Challenges in the Era of Globalization - iaabd

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
ISBN: 0-9765288-6-X Confident in Africa’s Future
Volume 12
Challenges in the Era of Globalization
International Academy of African Business and Development
(IAABD)
Peer-Reviewed Proceedings of the
12 th Annual International Conference Held at:
Robbins Health Learning Center, 10800 – 104 Avenue
Edmonton, Canada
May 17-20, 2011
Edited By: Emmanuel Obuah
Alabama A & M University, Normal, Alabama, USA.
Hosted by:
Athabasca University, in partnership with Grant MacEwan University,
Edmonton, Canada.

Proceedings of the 12th Annual Conference © 2011 IAABD
Challenges in the Era of Globalization
International Academy of African Business and Development
(IAABD)
Peer-Reviewed Proceedings of the
12 th Annual International Conference Held at:
Robbins Health Learning Center, 10800 – 104 Avenue
Edmonton, Canada
May 17-20, 2011
Edited By: Emmanuel Obuah
Alabama A & M University, Normal, Alabama, USA.
Hosted by:
Athabasca University, in partnership with Grant MacEwan University,
Edmonton, Canada.
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Table of Contents
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Forward ................................................................................................................ XII
International Academy of African Business and Development .................... XIV
Local Steering Committee and Track Chairs ................................................. XV
Track 1: Accounting, Finance, and Investment .................................................. 1
Analysis of the relationship between share ownership structure, corporate governance
structure, and corporate investment efficiency, using GSE market data (2005-9) ............................... 2
King A. Salami, Business School, Central University College, Christ Temple Campus,
Abossey-Okai, Accra, Ghana.
Do Sub-Saharan African Banks with Market Power Profit from Monetary Policy? ........................... 9
Mohammed Amidu, University of Ghana Business School, Legon, Ghana.
Impact of Financial Pressure on Productivity growth of Listed non-Financial Firms in
Nigeria. ...................................................................................................................................................... 20
Obembe, Olufemi B, Andrew Young School of Policy Studies, Georgia State University, Atlanta GA.
Afolabi, Babatunde , Guaranty Trust Bank PLC, Ado-Ekiti, Nigeria
Adejumo, Victor, Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria.
Determinants of Bank Lending Behavior in Ghana ............................................................................... 27
Jonas Ladime, Department of Banking and Finance, Methodist University College Ghana.
Emmanuel Sarpong-Kumankoma and Kofi A. Osei, Department of Finance, University of Ghana
Business School.
Assessing competitive behavior in emerging banking market: African evidence ............................... 34
James Ntiamoah Doku, Department of Banking and Finance, Methodist University College Ghana
Joshua Abor, Charles Komla Delali Adjasi, and Charles Andoh, Department of Finance, University of
Ghana Business School, Legon, Ghana
Repositioning the Nigerian Tax System for Sustainable Development: Role of Business Taxpayers’
Perception of the Company Income Tax Administration ...................................................................... 42
T. O. Fagbemi, University of Ilorin, Nigeria.
S. O. Ajibolade, University of Lagos, Nigeria.
S. S. A. Arowomole, University of Lagos, Nigeria.
M. Femi Ayadi, University of Houston Clear Lake USA
The effects of the world financial crisis on Tanzania’s economy: A reflection from
macroeconomic indicators ........................................................................................................................ 51
M.D. Baisi, University of Dar es Salaam Business School, University of Dar es Salaam, Tanzania.
M.L. Mhina, Moshi University College of Cooperatives and Business Studies, Moshi, Tanzania.
An Econometric Investigation into the Impact of Inflation on Financial Development in Nigeria ... 59
Babatunde O. Oke, Department of Finance, Faculty of Business Administration, University of Lagos,
Nigeria.
Obaji R. N, Department of Business Administration, Faculty of Business Administration, University of
Lagos, Nigeria.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Track 2: International Aid, Economic Policies and Strategies ........................ 70
Study on Africa Government Regulation on Gold Market ................................................................... 71
Ju Yang, Shanghai Institute of Foreign Trade, Shanghai 201620, China
William X. Wei, School of Business, Grand MacEwan University, Alberta, Canada
Hongzhou Geng , Market Operation Regulation Bureau, Ministry of Commerce, Beijing, 100037, China.
Can Exchange Rate Targeting Become an Appropriate Development Policy in Small and Poor
Countries in East African Region (A case study for Uganda) ......................................................... 77
Devendra Kumar Jain, Makerere University, Uganda
Track 3: Energy, Natural resources, and Environment ................................... 82
Challenges of Oil Revenue Management in Nigeria ............................................................................... 83
Eleonu, C. Charles, College of Arts and Science, Port Harcourt, Nigeria
Land Based Sources of Pollution in Lagos Lagoon ................................................................................ 93
OSHISANYA, K. I, Nigeria Institute for Oceanography and Marine Research,
Victoria Island, Lagos Nigeria.
On the Mitigation of Reversal Risk in Carbon Offset Projects ............................................................. 99
Joshua Okeyo Anyangah, Department of Economics, University of Lethbridge, Canada.
Assessment of pollutants in Nigerian coastal waters ............................................................................ 107
Oguguah, N. M., Department of Zoology, Faculty of Biological Sciences, University of Nigeria
Nsukka, Enugu State, Nigeria
Renner, K. O., Department of Biological Oceanography, Nigerian Institute for Oceanography and
Marine Research Lagos, Nigeria
Oshisanya, K. I., Department of Physical and Chemical Oceanography, Nigerian Institute for
Oceanography and Marine Research Lagos,Nigeria
Babalola, A. F., Department of Fish Technology, Nigerian Institute for Oceanography and Marine
Research Lagos, Nigeria
Track 4: Clusters, Relationships, Networks and Inter-firm Linkages ......... 113
A Study of Customer Complaint Behavior and its Impact on Customer Satisfaction and
Loyalty: The case study of supermarkets in Kampala, Uganda ......................................................... 114
Aihie Osarenkhoe, Department of Business Studies, Faculty of Education & Economics,
University of Gävle, Sweden.
Mabel Birungi Komunda, Department of Marketing & International Business, Makerere University
Business School, Uganda
Network Diversity Value Model and Local South African Entrepreneurial
Development: An Emergent Theory via Grounded Theory Analysis ............................................ 122
Eliada Nwosu, University of Cape Town Graduate School of Business
Socio-Cultural Factors Influencing Insurance Patronage in Nigeria: An Exploratory Study ......... 130
BADRU, Fatai Adesina, Department of Sociology, Faculty of Social Sciences, University of Lagos,
Nigeria
YUSUF, Tajudeen Olalekan, Department of Actuarial Science and Insurance, Faculty of Business
Administration, University of Lagos, Nigeria
ISOLA, Wakeel, Department of Economics, University of Lagos, Nigeria
The search for poverty reduction and sustainability in agribusiness in Tanzania:
Will value chain approaches provide the insight? ................................................................................ 140
Lettice Rutashobya, University of Dar es Salaam Business School, Uganda and
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Lennart Bangens, Goteborg, Sweden
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Track 5: Management Education ..................................................................... 147
Track 6: Entrepreneurship, Small Business and the Informal Sector .......... 148
Diaspora Entrepreneurship: A Pilot Study of British-African Entrepreneurs ................................ 149
Sanya Ojo, University of East London, UK.
Entrepreneurial Policy and Business Success in Developing countries: Evidence from Kenya ...... 157
George Yashon Ombado, ACCOSCA
The effect of entrepreneurship education on enterprising competencies development and career
intentions of students in Ghanaian tertiary institutions ...................................................................... 165
Wilberforce Owusu-Ansah, and Kofi Poku, Department of Marketing and Corporate Strategy, KNUST
School of Business, KNUST, Ghana.
SMES access to financial services: Bankers’ eye .................................................................................. 174
Richard, Evelyn and Mori, Neema, University of Dar es Salaam Business School
Entrepreneurial intentions of Tshwane University of Technology Students ..................................... 181
Patrick Ebong Ebewo, SIFE Tshwane University of Technology, South Africa
Richard Shambare, Tshwane University of Technology, South Africa
Integrating Scientific with Indigenous Knowledge: Towards a conceptual framework of the
innovation process of indigenous entrepreneurs .................................................................................. 190
Henrietta Onwuegbuzie, Faculty of Entrepreneurship and Decision Making, Lagos Business Shcool
Pan African University, Lekki, Lagos, Nigeria.
Norma Juma, Washburn University, School of Business, Topeka, KS, USA
Cultural values of Ugandan students and their influence on entrepreneurial intentions ................. 198
Isaac Wasswa Katono, Uganda Christian University, Uganda
Trait emotional intelligence and employability skills: The case of Ugandan undergraduates ......... 205
Isaac Wasswa Katono, Uganda Christian University Uganda.
Challenges of sustainable entrepreneurship development in Nigeria................................................. 213
Victoria C. Chibuike, Department Of Business Management, Godfrey Okoye University,
Thinkers Corner, Enugu, Nigeria.
Profitability analysis of Small Scale aquaculture enterprises in Central Uganda ............................ 222
Theodora S. Hyuha and Julius Twinamasiko, Department of Agribusiness and Natural Resources
Economics, Faculty of Agricultural Sciences, Makerere University, Kampala Uganda.
James O. Bukenya, Department of Agribusiness, Alabama A&M University, Normal AL 35762
Joseph Molnar, Auburn University, Auburn Alabama.
Assessing Community Leaders’ Support for Value-Added Agriculture:
Evidence from Survey Data .................................................................................................................... 230
LaTravis Brazil, James O. Bukenya and Danyelle Starks, Department of Agribusiness,
Alabama A&M University, Normal, USA.
Understanding critical success factors for entrepreneurs: A comparison of Mbarara
Municipality in Uganda and Nnewi Cluster in Nigeria. ...................................................................... 237
Arthur Nuwagaba, Uganda Christian University, Uganda.
Ijeoma Ezeasor, University of Nigeria Enugu Campus, Nigeria.
Hope n. Nzewi, Nnamdi Azikiwe University, Awka, Nigeria.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Track 7: Exporting, Internationalization and Foreign Direct Investment .. 243
Evaluating the importance of location factors in the decision of MNCs to undertake
FDI in Syria and Jordan ......................................................................................................................... 244
Omar Al-Habash and Frederick Mmieh , Business School, Brunel University, UK.
Capital flight in developing economies: A panel analysis of Nigeria and South Africa .................... 254
AYADI, Folorunso Sunday, Faculty of Social Sciences, University of Lagos, Akoka-Yaba,
Lagos, Nigeria.
Determinants of Import Demand of Rice in Uganda ........................................................................... 262
Theodora S. Hyuha and Ekere William, Department of Agribusiness and Natural Resources,
School of Agricultural Sciences, Makerere University, Kampala, Uganda.
Grace Bantebya Kyomuhendo , National Crop Resource Research Institute
Jimmy Lamo, Department of Gender and Women Studies Makerere University, Uganda.
Project Management for Development in Africa: Why Projects are Failing and What
Can Be Done About It ............................................................................................................................. 268
Lavagnon A. Ika, Université du Québec en Outaouais, Département des sciences administratives
C. P. 1250, succ. B. Gatineau, Québec, Canada.
The Changing Requirements of FDI in Sub-Saharan Africa. ............................................................. 275
Emmanuel Cleeve, Department of Economics, Manchester Metropolitan University, UK
Impact of service quality perceptions on Foreign Direct Investment inflows: a case of Uganda ..... 284
Jotham Mbiito Byarugaba, Department of Marketing & International Business, Makerere University
Business School, Kampala, Uganda.
Trust Africa Investment Climate & Business Environment Research Fund 2011
New perspectives on Foreign Direct Investment and Technology transfer in Africa: Insights
from the construction industry in Ghan ................................................................................................ 291
Ellis L.C. Osabutey, Middlesex University, The Business School, The Burroughs, Hendon, London, UK.
Y. Debrah, University of Wales, Swansea, School of Business and Economics, Singleton Park, Swansea,
UK.
Track 8: Gender and Economic Development ................................................ 299
The effect of tender document in empowering women entrepreneurs operating in
small business in South Africa. .............................................................................................................. 300
GE Chiloane-Tsoka, Department of Business Management, College of Economic and Management
Sciences, University of South Africa, South Africa.
Gender, poverty and sustainable development in Nigeria............................................................. 307
Ola E. Aluko, Department of Urban & Regional Planning, Faculty of Environmental Sciences,
University of Lagos, Akoka, Lagos, Nigeria
Is the glass ceiling cracking? Women and economic empowerment in South Afric ......................... 315
Tidings P. Ndhlovu, Manchester Metropolitan University, UK.
Inhibitive factors facing women managers? A survey in Lagos, Nigeria. .......................................... 325
Hassan, Adedoyin R and Ogundele, O.J.K, Lagos State University, Faculty of Management Sciences
Department of Business Administration and Management Technology, Ojo, Lagos, Nigeria.
Fagbemi, Ayodele.O, National Open University of Nigeria, School of Business and Human Resource
Management, Lagos, Nigeria.
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Track 9: Global Studies and Political Economy ............................................. 335
Nigerian Foreign Service: Challenges of Diplomatic Machinery ........................................................ 336
Eleonu, Charles Chidi, College of Arts and Science, PMB 5936 Port Harcourt
The Dollarization of the Zimbabwe Economy in the Era of Globalization. ....................................... 346
Zuvarashe Judith Mushipe, Institute for Professional Studies, St Thomas University, Miami, Florida
Ownership of Factors of Production: An indigenization case study................................................... 351
Swithina Mboko, Aquinas College, USA.
International Trade in the Era of Maritime Piracy in the Horn of Africa: Issues and Challenges 358
Emmanuel Obuah, Alabama A & M University, USA
Independence C. Enyindah, College of Arts and Science (CAS), Port Harcourt, Nigerian
Chris Enyinda, Alabama A & M University, USA
The Sub-Saharan Business Environment Report: Business Information at a Ready Glance .......... 370
Anita Spring, University of Florida, Gainesville, FL, USA
Global Financial Crisis and the Nigerian Capital Market: An Evaluation ....................................... 377
Adegbite, Esther O. and Babatunde O. Oke, Department of Finance, Faculty of Business
Administration, University of Lagos, Nigeria.
Track 10: Public Sector and Health Care Management ................................ 395
The wealth-health cycle in West Africa: Is it virtuous or vicious? ..................................................... 386
M. Femi Ayadi, University of Houston – Clear Lake, Houston, TX, USA
Global Fund and Tuberculosis Management in a Ghanaian Public Hospital .................................. 393
Mercy Akosua Akortsu and Joshua Abor, Department of Finance University of Ghana
Business School, Legon, Ghana.
A study of fixed and variables costs in three hospitals in Ghana ........................................................ 401
Anthony Q. Q. Aboagye, University of Ghana Business School, Legon- Ghana.
Exploring Organizational Resilience in Uganda Parastatals .............................................................. 409
Samuel Mafabi, John C. Munene and Joseph Ntayi, Makerere University Business
School, Uganda
Evaluating and Improving Operational Performance of Healthcare Facilities in Africa
Using Mathematical Models and Information Systems ....................................................................... 417
Mohamed Djerdjouri, State University of New York at Plattsburgh, USA
Hassiba Djemaa, Ecole des Hautes Etudes Commerciales (EHEC) d’Alger, Algeria
Is corruption an innovation? Extending the decomposed theory of Planned Behaviour
to explain corruption ............................................................................................................................... 425
Richard Shambare and Robert Rugimbana, Tshwane University of Technology, South Africa.
Track 11: Human Resources, Management and Organization ..................... 432
Organizational Communication and worker Satisfaction in organizational workplace ..... 433
James Baba Abugre, University of Ghana Business School, Ghana.
Towards examination of the impact of organizational culture traits on banks’
performance in Ghana ............................................................................................................................ 440
Kofi Poku, Wilberforce Owusu-Ansah and Mariama Zachary, Department of Marketing and
Corporate Strategy, KNUST School of Business, KNUST, Ghana.
Does Training and Development of staff in Financial Institutions in emerging economies make any
difference in their performances? .......................................................................................................... 448
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Proceedings of the 12th Annual Conference © 2011 IAABD
James B. Abugre and Kester A. Adebola, University of Ghana Business School, Ghana
Transformation within South African Police Service in the Era of Globalization: The case of
Implementation of the Employment Equity Act, 1998 (Act 55 of 1998) ............................................. 457
Mapome J Mohajane, Career MGT HR Monitoring & Evaluation, South African Police Service
John Ntshaupe Molepo and Josephine E Ranngu, Department of Public Management, Tshwane
University of Technology
Perceived Organizational Justice, Mutual Commitment and the Human Factor in
Ghana and India ..................................................................................................................................... 464
Moses Acquaah, University of North Carolina at Greensboro, USA
Grishma S. Kulkarni, Mukesh Patel School of Technology Management & Engineering, Mumbai, India
What does Globalization mean? A Ghanaian Perspective. ................................................................. 447
Kojo Saffu, Faculty of Business, Brock University, Canada.
Aminu Mamman, University of Manchester, Institute for Development Policy and Management
Manchester, United Kingdom
Angela Lemaire, School of Business,Takoradi Polytechnic, Takoradi, Ghana
Using focus groups to examine effective leadership and motivation in the African Diaspora ......... 486
Terri Lituchy, Concordia University, Canada
Betty Jane Punnett, University of the West Indies, Barbados
Alethea Thomas, University of the West Indies, Barbados
Amanda Cruickshank, University of the West Indies, Barbados
Robert Oppenheimer, Concordia University, Canada
David Ford, University of Texas at Dallas
Bill Puplampu, University of Ghana
Sam Sejjaaka, Makerere University, Uganda
Track 12: Information Systems and E-Business ............................................. 493
Is online communication the only way to lunch and develop brand now and in the future?:
Case study from mobile communication from UK and Nigeria .......................................................... 494
N. Gladson Nwokah, Department of Marketing, Faculty of Management Sciences, Rivers State
University of Science and Technology Nigeria
Juliet Gladson-Nwokah, Department of Marketing, School of business, Rivers State Polytechnic,
Bori, Nigeria
Work Life Balance Practices in Nigeria: a Less Travelled Terrain ................................................... 503
Chima Mordi and Stella Ibiyinka Ojo, Brunel Business School, Brunel University,UK.
A study of the attitude of the youth towards adoption of Internet entrepreneurship in Nigeria ..... 511
Chukwudi Nwaizugbo, Department of Marketing, University of Nigeria, Enugu Campus, Nigeria
V N O Aghara, Department of marketing, Nnamdi Azikiwe University, Awka, Anambra state, Nigeria
Customer Satisfaction and ATM Usage in Nigeria .............................................................................. 518
Olasanmi Omoneye Olufunke, Department of Management and Accounting, Faculty of Administration,
Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria.
Track 13: Law, Social Responsibility and Ethics ............................................ 526
Fostering Business Ethics in Pursuit of Organizational Integrity in a globalized business
environment: Dilemmas for South African Business Organizations .................................................. 527
Abel J. Diale, Tshwane University of Technology, South Africa
Diagnosis of organization culture and it’s effectiveness in Nigerian Banks ....................................... 536
Oshisanya Taoheed Kehinde, Speedway Information Technology Institute, Nigeria.
Challenges of Ethics in Nigeria within the Context of Global Ethical Practice ................................. 546
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Ogundele, O.J.K. and Hassan, A. R. Department of Business Administration and Management
Technology, Faculty of Management Sciences, Lagos State University, Ojo, Nigeria
Track 14: Operations and Supply Chain Management ................................. 554
Determinants of bank selection: A study of undergraduate students in the University of Ghana. . 555
Robert E. Hinson, University of Ghana Business School, Legon-Accra, Ghana,
Aihie Osarenkhoe, Department of Business & Economic Studies, Faculty of Education & Economics,
University of Gävle, Sweden
Abednego Feehi Okoe, Institute of Professional Studies, Legon-Accra, Ghana.
Managing Supply Chain Disruption Risks in Nigerian Manufacturing Sector ................................. 564
Chris I. Enyinda, Alabama A & M University, USA
Alphonso O. Ogbuehi, Clayton State University, UAS
Chris H. Mbah, Higher Colleges of Technology, United Arab Emirates
Managing and Mitigating Supply Chain Blind Spots and Vulnerabilities in Nigerian Elections .... 574
Chris I. Enyinda, Alabama A & M University, USA
Indy C. Enyindah, College of Arts and Science, Port Harcourt, Nigeria
Emmanuel Obuah, Alabama A & M University, USA
Track 15: Marketing and Consumer Behavior ............................................... 584
Factors Influencing Bank Choice among Undergraduates in Nigeria ................................................ 585
Steve Ukenna, Department of Marketing, Nnamdi Azikiwe University, Anambra State, Nigeria
Anayo D. Nkamnebe, Department of Marketing, Nnamdi Azikiwe University, Anambra State, Nigeria
Carol Anionwu Department of Business Administration, Cross River University of Technology, Cross
River State, Nigeria
Bank selection decisions: A case study of Institute of Professional Studies ....................................... 594
Robert E. Hinson, University of Ghana Business School, Legon-Accra, Ghana.
Aihie Osarenkhoe, Department of Business & Economic Studies, Faculty of Education &
Economics, University of Gävle, Sweden.
Abednego Feehi Okoe, Institute of Professional Studies, Legon-Accra, Ghana.
Social marketing: Behavioral change communications and malaria prevention in Ghana ............. 606
Ernest Yaw Tweneboah-Koduah, Department of Marketing and Customer Management,
University of Ghana Business School, Legon, Ghana.
Mahamah Braimah, Department of Marketing and Customer Management, University of Ghana
Business School, Legon, Ghana.
Priscilla Ntriwaa Otuo Department of Business Studies, Wisconsin International University
College, Legon, Ghana.
Perceptions of the success factors for social media implementation in a South African
life insurance company ........................................................................................................................... 613
Michael Probyn and Mlenga G. Jere, The Graduate School of Business University of Cape Town,
South Africa.
Service quality and customer retention in the mobile telecommunication industry in Ghana ........ 621
Kofi Poku and Wilberforce Owusu-Ansah, Department of Marketing and Corporate Strategy,
School of Business, KNUST, Ghana.
Comparative Study of Perceptions of Relationship Marketing in the Nigerian Food
and Beverages Industry .......................................................................................................................... 631
Bolajoko Nkemdinim Dixon-Ogbechi, University of Lagos. Lagos, Nigeria
Elizabeth M. Haran and Joseph Aiyeku, Salem State University, Salem MA, USA.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Profiling the environmental sustainability-conscious (ESC) consumers in sub-Saharan Africa:
Proposing the S-P-P Approach. ............................................................................................................. 639
Steve Ukenna, Department of Business Management, Godfrey Okoye University, Enugu, Nigeria.
Anayo D. Nkamnebe, Department of Marketing, Nnamdi Azikiwe University, Awka, Nigeria
Brand Personality Re-examined: Perspective from Fast-food Industry in a Typical
African Country ...................................................................................................................................... 648
Ayantunji Gbadamosi, University of East London, UK.
Ayodele Oniku, InfoResource Consulting, UK.
David Bamber, Liverpool Hope University, UK,
Clothing acculturation among Black African women in London (UK): An exploratory study ....... 656
Ayantunji Gbadamosi, Royal Docks Business of School, University of East London, UK.
Marketing Nigerian medicinal plants: A 4PS Perspective ............................................................ 664
Dixon-ogbechi, Bolajoko Nkemdinim, University of Lagos, Nigeria
Odugbemi, Tolu and Aiyeku, Joseph Fola, Salem State University, USA
Venture capitalist marketing strategies for attracting portfolio companies in South Africa:
A theoretical review ................................................................................................................................ 671
Olutoye O. Ayodeji and Titilola Okusolubo, Tilak Investment, Pretoria, & Post-graduate Student,
Vaal University of Technology, Vandebijlpark, South Africa.
Olutola Ayodeji, Tilak Investment Nigeria Limited, Lagos, Nigeria.
CSR Practices of a Communications Service Provider in Ghana ....................................................... 681
Prince Kodua and Stephen Arthur, Department of Marketing and Customer Management,
University of Ghana Business School, University of Ghana, Legon, Accra.
Competitive Strategies and Organizational Performance in Emerging Markets: A
ComparativeAnalysis of Contemporary Marketing Practices in China and Ghana ........................ 690
Kofi Q. Dadzie , Georgia State University, USA, and Evelyn Winston, Clark Atlanta University, USA
Track 16: Tourism and Sustainable Development ......................................... 697
An Exploratory study of the Critical Success Factors in the Kenyan banking Services
Market for the “unbanked” customers. ................................................................................................ 698
Allan Mulengani Katwalo, Strathmore Business School, Madaraka Est, Nairobi, Kenya
Customer satisfaction with retail banking services in Ghana ............................................................. 706
John Kuada, Aalborg University, Denmark
Bedman Narteh, University of Ghana Business School, Ghana.
“The Facebook phenomenon:” Social Networking among South African students ......................... 712
Richard Shambare, Robert Rugimbana, and Nkosi Sithole, Tshwane University of Technology, South
Africa.
Track 17: Project Management in Africa ........................................................ 720
Innovative Public Governance: comparing the African Participatory Poverty Assessments
(PPAs) and the Brazilian Participatory Budgets (PBs) ........................................................................ 721
Evandro Bocatto and Eloisa Perez-de-Toledo, Grant MacEwan University , School of Business,
Edmonton, Canada
Project Management Trilogy Challenges in Africa – where to from here? ....................................... 725
P D Rwelamila and N Purushottam, University of South Africa (UNISA), South Africa
Project management training curricula at South African public universities – Is the balanced
demand of the profession sufficiently accommodated? ....................................................................... 733
Thelma Louw and PD Rwelamila University of South Africa (UNISA), South Africa.
Governance of Public Investment Projects in Ethiopia ....................................................................... 743
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Asmamaw Tadege Shiferaw and Ole Jonny Klakegg, Norwegian University of Science and
Technology, Norway.
Track 18: China-Africa Business Relationships ............................................. 754
The research on the efficiency in Chinese central SOEs and their influencing factors ................ 755
Hao Ji, Business School, Beijing Union University, Beijing 100025, China.
A Conceptual Model of the Internationalization Strategies of Chinese State and Private Sector
Enterprises in Africa ............................................................................................................................... 764
Xiaohua Lin and Carlyle Farrell, Global Management Studies DepartmentTed Rogers School of
Management, Ryerson University, Ryerson Business Building, Toronto Ontario
Track 19: Graduate Student Paper .................................................................. 773
Globalization, Rise of Indigenous African Capitalism and Higher Education: The Case of
Zimbabwe. ................................................................................................................................................ 774
Munyaradzi Hwami, Educational Policy Studies, University of Alberta, Edmonton, Canada.
Bank Efficiency, Capital Account Liberalization and Economic Growth: Evidence from Africa .. 782
Emmanuel Mensah, Joshua Abor, A Q Q Aboagye and Charles Adjasi , University of Ghana
Business School, Ghana
Exporting Services from Developing Countries: Harnessing Ghana’s Unique Sectors.................... 789
Cynthia Bulley, Central University College, Dansoman, Accra, Ghana.
A Thorough Analysis of the Bank Lending Channel of Monetary Transmission in the
CEMAC Area .......................................................................................................................................... 794
Samba Michel Cyrille, Shanghai University of Finance and Economics.
Foreign equity portfolio investment flows and economic growth in Africa ....................................... 801
Elikplimi Komla Agbloyor, Joshua Abor, Charles Komla Delali Adjasi, University of Ghana
Business School, Ghana.
Alfred Yawson University of Adelaide Business School in Australia
On the determinants of Foreign Equity Portfolio Investment flows into African Stock Markets ... 808
Elikplimi Komla Agbloyor, Joshua Abor, Charles Komla Delali Adjasi, University of Ghana
Business School, Ghana.
Alfred Yawson University of Adelaide Business School in Australia
Challenges to Pension Reform in Ghana ............................................................................................... 816
Ofosu-Hene, D. EricSweeting and J. Paul, School of Mathematics, Statistics and Actuarial Science,
University of Kent, United Kingdom.
Motivational factors behind the 2010 Soccer World Cup spectatorship .................... 828
Fanampe Tsholofelo, Shambare Richard, Van Heerden C.H., and Nthangeni, A.S, Tshwane University of
Technology, Department of Marketing, Logistics and Sport Management Faculty of Management
Sciences.
Assessing the Portfolio Behaviour of Commercial Banks in Developing Countries: A Literatureand
Methodological issues for the Case of Tanzania Commercial bank. ............................................. 836
Tobias Swai, University of Dar es Salaam, Business School, Tanzania
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Proceedings of the 12th Annual Conference © 2011 IAABD
Foreword
Once again we have assembled in Edmonton, one of Canada’s outstanding and ecologically valuable
cities to exchange ideas on a very provocative theme for this conference “Challenges in the Era of
Globalization”. Defying a common definition, globalization is understood to be a “ process of increasing
interconnectedness between societies such that events in one part of the world more and more have effects
on peoples and societies far away” (Smith and Baylis 2005:8). ) Viewed from this lens, the theme of this
year’s conference is apt and germane particularly at this auspicious time when many African states are
still struggle to tackle many basic problems exacerbated by lack of sustainable growth and development
and democratic governance. As an integral part of the global economy Africa has been vulnerable to the
shocks and challenges of the system.
In an evolving global economy, Africa has engaged many ways and measures of addressing its problems.
For example, many African states have embraced different endogamous and exogenous models of
development: from the trickle down import industrialization strategy of the early post-independence years
to the structural adjustments prescription of the Washington Consensus. Accordingly, African states have
adopted different paths to growth and development: socialist or capitalist paths. African states have also
responded to the challenges of sustainable growth and technological development collectively through the
creation of (sub) regional schemes and robust regional economic integration groupings.
Similarly, African scholars in management studies, development studies and other related disciplines have
provided theoretical frameworks to growth and development. Our Academy has been in the forefront of
scholarship in various aspects of African studies. In the past 11 years, the various IAABD’s conference
compendia have focused on different strategies of achieving economic growth and development and the
challenges thereof.
On the political level, many African states have embarked on the road to civil democracy. Military
regimes are no longer fashionable. Furthermore, there is a gradual erosion of the one party/no opposition
party symptomatic of African politics. Today in Africa opposition parties are winning not ony legislative
contests but presidential contests. Also the entitlement syndrome which has characterized political
leadership is seriously under challenge. Across Africa women and other marginalized ethnic groups are
incrementally, through constitutional and legal means ascending to high echelon of political authority.
However, some of these achievements are been mired by the challenge of nonsustainability of legitimacy
in the nascent democracies.
At the economic level, the picture is mixed; the continent has diversified its economic relations and the
European countries have lost dominance of the the continent but it continue to face hydra-headed
problems. China has emerged as a serious partner and is investing in the continent. However, the
continent is still ravaged with unemployment, poverty, debt, corruption and other social problems
exacerbated by the process of globalization.
There were dozens of papers presented in volume 12 of the IAABD peered reviewed Proceedings. In
addition, there were also dozens of work in progress not included in this volume but were presented in
various sections at the conference. The papers were meticulously reviewed and selected by the track
chairs to underscore the relevance and essence of the conference theme. These papers and presentations
touched on various aspects of Africa’s growth and development and integration into the global economy.
xii

