keizai Inc. Toribe, Shinji (1997) Kigyou no toushi koudou riron [Theory of firm’s investment activity], in Japanese, Chuo Keizai Inc. Tsuchiya, Morio (1983) “Prefature and Process, in Japanese, Diamond. ）

Yamamoto, Masahiro (1998) Senryaku teki toushi kettei no keizaigaku [Economics of strategic investment decision], in Japanese , Bunshindo

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AN EXAMPLE OF EXCELLENCE: WHY BUSINESS SCHOOLS ARE BRINGING MILITARY HISTORY BACK

TO THE CURRICULUM Mary H. Kelly, Texas A&M University-Central Texas

Margaret Britt; University; Mount Vernon Thomas G. Hardenbergh; the University of Michigan

William E. Hardenbergh; University of Michigan

ABSTRACT Today’s business reaches many new frontiers (Afful, 2006), making it poignant to ask: How can the business curriculum provide excellence? A sampling of new components to the business curriculum includes: new technology; new financial instruments trading among new groups of investors on new exchanges with new ownership; new global markets developing at a furious pace; new regulations affecting a panoply of industries; new metrics to analyze corporate profitability; new standards for public policy; and, new methods of educating students termed non-traditional learners, in addition to traditional-aged learners. The intent of this paper is to answer the question: How can the business curriculum provide excellence? This paper suggests that the re-emergence of military history in the business curriculum is an example of continued excellence by business programs. Research is limited regarding curricula and enrollment by business students in military history courses; thus, the research focuses on a review of the literature for pedagogical purposes. This paper discusses the reasons for incorporating military history, i.e., the influence of military might on the development of past empires, as a source of essential knowledge and keen insights for future business decisions, and finds a clear example of excellence in today’s business curriculum. BIOGRAPHY Mary H. Kelly, Assistant Professor of Finance; Coordinator-Accounting, Finance and Economics; Texas A&M University-Central Texas; 1901 South Clear Creek Road; Killeen, TX 76549; [email protected]. Dr. Margaret Britt; Professor of Human Resource Management; Jetter School of Business; Mount Vernon Nazarene University; Mount Vernon, OH 43050; [email protected] Mr. Thomas G. Hardenbergh; Student attending the University of Michigan; Major-Actuarial Mathematics; Minors-Finance and History; [email protected] Mr. William E. Hardenbergh; Student attending the University of Michigan; Major-Biology; Minors-Finance and Education; [email protected]

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BALANCED SCORECARD PRACTICES AND DETERMINANTS: AN EMPIRICAL STUDY OF LISTED

COMPANIES IN THAILAND Wasatorn Shutibhinyo, Chulalongkorn University

ABSTRACT

This paper develops a framework for Balanced Scorecard (BSC) stage classification (non-adoption, adoption and implementation) by considering BSC attributes embedded in firm’s performance measurement system and examines how various determinants (external, structural, attitudinal and executional factors) affect each BSC stage. Based on a survey, 26% and 64% are BSC-adoption and BSC-implementation firms respectively. The findings also reveal the evidence of the different interpretations of BSC resulting in misclassification. Regarding determinant test, the results show that the importance levels of determinants somehow vary by stages and clearly differ from the findings if employing firms’ self-assessed responses. This research contributes to BSC literature by highlighting how to identify the BSC stages without taking firm’s self-assessed response about the BSC application as given and by providing the evidence of stage-dependent determinants. This study also sheds some light on Technology Acceptance Model as attitudinal factor is another key determinant for implementing BSC.

JEL: M490 and M190 KEYWORDS: Balanced Scorecard, Implementation, Adoption, Determinants, Technology Acceptance Model INTRODUCTION

Over two decades of the Balanced scorecard (BSC) devised by Kaplan and Norton in 1992, it has attracted considerable interest worldwide, including Thailand (Decharin, 2003; Thinwilai, 2005; Yongvanich and Guthrie, 2009). As it relates to the advancement of the performance measurement system, one of the responsibilities of accountants, BSC becomes one of the most important developments in management accounting, particularly in strategic planning and control (Atkinson et al., 1997). Many studies explore the BSC diffusion, examine factors influencing the adoption and the implementation of BSC, and investigate the effects of BSC implementation. However, prior studies provide mixed results since they have not provided a clear definition of BSC application. More importantly, they are likely to take firms’ responses about BSC application as given. Several studies use “Adoption” and “Implementation” interchangeably despite different meanings. Adapted from Roger (2003), BSC-adoption firm is one that is at the stage of choosing to follow BSC idea by making use of financial and nonfinancial measures along multiple dimensions. BSC-implementation firm is the firm that at the stage of carrying out a practical means for accomplishing BSC usage. Thus, BSC stages should consist of Non-adoption, Adoption, and Implementation. Additionally, most studies have trusted in firms’ self-assessed responses about BSC application. This can bias the research results as firms may differently understand the BSC concept, leading to dissimilar criteria used to judge to which stages of BSC application they belong (Kaplan, 2010). Hence, this raises the importance of the accurate determination of BSC application at the beginning of research projects (Burkert et al., 2010). To avoid misunderstanding about BSC, the elements of BSC should be taken into account in order to properly

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identify the stages of BSC application. This method allows researcher to accurately investigate the extent of BSC usage and the determinant and the consequence of BSC application. To date, little research has been published on performance measurement systems, particularly BSC, in the context of Thailand. As Thai firms are not required to apply Balanced Scorecard, it is expected that certain companies apply BSC either intentionally or unintentionally. In this study, the characteristics of firms’ performance measurement systems are explored to reflect the BSC attributes, which are then used for classifying the stage of BSC application. Once the stages of BSC application are identified, understanding the determinants of BSC application is important as it presents the factors that help facilitate or impede moving forward from one stage to another. Therefore, the objectives of this study are to develop a framework of BSC application and to use such framework to identify the BSC attributes and BSC stages of survey-responding firms. This study also represents an extension of prior studies by drawing the determinants from the organizational innovation, technology acceptance model (TAM) and contingency theory to examine whether external, structural, attitudinal and executional factors affect adoption and implementation stage of BSC.This paper contributes to BSC by developing conceptionalization and operationalization of BSC framework which can be further used by both academics and practitioners. This paper also explores the BSC application in Thailand to complement the prior studies mostly conducted in US and Europe. This study extends prior determinant literature of BSC and TAM by going further into details of the determinant-innovation relation to reveal how factors ease or inhibit the BSC implementation process. This paper is divided into five sections. The first section is the introduction discussed earlier. The second section presents a brief literature review, followed by the research methodology. The fourth section shows the developed BSC framework and the empirical results. The last section concludes the paper. LITERATURE REVIEW Balanced Scorecard (BSC) Balanced scorecard is initially devised by Kaplan and Norton as the multi-dimensional performance measurement system with a collection of financial and nonfinancial measures and is now transformed into a strategic performance measurement system (Kaplan and Norton, 1992; 1996; 2001; 2008). BSC incorporates various important attributes as shown in Table 1. Table 1: The attributes of Balance Scorecard

BSC Attributes Explanation Translating strategy into operation terms (Strategy)

This feature is a foundation of BSC. Without this characteristic, firms cannot claim that it has implemented BSC. This key attribute includes three sub-attributes – (1.1) Multiple perspectives, (1.2) Measures derived from strategy, and (1.3) Cause-and-effect relationships among the strategic objectives or measures.

Aligning the organizational units to the strategy (Alignment)

Since organization consists of various business units and support departments, it is important to align business units’ and functional units’ strategies to the corporate-level strategy in order to generate the corporate synergy, which causes a collection of business units to create value than if each unit operates autonomously.

Communicating strategy to employees (Communication)

The CEOs and executives cannot run the business by themselves. Communicating and educating ensure that employees understand firm’s strategy and scorecard. This intrinsically and extrinsically motivates employees to perform their works in the ways that contribute to the success of the strategy.

Providing feedback and learning (Feedback)

Strategy should be linked to the budgeting process by setting targets for the strategic measures and by screening the strategic initiatives for achieving such targets. The feedback and learning process is also needed to enable strategic refinements or make strategy a continual process.

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Most prior studies have not simultaneously concerned all the above-mentioned BSC attributes. Some prior studies have focused only on sub-attribute or one BSC attribute (e.g., Gosselin, 2005; Abernethy et al., 2005), while some have done on the various combinations of the BSC features (e.g., Malina and Selto, 2001; Malina et al., 2007). Only one study (De Geuser et al., 2009) refers and tests all four BSC features separately; however, they focus only on BSC users and test whether these four features of BSC and top management support are the sources of BSC contributions. They find that attribute 1 (Strategy) and 4 (Feedback) seem to be the key sources of overall improvement; while attribute 2 (Alignment) and 3 (Communication) show marginal impact. Top management support does not influence any perceived organizational performance. The Stages of BSC Application Most prior studies (e.g., Ittner et al., 2003; Thinwilai, 2005; Yu et al., 2008) have assigned firm as non- BSC or BSC based on firm’s self-assessed response about the stage that firm has selected in the questionnaire. Few studies (i.e., Speckbacher et al., 2003; Yongvanich and Guthrie, 2009) additionally consider BSC attributes for firms that respond that they are at the stage of BSC usage. For example, Speckbacher et al. (2003) developed the classification framework as follows: Table 2: Speckbacher et al.’s (2003) Classification Framework

BSC Stages BSC Type Criteria (1) No contact with BSC thus far (2) Know BSC (3) Studied BSC, but no concrete steps taken (4) First steps already taken (5) BSC project has existed

Non-BSC firm

(6) BSC implemented in individual business units (7) BSC implemented for entire company

BSC firm

Type 1 (1) Identify strategic measures or objectives (2) Group strategic measures or objectives into perspectives

Type 2 Type 1 with the following criterion: (1) Employ cause-and-effect chains

Type 3

Type 2 with some or all of the following criteria: (1) Contain action plans/target (2) Link Measures to incentives

Firms at stage (1) to (5) are classified as non-BSC firms, while those at stage (6) to (7) are done as BSC firms. The BSC firms are then reclassified into three groups of BSC users, depending on their BSC attributes. Based on foundation of BSC, Type1 firms should not be BSC users as they are only at adoption stage. Additionally, Speckbacher et al. (2003) have not studied all four attributes of BSC; Yongvanich and Guthrie (2009) have done so but have not investigated four BSC attributes separately. At this point, it is crucial to call attention to the critical concern – different interpretations of BSC. Some academics and practitioners may think of the BSC based on the original 1992 BSC article, which is just one part of current BSC concept (Kaplan, 2010). Dissimilar interpretations of BSC can affect the firms’ self-assessed responses and bias the results in the sense that firms without BSC attributes (but with initial BSC project) may think that they are BSC users; thus, they may select the stage of BSC usage. On the contrary, firms with some BSC attributes may think that they are not qualified enough to claim that they are BSC users; hence, they may be erroneously classified themselves as non-BSC users. This interpretation problem can be mitigated by identifying the features of performance measurement systems to reflect the BSC attributes and to indicate the BSC stage for each responding firm.

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To the best of my knowledge, only one study (Soderberg, 2006) has asked the structure and the use of performance measurement system in order to categorize firms as BSC or non-BSC without asking whether or not they are BSC user. BSC firms are then re-categorized into several levels of BSC application. The criteria used for the classification are shown in Table 3. BSC level 1, 2a, 2b, and 3 are consistent with attribute 1 (Strategy). BSC level 4 combines attribute 3 (Communication) and 4 (Feedback); however, attribute 2 (Alignment) is not considered. Based on key features of BSC, firms that are classified as firms at level 3 and 4 are BSC users; conversely, those at level 1, 2a, and 2b should be non-BSC users as all key sub-attributes of attribute 1 (Strategy) have not been met. Table 3: Soderberg’s (2006) Classification Framework

BSC level Attribute Criteria Non-BSC firms No any criterion is met. BSC firms

1 Derived from strategy (1) Business unit strategy is well defined. (2) Performance measures are derived from such strategy.

2a Strategy+ Balance BSC level 1 with all following criteria (1) PMS contained financial and nonfinancial measures. (2) PMS contained driver (leading) and outcome (lagging) measures.

2b Strategy+ Causal links BSC level 1 with all following criteria (1) PMS has measures that are linked through driver-outcome relationships (2) Business unit understand the potential driver-outcome relationship among individual measures

3 Strategy+ Balance+ Causal links

Level 2a with Causal links, or Level 2b with Balance

4 Level 3 with some or all following criteria Double Loop Learning (1) Deviation from expected or planned results causes the business unit’s management to question

the unit’s business strategy Tied to Compensation (2) Business unit use the PMS to compensate/reward some or all of unit’s employees

Table 4: Determinants, Related Literature Review and the Developed Hypotheses

Determinants Summary of literature review Hypotheses proposed in alternative form

Ex te

rn al

Environment uncertainty

(+) Firms in uncertainty environment tend to use both financial and nonfinancial measure (e.g., Gosselin, 2005; Jusoh, 2008) and BSC usage (Hendricks et al., 2004).

H1a: Environment uncertainty is positively associated with reaching BSC adoption stage. H1b: Environment uncertainty is positively associated with reaching BSC implementation stage.

St ru

ct ur

al Participation

(+) The higher degree of participation is a significant predictor of innovation application (Damanpour, 1991; Chenhall, 2003; Abernethy and Bouwens, 2005), including BSC (Gosselin, 2005). (=) Braam and Nijssen (2008) have found insignificant relation between decentralization and BSC application.

H2a: Participation is positively associated with reaching BSC adoption stage. H2b: Participation is positively associated with reaching BSC implementation stage.

Formalization (+) Wiersma (2009) finds that when more action control is used, the managers use BSC more often for making decisions and rationalizing these decisions for themselves and towards others. (=) Braam and Nijssen (2008) find no effect between formalization and the use of performance measures. (-) Henry (2006) finds negative relation.

H3a: Formalization is positively associated with reaching BSC adoption stage. H3b: Formalization is positively associated with reaching BSC implementation stage.

Interconnect- edness

(+) Braam and Nijssen (2008) finds the positive impact of departmental interconnectedness on BSC adoption

H4a: Interconnentedness is positively associated with reaching BSC adoption stage. H4b: Interconnentedness is positively associated with reaching BSC implementation stage.

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Table 4 (Cont’): Determinants, Related Literature Review and The Developed Hypotheses

Determinants Summary of literature review Hypotheses proposed in alternative form

St ru

ct u ra l Information

System (+) Information system capability can assist BSC application (e.g., Assiri et al., 2006; Kaplan, 2010)

H5a: Information system is positively associated with reaching BSC adoption stage. H5b: Information system is positively associated with reaching BSC implementation stage.

A tti

tu di

na l

Attitude toward BSC

(+) some studies preliminarily reveal that the perceived ease of use and the perceived usefulness of BSC are likely to affect the individual’s intent to use (Hongrattanawong, 2002; Islam and Kellermanns, 2006) and the use of BSC (Speckbacher et al., 2003; Yongvanich and Guthrie, 2009). (=) Chen et al.’s (2006) study finds no impact of the perception of BSC ease of use and BSC usefulness on BSC adoption and implementation stages.

H6a: Attitude toward BSC is positively associated with reaching BSC adoption stage. H6b: Attitude toward BSC is positively associated with reaching BSC implementation stage.

Ex ec

ut io

na l

Top management support

(+)This is one of the most important variables in implementing any innovations (Damanpour, 1991; Roger, 2003; Chenhall, 2003), including BSC, (Kaplan and Norton, 2001; Braam and Nijssen, 2008). (-) Chen et al. (2006) find negative impact of top management support on BSC application.

H7: Top management support is positively associated with reaching BSC implementation stage.

CFO’s involvement

(+) Chief financial officer is expected to be an innovation champion who can promote the BSC implementation (Chen et al., 2006; Braam and Nijssen, 2008)

H8: CFO involvement is positively associated with reaching BSC implementation stage.

Project Team (+) Prior studies point out the importance of this factor (e.g., Kaplan and Norton, 2001; Abernethy et al., 2005; Assiri et al., 2006; Soderberg, 2006)

H9: Team is positively associated with reaching BSC implementation stage.

Training (+) Training or education support is needed for employees (e.g, Assiri et al., 2006) to enhance their understanding about long term strategy and scorecard.

H10: Training is positively associated with reaching BSC implementation stage.

(+), (-) and (=) represent the results of prior studies providing positive relation, negative relation, and insignificant relation between the determinant and BSC application, respectively. This current study has extended prior research by taking into account all attributes of BSC with the assumption that firm’s responses about its characteristics of performance measurement system can reflect its actual practice. The applied attributes of BSC allows this study to specify stage of BSC application. It should be noted that this research examine BSC usage at firm-level, not individual business-unit level. The Determinants of BSC Application Drawing upon organizational innovation, technology acceptance model and contingency theory, determinants expecting to affect the adoption and implementation of BSC are shown in Table 4. External factor is critical for any contingency-based research (Chenhall, 2003). Structural factors reflect firm’s characteristics (Anderson and Young, 1999) that can affect innovation application (Damanpour, 1991). Both external and structural factors are expected to be associated with reaching both adoption and implementation stages. Executional factors reflect mechanisms supporting the implementation process (Anderson and Young, 1999); they should be associated with reaching the implementation stage only. RESEARCH METHODOLOGY Data Collection and Survey Instrument Samples in this cross-sectional survey research are 508 firms listed in the Stock Exchange of Thailand (SET) and Market Alternative Investments (MAI). 81 questionnaires are returned; the response rate is 15.94 percent. This low response rate is not unusual for the mail-survey in Thailand (Pholnaruksa, 2007).

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A survey package was mailed out to CFO in May and June, 2011. The questionnaire was firstly developed based on the developed framework derived from the conceptual foundation of BSC as well as proposed in Table 5. The questionnaire is then revised based on the pre-tested results and comments from academics and the CFOs. Questionnaire contains four parts: the first part asks about the characteristics of the performance measurement system (YES/NO questions) to reflect the BSC attributes, which are later used as the criteria for classifying the stage of BSC application. The second part requires the respondents to specify the percentage ranging 0-100 about BSC attributes. The third part asks about the self-assessed application of BSC (YES/NO question). The last part contains questions regarding determinants by requiring respondents to specify the percentage responses (0-100%). Model and Variable Measurements for Determinant Study Determinant study has two parts: adoption and implementation. The binary logistic regression model is employed to test whether each determinant is associated with reaching adoption/ implementation stage:

[ ] iii ControlsXYPYPLn εββ +++==−= 10)1(1/()1( (1) The primary dependent variable is the stage of BSC application consisting of Non-adoption, Adoption, and Implementation stages. As per adoption part, Y =1 for adoption or implementation firm, 0 otherwise. According to implementation part, Y =1 for implementation firm, 0 otherwise. To strengthen construct validity, each determinant variable has multiple questions adapted from prior studies as follows: Environment uncertainty (Gosselin, 2005), Formalization (Robbins and Judge, 2009; Braam and Nijssen 2008), Interconnetedness (Rogers, 2003; Braam and Nijssen, 2008), Information system (Krumweide, 1998; Assiri et al., 2006), Attitude toward BSC (Davis, 1989; Hongrattanawong, 2002). Top management supports (Assiri et al., 2005; Chen et al., 2006), CFO’s involvement (Chen et al., 2006; Braam and Nijssen 2008), Project Team (Assiri et al., 2005; Chen et al., 2006), Training (Krumweide, 1998; Hongrattanawong, 2002; Assiri et al., 2005). The average percentage score of each determinant for each firm is calculated, except for Participation which follows the level of participation (Pasewark and Welker, 1990; Pholnaruksa, 2007). Three variables are controlled in both the adoption and implementation models. SIZE is 1 for SET; 0 for MAI. Industries are controlled by employing two variables: IND1 (1 for Finance or insurance firm; 0 otherwise) and IND2 (1 for Manufacturing firm; 0 otherwise). RESEARCH FINDINGS The developed framework Based on BSC literature, the framework for classifying BSC attributes along with the BSC stages are proposed as follows:

An organization with a collection of financial and nonfinancial measures that are grouped into perspectives is considered to be a BSC-adoption firm since two conditions (FNFM and PER) are met. Such firm is, at least, at the stage of choosing to follow BSC idea. A firm not meeting all of these two conditions is classified as non-adoption one. BSC-adoption firms that meet the strategy attribute requirement: the strategy is well-defined as well as the measures are derived from strategy and can be shown as a causal chain to illustrate the value-creation process are qualified to be BSC firms or at the

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implementation stage. Consequently, the other BSC attributes for BSC-implemented firms are examined. Fully-implemented BSC firms have met all of the conditions for alignment, communication and feedback; otherwise, they are partially-implemented BSC.

Table 5: The framework for classifying the BSC attributes and the BSC stages

BSC Stage Conditions Non-Adoption No any criterion is met. Adoption

Adoption firm = Firm with all of the following criteria: (1) Financial and non-financial measures (2) Grouped into perspectives

Imple- mentation

Implementation firm = Adoption firm with the following sub-attributes to satisfy Attribute 1: Translating strategy into operational terms (1) Well-defined strategy (2) Strategic objectives or measures (3) Cause-and-effect relationships Firms at this stage are classified as BSC firms, which can be re-classified as partially- or fully-implemented BSC firms:

Partial BSC firms that have applied some of the following attributes: Attribute 2: Aligning the organizational units to the strategy (1) Aligning business units’ or support functions’ strategies to firm’s strategy (2) Disseminating objectives or measures throughout the company Attribute 3: Communicating strategy to employees (1) Communicating vision, mission, and strategy throughout the company (2) Understanding firm’s strategy (3) Linking measures to reward system Attribute 4: Providing feedback and learning (1) Linking strategy to operating plan and budgeting systems (2) Information system for strategy review (3) Process for formulating, learning, and reviewing strategy (4) Process for questioning and refining strategy

Full BSC firms that have applied all of above.

Based on a total of 81 observations, 80 are usable. 8 observations have some missing YES/NO responses for identifying BSC attributes. Thus, BSC attributes of 72 firms are identified by considering YES/NO responses, while those of eight firms will be done by relying on percentage scores. This requires the additional tests to determine whether the classification of BSC attributes by relying on YES/NO responses is valid and whether 60-percent is appropriate to be used as a cutoff-point to identify the use of BSC attributes. Table 6 provides the statistics for each BSC attribute and Table 7 summarizes additional test and the results. Table 6: BSC attributes (N=81)

BSC Attributes YES response NO response Missing Missing Missing Total Avg% N Avg% N (Yes/No) (%) (Both)

Financial and Nonfinancial Measures

FNFM 77.90 77 45.00 2 0 2 0 81

Multiple perspectives PER 78.07 71 34.38 8 1 1 0 81 Well-Defined strategy STRAT 78.59 76 40.00 5 0 0 0 81 Strategy-linked measures SL 77.46 66 46.00 10 3 2 0 81 Causal links CL 72.85 51 50.59 26 3 0 1 81 Alignment A 74.24 70 42.97 8 3 0 0 81 Communication C 76.07 55 54.90 24 2 0 0 81 Feedback F 78.09 63 55.36 18 0 0 0 81

The minimum value of cronbach’s alpha is 0.885, which is above the lower limits of normal acceptable value (Nunnally and Bernstein, 1994), confirming the reliability of all constructed variables.

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Table 7: Additional tests

Tests and methodology Results and conclusion The mean comparison between YES-firm and NO-firm. The classification based on YES/NO responses is rational when the mean percentage score of YES- response firms is significantly greater than that of NO- response firms. The t-Tests for equality of means and Mann-Whitney tests are employed.

The mean percentage response of YES-response firms is greater than that of NO- response firms at 0.01 significance level, except for one sub-attribute (FNFM) at 0.05 level. Thus, YES/NO responses can be employed to identify the BSC attributes and, subsequently, to classify the stage of BSC application, as such.

Test for 60-percent cutoff point For each attribute, we have tested whether the mean percentage score of YES-firm is greater than 60 percent. This cutoff-point is the lower limit of percentage in the “some” column, which is qualitatively similar to the cutoff point used in Soderberg (2006).

Regarding each attribute, the mean percentage score for YES-firm is significantly greater than 60 percent at 0.01 level. Hence, the 60-percent can be applied as a cutoff point for all BSC attributes. Firms with greater-than-60% average response of particular BSC attributes will be considered as they have such attributes.

Agreement test A test for agreement between the attribute classification using YES/NO responses and that using 60-percent cutoff point has been performed.

Kappa test results show that the agreement between these two methods of attribute classification (YES/NO method VS 60-percent-cutoff-point method) is statistically significant at 0.01 level, except for two sub-attributes (FNFM and STRAT) at 0.05 level. The rates of agreement are over 70 percent.

76-81 observations are analyzed in these additional tests. The results from three tests support identifying the BSC attribute, for each responding firm, by considering YES/NO responses. In addition, when the YES/NO responses are missing, the 60% cutoff point can be employed to identify the use of each BSC attribute. That is, BSC attributes are identified by YES/NO responses for 72 firms and by percentage responses for 8 firms. The BSC Practices Among Thai Listed Firms Using the proposed framework, BSC practices among Thai listed firms are as follows: Table 8: The survey results

BSC Stage Classified by BSC attributes Classified bySelf-assessed responses Proportion Number of firms BSC firms Non- BSC firms Non-Adoption 10% 8 1 7 Adoption 26% 21 6 15 Partial Implementation 15% 12 10 2 Full Implementation 49% 39 19 20 Subtotal 100% 80 36 44 Firms with missing data 1 1 0 Total 81 37 44

Of the useable observations, 72 meet the requirement for adopting BSC. Hence, at least, these firms could be classified as BSC-adoption firms. However, the performance measurement systems of some firms contain attributes of BSC. This means that some firms could be classified as BSC-implementation firms; some could not. The remainders (8 firms) are classified as Non-adoption firms.Fifty one firms meet all three sub-attributes of the strategy attribute; thus, they are classified as firms at implementation stage. The remaining 21 firms are still at the BSC-adoption stage since some conditions are not met. 39 out of 51 firms are considered as fully-implemented BSC firms since all of conditions for alignment, communication and feedback are met. The rest (12 firms) are classified as partially-implemented BSC firms as they have only certain attributes of BSC. Aforementioned, firms may dissimilarly interpret the BSC concept and, subsequently, differently classify themselves. The stages of BSC application classified by BSC attributes proposed in this paper in comparison with those classified by self-assessed responses are also shown in Table 8. One out of eight firms claims to be BSC user despite the fact that it is only at the non-adoption stage. It is found that this

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firm has just started the BSC project. 6 out of 21 firms claim to be BSC users despite the fact that they are only at the adoption stage. One firm does not have even a well-defined strategy, while the other five firms do not have causal-links among the strategic objectives or measures. Only 2 out of 12 partially- implemented firms and 20 out of 39 fully-implemented firms misclassified themselves. Overall, the disagreement (or misclassification) rate is 36% (29 out of 80 firms). Although 64% of responding firms can correctly classify themselves, this evidence still raises the importance of proper classification of BSC application by using similar criteria at the first step of any determinant and consequence study.

The Determinants of BSC Application Regarding determinant study, 73 out of 80 are useable. Table 9 summarizes the dependent variables, independent variables (i.e., the external, structural, attitudinal, and executional factors) and control variables used in the determinant study and their descriptive statistics. Table 10 provides the results of determinant study for both adoption part and implementation part. Table 9: Variables for determinant test (N=73)

variables average min max cronbach’s alpha dependent variables adoption adopt 0.89 0.00 1.00 n.a. implementation imple 0.63 0.00 1.00 n.a. independent variables external: environment uncertainty env 64.23 6.67 100.00 0.851 structural : participation part 7.32 0.00 10.00 n.a. formalization form 75.51 10.00 100.00 0.897 interconnectedness int 74.52 10.00 100.00 0.910 information system is 74.67 35.00 100.00 0.933

Table 9: (Cont’): Variables for determinant test (N=73)

Variables Average Min Max Cronbach’s alpha Independent variables Attitudinal : Attitude toward BSC ATT 69.45 3.33 100.00 0.976 Executional : Top management support TOP 76.68 14.00 100.00 0.963 CFO’s involvement CFO 78.11 30.00 100.00 0.891 Project Team TEAM 72.38 0.00 100.00 0.947 Training TRAIN 71.57 0.00 100.00 0.951 Control variables Firm’s size SIZE 0.90 0.00 1.00 N.A. Industry - Finance & Insurance IND1 0.12 0.00 1.00 N.A. Industry - Manufacturing IND2 0.41 0.00 1.00 N.A.

Panel A, Table 10 reports the results of the binary logistic model for adoption part. Environment uncertainty is insignificantly associated with reaching to adoption stage; however, the positive sign partially supports that uncertainty may lead managers to adopt BSC to equip firms with the relevant information for decision making. As per the structural factors, participation, formalization, and interconnectedness are positively significant at 0.05 level. The higher degree of participation, formalization and interconnectedness are positively affect the decision to adopt BSC. Participation allows subordinates to share their ideas and relevant information to supervisors. Anecdotal evidence from the interview with CFO supports this notion; firm has decided to adopt BSC due to the recommendation

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from managers or employees. Furthermore, the use of written rules, procedures, and documents can facilitate management intervention by developing and enforcing norms to improve a firm’s performance measurement system. In addition, networks in the organization facilitate the flow of new ideas more easily. However, information system is insignificantly associated with reaching adoption stage. Evidence from the interview revealed that spreadsheet is mostly employed during the adoption of BSC; full option of information system is not required at this stage. Attitude toward BSC are positive and significant at 0.05 level. Thus, attitude appears to be one of the determinants in the decision to adopt BSC by introducing the idea of multidimensional perspectives containing both financial and nonfinancial measures. This evidence also supports TAM studies as the attitude positively related to intention to use (or adoption stage in this study.) Table 10: The results of determinant study (N = 73)

Panel A: Adoption vs. Non-adoption Independent variable ENV PART FORM INT IS ATT

+ 0.014 0.315 ** 0.037 ** 0.057 ** 0.021 0.030 ** Constant 0.989 -0.026 -0.716 -1.987 0.239 -0.443 SIZE 0.198 -0.152 -0.071 -0.112 0.277 0.538 IND1 -0.047 -0.335 0.173 0.353 0.229 -0.047 IND2 0.144 0.728 0.477 0.447 0.141 0.314 AIC 59.776 54.849 57.069 54.957 59.547 57.757 Percent correct 89.0 87.7 89.0 87.7 89.0 87.7

H1a is not supported

H2a is supported

H3a is supported

H4a is supported

H5a is not supported

H6a is supported

Panel B: Implementation vs. Non-implementation Independent variable ENV PART FORM INT IS ATT

+ 0.019 * 0.319 *** 0.043 *** 0.039 ** 0.031 ** 0.023 * Constant -1.934 ** -2.762 *** -3.878 *** -3.777 ** -3.179 ** -2.608 ** SIZE 1.401 * 1.017 1.164 1.458 * 1.557 ** 1.694 ** IND1 0.524 0.331 0.838 0.917 0.927 0.601 IND2 -0.137 0.140 0.127 0.090 -0.148 -0.008 AIC 99.685 91.253 94.345 97.229 98.392 99.169 Percent correct 64.4 69.9 64.4 63.0 64.4 65.8

H1b is supported

H2b is supported

H3b is supported

H4b is supported

H5b is supported

H6b is supported

Independent variable TOP CFO TEAM TRAIN

+ 0.048 *** 0.045 *** 0.048 *** 0.049 *** Constant -4.822 *** -4.371 *** -4.486 *** -4.435 *** SIZE 1.690 ** 1.458 * 1.573 ** 1.391 * IND1 0.761 0.869 1.013 0.765 IND2 0.219 -0.036 0.107 0.320 AIC 93.467 94.996 91.007 91.957 Percent correct 69.9 68.5 69.9 64.4

H7 is supported

H8 is supported

H9 is supported

H10 is supported

***, **, * indicates significance at 0.01, 0.05, and 0.10 level, respectively. Hosmer-Lemeshow test results for each model suggest that the model is fit since the null cannot be rejected at 0.05 level.

Panel B, Table 10 reports the results of the binary logistic model for implementation part. Environment uncertainty is positively and significantly associated with reaching to implementation stage at 0.10 level. After adopting the BSC concept, firms have experienced some BSC-related administrative tasks; therefore, implementing BSC seems to slightly departure from the existing practices (Damanpour, 1996). Firms tend to derive key measures from strategy and illustrating them as a cause-and-effect relationship. The impacts of environment uncertainty on reaching the adoption and the implementation stage are

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different. The extent that the direction for this external factor varies by stages highlights the importance of separating adoption from implementation. Participation, formalization, interconnectedness and information system are positively significant at 0.01, 0.01, 0.05 and 0.05 level, respectively. The higher degree of participation, formalization, interconnectedness, and information system positively put BSC into use by encouraging management to further improve a performance measurement system. Attitude toward BSC is positively but marginal significant at 0.10 level. CFO’s attitude makes the implementation of BSC easier since CFO or accounting manager is customarily the head of the accounting and finance department. The positive relation between attitude and the usage (or implementation stage in this study) is also consistent with TAM studies. Furthermore, top management support, CFO’s involvement, project team, and training are positively associated with reaching the stage of BSC implementation at 0.01 level. This confirms the role of top management in supporting the implementation of BSC. This evidence also promotes the role of CFO in developing the advanced performance measurement system, especially BSC, and complements the prior studies that rarely investigate this factor. Project team and training are also crucial factors for reaching BSC implementation stage. Interestingly, this study has re-examined the implementation part by employing a firm’s self-assessed responses about the BSC application. The untabulated results suggest that participation, top management supports, attitude toward BSC and training are positively significant at 0.05, 0.10, 0.05 and 0.05 significance level; however, environment uncertainty, formalization, interconnectedness, information system, CFO’s involvement, and project team are insignificant. This illustrates different evidence of key determinants assisting firm to reach the implementation stage of BSC and, once again, cast doubts the prior results relying on the firms’ self assessed responses. CONCLUSIONS This paper has developed a systematic BSC framework for identifying BSC attributes along with BSC stages and provides the evidence of BSC practices in Thailand. The results also show that many firms differently interpret the BSC concept. Hence, it is important to accurately categorize the BSC stage before conducting any analysis (Burkert et al., 2010). Regarding determinant study, the determinants in some ways change with the stages of BSC application. This research concurrently contributes to BSC and TAM. The developed systematic BSC framework can be applied to future research; the findings of stage-dependent determinants suggest that researchers consider the stages of BSC application before selecting the variables to explain BSC application behavior. This study can be replicated to examine the BSC application in different contexts with larger sample size. Prior determinant and consequence studies can be re-performed by using BSC framework developed in this paper as a starting point for identifying BSC stage. Regarding limitation, self-response bias is common limitation of survey research. Some returned questionnaires select the interval range of percentage scores, instead of specifying the percentage; thus, this research follows Pholnaruksa (2007) by assigning the midpoint of interval range for the corresponding selected interval. As this study examines the application of BSC at the corporate level, not business unit level, the results should be carefully interpreted. REFERENCES Abernethy, M. A., & Bouwens, J. (2005). Determinants of accounting innovation implementation. A Journal of Accounting, Finance and Business Studies , 217-240.

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Abernethy, M. A., Horne, M., Lilllis, A. M., Malina, M. A., & Selto, F. H. (2005). A multi-method approach to building causal performance maps form expert knowledge. Management Accounting Research , 135-155. Anderson, S. W., & Young, S. M. (1999). The impact of contextual and process factors on the evaluation of activity-based costing systems. Accounting, Organizations and Society , 525-559. Assiri, A., Zairi, M., & Eid, R. (2006). How to profit from the balanced scorecard: An implementation road map. Industrial Management & Data Systems , 937-952. Atkinson, A. A., Balakrishnan, R., Booth, P., Cote, J. M., Grout, T., Malmi, T., et al. (1997). New directions in management accounting research. Journal of Management Accounting , 70-108. Braam, G. M., & Nijssen, E. J. (2008). Exploring the antecedents of balanced scorecard adoption as a performance measurement and strategic mangement system. workingpaper. Burkert, M., Davila, A., & Oyon, D. (2010). Performance consequences of balanced scorecard adoption: Claim for large-scale evidence and propositions for future research. Performance Measurement and Management Control: Innovative Concepts and Practices Studies in Managerial and Financial Accounting , 345-361. Chen, H., Duh, R., & Lin, J. C. (2006). The determinants of implementation stages of balanced scorecard. International Journal of Management and Decision Making , 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 , 127-168. Damanpour, F. (1991). Organizational innovation: A meta-analysis of effects of determinants and moderators. Academy of Management Journal , 555-590. Damanpour, F. (1996). Organizational complexity and innovation: Developing and testing multiple contingency theory. Management Science , 693-716. Davis, F. D. (1989). Perceived usefulness, perceived ease of use, and user acceptance of information technology. MIS Quarterly , 319-340. De Geuser, F., Mooraj, S., & Oyon, D. (2009). Does the balanced scorecard add value? Empirical evidence on its effects on performance. European Accounting Review , 93-122. Decharin, P. (2003). Balanced scorecard: Implementing Balanced scorecard. Bangkok: CU Press. Gosselin, M. (2005). An empirical study of performance measurement in manufacturing firms. International Journal of Productivity and Performance Management , 419-437. Hendricks, K., Menor, L., & Wideman, C. (2004). The Balanced Scorecard: To adopt or not to adopt?. Ivey Business Journal , 1-7. Henry, J. (2006). Organizational culture and performance measurement system. Accounting, Organizations and Society , 77-103.

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Hongrattanawong, 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. Chulalongkorn University. Islam, M., & Kellermanns, F. W. (2006). Firm- and individual-level determinants of balanced scorecard usage. Canadian Accounting Perspectives/Perspectives Comptables Canadiennes , 181-207. Ittner, C. D., Larcker, D. F., & Randell, T. (2003). Performance implications of strategic performance measurement in financial services firms. Accounting, Organizations and Society , 715-741. Jusoh, R. (2008). Environment uncertainty, performance and the mediating role of Balanced scorecard measures use: Evidence from Malaysia. International Review of Business Research Papers , 116-135. Kaplan, R. S. (2010). Conceptual foundations of the balanced scorecard. Retrieved on July 6, 2010, from 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. (1996). The Balanced scorecard: Translating strategy into actions. Boston: Harvard Business School Press. Kaplan, R. S., & Norton, D. P. (2008). The execution premium: Linking strategy to operations for competitive advantage. Massachusetts: Harvard Business Press. Kaplan, R. S., & Norton, D. P. (2001). Transforming the Balanced scorecard form performance measurement to strategic management. Accounting Horizon , 87-104; 147-160. Krumweide, K.R. (1998). The implementation stages of activity-based costing and the impact of contextual and organizational factors. Journal of Management Accounting Research , 239-277. Malina, M. A., & Selto, F. (2001). Controlling and communicating strategy: An empirical test of the effectiveness of the balanced scorecard. Journal of Management Accounting Research , 47-60. Malina, M. A., Norreklit, H. O., & Selto, F. H. (2007). Relation among measures, climate of control, and performance measurement models. Contemporary Accounting Research , 935-982. Nunnally, J. C., & Bernstein, I. H. (1994). Psychometric Theory (3/e ed.). R.R.Donnelly&Sons Company. Pasewark, W. R., & Welker, R. B. (1990). A Vroom-Yetton evaluation of subordinate participation in budgetary decision making. Journal of Management Accounting Research , 113-125. Pholnaruksa, I. (2007). Implementation levles of activity-based management and the effects on profitability of Thai manufactuing firms. Thailand: doctural Dissertation. Department of Accountancy, Chulalongkorn University. Robbins, S. P., & Judge, T. A. (2009). Organization theory: The structure and design of organizations. New Jersey: Prentice Hall.

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Roger, E. M. (2003). Diffusion of innovations (5 ed.). New York: The free press. Soderberg, M. J. (2006). The balanced scorecard: Structure anduse in Canadian companies. Master's Thesis. Master degree in Science . Canada: University of Saskatchewan. Speckbacher, G., Bischof, J., & Pfeiffer, T. (2003). A descriptive analysis on the implementation of balanced scorecards in German-speaking contries. Management Accounting Research , 361-387. Thinwilai, N. (2005). The relationship between the application of balanced scorecard and the change in organization performance. Thailand: Master's thesis. Department of Accountancy, Chulalongkorn University. Wiersma, E. (2009). For which purposes fo managers use Balanced scorecards? An empirical study. Management Accounting Research , 239-251. Yongvanich, K., & Guthrie, J. (2009). The balanced scorecard of Thailand listed companies and performance implications. Pacific Accounting Review , 132-149. Yu, L., Perera, S., & Crowne, S. (2008). Effectiveness of the balanced scorecard: The impact of strategy and causal links. Journal of Applied Management Accounting Research , 37-56. ACKNOWLEDGEMENT This study is part of my dissertation in progress at Chulalongkorn Business School, Chulalongkorn University. I would like to thank my advisor, Asso.Prof.Vorasak Toommanon, for his helpful comments and suggestions. Any errors or omissions remain my responsibility.

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VALUE OF RISK OF OPTION PORTFOLIOS USING MONTE CARLO SIMULATION UNDER A RISK- NEUTRAL STOCHASTIC IMPLIED VOLATILITY

MODEL Peng He

ABSTRACT

Value at Risk (VaR) of option portfolios are calculated using Monte Carlo simulation under a risk neutral stochastic implied volatility model. Comparing with the benchmark, namely delta-normal method, the model produces much more accurate result by taking account of nonlinearity, passage of time, non normality, changing of implied volatility. Two parameters in the model, namely the correlation between underlying and the at the money implied volatility and the volatility of percentage change of the at the money implied volatility, can explain market skew phenomena quite well and VaR changes with the two parameters as the terminal underlying price distribution does. RISK NEUTRAL STOCHASTIC IMPLIED VOLATILITY MODEL There are some compelling evidences that exchange-traded options prices do contain additional volatility information that can not backed out from the price information of the underlying security alone.(He and Yau(2007), Christensen and Prabhala(1998), Cao and Chen (2000) etc). Therefore instead of deriving prices for them, a pricing model should use their prices as input. Schonbucher (1998) and Ledoit and Santa Clara (1999) made this breakthrough and for the first time, in the financial literature, the implied volatility is modeled as an input rather than as an output. Hafner (2004) presented a factor-based model of the stochastic evolution of the implied volatility surface. On the other hand, directly modeling the dynamics of implied volatilities is required by the nature of some exotic derivatives based on ATM (At the Money) implied volatility of an option written on a reference asset. In previous paper (He and Yau (2006)), we develop a risk-neutral diffusion model for the stochastic market implied volatility. Unlike Hafner (2004) and Ledoit and Santa Clara (1998), we think modeling whole implied volatility surface is dangerous because it is very difficult to guarantee no arbitrage between the options with different strikes during the diffusion process of the corresponding implied volatilities of those options. Instead, we only model one implied volatility. Our model setup is also different from Schonbucher (1998). We think the percentage movement of implied volatility is more appropriate to be modeled than the implied volatility itself. The reason is the same as why people model the percentage movement of underlying asset price as opposed to underlying asset price itself. Furthermore this modification can ensure implied volatility to be positive during the diffusion process. After the proper setup, the risk-neutral drift term of stochastic implied volatility is derived, which is necessary to be no- arbitrage. We proved that the implied volatility of At-the-Money options mature immediately should converge to underlying volatility at rate of time to maturity, which specifies the stochastic process of underlying volatility. Finally the model is developed as follows:

ttttt dWSdtrSdS θ+= (1)

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dtdtSdtS

dWSdtrSdZ

dtrdtrXd

tTtKtttttK

ttttKttKt

t t

t t

δρδβθθδ

θδδβδ

βρ δ

θ δ

τδ

∂+∂+∂+

∂+∂++

−+−==

222

23

2 1

) 2

() 24

()1,(

(2)

)1,0( === Xtt τδθ (3) Where tθ is instantaneous underlying volatility. ),( Xt τδ is the relative implied volatility indexed by time to maturity τ and moneyness tSKX /= , the ratio between strike and underlying price. So

)1,0( == Xt τδ is the implied volatility of ATM option maturing immediately. ρ is the correlation coefficient between one Brownian motion Z and another Brownian motion W . β is the volatility of percentage change of implied volatility. To simplify the model to be useful in practice, we assume tKδ∂ , tKδ

2∂ and tTδ∂ be zeros. The assumption is reasonable because empirical observation find out that ATM implied volatilities typically keep the same or change little for small strike (or underlying price) change and small maturity time change. This is in accordance with traders’ “sticky delta rule”. It is impossible to find any analytical solution to the above equations. For the complicated probabilistic system, Monte-Carlo simulation is the method to use. Given a proper initial ATM implied volatility )1,0(0 =Xδ or underlying volatility tθ , underlying price

0S , interest rate r and two model parameters ρβ , , this dynamic system can be simulated from time 0 to time T as following:

1. Suppose at any time t, Tt ≤<0 , we have got ))1,((, =XtorS ttt δθ and now we want to simulate ttS ∆+ and tt ∆+θ at time tt ∆+ , which Ttt ≤∆+ .The short time interval

./)0( NTt −=∆ 2. At time t, generate the random next increment tt ZW ∆∆ , of Brownian motion for use over the

current time interval [ ]ttt ∆+, . Since tt ZW ∆∆ , are correlated, we set tW∆ = tt ∆,1ε

ttZ ttt ∆−+∆=∆ 2

,2,1 1 ρερε Where tt ,2,1 ,εε are two independent random numbers from standard normal distribution. 3. Approximate the solution of SDE equation for the underlying price by

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tt t

ttt WtrSS ∆+∆−+=∆+ θ θ

) 2

(lnln 2

The simulation equation for the underlying volatility is based on Euler approximation. It is given by

dZtrtr t t

t t

ttt βθβρ θ

θ θ

θθ +∆−+∆−+=∆+ )2 (()

24 (

23

With ttS ∆+ , tt ∆+θ , now start to compute parameters at time tt ∆+ , return to Step 1, reset t to

tt ∆+ and iterate until time T generate trajectories of tS and tθ . COMPUTATION OF VALUE AT RISK OF OPTION PORTFOLIOS The measurement of financial market risk is of primary importance for senior management and regulators. Value at risk (VaR) summarizes the worst loss of a portfolio over a given period of time with a given level of confidence. VaR has become widely used by financial institutions, corporations and asset managers. The Basle Committee on Banking Supervision (BIS) and other central bank regulators also use VaR as a benchmark risk measure to determine the minimum amount of capital a bank is required to maintain as reserves against market risk. There are two approaches to compute VaR. The first approach use local valuation. Local valuation methods measure risk by valuing the portfolio once, at the initial time 0, and using local derivatives to deduce the possible movements. The second approach uses full valuation. Full valuation methods measure risk by fully repricing the portfolio over a number of scenarios. In the local valuation approach, the delta-normal method is most commonly used by practitioners to calculate the VaR of option portfolios. It uses the linear, or delta derivatives and assume normal distributions. The well-known formula is applied.

TRN DScTVaR υαφα φ ||)(),,( 0)1,0(=

Where )()1,0( αNc is the α -quantile of the standard normal distribution. 0S is the initial underlying price.

|| φD is the absolute delta of the option portfolio. TRυ is the volatility of return of the underlying during holding period ].,0[ T The full valuation approach uses Monte Carlo simulation or historical simulation to generate the probability distribution for TV∆ . Let

j TV∆ denote the change in portfolio value over ],0[ T in scenarios

Jj ,...1= . Then the distribution function )(xF TV∆

of TV∆ can be approximated by

∑ ≤∆

= ∆ =

xV Jj

V

j T

T J xF

,...1

1)(ˆ

We will then do a case study to show the difference the delta-normal method and the paper Monte Carlo simulation approach. Let us consider two option portfolios. Let us suppose the underlying price is 100 and risk free interest rate is 0. The two portfolios consist of the following instruments.

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• Portfolio 1 (PF1): A long position in 100 call option with strike 100=K and maturity date is 42 days away

• Portfolio 2 (PF2): A long position in 100 ATM straddles (long position both in call and put option with same strike and same maturity) with strike 100=K and maturity date is 42 days away.

At time zero, the portfolio values ,2,1,0 =iV i

PF are:

90.541)365/42,4.0 ,0,100,100(*100 000 1

== ====

σ rKSCV PF

80.1081))365/42,4.0 ,0,100,1000(

)365/42,4.0,0 ,100,100((*100

0

000 2

== ===+

== ===

σ

σ rKSP

r KSCV PF

The objective of the following analysis is to compute the VaR for both portfolios over 1 business and 10 business day. The confidence level is set to 95%. Let us first consider the delta normal method. The Black Scholes deltas for the above call and put option are 0.5270, -0.4730. So the portfolio deltas are:

70.525270.0*100 1

1

0 == ∂

∂ =

S V

D PF

PF

41.5)4730.05270.0(*100 2

2

0 =−= ∂

∂ =

S V

D PF

PF

Using 645.1=%)5()1,0(NC , and volatility 0.4, the VaR for each portfolio and each holding period is then computed according to the formulas. The result is listed in Table1 column “Delta-normal”. Let us consider Monte Carlo simulation. The parameters we choose here are 1,5.0,4.00 =−== βρθ . Following the procedure described as above, we generate 10,000 scenarios of σ,S over the time horizon

],0[ T , where T equals 1 business day or 10 business days, respectively. For each scenario, we compute the portfolio value and the change in portfolio value. This provides us with a simulated distribution function )(ˆΔ xF TV . Given )(ˆΔ xF TV , VaR is easily computed as the negative −α quantile of TVΔ . The result is listed in Table 1 column “Paper Monte Carlo”. As shown in the Table 1, the VaR computed under delta normal method is quite different from the one computed under paper Monte Carlo simulation. For portfolio 2 under the delta-normal method, the VaR is lower than the VaR under paper Monte Carlo simulation, whereas for portfolio 1 it is opposite. This can be explained as follows: Since the straddle position is almost delta neutral, so the VaR is very small under delta-normal method. This, however, indicate one disadvantage of delta-normal method. Delta-normal method is linear approximation, which can not capture the nonlinearity of options. In this case, the straddle position is exposed to relative big Gamma risk and the Gamma is the quadratic part. On the other

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hand, considering portfolio 1, the delta-normal method produces higher VaR than it should be. The obvious example is that 10-day holding period VaR for portfolio 1 under Delta normal method is 694 Dollar. The maximum amount of money one can lose when holding that call option, Portfolio 1 over 10 days (or any day) is the initial option premium, i.e. 541.90 Dollar .The reason why delta normal method produces too high VaR for portfolio 1 is that the delta normal method does not account for the time decay of option prices. Table 1: Delta-normal VaR and Paper Monte Carlo simulation VaR (in U.S. Dollars) for a confidence level of 95%

Delta-normal Paper Monte Carlo Holding Period

1 Day VaR

10 Day VaR

1 Day VaR

10 Day VaR

Portfolio 1 219 694 207 497 Portfolio 2 23 71 109 373

Note: the components in Portfolio 1 and Portfolio 2 are mentioned in the paper. Figure1 Implied volatility Curve and The moments of Log Terminal Underlying Price Distribution 1,5.0 =−= βρ

Distribution: Skewness = -0.053 Kurtosis = 4.027

2,5.0 =−= βρ

Distribution: Skewness = -0.41 Kurtosis = 10.6

1,0 == βρ

Distribution: Skewness = -0.012 Kurtosis = 3.54

2,0 == βρ

Distribution: Skewness = -0.066 Kurtosis = 7.055

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1,5.0 == βρ

Distribution: Skewness = -0.057 Kurtosis = 3.836

2,5.0 == βρ

Distribution: Skewness = -0.385 Kurtosis = 10.7

Note: Simulated Implied Volatility Curves for options with maturity of 42 days. The initial underlying volatility 0θ is 0.4 and interest rate r is 0. The moments (Skewness and Kurtosis) are the moments of log terminal underlying price distribution under simulation, In particular,

)/ln( 0SST . TS is the terminal underlying price and 0S is the initial underlying price. In fact, besides nonlinearity and passage of time, there are two other effects which are not captured in the delta normal method, non-normality and implied volatility variations. The delta normal method assumes that the underlying return TR is normally distributed. However convincing empirical studies have shown that underlying return tend to exhibit fat-tailed distributions. In other words, extremely low and high returns have greater probability than assigned by the normal distribution. The kurtosis of the log Terminal Price distribution for the above parameter set is 4.06, which explains fat-tailed distribution.In addition, the delta normal method assumes a constant underlying volatility, and thus constant implied volatilities. In fact, implied volatilities change over time. In contrast, the paper Monte Carlo simulation capture all the effects mentioned above. It is a much better method to compute VaR. The only disadvantage of the paper Monte Carlo simulation is computation time. However using today’s more and more powerful computer, the computation runs faster and faster. Next we will study how VaR changes with parameters in the paper model, namely β and ρ . Those two parameters can explain market skew phenomena quite well. For zero correlation between the underlying and volatility )0( =ρ , the implied volatility curve is symmetric and skewness is around zero. Smile- shape volatility curves are commonly observed for options on a foreign currency. Our analysis is consistent with the empirical study (Bates 1996), which show that the correlation between implied volatilities and the exchange rate is close to zero. For negative correlation )0( <ρ , the implied volatility curve is skewed to left and skewness is negative. Skew-shape volatility curves are commonly observed for options on equities and equity indices. Our analysis is consistent with the empirical study (Christie 1982), which show the volatility of an equity price tend to be negatively correlated with the equity price. For positive correlation )0( >ρ , the implied volatility curve is skewed to right and skewness is positive. The bigger the absolute value of ρ , the more skewed of the curve and the bigger the absolute value of skewness. On the other hand, the volatility of percentage change of implied volatility β has a effect on the curvature of implied volatility curves. With other parameter held fixed, the larger the β , the larger the curvature of the implied volatility curve, the larger the kurtosis.

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VaR of the two option portfolios for different β and ρ are calculated and the results are listed in the Table 2. The higher the skewness and kurtosis of the log terminal underlying distribution )(ln TS , the higher VaR value of both option portfolios. Table 2 Paper Monte Carlo simulation VaR of two option portfolios for different β and ρ (in U.S. Dollars) for a confidence level of 95%

Portfolio 1

β ρ Skewness Kurtosis 1 Day VaR

10 Day VaR

1 -0.5 -0.053 4.027 207 497 1 0 -0.012 3.54 206 492 1 0.5 -0.057 3.836 206 497 2 -0.5 -0.409 10.578 224 514 2 0 -0.066 7.055 225 512 2 0.5 -0.385 10.728 226 513

Portfolio 2

β ρ Skewness Kurtosis 1 Day VaR

10 Day VaR

1 -0.5 -0.053 4.027 109 373 1 0 -0.012 3.54 113 393 1 0.5 -0.057 3.836 109 369 2 -0.5 -0.409 10.578 203 537 2 0 -0.066 7.055 213 573 2 0.5 -0.385 10.728 202 546

Note: the components in Portfolio 1 and Portfolio 2 are mentioned in the paper. REFERENCES Bates, D.S. (1996) Jumps and Stochastic Volatility: Exchange Rate Process Implicit in Deutsche Mark Options, Review of Financial Studies, 9,1, pp69-107 Cao, Bakshi G and Chen Z. (2000) Do call prices and the underlying stock always move in the same direction? Review Financial Studies, 13, pp549-84 Christie,A.A. (1982) The stochastic behavior of common stock variances: Value, leverage, and interest rate effects, Journal of Financial Economics, 10, 4 Christensen, B.J. and Prabhala, N.R. (1998) The relationship between implied and realized volatility, Journal of Financial Economics 50 , 125-150 Hafner Reinhold (2004) Stochastic Implied Volatility, A Factor-Based Model, Springer-Verlag Berlin Heidelberg

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He, Peng and Yau, Stephen (2007) Forecasting Stock Market Volatility Using Implied Volatility. Proceedings of the 2007 American Control Conference, pp 1823-1828 He, Peng and Yau, Stephen (2006) The Risk Neutral Dynamics of Market Implied Volatility Submitted to Journal of Computational Finance LeDoit O. and Santa Clara P., “Relative pricing of options with stochastic volatility” Working Paper, Anderson Graduate School of Management, University of California, Los Angeles, 1998 Merton, R. C. (1973), Theory of rational option pricing, Bell Journal of Economics and Management Science, 4, 141-83 Schonbucher, P.J. (1999), A market model of stochastic implied volatility, Philosophical Transactions for the Royal Society, Series A, 357, pp 2071-2092 BIOGRAPHY Dr. Peng He is the Head of Quantitative Research at ITG Derivatives LLC ( a wholly-owned subsidiary of Investment Technology Group, Inc. ), 601 S. LaSalle St. Suite 300, Chicago, IL 60605 USA (corresponding author),; phone: 312-363-8121; email: [email protected]

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DOES TECHNOLOGICAL OVERSHOOTING EXIST IN THE JAPANESE MINIVAN MARKET?

Go Shionoya, Kobe University

ABSTRACT This study empirically examines whether technological overshooting for product attributes existed in the Japanese minivan market between 2001 and 2008 using a hedonic approach and the compound average growth rate (CAGR) for product attributes. The result of the hedonic regression shows that interior space did not affect consumer utility during 2001 and 2008. Also, major growth in interior space was not seen, according to the CAGR during this period. Therefore, we conclude that technological overshooting has not been confirmed in the Japanese minivan market. JEL: L62; M10 KEYWORDS: technological overshooting, marginal utility, hedonic approach, CAGR INTRODUCTION The purpose of this study was to empirically examine, using a statistical method, whether or not technological overshooting for product characteristics existed in the Japanese minivan market between 2001 and 2008. Technological overshooting is the term used to describe the phenomenon of excessive competition for product characteristics that do not have an effect on consumer satisfaction. Technological overshooting has received attention within the scope of corporate strategy and technology management. In particular, many case studies of technological overshooting have been examined in recent years (e.g., Christensen, 1997), but there has been little empirical research on this subject. For these reasons, we suggest an empirical framework for identifying technological overshooting and apply it to the Japanese minivan market. The result of this study shows that technological overshooting was not confirmed in Japanese minivan market. LITERATURE REVIEW Porter (1985) explains that unnecessary differentiation is the result of failure to diagnose a performance level that consumers need or “consumer marginal utility.” Similarly, according to Christensen (1997), once the performance level demanded of particular product attributes has been achieved as a result of the repetition of sustained innovation, customers indicate their satiation by being less willing to pay a premium price for continued improvement in those attributes. In this study, we define technological overshooting in terms of their arguments in two stages. THE DEFINITION OF TECHNOLOGICAL OVERSHOOTING The first stage of technological overshooting is defined as a condition that saturates the needs of a customer for product characteristics. In other words, this is a condition where the consumer marginal utility for product attributes is zero. By contrast, if the value of consumer marginal utility is a positive or negative number, we conclude that the first stage of overshooting has not occurred because of increasing or downsizing of the number of product characteristics to increase consumer utility.The second stage is defined as a situation where excessive differentiation by companies occurs in the space for product attributes that do not influence consumer utility. At this stage, we consider that technological

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overshooting has occurred. This is determined based on the growth rate of the functional value in companies. METHODOLOGY Identifying Technological Overshooting: Hedonic Approach And CAGR First, our research adopts a hedonic approach for specifying the first stage of technological overshooting. It is known that regression coefficients in the hedonic function coincide with the marginal utility of product characteristics (Rosen, 1974). In this research, if the regression coefficients are statistically significant, and if an increasing or lowering of functional values positively affects consumer utility, we do not consider that overshooting has occurred at this point. Conversely, if the coefficients were statistically zero, we would suspect that technological overshooting has occurred. Second, we need to show the growth rate of a functional value that has a marginal utility equal to zero. Therefore, this research uses the compound average growth rate (CAGR). This means the year-over-year growth rate of a functional value over a specified time, and can be expressed as:

CAGR = ( Ending functional value Beginning functional value

) 1

n of years -1 (1) CAGR is calculated by using the average of the functional value on a company-by-company basis. The interpretation of the CAGR depends on the direction of the product differentiation. Table 1 shows the conditions for the second stage of technological overshooting. If the CAGR of product attributes which do not have effect consumer utility is large in the direction of its differentiation, we regard this as an occurrence of technological overshooting. Table 1: The conditions for the second stage of technological overshooting

Direction of Product Differentiation CAGR positive (e.g., acceleration of car) large positive number negative (e.g., response speed of PC) large negative number

positive or negative (e.g., product size) absolute value of CAGR is a large positive number

This table shows the conditions for the second stage of technological overshooting. Data and Estimation In this study, we selected the Japanese minivan market for research. The reason is that the market size is declining. At the same time as remarkable innovation, for instance the introduction of hybrid minivans, there is no denying that market size and share are falling.The data used for this study are from SAISHIN MINIVAN ZEN MODEL KONYU GUIDE, which is a special interest magazine on Japanese minivans published by the Japan Automobile Federation. A total of 199 samples of panel data covering 37 models were collected between 2001 and 2008.The dependent variable is price. Independent variables on product attributes include acceleration, interior space, and fuel efficiency. These are important characteristics used for empirical research in the automotive industry (e.g., Berry et al, 1995; Petrin, 2002). We collected these data from the most inexpensive grades. We also conducted a two-way fixed effect model to estimate the hedonic price function. As well, we used year dummy variables to control unobservable economic fluctuations.

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RESULTS Table 2 shows the result of hedonic regressions for specifying whether consumer marginal utility of a product attribute is zero. First, acceleration and fuel efficiency have a significant effect on price. Thus, we conclude that the raising or lowering of these attributes increases consumer utility and that overshooting did not occur in these characteristics at this point. By contrast, we can interpret this result as meaning that the marginal utility of interior space is zero. Therefore, we should assess the overshooting of interior space by CAGR. Table 2: Result of Hedonic Regression (2001-2008)

Dependent Variable ln Price Coefficient ln acceleration (ps/weight) 0.144** (0.057) ln fuel efficiency (km/l) -0.274*** (0.074) ln interior space (m3) -0.207 (0.135) Year dummies (2002–2008) yes Constant 6.648*** (0.285)

2R 0.372 p-val. F test 0.000 p-val. F test for fixed effects 0.000 P-val. F test for time fixed effects 0.000 N 199

The *, **, and ***, denote 10%, 5%, and 1% significance levels, respectively. Standard errors are in parentheses. Here we discuss whether companies have increased functional value for interior space that satiates consumers. Table 3 provides information on the CAGR of interior space. First, looking at the CAGR between 2001 and 2008, Toyota, Honda, and Mazda have a small negative value. Therefore, we can say that the interior space in minivans from these companies was shrinking slightly. On the other hand, though the CAGRs from Nissan and Mitsubishi are positive numbers, the values are not large. For these reasons, we conclude that there is no intense competition for interior space and that technological overshooting is not confirmed by our investigation. Table 3: CAGR of Interior Space (2001–2008)

Toyota Nissan Honda Mazda Mitsubishi Average -0.12 0.19 -0.92 -0.45 1.41 0.11

source: saishin minivan zen model konyu guide note: cagr is calculated by using the functional value of the most inexpensive grades. CONCLUSION The empirical results in this paper indicate that there was no overshooting in the Japanese minivan market. As such, this investigation contributes to a statistical understanding of the existence of technological overshooting. Hedonic regression to find product attributes where consumer satiation occurs can be used as a guideline for appropriate product design and for modifying investment plans for product characteristics.However, some aspects of this study require further research. We estimated the marginal utility of a representative agent in this study. On the other hand, if we assume that the marginal utility varies among buyers, we should correct for individual purchase data and apply a discrete choice model. REFERENCES Berry, S., Levinsohn, J., & Pakes, A. (1995). Automobile Prices in Market Equilibrium.

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Econometrica, 63, 351-381. Christensen, C. M. (1997). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press, Boston, MA. Petrin, A. (2002). Quantifying the Benefits of New Products: The Case of the Minivan. Journal of Political Economy, 110, 705-729. Porter, M.E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press, New York. Rosen, S. (1974). Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition. Journal of Political Economy, 82, 34-5 BIOGRAPHY Go Shionoya is a Ph.D. student in the Graduate School of Business Administration at Kobe University. His main research is in the field of Technology Management, specifically in Product Development. He can be contacted via Email: [email protected]

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THE IMPORTANCE AND BENEFITS OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN THE

LIBYAN CONTEXT: EVIDENCE FROM MANAGERS Nagib Salem Bayoud, The University of Southern Queensland, Australia

Marie Kavanagh, The University of Southern Queensland, Australia

ABSTRACT This explains the importance and benefits for Libyan companies of engaging in corporate social responsibility disclosure (CSRD). The researchers have chosen the Libyan context as one of the world’s developing countries and it has undergone many changes over a short period of time in terms of economic, environmental and social changes. Both quantitative and qualitative methods were used to collect data relating to CSRD in Libyan companies. Perceptions of financial managers interviewed as part of the study reveal that CSRD is important for company performance, not only in the developed countries but also in developing countries. This paper reveals that CSRD in the annual reports is very important in terms of attaining company objectives to: satisfy the interests of stakeholders; protect employee’s interests; clarify the extent of contribution of the company in both CSR activities and CSRD; assist appropriate investment decisions. The perceived primary benefits of CSRD were enhanced company reputation, and increased financial performance. It also improves ability to attract foreign investors, and results in a higher level of consumer satisfaction leading to commercial benefits. Secondary benefits include demonstration of compliance with regulation and improved employee commitment. KEYWORDS: Corporate Social Responsibility (CSR); Corporate Social Responsibility Disclosure (CSRD); Financial Performance; Corporate Reputation. INTRODUCTION The institutional context of the emerging economy of Libya has experienced dynamic change over the last ten years (Mateos 2005). The main influential factor that leads to and regulates the attitude and behaviour of Arab societies, including Libya, is the Islamic religion. According to Ali (1996) the Islamic religion organises the social life in family and other social organisations and maintain their endurance and influence. Changes in regulatory environment may have an impact on companies in terms of their disclosures, therefore the level of CSR disclosure has increased since 2000 in Libya compared to previous years (Pratten & Mashat 2009) due to pressures from stakeholders, which in turn may clarify the importance and the benefits of CSRD in the Libyan companies. This also may refer to develop the concept of CSRD.The development of the concept of CSRD has been passed in the different stages; the first stage is the period 1970-1980. Empirical studies were focus on developing methods to measure the incidence of information disclosure by firms which was voluntary. Most frequently were disclosed about employees and product activities. At that time, managers, accountants, and the majority of their observers were not interested in environmental concerns, because it was invisible. Some empirical studies were used three environmental categories out of twenty seven (Ernst and Ernst, 1978 as cited in Mathews 1997). The second stage is the period 1980-1990. Many changes have appeared due to the focus of the social and environmental accounting literature, with increasing signs of specialization since 1980. For instance, value-added statements attracted a separate

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group of adherents and employee reports (Burchell et al., 1985). Environmental disclosure has become of more concern than social disclosure, environmental disclosure and regulation consider an alternative means of reducing environmental damage. Legally enforceable accounting standards, Means of conceptual frameworks, and legislations are features of this period which contribute in the increase regulation of accounting disclosures. Empirical studies in this period were more analytical and less descriptive. The final stage is the period 1991-now. This stage has focussed on environmental issues within accounting on a broad front, including interest from managers as well as accountants. (Gray et al. 1995) argue that this stage has been characterized by the almost complete domination of environmental accounting with research on broader social reporting (including employee and ethical disclosures).

This research presents evidence from interviews with 24 financial managers and 7 information managers on the importance and the benefits of CSRD in Libya. The motivations for this research are that some companies consider CSR activities and its disclosure may bring a competitive advantage and External pressures consider catalyses other companies to engage in CSR activities and its disclosure (Branco & Rodrigues 2008). This research contributes to our knowledge about what the extent of the importance of disclosure of CSR activities information for stakeholders and what the potential benefits to the Libyan organisations that can be obtained from disseminating CSRD. There are few numbers of studies that focus on these questions in quantitative studies; however this research is the first study that depends on both quantitative and qualitative study to explain the importance and the benefits of CSRD in Libya. The research could obtain a deeper understanding on this subject than do prior articles based on interviews. Generally, this research expands the evidence that exists about both the importance and the benefits of CSRD. The majority of interviewees are that CSRD are considered as one of the most important reasons which help the Libyan companies to achieve their objectives, such as enhancing image and reputation; supporting financial performance; improving employee commitment, etc. These benefits gained CSRD the observed importance by different stakeholders. But few numbers of interviewees believe that CSRD is a minor element to improve the business performance in the Libyan context. LITERATURE REVIEW CSRD has found an increasing amount of attention in both the academic and business organizations. Such disclosure includes the provision of information on human resource aspects, products and services, involvement in community activities and environmental reporting. Gray et al. (1995) state that “… It is not restricted necessarily by reference to selected information recipients, and the information deemed to be CSR may, ultimately, embrace any subject …”. Many quarters have recognized this view of CSR as a broad concept. Cleaner environment and better society for instance is regarded CSR as a concept whereby companies decide voluntarily by The European Commission (2001). The World Business Council for Sustainable Development (WBCSD) (1998) defines CSR as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large” (Holme and Watts, 2000). Currently, making profits and element of CSR and accountability consider the main objective of business organizations in order to maintain corporate reputation and appropriate performance whereas in the previous years, the main objective of business organizations is making profits (Ghazali 2007).

A growth of nonfinancial reporting (disclosure) has relied on the evolution of the concept of CSR. This means, the company is responsible for its action. Indeed, stakeholders are asking companies to disclose their both social and environmental activities and their ability to improve the corporate process through nonfinancial reporting. In this regard, identifying, monitoring, and reporting all social, environmental, and

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economic effects of its operation on society at large are concrete evidence that companies are committed to continual, long-term improvement, if they want to gain their stakeholders’ trust and build a good reputation in the market (Brammer & Pavelin 2004).

Responsibilities of company differ toward their stakeholders regards economic, legal, and social in order to improve its organisational performance in terms of financial performance, employee commitment, and corporate reputation. In addition, the strategy of Corporate social responsibility is important (policy, programme or process) when it yields substantial business- related benefits to the firm, in particular by supporting core business activities and thus contributing to the firm's effectiveness in accomplishing its mission (Burke & Logsdon 1996). The blending of these responsibilities into complete corporate policy without losing sight of any of its commitment is the main challenge for the company. Additionally, in the long-term, the commitment of the company toward its stakeholders often lead to improved organisational performance, in other words, the economic responsibility of company might conflict with its social responsibility in the short-term, at the same time, they can work together to improve the company’s image. Thus, this does not mean that socially responsible of the company cannot be as profitable as others.Currently, the common concept of CSR involves to voluntarily disclose companies about social and environmental concerns in their operations and interaction with stakeholders. It includes some complex issues such as environmental protection, human resources management, health and safety at work, relations with local communities, and relations with suppliers and consumers. In addition, Friedman (2002) presented the most famous definition of CSR as the economic concept of market value maximization that has support from shareholders. He asserts that the profit demands of the owners or shareholders and the basic regulations of society are consistent with the responsibility of a company.

As evidence of adherence of companies to CSR and sustainable development concepts, currently, there is a growth in numbers of multinational corporations as well as small- and medium-sized companies claim their social and environmental reporting practices. In a similar vein, the right way towards an overall comprehension of what practitioners consider efficient and appropriate socially responsible behaviour is represented by reporting-based analyses (David 2005). A company should disclose both the positive and negative impacts of CSR due to its business operation on labour standard, the environment, economic development, and human rights by CSR reporting. Furthermore, as a result of a general growth of the overall number of companies producing CSR reporting, currently there is a growth and expansion of CSR reporting to include a broad focus on social, economic, and governance issues although reporting was focused almost entirely on occupational health and safety and environmental issues (O‘Rourke 2004).

CSRD has several roles which are included: Assessing the impacts of CSR activities; Measuring the effectiveness of CSR programs; Reporting on CSR; and External and internal information systems allowing the comprehensive assessment of all corporate resources and sustainability impacts (Jenkins & Yakovleva 2006). Many scholars have been asserted (Gray 2001; Gray et al. 1997; Mathews 1997) that the CSR has identified a number of stages in CSR’s development. The first stage is the period 1970-1980. Empirical studies focused on developing methods to measure the incidence of information disclosure by firms which was voluntary. Most frequently were disclosed about employees and product activities. At that time, managers, accountants, and the majority of their observers were not interested in environmental concerns, because it was invisible. Some empirical studies were used three environmental categories out of twenty seven (Ernst and Ernst, 1978 as cited in Mathews 1997). The second stage is the period 1980-1990. Many changes have appeared due to the focus of the social and environmental accounting literature, with increasing signs of specialization since 1980. For instance,

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value-added statements attracted a separate group of adherents and employee reports (Burchell et al., 1985). Environmental disclosure has become of more concerned than social disclosure, environmental disclosure and regulation consider an alternative means of reducing environmental damage. Legally enforceable accounting standards, Means of conceptual frameworks, and legislations are features of this period which contribute to the increased regulation of accounting disclosures. Empirical studies in this period were more analytical and less descriptive. The final stage is the period 1991-now. This stage has focused on environmental issues within accounting on a broad front, including interest from managers as well as accountants. (Gray et al. 1995) argue that this stage has been characterized by the almost complete domination of environmental accounting with research on broader social reporting (including employee and ethical disclosures).

Two different types of motivations can lead companies in order to engage in CSR activities and disclosure. The first motivation is that some companies consider CSR activities and disclosure may bring a competitive advantage. For example, they think that having good relations with their stakeholders will obtain them a good financial performance, employee commitment, and corporate reputation by assisting in developing valuable intangible assets. External pressures (government, shareholders, consumers, etc.) consider the second motivation which catalyses other companies to engage in CSR activities and disclosure (Branco & Rodrigues 2008). These companies think that not doing CSR activities and disclosure will lead them to lose some their profitability, reputation and must be addressed to mitigate their effects. Social responsibility activities and disclosure constitute mainly a legitimacy instrument used by a company to demonstrate its adherence toward stakeholders in order to increase or maintain their financial performance, their image and their relationship with their stakeholders.

THE METHOD This research method was used both quantitative and qualitative approach. The quantitative approach was employed the annual reports of the period of 2007 and 2009. The qualitative approach was to gather information from face to face of semi-structured interview (see Table 1). In general, the purpose of study is to investigate the perspective of financial managers and information managers of the firms in Libya about both the importance and benefits of CSRD. Data gathered from interviews was recorded by a note and tape recorders with financial managers and information managers of the firms enabled the researchers to gain the deeper insights on this issue in this research. The interviews took place between October 2010 and February 2011. Interviews lasted between twenty minutes to one hour and half. The meetings were held in the manager’s office. As a result of the interview can explain issues in depth (Denzin & Lincoln 2000), it considers an appropriate technique for this research. Thus, it plays an important role in explanatory research. Interviews with one of the most important social and environmental stakeholder groups were conducted to help the researchers to gather data relevant to this issue. In addition, knowledge gathered from consulting with other researchers in CSRD and literature reviews enabled the researchers to design an interview guide with common questions in order to ask the interviewees. Table 1: Profiles of interviewees

Sector Name Financial Managers Information Managers Total Manufacturing 8 4 12 Services 11 1 12 Banks and Insurance 4 2 6 Mining 1 0 1 Total 24 7 31 Participants rate 77% 23% 100%

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THE FINDINGS AND DISCUSSION 4.1 The Importance of CSRD In order to obtain a deeper understanding of this phenomenon, the following question was initially asked to interviewees about what the extent of the importance of disclosure CSR activities in their annual reports for stakeholders. Interviewees were also asked their personal opinions about CSRD. All interviewees confirmed that CSR activities and information play an important role toward their companies and society and the responsibility of their companies in society to achieve both social and economic benefits. The majority of interviewees emphasised that their companies attempt to achieve economic objectives through increasing profit, revenues and sales as well as social objectives. Two PhD theses provide the same findings for the responsibilities of the businesses toward society, and the roles of their business in society to be both social and economic are Momin (2006) and Aribi (2009). Aribi (2009) also mentioned that corporate policies for disclosing CSR information are determined very much by the profit objective, but not the only objective of these companies. In this regard, Abdulhamid et al.(2005) demonstrate that disclosure about social and environmental activities in the Libyan annual reports leads to some social and economic benefits which are reflected at the macro level. The interviews of this research believe that their companies should achieve both objectives, when their companies invest their money in any project. One of the information managers states that:

One of the most important goals in the Development Bank is to reject investment in projects that does not take into consideration the adverse impact of the project on the environment and hence this bank obligates the customer to get the agreement of the environmental management in order to obtain the requested loan. One of the financial managers states that: Management of the Company when investing in any project, it looks at the goals of economic and it does not disregard the benefits which will be obtained by this project to the community such as participation in addressing the problem of unemployment, employee training, etc., as the company is part of the community and should contribute in social activities for the development of society as a whole

All interviewees confirmed that the importance of CSR information in the annual reports is not less important than CSR activities; both of them can play a significant role to gain the company objectives. Abdulhamid et al. (2005) illustrate that information about CSR activities should reflect the interaction between the society and the management and should recognise the right of different stakeholders. The management also should inform all stakeholders about CSR information. They revealed that CSR information in the Libyan context is directed and limited to some interest from some stakeholders such as the General Assembly, the management (the company’s Administration Board) and, the central Authorities (such as the security of Economy, the security of finance, the security of Industry, the Central Bank of Libya and the watchdogs bodies which include the Public Control Office and the Tax Office). However, all interviewees of this research believe that CSR information is one of the most important parts that clarify what the extent of committing their companies to contribute to CSR activities to most stakeholders. Some interviewees mentioned that CSR information are directed to some stakeholders such as employees, management, investors, customers, shareholders, government through annual reports (financial information, CSR information) to determine the following purposes: few employees use annual reports to help their companies to protect their interests. Shareholders use annual reports to know how to

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use their funds; Investors use annual reports to help them in making investment decisions; Management uses annual reports to evaluate the company and to address the problems and correct negative deviations in the company through appropriate making a decision, as shown in the following quotations by some financial managers:

The management in this company supports full disclosure for the transparency cause and we review all activities in the annual report, you can apply this to everything when it is related to social activities.

We are preparing the annual report in order to show the real situation of the company either financially or socially, as we know that there are many parties that benefit from using this information to assess the situation of the company and know what the company achieved and its evidences during the year.

On the other hand, Ahmad, N.S.M. (2004) found that the Libyan companies did not inform employees about CSR information due to a lack of importance of this information to their employees, while the remaining stakeholders are interested in social and environmental information. Some interviewees illustrated that while CSR information is important to management, investors and shareholders, there is a lack of ability to comprehend CSR information by employees that in turn, may lead to their disregarding information included in annual reports. This view is obliviously stated in the next quotations by some financial managers:

I believe that the information about the activities of social responsibility affect the decisions of management and shareholders and investors... But unfortunately, many employees were not aware of the importance of social activities, only a few employees know the importance of social activities and disclosure of them and their effects on the company.

Some interviewees believe that some Libyan companies are still under privatized. This means that the government companies have limited stakeholders such as government, management, customers, employee and creditors. These stakeholders except for the government cannot affect the policy of the company as the Libyan government possess all shares in these companies, while non-government companies which are listed in the Libyan stock market have all stakeholders such as investors, shareholders, customers, creditors and so on that can influence the policy of disclosure. The following quotation was stated by some financial managers.

Ownership base on the bank has a negative impact on the importance of this information for stakeholders and the financial benefits expected to provide this information.

Abdulhamid et al.(2005) also revealed that stakeholders of the Private companies in the Libyan context see a main influence of the disclosure of CSR information on the environment, in particular manufacturing companies whilst the service companies may perceive little influence of CSR information on the environment.The importance of CSR information differs from one category to another. Most interviewees in banks and insurance sector as well as services sectors considered employee information and customer information in annual reports to be more important than others. In this regard with a simple difference, all interviewees in manufacturing and mining sectors confirmed the importance of employee information, environmental information and customers’ information compared with community

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involvement information to all stakeholders excepting society. Some financial manager stated in the following quotation:

Service companies such as ours are interested in social activities and information about the employees, and information relating to customers, considering that this information helps the company's decision-making that in turns, is reflected in the improved financial performance for the company and hence these companies disclose this information more.

Another interviewee supported this view in the following quotation:

I believe that the industrial companies such as this company take into account the environmental impacts that may affect their workers and the community, particularly the places that surround it as, it cares about workers and the quality of the product because these activities and these information affect the performance of the organization.

This is general information about the importance of CSR and CSRD for the Libyan companies and the extent of the importance of CSR activities and information to achieve the company objectives.In summary, the main reasons of CSR activities and information are used to achieve the interests of stakeholders. CSR activities and information in annual reports explain the extent of the contribution of the company in CSR activities towards society to stakeholders; to assist the company in order to protect the employees’ interests; to make investment decisions and to determine how the management use their funds; and to make appreciate decisions.

4.2 Benefits of CSRD A number of theories in the accounting literature have presented some justifications for disclosing CSR information in annual reports and hence stakeholder theory was used in this study to answer the question regarding what determines that motivates companies to disclose social information. Some benefits were mentioned in the accounting literature for companies disclosing CSR information in developed countries; however, the benefits of CSRD in developing countries are still ignored and ambiguous due to a few of the studies in the accounting literature related to answer the previous question. Interviewees clarified different causes as shown in Table 2. Most interviewees mentioned that there are two types of benefits for disclosing CSR information in annual reports. The main benefits include an increase in the company profitability, the extent of management attention for disclosing of CSR information, enhancing the company image, helping the management to make decisions, informing stakeholders about the company's contribution to community service and transparency. Thirteen of interviewees believe that providing positive CSR information in annual reports helps a company to support its financial performance. In this vein that twelve stated that the financial support has obtained by encouraging and attracting some stakeholders such as investors and consumers. In addition, twelve see that the growth of social and environmental awareness of the Libyan management has given more attention for disclosing of CSR information in annual reports, because such practices helps Libyan companies to make appropriate decisions. Six of interviewees see that the competition is an involved factor in improving a company performance, whilst only one says that the disclosure of social and environmental information has led to increase productivity.

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Table 2: Perception of Interviewees on Causes and benefits for Disclosing CSR information

Number of Interview The Percents of Interviews Causes and Benefits of Discloser Improving Financial Performance: 13 out of 31 12 out of 31 12 out of 31 6 out of 31 1 out of 31

42% 39% 39% 19% 3%

Encourage and attract investors and customers Supporting the organisation profit Making-decision Competition Improving productivity

Regulation and Management: 3 out of 31 3 out of 31 5 out of 31 3 out of 31

10% 10% 16% 10%

Requirements of stock market International Accounting Standards Environmental law Management

19 out of 31

61% Enhancement / creation of the company's image/reputation

16 out of 31 52% Informing their stakeholders about the company's contribution to community service

14 out of 31 45% Transparency 2 out of 31 6% Improving employee commitment

Table 2 shows the perception of financial managers and information mangers about the benefits that motivate the company to disclose CSR information in its annual reports. This is also evident in the following comment:

This company does not prepare annual reports for nothing; it has some reasons and benefits for emerging social activities.

Furthermore, sixteen mentioned that Libyan companies use CSR information for informing their stakeholders about the company's contribution to community service. Moreover, fourteen of the interviewees believe that transparency is considered as one of the most important motivations types that have led to the disclosure of social and environmental information, and it is also one of the most advantages of the top management. More specific, Armitage and Marston (2008) revealed that transparency in emerging CSR information may lead to: promoting integrity within the company and in its dealings with stakeholders; promoting confidence on the part of shareholders and other stakeholders; being part of what is expected of a good corporate citizen; helping non-executive directors to understand the business. Aribi, Z. A. (2009, p. 180) indicated that ‘disclosing social responsibility information for the reason of transparency might be considered as a form of motivation for the top management to reveal such information’. Momin (2006) also revealed that companies in Bangladesh have a social obligation, and ‘CSR practices are driven by the altruistic motivation of discharging such obligation by providing information to society, accepting that stakeholders have the right to know about the corporation in more detail’. In addition, he indicates that the increase of CSR of awareness has given encouragement to managers to use CSR information. Nineteen of interviewees that CSR practices could enhance/create the company reputation and the company image, and thus the company works to make strong communication with stakeholders, in particular its external stakeholders whom they think important for continuing their operation. They think that creating or enhancing Reputation and profitability regardless long term or short term are often made by public relation exercises, and are essentially paying attention with investors and consumers. Thus, the effect of CSRD on society has been referred to as tactics that possibly enable the companies to affect this perception (Deegan 2002). Two theses of Momin (2006) and Aribi, Z.A.(2009) also appears that emerging CSR activities in annual reports allow the company to enhance its reputation and its image through focus on its stakeholders or a marketing attention-grabber that is aimed at attracting consumers and investors and this has given benefits in long term and short term. Graham et al. (2005) that

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the main motivation for disclosure is a reputation enhancement for transparency. In the same way, Eccles and Mavrinac (1995) stated that the main benefit of disclosure improvement is increased management credibility in enhancing disclosure of quality. Lundholm & Van Winkle (2006) emphasize on the importance of obtaining shareholder confidence to achieve the purpose of disclosure that lead to increasing the share price through reducing scepticism about the company’s future. The following comments by financial managers support the perceptions in table 2:

We believe that the company focuses on achieving some goals more than others, when it discloses information about social activities conducted in their annual reports. For example, the company focuses on enhancing the company's image, improving its financial performance and transparency, …making the right decision… publicizing the company and its activities to all stakeholders....through conveying what has been done during the year to stakeholders such as owners, shareholders, investors and other… and the benefits are greater if the management of the company is convinced of the importance of disclosure of this information.

The secondary benefits that help the management to achieve some objectives are regulation and improving employee commitment. In this regard, Momin (2006) indicates that companies that are not responsive will not be able to survive and therefore companies will comply with regulations and standards. Three of the interviewees stated that Libyan companies which are listed in the Libyan stock market obligates disclosing for CSR information through the requirements of the stock market, while another three said that a company uses international Accounting standards which are considered as one of the main reasons for disclosing CSR information in its annual reports. Five confirmed that applied the environmental laws in a manufacturing company helps in disclosing CSR information. Regarding employee commitment, two see that disclosing CSR information might be considered as one of the forms of benefits for the management to reveal such information. The following comments by financial managers support the perceptions in table 2:

In fact, we believe that the dissemination of this information in the annual report will have a role in supporting the commitment of the employee and, also takes into account the application of law, but the commitment of employees is not non-core with most companies.

On the other hand, interviewees who are working in the manufacturing companies which are listed on the stock market believe that the company is committed to preparing annual reports according to regulations, in particular environmental laws and the requirements of the stock market because if the company did not apply these laws, this will be costly. Therefore, applying these laws can be effective as the most important factor for disclosing CSR information. Some financial managers stated in the following quotation:

Industrial companies such as steel and cement industry specifically committed to the application of laws that are interested in social activities in general and in particular environmental activities , hence it tries to show in the annual reports to avoid negative effects on the share price and reduce the profitability of the investor in the company.

SUMMARY AND CONCLUSION The purpose of this paper is to explain the importance and the benefits of CSRD in the annual reports of the Libyan context, as perceived by financial managers and information managers of the four sectors (manufacturing sector, banks and insurance sector, the services sector and mining sector), using a

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theoretical framework which combines stakeholder theory. This framework shows that an importance of CSR disclosure related to four categories (environmental activities, consumer activities, community activities and employee activities) to stakeholders. The focus on this topic is motivated by the emphasis in the prior accounting literature review on the reasons for disclosing CSR information as a primary motivation by which disclosure policy can influence the company performance. Managers and employees increasingly require considering SRD as a signal of improved CSR conduct in those fields because disclosure affects the business performance such as a company's reputation. CSR disclosure also leads to important results in the creation or deletion of other fundamentally intangible resources, and may help build a positive image with employees and managers. By demonstrating that a company does emerge CSR activities for their enhancing organisational performance, whereas non-emerging CSR can destroy organisational performance for a company, hence stakeholders require their companies to disclose CSR activities in their annual reports. Furthermore, this paper presents some details about the effects of some factors on CSRD in the Libyan environment context. Social, cultural, political, economic and legal factors are considered as the one of the most main effective factors in the business performance and accounting through CSRD.This paper provides evidence from these managers about the importance and the benefits of CSR information for the company. The most important results are consistent with prior accounting research conducted in both developed and developing countries. Our experience with CSRD in Libya suggests that CSRD are often unimportant at being unable to prove the worth of CSR information. The results of this paper should help address concerns often expressed by stakeholders about the importance of dissemination CSR information in the annual reports. In particular, the results of this paper should be of value to managers concerned with the company performance on the whole. The companies can reap the major benefits from disclosing CSR information such as improving its financial performance through attracting some investors and consumers, improving its competition in the Libyan market, supporting the company profit, making- decision and improving productivity. They are also able to obtain tangible benefits such as enhancing the company of image/ reputation, improving the company of employee commitment. The results explains some reasons for disclosing CSR information in the annual reports such as requirements of the stock market, applying international accounting standards, environmental laws, the growth of social and environmental awareness of the Libyan management and transparency. REFERENCES

Abdulhamid, MA, Ritchie, R, Lovatt, CJ & Pratten, JD 2005, 'The social role of accounting: views and perceptions of the accounting community in Libya towards corporate social responsibility and accountability', UK, Ahmad, NSM 2004, 'Corporate Environmental Disclosure in Libya: Evidence and Environmental Determinism Theory', Napier University, UK. Ali, A 1996, 'Organisational development in the Arab World', Journal of Management Development, vol. 15, no. 5, pp. 4 - 21. Aribi, ZA 2009, 'An Empirical study of corporate social responsibility and its disclosure in Islamic financial institutions', Edinburgh Napier University. ---- 2009, 'An Empirical study of corporate social responsibility and its disclosure in Islamic financial institutions', Edinburgh Napier University, UK.

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Armitage, S & Marston, C 2008, 'Corporate disclosure, cost of capital and reputation: evidence from finance directors', The British Accounting Review, vol. 40, no. 4, pp. 314-36 Burke, L & Logsdon, JM 1996, 'How corporate social responsibility pays off', Long Range Planning, vol. 29, no. 4, pp. 495-502 David, V 2005, Market for virtue: the potential and limits of corporate social responsability, Brookings Institution Press, Washington DC. Deegan, C 2002, 'The legitimising effect of social and environmental disclosures–a theoretical foundation', Accounting, Auditing & Accountability Journal, vol. 15, no. 3, pp. 282-311 Denzin, NK & Lincoln, YS 2000, 'The discipline and practice of qualitative research', Handbook of qualitative research, vol. 2, pp. 1-28 Eccles, RG & Mavrinac, SC 1995, 'Improving the corporate disclosure process', Sloan Management Review, vol. 36, no. 4, pp. 11-25 Ghazali, NAM 2007, 'Ownership structure and corporate social responsibility disclosure: some Malaysian evidence', Corporate Governance, vol. 7, no. 3, pp. 251-66 Graham, JR, Harvey, CR & Rajgopal, S 2005, 'The economic implications of corporate financial reporting', Journal of Accounting and Economics, vol. 40, no. 1-3, pp. 3-73 Gray, R 2001, 'Thirty years of social accounting, reporting and auditing: what(if anything) have we learnt?', Business Ethics A European Review, vol. 10, no. 1, pp. 9-15 Gray, R, Kouhy, R & Lavers, S 1995, 'Corporate social and environmental reporting', Accounting, Auditing & Accountability Journal, vol. 8, no. 2, pp. 47-77 Gray, R, Dey, C, Owen, D, Evans, R & Zadek, S 1997, 'Struggling with the praxis of social accounting', Accounting, Auditing and Accountability Journal, vol. 10, no. 3, pp. 325-64 Jenkins, H & Yakovleva, N 2006, 'Corporate social responsibility in the mining industry: Exploring trends in social and environmental disclosure', Journal of Cleaner Production, vol. 14, no. 3-4, pp. 271- 84 Lundholm, R & Van Winkle, M 2006, 'Motives for disclosure and non-disclosure: a framework and review of the evidence', Accounting and Business Research, vol. 36, no. I, p. 43 Mateos, ES 2005, 'Libya's Return to the International Scene', Mediterranean Politics, vol. 10, no. 3, pp. 439-45 Mathews, MR 1997, 'Twenty-five years of social and environmental accounting research', Accounting, Auditing & Accountability Journal, vol. 10, no. 4, pp. 481–531

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Momin, MA 2006, 'Corporate social responsibility and reporting by multinational corporations in Bangladesh: an exploration', University of Glasgow, UK. O‘Rourke, D 2004, 'Opportunities and obstacles for corporate social responsibility reporting in developing countries', The World Bank Group œ Corporate Social Responsibility Practice Mar, vol. 27, pp. 39-40 Pratten, JD & Mashat, AA 2009, 'Corporate social disclosure in Libya', Social Responsibility Journal, vol. 5, no. 3, pp. 311-27 WBCSD 1998, World business council for sustainable development: Corporate social responsibility, WBCSD publications, Geneva.

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THE PRICE OF STOCKS IN LATIN AMERICAN FINANCIAL MARKETS: AN EMPIRICAL APPLICATION OF THE OHLSON MODEL

Pedro Martínez, Instituto Tecnológico y Estudios Superiores de Monterrey Diego Prior, Universidad Autónoma de Barcelona Josep Rialp, Universidad Autónoma de Barcelona

ABSTRACT

The emergence of the Latin American market and its growing importance are factors that attract global investors to this region with an eye on profit opportunities, a situation that demands a reliable instrument for the calculation of future stock prices of regional companies. This study examined the reliability and validity of the use of the Ohlson Model to predict Latin American stock prices through an empirical application of a panel data analysis of 1,112 companies from this region with data from 2002 to 2009. The findings identified the countries in Latin America where the model can be used successfully. KEYWORDS: Ohlson Model, Latin American, Stock Prices INTRODUCTION Calculating the value of a firm is of paramount importance; identifying and defining the broad spectrum of factors that influence the prices of stock have been a challenge for the scientific community, who has proposed different models with different approaches. The Ohlson Model attempts to determine the market value of a company´s stock from accounting data. This model has attracted considerable attention (Ota, 2002) and has had the greatest impact on the relevant literature in recent years (Larrán & Piñero, 2005). It has the advantage over other models in that the accounting information is available for all the listed companies. Even though much research has been done using the Ohlson Model in the United States and Western European and Asian countries, few research exists about Latin America. Therefore a research opportunity exists in the literature, focusing on probing the validity and applicability of the Ohlson Model to stock markets from Latin American countries, which have great development potential. To fill this gap, this study attempted to answer the following research question: Can the Ohlson Model be used to determine the stock prices in countries of Latin America?

LITERATURE REVIEW As Milton Friedman stated in his “Price Theory” (2007), the allocation of resources among different uses sets the price of one item relative to another. Other authors have developed models and theories in their efforts to explain the price of assets. For instance, Sharpe (1964) developed the Capital Asset Pricing Model (CAPM) and Ross (1976) offered the Asset Pricing Theory (APT), while Wei (1988) made an effort to unify these two. There are other models based on dividends and on cash flow, such as the Discounted Cash Flows (DCF´s), which have several drawbacks, such as difficulty calculating expected dividends and the fact that cash flows are distributions of wealth instead of creation (Penman, 1992). The Ohlson Model must be regarded as a breakthrough, with the price based on the expected future earnings (Penman, 1992), and with the condition of the use of clean surplus accounting. The Ohlson Model is presented by of James Ohlson in “Earnings, Book Value and Equity Valuation” (1995), and later

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in “Valuation and Clean Surplus Accounting for Operating and Financial Activities” by Feltham and Ohlson (1995). The models developed in both works relate the accounting information to the firm value. Basically they assume that the value of a stock can be calculated from the book value and the net present value of the abnormal earnings; that is, the earnings a company makes above the cost of the money used to make them, discounted at a risk free rate, in an accounting system that is based on the clean surplus. The Ohlson Model has provided a solid theoretical framework for the market-based studies through the clean surplus approach (Walker, 1997). The literature currently contains several important empirical research studies based on this model. The study written by Ota (2001) had a very clear mathematical development of the Ohlson Model and showed a great concern with the difficulty in estimating the factor for “Other Information” variables that affect the future performance of a firm. A study by Duran, et. al. (2007) attempted to validate the application of the model to Mexico´s companies. Another study by Giner & Íñiguez (2006) corroborated the predictive ability of the Ohlson (1995) and Feltham Ohlson (1995) models from future earnings. For their study, they took non-financial companies from the Madrid stock market from 1991 to 1999, using book value and earnings. The simplifications they used were the same as those used by Duran, et. al. (2007), using earnings instead of abnormal earnings and discarding financial companies without a proper justification. METHODOLOGY Data from the Osiris Data base was used for analysis. First a Pooled Regression was made and compared with the panel data analysis for data from 2002 to 2009 for several countries from Latin America. More than 23,000 observations for 2,912 listed companies in 34 countries were used. Adopting the Ohlson Model used by Collins, et al. (1999), and taking the model: 𝑃𝑡 = 𝑦𝑡 + 𝛼1𝑥𝑡𝑎 + 𝛼2𝛾𝑡 with a few notation changes; that is, 𝑦𝑡 = 𝐵𝑉𝑡 and 𝑥𝑡𝑎 = 𝐴𝐸𝑡𝑎 we arrive at:

𝑃𝑖𝑡 = 𝛼0 + 𝛼1𝐵𝑉𝑖𝑡 + 𝛼2𝐴𝐸𝑖𝑡𝑎 + 𝛼3𝛾𝑖𝑡 + 𝜀𝑖𝑡 The variables for this model are expressed in thousands of dollars at the closing date of each year. For this model, 𝑃𝑖𝑡 was “MarketCap0atclosingdatethUSD” as the dependent variable, which is the total value of a company. The Book Value 𝐵𝑉𝑖𝑡 one of the independent variables, “ShareholdersFundsthUSD”, and the abnormal Earnings was estimated by the variable “NetIncomethUSD” as is seen in Duran, et al, (2007). The term 𝛾𝑖𝑡, which stands for other information that affects the price, was neglected due to the difficulties in estimating this parameter, (Ota, 2001). With this model, a panel data analysis, was made because of the considerable advantages that it offers (O´Connell, 2007), such as the control of unobservable firm-specific effects that are difficult to measure. The panel data analysis has the advantage of allowing the identification of countries and/or time periods where accounting conservatism is different (O´Connell, 2007). The use of US dollars in every country gives the advantage of easy comparability, and the cost of money would be the same for all the countries. Observations with no market capitalization or negative market capitalization values were eliminated from the study. The countries that had less than 5 companies left after this adjustment were also discarded. Only 13 countries were left, for a total of 1,112 companies, with a total of 8,896 observations.The first analysis done was a pooled OLS regression. A panel data estimation was used and compared with the pooled OLS regression using a Lagrangian Multiplier test for random effects. The Panel Analysis with

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fixed effects was then tested and compared. If both of these analyses were better than the pooled regression, a Hausman test would be used to determine which one is better. RESULTS With this pooled Regression OLS, the R square value is 0 .6931 and the overall F test was displayed with a 0.0000 value, which allowed rejection of the null hypothesis; therefore, it was concluded that the model is valid. The p values for the individual coefficients, the constant, and the independent values were shown to be statistically significant, with values of 0.000 in each case. All the coefficients were positive, and this was consistent with the theoretical expected values for the Ohlson Model. A panel data analysis allowed control of each company. In this second step, the Generalized Least Square (GLS) random effects estimator was analyzed so that the model assumed that each company had a different constant. The results of the analysis showed that the R square within, which is, the explained variation within companies, was 0.5064, while the R square between had a value of 0.7317 and the overall R Square of almost .70; this was a very good overall value. All of the coefficients were positive with P values of zero, so the model and the variables were significant and had the expected sign: the model can be used. To determine whether a pooled regression or random effects, was better, a statistical probe of the null hypothesis could be performed, for this, a test formulated by Breusch and Pagan, known as the Lagrangian Multiplier test for random effects was used. From the results of this test, the null hypothesis can be rejected, given that the P value of the Chi Square was 0.0000. Therefore, it could be concluded that the random effects were relevant; the random effect model was better than the pooled regression model. Another model that was tested is the fixed effects regression model. The R square values were very similar to the random effects model, and the p value for the F test was 0.0000. Thus it could be assumed that this is a valid model. The values for Sharehoder and Net Income variables were positive and statistically significant. To determine whether the fixed or random effect model was better a Hausman test was used. The Test demonstrated that the difference between the fixed and the random coefficients could be used to test the null hypothesis: The null hypothesis was rejected, so the fixed effect model was used. Then a vector of dichotomic variables was added for each country to see if any country had an important particularity. Every country was analyzed individually to see if the Ohlson Model could be applied to each country, and if there was a significant difference. Tests needed to be done under the fixed effect scope because of the result of the Hausman test. In Table 1 the results of this analysis are presented. Table 1: Panel Data Analysis with Fixed Effects

Country Constant Shareholder NetIncome R² F Argentina 823,033*** -0.0505 1.2358 0.7319 1.03 Bermuda 198,927*** 0.8419*** 1.5339*** 0.7045 589.23*** Brazil 508,540** 0.8801*** 0.4197 0.767 295.2*** Cayman Islands 34,709 1.3938*** 3.0931*** 0.4925 232.72*** Chile -110,718 1.5961*** 3.0733*** 0.8069 305.74*** Colombia -1,616,491* 5.0383*** -21.0066** 0.1686 18.68*** Mexico 700,538** .6397*** 5.4558*** 0.6316 84*** Panama -59,122 -1.7667 19.6347** 0.7868 10.69** Peru -497,206*** 3.5599*** 1.4414 0.7116 101.97*** Venezuela 395,628 0.2255 -1.1718 0.0105 0.91

Note. This table shows results for the panel data analysis with fixed effect, separated by country using the STATA statistical program version 11.0. ***, **,* indicate significance at 1,5,10 percent respectively. El Salvador, Honduras, and Jamaica were omitted because of the lack of observations or collinearity problems. Furthermore, from the F test p values, it can be seen that the Ohlson Model did not explain the

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stock prices for the cases of Venezuela and Argentina; the R square values for Venezuela were also very low, with 1% of the variance explained by the model. In these two countries, the independent variables were not significant, given that, in the case of Argentina, the price of the stock had a negative sign in the Shareholder variable, and, in the case of Venezuela, the NetIncome variable was also negative, although none were not statistically significant in both cases. From Table 1, Bermuda, Cayman Islands, Chile, and Mexico had positive and significant values, as it was expected from the Ohlson Model. In the case of Peru and Brazil, both values were also positive, but, in the case of NetIncome variable were not significant. Colombia had a statistically good model with a 0.0000 p value, but the R square factor was 0.1686. In addition, the value for the NetIncome variable was negative, with more than 95% of statistical significance, meaning that there had to be a difference that did not allow the Ohlson Model to predict the stock value. As a result, as the NetIncome variable increased, the stock price dropped. In the case of Panama, the p value was lower than 0.05, and the R square was 0.7868, which means that the Ohlson Model gave a good explanation of the variance, but the shareholder variable was negative, although it was not significant. CONCLUSION The Ohlson Model is a good price estimator for stock in Bermuda, Cayman Islands, Chile, and Mexico, due to the fact that the variable coefficients were both positive and statistically significant. For the case of Brazil and Peru, both of the variables were positive, but the coefficient for the NetIncome variable is not significant. Panama has a p value smaller than 0.05, and the Shareholder Value which was negative even though it was not significant. Colombia had a good model with a low R square, and the NetIncome variable was statistically significant but negative, which is contrary to the theory. In the cases of Argentina and Venezuela, the Ohlson Model did not work due to the fact that the F test showed that the models were not statistically correct. For Argentina, the R square value was fair with a value of 0.7319, but the only significant value was that of the constant, and there was a negative value in the shareholder variable. In the case of Venezuela, the Ohlson Model did not work as expected. The R square value was 0.0105, which was the percentage of the variance that is explained by the model. The F test p value was not significant, for all of the variables and the model constant. It was concluded that the Ohlson Model is a powerful tool to predict the price of the stocks for most of the Latin American stock markets, with the exception of Venezuela, Argentina, and Colombia. LIMITATIONS A limitation of this research was the lack of a deep study of the different regulatory frames for each county and the institutional differences. Another was the use of the US dollar, which simplified the analysis but could have had an impact on the results of the application of the Ohlson Model, due to a possible currency devaluation that could be an adverse factor. Some other limitations of the present study included scale problems, autocorrelation, or heterocedastisity, which could be present; therefore, a more sophisticated analysis is required. Another limitation was the use of net income as a proxy for abnormal earnings. An important modification to the model could be made by estimating the factor, “Other Information”, with a different supposition to see if the model improves.

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REFERENCES Collins, D. W., Pincus M., & Xie, H. (1999). Equity Valuation and Negative Earnings: The Role of Book Value. The Accounting Review, 74 (1), 29-61. Duran, R., Valdés, A.L., & Valencia, H. (2007). Value Relevance of the Ohlson model with Mexican Data. Contaduría y Adminitración, 223,33-55. Feltham, G., & Ohlson, J.A. (1995). Valuation and Clean Surplus Accounting for Operating and Financial Activities. Contemporary Accounting Research, 11 (2), 689-732. Friedman, M. (2007). Price Theory. United States of America: Transaction Publishers Giner, B., & Íñiguez, R. (2006). The predictive ability of the Felham-Ohlson models for future earnings: An empirical Analysis. Revista Española de Financianción y Contabilidad, 35 (132), 729-759. Larran, M.J., & Piñero López, J.M. (2005). El modelo de Ohlson (1995): ¿Hemos llegado realmente a comprenderlo?. Revista de contabilidad, 8 (16), 115-149. O´Connell, V. (2007). Dealing with panel data in accounting and Managerial finance research. International Journal of Managerial Finance, 3 (4), 372-389. Ohlson, J. A. (1995). Earnings, Book Value and Dividends in Equity Valuation. Contemporary Accounting Research, 11 (2), 661-687. Ota, K. (2001). The Impact of Valuation Models on Value-Relevance Studies in Accounting: A Review of Theory and Evidence. The Australian National University School of Finance and Applied Statistics, 1- 37. Ota, K. (2002). A test of the Ohlson (1995) model: Empirical Evidence from Japan. The International Journal of Accounting, 37, 157-182. Penman S. H. (1992). Return to Fundamentals. Journal of Accounting, Auditing and Finance, 7, 465-483. Ross, S. A. (1976).The Arbitrage Theory of Capital Asset Pricing. Journal of Economics 13, 341-360. Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under conditions of Risk. Journal of Finance, 19 (3), 425-442. Walker, M. (1997). Clean Surplus Accounting Models and Market-based Accounting Research: A Review. Accounting and business Research, 27 (4), 341-355 Wei, J. (1988). An Asset-Pricing theory Unifying the CAPM and the APT. Journal of Finance, 43 (4), 881-892.

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DO YOU KNOW WHERE YOUR DERIVATIVES ARE? Ann Galligan Kelley, Providence College

ABSTRACT

This paper is designed to assist individuals and organizations in understanding the role and risks of derivatives in two specific areas -- debt management and investing. It further serves as a warning to those who are exposed to derivatives particularly in this post financial crisis era. Individuals and organizations should take the time to educate themselves as to the serious potential risks involved with these instruments. JEL: M40, G11,G24 KEYWORDS: derivatives, exchange-traded funds, leveraged, futures contracts, counterparty risk, tracking errors INTRODUCTION The 2,315-page Dodd-Frank Wall Street Reform and Consumer Protection Act has been hailed as the solution for preventing future financial meltdowns such as those currently experienced in this economy. Investors should not be lulled into complacency though. This legislation creates a division within the Federal Reserve designed to protect consumers. However, while its goal is to increase the transparency of complex financial products including the oversight of swaps and other derivatives, it is certainly not a substitute for individual and organizational prudence and due diligence. Furthermore, many of the changes in this bill are not expected to be fully enacted until 2015. Boards of directors, management, CPA firms, elected officials and even financial advisors should view this legislation as a tool to eventually help protect their respective organizations and not insurance against future problems. LITERATURE REVIEW Debt Management Policies It is important for all debt issuing organizations, whether they currently use derivatives or not, to have formal written derivatives policies in place that assure that appropriate due diligence procedures be conducted and require prescribed approval protocols for the acquisition and management of all types of derivatives. What are some of the more common types of derivatives used in debt management? Derivatives, which include futures, options, forwards and swaps (including credit default swaps), get their name from the fact that they derive their value from an underlying asset, typically an established index or another financial instrument or security. Interest rate swaps have been around for years and are actually quite prevalent in the governmental and non-profit world. There are many types of swaps. “The total notional value of interest rate derivatives including swaps reached nearly $450 trillion as of June 30, 2010” according to the Bank for International Settlements’ June 2010 report. The most common types of interest rate derivatives are:

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1) Interest rate swaps are used to synthetically convert variable rate debt to fixed rate and vice versa. For example, if a university can efficiently issue variable rate debt but would prefer not to be exposed to potential future interest rate increases, the university could enter into an interest rate swap with another group, called a counterparty, to effectively convert their variable rate debt to fixed rate debt. (Kelley, 2011)

2) Interest rate caps are used to limit exposure to interest rate volatility. For example, an

organization with variable rate debt may be willing to tolerate interest rate increases up to a certain level or believe that interest rates will remain low. However, the organization may wish to limit its interest rate risk by purchasing an interest rate cap, which assures that the organization will not pay an interest rate exceeding the rate prescribed in the cap. (Kelley, 2011)

3) Basis swaps are used to manage or change the “basis” on which variable interest rates are

calculated. These are more commonly associated with revenue bonds where an organization’s income may be dependent upon a particular interest rate index; yet the debt the organization has issued is based on a different index. For example, if revenues are based on the prime interest rate while the interest expense that must be paid is a function of the London Interbank Offered Rate (LIBOR), and the traditional correlations between these two indices digresses; a basis swap will protect the entity from market dislocations. LIBOR is used in determining the price of many financial derivatives, including interest rate swaps. This is the average short-term deposit rate that banks participating in the London money market exchange offer each other. (Kelley, 2011)

4) Rate locks, which are based on interest rate swaps, are used to hedge “lock in” a rate for an

upcoming bond issue. These are really nothing more than institutional versions of an interest rate lock fee that one might pay to lock in an interest rate when applying for a home mortgage. (Kelley, 2011)

However, there are risks associated with derivatives. There are certain fundamental risks associated with the utilization of derivatives, which should be carefully considered by organizations and addressed in their Derivative Policy statement.

1) Counterparty/credit risk is that the entity on the other side of the transaction might not be able to fulfill their obligation.

2) Basis risk is that the interest rate that an organization is trying to hedge does not track exactly with the derivative. Hence, the organization may not get the full benefit that they are anticipating from the derivative.

3) Termination risk is the circumstances under which either the buyer or seller of the swap can terminate and how are the termination costs calculated?

4) Credit downgrade risks are the consequences of a credit downgrade or default of either party. Investments with Embedded Derivatives

Derivatives are not only used in debt management but can also be incorporated into investments which may not be as readily apparent. Many organizations believe that they are not exposed to derivatives in their investments because they do not directly purchase derivative contracts. Derivatives, however, are being incorporated into many investment products which are not being fully disclosed or understood by even many experienced financial advisors. Few people are aware that some mutual funds and many

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exchange traded funds (ETFs) use derivatives to hedge risk or to magnify market or security movements. Many of these ETFs have labels such as Short, Ultra, 2X, Double Long, or Inverse among others.

Derivatives are actually used in a number of ways in our economy, and for the most part they can be beneficial. Airlines often hedge the price of the fuel they are using for their jets by using futures contracts, a type of derivative. Hence, if fuel prices increase significantly, your favorite airline will not be at risk of losing money on passenger tickets that were sold months ago. Basically, they are locking in a price for their fuel cost using derivatives.

ETFs are not index funds. They trade on stock exchanges similar to stocks and may hold physical assets such as stocks, commodities or bonds. However, unlike index funds, ETFs typically range between two categories. The first category owns at least some of the physical assets they seek to track. The second category known as synthetic ETFs, are funds that earn a return by investing in derivatives. These derivatives are typically asset swap agreements with a counterparty which strive to replicate the performance of the index or asset it tracks. There are now more than 1,000 ETFs that track major indices such as the S&P 500, industry sectors, commodities and currencies. "Not everything is (a) suitable (investment for all people)," according to John Gabriel, Morningstar ETF analyst. "You need to understand what you own. People let research end with the name of the fund. That can get you into lots of trouble." For example, some ETFs are leveraged, meaning they invest with borrowed money, which makes them more risky. "Fund performance can be the opposite of what investors expect," Gabriel further stated. (Guste, 2010)

The SEC is also concerned that investors do not understand the risks associated with more complex ETFs and the “abbreviated” disclosures that provide a false sense of security to investors pertaining to the scope of a fund’s reliance on derivatives. “… some funds employing this type of disclosure, in fact, appear to invest significantly in derivatives,” wrote Barry Miller, an associate director in the SEC’s division of investment management. According to Paul Justice, CFA, an ETF strategist, he commented in his January 22, 2009 Morningstar article after returning from an ‘inside ETF conference’, that he was “shocked to learn how many people have a misconception as to how these funds work. And this sampling was not of novice day traders –these are professionals and financial advisors.” This is such a huge potential problem that the SEC on October 19, 2011, has deferred consideration of new requests for ETFs that utilize significant investments in derivatives. Mary Schapiro, the current SEC Chairman, stated in an SEC press release dated March 25, 2010, that “It’s appropriate to engage in a more thorough review of the use of derivatives by ETFs and mutual funds given the questions surrounding the risks associated with the derivative instruments underlying many funds”. Existing ETFs and mutual funds that use derivatives are so far unaffected. While the SEC is studying the use of derivatives as of April 1, 2010, there were 151 US listed inverse and leveraged ETFs with assets of $29.9 billion according to investment bank Morgan Stanley. ETFs in the United States have grown to account for approximately $1 trillion in assets, or approximately 10 percent of the long-term U.S. open-end investment company industry, with U.S.-domiciled ETFs making up approximately two-thirds of global offerings. (Rominger, 2011)

One popular use of derivatives is to create leveraged or inverse ETFs. Inverse funds utilize a variety of strategies to achieve their investment objectives including short selling, trading derivatives such as futures contracts, and other leveraged investment techniques. Leveraged ETFs are marketed as a way of doubling or tripling returns on the movement of underlying indexes and benchmarks such as the S&P

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500. Hence, if the S&P were to increase by 10%, one would expect a 2x leveraged ETF to increase 20%. Inverse ETFs supposedly provide investors with a vehicle to get a leveraged benefit if the targeted index declines.

Most investors understand that borrowing money creates leverage, which can be used to magnify returns, which is how they think a leveraged ETF operates. However, the 1940 Investment Company Act placed restrictions on how much investment funds could borrow. ETFs, consequently, obtain their leverage with the use of derivatives. The Investment Company Act could not have contemplated the use of these complex types of investments. “… the Act, while in fact being 70 years old, is being challenged and stretched in ways that were inconceivable when it was enacted, but which we in the Division of Investment Management are dealing with today” stated Andrew J. Donohue, Director of the SEC's Division of Investment Management in June 3, 2010 SEC Staff Keynote Address at the ALI-ABA Compliance Conference. It could be argued that leveraged ETFs are circumventing the intent of the Investment Company Act by using derivatives to achieve leverage that would otherwise be prohibited. Policy Considerations For Investments With Derivatives The popularity and complexity of these new ETF investment vehicles requires that investment policy statements be updated to specifically address their unique characteristics and their associated risks similar to the debt management example above. Risks of Exchange Traded Funds There are two primary risks associated with ETFs that utilize derivatives such as interest rate swaps or futures. The first major risk is reliance on a counter party to make good on their commitment. For a derivative to function there is reliance on the performance of the entity on the other side of the transaction. If that entity does not perform because of credit problems, legal issues or outright fraud, then the derivative and most likely the investment will suffer a loss. In this worldwide economy, it is easy to imagine situations where systemic risk could cause such large losses that the counterparty no longer has the liquidity to pay. This counterparty risk also became painfully obvious with the collapse of Lehman Brothers and the AIG bailout. One way of mitigating much of this risk is for the derivative to be collateralized. However, it is not practical for an individual investor in an ETF to monitor the liquidity and market value of the collateral. “ETFs that use swaps to clone stock, bond or currency returns have been criticized by regulators and firms including Fidelity Investors, which say clients risk losing money should the banks writing the derivatives become insolvent.” (Xydias, 2011). The original prospectus of an ETF may state that the fund may use derivatives to carry out its investment objectives. To know if the ETF you are holding or considering purchasing utilizes derivatives, and to what extent, it is important to go directly to the particular fund’s website and click on the link for their daily holdings. Most funds will indicate if their holdings include swaps or other derivatives. The websites of most funds disclose their holdings, including the amount of swaps (See Table 1 example). The second primary risk of ETFs that use derivatives is commonly associated with leveraged ETFs, which are mainly managed by firms like Direxion, Rydex and ProShares. A popular example of a leveraged ETF is an inverse ETF which is engineered to deliver a positive return that is a multiple of any declines in the designated benchmark. The risk is a function of the daily compounding calculations of leveraged funds caused by the mark-to-market of derivatives on a daily basis. For example, one

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would expect a triple inverse ETF on the S&P 500 to increase 30% if over time the market declined by 10%. The unexpected reality in a volatile market might be that this ETF actually declines rather than increases. It should be pointed out that leveraged inverse ETFs should only be considered for very short-term daily investment purposes since the mathematical impact of daily compounding in a volatile market could result in the opposite of what an investor hopes to achieve. Over longer periods of time, such as weeks or months, results could be significantly different from what an investor is expecting particularly in volatile markets. "It pays to look beyond the cover," says Matt Hougan, editor of ETF Web site IndexUniverse.com. In August 2009 the SEC and the Financial Industry Regulatory Authority (FINRA) issued an Alert warning investors about extra risks involved with leveraged and inverse ETFs. Two “real-life” examples provided in the Alert were:

• Between December 1, 2008, and April 30, 2009, a particular index gained 2 percent. However, a leveraged ETF seeking to deliver twice that index's daily return fell by 6 percent—and an inverse ETF seeking to deliver twice the inverse of the index's daily return fell by 25 percent.

• During that same period, an ETF seeking to deliver three times the daily return of a different index fell 53 percent, while the underlying index actually gained around 8 percent. An ETF seeking to deliver three times the inverse of the index's daily return declined by 90 percent over the same period.

There are a wide variety of ETF choices with different index compositions and methodologies. Not only do leveraged ETFs depend on the use of derivatives but certain types of commodity ETFs also rely on leverage to meet their investment objectives. On October 19, 2011 Eileen Rominger, director of the Securities and Exchange Commission's Division of Investment Management testified before a Senate subcommittee that a certain small group of so-called "inverse, leveraged ETFs" are made up of derivatives and other securities and can have an effect that that can be magnified in volatile markets. She further stated that leveraged, inverse, and inverse leveraged ETFs approximated $48 billion in assets.

With the future of the US economy in question, those investors seeking to purchase investments that move in the opposite direction of the market (inverse ETFs) or to hedge their existing investments should be cautious. As Figure 2 illustrates, inverse ETFs may not necessarily deliver the results anticipated by investors. The problem is that many retail investors as well as many professionals do not understand that these leveraged and inverse ETFs compound daily and can produce these skewed results. Leveraged ETFs should typically be held for less than one day and definitely not treated as index funds. This is because of the effects of compounding (sometimes called "beta slippage"). This issue has attracted much public attention now that these ETFs have been increasingly used by less experienced investors. The Securities and Exchange Commission and FINRA had issued a warning on the leveraged and inverse ETFs. (2009) The SEC is seeking comments currently on ETFs that invest in derivative products to provide input as it evaluates the acceptable level of risks for investors. (2011) If an investor purchased ProShares ETF 2x Dow Jones U.S. Real Estate Index (SRS) in February 2007 and held it until August 2010, he would have expected an 88% gains based on the fact that the Dow Jones Real Estate Index decreased 44%. However, an unpleasant surprise would have been the realization that the ETF 2x decreased by 92% due to daily compounding in volatile markets. (Figure 2)

A random internet search of leveraged and inverse ETFs will still show individuals touting leveraged ETFs as a way to bet against the market. Investors should be wary and educate themselves as to the risks of these leveraged and inverse ETFs. There are now lawsuits from misinformed investors. RBC Capital is being sued by Massachusetts for selling leveraged and inverse exchange-traded funds to clients who did

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not understand what they were buying and subsequently suffered losses. (Condon, 2011) Other law firms have received publicity for investigating FINRA brokerage firms who had advised customers to purchase leveraged and inverse ETFs including those issued by Direxion, ProFunds (ProShares) and Rydex. (De Veire, 2011) ETF POLICY CONSIDERATIONS Because of the inherent risks associated with ETFs that use derivatives, an organization’s investment policy should state that every effort should be made to determine the extent of derivative use and its associated risks before investing in ETFs. Furthermore, if the organization does invest in ETFs, these ETFs should be constantly monitored to see if they are in fact actually performing as anticipated in relation to their benchmark. For leveraged or inverse ETFs, this monitoring should be done daily. Tracking errors for a variety of reasons are a significant risk for ETFs. CONCLUSION Derivatives can be useful tools whether they are interest rate swaps or components of investments. Just as investors found though that complex instruments created from subprime mortgages like collateralized debt obligations (CDOs) and CDOs-squared, if you do not understand the mechanics of how these instruments really work, there is the potential for some startling surprises. "Education, obviously, is always the key to being a successful investor," says Kevin Quigg, head of the ETF strategy and consulting group of State Street Global Advisors. “Investors need to ask questions and read carefully about the exact structure of any prospective exchange-traded product purchase.” (Shari, 2011). ETFs need to be thoroughly understood in order to be properly incorporated into an individual’s or organization’s overall asset allocation, risk tolerance, and liquidity goals for their investment portfolio. Table 1: Example of a Fund Showing Holdings with Derivatives

UltraShort Real Estate ProShares: UltraShort Real Estate seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate IndexSM.

Security Description Notional Value Market Value Shares/Contracts DJUSRE SWAPS (324,697,672.94) - (4,114,685.30) Net Other Assets / Cash - 161,693,221.83 161,693,221.83

As of 11/11/11 at www.proshares.com/fund/srs_daily_holdings.html Table 2: Sample Data

$ Value of 2X $ Value of % Change "Double the Inverse ETF

Period Index In Index Inverse" w/compounding START

1 $100 100 2 $95 -5.00% 10.00% 110 3 $80 -15.79% 31.58% 144.74 4 $95 18.75% -37.50% 90.46 5 $75 -21.05% 42.11% 128.55 6 $90 20.00% -40.00% 77.13 7 $80 -11.11% 22.22% 94.27 8 $90 12.50% -25.00% 70.7 9 $100 11.11% -22.22% 54.99

10 $90 -10.00% 20.00% 65.99 11 $100 11.11% -22.22% 51.33

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Figure 1: Graph showing index vs EFT

Table 2 and Figure 1 illustrate period by period how compounding causes severe tracking errors for a 2X Inverse ETF versus its index. Logically, the expectation would be that over a given period of time if the indexreturned to where it began, the ETF would also. However, in this example if you just "bought the index" you would end up exactly where you started. The leveraged ETF on the other hand lost 50% of its value. Figure 2: Proshares ETF 2x Inverse of Dow Jones US Real Estate Index (SRS) vs the Actual Index

Investor deposited $10,000 on March 1, 2007 into ProShares ETF 2x, which inversely tracks the Dow Jones Real Estate Index. There was a 44% decline in the Dow Jones Real Estate Index from February 2007 until August 2010. Given that his investment was a 2x inverse, this investor expected his ETF to INCREASE 88%. Inverse ETFs embed derivatives that are marked to market and are thus compounded daily. Therefore, mathematically, the 88% increase does not happen in actuality. This investor actually experienced a 92% DECLINE, resulting in his $10,000 investment now only being worth $800 as of August, 2010. Hence, policies and guidelines must be in place for investors who invest in these products. They should also not be purchased by small individual day traders due to the risk involved. REFERENCES Kelley, Ann G. (2011) “Why a Good Derivatives Policy Could Protect Your Job,” Strategic Finance, June, pages

$20

$40

$60

$80

$100

$120

$140

$160

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Example of an Index Starting & Finishing at $100 in comparison to a 2x Inverse EFT of That Index Which Because of Volatity With Daily Compounding Incurs A Loss

Underlying Index 2 X Inverse ETF

Both No Loss For the

-150%

-100%

-50%

0%

50%

100%

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200%

ProShares ETF 2x Inverse of Dow Jones US Real Estate Index (SRS) vs the Actual Index

SRS Adj Gain or Loss Dow Jones US Real Estate Index Expected Return

Based on a 44% decline of DJ R/E Index, naive investor

% Gain or -Loss

Actual SRS loss from Feb 2007 was 92%

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Gustke, Constance (2010) “Are exchange-traded funds dangerous?” Bankrate.com, September 17. Miller, Barry (2010) “SEC Division of Investment Management letter pertaining to Derivatives-Related Disclosures by Investment Companies,” July 30. http://www.sec.gov/divisions/investment/guidance/ici073010.pdf Justice, P., CFA (2009) “Warning: Leveraged and Inverse ETFs Kill Portfolios,” Morningstar, January 22. Rominger, Eileen (2011) “Testimony on Market Micro-Structure: An Examination of ETFs,” United States SEC Testimony Before the Subcommittee on Securities, Insurance, and Investment Committee on Banking, Housing and Urban Affairs of the United States Senate, October 19. Donohue, Andrew J. (2010) “Speech by SEC Staff: Keynote Address at the ALI-ABA Compliance Conference” Securities & Exchange Commission, Washington, DC, June 3. Xydias, Alexis (2011) “Swap ETFs, Lyxor Have Record Outflows” Bloomberg, November 1. Condon, Christopher (2011) “Massachusetts Suing RBC Capital Over Leveraged ETF Sale” Bloomberg, July 20. Van De Veire, Robert (2011) “Malecki Law Announces Investigation into Leveraged and Inverse ETFs” New York Securities lawyers Blog, November 2. Shari, Michael (2011) “Everything Wants to Be Called an ETF These Days” Barron’s, November 12.

BIOGRAPHY

Ann Galligan Kelley is a Professor of Accountancy at Providence College and Director of the Business Studies Program. She is a CPA whose research and interests include taxation, investments, financial planning including retirement and pension research and financial accounting research. Having formerly worked for both an international and small CPA firms as well as a tax accountant for a large New England law firm, she has advanced degrees from both Northeastern University and Bryant University and has published previously in various journals including The CPA Journal, The Practical Accountant, Strategic Finance and various academic journals. She can be reached at [email protected].

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CALIBRATION AND COMPARISON OF SPECTRAL RISK MEASURES FOR A PRACTICAL

IMPLEMENTATION Stephan Thomas, Phast Solutions & University of Paris Sorbonne

ABSTRACT

Recently, new coherent, law-invariant and comonotonic additive risk measures known as spectral risk measures (SRM) have been proposed as interesting complements to the regulatory-standard VaR. While such risk measures allow various attitudes towards risk to be specified by the risk manager through a risk spectrum, there has not been proposed to date any practical way of calibrating them but arbitrarily. It is not clear neither how a risk manager could supplement VaR or CVaR with such risk measures in its risk assessment process through a realistic methodology. In this paper, we propose a methodology to both calibrate and compare SRMs. For that, we rely on concepts of relative entropy optimization allowing us first to build a data-implied distortion as a reference measure for calibration and second to define an entropic risk measure that we use for comparison. Finally, we apply the methodology to real market data and assess four SRM through various specifications of the historical probability measure.

JEL: C6, D81 D84, G11, G17, G32.

KEYWORDS: risk management, spectral risk measures, distortion risk measures, minimum relative entropy, economic capital, backtesting, decision theory.

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A COMPARATIVE STUDY OF CORPORATE ACCOUNTING MALFEASANCE AND RESTATEMENTS

FOR 100 COMPANIES WITH FINANCIAL AND MARKET IMPACT AND ANALYSIS OF MONITORING

CHARACTERISTICS Liz Washington Arnold, The Citadel

Peter Harris, New York Institute of Technology

ABSTRACT This study examines corporate accounting malfeasance from an exploratory and empirical perspective for 100 companies to determine if there is an association between the Jenkins recommendations SOX requirements. The exploratory perspective discusses the types of corporate malfeasance and gives the dollar impact for the financials and the market dollar impact ($140 and $857 billion respectively) of 100 companies with publicly announced malfeasance. In addition to the dollar impact, the results of the exploratory study supports previous studies which found that revenue was the most common area of corporate malfeasance and actual theft was the least. The exploratory study was followed with an empirical examination of corporate malfeasance using internal (corporate governance) and external (auditor and financial analysis) monitoring characteristics by matching the malfeasance companies with non-malfeasance companies. The results of the empirical study did not find any significant differences in the monitoring characteristics of malfeasance as compared to non-malfeasance companies even though these characteristics were chosen based on an examination of recommendations/requirements for business reporting for SOX and several accounting committees over the years.

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THE VALUATION OF THE SMALL LOCAL BUSINESS IN A DIVORCE: A CASE STUDY

Hanna Savolainen, University of Eastern Finland

ABSTRACT

The discounted economic income method has increasingly been used for valuing small businesses. This paper discusses the questions arising from the use of that method in the context of the valuation of a small business for marital dissolutions. The paper is based on a case study. A real Finnish divorce case, which ended up to the court, is used to illustrate the pitfalls of using the discounted economic income method in valuing a small business for non-transactional situations. This study reveals that one of the pitfalls is the subjectivism of the final value, depending on how the measure of the economic income and the present discount rate is selected. It can sometimes result in an unrealistically high final value of the business. Secondly, the method is based on the economic income expected in the future. In a divorce, the aim of the valuation is to define the value of the business at the date of the partition. This means that when valuing a small business in marital dissolutions it is essential to take both the accounting and the legal point of view into consideration.

KEY WORDS: Valuation, small business, divorce, discounted economic income method INTRODUCTION The valuation of a small business in a divorce is problematic, because one needs both the accounting and the legal knowledge. In a divorce, it is common that the spouses are not able to agree the value of the business and the case may end up to the court. The court gives the judgment about the value of the business usually basing it on an expert’s statement. The problem is that the judge is not often an expert in accounting or finance. On the other hand, the expert, who has given the statement, may not be familiar with the marital law neither jurisdiction nor how to interpret it from a valuation point of view. The purpose of this paper is to discuss the questions arising from using of the discounted economic income method in the context of valuing a small local business in a divorce. A real Finnish divorce case is used to illustrate the pitfalls of using that method in valuing the small business in marital dissolutions. The main questions arising are on the one hand related to the method itself. On the other hand, they are related to the legal point that should take into account in valuing business in a divorce. The method related questions are dealing with measuring the economic income and selecting the discount rate and the influence of the terminal value. In addition, a very important question is if the characteristics of the business have sufficiently been taken into account in valuation. The very essential questions from the legal point of view are related to the marital assets. One is the inclusion and measurement of goodwill as marital assets. The other is the question of to which extent the future income belongs to the marital assets. This is interesting, because the discounted economic income method is based on the income expected in future. The point is if the method is applicable in marital dissolutions or is it too much directed to the future.The next section discusses briefly the basis for valuing small businesses in a divorce. The third section presents the case: the characteristics of the business and the lawsuit. The fourth section describes the experts’ valuation using the discounted economic income

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method. The fifth section focuses on pitfalls of using the method in the context of a divorce. The last section concludes. BACKROUNDS The traditional valuation approaches in business valuation are market approach, income approach and asset-based approach (Hitchner 2011, Anderson 2009, Feldman 2005, Pratt et al. 1998, Fodor and Mazza 1992). The valuation methods are determined according to them. The market approach means that the valuation is relaying on prices of similar assets traded in the open market. This kind of information is seldom available about small businesses, so market approach is not often suitable for valuing small businesses. Therefore, the two possible ways in valuing small businesses are asset-based approach or income-based approach. The asset-based approach is based on a business’s net asset, relaying primarily on accounting records. According Houghton (2002) asset-based approach has usually been applied for example in valuing businesses where the future of the business is highly dependent on the owner- manager’s personal relationships with providers of work. Versus according Gasson (2002) assed-based valuation are used only where the value of the business is easily expressed in terms of its assets. Anderson (2009) points out that the asset approach is theoretically weak as a valuation method, because records based on the historical cost cannot be expected to predict the value that investors place on the future earning power of business. The income-based approach is using a discounted economic income to summarize the current value of the future income. This approach contains a large number of measures of income, methods of projecting them into future and applications of discount rate. The income-based approach and the valuation methods relaying on it, particularly the discounted cash flow method, is widely accepted for valuing the small businesses (Anderson 2009, Fernández 2007, Pratt et al. 1998, Fodor and Mazza 1992). In the financial literature, the discounted cash flow method is presented as the most theoretically pure and constant of all valuation methods. On the other hand the weakness of the method is its’ dependency on forecasts (Martins 2011, Gasson 2002, Pratt et al. 1998). In addition, the validity of the valuation process depends on two essential inputs – the expected income and the discount rate used in making the time adjustments (Dukes et al. 1996). Both the asset-based approach and the income-based approach are accepted in Finnish legal literature when valuing business in a divorce. According Aarnio and Helin (1992) the adjusted book value derived from adjusted balanced sheet is an applicable basis for valuation. In addition, one should take into account factors that affect the income such as goodwill. Pratt et al. (2000) define the goodwill “the propensity of customers to return for repeat business”. Goodwill in small businesses is either practice (institutional) goodwill or professional (personal) goodwill. Practice goodwill is an intangible asset of the business as an institutional entity. It consists of intangible elements such as location, operation procedures and client base. Personal goodwill is associated primarily with the individual owner of the business (Pratt et al. 1998). According to Finnish legal literature and judicial precedents, the personal goodwill does not belong to marital assets. Välimäki (1996) questions the use of the adjusted book value as basis for valuation when the business is going concern. Instead of it, he would rather base the valuation on the use of the discounted economic income method. If the personal goodwill exists, the amount equivalent to the personal goodwill should depreciate from the final value at the end. At the beginning of a valuation process one must define the standard of value that applies to the specific situation. The standard of value defines for the analyst the type of value being sought (Pratt et al 1998). The most widely encountered standards of value are fair market value, investment value, intrinsic or fundamental value and fair value (Hitchner 2011, Anderson 2009, Pratt et

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al. 1998). Fair market value has been often defined in the financial literature according to U.S. Internal Revenue Service (IRS) Revenue Ruling 59-60. It is the price at which property would change hands between a willing buyer and a willing seller. Neither of them is not under any compulsion to buy or sell and both parties have reasonable knowledge of the relevant facts (Anderson 2009, Pratt et al. 2000, Fodor and Mazza 1992). The investment value is the value of an asset to a specific owner whereas the intrinsic or fundamental value is a real value of the assets. The definition of the fair value in turn is depending on the context of its use (Pratt et al. 2000). Law or other legal documents can legally mandate the standard of value. The standard of value can also be a function of the wishes of the parties involved. In the context of marital dissolutions, however, the applicable standard of value is generally less clear than for any other appraisal purpose (Hitchner 2011, Pratt et al 1998). This is the case also in Finland. In marital dissolutions, the applicable standard of value is not clear in Finnish legislation. The law is silent with regard to standard of value and little judicial precedents exist. According to Finnish legal literature, for example Aarnio and Kangas (2010), Välimäki (1996), Aarnio and Helin (1992), the applicable standard of value as a basis is fair value. The problem is that the expression fair value is ambiguous and no exact definition exists. According to above-mentioned literature, fair value means a value, which is equivalent to the amount at which the business would change hands between seller and buyer in the open market. However, when valuing small local businesses the lack of free market makes the valuation difficult. THE VIB CASE: THE CHARACTERISTICS OF THE BUSINESS AND THE LAWSUIT This study is a case study basing on a real Finnish divorce case. In the case, a great deal of the marital assets consisted of a small local business, which the spouses owned together. In a divorce, they could not agree on the value of the business and a legal battle followed. Finally, the Supreme Court decided the value of the business relying on the statements made by two different experts. The study is a critical analysis of the valuation from the accounting and the legal point of view. All the material, the calculations, statements, briefs and other documents in the study originated from the files of the Supreme Court. In Finland, the Supreme Court mainly relies on written evidence when deciding on a case, as it did also in this case. Hence, this study has exactly the same material than the Supreme Court had when deciding the case. The business in the case was a small vehicle inspection business, hereafter named with the fictitious acronym of “VIB”. VIB was situated in a remote small locality and had approximately €85,000 profit per year. It was officially a partnership owned by the husband (70%) and the wife (30%), but virtually it was like a professional practice. There were no employers; the husband was working as a vehicle inspector. He was also taking care of the secretarial work and the cleaning and the wife was apparently helping him. He worked long days and did not take vacations. Then the husband and wife divorced. The couple was arguing about the business and the husband tried to sell the business to some larger businesses in the same industry, but they were not interested. They all said that it would not be profitable running the business by hiring extra staff. It would also be very hard to find an entrepreneur to run the business with such a remote location. Running the business like that alone would demand exceptional commitment to the business. Therefore, the husband decided to carry on the business himself, but he and the wife could not agree on the value of their marital property including the value of the business. They applied to court to assign an estate distributor to value and distribute their property. According to husband the value of the business was €40,000. The wife had obtained a statement of the value of the business made by an expert and referring to it, she claimed that the value was €120,000. The expert’s statement will be introduced in the

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next section.The estate distributor decided that the valuation method, which the expert had used, was not applicable to a small “one man” business. The estate distributor valuated the business himself. He based his valuation on both the assets and the income.He appraised the machinery and equipment to their current value instead of the value in the balance sheet. He determined that the net asset value was zero. However, the estate distributor thought that because the business is still operating it has a goodwill value. It was consisted of the constant clientele, business location and working machinery. According to the estate distributor, this value was indisputable although the immediate buyer could not be found. The point was that as long as the business was going concern the value was in the hands of the husband. The estate distributor based his valuation on the financial statements from the years 2003-2006. He adjusted the profit by reducing it with the amount equivalent to the reasonable wage to the owner. It was €4,000 per month in 2003, €4,500 per month in 2004 and €5,000 per month in 2005 and 2006. The key figures he used are presented in the table 1. Table 1: The Key Figures in the Estate Distributor’s Valuation

Year 2003 2004 2005 2006 Profit, € 63 000 77 000 100 000 100 000 Owner’s wage, € -48 000 -54 000 -60 000 -60 000 Adjusted profit, € 15 000 23 000 40 000 40 000

From the basis of the key figures, the estate distributor considered that the economic income, which he took into account in valuing the business, was €20,000 per year. Two reasons for reducing the income existed. One was that a part of the profit resulted from the professional goodwill of the husband. According to Finnish legal system, professional goodwill is not a distributable marital asset and that must take into consideration in measuring the economic income. The other one was that, according to Finnish law, the vehicle inspection business is a licensed trade. The estate distributor decided that it also reduced the economic income per year.The estate distributor considered that the income should take into account for three years time. Thus, he multiplied the income €20,000 per year three and resulted in the final value of €60,000.The wife disagreed and appealed to the District Court claiming that the value should be €120,000 according to the expert’s statement. She also presented a new statement of the value made by another expert. According to it the value was €106,500 – 156,400. The statement will be introduced in the next section. The District Court however affirmed the estate distributor’s value €60,000 and the wife appealed again. The Court of Appeal determined that the valuation should be based on the discounted economic income method, which both the experts had used. The Court of Appeal admitted the subjectivism of the method. It resulted to very different values when changing lightly the variants. That is why the Court of Appeal pointed out that the valuation should not be based only on the experts’ statements. One should also take into account that the business had been deeply depended on the abilities and the work of the husband. That was why the value should be reduced. Therefore, the Court of Appeal decided that the value of the business was €90,000. Now the husband appealed to the Supreme Court claiming that the discounted economic income method, which had been used in valuation, had been developed for larger firms and was not applicable to small businesses. He claimed that the valuation method should be asset-based instead and the value of the business should be €60,000 as the estate distributor had decided. The Supreme Court admitted that the husband was partly right. The fact that the business was small and depended on the husband’s work and ability favored for the asset based method. However, the Supreme

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Court determined that because of the going concern assumption, the valuation should be based on the discounted economic income method. The business was still operating and saleable. It had been profitable in the ownership of the husband, so it would also be profitable in the ownership of someone else. There will be a realistic possibility to a business acquisition.If selling the business the price will probably be determined according to the future income. The future income will be assessed according to previous income, which mainly was based on the husband’s work. If he stopped working after the acquisition, it will be uncertain if the income remains as equal as they had been. The prospective buyer will probably think that this decreases the price. Because of that, the Supreme Court determined that the final value must be less than in the experts’ statements. Therefore, the Supreme Court upheld the value the Court of Appeal had determined. Thus according to the Supreme Court the final value of the business was €90,000. THE EXPERTS’ VALUATION As it was mentioned earlier, two different experts prepared statements about the value of the business, hereafter called expert A and expert B. They were both Authorized Public Accountants. They both used the discounted economic income method in their valuation. Both the experts calculated the adjusted income and used it as a measure of the economic income as well. They based their statements exclusively on the financial documents, mainly to the financial statement and the balance sheet. Expert A based his analysis solely on the financial statements in years 2004-2006. Expert B made forecasts for expected income for years 2007-2011 basing them on the financial statements in years 2004-2006. The Value of the Business According to Expert A Expert A decided that year 2006 represented financially a typical year of the business. Therefore, he based his calculation of the economic income on the adjusted income in year 2006 as follows:

The adjusted profit in 2006 84 539 Reasonable wage to the owner including statutory cost, 4 725 €/ month - 56 700 Profit before tax 27 839 Tax - 6 400 Profit after tax 21 439

The adjustment of the profit was because of the depreciation differences. Taxes and the wage to the owner were not included in costs in financial statement. In Finland, in partnership, they usually do not pay wage to the owner and the owner himself pays the taxes. Expert A decided according to his calculation that the expected income was approximately €20,000 per year. He calculated the present value of the expected income for three years and the terminal value of the business at end of the year of that time using the 15% discount rate and the following formula: PV=∑ 𝐸𝑖

(1+𝑟)𝑖 𝑛 𝑖=1 +

𝐸𝑖/𝑟 (1+𝑟)𝑛+1

(1) where: PV=Present value ∑ = Sum of Ei = Expected economic income in the ith period in the future r = Present value discount rate n= Last period for which the economic income is expected

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i = Period in the future in which the economic income to be discounted is expected to be received Thus according to expert A the final value of the business was comprised of the following amounts:

Present value €45,660 Terminal value €76,226 Final value €121,886

The final value of the business in the statement of expert A was determined minimum €120,000 assuming the business will operate as a going concern. The Value of the Business According to Expert B Expert B used the discounted economic income method as well. He made forecasts for expected income for years 2007-2011 basing them on financial statements in years 2004-2006. He calculated the mean of the adjusted profit from years 2004-2006. He adjusted the profit by reducing the wage of the owner, €4500 per month and it was raised 5% per year. The mean of the adjusted profit was as follows:

Mean Revenue €165,900 Operating profit € 89,000 Profit € 86,300 Adjusted profit €32,300

Expert B made forecasts for expected income for years 2007-2011, which based on mean of the adjusted profit from the years 2004-2006. The forecasts are presented in the table 2. Table 2: The forecasts for expected income for years 2007-2011 according to expert B

Year 2007 2008 2009 2010 2011 Revenue, € 174,000 182,900 192,000 201,600 211,700 Operating profit, € 93,400 98,100 103,000 108,200 113,600 Profit, € 91,000 95,500 100,300 105,300 110,600 Adjusted profit, € 34,300 36,000 37,800 39,700 41,600

Expert B used these forecasts and made several alternative calculations for the present value of the adjusted income using different rates and periods. He used the following formula, but unlike expert A, he did not calculate the terminal value. PV=∑ 𝐸𝑖

(1+𝑟)𝑖 ∞ 𝑖=1 (2)

The present values in different rating and timing that he calculated are presented in table 3. Table 3: Present values in different rating and timing according to expert B

Time Rate 10 % Rate 12 % Rate 15 % 3 years €98,300 €96,600 €94,200 5 years €156,500 €151,300 €144,100

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According to expert B, there were also non-operating assets in the business about €12,300 and he added them in the final value of the business. The final value of the business in the statement of expert B was determined €106,500 – 156,400. THE PITFALLS OF USING OF THE DISCOUNTED ECONOMIC INCOME METHOD IN THE CONTEXT OF A DIVORCE The study revealed that the use of the discounted economic income method in the context of a divorce could be fraught with difficulties. First, the problems related to the method itself. One problem is the subjectivism of the discounted economic income method. The final value is deeply dependent on how the future economic income is measured and the discount rate is selected. Therefore, it is very important when using this method to acquire an adequate amount of information about the economy and industry conditions that affect the business. In addition, one must carefully examine the past earnings, project the future earnings and then discount them (Anderson 2009, Fodor and Mazza 1992). One should also take into account the characteristics of the business. In the VIB case, both experts based their calculations on quite inadequate economic and operational information of the business. They both based their analysis solely on the economic information taken mainly from the income statement and balance sheet. They both ignored the facts that the prospective buyers, the larger vehicle inspector firms, had pointed out. They claimed that the location of the business was remote and the profitability of the business was strongly dependent on the husbands work and ability. In addition, the machinery of the business was quite simple and old, and that was why the selection of the services the vehicle inspection business served was restricted. Without this essential information, the experts assessed the future income. This is problematic particularly when using the method where small differences in the variants produced remarkable changes in the final value.The calculations made by expert B showed this clearly. The other problem in the experts’ statements in the VIB case was the discount rate. The importance of selecting the discount rate is emphasizes in the financial literature (see for example Martins 2011, Gasson 2002, Pratt et al. 1998, Fodor and Mazza 1992). However, neither of experts explained how they had determined the discount rate. Expert B made calculations with even two different rates, but did not clarify the difference between them. Without knowing how the discount rate was selected it is difficult for a judge to estimate if it is appropriate. It seems that the experts just relied on rules of thumb and used the commonly used 10 or 15 % discount rates. Expert A also calculated the terminal value using the same expected future economic income (€20,000) and discount rate (15%) as he had used when calculating the present value. According Copeland et al. (2000) a high quality of estimating terminal value is essential, because the terminal value often accounts for large percentage of the total value of the business. For example, Mercer and Harms (2008) notes that in a typical five-year DCF forecast, the terminal value will account for 60% to 80% or more of the total present value for the method. Also Martins (2009) and Mercer and Harms (2008) warn that the impact of the terminal value may turn to be a caveat. In expert A’s statement the terminal value (€76,226) was approximately 64 % of the final value (€120, 000). He did not validate the key figures he had used in the calculation. In VIB case, the terminal value seems to be overvalued regarding the characteristics of the business mentioned above. In addition, the study illustrated that the difficulties of using the discounted economic income method emphasize in the context of non-transactional situation such as a divorce. At

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first, it is very important to notice the difference in establishing a value and setting a price for the business. According to Carland and White (1980), the value is the assessment of the worth of the business by whoever is performing the valuation whereas the price is negotiated value agreed upon by the buyer and seller. Also Sliwoski and Jorgenson (1996) point out that in many instances the value is really a suggested selling price or purchasing price. In business transactions, the computed value of business provides a starting point for the selling price negotiations. One could assume that the “right” price for the business in business transaction is the price at which the business changes hands. Thus, the final value, the price, is “tested” in transaction. If the price is not appropriate, no transaction happens. This certain kind of control of the final value does not appear in non-transactional situations. In the context of divorce, the court usually decides the final value based on the experts’ statements.From the legal point of view, two issues relating to the marital assets are important. One is the treatment of the professional goodwill. No mention of professional goodwill included in the experts’ statements in the VIB case. They both adjusted the income by reducing the amount of the owner’s reasonable wage. It remained unclear if they meant that the professional goodwill included to that. Because the professional goodwill does not belong to marital assets in Finland, it should exclude from the value of the business. The other issue in valuation in a divorce context is the fact to which extent the future income belongs to the marital assets. It relates to the purpose of the valuation in a divorce. The aim of the valuation in a divorce is to define the value of the business at the date of the partition, not in the future. That might be in contradiction with the discounted economic income method, because the method is based on economic income expected in the future. When accepting the use of the discounted economic income method in the VIB case the Supreme Court might not sufficiently took into account the purpose of the valuation. According to Pratt et al. (1998), some analysts also are afraid that the discounted economic income method impounds the results of future efforts of the operating spouse (which are not marital property) into the present value to the business. If this is the potential issue, Pratt et al. continue, one should be careful to reflect only the income that would reasonable expected from running the business with an employed, non-owner manager. In the VIB case, the Supreme Court indeed concluded that the value of the business should be less than in the experts’ statements. That was because the income was mainly basing on the husband’s work. However, reducing the final value at the end may not be the correct way, if the final value originally was unrealistic high. CONCLUSION This study revealed that when valuing a small business in a divorce it is essential to take into account both the accounting and the legal point of view. From the accounting point of view, careful consideration should take into the valuation method. The discounted economic income method has increasingly been used in small business valuation. However, some questions are arising when using it in the context of a divorce.The method is very sensible giving different final values when changing lightly the variants. It is also subjective. The final value is depending on the how the future economic income is predicted and the discount rate selected. Therefore when using this method, one needs an adequate amount of information about the economy and industry conditions that affect the business. It is also very important to take notice to the characteristics of the business. Valuation in the context of a divorce differs from valuation in business acquisitions, because no control of final value appears in a divorce context. From the legal point of view, one should bear in mind that the professional goodwill might not belong to the marital

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assets. According to Finnish legal system, it does not. In that case it must not include in the final value. The other point is that the purpose of the valuation in a divorce is to determine the value of the business at a certain date. In Finland, the valuation date is the date of the partition. The income after that date does not belong to the marital property. Hence, the valuation should not be based too much on the future income. The more important is the value that the business has in the hands of the owner at the date of the valuation. REFENCES Aarnio A. and Kangas U. (2010). Perhevarallisuusoikeus. Helsinki. Finland. Aarnio A. and Helin M. (1992). Suomen avioliitto-oikeus. Helsinki, Finland. Anderson P. (2009) “The value of Private Business in the United States,” Business Economics, vol. 44, no 2, p. 87–108. Carland, J. and White, L. (1980) “Valuing the small business,” Journal of Small Business Management, vol. 18 Issue 4, p. 40–48. Copeland, T., Koller T., and Murin J. (2000) Valuation: Measuring and Managing the Value of the Company, New York, USA: Wiley. Dukes W., Bowlin O. and Ma K. (1996) “Valuation of closely-held firms: a survey,” Journal of Business Finance & Accounting, vol. 23 no 3, p. 419–438. Feldman S. (2005) Principles of Private Firm Valuation. Hoboken, New Jersey, USA: Wiley, http://site.ebrary.com/lib/uef, p. 45–68. Fodor G. and Mazza E. (1992) “Business valuation fundamentals for planners,” Journal of Financial Planning, Vol. 4 Issue 4, p. 170–179. Hitchner J. (2011) Financial Valuation, Applications and Models. Hoboken, New Jersey, USA: Wiley. Houghton, D. (2002)”Buying a Business” in Kogan Page Staff (Contributor). Corporate Finance Handbook (3rd Edition). Milford, CT, USA: Kogan Page Ltd., 2002, http://site.ebrary.com/lib/uef. Martins A. (2011) “The valuation of privately held firms and litigation: a case study,” International Journal of Law and Management, vol. 53 no 3, p. 207–220. Pratt, S., Reilly, R. and Schweihs, R. (2000) Valuing a Business : The Analysis and Appraisal of Closely Held Companies (4th Edition).Blacklick, OH, USA: McGraw-Hill Professional Publishing, http://site.ebrary.com/lib/uef. Pratt, S., Reilly, R. and Schweihs, R. (1998) Valuing Small Businesses and Professional Practices (3rd Edition). Blacklick, OH, USA: McGraw-Hill Professional Publishing, http://site.ebrary.com/lib/uef.

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Sliwoski, L. and Jorgenson M. (1996) “Acquiring a small business: how much can your client afford?” The national public accountant, vol. 41, issue 10, p. 16–21. Välimäki P. (1996). ”Ositettavan omaisuuden ja sen arvon määräytymisestä” Defensor Legis, vol. 2 (March – April) p. 154–167. BIOGRAPHY Hanna Savolainen is LL.M. and postgraduate student in the business and law. She is also University Lecturer in the University of Eastern Finland, at the department of Business and Law. Her research area relates to different legal problems in small businesses. She can be reached at the University of Eastern Finland, Yliopistonkatu 2, 80100 Joensuu, Finland, [email protected].

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THE DEFENSES OF LIFO AS AN ACCEPTABLE ACCOUNTING METHOD Peter Harris, New York Institute of Technology

Liz Washington Arnold, The Citadel

The Last in First out Method (LIFO) is presently under severe scrutiny from the financial community which may soon culminate in its repeal as an acceptable accounting method. There are pressures from the SEC in conjunction with the International Financial Accounting Standards Board (IFRS) to standardize accounting standards worldwide. In addition, there is political pressure imposed by the US Obama administration to raise additional revenues. Both groups strongly oppose LIFO, raising a strong possibility that’s its complete elimination as an accounting method will occur by as early as 2014. This paper will address the reasons defending LIFO as an acceptable accounting method. First, from an accounting theory perspective, it satisfies the principles of historical cost, conservatism, reliability, matching, the temporary difference aspect of deferred taxes and the income statement economic reality of LIFO presentation. Second, from the perspective of the US government, tax loopholes are many and LIFO is but one small example. If the US government eliminates these many tax loopholes at the expense of lowering the tax rates, as indicated, the result will be a tax neutral revenue situation which does nothing to help the deficit. Third and lastly, IFRS and US GAAP are in the process of convergence, which is far different than having identical accounting standards. Differences between the two entities in financial reporting will remain in effect after 2014. The result is that the need to eliminate LIFO is not necessary from taxation, political or financial reporting position.

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A CROSS-CULTURAL COMPARISON OF ONLINE CUSTOMER REVIEWS

Peng He, University of Maryland, Baltimore County Jianwei Lai, University of Maryland, Baltimore County

Hsien-Ming Chou, University of Maryland, Baltimore County Lina Zhou, University f Maryland, Baltimore County

ABSTRACT

In this paper, we describe both cultural and lingual factors have impacts on customers’ online reviewing behaviors. In order to investigate the difference between customers’ reviews in English and Chinese, 20 reviews for each of three products (e.g., a cell phone, a camera and a computer external hard drive) on both amazon.com and amazon.cn have been chosen and compared. Qualitative study has been conducted to compare the difference between English and Chinese on these aspects. Coding schemes were extracted based on the results of the qualitative study, and English and Chinese reviews were further studied in quantitative methods. Our results show that Chinese reviews focus more on negative aspects than American reviews, and American customers give more recommendations to others than Chinese customers. Furthermore, Chinese and American customers focus on different aspects of products. The results of this study can be used to improve customer service, product marketing and promotion in multinational business.

JEL: M3 - Marketing and Advertising, M30 – General KEYWORDS: online customer reviews, cross-culture perspectives, lingual difference, multinational business, amazon.com, amazon.cn INTRODUCTION When consumers search for product information and buy potential products on the Internet, they could browse online reviews written by other customers. These customer reviews are displayed in different formats and content, for example, they may present as star-rating style, personal comments, product functional reviews and so on. Prospective customers will read these product reviews and make their own purchase decisions, and these consumers’ final selections will also affect the sales of retailers and aspiration of other potential customers. What's more, online customer reviews can be defined as peer- generated product evaluations posted on company or third party websites. Retail websites offer consumers the opportunity to post product reviews with content in the form of numerical star ratings and open-ended customer-authored comments about the product [1]. The mere presence of customer reviews on a website can improve customer perception of the website [2]. Sites such as Amazon.com elicit customer reviews for several reasons, such as to serve as a mechanism to increase site “stickiness,” and to create an information product that can be sold to other online retailers. Reviews that are perceived as helpful to customers have greater potential value to companies, including increased sales [3-6]. Recent research has examined the role of online customer product reviews, specifically looking at the characteristics of the reviewers [7, 8]. The cultural dimensions were also found to vary across the different countries and different products [9]. However, despite the obvious importance of cultural factors, only a few studies have been performed on cross-cultural issues [10]. This is partly because any such study must confront the difficulty of explicitly identifying and measuring the intangible concept of

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culture in the context of a particular system [11]. In this paper, we will try to compare customer reviews written in two different languages (English and Chinese) for three distinct products and collect data from Amazon.com (US-based) and Amazon.cn (China-based) website.

RESEARCH QUESTIONS Individualism-collectivism [12] is one of the most commonly used dimensions in cross-cultural studies. Members of individualist cultures (e.g., American) tend to hold an independent view of the self that emphasizes separateness, internal attributes, and the uniqueness of individuals, while those of collectivist cultures (e.g., Chinese) tend to hold an interdependent view of the self that emphasizes connectedness, social context, and relationships. As a result, there are attitudinal and behavioral differences between the two cultures, which are listed in table 1 [13]. Table 1: Relative Attitudinal And Behavioral Differences Associated With Individualism Versus Collectivism

Members of collectivist cultures tend to form attitudes about individuals on the basis of both dispositional traits and contextual factors. However, members of individualist cultures form attitudes about individuals solely on the basis of dispositional traits [14]. We believe these cultural differences will also influence people’s attitudes and behaviors on online products reviewing. One of our research questions is to determine whether there are any differences on the review content. Thus, we first hypothesize that: H1: American customers comment on products focused more on products’ specific traits than Chinese customers. Online reviewing is a way of expressing people’s opinion. Huang [15] conducted a cross-cultural study to explore the effects of cultural conditions, particularly the dimension of individualism/collectivism, and the effects of individual motives on opinion expression by drawing two probability samples from the United States and Taiwan, two countries with different scores on individualism/collectivism. Results show that incongruence between one’s own and the perceived future majority opinion and a lack of efficacy reduce Taiwanese people’s willingness to express their opinions. For Americans, it is only motives for not expressing opinions that make them less willing to express their views. We believe that Americans are more willing to give feedback to products as reviews: H2: Americans tend to express more of their own opinions about products than Chinese. In a collectivistic culture like the Chinese, the self is bound by relationships with others. The Chinese are

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more inclined to behave in accordance with personal preference and social demand that with objective standard. Such concepts as “renqing” and “guanxi” have impact on how people persuading and influencing others. Meanwhile, the major cultural values of Americans are individualistic which have the emphasis upon independence and individual rights. In the process of persuasion, persuades are believed to have the right to choose whether or not to comply. Individuals are socialized to make rational decisions and prefer to use the factual-inductive style of persuasion [16]. Hence, we hypothesize that Americans and Chinese use different persuading styles in their customers’ reviews: H3: American and Chinese customers using different persuading styles in their reviews. RESEARCH DESIGN In this part, we will explore and try to answer these 3 following questions when we design our research: How do we design our research to capture main culture factors in terms of English and Chinese online product reviews? How do we choose products and reviews? And what kinds of data should be collected? Design Research To Capture Main Culture Factors In order to reflect two different culture backgrounds, two most popular websites in their own countries have been chosen: (1) www.amazon.com (US-based) (2) www.amazon.cn (China-based) The reasons that we chose these two websites are not only because they did look so similar in layout and they are actually owned by one company, the main point is we are trying to eliminate other factors but cultures, because our research design is to capture main culture factors in terms of English and Chinese on these two B2C websites. Choice of Products And Reviews Again, in order to minimize other factors effect on our research, we narrow down to randomly select 3 distinct products in the category of electronic devices: A cell phone (Nokia 5530), a camera (Sony DSC- W350 in black color) and a hard drive (Toshiba 2.5-Inch 320 GB External Hard Drive). Besides, we need to make sure there are enough customer reviews on both websites for these selected products to be analyzed. So for this study, we first order these reviews by “Most Helpful First” option and then we select 20 reviews from US website (www.amazon.com) and 20 reviews from Chinese website (www.amazon.cn) for each product discussed above. Data Collection We collect 120 customers’ reviews from these two business-to-customer e-commerce web sites on three different products. So, there are 20 reviews in English and 20 are in Chinese, totally there are 40 reviews for each product. We firstly apply qualitative analysis: we review all the 120 customers review, and analyze and compare reviews in two languages to figure out the similarity and differences, as well as find

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characteristics in both of them. And then based on the findings from qualitative analysis, we start to build coding schemes. We capture such factors in our scheme: Total number of sentences; Overall review; Price; Features; Recommendation to Consumers; Promotions (E.g. Accessories); Genuine; Location of Manufactory; Others (E.g. Customer services, shipping and returning issues). For example, table 2 is the scheme template for one of our products – camera (Sony DSC-W350). The frequency of how many times the reviewer comments on these aspects will be coded and the frequencies of reviews in two languages will be compared. Table 2: Example of a Scheme Template For Camera Product

Revie

ws Total

number of sentences

Ove rall

revie

Pri ce

Feat ures

Recommend ation to

Consumers

Promotion s (E.g.

Accessorie

Genu ine

Location of Manufactory Others

R1 35 1 2 27 1 0 0 0 4

R2 16 1 0 14 0 0 0 0 1

R3 11 3 1 5 0 0 1 0 1

R4 4 1 0 3 0 0 0 0 0

R5 9 1 0 6 0 0 0 0 2

R6 13 1 1 9 0 0 0 0 3

R7 23 1 0 13 2 0 0 0 7

R8 4 1 1 2 0 0 0 0 1

R9 8 2 2 3 0 0 0 0 2

R10 9 1 0 8 0 0 0 0 0

R11 12 1 0 10 0 0 0 0 1

R12 5 1 1 4 0 0 0 0 0

R13 9 1 2 6 0 0 0 0 1

R14 9 1 0 8 0 0 0 0 0

R15 4 1 0 4 0 0 0 0 0

R16 6 1 2 3 0 0 0 0 0

R17 4 1 0 3 0 0 0 0 0

R18 6 1 1 1 0 0 0 0 3

R19 7 2 0 5 0 0 0 0 1

R20 9 1 0 7 0 0 0 0 1

RESULTS 120 reviews were first carefully compared and analyzed by us. Some valuable conclusions have been drawn based on the comparison, which are presented in the following section. The data coded have been analyzed through Chi tests and t tests, and the results are also presented in this part.

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Qualitative Analysis Results Based on ours comparison of Chinese and English reviews, 7 conclusions have been drawn as follows: (1) Praise vs. criticism Chinese reviews focus more about negative aspects, e.g., “ 听筒有问题，听谁说话都是感冒一样的声音。 (In English: There is a problem with the handset, so everybody’s talk voices are the same that looks like they all get cold)”, “ 后悔死了，加密的内容还要硬盘才能打开，这叫什么加密？ (In English: I am so regret that the encrypted content should be opened by the hard disk, what kind of this encryption?” However, English reviews have more positive aspects, e.g., “I find it to be very functional - I have not had a dropped call or any problems with the interface itself. The touch-screen is very easy and fun to use.” Previous study has verified that culture has impact on feedback behaviors [17]. According to individualism and collectivism theory, people in collectivistic cultures care about group harmony more than in individualistic cultures, and they are less likely to show their dissidence directly. However, our finding is not consistent with it. We believe it may be due to the special online environment. Firstly, customers use IDs when they provided their feedback, or even anonymously. Hence it is impossible to identify them, and they are more willing to express their true opinions. Secondly, online customers are not familiar with each other, thus they may do not have strong sense of group. (2)Persuadin gbehaviors American customers tend to make some direct recommendations to others, while Chinese customers do not make recommendations to others. For example, online product reviews are coming from American customers like: “For anyone who is planning to buy this phone I won’t recommend it”; “I don't recommend to buy this cell phone ever”; “I recommend to others”. We did not see many recommendations like those sentences in Chinese reviews. Hence, our hypothesis three – H3: American and Chinese customers use different persuading styles in their reviews, is supported in this context. (3) Concerns Both Chinese and American pay much attention on product functions, features, quality, and price. However, Chinese customers complain much more on customer service of the website than American customers, such as product packing problems and delivering qualities. It reveals that amazon.cn needs to improve their localized customer services. Besides, Only Chinese customers make comments about whether the product is genuine or not, and only Chinese customers make comments on manufactory location. We believe it is because of the Chinese market environment is not as mature as American. Counterfeit digital products are in some kind of degree indeed available in Chinese market. (4) Motivation to give feedback We have chosen top 20 most useful reviews in both Chinese and English for each product. However, it seems that Americans are more willing to provide their feedback, and the length of American reviews is

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much longer than Chinese reviews. It is not clear why Americans are more motivated to provide more feedback. It could be related to the operation strategy of those two localized web sites. Quantitative Analysis Results We also qualified the reviews of three products with the same nodes. The data have been analyzed in the following ways. (5) Number of review sentences We have compared means of review sentence numbers, which is presented in figure 1. T-test results are shown in table 3. As the result shows, English reviews are significantly longer than Chinese reviews for three products, and all the reviews in total.

Figure 1: Means of review sentence numbers

Table 3: T-test of means of review sentence numbers

t P

total -6.576 <0.001

Toshiba hard drive -6.426 <0.001

Nokia 5530 -2.487 <0.01

Sony DCS-350 -4.122 <0.001 Those results support hypothesis two – H2: Americans tend to express more of their own opinions about products than Chinese. (6) Opinion numbers

3.47 1.75

5.60

3.05

10.80 10.40 11.85

10.15

.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Chinese English

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Figure 2: Opinion numbers of Chinese and English reviews

We also compared opinion numbers, which are presented in figure 2. As the result shows, English reviews have more opinions for three products, and all the reviews in total. This also support hypothesis two particularly – H2: Americans tend to express more of their own opinions about products than Chinese. (7) Customer concerned aspects

Chi-Square tests have been conducted to see whether American customers and Chinese customers focus on the same aspects of products. 1. Product: Toshiba hard drive

Table 4: Frequencies and percentages of concerned aspects (Toshiba hard drive)

Overall

comment Price Featu

res Recommendation to

Consumers Accessory Promotion

Genui ne

Location of Manufactory Others

Total review number

Chine se 20(29%)

6(9% )

35(50 %) 3(4%) 1(1%) 4(6%) 1(1%) 0(%) 70

Engli sh 56(23%)

11(4 %)

96(39 %) 8(3%) 0(0%) 0(0%) 0(0%)

76(31 %) 247

Table 5: Chi-Square test result(Toshiba hard drive)

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 47.035a 7 .000 Likelihood Ratio 60.076 7 .000

N of Valid Cases 317

The frequencies and percentages of customer concerned aspects in table 4 and Chi-Square test result in table 5 indicate Chinese and American customers’ focused aspects are significantly different. Besides the total number of opinions for English reviews is much larger than that of Chinese reviews.

70 131

61

262 247 260 210

717

0 100 200 300 400 500 600 700 800

Toshiba hard drive

Nokia n5530

Sony DCS- 350

total

opinion numbers

Chinese

English

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2. Product: Nokia 5530 Similar to the results for the product of Toshiba hard drive, the frequencies and percentages of customer concerned aspects in table 6 for Nokia 5530 and Chi-Square test result presented in table 7 indicate Chinese and American customers’ focused aspects are also significantly different. American customers’ reviews are mainly focus on features of products. However, Chinese customers pay much attention on other aspects rather than the products themselves.

Table 6: Frequencies and percentages of concerned aspects (Nokia 5530)

Overall

comment Price Features Recommendation to Consumers

Accessory Promotion Genuine

Location of Manufactory Others Total review number

Chinese 7(5%) 8(6%) 52(40%) 0(0%) 1(1%) 1(1%) 1(1%) 61(47%) 131

English 23(9%) 11(4%) 202(78%) 6(2%) 0(0%) 0(0%) 0(0%) 18(7%) 260

Table 7: Chi-Square test result (Nokia 5530)

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 98.114a 7 .000

Likelihood Ratio 97.924 7 .000

N of Valid Cases 391

3. Product: Sony DCS-350 We did the same research for the third product of Sony DCS-350. Again, the frequencies and percentages showed in table 8 and Chi-Square test result in table 9 indicate Chinese and American customers’ focused aspects are significantly. Table 8: Frequencies and percentages of concerned aspects (Sony DCS-350)

Overall comment Price Features

Recommendation to Consumers

Accessory Promotion Genuine

Location of Manufactory Others

Total review number

Chines e 15(25%)

11(18% ) 11(18%) 1(2%) 14(23%) 3(5%) 1(2%) 5(8%) 61

English 24(11%) 13(6%) 141(67%) 3(1%) 0(0%) 1(0.5%) 0(0%) 28(13%) 210

Table 9. Chi-Square test result(Sony DCS-350)

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 92.497a 7 .000

Likelihood Ratio 87.938 7 .000

N of Valid Cases 271

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4. For all three products Finally, we did the research for all these products and would like to get the results in general. Just like the previous 3 experiments, the frequencies and percentages of customer concerned aspects in table 10 and Chi-Square test result in table 11 indicate Chinese and American customers’ focused aspects are significantly different. Table 10: Frequencies and percentages of concerned aspects of three products

Overall commen t

Price Feature s

Recommendati on to C

Accessor y P ti

Genuin e

Location of Manufactor

Other s

Total review

b Chines

e 42(16%) 25(10% ) 98(37%) 4(2%) 16(6%) 8(3%) 8(3%) 3(1%) 262

Englis h

103(14 %) 35(5%)

439(61 %) 17(2%) 0(0%) 1(0.5%) 0(0%) 0(0%) 717

Table 11: Chi-Square test result of three products

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 104.049a 7 .000

Likelihood Ratio 100.586 7 .000

N of Valid Cases 979

Figure 3 below compares the percentages of Chinese and English reviews focused aspects. And we can get the conclusion that more than 60% of American customers’ reviews are about features; on the other hand, less than 40% of Chinese customers’ opinions are about features. Figure 3: Comparison Of Percentages Of Chinese And English Focused Aspects

From figure 3, it also validates our hypothesis one that is about customers’ focused aspects:

0% 10% 20% 30% 40% 50% 60% 70%

Chinese English

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H1: American customers comment on products focused more on products’ specific traits than Chinese customers. CONCLUSIONS AND FUTURE RESEARCH In our research, 120 pieces of customer online reviews of three electronic products from Amazon.com (US-based) and Amazon.cn (China-based) have been carefully collected, coded, and analyzed through qualitative and quantitative study approaches. We initially propose 3 hypotheses at the beginning part based on related studies in this area. After studying customer’s persuading behaviors in online reviewing, our research results finally well support these hypotheses: “H1: American customers comment on products focused more on products’ specific traits than Chinese customers”, “H2: Americans tend to express more of their own opinions about products than Chinese” and “H3: American and Chinese customers using different persuading styles in their reviews”. To conclude our study results, we list them as follows: (1) Chinese reviews focus more on negative aspects than American reviews, which may reveal different styles in two cultures of giving feedback. (2) American customers give more recommendations to others than Chinese people, which also indicate that people have different persuading styles in two cultures. (3) Chinese and American customers focus on different aspects of products. The results can be used to improve customer service, product marketing and promotion in the future. (4) American customers write more number of sentences in their feedbacks, and they express more opinions than Chinese customers. It indicates that American customers are more willing to provide feedbacks than Chinese customers. There are some limitations we will discuss below and some future research to be explored. First, we used sentence number to indicate the willingness of customers to provide feedbacks online. However, there may have some problems with this method. The expression power of Chinese and English is different, for example, one Chinese sentence can be translated into several English sentences. Besides, there might be some other factors rather than willingness that have impact on sentence numbers, such as the encouragement of the web sites. Even though, we still believe the results are significantly differences between the sentence numbers in two languages. Besides, we have only focused on whether customers concern certain aspects, and we have neglected the sentiment trends of Chinese and English reviews. Opinion analysis, such sentiment analysis, may be used here to help us. For example, when we study customers’ reviews and we have found that Chinese customers tend to provide more negative feedback than American customers. However, further research need to be studied in order to support our hypothesis. Also, we did not take the differences between two languages into consideration, such as sentence structure, syntax, etc., which are also our future research topics. REFERENCES

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Mudambi, S. M. and Schuff, D. What Makes a Helpful Online Review? A Study of Customer Reviews on Amazon.-com. MIS Quartly, 34, 1 185-200, 2010 Kumar, N. and Benbasat, I. Research Note-The Influence of Recommendations and Consumer Reviews on Evaluations of Websites. Information Systems Research, 17, 4, 425-439, 2006 Chen, P. Y., Dhanasobhon, S. and Smith, M. D. All reviews are not created equal: The disaggregate impact of reviews and reviewers at amazon.com, Carnegie Mellon University, 2008 (available at SSRN: http://ssrn.com/abstract=918083). Chevalier, J. A. and Mayzlin, D. The effect of word of mouth on sales: Online book reviews. Journal of Marketing Research, 43, 3, 345-354, 2006 Clemons, E. K., Gao, G. G. and Hitt, L. M. When online reviews meet hyperdifferentiation: A study of the craft beer industry. J Manage Inform Syst, 23, 2, 149-171, 2006 Ghose, A. and Ipeirotis, P. G., Designing ranking systems for consumer reviews: The impact of review subjectivity on product sales and review quality. In Proceedings of the Workshop on Information Technology and Systems, 2006 Forman, C., Ghose, A. and Wiesenfeld, B. Examining the relationship between reviews and sales: The role of reviewer identity disclosure in electronic markets. Information Systems Research, 19, 3, 291-313, 2006 Smith, D., Menon, S. and Sivakumar, K. Online peer and editorial recommendations, trust, and choice in virtual markets. Journal of interactive marketing, 19, 3, 15-37, 2005 Lee, I., Choi, G. W., Kim, J., Kim, S., Lee, K., Kim, D., Han, M., Park, S. Y. and An, Y. Cultural dimensions for user experience: cross-country and cross-product analysis of users' cultural characteristics. In Proceedings of the 22nd British HCI Group Annual Conference on HCI 2008: People and Computers XXII: Culture, Creativity, Interaction-Volume 1 (2008). British Computer Society, 2008 Smith, A., Dunckley, L., French, T., Minocha, S. and Chang, Y. A process model for developing usable cross-cultural websites. Interaction Computing, 16, 1, 63-91, 2004 Straub, D., Loch, K., Evaristo, R., Karahanna, E. and Srite, M. Toward a theory-based measurement of culture. Human factors in information systems, 61-82, 2002 Schwartz, S. H. Individualism-collectivism: Critique and Proposed Refinements. Journal of Cross- Cultural Psychology, 21, 2, 139-157, 1990 Aaker, J. L. and Maheswaran, D. The effect of cultural orientation on persuasion. Journal of Consumer Research, 24, 3, 315-328, 1997 Cousins, S. Culture and selfhood in Japan and the US. Journal of Personality and Social Psychology, 56, 1, 124-131,1989

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Huiping Huang. A cross-cultural test of the spiral of silence. International Journal of Public Opinion Research, Vol. 17 Issue 3, p324 – 345, 22p, 2005. Ng, R. The influence of collectivism-individualism on persuasion in Chinese and American cultures. Communication and culture: China and the world entering the 21st century, 71-82, 1998 De Luque, M., and Sommer, S.M. The impact of culture on feedback-seeking behavior: An integrated model and propositions, Academy of Management Review 25: (4), 829-849, 2000

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CASE STUDY ON SUCCESSIVE PLANNING Peter Harris, New York Institute of Technology

Katherine Kinkela, New York Institute of Technology Steven Shapiro, New York Institute of Technology

We prepare, a case study on a real life situation on successive planning involving two shareholders of a privately held business. The issues explored are as follows: 1- reasons for successive planning 2- Failures resulting by not having a successive plan in place 3- Types of Successive plans(The 2 types of Buy-Sell agreements) 4- Taxation aspect of each plan 5- Other advantages and disadvantages of each plan 6- Valuation methods to value business and the need to revalue 7- Discount for marketability and Liquidity 8- Funding the plan 9- Types of insurance used to fund a successive plan 10- How to pay the premiums to maximize Estate and Income Tax aspects 11- Accumulated Earning Tax Penalty(IRC 529) 12- Disability aspect in the Buy-Sale Agreement We present the actual financial statements (change of name of course) of the company, and ask a series of questions on the above points. Generally, there will be a recommended answer which will not be exact due to the inexact science of valuation and more than one recommended solution may be viable, depending on assumptions and needs of the company and/or owners. In this case however, there will be one recommended solution as the owners are the same age, the company has much money to fund the plan and the owners agree on the method which will yield the most beneficial tax benefit from both: estate and income tax purposes.

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ORGANIZATIONAL LEARNING AS COMPETITIVE ADVANTAGE

Diego Fernando Santisteban Rojas, Unidades Tecnológicas de Santander (UTS) Jorge del Rio Cortina, Universidad Tecnológica de Bolívar (UTB)

ABSTRACT

This paper addresses the different theoretical framework for organizational learning from two aspects, the individual to the organization and from the perspective of the organization to the individual. The most significant finding is intended to highlight the guidelines for each of the authors concentrated per cluster, and note, that different authors present guidelines for processes, individual skills, changes in the environment, teamwork and competitiveness. The insight gained, considers that organizational learning is a process, not routine. It allows you to create, acquire and transfer knowledge. This will always be limited to the internal capabilities developed during the course of the timeline, identifying skills and competencies generated in accordance with the requirements presented by the different environments. Organizational learning is associated with both the change in organizational behavior and creation of a knowledge base to support it. The information was derived from books, magazines and important links on the web, which analyzed and identified concepts, dimensions and levels of organizational learning. This exploratory study allowed for an adequate approach to the issue under study. KEYWORDS: organizational learning, organizational processes, models of competitiveness, smart organizations.

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OPTIMALIZATION OF LIQUIDITY STRATEGY: POLISH NONPROFIT ORGANIZATIONS CASE

Grzegorz Michalski, Wroclaw University of Economics

ABSTRACT In dependence of kind of realized mission, sensitivity on risk, which is a result of decision about liquid assets investment level and liquid assets financing. The kind of organization influence the best strategy choice. The organization choosing between various solutions in liquid assets needs to decide what level of risk is acceptable for her owners and capital suppliers. That choice results with financing consequences, especially in cost level. It is a basis for considerations about relations between risk and expected benefits from the liquid assets decision and its results on financing costs for both nonprofit or for profit organizations. The paper shows how in author opinion decisions about liquid assets management strategy and choice between kind of taxed or non-taxed form inflow the risk of the organizations and its economical results during realization of main mission. Comparing the theoretical model with empirical data for 1000+ Polish nonprofit organization results, suggest that nonprofit organization managing teams choose higher risky aggressive liquid assets solutions than for-profit organizations.

JEL: G31, L31, M21

KEYWORDS: liquidity value, short-run financial management, financial liquidity, liquid assets, working capital INTRODUCTION As is widely believed, the advantage of commercially driven businesses is more effective management than in government controlled organizations (Nowicki, 2004, p. 29). In that paper we study the nonprofit organization liquid assets management. That group of organizations face specific incumbent needs, which are the result of higher unemployment and other similar factors (Zietlow, 2010, p. 238-248). The main financial aim of the nonprofit organization (NPO) is not the maximization of organization value but the best realization of the mission of that organization (Zietlow, 2007, p. 6-7). But for assessment of financial decision NPO, should be used analogous rules like for for-profit organizations (Brigham 2006, p. 524-536). One of that rules is fact, that the higher risk is linked with the higher cost of capital rate which should be used to evaluate the future results of decisions made by nonprofit organizations. That is also positively linked with the level of efficiency and effectiveness in realization of the NPO mission. Cost of financing net liquid assets (working capital) depends on the risk included to the organization strategy of financing and/or investment in liquid assets. Managing team of non-profit organizations has a lot of important reasons for which their organization should possess some money resources reserves even if current interest rate is positive (Michalski 2010, Kim 1998). The reasons may be classified into three main groups: the necessity of current expenses financing (transactional reason), fear of future cash flows uncertainty (precautional reason), future interest rate level uncertainty (speculative reason). Liquid assets, especially cash, understood as money resources in organization safe are not a source of any or small interests. Maintaining liquidity reserve in the non-profit organization is a result of belief that the value of lost income on account of interest will be recompensed by the benefits for incumbents of non-profit organization (Kim 1998, Lee 1990). The hypothetical benefits are from higher profitability that organization mission will be completed, thanks adequate liquidity level. There is a point corresponding with the optimal (critical) liquidity level, up to which the amount of liquid assesses in the non-profit organization may be increased at a profit (Washam 1989, p.28; Henderson 1989, Lee 1990).

Financing of the liquid assets has its cost depending on risk linked with liquid assets strategies used by the financed organization. If we have higher risk, we will have higher cost of financing (cost of capital) and as result other Organization efficiency growth. There are no free lunches. Cost of financing of liquid assets depends on kind of financing, next on level of liquid assets in relation to sales and last but not least risk exposition.

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According to kind of financing we have three strategies: an aggressive strategy with the most risky but the cheapest, mainly short-term financing, a compromise strategy with compromise between risk and costs of financing or a conservative strategy with the most expensive long-term financing and with the smallest level of risk. Choosing between various levels of liquid assets in relation to sales, we use one from three strategies: a restrictive strategy when management use the most risky but the cheapest, the smallest as possible, level of liquid assets, a moderate strategy when management moderate between risk and costs of holding liquid assets, or a flexible strategy when management use the most expensive and rather high levels of liquid assets wanting to hedge the organization before risk of shortage of liquid assets (Michalski 2010). Risk exposition depends on position of the organization in its business branch. If the risk exposition should be higher, then more smart is to choose more flexible and more conservative solutions to have better results. It works in opposite direction also, the safe organization with near to monopoly positions can use more restrictive and more aggressive strategies to have better results. STRATEGIES IN LIQUID ASSETS INVESTMENT AND LIQUID ASSETS FINANCING Current assets investment strategies are the set of criteria and specific code of conduct revolved around attaining multiplication of efficiency of using donors money for realization of the mission. Organization managing team implement such strategies into practice while making the crucial decisions concerning obtaining sources for financing current and future needs and defining ways and directions of utilization of these sources, taking into consideration at the same time: opportunities, limitations and business environment that are known to the board today. It is possible to apply one of the three liquid assets financing strategies (or their variations): aggressive, compromise or conservative. Aggressive strategy consists in the significant part of the organization fixed demand and the whole organization variable demand on liquidity-linked financing sources coming from short term financing. The Compromise version of liquid assets financing strategy aims at adjusting the needed financing period to the duration of period for which the organization needs these assets. As a result, the fixed share of current assets financing is based on long term capital. However, the variable share is financed by short term capital. The conservative liquid assets financing strategy leads to the situation where both the fixed and the variable level of current assets is maintained on the basis of long term financing. Liquid assets financing strategy to risk relation. There is a relationship between the three above mentioned approaches based on the relation between expected benefit and risk. In case of capital providers for organizations that have introduced this specific strategy it is usually linked with diversified claims to the rate of return from the amount of capital invested in the organization. The connection of these claims with the chosen way of financing may be insignificant. Nevertheless, it also might be important to such a considerable degree that it will have an effect on the choice of strategy. Example. XYZ organization managing team is pondering over the choice of current assets financing strategy. Need to be chosen the best strategy provided by the aim which is to minimize cost of financing liquid assets and maximize organization efficiency. Fund capital/engaged capital ratio is 40% {E/(E+D) = 40%}. Anticipated annual sales revenues (CR) are 2000. Forecasted earnings before interest and taxes (EBIT) for XYZ will amount to about 50% of sales revenues (CR). Fixed assets (FA) will be going for around 1400, current assets (CA) will be constituting almost 30% of forecasted sales revenues (CR), property renewing will be close to its use (NCE = CAPEX), and changes in relations of net liquid assets constituents will be close to zero and might be omitted (ΔNWC = 0). The organization may implement one of the three liquid assets financing strategies: the conservative one with such a relation of long run debt to short run debt that (Ds/Dl = 0,1), Compromise one (Ds/(Dl) = 1) or the aggressive one (Ds/(Dl) = 2). Accounts payable will be equal to 50% of current assets. It is necessary to consider the influence of each strategy on the cost of organization financing capital rate and on organization efficiency. In the first variant, one must assume that capital providers seriously consider while defining their claims to rates of return the liquid assets financing strategy chosen by the organization they tied in. Let us also assume that the correction factor CZ depends on Ds/Dl relation.

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CZ1 variant. We assume here that capital providers take into consideration the organization liquid assets financing strategy while defining their claims as regards the rates of return. Of course, aggressive strategy is perceived as more risky and therefore depending on investors risk exposition level, they tend to ascribe to the financed organization applying aggressive strategy an additional expected risk premium. To put it simply, let us assume that ascribing the additional risk premium for applied liquid assets financing strategy is reflected in the value of β coefficient. For each strategy, the β coefficient will be corrected by the corrective coefficient CZ corresponding to that specific strategy in relation to the situation Ds/Dl = 0. XYZ risk premium will amount to 9%×(1+CZ) in relation of fund capital to foreign long term capital and 12%×(1+CZ) in relation of fund capital to short term debt level. Risk free rate is 4%, rate of return on market portfolio is 18%. If our organization is a representative of A sector for which the non-leveraged risk coefficient βu = 0.77. On the basis of so called Hamada relation (Hamada 1972), we can estimate the fund capital cost rate that is financing that organization in case of each of the three strategies in the first variant.

19.1)66.081.01(77.0)1(11 =×+×=  

   ×−+×=

E DTuββ

(1)

where: T – effective tax rate, here the assumption is taken that the NPO uses the tax-exempt debt and as a result there have about the same effective cost of debt as for profit organizations (Brigam 2000, 30-5,7,20), D – organization financing capital coming from creditors (Ds+Dl), E – organization financing capital coming from owners, β – risk coefficient, βu – risk coefficient linked with assets maintained by the organization (for an organization that has not applied the system of financing by creditors capital), βl – risk coefficient for an organization that applying the system of financing by creditors capital (both the financial and operational risks are included). For aggressive strategy (CZ = 0.2):

( ) 43.12.1)66.081.01(77.01)1(1 =××+×=+×  

   ×−+×= CZ

E DTulAGR ββ

(2)

where: CZ – risk premium correction factor dependent on the net liquid assets financing strategy For compromise strategy (CZ = 0.1):

(3)

( ) 31.11.1)66.081.01(77.01)1(1 =××+×=+×  

   ×−+×= CZ

E DTulCMP ββ

For conservative strategy (CZ = 0.01): (4)

( ) 2.101.1)66.081.01(77.01)1(1 =××+×=+×  

   ×−+×= CZ

E DTulCNS ββ

Thanks to that information, we can calculate cost of fund capital rates for every variant. (5)

%24%4%1443.1)( =+×=+−×= RFRFMe kkkk AGR β ; %3.22%4%1431.1)( =+×=+−×= RFRFMe kkkk CMP β ;

%8.20%4%142.1)( =+×=+−×= RFRFMe kkkk CNS β where: k – rate of return expected by capital donors and at the same time (from organization’s perspective) – organization cost of financing capital rate, ke – for capital coming from owners (cost of fund capital rate), kM – for average rate of return on typical investment on the market, kRF – for risk free rate of return whose approximation is an average profitability of Treasury bills in the country where the investment is made. Hence, since the risk premium for XYZ accounts for 9%×(1+CZ) in relation of fund capital to foreign long term capital, we can get long term debt cost rates:

(6) %2.132.1%9%24 =×−=

AGRld k ; %4.121.1%9%3.22 =×−=

CMPld k ; %7.1101.1%9%8.20 =×−=

CNSld k

where: kdl – for long term debt rate, i.e. capital coming from long term creditors, And consequently for short term:

(7)

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%6.92.1%12%24 =×−= AGRsd

k ; %1.91.1%12%3.22 =×−= CMPsd

k ; %7.801.1%12%8.20 =×−= CNSsd

k

where: kds – for short term debt, i.e. capital coming from short term creditors, However, for each strategy, this cost rate will be on another level. Cost of capital and changes in organization efficiency (or economic efficiency nonprofit organization) depending on the choice of strategy, give us results for cost of capital financing organization (CC): 14.8% for aggressive, 14.2% for compromise and 13.9% for conservative strategies. In result of such costs of capital levels, organization efficiency growth (∆V) is 5057 for aggressive, 5342 for compromise and 5494 for conservative strategies. Cost of organization financing capital rates are different for different approaches to liquid assets financing. The lowest cost of capital rate is observed in conservative strategy and the conservative strategy gives in CZ1 case the most effective organization efficiency growth. In the CZ2 variant, we will also assume that capital providers while defining their claims to rates of return take into consideration the organization liquid assets financing strategy to a lesser extent. Obviously, the aggressive strategy is perceived as more risky and therefore, depending on their risk exposition, they tend to ascribe an additional risk premium for an organization that implemented this type of strategy. For conservative strategy, XYZ risk premium is equal to 9%×(1+CZ) in relation of fund capital to long term debt and 12%×(1+CZ) in relation of fund capital to short term debt. Risk free rate of return is 4%, rate of return on market portfolio is 18%. Our NPO is a representative of a sector for which non-leveraged risk coefficient βu = 0.77. On the basis of Hamada relation, we may estimate the cost rate of fund capital financing this organization in case of each of the three strategies. We are given all necessary information to assess cost of organization financing capital rate for the organization applying the given type of liquid assets financing strategy. For each strategy the organization efficiency growth will be on another level. Cost of capital and changes in organization efficiency (or economic efficiency nonprofit organization) depending on the choice of strategy, give us results for cost of capital financing organization (CC): 13.15% for aggressive, 13.3% for compromise and 13.81% for conservative strategies. In result of such costs of capital levels, organization efficiency growth (∆V) is 5905 for aggressive, 5819 for compromise and 5541 for conservative strategies. Taking into consideration the risk premium resulting from implementation of a certain liquid assets financing strategy has an additional impact on the organization financing capital. Organization financing capital cost rates are different for different approaches to liquid assets financing. In this variant, the lowest level is observed in aggressive strategy. As a consequence, the highest organization efficiency growth is characteristic for aggressive type of strategy. In the third CZ3 variant, we also assume that capital providers to a lesser extent consider while defining their claims to rates of return the liquid assets financing strategy chosen by the organization they invested in. For conservative strategy, XYZ risk premium amounts to 9%×(1+CZ) in relation of fund capital to long term debt level and 12%×(1+CZ) in relation of fund capital to short term debt. Risk free rate is 4%, rate of return on market portfolio is 18%. Our NPO is a representative of sector W for which non-leveraged risk coefficient βu = 0.77. On the basis of Hamada relation we may estimate organization financing fund capital cost rate in case of each of the three strategies. We have all necessary information to assess the organization financing capital cost for the organization applying the given type of liquid assets financing strategy. Cost of capital and changes in organization efficiency (or economic efficiency nonprofit organization) depending on the choice of strategy, give us results for cost of capital financing organization (CC): 13.7% for aggressive, 13.6% for compromise and 13.8% for conservative strategies. In result of such costs of capital levels, organization efficiency growth (∆V) is 5591 for aggressive, 5653 for compromise and 5546 for conservative strategies. Here the best is compromise strategy. EMPIRICAL DATA Data collected about Polish NPO show their liquidity strategies for 2009 and 2010 years. If we compare it with for profit Polish organizations results, we can see that the average length of operating cycle and net operating cycle (cash cycle) is shorter than for average for profit organizations. Observation of NPO data can inform us about interesting customs of NPO managing teams. Generally, basing on the data collected from Opolskie area in Poland, for 2009 and 2010 years, also average operating cycle for such group of organizations vary differ, in 2009 was short

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(about 5,89 days for 2009 data, with standard deviation = SD = 22,69 days) and in 2010 was shorter (about 3,59 days for 2010 data, with SD = 9,35 days). The data delivered from 80 selected nonprofits in Opolskie (Bopp 2011) suggests also that is no hard link between operating cycle and ROA and ROE results. Operating cycle policy must be first of all a slave of the best realization of the mission nonprofit organization. The economic results are important, but the second or even third in the queue of the aims. According to data received from 1000+ Polish NPOs, the average NPO investment in liquid assets is more aggressive than in for profit organizations. Average Polish NPO accounts receivable period for 2009-2010 data is about 23 days (5.8 days using winsorized mean and 5.8 days using truncated mean). Average Polish for profit accounts receivable period for 2009-2010 data is about 46 days (Dudycz 2011). Average Polish NPO inventory period for 2009-2010 data is about 4.7 days. Average Polish for profit inventory period for 2009-2010 data is about 39 days. The observation delivered from data of over 1000 selected nonprofits in Poland (Bopp 2011), suggests that here, in Polish NPO case we have situation typical for small risk sensitivity. Is it small risk exposition or rather smaller aversion of managing teams? Unfortunately, author believe that rather the second. That point will be the subject of next findings. CONCLUSIONS As was shown in our findings, depending on kind of realized mission, sensitivity on risk, NPOs should chose liquid assets investment level and resulting from that liquid assets financing. The kind of organization influence the best strategy choice. If an exposition on risk is greater, the higher level of inventories, accounts receivable and operating cash should be. If the exposition on that risk is smaller, the more aggressive will be the net liquid assets strategy and smaller level of inventories. The organization choosing between various solutions in liquid assets needs to decide what level of risk is acceptable for her owners and capital suppliers. That choice results with financing consequences, especially in cost level. It is a basis for considerations about relations between risk and expected benefits from the liquid assets decision and its results on financing costs for both nonprofit or for profit organizations. Decisions about liquid assets management strategy and choice between kind of taxed or non-taxed form inflow the risk of the organizations and its economical results during realization of main mission. Comparing the theoretical model with empirical data for 1000+ Polish nonprofit organization results, suggest that nonprofit organization managing teams choose higher risky aggressive liquid assets solutions than for-profit organizations. That observation suggest us that here, in Polish NPO case we have figure 6 situation with smallest risk exposition solution in managing team mind. But in fact probably there is not a smaller risk exposition but rather smaller aversion of managing teams. REFERENCES: Brigham E.F. (2006), Fiancial Management 11e, http://www.swlearning.com/finance/brigham/theory11e/web_chapters/bri59689_ch30_web.pdf (last visit: April 2011). Database of Polish NPO’s https://bopp.pozytek.gov.pl/, last visit 17.08.2011 Dudycz T., Rachunkowość (2011) http://rachunkowosc.com.pl/text/wskaz2009s.pdf Hamada, R.S. (1972) “The Effect of the Organization's Capital Structure on the Systematic Risk of Common Stocks,” The Journal of Finance, 27(2):435-452. Henderson J.W., T. P. Maness (1989), The financial analyst's deskbook: A Cash flow approach to liquidity, Van Nostrand Reinhold, New York

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Kim C-P., D. C. Mauer, A. E. Sherman (1998), The Determinants of Corporate Liquidity: Theory and Evidence, Journal of Financial and Quantitative Analysis, vol. 33, nr 3, september. Michalski G. (2010), Planning Optimal from the Firm Value Creation Perspective. Levels of Operating Cash Investments, Romanian Journal of Economic Forecasting , 13(1)/2010, ISSN: 1582-6163, Institute of Economic Forecasting, Bucharest, p. 198-214. Nowicki M., (2004), The Financial Management of Hospitals and Healthcare Organizations, Health Administration Press, New York 2004., p. 29 Washam J., D. Davis (1998), Evaluating Corporate Liquidity, TMA Journal, March / April, vol. 18, nr 2. Zietlow J., (2010), Nonprofit financial objectives and financial responses to a tough economy, Journal of Corporate Treasury Management, vol.3, nr 3., May 2010, Henry Steward Publications, ISSN1753-2574, p. 238-248. Zietlow J., J.A.Hankin, A.G.Seidner, (2007), Financial Management for Nonprofit Organizations, Wiley, NewYork, 2007; ACKNOWLEDGMENT The research is financed from the Polish science budget resources in the years 2010-2012 as the research project NN113021139 BIOGRAPHY Grzegorz Michalski is Assistant Professor at Wroclaw University of Economics. His main area of research are Business Finance and Financial Liquidity Management. He can be reached at Wroclaw University of Economics, Komandorska Street 118/120, p.Z-2, KFPiZW, PL53-345 Wroclaw, Poland, +48503452860, [email protected]

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THE UNCERTAIN FUTURE OF LIFO Peter Harris, New York Institute of Technology

Katherine Kinkela, New York Institute of Technology

ABSTRACT The Last in First out Inventory Method, (LIFO) is under intense scrutiny from many various groups, which may result in its complete elimination in the near future. There are pressures from the SEC to standardize financial reporting standards in light of the ongoing worldwide financial and economic unrest, in conjunction with the International Accounting Standards Board (IASB), coupled with the political pressures imposed by the U.S. Obama Administration to raise additional tax revenues; both of whom strongly oppose LIFO, resulting in its possible elimination by as early as December 31, 2014. A critical review of LIFO is examined, and its shortcomings addressed, which include: The “tax loophole” aspects of LIFO, leading to faulty asset management decision making processes,Balance Sheet and Income Statement limitations and the imposition of political pressures. Assuming a complete repeal of LIFO , recommends a host of tax and managerial opportunities available to the taxpayer to help ease in this transition.

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FOREIGN DIRECT INVESTMENT IN AFRICA: SECURING CHINESE’S INVESTMENT FOR A LASTING

DEVELOPMENT IN AFRICA Paulin Houanye, University of International Business and Economics

Sibao Shen, University of International Business and Economics

ABSTRACT At the end of the 20th century, when the investors were actively seeking for a favorable and secure place of their capital investment, the African continent has almost never appeared on their schedule. The most recent uncertainty experienced by financial markets as well as capital markets around the world and the increased demand of natural resources forced investors to focus on Africa. The most important investors turned permanently to the mainland unusually shortlisted. This situation, for over a decade, has put the whole of Africa, the developing countries as well as the industrialized ones, in an embarrassing position with a little high rate of foreign investment in the world. Regarding China's presence in Africa, it is not easier to discuss about African development without referring to the currently Chinese investment in Africa. In these past twenty years, its interest in Africa is growing significantly and arouses intense debates within the international community because it has a noble ambition to establish long term relationship with its African partners. This new state of affairs will inevitably generate a legal protection’s problem of the interests of each part. This article has examined the impact of the Chinese’s investment in African countries development regarding the foreign direct investment, how Chinese investors face challenges in Africa and what legal protection the host country provides to the investors to secure their profit and at the same time protect their own interest. JEL: K33 KEYWORDS: Foreign direct investment, foreign protection of international investment, developing

countries and regional integration.

INTRODUCTION

Historical evidence shows that the African continent has never appeared on the program of foreign investors, when they were actively seeking a favorable and secure place of their capital investment. The fundamental reason was the legal and judicial insecurity that prevailed in Africa after the 1960’s. But, the most recent uncertainty experienced by financial markets as well as capital markets around the world and the increased demand of natural resources forced investors to focus on Africa. The most important investors turned permanently to the mainland unusual shortlisted. This situation, for over a decade, has put the whole of Africa, the developing countries as well as the industrialized ones, in an embarrassing position with a little high rate of foreign investment in the world. As it relates to China's presence in Africa, it is not easier to discuss about African development without referring to the currently Chinese investment in Africa. China has become the leading country on foreign direct investment in Africa. For the last two decades, its interest in Africa is growing significantly and arouses intense debates within the international community because its foreign direct investment has increased exponentially and also for its noble ambition to establish long term relationship with its African partners. But China is not a new player in Africa, since it has invested in few African countries before such as Sudan. But during that time, the investment was very low and it is not worrying about protection. This new state of affairs will inevitably generate a legal protection problem of the interests of each part because the foreign investment is

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subjected to the law and administrative control of the host country and it therefore means that the guarantees afforded to the foreign investors must not jeopardize the States’ right to legitimate regulation. The purpose of this paper is to examine and explore the increasingly important economic impact of the Chinese’s Foreign Direct Investment (FDI) in West African countries development as it relates to the foreign direct investment, how Chinese investors face challenges in Africa and what legal protection the host country can provide to its foreign investors to secure their profit and at the same time protect its own interest.

China’s economic growth is leading China to increase its investment activities in Africa and makes it all the more relevant to African countries. It has become a “new” lender for African countries. This position is not determinate by the duration of its presence on the continent, but the exploding increase in amounts lent to African countries and by its importance as a lender outside the existing hegemony of development actors as Western donors. Then, there are needs to protect its investments to allow continuity for foreign direct investment.

This paper will review the evolution of Chinese Foreign Direct Investment in Africa by identifying the model of Chinese partnership with Africa, the prospects for China’s role in developing Africa’s infrastructure within the context of China’s new trend investment engagement in Africa before analyzing the various obstacles and challenges faced by Chinese investors and finally the setup of laws and regulation of the investment policy in the regional integration organization to improve, increase and protect foreign investment as well as Chinese investment in the region.

THE TRENDS OF CHINESE FOREIGN DIRECT INVESTMENT IN AFRICA

The last two decades, China has been rapidly becoming an important source of outward foreign direct investment and the recent profound increase has made an important change in Chinese foreign investment policy as well as in the world economy and geopolitical competition. Historically, China has had a long economic and political relationship with African countries which as far back as 500 years old. The landmark Bonding Asia-Africa conference in 1955 is seen as the foundation stone of Sino-African modern relationship. Despite some important economic projects, the relationship orientation between 1955 and the mid 1990's was mainly political. But the important period of their relations started when Chinese Government policy was initially the main determinant of outward foreign direct investment. Since 1990, the forces unleashed by the China Open Door Policy of 1979 created a significant momentum in China’s interest in the mainland continent. Presently, the primary focus is economic growth. Most Chinese companies have been moved into African countries in the last 5 years. In the context of China’s growing role as an investor in Africa, concerns over China’s investment behavior are being raised and Chinese enterprises are under increasing pressure to be more responsible global players and such efforts have been encouraged by the Government. Our purpose is to establish the Chinese “model” is a harbinger of a new international economic regime or a continuation of old ideas with a more modern dimension. China’s presence in Africa: a new economic partner for Africa development

Africa is the world's second-largest and second-most populated continent after Asia. It comprises of 54 independent countries with many cultures, heterogeneous customs and languages; but it is also known to be the world’s poorest inhabited continent despite its natural resources. China’s interest in trade and investment with African-home to over 1 billion of the globe’s poorest people and the world’s most formidable development challenge presents a significant opportunity for growth and integration of the Sub-Saharan continent into the global economy. China is not a new player in African continent and its economic and political presence, also its impact has grown exponentially in the last few years. This

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argues African countries to face a lot of new challenges for the China’s role on the continent. Like other parts of the world, Africa is really affected by the phenomenal growth of the Chinese economy. In the view of China aid strategy in Africa, the main motive for its partnership with African countries is to gain access to the abundant raw materials of Africa. This is the political foundation principle, which governs its establishment and development relations with African countries and regional organization. China’s contemporary policy for Africa is to focus on few factors that are important, such as its need for energy security driven by its domestic development strategy; new market and investment opportunity to establish export markets for its light manufacturing, services, agro-processing, apparel and communication offerings; diplomatic and development support for its “The one-china” principle; and forging partnership strategic. In its main co-operation driver’s way, “China will continue to strengthen solidarity and cooperation with African countries in the international arena, conduct regular exchange of views, co- ordinate positions on major international and regional issues and stand for mutual support on major issues concerning state sovereignty, territorial integrity….” China is the world’s second important consumer of oil and energy, with its limited national resources, its dynamic economic growth fuels an ever-increasing need for energy and strategic minerals. Africa is the best place to get these resources. China is attracted to Africa’s relatively underexploited petroleum and other natural resources since 1993 when it changed its policy from a net exporter to a net importer of oil. Sudan is the first African country that receives firstly Chinese investment for the oil in 1994. Ten years later, China was consuming 5.46 million barrels a day (bbl/d), outstripping Japan’s 5.43m bbl/d but still some distance from the United States’s 19.7m bbl/d. On investigation reports show that Chinese interest in Africa is for the foray into the continent’s energy business.

Another important reason of Chinese presence in Africa is economic interest, which aims to establish a new market and investment opportunities. Despite the small consumers market for African goods, the Africa trade relationship with China has had a significant impact on African economic growth and development.

China has been able to find a market for low-value consumer goods brought in by Chinese-dominated import companies and sold through a growing informal network of trading posts across urban and rural Africa. “Chinese products are well suited to the African market. At the time, China is in a position to manufacture basic products at very low prices and of satisfactory quality.” The Chinese private companies are actively investing in Africa with flexible and diversified means to invest. The number of private enterprises investing in Africa accounts for more than 70 percent of the total number of foreign enterprises investing in Africa. In the last decade, there are officially 820 Chinese enterprises being established in Africa and the trade volume between Africa and China is more than 29 billion Euros. China is now the second commercial partner of Africa since 2005. Its growing population and energy demand is pushing it to forge joint-partnerships with several African states rich in natural resources where China invests capital and develops the country’s infrastructure in exchange for employment and favorable terms for extracting raw materials to China. Agricultural investment in Africa has been encouraged by the government. Chinese investors have also established, in the textile and agro-industries, joint ventures whose aim is to export goods to the West at concessional rates by using the special provisions of the United States’ African Growth and Opportunity Act (AGOA) and the European Union’s Continuo Agreement.

During the radical revolution movement period which saw China’s youths lose a generation education for ten years, a slow economic production and trade, and virtually severed China's relations with the rest of the world. As a result China’s desire to be an economic power was set back significantly. This situation has made a critical change on the China’s foreign policies and led it to open the trade relations with the

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West. Since then, it started playing an active role in international organizations, and diplomatic relations were established with countries willing to recognize the People’s Republic as the government of China rather than the Nationalist government on Taiwan. On January 1st, 1979 China full diplomacy was recognized to the detriment of Taiwan. China’s insistence on recognition of its “the One-China” policy by African has forced it to provide deeply aid and investment to the mainland. Its economy had become the fastest growing economy in the world, in spite of not changing its communist political stance and it needed cheap resources that led it to Africa. Regarding how the relationship changed over time, what is the Chinese strategy to increase its investment in Africa?

Chinese Investment Model in Africa

Many factors have made China and Africa relationship to be distinct compared with the West relationship with Africa. China kept up an active menu of aid projects in more than forty-five African countries and its investment assistance to Africa in the form of building infrastructure boasts a long history. The Chinese model of investment in the continent brings in essence economic growth objectives and foreign policy together guiding trade and invest decision in Africa along with zero or near-zero percent interest financial and technical assistance. Chinese bid competitively for resource and construction projects using investment and infrastructure loans. Many Africans view Chinese investment in the continent as different from western investment. The neo-liberalism reform usually required by the World Bank under its “conditional provision” does not conduct Chinese investment model which aid by contrast comes without strings attached. China is having a profound impact on African economies by building a network of trade, aid and investment and some important infrastructures with close to fifty countries. Chinese investment in Africa is not only benefits to the Africans, but also to the Europeans and the Americans. China investment model by financing development projects in Africa as direct investment has very little interest for the western. In order to grow, African economies need some important infrastructures as well as Chinese investment, which helps these African countries to build roads, railways, hospitals and schools. In Africa, China is playing an important role by financing and providing much expertise development needed by the continent. The main trends of Chinese investment in Africa are:

- Chinese FDI structure which is based on the noble intention to establish long term relationships with African government is very different of Western countries model which is to involve private investors and does not undertake a long-term presence in the continent.

- Chinese investment encourages the development of infrastructure in Africa.

- Improved infrastructure facilitates the access for the African products to regional and international markets. African’s exports to China are increasing; while the trade between the other major continent markets and Africa is stagnated or regressed.

- Actually African’s imports from China are more diversified than its exports. There are three main types of products imported: machinery and transport equipment; manufactured goods and handicrafts products for improving local consumption and then contributed to the emergence of a consumer society in Africa.

- The creation of special economic zones exploited by the Chinese in African countries since 2006 should focus on value-added manufacturing by building the capacity of many African countries.

But Africa still has challenges in its relations with China because the Chinese’s trade does not seem to be directed towards an African, but it is consistent with China's policy as well as to reduce the country’s strain energy and the open markets opportunity for its light manufactured goods.

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New trend of Chinese investment in Africa

Africa provides China is a good opportunity to secure a sustainable access to raw materials, which are necessary for its growth. Africa is now a "laboratory" for Chinese manufactured goods. The breakthrough of the Chinese presence in Africa following four phases: firstly the oil, then minerals and construction, and finally exports with private operators, which is not necessarily related to the state apparatus. The fourth and last aspect constitutes the focal point of the trend of the new Chinese investment model in Africa. Recent developments of the Chinese presence on the continent focused on investments in the private sector and SMEs. With the Chinese government encouragement policy "Going out", many private companies have turned to Africa in recent years. In terms of number of projects, the vast majorities are not in natural resources areas. These investments provide favor to the business model and distribution that promotes not only an easier access of foreign companies, but also to promote and support the local economy development. Actually, the majority of Chinese enterprises in Africa are private companies. There are five factors leading them to invest and operate in Africa: the first one concerns the access to local market; the second one is the intense competition in domestic markets; the third is the transfer abroad of excessive domestic production capability; the fourth is the entry into new foreign markets via exports from host and the fifth one is its ambition for taking advantage of African regional or international trade agreements.

The Chinese enterprises are feebler to the risk than their Western counterparts. They are not subject to the same social and environmental safeguards. Most Africans are welcoming Chinese investment and products. The history of traditional Western aid and investment in Africa is one of a nagging "I correct you because I want what's best for you" parental-like stronghold over the continent. Tired of "the politically motivated, finger-wagging approach of western governments," Africans have welcomed China’s emphasis on pure business. Some of the key areas of Chinese investment, which align with improving the efficiency of resource extraction, are telecommunications, energy and physical infrastructure. These areas have traditionally been ignored by donors in Africa, who have instead favored social development programs such as education and health. Chinese companies are using some countries for its re-exports, particularly in the textile industries.

Reasons for investing in Africa As we mentioned above, the primary evidence of the Chinese private investment in Africa resulted of the both domestic and global factors. Since 1990, China had started an economic restructuring with recognizing the need to upgrade its manufacturing capacity for increasing its international competitiveness. The success of this economic restructuring policy led many new entrants into the market. But the inability to find sufficient domestic consumption had created excess production capacity and led many firms to look to establish operations overseas in new less challenging markets. On the order hand because both China and Africa are developing countries, Chinese private companies feel comfortable in investing in Africa and the commercial opportunities in Africa are so profound. Also, the introduction by the US government in the late 1990s of preferential textile quotas for Africa encouraged some Chinese firms to establish operations in African countries to exploit this opportunity. INVESTMENT RISK IN AFRICA

Risk is the potential that a chosen action or activity will lead to a loss. A common definition for investment risk is deviation from an expected outcome. The notion implies that a choice having an influence on the outcome exists. Potential losses themselves may also be called "risks". Almost any

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human endeavor carries some risk, but some are much more risky than others. People invest money to earn a return on their money, but often they receive less than expected—indeed, sometimes the return can be negative, when the investor receives less than the initial investment. With some investments, the entire investment can be lost. Investment risk is the chance that you will receive less than expected return from an investment, and differs according the type of investment. There are many types of risk that are caused by different factors, or which affect different investments to varying extents. Some factors affect most investments and are called systematic risks. Other risks, such as sector risks affect only a particular sector of the economy. Some risks are specific to a business or asset, and are called nonsystematic risks, or diversifiable risks, because such risks can be lowered by diversified investments. In general, the more active the investment strategy, the more an investor will need to pay for exposure to that strategy.

When investors are looking for a good profit, they also think about the potential risk associated to their investment in the host country. It is well known that investors make decisions based on a function that includes the rate of return and the risk of any investment choice: the higher the risk, the higher the required rate of return. Each investment carries its own particular risk-return ratios. However, in Africa, a number of environmental factors, external to the individual investment, tend to raise the risk, and thus, for any given rate of return, reduce the rate of investment. The African continent is considered as a high risk place for investment and there is a few reasons supporting this statement according to our understanding:

Political instability

Most African region is politically unstable because of the high incidence of wars, frequent military interventions in politics, and religious and ethnic conflicts. Except Ethiopia, Liberia and South Africa, the other African countries came to political independence later and more rapidly than those of other developing regions. The historical politic evolution of sub-Saharan Africa countries proved that in 1966 the average independent state in Africa had held sovereignty for 10 years less; its counterparts in the rest of the developing world had been independent for the better part of a century. Colonial structures of political control were both arbitrary and effective because of the boundaries cutting across historical patterns of politics and trade raison. This has contributed greatly to the various regional conflicts on the continent between neighboring nations, wars often tribal, ethnic, etc.

There is some evidence that the probability of war is very high in the region. Recently, Rogoff and Reinhart (2003) had computed regional susceptibility to war indices for the period 1960-2001 when they found that wars are more likely to occur in Africa than in other regions. Their study also pointed out that there is a statistically significant negative correlation between FDI and conflicts in Africa.

Benno Ndulu, Lopamudra Chakraborti, Lebohang Lijane, Vijaya Ramachandran, and Jerome Wolgin (2007) also argued that in the last two decades or so, Africa has experienced a debilitating descent of states into persistent internal conflict that has become an all-too-familiar phenomenon across the region. In fact, conflicts are now arguable the single most important determinant of poverty in Africa. Conflicts affect the economy through reduced investment in both physical and human capital, as well as through the destruction of existing assets, including institutional capacity, and these are reflected in reduced economic growth.

The incidence and severity of conflicts in Africa have had a robust, negative effect on the growth rate of income. The evidence showed that the countries that experienced civil wars had an average income 50 percent lower than that of countries that experienced no civil war and sometimes, the indirect cost of the war could be very higher than the direct cost because conflicts have always caused serious reversals in

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health and other human development aspects. As we see, political stability is one of the most important determinants of FDI in Africa.

Macroeconomic instability

Despite the fact that the macroeconomic stability has been achieved in most African countries now (low inflation, low public deficits), the investment environment is still uncertain because of investing in Africa is still riskier than doing so elsewhere. Instability in macroeconomic variables as evidenced by the high incidence of currency crashes, double digit inflation, and excessive budget deficits, has also limited the regions ability to attract foreign investment. More riskier in business, therefore more profitable. There is no doubt that firm investments are very low in Africa, pointing to other forms of uncertainties (political, regulatory, contractual, infrastructure). Investment and growth are higher in more stable countries in Africa and more recently evidence based on African data suggests that countries with high inflation tend to attract less FDI. Lack of policy transparency

In most sub-Saharan African countries, it is not very easy to accurately identify the specific aspects of government policy because of the political regime changes in several countries, also regional policy changes and lack of transparency in macroeconomic policy. The consequence of the lack of transparency in economic policy in a country is the increases in transaction costs due to strict regulation while reducing the incentives for foreign investment. In Africa, the situation is one of concern and needs to be contained.

The Chinese lending is generally suitable for Africa and often help to financing infrastructure and other projects which are the main needs of African countries. Unfortunately, we see that the Chinese lending is more willing to countries that have large debts outstanding or only in the resources rich countries. This increases the risk to debt sustainability of poor countries and lack of transparency in the process of negotiating loans with China. The loan agreements between China and African countries are not open to the public as well. This leaves a lot of power in the hands of a few African leaders and taints the process of transparency “effort already sick’’. The lack of transparency makes the conditions and the assessment of the debts very difficult. It also increases the risk that funds will not be used as intended and might be cases of illegitimate debt in the future. The lack of a favorable investment climate also contributed to the low FDI trend observed in the region as inhospitable regulatory environment. In the past, domestic investment policies were not conducive to the attraction of FDI. But since 1980, extensive efforts have been directed at generating economic recovery in West Africa. Much attention has been given to the need to promote investment because investment is essential in all West Africa country to promote the regional integration.

Information imperfections

If investment projects with high social returns exist in Africa, securing financing for them requires overcoming informational frictions. We trust that investment projects with high social returns exist in Africa and socially productive investment opportunities also exist on the continent, but it is not sufficient, the securing financing for them requires overcoming informational frictions. It is also necessary that potential external creditors be aware of such opportunities. Frictions are the most important variables explaining the geographic distribution of cross-border equity flows. The information-related variables explain a large share of the variance in the allocation of cross-border equity flows, with countries from which information flows freely receiving larger flows than those that are relatively more opaque. Informational frictions play also a prominent role in the literature on home bias in the allocation of

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financial portfolios, as well as in the analysis of herding and contagion in international capital markets. Information costs have also been cited to help explain why investors holding highly diversified international portfolios tend to react aggressively to “news” in the form of market rumors.

At least, informational frictions may help to explain why international lending by banks tends to have a regional bias. The information costs may represent an independent obstacle to investment in Africa. Informational frictions may be particularly severe in the case of Africa because of distance, isolation and poverty. The effects of distance and isolation are self-evident.

High protectionism

The low integration of Africa into the global economy as well as the high degree of barriers to trade and foreign investment has also been identified as a constraint to boosting Foreign Direct Investment (FDI) to the region. The relationship between openness and FDI flows to Africa must be very positive and suitable to the continent. There are also other factors that increase the low FDI flows to the region like the high dependence on commodities, the intensification of competition due to globalization which has made an already bad situation worse in Africa because globalization has led to an increase in competition for FDI among developing countries. The Weak law enforcement stemming from corruption and the lack of a credible mechanism for the protection of property rights are possible deterrents to FDI in the region. Foreign investors always prefer to make investments in countries with an effective legal and judicial system to guarantee the security of their investments. Investors can choose globally where to put their money and countries shouldn't make it too difficult for foreign investors if they want to get a benefice from that money. Sometimes, the African governments stifle investment by their regulatory policy whereas companies can only invest in big projects in countries where there is certainty and security for their profits and operations.

Table 1: African governments stifle investment

How much it costs to build a company

Some selected West African countries

Number of procedures

Time requested (days)

% of cost’s income

% of the minimum capital for income

Benin 9 63 189.2 377.6

Burkina Faso 15 136 325.2 652.2 Cote d’Ivoire 10 77 143.1 235.2 Mauritania 11 73 109.7 896.7

Niger 11 27 446.6 844 Senegal 9 58 123.6 296.1

Some selected Asian countries

Korean, Rep. 12 33 17.9 402.5 Malaysia 8 31 27.1 0

Singapour 7 8 1.2 0 Thailand 9 42 7.3 0

Source: http://rru.worldbank.org/DoingBusiness/default.asp. The table above shows the selected West Africa countries with some challenges that foreign companies may have to face for investment or start business in these selected countries.

Africa represents incredible potential. While capital flows have occurred quite successfully elsewhere, most notably in Asia, Africa has been left behind. Despite Africa’s enormous potential, low cost labor, and vast natural resources, investors, quite frankly, remain reserved. They are afraid of putting their money in a place which is often perceived as a continent affected by war, famine, AIDS, and corruption.

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Although specific financial mechanisms are necessary, they cannot address all the risks that confront businesses in Africa. Like everyone, Chinese investors also are facing all these challenges in Africa.

Since then Sino-African trade has continued to grow at an exponential rate, with China displacing the UK as Africa’s third largest trading partner behind the US and France. China accounts for nearly 20 per cent of Africa’s total exports and more than half of Africa’s exports to Asia. Across the continent the Chinese are multiplying investments in infrastructure, telecommunications and agro-businesses.

The uncertainty of the business environment in Africa and the fact that all or part of the investment costs are "sunk", the Chinese investor may also like all traditional investors adopt an attitude of "wait and see attitude’’. To avoid this situation at a time when the African continent need to raise the level of development, African countries need to innovate in the field of legislation and regulation of investment policies in order to make the business environment conducive.

LEGAL PROTECTION OF INVESTMENT IN WEST AFRICA

The provision of a legal protection to improve Chinese investment in West Africa must be a new challenge for this economics West Africa region (ECOWAS). China has pledged continuing development assistance and government-backed FDI to African countries. It pledged to double its investment in Africa by 2009 and to give Africa US$2 billion in preferential buyers' credits over the next three years. Chinese investment in Africa has focused on two main areas: infrastructure and human development. Chinese aid provides funding for highly visible and, to many minds, important infrastructure projects, which Western donors have long since stopped financing.

ECOWAS Investment policy Framework

Investment policy framework is a tool, providing a checklist of issues in policy domains for consideration by any national/regional government interested in creating an environment that is attractive to all investors and in enhancing the development benefits of investment to society.

Considered one of the pillars of the African Economic Community, the Economic Community of West African States (ECOWAS) is a regional integration organization which was founded in order to achieve "collective self-sufficiency" for its member states by creating a single large trading bloc through an economic and trading union. It also serves as a peacekeeping force in the region. The ECOWAS consists of two institutions to implement policies, the ECOWAS Secretariat and the ECOWAS Bank for Investment and Development, formerly known as the Fund for Cooperation until it was renamed in 2001. The region is a vast area of 5.1 million square kilometers with an estimated population of 300 million; its huge unharnessed water resources, arable land and large market make it an attractive place for investors. So it is a good place for Chinese investments and it has to provide a security panel for these investments. The Foreign Direct Investment’s issue has emerged in Africa as one of the flashpoints of the negotiations on the Economic Partnership Agreements context with European Union.

There are a number of actions that ECOWAS countries might take at the international level to help attract greater flows of Foreign Direct Investment. These are solely focused on getting investment to come, and have little to do with assuring the quality of the investment, or helping ensure that it fosters sustainable development in countries. These options involve signing some sort of international treaty committing to certain types of treatment for investors.

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Investment policy framework gives a list of questions under each theme to encourage policy makers to ask appropriate questions about their economy, their institutions and their policy settings and to help governments determine whether their policies are likely to encourage or discourage investment.

In the last two decades, the Member States of the community have become more determined to address the problem of low investment inflows into the region. The Economic Community of West African States has become more accommodating toward foreign direct investment as evidenced inter alia by changes in the regulatory regimes of most of the countries towards overseas investors and their investments.

As mentioned above, foreign investment is governed primarily by national law of the host state and this economic integration community is expected to provide a single economic space in which business and labor operate in order to stimulate great productive efficiency, higher levels of domestic and foreign investment, increased employment and growth of intra-regional trade and extra-regional exports. Recently, most countries in West Africa, in appreciation of the impact of the regional investment climate on national fortunes, have begun to adopt policies that improve their investment climate. The quality of investment policies directly influences the decisions of domestic and foreign investors. Transparency, property protection and non-discrimination are investment policy principles that underpin efforts to create a sound investment environment for all.

Investment policy principles under ECOWAS The West Africa regional Community has adopted some important elements of a more coherent and comprehensive investment policy framework including the followings:  Reviews of its policies and rules affecting investment and private sector development with a view

to improving the investment climate in their individual countries;  Greater adherence to relevant rules and instruments on Corporate Governance;  Reviews of costs and benefits of investment incentives and exchange views and experience on

their use and economic impact;  Intensified actions to remove obstacles to business development, in particular regulations and

administrative practices that obstruct or delay investment;  Greater emphasis on partnership in building human capacities and skills necessary for acquiring

and spreading the benefits of investment in the region;  Efforts and initiatives to develop a framework for the competitive functioning of their markets

which would include effective competition laws and the reform of economic regulations;  Initiatives to strengthen the capacities of investment promotion agencies to disseminate

information and to provide services to investors and encourage co-operation among these agencies at regional and international levels;

 Programs and projects to support small and medium sized enterprises and encourage their co- operation in regional projects; and

 Consultations between business groups, private sector associations, social partners and civil society organizations to explore the development of investment opportunities and to provide input to the decision making process on investment policies, laws and regulations.

The investment policy must set of laws and regulation to focus on issues as property and contractual rights, including intellectual property rights; the equal treatment of both foreign and national firms; removing the administrative obstacles to investment and Cost-benefit assessment of investment incentives.

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Investment security in West Africa

For many observers, the capacity of African countries to attract foreign direct investment is principally determined by their natural resources and the size of their local markets. The apparent lack of interest of foreign multinationals in African countries that have attempted to implement policy reforms has contributed to support this argument. The continent has been much less favored than Asia and Latin America over the past decade in attracting FDI. It has been argued that the reforms in many African countries have been incomplete and thus have not fully convinced foreign investors to develop activities that are not dependent on natural resources and aimed at regional and global markets. It takes time for a country to modify its image, especially when the State has a long tradition of policy intervention, and when the reforms have been mostly symbolic with the adoption of new texts. As market size and access to natural resources are crucial determinants in the foreign multinational decision processes, so is the investment security important.

The successful European integration model has considerable attraction and impact as an example for many other regional agreements like ECOWAS. EU is assisting ECOWAS in its harmonization of its various national investment policies into a regional one. Some established arrangements in ECOWAS region have already provided legal and regulatory framework for investments within the Community to operate, in order to access economies of scale in preparation to compete at multilateral level. To secure the Chinese investments in West Africa, it is now necessary to harmonize national laws of ECOWAS member States with a regional focus which will permit to abolish the uncertain and irrelevant provisions to promote transparency, and improve competitiveness of the regional economy.

With the putting in place of the regional investment code, locational choices of ECOWAS firms are now wider within an integrated regional market and investments of firms originating from non-ECOWAS member countries are now equally attracted to serve and exploit the consequent economies of scale and scope in the community. The codification of the regional investment policies is equally expected to mobilize investment as a driving force for economic growth and development of ECOWAS Community.

ECOWAS Investment Code seeks to provide the framework for designation of the region as a single investment location and is expected to enhance the regional investment climate.

CONCLUSION

It was discovered that West African countries have become more accommodating towards FDI over the last two decades, as evidenced inter alia by changes in the countries regulatory regimes. This changing stance towards FDI has also given rise to proliferation of investment promotion agencies, special economic zones and other targeted mechanisms by which ECOWAS countries aspire to attract foreign investors. It seems important and crucial firstly for the West African region to protect its domestic and foreign investments as well as Chinese.

Good laws are a very essential promotional tool and provide confidence to Investors and Government. Good laws clarify the role and responsibilities of private investors and Government, bind them to their respective rights and obligations, reduce the scope for discretionary decision-making, ensure transparency in administrative processes and certainty for investors, provide a basis for dispute resolution. Investment promotion is absolutely necessary but incentives should not distort regional competition for investors. ECOWAS shall create regional structures for implementing Community Investment Rules in promotion and facilitation of investments. The harmonization of the investment policies in the region into a single code is to simplify the investment regulatory regime.

The prospects for attracting and sustaining enhanced investment can be significantly improved when commitment to ECOWAS regional integration and the harmonization of investment policies based on a

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high level commitment to the key principles and best practices for successful investment policies prevail. So such simplification involves not only a business process but also cultural change in how ECOWAS nation states view those whom they regulate, and how those who are being regulated perceive the value and effectiveness of the regulatory processes.

In conclusion, our main question here will be to know if Chinese presence in Africa provides an advantage for the development of the regional organization or if the relationship between China and Africa is suitable for the regional organization or for some selected countries?

REFERENCES

Dr Jing, GU (2009) “China’s Private Enterprises in Africa and the Implications for African Development”, Institute of Development Studies, European Journal of Development Research Special Issue, Vol. 24, No. 1, (Forthcoming)

Onyeiwu, S. & Shrestha, H. (2004) “Determinants of foreign direct investment in Africa”, Journal of Developing Societies 20, p. 89-106

Basu, A. & Srinivasan, K. (2002) “Foreign direct investment in Africa: some case studies”, International Monetary Fund Working Paper, WP/02/61, March

Shola, O. (2007) “Sino-Africa Trade Relations”, Journal of the Washington Institut of China Studies, Spring, Vol.2, No 1, p. 98-105

Grace, Augustine (2008) “Chinese Activity in Africa”, Part 2: The Path of Least Resistance, August

Cai, C. (2006) “Outward Foreign Direct Investment Protection and the effectiveness of Chinese BIT Practice”, Journal of World Investment and Trade 7(5): 621-652

Benno, N. Lopamudra, C.; Lebohang L.; Vijaya R.; & Jerome W. (2007), “Challenges of African Growth Opportunities, Constraints and Strategic Directions”, The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Working Paper, p.3-9

Collier, P. & Patillo C. (2000) “Investment and Risk in Africa St Martin and Mc Millan”. Journal of International Trade and Economic Development 8 (1) pp. 53-71;

Akinlo, A. E. (2003), “Foreign direct investment and economic growth in Sub-Saharan Africa”, International Review of Economics and Business 50, p. 569-80

Konings, P. (2007) ‘‘China and Africa: Building a strategic partnership’’, Journal of Developing Societies, 23(3) p. 341-367

Erica Downs (2004), “The Chinese Energy Security Debate”, China Quarterly, no.177, March, pp. 21–41

Rogoff, K. & Reinhart, C. (2003), “FDI to Africa: the role of price stability and currency instability”. International Monetary Fund, Working Paper 03/10

He, “China- Africa Relations Moving into an Era of Rapid Development”, Inside, pp. 6

Zafar, A. (2007), “The growing relationship between China and Sub-Saharan Africa: macroeconomic, trade, investment, and aid links”. The World Bank Research Observer, Vol 22, Issue1, p.103-130,

Abraham, T. (2005), “Reviving an old dream of Afro-Asian cooperation”. YaleGlobal.

Aryeetey, E. & Udry, C. (2000), “Saving in Sub-Saharan Africa”, Harvard Center for International Development Working Paper No. 38.

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Lucy C. & Christopher B. (2006), “China’s Interest in Africa’s Construction and Infrastructure Sectors”, South Africa: DFID/ Centre for Chinese Studies, Stellenbosch University, Available at: http://www.ccs.org.za/downloads/DFID%203rd%20Edition.pdf, accessed September 30, 2011

Bigsten, & al. (1999b), “Exports of African Manufactures: Macro Policy and Firm Behaviour”, Journal of International Trade and Economic Development 8 (1) pp. 53-71

Joshua E. & Joshua R., (2003) “China must Play by the Rule in Oil-rich Sudan”, Alexander’s Gas and Oil Connections, vol. 8, no. 6, 21 August, p. 1.

Yao, G-M. (2008), “Africa: A promising land for Chinese Enterprises to Invest”, Africa Investment 1 (3):17

J.A. AREMU, “The Process of ECOWAS Investment Policies Harmonization”, ECOWAS Common Investment Market, Private Sector Development, P.2

Portes, Richard, Helene R., & Yonghyup Oh (2001), “Information and Capital Flows: the Determinants of Transactions in Financial Assets,” European Economic Review, Vol.46, pp. 783-796

Mohan and Kale, (2007) “The invisible hand of South-South globalisation: Chinese migrants in Africa”, The Development Policy and Practice Department, The Open University, Milton Keynes, MK7 6AA, UK, Page 7

Pierre-Antoine B., “Afrique, nouvel horizon chinois”, dans Le Monde du 10-12-2006, p.16

Nathalie F., “Les Chinois à la conquête de l'Afrique” » dans Le Nouvel Observateur, web, semaine du jeudi 11 mai 2006 - n°2166

Calvo, Sara and Carmen M. Reinhart (1996), " Capital Flows to Latin America: Is There Evidence of Contagion Effects?", in Guillermo Calvo, Morris Goldstein and Eduard Hochreiter (eds.), Private Capital Flows to Emerging Markets After the Mexican Crisis, Washington: Institute for International Economics, pp. 15 1- 17 1.

Adeyemi, Segun (2003). "West African Leaders Agree on Deployment to Liberia". Jane's Defence Weekly, 6 August

Central Intelligence Agency World Factbook 2009 (https://www.cia.gov/library/publications/the-world- factbook/)

Drafting of an Investment Policy Framework and Community Investment Code for the ECOWAS region Feasibility Investment Policy Framework, P. 3

BIOGRAPHY Paulin Houanye is a Phd Candidate, Researcher in International Investment Law at the University of International of Business and Economics since 2008. He can be reached at UIBE; Building 6 Room 547, No10 Huixin DongJie, Chaoyang District, Beijing, 100029, China; [email protected] Mr. Shen Sibao is the Dean，Professor of Law and Academic Advisor for the doctorate of law program at the University of International Business and Economics (UIBE) Law School. Member of the Group of Law of the Degree Commission under the State Council in China and the Chairman of China International Economic Law Studies Association and the Special Advisor to the Supreme Court in China. Since early 1990's, Mr. Shen Sibao has been the senior Arbitrator of the China International Economic & Trade

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Arbitration Commission and served as Vice-Chairman from 1996 to 2004. He can be reached at UIBE, 17th Floor, Building C, Grand Place, Huizhong Rd, Beijing, 100029, China, [email protected].

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INTEREST RATE RISK: SEVERAL STATISTICAL ANALYSES

Peter Harris, New York Institute of Technology K. Kallianotis, New York Institute of Technology K. Kasibhatla, New York Institute of Technology

Scott Liu, New York Institute of Technology J. Malindretos, New York Institute of Technology Steven Shapiro, New York Institute of Technology

ABSTRACT

We introduce a macroeconomic system which we use for interest rate determination. Then we generate the interest rate risk premium. Considering this risk premium function, we investigate, test, and determine the macro-variables which affect the interest rate risk premia by using a GARCH (p,q)and an ARC?H-M model. The empirical results examine ten different interest rate risk premia and fifteen factors. Factors with significant effects on risk premia are, the real risk-free rate of interest, the inflation rate, the unemployment rate, the growth of GDP and industrial production, the growth of national debt and current account deficit, the money supply growth, the yield differentials on S-T and L-T securities and other variables.

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CASE STUDY ON INVENTORY MANAGEMENT Leslie. Bobb, New York Institute of Technology James Dunne, New York Institute of Technology Peter Harris, New York Institute of Technology

ABSTRACT

We will prepare a case study of a real scenario high end restaurant (chain) which sells fish and liquor.Actual financial statements of the company will be the basis for evaluation. The case will center around effective inventory management for this high cost inventory-fish and wine. We will present the pros an cons of inventory buildup from different perspectives including ;the taxation and accounting inventory choices which will address including an analysis of the tax advantages of LIFO and LIFO buildup(LIFO Reserve), the cost of carrying inventory ,the investment return on this investment as well as stock out costs. Models such as the Economic Order Quantity (EOQ) and Just In Time (JIT) will be considered in this evaluation. This case study which will be interdisciplinary in nature can be used in a hospitality course capstone at the graduate or undergraduate level as well as a quantitative analysis , operations management and a taxation class.

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COMPARING FINANCIAL SYSTEMS IN A GLOBALIZED WORLD

Denis Wendt, University of Goettingen, Germany

ABSTRACT This study compares two basic types of financial systems in a global framework. It especially focused on the question if countries with an important stance of the capital markets set different incentives for international investors than a system where banks are the leading part in financing projects. It could be assumed that in countries where the capital markets are huge and liquid the investor protection is better too and therefore create an incentive for foreign long- and short-term investors to place a corresponding investment. Moreover the type of the financial system should have an impact on the international trade of goods, particularly if you treat the financial system and in connection with that the capital access as a component of the production function of an economy. Because of an expected dissimilar access to capital and different rates of innovation, the integration in the global trade could be different between economies with a significance of stock and venture capital markets and those with major banking systems. The same may be true with respect to the volatility of the business cycle, due to different degrees of specialization and a more or less probability of banking crises. Furthermore the study analyses the globalization of banks and shed light into that research area. Former studies show that profitable banks are doing direct investments abroad. Structural aspects like the size of the capital market and the market concentration could determine the profitability of banks and hence their engagement in the world. Last but not least this research work also has a look on the deposit holding and the life insurance penetration, which should differ in general owing to differences in asset holding and the social security net and the price of life insurance products in particular. Altogether the study detects several varieties in the above mentioned variables and shows that the type of financial system is important for them. JEL: E32; F40; G15; G21; G22 KEYWORDS: Business Cycle, Financial System, Globalization, Life Insurance. BIOGRAPHY Denis Wendt is a research associate at the Chair of International and Monetary Economics at the University of Goettingen, Germany. His special research interests are money and currency political implications of the globalization, financial structure analyses and international financial markets. Tel: +49 551 39 7294; fax + 49 551 39 22054; e-mail: [email protected]

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IS THE IRS A SORE LOSER? Laura Lee Mannino, St. John’s University

ABSTRACT

Like all administrative agencies, the Internal Revenue Service is given a fair amount of authority to enforce the laws enacted by Congress. Taxpayers often question the amount of authority granted to the IRS, and whether such authority is abused. In some situations this questioning of authority leads to litigation, resulting in both wins and losses for the IRS. From time to time, the IRS will respond to losses by creating a new rule or amending an existing one. Recent examples in the judicial system highlight the issue of administrative authority, and beg the question: Is the IRS a sore loser? INTRODUCTION Congress delegates certain authority to the Treasury Department through the Internal Revenue Code (Code). For example, Congress states that “the administration and enforcement of [the Code] shall be performed by or under the supervision of the Secretary of the Treasury.” In addition, “the Secretary shall prescribe all needful rules and regulations for the enforcement” of the Code. It is pursuant to these grants of power from Congress that the Treasury Department and the Internal Revenue Service (IRS) issue regulations. Taxpayers have questioned the IRS’s powers in a series of recent cases, and the IRS has responded by exercising even more authority. RECENT CASES FICA and Medical Residents In recent years the IRS has been battling with hospitals over whether stipends paid to medical residents are subject to Federal Insurance Contributions Act (FICA) taxes. A “student” that works for a “school, college, or university” is exempt from FICA under an exception in the Code, and many hospitals have claimed that their residents are students and are therefore eligible for the exemption. The argument rests on the fact that the purpose of a residency program is to train new doctors and provide them with the experience necessary to obtain their licenses to practice medicine. Regulations previously in effect expanded on the statutory language. The prior regulation stated that the determination of whether an employee was a student would be based on “the relationship of [the] employee with the organization for which services are performed.” Further, an individual who performed services “in the employ of a school, college, or university, as an incident to and for the purpose of pursuing a course of study at such school, college, or university” would be considered a student. In addition, the prior regulation held that the term “school, college, or university” should be “taken in its commonly or generally accepted sense.” Mayo Foundation is a not-for-profit organization having medical education and scientific research as its charitable purposes. Under the umbrella of Mayo Foundation is the Mayo Graduate School of Medicine which operates roughly 150 residency programs. Approximately 1,000 residents participate in the programs at any given time, with a typical residency lasting from three to seven years. Residents are required to attend lectures, read, and take examinations, however the bulk of their learning is clinical in nature and occurs from doing rounds with attending physicians. Residents spend anywhere from fifty to

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eighty hours each week doing rounds. They are not hired or fired, but rather must apply and be admitted into the program. Further, there is no expectation of continued employment after the residency program is completed. Residents do not pay tuition but instead receive a stipend, which for the years at issue ranged from $40,000 to $60,000. The taxation of these stipends was the issue in Mayo Foundation v. U.S. Both Mayo Foundation and the IRS agreed that the stipends were subject to income tax. However, they disagreed as to whether the stipends were subject to FICA. Mayo Foundation believed that the residents were within the student exception and the stipends were not subject to FICA. Mayo Foundation argued that it was a “school, college, or university” and that its residents were “students,” as those terms are used in the Code and interpreted by Treasury Regulations then in effect. Since the regulations provided that the term “school, college, or university” should be taken in its generally accepted sense, Mayo Foundation provided dictionary definitions to show that it easily fell within the terms. It also provided credible testimony from residents that the only reason they enrolled in the residency program was to learn. The government argued, on the other hand, that a “primary purpose” test should be applied in order to determine whether an organization is a school, college or university. Since Mayo Foundation’s primary purpose was patient care, argued the government, it should not be treated as a school, college or university. With regard to whether residents could be considered students, the government argued in the negative because the services performed by the residents were not “incident to learning” as the regulation required. The government argued that the opposite was true; because the residents worked between fifty and eighty hours per week, the learning was incident to the services, and therefore the statutory exception was not satisfied. The Federal District Court for the District of Minnesota held for the taxpayer. Mayo Foundation was considered by the court to be a school, college or university and the residents were considered to be students. Therefore, the stipends paid to them were not subject to FICA. In its opinion, the court specifically rejected the arguments put forth by the government. First, the district court pointed out that a “primary purpose” test shouldn’t be read into the regulation because it did not in fact contain such requirement. The court further note that even if a “primary purpose” test applied, the taxpayer would satisfy the test because the taxpayer is a non-profit institution having medical education and scientific research as its charitable purposes. With regard to the government’s argument as to why residents could not be considered student, the district court stated that “[t]ime alone cannot be the sole measure of the relationship between services performed and a course of study.” Within a few months of its loss in Mayo Foundation, the IRS issued amended regulations. Pursuant to the amended regulation, an organization is a school, college, or university as that term is used in the Code “if its primary function is the presentation of formal instruction, it normally maintains a regular faculty and curriculum, and it normally has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on.” The amended regulation also changes the definition of student. Although the regulation still states that an employee shall be treated as a student if the services provided are incident to and for the purpose of pursing a course of study, it now says that the educational aspect of the relationship between the employer and employee must be “predominant.” The regulation expands on this predominance factor, stating that “[t]he evaluation of the service aspect of the relationship is not affected by the fact that the services performed by the employee may have an educational, instructional, or training aspect. Further, the

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regulation states that a full-time employee – defined as someone who regularly works forty hours or more per week – cannot be considered a student because the services of a full-time employee are not incident to education. It is interesting to note that the IRS’s new interpretations of the terms “school, college, and university” and “student” were those specifically rejected by the Federal district court in Mayo Foundation. Statute of Limitations The IRS is currently litigating an issue relating to the statute of limitations for audits. Generally, the IRS has three years from the filing of a Federal income tax return to assess an additional tax. However, the Code provides that the statute of limitations is extended to six years when a taxpayer “omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return.” If a taxpayer improperly overstates the tax basis of an asset, the result is an understatement of income from the sale of the asset. The issue in these cases is whether the understatement of income that results from an overstatement of basis is considered an omission of income, thereby triggering the six-year statute of limitations. The U.S. Supreme Court addressed this issue in 1958 in Colony v. Commissioner. Colony involved a corporation in the real estate business which overstated the basis of land it sold. The result was an understatement of gross income that was more than twenty-five percent of the gross income shown on the return. The IRS argued that the extended statute of limitations applied, and the Court of Appeals for the Sixth Circuit agreed. However, the U.S. Supreme Court reversed on appeal. The Court examined the legislative history of the statutory language and determined that Congress intended the extended statute of limitations to apply only in situations where a taxpayer “actually omitted” an item of income and not when there are “errors in computation arising from other causes.” The Court further explained:

Congress manifested no broader purpose than to give the Commissioner an additional [number of] years to investigate tax returns in cases where, because of a taxpayer's omission to report some taxable item, the Commissioner is at a special disadvantage in detecting errors. In such instances the return on its face provides no clue to the existence of the omitted item. On the other hand, when, as here, the understatement of a tax arises from an error in reporting an item disclosed on the face of the return the Commissioner is at no such disadvantage. And this would seem to be so whether the error be one affecting “gross income” or one, such as overstated deductions, affecting other parts of the return.

Accordingly, the Court held that the extended statute of limitations does not apply to understatements of gross income due to overstatements of basis. In 2007, the U.S. Tax Court addressed whether Colony applies outside the context of a trade or business in Bakersfield v. Commissioner. Bakersfield involved a limited partnership which overstated its basis in oil and gas property. The IRS claimed that Colony only applied in the context of a trade or business, and since Bakersfield involved an investment the six-year statute of limitations should apply because the taxpayer’s basis error resulted in a substantial omission of gross income. However, the Tax Court held against the IRS on the basis that it was bound by Colony and therefore the three-year statute of limitations applied. The IRS appealed to the Court of Appeals for the Ninth Circuit, which affirmed the Tax Court. In so holding, the Ninth Circuit noted that the Supreme Court in Colony “did not even hint that its

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interpretation of [the Code] was limited to cases in which the taxpayer was engaged in a ‘trade or business.’ There is no ground for suggesting the Court intended the same language…to apply differently to taxpayers in a trade or business than to other taxpayers.” The IRS didn’t give up, however. In 2009, the IRS asked the Tax Court to reconsider its Bakersfield holding in Intermountain v. Commissioner. The taxpayer in Intermountain, a partnership, filed its 1999 Federal income tax return on September 15, 2000 which contained a loss which was overstated due to an overstated basis. On September 14, 2006, just one day less than six years later, the IRS issued a notice of Final Partnership Administrative Adjustment (FPAA). The taxpayer claimed that the FPAA was untimely because the three-year statute of limitations had long expired. Further, the taxpayer cited Bakersfield for the proposition that an overstatement of basis does not trigger the six-year statute of limitations. The IRS, however, claimed that the Tax Court had incorrectly decided Bakersfield. The Tax Court disagreed with the IRS, stating that Bakersfield “is directly on point.” Expressly declining the IRS’s “invitation to overrule it,” the Tax Court reaffirmed its holding in Bakersfield and held once again that the six-year statute of limitations is not triggered by an overstatement of basis. The IRS issued temporary regulations in September 2009, less than a month after the Tax Court ruled against it in Intermountain. The temporary regulations state that “an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income” for purposes of the extended statute of limitations. QUESTIONS PRESENTED Is the IRS permitted to create or change a rule following a loss in the judicial system? If so, can the new rule reflect a position that contradicts a court’s previous interpretation of a statute? DISCUSSION The U.S. Supreme Court recently answered the first question with a resounding “yes.” The Court was not troubled at all in Mayo Foundation v. U.S. by the fact that the Treasury Department changed the regulations relating to the student exception to FICA as a response to adverse litigation. To the contrary, the Court stated that it “found it immaterial to [its] analysis that a ‘regulation was prompted by litigation.’” The Court amplified the point by noting that in the past it has “expressly invited the Treasury Department to ‘amend its regulations’ if troubled by the consequences of [its] resolution of the case.” The Supreme Court has stated that an administrative agency’s interpretation will be upheld if Congress did not speak directly to the question at issue and if the regulation is a permissible interpretation of the statute. It has been noted, however, that more than one permissible interpretation can exist. Accordingly, the Treasury Department can amend an otherwise reasonable regulation in response to adverse litigation as long as the amended regulation is also a permissible, albeit different, interpretation. Ultimately, Mayo Foundation was resolved by the Supreme Court in favor of the government. The Court concluded that the amended regulation is a reasonable interpretation of the statutory language. The result is that medical residents are not students, and the stipends they receive are subject to FICA.

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The current status of Intermountain also favors the government. Reversing the Tax Court opinion, the Court of Appeals for the District of Columbia recently upheld the current regulation which states that an overstatement of basis triggers the six-year statute of limitations. Given the current split among the circuits, however, this issue is far from over. UNRESOLVED ISSUE What if the court that had previously interpreted the statutory language was the Supreme Court of the United States, and it had held that the statutory language is clear and unambiguous such that an administrative interpretation is unnecessary? Can the IRS still issue a regulation in response to the adverse litigation? Such is the situation in Intermountain. The current regulation appears to conflict with the Supreme Court’s holding in Colony. The IRS argues that no conflict exists because Colony involved an overstatement of basis within the context of a trade or business, whereas Intermountain occurs outside of such context. This statute of limitations issue has arisen in other factually-similar cases in several circuits with varying results. In January 2011 the Seventh Circuit Court of Appeals held for the government in one such case, Beard v. Commissioner. Following its loss, the taxpayer in Beard filed a Petition for a Writ of Certiorari with the U.S. Supreme Court. On July 29, 2011, the government filed an acquiescence, which means that although it agrees with the Seventh Circuit’s holding, the government concurs that the Supreme Court should hear the case. Given this acquiescence, it is expected by some that the Supreme Court will grant Certiorari in Beard, thereby resolving the question for all circuits. CONCLUSION The Supreme Court has recently reiterated that the IRS is permitted to create or amend a regulation following a loss in court. As long as the regulation is a reasonable interpretation of the statute, it is not inappropriate for the new regulation to conflict with a court’s previous holding. Whether that also applies to holdings of the High Court remains to be seen. The Supreme Court will respond to the Petition filed in Beard when it resumes in October. REFERENCES IRC § 3121(b)(10)

IRC § 6501(a)

IRC § 6501(e)(1)(A)

IRC § 7801

IRC § 7805

Treas. Reg. § 31.3121(b)(10)-2(c)

Treas. Reg. § 31.3121(b)(10)-2(d)(3)

Treas. Reg. § 301.6229(c)(2)-1T

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Treas. Reg. § 301.6501(e)-1T

Treas. Reg. § 31.3121(b)(10)-2(Pre-T.D. 9167)

Mayo Foundation v. U.S., 562 U.S. __ (2011)

Chevron v. U.S., 467 U.S. 837 (1984).

Colony v. Commissioner, 357 U.S. 28 (1958)

Beard v. Commissioner, 633 F.3d 616 (7th Cir., 2011).

Intermountain v. Commissioner, __ F.3d __ (D.C. Cir., 2011), 2011-2 USTC ¶ 50,468, rev’g 98 TCM 144 (2009).

Mayo Foundation v. U.S., 568 F.3d 675 (8th Cir., 2009), aff’d 562 U.S. __ (2011).

Bakersfield v. Commissioner, 568 F.3d 767 (9th Cir., 2009)

Colony v. Commissioner, 244 F.2d 75 (6th Cir., 1957), rev’d 357 U.S. 28 (1958)

Intermountain v. Commissioner, 134 T.C. 211 (2010).

Bakersfield v. Commissioner, 128 T.C. 207 (2007), aff’d 568 F.3d 767 (9th Cir., 2009)

Intermountain v. Commissioner, 98 TCM 144 (2009).

Mayo Foundation v. U.S., 282 F.Supp. 2d 997 (Minn., 2003)

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THE IMPACT OF IFRS FOR SMES ON THE ACCOUNTING PROFESSION, EVIDENCE FROM FIJI

Fazeena Fazneen Hussain, The University of the South Pacific Priyashni Vandana Chand, The University of the South Pacific

Prena Rani, The University of the South Pacific At the turn of the millennium, the many corporate collapses, business failures and fraudulent financial reporting scandals tarnished the reputation of accountants, giving rise to a credibility crisis for the accounting profession. The profession struggled to rebuild its reputation and desperately searched for a solution. At the same time, the growth of financial markets, resulting in increased investment opportunities in capital markets and the international orientation of businesses created the need for a common reporting framework, which would provide reliable and comparable accounting information across borders. The constantly changing information needs of users of financial reports and the increasing use of fair value added to the many challenges facing the accounting profession. All this resulted in a major restructure in the financial reporting framework leading to the development of the International Financial Reporting Standards (IFRS) and the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) by the International Accounting Standards Board (IASB). Almost 66 jurisdictions around the globe have already adopted or plan to adopt IFRS for SMEs as their principal financial reporting standard for small and medium sized reporting entities, with or without revisions (IFRS Foundation, 2010). Fiji is not far behind from other developed countries when it comes to adoption of international reporting standards as this is evidenced by the early adoption of IFRS by large reporting entities beginning January, 2007 and IFRS for SMEs by small and medium-sized entities from January, 2011. Prior literature has mostly examined the impact of IFRS for SMEs on small and medium sized entities (see, for example, Eierle & Haller, 2009; Alp & Ustundag, 2009; Paseková, et al., 2010), but so far, there has been no published work examining the impact of the standard on the accounting profession. The decision by the Fiji Institute of Accountants to adopt IFRS for SMEs so early since the enactment of the standards will obviously bring about a number of challenges to the accounting profession in Fiji and affect the future of the profession in a number of ways. Although accountants in Fiji have demonstrated that they can deal with the full suite of IFRS, the adoption of IFRS for SMEs, a much simpler form of reporting, will pose a set of challenges that the profession did not face when dealing with IFRS. This study therefore aims to examine the challenges faced by the accounting profession in Fiji in adopting IFRS for SMEs in terms of benefits, limitations, preparedness, capacity, educational resources, training support and overall transition to the new reporting framework. Understanding the impact of adopting globalised accounting standards in emerging economies would help us identify the benefits and limitations of such adoption as well as identify the potential factors that are necessary for a successful transition, thereby allowing us to better prepare ourselves for the adoption. We conducted in-depth interviews in order to get perceptions of practitioners on the issue. These practitioners were randomly selected from the big 4 and the non-big 4 accounting firms in Fiji.

The results indicate that the adoption of international reporting standards by emerging economies are important decisions, which require considerable thought on the part of standard setters and regulatory bodies. While benefits from adoption of such reporting frameworks are imminent in developed countries, it is still too soon to comment on whether such benefits would be realized in emerging economies like Fiji. The institutional and regulatory frameworks in developed economies is significantly different from

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that in emerging economies and for that reason, reporting standards developed in these economies may still be complex for reporting entities in emerging economies. Thus, adequate revisions are necessary to ensure that the requirements of the standard are applicable and suitable to our reporting environment. The transition to IFRS for SMEs from Fiji Accounting Standards is likely to pose a number of challenges for practitioners in Fiji, including meeting training and educational requirements, SME information needs and justifying to SMEs the need for a globalised reporting framework among many others. The results also indicate that the big 4 have a competitive advantage over the non-big 4 in adopting international standards as their international counterparts provide substantial resources, expertise and training support to them. The big 4 firms are hence in a much better position to adopt international standards like IFRS for SMEs. However, small and medium sized reporting entities are more concerned about the costs associated with the transition rather than the perceived benefits from such an adoption. While the results merely summarize the perceptions of accountants on the issue concerned, it may not be advisable to draw conclusions on the matter so early in the transition. In conclusion, a single set of reporting standards for all small and medium sized reporting entities should result in a more transparent principles-based reporting that enhances comparability and consistency. While SMEs in many jurisdictions have been subject to reporting under national accounting standards, such standards deter comparability of financial statements and are usually out-dated. A number of jurisdictions around the globe have therefore adopted IFRS for SMEs and in doing so; have faced quite a number of challenges. These challenges have particularly affected the accounting profession in such jurisdictions in a number of ways. Further, the reporting requirements under IFRS for SMEs are such that most of it may still not be applicable to SMEs in emerging economies like Fiji. This suggests that wherever guidance is not provided under the new reporting framework or is provided but not applicable to the current reporting environment, practitioners may refer to the old set of standards for guidance. In other words, careful consideration must be given in deciding whether the full set of IFRS for SMEs should be adopted by emerging economies, or should they use IFRS for SMEs as a reference point in developing their own standards or should such economies adopt IFRS for SMEs with necessary modifications to suit their reporting needs. For that reason, it is advisable for regulatory bodies in emerging economies to give considerable thought to the adoption of IFRS for SMEs and engage in wider consultations before deciding on the matter. REFERENCES Alp, A. & Ustundag, S. (2009). Financial reporting transformation: the experience of Turkey. Critical Perspectives on Accounting, 20, 680-699. Eierle, B., & Haller, A. (2009). Does size influence the suitability of the IFRS for Small and Medium- Sized Entities? – Empirical evidence from Germany. Accounting in Europe, 6(2), 195-230. IFRS Foundation. (2010). IFRS for SMEs World Standard Setters Meeting London. London, UK. Paseková, M., Müllerová, L., Strouhal, J., & Chyzhevska, L. (2010). IFRS for SMEs: Challenge for Emerging Countries? Case of Czech Republic and Ukraine, World Academy of Science, Engineering and Technology, 66, 1691-1694.

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PREFERENCES FOR PERFORMANCE BASED EMPLOYEE REWARDS: EVIDENCE FROM SMALL

BUSINESS ENVIRONMENTS Susan J. Kowalewski, D’Youville College Suzanne L. Phillips, D’Youville College

ABSTRACT

Rewarding and motivating employees is extremely important to organizations because employees are a critical resource for success. The primary objective of this paper was to determine if there are gender based employee preferences for performance rewards in small business environments. The results of this research indicate that social rewards were more valuable than economic rewards that would be valuable to small business owners and managers to develop programs to reward and motivate their employee. INTRODUCTION Employees are a critical resource for small business owners and managers. They need to be motivated and rewarded so they recognize how vital they are to the organization. This in turn will inspire employees to contribute to the company’s ability to grow and expand; increasing retention and decreasing turnover. However, small businesses typically have limited resources for providing incentives and performance rewards for their employees. The opportunity for an employee's advancement may also be constrained in a small business because there is typically no organizational chart or corporate ladder to climb. The combination of a small business owner’s limited resources and their dependence on highly motivated employees makes it extremely important that the employer provide incentives and rewards that the employee values. Understanding gender influences in this respect can assist in developing reward and incentive programs that are of value to the employee. There have been several studies conducted over the past 50 years that explored the differences between male and female perceptions regarding work satisfaction, work-related rewards and values (Kovach, 1995; Marini, Fan, Finley, and Beutel, 1996; Mottaz, 1986; Ross and Mirowsky, 1996; Schul, Remington, and Ben, 1990). This topic was first considered due to the increase in the number of females in the workforce during the post-World War II era. During the feminist movement of the 1960’s and 1970’s, the driving force behind these studies was the lower-paying positions afforded to most females. As women continued to attain higher level positions and commensurate higher pay, the focus shifted to potential differences in leadership styles of female managers in contrast to their male counterparts, as well as motivational factors for female employees as compared to those for males. The primary objective of this study was to determine if there are gender based employee preferences for performance rewards in small business environments. All of the studies referenced focused on larger companies or specific sectors of industry. There is limited research that looks at how gender influences employee preferences for performance rewards and motivational incentives in the small business environment. In addition, the information available is not current with the most recent studies occurring during the late 1990’s. Since small business as a vital part of the United States (US) economy, additional current data to assist small business owners and managers related to reward programs is needed.

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LITERATURE REVIEW In evaluating intrinsic and extrinsic rewards, organizations need to understand that “to change employees’ behavior and motivate them to improve their performance, you must influence their perception of how you reward them for their behavior and performance” (Bragg, 2000). The relationship between what employees (of either gender) value and consider motivational versus what supervisors believe should motivate the employee is also important to consider. Kovach (1995) compared results of three surveys distributed to industrial employees concerning employee and supervisory rankings of ten motivational items. This study was originally conducted in 1946, repeated in 1981, and conducted again in 1995. Differences were noted in the rankings for employees between 1946 and 1995. In 1946, US citizens had recently experienced a depression and war. In 1995, after 35 years of relative prosperity, the list of what workers wanted from their work had changed significantly. As part of the same survey, supervisors were asked to rank the list of job rewards as they believed the employees had ranked it. There was virtually no change in the responses from the 1946, 1981, and 1995 surveys. The supervisor rankings were: 1. Good wages 2. Job security 3. Promotion and growth in the organization 4. Good working conditions 5. Interesting work 6. Personal loyalty to employees 7. Tactful discipline 8. Full appreciation of work done 9. Sympathetic help with personal problems 10. Feeling of being in on things. Based on the responses from the supervisors and employees, it was clear that there was a significant disconnect between what employees valued and what supervisors believed employees valued. It appeared that rewards and incentives supervisors offered did not correspond with what workers desired. Kovach (1995) also looked at several subgroup comparisons, including male versus female responses. He found that there was no significant statistical difference in the ranking of rewards found between men and women. In terms of the actual ranking of values, females ranked “full appreciation of work” in first place while men ranked it in second place. “Sympathetic help with personal problems” was ranked seventh by females and tenth by males. The author suggested that female employees may place greater importance on interpersonal relationships and communication than male employees. The conclusion drawn by Kovach (1995) was “Employee motivation is a key factor in determining long-term employer success levels. Yet, ironically enough, it is an area overlooked by many organizations . . . in most organizations, the time to address this issue was yesterday” (p. 107). Schul, Remington, and Ben (1990) examined potential gender differences in an industrial sales force and the relationship between a set of supervisory behaviors (i.e. reward and punishment behaviors) and three key performance outcomes: job satisfaction, organizational commitment, and work motivation. Work motivation was analyzed in terms of extrinsic and intrinsic motivation. The influential factors for extrinsic motivation included money, promotions, and praise from a supervisor. Intrinsic motivation came from the satisfaction a person gets from the task itself, or in completing the task successfully. Schul et al. (1990) found that for both males and females, supervisory contingent reward (CR) behavior positively affected job satisfaction and organizational commitment. Supervisory CR behavior consisted

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of giving praise, recognition, and acknowledgement to employees based on effective performance of the task. CR behavior positively influenced females’ extrinsic work motivation, but had no effect on either the male salespeople’s extrinsic work motivation or the intrinsic work motivation of either gender. According to Schul et al. (1990) non-contingent reward behavior had no effect on male or female salespeoples’ job-related outcomes. This type of behavior (granting of approval and recognition without making it contingent on performance) was not viewed as overly negative by either male or female respondents. The authors also found that contingent punishment positively influenced male salespeoples’ extrinsic and intrinsic work motivation, while it had little effect on females. However, supervisory non- contingent punishment negatively influenced male salespeoples’ job satisfaction, work motivation and organizational commitment, with only limited effects on female salespeople’s’ work-related attitudes. The authors believed that when a manager exhibits arbitrary behavior (non-contingent reward and/or punishment), the employee’s identification with the job, relationships with people on the job, and the organization were weakened. Ultimately, the study conducted by Schul et al. (1990) identified more similarities than differences among male and female industrial salespeople in terms of how they respond to supervisory reward and punishment behavior. Mottaz (1986) conducted a study that focused on the following related issues: (a) the extent that men and women differ in overall work satisfaction, (b) possible gender differences in perceived work rewards, (c) possible gender differences in work values, and (d) possible gender differences in the determinants of work satisfaction. Based on his study, Mottaz (1986) concluded that there was no significant difference between men and women in their rating of overall work satisfaction. With regard to work related values, men assigned greater importance to promotional opportunities while women regarded task involvement along with friendly and supportive supervision as more important. He also found that there was a difference in the determinants of work satisfaction for men and women. For men, task autonomy was a significant predictor of overall work satisfaction; for women friendly and supportive relationships with supervisors were significantly more powerful determinants. However, he qualified the results of his study with the following statement, “It is clear that the pattern of gender differences in work is considerably influenced by the type and sample studied and the area of work considered” (p.374). Ross and Mirowsky (1996) conducted a study to examine interpersonal work rewards as potential alternatives to economic rewards. The purpose of the study was to determine if the theory of compensating differentials, which was used to explain why women choose jobs that pay less, was valid. The theory suggested that subjective utility, measured as psychological well-being and personal control of earnings, was greater for men, whereas interpersonal rewards were of greater importance for women. The researchers tried to understand if non-economic rewards, rather than earnings, contributed significantly to the work satisfaction of women, knowing working women earn approximately 70% of the salary of working men. According to the theory of compensating differentials, the employer must offset the negative effect of working conditions with sufficient pay to make the overall utility of the job positive for men. However, because women were willing to accept lower paying jobs, it was believed that these jobs must offer benefits other than high pay. It was concluded that men must value money more than women if the theory is true. However, the results of the authors’ study did not support the theory of compensating differentials. Their study found that men and women valued pay equally highly, and that men and women agreed on the characteristics of a good job. Both men and women ranked the feeling of accomplishment, high income, chance for advancement, job security, and short working hours identically (most to least preferred). They also concluded that women value money slightly more than men, not less; men value fewer work hours slightly more than women, not less. Ross and Mirowsky (1996) concluded that although women did not value economic rewards less or noneconomic rewards more than did men,

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women get economic rewards less and noneconomic rewards more than men do. Compared to men, women received more appreciation for their work and more recognition from others while getting lower earnings. As can be determined from the existing literature, not only have the studies of gender influences on reward and motivational preferences provided mixed results, but there is a notable lack of recent research in this area, limiting the applicability of early research in today’s workplace. Further, the subjects used in the research were primarily from large companies or institutions. It is not clear if the results and conclusions presented in these studies will hold true in the small business environment. All of the studies referenced focused on larger companies or specific sectors of industry. There is limited research that examines how gender influences employee preferences for performance rewards and motivational incentives in the small business environment. In addition, the majority of information available is not current. While small business is a vital part of the US economy, more current data to assist small business owners and managers with reward programs for their employees is needed. It is clear that additional research is needed in the area of gender preferences for rewards in the small business environment. Since the resources available to small businesses are more limited than for larger organizations, a better understanding of the effect of gender on reward and incentive preferences may assist with the development of a targeted and effective reward and incentive program for employees.

CONCLUSION AND DISCUSSION The primary objective of this paper was to determine if there are gender based employee preferences for performance rewards in small business environments. Information from this research are useful to owners, leaders, and supervisors of small businesses. Generally speaking, both male and female employees were concerned with economic issues such as job security, good wages, and good working conditions. This may be a result of the current economic conditions. However, when discussing specific situational reward preferences, social rewards (thank you from the boss) consistently ranked higher than monetary rewards. This indicated that employees valued rewards that do not place an additional financial burden on the company. It is important that supervisors develop a greater awareness of what employees want; they may be surprised to realize that actions can be taken to reward and motivate employees that have little or no economic costs. It is imperative that supervisors and organizations understand that what motivates one individual may not motivate another. REFERENCES Bragg, T. (2000). How to reward and inspire your team. llE Solutions, 32(8), 38-40. Kovach, K. (1995). Employee motivation: Addressing a crucial factor in your organization’s performance. Employement Relations Today, 22(2), 93. Mariani, M., Fan, P., Finley, E., & Beutel, A. (1996). Gender and job values. Sociology of Education. 69(1), 49-65. Mottaz, C. (1986). Gender differences in work satisfaction, work-related rewards and values, and the determinants of work satisfaction, Human Relations, 39(4), 359-378.

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Ross, C., & Mirowsky, J. (1996). Economic and interp0ersonal work rewards: Subjective utilities of men’s and women’s compensation. Social Forces, 75(1), 223-245. Schul, P., Reminton, S., & Ben, R. (1990). Assessing gender differences in relationships between supervisory behaviors and job-related outcomes in the industrial sales force. Journal of Personal Selling and Sales Management, 10(3), 1. BIOGRAPHY Dr. Susan Kowalewski is an Assistant Professor at D’Youville College in Buffalo, New York. Email: [email protected] Suzanne Phillips completed her MBA from D’Youville College May 2011. Email: [email protected]

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THE EVOLUTION OF THE MARKETING CONCEPTS: THEORETICALLY DIFFERENT ROADS LEADING TO

PRACTICALLY SAME DESTINATION! Solomon A. Keelson, Takoradi Polytechnic

ABSTRACT

This work is part of a larger study on market orientation and business performance. The evolution of the marketing concept from the pre-industrial revolution, down to our day is critically reviewed. The marketing concept as a business philosophy is traced from its origins as a business belief where efficient production was the emphasis to the current belief which emphasizes customer needs as a means of long- run business success. The concept has theoretically evolved over the last century. The underlying assumption of all the concepts, irrespective of the era in which they were dominant, is to provide stakeholders’ interests – including customers, producers, shareholders and society. The paper acknowledges that the different concepts of marketing are seen as different roads leading to the same destination, because each concept served important purpose of creating profitable customer. Thus, the development of a new concept would not necessarily mean abolition of old concepts. New concepts may build on old ones to make a business more successful in serving the interests of its stakeholders, especially, the creating and serving of profitable customers. Similarly, some old concepts may work well for some businesses and industries better than even new concepts depending on the type of product and industry. KEYWORDS: Marketing concept; Organizational objective, profitable customers; organizational performance INTRODUCTION The marketing concept is the known concept for explaining organisation’s philosophy of doing business. Since the 1900s, different business philosophies have been adopted by organisations, all aiming at creating and retaining profitable customers. The particular marketing concept over specific business era defines the customer’s involvement in product development decision. While some concepts gave minimal or no attention to customers involvement in product design decisions, others recognize the customer as an important factor in product design decision (Kotler and Armstrong, 2008; Ride and Ferrell, 2008; Kotler and Keller, 2009; Schiffman and Kanuk, 2009; Kotler and Armstrong, 2009). At least six concepts have emerged since 1850 to date. Businesses have since adopted production philosophy (Ferrell, 2008); product philosophy (Fullerton, 1988); selling philosophy (Kotler and Armstrong, 2008), marketing philosophy (Day and Wensley, 1983; McGee and Shapiro, 1988); societal marketing philosophy (Kotler and Armstrong, 2008); and the holistic marketing philosophy (Kotler and Keller, 2009). While each of the six business philosophies has received some form of criticisms, knowledge of these concepts reminds the marketer of the shifts of business thinking over the years. History it is said, ‘is a good starting point’ to understand today and plan the future. Marketers are in a good position to understand and better practice marketing now and even anticipate new and better ways of practicing marketing in future as they learn about the different stages that marketing has evolved. Moving from the early concepts to the latest, businesses are thought a great lesson of where marketing was, where it has gotten to and where it is heading towards. One may appreciate the argument that organisation’s

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movement from earlier philosophy to latter ones constitutes improvement in business practices to meet the market needs (Keith, 1960; Kotler, 1994). Yet, it is evident that the different concepts of marketing are different roads leading to the same destination (Kotler and Armstrong, 2008; Ride and Ferrell, 2008). The evolution helps appreciate that changes in customer characteristics and preferences with time, is inevitable; and that companies must be aware and operate their businesses in harmony with the changing needs of the market. Thus, in the view of this paper, new concepts may build on old ones to make a business philosophy more relevant. Again, some old concepts may work well for some businesses and industries today, better than even new concepts, depending on market conditions, production goals, as well as product design and customer types. The issue of hierarchy and superiority might not be too relevant a consideration in an objective analysis of the concepts. Such a view has the potential to miss the point of the importance of individual business thinking that might not work well for the achievement of business objectives (creating and retaining profitable customers) in different marketing eras. The paper addresses the different concepts that have been developed over time, highlighting their primary assumptions. The paper also puts the arguments related to the different concepts into perspective. This should help appreciate that in theory the concepts may seem different, but in practice they might all aim at achieving the same business objective of creating and retaining profitable customers. EVOLUTION OF THE MARKETING CONCEPT The academic discipline of marketing has two main schools of thought, where marketing is considered as either a philosophy or a function. Greater emphasis has been put on marketing as a philosophy or concept rather than a function. The marketing concept represents business thinking, and started developing since 1850s. Businesses have since adopted production philosophy (Ferrell, 2008); product philosophy (Fullerton, 1988); selling philosophy (Kotler and Armstrong, 2008), marketing philosophy (Day and Wensley, 1983; McGee and Shapiro, 1988); societal marketing philosophy (Kotler and Armstrong, 2008); and the holistic marketing philosophy (Kotler and Keller, 2009). The Production Philosophy Pride and Ferrell (2008) trace the production philosophy back to 1850s, through to the 1900s. This was the period of industrial revolution in the United States. At this period the country witnessed growth in electricity generation, rail transportation, division of labour, assembly lines, and mass production. These made it possible to produce goods more efficiently with new technology and new ways of using labour. Though production of goods increase with these emerging ways of production, there was heavy demand for manufactured goods (Ride and Ferrell, 2008). The production philosophy is premised on the assumption that consumers will favour product that are available and highly affordable (Kotler and Armstrong, 2008). This required that businesses’ concentration were directed toward product improvement and efficient distribution of goods. According to Schiffman and Kanuk (2009:5), the production philosophy assumes that “consumers are mostly interested in product availability at low prices; its implicit marketing objectives are cheap, efficient production and intensive distribution”. Miller and Layton (2001) observed that in the production era, the manufacturers typically concentrated on increasing output with the assumption that customers would look for, and buy, reasonably priced, and well made products. The production philosophy worked for businesses in the 1950s onward to achieve their business objectives. Today, such a business

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orientation may only make sense when the objective of the company is to expand the market. However, production orientation hardly works for many of today’s businesses. Companies with such a business philosophy today risk focusing their effort too narrowly on their own operation losing sight of the core idea of producing to meet customer expectation and needs to create customer value (Kotler and Armstrong, 2008). However, in the development of completely innovative products, where customer might not have any idea, and thus could not make any input into the design and development of such products, the production philosophy shall still be appropriate even today. Product Philosophy The product philosophy was the dominant marketing philosophy at the dawn of 1900s and continued to the 1930s. According to Fullerton (1988:103), “For more than a generation the concept of the production era dominated the understanding of marketing’s past held by students and scholars”. The production orientation assumes that consumers will prefer product based on its quality, performance and innovative features (Kotler and Armstrong, 2008). This means that the company knows its product better than anyone or any organization. Thus, the company knows what will work in designing and producing the product and what will not work. Since the company has the great knowledge and skill in making the product, it also assumes it knows what is best for the consumer. The product concept compelled companies to ensure improving product quality, and introduce new features to enhance product performance; as much as possible. These were done without consulting the customer to find his or her view on these product features. Yet products were produced with the customer in mind. Since the era culminated development of innovative products which did not have substitutes, customer needs might not be too much a demand since customer might not know their needs in such innovative market situation. In much of the product era, organizations were able to sell all of the products that they made. The success of this philosophy was due mostly to the time and level of technology in which it was dominant. The product concept survived much of the time after the Industrial Revolution (Miller and Layton, 2001). Most goods were in such short supply that companies could sell all that they made. Consequently, organizations did not need to consult with consumers about designing and producing their products. Much as some companies may still have a product oriented business thinking that direct their operations, the concept is not popular in today’s business environment. A product philosophy often leads to the company focusing on the product rather than on the consumer needs that must be satisfied (Schiffman and Kanuk, 2009), which leads to ‘marketing myopia’ (Levitt, 1960). Selling Philosophy The selling philosophy was the concept of businesses that proceeded the product era, and has the shortest period of dominance compared to the two preceding philosophies. It began to be dominant around 1930 and stayed in widespread use until about 1950. The emphasis of selling philosophy was to create a department to solely be responsible for the sale of the company’s product; while the rest of the company could be left to concentrate on producing the goods (Perreault Jr. and McCarthy, 1999). According to Kotler and Armstrong (2008), the orientation of the selling concept was that the company can sell any product it produces with the use of marketing techniques, such as advertising and personal selling. The concept assumes that “consumers are unlikely to buy the product unless they are aggressively persuaded to do so – mostly that ‘hard sell’ approach” (Schiffman and Kanuk, 2009). The emergence of the selling philosophy was necessary because of increase in production of variety of goods after the Industrial Revolution, as companies became more efficient in production. The increase in

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amount of product and types of products led to competition which eventually led to the end of product shortages and the emergence of surpluses. Regarding this Comyns and Jones (1927:147) noted, “Obvious pressure to buy may lose the customer for the future even though it takes the immediate sales”. It was because of the surpluses that organizations turned to the use of advertising and personal selling to reduce their inventories and sell their goods. The selling philosophy also enabled part of the organization to keep focusing on the product, via the product philosophy. In addition, the selling era was characterized by an orientation that a sales or marketing department could sell whatever the company produced. Miller and Layton (2001) noted that apart from the aggressive selling approach, the era was also noted for other unhealthy features, such as the idea that ‘selling is the goal of a company and not customer satisfaction’. Recently, Kotler and Armstrong (2010:35) note: “The selling concept takes an ‘inside-out’ perspective. It starts with the factory, focuses on the company’s existing products, and calls for heavy selling and promotion to obtaining profitable sales. It focuses primarily on customer conquest – getting short-term sales with little concern about who buys or why.” The selling philosophy in theory focuses on sales rather than customer satisfaction. In this connection, the challenge with this orientation is that when customers are persuaded to buy product that they would ordinarily not buy, they would buy just once. Also, they are more likely to communicate negatively of the product through word-of-mouth to other consumers, which could affect their purchases. In practice, however, if producers ensure that quality products are sold to customers, they are more likely to repeat purchase and also communicate positive word-of-mouth to others. Therefore, despite the fact that the selling concept has almost seized to be a preferred business orientation today, its acceptance or rejection should not be determined by the concept itself, but whether the belief was to sell quality products and services to customers in order to retain them. Even in the ear of a market oriented philosophy, organizations that deal with ‘unsought’ goods (such as life insurance); political parties who sell their candidates aggressively to apathetic voters; and also by companies that have excess stock (Schiffman and Kanuk, 2009) still use selling orientation successfully. Though the marketing philosophy has become the prescription for facing competition, “old habits die hard” (Miller and Layton, 2001:11) and even to date some companies still hold to the fact that they must use the ‘hard sell’ approach for business success and prosperity (Miller and Layton, 2001). Marketing Philosophy The marketing philosophy started to dominate business orientation during the 1950s (Pride and Ferrell, 2008), and continues until the twenty first century. This concept assumes that the starting point for any marketing process is the customer needs and wants, and no longer the aggressive selling. The key assumption underlying the marketing philosophy is that “a market should make what it can sell, instead of trying to sell what it has made” (Schiffman and Kanuk, 2009:15). The marketing concept focuses on the needs and wants of the buyer rather than the needs of the seller and the product. As noted by Mckitterick (1957), the principal task of the marketing function in a management concept is not so much about being skillful in making the customer do what suits the interests of the business as to be skillful in conceiving and then making the business do what suits the interests of the customer. These views are consistent with an earlier proposition by, Shaw (1912:736), who noted: “goods are being made to satisfy rather than to sell”. He also remarked, “today the more progressive business man is searching out the unconscious needs of the consumer, and is then producing the goods to gratify them” (p.708). Recently, Kotler and Armstrong (2010:35) noted: “The marketing concept takes an ‘outside-in’ perspective. The marketing concept starts with a well-defined market, focuses on customer needs, and

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integrates all the marketing activities that affect the customers. In turn, it yields profits by creating lasting relationship with the right customers based on customer value satisfaction”. The marketing concept recognizes that the company's knowledge and skill in designing products may not always be meeting the needs of customers. Thus business orientation shifted from product to market (Keith, 1960). Keith (1960:35), observed: “our attention has shifted from problems of production to problems of marketing, from the product we can make to the product the customers wants us to make, from company itself to the market place”. He also recognizes that even a good sales department cannot sell every product that does not meet consumers' needs. When customers have many choices, they will choose the one that best meets their needs. This is expressed in Levitt (1960) who made a clear distinction between the selling and the marketing orientation. According to him selling focuses on the needs of the seller; marketing 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. This philosophy is what is expected of firms today to be market oriented and reap business success. The Societal Marketing Philosophy The societal marketing concept emerged in the 1970s and has since overlapped with the marketing philosophy. The concept assumes that there is a conflict between consumer short-term wants and society’s long-run interest, and that organizations should focus on a practice that ensures long run consumer and societal welfare (Kotler and Armstrong, 2008, 2009). Kotler and Armstrong (2010) consider the societal marketing orientation as the best business philosophy to be adopted by organisations. They suggested: “this new concept represents an attempt to harmonize the goals of business to the occasionally conflicting goals of society’. They concluded: “the organisation’s task is to determine the needs, wants and interest of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors in a way that preserves or enhances the consumer’s and society’s well-being” (p. 35). The appropriateness of societal marketing philosophy is deduced from the fact that it supports a socially responsible behavior of organization. It thus, challenges the earlier assertion by Friedman (1962) that “the social responsibility of business is to make profit”. Organisation will still need to adopt this business philosophy to be able to deal with the cultural and regulatory aspect of the business environment. This means adoption of the societal marketing concept generate some factors of market orientation that foster business performance. It could be concluded from the literature that societal market orientation should not be seen as a separate concept. It should be a complementary business practice at the adoption of any marketing philosophy. Thus, whether a business is adopting production, product, selling or marketing philosophies, the interest of the society must still be given its rightful place because society is a key stakeholder in every business. The Holistic Marketing Philosophy he holistic marketing concept is a 21st century business thinking (Kotler and Keller, 2009).The concept is based on the “development, design, and implementation of marketing programmes, processes and activities that recognizes their breadth and interdependencies” (Kotler and Keller, 2009:59). The holistic marketing concept suggests that the 21st century business firm needs a new set of belief and practice toward business operation that is more complete and cohesive than the traditional application of the

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marketing concept. According to Kotler and Keller (2009:60) holistic marketing recognizes that “everything matter” in marketing. Holistic marketing is thus based on the assumption that the approach to marketing should be the adoption of all activities of marketing. Thus, holistic marketing includes internal marketing, performance marketing, integrated marketing and relationship marketing. Kotler and Keller’s (2009) holistic marketing concept seems to be an embodiment of marketing practice rather than a concept or philosophy of business. A marketing concept is “a way of thinking; a management philosophy guiding an organisation's overall activities [affecting] all the efforts of the organisation, not just its marketing activities" (Dibb et al., 1992: 13). The holistic marketing orientation seems to dwell on just the marketing functions and not the overall activities of the organisation. The concept looks at internal marketing, performance marketing, integrated marketing and relationship marketing, which are all typical activities of marketing. The concept fails to acknowledge other activities of business such as production, management style, organisation culture and other non-marketing factors of business that make a firm business orientated. Thus, the holistic marketing concept (Kotler and Keller’s, 2009) should better be viewed as a summary of what effective and efficient marketing involves rather than a business philosophy, and for that matter a marketing concept, because a marketing concept means more than just marketing functions (Dibb et al., 1992: 13), as suggested by Kotler and Keller’s, 2009. This means the holistic marketing concept is relatively not a superior philosophy that has the potential of generating the required antecedents of market orientation that fosters superior business performance, which includes non-marketing activities (Kohli and Jaworski, 1990; Zebal, 2003; Lok and Crawford, 2004; O’Regan et al., 2005). In this connection, the holistic marketing concept fails to acknowledge this strategic as opposed to functional approach to marketing (Drucker, 1973; McDonald, 1989). Marketing should be seen as an attitude of mind rather than a series of functional activities (McDonald, 1989), as seems to suggest by the holistic marketing concept (Kotler and Keller’s, 2009). The recent work by Kotler and Armstrong (2010) supports the fact that the holistic marketing concept is just an extended version of the marketing concept. They noted: “The marketing concept takes an ‘outside- in’ perspective. The marketing concept starts with a well-defined market, focuses on customer needs, and integrates all the marketing activities that affect the customers. In turn, it yields profits by creating lasting relationship with the right customers based on customer value satisfaction” (Kotler and Armstrong, 2010:35). ‘Integration of all marketing activities’, this should include internal marketing, performance marketing, integrated marketing and relationship marketing. Thus, the holistic marketing concept can be described as a clever combination of all the concepts that have been developed prior to it (Perreault Jr. and McCarthy, 1999; Pride and Ferrell, 2008; Kotler and Armstrong, 2008; Schiffman and Kanuk, 2009). DISCUSSIONS AND IMPLICATIONS Despite the appreciations and criticisms, knowledge of the development of the marketing reminds us of the shifts of business thinking over the years. The evolution of the concept shows how businesses have reacted to changing customer characteristics and demand; as well as the needs of the market. Although any given business can operate under any of the philosophies, the underlying precept of the development of marketing concept is that these philosophies form a hierarchy, with later philosophies being considered superior to those of earlier ones as the formation of the market change. Thus, organisation’s movement

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from earlier philosophy to latter ones constitutes improvement in business practices to meet the market needs of a particular time period with specific type of customers (Keith, 1960; Kotler, 1994). The different philosophies of marketing cannot be described in isolation. They should be discussed with the business objective and marketing conditions and practices at the time in mind. Though businesses have several objectives, the most important one is to create and maintain satisfied customers, and ultimately make profit. Except for social reasons, no company can continue in business if it is not making profit. Thus, whatever business philosophy or marketing concept an organization adapts, it should be one that leads the company to attainment of profit through creation of satisfied customers. Thus, the importance of a customer to a firm is defined in terms of the ‘customer’s ability to make the firm realize its profit goals in the long run’. In the same way the customer would give the company his ‘custom’ if he is provided with product and services that meet his needs and expectations (with or without his involvement in the product design and development). Therefore, while it may be a good concept to involve the customer in product design and development, it might not always be a requirement for effective business practice and provision of customer value. The customer can be a “victim” and a “victor”. The customer is a ‘victim’, if because of excess demand over supply; he is not involved in product design and development decision. In this case the customer has no choice but to accept what product the producer has made available. This is particularly true in eras or markets where there are hardly any substitutes to the products or services; or in new product development situation where the customer might not have any idea to determine what he wants. The customer is a ‘victor’ in competitive markets where supply exceeds demand. In such a market situation, consumers might be the ultimate determinants of what satisfy their needs. The producer only has to produce according to the dictates of the consumer. Thus, the customer’s involvement in product decisions – including design and development is very paramount. Yet other factors such as cost, profitability and capacity might influence the final product decision. No company can produce the product that the consumer wants if it lacks the organizational capabilities. In view of this, the six philosophies or concepts of marketing can be seen as different concepts aiming at producing efficient and profitable products and services to customers at one time or another. During these different times and market situations, customers might be either involved in the product decision or not, depending on whether demand for the product exceeds supply or vice versa. In other word the concepts are “different roads leading to the same destination”. The table 1 below helps us to appreciate how the different concepts of marketing that have developed over the years, aim at the creating and retaining profitable customers: Table 1 outlines the development of the marketing concept since its acceptance in the mid-1800s to the twenty first century (Bartels, 1962; Dalgic, 1998; Pride and Ferrell, 2008). A cursory look at the assumptions helps us to appreciate one important facts about the concepts. They all aim at producing products that the customer will buy for the company to make profit. For example, the business thinking in the production era was for firms to produce reasonably-priced and well-made products that customers will buy. This implies that even though customers might not be involved in the product design decisions, they were taken into consideration before a company develops products. Thus, to assume that production orientation means total avoidance of customers in product design and development that meet customer needs and wants is not wholly true. The production concept still holds the view that the customer should be the central consideration for productdesign decision so that the company can sell products that the customer wants, and to consequently make profit.

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Table1: Marketing Concepts and Their Underlying Assumptions

Authors Marketing Concept Assumptions Layton (2001) Kotler and Armstrong, (2008) Schiffman and Kanuk (2009:5)

Production Concept (1850s – 1900s)

 Customers would look for, and buy, reasonably priced, and well made products

 Consumers will favour product that are available and highly affordable  “Consumers are mostly interested in product availability at low prices;

its implicit marketing objectives are cheap, efficient production and intensive distribution”

Miller and Layton, (2001) Kotler and Armstrong, (2008)

Product Concept (1900s – 1930s)

 The company knows its product better than anyone or any organization.  Since the company has the great knowledge and skill in making the

product, it also assumes it knows what is best for the consumer.  Consumers will prefer product based on its quality, performance and

innovative features Comyns and Jones (1927:147) Miller and Layton (2001) Schiffman and Kanuk, (2009) Kotler and Armstrong (2010:35)

Selling Concept (1930s- 1950s)

 “Obvious pressure to buy may lose the customer for the future even though it takes the immediate sales”.

 Selling is the goal of a company and not customer satisfaction’.  Consumers are unlikely to buy the product unless they are aggressively

persuaded to do so – mostly that ‘hard sell’ approach”  “The selling concept takes an ‘inside-out’ perspective. It starts with the

factory, focuses on the company’s existing products, and calls for heavy selling and promotion to obtaining profitable sales. It focuses primarily on customer conquest – getting short-term sales with little concern about who buys or why.”

Shaw (1912:736) Keith (1960:35) Schiffman and Kanuk (2009:15)

Marketing Concept (1950s)

 “Goods are being made to satisfy rather than to sell”  Attention is shifted from problem of production to problem of

marketing, from the product that the firm can make to the product the customers wants the firm to make, from company itself to the market place”.

 “A market should make what it can sell, instead of trying to sell what it has made”

Kotler and Armstrong (2009:35) Societal Marketing Concept (1970s)

 There is a conflict between consumer short-term wants and society’s

long-run interest, and that organizations should focus on a practice that ensures long run consumer and societal welfare

 “The organisation’s task is to determine the needs, wants and interest of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors in a way that preserves or enhances the consumer’s and society’s well-being”

Kotler and Keller (2009:60) Holistic Marketing Concept (2000s)

 The concept is based on the “development, design, and implementation of marketing programmes, processes and activities that recognizes their breadth and interdependencies”

 The 21st century business firm needs a new set of beliefs and practices toward business operation that is more complete and cohesive than the traditional application of the marketing concept.

 Holistic marketing includes internal marketing, performance marketing, integrated marketing and relationship marketing.

Similarly, the product philosophy carries a business thinking that the company has the great knowledge and skills in making its product; and that it knows what is best for the consumer (Miller and Layton, 2001). Thus, it was assumed that consumers will prefer product based on its quality, performance and innovative features (Kotler and Armstrong, 2008). This means that consumer needs and preferences were the key determinants of product design and development. Once the company considers quality, the customer stands to benefit from what the company produces. Though what is considered quality by the firm may be different from the consumer’s perception of quality, it is believed that quality product is more likely to meet customer needs and to foster sales and finally profit. After all, in the era of the product orientation, the customer might not always know his needs since there were few products available to choose from. Therefore, it was the duty of the firm to produce quality, innovative products and create the need for these. Involving the consumer in the product decision at this time may not yield

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the desire result, especially when the demand exceeded supply so much that the customer was ready to buy any quality, innovative products and services. The selling concept is not different in terms of ultimate orientation from the other two above. This concept developed after the industrial revolution when mass production was the order of the day. Since there was huge supply, there was equally high demand for products and services. Most products had substitute at this time, hence there was the need for sales effort before a company could sell its products. Thus, the business philosophy was that consumers would buy the product only if they are aggressively persuaded to do so (Schiffman and Kanuk, 2009). In this concept, the firms operation starts with the factory, focuses on the company’s existing products, and calls for heavy selling and promotion to obtaining profitable sales (Kotler and Armstrong, 2010). Customer persuasion involves customer intimacy and relationship management, which is also a factor in the marketing concept. Therefore, it could be deduced that the selling concept involved obtaining profitable sales by persuading the customer to buy the company’s product instead of competitors’. This approach to business is particularly justified in situations where customers might not know their needs with regards to innovations or product availability. It must be noted that if customers are not positively persuade, even if they are involved in product development, they might still switch to ‘perceived’ strong brands if other companies do persuade them to believe so. In this connection, it can be said that sometimes it makes business sense to develop a product without the consumers’ knowledge and create the awareness later for the consumer to see the need to have the product. By this, consumers’ interest shall be considered and profitable sales can be made. The marketing concept has had wider acceptance since its emergence as a business philosophy. It is basically the belief that company’s attention be shifted from problem of production to problem of marketing, from the product that the firm can make to the product the customers wants the firm to make, from company itself to the market place” (Keith (1960:35). It is good for a business to make what it can sell, instead of trying to sell what it has made” (Schiffman and Kanuk (2009:15). The emphasis is to make the customer decides what his needs are and not the company doing so on the consumer’s behalf. The concept assumes that “goods are being made to satisfy rather than to sell” Shaw (1912:736). While this may theoretically be acceptable, no company can produce product that can satisfy the customer, if it cannot sell. Product must sell at all cost, if the company will remain in business and can be profitable. Thus laying too much emphasis on consumer involvement in product decisions might be an over exaggeration of a business thinking. This means companies must produce product which satisfies the customer; but they must also make sure that these products could be sold for profit. The societal marketing philosophy is seen as not just business thinking, but a responsible behavior for every firm that wants to succeed in business and the social environment of the market. The concept beliefs that the organisation’s task is to determine the needs, wants and interest of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors in a way that preserves or enhances the consumer’s and society’s well-being” (Kotler and Armstrong, 2009). It is understandable why this concept did not emerge until around the 1970s. The importance of this concept became eminent when the effect of business activities on the environment and society became too pronounce. It was then necessary for business to think on how to satisfy the market with the aim of profit, and still minimize its effects on society. Happy society is more likely to buy and to recommend a firm’s product, while an angry society will refuse purchase of a company’s product even if it can satisfy the need of the customer. This means the societal marketing philosophy, like other concepts gears toward creating and maintaining satisfied and profitable customers.

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The holistic marketing concept aims at integrating all marketing activities, including internal marketing, performance marketing, integrated marketing and relationship marketing to produce value for customer. The concept is not too different from the marketing concept. According to Shaw (1912) the more progressive business must search out the unconscious needs of the consumer, and then producing the goods to gratify them. In order to produce goods that gratify the consumer, conscious effort is needed on the part of the company, including involving the consumer in product design and development. This requires that organisations have the right minded staff, particularly the sales force who will directly deal with the customer. Such a business behavior is known as internal marketing (Berry, 1981, Ahmed and Rafiq, 2003). The idea of integrated marketing also involve the marketing mix, including promotion, distribution, pricing and product quality. These are important ingredients in production, product and selling concepts, where quality product at relatively lower price, product availability and product promotion respectively are considered as a business’s belief. Relationship marketing is something that is captured in all the concepts. Whether a company sells efficient and quality product through persuasion or not; and whether the company involves the consumer in product decision or not, one thing is sure: “as long as the producer makes product for the consumer, the supplier-customer relationship should always be implicit”. Thus, the holistic marketing concept also aims at creating and maintaining profitable customers for the organization. CONCLUSIONS Reviews of the related literature support the fact that different concepts have emerged as business philosophies for the last one century or so. These concepts are all important and acceptable business beliefs at one time or another; and they individually supported the firm’s ultimate objective of creating and retaining profitable customers. While some of the marketing concepts may be considered superior to others, the acceptability of one concept or the other is dependent on customer characteristics, including customer product’s knowledge; changing times, competitive intensity and market turbulence. Some concepts which seem outdated may even be necessary to adopt today in some situations. Therefore, we can say the evolution of the marketing concept may theoretically define different business philosophies; yet, in practice they all aim at creating and retaining profitable customers. Thus, the marketing concept can be described simply as “different roads’ (varying ways of looking at how best business should be operated) leading to the same destination (provision of customer needs and company profitability). REFERENCES Keith R.J. (1960) “The Marketing Revolution” Journal of Marketing, vol. 24, pp. 35-38. Kotler (1994). Marketing Management, Englewood Cliffs, N.J. Prentice-Hall, Inc. Kotler, P. and Keller, K.L. (2009) Marketing Management, Pearson Education International, London. Levitt T (1960), “Marketing Myopia”, Harvard Business Review, 38(4).

Drucker, P. F., (1954) The Practice of Management, Harper and Row, New York. Drucker, P.F. (1974) Management: Tasks, Responsibilities, Practices, Harper & Row. Comyns, R.J. and Jones, J.G. (1927) Selling Alexander Hamilton Institute, New York

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Day, G.S. and Wensley, R. (1983) “Marketing Theory with Strategic Orientation”, Journal of Marketing, Vol. 47, No. 4, pp. 79 – 89 McDonald, R.P. (1989). An Index of Goodness of Fit Based on Noncentrality. Journal of Classification, 6, 97-103. McKitterick, J.B. (1958), ‘What is the marketing management concept?’ The Frontiers of Marketing Thought and Science, ed F.M. Bass, American Marketing Association, Chicago. BIOGRAPHY Solomon A. Keelson, Takoradi Polytechnic, PO Box 256, Takoradi, [email protected]

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MANAGERIAL INCENTIVES FOR EARNINGS MANAGEMENT AMONG LISTED FIRMS IN

EMERGING ECONOMIES, EVIDENCE FROM FIJI Prena Rani, The University of the South Pacific

Fazeena Fazneen Hussain, The University of the South Pacific Priyashni Vandana Chand, The University of the South Pacific

INTRODUCTION The high profile corporate collapses of the past decade have greatly questioned the integrity of financial reporting. Earnings management has been of growing concern to many academics, practitioners and regulators. Despite an enormous amount of regulation and standards governing the financial reporting process, earnings management practices are accelerating at an alarming rate in organizations today. Fiji, like many other developed countries, has had instances of financial reporting failures in the past. One does not need to look further than the multi-million dollar saga involving the state owned Bank, the National Bank of Fiji, which was the largest known financial scandal in the history of Fiji and the Pacific Islands. This suggests that even emerging economies like Fiji have been introduced to earnings management practices long ago but was not that apparent. A large number of studies (DeAngelo, 1986; Cahan, 1992; Dechow, 2000; Beneish, 2001) have been conducted on managerial incentives for earnings management in USA, UK, Canada, Australia and New Zealand. While these were developed countries, very few studies have been conducted in emerging economies. Fiji’s weak regulatory environment makes it subject to high level of earnings manipulation therefore it becomes important to study earnings management practices in Fiji. This study therefore will use a questionnaire-based approach to examine management policies that give rise to earnings management among listed firms in Fiji, highlighting the most prevalent incentive for earnings management. These findings will provide FIA and other standard setters in emerging economies evidence on the most common driver for earnings management, which should assist them in formulating relevant financial reporting and corporate governance policies to ensure that management makes adequate disclosures. It should also assist users especially investors and financiers while reviewing annual reports to be cautious if the firm concerned displays characteristics that are aligned with the most prevalent incentive for earnings management. METHODOLOGY In order to obtain information about firm policies and practices that is not publicly available, we emailed questionnaires to CEO’s of the listed companies. In some cases, where the CEO was unavailable we requested an interview with the company’s CFO. The respondents completed the questionnaire in the presence of the researcher. Researchers were present in case the respondents needed clarification about any issues. In the questionnaire, we had closed-ended questions, whereby the researcher provided a suitable list of responses. Closed questions provide little or no scope for the researcher to misinterpret the meanings of answers. For example, if an answer is restricted to “Yes / No / Don’t Know” it is easy for the researcher to understand the exact intentions of the respondent. However, it also does not give an in-depth picture of

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the question being researched, as it is possible that respondents had some other answers to the research questions. That is another reason researchers were present before the respondents so they could discuss and note any other important points being raised. Our intended group of recipients for the questionnaire was the management team from each listed company. This is because we felt that a member of the management team would be the best person to answer the questionnaire as he/she has access to inside company information. Managers are in-charge of the day-to-day operations of the company and therefore possess more knowledge about their management policies and practices. There are 16 companies listed on the South Pacific Stock Exchange. This was our initial sample for the study that was later reduced to 14. This was because one of the listed firms was a financial institution and consistent with prior studies financial institutions were excluded due to their unique working capital structures. Another listed company was unavailable for interview and failed to return our questionnaire despite several calls and emails. RESULTS AND DISCUSSION Agency theory provides a solid framework for understanding earnings management as it provides the agents with economic incentives to manipulate financial results. These incentives with research results are provided below. Managerial Compensation Incentives One of the most common incentives for managing earnings is the manager’s remuneration package. In most businesses, managers are entitled to cash bonuses or share options upon achieving predetermined reported earnings. It is quite common for management employment contracts to include accounting based constraints that determine compensation opportunities, such as annual salary increases, bonus, performance evaluation, and reaching targets set in compensation contracts (Singh, 2008). The results show that management compensation is the most common incentive for earnings management in listed companies in Fiji. In the entire sample of companies, members of the management team are entitled to other incentives apart from normal salary, for instance, bonuses, annual salary increments, share options etc. In 86% of listed firms, the Board of Directors and other senior executives set the management compensation plans, while in the other 14% of firms, it is the Human Resources Department. From the firms studied, 93% of them revealed that the performance evaluation criteria for rewards are stated in the management contracts. Profit and sales figures was the most common benchmark for rewards in the management compensation policies amongst all listed companies. Therefore, if management remuneration is based on entity profit or sales for the period, managers may manipulate firm’s earnings so they can reach their sales/profit targets and get additional rewards. Borrowing Cost Effects The firm’s closeness to violating its debt covenant provides its management with another incentive to engage in earnings management.

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The results show that the debt financiers have imposed some form of debt covenant on 57% of the listed firm’s loan agreements. Results disseminate that 43% of the listed firms did not have a loan agreement with anyone. None of the respondents admitted to violating any debt covenants. Equity Offerings Share issues provide a direct incentive for management to engage in earnings management as higher earnings would result in increased share prices implying an increase in market valuation and a reduction in cost of capital. We found that equity offerings are probably the least common incentive for earnings management in Fiji, probably, due to the highly inactive capital market in Fiji. Management Buyout In case of a management buyout, earnings are managed downwards. Usually, in such a situation, management faces a conflict as they have a fiduciary duty to the shareholders to get the best price for the firm and as buyers, managers would not want to pay a high price. Hence, managers have an incentive to reduce reported earnings prior to the buyout. There has not been any instance of management buyout in any of the listed firms in Fiji. However, we cannot rule out the possibility that this can never be an incentive in the near future. Usually, management buyout is considered by government as one of the methods for privatizing state owned entities. An example of an attempt of management buyout in Fiji is the case of Rewa Rice Limited in 1999 when the government was planning to sell off its shares. However, the management's offer was declined. Meeting Targets/Expectations Financial analysts or management usually forecast firms’ expected earnings prior to year-end. In Fiji, we do not have analysts who forecast or make predictions about firm performance. Therefore, our results solely focus on internal forecasts. In all the listed firms, Board of Directors, CEO’s and managers set targets for various divisions in the company. Various factors such as past trends, non-financial measures, competition levels, demand for products/services and current economic conditions are all considered when setting company targets. “Economic conditions such as devaluation and political upheavals in Fiji in the past have led to non achievement of forecasts,” commented one of the respondents. With the presence of unpredictable events such as these, managers may not be able to meet their targeted expectations and this may lead to managing earnings upwards. One respondent also stated that if management does not meet their forecasted earnings, and they do not have a valid reason for this, their employment is at risk in the company. This means that to save their employment, the managers might have to engage in earnings management. Reduce (Increase) Regulatory Cost (Benefits) Regulatory concerns can also induce management to engage in earnings management. Usually firms that are vulnerable to anti-trust investigations or other adverse political consequences or firms seeking government subsidy have enormous incentives to manage earnings to appear less profitable.

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A number of firms receive some form of assistance from the government such as grants or subsidies. One respondent stated that they receive concessionary rates of duty on capital investments. Another stated that they receive tax exemptions on local production of wood chips. One respondent stated that they had tax exemptions when they were listed in 2000, however now, this has expired and they no longer receive any assistance from the government. Our findings reveal that 79% of listed firms do not receive any form of assistance. This indicates that only a few listed firms would be inclined to report conservative earnings so that they can qualify for subsidies and other grants from government. Therefore, after examining provisions in management policies and practices, we find that management compensation incentive, meeting firm targets/expectations, reduction in regulatory costs, increase in regulatory benefits and borrowing cost incentives are common drivers of earnings management in Fiji. Out of these, we find that management compensation is the most prevalent incentive for earnings management in Fiji. The least common ones are: equity offerings attributable to a highly inactive stock market; and management buyout. REFERENCES Beneish, M. (2001). Earnings management: a perspective. Managerial Finance, 27(12), 3-17. Cahan, S. (1992). The effect of antitrust investigations on discretionary accruals: a refined test of the political cost hypothesis. The Accounting Review, 67(1), 77-95. DeAngelo, L. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. The Accounting Review, 61(3), 400-420. DeChow, P., & Skinner, D. (2000). Earnings management: reconciling the views of accounting academics, practitioners, and regulators. Accounting Horizons, 14(2), 235-250. Singh, A. (2008). Analyses of Earnings Management Practices in SOEs (Masters thesis). University of the South Pacific, Suva, Fiji

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WEB-BASED CORPORATE SOCIAL RESPONSIBILITY REPORTING IN EMERGING ECONOMIES: EVIDENCE

FROM FIJI Priyashni Vandana Chand, The University of the South Pacific Fazeena Fazneen Hussain, The University of the South Pacific

INTRODUCTION The prominent corporate collapses, the ongoing scandals over product responsibility and environmental issues, followed by the globalization of financial markets increased the demand and need for businesses to be socially responsible and to disclose their CSR practices to their stakeholders. Stakeholders expect firms to demonstrate social and ethical behavior by actively contributing to society through environment conservation, health and safety awareness, product quality, educational support and the like. Consequently, CSR is defined as “the obligation of the firm to use its resources in ways to benefit society, through committed participation as a member of society, taking into account the society at large and improving welfare of society at large independent of direct gains of the company” (Kok, et al., 2001, p. 287). This definition and many more are open to a number of interpretations depending on the culture and the context in which they are applied. Hence, there exists no universal definition of CSR. Over the years, public awareness on the role of businesses in the society has substantially increased (Hackston & Milne, 1996). While CSR activities undertaken by the organization is necessary and probably the most important measure towards being socially responsible, there is an urgent need for organizations to communicate these measures to relevant stakeholder groups in an effective and efficient manner. Literature suggests that consumers and other stakeholders prefer firms that embrace social responsibility and disseminate their CSR information along with financial performance. Consequently, firms have adopted environmental, social and sustainability reporting mechanisms to demonstrate their accountability and integrity. While in the early years of CSR reporting, firms opted for traditional paper-based reporting, the recent developments in information technology and the wide usage of internet as a communication medium have shifted CSR reporting to the web. Consequently, the pressures from stakeholders to disclose continuous CSR information, together with the technological advancements and the wide reach of the internet have shifted CSR reporting on the web. While CSR studies have been conducted in some developing countries, very few studies have examined CSR reporting practices in Pacific Island countries, especially, Fiji. Businesses operating in these Pacific Island Economies must contribute to the welfare and betterment of the society in return for the use of its resources, environment and people. As of today, there are no laws governing CSR reporting practices in Fiji; hence, firms voluntarily disclose CSR information. This study therefore focuses primarily on Fiji’s emerging economy. Seemingly, prior studies mainly examined the annual reports and none so far analyzed the corporate websites to find the nature and extent of CSR reporting present on the corporate websites of firms in Fiji. Hence, the current study is the first to examine web-based CSR reporting in Fiji. Since the wide usage of internet provides businesses with an alternative means for communicating with its stakeholders, it is important to examine how firms make use of this opportunity to exert their corporate social behavior and apparently how the firms use this mode to gain, maintain or repair their legitimacy status. The present study, therefore, aims to examine the nature and extent of CSR reporting on corporate websites of listed firms in Fiji, through in-depth content analysis of each company website. The modest amount of literature available on web-based CSR

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reporting in emerging economies motivates the present study. This study will add to the limited literature on web-based CSR reporting practices in Fiji. The current study embraces a web-based content analysis, whereby we carry out a detailed observation of all listed firms corporate website. We believe that this form of analysis will fulfill our research question in examining the nature and extent of CSR reporting on corporate websites. To quantify CSR disclosures, researchers use various measures, for example, number of characters, words, sentences, pages or proportion of pages. We use number of sentences to measure the extent of CSR reporting on company website. In analyzing the nature of web-based CSR reporting, the present study used four themes: Environment, Community, Marketplace and Workplace. An initial sample of 16 firms was selected for this study. From our initial sample, we removed four firms, leaving this study with a final sample of 12. Data obtained for the study related to a 64-day period, beginning from 17th July, 2011 to 28th September, 2011. The results of this study show that 18.75% of the listed firms in Fiji do not maintain corporate websites to facilitate their business, to demonstrate their social responsibility, or to exhibit accountability to stakeholders at large. In terms of reporting CSR practices on the corporate websites, only 76.92% of the listed firms do such reporting. Additionally, only a few firms had their websites updated. We found that the most disclosed CSR theme on websites examined was Marketplace, with Environment being the least. Accordingly, inter-industry comparisons reveal that on average, Manufacturing / Merchandising sector provides the most CSR disclosures on their corporate website. It has also been noted that firms, which disclose CSR information, mainly focus on positive disclosures in an effort to build their legitimacy. Negative CSR information should be communicated to all stakeholders. Thus, a more serious and rigorous CSR reporting is needed by the listed firms operating in Fiji. In conclusion, this study revealed that firms in developing and emerging economies generally provide very limited or insufficient CSR information on their website. Even though the listed firms realize the importance of engaging in CSR activities and accordingly communicating it to their stakeholders, they have not yet fully committed themselves to achieving these objectives. BIBLIOGRAPHY Hackston, D., & Milne, M. J. (1996). Some Determinants of Social and Environmental Disclosures in New Zealand Companies. Accounting, Auditing & Accountability Journal, 9(1), 77- 108. Kok, P., Weile, T., Mckenna, R., & Brown, A. (2001). A Corporate Social Responsibility Audit within a Quality Management Framework. Journal of Business Ethics, 31(4), 285-297.

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OPTIMAL DIVERSIFICATION - DOES IT EXIST? Chien-Chih Lin, Tamkang University

Yung-Shun Tsai, Asia University Hsiao-Yin Chen, Kainan University

ABSTRACT

This study discusses the existence of the optimal diversification to maximize bank value. It finds that the impact of diversification on bank value depends on the business cycle. Since diversification can lower individual risk and raise system risk simultaneously, it will not always be beneficial for financial institutions to diversify their assets fully. This paper finds that, in a good economy, there will be an optimal diversification to maximize a bank’s value, but in a bad economy, diversification will hurt a bank’s value. Empirical evidence from Taiwan’s banks is provided. JEL: G34; L22; G21; G24 KEYWORDS: Diversification; Business Cycle; Systemic Risk; Banking INTRODUCTION International financial transactions and investments contribute to diversifying the assets of financial institutions, especially banks. Diversification can reduce individual risk, but the shocks of the recent mortgage and financial crises in the US and the credit crises in Europe have resulted in financial institutions’ having to withstand more risk because of their diversification. Of course, diversification has benefits. Elsas et al. (2010) examined the impact of diversification on bank value during 1996-2008 and found two reasons for diversification’s ability to increase bank value. The first is banks’ economies of scope: because of their frequently long-term relationships with customers, banks can get more client information than non-financial institutions can in order to improve diversification in products and services.In addition, banks’ high operating leverage allows banks more opportunities to find low-cost capital sources and achieve economies of scope. The second reason that diversification can increase bank value is due to the technological advantage and liberalization of the financial industries, such as progress in financial marketing technologies (e.g., the foot-in-the-door strategy of requesting small demands before major ones) and the spread of financial openness and liberalization, including financial derivatives and financial consolidation, to financially developing countries. Enterprise integration also provides internal capital markets to improve efficiency in the allocation of funds (e.g., Williamson, 1975; Stein, 1997). The cost of the internal capital market is usually lower than that of the external capital market (Goold and Luchs, 1993; Ghemawat, 2000), so it can reduce cost and increase profit while also reducing information asymmetry. Hadlock et al. (2001) showed that external financing in the open market had more serious adverse selection problems than did financing in internal markets. Khanna and Palepu (1999) studied the role of diversification in India’s enterprises and found that diversification can create shareholder value via products and labor and that diversification has a risk transfer effect in financial markets, particularly in emerging markets that are not fully developed. Lewellen (1971) argued that enterprise integration could improve capital efficiency and increase debt capacity, thereby improving corporate value by means of debt expansion.