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
While some papers focused on specific issues in different countries in Africa, others dealt with issues that
affect the continent as a whole. Yet, some papers and presentations examined the impacts and challenges
of specific global phenomena/issues or processes on Africa. Furthermore, the diversity of the papers in
this volume also reflects the copious academic versatility and multidisciplinary background of the
contributors. The Journal of African Business (JAB) is the official journal of the IAABD. I encourage
you to submit your articles for consideration for publication in JAB. The IAABD peer reviewed
Proceedings has become an important source for other academic journals seeking for potential research
articles on Africa for publication. While the reviewers painstakingly did their work, the authors are
responsible for the views and conclusions expressed in this volume.
It has been an honor and privilege to serve IAABD in various capacities, particularly as the Proceeding
Editor. I owe great gratitude to several individuals who contributed in various ways to the success of this
conference and to the publication of this volume. I am very grateful to all the authors who submitted their
papers and whose papers are contained in this volume. I am particularly thankful to the Program Chair,
Dr. Emmanuel Cleeve and the track chairs for undergoing the painstaking and tedious review process of
all the papers and sharing the thoughts with the various authors.
I also wish to thank the Local Steering committee for their tireless efforts in making this conference a
success. Finally, I am especially thankful to Chris Enyinda, the President of IAABD for giving me the
opportunity to serve. And to all the members of the current IAABD Executive Committee, I thank you for
the opportunity to serve in my present capacity and for your unflinching support.
Emmanuel Ezi Obuah, Ph.D, LLM
Proceedings Editor.
xiii

Proceedings of the 12th Annual Conference © 2011 IAABD
International Academy of African Business and Development
Founded in 1998, the International Academy of African Business and Development (IAABD) has
established itself as one of the world leading organizations committed to fostering functional education,
broadening and deepening global understanding of the various challenges facing African development
and business, and advancing alternative solutions to Africa’s business and economic challenges. IAABD
is open to scholars, professionals, and students of any nationality who are interested or actively engaged
in the teaching, research, performance or administration of business and economic development issues as
they relate to Africa. Around 200 scholars and professionals from all over the world attend its annual
conference.
Executive Committee
Position Name Affiliation
President Chris Enyinda Alabama A&M University,
USA
Vice President Anita Spring University of Florida, USA
Executive Secretary Jacob Musila Athabasca University, Canada
Vice president Finance and
Treasurer
O. Felix Ayadi Texas Southern University, USA
Vice President Membership Moses Acquaah University of North Carolina at
Greensboro, USA
Vice President Communications Judy Muthuri Nottingham University, UK
Program Chair Emmanuel Cleeve Manchester Metropolitan
University, UK
Proceedings Editor Emmanuel Obuah Alabama A&M University, USA
Editor Journal of African
Business
Simon P. Sigué
Athabasca University, Canada
xiv

Local Steering Committee
Jacob Musila Athabasca University
Meenal Shrivastava Athabasca University
Simon Sigué Athabasca University
Coy Beaton Athabasca University
Nancy Biamonte Athabasca University
Jill Calliou Athabasca University
Cheryl Christensen Athabasca University
Colleen Lathan Athabasca University
Carolyn Pidzarko Athabasca University
Theresa Polok Athabasca University
Shane Jaffer Alberta International and
Intergovernmental Relations
Frank Kense Canadian Council on Africa
William Wei Grant MacEwan University
Track Chairs
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Track Topic Chair
1 Accounting, Finance, and Bode Akinwande, London Metropolitan
Investment
University, y.akinwande@londonmet.ac.uk
2 International Aid, Economic Jacob Musila, Athabasca University,
Policies and Strategies
jacobm@athabascau.ca
3 Energy, Natural resources, and Joshua Anyangah, University of Lethbridge,
Environment
joshua.anyangah@uleth.ca
4 Clusters, Relationships, Richard Owusu, Hanken School of Business,
Networks
Linkages
and Inter-firm kwakus2403@hotmail.com
5 Management Education Gbolahan Gbadamosi, University of
6 Entrepreneurship, Small
Worcester, g.gbadamosi@worc.ac.uk
Lettice Kinunda Rutashobya, University of
Business and the Informal Sector Dar es Salaam, letticer@yahoo.com
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Proceedings of the 12th Annual Conference © 2011 IAABD
7 Exporting, Internationalization
and Foreign Direct Investment
8 Gender and Economic
Development
9 Global Studies and Political
10
Economy
Public Sector and Health Care
Management
11 Human Resources, Management
and Organization
Sam Akomea, University of Ghana,
samakomea@yahoo.com
Bolajoko N. Dixon-Ogbechi, University of
Lagos, dixonogbechi@yahoo.com
Meenal Shrivastava, Athabasca University,
meenals@athabascau.ca
Johan de Jager, Tshwane University of
Technology, DeJagerJW@tut.ac.za
Moses Acquaah, University of North
Carolina at Greensboro, m_acquaa@uncg.edu
12 Information Systems and E- Mihail Cocosila, Athabasca University,
Business
mihailc@athabascau.ca
13 Law, Social Responsibility and Judy N. Muthuri, Nottingham University
Ethics
Business
Judy.Muthuri@nottingham.ac.uk
School,
14 Operations and Supply Chain Chris Enyinda, Alabama A&M University,
Management
chris.enyinda@aamu.edu
15 Marketing and Consumer Aihie Osarenkhoe, University of Gavle,
Behavior
Aihie.Osarenkhoe@hig.se
16 Tourism and Sustainable Robert Rugimbana, Tshwane University of
Development
Technology, RugimbanaR@tut.ac.za
17 Project Management in Africa Janice Thomas, Athabasca University,
18 China-Africa Business
Janice.Thomas@mba.athabascau.ca
William Wei, Grant MacEwan University,
Relationships
weix@macewan.ca
19 Graduate Student Paper William Wei, Grant MacEwan University,
WeiX@macewan.ca
20 Special Sessions and Practitioner Simon Sigué, Athabasca University,
Panels
simons@athabascau.ca
xvi

Track 1: Accounting, Finance, and Investment
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
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Proceedings of the 12th Annual Conference © 2011 IAABD
Analysis of the relationship between share ownership structure, corporate governance structure,
and corporate investment efficiency, using GSE market data (2005-9)
Abstract
King A. Salami, kingsalami1@gmail.com
Business School, Central University College,
Christ Temple Campus, Abossey-Okai, Accra, Ghana.
Operational efficiency must be at the heart of the activities of the 35 firms listed on the Ghana Stock Exchange
(GSE), in relation to such important forces like share ownership structure, governance structure, and corporate
investment efficiency. With a randomly selected sample of seven listed companies’ data from the GSE Fact Book,
2010, the Annual Reports of these companies, and interviews with GSE officials, financial performance analysis
method, using financial ratios and measures was applied to the relevant data. Among the findings are: that most of
the listed companies have high ownership concentration in structure, made up of mostly institutional, and to some
extent, family or individual investors; that corporate governance structure is an important element in all the
investment strategies of the listed companies; and that these two findings appear to show some positive relationships
with corporate investment efficiency. Some related implications of these are: firstly, GSE should step up their
education campaign on the importance of effective corporate governance and how to achieve it to the benefit of
listed companies; and secondly, the GSE, through wide publicity campaign of the benefits of widely-dispersed share
ownership structure must begin to address potential investors scattered around the country as a way of mobilizing
further long-term capital that currently appears untapped.
Introduction
Ghana’s capital market has a pivotal role to play in Ghana’s developmental efforts. Certainly Ghana
Stock Exchange (GSE) constitutes an important component in these efforts to mobilize the needed capital
for investment purposes. So far GSE has managed to list about 35 companies, all of which are doing brisk
businesses in various sectors of the economy to further Ghana’s developmental aspirations.
In all these attempts, operational efficiency must be at the heart of all aspects of the work of the listed
companies, in connection with such forces as share ownership structure, governance structure, and
corporate profitability. Relationships among some of these forces need to be highlighted so that informed
decisions can be made available for potential beneficiaries like the government, investors, academia, and
other players in the financial system. Studies specifically relating to Ghana appear to be rare, if nonexistent,
implying that this study will be a timely development.
The overall aim of the study is to examine and analyze the relationship between corporate share
ownership structure, corporate governance structure, and investment efficiency in terms of profitability of
selected organizations on the GSE. The study specifically seeks to respond to the objectives of:
i. Examining the relationship between corporate share ownership structure, corporate governance
structure, and corporate investment efficiency in terms of profitability; and
ii. Analyze the forces behind the variables that constitute the related forces listed in (i).
The scope of the study is mainly limited to the secondary information provided mainly by GSE in their
most recent Fact Book of 2010, and the 2009 Annual Reports of the listed selected companies and
supplemented by interviews with GSE officials. Reliability and validity of the results of the study will of
course be influenced by the extent to which the data being used for the study are free of biases that are
associated with the compilation of such data. But we can take consolation from the fact that financial
information from the GSE has always won national and international acclaim. Nevertheless, the results of
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
the study can be said to be limited to the environment it is meant to address, and cannot be taken to
provide a universal policy menu.
The remainder of the study is organized into the following sections: Section 2 provides a review of related
literature, followed by Data Organization and Processing in Section 3. Section 4 details the Analysis and
Discussions of processed data. Section 5 ends the study with Conclusions and Recommendations.
Literature Review:
This study is at the heart of agency problem which is the focus of agency theory, an important area in
Finance theory. Agency theory is a theoretical concept used to explain and understand the conflict of
interests between shareholders and managers. The argument by agency theorists is that conflict of
interests arises because managers fail to bear the full wealth effects of their decisions, but shareholders
do. It is therefore necessary to institute monitoring mechanisms to mitigate the conflict of interests.
According to agency theory, the takeover market or the market for corporate control is an important
external mechanism capable of disciplining the corporate managements. This implies that if a firm’s
managers pursue inappropriate, opportunistic or ineffective strategies for a prolonged period, the firm is
likely to be undervalued in the market, and such firms can be likely targets for prime takeover bids, that
then enable new management team to displace the incumbent management and make subsequent changes
in strategy.
The earlier works of Berle and Means (1932) hold the view that corporations with owners widely
dispersed and each owning a small fraction of total outstanding shares tend to under-perform. Their study
opened the doors for other useful contributors like Hull and Weiss (1967), Jensen and Meckling (1976),
Fama and Jensen (1983), Demsetz (1983), Jensen (1986), Stulz (1990), Sundaramurthy and Lyon (1998),
Joh (2001), Sorensen (2006), High Bean Research (2008), and Goliath (2009), in areas relating to various
themes like share ownership concentration, share ownership dispersion, separation of ownership from
control, and the role of corporate governance structure.
For example, Jensen (1986) and Stulz (1990) commented on the issue of weak governance as an indicator
of high conflict of interests which is evident in inefficient company investment, high inefficient costs, and
high depletion of cash reserves by self interested managers. This was done through the general theory of
agency problems, which sees corporate governance as an essential tool for managing the agency problem
or mitigate the negative effects of agency problem. Both contended that owners would attempt to limit
managers’ access to free cash flow to prevent abuse by managers in the context of agency conflicts.
Further, Sundaramurthy and Lyon (1998) explored the conflict between internal and external shareholders
by examining the impact of the percentage of stock owned by managers, employees and institutional
investors on the level of three popular shareholders’ proposals.
Joh (2001) investigated how ownership structure and existence of conflicts of interests among
shareholders operating within a poor governance system, impacted on company profitability. His paper,
using panel data and regression models, concluded that firms with low ownership concentration showed
low firm profitability. This stand was buttressed by Sorensen (2006) who examined the effects of
ownership dispersion on cost efficiency, using empirical evidence, and concluded that corporate
governance failure suggested that dispersion and indirect ownership weakened incentives to control the
company, leading to agency losses and inferior performance. The study presented an empirical analysis
that suggested that fragmented ownership induced cost-inefficiency relative to companies owned by a
single entity.
The study by High Beam Research (2008) appears to contradict the above stand by looking at the
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Proceedings of the 12th Annual Conference © 2011 IAABD
determinants of ownership concentration and the effects of ownership concentration on the firm’s
performance, using panel data of firms from different manufacturing sectors of the Pakistan’s economy
during 2003-08. The results suggested that firms with high ownership concentration did not adopt better
governance practices and disclosed less, even though board composition had positive and significant role,
thus confirming the stand by Fama and Jensen (1983) who maintained that dispersed ownership was
advantageous because efficiency gains outweigh the agency costs. These imply that ownership
concentration was an endogenous response of poor legal protection of the investors which seemed to have
significant effect on corporate performance. Adopting a multiple regression approach, Goliath (2009) also
found that the size of Board members positively correlated with share value, but there was lack of any
significant relationship between inside ownership and share value.
What the foregoing review seems to reveal is that shareholder structure (whether highly concentrated
ownership or widely dispersed ownership) can influence investment efficiency (profitability) of the firm
through endogenous corporate governance. This revelation tends to emphasize the significance of
operating an effective corporate governance to mitigate potential agency problems and related costs,
which the above two opposing views attempt to deal with to secure investment efficiency.
Corporate investment efficiency (profitability) is defined using measures by Hasan and Butt, 2009;
Farooque, 2007; Breadley, Myers & Allen, 2008; and Helfert, 2000. For purposes of this study, our focus
will be on the shareholders who technically own the business, even though Helfert (2000) discusses other
two considerations of performance financial analysis: the viewpoints of management and lenders
(creditors). Our emphasis on the shareholders is because they have special interests in the current and
long-term returns on their equity investment concerning growing earnings, cash flows and dividends
which, in total, would result in the economic value of their venture. The two measures of investment
efficiency for our purposes are Return on Equity (ROE) often in percentage terms, and Earnings per Share
(EPS) always in monetary values, like the GHc. ROE is the most common ratio for evaluating the return
on the owners’ investment and it measures the relationship between the business Net Profit and total
shareholders’ investment, calculated as:
ROE = Net Profit/Shareholders’ investment (%).
The use of this measure is subject to some caution arising from the definition of net profits, which in our
case, is the result of operations belonging wholly to the holders of common and preferred equity shares.
But Average Equity is used to allow for the reasoning that profitable operations build up equity during the
year which implies that the annual profit should relate to the mid-point of the buildup. The measure is
thus adapted to become: Return on Average Equity = Net Profit/Average Shareholders’ Investment (%).
The second measure is Earnings per Share, that is EPS = Net Profit to common stock/Average number of
shares (GHc per share). A great deal of attention is paid to this ratio by both shareholders and
management, and it is used widely in the valuation of common stock. But we should note that its use is
not problem-free. For example, fluctuations in the number of shares outstanding during the year due to
new stock offerings, dividends paid, etc, require retroactive adjustments in past data to ensure
comparability. Another caution is to ensure that fluctuations and trends in actual performance are
compared to the projections and watched closely for signals of strength and weaknesses, especially
because analysts tend to focus attention on past EPS levels.
Another measure of corporate profitability, Tobin’s Q, is dealt with in Aluchna et al, 2007 and Farooque
et al, 2007. We should, however, note that all these tools have their own strengths and weaknesses.
In this paper we define corporate governance as the means by which shareholder value is facilitated by
effectively managing corporate affairs so as to ensure the protection of the individual and collective
interest of all stakeholders, (Hasan and Butt, 2009; Farooque et al, 2007). The ingredients of good
corporate governance practices include the board size and composition, skills of members, CEO/Chair
4

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
duality role, board compensation, etc, all of which have association with agency problem and agency
costs, and can be used to assess the effectiveness of a listed company.
Data Organization and Processing:
Data for the study is mainly secondary; the major source is the GSE Fact Book (2010) and the Annual
Reports of the selected companies, specifically the financial data on their Balance sheets and Income
statements for the years 2005 to 2009, the study period when data availability posed no challenge. The
results of the researcher’s interviews with GSE officials were used to supplement our secondary data.
A random sample of 7 listed companies among a total of 35 currently listed on the GSE was decided on.
The list applies to companies that have been very active during the study period.
Issues of share ownership structure, corporate governance structure, and those of corporate investment
efficiency were considered using the GSE Fact Book and the Annual Reports of selected companies. The
method to enable achievement of our objectives consisted of the use of financial performance analysis
employing financial ratios and other financial measures over the specified period
Collected data was processed into three major groups of Share-Ownership Structure; Corporate
Governance Structure; and Corporate Investment Efficiency (profitability).
1. Share-ownership structure: according to whether Concentration Ratio is High, or Low (Low
implying widely dispersed ownership structure), using the Herfindahl Index of Ownership
Concentration (Sorensen, 2008)
2. Whether Corporate Governance structure is good (that is satisfying the above list of good
corporate governance practice) or weak (that is, the opposite being the case).
3. Corporate Investment Efficiency (profitability), using financial ratios of Return on
Equity/Investment (ROE); and Earnings per Share (EPS). (Helfert, 2000; Breadley Stewart and
Allen, 2008; Farooque et al, 2007; Aluchna, 2007).
Tables 1, 2 and 3 provide relevant statistics on the three groupings.
Analysis and Discussions:
Tables 1 and 2 provide statistics on share-ownership structure and corporate governance structure
respectively of the 7 firms. Table 1 indicates that the companies have high owner concentration ratios of
above 0.6, constituted by about 4 firms, using Herfindahl Index of owner concentration (Sorensen, 2006).
Dispersed ownership appears to be rare among the listed firms. This fact necessitates keeping a large
number of Board of Directors to provide an effective governance structure. Majority of Board members
must be of Non-Executive status, and must be independent of management and free from any constraints
likely to materially interfere with the exercise of their independent judgment. Our interview with GSE
officials indicated that they insist that 25% of Board must be Non-executive; no compromise on
CEO/Chair duality role; and no decision on size of membership.
Table 2 provides some information on the ratio of Non-Executive members to total Board members. The
ratios for the companies appear high, except Mechanical Lloyd with very low ratio, probably implying
weak corporate governance structure, and also Aryton Drug Manufacturing Firm and Camelot Ltd that
need to beef up their governance structure. In the case of Enterprise Insurance Ltd, the ratio is fairly high,
but then it appears two Board members come from the same institution, a situation likely to lead to
opportunistic tendencies that could even compromise on some critical corporate objectives. Besides, only
the Ghana Commercial Bank retains two Independent Non-Executive members, which appears to be an
improvement over the others. To this end, other companies need to learn from such best practices. GSE
should continue to ensure that their education and publicity campaigns are given greater boost.
Nevertheless, we can discern that positive relationship exists among the share-ownership structure,
corporate governance structure, and corporate profitability. Table 3 indicates that ROEs and EPS for the
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Proceedings of the 12th Annual Conference © 2011 IAABD
companies over the study period have been positive, though with some variations. These results may have
been the outcomes of the relationships identified in the earlier paragraphs.
Table 1: Share Ownership Structure.
GHANA COM BANK FAN MILK LTD MECH. LLOYD LTD ENTERPRISE INSUR
Holder Share
s
(mill)
SSNIT 79.0 29.
8
% Cum
%
Holder Share
s
(mill)
29.8 Fan Milk
Internati
onall
GOVT 56.6 21. 51.2 Ent Ins
4
Ltd
BBG 17.4 6.6 57.8 BBg/JP
Morgn
Daniel 7.20 2.7 60.5 BBG Re
Ofori
Epk
Large
st 20
Holde
rs
72
Largest
20
Holders
% Cum
%
10.97 55.5 55.5 T.R.
Darko
Holder Shares
(mill)
10.98 21.
9
% Cu
m
%
21.
9
1.59 8.0 63.5 SSNIT 8.83 17. 39.
6 6
0.99 5.0 68.5 BBG 4.72 9.4 49.
0
0.67 3.4 71.5 M.O. 1.83 3.6 52.
Darko
6
78
Larg
est
20
Hold
ers
76
Holder Share
s
(mill)
Ventures
&
Acquisitio
ns
Ghana-
Re
12.83 48.
9
% Cu
m
%
48.
9
1.64 6.0 54.
9
SSNIT 1.57 6.0 60.
9
BBG. 0.88 3.3 64.
Epak Inv
2
Largest
20
Holders
AYRTON DRUG MANFACT CAMELOT LTD GOIL LTD
Holder Shares % Cum Holder Shares % Cum Holder Shares % Cum
(mill) %
(mill) %
(mill) %
Samuel 70.24 33.0 33.0 West 2.90 44.3 44.3 Ghana 107.4 51.1 51.1
Adjepong
Africa Data
Services
Govt
SSNIT 55.90 26.0 59.0 Strategic
Initiatives
Ltd
1.30 19.9 64.2 SSNIT 38.9 18.5 69.6
BBG/ 23.00 10.7 70.0 Akyea- 0.56 8.5 72.7 GOIL 9.3 4.4 74.0
SSB
Djamson
Employe
e Plan
BBG/Bar 20.90 9.7 80.0 P. K. 0.24 3.6 76.3 BBG 1.9 0.9 75
clay Capt
Nduom
Largest
Largest 5.97
Largest
20
96 20 Holders
91 20 166.9 79
Holders
Holders
Source: GSE Fact Book (2010) and 2009 Annual Reports for the selected 7 companies
78
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Table 2: Corporate Governance Structure – Members of Board of Directors
Members as GCB Ltd FAN Milk Mechanical Enterprise Aryton Camelot Gh GOIL Ltd
at 31/12/09
Ltd Lloyd Ltd Ins Ltd Drug Man Ltd
Chairman 1 1 1 1 1 1 1
Executive
Director
Non-
3 1 4 1 2 2 1
Executive
Director
Independent
7
5
2
6
4
3
7
Non-
Executive
Director
2
0
0
0
0
0
0
Total no. of
Members
Non-
13 7 7 8 7 6 9
Executive/
Board
members
Ratio
69% 71% 29% 75% 57% 50% 78%
Source: GSE Fact Book (2010) and 2009 Annual Reports of the selected 7 companies
Table 3: Corporate Investment Efficiency: ( ROE; EPS) for the 7 companies Years: 2005-9
2009 2008 2007 2006 2005
Company
ROE EPS ROE EPS ROE EPS ROE EPS * ROE EPS *
% GHc % GHc % GHc % cedis % cedis
GCB Ltd
Fan Milk Ltd
9.3 0.071 18.1 0.141 18.6 0.124 28.3 1577 17.8 782
43.2 0.766 32.9 0.357 28.1 0.220 29.8 1656 40.8 1781
Mechanical Lloyd
Ltd
7.2 0.020 11.0 0.030 13.1 0.030 9.1 149.9 10.4 159.2
Enterprise
Insurance Ltd
4.2 0.087 10.0 0.173 12.6 0.116 11.6 712.0 15.6 722.0
Aryton Drug 24.3 0.013 19.1 0.008 18.9 0.007 16.3 48.08 25.4 42.16
Manufact. Ltd
Camelot
Ltd
Ghana 7.90 0.009 25.53 0.020 2.49 0.001 8.72 48.70 3.73 20.23
Ghana Oil Co. Ltd 18.16 0.025 16.60 0.020 18.30 0.019 25.46 1132.0 16.12 651.01
Source: GSE Fact Book (2010); and 2009 Annual Reports of the 7 selected listed companies
• The local currency was the cedi, before re-denomination.
Conclusions and Recommendations:
The first conclusion of this study is that majority of the listed companies on the GSE have high ownership
concentration, which goes to buttress Farooque et al (2007). Secondly, a number of companies also
operate relatively effective corporate governance structure without which the positive ROE and EPS
measures reported would not have been achieved. The third conclusion is that there exist some positive
relationships among the three forces of share ownership structure, corporate governance structure, and
corporate investment efficiency, even though some researchers like Aluchna, et al (2007) and High Beam
Research (2008) seem to differ on the direction of the link. The resulting implications of the study are that
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Proceedings of the 12th Annual Conference © 2011 IAABD
GSE must step up their activities in the area of public education and campaign to attract further
investment capital through the launch of the benefits of wider share-ownership structure as an alternative
to the currently more popular high share-ownership concentration. Furthermore, existing companies must
also be encouraged to adopt a more effective and stronger governance structure to be able to achieve
greater efficiency of their investments. In all these, the GSE obviously needs the support of the
government that must continue to provide the very much needed enabling environment to achieve
effective mobilization of long-term capital for investment and national development.
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Sundaramurthy, C. and D.W. Lyon (1980) “Shareholder Governance Proposals and Conflicts of Interests
between Inside and Outside Shareholders, Journal of Management Issues, Vol.10
8

Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Do Sub-Saharan African Banks with Market Power Profit from Monetary Policy?
Mohammed Amidu amidu@ug.edu.gh
University of Ghana Business School, Legon, Ghana. Email:
Banking spread in Sub-Saharan Africa (SSA) is high by international standards and this phenomenon has been
suggested to be one of the factors hindering the region economic growth. This paper assesses the competitive
environments of SSA banks with the aim of testing whether banks with market power profit from monetary policy.
Employing various specifications of the Lerner index as the measure of degree of market power, the results suggest
that the high net-interest margins among SSA banks can be attributed to high level of market power and the cost of
labor. The results also show that spreads of banks with market power is significantly more sensitive to the monetary
policy changes. The overall findings point to the fact that banks in Africa profit from monetary policy shocks.
Introduction
Financial systems in Africa are predominately bank-based and the level of financial intermediation in
Sub-Saharan Africa (SSA) is relatively low as evidenced by low levels of credit to the private sector.
Studies have shown that a lack of or low financial intermediation is not only an important barrier to
growth; it is seen as a causal factor in explaining economic performance. Levine (2004) has provided
empirical evidence of a causal relationship between the level of financial intermediation and the degree of
economic growth. The effectiveness of the banking system in channeling funds from surplus economic
units to deficit units is measured by examining the spread between lending and deposit units as well as
assessing the level of competition and operational efficiency of the banking sector (Yildrim and
Philippatos 2007). The poor performance of SSA banks in the supply of loans to private sector appears
related to the prevalence of high lending costs in Africa. Figure 1 shows that SSA banks’ interest spreads
are among the highest in the world.
Figure 1: Interest rates spread across countries based on regional groupings
Bank spread
25
20
15
10
5
0
1998 1999 2000 2001 2002 2003 2004 2005
Years
East Asia & Pacific Europe & Central Asia Euro area
Latin America & Caribbean Middle East & North Africa South Asia
Sub-Saharan Africa
Source: World Development indicators (September 2009) and author’s calculations
This paper investigates whether SSA banks with market power profit from monetary policy tightening,
having access to cheap local sources of funding that enable them to maintain high interest margins. In
addition, the paper attempts to address the following issues: whether the prevalence of high spread in
Africa is due to the imperfect market conditions (Carbo Valverde and Rodriguez Fernandez 2007); the
regulatory large reserve requirements (Gelos 2006); the imposition of mandatory credit (Souza-Sobrinho
9

Proceedings of the 12th Annual Conference © 2011 IAABD
2010); the inefficient banking operating system (Claeys and Vander Vennent 2008); the bank regulation,
concentration and inflation (Demirguc-Kunt et al 2004) and the monetary policy and macroeconomic
shocks (Maudos and Fernandez de Guevara 2004). Employing micro-bank-specific and macro-countrylevel
data from 24 SSA countries, this paper contributes to the literature by examining the determinants of
bank interest spread in African banks focusing on the stance of monetary policy and the degree of market
power in the following ways: first, as there is no consensus in the literature regarding how best to assess
the degree of bank market power (Carbo et al,. 2009), three different specifications of the Lerner index
are constructed: conventional Lerner, efficiency-adjusted Lerner, and funding-adjusted Lerner to
investigate competitive environment of African banks. To the best of my knowledge there is no study that
has employed various specifications of the Lerner index in examining the causes of spread in SSA. The
second innovation of this paper lies in identifying the channel through which policies affect bank spread
and resource allocations.
The results suggest that on average conventional Lerner index is lower than that of funding and
efficiency-adjusted Lerner indices. These results imply that the former has been underestimating the
degree of market power in SSA. The results also suggest that the high net-interest margin in SSA is
attributed to high credit risk, risk aversion, excessive implicit payments and the increasingly high cost of
labor. Furthermore, the results reveal that spreads among banks with market power is significantly more
sensitive to the monetary policy stance.
The paper has four remaining sections. Section 2 reviews related literature on banks spread. Section 3
provides the methodology including the measurements of the key variables. Empirical results are
presented in section 4 and section 5 concludes.
Literature review
The theoretical principles explaining spread of banks can be described either in terms of ‘monopoly’,
‘dealership’ or ‘behavioral model’. The monopoly model developed by the seminal work of Klein (1971)
considers the banking firm’s main activity as the production of deposit and loans in the intermediation
services that is represented by a cost function of the C ( D , L ) type. Where D is the volume of deposits
while L is the volume of the loans produced by the bank. The rule in line with the cost function is that a
banking firm pursues its activities in an environment characterized by the presence of imperfect
competition in both deposit and credit markets. That is, the bank has the monopolistic power to set
interest rates in at least one of the markets where it conducts its operations. Klein (1971) contends that the
monopoly power of a bank can then be used to explain the scale of operations, its asset and liability
structure as well as its decision to affect the rate of return on liability (deposits) and asset (loan)
components. Thus, with this approach, banking firm spread reflects primarily its ability to charge a price
higher than the marginal cost for providing the services in both loan and deposit markets. The second
model in explaining bank spread is dealership. The dealership model introduced by Ho and Saunders
(1981) views the bank as a dynamic dealer, setting interest rates on loans and deposits to balance the
asymmetric arrival of loan demand and deposit supplies. The Non-synchronous arrival of loan and deposit
generates a cost for the bank given that it will have to hold either a long or short position in the money
market. The monopoly model and the dealership model of net interest margins have two main limitations.
According to Hanweck and Ryu (2005), monopoly and dealership models are single-horizon, static
models in which bank assets and liabilities are considered homogenous and accordingly priced at
prevailing loan and deposit rates and on the basis of the reference rate. The second limitation of these
models is that the banking sector is treated as either being homogenous or as having heterogeneous traits
that is based only on the assets’ size of banks. Conversely, banks with different products usually differ in
terms of their business models, pricing power and more importantly the funding structure and exogenous
shock. Hanweck and Ryu (2005) model of bank behavior in relation to net interest margins assume that at
10

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
each period a bank can significantly, but not completely; select the amount of its investment in assets and
liabilities of different re-pricing frequencies, given past choices that are immutable. In modeling bank
responses to credit and interest rates risks and shareholders maximization value, they argue that ‘not only
do bank managers have to choose the optimal financial service product mix, they also need to set the
lending rate and fees, hedge credit quality and volatility changes, manage their liability structure and
gauge the moods of the equity and debt markets to favorable or unfavorable news so as to increase
shareholder value.’
The empirical literature on bank spreads suggests that bank interest margins are mostly influenced by
administrative and other operating costs, the fraction on non-performing loans, the degree of bank market
power, the size of the operating capacity, the level of risk aversion regulatory, monetary and
macroeconomic shocks. Saunders and Schumacher (2000) decompose bank margins of selected OECD
countries into a regulatory component, market structure and risk premium component and reveal a tradeoff
between assuring bank solvency and lowering the cost of financial services to consumers. Claeys and
Vander Vennet (2008) investigate the determinants of bank interest margins in the Central and Eastern
European (CEE) countries and suggest that relatively high bank margins in CEE countries are influenced
by imperfect competitive markets, low operational efficiency, low capital adequacy and high influence of
foreign and state owned banks. The fall in bank spread in the European banking sector during 1993-2000
is mainly due to the relaxation of competitive condition in addition to the reduction of operating costs,
interest rate risk and credit risk (Maudos and Fernandez de Guevara, 2004). On the relationship between
bank spread and the degree of competition, Carbo Valverde and Rodriguez Fernandez (2007) contend that
market power varies significantly across bank specifications with market power increasing as bank output
of seven European countries becomes more diversified towards non-interest activities. Brock and Suarez
(2000) study bank spread of seven Latin American countries in the 1990s and find that while at micro
level, liquidity and capital risk affect banks’ margin, interest rate volatility, inflation and GDP growth
influence bank spread at the macro level. However, the results differ across countries. Employing a large
dataset from 1999-2002, Gelos (2006) found that prevalence of high bank spread among 14 Latin
American countries is as a result of high interest rates, less efficiency and large reserve requirements. In
Brazil, high spreads can be largely accounted for by the policy that required banks to invest half of their
deposits in reserves and mandatory credit (Sousa-Sobrinho 2010). On an Africa country specific study
Beck and Hesse (2009) identify bank spread and margins in Uganda to be driven by overhead cost,
sectoral composition of loans and other time invariant bank characteristics. Chirwa and Mlachila (2004)
reveal that Malawian bank spread is influenced by monopoly power, reserve requirements, high bank
discount rates and inflation, while Hesse (2007) find that regulatory, monetary policy as well as
macroeconomic factors impact on ex-ante bank spread in Nigeria.
These studies are yet to provide reasonable channels through which policy shocks and imperfect
competitive environments impact on bank spreads and allocation of resources to the private sector. This
paper contributes to the literature on two ways. First of all, in contrast to Altunbas et al (2010), it analyses
empirically the relationship between the stance of monetary policy and the spreads of banks in SSA
taking into account the degree of market power. Secondly it identifies the channel through which policy
stance distorts the bank spread. To this effect, the paper disentangles the effect of monetary policy from
other determinants, by exploring other possible factors that impact on the bank spread in SSA. Here, the
traditional bank specific factors and macroeconomic shocks (like GDP growth and inflation) are
considered in an empirical model as:
it , c = α 0 + α 1 S itc − 1 + β 1 X it , c + β 2 ∆ M t , c + β 3 X it , c * ∆ M t , c +
(1)
it
S ε
The above is a regression of bank interest spread for bank i for period t in country c, S , on its
it , c
S , the vector of bank-specific characteristic for period t in country , X , , on a set of macro
lags, it , c −1
c it c
11

Proceedings of the 12th Annual Conference © 2011 IAABD
variables, ∆ M tc , the interactions of these characteristics and macro variables, X it c * ∆ M ; and ε , tc
it is
α ( i = 1 ... n ) is the unknown intercept for each bank ( n bank-specific intercepts)
the error term. The 0
and β 's
are the estimated parameters.
Methodology
The dependent variable is bank interest spread and measured using ‘ex post spread’ methodology. The
‘ex-post spread’ measures the net yield of bank financial intermediation on revenue actually generated by
credit operations and the actual cost of deposit taking. The net interest margin is calculated from the
banks’ accounting data. It is calculated as the difference between interest revenue and interest expense as
a proportion to earning assets.
In this paper a Lerner index is employed to measure the degree of market power. It captures more
information about the actual price-setting behavior of banks in relation to their cost structure than the size
of banks measured either in terms of deposits, relative size of balance sheets or income generated. In line
with Fernandez de Guevara et al.’s (2005) empirical approach, this paper uses a single indicator of
banking activities and measures Lerner index as the spread between price and marginal cost:
L erner Index = ( P − MC ) / P
(2)
TA
TA
TA
The Lerner index in equation (2) suggests the extent to which the monopolist’s market power allows it to
fix a price above marginal cost. Following Fernandez de Guevara et al (2005), the construction of price
includes both interest and non-interest income, where PTA is the price of the total assets. MCTA is the
marginal cost of producing an additional unit of output. The MC TA is derived from the following translog
cost function as:
3
3
β2
2
lnCostit
= β 0 + β1
lnTAit
+ lnTAit
+ ∑γ ktlnWk
, it + ∑φk
lnTAitlnW
2
3
3
∑ ∑ δ ij ln k , it ln W j , it + ∑
k = 1 j = 1
i = 1
3
∑
i = 1
i ln t , ij
3
k= 1
k=
1
2
W ( δ / 2 ) ln W + η trend
ς W trend + v ln TA trend + ε
tj
i
j
t , ij
Where ln Cost is the log of the bank’s total costs that includes both financial and operating costs; ln TA
represents a proxy for bank output measured as total assets and W 1 , W2 and W3 indicate the input price of
deposit funds, labor and capital and these are respectively calculated as the ratio of interest expenses to
total deposits and money market funding, labor cost to total assets 1 , and other operating and
administrative expenses to total assets. Once the cost function is estimated, its first derivative with respect
to the output evaluated for each bank in the sample is the marginal cost. Hence, the marginal cost for each
banking firm is calculated as:
3
Cost ⎡
MC = ⎢ 1 + β 2 ln TA + ∑ φ k ln W k + δ 3Trend
TA ⎣
k = 1
2
∑
k = 1
⎤
⎥
⎦
β (4)
1 In the absence of data on total employees, the unit cost of labour is expressed in terms of total assets.
k
k
k,
it
+
(3)
12

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The index is interpreted as follows: the Lerner index with a higher value implies higher pricing power and
less competitive market conditions. However there are two possible setbacks associated with the Lerner
index (termed here as conventional Lerner) as estimated above. First, the MC estimation following
equation (3) is likely to reflect some form of monopoly power emanating from deposit markets, based on
the bank’s ability to fund at a relatively low price. This means that a form of deposit market power is
already reflected in the loan pricing. According to Maudos and De Guevara (2007) adding financing costs
and consequently the price of deposits in the cost function captures the effect of market power in banking
and this may biased results. They contend that excluding funding costs in the equation will lead to what is
termed as a ‘raw’ pricing power that is not biased by market power which had already been obtained in
the deposit market while securing funds. Therefore, a version of equation (3) is estimated to exclude
financing costs in the translog cost function. After calculating an operating MC for each bank at each time
period following equation (4) but including only two factors (labor cost and physical cost of capital), a
funding-adjusted Lerner index is derived from the structural model specified in equation (2). The second
issue associated with the conventional Lerner is that it implicitly assumes full bank efficiency and
therefore is unable to account for the possibility of banks failing to fully exploit output pricing
opportunities because of market power. Following Koetter et al (2008), an efficiency-adjusted Lerner
index is constructed by using the estimated total operating cost (TOC ) function in equation (3), the
corresponding marginal cost ( MC
^
) function in equation (4), the estimated profit ( P B T ) function and the
total assets (TA ) in a single structural model as:
^
^
R TA MC TA ) / A R TA
( A − (5)
Where A R TA
^
is the average revenue computed asTR / TA , whereTR = PBT + TOC . In contrast to the
conventional Lerner index in equation (2), efficiency-adjusted Lerner allows estimation of both bank
efficiency and degree of market power simultaneously. Consequently, this paper employs three different
specifications of Lerner: a conventional Lerner (Berger et al., 2009) a funding-adjusted Lerner (Maudos
and De Guevara, 2007) and an efficiency-adjusted Lerner (Koetter et al, 2008) in the analysis.
This paper employs a number of control variables that affect the relationship of interest. These controls
include bank-specific characteristics and the characteristics of the macroeconomic and monetary
environments. In this study, following the approach used by Claeys and Vander Vennet (2008); the ratio
of bank’s equity to total assets is used as a measure of the degree of risk aversion and the level of
capitalization. Ceteris paribus, risk aversion bank managers tend to impose an extra premium on interest
margin as a compensation for holding systematic risk. Ratio of total loan to assets is used as a proxy for
credit risk. The argument put forward for the use of this measurement is that banks charge additional
interest margin to compensate for exposure to be expected and unexpected credit risk, thus banks netinterest
margin will be high. The logarithm of total assets is employed as a proxy of banks operating
capacity (bank size) as there is no information available to proxy the transaction made. Implicit interest
payment is payment of interest on deposits through service charge remissions and other types of
depositor subsidy due to regulatory restrictions on explicit interest payments. Implicit payments are
calculated as the difference between operating expenses and non-interest income divided by total assets.
The proportion of labor cost as a percentage of total assets is used as a measure of expenditure on labor.
The higher the quality of management the higher the interest margins that the bank imposes, on the basis
that a high quality management translates into a profitable composition of assets and a low cost
composition of liabilities. Operating expenses as a ratio of gross income is used as the proxy of quality of
management. The study uses internally generated funds and non-deposit funds as bank funding
strategy. Internally accumulated funds are measured as the sum of net profit before extraordinary items
and loan loss provisions relative to bank loans at the end of the period while non-deposit funds are the
funding resources from other banks and other sources that include notes and all other related short-term
bills.
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Proceedings of the 12th Annual Conference © 2011 IAABD
This paper also controls for the countries’ general economic development, macroeconomic stability, and
institutional framework as these are likely to affect banking system performance. Boyd et al. (2001) find
evidence supporting the adverse impact of inflation on bank lending activities. Inflation and GDP growth
are included in the regression to account for differences in macroeconomic environments. Inflation is the
rate of inflation based on the Consumers Price Index (CPI). GDP growth measures business cycle
fluctuation. Cross-country studies on monetary policy choices are limited. This is because various
countries use different policy measures. The study employs the respective countries’ short-term interest
rate as a measure of monetary policy stance. Short-term interest rates appear to be a good indicator as
figure 2 shows a strong negative correlation between our short-term interest rates and the share of deposit
in total short-term financing of banks. An increase in short-term interest rates leads to a corresponding
decrease in the share of deposits in short-term finance. This result is also consistent with the argument
that banks rely more on uninsured debt Banking activities can also be affected by the freedom with which
they operate. The banking freedom index provides the overall measures of the openness of the banking
sector and the extent to which banks are free to operate their businesses (The Heritage Foundation 2010).
The study uses the banking freedom index from the Economic Freedom Indicators of the Heritage
Foundation. It is scaled from 0 to 100 with higher values indicating greater freedom.
Bank level data is taken from the Bankscope database maintained by Fitch/IBCA/Bureau Van Dijk. Series
are yearly, covering a sample of 264 banks across 24 Sub-Saharan African countries during the eight year
period, 2000–2007. The study employs unconsolidated balance sheet data whenever possible even though
in some cases the paper makes use of consolidated statement because of data availability. The analysis is
conducted on the individual banks and the sample includes all commercial banks, cooperative banks,
development banks, savings banks, real estate and mortgage banks for which annual data is available for
some period, or the years, during the period 2000-2007. Macro data are obtained from the World
Development Indicator of the World Bank and International Financial Statistics database of the
International Monetary Fund and the respective central banks.
Figure 2: Bank’s short-term finance mix and short-term interest rates
Deposits/Short-term
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2000 2001 2002 2003 2004 2005 2006 2007
Source: WDI, Bankscope and author’s calculations
4. Empirical Results
Years
Finance mix Short-term interest rate
Descriptive statistics
Table 1 provides descriptive statistics of both bank spreads and its determinants for 264 banks across 24
SSA countries averaged over 2000-2007. The banking spread in SSA countries has been increasing
during the period. It increased by 99% in 2000 (a rate 3.85) to 7.68 in 2004 and then fell marginally in
2007 to 4.51. At the same period, the competitive structure, proxied by Lerner index increase by 145.6%,
95.8% and 86.83% respectively to conventional, funding-adjusted and efficiency-adjusted Lerner indices.
It has to be emphasized here that, the Lerner indices have not followed a uniform pattern. The result
clearly shows that the Lerner indices increased from (10.4, 27 and 29.2) in 2000 to (25.5, 53.7 and 55.6)
in 2003; the highest during the sampled period, and fell thereafter to (24.8, 42.2 and 43.2) in 2007. Thus
60
50
40
30
20
10
0
Short-term interest rates
14

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
since 2003, SSA bank market power and spread have been falling. In general, the conventional Lerner
figures indicate 26% price mark-up over marginal cost during the period, 2000-2007, whereas the
estimated funding and efficiency-adjusted Lerner indices are around 57% and 59% respectively. As in the
case of Koetter et al (2008) for US banks, the figures of efficiency-adjusted Lerner exceeds that of
conventional index. Likewise the magnitude of funding-adjusted Lerner is on average more than the
conventional Lerner. These figures indeed suggest that the former figures underestimate the degree of
market power and thus justify the use of the three estimations in this analysis. The African banks have
increased their use of non-deposit funding over the period. In 2000, the average non-deposit funding, our
proxy for funding strategy was 7.8% then increase to 14.42% in 2004. The magnitude of non-deposit
funding then fell by 59% to 5.84% in 2007. Similar trends are reported for internal cash flow financing.
Risk aversion and credit risk increased in the period being analyzed; only falling in 2007. However, the
increase in risk aversion (equity ratio) must be analyzed in the context of the capitalization level in Africa.
Labor cost increased over the period while implicit payment increases in mid 2000s (i.e. 2001-2004). The
size of the bank proxied by the dollar amount of total assets was relatively stable during the period under
study. So was the cost to income ratio.
Table 1: Summary statistics averaged for the period 2000-2007
2000 2001 2002 2003 2004 2005 2006 2007
Bank spread 0.039 0.059 0.064 0.078 0.077 0.072 0.061 0.045
Conventional Lerner 0.104 0.115 0.178 0.255 0.257 0.245 0.263 0.248
Funding-adjusted Lerner 0.270 0.423 0.466 0.537 0.529 0.500 0.469 0.422
Efficiency-adjusted Lerner 0.292 0.454 0.493 0.556 0.545 0.501 0.485 0.432
Concentration 0.657 0.636 0.632 0.603 0.569 0.553 0.557 0.581
Internal fund 0.050 0.072 0.066 0.085 0.088 0.063 0.071 0.060
Non-deposit fund 0.078 0.103 0.131 0.144 0.144 0.109 0.096 0.058
Credit risk 0.275 0.392 0.395 0.446 0.466 0.432 0.411 0.354
Risk aversion 0.078 0.120 0.118 0.126 0.134 0.133 0.114 0.100
Bank size ($’million) 333.8 459.7 553.6 737.7 865.1 496.3 524.2 647.1
Implicit payment 0.010 0.018 0.018 0.020 0.022 0.019 0.017 0.011
Labor cost 0.012 0.019 0.022 0.024 0.024 0.023 0.020 0.017
Efficiency ratio 0.278 0.484 0.487 0.472 0.507 0.497 0.408 0.336
Non-interest income 0.097 0.127 0.162 0.166 0.163 0.150 0.142 0.132
Monetary policy 0.220 0.216 0.197 0.302 0.182 0.378 0.320 0.538
Source: WDI, Bankscope and author’s own calculations
All the calculations are in percentages except bank size which in million of US Dollars
Evaluation of bank spread in SSA
The objective of this paper is to investigate empirically the relationship between spread and monetary
policy. To this effect, the paper follows Maudos and Fernandez de Guevara (2004), to estimate equation
(1) using fixed effect. The method captures specific characteristics of individual banks by employing the
within-group estimators. The Hausman test allows the null hypothesis of absence of correlation between
individual effects and the explanatory variables to be rejected in all cases, thus the GLS estimator of the
random effect model being inconsistent. The regression results relating bank spreads to credit risk, labour
cost, cash flows, funding strategy, bank market power and implicit payments are presented in table 2. It
includes macro variables to investigate whether banks profit from tightening of monetary policy
indicators. The different columns reported relate to different empirical approaches to Lerner index used:
column 1 for conventional Lerner index, column 2 for funding-adjusted Lerner index and column 3 for
efficiency-adjusted Lerner index. The results, in general, show that all the variables considered in the
15

Proceedings of the 12th Annual Conference © 2011 IAABD
regression significantly affect bank spreads except non-deposit funding. Credit risk, risk aversion, implicit
payment, labor cost and internal cash flows are positive and significantly influence bank spread in SSA.
The positive coefficient of the credit risk indicates that SSA banks apply a risk premium implicitly in the
interest rate charged for their operation. The results on the implicit payment are consistent with Maudos
and Fernandez de Guevara’s (2004) findings on European banks, that banks charge an extra fee for their
services more implicitly through lower remuneration of liabilities, presenting higher interest spreads. The
inclusion of labor cost provides a strong indication of the importance of labor expenditure in evaluating
the determinants of spread in SSA. One percent increase in labor cost increases spread by more than 52
percent, ceteris paribus. A similar result is found on the coefficient on market power. On macro variables
shock on the spread of SSA banks, the result is consistent with most previous studies where inflation, the
growth in GDP and monetary policy stance significantly influence spread. The positive sign of inflation
suggest that banks in SSA increase their interest margin to overcome the adverse effect associated with
increase in inflation level. The most significant result of macro variables is that of monetary policy shock.
The positive and statistical result of the variable across all the regression means that spread increases
among African banks with the contraction of monetary policy indicator. A percentage change in the
tightening of monetary policy increases banks’ spread by more than 3 percent.
Table 2: Determinants of bank spread in SSA
Dependent variable: bank spread (1) (2) (3)
Credit risk 0.0471*** 0.0558*** 0.0819***
(0.0133) (0.0142) (0.0154)
Risk aversion 0.0754** 0.1055*** 0.1473***
(0.0344) (0.0366) (0.0370)
Size -0.0039* -0.0008 0.0049**
(0.0020) (0.0021) (0.0024)
Implicit payment 0.9922*** 1.0059*** 1.0847***
(0.0885) (0.0929) (0.0824)
Labour cost 0.5229*** 0.6482*** 0.7536***
(0.1751) (0.1800) (0.1820)
Internal fund 0.1480*** 0.1625*** 0.3302***
(0.0205) (0.0218) (0.0216)
Non-deposit fund -0.0170 -0.0156 -0.0103
(0.0106) (0.0111) (0.0131)
Efficiency ratio 0.0491*** -0.0277**
(0.0170) (0.0139)
Conventional Lerner index 0.1206***
(0.0155)
Funding-adjusted Lerner 0.0671***
(0.0221)
Efficiency-adjusted Lerner 0.0171
(0.0158)
Bank spreadt-1 0.1507*** 0.1770*** 0.0321
(0.0394) (0.0415) (0.0464)
Banking freedom 0.0134** 0.0112* 0.0085
(0.0058) (0.0060) (0.0071)
Monetary policy 0.0380*** 0.0357*** 0.0315***
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
(0.0049) (0.0051) (0.0052)
GDP growth 0.0836* 0.0918** 0.1223**
(0.0429) (0.0450) (0.0536)
Inflation 0.0291*** 0.0211*** 0.0180***
(0.00625) (0.0064) (0.0069)
Number of observation
R2
Hausman
Prob>chi2
691
0.7118
837.31
0.0000
687
0.7456
344.66
0.0000
716
0.6967
704.38
0.000
The estimation is based on data for 24 SSA countries using fixed effects estimators. The dependent variable is bank spread. Constant term included but not reported.
Standard errors are reported in parentheses. ***, **, and * indicates statistical significance at the 1% 5% and 10% level respectively
As banks profit increases with tightening of monetary policy, the monetary policy indicator is interacted
with bank credit risk, cash flow, funding strategy and market power to investigate monetary policy
sensitivity of spreads. The result is presented in table 3. The sensitivity of spreads to monetary policy
shock increases as the cash flows of the bank increases. The same results are obtained when bank funding
strategy, credit risk and the bank market structure are used. All these results are statistically significant at
0.01 significance level. The economic significance of these results is that the spread channel is much
stronger among banks with higher market power and credit risk with a significant coefficient of 6 and 7
percent respectively. The implication of this result is that the tightening of monetary policy indicator is
less effective with respect to banks with higher market power funding their investment from internal cash
flow and experiencing high credit risk.
Table 3: Sensitivity of monetary policy to bank spread
Dependent variable: bank spread (1) (2) (3) (4)
Credit risk 0.0453*** 0.0424*** 0.0437*** 0.0515***
Risk aversion
(0.0133)
0.0760**
(0.0342)
(0.0130)
0.0721**
(0.0334)
(0.0126)
0.0805**
(0.0324)
(0.0128)
0.0539
(0.0330)
Size -0.0033 -0.0026 -0.0042** -0.0048**
(0.0020) (0.0020) (0.0019) (0.0019)
Implicit payment 1.0142*** 1.0246*** 1.1641*** 0.9928***
(0.0887) (0.0861) (0.0861) (0.0847)
Labour cost 0.5505*** 0.6968*** 0.4600*** 0.5035***
(0.1748) (0.1727) (0.1652) (0.1676)
Internal fund 0.0451*** 0.0439*** 0.0286* 0.0277*
(0.0170) (0.0165) (0.0162) (0.0165)
Non-deposit fund 0.1318*** 0.1610*** 0.1807*** 0.1453***
(0.0217) (0.0201) (0.0198) (0.0196)
Efficiency ratio -0.0190* -0.0345*** -0.0154 -0.01843*
(0.0106) (0.0107) (0.0100) (0.0101)
Conventional Lerner index 0.1181*** 0.1155*** 0.0990*** 0.0770***
(0.0155) (0.0151) (0.0149) (0.0161)
Banking freedom 0.0132** 0.0131** 0.0118** 0.0108**
(0.0057) (0.0056) (0.0054) (0.0055)
Internal fund*Monetary policy 0.0310**
17

Proceedings of the 12th Annual Conference © 2011 IAABD
Non-deposit fund*Monetary policy
(0.0137)
0.0595***
(0.0105)
Credit risk*Monetary policy 0.0785***
(0.0097)
Lerner index*Monetary policy 0.0660***
(0.0095)
Bank spreadt-1 0.1422*** 0.1295*** 0.2487*** 0.1249***
(0.0394) (0.0384) (0.0391) (0.0379)
Monetary policy stance 0.0364*** 0.0117* 0.0115** 0.0059
(0.0050) (0.0067) (0.0057) (0.0066)
GDP growth 0.0817* 0.0588 0.0213 0.0860**
(0.0428) (0.0419) (0.0412) (0.0411)
Inflation 0.0223*** 0.0289*** 0.0168** 0.0405***
Number of observation
R2
Hausman test
Prob>chi2
(0.0069)
691
0.7072
552.81
0.0000
(0.0060)
691
0.7130
575.30
0.0000
(0.0060)
691
0.7489
366.03
0.0000
(0.0062)
691
0.7814
332.67
0.0000
The estimation is based on data for 24 SSA countries using fixed effects estimators. The dependent variable is bank spread. Constant term included but not reported.
Standard errors are reported in parentheses. ***, **, and * indicates statistical significance at the 1% 5% and 10% level respectively.
Conclusion
This paper contributes to the literature on banks spread by examining factors that affect the prevalence of
high interest rate in SSA, focusing on the stance of monetary policy. On the competitive environment, the
figures suggest an improvement in competition level in SSA banking sectors as the trend has been
declining since 2003. In evaluating the spreads of SSA banks, the paper finds evidence to suggest that
high credit risk, risk aversion, excessive implicit payments and the increasing high cost of labor
contribute to high net interest margin. A special mention has to be made of the labor cost of African
banks. The result shows that one percent increase in labor cost increases the spread of banks by more than
fifty percent. Thus African banks increase interest margin to finance labor expenditure. All macro
variables considered in this paper contribute to the high bank spreads in SSA. To enable them to earn
positive real interest margins, banks charge high lending rates during periods of increases in inflation rate.
Similar results are found during an economic boom. There is also evidence to suggest that banks in Africa
profit from monetary policy shocks. Overall results reveal that spreads among banks with market power is
significantly more sensitive to the monetary policy stance, thus making monetary policy less effective in
addressing banks spread. Other interesting avenues remain open for further research on the high spreads
of SSA banks. In particular whether in the absence of a well-functioning capital market, the high spread
of banks in SSA as a response of regulatory shock enables banks to plough back profit and capital for the
purpose of maintaining some level of stability.
Reference
Altunabas, Y., Gambacorta, L., and Marques-Ibanez, D. (2010) Does monetary policy affect Bank
Risk-taking, Bank for International Settlements Working Paper No. 298
Beck, T., and Hesse, H. (2009) ‘Why are interest spread so high in Uganda’? Journal of Development
Economics 88, 192-204
Berger, A.N., Klapper, L., and Turk Ariss, R. (2009) Bank competition and financial stability’, Journal of
Financial Services Research 35, 99-118
18

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Boyd, J.H., Levine, R., and Smith, B.D. (2001) ‘The impact of inflation on financial sector performance’,
Journal of Monetary of Economics 47, 221-248.
Brock, P., and Rojas-Suarez, L. (2000) ‘Understanding the behaviour of bank spreads in Latin America’,
Journal of Development Economic 63, 113–134
Carbo Valverde, S., and Rodriguez Fernandez, F. (2007) ‘The determinants of bank margins in European
banking’, Journal of Banking and Finance 31, 2043-2063
Carbo Valverde, S., Humphrey, D., Maudos, J., and Molyneux, P. (2009) ‘Cross-country comparisons
and pricing power of European banking’, Journal of International Money and Finance, 28, 115-134
Chirwa, E.W., Mlachila, M., (2004) Financial reforms and interest rate spreads in the
commercial banking system in Malawi. IMF Staff Papers 51 (1), 96-122.
Claeys, S., and Vander Vennet, R. (2008) ‘Determinants of bank interest margins in Central and Eastern
Europe: A comparison with the West’, Economic Systems 32, 197-216
Demirguc-Kunt, A., Laeven, L., and Levine, R. (2004) ‘Regulations, market structure, institutions, and
the cost of financial intermediation’, Journal of Money Credit Banking 36, 593–622
Fernandez De Guevara, J., Maudos, J and Perez, F. (2005) ‘Market power in European banking sectors’,
Journal of Financial Services Research 27(2), 109-137
Gelos, G. (2006) ‘Banking spread in Latin America’, IMF Working paper 06/44
Hanweck, G. and Ryu, l. (2005), The Sensitivity of Bank net Interest Margins and Profitability to Credit,
Interest-Rate and Ter-Structure Shocks Across bank Product Specializations, Federal Deposit Insurance
Corporation. Working Paper 2005-02
Hesse, H. (2007) Financial Intermediation in the Pre-consolidated Banking Sector in Nigeria, World Bank
Policy Research Working Paper, 4267
Ho, T. S. and Sauders, A. (1981), The determinants of bank interest margins: theory and empirical
evidence’, Journal of Financial and Quantitative Analysis 16 (4), 581-600
Klein, M.A. (1971) ‘A theory of banking firm’, Journal of Money, Credit and Banking 3, 205-218
Koetter, M., Kolari, J., and Spierdijk, L., (2008) ‘Efficient competition? Testing the ‘‘quiet life” of US
banks with adjusted Lerner indices. Working Paper, Groningen University.
Levine, R. (2004) Finance and Growth: Theory and Evidence, NBER Working Paper 10766 (Cambridge:
National Bureau of Economic Research)
Maudos, J. and De Guevara, J. (2007) ‘The cost of market power in the European banking sector: Social
Welfare cost vs. cost inefficiency’, Journal of Banking and Finance 31, 2103-2125
Maudos, J., and Fernandez De Guevara, F. (2004) ‘Factors explaining the interest margin in the banking
sectors of the European Union’, Journal of Banking and Finance 28 (9), 2259–2281.
Saunders, A., and Schumacher, L. (2000) ‘The determinants of bank interest rate margins: an
international study’, Journal of International Money and Finance 19 (6), 813–32.
Souza-Sobrinho, N (2010) ‘Macroeconomics of bank interest spreads: Evidence from Brazil’, Ann
Finance (6) 1-32
The Heritage Foundation Index of Economic Freedom (2010) ‘The link between Economic opportunity
and prosperity’, The Heritage Foundation and Dow Jones and Company, Washington D.C.
Yildirim, H.S., and Philippatos, C.G. (2007) ‘Competition and contestability in Central and Eastern
European banking market’, Managerial Finance 33 (3), 195-207.
19