Chandler (1977) and Teece (1982) confirmed that economies of scope can improve the efficiency of resource allocation, reduce costs, and increase corporate value, while Bhide (1990) suggested that diversified investment could address consumer, supplier, borrower, and tax issues to increase the

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efficiency of resource use. Montgomery (1994) proposed three major theoretical viewpoints—the agency theory, the resource-based view, and market power—to explain why enterprises may choose to diversify investments. According to the agency theory, the manager may seek diversified investment in order to (1) increase his or her compensation (Jensen and Murphy, 1990), power, and reputation (Jensen, 1986); (2) consolidate his or her position in the company by using expertise in investment (Shleifer and Vishny, 1990; Shleifer and Vishny, 1991); and/or (3) reduce the risk in his or her personal investment portfolio by lowering corporate risk (Amihud and Lev, 1981). From the resource-based view, when a company has excessive capital for investment, activities that take advantage of economies of scope, such as the integration of marketing channels and operating strongholds after product diversification, can increase corporate efficiency (Penrose, 1959) . Moreover, the integration of legal and financial resources can be improved by using diversified business operations (Wernerfelt and Montgomery, 1988; Bodnar et al., 1999). Using the perspective of the market power theory, Villalonga (2000) proposed three reasons why enterprises choose investment diversification to increase market power: (1) to use a company’s profits to offset the price-cutting competition of another; (2) to ally with other companies to compete with rivals in multiple markets; and (3) to crowd out smaller firms by investing in major enterprises to expand market share.On the other hand, diversification has its costs. Wagner (2010) argued that portfolio diversification increases opportunities for asset overlap. Under the influence of the wealth effect, a bank failure would decrease the wealth of another bank that holds the same assets, leading to further collapse and the possibility of systematic crisis. Goldstein and Pauzner (2004) suggested that, under the influence of wealth effect, international portfolio diversification would trigger international “risk infection” since bad news in one country would reduce investors’ wealth, resulting in rising risk aversion and disinclination to invest in other countries. Allen and Carletti (2006) and Allen and Gale (2005) argued that the credit risk transfer effect between the insurance and banking industries would lead to risk transfer from the insurance industry to the banking industry. When the banking and the insurance industry hold the same assets, the insurance industry may lower prices in order to sell the assets in times of crisis, harming the banking industry that holds the same assets. If the loss expands to a certain level, bank failures can result. Diversification may also result in increasing agency problems and increasing corporate costs (e.g., Jensen, 1986; Meyer et al., 1992), and inefficient resource allocation may arise from the functional failure of internal capital markets (e.g., Lamont, 1997; Scharfstein and Stein, 2000a; Rajan et al., 2000). In addition, information asymmetry between investment companies and managers of the companies in which they invest (e.g., Harris et al., 1992) is detrimental to business operations since information asymmetry may increase the rent-seeking behaviors of the managers and enable them to engage in non-productive profit- seeking activities (e.g., Scharfstein and Stein, 2000b), increasing corporate costs and lowering corporate value. Despite the competing positive and negative effects of diversification, studies on optimal diversification are rare. This study attempts to determine the conditions necessary for an optimal level of diversification to exist using the banking industry as an example. The study follows the model Wagner (2010) used to explore the effect of diversification in reducing individual risk and increasing system risk. We find that optimal diversification is related to the business cycle: When the economy is good, there is an optimal diversification level for maximizing banks’ value, and when the economy is bad, diversification will lower bank value. THE MODEL Consider a three-period economy and two banks. Suppose each bank has collected one unit of funds from investors, of which a share d is in the form of deposits and the remaining share is capital. At time 1 bank

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1 invests in an asset X , and bank 2 invests in an assetY . Each asset requires one unit of funds. The values of the assets are independent and uniformly distributed on the interval[0, ]s ; that is

1( ) ( ) , , [0, ]X Yf x f y x y ss = = ∀ ∈ , (1)

where ( )Xf x and ( )Yf y are the probability density functions of the values of assets X andY . At time 2,

each bank decides whether to transfer its asset to the other bank. We denote 1[0, ], {1, 2} 2i

r i∈ ∈ , the

share of a bank invests in a new asset. Thus, the bank is undiversified if 0ir = , and fully diversified if 1/ 2ir = . The payoffs of assets are realized at time 3, and the values of banks 1 and 2 at time 3 are

1 1 1 1( , ; ) (1 )v x y r r x r y= − + (2)

2 2 2 2( , ; ) (1 )v x y r r x r y= + − (3)

When the value of bank 1 is less than d , it is insolvent, and it has to liquidate its assets. If the other bank is solvent, then the failing bank can sell its assets to the other bank for their total value, reduced by c ; that is ( , )iv x y c− . If the other bank is insolvent as well, then the assets of bank 1 have to be acquired by outsiders who are inferior users of the assets, so the assets have to be liquidated at a loss of qc , where

1q ≥ . Under these assumptions, the expected value for banks 1 and 2, 1W and 2W , can be written as

1 1 2 1 1 1 1 2 2 1 1 2 2( , ) [ ( )] ( ( ) , ( ) ) ( ( ) , ( ) )W r r E v r cP v r d v r d qcP v r d v r d= − ≤ > − ≤ ≤ (4)

2 1 2 2 2 2 2 1 1 1 1 2 2( , ) [ ( )] ( ( ) , ( ) ) ( ( ) , ( ) )W r r E v r cP v r d v r d qcP v r d v r d= − ≤ > − ≤ ≤ (5)

Therefore, the total welfare in the economy is the sum of the expected values of bank 1 and 2:

( ) 1 1 2 2 1 2 1 1 2 2

1 1 2 2 2 2 1 1

1 1 2 2

( , ) ( , ) [ ( )] [ ( )] ( ( ) , ( ) ) ( ( ) , ( ) ) 2 ( ( ) , ( ) ).

W r r W r r E v r E v r c P v r d v r d P v r d v r d

qcP v r d v r d

+ = +

− ≤ > + ≤ >

− ≤ ≤

Since [ ( )]i iE v r is independent of ir , the optimal diversification simply minimizes the total expected liquidation losses at both banks. Because of symmetry, the optimal degrees of diversification for banks 1 and 2 are equal. Therefore, we can focus on the losses for bank 1 and solve

( )1 2 1 2rMin ( ( ) , ( ) ) ( ( ) , ( ) ) c P v r d v r d qP v r d v r d≤ > + ≤ ≤ Using these assumptions, the optimal degree of diversification can be derived.

Proposition 1. The optimal degree of diversification in the banking system is given by * 1

1 2 1 r

q =

+ − when 1

1 2 1 d s q

≤ + −

, and * 0r = when 1 1 2 1

d s q

> + −

.

In the Nash equilibrium, the degree of diversification for Bank 1 is solved by

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1 1 1 1 1 2 2 1 1 2 2r

Max [ ( )] ( ( ) , ( ) ) ( ( ) , ( ) )E v r cP v r d v r d qcP v r d v r d− ≤ > − ≤ ≤ , (6)

which leads to Proposition 2: Proposition 2. In the Nash equilibrium the degree of diversification in the banking sector is given by

1 1

Er q

= +

when 1 1

d s q

≤ +

, and 0Er = when 1 1

d s q

> +

.

The threshold of optimal diversification is related to the cost of liquidation by outsiders q . In this study,

the threshold of the optimal diversification is

1 1 2 1q+ − in general equilibrium and

1 1 q+ in the Nash

equilibrium. The cost of liquidation by outsiders q is suggested to be constant in the short term, which implies that the threshold would also be constant in the short term. EMPIRICAL RESULTS Sample We chose 33 publicly listed banks in Taiwan from TEJ (Taiwan Economic Journal) data bank as the screening group, based on the length of their history and the availability of data. We excluded banks that were merged into financial holding companies because of difficult access to data and their reduced business independence. Then we selected banks from this group whose business cycle was apparent (equity market capitalization had once been lower than book value, namely, Tobin’s q value was <1) and whose levels of diversification had fluctuated. After this screening, we were left with ten publicly listed banks and 120 monthly observations for each year from 2000 to 2009. Optimum Diversification We use Tobin’s q as a measure of bank valuation. Tobin’s q is calculated as the sum of the market value of common equity, plus the book value of preferred shares, plus the book value of total debt, divided by the book value of total assets. Lang and Stulz (1994) employed Tobin's q to observe the relationship between corporate diversification and performance, arguing that Tobin's q contains the capitalized value of diversification. Under the hypothesis of an efficient market and market value as the unbiased estimated value of the current cash flow of the company, Tobin's q can measure the contributions of the intangible assets of the company to market value. Hence, management activities (e.g., diversification) can increase or decrease corporate value through the impact of intangible assets. When the company’s investment portfolio changes, its Tobin's q will also change. When the diversification indicator is calculated from the perspective of the bank’s profitability, the profit- making activities are divided into interest-rate-related activities and non-interest-rate-related activities. Stiroh and Rumble (2006) studied the impact of diversification on the performance of American financial holding companies and found that diversification facilitates the revenue from interest-rate-related activities and that diversification is detrimental to non-interest-rate-related activities. As the non-interest- rate-related activities have higher fluctuations and the profit-making capabilities are not necessarily higher than the interest rate-related activities, asset diversification in non-interest-rate-related activities

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lowers the performance of the financial holding companies. The establishment of diversification indicators by Stiroh and Rumble is illustrated as follows:

)(1 22 NONNET SHSHDIV +−= 2 NETSH : is the share of net operating revenue from net interest sources 2 NONSH : is the share of net operating revenue from non-interest sources

Laeven and Levine (2007) studied the diversification effect of financial integration on corporate market value by categorizing the operational activities that affect diversification into loan-related activities and non loan-related activities. Their findings suggested that the economies of scope of business diversification after financial integration do not generate diversification premiums. The diversification indicator is set as illustrated below:

income operating total income operatingother - incomeinterest net 1)( −=LLationDiversific

Elsas et al. (2010) studied how diversification affected the value of bank during the 1996-2008 in nine countries. They classified the bank’s non-interest-related activities into net commission revenue, net trading revenue, and all other net revenue. The set diversification indicator is illustrated below:

])()()()([1 2222 TOR OTH

TOR TRAD

TOR COM

TOR INTDIV +++−=

INT: gross interest revenue COM: net commission revenue TRAD: net trading revenue OTH: all other net revenue TOR: total operating revenue, which is equal to the sum of the absolute values of INT, COM, TRAD and OTH.

Referring to the diversification indicators proposed by Elsas et al.(2010), this study, in accordance with the items on the balance sheet of Taiwan’s banking industry, categorizes the revenue sources of the banks into four types in order to calculate the banks’ diversification indicator:

H=1-[(interest revenue/total revenue)2 +(handling fee and handling charge commission revenue/total revenue)2 +(financial transaction revenue/total revenue)2 +(other revenue/total revenue)2]

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In order to verify the existence of an optimal level of diversification in the sample banks in Taiwan, Tobin’s q is used as the measurement indicator of the value of the bank, and H is used as the diversification indicator of the bank’s revenue to establish the regression model:

Q=c+a1H+a2H2 (7)

Q: Tobin Q=(M/B)=(Market Value/Book Value) H: the degree of diversification, c: the effects of other influencing factors

If the operational purpose of the bank is to maximize its value (Max Q), and there is an optimal level of diversification H, then H should satisfy the following two conditions: Condition I,

02 2

< dH

Qd , Second-order condition, namely, H2 regression coefficient a2<0, representing that the

existence of diversification has maximized corporate value. Condition II,

The optimum diversification: * 1 2

0 2 aH a

= > −

; hence, the regression coefficient is a1>0.

If the effects of reducing individual risk through the bank’s diversification are greater than the effects of increasing system risk, there should be an optimal level of diversification to maximize the value of the bank. This paper uses the corporate value Q of Taiwan’s sample banks to conduct a regression estimation of the diversification variables H and H2, leading to the results shown in Table 1. Table 1: Regression Results for Optimal Diversification

Bank C H H2 Adj.-R2

Coeff. p-value Coeff. p-value Coeff. p-value

2801 0.9616 0.0000 *** 0.2432 0.0000

*** -0.3002 0.0000 *** 0.3502

2809 0.9425 0.0000 *** 0.3667 0.0000

*** -0.5502 0.0000 *** 0.4077

2812 0.9491 0.0000 *** 0.2291 0.0004*** -0.2885 0.0015*** 0.1144

2834 0.9778 0.0000 *** 0.0658 0.0033*** -0.0504 0.1433 0.2730

2836 0.9626 0.0000 *** 0.1446 0.0000

*** -0.2004 0.0000 *** 0.1244

2837 0.9031 0.0000 *** 0.7495 0.0000

*** -1.2301 0.0000 *** 0.2699

2838 0.8376 0.0000 *** 0.6151 0.0002*** -0.6340 0.0008*** 0.2231

2845 0.8404 0.0000 *** 0.7383 0.0000*** -0.7422 0.0000*** 0.6366

2847 0.9017 0.0000 *** 0.3378 0.0000*** -0.2779 0.0001*** 0.5297

2849 0.9003 0.0000*** 0.4031 0.0000*** -0.3851 0.0000*** 0.6197

Tobin’s q is calculated as the sum of the market value of common equity, plus the book value of preferred shares, plus the book value of total debt, divided by the book value of total assets. Herfindal H=1-[(interest revenue/total revenue)2+(handling fee and handling charge commission revenue/total revenue)2+(financial transaction revenue/total revenue)2+(other revenue/total revenue)2]. * significant at the 10% level. ** significant at the 5% level. *** significant at the 1% level.

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As Table 1 shows, the regression coefficients of the first-order variable H of diversification against the bank value variable Q at the 1% significance level is positive, indicating that increasing diversification leads to rising corporate value. The regression coefficients of the second-order variable H2 of diversification at the 1% significance level are mostly positive except for one sample, indicating that diversification can maximize corporate value. Hence, Taiwan’s banking sample suggests that diversification’s positive effects on bank value (reducing individual risk) are greater than the negative effects (increasing system risk).Regarding the impact of economic conditions on the optimal level of diversification, this study organizes the probability of corporate value to be lower than liability value in conducting the sensitivity analysis and finds no significant results. It is not easy to estimate accurately the loss probability q and the observation value s of the highest possible value of the bank’s investment assets. Therefore, this question is expected to be explored in future studies. Among the sample banks in Taiwan, the Taichung Commercial Bank (2812) and the Kaohsiung Bank (2836) have higher risks (risk incidents had taken place) than other banks. The probability of liquidation conditions of the two samples, the d /s values, are more likely to exceed the threshold, so an optimal level of diversification is less likely. However, the regression fitness of the two samples is relatively poor (relatively smaller modified R2), and the representativeness is weak. The probability of the liquidation condition indicator, the d/s value of other sample banks, is more likely to exceed the threshold; hence, the possibility that there is an optimal level of diversification in Taiwan’s banking industry is relatively high. CONCLUSIONS For financial institutions, diversification may reduce individual risk and improve corporate value, as well as increasing system risk and lowering corporate value. Hence, if the integration results of the two are beneficial to the corporation, there is an optimal level of diversification to maximize corporate value. This study finds that diversification’s impact on corporate value is related to the business cycle such that, when the economy is good, there is an optimal level of diversification to maximize banks’ value, and when the economy is bad, diversification will hurt banks’ value. Moreover, the optimal level of diversification and the loss rate are in an inversely changing relationship. These results suggest that the integration effect of diversification in good economies are beneficial, and investment should increase, while the integration effects of diversification are negative in poor economies, and investment should be reduced. Most of the recent empirical studies on the impact of diversification on the value of financial institutions begin from the perspective of financial integration to test whether corporate value falls after financial integration. Such limitations are not generalized. Hence, with Taiwan’s banks as an example, this study tests the impact of diversification on the banks’ value and finds that, in the case of the sample banks, there is an optimal level of diversification to maximize corporate value. This finding suggests that Taiwan’s economic conditions still benefit the diversification of the banking industry. However, this study does not verify the indicators of conditions leading to probability of liquidation or loss rate, which may be considerations for future study. REFERENCES Allen, F. and Carletti, E. (2006) “Credit risk transfer and contagion,” Journal of Monetary Economics, vol. 53(1) p. 89-111. Allen, F. and Gale, D. (2005) “Systemic risk and regulation,” In: Carey, M., Stulz, R. (Eds.), The Risks of Financial Institutions, Chicago University Press. Amihud, Y. and Lev, B. (1981) “Risk reduction as managerial motive for conglomerate mergers,” Bell Journal of Economics vol. 12(2) p. 605- 617.

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Bhide, A. (1990) “Reversing corporate diversification,” Journal of Applied Corporate Finance vol. 3(2) p. 70- 81. Bodnar, G. M., Tang, C. and Weintrop, J. (1999) „Both Sides of Corporate Diversification: The Value Impacts of Geographic and Industrial Diversification,” Unpublished manuscript, Paul H. Nitze School of Advanced International Studies, Johns Hopkins University (December). Chandler, A.D. (1977) “The Visible Hand: The Managerial Revolution in American Business,” Belknap Press, Cambridge, MA. Ghemawat, P. (2000) “Competition and Business Strategy in Historical Perspective. Unpublished manuscript,” Harvard Business School (April). Goldstein, I. and Pauzner, A. (2004) “Contagion of self-fulfilling financial crises due to diversification of investment portfolios,” Journal of Economic Theory vol. 119(1) p. 151-183. Goold, M. and Luchs, K. (1993) “Why diversify? Four decades of management Thinking,” Academy of Management Journal vol. 7(3) p. 7 - 25. Hadlock, C., Ryngaert, M. and Thomas, S. (2001) “Corporate structure and equity offerings: are there benefits to diversification?” Journal of Business vol. 74(4) p. 613-35. Harris, M., Kriebel, C. and Raviv, A. (1992) “Asymmetric information, incentives, and intrafirm resource allocation,” Management Science vol. 28(6) p. 604-620. Jensen, M. C. (1986) “Agency costs of free cash flow, corporate finance and Takeovers,” American Economic Review vol. 76(2) p. 323-329. Jensen, M. and Murphy, K. J. (1990) “Performance pay and top management Incentives,” Journal of Political Economy vol. 98(2) p. 225–264. Khanna, N. and Palepu, K. (1999) “Corporate Scope and Institutional Context: An Empirical Analysis of Diversified Indian Business Groups,” Unpublished manuscript, Harvard University. Laeven, L. and Harry, H. (2009) “Accounting Discretion of Banks During a Financial Crisis. IMF,” Working Papers. Lamont, O. (1997) “Cashflow and investment: Evidence from internal capitalmarkets,” Journal of Finance vol. 52(1) p. 83-109. Lang, L. H. P. and Stulz, R. M. (1994) “Tobin's q, Corporate Diversification, and Firm Performance,” The Journal of Political Economy vol. 102(6) p. 1248-1280. Lewellen, W. (1971) “A pure financial rationale for the conglomerate merger,” Journal of Finance vol. 26(2) p. 521-537. Meyer, M., Milgrom, P. and Roberts, J. (1992) “Organizational prospects, influence costs, and ownership changes,” Journal of Economics and Management Strategy vol. 1(1) p. 9-35. Montgomery, C.A. (1994) “Corporate diversification. Journal of Economic

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Perspectives” vol. 8(3) p. 163– 178. Penrose, E.T. (1959) “The Theory of the Growth of the Firm,” Wiley, New York. Rajan, R., Servaes, H. and Zingales, L. (2000) “The cost of diversity: The diversification discount and inefficient investment” Journal of Finance vol. 55(1) p. 35–80. Scharfstein, D. and Stein, J.C. (2000a) “The Dark Side Of Internal Capital Markets: Divisional Rent- Seeking And Inefficient Investment,” Journal of Finance vol. 55(6) p. 2537-2564. Scharfstein, D. and Stein, J.C. (2000b) “Herd behavior and investment: Reply,” American Economic Review vol. 80(3) p. 465-479. Shleifer, A. and Vishny, R. (1990) “Managerial entrenchment, the case of manager specific investments,” Journal of Financial Economics vol. 25(1) p. 123-139. Shleifer, A. and Vishny, R. (1991) “The takeover wave of the 1980s,” Journal of Applied Corporate Finance vol. 4(3) p. 49-56. Stein, J.C. (1997) “Internal capital markets and the competition for corporate Resources,” Journal of Finance vol. 52(1) p. 111-133. Teece, D.J. (1982) “Towards an economic theory of the multiproduct firm,” Journal of Economic Behaviour and Organization vol. 3(1) p.39-63. Villalonga, B. (2000) “An Empirical Analysis of Diversification Motives,” Unpublished manuscript, Anderson Graduate School of Management, University of California, Los Angeles. Wagner, W. (2010) “Diversification at financial institutions and systemic crises,” Journal of Financial Intermediation vol. 19(3) p. 373-386. Wernerfelt, B. and Montgomery, C.A. (1988) “Tobin’s q and the importance of focus in firm performance,” American Economic Review vol. 78(1) p. 246–250. Williamson, O. (1975) “Markets and Hierarchies: Analysis and Antitrust Implications” Collier Macmillian Publishers, New York.

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BALANCED SCORECARD FOR ENTREPRENEURIAL STRATEGIC MARKETING IN COLOMBIA

Santiago García Carvajal, Universidad Militar Nueva Granada

ABSTRACT The article formulates a Balanced Scorecard based upon research outcomes that enables knowledge centric entrepreneurships in Colombia to implement strategic Marketing practices. It explores entrepreneur´s marketing rationale through fieldwork and data analysis by evidencing relationships between their education, revenues and years of experience with various strategic marketing options. Marketing rationale was defined within The Wheel of Consumer Analysis (WCA) framework: (Environment) Knowledge acquired from the outside, (Affective and Cognitive) Specialized training and procedures and formal and non-formal education thorough technical instruction, Competences implemented and experienced as routines and finally, (Behavior) transferring that knowledge across business areas and embed it the final products. Factor analysis helps determining appropriate marketing mixes for technology based entrepreneurships in terms of local idiosyncrasies. One way ANOVA provides mean comparisons between different categories for education, revenues and years of experience to factor scores.

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DECODING THE REGULATORY SYSTEM FOR ADVERTISING IN CONTEMPORARY CHINA

Luding Tong, Marietta College

ABSTRACT The recent announcement of the advertising code of ethics, “China’s Responsible Marketing Code,” by the China Association of National Advertisers was celebrated by the World Federation of Advertisers as a milestone in China’s advertising industry and the first step to establishing an effective self-regulatory system for advertising in China. This paper cautions that China’s advertising regulatory system is complicated and that the fundamental role of the Code remains to be seen. The paper examines the development and the principal dimensions of China’s current advertising regulation system, including the Advertising Law, the regulations that complement the Law, censors and the censorship process, and examples of censorable advertisements under the current system. The intricate relationship between the written and unwritten rules, on the one hand, and government involvement, on the other hand, leaves ample room for officials to make subjective decisions regarding advertisements in different contexts and political situations. The paper demonstrates that, in the ideological contest between socialism and capitalism, the Chinese government resorts to different strategies to regulate the advertising industry, and that the path to establishing effective advertising standards that are consistent with the principles in many developed countries is formidable. JEL: M31, M37, M38 KEYWORDS: China, advertising regulations, global marketing INTRODUCTION To help understand China’s advertising regulatory system and censorship, this paper examines the development and principal dimensions of the contemporary Chinese regulatory system for advertising, censorship, and their enforcement. The paper seeks to shed some insights on how different elements in the system work by looking into the intricate relationship among the written rules—which include the Advertising Law, the government-issued regulations and explanations of the Advertising Law, the ad industry’s self-regulatory rules—and the unwritten “moral law.” The paper also describes the connections between the government and the censorship organization, and the censorship process and practices. On April 11, 2011, at a press conference in Beijing, the China Association of National Advertisers (CANA) announced China’s first cross-industry self-regulatory advertising code of ethics, the “China Responsible Marketing Code” (hereafter, “the Code”). The Code had been developed jointly by CANA and the other two leading advertising associations in China—the China Advertising Association (CAA) and the China Advertising Association of Commerce (CAAC)—in consultation with the World Federation of Advertisers (WFA). The principles of the Code are reported to be consistent with advertising standards in the rest of the world. The Code was celebrated by representatives of WFA as a milestone in China’s advertising industry. (WFA Global News, April 13, 2011).

However, WFA’s optimism regarding the important role of the Code did not seem to be shared by CANA’s Chinese colleagues in CAA, an organization instrumental in China’s advertising censorship.

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During my recent interview at CAA, Li Fangwu, Executive Assistant to the Secretary General of the CAA and Director of the CAA’s Legal Service, was low-keyed about the significance of the Code: “CANA is a member of the WFA. Naturally, the Code has received international attention. Advertising censorship in China is government controlled. The regulatory rules are strict, and the system is complicated. There is little room for the Code to play a significant role in the advertising regulation system” (Tong, 2011). “COMMERCIAL REVOLUTION” The past three decades have witnessed a new era in China in which many cultural changes have taken place. With Deng Xiaoping’s proclamation “To get rich is glorious,” the “Mao fevers” of the Mao Era (1949-1976) have shifted to today’s “consumer fevers.” Commercialism has penetrated every aspect of contemporary Chinese society, exerting impact on every Chinese man and woman, old or young. This phenomenon has been characterized by critics as a “consumer revolution” (Davis, 2000).

China’s rapid economic growth since 1992 has given a further powerful impetus to a progressive expansion of consumerism. The Chinese consumer economy has shifted from one of satisfying needs to one that develops wants. Acquiring and consuming material goods—tastefully—has become an intrinsic part of modern living and a validation of one’s high social standing in China. China’s new elites like to dine at Western food restaurants; frequent outdoor cafés, bistros, and boutiques that possess a foreign cachet; and show off their newly acquired Western brand-name products, such as Armani and Louis Vuitton. China now ranks second in the world in the consumption of luxury goods, just behind Japan. According to projections by Goldman Sachs, China is likely to tie Japan as No. 1 in 2015, consuming 29 percent of luxury-goods sales world-wide (The Wall Street Journal, September 8, 2006). The government’s recent policy to transform China’s economy from an export- and manufacturing-oriented one to a domestic consumer-oriented one will no doubt further help expansion of consumerism in China.

As a central totem of commercialism, advertising has developed at a speed unprecedented in its Western counterparts. Only three decades ago, few Chinese people knew what a commercial advertisement was, or how it functioned. After the People’s Republic of China was founded in 1949, Western-style commercial advertising in China had been restricted for about 30 years. It was believed that advertising encouraged individual consumption, and was seen as a symbol of capitalism and a deliberate perversion of public communication for decadent commercial purposes. Products featured Mao’s face and the faces of other political leaders. Chinese people at that time lived a thrifty life. Almost every consumer good was rationed. When consumer wares were so scarce, no advertising was necessary. In the spirit of “deepening reform and broadening the open-door policy,” “socialist commercial advertising” was welcomed back in December 1978. Eager to earn advertising revenue from foreign clients, Chinese government officials responsible for economic development and advertising professionals informed foreign companies that they could place advertisements on radio, television, and billboards, and in newspapers and magazines. Shortly after the curtain lifted, a newly resuscitated Shanghai Advertising Corporation pursued foreign clients with English language advertisements: “Do you want to promote your business? Consult us. We are ready to offer full & efficient services” (Stross, 1990, p. 489). Drawn by China’s booming market, the world’s major advertising agencies rushed into the Chinese advertising market in the 1980s. Initially, foreign advertising companies explored the Chinese ad market with caution. Since the 1990s, foreign advertising has expanded rapidly. Now, almost all the world’s major advertising companies have operations in China. Tom Doctoroff, the North Asia CEO of WPP Group’s JWT ad agency, boldly claims that “We [at JWT] want our creative ideas to be extended

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into every corner of the country” (The Wall Street Journal, March 30, 2006). Once inside the country, Western advertising aroused the desire of the Chinese masses to embrace Western consumerism. GOVERNMENT, ADVERTISING LAW, AND ADVERTISING REGULATIONS For three decades, the advertising industry in China has grown from practically nothing in 1979 to a multi-billion-dollar business today, with annual advertising spending reaching $36 billion in 2010—the world’s second-largest national expenditure on advertising after the U. S. (CAA, 2010). The size of the ad industry, its explosive growth, the size and diversity of the country, the vague and potentially controversial government regulations, the novelty of the advertising industry and the comparative ignorance of indigenous advertising professionals about the new field, posed challenges for both government law makers and advertisers seeking to produce sound regulatory measures and quality ad products. Today’s Chinese advertising market, as accurately described by Jian Wang, is “vibrant yet chaotic” (Wang, 2000, p. 112). This chaotic situation has at least three explanations. 1. The Ideological Incongruity of a Socialist Society and a Capitalist Economy Since China’s adoption of a “socialist market economy,” party leaders have been struggling, on the one hand, to hold on to communist ideology as the country’s spiritual foundation and, on the other hand, to depend on capitalism to further the country’s economic development, in order to keep the party’s authority and legitimacy to rule the country. More than three decades have passed since the Chinese Communist party-state endorsed “socialist commercial advertising.” What exactly “socialist commercial advertising” is, is unclear, except that it “should differ from advertising in a capitalist country” and should be “in conformity with the criteria for socialist spiritual civilization” (Wang, 2000, p. 111). Consumerism was a hot (obsessive) topic in 1980s and 1990s in China. There were heated debates in newspapers and magazines and on television and radio, regarding the “shoulds” and “should nots,” as well as on the functions and principles of advertising in a socialist system. In his address to the Third World Advertising Conference held in Beijing in 1987, Wan Li, then China’s acting premier, stated that “Advertising links production and consumption. It is an important part of the economic activities of modern society” (Wang, 2000, p. 40). As noted by critics in the West, the arguments by those who advocated for advertising were precisely those that critics in capitalist societies used to attack advertising. These Chinese writers cheered advertising’s ability to “stimulate the consumers’ desire to consume—advertising consequently accelerates the expansion of production” (Stross, 1990, pp. 498-490). At that point, the ostensible distinction between Chinese socialist advertising and Western capitalist advertising disappeared. 2. The Advertising Law, Government Regulations, and Self-Regulation After advertising was welcomed back to China, there was initially little control by the government over regulations, resulting in a chaotic situation. It took a few years before government officials began to take measures to regulate the advertising industry. To promote ad industry standards and protect consumer interests, the government published a series of policies and regulations governing advertising. In 1982 the State Council issued “Provisional Regulations for Advertising Management,” and then the “Regulation for Advertising Management” in 1987. Other important advertising policy initiatives were the “Interim Regulations on the Advertising Agency System” and the “Interim Advertising Review Standards” by the State Administration of Industry and Commerce (SAIC) in 1993, and finally the Advertising Law was passed by the National People’s Congress and came into effect in February 1995 (Wang, 2000, pp. 95-96). Experience with the 1995 Advertising Law in the past decades, however, shows

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that the Law is not sufficient as a guide for the rapidly developing advertising industry in China. Ad agencies and professionals complain that the Advertising Law is vague and out of date. Many critics call for revision (Qu, 2006, pp. 16-17). Since 2007, the SAIC has published several sets of standards and measures to supplement or explain of the 1995 Advertising Law for the supervision and management of advertising in China. Examples are the “Standards for the Censorship and Publication of Advertising for Medical Products” and “The Announcement of Strengthening Supervision and Management of Print Advertisements.” Over the years, CAA and, recently, CANA have issued more detailed self-regulatory principles for advertising, advocating honest, truthful, and decent ad behavior and specifying responsibilities of the advertising parties. Although it encourages self-regulation by advertisers, the government has ultimate power over the industry. Because advertisers’ self-regulation is not legally binding, enforcement has been relatively weak. Punishments of violations of the rules usually involve media exposées. Over the past few years, the SAIC, with the participation of CAA, CANA, and China’s Consumer Association have been revising and updating the 1995 Advertising Law. It is unknown when the revised law will be passed by the People’s Congress and become effective. According to Li Fanwu, who has been involved in the revision, the revised law will remain general and conceptual, similar to the 1995 Advertising Law, rather than being specific and detailed. 3. The Unwritten Daode fa (Moral Law) Although the Advertising Law and the government-issued ad regulations are the primary codified legal texts for the advertising industry in China, a “law” that is not in writing, known as daode fa, roughly translated as “moral law,” is an important component of the government policies toward advertising. The “moral law,” which is similar to the code of ethics in the West, is generally associated with moral consciousness or ethical principles in human behavior, intended for human betterment. Such moral guidance usually is believed to derive from shared values and mores of a culture or society; however, Chinese daode fa, is more complicated, both in its concept and in its practice of regulating human behavior—specifically, advertising communications. There are at least three conceptual components in the formation of contemporary Chinese daode fa. The first is the body of Confucian moral values. Being the “central pillar” of Chinese culture, it is generally believed that the moral principles advocated by Confucianism shaped the core of “Chinese characteristics.” Confucian moral principles include belief in humaneness, or ren, and the practice of benevolent conduct. “Ren” is defined in Confucianism as “a sublime moral attitude, a transcendental perfection attained only by legendary heroes” (Guo, 2004, pp. 82-83). Since the turn of the 20th century, Confucianism has been going through political and ideological ups and downs in China. Attitudes of the masses toward Confucian values subsequently have undergone changes; so have Confucian moral responsibilities. Confucianism was criticized by Mao’s regime during the Cultural Revolution (1966-1976) as being feudalist and reactionary, and Chinese were ordered to eradicate it from their hearts and minds. In the wake of economic success in East Asia, Confucianism was resurrected. Confucian moral values once again have been advocated both by Communist Party leaders and by the New Confucians who believe in Confucianism in contemporary China as spiritual guidance to lead China through the nation’s modernization. Confucianism has been touted as the nation’s insurance to regain its power in the world and to influence the world’s future direction.

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The second conceptual component in the formation of contemporary daode fa is the so-called “socialist morals.” Historical materialism postulates that societies are divided by classes and fraught with class conflict. Chinese Marxists advocate that moral beliefs and values should reflect historical and socio- economical conditions of a society. In Zhou Wangsheng’s article explaining the relationship of moral values and the state law (Zhou, 2007), the author emphasizes that in socialist China, moral values are defined by socialist laws and should be for the benefit of socialist society: More specifically, Zhou states that Chinese socialist morals are manifested, in addition to the “goodness” of the nation’s traditional values, in “five loves,” namely, love of the country, love of the people, love of work, love of science, and love of socialist public virtues (Zhou, 2007). According to one advertising handbook, one key element in Chinese advertising is “its relatively strong, ideological content. In a class society, the essence of such an ideology reflects the thoughts of the class.” (Wang, 2000, p. 94) A development and an expansion of the traditional moral system, socialist moral consciousness should show the spirit of collectivism, defend the socialist cause, and serve the people and society, heart and soul. In short, socialist morals constitute an important part of the Chinese socialist spiritual civilization (Zhou, 2007). The third component of daode fa is its unique role in the enforcement of the law in China. Commenting on the practice of moral consciousness and the state law, Zhou Wangsheng characterizes the legal system in China as “not perfect” and in an on-going process of improvement. Regulating various social relations is subtle and complicated, and the regulations of many social relations cannot be thoroughly defined in words (Zhou, 2007). Zhou’s assertion is also stipulated in the 1995 Advertising Law. Article III of the Advertising Law of the PRC stipulates that “An advertisement shall be … in compliance with the requirements of raising a socialist cultural and ideological progress” (italics added). In other words, an advertisement should reflect socialist spiritual consciousness. So as socialist spiritual guidance, contemporary daode fa is crucial in regulating social relations: It functions to complement the law and to close the loopholes in the Chinese legal system. In this sense, the wordless daode fa bears an equal, if not superior, weight to the state law in China. The daodefa was an important source of spiritual guidance during the so-called “Anti-Spiritual Pollution” campaign in the early 1980s. It reinforced the need to separate the essential Western things from the dross, and to blend the West’s quintessence with China’s to create “socialist advertisements” that reflected China’s own “special characteristics.” This was a goal that all Chinese could support, and though the defining characteristics of a socialist advertising style remained vague, mere mention of the goal served to deflect criticism of undue Western influence” (Stross, 1990, p. 497). Despite some similarities between the Chinese daode fa and the codes of ethics in most developed countries (in terms of upholding the principles of honesty, truth, and decency), daode fa differs in its strong political and nationalistic implications. The nature and role of daode fa in contemporary China can be summarized as follows: 1) it is to serve as a “law” to protect the interest of socialist construction, the state, and the people; 2) unwritten, but shaped by certain socio-economic conditions in history, the concept and definition of daode fa are ever-changing, flexible, and open to interpretation; and 3) as a complement to law, it has the power of being morally binding in its regulation of social relations and human behavior. CENSORS AND CENSORSHIP Currently ad regulation in China is, in theory, a combination of government regulation and the industry’s self-regulation. However, the word “censorship” in Chinese “shencha” has strong political connotations and therefore implies an action of authoritarian enforcement. The Chinese political system ensures that the government controls ad-regulating activities and has the ultimate authority over approval or rejection

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of an advertisement. Although legal autonomy has been advocated in recent years, the Chinese legal institution is, in many ways, still an extension of state administration. Government regulations are a complication for advertisers in China. They require considerable work to either circumvent or accommodate. Advertising censorship in China is confusing, at best, and has created problems for advertisers in the Chinese market. Many companies, particularly foreign companies complain that avoiding violations of government advertising policies is painfully confusing and difficult. The Chinese Advertising Association The implementation and enforcement of the Advertising Law and the various regulations rest within the jurisdiction of SAIC. What is interesting is that, despite the tight government control of advertising, the government itself does little ad censoring. Advertisements in China are divided into two categories in terms of censorship requirement: mandatory and voluntary. The “mandatory advertisements” are the advertisements for pharmaceutical products, medicine, health products, agricultural chemicals, veterinary drugs, and medical equipment. Those advertisements must be censored by the state or provincial bureaus in charge before the ads are released to the public. The advertisements for other products are encouraged, but not required, to go through the censorship. For “non-mandatory” advertisements, the Chinese Advertising Association conducts the censorship review. Founded in 1983, the mission of the CAA is “to promote self-regulation and development, guide, coordinate, serve and supervise advertising organizations under the leadership of the State Administration for Industry and Commerce of the P. R. China,” according to the association’s brochure. Although the CAA describes itself as a non-governmental trade organization, it reports directly SAIC, indicating a level of government intervention that would be highly unusual for a trade organization in many other countries. As a result of their close association with the state bureau, the CAA enjoys enhanced authority as a pre-government regulator in censoring advertisements. For a fee, the Association’s review board will examine an ad and determine whether it is appropriate, before it is released to the general public. Currently, CAA’s approval or rejection of an advertisement is, in theory, not legally binding. However, as a government-sponsored organization charged with censoring responsibilities by SAIC, its stamp of approval seems to carry an almost official ring. During my interview with Li Fangwu at the CAA, Li stated that CAA’s legitimacy in executing ad censorship will be specified in the forthcoming revised advertising law. Therefore, in practice, as good as the Association may be at evaluating ads, its weight comes from its association with the government and its effectiveness at screening ads. Although sending ads to CAA for review is voluntary, it is customary for ad agencies to seek approval from CAA for their ad before producing and scheduling its appearance in the media. One major consideration in submitting the ads first to the CAA is that by detecting potential problems at an early stage of ad production (that is, at the storyboard stage), the agency and the advertiser can save money and effort if the ads are found to violate the Advertising Law, or the ad regulations, and therefore need to be altered. In essence, the CAA advertising review is a bureaucratic process. Censorship Process The first stage of censorship is usually self-censorship, which takes place during the creation stage of an ad. The ad agency and the client who has requested an ad sit down and examine a proposed ad for any potentially offensive or censorable material. This stage of the censorship process can be the most time-

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consuming and painstaking because of the indeterminate interpretation of the broad Advertising Law and the numerous newly issued rules that either supplement or supersede the existing regulations. It is also time-consuming because a large number of ads is submitted to a client, and each of them generally receives scrutiny. An interview with a professor of advertising in Beijing in 2006 revealed that an ad agency might submit 25 to 30 print ads per session to a client, and there may be as many as 5 different sessions before an ad is found that satisfies a client. This translates to more than 100 ads that must each be examined for censorable material. Although print ads are easier to examine than television ads, the sheer number of trial ads makes self-censorship a time-consuming and inconvenient task for ad agencies. However, self-censorship is also a very important stage. The next stage is usually censorship by the CAA. The CAA is generally good at anticipating what is and is not appropriate, and a successful pass through the CAA makes government approval very likely. If the CAA certifies an ad as appropriate, then the biggest hurdle is over. On other occasions, the CAA would make suggestions of revision. After alterations are carried out according to CAA’s recommendation, the CAA issues an approval certificate on the final version of the spot, and then the pre-showing censorship is over. Not all companies go through the CAA. Smaller companies usually do not bother to get their ads certified by the CAA. One reason for this is that the government does not care much about small businesses. Thus, smaller businesses have lesser motivation to join the CAA and invest in pre-censoring efforts. Larger businesses, on the other hand, have more money and have more influence in the Chinese market. They are under close watch by the government. Foreign businesses are, almost by definition, large businesses. It takes considerable time and resources for them to move into a foreign market, especially one as complex as the Chinese market. Almost all of them become CAA members and dutifully go through the screening process at the CAA. Too much is at stake for them to risk a blunder in their relationship with the government. An ad can be aired if it clears the CAA. However, this does not mean that the company is home free. Even then, it is possible for an ad to be pulled. The government does not ignore ads once they are cleared. The government monitors current ads for censorable material that may have escaped notice at an earlier stage and for consumer reactions. This actually happened with a McDonald’s ad at one point. The company’s TV commercial shows a man down on his knees begging for something. Later in the ad, the man is shown to be begging for a sandwich. The ad cleared the censors, only to be met by public concern for promoting undignified behavior. Although most Americans would be more likely to find this ad amusing than insulting, it caused a debate among the officials censoring ads. The government stepped in and pulled the ad soon after it was released. It was surprising that the advertising agency that created the ad was found culpable for this mistake and ended up paying. It was not the McDonald’s Corporation, the CAA, or even the media that failed to catch the ad at an earlier stage. It is apparently not uncommon for a company to put off paying an ad agency for work until the project is aired, or even later. Because the ad was pulled so quickly, the company that commissioned the ad (McDonald’s) refused to pay. It is the potential for mistakes like this that prompt many companies, particularly large companies, to submit material to the CAA for review. Even though the CAA is not perfect at eliminating inappropriate material, the potential losses from a bad product make a good attempt at censorship far better than none at all. The entire censorship process demonstrates the potential for ambiguous law enforcement of business practices to create difficulties for the advertising industry in China.

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The Media The last gatekeepers in the censorship process are the advertising media. They review all ads to be broadcasted or printed. The media establish their own advertising review mechanism. They reserve the right to reject any advertising deemed inappropriate for print or broadcast. However, a major challenge they have is how to survive in China’s socialist market economy. With the introduction of a market economy, the Chinese government is determined to eliminate the economic losses sustained by subsidizing media. Earlier in 2004, more than 1,400 state and party newspapers and periodicals were shut down, merged with commercial groups, or forced to finance themselves. Since 2000, the government has pressed China’s thousands of televisions channels to commercialize, even though the government still tightly controls media content. Media either go broke or “contribute” to GDP by relying on the market and attracting more advertising. Advertisers, domestic as well as foreign, encounter restrictions placed on the total quality of advertising accepted for television, newspapers, and magazines. During the early years of the advertising expansion in China, the government was concerned about the most important media being overwhelmed by commercialism. When China Central Television (CCTV), China’s most powerful television network, first announced that it would carry commercials, it stated its intention to restrict commercial time to only 15 minutes each day, and it stuck by this policy (Stross, 1990, p. 492). However, as the country is becoming more consumer-driven, the limits on television ads issued by the government in the 1980s are no longer followed. It is common for a TV program to be interrupted by two or three brief commercials. But between programs, commercials run for as long as 15-20 minutes. The bombardment of advertisements on television has caused sharp criticisms by the TV viewers and concerns by government officials. In April 2011, a government official stated that television advertising might be banned, according to the people I interviewed at CAA in May. Although many Chinese media are now primarily supported by advertising (an average of over 90 percent of the revenue for a television station is generated by advertising), they remain, in essence, state-owned entities. As Jian Wang has pointed out, “propaganda and profit are … equally important for them. Without one or the other they won’t be able to survive in this new media environment. The major media are particularly strict about advertising content because they cannot afford to bear the brunt of deviating from the government and party line” (Wang, 2000, p. 99). CCTV has its own censorship process for its own programs. As the mouthpiece of the Communist Party, and with its far-reaching impact across China, CCTV is more cautious in observing the Advertising Law than are provincial or local stations, and it censors content to assure consistency with values and ideas that the central government approves. The stipulations by the ad media in China do not necessarily duplicate what is established in the codified Advertising Law, yet they are not incongruent with the spirit of the law, either. The measures in censoring advertisements by media are more politically than legally motivated, as the political and the legal in China are often intricately intertwined. The verdict by the media on accepting or rejecting an ad is sometimes also a result of administrative interference from government officials and the current party line. An illustration is the sudden “pig ban” on Nestlé’s TV ads for the 2007 Chinese Lunar New Year, China’s biggest holiday. As China rang in the Year of the Pig, Nestlé planned to celebrate with a TV ad featuring a smiling cartoon pig. “Happy New Pig Year,” the ad said. A little over three weeks before the Lunar New Year, CCTV banned Nestlé’s ad. According to the CCTV official who made the announcement of the ban, the intent was to avoid offending Muslims, who consider pigs unclean. It is observed in a Wall Street Journal report that the ban

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came in the wake of the killing of 18 Muslims by police in the northwest of China. The government accused the men of being terrorists. Muslim activists called for an independent investigation. The network’s ad department explained to ad agencies that China was a multiethnic country. “To show respect to Islam, and upon guidance from higher levels of the government, CCTV will keep any ‘pig’ images off the TV screen” (The Wall Street Journal, January 25, 2007). Although advertisers have learned to cope with sometimes inconsistent government edicts as it attempts to control the media and popular culture, they were still taken aback by the ban on pigs. From first draft to post-release, someone is examining ads for objectionable material. The idea of self- regulation generally means that any government policy is to cultivate an environment in which the community will have freedom to operate. This is not the case in China. Due to the political structure, the ad industry’s self-regulation is an extension of the government regulation. There is little freedom or autonomy in ad decisions and ad activities. What is most surprising is how little of this censoring is done by the government itself. The government influence on the advertising industry seems more “inactive” than “active” with regard to the daily operation of ad agencies. It is the CAA, the media, and self- censorship that do most of the actual censorship work in Chinese advertising. The government exerts a powerful influence over advertising by spreading the threat of press exposé or government punishment. This threat is much more common than actual intervention, although the government is proactive about dealing with concerns should it feel the need. The method for censoring and controlling the content of advertisements may seem surprising to Westerners, but the Chinese model makes considerable sense. It would be difficult, as well as impractical, for the government to try to censor every advertisement of a multi-billion-dollar industry that is still growing. Thus, it makes more sense for a government with finite resources to have the companies themselves do most of the work and to provide a separate oversight organization through the CAA. This way, the government delegates a considerable portion of the work while minimizing the actual loss of control over content.

“CENSORABLE” ADVERTISEMENTS Another strategy in the ad censorship by the government is that, rather than screening the details of every single ad, the government focuses on those for the “targeted” products and companies that are most likely to run afoul of the law. Two types of advertising that are mostly likely to be scrutinized: One is fraudulent advertising, particularly for medical products, food, and cosmetics. The other is advertising of national images that would “hurt the feelings of the Chinese people.” Fraudulent Advertising In the early 1980s, the business of ad companies mainly involved design and manufacture of product catalogs, media buying, and indoor and outdoor decorating for department stores, as well as sales exhibitions. By the late 1990s, commercials were produced to promote all kinds of electronic products, furniture, automobile, real estate, services, talents, employment, rental, entertainment, consulting, and so on. In the explosive expansion of the advertising industry, false advertisements were prevalent, causing damages to consumers and a bad reputation of the industry. So during the early stage of the ad development in post-Mao China, the official criticism had been focused almost exclusively on “fraudulent” ads. In 1986, the government issued a circular warning that advertisements had to be truthful and legal. The president of the Chinese Consumer Association reinforced this warning by stating that “Where false products cause death, those responsible should pay with their lives” (Stevenson, 1985). The

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1995 Advertising Law requires “all advertising to be truthful (Article 3) and to exclude false information (Article 4), and advertisements and their agents, and publishers to be fair, honest, and credible (Article 5) (Palmer, 2006, p. 64). A classic story of China’s insistence on the absolute truth in all advertising was how Toyota had launched in China an advertising campaign based on an old Chinese proverb about having faith: “When you drive (your cart) into the mountains, you will always find a road out.” Toyota had added “Where there is a road, you will find a Toyota.” A year after Toyota’s slogan appeared on billboards, in newspapers, and on television, the Chinese authorities told Toyota that this constituted false advertising. Reasoned one official, ‘China has roads but there are not necessarily Toyotas on them. The roads in other countries do not necessarily have them either.’ Toyota had to drop the campaign. Later the Chinese regarded the story as the embodiment of the crucial difference between the strict standards of socialist advertising and the lax standards of its capitalist counterpart (Stross, 1990, p. 499). There are numerous examples of false advertising placed by domestic Chinese advertisers as well. The Economics Daily and other newspapers receive what they describe as a “continuous flow” of letters from readers who had been misled or cheated by domestic advertising. The 2002 Shanghai Regulations, reflecting a growing concern with ‘unethical selling’, place a heavier burden on sellers to advise consumers of the relevant aspects of their products and services, and honestly to answer consumer queries (Articles 17, 19, 21, 22, and 23). The 2005 annual advertising report reveals that 67,676 advertisements had been found to have violated the law (Qu, 2006, p. 7). National Images The other type of advertisement that has received heavy government scrutiny is ads that harm the Chinese national image. Any advertisements that are believed to portray a “bad national image” of China or the Chinese would “hurt the Chinese people’s feelings,” and are effectively banned under Chinese law. Partly due to their troubled history with foreigners in modern history, the Chinese have a greater sensitivity to self-image and public standing than Americans. This sensitivity is reflected in the country’s advertising policies. As stipulated in the Advertising Law, the national flag, the national emblem, and the national anthem, government agencies or their representatives, and other figures and images associated with the Chinese government are banned from commercial advertising (Article 7). The Chinese government is very concerned with maintaining a positive perception in the media. Preserving face seems to be the highest priority, especially at the national level. This is seen in the ill-fated ads by Toyota Motor Company. Toyota ran a commercial showing a Land Cruiser SUV towing what appeared to be a Chinese military truck, and another featuring stone lions, a traditional symbol of power in China, bowing down to Toyota’s Prado GX. Chinese consumers balked at the perceived insult to their armed forces in being towed, and at the notion of bowing to anything—even a car—representing Japan. Nike had a similar experience. As widely reported by the media, the ad campaign “Chamber of Fear” by Nike Inc. featured LeBron James, then of the NBA’s Cleveland Cavaliers, battling—and defeating—a computer-generated Kung Fu master. Although there was nothing inherently offensive in the eyes of Westerns, Chinese consumers found the concept insulting, and the Chinese government felt that publicly acknowledging foreign goods in such a manner was offensive. So the advertisements were blocked. (The Wall Street Journal, November 15, 2007). Inconsistency in Censorship Enforcement The ambiguity of the advertising law and the unwritten “moral law” give the government enough leeway to retain control of advertisements in China. Sometimes ads are blocked for unpredictable and less

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definable reasons. Officials deployed public letter-writing campaigns to encourage viewers and readers to express concern about foreign dominance of advertising or “unhealthy” advertisements to editors and television station officials. Women have occupied a central place in advertising since its return to China in the late 1970s. Representations of women in advertisements have been a heated topic among critics since then. Although the government claims to be protecting consumers from false, or other “unhealthy,” advertising, some gets more scrutiny than others. Article 7 of the Advertising Law prohibits advertising from “carrying any pornographic, superstitious, horrible, violent or ugly information.” Sexually appealing advertising, formerly considered taboo, has now been received with mixed attitudes. Take, for example, two advertisements containing sensually sensitive content. One is the commercial for Meijiajing (beautiful and clean) facial cream that was aired very briefly in early 2008. The commercial is about a young mother using the product. After she applies Meijiajing facial cream, her face becomes, smooth, youthful, and radiant. Her five-year-old son says to the young mother: “Mom, you’re so beautiful. I will marry you when I grow up.” After the ad was aired, some people expressed concern that this ad was “unhealthy” because it showed “incestuous love.” The commercial was quickly pulled. The other is the McDonald’s “beef” ads. In the campaign to promote its Quarter-Pounder in 2006, McDonald’s ran a series of racy advertisements. One billboard featured a close-up of a woman’s lips; on another ad, a woman runs her hand over a man’s flexed biceps. “Flirt with your senses,” the sign says. The burger chain’s TV commercials are even racier than the print ads. In one spot, a man and a woman eat Quarter-Pounders, and close-up shots of the woman’s neck and mouth are interspersed with images of fireworks and spraying water. The actors suck their fingers. The voice-over says: “You can feel it. Thicker. You can taste it. Juicier” (The Wall street Journal, September 21, 2006). For some reason, these edgy McDonald’s ads were not found offensive and met no criticisms. Advertising for the tobacco industry tells another story. There are strict rules on tobacco advertising. Article 18 of the Advertising Law states,

Publishing of advertisements for tobacco by means of radio, cinema pictures, television, newspaper, magazine or periodical is prohibited. Erecting or placing advertisements for tobacco at public places such as various waiting rooms, cinemas and theatres, conference halls and sports stadiums and gymnasiums is prohibited. Advertisements for tobacco must be marked with “Smoking is harmful to your health.”

The actual practices, however, are quite different from what the written law allows. It is most puzzling to see how lax government control is over ads for tobacco. Chinese authorities initially were reluctant to impose restrictions on cigarette and liquor advertising. Foreign cigarette companies, for example, were warmly welcomed in 1979; these companies accounted for four of the first five advertising accounts for Chinese television. When Chinese finally decided to ban advertising for foreign cigarettes, liquor, and cosmetics, the government’s ban showed only half-hearted concern with protecting the public from physical harm caused by cigarette consumption. In 1987 the state issued “Draft regulations for greater control over sports advertising.” But, there were, and still are, loopholes within the law that tobacco companies can exploit, and restrictions on tobacco are not so high as they appear. The foreign tobacco companies were free to take advantage of every possible opportunity to promote their products. In order to get around legal technicalities, tobacco companies would sponsor sports teams and events, and

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also purchased buildings in visible places and name them after the brand. So cigarette brand-names are seen during popular sports games (Stross, 1990, pp. 491-92). CONCLUSION China’s giant, vibrant, yet chaotic ad market remains a big challenge for both the Chinese government and advertisers, foreign and domestic. Although advertising regulation in China is increasingly governed by a more transparent legal framework than being subjected to the whim of personalities, advertising regulation in China is characterized by a lack of autonomy in legal regime, indeterminacy in interpretation, and thus low predictability. One of the sources of confusion over the legal boundaries of advertising expression is that the Advertising Law was written in broad and vague terms and is open to various interpretations. The inconsistency in the content of the Advertising Law and the multiple regulations issued at different times and by different organizations frustrate advertisers as they struggle to abide by its provisions and deal with the Chinese regulations and bureaucracy. An overarching explanation for many of these apparent contradictions in ad censorship rules and practices is the political shift that the Chinese government is trying to deal with. A Communist government runs China, but that government is at the same time trying to merge with a capitalist marketplace. The government is obliged to follow a Communist ideology, which conflicts with the rapid growth of free trade in China. So, the Chinese government has created a dilemma for itself. The party leaders must either renounce Communism, which seems extremely unlikely in the foreseeable future, or find a way to make communism compatible with free trade. The second option not only preserves face but also allows the government to maintain a higher level of control over the economy than other countries that have free trade. However, because the ideologies of Capitalism and Communism oppose each other, mixing them should prove very difficult. The experience of the multinational advertising industry in China seems to suggest that the Chinese government holds enormous power in influencing, and sometimes even determining, advertising behavior. Such government authority, according to Jian Wang, “derives from the state and, more importantly, its legitimacy to speak on behalf of the nation and to police and regulate … advertising content and practice” (Wang, 2000, p. 101). Under the notion of “building a harmonious society” and a loose definition of what benefits the nation and the people, the decision of whether an ad is censorable or acceptable is sometimes purely a party official’s preference. In Billions: Selling to the New Chinese Consumer, Tom Doctoroff asserts that government censors use the ambiguity of regulations to reject an advertisement simply because the government does not like it, rather than because it is truly a violation of the law (Doctoroff, 2005, p. 91). The generality and vagueness in the principles governing advertising, as well as the application of “moral law,” leave ample room for cognizant officials to make subjective decisions regarding ad products in different contexts and situations, thus making the principles more of an expedient. On the one hand, by subjectively applying the notion of “being good” to the people and the country, the Communist party-state can continue to seek opportunities to increase revenue brought in by the booming advertising industry. On the other hand, the government’s imposition of its control over advertising reinforces its claim that the Communist Party is the sole, legitimate representative of the masses and the nation. The path to establishing a transparent regulatory system for advertising in China, with standards consistent with other developed countries, is arduous and formidable.

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REFERENCES China Advertising Association (2010). Zhongguo guanggao nianjian (Chinese Advertising Annual Report). China State Administration of Industry and Commerce (1995). Advertising Law of the People’s Republic of China. Davis, D. S. ed. (2000). The Consumer Revolution in Urban China. Berkeley: University of California Press. Doctoroff, Tom (2005). Billions: Selling to the New Chinese Consumers. New York. Palgrave Macmillan. Guo, Yingjie (2004). Cultural Nationalism in Contemporary China: The Search for National Identity Under Reform. New York: Routledge Curzon Press. Palmer, Michael (2006). “The Emergence of Consumer Rights: Legal Protection of the Consumer in the People’s Republic of China.” Consuming China: Approaches to Cultural Changes in Contemporary China. Kevin Latham. et al. eds. London: Routledge, p. 56-81. Qu Jianmin (2006). “It Is Extremely Urgent to Revise the Advertising Law,” Modern Advertising, vol. 6, p. 16-17. Stevenson, H. L (1985). “Chinese Worried About Ad Growth,” Advertising Age. September 16. Stross, Randall (1990). “The Return of Advertising in China: A Survey of the Ideological Reversal,” The China Quarterly, vol. 123, p. 485-502. Tong, Luding (May 2011). Interview with Li Fangwu at CAA. The Wall Street Journal (November 15, 2005; March 30, 2006; September 8, 2006; September 21, 2006; January 25, 2007). Wang, Jian (2000). Foreign Advertising in China: Becoming Global, Becoming Local. Iowa: Iowa State University Press, 2000. World Federation of Advertisers (April 13, 2011). Global News. http://www.wfanet.org/en/global- news/first-principles-of-ad-ethics-1, retrieved on July 27, 2011. Zhou Wangsheng (2007). “Daode yu Zhongguo fa de shishi,” (the practice of moral consciousness and the state law), in Faxue wenxian (documents of law), http://article.chinalawinfo.com, retrieved on August 20, 2007.

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TEACHING INTERNATIONAL BUSINESS BY USING FICTION: HOW AND WHY I WROTE AN

INTERNATIONAL BUSINESS NOVEL Mark Bagshaw, Marietta College

ABSTRACT

In teaching international business, the author found that a textbook-and-lecture approach was efficient but ineffective for knowledge retention; group exercises and simulations evoked student interest but were inefficient and ineffective for transfer and application of knowledge to other business contexts. Because both textbook and lecture presentations suffer from being composed primarily of generalizations and abstractions distilled from practice, many students fail to see their practical relevance. To address the problem of student interest and to improve learning retention, the author wrote an international business novel that attempts to make major international business concepts more graphic and more concrete, and thus more memorable, for students. This paper chronicles that process and reports some preliminary results. JEL: A3; F1; F2; L1; L2; M1 KEYWORDS: International business, pedagogy, fiction INTRODUCTION Like many business professors, I imagine that I know more about the content of the course I am teaching than most of the students taking it. This has been particularly true with the international business (IB) course that is now required of many business majors at my institution and that serves as a popular elective for other students at the sophomore-junior level who are seeking to fulfill a general education requirement in globalization and diversity. One of the problems with my international business classes is achieving good knowledge retention by students as demonstrated by lackluster performance on class exams. One of the obstacles to knowledge retention appears to be lack of student interest in lecture and textual materials. How could any student not be interested in—fascinated by—international business? Although my colleagues and I joke that a prevailing student attitude at our institution assumes that Ohio is not only the center of the universe but extends in all directions to its outer limits, the mundane truth seems to be that student interest appears to be directly affected by the textbook-and-lecture classroom pedagogy I have used. One result has been that animated, relevant, and informed in-class discussions focused on IB- related concepts and processes, and on related world events, have been rare. My textbook-and-lecture approach has proven efficient in “covering” the core content but ineffective in achieving the desired student learning outcomes. At the same time, my forays into using group exercises, mini-case-studies, and simulations have been effective in evoking greater student interest and enjoyment but have been inefficient in terms of the amount of core IB learning that can be included in the class. They also have been ineffective for the transfer of core learning to other applications than the specific exercise, case study, or simulation at hand. To address this constellation of problems, I have tried to improve the success of my IB classes by reshaping my pedagogy. Specifically, I have written an “international business novel,” assigned it as an

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ancillary reading to the IB textbook, and held classroom discussions of the novel with students in the class. The first section of this paper discusses some of the important specifics of the overall problem. The second section discusses how I came to choose the particular mode of fiction I did and describes several available fictional modes or genres as represented by some prominent contemporary examples. In section three I discuss my suitability for undertaking such a project, the implementation setbacks I encountered in seeking to execute the project, and how I resolved them. The final section looks briefly at my one semester of classroom experience using the novel—Chaucer on the Nile—to teach my international business class. CRITICAL DIMENSIONS OF THE PROBLEM In terms of student interest and knowledge retention, textbooks have some serious defects. First, the presentation values of many pages filled with type, relieved by the occasional photo or graph, are quite limited in engaging a reluctant or previously unengaged reader’s interest. Second, despite exotic four- color photos of exotic locations and subjects, the dominant medium for presenting IB content in textbooks—words, words, words—is, for many students, boring and lifeless: a book is an inanimate object and predictably repetitive in many respects. Further, the typical textbook treatment is organized around generalizations drawn from many concrete incidents and situations—each of which is, nonetheless, far removed from the abstractions that appear on the pages. These abstractions or “distillations” lack the vivaciousness of the practical contexts from which they are drawn and consequently often fail to attract student interest or are not memorable. Similarly, lecturing as a pedagogy—the venerable but soporific “talking head” standing in front of the classroom and holding forth—also has limited appeal to student interest, particularly when repeated for every class, at regular intervals, for weeks at a time. In terms of lecture and learning retention, it has been asserted (Dale, 1946, 1954, 1969; NTL Institute for Applied Behavioral Science, 2011) that learners retain only five percent of what they’ve learned from lecture—but retain 50% of what they learn when engaged in a group discussion. With pedagogies that involve “practice by doing,” such as simulations, and learning a particular knowledge content by teaching it to others, it is asserted that retention rates climb to 75% and 90%, respectively. Lecturing as a pedagogy, with its allegedly low learning retention rate, seems likely to be ineffective with regard to student learning. The higher retention rate of the learning modes where students are more actively engaged—learning by doing and learning by teaching others—would be greatly preferable, were there but world enough and time. However, in fourteen weeks of 75-minute classes with enrollments around 35 students, these learning modes would be grandly inefficient. With a “learn-by-teaching” pedagogy, each of the enrolled students would be able to teach the class only a few times, and only a few of the major IB concepts. With regard to the “learn-by-doing” mode, the practical limits of the classroom would permit engagement with only those few of the major IB concepts that permit a hands-on or laboratory approach, and this limitation would render the “learn-by-doing” mode impracticable. The situation would seem to require a compromise. Learning by discussion, with an alleged learning retention rate of 50%, is more effective than lecture and less inefficient than learning by doing and learning by teaching others, and seems a reasonable pedagogic compromise, provided we offer our subject-matter in a way that lends itself to discussion by, for one thing, being significantly more interesting than a collection of generalizations and abstractions.

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CRITICAL DIMENSIONS OF THE SOLUTION

And so it was that I went looking for ways of grounding IB content in a practical and workable context (class discussion) in a manner that would (a) make it more real, vital, and interesting to students; and (b) make it “sticky”—both in the sense of contextual and applicable, and also in the sense of being memorable, sticking in the mind. Gary Overvold, a former colleague in the philosophy department at Clark University in Worcester, Massachusetts, has suggested that texts in the humanities, texts such as stories and fiction, allow us to learn about how the world operates in particular contexts and do it, as it were, on the cheap. He calls these texts “humane texts” and one of their principal purposes is to permit “the rehearsal of life in imagination”:

One of the most ancient models for the humanities (and for learning generally) is the one which sees them as the rehearsal of life in imagination. The text . . .is construed as an imaginative means for discovering value and disvalue in life. What the model evoked . . .was a low risk way to knowledge of others’ lives. What it drew on was the power of the word and of the symbol to anticipate, to display, and to teach possible futures, to analyse, review, and add insight to the past, and to provide a level of integration to the portrayal of the present.

(Overvold, 1985, p. 16-17)

The idea of rehearsing life in imagination suggested rearranging my thinking about my IB class—not to remove textbook and lecture altogether—but to incorporate a work of fiction in my class that would promote interest in IB concepts and promote their discussion in class. As an intervention, what I had in mind was no more complex than the analogy described by the Roman poet-philosopher Lucretius Carus (d. 55 A.D.) in his De Rerum Natura. Lucretius says that if you wish to gain compliance from someone who does not find compliance intrinsically desirable, you should do it as you would when getting a child to drink bitter medicine from a cup: you smear the rim of the cup with honey to make the medicine go down (1937, I. 935-943). In my case, the bitter content of the cup is the IB content of the class, and the fictional overlay or framework is the honey around the cup’s rim. Of course, I soon realized that I did not have to reinvent the wheel: there are any number of fictional modes currently being used in business education, the most obvious of which is the case study, which I use in my department’s senior capstone for management, marketing, and finance majors. A more recent fictive modality is the simulation, a variety of which are now readily available in packaged and electronic form, and used regularly by several of my colleagues. More exotic, although probably a closer approximation to what Overvold had in mind with his phrase “rehearsal of life in imagination” is the Japanese comic book or manga, which has been used for decades as a vehicle for the exposition of business content in Japan (Berfield, 2008). Japan, Inc: An Introduction to Japanese Business (1986, 1988) by ISHINOMORI Shōtarō first appeared in its Japanese form in 1986, with an American version in 1988. The True Life of Carlos Ghosn written by TOGASHI Yoko and illustrated by TODA Takanobu (2002-2004), chronicled the history of the Chairman and CEO of both the French Renault and the Japanese Nissan auto companies, and the work appeared in its original serialized Japanese form in 2002.

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Fables have been a core genre of human writings since before The Holy Bible and Aesop. Business fables have been a distinct literary genre, not just in Europe, but in Japan, since feudal times (Mulhern, 1991, vii). In contemporary American business literature, the range of works fall into three broad categories: (1) Moral tales focused on teaching ethical behavior in business, such as Jim Stovall’s The Ultimate Gift ( 2001) and The Arbinger Institute’s Leadership and Self-Deception: Getting Out of the Box (2000). (2) Didactic tales intended to teach useful attitudes or perspectives toward big ideas like accepting change in life and business, such as Spencer Johnson’s Who Moved My Cheese? (1998); Subhir Chowdhury’s The Ice Cream Maker (2005); and John Kotter and Holger Rathgeber’s Our Iceberg Is Melting (2005). (3) Functional fables, which seek to teach how to perform business or managerial functions and operations—examples here would include very professionally focused fables, such as James K. Loebbecke’s The Auditor (1999) or more general treatments of functional business issues, such as Patrick Lencioni’s The Five Dysfunctions of a Team (Jossey-Bass, 2002), or, for that matter, any of the half- dozen of what Lencioni calls his “leadership fables.” Loebbecke’s work is closer to a didactic yet realistic novel—he characterizes the fictional mode of The Auditor as “instructional novella”—but Lencioni’s leadership fables are crafted to focus reader and attention almost exclusively on the message or moral. Lencioni’s fables are sparse, gemlike, and maintain interest by minimizing distractions Here, for example, is the complete opening chapter of Lencioni’s Five Dysfunctions of a Team in its entirety: LUCK Only one person thought Kathryn was the right choice to become CEO of DecisionTech, Inc. Luckily for her, that person was the Chairman of the board. And so, less than a month after the previous chief executive had been removed, Kathryn Petersen took the reins of a company that just two years earlier had been one of the most talked-about, well-funded, and promising start-up companies in the recent history of the Silicon Valley. She could not have known just how far from grace the company had fallen in such a short period of time, and what the next few months had in store for her. (Lencioni, 2002, p. 3)

An attempt to meld the fable genre with the Japanese manga is represented by Daniel Pink’s The Adventures of Johnny Bunko: The Last Career Guide You’ll Ever Need (2008). When Johnny breaks apart his throw-away wooden chopsticks in a Japanese restaurant, a cute Japanese genie (improbably named Diana) emerges to teach him and his coworkers six big-picture career advice lessons, which the reader learns in the context of seeing the story taking place in manga-style cartoon drawings by Rob Ten Pas. Johnny Bunko is sufficiently recent that it is too early to tell whether the manga version of the business fable will catch on in the United States, but the “instructional novella” has had some prominent recent

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follow-ups, most notably Austin et al.’s The Adventures of an IT Leader (2009), published by Harvard Business School Press. Like Loebbecke’s The Auditor, the IT Leader focuses on a functional role (IT manager) in the context of a contemporary business. Both of these short business novels derive from what is a long-established genre of business novels in Japan (Mulhern, 1991)—a genre that is not well represented in English translation. A representative Japanese business novel in English is Chieko Mulhern’s translation of ARAI Shinya’s Shoshaman (1991). The work currently is out of print, though used copies appear from time to time on online booksellers, such as eBay and Amazon.com. The Shoshaman story takes place during the decline of the sōgō shōsha, the Japanese all-purpose trading company, during the 1980s and traces how one of these companies, Nissei Corporation, tries to migrate into types of businesses that add value, rather than simply serving as a middleman between manufacturer and retailer. At the beginning, the protagonist of the story, NAKASOTO Michio, is a newly promoted manager who is trying to figure out “the ropes to skip and the ropes to know”:

“What a close call! Nakasato shuddered, recalling his recent trip to the United States. Was I lucky to escape the fate of being sidetracked into a post away from Nissei’s mainstream! If I expect to be the first in my class to make it into

senior management, I must position myself in the head office . . . . I must avoid a sideline assignment, no matter how significant, to say nothing of hanging my fate on an American restaurant chain!” (Arai, 1986, 1991, p. 5)

Before being assigned to the United States to vet new business acquisitions, Nakasoto befriends and becomes romantically involved with a female officeworker at the company, Masako. He teaches her (and the reader) the basic concepts of starting and sustaining a business before flying off and abandoning her. When he returns to Japan, years later, he discovers she has used her entrepreneurial skills to develop a chain of successful upmarket dress boutiques in the Tokyo area. She gives him a tour of her outlets, including the small floor space she rented in another store when she first opened for business:

“Behind that pillar, over there, the recessed area to the left of the entrance—that’s the space I rented to start my business.” “Very impressive,” Nakasato said. “What’s the ultimate secret of your success? In the beginning you were in no position to cut costs by volume purchases. Maybe it was your fashion sense? But until you established some influence and rapport with the wholesale houses, you must have had trouble getting specific items you wanted, I imagine.”

“I just kept on doing whatever was necessary, as best I could, with stubborn persistence. There is no other secret,” Masako explained and turned toward her manager. “Minami-san, what do you think is the most important thing in managing this store?” “It’s communication,” the manager replied without hesitation. “Communication among the staff, communication with the head office, and communication with the customers. I believe well-maintained communication never fails to solve any problem.” “Well, you have it right,” Masako said, nodding in satisfaction. (ARAI, 1986, 1991, pp. 178-179)

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The “business novel” mode represented by ARAI’s Shoshaman seemed particularly suited to the requirements of my project in several ways. First, it allowed for a measure of expansiveness in treating a number of international business concepts and processes. Unlike Lencioni, for example, I was not in a position to unify my subject matter, to focus only on one critical issue such as how to avoid dysfunctional behavior in teams. My subject matter would range from the important contexts of international business— international politics, law, economics, finance, banking, and risk assessment with regard to prospective markets and production sites—to elements of the workings of the international business firm: business models and strategy, cash flow, modes of entry, logistics, production, and management and leadership, particularly in teams. Second, it allowed me to be selective: I could continue to assign a textbook that would do the heavy lifting with charts and figures, and I could enhance a variety of content areas that required more fleshing-out, such as the differences in international approaches that derive from differences in industry and a firm’s country of origin. Third, it allowed me to create and teach fiction in a way with which I already was comfortable.

IMPLEMENTATION AND EXECUTION

In the decade between 1971 and 1981, I wrote three novels (none of which was published), so I was familiar with the regimen. What was uncertain was whether I could still write fiction. I was on firmer ground with teaching novels in my social-science courses, having used fictional works for discussion in other courses: Stovall’s The Ultimate Gift in my Introduction to Leadership class, E.M. Forster’s A Passage to India in the Leadership in Global Contexts course, Qiu Xiaolong’s Death of a Red Heroine in the leadership capstone, and Lencioni’s Five Dysfunctions of a Team in a master’s level international leadership course. My approach in all of these cases has been to assign one or more chapters and then discuss key concepts from the works with the class. In the summer of 2009 I wrote a sabbatical proposal to create an IB novel set in the country that had been the site of one of my international excursions, Egypt. I submitted the proposal in the fall of 2009, and it was approved in the spring of 2010. I began the actual organizing and plotting of the novel over the semester break in December 2009. Organizing on the business side meant determining what IB content to highlight in the novel. In the end, I settled on an outline that looked like this:

• Basic business definitions & concepts • How does “international” differ from “domestic” business? • What criteria shape the decision to

– Leave/expand beyond your home market? – Enter a particular foreign market (Egypt as the presenting example)?

• Which markets to enter, with which product or service, when to enter, what scale, what entry mode?

• What types of changes do foreign markets require? • What are the prominent risks in international business? • Why do people trade? Who trades with whom? • What does superior management look like in international business? What ethics guide

manager behaviors? • How do we operationalize value-added and competitive advantage?

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• What are the effects of diversity and cultural differences on business success? • What roles are played by governments and international organizations?

– the role of tariff and non-tariff barriers to trade – the role of infant industries and dealing with “neo-mercantilists”

• Market demographics (serve rich man or poor man? offer luxury goods or value-priced goods?)

• How do we craft international business strategy? • How do we organize production operations, sourcing, and logistics? • What does superior leadership look like in international business?

Organizing on the fiction side meant imagining characters and opportunities where discussion of business could be a logical outcome of the situation. I did not want to simply transfer lectures on IB from the lectern in my classroom to the pages of my book, and so I spent some time trying to minimize lecture by including a number of characters—often foreigners touring Egypt—who were in a position to reflect on their own business experience in a way that would shed light on other international business experiences. For example, one character is a general contractor who has built fast-food outlets for his company in the American Midwest. On the shuttle bus from the Cairo airport, he mentions his business, and is asked immediately by one of my young protagonists what his company would have to do differently if they were to migrate their business to Egypt. The result is some compelling reflections. Other characters with business tales include a female Chinese student whose family has businesses in California; a Mexican- American retailer who owns shoe stores in Long Island, New York; a Canadian engineer who is helping to bring a nimble, emerging-market cargo plane back into production; a Chicago-based lawyer who has been a serial entrepreneur; and a casino employee from Las Vegas. There is even an original diversity-in- the- workplace case study (“The Invisible Dr. Zhou”).

I started the first draft in the summer of 2010 and had a significant leg completed by the time the sabbatical unofficially began in December 2010. The final chapters were completed by the end of March 2011. The initial complete draft ran to over 200 thousand words—an artifact of having both significant business content and a complex tale to tell. The final edited manuscript ran to about 170-thousand words, a little over five-hundred published pages—still too long—but manageable, I thought, as an undergraduate “read” in the context of a fourteen-week semester, even as an ancillary reading to the regular textbook assignments. I had begun shopping the book idea to business text publishing houses in 2009 and had received no encouragement, so by the time the book was finished in the spring of 2011, I was ready to begin querying regular literary agents. Happily, literary agents’ individual preferred methods of contact, query, and text submission are listed online. (I used an excellent site called AgentQuery.com.) From late March through the end of May, I contacted over sixty agents who accepted email queries, several of whom were surprisingly sympathetic and encouraging, despite the deadening aspects of the author’s-query side of their jobs—usually carried out at arm’s length by having editorial assistants do the reading. Despite my assiduousness, I did not have representation for my work when June came, let alone a contract to publish. But also happily, over the previous two years, The Wall Street Journal had been running stories on the growth of the e-book and the on-demand publishing industry, and I had been reading them. In the same vein, a colleague who is president of the Ohio Valley Chapter of the National Society of Arts and Letters (the former chair of the English department at the institution where I teach) had been attending sessions at the Society’s national conference in Clearwater Beach, Florida, in Spring 2011, and had heard publisher’s

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representatives urge writers to self-publish in the face of current publishing realities (Pridgeon, 2011). The burden of many of these stories was that publishers and agents have become overwhelmed. Slush piles (the repository of unsolicited manuscripts that publishers and agents receive from writers) have doubled in size in recent years, the economics of the publishing industry have made taking risks on unknown writers a very rare thing, and partially as a result of these two phenomena, the ‘vanity press’ label and onus has been peeled off self-publication in the contemporary literary world:

Writer Karen McQuestion spent nearly a decade trying without success to persuade a New York publisher to print one of her books. In July, the 49-year-old mother of three decided to publish it herself, online. Eleven months later, Ms. McQuestion has sold 36,000 e-books through Amazon.com Inc.’s Kindle e-bookstore and has a film option with a Hollywood producer. In August, Amazon will publish a paperback version of her first novel . . . .

(Fowler and Trachtenberg, The Wall Street Journal, 2010, A1)

So, the question lingering at the back of my mind for two years—will anyone publish this manuscript in a timely fashion; that is, in time to use it in class for fall semester 2011?—was answered in the affirmative: Yes, I will. The finished product, Chaucer on the Nile: A Pilgrim’s Progress, was published by CreateSpace, a company owned by Amazon.com, Inc. The costs to both CreateSpace and me were minimal: publication is on-demand, so the up-front costs for CreateSpace were negligible; the total costs to me for cover design, interior design, e-book formatting, and hand-holding were less than a thousand dollars. Chaucer on the Nile is told from the point of view of a male American college student (Chaucer Jeffries) who is on a college-sponsored summer study-abroad trip to Egypt—Cairo, the Nile, the Red Sea—just months before the Mubarak regime implodes. International business professor Robert Bobbitt (“Dr. Bobs”) and ancient-history professor Florence Lowe (“Profflo”) accompany him and his classmates as teachers and chaperones. In Cairo, other tourists from the U.S., China, Mexico, Australia, Canada, and France join their group, and these have their own (often IB-related) tales to tell. On the Nile, Chaucer discovers a flash drive in his backpack; its content appears to be fundamentalist jihadi propaganda. A contest for possession/recovery of the flash drive begins among parties known (the Amn al-Dawla—the thuggish internal secret police) and unknown (Sheikh Anwar, Gamel Sabah al- Weiki, Yusif Lawandy). Chaucer and his friends grapple with the flash drive’s purpose, and why it was planted on him. Their snooping leads to their being snatched and incarcerated. The conflict takes place against the background of a typical Egyptian tourist pilgrimage to the Pyramids, the Egyptian Museum in Tahrir Square, Nile temples and historic sites, the world-heritage site at Abu Simbel, and a Red Sea resort. —To my mind, all the makings of a ripping good yarn! CLASSROOM EXPERIENCE TO DATE The end-of-semester, “official” student evaluations of the international business course I offered in the past fall semester (which included the maiden voyage of Chaucer on the Nile) have not yet been made available by the central academic administration. Students complete these evaluations online, and then

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the academic dean’s office collects, calculates, and distributes aggregated results and individual student comments to instructors. However, two unofficial sources of student self-report information on the course are available: one, an anonymous self-report questionnaire that I fashioned and distributed in late October; and the second, face-to-face feedback to the instructor from students. Anecdotal face-to-face comments, during class discussion and to the instructor after class, suggest that classroom discussants, and students who listened to the class discussion, valued Chaucer for its understanding and portrayal of the complexity of international business concepts and processes in the context of putting them into effect on the ground in a particular setting (Egypt). Students also expressed great appreciation for the way the novel accurately portrayed college-aged people and their concerns, particularly when interacting with each other and with persons from other cultures and countries abroad. Several students, were enthusiastic about the degree to which issues of cultural understanding arose as the novel’s touring party encountered the Egyptian and Islamic “Other” on its home turf. When the class had completed its reading and discussion of the novel, I administered a simple printed questionnaire of my own design. Chapters of Chaucer had been assigned for reading concurrent with chapters of the assigned IB textbook. This amounted to nine days of assignments from the novel, three chapters per assignment. In the 10th week of the semester, students were asked to fill out the brief anonymous-response questionnaire to determine the specific ways in which the reading this international business novel had been useful (or not), and whether the novel’s contribution to student learning in the class made it worthwhile to assign the novel when the class was offered again. Each questionnaire item provided the opportunity to append a brief comment. Thirty-five students completed and turned in the questionnaire. Thirty of them (roughly 86%) strongly agreed that the novel was a worthwhile addition to their learning of international business content in the class. In the next two paragraphs I discuss the largest clusters of specific student responses in two groups: so- called “positive” responses (ones in which students indicated unequivocally that the novel added to their learning of IB content in the class) and “negative” responses (ones in which students indicated unequivocally that the novel did not add, or detracted, from their learning of IB content in the class). One group of specific positive responses clustered around the idea that classroom discussion of the novel seriously enhanced the learning environment in the classroom. A majority of students reported that they enjoyed coming to class because they anticipated participating in these discussions (n = 21; 60%). A clear majority of students asserted that their learning of IB content had been enhanced by having the opportunity to discuss and listen to the discussion of others (n = 25; 71%). Another group of positive responses (n = 19; 54%) suggested that reading the novel made the IB material (and the class) more relevant, interesting, and lively than it would have been with just instructor lecture and class discussion of the textbook. A related group of positive responses/comments (n = 27; 77%) thought that studying international business concepts and processes in a particular country and setting, with specific characters, helped to make these concepts and processes more available and comprehensible. The largest group of negative responses focused on issues of form rather than IB content. Half of student respondents (n = 17; 49%) said Chaucer was just too long to be enjoyable as an assigned text. A somewhat smaller group of responses (n = 7; 20%) indicated that although the story itself was enjoyable and absorbing, it did not focus enough on international business. A third group of negative comments (n

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= 4; 11%) strongly agreed that Chaucer did nothing to make the international business class more relevant, interesting, or lively, and that the presentation of IB concepts and processes in the novel were no more interesting than those discussed in the textbook. A fourth group (n = 5; 14%) found at least some of the IB content in the novel boring, specifically, those parts where the IB professor’s lectures are reported secondhand by the student narrator Chaucer Jeffries. CONCLUSION The student response data available to date are just too fragmentary to draw serious conclusions from them. More feedback will be available from the official student class evaluations and from using the novel next semester. It is gratifying to have over half the class react positively to use and discussion of the novel, and to have my own impressions validated by the obvious enjoyment of the class discussion by many students. However, I have no conclusive evidence to suggest that student knowledge retention was improved by this experiment. Student performance on exams did not differ significantly from previous semesters. I also incline to trust the responses that suggest the work, at 500-plus published pages, was just too long to hold the attention of many of the students taking the class. REFERENCES Arai, Shinya [pen name: AZUCHI Satoshi](1986, 1991), Shoshaman:A Tale of Corporate Japan (trans. by Chieko Mulhern). Berkeley: University of California Press. [Originally published in Japanese in 1986 as Kigyōka sararīman—“Entrepreneur Salaryman.”] The Arbinger Institute (2000), Leadership and Self-Deception: Getting Out of the Box. San Francisco, CA: Berrett-Koehler. Austin, R.D., Nolan, R.L., and O’Donnell, S. (2009), The Adventures of an IT Leader. Boston, MA: Harvard Business School Publishing Corp. Bagshaw, Mark (2011), Chaucer on the Nile: A Pilgrim’s Progress. Charleston, S.C.: CreateSpace, Amazon. Berfield, Susan (2008), “Career Advice from a Comic Book,” Bloomberg Businessweek, March 3, 2008. Chowdhury, Subhir (2005), The Ice Cream Maker. New York: Doubleday. Dale, Edgar (1946), Audio-Visual Methods in Teaching. New York: The Dryden Press. Dale, Edgar (1954), Audio-Visual Methods in Teaching (2nd ed.). New York: The Dryden Press. Dale, Edgar (1969), Audio-Visual Methods in Teaching (3rd ed.). New York: The Dryden Press. Fowler, G.A., and Trachtenberg, J.A. (2010), “ ‘Vanity’ Press Goes Digital,” The Wall Street Journal, June 3, 2010, A1. Ishinomori, Shōtarō (1986, 1988), Japan, Inc.: An Introduction to Japanese Business (trans. by Betsey Scheiner), with an introduction by Peter Duus. Berkeley, CA: University of California Press.

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Johnson, Spencer (1998), Who Moved My Cheese? New York: G.P. Putnam’s Sons. Kotter, J., and Rathgeber, H. (2005), Our Iceberg Is Melting. New York: St. Martin’s Press. Lencioni, Patrick (2002), The Five Dysfunctions of a Team. San Francisco, CA: Jossey-Bass. Loebbecke, James K. (1999), The Auditor. Englewood Cliffs, NJ: Prentice-Hall. Lucretius, Titus Carus (1937), De Rerum Natura (trans. by W.H.D. Rouse). Cambridge, MA: Harvard University Press. Mulhern, Chieko (1991), “The Japanese Business Novel,” in Shoshaman: A Tale of Corporate Japan. Berkeley: University of California Press, vii. NTL Institute for Applied Behavioral Science (1961), About the Learning Pyramid. Retrieved July 7, 2011 from www.homepages.gold.acuk/polovina/learnpyramid/about.htm. Overvold, Gary E. (1985), “The Humanities and the Human Sciences,” in Interpreting the Humanities. Princeton, NJ: The Woodrow Wilson National Fellowship Foundation, 16-17. Pink, Daniel (2008), The Adventures of Johnny Bunko: The Last Career Guide You’ll Ever Need. New York: Penguin Group. Pridgeon, Charles. personal communication, May 19, 2011. Stovall, Jim (2001), The Ultimate Gift. Colorado Springs, CO: RiverOak Publishing. Togashi, Yoko (2002-2004), The True Life of Carlos Ghosn (illustrated by Toda Takanobu). Tokyo: Shogakukan Inc. BIOGRAPHY Dr. Mark Bagshaw is Professor of Management and Leadership at Marietta College in Marietta, Ohio. Chaucer on the Nile is available as a hardcopy paperback from the publisher at Createspace.com/3612873 or as hardcopy or Kindle eBook from Amazon.com. He can be contacted at [email protected].

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SCENARIOS AND UNINTENDED CONSEQUENCES Kathleen Wilburn, St. Edward’s University

Ralph Wilburn, St. Edward’s University

ABSTRACT Unintended consequences litter the landscape of problem solving and decision making. Often, decisions are made and solutions are implemented in order to alleviate immediate negative conditions. However, little or no consideration is given to what unintended consequences that decision or solution might create in the future. Problem solving and decision making in the 21st century require a systems approach that anticipates future consequences—negative as well as positive. Scenario planning is a systematic tool that identifies those possible consequences in a world of uncertainty. It is an organized methodology, which provides a coherent and plausible picture of what the future might be. It allows exploration of different paths, based on forces such as the economy, the environment, globalization, culture, society, and language, which might affect the long terms results of decisions and solutions. This paper will provide a historical context for scenario thinking, describe existing global scenarios that can be used by organizations to develop scenarios, and provide an example of how scenario thinking can identify possible unintended consequences of solutions and decisions. By identifying signposts to monitor key changes, the probability of the occurrence of negative consequences can be evaluated, and interventions to mitigate the effects can be developed. INTRODUCTION Unintended consequences litter the landscape of problem solving and decision making. “How was I supposed to know?” is the plea when a solution yields a different result than the one intended, or yields unanticipated results as well as the intended one. The 21st century environment increasingly is creating a landscape that has landmines for strategic planning and risk management. A problem is never completely solved because the act of solving it changes the system in which it existed. The longer the time required for implementation, the more those changes in the system can alter the effect of the solution on the system. Dörner (1996) argues that it is human to focus on the present and to assume that we can solve the new problems later.

We must learn that there is a lag time between the execution of a measure and its effect. We must learn to recognize “shapes” in time. We must learn that events have not only their immediate, visible effects but long-term repercussions as well. We also must learn to think in terms of systems. We must learn that in complex systems we cannot do only one thing. Whether we want it to or not, any step we take will affect many other things. We must learn to cope with side effects. We must understand that the effects of our decisions may turn up in places we never expected to see them surface. (p. 198)

Problem solving and decision making in the 21st century require a systems approach that anticipates consequences, both positive and negative, other than the one that is planned, especially in a time when those consequences can have ethical as well as economic elements. As companies adopt corporate social responsibility (CSR) programs, they are finding that such programs meant to solve problems may create new problems. For example, donations of food to a drought stricken nation may solve an immediate problem of lack of food, but if they do not take into account that there are farmers in the nation that need

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to sell the crops they produced so they can plant again next year, the donations may mean the farmers, who can provide the long term solution, are put out of business. Chermack (2004) cites four contributors to failed decisions: “1) bounded rationality, 2) a tendency to consider only external variables, 3) the stickiness and friction of information and knowledge, and 4) mental models that include decision premises or policies” (p. 296). Scenarios can help decision makers step outside their boundaries and models to re-perceive the decision and the forces that surround it. In a study of causes of success and failure of scenario planning interventions, Wright, van der Heijden, Burt, Bradfield, and Cairns (2008) found that when leaders’ decisions had moved them to a point where they felt bound by them, even though they were not successful, bringing in a consultant to do scenario thinking was not successful. It thus appears that scenarios need to be developed before a crisis happens to ensure that all parties engage in quality discussions and ask “What if?” questions. Then the scenarios can be used to work though the crisis or problem. This paper will provide a historical context for scenario thinking, describe global scenarios that already exist that can be used by organizations to develop scenarios, and provide an example of how scenario thinking can identify possible unintended consequences of solutions and decisions. SCENARIO DEFINITION AND HISTORY Definitions Scenarios are compelling, vivid stories that allow the future to easily be seen in the reader’s mind. They should be negative or positive since business-as-usual scenarios rarely cause people to re-perceive their assumptions about the future. Each scenario must be memorable so that it is a filter when people are considering decisions. Each scenario must have enough detail about the steps that led up to the ending so that the person can identify the trends that must be monitored in order to support a positive scenario or derail a negative one. There should be one or two positive scenarios and one or two negative scenarios. Scenarios allow people to test possible actions by playing them out in three or four different scenarios. Schwartz (1991) says that an effective scenario

asks people to suspend their disbelief in its stories long enough to appreciate their impact. You know that a scenario is effective when someone, pondering an issue that has been taboo or unthinkable before, says, “Yes, I can see how that might happen. And what I might do as a result.” (p. 39)

In order to make that possible, scenarios must be believable. “The time horizon for scenarios must be short enough to create scenarios that are probable, but long enough for us to imagine that important changes with an impact on the future business can take place” (Lingren & Bandhold, 2003, p. 53). Scenarios address the need for identifying possible consequences and exploring what forces in the system may influence the success of any solution. Scenarios can study possibilities in a world of great uncertainty; they are a tool for creating alternative future environments in which to test the future viability of today’s decisions particularly about implementing solutions to a problem. They are organized stories of specific possible futures for a specific organization. They allow exploration of different paths that an organization could follow into the future, and then identify what would need to happen on each path to lead to a desired goal. Scenario thinking is not unfamiliar to human beings. In fact, people often ask “What if?” when planning something important. For example, people plan alternative routes to work.

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They identify certain places that will make them take an alternative if they see more traffic than normal. In sports, players think about their own plays as responses to the opponent’s moves. Chess players think many moves ahead. Wayne Gretzky, a great hockey player, said he anticipated where the puck would be after a shot so that he was in place to meet it. He was able to do this by studying the plays of his opponents and knowing the area to which each one shot the puck under normal circumstances. Developing scenarios is a tool that helps people consider where the puck will be under different circumstances. Scenarios Are Not Predictions Scenarios are not predictions. Schwartz (1991) quotes an old Arab proverb that says, “he who predicts the future lies even if he tells the truth” and goes on to say, “Rather, scenarios are vehicles for helping people learn. Unlike traditional business forecasting or market research, they present alternative images; they do not merely extrapolate trends of the present” (p. 6). Instead, they ask what might change in the future that would impact today’s decisions. Scenarios force executives and managers to consider the way current realities might change or mutate in the future and thus affect the goals set and the decisions made today. They also uncover possible unintended consequences of chosen actions. To solve problems in an uncertain world, organizations need to be able to re-perceive—to question their assumptions about the way the world works, so that they can see the future more clearly. Because organizations have used the past to develop future plans, they may not realize that what worked in the past, whether it be consumers’ behavior or suppliers’ availability, will not work in the future. Using scenarios provide an easy way to evaluate the assumptions and biases behind goals and strategies. Scenarios can allow risks to be assigned to certain forces so that as the probability increases for a certain scenario to come to be, a contingency plan can be fleshed out. Scenarios allow an organization to make choices in the present with an understanding of possible consequences of each of those choices. Using what is known in the present and what might happen in the future, the scenarios describe a coherent and plausible picture of what the future might be. They describe how an organization and its stakeholders might respond to the changing forces. By identifying what can happen, the organization is able to identify the signposts that will indicate that the probabilities of certain possibilities noted in the scenarios are increasing or decreasing. Once developed, they are used to test decisions going forward. The scenario development process identifies what actions will be most beneficial or detrimental going forward, and what adjustments may need to be made as events unfold. In the midst of a continual onslaught of information and data, scenarios identify what information and trends are crucial to the future success of an organization, and thus what trends must be tracked. HISTORY OF SCENARIOS Hermann Kahn developed a model to think about the future as part of his work in military strategy at RAND corporation. He is responsible for first using the word “scenario,” a Hollywood term for the script for a movie Scenarios were used by after WWII to imagine what the enemy might be able to do in the future and plan contingencies to counter that. Today, the military develops electronic simulations that act as scenarios in which planners make decisions in real time crises in a changing landscape and understand from making decisions. Thus, they can evaluate decisions in the light of what consequences they might create in the future (Lingren & Banhold, 2003).

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Shell International’s use of scenarios started 50 years ago when Pierre Wack and his planning team considered what might happen to the price of oil, which had been stable since the end of WWII, after the 1967 Arab-Israeli war. Wack wrote a scenario describing the consequences of the energy crisis that would be the result of prices and production were controlled by a consortium. The scenario led the company to develop a contingency plan that would move it from heavy fuels, which could be replaced by coal and nuclear power to light fuels like gasoline, and would include investing in refining plants that could make lighter fuels. The scenario identified signposts to track in the oil producing countries. When the Organization of Petroleum Exporting Countries (OPEC) consolidated its power over the oil market in retaliation for the West supporting Israel, Royal/Dutch Shell was prepared. After the Yom Kippur War in fall of 1973, an oil shortage followed and prices soared. Shell had already implemented its new strategy and moved from seventh to third in global oil company rankings (Schwartz, 1991). Royal Dutch/Shell In 1983, Royal Dutch/Shell was considering building a platform to extract natural gas from a field in the North Sea. It asked its current scenario team to write scenarios about the viability of the project, since it had a requirement for its return on investment (ROI), to look for possible consequences of developing the field. The scenario planning team realized that since the customers would be European countries, the future of the USSR would affect the profitability of the field. If the direction of Russia’s government changed and ended the Cold War, the restrictions on how much European countries could purchase from Russia, which had the world’s 2nd largest reserves of natural gas, would be lifted. Royal Dutch/Shell’s research determined that Russia’s labor force and birthrate were declining, its population was aging, and its productivity was declining. One scenario told a story of a person in Russia who could convince his country that rapprochement with the West was an extension of Lenin and Stalin’s ideas. Royal Dutch/Shell began tracking its identified signposts and noted when Russia’s factories fell into disrepair and when a person name Mikhail Gorbachev couched his economic and political ideas as being aligned with Lenin’s New Economy. Thus, Royal Dutch/Shell anticipated the fall of the Berlin Wall many months before it happened, and, since it did not know if Western companies would be invited in to help Russia develop the country’s oil and gas deposits, it delayed developing the North Sea gas field. Only after it determined that Russian oil and gas would not be available in the near future, did it move forward. Its strategic decision allowed it to make its required return on investment (Schwartz, 1991). JDS Uniphase Corp JDS Uniphase Corp, a company that designs and produces optical communication instruments, began using scenarios in 2004; each spring, executives consider three potential sales scenarios. In 2008, a worst-case scenario allowed the company to be proactive in responding to what appeared to be an economic downturn. Sales people found customers becoming cautious, and JDS shipped more orders than it booked in the quarter ending Sept. 27.

In October, the company announced it would kill some products, combine two of its four segments, shift more manufacturing to contractors, and shut three factories along with seven research-and-development sites, eliminating 400 jobs. . . . In the quarter ended Dec. 27, revenue fell for the first time in the downturn, by 11%, to $357 million. In January, the company said it would shut operations for one week each quarter, suspend its matching contribution to employee

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401(k) plans, and require senior managers to take extra unpaid days off. In February, JDS said it would sell a factory in China and shift more U.S. production to contract manufacturers. In all, the moves cut roughly one-third of JDS’s 6,700 employees and reduced annual operating expenses by $120 million. The company continued to generate cash, despite a projected 15% decline in revenue in the fiscal year ended June 27. (Tuna, 2009, para. 9)

Paul J. H. Schoemaker, research director of the Wharton School's Innovation, cited an example of successful strategic decision-making based on scenarios involving a large global industrial goods company; one of the scenarios dealt with possible outcomes of the 2009 election in Iran. When chaos erupted after the election, executives already had thought through how they might respond in the scenarios.

The impact on decision-making represents a perfect illustration of how so-called scenario planning techniques can be used to help managers navigate in complex and uncertain environments. . . . Pulling out the notes from these discussions, they already knew their options and had a view on how they would like to respond. In many ways, they were prepared—and already one-step ahead of some other companies. (“Eyes wide open,” 2009, para. 2)

BUSINESS RESPONSES TO SCENARIOS Schoemaker sees companies responding to the chaos of the future in three ways. In the first, no long-term decisions are made and the company is in a holding pattern. In the second, the company bets on a favorable future that it likes, but the decisions may be disastrous if the future is not the envisioned one. In the third, a company identifies what can be known and what cannot be known and uses it

. . . as a basis for exploring many possible futures—in other words, developing scenarios rather than predictions. This approach differs from the first two primarily in that it is a much more open mindset, with a focus on agility and options. Yet it also is in many ways the most challenging to adopt. “It takes courage to admit our collective ignorance,” Schoemaker says, “because it conflicts with our common notion of leadership, which prizes omniscience. However, our world is too complex for the heroic leadership of the past where a great leader rides up on a white horse and points the way to the future. A better approach now is to embrace uncertainty and examine it in detail to discover where the hidden opportunities lurk.” (“Eyes wide open,” 2009, para. 2)

The use of scenarios has ebbed and flowed with the health of the economy and the financial success of companies. “Shell’s success with the scenario planning approach also encouraged the majority of the Fortune 1000 companies to adopt scenarios in one way or another during the 1970s” (Lingren & Bandhold, 2003, p. 37). An unintended consequence for using this forward thinking tool that was helpful in downturns, was that in the recession in the 1980s, companies lost the creative people needed to write scenarios due to budget cuts, and brought back traditional forecasting. The tectonic shifts in the global business environment in the past fifteen years have renewed interest in using scenarios as a means of making better decisions. A 2008 McKinsey Global survey revealed that business executives see scenario planning as an important strategy in succeeding in a global environment where information comes from all sides and where sudden changes in global forces can have catastrophic consequences.

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Almost 70 percent of the executives agree that global trends have become more or much more important to corporate strategy over the past five years. . . . A wide difference exists between assigning importance to trends and taking active steps to address them (something we also found in previous surveys). For example, while around 75 percent of the responders say that a faster pace of technological innovation and the increasing availability of knowledge will have an impact—positive or negative—on their companies’ profits, just over 50% have done something about either of those two trends. (“How Companies Act,” 2008, p. 4)

A 2010 McKinsey report said that more executives are acting on key global forces today. Three fourths of the executives surveyed said that they were addressing the shift from developed-market countries to emerging-market countries, two-thirds said they were addressing the connectedness of the global economy, and one-half said they were addressing the collision between rising demand for resources and constrained supplies (Bisson, Stephenson, & Viguerie, 2010). One only has to review the recent economic chaos to realize how useful a scenario that detailed such a downturn would have been for individuals, individual companies, governments, and global corporations. It would have identified all the possible consequences of certain actions in response to a recession. A negative scenario would have detailed the environment in which one would need to act, and would have allowed consideration of possible decisions proactively instead of reactively. Having that scenario would have identified signposts that could have been tracked to see if the probability of certain events happening was increasing. Once a threshold was reached, a contingency plan could have been implemented. New hires or new office space or new ventures would have been delayed. As it was, few people knew what to look for in the myriad of available data, and even when it became obvious that the economy was souring, few had a plan to implement to minimize its negative effects. More importantly, because few companies have developed positive scenarios, they do not know what to look for in the current environment, so they may be missing excellent opportunities because of fear. The 2010 McKinsey survey revealed that few executives acted on any of the trends they thought might be important. When responders did act, “few companies seem to be capturing all the opportunities or addressing all the risks presented by the trends on which they act” (“How Companies Act,” 2008, p. 5). If companies had had scenarios that identified forces that they knew directly affected their operations, they would have known what trends to track. The scenarios would have allowed risk management to be based on data showing increased probabilities of events taking place. In the global environment the stability of a government and its regulations on workplace safety and worker rights, on environmental safeguards, and on tariffs are key factors in whether a company should locate in a country. Even if the need is only for suppliers, these issues will affect prices. The Arab Spring has brought freedom to people, but how the government is reconstructed will have a major affect on how business will be done. If the price of oil increases, the price of fuel will increase and thus the price of transportation. A company that could track the factors that would increase the price of oil might change its business model and find suppliers closer to its base, or move its base closer to its suppliers, if the country in which the suppliers existed had customer demand. Despite the economic problems in the United States and European Union, American businesses in 2011 are very profitable because they have found markets in other countries.

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IDENTIFYING FORCES THAT LEAD TO CONSEQUENCES There are global scenarios that are already written and available for companies to use. Royal/Dutch Shell, the U.S. National Intelligence Council (NIC) and the World Economic Forum (WEF) have developed scenarios based on data and a global perspective. World Economic Forum Scenarios According to the World Economic Forum:

The scenario stories in this report have a very broad scope and are intended to increase our understanding of the various uncertainties regarding the future of the global financial architecture. Such high-level scenarios can provide a useful framework for posting more detail about an organization’s specific external environment at the country, industry, or even product-line level. Used purposefully, scenarios can: • enhance a strategy’s robustness by indentifying and challenging underlying assumptions • allow better strategic decisions by discovering and framing uncertainties, leading to a more

informed understanding of the risks involved with substantial and irreversible commitments and promoting strong and pre-emptive corporate positioning

• improve awareness of change by shedding light on the complex interplay of underlying drivers and critical uncertainties, and enhancing sensitivity to weak and/or early signals of significant changes ahead

• increase preparedness and agility in coping with the unexpected and by making it possible to visualize possible futures and mentally rehearse responses

• facilitate collaborative action by providing different stakeholders with common languages and concepts in a non-threatening context. (World Economic Forum, 2009a, p. 77)

Its four financial scenarios are Financial Regionalism, in which companies must work strategically with three major trade and financial blocs; Fragmented Protectionism, in which companies face individual countries’ controls and regulations; Re-engineered Western-centrism, in which companies operate in a homogenous world that is always one crisis behind in its regulations; and Rebalanced Multilateralism, in which companies compete in a world of shifting geo-economic power, but one that is open to trade. It has also published specific scenarios on China, India, Russia, and the Gulf States, as well as scenarios on demographic shifts, engineering and construction, and technology and innovation. For example in China and the World: Scenarios to 2025, there are three scenarios: Regional Ties describes China’s success at reform and overcoming historical regional enmities; Unfulfilled Promise describes China’s failure to enact structural reforms necessary for economic development; New Silk Road describes a China that has flourished economically and culturally in a peaceful integration in the global community (World Economic Forum, 2009b). U.S. National Intelligence Council Scenarios The U.S. National Intelligence Council (NIC) began publishing global scenarios in 1997 Global Trends 2000, and published Global Trends 2015 in 2000, Global Trends: Mapping the Global Future in 2004, and Global Trends 2025: A Transformed World in 2008. The scenarios focus on the global economy driven by technology, the changes in political power, the effects of democratization and the power of tribes and religion, as well as the rising power of developing nations.

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In the introduction to Global Trends 2025: A Transformed World, C. Thomas Fingar, Chairman, National Intelligence Council, says:

By examining a small number of variables that we judge probably will have a disproportionate influence on future events and possibilities, the study seeks to help readers to recognize signposts indicating where events are headed and to identify opportunities for policy intervention to change or lock in the trajectories of specific developments. Among the messages we hope to convey are: “If you like where events seem to be headed, you may want to take timely action to preserve their positive trajectory. If you do not like where they appear to be going, you will have to develop and implement policies to change their trajectory.” For example, the report’s examination of the transition out of dependence on fossil fuels illustrates how different trajectories will entail different consequences for different countries. An even more important message is that leadership matters, no trends are immutable, and that timely and well-informed intervention can decrease the likelihood and severity of negative developments and increase the likelihood of positive ones. (National Intelligence Council, 2008, para. 2)

The document is based on predetermined forces that are relatively certain such as the emergence of a mulipolar system, the continuing shift in wealth from West to East, continuing economic growth that will create pressure on energy, food, and water resources, the increasing potential for conflict in the Middle East, especially if the youth unemployment is not reduced, and the continuance of the United States as a powerful, if less dominant, country. The uncertain forces include the pace of the energy shift from oil and gas, the speed of climate change and its effects, the shift of China and Russia from state capitalism to democracy, the effect of a nuclear Iran on its neighbors, and the outcomes of transformed geopolitics. In Global Scenario I: A World Without the West, the United States withdraws from Central Asia, the Shanghai Cooperation Organization becomes more important than NATO, and the lack of any stable bloc adds to instability that could threaten globalization. In Global Scenario II: October Surprise, governments must consider drastic action as a result of the destruction caused by climate change, such as relocating coastal cities. In Global Scenario III: BRIC’s Bust-Up, conflict between China and India over access to natural resources develops into global conflict. In Global Scenario IV: Politics is Not Always Local, digital communication and growing economies allow nonstate groups like NGOs, businesses, and religious groups to gain power. Royal/Dutch Shell Royal/Dutch Shell developed scenarios in 1992, 1995, and 1998 that “all featured a market-centric world (New Frontiers, People Power, and Just Do It!) as well as an alternative world giving more room to social and community aspirations” (Shell International Limited, 2005, p. 9). In 2005, Shell International published Global Scenarios to 2025: The Future Business Environment: Trends, Trade-offs and Choices. It poses a “Trilemma: Triple Dilemma” by asking how (1) Efficiency, perceived as market incentives, (2) Security, perceived as coercion and regulation, and (3) Social Cohesion and Justice, perceived as the force of the community, would be resolved in a future globalized world. Shell proposes three major global scenarios in which a business may find itself in the 21st century. Low Trust Globalization: Carrots and Sticks, based on Efficiency and Security, focuses on regulation of competition by the state where barriers to entry are high and security of citizens is paramount. Open Doors: Incentives and Bridges, based on Efficiency, and Social Cohesion and Justice, focuses on governance that values accountability for private and public sectors, which then allows global business to thrive. Flags: Nations & Causes, based on Social Cohesion and Justice, and Security, focuses on gated communities that value self-sufficiency and

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value national security and sovereignty rule, and distrust globalization (Shell International Limited, 2005). THE SCENARIO DEVELOPMENT PROCESS How does a company develop scenarios that can be used to identify possible consequences of implementing solutions to problems and making decisions? The first step is to define the forces that are important to the stakeholders involved in the solution or decision; they are those forces that, if they behaved differently than anticipated, would affect the planned outcome. These are forces that can create opportunities and threats. The global scenarios above provide information on these forces and how they might act in the future. Example: Fictitious Company A Company A makes irrigation equipment and has identified a market in a developing country. The country has a problem. Its current food production cannot support its population because lack of water at correct times causes crops to fail. Before making a decision about whether its irrigation equipment could solve this problem, the company would want to investigate the causes of the problem. The causes could be poor soil, lack of rain, lack of access to water sources (lakes, rivers), lack of good seeds, or government policy that exports food rather than using it for its people. Irrigation equipment would not solve the problem if these are the causes. However, if there is normal rainfall to sustain agriculture or if the government could develop a treaty on the use of water from a lake or river other countries also border, then improved irrigation could make a difference; farmers could pay for the irrigation equipment with increased income. Then it could use the global scenarios published by NIC, WEF, or Shell to study what the major forces might look like going forward. Environment Has the lack of water occurred often in the past? If so, is it because the population has grown or because the country is in a drought cycle or because it is slowly become more desert like? If it is a cycle, when does the cycle normally turn? If this is a new occurrence, is water from a river being diverted for industry or by another country? What is happening in countries bordering on this country? The NIC and WEF have data on what countries may have water scarcity in the future, and whether this is due to lack of rainfall, lack of water resources within the country, or other countries cutting off water supply for their own use. Economy What is the economy of this developing country? How much is devoted to agriculture? Does the country export crops? If there is industry, is industry using more water now than in the past? Is the economy diversified enough to weather this drought and survive until the next harvest, perhaps with some immediate assistance? If the economy has industry, are plants or factories taking more water than they have in the past?

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Government and Politics Is the government stable? What is the government doing to solve the problem? If so, is it run by leaders who have demonstrated a concern for their people or is it a corrupt government that typically ignores the problems of the poor? If the government is not corrupt, do the government leaders have the resources and power to help solve the problem? Are there grants available for farmers to improve their harvest with better irrigation? If another country has dammed the river, does the government have enough power to negotiate water rights? Is there any indication that local governments would decide on cooperative irrigation systems rather than individual systems? Population Has the population been increasing in the past years? If so, why? Is there conflict that has sent refugees to this country? Will the increase in population be temporary? Where does the population live? Is it rural or have people been moving to the cities? Are fewer farmers feeding more people who live in the cities? Is city growth using more water than in the past? Infrastructure Does the country have a good infrastructure? Does it have good roads? Does it have warehouses to store agricultural products? Does it have trucks and trains that could move produce from places where there is water to grow crops to the cities? Does it have a sound financial system? Are there banks that could make loans to farmers if this lack of water is temporary? Could farmers be granted loans to buy equipment from the company? Do the citizens have electricity or any type of power grid? If so, is it only in the cities? Resources Does the country have resources that it is exporting so that it does not need to export agricultural products? Does it have the capacity to create a demand for more of those resources on the global market? Does it have the capacity to buy enough food to feed the population in the short term as farmers are improving the irrigation systems? What are the farmers doing now about supplying their fields with water? Is it possible that pipes or waterways are leaking? Is there any use of renewable resources such as solar or wind to provide power? Would new irrigation have access to electricity, generators or only foot power? Culture/Social Are there social or tribal issues such as a caste system that leaves poor farmers powerless? Is there a growing middle class or a government that is focused on industry at the expense of farming because it thinks it can import the food it needs? If there is a growing middle class, is the food problem because the population is eating more food that requires more water? Are agricultural acreages being turned over to grazing to produce more meat rather than grains and vegetables?

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Technology What technology is available in the country? Since it is a developing country and one could assume that electricity is not abundant, are there cell phones that can be used for communication? Do the farmers have equipment that must be maintained? Do the farmers use fertilizers that require land to lay fallow or genetically altered seeds that may not provide a future seed bank? If so, what percentage of their profit goes to maintaining equipment, fuel, and fertilizers? Do they have access to computers so they can communicate with experts on plant diseases? SAMPLE SCENARIO FOR FICTITIOUS COMPANY A scenario is a narrative that places the writer in the future. Each scenario can be positive or negative; for purposes of the assignment, there should be two positive and one negative or two negative and one positive. The first two or three paragraphs of each scenario should describe the organization as it exists in 2020. It might begin:

It is 2020, and developing country’s water shortages are a thing of the past. Water storage facilities now assure that water is available even in times of drought. A result of a partnership between the government and Company A, the storage facilities are required to maintain a reserve based on historical needs during drought. The partnership has also developed irrigation systems that capture rainwater rather than letting it run off, and have sensors to indicate when the crops need water. The government has developed regulations on industry growth and use of water and water plans to ensure that the arable land needed for crop production is available.

Once the first part of a scenario is written, the question becomes, “If this scenario became reality, how did we get there?” The second part of the scenario describes that path and the new decisions that had to be made in the process of implementing the original solution or decisions. Working backward from the future of the scenario to the present decision creates a map that allows us to see possible consequences.

Company A realized that the county it was considering for expansion, could have enough water to grow crops to feed its population, but it did not have a system to save water during the rainy season. Farmers were irrigating at the wrong time of day, and the system of trenches was allowing water to evaporate. However, it also learned that the farmers were poor and did not have access to loans nor did they have enough money to buy irrigation systems. Company A also realized that the drought conditions felt by this country was also a problem for neighboring countries, so population shifted between countries depending on conditions. The possibility of further droughts in the future was increasing. Thus Company A decided that the only way to expand to the country, and perhaps then to the region, was through a partnership with the government.

In 2011 that looked like a low probability. The government was not stable, and there was upheaval in the political arena. Many thought that the economy could survive by exporting manufacturing goods and importing food. One consequence of this thinking could be that more of the existing water would be funneled to manufacturing by the government and there would be less for farmers, who would then make even less profit. Another consequence that Company A saw in bringing in irrigation systems was that only those farmers who had money already could afford the systems. As they became more efficient, many poor farmers would lose their livelihood

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and move into the cities. Company A conjectured that this would have a negative impact on the entire economic system which was precarious because its manufacturing sector was not strong.

However, by 2013, the continued global downturn made people realize that the market for manufactured goods was stagnant, and food prices were increasing because transportation was increasing as the new governments in North Africa brought oil exports back slowly. A new set of leaders began to focus on infrastructure and becoming more self-sufficient. Food production was a priority. Company A set up meetings with the leaders to look at irrigation systems. Company executives wanted a partnership with the government that would provide government assistance to build water storage units and provide grants to farmers to set them up with irrigation systems, because the executives feared that the economic issues would not provide enough demand. They also feared that even thought farmers could get loans, they would not be able to pay off the loans quickly enough if there was another drought before storage units could be built and filled. The executives also wanted the storage units to be controlled by the government, not the private sector, to insure that farmers would receive what they needed at a fair price. Company A also realized that the infrastructure necessary to support irrigation would not be developed for two or three years so it invested in foot pedal systems that did not need electricity or generators.

By 2016, there was some success. Company A had watched carefully a growing conflict between the country and one of its neighbors who wanted to damn up a river that the irrigation system depended on. The company actually stopped installing irrigation systems until the two countries agreed on a plan to share water. Part of the agreement was that Company A would expand its business to the second country, although it had doubts about its ability to expand that quickly and also concerns about the government in the other country. It continued the bulk of its work in the first country, and worked with farmers in the second country that were close to the border.

Company A monitored global warming, pollution, rainfall numbers, and population numbers. It monitored how much water was being diverted to industry. It also monitored the development of new seeds that needed less water. Research showed that water was wasted if there were low spots in fields, so it helped farmers find ways to level their fields. It also monitored food prices and the kinds of food the growing population in the cities were eating.

By 2018, it had expanded into four countries in the region, and was manufacturing its systems there. It had developed a local maintenance force. In one country, it slowed sales because the data showed the government was favoring manufacturing in water pricing and use. The company representatives, studying trends, also realized that many farmers were considering planting crops that required considerably more water than those they had been growing because the farmers knew they could get higher prices for those crops. Company A produced charts and graphs showing that one consequence of the shift would be that the staple grains would need to be imported and that the increase in water use would mean an increase in prices, since the country’s water supply was certainly not excessive, and thus farmers could have less income than more. It also showed how another drought, which the region could easily have, would mean the farmers could not grow the new crops at all.

The third step in preparing the scenarios for future use is to select signposts to monitor changes in the key forces established as important in the scenario. Sources of information and data are identified. Much as information from weather satellites and radar is used to measure the probability of a tropical storm

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becoming a hurricane, these signposts are the key sources of information that are important to achieving the organization’s strategic goal. Once the indicators are identified, the increasing or decreasing probability of their impact can be calculated, as the future becomes the present. Being proactive rather than reactive allows decisions and actions that can diminish or thwart a negative consequence or support a positive consequence. A solution can be halted if the signposts say that the probability of a negative consequence is growing. A plan can be altered to adapt to a change in forces that was not part of the scenario. In the case of Company A, that would be needed to track the indicators are then chosen so that, as the probability increases that a particular scenario is becoming reality, the new strategy can be implemented. Obviously, seeing a change in government coming that would nationalize companies could help the company extract itself from a country. Tracking the development of crops that change color when they need water, or cheap desalination plants, or collection of water from fog, could mean changes in the future of the business, particularly if any of those were happening in neighboring countries that might make importing food cheaper than growing it. In developing countries, the speed of infrastructure growth can change with leaders. It can be bogged down in corrupt policies. It can be derailed because competing projects gain strength. All of these could have negative consequences that would derail the best-case scenario, but if they are watched carefully, they can be contained. CONCLUSION If different scenarios are developed detailing what the future might be as best case and worst case, then it is possible to evaluate the consequences of implementing a program or solution in the future. Not only can unintended consequences be uncovered, there will be signposts for positive and negative trends that can be identified. By then watching for the signposts, interventions can be implemented when a negative trend is gaining strength and support can be made available for positive trends. Building scenarios that can answer “What if?” allows the problem solvers to practice the implementation of the solution before it goes “live.” They allow the problem solvers to identify possible consequences, especially negative ones, early enough to then watch for them and intervene early enough that they do no harm. With this ability to monitor changes, the probability of negative consequences occurring can be evaluated, allowing for interventions that will mitigate the effects of negative consequences, especially if they have ethical considerations, and allow an organization to continue to succeed. REFERENCES Bisson, P., Stephenson, E., & Viguerie, S (2010, June) “Global forces: An Introduction.” Retrieved from https://www.mckinseyquarterly.com/Strategy/Globalization/Global_forces_An_introduction_2625?gp=1 Chermack, T (2004) “Improving Decision-making with Scenario Planning,” Futures, 36, pp. 295-309 Dörner, D (1996) “The Logic of Failure.” New York: Metropolitan Books De Geus, A (1997) “The Living Company: Habits for Survival in a Turbulent Business Environment.” Boston: Harvard Business School Press “Eyes Wide Open: Embracing Uncertainty Through Scenario Planning” (2009, July 22) Knowledge @ Wharton. Retrieved from http://knowledge.wharton.upenn.edu/article.cfm?articleid=2298

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Global Reporting Initiative (2009) “GRI Reports List.” Retrieved from http://www.globalreporting.org/GRIReports/GRIReportsList/ Hammond, A (1998) Which World? Scenarios for the 21st Century: Global Destinies, Regional Choices.” Washington, DC: Island Press/Shearwater Books “How Companies Act on Global Trends: A McKinsey Global Survey” (2008, April) The McKinsey Quarterly: The Online Journal of McKinsey and Co. Retrieved from http://www.mckinseyquarterly.com/aticle_page.aspx?L2=39&L3=29&ar=1741 Lingren, M., & Bandhold, H (2003) “Scenario Planning: The Link Between Future and Strategy.” London: Palgrave Macmillan Luban, D., Strudler, A., & Wasserman, D (1992) “Moral Responsibility in the Age of Bureaucracy. In Shaw, W. & Barry, V. (2007) Moral Issues in Business. 10th ed. Belmont, CA: Thomson Wadsworth McLaughlin-Rotman Centre for Global Health (2007, September 13) Ethical Issues of Scientific Research in Developing World Examined,” Science Daily. Retrieved October 1, 2007 from http://www.sciencedaily.com/releases/2007/09/070911073925.htm Mitroff, I (1998) “Smart Thinking for CrazyTimes: The Art of Solving the Right Problems.” Berrett- Koehler, San Francisco Mazumdar, S (2011, April) “Arid Land, Thirsty Crops,” Scientific American Nanus, B (1992) “Visionary leadership.” San Francisco: Jossey-Bass National Intelligence Council (1997, November) “Global Trends 2010.” Retrieved from http://www.dni.gov/nic/special_globaltrends2010.html National Intelligence Council (2000, December) “Global Trends 2015: A Dialogue About the Future with Nongovernment Experts.” Retrieved from http://www.dni.gov/nic/PDF_GIF_global/globaltrend2015.pdf National Intelligence Council (2004, December) “Mapping the Global Future.” Retrieved from http://www.dni.gov/nic/NIC_globaltrend2020.html National Intelligence Council (2008, November) “Global trends 2025: A Transformed World.” Retrieved from http://www.dni.gov/nic/NIC_2025_project.html Ringland, G (2002) “Scenarios in Business.” West Sussex, UK: John Wiley & Sons Schwartz, P (1991) “The Art of the Long View: Planning in an Uncertain World.” New York: Doubleday/Currency Shell Global (2011a) “Past Scenarios: Global Scenarios 1992-2020.” Retrieved from http://www.shell.com/home/content/aboutshell/our_strategy/shell_global_scenarios/previous_scenarios/

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Shell Global (2011b) “Past Scenarios: Global Scenarios 1995-2020.” Retrieved from http://www.shell.com/home/content/aboutshell/our_strategy/shell_global_scenarios/previous_scenarios/ Shell Global (2011c) “Past Scenarios: Global Scenarios 1998-2020.” Retrieved from http://www.shell.com/home/content/aboutshell/our_strategy/shell_global_scenarios/previous_scenarios/ Shell Global (2011d) “Past Scenarios: Global Scenarios 2001-2020.” Retrieved from http://www.shell.com/home/content/aboutshell/our_strategy/shell_global_scenarios/previous_scenarios/ Shell Global (2011e) “Shell Energy Scenarios to 2050.” Retrieved from http://www- static.shell.com/static/public/downloads/brochures/corporate_pkg/scenarios/shell_energy_scenarios_2050 .pdf Shell International Limited (2005) “Shell global scenarios to 2025.” London, UK: Global Business Environment Tuna, C (2009, July 6) “Pendulum is Swinging Back on “Scenario Planning” JDS Uniphase Prepares Responses for a Range of Business Situations, Helping Company React Quickly to Change,” The Wall Street Journal. Retrieved from http://online.wsj.com/article/SB124683295589397615.html Van Der Heijden, K (1996) Scenarios: The Art of Strategic Conversation.” West Sussex, Eng: AWiley World Economic Forum (2009a) The Future of the Global Financial System: A Near-term Outlook and Long-term Scenarios.” Retrieved from http://www.weforum.org/en/initiatives/Scenarios/NewFinancialArchitecture/index.htm World Economic Forum (2009b) “China and the World: Scenarios to 2025.” Retrieved from http://www.weforum.org/en/initiatives/Scenarios/ChinaScenarios/index.htm World Economic Forum (2009c) “India and the World: Scenarios to 2025.” Retrieved from http://www.weforum.org/en/initiatives/Scenarios/IndiaScenarios/index.htm Wright, G., Van der Heijden, K., Burt, G., Bradfield, R., & Cairns, G (2008, April) “Scenario Planning Interventions in Organizations: An Analysis of the Causes of Success and Failure.” Futures, 40 (3), 218- 236

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RECOGNIZING COMMON SENSE LEADERSHIP WITHIN THE 21ST CENTURY ORGANIZATIONAL

CONTEXT Jon K.Webber, University of Phoenix

Gregory W. Goussak, Ashford University Elliot M. Ser, Florida Atlantic University

ABSTRACT

The purpose of this study is call for further academic conversations into how to recognize common sense leadership as it relates to the 21st century organization. This qualitative study was performed from July 29th through December 7th, 2010, which involved 26 participants from across the United States who were identified as senior leaders in their organization. These executives indicated that common sense leadership is a multi-pronged approach that requires flexibility to address both the needs and desires of the organization in conjunction with those of the members of the organization. Participants concluded that common sense decision making requires a sense of morality that sometimes supersedes organizational performance and profitability. Finally, study participants strongly believe that employee motivation that encompasses goal attainment and decision making, through a sense of morality, are important benchmarks in being a common sense leader. JEL: M1 KEYWORDS: Leadership, Transformational Leadership, Common Sense INTRODUCTION Much like the definition of leadership, there is not one common word or phrase that seems to best describe what common sense is all about, just what attributes are encompassed in that term. Our study sought to find broad categorizations of what common sense can be identified as encompassing among senior leaders across multiple disciplines and various locations across the United States. The following summarizes the findings of those who took part in this initial inquiry, which then can be used as a starting part for further dialogue among those who might pioneer this concept ahead. RESEARCH BACKGROUND The study started out with the assumption there must be a common set of terminology that could be used to define common sense as it relates to organizations. After reviewing the literature, conversing with colleagues, and considering the data collected, the researchers discovered this is an impossible task to complete. The one certainty about the definition of common sense leadership is there is no single quantifiable measurement that could tell us how to define the term but everyone seems to recognize its attributes in practice much like one could differentiate the famous contour design of the Coca-Cola bottle from one that came from one of its competitors. Common sense leadership follows the same pattern because people can tell you what it is without being able to correlate the term to a single benchmark or paradigm.

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Observations were made following leadership conferences in Eastern Europe in the early 21st century that attendees were eager to embrace a Western leadership style but often did not show their comprehension of how such principles could be applied in a practical, organizational setting. Much of this resistance was because of the participant’s past experiences in a Communist worldview setting where such an approach was forbidden. Even after democratic reforms were initiated, the old paradigm of leadership could not be easily shaken from emerging organizational leaders who openly stated they wanted to find a new paradigm to do their business but did not know where to begin the process. Further observations among United States leadership conference attendees, whom had already practiced the skills that the Eastern Europe attendees hoped for, seemed to show a similar pattern of participants wanting to embrace a different style. Yet, barriers seemed to be in place so the application of new paradigms was hindered. It appeared that while there was a will to make an organizational leadership style change, there was a missing element that did not allow these leaders to take the principles learned from theory into practice. A final consideration was the plethora of styles that are available for leaders to emulate in their organizations. Beginning with Taylor and the scientific management movement (1890- 1940), followed by Weber’s bureaucratic management approach (1930-1950), and then Mayo and Roethlisberger (Hawthorne study), McGregor (Theory X and Theory Y), and other notable researchers involvement in the human relations movement studies (1930-today). What seemed to connect these observations to the researchers was the notion of common sense and its ability to serve as the hitching mechanism to connect individuals and their organizations to the desired principle of operations. Without common sense, it seemed the parties could appreciate the appearance of the desired principles from a distance but could not have a full connection to them in order to move the paradigm forward personally or organizationally. LITERATURE REVIEW There is a literature gap involving common sense and the areas of leadership and organizational behavior in general. The topic is mostly identified within the context of the political arena and whether someone’s actions are appropriate or not. However, since 2000, the notion of common sense leadership as it relates to organizational behavior is almost a quiet topic by theorists in the field. Fletcher (1984) believed common sense is a component of common understandings about the environment consisting of three points. First, common sense unites underlying presuppositions about the environment (Goodwin, 2009). Second, common sense consists of a group of shared opinions about the environment (Goodwin). Finally, common sense is a shared “way of thinking” about the environment (Fletcher, 1984, p. 204). Salter and Highhouse (2009) relate common sense within the context of situational judgment. They note there are eight schools of thought in this area starting with File (1945) and continuing through Brooks and Highouse (2006); Motowidlo, Hooper, and Jackson (2006); and Stemler and Sternberg (2006). Salter and Highhouse note there is a commonality in how each of these scholars defined situational judgment such that “good judgment does not exist in a vacuum; it usually occurs in the context of other people or situations” (p. 394). The Situational Leadership Model, developed by Hersey and Blanchard, postulated that leaders maximize their opportunity for success by adapting style to the specific situation based on the skills, abilities and desires of the followers (Hersey, Blanchard & Johnson, 2007; Newstrom & Davis,

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2007; Pechlivanidis & Katsimpra, 2004). The seminal research seems to point to the notion that there is a connection between common sense and its relationship with familiar experiences of people in a grouping. Salter and Highhouse (2009) further state that situational judgment (what this study calls common sense) is a qualitative determination where factual and procedural knowledge are used to discover how others will respond to various circumstances. This is perhaps why there are differing definitions of what common sense is given it is not a measure that can be quantified because of its amoebic, ever changing nature. What might be considered common sense by one person now may not be deemed as such by later investigations because of what Polanyi (1960) called tacit knowledge or what one learns from past experiences, which are not always quantified or recorded for later review. Moon (2009) relates the importance of common sense study to change management particulars. He links the need for common sense as a means to “pass stakeholders’ common sense ‘sniff tests’” (p. 518). Moon further notes “stakeholders are less likely to adopt change when their common sense perspectives are violated” (p. 518). Kaler (2006) believes that properly managing stakeholders for any kind of an organization focuses on the ability to address the needs of more than corporate profits and the growth of shareholder wealth. Managing in the 21st century requires a much broader thinking concerning the ramifications that organizational decisions have on the overall environment (Harrison & St. John, 1996). Effective management of a wide range of stakeholders requires leaders to identify each type of stakeholder that could influence the direction of the organization and their specific expectations (Harrison & St. John, 1996). Rigsby and Greco (2003) believe that leaders with a creative and unique vision look beyond the obvious needs of the organization towards an uncharted future. Leaders that fail to recognize the tangible and intangible future of any stakeholder, individual, group or environment creates a detrimental atmosphere where failure becomes a possibility (Wallace, 1995). Thus, common sense becomes a benchmark that is “so clearly self-evident and to think/do otherwise would obviously be folly” (Moon, personal communication, April 28, 2011). In this context, common sense then becomes a group norm that is transformed from what one person thinks to something that is embraced by other members of the organization. Clawson (2009) believes that one needs to consider common sense from a broader perspective because “managers who are unable to review and adjust their common sense are not likely to be effective managers locally or globally” (p. 470) He notes the reason why leaders cannot come to a firm definition is because “people draw conclusions based on vague values, assumptions, beliefs, and expectations they have about the way the world is or should be” (Clawson, personal communication, April 26, 2011). Clawson also sees common sense as being a local or global perspective rather than something identified by all who understand the term (2011). Rausch (2009) notes that while there have been myriad leadership publications a general consensus on the meaning of common sense has not been reached among scholars and practitioners. What can be agreed on, though, is there is a positive relationship between common sense and how one is thought to make sound decisions on any given matter (Rausch). That is accomplished in the organizational setting through the communication of the leaders’ values. Zhao (2009) makes an important observation on common leadership when he notes, as others, that it seems the common sense is a self-evident concept espoused by practitioners, which then ends further discussion. However, opinions about what the term common sense includes are more “about effectiveness, not about science” (Zhao, 2009, p. 449). Zhao goes on to connect those who are proponents of common

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sense leadership to a “response to arbitrary and bureaucratic management, and useless complicated or dogmatic procedures” (p. 449). What is interesting in the literature is common sense is recognized as having an imprint on organizational behavior (Goodwin, 2009; Moon, 2009; Rausch, 2009; Salter & Highhouse, 2009; and Zhao, 2009). However, common sense serves as an intangible qualifier that people can see the effects of without being able to hold it in their hands, much like the wind. Yet, common sense is no less important to organizational survival and the ability of managers to make prudent decisions that could lead to success or failure based on how these actors are implemented and grasped by their followers.

STUDY BACKGROUND This qualitative study on recognizing common sense as it relates to the 21st century organization was performed from July 29th through December 7th, 2010. It involved 26 participants who were identified as senior leaders in their organization (Vice-President and higher on the organizational chart). The convenience sample included individuals from both the public and private sector and included leaders from information technology, insurance, investment, legal services, manufacturing, marketing, public utilities, real estate, restaurants, and staffing. Participants were polled from Georgia (50%), Nevada (23%) and other regions of the United States (Alabama, Connecticut, Florida, Maryland, Minnesota, North Carolina, and Pennsylvania); using SurveyMonkey.com as the platform for them to record their complete comments. FINDINGS It was not difficult for these senior-level leaders to identify how common sense leadership was recognized by them, although there was no single broad category that could be used to delineate the meaning of the term. Instead, three predominant groupings were produced from the data, which seemed to guide the participants’ perceptions of what common sense leadership means in their organizational setting: (a) goal setting, (b) decision making, and (c) motivation. Goal setting Opinions about common sense as they relate to operational issues fell within three broad groupings: mission, vision, and purpose. Within those areas, participants identified two specific subsets: recognition and getting back to basics. Recognition Participants noted that common sense starts within the proper mindset of what is happening in the organization. CS7 opined that meant the leader needs to have an “innate ability to recognize issues and processes within a business structure and address them accordingly”. That perspective was echoed by CS23 added that commons sense realizes this in the context of “social environments in which a person operates. Common sense includes a personal feel for the operations of a business, knowledge of the external environment in which the business exists, and understanding of the social dynamics that exist within the organization”. In other words, common sense operates within an amoebic kind of environment where all parts are connected, blended together, and flowing together in tandem within the parameters of mission, vision, and purpose. CS13 adds, “Since the state of man is such that he is constantly searching

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to find his meaning and purpose, common sense would dictate that a leader be able to provide/communicate, in part, this meaning and purpose to the individual in an organization”. Other participants in this study noted a similar connection as they saw how common sense relates to “the absolute understanding of your business model and processes (CS25). CS8 attributed common sense to the leader’s “ability to assess reality”. CS20 viewed the pursuit of using common sense in the context of “vision expressed daily. Efficiency tweaked daily. Productivity measured daily. Relevance to customer needs examined daily”. Common sense then would be bounded by observing what has been done in the past, looking to what the organization is experiencing now, and looking to the realities of the future in almost a simultaneous set if activities by the leader. The notion of common sense was also framed within the ideal of knowing what tools are available to the leader. CS26 defined this area as “a set of mental tools that guide a person through the decision process to a point where the obstacles have been analyzed, potential solutions have been outlined with different consequences thought through, and then reasoning the way to the best solution”. Instead of describing a situation where one tool fits all leaders, common sense then would seem to relate to the recognition that there are differing ways to use those devices and arrive at varying solutions, which may be beneficial to the organization. At least that is what CS26 seems to indicate when it was opined that leaders in the 21st century “will have to accommodate people in leadership positions who have a different common sense matrix than has been thought of as traditional common sense”. The reason why that may be true is best described by CS13 who posited that “common sense is that set of intuitions, biases, and perceptions which are taken for granted by the one who possesses them”. If one thinks that a leadership tool has only one use then there may be a surprise when that device ends up having different uses by those who do not see common sense leadership within a narrow set of definitions. However, the study of leadership is challenged because CS26 also noted that “what makes it harder is that we now have two generations who have developed a different sort of common sense as a result of a different upbringing”. Intergenerational differences need to be considered when determining what is or is not defined as common sense leadership in the 21st century. Back to Basics Aligned with mission, vision, and purpose issues are where participants felt common sense leadership begins in an organization. CS3 sees the genesis of such understanding starting by “getting back to the basics of setting measurable and attainable goals”. Only when the leader knows their true north coordinates will the organization be able to know the clear direction they want to follow without being distracted by alternative opinions from those who are following an outdated map of operations. CS25 added that common sense is more than just the leader knowing where the organization is heading but they also possess “the ability to know that all processes and functions are working properly or improperly. This applies to everything from software to human resources”. When a leader is confident that they have marked a clear path for the rest of the organization to follow behind them and all known and needed resources are in place then the participants believe common sense is being used optimally. Participants noted that common sense relates to the ability of a leader to offer “the product or service in a way that is easy to understand, purchase, and see the value of the product or service” (CS22). The reason is that, as CS25 noted, “Without understanding how your organization is built and functions you cannot see if something is amiss”. If a leader is able to have such focus then CS3 suggests that one can pursue “those goals without being impacted by noise or emotional drivers. Too often these days, plans are created and decisions are made with drivers that are contrary or not related to success”. That is why the

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participants may have been focused mostly on mission, vision, and purpose because as CS8 views common sense in leadership, one has to “develop a plan, and present and sell that plan to achieve your objectives”. Decision-making Opinions about common sense as it relates to decision-making fell into broad principle-driven considerations. Common sense, according to the participants, is based on internal drivers rather than outside factors that may affect the leader. CS2 notes common sense is “experienced based decisions that are not driven by politics”. The leader in such cases will look at situations as doing what is right first while looking out for the best interests of the organization. CS14 says this process all begins by knowing your customer and what their expectations may be. CS15 sees common sense as “looking past numbers to do the right thing for employees, customers, and shareholders”. CS11 agrees with that notion and further states that common sense is “acting in a way that positively affects company goals while appearing to stakeholders to be the most appropriate approach”. CS24 added that “common sense as it relates to leading a 21st century organization is best defined as doing the right thing at the right time with resources--time, people, money and information”. Common sense then is formed as CS24 described “a fail-safe, flexible model for action that results in obtaining the key objectives of the organization consistently” while doing the right thing every time. CS10 connected common sense leadership to “doing what is right by leveraging personal and professional experiences” rather than what someone else wants you to do. Many of the participants equated common sense to moral decision making. CS5 said this relates to “using your moral compass to make decisions and following the ‘do unto others’ principle”. The core question that leaders would then need to answer would be, “Is what you are considering something that you would personally feel right about, and would you be proud to talk about it to others”? (CS17). CS4 notes that leaders should “try to perceive the outcome of their action(s) and determine if they would be happy with that result”. CS19 believes the answer follows one’s practice of “simply doing the right thing even when it is often not the easy thing to do. Lead by example. Practice what you preach”. By setting the right example in their organizations, leaders can show common sense that can be emulated by their followers. Several participants noted that the benchmark for common sense activity in organizations is “actually a matter of aligning our lives with timeless principles” (CS21). CS7 stated a similar observation that “one’s moral/ethical beliefs play an important part in how these things are addressed”. The end-result according to CS12 is that “common sense and doing what is right is what leaders do to grow their fruit stands into factories”. Motivation Opinions about common sense as it relates to motivation fell within two broad groupings: employee focus and the setting up the right environment. Both seem to work in tandem with each other to encourage further common sense practice and application within established organizational norms.

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Employee Focus Another element that participants said would apply to common sense leadership relates to human capital considerations. CS3 believes the starting place for common sense leadership in this area begins with “assembling a team of people with a track record of success”. Common sense then would include the leader knowing who the right people are to move the organization ahead, understanding their availability for hire, and making sure the targeted individuals have gained success within similar areas of operations. Once the human assets are in place, CS1 believes one starts by first having the mindset of caring about the people who are employed by your organization. At the very base of common sense in leadership is how to motivate your employees so they will maintain a long and productive relationship with your organization. CS9 says it begins with praising and rewarding “employees for the good work they do - take care of the employees and the bottom line will take care of itself”. At the core of commons sense and motivation is what CS13 sees as “an endowment given to all mankind in varying degrees. It is a subjective, non-material object, which can only be measured and defined in relationship with something else. Since organizational leadership is necessarily people-driven, common sense possessed by the leader of any organization will be marked by his seemingly 'natural' ability to understand what motivates people”. CS1 notes that also means knowing that “the employees of the company are people first, employees second”. CS12 puts the onus for that on leaders as they show their “understanding that people work with people, not for people”. The nuance there is one of use as being proactive vs. reactive in how it is approached. CS18 notes that empowerment is a part of what happens because “common sense consists of understanding the unique ways in which the members of your organization can be enabled to be part of a team effort to achieve worthy goals”. CS6 concurs by noting “common sense is the ability to look at more than one party’s perspective on an issue or subject and make reasonable decisions based on that”. How a leader can reach that level of understand comes by “realizing that people are the base of our services, products, technology, etc... and the only value your company has is the quality of employees” (CS15). CS14 adds that common sense means “treating employees and customers fairly”, which seems to be the hallmark of what the participants said best defined common sense in this area of inquiry. Setting the Right Environment A smaller area of consideration of what common sense means as it relates to motivation was described by several participants who noted that setting the right environment was a consideration. CS1 noted that getting employees to “ride for the brand” needs to be emphasized. The goal in such work would be to engage employees in activities that would move the brand forward while concurrently recognizing the followers’ individual work in doing so. CS12 believes that means to “try to make all areas "win/win" situations” for leaders and their followers. CS13 posits that “at a basic level, leadership is a function of an individual's ability to intrinsically motivate people to work together to make a vision reality. Organizations exist around a common purpose, and it is the job of the leader to help people in an organization understands and cares about the purpose.” By doing so, the work environment will thrive and survive in whatever challenges it may face from its stakeholders.

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CONCLUSIONS According to Fletcher (1984), common sense leadership focuses on organizational environment. A single answer to define common sense leadership is not possible because senior level management has a number of different points-of-view. Summarizing the results of this study categorize common sense leadership into three areas: (a) goal setting, (b) decision making and (c) employee motivation. Kinicki and Kreitner (2010) believe that setting goals requires a “clear line of sight” in order to lead a 21st century organization (p. 245). Furthermore, common sense leaders differentiate between performance outcome goals and learning goals (Kinicki & Kreitner). CS3 believed that common sense requires the leader to “set measureable and attainable goals”. The results of this study indicate that leader flexibility adapting to the ever changing environment is critical to being a common sense leader. According to CS26, leaders in the 21st century “will have to accommodate people in leadership position who have a different common sense matrix than has been though of as traditional common sense”. Maintaining a flexible view of both the environment and the members of the environment is the first indication of 21st century common sense leadership. The second of the three areas of common sense leadership concerns the decision making process used by 21st century leaders. It is important that the reader understand that decision making in modern organizations follow one of two directions: (a) rational or (b) nonrational. According to Kreitner and Kinicki (2010), the rational approach to decision making requires the leader to solve problems by following a process that examines all potential alternatives before making a final decision. Participants in the current study indicate that a moral compass in choosing a direction for an organization is an important component of being a common sense leader. The central focus of this moral compass is the ability to inspire. Inspirational leaders expand their credibility by engaging their followers into accepting new responsibilities necessary for goal attainment (Bass & Avolio, 2002; Bass, 2003). CS24 believed that “common sense, as it relates to leading a 21st century organization, is best defined as doing the right thing at the right time with resources, time, people, money and information”. This study concluded that true common sense leadership requires leaders to inspire followers while making directional choices for the organization that ethically satisfy the morality of the overall environment. The final area of common sense leadership focuses on employee motivation. Motivating people accounts for the influential effectiveness leaders have with their followers (Schermerhorn, Hunt & Osborn, 2004). Motivation theory is divided into three overall categories: (a) reinforcement theories, (b) content theories, and (c) process theories. Reinforcement theories reflect the “process of controlling an individual’s behavior by manipulating its consequences” (Schermerhorn, Hunt & Osborn, 2004, p 85). Content theories focus on the needs of employees. Maslow’s Hierarchy of Needs measures motivation through meeting certain physiological human needs (Newstrom & Davis, 2002). Finally, process theories motivate from a more esoteric approach concentrating on behavioral influences (Schermerhorn, Hunt & Osborn, 2004). CS13 views motivation and common sense leadership as a partnership between focusing on people and determining the direction required for the organization to be successful. In summary, understanding common sense leadership is not possible from a single point-of-view. Senior level executives indicate that common sense leadership is a multi-pronged approach to 21st century organizational behavior. Common sense leaders must maintain a level of flexibility to address both the needs and desires of the organization in conjunction with those of the members of that organization. Decision making requires a sense of morality that sometimes supersedes organizational performance and

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profitability. Finally, study participants strongly believe that employee motivation that encompasses the previous two concepts (e.g. goal attainment and decision making) through a sense of morality is the key to being a common sense leader. REFERENCES Bass, B.M. (2003). Power to change: a conversation with Bernard M. Bass. Leadership in Action, 23(2), 9-11. Bass, B.M., & Avolio, B.J. (2002). Developing Potential Across a Full Range of Leadership: Cases on Transactional and Transformational Leadership. Mahwah, New Jersey: Lawrence Erlbaum Associates. Clawson, J.G. S. (2009). Level three common sense. Management Decision, 47(3), 470-480. Fletcher, G.J.O. (1984). Psychology and common sense. American Psychologist, 39(3), 203-213. Goodwin, P. (2009). Common senses and hard decision analysis: why might they conflict? Management Decision, 47(3), 427-440. Harrison, J.S. & St. John, C.H. (1996). Managing and partnering with external stakeholders. Academy of Management Executive, 10(2), 46-60. Hersey, P.K., Blanchard, D.J., & Johnson, D.E. (2007). Management of Organizational Behavior: Leading Human Resources (9th ed.). Upper Saddle River, New Jersey: Prentice Hall. Kaler, J. (2006). Evaluating stakeholder theory. Journal of Business Ethics, 69, 249-268. Kinicki, A., & Kreitner, R. (2010). Organizational Behavior (9th ed.). New York: McGraw-Hill Irwin. Moon, M.Y. (2009). Making sense of common sense for change management buy-in. Management Decision, 47 (3). 518-532. Newstrom, J.W. & Davis, K. (2007). Organizational Behavior (12th ed.). Upper Saddle River, New Jersey: Prentice Hall. Pechlivanidis, P. & Katsimpra, A. (2004). Supervisor leadership and implementation phase. Leadership and Organizational Development Journal, Bradford, 25(1/2), 201. Polyani, M. (1966). The Tacit Dimension. Garden City, NY: Doubleday & Co. Rausch, E. (2009). Do we know what common sense is and, can we prove it if we do not? Management Decision, 47(3), 413-426. Rigsby, J, & Greco, G. (2003). Mastering strategy: Insights for the world’s greatest leaders and thinkers. New York: McGraw-Hill.

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Salter, N.P., & Highhouse, S. (2009). Assessing managers’ common sense using situational judgment tests. Management Decision, 47(3). 392-398. Schermerhorn, J.R., Hunt, J.G., & Osborn, R.N. (2004). Core Concepts of Organizational Behavior. Hoboken, New Jersey: John Wiley & Sons. Wallace, G. (1995). Managing and mismanaging stakeholder expectations. The Journal for Quality and Participation, 18(3), 76-79. Zhao, S. (March 2009). The nature and value of common sense to decision making. Management Decision, 47(3), 441-453. BIOGRAPHY Dr. Jon Webber is a Professor at the University of Phoenix. He can be contacted at: Webber Impact Management, 5015 Sunset Trail, Cumming, Georgia 30040, US Email: [email protected]. Dr. Gregory Goussak is an Assistant Professor at Ashford University He can be contacted [email protected] Dr. Elliot Ser is a Professor at Florida Atlantic University. He can be contacted at: 4150 N.W. 73rd Way, Coral Springs, Florida 33065, US Email: [email protected].

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CULTURAL PLURALISM: A CRITICAL NEEDS PLAN FOR GENERAL MOTORS

Gregory W. Goussak, Ashford University Jon K.Webber, University of Phoenix

Elliot M. Ser, Florida Atlantic University

ABSTRACT The purpose of this paper is to create a critical needs plan for General Motors Corporation in the 21st century. General Motors (GM), once the most dominant manufacturer in the automotive industry, finds itself in financial crisis with a Chapter 11 bankruptcy and a necessary government infusion of capital. The foundation of this paper applies the Supportive Model as an effective strategy for creating a new corporate culture and focusing GM as a competitive manufacturer in the global automotive industry. The basis of this critical needs plan focuses on more than managerial or financial influence, but a cultural change including corporate ethics, corporate social responsibility and a critical thought approach to operating in the 21st century. JEL: M1 KEYWORDS: Leadership, Cultural Pluralism, Organizational Behavior INTRODUCTION With the increase in global competitive pressure, it is important for a business organization to understand the organizational behavior and dynamic changes to its cultural and ethical environment. Economic globalization has forced many U.S. companies to take a hard look at their competitive environments focusing on the steps necessary to remain competitive on the world-stage. Engle (2006) observed that many of the top industrial powerhouses within the past 10 years have realized that past success does not equate to future gains. Companies must replace complacency with an intense effort to optimize operational processes by examining the organizational behavioral. This is especially true for companies facing critical issues. This case study provides a critical needs plan for General Motors Corporation. The organization’s culture and ethical behavior are two of the many possible subject areas examined as an overall plan to optimize operations. The recommendations will take a comprehensive approach by considering leadership, organizational culture, financial ramifications, cross-cultural issues, and potential ethical conflicts.

A critical needs plan for a global company such as General Motors Corporation includes an assessment of global culture and global ethics. The structure of the organizational plan for General Motors is to be adaptive to the global environment and strategically support global markets competitive demands. According to Hannan and Freeman (1977), any plan focusing on a global company is complex and relies on a working strategy that supports a relationship between the structure and its environment. Gupta and Govindarajin (2004) believed that globalizing in today’s business environment necessitates organization’s recognize four key constructs to globalizing in the 21st century: (a) the organization’s position in the market; (b) the availability of capital to expand the organization; (c) the availability of supplies for the organization and (d) a corporate outlook that considers the overall global picture.