Proceedings of the 12th Annual Conference © 2011 IAABD
Impact of Financial Pressure on Productivity growth of Listed non-Financial Firms in
Nigeria.
Abstract:
Obembe, Olufemi b. f_obembe@yahoo.com
Andrew Young School of Policy Studies, Georgia State University, Atlanta GA.
Afolabi, Babatunde
Guaranty Trust Bank PLC, Ado-Ekiti, Nigeria
Adejumo, Victor
Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria.
This paper examined the impact of financial pressure on productivity growth of 76 listed nonfinancial
firms between 1997 and 2007 in Nigeria. Data collected was analyzed with the use of
Arellano and Bond GMM dynamic panel model. Our findings suggest that financial pressure
measured by borrowing ratio and debt ratio exerted a negative but not significant impact on
productivity growth, while, bank debt, financial distress and bank debt in distressed firms were
found with positive but also not significant impact on productivity growth of firms. Vertical was
found to exert a negative and significant impact on productivity growth. Our result indicates that
productivity growth does not respond to financial pressure in Nigeria.
Introduction
The subject of productivity growth has received tremendous attention in the recent time owing to the
significance of its role as a source of wealth and prosperity of nations. Productivity growth has become
the source of long term growth and development of countries. A growth in total factor productivity leads
to increase in income per worker thereby enabling a higher standard of living. Moreover, productivity
growth brings increased revenue to the government in form of corporate income taxes which enables it to
finance infrastructure from domestic sources thereby promoting stability. Statistics show that countries
with high living standards today are those that have experienced rapid total factor productivity growth in
the last four decades.
The performance of Nigeria in the productivity ladder among the nations is of much concern. According
to data presented by Isaksson (2007), Nigeria occupied 94th position out of 112 countries in 1960 leading
such countries as China, Ghana, Togo, and Ethiopia and also at par with India and Bangladesh in terms of
their relative productivity to the United States. However, in 2000, Nigeria has slipped down from 94 th to
108 th position leading only four countries in the whole world, with a record of 2 per cent productivity
growth in terms of the United States. Adenikinju (2005) observed that Nigeria’s GDP grew by an average
of 2.43 per cent between 1962 and 2000, while the growth experienced was attributed primarily to factor
accumulation with a decline in productivity by an average of -2.85 percent over the review period.
Indeed, today, as Nigeria is endowed with huge natural and human potentials, the country still remains
one of the poorest countries in the world.
A study of productivity growth in Nigeria according to Adenikinju (2005) is important for a number of
reasons. First, there is direct linkage between productivity growth and sustained economic growth.
Secondly, Nigeria’s development experience shows that past growth strategy based on factor
20

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
accumulation is both infeasible and sub-optimal. The economic reality facing the country today requires
a shift in emphasis to factor efficiency, and finally, higher productivity is a key to poverty reduction.
In the study of determinants of productivity growth of firms, financial pressure created through debt either
by shareholders or managers of firms has been identified as a major factor. Shareholders can increase the
debt ratio to commit the management to obligatory debt service payments so that excess cash flow will
not be diverted by managers to projects with negative Net Present Values (NPV) so as to enhance
managerial utility (Jensen, 1986). Self-interested managers also could use debt as a bonding mechanism
to pursuing no other objective aside from profit maximization (Grossman and Hart, 1982). Empirical
works however on the impact of financial pressure on productivity growth of firms have been limited to
developed countries. It is very pertinent to understand the role of financial pressure in developing
countries with imperfect capital markets whether it could serve as an alternative governance mechanism.
Having looked at the introduction, the remaining part of this paper is divided into four sections. Section
two takes a look at the theoretical framework and literature review while the third section presents the
methodology and section four presents data analysis and results while section five summarizes with
conclusions.
Theoretical framework and literature review
Analytical Framework
Our analytical framework derives from the Agency theory of Jensen and Meckling (1976). In this
framework, the separation of ownership and control in the modern form of business organizations gives
room for agents (managers) to pursue non-profit maximizing objectives at the expense of the owners
(principal). The realization of this possibility has led the principal to taking some necessary measures in
protecting their interests. Financial pressure which results from higher level of debt service payments
relative to the average level of earnings is one of such measures adopted by shareholders (principal) in
ensuring that managers’ interests are aligned appropriately with those of the owners.
Firms with free cash flow and limited growth opportunities, managers may engage in self serving and
opportunistic behavior by investing free cash flow in projects that are not associated with the firm’s
current lines of business. Jensen (1986) explained that the opportunistic behavior of the managers in this
respect can be controlled by increasing the proportion of debt in the capital structure which increases the
debt burden and consequently debt service obligations which managers are compelled to meet failure of
which may lead to bankruptcy and which will not be in the interest of the managers. Hence, putting
managers under financial pressure of meeting debt service obligations enables them to adopt measures at
improving the productive use of resources, more so this can be more effectively achieved when a higher
proportion of the debt service is from the bank (Jensen, 1986; Aghion and Howitt, 1996). It has also
been observed that creditors are not much concerned about firm monitoring, but rather on avoiding failure
of loans provided Stiglitz (1985), hence, it is expected that banks will interfere more in firms in which
they have much loans and whose performance are poor.
Following from the above framework, we formulate the following hypothesis for Nigerian firms.
Hypothesis 1: High borrowing ratio has a positive impact on productivity growth
Hypothesis 2: High Debt ratio has a positive impact on productivity growth
Hypothesis 3: High bank debt has a positive impact on productivity growth
Hypothesis 4: Firms going through financial distress increases productivity
Hypothesis 5: Bank debt increases productivity growth of firms going through financial distress
21

Proceedings of the 12th Annual Conference © 2011 IAABD
Empirical Evidences
Empirical works of the impact of financial pressure on firm performance focuses on the level of debt
interest payments on productivity growth of firms. These works include, Nickell et al (1992), Nickell et
al (1997), Konigngs (1998), Nickell and Nicolitsas (1999), Koke (2001)., Benito and Hernando (2002).
In a series of works conducted on UK manufacturing enterprises Nickell et al (1992) found that higher
levels of debt service was associated with increased level and growth of manufacturing productivity, this
was also confirmed using 580 UK manufacturing companies in 1997. More so, in another study of 680
UK companies, Nickell et al (1999) found that financial pressure recorded a small positive effect on
productivity and a negative effect on employment and pay rise. A similar result was obtained by Konings
(1998) in a study of 1200 Bulgarian enterprises in which financial pressure was found to improve
productivity of the firms while no evidence was documented for 200 Estonian enterprises. In a study of
841 German firms, Koke (2001) provided support for the positive impact of financial pressure on
productivity growth, while weak evidence was recorded for the role of bank debt on productivity growth
except for poor performing firms. In a study of the effect of financial pressure on banking industry, Melle
(2003) also confirmed that financial pressure measured by interest payments normalized on generated
rents had a positive impact on future productivity growth, also, the study provided evidence that financial
pressure can be substituted by competition.
Studies emanating from Nigeria have examined the impact of capital structure of firm profitability of
firms. A study by Onaolapo and Kajola (2010) confirmed a negative impact of debt on firm performance.
This study assembled a sample of thirty non-financial firms from year 2001-2007 using the ROA and
ROE as measures of financial performance. This study however made use of the OLS model which does
not address some econometric problems such as firm heterogeneity and endogeneity, moreover, the
sample size was less than half of what we are currently using in our study.
Evidence on the role of financial pressure on productivity growth of firms in developing countries, most
especially sub-Saharan Africa, and in particular Nigeria is very scarce. Given the imperfect nature of the
capital market in developing countries thereby limiting its effectiveness at disciplining managers of firms,
this study intends to evaluate the effect of financial pressure as an alternate governance mechanism on the
performance of firms in Nigeria using productivity growth as a measure of performance.
Methodology
Following Nickell (1997), Nickell et al (1999) Koke (2001), we estimate a differenced version of Cobb-
Douglas production function regression equation derived through several stages. The differenced
productivity growth model assumes that a firm’s current performance results from a cumulated
experience with its governance mechanism, competitive and financial pressures. Hence, we assumed that
current performance is shaped by previous experiences, which enables us to incorporate our financial
pressure variables in lags. Given the Cobb-Douglas Production function of the form;
-----------------------------------------------------------------------------------------(1)
Yit = Real Sales (output); Lit = Labour (number of workers); Kit = capital input derived using the perpetual
inventory method; Ait = a measure of total factor productivity. We first took the logarithm of equation (1)
and then add a lagged output beside the factor inputs by a weight λ to take care of any persistence
inherent in the output. We subsequently include αit and an error term εit to take care of the firm
heterogeneity and the stochastic component respectively. The error term is assumed to be serially
uncorrelated. This subsequently yields equation (2) as follows:
--------------------------(2)
22

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The lower case letters are the logarithm forms of the upper case letters in equation (1). We hence
differenced equation (2) to eliminate the fixed effect αit thereby arriving at the differenced Cobb-Douglas
production function in (3).
-------------------------------(3)
We finally specify productivity growth as a function of financial pressure in year t-1, and control
variables which include assets and market structure of the firm. We also include a business cycle (CYC)
and time variables to filter away the productivity shocks. Hence, our model is given in (4) as:
---------------------(4)
Equations (3) and (4) provide the empirical model of productivity growth which corresponds to the
differenced panel model with lagged endogenous variables considered by Arellano and Bond (1991). We
subsequently employed the GMM in addition to OLS and fixed effects methods to estimate the equation.
Data for analysis was collected from the Nigerian Stock Exchange and African Financials Website.
Data Analysis and Presentation
The result of our econometric analysis is presented in the table below. The results obtained using
Arellano and Bond (1991) method shows that the asymptotic standard errors reported in parentheses are
robust to general cross-section and time series hetroskedasticity. Our instruments include second and
deeper lags of log of output, borrowing ratio, bank debt, financial distress and debt ratio, and these were
valid as they were not rejected by the Sargan tests.
Dependent variable: Output growth (
Lagged output growth
(
Model (1) Model (2) Model (3) Model (4) Model (5)
-0.0268
(0.0229)
Capital Growth ( ) 0.1219
(0.0216)*
Labour Growth ( ) -0.0507
(0.0296)***
Business Cycle (CYC) 0.9825
(0.0209)*
Vertical Integration -0.0421
(0.0231)**
-0.0245
(0.0257)
0.1260
(0.0234)*
-0.0545
(0.0324)***
0.9845
(0.0211)*
-0.0431
(0.0228)***
-0.0232
(0.0253)
0.1277
(0.0239)*
-0.0550
(0.0327)***
0.9872
(0.0212)*
-0.0420
(0.0223)***
-0.0232
(0.0268)
0.1362
(0.0273)*
0.0560
(0.0326)***
0.9804
(0.0202)*
-0.0359
(0.0215)***
-0.0138
(0.0237)
0.1367
(0.0263)*
-0.0588
(0.0334)***
0.9790
(0.0202)*
-0.0332
(0.0220)
Borrowing Ratio ( ) -0.0008 -0.0009 -0.0012 -0.0012 -0.0011
23

Proceedings of the 12th Annual Conference © 2011 IAABD
Debt Ratio ( ) -0.0082
(0.0009) (0.0010) (0.0011) (0.0011) (0.0012)
(0.0201)
-0.0091
(0.0201)
Bank Debt ( ) 0.0139
(0.0365)
-0.0083
(0.0199)
0.0130
(0.0368)
Financial distress ( 0.0697
Bank debt*Financial distress
Log of Total Assets 0.0389
(0.0198)**
Log of Age -0.1393
(0.1069)
0.0368
(0.0201)***
-0.1525
(0.1226)
0.0365
(0.0199)***
-0.1490
(0.1248)
(0.0771)
0.0233
(0.0246)
-0.1574
(0.1316)
Observations 675 675 675 675 675
-0.0102
(0.0215)
0.0015
(0.0390)
-0.0017
(0.1223)
0.1706
(0.2075)
0.0257
(0.0238)
-0.1532
(0.1296)
AR(1) 0.005 0.012 0.008 0.009 0.002
AR (2) 0.137 0.566 0.536 0.508 0.904
Sargan Test of Instrument
validity
* ** *** 1%, 5%, 10% respectively.
0.233 0.353 0.323 0.451 0.678
Models 1 to 5 presents the results of the 5 hypothesis stated. In model 1, borrowing ratio was found with
a negative but not significant impact on productivity growth which does not lend support for our
hypothesis, similarly, model 2 yielded the same outcome. However, when we considered model 3 with
bank debt, the result was found to be positive but not significant, this was also replicated in model 4
where firms with financial distress were found to increase productivity even though it was also not
statistically significant. In our final specification where we interacted bank debt and financial pressure,
the result though also was positive but was not significant. Our results have shown that financial pressure
does not have any significant impact on productivity growth of firms in Nigeria. This result is contrary to
findings obtained from other parts of the world such as UK by Nickell (1997), Germany by Koke (2001).
This result indicates that financial pressure does not induce productivity growth in Nigeria, our thinking is
that banks for instance were not so much interested in the productivity performance of the firms in as
much as they can recover their exposures to the firms.
24

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Our result also interestingly shows that vertical integration had a negative impact on productivity growth
and this was statistically significant in almost all the 5 models apart from the fifth one. This seems to
confirm that the free cash flow available to the managers were invested in projects with negative net
present values, while financial pressure was not effective enough at checking this problem. The log of
total assets was found to impact positively on the productivity growth of listed non-financial firms, this
seems reasonable as firms with large assets could secure some economies of large scale production
ranging from finance, marketing, managerial and research and development. The log of age recorded a
negative but not significant impact on productivity growth of the firms.
Summary, Conclusions and Recommendations
This paper examined the role of financial pressure created through total debt, bank debt, borrowing ratio
and financial distress on productivity growth of listed non-financial firms in Nigeria. This was initiated
due to limited studies emanating from Nigeria, moreover, studies such as that of Onaolapo and Kajola
(2010) focused on the impact of capital structure on firm profitability which is not a comprehensive
indicator of firm performance, especially in the context of Nigeria. For instance, it is very possible for a
firm to record a higher profitability by increasing the prices of their final products while maintaining a
fixed level of output. This is very possible in Nigeria because of lack of adequate competitive pressure
that could check the monopolistic tendencies of firms. More so, the study in question used the OLS
model which is subject to various econometric problems. This study hence focused on productivity
growth while accounting for the endogeneity problems inherent in the use of OLS and fixed effect models
of panel data analysis by employing the Arellano and Bond general methods of moments (GMM) method.
Our study reveals that financial pressure through borrowing ratio (BRT) and Debt ratio (DBT) had a
negative but not significant impact on firm productivity growth, while bank debt (BNK), financial distress
(LSS) and bank debt in firms with financial distress (BLS) recorded a positive but insignificant impact on
productivity growth of the firms. Vertical integration was found to exert a negative and significant
impact on productivity while total assets recorded a positive and significant impact on productivity
growth.
We still intend to improve this study by considering the ownership structure and competitive pressure of
the firms to determine whether the role of financial pressure varies with ownership concentration and
director shareholdings. However, our study has confirmed that financial pressure does not enhance
productivity growth of firms in Nigeria.
References
Adenikinju, A.F. (2005). “Productivity Performance in Developing Countries: Country Case Studies”, A
Report Submitted to UNIDO.
Arellano, M. and Bond, S. (1991), “Some Tests of Specification for Panel Data: Monte Carlo Evidence
and an Application to Employment Equations.” Review of Economic Studies, 58(2): 277-297.
Aghion, P. and Howitt, P. (1996): “A Research and development in the growth
process”. Journal of Economic Growth, 1(1), 49-73.
Benito A. and Ignacio H. (2002). Extricate: Financial Pressure and Firm Behavior in Spain,
http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/02/
Fic/dt0227e.pdf
Grossman, S.J. and Hart, O. D. (1982). Corporate Financial Structure and Managerial Incentives in
J.McCall (ed.), The Economics of Information and Uncertainty, Chicago: University of Chicago Press.
Issakson, A (2007) Productivity and aggregate growth: a global picture, Research and Statistics Branch
Staff Working Paper 05/2007. United Nations Industrial Development Organization (UNIDO).
25

Proceedings of the 12th Annual Conference © 2011 IAABD
Jensen, M.C. and Meckling, W. (1976) “Theory of the firm: Managerial Behavior, Agency Costs, and
Capital Structure.” Journal of Financial Economics 3(4): 305-360
Jensen, M.C. (1986) “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American
Economic Review, 76(2): 323-29.
Koke, J. (2001). “New Evidence on Ownership Structures in Germany”. Kredit und Kapital 34(2), 257-
292.
Konings, J. (1998). Firm Performance in Bulgaria and Estonia: The Effects of Competitive Pressure,
Financial Pressure and Disorganization, http://hdl.handle.net/2027.42/39572
Melle, M. (2003). Do Market Competition and financial Pressure make Banks Perform Well?
xiforofinanzas.ua.es/trabajos/1030.pdf
Nickell, S. Wadhwani S. and Wall M. (1992). “Productivity Growth in U.K. Companies”. 1975-1986,
European Economic Review 36(5): 1055-1091
Nickel, S., Nicolitsas, D. and Dryden N., (1997). “What makes Firms Perform Well? European
Economic Review 41: 783-796.
Nickell, S. and Nicolitsas, D (1999), “How Does Financial Pressure Affect Firms?” European Economic
Review 43(8): 1435-1456.
Onaolapo, A. A. and Kajola, S.O. (2010). “Capital Structure and firm Performance: Evidence from
Nigeria”. European Journal of Economics, Finance and Administrative Sciences. ISSN 1450-2275 Issue
25.
Stiglitz, J. (1985), “Credit markets and the control of capital”. Journal of Money, Credit, and Banking
17(2): 133-152
Definition of variables
The borrowing ration in the above formula were set equal to 1 for firms whose denominator were less
than zero
Financial distress (Loss) = firms with negative Profit before tax.
Business Cycle (CYC): We used the deviations of real sales from its mean. This we did by running a
regression of real sales with time and subsequently deducted the estimated from the observed.
6.
7.
. We used the Perpetual Inventory Method to derive capital.
26

Abstract
Determinants of Bank Lending Behaviour in Ghana
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Jonas Ladime, ladime2002@hotmail.com
Department of Banking and Finance, Methodist University College Ghana.
Emmanuel Sarpong-Kumankoma, ksarpong@ug.edu.gh
Department of Finance, University of Ghana Business School
Kofi A. Osei, kaosei@ug.edu.gh
Department of Finance, University of Ghana Business School, Ghana.
This paper investigates the determinants of bank lending behaviour in Ghana. Using the GMM-System estimator
developed by Arellano and Bover (1995) and Blundell and Bond (1998), we find that bank size and capital structure
had a statistically significant and positive relationship with bank lending behaviour. We also find evidence of
negative and significant impact of some macroeconomic indicators (central bank lending rate and exchange rate) on
bank lending behavior. Again, competition in the industry was found to have a positive and significant impact on
bank lending behaviour. Finally, relationship banking has positive correlation with bank lending behaviour in
Ghana. Thus, policies aimed at maintaining stable macroeconomic fundamentals would greatly accelerate bank
lending decision.
Introduction
The banking industry is one critical component of the financial system in developing countries capable of
facilitating capital accumulation and economic process. This is possible through efficient financial
intermediation. The banks mobilize funds from the surplus spending units in order to bring financial costs
down. Banks mostly transform liquid assets like deposits into illiquid assets like loans (Diamond and
Rajan, 1998). This transformational process of banks’ activity is at best influenced by a host of factors,
namely, macroeconomic, bank level (Peek and Rosengreen, 1995) and industry level characteristics (Boot
and Thakor, 2000). Boot and Thakor (2000) indicates the level of banking industry competition greatly
influences bank lending strategy positively. Again, Kashyap and Stein (2000), find a strong case that in
situations where a bank is handicapped in terms of credit, it will only take the bank capital to measure its
ability of lending.
Ghana’s rapid economic growth in the past was supported by the good performance of its financial
institutions. Indeed Ghana’s macroeconomic performance has been very significant with major indices
enjoying relative stability. The national output grew at an annual average of about 6.3%. Although
macroeconomic stability is highly regarded as a major condition for sectorial credit flow, gross credit to
the private sector has remained relatively stagnant and difficult to access (World Bank, 2008). Credit to
the Agriculture sector actually declined by about 3% with total flow to the manufacturing subsector of the
industrial sector remaining relatively low. A total of ¢25,197.6 billion credit facility was allotted to the
private and the public sectors by the deposit money banks representing a growth rate of 40.5% in the year
2006. Overall, total credit increased by 27.1% in real terms by the end of 2006 as against a 21.9% in 2005
(Bank of Ghana 2006). The banking industry in Africa and Ghana in particular forms a strategic hub of
the financial system. Lending decisions by banks cannot be overlooked as they are the principal providers
of funds to governments, corporate bodies and individuals as a whole (stock markets are just recent
developments in the financial system). Existing literature provides paucity of empirical evidence on bank
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Proceedings of the 12th Annual Conference © 2011 IAABD
lending behaviour in emerging markets like Ghana. In developing economy like Thailand, Suwanaporn
(2003) provides that banks consider risk and relationship factors in their bank lending decisions, This
work tries to fill this gap and find evidence of the determinants of bank lending behaviour in Ghana.
Specifically, we investigate the effect of bank specific, macroeconomic factors and industry
characteristics on bank lending behaviour.
The rest of this paper is organized as follows: section two discusses existing bank-lending behaviour
literature. Section three focuses on methodology and estimation approach while section four discusses the
results, provides conclusions and policy implications of the study.
Review of Literature
Fundamental role of a bank is intermediation by way of collecting savings from depositors and making
these savings available as loans to borrowers. Banks are more efficient in the collection of information
and loan production to dispel doubt on asymmetric information (Suwanaporn, 2003). Again, banks are in
the right positions to evaluate the future potentials of good investments as they have much more
experience in doing that with similar investments. Notwithstanding, these specialties, banks are more
circumspective about their lending decisions-lending decisions are influenced by a host of factors as
explained below:
One of the underlying factors for lending decision is the level of bank capital. The effects of bank capital
on lending behavior have been widely debated since the 1988 Basel Capital Accord (Gambacorta and
Mistrulli, 2004). Diamond and Rajans (1999) also show that there is a positive relationship between loan
growth and capital requirements and its regulations. The real impact of bank capital on its lending
behaviour received more attention in the USA banking system. A clear example is Kishan and Opiela,
2000. The general conclusion is that there is a connection between bank capital and bank lending
behaviour. However, the empirical literature on European countries is rather inconclusive. Ehrmann et al.
(2003) find that monetary tightening has a severe negative impact on rather undercapitalized banks’
lending. Thus, one can conceive that, the precise relationship between bank capital and lending is mixed.
An empirical evidence from an emerging economies would therefore enrich understanding about bank
capital-lending nexus.
Bank interest rate spread has also been shown to affect lending behaviour. Monetary policy, through a
prime rate (Central Bank’s rate) has a transmission mechanism on interest rates in the financial market
(Borio and Fritz, 1995). Bank lending rates are mostly seen as being rigid for the reason that they do not
move in tandem with the markets. A number of explanations have been suggested to account for the
rigidity in the bank lending rates. In the case of loans, the rigidity has been as a result of the rationing of
credit to borrowers owing to the fact that there are problems of asymmetric information ( Blinder and
Stiglitz, 1993). Indeed, financial markets are not perfect; in the presence of adverse selection and moral
hazard issues, banks are more likely to opt for credit rationing than to adjust their lending rates in a
situation where there has been an upward adjustment of interest rates by the central bank. It may also be
possible that when large banks capture large market share, the impact of tight monetary policy on bank
lending will be minimal. However, Berger and Udell (1992) could not find concrete support for the
rationing of credit as a reason for the rigidity of lending rate.
Bank size is considered as important determinant of bank lending decision (Berger and Udell, 2006,
Uchidal et al. 2007). Berger and Udell (2006) provide that large and complex organizations banks tend to
lend few loans to small scale firms. Stein (2002) explains that small banks have comparative advantages
in producing soft information whereas large banks also have comparative advantages in lending based on
hard information. On the other hand, when large and complex banks are able, through technical expertise,
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Challenges in the Era of Globalization
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to process soft information about small scale firms, then there would be positive relationship between
bank size and lending.
Additionally, the macroeconomic environment within which a bank operates matter for its lending
decision. For instance, in the period of economic boom, businesses demand for loans to take advantage of
expansion and banks investment opportunities equally soar. On the other hand, in period of economic
recession, demand for credit plummets. This provides a pro-cyclical relationship between economic
growth and bank lending. Dell’Ariccia and Marquez (2006) find that bank credit expansions tend to be
pro-cyclical that is, high rates of growth in GDP tends to induce a high rate of growth in bank credit. This
is because in the period of economic boom, banks relax their criteria and lend to both good and bad
projects, then in times of economic recession most loans become non-performing and the source of credit
dries up, rationing out even good projects. In Italy, Vazakidis and Adamopoulos (2009) indicated that
economic growth had a positive effect on credit market development. Again, the central bank’s prime rate
serves as an indicator to the movement in key economic variables like inflation which in turn affects
interest rate. Through the transmission mechanism, an increase in prime rate negatively affects bank’s
lending behaviour. Exchange rate fluctuations, specifically currency depreciation in a home country
results in banks’ assets being valued less in foreign currencies as against their liabilities. Additionally,
Lindgren et al. (1996) find that fluctuation in exchange rate is a prime cause of poor performance on
banks’ borrowers and subsequently, affect bank profitability. This situation is more certain in developing
economies which are exposed to foreign trade. Excessive exchange rate variation weakens economic and
financial growth in a country and is seen to be the most significant cause of the banking crises in a lot of
countries (Lindgren et al. 1996). In a developing and open economy like Ghana, one expects that
exchange rate depreciation will negatively affect bank lending behaviour.
With regards to industry structure, the precise relationship between bank industry structure and lending is
moot. From an economic theory perspective, exercise of market power in banking will lead a higher rate
of interest and a lower supply of available credit than in a perfect competition market. On the other hand,
there seems to be no consensus in literature as to the precise impact of bank market structure on the
supply of lendable funds. One school of thought argue that in the presence of market power (high
concentration), banks have more incentive to invest in the acquisition of soft information through
relationship banking (by establishing close relationships) with borrowers over time thereby, enhancing the
supply of credit and consequently reducing firms’ financial constraints (Dell´Ariccia and Marquez, 2004).
Additionally, Boot (2000) argued that, even though a borrower runs the risk of paying higher interest rates
in a context of non-competitive banking markets, the borrower can benefit from a greater availability of
finance. Another school of thought posits that in a market characterized by competitive conditions,
lending rates are lower hence more financing for firms. In other words, concentration heightens financing
obstacles to firms, especially from developing countries like Ghana (Beck et al. 2004).
Econometric Issues
Data Description and Model Specification
The study uses panel data, which involves pooling of seventeen (17) banks over the period 1997 – 2006.
And further adopts the model used by Alfaro et al. (2003). This model assumes that bank lending
behaviour today is explained by past lending experience (lag of the dependent variable), banking industry
characteristics, macroeconomic and bank-specific variables. Thus we formulate the model in the
following way:
3
3
i
i
yit = ρ yit−1
+ β1HHIt
+ ∑α
jBC
jit + ∑γ
sMAC
st + ε it
j=
1
s=
1
Where yit represents the log of bank lending behavior proxy by total loan portfolio of bank i at a given
period, t. BC ′ is a vector of bank specific variables including size, bank spread and capital structure,
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Proceedings of the 12th Annual Conference © 2011 IAABD
measured by total debt over shareholders fund, HHI represents the industry characteristic which is an
index of competition, and MAC ′ is macroeconomic variables including prime rates, the growth rate of real
gross domestic product and log of exchange rate. The variables ρ, β1, α and γ are vectors of estimators or
coefficients and ε is an error structure defined below:
ε it = v i + µ it
is the disturbance with the unobserved bank–specific effect and the idiosyncratic error.
The lag of the dependent variable was included as independent variable on assumption that for every
current loan supply or bank lending, there is a credible past relationship (in other words bank lending will
depend on the previous credit relationship) and the bank will re-assess the borrower for the current level
of information asymmetry. When the lag of the dependent variable coefficient assumes a value of 1 then
the relationship could be termed as good and a value close to zero will represent a fairly good relationship
between lenders and borrowers. The size of the bank size is measured by the log of total assets or the size
of deposits. Size is expected to have a positive influence on bank lending behavior. With regards to
Capital structure- it is measured as the debt to capital or equity ratio and it is expected to move in tandem
with bank lending behaviour. The bank spread is measured by the net interest margins of the banks as a
percentage of the net interest income of every bank. The spread represents a premium charged by the
banks as an additional cost to borrowers and the numerous risks levels that are faced by the banks.
Therefore, higher spread depicts the volatility among borrowers and that makes it difficult for banks to
give out loans to individuals and firms. Therefore, banks will only lend if and only if borrowers are
willing and able to pay more premium. We also used exchange rate consistent with (Alfaro et al. 2003).
We, measured exchange rate as the Ghanaian Cedi per United State Dollar. The exchange rate is
expected to have a negative effect on bank lending behavior, especially on the domestic banks.
We also control for the level of economic activities likely to influence bank lending using the growth rate
of real gross domestic product.GDP growth is expected to have a positive impact on bank lending
behavior. Bank lending behaviour in response to monetary policy from the central bank was captured
using. Central bank’s prime/lending rate. This rate measures how Bank of Ghana loosens and tightens the
monetary policy that either eases up credit or tightens up credit. The prime rate in the regression equation
is expected to move negatively to bank lending behaviour. The macroeconomic variables were obtained
from Bank of Ghana website whereas bank-specific variables from the audited financial reports of the
banks.
Estimation Method
The study used Generalized Method of Moments (GMM) estimators, which was propounded by Arellano
and Bond (1991), particularly the GMM-System estimator developed by Blundell and Bond (1998). The
dynamic model is the most appropriate model specification for the general form of the first-differenced
GMM estimation. Several merits inform our choice of dynamic model estimations. It is preferable in
situations of omitted variables. In addition, the variables used as instruments permit the estimators to be
estimated harmoniously in models that have the problem of endogeneity. Last but not the least is that
instruments are able to permit harmonious estimation in times where there might have been some
measurement error (Bond et al. 2001). The appropriateness of the model is tested using the Sargan and
the serial correlation tests. The Sargan test, tests for the over-identifying restrictions. This study tests the
sample analog of the moment conditions that were engaged in the process of the estimation to test for the
overall validity for the instruments. The test statistic here is a distribution where m is the number of
degrees of freedom obtained from the difference between the number of instruments and regressors. A
test for serial correlation is looked at by formulating a null hypothesis that the error term is not serially
correlated. The null hypothesis is formulated as the error term in the differenced equation shows no
second-order serial correlation.
30

Empirical Results
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Table 4.0 Dynamic Model Result
Dependent Variable: Log of Loans and Advances
Dependent variable:
Loans and advances Coef. Z P> Z
Llad
L1. 0.1904 3.46 0.001
Bank characteristics
Log of Size 0.7031 10.69 0.000
Capital Str. 0.8208 3.06 0.002
Spread -0.3405 -1.26 0.209
Macroeconomic indicators
Prime rate -6.493 -7.10 0.000
Log of Exchange -0.703 -4.45 0.000
Real GDP growth -0.7986 -0.15 0.881
Industry characteristic
HHI 11.0094 3.91 0.000
Cons 6.9929 3.90 0.000
Wald chi2(8) = 5467.56
Prob > chi2 = 0.0000
Note: AR(1) is -3.16 and AR(2) is -0.0859 with p-values 0.0016 and 0.9315 respectively. Sargan test χ 2 (2) =9.0117 with p-value
0.7721.
The coefficient of the lag variable is statistically significant, positive and less than unity (1). This implies
a fairly good relationship among banks and borrowers and could be further reinforced by previous
lending relationship giving high likelihood that banks will lend more in a current period. The bank size
has a positive and statistically significant influence on bank lending. Bigger banks thus lend more than
smaller ones. Consistent with existing studies such as Alfaro et al. (2003) and other studies that bank size
indeed contribute significantly to loan supply. What this means is that if banks are able to raise enough
capital from the capital market it is most likely this will enhance their lending decision and economic
development because banks and the stock market play a complementary role in economic growth as has
been found by (Zukarrnain, 2008).With regards to the capital structure, the coefficient reports a positive
and statistically significant effect on bank lending behaviour. Again, because maturity mismatch has a
great negative impact on bank profit as well as capital if all doors are shut for banks to raise some
additional capital, they are forced to reduce lending as regulation requires that bank capital has to be
around a certain minimum percentage of loans (Van den Heuvel, 2001). In addition, the study confirms
studies done on US banks suggest that there is an impeccable necessity of bank capital having some sort
of relationship with bank lending behaviour (Kishan and Opiela, 2000).
Log of exchange rate and Bank of Ghana prime rate have negative coefficients and are significant in all
estimations. As expected, anytime the central bank tightens monetary policy, bank lending is narrowed or
reduced. The results suggest that increases in inflation reduces the real return to the banks and hence
restrict the amount of money the banks wish to lend .The log of exchange rate with a negative coefficient
indicates that depreciation of the domestic currency against a foreign currency tends to reduce the volume
of loans banks make. This is because banks tend to invest more in foreign currency if they expect the
domestic currency to depreciate hence reducing the amount available for loans and advances.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Unexpectedly, the results indicate that real gross domestic product has a negative coefficient and is not
significant in all regressions. However, this may suggests that bank lenders’ expectations do not depend
on the current phase of business activities, which confirms findings of Danilowska (2008). With regards
to HHI, the results indicate that the banking industry has a positive and significant effect on bank lending
behaviour. By implication, competitive banking environment is likely to enhance bank lending behaviour
in Ghana. This confirms a study by (Beck et al. 2004).
ConclusionsThe study observes a relationship between bank lending behaviour and a set of
macroeconomic indicators, industry and bank level characteristics. Bigger banks seem to be in a better
position to lend more than otherwise. This might be due to enough resources they have to cushion
lending. Similarly, high level of bank capital is found to support much higher volumes of bank lending. A
strong and resilient financial system is necessary for economic growth. It restores confidence and
determines the elasticity of the system to shock as well as enhancing the credibility of the financial
institutions in the system. Therefore, the Bank of Ghana recapitalization policy must be encouraged so as
to help the economy prepare against any disastrous macroeconomic shocks. It will also enable wellcapitalized
financial institutions respond to increased demand for credit. Moreover, the central bank must
adopt a pragmatic approach that would ensure the stability of the local currency against the foreign
currencies to enhance bank lending decision in Ghana. However, in as much as tight monetary policy
would be considered favorable in certain situations, it has negative implications on bank lending decision.
Thus, as a policy guide, the central bank should critically weight all the outcomes and the trade-off of
tight monetary policy so as not to dampen the lending decision of banks to firms since this would have
dire consequences on economic development of this nation. Again, competitive banking industry structure
enhances bank lending decision. This might be due to associated low lending rate that characterizes
competitive banking systems.
Reference
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Berger A.N and Udell G.F. (2006). A more complete conceptual framework for SME finance. Journal of
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Danilowska A. (2008). Macroeconomic determinants of agricultural preferential investment credit in
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coexistence of lending and deposit taking. Quarterly Journal of Economics, 113, pp. 733-771.
Kishan R. P. and Opiela T. P. (2000). Bank size, bank capital and the bank lending channel. Journal of
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Proceedings of the 12th Annual Conference © 2011 IAABD
Assessing competitive behaviour in emerging banking market: African evidence
James Ntiamoah Doku, jmsdoku@yahoo.com
Department of Banking and Finance, Methodist University College Ghana
Joshua Abor, joshabor@ug.edu.gh
Department of Finance, University of Ghana Business School, Legon, Ghana.
Charles Komla Delali Adjasi, adjasikd@ug.edu.gh
Department of Finance, University of Ghana Business School, Legon, Ghana.
Charles Andoh, chandoh@ug.edu.gh
Department of Finance, University of Ghana Business School, Legon, Ghana.
Abstract
This paper investigates competitive bank behaviour in Africa during the period 1999-2008 and the factors that
account for the competitive bank behaviour. Using Panzar-Rosse (1987) methodology the findings indicate that the
banking system in Africa can best be described as monopolistically competitive. Relating the measured
competitiveness to concentration, contestability indicators, bank specific and general level of economic
development, the findings indicate that there is cross-country evidence that the markets are contestable. Fewer
banks’ activity restrictions, foreign bank penetration and regulations that deny entry by foreign banks play
significant impact on the degree of competitive bank behaviour. Thus, in order to enhance competitive bank
behaviour, policy makers should pursue policies that would eliminate restrictions on banks activities, provide
attractive investment climate all in attempt to enhance the attractiveness of the bank market.
Introduction
The banking secctor in Africa had witnessed structural reforms since 1980’s. In recent times, there have
been advances in communication technology, development of sophiscated financial products,
globalisation, deregulation of financial markets and influx of banks from one country into another. These
developments are expected to enhance the competitive bank behaviour as well as the conduct and pricing
behaviour. Indeed, the behaviour of banks in lately, has been spotlighted in the wake of the financial
crisis that engulfed some developed economies. The structure of bank market influences not only the
behaviour (pricing) but also the stability of the financial system. In addition, banking sector
competitiveness promotes efficient allocation of financial resources and this in turn affects economic
growth (Vivex, 2001). Accroding to Vivex (2001), the degree of competition in the financial sector can
matter for the access of firms and households to financial services and external financing, this in turn
affects overall economic growth (Vivex, 2001).
Therefore, existing literature started exploring the competitive bank behaviour in emerging markets
(Hauner and Peiris, 2005, Gelos & Roldos, 2004). For developed economies (Bikker and Haaf, 2002; Al-
Muharrami et al., 2006) and at international level (Claessens & Laeven, 2004). In Africa, a number of
studies investigated bank behaviour (Okeahalam, 1998, Al-Haschimi, 2007, Nannyonjo, 2002, Beck and
Hesse, 2006, Flamini et al 2009) and Buchs and Mathiesen (2008).
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Challenges in the Era of Globalization
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Essentially, the knowledge about the competitive bank behaviour in Africa is largely confined to the
above mentioned individual country-studies which also ignore the examinations into the forces
underpinning the competitive bank behaviour. A comprehensive knowledge about the factors influencing
competitive bank market conditions would go a long way in informing policy. This is the gap which the
current study fills-this study explores the competitive behaviour of commercial banks in Africa (26
countries) and further examines the forces driving the competitive behaviour. The rest of this paper is
structured in the following manner. Section 2 surveys the relevant literature on competitive bank
bahaviour and also provides the analytical framework for the study. Section 3 presents the description of
the data, operationalisation and estimation of the Panzar and Rosse (1987) model. Section 4 provides the
discussion of empirical results. Section 5 provides conclusions and recommendations for policy agenda.
Analytical Framework and Extant Literature
Examinations into competitive bank behaviour derives from two main strands in literature-the structural
approach based on the structure-conduct-performance paradigm and efficiency paradigm and the nonstructural
approach.The structural approach posits that highly concentrated market (market with fewer
and larger firms) causes collusive and anticompetitive behaviour which gives superior market
performance (Neumark and Sharpe 1992), whereas the efficiency hypothesis posits that it is rather bank
efficiency that matters in achieving enhanced bank performance. Using the SCP approach, Bikker and
Haaf (2002) find a negative connection between competitive bank behaviour and degree of concentration
concluding that increasing concentration in Europe would harm competition.
However, the structural approach has a fundamental weakness in that; it explores the competitive bank
behaviour by explicitly inferring information about the structure of the market rather than the actual
behaviour of banks with respect to changes in input factors. In that regard, the non-structural approach
becomes applicable. Two forms of this approach are the Panzar-Rosse (1987) and the Bresnahan (1982).
The attractive features of the former lies in its applicability using bank-level data whereas the later is
more suitable for aggregate industry data. Again, the non-structural models Panzar-Rosse (1987) and the
Bresnahan (1982) and Lau (1982) are derived from profit-maximizing equilibrium conditions. Shaffer
(1989) applied the Bresnahan methodology using a sample of US banks and finds results that strongly
reject collusive conduct, but are consistent with perfect competition. Similarly, using data from Canadian
banking sector, Shaffer (1993) finds that the Canadian banking system was competitive over the period
1965-989, although being relatively concentrated. As an alternative approach to the Bresnahan approach,
Shaffer (1982) applies the PR model to a sample of New York banks using data for 1979 and found
monopolistic competition. Using the data from Canadian banking system, Nathan and Neave (1989) used
the PR methodology and found results consistent with the results of Shaffer (1989) using the Bresnahan
methodology. In European banking system, notable applications of the PR methodology can be found in
the works of Molyneux et al. (1994) and De Bandt and Davis (2000). The conclusion is that, most of the
banking systems were in the form of monopolistic competition. Casu and Giradone (2006) applied the PR
methodology and find that, the degree of concentration in a banking system does not relate to the level of
competition. It can be observed that formal application of these approaches to test the competitiveness of
banking systems for developing countries like Africa and transition economies are few to date.
Furthermore, given the variations of the nature of competitive bank conditions in empirical works, recent
attention has shifted to exploring factors underpinning competitive bank behaviour. Claessens and Laeven
(2004) find that the measured competitiveness of a banking sector is positively related to foreign bank
presence, less-severe entry restrictions, and few activity restrictions. Barth et al. (2007) further report that
tighter entry requirements negatively affect bank efficiency, and restricting foreign bank participation
increases bank fragility. Other scholars (Beck et al., 2003, Martinez et al., 2004) show that market
concentration may not be a reliable predictor of pricing behaviour. They argue that competitive pricing
may occur even in concentrated markets. Moreover, Jansen and De Haan (2003) added that there is no
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Proceedings of the 12th Annual Conference © 2011 IAABD
connection between concentration and market competition. Thus, it seems that competition and
concentration contrasts each other-if one accepts the theoretical proposition that a more concentrated
market implies a lower degree of competition due to undesirable exercise of market power by banks.
Moreover, the traditional approach of assessing competitive behaviour might appears less appropriate
given the fact that banking markets have experienced increased contestability.
Contestability theory posits that, under particular conditions, competition and concentration can coexist.
The theory of contestability as explained by Baumol et.al., (1982) assumes that firms can enter or leave
rapidly any market without losing their capital and that potential competitors possess the same cost
functions as firms that already serve and exist in the market. These characteristics indicate that in the
contestable market the threat of potential entry constrains firms to price their products competitively. If
these conditions are met, then external conditions will dominate internal conditions and guarantee noncollusive
behaviour within that market.
From the foregoing exposition, it stands to conjecture that competition is a multifaceted issue, and factors
other than concentration determine the degree of competition in banking as contestability theory explains.
Therefore, to provide a comprehensive assessment of the competitive bank behaviour, broader measures
of competition must be considered.
Methodology
Sources of Data and Model Specification
We used annual financial data from BankScope database provided by Fitch-IBCA (International Bank
Credit Analysis Ltd.) covering 270 commercial banks from 26 countries for the years 1999-2008. We
adopted the PR (1987) methodology which we specified as a reduced-form revenue equation below:
3
ln( R ) it = α + ln∑
β X it + ln ∑ β 2 BSFit
+ η t + λi
+ u
n=
1
3
1 it
n=
1
.......... .......... .... 1
The dependent variable ln(R) proxy for the log of the ratio of total interest revenue to total assets (proxy
for output price of loans). The set of the independent variables are three dimensional vector of factor input
prices (X), namely, interest expenses to total deposits (input price for deposits), personnel expenses
(wages) to total assets (input price for labour) and expenses related to fixed assets to stock of fixed assets
(input price for equipment/fixed capital). The choice of these input variables was informed by the
intermediation approach in bank productivity. We also control for a vector of bank-specific variables
consistent with existing studies. Thus, BSF indicates EQTA (Equity to Total Assets)-degree of leverage
reflecting differences in risk preference across banks, LOATA (Loans to Total Assets)-accounting for a
degree of financial intermediation, SIZE (Total Assets)-scale economies while
η represents time fixed
t
effects and λ i is individual bank fixed effects which capture relative measures of management
effectiveness across banks. We take natural logarithms of all variables. The PR model estimation is based
on H-statistic computed from the equation one as:
H = ∑ β1
A market structure is considered as monopoly or perfectly collusive oligopoly when the estimated Hstatistic
is less or equal to zero ( H ≤ 0), monopolistically competitive if it is between zero and one (0 < H