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CULTURAL BEHAVIOR

Cultural behavior can vary significantly among different markets. Jung and Avolio (1999) believe that successful organizations that expand globally understand the differences in foreign cultures and that this understanding corresponds with the exponential growth of the global economy. Being the world’s biggest automotive manufacturer prior to 2008, General Motors employed approximately 325,000 employees worldwide (Webster, 2006). With the diversity of cross-cultural differences, it is critical that General Motors study each market’s cultural organizational behavior and determine if a common matrix exists. The Supportive Model is an effective model for use as a base plan for any organizations needs. This model illustrates leadership by a human resources approach of emphasizing support for the workers as the most important factor in leading the organization. “[Elton Mayo and F.J. Rothlisberger] concluded that an organization is a social system and the worker is indeed the most important element in it” (Newstrom & Davis, 2002, p. 36). When dealing with a sensitive issue such as health-care costs and the expansion of operations into a foreign environment, it is important to implement a plan that demonstrates the company’s commitment to its employees and those from the new foreign environment. A change in the organizational culture would not prevail over the individual priorities of a company’s employees or the foreign environment. According to Newstrom and Davis (2002), leadership and not managerial authority is the foundation of the Supportive Model. This type of leadership helps promote employees growth and motivates them to obtain common goals that are beneficial to the organization. Utilizing the Supportive Model, General Motors can embrace cultural diversity and pluralism as part of the globalization strategy. Cultural pluralism relates to the relationship of the internal and external stakeholders of the group (White, 1978). According to Nagar (2005), global organizations must understand that the global environment of 21st century organizations is in a state of change. Cultural pluralism defines the manner in which an organization reacts to the changing cultural paradigms. Successful organizations find ways to adapt to the changes in beneficial ways while continuing the involvement and advancement of its internal members (Nagar, 2005). One problem an organization finds when globalizing concerns that significant differences exist in the market’s organizational culture. Cultural discomfort among management dealing with markets that they are not familiar with could result in disruption to business flow. The intent is not to force a change in the organizational culture, but embrace it and bridge different cultures together. The challenge of managing organizational culture is the human relation factors. Despite the fact that the company is from the United States, it would not be appropriate for General Motors to assume that foreign markets share a common vision. The key to dealing with organizational cultural differences begins with the identification of any commonalities among the different cultures. The goal is to develop a general plan encompassing components from existing cultures in order to establish a new global organizational culture. Jung and Avolio (1999) cited Hofstede [who] “argued that many differences in individual motivation and leadership styles could be traced to differences in cultural programming. Erez also challenged the appropriateness of simply assuming that United States-centric leadership theories can be generalized to other cultures” (p. 208). Recognizing the differences in organizational culture would mitigate the risks of domestic or global cross- cultural influences to the operational plan. Although incorporated in 1908, General Motors did not experience success until 1923 with the hiring of Alfred P. Sloan as Chief Executive Officer. Sloan, an engineer by trade, believed that product development began with design and must focus on the wants of the buying public. Sloan found that in the early years, GM’s problems originated with its lack of brand specialization. Prior to Sloan’s employment,

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the company failed to focus a dedicated brand to a specific market segment. Sloan changed GM’s corporate philosophy by concentrating each GM brand to a dedicated market resulting in overall U.S. market domination that rose as high as 50% between 1950 and 1965. In addition to being the largest automaker, GM prided itself on producing automobiles at the lowest cost while remaining the style leader of the industry (Olson & Thjomoe, 2010). The domination was so prevailing that in 1955 the United States Congress began anti-trust hearings threatening to divide the company into smaller segments. Although no action was taken, GM management realized that a refocus of corporate direction was necessary. Instead of increasing its market share, GM would need to find ways to increase its profit margin while maintaining is existing control of the market (Olson & Thjomoe, 2010). Unfortunately, the decision to change business strategy failed to recognize the materialization of a new desired market segment for smaller more compact vehicles. Another issue confronting GM originated with the focus on reducing costs and increasing profits. The increase in profits did not go unnoticed by the United Auto Workers (UAW). The UAW was astute to the direction of the American automobile industry and that higher profits provided increased opportunity for union worker wages and benefits without an equivalent proportion of increased worker productivity (Martin & Schrum, 2010). A New York Times article in 2009 reported that upwards of $ 1,000 per auto sold represented health care and pension costs to the company (Martin & Schrum). The issue is magnified when retirees are factored into the equation as upwards of 450,000 non-working individuals, retirees and surviving spouses, were covered by GM benefit plans in 2005. In addition to the issues related to its benefit and pension issues, GM continued to further distance itself from its successful past by implementing a strategy of “platform sharing across GM division brands” (Olson & Thjomoe, 2010, p. 105). The strategy to cut costs included a reduction in Sloan’s original plan of brand specialization sharing similar designs across the GM brand spectrum. Although the strategy did succeed in reducing overall costs, the long-term affect was a dilution of each brand’s uniqueness. In 1979, GM’s share of the U.S. market was 46%, but because of rising health care and pension costs, a reduction in worker productivity and a dilution of brand specialization that market share dropped to 22.5% (Olson & Thjomoe, 2010). By 2009, General Motors had declared bankruptcy and was in the process of eliminating certain brands and closing dealerships and operations (e.g. Saab, Hummer and Pontiac). Furthermore, the company required an immediate cash infusion of $ 50 billion in capital from the U.S. Government in order to meet current daily obligations. The price for the involvement of government money was to force the accelerated sale of GM assets (Lubben, 2009). The sale of the assets also created a way to reduce existing health and pension costs by creating a specialized trust called a Voluntary Employee Benefit Association (VEBA). The VEBA would be a fully funded separate entity that would guarantee benefits but required a promise of no union action (e.g. strikes) for several years (Lubben, 2009). The challenge created by the bankruptcy and government involvement is for General Motors to recreate the confidence it once experienced by consumers. Key to regaining consumer confidence begins with a change in an organization’s culture. According to Harbour- Felax, General Motors is aware of the issues related to its financial downfall, but failed to make the necessary cultural changes to resolve these issues (Zoia, 2006). General Motors needs to embrace diversity in global manufacturing facilities and market share. General Motors needs to return to an organizational culture that embraces product specialization that focuses on the specific wants of its

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consumer base. The changing global environment, increased fuel costs and a desire for environmental protection creates a different culture that is necessary for success in the 21st century (Svensson, 2004). ETHICS AND LEADERSHIP Elmer W. Johnson (1986), a former Vice President of Public Affairs and General Counsel for General Motors said: The people of the United States and other industrialized nations of the free world, through their governments, have rightly come to look upon GM and other large corporations not simply as business enterprises organized for profit, but also as institutions with far-reaching responsibilities to protect and enhance various social interests and goals (p. 174). Ethics and leadership are synonymous terms that work in conjunction with one another in order to establish a foundation in which an organization operates. Baron (2006) believed that ethical behavior is a methodical approach to making decisions based on defined principles. General Motors recognized that its overwhelming position in both the U.S. economy as well as the global economy places the company in a unique position of more than a corporate giant. General Motors’ actions affect more than just its internal stakeholders (e.g., employees, management, and shareholders), but has a direct affect on its nonmarket environment as well. “The nonmarket environment is composed of the social, political, and legal arrangements that structure interactions outside of, but in conjunction with, markets and contracts” (Baron, 2006, p. 2). Included in Baron’s (2006) definition of the nonmarket environment are outside groups, governmental entities and the public. In contrast, Bass (1990) believed that transformational leaders help to broaden the vision of one’s followers focusing on creating an atmosphere that considers more than individual needs but considers the needs of the organization. Managing a business or organization requires careful consideration and balance of the various components. True leadership is capable of considering a multitude of components that includes both market and nonmarket issues. The concept of ethics is one of a guiding light or force to assist the leader in his or her quest to maximize the potential of the organization. The theory of transformational leadership works in conjunction with the plan utilizing the Supportive Model by considering the needs and desires of the General Motor’s employees and its new partners in an ever-expanding global environment. CORPORATE SOCIAL RESPONSIBILITY General Motors recognized its inherent responsibility in its social performance as well as its corporate performance. Wood (1991) defined corporation social performance as, “a business organization’s configuration of principles of social responsibility, process of social responsiveness, and policies, programs and observable outcomes as they relate to the firm’s societal relationships” (p. 759). General Motors social responsibility encompasses a wide range of stakeholders including employees, stockholders, customers, governmental agencies, and the public. General Motors acknowledges this responsibility by analyzing all legitimate parties to its operations in order to determine the potential conflicts between corporate responsibility and its social responsibility (Johnson, 1986). In the 1980s, General Motors experienced a conflict between these different responsibilities because of its former

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policy of “command-and-control” (Johnson, 1869, p. 174) to one of social responsibility. General Motor’s attempt to implement a new mentality upon its management in a short period placed its managers in a quandary between a market mentality and a social responsible mentality required of corporate partners’ intent on a comprehensive plan for interaction and responsibility within its environment. As a subcomponent of the Supportive Model, the ethical leadership plan incorporates the theory of utilitarianism into the overall plan. “Utilitarianism is a consequentialist system with two particular features. First, consequences are to be evaluated in terms of the preferences of individuals, and second, those preferences are to be aggregated” (Baron, 2006, p. 702). Those following utilitarianism base their ethical decisions on the interest of the whole and not any individual part of the group. Utilitarianism finds its foundation in the needs of the General Motors employees in addition to the needs of its corporate environment. Within the Supportive Model, the theory of utilitarianism provides the General Motors’ management a clear overview of all possible directions in regards to health care coverage and how it will approach its plan that effectively globalizes the company resulting in reduced costs, increased profits, and an effective relationship with its hosts in various foreign countries. MANAGEMENT APPROACH TO ISSUES Rising health-care costs and a declining market share have significantly affected the financial stability of General Motors. General Motors is the largest private provider of health care within the United States. In conjunction with the significant health care liability, the antiquated distribution system that adds at least 20 percent to the price of every new car enhances the overall problems at General Motors (Levinson, 2006). Kubasek, Brennan and Browne (2003) suggests that a critical thinking approach could help General Motors identify the company’s strengths, weaknesses, threats and opportunities and will improve General Motors overall operations. The critical thinking approach encompasses the following eight steps: Step 1) the company must know the facts. In a global environment, it is important to be aware of consumer concerns and competitors position. The Supportive Model will enable General Motors to take a more proactive approach at focusing on gathering appropriate data necessary for future decisions. Step 2) the company must identify the critical needs and issues affecting the company. The primary questions or issues requiring attention are: (a) which factors contribute to General Motors excessive costs and (b) what are the contributing factors in decline in sales? The problem that all automotive manufacturers face is the rising costs of manufacturing when the emerging markets have limited resources for the purchase of automobiles and prefer a basic vehicle in comparison to the loaded varieties commonly found in the United States (Howell & Hsu, 2002). The answer lies in the creation of partnerships and alliances among competitors and technology companies. Technological alliances permit General Motors a strategic advantage by establishing a relationship with a competitor with a sound base in a specific foreign market while utilizing common technology for the benefit of both companies. For example, a General Motors alliance with Suzuki opened an opportunity within the Asian market without the barrier of a new start up operation. In conjunction with Suzuki’s presence in Asia, this alliance provides General Motors with,

… access to Suzuki’s small car platform and its low-cost manufacturing experience. The tie-up gives Suzuki access to General Motors advanced technologies, particularly alternative propulsion and hybrid systems, entry to the growing Latin American market and worldwide component sourcing (Howell & Hsu, 2002, p. 45).

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The relationship between General Motors and Suzuki provides a focus of the critical needs plan for General Motors utilizing the Supportive Model. General Motors can no longer operate in the same manner it did during the 20th century. The future of General Motors depends on strategic alliances like the one with Suzuki. This provides a unique approach to supporting its employee base, stakeholders, and its new global alliances in an ever-expanding global environment. Step 3) the company must establish a set of logical reasons or justifications for supporting the business decisions. Management from the top and continuing down the chain of command should review all reasons and provide justifications for why these issues and risks were not identified sooner. The process of critical thinking requires that the decision be viewed from a different set of lenses. “… Officers and directors are required to exercise their duties in a manner they reasonably believe to be in the best interests of the corporation” (Kubasek et al., 2003, p. 433). Critical thinking skills are important for business decisions to comply with emergent law and as well support of the community ethics (Kubasek et al., 2003). Step 4) once the appropriate facts are defined, the company must assess the legal and social impact of business decisions. This step is critical to General Motors’ success in an ever-expanding global environment. The key is a comprehensive knowledge of the legal environment in the various foreign countries that General Motors chooses to compete. Step 5) once determined, the plan should be implemented at all levels of the business. It is important not to discard subjective reasoning without applying critical reasoning. Innovative ideas require an accurate utilization of critical thinking ability to determine if the information is factual or subjective with merit. This is critical when it comes to technical discussions, where ambiguous subjective comments such as it can never be done may have a negative impact on innovation. Step 6) in conjunction with plan review and implementation, the ethical norms of the business decision should also be considered. The primary ethical norms that provide direction of the legal environment of business are freedom, security, justice, and efficiency (Kubasek et al., 2003). The final decisions made by General Motors consider the ethical impact of its business decisions. What will internal and external stakeholders’ think of the decision? Step 7) business decisions depend on the experience and knowledge of previous events. In order for General Motors to move ahead, the company must review and analyze previous events and actions. Step 8) the final step of the critical thinking process is to consider the business decision in regards to missing information. In a global environment, the dynamics of said environment change quickly and it is critical for the company to be on the cutting edge of all available information. SUMMARY The foundation of this critical needs plan for General Motors centers on the Supportive Model utilizing a critical thinking approach to globalization. Global expansion is inevitable for all automobile manufacturing companies. After many years of negative financial results and stratospheric increases in health-care costs, General Motors is taking a proactive approach in order to lower its manufacturing costs and expanding its market base into markets that are exponentially growing in the 21st century. The Suzuki example in Asia demonstrates that implementing the Supportive Model focuses on the strengths of both partners considering the needs and desires of both the internal and external stakeholders. “Globally integrated strategies demand it to manage both the uncertainties involved in a highly intricate networking operation and to develop and implement strategies quickly to parry and riposte the actions of other companies pursuing a similar strategy” (Lei & Slater, 1990, p 29). The first automobile manufacturing company to maximize the advantages of a global market including those of reduced costs will set itself up as the primary manufacturing company in the 21st century.

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REFERENCES Baron, D. P. (2006). Business and its environment, 5th ed. Upper Saddle River, NJ: Pearson Prentice Hall. Bass, B.M. (1990). Bass & Stogdill’s Handbook of Leadership. New York: The Free Press. Engle, Paul (2006). What's the world coming to? Industrial Engineer 38(2), 22. Gupta, A. K., & Govindarajan, V. (2004). Global Strategy and organization. New York: John Wiley & Sons. Hannan, M. T., & Freeman, J. H. (1977). The population ecology of organizations. American Journal of Sociology, 929-64. Howell, L.J. & Hsu, J.C. (2002). Globalization within the auto industry. Industrial Research Institute, 43-49. Isidore, C. (2009). GM bankruptcy: end of an era. CNN-Money: June 2, 2009. Retrieved on August 31, 2011 from http://money.cnn.com. Johnson, E.W. (1986). General Motors Corporation, its constituencies and the public interest. Journal of Business Ethics, 5(3), 173-176. Jung, D. I., & Avolio, B. J. (1999, April). Effects of leadership style and followers' cultural orientation on performance in group and individual task conditions. Academy of Management Journal, 42(2), 208-219. Kintner, H.J. (1989). Demographic change in a corporate health benefits population, 1983-87. American Journal of Public Health, 79(12), 1655-1656. Kubasek, B. A., Brennan, B. A., & Browne, M. N. (2003). The legal environment of business (3rd ed.). Upper Saddle River, NJ: Prentice-Hall. Lei, D. & Slater, B. (1990). The evolution of global strategy. The International Executive, 31(6), 27-31. Levinson, W. (2006, January). On the road again. Industrial Engineer, 38(1), 28. Lubben, S.J. (2009). No big deal: the GM and Chrysler cases in context. The America Bankruptcy Law Journal, 83(4), 531-547. Martin, J.A. & Schrum, J.L. (2010). The bankruptcy option: does the United Airlines Model work for General Motors? Journal of the International Academy for Case Studies, 16(7), 21-30. Nagar, B. (2005). Reflecting on cultural considerations for team development in major urban

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settings. Organizational Development Journal, 23(1). Newstrom, J. W., & Davis, K. (2002). Organizational behavior (11th ed.). New York: McGraw- Hill Higher Education. Olson, E.L. & Thjomoe, H.M. (2010). How bureaucrats and bean counters strangled General Motors by killing its brands. Journal of Product & Brand Management, 19(2), 103-113. Svensson, G. (2004). Supplier segmentation in the automotive industry: a dyadic approach of managerial model. International Journal of Physical Distribution & Logistics Management, 34(1/2), 12-38. Webster, P. (2006, January 14). US big businesses struggle to cope with health-care costs. Lancet, 367(9505), 101-102. White, N.R. (1978). Ethnicity, culture and cultural pluralism. Ethnic and Racial Studies, 1(2), 139-153. Wood, D.J. (1991). Corporate social performance revised. Academy of Management Review, 16(4), 691-718. Zoia, D. E. (2006). Big 3 need to change culture. Ward's Dealer Business, 40(1), 34. BIOGRAPHY Dr. Gregory Goussak is an Assistant Professor at Ashford University. He can be contacted at: Email: [email protected] Dr. Jon Webber is a Professor at the University of Phoenix. He can be contacted at: Webber Impact Management, 5015 Sunset Trail, Cumming, Georgia 30040, US Email: [email protected]. Dr. Elliot Ser is a Professor at Florida Atlantic University. He can be contacted at: 4150 N.W. 73rd Way, Coral Springs, Florida 33065, US Email: [email protected].

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THE EFFECT OF INVESTOR BIAS AND GENDER ON PORTFOLIO PERFORMANCE AND RISK

Kevin Lee, California State University – Fresno Scott Miller, Pepperdine University

Nicole Velasquez, Pepperdine University Christi Wann, University of Tennessee Chattanooga

ABSTRACT

We survey 84 finance and accounting majors to determine the behavioral factors that males and females exhibit when making investment decisions. The survey results are linked to student performance in the Stock-Trak Global Portfolio Trading Simulation. We find that males and females exhibit different behavioral biases and these behavioral biases can ultimately affect investment performance. We also find evidence to support previous research showing that males are more risk tolerant than females. However, our findings indicate that this behavior may be due to a difference in the perception of the actual risk being taken rather than an inherent desire to engage in more risky behavior. JEL: D03, G02; G14 KEYWORDS: Behavioral Bias, Gender, Risk Aversion, Stock-Trak

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RE-EXAMINING THE CONCEPT OF BOUNDARY OBJECTS WITHIN COMMUNITIES OF PRACTICE

W. David Holford, University of Quebec at Montreal

ABSTRACT Past perspectives on boundary objects have had a tendency to over-emphasize 'key' boundary object attributes, and under-emphasize human-object intra-action dynamics. An alternative framework based on a boundary construction concept is proposed. Starting from a common onto/epistemological and cognitive thread deriving from specific forms of constructivism, it is argued that boundary constructions are in a constant flux of co/re-construction at the hands of intra-acting actors. The active role of individuals in boundary constructions implies engagement. Such engagement requires management’s implication in providing a psychological safety net within the workplace. JEL: M0 KEYWORDS: boundary constructions, constructivism, intra-action, enactment INTRODUCTION In the following paper, we first review past literature on boundary objects and its often prescriptive approach towards 'effective boundary object' conditions which fail to place sufficient emphasis on human- object interaction dynamics. An alternative cognitive, epistemological and ontological thread that allows us to propose the concept of boundary constructions follows this. An ethnographic case study within a high tech firm then illustrates how this is validated within a meeting environment. Finally, we recommend certain managerial practices that may enable effective boundary constructions within the workplace. LITERATURE REVIEW Star and Griesemer (1989) speak of boundary objects as “things” which coordinate the perspectives as well as serve the information needs of the intersecting social worlds of various actors towards a given purpose. According to the authors (1989: 410-411), there are four categories of boundary objects: 1) repositories (e.g. databases or libraries) of objects “indexed in a standardized fashion” which individuals can borrow for their own purposes without the need for negotiation; 2) ideal types which are locally adaptable due to their vagueness since they do not “accurately describe the details of any one locality or thing”; 3) standardized forms which emphasize methods of common communication over long distances (and are therefore especially applicable to dispersed work groups); and 4) coincident boundaries which have different internal contents depending on the interests and perspectives of each party yet are still common objects with the same boundaries. From an ontological viewpoint, Star and Griesemer’s (1989) concept of boundary object leads to varying degrees in duality between the object and subject. For example, repositories imply that while on the one hand the individual who interacts with these will use a certain degree of subjective interpretation, it is assumed, especially within the field of information technology, that such subjective interpretation is minimized across the use of codified knowledge (or in other words, a 'distant objective' viewpoint is

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attained). As for ideal types and coincident boundaries, there is an explicit acceptance that the subject’s active interpretation and viewpoints comes into play, yet the object is still viewed as being discretely and permanently separate from the subject. Here, the object can be seen as being either static, or as a changing entity in which we focus only on its static end-result. Later interpretations have continued to imply varying degrees of permanent separation between the actor-individual and the object: “boundary objects are artifacts, documents, terms, concepts and other forms of reification around which communities of practice can organize their interconnections” (Wenger, 1998: 107); or “boundary objects are physical objects that enable to understand other perspectives” (Feldman et al, 2006: 95). Although Bødker (1998) acknowledges the mediation that occurs around most of these ‘objects’, they are nevertheless viewed as static representations. This is best summarized by Lutters (2001) who highlights that the “boundary object...still suffers from an artifact-centric view of knowledge, rather than a process oriented perspective” (2001: 35-36). Carlile (2002) identifies three factors for generating useful boundary objects: 1) the boundary object needs to provide a common language for actors to represent their knowledge (“syntactical approach”); 2) the boundary object must provide a means for actors to express different interpretations (“semantic approach”), thereby allowing the possibility for novelty to emerge; and 3) the boundary object must facilitate processes by allowing the actors to change its contents in order for it to continue to be useful to all involved participants (“pragmatic approach”). However, Carlile’s level of analysis tends to imply boundary objects as being independent variables to the subject-actor, while simultaneously implying the subject-actor to be dependent on the boundary object. In the following sub-section we will draw upon certain cognitive and epistemological insights from authors such as Glasersfeld (2002) and Weick (1995 and 2009) which will allow us to shift more emphasis on the active and dynamic role the actor has over boundary objects; and thereby shift our focus as to where and what the most pertinent ‘success factors’ are when speaking of effective boundary ‘objects’. The mutual shaping of the subject and object as boundary constructions

Glasersfeld's (2002) radical constructivism makes us re-question the representational notion of a pre- existent environment (as a collection of pre-existing objects) that is simply there to be discovered by an objective and separate observer. Glasersfeld (2002) directly addresses the representational claim of observer objectivity by first explaining, across Jean Piaget's work on cognitive development, how human mental operations lead up towards a mental/subjective construction of reality. These operations involve both the construction of action and symbolic schemes leading (the latter being mostly linguistic in nature, based on interpretive semantic rather than arbitrary semiotic analysis) leading towards sensorimotor and conceptual knowledge, respectively (2002: 76). Each of these schemes is constructed based on unique personal experiences, which may be similar, but never identical to, another person's constructions (Glasersfeld, 2002: 158). Furthermore, inductive learning from experimental outcomes is attained by experimenting and constructing "a repertoire of schemes" that enables one to maintain his or her "sensory perceptions within an acceptable range of reference values."

The point here is that humans learn by constructing a viable (as opposed to a true in the positivistic sense) picture of reality; and that we may on occasion 'bump' into our external reality across "failures" (2002: 156). This rejoins Weick's (1995) theory of individual and organizational sensemaking, which seeks plausibility as opposed to what is true in the absolute sense. In other words, "truth is what works" (James, 1907) in that our external reality is much too complex to comprehend in terms of exact

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correspondence. As Glasersfeld (2002: 156) explains, "the idea of correspondence with reality is replaced with the idea of fit. Knowledge is good knowledge if it fits within the constraints of experiential reality and does not collide with them. This fit must be attained not only insofar as a cognitive structure, a scheme, a theory, has to remain viable in the face of new experience or experiments, but also in that they prove compatible with other schemes and theories one is using." Hence, "the requirement that knowledge be called true knowledge only if it reflects the real world, is relinquished for the requirement that it be found conducive to the attainment of our goals in the world as we experience it" (2002: 44).

Weick (1979 and 1995) goes one-step further by reiterating Berger and Luckmann’s (1966) construction of social reality across the process of enactment through which we proactively shape and structure our realities in an unconscious manner. Morgan (1997: 141) offers a succinct explanation on enactment: "Although we often see ourselves as living in a reality with objective characteristics, life actually demands much more of us than this. It requires that we take an active role in bringing our realities into being through various interpretive schemes, even though these realities may then have a habit of imposing themselves on us as “the way things are”. Weick (2009: 190) cites Follett (1924) to describe the two way shaping process that occurs between the environment (in the most general sense) and the subject:

“…the activity of the individual is only in a certain sense caused by the stimulus of the situation because that activity is itself helping to produce the situation which causes the activity of the individual…My farmer neighbors know this: we prune and graft and fertilize certain trees, and as our behaviour becomes increasingly that of behaviour towards apple-bearing trees, these become increasingly apple-bearing trees. The tree releases energy in me and I in it; it makes me think and plan and work, and I make it edible fruit. It is a process of freeing on both sides. And this is a creating process” (Follett, 1924: 118-119).

As an engaged subject, we have a role and partial accountability in shaping our environment. In returning to boundary objects, we can now propose that actor-subjects shape them, just as they also shape actor- subjects. Hence, we propose boundary constructions as an alternative term to boundary objects. It is important to note that this puts heavy emphasis on the process aspect of the term ‘construction’ as opposed to its end-resultant and static aspect of ‘construct’.

We can now reword the factors identified by Carlile (2002) for effective boundary objects as follows: 1) the actors must provide a common language for them to effectively represent their respective knowledge across the help of a co-constructed or co-negotiated boundary construction; 2) the actors must provide a means to express their different interpretations across the help of a co-negotiated boundary construction; and 3) the actors must continually co-negotiate and co-transform the boundary construction so as to maintain an on-going pertinence to all involved participants. This re-wording, changes our research aims from a linear-causal type of questioning such as ‘Which type of boundary objects could fulfill these conditions?’ (Figure 1-A) to a more dialectic/holistic question of ‘Which enabling conditions would encourage the needed interactions between the actors and the boundary construction towards effective knowledge sharing?’ (Figure 1-B).

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METHODOLOGY The research site, given the pseudonym, NorAm Aircraft Engines, is an aircraft engine manufacturer which employs over 4000 people world-wide. Preliminary discussions with a first workgroup (the Engine Operability Development or EOD group) not only confirmed their interest to participate, but were involved in bi-weekly meetings with another group that had not been initially identified (the Engine Component Rig Testing or ECRT group). This second group was also approached and accepted to participate. The EOD and ECRT workgroups The EOD group is responsible for ensuring the development of adequate engine operability envelopes throughout all phases of engine development programs. The proper establishment of the engine operability envelope is of critical importance, in that it delimits the boundaries beyond which the aircraft risks running into critical compressor surges or other types of catastrophic engine failures. EOD group members have a good general understanding of the various engineering disciplines involved in engine design and development. A principal objective of the EOD group is to ensure meaningful engine component test data is generated. Establishing the type of engine test data to be generated is negotiated between the EOD group, the various engineering specialty groups, and the ECRT group; the latter being responsible for the generating and integrity of the required engine component test data. In turn, the ECTR group’s responsibilities include the development and preparation of component test rigs (required for each

Figure 1- A: Linear causal understanding towards effective knowledge sharing Figure 1- B: Holistic-dialectic understanding towards effective knowledge sharing

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new engine development program), their subsequent test runs, and the proper collection of the test data. Both groups interact with each other daily (informal) and also meet bi-weekly. Data collection and analysis The interactions, within, as well as between, the two specific work groups at the NorAm Aircraft Engines Company was used as a case study whereby our aim was to both “test/build theory” as well as to “provide description” (Eisenhardt, 1989: 535). With a vigilance for ‘emergent’ dimensions, categories or alternative theory, we based ourselves on Schwartzmann’s (1993:47-72) ethnographic studies in organisations involving a dialogical inductive-deductive process between empirical evidence and theoretical elaboration across thick descriptive writing. Hence, for the purpose of our work an ethnographic case study approach was adopted using direct (non-participant) observations. This was conducted over a three month period in early 2007. These observations were also coupled with one-on- one ad hoc conversations/informal interviews in a dialectical fashion. Three embedded units of analysis within the single case study were chosen, namely: 1) the bi-weekly inter-group meetings between EOD and ECRT; 2) the EOD group; 3) the ECRT group. For this paper, we limited ourselves mostly to the first unit of analysis. The primary research design criterion sought was based on trustworthiness (Lincoln and Guba, 1985), involving the constructivist sub- criteria of: i) credibility via both the saturation of findings and triangulation of data collection to obtain complementary perspectives (as opposed to triangulation in the positivistic sense of ‘intersection’ of findings) of what people say vs. what people do (Schartzmann, 1993); and ii) transferability across thick description. Also in support of this primary criterion of trustworthiness, was our desire to attain reliability of data by ensuring that the research was conducted “as if someone were looking over our shoulder” (Yin, 2003: 38); that is, making sure we had rigorous documentation of data (from observations and interviews) so as to provide an adequate audit trail. For observations, we drew upon Spradley (1980: 63-84) who recommends: 1) the use of short in vivo condensed notes, which were often complemented with on-site in vivo digital recordings; 2) to be subsequently elaborated within 24 hours or as soon as possible in a separate journal of ‘expanded notes’; 3) a reflexive journal on personal emotions and reactions in regards to recorded experiences; and 4) analytical notes on interpretations on what was observed, as well as questions or further points that needed to be verified. Descriptive data from observations and interviews were manually analyzed and interpreted in a separate journal as per Spradley (1980) against a priori concepts as well as for emerging categories via repeated identification of comments and actions. The nature of the data that was collected (digital recordings, hand-written observations and filming) allowed us to analyze for verbal and non-verbal (voice tonality, facial expressions, body language, etc.) cues thus bringing forth important contextual information. RESULTS The first and lasting impression upon assisting the bi-weekly inter-group meetings between EOD and ECRT was the high degree of camaraderie found within each group as well as between both groups; and also extended between the two group managers (Gerry and Frank). Members, upon entering the meeting room a few minutes early, would often discuss non-work related topics (hockey, renovations, car repairs, etc.). On other occasions, members, prior to the start of the meeting, often discussed specific technical issues related to joint project activities. This was often accompanied by the act of sketching a particular view of a rig or engine component that one member was trying to describe, justify or clarify. Throughout

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such conversations sketches were often drawn and modified in successive superimposing steps by each of the interacting members before finally converging towards a mutually agreed version. Similar types of exchanges were also observed with the aid of pre-existing 2D drawings. Here, existing blueprints were modified (with superimposed dialogue) with pen/pencil to either express or explain one’s own existing perspective (sensegiving), comprehend someone else’s perspective (perspective-taking) or construct new perspectives (perspective-making). Once the formal meeting began, the EOD manager (Gerry) usually started by verbally calling out the first item on his agenda/status sheet. This sheet consisted of one or two-line descriptions identifying the development engine model/test rig combination in question, the principle tasks being monitored, a completion target date for each of these tasks, and the current status of the task in question. Most of the members had a copy of this same status sheet. Gerry’s “QA510 Gas Generator?” would prompt a response by one of the attending members such as “We’ve finish-machined and installed the second compressor stator and the rotating bullet is now being installed. The gas gen. rig should be ready for first shake-down by the middle of next week.” Gerry, as well as certain other members around the table would then jot notes on their status sheet in relation to what had just been said. Gerry would then either go onto the next engine model/test rig on his list, or ask a further clarifying question such as:

Gerry: “Are we clear as to what tests Colin needs...do we know which running conditions, and which points we need to measure?” Jon: (from the ECRT group): “I spoke to Vincent about this last week, and told him we needed to do some measurements two degrees above and two degrees below the nominal...” Gerry :(in a patient tone, starts to provide sensegiving): “Ya, but that’s another thing. What I’m talking about here is for the same (strong emphasis made on this word) operating point (pauses), in pressure ratio and in corrected speed...” Jon: (provides a cue that he’s following Gerry’s explanation i.e. perspective-taking): “Ya...” Gerry: (continues with sense-giving): “...and then recording the stabilization time needed for the outlet temperature to reach the ambient temperature.” Jon: (major learning moment - self-discredits or modifies his own current assumptions): “Ah ok! I had understood it was...I’d better get back to Vincent on this – it sounds like I’m going to be a day late after all.”

This prompted Gerry, and other members also involved with the item of concern to further modify their respective status lists. Each wrote something similar, yet different enough to address their own respective perspectives. Members discussed a variety of technical issues they were jointly working on. These conversations were accompanied by either active sketching from scratch or modification of existing drawings. A vivid detailed example (March 12th, 2007) involved Frank going up to the drawing board to draw and (simultaneously) verbally articulate a new test rig arrangement he proposes:

Frank: “Ya, because I think the problem...is that we've never run an engine rig with a plenum (gas containing chamber) like this”

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Frank simultaneously draws the following schematic of a plenum:

Frank then erases the two top extending lines, and adds a “+” and “-” sign in brackets so that it now looks as follows while at the same time saying:

Frank: “Ok so this is how it's configured with the large nozzle. We actually used this set-up back on the QA700...the 700 family; it worked on the 706. They ran the engine on a rig test." Mark: “the 706 or 705...” Frank: “Ya...” Mark: (agrees but also clarifies Frank’s narration while pointing to Frank’s sketch): “There wasn't a real nozzle so to speak...it was really configured like this.” Frank: “Ya, and they realized that there was some sort of static pressure variation; something low like right over here (points to – sign) and a high point over there (points to + sign).

Frank now draws an additional lower vertical line to the drawing as he says:

Frank: “They added a baffle, ‘Bing!’ (onomatopoeia) like this which really improved things. We didn't go into the intake...the solution was really in the compressor rig - the data showed this. I think it was because of this engine's IGV (inlet guide vanes).”

Frank, on his last sentence, simultaneously draws guide vanes on the existing sketch:

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Frank: “We created this pre-swirl’...”

Frank then adds gas flow lines to his sketch and simultaneously says:

Frank: “The air comes in like this, and instead of descending equally on each side, it takes on this tendency more or less like this ...” Mark: (agrees with Frank’s assessment): “Yep, that's what it does in reality.” Frank: (acknowledges Mark’s approval): “That's it, eh? (then points to lower vertical line representing the baffle) By closing off this area here, things improved a lot...” Mark :(again agrees with Frank): “Ya things got better when we did that...”

Frank then points to the top left hand corner of the ‘plenum’ and adds:

Frank: “But we still have a problem on this side (then points to left side of vertical baffle) because of a dead zone. And that's where the temperatures got way high over here (then points to top right hand corner of baffle) and real low over here...I figure..."

Frank then draws a thick vertical line in the top half of the baffle and then says:

Frank: “...I figure, why not put a baffle right over here as well? This way we split the plenum in two zones..."

Frank then adds more gas flow lines to equilibrate the flux lines on both the left and right side of the baffle and simultaneously says:

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Frank: “That would make the air feed in more equally on both sides.”

What is important to note in the above example is the step by step or incremental progression of both verbal and visual aspects of an evolving story, almost like a film or ‘cartoon’. Complementing the actual action of drawing is the frequent use of hand/arm movement to explain a particular aspect of the gas plenum arrangement.In a more general sense, members often brought up new points of views which were accompanied by the active listening of others; but once expressed, responses were quick to follow, ranging from further questioning prior to acceptance or to further counter-argumentation. Such counter- arguments also went through the same process, often in parallel to the initial argument’s transformation. All of this was typically conducted in an atmosphere of mutual respect, trust and appreciation of each others’ contributions. Furthermore, sense-giving conducted by various members, including both managers, was principally to guide rather than to coerce. Initial sense-giving by one member was often ‘self-discredited’ (in the weickian sense) as a result of another member’s counterpoint or questioning. Hence, ‘healthy doubt’ as defined by Weick (2001) was often present, and helped ensure a reasonable balance between the “crediting” and “discrediting” of beliefs and assumptions. ANALYSIS Different types of mediums were used in helping to transmit perspectives within individual interactions such as the use of agenda sheets, active sketching from scratch, sketching to modify existing drawings and the use of existing schematic drawings or documents themselves. These ‘objects’ were usually accompanied with some form of visible action on the part of actors, whereby it was during the dynamic yet transient modifications of these ‘objects’ by these very same actions that perspectives were both given and taken. For example, agenda sheets were actively modified across handwriting, as discussions advance from one item and/or topic to the next. And in conjunction to this dynamic re-construction of the ‘object’ were the updating of everyone’s own sense and perspective of the topic at hand. In this sense, we concur with Suchman (2009) when she speaks of the agenda (as a form of plan) as an evolving artefact emerging from purposeful action, (which she coins as situated action). Her use of the term action implies not only physical movement but also more reflexive components such as language and dialogue. Another example such as the active process of sketching and re-sketching diagrams or representations is in a similar way much more meaningful across its dynamic construction and re-construction at the hands of participating actors then simply looking at the end-resultant sketch or construct. For example, Mark, a senior member of the EOD group, explains:

“It’s as if you’re constructing it – not concretely in mechanical terms, since it’s more in a ‘virtual’ sense, but it’s a lot more than just words. For example when I say ‘We got to change this’ – if you haven’t seen it then you’re wondering ‘Change what?’…So by making a drawing I feel it makes the idea in your head come out for everyone to see – and have everyone better

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understand or feel your own experience…And that’s how people can then say to you ‘Ah that’s what you meant. Well, in that case, no I don’t think that’s feasible…or ya, I think that can be done.’”

And as Mark further adds, if the same explanatory words were used in the absence of specific motions and line drawing movements (e.g. the portraying of gas flows within a combustion chamber), one would have a less clear sense or understanding of the phenomena being articulated. In all of these cases, we are looking at physical boundary objects being continually constructed and re- constructed by the subject-actors in a manner similar to Figure 1-B. We are essentially looking at 'artefacts as phenomena' as opposed to static pre-existing objects. Hence, we can speak of boundary constructions as proposed in our a priori framework (Figure 1-B). Even existing drawings without any visible line markings or modifications added to them, are typically accompanied by some form of finger or arm movements across various features and physical phenomena an actor wishes to bring a mental attention to (e.g. gas flows, stress distributions, hole diameters, etc.). This creates new mental bracketings (Weick, 1995) necessary for constructing new mental representations within the minds of the various interacting members. Yet, there is at least one element that was ignored in our initial framework (Figure 1-B) which requires further examination. A hint of this is provided to us by Latour's (1993) concept of hybridization of categories (in this case, the subject vs. the object) - a hybridization involving an interpenetration or 'alloying' of one category into another. Is this what happens in 'real life'? In both the case of the agenda sheet and the sketching of drawings, there were various degrees of gestures, inscriptions, mapping, various forms of record keeping and the like that was used. Goodwin (2003: 20) speaks of the "symbiotic" relationship between gestures and their objects, whereby the gesture's objects are integral components of the gesture itself. On the other hand, the actor is also integrally part of the gesture. It becomes somewhat tricky to define the clear cut boundaries between the bodies involved in the gesturing. Here, we are reminded of Glasersfeld's (2002: 90-91) words: "To grasp as a unit what was just presented is to cut it out of the continuous flow...Focused attention picks a chunk of experience, isolates it from what came before and from what follows, and treats it as a closed entity." Not only are the contents of the bodies changing with time (in terms of the changing form of the artefact as well as the increasing comprehension achieved by the subject), but the boundaries themselves seem to shift or become blurred. The integral whole (of gesture, actor and object) becomes more easily understood as a phenomenon. Along these lines, Barad (2007) proposes an alternative onto-epistemology which she calls agential realism. Reality is viewed as a collection of phenomena involving the intra-action between agencies of observation and 'objects' (where both involve shifting boundaries or 'cuts'). These boundaries depend on context, points of views and observation apparatus configurations at hand. Observation apparatuses in themselves can involve both human and non-human bodily arrangements, which shift and intra-act with one another as phenomena. "Whereas the construct of interaction suggests two entities, given in advance, that come together and engage in some kind of exchange, intra-action underscores the sense in which subjects and objects emerge through their encounters with each other" (cited in Suchman, 2009: 267). Required Enabling Conditions Throughout the complexity of enactment and agency, boundaries between humans and non-humans are not given but constructed (Barad, 2007). “Boundaries are necessary for the creation of meaning, and are

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therefore never innocent...Responsibility on this view is met neither through control nor abdication but in ongoing practical, critical, and generative acts of engagement” (Suchman, 2009: 285-286). Such an engagement involves perspectives to be aired and exchanged across verbal articulation and non-verbal body-movements (the latter being especially present within dynamic acts of boundary constructions between interacting individuals), whereby there is a continuous re-visiting and re-adjustments of ideas and concepts. Yet for this to happen, individuals must first feel secure to interact with one another within an environment of openness, trust, and respect. This is primordial for truly reciprocal dialogical interactions to occur whereby individuals feel comfortable in expressing themselves on the one hand, and to mentally ‘step into another’s shoes’ on the other hand (Enriquez, 1992). Hence, it becomes important for management to nurture mutual trust and respect which in turn provides a psychological “safety net”, whereby people feel comfortable in learning and trying new ideas. Frank, the ECTR manager, spoke of a “parental” approach which requires a judicious balance between encouraging a gradual transition towards autonomy as members gain confidence and knowledge on the one hand, and always being present in the background so as to provide needed support when members face particularly daunting issues and problems on the other hand. The term ‘parental’ should not be misconstrued with the term ‘paternalistic’ (as referenced by various authors such as Crener and Monteil (1981), etc.) whereby management does not allow members to take the initiative towards making their own decisions, thereby severely limiting autonomy. Within Frank’s parental approach, we are reminded of Bateson’s (1978: 498) words:

“During the period when the acrobat is learning to move his arms in an appropriate way, it is necessary to have a safety net under him, i.e., precisely to give him the freedom to fall off the wire. Freedom and flexibility in regards to the most basic variables may be necessary during the process of learning...”

Within this environment, mistakes or errors are not condemned but rather seen as opportunities to learn, improve oneself and improve the group collectively across the sharing of ‘lesson’s learned’. Such a psychological “safety net” provides a shared belief amongst the members that the group “is safe for interpersonal risk-taking” (Edmonson’s, 1999: 351); and thereby encourages the willingness to learn, share and create new knowledge (Bogenrieder and Nooteboom, 2004). CONCLUSIONS In diverging with past perspectives of boundary objects, this paper first proposes the alternative concept of boundary constructions. This depicts a more active role on the part of individual actors and taps into specific elements of both radical and material constructivism: objects are not pre-existent but emerge from cognitive constructions (Glasersfeld, 2002), enactments (Weick, 2009), agency (Barad, 2007) and situated action (Suchman, 2009). In turn, these ‘objects as phenomena’ shape the very individuals that acted upon them. Boundaries between objects and subjects become ever more blurred in a manner similar to Latour’s (1993) hybridization of categories and Barad’s agential realism. Interactions become intra- actions.The active role of individuals in boundary constructions implies responsible engagements. Such engagements require trust and respect between participating parties, which in turn, requires management’s implication in providing a psychological safety net within the workplace.

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This single case study prevents us from generalising our findings across the entire firm in question; and by extension, any manner of external validity outside of the firm’s context. Additiona workgroups/teams both within the existing firm and other high-tech institutions are to be envisaged.

REFERENCES Barad, K. (2007) Meeting the Universe Halfway: Quantum Physics and the Entanglement of Matter and Meaning, Durham NC: Duke University Press. Bateson, G. (1978) Steps to an Ecology of Mind, London: Paladin. Berger, P.L. and Luckmann, T. (1966) The Social Construction of Reality, Garden City, NY: Anchor Books, Bødker, S. (1998) "Understanding representation in design", Human-Computer Interaction, vol. 13(2), p. 107-125. Bogenrieder, I. and Nooteboom, B. (2004) "Learning groups: What types are there? A theoretical analysis and an empirical study in a consultancy firm", Organization Studies, vol. 25(2), p. 287-313. Carlile, P. R. (2002) "A pragmatic view of knowledge and boundaries: Boundary objects in new product development", Organization Science, vol. 13(4), p. 442-455. Crener, M. and Monteil, B. (1981) Principes de Management, Sillery (Québec): Les Presses de l’Université du Québec. Edmonson, A. (1999) "Psychological safety and learning behavior in work teams", Administrative Quarterly, vol. 44(2), p. 350-383. Eisenhardt, K.M. (1989) "Building theory from case study research", Academy of Management Review, vol. 14(4), p. 532-550. Enriquez, E. (1992) L’Organisation en analyse, Paris: Presses Universitaires de France. Feldman, M.S., Khademian, A.M., Ingram, H. and Schneider, A.S. (2006) "Ways of knowing and inclusive management practices", Public Administration Review, vol. 66, Special Issue, p. 89-99. Follett, M.P. (1924) Creative Experience, New York: Longman, Green. Glasersfeld, E. von (2002) Radical Constructivism: A Way of Knowing and Learning, London: RoutledgeFalmer. Goodwinn, C. (2003) "The body in action", in J. Coupland and R. Gwyn (eds.), Discourse, the Body and Identity, p. 19-42, New York: Palmgrave/MacMillan. James, W. (1955) Pragmatism, Cleveland/New York: Meridian Books (first published in 1907).

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Latour, B. (1993) We Have Never Been Modern, Cambridge, MA.: Harvard University Press. Lincoln, Y.S. and Guba, E.G. (1985), Naturalistic Enquiry, Sage Publications, Newbury Park, CA. Lutters, W.G. (2001) Supporting reuse: IT and the role of archival boundary objects in collaborative problem solving, Ph.D. Thesis, University of California, Irvine. Morgan, G. (1997) Images of Organization, 2nd edition, Thousand Oaks, CA: Sage Publications. Schwartzman, H.B. (1993) Ethnography in Organizations, Newbury Park, CA: Sage Publications. Spradley, J.P. (1980) Participant Observation, New York: Rinehart and Winston. Star, S.L. and Griesemer, J.R. (1989) "Institutional ecology, ‘translations’ and boundary objects: Amateurs and professionals in Berkeley’s Museum of Vertebrate Zoology", Social Studies of Science, vol. 19(3), p. 387-420. Suchman, L.A. (2009) Human-Machine Reconfigurations: Plans and Situated Actions, 2nd Edition, Cambridge UK: Cambridge University Press. Weick, K.E. (1979) The Social Psychology of Organizing, 2nd Edition, Reading, MA: Addison-Wesley Publishing Co. Weick, K.E. (1995) Sensemaking in Organizations, Thousand Oaks, CA: Sage Publications, Weick, K.E. (2001) Managing the Unexpected. Assuring High Performance in an Age of Complexity, San Franscisco, CA: Jossey-Bass. Weick, K.E. (2009) Making Sense of the Organization (Volume 2): The Impermanent Organization, West Sussex UK: John Wiley and Sons Ltd. Wenger, E. (1998) Communities of Practice: Learning, Meaning and Identity, Cambridge, UK.: Cambridge University Press. Yin, R.K. (2003), Case Study Research: Design and Method, 3rd Edition, Sage Publications, Thousand Oaks, CA. BIOGRAPHY W. David Holford is Associate Professor of Management at the University of Quebec at Montreal. His field of interest focuses on organizational sense-making, knowledge sharing and risk creation. He has authored/co-authored articles on knowledge construction/sharing and risk induction in high-tech organizations within the aeronautical, automotive and biopharmaceutical sectors. He has also worked 19 years in the aerospace industry.

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MULTI-CRITERIA ANALYSIS AND OPTIMIZATION OF FINANCES IN WATER RESOURCES: LESSONS

LEARNT FROM PRACTICE Bojan Srdjevic, University of Novi Sad Zorica Srdjevic, University of Novi Sad

Ratko Bajcetic, Public Water Management Co Jovana Dragincic, University of Novi Sad Bosko Blagojevic, University of Novi Sad

ABSTRACT

Water systems involve multiple criteria and measures of performance, or objectives, which should be optimized simultaneously. However, optimal performance according to one objective often implies low performance in one or more of the other objectives. This results in an ambiguous definition of the best solution in a set of candidate ones, since they may reflect the trade-off between the objectives. Thus, the process of multi-criteria decision making (MCDM) consists of two phases: the search for candidate solutions, and the decision-making to rank them. This has resulted in the division of MCDM methods into two scientific areas: (1) multi-criteria decision analysis (MCDA), concerned with the methods for making choices between solutions that represent trade- off alternatives, and (2) multi-objective optimization (MOO), which focuses on the search for candidate solutions. MCDA can generally be ‘objective led’ and ‘alternative led’ and a scientific community does not demonstrate bias amongst them. On the other hand, multi-objective optimization is a search for near optimal solutions in large spaces of feasible solutions; stochastic search engines such as genetic algorithms, simulated annealing or taboo search are widely employed to perform MOO. Finances, and in broader context economic set of decision making elements, related to water resources are pillars in related MCDA and/or MOO applications. The paper presents experience gained in water resource planning and management in Serbia and illustrates some challenges and lessons learnt in treating financial (economic) matters in several case studies. KEYWORDS: multicriteria analysis, water resources, lessons from practice BIOGRAPHY Prof. Dr. Bojan Srdjevic can be contacted at Department of Water Management, Faculty of Agriculture, Univ. of Novi Sad, Trg D. Obradovica 8, 21000 Novi Sad, Serbia TEL: +381-21-4853-337, +381-63- 8117-364, FAX: +381-455-713, Page http://polj.uns.ac.rs/english/faculty/srdjevic.htm Zorica Srdjevic, Jovana Dragincic and Bosko Blagojevic can be contacted at Department of Water Management, Faculty of Agriculture, University of Novi Sad, Trg D. Obradovica 8, 21000 Novi Sad, Serbia Ratko Bajcetic, can be contacted at 2Public Water Management Co. Vode Vojvodine, Bul. Mihajla Pupina 25, 21000 Novi Sad, Serbia

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THE ASSOCIATION BETWEEN TECHNOLOGICAL CAPABILITIES AND EXPORT SALES IN SMALL AND

MEDIUM-SIZED ENTERPRISES OF METALWORKING INDUSTRY IN THE CENTRAL REGION OF THE STATE

OF COAHUILA, MEXICO Elvira Velarde López, Universidad Autónoma de Coahuila Zóchitl Araiza Garza, Universidad Autónoma de Coahuila

Eunice Coronado Rojas, Universidad Autónoma de Coahuila

ABSTRACT

Trade liberalization in Mexico has caused a large increase in export sales; this activity may be a very important factor for the acquisition of technological capabilities in firms. Under this perspective, the aim of this paper is to analyze the association between the change (increase and decrease) in export sales and the technological capabilities developed in small and medium-sized enterprises (SME’s) of the metalworking industry in the central region of the state of Coahuila, Mexico. The methodology consisted in the application of a structured questionnaire to 50 firms of the mentioned industry; the collected information was processed by the SPSS using the statistical tool Cross Tabs. The data analysis suggests an association between the change in export sales and the levels of development of investment capabilities, as well as the levels of importance the employers give to the variables: i) training and recruiting, and ii) search, evaluation and selection of technology (investment capabilities); iii) improvements to the plan, program and maintenance (production capabilities); iv) cooperation between companies in the same industry, and v) cooperation with other companies (linking capabilities); and, finally vi) purchase of machinery and equipment (manufacturing and adaptation of machinery and equipment capabilities). JEL: O32, O33 Key words: technological capabilities, export sales, SME’s, metalworking industry. INTRODUCTION In the ambit of economic and technological performance of organizations, regions, developed and developing countries, the literature highlights two key concepts: competitiveness and innovation (Tapias, 2005); in order to survive, grow and become competitive, firms require to develop their internal capabilities, which may be organizational and/or technological capabilities (Barney, 1991); acquiring these technological capabilities enables innovation in firms (Bell y Pavitt, 1995). The estate of Coahuila, which is located in the north of Mexico along the border with Texas, has had a great increase in manufacturing production (Díaz, Acevedo and Ramírez, 2008); the SME’s in the region need to increase their competitiveness through increasing their productivity, supporting the substitution of imports and increasing their export sales by integrating productive chains. (Simón y Rueda, 2004).

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The objective of this paper is to analyze the relationship between export sales and technological capabilities that have developed the metalworking industry SME’s in the central region of the state of Coahuila. This paper begins with a review of the literature on technological capabilities and export sales in firms, then the methodology used and the results are presented; finally, the conclusions and limitations of the study are detailed and the future lines of research defined. LITERATURE REVIEW Technological capabilities include information and skills -technical, institutional and managerial- which allow productive firms to effectively assimilate, use, adapt and change their equipment and technology, for existing technologies and also to create new technologies and develop new products and processes (Biggs, et al., 1995; Jonker, 2002), in the same direction, Huq (2002) adds the human experience and appropriate institutional mechanisms and linkages. According to Bell and Pavitt (1995), technological capabilities are the resources required to generate and manage the technological change: knowledge, skills and experience, institutional structures and linkages within firms, between firms and outside firms. Morrison, Pietrobelli and Rabellotti (2008) mention that technological capabilities are the skills -technical, administrative and organizational- that companies need to efficiently use equipment and information technology. According to Carvajal (2010), technological capabilities are the skills or provisions that have been acquired through technological learning in a social and cultural environment. The kinds of technological capabilities have been determined under different approaches: (Lall, 1992; Bell and Pavitt, 1995). The taxonomy developed by Lall (1992) includes investment capabilities, production and linkage, which are different; and although these capabilities may be interrelated, partly are overlap and strongly interdependent (Morrison et al. 2008). Bell and Pavitt (1995) developed an analytical framework of technological and industrial capabilities, with three types of technological capabilities: investment, production and support. Meanwhile, Domínguez and Brown (2004) determined 26 variables of the functions of investment, production and firm links. The functions used in this study are: • Investment Capabilities: skills and information necessary to identify viable investment projects, to

locate and purchase appropriate technologies for the design and engineering of the plant and for the direction and execution of the project (Biggs et al. 1995).

• Production capabilities: skills and knowledge necessary for the operation and improvement of the plant or equipment purchased by the firm (Biggs et al. 1995).

• Linkage Capabilities: knowledge, skills and experience required for the exchange of information, technology and skills with other companies and institutions (Bell and Pavitt, 1995).

• Manufacturing and adaptation of machinery and equipment capabilities, knowledge, skills and experience to improve and modify existing technology and the creation of new technology (Bell and Pavitt, 1995).

There are some differences from the results of the crossing the technological capabilities and the export sales: first, there is evidence of a significant positive relationship between them (Bhaduri & Ray, 2004; Rasiah, 2004). Export activity is strongly correlated with the ability to process technology, according to Rasiah (2004), who obtained a highly significant correlation with an extremely strong and positive coefficient. Production capabilities increase performance and competitiveness in the export sales process (Bhaduri & Ray, 2004), which guarantee an increase in export activities in firms. According to Pérez- Escatel and Perez (2009), the accumulation of technological capabilities is a variable that helps to explain

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the exporter nature of the enterprises, because international competition stimulates technological change to continue with sales in international markets. On the other hand, several authors report that the association between export activity and the accumulation of technological capabilities is not significant (Athukorala, 1995). Some studies present evidence concerning that, despite trade liberalization, Mexican exporting companies are still heavily dependent on imports of capital goods. Furthermore, these companies have not been able to strengthen and stimulate its technological capabilities, despite the demands of the competitive international market (Cimoli, 2002). METHODOLOGY The methodological strategy of this research was based on a quantitative approach by face to face surveying 50 entrepreneurs, this was the non-probability convenience sample of a population of 153 companies. The data was collected in 2007, using a structured questionnaire designed by the authors (Velarde and Araiza, 2010); Subsequently, the questionnaire was elaborated using for the indicators each sub-dimension a Likert scale, asking if there had been activity related to each of the dimensions and the importance in the firm, from 1 to 5, where 1 was "not important" and 5 "totally important." On the other hand, the questionnaire included a question about the effect of export sales in the firm, during the last five years: if the export sales decreased, remained stable or increased. To obtain the development levels of technological capabilities, the authors identified previously three ranges according to the number of activities of technological capabilities carried out by the firms in this study: high, medium and low, established with cutoff points at the same numerical distance from each other (Velarde and Araiza, 2010). RESULTS Regarding to the crossing between the development level of technological capabilities and the change in export sales, there was found only significant results of a positive relationship in the investment capabilities. There was found a significant positive relationship between export sales and the level of importance of investment capability, and the sub-dimensions: i) training, recruitment and personnel selection, ii) search, evaluation and selection of technology.There were no statistical significance of association between the production capabilities and export sales, only for the sub-dimension: improvements to the plan, program and maintenance. The level of importance of the linkage capability has a significant positive relationship with the change in export sales; also with the sub-dimensions: cooperation with companies in the same sector and cooperation with other companies. There were no significant results for a relationship between manufacturing and adaptation of machinery and equipment capabilities and the change in export sales of the enterprises, except for the sub-dimension: acquisition of machinery and equipment. The contents of this section with respect to the results of analysis of the relationship between technological capabilities and export sales, confirms the findings in the literature as some authors (Braga and Willmore, 1991, Lefebvre, 2001; Bhaduri & ray, 2004) report that there is significant relationship between technological capabilities and export sales. As mentioned above, if the firms want to compete nationally and internationally, they require a great investment in human resources, physical resources and time, in activities aimed to the improvement of technology (Dahlman and Westphal, 1981, Ray and Bhaduri, 2001; Caniëls and Romijn, 2003, Jonker, et al., 2006).

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CONCLUSIONS The main contribution of this work is to have found a statistically significant positive relationship between technological capabilities and export sales of SMEs in this study. Theresults shows the interest of these firms to carry out their production processes with efficiency, with the aim of providing excellent service and / or product to the customer. Also, the results highlight the relevance of promoting the acquisition and accumulation of the mentioned capabilities in the firms, so that they can be more competitive in international markets. Limitations: this research was conducted exclusively in a region, so the results and conclusions presented are limited to the population of this study. Future studies examining these variables in other contexts, using the same data collection instrument for further comparative studies, identifying differences and similarities. REFERENCES Athukorala, P. (1995). Foreig direct investment and manufacturing for export in a new exporting country: The case of Sri Lanka. World Economy. 18 (4): 543-564. Bhaduri, S. & Ray, A.S. (2004) Exporting Through Technological Capability: Econometric Evidence from India’s Pharmaceutical and Electrical/Electronics Firms, Oxford Development Studies, Vol. 32, No. 1. Barney, J. (1991). “Firms resources and sustainable competitive advantage”, en Journal of Management, v. 17, 1, p. 99-120. Bell, M., y Pavitt, K. (1995), “The Development of Technological Capabilities”, in I.u. Haque (ed.), Trade, Technology and International Competitiveness, Washington, The World Bank, pp. 69-1.

Biggs, T., Shah, M. and Srivastava, P. (1995). Technological Capabilities and Learning in African Enterprises. World Bank Technical Paper Number 288. Africa Technical Department Series. The World Bank, Washington: D.C. Carvajal, A. (2010). Las capacidades tecnológicas como base para el desarrollo. Actualidades Investigativas en Educación. Revista Electrónica publicada por el Instituto de Investigación en Educación. Universidad de Costa Rica. Volumen 10, Número 1, pp. 1-19. Cimoli, M., (2002), “Developing Innovation Systems, México in a global context”, Continuum International Publishing Group, London, U.K. Díaz, M., Acevedo, J. y Ramírez, C. (2008). Capacidades Tecnológicas e integración industrial de las PYMES del sector metal-mecánica con las empresas líderes en Sonora. Mt 6 SinncO 2008.

Domínguez, L. y Brown, F. (2004) Medición de las capacidades tecnológicas en la industria mexicana. Revista de la CEPAL 83. 135.151. México. Hadjimanolis, A., Dickson, K. (2004). Innovation Strategies of SMEs in Cyprus, a Small Developing Country, in International Small Business Journal 18, 4, pp.62-79.

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Huq, M. (ed.) (2002) Building Technological Capability: Issues and Prospects. Dhaks: The University Press Limited, xxii ¡ 256 pp., ISBN 984 05 1633 7 (hbk), TK 450.

Jonker, M. (2002). Building technological capabilites to improve performance. A case study of the paper industry in West Java, Indonesia. 464103 M. Sc. Thesis, Eindhoven University of Technology. Lall, S. (1992). Technological Capabilities and Industrialization. World Development, Vol. 20, No. 2 pp.165-86. Morrison, A., Pietrobelli, C. y Rabeellotti, R. (2008). Global Value Chains and Technological Capabilities: A Framework to Study Learning and Innovation in Developing Countries. Oxford Development Studies. Vol. 36, No. I, March 2008. Routledge Taylor & Francis Group.

Pérez-Escatel, A. y Pérez, O. (2009). Competitividad y acumulación de capacidades tecnológicas en la industria manufacturera mexicana, Investigación Económica, Vol. LXVIII, 268, abril-junio de 2009. Pp. 159-187. Rasiah, R. (2004). Exports and Technological Capabilities: A Study of Foreign and Local Firms in the Electronics Industry in Malaysia, The European Journal of Development Research, Vo. 16,No. 3, Autumn 2004, pp. 587-623.

Simón, N. y Rueda, I., (2004). Changes in the mexican steel industry alter privatization: The case of Altos Hornos de Mexico (AHMSA). Mexico and the World Web Journal. Volume 9, Issue 3, Summer 2004, PROFMEX ISSN 1535-0630. Mexico.

Tapias H. (2005). Capacidades tecnológicas: elemento estratégico de la competitividad. Revista Facultad de Ingeniería, Universidad de Antioquia Colombia, No. 33 pp. 97-119. Red de Revistas Científicas de América Latina y el Caribe, España y Portugal. Velarde, E. y Araiza, Z. (2010). La Industria metalmecánica y sus capacidades tecnológicas. Diagnóstico de la Región Centro del Estado de Coahuila en Díaz, C. (2010), Sistemas de Innovación, Redes de Conocimiento y Desarrollo de Capacidades Tecnológicas. Universidad de Guadalajara (en impresión).

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GLOBALIZATION PROCESS AND THE IMPACT OF IT GROWTH IN ALBANIA

Kozeta Sevrani, University of Tirana Klodiana Gorica, University of Tirana

The globalization is the philosophy that support establishment of private company (business) without boundary and in the all word. It is the irreversible process. The ideology of globalization is that the world is the big market where each company, undistinguished the country, has the access (the right) to compete without national or local boundary with the others company. The footfalls of changes for some country are fast. During the human history in the all the world, the human beings has been connected. But now the process of relationship is so different. The airplane, the mobile, email, computer, the highs speed transfer of money are making the word more complicated. The multinational corporate produce in many countries and sell in the all the world. The money, the technology, and the stock have moved fast between the countries. Together with products and the finances also the ideas and the cultures are moved freely. The FDI are the most important factor for the development of the country and Albania has more to do to stimulate the foreign investments. How it will be the process of globalization for Albania? Why so many multinational corporate are addressed to invest in Albania? How can explain the fast economic growth of Albania? What are the factors that influence in the low level of FDI? KEY WORDS: globalization, FDI, risk, development THE CONSEQUENCES OF GLOBALIZATION UNDER ALBANIAN ECONOMY.

Globalization is an inevitable and irreversible process. To treat globalization so put as to raise the positive aspects and lower negative ones is maybe the biggest purpose of the millennium. Possibilities for the globalization to have success are enforced to expel new dangers, mostly to the developed countries. Albania lately has reached an adoption with the international institutions as BB, MNF, etc., making a step further into the global trade. Yet Albania needs an economical and political strategy, which will be able to drive the country on an active position to the global economy. Home-brew business is set upon globalization elements, which through a long-term strategy must exploit opportunities discovered by this new are of globalization. Globalization is a continues phenomena, never seized, but what changes is the utilization from its confederation. Globalization is shown in many ways but first it is seen under economical and financial terms. On this concept it can be conceived as a large and deep connection with the national economy under world trade goods, services and especially capital assets. As a result of the revolution in telecommunication and informational technology, on the last 15 years there have been huge progress on the trade connection and international exchange of capital as well as radical change on the form, structure and pace of production.The positive consequences are: Economical Growth: It is theoretical argued that it will bring an efficient delivery of a country resources towards the sectors and fields where they have a competitive advantage. Focusing on the Albanian conditions, this means to high coefficient industries under working utilization force because of the low cost it has and this helps in the increase of the national economy. The poor layer will profit from this increase by getting employed from these industries. On the other hand it is essential to be invested on the human resources (education and training) to increase their working efficiency. There were made many researches by the World Bank and others, and they show that generally the rapidly increase of the economy is accompanied by the reduce of the poorness. This is the reason that the World Bank adds the

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pressure on different states (including Albania) to be driven towards free trade and WTO. In fact, there is no lack of the facts of both success and failures. For the last mentioned, generally the fault remains to the performance of the national institutions. Improvement of the Productivity: One of the most positive effects (approved by all) is the improvement of the productivity. This for the reason of the simplicity it brings on the investments and technology transfer through different countries. In order to reach this state, a transit period is necessary through which are needed to be developed and consolidated the country’s structures, to guarantee a law functioning state, with the terminus to empower the trade’s economy. Increase of the rivality between companies: Today, more than ever, companies are obliged to oversee the continuance of the quality of their products, to keep prizes on accepted levels and to present new products from time to time, and for this is required the constant improvement of the technology and the scientific researches. Improvement of the relationships between different countries: through inclining the rate of the conflicts and through raising the rate of cooperation between them. As a conclusion, the increase of the chances for survival and success in the era of globalization needs an immediate role of the government and of other important principals for the Albanian economy reconstruction through specific programs which would drive the Albanian economy towards the sectors which have higher possibilities of development. Such are: industries with high coefficient of the usage of manpower, the organic agriculture, tourism, the medical and aromatic planting industry, the confections industry, etc. Beside the positive effects, on the other hand globalization could increase the risk for the financial crisis in the developed countries. According to Stigliz, “Small countries in development are like small boats. Quick liberalization of the capital trade which IMF aspires, is like sending the bout in a strong sea before closing the holes, or before training the captain, before taking safe tires. Even on best conditions it stands the possibility that the boats will drown when hit by an open wave” The confront of the civilization. The disappearance of the economical boundaries between countries, brings about the mixture of the different traditions and mentality and this could cause unexpected conflicts. The bankrupting of small companies, which will be obliged to accept the loss before giant companies, or to be their allies, under conditions established of course by the strong. Increase of unemployment in western countries, which have high living-cost, because the companies of course will employ people from poor countries to apply a lower salary. Difficulty of control which means that each phenomena enlarging to global sizes, represents a danger, because every moment it can come out of hand and have unpredictable consequences. While the most known view of the globalization on the last decade is the rapid integrity of the stock and financial trades; trade and investments are the main power standing under the curtains of globalization. The discussions coming from the field of FDI are important part of the whole globalization process. FDI can play an important role raising the capacity of the hosts country in order to respond the chances offered from the world economy integration, a purpose known as the main one for the strategic development. FDI in the last two decades were part of the main elements of globalization and world economy. Companies from different countries are spreading more than ever taking part in many industries through direct investments. Economies competes virtually together to get rid of multinational companies. As a result, world investment fluxes have reached higher levels.

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FDI and affects on the host places Affects of FDI on the host places are visible. They are shown on the profits and costs. PROFITS Technology: According to the economists, multinational companies through FDI help to fill up the gaps between developed countries and those under development process (hosts) and they ensure smaller possibilities of increase in the host trades. According to this point of view, producers on developed countries have full access on productive knowledge not present on host counties. This productive knowledge could take the role of the technological survey, manger and marketing abilities, export contracts, coordinated connections between suppliers and customers and the good name. According to economists, the technological transfer could stimulate the economical growth of the countries under development. Besides technology, there is also the transfer of capital and manager abilities. So the host country can, through FDI and through multinational companies have access to the finances whih are unavailable for the home-brew companies. Manpower: The transfer of productivity and technology solves the problem that the intrusions from outside are good or bad for the workers in terms of salary. When the foreign company has untouchable product knowledge, then the technological transfer and other trainings will be seen in the human capital of the foreign company in the host country. This expansion of the human capital is seen in the higher productivity of the people which are paid with higher salaries. The macro economical growth: The FDI connection as a macro economical growth and the stability of this connection is very important because the host countries evaluate pro’s and contra’s according to the foreign intrusions. The largest evidences are found in the studies made to the countries under development. For example: introductory investments analyzes in Greece, Taiwan, Indonesia and Mexico show positive contribution on the growth of these countries. The raise and enlargement seem to be stronger when foreign branches and home-brew firms compete directly with each other as in the case with the protected industries (Markusen, 1995, he is an advocate of this idea). Borensztein, DeGregorio and Lee (1998) find almost positive effects between FDI and the growth with the accumulation of the human capital in the host countries, admitting that they must be abundantly big so that the places can profit from the positive effects of the foreign fluxes growth. Business circles: FDI can affect business circle model in the host countries, the transmission of the circles from outside trades and the crisis escort through trades. When countries under development are separated into two big groups: well integrated financial economies and non integrated, they both have connections to the macro economic world aggregates, with this connection not higher last decades compared with that of 1960-1970 (Kose, Prasad, Terrones 2003). The interdependence role of FDI and specifically multinational firms under the integration of business circle, is not yet explored totally. The specific contribution of the FDI under the business circle still remains an issue to be solved.

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COST Bad effects in the national competition: It happens that the multinational companies take over all the funds generated somewhere else to fill their cost. This can bring about the monopolization of the trade and bankrupting of the home-brew companies. Negative effect on the balance fee: We have decrease of balance fee where the daughter company brings back into the mother country parts of the income. Also if the stock is imported from outside to the host countries of FDI then we have decrease of account of the balance fee of host country. National sovereignty: Many of the times, the decisions for the host countries economy have to be taken from these multinational companies which show not so much interest for the host countries and most of the time the government of this countries has no control over them. FDI growing in the future The FDI fluxes is rapidly growing the last days. The highest fluxes of FDI in the world shows an economical environment always improving, this on the presence of reforms and political orientation towards investments. The growth of FDI has reached record levels. This was brought by/stimulated also by the extinction and international purchases of the companies. The higher the fluxes of FDI in a country the more occupation that country could have. FDI create more occupation in productive sectors than in any other sectors. Throughout the years many countries have created a welcoming environment on their places with the clear purpose to gain more funds to be invested in the country. Structural and short-term conditions in favor of the growth of FDI Growth of FDI until 2009 is explained in 3 main factors:

a. continuance of the long-term inclination which are engrossing for the multi nationalization of the companies

b. long-term and short-term economical view characterized by stable growth and financial sources available

c. necessity of new resources and opportunities for investments

Governments of the countries under development perceive the FDI as a source for economical growth, this is also shown by the growing rivality of the places interested for this investments. FDI play positive role in the economical development through intrusion of capital, contemporary technology, on the marketing and management field, on rebuilding the economy, speeding up the denationalize rate, entry of new job opportunities, raise of exports, improvement of the salary balance, etc. for all these reasons they hold a special importance, especially for the countries under development and it is necessary the creation of suitable strategies to attract these investments. Taking a glance at the value that foreign investment directly hold (FDI) for the economy of a country and the interest that Albania has shown towards it, I thought it was of a great value making a study of this kind.

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FDI dispersion in Albania We can say that FDI are settled on main towns like Tirana and Durres. Tirana as the capital of Albania is more exposed from investors, becoming the mot important economical centre of the country and of human potentials. Tirana holds 80% of foreign or common capital investments and also branches, departments or representative offices of many multinational known companies which have invested in Albania over than 231 million euro. While Durres has the largest Albanian port holding 85% of the import-export services of the county.As it might be seen, the areas where FDI are centered are places with higher income rate and more developed infrastructure. The internal central part and the north-east part of Albania, are the least preferred areas from foreign investors. Beside the non-developed infrastructure of these areas and the missing marketing, it might have played a serious role also the internal and external migration, which makes it even harder the possibility of qualified manpower. However, a high percentage rate was find in terminal cities of Albania and Greece like Korca and Gjirokastra. Investments in industry have intended sectors of high manpower percentage and not those of capital and technology percentage leaving small window to the foreign investments role under technology transfer and on the growth of technological capacity production in Albania, through minimizing positive side-effects of these investments on other productive sectors. FDI origin in Albania From the origin viewpoint, Italy and Greece hold the leading position on foreign investments in Albania. FDI origin is 48% from Italy, 43% from Greece, 2% from Macedonia and Turkey and the remaining part belongs to Germany, Austria, Bulgaria, UK, USA, etc. On the contrary of other center and east European countries, Albanian FDI are connected to near-by countries. On this foreign capital stock viewpoint, at the end of 2004, almost 82% of this stock was hold by the EU nations, with Greece as the main investor (with 48% of foreign capital stock in the end of 2004) and Italy (with 30%). Greece and Italy have raised meaningfully their presence on the foreign capital stock in Albania. The geographic connection of Albania and also the economical powerful cooperation with EU, are some of main reasons that these places host foreign investors.

Source: Albanian Bank Italian investments are utilized on the western part of Albania, near Adriatic sea. The largest parts are hold by small and medium industries, which handle construction works (35%), textile and shoes production (21%), trade and services (16%) and also with the agro-nutritive industry (8%) mostly coming from the south Italy. Italian firms profit from the rivalry advantage of working quality with low cost in Albania. Salaries are ten times lower than those in Italy. Italian investors profit from Italian Government grants focused to stimulate Italian investments in Albania. Greek investors are centered on south and south-east part of Albania. They follow trade more and only 2% are hold with other different branches of

FDI from the origin viewpoint

48%

43%

2% 7%

Italy Greece Macedonia Others

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industry, like textile, clothing, production of leather products and tobacco. Over than 60% of Greek FDI come from grants offered by Greek Government for these firms, with the intension to invest in Albania.

Activity Flux % 1. Trade 67% 2. Industry 17%

3. Agriculture 1.3% 4. Service 6% 5. Building 5%

6. Transport 4.7%

Source: INSTAT FDI in agriculture: are on low rates, as a result of small and fragmented parcels of ground, limitations to take assets on rural areas, bad roadway infrastructure and difficult transport with the biggest trades of the region and area. Sectors which attract more investments in agriculture and other common industries are fishing, rehashing and conservation of the fish, food rehashing, olive oil refining, production of beverage and the production of wood. On the service sector:FDI are focused on the bank service, retails and construction. Construction FDI are raising referring to the number of the companies and their activities. Many investors in construction come from Turkey, Italy and Greece. FDI will necessarily be lied on these fields as investments in infrastructure and habitation (business centers and living houses), based on the source fluxes from donation countries and also as a response of urban migration. On the production sector: the largest part of the foreign companies take part on the final re-exportation and half-final products, most of which are textile, different articles of leather and shoes. They consist of around 60% of our exports and only in 2006 have reached a raise of 20%.

Factors affecting low level of FDI in Albania Low levels of IDH in Albania could be attributed partially:

Slow process of the states medium and big companies denationalization under the industrial sectors which have high capital intensity and of the strategic sector like energy and telecommunication.

Low interest of foreign investors as a result of a political percept risk of the country connected with social violence on the past and on the other hand the political changes in Albania and the lack of stability in Balkan and Kosovo. Image problem that Albania has created to the foreign countries. Problems and conflicts connected with land ownership, bureaucratic procedures for the register of ownership rights, for the approval and construction license authorization create barriers to the foreign investments. Informality levels of economy, which is a fact that brings about a wrong competition of trade.

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Lack of efficiency and high cost of infrastructure (transport, energy, water) and the missing of industrial places for the FDI oriented towards export and tourism. Lack of abundance in financial services, benches or not (low level of credits, low quality of financial services for the international trade, high rate of interest, high request for collateral, etc. Low function of public institutions and low application of law. Elements of a strategy to stimulate investments FDI role could change from place to place, depending on the governmental and economy nature. There exists no ideal development of FDI that can be natural to all nations at all times. This way Albania could attract three types of investors: Investors based on the sources research: which could be interested in mineral reserves, forests, petrol, gas. First investment companies could be international companies of refinery or mine. Then it could be the aim towards production of the minerals. Investors based on trade research: which could be companies interested to enter the Albanian consumption trade and the creation of a presence growing with the growth of the trade. On this category it is important the stimulation politics of FDI on strategic sectors (telecommunication, energy, bank sector, transport, water) as well as other private investments in infrastructure. Investors based on the efficiency assumptions: (or FDI oriented towards export). These would be more outside of strategic sectors and infrastructure, for production of products in export and re-export. Stimulation and attraction of FDI The stimulation and attraction of FDI is a high rivalry and a specialized activity, on a growing number of the countries looking to attract active foreign investors and also from many systematic sponsored campaigns. Now a considerable experience is present on the strategies and techniques used for the attraction of FDI and in the part of which could function and which can not. Attraction Investment Agencies from all over the world use many techniques to attract FDI through: Creation of image: is the most suitable when investors image over a pace as a destination for investment is less favorable in reality, and where fore-requests to attract investments are present. Investments generation: represents the identity of potential investors, which are more interested for a place, development of a strategy to contact and cooperate with them, with the intension to make them be involved in investing. Specific used techniques to generate investments include: campaigns through telephone and post, seminars for the investments, missions run inside and outside boundaries and the direct marketing. Service towards investors: could split into two components: fore and after approval services. Fore approval services : is focused on the investors approach referring to the requirements over which the decision to invest has already been taken and the project has been approved (if it is necessary)

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Service after the approval: or after taking the decision if no approval is requested, is considered a necessary activity, including here bank field and industry operations on some fields like: assistance in having a indispensable infrastructure like telecommunication, energy, water and canalization: ensuring the main contacts with the government, business and community: Satisfied investors are the best stimulation for a continuance of investments in the future;

Service towards investors is the element containing the most efficient cost, manageable in all stimulation activities for investment; Maximization of the potential investors number which become actual investors enforce the reputation and image of a country; Services towards investors are more indispensable in an investment place, where not all the elements are favorable and could face obstacles to realize investments from the interested firms. Many of the countries have established success in attracting investments through the usage of these Agencies for the Investments stimulation (AIS). AIS have many important functions, including fulfillment of investment needs, maintenance of friendly politics towards business, and the cultivation and projection of the favorable image of a country as the destination of the investments. CONCLUSION The level of FDI in Albania remains on low rates, even though from 1999 it has been drastically grown in projects and flowing fluxes from investments.

The main causes for these low rates of investments are: the most important is the image of Albania into the international arena, this acquired from the political instability, economical one, perceptional risk, the slowing process of the denationalization mostly on strategic sectors, lack of responsibility and institutional ability, low application of law, lack of efficiency and low cost of infrastructure, lack of composition in comprehensive strategies of the social and economical development, impotence and overcharge of administrative taxes, etc. Low intensity of foreign investors is due to the perception of a high risk connected with the social violence existing before and the political changes in Albania and also due to the lack of stability in Balkan and Kosovo. Albania has some potential sectors and very good possibilities for the attraction of IDH, mainly in tourism (sector with much of the perspective also for the reason of favored natural conditions), services, transport, etc. Agriculture in Albania have much possibility of development starting from the geographic positioning, its sources, quality and quantity of manpower. The country could become an important exporter of agricultural products with organic basis pointing at European and world trades.

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Albania has no developed an effective strategy for the investment attraction. It is very important to mention here the lack of marketing territory. The territory marketing plays a very important role, especially to create the image of a country, its communication, approaching of investments. The territorial promotion and attraction of investment agencies play a very small role according to their original function, this maybe also from the lack of connection with the investors, or low approach from state authorities, etc. Foreign investments must help Albania through chances of food elaboration to ensure foreign trades. The strategy for investment attraction in the agriculture field of Albania must decide the main perfumers and retailers in Europe and USA. RECOMMENDATIONS Albania must work to improve the environment where FDI are active, in order to acquire attract on higher and diverse levels.

Albania must attract FDI for products that the country is considered to have high international advantages at (actual or potential ones). Its important mainly that part of production which identifies the export products, for which the country have made possible a response to the growth of world trade (cotton trousers, shirts and cotton suits, rough tobacco, etc.). also it must utilize its potential on the field of tourism, agriculture, etc. Albania must focus its energies on the service of actual and possible investors. The investors gratification is the best advertisement for the country and is considered as the most faithful source for other investors. The actual investors can stay longer and could raise their investments. It is very important that Albania develops the territory marketing. Several efforts must be made through this marketing to improve its image. The government must stimulate such politics to attract investors, it must speed up and finish the program for the return of the land. The land must be registered as soon as possible, mainly the urban land and attractive areas which serve to the trade development. To improve the efficiency of s solution to the disagreement of land and also to raise its administrative efficiency. The government must utilize a strategic vision, which would decide for a number of long-term, medium- term and short-term efforts which give priority to the acceleration and finalization of program for the return of the land. to finalize the registration of urban land and trade development areas. Main agent which could pay the role of a contact, sustainer and promoter of the territory for the foreign investors are the Teritorial development agents.

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AN EXPLORATORY STUDY ON BRAND PERSONALITY IN MEXICO

María de la Paz Toldos Romero, Tecnológico de Monterrey Campus Guadalajara

ABSTRACT

The principal objective of this study was to develop an exploratory investigation of the dimensions of brand personality in Mexico. An estimated 400 undergraduate students participated. They were given a questionnaire to measure brand personality divided into two sessions (six brands of think products in one session and six brands of feel products in another session). However, not all the students attended class on both days, so some completed only one of the two sessions. In the end, 313 participants completed the questionnaire on the six brands of think products (48.6% women; 51.4% men; M= 20.44, SD= 1.76), and 320 completed the questionnaire on the six brands of feel products (47.8% women; 52.2% men; M= 20.60 years, SD = 1.83). A total of seven factors were extracted from the brand personality scale: Success, Hipness/Vivacity, Sophistication, Sincerity, Domesticity/Emotionality, Ruggedness, and Professionalism. The author discusses the implications of the research for marketing practice and the meaning of these brand personality dimensions in the Mexican cultural context.

KEYWORDS: Brand personality; personality traits; gender INTRODUCTION Brand personality is defined as “the set of human characteristics associated with a brand” (Aaker, 1997, p. 347). Similar to human personality, brand personality is distinctive and enduring (Aaker, 1996, p. 141- 142). Customers associate human personality traits with brands because they relate to brands as they would to partners or friends (Fournier, 1998), because they perceive brands as extensions of themselves (Belk, 1988), or because marketers suggest that brands have certain characteristics. The attribution of human personality characteristics to brands is of great interest among marketing researchers and practitioners, since understanding how consumers perceive products and brands can be useful for the elaboration and implementation of marketing actions. A brand personality can be used as a basis of differentiation from other brands and help to differentiate the brand from competitors in a particular product category. Measurement of Brand Personality Similar to the “Big Five” model of human personality (Goldberg, 1990; McCrae and John, 1992), brand personality is measured along five dimensions that uniquely apply to consumers’ characterization of brands (Aaker, 1997). It was with Aaker’s research (1997) that a generalizable (reliable and valid) scale was developed to assess brand personality (Koebel and Ladwein, 1999). Jennifer Aaker (1997) developed a theoretical framework of the brand personality construct by determining the number and nature of dimensions of brand personality traits. Aaker (1997) developed a measurement scale called the Brand Personality Scale, which consisted of 42 traits. Even when the sample was divided by age or sex, or when subgroupings of brands were used, five personality dimensions emerged. These five brand personality dimensions and 15 facets desired by many companies for their products are Sincerity; Excitement; Competence; Sophistication; and Ruggedness. The impact of this model has been so profound that since 1997 most of the academic publications about brand personality are based on Aaker’s methodology

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(1997). With the aim of determining the adaptability of Aaker’s original model (1997) to other cultures, the model has been used in other countries, such as France (Koebel and Ladwein, 1999), Japan and Spain (Aaker et al., 2001), Mexico (Alvarez-Ortiz and Harris, 2002), Russia (Supphellen and Grohaug 2003), Korea (Lee and Oh, 2006), and Venezuela (Barrios and Massa, 1999; Pirela et al., 2004). The studies conducted in these countries differed in three aspects: the use of Aaker’s methodology (1997), the dimensions found, and the conclusions. In the study conducted in Mexico, Alvarez-Ortiz and Harris (2002) found a dimension called Gender, which was more representative than that of Ruggedness and contained only feminine and masculine traits. From this it appeared that Mexican consumers perceived brands with masculine and feminine traits, a perception that represented a bipolar dimension rather than the dimension Ruggedness. So in Mexico, the model consisted of Sincerity, Enthusiasm, Competence, Sophistication, and Gender. This study aims to develop an exploratory investigation of the dimensions of brand personality in Mexico using the theoretical basis established in Aaker’s study (1997) of personality traits, since we found only one study about brand personality in Mexico. Given that different brand personality dimensions have been found in other countries, in the case of Mexico it was not expected to find exactly the same dimensions as Aaker (1997) did in the United States and Alvarez-Ortiz and Harris (2202) did in Mexico, because this study differs from the study conducted in Mexico in the methodology, brand selection, sampling used, and characteristics of participants. It was expected to find more coincidence with the dimensions originally proposed by Aaker than with those found in other countries because of the geographic proximity of Mexico to the United States, the influence the United States has on Mexico, and the characteristics of the sample (students with an upper-middle socioeconomic level who are accustomed to buying U.S. products when they spend vacations in the United States). In addition, in Mexican culture masculinity and femininity are still prominent characteristics and sex roles are still markedly accentuated in some sectors. As Alvarez-Ortiz and Harris (2002) found in the study of brand personality in Mexico, in this study it was expected that a dimension related to gender would also be found in this study as a result of the macho culture in Mexico. Thus, the following hypotheses were made: H1: Brand personality in Mexico will be identified by at least five dimensions similar to those established in other cultures. Moreover, the brand personality dimensions will be more similar to those that Aaker originally proposed, compared with those found in other countries. H2: At least one brand personality dimension will be related to gender (masculine and feminine traits). METHODOLOGY Brand Selection: Following the FCB Grid by Ratchford (1987) and Vaughn (1986), which allows products to be classified as feel or think and as having high or low involvement, four product categories were selected: (a) laptops as think products with high involvement; (b) shampoos as think products with low involvement; (c) perfumes as feel products with high involvement; and (d) soft drinks as feel products with low involvement. A total of 90 students completed a survey in which they were asked to write the first three top-of-mind brands for these four product categories. Finally, using a combination of top of mind and top of share, the 12 brands selected were the following: a) Laptops: Dell, HP, Apple; b) Shampoos: Pantene, Herbal Essences, Sedal; c) Perfumes: Ralph Lauren, Hugo Boss, Chanel; and d) Soft drinks: Coca-Cola, Pepsi, Sprite.

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Participants and Procedure The research adopted a nonprobability convenience sampling. Participants were recruited from the Tecnologico de Monterrey, Campus Guadalajara, Mexico. An estimated 400 undergraduate students participated from the classes that were selected as part of the study. They were given a questionnaire during class time divided into two sessions: In the first session, half of the sample was given the section of the personality scale for the six brands of think products, and in the second session, after the week of rest, they completed the six brands of feel products. The other half of the sample began with the six brands of feel products, followed by the week of rest and then the six brands of think products. However, not all the students attended class on both days, so some only completed one of the two sessions. In the end, 313 participants completed the questionnaire on the six brands of think products (48.6% women; 51.4% men; ages between 17 and 25, M= 20.44, SD= 1.76), and 320 completed the questionnaire on the six brands of feel products (47.8% women; 52.2% men; M= 20.60 years, SD = 1.83). Measures: Even though Aaker (1997) provides a brand personality scale, and there is a Spanish (Castillian) brand personality scale (Aaker et al., 2001), these could not be assimilated into the Mexican culture and language. Therefore, a rigorous scale-adjustment process was necessary. Consequently, the original Brand Personality Index (BPI), which includes 42 items of brand personality traits developed by Aaker (1997), was translated to the Spanish language, with modifications to some items for the Mexican culture and language. A pilot study with 85 students was conducted to validate the Spanish version of the Brand Personality Index created especially for this study. The questionnaire had 42 items of brand personality traits and respondents had to assign a value from 1 (very unlikely) to 5 (very likely) to each attribute. A principal component factor analysis with Varimax rotation procedures was used to modify or rewrite the items, as necessary, before applying the scale to the definitive sample. After the statistical analysis with the pretest study, 10 items were changed and the other 32 items remained the same. RESULTS Brand Personality Dimensions For the validation of the brand personality scale, it was designed that each participant evaluated the personality of the 12 brands in each of the 42 items that composed the questionnaire. This way the total of the sample for the validation of this scale was made up of 3798 evaluations, which were used for the rest of the statistical analyses. To extract the underlying brand personality dimensions, it was used exploratory factor analysis (Principal component) with Varimax rotation. Without forcing the number of factors, a factorial solution of seven factors was obtained: Success, Hipness/Vivacity, Sophistication, Sincerity, Domesticity/Emotionality, Ruggedness, and Professionalism. As can be seen in Table 1, the indices for all of the dimensions were quite high, with the exception of Ruggedness and Professionalism, which had more moderate coefficients due to the fact that these dimensions consisted of only three items each. Nevertheless, the alpha coefficients that were presented in the first five dimensions demonstrate that the scale had a satisfactory internal consistency whose values oscillated between .75 and .91. The internal consistency of the seven factors, evaluated by the alpha coefficient, was .95. The amount of variance of the data explained by this solution was 60.3%.

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DISCUSSION

The principal objective of this study was to develop an exploratory investigation of the dimensions of brand personality in Mexico. In function of these objectives, two hypotheses were made that were reviewed and corroborated with the results found in this study. Hypotheses H1 and H2 were partially confirmed. In hypothesis H1 it was hypothesized that brand personality in Mexico would be identified by at least five dimensions similar to those established in other cultures, and that those would be more similar to those that Aaker (1997) originally proposed, compared with those found in other countries. Seven dimensions of brand personality were extracted in this study. Although the factor loading of the brand personality traits in this sample differed from other samples and in particular from Aaker’s study (1997) due to differences in culture and language, three of the brand personality dimensions were very similar to Aaker’s findings (1997): Sincerity, Sophistication, and Ruggedness. Nevertheless, other dimensions that were found in this study, such as Success, Hipness/Vivacity, Domesticity/Emotionality, and Professionalism, were found to carry more specific cultural meanings. Although the dimension Competence remained constant in all of the countries investigated, in this study three of the personality traits (hardworking, technical, and corporate) that made up Competence in Aaker’s study (1997) formed a new dimension that it was called Professionalism. Additionally, the personality traits that made up the dimension Success in this study coincided with personality traits that were part of the dimensions Excitement and Competence in Aaker’s study (1997). For Hipness/Vivacity, personality traits were found that coincided with four of the traits that made up the dimension Excitement in Aaker’s study (1997). Thus the dimensions Success and Hipness/Vivacity could correspond with Aaker’s dimension Excitement. Finally, the dimension Domesticity/Emotionality was made up of three personality traits that correspond with Aaker’s Sincerity dimension and one trait each from Aaker’s Sophistication and Ruggedness dimensions. These results imply that the brand personality dimensions that were found in this study were more similar to those that Aaker originally proposed, compared with the dimensions found in other countries. With respect to hypothesis H2 it was expected that at least one brand personality dimension would be related to gender (masculine and feminine traits) as was true for the study conducted in Mexico (Alvarez-Ortiz and Harris, 2002), in which they found a dimension with masculine and feminine traits, which they called Gender. However, contrary to expectations, in this study the feminine and masculine traits were not as accentuated in the personality dimensions. The results showed that the brands were not perceived only as traditionally masculine or feminine, but instead I intuit that there are different types of masculinity and femininity. The consumers in this study did not perceive the brands as simply feminine, but instead perceived two different types of femininity. One type is the woman who represents elegance and glamour, and is upper-class, Western, and feminine. On the other hand, they perceived some brands with a different type of femininity: the woman who is affectionate, friendly, provincial, emotional, and family-oriented, or in other words, the woman who in Mexico is called a ranchera (small-town, country bumpkin) and who is represented by a large part of the population, perhaps the type of woman who represents a socioeconomic class that is uneducated or from past generations such as those of their mothers or grandmothers. As for masculinity, it was perceived as rugged and strong, represented by the personality dimension Ruggedness. And perhaps in this dimension we can glimpse another type of man, the man who is professional, corporate, and hardworking, and who has technical knowledge. Without a doubt, although gender will always form part of the personalities of brands, and especially in Latin American cultures, in which gender roles are still very traditional, the meaning associated with brands differs depending on the samples used, the types of products, and the historical moment.

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Table 1: Results of factor analysis: Brand personality

Factor Name Items Factor

Loading M (SD) Eigen- value % of variation

Cronbach's Alpha

1. Success

Leader Successful Original

Up-to-date Imaginative

Secure Unique Trendy

Real Daring

Independent Exciting

.672

.654

.606

.584

.578

.513

.494

.474 .44

.437 .43

.422

3.69 (1.15) 3.97 (1.04) 3.68 (1.15) 3.86 (1.09) 3.66 (1.12) 3.69 (1.13) 3.50 (1.21) 3.79 (1.13) 3.73 (1.11) 3.51 (1.19) 3.56 (1.18) 3.36 (1.17)

15.43 36.73 .91

2. Hipness/Vivacity

Young Spirited

Cool Cheerful

Charming

.755

.645

.626

.576

.494

3.77 (1.16) 3.71 1.10) 3.77 (1.13) 3.67 (1.13) 3.68 (1.14)

2.76 6.56 .85

Confident Contemporary

.478

.446 3.97 (1.04) 3.67 (1.10)

3. Sophistication

Good looking Glamorous Upper-class

Western Feminine

.773

.747

.721

.513

.477

3.47 (1.27) 3.40 (1.29) 3.49 (1.27) 3.77 (1.16) 3.29 (1.36)

2.15 5.12 .80

4. Sincerity

Honest Sincere Reliable

Wholesome Down-to-earth

Intelligent

.696

.658

.627

.596

.548

.513

3.47 (1.18) 3.47 (1.12) 3.68 (1.15) 3.35 (1.30) 3.48 (1.15) 3.71 (1.10)

1.65 3.92 .85

5. Domesticity/ Emotionality

Family-oriented Smooth Friendly

Small-town Sentimental Outdoorsy

.665

.643

.547

.536

.493

.438

3.03 (1.33) 3.32 (1.18) 3.55 (1.14) 2.50 (1.26) 3.43 (1.17) 3.15 (1.35)

1.20 2.86 .75

6. Ruggedness Masculine

Rugged Tough

.76 .746 .456

2.89 (1.37) 2.60 (1.28) 3.51 (1.18)

1.14 2.71 .63

7. Professionalism Technical Corporate

Hardworking

.69 .672 .561

3.13 (1.23) 3.43 (1.30) 3.35 (1.20)

1.03 2.46 .55

Theoretical Contributions And Managerial Implications Although the “Big Five” model of human personality (Goldberg, 1990; McCrae and John, 1992) has been advocated as a basic paradigm for personality description and assessment, the utility and comprehensiveness of the “Big Five” has recently been challenged (see Benet and Waller, 1995; Block, 1995). Recent research has established the structural robustness of the “Big Seven” model of human personality across samples and targets (Benet and Waller, 1997) and demonstrated that the “Big Seven” were cross-culturally and cross-linguistically robust personality dimensions that are were subsumable by the “Big Five.” This further evidence for the “Big Seven” factor model suggests that we probably need to

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reinterpret the “Big Five” brand dimensions toward a “Big Seven” model. The five dimensions of Aaker’s (1997) original model cannot be generalized to other cultures, as Aaker et al. (2001) had already proposed, since the different brand personality dimensions reflect the meaning that us given to them through marketing strategies that may be different from the values of each culture. However, the scale created to measure brand personality is sufficiently reliable, valid, and robust to be used to obtain consistent results for each type of target population and to select different products and brands. The results found in this study also represent important implications in the areas of marketing and management, since they permit us to conclude that it is valid to use a more direct approximation of the original methodology of Aaker (1997) by using a scale that measures brand personality. Limitations And Future Research This study has limitations; the first concerns the sample. Mexico is a country with many public and private universities, and thus future research should compare these findings with personality taxonomies from other institutions or Mexican states. Moreover, future research is needed to determine whether brand personality is different in various geographical and cultural contexts. As a final point, it would be important to study the process by which a brand personality is built, the most important factors in forming a personality impression, and the factors that allow the stability over time of that personality. In conclusion, the results of the study suggest that a Mexican taxonomy of personality trait terms should include at least seven higher-order personality dimensions, and that future research is needed to verify the stability of brand personality dimensions for different brands and with other Mexican samples. Also, the possibility of using local Mexican brands and product categories could be helpful in improving the generalizability of results. REFERENCES Aaker, David A. (1996). Building Strong Brands. New York, USA: The Free Press. Aaker, Jennifer L (1997) “Dimensions of Brand Personality,” Journal of Marketing Research, vol. 34(3), August, p. 347-356. Aaker, J.L., Benet-Martínez V. & Garolera, J (2001) “Consumption Symbols as Carriers of Culture: A Study of Japanese and Spanish Brand Personality Constructs,” Journal of Personality and Social Psychology, vol. 81(3), September, p. 492-508. Alvarez-Ortiz, C. & Harris, J (2002) “Assessing the Structure of Brand Personality among Global and Local Mexican Brands,” proceedings of the American Marketing Association Summer Educators’ Conference, American Marketing Association, San Diego, CA, USA. Barrios, M. & Massa, C (1999) “Dimensiones de la Personalidad de la Marca en Venezuela,” Trabajo de Grado, sin publicar, IESA. Belk, Russell (1988) “Possessions and the Extended Self,” The Journal of Consumer Research, vol. 15(2), September, p. 139-168. Benet, V. & Waller, N (1997) “Further Evidence for the Cross-cultural Generality of the Big Seven Factor Model: Indigenous and Imported Spanish Personality Constructs,” Journal of Personality, vol. 65(3), September, p. 567-598.

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Benet, V. & Waller, N (1995) “The Big Seven Factor Model of Personality Description: Evidence for Its Cross-cultural Generality in a Spanish Sample,” Journal of Personality and Social Psychology, vol. 69(4), October, p. 701-718. Block, Jack (1995) “A Contrarian View of the Five-factor Approach to Personality Description,” Psychological Bulletin, vol. 117(2), March, p. 187-215. Fournier, Susan (1998) “Consumers and Their Brands: Developing Relationship Theory in Consumer Research,” The Journal of Consumer Research, vol. 24(4), March, p. 343-373. Goldberg, Lewis (1990) “An Alternative “Description of Personality”: The Big-Five Factor Structure,” Journal of Personality and Social Psychology, vol. 59(6), December, p. 1216-1229. Koebel, M. & Ladwein, R (1999) “L’échelle de Personalité de la Marque de Jennifer Aaker: Adaptation au Contexte Français,” Décisions Marketing, 18, p. 81-88. Lee, M.Y. & Oh, K.Y (2006) “An exploratory study on brand personality: the case of a traditional casual brand in Korea,” Journal of Fashion Business, vol. 10(6), December, p. 79-90. McCrae, R. & John, O (1992) “Introduction to the Five-factor Model and its Applications,” Journal of Personality, vol. 60(2), June, p. 175-215. Pirela, J.L, Villavicencio, H. & Saavedra, J.L (2004) “Dimensiones de Personalidad de Marca. Estudio Exploratorio en Venezuela,” Revista de Ciencias Sociales, vol. 10(3), September/December, p. 430-440. Ratchford, Brian (1987) “New Insights About FCB Grid,” Journal of Advertising Research, vol. 27(4), August/September, p. 24-38. Supphellen, M. & Gronhaug, K (2003) “Building Foreign Brand Personalities in Russia: The Moderating Effect of Consumer Ethnocentrism,” International Journal of Advertising, vol. 22(2), May, p. 203-226. Vaughn, Richard (1986) “How Advertising Works: A Planning Model Revisited,” Journal of Advertising, vol. 26(1), February/March, p. 57-66. BIOGRAPHY María de la Paz Toldos Romero earned a Doctorate of Psychology from the Complutense University of Madrid (Spain) in 2002, and in 2009 completed a Post Doctorate degree in Marketing at Tulane University in New Orleans (USA). She has worked as a professor and researcher at the University of Valencia and the University of Alcalá de Henares (Spain). Currently professor at the Tecnológico de Monterrey and Level 1 of the National System of Researchers of the National Council of Science and Technology. She can be reached at Tecnológico de Monterrey, Campus Guadalajara, Av. General Ramón Corona 2514, Col. Nuevo Mexico, 45201 Zapopan, Jalisco, Mexico, [email protected]

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THE CRISIS OF TEACHER TURNOVER. A THREAT TO PUBLIC SERVICE STABILITY

PM Mampane, Tshwane University of Technology

ABSTRACT In spite of numerous strategic interventions by the department of basic education to retain educators in the profession, the department continues to bleed with a significantly high number of educators leaving the profession. This attrition of skilled personnel has had an attendant adverse effect on the capacity of the state to realize its millennium development goals which amongst others is to achieve universal primary education by 2014. A key focus of the South African government strategic objective is to ensure that the country has skilled expertise in various fields i.e. commerce, education, industry, science and technology etc. This can only be possible in an environment of sustained investment in the area of human capital development by the government. In the arena of education which is the main focus and thrust of this article, a significant contribution of the country’s fiscus has been directed to the area of teacher development. Despite these gargantuan efforts on the part of government, there continues to be a brain drain with a high turnover of educators leaving the profession. A tacit indication of this massive investment in education is the fact that of the of the total of R165 billion budgeted for education, R2.7 billion has been earmarked for teacher development which clearly points out to the strategic importance of leadership and human capital development as critical areas of the broad human resource development goals of the state. KEYWORDS: Crisis, South Africa, Teacher Turnover, Training. RESEARCH OBJECTIVES The following research objectives will be explored in the study  To provide a theoretical overview of management and leadership in education.  To undertake a scientific analysis of the reasons behind the high turnover of educators from the

profession.  To provide recommendations with a view to arresting the malaise and making the profession an

attractive one to young people.

INTRODUCTION Research has revealed that institutions in South Africa periodically assess their employee’s needs and levels of needs satisfaction. They follow a “one size fits all” approach (Robbins, Odendaal, Roodt, 2003:131). The attendant effect of this approach has had the invariable effect of demotivating and demoralizing employees to an extent that productivity levels are negatively affected. One of the famed points of Maslow’s hierarchy of needs theory refers to the inextricable relationship between high and low order needs. This means that as much as employees can achieve self actualization, it is equally pertinent that low order needs pertaining to remuneration, job satisfaction be satisfactorily addressed. The existing literature on leadership, power and influence processes; and provides a theoretical basis for understanding the leadership process in formal organizations (Jacobs, 1970:1). Literature supporting leadership and effective leadership in particular is ever increasing. This implies that the success of any institution or of any group within an institution depends largely on the quality of its leadership. In general

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therefore, it is critically important that individuals are positively influenced towards the achievement of goals for the success of the institution. The relevance of this statement lies in the fact that to achieve the goals of quality education in South Africa, it is a sine qua non that educators be treated as professionals, with dignity and respect, which is hardly the norm currently. MANAGEMENT AND LEADERSHIP IN EDUCATION In the South African context formal education consist of a total of 12 years of schooling divided into 7 years of primary schooling and five years of secondary schooling. The national department of Basic Education is charged with the legislative responsibility to manage education at this level. The department is led by the minister flanked by her deputy, the director general and his deputies and is replicated almost the same in the nine provinces of the Republic of South Africa. Provinces are themselves divided into districts of education which like Gauteng province can manage up to 2424 ordinary schools. Districts can in turn be divided into 12 like in the case of Gauteng province. However this number will vary based on the unique demographics of each province. The districts are given the responsibility to manage the number of schools in their respective area of jurisdiction (Department of Education, 2011). A cluster of about 5 schools will be led by an academic support officer referred to as Institutional Development Support Officer (IDSO) whose responsibility is to provide both strategic leadership and management support to the principal and his/her School Management Team (SMT). Teachers teach and work in schools that are usually administered by managers, who are known as principals or headmasters. The conditions of teachers’ working life is influenced to a greater extent by the administration and leadership provided by principals, and it is widely assumed that school leadership directly influences the effectiveness of teachers and the achievement of outcomes of learners (Harlinger and Murphy, 1986) in (OECD, 2001:1). Principals are supposed to be dynamic and organic individuals able to motivate teachers to ensure that the goal of quality education and leadership is provided to learners and their immediate communities. The objective conditions however demonstrate that a number of these managers are found wanting in so far as the provision of dynamic leadership is concerned. The Mathew Goniwe School of Leadership has been made available for principals to undertake leadership and management training. This institution provides strategic management training to school managers. Strategic management and planning requires a radical shift for schools that previously focused on short term tasks and adopted a culture of dependency. The reality is that despite these interventions, there is limited evidence of a strategic approach to school management (Moloi, 2008: 466). The overview outlined in the preceding paragraphs is meant to provide a contextual analysis of the situation prevalent in the schools and its attendant contribution to the problem of teachers leaving the profession in droves. Hall, Altman, Nkomo et al (2005) postulate that the process to change one’s job is preceded by a process of job evaluation and determining alternative employment opportunities. Dissatisfaction with the workplace can be a very strong incentive to seek alternative employment opportunities elsewhere. This implies therefore that leaving one’s place of employment is not a decision to be taken lightly particularly in the context of the tough economic conditions in South Africa and globally especially in the past two years of the global economic meltdown. However as will be outlined below South Africa continues to experience a situation where teachers are resigning from the profession. The following factors although not exhaustive are amongst some of the fundamental reasons behind the high turnover rate of teachers from the profession.

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EDUCATOR WORKLOAD The advent of the new curriculum of education the Outcomes Based Education and the National Curriculum Statement (NSC) has meant largely the erosion of instructional time into the programmes of teachers and schools (Chisholm, Hoadley, Kivulu et al. 2005). Teachers are now burdened with additional administrative responsibilities that were in the past the preserve of clerks employed by schools. These administrative responsibilities amongst others include the capturing of learner marks (Continuous Assessment /CASS), filling of learner portfolios without the attendant provision of office space, preparing learner reports, compiling data on learners progress on a quarterly basis which form the basis of the progress reports, preparing reports on learners social and family background, pastoral duties, professional duties like meetings, workshops, seminars, conferences and countless other responsibilities as enshrined in Chapter 3. 3.1 (b) of the Employment of Educators Act (Act 76 of 1998). Over and above this, teachers are supposed to provide leadership in number of committees which in certain schools can number up to 15. This committees, range from Learners-Teacher Support Material, Sports, Fundraising, Exam etc. These committees take an inordinate amount of the time teachers are supposed to spend in the classroom. For instance the declaration by government that a majority of schools in the townships and rural areas to become “no fee schools” as reflected in the Education Laws Amendment Act (Act 24 of 2005) has placed the management of these schools with an additional responsibility to source their own funds for other activities other than those that have to do with teaching and learning. This is because the Act only makes provision for the funding of activities related to teaching and learning i.e. learner teacher support material and infrastructural development. This then requires teachers, parents and learners to utilize precious teaching time to organize activities like beauty pageants in order to supplement the meager funds the school has in its kitty. The amount of time that teachers also spent on planning for lessons is disproportionate to the actual period that they should have in presenting lessons in class. Heads of department occasionally check teachers files with the main focus being whether the teachers has daily, weekly and quarterly lesson preparation forms for his/her subjects. On average teachers spent 43-46% of their time in the classroom teaching whilst national policy expect teachers to spend between 64% -79% of the 35 hour weekly schooling period, on actual teaching ( Employment of Educators Act, 1998). Mention must also be made that in some schools hardly any teaching takes place after lunch on Fridays and this trend is also reflected on pay days when educators receive their salaries. The situation is much more acute in rural areas where banks are situated far from places of work, forcing educators to leave work early on month end, navigate treacherous roads in an effort to be the first access financial institutions like banks. Most educators end up feeling stressed because of their inability to cope with this workload and studies have revealed that a significant number of teachers are absent from work as a result of psychological factors, fatigue, physical illness necessitated by being overworked. Yet despite research from previous research studies (Buwalda & Kok, 1991; Mwamwenda, Monyooe & Glencross, 1997) in Milner and Khoza (2008, 4) reveal that teachers stress levels in South Africa is extremely high and little appears to be done in the education sector to combat or ameliorate the high levels of stress that teachers experience. This coupled with the fact that there is still a significant number of vacant posts in the profession which clearly points out to the need for the hiring of more teachers means the problem of heavy workload will continue unabated in the foreseeable future. It is within this context that a lot of educators are resigning from the profession for other perceived greener pastures.

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TEACHER-PUPIL RATIO One of the critical factors leading to increased workload is the historical inequality in pupil teacher ratios. At one stage it was reported that Kwazulu Natal Provincial Department of Education had the highest teacher-pupil ration at 38:1(Jarvis.1999). Personal experience has been that in certain classes a teacher would have up to 51 learners in class. International comparative studies were able to reveal that the trend in some countries like the UK is 18:1 with countries in North Africa standing at an average of 19:1 (Huebler, 2008: 1). School Governing Bodies (SGB’s) at historically advantaged institutions are able to use their massive budgets to employ additional teachers to alleviate the problem of high teacher-pupil ratios. Sadly the same privilege cannot be enjoyed by schools in historically disadvantaged area owing to lack of resources. The goal of universal education for all young people is regrettably being pursued at the expense of teachers whose labour is being exploited with little regard to their well being. The end result is teacher’s inability to provide individual attention to slow learners with the consequent effect of adversely affecting the provision of quality education, which is needed if South Africa is to be a competitive player in the global world of commerce, technology culture, international political institutions and the economy. LOST PRESTIGE Most studies undertaken by researchers, casual glance at matters of education and just general observation reveals that the prestige that the teaching profession had in the period before 1990 has largely degenerated. Kayuni and Tambulasi (2007: 91) in one of their papers point out that in the 1940’s-70s teachers were seen as bringers of progress, modernity and development and were rewarded and respected accordingly. The profession which produced educators of note like the esteemed Zephania Mothopeng, Khambule et al has now become the last resort amongst students when they enroll at institutions of higher learning. Teachers were the considered the crème de la crème of society. Unfortunately the professional prestige associated with teaching has been declining at an alarming rate. If you can randomly enter any classroom in a South African school and ask learners their careers of choice, the likelihood of finding a learner interested in pursuing teaching as a profession is minimal In an effort to arrest this malaise, The Department of Basic Education has made available the Funza Lushaka Bursary Scheme to entice students to enroll for the teaching program at universities in South Africa. Recipients of the bursary are required to teach at a school for the same number of years that they receive the bursary (Department of Basic Education, 2008). Preliminary studies are able to reveal that a number of students apply for the bursary scheme not because of the attraction to teaching as a profession but rather as a result of the broader socio economic situation in South Africa. This implies to avoid the likelihood of sitting at home without any prospects of employment “enrolling for teaching is better than nothing”; “At least you are guaranteed that you will find work after completion of your studies “ which is a popular mantra amongst young South Africans. The same cannot be said about millions of young South African who are unemployed and with no foreseeable prospects of getting money to enroll at institutions of learning. Extensive studies are however yet to be conducted to ascertain as to what extent has this intervention assisted in restoring the attractiveness of the profession to young people. The general decay in the moral fiber of society has to a larger extent also contributed to the degeneration of the teaching profession invariably contributing to many educators leaving the profession. The profession is generally perceived to have gone to the dogs. Learners at schools are generally disobedient,

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ill disciplined and have no regard for authority. Bullying is only regarded as a Grade 2 offence in the Code of Conduct (2007:16) drafted by the Department of Education. This means that unlike Grade 4 offences which can be reported to the SAPS, bullying is largely considered a minor offence even though it’s effect in the main have also contributed to lady teachers fearing for their safety at schools. The promulgation of legislation outlawing corporal punishment has left teachers powerless to deal authoritatively with growing acts of intimidation associated with bullies in schools. The principle of in loco parentis is no longer the cornerstone of teacher-learner relations in schools owing to the fact that learners have all the rights and power to determine the school agenda as they deem it fit. Nonexistent security in schools has left teachers vulnerable to gun toting learners and their friends in surrounding communities who are able to enter school yards at will and terrorize teachers. Instances of learners’ physically attacking teachers have been widely reported in the media that they are no longer newsworthy. Teachers have become numb and are used to these phenomena. The South African Police Service conducts regular searches at schools and illegal weapons ranging from guns, dagga, knifes and other drugs have been found on learners (Looklocal newspaper, 2011). TEACHER REMUNERATION Beardwell and Holden (2001:514) explained that the salary of a particular job reflected beliefs about the worth of jobs based on scope, level of responsibility, skill requirements, objectionableness of duties, commercial worth and strategic relevance. Over and above that Bull (2005,22) in Begley & Czaika, 1993; Chiu, 2000;Tharenou,1993) postulate that job satisfaction is an important area of research because it is correlated to enhanced job performance, positive work values, high levels of employee motivation and lower levels of absenteeism, turnover and burnout. As a result of the trifle remuneration enjoyed by teachers in the public sector, organizational performance has been seriously compromised. This goes against the grain of the provisions of the White Paper on the Transformation of Public Service Delivery (1997) (Batho Pele) in particular section3 (8) value for money which require public servants to provide services economically, effectively and efficiently. This principle cannot be achieved on the kind of salaries teachers receive. The Cape Professional Teachers Association an employee body that looks after the conditions of service of educators argued that up to twenty thousand teachers leave the profession every year (IOL News, 2008). In a reply to a parliamentary question, the Minister of Basic Education indicated that “between 2005 and 2008 24 750 teachers left the profession”. She further said that “South Africa is only producing 8000 teachers annually when about 20 000 teacher graduates are needed” (IOL News, 2010). A significant number of these teachers are poached by overseas countries with promises of better conditions of service and in particular better salaries. Of concern is the fact that South Africa is losing the best teachers in scarce skills areas like mathematics, science, technology and languages. One teacher Dudley Stuurman who is qualified to teach mathematics up to Grade 12 pointed out that he is leaving the country to go and teach in Bahrain in view of the fact that “the R6500.00 I get after tax is not enough for me to pay for a bond and a car “. Teachers complain bitterly that on the salary that they receive it is extremely difficult for them to qualify for bonded houses neither do they qualify to get the free RDP houses government provides to the needy. Recruitment agencies have reported that they receive up to 250 calls a month from teachers interested in being placed on their waiting list for possible opportunities to teach abroad where they are likely to receive up to three times the salary they receive in South Africa (Footsprint Recruiting, 2009). The

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Department of Basic Education is now recruiting educators at countries such as Zimbabwe and Cuba particularly in areas such as mathematics, science and technology. This practice defeats the country’s skills development agenda given the fact that after the contracted period of work the expatriate teachers will simply pack their bags and leave for their homelands without having transferred the requisite skills to local teachers. It is therefore not surprising to see a significant number of educators leaving the profession for better job avenues elsewhere. The Department of Basic Education has introduced a performance based reward system called the Integrated Quality Management System (IQMS) in an effort to enhance quality assurance in the teaching fraternity. The public was informed that “IQMS signals a new approach to performance evaluation in the South African school system” (Report on the IQMS, 2006). Teachers were to be remunerated in accordance with their performance in and outside of the classroom. However for teachers to be adequately rewarded for their performance there is a need for the evaluation process to be conducted by properly trained managers. The reality in South Africa is that the Development Support Groups (DSG’s) consisting of the teachers’ immediate supervisor the Head of Department (HoD) and a peer educator have been found wanting with regard to capacity in implementing the basic principles of the IQMS (SADTU-The Voice, 2009). The end result has been that almost all educators in the system have been receiving the 1% once off annual amount based on “performance” irrespective of whether the teachers has been providing a quality service or not. The fact is matric results in South Africa have been progressively declining in quality over the years coupled with the poor performance of learners in mathematics and science, and in international literacy assessments ( compared with their peers internationally ( City Press, 3 July 2011). This is indicative of amongst others the general discontent of educators with their condition of service and in particular the poor salaries they receive. LABOUR DISPUTES One of the fundamental reasons behind the massive migratory movement of teachers from the professions has been demonstrated over the years by the high number of teacher’s strikes in particular over poor salaries. Haffajee and Bisseker (2002; 30-32) point out that teacher’s widespread demonstrations, picketing and strikes has been the order the order of the day in South Africa. Almost every year teachers in the public service engage in organized and wildcat strikes over the conditions that they find themselves in. More often than not the strikes end not because teachers are happy with the outcome of salary negotiations, but rather because they feel the pinch of the salary deductions that are to be effected on their salaries in line with the principle of no work, no pay as enshrined in the Labour Relation Act (Act 66 of 1995). The teacher’s strikes have become an annual ritual with the issue of salaries always at the centre of the dispute between the employer and the employees. In an effort to provide their kids with quality education, many parents are taking their children out of the public schooling system and enrolling them in private schools despite the exorbitant monies they have to pay. This signals a motion of no confidence in the public schooling sector largely as a result of the unending teachers strikes bedeviling this sector. Bernstein (2010) argues that “these strikes have highlighted the government’s failure to improve apartheid era education levels that have South Africa as one of the most unequal societies in the world. A doubling of the education budget to R165.1 billion ($22.4 billion) in the last five years has failed to reverse a decline in the number of educators leaving the profession.

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DEPLOYMENT & REDEPLOYMENT In allocating staff to classes, account should be taken of the qualities, experience and expertise of teachers and matching these to curricular objectives. Where applicable, the redeployment of teachers should be carefully planned and regularly reviewed to good effect (IIEP, 2009). With the advent of democracy it was hoped that teachers in historically advantaged schools would be willing to contribute to the democratic project by offering to be redeployed to historically disadvantaged schools with high intake of learners and a poor resource base. The intention was also to achieve a reasonable ratio of one teacher to 30-35 learners. However only a negligible number of teachers took up this offer. This has left a bitter taste for predominantly African (black) teachers who have not seen the fruits of integration as envisaged by the democratic project. Many disillusioned teachers left the profession and opted to take severance packages. Included in this group were some of the most experienced members of the profession. With the subsequent exodus of teachers from the profession, government was compelled to rehire the retired teachers and to lure them back meant the negotiation of compromises which included offering these teachers senior management positions in the schools (Chudnovsky, 1998:1). This move generated a great deal of bitterness amongst teachers left in the profession and led to subsequent resignations owing to the perception that they were not taken seriously as working professionals. Teacher disillusionment has also been caused by what is referred to as cadre deployment, where members of the ruling party get preference over promotional posts. While other teachers with the requisite skills, experience and qualification may spend their entire career as Post level one educators (entry level), members and leaders of the South African Democratic Union (SADTU) which is an alliance partner to the ruling party, the African National Congress (ANC) get preferential treatment when it comes to promotional posts in the public sector. This occurs irrespective of whether these members are qualified or not (News24.2011) A lot of teachers and, civil society and members of the public have bemoaned this practice as part of the spoils system the ruling party is renowned for. The practice has had an attendant effect of demoralizing and demotivating committed and competent teachers who are ultimately lost to the profession because they cannot stomach this blatant system of patronage and being overlooked despite their competency. CONCLUSION AND RECOMMENDATIONS The legacy of apartheid has left the profession in dire straits. Hopes that the advent of democracy will tilt the scale in favour of the professionalization of the teaching profession have not materialized as expected. The massive financial injection in education has not been met with the concomitant investment in the teacher as one of the most fundamental constituent part of the education milieu. In order to halt the high teacher turnover, the following recommendations can arrest this negative trend:  Decisive well thought measures over and above the Fundza Lushaka bursary scheme need to be

commissioned to market the attraction of teaching as a profession.  Competitive remuneration packages have to be offered to teachers almost equal to those offered

by independent schools to halt this migration.  The professionalization of teaching not as a theory but rather in practical terms.

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 Incentives for teachers who continuously produce good results is necessary in order to motivate and inspire them to remain in the profession.

 Massive investment in infrastructure development seeing that one of the causal factors of high pupil-teacher ratio is the shortage of schools particularly in rural areas.

 Enforcement of strict disciplinary measures on learners will restore the confidence of teachers in the profession and make them buoyant to go an extra mile in providing quality education to learners.

 To seriously invest in the area of teacher training and development unlike the current trend where teachers are trained in the implementation of a new curriculum in 5 days and be expected to be competent.

 Reopening of teacher training colleges to cope with the increased demand for teachers.

REFERENCES Beardwell, I. and Holden, L. 2001. Human Resource Management: A Contemporary Approach, Essex: Pearson Education. Bernstein, A. 2010. 75-80% of schools dysfunctional, Report by the Johannesburg Research Institute. Bull, AIF. 2005. Mini Thesis in partial fulfillment of the requirements for the degree of Industrial Psychology, University of Western Cape. South Africa. City Press, 3 July 2011. Better off than Education, Report on results of Annual National Assessment Test. Chisolm L, Hoadley U, wa Kivulu M, Brookes H, Prinsloo C, Kgobe A, Mosia D, Narsee H and Rule S. 2005. Educator Workload in South Africa. Pretoria: HSRC Press. Chudnocsky, D. 1998. The big bungle, Teacher Redeployment in South Africa, Africa Files:Vol 13 (2). Department of Basic Education, 2011. [Web:] www.education.gov.za/ [Date of Access; 15 November 2011]. Department of Education, 2008. Funza Lushaka Bursary Scheme, Pretoria: Government Printers. Footprints Recruitment, 2011. Teach English Overseas, [Web:] www.footprintsrecruiting.com/ [Date of Access: 14 November 2011]. Haffajee, F. and Bisseker , C. (2002:31). Teachers give revised version the Star of approval, Financial Mail, 2009. Hall, E, Altman, M, Nkomo N, Peltzer K, and Zuma K, 2005. The Potential Attrition in Education: The Impact of Job Satisfaction, Morale, Workload and HIV & AIDS. Pretoria: HSRC Press. Huebler, F. 2008. Pupil Teacher in Secondary Schools, International Education Statistics. International Institute for Education Planning (IIEP) 2009. The quality indicators, [Web:] http://hmie.gov.uk/documents/publication/cd/content/parts/part03_27.htm [Date of Access: 10 September 2011]. IOL News, 2008. Teacher Exodus, [Web:] www.iol.co.za/south-africa/teacher-exodus-1.411686 [Date of Access: 11 November 2011].

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IOL News, 2010. Crisis looms as teachers quit in droves. [Web:] www.iol.co.za/news/...crisis-looms-as- teachers-quit-in-droves-1.468... [Date of Access: 16 October 2011]. Jacobs, T.O. 1970. Leadership and Exchange in Formal Organizations, Virginia: HumRRO. Jarvis, M. 1999. Teacher- Pupil Ratios, Report to Kwazulu Natal Portfolio Committee on Education. Kayuni, H. & Tambulasi, R. 2007. Teacher Turnover in Malawi’s Ministry of Education: Reality and Challenges, International Education Journal. Vol 8 (1) 89-99. Look Local Newspaper. 22 August 2011 [Web:] www.looklocal.co.za/.../en/.../lenasia-news- general?...school... [Date of Access: 10 November 2011]. Milner, K. and Khoza, H. 2008.A comparison of teachers stress and school climate across schools South African Journal of Education, Vol 28:155-173. Moloi, K. 2008. An overview of Education Management in South Africa, South African Journal of Educatio, Vol 27(3) 463-476. News24, 2011. Mantashe defends ANC cadre deployment, [Web:] www.news24.com/Tag/Copanies/sadtu [Date of Access: 17 November 2011]. Organization for Economic Cooperation and Development (OECD). 2008. Improving School Leadership, Edited by Point, B, Nusche, D and Hopkins D (eds). Robbins, S.P, Odendaal, A. and Roodt, G. 2003. Organizational Behaviour: Global and Southern African Perspectives, Pretoria: Maskew Miller Longman. South Africa, 2007. Educators Laws Amendment Act, Act 31 of 2007. Pretoria: Government Printers. South Africa, 1998. Employment of Educators Act, Act 76 of 1998. Pretoria: Government Printers. South Africa, 1998. General Notice, Notice776 of 1998, Pretoria: Government Printers. South Africa, 1995. Labour Relations Act, Act 66 of 1995, Pretoria: Government Printers. South Africa, 1997. White Paper on Public Service Delivery, General Notice, Notice 1459 of 1997, Pretoria: Government Printers. South Africa, 20 June 2006. Performance Based Rewards, Report to the Portfolio Committee on IQMS. Pretoria: Government Printer. The Voice -South African Democratic Teachers Union, (SADTU). 2009. August. [Newsletter]. BIOGRAPHY PM Mampane is Lecturer: Department of Public Management, Tshwane University of Technology, Prvate Bag X680, Pretoria 0001

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Tel (012) 382 9162 Fax: (012) 382 9042 Email: [email protected]

THE IMPACT OF MECHANICAL GUIDANCE AND JUSTIFICATION REQUIREMENT ON JUDGMENT OF AUDITORS OF DIFFERENT RANKS IN MATERIALITY

DETERMINATION Juthathip Audsabumrungrat, Chulalongkorn University

Sompong Pornupatham, Chulalongkorn University

ABSTRACT

This paper examines the impact of providing mechanical guidance and justification requirement on decision making of audit managers and audit seniors of Big N firms in planning materiality determination. This paper fills the gap by examining materiality decision in the planning stage as previous research papers have focused mostly either on materiality decision at later auditing stages or on materiality decision on accounting issue and accounting restatement. Using an experimental methodology, we find that first the mechanical guidance could limit attention of auditors of both ranks and thus weaken their risk awareness. Second, justification requirement could increase cognitive effort of audit managers but could not significantly influence audit seniors. Finally, we do not find the interaction effect of mechanical guidance and justification on both audit managers and audit seniors. This paper provides useful implications for standard setters, regulators as well as financial practitioners by shedding light on the limitation of providing mechanical guidance in planning materiality determination and emphasizing the benefits of justification requirement, which likely depend upon either the familiarity with the justification task or auditors’ roles or both. KEYWORDS: guidance for materiality, justification requirement, audit planning INTRODUCTION

Following the collapse of Enron, a greater number of public users of audited financial statements have questioned the audit materiality of the financial reports, which in turn erodes the creditability of the financial statements. Materiality is viewed as an excuse for auditors to avoid litigation. Determining overall materiality or materiality for planning is important for auditors because it affects the whole auditing process. Big audit firms have provided guidance for setting materiality levels, such as certain percentages of earnings before taxes, which we call mechanical guidance hereafter. But one large audit firm in Thailand ceases providing mechanical guidance for materiality determination this year. Since types of decision aids or guidelines have differing impacts on judgment performance (Asare and Wright, 2004), this paper investigates the impact of providing mechanical guidance on auditors’ judgment on planning materiality determination. Justification is found to increase auditors’ judgment performance (Ashton, 1992; Wheeler and Arunachalam, 2008). This paper examines the main effect of justification requirement on auditors’ planning of materiality determination. Besides the environmental factors, this paper also studies a personal factor captured by professional rank.

This paper would fill the gap by examining materiality decision in the planning stage as previous research papers have focused mostly either on materiality decision at later auditing stages, such as recording or

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waiving audit differences (Hermanson, 1997; Braun, 2001; Esters and Reames, 1988; Morris and Nichols, 1988; Carpenter et al., 1994; Ng and Tan, 2007) or on materiality decision on accounting issue (Carpenter and Dirsmith, 1992) and accounting restatement (Chen et al., 2008). In addition, this paper would provide some insights for standards setting bodies and practitioners what types of materiality guidance should be provided to auditors as it presents the direct effects of both provided mechanical rule and justification. The next section discusses hypotheses development followed by the research methodology. The experimental result section discusses the impact of mechanical guidance and justification requirement on auditors’ judgment. The last section concludes this research. LITERATURE REVIEW Even though the materiality has become increasingly important for auditors, it is difficult to find the optimum materiality level which might be at different levels for different persons. The standard setters and regulators have put more effort into issuing the materiality guidance to accommodate auditors’ decision making. Some large audit firms have internally developed mechanic guidance and imparted it to their audit staff members to assist the latter when planning materiality so as to raise internal consistency in audit firms. But one big audit firm in Thailand starts using only materiality framework instead of providing mechanical guidance this year. This practice indicates that the mechanical guidance could present both advantages and disadvantages to an auditor when making a decision. Studies have shown benefits of mechanical guidance in raising efficiency (McDaniel, 1990), accuracy, consistency, and consensus (Ashton, 1992). On the contrary, some studies show the drawbacks, such as limiting thinking efforts (Todd and Benbasat, 1992; Asare and Wright, 2004; Wheeler and Arunachalam, 2008), especially when used with ill-structured tasks, and lowering thinking efforts toward preferential decision called confirmation bias (Bedard and Biggs, 1991). Based on the anchoring effect (Joyce and Biddle, 1981), the given mechanical guidance which suggests basis and percentage range for planning materiality determination is expected to limit auditors’ attention and induce auditors to ignore relevant risk factors. Specifically, we posit that auditors with the provided mechanical guidance would set higher planning materiality amount than those without the mechanical guidance. H1: In determining the planning materiality, auditors will set higher (lower) materiality amount when they are provided (not provided) the mechanical guidance. Justification is another technique that has been used to motivate people to increase cognitive and physical efforts to do the tasks, but this does not necessarily leads to performance improvement due mainly to the task complexity (Chang et al., 1997). When an individual is required to write down the evidence or reason to support his decision, it would require more cognitive effort and more deep thinking. Justification is found to increase accuracy and consistency of judgment (Ashton, 1992). On the contrary, when an individual is not required to provide justification, he could make a decision quickly and might not deeply and carefully think about relevant information. Auditors who are required to justify their planning materiality determination would think more thoroughly about relevant risks and be more aware of their decision. Thus, we hypothesize that auditors with justification requirement would concern more with relevant risks, which leads to lower materiality amount for planning. H2: In determining the planning materiality, auditors will set lower (higher) materiality amount when they are required (not required) to make justification.

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Even though the guidance and justification requirement were found to increase the accuracy of auditors’ judgment on classification of bond ratings, the interaction effect between these two factors has not been examined (Ashton, 1992). The justification requirement was found to remedy confirmation bias by forcing participants to deeply assess reasons to support their answers, whereas the factor evaluation checklist (structured checklist) could not reduce the confirmation bias occurring during information search strategies of tax professionals (Wheeler and Arunachalam, 2008). Explicitly, this paper posits that auditors who are required to justify their decisions would set lower materiality amount than those without justification requirement when auditors are provided the mechanical guidance. H3.a: Under the availability of mechanical guidance, auditors with justification requirement will set lower materiality amount than those without justification requirement. When auditors are not provided with the mechanical guidance, they are not limited in their scope of thinking. Justification requirement is an incentive tool to encourage auditors to think more deeply and thoroughly through relevant risk information. As a consequence, without mechanical guidance, auditors who are required to justify their decisions would think more deeply and carefully of all relevant information. Specifically, this paper posits that without mechanical guidance, auditors with justification requirement would set lower materiality amount than those without justification requirement. H3.b: Without the mechanical guidance, auditors with justification requirement will set lower materiality amount than those without justification requirement.

Besides the environmental factors, guidance, as well as justification, personal factors are found to affect auditors’ judgment performance (Tan and Kao, 1999; Tan et al., 2002; Chang et al., 1997; Rose, 2007; Agoglia et al., 2009). Since different auditor levels performs different task demands, the importance of each attribute of each auditor level in performing assigned tasks successfully would be different (Emby and Etherington, 1996; Tan and Libby, 1997; Tan, 1999). During the planning stage, auditors must understand their client’s business and assess engagement and inherent risks. Audit managers are likely to perform less structured tasks, such as evaluating client plan, assessing management attitude or aggregating risk assessment, while audit seniors perform more structured tasks, such as determining ownership of entity or determining unusual accounting policies (Abdolmohammdi, 1999). Since managers encounter various pressures, both outside and inside audit firms, they manage and balance pressures in order to succeed in their career. Their tacit managerial skills become one of the most important attributes for their success (Tan and Libby, 1997). In addition, experience with the task will enable auditors to develop their knowledge which leads to higher performance. Hence, this paper posits that a higher professional rank auditor (manager level) can better judge on planning materiality by incorporating more relevant risks in comparison with a lower rank auditor (senior level). H4: Regardless of the effect of guidance or justification requirement, audit managers could incorporate more related risk factors or set lower planning materiality amount than audit seniors. METHODOLOGY Participants and procedure We engaged 85 audit managers (mean audit tenure = 10 years) and 123 audit seniors (mean audit tenure = 4 years) from Big N firms in Thailand but excluded one audit manager and three audit seniors as they

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failed to answer the experimental case completely. Almost all of the participants have audited manufacturing companies and ninety-one percent of the participants reported their familiarity with their firms’ mechanical guidance. We separately conducted our experiment during in-house training sessions run by each audit firm. The different experiment sessions did not significantly impact planning materiality determination (p = 0.09). We did not put a constraint on time in our experiment as it could impact participants’ decision (Ordonez and Benson, 1997; Glover, 1997; McDaniel, 1990). Each session took approximately 30 minutes. The combination of the mechanical guidance and the justification requirement yielded four case types. Participants were randomly assigned to each case.

Table 1: Case material based on mechanical guidance and justification requirement

With Mechanical guidance

Without Mechanical guidance

With Justification requirement Case 1 Case 3 Without justification requirement Case 2 Case 4 This table shows the combination of two environmental factors in constructing the experimental cases All participants received a package of case comprising client’s background information, the two-year consecutive financial statements, and distinctive answer sheet for determining planning materiality amount. After completing the materiality task, they provided demographic information. Independent variables Our research design is a 2 x 2 x 2 between subject variables, with mechanical guidance (provided versus not provided), justification requirement (required versus not required), and auditor level (manager versus senior) identified by each audit firm. Under the provided mechanical guidance, the following instructions adopted from the Audit and Accounting Manual (2005) of the American Institute of Certified Public Accountant (AICPA) are shown step by step in the case material:

Step 1: Use 5% - 10% of earnings before income taxes Step 2: Use 1% - 1.5% of total assets or total revenues, whichever is higher Step 3: Take the higher amount of (1) or (2) as planning materiality

In the absence of mechanical guidance, we provide only materiality definition as “The planning materiality level will be used to determine the audit procedures in order to get sufficient evidence for issuing an audit opinion and to assure that financial statements have no material misstatement or errors that could impact the decision of financial statement users”. The justification condition requires participants to write down their reasons to support their determination of materiality. We did not manipulate in such a way that their reasons will be reviewed by their supervisors. Thus, the justification condition in this paper could be a weak form of justification requirement. Under no justification requirement, participants are not required to write any reasons to support their decision. Dependent variable Participants are required to provide the basis and percentage used for calculating the materiality amount. Then, the final amount of materiality will be calculated and used as dependent variable.

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Case Materials We initially used material events as indicated by Pinsker et al. (2009) because they included both quantitative and qualitative material events that auditors should be concerned with in materiality judgment. Some inherent risks and control risks of inventories and fixed assets were added to the case materials. The client for this case is a manufacturer of steel assemblies. We selected manufacturing industry because specific industry knowledge, such as that of financial institution industry, is not required. The overall information of client (“ABC public company”) and summary of comparative financial information for two years were given. The current year in the case presented a profit from selling obsolete machines for about 3.48 million Baht, which was recognized as “other income”. The current machinery was expected to be in use for the next seven years. This implies that gain from selling obsolete machines in the current year was a non-recurring item which should be excluded before calculating materiality for planning. In addition, the company invested in one associated company four years ago, but this year it has just received dividend for the first time in the amount of 4.4 million Baht. This dividend income was expected to be excluded before calculating materiality for planning. The case materials were reviewed and commented by one senior manager and two audit partners from two big audit firms. We manipulated the financial statement by showing high total assets (192.72 million Baht) while having earnings before taxes of only 17.24 million Baht. If the participants followed the guidance, they would set the materiality amount 1%-1.5% of the total assets. If participants took into account the nature of business and concerned more relevant risks, they would use earnings before taxes as the initial base for materiality determination. Since the case states that the company has just received dividend from an associated company invested four years ago and this year the company has gains by selling fixed assets, which is not expected to recur for another seven years, participants would adjust for these two one-time items before calculating materiality for planning.

RESULTS AND DISCUSSIONS Hypothesis 1 expects that the materiality amount determined by auditors with the existence of mechanical guidance will be higher than that set by auditors without guidance. As predicted, Table 2 shows that the main effect of mechanical guidance is statistically significant (p = 0.0011) and Table 3A also reveals that the natural logarithm of materiality amount under guidance provision is higher than that under no guidance condition (6.67 versus 6.40; p = 0.0008).

Table 2: ANOVA results of natural logarithm of materiality amount determined by auditors Source of variation Sum of Squares df Mean Square F P Between-Subjects Guidance 3.498 1 3.498 10.98 0.0011*** Justify 0.975 1 0.975 3.06 0.0819* Level 0.072 1 0.072 0.23 0.6343 Guidance x Justify 0.005 1 0.005 0.02 0.8997 Guidance x Level 0.027 1 0.027 0.08 0.7730 Justify x Level 0.832 1 0.832 2.61 0.1077 Guidance x Justify x Level 0.076 1 0.076 0.24 0.6255 Error (Total) 59.904 195 0.319 This table shows main significant effect of guidance and marginal impact of justification requirement. ***, ** and * indicate significance at 1, 5, and 10 percent levels, respectively

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Table 3A: Main effect and Two-way interaction of Mechanical guidance and Justification requirement: Natural logarithm of Materiality Amount (standard deviation) for all participants Mechanical guidance

Justify No Justify Main effect of guidance

Compare contrast

Present 6.61 6.73 6.67 GJ – GNJ = -0.12 (0.37) (0.50) (0.44) (p = 0.31) Cell GJ = 49 Cell GNJ = 49 Cell G = 98 Absent 6.33 6.46 6.40 NGJ – NGNJ = -0.13 (0.59) (0.73) (0.66) Cell NGJ = 50 Cell NGNJ = 48 Cell NG = 98 (p = 0.26) Main effect of 6.47 6.60 Justification (0.51) (0.64) Cell J = 99 Cell NJ = 97 This table presents the natural logarithm of materiality amount rather than materiality amount for each combination of guidance and justification requirement. This transformation is done to comply with homogeneity of variance and normality assumptions. The second hypothesis expects that justification requirement could increase thinking effort of auditors. The results in Table 2 reveal that justification requirement marginally affects materiality determination of auditors (p = 0.0819). Table 3B shows the marginal impact of justification requirement (6.47 for justification versus 6.60 for no justification; p = 0.1). Table 3B: Main effect and Two-way interaction of Justification requirement and Auditor ranks: Natural logarithm of Materiality Amount (standard deviation) for all participants Justification requirement

Managers Seniors Main effect of Justification

Compare contrast

Justify 6.37 6.55 6.47 JM – JS = -0.18 (0.56) (0.47) (0.51) (p = 0.15) Cell JM = 41 Cell JS = 58 Cell J = 99 No justify 6.65 6.56 6.60 NJM – NJS = 0.09 (0.46) (0.75) (0.64) Cell NJM= 50 Cell NJS = 56 Cell NJ = 97 (p = 0.42) Main effect of 6.51 6.55 Auditor ranks (0.53) (0.62) Cell M = 82 Cell S = 114 This table presents the natural logarithm of materiality amount rather than materiality amount for each combination of justification requirement and auditor ranks. This transformation is done to comply with homogeneity of variance and normality assumptions. Table 2 illustrates that the interaction effect of guidance and justification insignificantly impacts materiality determination, while the main effect of mechanical guidance significantly influences the materiality determination and the main effect of justification marginally affects the materiality determination (p value of interaction effect = 0.8997; p value of main effect of guidance = 0.0011; p value of main effect of justification = 0.0819). This suggests that there would not be interaction effect between mechanical guidance and justification requirement. Hypotheses 3a and 3b predict that justification requirement could increase thinking efforts and lead to assessing relevant information more deeply and thoroughly both in the presence and absence of mechanical guidance. Specifically, hypothesis 3a posits that under the availability of mechanical guidance, auditors with justification requirement determine lower materiality amount than those without justification requirement. We compare mean of natural logarithm of materiality amount of Cell GJ in Table 3A (6.61) with mean of natural logarithm of materiality amount of Cell GNJ in Table 3A (6.73). The result in compare contrast column of Table 3A does not statistically support our hypothesis 3a (p =

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0.31). In the absence of mechanical guidance, the natural logarithm of materiality amount under justification requirement is insignificantly lower than that under no justification requirement (6.33 vs. 6.46, respectively, p = 0.26), inadequately supporting hypothesis 3b. These results indicate that justification requirement could not significantly reduce the cognition bias of the existence of mechanical guidance Hypothesis 4 expects that audit managers will perform better than audit seniors as the former will use their tacit managerial knowledge and their experience to incorporate and assess relevant risks. The planning materiality of audit managers is expected to be lower than that of audit seniors. Unexpectedly, Table 2 disproves our expectation as the main effect of professional level is insignificant (p = 0.6343). When we provide mechanical guidance to both professional ranks, audit managers set insignificantly lower materiality than audit seniors (6.64 vs. 6.70, respectively, p = 0.59 see Table 3C). Both audit managers and audit seniors set almost the same materiality level when they are not provided the mechanical guidance (6.39 vs. 6.40, respectively, p = 0.93 see Table 3C). Under justification requirement, audit managers set insignificantly lower materiality than audit seniors (6.37 vs. 6.55, respectively, p = 0.15 see Table 3B). When they are not required to justify their answers, audit managers insignificantly underperform audit seniors. The materiality level of audit managers is unnoticeably higher than that of audit seniors (6.65 vs. 6.56, respectively, p = 0.42 see Table 3B). Although the difference in materiality level between audit managers and audit seniors under each condition of guidance and justification is insignificant, the impact of justification requirement on audit managers might be different from that on audit seniors. We will further investigate this in the next section. Table 3C: Main effect and Two-way interaction of Mechanical guidance and Auditor ranks: Natural logarithm of Materiality Amount (standard deviation) for all participants Mechanical guidance

Managers Seniors Main effect of Guidance

Compare contrast

Present 6.64 6.70 6.67 GM – GS = -0.06 (0.48) (0.42) (0.44) (p = 0.59) Cell GM = 40 Cell GS = 58 Cell G = 98 Absent 6.39 6.40 6.40 NGM – NGS = -0.01 (0.55) (0.74) (0.66) Cell NGM= 42 Cell NGS = 56 Cell NG = 98 (p = 0.93) Main effect of 6.51 6.55 Auditor ranks (0.53) (0.62) Cell M = 82 Cell S = 114 This table presents the natural logarithm of materiality amount rather than materiality amount for each combination of mechanical guidance and auditor ranks. This transformation is done to comply with homogeneity of variance and normality assumptions. Additional analysis

We divided the samples into audit manager group and audit senior group; and separately tested the impact of mechanical guidance and justification on both groups. Audit managers are significantly affected by both mechanical guidance and justification requirement (p of main effect of guidance = 0.028, p of main effect of justification = 0.0149, Table 4), while audit seniors are significantly affected only by mechanical guidance (p-value of main effect of guidance = 0.0108, p-value of main effect of justification = 0.9202, see Table 5). There is no interaction effect between guidance and justification factors for both audit managers and audit seniors (see Table 4 and Table 5).

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Table 4: ANOVA Results of natural logarithm of materiality amount determined by Audit managers Source of variation

Sum of Squares

df

Mean Square

F

p

Between-Subjects Guidance 1.253 1 1.253 5.01 0.0280** Justify 1.551 1 1.551 6.20 0.0149** Guidance x Justify 0.052 1 0.052 0.21 0.6502 Error (Total) 19.507 78 0.250 This table presents the ANOVA results and shows main significant effect of guidance and marginal impact of justification requirement on audit managers. ***, ** and * indicate significance at 1, 5, and 10 percent levels, respectively Table 5: ANOVA Results of natural logarithm of materiality amount determined by Audit seniors Source of variation

Sum of Squares

df

Mean Square

F

p

Between-Subjects Guidance 2.470 1 2.470 6.73 0.0108** Justify 0.003 1 0.003 0.01 0.9202 Guidance x Justify 0.025 1 0.025 0.07 0.7944 Error (Total) 40.398 110 0.367 This table presents the ANOVA results and shows main significant effect of guidance and marginal impact of justification requirement on audit seniors. ***, ** and * indicate significance at 1, 5, and 10 percent levels, respectively According to contrast comparison for audit manager group in Table 6, justification requirement could induce audit managers to think more carefully when not being provided with mechanical guidance than when being provided with mechanical guidance (difference of natural logarithms of materiality amount between in the presence and absence of justification under no guidance condition = -0.32, p = 0.04, while that under guidance condition = -0.23, p = 0.16). Even though audit managers are required to justify their answers, they are likely to limit their attention to the provided guidance. This is supported by the natural logarithm of materiality amount determined by audit managers with mechanical guidance of 6.52, while that without mechanical guidance is 6.23 under justification condition (p = 0.06, see Table 6). Table 6: Main effect and Two-way interaction of Mechanical guidance and Justification requirement on Determination of materiality amount of Audit managers Mechanical Justify No Justify Main effect of Compare contrast guidance Guidance Present 6.52 6.75 6.64 GJM – GNJM = -0.23 (0.39) (0.54) (0.48) (p = 0.16) Cell GJM = 20 Cell GNJM = 20 Cell GM = 40 Absent 6.23 6.55 6.39 NGJM – NGNJM = -0.32 (0.65) (0.35) (0.55) (p = 0.04) Cell NGJM = 21 Cell NGNJM =21 Cell NGM = 42 Main effect of 6.37 6.65 Justification (0.56) (0.46) Cell NJM = 41 Cell NJM = 41 Compare contrast GJM – NGJM

= 0.29 GNJM – NGNJM

= 0.20

(p = 0.06) (p = 0.21) This table presents the natural logarithm of materiality amount rather than materiality amount for each combination of mechanical guidance and justification requirement for audit managers. This transformation is done to comply with homogeneity of variance and normality assumptions.

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Table 7: Main effect and Two-way interaction of Mechanical guidance and Justification requirement on Determination of materiality amount of Audit seniors Mechanical Justify No Justify Main effect of Compare contrast guidance Guidance Present 6.68 6.72 6.70 GJS – GNJS = -0.04 (0.34) (0.48) (0.42) (p = 0.80) Cell GJS = 29 Cell GNJS = 29 Cell GS = 58 Absent 6.41 6.39 6.40 NGJM – NGNJM = 0.02 (0.53) (0.93) (0.74) (p = 0.91) Cell NGJS = 29 Cell NGNJS =27 Cell NGS = 56 Main effect of 6.55 6.56 Justification (0.47) (0.75) Cell NJS = 58 Cell NJS = 56 Compare contrast GJS – NGJS

= 0.27 GNJS – NGNJS

= 0.33

(p = 0.10) (p = 0.05) This table presents the natural logarithm of materiality amount rather than materiality amount for each combination of mechanical guidance and justification requirement for audit seniors. This transformation is done to comply with homogeneity of variance and normality assumptions.

According to contrast comparison for audit senior group in Table 7, justification requirement could not significantly impact audit seniors when performing the planning materiality determination task. Under both conditions of with and without mechanical guidance, the natural logarithm of materiality amount determined by audit seniors who justified and those who did not justify is not significantly different (6.68 vs. 6.72 for auditors who justified and not justified, respectively in the presence of mechanical guidance, 6.41 vs. 6.39 for auditors who justified and not justified, respectively in the absence of mechanical guidance). However, it could not be concluded that justification requirement would not induce more deep thinking from audit seniors. Audit seniors are usually engaged in justification process during audit review either in the form of writing or oral communication. Furthermore, audit seniors are normally required to write justification to support audit evidence, and the practice would be beneficial for them in justifying their decisions. On the other hand, audit managers’ main responsibility is to review the audit results and they infrequently write a justification. The unfamiliarity with the justification task necessitates the managers to devote more cognitive efforts to writing the reasons, which also leads to better materiality determination. One might argue that the materiality determination task might be so complex that the audit seniors’ judgments could not be improved by justification requirement because justification effect depends on task complexity (Chang et al., 1997). However, in this case almost all of the participants reported that they had task experience in materiality determination (i.e., mean task experience is two years and only three seniors reported that they did not have task experience). Furthermore, forty-five percent of the audit seniors who were not required to justify provided their reasons in the answer sheet, whereas merely twenty-four percent of the audit managers whose justifications were not required gave the reasons in the answer sheet. Another possible explanation is that justification level manipulated in this paper might be too low to encourage audit seniors to seriously put in their thinking efforts because their answers would not be reviewed by their audit firms and their answers would remain undisclosed. According to the above additional analysis, audit managers are affected by both the mechanical guidance and justification factors. Specifically, the presence of mechanical guidance could limit attention of audit managers solely to the guidance and could lead the managers to concern less with relevant risks. The justification could induce audit managers to think more deeply and concern more with relevant risks. On the contrary, justification could not affect audit seniors in this task of planning materiality determination. However, the presence of

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mechanical guidance could also limit attention of audit seniors. These results give rise to an implication that the impact of justification on judgment of auditors might depend on either the familiarity with justification task or auditors’ roles or both. CONCLUSION

This paper investigates the question of whether the availability of mechanical guidance limits auditors’ attention to relevant risks when determining materiality for planning. Justification requirement is further examined to determine whether it increases thinking effort and can remedy the cognition bias arising from the existence of mechanical guidance. We also consider whether professional rank has an impact on materiality determination.

Consistent with our expectation, our experimental results suggest that the mechanical guidance could limit attention of auditors. Specifically, we find that the materiality determination of auditors with the existence of mechanical guidance is significant higher than that of auditors without mechanical guidance. This indicates that auditors with mechanical guidance concern less with relevant information in the case. Although one might consider justification requirement in this paper a weak form of justification as participants wrote their thinking reason to the experimenter, our result shows that justification requirement could induce audit managers to deeply contemplate relevant risk information in the case, but justification requirement could not influence judgment of audit seniors. This might be explained by the fact that audit seniors are normally required to provide justifications and have familiarity with the task and that their answers are not reviewed by their superiors and their names remain undisclosed. The results of this research study will contribute a new insight to the knowledge pool of existing auditing literature. While most prior research focuses on materiality decision in later stages of auditing, this study fills the gap in materiality literature by studying at the planning stage of audit. This would offer some thoughts for standard setters, regulators, and practitioners to exercise greater caution when implementing mechanical guidance through auditors. Justification requirement provides opportunities for improving the quality of auditors’ judgment but its effect likely depends on either the familiarity with the justification task or auditors’ roles or both.

The experimental study described in this paper has some limitations. First, this paper includes not only ten material events selected from Pinsker (2009), which subsequently are assigned as either low or high risks, but also some inherent risks and control risks. However, these material events do not necessarily reflect a realistic decision environment. Second, the experimental instrument is in the form of paper-based case while auditors normally use computer aids in practice. This could limit the auditors’ ability to search for more information as they do in real practice. Third, the experimental procedure asks individual auditor to set planning materiality, while in practice there would be a discussion among engagement team before determining planning materiality. Fourth, only two types of guidance are examined in this paper. There might be other decision aids that could be used with greater success. Finally, we only compare justification requirement to no justification requirement. Other forms or types of justification requirement that could impact auditors’ judgment (Agoglia et al., 2003) are not investigated in this paper. Since the reviewer’s preference was found to influence auditors’ evaluation of evidence and cognitive effort (Peecher, 1996; Tan et al., 1997) and supervisor preference could influence subordinate to bias his decision toward supervisor preference (Piercey, 2009) as supervisor was found to give higher performance rating to subordinate who had goal-congruence and had strong justification (Tan and

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Shankar, 2010), future research might investigate how the preference of reviewer or supervisor impacts auditors’ materiality determination and how it influences written justification. In addition, types of justification, such as supporting, balance, and component justification memos, could be examined for planning materiality decision.

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problem-solving ability, task complexity,” Journal of Accounting Research, vol. 37, p. 209-223. -----, & Libby, R. (1997) “Tacit Managerial versus Technical Knowledge as Determinants of Audit Expertise in the Field,” Journal of Accounting Research, vol.35, p. 97-113 -----, & Shankar, P.G. (2010) “Audit Reviewers’ evaluation of Subordinates’ Work Quality,” Auditing: A Journal of Practice & Theory, vol.29(1), p. 251-266. -----, Ng, T.B.P. & Bobby, W.Y.M. (2002) “The effects of task complexity on auditors’ performance: The impact of accountability and knowledge,” Auditing: A Journal of Practice & Theory, vol.21 (2), p. 81-95. Todd, P., & Benbasat, I. (1992) “The Use of Information in Decision Making: An Experimental Investigation of the Impact of Computer-Based Decision Aids,” MIS Quarterly, vol.16 (3), p. 373-393. Wheeler, P.R., & Arunachalam, V. (2008) “The Effects of Decision Aid Design on the Information Search Strategies and Confirmation Bias of Tax Professionals,” Behavioral Research in Accounting, vol.20 (1), p. 131-145. BIOGRAPHY Juthathip Audsabumrungrat is a doctoral student at Chulalongkorn University. She can be reached at Chulalongkorn University, 254 Phayathai Road, Pathumwan, Bangkok Thailand. 10330,

[email protected] Sompong Pornupatham is Assistant Professor of Department of Accountancy, Faculty of Commerce, at Chulalongkorn University. He can be reached at Chulalongkorn University, 254 Phayathai Road, Pathumwan, Bangkok Thailand, 10330, [email protected]

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TIMED CORE PERFORMANCE INDICATORS: THE ROAD TO THE COMPANY’S OPTIMALPERFORMANCE

Bernard Morard, University of Geneva (UNIGE) Alexandru Stancu, University of Geneva (UNIGE)

Jeannette Christophe, University of Geneva (UNIGE)

ABSTRACT This paper studies the relationship between structural equation modeling and Balanced Scorecard in a Swiss non-profit establishment. Using financial and non-financial performance indicators collected directly from the organization, the paper proposes a rational construction and analysis of Balanced Scorecard by selecting the factual metrics for the right strategic areas. This choice is made by applying a sequence of Partial Least Squares in the proposed model. Furthermore, the approach establishes the cause-and-effect sequence originally defined by Kaplan and Norton as: the measures of organizational learning and growth will influence the measures of internal business processes which sequentially will impact the measures of the customer perspective which, lastly, will affect the financial indicators. It will be noted that the Kaplan and Norton model of Balanced Scorecard is different from the findings in this study, a case somehow too general to handle today’s complex market environment. Following this, the paper puts forward a time-managed approach to identify the evolution of the main contributors to the current company’s strategy as well as their behavior in the future organizational performance. The suggested approach will be applied and demonstrated in a detailed real case of a Swiss non-profit organization. INTRODUCTION An innovative approach of strategic management was introduced in the early 1990s by Robert Kaplan from Harvard Business School and David Norton, co-founder and president of Balanced Scorecard Collaborative Inc., based in Boston, USA. They named this approach the Balanced Scorecard (BSC). Pinpointing some of the drawbacks and ambiguity of previous management systems, the BSC method proposes a coherent guidance as to what companies should measure in order to “balance” the financial perspective.The BSC summarizes a series of performance indicators that offers executives a quick but comprehensive representation of their business. The BSC includes financial indicators that illustrate the outcomes of actions already taken and it complements the financial measures with operational indicators on customer satisfaction, internal processes, and the company's innovation and development activities – “operational measures that are the drivers of future financial performance” (Kaplan & Norton, 1992). However, one of the limitations of the BSC lies in its structure. Despite the fact that the authors provide us with some key points and describe the steps for building the BSC, the concepts are rather ambiguous and can be difficult to apply in an organizational environment.There are three main goals in this study. The first goal is to merge the above concepts and try to advance several statements for a representative construction of a BSC using the Partial Least Square (PLS) technique. The objective is to generate a realistic model that can be applied in any organization environment, thus modeling the concept of BSC. The second goal is to validate the assumptions with a nonprofit organization case where performance indicators selected will outline the different strategic perspectives, and a rational explanation for this selection is established. A cause-and-effect structure will be generated and clarifications made as to which

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strategic perspectives (latent variables) are impacting and which are to be influenced. One of the main conclusions of this example is that the Kaplan and Norton’s model of BSC is nothing more but a particular case of our conclusions. The final aim is to closely monitor on a timely basis the upmost indicators that impacted the organizational performance, indicators that will shape the future company’s strategy.The paper is structured as follows. In the next section, the main BSC concepts will be presented. The “idealistic” process of 4-axes construction is then highlighted followed by a logical structure- allowing for the identification of the number of strategic perspectives as well as the performance indicators connected to each perspective. A tentative modeling of BSC that can be implemented in any organization environment is put forward. This is pursued by a real example of a nonprofit establishment in which the PLS method is applied in order to build a coherent BSC. Finally, the key performance indicators are analyzed on a regular time basis in order to identify the ones that contributed most and shaped the current organizational strategy. Using this information, one is able better predict the future company trends and take enhanced corrective measures to quickly adapt in a challenging and complex organizational environment.

The Need for A New Validation Approach According to Kaplan and Norton, the BSC is a management tool (not only a measurement model) that enables companies to acknowledge their vision and strategy and convert into action. Consequently the BSC allows top management a thorough compilation that translates the organizational strategic goals into a coherent set of performance measures. It provides response across the internal company processes as well as external results in order to constantly advance strategic performance and outcomes. When completely set up, the BSC converts strategic planning from an abstract task into the fundamental point of an organization. As mentioned by Fielden’s (1999), companies worldwide start on influencing the ability of BSC for translating vision and strategy into measurable objectives.