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Test of Competitive Long run Equilibrium
The PR-model is based on the premise that the market is in the long run equilibrium. To test for this, we
estimate the following equation.
3
ln ROA it = α + ln∑
β X it + ln∑
β2BSFit
+ ηt
+ λi
+ u
n=
1
3
1 it
n=
1
.......... .......... .......... 2
We compute the dependent variable (ROA) as earnings before tax divided by total assets. Again, due to
the fact that return on assets can take on negative values, we modify the dependent variable as
ROA=ln(1+ROA) such that ROA is the unadjusted return on assets. Following Claessens and Laeven
(2003), we test for the equilibrium, E, statistic as:
3
∑
n=
1
β = 0
1
Using F-test, if rejected, the market is assumed not to be in equilibrium. In that regards, we interpret the
result that return on banks’ asset is not dependent on input prices. We estimated equation 1 for each
country and generated country-level H-statistic.We further relate the estimated competitiveness measure
to a set of cross-sectional determinants where data was available. This is formulated as:
H = α + α CR + α Contestability
+ α BS + α log GDPpc + ε .......... .......... ..... 3
i
0 1 3i 2
i 3 i 4
i t
Where Hi is PR H-statistics generated from the earlier estimation, Contestability refers to a vector of
variables such as index of activity restrictions, fraction of application denied and foreign ownership.
These variables are extracted from Barth et al (2007). We expect that higher bank activity restrictions
would promote anti-competitive bank behaviour (Claessens and Laeven, 2004). We further expect that
the more applications to doing banking business being turned down, the less competitive the banking
system becomes. More influx of foreign banks into a domestic economy should also influence variations
in bank competitive behaviour. Thus, we expect negative relationship between fraction of applications
denied and activity restrictions and bank competition whereas positive with regards to foreign ownership.
The precise relationship between bank competition and CR3, three-bank concentration index from Barth
et al (2007), is inconclusive while we control for bank-specific variables (BS) such as profitability (Net
Interest Income) which accounts for the possibility of banks in concentrated markets enjoying high profit,
and cost-income (proxy for efficiency) which also accounts for the likelihood that banks less exposed to
competition being less efficient as well as the level of economic development proxy by Per capita GDP
from World Development Indicator series (WDI).The initial sample covered 26 countries; however it was
found that some of them do not have essential contestability variables so we limit our sample to 15
countries.
Discussion of the Empirical Results
The estimation results of equation 1 and 2 are reported in table 2. The PR H-statistic is estimated from the
pooled regressions on all countries. A preliminary check on the data shows the presence of
heteroskedasticity thus, appropriate estimation techniques were applied. The equilibrium test condition
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Proceedings of the 12th Annual Conference © 2011 IAABD
reveals that the markets are in equilibrium 2 -hence in the long run, return on assets is correlated with input
prices. Again, the PR H-statistic (0.67) shows that banks in Africa as a whole operate in an environment
characterized by monopolistic competition. In table 2, the coefficients of input price of fund (PF) labour,
(PL) and Capital (PK) record positive and statistically significant results. This indicates that the input
prices positively influence total revenue of banks in Africa. Expectedly, the ratio of loan to total asset
enters the regression positively significant. It suggests that higher proportion of loans relative to asset of a
bank would be expected to generate higher revenue. Bank size does seem to impact negative influence on
bank revenue from this result unlike bank capitalization ratio. Above all, the monopolistic competitive
market structure suggests that there is an element of product differentiation among banks, some degree of
market power over pricing and low entry barriers. We then turn our focus to exploring the factors
accountable for the competitive bank behaviour in Africa.
Pool Sample Regression Results
Table 2 H-statistic of Banking System in Africa. Pooled sample Result
Ln(TRETA) Ln (ROA+1)
Variable Β t-statistic Β t-statistic
Ln(PF) 0.3362 15.48*** 0.0014 2.13*
Ln (PL) 0.2600 9.61*** 0.0026 3.04**
Ln(PK) 0.0741 5.13*** 0.0004 0.69
Ln (TA) -0.0129 -2.15* -0.0011 -5.28***
Ln (Equity/Ta) 0.0085 0.47 0.0014 2.04*
Ln (Loan/TA) 0.1243 4.37*** -0.0056 -4.57***
Constant -0.1511 -1.28 1.0398 315.46***
No. of Obs 1560 1507
H-statistic 0.67 0.0042
Note. *, ** and *** significant at 10%, 5% and 1% levels, respectively. Regressions were estimated using
heteroskedastic panels corrected standard errors
Factors Explaining Competitive Bank Behaviour
From table 3, the relationship between profitability measure, net interest margin, and competitive measure
is negative and statistically significant. This indicates that banks which are able to reap high profit do so
in an environment characterized by monopolistic competition. Alternatively, it shows that high bank
spreads are characteristic of concentrated banking markets.
2 Test of equilibrium provides p-values 0.0002 which is less than 1%.
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Table 3 Determinants of Competitive Bank Behaviour
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Variable
Coeff Robust Std Error t-statistic P-values
Net Interest Margin -0.36620 0.06250 -5.85*** 0.0000
CR3 -0.11130 0.01802 -6.18*** 0.0000
Cost-income ratio -0.00001 0.00105 -0.10 0.9900
Activity Restrictions -0.33740 0.00191 -176.51*** 0.0000
Fraction of Entry Denied -0.17360 0.01340 -12.96*** 0.0000
Foreign Ownership 0.03910 0.01164 3.36*** 0.0000
Log(GDPpc) -0.11540 0.00166 -69.68*** 0.0000
Intercept 2.39660 0.02065 116*** 0.0000
No. Obs 850
R-sq 0.996
Dependent Variable is the PR H-statistic computed for each country. OLS robust standard error to correct
for heteroskedasticity employed on a panel of 15 countries over the period 1999-2008 with 850
observations. ***, significant at 1%.
Consistent with Bikker and Haaf (2002), we report negative and significant relationship between
concentration and bank competitive measure. This indicates that the level of competition reduces as the
banking system becomes more concentrated. Thus, it is likely that monopolistically competitive banking
environment in Africa is likely to confer more market power on banks. We must add that, one must be
cautious in explaining this causal relationship (Beck et al., 2003). With regards to the variables
representing contestable markets, the coefficient of the activity restriction variable is negative and
statistically significant at 1%. By predictions of the contestability theory, this shows that more restrictions
imposed on cross-sector activities of banks in the financial industry will enhance anti-competitive
behaviour of the existing banks leading to a lower degree of competitive bank behaviour (Claessens and
Laeven, 2004; Bikker et al., 2007 and Turk-Ariss, 2009). Similarly, foreign ownership indicates positive
and statistically significant relationship with bank competitive measure. By implication, the presence of
foreign banks actually explains variations in the level of competition in the banking sector among
countries in Africa (Bikker and Haaf, 2002 and Claessens and Laeven, 2004). Furthermore, the
percentage of fraction of entry denied shows a statistically negative and significant relationship with
competitive measure. This supports the fact that countries where there are higher restrictions on and high
denial of applications to entry into the bank sector, existing banks are protected against competition.
Thus, the more applications being denied, the less competitive the banking sector becomes. Competitive
banking behaviour could be influenced by the response of banks to business cycle dynamics. The
expected direction of this response could be positive or negative. The logarithm of GDP per capita reports
statistically significant and negative coefficient.
Conclusion
This paper investigates competitive banking behaviour in Africa using a sample of 26 countries over the
period 1999-2008. It further examines the factors that account for the competitive bank behaviour using
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Proceedings of the 12th Annual Conference © 2011 IAABD
15 countries due to data availability. We applied the famous Panzar-Ross methodology to estimate the
degree of competitiveness resulting in H-statistic, which was in turn related to concentration index,
contestability indicators, bank specific and the level of general economic development. The findings
indicate that the banking system in Africa can best be described as monopolistically competitive. The
traditional concentration index has significant influence on competitive bank behaviour. Furthermore,
there is also cross-country evidence that the markets are contestable. Lesser barriers to entry and fewer
restrictions on banks activities to engage in investment banking, real estate and insurance businesses
heighten competitive behaviour of banks. Additionally, foreign banks’ penetration and regulations that
deny applications to entry by foreign banks play significant impact on the degree of competitive bank
behaviour. Thus, in order to enhance competitive bank behaviour, restrictions that limit banks’ ability to
engage and diversify their operations into other areas must be minimized, and granting permissions for
applications to entry into banking business must be encouraged.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Repositioning the Nigerian Tax System for Sustainable Development: Role of Business Taxpayers’
Perception of the Company Income Tax Administration
Abstract
T. O. Fagbemi, olamidefag@yahoo.com
University of Ilorin, Nigeria.
S. O. Ajibolade soajibolade@yahoo.com
University of Lagos, Nigeria.
S. S. A. Arowomole, AyadiM@uhcl.edu, drasoarowomole@yahoo.com
University of Lagos, Nigeria.
M. Femi Ayadi
University of Houston Clear Lake USA
Tax evasion has been identified as a major source of low tax revenue in Nigeria. This paper examines the
contribution of perceptions of taxpayers about aspects of the Company Income Tax administration to their
compliance attitude. Data obtained from 144 corporate taxpayers using a questionnaire are analysed using
correlation and regression analyses. Major findings are high perception on poor governance in collection and use
of taxes; moderate perception on effective performance of tax administration duties; moderate tax knowledge; and
significant relationships between these factors and compliance attitude. The study recommends strategies to
improve tax knowledge and governance practices.
Introduction
Revenue generation forms an important part of governance as most of government’s plans and policies
depend on the amount of revenue collected (Soyode & Kajola, 2006). While taxation constitutes a major
source of government revenue for many modern economies, typically accounting for 70-90 percent or
more of their income (Oloyede, n.d), it has not been a major source of government revenue in Nigeria.
The country which ranks among the major oil producing economies in the world has much of its public
revenue being generated from oil. Oil revenue accounts for about 70% of budget revenues and up to 95%
of foreign exchange earnings. This excessive dependence on the oil sector exposes the economy to
external shocks with resultant effects on the achievement of government plans. A major concern to
successive governments has therefore been how to improve non-oil revenue especially from taxation. The
low taxation revenue has been attributed largely to tax evasion resulting from deficiencies in the tax
administration, complex legislation, and apathy of current and potential taxpayers (Ijewere, 1991;
Ndekwu as cited in Ariyo, 1997). Company income tax has been particularly problematic contributing
only an insignificant 6% of government revenue in recent years, in spite of the massive turnover of
incorporated entities in Nigeria (Babalola, 2009).
Noting that tax evasion is a major social problem inhibiting development in developing countries by
undermining and reducing tax revenues (Sikka & Hampton, 2005; Otusanya, 2011), the Federal
government of Nigeria through the relevant tax authorities has taken various steps to improve on the
structures and procedures of tax administration. Such improvements designed to encourage voluntary
compliance have however recorded little compliance to the company income tax law (Olaofe, 2008). As
reported in This Day (Sep. 13, 2010), the Lagos State Internal Revenue Service enforcement team under
Afolayan estimated that the tax officers in Lagos State alone were able to uncover tax evasion to the tune
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
of N0.593billion between 2000 and 2006 by six companies. 546 companies were also reportedly shut
down over tax evasion between August 2009 and August 2010. Nwachukwu (2006) estimated that about
$8 billion is being lost annually to capital flight in the upstream activities of oil and gas industry.
In examining factors contributory to non compliance with tax obligations, it has been noted that in many
countries, low tax revenue is often traced to incapability of the tax administration in realization of its
duty, or some degree of corruption (Kaldor, 1980; Kidd & Crandall, 2006). Some researchers argued that
corruption in fiscal administration, which decreases the resources available for public investment in
infrastructure, has adverse effects on tax morale of economic agents (Oberholzer, 2007; Attila, 2008).
Citizens’ perception of corruption in a country’s revenue administration has many adverse effects
including reduction in voluntary compliance with tax laws and erosion of public trust and confidence in
government institutions (Fjeldstad, 2005). Perceptions about the tax system governance practices have
therefore been noted as an important contributory factor to the reluctance of Nigerian taxpayers to fulfil
their obligations (Fafunwa, 2005; Lambo, 2005; Obaji, 2005; Adigun, 2008). Adigun (2008) for instance,
noted that “Nigerians usually complain that they don’t pay tax because the money is not properly used for
the provision of basic infrastructures like roads, electricity, schools, portable water, etc...” (Daily Sun,
July 10, p. 37). Others noting the ineffectiveness of the performance of tax administration’s technical
duties argued that tax payers in Nigeria are not sufficiently educated and enlightened on the provisions of
the various laws (Olaofe, 2008).
However, there is limited empirical evidence on the influence which taxpayers’ perception on these
various aspects of tax administration exert on their compliance attitude. Knowledge of such influences on
compliance attitude should assist in identifying areas for improving tax administration and the appropriate
improvement strategies needed to encourage voluntary tax payments. This study therefore examines
corporate taxpayers’ perception of the effectiveness of tax administration structures and procedures and
governance practices; the level of taxpayers’ knowledge and their impact on compliance attitude.
The rest of the paper is organised as follows: Section 2 presents a review of relevant literature. This is
followed by a presentation of the methodology in section 3, the results of the analyses of data collected
are presented in section 4 and the conclusion and recommendations are provided in the final section.
Review of Literature
Generally, taxation plays a critical role in providing revenue to support and pay for the basic functions of
government (Lymer & Oats, 2008) and may be used to promote behaviours believed to be for the good of
the wider community, for example, environmental taxes (Institute of Chartered Accountants in England
and Wales, 2007). Tax has been described as a compulsory levy by the government on people’s income or
wealth without a direct benefit (Song & Yarbrough, 1978). The way a tax system is administered is
important to using tax policy to achieve the goal of efficient resource allocation through the provision of
adequate infrastructures. Properly administered tax policy which encourages compliance to tax laws by
taxpayers should greatly improve tax revenue, while ineffective tax administration can result in a
substantial gap between tax law and actual taxation (Mansfield, 1988). According to Silvani (as cited in
Olaofe, 2008) an effective tax administration should not only be able to detect tax liabilities and bring
more tax payers into the tax net, it should also combat tax evasion.
The Federal government of Nigeria has the power of legislation and collection of the company income tax
and delegates this responsibility to the Federal Inland Revenue Service (FIRS). The FIRS administers the
Company Income Tax Act (CITA) which regulates the taxation of all incorporated companies doing
business in Nigeria (private and public limited companies alike), other than those engaged in petroleum
operations. The Act provides that tax is payable for each year of assessment on the profits of any
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Proceedings of the 12th Annual Conference © 2011 IAABD
company accruing in, derived from, brought into or received in Nigeria in respect of all kinds of income;
that is income derived from a trade, business or investments. The Act places obligations on corporate
taxpayers based on the arrangements of their formation, their type of business activity and their location.
Four broad categories of obligations however exist for almost all corporate taxpayers namely: registration
in the system; timely filing or lodgement of requisite taxation information; reporting of complete and
accurate information (incorporating good record keeping); and timely payment of tax obligations
(Baiyewu, 2000). For their part, taxpayers have an important role to play in meeting these obligations, as
in many situations, it is only they who are in a position to know that they may have an obligation under
the law (OECD, 2004).
Many studies noting a substantial tax gap between what is collectable and what is actually collected in
taxes have suggested lack of voluntary compliance by current and potential taxpayers as one of the main
reasons for the tax gap (Oberholzer, 2008, Richardson & Sawyer, 2000; Long & Swingen, 1988; OECD,
2004). Such studies have attempted to explain the noncompliance attitude of tax payers to their
obligations from different perspectives. From the economic rationality perspectives, such factors as the
tax complexity, cost of compliance (amount of tax owed) were identified as factors which shape the
behaviour of taxpayers (Etzioni 1986 Richardson & Sawyer, 2000; Long & Swingen, 1988; OECD,
2004).
From the behavioural perspective, factors that have been used to explain tax payers’ attitude include
perception of fairness in collection procedures and perception of fairness in the way tax revenue is
utilized. Ritsema et al. (2003), found taxpayers’ perceptions of the fairness of the tax system as likely
influence on willingness to evade payment. Thurman et al. (1984) and Richardson and Sawyer (2000)
also explored justice concerns on whether or not citizens receive the goods and services they believe they
deserve given the taxes that they pay. Wenzel (2002) and Coleman et al. (2001) noted that perceptions of
unfair treatment were reputed to be rife among the small business community in Australia who the
Australian Taxation Office (1996) noted to express strong resentment against the tax system. Noble
(2000) and Tan and Veal (2003) also raised fairness issues in relation to administration and tax levels in
New Zealand. Etzioni (1986) concluded that tax evasion is linked to the feeling of tax unfairness in public
opinion (1960-1980), even when tax rates remain unchanged for the United States of America.
Apart from the perception of fairness, taxpayers’ attitudes are also argued to be learned and in some way
affected by experience and knowledge (Lewis, 1982). Butressing this argument, Peters (cited in
Oberholzer, 2008, p.65) noted that citizens do on the whole like the benefits they receive from
government and tend to be much more willing to pay taxes when reminded of the benefits received as a
consequence of doing so, thus providing support for the suggestion that tax knowledge will affect the
attitude of tax payers. Eriksen and Falian (1996) reported significant changes in attitudes towards taxation
from tax course exposure. Increasing tax knowledge of taxpayers is an important function of tax
administration (OECD, 2004; Tanzi & Pellechio, 1995). Tax administration’s effectiveness is therefore
expected to result in high level of knowledge among tax payers which should in turn result in a higher
level of compliance.
Model of the Study
It is from the behavioural perspective that this study examines impacts on taxpayers’ attitude to
compliance with tax laws. The study proposes relationships among four groups of variables namely;
Perception of Tax Administration structures and procedures; Perception of governance; and Tax payers’
knowledge as the independent variables and the Compliance Attitude of taxpayers as the dependent
variable. The study argues that poor compliance attitude by the Company income taxpayers in Nigeria is
influenced to a higher extent by the high perception of tax payers about the lack of accountability and
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
fairness in tax administration, inadequacies of tax administration procedures and structures and Low tax
knowledge among taxpayers.
FIGURE 1: Conceptual Model of the Relationship between Tax Administration Features and
Taxpayers’ Compliance Attitude
Taxpayers’ Perception of Client
service & procedures in tax admin
Source: Authors (2011)
Methodology
Tax payers’ Knowledge
Taxpayers’ Perception of
Governance in tax Admin.
Taxpayers’ Compliance Attitude
In achieving the aim of this study, the following three null hypotheses were proposed and tested:
H01: Taxpayers’ perception about the Companies Income Tax administration’s structures and procedures
has no significant relationship with Taxpayers’ compliance attitude.
H02: Taxpayers’ knowledge has no significant relationship with Taxpayers’ compliance attitude.
H03: Taxpayers’ perception of governance has no significant relationship with Taxpayers’ compliance
attitude.
The population of this study comprises of all incorporated companies (private and public) chargeable to
tax under the Companies Income Tax Act in Nigeria with the exception of companies in the oil and gas
industry, which are subject to the petroleum profits tax. However, Lagos State is considered an
appropriate site for this study as the state alone harbours 60% of the Federation’s total industrial
investments and foreign trade while also attracting 65% of Nigeria’s commercial activities (The Academy
of Business Strategy, 2011). Using a sampling frame constructed of companies with registered offices in
Lagos state, a sample size of two hundred (200), constituting 25 percent of the sampling frame was
selected by the simple random sampling technique. A five-point Likert scale-questionnaire was used to
seek the perceptions of managers of the companies. Rice (cited in Otusanya, 2011) noted that managerial
preferences play an important role in corporate compliance. Analyses were done using Mean, Standard
deviation and Pearson correlations. A Linear Regression analysis of the full model of the relationship
proposed and stated as follows was also carried out.
Y = βο + β1Χ1 β2Χ2 β3Χ3 + ε where:
Y = Taxpayers’ compliance attitude; βο, β1β2β3= Regression Coefficients
Χ1 = Perception on Tax admin client service and procedures
Χ2 = Tax Knowledge; Χ3 = Perception on Governance in tax administration
ε= Error term
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Proceedings of the 12th Annual Conference © 2011 IAABD
Data Analysis and Findings
A total of one hundred and forty-four copies (72% response rate) of the returned questionnaire found
usable were utilized for the analyses. Mean scores were computed as measures of respondents’ perception
on each of the 18 items (further grouped into the four variables) in the questionnaire. Mean scores below
3.0 were considered low, 3.0 to below 4.0 were considered moderate and 4.0 and above were considered
high perceptions scores. The findings as presented in Table 1 are as follows:
i. Perception of Tax Administration Structures and Procedures: A high positive perception on the tax
officers’ competence, efforts and ability to provide appropriate information (above 4.0 in the 3 of 8
items; CS1, CS7 and CS8) is found. The overall mean score on this variable is however found to be
moderate at 3.8.
ii. Taxpayers’ Knowledge of Companies Income Tax Law in Nigeria: A high level of awareness of the
respondents on the need to comply with tax laws; knowledge about filling of tax forms is found to
be high (above 4.00). However the results indicate low knowledge on preparation of tax returns
(TK2=2.95), low knowledge on the impact that non-payment of taxes could have on government
effectiveness (TK4 - mean 2.93). The overall mean score on the 5 items representing taxpayers’
knowledge is found to be only at a moderate level with a mean score of 3.48056. This result
appears to corroborate the result on the overall perception of client service and procedures and tend
to support arguments that the Nigerian public is yet not sufficiently educated and enlightened on the
provisions of the various laws and that there is absence of information in the public domain on
some relevant tax matters (Olaofe, 2008).
iii. Perception of Governance: The result indicates high perception among the respondents on lack of
transparency and ineffectiveness in the use of tax revenue in providing adequate infrastructure for
the benefit of the citizens. This is evidenced by a high mean score of Gov 4.4086 and low standard
deviation of scores.
iv. Compliance Attitude of Taxpayers: The compliance attitude was appraised through four (4)
questionnaire items (CPL1, CPL2, CPL3 and CPL4). Respondents are of the view that it is
everyone’s responsibility to pay the correct amount of tax and that it is quite ethical to claim for
reliefs and allowances they are entitled to (CPL3 and CPL2). This is evidenced by the means score
of 4.03 and 4.28 respectively. However, lower mean score of 2.87 and 3.10 respectively on the
difficulty in preparing tax returns and time it takes (CPL1 and CPL4).
TABLE 1: Descriptive statistics of the study’s Variables
Mean Std. Deviation
Tax officers’ competence (CS1) 4.0278 0.39124
Quick response to taxpayers’ need (CS2) 3.7500 0.86502
Attitude towards approaching tax authority for guidance (CS3) 3.3681 0.64501
Satisfaction with services provided by tax officers (CS4) 3.8056 0.44687
Tax officers’ response to taxpayers’ enquiries are useful (CS5) 3.8681 0.33961
Tax officers treat taxpayers in a professional manner (CS6) 3.4722 0.77500
Tax officers’ effort in educating taxpayers (CS7) 4.3403 0.47546
Accurate info on filling procedure is obtainable (CS8) 4.0069 0.41806
Overall Mean Score 3.829875
The need for compliance (TK1) 4.7361 0.69951
Knowledge about preparation of tax returns (TK2) 2.9514 0.88760
Knowledge about filling of tax forms (TK3) 3.3056 0.98434
Unpaid taxes reduce governments’ effectiveness (TK4) 2.9375 0.87880
Performance of government is hinged on its revenue base (TK5) 3.4722 0.77500
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Challenges in the Era of Globalization
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Overall Mean Score
Lack of transparency and Ineffectiveness in the use of tax revenue
3.48056
in providing adequate infrastructure for the benefit of the citizens
(Gov)
4.4086 0.21580
No difficulty in preparation of tax returns (CPL1) 2.8681 0.86296
Taxpayers’ responsibility to claim reliefs and allowances (CPL2) 4.2847 0.48275
Responsibility to pay the correct amount of tax (CPL3) 4.0347 0.21849
Preparation of tax returns is time consuming (CPL4) 3.1042 0.55114
Overall Mean Score 3.572925
Test of Hypotheses
Relationship between Client service and Compliance attitude (Hypothesis 1)
Result as shown in Table 2 shows a significant positive relationship between the perception of the client
service and procedures of tax officers and their attitude to filing of tax returns.
Table 2: CORRELATION BETWEEN PERCEPTION OF CLIENT SERVICE AND PROCEDURES and
COMPLIANCE
CLIENTSERVICE TAX_RETURNS_FILING
CLIENTSERVICE
Pearson
Correlation
1 .241(**)
Sig. (2-tailed) .004
Pearson
TAX_RETURNS_FILI
NG
Correlation
Sig. (2-tailed)
.241(**)
.004
1
** Correlation is significant at the 0.01 level (2-tailed).
Relationship between Tax Knowledge and Compliance attitude (Hypothesis 2)
This result as shown in Table 3 indicate a significant relationship between the knowledge of taxpayers
and their attitude to filing of tax returns. The more knowledgeable taxpayers are, the more they are likely
to comply with companies income tax laws.
Table 3: Correlations between tax knowledge and compliance
Tax Knowledge Tax Returns Filing
TAXKNOWLEDGE Pearson Correlation 1 .530(**)
Sig. (2-tailed) .000
TAX RETURNS FILING Pearson Correlation .530(**) 1
Sig. (2-tailed) .000
**. Correlation is significant at the 0.01 level (2-tailed).
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Proceedings of the 12th Annual Conference © 2011 IAABD
Relationship between perception of Governance and Compliance (Hypothesis 3)
This result as shown in Table 4 reveals a significant positive relationship between perception of
governance and taxpayers’ attitude to filing of tax returns.
Table 4: Correlations between governance and compliance
Gov Tax Returns Filing
GOV Pearson Correlation 1 .317(**)
Sig. (2-tailed) .009
TAX RETURNS FILING Pearson Correlation .317(**) 1
Sig. (2-tailed) .009
** Correlation is significant at the 0.01 level (2-tailed).
Regression Analysis of the full model of the study
Table 5: Regression results
Model
Dep.
Var.
1 CPL
Ind.
Var.
CLS,
TK,
Gov
b0 b1 b2 b3 R R 2
-
.592
P value .000 .011 .000
Std.
beta
Conclusion and Recommendations
R2
Adj.
p F
.485 .210 .404 .633 a .401 .388 .000 31.202
.566 .172 .294
Revenues currently generated from taxes are insufficient to meet Nigeria’s developmental needs. While
tax evasion has been noted as one of the major problems militating against revenue generation, it has been
suggested that high voluntary compliance could be achieved if the taxpayers positively perceived the tax
administration system. This study, as an effort towards improving tax revenue generation in Nigeria,
examined the effectiveness of the Nigerian tax administration system from the perspective of taxpayers’
perception of the system.
The study found that perceptions on governance practices, effectiveness of tax administration’s structures
and procedures; and taxpayers’ knowledge are correlated with compliance attitude. The study found a
high perception of taxpayers on poor governance practices in tax administration in Nigeria. This has a
negative influence on compliance attitude as the result has shown. The regression model showed
statistical significance. However, an interesting result from the study is that tax payers’ knowledge
appears to exert a greater impact than perception on governance on compliance attitude. The results reveal
a strong positive correlation (r=0.53) between tax payers’ knowledge and compliance attitude in
comparison to r=0.371 between governance and compliance.
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Challenges in the Era of Globalization
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On the basis of the major finding in this study, an important strategy to improve compliance with
Company Income Tax obligations should include improvement in tax administration’s capability to
enhance taxpayers’ knowledge. Regular training and retraining of tax officers to keep them abreast of any
developments in the tax system so they can properly educate, give advice and continually update
taxpayers on changes in the tax laws and their interpretations would be necessary. Commissioning
surveys on regular basis to assess the perception of taxpayers on the effectiveness of the system and to
gain knowledge on difficulties faced by taxpayers to enable timely corrective actions.
The tax system should also focus on improving the confidence of taxpayers in the fairness and
accountability of the system by developing mechanisms to communicate to the public the extent to which
tax revenue contribute to the provision of infrastructure and services for public benefit. Tax payers’
contributions to fiscal policy formulations should be sought and their interest taken into consideration to
enhance acceptance of such policies and ultimately their compliance attitude. Private sector organizations
such as the Manufacturers’ Association should be more actively engaged. A communication network
between such groups and the tax authority would provide a more co-operative system.
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The effects of the world financial crisis on Tanzania’s economy: A reflection from macroeconomic
indicators
Abstract
M.D. Baisi, baisi@udbs,udsm.ac.tz
University of Dar es Salaam Business School, University of Dar es Salaam,Tanzania.
M.L. Mhina
Moshi University College of Cooperatives and Business Studies, Moshi, Tanzania.
This research used macroeconomic indicators to evaluate how Tanzania’s economy was affected by the recent world
economic crisis. Secondary data from the Bank of Tanzania, the National Bureau of Statistics and other sources was
analysed and tested using ANOVA and Brown-Forsythe and Welch F tests.
Except for value of loans, exports and government debt which did not indicate signs of being affected, all other
indicators tested (financial instruments, FDIs, Interest and exchange rates, employment levels and foreign reserves)
indicated signs of being affected by the world financial crisis. However, although affected, the monthly percentage
growths did not indicate abrupt changes which might be a sign of economic stability. The study recommends for the
governments to enter into global/regional unified and enforceable economic pacts, a push for enhanced IMF and
world bank roles in managing world economic stability, need for strengthening financial sector regulations to
manage negative side of highly increasing “financial engineering” and the need for governments to invest in indepth
study on financial crises to establish the best ways to build effective economic ‘shock absorbers”.
Introduction
Towards the end of the third quarter of 2007, the world found itself in another financial crisis after the
1997/98 Eastern Asia crisis. The western economies started to shrink following the collapse of key
corporates in the financial sector specifically arising from the increased default rates in sub-prime
mortgages particularly in the United States of America (USA) and the United Kingdom (UK). The
collapse of the credit system ignited a cyclical effect that led to a declining propensity to consume
(spend), declining sales, production cuts and eventually the economic crisis. This study reviewed and
analyzed the effect of this crisis on Tanzania’s economy as reflected in the key macroeconomic
indicators.
Was Tanzania hit by the world financial crisis?
When the world financial crisis was withering the world economies, some of our political leaders and
even financial and economic professionals expressed mixed feelings on its possible impact to our
economy. The Bank of Tanzania (BOT) governor commented on the stability of the “financial market”
and the possible indirect impact of the crisis in the press release issued by BOT in October 2008, the tone
of which was interpreted differently by Tanzanians. To many, it sounded as if Tanzania was safe from the
effects of this crisis. The public questioned the accuracy of the BOT governors’ data and whether the
BOT meant that Tanzania would not be hit by this financial crisis. “How can we survive the crisis in this
“economically networked world” was the ringing bell in many Tanzanians’ minds. It is on this basis that
we developed an interest to review and analyze this crisis’ effect on our economy, as reflected by
macroeconomic indicators.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Statement of the research problem
Although at first the Government wanted people to believe otherwise, the negative effect of the crisis was
almost obvious as, for example, some companies were forced to retrench staff due to declining sales.
During the time of the crisis what remained elusive was the extent to which the Tanzanian economy was
affected and “how do we monitor and address the impact on our economy resulting from this economic
downturn?”
Research objectives and questions
Given the research problem the study had the following specific objectives to achieve.
1. To identify and analyze the economic effects of the world financial crisis on Tanzania’s economy;
2. To identify and analyze whether any specific efforts have been taken by the Tanzanian government in
trying to address the effects of the financial crisis.
Literature Review
Causes of financial Crises
The financial crisis that unfolded around mid 2007 was not the first one in the world’s economic history.
It was just one of many including the 1930 crisis and the Eastern Asia countries crisis of 1997-98 (Liu,
2000). Financial crisis has been defined as a “disturbance to the financial markets that disrupts the market
capacity to allocate capital to financial intermediation and hence investments come to a halt” (Portes,
1998). The financial crisis may disrupt financial markets in various forms including foreign exchange
market disruptions, banking system disruptions or a debt crisis (Portes, 1998). Portes also stipulates that
although historically the financial crises have originated from the banking system, the true causes
(sources) are normally too complex to establish. In this vain, Portes’ (1998) statement reflects the cyclic
causation and relationship among many drivers.
The causes of the crises have been determined through research around the world to include (but not
limited to):
• Maturity mismatch between borrowings and lending (Portes,1998; Liu, 2000).
• Poor regulations in the financial sector (Liu, 2000; Portes, 1998; Eiteman et al, 2008; World bank
1998 in Liu, 2000).
• World financial markets inefficiencies (Portes, 1998; Eiteman et al, 2008)
• Sub-prime mortgages’ markets failures (McCulloch, 2008; Blundel-Wignall et al, 2008).
• Excessive foreign reserves in some countries specifically China and Middle East (McCulloch, 2008;
Blundel-Wignall et al, 2008).
• Expansionary monetary policy in OECD countries and macroeconomic policies failures (McCulloch,
2008; Blundel-Wignall et al, (2008).
• General regulatory and policy failures (Blundel-Wignall et al, 2008; Saunders, 2008).
• Corporate governance failure (Blundel-Wignall et al, 2008; (Blundell-Wignall and Atkinson, 2008;
Saunders, 2008).
Theoretical and empirical literature, therefore, underscore the fact that the causes of the financial crisis
originate from extreme and unsustainable economic growth, poor regulations of the financial markets and
the impact of policy changes in the “networked” global economy.
Effects of the financial crisis
The financial crises affect the world economies differently, depending on how each country is linked to
the world economy particularly the financial sector. These effects are usually reflected on:
• Value of assets (Liu, 2000; Portes, 1998; McCulloch, 2008; AFDB, 2009).
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Challenges in the Era of Globalization
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• Increased business risks (Liu, 2000; McCulloch, 2008; Brigham & Houston, 2006; Bank of
England, 2009; Severino, 1998)
• Foreign exchange rates (Lin, 2000)
• Employment (Lin, 2000, Liu, 2000; AFDB, 2009; Sandstrom, 1998 in Liu, 2000).
• Governments’ debt and trade: (McCulloch, 2008; Liu, 2000 and AFDB, 2009).
• Economic growth (Shirazi, 1998 in Liu, 2000).
Research Methodology
The nature of the research problem required a comprehensive approach that would as much as possible
eliminate the exogenous factors from invalidating the findings. One of the key possible exogenous factors
was the Tanzanian political regime change in 2005 from third phase to fourth phase governments.
Because the subject selected is not only wide but also it covers a wide range of topics that can be studied
on their own, this research was designed to follow the exploratory approach which aims more at
developing hypotheses than answering them (Kothari, 2008). Exploratory research provides a room for
the researcher to change or add on the pre-determined approach as better ways are identified. This feature
was important because at the time of the study the problem was still hot and as events unfolded it may
have necessitated approach changes. The study was also intended to describe the state of affairs as they
were, using statistical analysis, hence qualifying to be considered as both a descriptive and analytical
research design (Kothari, 2008).
Sampling design
It was felt that the requirement for this study would be better addressed by the strata and/or cluster
sampling. However, instead of being “area clustering” (Kothari, 2008), we adopted the “periodic
clustering” system with different time periods formulating clusters. The periods and events covered were
distinguishable and categorized based on how the events unfolded.
Time scope: The study covered a period of seven and a half years from January 2003 to June 2009, which
were sub-categorized into three groups each of which was identified by the situation surrounding it. The
reason for selecting this time frame was to enable the study to manage the identification and elimination
of effects in the economy which are not related to the financial crisis; hence a long period of time was
required.
• PHASE I (January 2003 – December 2005): This is a period of the last 36 months of the third phase
government. The expectations were the variations in economic performance between this phase and
the subsequent ones is a reflection of policy change following regime change.
• PHASE II (January 2006 – September 2007): This is a period of 21 months in the pre-crisis phase of
the fourth phase government.
• PHASE III (October 2007 – June 2009): This is another 21 months during the crisis under the fourth
phase government.
Identification of these “clusters” was considered reasonable in enabling the study to be able to identify
any trends in changes in macroeconomic indicators that originate from policy changes that are not related
to the financial crisis. However during the actual study a modification on the analysis and interpretation
of the findings was considered.
Data required, source and method of analysis
This study evaluated the trends in the selected indicators to reach a statistically supported conclusion
whether there were any significant changes (effects) that can be reasonably associated with the financial
crisis. Secondary data was collected from the Bank of Tanzania reports including the monthly and
quarterly economic bulletins and half yearly Statements of Monetary Policy. Other sources of data
included reports from the Tanzania Revenue Authority, the Tanzania National Bureau of Statistics,
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Proceedings of the 12th Annual Conference © 2011 IAABD
Tanzania Investment Centre, and the Tanzania Government budget. Some data was obtained from
government departments’ presentations and meeting proceedings, interviews with experts in some
industries including the telecommunications industry and banking industry.
Data was analyzed using descriptive statistical measures like measures of central tendencies (Mean,
Mode, and Median) and measures of dispersions (Standards deviation, variance). Wherever applicable,
these statistical tools were used in conducting inference to the population from the sample results
(Baradyana & Ame, 2005).
All of the study propositions were tested using three different approaches, the absolute values tests,
Monthly growth tests and “index like” tests. Absolute value tests which in this study was referred to as
“ABSOLUTES”, utilized the actually reported figures without any manipulation, while the month on
month growth, which in this study was referred to as “RELATIVES”, measured the growth between
absolute value in the preceding period (P=1) from the prior period (P=0). The Month on Month growth
(MoM) were calculated as follows:
MoM (P=1) = (Values P=1 / Values P = 0)
An Index like test, referred to as “INDEXED”, was also conducted although it was not originally
proposed. This was based on formula similar to the one used in computing the FTSE market index (FTSE,
2005), where the first month for each of the proposed three phases was set as 100%. The formula for the
monthly index was computed as follows.
Index (P=1) = Index (P=0) * (Values P=1 / Values P = 0)
However the index test only makes sense only where the data have the same nature in terms of sign, that
is, either all positives or all negatives. Hence the Index like measure was only used in the parameters that
always have the same signs.
In comparing the means, macroeconomic indicators were tested for their homogeneity so as to ensure that
the tests statistics provides reliable results. The one way ANOVA was used where variances were
homogeneous, otherwise the Brown Forsythe and Welch F tests were used (Field, 2008).
Data Analysis and Findings
The findings for the study propositions highlighted a mixed feeling where in some cases the impact was
reflected in the indicators while in some cases it was not. In other cases, although the statistical
significance was noted, other qualitative reports nullified the link between the “significance” and the
financial crisis. Since each of the propositions was a reflection of a research question, the summary of the
findings will be given while concluding on the research questions. It should be noted that the YES or NO
answers will be answered in a reflection of what impact was expected (at least from the researchers’
perspective) from the financial crisis, which in almost all cases was the worst scenario (negative impact)
to our economy.
Conclusion on research questions and objectives
1. Is there any proof that the financial crisis significantly affected the value or volume of financial
and/or capital assets traded in the Tanzanian economy? Based on the economic values of the
treasury bills and bonds which were the indicators used to test the related proposition, the conclusion is
YES, the financial crisis led to fewer number of auctions of smaller volume to manage the bills’
interest earning and boost liquidity in the economy. This finding is substantiated by the qualitative
review which revealed that the BOT has had to change its auction system and targets by reducing the
number of auctions and value on offer so as to increase the level of liquidity in the economy (for Tzs)
that would keep the economy running, managing the inflation rates and lowering the treasury bills
interest yield so as to influence the commercial banks rates (BOT, 2009(a)).
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Challenges in the Era of Globalization
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2. Is there any proof that the financial crisis significantly affected the level of Foreign Direct
investments in Tanzania? This was another YES. Both FDIs and local investments were affected by
the crisis with investors facing funding problems leading to investments and projects worth billions of
Tzs halted. The projects studied are in the mining and electronic communication sectors.
3. Is there any proof that the financial crisis significantly affected the interest rates in the Tanzanian
economy? The answer was a YES along the same line with question one. Since treasury bills’ rates are
treated as risk free rates and used in determining the commercial banks rates, and the BOT influenced
the bills’ rates and the effect on interests rates was felt where the average interbank lending rate
between Phase II and Phase III declined from 8.62% to 6.61% encouraging the banks to borrow from
each other and hence increasing their liquidity. On US$ saving rates, the effect was also felt where the
average deposit rate increased by 104% from 0.82% to 1.67% reflecting the scarcity of US$ in the
economy and the desire by banks to hold US$ deposits.
4. Is there any proof that the financial crisis significantly affected the volume of loans traded in the
Tanzanian economy? The answer to this question is was “NO”. The statistics showed that the general
levels of loans/credits by banks and especially credit to the private sector increased as opposed to
expectation of a decreasing trend. An average monthly credits issued to the private sector during Phase
III was Tshs 3.7Bn compared to Tshs 1.99Bn and Tshs 0.96Bn in Phase II and I respectively. The
average monthly total domestic credit (loans) were Tshs 3.7Bn compared to Tshs 2.1Bn and Tshs 1.1
billion in Phase II and I respectively.
5. Is there any proof that the financial crisis significantly affected the levels of exchange rates of
Tanzanian shillings against major international currencies? The answer was YES. The Tanzanian
shilling power was shaken by the financial crisis. Significant differences in exchange rates movements
were noted, indicating the depreciation of the shilling. Tshs/USD rate was in ranges of lower 1,300s
(Jan. 2007), then appreciated to 1,100s (Oct. 2007), then depreciated to 1,200s (October 2008) and
further to mid 1,300s in Jan 2009. The BOT took commendable efforts to manage the exchange rates
as well as panic for foreign currency drought. During almost the whole of October 2008, the dollars
dried up in the financial market, and most firms had to struggle a lot to purchase dollars to pay their
foreign suppliers.
6. Is there any proof that the financial crisis significantly affected the levels of employment in
Tanzania? This is directly related to question 2 and the answer was YES. A number of projects that
would create employment were put on hold; some companies closed operations with others failing to
get funds for expansion and a number of other negative effects on the economic activities. All these
caused redundancies and layoffs of the actual and potential employment opportunities.
7. Is there any proof that the financial crisis significantly affected the levels of Tanzanian government
debt? There were some statistically significant means’ differences noted on tests results on debt
indicators. However, the significance resulted mainly from the relatively low debt levels in Phase II
which was contributed by the HIPC and MDRI debt relief programs and this low level of debt was
followed by a subsequent normal level which again turned to be significant due to an unusual low level
in Phase II. The average monthly balance of foreign debt which forms a significant part of the debt
was US$ 5.934Bn in Phase III compared to US$ 5.956Bn and US$ 7.82Bn in Phase II and Phase I
respectively. No incidents of failed government’s obligation on debt servicing were reported. Hence
the conclusion to this question and based on the scope of the study is NO effect noted on government
debt.
8. Is there any proof that the financial crisis significantly affected the levels of Tanzania’s exports of
goods and services? The review of the exports and international trade indicators in general, indicated
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Proceedings of the 12th Annual Conference © 2011 IAABD
that there was NO effect on the exports and international trade indicators. All the indicators showed a
normal increasing (growth) trend with the lowest growth on phase’s monthly averages of 35% in total
good and services exports.
Other general observations
Apart from macroeconomic indicators tested, some other tests were also done on inflation trends and the
Gross Domestic Product (GDP). Although inflation showed significant growth through all phases
(absolutely), various BOT monthly reports linked the inflation to food inflation caused by draught rather
than the financial crisis. Average inflation rates per month (among phases) were 4%, 6.49% and 10.34%
for phase I, II and III respectively.
The GDP trends were tested and the analysis showed that the average GDP growth fell from the average
of 7.3% in the previous 6 years to an average of 5%. As the effect on GDP is a sum of all the observed
impacts in the study it can be concluded that the Tanzanian economy was generally hit, and the rate of
growth in GDP is fell to 5% from a yearly average of around 7%.
General Conclusion
Although the findings generally show that the Tanzanian economy was hit by the crisis, the highlights
picked from the media indicate that the impact might have been higher than what was reflected in the
indicators. The government should invest in analyzing the crisis, its impact, and effectiveness of its
policies and take timely corrective action.
Another observation, which is a compliment to BOT and may be, the nature of economy, is that although
we have been impacted, very few tests of month on month growth have indicated a significant movement
meaning that the economy was relatively strong and stable. The impact has been well absorbed over the
time, and there were no abrupt movements between months.
Recommendations – Implication for policy and practices
The following are the key lessons from this study which have to be considered by various natural and
artificial persons and government policy reforms.
• Considering the source of the world financial crisis and the findings of this study, the key lesson
learnt is that a fall in economic activities in one country in the modern “interconnected economies”
impacts the others, hence it is very important for the governments to enter into unified and
enforceable trade and economic pacts that will ensure that at anytime interests of all are preserved.
• Countries should be concerned with their neighbour’s affairs because a lesson from this crisis has
underscored the importance of economic and even political groupings within regions with
enforceable economic treaties, because a very minor fall in a neighbouring country’s economy may
significantly affect the other countries economically, socially and even politically.
• Governments to invest on and study the relationship between various economic behaviour or
indicators and the economic shocks. This will enable the governments to identify the correlations
and hence learn on “where”, “when” and “how”, to build effective economic “shock absorbers”.
• From the source of the crisis, another lesson is on how key it is, for the governments to build strong
and well regulated financial sectors especially in this era of high levels of “Financial engineering”,
because failure to properly analyze and regulate one type of financial products in USA (i.e. the
Mortgage Backed Securities) affected the whole world’s economies.
• There seems to be a need to review and enhance the roles of the international financial
organizations like the World Bank and International Monetary Fund (IMF) or create a separate
organization with the responsibility to manage the global economic development and stability. As
the world becomes increasingly connected, there must be a body which has sanctional powers over
56