The BSC can manage the base of the organization’s efforts in indentifying and communicating the crucial key interests to managers, employees, investors and even customers (Kaplan & Norton, 1993). With four strategic perspectives, the BSC reduce information excess by controlling the number of measures used and compels executives to concentrate on the handful of performance indicators that are most essential. Accordingly, it enables companies to contour financial results while simultaneously monitoring the resources and obtaining the intangible assets they would need for future development (Kaplan & Norton, 1996). The BSC poses managers with the facility to identify performance indicators that could accurately predict the wealth and health of an organization. By allowing the capacity to decode strategy in rapid and quantifiable actions, a BSC manages strategy in an organizational environmental and unveil hidden assets and information. Furthermore, by connecting both internal and external people with these strategies, recurrent learning and development can be achieved (Pineno, 2002). However, the BSC has drawbacks with some of its key assumptions and relations. Firstly, there is not a causal but rather a sound connection between the strategic areas analyzed. Nørreklit (2000) contends that customer satisfaction does not automatically create superior financial outcomes. Measuring the financial consequences of enhanced customer satisfaction or quality improvements involves a financial calculation. Sequences of action that produce a high ratio of customer value at low costs lead to good financial results. But this is not an issue of causality; it is commonsense since it is integrated in the concepts. Consequently, the BSC makes illogical suppositions, which may conduct to the anticipation of measures which are incoherent, causing sub-optimal performance. In addition, the BSC is not a representative strategic management tool mainly because it does not certify any rapport between organizational and

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environmental reality (e.g. competition). As a result, a discrepancy must be accepted between the strategy formulated in the actions actually undertaken, and the assumed strategy (Nørreklit, 2000). Within this broad-spectrum environment of ambiguity and criticism, some authors (Shields, 1997; Shields & Shields, 1998) have called on management accounting researchers to make better use of Structural Equation Modeling (SEM). Structural Equation Modeling is a statistical technique comprising a family of different methods (path analysis, Partial Least Squares models and latent variable SEM) that allows the simultaneous analysis of a series of structural equations. However, there appears to be some consensus that all SEM involve two characteristics: first, the estimation of multiple interrelated dependent relations between variables, and second the ability to represent latent variables in these equations while accounting for estimated measurement error connected to the unsatisfactory measurement of variables. These methods are particularly helpful when a dependent variable in one equation turn into an independent variable in another equation (Hair et al., 1998). An essential concern to log is the need of a significant sample size for the majority of SEM models. A suggested rule of thumb for latent variable SEM is a minimum sample size of 100 (Medsker et al., 1994). Furthermore, it has been advised that a sample volume of 200 may be required to produce valid fit measures and to prevent making inaccurate conclusions (Marsh, Balla, & McDonald, 1988; James & James, 1989; Boomsma, 1982; Medsker et al., 1994). In spite of these concerns, Smith and Langfield- Smith (2004) conclude in one of their management studies that eleven of the 20 surveys (55%) had sample volumes beneath the accepted threshold of 200. Even if the recommended sample size of 100 is considered the lowest bound of tolerability, three of the 20 researches (Magner, Welker, & Campbell, 1996, Chalos & Poon, 2000, Abernethy & Lillis, 2001) fall underneath this level, denoting that the conclusions drawn from these studies could be questioned. As a result of that, management accounting researchers may be restrained from using covariance based methods caused by the significant sample size requirements, and puts forward the statement that the technique is only appropriate in areas where theory is relatively robust. Despite the fact that these shortcomings are true for latent variable SEM techniques, Partial Least Squares (PLS) modeling presents an alternative.Compared to others, PLS regression is a fairly recent technique that generalizes and merges features from principal component analysis (PCA) and multiple regressions. It is specifically useful when require predicting a series of dependent variables from a (very) large sequence of independent variables (i.e., predictors). It was employed in the social sciences (specifically economics, Herman Wold 1966) but became popular first in chemometrics (i.e., computational chemistry) due in part to Herman’s son Svante, (Geladi & Kowalski, 1986) and in sensory evaluation (Martens & Naes, 1989). But PLS regression is also becoming an alternative in the social sciences as a multivariate method for non-experimental and experimental data alike (neuroimaging, see Mcintosh, Bookstein, Haxby, & Grady, 1996). It was first pioneered as an algorithm similar to the power method (used for calculating eigenvectors) but was rapidly retained in statistical milieu (Hervé, 2003). The usage of PLS, despite of its intrinsic limitations (specifically that it is a limited-information method, aimed to maximize prediction, rather than fit), figures out to be a way in which statistical modeling in management accounting research can move forward without the requirement to obtain large samples, something which management accounting researchers have usually found problematic. Another benefit of PLS is the method's ability to accommodate non-normal data, triggered by less demanding assumptions behind the technique (Smith & Langfield-Smith, 2004).Nevertheless, there is some misunderstanding in the terminology utilized in the PLS field. Herman Wold first introduced the notion of Partial Least

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Squares in his study about principal component analysis (Wold, 1966) where the NILES (nonlinear iterative least squares) algorithm was developed. This algorithm (and its extension to canonical correlation analysis and to specific situations with three or more blocks) was afterwards called NIPALS (nonlinear iterative partial least squares) (Wold, 1973; Wold, 1975). The notion of “PLS approach” is somewhat too broad and combines PLS for path models on one side and PLS regression on the other. Following a suggestion by Martens (1989), this study exploits the term PLS for Structural Equation Modeling to designate the use of “PLS Path Modeling” as illustrated in Figure 1. Figure 1: Example of PLS Path Modeling

Any PLS model is described by two key relations, the first named the outer model, illustrating the connection between the latent variable and its manifest variables and a second one called the inner model defining the relationships among the latent variables themselves. Relationships between the observed variables and the latent variables (outer model) Each latent variable jξ is implicitly explained by a group of observed variables jhx . Each observed variable is related to its latent variable by a simple regression: jhjjhjhjhx εξππ ++= 0 Relation between the latent variables (inner model) The causality model leads to linear equations connecting the latent variables:

1

2

Ind 1

Ind 2

Ind 3

w11 = Corr (Ind 1, Z1) . . . w13 = Corr (Ind 3, Z1) Ind 8

Ind 9 Ind 4

Ind 5

Ind 6

Ind 7

ξ1

η1

η2

w31 = Corr (Ind 8, Z3) w32 = Corr (Ind 9, Z3)

w21 = Corr (Ind 4, Z2) . . . w24 = Corr (Ind 7, Z2)

Variables are normalized after each step Iterate until convergence

β22 = RegCoeffZ (Z1,Z2 on Z3)

β 1 =

c or

r( Y 1

,Y 2)

β21 = RegCoeffZ (Z1,Z2 on Z3)

Y1 = Xw1 Z1 = β1Y2+ β21Y3

Y2 = Xw2 Z2 = β1Y1 + β22 Y3

Y3 = Xw3 Z3 = β21 Y1 + β22Y2

External estimation Internal estimation

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∑ ++= i

jijijj vξββξ 0

The latent variables related to jξ are divided into two categories: the precursors of jξ which are latent variables affecting jξ and the successors which are latent variables affected by jξ . For any precursor iξ of the latent variable jξ , the inner weight jie is equivalent to the regression coefficient of Yi in the multiple regression of Yj on all the Yi’s connected to the precursors of jξ . If iξ is a successor of jξ then the inner weights jie is equivalent to the correlation between Yi and Yj (Tenenhaus & Vinzi, 2004). The available software has been for many years LVPLS 1.8 developed by Lohmöller (1987, last existing version). Lohmöller has broadened the basic PLS algorithm in numerous ways and published all his research outcomes in 1989. More recently, an updated software has been elaborated by Chin (2001, for the last version, left still in beta test) entitled PLS-Graph 3.0. It included a Windows user- friendly graphical interface to PLSX, which is actually the initial engine for PLS path modeling existing in LVPLS 1.8. The only addition is a cross-validation of the path model parameters by jack-knife and bootstrap. Bootstrapping is the technique of gauging components of an estimator (for example its variance) by measuring those aspects when sampling from an estimating distribution. One typical option for computing distribution is the observed distribution of the empirical dataset. In the situation where a group of observed variables are assumed to be from an identically and independent distributed population, this can be solved by creating a number of resamples of the observations (and of same size of the observations), each of which is achieved by random sampling with replacement from the initial set of data. The benefit of bootstrapping compared to analytical techniques is its high simplicity - it is significantly easy to use the bootstrap in order to find estimates of standard errors and confidence intervals for complex estimators of the distribution, such as percentile points, proportions, correlation coefficients and odds ratios. Even if more, newer and more complex PLS programs are available today (e.g. SmartPLS), a greater examination of the PLS Path Modeling permitted us to develop our software from scratch with the aim of computing the path weighting scheme and the bootstrap validation procedure. Bonding Balanced Scorecard with Partial Least Squares Ittner and Larckner concluded in 1998 that "(...) decisions using multicriteria performance measurement systems should be computed using explicit, objective formula that prescribes the weights to be attached to each measure, or should be based on subjective evaluations where the weights to be attached to each measure is implicitly or explicitly chosen by the decision maker". This should be always considered when building, checking and validating assumptions of causality relationships between the performance indicators within the context of the BSC implementation in a company. While this might seem difficult from a practical perspective, the PLS technique offers a valid solution. As shown in Figure 2, the initial statements of causality relationships between the four strategic perspectives of the Kaplan and Norton’s BSC remain subjective. The use of a structural equations model is recommended to establish, in a more objective way, the intensity of the relations between the latent variables defined by groups of observed or measurable indicators. Indubitably, whereas the choice of the perspectives and the hypotheses that link them remain biased in the case of Kaplan and Norton, the model

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of structural equations aims "to provide a meaningful and parsimonious explanation for observed relationships within a set of measured variables" (MacCallum, 1995). Figure 2: Generic Relationship Map (Kaplan and Norton 1996) In a structural equations approach the latent variables cannot be assessed in a direct and precise way. Consequently, these latent variables require measurable variables, which are described through performance indicators that can be directly observed and evaluated. The structural equations method is derived from the principal component analysis of the data (confirmatory or exploratory, in line with each specific case) to distinguish and validate the model of the causal relationships which represent the focal point of BSC. It is essential to highlight that one of the restrictions intrinsic in the application of a system of structural equations in the BSC milieu, are the statistics requirement expected for the data validation, which compels a significant quantity of observations in order so as to boldly validate the results achieved. The gathering of a large series of data is not easy, particularly in small and medium-sized firms. This is why the use of PLS presents a huge benefit in this particular case or in any case where large datasets are not available.

A Pragmatic Case: Example Of A Non-Profit Organization The suggested method of this study, although universally applicable to any kind of organization, is presented using an example of a non-governmental and non-profit institution. Based in Geneva, Switzerland, this international governmental organization has associative statute active at multinational levels in the field of human rights protection. Devoted to the primacy, the coherence and the application of the international law and the principles which make progress the human rights, the association is joining together the national and international lawyers, offering their competences in regards to legal expertise for promotion and defense of the aforesaid rights. The organization has branches in regional offices of Thailand, Nepal, Guatemala and South Africa and is employing a total of around 40 people. When fully implemented, the proposed method for BSC construction using PLS approach will allow the following:

• Identification of the vision and strategy by highlighting the crucial performance indicators. The stress is laid on the fact that financial measurements must be “balanced” with non-financial measurements, coming from other strategic perspectives.

Financial

Customer

Process

Learning & Growth

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• While seeking to define the sequences of actions which ultimately create the success of an organization, the process helps retaining only the key performance indicators dependent on the objectives of the strategic perspectives.

• Once the strategy and key actions are seized, the organization must then identify its crucial

competences, essential to the development and the improvement of the processes relative to its strategic success

• Finally the construction of a BSC adapted to the various hierarchical levels, communication and

fixing of short and long-term targets for the various key indicators.

In a nutshell, there are five chronological main steps in the suggested methodology of this study that will allow the construction and implementation of a rational and optimal BSC: (1) gather historical data from the organization, (2) organize and prepare the final database, (3) ascertain and define the numbers of strategic perspectives and performance indicators connected to those, (4) assemble the cause and effect link between all strategic perspectives and, lastly, (5) employ and operate this management tool for long-term vision. As showed in Figure 3, the first step is associated with the collection of all historic key performance measures throughout the organization. Even though this seems a simple assignment, it actually entails a massive time gathering the metrics employed in the institution, particularly building a valid historic database. This exercise is crucial and will directly influence all of the following steps. Applying this step in the selected organization resulted in a total of 54 variables summarizing their evolution over 12 periods on a quarterly basis (3 years). Figure 3:Identifying and gathering company’s performance measures Taking into account the sizeable database of indicators, the second step is related to the final cleaning of the database (Figure 4). As stated previously, the collected measures could contain errors and will

Department 4

Department 5

Department 1

Department 2

Department 3

ORGANIZATION

Indicator 2.1 Indicator 2.2 Indicator 2.3 Indicator 2.4

...

Indicator 1.1 Indicator 1.2 Indicator 1.3 Indicator 1.4

...

Indicator 3.1 Indicator 3.2 Indicator 3.3 Indicator 3.4

...

Indicator 4.1 Indicator 4.2 Indicator 4.3 Indicator 4.4

...

Indicator 5.1 Indicator 5.2 Indicator 5.3 Indicator 5.4

...

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potentially pollute the findings. Consequently, the variables should be characterized by (a) reliability and consistency, (b) same occurrence in time, (c) ability to capture a fraction of the organizational current strategy, (d) information singularity and (e) clarity and straightforwardness. This step is achieved through consistent analysis and intense top management consultations and will ensure that the retained performance indicators are the key drivers of the organization. After this step only 48 variables from the non-profit organization have finally been kept.

Figure 4: Example of cleaning and setting up the final database However, albeit this rational managerial selection has been employed, the company still has a large database which is quite challenging to administer for the BSC construction. As illustrated in Figure 5, the third main step is to filter and congregate the variables within specific axes (or strategic perspectives) able to encapsulate a part of the organization’s performance. There are three main attainments in performing this step: first is to generate the number of strategic axes summarizing an acceptable level of the total company’s performance, second is to filter each axis and retain only the performance indicators that are highly correlated, disregarding any unnecessary and irrelevant information and third is to label these assemblies of indicators by studying the nature of information that gravitates each strategic perspective or axis.

There are several existing statistical methods that are able to accomplish this classification. Both factor analysis and principal component analysis (PCA) can be applied for this step. Although different, the two techniques are often mixed up, though factor analysis becomes equivalent to PCA if the "errors" in the factor analysis model are supposed to all have the same variance. Principal component analysis can be used for dimensionality reduction in a dataset by preserving those characteristics of the data that influence most its variance and by keeping lower-order principal components and disregarding higher-order ones. Such low-order components regularly summarize the "most important" features of the dataset. Factor analysis on the other hand, is a statistical technique employed to describe variability among analyzed variables in terms of fewer unobserved variables called factors. Factor analysis assists in identifying "factors" that explain a diversity of results on distinct tests. As such, the PCA fits better this study requirement as it is appropriate for a non-predefined experimental model, while factor analysis is righter for models that have already a standard. As the statistical technique

Ind 5.10

x

x

x

x

xxxMonth 30

yx...

xxxMonth 3

xxxMonth 2

xxxMonth 1

...Ind 1.3Ind 1.2Ind 1.1

Strategic performance indicator database

Missing variable

Missing variable

Unreliable variable

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applied (PCA) is handling historical data, the outcome of the actual research will subsequently be contingent on the data obtainable at the time of collection. Nevertheless, the purpose of this model is not to build the best indicators, which sometimes could lead to subjectivity and personal preference, but to actually emphasize the significance of the variables available. Figure 5: Filtering the performance measures per strategic perspectives

3r d ax

is

2n d a

xis

1st axis

Ind 1.1

Ind 1.2

Ind 1.4

Ind 1.3

Ind 2.1

Ind 2.4

Ind 2.3

Ind 2.2

Ind 3.3

Ind 3.4

Ind 3.2

Ind 3.1

Ind 4.3

Ind 4.1

Ind 4.2

Ind 4.4

Ind 5.3

Ind 5.1

Ind 5.2

Ind 5.4

The software applied for the PCA calculation was SPSS. In the presented example, when this step is conducted over the whole variables, one can clearly observe that with 4 components, approximately 93% of the total organizational variance is explained (Table 1). This percentage can be interpreted as the influence of the axes on the total performance: the higher this percentage, the more explanation it provides on the company’s performance. Table 1: Extract of Total Variance Explained

Component % of Variance Cumulative %

1 24.26 50.53

2 11.97 75.46

3 5.78 87.51

4 2.76 93.26

5 1.37 96.12

6 0.80 97.79

The same PCA technique also provides the influence of the variables (indicators) against each of these 4 axes with the assistance of the component matrix establishing the correlation of all variables with each of these axes. Table 2 illustrates the correlation of the first 10 variables with each axis. The nearer a correlation is to 0, the less the corresponding variable impacts the axis. Finally, the variables will be ranked and filtered with respect to the correlation is has upon the axes. The first 10-15 indicators per axis are favored for selection, ranked by their correlation with the axis. First, these metrics offers a good outlook on the information clustered and second, because the indicators

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are sorted by correlation, their explanatory value will decrease when moving further in the ordered list. One may note that this straightforward selection will congregate the performance measures that are particular to one area of the company. To be precise, a simple mathematical clustering will distinguish the actual areas specific to the institution. The ranking and grouping of variables by axis will permit to label and define them strategically.

Table 2: Extract of the First 10 Indicators from Component Matrix

VAR no. VAR name 1st axis 2nd axis 3rd axis 4th axis

VAR001 persofindetr 0.886 -0.259 0.324 -0.182 VAR002 persoju 0.765 -0.310 0.454 -0.257 VAR003 persoadmin 0.968 -0.153 0.092 -0.050 VAR004 arrivé -0.021 -0.280 -0.098 -0.750

VAR005 départ -0.192 0.134 -0.678 0.632 VAR006 agemoy 0.649 0.586 -0.109 0.288 VAR007 ho 0.902 -0.285 0.270 -0.073 VAR008 fe 0.799 -0.199 0.390 -0.348

VAR009 expeant -0.221 0.273 -0.460 0.666

VAR010 formation 0.318 -0.521 0.567 -0.392

Statistically speaking, the top ranked indicators are highly correlated to the respective axis. However, after the PCA analysis, one still needs to do a small cleaning of the data by eliminating those measures which would not adequately explain the definition of the perspective. While this procedure it is not mathematically validated, it is primarily aimed to clear out certain metrics that are not rigorously accurate and would violate the definition of the axis. The rejection of any indicator must be well justified in front of the strategy for defining the strategic axes. In any economic environment (which by definition is uncertain) it is improper to consider that all indicators correlated to the perspective in cause are also representative from a strategic viewpoint. Those indicators that do not describe the definition of the axis should not be selected in the final model as these might potentially corrupt the final result. With the intention of better controlling and comprehending the final model and in order to maintain certain accuracy on the strategic perspectives, the final number of indicators per axis should rarely exceed 10. At the end of this third step, the organizational strategy from the presented example was acknowledged to gravitate along 4 perspectives: Regional Representation, Financial Perspective, Quality Perspective and International Law and Protection each of them containing 6 to 10 explanatory variables as described in the next step. As exemplified in Figure 6, the fourth major step in ascertaining the actual strategy of the company is to employ a PLS Path Modeling regression on the final strategic perspectives. To determine the most viable cause-and-effect chain between the perspectives, all possible valid connections between these axes should be studied. The most stable PLS model from all possible combinations is regarded as the closed to the organization’s current strategy. The stability of the PLS model could be assessed applying a bootstrap technique on each possible graph.

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1st axis

3rd axis

2nd axis

Ind 1

Ind 2

Ind 3

Ind 4

Ind 5

Ind 6

Ind 9

Ind 10

Ind 7

Ind 8

Ind 7

Ind 8

Figure 6: Exemplification of a cause-and-effect chain using PLS Path Modeling

Applying this step to the specific example of this study, all possible valid connections between the 4 axes, that is to say a total number of 52’720 possibilities were examined with the in-house created software and the most stable PLS graph was chosen from all valid combinations represented in Figure 7. This assembly is the optimal structure of connection between the four axes and turns out to be more realistic than any other model - the closest to the actual organizational strategic vision. This representation shows that the angular stone of the strategy is characterized by the Regional Programs which, in turn, influence the financial health of the organization. The financial perspective affects at the same time the general quality of work as well as the whole of the “International Law & Protection” Program. In order to seize what these three bonds contain, we will study successively the causes suggested by the graph above. The objective is to briefly try to foresee what comes out from these causals connections. The diagram emphasizes a capital element by spotlighting the Regional Programs. Indeed, we find among the variables which define this axis the nongovernmental funds under all its aspects: nongovernmental funds, nongovernmental restrictive funds (earmarked), total restrictive financing (earmarked), as well as the funds specifically intended for Asia, Africa and MENA. Consequently, we tend to believe that these programs are at the origin of the financial performance of the organization. And since the causal links are one-way, activities of the regional programs can only be the subject of auto- financing and therefore the activities are not covered by any formed of organizational reserve. Since the contributions for the Regional Programs are higher than the expenditure needed within the framework of their activities, it is perfectly obvious that are actually contributing to reserves of the organization. The reason why the Europe is attached to the Financial Perspective and not to the Regional Representation where one would see fit is that the principal activities as well as the headquarters are based in Geneva. This region is mainly seen as a support area rather than a “fundraiser” one.

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Figure 7: BSC’s cause-and-effect chain using PLS approach (with 12 quarterly time periods)

0

.944 -.426

.538 -.077

.988

.842

.920 -.953 .995

.546

-.465

.483

.885 .782

.976

-.989

.903

.455

.987

-.992

.964

.945

.960

-.181

.862 .833

Regional Representation

Non-governmental total funds

“Earmarked” funds Asia

“Earmarked” funds GSRL

Non-governmental “earmarked” funds

“Earmarked” funds Africa

“Earmarked” funds MENA

Consultancy costs Activity ratio

# of employees

“Earmarked” total funds

# of admin employee

“Earmarked” funds Europe

Depreciation

Travel and training costs

Total contributions

# of current ICS procedures

Governmental funds ratio

Non-governmental funds ratio

Financial Perspective

International Law and Protection

# of financial reports after ddline

# of juridical reports after ddline

# of new arrivals / new employees

Average age of personnel

# of dismissals / positions abolished Gender ratio

Quality Perspective

Average formation of personnel

Governmental funds

# of juridical personnel

Employee past experience

Annual expense for IER program

Annual expense for GSRL program

Annual expenditure ILP

Annual expense for CIJL program

0.878

0.763 0.811

-.127

.236

.442

.442 .442 .442

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Applying the logic further, the accumulated reserves can fund and support the International Program “ILP” as well as the Quality area. This is explained by the fact that the organization is characterized by a very high reputation and quality of the work. The education level of the personnel coupled with related expenditure is therefore essential. Contrary to the initial model of Kaplan and Norton (1992), the quality perspective does not influence the customer satisfaction which, in fine, affects the financial area of the organization. This is indeed true as funds raised from various regional projects are not dependent on the overall outcomes of the organization. Or, in other words, the International Program “ILP” is financed in an organic way (bond between the financial health and the International Program), in order to provide a form of results which do not produce any “return on investment” (bond between the financial health and quality). This can be explained by two factors: 1) the quality of the work provided by the organization is already over and above the required standard and/or 2) the quality of the work is not important in the stakeholders’ eyes (contributors). Whatever the cause, this last conclusion needs further investigation from the management side, especially that the current strategy is considered as problematic. It should be also noted that any management tool is usually needed to be implemented in a period of transition and important changes within the organization. When it comes to model validation from a statistical point of view (Table 3), the overall figures are assessing in a good way both measurement (outer) and structural (inner) model. As a general rule of thumb, in order to validate the outer model (measurement model), the Average Variance Explained (AVE) should be above 0.5 (Chin, 1998) and Composite reliability greater than 0.6 (Werts, Linn, and Jöreskog, 1974). Although all figures are exceeding the required threshold, one should note the borderline for Quality Perspective. While this perspective is perfectly validated, the low value will demand for a closer investigation together with the business of the measures that are building this block. Table 3: PLS model validation criteria

AVE Composite reliability R-square Redundancy

index

Regional Representation 0.728 0.939

Financial Perspective 0.834 0.821 0.770 0.641

Intl. Law and Protection 0.656 0.844 0.582 0.464

Quality Perspective 0.540 0.785 0.656 0.333

As for structural (inner) model validation, the best gauge to use is the R-square level. Values of 0.67, 0.33 and 0.19 are considered to be strong, moderate and respectively weak for the inner model valuation (Chin, 1998). The R-square have acceptable values for ILP Program as well as for the Quality Perspective, even very close to the highest acceptance threshold. Furthermore, for the Financial Perspective one can remark a strong significance, materializing the conclusion that all values are validating in a satisfactory way our model. As stated in the beginning of this study, the inner and outer relations are based on structural equations. Hence, behind each PLS Path model lies equations that supports the relations between indicators and the corresponding axis (outer model equations) and between the axes or strategic perspectives themselves (inner model equations). The fifth major step is consequently based on applying these equations in order to study and forecast the relations for the long term. From a practical point of view, there are substantial advantages in doing that:

a) analyze the variance impact of one (or several) indicators to the whole model;

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b) forecast the strategic changes by looking at the relationships between the axes;

c) visualize and manage both direct and indirect changes needed for an important change in the

company‘s strategy;

d) simulate the impact of resources allocation decisions on the future performance, thus complementing the traditional budget approach;

However, one should keep in mind that an organization takes time in order to recalibrate to any change or crisis situation. Any change in the company’s strategy should be done in a pondered and controlled way. Moreover, it should be noted that a non-profit organization cannot be revolutionized or radically transformed as a commercially-driven company might be.

FINAL CONCLUSIONS AND REMARKS The crucial part in the proposed methodology is the selection of the number of axes and of the corresponding performance indicators. It is essential that the key performance indicators describe to a certain extent the strategy of the organization. This hints to the decision to filter out the main components for outlining the strategy with the desired depth of analysis. Unquestionably, the strategy metrics differ among organization, especially among different sectors (e.g. profit vs. non-profit). The research aim of this paper was to elaborate and empirically validate an inclusive framework that channels Balanced Scorecard model with Structural Equation Modeling approach and endorses a modern comprehension of factors underlying the current strategy, in order to better manage and control the corporate performance. The first essential step towards this goal was the development of a general frame of reference that harmonized previously conflicting theoretical assumptions related to Balanced Scorecard as well as its ease of implementation. On this basis, the proposed framework is embracing several major concepts:

1. addresses the issues of strategic vision of any organization and translates the actual strategy into an easy-to-use model for better integration, communication and long-term management;

2. underlines the key performance indicators that have the ability to seize the most relevant

information from the company, information that is strongly connected to the current objectives the organization is aiming for;

3. compiles distinctive strategic perspectives that summarizes company information in a

suitable way, in order to create a comprehensive illustration driving organizations in their road to success;

4. determines the relationships between strategic perspectives in a cause-and-effect chain

that highlights the interactions taking place at a strategic level, helping in spotlighting the company’s advantages and weaknesses;

5. overcomes the static feature of previous models revealing the dynamic evolution over

time by employing mathematical PLS equations, refining the planning and control of the main constituents within an organization.

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The main objective of this study was to put in debate the Kaplan and Norton BSC theory compared to a more pragmatic approach. Having founded the strategic research framework, we attempted to empirically validate the proposed model by developing a strategic map in the context of a Swiss nonprofit organization. The stability of this model has been validated through the application of the bootstrap technique. For this purpose, the SPSS software was used along with a PLS software we specifically built for this kind of analysis. The results obtained indicated that the BSC problems can be formalized in a rigorous manner. It is thus possible to reassess the remarks progressed by Kaplan and Norton as exposed in the analysis of this case. However, it should be stressed that the necessary prerequisites are relatively constraining. Therefore it is essential to have an adequate number of indicators together with a consistent historical sample of data. Furthermore, the noted real value of BSC lies more in the diffusion and the comprehension of the strategy on all the levels within the company. Thus this requires strong communication, interpretation and analytical skills. The application of PLS Path Modeling translates the actual strategy into a cause-and-effect model that can be monitored and controlled using a handful of essential performance indicators. One might debate that by treating historical data, the model summarizes and obsolete information by illustrating a picture that cannot be employed to influence the future planning. While the deduction is appropriate, the model is actually identifying the actual strategy applied by the organization. Only by fully acknowledgement of the current situation one can plan ahead for the period to come. As suggested in this paper, as the PLS regression is more suited for maximizing prediction, the model is also capable of portraying the forecast strategy of the company. Furthermore, this approach allows the simulation of the resource allocation impact on the company's overall performance. Lastly, it should be noted that these management tools are applied in a moment of a significant need for strategic change in the organization. The use of this approach allows not only understanding the chain of causality between different strategic areas of the company's performance, but also reinforces the intuition with “a measure of the measures”. To conclude, we believe that it is relevant to develop a more formal methodology in order to validate the company's strategy in a rational way, while using a simplified model. Indeed the PLS method suffers from a deficiency of theoretical foundation. But similarly, Kaplan and Norton's approach was strongly criticized in the specialized literature from this point of view as well. The difficulty with which future researchers will be challenged lies in the compromise between the pragmatism sought by the organizations and the need for the theoretical framework required by scholars REFERENCES Abernethy, M.A., & Lillis A.M. (2001). Interdependencies in organization design: A test in hospitals. Journal of Management Accounting Research, 13,107-129. Boomsma, A. (1982). The robustness of LISREL against small sample sizes in factor analysis models. In K.G. Joreskog and H. Wold (eds.), Systems Under Indirect Observation: Causality, Structure, and Prediction, Part I, 149-173. Amsterdam: North-Holland Publishing. Chalos, P., & Poon, M.C.C. (2000). Participation and performance in capital budgeting teams. Behavioral Research in Accounting, 12, 199-229. Chin, W.W. (1998). The partial least squares approach to structural equation modeling. Modern Methods for Business Research, 295-336.

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Fielden, T. (1999). Pilot Refines Decision Support. InfoWorld, November 29, pp. 77-78. Geladi, P., & Kowalski, B.R. (1986). Partial least squares regression: A tutorial. Analytica Chimica Acta, 185, 1-17. Hair, J. F. Jr., Anderson, R. E., Tatham, R. L., & Black, W. C. (1998). Multivariate data analysis with readings (Fifth Edition). Upper Saddle River, NJ: Prentice-Hall International. Hervé, A. (2003). Partial least squares (PLS) regression. In Lewis-Beck, M., Bryman, A., Futing, T. (Eds.), Encyclopedia of Social Sciences Research Methods. Thousand Oaks (CA): Sage Ittner, C. D., & Larcker, D. F. (1998). Innovations in performance measurement : Trends and research implications. Journal of Management Accounting Research, Vol. 10, 205-239. James, L.R., & James, L.A. (1989). Causal modeling in organizational research. In C.L. Cooper, and I. Robertson (eds.), International Review of Industrial and Organizational Psychology, 371-404. New York: John Wiley. Kaplan, S. R., & Norton, P. D. (1992). The Balanced Scorecard: measures that drive performance. Harvard Business Review, January – February, 71-79. Kaplan, S. R., & Norton, P. D. (1993). Putting the Balanced Scorecard to work. Harvard Business Review, September – October, 142-143. Kaplan, S. R., & Norton, P. D. (1996). Using the Balanced Scorecard as a strategic management system. Harvard Business Review, January – February, 75-85. Kaplan, S. R., & Norton, P. D. (1996). Linking the Balanced Scorecard to strategy. California Management Review, Fall, 53-79. Martens, H., & Naes, T. (1989). Multivariate Calibration. NY: Wiley. MacCallum, R. C. (1995). Model specification: Procedures, strategies and related issues. In R. H. Hoyle (ed.), Structural Equations Modeling, Thousand Oaks (CA): Sage, 16-36. Magner, N., Welker, R.B., & Campbell, T.L. (1996). Testing a model of cognitive budgetary participation processes in a latent variable structural equations framework. Accounting and Business Research, 27, 41- 50. Marsh, H.W., Balla, J.W., & McDonald R.P. (1988). Goodness-of-fit indices in confirmatory factor analysis: Effects of sample size. Psychological Bulletin, 103, 391-411. McIntosh, A.R., Bookstein, F.L., Haxby, J.V., & Grady, C.L. (1996). Spatial pattern analysis of functional brain images using partial least squares. Neuroimage, 3, 143–157.

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Medsker, G.J., Williams, L.J., & Holahan P.J. (1994). A review of current practices for evaluating causal models in organizational behavior and human resources management research. Journal of Management, 20, 439-464. Nørreklit, H. (2000). The balance on the Balanced Scorecard – a critical analysis of some of its assumptions. Management Accounting Review, 11. Pineno, C. C. (2002). The Balanced Scorecard: an incremental approach model to health care management. Journal of Health Care Finance. Shields, M. (1997). Research in management accounting by North American in the 1990’s. Journal of Management Accounting Research, 9, 1-61. Shields, J. F., & Shields, M. (1998). Antecedents of participative budgeting. Accounting, Organisations and Society, 23, 49-76. Smith, D., Smith, L.K. (2004). Structural equation modeling in management accounting research: critical analysis and opportunities. Journal of Accounting Literature, 23, 49-86. Tenenhaus, M., & Vinzi, V.E. (2005). PLS Path Modeling. Computational Statistics and & Data Analysis, 48(1): 159-205. Wold, H. (1966). Estimation of principal components and relazed models by iterative least squares. In P. R. Krishnaiah (ed.). Multivariate Analysis: Preceeding of International Symposium held in Dayton, Ohio, June 14-19, 1965, 391-420, New York: Academic Press. Wold, H. (1973). Nonlinear iterative partial least squares (NIPALS) modeling: Some current developments. In P.R. Krishnaiah (ed.). Multivariate Analysis II: Preceeding of an International Symposium held at Wright State University Dayton, Ohio, June 19-24, 1972, 383-407, New York: Academic Press. Wold, H. (1975). Path models with latent variables: The NIPALS approach. In H.M. Blalock, A. Aganbegian, F.M. Borodkin, R. Boudon, & V. Cappecchi (Eds.), Quantitative Sociology: International Perspectives on Mathematical and Statistical Modeling, 307-357, New York: Academic Press. Wold, H. (1986). Partial least squares. Encyclopedia of Statistical Sciences, Vol. 6, New York: Wiley. BIOGRAPHY Bernard Morard, is a double PhD in both Finance and Accounting and currently a full professor in Management Accounting at the University of Geneva, Switzerland. He is the author of numerous publications in Management Accounting and various financial studies in the specialized literature. Alexandru Stancu is a PhD in Management Accounting at University of Geneva and is currently working in IATA (International Air Transport Association) in Planning and Control department. His PhD thesis focuses on the Balanced Scorecard concept and identifies new ways in building a rational management tool, closer to today’s organizational environment and demands, by implementing statistical methods like

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principal component analysis (PCA) and partial least squares (PLS). He is the author of several publications in the field of Management Accounting. Christophe Jeannette is currently a Teaching and Research Assistant in Management Accounting. He is in process of finalizing his PhD thesis identifying and establishing patterns for company’s failure and bankruptcy processes. He is also the full developer of PLS software that enabled many in-house studies and researches to be analyzed and finalized.

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EXPLORING THE IMPACT OF THE LABOR DISPLACEMENT ON THE HOUSING MARKETS

Meihua Liao, Asia University

ABSTRACT There are few studies of the labor displacement for the housing markets. The average house price in Taipei has increased by 20 percent from last year. Housing prices have a reached record high, which drew complaints from the public. Due to the inclined-policies, and the participations of Taiwan businesses and Mainland investors, property prices keep climbing up, despite the recent financial crisis. According to Taiwan RDEC’s (The Research, Development and Evaluation Commission) internet poll, the top public discontent is the “Over-priced housings in metropolitan area”. "Housing" is an important demand among people. There sure will be serious public discontents, if the governments do not have clear objectives and regulations in terms of policies and legislations. But at the same time, we can see the increasing “added worker effect,” which is an increase in married women’s labor supply in response to their husbands’ unemployment spells. JEL: R21, R23 KEYWORDS: Education distribution, Marriage distribution, Housing markets, Labor displacement

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A CO-OPETITIVE FRAMEWORK FOR ACCOUNTING HARMONIZATION: THE CASE OF THE FASB AND

IASB CONVERGENCE AGREEMENT Anne-Sophie Fernandez, University of Montpellier France

Francoise Pierrot, University of Montpellier France

ABSTRACT This paper aims at analyzing the evolution of the relationships between two major accounting standards setter bodies (FASB and IASB - Financial Accounting Standards Board and International Accounting Standards Board) through a strategic theoretical framework. This study shows that the interactions between those institutions can be defined as coopetition. Scholars’ attention to coopetition defined as a simultaneous pursuit of cooperation and competition by firms (Bengtsson and Kock, 2000; Gnyawali et al. 2008) has been increasing over the years with increased managerial significance. A case-based exploratory method is used to highlight this paradoxical relation. These results are particularly interesting because they deal with a case of institutional coopetition, a topic that has been two less investigated by scholars. INTRODUCTION The current global economic crisis highlights the impact of the accounting standards on the evaluation of firm performance. In such a context, the type of standards companies use becomes increasingly critical. Both, FASB and IASB, are two of the most important standards setter bodies responsible for accounting standardization in the world, each one developing its own set of standards: the US GAAP and the IFRS (United-States General Accepted Accounting Principles – International Financial Reporting Standards). The economic and financial globalization pointed out the need for global accounting standards. As an answer to this question, those institutions, previously acting as competitors, began to collaborate. From a strategic point of view, this evolution is analyzed as coopetition. THEORETICAL BACKGROUND Coopetition: A New Dyadic Strategy In strategic management, competition and cooperation have often been presented as two opposing forces. Bresser and Harl (1986) show that sequences between cooperative and competitive strategies creates many dysfunctions. Several authors consider that it may be beneficial for the companies to combine competition and cooperation, two strategies that were previously thought to be a priori contradictory (Bengtsson and Kock, 1999, 2000; Brandenburger and Nalebuff, 1995, 1996). The creation of the neologism ‘coopetition’, a contraction of cooperation and competition, gives rise to a new research field, which analyzes relationships that are simultaneously cooperative and competitive. Brandenburger and Nalebuff (1995, 1996) are the first authors to propose a framework of coopetition. They use game theory to define the coopetition as “a bringing together of interests between complementors when cooperation and competition occur simultaneously” (Dagnino et al., 2007, p. 88). More recently, Bengtsson and Kock (1999, 2000) develop a theory of coopetition based mainly on the social network analysis and the resource based view (RBV). The authors define coopetition as a “dyadic and paradoxical relationship which emerges when two companies cooperate in some activities, and are at the same time in competition

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one with the other on other activities” (Bengtsson and Kock, 2000, p. 412). This definition of the concept is the most relevant. Coopetitive strategies have been growing over the years with increased managerial significance. The diffusion of coopetition goes beyond multinational firms. Indeed, coopetition becomes a real strategic standard between SME’s (Morris et al., 2007; Gnyawali and Park, 2009), between subsidiaries (Luo, 2007) but also between institutions. Too less attention has been paid to coopetition between institutions, creating a gap on the literature about this topic. This research is focused on the strategic decision-making process of institutions. The objective is to understand why competing institutions are involved in such paradoxical relationships. In order to do so, we explore the literature about the macro drivers of coopetition. The Macro Drivers of Coopetition Actors don’t have the same propensity to develop coopetition (Bengtsson and Kock, 1999, 2000; Gnyawali and Park, 2009). Some of them focus their attention on coopetition while others deliberately refuse to work with their competitors (Gnyawali and Park, 2009). The reasons for this choice are not well understood. Scholars tried to explain the adoption of coopetitive strategies by examining several levels of drivers: industry, dyadic, organization and intra-organization. But, the complexity of coopetition can’t be summarized at one level of analysis. In order to understand why institutions adopt coopetition, we try to develop a framework about macro drivers of coopetition. Coopetition is more likely to emerge in dynamic and complex environments in which knowledge is the core of firm’s competitiveness (Carayannais and Alexander, 1999). Though, coopetition appears mostly in hi-tech industries (Gnyawali et al., 2008). Three characteristics of hi-tech industries explain why coopetition become a strategic standard: The short life-product cycle, the technological convergence and the importance of R&D costs (Gnyawali and Park, 2009). Michael Porter (1980) considers that the structure and the environment influence inter-organizational competitive behaviours. The same logic can be applied to coopetition: the structure and the environment influence inter-organizational coopetitive behaviours. Okura (2007) show that coopetition emerges because a specific structure exists to allow the actors to achieve common objectives on some activities and private objectives on others. Moreover, the markets’ structures can encourage cooperation or competition. They also pressure the way in which both strategies combine one with the other. The edition of formal rules, like the Sherman Act in 1980, drives the strategic choices of the actors. Institutions have the power to influence the structure of the market and thus to induce coopetition (Bonel and Rocco, 2007). The structure of a network is also powerful to stimulate collaboration between competitors (Ring and Van de Ven, 1992; Easton and Araujo, 1992; Gomes-Casseres, 1994). In clusters, collaboration between competitors is critical for the innovation process (Bengtsson and Solvell, 2004). The Silicon Valley is a good example of potential coopetitive structure (Ferrarry, 2003).

The dyadic relationship could be direct (without being mediated by a 3rd party such as client, consultant, government, institution) or mediated by such a third party (Jacobides and Billinger, 2006). Previous researches show that the presence of a third actor, who is not a competitor, provides interesting dynamics coopetition. Depeyre and Dumez (2010) compared the role of a third actor to an architect in terms of designing and driving coopetition. Castaldo et al. (2010) point out that the intermediary impacts not only the emergence of coopetition but also the management of the relationship.Globalization increases

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hypercompetition (D’Aveni, 1995) and created new collaborative opportunities (Contractor and Lorange, 1998). In spite of being competitors, actors have to face the same environmental constraints. In such a context, pooling their forces appears as a good opportunity to survive maintaining their market shares (Tidstrom and Ahman, 2006; Bonel and Rocco, 2007). Two competitors can also decide to cooperate in order to win against a third common competitor (Bengtsson and Kock, 1999).

The diffusion of coopetition like a strategic standard is surprising. The neo-institutional theory explains the phenomenon by the presence of a common institutional environment (Meyer and Rowan, 1977). This perspective offers interesting insights to understand the emergence of coopetition (Oliver, 1991). Coopetition can result from three types of isomorphic institutional pressures (Di Maggio and Powell, 1983; Scott, 1995). First, coercive isomorphism comes from political influence. An actor can formally or informally pressure actors to fit with cultural standards of the society. These pressures can be seen as incentives by the actors to join the collusion. In that sense, coercive isomorphism influences coopetition. Second, mimetic isomorphism explains the diffusion of coopetitive practices within an industry (Luo, 2004) or in hi-tech industries (Gnyawali and al., 2008). The adoption of coopetitive strategies results from the actors’ will to be consistent with environmental norms and standards. Third, normative isomorphism that is related to the professionalization of the labour force has less power to explain the emergence of coopetition than the two other types of isomorphism. The literature review presented above offers interesting insights to understand macro drivers of coopetition. Based on the different drivers identified, we propose the following integrated framework (figure 1). This framework will be discussed further with the results of our case study. Figure 1: an integrated framework of coopetition’s macro drivers

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METHOD A Qualitative In-Depth Case Study Case-based exploratory methods seem very appropriate to understand a phenomenon that is poorly understood (Eisenhardt, 1989), has multiple and complex elements (Dodgson et al. 2008) that evolve over time (Langley, 1999). In-depth study exploring details of a multi-faceted and paradoxical phenomenon as coopetition is the best way to understand the difficulties associated with the design of coopetitive strategy (Gnyawali and Park, 2011). Accordingly, we conducted in-depth studies of one exemplar case in order to develop insights about the macro drivers of the phenomenon (Yin, 1994). Indeed, the relationships between the FASB and the IASB are unique and offer us an exemplar case of investigation. The data gathering is carried out starting from analysis of secondary data: internal data (internal reports, reports of meeting, etc.) and external data (general and specialized press review). The mode of reasoning is based on abductive logic, since the results of the case study and the academic insights have been simultaneously processed. Accounting Standardization Werner Sombart has famously defended the idea of a link between economy and the double entry accounting evolution (Lemarchand and Nikitin, 2000). During the last century, the main industrial countries develop their own accounting standards in order to help companies to report their financial information in priority whether to investors or to the tax authorities and creditors, depending on the accounting model they refer to: the Anglo-Saxon or the Continental one (Nobes, 1983). At this time, this latter dissociated the “Macro-Uniform Government-driven Tax-dominated” from the “Micro-fair- judgmental commercially-driven” approach. Depending on the country, accounting regulation is assumed by the State or some inter State organization (the case of the European Union – EU), or by an independent entity like the FASB (the case of the USA: although considered as independent, the FASB is controlled by the Security Exchange Commission) or a totally private independent organization like the IASB. The form of accounting regulation is contingent to each country, depending on historical, social, economic, legal and political specificities (Colasse, 2005). These contingencies lead to the elaboration of different accounting languages almost in every country. These differences interferes with the intelligibility and comparability of financial information beyond borders and consequently with the access of companies to foreign financial markets. Accounting standards become an important actor of the development of International companies. From the late 70’s to nowadays, the relationships between the main accounting standards setters have evolved as described hereafter. The Case Study At a European level, the EU decides to enter into a harmonization process by developing the 4th, the 7th and the 8th directives (1978, 1983, 1984) to deal with this situation. At an International level, the IASC develops a set of International accounting standards, the IAS. At the same time, the US GAAP are considered as the best accounting system. Consequently, most companies use them in order to achieve understandability and comparability of their financial statements among International investors. The supremacy of the US GAAP decreased since the adoption of the IAS/IFRS by the European Union.Since the creation of the IASC by Henri Benson in 1973, the need for accounting standards harmonization lead

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the FASB and the IASB to cooperate in order to reach a consensus on some specific themes (Street and Shaughnessy, 1998). In 1993, the FASB was one of the four Anglo-Saxon standards setters (the Australian Accounting Standards Board (AASB), Canadian Accounting Standards Board (AcSB), FASB and UK Accounting Standards Board (ASB)) the IASC began to work with in order to achieve accounting compatibility between their standards. At the same time, the accounting standards of the FASB and the IASC were in competition in the harmonization process conducted in Europe (Colasse, 2004). In the 90’s, the European Union did not succeed in harmonizing the accounting practices throughout its territory, and European companies began to use the US or the International accounting standards to reach information comparability on financial markets. At that point, the question of the choice of one of those sets of standards emerged; in 2002 the UE chose the IAS/IFRS to avoid the USA hegemony. Relationships between FASB and IASB have evolved since then and ended up at a common project of accounting standards convergence. The Norwalk agreement (2002) leads to interdependencies between them. Initially competitors, they have to collaborate to develop a single accounting standards set. Since then, these institutions have been at the same time partners and competitors. The framework of the drivers of co-opetition is relevant to understand the definition of firms’ strategies. Since institutions like the FASB and the IASB strategically behave as global companies, we ask whether this framework is also relevant to explain the evolution of their relationships. RESULTS The results provide insights regarding three macro drivers of coopetitive strategy emerging between the FASB and the IASB. First, following Jacobides and Billinger (2006), our results confirm the influence of a third actor called « architect » in the emergence of coopetitive relationships. The European Union is identified as the architect of coopetition as its choices constraints the FASB and the IASB to collaborate. Since the EU chose international standards, the US GAAP have been less used by multinational firms. Thus, influent developed countries have started to make their own accounting standards converged with the IFRS. Consequently, the SEC finally accepted financial statements based on IFRS standards on US financial markets. Second, in the perspective of the neo-institutional theory (Di Maggio and Powell, 1983; Scott, 1995), the results of the case study points out the critical role of coercive isomorphism in the emergence of coopetitive strategy. Indeed, after scandals such as the Enron case, the US GAAP are considered less reliable. The context benefits the IFRS. Since then, a growing number of Americans started to be seduced by the IFRS (Veron, 2007). Besides, the Sarbanes-Oxley act (July 2002) mandated the SEC to evaluate if a principles-based accounting system set could be introduced in the US. As the IFRS are a principles-based accounting system, the Norwalk Agreement, enables the FASB to revise its own accounting standards. Third, considering the strategic intent in the collaboration between two accounting standards setter bodies, the results of our case study show a yet non-investigated macro driver. Whereas coopetition between global companies is driven by technological standardization (Gnyawali and Park, 2009), this case of institutional coopetition is driven by normative harmonization.Accounting standard development is presented as a kind of economic policy that offers to the concerned standard setter organization a sort of political power (Veron, 2007). The question of the power of standard setter organization appears to be the core of the subject, whereas the institutions point out the interest of stakeholders and more specifically the one of investors as the main goal of their action (“efficient allocation of capital by investors everywhere in the world” (Shapiro, 2011)).

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CONCLUSION This study contributes to both coopetition and strategic management literature. We highlight the macro drivers of coopetition. Institutional drivers have been two less investigated by scholars. Our study provides interesting insights to fulfill the gap regarding this topic in coopetition literature. In that sense, relationships between the FASB and the IASB can be seen as an exemplar case of institutional coopetition. The case study also contributes to accounting literature providing a strategic framework to analyze the relationships between two accounting standards setter bodies. Such a framework is actually relevant to understand the decision-making process of these two actors. Our study is presenting some limitations that offer opportunities for future research. First, this study is based on secondary data that could be completed with semi-structured interviews conducted with key actors. A quantitative study could enable the confirmation of our results. Second, we made a longitudinal study on a short period. Relationships between the FASB and the IASB are still evolving. Further study could analyze the next strategic steps. REFERENCES Aveni, (D’) R. (1995), Hypercompétition, Paris, Vuibert. Bengtsson M. and S. Kock (1999), “Cooperation and competition in relationships between competitors in business networks”, Journal of Business and Industrial Marketing, vol. 14(3), p. 178-190. Bengtsson M. and S. Kock (2000), “Co-opetition in Business Networks – to Cooperate and Compete Simultaneously”, Industrial Marketing Management, vol. 29, p. 411-426. Bengtsson M. and O. Solvell (2004), “Climate of competition, clusters and innovative performance”, Scandinavian Journal of Management, vol. 20, p. 225-244. Bonel E. and E. Rocco (2007), “Coopeting to survive, Surviving coopetition”, International Studies of Management and organization, vol. 37(2), p. 70-96. Brandenburger A. M. and B. J. Nalebuff (1995), “The Right Game: Use Game Theory to Shape Strategy”, Harvard Business Review, (juillet-août), p. 57-71. Brandenburger A. M. and B. J. Nalebuff (1996), Co-opetition, Doubleday. Bresser R. K. and J. Harl (1986), “Collective Strategy: Vice or Virtue?”, Academy of Management Review, vol. 11(2), p. 408-427. Carayannis E. G. and J. Alexander (1999), “Winning by co-opeting in Strategic Government-University- Industry R&D partnerships: The power of complex, Dynamic Knowledge Networks”, Journal of Technology Transfer, vol. 24(2-3), p. 197-210. Castaldo S., Möellering G., Grosso M., and F. Zerbini (2010), “Exploring how third-party organizations facilitate coopetition management in buyer-seller relationships”, In S. Yami, G. Dagnino and F. Le Roy (Dir), Coopetition: Winning strategies for the 21st century, UK, Edward Elgar Publications, p. 141-165.

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Colasse B. (2004), “Harmonisation comptable internationale : de la résistible ascension de l’IASC/IASB”, Gérer, Vol. 75, mars. Colasse B. (2004), “La régulation comptable entre public et privé”, In Capron M. et al. Les normes comptables internationales, instruments du capitalisme financier, La Découverte, Paris, p. 27-48. Contractor F-J. and P. Lorange (1988), “Competition vs. Cooperation : A Benefit/Cost Framework for Choosing Between Fully-Owned Investments and Cooperative Relationships”, Management International Review, vol. 28(4), p. 5-18. Dagnino G. B., Le Roy F., and S. Yami (2007), “La dynamique des stratégies de coopétition”, Revue Française de Gestion, vol. 33(76), p. 87-98.

Depeyre C. and H. Dumez (2010), “The role of architectural players in coopetition: the case of the US defense industry”, In: Yami S. (Ed), Coopetition: Winning strategies for the 21st century. Edward Elgar Publications, UK, p. 124-141.

Dodgson M., Mathews J., Kastelle T., Hu MC., (2008), “The evolving nature of Taiwan’s national innovation system: the case of biotechnology innovation networks”, Research Policy, Vol. 37, p. 430- 445. DiMaggio P. and W. Powell (1983), “The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields”, American Sociological Review, Vol 48 (April), 147-160. Easton G. and L. Araujo (1992), “Non-economic exchange in industrial network”. In B. Axelsson, and G. Easton (Dir), Industrial networks a new view of reality, London: Routledge. Eisenhardt K. (1989), “Building Theories from Case Study Research”, Academy of Management Review, vol. 14(4), p. 532-550. Ferrary M. (2003), “The Gift Exchange in the Social Networks of Silicon Valley”, Californian Management Review, vol. 45(4), p. 120-138. Gomes-Casseres B. (1994), “Group versus group: How alliance networks compete”, Harvard Business Review, vol. 72(4), p. 62-71. Gnyawali D.R., He J., and R. Madhavan (2008), “Co-opetition: promises and challenges”, In: Wankel, C. (Ed), 21st Century Management: A reference Handbook. Sage Publications, Thousand Oaks, CA, p. 386- 398. Gnyawali D. R. and B-J. Park (2009), “Co-opetition and Technological Innovation in Small and Medium- Sized Enterprises: A Multilevel Conceptual Model”, Journal of Small Business Management, vol. 47(3), p. 308-330. Gnyawali D. R. and B-J. Park (2011), “Co-opetition between giants: Collaboration with competitors for technological innovation”, Research Policy, vol. 40(5), p. 650-663.

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Jacobides M. and Billinger S. (2006), “Designing the boundaries of the Firm: From ‘Make, Buy or Ally’ to the Dynamic Benefits of Vertical Architecture”, Organization Science, vol. 17(2), p. 249-261. Langley A. (1999), “Strategies for theorizing from process data”, Academy of Management Review, vol. 24(4), p. 691-710. Lemarchand Y. and M. Nikitin (2000), "Histoire des systèmes comptables", In Encyclopédie de Comptabilité, Contrôle de Gestion et Audit, Paris, Economica, p.771-780. Luo Y. (2004), Coopetition in International Business, Copenhagen Business School Press. Luo Y. (2007), “A Coopetition Perspective of Global Competition”, Journal of World Business, vol. 42(2), p. 129-144. Meyer J. and B. Rowan (1977), “Institutionalized organizations: formal structure as myth and ceremony”, American Journal of Sociology, vol. 83, p. 340–363. Morris M. H., Koçak A., and A. Özer (2007), “Coopetition as a small business strategy: implications for performance”, Journal of Small Business Strategy, vol. 19(1), p. 35-55. Okura M. (2007), “Coopetitive Strategies of Japanese Insurance Firms”, International Studies of Management & Organisation, vol. 37(2), p. 53-60. Oliver C. (1991), “Strategic Responses to institutional processes”, Academy of Management Review, vol. 18(1), p. 145-179. Porter M. E. (1980), Competitive Strategy, New York, Free Press. Ring P. S. and A. H. Van de Ven (1992), “Developmental processes of cooperative interorganizational relationships”, Academy of Management Review, vol. 19(1), p. 90-118. Scott W. (1995), Institutions and Organisations, California, Sage Publications. Shapiro C. and H. Varian (1999), “The art of standard war”, California Management Review, vol. 41(2), p. 8-32. Shapiro M. L. (2011), “Testimony on "Financial Regulatory Reform: The International Context"”, http://www.sec.gov/news/testimony/2011/ts061611mls.htm. Street D. L. and A. Shaughnessy (1998), “The Quest for International Accounting Harmonization: A Review of the Standard Setting Agendas of the IASC, US, UK, Canada, and Australia, 1973-1997”, The International Journal of Accounting, vol. 33(2), p. 179-209. Tether B. S. (2002), “Who co-operates for innovation, and why: An empirical analysis”, Research Policy, vol. 31, p. 947-967. Tidstrom A. and Ahman S. (2006), “The process of ending inter-organizational cooperation”, Journal of Business & Industrial Marketing, vol. 21(5), p. 281-290.

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Veron N. (2007), “Histoire et déboires possibles des normes comptables internationales”, L’économie politique, vol. 4(36), p. 92-112. Yin, R.K. (1994), Case Study Research, Design and Methods, Applied Social Research Methods Series, California, Newbury Park, Sage. BIOGRAPHY Anne-Sophie Fernandez is doctor in management and teaching strategic management and strategic marketing at the University of Montpellier (France). She is interested in complex inter-organizational dynamics such as coopetitive strategies in hi-tech industries, more specifically in the aerospace industry. She can be reached at University of Montpellier – ISEM, rue Vendémiaire Espace Richter Bât. B, CS 19519 – 34960 MONTPELLIER Cedex France, [email protected]. Francoise Pierrot is associate professor of accounting at the University of Montpellier (France). She is interested in accounting standardization and more particularly in the impact of the IFRS adoption on financial reporting of French listed companies. She can be reached at University of Montpellier – ISEM, rue Vendémiaire Espace Richter Bât. B, CS 19519 – 34960 MONTPELLIER Cedex France, [email protected].

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ECONOMIC ASSESSMENT OF THE USE OF SOLAR ENERGY IN KUWAIT

Mohamed A. Hadi, Tech. Dept., Council of Ministers, Kuwait. Refaat H. Abdel-Razek, Arabian Gulf University, Bahrain.

Walid M. Chakroun, Kuwait University, Kuwait.

ABSTRACT In Kuwait, the current method of generating electricity using conventional power plants cannot provide the beneficiaries with adequate service unless more plants are constructed. In addition to their high cost, these plants cause environmental damage, creating the need to investigate an alternative source of clean energy. The objective of this study is to assess the technical and economic feasibility of implementing Photovoltaic (PV) solar energy in residential houses in Kuwait. First, data and information were collected and the appropriate PV system was selected according to cost and PV specifications. Second, the equivalent annual costs of the PV system with various discount rates were estimated together with the cost per kWh both for new and existing houses. Third, the annual reduction of CO2 emissions resulting from implementing grid-tied PV systems was calculated. Taking into consideration the financial savings from CO2 reduction, the cost per kWh was estimated and compared with the current cost. The purported discount rate adopted by the Kuwaiti government’s long term plan is 6.7%. However, a range of discount rates from 0% to 20% was applied and results obtained. The results showed that with a 6.7% discount rate the annual savings on energy costs for a new house and a previously constructed one were KD 745 and KD 653 respectively. The results also revealed that the payback periods for the PV system for these houses are 15 and 15.5 years respectively. It is concluded that building integrated PV (BIPV) solar energy is economically and technically feasible in Kuwait when the discount rate is equal to, or less than, the break-even point of 10.36% discount rate. KEYWORDS: BIPV, Equivalent Annual Cost, Pay-back Period, Renewable Energy, Solar Energy. INTRODUCTION The energy consumption in Kuwait is increasing at a rate of 8% annually (Alotaibi, 2011). The accelerating growth of both the population and new cities, and the need for new infrastructure, especially in forms of electricity and water, has doubled the loads of electrical power plants, and constitutes challenges to find alternative sources of electrical power. Residential buildings consume a high percentage of electricity and can reach 70% of total production during the summer (MEW, 2010). The current method used to generate electricity cannot effectively provide the beneficiaries with adequate service all through the year, unless more new conventional power plants are constructed (Al-Faris, 2002). Conventional power plants are major oil consumers; the consumption in these plants alone would reach 26.5% of the total Kuwaiti oil production by 2020. With the oil production rate of 2008, all of the oil produced would be consumed locally by 2027 (Alotaibi, 2011). Kuwait is considered one of the highest carbon dioxide emitters per capita in the world (30.2 ton/person), mostly due to gases emitted from conventional electricity plants (UN data, 2010). Emissions of toxic gas from traditional power generators, which run on fossil fuels, are harmful to the environment and humans alike. In these circumstances, there is a growing interest in renewable and eco-friendly energy sources such as solar energy, to be used as auxiliary sources of energy. Solar energy is one of the renewable

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energy sources that can be a partial substitute for fossil fuel, to avoid most of the negative impact of fossil fuels (Kumar and Tiwari, 2009). Photovoltaic (PV) technology is proven and easy to use and the global PV market is predicted to increase substantially in the future. (Hoffmann, 2006). KUWAIT GEOGRAPHICAL LOCATION AND AVERAGE RESIDENTIAL BUILDING Kuwait is a desert country with a clean, hot and dry climate. From the NASA clearness index, KT, the average yearly reading for Kuwait over a twenty-year period is 0.59, which is considered almost clear sky all year long. For values above 0.5, the location is considered to have clear skies most days of the year (Islam, et al., 2009). The maximum yearly total global solar radiation corresponds to a tilt angle of 30°, which is equal to Kuwait’s latitude. The PV arrays for a proposed system should have the same orientation, 30° angle facing south (Al-Hasan, et al., 2004). The average annual sun hours for Kuwait are 9.2 hours daily. With average peak hours of 7.5 daily, average solar radiation of 5.5 kW/m2 and diffused radiation of 1.6 kW/m2, only 1 kW/m2 would normally be needed to activate the solar cell to its maximum power output (Alnaser et al., 2004). Al-Mumin and Al-Mohaisen (2008) showed that the average roof area of a typical Kuwaiti house is 308.3 m2, as shown in Fig.1. The average Kuwaiti house consists of two and a half floors, and consumes an average of 166.25 MW/yr (MEW, 2009). The latest MEW report (2010) stated that there are 375529 houses or consumers in the residential sector. The actual cost of producing electricity in Kuwait is 34 Fils/kWh ($0.12/kWh) (Ramadhan and Nasseeb, 2011). Figure1: First Column Represents the Average Roof Surface Area of Kuwaiti Houses (Source: Al-Mumin and Al-Mohaisen, 2008).

PARAMETERS OF THE SELECTED BIPV SYSTEM Pv Modules Selecting the proper module depends on a number of factors, for example: maximum efficiency, minimum area modules occupy, highest output power a system can give and cost of the PV module. The specification data of four different types of PV modules were collected (Samsung, 2011, DMSOLAR,

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2011, SinoSolar 2011 and BestSun 2011). Hadi (2011) analyzed these data and concluded that the BestSun156P300-72 module is the most appropriate module to be installed in Kuwait. Table 1 presents the main comparison features between the four modules, some specific data for each module and the comparison results. The Inverter Electricity supply in Kuwaiti uses 3-phase power, which leads to the selection of a model TLS-ZB 40kW inverter unit. The cost per inverter is $8810, with a twenty-year manufacturer’s warranty (Tresstech, 2011). Table 1: Comparison of Four Different PV Modules

Features Samsung LPC241SM DmSolar DM-280M2-3 SinoSolar SA260-96 BestSun156P300-72 Cell type mono-crystalline poly-crystalline mono-crystalline poly-crystalline

Effeciency 15.06% 14.40% NA 15.6%

Module's output wattage 241 280 260 300

Module Price $ 582 518 429 465

Price/Watt $ 2.41 1.85 1.65 1.55

NOCT 46 +-2C 47 +-2C NA 46 +-2C

Weight 18.6 Kg 23.2 Kg NA 23Kg

Temp. Cycling (-)40 t0 +85 C (-) 40 to +90 C NA (-) 40 to +85 C

Roof Area m2 308.3 308.3 308.3 308.3

Occupied area (ms) 1.60066 1.940352 1.659 1.940352

Total AAPM plus shade 2 m2 2.3 m2 2 m2 2.3 m2

No. of Modules 154 134 154 134

System power watt 37114 37520 40040 40200

Cost of Modules $ 89444.74 69412 66066 62310 The Balance of the System (BOS) BOS of a PV system consists of all the system or engineering components. It primarily consists of an inverter to transform the direct current (DC) output from the PV array into a form of alternating current (AC) electricity that can be synchronized with, and connected to, the electric utility grid. It also involves support structures and the cost of labor in the system installation. The BOS accounts for 30% to 40% of the cost of the PV system. In some studies, 35% was chosen as the average BOS cost factor of the PV system, taking into account that none of the other components are added to the cost of the modules. In most cases, the cost of the inverter, which is the second most expensive component of the system, is added to the module cost, thus decreasing the BOS cost from 35% to 25% (Ayompe, et al., 2010).

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ESTIMATING THE PV SYSTEM INITIAL COST Modules And Inverter Initial Costs The roof area of the average residential house is 308.3m2. Each module of the selected model BestSun156 P300-72 occupies 2.3m2 including the shaded area between module panels. Number of modules per PV system = total roof area / area of a single module = 308.3m2 / 2.3m2 = 134 modules per house Initial cost of one module with 300-watt peak output power = $ 465 (Table 1) Initial cost of all modules = $465 * 134 = $62,310 Initial cost of the inverter = $8,810/system (Tresstech, 2011). BOS Initial Cost And Total PV System Initial Costs Per House System initial cost = modules initial cost + inverter initial cost + BOS initial cost …..(1) It is assumed that the cost of BOS = 25% of the system cost (Rigter and Vidican, 2010). Let x = the initial cost per system in equation (1) x = $62,310 + $8,810+ 0.25x BOS initial cost = $94,827 * 0.25 = $23,707 per house Total PV system initial costs = $94,827 / house ESTIMATING THE EQUIVALENT ANNUAL COST (EAC) OF THE PV SYSTEM Cost of Operations and Maintenance (O&M) Using the following equation (Park, 2009): AAOM = P*(1+ƒ)n ……………………..………………………….…..…….……(2) Where: AAOM is the average annual cost of operation and maintenance, P is the present O&M cost (System data manual) = $500, ƒ is the annual inflation rate expected = 3.24% (InflationData.com, 2011), and n is the system estimated useful life =20 years. Then, AAOM = $688.40 Total Equivalent Annual Costs (Eac) EAC = Ai + AAOM ……………………………..…………………….....….....……(3) Where: EAC is total system equivalent annual cost, Ai is the equivalent annual cost of the system initial cost at certain discount rate (i) and is derived from the following equation:

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Ai = P * CRF ……………………………………………………….……....……….(4) Where: P is the system initial cost, CRF is the capital recovery factor and is obtained from the following equation: 𝑪𝑹𝑭 = �𝒊×(𝟏+𝒊)

𝒏

(𝟏+𝒊)𝒏−𝟏 � …………………….………………………….………..………(5)

Where: 𝒊 is the discount rate and 𝒏 is the system useful life, assumed to be 20 years. The purported discount rate adopted by the Kuwaiti government’s long term plan is 6.7%. However, a range of discount rates from 0% to 20% was applied. The resulting EACs in US$ and Kuwaiti Dinars (KD) are given in Table (2). Table 2: EAC of BIPV System with Different Discount Rates

Discount rate Initial cost ($) Initial cost per/year

($)

O&M/year

($) System EAC

($) (KD)

0% 94,827 4741.3 688.4 5432.0 1,514.4

5% 94,827 7609.1 688.4 8297.6 2,313.4

6% 94,827 8267.4 688.4 8,961.2 2,496.9

6.7% 94,827 8743.3 688.4 9431.8 2,629.6 10% 94,827 11138.3 688.4 11826.7 3,297.3 15% 94,827 15149.7 688.4 15838.1 4,415.7 20% 94,827 19473.3 688.4 20161.7 5,621.1

SYSTEM ANNUAL OUTPUT POWER (AOP) AND COST PER kWh AOP in Kuwait = average insolation /m2/yr * module efficiency * modules area .....(6) (Ramadhan and Nasseeb, 2011) The average annual solar insolation for Kuwait = 2080 kWh/m2/yr (Ramadhan and Nasseeb, 2011 & Alnaser, et al., 2004), Module efficiency = 15.6% (BestSun, 2011) Area occupied by 134 modules = 134 * 1.94 m2 (Table 1) = 259.96 m2 AOP in Kuwait = 2080 kWh/m2/year * 0.156 * 259.96 m2 = 84351.8 kWh/yr Cost of electricity per kWh = EAC/AOP ………………………………………..…....(7) Cost of electricity per kWh (at 0% discount rate) = 𝟏,𝟓𝟏𝟒.𝟒 𝑲𝑫

𝟖𝟒,𝟑𝟓𝟐𝑲𝑾/𝒚𝒓 = 18 KF/kWh

1KD=1000 Kuwaiti Fils (KF)

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Table (3) shows the cost/kWh at several discount rates in US cents and KF Table 3: Cost per kWh for the BIPV system at different discount rates

Discount rate 0% 5% 6% 6.7% 10% 15% 20%

System EAC US $ 5432 8298 8956 9432 11827 15838 20161

KD 1514 2313 2497 2630 3297 4416 5621

System AOP (kWh/house) 84352 84352 84352 84352 84352 84352 84352

Cost/kWh US Cent 6.4 9.8 10.6 11.2 14.0 18.8 23.9

KF 18.0 27.4 29.6 31.2 39.1 52.3 66.6

* 1US dollar = 0.2788 Kuwaiti Dinar (KD) ** 1 Kuwaiti Dinar (KD)= 3.586 US dollars SYSTEM NET COST AFTER DEDUCTING THE CO2 COST/kWh CO2 emission has a cost; this cost however ranges widely, depending on several factors (Roberto, 2010). In this study the average cost of CO2 emission is taken as $30/ton (Ramadhan and Nasseeb, 2011; Chel, et al.; 2009; Johnson and Keith, 2004). The amount of CO2-e prevented by the use of solar energy, i.e. the equivalent amount of carbon dioxide emitted to the atmosphere by conventional energy sources, is given (EPA, 2011) as: Annual amount saved of CO2 per kWh = 7.18*10-4 metric tons CO2/kWh ……….…(8) = (7.18 × 10−4) metric tons CO2 per kWh × 84351.8 kW = 60.6 metric tons/house/year Cost of CO2 saved by the PV system = 60.6 * $30 =$1818/house (KD 507/house) Cost of CO2 saved per kWh = Annual cost of CO2 / PV system annual output power = $1818 / 84351.8 kWh = $0.022/kWh (KF 6.1/kWh) Net cost per kWh (at zero interest rate) = EAC per kWh – CO2 cost per kWh = 18 – 6.1 = KF 11.9 /kWh Table 4 shows the net system cost per kWh at several discount rates. COST COMPARISONS BETWEEN PV AND CURRENT SYSTEMS The current electricity cost in Kuwait is 34 KF/kWh (Ramadhan and Nasseeb, 2011). The discount rate adopted by the Kuwaiti government’s long term plan is 6.7%. Cost per house at 6.7% discount rate using PV system = 2123.5 KD/house Current annual cost = Cost/kWh * Annual PV system output = 34 * 84351.8 = 2868 KD/year Annual saving per house = 2,868 – 2123.5 =744.5 KD/house

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Table (5) shows the cost comparisons between the PV system and current system per kWh and per house per year for several discount rates. Figure 2 shows the cost differences per kWh between PV system and conventional system at different discount rates. Fig.3 shows the annual cost differences per house at different discount rates. It is shown that the PV system is economically feasible when the discount rate is ≤ the break-even point of 10.36% discount rate. Table 4: Cost Comparisons between PV & Current Cost for a New House

Discount rate

PV system cost /kWh

PV System annual cost

/ house

Current cost/kWh

Cost Differences

KF/kWh

Current annual cost/house

Annual Cost differences KD/house

0% 11.9 1007.7 34 22.1 2868 1860.3 5% 21.4 1807.3 34 12.6 2868 1060.7 6% 23.6 1990.8 34 10.4 2868 877.2 6.7% 25.2 2123.5 34 8.8 2868 744.5 10% 33.1 2791.2 34 0.9 2868 76.8 10.36% 34.0 2868.0 34 0.0 2868 0.0 15% 46.3 3909.6 34 -12.3 2868 -1041.6 20% 60.6 5115.0 34 -26.6 2868 -2247.0

Figure 2: Cost Differences per kWh between PV and Conventional Systems

SYSTEM PAY-BACK PERIOD FOR NEWLY CONSTRUCTED HOUSES The estimated payback period (PBP) is given as (Chel and Tiwari, 2011): The system PBP = (system total annual cost per house at certain discount rate * system lifespan in years) / current annual cost of electricity per house Where: system annual cost at 0% discount rate is 1007.7 KD, system lifespan is 20 years and current annual cost of electricity per house is 2868 KD/house/yr. PBP at 0% discount rate = 𝟏,𝟎𝟎𝟕.𝟕𝐊𝐃×𝟐𝟎

𝟐,𝟖𝟔𝟖𝐊𝐃 = 7 years

PBP at several discount rates is given in Figure (4). It is shown that at 6.7% discount rate the PBP is 14.8 years, and at the break-even discount rate of 10.36% it is 20 years.

0% 5% 6% 6.70% 10%

15% 20%

22.1

12.6 10.4 8.8

0.9

-12.3

-26.6 -30

-20

-10

0

10

20

30

C os

t d iff

er nc

es p

er k

W h

in F

ils

Discount rate The difference

Break-even point =

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Figure 3: Annual Cost Differences per House at Different Discount Rates

Figure 4: PBP of PV System for Newly Constructed Houses

PV SYSTEM FOR PREVIOUSLY CONSTRUCTED HOUSES The only difference between implementing a BIPV system on a newly constructed and a previously constructed house is the cost of the BOS component. The infrastructure of previously constructed houses does not accommodate the PV system directly. Some adaptations are required to the main utility box and the installation of the wiring conduits. To cover all additional costs, the estimated BOS initial cost of the previously constructed house is estimated to be15% more than the BOS cost of a new house. The same methodology used for estimating the cost for newly constructed houses was used. The net cost/kWh was calculated for several discount rates. The results showed that the net cost is 12.5 and 24.6 KF/kWh for 0.0% and 6% discount rates respectively. The results also revealed that with a 6.7% discount rate, annual saving for a previously constructed house is KD 653. The PV system is economically feasible when the discount rate is ≤ the break-even point of 9.82% discount rate and the payback period is 15.5 years.

0% 5% 6% 6.70% 10%

10.3607%

15% 20%

1,860

1,061 877 744

77

0

-1,042

-2,247 -KWD 2,500 -KWD 2,000 -KWD 1,500 -KWD 1,000

-KWD 500 KWD 0

KWD 500 KWD 1,000 KWD 1,500 KWD 2,000 KWD 2,500

An nu

al c

os t d

iff er

en ce

s pe

r h ou

se

Discount rates Cost differences in Kuwaiti Dinars

0

10

20

30

40

7.0 12.6 13.9 14.8

19.5 20.0

27.3

35.7

N um

be r o

f y ea

rs

Discount Rates

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CONCLUSIONS Due to the extensive use of conventional power plants, Kuwait is considered one of the highest carbon dioxide emitters per capita in the world, 30.2 ton/person/year. The PV system would reduce the country’s emissions by almost twenty three million tons per year. The sunny climate of Kuwait creates excellent conditions for increasing the peak hour output of the PV system, which in turn lowers the cost of the BIPV system. Taking into consideration the financial saving of the CO2 reduction resulting from using the new system, the EAC of the BIPV system is lower than the EAC of the current conventional source of energy. At 6.7% discount rate, the estimated cost/kWh of the BIPV system for a new house is 25.2 KF, while for a previously constructed house it is 26.3 KF. The current conventional electricity cost is 34 KF/kWh. The annual savings, therefore, of BIPV for newly and previously constructed houses are 744 and 635KD/house respectively. The estimated payback periods of the BIPV system, with 6.7% discount rate, for newly and previously constructed houses are 14.8 and 15.4 years respectively. These are shorter than the twenty-year lifespan of the BIPV system. BIPV solar energy is economically and technically feasible in Kuwait when the discount rate is equal to, or less than, the break-even point of 10.36% for new houses and 9.82% for existing houses. REFERENCES Al-Faris, ARF (2002) “The Demand for Electricity in the GCC Countries,” Energy Policy, vol.30(2): p. 117-124 Al-Hasan, AY, Ghoneim, AA & Abdullah, AH (2004) “Optimizing Electrical Load Pattern in Kuwait Using Grid Connected Photovoltaic Systems,” Energy Conversion and Management, vol. 45(4), p. 483- 494 Al-Mumin, A & Al-Mohaisen, A (2008) “Greening the Kuwaiti Houses: Studying the Potential of Photovoltaics for Reducing the Electricity Consumption,” Journal of GBER, vol. 5(3), p. 3-10 Alnaser, WE, Eliagoubi, B, Al-Kalak, A, Trabelsi, H, Al-Maalej, M, El-Sayed, HM, & Alloush, M (2004) “First Solar Radiation Atlas for the Arab World,” Renewable Energy, vol. 29(7), p. 1085-1107 Alotaibi, S (2011) “Energy Consumption in Kuwait, Prospects and Future Approaches,” Journal of Energy Policy, vol. 39(2), p. 637-643 Ayompe, LM, Duffy, A, McCormack, SJ & Conlon, M (2010) “Projected Costs of a Grid-Connected Domestic PV System under Different Scenarios in Ireland, Using Measured Data from a Trial Installation,” Energy Policy, vol. 38(7), p. 3731-3743 BestSun (2011). Technical Data and Price of BestSun Module Model 156P300-72, Appendix C. Retrieved February 20, 2011, from: http://www.enf.cn/pv/11732b.html

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Chel, A & Tiwari, GN (2011) “A Case Study of a Typical 2.32 kWP Stand-Alone Photovoltaic (SAPV) in Composite Climate of New Delhi (India),” Applied Energy, vol. 88(4), p. 1415-1426 Chel, A, Tiwari, GN, & Chandra, A (2009) “Simplified Method of Sizing and Life Cycle Cost Assessment of Building Integrated Photovoltaic System,” Energy and Buildings, vol. 41(11), p.1172- 1180 DMSOLAR (2011). Technical Specifications and Price of DMSOLAR PV Module, Appendix B. Retrieved February 1, 2011, from: www.ecobusinesslinks.com/solar_panels.htm EPA (2011). United States Environmental Protection Agency, Calculations and References; CO2 Emission Factor, Clean Energy. Retrieved January 1, 2011, from: www.epa.gov/cleanenergy/energy-resources/refs.html Hadi, MA (2011) “Economic Assessment of the Use of Solar Energy Technology in Residential Buildings in Kuwait.” A thesis submitted in partial fulfillment of the requirements for the Master’s Degree in Technology Management (Engineering Track), Technology Management Program, Arabian Gulf University, Kingdom of Bahrain. Hoffmann, W (2006) “PV Solar Electricity Industry: Market Growth and Perspective,” Solar Energy Materials and Solar Cells, vol. 90(18-19), p. 3285-3311 InflationData.com (2011). Annual Inflation, Is Inflation Rising or Falling? Retrieved June 13, 2011, from: http://inflationdata.com/inflation/Inflation/AnnualInflation.asp. Islam, MD, Ohadi, IK & Alili, MAA (2009) “Measurement of Solar Energy Radiation in Abu Dhabi, UAE,” Applied Energy, vol. 86(4), p. 511-515 Johnson, TL & Keith, DW (2004) “Fossil Electricity and CO2 Sequestration: How Natural Gas Prices, Initial Conditions and Retrofits Determine the Cost of Controlling CO2 Emissions,” Energy Policy, vol. 32(3), p. 367–382 Kumar, S & Tiwari, GN (2009) “Life Cycle Cost Analysis of Single Slope Hybrid (PV/T) Active Solar Still,” Journal of Applied Energy, vol. 86(10), p.1995-2004 MEW (2009). Energy Conservation Program, Energy Conservation Measures in Residential Sector Buildings, Code of Practice No. MEW/R-6, Appendix 2. Ministry of Electricity and Water, State of Kuwait. MEW (2010). Electrical Energy - Statistical Year Book, Ministry of Electricity and Water, State of Kuwait Park, S (2009) “Fundamentals of Engineering Economics, Pearson Education Int., 2nd ed. Ramadhan, M & Naseeb, A (2011) “The Cost Benefit Analysis of Implementing Photovoltaic Solar System in the State of Kuwait,” Renewable Energy, vol. 36(4), p. 1272-1276

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Rigter, J & Vidican, G (2010) “Cost and Optimal Feed-In Tariff for Small Scale Photovoltaic Systems in China,” Energy Policy, vol. 38(11), p. 6989-7000 Roberto, C (2010) “Ramsey Pricing Including CO2 Emission Cost: An application to Spanish Airports,” Journal of Air Transport Management, vol. 16(1), p. 45-47 Samsung (2011). Technical Specifications and Price of Samsung PV Module, Appendix A. Retrieved January 20, 2011, from: www.ecobusinesslinks.com/solar_panels.htm SinoSolar (2011). Prices of PV Modules, Appendix F. Retrieved March 24, 2011, from: www.sinosola.com Tresstech (2011). Technical Specifications and Price of the Inverter, Appendix D. Retrieved February 26, 2011, from: www.tresstech.cn UN Data (2010). Carbon Dioxide Emissions (CO2), Metric Tons of CO2 Per Capita (CDIAC). Retrieved January 17, 2011, from: http://data.un.org/Data.aspx?d= MDG&f=seriesRowID%3A751

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IMPORTANT KNOWLEDGE FOR STRATEGIC INTELLECTUAL PROPERTY MANAGEMENT

Koichiro Kato, Kanazawa Institute of Technology Megumi Sako, Kanazawa Institute of Technology

ABSTRACT

Recently, the concept of CIPO (Chief Intellectual Property Officer) is attracting attention as a leader in enterprise management to promote strategic Intellectual Property management. CIPO is a key player to link and achieve Business, Research and Development, and Intellectual Property strategy with CEO and CTO. However, there are no training courses focused on CIPO education in companies or outside institutes like graduate schools. The purpose of this study was to investigate important knowledge for CIPOs to develop an ideal CIPO training course for CIPO candidates. The results showed a clear demand for CIPO training course at graduate schools, and the important knowledge for strategic intellectual property management were related to “Business” and “Human” skills, rather than “Legal” and “Legal practice”. The overall results suggested that CIPO training course at graduate schools should apply "business school" approach rather than “law school” approach which is more legal focused. INTRODUCTION Intellectual Property (IP) is recognized as one of the company's most important assets. As Technology management is having a dramatic impact on IP Management, the concept of CIPO is attracting attention as a leader in enterprise management to promote strategic IP management. CIPO is a kind of CxO, and a key player to link and achieve Business, Research and Development, and IP strategy with CEO and CTO. Under such circumstance, there is an increasing demand for educational institutions like graduate schools to take more serious action for IP education and training. In Japan, a standard called “Intellectual Property Skill Standards (IPSS)” was developed for IP professionals by the Ministry of Economy, Trade and Industry (2007). IP management specialists’ education has been started at universities around the world. However, there is no training course focused on CIPO education in graduate schools in the world. The purpose of this study was to investigate the important knowledge of CIPOs to develop ideal CIPO training courses. LITERATURE REVIEW Kato investigated the carriers and experiences of CIPOs in Japanese companies (Kato, 2010). Phelps and Kline explained the roll of CIPO in major IT companies in detail (Phelps and Kline, 2009). The necessities of the training for intellectual property managers, training methods and programs, etc. have been discussed in several studies (ex. Nagata, 2004). Marushima, the former CIPO of major manufacturers in Japan introduced CIPOs’ responsibilities of the position (Marushima, 2008). Despite the numerous studies related to this issue, there has been no conclusive answer to the program of CIPO Education in companies or outside institutes like graduate schools. METHODOLOGY We provided questionnaire surveys to various CIPOs in Japan (domestic) and Overseas (international). The surveys were sent to companies that submitted a high volume of patent applications which based on the ratio analysis of previous questionnaires classified by the volume of submitted patent applications per year. The survey was also sent to IP businesses sectors that were keen to have a CIPO.

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In this study, the definition of CIPO was 1) Leader in enterprise management to promote strategic IP management; or 2) A Key player to link and achieve Business strategy, Research and Development strategy; and 3) Develop IP strategy with CEO and CTO. The questionnaire forms were sent to the 168 Japanese companies (based on JPO survey in 2008), between March-April 2009 and 137 international companies (Top 150 USPTO Applicants in 2008 and Top 100 PCT Applicants in 2009, excluding Japanese companies), in May 2010, also, to the 51 international companies based on Intellectual Property Business Congress 2010 (IPBC) attendees' list, in Oct 2010. Responses were obtained from 59 domestic companies (35.1%) and 13 international companies (6.91%). RESULTS AND DISCUSSIONS Categories, Sub-Categories and Knowledge Items We used a five-point Likert scale to investigate the important knowledge necessary for CIPOs. The most important attribute was ranked 5 by the respondents and the least important was ranked 1. 25 items were selected from the IPSS categories. Graduate school’s IP and business course subjects were also used as a reference. There were 4 big categories related to “Performance Evaluation” such as (1) Business, (2) Law, (3) Legal practice and (4) Other. Each big category had sub-categories related to “Practice”. In (1) Business, there were 3 sub-categories (Management, IP management, Standardization). Table 1 shows sub-category and items in (1) Business. Table 1: Items in Category (1) Business

sub-category: items: name of items management corporate strategy/ management strategy knowledge 1 management of technology knowledge 2 marketing knowledge 3 accounting/financial affairs knowledge 4 ip management ip management/ strategy planning knowledge 5 ip licensing knowledge 6 ip evaluation knowledge 7 standardization international standardization strategy knowledge 8

in (2) “law”, there were 2 sub-categories (domestic ip law and international ip law). table 2 shows sub-category and items in (2) law. Table 2: Items in Category (2) Law

sub-category: items: name of items domestic ip law patent law knowledge 9 design patent law knowledge 10 trademark law knowledge 11 precedents of ip law knowledge 12 copyright law knowledge 13 unfair competition prevention law knowledge 14 civil law knowledge 15 international ip law ip related treaty knowledge 16 foreign patent law knowledge 17

In (3) “Legal practice”, there were 2 sub-categories (Domestic, International). Table 3 shows sub-category and items in (3) Legal practice.

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Table 3: Items in Category (3) Legal practice

Sub-Category: ITEMS: Name of ITEMS

Domestic Patent application practice Knowledge 18

IP litigation practice Knowledge 19

International International patent application practice Knowledge 20

Foreign patent application practice Knowledge 21 In (4) “Other”, there were 3 sub-categories (Technology, Foreign language, Human skills). Table 4 shows sub-category and items in (4) Other. Table 4: Items in Category (4) Other

Sub-Category: ITEMS: Name of ITEMS

Technology Technology Knowledge 22

Language Foreign language Knowledge 23

Human Skills Human resource management/leadership Knowledge 24

Negotiation Knowledge 25

Result of Important Knowledge for CIPOS Table 5 shows the average scores of Knowledge 1-25. Items scored larger than 4 point were considered to be important knowledge for CIPOs. As a result, 8 items were scored larger than 4 points by domestic CIPOs. BUSINESS: Corporate strategy/ management strategy (Knowledge 1), Management of technology (Knowledge 2), IP management / strategy planning (Knowledge 5), IP licensing (Knowledge 6) , LAW: Patent law (Knowledge 9) , OTHER: Foreign language (Knowledge 23), Human resource management/leadership (Knowledge 24) , Negotiation (Knowledge 25) . 6 items were scored larger than 4 points by international CIPOs. BUSINESS: Corporate strategy/ management strategy (Knowledge 1), Management of technology (Knowledge 2), IP management/ strategy planning (Knowledge 5), IP licensing (Knowledge 6) OTHER: Human resource management/leadership (Knowledge 24), Negotiation (Knowledge 25). There were similarities between the domestic and international CIPOs. Such as knowledge from (1) “Business” and (4) “Other” category were highly valued. It would be thought more attention should be given to those fields. Accordingly, CIPO training course at graduate schools should apply "business school" approach to develop the ability of management skills and human skills rather than "law school” approach which is more legal focused. The main difference seen between both groups was that international CIPOs did not value “law” and “language” as important knowledge. Needs for the educational course for CIPOs in Graduate schools We asked the necessity of CIPO training program in graduate schools, adequate course (Doctors, Masters, Certificate, etc.) and desirable course period. From the results of these questions, more than half domestic and 70% of international CIPOs surveyed recognized the needs of CIPO educational course. More than 60% of both domestic and international CIPOs responded that the course should be Master Degree Course for a period of between 1 or 2 years.

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Table 5: Result of average scores of Knowledge 1-25

Name of ITEMS Domestic International

Knowledge 1 4.43 4.73 Knowledge 2 4.27 3.91 Knowledge 3 3.79 3.45 Knowledge 4 3.64 3.73 Knowledge 5 4.41 4.82 Knowledge 6 4.09 4.64 Knowledge 7 3.88 4.27 Knowledge 8 3.59 3.09 Knowledge 9 4.05 3.91 Knowledge 10 3.66 3.18 Knowledge 11 3.80 3.27 Knowledge 12 3.70 3.45 Knowledge 13 3.50 3.09 Knowledge 14 3.77 3.00 Knowledge 15 3.55 3.09 Knowledge 16 3.63 3.36 Knowledge 17 3.77 3.45 Knowledge 18 3.88 3.64 Knowledge 19 3.68 3.45 Knowledge 20 3.21 3.36 Knowledge 21 3.39 3.36 Knowledge 22 3.52 3.64 Knowledge 23 4.14 3.36 Knowledge 24 4.43 4.64 Knowledge 25 4.25 4.64

Interview surveys Interview surveys were conducted to determine whether the findings of this research were applicable to CIPO education course in graduate schools, and to obtain opinions about industry-university cooperation. Interview surveys were conducted on the basis of a loose structure consisting of open ended questions. Interviews took place mid-August 2011. Participants were Dr. Kazunari Sugimitsu (Developer of the “Intellectual Property Skill Standards (IPSS)”, Professor, Ph.D., Patent Attorney), Mr. Tsutomu Kigoshi (Director, Patent, Thomson Engineering Lab. (Technicolor), JD, Patent Attorney) and Mr. Giichi Marushima (Corporate Advisor, The former CIPO of Canon Inc., Patent Attorney). All the Participants mostly agreed to our conclusion drawn from data collection and analyses undertaken through this study. They strongly agreed to the importance of established collaboration between companies and outside educational institutions specialized in CIPO education. Some impressive comments were as follows. “Most subjects could be adapted from MBA courses and converted as IP courses by adding subjects valued as important experience in this survey.” (Kazunari Sugimitsu). “OJT is one of the best ways to educate CIPO and its candidates. It even works for developing skills to drive the business. However, since CIPO is one of the top executives, lectures should not be given in the workplace by junior staff. Therefore, it is Graduate School’s responsibility to contribute CIPO education.” (Tsutomu Kigoshi). “Collaboration between company and the outside institute is hard to achieve. Educating CIPOs would not be easy whether if it’s done in the work place or the outside institute. The success of the course

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is depending on how many practical curriculums could be included. Universities should consider giving lecture on IP at the undergraduate schools, too.” (Giichi Marushima ). CONCLUSION The results of this study showed a clear demand for CIPO training course at graduate schools. Master's degree on the competition basis for 1 or 2 years thought to be sufficient for CIPO course in graduate schools. The important knowledge for strategic intellectual property management was related to Business and Human skills, rather than Legal or Legal practice. Needless to say, IP law and practice related knowledge will be needed for CIPOs; however the basic legal education was desired to be offered. This means, CIPOs do not have to be legal-professionals. The overall results suggested that the CIPO training courses at graduate school should apply "business school" approach rather than “law school” approach which is more legal focused. While very few universities internationally offer a special course for IP management, Kanazawa Institute of Technology (K.I.T.) Toranomon Graduate School has been equipping oneself for 2012. This will be first of its kind in the world as a CIPO training course. The course is a Master degree program for working people, along with programs in CIPO education based on the results. K.I.T will be continually attempt to drive themselves to find better approach for CIPO education to respond the social needs. In the end, it is necessary to establish collaboration between companies and outside educational institutions specialized in CIPO education, and undertake the re-surveys for a certain period of time, to improve the programs in effective means. REFERENCES Koichiro Kato (2010) “An Analysis Of CIPOs (Chief Intellectual Property Officers) In Japanese Companies”, Journal of Academy of Business and Economics, Vol.10, No.3, pp.1-6 Marshall Phelps and David Kline (2009) “Burning The Ships, Intellectual Property And The Transformation Of Microsot”, John Wiley & Sons, Inc., New Jersey Akiya Nagata,” Managing Intellectual Property”, Chuokeizaisya, 2004 (Japanese) Giichi Marushima,” Chizai konohito ni kiku” Vol. 1, Hatsumeikyoukai, 2008 (Japanese) Ministry of Economy, Trade and Industry (2007) “Intellectual Property Skill Standards (IPSS)”, METI web site, http://www.meti.go.jp/policy/economy/chizai/ipss/index.html (Japanese) ACKNOWLEDGEMENT This work was supported by KAKENHI 20607006 (Grant-in-Aid for Scientific Research (c)). BIOGRAPHY Dr. Koichiro Kato earned his Ph.D. in Technology Management at Tohoku University, Japan. Currently he is a professor of Kanazawa Institute of Technology (Toranomon Graduate School), examiner of the Test of Certified Skilled Worker of Intellectual Property Management, and patent attorney. Before joining academia, he worked for IBM-Japan.

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Megumi Sako is a visiting researcher of Kanazawa Institute of Technology, Japan. She received her Bachelor’s Degree in Visual Arts from the University of Sydney, Australia. She earned two Master’s degrees, one in Global Information and Telecommunications Studies from Waseda University, Japan and another in Technology from Kanazawa Institute of Technology, Japan.

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HOUSING FINANCE BY THE COMMERCIAL BANKS IN INDIA : GROWTH, CHALLENGES AND PROSPECTS

Jagpal Singh Benipal, Mata Ganga Khalsa College For Girls,Kottan (Ludhiana)

ABSTRACT

According to the Ministry of Urban Development and Poverty Alleviation, the shortage in housing in the country’s urban areas numbered 24.71 million in 2007. India will face shortage of over 26 million houses by 2012. Demand for residential houses is rising sharply because of growing young working population, increasing urbanization, declining household size resulting in more nuclear families with growing household income and improved availability of loans. The allocation of funds for housing at all India level by the commercial banks was Rs. 723.78 crore in 1994-95 and it rose to 8389.10 crore into 2003-04.As against allocation, the achievement of housing finance by commercial in 1994-95 was Rs. 748.61 crore and it rose to 45378.20 crore in 2003-04. The recent growth of Indian Private Banks proves that these banks have the role to play in this field in the coming years. There are some challenges for the housing finance sector in the form of some problems. The major portion of the houseless population is in low and lower middle income segments. The poor repayment capacity of the borrowers is a major problem for this sector. INTRODUCTION Housing Finance is one of the constituent of the services sector in India. Now, the services sector accounts for more than half of India’s Gross Domestic Production (GDP). Its contribution in India’s GDP is 56.4 per cent in 2008-09. At present, India emerged as one of the fastest growing economies of the world and the services sector played a significant role in this remarkable performance of the Indian Economy. Housing Finance is an important constituent of the services sector. Against this background the present paper throw some light on the Housing Finance in India. As far as the shortage of houses are concerned, it is a global problem. Although the problem is very chronic in the developing countries, most of the advanced countries also face this problem though in varying degrees. The problem of housing has not been solved in India since its independence. Inspite of a continuous effort in the country, the problem has become more serious especially in the urban sector of the economy. The problem of housing shortage is likely to grow at a very fast rate in the years to come. So, it is very clear that the housing finance needs to be stimulated so that the supply of housing could be increased at a faster rate so as to fill the gap between demand and supply of housing. Against this background the present paper has the following objectives : OBJECTIVES OF THE STUDY The specific objectives of the study are as follows : (i) To review the magnitude of the problem of housing shortage in India;

(ii) To evaluate the growth of housing finance by the commercial banks in India; (iii) To find out the various challenges ahead in this sector ;

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(iv) To find out the various prospects for the growth in this sector ; METHODOLOGY To examine the objectives, the study is based on the secondary data, collected from the various Financial Institutions like Annual Reports of National Housing Bank (NHB), Census of India, Various Five Year Plans of India and reports of various commercial banks etc. For the purpose of the analysis of the data, various statistical tools like averages, percentages and growth rate have been used. The rest of the paper is structured as follows : Section II reviews the Magnitude of the problem of housing in India. Section III evaluates the growth of housing finance by the Commercial Banks in India for the period of 1993-94 to 2003-04. Section IV discusses the various challenges ahead in this sector. Section V explains the various prospects for the growth of this sector. Finally, section VI concludes the major findings and suggestions. Magnitude Of The Problem Of Housing In India The First Five Year Plan estimated the shortage as 18.4 lakhs houses in urban areas in addition to 10 lakh houses for displaced persons from Pakistan. The Second Five Year Plan estimated that the shortage of houses in urban areas might increase by 1961 to about 5 millions as compared to 2.5 million houses in 1951. Based upon the census, the National Building Organisation has assessed the housing inadequacy in the country during 1985 of the order of 247 lakh dwelling units (188 lakhs in rural areas and 59 lakhs in urban areas). The Working Group on Housing has estimated the urban housing shortage at the beginning of Tenth Plan at 8.89 million units and the total number of houses required cumulatively during the Tenth Plan period is assessed at 22.44 million. According to the report of the Technical Group on estimation of Housing shortage constituted in the context of preparing Eleventh Five Year Plan document, housing shortage during the plan period (2007-12) including the backlog was estimated as 26.53 million. Most of the housing shortage is for the Lower Income Group sections which does not seem to be getting translated into economic demand due to lower affordability by the poor. A survey by the National Sample Survey Organisation (NSSO) in 2007 also showed that one out of every seven urban households in the country lived in slums. That would mean that about 8 million people live in slums and it is 2 million more than a decade ago. Growth Of Housing Finance By Commercial Banks In India Indian Housing Finance market is mainly dominated by multiple sources of finance. Most of the households resort to more than one source of housing finance because of their inability to secure sufficient housing finance from a single source. The housing finance market can be conveniently divided into Formal Housing Finance Market and Informal Housing Finance Market. The housing credit from institutional sources is termed as formal housing finance. Formal Housing Finance market constitutes- Commercial Banks, Employers supplying housing loan facilities against employee’s provident fund contribution, specialize housing finance institutions such as HUDCO, HDFC and LIC etc. and private housing finance institutes. Among the formal institutions, the commercial banks are playing a dominant role in the housing finance market of India. Till late seventies, the commercial banks were not exposed to any type of housing finance. Although the commercial banks are the late entrants in the field of housing finance yet they have surpassed the total lendings done by the Housing Finance Companies over the past few years. The information relating to housing finance as provided by various scheduled commercial banks in India during 1994-95 to 2003-04 has been given in Table 1. This information pertains to the allocation and achievement of housing finance

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by commercial banks. The percentage increase in allocation and percentage increase in achievement for each year has also been computed.

Table 1 : Housing Finance by Commercial Banks in India (Rs. Crore)

Year Allocation %age Increase in Allocation

Achievement %age Increase in Achievement

Per cent of Achieved Loan to Allocated Loan

1994-95 723.78 30.99 748.61 76.03 100.27 1995-96 927.03 28.08 842.03 12.48 90.83 1996-97 1071.45 15.58 1805.62 114.44 168.52 1997-98 1295.19 20.88 1284.00 -28.87 99.14 1998-99 1480.831 14.33 3951.992 207.78 158.49 1999-2000 3051.52 106.06 9911.35 150.79 324.80 2000-2001 3405.95 11.61 9787.24 -1.25 287.35 2001-2002 5159.22 51.48 14744.85 50.65 285.79 2002-2003 8574.10 66.19 33840.53 129.50 394.68 2003-2004 8389.10 -2.15 45378.20 34.09 540.91 Compound Growth Rate

27.7 _____ 50.8 _____ _____

Source : Report on Trend and Progress of Housing in India, 1999, 2003 and 2004.

The allocation of funds for housing at all India level was 723.78 crore in 1994-95. This amount rose to 8389.10 crore in 2003-04, showing that in money terms the amount for housing during 1994-95 to

2003-04 increased by 914.298 per cent per annum. As against allocation, the achievement of housing finance by commercial banks in 1994-95 was 748.61 crore. It rose to 45378.20 crore in 2003-04. The amount of achievement in housing finance during the same period increased by 2189.44 per cent per annum. The growth rate of achievement is much higher than the growth rate of allocation from 1994-95 to 2003-04. Achievement as percentage of the amount of allocation is more than 100 per cent in most of the years except 1995-96 and 1997-98. The compound growth rate for achievement (50.8) is more than the compound growth rate for allocation (27.7). The information relating to Bank group wise direct disbursement of housing finance during 1999-2000 to 2003-04 has been shown in Table 2.

Table 2 : Bank Group wise Direct Housing Finance Disbursal (Rs. Crore)

Banks 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Compound Growth Rate

SBI & Associates 1205.06 (33.5)

1950.09 (35.1)

2636.34 (30.8)

4782.88 (20.3)

6478.80 (19.7)

40

Nationalised Banks 1710.10 (47.5)

2800.90 (50.4)

4963.62 (57.9)

9129.47 (38.8)

13722.91 (41.8)

51.6

Indian Private Banks 522.30 (14.5)

645.06 (11.6)

696.79 (8.1)

8864.03 (37.6)

11102.52 (33.8)

84.3

Foreign Banks 159.94 (4.4)

157.06 (2.8)

269.66 (3.1)

776.99 (3.3)

1512.16 (4.6)

56.9

Total 3597.40 (100.0)

5553.11 (100.0)

8566.41 (100.0)

23553.41 (100.0)

32816.39 (100.0)

55.7

Figures in parenthesis indicate percentage to total. Source : Report on Trend and Progress of Housing in India-June 2003 and 2004. It is clear from the data that the share of SBI & Associates in total direct housing finance disbursement has declined from 33.5 per cent in 1999-2000 to 19.7 per cent in 2003-04. The share of Nationalised Banks has also decreased from 47.5 per cent in 1999-2000 to 41.8 per cent in 2003-04. Although the share of Nationalised Banks in total direct housing finance has declined yet it has the dominant role in providing the direct housing finance among the Commercial Banks. Nationalised Banks has the highest

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share in total direct housing finance for each year from 1999-2000 to 2003-04. In 2003-04 it had provided 41.8 per cent of direct housing finance. The role of Indian Private Banks has been increasing since 1999- 2000 in the field of direct housing finance in India. Indian Private Banks has only 14.5 per cent share in the disbursement of total direct housing finance in India while it rose to 33.8 per cent in 2003-04, thereby, surpassing the SBI and Associates. Indian Private Banks have the second highest share only after Nationalised Banks in 2002-03 and 2003-04. The Foreign Banks have a meager share in providing direct housing finance in India. Foreign Banks have increased a little share from 4.4 per cent in 1999-2000 to 4.6 per cent in 2003-04. It seems that no doubt the Nationalised Banks are dominating the housing finance market in India yet the recent growth of Indian Private Banks particularly in 2002-03 and 2003-04 proves that these banks have the role to play in this filed in the coming years. Challenges Ahead in This Sector The large population base, the massive housing backlog, the fast expanding urban population, mushrooming slums and squatter settlements are becoming a major socio-economic challenge for India. The working Group on Housing for the Tenth Plan has observed that 90 per cent of housing shortage pertains to the weaker sections. So, most of the housing shortage is for the Lower Income Group sections which does not seem to be getting translated into economic demand due to lower affordability by the poor.The liberlisation and the active entry of commercial banks into housing finance market, deregulation of interest rate increased the competition in the housing finance market and affected the volume of housing companies in the recent years. Prospects for the Growth of this Sector The Economic Times dated September 16, 2010 stated that India will face shortage of over 26 million houses by 2012, which would lead to spurt in housing prices as demand-supply gap widens and rising purchasing power of the middle class people. With India back on a high trajectory demand for commercial and residential space is likely to witness an upward trend. Demand for residential property is rising sharply because of growing young working population, increasing urbanization, declining household size resulting in more nuclear families with growing household income and improved availability of loans. Co-chairman of FICCI Real Estate Committee Pranay Vakil said over $ 1.2 trillion investment was needed to meet the rising demand for urban development. Urban population in India would nearly double to 600 million in the next 15 years from nearly 350 million now and this would put massive pressure on urban infrastructure including housing. In the present paper, the analysis of growth rate of housing finance by the commercial banks from 1994-95 to 2003-04 also proves that there is a great opportunity for the financial institutions in the housing sector of India. Moreover, housing activity would be an engine for substantial generation of employment in the country. Major Findings and Suggestions (i) The housing shortage is rising in India at a faster rate. It was 18.4 lakh houses in the First Five

Year Plan and it rose to about 26.53 million in the Eleventh Five Year Plan.

(ii) Around 90 per cent of housing shortage pertains to the weaker sections and most of them have no access to housing finance.

(iii) The compound growth rate of achievement is much higher (50.8) than the growth rate of

allocation of funds for housing of the commercial banks from 1994-95 to 2003-04. (iv) The Nationalised Banks are dominating the housing finance market in India.

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(v) The growth of Indian Private Banks in housing finance after 2001-02 proves that these banks

have the role to play in this field in the coming years. (vi) The Foreign Banks have a meager share in providing direct housing finance in India. These

Banks have increased a little share from 4.4 per cent in 1999-2000 to 4.6 per cent in 2003-04. SUGGESTIONS Housing activity can make various contributions to the financial sector, insurance business, capital market, construction material industry and employment etc., thus ensuring more Gross Domestic Production (GDP) growth. This potential needs to be channelised and realized by promoting housing supply and the mortgage industry. The facilitating role of the Government and financial institutions along with private intervention to address the housing needs of the society should be recognized. Efforts should be made to identify the legal and administrative constraints in the housing finance market and these should be addressed suitably. There should be a strong public-private partnership for tackling the housing and habitat issues in India. There is a strong need for more reforms in the banking sector in India. REFERENCES Government of India, Various Census Reports. Government of India, Various Five Year Plans. National Housing Bank, Annual Reports. National Housing Bank, Various Reports on Trend and Progress of Housing in India. Sharma K.S.R.N., “Housing Finance in India”, Indian Institute of Public Administration, New Delhi. Various Newspapers. Verghese K.V., “Housing Problem in India : Economic and Social Aspects”, Eureke Publications, New Delhi, 1980.

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ASSESSING INDIVIDUAL PERFORMANCE ON INFORMATION TECHNOLOGY ADOPTION: A NEW

COMPETING MODEL Diah Hari Suryaningrum, University of Brawijaya

ABSTRACT

This paper aims to propose a new model in assessing individual performance on information technology adoption. The new model to assess individual performance was derived from two different theories: decomposed theory of planned behaviour and task-technology fit theory. Although many researchers have tried to expand these theories, some of their efforts might lack of theoretical assumptions. To overcome this problem and enhance the coherence of the integration, I used a theory from social science literature, particularly from Blumer’s theory of symbolic interactionism. This theory indicates, as Blumer himself noted, that “the symbolic interactionist approach rests upon the premise that human action takes place always in a situation that confronts the actor and that the actor acts on the basis on defining this situation that confronts him.” Symbolic interactionism may have theoretical strengths on the basis that reality is understood as a social production; interaction is symbolic; humans have the capacity to engage in self- reflexive behaviour; interactionism regards society as ongoing process; and social and physical environments set limits on behaviour, but do not determine behaviour. In this essence, normally, humans use technologies not for the sake of technologies but for supporting their primary tasks, being job related or entertainment oriented. Thus, there is an interaction between human and his/her technology. In this paper, I suggest some propositions that can be tested later using experimental research design or longitudinal survey research. JEL: M15 KEYWORDS: individual performance, human-technology interaction, decomposed theory of planned behaviour, task-technology fit theory INTRODUCTION The interaction between information technology and individual performance has been an ongoing concern in Information System (IS) research. Since information technology adoption is related with human, researchers use psychology theory to predict human behaviour on that regard: Theory of Reasoned Action/TRA (Fishbein and Ajzen 1975), Theory of Planned Behaviour/TPB (Ajzen 1985, 1991), Technology Acceptance Model/TAM (Davis, 1989), and recently, Decomposed Theory of Planned Behaviour/DTPB (Taylor and Todd 1995, Hsu and Chiu 2004, Koeder et al. 2011). As to predict individual performance, IS researcher uses the concept of “fit” to investigate the interaction of task and system characteristics and their effects on information system usage and task performance: Task- Technology-Fit/TTF theory (Goodhue and Thompson 1995, Dishaw et al. 2002, Klopping and McKinney 2004, McGill and Hobbs 2006, Usoro et al. 2010). This paper proposes a new model of the relationship between the adoption of information technology and individual performance by taking on insight from these two research streams (user behaviour as predictors of system usage and task-technology-fit as predictors of performance). The core content of this new model, called Human-Task-Technology Interaction and Performance Model (HTTIP), is the contention

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that in order for information technology has a positive impact on individual performance, then the technology was not only be accepted and used, but also the technology must be a good fit or match with the task it supports. To develop a new model, I focus on the DTBP (Taylor and Todd 1995) and TTF (Goodhue and Thompson 1995). The DTBP has advantages over other acceptance models in that it identifies specific prominent beliefs that may influence information technology usage. The model was found to have better predictive power compared to the initial TPB and TAM. Likewise, the TTF theory defines a model that has been used to explain information system utilization. Goodhue and Thompson's (1995) research describes the relationship between the task requirements of the user and the functionality of the system and their impact on utilization. Performance impacts will occur when the technology meets the users' needs and provides features that support the fit of the requirements of the task. In their research, Goodhue and Thompson suggest that utilization ideally be measured as the proportion of times users choose to utilize or use system. Hence, to enhance the coherence of integration of these two models (DTPB and TTF), I employ a theory from social science literature, particularly Blummer’s theory of symbolic interactisonism. UNDERPINNING THEORY OF ACCEPTANCE Researchers and practitioners have a strong interest in understanding why human accept information technology so that better methods for designing, evaluating, and predicting how users will respond to new technology can be constructed. Lack of user acceptance is a significant obstacle to the success of new IS. Some facts indicate that users are often unwilling to use information system when if it used, it will troublesome or the outcome will not reached his/her expectation. Therefore, user acceptance has viewed as the important factor in determining the success or failure of any information system project (Davis 1993). Several underpinning theories have been developed to examine and understand the factors effecting acceptance of information technology application in organisation. Although each model has a different insight towards the acceptance process and each theory has different construct, there are some similarities in them. For example, while TRA includes usage behaviour, behaviour intention, attitude, and subjective norms; TPB uses the same construct as TRA with additional construct of perceived behaviour control. Meanwhile, TAM includes different antecedent of behaviour intention, such as external variables, perceived ease of use, perceived usefulness, and attitude. DTPB as an extension of TPB, includes some construct from Diffusion of Innovative theory (DOI): usage behaviour, behaviour intention, attitude, subjective norms, perceived behaviour control, perceived ease of use, perceived usefulness, attitude, compatibility, peers influence, superior influence, self-efficacy, resource facilitating conditions, and technology facilitating conditions. Theory of Reasoned Action TRA was proposed by Fishbein and Ajzen (1975) and is a well established model in social psychology research that can explain nearly any human behaviour. This theory suggests that person’s performance of specific behaviour (eg. Use of technology) is determined by his/her intention to perform the behaviour and behavioural intention is jointly influenced by his/her attitude and subjective norm with relative weights that estimated by regression (Figure 1). Attitude is equated by the salient belief about the consequences of performing the behaviour and the affective evaluation of those consequences. Beliefs are

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defined by the person’s subjective view that performing a given behaviour will result to a given consequences. Subjective norms are determined by normative beliefs and motivation to comply with perceived norms. Figure 1: Theory of Reasoned Action (Fishbein and Ajzen 1975)

This figure shows the construct of TRA and explains that actual usage influenced by behavioural intention and behavioural intention both influenced by attitude and subjective norm, the antecedent of attitude is attitudinal belief, while subjective norm is normative belief. A meta-analysis of TRA, performed by Sheppard et al. (1988), showed that TRA carried out well in the predictions of human behaviour and intention towards information technology. TRA also offered strong predictive utility in a situations such as non-voluntary behaviour and even when used to investigate intentions even before the individual had all the information necessary to form a completely confident intention (Dillon and Morris 1996). Besides that, Sheppard et al. (1988) pointed out three problems of TRA. First, one must differentiate between behaviour and intention. This could be a problem because avidity factors in addition to one, that is intention, determined how the behaviour is performed. Second, there is no provision in the model for considering whether the probability of failing to perform is due to ones behaviour or due to ones intention. Third, irrational decision, habitual actions or any behaviour that is not consciously considered cannot be explained. Theory of Planned Behaviour TPB was developed from the TRA by adding an additional construct, namely perceived behavioural control (PBC) to consider situations where an individual control or lack of the necessary resources to perform the target behaviour (Ajzen 1991) as seen in figure 2. PBC is determined by the availability of skills, resources, and opportunities. Since TPB consider the behavioural control, TPB assumed to be more general than the TRA.

Attitudinal Belief

Normative Belief

Attitude

Subjective Norm

Behaviour al

Actual Usage

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Figure 2: Theory of Planned Behaviour (Ajzen, 1991)

This figure shows the construct of TPB and explains that actual usage influenced by behavioural intention and behavioural intention not only influenced by both attitude and subjective norm, but also influenced by perceived behavioural control, and the antecedent each constrcts are attitudinal belief, normative belief, and control belief, respectively. Taylor and Todd (1995) pointed out that TPB is not without criticism. The relationship between the belief structure and the determinant of intention: attitude, subjective norm, and perceived behaviour control are not essentially well understood. Although TPB introduced one variable, perceived behaviour control, as an answer to all uncontrollable elements of behaviour, the beliefs set and construct may be difficult to operationalise the TPB and may not be consistently related to attitude, subjective norms, and perceived behavioural control. Furthermore, Taylor and Todd (1995) suggest that TPB model still requires individuals to be motivated to perform certain behaviour. Technology Acceptance Model TAM (Davis 1989) shared with the TRA on the general explanation that links attitude to behavioural intention but differ in drafting TAM attitude and behavioural intention. According to TAM, behavioural intention is jointly determined by attitude and perceived usefulness and together with the perceived ease of use explains the attitude. Broadly, the TAM indicates the general determinants of individual acceptance of technology and can therefore be used and has been applied to explain and predict individual behaviour across a broad range of technologies, end user computing and user groups (Davis et al. 1989). Because of its focus on technology, TAM appropriately used to observe the technology acceptance by individual professionals, but may still require theories or other models, because of its general and simple model. Figure 3: Theory of Acceptance Model (TAM)

This figure shows the construct of TAM and explains that actual usage influenced by behavioural intention and behavioural intention is jointly influenced by attitude and perceived ease of use, perceived ease of use and perceived usefulness reflect the beliefs about the value and user’s friendliness of information system, respectively.

Attitudinal Belief

Normative Belief

Attitude

Subjective Norm

Behaviour al

Actual Usage

Control Belief

Perceived Behavioural

Control

Perceived Ease of

Perceived Usefulness

Attitude Behaviour al

Actual Usage

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Some studies indicate that TAM represents a parsimonious model because it has been proven by many researchers in a different context and diverse technologies, such as in education (Teo et al. 2011, Sheikhshoaei and Oloumi 2011), public service organization (Bouwman and Winjgaert 2009), internet banking (Suh and Han 2002). Some researchers have also integrates TAM with TTF to obtain a more comprehensive explanation of human behaviour associated with the use of information systems (Dishaw et al. 2002, Klopping and McKinney 2004, Usoro et al. 2010, Schrier et al. 2010). Although there have been considerable amount of studies to support TAM model, TAM still need to be investigated for its inconsistent pattern; in some studies the relations were statistically significant, while other studies showed the opposite. Legris et al. (2003) found that perceived usefulness and perceived ease of use are not the only predictors of technology acceptance and lack of many significant factors that influence adoption. TAM provides only limited guidance on technology usage (Lin 2007) and substantially ignores external and situational influences particular to a given circumstance, such as mandatory or non-mandatory (voluntary) usage (Taylor and Todd 1995). Decomposed Theory of Planned Behaviour DTBP is an extension of TPB, was proposed by Taylor and Todd (1995) to overcome some of the limitation of TPB. Taylor and Todd (1995) extended TPB by decomposing the attitudinal belief, normative belief, and control belief into several dimensional constructs to provide higher descriptive power and a more accurate understanding of the antecedents of behaviour (Figure 4a). They claimed that DTBP provides some advantages: first, by decomposing belief, the relationship between belief and the antecedents of intention should become clearer and more readily understood. Second, decomposition can provide a stable set of beliefs which can be applied across a variety of settings, and third, by focusing on specific beliefs, DTPB more managerially relevant. Because of the larger number of factors that may influence adoption and usage, DTPB should provide a more complete understanding of IT usage. Several researchers have examined the validity of DTPB in understanding behavioural intentions (Taylor and Todd 1995, Hsu and Chiu 2004, Koeder et al. 2011). Hsu and Chiu (2004) studied electronic service continuance using DTPB. They indicated that even though DTPB provides better diagnostic value than original TPB model, it is still more complex because it introduced numbers of factors that may influence usage. Koeder et al. (2011) developed their model to identify the factors that encourage consumer to purchase e-book reader in Japan, with the focus on normative factors. They found that attitude towards connected e-book readers were the most important factor contributing to purchase behaviour. Koeder et al. (2011) study was differ from Taylor and Todd (1995) and Hsu and Chiu (2004) because they developed new constructs in decomposing attitude with relevance advantage and decomposing subjective norm with normative influences. TASK-TECHNOLOGY FIT THEORY TTF theory is seen as an important development in information system theory. TTF theory assumed that information technology is more likely to have a positive effect on individual performance and be used if the capabilities of information technology match the task that the user must perform (Goodhue and Thompson 1995) as seen in Figure 4b. To explain the linkage between information technology utilisation and individual performance, they developed a conceptual model of technology-to-performance chain. This conceptual framework was based on two separate research streams: first, the utilisation of information technology with its antecedent of attitude and behaviour, and second, the “fit focus” evident in research investigating the performance of individual information technology user.

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The concept of “fit” assessment in strategy research has been discussed comprehensively by Venkatraman (1989) with six alternative perspective and approach of fit. 1) Fit as moderation perspective; effect of fit as a moderating variable of an independent variable (predictor variable) on dependent variable (criterion variable). 2) Fit as mediation perspective; an existence of intervening (indirect) effects between an antecedent variable and its consequent (criterion) variable. 3) Fit as matching perspective; fit is a theoretically defined match between two related variable. 4) Fit as gestalts; gestalts could be defined as the degree of internal coherence among a set of theoretical attributes (fit as on the identification of different group). 5) Fit as profile deviation; the degree of adherence to a specified profile. 6) Fit as covariation; a pattern of covariation or internal consistency among a set of theoretically related variables. The first two perspectives are more commonly used than the remaining four perspectives (McGill and Hobbs 2006, Teo and Men 2008). Goodhue and Thompson (1995) use the concept of fit as moderating variable, as they proposed: “information system (systems, policies, staff of IS, etc) have a positive impact on performance only when there is a correspondence between their functionality and the task requirements of users.” Their study found moderately supportive evidence of TTF as a function of system characteristics and task characteristic, and strong evidence of performance in which TTF and utilisation must be included. Even if TTF has some supporting evidences, some researchers have extended TTF with TAM in varying areas; conceptualization perspective (Dishaw et al. 2002), consumer of e-commerce (Klopping and McKinney 2004), education (Strong et al. 2006), e-Tourism (Usoro et al. 2010), hotel industry (Schrier et al. 2010) to obtain a more comprehensive explanation of human behaviour associated with the use of information systems. This new model of individual performance is trying to integrate TTF with DTPB, because even though TAM has a robust model, but TAM is a simple model, while DTPB assumed to provide more complete understanding of IT usage. To enhance the coherence of the two models, I use the sociology theory of symbolic interactionism. SOCIOLOGY THEORY OF SYMBOLIC INTERACTIONISM Social theory has a substantial part to play in the development of the discipline of IS, particularly in helping to understand and interact with the societal, organizational and personal contexts without which the technology is meaningless. Blumer has made a substantial contribution to that theory, and his theory of symbolic interactionism has been taken up by a number of IS researchers (Tan et al., 2003). Blumer (1969) invented the term symbolic interactionism. He sees human action toward social objects as individual terms in describing the object, rather than the characteristics of the object. Blumer divided symbolic interaction into three premises of: a) People behave according to their understanding of objects and events that happen to them; b) An understanding of the individual objects and events rooted in the individual's interactions with others; and c) Understanding more about interpretation than just a mere literal sense that has been standardized. He defined interpretation in two ways, first is the identification of the actor on an object in a situation that has meaning. The second is the internal communication within the actor's self and decide which objects that have meaning to the situation. Blumer (1969) identified interactions as an interpretation of language and symbolic gestures, and the determination of the understanding or the meaning of the actions performed by others. Humans should be able to understand one another, because social life is a "flow and

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process” of negotiation. Reasonable for individuals to try to adjust their actions and behaviours with those in which the individual interacts. Symbolic interactionism theory refers to the character that goes between people. Actor does not merely react to other actions, but he interprets and defines those actions. Human interaction is bridged by the use of symbols to find a meaning. Actor will select, examine, think, organize and transform meaning in relation to the circumstances in which and toward which his actions. Blumer (1969) says that the individual is not surrounded by an environment of potential objects, but it was he who formed objects. Individuals designing different objects, giving meaning, assessing compliance with the act, and making decisions based on those assessments. Thus, humans are actors who are aware and reflective, which unites the objects known through what is Blumer referred to as self-indication. Self-indication is the ongoing process of communication where individual know something, evaluate it, give it a meaning, and decided to act on that meaning. Human excellence is if he understood where he was going, what is his obstacles, and what he would earn. Thus, this theory indicates that “the symbolic interactionist approach rests upon the premise that human action takes place always in a situation that confronts the actor and that the actor acts on the basis on defining this situation that confronts him.” Symbolic interactionism may have theoretical strengths on the basis that reality is understood as a social production; interaction is symbolic; humans have the capacity to engage in self-reflexive behaviour; interactionism regards society as ongoing process; and social and physical environments set limits on behaviour, but do not determine behaviour (Tan et al. 2003). In this essence, normally, humans use technologies not for the sake of technologies but for supporting their primary tasks, being job related or entertainment oriented. Thus, there is an interaction between human and his/her task-technology. Dillon and Morris (1996) pointed out that interaction between human-technology has been addressed by human-computer interaction (HCI) researches. They explained that HCI research has moved from its original concern with hardware ergonomics and screen design to user issues of interest. They also indicated that even if HCI is not equivalent with the concept of acceptance, most HCI researchers assume that the more usable a technology is made, the greater it chances in proving the acceptable to users. Zang and Li (2004), in their assessment of HCI research in management information system (MIS), casted light upon the research studies that HCI concerned with the ways human interact with information, technologies, and task, especially in business, managerial, organisational, and cultural contexts. They synthesized a frame work indicating a board HCI issues and concerns. They concluded that the interaction of human and technology alone is still incomplete, since nothing happens in a vacuum. The interaction experience is relevant and important only when humans use technologies to support their primary tasks within certain contexts, being organizational, social or societal. A NEW MODEL: HUMAN-TASK-TECHNOLOGY INTERACTION AND PERFORMANCE The new model is an integration of DTPB and TTF. DTPB is selected in this new model because it provides fuller understanding of the determinant of behavioural intentions (Taylor and Todd 1995, Lin 2007). Both researchers compared three theories and model of usage behaviour: TAM, TPB, and DTPB. They examined the trade-off between parsimony and understanding associated with decomposition and showed that even if DTPB is more complex than the pure TPB because of its additional construct, by decomposing the belief structure of TPB increases the explanatory power and a better, more precise understanding of the model for behavioural intentions. Particularly they emphasized that the

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unidimensional belief constructs of DTPB provides better understanding of behavioural antecedents (figure 4a). Thus DTPB is selected for its capability to understand human behaviour and a good predictor for system usage. Likewise, TTF is chosen because of its theoretical assumption that information technology is more likely to have a positive effect on individual performance and be used if the capabilities of information technology match the task that the user must perform (Goodhue and Thompson 1995) as seen in Figure 4b. Symbolic interaction occurs not only among subjects, but could also occur between subject and object. An example is the interaction between people and objects in the form of information and technology. The rapid developments in information and communication technology have driven the development study of the interaction between people and technology. Eason (1991) model divides human interaction with computers (technology) at three levels: level one related to human-computer interaction; expanded by a factor of two levels of users, tasks, and environments that may affect job performance, and level three, IT and between human-computer interaction impact on social life in the changed of nature of work, the way how the organization operates, and how humans interact with one another. In HTTIP model, the main components are human. Although there are many ways to understand human beings and their interactions with technology, eg in terms of demographics, physical skills and ergonomics, cognitive and effective, but in this model is focused on human behaviour intentions (cognitive aspects). For that I use DTPB model because of its comprehensiveness in predicting human behaviour. Decomposing Attitudinal Belief Ajzen (1985) revealed two kinds of differences in attitudes which are attitude toward object and attitude toward behaviour. Attitude toward the behaviour is degree in which a person has pleasant or unpleasant evaluation. Ajzen further stated that attitudes are related to the behaviour intention has a direct effect on behaviour, while attitudes toward object has an indirect relationship. Thus, there are many factors that affect the consumer interest to use and adopt information technology. In HTTIP model, attitude is decomposed to three constructs: perceived ease of use, perceived usefulness, and perceived risk. Perceived ease of use and perceived usefulness was originated from TAM model (Davis 1989). Teo, et al. (2011) provided evidence to support TAM as a viable and efficient model to explain the intention to use technology. Fisbein and Ajzen (1975) extended TAM model and proved that the differences in attitudes, perceived usability, perceived risk, and perceived playfulness is an attitude associated with the usage that are categorized as attitudes on behaviour. Proposition #1 : Perceived ease of use, perceived usefulness, and perceived risk will have a significant influence on attitude towards technology use.

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igure 4: The Decomposed Theory of Planed Behaviour, Task-Technology Fit Theory, and Human-Task- Technology Interaction and Performance.

a) Decomposed Theory of Planned Behaviour Model

a) Task – Technology Fit Model

Perceived Usefulnes

Perceived Ease of

Compatib i-lity

Peer Influence

Superior Influence

Self- Efficacy

Resource

Technolo

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This figure shows the construct of DTPB, TTF, and HTTIP. Figure 4a explains that attitude, subjective norm, and perceived behavioural control will influence the behavioural intention towards usage behaviour. Attitude, subjective norm, and perceived behavioural control are decomposed into multi-dimensional belief constructs. Figure 4b indicates task, technology, and individual characteristic that effects task-technology fit towards individual performance. Figure 4c, as a new model, integrated DTPB and TTF as a more comprehensive model to explain the relation between human-technology and performance. Decomposing Subjective Norm In the TPB, subjective norm is the perceived social pressure to perform or not perform the behaviour or belief a person that someone or something important will be approved or not approved if it performs the behaviour (Ajzen, 1991). Relative interests of subjective norm in predicting the expected interest varies according to the behaviour and situation. Hsu and Chiu (2004) found the influence of subjective norm on behavioural intentions, contrary Tan and Theo (2000) found no significant effect of subjective norms on individual intention to adopt internet banking. Bhattacherjee (2000) stated that subjective norm is an important predictor of interest to use an electronic brokerage service. In his research, Bhattacherjee (2000) showed that subjective norm include two forms of interpersonal influence and external influences. Therefore, in this study, subjective norm decomposed into two components, namely interpersonal influences and external influences. Proposition #2 : Interpersonal and external influence will have a significant influence on subjective norm towards technology use.

c) A New Model: Human-Task-Technology Interaction and Performance

Human Theory of Symbolic Interactionism

Task-Technology-Fit

Perceived Usefulnes

Perceived Ease of

Perceived Risk

Interpersona l Influence

External Influence

Self- Efficacy

Perceived Resource

Perceived Controllabili

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Technology Characteristics

Technology Characteristics

Individual Performance

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Decomposing Perceived Behaviour Control Perceived Behaviour Control (PBC) tend to be a means as the individual's perception of ease or difficulty in performing the behaviour and it is assumed to be a reflection of past experience such as the availability of resources and opportunities (Ajzen, 1991). In his subsequent study in 2002, Ajzen suggested two-level hierarchical model in which the PBC is the holding of the construct of self-confidence (self efficacy) and controllability. Several studies applying the TPB to predict the behaviour of interest and prove that the self-confidence (self efficacy) and controllability significantly associated with intentions. Self-efficacy is the ease or difficulty to perform the behaviour, or beliefs of individuals to perform the behaviour, whereas controllability is control of the behaviour or beliefs about how far do the behaviour is a will of its own behaviour (Ajzen, 2002). Associated with self efficacy, individuals will feel more satisfied with the behaviour that they feel able to do so, or vice versa (Bandura, 1998). One component of PBC is a condition that facilitates (facilitating condition) which reflects the availability of the necessary resources to perform a behaviour, such as money, time and other resources. Zang and Guttierez (2007) states that perception resources (perceived resources) have a significant influence on persepsian behavioural control (PBC). Thus, in this study Perceived Behaviour Control (PBC) decomposed into three components, namely the self-assurance (self-efficacy), perceived controllability and perceived resources Proposition #3 : Self efficacy, perceived resources, and perceived controllability will have significant influence on perceived behaviour control toward technology use. Proposition #4 : Attitudes, subjective norm, and perceived behaviour control towards technology use will have significant influence on behaviour intention to use technology. Proposition #5 : Behaviour intention to use technology will have a significant influence on actual use of technology. The second component of the HTTIP model is task-technology fit which include task, technology, and a fit between both. Goodhue and Thompson (1995) define tasks as “action carried out that turn inputs into outputs.” Gebauer and Shaw (2002) differentiate three different tasks within the organization, namely operational tasks, management tasks, and information tasks. Meanwhile, technology is the making, usage, knowledge of tools, machines, techniques, systems of method in order to solve a problem or perform a specific function. Includes in technology are hardware, software, applications, data, knowledge, and supporting procedures. Goodhue and Thompson (1995) indicate that the fit between task characteristics and features of information systems provide a conceptual basis for testing the quality of individual decision-making. System information helps users by providing information that can be used individually to carry out their duties. Therefore, the strong relationship between information technology and individual performance (McGill and Hobbs 2006, Teo and Men 2008) or utilization (Strong et al. 2006) is the fit between information technology that provides information to users and information needed to the task that must be

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done. This TTF theory proposes that a better fit between technology and task will lead to better performance. Proposition #6 : Task characteristic and technology characteristic will have a significant influence on task-technology fit towards individual performance The TTF model, as a fit between task and technology, has been used as moderating variable within TAM model. Usoro et al. (2010) argued that “TAM and TTF model are individually effective in their explanation of the different factors affecting user acceptance and utilization of IT systems and the impact of their adoption on individual performance from two different perspectives – TAM focuses on user attitude while TTF focuses on the correspondence between the user’s task and the functionalities of the system.” Thus, integration of both TAM and TTF will be more effective than the individual models in its explanation and prediction of the adoption and utilization process for an IT system by the user (Klopping and McKinney, 2004). In this new model, I integrated DTPB with TTF, since DTPB is more comprehensive than TAM in predicting human behaviour of information technology usage. Theory of symbolic interactionsm indicates that reality is understood as a social production; interaction is symbolic; humans have the capacity to engage in self-reflexive behaviour; interactionism regards society as ongoing process; and social and physical environments set limits on behaviour, but do not determine behaviour. In this essence, normally, humans use technologies to support their primary tasks with purpose in enhancing his/her performance. Proposition #7 : The integration of DTPB and TTF predicts the actual use of information technology and individual performance. This paper is an early attempt to provide a comprehensive model in assessing individual performance within information technology adoption. Some subsequent studies, using experimental research design or longitudinal survey research, must be employed to test the validity of the model and propositions. REFERENCES Ajzen, I., (1985), “From Intention to Actions: A Theory of Planned Behaviour,” in Kuhl, J and Bechmann, J (Eds.), Springer Series in Social Psychology, Berlin, Springer. Ajzen, I., (1991), “The Theory of Planned Behaviour,” Organizational Behaviour and Human Decision Processes, Vol. 50, No. 2, p. 179-211. Ajzen, I., (2002), “Perceived Behaviour Control, Self-Efficacy, Locus of Control, and the Theory of Planned Behaviour,” Journal of Applied Social Psychology, 32 (4), p. 665-683. Bandura, A., (1998). Self-Efficacy: The Exercise of Control, W.H. Freeman, New York. Bhattacherjee, A. (2000). “Acceptance of Internet Applications Services: the Case of Electronic Brokerages, IEEE transactions on system”, System and Human, 30, p. 411-420. Blumer, H., (1969). Symbolic Interactionism: Perspective and Method, Englewood Cliffs, NJ: Prentice- Hall.

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Bouwman, H., and van de Wijngaert, L., (2009), “Coppers Context and Conjoints: A Reassessment of TAM,” Journal of Information Technology 24, p. 186-201. Davis, F. D., (1989), “Perceived Usefulness, Perceived Ease of Use, and User Acceptance of Information Technology,” MIS Quarterly, 13 (September), p. 319-339. Davis, F. D., (1993), User Acceptance of Information Technology: System Characteristics, User Perceptions and Behavioural Impacts,” International Journal of Man Machine Studies, 38 (September), p. 475-487. Davis, F. D., Bagozzi R.P., and Warshaw P.R, (1989), “User Acceptance of Computer Technology: A Comparison of Two Theoretical Models,” Management Science (35: 8), p. 982-1002. Dillon, A., and Morris, M. G., (1996), “User Acceptance of Information Technology: Theories and Models,” in M. Williams (ed.) Annual Review of Information Science and Technology, Vol. 31, Medford NJ. Information Today, p. 3-32. Dishaw, M. T., Strong, D. M., and Bandy, D. B., (2002), “Extending the Task-Technology Fit Model with Self-Efficacy Constructs,” Eighth Americas Conference on Information System, p. 1021-1027. Eason, K.D., (1991), “Ergonomics Perspective on Advances in Human-Computer Interaction,” Ergonomics, 34 (6), p. 721-741 Fishbein, M., and Ajzen, I., (1975), Belief, Attitude, Intention, and Behaviour: An Introduction to Theory and Research, Addison-Wesley, Reading, MA. Gebauer, J., and Shaw, M.J., (2002), “A Theory of Task/Technology Fit for Mobile Applications to Support Organisational Processes,” Working Paper, citeseerx.ist.psu.edu, name: 10.1.1.137.6695.pdf. Goodhue, D. L., and Thompson, R. L., (1995), “Task-Technology Fit and Individual Performance,” MIS Quarterly, 19, 2, (June), p. 213-236. Hsu, M.H., and Chiu, C.M., (2004), “Predicting Electronic Service Continuance with a Decomposed Theory of Planned Behaviour,” Behaviour and Information Technology, Vol. 23, No. 5, p. 359-373. Klopping, I. M., and McKinney, E., (2004), “Extending the Technology Acceptance Model and the Task- Technology Fit Model to Consumer E-Commerce,” Information Technology, Learning, and Performance Journal, Vol. 22, No. 1 (Spring), p. 35-47. Koeder, M. J., Mohammed, U., and Sugai, P., (2011), “Study of Consumer Attitude towards Connected Reader Devices in Japan Based on the Decomposed Theory of Planned Behaviour,” Economic and Management Series, EMS-2011-10 (May), IUJ Research Institute, International University of Japan. Legris, P., Ingham, J., and Collerette, P., (2003), “Why do People Use Information Technology? A Critical Review of the Technology Acceptance Model,” Information and Management, 40, p. 191-204.

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Lin, Hsiu-Fen, (2007), “Predicting Consumer Intention to Shop Online: An Empirical Test of Competing Theories,” Electronic Commerce Research and Applications, 6, p. 433-442. McGill, T. J., and Hobbs, V. J., (2006), “E-Learning and Task-Technology Fit: A Student and Instructor Comparison,” 17th Australasian Conference on Information Systems (6-8 Dec), Adelaide. Schrier, T., Erdem, M., and Brewer P., (2010), “Merging Task-Technology Fit and Technology Acceptance Models to Assess Guest Empowerment Technology Usage in Hotels,” Journal of Hospitality and Tourism Technology, Vol. 1, No. 3, p. 201-217. Sheikhshoaei, F., and Oloumi, T., (2011), “Applying the Technology Acceptance Model to Iranian Engineering Faculty Libraries,” The Electronic Library, Vol. 29, No. 3, p. 367-378. Sheppard, B., Hartwick, J., and Warshaw, P., (1988), “The Theory of Reasoned Action: A Meta-Analysis of Past research with Recommendations for Modifications and Future Research,” Journal of Consumer Research, 15 (3), p. 302-325. Strong, D.M., Dishaw, M.T., and Bandy D.B., (2006), “Extending Task-Technology Fit with Computer Self-Efficacy,” The Data Base for Advances in Information Systems, spring, Vol. 37, 2/3, p. 96-107. Suh, B., and Han, I., (2002), “Effect of Trust on Consumer Acceptance of Internet Banking,” Electronic Commerce research and Applications, 1 (3), p. 247-263. Tan, M., and Theo, S.H., (2000), “Factors Influencing the Adoption of Internet Banking,” Journal of the Association for Information System, 1, p. 1-42. Tan, M. T.K., Zhu, L., and Wang, X. W., (2003). “Symbolic Interactionist Ethnography: Toward Congruence and Trustworthiness,” Ninth Americas Conference on Information System, p. 2885-2894. Taylor, S., and Todd, P., (1995), “Understanding Information Technology Usage: A Test of Competing Models,” Information Systems Research, 6 (2), p. 144-176. Teo, T.S.H., and Men, B., (2008), “Knowledge Portal in Chinese Consulting Firms: A Task-Technology Fit Perspective,” European Journal of Information Systems 17, p. 557-574. Teo, T., Ursavas, O.F., and Bahcekapili, E., (2011), “Efficiency of Technology Acceptance Model to Explain pre-Service Teachers’ Intention to Use Technology,” Campus-Wide Information Systems, Vol. 28, No. 2, p. 93-101 Usoro, A., Shoyelu, S., and Kuofie, M., (2010), “Task-Technology Fit and Technology Acceptance Models Applicability to e-Tourism,” Journal of Economic Development, Management, IT, Finance, and Marketing, 2 (1), (March), p. 1-32. Venkatraman, N., (1989), “The Concept of Fit Strategy Research: Toward Verbal and Statistical Correspondence,” The Academy of Management Review, 14 (3), p. 423-444.

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Zang, W., dan Guttierez, O., (2007), “Information technology acceptance in the social services context: an exploration.” Social Work; (52,3) Academic Research Library, p. 221. Zhang, P., and Li, N., (2004) “An Assessment of Human-Computer Interaction Research in Management Information Systems: Topics and Methods,” Computers in Human Behaviour, 20, p. 125-147. BIOGRAPHY Diah Hari Suryaningrum is currently a doctoral student of accounting program at University of Brawijaya, Malang – Indonesia. Her research interest includes information system, ethics, and accounting behaviour. She can be reached at Universitas Pembangunan Nasional “Veteran” Jawa Timur – Surabaya, Indonesia; email: [email protected].

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A CLOSER LOOK AT CURBING FRAUD AMONG TAX RETURN PREPARERS

Richard Lai, St. John’s University, Jamaica, New York Maria Pirrone, St. John’s University, Jamaica, New York

ABSTRACT

Unethical tax preparers have been caught and convicted of criminal acts that have cost the cash strapped Federal and state governments millions of lost tax revenue. In order to further regulate this troubling industry, the Internal Revenue Service and some states now require paid tax return preparers to formally register with them and many may be required to pass tests that would establish minimal competency. Since taxpayers are ultimately responsible for their tax returns that are signed and filed by them, caution is advised in carefully selecting their tax return preparer. When choosing a tax return preparer: be cautious of tax preparers who claim that they can obtain large or larger refunds; avoid preparers who base their fees on a percentage of the refund; consider whether an individual or firm will be available to answer questions after the current tax season and in subsequent years; check tax preparers’ credentials; and never sign a blank return.

INTRODUCTION A recent US Department of Justice release declares: “Former Dallas Tax Preparer Sentenced to 15 years in Federal Prison on Conspiracy and Obstruction of Justice Convictions”, re: Herbert Jena, September 16, 2010. Unfortunately, this has been a recent and recurring scenario where unethical tax preparers have been caught and convicted of criminal acts that have cost the cash strapped Federal and state governments millions of lost tax revenue. Other Current Cases Other recent cases of criminal acts by tax return preparers throughout the country include: A state certified tax preparer of California was convicted of tax fraud, identity theft, and financial fraud, and ordered to pay close to $363,000 in restitution. She was sentenced to 42 months in prison and 3 years of supervised release. Re: Willena Stargell – September 19, 2011. A Flint, Michigan woman, operator of a tax return preparation center, was found guilty of 37 counts of preparing and filing false tax returns. She was sentenced to 33 months in prison, 1 year of supervised release, and ordered to pay $3,700 in fines. The estimated tax loss was over $110,000. Re: Chandra Hicks – September 14, 2011. A Manhattan, New York tax return preparer was found guilty of 12 counts of aiding and assisting in the preparation of false and fraudulent individual tax returns. She was sentenced to 12 months and 1 day in prison. The estimated tax revenue loss was between $80,000 and $200,000. Re: Gloria Gaviria – September 14, 2011.

Abuses Under Section 7701(a)(36), tax return preparers include one or more compensated persons who prepare and sign tax returns as well as those who may not actually sign as preparer but advise on an income tax position or entry. Among the many abuses that tax return preparers have been convicted include:

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-Claiming false business, rental, and itemized deductions -Claiming false exemptions -Claiming false credits such as the earned income credit -Failing to report all required income -Failing to remit payroll tax deposits and withholdings -Filing false returns and seeking illegal refunds -Redirecting refunds to their own accounts -Guaranteeing large refunds and/or basing their preparations fees on refunds claimed CIVIL PENALTIES In addition to facing criminal charges and possible injunctions from further practice as tax return preparers, there are numerous civil penalties that may be assessed against tax preparers in this relatively unregulated business. These include the following penalties: 1. Under Section 6695 of the Internal Revenue Code (Other Assessable Penalties with Respect to the Preparation of Tax Returns for Other Person), a $50 penalty per failure may be imposed against preparers for: -Failure to furnish taxpayers with a copy of their tax return -Failure to sign a return -Failure to furnish preparer’s identification number -Failure to retain a copy or list of returns -Failure to file a current information return However, the total penalty per failure may not exceed $25,000 and will be imposed only if the failure is without reasonable cause and is due to willful neglect. 2. Under Section 6695(f), a $500 penalty per check may be imposed against any preparer who endorses or negotiates an income tax refund check made payable to another. 3. Under Section 6695(g), a $500 penalty may be assessed for failure by a preparer to comply with required due diligence requirements relating to the eligibility or correct amount on returns claiming the earned income credit. 4. Under Section 6694 (Understatement of Taxpayer’s Liability by Tax Return Preparer), a penalty equal to the higher of $1,000 or 50% of the fee derived from a filed return may be assessed where a non- disclosed, unreasonable (no substantial authority) position is taken on a filed return. (Section 6694(a)) 5. Under Section 6694(b), a penalty equal to the higher of $5,000 or 50% of the fee derived from a filed return may be assessed for any understatement of tax resulting from the preparer’s willful or reckless conduct or from any reckless or intentional disregard of the tax rules or regulations. 6. Under Section 6701 (Penalties for Aiding and Abetting Understatement of Tax Liability), a penalty of $1,000 per individual return ($10,000 per corporate return) may be assessed against anyone who aids in a return that they know would result in an underpayment of a tax liability.

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DEFENSIVE ACTIONS The IRS encourages people who suspect fraud by abusive and unscrupulous return preparers to report them to their nearest IRS office by phone or by writing. Form 3949-A is available for this purpose and whistle blowers may be entitled to a reward.In order to further regulate this troubling industry, the Internal Revenue Service and some states such as New York and California now require paid tax return preparers to formally register with them and obtain a preparer tax identification number (PTIN). Additionally, under IRS guidelines, registered tax return preparers (RTRP) may be required to pass a 2.5 to 3 hour test that would establish minimal competency. However, more importantly, these regulated tax return preparers must adhere to ethical standards in their preparation of tax returns and may be required to complete 15 hours per year of continuing education which include tax ethics, recent tax law updates, and other relating topics. Finally, the Treasury Department plans to apply Circular 230, which regulates the practice of licensed attorneys, CPAs, and enrolled agents before the Internal Revenue Service, to registered tax return preparers. CONCLUSION What To Look For When Choosing A Tax Preparer When choosing a tax return preparer, the following points should be noted: -Be cautious of tax preparers who claim that they can obtain large or larger refunds -Avoid preparers who base their fees on a percentage of the refund -Consider whether an individual or firm will be available to answer questions after the current tax season and in subsequent years -Check tax preparers’ credentials -Never sign a blank return Remember – the Taxpayer is ultimately responsible for their tax return that is signed and filed by him or her. Caution is advised in carefully selecting your tax return preparer and a reputable preparer should always be used. BIOGRAPHY Richard T. Lai holds a LL.M. in Taxation from New York University School of Law and a J.D. from Boston College Law School. He is a licensed Attorney and CPA in New York State and currently provides extensive tax consulting and planning for various business entities. In addition, he has delivered numerous presentations to Internal Revenue Service auditors and examiners in their Continuing Professional Education Program. Email: [email protected] Maria Pirrone is an assistant professor at St. John’s University. She holds a J.D. from St. John’s University School of Law and a LL.M. from New York Law School. She is a licensed Attorney and CPA in New York State. Email: [email protected]

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BEAUTY IN THE AGE OF MARKETING Bingqing Yin, Washburn University Susie Pryor, Washburn University

Abstract

Research has repeatedly demonstrated that beauty is positively related to a number of important outcomes including social and personal power, self-esteem, and preferential treatment from others (Bloch and Richins, 1992; cf. Adams, 1977; Goldman and Lewis, 1977). Moreover, studies consistently suggest that the use of physically attractive models results in positive effects (Berscheid and Walster, 1974; Bower, 2011; Buunk and Dijkstra, 2011; Landy and Sigall, 1974). Accordingly, advertisers utilize attractive models to promote a wide array of products ranging from cosmetics to electronics. Despite the emergence of physical attractiveness as a major component of consumer marketing, there is little cohesive theoretical development in this area. This oversight ignores a marketplace dominated by global marketing initiatives which cross nation-state and cultural boundaries. We have no coherent language system for the study of beauty, nor has there been a systematic attempt to develop a theory of beauty that is robust enough to be useful to marketing and advertising practitioners. The purpose of this paper is to contribute to that theoretical development. First, we refine terminology. Second, we review the marketing literature related to the subject area. Finally, we tentatively suggest how socio-cultural factors may affect consumer perceptions of beauty. JEL: M31 KEYWORDS: marketing, beauty, consumer behavior, cross-cultural research INTRODUCTION Beauty, it is said, is in the eye of the beholder. It is, accordingly, subjective and presumably both socially and culturally influenced. From a marketer’s perspective, this is a less than useful perspective, for beauty sells. A body of research suggests, for example, that physically attractive models used in advertising produce consumer expectations of accountability, dynamism and trustworthiness; therefore, marketers tend to use these models to enhance and strengthen the appeal of their advertisements and products (Kamins and Gupta 1994). Physically attractive people are known to be perceived by consumers as friendly, warm, dominant, sociable, outgoing, responsive, and possessing both self-esteem and intelligence (Bloch and Richins, 1992). Individuals favor and are favorably disposed towards physically attractive people (Caballero, Lumpkin and Madden, 1989). More broadly, research in other fields finds physical attractiveness both a determinant and moderator of various processes including heterosexual liking (Berscheid, Dion, Walster, and Walster, 1971), individuals’ perception and evaluation (Sigall and Landy, 1973;), persuasion effectiveness (Mills and Aronson, 1965) and attributions of personal characteristics and future success (Clifford and Walster, in press). It is therefore not surprising that physical attractiveness has become a major component of consumer marketing, Beauty is power. What is surprising is the lack of theoretical development in the field, and that becomes apparent when beauty is conceptualized not as an independent variable but as a marketing construct. Understanding consumers’ perceptions of beauty, particularly in a complex, global marketplace, has become increasingly strategically important.

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The pursuit of beauty is apparent throughout centuries and across cultures. Consumers, especially female consumers, use cosmetics, adornments, clothes, and even plastic surgery to increase and enhance their physical attractiveness (Bloch and Richins, 1992). In daily life, consumers are confronted with advertisements in which products -- varying from cosmetics and clothes to cars and television sets -- are promoted by attractive models and studies provide empirical support for the validity of this marketing approach (Buunk and Dijkstra, 2011). Taken as a whole, the literature offers substantial evidence that beauty is an important construct. The literature also suggests areas of general consensus. One, beauty is usefully employed in the promotion of products, both in mass advertising and at point of purchase. Two, consumer attributions related to beauty are multidimensional and favorable. Three, these two axioms hold true across the globe. From a theoretical viewpoint, the literature has made several key contributions. It has developed a set of outcome variables and has tested relationships in a variety of contexts and through a variety of methodological approaches and effectively established nomological validity that allows us to accept these results as robust. Some work has explored cultural differences in consumer perceptions of beauty, laying the foundations for research. Other work has established the features which contribute to human physical beauty. However, there is a relative paucity of work which sets out to provide a coherent theory of beauty. We lack, for example, a common language with which to work. The proliferation of inexact and variable usage of terms such as beauty, physical attractiveness, aesthetics, and other similar words confounds our task. The purpose of this paper is to begin to examine beauty as a complex marketing construct in order to provide the basis for theoretical development in this area. The paper is organized as follows. We begin the process of defining terms, each of which may present its own avenue for future theoretical development. These include beauty, attractiveness, and aesthetics. We then focus more narrowly on physical attractive and review findings in the literature, in order to suggest how the extant research might be assimilated to begin the process of construct development. Finally, we suggest how research may wish to undertake the task of exploring beauty in the age of marketing. LITERATURE REVIEW Beauty is commonly considered a characteristic of individuals, objects, and places that is perceived pleasurably. It is studied in diverse fields such as sociology and anthropology (people and animals), art and aesthetics (objects), and tourism studies (places). It is a term which is unique and independent from other related terms, such as attractiveness and aesthetic. Beauty is colloquially defined as “attractiveness” in advertising and marketing research, and has been measured on a continuum from attractive to unattractive (Langmeyer and Shank, 1994). Arguably, beauty is, however, more than a simple judgment of attractiveness. Beauty is psychologically complex and reflects multiple dimensions which provide for the inclusion of facets of beauty that are described by consumers in varied terms, such as cute, elegant, sexy, etc. (Solomon, Ashmore and Longo, 1992). This multiplex conceptualization makes the continuum approach problematic. Physical attractiveness generally includes the individual’s analysis of specific characteristics including facial image, body proportion and shape and skin tone (Langmeyer and Shank 1994). For practical purposes, a common categorization in the field of advertising assessing physical attractives across six interrelated psycho-logical distinctions or differentiations including (1) Classic Beauty/ Feminine, (2) Sensual/Exotic, (3) Sex-Kitten, (4) Trendy, (5) Cute, and (6) Girl-Next-Door” (Solomon, Ashmore and Longo 1992).Physical attractiveness, then, is a term related to, but unique from, beauty.