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
its members’ economic affairs in a similar way the United Nations manages the political affairs of
its member states.
• It is important to build a self sustaining economy that depends much on internal demand. It is an
observation that countries with huge internal market suffered less and recovered quickly with China
and India being prime examples (IMF, 2009).
• Although Tanzania was hit by the crisis, the economic indicators do not have month on month
extreme growths which means that the magnitude of the effects on the economy was not as severe
and as fast as in the developed countries. Being “primitive” in terms of underdeveloped financial
markets and communication technology may have been Tanzania’s key weapon.
Limitation of the study
This study suffered from some limitations which may have impacted its findings’ strength in representing
the reality. The main weaknesses were:
• Secondary data – The study utilized the secondary data which are sometimes biased and may fail to
represent the reality. The nature of the data preparation and reporting especially in our developing
countries may not be reliable in terms of accuracy and are prone to bias.
• The scope – The coverage was too wide, and hence it might have lacked concentration and focus.
• Methodology – Although as much as possible the statistical tests were supplemented by the
qualitative reviews, the methodology of accepting the significant means differences between Phase II
and Phase III to be a direct impact of the financial crisis may not always hold.
References
AFDB (2009), “Impact Of The Crisis On African Economies – Sustaining Growth And Poverty
Reduction” - A Report From The Committee Of African Finance Ministers And Central Bank Governors
established to monitor the crisis-African Perspectives and Recommendations to the G20
Bank of England (2009), Changes in Bank Rate, Minimum Lending Rate, Minimum Band 1 Dealing Rate,
Repo Rate and Official Bank Rate, Bank of England,
Baradyana, J. S & Ame, A. M (2005), Quantitative techniques for business decisions, Mkuki na Nyota
Publishers, Dar es Salam.
Blundell-Wignall, A and Atkinson, P. (2008) ,”The Subprime Crisis: Causal Distortions and Regulatory
Reform”, in: Paul Bloxham and Christopher Kent, Lessons from the Financial Turmoil of 2007 and 2008,
Proceedings of a Conference held at the H.C. Coombs Centre for Financial Studies, Kirribilli, on 14-15
July 2008
Blundell-Wignall, A, Atkinson and Lee, S. H (2008), “The Current Financial Crisis: Causes and Policy
Issues”, Financial Market Trends – ISSN 1995-2864, OECD
Brigham, E.F and Houston, J.F (2006), Fundamentals of Financial Management, 10th Edition, Thomson
Southwestern India.
BOT (2009a), Monetary Policy statement June 2009, ISSN 0856 – 6976, Governor, Bank of Tanzania
BOT Reports, The monthly economic bulletin, reports for all the periods from December 2002 to July
2009
BOT Reports, The quarterly economic bulletin, reports for all the quarters falling between March 2003
and March 2009
BOT Reports, The Monetary policy statement, documents for all the half years falling between June
2004 and June 2009
Eiteman, D.K, Stonehill, A.I, Moffet, M.H and Pandey, A (2008), Multinational Business Finance, 10
edition, Dorling Kindersley (India) Pvt. ltd
IMF (2009), World economic outlook October 2009 – Sustaining the recovery, World Economic Studies
Division, IMF Research Department.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Kothari, C.R (2008), Research methodology: Methods and Techniques, New Age International
publishers, Delhi, India
Liu, W (2000), An Empirical Study of Asian Financial Crisis by Debt Service Capacity Comparison,
Managerial finance Journal, Vol. 26, Pg 16-27, Department of Economics and Finance, Pitts-burg State
University, Pittsburg
Lin, Z. J (2000), Asian Financial Crisis and Accounting Reforms in China, Managerial finance journal,
Volume 26 Number 5, Pg 63 - 78
McCulloch, N (2008), The impact of the global financial crisis on developing countries, Policy options,
Institute of Development Studies, Sussex, November 2008,
Portes, R (1998), “An Analysis of Financial Crisis: Lessons for the International Financial System”,
London Business School. Paper presented at FRB Chicago / IMF Conference Chicago, 8-10 October
1998
Saunders, A. (2008), ”What Have We Learned from the Sub Prime Crisis?”, A paper presented at New
York University, Stern School of Business, May 2008
58

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
An Econometric Investigation into the Impact of Inflation on Financial Development in Nigeria
Babatunde O. Oke, okebabatunde@yahoo.co.uk
Department of Finance, Faculty of Business Administration, University of Lagos, Nigeria.
Obaji R. N, ritaobaji@yahoo.co.uk
Department of Business Administration, Faculty of Business Administration, University of Lagos,
Nigeria.
Abstract
In this paper, we examine the link between financial development and inflation in Nigeria. We set out to fill the
lacuna existing in the literature since only very few studies have examined this nexus globally and none in Nigeria,
to the best of our knowledge. We employ cointegration and error correction methodology using annual
macroeconomic data from the Central Bank of Nigeria (CBN) for the period 1972 to 2007. We confirm that the
relevant variables are cointegrated, meaning that there exists a long run relationship among the variables in
question. Further analyses show that inflation negatively and significantly affects financial development in Nigeria
at 5 percent level during the period under consideration. In other words, inflation is detrimental to financial
development in the country. This result is in agreement with a recent study by Bittencourt (2008) for Brazil and an
earlier study by Boyd, Levine and Smith (2001) for 100 countries over the period 1960–1995. The main policy
implication of this study is that, in order to achieve a growth enhancing financial development in Nigeria,
appropriate policies must be put in place to curtail inflation. This in part explains why inflation targeting has been
adopted today by many nations.
INTRODUCTION
Among the many controversies in economic and financial literature are the finance-growth argument and
inflation-growth debate. In the main, most theoretical and empirical literature favour a finance driven
growth and an inflation hindering growth propositions. In other words, it is generally believe that
financial development promotes economic growth while inflation is detrimental to economic growth.
In Nigeria, policy makers tend to favour a “finance-led growth” hypothesis by constantly tinkering with
the financial system with the aim of developing the sector for optimal performance. Notably, the
Structural Adjustment Programme (SAP) of 1986 included the financial sector reform, which brought
about a phenomenal increase in the number of financial institutions. The recapitalization and
consolidation exercise carried out by the monetary authorities in 2005 (necessitated by wanton distress in
the banking sector in the early 1990s and low capitalization, among others) has seen the number of
institutions in the sector getting thinner and fitter. Financial indicators have also improved since 2005.
According to the Central Bank of Nigeria (CBN 2006), by 2006 ending, financial institutions in the
Nigerian financial system comprised of the Central Bank of Nigeria (CBN), the Securities and Exchange
Commission (SEC), the Nigerian Deposit Insurance Corporation (NDIC), the National Insurance
Commission (NAICOM), the Nigerian Pension Commission, 25 deposit money banks, 750 community
banks (CBs), 7 microfinance banks (MFBs), 112 finance companies (FCs), 322 bureaux-de-change
(BDCs), 1 stock exchange, 1 community exchange, 5 discount houses, 91 mortgage institutions, 5
development finance institutions, 103 insurance companies, and 581 brokers. Moreover, at the end of
2007, broad money (M2) grew by 106.40 percent from N 2814846.1million in 2005 to N 5809826.5
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Proceedings of the 12th Annual Conference © 2011 IAABD
million in 2007 while the ratio of broad money to GDP (an indicator of financial development) rose from
19.3 percent in 2005 to 28.1 percent in 2007. Similarly, the aggregate bank credit to the private sector
rose by 151.91percent from N2007355.8 million to N5056721 million during the same period.
Importantly, another indicator of financial development, the ratio of credit to the private sector to GDP
(CPS/GDP) also grew from 13.8 percent in 2005 to 24.5 percent in 2007 (CBN 2007). Although the
above implies a tremendous improvement between 2005 and 2007, the two indicators of financial
development have shown a high degree of variability over time. (See for instance figure 1)
Aside from tinkering with the financial sector of the economy, the achievement of price stability (or
reduction in the rate of inflation) has been a major macroeconomic policy objective by successive
governments in Nigeria. This is in line with global thinking that high and extremely volatile inflation
adversely affects many macroeconomic variables including economic growth. In Nigeria, the economy
has experienced hyperinflation and inflation volatility over the years especially between 1988 and 1996.
This could be traced to the fallout of the Structural Adjustment Programme (SAP), especially the adverse
effects of exchange rate devaluation, and trade liberalization, among others. For instance, inflation rate
jumped from 5.4 percent in 1986 to 38.3 percent and 40.9 percent in 1988 and 1989 respectively and
reached the all time high of 72.8 percent in 1995. Inflation volatility can be seen clearly in fig 2 where
inflation rate fell from 40.9 percent in 1989 to 7.5 percent in 1990, rose again to 44.5 in 1992 and after
reaching the all time rate of 72.8 percent in 1995, fell to 29.3 in 1996 and further reduced to 8.5 in 1997.
Surely this movement is unpredictable and such uncertainty has negative effects on key macroeconomic
variables.
Fig 1 Fig 2
The effect of inflation on economic growth has been thoroughly examined over the years. Although many
studies have shown that inflation adversely affects economic growth, very few extant studies globally
however explain the mechanism through which inflation hinders economic growth. In Nigeria, none has
been written to the best of our knowledge. The limited studies outside Nigeria explain that inflation
affects economic growth through the financial system. As depicted by figures 1 and 2 above, the indicator
of financial development and inflation rate have shown high degree of variability over the years in
Nigeria. Pertinent questions to ask are: is the variability in financial development attributable to changes
in inflation rate? Can we ascribe the volatility of financial development in Nigeria to volatility in inflation
rate? To answer these similar questions and fill the lacuna in the literature, this paper uses econometric
techniques to ascertain the exact relationship between inflation and financial development in Nigeria from
1972 to 2007.
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The rest of the paper is divided into five sections. In section II, relevant theoretical and empirical studies
are reviewed while the methodology of the study is explained in section III. The findings of this study are
presented in section IV while section V contains the summary and concluding remarks.
Review of Theoretical and empirical studies
Many theoretical and empirical studies have shown that both financial development and inflation are
determinants of economic growth (See surveys of the empirical growth literature such as Durlauf,
Johnson and Temple 2005, and Mirestean and Tsangarides 2009). Indeed, while Levine (2005), and
Demirgüç-Kunt and Levine (2008) reveal that finance promotes economic growth, Dewan and Hussein
(2001), and Mallik and Chowdhury (2001) find proof of a negative connection between inflation and
economic growth.
A pertinent question to ask is, what are the mechanisms through which inflation rate affect economic
growth? Huybens and Smith (1998, 1999) and Boyd and Smith (1996) show that an increase in the rate of
inflation reduces the real rate of return on assets in general and this in turn worsens credit market
frictions. They further demonstrate that the deteriorating market frictions lead to rationing of credit and as
inflation rises, credit rationing becomes more severe. Moore (1986) also notes that high inflation impacts
negatively on financial development since the former erodes the real value of financial assets and creates
doubt concerning prospective borrowers’ capacity to repay indebtedness. Indeed, Lach and Tsiddon
(1992), Jaramillo (1999), Debelle and Lamont (1997) have shown that higher inflation usually leads to
higher relative price variability and increased uncertainty. Druck and Garibaldi, (2000) further show that
the rise in the probability of borrowers’ default (due to high inflation volatility) discourages banks from
lending to the private sector. Thus, the financial sector makes fewer loans, resource allocation is less
efficient, and intermediary activity diminishes with unfavorable implications for capital investment. The
decrease in capital formation adversely affects both equity market activity and economic growth.
According to Azariadis and Smith (1996), when inflation rate is low and has not reached the “critical”
rates, credit market frictions may be “nonbinding”, meaning that inflation does not alter the information
flow or hamper resource allocation and economic growth. But once inflation rate goes beyond the
threshold level, credit market frictions become ‘binding”, leading to a distinct fall in financial sector
performance as credit rationing become intense. They also believe that a second threshold rate of inflation
exists and whenever this threshold is exceeded, inflation is significantly associated with inflation
variability and asset return volatility. Moreover, Boyd and Smith (1998) and Huybens and Smith (1998
and 1999) posit the existence of a third inflation threshold showing that once the rate of inflation exceeds
this critical level the economy is prevented to converge to a steady state. When this occurs, further
increases in inflation have no additional detrimental effects on the financial system or economic growth
since “all of the damage to the financial system has already been done.”
Boyd, Levine and Smith (2001) study of 100 countries over the period 1960–1995 shows that at low-tomoderate
rates of inflation, a nonlinear, significant and negative relationship exists between inflation and
three indicators of financial development. These indicators include: lending by the financial sector to the
private sector; the quantity of bank assets; and the volume of liabilities issued by banks. Also, at low-tomoderate
rates of inflation, there is a significant negative link between inflation and measures of stock
market liquidity and trading volume. On the other hand, there exists a strong positive connection between
inflation and stock return volatility. Moreover, Zoli (2007) study of emerging European nations from
1995 to 2006 indicates that inflation is detrimental to financial development. Furthermore, Bittencourt
(2008) uses different estimators and different measures of financial development to reveal the existence of
a significant and negative relationship between inflation and financial development in Brazil between
1985 and 2002.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Methodology
Model Specification
To ascertain the nexus between inflation and financial development in Nigeria, we gauge the robustness
of the independent partial correlation between inflation and financial development in Nigeria using the
following model:
n
= ∑
n
j X t + ∑
j=
1
j=
1
FINDEV α β ( DIR)
+ µ
Where:
j
t
FINDEV is the indicator of financial development; X is a set of control variables; α is a vector of
coefficients on the variables in X; β is the estimated coefficient of domestic inflation rate (DIR); and µ is
an error term. We expect “a priori”, β < 0
Model Estimation Technique
In this study, we employ time series econometric techniques to ascertain the nexus between inflation and
financial development in Nigeria from 1972 and 2007. Specifically, we perform cointegration and error
correction modeling to establish the short-term and long run dynamics between inflation and financial
development in Nigeria. Before conducting the cointegration analysis, univariate unit root tests are carried
out to find out the stationarity or otherwise of the time series. Thus, we employ the widely used
augmented Dickey-Fuller (ADF) and the Philips - Perron (PP) tests (Dickey and Fuller 1979; and Philips
and Perron 1988). The null hypothesis of a unit root is rejected against the one-sided alternative if the tstatistic
is more than the critical value in absolute terms. Thereafter, cointegration tests are carried out to
determine if a stable long-run (equilibrium) relationship exists among the nonstationary time series.
Cointegration tests can be conducted via Engle and Granger (1987) two-step test and the one step
maximum likelihood method developed by Johansen (1995). In this study, the Johansen technique is
employed. Engle and Granger (1987) linked the long – run relationship derived from cointegrating
relationship with the short term dynamic process by associating cointegration with error correlation
model. Indeed, the error correlation model specification is the avenue through which the short-run
observed behaviour of variables is associated with their long-run equilibrium growth paths.
Indicators of Inflation and Financial Development:
The indicator of financial development, FINDEV is the ratio of credit to private sector divided by GDP.
The rationale behind the choice of FINDEV is that financial systems that funnel more loanable funds to
the private sector are more involved in performing the five functions of the financial system than financial
systems that simply channel credit to the public sector. Also, we make use of the rate of inflation
(Domestic Inflation Rate) as the indicator of inflation in Nigeria. All the macroeconomic data were
obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin 2007.
Control Variables
In this study we use OPENNESS (a measure of the degree of openness of the economy to the external
sector) and ER (exchange rate) as the control variables (X) because extant literature shows that there are
links between these variables and financial development. For instance, Do and Levchenko (2004) present
empirical proof that trade openness influences countries’ financial systems while Dehesa, Druck, and
Plekhanov (2007) show that higher real exchange rate volatility results in lower ratios of credit-to-GDP.
(1)
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Research Findings
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
As is customary with time series analysis, we initially examine the graphical representation of the time
series data employed in this study. Fig 1 below shows that all the variables, namely: FINDEV, DIR, ER
and OPENNESS trended upwards with varying degrees of fluctuations.
Fig 3: Graphical representation of time series data
Following Granger and Newbold (1974), and Engel and Granger (1987) assertions that many of the
variables that appear in time series econometric models are non-stationary (or are integrated variables) we
therefore perform unit root tests on the univariate time series to ascertain the stationarity or otherwise of
the series. The null hypothesis of a unit root is rejected against the one-sided alternative if the t-statistic is
more than the critical value in absolute terms. The results from the Augmented Dickey-Fuller (ADF) and
the Philips-Perron (PP) tests (Dickey and Fuller 1979; and Philips and Perron 1988) are presented in table
1 below. For all the variables, the ADF and PP tests fail to reject the null hypothesis of a unit root at 5
percent significance level. In other words, the tests indicate that the variables are nonstationary at the
level. Further differencing however shows that the variables are stationary at their first differences and are
thus integrated of order 1 i.e I (1).
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Proceedings of the 12th Annual Conference © 2011 IAABD
Table 1: Unit Root Test
ADF 5 Percent
Critical
Value
PP 5 Percent
Critical
Value
First Diff
ADF
First Diff
PP
Order of
integration
FINDEV -1.78 -3.54 -1.85 -3.54 -4.78 -4.54 I(1)
DIR -2.96
-4.24 -2.93
-3.54 -5.58
-9.83
ER -1.78 -3.54 -1.78 -3.54 -5.81 -5.81 I(1)
OPENNESS -2.19 -3.54 -2.19 -3.54 -7.81 -7.96 I(1)
Source: Authors computation
Having established that the variables are I(1), we then carry out the cointegration test using the Johansen
(1992), and Johansen and Juselius (1992) framework. The results of the cointegration tests as shown in
table 2 below indicate the presence of 1 (one) cointegrating equation. In other words, the variables are
cointegrated. This means that there are dynamic long-run causal relationships involving indicators of
financial development (FINDEV) and Inflation (DIR) as well as the control variables (OPENNESS and
ER) in Nigeria during the period under consideration.
Table 2: Cointegration Tests
Ho Eigenval
ue
r = 0**
r = ≤ 1**
r = ≤ 2**
0.59
0.35
0.12
λmax 95%
Critical
Value
30.28
14.41
4.51
r = ≤ 3 0.00 0.14
Source: Authors computation.
27.07
20.97
14.07
3.76
99%
Critical
Value
32.24
25.52
18.63
Trace 95%
Critical
Value
49.33
19.05
4.64
47.21
29.68
15.41
99%
Critical
Value
54.46
35.65
20.04
*(**) denotes rejection of the hypothesis at the 5%(1%) level. Trace and Max-eigenvalue tests
indicate 1 cointegrating equation at the 5% significance level
6.65
Finally, having ascertained that the variables are cointegrated and that there exists 1 (one) cointegrating
equation at 5% level of significance, we then formulate the error correction model.
From table 3 below, the equilibrium structure of the parsimonious error correction model is validated by
the significance of the error correction term (ECM -1). The error correction term shows significant
correction of about 14 percent from short run disequilibrium to long run equilibrium. Also, the results
from the table show that DIR enters with the right sign and significantly influences financial development
in Nigeria at 5 percent level during the period under consideration. This means that inflation is
detrimental to financial development in the country. The result confirms similar study by Bittencourt
(2008) for Brazil and that of Boyd, Levine and Smith (2001) for 100 countries over the period 1960–
0.14
3.76
6.65
I(1)
64

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
1995. These studies therefore confirm our results in country specific and cross country analyses
respectively. In addition, the results indicate that although OPENNESS significantly affects financial
development in Nigeria at 5 percent level, it is negatively signed. This implies that trade with the rest of
the world hinders financial development in the country during the period under review. The result thus
confirms the findings of Do and Levchenko (2004). The reason for this could be traced to the fact that
Nigeria is highly exposed to the external sector such that volatility in the external sector greatly affects
the Nigerian economy. The monocultural nature of the economy and inherent rigidities make policies
such as devaluation or deregulation and trade liberalization hurt the Nigerian financial sector and the
economy more than gains derivable from such policies. This could also account for the low influence of
exchange rate (ER) on financial development in this study.
Table 3: The Parsimonious Error Correction Model
Dependent Variable: FINDEV
Variable Coefficient Std. Error t-Statistic
C 0.122207
D(FINDEV (-1)) -0.308170
D(DIR (-1))** -0.064718
0.51748
0.20664
D(ER (-1)) 0.130201 0.07198
D(OPENNESS (-1))*** -0.200620
ECM (-1)** 0.138693
R-squared: 0.362993 Adj. R-squared: 0.249242
Source: Authors computation.
Note: *** significant at 1%, ** significant at 5%, * significant at 10%
Table 4: Summary of Diagnostic Tests for the Model
0.23616
-1.49135
0.03077 -2.10336
0.07572
0.06444
Akaike AIC: 4.967942
1.80894
-2.64952
2.15237
Schwarz SC: 5.237300
F Test F Statistic Prob
Breusch-Godfrey Serial Correlation LM Test: 0.427806 0.655986
ARCH LM Test 0.036256 0.850154
White Heteroskedasticity Test: (Cross Terms) 0.736149 0.672835
White Heteroskedasticity Test: (No Cross Terms) 0.830662 0.556006
Chow Breakpoint Test 2.027667 0.117702
Chow Forecast Test 0.739573 0.730086
Jarque-Bera Normality Tests 0.660675 0.718681
Ramsey RESET Test: 1.577323 0.218530
Source: Authors computation.
Table 4 above presents the results of relevant diagnostic tests for the model. The results in general are
satisfactory. The Breusch-Godfrey Serial Correlation LM Test shows that there is no evidence of
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Proceedings of the 12th Annual Conference © 2011 IAABD
autocorrelation while the Jarque-Bera test for residual indicates that the normality assumption is not
violated. Also, there is absence of both heteroskedasticity and ARCH effect in the residuals, with the
latter ensuring that there is no loss of efficiency. Moreover the Ramsey Reset test shows that the model is
well specified and that valid inferences can be made from the results of this study.
20
15
10
5
0
-5
-10
-15
-20
Fig 4: CUSUM Test
1.6
1.6
1.2
1.2
0.8
0.8
0.4
0.4
0.0
0.0
-0.4
-0.4
Fig 5: CUSUM of squares test
1980 1985 1990 1995 2000 2005
1980
1980
CUSUM 5% Significance
1985
C U S 1985 U M
C U S U M
1990
o f S q1990
u a r e s
o f S q u a r e s
Additional tests conducted to ascertain the model for stability in the parameters of the equation also prove
satisfactory. Both the CUSUM test (fig 4) and CUSUM of squares test (fig 5) find parameter stability.
The CUSUM test (Brown, Durbin, and Evans, 1975) in fig 4 plots the cumulative sum as well as the 5%
1995
1995
5 %
5 %
2000
2005
S2000
ig
n if
ic
a n 2005 c e
S ig
n if
ic
a n c e
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
critical lines. The test finds parameter stability since the cumulative sum does not go outside the area
between the two critical lines.
Similarly, the CUSUM of squares test (fig 5) provides a plot of St against t and the pair of 5 percent
critical lines. Also, the test finds parameter stability since the cumulative sum does not go outside the St
critical lines.
Conclusion and Recommendations
In this study we ascertain the nexus between financial development and inflation in Nigeria for the period
1972 to 2007. We employ cointegration and error correction methodology using annual macroeconomic
data from CBN for the period under review. We confirm that the variables employed are all nonstationary
at the levels and that the variables are cointegrated. This means that there exist a long run relationship
among the variables in question. Further analyses show that inflation negatively and significantly
influences financial development in Nigeria at 5 percent level during the period under consideration. In
other words, inflation is detrimental to financial development in the country. This result is in agreement
with a recent study by Bittencourt (2008) for Brazil and an earlier study by Boyd, Levine and Smith
(2001) for 100 countries over the period 1960–1995. These studies therefore confirm our results in
country specific and cross country analyses respectively. With respect to the control variables, we find
that the degree of OPENNESS significantly but adversely affects financial development in Nigeria while
the influence of exchange rate (ER) on financial development is not robust. The main policy implication
of this study is that, in order to achieve a growth enhancing financial development in Nigeria, appropriate
policies must be put in place to curtail inflation. It is also imperative for the Nigerian government to align
its fiscal policy measures with the monetary policy so that efforts of the monetary authorities to reduce
inflation will not be thwarted by reckless spending of the fiscal authorities in the country.
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Proceedings of the 12th Annual Conference © 2011 IAABD
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Track 2: International Aid, Economic Policies and Strategies
70