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The term aesthetics concerns the nature of beauty, creation, and appreciation of beauty. Parsing the term aesthetics from that of beauty may be particularly theoretically important in marketing from a global perspective. It is common to allude to, for example, the Western aesthetic, the Islamic aesthetic, or the post-modern aesthetic. Throughout centuries and across cultures, people have used adornments in their pursuit of beauty (Bloch and Richins, 1992) and people adorn their bodies in various ways by covering fashionable or desirable parts graciously to achieve beauty or for aesthetic effect ( Scott, n.d. ). Empirical studies have shown that adornment usage, which is positively related to physical beauty, enhances attractiveness and perceptions of femininity (Cash, 1988; Guthrie, Kim and Jung, 2006). Moreover, adornment usage affects self – esteem and social power (Adams and Read, 1983). Adornments such as nail items, tattoos, hair styles, jewels, shoes and other grooming and beauty enhancing products have flooded the beauty market. Hundreds of millions of dollars are spent every year by companies to persuade customers to remain fashionable in order to fulfill their desire of both of material level of self-satisfaction and physical level of attractiveness. In addition to financial expenditures, consumers – particularly women -- are willing to suffer physical pain to fit a certain type of social expectation of beauty (Bloch and Richins, 1992). For example, women wear uncomfortable high heels to fit the social standard of beauty and enhance feelings of confidence and attractiveness (Solmon and Schopler, 1982). As one of the major components in the pursuit of beauty, clothing presents an individual’s image. Fashion appeal is a non-verbal communication (Vanderholf 1988), through which the observer can assume the wearer’s emotional, educational, moral, economic and social status (Faiola and Pullen, 1982). Consumers use cosmetic products to enhance their appearance and create a “positive declaration of the self,” and “ inscribe attributes to [one’s] personality” (Craik, 1993) and promote self-esteem (Creekmore, 1974). The application of make-up allows consumers to quickly and temporarily change their appearance. Commonly used cosmetics serve as a quick, easy and means to improve facial attractiveness and hence strengthen self-confidence (Miller and Cox, 1982). Improving physical attractiveness is one of the main reasons women apply cosmetics (Guthrie, Kim and Jung, 2006). Women wearing make-up express a more positive body and self-image and show more confidence than women not wearing make-up (Cash and Cash, 1982). Certain cultural and social standards of beauty and the perceived rewards for being physical attractive have pressured more and more women to apply cosmetics to change their appearance in order to conform to idealized social and cultural beauty standards and expectations (Kelson, Kearney- Cooke, and Lansky, 1990). Researchers have found out that women who identify with more traditional roles are more likely to apply cosmetics to achieve beauty (Forbes, Jung and Haas, n.d.), cosmetic usage is positively correlated with facial satisfaction (Cash and Cash, 1982), and that females who wear make- up have more overall appearance satisfaction, believe that they receive more attention than they would otherwise receive, and are also more likely to overestimate their attractiveness when wearing make-up and underestimate their attractiveness when they do not apply make-up (Cash, Dawson, Davis and Bowen, 1989). Cosmetic brands adopt commonly understood and culturally embedded beauty standard to express to targeted groups’ desirable images of beauty (Guthrie, Kim and Jung, 2006.). The influence of these brands and their advertising has been felt globally. For example, before 1910, women in Japan presented a traditional image of covering their face with lead-based white powder, but after 1910, western style transparent white and skin-toned powder become more commonly used (Peiss, 2002). . Increasingly,

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consumers choose brands in order to reflect social status as well as desired facial image (Wood, 2004). Accordingly, brand managers are advised to relate brand personality to women’s’ cosmetic purchase behaviors and perceptions of facial image to identify different marketing strategies (Jamal and Goode , 2001). Perception of facial beauty are affected by generic, social, cultural and environments factors (Naini, Moss and Gill, 2005). Culturally, socially, and historically subjective, issues related to facial beauty have fascinated scholars for centuries (Gunes and Piccardi, 2006). Facial beauty may be viewed as a combination of certain qualities which generate a sense of pleasure (Naini, Moss and Gill, 2005). Overall, facial symmetry, facial proportion and facial expression are the significant characteristics in the determination of facial beauty. Regardless of variables such as race, age and sex, a universal standard of human physical beauty is thought exist, which can be simply expressed as ideal facial proportion (Gunes and Piccardi, 2006; Larrabee, 1997). The Divine Proportion (Jefferson, 2004), Golden Proportions (Borissavlievitch, 1985; Huntley, 1970) or the Facial Thirds (Farkas, 1994) have been widely accepted as ideal facial proportion measurements. Faces with the ideal facial proportions are not just physically attractive but also biologically healthy (; Rhodes etc. 2001; Simposon, 1999). Researchers have noted that the level of symmetry is one of the fundamental factors that affect human face attractiveness (Gangestad, Thornhill and Yeo, 1994). Evolutionary biologists have proposed symmetry as a sign of health and high genetic quality that may be adaptive (Thornhill and Moller, 1997; Watson and Thornhill, 1994). Moreover, facial symmetry is theorized to be a signal of mate quality (Swaddle and Cuthill, 1995; Watson and Thornhill, 1994). Studies by Rhodes et al. (1998) report that by increasing the symmetric level of individual faces, the attractiveness of these faces can be increased and that by reducing the symmetric level, facial attractiveness can be decreased. However, some other related studies have shown that normal levels of asymmetric faces are more attractive than perfectly symmetric versions of the same faces (Kowner, 1996; Langlois, 1994). For example, research by Knowner and Langlois suggests that the average face is more attractive than the perfectly symmetric one, which comes to the conclusion that people prefer symmetric faces ( perfectly symmetric excluded) than average faces. Facial symmetry is only one factor important to facial attractiveness (Rhodes et al. 1998). Psychologists and medical sciences have proposed that there is a timeless, ideal beauty based on facial proportion (Naini, Moss and Gill, 2005). In addition, different cultures hold their own perception of attractive facial image. For example, the ideal face image of beauty in Asian women’s perception is a tiny face with large eyes and prominent nose (Kaw 1991). An eyelid without cease and a flat nose indicate “sleepiness,” “dullness,” and “passivity” (Kaw 1991 p79). A number of researches have showed that Asian women tend to change their facial features through cosmetic surgery (Rosenthal 1991) in order to acquire “symbolic capital” (Bourdieu 1984; Kaw 1991). More and more Asian women seek cosmetic surgery for double eyelids to get wider and larger eyes and nose bridges for higher noses to avoid the stereotype oriental look and negative traits in their culture in order to be exotic and outstanding (McCurdy 1990; Kaw 1991). Many Asian women seek cosmetic surgeries to avoid the racial prejudice that correlates with Asian stereotyped facial beauty (Kaw 1991). In Asia, fair skin is central to understandings of physical beauty and is correlated with a woman’s social status, job prospects, and earnings potential (Leslie 2004; Li, Min, Belk, Kimura and Bahl 2008). White skin, especially in south Asia, is considered both noble and aristocratic (Bray, 2002). Skin whitening,

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which can be traced back to colonialism (Li, Min, Belk, Kimura and Bahl 2008) and views regarding western beauty and nobility (Wagatsum 1967) fuses traditional Asian cultural values with Western aesthetics (Li, Min, Belk, Kimura and Bahl 2008). The ideal of white skin is the interaction of western- centrism and Asian ideologies represented by Confucianism (Russell 1996). Since whiteness remains as a significant element, women in Asia use various methods to brighten, whiten and lighten their yellow- toned or dark skin such as skin whitening or skin bleach cream, pearl powder, or skin whitening drugs (Bray, 2002; Jeon 1987). Skin color bias, especially within the African American community, reflects the difficulty, disadvantage and pain of dark-skinned women (Thurman, 1929; Thomas and Keith, 2001). In African American communities, skin color plays a significant role in class and social status determinations (Thurman, 1929). Research suggests that dark-skinned women are considered on the bottom rungs of the social ladder, least marriageable, with the least education and career opportunities (Parrish, 1994; Warner, Junker and Adams, 1941). The physical attractiveness stereotype “what is beautiful is good” (Dion, Bersheid and Walster, 1972) creates a “Halo” effect to light-skinned women (Thomas and Keith, 2001). Attractive women are perceived to have lighter skin tones than unattractive women, and a darker-skinned woman may feel herself unattractive and think herself unsuccessful no matter how intelligent and inventive she is (Russell, Wilson and Hall, 1992). African Americans have been conditioned to believe in conformity to a beauty standard that equates light skin with an easier and more rewarding life (Bond and Cash, 1992; Gatewood, 1998). Interestingly, western Caucasians may seek darker skin tones. While suntanned skin was once the hallmark of the working-class, farmers and outdoor laborers, and a tanned skin viewed as unattractive and undesirable (Mahler, Beckerley and Vogel, 2010), this aesthetic was entirely reversed due to the efforts of the French designer, CoCo Chanel. American culture quickly adopted Chanel’s portrayal of tanned skin as not merely aesthetically pleasing and trendy (Berkeley, Wellness Letter, 1998) but also come to equate it with good health, wealth, and prestige (Bellafante, 2001). Studies show that individuals compare their own level of attractiveness with that of fashion models (Richins, 1991). Stereotypes indicate that women’s values are judged by their physical attractiveness and the ideal image of attractiveness is considered as a “creditable source” (D'Alessandro and Chitty, 2011) for women. Several researchers report that attractive body image, which can generally be represented by body shape, body proportion and weight, is a significant variable when comes to the general standards and judgment of beauty and effectiveness of advertisements (D'Alessandro and Chitty, 2011). Attractive body image is seen as an indicator of interpersonal, material, and career success (Sullivan, 1993). Singh (1993a) suggests that body fat distribution may be presented by waist-to-hip ratio (WHR.). An indicator of health, youth and fertility usually lies between 0.67 and 0.80 for healthy and reproductively capable women and is correlated with women’s physical attractiveness (Streeter and McBurney, 2002). Singh (1993a) contends that the smaller the WHR ratio is, the more attractive the woman will be considered. Further studies have found that both men and women find women with 0.7 WHR as most attractive (Furnham, Lavancy, and McClelland, 2001). Highly attractive underweight model images are pervasive (Westover and Randle, 2009). Both in western and eastern cultures, thinness as the ideal woman beauty standard has been stressed in media representations of beauty (Wifley and Rodin, 1995). Dalley and Gomez (1980) note that slimness has been found to relate to elegance, self-control, social attractiveness, and youth (Dailey and Gomez 1980). Media pressure, socio-cultural pressure, self- dissatisfaction pressure and male preference pressure have delivered the clear message to woman that being thin is perceived more attractive than average weight or

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overweight (Stice, Schupak-Neuberg, Westover and Randle, 2009). (Exceptions exist. In Uganda, for example, heavier body shapes are overwhelmingly preferred.) Large numbers of women reify standards of beauty established via media images, striving for reductions in body mass (Monteath and McCabe, 1997). Eating disorders, cosmetic surgery and depression caused by self- dissatisfaction reported negative results of these consumer responses to media presentations of beauty (Singh, 1994b). CONCLUSION This paper is by no means a comprehensive examination of the construct of beauty, nor is it intended to be a critique or presentation of media representations. Rather, it is designed to be suggestive of the breadth and depth of knowledge needed in the field of marketing to developing a theory of beauty useful to practitioners. It suggests, for example, the types of variables that interplay with the construct of beauty. It also suggests the variable nature of the construct. It acknowledges that social and cultural factors contribute to perceptions and beliefs about beauty. Finally, it hints at the magnitude of importance of understanding beauty. Such an understanding will contribute to the field, assisting advertisers, consumers, and consumer advocates. REFERENCES Available upon request from the authors BIOGRAPHY Bingqing Yin is a graduate student at Washburn University. Her research interests include cross-cultural perceptions of beauty and consumer behavior. Susie Pryor is an assistant professor of marketing. Her research interests include social capital and co-production.

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“INTRAPORTFOLIO CORRELATION”: AN APPLICATION FOR INVESTMENTS STUDENTS

Lynda S. Livingston, University of Puget Sound

ABSTRACT

“Intraportfolio correlation,” a measure of portfolio diversification, is becoming increasingly popular among investment practitioners. However, far from providing the “free lunch” its adherents assert, the intraportfolio correlation is a simplistic and flawed measure that ignores material information about the relationships among portfolio assets. Deconstructing the intraportfolio correlation therefore can be a productive and educational exercise (and a cautionary tale) for students of portfolio theory. In this paper, we describe the measure and offer suggestions for incorporating it into an introductory investments course. JEL: G11, G14

KEYWORDS: Portfolio Theory, Diversification, Finance Pedagogy INTRODUCTION Students of investments are certain to learn the portfolio concepts of Markowitz (1952) and the Capital Asset Pricing Model of Sharpe (1964). However, classroom models do not always transfer easily to the “real world,” and practitioners constantly search for new ways to make difficult theoretical constructs operational. Students therefore must be prepared to evaluate applied metrics, and to ensure that nothing critical is lost in their translation from the academic ideal. In this paper, we consider a relatively new metric meant to assess portfolio diversification: “intraportfolio correlation” (IPC, or “Q”). The bold claims made for this measure (for example, that it is diversification, all by itself), its various definitions, and its drastically simplified inputs beg for critical examination by investments students. Q fits neatly into discussions of two- and three-asset portfolios, the standard approach in undergraduate courses. A thorough examination of this new metric should ensure that students—unlike the purveyors of Q—clearly understand the difference between correlation and covariance. DEFINING THE INTRAPORTFOLIO CORRELATION According to adherents, intraportfolio correlation defines diversification. However, there are competing definitions for IPC, which complicates evaluation. One definition that comes up frequently is: Q = ∑∑

i j ijjiww ρ , (1)

i≠ j, where wi is the fraction of the portfolio invested in asset i, wj is the fraction of the portfolio invested in asset j, and ρij is the correlation between assets i and j. (See, for example, Gravity Investment, 2011 and Economic Expert, 2011.) Q, the intraportfolio correlation, then feeds into a calculation for the “percent of diversifiable risk removed”:

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% of diversifiable risk removed = 2

)1( Q− (2)

For example, if Q = 1 (its highest possible value), diversification is zero, while if Q = -1 (its lowest possible value), diversification is perfect. However, there is a problem with this definition. Consider an equally weighted portfolio of two assets i and j, where σi2 = σj2. If assets i and j are perfectly negatively correlated, this portfolio would have a Q of 2*(.5)2*(-1) = -.5, implying that the percent diversified is (1+.5)/2 = .75, or 75%. However, in fact, this equally weighted portfolio would actually eliminate risk. Therefore, we will use an alternative definition (found, for example, at Hedge Fund Consistency Index, 2011 and WordIQ, 2011) of intrapoprtfolio correlation:

Q = ∑∑

∑∑

i j ji

i j ijji

ww

ww ρ , (3)

Using (3), Q equals -1 for the equally weighted equal-variance portfolio, so that the percent diversified is 100%, as it should be. Unfortunately for Q adherents, defining the metric to be consistent with (2) does not mean that Q is actually helpful. For our two-asset, perfectly negatively correlated portfolio, for example, Q will always equal -1, even though portfolio variance, σp2, is zero only when the assets are weighted equally. Q always sends the same signal; it is not providing an adequate measure of true diversification. We continue to examine these sorts of problems with Q for two- and three-asset portfolios in the next section. Q AND BASIC PORTFOLIOS Two-asset portfolios are unique in that all two-asset portfolios are minimum-variance—they all offer the lowest-variance way to deliver a given expected return. As with all portfolios, the variance of a two-asset portfolio depends upon the weighting scheme chosen. However, the dependence of σp2 on wi is obscured by the intraportfolio correlation expression:

Q = ji

ijji

ww ww

2 2 ρ

= ρij. (4)

All Q tells us is the correlation coefficient—which we already knew—not the amount of realized diversification in a specific portfolio. The problem with Q is that it abstracts from the variances of the underlying assets. Figure 1 gives us one way to think about this problem. In the figure, we show the portfolio parabolas (possible portfolios, plotted in [σp, E(R p) space]) for two sets of assets A and B. The assets A and B used to create the two parabolas have the same expected returns in each case. (Asset A is depicted with circles; asset B by diamonds.) The correlation between the assets is also the same in both cases: 0.2. In neither case is A or

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B dominated when held in isolation. However, asset A has a higher standard deviation in parabola #2 than in parabola #1, while asset B has a lower standard deviation. Consider the upper point at which the two parabolas cross, which is marked by a star. At this point, both the portfolio on parabola #1 and the portfolio on parabola #2 have the same weighting schemes for A and B, the same expected return, and the same standard deviation. Given the common correlation coefficient, these two portfolios also have the same value for intraportfolio correlation, Q. However, an investor clearly would not be indifferent between the two portfolios—despite the common Q, E(Rp), and σp—since the portfolio, while not dominated on parabola #2, is dominated on parabola #1. Again, these parabolas were constructed using assets differing only on standard deviation, the information Q ignores; they share the same weighting scheme, ρ, and expected returns. Intraportfolio correlation cannot distinguish between them since it abstracts from critical information concerning their relative risk. Yet Q purports to be a risk measure! Figure 1: Comparison of Two Pairs of Assets

This figure shows two portfolio curves made up of two assets A and B. For both curves, E(RA) = 25% and E(RB) = 10%. In parabola #1, the assets’ standard deviations are 24% and 23%, respectively; in parabola #2, they are 55% and 10%. Consider the crossover point marked by a star: this portfolio has the same Q on both parabolas, but is dominated on parabola #1. Q cannot distinguish between acceptable and unacceptable (dominated) cases. Figure 2 shows that Q’s problems are not limited to the two-asset case. This figure plots an isovariance ellipse and two isomean lines (following Markowitz, 1952), using portfolios of three assets. Consider the point at the tangency of the isovariance ellipse and the upper isomean line (this point is boxed in the graph). The portfolio represented by this tangency point delivers the expected return with the lowest possible variance, and is therefore efficient. However, this is not the portfolio that would be chosen using Q as the criterion. The diamonds show the values of Q that correspond to the portfolios on the isomean line. The Q value associated with the efficient portfolio (which is also boxed) is not the lowest; minimizing Q therefore cannot be an optimal strategy.

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0 0.1 0.2 0.3 0.4 0.5 0.6

ex pe

ct ed

re tu

rn o

f p or

tfo lio

standard deviation of portfolio

parabola #1 parabola #2

E(RA)

E(RB)

minimum- variance

portfolio for parabola #1

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Figure 2: Q and Three-Asset Portfolios

The ellipse is one of a series of concentric isovariance ellipses. The lines are isomean lines; expected return rises as these lines move to the northeast. Investors choose points on the efficient set, which is determined by the tangencies between isovariance curves and isomean lines. One such point is highlighted. However, the Q value (diamond) for this efficient portfolio is not the lowest Q value possible for this level of expected return. Minimizing Q cannot therefore be an appropriate decision rule for a risk-averse investor. APPLICATIONS TO INVESTMENTS COURSES The most straightforward theoretical application of Q to investments courses relates to the discussion of the Capital Asset Pricing Model. After introducing the Capital Market Line (CML), the instructor could ask students to consider the intraportfolio correlation for a portfolio of n assets lying on the Capital Market Line. Since all assets on the CML are perfectly positively correlated, the Q value would be 1, implying that there was no diversification whatsoever. However, since all assets on the CML are already perfectly diversified—they have no systematic risk, by definition—this is clearly a nonsensical implication. A second theoretical link occurs when considering naïve diversification. Studying the portfolio variance effects of setting all weights to (1/n), where n is the number of included securities, gives students an early appreciation for the relative inconsequence of individual asset variances and the importance of covariances. Bodie, Kane, and Marcus (2011) provide an example in which they assume that all correlations and variances are the same (var(i) = σ2 for all i; corr(i,j) = ρ, i≠j). In this case, portfolio variance equals:

σp 2 = 22

)1(1 ρσσ n

n n

− + (5)

As n increases, it is easy to see that the first term—the contribution of the individual asset variances— goes to zero, while the second term approaches ρσ2. Portfolio variance therefore approaches the common covariance. However, since all pairs of assets have the same correlation, Q becomes simply ρ, as it does for the two-asset case. Again, the measure degenerates into something we already knew, and we miss the point of the example—that even naïve diversification diminishes the influence of unique risk. Moving beyond these theoretical evaluations of Q, investments professors may also introduce IPC in more applied topic areas. For example, it is common for investments courses to incorporate spreadsheet projects based on real data. Ammar, Kim, and Wright (2008) add a simulation exercise focused on correlation. Using an equally weighted two-stock portfolio, they demonstrate the power of low

0

0.05

0.1

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0

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0.4

0.6

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1

-0.3 -0.1 0.1 0.3 0.5 0.7 0.9

in tra

po rtf

ol io

c or

re la

tio n

we ig

ht in

a ss

et C

weight in asset B

direction of increasing E(R)

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correlations to reduce portfolio risk. They suggest—but do not perform—extensions, such as allowing rebalancing. This type of extension could provide an opportunity for students to explore intraportfolio correlation. Discussing Q would highlight the importance of a portfolio’s weighting scheme, which is currently missing from Ammar, Kim, and Wright’s simulation. More interesting evaluations of Q are possible when students actually set out to find the efficient set. Since identifying mean-variance efficient portfolios is straightforward with Excel, students who learn the process should be easily convinced that a simplistic metric like Q is unnecessary. Carter, Dare, and Elliott (2002) provide a template for finding mean-variance efficient portfolios using Excel’s Solver tool. With Solver, students can generate efficient frontiers for n-asset portfolios, which they can then compare to reference portfolios. Using a plot of portfolios in (standard deviation, expected return) space, students can easily compare efficient and dominated portfolios, and their Qs. As we showed in Figure 2 above, they will learn that Q does not identify efficient portfolios. Students who wish to go further with Excel can follow Arnold’s (2002) application of the program’s matrix multiplication functions. Arnold advocates for introducing students to efficient set mathematics using linear algebra, both to enhance their appreciation for the meaning of efficiency in the n-asset case and to link portfolio theory solutions to regression analysis. Given the generality of the templates he provides, he asserts that, “[p]articularly with the aid of a spreadsheet program, multiple asset portfolios are not beyond the comprehension of undergraduate students.” Why then, would they need Q? CONCLUSIONS Intraportfolio correlation is a relatively new metric being advanced by some practitioners as a valuable measure of portfolio diversification. However, it does not appear to live up to its hype. Markowitz (1952) notes that his expected value/variance hypothesis implies the “‘right kind’ of diversification for the ‘right reason’.” It is not the number of securities in a portfolio that generates efficient diversification—it is the relationships among those securities. This is undoubtedly the insight driving the advocates of intraportfolio correlation. However, by focusing only on correlation, the standardized measure of comovement, Q ignores the rest of covariance: the standard deviations. In this paper, we evaluated Q using the two- and three-asset cases. These cases are part of the basic investments curriculum, so should be easily accessible to undergraduate students. Nonetheless, they are sufficient to demonstrate some of the problems with Q: students will be able to determine that Q is not able to identify optimal portfolios—which is its job. REFERENCES Ammar, S., Kim, C.,& Wright, R. (2008) “Understanding Portfolio Risk Analysis Using Monte Carlo Simulation,” Journal of Financial Education, vol. 34, p. 40-58 Arnold, T. (2002) “Advanced Portfolio Theory: Why Understanding the Math Matters,” Journal of Financial Education, vol. 28(3), p. 79-96 Bodie, Z., Kane, A., & Marcus, A.J. (2011) Investments, 9th ed. New York, NY: McGraw-Hill/Irwin

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Carter, D.A., Dare, W.H., & Elliott, W.B. (2002) “Determination of Mean-Variance Efficient Portfolios Using an Electronic Spreadsheet,” Journal of Financial Education, vol. 28(3), p. 63-78 Economic Expert (2011). Diversification. Retrieved January 23, 2011 from Economic Expert Web site: www.economicexpert.com/a/Diversification.htm Gravity Investments (2011). GSphere: Diversification Meter. Retrieved January 23, 2011 from Gravity Investments Web site: www.mydiversification.com/DiversificationMeter.aspx Hedge Fund Consistency Index (2011). Diversification. Retrieved January 23, 2011 from Hedge Fund Consistency Web site: www.hedgefund-index.com/d_diversification.asp Markowitz, H. (1952) “Portfolio Selection,” The Journal of Finance, vol. VII(1), p. 77-91 Sharpe, W.F. (1964) “Capital Asset Prices: A Theory of Market Equilibrium Under Risk,” Journal of Finance, vol. XIX(3), p. 425-442 WordiQ (2011). Diversification: Definition. Retrieved January 24, 2011 from WordIQ Web site: www.wordiq.com/definition/Diversification BIOGRAPHY Lynda S. Livingston teaches investments at the University of Puget Sound in Tacoma, WA. She is also the founder of 4 Horsemen Investments, a not-for-profit financial education company. She can be reached at [email protected].

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CHALLENGES OF IMPLEMENTING AND ENFORCING OF ENVIRONMENTAL LAW IN MALAYSIA

MohammadReza Aghaei, Management and Science University Amin Moazami, Management and Science University Mehrdad Salehi, Management and Science University

Amir Hossein Vazirifar, Management and Science University Marzieh Djadidi, Management and Science University

Mojtaba Saeidinia, Management and Science University

ABSTRACT In this article, we discuss the problems faced in implementing environment law in Malaysia. Firstly, we brought some real cases that Malaysian government had dealt with before, according to their weak management. As basis for environmental law and regulations, policies have been originated to manage and mitigate possible environmental issues in future. However, economic policies that formulated by government always mentioned as the most important reason for the current environmental problems. Initiation of various environmental policies and regulations has not been able to protect upcoming environmental damages. Regardless of all efforts to prevent environment by passing of laws and regulations, Malaysia still face with increasing of demands for developing to greater urban that cause high damage to environment. The misunderstood concept that says preserving environment means limitation for developing makes much harder the implementing and enforcing of environmental laws. This discussion tries to find a solution to improve implementing of laws and regulation to attain a sustainable development in Malaysia. KEY WORDS: Environmental law, Implementation, Regulation, misunderstood concept INTRODUCTION Nowadays, environmental is an emphasis issue in whole of the world, and NGOs are worried about environment in future. One of the most important discusses in the international societies is Environmental concern. It is recognized now increasingly that many issues relating to the environment have a global dimension. For instance, global activities contribute to the emission of green house gases as well as global warming and climate change. Disasters cause incredible damage within jurisdictions witness the recent earthquakes in Pakistan, Hurricanes Rita and Katrina, and the Tsunami now cross boundaries is an order hardly ever seen before. The result of statistics makes all this clear, but there are variety reasons, more governments neglect in implementation environmental law. Nowadays, Main problem is implementation in this division, because of existence of steady laws in these countries in order to protect of the environment. In fact, environmental laws are international matters, so the government cannot ignore environmental laws. Decisions of government may have an environmental impact, among other things that are more and more being made outside of the national sovereign sphere. LITERTURE REVIEW In contrast, some of the issues will influence the environmental such as being able to develop stronger business relationships with suppliers, attracting ethical investors and even penetrating new markets due to better environmental performance. Global capitalism creates pressures and tendencies for corporations to

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act and adopt strategic environmental practices. Furthermore, ISO 14001certification (environmental management standards) might be one of the most appropriate examples for this case. In reality, The ISO 14000 exists to help organizations (a) reduce how their operations (processes etc.) negatively affect the environment (i.e. cause unfavourable changes to air, water or land). (b) Conform to applicable laws, regulations, and other environmentally oriented requirements and (c) continually get better in the above. ISO 14000 is similar to ISO 9000 quality management as both of them be appropriate to the process of how a product is produced, rather than to the product itself. According to ISO 9000, certification is performed by third-party organizations rather than being awarded by ISO directly. Furthermore, The ISO 19011 audit standard applies when auditing for both 9000 and 14000 compliance at once. Concerning can consider about the relationships between groups, individuals, organizations, and the rights to information that such relationships entail (Gray R, Dey, 1997). Environmental responsibility values can be developed throughout discourses of accounting with transparency and completeness indicating the collective meanings of the disclosures, self-respect and closeness of relationships (Lehman, 1995). Inevitably, corporate environmental reporting acts as the vehicle for providing environmental data that designed to satisfy the accountability relationships in order to designate corporate consciousness through a moral discourse on environmental issues. It justifies an environmental accountability level in creating a just society amongst business corporations (Shearer T, 2002). ISO 14001 certification provides evidence and confidence to external parties that the companies have control over the significant aspects of their operations and activities. They are committed to conform to all relevant environmental legislation, regulations and that they are continuously improving their environmental performance. On the other hand, some companies chose to set up environmental management systems (including environmental disclosure practices) with no seeking a certificate. The reasons maybe the costs of implementing the procedures, investments towards controlling measures, auditing costs, training costs and many more. Certification to international environmental standards creates significant trade and investment relationships and in the Asia-Pacific region, ISO 14001 has been seen as an important indicator of voluntary business commitment towards environmental improvement for Singapore and Malaysia case (Sumiani, 2006).The countries should accept ISO 14001 due to international laws and it is criteria for certified by environmental NGOs. One of the Asian countries that are rapidly developing is Malaysia that may increasingly face the tension between the economic incentives and the claim for ethical consciousness with regard to accounting for the environment. Thus, there is increase in tendency to know the local environmental position and its economic dependency in interpreting Malaysian motivational factors for environmental accounting and reporting (Sumiani, 2006).Malaysia plans in order to reach the status of a developed country in the year 2020 and the construction industry is seen as a most important catalyst to attain this vision. On the other hand, this industry has a dark side. Regardless of the findings on the improvements of the engagement of the corporations on strategic environmental movements, environmental reporting is still very low and general, and descriptive in nature (Harte G, Lewis, 2000). Unfortunately, many countries approved some of the laws in their society as well as perform in implementation very weak. The environmental dilemma in Malaysia cannot be overstated. The indifferent attitude of the Malaysian policy makers towards a long-term development in fondness to short-term fast economic gains has contributed hugely to the environmental affliction of the country. They failed to learn from history that has clearly shown because of the main reasons for societies’ collapse is conscious destruction of their natural resources. A society seeking rapid development could

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achieve its aspirations with no necessarily having to compromise its environment. It is essential for any society to make sure that it develops without necessarily compromising its environmental needs so as not to undermine the present achievements (Maidin, 2005). In Malaysia there are so many environmental laws that just we talk about some of them in the following: 1. Environmental Quality Act 1974 (Act 127) - www.doe.gov.my

2. Fisheries Act 1985 - www.moa.gov.my 3. Land Conservation Act 1960 - www.jkptg.gov.my 4. Local Government Act 1979 - www.jkt.gov.my 5. Merchant Shipping (Oil Pollution) Act 1994 6. National Forestry Act 1984 - www.forestry.gov.my 7. National Park Act 1980 - www.wildlife.gov.my 8. Plant Quarantine Act 1976 - www.moa.gov.my 9. Pesticides Act 1974 - www.moa.gov.my 10. Protection of Wildlife Act 1972 - www.wildlife.gov.my 11. Radioactive Substance Act 1968 - www.mosti.gov.my 12. Sewerage Services Act 1993 - www.jpp.gov.my 13. Town and Country Planning Act 1976 - www.jpbd.gov.my 14. Water Enactment 1920 (-Revised) Act 1979 - www.ktak.gov.my 15. Sarawak Biodiversity Centre Ordinance 1997 16. Sabah Biodiversity Enactment 2000 17. Sarawak Natural Resources and Environment (Amendment) Ordinance 2001 18. Sabah Environment Protection Enactment 2002 19. Sabah Forest Enactment 1968 20. Sarawak Forest Ordinance 1954

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There are so many real environmental cases in Malaysia and other countries relevant to this issue, we mention in the present article to two real cases as example: 1- Mitigating the palm oil effluent problem in Malaysia: It can be traced back to 1960s when (a) the prices of the competing crop rubber began to fall; and (b) the Malaysian government embarked on a huge program of agricultural diversification. By the early 1970s, in order to provide the processing needs of the agricultural estate, a large number of moderately sized mills scattered around the plantations were established. Between 1965 and 1975, the output of Crude Palm Oil (CPO) grew six times lead to more water use for processing and eventually more discharge of (untreated) wastewater into water bodies. The estimates suggest that for every ton of CPO produced, the mills generate 2.5 tons of effluent (Ma et al., 1982 as referred in Vincent et al., 1997: 328). The extent of pollution is reflected, in the fact that by mid1977, 42 rivers in Malaysia were so considerably polluted freshwater fish could not survive in them. This had wide ramification because freshwater fish were a major source of protein for countryside Malays. Unfortunately, the palm oil mill effluent (POME) problem was exceptional to Malaysia and no confirmed treatment technology existed at that time. However, the pollution situation improved within 6–7 years from 1978 to 1985 due to the acceptance of different policies. The data shows that in 1975, the BOD load discharged by 131 CPO mills was equal to the BOD load in the raw sewage of 12 million people, which corresponded to Malaysia’s entire population during that time. By 1985, however, the population-equivalent BOD load declined by 99% to only 80,000 people. Respectively, the number of polluted rivers fell to 12 and clean rivers rose to 81 in 1992.This suggests that some strong policies were in place during this period. The change occurred despite a important (z72%) increase in the number of CPO mills from 131 mills in 1975 to 225 in 1985 along with the tripling of the industry’s output. Interestingly, the period also marked the time when POI became the country’s largest foreign exchange earner, Malaysia consolidated its position as the world’s largest producer of CPO and accounted for 3/4th of world’s exports, and its contribution to GDP increased from 4.3% in 1980 to 8.4% in 1989. The three major policy steps to control pollution were the passage of the Environmental Quality Act (EQA), the establishment of the Department of Environment (DOE) (both in 1974), and the formation of an expert committee (with representatives from both the government and industry). These measures convinced the POI that the government was keen on reducing pollution levels. The EQA authorized the DOE to ‘prescribe’ certain industrial premises i.e., necessitating them to obtain a license as a precondition to activate besides satisfying conditions related to pollution control On July 7, 1977, the EQ (Prescribed premises) Regulations were announced by the DOE imposing standards on eight parameters of POME . The regulations were designed to serve two purposes: (a) Raising revenue through license; and (b) ensuring a guaranteed reduction in BOD discharge by a minimum amount through standards. The DOE also announced that it would make the standards increasingly stringent over the next four years. The warning was intended to induce the mills make an early investment in treatment facilities. However, the development of the appropriate standards was an outcome of two years of preliminary work by the expert committee. Since BOD is the key parameter of the palm oil mills (POMs), it attracted the maximum attention of the authorities. The firms were asked to reduce BOD attentiveness from 5,000 ppm (parts per million) to 500 ppm in four years 1978 to 1981. These limits were reduced further to 250 ppm in 1982 and to 100 ppm in 1984 (Table 1). The regulators

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gave an elegance period of one year to the mills to install treatment facilities enabling them to comply with the regulations. The regulations also required CPO mills to apply for an operating license every year for a particular fee. The fee consisted of two parts a flat processing fee of M$ 100 and a variable effluent- related fee. The variable component varied according to: (a) the class of premises; (b) the location of premises; (c) the quantity of wastes discharged; (d) the pollutants discharged; and (e) the existing level of pollution to persuade mills reduce pollution levels. However, the first generation standards did not make different between watercourse discharge and on land disposal, as effluent-related fees computed for both the mediums were equal. The mills were required to pay M$ 0.05/ton of BOD for discharges onto land. For any watercourse discharge, the fee was M$ 10/ton of BOD for concentrations up to the standard, and beyond that, an excess charge was imposed equivalent to 10 times the license fee. Therefore, the mills had a choice as they could either arrange of their pollution and pay the fee or invest in a treatment facility and save on the license fee. The later generations of standards, however, created an enticement for watercourse discharge as the effluent related fees were considerably lower than those for land disposal. The results of policy performance appear to be quite encouraging, yet below the expectations. The DOE had expected that the average daily discharge of BOD per CPO mill would reduce from 220 to 25 tons. However, it fell to only 125 and many mills opted to pay the excess fee. Of 130 mills, 46% paid a fee of more than M$ 10,000; 7% paid more than M$ 100,000 and a total of M$ 3.5 million was collected. The DOE had two choices either to increase the license fee or to make the standards more strict and binding. The DOE chose for the later and made it plentifully clear to the mills that any violation of the BOD standard would be dealt with by conclusion. The threat worked as it yielded instant results. The average daily discharge fell to 60 tons the next year with a total reduction in load discharged of 84.7%, whereas in terms of the effluent-related fee none of the mills paid more than M$ 10,000 after the 1980s. The Malaysian experience in waste matter control in the palm oil industry has shown that a set of well- designed environmental policies can be very efficient in controlling industrial pollution in a developing country. The CPO regulations with active enforcement by the regulator in Malaysia represent a mixed system of pollution control instruments. Palm oil industry offers several lessons for pollution control efforts in other developing countries: (a) Concurrently, Pollution reduction and industrial expansion can take place. The fact that an industry is economically important is not a justification for not addressing the pollution problems caused by it. (b) The environment and industry objectives can be merged only if many products from the waste matter develop along with an effective and relatively reasonably priced technology. Nevertheless, this can be possible only with the active support of the State. (c) A proper support in order to R&D is required if conformity is to be ensured. The enclosure of a clause by DOE that full or partial waiver of the charges/fee is permitted if any firm was believed to undertake R&D on effluent disposal or treatment reflects this support. (d) The last and the most important lesson that can be learnt is that compliance requires a regulator to complete multiple roles a believable regulator, a facilitator and an enforcer. The reliability of laying down the standards was established when the industry was also made part of the standards fixation process, whereas the facilitator role of the regulator became obvious when the DOE decided to give some

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time to the industry to construct a treatment facility and get some experience before implementing new regulations. 2-Bakun Dam The Bakun Dam is an embankment dam located in Sarawak, Malaysia on the Balui River, a tributary or source of the Rajang River and some sixty kilometres west of Belaga. As part of the project, the second tallest concrete-faced rock fill dam in the world would be built. It is planned to generate 2,400 megawatts (MW) of electricity once completed. The purpose for the dam was to meet growing demand for electricity. However, most of this demand said to lie in Peninsular Malaysia and not East Malaysia, where the dam is located. Even in Peninsular Malaysia, however, there is an over-supply of electricity, with Tenaga National Berhad being locked into unfavourable purchasing agreements with Independent Power Producers. The original idea was to have 30% of the generated capacity consumed in East Malaysia and the rest sent to Peninsular Malaysia. However, about this plan is 730 km of overhead HVDC broadcast lines in East Malaysia, 670 km of undersea HVDC cable and 300 km of HVDC transmission line in Peninsular Malaysia. Future, plans for the dam include connecting it to an envisioned Trans-Borneo Power Grid Interconnection, which would be a grid to supply power to Sarawak, Sabah, Brunei, and Kalimantan (Indonesia). There have been mentions of this grid made within ASEAN meetings but any party has taken no actions. Bakun Dam came online on 6 August 2011.Ting Pek Khing's name again was raised in connection with the project In May 2004. A Ting-owned company, Global Up line, was supposed to be awarded a contract to carry out "biomass removal" in the flood basin. This would allow him to harvest timber in the area without a separate permission. Issuance of timber permits has come under increased inspection due to political conditions and environmental concerns. However, as of December 2006 it has not been awarded.Usage of the generated capacity was to have been by a proposed aluminium smelting plant in Similajau, near Bintulu, just about 180 km inside from the dam. The project is a joint venture between Dubai Aluminium Co, Ltd (Dubal) and Gulf International Investment Group (GIIG); make an investment fund jointly set up by Malaysian tycoon Syed Mokhtar, and Dubai-based international financier Mohamed Ali Alabbar. This plant was expected to consume 50% of the power generated. The government has agreed in principle that 60% of Sarawak Hidro, the entity which owns the dam, will be sold to GIIG. Due to delays in dam construction, the plans for the smelter have since been shelved. Smelter agreement was originally signed in 2003 and some conditions have lapsed due to delays in construction. Rio Tinto announced in August 2007 that they had signed a deal with Malaysian corporation Cahya Mata Sarawak Berhad (CMSB) to build an aluminium smelter. The production capacity would be 550,000 tonnes initially with expansion to 1.5 million tonnes possible. Production of aluminium would start at the end of 2010.At the end of 2004, the minor partners in the Malaysia-China Hydro JV consortium (Ahmad Zaki Resources Bhd, WCT Engineering Bhd and MTD Capital) will report quarterly losses due to the Bakun project. Discounting this project, they would all be operating profitably for the quarter. For Ahmad Zaki Resources Bhd, this is the first time it will report losses since 1993. Ahmad Zaki estimates net losses suffered for nine months ending September 30, 2004 at RM4.55 million. WCT has reported a net loss of RM13.08 million for the quarter ending September 30, 2004 due to the Bakun project. MTD Capital reported a RM4.04 million loss in the quarter ending September 30, 2004 and attributed it to "a major project undertaken by the company in joint venture with

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both local and foreign partners" without particularly naming Bakun.The lead partner in the project, Sime Engineering reported a profit of RM521, 000 for the same quarter versus a profit of RM4.18 million for the same quarter in 2003. Declines in profit were attributed to cost overruns and project delays. In November 2007, Sime Darby, the parent company of the contractor Sime Engineering will be merged with Golden Hope and Guthrie into a new company with a market capitalization of RM 31 billion (USD 8 billion). Concurrently with the merger, the contractor Sime Engineering will take over the ownership of the Bakun Dam project. As of February 2007, there are three developments affecting the Bakun project. The first is the merger of the Sime Darby, Guthrie and Golden Hope into a new entity named Synergy Drive. The second is the proposed capture of the Bakun project by the contractor, Sime Engineering. The third is the revival of the submarine HVDC cable under the South China Sea to transport electricity from Borneo to Peninsular Malaysia.Sime Engineering Sdn Bhd has filed a suit against AZRB over alleged breaches in the Malaysia-China Hydro joint venture agreement dated June 12, 2002 relating to the Bakun dam. AZRB was served with a writ summons and statement of claim dated Oct 12 by Sime Engineering claiming “RM15.24 million for supposed breaches by AZRB of the Malaysia-China Hydro JVA” relating to Bakun hydroelectric project package CW2 - main civil works Environmental and social damage: The Bakun dam flooding commenced on 13th October 2010[8] with a faulty start and will put 700 km² of land under water - equivalent to the size of Singapore. The rainforest of this part of Southeast Asia has some of the highest rates of plant and animal endemism, species found there and nowhere else on Earth, and this dam has done irreparable ecological damage to that region. Construction of the dam required the relocation of more than 9,000 native residents (mainly Kayan/Kenyah) of the original peoples who lived in the area to be flooded. Many Sarawak natives have been relocated to a longhouse settlement named Sungai Asap in Bakun. Most of them were survival farmers. Each family was promised 3 acres of land but many families still have not been compensated. Concerns were raised also about such things as the relocation of people; amount of virgin tropical rainforest which had to be cut down (230 km²); possible dam collapse issues; increase in diseases with water-borne vectors such as schistosomiasis, opisthorchiasis, malaria, and filariasis; and sediment accumulation shortening the useful natural life of the dam. A 5 part series of Bakun dam documentaries was filmed by Chou Z Lam. The series highlighted the basic group of people problems faced by displaced native people such as the lack of land areas for farming and hunting, lack of educational, medical, and transport facilities and also the promises not being kept by the government. This documentary series was later banned from Radio Television Malaysia (RTM) on May 2010, forcing the remaining series to YouTube. Transparency International includes Bakun Dam in its ‘Monuments of corruption’ Global Corruption Report 2005. The permission to expand the project went to a timber contractor and friend of Sarawak’s director. CONCLUDATION & RECOMMENDATION Regarding to the issues considered in above, significant matters is implementation, despite so many of the Nongovernmental organization (NGO) attempted to resolve this problems but still variety matters in implementation. Nongovernmental organization (NGO) should encourage the governments strictly to implement environmental laws and prove to them who performing laws will not restrict their developments.

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Our recommendation is use of Environmental Education wide spread. In fact, Environmental Education (EE) increasingly promoted as a tool in environmental management. The importance of Environmental Education (EE) is highlighted in the National Policy on the Environment, use of Strategies on “Education & Awareness.” Malaysia government and other countries should make an investment in Environmental Education (EE) as a type of formal and non-formal education more than. It will be introduced in schools as Environmental Education Program (EEP), across curriculum at primary and secondary level. Related to that, Environmental Education (EE) was found as an important subject who it must be known by the teachers previous to teach that subject indirectly in the classroom. Problems occurred while implementing Environmental Education Program (EEP) in schools such as; less knowledge about Environmental Education (EE) among teachers, thinking Environmental Education Program (EEP) as an extra burden for them to educate, etc. It will not be possible unless Environmental Education (EE) support by Malaysia governmental organizations for instance Ministry of Education (MOE) with collaboration of other government agencies such as Department of Environment (DOE), Ministry of Higher Education (MOHE). The non- governmental organization (NGOs) for example Environmental Protection Society, the Environmental Management and Research Association of Malaysia, the Nature Society and Worldwide finance for Nature plays a significant role too in promoting the significant of consciousness of the environmental. REFFRENCES Ashok Swain, A.M.C., Political Structure and ‘Dam’ Conflicts: Comparing Cases in Southeast Asia. 2004. Habibah Lateh, Environmental education (EE): current situational and the challenges among trainee teachers at teachers training institute in Malaysia. 2010. Abidin, N.Z., Investigating the awareness and application of sustainable construction concept by Malaysian developers. 2010. Boyle, J., CULTURAL INFLUENCES ON IMPLEMENTING ENVIRONMENTAL IMPACT ASSESSMENT: INSIGHTS FROM THAILAND, INDONESIA, AND MALAYSIA. 1998. G, L., A legitimate concern for environmental accounting. Critical Perspectives on Accounting Journal of Chemical Health & Safety, 1995, September/October 2010. Gray R, D.C., Owen D, Evans R, Zadek S., Struggling with the praxis of social accounting: stakeholders, accountability, audits and procedures. Accounting, Auditing & Accountability Journal 1997. Kathuria, V., Controlling water pollution in developing and transition countries lessons from three successful cases. 2005. Nijar, p.g.s., environmental protection the role for a globalising legal profession by Prof gurdial singh nijar. At: www.malaysianbar.org.my/ 9. R. Saidur, H.H.M., Energy and associated greenhouse gas emissions from household appliances in Malaysia. 2007.

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T, S., Ethics and accountability: from the for-itself to the for the other. Accounting, Organizations and Society,2002. Tan, L.P, and Implementing ISO 14001: is it beneficial for firms in newly industrialized Malaysia. 2005.

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BIVARIATE EXTREME DEPENDENCY BETWEEN STOCK MARKET AND OIL RETURNS

Gözde Ünal, Bogazici University Derya Korman, Bogazici University

ABSTRACT

This study investigates the dependency structure between Turkish stock market returns and oil price movements, especially on the extreme observations. The bivariate extreme value methodology is used for understanding the dependency between oil price movements and stock market index. The residuals of autoregressive integrated moving average (ARIMA) models of stock market index (ISE 100) and Brent oil returns are examined by using bivariate extreme value analysis over the period between 1988 and 2011. The overall period studied is analyzed by subdividing the period into two phases. We observe a higher dependency in the second phase (2000-2011), compared to the first phase (1988-1999). Our results show that in the second phase the extremes on the negative tails coincide more commonly compared to the extremes on the positive tails, which is in line with the current literature findings. However, in general Turkish stock market and oil returns are asymptotically independent in extreme observations, which suggest diversification opportunities for portfolio managers.

JEL: C46, C51, C53, F4 KEYWORDS: Bivariate EVT, Stock Market Returns, Oil Prices, ISE INTRODUCTION Scarce energy sources and world’s growing demand for energy highlight the importance of energy economics. Oil is still the world’s leading energy input considering nearly 35 percent of the global energy consumption provided by oil. This percentage is considerably more in the emerging industrialized nations. As it is explained in Basher and Sardosky (2002), emerging economies tend to be more energy intensive and are exposed to higher oil prices compared to developed countries that are more energy efficient in our day. Oil prices fluctuate unprecedentedly during the past decade, especially after 2003. Growing demand in emerging countries, invasion of Iraq, oil price speculations and global financial crises are the main reasons for past decade fluctuations. There is an increasing trend in the oil prices after 2003. Increasing prices have a considerable effect on macroeconomic variables such as growth rate, foreign trade balance and inflation particularly for emerging countries. This study investigates dependency relationship between oil prices and Turkish stock market. Turkey, as an emerging country, supplies more than 40 percent of its energy requirements from crude oil. About 9 percent of Turkey’s total imports consist of crude oil. Considering importance of oil in Turkish economy, one can say that oil prices have a decisive effect on macroeconomic indicators. Despite various researches done on macroeconomics of energy matter, there is relatively limited number of researches, which concentrate on financial markets’ reaction to the energy prices. During the last decade, considerable amount of extreme price movements for oil and stock markets are observed. In the volatility of our times, extreme price movements become a familiar phenomenon. Oil and stock market relationship examined by the current literature mainly focused on analyzing central

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observations. This study concentrated on oil price and Turkish stock market relationship on the extreme events. This approach may help to understand the behavior of financial markets in volatile conditions and times of crisis. The rest of the paper continues as follows: Section 2 presents the literature review, Section 3 identifies the model and the data used for this study, Section 4 present the empirical results for the study and Section 5 concludes the paper. LITERATURE REVIEW Numerous researchers through the last two decades have studied oil price effect on macroeconomic variables. Hamilton’s (1983) study can be considered as a starting point in the literature of this subject, followed by other researchers such as; Loungani and Prakash (1986), Gisser and Goodwin (1986), Mork (1989). Considering the number of researches that have analyzed oil price effect, there is relatively small number of works that focused on the stock markets. Going through the literature, many of the findings represent a negative relationship between oil prices and stock markets. Jones and Kaul’s (1996) study was the first to reveal negative impact of oil prices on stock exchanges. Sadorsky (1999) and Papapetrou (2001) find a negative relationship between stock markets and oil prices. Sadorsky (1999) also reports a change in oil price dynamics, that after 1986 oil price explains a larger fraction of forecast error variance in stock returns. An increased number of researches can be observed after 2000’s together with more diversified findings on oil and stock market relationship. In the recent literature, some of the negative oil and stock market relationship findings continue as follows: Hammoudeh and Li (2005) reveal a negative bidirectional dynamic relationship between oil future price and Morgan Stanley Capital International (MSCI) global equity index. Park and Ratti (2008) apply multivariate vector auto regressive (VAR) analysis on US and 13 European countries stock indices and conclude that oil price shocks have a negative impact on real stock returns except for Norway, which is an oil exporter country. Bhar and Nikolova (2010) conduct bivariate exponential general autoregressive conditional heteroskedastic (GARCH) model on weekly data and identify a negative time varying conditional correlation between Russian equity market and oil price. Filis (2010) observes negative effect of oil price on Greek stock market by using a VAR approach. Lee and Chiou (2011) find a significant negative impact of oil prices on US stock returns. Recent findings also show positive relationship between oil and stock markets. Constantinos et al. (2010) estimate a VAR model with granger causality tests on daily data and indicate a significant positive association between Greek stock market and oil prices. Choi and Hammoudeh (2010) employ Markow- switching GARCH models on oil price and US SP500 index and argue that high volatility regimes have positive probability correlations. Zhu et al. (2011) investigate on 14 countries and conclude that increased oil prices have a positive impact on stock prices and increased stocks influence crude oil positively. Narayan and Narayan (2010) conduct a long-run model on daily data and show that oil price and exchange rate have a significant positive effect on Vietnamese stock prices. Basher and Sadorsky (2006) also reveal that oil price risk on 21 emerging stock markets is statistically significant and positive in most models. A part of the literature suggests that there is a conditional relationship between oil and stock market or no relationship at all. Filis et al. (2011) employ dynamic conditional correlation GARCH (DCC-GARCH)

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model on monthly data of three oil importing and three oil exporting countries. They assert that precautionary demand side oil shocks cause negative correlations whereas aggregate demand side shocks cause positive correlations. Their findings also show that oil price shocks during global business cycle fluctuations have a significant effect on oil price relationship regardless of countries oil dependency status, however oil shocks caused from production cuts do not seem to have an significant impact. Faff and Brailsford (1999) conduct augmented market model on 24 Australian industry portfolios and oil price. Their findings indicate a positive sensitivity for diversified industrial resources and oil and gas portfolios together with a negative sensitivity for transportation and paper and packaging portfolios. Eryigit (2009) applies Faff and Brailsford’s (1999) augmented market model on 16 sector indices of Istanbul Stock Exchange and demonstrate that different oil price effects for different indices. Malik and Hammoudeh (2007) estimate a multivariate GARCH model with BEKK parameterization on daily data and conclude that Gulf equity markets receive volatility from oil market. Mohanty et al. (2010) and Laopodis (2011) analyze European stock markets and reveal that there is no relation between equity and oil prices. Hearn and Man (2010) apply a VAR model on monthly data for China and Hong Kong stock indices and conclude that there is general lack of long-term price integration between markets and oil price. Maghyereh (2004) and Al-Fayoumi (2009) investigate on emerging market stock indices and document that oil price do not affect these stock markets. Hammoudeh and Choi (2006) estimate a VEC model on 5 Gulf Cooperation Council (GCC) countries stock markets and could not found a relationship between oil price and GCC equities. Huang et al. (1996) investigate US SP500 stock index on different levels by using a VAR approach. They provide that there is no relationship between oil futures and broad based stock index but on the firm level they discover a significant relationship. Contribution of this study to the existing literature will be using bivariate extreme value theory for analyzing the dependency structure of stock market and oil prices. As it is mentioned in some of the studies such as: Choi and Hammoudeh (2010) and Lee and Chiou (2011), different volatility regimes have different oil price effect on stock markets. High volatility environment has many extreme events in term of oil price and stock market movements, which also illustrates our global market structure in the last decade. Instead of the normal price behavior of crude oil, this study will focus on extremal events by using a bivariate extreme value methodology on an emerging market, Turkey. METHODOLOGY Data In this study, daily data is used for crude oil prices and stock market index. The daily data covers the period from January 1988 to August 2011. Brent oil prices are used as the crude oil prices since Brent oil index is the main indicator for Turkish oil trade. Oil price data come from U.S. Energy Information Administration (EIA). Istanbul Stock Exchange 100 (ISE 100) closing prices are used as the stock market data. Stock market data is taken from Istanbul Stock Exchange web site (www.ise.org). Both oil and stock prices are expressed in US dollars. Our data set consists of log returns of spot prices and there is a total of 5732 observation excluding missing days for oil price and stock index. Considering the chorological events of late 1990s and 2000s such as; (1998) Asian economic crisis, (2001) 9/11 attacks, (2003) Iraq war and 2007 Subprime crisis, we divide our dataset into two phases. The first phase covers the years 1988-1999 and the second phase covers the years through 2000-2011. The data covers a period of 23 years during which we observe a shift in scale of prices and volatility both in oil and stock market.

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Descriptive statistic results provided in Table 1 demonstrate ISE 100 index returns are more volatile compared to oil returns. Results of the Jarque-Bera test shows that oil returns and ISE 100 index returns are not normally distributed at both phases. Skewness and excess kurtosis values also indicate the same result. Augmented Dickey-Fuller (ADF) test shows us that our data set at both phases are stationary. Data set used in this study is not independent and identically distributed (i.i.d.) except for oil returns at the second phase according to Ljung-Box test statistics. To test data with bivariate extreme value model, data set needs to be converted into i.i.d. series. We utilized an ARIMA model for data conversion process. Data set examined according to Akaike information criteria (AIC) and Bayesian information criteria (BIC) to get the best-fitted model possible. Tools for selecting AIC and BIC values are provided in Hyndman’s (2011) package ‘forecast’. Table 1. Descriptive Statistics

Statistics Phase 1 Phase 2

Brent ISE 100 Brent ISE 100 Mean 0.00007 0.00024 0.00056 0.00028 Median 0.00000 -0.00024 0.00140 0.00083 Maximum 0.17333 0.17738 0.18130 0.24999 Minimum -0.36121 -0.25376 -1.98907 -0.23666 Std. Dev 0.02376 0.03298 0.02486 0.03131 Skewness -1.11255 -0.39792 -0.35938 0.01687 Kurtosis 27.65269 7.45027 8.31147 10.42053 Jarque-Bera 73167.340 2440.674 3430.635 6575.732 [p-value] [0] [0] [0] [0] Augmented Dickey-Fuller -12.6856 -12.7272 -12.7561 -11.7945 [p-value] [0.01] [0.01] [0.01] [0.01] Ljung-Box 6.7137 66.3909 0.7507 16.6621 [p-value] [0.00957] [0] [0.3862] [0.00004] Observations 2866 2866 2866 2866

This table shows descriptive statistics for Brent oil price returns and ISE 100 index returns for the two phases. Phase 1 and phase 2 cover the periods from 1988 to 1999 and from 2000 to 2011, respectively. Table 2. ARIMA Models

Statistics Phase 1 Phase 2

Brent ISE 100 Brent ISE 100

ARIMA Model ARIMA(1,0,4) ARIMA(2,0,2) ARIMA(0,0,0) ARIMA(0,0,1)

Ljung-Box 0.0012 0.001 0.7507 0.0071 [p-value] [0.9718] [0.9742] [0.3862] [0.9329]

This table shows fitted ARIMA models and Ljung-Box statistics for oil price returns and ISE 100 index returns. Statistical results for Ljung-Box tests and lag order of ARIMA models are represented in Table 2. Ljung- Box results indicate that data set is i.i.d. after fitting ARIMA models. Since oil returns at the second phase are already i.i.d. series, it is not necessary to fit the model for this series. Model Bivariate extreme value methodology is used in this study to investigate the dependency between stock

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market and oil returns. Extreme value method is used to block extrema or exceedances to a predetermined threshold. Determining the threshold level is crucial for extreme value analysis. A low threshold level would cause selecting samples from central part of the distribution, while a high threshold level would eventuate with insufficient data and inaccurate estimates. Threshold level for our data series is determined as 10th percentile for the lowest returns and 90th percentile for the highest returns. Threshold levels are determined visually by using threshold choice plots and mean residual life plots provided in Figure 1 and Figure 2.

The dependence strength between extreme returns of ISE and oil prices is estimated by fitting joint exceedances to a bivariate extreme value distribution. Censored likelihood methodology is used for this procedure, which is described in Ledford and Tawn’s (1996) study.

Dependency structure of extreme returns is computed by using logistic bivariate Generalized Pareto Distribution (GPD) model. This model is described in Mendes and Moretti (2002), Klüppelberg (2006) and Onay and Ünal (2011). Tools for computing logistic bivariate GPD model are provided in Ribatet’s (2009) POT package. Summary of the model is presented below.

Following dependence function defines the logistic model:

, (1)

where 0 < α ≤ 1. This gives the joint distribution function:

(2)

for x, y > 0. Complete dependence is obtained when α → 0 and total independence is when α = 1.

Dependency of extreme returns between oil and ISE 100 index is identified by the statistic of Coles et al. (1999) work.

(3)

Perfect dependence is denoted by -statistic getting closer to 1 and independent variables denoted by -statistic getting closer to 0.

EMPRICAL RESULT Threshold levels of 10th and 90th quantiles of oil returns and ISE 100 returns indicates that there are 287 highest and 287 lowest extreme events exceeding selected thresholds out of 2865 daily returns for each phase. Results of the EVT models are presented in the following tables.

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Table 3. Positive Extreme returns: ISE100 and Brent, Phase 1

Model Estimates: Model Strength 0.017 scale1 shape1 scale2 shape2 alpha

Deviance 331 0.015280 0.140060 0.021210 -0.023840 0.988040

Marginal Number Above 287 Standard Errors: Joint Number Above 30 scale1 shape1 scale2 shape2 alpha

Joint Number Above (3days) 92 0.001278 0.060592 0.001632 0.049885 0.010456 This table shows the result of bivariate EVT from 1988 through 1999 for highest oil and ISE 100 returns at 90th quantile. Table 4. Negative Extreme returns: ISE100 and Brent, Phase 1

Model Estimates:

Model Strength 0.008 scale1 shape1 scale2 shape2 alpha

Deviance 412 0.013100 0.225300 0.024190 0.054790 0.994160

Marginal Number Above 287 Standard Errors:

Joint Number Above 31 scale1 shape1 scale2 shape2 alpha

Joint Number Above (3days) 85 0.001111 0.063740 0.001961 0.055734 0.011808 This table shows the result of bivariate EVT from 1988 through 1999 for lowest oil and ISE 100 returns at 10th quantile.

Table 3 and 4 show bivariate EVT model results, which estimates highest and lowest returns dependency between oil and stock market returns at phase 1. Independence assumption suggests that average 28.6 events would coincide on the same day at 10th and 90th quantiles. Our results show that 30 of the 287 highest returns and 31 of the lowest 287 returns happen on the same day. Table 5. Positive Extreme returns: ISE100 and Brent, Phase 2

Model Estimates:

Model Strength 0.06 scale1 shape1 scale2 shape2 alpha

Deviance 196 0.012270 0.170060 0.015160 0.302630 0.956000

Marginal Number Above 287 Standard Errors:

Joint Number Above 45 scale1 shape1 scale2 shape2 alpha

Joint Number Above (3days) 118 0.001073 0.067218 0.001414 0.075473 0.015859 This table shows the result of bivariate EVT from 2000 through 2011 for highest oil and ISE 100 returns at 90th quantile. Table 6. Negative Extreme returns: ISE100 and Brent, Phase 2

Model Estimates:

Model Strength 0.103 scale1 shape1 scale2 shape2 alpha

Deviance 344 0.013970 0.194410 0.020400 0.146180 0.923800

Marginal Number Above 287 Standard Errors:

Joint Number Above 55 scale1 shape1 scale2 shape2 alpha

Joint Number Above (3days) 130 0.001216 0.066207 0.001822 0.068609 0.017352 This table shows the result of bivariate EVT from 2000 through 2011 for lowest oil and ISE 100 returns at 10th quantile.

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Table 5 and 6 show estimates for highest and lowest returns dependency between oil and stock market returns at phase 2. Compared to the 28.6 expected events under independence assumption, our results show that 45 of the 287 highest returns and 55 of the lowest 287 returns happen on the same day. Oil price effect latency to stock markets is considered in extreme dependency analysis by setting a 3-day margin. This study shows that 85 of the 287 highest returns (30%) and 118 of the lowest 287 returns (41%) happen within the 3 days at the first phase, while 118 of the 287 highest returns (41%) and 130 of the lowest 287 returns (45%) happens within the 3 days at the second phase respectively. There is a considerable increase in joint number of days above the selected threshold level in the 3-day margin. The numbers in parentheses imply conditional probabilities of having an extreme daily stock market return in the coming next three days when today is an extreme day for oil returns. In general, model strength statistics indicate that oil and ISE returns at both phases are asymptotically independent in extreme observations, which is also confirmed by -statistic and α parameter estimated in the models. It is not possible to speak of a dependency relationship between oil and ISE index. Bivariate extreme dependency analysis indicates that oil and ISE 100 returns have a higher dependency at the second phase, in the years from 2000 to 2011. Joint number of days exceeding selected thresholds at second phase is increased by 50 percent for the positive tail and by 77 percent for the negative tail compared to the first phase. Model strength statistics at the second phase is 3.5 times greater for the positive tail and 12.9 times greater for the negative tail, compared to the first phase. In the light of model results, increase in the oil and ISE 100 returns extreme dependency during the second phase is clearly mentioned. Negative returns for oil and ISE 100 index have a higher dependency value compared to the positive returns at the second phase. It is possible to refer negative oil price movements affect ISE 100 index more commonly compared to positive movements at the second phase. CONCLUSION This paper examines extreme dependency between oil prices and Turkish stock index. The data used for dependency analysis consist of daily log returns on Brent oil prices and ISE 100 index for the period between 1988 and 2011. Turkey is an emerging country that supplies nearly half of its energy requirement from crude oil. Oil is one of the major commodities for Turkey’s total imports. Expanding emerging countries need oil as a source of energy for their growing industries. Their exposure to oil price fluctuations is more directly compared to developed nations. Main motive of this study is to show oil price effect in an oil dependent emerging country, such as Turkey. Researches have been done oil price and stock market relationship in the literature mainly focus on analyzing central observations, studying extreme events by employing bivariate EVT model is a first. Results of this study reveal an asymptotic independency relationship between oil prices and ISE 100 index returns in extreme observations. Bivariate extreme dependency analysis applied to the data set by dividing data into two phases, where phase 1 and phase 2 cover the periods from 1988 to 1999 and from 2000 to 2011. Extreme dependency analysis indicates that oil and ISE 100 returns have a higher dependency at the second phase. It is also observed that negative oil price movements affect ISE 100 index more commonly compared to positive movements at the second phase. Oil price effect latency to stock markets is also examined within the study by setting a 3-day margin. Yet, the number of observed joint exceedances is quite close to the expected values under complete independence assumption.

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Findings of this study, which indicates absence of extreme dependency between oil and stock market, may help portfolio managers and investors to identify better diversification opportunities. However, considering higher dependency of stock markets for negative oil price movements, diversification opportunities must be used with comprehensive thinking in the times crisis. REFERENCES Al-Fayoumi, N. A. (2009). Oil Prices and Stock Market Returns in Oil Importing Countries: The Case of Turkey, Tunisia and Jordan. European Journal of Economics, Finance and Administrative Sciences, 16, 84-98.

Basher, S. A., & Sadorsky, P. (2006). Oil price risk and emerging stock markets. Global Finance Journal, 17(2), 224-251.

Bhar, R. & Nikolova, B. (2010). GLOBAL OIL PRICES, OIL INDUSTRY AND EQUITY RETURNS: RUSSIAN EXPERIENCE. Scottish Journal of Political Economy, 57(2), 169-186.

Choi, K., & Hammoudeh, S. (2010). Volatility behavior of oil, industrial commodity and stock markets in a regime-switching environment. Energy Policy, 38(8), 4388-4399. Elsevier B.V.

Coles, S., Heffernan, J., & Tawn, J. (1999). Dependence Measures for Extreme Value Analyses. Extremes, 2(4), 339-365.

Constantinos, K., Ektor, L. A., &Dimitrios, M. (2010). Oil Price And Stock Market Linkages In A Small And Oil Dependent Economy: The Case Of Greece. Journal of Applied Business Research, 26(4), 55-64.

Eryigit, M. (2009). Effects of Oil Price Changes on the Sector Indices of Istanbul Stock Exchange. International Research Journal of Finance and Economics, 25, 209-216.

Faff. R. W. & Brailsford, T. J. (1999). Oil price risk and the Australian stock market. Journal of Energy Finance & Development, 4(1), 69-87. Elsevier B.V.

Filis, G. (2010). Macro economy, stock market and oil prices: Do meaningful relationships exist among their cyclical fluctuations? Energy Economics, 32(4), 877-886. Elsevier B.V.

Filis, G., Degiannakis, S., & Floros, C. (2011). Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries. International Review of Financial Analysis, 20(3), 152-164. Elsevier B.V. Gisser, M., & H Goodwin, T. (1986). Crude Oil and the Macroeconomy: Tests of Some Popular Notions: Note. Journal of Money, Credit and Banking, 18(1), 95-103. Ohio State University Press. Hamilton, J. D. (1983). Oil and the Macroeconomy since World War II. Journal of Political Economy, 91(2), 228. Hammoudeh, S., & Li, H. (2005). Oil sensitivity and systematic risk in oil-sensitive stock indices. Journal of Economics and Business, 57(1), 1-21.

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Hammoudeh, S., & Choi, K. (2006). Behavior of GCC stock markets and impacts of US oil and financial markets. Research in International Business and Finance, 20(1), 22-44.

Hearn, B. & Man, S. Y. (2010). An Examination of Price Integration Between Stock Market and International Crude Oil Indices: Evidence from China. Applied Economics Letters, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1724303

Huang, R. D., Masulis, R. W., & Stoll, H. R. (1996). Energy shocks and financial markets. Journal of Futures Markets, 16(1), 1-27. John Wiley & Sons.

Hyndman, R. J. (2011). A users guide to the ‘forecast’ package, (Version 3.11), http://cran.r- project.org/web/packages/forecast/index.html Jones, C. M., & Kaul, G. (1996). Oil and the Stock Markets. Journal of Finance, 51(2), 463. Klüppelberg, C., & May, A. (2006) Bivariate extreme value distributions based on polynomial dependence functions. Mathematical Methods in the Applied Sciences, 29, 1467–1480.

Laopodis, N. T. (2011). Equity prices and macroeconomic fundamentals: International evidence. Journal of International Financial Markets Institutions and Money, 21(2), 247-276. Elsevier.

Ledford, A. W., & Tawn, J. A. (1996). Statistics for near independence in multivariate extreme values. Biometrika, 83(1), 169-187.

Lee, Y.-H., & Chiou, J.-S. (2011). Oil sensitivity and its asymmetric impact on the stock market. Energy, 36(1), 168-174. Elsevier Ltd.

Loungani, P. (1986). Oil price shocks and the dispersion hypothesis. The Review of Economics and Statistics, 68(3), 536–539. JSTOR. Maghyereh, A. (2004). Oil price shocks and emerging stock markets: A generalized VAR approach. International Journal of Applied Econometrics and Quantitative Studies, 1(2), 27–40. Euro-American Association of Economic Development.

Malik, F., & Hammoudeh, S. (2007). Shock and volatility transmission in the oil, US and Gulf equity markets. International Review of Economics Finance, 16(3), 357-368. Mendes, B., & Moretti A. R. (2002). Improving Financial Risk Assessment through Dependency. Statistical Modelling, 2, 103-122. Mohanty, S., Nandha, M.& Bota, G. (2010). Oil shocks and stock returns: The case of the Central and Eastern European (CEE) oil and gas sectors. Emerging Markets Review, 11(4), 358-372. Elsevier B.V. Mork, K. A. (1989). Oil and the Macroeconomy When Prices Go Up and Down: An Extension of Hamiltonʼs Results. Journal of Political Economy, 97(3), 740-744. The University of Chicago Press.

Narayan, P. K. & Narayan, S. (2010). Modelling the impact of oil prices on Vietnam’s stock prices. Applied Energy, 87(1), 356-361.

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Onay, C., & Ünal, G. (2011) Cointegration and Extreme Value Analyses of Bovespa and Istanbul Stock Exchanges. Czech Journal of Economics and Finance, Forthcoming. Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1636183

Park, J., & Ratti, R. (2008). Oil price shocks and stock markets in the U.S. and 13 European countries. Energy Economics, 30(5), 2587-2608.

Papapetrou, E. (2001). Oil price shocks, stock market, economic activity and employment in Greece. Energy Economics, 23(5), 511-532. Elsevier.

Ribatet, M. (2009). A user's guide to the POT package, (Version 1.1-0), http://cran.r- project.org/web/packages/POT/index.html

Sadorsky, P. (1999). Oil price shocks and stock market activity. Energy Economics, 21(5), 449-469.

Zhu, H., Li, S. & Yu, K. (2011). Crude oil shocks and stock markets: A panel threshold cointegration approach. Energy Economics, 33(5), 987-994. Elsevier B.V. ACKNOWLEDGEMENT This research is supported by Bogazici University Research Fund (D6300).

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WHAT IS PROPELLING THE AMERICAN WORKER TO GO THE WAY OF THE HORSE? THE CHANGING

ANATOMY OF U.S. EXPORT INDUSTRY Tony Mutsune, Iowa Wesleyan College

ABSTRACT

In today’s increasingly dynamic global economy, many industrialized nations are developing comparative advantages that are derived from human effort rather than natural status in their export industries. This is evidenced by a global pattern of shifting man-made comparative advantages over time. Empirical evidence seems to lend support to Wassily Leontief’s findings that would later contradict the previously accepted predictions of the factor endowment theory, which suggested that nations traded internationally based on their resource dispensations (Leontief, 1954). This study is a work in progress that aimed at identifying meaningful factors that propel the development of human-based comparative advantages, and exploration of a testable theoretical framework that will aid a better understanding of the disposition of such factors for the U.S. exporting firms. JEL: F1; L1; E0 KEY WORDS: export industry, innovation, workforce anatomy, transformation INTRODUCTION The utility of the horse during earlier times in human history is undeniable. Horses were used in service for man to ease burdensome tasks such as plowing fields and transportation, among several other practical uses. As society and economy evolved during the renaissance and industrial revolution periods, civilization became more advanced. Changes in society’s interests and mechanism became inescapable. Horsemanship gradually transformed into an art form with the purpose of enhancing the horses’ natural strength and beauty. Horses increasingly became specialized for artistic purposes as their use for practical ends was steadily replaced by Man’s own growing usefulness to himself as he developed new mechanisms of accomplishing his work. Society’s quest for improvement and advancement has been unrelenting throughout history. Human labor transition patterns that are comparable to those of the horse are evident around the world. The impact on the comparative advantages that nations hold is both dramatic and meaningful in international trade. The findings of Leontief (Leontief, 1953), which are commonly referred to as “The Leontief Paradox” offer insights into the transformational changes that are unfolding in labor resources and the resulting influences on patterns of international trading among exporting nations. This study pays particular attention to U.S. exporting sector. In his study of U.S. export patterns, Leontief recognized that the U.S. seemed to have been endowed with more capital per worker than any other country in the world then. Thus, it was accepted that the US exports would have required more capital per worker than US imports (Ohlin, 1933). However, Leontief’s findings seemed to indicate a different outcome. U.S. imports were 30% more capital-intensive than US exports. Subsequent investigations would reaffirm the findings (Leontief, 1956 and Robert Baldwin, 1971).

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Leontief himself suggested an explanation for his own paradox. He argued that U.S. workers may be more efficient than foreign workers. Assuming that Countries around the world have identical technologies, Leontief attributed the superior efficiency of American labor to superior economic organization and economic incentives in the U.S. The U.S. workforce anatomy, similar to other advanced economies around the world, is trending in a steady shift in demand away from a less skilled toward a more skill-intensive workforce. Remarkable technological advances are shaping the way production is accomplished. It follows that the level of skill that many jobs now require is technology based. While full obsolescent is doubtful, human labor independent of skills is becoming less useful in compared to previous periods. Knowledge and skills are much more important in production today. This trend has produced dramatic changes in workforce anatomy and consequently comparative advantages held by nations. United States is among several advanced economies that are abundant in human capital (highly educated and trained workers) and export human capital intensive products. LITERATURE REVIEW A Discussion of Explanatory Factors If in fact the superiority of the U.S. workforce is the outcome of maturity in economic organization and growing incentives as suggested by Leontief and several more scholars, then it is granted that such status could be retained, improved, or lost, over time. Also then, the ability to achieve and retain a superior status would depend on the ability to affect the required and appropriate measures, and implement the needed economic policy actions. If the Leontief paradox sustains, it follows that the anatomy of the U.S. export industry workforce, and consequently export products will adjust to reflect changes in superiority status. Dr. Nam Pham’s (2010) study on intellectual property-intensive (IP intensive) industries in the U.S.—such as life sciences, software, and aerospace shows that IP-intensive industries succeed globally, drive innovation, and invest heavily in research and development. This, in turn, grows the economy by creating jobs and driving exports in a variety of different careers and trades, both blue collar and white collar (Pham, 2010). U.S. Census Bureau statistics indicate that over the period 2000-2008 approximately 60% of jobs in U.S. export industry were in IP-intensive industries, which are a type of human capital-intensive industry. Nam Pham’s study also pointed out the role of IP- intensive industries in creation of new tradable products and services for the U.S. IP-intensive industries made up nearly half of output and sales of all 27 U.S. tradable industries and employed more than 30% of American workers in these industries. More important, IP-intensive industries accounted for approxi- mately 60% of total U.S. exports—rising from $665 billion in 2000 to $910 billion in 2007. During this time period, American firms exported an annual average $405.5 billion of IP-intensive products versus $278.1 billion of non-IP-intensive products. The impact of labor market trends on international trade around the world, and certainly for the U.S. is clear. Most of the overall shift in U.S. labor demand in manufacturing since the early 1980s has more to do with change in skill demands from less skill-intensive to more skill-intensive. Having made this recognition, this study seeks develop a conceptual framework that is useful in the understanding and investigation of organizational and incentive factors that are facilitating the necessary workforce and consequent product transformations in America’s export industries main purpose of this study .

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THE MODEL DESIGN The process through which exporting firms respond to national organizational advantages and incentives to develop dynamism forms part of the general features of the firm's operational objective. To better understand the role and nature of the organizational advantages and industry incentives, we need to examine the composite model of these processes. In this regard, this paper offers a simple model that can be applied to appropriate data. It is conceived to explore suitable specifications that would be helpful for determining policies towards a sustainable strong export performance. Conceptually, two classifications of factors that influence the export industry workforce anatomy and export product type exist, namely, firm incentives and degree of economic organization. These coincide with industry specific and economy wide realms respectively. Incentives for exporting firms constitute of factors that encourage innovative transformation within exporting firms. Examples of these are profit or compensational gains, increased market share, spill overs and reputational benefits (Davis and Jerome, 2004), strength of copyright and patent legislation, degree of restrictiveness of industrial regulation, level of inter-industry rivalry (Sastry, 2005), strong industry-government research and development partnerships, and adaptability of the labor force. Ezeala-Harrison’s work on macroeconomic factors that influence competitiveness in firms presents a useful definition of the economy wide factors. He describes these as generally made up of supportive institutional arrangements and infrastructure facilities. Institutional factors include the variables of government policy actions. Examples are such as tax policy, labor market policy, exchange rate regime adopted, and financial sector regulatory or deregulatory policies, and the existence and adequacy of infrastructure. There also are the availability (or stability) of other institutional parameters such as legal, educational, health and para-medical, and financial infrastructure. The degree of "economic liberalization" provided and allowed by the country’s authorities, and existence of adequate institutional framework in a country are crucial factors that influence innovative transformations in the export industries. These factors, however, hang largely on the political and (ideological) leaning of the country's authorities and policy makers. These policies usually remain fairly unchanged over time. These economy wide parameters are considered as qualitative in nature, in the sense that they are given (or constant) over time, and work to provide the ultimate background conditions on which individual firms can respond to incentives that are specific to the industries they occupy (Ezeala-Harrison, 2010) . Ezeala elaborates on the meaning and significance of economic liberalization in trade. It is the package of measures designed to direct an economy away from restrictive regulatory and central control, toward a free-market based system which is based on competition, deregulation, and enhanced private-sector. Among the conceivably several major parameters of economic liberalization, two of the most cogent ones are the country's: (i) trade liberalization (or free trade) policy, and (ii) currency exchange rate regime (stable, flexible, and moderate exchange rate level). Other parameters of economic liberalization such as degree of privatization, deregulation, and centralization are equally important, and various indices could be employed to measure their levels to assess the degree of economic liberalization. These two are selected only on the basis of their being relatively easy to keep track of explicitly. Formulation of the Conceptual Framework Again, the determining factors that influence changes in the composition of the labor force and nature of export products can be broadly categorized as: existing incentives for exporting firms and the degree of

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economic organization of the country. Each category can be further decomposed into definitive variables that are specific to the export industry and those that involve the conditioning and supportive institutional arrangements and infrastructure. The basis for a testable formulation of the links between export industry innovative transformation and these determinant factors is a model that assumes similar capital endowments across countries (Leontief, 1953) and involves the level of labor utilization, and efficiency of allocation of resources (labor). Competitive export firms will seek to effectively utilize resources in the most efficient manner relative to others under conditions of equal capital endowment. Thus, a composite magnitude of total labor efficiency growth rate and product value changes over time constitutes the quantitative measure of export strength as it indicates the combined effect of the effectiveness of the firms resource utilization and resultant (exported) product value (which may also translate to product type transformation) The mathematical depiction is as follows: Comp. {α(K/L)+ Prod. / t} = f( µX + βZ) (1) where,

α = a multiplicative factor that estimates the degree of relative worker skill level under the equal capital endowment assumption.

K = Capital endowment measure L = Measure of Labor quantity Prod. = product changes t = change in time X = firm incentives parameters Z = organizational parametersqualitative β, λ = weighting indexes of the degree of respective parameters, This simplistic model helps to formulate some testable predictions about innovative transformation in exporting firms. It provides a framework that links innovative transformation to key determinant variables. With the aid of this model, an empirical framework can be constructed testing the strength of that linkage. DISCUSSION OF POLICY IMPLICATION AND SUMMARY With a more robust understanding of the determinant incentive and organizational factors that influence the U.S. export industry anatomy, a strategy to improve the potential for sustainable and meaningful transformation can be shaped. A more accurate identification and measurement of the determinant factors is crucial milestone in effective policy prescription at the economy wide level and strategic management

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at the firm level as America restructures its exports to in response to the shifting advantages that necessitate industrial transformation. It is anticipated that the empirical testing of the proposed model will result in conclusive study design that can be applied to a carefully selected data for the U.S. export sector, and also lead to insights for policy prescription. REFERENCES Baldwin, R.E. (1971). Determinants of the Commodity Structure of U.S. Trade, American Economic Review 61(1). Carsten B., Thorsten L. (2008). Incentives and Innovation? R&D Management in Germany’s High-Tech Industries During the Second Industrial Revolution, A Max Planck Institute for Research on Collecctive Goods Report, Bonn, Germany. Davis L., Davis J. (2004). How Effective are Prizes as Incentives to Innovation? Evidence from Three 20th Century Contests. Presented at the DRUID Summer Conference, Elsinore, Denmark. Ezeala-Harrison F. (2010). International Competitiveness: An Analysis on the Interaction of Qualitative and Quantitative Indicators. A working paper presentment at the Institute of Business and Finance Research Global Conference in San Jose, Costa Rica. Leontief, W. (1956). Factor Proportions and the Structure of American Trade: Further theoretical and empirical analysis, Review of Economics and Statistics, 38 (386-40). Leontief, W. (1953). Studies in the Structure of the American Economy, Oxford University Press. Linda S. (1961). An Essay on Trade and Transformation, New York, John Wiley. Ohlin, Bertil. (1933). Interregional and International Trade, Harvard University Press, Cambridge, 1933. Pham, Nam. (2010). The Impact of Innovation and the Role of Intellectual Property Rights on U.S. Productivity, Competitiveness, Jobs, Wages and Exports. NDP Consulting Group Report. Sastry, B. (2005). Market structures and Incentives for Innovation. International Think-tank on Innovation and Competition (INTERTIC) policy paper.

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RISK FACTORS INFLUENCING THE SURVIVAL OF STRATEGIC ALLIANCES AMONG SMALL AND MEDIUM ENTERPRISES IN KENYA: EVIDENCE

FROM KISUMU DISTRICT Charles M. Rambo, University of Nairobi, Kenya

ABSTRACT

Between a half and two-thirds of strategic alliances formed by Small and Medium Enterprises (SMEs) often fail to realize their purpose due to a gamut of unmitigated risk factors. Most studies on strategic alliances and associated risks have been conducted in developed economies, leaving Sub-Sahara Africa (SSA) with a dearth of academic literature. Using the Kenyan case, this study sheds light on risk factors influencing the survival of SME alliances in the SSA. Primary data was sourced from 120 SMEs involved in strategic alliances. I applied both quantitative and qualitative techniques to process and analyze the data. Results indicate that the survival of SME alliances is a function of factors such as proportion of skilled staff, explaining up to 8.7 percent of variance, transportation cost (8.1%), information sharing (7.5%), level of trust among partners (6.6%) and integration of computers to support business activities (5.5%). In conclusion, SME strategic alliances remain risky ventures, requiring a concerted effort of all stakeholders to initiate appropriate mitigative measures to avert economic losses resulting from alliance failure. Among other recommendations, the study underscores the need for SSA governments to provide tax incentives, improve infrastructure and explore cheaper energy alternatives. JEL: O16 KEYWORDS: Risk, Risk Factors, Small and Medium Enterprises, Alliance Survival, Alliance Failure INTRODUCTION The role of SMEs in employment creation, poverty reduction and industrialization has been documented in economic blue prints and empirical research world over (Abaka & Mayer, 1994; Atieno, 2001). According to Olutunla and Obamuyi (2008), SMEs provide more employment per unit of capital investment than large-scale enterprises. In Kenya, recent statistics show that SMEs create employment for about 70 percent of the national workforce, contributing up to 22 percent of Gross Domestic Products (GDP) (Mbithi & Mainga, 2006; Atieno, 2009). However, globalization forces, technological advancement and competition constantly threaten the contribution of SMEs in national development. To secure their survival, SMEs are increasingly initiating strategic alliances, which enable them to reduce production costs, acquire knowledge, as well as access new technology, financial resources and labour (Das & Teng, 2001; Ireland, Hitt & Vaidyanath, 2002; Li & Malin, 2009; Alders, van Liere, Berendsen & Ineke, 2010). Even though strategic alliances have been attractive to SMEs, between 50 and 60 percent often, fail to realize the expectations of their crafters (Reuer, 1999; Das & Teng, 2001; Alders et al., 2010). High failure rates of SME alliances have been associated with various forms of risk factors, arising from inter- firm relations, firm capacity and firm-environment interaction (Das & Teng, 1998; 2001; Ireland, et al., 2002; Chi, 2005; Li & Malin, 2009; Alders et al., 2010; Long & Zhai, 2010).

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LITERATURE REVIEW In management, a risk is an unanticipated negative variation between set targets and actual achievement (Kogut, 1988; Das & Teng, 1998; 2001). According to Miller (1992), the concept of risk refers to factors that are either internal or external to alliance firms, which impede the realization of targets. Influenced by Miller’s thoughts, Das and Teng (1998) came up with two broad categories of risks within the context of strategic alliances, viz. relational and performance. Relational and Performance Risks Relational risk is concerned with poor or non-adherence of alliance partners to documented regulations governing their behaviors and relations (Das & Teng, 1999; 2001; Elmuti & Kathawala, 2001). Perpetuation of opportunistic tendencies such as dishonesty, shirking, distortion of information, as well as poaching partners’ skills, clients or personnel are manifestations of relational risk (Das & Teng, 1999; 2001; Elmuti & Kathawala, 2001; Alders et al., 2010; Long & Zhai, 2010). Das and Teng (2001) assert that relational risk is inevitable in strategic alliances, but emphasize the importance of ‘trust’ and ‘control’ for strategic alliances to survive and realize their purpose. Whereas ‘trust’ was considered a means to reducing perceived risks, control is an active measure taken to reduce such risks. Similarly, Long and Zhai (2010) contend that trust and commitment form the foundation of strategic alliances, manifested through information sharing, technology; as well as equitable sharing of costs and profits. Performance risk is the probability that an alliance may fail to achieve its targets even when partners commit themselves fully. Performance risk is a function of institutional capacity factors such as staff competency, capitalization level and integration of ICT; as well as business environmental factors such as competition, taxation, cost of raw materials, transportation and energy, among others (Das & Teng, 1998; 2001; Li & Malin, 2009; Alders et al., 2010). Strategic alliances can distribute performance risk among partners, for instance, by sharing expenditure, resources, skills and technology (Das & Teng, 2001). Thus, the synergy created by strategic alliances is a partial remedy for performance risk. However, not all strategic alliances have the potential to create synergy, as some partners may be deficient in terms of institutional capacity, leading to poor performance (Das & Teng, 1998). Unlike relational risk, performance risk exists in all business enterprises, irrespective of their involvement in strategic alliances. Besides, the two risk types are independent and have no specific pattern of correlation. Hence, alliance partners can enjoy good relations despite poor financial performance (Das & Teng, 1998; 2001; Alders et al., 2010). Most empirical studies on strategic alliances and inherent risks focus on developed economies of Western Europe, North America, Australia and South-East Asia. Crotts and Wilson (2005) noted that although relational and performance risks form a crucial dimension for understanding strategic alliances, risk considerations are yet to receive adequate attention in academic research, particularly in developing economies. This study was conducted to determine risk factors significantly associated with the survival of SME strategic alliances; determine the influence of risk factors on the intention of alliance partners to stay on or pull out of their alliances; as well as assess mitigative measures initiated by SMEs. In this study, I measured relational risk in terms of the willingness of partners to share information and share expenditure, extent of staff bonding and the level of trust between alliance partners. Besides, I measured performance risk in terms of firm size, ownership structure and integration of computers to

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support business activities; as well as level of demand for alliance products/services, taxation level, transportation and energy costs. Also captured were intermediate risk factors such as prevalence of conflict between partners, availability of conflict resolution mechanisms, alliance age, change in revenue, type of business activities and the location of premises. Resource-Based View of Strategic Alliances The Resource Dependency Theory (RDT) postulates that a firm’s competitive advantage is founded on its internally-available resources, including tangible assets such as premises, machinery, human and financial resources; as well as intangible assets such as technology, skills, managerial expertise and reputation, among others (Barney, 1991; Grant, 1995; Das & Teng, 1998). Das and Teng (1998) categorize firm’s internal resources into four, viz. financial, technological, physical and managerial. Combinations of the four broad resource types are indispensable for firms to build competitive advantage (Chi, 1994). However, most firms are not self-sufficient; those experiencing a shortage of any form of strategic resources are likely to reach out to other firms holding complementary resources to secure their survival (Barney, 1991; Das & Teng, 1998; 2001). Strategic alliances permit firms to access resources, which they do not possess, but which are necessary for its performance and survival. However, firms can only realize synergy when they seek to combine complementary rather that supplementary resources (Harrison, Hitt, Hoskisson and Ireland, 1991). METHODOLOGY Data I sourced data from 120 SMEs involved in strategic alliances for at least 3 years. Inclusion in the sample was based on availability of complete accounting records for the immediate trading period; willingness of managers/owners to avail such financial records; and acceptance to be interviewed. Model Bivariate analysis generated cross-tabulations with Chi-square (χ2) statistic, while at the multivariate level; I applied binary logistic regression to determine the influence of individual risk factors on the alliance survival. The model is often expressed in the form: -

(1) (1) Where: Y = the predicted variable (alliance survival); θ(Y) = the probability of an SME staying on; 1- θ(Y) = the probability of an SME pulling out; α = constant term of the equation; β1, β2…βi = regression co- efficients associated with independent variables; X1, X2...Xi = independent variables and ε = the error term. Qualitative data were processed and analyzed following three steps, including listing of responses under key thematic areas; description to produce a preliminary report; systematic analysis and interpretation. Publications such as Nachmias and Nachmias (1996), as well as Bryman and Cramer (1997) provide details of the design and approaches used in this study.

Logit [θ(Y)] = log = α +β1X1+β2X2+β3X3+…+βiXi+ε θ(Y)

1- θ(Y)

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RESULTS AND DISCUSSIONS Strategic alliances were formed with various types of organizations, including competitors (56%), customers (16%), suppliers (12%), financial institutions (8%), educational institutions (5%) and government research institutions (3%). In addition, up to 97 (80.8%) SMEs were collaborating with only one partner, 22 (18.3%) had two partners, while one SME had formed an alliance with more than two partners. This study focused on the most recently formed strategic alliances, aged at least 3 years. Furthermore, strategic alliances were created for various reasons, listed in table 1 below. Table 1: Reasons for Engaging in Strategic Alliances

VALID RESPONSES FREQUENCY PERCENT OF CASES Improve revenue 71 59.2 Access technology 11 9.2 Raise capital 79 65.8 Share distribution channels 29 24.2 Ensure steady flow of raw materials/supplies 43 35.8 Counter competition from larger firms 54 45.0 Reduce competition 22 18.3 Train staff 17 14.2 Develop more efficient production methods 11 9.2 TOTAL 337 280.8

This table shows the reasons why SMEs in Kisumu District, Kenya engaged in strategic alliances. It is a multiple response table, showing frequency distribution and corresponding percent of cases, which in this case, was 120 SME managers/owners. The main reasons why SMEs engaged in strategic alliances included the need to raise capital, improve revenue, counter competition from larger firms, ensure a steady flow of raw materials or supplies, and share marketing distribution channels. The longevity of strategic alliances is an important dimension of how well they are likely to achieve the expectations of collaborating firms. Alliances that fail to live up to the expected duration are less likely to be successful in realizing the purpose for which they were created. In view of this, 55 percent of the 120 SMEs intended to remain in their alliances for at least 5 years, while 45 percent intended to pull out within the same duration. Bivariate Analysis Results Bivariate analysis was used to determine the presence or lack of a significant relationship between alliance survival and selected risk factors. The results presented in table 2 below, indicate that the survival of SME alliances was significantly associated with risk factors such as information sharing, sharing expenditure, extent of staff bonding and level of trust. Table 2: Association between Alliance Survival and Risk Factors

RISK TYPE RISK FACTORS SUMMARY OF CHI SQUARE (χ 2) RESULTS

CALCULATED χ2 DF SIG.

Relational

Information sharing 6.742 2 0.034** Sharing expenditure 24.297 2 0.000*** Extent of staff bonding 7.495 2 0.024** Level of trust 10.020 2 0.007***

Performance

Firm size 14.123 6 0.028** Ownership structure 8.243 2 0.016** Integration of computers 6.810 1 0.009*** Proportion of skilled staff 16.186 5 0.006*** Demand level 10.549 2 0.005*** Taxation level 8.952 2 0.011** Transportation cost 9.001 2 0.011** Energy cost 6.059 2 0.048**

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Intermediate

Conflict prevalence 11.870 2 0.003*** Conflict resolution mechanism 7.129 1 0.004*** Alliance age 2.081 3 0.556 Change in revenue 58.204 2 0.000*** Type of business activities 15.982 11 0.142 Location of premises 0.825 1 0.364

This table presents a summary of χ2 results, calculated from cross tabulation analysis between alliance survival and risk factors. The column labeled CALCULATED χ2 is comparable to table χ2 values. DF stands for degrees of freedom, while SIG. indicates the statistical significance of association between the risk factors and alliance survival. ***, ** and * shows the level of significance at 1, 5 and 10 percent respectively. The survival of SME alliances was also significantly associated with performance risk factors such as firm size, ownership structure, integration of computers, proportion of skilled staff, level of demand, taxation level, transport cost and energy cost; as well as intermediate factors, such as frequency of conflict, availability of a conflict resolution mechanisms and revenue change. Multivariate Analysis Results Appendix A presents the results on odds ratios or Exp(β) and partial regression co-efficients. The predictive power of binary logistic regression models is indicated by the -2Log Likelihood (-2LL) statistic. Each model generates an initial -2LL (chance model); the unit change in the value of -2LL statistic each time a covariate is added represents the proportion of variance in the dependent variable, explained by that covariate. Figure 1 shows the covariates included in models 1 and 2, and the proportion of variance in the survival of SME alliances accounted for by each. Figure 1: Proportion of Variance in Alliance Survival Explained by Risk Factors

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The proportion of variance accounted for by each risk factor (covariate) was obtained from the unit change in -2LL statistic corresponding with the addition of each covariate. INFOshare stands for information sharing between partners; EXPshare = expenditure sharing; STAFFbond = extent to which staff of alliance partners had bonded. TRUSTlev = level of trust among alliance partners; FIRMsize = number of paid workers; OWNstruc = ownership structure; COMPint = integration of computers; and SKILLstaff = proportion of skilled staff. DEMlevel = demand level for products offered by an alliance; TAXlevel = taxation level; TRANcost = transportation cost; ENERGcost = energy cost; REVEchange = change in revenue; CONFprev = prevalence of conflict, and CONFresc = availability of conflict resolution committee. In model 1, the willingness of partners to share information accounted for up to 6 percent of variance in alliance survival. However, when the model is adjusted to include intermediate covariates, the proportion of variance accounted for by the covariate scales-up to 7.5 percent. Improvement in information sharing reduced the likelihood of partners pulling out, which in turn, increased the odds of alliance survival. However, most firms would not be free to share their critical information such as product formulae or

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marketing secrets, without guaranteed security of such information. Besides, protectiveness of information only reinforces distrust, which in turn, may constrain alliance survival. The willingness of partners to share expenditure accounted for 4.8 percent of variance in alliance survival, as indicated by model 1. However, the inclusion of intermediate variables reduced the proportion of variance accounted for by the risk factor to 2.9 percent. An increasing willingness of partners to share expenditure reduces the likelihood of SMEs pulling out; thus, increases the odds of alliance survival. Expenditure sharing is particularly important for enhancing commitment and SME managers/owners should consider it before initiating alliances. Model 2 shows that the extent of staff bonding explained up to 4.8 percent up from 1.3 percent in model 1. As bonding improves among staff of alliance partners, the likelihood of SMEs pulling out reduces. Thus, the higher the bonding among staff, the better the survival chance of such alliances, and vice versa. Poor bonding among staff may be perpetuated by factors such as negative attitudes, gossip, stigmatization and competition. It must be noted that strategic alliances bring with it sudden changes, which may disrupt usual work routines. Establishing a strategic alliance is process of change that is associated with anxiety and uncertainty. Effective management of change is critical for helping staff of alliance partners to bond and work as a team, where members treat each other with respect and where members feel secure, respected and trusted. However, starting and sustaining change among staff members requires creative leadership that is able to inspire people through positive behaviour, ethics and values. Staff bonding may also be expedited through informal spheres where staff members can interact freely to water down communication and ideological ‘glass walls’. The level of trust between alliance partners explained up to 6.6 percent of variance in alliance survival, up from 5.8 percent in model 1. An increasing level of trust among alliance partners directly corresponded with the likelihood of SMEs pulling out. In other words, the higher the level of trust, the better the survival chance for such alliances, and vice versa. The challenge faced by alliance partners is how to nurture and sustain trust amongst themselves. In this regard, SME managers/owners face the challenge of balancing between alliance and firm-specific interests, without compromising trust. Opportunistic behaviors are the most common threats to trust levels between or among alliance partners, which in turn, reduces the odds of alliance survival. Firm size, measured in terms of the number of paid workers, accounted for 4.4 percent of variance in alliance survival. However, when the model is adjusted for intermediate variables, the proportion of variance accounted for in the survival of alliances reduced marginally to 2.4 percent. An increase in staffing level resulted to a stronger institutional capacity, which in turn, improved the odds of alliance survival. Although staffing level is an important risk factor influencing the odds of alliance survival in Kenya, other key parameters such as performance management, training and welfare remain critical for enhancing institutional capacity. Moreover, the proportion of skilled staff explained up to 8.7 percent of variance in alliance survival, up from 5.8 percent in model 1. As the proportion of skilled staff increases, the level of performance risk reduces and so is the likelihood of SMEs pulling out of their alliances. Hence, the higher the proportion of skilled staff, the better the odds of alliance survival. In model 2, ownership structure explained up to 2 percent of variance in alliance survival, down from 2.3 percent in model 1. Alliances crafted by sole proprietors had a lower survival chance than alliances involving limited companies, the main separating factors being capitalization and staffing level, as well as systems, structures and physical resource capacity. Hence, SMEs are better-off establishing strategic

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alliances with limited companies than sole proprietorships. Furthermore, SMEs should consider initiating alliances with firms that have integrated computers in their business activities. Model 2 shows that integration of computers accounted for 5.5 percent of variance in alliance survival. The initiative reduced performance risk, and by extension, increased the odds of alliance survival. Furthermore, the level of demand for alliance products/services accounted for 1.9 percent of variance in alliance survival. An increasing level of demand inversely corresponds with the likelihood of SMEs pulling out and directly corresponds with the odds of alliance survival. Sustaining demand for alliance products/services through diversified marketing channels remains a critical option that SME alliances should consider to improve their survival chance. In addition, taxation level accounted for 4.8 percent of variance – a marginal increase from 4.6 percent in model 1. The higher the perceived taxation level the lower the odds of alliance survival. Nevertheless, the perceived level of taxation depends on the extent to which products/services have been established in the market. An established product/service is likely to defray taxation charges more than one that is yet to establish. Although SSA governments bear the responsibility of tax regulation, SME alliances should focus on establishing their products/services to improve returns; thus, lighten taxation burden and improve alliance survival chance. In model 1, transportation cost accounted for 8.8 percent of variance in alliance survival. However, this scaled down to 8.1 percent in model 2. Increment in transportation cost resulted to a higher level of performance risk, which in turn, reduced the survival chance for SME alliances. Transportation cost remains a critical element influencing the survival of SME alliances in Kenya. Model 2 shows that energy cost accounted for up to 1.9 percent of variance in alliance survival, down from 2.5 percent. As energy cost escalates, performance risks also increase, which in turn, reduces the odds of alliance survival. To determine the explanatory power of the two models, the covariates were plotted on a scatter-gram, as indicated in figure 2 below. Figure 2: Distribution of Covariates

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This figure shows the distribution of covariates on a scatter-gram, which was also used to generate best-fit lines and co-efficient of determination R2, representing the predictive power of the model. The linear equation for model 1 is y=0.049x + 4.181, with R2=0.540. For model 2, the resultant linear equation was y=0.093x + 5.309, with R2= 0.684.

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The scatter-gram also provides best-fit lines and co-efficients of determination (R2). In this regard, model 1 explained up to 54 percent of variance in the survival of SME alliances, while model 2, which incorporated intermediate factors, predicted up to 68.4 percent of variance. This implies that up to 31.6 percent of variance may be explained by other variables not included in model 2. Risk Management Practices Table 3 below, presents the measures initiated by SMEs to manage as well as cope with relational and performance risks. In this regard, 73 percent of the respondents cited legalization as the most important mitigative measure. SME strategic alliances were legalized through contracts and memoranda of understanding; spelling out terms of engagement; responsibility, liability and profit sharing; as well as frequency of review meetings and follow-up mechanisms. Legalization of alliances was particularly useful in enhancing commitment among partners as well as regulating opportunistic behaviors. However, non-adherence to documented agreements by some partners was still a cause for concern. Consequently, up to 45 percent of the firms intended to pull out of their alliances. Furthermore, 53 percent mentioned joint planning as the key strategy used to manage risks by watering down ideological ‘glass walls’, as well as filling up ideological gaps. Joint planning entailed activities such risk assessment, market surveys as well as analysis of strengths, weaknesses, opportunities and threats (SWOT). Joint planning also included projection of demand levels, market prices, market growth and revenues. Through joint planning effective financial control and reporting systems were established and so were exit strategies. Up to 50 percent of the firms initiated regular review meetings to share their experiences, monitor progress as well as address emerging risks to enhance the odds of alliance survival and excellence. Table 3: Risk Management Practices

VALID RESPONSES FREQUENCY PERCENT OF CASES Diversification 18 15.0 Partner complementarity 27 22.5 Legalization of alliances 88 73.3 Regular review meetings 60 50.0 Cost-sharing 51 42.5 Joint planning 64 53.3 Competition reduction 14 11.7 Special management structures 21 17.5 Conflict resolution mechanisms 37 30.8 TOTAL 380 316.7

This table shows measures initiated by SMEs involved in strategic alliances to mitigate or cope with relational and performance risks. This is a multiple response table, showing the frequency distribution of responses and corresponding percent of cases. The study involved 120 SME mangers/owners. About 31 percent of the alliances established conflict resolution committees to address all forms of dispute and enforce behavior control. In the opinion of SME managers/owners, conflict resolution committees were most effective in curbing opportunistic behaviors among errant alliance partners. Partner complementarity was also identified as a mitigative strategy against risks. In this regard, 23 percent of the SMEs were keen to select partners who were complementary in terms of resources, skills and technology to avoid overlaps and gaps. However, when requested to rate their satisfaction with their choice of partners, up to 67 percent expressed dissatisfaction, the reason being the difficulty of finding complementary partners among SMEs.

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In addition, 18 percent of the alliances created special management structures run by a team of skilled and experienced staff selected by both partners. Besides, 15 percent of the SMEs initiated alliances with multiple partners to diversify risks by sharing the cost of projects, considered to be of high risk. Such alliances were instrumental in lowering a firm’s risk exposure. Finally, up to 12 percent of the alliances employed various measures to avoid competition between/amongst partners, including giving away some market areas, demarcating market boundaries, selling each other’s products and coming up with jointly branded products. CONCLUSIONS The formation of strategic alliances does not necessarily guarantee the success of collaborating firms. Besides, the failure of such alliances portends far-reaching economic consequences, not only for the firms involved, but also for SSA economies. Although strategic alliances are critical for the survival of SMEs, they remain risky ventures that require adequate preparation in terms of appropriate mitigative measures; thus, avert losses that may occur in the event of alliance failure. In addition, SSA governments bear a big chunk of responsibility in mitigating risk factors emanating from the business environment, particularly, taxation, infrastructure and alternative energy sources. Equally important, is the improvement programs intended to support the development of SMEs. RECOMMENDATIONS This section presents recommendations for SMEs as well as key stakeholders such as governments, trade unions and non-governmental organizations. Recommendations for SMEs

1. Establish joint secretariats to plan and execute all decisions made by alliance partners. The secretariat shall also monitor, evaluate and report performance to partners during review meetings.

2. Improve information sharing by identifying and training specific staff to handle shared information; creating special security facilities to handle classified information and legal restraints for partners who may abuse shared information.

3. Initiate team-building activities such as games, tree planting and environmental clean up, among others to o expedite staff bonding and foster teamwork.

4. Recognize and reward staff members who perform exceedingly well in their work, leadership positions or in terms of behaviour. Small acts of positive behavior among staff should be amplified for emulation.

Recommendations for Governments and Stakeholders

1. Provide tax incentives through temporary exemptions or abolition of unnecessary taxes for SME alliances to improve production capacity and survival in hyper-competitive markets.

2. Explore cheaper energy alternatives such as solar, wind and geothermal power to reduce

overdependence on hydro-electricity, which is too expensive and constraining performance.

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3. Improve road network by increasing the coverage of all-weather roads and maintaining rural access roads to reduce transportation cost; thus improve performance and alliance survival.

4. Establish SME assistance centres at the County level, with key functions such as promoting the

development of SMEs, creating necessary linkages, training, research and dissemination. Such centres should be modeled after the Small Business Developments Centers of the United States or Technology Centers in Netherlands.

5. Develop appropriate curriculum on strategic alliances and encourage all tertiary educational

institutions, particularly those accredited to provide Technical, Industrial, Vocational and Entrepreneurship Training (TIVET) programs to incorporate and implement the curriculum.

LIMITATIONS At the time of this study, the idea of strategic alliances among SMEs was fairly a new concept in Kisumu District; hence, the difficulty of finding data on registered SME alliances. This gap constrained the sample size used in this study. Also limiting the sample size was lack of complete and consistent accounting records among SMEs. Although the study was conducted nearly a decade ago, this paper serves as a stimulus for more research on the subject, particularly in the SSA. REFERENCES Abaka, K. and P. Mayer (1994) Promotion for Small-scale Enterprises in Ghana. Accra, Ghana: NBSSI. Alders, B., M. van Liere, G. Berendsen and P. Ineke (2010) “Risk in Inter-organizational Networks and Strategic Alliances,” HAN Business Publications, No. 3 (September), p. 27-39. Atieno, R. (2001) “Formal and Informal Institutions’ Lending Policies and Access to Credit by Small- Scale Enterprises in Kenya: An Empirical Assessment,” AERC Research Paper 111, Nairobi: African Economic Research Consortium. Atieno, R. (2009) Linkages, Access to Finance and the Performance of Small-Scale Enterprises in Kenya. Research Paper No. 2009/06- February. New York: World Institute for Development Economics Research. Barney, J. B. (1991) “Firm Resources and Sustainable Competitive Advantage,” Journal of Management, Vol. 17, p. 99-120. Bryman, A. and D. Cramer (1997) Quantitative Data Analysis with SPSS for Windows: a guide for Social Scientists. London: Routledge

Chi, T. (1994) “Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems, and Choice of Exchange Structure,” Strategic Management Journal, Vol. 15(1), p. 217-290.

Chi, R.Y. (2005) “The Formation of Regional Innovation Networks of SMEs, Improve the Structure and Function of Property: Survey of Zhejiang Province,” Management World, Vol. 10 (103), p. 54-77.

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Crotts, J. and D. Wilson (2005) “An Integrated Model of Buyer-Seller Relationships in the International Travel Trade,” Progress in Tourism and Hospitality Research, Vol. 1(2), p. 125-139. Das, T.K. and B. S. Teng (1998) “Resource and Risk Management in the Strategic Alliance Making Process,” Journal of Management, Vol 24(1), p. 21-42. Das, T.K. and B.S. Teng (1999) “Managing Risks in Strategic Alliances,” Academy of Management Journal, Vol. 23(1, November), p. 491-512. Das, T.K. and B.S. Teng (2001) “A Risk Perception Model of Alliance Structuring,” Journal of International Management, Vol. 7(1), p. 1-29. Elmuti, D. and Y. Kathawala (2001) “An Overview of Strategic Alliances,” Management Decision, Vol. 39(3), p. 205-217.

Grant, R.M. (1995) “Diversity, Diversification and Profitability among British Manufacturing Companies, 1972-84,” Academy of Management Journal, Vol. 31(4), p. 771-801.

Harrison, J., M. Hitt, R. Hoskisson and, R. Ireland (1991) “Synergies and Post-acquisition Performance: Differences versus Similarities in Resource Allocations,” Journal of Management, Vol. 17(1), p. 173-190. Ireland, R., M. Hitt and D. Vaidyanath (2002) “Alliance Management as a Source of Competitive Advantage,” Journal of Management, Vol. 28(3), p. 413-446. Kogut, B. (1988) “Joint Ventures: Theoretical and Empirical Perspectives,” Strategic Management Journal, Vol. 9(4), p. 319-332. Li, Y. and S. Malin (2009) “Formation Mechanism of Green Strategic Alliances and Its Cooperative System for Coal- Mining Eco-Industrial Parks Based on Synthetic Decision Support System,” Journal of Computers, Vol. 4 (11), p. 1109-1116. Long, Y. and S. Zhai (2010) “Risk Control in Business Strategic Alliances of SMEs - A Case Study of SMEs in Zhejiang Province,” Management World, Vol. 3(13, April), p. 323-364. Mbithi, M. and J. Mainga (2006) Doing Business in Kenya Procedures and Regulations, Opportunities, Sources of Finance and Incentives: A Handbook for Local Investors, January. Nairobi: UNDP. Miller, K.D. (1992) “A Framework for Integrated Risk Management in International Business,” Journal of International Business Studies, Vol. 23(1), p. 311-331. Nachmias, C.F and D. Nachmias (1996) Research Methods in the Social Sciences, 5thEdition. London: Arnold. Olutunla G.T. and T.M. Obamuyi (2008) “An Empirical Analysis of Factors Associated with the Profitability of Small and Medium-Enterprises in Nigeria,” African Journal of Business Management, Vol. 2(1), p. 195-200.

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Reuer, J.J. (1999) “Collaborative Strategy: The Logic of Alliances,” Mastering Strategy, Vol. 4(October), p. 12-13. ACKNOWLEDGEMENT I am grateful to my supervisors: Prof. L. Simpson and Dr. R. Hinds who gave me invaluable guidance throughout the research process. I’m indebted to all SME managers/owners who volunteered their time to provide the information contained in this paper. Finally, I thank my colleagues; Tom Odhiambo and Paul Odundo for reviewing and validating the contents of this paper. BIOGRAPHY Charles M. Rambo is a lecturer 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 Educational Research. He can be reached 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] APPENDICES Appendix A: Summary Results of Binary Logistic Regression

COVARIATES MODEL 1 MODEL 2 β S.E. ρ Exp(β) β S.E. ρ Exp(β) INFOshare Poor 1.82 0.02 0.00* 6.17 1.83 0.02 0.00* 6.23 Fair 1.57 0.00 0.00* 4.81 1.55 0.01 0.01** 4.70 Good (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx EXPshare Poor 1.55 0.33 0.02** 4.71 1.53 0.23 0.01** 4.61 Fair 1.32 0.13 0.04** 3.74 1.30 0.12 0.03** 3.66 Good (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx STAFFbond Poor 1.62 0.34 0.01** 5.05 1.60 0.34 0.01** 4.94 Fair 1.04 0.32 0.03** 2.83 1.02 0.30 0.03** 2.77 Good (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx TRUSTlev Low 0.61 0.23 0.01** 1.84 0.59 0.22 0.01** 1.80 Fair 0.19 0.41 0.06*** 1.21 0.17 0.41 0.17 1.18 High (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx FIRMsize No paid workers 2.02 1.80 0.00* 7.51 1.99 1.79 0.00* 7.34 1 to 9 workers 1.49 1.26 0.00* 4.41 1.46 1.27 0.00* 4.32 10 to 19 workers 1.02 0.80 0.01* 2.78 1.00 0.80 0.01** 2.72 20 to 29 workers 0.77 0.55 0.04** 2.17 0.75 0.24 0.03** 2.12 30 to 39 workers 0.01 0.21 0.24 1.01 -0.01 0.21 0.12 0.99 40 workers+ (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx OWNstruc S/ proprietorship 1.07 0.84 0.01** 2.90 1.04 0.71 0.08*** 2.84 Partnership 0.03 0.19 0.42 1.03 0.01 0.19 0.37 1.01 Ltd company (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx COMPint Using computers -0.02 0.24 0.03** 0.98 -0.05 0.18 0.03** 0.96 No computers (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx SKILLstaff

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<10% 2.13 1.90 0.00* 8.37 2.10 0.76 0.00* 8.19 10-29% 2.06 1.84 0.00* 7.85 2.04 1.84 0.00* 7.68 30-49% 1.67 1.45 0.00* 5.33 1.65 1.45 0.01** 5.21 50-69% 0.41 0.19 0.07*** 1.51 0.39 1.19 0.04** 1.48 70% + (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx DEMlevel Poor 1.38 0.31 0.01** 3.99 1.36 0.30 0.02** 3.90 Fair 1.06 0.48 0.03** 2.89 1.04 0.47 0.03** 2.82 High (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx TAXlevel Too high 2.02 1.80 0.00* 7.52 2.00 1.82 0.00* 7.36 High 1.61 1.39 0.00* 5.01 1.59 1.39 0.01** 4.90 Fair (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx TRANcost Too high 1.55 1.33 0.00* 4.70 1.53 1.32 0.00* 4.60 High 1.33 1.10 0.03** 3.76 1.30 0.10 0.01** 3.68 Fair (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx ENERGcost Too high 1.15 0.93 0.00* 3.16 1.13 0.78 0.00* 3.09 High 1.00 0.78 0.03** 2.73 0.98 0.78 0.04** 2.67 Fair (RC) xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx

This table presents the results of binary logistic regression, through which two models were generated, the first model incorporated relational and performance risk factors only, while model 2 included relational and performance risk factors as well as intermediate risk factors. The column labeled β represents the regression co-efficients, the column labeled S.E. represents the standard error associated with the regression co- efficients, ρ column represents the significance of variation between the co-efficients, while Exp(β) column presents the odds ratios. Furthermore, RC stands for Reference Category, while ***, ** and * shows significance level at 1, 5 and 10 percent, respectively.

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FORGIVENESS AS A LEADERSHIP TOOL Ilkka Virolainen Kymenlaakso, University of Applied Sciences, Kouvola, Finland

ABSTRACT

Forgiveness is a topic that is seldom discussed in organizations. This paper brings to light the kind of role forgiveness can play in organizations. This paper shows the different benefits that forgiveness can bring into an organization and also how forgiveness can be used in practice. Forgiveness brings many benefits at the individual employee level, dyad level, team level and organizational level. Conflicts, misunderstandings, losing trust and crises are all things that happen in companies. Forgiveness can be used as a tool to solve these issues. Therefore forgiveness can be seen as a leadership and employee wellbeing tool. This paper is a literature review. KEY WORDS: forgiveness, forgiveness at work, leadership, employee wellbeing INTRODUCTION Forgiveness is seldom discussed at the work place even though there are lots of situations in which forgiveness could be a very useful tool. As Aquino et al. (2003) point out, once people work together there are endless opportunities to offend or harm others intentionally or unintentionally. The quality of healing harmed and broken relationships within organizations influences the success of a business and the nature of work life (Madsen et al. 2009). According to Aquino et al. (2003) forgiveness should be an important concern for both organizational theorist and practicing managers because it is a way for individuals to repair damaged workplace relationships, and overcome debilitating thoughts and emotions resulting from interpersonal injury. Davidhizar and Laurent (2000) point out that the ability to forgive is important for success in management. Forgiveness can be a motivational transformation that inclines managers to inhibit relationship-destructive responses and to behave constructively towards a person who has in turn acted destructively towards them.The goal of this literature review paper is to show how forgiveness can be used as a leadership tool. Initially it discusses different definitions of forgiveness. The next section explains the benefits of forgiving at different levels of an organization. Also the consequences of failing to forgive at work are discussed. Lastly this paper gives practical models and guidelines for how forgiveness can be implemented in an organization. The final section includes the conclusion summing up the key points of this paper. Definitions of Forgiveness There are several definitions of forgiveness. A possible starting point in forgiving others is for the forgiving person to realize that he/she has been hurt by someone. Table 1 shows different definitions of forgiveness. As it can be seen from table 1, forgiveness can be defined in many different ways. There are some common elements in the definitions as well as some differences. Several definitions point out that forgiveness is a process that includes cognitive, emotional and behavioral elements. The cognitive point of view includes changes in our way of thinking. For example, an employee changes his or her way of thinking so that there is no blaming, negative judgment or ideas of victimhood. At the emotional level a person gives up negative emotions like anger, hostility and resentment. At the behavior level a person doesn’t want to harm the other person. Some definitions go further than that, for example Enright et al.’s (1998, 46-47) point out that a person should foster compassion, generosity and

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even love towards the other person. According to McCullough et al. (2003) forgiveness can motivate employees to extend acts of conciliation and goodwill towards the offender and to overcome social estrangements. However, this is not always the case. Tsarenko and Toijib (2011) point out that a forgiving person may not necessarily interact with or receive acknowledgment from the offending party after the event. It is also possible that people move on and don’t have anything to do with each other in the future. For example, they might work in different departments or change the organization they work for. When discussing definitions of forgiveness, it is also useful to mention what forgiveness is not. Forgiveness is not just condoning, forgetting, ignoring or excusing a hurtful action. Forgiveness is not denying the hurt that a person feels. It is neither giving up having feelings. (Luskin 2003, viii; Madsen et al. 2009.) Table 1: Forgiveness definitions

Writer Definition Key points Enright et al.’s (1998, 46- 47)

Forgiveness is the willingness to abandon resentment, negative judgment and indifferent behavior towards one who has been unjustly injured, while fostering the qualities of compassion, generosity and even love towards him or her.

-Willingness to give up resentment, negative judgment, and indifferent behaviour towards the other person. -Foster compassion, generosity and love towards the other person.

Scobie & Scobie (1998, 382)

Forgiveness includes the conscious decision to set aside one’s legitimate claim for retaliation or restitution for a damaging act committed by a significant other, in order for any, or all, of the following to occur: 1.The relationship, or a modified version of the relationship, to be restored. 2.The negative effects associated with the damaging act for the forgiver and/or the forgiven to be given the opportunity to be reduced. 3.The forgiver to cease playing the role of the victim and the forgiven to be given the opportunity to make amends. 4.The forgiver and the forgiven to gain release from the dominating effect of the damaging act.

-Decision to let go of the legitimate claim for retaliation or restitution for damaging act. -Restore the relationship. -Not playing the role of the victim.

Cameron and Caza (2002, 39)

Organizational forgiveness includes the capacity to foster collective abandonment of justified resentment, bitterness, and blame and instead it is the adoption of positive, forward-looking approaches in response to harm or damage. Forgiveness in organization requires a transformation, and an organization becomes virtuous to the extent to which it encourages, supports and facilitates such transformation. Forgiveness in search of reward is not true forgiveness.

-Foster abandonment of resentment, bitterness and blame. -Adopt positive, forward-looking approaches.

Stone (2002) Forgiveness means to give up blame and faultfinding. -Giving up blame and faultfinding. Aquino et al. (2003) Interpersonal workplace forgiveness is a process whereby an

employee who perceives him or herself to have been the target of a morally injurious offense deliberately attempts to: 1.overcome negative emotions (for example anger, hostility) toward his or her offender 2.refrain from causing the offender harm even when he or she believes it is morally justifiable to do so.

-Process where a person attempts to overcome negative emotions and refrain from causing harm to the other person.

Tsarenko and Toijib (2011)

Forgiveness is a process of emotional and cognitive progressions that requires effort at each stage. Once negative emotions have been relinquished and the intention to punish an offender has been resolved, forgiveness from the process converts into action and it can be said that forgiveness has been granted.

-Process of emotional and cognitive progressions.

The Benefits of Forgiving “Forgiveness is key to happiness.” Jampolsky (2000, 128) A culture of forgiveness can give several different benefits to an organization. These benefits can be seen at the individual, dyad (two people), team and organizational level. (Stone 2002.) Health benefits Research shows that forgiveness improves mental and physical health. (for example; Butler & Mullis 2001; Luskin 2003, 77; Anderson 2007; Legaree et al.

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2007; McCullough et al. 2007; Pettigrove 2007; Madsen et al. 2009). Employee health problems end up costing a lot for organizations. Using forgiveness as an employee wellbeing tool can reduce these costs. Forgiveness lowers blood pressure, improves the immune system response, reduces anxiety and depression, improves sleep, reduces stress, increases energy (Forgiveness and health 2011) and decreases anger (Luskin 2003, 81). Forgiveness has also helped people who have had back pains, high blood pressure, ulcer and cancer (Jampolsky 2000, 21). Studies also show that forgiveness increases hopefulness, optimism, compassion, self-confidence and vitality (Luskin 2003, xv, 78, 81). Epstein (1999) argues that by forgiving you give yourself permission to move on, to be free of baggage and to be able to progress without the burdens of the past. Therefore forgiveness fosters a person’s well being. On the other hand, it can be said that chronic states of not forgiving (holding on to feelings like anger, hostility, resentment and fear) are linked to adverse physical health outcomes (Cameron & Caza 2002; McCullough et al. 2007; Madsen et al. 2009). These feelings influence the body’s physical functions like blood circulation, the immune system, and create stress that influences the heart and other organs (Jampolsky 2000, 21). In general people who are more forgiving report fewer health problems and vice versa (Luskin 2003, xv, 80). Organizational issues People in organizations may face several types of conflict such as disagreements between workers, arguments between departments, fights between workers and managers, disappointments that can be related to promotions, layoffs, hurtful rumors and misunderstandings. It can also be said that employees and managers make mistakes that can cause a lot of harm: whether it is economical, emotional or for example health related. (Madsen et al. 2009.) Especially in these types of situations forgiveness is important. Madsen et al. (2009) points out that unforgiving employees and an unforgiving organizational culture can result in lower levels of performance at all levels. Davidhizar and Laurent (2000, 50) noticed that when managers and leaders failed to forgive employees and superiors, there was a lack of personal and team productivity that led to aggressive and passive-aggressive behavior. Stone (2002) points out that not forgiving can cause big costs for the organization because employees separate themselves leading to ineffective job performance and employees to leave the organization. Employees may tell negative stories related to the organization harming the image of the company. On the other hand Stone (2002) points out that a forgiving culture improves retention, increases a sense of community and improves authentic, courageous and open communication. Stone (2002) points out that if you do not forgive then your ability to appreciate the strengths and admirable qualities in others and in yourselves is reduced, discretionary effort is limited and your ability to be fully present and focused on current issues and projects are greatly diminished. In other words employees do not feel free to contribute their passion, innovation and unique talents in an unforgiving culture. According to Stone (2002) carrying resentment towards others keeps a person in a subtle and constant state of low grade upset. On the other hand, forgiveness gives a person the opportunity to utilize mistakes, failures, flaws and breakdowns as opportunities to awaken greater wisdom, compassion and capability in co-workers and themselves. Forgiveness supports the development of organizational cultures in which people feel free to take risks, use their creativity and demonstrate enthusiastic contribution. Job performance and productivity According to McCullough et al. (2000) forgiveness is associated with higher morale and satisfaction, greater social capital, trust, humanness, and caring relationships. This has been the case especially in situations where an organization has experienced harm or unjust treatment as in cases of downsizing. According to Aquino et al. (2003) forgiveness motivates employees to extend acts of conciliation and goodwill towards the offender and to overcome social estrangement. This makes the

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employee relationships more effective and productive (Madsen et al. 2009). Madsen et al. (2009) points out that several organizations have noticed that physically and mentally healthier employees are more productive. Stone (2002) points out that if you have not forgiven it is difficult to be present. It is because you are energetically holding on to something from the past. In other words, you are stuck in the past. In order to do excellent work performance you have to operate in the present. In this state of heightened awareness employees can thrive and contribute their ideas, their passion and their dedication. According to Luskin (2003, 179) forgiveness allows a person to think more clearly, solve problems wisely and have greater access to positive emotions. Fredrickson (2001) points out that positive emotions like joy, hope and happiness help people flourish. Positive emotions also help us to use our creativity (Kauffman 2006, 223) and to work in teams (Losada 1999) both being important factors when developing innovations. It can be said that not forgiving has an impact on several levels of an organization. As we can see from table 2, the lack of forgiveness causes a loss of energy in each of these levels. This can be seen, for example in covering up, playing safe and avoiding painful situations. Instead this energy could be used to learn, grow, connect and in general be more productive. (Stone 2002.) Table 2: Impact of Lack of forgiveness (Stone 2002)

Individual Dyad (two people) Team Organization Alienation Self-doubt Righteousness Preoccupation Anger / withdrawal Lack of creativity / innovation Poor health Unhappiness Guilt Fear Depression Suffering Low self-esteem

Separation Conflict Blame Avoidance Mistrust Controlling Punishing Frustration Anger Tension Judgmental Disharmony Agitation Disappointment Defensiveness Inauthentic behavior

Internal competition Lack of common direction Fault finding Jealousy Negative politics Gossip Manipulation Stress Frustration Denial Score keeping Distance

Controlling behavior Secrecy Mistrust High turnover Protective behavior Back stabbing Over-work Out of balance Confusion Political posturing Non-coordinated workforce Low allegiance

Not forgiving usually increases separation while decreasing effort, creativity and authenticity. At the same time we can also often see more criticism and doubt. Feeling a sense of belonging is an important aspect in any organization. So there is a risk that if a person feels more and more alienated, that person will leave the organization or become an ineffective member of the organization just waiting to retire. Not forgiving at the dyad level will often cause feelings like anger, blame and resentment. Feelings of victimization often lead to protective behavior. Protective behavior in turn leads to justification, fault- finding, avoiding the other person and malicious gossip. At the team level not forgiving can lead to feelings and behavior of “us against them”. Team separation leads to internal competition, gossip and fault-finding. It can be said that organizational culture that does not promote forgiveness will engage in negative and destructive politics. Employees will be afraid to speak out, hiding their true feelings. This will lower trust and increase stress level. In situations like this, burnout is common resulting in a high turnover rate. (Stone 2002.) When a person does not forgive, we can usually see behavior in the other person that is related to avoidance and revenge (Biswas 2009). Table 3 shows how avoidance and revenge can show up.

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Table 3:Signs of Avoidance and Revenge (Biswas 2009)

Avoidance Revenge Difficult to act warmly towards the other person. Wish that something bad would happen to the other person. Avoid the other person. Want to see the other person hurt and miserable. Withdraw from the other person. Want to make the other person pay. Cut off the relationship with the other person. Act as if the other person doesn’t exist / is not around. Not trusting the other person.

Both avoidance and revenge related behaviors are not positive factors for successful co-operation and employee wellbeing. Instead, avoidance and harm do harm both at the individual level as well as the dyad, team and organizational level. All these can be avoided by forgiving. As we can see from table 4 there are also several other benefits that can be seen once people forgive. Table 4: The influence of forgiveness in organizations (Stone 2002)

Individual Dyad (two persons) Team Organization Happiness Presence Creativity/innovation Vibrant health Autonomy Personal responsibility Peace of mind Authenticity Freedom to self-express Choice Self assurance Focused Openness

Partnership Collaboration Trust Open /authentic Communication Supportive Acknowledgment Appreciation Gratitude Ownership Interconnection Respectful Growth Nurturing Sharing information Compassion

Mutually supportive Feeling of community Joy / fun Playfulness Shared learning Interconnection Action orientation Clarity of roles Direction Sense of belonging

Open authentic culture Focus on contribution and service Employee retention Flexible work force Respected in the community Empowerment Pride in organization Meaningful work Values in action

Reasons Not To Forgive “Notice that only your own thoughts cause the suffering that you now have. You can choose what you think.” (Jambolsky 2000, 127) As it has been mentioned, forgiveness has an enormous positive impact on different organizational levels. Also, when an organization’s members do not forgive there can be several serious negative impacts. So with these arguments in mind, it should be logical to put extensive efforts in to encouraging forgiveness. However, in practice it does not always happen. There are several reasons why people do not forgive. One reason people don’t forgive at work is that there are only a few role models to teach employees and managers how to forgive. Forgiveness is also seldom spoken of in organizations. In many cases organizational structures create cultural norms that do not support acts of forgiveness, instead it is thought that someone is always to blame. Letting people “off the hook” may be seen to set a bad example for other employees. Furthermore, some managers struggle with fears related to forgiveness. They are afraid that the balance of power would be disrupted resulting in a permissive environment that in turn would lead to chaos and anarchy. (Stone 2002.) One reason people don’t forgive is that they have fears related to loss of face and possession. Loss of face is related to the way of thinking that focuses on “what will others think of us if we fail”. Another fear related to forgiveness is that of being embarrassed or rejected by others. Loss of possession is related to protecting territory: position or property. Related to this is also the fear of being hurt physically or

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emotionally. Yet another reason people don’t forgive is that they fear it sends out the message that they accept the other person’s behavior leading to future reoccurrence of the same behavior. In this case the person fails to realize that holding on to anger or resentment in order to punish the other person is creating a prison of one’s own pain, isolation and alienation. (Stone 2002.) Sometimes people believe forgiving makes them seem weak. A way of thinking that prevents forgiving is: “If I forgive this person, it is the same as saying that he/she was right and I was wrong”. Some people believe that not forgiving is a way to control the other person and to have power over the other person. But in reality all these mentioned beliefs are based on fear, not power. (Jampolsky 2000, 68−69.) Some people say that what happened to them is unforgivable. But in reality it is a question of motivation, a question whether the person wants to forgive or not. It is very likely that other people have managed to forgive similar kinds of events that they have faced. So once people find motivation, forgiving is easier. This can be done, for example, by understanding that it is the person who refuses to forgive that suffers and by forgiving can end the suffering. However, if a person does not have the right tools then forgiving can take a lot of effort. With the right methods forgiving is easier. (Luskin 2003, 106-107.) Several reasons related to not forgiving at work are to do with a person’s own attitude and the organizational culture. From a managerial point of view, building a culture that fosters forgiveness is important. According to Stone (2002, 279) having an in-depth understanding of the value of forgiveness provides managers and employees opportunities to use mistakes, failures and breakdowns as opportunities to awaken greater wisdom, compassion and capability. Organizations that develop a culture of forgiveness will seem to be more authentic, courageous and to facilitate open conversation based on their values and vision as well as the current commitments and strategic objectives. Forgiveness is an essential element of attaining a more nurturing and fulfilling work climate. “Not to forgive is the decision to suffer.” (Jampolsky 2000, 48) Practicing Forgiveness “It is easier to forgive once you decide to let go of being a victim.” (Jampolsky 2000) In order to practice forgiveness a person has to realize that he/she can always choose how to react to any situation. People tend to react in a manner that is similar to their earlier encounters, projecting painful memories of the past on the present situation. So thoughts from the past shape experiences of the present. But by raising one’s awareness of that phenomenon a person can start to choose his/her reaction based on the present situation instead of past beliefs and experiences. It can also be said that a person’s attitude determines the quality of his/her perception. After examining one’s attitude it is easy to realize that there is always a choice. Instead of reacting based on a person’s own history, expectation and past perception, a person can choose to take action based on values and vision. Being present to one’s own thoughts, feelings and sensations helps us make conscious choices. Forgiveness can help a person to be more present. Forgiving sets you free of the fear and anger that have been imposed on your mind by holding on to the past. (Stone 2002) There are several ways to forgive. Borysenko (1990) points out that forgiveness can be seen as a growth process. Davidhizar and Laurent (2000) point out that forgiveness begins with the acceptance that nobody is perfect. Another important factor is empathy. Once a person sees the situation from another’s point of view his/her empathy usually develops. Davidhizar and Laurent’s (2000) forgiveness model for managers includes 6 steps:

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1. Accept the lack of perfection in others.

2. Look at the incident from the other’s point of view. 3. Place self in the offender’s position and empathize with his or her feelings.

4. Surrender the right to get even.

5. Accept an apology when it is offered.

6. Forgive the individual taking administrative action when this is appropriate but leave the ultimate

judgment for the behavior to outside forces. Enright et al. (1998, 53) point out that there are several psychological variables related to the forgiveness process. These are shown in table 5. In the uncovering phase, the person denies that he or she has been hurt. Once these defenses break, the person usually feels anger towards the injurer. People might also feel other negative feelings like shame deepening the emotional pain. A person may also notice that he/she is continually replaying the event in his/her mind and also comparing his/her unfortunate state to the relatively comfortable state of injurer. The person may feel that life is unfair. Once the person moves on to the decision phase he/she starts to notice that his/her way of thinking and behaving so far is not healthy. The person starts to consider forgiveness and commits to that. In this phase the person may still have thoughts that are related to revenge. In the work phase the situation is reframed and therefore understood in a different way. Many times a person feels empathy and compassion towards the injurer. Now the person does not want to hurt the other person any more. In the deepened phase, a person may find a deeper meaning of the event and forgiveness process. For example a person may find a new direction in life. The process of forgiving improves one’s psychological wellbeing. Once a person gives others mercy and compassion he himself becomes healed. (Enright et al. 1998, 52-54.) Table 5: Psychological variables related to forgiveness (Enright et al. 1998, 53)

Uncovering phase - - - - -

Examination of psychological defenses (Kiel 1986) Admittance of shame when this is appropriate (Patton 1985) Insight that the injured party may be comparing self with the injurer (Kiel 1986) Realization that oneself may be permanently and adversely changed by the injury (Close 1970) Insight into possible altered “just world” view (Flanigan 1987)

Decision phase - - -

A change of heart, conversion, new insights that old resolution strategies are not working (North 1987) Willingness to consider forgiveness as an option Commitment to forgive the offender (Neblett 1974)

Work phase - - -

Reframing through role taking who the wrongdoer is by viewing him or her in context (Smith 1981) Empathy towards the offender (Cunningham 1985) Acceptance of absorption of the pain (Bergin 1988)

Deepening phase

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- - - - -

-

Finding meaning in the suffering and in the forgiveness process (Frankl 1959) Realization that self has needed the forgiveness of others in the past (Cunningham 1985) Insight that one is not alone (universality, support) Realization that one may have a new purpose in life because of the injury Awareness of decreased negative effect and perhaps increase in positive effect if this begins to emerge towards the injurer, - awareness of internal, emotional release (Smedes 1984)

Davidhizar and Laurent (2000) point out several things related to the forgiveness process.

1. The need for personal forgiveness must be recognized. Instead of blaming others it is important that the manager “looks in the mirror” and sees his/her own role in the current crisis or conflict.

2. Forgiveness is facilitated when events are put into perspective. Once a manager forgives he/she can learn and in turn help other in learning from the situation. So the focus is on positive issues related to the case.

3. Forgiveness remembers the past with truth. Forgiveness helps the manager see the event in true colors. This helps the manager see that certain managerial actions might have eliminated the problematic situation. Accepting personal responsibility is part of forgiveness.

4. Forgiveness remembers with new respect for self. A manager who feels victimized by the wrongdoings of an employee may allow the offence to cause him/her to lose respect for that worker. The way to restore self-respect is to forgive. Breaking the grip of a painful memory is an effective way to restore self-respect. By saying for example: “We really messed up with that one. Let’s be glad nothing worse happened. Now let’s plan so that it doesn’t happen again” can allow both the manager and employee to move on with hope.

5. Forgiveness is for people, not institutions. A manager may feel wronged by an organization. However, organizations can’t be forgiven as forgiving is between people. Therefore, the manager needs to forgive a representative of the organization who was related to the situation, for example the CEO or the manager's supervisor.

6. Forgiveness should be given on the basis of what was done, not for who the person is. In many cases people are too complex to be forgiven for who they are. So in several cases it is more productive to focus on the specific wrongdoing.

7. Forgiveness is needed for incidents that can’t be forgotten. It is important to forgive the events that cause big harm.

8. Forgiveness is for people who wrong others and end up wounding them. Wrongdoing can break the trust between two parties. In order to develop that trust it is important to forgive.

According to Luskin (2003, xii-xiii) there are certain core components in the creation of long standing hurt and grievance. These are exaggerated taking of personal offence, blaming the offender for how the person feels and creation of a grievance story. Changing these elements helps a person to forgive.

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The exaggerated taking of personal offence Luskin (2003,14-20) points out that instead of making the painful event too personal the same situation can be seen from an impersonal point of view by understanding that similar types of events happen to many other people. It is also good to remember that the most offences are committed without the intention of hurting anyone personally. For example an employee can impose negative meaning on the words of his/her superior even when the superior has meant a totally different thing. The blaming of the offender for how the person feels In the blaming stage people blame others for their own feelings and problems. When a person blames others he/she feels the cause of the hurt is outside of him/her and is looking outside to find the reason. In many cases a person who blames others forgets that the other party has not hurt him/her purposefully. In many cases the person does not know why other people have behaved in certain ways towards him/her. When a person blames others it basically means that he/she is stuck in the past. Everyone is responsible for their own feelings, what a person feels now is something that he/she can decide. The person doesn’t have to suffer emotionally now because of something that happened in the past. Once the person focuses on more positive things in life the hurt will diminish in importance. The biggest drawback in telling the hurt-story is that it keeps the person connected in a powerless way with the person who hurt him/her. By reconnecting with positive intentions a person reminds him or herself of personal goals and it also enables him/her to move forward. The story the injured person tells is a personal interpretation of the situation. The interpretation of other people is usually different. Once a person changes his/her way of thinking he/she can look at the situation in a new light and then tell a new story. The story that a person tells him or herself influences how that person feels and what action he/she will take. So by changing the story a person can influence both of these. (Luskin 2003, 21-26, 137-139.) The Creation of a grievance story Once a person tells the same hurt-story again and again feeling hurt each time it is a question of a grievance story. Instead of letting go and moving on a person holds on to the story about how someone hurt them. Telling the story can happen in the person’s own head so that the person thinks about the situation over and over again. Instead the person might tell the story over and over again to other people. Once you tell the same story many times it keeps you in the past instead of helping you to move on. A person can always choose which story to tell. Telling a hurt-story it keeps one stuck. When people tell a hero-story instead of a hurt-story then they can see what they have learned from the experience and how it helps them to grow. In the end it is a question of perspective. (Luskin 2003, 8-10, 36-41.) Luskin (2003, 211-212) has developed 9-step forgiveness process.

1. Know how you feel about the situation and be able to articulate the things that were not fair. Tell a couple of trusted people about your experience.

2. Make a commitment to yourself to do what is necessary to feel better.

3. Forgiveness does not necessarily mean reconciliation with the person that hurt you or condoning their action. What you are after is finding peace.

4. Get the right perspective on what is happening. Recognize that your primary distress is coming

from the hurt feelings, thoughts and physical upset you are suffering now, not what offended you or hurt you two minutes or ten years ago.

5. Practice some stress-management technique to soothe your body’s flight or fight response.

6. Understand that you can control only your own thoughts and actions, not those of others. Give up

expecting certain things from other people or life they do not choose to give you.

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7. Put your focus from hurt feelings to finding a way to achieve your goals. Instead of mentally

replaying your hurt seek out new ways to get what you want.

8. Instead of focusing on your wounded feelings and thereby giving the person who caused you pain power over you, learn to look positively at the things around you, for example see love, beauty and kindness.

9. Change the story that you are telling to yourself so that it no longer dwells on victimhood, but

focuses instead on your ability to cope and to grow. Remind yourself about the heroic choice to forgive.

Based on these different forgiveness processes it can be said that it is important to give up the victim story and look at the situation from another point of view. Once a person understands that everybody makes mistakes and that the same kind of situations have happened to many other people who have then been able to forgive helps the person change his/her story from that of victimhood to growth. It is also important to focus on positive things in order to feel positive emotions. People are responsible for their own thoughts and emotions. Therefore people have the power to influence their feelings and behaviors. Once people forgive they can be present and feel more positive things compared to when they tell a victim story and by doing so end up stuck in the past and letting past events influence the present moment. Having willingness to forgive and putting effort to do so people do a big service firstly to themselves. After that the influence can also be seen in other levels of the organizations. “It is easier to forgive once you decide to give up being a victim.” (Jambolsky 2000, 93) Practical Issues for Managers “The key word to learn how to forgive is willingness to forgive.” (Jampolsky 2000, 57) In order to use forgiveness as a tool in organizations, knowledge and a positive attitude towards forgiveness are needed. According to Stone (2002) many business leaders continue to believe that it is inappropriate to discuss forgiveness in the workplace because it is considered an abstract philosophical or religious principle. The manager’s role in fostering a forgiving culture in an organization is important (Madsen et al. 2009). Cameron and Caza (2002) point out two key roles for managers in fostering forgiveness.

1) When managers provide meaning and vision during challenging times, employees often respond positively. Forgiveness does not mean that errors are totally acceptable, but instead it facilitates excellence and improvement.

2) Managers can provide legitimacy and support. They can value virtuous actions, such as forgiveness by initiating and supporting organizational structures, systems, and resources that are aligned with forgiveness and other important virtues (Cameron & Caza 2002).

Kurzynski (1998) points out the importance of forgiveness when employees make mistakes. In these cases managers can be role models by forgiving, accepting occasional mistakes and assisting employees so that mistakes are not repeated. Forgiveness also offers ways for the manager to deal with the negative

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feelings that may result after conflict between the manager and an employee. In the end forgiveness can empower both the manager and the employee. In order to forgive, the manager should realize the responsibility and challenge in accepting others as human beings with faults and learn to live without sustained anger and resentment. Madsen et al. (2009) shows six forgiveness business interventions.

1. Third-party interventionsWorkers can be encouraged to forgive by using third-party interventions. Forgiveness interventions can help repair damaged workplace relationships and assist in building more healthy workplaces. (Struthers et al. 2005)

2. Social interest interventions According to Butler and Mullis (2001) social interest increases forgiveness. Interventions related to team building, third party peacemaking, and survey feedback processes that focus on social interest peacemaking in organizations may also promote the use of forgiveness as a tool to solve workplace conflicts.

3. Writing and journaling Pettigrove (2007) points out that writing and journaling can be used as

tools to aid in conflict management, conflict resolution, and personal communication interventions within the workplace.

4. Educational programs Madsen et al. (2009) points out that educational programs related to forgiveness can empower employees by providing knowledge about forgiveness and its benefits. Education can also bring out possible biases and assumptions employees may have that may hinder the forgiveness process.

5. Forgiveness programs In some cases forgiveness programs may be useful. For example, in major downsizing or hostile takeover related cases. (Madsen et al. 2009)

6. Empathy-building and communication interventions

According to McCullough et al. (2003) building strong empathy among employees can be helpful in encouraging forgiveness.

A manager can strengthen relationships in the workplace by forgiving. Letting go of resentments can create feelings of release, liberate energy and creativity, and decrease avoidance behavior towards the offending person. From a managerial point of view it is important that the manager forgives employees when they make mistakes. However, it is important that forgiveness begins personally with the manager. This means that the manager forgives him or herself. Several managers hold themselves as role models for their employees. So forgiving their own mistakes is crucial. It is difficult to forgive if ones own personal failure is denied. A manager who is able to practice personal forgiveness may have less difficulty forgiving employees when they have made errors. Forgiveness does not mean that the mistakes or unethical behavior of the employees is not discussed and the necessary action taken. Sometimes forgiveness is related to the decisions made by decisions of the manager’s supervisor, for example related to staff reductions and promotions. (Davidhizar & Laurent 2000.) Failing to forgive employees or administration often leads to passive-aggressive behavior and decrease in productivity. Not forgiving personal mistakes can lead to guilt, which can lead to feelings of depression and personal unhappiness. (Davidhizar & Laurent 2000; Borysenko 1990.) Managers also play a key role in the training point of view. As Enright et al. (1998, 52) point out most people need to be taught forgiveness in order to begin forgiveness. As Luskin (2003, 65) points out forgiveness is a skill that can be learned.

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“The power of forgiveness can make miracles in your life.” (Jambolsky 2000, 56) CONCLUSION It can be said that forgiveness is a very useful leadership tool. By forgiving you can avoid misunderstandings and mistakes from becoming conflicts. Forgiveness is also an excellent tool in solving conflicts in the workplace. The manager’s role in creating a forgiving organizational culture is essential as the manager shows an example to the employees. Forgiving brings several benefits, for example it improves openness, trust and cooperation. Forgiveness also increases positive emotions that are useful in creative problem solving and innovation. Forgiveness can improve the wellbeing of employees in several ways. Forgiveness can improve mental and physical health. It can improve trust, collaboration and the organizational climate in general. Even though forgiveness presents many benefits, it is rarely discussed and practiced systematically in organizations. In order to change the situation managers need more information about the topic. By understanding that forgiveness can be used as a leadership tool managers can use it on daily basis. When a conflict or crisis happens, instead of feeling angry and avoiding others, employees and managers should focus on positive emotions and face each other with respect. Forgiveness plays a key role in situations like that. Like Luskin (2003, 91) said: “Forgiveness simply works.” Further studies In order to improve the use of forgiveness as leadership tool some further research topics are useful. Here are some research topics that are relevant to study in order to understand more about the role of forgiveness in organizations and how to develop a forgiving organizational culture.

a) What kind of forgiveness cultures do different organizations have?

b) What ways of forgiveness are used in organizations?

c) What kind of experiences people in organizations have about forgiveness? “It is never too soon to forgive. It is never too late to forgive.” (Jampolsky 2000, 133, 139) REFERENCES Aquino, K., Grover, S., Goldman, B. & Folger, R. 2003. When Push Doesn’t Come to Shove. Interpersonal Forgiveness in Workplace Relationships. Journal of Management Inquiry, 12 (3), 209-216. Anderson, J. 2007. Forgiveness – a relational process: Research and Reflections. European Journal of Psychotherapy and Counceling, 9 (1), 63-76. Bergin, A. 1988. Three contributions of a spiritual perspective to counseling, psychotherapy, and behavior change. Counceling and values. 33, 21-32. Biswas, M. 2009. Measuring Construct of Workplace Forgiveness: A Confirmatory Assessment Using SAS Proc Calis Procedure. South Asian Journal of Management, 16 (4), 148-162. Borysenko, J. 1990. Guilt Is the Teacher, Love Is the Lesson. Warner Books, New York. Butler, D. & Mullis, F. 2001. Forgiveness: A Conflict Resolution Strategy in the Workplace. The Journal of Individual Psychology, 57 (3), 259-272.

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Cameron, K. & Caza, A. 2002. Organizational and Leadership Virtues and the Role of Forgiveness. Journal of Leadership & Organizational Studies, 9 (1), 33-48. Close, H. 1970. Forgiveness and Responsibility: A Case Study. Pastoral Psychology, 21 (6), 19-25. Cunningham, B. 1985. The Will to Forgive: A Pastoral Theological View of Forgiving. Journal of Pastoral Care 39 (2), 141-149. Davidhizar, R. & Laurent, R. 2000. The Art of Forgiveness. Mospital Materiel Management Quaterly, 21 (3), 48-53. Enright, R., Freedman, S. & Rique, J. 1998. The Psychology of Interpersonal Forgiveness. In R. Enright & J. North (Eds.), Exploring Forgiveness. Madison, The University of Wisconsin Press, 46-62. Epstein, L. 1999. Trusting You Are Loved – Practicies for Parnership, Partnership Foundation, Mill Valley. Flanigan, B. 1987. Shame and Forgiveness in Alcoholism. Alcoholism Treatment Quaterly, 4 (2), 181- 195. Frankl, V. 1959. The Will to Meaning: Foundations and Applications of Logotherapy. New York. World Publishing House. Fredrickson, B. 2001. The Role of Positive Emotions in Positive Psychology: The Scope of Attention and Though-Action Repertoires. Cognition and Emotion, 19 (3), 313-332. Jampolsky, G. 2000. Parantava anteeksianto. Juva. WSBookwell Oy. Kaplan, B. 1992. Social Health and the Forgiving Hearth: The Type B Story. Journal of Behavioral Medicine, 15 (1), 3-14. Kauffman, C. 2006. Positive Psychology: The Science at the Hearth of Coaching. In S. Stober & A. Grant (Eds.). Psychometricss in Coaching, 239-253. Kogan Page, London. Kiel, D. 1986. I Am Learning How to Forgive. Decision (Feb), 12-13. Kurzynski, M. 1998. The Virtue of Forgiveness in the Context of Developmental Guidance: Implementation and Evaluation. British Journal of Guidance & Counceling, 32 (4), 477-492. Legaree, T.-A., Turner, J. & Lollis, S. 2007. Forgiveness and Therapy: A Critical Review of Conceptualizations, Practices, and Values Found in the Literature. Journal of Marital and Family Therapy, 33 (2), 192-213. Losada, M. 1999. The Complex Dynamics of High Performance Teams. Mathematical and Computer Modelling, 30 (9-10), 179-192. Luskin, F. 2002. Forgive for Good. New York. Harper CollinsPublishers. Madsen, S., Gygi, J., Hammond, S. & Plowman, S. 2009. Forgiveness as a Workplace Intervention: The Literature and Proposed Framework. Institute of Behavioral and Applied Management. McCullough, M., Fincham, F. & Tsang, J.-A. 2003. Forgiveness, forbearance, and time: the temporal unfolding of transgression-related interpersonal motivations. Journal of Personality and Social Psychology, 84 (3), 540-557.

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Neblett, W. 1974. Forgiveness and Ideals. Mind 83 (330), 269-275. North, J. 1987. Wrongdoing and Forgiveness. Philosophy 62 (242), 499-508. Patton, J. 1985. Is Human Forgiveness Possible? Nashville. Abingdon. Pettigrove, G. 2007. Understanding, Excusing, Forgiving, Philosophy & Pehonemenological Research, 74 (1), 156-175. Scobie, E. & Scobie, G. 1998. Damaging Events: The Perceived Need for Forgiveness. Journal of the Theory of Social Behavior, 28 (4), 373-401. Smedes, L. 1984. Forgive and Forget. Healing the Hurts We Do Not Deserve. New York. Harper and Row. Smith, M. 1981. The Psychology of Forgiveness. The Month, 14, 301-307 Stone, M. 2002. Forgiveness in the workplace. Industrial and Commercial Training, 34 (7), 278-286. Tsarenko, Y. & Toijib, D. 2011. A transactional model of forgiveness in the service failure context: a customer-driven approach. Journal of Services Marketing. INTERNET Forgiveness and health 2011. http://www.forgivenessandhealth.com/ (cited 2.9.2011) [email protected]

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CROSS-BORDER EDUCATION: FACTORS INFLUENCING CANADIAN STUDENTS’ CHOICE OF

INSTITUTIONS OF HIGHER EDUCATION IN THE UNITED STATES

Erin E. McCarthy, D’Youville College, Buffalo, New York Arup K. Sen, D’Youville College, Buffalo, New York

Bonnie Fox Garrity, D’Youville College, Buffalo, New York

ABSTRACT This study seeks to explain the factors influencing Canadian students’ motivation for studying in the United States. The United States has continuously been the leader in international students, but is now facing increasing competition from other nations around the world. As one of the top senders of international students to the United States, Canada is of special interest to institutions of higher education in the United States due to the close social, economic, and political ties. International student mobility is influenced by push-pull factors that influence a student’s decision to study abroad, and ultimately pull factors from host nations that student’s find favorable. To understand Canadian students’ motivation for studying in the United States, a study was conducted with a sample of 411 Canadian students at a small private college in Buffalo, New York. The study found statistically significant differences in the the importance placed on reasons for not remaining in Canada for higher education, the factors that influence the selection of the United States as a study destination, and student preferences for institutions of higher education in the United States. The study concluded that there are separate push-pull factors influencing Canadian higher education students on the Canada-U.S. border, and that Canadian students are their own distinct group that are neither truly like international nor domestic students. JEL: 051 U.S.; Canada KEYWORDS: International education, Canadian students, higher education.

INTRODUCTION

Student mobility trends in the past decades have led to an increased number of students participating in international education. Today, more students are studying abroad than ever and there has been an ever increasing competition for international students. The United States has been leading the way as a destination for international students in higher education with 22% of the international student market (Verbik & Lasanowski, 2007). While the United States has always been a leader in international student enrollment, the nation is now facing increasing competition from other well positioned nations like Australia, Germany, and France. To maintain their competitive advantage educators and administrators in the United States must understand their international student markets and develop appropriate strategies to attract and maintain students. One of the largest segments of international students in the United States comes from Canada. In 2009/2010, the number of international students studying in the United States reached 690,923 students, of which 28,145 students were from Canada (Open Doors, 2010). Canada sends more of their students to the United States than to any other country, and has been continuously one of the United State's top ten source countries for international students. With our close cultural, economic,

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and geographical ties, why is the United States a destination for so many Canadian students? The answer to this question has critical implications for educators on both sides of the border. International students, in general, study abroad for a variety of different reasons, these reasons include a home country that cannot meet demand for higher education, students seeking institutions with more prestige or power, or other nations that have institutions that specialize in a desired area of study. Students, especially from developing countries, have found that their country may lack the supply of quality opportunities in higher education that they demand, and they must travel abroad to developed nations for their education. Students from developed nations choose to study abroad due to the increase in globalization and the need for students with a global perspective and experiences (Altbach, 2004). More than 90% of international students are enrolled in countries that belong to the Organization for Economic Co-operation and Development (OECD) such as the United States, the United Kingdom, and Australia, who attract approximately 45% of the total amount of foreign students worldwide (Verbik & Lasanowski, 2007). Studying abroad has become more accessible due to decreased transportation costs and innovations in communications technology. Governments have also realized the economic potential of international students, and have allocated more funds to improve higher education in their country and to increase the number of international students (Altbach, 2004). These skilled and educated students also provide a local labor force that can contribute to research and innovation, and also in any skilled labor shortages (Gribble, 2008). International students are also often influenced to study abroad by "push-pull" factors (Altbach, 2004; Li & Bray, 2007; Maringe & Carter, 2007; Mazzarol & Souter, 2002 Students are "pushed" abroad due to factors in their home country, and students are then "pulled" by factors in the host country that make it an attractive place to study. Students can be pushed from their home country due to an inability to study in local universities caused by competition or because another country's institutions specialize in a desired program. Students are pulled to the United States as a destination for international study because of the country's reputation as one of the world's best, and most prestigious, academic systems (Mazzarol & Soutar, 2002). Research conducted by Cubillo et al., (2006); Chen, (2008); Soutar & Turner, (2002); Shanka et al., (2005), has found that international student's have an extensive and complex decision making process when deciding to study abroad. The decision making process consists of personal reasons and motivations for studying in a foreign country, encouragement from significant others, country image effect, proximity of host institution, the institution’s image, recommendations from friends and colleagues, and an evaluation of the program. Many studies (Chen, 2008; Cubillo et al., 2006; Mazzarol & Soutar, 2002; Shanlm et al., 2005; Soutar & Turner, 2002) have looked at why international students decide to study abroad, and the factors that influence their choice of institution, but few have looked at the migration of students from one specific country to another. While the United States and Canada share a border, strong economic ties, and cultural similarities, there have been surprisingly few comparative studies in education that center on these two nations. It may have been previously thought that these nations were too similar, that a study between the two would not be useful (Skolnik & Jones, 1992). With the largest percentage of Canadian international students going to the United States, it would be imperative for those on both the American and Canadian sides of the border to understand why this movement occurs. American colleges and universities must identify the factors that contribute to Canadian student movements to the United States and employ this information in their strategic policies to attract and retain such students. Internationalization and the use of international marketing have had great influence on students’ choices of study abroad destinations (Chen, 2008), so by segmenting the market, American universities can tailor their marketing approach to Canadian students more effectively.

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Canadian colleges and universities can use such a study to understand how they can retain students. In an effort to understand the factors that influence a Canadian student to specifically select the United States as a study abroad destination this study used a quantitative method to discover the main factors influencing the migration of Canadian students and the specific "push-pull" dynamic between the two nations. Set against this back drop four interlinked questions are addressed in the empirical analysis which follows. First, what are the most important “push” factors influencing the movement of Canadian students out of Canada? Second, what are the most influential factors “pulling” Canadian students specifically to the United States as a host country for their higher education? Third, what factors do Canadian students find the most important when choosing an institution to study at in the United States? And fourth, will the Canadian students’ decision making process in regards to choice of institution resemble that of a domestic student or an international student. RESEARCH CONTEXT Cross border education has become an important mode for globalizing higher education, while knowledge has become an international good that can transcend national boundaries. Higher education has become a service to be traded across borders and attracts a market from all over the world. Demand for cross border education has increased because of globalization and the increasing employment opportunities in multinational corporations and foreign countries (Varghese, 2007). Varghese (2007) notes that institutions of higher education are institutions with dual characteristics; they are both national and international. The content and knowledge shared is universal and international, while the ownership, organization, and culture have always been national. Globalization in education can take many forms. First, there can be a cross-border supply of educational services, like online distance education programs, where students do not even need to leave their country. Another form of globalization is the consumption of educational services abroad, which is what this study focuses on, where students physically cross the border for educational purposes. The commercial presence of a provider in another country, such as in the form of branch campuses, is another aspect of international education. Twinning and franchising arrangements between institutions in the developing and developed world are collaborations that institutions are considering to increase their international impact. Finally, globalization in higher education can be seen in the exchange and mobility of professors and employees from one nation to another through academic partnerships or to teaching opportunities at branch campuses (Varghese, 2007). The international market for higher education has many variables that affect international student mobility. There are strategies employed by home governments to organize this flow of students seeking to study outside their home nation (Bourke, 2000). Some of these strategies include funding arrangements, accreditation and new educational offerings. Since some nations lack the capacity for certain higher education opportunities, governments may select to fund students to study in a specific country. Accreditation is another important aspect of international higher education, since the recognition of the host country's credentials is a vitally important factor when deciding to study abroad. Accreditation is a tool used by home governments to have an influence on student flows. Accreditation and the recognition of education degrees from overseas institutions are blurred by political circumstances and can significantly impact the flow of students from one country to another (Bourke, 2000).

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Currently there are many factors influencing student flows in international education. Some of the most prominent factors include cost of education, academic superiority in host nation, student experience, language proficiency, employment opportunities, and lack of educational opportunities in home country. (Varghese, 2007; Verbik & Lasanowski, 2007; Mpinganjira, 2009) Varghese (2007) found that influential factors for international education include cost of education, since some countries have higher tuition levels applied to international students compared to domestic students. Language proficiency, another important factor, may explain why regional flows may be high, especially in North America and Western Europe. Perceived academic superiority of the institution in the host country is seen as a significant factor since international students traditionally move from less developed countries to more developed countries for their education. Many students also find the acquisition of foreign language and culture an influential factor in deciding to study abroad. The opportunity for employment is a major reason to study abroad; whether because study abroad enhances credentials, or the student plans on staying in the host country after completion of their study. A "push-pull" model has been developed to understand student mobility trends. Push factors are those that operate within a student's home nation and initiate a student's decision making process to study abroad. Pull factors operate in the host country and make the country more attractive to international students (Mazzarol & Soutar, 2002). The theory was developed by McMahon (1992) in a study of international student's from 18 developing nations and their movement to develop in the 1960s and 1970s. The push model suggested that student flows were dependent on economic factors and the degree of involvement of the sending nation in the world economy, educational opportunities found in the home nation, and social and cultural factors like the priority the developing country puts on education. The pull model from the study suggests that the student is pulled to a nation due to the size of the host country's economy relative to that of the one in the home nation, economic links between the two nations, and political factors like the host nation's political ties to the home nation. Mazzarol and Soutar (2002) identified six push-pull factors that have an impact on the decision to study abroad. These factors include knowledge and awareness, recommendations from family and friends, cost issues, environment issues, social links, and geographical proximity. Knowledge and awareness was measured by four items that included student's access to information on the host country, level of knowledge student has of the host country, quality of education of host country, and the recognition of host country's qualifications. The decision to study abroad is an involved process that includes the initial reason to study abroad, the choice of host country, and the choice of institution. Cubillo et al. (2006) set forth a theoretical framework that analyzed the different dimensions of the international student's decision making process. The main factors the study identified in the international student choice process included personal reasons, country image effect, institution image, and program evaluation. Country image which includes cultural distance, social reputation, academic reputation, cost of living, immigration procedures, and time to earn a degree, had a direct and positive relationship with the purchase intention of the student. It is clear that there exists a well-defined body of evidence on students’ choice decision and offer insights into the problems of consumer choice models, however, insufficient research exists on the challenges faced by small private institutions in recruiting and attracting foreign students in the United States. The main purpose of this study is to understand the controllable and uncontrollable factors influencing Canadian students choice of a small private institution given the high involvement nature of college choice decisions.

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SURVEY METHODOLOGY In light of the foregoing literature, the overall study objective was to determine the key factors in the decision process of selecting a higher education institution in the United States by Canadian students. The research subjects were comprised of Canadian students enrolled at D’Youville College, a small private institution located in Buffalo, New York which is located within half a mile of the border between United States and Canada. Convenience sampling of 411 Canadian students enrolled in the various programs offered at D’Youville College was utilized. The entire population of Canadian students at D'Youville College was invited to participate in the study through campus email. The email contained a link to a landing page with a web survey. Follow up emails were sent one and two weeks after the initial email with the survey invitation to remind potential participants of the survey to obtain an acceptable response rate. The purpose of the study was to understand factors influencing Canadian students' decision to study in institutions of higher education in the United States. The survey was designed to examine the various influences, including any push-pull dynamic. The survey, in three different sections, looked at factors influencing Canadian students' choice not to study in Canada, factors influencing their decision to study in the United States, and factors influencing their choice of institution in the United States. In each section of the survey, participants rated certain factors known to affect student mobility, derived from the literature review, on how important they were in their decision making process. The survey had response categories based on a four-point Likert Scale from 1 (not considered in decision) to 4 (very important to my decision). In each section, the participants were asked to select the most influential factor in their decision, and an open-ended question was employed to discover any additional factors that may have been considered when choosing the study at an institution in the United States rather than one in Canada. DATA ANALYSIS To analyze the data collected from the survey, this study employed the Chi-Square Goodness of Fit test to evaluate whether there were statistically significant differences between the identified factors. Frequency tables were used to illustrate respondents' responses to each question. SPSS was employed to collect, organize, and calculate the data. The survey was started by 104 respondents, with 87 useable complete surveys, which resulted in a 21 % response rate. By academic level, 23% of respondents were undergraduate, 54% were graduate students, 21% of students were in professional programs, and 2% were doctoral students. The mean age of the respondents was 31.4 years of age with 75% of respondents female and 25% of respondents male. Education, Nursing and other Health related majors were the majority of responses (See Table 1).

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Table 1: Majors of Survey Respondents Major Respondents % Education 39.0% Nursing 17.1% Physical Therapy 14.9% Occupational Therapy 6.8% Interdisciplinary Studies 4.5% Dietetics 3.3% Business 2.2% Physician Assistant 2.2% Doctoral 2.2% Biology 2.1% This table shows the major of the survey respondents with education, nursing and health related majors being the majority of the responses. DISCUSSION OF RESULTS From the results of the survey, we can see that Canadian students have their own distinct reasons for leaving Canada, and choosing to come to the United States for educational purposes. The factors that were most important in the Canadian students' decision to study outside Canada revolved around the issue of competitive entry requirements in Canada, broadening personal experience, lack of university places or the inability to get a place in a course the student wanted to study at home (See Table 2). These results are consistent with previous studies including Mazarol and Souter (2002) which found that difficulty finding entry into institutions at home were significant "push" factors in international students' decision to pursue their higher education outside their home country (See Table 2). Like a study conducted by Mpinganjira (2009), the results of the survey indicated that the enhancement of future employment prospects also was an important reason for studying outside of Canada. Regarding the decision to study in the United States, the most important factor reported by Canadian students was that the qualifications were recognized in their home country (See Table 3). This result is consistent with the study conducted by Mpinganjira (2009) where students indicated the most important factor when deciding to study abroad was that students were seeking qualifications with worldwide recognition. The second most important reason for coming to the United States for Canadian students was related to geographical proximity and the ability to commute or easily travel to the United States. This is similar to findings by Wiers-Jenssen (2003) in a study of Norwegian students who studied in linguistically and geographically peripheral European countries, where students indicated that geographical proximity was a significant factor in their choice process. While not one of the most important factors in the selection of the United States as a study destination, knowledge of someone who has studied in the United States was seen as a key factor in students' decision making (See Table 4). The survey also found that a favorable image of the United States was not particularly important in their decision to study in the United States, and only 1 % of respondents indicated that it was the most important factor in their decision. This seems to conflict with the literature that indicates the significance of country image, though when survey takers were asked if they considered any other countries when looking to study outside of Canada, 86% of respondents answered "no". This indicates that while country image was not consciously an important factor, many students did not consider any other country when deciding to study outside of Canada.

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Table 2: Factors in Decision to Study Outside Canada Factors Not

Considered Not Important

Somewhat Important

Very Important

Unavailability of course at home 32.2% 18.9% 25.6% 23.3% Broaden personal experience 27.8% 24.4% 32.2% 15.6% Competitive entry requirements in home country

11.2% 12,4% 20.2% 56.2%

Lack of university places 20.0% 16.7% 32.2% 31.1% Inability to get a place in course one wanted to study at home

21.1% 13.3% 26.7% 38.95%

Enhance future employment prospects 19.1% 13.5% 28.1% 39.3% Absence of equivalent domestic Opportunities

35.2% 19.3% 19.3% 26.2%

Other 25.0% 15.0% 20.0% 40.0% This table presents the factors that Canadian students either consider to be “very important” to “not considered” in the decision process to study outside Canada. Table 3: Most Important Factors in Decision to Study in the United States Factors Response (%) Qualifications recognized at home 51% Geographical Proximity 14% Ability to commute or travel easily to the United States 13% Vale of degree in economic market 10% Know someone who studied there 5% Intention to migrate to United States after degree completion 5% Favorable image of higher education in the United States 1% Common language 0% Prior connection or historical ties to country 0% Ease of visa formalities 0% Other 1% This table shows the most important factor in the Canadian students’ decision making process to study in the United States. Table 4: Factors in Decision to Study in United States Factors Not

Considered Not Important

Somewhat Important

Very Important

Favorable image of higher education in the US 37.5% 20.5% 29.5% 12.5% Common Language 29.1% 12.8% 31.4% 26.7% Geographical Proximity 3.5% 7.0% 27.1% 62.4% Know someone who studied there 17.4% 15.1% 40.8% 26.7% Qualifications recognized in home market 2.3% 2.3% 21.8% 73.6% Value of degree in economic market 11.7% 8.1% 29.1% 51.1% Prior connection or historical ties to the country 64.0% 20.9% 7% 8.1% Intention to migrate to U.S. after degree completion 53.5% 19.8% 17.4% 9.3% Ability to commute or travel easily to U.S. 6.9% 4.6% 25.3% 63.2% Ease of visa formalities 25.6% 9.3% 31.4% 33.7% Other 62.5% 0% 0% 37.5% This table shows the factors Canadian students’ consider to be “very important” to “not considered” as part of their decision to study in the United States. Regarding selection of an institution, the respondents indicated that the institution having the desired program of study was the most important factor, with another significant factor being the quality of education (See Table 5). The second most important factor in choice of institution was location of the institution. While not selected as the most important factor in their selection of a particular institution, a

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significant number of respondents indicated that favorable scheduling options and grade requirements were key factors in their decision making process (See Table 6). Table 5: Most Important Factor in Choice of Institution Factors Response (%) Have desired program of study 34% Location 16% Have favorable scheduling options 15% Quality of education 14% Grade requirements 8% Reputation 3% Interaction with faculty and staff 3% Recommendation from family and friends 3% Availability of financial aid 2% Other 0% This table presents the most important factor considered by Canadian students’ consider to be most important in their choice of institution. Table 6: Factors in Decision to Study at D’Youville College Factors Not

Considered Not Important

Somewhat Important

Very Important

Have desired program of study 2.3% 1.1% 5,7% 90.1% Reputation 10.3% 5.7% 31.1% 52.9% Have favorable scheduling options 14.9% 8.1% 21.8% 55.2% Availability of financial aid 47.8% 24.2% 14% 14% Interaction with faculty and staff 30.2% 8.2% 30.2% 31.4% Location 4.5% 2.3% 19.3% 73.9% Quality of Education 3.4% 1.2% 26.4% 69% Grade Requirements 9.3% 2.3% 37.2% 51.2% Recommendations from family and friends 20.9% 9.3% 32.6% 37.2% Other 77.8% 0% 11.1% 11.1% This table shows the factors Canadian students consider to be either “very important” to “not considered” in their decision process to study at D’Youville College. INTERNATIONAL OR DOMESTIC? WHERE DO THEY FIT? Canadian students do resemble international students. Canadian students face similar push factors to other international students identified in the literature review. The push factors that are motivating many of the Canadian students are similar push factors to students from other nations studying abroad. These push factors include competition and lack of space in desired program of study. Also, Canadian students are mainly concerned about whether their qualifications obtained in the United States would be recognized in their home market, which is distinctly an international student perspective. On some factors, Canadian students did not resemble international students. Canadian students were not overly concerned with having a common language or the image of higher education in the United States. While these factors were important, they were not selected as most important, where these factors had been identified in the literature review as decisive factors. On other factors, Canadian students took more of a domestic student approach, especially when it came down to choice of institution. The importance placed by the Canadian students on things like location, scheduling options, and grade requirements were all factors more likely to be a main concern for a domestic student. Studies of domestic students choice of institution found that program of study was the most important factor in the choice of institution, which we also found in this study. From the results of this survey we can see that the Canadian students

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studying in the United States resemble both international and domestic students. LIMITATIONS A limitation of this study is the use of convenience sampling employed during data collection. The data collection was limited to one institution located near the border of the United States and Canada. To obtain results it can be generalized on the factors influencing student mobility between the United States and Canada in border areas, a wider survey, with multiple institutions located in bordering regions should be conducted. CONCLUSION The findings of this study can be used to understand the student mobility dynamic between the United States and Canada, especially pertaining to institutions in bordering regions. Furthermore, this study indicates that Canadian students are not like traditional international students, nor do they share the same concerns as domestic students. Canadian students studying in the United States are their own distinct group, with unique concerns and trends. Institutions of higher education looking to market towards Canadian students should understand that traditional marketing materials aimed at international students may not be fully appropriate for the Canadian audience. Materials used in the institution's home market for domestic students would not be suitable either. Students on bordering regions may need their own exclusive set of materials tailored to their specific concerns. The topic of student mobility is one of many possibilities of study. Further study of Canadian students in other bordering regions would add more depth to the subject of student mobility between the countries of the United States and Canada. Other research on student mobility trends between two nations with significant student flows in other parts of the world would greatly add to the literature on globalization in higher education. Student mobility trends differ from country to country and understanding the movement of students from one country to another will give administrators and marketers in higher education more knowledge of how to meet the needs of their unique student populations. REFERENCES

Altbach, P. (2004). Higher education crosses borders, Change 36(2), 18-25. Retrieved September 1, 2010 from Professional Development Collection database. Bourke, A. (2000). A model of determinants of international trade in higher education. The Service Industry Journal, 20(1) 110-138. Retrieved November 10, 2010 from Business Source Premier. Chen, L. H. (2008). Internationalization or international marketing? Two frameworks for understanding international students' choice of Canadian universities. Journal of Marketing for Higher Education, 18(1), 1-33. Retrieved September 1, 2010 from Education Research Complete. Cubillo,I. M., Sanchez, I., & Cervino, I. (2006). International students' decision-making process. The International Journal of Educational Management, 20(2), 101-115. Retrieved September 1, 2010 from ABIIINFORM Complete.

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Gribble, C. (2008, February). Policy options for managing international student migration: the sending country's perspective. Journal of Higher Education Policy and Management, 30(1), 25-39. Retrieved September 2, 2010 from Business Source Premier. Li, M., & Bray, M. (2007). Cross-border flows of students for higher education: push-pull Factors and motivations of mainland Chinese students in Hong Kong and Macau. Higher Education, 53, 791-818. Retrieved November 10, 2010 from Academic Search Premier. Maringe. F., & Carter, S. (2007). International students' motivation for studying in UK HE. International Journal of Management, 21(6), 459-475. Retrieved November 10, 2010 from ABI/INFORM Complete. Mazzarol, T., & Soutar, G.N. (2002). 'Push-pull' factors influencing international student destination choice. The International Journal of Educational Management, Vol. 16 No.2, pp. 82-90. Retrieved September 1, 2010 from ABI/INFORM Complete. McMahon, M.E. (1992). Higher education in a world market. A historical look at the global context of international study. Higher Education, 24(4), 465-482. Retrieved November 10, 2010 from JSTOR.org Mpinganjira, M. (2009). Comparative analysis of factors influencing the decision to study abroad. African Journal of Business Management, 3(8),358-365. Retrieved November 10, 2010 from academicjournal.org Open doors fast facts. (2010). Institute of International Education. Retrieved November 29, 2010 from http://www.opendoors.iienetworkorg. Shanlm, T., Quintal, V., & 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. Retrieved November 10, 2010 from www.haworthpress.com/web/JMHE. Skolnik, M. L., & Jones, G. A. (1992). A comparative analysis of arrangements for state coordination of higher education in Canada and the United States. The Journal of Higher Education, 63(2), 121-142. Retrieved from Research Library. Soutar, G. N., & Turner, J. P. (2002). Students' preferences for university: a conjoint analysis. The International Journal of Educational Management, 16(1), 40-45. Retrieved November 10, 2010 from Pro quest Central. Varghese, N.V. (2008). Globalization of higher education and cross-border student mobility. IIEP- UNESCO Research Paper Series. Paris. Retrieved November 14, 2010 from www.unesco.org/iiep/PDF/pubs/2008/Globalization_HE.pdf. Verbik, L., & Lasanowski, V. (2007). International student mobility: Patterns and trends. London: The Observatory on Borderless Higher Education. Wiers-Jenssen, J. (2003). Norwegian students abroad: experiences of students from a

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linguistically and geographically peripheral European country. Studies in Higher Education, 28(4). Retrieved November 10, 2010 from Academic Search Premier.

APPENDIX A Survey

The questions below were on a Likert Scale using the following values 1. Not consider in my decision 2. Not an important factor in my decision 3. Somewhat important factor in my decision 4. Very important factor in my decision Factors influencing decision to study outside Canada

1. Unavailability of course at home 2. Broaden personal experience 3. Competitive entry requirements in home country 4. Lack of university places 5. Inability to get a place in course one wanted to study at home 6. Enhance future employment prospects 7. Absence of equivalent domestic opportunities Overall what was the most important factor in your decision to study outside Canada? Were there any other factors that were not included that influenced your decision to study outside of Canada? Factors influencing decision to study in the United States 1. Favorable image of higher education in the United States 2. Common language 3. Geographical proximity 4. Know someone who studied there 5. Qualifications recognized at home 6. Value of degree in economic market 7. Prior connection or historical ties to the country 8. Intention to migrate to the United States after degree completion 9. Ability to commute or travel easily to United States 10. Ease of visa formalities Overall, what was the most important factor in your decision to study in the United States? Were there any other factors that were not included that influenced your decision to study in the United States? Did you look at countries other than the United States when deciding to study outside of Canada? Yes No

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Factors influencing choice of institution 1. Have desired program of study 2. Reputation 3. Have favorable scheduling options 4. Availability of financial aid 5. Interaction with faculty and staff 6. Location 7. Quality of education 8. Grade requirements 9. Recommendations from family and friends Overall, what was the most important factor in your choice of institution in the United States? Were there any other factors that were not included that influenced your choice of institution in the United States? Demographic Data Age Gender Year of Study Country of Origin Field of Study

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COMPETITIVITY OF RURAL TOURISTIC DESTINATIONS: PROPOSAL OF AN EVALUATION

MODEL Adalberto Avelar García-Rojas, Universidad Autónoma de Baja California Ariel Moctezuma Hernández, Universidad Autónoma de Baja California

ABSTRACT

Tourism has grown all over the world in the last 15 years and it is projected that it will continue growing. Migration of younger generations over the last few years and the decrease of rentability of primary sector activities in the rural areas have pushed inhabitants to search for new ways to potentiate the use of their natural resources. Baja California with its vast extension of rural areas has a potential to be an economic boost to the region trough rural tourism activities. In this Doctoral Dissertation Proposal Outline, it is suggested to create a competitivity evaluation model that meets the needs of Baja California, Mexico. Dimensions will be decided and analyzed thru the scrutiny of the mostly used models in the literature over the years and a documentary research will extensively be done to support the model which will be applied to the managers of Rural Recreation Centers in Baja California. As per the Secretariat of Tourism, there are in Baja California 175 Rural Recreation Centers, which we do not know the if they are running over competitive schemes and what do they need to foster it. A sample of 122 RRCs will be taken for the analysis. INTRODUCTION The so called touristic phenomenon has grown over the last 15 years and all evidence suggests that it will continue growing as primary economic sectors such as agriculture, fishing and mineral extraction in many countries and municipalities have been displaced by the tourism services and as the need of travel and recreation of the world population has increased. A vast variety of touristic destinations are still emerging and it is imperative to analyze the factors that take part in the competitiveness that can lead entities to gain an advantage over the competition. It is also important to note that given their natural resources, some rural areas have the potential and are more susceptible and suitable to be developed as touristic destinations. Unfortunately, in some parts of the world the saturation of touristic destinations have lead overexploitation and decay of natural resources and endemic cultures. Touristic destinations have a wide range of attractors that are of special interest of potential visitors which upon planning their trip consider their travel decisions upon. Some of these factors are the distance they have to travel to get there, the availability and price range of activities and lodging, cultural heritage, hygiene and security amongst others. This has been changing at a fast rate due to what Barroso and Flores (2008) stated as improvements in communication, decrease in costs of transportation, the decline of mature destinations and the appearance of new travel possibilities are important factors in the decision process on where to vacation. Different methodologies have been used to study of touristic destinations since the 1950’s; however, there have not been an agreement on which model best describes the success or predicts the results of their actions. In Mexico as in most of the world, governments have included in their agendas tourism as a way to foster economic development of their countries following the initiatives of the World Tourism Organization. To objectively compare the competitivity of 139 countries, the World Economic Forum uses a competitive

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index developed with the feedback of their Industry Partnership Program participants. They use a 14 pillar composed around 3 main indexes (1- Travel and Tourism regulatory framework 2- Travel and Tourism business environment and 3- Travel and Tourism human, cultural and natural sub indexes). In 2011 Mexico is in 43rd position, rising from 2009’s 51st position. In 2011 is just below China, Bahrain, Thailand and Quatar and above Costa Rica, Puerto Rico and Israel. In America, Mexico holds 4th place in competitivity below the United States (6th overall), Canada (9th overall) and Barbados (28th overall). Still in 2009, Mexico held 19th place in the most visited countries ranking. Federal Government stated 2011 as the year of tourism and thru the Tourism Secretariat has planned to raise Mexico to the top 10 most visited countries position in the following ten years. It is a complex task; however it is possible if all actors (from the companies that run touristic destinations attractions to the top level government officials) collaborate together. In the following pages, a Doctoral Dissertation Proposal Outline is presented; it is suggested to create a competitivity evaluation model that meets the needs of Baja California, Mexico. Based on the assumption that knowing the factors that particularly contributes to the competitivity of Baja California and its geographic distribution, vast environment diversity and remoteness, gives the state an opportunity to be developed as a premiere competitive touristic destination.n Dimensions will be decided and analyzed thru the scrutiny and study in depth of the mostly used models in the literature over the years and a documentary research will extensively be done to support the model. This then will be applied to the managers of Rural Recreation Centers in Baja California. LITERATURE REVIEW Competitiveness of touristic destinations can be analyzed considering the supply and/or the demand part of it. As per the supply part, Merinero & Pulido (2009) asserts that literature review over the time insists that touristic destinations capability of growth and development is related to their willingness to work together and establish cooperative relationships with every related actor. On the other hand, considering the demand, the strongest factors behind a person choosing one destination over another is influenced by natural and cultural aspects of the destination Manning (1993) on Toledo et al (1998). He also points out the potential visitor search for safe and clean environment. The term competitivity is one of the most commonly used terms in economic theory studies, although its definition is controversial as Gonzalez et al (2009) points out. They considered that most of the debates are to define its operationalization. It has been defined and studied by many scholars. It is important to note the concept that Esser et al (1994) on Gonzalez et al (2009) established aiming the discussion to the fact that competitivity does not come by itself, it needs to be planned, implemented and monitored. Manning (1993) on Toledo et al (1998) thus defines competitivity to be within the possibility of the developer on keeping the attractions (natural and man-made) clean. If touristic destination want to grow and be competitive, the key development actors need to find alternatives consistent with their context, with the planned projection of the near future and aligned with their costumers needs. As Mazaro (2007) noted, they have to be integrated into creating a value chain within the visitor stay. The Toledo, et al (1998) model is also based on Porter’s diamond of competitivity model and assumes that to achieve competitive levels at a destination level, there must be a cluster aggrupation of companies related to the economic activity. They also mention the case of Costa Rica were they have experienced tourism annual growth rates of 10.5%. one of their success factors beside the aggrupation in cluster is the

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environmental conservation policies, common marketing campaigns and the segmentation of the demand in specific sectors (ie adventure, youth, nature). The premier ranked model of Genest & Legg (2002) workbook contains a 3 phase, 7 step methodology to Evaluate, Interpret and Plan strategies for recovering the tourism economy and convert Touristic Destinations into what they named “Premier Ranked” A critique that Dieguez, Gueimonde, Sinde, & Blanco (2011) to the notes the difficulty of Dwer & Kim’s model due to the difficulty of getting the data available for analysis. METHODOLOGY Background As a consequence of the rapid growth around the world of commercial touristic activities in the last decade and according to the projections of the World Tourism Organization on Mazaro (2007); the value of touristic activities will be greater of those of the automobile and oil trades. Due to the socioeconomic restructuration given by the dramatically decrease of agriculture, cattle farming and mining as primary activities in some rural areas around the world; have driven the need of the people to merge into other type of economic activities as Flores & Barroso (2011) noted. In this regards, the available labor have reassigned the economic activity to the service area many of these to touristic activities.On the other hand, as a result of the intensive use of information technologies to market touristic destinations, the ease of long distance transportation and the increasing need of customization on travel packages. It is imperative that touristic destinations are competitive in order to attract the quantity and quality of visitors; enough to leave an economic spill sufficient to increase the quality of living of the residents. The main goal of the National Tourism Secretariat is to lead Mexico into the top 10 touristic destinations of the world (Secretaría de Turismo, 2011) which requires that all touristic destinations to be competitive as they will be competing to attract visitors. According to the Centro de Investigación y Estudios Turísticos del Tecnológico de Monterrey (2010), the state of Baja California ranks number four in the National Tourism Competitiveness Index with 40.4/100 points, however it does not reflect the situation of the rural touristic destinations; given its nature, this methodology cannot be directly applied to evaluate the total touristic destinations as it is. Research Problem: In order to meet the challenge of competitiveness of Baja California as a rural touristic destination, the overall destination has to be scientifically diagnosed. There are many models to evaluate the competitiveness of a touristic destination that could be used in rural areas but there is none specifically proven to work in the needs of rural touristic destination for Baja California. Significance Of The Study: The importance of having a tool to understand the relationships of the factors that lead the competitiveness of the rural touristic destination of the state of Baja California, Mexico is the key to successfully develop competitive enterprises, projects and public policies to support them. Thus, this study will be relevant to managers, entrepreneurs and policy makers to create a framework to build and transform companies to be more competitive and gain the trust and preference of visitors over other places near and far away.

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Purpose: The intention of this research is to suggest a model to evaluate the competitiveness of rural tourism destinations. Problem statement What factors influence the competitiveness of Baja California as a rural touristic destination? HYPOTHESES H1: the strategy, structure and rivalry conditions have a positive relation to the competitiveness of Baja California as a touristic destination. H2: the conditions of the demand have a positive relation to the competitiveness of Baja California as a touristic destination. H3: the related and supporting industries have a positive relation to the competitiveness of Baja California as a touristic destination. H4: the factors and conditions of the environment have a positive relation to the competitiveness of Baja California as a touristic destination. H5: the government policies and actions have a positive relation to the competitiveness of Baja California as a touristic destination. Theorical Framework Business competitive advantages at a destination level are determined in part by the macroeconomic efficiency of the units of production within; thus, competitivity at a destination level has to be measured at the company (entrepreneur-manager) level. Per Gonzalez and Mendieta (2009), preliminary results of their study show that the three most important keys to explain local competitivity are:

- The diversity of empirical variables used as competitive determinants - The yet to be explored relationship between competitivity and quality of life. - The work of local government agencies promoting competitivity.

Human resources capability is a mean to development and a key ingredient in a competitive recipe, as Gonzalez & Mendieta (2009) noted. When talking about rural destination competitiveness it is essential to consider the challenging situation that some of the rural community’s entrepreneurs might hiring and training employees and also their own lack of managerial and planning skills. A model is a graphical representation of the variables that impact a problem. According to Bosch et al (1998) on Mazaro & Varzin (2008), there are two basic types of development models: Continuous Intensive, which is characterized by a urban congestion, densification and environment and landscape spoilage. And the Punctual Extensive, which is based on a equilibrated development and is planned to create a high end image, the landscape spaces once wasted are recovered and planned to conserve. Models are not static and need to be reviewed as the conditions of the economic environment changes.

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A total of 19 different models were partially reviewed, finding that most of the models analyzed on this study are different representations and adaptations of Porter’s national competitivity diamond model, one of the most common adaptation is the addition of the sustainability variable, to note the importance of it, Ritchie and Crouch (2000) stated, competitivity being an illusion if sustainability is not accounted for. Mazaro & Varzin (2008) critiques Toledo’s et al (1998) model for not including the sustainability dimension into their model and also pointed on their study that the development of competitivity evaluation models have to be oriented to equally reduce the environmental impact that activity has on the host community and increase the threshold of development. There is a need of the touristic destination actors (public and private) to adapt the management of the destination procedures and metrics with a comprehensible, integrated and qualitatively measurable perspective in order to be able to manage the changes required to be competitive (Mazaro & Vazin, 2008). Limitations: Limitations of the study are the uncertainty of the context given political reasons out of control and the bias that respondents could bring to the study. Delimitation The study will be completed taking as objects of study the managers of the rural tourism companies in the state of Baja California as per the Tourism Secretariat. Definitions

Important Concepts Description Destination (main destination) of a trip

The main destination of a tourism trip is defined as the place visited that is central to the decision to take the trip.

Employment in tourism industries

Employment in tourism industries may be measured as a count of the persons employed in tourism industries in any of their jobs, as a count of the persons employed in tourism industries in their main job, as a count of the jobs in tourism industries, or as full-time equivalent figures.

International tourism International tourism comprises inbound tourism plus outbound tourism, that is to say, the activities of resident visitors outside the country of reference, either as part of domestic or outbound tourism trips and the activities of non-resident visitors within the country of reference on inbound tourism trips.

Purpose of a tourism trip (main) The main purpose of a tourism trip is defined as the purpose in the absence of which the trip would not have taken place. Classification of tourism trips according to the main purpose refers to nine categories: this typology allows the identification of different subsets of visitors (business visitors, transit visitors, etc).

Rural tourism It is used when the rural culture of the destination is the key component of the offered product. Tourist (or overnight visitor) A visitor (domestic, inbound or outbound) is classified as a tourist (or overnight visitor), if

his/her trip includes an overnight stay. Travel / tourism Travel refers to the activity of travellers. A traveller is someone who moves between different

geographic locations, for any purpose and any duration. The visitor is a particular type of traveller and consequently tourism is a subset of travel

Trip A trip refers to the travel by a person from the time of departure from his/her usual residence until he/she returns: it thus refers to a round trip. Trips taken by visitors are tourism trips.

Visit A trip is made up of visits to different places. The term tourism visit refers to a stay in a place visited during a tourism trip

Visitor A visitor is a traveller taking a trip to a main destination outside his/her usual environment, for less than a year, for any main purpose (business, leisure or other personal purpose) other than to be employed by a resident entity in the country or place visited. A visitor (domestic, inbound or outbound) is classified as a tourist (or overnight visitor), if his/her trip includes an overnight stay, or as a same- day visitor (or excursionist) otherwise.

per the World Tourism Organization (n.d)

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METHODOLOGY The methodology to empirically test the research hypotheses to be used on this dissertation is quantitative using relational statistical tools. METHOD A survey type questionnaire will be designed based upon further research on at least 15 of the reviewed models, also including social and demographical questions for control.Main variables will be measured with a 7 scales Lykert type response, open ended questions will be included to understand the context of the respondents.Tests of Validity and Reliability are to be made to the Measuring Instrument Population definition According to the Rural Route guide published by the State Tourism Secretariat (SECTURE, 2011). In Baja California exists 175 Rural Recreation Centers (RRC). The Guide clearly defines that the Recreation Centers are located within the state as follows. - 9 RRC in Tijuana - 18 RRC in Rosarito - 45 RRC in Tecate - 19 RRC in Mexicali - 18 RRC in San Felipe - 66 RRC in Ensenada N = 175 Sample size calculation Per Israel, 1992 sample size was determined assuming a 95% confidence level and equal proportion of variability p and q to be 50%.

𝑛 = 𝑁

1 + 𝑁(𝑒)2

n= sample size N= population size = 175 e= sampling error = 5%

𝑛 = 175

1 + 175(0.05)2 = 122

Sampling size is 122 RRC in the state of Baja California. Sampling method definition: A Clustered Proportional Random Sampling method is proposed with the following participation: - Tijuana 6 RRC - Rosarito 13 RRC

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- Tecate 31 RRC - Mexicali 13 RRC - San Felipe 13 RRC - Ensenada 46 RRC DISCUSSIONS The environmental decay that have been developing since the Industrial Revolution and the advancements in technologies and transportation means have led to a new dimension and the rising of a new traveler generation with customized needs and detailed specific satisfactory requirements which means that only the most agile and competitive companies will somehow grow and survive the competition. This have forced Global Organizations such as the United Nations to lead and establish conservation goals to unify the fighting for conservancy and against poverty In Mexico, the Federal Tourism Secretariat is the one responsible to coordinate forces along the country to strengthen the tourism sector and lead the way to reach the goal to be on the top 10 touristic destination of the world. This can only be done thru competitive companies that will withhold the needed competitivity of a specific area and create a multiplicative effect along the country. State and local governments also have in their agendas tourism activities and policies as a priority, however an increase of local touristic flow is not the solution without the competitiveness of touristic supply as an important reason of the relevance of this Doctoral Dissertation Proposal. REFERENCES Barroso, M. & Flores, D. (2006). La competitividad internacional de los destinos turísticos: del enfoque macroeconómico al enfoque estratégico. Cuadernos de Turismo, 2006 (17), 7-24. Retreived October 24th 2011 from: http://redalyc.uaemex.mx/pdf/398/39801701.pdf Centro de Investigación y Estudios Turísticos del Tecnológico de Monterrey (2010). Indice de competitividad turística de los Estados Mexicanos. Retreived: October 30th 2011 from: http://www.cidetur.uqroo.mx/cds/ESTUDIO-SOBRE-EL-TURISMO-EN-LOS-ESTADOS-DE- MEXICO-ITESM.pdf Diéguez, I., Gueimonde, A., Sinde, A. & Blanco, L. (2011). Análisis de los principales modelos explicativos de la competitividad de los destinos turísticos en el marco de la sostenibilidad. Revista de Cultura e Turismo. 05 (02), 101-124. Retreived October 24th 2011 from: http://www.uesc.br/revistas/culturaeturismo/ano5-edicao2/artigo_7.pdf Flores, D. (2009). Competitividad sostenible de los espacios naturales protegidos como destinos turísticos: un análisis comparativo de los parques naturales Sierra de Aracena y Picos de Arcoche y Sierras de Cazorla, Segura y Las Villas (Tesis para obtener el grado de Doctor) España: Universidad de Huelva Flores, D. & Barroso, M. (2011). Desarrollo rural, economía social y turismo rural: Un análisis de casos. Revista de Economía Publica, Social y Cooperativa, 2011 (70), 55-80. Retreived October 26th 2011 from: http://www.ciriec-revistaeconomia.es/banco/7003_Flores_y_Barroso.pdf

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González, R. & Mendieta, M. (2009). Reflexiones sobre la conceptualización de la competitividad de Destinos Turísticos. Cuadernos de Turismo, 2009 (23), 111-128. Retreived September 15th 2011 From: http://revistas.um.es/turismo/article/view/70201/67671 Israel, G.D. (1992). Determining Sample Size (Fact Sheet PEOD-6 Program Evaluation and Organizational Development). Florida, EE. UU.: Institute of Food and Agricultural Sciences, University of Florida. Retreived October 27th, 2011 from: http://www.soc.uoc.gr/socmedia/papageo/metaptyxiakoi/sample_size/samplesize1.pdf Mazaro, R.M. (2006). Competitividad de Destinos Turísticos y Sostenibilidad Estratégica. Proposición de un modelo de evaluación de factores y condiciones determinantes. (Tesis para obtener el grado de Doctor) Barcelona, España: Universitat de Barcelona Mazaro, R.M. (2007). Factores determinantes de competitividad para destinos turísticos en el marco de la sostenibilidad Observatório de inovação do turismo, Volumen II (1), 1-16. Retreived October 28th from: http://bibliotecadigital.fgv.br/ojs/index.php/oit/article/viewFile/1632/1051 Mazaro, R.M. & Varzin, G. (2008). Modelos de Competitividad para Destinos Turísticos en el Marco de la Sostenibilidad Revista de Administração Contemporânea, 12 (3), 789-809. Retreived October 20th from: http://redalyc.uaemex.mx/pdf/840/84012309.pdf Merinero, R. & Pulido, J.I. (2009). Desarrollo turístico y dinámica relacional. Metodología de análisis para la gestión active de Destinos Turísticos. Cuadernos de Turismo, 2009 (23), 173-193. Retreived October 24th 2011 from: http://redalyc.uaemex.mx/src/inicio/ArtPdfRed.jsp?iCve=39811874009 Parra, E. (2008). Determinantes estratégicos para la obtención de ventajas competitivas en el canal de distribución de servicios turísticos (Tesis para obtener el grado de Doctor) Tenerife, España: Universidad de la Laguna Perea, J. (2006). Estrategias de diferenciación para los productores cafetaleros de la región de Córdova, Veracruz (Tesis para obtener el grado de Doctor en Ciencias Administrativas) México, D.F., México: Instituto Politécnico Nacional Secretaria de Turismo (2011). Boletín 11 Decreta el Presidente Felipe Calderón al 2011 como año del Turismo en México. Retreived October 31st from: http://www.sectur.gob.mx/es/sectur/Boletin_11 Secretaria de Turismo (n.d.). Planeación y Gestión del Desarrollo Turístico Municipal. Retreived on October 26th from: http://sectur.gob.mx/es/sectur/sect_Planeacion_y_Gestion_para_el_Desarrollo_Turis Secretaria de Turismo del Estado (2011), Guía Estatal de Ranchos, Balnearios, Campos Turísticos y Centros Recreativos de Área Rural de Baja California. Retrieved Octubre 1st, 2011 from: http://www.descubrebajacalifornia.com/guias/pdf/ruta-rural/guia.pdf Toledo, G.L., Valdés, J.A. & Pollero, A.C. (1998). Empresas turísticas en ambiente globalizado: marketing y competitividad. Estudio de casos de clúster turísticos. São Paulo: FEA/USP. Retreived October 20th 2011 from: http://fama2.us.es:8080/turismo/turismonet1/economia%20del%20turismo/ultimos/empresas%20turistica s%20en%20ambiente%20globalizado.pdf

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World Tourism Organisation (n,d,). Understanding tourism: Basic glossary, Retreived October 30th 2011 from: http://media.unwto.org/en/content/understanding-tourism-basic-glossary BIOGRAPHY Adalberto Avelar is a first year PhD full time student at Universidad Autónoma de Baja California, Campus Ensenada. He can be reached at [email protected] Ariel Moctezuma Hernández holds a PhD in Economic Sciences from the Universidad Autónoma de Baja California where he is a full time professor. He can be reached at [email protected] APPENDICES Appendix A: Models referenced in the proposal

Model name (year created, institution)

Bosch (1998)

Toledo, G. L., Valdez, J.A., Pollero, A.C. (1998)

Kosak & Rimmington (1999)

Buhalis (2000)

Hassan (2000)

Kim (2001)

Genest, J. Legg, D. (2002)

Dwyer & Kim (2003)

Ritchie and Crouch (2003)

Sanchez & Fajardo (2004)

Gooroochurn & Sugiyarto (2005)

Hu & Wall (2005)

Mazaro (2006)

Mazanec (2007)

Hong (2009)

Navickas & Malakauskaite (2009)

Indice de competitividad turistica de los estados mexicanos (ITESM)

World Travel & Tourism Council (WTTC)

Travel and Tourism Competitivity Index (WEF)

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THE IMPACT OF MANAGEMENT CONTROL ON PERFORMANCE IN SMALL AND MEDIUM-SIZED ACCOMODATION ENTERPRISES: A LITERATURE

REVIEW AND SUGGESTIONS FOR FUTURE RESEARCH

Guacimara Jiménez-García, University of Las Palmas de Gran Canaria Rosa M. Batista-Canino, University of Las Palmas de Gran Canaria

ABSTRACT

The author peruses the most up to date management control-related articles. This review focuses on different aspects such as accounting, strategic planning, budgeting and forecasting, which all come under the heading, Management Control Systems. Performance Management Systems are addressed in a separate section, as they are an important issue of the management control systems, which includes the balanced scorecard and the effects of non-financial measures, as well as the data envelopment analysis. Some differences between large and small and medium-sized enterprises, within the Tourism sector, are also identified therefore researchers and professionals must agree on the need for a change. In addition to the review, the author also provides suggestions for future research. JEL: M10 KEYWORDS: Management control systems, performance management systems, small and medium- sized enterprises, accommodation. INTRODUCTION One of the hallmarks of leading-edge organizations has been the successful application of performance measurement to gain insight into, and make judgments about, the organization and the effectiveness and efficiency of its programs, processes, and people (Amaratunga et al., 2001). This paper focuses therefore, on the review and analysis of two major topics: the management control systems and the performance management systems as an important issue within the former. This document pursues two main aims. The first aim is to analyze and classify the different studies to identify current research trends and work done in this field. The second is to identify and evaluate the objectives and variables of analysis presented by different researchers, which form the basis of methodological framework for future research. Because, most studies that focus on tourism refer to large companies, the topic choice is a novelty itself, given the paucity of literature examining business practices in small and medium-sized enterprises (Phillips and Louvieris, 2005). The reason why it is important to conduct research on these issues regarding SMEs is clear. It is due to the main impact of these businesses in the global economy. In fact, SMEs have always occupied an important position in the hospitality industry and it is imperative we investigate this further to ensure their success (Quinn et al., 1992) and efficient management.

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The remainder of this article is organized as follows. Firstly, the literature on management control systems (MCS) and performance management systems (PMS) is reviewed. Secondly, we try to demonstrate the impact of MCS on performance. Then, conclusions and recommendations are presented, and the theoretical model is outlined. LITERATURE REVIEW Literature review contained in the present study aims to analyze the management control systems (MCS) and the performance management systems (PMS), in the field of small and medium-sized accommodation enterprises (SMEs). Accordingly, we start by properly defining the concepts we are going to analyze. First, According to the second article in the Official Journal of the European Union on May 6, 2003, the Commission´s recommendation on the definition of SMEs is made up of companies with fewer than 250 employees and whose annual turnover does not exceed EUR50 million or an annual balance sheet total not exceed EUR43 million.Second, MCS are defined broadly as the formalized routines and procedures that use information to maintain or alter patterns in organizational activity (Simons, 1991). According to Wood and LaForge (1981); Grinyer et al. (1986); Rhyne (1986); Ramanujan and Venkatraman (1987); Fredrickson (1984), (cited in Lyles 1993), the formality of planning has been measured by assessing such procedures as the degree of planning manual usage, the amount of emphasis on developing written plans and/or the existence of specific schedules for formulating plans. Finally, PM is defined as the process of quantifying past action, according to Neely (1998) cited in Amaratunga et al., (2001). However, it is a useful tool for implementing long-term change (Kaplan and Norton, 1996).In the literature, we find a variety of articles examining the management control procedures, which covers a wide range of issues, such as accounting, practice, budgeting and strategic planning, which all come under the heading, MCS (See Table 1). Furthermore, PMS represent an important issue of the management control systems, which includes the balanced scorecard and the effects of non-financial measures, as well as the data envelopment analysis (See Table 2). Strategic Planning as Management Control Systems (MCS) Several authors argue the positive impact that a more formal planning exerts on business performance (Robinson and Pearce, 1988; Lyles et al., 1993; Wijewardena et al., 2004). In fact, the use of planning tends to increase with firm size according to Berman, Gordon, and Sussman (1997) and, Robinson and Pearce (1984) (cited in Wijewardena et al. 2004). Initially, Robinson and Pearce (1983) suggested that there were no differences between firms using formal and informal planning. However, the results of later studies highlight the positive impact that strategic planning has on the performance of small and medium-sized enterprises (SMEs) and document the low degree of planning in such firms (Robinson and Pearce, 1984). Thus, note that a planning sophistication-strategic orientation interaction exists (Robinson and Pearce, 1988). Lyles et al. (1993) demonstrated a positive relationship between planning and performance of SMEs. Firms with no written strategic plan were covered as non-formal planners and those with written plans were classified as formal planners. This study is an advance in this field showing the benefits of formal planning in SMEs. Wijewardena et al., (2004) has empirically demonstrated the significant relationship between planning and control sophistication in sales performance. In essence, the findings of the study

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suggest that the greater the sophistication in both planning and control processes, the higher the sales growth. However, it presents some limitations on the numbers of performance variables analyzed, needing further studies to prove this relationship. Table 1: Management Control Systems

Author/s Type of research Sample Scope/Target Sources Theoretical framework Hesford and Potter (2010)

Theoretical NA Tourism Literature Accounting practice Cost management

Strategic management control Jones (2008) Quantitative 31 (UK) Hotel industry Questionnaire: Likert-

5/Nominal/Ordinal Budgets Budgetary control

Lyles, et al. (1993)

Quantitative 188 (USA) SMEs Pre-test: Interviews Planning formality Questionnaire: Likert- 5/Nominal

Strategic process Business performance

Marginson (2002)

Qualitative 1 case (UK)

Telecommunications Case study: Interviews Management control systems Strategic process Simons' model (1991, 1994, 1995)

Robinson and Pearce (1983)

Quantitative 85 (Carolina)

Small banks Questionnaire: Likert- 4/Nominal

Planning formality Financial performance SMEs

Robinson and Pearce (1984)

Theoretical NA Management Literature Strategic planning SMEs

Robinson and Pearce (1988)

Quantitative 97 (Carolina)

Manufacturing firms Questionnaire: Likert-5 Strategic orientations Performance Planning process

Simons (1991) Qualitative 30 (USA) Health care industry Interviews Management control systems Strategy Simons' model (1987)

Simons (1994) Qualitative 10 (USA) Various Interviews Management control systems Longitudinal analysis Strategic change

Simons' model (1987, 1990, 1991) Steed and Gu (2009)

Quantitative 42 (USA) Hotel industry Questionnaire: Likert- 5/Nominal/Ordinal

Budgeting/Forecasting Efficiency

Wijewardena, et al. (2004)

Quantitative 168 (Sri Lanka)

Manufacturing SMEs

Questionnaire: Nominal/Ordinal

Planning sophistication Control sophistication Performance measurement

Tourism-related articles are in bold MCS appear as levers for strategic change. Simons (1991) shows how top managers in the health care industry use specific control systems for implementing strategic objectives. Subsequently, the author examines, by taking samples from different sectors, how MCS are used by managers to communicate new strategies, establish implementation targets and ensure the continuity of new strategic initiatives (Simons, 1994). Marginson (2002) offers a rich portrait of how MCS might strengthen strategic change, innovation and business performance. Accounting And Budgeting As Management Control Systems (MCS) Historically, accounting has been the basic tool of control for managers. Budgeting has also played a dominant role as a technique for evaluation and control. Even today, budgets remain one of the most

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widely MCS techniques used. For instance, Jones (2008) discovered three key reasons why organizations in the hospitality industry developed budgets as a tool for management control, performance evaluation and planning. Currently, budgets can be viewed as a forecasting tool in the short term (one year). However, in order to align strategy and business objectives in the long term, the need for advanced forecasting (5-10 years) arises. In this way, Steed and Gu (2009) document the budgeting and forecasting practices in the hospitality industry. They also identified significant differences in processes between large and small hotel management companies. Hesford and Potter (2010) show a complete collection of accounting research papers that were published in the Cornell Hospitality Quarterly, which includes issues that involve accounting practice, cost management and strategic management controls. The authors have presented various explanations for accounting topics such as budgets, costs and performance measurement. Some problems and limitations are drawn from this study, related to the limits of cost assignment and the misuse of flexible budgets and non-financial measures. Performance Management Systems (PMS) as Management Control Systems (MCS) Performance measurement is a very useful tool for management control systems. According to contemporary approaches, to improve business performance in management fields, the Balanced Scorecard (BSC) is widely used as management framework instead of the traditional ratio analysis. However, we also found further recent studies that use data envelopment analysis (DEA) to analyze the efficiency and performance, which also deserves our attention. Table 2: Performance Management Systems

Author/s Type of research Sample Scope/Target Sources Theoretical framework Amaratunga, et al. (2001)

Theoretical NA Management Literature Kaplan y Norton´s BSC (1992, 1996)

Performance measurement Banker, et al. (2005) Qualitative 1 case

(USA) Hotel chain Interviews Kaplan y Norton´s BSC (1992,

1996) Longitudinal analysis

Non financial measures Financial measures

Chen (2011) Quantitative 1 case (Taiwan)

Hotel chain DEA Model Performance measurement Business efficiency

Cruz (2007) Qualitative 2 cases (Portugal)

Hotel industry Interviews Control practices Performance measurement

Denton and White (2000) Qualitative 1 case Hotel chain Experimental Kaplan y Norton´s BSC (1996) Kaplan and Norton (1996) Theoretical NA Management Literature Kaplan y Norton´s BSC (1992)

Strategy Neves and Lourenço (2009)

Quantitative 83/2 cases (Global)

Hotel industry DEA Model Performance measurement Longitudinal analysis Strategic analysis

Phillips and Louvieris (2005)

Qualitative 10 cases (UK)

Tourism SMEs Interviews Kaplan y Norton´s BSC (1996) Performance measurement

Sainaghi (2010) Theoretical NA Hotel industry Literature Kaplan y Norton´s BSC (1992, 1996) Performance measurement

Tourism-related articles are in bold In 1992, Kaplan and Norton revolutionized conventional thinking about performance metrics by going beyond traditional measures of financial performance. In later work, Kaplan and Norton (1996) showed that non-financial indicators were extremely valuable for predicting future financial performance rather

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than simply reporting the past. This work describes how the BSC can help managers to link current actions to future goals becoming a strategic management system for teamwork and innovation. Denton and White (2000) show the advantages of implementing the BSC in a hotel chain, in order to achieve the long-term objectives, move into news strategic areas and identify negative trends in the early stages. Amaratunga et al. (2001) extend the Kaplan and Norton´s BSC by showing a novel view to deploy strategic direction, communicate expectations and measure progress towards agreed objectives. According to these authors, the key approach to overcome the BSC implementation is to develop a systematic and structured improvement process to support the measurement system. Phillips and Louvieris (2005) highlight performance management as a determining factor for the success of tourism SMEs and show how companies can adopt the BSC to improve PMS. Sainaghi (2010) highlights the relevance the BSC has gained in the hospitality industry as a satisfactory PMS. Cruz (2007) states that budgets remain a valuable management tool in the tourism context. She also shows how new performance measurement practices employed by international hotel companies can be adapted to local areas where these companies operate. Although there is still much confidence in financial reporting as a business strategy, non-financial measures are increasingly taken into account (Phillips and Louvieris, 2005). The most successful companies consider these measures as the key for future business performance as will be reflected in long-term financial performance (Denton and White, 2000). Banker, et al. (2005) empirically show how improvements in the non-financial measures of a hotel chain were followed shortly by increases in revenue and profit.In the last 20 years, academics and professionals have been arguing that performance management is only possible if the PMS reflects the company’s multidimensional nature, according to Anthony and Govindarajan (2003); Kaplan and Norton (1992, 1993, 1996) and Zhu (2000), (cited in Neves and Lourenço, 2009). The main criticism of this stream of thought is that multiple measures may divert management attention from the organizations’ objectives. Therefore, it has been suggested that a subjective weighted average rate may generate a performance index from the BSC. In this sense, the data envelopment analysis (DEA) satisfies the criticism where the weights applied to each variable within the model are determined to maximize the performance index of each decision-making unit (Neves and Lourenço, 2009).Very few studies use the DEA model to measure performance in the hotel industry. Neves and Lourenço (2009) show how DEA can be used in strategic management and performance measurement in the hospitality industry, being a novel alternative technique to traditional ratio analysis. Chen (2011) also uses DEA as a technique to analyze each unit’s relative use of inputs and its relative production of outputs in a hotel chain, proving to be a useful tool for multiple performance measurement. Through this approach, the hotels chain´s inefficiencies can be detected and managers can focus on improving performance. CONCLUSIONS With regard to the management control systems and the performance management systems it is not a new research in management discipline, but in Tourism it is a novelty, as very little research has been done. The articles reviewed have contributed to a greater understanding of management practices, analyzing issues related to accounting information systems, management control, strategic planning and the use of the balanced scorecard as a primary tool to measure the organizations’ performance (See Table 3).

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Table 3: Main topics reviewed

Management Control Systems (MCS)

Strategic planning: Formal and Non formal planners

Accounting: Cost Management, Budgeting & Forecasting

Performance management systems (PMS)

BSC a Methodology

DEA b Model a Balanced Scorecard; b Data Envelopment Analysis

The main conclusions from the review relate mainly to the relevance of this research. The analyzed studies demonstrate a significant association between the use of MCS and PMS on the overall organizations’ performance (Robinson and Pearce, 1988; Lyles et al., 1993; Wijewardena et al., 2004). Firstly, the use of different MCS and PMS promote the strategic implementation and the execution of organizational goals (Lyles et al., 1993; Simons, 1994; Kaplan and Norton, 1996; Marginson, 2002). Secondly, performance measurement arises as a key factor for SMEs success in the accommodation industry (Phillips and Louvieris, 2005), turning the Kaplan and Norton’s methodology into a very useful tool for measuring performance (Denton and White, 2000; Banker et al., 2005; Phillips and Louvieris, 2005; Sainaghi, 2010) and management control. Further, any improvement on non-financial measures results in revenues and profits increasing in the short term (Banker et al., 2005). Finally, the use of budgets as a control technique is highly relevant in the hospitality industry (Cruz, 2007; Jones, 2008; Steed and Gu, 2009). According to the main conclusions mentioned above, this interplay between MCS, PMS and performance is depicted in Figure 1, which establishes the conceptual framework for future researches. Figure 1: Theoretical Model This figure shows the relationship between management control systems (MCS), performance management systems (PMS) and business performance. The review so far, suggests that little is known about SMEs within the tourism industry. In general, future research should focus on further understanding of the links between management control and performance, as no set criteria is clear. In this sense, the development of more qualitative studies will be an advance towards a better in depth understanding of the issues. There is a need for articles using experimental and analytical methods that employ a more consistent statistical analysis, which allows a better fit of the relationship between variables; this will contribute positively to the science and the

+

MCS Formal Non Formal

PMS Financial measures Non-Financial measures

Business Performance

+

+

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tourism industry.The main concern for future research is about discovering why some companies use formal systems whilst others use informal systems and the consequences they have on organizational performance. This subject should be considered especially in SMEs, as there are significant differences between SMEs and large companies (Steed and Gu, 2009). Cross-studies regarding the use of these control systems in different areas and economic sectors, such as tourism, should help identify these companies’ contributions in the global economy.As tourism is the world’s largest industry and due to the prominent role of SMEs in the global economy, new studies relating to these issues are necessary with performance improvement being the main objective. REFERENCES Amaratunga, D.; Baldry, D.; Sarshar, M. (2001): “Process improvement through performance measurement: The balanced scorecard methodology”, MCB University Press, Work Study, vol. 50(5), p. 179-188. Banker, R. D.; Potter, G.; Srinivasan, D. (2005): “Association of nonfinancial performance measures with the financial performance of a lodging chain”, Cornell Hotel and Restaurant Administration Quarterly, Vol. 46(4), p. 394-412. Chen, Tien-Hui (2011): “Performance measurement in a small Taiwanese hotel chain”, Cornell Hospitality Quarterly, Vol. XX(X), p. 1-9. Cruz, I. (2007): “How might hospitality organizations optimize their performance measurement systems?”, International Journal of Contemporary Hospitality Management, Vol. 19(7), p. 574-588. Denton, G. A.; White, B. (2000): “Implementing a balanced-scorecard approach to managing hotel operations: The case of White Lodging Services”, Cornell Hotel and Restaurant Administration Quarterly, Vol. 41(1), p. 94-107. Hesford, J. W.; Potter, G. (2010): “Accounting research in the Cornell Quarterly: A review with suggestions for future research”, Cornell Hospitality Quarterly, Vol. 51(4), p. 502–512. Jones, T. A. (2008): “Changes in hotel industry budgetary practice”, International Journal of Contemporary Hospitality Management, Vol. 20(4), p. 428-444. Kaplan, R. S.; Norton, D. P. (1996): “Using the balanced scorecard as a strategic management system”, Harvard Business Review, July-August 2007, p. 150-161. Lyles, M. A.; Baird, I. S.; Orris, J. B.; Kuratko, D. F. (1993): “Formalized planning in small business: increasing strategic choices”, Journal of Small Business Management, Vol. 31 (2), p. 38-50. Marginson, David E. W. (2002): “Management control systems and their effects on strategy formation at middle-management levels: evidence from a UK organization”, Strategic Management Journal, Vol. 23(11), p. 1019-1031.

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Neves J. C.; Lourenço, S. (2009): “Using data envelopment analysis to select strategies that improve the performance of hotel companies”, International Journal of Contemporary Hospitality Management, Vol. 21(6), p. 698-712. Phillips, P.; Louvieris, P. (2005): “Performance measurement systems in tourism, hospitality, and leisure small medium-sized enterprises: A balanced scorecard perspective”, Journal of Travel Research, Vol. 44(2), p. 201-211. Quinn, U.; Larmour, R.; McQuillan, N. (1992): “The small firm in the hospitality industry”, International Journal of Contemporary Hospitality Management, Vol. 4(1), p. 11-14. Robinson, R. B.; Pearce, J. A. (1983): “The impact of formalized strategic planning on financial performance in small organizations”, Strategic Management Journal, Vol. 4(3), p. 197–207. Robinson, R. B.; Pearce, J. A. (1984): “Research thrusts in small firm strategic planning”, Academy of Management Review, Vol. 9(1), p. 128-137. Robinson, R. B.; Pearce, J. A. (1988): “Planned patterns of strategic behavior and their relationship to business-unit performance”, Strategic Management Journal, Vol. 9(1), p. 43-60. Sainaghi, R. (2010): “Hotel performance: state of art”, International Journal of Contemporary Hospitality Management, Vol. 22(7), p. 920-952. Simons, R. (1991): “Strategic orientation and top management attention to control systems”, Strategic Management Journal, Vol. 12(1), p. 49-62. Simons, R. (1994): “How new top managers use control systems as levers of strategic renewal”, Strategic Management Journal, Vol. 15(3), p. 169-189. Steed, E.; Gu, Zheng (2009): “Hotel management company forecasting and budgeting practices: a survey- based analysis”, International Journal of Contemporary Hospitality Management, Vol. 21(6), p. 676-697. Wijewardena, H.; De Zoysa, A.; Fonseka, T.; Perera, B. (2004): “The impact of planning and control sophistication on performance of small and medium-sized enterprises: Evidence from Sri Lanka”, Journal of Small Business Management, Vol. 42(2), p. 209–217. ACKNOWLEDGEMENT This study is part of a broader research line on management control, which has been started by the Doctoral Program “Scientific Perspectives on Tourism and Hospitality Management”, which is offered by the University of Las Palmas de Gran Canaria. BIOGRAPHY Guacimara Jiménez-García is a Professional Consultant and a PhD candidate of Tourism Management at University of Las Palmas de Gran Canaria. She can be contact by E-mail: [email protected].

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Rosa M. Batista-Canino is Associate Professor in the Department of Economics and Business Management at the University of Las Palmas de Gran Canaria (Canary Islands, Spain). Contact detail: Facultad de Economía, Empresa y Turismo, Módulo C- Dcho. C216. 35.017 Las Palmas. E-mail: [email protected].

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DEMOGRAPHIC PROFILE OF ADVENTURE TOURISTS IN PRETORIA

Melissa J. Lötter, Tshwane University of Technology (TUT) Sue Geldenhuys, Tshwane University of Technology (TUT) Marius Potgieter, Tshwane University of Technology (TUT)

ABSTRACT

Adventure tourism is not a well-defined segment in the discipline of tourism studies. It is therefore difficult to examine the different motivations and segment differentiations in niche markets such as adventure tourism. In order to assist adventure tourism companies towards identifying and developing effective marketing strategies to attract or penetrate the adventure niche market, this study aims to contribute towards the current understanding of adventure tourists by compiling a demographic profile of such tourists. This profile includes the gender, age, ethnic group, family life cycle stage, household type, as well as the income and expenditure rates. Two hundred and fifty adventure tourists who used the products/services of adventure tourism companies within Pretoria participated in this study. However, because of incomplete self-completing questionnaires that could affect the outcome of this study, the sample size that realized were 234, a 93.6% response rate. The results indicate that a typical adventure tourist in Pretoria is generally Afrikaans speaking individuals between the ages of 28 and 49 years (born between 1960 and 1981). These individuals are mostly part of a family, because a large segment is married with no children or have two children who are above the age of twelve years. Adventure tourists in Pretoria tend to be further educated as Technicians and Associate Professionals, or Legislators, Senior Officials and Managers whose gross individual income ranges between R10 001 and R29 999 per month. Their households tend to consist of two or four people and there are generally two income earners per household. This study established that there is a need to further research comprehensive adventure tourist profiles that is equally accepted and interpreted. These findings could assist adventure tourism companies to promote and sell specific activities and experiences that will meet the specific needs and wants of identified target markets. JEL: M000 KEYWORDS: tourism; adventure tourism; market segmentation; demographic profiles INTRODUCTION Tourism is the act of travel for predominantly recreational or leisure purposes and refers to the provision of services in support of this act. Tourists are people who travel to and stay in places outside their usual environment for not more than one consecutive year – for leisure, business and other purposes not related to the exercise of an activity remunerated from within the place visited (World Tourism Organization [WTO], 1991). Adventure tourism, according to Andrews (2007:21), is a type of tourism involving exploration or travel to remote, exotic and possibly hostile areas where the tourist should "expect the unexpected”. Adventure tourism is rapidly growing in popularity because tourists increasingly look for different kinds of vacations. According to the Adventure Travel and Trade Association (2005) of the

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United States of America, adventure tourism may be any tourist activity that can include two of the following three components: a physical activity, a cultural exchange or interaction, and an engagement with nature. While these characteristics might constitute the motivation for participation in adventure activities for some, it can also be a deterrent for others not to participate in adventure activities. An exhaustive search of existing literature did not reveal any profiles of adventure tourists – only general classifications or definitions used to attract all possible adventure tourism groups were found. Furthermore, Heyniger and Consulting (2008:2) suggest that adventure tourism is not a well-defined segment in the discipline of tourism studies. Therefore, it is difficult to examine the different motivations and segment differentiations in niche markets such as adventure tourism. As a result, adventure tourism companies need to include target marketing as a core element of strategic marketing management in order to identify the parts of the market it can best serve, rather than trying to compete in an entire mass market. This could assist adventure tourism companies to promote and sell specific activities and experiences that will meet the specific needs and wants of their identified niche target market. Against this background, the primary objective of this investigation was to develop a demographic profile of adventure tourists in Pretoria with a view to assist adventure tourism companies to promote and sell specific activities and experiences that will meet the specific needs and wants of their identified niche target markets. More specifically, the secondary objectives of this investigation were to explore the notions of market segmentation, market targeting, and market positioning in order to explain how these elements contribute towards profiling consumers; and to identify the demographic descriptors applicable to adventure tourists. This investigation starts with reviewing the literature applicable to demographic segmentation and this is followed by discussing the research methodology and data analysis techniques used. This is followed by a presentation of the findings. This investigation concludes with a discussion of the findings and the managerial implications, research limitations, and recommended directions for future research. LITERATURE REVIEW Although tourism, as suggested by Kalbassi (2010:51), is one of the world’s largest industries, it is still difficult to define its limits and decide what counts as tourism. As mentioned earlier, many definitions of tourism are lodged within a leisure and recreational context. Therefore, tourism shares strong fundamental characteristics and theoretical foundations with the recreation and leisure field of study. The exact size of the adventure tourism market is still debated because of (1) the lack of a standard adventure tourism definition; (2) the fact that the phenomenon of adventure tourism is both new and complex; (3) the majority of available research on adventure tourism is kept confidential as it is collected for individual companies’ marketing purposes; (4) government and industry awareness of adventure tourism is not equally developed worldwide; and (5) the available data on adventure tourism is difficult to use due to a lack of comparability. Although it is difficult to measure the market, Fluker and Turner (2000:380) explain that the adventure tourism market is a newly emerging, fast-growing sector of tourism. Swarbrooke, Beard, Leckie, and Pomfret (2003:55) further concur that although the adventure tourism market appeals to an expanding population who are seeking self-fulfillment and excitement through participating in physically and mentally stimulating activities, the patterns of consumer behavior are in a constant state of flux.

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Loverseed (1997:93) suggested in the 1990s already that satisfaction and self-actualization appear to be crucial in understanding tourists’ engagement with an activity or a product for a specific purpose to satisfy their specific interest and needs. However, Weber (2001:368-370) recommends that when analyzing the decision-making process, researchers should obtain information regarding tourists’ characteristics and their consumer and travel behavior because anticipating and meeting tourists’ needs are the key to success. Adventure tourism research has received relatively little attention in academic literature and the focus of studies in this field tends to be on accidents or injuries. In addition, adventure tourism is mentioned in some texts of ecotourism, outdoor recreation and park management, but not explored in much detail. Authors such as Fennel and Eagles (1990), Fennel (1999), Page and Dowling (2001), as well as Weed (2008) include adventure tourism typologies within their publications. However, it appears to be only Hudson (2003), Swarbrooke et al. (2003), as well as Buckley and Cater (2007) whose publications specifically focus on the concept of adventure tourism. In addition, research investigations with an adventure tourism focus have been published by Bentley, Page and Laird (2001), Beedie and Hudson (2003), Gyimothy and Mykletun (2004), Cater (2006), as well as Bentley and Page (2008). However, profiling adventure tourists does not form the focus of their research, as this investigation proposes to do. Adventure tourism companies ought to recognize that they cannot appeal to all consumers in the same way (mass/undifferentiated marketing). Yang, Wall and Smith (2008:753) indicate that “consumers are too numerous, too widely scattered, and too varied in their needs and buying practices”. Furthermore, different companies vary widely in terms of their ability to serve different segments of the market. As a result, Kurtz (2008:281) suggests that every company should implement differentiated marketing strategies. In order to implement an effective target-marketing strategy, companies should follow the three major steps of target marketing. Target marketing, as set out by Kotler (2000:256) coincides with the model of Rudra (2008:48). The first step, market segmentation, involves: (1) dividing a market into distinct groups of consumers with different needs, characteristics, or behaviors who might require separate products/services or marketing mixes (segmentation bases), as well as identifying different bases to segment the market, and (2) developing profiles of the resulting market segments. The second step, market targeting, involves: (3) developing measures for every market segment’s attractiveness and (4) selecting one or more of the market segments to enter. The third step, market positioning, involves: (5) developing the competitive positioning for the product/service and (6) developing a detailed marketing mix for every segment. As developing profiles require the implementation of an identified segmentation basis, the following section will explore demographic segmentation as a sub-section of market segmentation, as well as how these elements contribute to developing a demographic profile of adventure tourists. Market Segmentation Markets consist of consumers and consumers, according to Waldfogel (2008:569-570), may differ in their wants, resources, locations, buying attitudes, and buying practices. Ideally, every consumer can be viewed as a potentially separate market because consumers have unique needs and wants (customization). The role of market segmentation, according to Kurtz (2008:281), is to divide the total market into smaller,

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relatively homogenous groups. This is necessary in today’s business world because there are too many variables in consumer needs, preferences, and purchasing power to attempt attracting all consumers with a single marketing mix. This does not necessarily mean that adventure tourism companies should change their products/services in order to meet the needs of different market segments, but it does suggest that adventure tourism companies should attempt to identify the factors that affect consumers’ purchase decisions; group consumers according to the presence or absence of these factors; and then adjust their marketing strategies in order to meet the needs of the selected group(s) of consumers. Market segmentation presents numerous advantages and disadvantages to adventure tourism companies. The advantages of using market segmentation, according to Musyoka, Mutyauvyu, Kiema, Karanja, and Siriba (2007:633) are: easier marketing as it is simpler to address the needs of smaller groups of consumers if they have many characteristics in common; finding niches (locating under-served or un-served markets will enable a new company or new product/service to target less contested marketplaces and helps a mature product/service to seek new consumers); and, efficiency (creating a more efficient use of marketing resources by focusing on the segments with the best potential). The disadvantages of using market segmentation, according to George (2001:121), are: developing separate market products/services are expensive; it may be difficult for the company to know how accurately or broadly to segment the market; and lastly, there is a tendency to appeal to markets that are not viable. Taking the above into consideration it can be concluded that market segmentation is the process of breaking a larger target market into smaller groups with specific characteristics. Every group requires different promotional strategies and marketing mixes because every group has different wants and needs. An understanding of a group’s characteristics such as personality, social class and lifestyle plays a vital role in developing a successful marketing strategy (Kurtz, 2008:283). As previously indicated, there are two steps involved in market segmentation, namely: (1) identifying the bases for segmenting various markets; and (2) developing profiles of the resulting market segments. These steps form the basis of this investigation and will now be further explored. Bases of Market Segmentation Companies can identify four different bases for segmenting markets, namely geographical, demographical, psychographical and behavioral. However, according to studies by Kotler, Bowen & Makens (2006:263), demographic characteristics should be known to assess the size of the market and to reach it effectively. Therefore, for the purpose of this investigation, the focus will be on exploring the demographical bases to segment a market. Following is a description of six demographic segmentation variables. (1) Gender-Gender is a variable that helps define markets for certain products/services; yet, segmenting by gender can be tricky. Gender segmentation is in some cases obvious, according to Kurtz (2008:287). However, adventure tourism companies may have to segment their markets differently if a ‘typical’ male or female product/service is not clearly identifiable. Kotler, Bowen and Makens (2006:269) suggest that companies’ marketing strategies should rather be aimed at consumer interests rather than gender as gender marketing is more effective when combined with lifestyle and/or demographics.

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(2) Age Age is another variable that adventure tourism companies could use to segment their markets. However, as with gender, age distinctions have become blurred as consumers’ roles and needs change, as age distribution shifts, and as studied changes take place in every group. Adventure tourism companies can benefit from taking into consideration the sociological concept called the cohort effect. Kurtz (2008:288) describes this concept as “... the tendency of members of a generation to be influenced and bound together by significant events occurring during their key formative years.” The cohort effect helps to define the core values of the age group that eventually shape consumer preferences and behavior. In order for adventure tourism companies to be effective, they need to understand some basic characteristics of the cyber generation, generation Y, generation X, baby boomers, and the silent generation. (3) Ethnic group- Companies are increasingly segmenting the market according to ethnic groups with a view to increase their market share. Companies then tend to target the largest and fastest growing ethnic groups (Kurtz, 2008:290-293), as well as ethnic groups with the most disposable income. The focus then is to inform and attract these groups as spending by these groups are rising at a faster pace than what is the case for general households. (4) Family life cycle stages-As people move from one life-cycle stage to another, they become potential consumers of different types of goods and services (Frash, Antun & Hodges, 2008:382). Therefore, adventure tourism companies should consider whether a consumer is a young single person, a young couple, a full nester, an empty nester, a single parent, a blended couple or an older single person when developing their marketing approaches. (5) Household type-The average household size in South Africa, as indicated by the Health Systems Trust (2007), has decreased from 4.5 in 1995 to 3.9 in 2007. Hayami and Okada (2005:201) explain that the trend towards smaller households could include lower fertility rates, young people’s tendency to postpone marriage, the frequency of divorce, and the ability and desire of many people to live alone. Today’s households represent a wide range of diversity. Households, according to Kurtz (2008:294), could include a household with a married couple and their children; a household that is blended through divorce, or the loss of a spouse and remarriage; a household with a single parent, same-sex parents or grandparents; couples without children; groups of friends; and single-person households. It is important for adventure tourism companies to identify household trends, should these be applicable, in order to modify their marketing approach, so that they will be able to meet the needs of different groups. (6) Income and expenditure rates-Companies often target geographic areas known for the high incomes of their residents, and/or they might consider age or household types when determining potential buying power. In order to identify how expenditure patterns vary with income, adventure tourism companies could utilize Engel’s Law. Ernst Engel, a German statistician, published what is known as the Engel Curve, or Engel’s Law. This law states that the higher a family’s income the smaller the proportion of it is spent on food; the percentage spent on housing, household operations and clothing remain constant; and the percentage spent on other items (education and recreation) increases (Engel, 2009). Engel’s conclusion was based on a budget study of 153 Belgian families and was later verified by a number of other statistical inquiries into consumer behavior. It is evident that adventure tourism companies could utilize Engel’s Law when segmenting their markets according to income and expenditure rates.

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To conclude the discussion on demographic segmentation, it is important to keep in mind that demographic segmentation as a basis can be helpful, but it can also lead to stereotyping, as indicated by Kurtz (2008:287). Furthermore, it can alienate a potential market or cause adventure tourism companies to miss a potential market altogether. The idea is to use demographic segmentation as a starting point and not as an only alternative. The discussion on market segmentation addressed the first step of the market segmentation process; the next section will elaborate on how to develop profiles of the resulting market segments. Profiles of Resulting Market Segments Profiling is the second and last step of the market segmentation process and this concludes the first step of the target marketing process. Before a marketing program aimed at a specific market segment (differentiated marketing) can be developed, adventure tourism companies should understand the typical consumer in that market. According to Czinkota et al. (2000:225), a detailed picture of a market segment is called a profile. A profile, according to Hanson, Rauniyar and Herrmann (1994:303), should paint a clear picture of the typical consumer by using applicable segmentation variables. For the purpose of this investigation, the demographic variables were identified and discussed above. Although a profile is a generalized average of the typical consumer in a segment (Mostafa, 2009:11034), profiling is very important because the usefulness of market segmentation is precipitated upon accurate profiling. Relatively low accuracy in forecasting segment membership will result in ineffective marketing programs and may have a potential negative impact due to targeting unintended segment members. As the primary research purpose of this investigation was to develop a demographic profile of adventure tourists, step one and two of the market segmentation (step one of the target marketing process) forms the basis of this investigation. The resulting information gained through implementing this process will address the research problem of this investigation. In order to identify how this investigation’s resulting information can be utilized by adventure tourism companies, companies should implement market targeting and market positioning strategies. Detailed discussions of these strategies fall outside the scope of this investigation but could form part of future research. METHODOLOGY This paper is based on applied research in order to attain the stated objectives and find a solution to the research problem. This paper is based on the descriptive research approach because of the specific information requirements. A quantitative methodology is used because the methodology of this paper is grounded in the positivist social sciences paradigm. The target population consisted of all adventure tourists within Pretoria, and the sample consisted of adventure tourists using the products/services of adventure tourism companies within Pretoria. Non-probability sampling in the form of quota and convenience sampling was used to select the sample members. Quota sampling with predetermined parameters was used to ensure data comparability. The sample consisted of 250 adventure tourists of whom 50% were male and 50% female. However, because of incomplete questionnaires that could affect the outcome of this paper, the sample that actually realized was 234, providing a 93.6% response rate. Lastly, convenience sampling was applied because the selection of sample members was based on their proximity to the researcher and the ease with which participants could be accessed.

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A list of adventure tourism companies presenting adventure tourism activities at their premises within Pretoria was compiled with the assistance of the Gauteng Tourism Authority (GTA), the GSA (industry magazine), the Indaba traders’ catalogue, the Internet, and personal interviews. The list consisted of 35 adventure tourism companies; however, due to a lack of cooperation by some of these companies, the final list comprised of 20 adventure tourism companies. The sample size was divided into the number of adventure tourism companies to ensure that an equal number of responses were obtained when these companies were visited. The aim was to include as many as possible adventure tourists participating at adventure tourism companies, in order to obtain a representative sample. Prior to distributing the questionnaires, 30 first and second year adventure tourism students at the Tshwane University of Technology completed a pilot questionnaire in order to determine the analytical capability and the effectiveness of the questionnaire as a research instrument. Based on the feedback received from the pilot paper, adjustments were made to the questionnaire before it was distributed. Self-completing questionnaires were distributed among adventure tourists using the products/services of adventure tourism companies in Pretoria. To ensure that these tourists have participated in at least one adventure activity, the researcher approached them to participate in the study after they have completed their activities. This approach was necessary because the purpose of this paper was to profile adventure tourists and not tourists in general. The researcher administered the pilot and fieldwork. The questionnaire was specifically designed for the purpose of this paper. Questionnaires used in previous profiling studies were consulted as a guideline during the construction of this questionnaire, such as (1) the questionnaire used by Tassiopoulos and Haydam (2008) for profiling golf tourists attending an international golf event in South Africa, and (2) the questionnaire used by Muthaya (2009) for segmenting the international market. Furthermore, the literature review served as a guideline to ensure that all the demographic variables were included in order to address the objective of this paper. The questionnaire followed a positivistic approach and consisted of closed-ended, dichotomous, multi-choice and two ranking scale questions that required the participants to rank their personality, social class, and lifestyle. The guidelines for constructing questions (Babbie, 2009:262-270) and the Code of Ethics (Jennings, 2001:98) were followed to aid the success of data collection and analysis. Reliability is a complex issue in the social sciences because the fact that human nature changes over time and space means that consistency with previous research findings is by no means a guarantee of reliability. The reliability of the questions in the questionnaire posted to the sample was tested by using the Cronbach Alpha Coefficient. According to the Cronbach Alpha Coefficients for all the items tested in the questionnaire, 0.7388 indicated raw variables and 0.7302 indicated standardized variables, which were more than the acceptable level of 0.70. Therefore, the questionnaire used for the purpose of this paper proves to be reliable and consistent. Data validation is the process of ensuring that a program operates on clean, correct and useful data. Each variable was tested to fall within these boundaries. These boundaries were pre-programmed into the Microsoft Access database on which the pre-coded data was captured. Thereafter, the data was imported into the SAS (Statistical Analysis Software) format through the SAS Access module to perform a univariate and bivariate analysis. Data accuracy and correctness were ensured by capturing the data twice and comparing the two data sets for errors. Errors could be in the form of an invalid code or an unexpected missing value. By referencing back to the original questionnaires, all errors were traced in the data file and corrected. However, construct validation can only be taken to the point where the questionnaire measures what it is suppose to measure. As the questionnaire was suppose to develop a

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demographic profile of adventure tourists, construct validity was assured during the planning and development stage of the questionnaire. The final data outputs were validated and checked by the research statistician. FINDINGS Demographic descriptors are those innate economic, geographical, and social attributes that constitute an individual and describe the location of that individual in his or her social environment. Demographic characteristics provide the impetus for both tangible and intangible variations among the ways consumers think, feel and act. This study used pre-determined demographic descriptors in order to provide an overall picture of the respondents’ gender, age, ethnic group, family life cycle stage, household type, as well as their income and expenditure rates. The primary objective of this investigation was to develop a demographic profile of adventure tourists in Pretoria. In order to achieve this objective the demographic descriptors applicable to adventure tourists within this area were identified. A univariate and bivariate analysis was performed on all variables; displaying means, standard deviations, frequencies, percentages, cumulative frequencies and cumulative percentages. The univariate and bivariate statistics for the demographic variables enabled the development of the demographic profile of adventure tourists. Gender An equal number of respondents are male (49.4%) and female (49.4%), whereas 1.2% of the respondents did not stipulate their gender. This is an important factor to mention as it facilitated the comparison of adventure tourists’ profiles. Age The age descriptors were divided into the sociological concept of the cohort effect. 32.1% of the respondents are part of the generation Y age group (born 1982-2001), 57.3% are from the generation X age group (born 1960-1981), 9.8% are from the baby boomers age group (born 1943-1960), and 0.4% are from the silent generation age group (born 1925-1942). Ethnic group More than half of the respondents (51.7%) belong to the Afrikaans-speaking (linguistic) ethnic group, 23.9% of the respondents are from the English-speaking (linguistic) ethnic group, and 24.4% of the respondents are from other ethnic groups. Not all the ethnic groups are specified because many companies tend to target the largest and/or fastest growing ethnic groups (Kurtz, 2008:290-293). Family life cycle stage The majority of the respondents comprise of families (41.9%) and pre-families (26.9%) as they are married (49.6%) or single (30.8%) with no children (38.0%) or two children (35%.0%) older than twelve years of old (64.1%). However, 17.1% of the respondents have one child that is under the age of twelve, 14.5% have two children under the age of twelve, 3.4% have three children under the age of twelve, and 0.4% has four or more children under the age of twelve. This is an important factor to identify seeing that most adventure tourism companies provide special activities and discounted prices for children under the age of twelve.

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Household type Adventure tourism companies should identify household trends in order to modify their marketing approach, so that they will be able to meet the needs of different groups. It is important to note that there are various household types within Pretoria, for example foster parents/children, but for the purposes of this study, the ten most common household types have been used. As indicated in Table 1, a large percentage of the respondents (24.4%) are married with children (the children would select the same option if their parents were married), and this exceeds single person households with only 9%. Table 1: Household Type

Household type Frequency Percentage Married with children 57 24.4%* Single person household 36 15.4%** Couples without children 33 14.1% Couples with children 29 12.4% Single parent household 24 10.3% Married without children 19 8.1% Household blended through divorce 16 6.8% Group of friends living in a commune 12 5.1% Grandparents 6 2.6% Same sex parents 2 0.8%

This table indicates the type of households that adventure tourists in Pretoria occupy. *Most represented sample ** Second largest represented sample Furthermore, a large number of households (25.6%) consist of two people and households consisting of four members (25.2%) closely follow this segment. This coincides with the results obtained in the family life cycle stage. Income and expenditure rates In order to identify how expenditure patterns vary in terms of income, adventure tourism companies should consider the level of education, current occupation, individual income, and the number of income earners within a household of their target markets. For the purposes of this study, the respondents’ responses to their education level are divided into the three levels of education used in South Africa. The general level of education comprises an NQF (National Qualification Forum) Level 1 (Grade R to Grade 9 school grades). The further level of education comprises the NQF Level 2 (Grade 10), NQF Level 3 (Grade 11) and NQF Level 4 (Grade 12). The higher level of education comprises the NQF Level 5 (Certificate, Higher certificate and First diploma), NQF Level 6 (Bachelor’s degree, Professional first- degree post-graduate, General first degree), NQF Level 7 (Postgraduate diploma, Honors degree, Master’s degree), and NQF Level 8 (Doctoral degree). Based on the results, the respondents are normally further (67.1%) or higher (30.8%) educated Technicians and Associate Professionals (27.8%) or Legislators, Senior Officials and Managers (24.4%) whose gross individual income ranges between R10 001 and R19 999 per month (26.5%) or R20 000 and R29 999 per month (20.9%). Their households generally consist of one (32.5%) or two (58.6%) income earners per household. To conclude, numerous adventure tourism companies should view marketing as a major tool to reach their target markets who in return needs to understand the nature and benefits of the adventure tourism companies’ products and/or services. Adventure tourism companies should also use different marketing

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methods and techniques to meet the varying levels of understanding tourists. Moreover, they should further consistently analyze, plan, develop, deliver, evaluate, and update their marketing campaigns to meet their marketing objectives whilst meeting the demand of their target markets. DISCUSSION The primary objective of this paper was to develop a demographic profile of adventure tourists in Pretoria; more specifically, the secondary objectives of this paper were to explore the notions of market segmentation, market targeting, and market positioning in order to explain how these elements contribute towards profiling consumers; and to identify the demographic descriptors applicable to adventure tourists. Summary of Findings and Managerial Implications Technical definitions of tourism are commonly used by companies seeking to define their target markets. Although, the WTO definitions are applied by the majority of users to define tourism-related terms, Page and Connell (2006:12) indicated that there are different interpretations between countries where tourism statistics are gathered. They suggest that international comparisons can only be made if statistics are equally defined, collected, and analyzed. This exemplifies a need for a tourism classification that can evolve and accommodate more complex forms of tourism, such as adventure tourism. According to Page and Connell (2006:16), a robust system is required to classify and measure tourism-related terms. The importance of implementing target-marketing strategies when developing consumer profiles were identified. This study’s empirical research identified that adventure tourism companies cannot appeal to all consumers in the market and they cannot successfully approach all consumers in the same way. It is recommended that adventure tourism companies should identify sections of the market they can serve best − niche target markets. This approach contributes towards identifying market opportunities and developing products/services that are more appealing. The first step of target marketing, namely market segmentation is the act of dividing the market into distinct consumer groups who might merit separate products/services or marketing mixes. Markets can be segmented using different bases and adventure tourism companies should try several approaches, and even combinations of these, in order to determine which will yield the best opportunities. This addressed the second secondary objective, seeing that the development of demographic profiles require the implementation of the mentioned demographic segmentation bases, namely gender, age, ethnic group, family life cycle stage, household type, as well as their income and expenditure rates. In order for adventure tourism companies to utilize the profile, the last two steps of the target marketing strategy (market targeting and positioning) should also be implemented. The steps of this process are reliant on the success of each other, in other words, every step needs to be implemented effectively in order to proceed and successfully complete the systematic process. Therefore, adventure tourism companies should consistently analyze, plan, develop, deliver, evaluate, and update their marketing campaigns to meet their marketing objectives whilst meeting the demands and/or preferences of their target markets.

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Limitations and Directions for Future Research The structural limitations of this investigation include the limited available literature associated with adventure tourism. Adventure tourism has been industry-driven; therefore, the importance of theoretical constructs might not have been fully recognized as greater attention was paid to empirical applications. Adventure tourism studies are usually performed from a social science perspective, therefore exchanging research terms or application practices may violate assumptions across these two fields. In addition, regarding the research methodology, the sample might raise the following concerns in terms of representativeness and the fact that the findings of this investigation cannot be generalized. Firstly, this investigation could not be extended to include more or all provinces in South Africa, nor a bigger sample. Secondly, due to a lack of cooperation from some adventure tourism companies, all the adventure tourism companies based in Pretoria could not be included in this study. Lastly, non-probability sampling was used. Nevertheless, the target population of this investigation was not the general public in Pretoria; rather, it comprised adventure tourists utilizing the products/services of adventure tourism companies within Pretoria. Future research could include more extensive research to gain further insight into profiling adventure tourists; more geographic, demographic, behavioral and psychographic components (such as needs, motivations, or benefits) should be considered. Further research is needed in terms of adventure tourism marketing because the full effect of this type of marketing will be beneficial to the entire adventure tourism industry. CONCLUSION The demographic profile of adventure tourists developed in this paper presented a challenging but worthy task, particularly when little systematic research has previously been reported on the subject to date. As there are only general classifications or definitions used to attract all possible adventure tourism groups, the findings of this paper will assist adventure tourism companies to promote and sell specific activities and experiences that will meet the specific needs and wants of adventure tourists in Pretoria. This will contribute towards the effective management of adventure tourism companies whose goals will benefit the company as well as their surrounding communities. REFERENCES Adventure Travel & Trade Association (2005) Adventure Travel Glossary of Terms. Retrieved March 03, 2009, from the Adventure Travel & Trade Web site: http://www.adventuretravel.biz/glossary.aspx. Andrews, S. (2007) Introduction to Tourism and Hospitality Industry. New York: McGraw Hill. Babbie, E.R. (2009) The Practice of Social Research. 12th Ed. Florence: Cengage Learning. Beedie, P. & Hudson, S. (2003) “Emergence of Mountain-Based Adventure Tourism,” Annals of Tourism Research, vol. 30(3), July, p. 625-643.

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Bentley, T.A. & Page, S.J. (2008) “A Decade of Injury Monitoring in the New Zealand Adventure Tourism Sector: A Summary Risk Analysis,” Journal Of Tourism Management, vol. 29(5), October, p. 857-869. Bentley, T.A., Page, S.J. & Laird, I.S. (2001) “Accidents in the New Zealand Adventure Tourism Industry,” Journal of Safety Science, vol. 38(1), June, p. 31-48. Buckley, R. & Cater, C. (2007) Adventure Tourism. Wallingford: Cabi. Cater, C.I. (2006) “Playing With Risk? Participant Perception Of Risk and Management Implications in Adventure Tourism,” Journal of Tourism Management, vol. 27(2), April, p. 317-325. Czinkota, M.R., Dickson, P.R., Dunne, P., Griffin, A., Hoffman, K.D., Hutt, M.D., Lindgren, J.H., Lusch, R.F., Ronkainen, I.A., Rosenbloom, B., Sheth, J.N., Shimp, T.A., Siguaw, J.A., Simpson, P.M., Speh, T.W. & Urbany, J.E. (2000) Marketing: Best Practices. Columbus: The Gryden Press. Engel (2009) Encyclopedia Britannica Online Encyclopedia. Retrieved June 10, 2009, from the Encyclopedia Britannica Web site: Http://www.britannica.com/ebchecked/topic/187452/ernst- engel#ref=ref86426. Fennell, D. (1999) Ecotourism: An Introduction. London: Routledge. Fennell, D.A. & Eagles, P.F.J. (1990) “Ecotourism in Costa Rica: A Conceptual Framework,” Journal of Park and Recreation Administration, vol. 8(1), p. 23-34. Fluker, M.R. & Turner, L.W. (2000) “Needs, Motivations and Expectations of a Commercial White- Water Rafting Experience,” Journal Travel Research, vol. 38(2), p. 380-389. Frash, R.E., Antun, J.M. & Hodges, H.E. (2008) “Family Life Cycle Segmentation for Foodservice Marketing: An Exploratory Case Study,” Journal of Restaurant and Foodservice Marketing, vol. 11(4), December, p. 382-397. George, R. (2001) Marketing South African Tourism and Hospitality. Cape Town: Oxford University Press. Gyimothy, S. & Mykletun, R.J. (2004) “Play in Adventure Tourism: The Case of Arctic Trekking,” Annals of Tourism Research, vol. 31(4), October, p. 855-878. Hanson, G.D., Rauniyar, G.P. & Herrmann, R.O. (1994) “Using Consumer Profiles to Increase the U.S. Market for Seafood: Implications for Aquaculture,” Journal of Aquaculture, vol. 127(4), November, p. 303-316. Hayami, A. & Okada, A. (2005) “Population and Households’ Dynamics: A Mountainous District In Northern Japan in the Shûmon Aratame Chô Of Aizu, 1750-1850,” Journal of the History of the Family, vol. 10(3), October, p. 195-229.

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Health Systems Trust (2007) Average Household Size. Retrieved August 18, 2009, from the Health Systems Trust Web site: http://www.hst.org.za/healthstats/6/data. Heyniger, C. & Consulting, X. (2008) Adventure Travel Industry Growth Statistics. Retrieved August 8, 2009, from the Xola Consulting Web site: www.xolaconsulting.com Hudson, S. (2002) Sport and Adventure Tourism. London: Routledge. Jennings, G. (2001) Tourism Research. San Francisco: John Wiley & Sons Ltd. Kalbassi, K. (2010) “Personalizing Recommendations for Tourists,” Journal of Telematics and Informatics, vol. 27(1), February, p. 51-66. Kotler, P. (2000) Marketing Management. The Millennium Edition. Upper Saddle River: Prentice-Hall Inc. Kotler, P., Bowen, J.T. & Makens, J.C. (2006) Marketing for Hospitality and Tourism. 4th Edition. Upper Saddle River: Pearson Education Inc. Kurtz, D.L. (2008) Principles of Contemporary Marketing. International Student Edition. Mason: Thomson Learning Academic. Loverseed, H. (1997) “The Adventure Travel Industry in North America,” Travel and Tourism Analyst, vol. 6(1), p. 87-104. Mostafa, M.M. (2009) “Shades of Green: A Psychographic Segmentation of the Green Consumer in Kuwait Using Self-Organizing Maps,” Journal of Expert Systems with Applications, vol. 36(8), October, p. 11030-11038. Musyoka, S.M., Mutyauvyu, S.M., Kiema, J.B.K., Karanja, F.N. & Siriba, D.N. (2007) “Market Segmentation Using Geographic Information Systems (GIS),” Journal of Marketing Intelligence & Planning, vol. 25(6), p. 632-642. Muthaya, B. ([email protected]). 2009. Departure Survey Questionnaire. [E-Mail To:] Potgieter, M. ([email protected]) September 30. Page, S.J. & Connell, J. (2006) Tourism: A Modern Synthesis. 2nd Edition. South Melbourne: Thompson Learning. Page, S.J. & Dowling, R.K. (2001) Ecotourism. London: Prentice Hall. Perner, L. (2008) Consumer Behavior: The Psychology of Marketing. Retrieved August 15, 2009, from the Consumer Psychologist Web site: Http://www.consumerpsychologist.com/. Rudra, S. (2008) Market Segmentation, Targeting & Positioning. Retrieved August 15, 2009, from the Scribd Web site: Http://www.scribd.com/doc/6356725/market-segmentation-targeting-positioning-by- subha-rudra.

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Swarbrooke, J., Beard, C., Leckie, S. & Pomfret, G. (2003) Adventure Tourism: The New Frontier. Kidlington: Butterworth-Heinemann. Tassiopoulos, D. & Haydam, N. (2008) “Golf Tourist in South Africa: A Demand Side Study of a Niche Market in Sports Tourism,” Journal of Tourism Management, vol. 29(5), p. 870-882. Waldfogel, J. (2008) “The Median Voter and the Median Consumer: Local Private Goods and Population Composition,” Journal of Urban Economics, vol. 63, p. 567-582. Weber, K. (2001) “Outdoor Adventure Tourism: A Review of Research Approaches,” Annals of Tourism Research, vol. 28(2), p. 360-377. Weed, M. (2008) Sport and Tourism: A Reader. Abingdon: Routledge. World Tourism Organization. (1991) Resolutions of International Conference on Travel and Tourism: Proceedings of the International Conference on Travel and Tourism Statistics, Held in Canada On 25-28 June, 1991. Madrid: WTO. WTO See World Tourism Organization Yang, L., Wall, G. & Smith, S.L.J. (2008) “Ethnic Tourism Development: Chinese Government Perspectives,” Annals of Tourism Research, vol. 35(3), July, p. 751-771. BIBLIOGRAPHY Melissa Jeanette Lötter is a Master of Adventure Tourism Management at the Tshwane University of Technology. She also lectures Adventure Tourism Management and Tourism Management at the university. She can be reached at the Department of Tourism Management, Private Bag 680, Pretoria West, South Africa, 0001 or at [email protected]. Sue Geldenhuys is a Doctor and Head of Department (HOD) at the Department of Tourism Management at Tshwane University of Technology. She can be reached at the Department of Tourism Management, Private Bag 680, Pretoria West, South Africa, 0001 or at [email protected]. Marius Potgieter is a Doctor at the Department of Tourism Management at Tshwane University of Technology. He is also a senior lecturer of Tourism Management at the university. He can be reached at the Department of Tourism Management, Private Bag 680, Pretoria West, South Africa, 0001 or at [email protected].

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DOES SEXUALITY IN ADS WORK FOR EVERYONE/ANYONE? AN EXPLORATORY

RESEARCH OF MUSLIM CONSUMERS’ REACTIONS TO SEXUALITY IN ADS

Ahmet Bayraktar, Rutgers University

ABSTRACT

This paper explores the reactions and responses of Muslim consumers to advertisements that include sexuality. Specifically, it seeks to answer the following questions: What do Muslim consumers think about the advertisements that include sexuality? How does sexual content of ads influence their behavior? What might be the mechanism that explains the behavioral process? This study utilizes exploratory research methods to answer these questions. It suggests that Muslim consumers tend to develop negative attitude toward the advertisements that include sexuality. They may also develop negative attitude toward the brands in these ads, and toward the firms that own these brands, a process explained by “halo effect.” Furthermore, they tend to take some measures in order to prevent both themselves and their children from being exposed to these ads. This paper argues that the concept “personal modesty” explains Muslim consumers’ responses to sexuality in ads. JEL: M37 KEYWORDS: Advertising, sexuality, Muslim consumers, personal modesty INTRODUCTION The use of sexuality in ads and its effects on consumer behavior have been a matter for discussion among researchers. Some (Smith et al., 1995; Reichert, 2002; Treise and Weigold, 1994) have found that advertisements which include sexuality may negatively influence consumer behavior; on the other hand, others (Reichert et al., 2001; Dudley, 1999) have shown that sexuality in ads may positively affect consumer behavior. Research (Reichert, 2002) suggests that religious preference is one of the most important factors that influence individuals’ reactions to sexuality in advertisements. Given the traditional importance of conservatism, personal modesty, the value of women and raising moral and righteous children in Muslim community, it emerges as important questions to explore what Muslim consumers think about and how they react to advertisements that contain sexuality. Furthermore, given the significant number of Muslim population in the world, which is gradually increasing, and the widespread use of sexuality in ads, it becomes more important to explore the aforementioned questions. This study aims at exploring how Muslim consumers react and respond to ads that include sexuality. Specifically, it seeks to answer the following questions: What might be the outcomes of sexual advertisements, when it comes to Muslim consumers? What might be the mechanism that explains Muslim consumers’ reactions to ads that include sexuality? What explains their reactions and responses? For these purposes, this paper firstly offers a brief review of literature on sexuality in advertisements and personal modesty in Islam. Secondly, it introduces the exploratory research findings along with the proposed mechanism that explains the behavioral process. Finally, it discusses the contributions and future research.

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LITERATURE REVIEW Sexuality In Advertisements In recent years, there has been an increase in the use of sexuality in advertising. Human body has been abused in advertisements and provocatively used to sell products (Heller, 2000). Sexual appeals in advertisements consist of a variety of elements and are generally presented in visual elements such as attractive models (Gould, 1994). An analysis reveals that common forms of sexual content include the followings: nudity (dress), physical attractiveness, seductive behavior and interaction, innuendo, and other factors such as setting, context and camera effects (Reichert, 2002). Lambiase and Reichert (2003) suggest that there are five types of sexual information in ads: Nudity, sexual behavior, physical attractiveness, sexual referents, and sexual embeds. Ramirez and Reichert (2000) propose that physical characteristics are perceived as the most sexual in an advertisement and the sub-categories of these characteristics are clothing, attractiveness and body. In many advertisements, women are used as a marketing instrument that exists to satisfy men’s sexual desires (Bayraktar, 2011). Baker’s study (2005) shows that an average person in the US is exposed to over 3,000 ads each day and in many of these ads, women are portrayed as sex objects (Smith et al., 1995; Boddewyn, 1991; Baker, 2005). Advertisers feature provocative images of sexually attractive women in ads (Reichert, 2002) without considering their negative effects on individuals and society (Bayraktar, 2011). Many researchers have examined the effectiveness of ads that include sexuality. Most of them (e.g. Steadman, 1969; Alexander and Judd, 1978; Bushman, 2005; Bushman and Bonacci, 2002; Bushman and Phillips, 2001) have found that sexuality in ads negatively influences consumer behavior. One of the most significant negative effects of sexual content is that it reduces consumers’ brand recall (Steadman, 1969; Alexander and Judd, 1978; Bushman 2005; Bushman and Bonacci, 2002). Research demonstrates that sexual images have high attention-getting value and that they arouse the immediate attention of both men and women (Baker, 1961). Many individuals pay more attention to sexual media than non-sexual media (Bushman, 2005). Therefore, when an advertisement contains sexuality, many viewers will direct their attention to sexual stimuli, pay less attention to other cues in the advertisement (Steadman, 1969; Alexander and Judd, 1978; Bushman 2005; Bushman and Bonacci, 2002) and have lower motivation to process brand information (Petty and Cacioppo 1986; Petty, Cacioppo and Schumann 1983). This mechanism negatively affects consumers’ brand recall. A limited number of studies have found that sexuality in ads positively influences consumer behavior. Reichert et al. (2001) argue that advertisements that include sexual images create more positive feelings about the implementation of the ad than do advertisements that do not include sexual images. Besides, researchers (Dudley, 1999; Reichert et al., 2001) suggest that sexual information attracts attention. In addition, findings show that advertisements which include sexuality are more engaging, involving, and interesting than advertisements which do not include sexuality (Reichert and Alvaro, 2001; Reichert, et al., 2001).The above discussion demonstrates that sexuality in ads does not work as advertisers expect. It lowers consumers’ brand recall, which is one the most important goals of advertisements. What would happen, if individuals also have negative attitude toward sexuality in ads? Would the negative outcome still be only reduced brand recall?

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Personal Modesty In Muslim Community Personal modesty is of significant importance in Muslim community (Denny, 2006). It has a great place in the Our’an, the holy book in Islam, and Hadiths, which are narrations originating from the words and deeds of the Islamic prophet Mohammad. Modesty in Islam is known as haya, a word that describes shyness, propriety in dress, speech and behavior, and a deeper modesty based on faith (Benlafquih, 2009). In the Qur'an, God says, “O children of Adam, We have provided you with garments to cover your bodies, as well as to be an adornment to you. However, the best garment is the garment of righteousness. These are some of God's signs, that they may receive admonition” (Quran, 7: 26). This verse emphasizes the importance of being righteous or modest. The Qur'an (24: 30-31) also says: "Say to the believing man that they should lower their gaze and guard their modesty; that will make for greater purity for them; and Allah is well acquainted with all that they do. And say to the believing women that they should lower their gaze and guard their modesty; and that they should not display their beauty and ornaments except what must ordinarily appear thereof; that they should draw their veils over their bosoms and not display their beauty except to their husbands...” In a Hadith prophet Mohammad says, “If you feel no shame, do as you wish.” In another Hadith, He says, “Modesty is a part of faith,” (Nevevi, 2009: 243). These suggest that modesty in Islam is so important that the absence of it can lead a person to sinful behavior and disbelief (Benlafquih, 2009). In the writings of the Qur’an and Hadiths, the code of modesty for both men and women includes (Benlafquih, 2009; Guven, 2010; Colakoglu, 2001; Nevevi, 2009): • Lowering the gaze and avoiding flirtatious speech and behavior, • Refraining from close physical contact with unrelated individuals of the opposite sex, • Avoiding eyes from being exposed to forbidden images, • Paying attention to wearing modest or Islamic dress and avoiding seductive dresses, • Refraining from drawing unnecessary attention to oneself, • Protecting one’s purity. In Islam, both men and women are forbidden to look at the nude images of opposite sex. They are also forbidden to look at some parts of the same sex (Benlafquih, 2009; Guven, 2010). In a Hadith, it is defined as the adultery of the eye to look at women with desire (Nevevi, 2009: 490). Looking at unlawful images is regarded by Muslim scholars as a first step that takes one to greater sins such as adultery or other unlawful sexual relations (Guven, 2010). Thus, individuals are encouraged to avoid being exposed to sexual images. In addition, it is the parents’ responsibility to protect their children from being exposed to illicit images or scenes. Islam pays much attention to raising righteous and moral children. Therefore, it is one of the main duties of parents to bring up modest children (Guven, 2010; Colakoglu, 2001). Adultery appears explicitly in the Qur’an as “Nor come nigh to adultery: for it is a shameful deed and an evil, opening the road to other evils” (Bennett, 2007). Qur’an does not say “Do not commit adultery,” instead, it says “Do not approach to adultery.” This means, one should avoid from the ways or situations that may take him or her to adultery. Therefore, most Muslim individuals pay great attention to refraining from looking at sexual images or scenes (Guven, 2010). In Muslim community, prohibiting looking at

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unlawful images and adultery is thought to prevent emotional injury, and to result in greater familial stability and social harmony (Bennett, 2007, Guven, 2010). In addition, it is believed in Muslim community that looking at sexual or unlawful images or watching illicit scenes weakens individuals’ memory and leads to amnesia (Guven, 2010). Women have distinctive value in Muslim community. There is a chapter in the Qur’an named Nisa, which means women. In this chapter, the Qur’an enjoins fairness toward women. It says, “Live with them with kindness.” In addition, we can find the same kind of distinctive value given to women in Hadiths. Prophet Mohammad says, “Act kindly towards women…” (Nevevi, 2009: 112) In another Hadith, He says, “The whole world is a provision, and the best object of the benefit of the world is the pious woman,” (Rahim, 2000). In Muslim families, the man is responsible for his wife and girls’ purity, and his honor is directly connected with the purity of the women in his family (MacNeill, 2009). Qur’an warns those who propagate shameful things among believers. It says, “Verily those who love that indecency should spread among the believers deserve a painful chastisement in the world and in the Hereafter. Allah knows, but you do not know,” (Quran, 24: 19). In all Muslim countries, all kinds of body displays and sexual references are considered indecent (Boddewyn, 1991). METHODOLOGY This study adopted exploratory research methods in order to obtain in-depth understanding of Muslim consumers’ reactions to sexual advertisements and the mechanism of the process. It utilized long-term observations of Muslim individuals and families and interviews with them. The analysis of observations and interviews sought to identify Muslim consumers’ general approach and reactions to sexuality in ads, their attitude toward the brands whose ads include sexuality and toward the firms that own these brands and the motivations behind their behavior. FINDINGS The findings suggest that Muslim individuals tend to believe that today’s advertisements include too much sexuality. Furthermore, irrespective of their gender, they have negative attitude toward the use of sexuality in advertisements and express their discomfort with it. In addition, they tend to avoid looking at or seeing advertisements that contain sexuality. The extent to which they take some measures to avoid being exposed to these ads varies. They tend to believe that most advertisements abuse females’ body, degrading women’s value in the community, and deteriorating social values. They are mostly troubled with the sexual ads on billboards, newspapers and TV channels. Moreover, some are irritated by the advertisements including sexuality. A great majority of women find some advertisements disgusting and insulting. Their discomfort tends to increase when the ads also include the images of sexual males. On the contrary, some Muslims do not have any negative attitude toward sexuality in ads and avoid seeing these ads. Moreover, they regard it as a legal strategy to attract consumers’ attention. This research argues that religiosity level, in particular personal modesty, determines the extent to which a Muslim person has negative attitude toward sexuality in ads. Therefore, it hypothesizes that those who are more religious and have high level of personal modesty have more negative attitude toward sexuality in ads than those who are less religious and have low level of personal modesty.At this point, significant questions arise: Does Muslim consumers’ negative attitudes toward sexual ads influence their evaluations of brands in these ads? Do they develop negative attitude toward the brands and firms that own these brands? In other words, does “halo effect” occur? If yes, how

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is the evaluation process influenced? What extraneous variables affect the evaluation process? The exploratory research findings suggest that Muslim consumers may develop negative attitude toward the brands whose ads accompany sexuality, toward the firms that own these brands, and toward the advertisers who use sexuality in the advertisements that they make. Some informants make very harsh criticism against these firms and advertisers. One interviewee draws attention to a very interesting point, when criticizing firms’ use of sexuality in the ads. He says,

“Why do they use this strategy to attract my attention or why do they try to attract my attention by using sexuality? I feel insulted whenever I see an advertisement which includes sexual women.”

He further claims that advertisers who use sexual women in ads are insulting men. Although not common, Muslims may even boycott the products whose advertisements include sexual images. They try to avoid buying them even if the products are desirable. One participant gives a very interesting example, saying that he has not bought a biscuit with a particular brand since he saw its advertisement. He says, “Almost 10 years ago, I watched the advertisement on TV, in which there were huge sexual woman lips that covered the whole screen, which had nothing to do with the product. It was disgusting…”One claims that those who make sexual ads on billboards limit his freedom. “I can avoid those in newspapers by not buying the newspapers or those in TV channels by not watching the channels; however, it is difficult to avoid those on billboards.” The extent to which Muslim consumers’ negative attitude toward sexual ads influences their decision making process needs further attention and examination of large samples by including other variables into the study such as price, brand name, product quality and product category. However, this research explores that sexual ads significantly influence their decision making when it comes to newspapers, magazines and TV channels. Muslim individuals tend not to buy any magazine or newspaper that contains advertisements including sexual images and watch TV channels that broadcast advertisements including sexuality. This tendency may also be related to other contents of these newspapers, magazines and TV channels. In addition, word-of-mouth effect may play role in the decision process. Those who know that a newspaper includes sexual images denigrate this newspaper and share their thoughts with others, trying to prevent their purchase. Therefore, we can claim that even if one does not know that a newspaper includes sexual ads, he or she may develop negative attitude toward the newspaper and avoid buying it through word-of-mouth communication. Observations suggest that Muslim consumers tend to be stricter when it comes to their children. They tend to believe that advertisements that include sexuality deteriorate the culture and negatively affect children and adolescents. They consider that these advertisements arouse sexual thoughts in children and adolescents’ mind, increasing their inclination to sexual behaviors. Some parents believe that it becomes more difficult for children who are frequently exposed to sexuality to focus on their education. Those who have children tend to prevent their kids from being exposed to these kinds of ads. Observations show that parents who are religious and who want their kids to become religious take more drastic measures. They tend not to let their kids to buy magazines or newspapers that contain sexuality and watch TV channels that broadcast sexual images. In addition, those who do not have children consider that they would do almost the same thing if they had kids. It is interesting to note that those who do not criticize sexuality in ads are relatively sensitive when it comes to their kids. Based on the above findings, table 1 demonstrates the proposed mechanism that explains Muslim consumers’ reactions to sexual advertisements.

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Table 1: Proposed Path Model of Muslim Consumers’ Responses to Sexual Ads This table shows the proposed path model of the Muslim consumers’ responses to advertisements that include sexuality. The expected relationships are developed based on the research findings. CONCLUSION AND DISCUSSION The effectiveness of advertisements that contain sexuality has been a matter for discussion among researchers. Many of them have found that sexuality negatively influences the effectiveness of ads, due to its high attention-getting value and attractiveness. Their argument is that sexuality attracts more attention than other cues in the ads, resulting in lower brand recall. However, when it comes to Muslim consumers, further negative effects occur. This paper aimed at exploring the responses and reactions of Muslim consumers to advertisements that contain sexuality. The findings reveal that irrespective of their age, gender and marital status, Muslim consumers tend to have negative attitude toward the use of sexuality in ads. The extent to which sexual ads influence their brand evaluation and purchase decision appears as an important research question. Furthermore, the antecedents of this negative effect and the moderators involved in the process require further attention.Emotional perspective primarily considers the affective aspects of consumer decision process and accounts for the feelings of individuals as a complement to cognitive processes dominant in the value perspective (Auger, et al., 2011). According to emotional perspective, both positive and negative feelings can significantly influence purchase intentions (Holbrook and Hirschman, 1982). In addition, it can be inferred from the “halo effect” that the first impression of a brand may influence the future evaluations of the brand. Therefore, those who have negative attitude toward sexuality in ads may negatively evaluate the traits of the brand, when its ads include sexuality. In addition, their negative feelings can significantly influence their purchase intentions.This study argues that Muslim consumers tend to avoid looking at or seeing ads that contain sexuality and try to prevent their kids from being exposed to these ads. This tendency is expected to lead Muslim consumers to have low brand recall. Furthermore, they tend not to buy newspapers or magazines that include sexual images and watch television ads that contain sexualityThis study suggests that “personal modesty,” a concept that describes shyness, propriety in dress, speech and behavior, and a deeper modesty based on faith (Benlafquih, 2009), explains Muslim consumers’ reactions to sexuality in ads. Therefore, it hypothesizes that advertisements that contain sexual stimuli will negatively influence consumers with high level of personal modesty.This paper recommends that those who wish to appeal successfully to Muslim consumers should take into consideration the requirements of personal modesty. Specifically, they should avoid using sexuality in their marketing campaigns. The advertisers should

Religiosity

Personal Modesty

Negative Attitude toward

Sexuality in Ads

Avoidance of Sexual Ads

Negative Attitude toward

brand/firm

Low Brand Recall

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refrain from using women with seductive dresses. They should also refrain from using flirtatious behaviors and speeches in television ads. Furthermore, the newspapers, magazines and TV channels targeting Muslim consumers should pay attention to the requirements of personal modesty and avoid sexual advertisements. In addition, since Muslim parents pay much attention to raising righteous and modest children and want them to stay away from sexuality, the marketers should not use any kind of sexual image in their marketing campaigns that target Muslim children. Moreover, they should not use any kind of sexual image on the products with which they target Muslim children. Briefly, firms that want to be successful in Muslim markets and appeal effectively to the consumers in these markets should use in their marketing campaigns the images and materials that comply with the requirements of personal modesty.The findings of this study points to several future research areas. First, more research is needed to better understand how Muslim consumers respond to advertisements that include sexuality. Due to its exploratory nature, this paper offers an initial understanding of the subject matter. Future research needs to examine the issue with a large sample size and investigate some covariates such as age, gender, marital status, country of origin and educational background more in depth. Second, future studies need to pay attention to personal modesty in order to understand this phenomenon and its effects on consumer behavior. The development of “personal modesty scale” can help better understand Muslim consumers’ behavior and contribute to consumer behavior literature. Finally, it is likely that cross-cultural investigations will offer new insights and a better understanding of the subject matter. REFERENCES Alexander, M. Wayne and Judd, Jr. B. (1978) “Do Nudes in Ads Enhance Brand Recall?” Journal of Advertising Research, 18, February, 47-50. Baker, S. (1961) “Visual Persuasion” New York: McGraw-Hill, December 1. Baker, C.N. (2005) “Images of Women’s Sexuality in Advertisements: A Content Analysis of Black- and White-Oriented Women’s and Men’s Magazines,” Sex Roles, 52, January, 13-27. Bayraktar, A. (2011) “Is It Ethical to Use Women as a Marketing Instrument?” Global Conference on Business and Finance Proceedings, 6, 1, 250-260. Benlafquih, C. (2009) “Modesty (Haya) in Islam,”http://quran-hadith studies.suite101.com/article.cfm/modesty_haya_in_islam Bennett, L.R. (2007) “Zina and the Enigma of Sex Education for Indonesian Muslim Youth,” Sex Education, 7, November, 371-386. Boddewyn, J.J. (1991) “Controlling Sex and Decency in Advertising around the World,” Journal of Advertising, 20, 4, 25-35. Bushman, J.B. (2005) “Violence and Sex in Television Programs Do Not Sell Products in Advertisements,” Psychological Science, 16, 702-708.

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Bushman, B. J. and Bonacci, A.M. (2002) “Violence and Sex Impair Memory for Television Ads,” Journal of Applied Psychology, 87, 557-564. Bushman, B.J. and Phillips, C.M. (2001) “If The Television Program Bleeds, Memory for The Advertisement Recedes,” Current Directions in Psychological Science, 10, 44-47. Colakoglu, O. (2001) “Islam’da Edeb,” (Personal Modesty in Islam). Coskun Matbaacilik, Izmir, Turkey. Denny, F.M. (2006) “An Introduction to Islam,” Pearson-Prentice Hall: New Jersey. 3rd Edition, 279- 281. Dudley, S.C. (1999) “Consumer Attitudes toward Nudity in Advertising,” Journal of Marketing Theory and Practice, 79, 4, 89-96. Gould, S.J. (1994) “Sexuality and Ethics in Advertising: A Research Agenda and Policy Guideline Perspective,” Journal of Advertising, 23, 3, September, 73-80. Guven, M.Y. (2010) “Gozumu Haramdan Nasil Korurum?” (How Can I Protect my Eyes from Illicit Images?). Isik Yayinlari, Izmir, Turkey. Heller, S. (2000) “Sex Appeal: the Art of Allure in Graphic and Advertising Design,” Allworth Press, New York, NY. Holbrook, M. and Hirschman, E. (1982) “The Experiential Aspects of Consumption: Consumer Fantasies, Feelings, and Fun,” Journal of Consumer Research, 9, 2, 132-140. Lambiase, J. and Reichert, T. (2003) “Sex in Advertising: Perspectives on the Erotic Appeal,” Lawrence Erlbaum Associates. MacNeill, M. (2009) “The Practice of Veiling, http://islamic- practices.suite101.com/article.cfm/the_practice_of_veiling Nevevi, I. (2009) “Riyazu’s Salihin,” Isik Yayinlari, Izmir, Turkey. Petty, R.E. and Cacioppo, J.T. (1986) “The Elaboration Likelihood Model of Persuasion,” Advences in Experimental Social Psychology, 19, 123-205. Petty, R.E., Cacioppo, J.T. and Schumann, D. (1983) “Central and Peripheral Routes to Advertising Effectiveness: The Moderating Role of Involvement,” Journal of Consumer Research, 10, 135-146. Rahim, H. (2000) “Virtue, Gender and the Family: Reflections on Religious Texts in Islam and Hinduism,” Journal of Social Distress and the Homeless, 9, 3, 187-199. Ramirez, A. and Reichert, T. (2000) “Defining sexually oriented appeals in advertising: A grounded theory investigation,” Advances in Consumer Research, 27, 269-273. Reichert, T. (2002) “Sex in Advertising Research: A Review of Content, Effects, and Functions of Sexual Information in Consumer Advertising,” Annual Review of Sex Research, 13, 241-273.

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Reichert, T. and Alvaro, E. (2001) “The Effects of Sexual Information on Ad, Brand Processing and Recall,” Southwestern Mass Communication Journal, 17(1), 9-17. Reichert, T., Heckler, S.E. and Jackson, J. (2001) “The Effects of Sexual Social Marketing Appeals on Cognitive Processing and Persuasion,” Journal of Advertising, 30, 1, 13-27. Smith, S.M., Haugtvedt, C. P., Jadrich, J.M. (1995) “Understanding Responses to Sex Appeals in Advertising: An Individual DifferenceApproach,” Advances in Consumer Research, 22, 735-739. Steadman, Major (1969) “How Sexy Illustrations Affect Brand Recall,” Journal of Advertising, 9, 15-19. Treise, D. and Weigold, M. (1994) “Ethics in Advertising: Ideological Correlates of Consumer Perceptions,” Journal of Advertising, 23, September, 59-70. BIOGRAPHY Ahmet Bayraktar is a PhD student in the marketing department at Rutgers University. His research interests are related to consumer behavior, brand management and marketing ethics. He can be contacted at Rutgers Business School, 1 Washington Park, Newark, NJ 07102. Email: [email protected]

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EMPLOYEE STOCK OWNERSHIP PROGRAM (ESOP) PHENOMENA ON PUBLIC COMPANIES IN

INDONESIA I Putu Sugiartha Sanjaya, Atma Jaya University Yogyakarta, Indonesia

ABSTRACT

The objective of this study is to explain the phenomena of employee stock ownership program on public companies in Indonesia. It is done because the ownership of companies in Indonesia is concentrated by single controlling shareholder. Some time, board of directors and board of commissioners of the company are controlling shareholder or his/her family. Therefore, this study is interested to describe the interesting phenomena of employment stock option program. This study collects data from Indonesian Stock Exchange Database conducting the program. The company conducting this program only is 45 companies from 1999 until 2011. In 2011, the number of public companies listed on the Indonesian Stock Exchange approximately 398 companies. It means that the public companies conducting the program are only 11.30%. Why do not more companies make this program? Almost 33.56% directors of public companies in Indonesia is family of controlling shareholder. Therefore, he/she feels that this program will not have any impact to the manager because the manager has the same interest with controlling shareholder. Thus, the program is not attractive in Indonesia as one way to mitigate agency problem between shareholders and manager. It is relevance to be applied in public companies dispersed ownership. JEL: M41; G32 KEYWORDS: employee stock ownership program, corporate ownership, concentrated, dispersed

INTRODUCTION Management practices of the world can affect a company's practices in Indonesia. These practices generally occur in the developed countries such as employee ownership program. It is better known as Employee Stock Ownership Program (ESOP). This program is introduced by the management of human resources in the form of corporate ownership by employees. One objective of this program is to align the interests between agent (managers) and principles (owners). The alignment can reduce agency problems between owners and managers. This program will be decided in a general meeting of shareholders or the extraordinary meeting of shareholders as in PT Garuda Indonesia Tbk. Based on a decision of the Extraordinary Meeting of Shareholders (EGM) of PT Garuda Indonesia Tbk on November 15, 2010 as amended by Decision Circular Shareholders on January 26, 2011, the shareholders have approved ownership program by the management and employees (Management and Employee Stock Allocation/MESA). It was done by allotment of shares to the buyer special which consists of stock bonus and stock discount. It also provides the option right to the management and employees (Management and Employee Stock Option Plan/MESOP). Based on the approval of the shareholders, the directors have set the number of shares for the MESA program at most 5% of total issuance of new shares and stock option for the program MESOP as much as possible 0.97% of total issued and paid up after the public offering.

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In Indonesia, the program has been set in the Statement of Financial Accounting Standards No. 53. The statement was effective from October 1, 1998. Stock option is offered as rewards and compensated to employee. It is measured and recognized at the fair value of equity instruments. The fair value of the instrument can be determined as service of employee as same as fair value after deducting from the amount to be paid at the time of the equity instruments given (IAI, 2007). According Machfoedz (1999), stock option is the right to buy shares at a special price. It is usually given to executives because they have good dedication to the company in certain period. Employee stock option program is a program directed to provide an opportunity for employees to own stock of the company through stock options. Implementation of ESOP in Indonesia has not yet optimal. It is not so many public companies to do this program. The question is why the program is not getting response from the public companies in Indonesia. The program has some good objectives as follows. 1. This program can provide reward to all employees and directors for their contribution to company

performance. 2. This program can also create alignment of interests between employees (directors) and owners

(principals). 3. This program can also increase employee motivation and commitment to the company because they are

also the owner of the company. Therefore, the program is expected to increase productivity and performance.

4. This program can be used to retain and motivate key employees to enhance value of the firm in the future.

However, why the program has less been done by public companies in Indonesia? Is it concentrated ownership causing the program less optimal? Therefore, the objective of this study is to answer these questions. The remainder of the paper is organized as follows. Section 2 discusses the relevant literature. Section 3 is research method. Section 4 provides analysis based data. Section 5 concludes the paper. THEORETICAL FRAMEWORK Emloyment Stock Option Plan According to El-Tahch and Ricaurte (2011), employee stock option program is the basis for developing a key employee in the present and future. Companies need to establish a work plan and a good blue print before establishing any basis. Philosophy and benchmarking is a blueprint and a plan to develop a company by an employee ownership program. Explain what the company's plans are intended to be achieved as retain key employees, paying a basic salary at a specific rate or an annual bonus on a certain level, and paying a basic salary or phantom stock. Another important part prior to the implementation of the ESOP program is a comparative study. This analysis uses the market or industry survey data relating to other companies. How do they pay such as based salary and bonus payments annually? We shall compare it with the current pay practices at companies that will implement the ESOP. The study will provide an overview of the current picture of

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employee compensation and what is needed to respond any gaps between the company's compensation plan and the relevant benchmark. The stock option program has several benefits as follows. 1. Stock option program for employees can be used effectively to reduce agency problems between

owners (principals) and managers (agents). The program is expected to increase company performance. According to Iqbal and Hamid (2000), employee stock ownership will increase sense of satisfaction, commitment, and control to the company. ESOP can also improve employee motivation and productivity for the the company (Shulman, 2002).

2. Related to agency problems, the stock option program for employees is an effective way to reduce agency cost (Brenner, Sundarm, and Yermack, 2000). The cost can be mitigated through the alignment of interests between managers and principals. According to Chance, Kumar, and Todd (2000), this program can be used by public companies to plan incentives and compensation for employees. McColgan (2001) suggests that the structure of executive compensation contracts can be an incentive to increase value of the firm. It also influences on the alignment of interests between owners and managers.

3. ESOP will increase value of the firm. According to Senders (1999), ownership of shares by the

employee will increase the performance of company. Iqbal (2000) finds that there is a positive association between operating performance of ESOP companies and the price market of stock of this company.

4. According to Carberry (1996), stock ownership by employee can represent a respect for the voting

rights by the employees. Therefore, the stock ownership can determine the percentage of their control to the company.

5. Cash flow advantages, an employee can contribute to a plan in the form of cash. The ESOP is required

to invest primarily in the ownership by employees. This cash flow advantage for companies is clear. Through ESOP, employees receive a deduction equal at fair market value of shares (Shulman, 2002).

6. ESOP can be used to absorb funds from the public. Core and Guay (2000) suggest that when the

problem arises of financial and capital needs, these companies will implement share-based compensation.

ESOP in Indonesia According Bapepam (2002), in Indonesia parties implementing the concept of stock ownership by employees can be divided into two groups. The first group is public companies begin implementing stock ownership program. The program is conducted through a special allocation program for employee or employee stock allocation, bonus shares or bonus share plan, or provision of stock option or stock option plan. Employee stock ownership plan through program savings or purchasing stock is not yet a common activity in Indonesia. The second group is companies which are subsidiaries of multinational companies (foreign companies). Multinational companies are part of the compensation package for employee to implement ESOP program. It is also applied to employee of its subsidiaries in Indonesia which are eligible to participate for this program.

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According to Bapepam (2002), there are two main rules governing the implementation of ESOP in Indonesia as follows. 1. Bapepam. IX.A.7 suggests that employee get priority of allotment up most 10% of total public offering. 2. Bapepam. IX.D.4 regulates that issuers can increase equity without giving shareholders pre-emptive rights to all specified in the charter. Within a period of three years, additional capital is more than 5% paid up. Based on the regulation, many issuers use this rule to increase the share up to 5% of the total paid-up in the framework of the ESOP program. This rule also regulates the disclosure required to increase equity without through public offering only limited to as follows.

a. Analysis and discussion by management about financial condition. b. Pro forma company. c. Effect of increasing on equity to shareholders after adding equity. d. The reason for the addition of equity without the order right in advance is the best option.

The company also must follow to the regulation governing the exercise price of the shares issued in the added equity without preemptive rights. The exercise price must be at least from the market price of the stock in the regular market. It is the average closing price during the period of 25 consecutive days before the announcement of general meeting of shareholders scheduled to adding equity. The development of the implementation ESOP in Indonesia is as follows (Bapepam, 2002). 1. Prior to 1998, the ESOP is done by Indonesian companies. At the beginning, ESOP is the allocation of shares when the company goes to public. It is only a stock allocation scheme. In this offering, employee obtains subsidies or loans guaranteed by the company. 2. 1998-present, before public offering, employee is given warrants to purchase shares at a specified price in the future predetermined period and price. LITERATURE REVIEW Previous researchers observed positive effects of employee stock ownership plan on operating performance as documented by Park and Song (1995) and Blasi, Kruse, and Conte (1992). According to Klien (1997), there are several theoretical perspectives relating with the ownership of companies by employees on employee behavior and corporate performance. Employee stock ownership will increase the employee commitment and performance for the company. According to Jensen and Meckling (1976), financial incentives such as employee stock ownership will align the interests of the employee and interests of shareholders. Positive benefit will be obtained by employee-owners. It is often cited as a primary motive to establish an ESOP in the company. It suggests that employee will be more motivated and act as owners through ESOP participation. The program also minimizes agency costs and aligns their behavior with the goals of the firm. They will perform in their own best interest because they are not as employee but as shareholder. Alignment of interest between agent and principle is a great benefit. This is a result of ESOP implementation. Because of ESOP has impact on improving company performance.

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Wah (1999) finds that total shareholder return for ESOP firms exceeded those of non ESOP firms by 6.9% and that average annual return on assets for ESOP is 2.7% higher than for industry peers without ESOP. Wah (1999) uses 382 U.S. public firms that adopted ESOP over period 1971-1995. Kruse and Blasi (2002) uses 343 matched pairs of ESOP and non ESOP held firms closely. Kruse and Blasi (2002) also compare performance differences from three years prior to three years after introduction of the ESOP. Kruse and Blasi (2002) find differences in favor of ESOP of 2.4% in sales, 2.3% in employment, 2.3% in sales per employee, and 4.4% in employee productivity. Lee (2003) uses Taiwanese electronics manufacturers. Lee (2003) find similar productivity gains of 4-5% associated with the introduction of ESOP. Pugh, Oswald, and Jahera, Jr. (2000) find that few firm performances increased significantly return on equity, return on assets, and net profit margin. This is in short term. Iqbal and Hamid (2000) examine the longitudinal relationship between stock price changes and operating performance of ESOP firms. Iqbal and Hamid (2000) find a positive relationship between stock price changes and performance. Iqbal and Hamid (2000) also find that this relationship significant on several quarters after the changes in stock prices occurs. Ducy, Iqbal, and Akhigbe (1997) examine the ESOP three year pre- and post-implementation economic performance of publicly traded firms using operating cash flow (OCF) rather than accounting returns. Ducy, Iqbal, and Akhigbe (1997) determine that adjusted performance in industry of ESOP deteriorated on all three measures utilized as OCF to market value of assets, OCF to sales, and OCF per employee. According Kruse, Freeman, Blasi, Buchele, and Scharf, (2003), the role of human resources policies and the motivation of ESOP employee-owners are how to understand employee ownership works successfully. It requires three analyses as incentives of ownership, available of participative mechanisms, the corporate culture. However, the executives take advantage of the opportunities available to increase earnings. They hope that stock market price will increase (Baker, Collins, and Reitenga, 2002). It happens because the earnings information shows the company's performance. The information can also be used to predict the performance of companies in the future. Managed earnings are known as earnings management. Some researchers in Indonesia such as the Asyik (2007) and Astika (2008) study earnings management and ESOP. Asyik (2007) finds that managers of the company have ability to manage earnings around option grant date. The effect is stronger when executives release earnings before option grant date for period prior to ESOP. For period after ESOP, the effect is stronger related to manage stock price volatility. It happens because the volatility determining fair value of option based on management policy. Astika (2008) finds employee stock option granted positively effect on earnings management before the grant date. The results indicate that the more option grant, the more likely manager to manage earnings downward. Manager hopes to lower the option exercise price. Astika (2008) also finds the number of exercised employee stock option positively influence to earnings management before the exercised date. It indicates the more exercised option the more likely manager manages earnings upward before the exercised date to take advantage of a higher stock price. RESEARCH METHODS Samples The sample of this study is that public companies implementing ESOP. The companies are listed in Indonesia Stock Exchange in the year 1999-2011. Sampling was done by purposive sampling. The

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number of ESOP companies conducting programs during the period is 45 companies. The number of companies conducting ESOP is limited. Companies listed on the Indonesia Stock Exchange is approximately 398 companies. It means only 11.31% public companies conducting ESOP. Based of the facts, why the companies less make ESOP program? The program has some advantages both the company and shareholders. What is it caused by limited rules in Indonesia regulating ESOP program? Or whether concentrated ownership of the public companies causing ESOP program is not popular in Indonesia? These conditions will be discussed in the data analysis. DATA ANALYSIS Based on the samples, the study will analyze the structure of corporate ownership. This study uses the ultimate ownership structure to trace corporate ownership. To trace ultimate ownership, this study collects data from Indonesian Business Data Center. It is caused by concentrated corporate ownership (Sanjaya, 2011). This study analyzes corporate ownership only for the manufacturing industry because to obtain data on the ultimate ownership of non-manufacturing companies is very difficult to find. Based on 45 companies conducting the ESOP program, the study can identify only four companies included in the manufacturing industry such as PT Davomas Abadi Tbk in 2002, PT Dynaplast Tbk in 2003, Tbk PT Indofood Sukses Makmur Tbk in 2004, and PT Multistrada Arah Sarana Tbk in 2007. It will be shown in figure of the ownership structure for each company as follows. Figure 1: Ownership Structure of PT Davomas Abadi Tbk in 2002 Based on the tracing in the chain of ownership, this study finds that the controlling shareholder in PT Davomas is Hassoks Enterprise Ltd. Percentage of share ownership is 23.17%. Hassoks is a foreign company in which this study is unable to trace who controls Hassoks. Hassoks’ control rights to PT Davomas is 23.17% and cash flow rights is 23:17%. This result indicates that there is no agency problem

PT Davomas Abadi Tbk.

Hassoks Ent. Ltd.

(23 17%)

Caterpillar Ass. Ltd (11.46%)

Polar Cap. Inv. Ltd (6.08%)

Krigler Holding Ltd.

(7 75%)

Public (38.37%)

Catnera Ltd (5.53%)

PT Multiprima P. (19.59%)

PT Sheriutama R. (6.03%)

Willy S. (20%) Tji H. S. (20%) Hendrawan S. (60%)

Tonny B. (24.35%)

Irwan S. (58.98%)

Ernas K. M. (16.66%)

Templeton A. Ltd. (5.53%)

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between controlling shareholder and non-controlling shareholders in PT Davomas. Because of the number of control rights and cash flow rights are the same or cash flow rights leverage is zero. Cash flow rights leverage can be used as a proxy for determining the agency problems. Cash flow rights leverage is control rights minus cash flow rights. PT Davomas is controlled by foreign institution. The compositions of the board of directors and commissioners of PT Davomas on December 31, 2002 are as follows. Board of Directors Board of Commissioners President Director: Johanes Herkiamto President Commissioner: Hermawan Felani Director: Theodorus Hopmans Independent Commissioner: Anthonius A. Unawekla Director: Berliana Sukarmadidjaja Commissioner: Elfisno Board of directors and commissioners are professional people. Because of tracing the chain of ownership in PT Davomas does not find the names of families associated with directors and commissioners. This study shows the ownership structure of PT Dynaplast Tbk in 2003 as follows. Figure 2: Ownership Structure of PT Dynaplast Tbk in 2003 Based on the tracing on chain of ownership in PT Dynaplast Tbk, this study finds that controlling shareholder in this company is the Bank of Bermuda Ltd. Hong Kong. Ownership percentage of shares of Bank of Bermuda in PT Dynaplast is 39.80%. Bank of Bermuda is a foreign company and this study could not trace who controls the bank. Bank of Bermuda has control rights as same as cash flow rights in

PT Dynaplast Tbk.

Tirtadjaja Hambali (0.41%)

PT Panca Graha S. (21.4%)

Public (28.50%)

PT Hambali D. C. (4.77%)

Tirtadjaja Hambali (44.444%)

Soebekti Hambali (55.56%)

Irene M. Hambali (10%)

Tirtadjaja Hambali (30%)

Soebekti Hambali (30%)

Bank of Bermuda Ltd. Hongkong. (39.8%)

C. Gina Hambali (10%)

Peggy Hambali (10%)

Ayleen Hambali (10%)

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PT Dynaplast (39.80%). This suggests that agency problems between controlling shareholder and non- controlling shareholders are low or absent. It indicates that the value of cash flow rights leverage is zero. PT Dynaplast is also controlled by foreign institution. The compositions of the board of directors and commissioners of PT Dynaplast on December 31, 2003 are as follows. Board of Directors Board of Commissioners President Director: Tirtadjaja Hambali President Commissioner: Soebekti Hambali Director: Gunawan Tjokro Commissioner: Robert Wiryono Director: Mulyadi Kosasih Commissioner: Santoso Symkoputro Commissioner: Sri Hartini Urip S. Figure 3: ownership structure of PT Indofood Sukses Makmur Tbk. in 2004 President Director and Commissioner of PT Dynaplast is the second controlling shareholder. They are controlling shareholder after the Bank of Bermuda. If calculated, their control rights and cash flow rights are 26.58%. The number is still lower than the control rights and cash flow rights of Bank of Bermuda. The objective of ESOP in this company is to motivate corporate executive to work the best for the company. Performance improvement will increase value of the firm. It will also improve the welfare both owners and managers. Agency problem in PT Dynaplast is low. It encourages alignment between the controlling shareholder and non-controlling shareholders such as Bank of Bermuda and Hambali’s family

PT Indofood Sukses Makmur Tbk.

T. Stock (9.69%) Public (43.77%)

Horizon Holding Investment Ltd (100%)

First Pacific Consumer Products Ltd. (100%)

CAB Holding Ltd. (46.53%)

First Pacific Company Ltd. (100%)

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and other non-controlling shareholders.Next, this study shows the ownership structure of PT Indofood Sukses Makmur in 2004 as follows. Based on the tracing on chain of ownership in PT Indofood Tbk, this study finds that controlling shareholders in this company is First Pacific Company Ltd. Percentage of shareholding First Pacific Company Ltd. in PT Indofood is 46.53%. First Pacific Company Ltd. is a foreign company and this study can not trace who controls the company. Control rights of First Ltd. in PT Indofood are 46.53%. Cash flow rights of First Ltd. are 46.53%. This results shows that there is no agency problem between controlling shareholder and non-controlling shareholders in PT Indofood. This occurs because the control rights and cash flow rights are equal or cash flow rights leverage is zero. PT Indofood is controlled by foreign company. Next, this study shows the ownership structure of PT Multistrada Arah Sarana Tbk in the year 2007 as follows. Figure 4: ownership structure of PT Multistrada Arah Sarana Tbk. in 2007

Based on the ownership structure in PT Multistrada, this study finds PVP XIII Pte as the controlling shareholder. In PT Multistrada, agency problems are low and almost not exist. The control rights of PVP XIII. Ltd. is equal to its cash flow rights. This study can not trace who the owner of PVP XIII Pte. PVP is a foreign company. Thus, PT Multistrada is controlled by foreign company.

PT Multistrada Arah Sarana Tbk.

PVP XVIII Pte. Ltd (27.73%)

Prudent Capital Ltd. (15.92%)

Public (43.55%)

Hongkong and Shanghai Bank, Jakarta (8.96%)

PT Dwitama Agra Sejati (10.8%) PT Perkasa Cipta Terang (5%)

PT Indokemika Jayatama (3.81%)

PT Inti Idola Sejati (84.2%)

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ANALYSIS Based on these four manufacturing companies, ESOP in Indonesia is only conducted by companies owned by foreigners. ESOP is conducted in companies which have the low agency conflict between the controlling shareholder and non-controlling shareholders. It is shown by the value of cash flow right leverage equal to zero. The leverage can be used as a proxy for agency conflicts between controlling shareholder and non-controlling shareholders on concentrated ownership. The next discussion is why the ESOP programs are less popular in Indonesia? Though, this program has several benefits such as to reduce the agency problem between principals and agents. Another objective of ESOP is to align the interests between managers and owners. The alignment will improve the employee performance. It can also increase value of the firm. It will give a positive impact on the welfare of both the employee and the employer. But why this program is not interesting in Indonesia? Sanjaya (2011) shows that the public companies which are not owned by ultimate or direct ownership (immediate) is 3.79% of all manufacturing companies listed on Indonesia Stock Exchange during 2001- 2007. There are 96.21% manufacturing companies which are owned by ultimate ownership. Companies which are owned dispersed at cut off less than 10% of control rights is 0.49%. Based on cut off 10%, there are 99.51% manufacturing companies which are owned concentrated. The results confirm that only 0.49% manufacturing companies which are dispersed. Sanjaya (2011) also suggests that the family is the greatest controlling shareholder as 68.49% at cut off 10%. This finding is consistent with La Porta, Lopez-de-Silanes and Shleifer (1999), Claessens, Djankov and Lang (2000), Faccio and Lang (2002), and Siregar (2006). The Indonesian government only controls 2.58% at cut off 10%. The results are not much different with Siregar (2006). Other controlling shareholder controls 28.93% at cut off 10%. Other controlling shareholder includes foreign investors, cooperation, and employees. The results are not much different with Siregar (2006). Siregar (2006) shows 437 of 1302 observations on a categorical variable are 1 for management. This result indicates that 33.56% controlling shareholder is also part of the directors of public companies. This means that directors of public companies are the controlling shareholder or the family member of controlling shareholder. Involvement in the board of director is another way to improve the control mechanisms other than through ownership pyramids or cross-ownership. In this circumstance, ESOP program is not important because without this program directors had aligned their interests with shareholder interests. Directors may not make decisions that will harm their family members. The phenomenon of agency problems in Indonesia is different from the phenomenon of agency problems in the U.S. or the U.K. Agency problems occurred in Indonesia is between controlling shareholder and non-controlling shareholders. ESOP programs become less relevant to apply to this context. ESOP programs are more effective implemented in dispersed ownership where managers are as the controller for company. Agency problem occurring is usually between management companies and owners. ESOP program becomes very relevant and appropriate to be implemented in the context of dispersed ownership. The objective of program is to reduce agency problems and to improve the performance of

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each employee. Meanwhile for companies that concentrated ownership, ESOP program is less effective to reduce agency problems. It is due to agency problems occurred between the controlling shareholder and non-controlling shareholders. How does the ESOP program align the interests between controlling shareholder and non-controlling shareholders? It can not be done easily. However, this program relatively can be done to the context of concentrated ownership. This program can be implemented in companies which do not have agency problems between controlling shareholder and non-controlling shareholders. The ESOP program is a strategy to make managers more serious and committed in their jobs. It is a way for mutually beneficial for all parties existing in the company. CONCLUSION The study concludes that the ESOP program less attractive to be implemented in Indonesia. It is caused by the directors of the company is the controlling shareholder or a family member of controlling shareholder. Second, ownership of companies in Indonesia is concentrated in certain groups such as family. Family is the most dominant to control public companies. Third, agency problems in Indonesia are between controlling shareholder and non-controlling shareholders. These conditions make the ESOP program to become less popular in Indonesia. This program is effectively implemented in the dispersed ownership. Because, agency problems occurring in dispersed ownership is between managers (agent) and owners (principles). To reduce this problem, the ESOP program can be implemented. This program will align interests between managers and owners. In the context of concentrated ownership has occurred alignment between managers and owners. It occurs because the manager is a family member of the owners. In this condition, the manager will not make decisions which benefit themselves and harm the owner. If it is done, the manager also harms their families. Limitations of this study are that, the first, this study only describes the phenomena existing in Indonesia. Second, this study is limited to the context of Indonesia. Third, private ownership in some companies in abroad can not be traced. Subsequent studies can consider aspects of ownership to conduct research on ESOP. Astika’s study (2007) can be developed by considering the agency problems occurred in Indonesia. Future studies can compare ESOP phenomenon in some East Asian countries. It will be done to confirm whether the ESOP program can be implemented. REFERENCES Astika, I. B. P. (2007), Perilaku Eksekutif dalam Menentukan Return Ekspektasian Melalui Program Opsi Saham. Jurnal Riset Akuntansi Indonesia, 11, 327-347. Asyik, N. F. (2007), Pola-pola Perilaku Eksekutif Berkaitan dengan Tahapan Penawaran Opsi saham: Uji Komprehensif di Sekitas Tanggal Hibah. Journal Riset Akuntansi Indonesia, 10, 287-302.

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Journal of Finance, LIV, 471-516. Lee, Y. T. (2003), the Productivity Effects of Employee Stock Ownership Plans: Evidence from Panel Data of Taiwan Electronic Companies. International Journal of Management, 20, 479-489. Macfoedz, M. (1999), Akuntansi Keuangan Menengah, Edisi Kedua, BPFE, Yogyakarta.

McColgan, P. (2001), Agency Theory and Corporate Governance: A Review of the Literature from a UK Perspective. Working Paper. Park, S., and Song, M. (1995), Employee Stock Ownership Plans, Firm Performance, and Monitoring by Outside Blockholders. Financial Management, 24, 52-65. Pugh, W. N., Oswald, S. L., and Jahera Jr., J. S. (2000), the Effect of ESOP Adoptions on Corporate Performance: Are There Really Performance Changes? Managerial and Decision Economics, 21, 167- 180. Sanjaya, I. P. S. (2011), Agency Problem in Indonesia: the Case of Firms in Manufacturing Industry in Indonesia Stock Exchange. Journal of International Business and Economics, 11, 94-103. Sender, W. G. (1999), Incentive Structure of CEO Option Pay and Stock Ownership: the Moderating Effects of Firm Risk. Managerial Finance, 25, 61-76. Shulman, C. C. (2002), Employee Stock Ownership Plans: Part I. Journal of Pension Planning & Compliance, 28, 63-118. Wah, L. (1999), ESOP Performance at a Glance. Management Review, 88, 10. BIOGRAPHY Dr. I Putu Sugiartha Sanjaya, S.E., M.Si. is Lecture at Accounting Department, Economics Faculty, Atma Jaya Yogyakarta University, Indonesia. He can be contacted at Economics Faculty, Atma Jaya Yogyakarta University, Jl. Babarsari No. 43 Yogyakarta (55281) INDONESIA. Email: [email protected]

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THE PERFORMANCES OF THE ORGANISATION IN THE CONTEXT OF THE ECONOMIC CRISES

Ionica Oncioiu, Tomis University of Constanta Florin Razvan Oncioiu, University of Agronomic Sciences and Veterinary

Dan Balamaci, Free International University of Moldova

ABSTRACT

Major changes which occur in the economic actions and processes, as a direct effect of the economic crises and increasing competition, involve the use of innovation as founding pillar in the creation of strategies by managers. Knowledge along with information is the nowadays competitive weapon and will be the main motor force. This paper wants to reveal the superior rendering profitable of information and knowledge by the manager represents the main source of creating the value in the company which activates in economic crises.The world is literally crossed by a large number of economic, communicative, cultural, independence.

INTRODUCTION

The economy of the future will be totally different in its essentials from its present form. This new economy will find its reliance in the advancement of science and technique, the technologies of the future, which should work with priority according to the environment regulations. This trend is already noticeable especially in the IT industry.On the other side, the economy of the future will have to be more efficient than the present one; the motivation is already known: the changes in economic crises and their impacts, the population is constantly increasing and the resources are, quite often, limited, even if there is an important transformation undergoing in the place and purpose of the factors of production. It’s all about the genesis of a new civilization (based especially on elements coming from science and technique), which comes in a constant conflict with the other civilizations today, the later trying as well to expand their influences. The essential dominant characteristic of this century is change. It applies to all the organizations, no matter what they do, all are systems undergoing change, and their self – regulation is done through management.We will witness, in economy, a revolution of the information which is the base of the economical increasing significance of information, of the capacities and of the organization competences. An essential role in the starting of this revolution it’s held by the mixing up between the new IT, the communication technology and acquisition means, making, dissemination and use of information. In the context of economic crises the need to have vast and inclusive information will trigger a very profound and broad process, with major changes in all the components of the economical activity. LITERATURE REVIEW We can say that we do not have to prepare for the organization of this situation, we are already there and only those who will adjust quickly will be winners, otherwise chances and opportunities will be lost. There’s no need to build an ideal company, but one shaped by goals, people and cultures. An organizational culture has to be developed, focused on the values of knowledge and communication. It

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takes a remodeled company, which can permanently shift from one strategy to another. This is the flair and instinct of the manager anchored in the society based on knowledge. In a society affected by the crisis, the changes are more consistent and occur one after the other in a constantly increasing pace. These changes are oriented in some great ways, which even if they cannot be seen as exhaustive, give a rather clear image on the challenges of the future and of the impact these will have on the very existence and activities of the organizations. In the informational society, the essential economical resource is no longer the fund, nor the land, nor physical labor. Knowledge and information will soon become essential elements of the obtaining of competitive advantages by the organizations in the context of the economic crises. At the core of the genesis and running of the informational system of the organization – just as the information management – there’s a new paradigm. The one used until a few years back referred to the focusing of the informational system on the identification of the need of information and the ways of compliance, concomitant with the information usage approach, in a vision both strategic and economic, focused on efficiency. This paradigm is a prediction of the evolution towards the company based on knowledge, being the kind of organization which develops the fastest in a significant part of the globe.The approach of definition, running and designing of the company’s informational system starting from a new paradigm represents the premise of its running and efficiency. The information from within the organizations is extremely complex. To facilitate their description, there are classified according to several criteria, which allow the presentation of areas significant for the management of the organizations. Therefore, information is raw material involved in all the activities of the organization. Every work process, no matter its nature, is based on information. A common characteristic of managers is the fact some information contain a ruling aspect, shaping into decisions. Therefore, the decision can be defined as being that information through which is being ascertained, for other people, the obligation to do certain work processes with an exact outcome. In light of the aspects mentioned earlier, information gives power to the holder.The more information the person inside the organization holds – meaning raw material and finite informational product – and the more ability to use it efficiently, the more power he holds, formal or informal one. The relation information – power acquires new dimensions in the shifting environment to an economy based on knowledge. Specialists believe information has value and generates efficiency at a level which depends on the complexity and the competitive aspect of the environment involved. In the context of the development of the organizations based on knowledge – the basis of birth, development and use of knowledge – is amplified.On the informational – managing side this is reflected in the appearance of the so-called contextual scanning, which is the systematic activity of research of the informational environment of the company by the manager, based on the Internet connection of the company and other informational resources. Therefore, information starts moving intensively towards the ambient environment, through which a large quantity of exogenous information is absorbed. In an increasing proportion, the ability of managers to ensure the access to the most recent and performing hardware and software limits the competitive capacity of the organization. For the performance of each organization it is essential that the informational subsystem is not approached by itself, but related to the other systems which form the managerial system. This is absolutely necessary because in each company there’s the trend to ignore or underestimate the correlations with the other subsystems, which triggers multiple negative effects, on the functioning and economical level.

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The managerial system of the company contains the shaping and exertion of the processes and managerial relations in a certain manner, as to determine the obtaining of high competitiveness. In other words, the managerial system, can be defined as the total of the elements with a decisional, organized, informational, motivational aspect from within the organization, through which is exerted the management process and relation ensemble.When it comes to them, the elements which compose the informational system greatly mark the running of the managerial instrument. The biggest impact is held by the quality of the information delivered, which, evidently, depend greatly of the characteristics of the procedures, circuits, transfer and informational means. The data and information represent, accompanied by the decisions as well, the main inputs in the methodic – managing system, seriously limiting its effects generated directly and indirectly. The relations between the informational system and the organization system are both functional and structural- constructive. The entire informational system is held by the organizational structure of the company. Working with the data and information, the operation of the moving of information and the informational procedures, the use of means to deal the information are the result of the tasks, competences and responsibilities exertion of certain managers. Their reasoning has a great impact over all the components of the informational system. Simultaneously, there’s a strong influence of the organizational culture over the informational elements. This influence is functional, and is exerted especially over the operational way of the components of the informational system.By the correlative measuring of the performances, we call upon concepts of competitiveness and competitor advantage. Inevitably, the notion of performance brings to light the efficiency and efficacy, and the indicators of performance acquire a special diversity. Therefore, the obtaining of performances at a company level assumes, directly or indirectly, the reevaluation of the concepts of competitiveness, competitor advantage, efficiency and efficacy. Performance is not a simple ascertained fact of a result, but just the opposite, is the consequence of a comparison between result and objective. The proportions the term “practice” of performance has achieved, led to outline of a new concept, the one of performance management, itself debatable, but justified by the orientations which the stating of performance in the center of the managerial concerns of the organization gives the present steps and especially to the future ones of it.Also, performance cannot be defined as a great result obtained in the field of management, economics, commercial which gives characteristics of competitiveness, efficiency and efficacy to the organization and its procession and structural components. Which is particularly interesting are the theory and managerial practice from Romania, the managerial performances, which are absolutely necessary to obtain economic and financial performances in the fields they run. CONCLUSIONS The unanimous recognized conditions by specialists in this area of scientific concerns are clear: only a performing management, exerted by professional managers, is capable of managerial performances, generated by social, economic, financial performances.For this it is necessary to know the accomplishments of other organizations in the reference fields in order to compare (volume indicators, quantity, as well as efficiency). A performing organization, anchored in the economy based on knowledge, renders better the opportunities of the ambient environment, overcomes more easily the difficulties arisen, performs better from a quantity and quality point of view towards a segment of the social need, and obtains a competitive advantage on its specific market.

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In fact, a performing organization from a managerial and economical point of view is capable to fully satisfy the economical interests of its main stakeholders – employees, managers, shareholder, state, local authorities, banks, contractors, clients – when the two fundamental trends are optimized and they mark its running: “the obtaining of value for the client” and ”the obtaining of value for the shareholder”.Mainly, the obtaining of managerial performances at a company level is limited by the competence of managers and employees, by the cultural context in which they act and, evidently, by the contextual influences exerted by the ambient, national and international environment. One factor of limitation of the level of managerial performances is represented, without any doubt, the competence of those who exert management processes, meaning managers but also those who implement the decisions, the employees. Evidently, the decisive role is held by the managers, proper education, no matter the position in the organization.A competent manager, professional, takes quality decisions (proven scientifically, proper, complete), using modern leading instruments, increasingly sophisticated, in a cultural context as open as possible, to allow him to implement managing styles which involve others as well. The managerial performances are, in conclusion, several and have great chances of implementation in the organization.Knowledge along with information is, in condition of the economic crises, the nowadays competitive weapons and will be the main motor force. REFERENCES

Berrien K., (2006) A General Systems Approach to Organization, College Publishing Company, Chicago. Drucker Peter, (2004) Managementul viitorului, Editura Asab, Bucureşti. Henry P., (2007) Creative Management, Glenview Scott, Foresman. K. Kalseth, (2008) Re-inventing Information Management: Bridging the Gap between Information, Needs and Knowledge Source, FID Bulletin, nr. 48. Radu I., Ursăcescu M., Vlădeanu D., Cioc M., Burlacu S., (2005) Informatică şi management – o cale spre performanţă, Ed. Universitară, Bucureşti. Verboncu I., Michael Zalman, (2005) Management şi performanţe, Ed. Universitară, Bucureşti.

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PROMOTION A MORE RAPID GRADUATION PROCESS FOR UNIVERSITY STUDENTS

Harri Virolainen, Turku University, School of Economics, Pori unit

ABSTRACT This article focuses on promoting the speeding up of the graduation process of university students. Graduation is delayed for many reasons; financial reasons, family reasons and a lack of motivation. Universities can promote study and graduation in many different ways and decrease the factors that cause graduation to be delayed. Interaction between university staff and students is a good way to promote study. Suitable methods of interaction are study plan counselling, personal master’s thesis counselling, and feedback on courses and studies in general. Certain learning methods such as e-learning can also promote a more rapid graduation, especially if a student works full-time or lives in another city. KEYWORDS: delay of studies, promotion of studies, graduation INTRODUCTION This article deals with factors that cause university studies to be delayed and makes suggestions on how to promote study and increase the speed of graduation. In Finland people start university studies at approximately 23 years of age. The average age of students when they graduate with an MA is 27 years. Academic freedom has made it possible for students to spend seven years studying and then allows them to ask for more time to finish their studies. Academic freedom is not always efficient and in Finland it is estimated that about 33 % of university students drop out of their study program (Saarenmaa, Saari & Virtanen 2010; Rautopuro & Väisänen 2001, 15, 30). A protracted study period is clearly a different problem to dropping out. However, students themselves don’t necessarily see protracted study length as a problem (Laukkanen 1988; Kalliosalmi, Pekkala & Rönkkömäki 1990; Rautopuro 2011). However, graduation and getting a degree “on time” without a major delay is to everyone’s’ advantage: the state saves money, the university saves resources and improves its image, employers receive workers and individual students increase their competence. Getting a degree “on time” also positively affects students’ physical and mental well-being. Students often feel guilt, social shame and stress if their studies are protracted (Remonen 1996). Despite the win-win situation only about 25 % of the Finnish university students attain a master’s thesis within the five years aimed at by the Finnish state and 22 % of the students do not graduate (Rautopuro & Korhonen 2011). There has been some research (for example Rautopuro & Väisänen 2001; Vesikansa, Lempinen & Suomela 1999) on the factors that affect the delay of studies. However, despite the information and research results, universities are still dealing with study delays and drop outs. There has been little solution focused activity, nor research on how different solutions to avoid protracted studies might work in practice. This article presents different solutions for decreasing study delays and the amount of students who fail to graduate. It also analyses those solutions. This article answers the following study questions:

1) What are the main reasons that result in university students having delayed graduation? 2) What kinds of solutions are there for promoting study that results in graduation on time?

This article begins with a chapter about factors that affect the delay of studies, and deals with both the internal and external factors that affect how a student studies. It is followed by a chapter suggesting and

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assessing solutions for promoting graduation on time. The article ends with a discussion of the issues raised. FACTORS THAT AFFECT STUDY AND RESULT IN DELAYED GRADUATION The causes of delayed graduation are complex and varied. According to Vesikansa et. al (1999) the factors that result in prolonged study can be grouped as follows: 1) Internal factors including motivation factors, orientation factors and orientation to the education field, clearance of field and certainty; 2) External factors including financing (financing of studies, working), education institute related factors (teaching, counseling, climate), structure of degree factors (education field, study methods), employment situation factors (work life qualification, working situation) and life situation related factors (family etc). Internal factors are mostly self-directed but external factors can also influence them. According to Seinä’s (2000) study, motivation is a significant factor in the prolonging of studies. A weak study motivation can delay studies. In many cases, another activity, such as work or social activities, can take away a student’s energy and decrease their study motivation. However, the delay of studies is so common it is expedient to think that this is because students are not highly motivated, or because they have poor study plans, or that an administrative reason led to the delay, rather than looking for the actual causes. Orientation factors have a very important role in setting the tone for study, especially during the first study year. Students often want to change faculty and their field of study. Rautopuro and Väisänen (2001) conducted a study at the university of Joensuu where they gathered data on students who began studying in 1995 (N=916). They collected data from the same students during their second and fourth year and found three main reasons why students dropped out of a course. Over half (55 %) of the students named certain academic reasons, such as the nature of the studies, not being able to study subjects they were interested in and making the wrong career choice. In Finland there are large differences between faculties regarding the amount of students who start at the faculty and the amount that graduate from the same faculty. The faculty of medicine has the highest graduation rate – almost 90 % receive a master’s. The natural sciences have the lowest graduation rate, only about 30 % receive a master’s (Korhonen 1994, 48). This phenomenon is partly explained by students changing faculty. Many students who start out by studying the natural sciences transfer to other faculties belonging to the technical or economic sciences. In study fields such as the humanities and social sciences, dropping out is more frequent than in sciences which aim for vocational degrees, such as law and medicine (Helenius 1991). Rautopuro’s and Väisänen’s (2001, 49-50) results show that students’ study experiences become negative during their studies. After the first year of study 15.4 % of the students had dropped out, and of those who continued their studies 14% had dropped out after second or third year. Approximately 25 % of the students gave reasons related to infrastructure factors as the cause of their dropping out of a course, e.g. the location of the university, the university’s infrastructure, the city’s climate, while about 20 % mentioned personal, social or family related reasons. According to many studies (e.g. Helin 2000; Uski 1999) external factors are significant in delaying studies. The main external reasons for the delay of studies are full time work, financial reasons, family, long travel distances to the university, an unclear curriculum, studies being too demanding, too rapid a study speed and not enough information about study arrangements. In many cases financial reasons lead

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to students working full-time or part-time during semesters. Some other factors, such as health problems, social relationship problems and studying abroad had only a minor effect on study progress. Almost two-thirds of university students work during a semester (Osaava työvoiman saatavuus 2010) Working during a semester usually prolongs studies. According to Helin (2000), working estranges students from a university’s conventions and decreases their social contacts with other students, which is something that can increase participation in lessons. Life situation reasons include, for example, family reasons and health reasons. Typically, the birth of a baby and long-term health problems delay studies. However, health problems have only a minor role in the delay of graduation (Uski 1999; Saarenmaa et al. 2011) Many of the life situation factors can direct a student’s activity more than university administration activities and expectations. For example, work life qualifications are not unambiguous (Vesikansa et. al. 1998; Vuorinen & Valkonen 2001). Depending on the faculty it takes approximately about 6.5 years to attain a master’s degree in Finland. In some faculties, such as sports, economics, education and health care, the average time to graduation is 6 years, while in other faculties it is 7 years. An architecture student’s average time spent attaining a master’s is 9 years, which is the longest (Tilastokeskus 2011). There are some differences based on gender and age concerning delays and dropping out of studies. Male students drop out of studies or have a more prolonged study time compared to female students. Older students are more likely to drop out and their studies take longer than those of younger students. Older students are more likely to be affected by their life situation, family life and financial situation. They usually study alongside their full-time work (Friman & Kokko 2000). A university cannot influence everyone regarding the above mentioned factors. However, in many cases it is possible to help students so that their studies move forward more quickly. On the other hand some of the factors slowing down studies are not so easily fixed by university administration (Päkkilä 2002). The next chapter looks at solutions for speeding up the average time of graduation. SOLUTION PROPOSITIONS FOR THE PROMOTION OF UNIVERSITY STUDIES According to researchers (for example Uski 1999; Salminen 2001) certain factors can help students to promote their studies: 1) Introduction to a university’s routines: According to Vesikansa et al (1998), a study career includes moments where continuing studies becomes problematic. An especially problematic phase seems to be the first year, which includes many changes, such as moving, adapting to new teaching methods and meeting new people. Success in the first year of study seems to predict a smoother road to graduation. According to Virtanen (2000, 14, 34) and Rautopuro et al (2011), students whose studies progress slowly usually gain just a few credit points during their first study year. Students whose studies proceed well usually attain good grades. Some of the main ways to promote study are study counseling and tutoring. If students are properly introduced to university routines it is much easier for them to concentrate on their studies. This results in proactive study and – if done properly – it can increase motivation and help prevent the delay in graduation. Proactive counseling in the beginning of the first study year can be very helpful for many students as helping students before they fall behind schedule too much or build up too much stress might be a very helpful and efficient way of promoting study.

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2) Study counseling: According to Salminen (2001) study counseling, encouragement and concrete support are good ways to minimize drop outs and delayed graduation. However, 25 % of those students whose graduation is delayed feel poor counseling was one of the key reasons for their delayed graduation (Saarenmaa 2010) Students also noted the lack of a contact person who knows the course structure, degree demands and who has time for students but who can also help them to make study plans. In particular, first year students miss study counseling, but so do other students. Students whose graduation is delayed have usually misunderstood or received incorrect answers to questions such as what courses they still have to study and when those courses will be available (Salminen 2001). University studies emphasize self-direction. This means that university staff assume that students themselves plan their studies and figure out how to solve problems. In practice, not every student is able to take care of their studies without support and guidance. Many students need extra support and guidance during their studies. By increasing study counseling it is possible to decrease stress and lack of awareness and increase their self-confidence and motivation towards studies (Brockett & Hiemstra 1991; Grow 1991; Koro 1993). In many cases students contact a study advisor when their anxiety level is high, their studies are falling behind schedule or when they don’t know what else to do. Usually, such a situation has already progressed to a point where it is difficult to get students back on track. It also seems that many students hesitate to contact study counselors and other administrative and teaching staff until it is too late (Tanner 2002). Thus, it would be beneficial if students would contact study counselors proactively before a situation becomes difficult to resolve. Proactive discussions between every student and study advisor, for example, once or twice per year could help study planning and aid study progress. Development discussion once a year between student and a teacher, including the checking of credit points and motivation would also be proactive way to promote studies. For instance, a study counselor could be a contact person for study planning etc. However, the amount of study counselors is usually quite small and the amount of students is usually quite high – perhaps hundreds or even thousands of students per study counselor in some universities – so personal contact with every student might be hard to arrange. A counselor does not necessarily need to be a member of the study department’s staff. In the beginning of the first study year student tutors could take on a bigger role than they have previously and be a contact person concerning simple study planning and study questions. In addition, students lack frequent counseling, especially from teachers. Kokko and Termonen (2002) emphasize the importance of personal interaction between students and university staff that would make it possible to discuss a student’s progress in their studies. Thus, there could also be a member of staff contact person for every subject of study. That person could be, for example, an assistant, senior lecturer or even a professor. That way the number of students would decrease per counselor, which would increase the amount of personal counseling time per student. 3) General and language studies: General and language studies are in many cases problematic and cause graduation to be delayed for many students. Language course are usually compulsory, which leads to problems in scheduling due to length, especially if students are also working. Students who live in different cities and who have to travel long distances to participate in long language courses find attending them difficult to arrange (Uski 1999). There are certain solutions for general and language courses. In many cases basic language courses and other general studies could be studied at the Open University in different cities. For students who live in other cities this should offer more opportunities to take part in courses where attendance is compulsory. Another possibility is e-learning solutions which are discussed in more depth in section 7.

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4) Time schedule of the courses: According to Päkkilä’s (2002) research the main reason for graduation being delayed was work. Many students who were working felt that they did not have time for their studies. Some students mentioned that the work and study schedules conflicted and made it hard to attend classes. They hoped that at least some lectures would be organized during the evening or at weekend. One possibility is to arrange intensive courses where all the course lectures are held over one or two days. That would also make clear to those students who live in another city which days to be absent from work and indicate when they should study intensively. However this solution is not trouble-free. Firstly, some courses might include homework and learning might be seen as a process which happens over time and for which one or two days of intensive study might not be the best solution. Secondly, intensive days might not fit a student’s schedule and in that case the whole course would be missed because of one missed day. 5) Lower demands: Some of the students have asked teachers or professors to lower the demands of certain courses so that they would have a better chance to pass them (Uski 1999). In practice this suggestion is out of the question. In addition, university courses have certain learning goals and demands cannot be lowered below those learning goals (see Avoin Yliopisto, 2011). The demands for passing a course and the performance demands are the same for every student whether a student is a full-time student or a part-time student etc. So, there is not much potential for flexibility. A teacher cannot make a course easier to pass for some students. Nevertheless, there is some potential for flexibility; a teacher can, for example, give certain alternatives to students regarding how they accomplish a study task, such as choosing between a learning diary, an exam or writing an essay. This might make it easier for students to study but will probably result in teachers having an increased workload.

6) Work experience to compensate for some of the study courses: There has been discussion about whether work experience should replace some study courses that cover the same subject area. For example, a student who has work experience in human resource management could use that to compensate for an academic human resources course. In practice, that does not happen very often. University studies include the mastery of theoretical information and practical work experience seldom offers that. Thus, even though practical work experience provides exactly that, it seldom offers academic readiness (see OPM 2007:4).

7) Distance learning: The possibility to take an exam in another city would help those students who live elsewhere. This would decrease traveling and the possibility to take an exam in another city should be easy to organize. There will be some extra costs, such as postal costs and extra work for administrative staff, but those are quite small. Students who live in other city can then save time and money (see Jyväskylänkesäyliopisto 2011). Distance learning is much more than just taking exams in other city. Distance learning also includes different e-learning possibilities that could make it possible to listen and watch lectures at home online, do learning assignments at home and read e-books etc. In e-learning studying is independent of time and place. However e-learning is not the best option for every course. For some courses face-to-face contact is important, which is why e-learning does not solve all the problems associated with delayed graduation (see Kiviniemi 2000; Saarinen 2002). 8) Master thesis counseling: Students lack personal master’s thesis counseling and counselors who understand the possible life situations facing students. In contrast, some students want their counselor to give them a research topic, possibilities to take part to study projects and ready book lists. In

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consequence, masters counseling varies depending on the counselor and the questions asked. Some of the counselors rely on students being mostly self-sufficient and feel that a student should do their thesis without major counseling. On the other hand, some counselors feel that students need strict and exact counseling and they have certain protocols for counseling their master’s students. Master’s thesis counseling can benefit students by increasing personal feedback to students and by listening and motivating students more. Hakala emphasizes the importance of a counselor’s quick response to students’ questions concerning a master’s thesis. A quick response often makes students feel that someone cares and will help to accomplish their goals. It also promotes activity because students do not have to wait for an answer for a long time and they can begin writing (Valtonen 2002). Counseling on a thesis’ technical or substantive themes is not only important it also helps ascertain a student’s motivation, and can help reduce their anxiety and promote self-confidence and hope, which are very important for students. However, an increase in personal counseling time per student is not as easy as it might sound. In many cases staff members have many master’s degree students and increasing personal counseling time means longer working hours for them. Although, in many cases even a short phone call or short email to student asking how she or he is doing might have a very positive effect on a student (see Opinnäytetyö ja sen ohjaus, 2004). Some universities have organized intensive master thesis counseling days where counselors motivate and help students during intensive days. Students can then write their master’s thesis during the computer class and have the counselor available for all that time as well as the library. Such intensive days may be especially suitable for students who work or live in another city (Virolainen 2011). 9) Flexible library services: Some students have mentioned that borrowing books from other libraries should be made cheaper and easier for master’s degree students. Students have also requested that more course books are made available in the university library (Uski 1999). Library services are partly dependent on resources and some libraries and faculties lack funds for extra course books, making it difficult to increase the amount of course books. E-books could be one possibility. By using e-books every student would have the opportunity to borrow a course book when they want. E-books would also decrease the amount of borrowing from other libraries and reduce costs for students. In practice, the situation is not so simple. There is a lack of suitable course books published in e-book format and even if a book is in that format, the teacher in charge does not necessarily know about those options and might choose a traditional paper book. Library opening hours could also vary to allow longer evening opening hours on some days, which would benefit students who work during the day. 10) Different universities co-operation: There is some co-operation between Finnish universities. Students can, for example, take some courses at other universities and include them in their grades. Open University studies are available for all and that is one solution for students who do not live near their university. However, the Open University does not solve all the problems, this is because the amount of courses it offers is limited (see avoinyliopisto.fi 2011). 11) Study grand: Raising the study grant has been discussed almost every year since the middle of the 1990s in Finland. By raising the study grant students would have more money to compensate for their living costs and they would not necessarily have to work during semesters and could concentrate better on their studies. This could help some students, although some students would probably still want to work during semesters. Universities cannot do much as the Finnish parliament decides the study grant. On January 1, 2010 a law came into effect that makes it possible for students who are over 25 years old to get

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unemployment benefit if they have already spent their study grant. This gives financial support, especially to those students whose graduation is already behind schedule (see yövoimatoimisto, 28.10.2011). 12) General motivation by university staff: Academic studies emphasize studying at home. University staff believe that students will study hard and only come and ask questions when they have problems. On the other hand, for many of the students being able to study at home is not self-evident. Students might lack motivation and self-confidence and require motivating, which is something that is not always forthcoming from university staff. Hence, teachers and professors could, for example, provide more feedback to students, including both positive and constructive feedback. Furthermore, messages for students when a deadline has been missed as well as motivational emails and phone calls could be increased (see Kääpä & Siirilä 2008). 13) Questionnaires and letters: Receiving questionnaires or informative letters from a university might create a feeling of being appreciated. Letters can also increase the motivation to study and function as a “wake up call”. For students who have not studied for some time this kind of letter might be the only contact from the university in a long time. Such letters might receive better results if they are sent to students whose studies have only just started to fall behind schedule (see Kronqvist & Linnansalo 2004). DISCUSSION This article identified the main reasons for a slow pace of study and delayed graduation. It also suggested ways study could be sped up. The main reasons for study delays are students working during semesters, a lack of motivation, financial difficulties and a difficult life situation. Some of these reasons affect others. For example financial reasons affect the need to work and the motivation to study. A university can reduce the effect of some of those factors but not necessarily all of them. Ultimately, taking care of one’s studies is a student’s own responsibility. However universities have relied too much on students’ self- direction and concentrated mainly on curricula. By putting a little extra effort into encouraging students there could be benefits that exceed the effort expended. Many activities for encouraging student study can be done fairly easily but may require resources from a university or its staff. Nevertheless, activities such as quickly responding to student questions and motivational activities are highly dependent on the willingness of university staff and not on resources. One important period is the first year of study and it is clear that university staff and tutors should concentrate more on those students. By creating a positive learning atmosphere and by offering them counseling and help, students will receive a strong foundation for continuing their studies. Another critical moment is the master’s thesis stage. Good master’s thesis counseling includes motivation, quick response and guidance, which promotes thesis activity. Proactive ways of thinking at universities concerning the counseling and guidance of students is required. In many cases universities claim that they have a limited amount of resources for study counseling. However by increasing proactive activities such as study counseling there would probably be fewer delays during the study period and a fewer amount of students would drop out. Dealing with students whose studies fall behind takes, in many cases, much more time and resources than proactive activities. Thus, universities would probably save resources by investing more resources in proactive activities. A proposal further study proposal is to enact some of the above mentioned activities, such as study counseling, or e-learning possibilities and study how they affect the average speed of graduation or course dropout rates. This should be conducted as a longitudinal study.

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REFERENCES Avoin yliopisto (2011) http://www.avoin.helsinki.fi/opettajille/opettajan_kasikirja.htm. Read 28.10.2011 Avoinyliopisto.fi (2011) www.avoinyliopisto.fi read 28.10.2011 Brockett , R. & Hiemstra, R (1991) Self direction in adult learning. Perspectives on theory. Research and practice. London: Routledge. Friman, M. & Kokko, P (2000) Raportti Hämeen ammattikorkeakoulussa tapahtuneista opintojen keskeyttämisistä lukuvuonna 1998-1999. Opintojen edistäminen ja tukeminen. Oped. Grow, G (1991) The staged self-directed learning model. In H. Long and associates. Self-directed learning. Concensus and conflict. Oklahoma. Helenius, B (1991) Korkeakouluopintonsa keskeyttäneiden sijoittuminen. Korkeakouluneuvoston julkaisuja 4/1991. Helsinki: Opetusministeriö. Helin, S (2000) Humanistisen tiedekunnan opiskelijoiden opintojen eteneminen. Selvitys viivästymisen ja keskeyttämisen syistä. Humanistinen tiedekunta. Helsinki. Yliopistopaino. Jyväskylän kesäyliopisto (2011) http://kesayo.jyu.fi/avoin-yliopisto/ilmoittautumiskaytannot. Read 28.10.2011. Kalliosalmi, I., Pekkala, S. & Rönkkömäki, H (1990) Opintojen keskeyttäminen Oulun yliopistossa. Opintotoimiston julkaisuja 2. Oulun yliopisto. Kiviniemiemi 2000. Johdatus verkkopedagogiikkaan. Kokkola: Keski-Pohjanmaan ammattikorkeakoulu. Kokko, P. & Termonen, T (2002) Hämeen ammattikorkeakoulu. Pitkittymisrenkaan toiminnalle tilaus (Ed). P. Kokko. Pitkitty-mutkistuuko? Opedin P-renkaan loppuraportti. Hämeen ammattikorkeakoulun loppuraportti. Korhonen, K (1994) Korkeakouluopiskelu pitkittyy, keskeyttäminen harvinaisempaa. Hyvinvointikatsaus 4. Koro, J (1993) Aikuinen oman oppimisensa ohjaajana. Jyväskylän yliopisto. Kronqvist, E. & Linnansalo, S (2004) Oppimista ja oivalluksen iloa. Oulu: Oulun yliopisto. Kääpä, P. & Siirilä, S (2008) Palautetta, tukea ja vaikutusmahdollisuuksia. Turku: Turun yliopisto. Laukkanen (1988) Korkeakouluopinnot. Keskeyttäminen, viivästyminen ja ammatilliset opinnot. Helsinki: Taloudellinen suunnittelukeskus. Opinnäytetyö ja sen ohjaus (2004) Tampere: Tampereen yliopisto. OPM 2007:4 (2007) Opetusministeriön työryhmämuistioita ja selvityksiä 2007:4: Aiemmin hankitun osaamisen tunnustaminen korkeakouluissa. Osaava työvoiman saatavuus ja osaamisen kehittämisen muodot. Sektoritutkimuksen neuvottelukunnan tutkimuksia (2010) 6/2010.

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Päkkilä, M (2002) Opettajaksi hitaalla plulla. Oppimisportfolio. Oulun seudun ammattikorkeakoulu. Rautopuro, J (2011) CC-tutkmustoiminta opintojen hidas eteneminen, syrjäytymisriski viako vapaaehtoinen valinta. Esitys Campus Conexus –projektien ohjausryhmän kokouksessa. 18.8.2011. Rautopuro, J. & Korhonen, V (2011) Yliopistojen keskeyttämisriski ja opintoihin kiinnittyneet ongelmat. In Korkeajännityksiä – kohti osallisuutta luovaa korkeakoulutusta. Rautopuro, J. & Väisänen (2001) Experiencing studies at the university of Joensuu. Modelling a student cohort satisfaction, study achievement and dropping out. Finnish educational research association. Research in educational sciences 7. Remonen, S. (1996) Raportti Jyväskylän yliopiston roikkuvista opiskelijoista. Jyväskylän yliopiston ylioppilaskunta. Saarenmaa, K., Saari, K. & Virtanen, V (2010) Opiskelututkimus 2010. Opetus- ja kulttuuriministeriön julkaisuja 18/2010. Saarinen, J (2002) Etäopiskelun mahdollisuudet. In J. Saarinen (ed). Kouluttajana verkossa – menetelmät ja tekniikat, 43-74. Hämeenlinna: Hämeen ammattikorkeakoulu. Salminen, H (2001) Opintojen tehostaminen ammattikorkeakoulun aikuiskoulutuksessa. Teoksessa Kokko, P. & Kolehmainen, S Ed.). Mutkatonta opiskelua. Puheenvuoroja ammattikorkeakoulujen edistämisestä. Oped, Hämeen ammattikorkeakoulu. Seinä, S (2000) Opintojen etenemisen edistäminen. Näkökulmia ja pohdintaa opintojen pitkittymisen ja keskeyttämisen ehkäisemiseksi Hämeen ammattikorkeakoulussa. Hämeen ammattikorkeakoulu. Tanner, T (2002) Haaga Instituutin ammattikorkeakoulu: Opinto-ohjaajan merkitys opiskelijan näkökulmasta tarkasteltuna Tilastokeskus (2011) Ylemmän korkeakoulututkinnon keskisuoritusaika 1999-2008. http://www.stat.fi/til/yop/2008/02/yop_2008_02_2009-06-18_tau_002.html read 28.10.2011 Työvoimatoimisto (2011) Omaehtoinen opiskelu työvoimatuella tuettuna. http://www.mol.fi/mol/fi/03_koulutus_ura/05_omaehtoinen_opiskelu/index.jsp read 28.10.2011 Uski, E (1999) Eksyneet lampaat. Selvitys Tampereen yliopiston opiskelijoiden opintojen pitkittymisestä. Tampere: Tampereen yliopisto. Valtonen, A (2002) Tee mahdollisimman huono diplomityö. Tekniikan akateemiset 4/2002. Vesikansa, Lempinen & Suomela. 1998. Tehokkaaseen opiskeluun – norminopeutta vai mielekästä oppimista. Opiskelijajärjestöjen tutkimussäätiö Otus 14. Vesikansa, S., Lempinen, P., Suomela, S(1999) Tehokkaaseen opiskeluun - Norminopeutta vai mielekästä oppimista. Opiskelijajärjestöjen tutkimussäätiö Otus rs 14/1999

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Virolainen, I (2011) Personal oral communique 26.10.2011. Vuorinen, P. & Valkonen, S. (2001) Opintojen keskeyttäminen ammattikorkeakoulussa oppilaitoksen näkökulmasta. Jyväskylän yliopiston koulutuksen tutkimuslaitoksen tutkimusselosteita. Joensuun yliopistopaino.

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CONVERGENCES AND DIVERGENCES REFFERING TO THE CONCEPT OF FAIR VALUE

Ionica Oncioiu, Tomis University of Constanta Florin Razvan Oncioiu, University of Agronomic Sciences and Veterinary

Daniela Simona Nenciu, Dimitrie Cantemir University of Constanta

ABSTRACT

Many of the authors are presenting the advantages of the fair value, but there are voices which contest this concept, because of its volatility and the tendency of subjectivism, of the manipulation of used models for the evaluation. Among the advantages of the fair value there can be named: utility, relevance, transparency and superior accuracy of the results and cash-flow of the company, it brings more clearance to the financial statements, it does a total accounting of the comparable value and it gives more liability to the manager.The credibility regards a reasonable evaluation, the using of market information in all possible situations for evaluating and justifying the subjective arguments. Starting from these concepts, the users of the accountancy information had demanded the elaborating of a model for a general appliance of the fair value.There are also specialists who criticize the limited use of fair values in IFRS. However, those criticizing fair value accounting do not seem to provide any credible alternatives. Do we go back to historical cost accounting, wherein the financial assets are stated at outdated values and hence are not relevant or reliable? In the current crisis, a question that is raised is: Should assets be marked down to their current throw away prices, as companies may not want to sell them at those values? This paper analyses the answer of this question, and also various controversial issues of the concept of fair value it as it is presented in the current project of the IASB and FASB. INTRODUCTION Fair value is a relatively new concept. It did not feature in the academic debate on current values in accounting that raged (not too strong a term) in the 1960s. In those days, the current values that were debated as alternatives to historical cost, and to one another, were replacement cost (Günter 1966), net realizable value (Chambers 1967) and deprival value (Baxter 1967). The term ‘fair value’ seems to have been used first by accounting standards setters in the United States and has subsequently appeared in UK standards, in international standards and in the Directives of the European Commission, in addition to some more recent standards in the US. The use of the term by standards setters has been to describe, rather loosely, a market-based current value, as opposed to traditional historical cost. The precise application of fair value has varied from standard to standard, and the United States Financial Accounting Standards Board (FASB) has recently developed a standard which prescribe a uniform method of calculating fair value, to apply within all standards that currently use the term. An exposure draft was issued in 2004 and the final standard was published in September 2006. The International Accounting Standards Board (IASB) is committed, as part of its international convergence program, to issuing a discussion paper (the first stage of its due process for developing a standard) based on the new FASB standard. LITERATURE REVIEW Fair value is usually defined as a current market price. The definition in current international financial reporting standards (IFRS) is: „The amount for which an asset could be exchanged, a liability settled, or

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an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction” (IASB 2006, 2304). The FASB fair value measurement standard defines fair value as follows:”Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (FASB 2006). The new definition resolves two of the alternatives within fair value as follows: 1. The reference to price rather then amount makes it clear that transaction costs are not included in fair value. If they are included in the measurement, the correct description would, in the case of assets, be ‘fair value, less cost to sell’. 2. The reference to received to sell an asset and paid to transfer a liability clarify the choice of market, by specifying the exit market (disposal) rather then the entry market (acquisition). There are two distinct dimensions to the consideration of alternatives to fair value. The first is to examine alternative current values, and the second is to consider historical costs. Discussions of fair value often fall in to the trap of debating the relative merits of fair value and historical cost while ignoring the existence of alternative current values. Thus fair value can, wrongly, be regarded as the only alternative to historical cost. In order to avoid giving this false impression, the current discussion will focus first on alternative measures of current value. Like fair value, the other current value measures have a number of alternative definitions and their classification into generic groups is far from simple. Here we shall adopt the classification used by the Discussion Paper on measurement bases, published recently by the IASB (IASB 2005). APB Opinion No. 16 (1970) on business combinations in an early example. The term ‘fair value’ subsequently became widely used to describe the measurement basis used in the revaluation exercise required by acquisition accounting for initial recognition of an acquired entity. This includes an entry value, current cost (subdivided into reproduction cost and replacement cost), two exit values (net realizable value and value in use) and one method that combines both entry and exit values (deprival value). For the sake of simplicity, the subsequent discussion is conducted in terms of measuring assets, although most but not all of it is equally relevant to liabilities. For example, due to the financial nature of liabilities, the distinction between reproduction cost and replacement cost is not generally relevant to them. A useful analysis of the recognition and measurement of liabilities is Leonard in 2002. The Fair Value Against the Historical Cost Historical cost is the method of measurement traditionally used by accountants. It measures an asset at the cost of acquiring it. This provides a reliable basis for measurement, but an obvious disadvantage is that, as price change subsequent to acquisition, the relevance of historical cost declines if the objective of measurement is to reflect the current economic benefit represented by the asset. Moreover, it is possible that, in some cases, the transaction did not take place at market price (as in the case of bargain purchase) so that the transaction price did not represent the current economic benefit conferred by the asset, even at the moment of purchase. This comparison holds between historical cost and each of the current value alternatives described above. Each of the current values measures a current rather than an historical attribute of the asset and looks to the market rather than the specific transaction for evidence, but this leads, in each case, to a degree of estimation, because the current measures are not based on actual transactions but upon transactions that might take place in markets that are far from perfect and, in the extreme, may not even exist. Hence, current values include gains or losses in value that are unrealized,

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where as historical cost does not amend the measurement arising from the acquisition transaction until the gain or loss is realized in a disposal transaction. These benefits of historical cost are obtained by sacrificing relevance to the current economic opportunities represented by the asset. From that perspective, historical cost loses its relevance as time passes and prices and opportunities change. Moreover, historical cost will measure otherwise identical assets of the same entity at different amounts, depending on the specific acquisition cost prevailing at the time of acquisition. Thus, it does not provide either a timely or a comparable basis for measuring the economic benefits conferred by the ownership of asset.There are clearly several plausible alternatives to fair value. In choosing between them, it is necessary to have criteria with which to weight their relative costs and benefits. The conceptual framework of various accounting standard settlers attempt to provide such criteria, although no standard setter has yet taken the courageous step of choosing a single valuation basis which is consider to be generally superior to the others. Thus, the extant standards are based upon mixed measurement systems. Current values and historical costs are used in different standards and sometimes as alternatives within the same standard. The selection of alternative current values also varies: sometimes it is described as fair value and other time is not (e.g. the use of ‘fair value less cost to sell’ in IAS 36). Even when fair value is the prescribed measure, as in several of the current IASB and FASB standards, the precise application of the term is not the same across different standards: removing such inconsistencies is the main objective of the current FASB and IASB project in fair value measurement. The fundamental measurement issue is not application guidance and the choice of evidence to support measurement, but rather it is to determine the guiding objective of the measurement process. The primary objective of account, and therefore of measurement in accounts, is, according to the conceptual framework of the IASB and the FASB, relevance to the need of users. Those needs are assumed to arise from the economic decisions that users have to make. These decisions are assumed to be primarily those made by an investor, and they therefore relate primarily to the prediction of future cash flows. However, prediction does not imply merely forecasting, and the concerns of stewardship are also assumed to be included in the objective. Stewardship implies accountability by management to investors. The feedback that this provides is relevant to future cash flows because it will affect the future conduct of management and confidence which investors will place in the entity’s prospects. In practice, therefore, cost/benefit considerations seem to rule out an unconstrained multiple column approach, and the need for comparability suggests that the single measurement that is given prominence in the accounts should be chosen by reference to consistent guidance, so that like transactions and events are recorded in a similar manner. This requirement does not rule out measurement methods such as deprival value, which may use a different measurement method in different circumstances, because such a method will always treat like circumstances is a similar manner. Equally, it does not rule out systematic valuation of different types of asset on a different basis (e.g. current assets at selling price and fixed assets at cost); such an approach might be chosen on cost/benefit grounds (e.g. if fixed assets are expensive to value and the resulting valuation are unreliable). However, when the cost measure used is the historical cost, it could be argued that such measures cannot be compared in an economically meaningful way because the measure is dependent on the time of acquisition, which will differ across different assets. Many academic writers have advocated that a single measurement method be applied to all assets. This would have the obvious benefit of enabling different types of asset to be compared without having to allow the changes in valuation method and would also remove possible errors or bias arising from different classification methods being used by different entities or at different times. However, it seems

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likely that, in practice, cost/benefit considerations may justify the use of different measurement methods for different categories of asset (e.g. when market evidence is unavailable or expensive). In the latter case, it may still be helpful to users to have a common valuation objective, imposing consistency of purpose, even if the techniques used to achieve it may vary according to asset type. Moreover, it may be preferable to choose techniques by reference to specific circumstances rather than asset type: thus, it would be the actual absence of market information, rather then asset type that would justify the use of an alternative technique, so that the measurement objective would always be followed as closely as was permitted by the available evidence. This is the approach adopted by the fair value hierarchy discussed above.The positive result of the theoretical debates of the 1960s was to demonstrate the potential usefulness of different current valuation bases, such as replacement cost, net realizable value and deprival value. CONCLUSIONS To conclude, there are a number of plausible alternatives to fair value and that the choice will depend upon the specific circumstances of the entity and the needs of the user of accounts. In an uncertain world with imperfect and incomplete markets, no particular measurement objective should be regarded as having a monopoly, and different measurements should be regarded as complementing one another. Fair value is here to stay. It is already deeply embedded in IASB and FASB literature and there are growing calls from the user community to increase its use in financial reporting. Conceptual support for fair value is demonstrable and will be further underpinned in the revised conceptual framework. Users, auditors and regulators will become more comfortable with the use of fair value as time passes. Moving from theory to practice, the question perhaps becomes: What are the informational advantages and disadvantages of the practicable proxies to fair value, value, both when applied consistently, and when applied pragmatically on an item-by item basis? This takes us back to the academically traditional debates on the pros and cons of the various theories of income measurement and asset valuation. Many academics have strongly held view on these issues. REFERENCES

FASB., (2006) Fair Value Measurements. Statement of Financial Accounting Standards No. 157. IASB., (2006) International Financial Reporting Standards. London. International Accounting Standards Foundation. Leonard, A., (2002) Liabilities and How to Account for Them: An Exploratory Essay. London: Accounting Standards Board. Van, T, and Whittington, G., (2006) Deprival Value and Fair Value: A Reinterpretation and Reconciliation. London. Accounting and Business Research.

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ARE THE DEMOGRAPHIC CHARACTERISTICS OF STUDENTS RELATED TO THEIR PREFERENCES FOR ONE UNDERGRADUATE COURSE DELIVERY MODE

OVER ANOTHER? Robert J. Koenig, New York Institute of Technology

ABSTRACT Students in higher education can and do take courses delivered in a variety of ways. But, to date, little research has been done on the demographic characteristics of students related to their preferences for one undergraduate course delivery mode over another. This study sought to fill that void by comparing the effectiveness of three undergraduate course delivery modes: classroom, online, and video conference at a technical institute in a mid-Atlantic state. Students (N = 1,206) completed questionnaires on effectiveness, in terms of satisfaction for each delivery mode and on demographic characteristics. The questionnaire response rate was 74% for students. In summary, in terms of the relationship between demographic characteristics of students and preference for the three delivery modes, significant differences were found on most characteristics tested. Only gender and race/ethnicity showed no significant relationships to choice of delivery mode. The other factors, age, year in school and full-time status, were significantly related in some way to delivery mode. The results of this research should assist leaders in higher education to understand the benefits associated with different undergraduate course delivery modes. In addition, the study provides leaders with a useful tool for securing and applying this type of information when making decisions about the modes best suited to serve their academic communities. BIOGRAPHY Robert J. Koenig, Associate Dean: School of Managements Student Advancement Programs and Department of Hospitality Studies, New York Institute of Technology

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THE FACTORS OF INNOVATIVE ORGANIZATION: SOME EVIDENCE IN THAILAND

Wannapa Wichitchanya, Chulalongkorn University Supol Durongwatana, Chulalongkorn University

Pakpachong Vadhanasindhu, Chulalongkorn University

ABSTRACT

The aim of this study is to explore the organization structure that suite for innovative organization and support employees’ creativity. Mix method is used in gathering the data that can categorize in two parts. The factor of innovative firms are company infrastructure, external confidence, clear objective, team constitution, external influence, freedom, attitude to risk, internal confidence, department growth and development. The result shown almost employees understood the important of innovation and innovation concept that would served organization in business competition environment. The employees recommended firm to create innovative culture from executive manager to employees to support the new research and development of exist products and new products, set work standard in organization. The communication among individual, group, organization would be facilitated employees to understand the detail of firm’ innovation, and should be openness and motivate employees to participate and create new ideas. JEL: M 10, M12, M14 KEYWORDS: Innovation, Innovative Organization, Corporate Structure, Biotechnology, Small and Medium Firm INTRODUCTION Nowadays, Biotechnology industry is critical to Thailand's economy and the government set the biotechnology framework that the detail focused on expanding its neighboring countries, boosting a large country investment and supporting industrial research and development. This policy made the private sector active and interested in biotechnology investment as well as attracting new foreign corporation. Thus, the local company that looking forward to build a competitive advantage start the innovation strategy. Although, the successful innovation is not simplify, its depend on several factors, such as funding, networking, marketing strategies, and human resource management in the organization. Especially, human resource management (HRM) will affect the corporate structure: the employee relation within firm, and employee behavior change that are the important factor of the innovation failure or successful. However, organizations must realize to start from the effective source of human capital and find the right person who has special skills and the willingness to work differently (Hawitt-dundas, 2006). LITERATURE REVIEW What’ S Innovation? Drucker (1994) business management scholar, “Innovation is the entrepreneurial tool for getting property, profit and firm potential, whether innovation may be related to technology and new technique or not, but the innovation affect the entire economic and society, for example, the emergence of the newspaper and

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insurance business.” Roger (1995) stated that “Innovation is a new idea implementation or new method of the individual.” Hansen and Birkinshaw (2007) described the main innovation concept as innovation value chain process that are: 1. Idea Generation – idea generation is the first stage of the innovation process and could be both from the in-house idea and external idea. 2. Conversion – the idea selection and development stages. 3. Diffusion – the commercialized and distributed the new product or service to be outside. Figure. 1: Innovation Value Chain

The factor of innovative organization The emergence of innovation often occurs in the organization because of huge investment in research and development and systematic knowledge management. Thus, the pleasant environments and good managerial way will result in an effective innovation. Katz (2004) stated one of the innovation dimensions called the human side of innovation that consisted of three factors: 1. Corporate Culture - socialized the employee what the organization needs and the innovation process. 2. Architecture / Structure - The relationships of managers and subordinates in the organization will help people to interact and blend ideas among groups, teams, departments or business units that the origin of innovation. 3. Roles - The role of formal and informal of staffs that are project leader, product champion, and gatekeeper. These roles take the dominant in the innovation process. Rosenfeld (2008) said the executives not only understand the innovation process, and the innovators must have a wide range of skills, but also motivate the employee to work. Meanwhile, creating the appropriate infrastructure, corporate structure, innovative champion and trust are needed. Tidd and Bessant (2009) noted the challenge of organizational management is to create an innovative organization that made people focus on creativity, innovation and change behavior to innovative

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behavior. The innovative behavior of employees is achieved by working with a multi-skill team in proper working environment. The human resource management practices associated with the innovative aspects of promoting and supporting innovation, such as job design, reward system, employee participation and team building, etc. The critical components of innovation in the enterprises are: 1. Company Infrastructure - refers to the resource, management model and plans that affect the operation. 2. External Confidence - The confidence of the executive of employees. 3. Clear Objective - The clear goals setting and thinking process that guide employees work and recognize. 4. Team Constitution - The nature of the team member who consistent with the corporate plan. 5. External Influences - The external environment that affect the operations of the organization such as finance, technology, creativity, new knowledge. 6. Freedom – the employees have the authority to decide, plan and control their work. 7. Attitude to risk - refers to proactive thinking, ready to change and learning from mistakes that are beneficial to organizations. 8. Internal confidence - Trust in a group of employees and confidence in the ability of their potential to create change and solve the problem. 9. Department growth and development - The employee should develop new skills which add value to the organization. METHODOLOGY

The research designs of this paper is mixed methods and study in a medium well known firm in Thai biotechnology industry that was selected to be the case study. The methodology categorized in two parts.

1. The qualitative collection used focus group discussion in R&D unit. The participants consist of manager, assistant manager, supervisor and talent employee. Data analysis is to describe the nature of participant and grouping information followed the components of innovation in the enterprises (Tidd and Bessant (2009).

2. The quantitative gathering is the employee perception survey about innovative culture and structure by questionnaires. The samples are 152 employees in all departments that were selected by simple random sampling technique. The statistic is descriptive statistics that are frequency, percentage, means and standard deviation. FINDING A case study is the import-export company that distributes animal feed raw materials and initiates new agriculture product through investment in research and development to expand the domestic and ASEAN

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market. The main products include shrimp feed, shrimp head protein extracts, soybean processing, organic minerals, organic agricultural supplement, protein and probiotic enzymes. The currently targets accelerate to research and develop of human functional food and distribute in the country and abroad. In order to R&D, the company works with government agencies, research institutes and academic institutions to develop technology and transfer knowledge. Further, the company enrolled many pretty patents and patents and was taken the National Innovation Award in 2007. The Opinion Of Employees The survey results had shown that the employee rated the team constitution and the external influence in the high level (x̄ = 4.34), followed by the attitude to risk ( x̄ = 4.18), the company infrastructure (x̄ = 4.14), the clear objective ( x̄ = 4.01), the internal confidence (x̄ = 3.99). The department growth and development and the freedom dimension were in the same rate ( x̄ =3.96). Finally, the external confidence was rated at low level (x̄ = 3.89).

Table 1: Means and Standard Deviation of The factors of innovation in the enterprises Components

Ax̄ E SD Company Infrastructure 4.14 0.85 External Confidence 3.89 1.04 Clear Objective 4.01 0.80 Team Constitution 4.34 0.79 External Influence 4.34 0.79 Freedom 3.96 0.75 Attitude to risk 4.18 0.60 Internal confidence 3.99 0.76 Department growth and development 3.96 0.93

Total average 4.09 0.64

The factors of innovation in the enterprises Almost employees had understood the innovation concept that “the innovation is new product, service or process. The innovation novelty has multiple levels: new to the world, new to the nation, new to the organization or new to the market. However, the important for innovation is its invention can commercialize.” The company plans to create learning atmosphere within the organization and recognizes to transfer basic innovation concept to all employees. Moreover, all process in the organization base on the innovation concept. It could be seen from the development of innovative products and ongoing research. In addition, management also plays a role in innovation supporting in organizations such to encourage long life learning of employees and creating network that is beneficial to the organization. 1. Company Infrastructure – the company had sufficient tools and equipments. For scientific equipment, some of which are often less use and high investment, the company had cooperated with outside agencies to use. The organization not only created a learning organization environment, but also restructured organization to flat organization that had less hierarchy and command level. This made close contact among employees, departments and top managerial positions. Furthermore, the monthly meeting was held to receive suggestion and operating problem, and the directly channel between employees and executives via E-mail took employee comments as well.

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2. External Confidence - top executives recognized the employee capability and supported staff to public training with technology institutions. In the part of in-house training, the top executives allocated resources and coordinated with external experts to set training program for educating the employees, including socialized new values “the innovation is not overloaded work, but is the challenge of the work.”

3. Clear Objective - the company set the clearly direction and communicated to employees in monthly meeting and prime occasion. Instance of each meeting, the president had focused and repeated about company vision, mission and strategy to ensure that all staffs get into the same direction before start the new discussion topics.

4. Team Constitution - the coordination and sharing production information among various departments, such as production problem, R&D information and customer needs, was essential for efficiently new product development process. All parties involved in setting goals and operating guidelines. For R&D unit, the company focused on career planning of researchers and knowledge sharing each other.

5. External Influence - the cooperation with educational institutions, universities, research and technology agent, and government unit; the Nation Innovation Agency (NIA), Nation Science and Technology Development Agency (NSTDA), in funding, policies and transfer body of knowledge affected the development operations in the company.

6. Freedom - the company permitted the employee to work on their own, express the opinion and delegated authority in decision making about their job. These ways were convenient and helped to encourage creativity of employees. Therefore, the staff proposal and ideas would not be blocked that affected sense of belonging and goal achievement.

7. Attitude to risk - the company initiated new projects that focused on technology investments and high risk operation. Thereby, the administration and staffs had understood about innovation and risk in doing it as well. They also learn from the past failed experience and successful implication before develop the suitable plan for each project.

8. Internal confidence – the company had efforts to create a workplace environment regarding safety and quality of work life of employee issues as well as focused on communication within the organization and interpersonal communication to keep good relationships and trust.

9. Department growth and development - the company emphasized on staff development at all levels. In R&D unit, the company invited the technology expert to be an employee consultant and coach. Further, they highlighted on internal and external training as well as career management. CONCLUSION The survey and focus group discussion aligned in the same results. The final finding found that almost staffs had understood the innovation concept, and all factors of the innovation in the enterprise affected the employee innovative behavior and innovation process in the company. The innovative firms should be concerned and transform the organizational structure to motivate and support the employees’ creativity as well as boosting the innovative culture from leader to operational level and set the standard base on the innovation process. The staffs also had the opinion about an external factor such as the government must take the proactive role in promoting and supporting. Especially, resources and service center who provides science equipment, laboratory service and knowledge management system to facilitate the private sector. As this study the population is small and come from a single company. The results obtain not pretty complete and reliability is not so much. Therefore, further study should require increasing the size of the population and comparing with other biotechnology companies or other industry.

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REFERENCE Hawitt-dundas N. (2006), Resource and Capability Constraints to Innovation in Small and Large Plants, Small Business Economics, vol. 26, 2006, p. 257-277. Drucker P. (1994), Innovation and Entrepreneurship, Butterworth. Rogers M., Diffusion of innovations, Free Press, 1995. Hensen T.M. and Brilinshaw J. (2007), The Innovation Value Chain”, Harvard Business Review, p.121- 130. Katz R. (2004), The Human Side of Technological Innovation, Oxford University Press. Rosenfeld B.R. (2008), All About People: Why Leaders Need to Know the Human Side of Innovation, Leadership in Action, 27(6), p. 13. Tidd J. and Bessant J. (2009), Managing Innovation. John Wiley & Sons. ACKNOWLEDGEMENTS The successful in this study come from the collaboration of CEO of the company that allowed the author to gather the data and provide much useful information. I would like to thank all staff who participated in group discussions and survey respondents. BIOGRAPHY Wannapa Wichitchanya is a Ph.D. candidate in Technopreneurship and Innovation Management Program, Graduated School, Chulalongkorn University and she is also the lecturer in Human Resource Management Program at Burapha University. Her previous researches are in the human resource management. She can be contacted at: 1405-1409 14th Floor, Chamchuri Square Building Phayathai Road, Pathumwan Bangkok 10330, Thailand, [email protected] Dr. Supol Durongwatana is an Associate Professor of Commerce and Accountancy (Statistics) at Chulalongkorn University. His expertises are regression models, design models, baysian inference. Almost his researches are in organization and corporate performance area. He can be contacted at: Faculty of Commerce and Accountancy, Chulalongkorn University, Phyathai Road, Pathumwan, Bangkok 10330 Thailand [email protected] Dr. Pakpachong Vadhanasindhu is an Associate Professor of Commerce and Accountancy at Chulalongkorn University. She had many experience in business and government consultancy. Her researches are about business model, corporate structure and strategy. She can be contacted at: Faculty of Commerce and Accountancy, Chulalongkorn University, Phyathai Road, Pathumwan, Bangkok 10330 Thailand, [email protected]

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THE GLOBALIZATION AND EUROPEAN UNIQUE MARKET – A NEW CHALENGES FOR THE ROMANIAN

ECONOMY Ionica Oncioiu, Tomis University of Constanta Florin Sorescu, Tomis University of Constanta

ABSTRACT

Globalization represents the process or the long term reception and approach systems of the greatest contemporary issues determined by the interaction of multiple processes and economic, technical, social, cultural phenomena and the envisage of their solution in a wide perspective by the international community. The European unique market is dynamic, constantly evolving and adapting itself to the new realities. Still, it must remain dynamic and steadily adapt itself in order to remain valid, and continuously contribute to the economic growth and social cohesion. The unique market must take position by stimulating the development of norms and quality standards in accordance with the international norms, in order to enable the European citizens and enterprises to benefit from the opportunities of globalization, minimizing the risks at the same time. This paper wants to reveal that Globalization and the European unique market, as all social-economical phenomena is neither totally good, but it can neither be considered something totally bad INTRODUCTION As regarding the globalization, we confront ourselves both with false ideologies perceptions of this phenomenon and with conceptions which make the rule of understanding, though they are inadequate, accomplished or simply inaccurate. As both theory and phenomenon, globalization tends to increase the economic blockings existent at a certain moment. Therefore, in the specialist literature, it is presented as a challenge and justification, as well as a stimulus to widen integrity, competition and freedom of trade. The essence of globalization is to ensure a social completeness of economy. The economy may be globalized as an effect of commercial conventions through its specific agents, players of the global markets. According to their position on the international scene, this phenomenon shall be benefic for humanity. Globalization seems to be an integration study of the worldwide economy in which the unique market tends to be an actor of the global market as a viable matrix of international transactions. According to certain authors, the European Union appeared as a response to the intensification of competition on the global market and as a consequence and cause of changes in the economic role of the states. It became a significant actor in the worldwide economy. The unique market is an essential component of the international economic integration and, at the same time, the main means of achieving the common goals of the states which are part if it. If initially, the accent was emphasized on the elimination of the main cross-border obstacles which the enterprises were confronting with, the European unique market should evolve as to improve the functioning of the markets and to bring concrete benefits to the citizens, entrepreneurs, workers and consumers in an enlarged Europe.

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In order to realize these objectives, the European unique market should face the following changes: 1. globalization, which offers numerous opportunities but which has accumulated the competitive

pressure for the European enterprises and which makes that the razor edge between the internal and external markets to become more and more indeterminate;

2. structural changes generated by the development of the economy based on knowledge, the increasingly important role of services within the economy, the increase of energy dependence, climate changes and population ageing;

3. a more extended and diversified European Union, which developed from a community of 12 members and which has at present a number of members.

METHODOLOGY RESEARCH As regarding the European integration, globalization is seen as an external threat which shall create an environment where a higher degree of integration shall be necessary. Therefore, Europe shall aspire towards realizing a union in global context. It will be difficult for Europe to accomplish its mission of reducing the tensions created from an economic point of view and to contribute to the hastening of institutionalization of international and global governing instruments. For a better understanding of the new world formula and the way in which it determines the transformational reactions at the level of Romanian authorities we have to briefly consider the immediate past. The most important problem is if Romanians will be able to greatly take advantage of the immense opportunity of the European integration. For that the Romanian authorities must adopt a political decisions mix able to ensure the economic effect regarding the accomplishment of nominal and real convergence of our economy with that of other UE member states. The European Union states shall increasingly feel the need of security offered as a member quality in the European economic block as the low economies can no longer develop isolated, in a global market environment. The most advantageous are the consumers and small Romanian enterprises due to the fact that the unique market maintains their benefits and the profits shall integrally return to them. They increasingly demand to stay under the “umbrella”, sheltered by the tumultuous globalize market. Today the environment of the Romanian enterprises became more uncertain, more complex, and more turbulent. The competitiveness of the enterprises on more and more globalize markets constitute a supplementary competitive pressure for the enterprises of the countries developed. This dynamic depends of a complex game of various factors, but the production of knowledge and of new technologies play of it a role of first plan. The competitiveness of the European Union, to the, global level, is conceived like an instrument to assure an attractive space in term of activities and of jobs, and finally to permit a supportable development. In analyzing the benefits and the disadvantages brought by the European unique market, at the extremes there are those who either support the European unique market without reservation, considering it a cure- all, or reject it completely. The disadvantages of the unique market would be as follows: - on short term: partial loss of national economic control; - on medium and long term: if this loss shall be prolonged, some immature industries could disappear.

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The contemporary world is one of interdependences; from the specialists’ point of view, there is no better solution at this moment than globalization and rationalization. The integration within the European Union implies respecting the same rules and regulations both on the national and unique markets. Adopting and implementing the EU standards in Romania represents one of the conditions for the access on the Unique Market, as Romania, after accession, is not only a member with full rights of the Unique Market, but it is also a completely integrated member within it. Romania is challenged by the identification of key-factors to constitute an environment in which the entrepreneurial initiative and commercial activities may develop. Political measures shall be needed in order to stimulate the entrepreneurship both at the level of “unique” and national markets, through an adequate approach for raising the number of entrepreneurs and developing an increasing number of firms. Therefore, the globalization is an irreversible reality and any country carefully preparing its future finds itself forced to interact with it. Failing to adjust to the new globalization “environment” represents not only a lost chance, but also the risk of losing position and market segments already attained. The present evolution of the enterprises, the internationalization of the economy and walks entailed the multiplication of operations that is often about amounts elevated and frequently had transnational consequences. There are voices which consider that the unique market must be rethought as the economy of the European Union is more fragmented than that of the United States. This European general trend regarding the consume, the investments and the labor market represents an argument for a rethought of the unique market politics. More exactly, a redirection of it is necessary from the concentration of the goods towards services and innovation. In addition, a message is conveyed to realize more reforms within the production and financial and labor markets in order to diminish the barriers that still exist against the commercial changes and investments. Globalization and the European unique market, as all social-economical phenomena is neither totally good, but it can neither be considered something totally bad. We can only say that, overall, it has more positive aspects than negative ones or, just as Joseph E. Stiglitz states “those criticizing globalization too often ignore its benefits.” They demand that the unique market to become a means, not an aim. A means to allow all those who are part of the European Union to fully capitalize the opportunities offered to them by a more open and integrated European Union. At the same time, they contrive promoting the interests of the European citizens in an era of globalization on a cosmopolitan stage. Therefore, the unique market is never going to be “complete” or “accomplished”. A stable legislative frame was formulated for most of the activity sectors, but on the one hand there are still gaps to be filled, on the other hand the current norms are not always fully applied. CONCLUSIONS In conclusion, the unique market is promoted by certain connected politics applied by the European Union along the years and for Romanian economy specialists importance is that have the task of finding viable answers to such challenges. The purpose of these politics is to aid as many companies and consumers to enjoy the advantages of the unique market including the Romanians.

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REFERENCES Blondel J., (2004) La globalization: approche du phenomene et ses incidences sur l’action humanitaire, IRRC, vol 86, nr. 855, 2004. Mathieu T., (2003) Le monde des services et les leviers techonologiques associes a son industrialization, Pea Consulting. Mattera A., (2002) Le marche interieur de la communaute, Rapports 2000. Moussis N., (1996) Manuel de l’Union Europeenne, Edit. EUR, Paris.

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THE INFORMATION CONTENT OF GOODWILL IMPAIRMENTS ARISING FROM THE ACQUISITION

METHOD TREATMENT FOR BUSINESS COMBINATIONS

Nina Dorata, St. John's University According to Compustat TM, the reported amount of Goodwill during the past 10 years has increased by 219% yet the amount of goodwill impairments decreased by approximately 59% over the same period for U.S. domestic companies that remained active over the same 10-year period. Along with the significant increase in the reported goodwill came increased scrutiny from the Securities and Exchange Commission (SEC) of valuations used in the business combination, especially for indefinite-life assets. Goodwill in particular as it represents an amount paid in excess of the fair value of identifiable net assets, pressures acquiring firms to support economic reasons for the excess payments. A KPMG study also documents that goodwill impairments substantially decreased between 2008 and 2009 citing improvement is a result of large goodwill write-downs from prior years as well as signs of improvement in the economy at that time. In that period, the amount of goodwill increased from $3.5billion to $3.8 billion while the amount of goodwill impairments decreased by 89% according to the sample of Compustat TM firms. The data found in Compustat TM is consistent with a continuation of the KPMG study, which cited that the decline in goodwill impairments continued in 2010 by 72% from 2009 levels. The goodwill losses dominated the financial industry, with the remainder of the losses impacted telecommunications and energy. The modest increase in the amount of goodwill from 2008 to 2009 is reasonable given that deal values for those years aggregated about $154 billion and $251 billion, respectively (Sample obtained from FactSet Merger and Acquisition database for U.S. publically held acquirers and target firms.) However, deals values for 2010 declined to $148 billion, which should lead to less goodwill impairments beyond 2010. Overall, the evidence suggests that goodwill impairments are declining in spite of fluctuating deal values and less than robust merger and acquisition market, while overall goodwill is increasing. INTRODUCTIONS The paradox could be explained by the other important factor that occurred in the 2008 to 2009 period; a significant change in accounting for business combinations from the purchase method treatment to the acquisition method. The latter method treats acquisition-related costs, namely accounting, legal, and investment banker fees as expenses; the former method afforded capitalization treatment for the same costs and thereby inflating goodwill and thus provide the explanation for the reported increase in goodwill amounts during the past years. The change in accounting for business combinations did not change procedures for testing the recognition of goodwill impairments. On September 15, 2011, the FASB issued Accounting Standards Update No. 2011-08, titled Intangibles-Goodwill and Other, Testing Goodwill for Impairment (ASU). The purpose of the ASU is to further simplify the goodwill impairment test from a 2- step test to an optional assessment of qualitative factors to determine whether there is a more likely than not that fair value of the reporting entity is less than its carrying amount. This procedure is effective for fiscal years beginning after December 15, 2011.

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For 2008 deals, just before the change to the acquisition method treatment, goodwill was 50% of deal values at completion. In 2009 and 2010, when the acquisition method was required, goodwill as a percentage of deal values was 32% and 36%, respectively. The precipitous decline in goodwill as a percentage of deals values for 2009 and 2010 is directly associated with treating significant acquisition costs as expenses compared to past treatment as a component of goodwill. Therefore, the decline in goodwill impairments cited earlier could also be attributed to the change in the accounting treatment for business combinations. The purpose of this study is to examine goodwill impairments associated with 2008 business combinations using the purchase method treatment, and for 2009, and 2010 business combinations that used the acquisition method treatment. Using the methodology of Bens et al. (2011), a sample of goodwill impairments from those business combinations will be analyzed for their information content as the difference between an estimate of their expected impairment and their actual impairment, “the surprise impairment.” The test variable is the accounting method used for the business combination. Controls for attributes of the business combination, such as bid premiums, deal size, industry comparability, and information asymmetry will be used in the analysis. Event study methodology, using the impairment announcement as the event date, will examine the market reaction to the surprise impairment. The results of the empirical analysis are expected to be consistent with the findings of Bens et al. (2011), but for different reasons. The market reaction to the impairment news should be less significant for those business combinations using the acquisition method treatment than those that did not. The contribution of this study serves to highlight the acquisition method critics’ claims that not capitalizing acquisition costs, and thus reducing the amount to reported goodwill for business combinations, does not provide relevant accounting information for users to evaluate investments in the corporate control market. REFERENCES Bens, D.A., Heltzer, W, & Segal, B. (2011) The information Content of Goodwill Impairments and SFAS 142. Journal of Accounting, Auditing & Finance, 26, 527-555 Financial Accounting Standards Board (2011) Accounting Standards Update No. 2011-08, Intangibles- Goodwill and Other (Topic 350) Testing Goodwill for Impairment KPMG LLP (2011) Evaluating Impairment Risk: Goodwill Impairment Continues Its Downward Trend in 2010

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MANAGING THE FUZZY FRONT END OF INNOVATION

Linda L. Naimi, Purdue University Brian S. Glassman, Purdue University

The unacceptably high failure rate of new product development may be due in part to the inadequacies of the processes used to generate and manage ideas – the fuzzy front end of innovation. Improving this early phase of the innovation/development process may prove critical to enhancing a company’s competitiveness and sustainability. This paper examines the unintended consequences that arise when companies fail to manage the fuzzy front end of innovation. Our research suggests some structured approaches and process models to improve the generation, capture and management of ideas during the early phases of the innovation process. The need to manage innovation more effectively is critical if a company is to remain competitive, efficient, adaptable and sustainable in an ever-changing world. (Collins, & Porras, 2002; Berkun 2007; Christensen, & Raynor, 2003; Christensen, 2000; Drucker, 1985). The fuzzy front end involves new product development, and research in the area focused on innovation management, processes, tools, resources, people, culture, and best practices for new product development (Kahn, 2005; Belliveau, Griffen, Somermeyer, 2002; Griffen, Somermeyer, 2007; Belliveau, 2004). On the process side, Koen (2005) breaks the innovation process “into three areas: the Fuzzy front end (FFE), the New Product Development Portion (NPD), and Commercialization” (p. 3). Of these, the fuzzy front end (coined by Smith & Reinerten in 1991) is considered a fundamentally important issue in future research on product development (Verwon, Herstatt, & Nagahira, 2008). Backman, Borjesson, and Setterberg (2007) posit that “the greatest opportunities for improving the overall innovation process lie in the very early phases of NPD” process (i.e., the fuzzy front end) (p. 321). Zhan and Doll (2001) state that “managers and researchers claim the benefits resulting from improvements in the front [end] are likely to far exceed those that result from improvements aimed directly at the design engineering process” (Koen, et al. 2001, p. 2). Process models for the fuzzy front end center on idea generation as a core activity of innovation (Hansen, & Birkinshaw, 2007; Khurana, & Rosenthal, 1998; Gallagher, George, & Kadaki, 2006; Koen et al. 2001; Husig, Kohn, & Poskela, 2003; Hüsig & Kohn, 2003; Hüsig, Kohn, & Poskela, 2005; Flint, 2002). Simply put, “innovation begins with an idea” (Vandenbosch, Saatcioglu, & Fay, 2006, p. 12). How important are ideas? Jack Foster (1996) asserts that “new ideas are the wheel of progress” (p. 3) and Linda Rochford (1991) states that “ideas are the raw material for product development” (p. 4). Therefore, it stands to reason that effectively managing ideas will enhance the innovation process and lead to improvements in new product development processes. According to Stasch, Lonsdale, & LaVenka (1992) “the objective of all idea-generating activities is to guarantee that the company does not leave the exploration stage of new-product development to chance” (p. 3). While McGuiness (1998) argues that “organizations that are active in new product development work must have a system of sorts to keep the flow of ideas coming” (p. 121). The problem, according to Tucker (2003), is that idea generation is often mishandled in companies where it arises sporadically and is inefficiently captured and managed. This results in a loss of valuable information, loss of new ideas, and loss of time and opportunity. As Gamlin, Yourd, & Patrick (2007) observe, “Idea generation is everyone's job and no one's responsibility….no one individual in a company or business unit is specifically in charge of idea generation, and often, when new ideas surface, no action is taken” (p. 42). This research explores both the intended and unintended consequences of managing the fuzzy front end of innovation and how it may improve innovation and sustainability.

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TURNOVER AND JOB EMBEDEDDNESS IN TIJUANA, MEXICO

Blanca Rosa García Rivera, Universidad Autónoma de Baja California Ignacio Alejandro Mendoza Martinez, Universidad La Salle

Sonia Elizabeth Maldonado-Radillo, Universidad Autónoma de Baja California Ma. Concepcion Ramirez Baron, Universidad Autónoma de Baja California

ABSTRACT

In this paper we analyze if having family and community links keeps the employees from leaving their jobs at the export processing zone (EPZ) in Tijuana. With survey data gathered in a organization belonging to the EPZ of the Tijuana area, we use the international model of extended job embededdness to find the causes hidden behind turnover. A questionnaire with 125 items using a 4 points likert scale was developed using the international extended job embeddedness model. Questions measuring variables such as attachment to the firm and community, satisfaction with benefits offered by the employer, Attitudes towards job and community, Family attitudes towards job, recent events causing the employee to think about leaving, benefits of returning home or emigrating to USA, cultural questions and personnal data were used to correlate vs. employee future intentions to stay or leave the organization. 225 questionnaires were applied to find the relationship between family and community embededdness, affective commitment and satisfaction with benefits and future intentions to quit that employees present in the sample. High correlations were found that proof a strong relationship between the variables of the proposed model. JEL-M12

KEY WORDS: job turnover, Ensenada, Mexico, Model of Employee Turnover, maquiladora industry (foreign assembly plant industry outside the U.S.A. INTRODUCTION While an extensive literature research has been developed in the last fifty years since export processing began in northern Mexico, very little research has addressed the relationship between turnover and employee family and community links leading to labor migration in the export processing zones (EPZ). In this paper we look at if having family and community links keeps the employees from leaving their jobs at the export processing zone (EPZ) in Tijuana. With survey data gathered in a organization belonging to the EPZ of the Tijuana area, we use the international model of extended job embededdness to find the causes hidden behind turnover. The paper begins with a documentary research related to turnover studies and findings. Then we analyze the preliminary data collected using the questionnaire developed to be applied in Mexico with the purpose to stablish the relationship of the variables of the model. For the Mexican survey, we chose Tijuana due to its Maquiladora Industry dynamics along the Mexico Border that has contributed to employment growth, economic resources and knowledge spillovers in the area since 1960.

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• Maquiladoras originated as part of the Mexican government’s 1965 Border Industrialization Program.

• Most maquiladoras are foreign-owned, controlled or subcontracted manufacturing plants that process or assemble imported components for export.

• Maquiladora inputs are generally imported duty-free, and countries, like the U.S. only tax the value-added portion of mapuiladora exports.

• Maquiladoras account for more than 60% of Mexico’s exports • The area of Tijuana, Mexico employs roughly 120,000 workers with over 3,000

maquiladoras. Approximately 58% of the jobs in Tijuana are from the maquiladora industry.

• Tijuana is also geographically desirable to foreign investors as it is conveniently located directly on the U.S. Mexico Border allowing for cheap shipment of assembled products directly into the U.S. (twin plants.)

Tijuana is known as the "TV manufacturing capital of the world." Maquiladora companies produce more than 12 million television sets there each year. Tijuana's largest employers, for example, are Sony and Sanyo. Also, other manufacturing plants not related to the electronics have chosen Tijuana as their center of production due to the geographical advantages described above. Carrillo, et al. found interesting statistic that less than twenty-three percent of the workers in Tijuana were natives of Tijuana.

Research Objectives: 1-Describe the relationship between family and community embeddedness and future turnover intentions in the sample. 2-Describe the relationship between satisfaction with benefits and future turnover intentions in the sample. 3-Describe the relationship between affective organizational commitment and future intentions turnover in the sample. LITERATURE REVIEW

Research for turnover and human resources management in the EPZ is scarce. Academic researchers have not analyzed this problem from the workers point of view. Various models designed to analyze human resource management have been developed to explain the reason behind turnover. These models have been widely accepted in the United States but application of the same in other countries is under speculation. (March – Simon 1958).

There is no appropriate turnover model for EPZ countries outside the United States and its absence is clearly manifested by the lack of knowledge in the application of a suitable turnover model.

Arrioja (1993), partially proved that these foreign models could be used in EPZ countries, even though, his research was very limited and more than 10 years have passed since he validated his hypothesis. Other researchers such as Pena (2000) stated that conditions in the maquila industry were different, which allowed the emerge of new hypothesis that refuted the old ones. He also stated that up to the middle of the sixties, the most part of research found in turnover was bivariated, emphasizing the relationship between job satisfaction and turnover.

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Williams e Ibarreche (1989) found that Mexican workers perceive personal and working conditions variables in a very different way than the United States workers. Also, they found that there is a strong relationship between the personality variables and job continuation. (Carrillo- Santibañez 2001).

McEvoy & Casio (1985) mentioned more than 1000 publications on turnover, and Rosse (1991) mentioned 2,000 articles concerning turnover.

Porter mentioned the organizational factors of job atmosphere, job content and personals as the main causes of turnover.

Rodriguez (1988) found that turnover didn’t affect productivity of these companies due to the abundant labor available searching for jobs.

Carrillo and Santibáñez 2001 emphasized the need of managing turnover in the maquiladora sector, due to the multiple factors that contribute to the individual decision of leaving the job and to the major problem that it means. For them, the problem of turnover was practically impossible of solving without affecting the location of the plants and the posibilities of managerial policies.

Ahr & Ahr (2000) mentioned that since March & Simon’s, findings, researchers have focused in finding out how jobs availability and job dissatisfaction interact to give as a result turnover behavior. They stated that under certain circumstances, the availability of different job opportunities stimulate job dissatisfaction in the worker by creating expectations that are not met in the present job. According to them, some employees stay in the organization due to loyalty to the company (normative commitment), while others stay due to the fact that leaving their actual job cost is higher than what they are willing to pay (continuity commitment). Those employees that show attitudes and habits more desirable by the managers tend to be the ones that stay because they want to (affective commitment).

Organization practices represent a potential treat to efficiency and effectiveness of the organization in the maquila industry due to the centralization of power that characterizes this kind of companies. In the Maquila Industry, the grade of centralization is very high due to the fact that most of the high executives are foreigners who are the decision makers (Kacmar et.al 1999). According to them, the perception of the organizational practices is affected by activities such as favoritism, suppression of organization competition and manipulation of internal policies, according to the way the individual perceives them. In the maquila industry workers who do not perceive organizational policies like impartial, where supervisors and his under workers do not have a respectful relationship where the individual has the faculty to become jumbled in the decision making of the organization and to perceive that the opportunities and the forms of remuneration, as well as the relations occur in an impartiality atmosphere.

The lack of knowledge of the Mexican culture, its labor, its laws and the atmosphere of businesses that prevails could disturb the advantages of the low cost labor when requiring additional expenses in recruitment, selection and training, as well as in the losses of productivity whenever an experienced worker leaves the company. (Cascio 1991).

The voluntary exit of a worker of the company is understood as turnover. Turnover says so much about the need of a worker to go to another economic sector or towards not-economic activities. (Carrillo- Santibañez 2001).

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Family and Job Embeddedness In particular, Ramesh & Gelfand (2010) demonstrated that “family embeddedness”—comprising family opinions about an incumbent’s employment in a firm, family benefits from incumbent’s employment, and ties between family and incumbent’s colleagues—can explain additional variance in turnover beyond that of job embeddedness. Customizing this model for collectivist cultures is increasingly essential as turnover is a crucial challenge for manufacturers in export processing zones (EPZ; Sargent & Matthews, 2008) in developing--often collectivist--countries. To illustrate, factory turnover can amount to 31% in China (Chiu, Luk, & Tang, 2002) and exceed 100% in Mexico (Maertz, Campion, & Stevens, 2003).

Understanding what embeds the Chinese and Mexican EPZ workforce is important as they represent a vital source of low-cost factory labor (hired directly or indirectly) for transnationals (Gereffi, 2009). Chinese manufacturers may also become concerned about turnover in Mexico as they increasingly invest there to circumvent NAFTA tariffs, hire even less costly Mexican labor, and access Latin American markets (Liu & Chenyin, 2011). Though Mexico and China both supply EPZ labor, their cultural comparison can offer a strong test of the cultural universality of our model and well as cultural moderation. According to the Globe Project, Mexicans have higher performance orientation, future orientation, collectivism, and uncertainty avoidance than the Chinese (House, Hanges, Javidan, Dorfman, & Gupta, 2004). Such cultural differences may translate into differential effects for various embedding forces. For example, greater collectivism among Mexicans suggests that links, normative pressures, and network colleague closure embed them more than do the Chinese. Moreover, our project further advances the limited cross-national attrition research by demonstrating whether between- and within-country differences in cultural values exhibit similar moderating effects. To illustrate, a collectivism moderation thesis is best sustained if embedding forces have stronger loyalty effects on Mexican than Chinese nationals (a between-group moderating effect) and if these relational antecedents are stronger among more collectivist than individualist individuals from both societies (Ramesh, 2007). Testing the efficacy of the embeddedness model for counteracting forces driving employees to quit, such as job dissatisfaction or shocks—critical events at work (or outside work) prompting incumbents to think about quitting (Lee & Mitchell, 1994) is important for EPZ countries. In recent years, turnover researchers observed that basic job embeddedness can deflect the negative effects of shocks, such as supervisory abuse or layoff threats (Burton et al., 2010; Mitchell & Lee, 2001; Trevor & Nyberg, 2008). That is, embedded incumbents exposed to shocks are less like to perform poorly or decide to quit. We extend this emerging research by considering whether our extended embeddedness model can attenuate shocks' effects among the EPZ workforce. EPZ workers are especially prone to varied shocks noted by Lee and Mitchell's (1994) unfolding model. According to EPZ research, they quit due to a) personal (path 1) shocks (invoking pre-existing plans to quit), such as returning home to care for family members, b) negative workplace (path 2) shocks, such as hazardous working conditions or unpaid wages, and job-offer (path 3) shocks, such as being recruited away by former co-workers or other plants (Johnson, 2004; Maertz et al., 2003; West, 2004). While exposed to greater forces that "push" (path 2 shocks) or pull" (path 1 shocks) them away from the factory job, EPZ workers however lack certain "pull" forces keeping them in jobs (Tharenou & Caulfield, 2010). Because many Mexican and Chinese EPZ workers emigrated from the interior countryside for work, they are rarely embedded in the EPZ community (Rivera & Tovar, 2007). To illustrate, Chinese

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migrants lack hukou (or rights to housing or education benefits that are available for legal residents in a community) and thus would not find it costly (in terms of foregone community amenities) if they leave EPZ locales. They also may have few--if any--family members residing nearby and even may have left children in their hometowns to be reared by grandparents (Yardley, 2004). Because EPZ workers encounter more shocks and are weakly embedded in communities in which they work (lacking community links and sacrifice; Mitchell & Lee, 2001), it is not surprisingly that this workforce exhibits exorbitant turnover. In sum, evaluating "attenuation" capacity of our extended model to deflect or mute shocks' effects advances previous research by probing this capacity with EPZ workers, representing both a powerful as well as an international test. DATA AND METHODOLOGY A questionnaire with 125 items using a 4 points likert scale was developed using the international extended job embeddedness model. Questions measuring variables such as attachment to the firm and community, satisfaction with benefits offered by the employer, Attitudes towards job and community, Family attitudes towards job, recent events causing the employee to think about leaving, benefits of returning home or emigrating to USA, cultural questions and personnal data were used to correlate vs. employee future intentions to stay or leave the organization. The questionnaire items and corresponding variables are described in Table1. Figure . 1:The International Extended Job Embeddedness Model:

Upon securing firm permission, we directly administered the survey to 250 workers when their work shifts ended. The purpose was to assure survey confidentiality as well as address respondent questions. After this first survey application, we tested the predictive validity of the model with logistic regression and cultural moderation with hierarchical moderated (logistic) regression. Sample Characteristics As we can see, most of the employees surveyed are young, 52% of them are less than 30 years old, 52% are male, 48% are married, 80% have a low level of education, where 40% only have elementary school and 40% secondary school. About seniority, 20% are new employees of 1 year or less, 28% have between 1 and 2 years of seniority, 12% have between 2 and 3 years and 40% have been working for the company for more than 3 years.

Job Embeddedness

Factory Retention

Family Embeddedness Workplace &

External Shocks

Friendship Network Closure

+ -

+

+

Normative Demands to

Stay

+ Job Ftit Job Links Job

Sacrifice

Community Fit Community

Links

Community Sacrifice

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Table 1: Operational description of International extended Job Embeddedness Model

Variable item Workplace and external shocks

ES1-2

Family embdeddness

FE1-10

Job embededdness

JE1-23

Satisfaction with benefits SB1-18 Pay adequacy PA1-4

GLOBAL JOB EMBEDDEDNESS

GJE5-12

JOB SATISFACTION

JS13-15

AFFECTIVE ORGANIZATIONAL COMMITMENT

AOC16-19

PERCEIVED JOB PROSPECTS PJP19-21 SUPERVISORY COMMITMENT

SC22-25

TEAM COMMITMENT

TC26-29

DEFECTING COWORKERS OR SUPERVISORS

DCS30-31

NORMATIVE PRESSURES FROM FAMILY TO STAY OR LEAVE

NP11-13

RELOCATION DESIRABILITY FROM THARENOU AND CAULFIELD MODEL

ON EXPATRIATE TURNOVER

RD1-8

MEASURES O HOFSTEDE CULTURAL DIMENSIONS

1-6 = POWER DISTANCE 7-12 = COLLECTIVISM

13-17 = UNCERTAINTY AVOIDANCE

HCD1-17

Factory Retention FR1-5 Source: self research

Table 2: Education Level of the Sample

percentage Level of education 40% elementary school education 40% secondary school education 20% had high school or more

Source: self research

Table 3: Seniority of the Sample

Percentage Level of seniority 20% One year or less 28% between 1 and 2 years 12% Between 2 and 3 years 40% More than 3 years

Source: self research

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Table 4: Sample’s Age

Percentage Age 52% 20-30 years old 28% 31-40 years old 20% Older than 40

Source: self research

Table 5: Gender of the Sample

percentage Gender 52% Male 48% Female

Source: self research Table 6: Seniority of the Sample

percentage Level of education 20% One year or less 28% between 1 and 2 years 12% Between 2 and 3 years 40% More than 3 years

Source: self research

Measures Predictor variables:Two survey formats were used: (1) Likert-type scales ranging from 1, “strongly disagree” to 10 “strongly agree” and (2) demographic questions. Employees self-reported data on all variables with the exception of characteristics of the organization, for which human resources personnel provided data. Control variables. Organizational characteristics and employee profile were controlled as both have been found to correlate with turnover (Griffeth et al., 2000). Gender was coded as “male” 1, and “female” 2. The variables in the model were measured by individual perceptions and assessments as recorded on the questionnaire. The questionnaire included multiple items intended to measure the perception of the employee for the variables attachment to the firm and community, satisfaction with benefits offered by the employer, Attitudes towards job and community, Family attitudes towards job, recent events causing the employee to think about leaving, benefits of returning home or emigrating to USA, cultural questions and personnal data were used to correlate vs. employee future intentions to stay or leave the organization. Most of these variables were based on previous measurement work by Hom and Garcia (2011). We designed 128 questions in a new questionnaire. RESULTS We analyzed data using the S.P.S.S. program with Pearson correlations. For the variable of future intentions to leave the job, we used the methods described by Hom and Garcia (2011) in their turnover research. Findings about demographics of the employees were:

• The group that presented high turnover represents 49.7% of the sample, and the low turnover group represents 41.7%, having 8.6% of non responders. Average seniority was 18 months in the job.

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• Employees that stayed longer than 18 months in the job are older than 26 and younger than 35 years old.

Married women represent most of the low turnover employees. • 48% of the total employees sampled are foreigners who don’t have family or community links in

this city. • 47% of the total employees sampled are renting a small house temporarily.

About the satisfaction with the benefits offered by the organization, we found that the average of the employees were satisfied, eventhough, a great number was showing dissatisfaction, which could lead to turnover. Some of the results are shown on table No. 7:

Table No. 7: Satisfaction with the benefits offered by the organization

Benefit description Very disatisfied disatisfied none satisfied Very satisfied Christmas bonus 8% 20% 12% 52% 8% Seniority bonus 12% 20% 32% 28% 8% Punctuality bonus 4% 16% 8% 52% 20% Yearly salary increases 16% 24% 28% 20% 12%

Source: self research

Table No. 8: Spearman Correlations

PEARSON CORRELATION

MATRIX

FAMILY AND COMMUNITY

EMBEDEDDNESS

FUTURE INTENTION

TO QUIT

SATISFACTIO N WITH B.

AFFECTIVE COMMITMENT

FAMILY AND COMMUNITY EMBEDEDDNESS

.629*** 1.000 .553*** .427***

FUTURE INTENTION TO QUIT

.699*** .525*** 1.000 .557***

SATISFACTION WITH BENEFITS

.553*** .552*** .206*** 1.000

AFFECTIVE COMMITMENT

.427*** .557*** .397*** .445***

*** correlations significance is to 0.01 level source: self investigation

Main Findings and Discusion As shown in figure No. 8, correlations between family and community embededdness and future intentions to quit are high, employees with no family and community links are the ones that leave the organization first. About the satisfaction with the benefits, there is a strong relationship found with the future intentions to quit. We found a strong relationship with future intentions to quit and the employees affective commitment. Objectives are achieved in the main findings. Mexico is a collectivist society. People respond to the norms of others to fulfill their need for social affiliation. Community embeddedness of fit and sacrifice reflect an individual's preferences (i.e., self need of acceptance). Community links is related to future quit intentions. As noted, 48% of the employees sampled have no community links and have future intentions to migrate to USA. Job embeddedness theory does not fully capture the emotional intensity of links (which Holtom et al., 2008 acknowledge).

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American-based models are so individualistic, assuming that people are motivated mostly by self-gain. We are finally recognizing social influences, though we continue to disparage them as “constraints” on self-fulfillment. Yet newer theories on collectivism suggest that collectivists embrace the opportunity to serve group goals (finding altruism “intrinsically rewarding; cf. Adam, 2007) or that their self-identity derives from group affiliations (Brewer & Chen, 2007). As we carry out more turnover studies in collectivist countries, we need to revamp our models to fit these cultural differences. As shown in the results, Family embeddedness and affective commitment are good predictors for turnover. For the sample of this research, it was very clear the importance of community and family links to feel attached to their roots at the same time that they belong to the organization. Having 35% of the population in Tijuana considered as floating population, due to their status, it is very understandable that employees consider their jobs at the EPZ as temporary and a necessary step before crossing the border. Many of those employees that get hired by this companies (48%) according to this research, will leave the company at the first opportunity. With high instability in the border towns of the EPZ, administering and keeping the work force is a hard task for most human resources’ managers. Organizations need to “read” the future employee intentions to stay or leave the company understanding the hidden reasons he has for his final destination. REFERENCES Burton, J. P., Holtom, B. C., Sablynski, C. J., Mitchell, T. R., & Lee, T. W. (2010). The buffering effects of job embeddedness on negative shocks. Journal of Vocational Behavior,76, 42-51. China: Mexico wants Chinese investors. (2010, June 11). Thai Press Reports. Chiu, R., Luk, V., & Tang, T. (2002). Retaining and motivating employees: Compensation preferences in Hong Kong and China. Personnel Review, 31, 402-431. Garcia Rivera, B.R. & Rivas Tovar, L.A. (2007). A turnover perception model of the general working population in the Mexican cross-border assembly (maquiladora) industry. Innovar, 17, 107-114. Gereffi, G. (2009). Development models and industrial upgrading in China and Mexico. European Sociological Review, 25, 37-51. Johnson, T. (2004, September 8). Chinese factory workers begin protesting low wages, poor conditions. Knight Ridder Washington Bureau. Hom, P. W., Tsui, A. S., Wu, J. B., Lee, T. W., Zhang, A. Y, Fu, P. P., & Li, L. 2009. Explaining employment relationships with social exchange and job embeddedness. Journal of Applied Psychology, 94: 277-297. House, R., Hanges, P., Javidan, M., Dorfman, P., & Gupta, V. (2004). Culture, leadership, and organizations: The Globe study of 62 societies. Thousand Oaks, CA: Sage.

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Kammeyer-Mueller, J.D., Wanberg, C.R., Glomb, T.M., & Ahlburg, D. 2005. The role of temporal shifts in turnover processes: It’s about time. Journal of Applied Psychology, 91: 644-658. Lee, T. W., & Mitchell, T. R. (1994). An alternative approach: The unfolding model of voluntary employee turnover. Academy of Management Review, 19, 51–89. Liu, L., & Chenyin, W.-Y. (2011, January 13). Mexican economy minister seeks to build stronger Sino- Mexican economic ties. Xinhua News Agency. Maertz, C., Stevens, M., & Campion, M. (2003). A turnover model for the Mexican maquiladoras. Journal of Vocational Behavior, 63, 111-135. Miller, J., Hom, P., & Gomez-Meijia, L. 2001. The high costs of low wages: Do maquiladora compensation practices reduce turnover among Mexican workers? Journal of International Business Studies, 32: 585-595. Mitchell, T. R., & Lee, T. W. 2001. The unfolding model of voluntary turnover and job embeddedness: Foundations for a comprehensive theory of attachment. In B. Staw (Ed.), Research in Organizational Behavior, vol. 23: 189-246. Elsevier Science. Mexico seeking investment by Chinese automakers. (2009, April 23). EFE World News Service. Ramesh, A. (2007). Replicating and extending job embeddedness across cultures: Employee turnover in India and the United States. Doctoral thesis, University of Maryland, College Park. Ramesh, A., & Gelfand, M. 2010. Will they stay or will they go? The role of job embeddedness in predicting turnover in individualistic and collectivist cultures. Journal of Applied Psychology, 95: 807- 823. Tharenou, P., & Caulfield, N. (2010). Will I stay or will I go? Explaining repatriation by self-initiated expatriates. Academy of Management Journal, 53, 1009-1028. Trevor, C. O., & Nyberg, A. (2008). Keeping your headcount when all about you are losing theirs: Downsizing, voluntary turnover rates, and the moderating role of HR practices. Academy of Management Journal, 51, 259-276. Yardley, J. (2004, December 21). Rural exodus for work fractures Chinese family. New York Times, A.1. West, M. (2000). Employee turnover in Mexico: A cultural investigation of causes. Unpublished doctoral dissertation, Tempe, AZ: Arizona State University. BIOGRAFIA Blanca Rosa García Rivera Universidad Autónoma de Baja California, Facultad de Ciencias Administrativas y Sociales México [email protected] tel. 619 207 43 29 (USA) 1550 Broadway St. E17

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Chula Vista, Ca. 91911 Ignacio Alejandro Mendoza Martinez, Universidad La Salle, México, D.F. [email protected], tel. 011 52 555 617 58 32 Sonia Elizabeth Maldonado Radillo, Universidad Autónoma de Baja California Facultad de Ciencias Administrativas y Sociales México Ma. Concepcion Ramirez Baron, Universidad Autónoma de Baja California, Facultad de Ciencias Administrativas y Sociales México

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GREAT WAR LEADERS’ SUCCESSFUL MEDIA STRATEGIES FOR BUSINESS: HOW FRANKLIN DELANO ROOSEVELT AND JOHN CURTIN WON

JOURNALISTS’ SUPPORT Caryn Coatney, Curtin University

ABSTRACT

At the height of the Pacific war, the American and Australian leaders communicated successfully with journalists, providing valuable business strategies on how to develop positive media relations in crises. After the bombing of Pearl Harbor, Hawaii, in December 1941, the United States President, Franklin D. Roosevelt, and Australian Prime Minister, John Curtin, generated favorable news coverage about their leadership. Yet there is a lack of information on their media strategies to win journalists’ support in a time of crisis. This paper shows how Roosevelt and Curtin managed to influence and persuade the news media. First, they frequently communicated to journalists in an honest, egalitarian and friendly way, increasing the number of regular news briefings between the press and the national leader. Secondly, they advanced the relatively new medium of radio to broadcast appealing, inclusive and accessible messages. Journalists repeated and amplified their radio talks in the news. Thirdly, they used practiced, forceful rhetoric and hand gestures in filmed newsreel scenes to convey their resolve and create the appearance of a direct, friendly relationship with their target audiences. These media strategies are still useful to business leaders when managing information needs in today’s 24-hour news cycle.© INTRODUCTION Just as CEOs need to communicate a unifying vision to reassure troubled markets, Franklin Delano Roosevelt used the media to bring together diverse global audiences after the Pearl Harbor bombing. During the Pacific crisis, for example, Australian people’s “admiration of his personal qualities” was “unlimited”, as that country’s Prime Minister John Curtin declared (1945a). Why did people in Australia and around the world develop “a personal devotion” to this United States president “rarely given by a people to any statesman other than their own” (Eggleston, 1945)? While Roosevelt is known for his stirring radio “fireside chats,” there is a lack of published findings on how he managed his media relations to generate positive news coverage about his resolve to end the Pacific crisis with Curtin. Likewise, United States journalists reported on “Honest John” Curtin’s eloquent radio rhetoric, likening this to the words of Civil War poet Walt Whitman because it “should have roused the fight in the entire U.S. public” (Time, March 23, 1942, p. 27; August 23, 1943, p. 34; August 30, 1943, p. 28). Their media strategies are useful for today’s businesses when communicating information needs during a time of crisis. Effective leadership calls for personable executives skilled in the fine art of communicating across boundaries (Fombrun, 1992; Hartog and Verburg, 1997). The most successful firms provide a common understanding of a clear and consistent corporate vision (Bartlett and Ghosal, 2002). Through their frequent messages in the press, radio and film, Roosevelt and Curtin generated mainly favorable media coverage about their alliance in World War II (hereafter the war). They developed cooperative media strategies after the Japanese military government’s bombing of the Hawaiian naval base, Pearl Harbor, on December 7, 1941. Roosevelt sent about 90,000 US servicemen to Australia, a country with major military bases and a population of seven million people, by August 1942 (Curtin, 1944a; Saunders and

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Taylor, 1995). By talking frequently with journalists, using inclusive language and practiced, forceful gestures, they persuaded varied public audiences to coalesce and support their strategic direction. This paper identifies the lessons of their media success for today’s businesses. LITERATURE REVIEW A review of the literature reveals parallels in both leaders’ media skills. They established a close affinity with journalists by talking about their previous newspaper experiences in media conferences. While Roosevelt enjoyed referring to his undergraduate position as the managing editor and president of his university’s newspaper, The Harvard Crimson, Curtin discussed his former role as an Australian labor newspaper editor (Davidson, 2000; White, 1979). When Curtin visited San Francisco on April 19, 1944, for example, he said he had been a “newspaperman” at a media conference that was “the biggest and best ever held” in the city, according to a Columbia Broadcasting System (CBS) commentator (Moody, 1944a, p. 1). Appealing to journalists’ sense of integrity, Curtin said they were in an “honorable” profession that necessitated a “high degree of responsibility” and upholding a “code” (1944b, p. 44-45). These press conversations assisted the two men to develop a sense of a common bond with reporters. As Roosevelt answered journalists’ impromptu questions, his interviews represented a significant departure from the more formal, structured briefings provided by his predecessors, Herbert Hoover and Woodrow Wilson (Perloff, 1998; Truman, 1945; Winfield, 1990). He generally conducted twice-weekly news conferences during his four presidential terms. This amounted to 998 interviews during slightly more than 12 years, from March 8, 1933, to April 5, 1945 (Perloff, 1998). Likewise, Curtin generally held twice-daily media briefings, well-timed at noon and the early evenings to coincide with reporters’ deadlines including weekends (Lloyd, 1988, Lloyd and Hall, 1997). Furthermore, he conducted at least three major media conferences in San Francisco and Washington DC in 1944 (Campbell, 2008; Curtin, 1944c; Great Britain Foreign Office, 1944). Just as Roosevelt was the first president to employ a full- time press secretary, Stephen T. Early, in 1933, Curtin appointed Australia’s first full-time prime ministerial press secretary, Don Rodgers, in 1941 (Levin, 2008; Rodgers, 1971). While Curtin and Roosevelt benefited from the wartime censorship policies, and a few newspaper publishers disagreed with their ideologies, they developed mainly respectful, egalitarian relationships with journalists (Day, 1999; Serle, 1998; Steele, 1985). Both leaders enthusiastically used the relatively new media of radio and wartime newsreels (Bonner, 1963; Day, 2000; Link, 1955; University of San Diego, 2008; Ward, 1999). Scholars have described Roosevelt’s radio “fireside chats” as setting “the gold standard for American political oratory” because of his ability to project a warm, fatherly persona to US audiences (Bonner, 1963; Lim, 2003, p. 438; Link, 1955). As historical accounts vary, it is believed he gave between 25 and 31 radio “fireside chats” during his presidency (Lim, 2003). Also Curtin gave radio talks from his country to US listeners (John Curtin Prime Ministerial Library, 2007). By early 1944, he and Roosevelt had developed a “very friendly and cooperative relationship” (Black, 2001, p. 225). Likewise, the leaders’ wives, Eleanor Roosevelt and Elsie Curtin, used news conferences to promote their wartime alliance, as well as to support women in business and leadership. On March 6, 1933, only two days after her husband’s inauguration, Eleanor Roosevelt began weekly interviews to try to persuade US news organizations to employ at least one female journalist each. She conducted 350 women-only media conferences in the White House from 1933 to 1945 (Beasley, 2000; United States Library of Congress,

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2006). Just as Eleanor Roosevelt gave media talks during her visit to Australia, Elsie Curtin conducted news interviews in Washington DC (Campbell, 2008). As US correspondents portrayed Roosevelt’s death as a shock to Americans, similarly many Australians were reportedly astonished by the loss of Curtin. Both nations’ citizens seemed genuinely surprised by the news because journalists had cooperated with the two leaders and censorship policies by avoiding publishing detailed medical diagnoses of their health problems (Coatney, 2011; Evans, 2002). Curtin wrote to Eleanor Roosevelt and the new US President, Harry S. Truman, that Australians were deeply “shocked” by his death during his vacation in Warm Springs, Georgia, on April 12, 1945 (1945b, p. 34.). Similar statements were made about Curtin after he died in Canberra on July 5, 1945. Few Australians “were prepared” for the tragedy, with people quoted as saying they “didn’t think it was so near.” The news was reported as tributes on US press front pages (Coatney 2011). Journalists lauded the two men’s resolve to remain as leaders to help achieve a war victory. METHODOLOGY To discover how the two leaders were able to develop positive media relations, this study has conducted a multimethod approach. First, a new examination is made of primary sources, some of which are rarely viewed, to identify the successful strategies developed by Roosevelt and Curtin in their media conferences. Secondly, through a limited content analysis, this paper investigates the keywords they emphasised to persuade audiences. Thirdly, the simplicity, accessibility and appeal of their words will be examined. The Flesch Kincaid score will be used for this purpose. This formula ranks documents on a school grade level. The recommended Flesch-Kincaid score for most public documents is about eight, close to the reading level of “middle-brow” newspapers and suitable for an eighth-grade student (Day, 2008; Lim, 2003). Rudolph Flesch first developed his readability formula as a doctoral thesis in 1943 at Columbia University’s Teachers College in New York City (Sirico, 2008). Certainly, Roosevelt and Curtin were aware of the need to speak distinctly in national broadcasts (Curtin, 1941a; Ryfe, 1999). Expert recommendations have varied on the optimal pace of public speech, with some scholars advising a languid pace of one hundred words each minute (Lim, 2003) while other authors advocate 125 words a minute in a business setting (Nichols and Stevens, 1957). These formulas will be applied to a sample of Roosevelt and Curtin speeches to glean an understanding of whether their media messages were targeted effectively to global audiences. Fourthly, it is important to discover whether these messages were reproduced favorably in the news. This analysis is based on the Pew Research Center’s Project for Excellence in Journalism formula (2008) that a news article is deemed “positive” if two-thirds of the statements appear to support a leader (Public Broadcasting Service, 2009). Fifthly, while public opinion polling was new in the wartime era, these surveys indicate general support for the two leaders (Gallup, 1972; The Courier-Mail, August 14, 1942, p. 4; Time, August 23 and 30, 1943). By investigating their ability to promote their values and visions, this study will identify the secrets of their success as media communicators. FINDINGS AND DISCUSSION Managing the News Although Roosevelt and Curtin cultivated good-natured relationships with journalists, they delivered their main messages forcefully to the media. For example, the president joked with the nation’s newspaper

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financial editors at the beginning of an interview, when he said: “Of course, very few newspapermen know the difference between a dollar and a dime, anyway. But then, on the other hand, very few Presidents do. So we start even” (1942a). Yet he knew how to persuade journalists to focus on his messages. At one of his White House media conferences, he sought to influence correspondents to report on the US economic agreements with Australia. He announced: “We have been receiving from Australia enough beef and veal, practically, to feed all of our troops that are based in Australia.” This “reverse lend-lease process” enabled US meat producers to send about the same amount of beef and veal to troops in Europe. “I didn’t know it until this morning,” he told journalists. “I grabbed hold of it and said that’s the thing that has been overlooked.” He also encouraged them to publish the news by saying: “That is a real headline. In the long run that is something that the country doesn’t know” (1943). As a result, the press reports supported the US-Australian military alliance (Coatney, 2011). Roosevelt’s innovative news conferences perhaps influenced Australia’s prime minister to hold more frequent, two-way discussions with journalists. Curtin’s news interviews were unprecedented in their frequency, openness and informality in Australia (Coatney, 2011). At his San Francisco media conference, “pressmen” applauded and laughed when he joked that neither he nor Roosevelt “could get outside of the law of natural attraction” as American servicemen married Australian women (1944d, p. 35; Moody, 1944b). Despite these seemingly spontaneous interactions, Curtin was prepared to direct the content of these international media talks. When he visited Ottawa in 1944, the Canadian Prime Minister, William Lyon Mackenzie King, observed: “He seemed to attach great importance in the morning to the press interview. He came with material prepared for distribution, welcomed questions, etc” (June 1, 1944, p. 565). Just as Roosevelt had persuaded reporters to promote his “real headline,” Curtin focused journalists’ attention on his prepared information. Likewise, Eleanor Roosevelt created a “delightfully informal atmosphere” and also made her main points emphatically at a media conference in Canberra, Australia on September 3, 1943. Afterwards a senior Australian journalist, Joseph Alexander, wrote in his diary: “She is the greatest woman in public life that I have ever met” (September 4, 1943). Furthermore, Eleanor Roosevelt’s candid media talks in Australia might have influenced Elsie Curtin’s interview techniques when she visited Washington DC in 1944. Elsie became a popular media personality, who assisted her husband’s US mission. Shortly after Curtin announced his trip, The New York Times (April 4, 1944, p. 14) and The Washington Post (April 6, 1944, p. 9) publishers praised Elsie’s decision to “break a tradition” and travel with her husband. Eleanor promoted a firm friendship with Elsie (Eleanor Roosevelt 1944). At her first US news conference, Elsie accentuated themes of kinship by saying Australian and American women had “a good deal in common” and she would continue to support their “prominent” work in “public affairs” (1944). After her interview with Washington DC’s leading female journalists, she was praised for her “honest opinions of matters American and Australian” (Republican, May 5, 1944; The New York Times, April 26, 1944, p. 20; The West Australian, April 28, 1944; Valley News, May 6, 1944). Elsie extended her US visit, resulting in Washington Post stories about her “busy time” as an “honor guest at luncheons” and her speech to the American Association of University Women (May 12, 1944, p. 12; May 15, 1944, p. 3). Subsequently the two women pioneered direct relationships between a national leader’s wife and international journalists. Along with their candid press briefings, Roosevelt and Curtin were adept in diverting media attention from controversies. One day after the US declaration of war against Japan on December 8, 1941, Roosevelt announced new censorship rules at his press conference. In a persuasive manner, he added: “It is going to work out all right.” Yet one White House reporter questioned: “Will there eventually be a

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censor who we can get our teeth stuck into?” The president replied: “It is awfully hard to answer it. Talk to Steve [Early] about this” (1941a). By referring the journalists to his press secretary, Early, he managed to forestall more negative questions. Ultimately reporters were willing to accept a voluntary censorship system because it was preferable to punitive war secrets laws and they recognised the popular support for fighting totalitarian enemies (Hammond, 2001). Similarly Roosevelt was keen to prevent undue media attention of Curtin’s visit because he was secretly resting at his advisor Bernard Mannes Baruch’s hunting and fishing lodge in Hobcaw Barony, South Carolina. Before the meeting, Eleanor confided to Elsie: “The President may still be away on an enforced holiday due to complete weariness” (1944). They kept Roosevelt’s secret. Curtin did not give details of his forthcoming trip when he spoke to 80 leading journalists at Blair House, Washington DC on April 24, 1944. Instead, correspondents positively portrayed his views on peace talks (The New York Times, April 25, 1944; The Washington Post, April 25, 1944). While detailed records do not exist, Roosevelt seemed to have enjoyed Curtin’s visit because on the same day, he cabled Churchill to confirm: “Everything goes well here in my vacation residence. The doctor agrees with me that I am better” (1944a). Early’s media release indicated only that the Curtins had accompanied Eleanor on a one-day return trip to Roosevelt’s “vacation residence in the South” (Early, 1944, p. 15). This abstruse message was repeated in newspapers and an official photograph of the cheerful visitors was published (Republican, May 5, 1944; The Daily Mirror, May 1, 1944; The Daily Telegraph, Sydney, April 27, 1944; The Sydney Morning Herald, April 25, June 27, 1944). In fact, Roosevelt revealed his “vacation hide-out” to White House correspondents only when he invited them to an interview at Hobcaw Barony on May 6. Imploring them to maintain confidentiality, he said: “I have been very comfortable down here. I want to come back” (1944b). Their press strategies are useful for businesses when conducting media conferences and news interviews. While cultivating direct, candid and forceful communications to journalists, they knew when to divert attention quickly from potential controversies. Although they gave the appearance of informal, spontaneous press interactions, they were prepared to focus on their main messages by distributing written material and persuading reporters to accept what they considered to be a “real headline” (Roosevelt 1943). Connecting with New Media Audiences During their global media broadcasts, Roosevelt and Curtin deliberately selected inclusive language of unity and appealed to ideals that evoked shared meanings among different cultural groups. When Roosevelt began his Pearl Harbor announcement and his “fireside chats,” he always welcomed his media audiences with some variant of a greeting to “My Friends” (Lim, 2003). One day after the bombing in Hawaii, he attempted to instil hope in his listeners by talking of “righteous might,” “absolute victory,” “confidence,” “determination,” and “triumph” (1941b). As Curtin broadcast the first prime minister’s radio talk from Australia to American listeners, he greeted “men and women of the United States” particularly those who were “fighting,” “sweating in factories and workshops,” and “making sacrifices.” His frequent use of “we,” “us” and “our” contributed to his reassuring tone (1942a). Curtin’s appeals to freedom, democracy, and liberty were familiar in Roosevelt’s rhetoric. More than half of the “fireside chats” were published on The New York Times front pages, with the full texts of the speeches continuing inside the issues (Lim 2003). Such prominent news columns indicated press endorsement for Roosevelt in his home state as he was a former governor of New York. Furthermore, when he mentioned “Australia” occasionally (1942b, 1942c and 1942d), his speech was often favorably promoted on Australian newspaper front pages (e.g. The Argus, April 30, 1942; The Canberra Times, February 25,

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1942, September 9, 1942). Curtin broadcast his US radio talk to more than 700 radio stations connected to the National Broadcasting Company of America, as well as to the British Isles, Canada, Europe and South America (1942a; The Age, The Canberra Times and The West Australian, March 16, 1942). He received positive US press coverage and London reporters praised his “fighting message to America” (The Age, March 16, 1942, p. 2; Time, March 23, 1942). Thus they established a semblance of a friendship with their audiences that reinforced each one’s media image as a “man of the people” (ScreenSound Australia, 1945). Despite their theme of unity, the two leaders tried to marginalise and isolate their critics. Roosevelt “assailed his opponents … as often as he greeted his friends” in his “fireside chats” (Lim, 2003, p. 449). During his broadcast to celebrate George Washington’s birthday, he described foreign policy isolationists as those who “wanted the American eagle to imitate the tactics of the ostrich.” He added: “Now, many of these same people, afraid that we may be sticking our necks out, want our national bird to be turned into a turtle.” Roosevelt reassured his listeners, however, that “we prefer to retain the eagle as it is - flying high and striking hard” (1942e). Likewise, Curtin branded his critics, who were opposed to his military draft policy, as “the mischief-makers outside” the government, and “abusers” whose “quarreling” would not hinder “those who have the responsibility of conducting the war” (1943a, p. 592-596). Newspaper editors copied his speech, focusing on his description of the “mischief-makers” (The Age, The Sydney Morning Herald and The West Australian, February 12, 1943). Yet both leaders took care to make impersonal references to “Japan,” “the enemy,” and the war. It was necessary to avoid verbal “assaults” on Japan’s revered Emperor Hirohito, according to the US government. By the first half of 1942, Roosevelt and Curtin removed official anti-emperor and racist statements that might consolidate Japanese people’s support for their military government and could become counterproductive to Allied efforts in the Pacific (Brands, 2005; Curtin, 1942b; Mowell, 1942). With the aid of speechwriters, as well as adding their personal written flourishes, they were able to portray their opponents as removed from public opinion. Moreover, Roosevelt and Curtin advanced the use of relatively new media to aim their messages appropriately to their target audiences. Roosevelt made about nine radio talks each year during his presidential terms. Curtin broadcast about 12 significant prime ministerial radio addresses a year. In terms of the accessibility of their words, Roosevelt’s “fireside chats” were suitable for audiences with a ninth-grade reading level. A selected sample of Curtin’s radio talks was generally appropriate for tenth- grade listeners. Although the prescribed standard was for a public document to be targeted to an eighth- grade student, it appeared that they still aimed their major radio broadcasts to a predominantly lower secondary school level. This was suitable for the era, when the average level of education was eight years of schooling in the US and nine years in Australia. The Roosevelt and Curtin radio talks were accessible to global media audiences (Coatney, 2011; Day, 2008; Lim, 2003; U.S. Census Bureau, 1942). Both Allied war leaders knew how to deliver their oratory at the right pace for their target audiences. When announcing the Pearl Harbor tragedy, Roosevelt spoke for six minutes and was reportedly interrupted by “wild and thunderous applause and cheers” in the joint session of Congress (1941b; The Argus, December 10, 1941, p. 5). Therefore he spoke 86.6 words a minute; his pauses emphasised the drama and import of his words during the broadcast. In his radio talk on the same day, Curtin spoke 119.4 words per minute, which some scholars would consider to be an acceptable pace (1941b; Nichols and Stevens, 1957). After developing a reputation as a very fast speaker, Curtin talked calmly with Australians in like manner to Roosevelt’s reassurance that the invasion of Pearl Harbor was “a date which will live in infamy” (Roosevelt, 1941b; The Herald, October 4, 1941). According to different scholarly estimates, the president’s average pace was between 105 and 117 words per minute in his “fireside chats”

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(Bradenburg and Braden, 1958; Lim, 2003). Based on a selected sample, Curtin spoke an average 139.46 words a minute, faster than the recommended levels of 100 to 125 words (Curtin 1941b, 1942a, 1943b). Yet at the start of the Pacific crisis, both leaders spoke more slowly than they normally did to emphasise their keywords about hope, unity and a strong defence. During his “fireside chats” newsreels, Roosevelt spoke directly to the camera at eye level, with his hands placed on the table before him to signify his straightforward manner and a close connection with his audiences. Also the president was framed in close-up and medium shots to convey a personal relationship with US moviegoers (Universal Studios, 1933, 1934). In a 1934 scene, for example, he removed his pince-nez glasses and looked straight at the camera to criticize “a timid few people” opposed to his policies and to emphasize his words: “I believe in practical explanations and in practical politics” (Universal Studios, 1934). In like manner to his newsreels, filmmakers started a pattern of intimate, close-up scenes that signified Curtin was leveling with the public. Filmed rehearsals showed Curtin’s determination to perfect his messages as he uncomplainingly waited for the director’s clapperboard and the call for “action!” His practice film scenes indicated he refined his memorised rhetoric, gestures and camera delivery to build “a closer relationship between the Australian and American peoples,” as he declared in a public statement. During one of his stand-ups to the camera in “take three,” for example, Curtin pointed his finger, moved his head from side to side, looking like he might be addressing an unseen audience, and said: “We know that our destinies will go forward hand-in-hand and we are proud and confident in that association.” The camera zoomed in closer during “take four” as he embellished his statement to add, “we will stand or fall together” and “we are proud and happy in that association [emphasis added.]” As in his other newsreels, he did not refer to notes (Coatney, 2011). Roosevelt’s innovative use of relatively new media may have influenced Curtin’s radio and film strategies. Both leaders seemed to have approved of film techniques that emphasized their direct communications and strong, decisive gestures to reassure international audiences.

They worked hard to look like skilful media performers, providing useful tips to business communicators. Their strategies included rehearsing in practice sessions so that later, they would appear to be using new media effortlessly. Also they approved of close-up, eye-level visual images of themselves to establish a sense of a personal relationship with their audiences. They used assertive hand gestures to emphasise their main messages, such as when Roosevelt deftly removed his pince-nez glasses and Curtin pointed his finger as they made their points. Their unifying, inclusive language appealed to shared ideals that brought different groups together. At the same time, they portrayed their opponents as isolated from mainstream public opinion. Additionally they took care to use impersonal words to characterise foreign enemies so they would not alienate overseas populations. They spoke more slowly to appear calm and reassure people in a time of crisis, and selected accessible words that were appropriate for their target audiences. Their rhetoric, media images, and gestures are applicable for today’s business leaders when needing to articulate a clear vision to increasingly multicultural audiences The frequency of their radio broadcasts, the largely positive reception towards them in the news, the mass audiences of devoted listeners and polls suggest that Roosevelt and Curtin used the media skilfully (Lloyd, 1988; Steele, 1985; Time, August 23, 1943). Similarly to the president, Curtin generated mainly positive news coverage of his foreign policies (Coatney, 2011; Steele, 1985). They were successful in using relatively new media to develop a close link with public audiences. For example, Australian radio listeners enjoyed Curtin’s “periodical talks to the nation” because they liked to “hear his voice, weigh his words and generally maintain that personal contact with the head of the Government which is eminently desirable” (The Age, January 22, 1945). At least 12 wartime senior journalists affirmed in their

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reminiscences that he was a great prime minister (Coatney, 2011). Likewise, public polling conveyed the leaders’ foreign policies were mostly popular among citizens. By January 1942, Roosevelt’s public approval rating was 84 per cent, according to the Gallup poll. Another survey found 73 per cent of respondents approved his handling of foreign policy in May 1943 (Gallup, 1972). The next year he was elected to an unprecedented fourth presidential term. In a survey in Australia, eight out of 10 voters said they “were satisfied or more than satisfied with Curtin’s job as prime minister” in August 1942 (The Courier-Mail, August 14, 1942). During the Australian federal election in 1943, he won 66.9 per cent of the votes in his electorate of Fremantle, Western Australia. At the time, this was the greatest election victory for his Australian Labor Party. Time reported (August 23 and 30, 1943) that 78 per cent of Australians supported his leadership. These types of polls and news coverage indicated the leaders’ mass media strategies were successful in attracting broad support. CONCLUSION In a global crisis, Roosevelt and Curtin provided valuable lessons on how to manage media relations. As rarely researched documents have shown, they successfully cultivated spontaneous interactions with journalists, the result of thorough preparations before interviews. They kept focused on their main messages, directing talks from potential controversies and branding opponents as far from the mainstream. When advancing the use of relatively new media, they selected inclusive language of unity to appeal to ideals shared by disparate populations. Their media images signified a direct, honest relationship between them and the public. Also they spoke more slowly to media audiences after the Pearl Harbor bombing, emphasising their resolve, and targeted their words at an accessible level. Their techniques are helpful to business managers as they seek to communicate a strong, unifying and memorable vision in the media. REFERENCES Alexander, J.A. (1943) “Papers 1833-1957,” Canberra: National Library of Australia, NLA MS2389.

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Evans, H.E. (2002) The Hidden Campaign: FDR’s Health and the 1944 Election. New York: M.E. Sharpe, Inc.

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Great Britain Foreign Office (1944), “Political situation: consular reports,” April 28, Bentley: John Curtin Prime Ministerial Library, JCPML00779/13.

Hammond, W.H. (2001) “Book review: Secrets of Victory: The Office of Censorship and the US Press and Radio in World War II” (Michael S. Sweeney), The Journal of Military History, vol. 65(3), p. 840- 841.

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Link, A.S. (1955) American Epoch: A History of the United States Since the 1890’s. New York: Alfred A. Knopf.

Lloyd, C.J. (1988) Parliament and the Press: The Federal Parliamentary Press Gallery, 1901-88. Carlton: Melbourne University Press.

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Roosevelt, F.D. (1941a) “Excerpts from the Press Conference”, December 9, The American Presidency Project, Accessed December 8, 2008 at: http://www.presidency.ucsb.edu

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ACKNOWLEDGEMENTS This research was supported by the Australian Government under an Australian Prime Ministers Centre Fellowship, an initiative of the Museum of Australian Democracy. The author would like to thank the Institute for Business and Finance Research, the John Curtin Prime Ministerial Library, and Associate Professors Steve Mickler and Bobbie Oliver of Curtin University. BIOGRAPHY Dr Caryn Coatney lectures and teaches at Curtin University in Western Australia. She has completed a Fellowship at the Australian Prime Ministers Centre in the Museum of Australian Democracy, Canberra. Along with her academic publications, she has a PhD, MA, and BA with Double Honours. She has worked in journalism and public relations for 20 years including as a staff writer, news editor and bureau manager at The Christian Science Monitor and The West Australian Newspaper Group.

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THE FASB ACCOUNTING STANDARDS CODIFICATION AND ACCOUNTING QUALITY

Chia-Ling Chao, National Chung Cheng University

ABSTRACT On June 30, 2009, the Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162. Although the Codification was not intended to change generally accepted accounting principles (GAAP) or any requirements of the Securities and Exchange Commission (SEC), the process of eliminating content viewed as redundant or nonessential introduces the possibility that GAAP is altered. Moreover, if management specifically used ambiguity in pre-codification compilation GAAP to shift their numbers toward industry means or stable time trends, then it is warranted to investigate whether the Codification lessen opportunities for this sort of earnings management (McEwen, Hoey, and Brozovsky, 2006). Against this background and concern, this paper examines whether the implementation of the FASB Codification is associated with higher accounting quality. The results indicate that accounting amounts of firms in the post-codification period exhibit less income smoothing, more timely recognition of losses, and higher value relevance than those in the pre-codification regime. This comparison provides direct evidence that accounting quality for U.S. public firms improves between the pre- and post-codification periods. JEL: M4 KEYWORDS: Earnings Management•Conservatism•Value Relevance

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DISCLOSURE LEVEL, STOCK MARKET LIQUIDITY, AND EARNINGS QUALITY: EVIDENCE FROM TAIWAN

Horng-Ching Kuo, National Chengchi University, Taiwan Hsiu-Chin Lin, Deloitte, Taiwan

ABSTRACT

In 2003, authorities in Taiwan launched a system to annually rank listed firms according to disclosure level to encourage raising disclosure levels so as to reduce cost of capital. This study explores the relation between disclosure level (as proxied by the ranking results of the system) and market liquidity (as measured by effective bid-ask spreads) to empirically test whether the objective of the system can be achieved as asserted. In examining the relation between disclosure and cost of capital, Francis et al. (2008) find that the relation between the constructs examined is due to disclosure being merely a proxy for earnings quality. Following Francis, et al. (2008), this study also examines whether earnings quality plays a role in the relation between disclosure and liquidity. Results of the study reveal that market liquidity is better for firms that disclose more. In addition, this study finds that market liquidity is higher (lower) for firms with higher (lower) earnings quality. Finally, in contrast to Francis, et al. (2008), this study finds no significant difference in the relation between disclosure and liquidity after controlling for earnings quality, which indicates that, aside from earnings quality, information disclosure is affected by other factors as well. JEL: M KEYWORDS: Disclosure, Information transparency, Earnings quality, Liquidity

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CAPITALIZING WOMEN’S HUMAN RESOURCES THROUGH MICROENTERPRISE DEVELOPMENT IN

RURAL AREAS: ROLE OF MICROFINANCE Poornima Gayangani Wasana Jayawardana, Ritsumeikan Asia Pacific University

ABSTRACT

Microfinance is closely associated with microenterprises due to its ability to eliminate one of the greatest obstacles of access to capital. However, its effectiveness in microenterprise development remains questionable. This study attempts to shed some light on this by assessing the role of the largest microfinance provider in Sri Lanka in microenterprise development among rural women, with a qualitative case study. The study reveals that mishandling of loans has largely limited the program effectiveness in promoting female microenterprises. This is mainly due to the lack of proper monitoring even with the availability of other supporting services. Thus, field officers’ role in effective monitoring of credit disbursement and utilization is essential for actively promoting microenterprises among these rural women through the program. INTRODUCTION Microenterprise development through microfinance has been emerged as a major strategy for integrating women into the overall economic development process in many developing countries. Microenterprises mainly focus on developing and utilizing the entrepreneurial skills and potential of rural women below the poverty line (Kaushik & Rengarajan, 2010). Microfinance programs have been recognized as an effective mechanism for bringing equal opportunity for women by providing capital through repayment technologies. Thus, microenterprises are generally perceived as very small businesses owned by the self employed poor that usually do not have access to the commercial banking sector and use microfinance (Leon & Schreiner, 2001; Jones, 2004). Despite the wide recognition given to the microfinance in promoting microenterprises, studies have offered contradictory findings on its effectiveness. This study seeks to provide an insight into this issue by assessing the role of Samurdhi program in Sri Lanka in promoting microenterprises among rural women in the country. Samurdhi or ‘prosperity’ in local language is the largest microfinance provider in Sri Lanka. It was launched in 1995 by the government as a poverty alleviation program with total country coverage, where a large percentage of poor families as members of Samurdhi Banking Societies (SBSs) that facilitate community based lending. The program consisted of three main components of provision of consumption grants, provision of savings and credit facilities that provides microfinance services, and community development programs. These three components are operated as integrated support activities. The Samurdhi program has extensive coverage in rural areas, and the majority of the program participants are women (Gant et al, 2002). The main objective of the program is to ensure beneficiary participation in the production process by increasing access to resources for self employment. This study was conducted in Ihala Koswaththa village with a population of approximately 2500 in 2010. The village is situated in Kurunegala District of North Western Province in Sri Lanka. The study relies on the female microfinance clients of the study village to reflect and assess to what extent access to

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microfinance services through the Samurdhi program has contributed to develop microenterprises among them. LITERATURE REVIEW There is no single definition of microenterprise as it varies depending on the context. Munoz (2010) comprehensively defines microenterprise as:

A very small enterprise that is typically owner operated and participated by marginalized segments that sell a product or service through entrepreneurial methodologies and utilizing diverse organizational forms. It operates under flexible arrangements and locations to manage entry barriers and capital constraints, in order to respond to market trends and customer requirements to achieve profitability and business growth. (p.3)

Microenterprise development projects are primarily designed to serve four objectives of poverty reduction, empowerment of women, employment generation, and enterprise development as an end in itself. Most projects combine first two or three as their explicit objectives (Jalal, 1997). Access to finance has been a major obstacle faced by microenterprises along with lack of support, market access and geographic constraints, lack of infrastructure, growth and expansion challenges, lack of market intelligence, poor business expertise, and lack of management skills. Hence, successful microenterprise development requires both financial and nonfinancial services (Goldmark, 2001). In this context, microfinance has been identified as an effective mechanism in providing financial services on a sustainable basis to poor who are outside the scope of financial markets by providing needed opportunity for starting up or expanding microenterprises. In addition to the financial services, microfinance often includes social intermediation and thus considered as the most effectual means for promoting female entrepreneurship (Ledgerwood, 2001; Churchill & Frankiewicz, 2006; Fayolle, 2007). The basic theory in microfinance assumes that increasing women’s access to financial services empowers them by putting capital in their hands, enabling them to increase their income through microenterprises and contribute financially to their households and communities. This economic empowerment is expected to produce increased self esteem, respect, and other forms of empowerment for microfinance women beneficiaries (Cheston & Kuhn, 2002, Mayoux, 2002). METHODOLOGY The study is qualitative in nature and data were gathered conducting fieldwork in Ihala Koswaththa village during September 2007 and 2010, through in depth interviews with individual Samurdhi program beneficiaries, small groups, Samurdhi field officers, village officer, and informal interviews, and observations made by visiting beneficiary households, weekly Samurdhi group meetings and monthly meetings of Samurdhi societies during the fieldwork. The respondents were selected through purposive sampling by selecting information rich cases on the basis of theoretical saturation (Guest et al, 2006), and interviews of Samurdhi microfinance clients were conducted with the married middle aged poor women who are also Samurdhi consumption grant recipients in the village.

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FINDINGS AND DISCUSSIONS The Samurdhi program has been primarily targeting women in Ihala Koswaththa for providing loans for microenterprises. According to the Samurdhi field officers, female recipients of Samurdhi in Ihala Koswaththa have been actively participating in the program and related activities. Figure 1: Samurdhi Microenterprise Development Approach through Microfinance

Source: Compiled by the Author Based on the group lending methodology, the program has encouraged women to form groups of five members having some already established connection and mutual understanding. The borrowers from groups guarantee one another’s loan repayments. The Samurdhi field staff highlighted that they assess the feasibility of the projects, and conduct field checks before approving group members’ loan applications. Furthermore, they monitor the progress and grant loan money at different stages of the projects. The village women who already owned microenterprises or had plans for undertaking income generating activities had obtained loans referring to those activities. In addition to the loan facilities, the program had provided various credit plus services including entrepreneurial skills training development of women in the village. The training component had assisted women to acquire new skills and identify avenues for starting microenterprises so that they were able to apply for loans. The program initially grants small loans for women and gradually encourages them to obtain larger loans through the expansion of their microenterprises. Microfinance though Samurdhi program has also provided insurance facilities for these women in the event of project failures due to various reasons such as death and natural disasters. The importance of providing nonfinancial services along with the loans has been highlighted for effective development of microenterprises through microfinance. The enterprise credit without consumption credit or safety net is considered ineffective in developing entrepreneurship (Jalal, 1997). Although Samurdhi

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program meet these criteria by combining financial services with nonfinancial services and a safety net component, the program role in promoting active entrepreneurship among women in Ihala Koswaththa village has been limited mainly due to the diversion of loan utilization for other purposes. Majority of the women interviewed in Ihala Koswaththa village had obtained loans through the Samurdhi program by indicating in the loan application that the money would be invested in microenterprise. This is consistent with the main objective of the program. However, according to interviews with recipients the loans had often not been used for the stated purposes, but instead for other purposes such as housing, family welfare, and repayment of other loans. Majority of the beneficiaries revealed that it was their initial intention even at the time of making the loan application. There were only few beneficiaries who had plans for investing in microenterprises when applied for the loans, but later had to prioritize their needs and spend the loan money on other purposes. Discussions with the field staff highlighted that women somehow tend to manage their repayments on time without investing credit on microenterprises in the absence of rigorous follow up and monitoring. Given that, all of the women who were interviewed had managed the loan repayments on time, with the income from their existing livelihood activities, with the help of their husbands, or in extreme cases with constant loans from neighbors and moneylenders despite the fact that loan money had not been invested in any income generating activities. The women under the study revealed that, in most cases, the field staff neither visited them before granting the loans nor monitored their progress unless they had been given a considerably large sum of money, giving opportunity for women to deceive the officers and misuse the obtained loans. This has largely contributed to the ineffective use of Samurdhi microfinance services in promoting microenterprises among these women. All of the women interviewed in Ihala Koswaththa possessed different skills, and had received various trainings under the Samurdhi credit plus service that could have been utilized for income generating activities. However, not all of the women had an entrepreneurial spirit or faith in starting or expanding their microenterprises. Women in the village highlighted various reasons behind this such as infrastructure constraints, limited market access, limited access to information, risk averseness, insufficient funds through loans for initiating projects, lack of commitment and discipline in continuation, lack of enabling household environment, and the traditional negative perception towards indebtedness in Sri Lankan society. CONCLUSION The findings highlight the limited capacity of Samurdhi microfinance services in promoting microenterprises among women in the study area largely due to the diversion of loan utilization for other purposes in the absence of proper monitoring, though the necessary nonfinancial supporting services are already in place with the financial services. The field staff role is vital in ensuring close monitoring of credit disbursement and utilization while approving enterprise loans only for viable economic activities. It should be ensured that repayments are made through business revenues enabling the primary objective of the program is satisfied. Along with that, program should adequately upgrade existing credit plus services to deal with the other issues and foster women’s confidence in entrepreneurship for actively promoting microenterprises, and thereby capitalizing women’s human resources that will ultimately enhance the life and economy of rural society.

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REFERENCES Cheston, S. & Kuhn, L. (2002). “Empowering Women through Microfinance”, in S. Daley Harris (eds). Pathways Out of Poverty: Innovations in Microfinance for the Poorest Families, Bloomfield, Connecticut: Kumarian Press. Churchill, C., & Frankiewicz, C. (2006). “Making Micorfinance Work: Managing for Improved Performance”. Geneva: International Labor Office (ILO). Fayolle, A. (2007). “Handbook of Research in Entrepreneurship Education: Contextual Perspectives”. Edward Elgar Publishing. Gant, R., de Silva, D., Atapattu, A., & Durrant, S. (2002). “National Microfinance Study of Sri Lanka: Survey of Practices and Policies”. Colombo: AusAID & GTZ. Guest, G., Bunce, A., & Johnson, L. (2006). “How Many Interviews are Enough? An Experiment with Data Saturation and Variability”. Field Methods, 18(1), 59-82. Goldmark, L. (2001). “Microenterprise Development in Latin America: Towards a New Flexibility”. Journal of Socioeconomics, 30: 145-149. Jalal, K.F. (1997). “Microenterprise Development: Not by Credit Alone”. Asian Development Bank (ADB). Jones. S. R. (2004). “Legal Guide to Microenterprise Development”. American Bar Association. Kaushik, S.K. & Rengarajan, V. (2010). “Microfinance and Women’s Empowerment”. Serials Publications. Ledgerwood, J. (2001). “Microfinance Handbook: An Institutional and Financial Perspective”. Washington: The World Bank Publications. Mayoux, L. (2002). “Women’s Empowerment Versus Sustainability? Towards a New Paradigm in Microfinance Programs”. In B.Lemire, R.Pearson & G.Campbell, (eds)., Women and Credit: Researching the Past and Refiguring the Future, pp.245-269. New York: Berg Publisher. Munoz, J.M. (2010). “Contemporary Microenterprise: Concepts and Cases”. Edward Elgar Publishing. Schreiner, M. & Leon, J. (2002). “Microfinance for Microenterprise: A Source Book for Donors”. Savings and Development 26.

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ANTECEDENTS OF ORGANIZATIONAL DOWNSIZING IN THAILAND'S TOURISM AND HOSPITALTIY

INDUSTRY: THE ROLE OF BUSINESS IDEOLOGY Por-ngarm Saengratwatchara, Srinakharinwirot University Theerapong Subsupanwong, Srinakharinwirot University

ABSTRACT

This paper examines the empirical relationship between business ideologies and perceptions of layoff and organizational downsizing within a context of tourism and hospitality business industry in Thailand. Drawing up on the concept of business ideology (Beyer 1986: 66), the study proposes that individuals having strong belief in business ideologies are more likely to perceive layoff and organizational downsizing as acceptable than those who do not. We have derived two formal hypotheses from this conceptual framework, discussed relevant issues in explaining key variables, and specified implications for future research and management practice. INTRODUCTION In the past three years, tourism in Thailand has been through its worst situation in decides, as a result of the global economic slowdown and political turmoil (Anonymous, 2008). Several tourism and hospitality businesses have to reduce cost by downsizing the size of an organization’s workforce to handle the situation. The reduction can be implemented through several means such as temporary layoff certain number of employees, no further plan for new employees, ask some employees to leave a few weeks without pay, shut down restaurants in hotels for certain period of time, etc (Anonymous, 2008). Organizational downsizing as a change management strategy has been adopted for more than two decades (Williams, 2004). Specifically, it is defined as a purposeful reduction in the size of an organization’s workforces (Cameron, Freeman, & Mishra, 1991; Cascio, 1993). Downsizing literature has evolved and now covers many aspects of organizational downsizing. Within literature, there is a growing body of work (Budros, 1999; Lamertz & Baum, 1998; McKinley, Sanchez, & Schick, 1995; McKinley, Mone, & Barker, 1998) that addresses downsizing from neo-institutional and ideological perspectives. This research suggests that downsizing is now taken for granted by managers and supported by specific ideologies that they and their employees share. One consequence of organizational downsizing that has become more visible lately is a dramatic shift in the employee-employer relationship. Originally conceptualized as a highly dependent and mutually beneficial relationship where the employee would stay with one firm for their entire career, now sees employees job hopping a myriad of times in order to get higher pay, better benefits, or a shorter commute. Because of this shift towards being increasingly independent, it would seem likely that the historically negative connotation about downsizing has also changed. Unfortunately, it is hard to test this assumption as little is currently known about the determinants of downsizing attitudes and perceptions because there is almost no research, to our knowledge, studying how business ideologies that both employers and employees in a society share impact level of favorableness in using organizational downsizing tactics. The current study sought to examine so by proposing that two business ideologies – the ideology of employee self-reliance and the ideology of corporate change help influencing the favorableness in using organizational downsizing tactics within tourism and hospitality business context of Thailand. In this

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paper, the ideology of employee self-reliance is defined as the belief that employees should be as independent of employers as possible, particularly regarding their own employability (McKinley et al., 1998), while the ideology of corporate change is defined as the belief that corporate change is constant, healthy and the normal condition for a corporation. THEORETICAL BACKGROUND AND HYPOTHESES The employee-employer relationship has changed significantly over the past 20 years from one representing a dependence based relationship to more of an at-will relationship. As such, scholars studying this change (e.g., Ellig, 1998; Kissler, 1994; Lucero & Allen, 1994) have posited a shift from an employer-reliant relationship in which employees rely on their employer for career success to one where the employees are more self-reliant (McKinley et al., 1998) where employees counteract their typical reliance on the firm by an increased proclivity for job mobility. Amongst the multiple causes for this shift, there has been much focus on employees’ increased levels of job mobility and organizations’ increased usage of downsizing and restructuring strategies (McKinley et al., 1998) likely play integral roles and place an increased level of demand on employees to take advantage of available methods for improving existing skills and developing new ones (Ellig, 1998). Beyer (1981: 66) defined ideologies as a “relatively coherent set of beliefs that bind some people together and that explain their worlds in terms of cause-and-effect relations.” When applied to organizational settings, contemporary scholars expand this definition and argue that managers adhering to ideologies experience a lowering of information processing requirements and some relief from the need to continually interpret an overabundance of complex information (e.g., Bunderson, 2001; Rust, 1999, Rust & McKinley, 2002). Therefore, following that belief in ideologies could ultimately influence decisions made by managers. Researchers have attempted to identify ideologies adopted by managers, and analyze how adoption of these ideologies affects the actions and interpretations of those who hold theme. For example, Meyer (1982a, 1982b) showed how ideologies influenced hospital administrators’ perceptions of a doctor’s strike. The major implication from this study is that different ideologies created different cognitive perceptions that led managers to interpret and respond to the same environmental event in different ways. Also, Barley and Kunda (1992) argued that managerial ideologies have repetitively shifted between rational and normative ideologies of control, influencing business practice in the process. McKinley et al. (1998) identified two managerial ideologies currently being explained in the writings by consultants and the popular business press – the ideology of employee self-reliance and the ideology of debureaucratization. Specifically, McKinley and his colleagues argued that these two ideologies have helped to create a context favorable to downsizing, primarily by changing employees’ views about the nature of the relationship between employee and organization. In her study of the effect of future threat of downsizing, Saengratwatchara (2005) further proposed that the ideology of corporate change, also creates a context of favorable to organizational downsizing by emphasizing that organizational downsizing is common as it is a part of organizational change, thus making downsizing seem more normal. Losing jobs through downsizing is widely considered to be one of the most traumatic events that can occur in a person's life (Grunberg, Moore, & Greenberg, 2006). However, we suspect that this thinking will eventually be reduced when individual employees subscribe to the ideologies described above. The

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ideology of employee self-reliance advocates employee independence, implying that the organization is not expected to be responsible for employees’ job security. The ideology of corporate change supports the idea of change, and contains a message that layoff and organizational downsizing should be expected, since it is a part of corporate change. If one adheres to these ideologies, job security will not be one of the obligations that one feels and employer should provide. Thus the failure to guarantee and/or provide job security will be seen as more acceptable and expectable, instead of being painful and unbearable among employees. The arguments above are summarized in the following hypotheses: Hypothesis 1: Individuals with strong belief in the ideology of employee self-reliance are more likely to perceive layoff and organizational downsizing as acceptable. Hypothesis 2: Individuals with strong belief in the ideology of corporate change are more likely to perceive layoff and organizational downsizing as acceptable. METHODOLOGY Population of interest of this study will be employees working for tourism and hospitality businesses in Bangkok and metropolitan areas. Participants will be given incentives once they finish the questionnaire. In developing a survey instrument to collect information of employees in tourism and hospitality business’s belief in business ideology and the use organizational downsizing, we will follow Saengratwatchara’s instrument assessing the effect of future threat downsizing (Saengratwatchara, 2005). The first part is an essay advocating the ideology of corporate change and the ideology of self-reliance while the second part is a series of items asking about the plausibility and the logic of the author’s argument. Additionally, there are four questions capturing their attitudes towards the use of downsizing tactics. These items are adapted based on the Downsizing Attitudes Scale (DAS) (Karau, Walker, & Saengratwatchara, under review). The scale shows excellent internal consistency, with the Cronbach alpha of .88 (Hair, Anderson, Tatham, & Black, 1995). The ranking scales range from 1= strongly disagree to 7 = strongly agree. The second part is demographic questions as well as other questions related to layoffs and/or downsizing experience. For example, the item asks whether participants have ever been laid off; if they have, when. Since our master instrument is originally in English, it will be translated into Thai and the translated instrument will be administered to individuals employed in tourism and hospitality businesses in Thailand. After collection of the data, the instrument was back-translated by a different native Thai speaker from the one who had performed the original translation. This will be done to verify that the Thai version have been an accurate translation of the English original (Brislin, 1980). DISCUSSION AND CONCLUSION The most general discussion of this research is that business ideologies influence how people perceive layoff and organizational downsizing. Specifically, individuals with strong belief in the ideology of employee self-reliance and the ideology of corporate change are more likely to embrace layoff and organizational downsizing than those who do not believe so. As emphasized above, ideologies provide a cognitive framework that reduces uncertainty about the meaning of phenomena with which the believer is presented, highlighting certain aspects of the phenomena and downplaying others. This applies to layoff and organizational downsizing as well as any other phenomenon. In the current research, the aspect of organizational downsizing that appears to be highlighted (or constructed) by strong belief in the ideology

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of employee self-reliance and the ideology of corporate change is they have become more acceptable and thus favorable among employees nowadays. There are several routes for future research. First, scholars might want to administer the scale on a sample that is also exposed to layoff and organizational downsizing. Specifically, certain industries such as auto manufacturing always have a looming presence of these organizational practices and would serve as an interesting sample. Second, it would be interesting to administer this scale among difference parties in the layoff and organizational scenarios such as terminating agent, survivors, management, and victims. Furthermore, future research may want to examine which antecedents drive individuals’ perceptions toward the business ideologies. It is possible that personality traits such as self-esteem as well as others may impact the employee’s reaction to the threat of future downsizing. For example, employees with high levels of self-esteem have confidence in their skills and their ability to find new jobs so that they will not be as vulnerable as those with lower level of self-esteem when experiencing with layoffs. The study also has practical implications. Assuming that the results of the study supported the hypotheses that individuals with strong belief in the ideology of employee self-reliance and the ideology of corporate change would be more likely to accept layoffs and other organizational downsizing, we could expect managers to be tempted to hire employees holding those beliefs. This is because managers would expect that those individual employees would be more acceptable of layoff and organizational downsizing. Additionally, managers might seek to instill the beliefs into current employees so they would show less resistance when layoffs and/or downsizing occur in the organizations. In conclusion, we hope that our study provides a spark in the literature to more thoroughly research the unlimited of variables within the phenomenon of layoff and organizational downsizing, especially on business ideologies related to it. REFERENCES Anonymous. (2008, January, 2). Labour News. Retrieved January 2, 2008, from http://www.thannews.th.com/detialnews.php?id=T1223882&issue=2388. Barley, S. R. & Kunda, G. (1992). Design and devotion: surges of rational and normative ideologies of control in managerial discourse. Administrative Science Quarterly, 37, 363-399. Beyer, J. M. (1981). Ideologies, values, and decision making in organizations. In P.C. Nystrom, & W. H. Staruck (Eds.), Hanbook of Organizational Design, 2, 166-2020. New York: Oxford University Press. Brislin, R. W. (1980). Translation and content analysis of oral and written material. In H.C.Triandis & J.W. Berry (Eds.), Handbook of cross-cultural psychology, 2, 389-444. Boston: Allyn & Bacon. Bruton, G. D., & Keels, J. K. (1996). Downsizing the firm: Answering the strategic questions. Academy of Management Executive, 10, 38-45. Budros, A. (1999). A conceptual framework for analyzing why organizations downsize. Organization Science, 10, 69-82.

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Bunderson, J. S. (2001). How work ideologies shape the psychological contracts of professional employees: dcotors' responses to perceived breach. Journal of Organizational Behavior, 22, 717-741 Cascio, W. F. (1993). Downsizing: What do we know? What have we learned? Academy of Management Executive, 7, 95-104. Grunberg, L., Moore, S., & Greenberg, E. S. (2006). Managers' reactions to implementing layoffs: relationship to health problems and withdrawal behaviors. Human Resource Management, 45, 159-178. Hair, J., Anderson, R., Tatham, R., & Black, W. (1995). Multivariate Data Analysis. Englewood Cliffs, NJ: Prentice Hall. McKinley, W., Mone, M. A., & Barker, V. L. (1998). Some ideological foundations of organizational downsizing. Journal of Management Inquiry, 7, 198-212. McKinley, W., Sanchez, C. M., & Schick, A. G. (1995). Organizational downsizing: constraining, cloning, learning. Academy of Management Executive, 9(3), 121-145. Meyer, A. D. (1982a). Adapting to environmental jolts. Administrative Science Quarterly, 27, 515-537. Meyer, A. D. (1982b). How ideologies supplant formal structures and shape responses to environments. Journal of Management Studies, 19(1), 45-61. Rust, K. G. (1999). The effects of financial conditions and managerial ideologies on corporate downsizing: some evidence from the US investor-owned electric utility industry 1992-1995. M@n@gement, 3, 89-126. Rust, K. G. & McKinley, W. (2002). Managerial ideologies as rationalizers: how managerial ideologies moderate the relationship between changes in profitability and downsizing. Journal of Behavioral and Applied Management, 3, 108-128. Saengratwatchara, P. (2005). The threat of future downsizing and its ideological consequences. (Doctoral dissertation). Retrieved from UMI's Dissertation Abstracts database. (3204671). Williams, S. M. (2004). Downsizing - Intellectual Capital Performance Anorexia or Enhancement? The Learning Organization, 11(4/5), 368-379. BIOGRAPHY Por-ngarm Saengratwatchara is an Assistant Professor in the International College of Sustainability Studies at Srinakharinwirot University, Thailand. She received her Ph.D. in management from Southern Illinois University, Carbondale. Her research interests are organizational downsizing, layoffs, organizational restructuring and changes, and strategic management in business functions. Theerapong Subsupanwong is a lecturer in the International College of Sustainability Studies at Srinakharinwirot University, Thailand. His research interests includes sustainable tourism, community- based tourism, and specific tourism business.

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AN EXPLORATION OF THE CURE FOR DISSATISFACTION AMONG CUSTOMERS OF

MEDICAL SERVICES Jungki Lee, Korea University at Sejong, Jochiwon, South Korea

ABSTRACT

Research across cultures has consistently reported that customers of medical services experience a high propensity to experience dissatisfaction. Because a customer’s dissatisfaction with medical service produces a series of undesirable behavioral consequences, identifying sources of their dissatisfaction and cure for it is urgently needed. This study attempts to investigate the nature of dissatisfaction among medical service users from the perspective of the theory of perceived control. Data were collected from a sample of customers who had experienced dissatisfaction with medical services. Results of the study reveal that medical customers’ perception of low control during their interaction with medical service providers indeed has significant influences on their dissatisfaction. Managerial implications and future research directions are provided. BIOGRAPHY Jungki Lee can be contacted at Division of Business Administration, Korea University at Sejong, Jochiwon, Jochiwon-Eup, Yeongi-gun, Chungnam 339-700 South Korea, [email protected], 82-41-860-1660 (Office), 82-10-4546-4461 (Cell)

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THE CROSS-BORDER REGIONAL GOVERNANCE OF THE GLOBAL AUTOMOBILE PRODUCTION

NETWORKS IN ASIA Katsuhiro Sasuga, Tokai University, University of Warwick

ABSTRACT

This paper seeks to clarify the characteristics of the emerging cross-border regional governance of the global automobile production networks in Asia. It draws three streams; (1) the relationships between the global shift of the automobile industry and the sharp rise in automobile production and sales in China and India; (2) the ability of institutional settings at the host country focusing on the sub-national levels of government; (3) the role of foreign firms in technology transfer to developing countries and creation of local supplier networks. This paper seeks to examine and analyze the development of the Chinese and Indian automobile industries and the emergence of cross-border production networks in order to reveal a multi-scalar phenomenon linking specific regions and countries. It attempts to understand the nature and dynamics of operational regional governance comprising both individuals and collectives, as well as the roles of public and private actors pursuing common goals. The state has played an indispensable role in pushing the country to a higher phase of automotive modernization. But the paper highlights the dynamic and overlapping nature of automobile production networks in which cooperation and competition among economic actors actively take place. KEYWORDS: automobile industry, India and China, local government, production networks

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GLOBAL LINKAGE OF FINANCIAL SECTOR STOCK PRICES DURING US FINANCIAL CRISIS: EVIDENCE

FROM INDONESIA Aldrin Herwany, Universitas Padjadjaran, Indonesia

Erie Febrian, Universitas Padjadjaran, Indonesia

ABSTRACT Monetary authorities in Indonesia, as well as some academicians believe that the absence of long run relation between Indonesian stock market and developed markets prevents this emerging market from being deeply affected by the US downturn. Nevertheless, this hypothesis may not apply to the domestic financial industry as such service firms involve in cross-country financial investments. This study examines the global linkage of Indonesian Financial Sector stock prices during the US downturn using co-integration test and vector autoregression. This study elaborates the linkage of Indonesian Financial Industry with the same industry in US and UK markets, as well as with four developed Asian markets, i.e Tokyo, Hongkong, Singapore, and Kuala Lumpur stock exchanges, using more frequent time series data. We also conduct similar test using pre-US-crisis data to show magnitude of the linkage change. The results show whether financial industry fund managers would be able to diversify their portfolio in these markets either in long run or short run KEYWORDS: Financial sector, financial crisis, market co-integration

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EXCHANGE RATE VOLATILITY AND CORPORATE PERFORMANCE IN NIGERIA: A PANEL REGRESSION

APPROACH Ikechukwu Kelilume, Lagos Business School

Doyin Salami, Lagos Business School

ABSTRACT Nigeria experienced a large depreciation of its currency in the wake of the global financial crisis of 2008 with the result been a greater use of tight monetary policy tool and stringent management of the country’s foreign reserves to check volatility in the foreign exchange market The result has been massive fluctuation in exchange rate movement which have altered not only the structure and composition of firm’s profitability but also the cost profile of most firms. In this study we obtained cross sectional data for the most active 20 companies listed on the Nigerian Stock Exchange and adopted the panel data regression approach to assess empirically the effects of volatility clustering in exchange rate on firm’s performance in Nigeria over the periods 2000 to 2010. Our result indicates that exchange rate volatility have had a negative impact on corporate performance in Nigeria. In addition, we find the negative effects of fluctuation in exchange rate to have been induced by high and sustained increase in imported raw materials and capital goods. These results have implications for economic stability, policy initiatives and firm strategies. JEL: C34, D21, D51, D92, F31. KEYWORD: Exchange Rate Volatility, Corporate Performance, Panel Data Regression, Policy Formation and Strategies INTRODUCTION Firm performance in Nigeria has not particularly received much attention from macroeconomic point of view. The few studies on the existing on the subject matter have focused specifically on individual firm performance in relation to micro variables. Yet, in the empirical literature, several scholars’ contend that firms can take advantage of changes in macroeconomic aggregates to influence business performance (Greer, Ireland and Wingender 2001; Kypriotakis, 2002; Krishnamurthy, 2005; and Navarro, Bromiley and Sottile 2010). Others have linked firm’s performance directly to the movement of exchange rate (Klitgaard, 1999; Chatterjee, Carneiro and Vichyanond 2010; and Baggs, Beaulieu, Fung and Lapham 2011). The challenges posed by volatile movement of exchange rate became an issue of great concern to corporate establishments and policy makers in Nigeria in the wake of the 2007-2008 global economic crises. At the WDAS1, exchange rate during the period (January 2, 2008), opened at N115.00/US$ and closed at N130.32/US$ in the period (December 31, 2008) representing a depreciation of 13.32 percent. As at November 16, 2011 the naira exchanged at N153.5/US$ representing a depreciation of over 33.5 percent over the period 2008-2011. The volatile nature of the movement of exchange rate in Nigeria and the paucity of research in the area of exchange rate volatility and firm

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performance provides us a good opportunity for studying the effects of exchange rate volatility on firm performance in Nigeria. Instability in the foreign exchange market can pose significant risk to companies and enterprises conducting businesses in foreign markets. Through massive depreciation of the domestic currency of a country, firms operating in the domestic market can be subjected to either translation or transactions risks translating into significant shrinkage in company’s earning, market share, cash flow and firm’s balance sheet. In Nigeria, over the past decades, real output growth has averaged 6.5 percent with the manufacturing sector growth averaging less than 3.5 percent over the same period. This presupposes a declining firm’s corporate performance in the face of changing macroeconomic environment. This paper empirically examines the effects of exchange rate volatility on firm’s performance in Nigeria, using a panel data of twenty most active companies drawn from the Nigerian Stock Exchange and two key performance variables, cost of goods sold and gross profit before tax. We estimate a panel regression to take into account fixed effects and random effects across the companies. Following the introductory section, the rest of the paper is structured as follows; Section II covers some major theoretical and empirical literature while section III is the methodology. Section IV presents the result of the study while section V concludes the study. LITERATURE REVIEW Firm Transactions, Performance and Exchange Depreciation Harris (2001) affirmed that exchange rate depreciation is a necessary factor that influences the gap in productivities. Auer and Chaney (2007) insisted that in equilibrium, the market power of a given firm depends on the prices and qualities of its closes competitors and more than on prices of other closely related firms. They noticed that exchange rate movement is largely influenced by export transactions of low quality goods, which are in high demand internationally, since producers of such good are in steep competition and face the same exchange rate shocks (Fung, 2004). Considering exchange rate movements, the rates of export and firms’ performance, Berman, Martin and Mayer (2008) study indicates that in the presence of distribution costs in the export market, high and low productivity firms react differently to exchange rate depreciation. They noticed that firms with high performance optimally raise their markup rather than the volume they export; while low productivity firms choose the opposite strategy. Consequently, this heterogeneity has serious distorting influence on the levels of exchange rate movements in the economy. Insights from the concept of fixed cost to export express the fact that exporting requires a high productivity, an attribute which in turn gives an incentive to firms to react to exchange rate depreciation by increasing their export price rather than their sales (Berman, Martin and Mayer, 2008). They found out that high performance firms react to depreciation in exchange rate by increasing their export price rather than their export volume but low performance-exporting firms do otherwise. In addition, results revealed that more firms enter the export market following depreciation, these firms are small, their productivity is low and their extensive margin response to exchange rate movement is small when compared with other firms at the aggregate level. Their results suggest that prices are rigid in the currency of the export market and the levels of uncertainties as a result of the nature of the levels of imperfection in the competitive market and the influence of distribution cost (Campa and Goldberg, 2005; Corsetti and Dedola, 2005; Gopinath, Oleg and Rigobon, 2010). In this wise, local distribution costs

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basically lower the pass-through to consumer prices and generate uncertainties in productive capacity to remedy further reductions (Corsetti and Dedola, 2005; Berman, Martin and Mayer 2008). Empirical Literature To estimate exchange rate movement influence on firms performance, most literatures proposed that the main factors that are important in order for firms to be competitive include the ability to export, effective policy regulation, management style, ownership structure, technology and human capital (Bartelsman and Doms 2000; Girma, Greenaway and Kneller 2002). Therefore, to determine how the prices of different goods respond to exchange rate shocks and how this influences performance, Auer and Chaney (2007) proposed a model that viewed competitive pressure from various dimensions such as the domestic market structure, import competition, regional variation product markets, transportation infrastructure, and labor market competition. Also, they analyzed the time path of the impact of a competitive shock (i.e. the abrupt liberalization of prices, entry, imports, and labor mobility) in other to examine the non linearity in the effect of these competition forces. The evaluation of firms survival (persistent increase productivity), disclose that foreign and domestic market competition and good transportation infrastructure have negative impacts on survival, while demand shocks cause increases in the probability of survival. The strength of this impact depends on higher initial profitability and the size of export activities. This result also disclosed that total factor productivity produced strong evidences suggesting that domestic product market competition, import competition and local labor market competition have strong effects on firms’ efficiency (Berman, Martin and Mayer, 2009). Studying the effect of exchange rate shocks on pricing decision of multi-product firms and its impact on firm’s performance, Chatterjee, Carneiro and Vichyanond (2010) constructed a model putting into perception the quantity of the scope of the product, to analyze firms’ price adjustment in circumstances of exchange rate depreciation. It was noticed that firms face a product ascending steps of clustered processes, which is detected by their marginal cost of production. The research work revealed that these margins were usually high for products further away from firms’ core competency. Also, in the event of rate of exchange depreciates, most firms increase the prices of products closer to their core competency. This level of adjustments enhances firms’ performance. Farinas and Martin-Macros (2003) measured difference in economic performance and evaluated the total productivity difference between exporting and non-exporting manufacturing firms for over a ten years period. To do this effectively, they evaluated two measures so performance, labor productivity and total factor productivity and introduced a panel data analysis in accordance with the generalized moving moment (GMM) approach of Blundell and Bond (1999). They controlled for unobserved heterogeneity and simultaneity bias produced by the effect of productivity of the firms on output decisions. They noticed that exporting firms exhibit greater economic performance and self-select the most favorable output process. Park, Yang, Shi and Jiang (2006) considered firm performance by analyzing export demand shocks during the period of the Asian financial crisis in other to disclose how it influence Chinese exporting firms. They did this by constructing firm-specific exchange rate shocks based on the pre-crisis destinations of firms’ exports. These unanticipated shocks were used for to evaluate the impact of exportation on firm productivity and performance. They controlled for the selection bias of joint estimate in the equation by using the full information maximum likelihood method (Clerides et al., 1998). Therefore, Park, Yang and Jiang (2006) perceived financial crisis shocks has unanticipated and large,

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claiming that they were most ideal for identifying the impact of exportation on firm productivity and firms performance. As a result of this fact, they invoked a panel data to explore firm-specific exchange rate shocks based on the pre-crisis destinations of firms’ exports. They noticed that although export growth increase firm productivity and performance, exchange rate depreciation slow growth in export. The introduction of firm-specific exchange rate shocks is made possible by the availability of information on firm-specific export country destination for foreign-invested firms in China’s industrial. This was used to represent the timing and pattern of devaluations which were unforeseen due to the crisis. This identification strategy controlled for sector fixed effect and thus rules out bias from unobserved regional or sectoral changes. Also, it made it possible to determine how instrumented changes in exports affect measures of firm performance. Three key measures of performance considered by this study are the value of total factor productivity, total sales and return to asset. They were known to increase as the levels of export increased. They disclosed that firms with greater currency depreciation have slower growth in exports and export growth was noticed to increase firm productivity and performance. This study is different because it examines shocks that are heterogeneous across firms (as anticipated shocks from the financial crisis), which are not based on potential endogenous government actions (such as trade liberalizations), and are not caused by major crises or regime changes that are likely to be correlated with other economic or policy changes. Klitgaard (1999) examines the responses of firms to maintaining stable profit margins and sales as the rate of exchange fluctuates. These firms were known to strike a balance between a stable profit margin and a reasonable sales profile that will substance this profit. The short-run response of profit margins to exchange rate movements appears to be more prominent in firms associated with high valued commodities, the author suggested that this should be due to the fact that the prices of these commodities are majorly invoiced in foreign currencies such that when they are valued in terms of the local currency, they respond automatically to exchange rate swings. It was also noticed that the direction of the movement of the local currency have no effect on firms behavior in analyzing sale-profit relationship, this is because, these firms are used to adjusting their profit margins to stabilize prices in foreign markets. This means that these firms will only raise their profit margins when the local currency depreciates and they may cut margins when the yen appreciates. Baggs, Beaulieu, Fung and Lapham (2011) estimated the effect of real exchange rate movement on Canadian retail firms and its impact on firms’ performance. The measures of performance evaluated are profitability, size, sales and employment. They anticipated that exchange rate movement will have a demand-side effect on retail firms through its impact on cross-border shopping, mainly, Canadian- American consumers. Also, they proposed that these firms will have a supply side effect through its impact on the prices of imported goods that Canadian retailers purchase for resale. They examine the exchange rate effect on retail firms and its impact on different industry groups and detected that the effect of exchange rate movement was most adverse on profitability and the obtained effect diminished over time in accordance to the location of the firm, i.e. nearness to the market. They also disclosed that the real exchange rate distance interaction term maintain the same strong positive sign for all the firms observed. A negative exchange rate effect was observed due to a net effect in the prices of input as a result of an increase in the domestic rate of exchange, which caused the prices of inputs to fall and as a consequence, the retail price of the good was reduced. This indicates that a real appreciation of the Canadian dollar reduces the level of sales, increase in labor supply and firm profit.

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The exchange rate movement was also noticed to influence the levels of sales. The levels of sales were noticed to decrease as the rate of exchange appreciated while in depreciation in the real rate of exchange lead to increase in sales. Subsequently, the mixed effect of exchange rate movement was identified to have effect on firm’s survival. Therefore, the real exchange rate effect was viewed to have substantial implications for the sales, employment and profits of retail firms. Also, it was noticed that the largest shock adjustment effect is in profits, and that firms absorb a considerable portion of exchange rate shocks in sales and employment. It was also disclosed that the location of firms determine the magnitude of exchange rate shocks it can absorb. In a model with heterogeneous consumers, exchange rate pass through can be incomplete and heterogeneous across goods of different quality, Auer and Chaney, (2008) affirm that exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. For this reason, the level of productivity is subject to decreasing return to scale. The level of supply and intense competition react to cost changes due to exchange rate fluctuations. Subsequently, it was justified that exchange rate shocks are imperfectly passed through into prices. Exchange rate has a significant positive impact on export volumes, which varies across firms; although it is significantly reduced for low performing firms (Berman, Martin & Mayer. 2008). This suggests that high and low productive firms have distinct strategies for various circumstances of exchange rate changes. METHODOLOGY Data We obtained the data used for this study from Nigerian Stock Exchange Fact Book (2008), companies’ annual report and statements of accounts and the National Bureau of Statistics Nigeria. The company data comprises cross sectional yearly observations of company performance indicators for twenty most active companies listed on the Nigeria Stock Exchange over the period 2000 to 2009. The twenty companies selected for the study are Ashaka Cement Plc., Benue Cement Company Plc., Cadbury Nigeria Plc., Conoil/National Oil Plc., Flour Mills Plc., Guinness Nigeria Plc., John Holt Plc., Unilever Nigeria Plc., Julius Berger Nigerian Plc., Mobil Oil Nigerian Plc., Nigerian Bottling Company Plc., Oando/Unipetrol Plc., P.Z Industries Plc., Texaco. Nigerian/Chevron Plc., Total Nigeria Plc, W.A.P.C.O, United Nigerian Textile and UACN. The variables used in the study to capture corporate performance are cost related variables (Cost of goods sold) and profitability variable (profit before tax). The exchange rate volatility variable used is the square of the mean adjusted relative change in the official exchange rate. Model The model used for this study is a panel data regression in which corporate firm performance variable is expressed as a function of exchange rate volatility variable. To allow for control variable is the model, we added two explanatory variables prime lending rate and index of industrial production (a proxy for the level of economic activities). The model in it linear estimation form is expressed as follows;

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( )143221 ititititit uLINDPLINTREXRTLCOGS ++++= αααα ( )243221 ititititit uLINDPLINTREXRTLPRBT ++++= ββββ

Where; i = 1, 2,…,20 t =1, 2,…,10 LCOGSit is the log of cost of goods sold for the company i at time t. LPRBT is the log of profit before tax for the company i at time t. LINDPit is the log of index of industrial production affecting company i at time t EXRT2it is the exchange rate volatility variable. LINTRit is the prime lending rates affecting company i at time t. Uit is the error term. The study adopts the panel data estimation to test the behavior of the parameters in the models with the models allowing for three different assumptions: the common constant assumption, the fixed effect assumption and the random effect assumption. The first two models, equation (1) and equation (2) represent the common constant model. In this specification, we assume there are no differences between the estimated cross sections of the twenty companies. This assumption is useful only under the condition that the data set of the different companies is a priori homogenous. But firms hardly behave alike. To capture heterogeneous behavior across the twenty firms, we re-specify equations (1) and (2) as follows;