Abstract:
Study on Africa Government Regulation on Gold Market
Ju Yang alfjy@hotmail.com
Shanghai Institute of Foreign Trade, Shanghai 201620, China
William X. Wei
School of Business, Grand MacEwan University, Alberta, Canada
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Hongzhou Geng
Market Operation Regulation Bureau, Ministry of Commerce, Beijing, 100037, China.
This paper gives a review of the government regulation and policy changes on gold and gold markets in the major
gold producer and consumer countries. It proposes that with a large amount of spot gold in produce, Africa should
push in the development of spot gold market in full sail, expand the future gold market with cautiousness and
stability and increase gold reserve in good time. In the end, it puts forward the general effective strategies and
methods of the government regulation on the gold market in Africa.
Introduction
Africa is a major gold producer in the world, and it used to produce up to 60% of the global production.
South Africa is one of the global leaders in gold production. In 1970 South Africa produced over
32Moz of gold, 2/3 of the world's production (47.5Moz). Coupled with the labor problems, lowering
grades as well as several mines reaching the end of their lives, South Africa’s gold production has been
declining steadily. In 2000, the world production hit 2,573mt (82.6Moz), but South Africa only produced
428mt (13.8Moz) accounting for 16.6% of the total. In 2009, China’s production was 313.98 mt., which
made it the largest gold producer in the world. While South Africa produced 204.92 mt., and Ghana was
still a major gold producer in Africa. With a production of 90.20 mt. in 2009, Ghana became the second
largest gold producer in Africa. Zimbabwe has historically been a prominent gold producer in Africa, and
Tanzania and Mali are rapidly becoming the newest African gold producers with several mines being
commissioned or in final feasibility stages.
Gold production in West Africa is set to rise by about 30 percent over the next 4 years, mainly driven by
the higher output from Randgold and Iamgold. Gold production in West Africa is expected to rise by
about 2 Moz a year or 57 tones by the end of 2013. The combined gold output from Ghana, Mali, Guinea,
Burkina Faso, Mauritania and Ivory Coast has risen by more than 65% over the last five years to about
190 tones per year. However, these West African countries were growing off a small base, and despite the
sharp increase, these countries still accounted for less than 8% of 2,500 tones of gold mined globally in
2009.
As a special goods characteristic of finance, gold is of great significance to the national economy and the
people’s livelihood. What should the government do to achieve effective regulation? With a further study
of the government regulation and policy changes on gold and gold market in the leading gold producer
and consumer countries in the world, it puts forward the proper strategies and methods that African
government should take to achieve effective regulation on gold market.
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Literature Review
Gold was once considered as the standard currency, and researches on gold have covered both its
financial and goods properties. Jastram (1977) studied the changes of gold price from 1960 to 1976 and
concluded that gold price had a better market tendency in currency deflation than in inflation.
M.C.Marcuzzo & A. Rosselli (1987) presented a new gold check number formula and modalized the
fluctuation of the gold market after a study of the acquirable data of the gold market from the end of 18 th
century to the beginning of 19 th century. They put forward the equilibrium mechanism of gold motion,
that was: in world range, gold moved from trade deficit countries to trade favorable balance countries,
which made an adjustment and restoration of international balance-of-payments. By applying theory
model and through an empirical study, Larry & Fabio (1996) proved that the change of exchange was the
main cause of the change of gold price. Harmston (1998) showed through a case study that the tendency
of gold price had a negative correlation with the value of American treasury and long-term governmental
bond. B. Adrangi, A.Chatrath, and R.C.David (2000) explored the gold price relevance of different
markets through a case study of the strategic relation between the market prices of gold and silver.
Graham Smith (2001) presented that gold price had an negative correlation with the stock index of the
main industrial countries (like American Dow-Jones index). Colin Lawrence (2003) put forward that the
macro economic variance had no statistic distinctiveness with gold investment return, which was
independent from business cycle, but had distinctive correlativity with financial assets indexes. Capie,
Mills and Wood (2004) showed through empirical study that gold price had a negative correlation with
the main currency exchange rates. Paul Burton (2005) pointed out that gold maintained an average cost
price of about $250 per ounce on the whole. Zhai Min & Hua Renhai (2006) carried out an empirical
study of the dynamic relation of the spot gold price in Chinese and international markets with Johansen
co-integration test, the error analysis model, Granger causal test and the impulse response analysis. The
study showed that there existed a long-term balance between the gold prices of Shanghai Gold Exchange
and London Gold Market, which interacted with each other and London Gold Market had a stronger
influence on Shanghai Gold Exchanges. Levin & Wright (2006) held that from a long-term viewpoint,
gold price had a long-term stable positive correlation with American price level, so gold could be used as
the hedging tool of inflation; from a short-term viewpoint, American inflation and its fluctuation rate and
credit risk had an apparent positive correlation with gold price. Liu Shuguang & Hu Zaiyong (2008)
found out the consistence of the price change of gold and American dollar through empirical analysis and
proposed that Chinese government should take gold as part of the financial assets and increase the
proportion of gold in international reserve.
In the research field of government regulation, there are lots of research findings that have contributed a
lot to the founding and research of the economics control, like Stigler,
1971¡Peltzmam 1976¡Kahn 1980¡Hahn Robert W., & H. John, 1991; Hahn Robert W, 1993;
S.Andrei& V. S. Cass R., 1996; Geroge A.Steiner& John F. Steiner, 1997; Richard A. Posner, 2000;
Schwartz A, 2000; Wang Junhao, 2001; H. Robert W. & S.Cass R., 2002; Skogstad, 2003¢G. Edward &
A. Shleifer, 2003; Djankov Simeon etc, 2003; Andreas 2004¡Ju Yang, 2008,2009.
Though there are so many relative research findings in this field, deficiency and research blank still exist:
the government regulation strategies and methods in facing the challenges of the integration of world
economy, the prosperity of international trade and the distribution of global resources, etc.. Should Africa
increase its gold reserve? What should the government do to achieve effective regulation? This paper
attempts to put forward the general effective strategies and methods of African government regulation on
gold market.
Further Analysis
Government regulation on gold market
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
After the First World War, the gold standard system collapsed; after the Second World War, the Briton
Forest system established the dual-link of dollar with gold and other currencies. In 1976, Jamaica Meeting
set up the principle of demonetization of gold. With the weakening of the currency function, the status of
gold in international reserve system began to drop and many countries and regions began to reduce their
gold reserve. The gold price dropped from its high point of $850 on January 21, 1980 to its lowest point
of $252.8 on July 21, 1999. During this period, many countries announced to undersell gold, such as
Holland, which undersold 324 tons during 1994—1995 and 100 tons in November, 2000; Belgium, 290
tons during 1994—1995; Australia, 167 tons; Argentina, 124 tons, etc.. In 1997, in order to get the loan
from IMF to resist the financial crisis, South Korea collected about 250 tons of gold from its people and
changed them into foreign exchanges. In 1998, Russia undersold 33% of its gold reserve to resist the
financial crisis (Vladimir Alekseevich Mironov, 1998). And in 2001, Russia sold part of its gold reserve
for the reconstruction of Siberia after the flood. In August, 1999, worried about the countries’ further
reducing of their gold reserves, the gold producers undersold gold in the futures market, and the gold
price dropped to $251.70. From July, 1999 to March, 2002, Britain sold 415 tons of its 715 tons of gold
reserve (20 or 25 tons auctioned every two months). To stabilize the gold price and increase the
transparency of the central banks of every country in gold underselling, the European Central Bank signed
“Washington Agreement” with central banks of 14 countries in November, 1999, which reiterated the
important position of gold in the currency system and promised that within 5 years, every year’s total sale
of gold wouldn’t surpass 400 tons, which was increased to 500 tons in 2004. With the Asian financial
crisis, the American economy’s depression and the devaluation of America dollar, the position of gold
regained its importance and many countries began to readjust the amount of gold reserve and its
proportion in the national reserve to improve its function in modern economic system. (Gao Jie & Li Jing,
2007).
Just as the balance function of gold motion ( M.C.Marcuzzo & A. Rosselli, 1987), gold played the role of
balancing world payment as a means of international payment in history. However, the fact is, as the
Sunday Times of April 15, 2007 has analyzed and the later continuous bull market has showed, those who
have bought the undersold gold of the above-mentioned central banks are the real beneficiaries, which
presents the gold function of value keeping and increasing in the chain from dollar’s over-issuance to its
overflowing, the inflation, its devaluation and gold’s value increasing.
The strategies of African government regulations on gold and gold market
In view of the rising of world gold price, as the main source of the gold markets, London and Zurich
mainly rely on imports from Africa. With the quick rise of gold production from West Africa, African
government should introduce active industrial and tax policies in an effort to create an attractive
investment climate to encourage exploration activities and possible future changes in government mining
regulation, including the countermeasure to cases of the labor unrest and energy shortages, and increase
gold reserve in some ambitious African countries.
As the world’s great gold production and consumption country, China has big advantages in spot gold and
resources reserves. With the long-term friendly relationship with African countries, “a series of
remarkable accomplishments have been achieved in the economic and trade realm, with bilateral trade
volume exceeding $100 billion in 2008. China currently remains the second largest trading partner in
Africa and its investment in the vast continent has seen constant growth. By the end of 2009, the volume
of China's accumulative non-financial investment in African countries had surpassed $8 billion and it had
become the largest investor in the continent among developing nations. China's engineering contracting
business has also made progress in African countries, increasing nearly 25-fold over the past decade. So
far, Africa is China's second largest overseas market in terms of projects contracting” (Zhang Hongming,
China Daily 2010-09-08).
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“The Chinese government has always supported African countries in their effort to reduce their debts,
help relieve their burden of debts to China. From 2000 to 2009, China canceled 312 debts of 35 African
countries, totaling RMB18.96 billion. The above-mentioned debt relief measures demonstrate China's
determination and aspiration to help Africa develop, and speed up the process of debt reduction for Africa
by other countries.”
Similarly, as developing countries, Chinese government regulation on gold and gold market and the gold
industrial policy is worth of reference for African countries. New York futures gold /London spot gold
and Shanghai spot gold are co-integration and mutual Granger Cause relation (two-way guidance)
respectively. Shanghai spot gold market is comparatively healthy. The cooperation with Chinese large
state-owned gold enterprises and commercial banks on gold refining, processing, sale, transactions and
cultivating high-quality talents are meaningful and promising.
For the co-integration between Shanghai spot gold market and international gold markets (proved in the
third part of the empirical test), there shouldn’t be a big gap between domestic and international tax rates,
especially that of developed countries (basically compatible with the current international practice),
corresponding policy environment should gradually correspond with the major world gold markets.
African gold produce countries’ tax policies on gold production, refining, circulation should be similar to
international practice. It is necessary to cancel duty and VAT of gold market to encourage people to
reserve gold and push the development of the gold jewelry processing enterprises in the near future. it is
an effective way to reduce smugglings and strengthen the construction of Africa’s own spot gold market.
Africa should push in the development of spot gold market in full sail, expand futures gold market with
cautiousness and stability and increase gold reserve in good time.
Conclusion
With the government regulation on gold as its research subject, this paper gives a review of the
government regulation and policy changes on gold and gold markets in the major gold producer and
consumer countries. On the basis of the above research, it proposes that with a large amount of spot gold
in produce, Africa should push in the development of spot gold market in full sail, expand the future gold
market with cautiousness and stability and increase gold reserve in good time. In the end, it puts forward
the general effective strategies and methods of the government regulation on the gold market in Africa in
three aspects: the policies of import and export, revenue and industry.
Acknowledgment
This research was supported by Shanghai universities humanities and social sciences research base,
Shanghai Institute of Foreign Trade International Economic and Trade Research Institute and Leading
Academic Discipline Project of Shanghai Municipal Education Commission (Project Number£J51201),
Shanghai Philosophy Social Sciences Planning Project (No:2009BJB007), Shanghai Municipal Education
Commission Major projects (09ZS188), The Ministry of Education Project(10YJA790226) and Shanghai
Institute of Foreign Trade Project(085)“Research on International financial derivatives of commodity
pricing rules” .
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Can Exchange Rate Targeting Become an Appropriate Development Policy in Small and Poor
Countries in East African Region (A case study for Uganda)
Abstract
Devendra Kumar Jain, dkumar54@gmail.com
Makerere Univeristy, Uganda
The pass through of exchange rate variability on the agents of economic development has become an
empirical issue among policy makers and academics. The floating rate regime with incompatible triangle
( underdeveloped financial market, open trade policy and no capital controls ) though provides a useful
shock absorber for real disturbances to the world economy, is a substantial source of uncertainty for
trade, investment, and industrialization . This paper provides an overview of the main issue i.e. the best of
choice of exchange rate regime for a small, open and underdeveloped economy (as a country specific
study) linking it to a broader debate in academic literature.
Introduction
The Exchange Rate Policy is a focal point of discussion in the aftermath of the global financial crisis. We
have seen many experiments with exchange rate policies during the long period of globalization and
financial liberalization. All these policies led to some sort of financial crises in the International Monetary
and Financial System. The global financial crisis has shown the pitfalls of economic orthodoxy of free
markets and financial liberalization. For most of the emerging economies, the exchange rate policy has
played a vital role in neutralizing the impact of global financial crisis. The protected trade policies and
restricted financial liberalization have also contributed to their financial stability. These countries
absorbed most of the food and fuel price shocks through targeting exchange rate. The overall results for
these economies are encouraging. Their exchange rate policies have supported the industrialization and
export diversification efforts.
However, the countries in transition stage of development, particularly Small Sized open economies in
East African Region have a different story. The countries in the region are suffering the adverse impact
of recent energy and food crises, and they have the least capacity to cope with yet other economic crises.
The combination of high exposure to shocks as well as weak resilience to those shocks is likely to add to
the already chronic development challenges and hence will be harder hit than most other countries. The
crisis is already undermining those factors that enable robust growth performance in these countries in the
decade before the crisis. Their vulnerability is not just a reflection of commodity dependence and related
sensitivity to price fluctuations; it is due to the combined threat from falling commodity prices, the slow
down in global demand and the contraction in financial flows (both FDI and remittances). As a result,
commodity-dependent economies are being hit hard.
The large sized economies of emerging markets have adopted the policy of managed float/exchange rate
manipulation in order to protect their export-led growth. But for the small and undiversified economies of
East Africa that face physical, political and policy-induced constraints to deeper economic integration
with their neighbors and the global economy, excessive reliance on free float exchange rate and inflation
targeting approach limits the effectiveness of such policy beyond price stabilization, owing to the
underdeveloped state of financial institutions and the absence of viable bond markets. These countries
face structurally high of interest rate , not conducive to an investment-driven growth path. They have a
chronic credit crunch that is not a result of the recent global banking crisis. This has endangered the
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industrialization process of these poor and small countries by undercutting their competitiveness of the
domestic industries. Hence, there is a slow pace of industrialization and asset price boom in non-tradable
items.
The management of the exchange rate and the capital account of the balance of payments is a key support
of an investment –driven strategy. Macroeconomic policies across these countries during the last decades
have been influenced by the recommendations of the international financial institutions and bilateral aid
donors. The empirical results of these policies are not suggestive of equitable growth compared to the
growth stories in other parts of the world. In a free floating economy, the continuous depreciation of
domestic currency implies a fall in the real wage. The income distribution measures in the depreciation
case indicate that due to increases in the CPI, all factors loose purchasing power.
The current orthodoxy of freely floating rates combined with monetary policy focused on inflation targets
is often correlated with exchange rate volatility of the kind that undermines domestic macroeconomic
stabilization efforts. In view of the current macroeconomic challenges of globalization, the consistency of
the exchange rate policy to macroeconomic objectives needs to be re-examined. Hence, there is a clear
case for revisiting the inflation targeting .The inflation targeting approach has many assumptions such as
reliable forecast for inflation; efficient financial market; complete industrialization and high market
credibility. It is also dependent on the degree of independence of central banks and their financial
strength. A depreciating exchange rate can only support or increase the net exports if there is idle
capacity and the industrial infrastructure is in place.
With this preamble, this paper explores the possibility of exchange rate targeting as an anchor of
development policy instrument in Uganda. The paper is organized as follows. Section 1 gives an
overview of the recent developments in the literature. Section 2 does the analysis of economic data to
support the basis of the hypothesis of the paper .Section 3 provides the tentative interpretation and policy
implication. The last section concludes with further scope of the study.
Recent Development in the Related Literature
A literary survey of neoclassical theories suggests that the nominal exchange rate can serve as a nominal
anchor for macroeconomic stability in the long run. Gill Hammond et al (2009) say that monetary policy
is typically the first line of defense against a number of internal and external shocks. The study further
suggests that country specific circumstances and internal initial conditions mater a great deal in dealing
the issue of appropriate monetary policy framework. The study concludes that for economies that are
highly open to trade, high nominal exchange rate volatility complicates domestic macroeconomic
management and can have adverse effects on investment, employment and output growth. The stable
exchange rate is welfare improving from a purely domestic point of view. The experience of Tunisia, a
small and open economy, as a country that has adopted exchange rate targeting, is quite encouraging.
Recent studies on the role exchange rate in the monetary policy framework and the role of exchange rate
on economic growth have found positive relationship between economic growth and stable exchange rate
regimes.
Gunther Schnabl (2007) argues that for small open economies in the economic- catch-up process, fixed
exchange rates provide a more stable environment for the adjustment of asset and labor markets. Huang
and Malhotra (2004) findings suggest that fixed and managed float outperform floating exchange rate
regime in terms of growth in developing economies. The most inspiring study on the subject is one by
Eichengreen (2008). The study concludes that the exchange rate policy is an important enabling
condition for the economic growth; that maintaining the exchange rate at competitive levels and avoiding
excessive volatility are important factors to capitalize on disciplined labor force for rapid industrialization
and creating an investment friendly climate.
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Rodrik (1997) finds no significant statistical association between Capital Account Openness and Growth.
Jenkins (2005) argues that, the structural imbalances and weak financial sector suggest that liberalization
of the Trade and Exchange Rate do not address the issue of All Inclusive Growth. The findings further
suggest the overall impact of Liberalization of Trade and Exchange Rate on employment is negative.
Kasekende, L .A. (2000) has discussed the overall experience of CAL in Uganda. Kasekende, L.A (1998)
on Capital Account Liberalization and Poverty, highlights the challenges of CAL in Poverty Alleviation.
Nissanke M and Aryeetey (2006) have analyzed the fragmented and segmented nature of Financial
Market in Sub-Saharan Africa.
The basis of the present study
Table 1.1 gives a snapshot of the economic performance post financial liberalization and adaptation of
free float and open trade policy.
YEAR AVERAGE
YEARLY
EXCHANGE
RATE
GDP
GROWTH
RATE AT
CONSTANT
PRICE 2002
2000 1644.48 - -
GDP
GROWTH
RATE PER
CAPITA
CONSTANT
PRICE 2002
EXPORT
AS % OF
GDP
IMPORT
AS % OF
GDP
CPI
BASE
2005
2001 1755.43 8.8 5.3 11.52 23.81 82.03
2002 1797.54 7.1 3.7 11.21 25.06 81.8
2003 1963.94 6.2 2.8 11.39 25.2 88.90
2004 1809.88 5.8 2.5 12.72 22.81 92.21
2005 1781.00 10 6.5 14.2 24.85 100
2006 1831.43 7 3.7 15.31 28.42 107.31
2007 1723.49 8.1 4.7 16.74 30.08 113.91
2008 1720.44 10.4 6.9 24.28 31.98 127.16
2009 2030.49 5.2 1.9 23.39 34.64 144.26
2010 2177.56
Source: Uganda Bureau of Statistics/data.worldbank.org
The Tentative Interpretation
The primary analysis of economic data suggests that free float and Open trade has not contributed to the
robust growth. The Exchange rate variability is closely linked with the volatile episodes of Inflation.
Since the launch of Financial Liberalization and adaptation of Market –Based Exchange Rate policy in
Uganda, the domestic currency has depreciated more than 100% (the official Inter-bank Rate during Jan
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1992 was USD/UGX 970 and during Aug 2009 is 2070). The fiscal deficit minus grants has increased
from 2 % (in 1991) to 13% (in 2004) of GDP. Although trade volumes grew after liberalization, the
country’s import grew at much faster pace than export. The export as a percentage of GDP have grown
from 11.52% (2001) to 23.39 % (2009) while the import as a percentage of GDP has grown from 23.81%
(2001) to 34.64% (2009). The GDP growth rate at constant price of 2002 is 8.8% in 2001 to 5.2 in 2009.
Per Capita GDP growth at constant price of 2002 is 5.3 % in 2001 to 1.9 % in 2009.
In practice, all inflation targeting central banks target the headline inflation. In transition economies, a
large part of the consumption basket of average household is accounted for by food and energy. In such
scenario, targeting core or headline inflation is not feasible and politically acceptable (Gill Hammond et al
2009). The relative weight in CPI basket in Uganda on Food is 27%. The real problem is that the
depreciating effects of the currency are quickly passed on to the end users and the appreciating effects of
the exchange rate are not adjusted particularly in non-traded items. Another negative aspect of inflation
targeting is that the burden of adjustment mainly falls on the labor particularly in unorganized sector of
the economy. Open, imperfect and unregulated FOREX market is a major cause of price- instability in
Uganda.
Moreover, the exchange rate channel is a rapid source for transmitting the inflationary effects. In an
economy where prices of imported goods are quoted in foreign currency and are sold to consumer for
local currency at the rate prevailing exchange rate. In such a case, depreciation effects of local currency
will be automatically transmitted to the consumer prices in a high inflation economy or in highly
dollarized economies. In inflation targeting approach, monetary authority is left with few choices like
increasing interest rate. When the inflationary pressures arise from external shocks and high food prices,
interest rate hike can hardly deliver in imperfect and underdeveloped financial markets.
This paper is a preliminary discussion for thinking beyond the free float and inflation targeting approach
thereby exploring the feasibility of exchange rate targeting or managed float approach as a development
instrument in Uganda. Arguments in favor of exchange rate targeting are many. The leveling out of
currency fluctuations reduces uncertainty and is conducive for stimulating trade and industrial activities.
As exchange rate targeting is not compatible with free flow of capital, a sector specific scrutiny of capital
flows is needed. Capital flows for substituting imports or industrialization should be given priority and
capital flows related to real estates should be taxed. The important condition of the success of ERT is the
implementation of protective trade policies thereby protecting domestic industries in the short run. This is
what has exactly been done by developed countries and emerging economies during their early stages of
industrialization.
The widespread use of foreign currency and foreign currency deposits in private portfolios increases the
sensitivity of domestic money demand to interest rates and inflation. The response of inflation and capital
flows to money supply shocks will be quantitatively high and unpredictable. (Christopher Adam, 2009). It
may also affect the deepening of domestic financial markets. Destabilizing surges of inflows and outflows
of speculative capital occur suddenly and have been a regular feature of the financial system, so it is
important for Uganda to be able to deploy effective capital controls whenever it considers it necessary.
The common problem at present may be dealing with outflows of capital including capital flight by elite
groups, but commodity dependent countries also experienced speculative capital inflows during the recent
boom in world prices, and short-term measures may be necessary now to slow down the outflow of
speculative portfolio investment.
The problem of trade deficits can be solved partially via import substitution programs and channeling
some portion of accumulated reserves to exchange rate stabilization fund in the central banks. Global
financial institutions can also assign some funds for stabilizing exchange rate for small and poor countries
that are facing tough challenges from the large- sized emerging markets, in the terms of trade
competiveness and productivity. This paper is also focuses on some implementation issues in the
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financial markets. FOREX and banking related regulations are key ingredients to successful monetary
operations. Informal channels of money lending and FOREX operations through FOREX bureaus are
often distorting the interest rate and exchange rate movements.
Conclusions
Managing the exchange rate through a managed float requires resources and policy capabilities. However,
it allows greater macroeconomic policy options. There can be no single model of exchange rate
management applicable to East African countries, but there is increasing consensus that the extreme
solution of purely floating rates do not work. Managing the exchange rate through a managed float, for
example, would support fiscal policy by helping to avoid depreciation because of fears of inflation and
aim to check the volatility of the rate following external shocks.
A stable exchange rate in the region, coherently designed and implemented with fiscal and trade policies,
is perhaps the best contribution to the macroeconomic management focusing on price stability and
equitable growth. The biggest challenge in exchange rate targeting approach is to measure the impact of
foreign shocks passing through the exchange rate on the economy. Another important challenge is to
model target zones for exchange rate targeting regime.
References
Annual Reports and Historical Data on Exchange Rate on www.bou.or.ug
Anguyo F.(2008). “ Exchange rate pass through to inflation in Uganda: evidence from a vector error
correction model ”.Bank of Uganda Working Paper WP/09/08
Christopher Adam (2009).” The conduct of monetary policy in Uganda: an assessment ”. Kampala,
Economic Policy Research Centre (EPRC), Uganda
Eichengreen,B (2008). “ Commission on Growth and Development”. WP No. 4
Eichengreen, B and Hausman, R (1999).” Exchange Rate and Financial Fragility” . NBER Working Paper
10036.
Gill Hammond et al (2009). “ Monetary policy challenges for emerging market economies” , Bank of
England Publication –Monthly Policy, 2009
Gunther Schnabl (2007).” Exchange Rate Volatility and Growth in small open economies at the EMU
periphery” ECB WP/773/2007 retrieved April 14 from www.ecb.int/pub/pdf/scpwps/ecbwp773.pdf
Huang,H and Malhotra ,P (2004). “ Exchange rate regimes and economic growth:evidence from
developing Asian and Advanced European Economies” . IMF WP,10673,p.1-26
Jenkins, Rhys(2005).”Globalization of Production, Employment and Poverty: three macro-meso-micro
studies”, 17(41:601-25). European Journal of Development Research .
Kasekende L (1998).” Capital Account Liberalization and Poverty”
(www.brettonwoodsprojects.org/topic/financial/f22gowithflowspt3.pdf.
Kasekende L (2000). “Capital Account Liberalization: the Ugandan Experience ”. A paper presented at
the Overseas Development Institute.
Nisssanke M and Aryeetey E (2006).” Institutional analysis of financial market fragmentation in sub-
Saharan Africa” . WIDER Research Paper No. 2006/87. Helsinki: World Institute for Development
Economics Research.
Rodrik D (1998).” Who need Capital Account Convertibility ? ”: Princeton Essays in International
Finance, 207;55-65
Rodrik D (1997). “Where did all the growth go? External shocks, social conflicts and growth collapses”.
http://ksghome.harvard.edu/-drodrik/conftext.pdf (assessed 12 April 2007).
(2007). Economic Development in Africa: Reclaiming UNCTAD Policy Space
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Track 3: Energy, Natural resources, and Environment
82

Abstract
Challenges of Oil Revenue Management in Nigeria
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Eleonu, C. Charles rev.charleseleonu@yahoo
School of Humanities /Social Sciences College of Arts and Science, Port Harcourt, Nigeria
It is significant to know how the huge revenue generated in Nigeria is managed in the face of perpetual
underdevelopment. Nigeria’s oil wheeled economy seems not spinning smoothly in the light of the huge oil
sector revenue. Oil and gas actually generate great wealth, accounting for 95% of the nations export and
state revenues. The positive direct oil benefits are yet to be effectively translated to economic success. The
inhibiting challenges are those of political leadership, corruption, neglect of women, illiteracy, among
others. The end results have been perpetual underdevelopment and continual dependence on economically
advanced countries. Political leaders are expected to manage the oil revenue to the benefits of the generality
of the Nigerian citizens.
Introduction
There are factors resulting in irresponsible management and lack of accountability amounting to
failure of Nigerian economy. The IA World Fact book 2010 statistics, project that Nigeria is
endowed with 36,220,000,000(36.2 billion barrels-5.76X 109 m3) of proven oil reserves, making
the country second on Africa’s proven oil reserve chart, and ranking the country as the second
largest oil producer in Africa, globally the sixteenth behind Algeria. Nigeria is the 8th largest
exporter in the world, (with a 2007 estimated export capacity of 2,327,000) and largest oil exporter
in Africa ahead of Algeria, Libya, Angola, Equatorial Guinea and Egypt. In Nigeria oil, gas and
minerals, actually generate great wealth. Unlike some Western, Middle East and Asian
counterparts, economic success stories in Nigeria is a mirage. Transparency International findings
suggest that most oil-producing nations including Nigeria are also rife with corruption, and calls on
oil companies to provide more information about their operations to help clean up the market
(Associated Press, AP London, October 19 2004). In Nigeria, corruption reigns and the gulf
between the rich and the poor is extreme, essential infrastructure and amenities such as roads,
water, electricity etc are lacking.
The importance of oil revenue management can not be overemphasized. Electricity, education and
healthcare which are in poor state and short supply will be provided, while pollution, poverty and
barefaced corruption will be drastically reduced. The benefits of oil resources can now be counted
in Nigeria because oil revenues will be judiciously used as foundation for a widespread economic
development. Nigerian economy should have become considerably competitive and reasonably
viable, oil resources will be channeled to providing quality infrastructure, flexible and efficient
markets, healthy, well educated workforce, high levels of technological readiness and innovative
capacity. The present Nigerian out right sick, ailing or laboring economy will no longer be weighed
down by weaknesses in the institutional infrastructure. In this wise, it is significant for Nigeria to
have clearly defined fiscal policies, efficient government operations, as well as stable business
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environments. Nigeria must rise against rebellion with the force of arms. The expectation of
improved well being by Nigeria is not out of place as petro-dollars can create powerful economic
incentives for economic and social development, poverty reduction and structural advancement.
Nigerian government need to develop prudent fiscal policies that can enable governments to invest
oil revenues heavily in education, infrastructure and the maintenance of a broad array of social
services.
Oil as Strategic Material in World Politics
Contemporary international politics of oil is mainly about the broader political economy. Due to the
enormous strategic importance of energy for every government, oil issues have often been used to
illustrate the changing relationship between the state and business. Large private oil corporations
influence public policy concerning trade and investment policies, and the broader regulatory
environment. All of these issues highlight the diversity and complexity of the international politics
of oil. A range of theoretical perspectives explore the influence of oil in distinct areas such as,
foreign policy, the environment, development and conflict, and state-business relations. Verrier
(1983) explained that oil is a weapon in use in international politics. He examined the role of the
British government in the Nigerian civil war of 1967 and observed the British use of oil as a
weapon, particularly referencing the Draft (Defence Pact) Agreement between the Government of
the United Kingdom and Nigeria in 1962. Honorat (1987), identified the role of the oil industry in
international economic relations, as directed by their home countries. Throughout the second half
of the 20th century, oil has been at the heart of foreign policy. The Suez Crisis in 1956, the 1973
Arab oil embargo, the consequences of the Iran-Iraq War in 1980, the two Gulf Wars in 1990 and
2003 most visibly illustrate how oil has been implicated in international relations.
American dependence on oil imports has grown from 35% in 1973 to 60% by the end of 2006. The
Energy Information Administration projects that U.S. oil imports will remain flat and consumption
will grow, so net imports will decline to 54% of U.S. oil consumption by 2030. According to the
Department of Energy, the top oil exporters to the United States in May 2008 were Canada, Saudi
Arabia, Mexico, Venezuela, and Nigeria (in order from most exports to least).
Ex-CIA director James Woolsey and U.S. Senator Richard Lugar wrote: Energy is vital to a
country's security and material well-being. A state unable to provide its people with adequate
energy supplies or desiring added leverage over other people often resorts to force. Consider
Saddam Hussein's 1990 invasion of Kuwait, driven by his desire to control more of the world's oil
reserves, and the international response to this threat. The underlying goal of the U.N. force, which
included 500,000 American troops, was to ensure continued and unfettered access to petroleum.
The United States oil politics indicates the degree of US dependence on foreign oil. Approximately
40% of the energy consumed annually by the US is produced by burning oil. As of 2008, more than
two-thirds of US oil is imported. With approximately 5% of the world's population, the United
States is responsible for approximately 25% of annual global oil consumption and according to
2008 estimates has a per- person daily consumption rate more than double that of the European
Union, whose population is significantly greater. American dependence on oil imports has grown
from 35% in 1973 to 60% by the end of 2006. The US Energy Information Administration, projects
that U.S. oil imports will remain flat and consumption will grow higher. On Oil and Economic
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Well-Being, it is commented that the economic aspect of our oil dependence is the area that
Americans feel most directly. Oil at $60 per barrel and gas pump prices well over $2 per gallon hit
Americans where it hurts most. The fact is that “China’s large and rapidly growing demand for oil
is putting pressure on global oil supplies. U.S. Energy Department predicts that, with the rapid
development of India and China, annual global Consumption will rise from over 78 million barrels
of oil a day to over 119 million barrels by 2025. Absent efforts to reduce American consumption,
these new demands will lead to soaring oil prices, inflation and a loss of America’s trade
advantage. Both American consumers and the U.S. economy are already suffering from the
cumulative effect of recent increases in gas prices. Even now, fully one quarter of the U.S. trade
deficit is associated with oil imports. By some estimates, America loses 27,000 jobs for every
billion dollars of additional oil imports. American dependence on foreign oil is a drain on our
economy and leaves us vulnerable to unstable oil prices set by those without our best interests in
mind. One needs only look at the impact of Hurricane Katrina to see how oil and our economy are
inextricably linked. Our present dependency creates another vulnerability to our economy, attacks
on oil infrastructure. According to the Department of Energy, the top oil exporters to the United
States in May 2008 were Canada, Saudi Arabia, Mexico, Venezuela, and Nigeria. While others are
complaining, Nigeria should effectively mage her oil revenue for it is a blessing and not a curse.
History of Oil in Nigeria
Odozi (2010) recalls that Oil was first discovered in Nigeria in 1956 at Oloibiri in the Niger Delta
after nearly 50 years of exploration. Nigeria became an oil producing country in 1958, with the
coming on stream of its first oil field producing about 5,000 bpd at the time. After more discoveries
were made, the oil fields became operational in the 1960s. By the late 1960s and early 1970s,
Nigeria had achieved an output level of over 2million barrels per day bpd. Nigeria joined OPEC in
1977 and the out put rose to 2.4m bpd as of 1979. Though production has witnessed booms and
busts, Nigeria was able to achieve a record level of 2.5m bpd in 2004.
Oil Revenue Effects and Impacts on Nigerian Economy
Social Conflict and Global Effects
Rising oil and gas prices have only added to geopolitical instability in the world’s oil and gasproducing
regions. The experience is that the more oil flow, the more oil income, then more
corruption, and social conflict. In its 2008 Report on Revenue, Transparency International, TI,
highlights that “high revenues from the extractive industries have often fueled corruption, social
conflicts, economic stagnation, inequality in host communities and organizations international
peace. The over-dependence of several major African nation states on oil funded economy is
unhealthy. The impact of the OEC regulated fluctuations in the global oil business, the wars and
instability in most of the Middle East and Gulf States, local and international terrorism, America
and China’s insatiable appetite for oil, corruption and public sector collapse, drags Nigeria by the
tail which adversely affect social life in Nigeria. The Ogoni people of Rivers State in Nigeria in
1991 lamented that the federal government refused to pay oil royalties and mining rents amounting
to an estimated $20million for petroleum mined in Ogoni land for over three decades ago. On
January 4, 1993 this was followed up by the Ogoni. This eventually led to the execution of Ken
Saro-Wiwa, the outstanding Ogoni leader and spokesman on November 10, 1995 (Wilcox B.
1992). The Ogoni people are not alone in the pursuit for change of the status quo. The Ogbia
communities in Old Rivers State and Ikot Abasi communities in Cross River State of Nigeria had
earlier demonstrated in 1987. Over 38 houses were destroyed due to instrument of state Police
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intervention. There was also a demand for compensation of N38million from the federal
government for oil exploration and exploitation that had devastated the area. The Itshekiri, Ijaw and
Urhobo rioted and killed due to oil related matters. The Kaima declaration of 1998 was geared
towards safeguarding and control of the Ijaw and Niger Delta in general. The governors of the
Niger Delta states of Rivers, Delta, Abia, and Akwa Ibom had severally made presentation for
increased oil revenue allocation to at least 10 percent for the development of Niger Delta region,
but only three percent was granted by the federal government on June 1992.
Corruption and Weak Institutions
The abuse of political power for private gain deprives Nigeria vital public services, which oil
income could fund if properly managed. There is favoritism in government decision-making even
in allocating oil blocs, an insufficiently independent judiciary, and security costs associated with
high levels of crime and corruption. Oil businesses in Nigeria are associated with uncertainties
stemming from weak institutions, corruption and crime, favoritism, easily influenced judiciary and
a weak property rights regime. Nigeria lack genuine credibility and convincing acceptability by
majority of the people. The private sector in Nigeria as in most African countries has serious
misgivings about the independence of the judiciary and the administration of justice. Legal redress
in Nigeria is not expeditious and not transparent. It is expensive and such environment cannot
provide veritable business atmosphere for investors and government to utilize and consolidate oil
revenues. Odozi explains that Nigeria is prone to corruption arising from the pressures and
opportunities associated with the huge flows of revenue.
Environmental Impact
The environmental impact on Nigeria of Western development is alarming. The clearing of forests
for timber exports increases vulnerability to erosion, river silting, landslides, flooding, and loss of
habitats for plant and animal species are examples. In particular, gas flaring from oil production,
where unusable waste emissions are burned off, pumps large amounts of carbon dioxide into the
atmosphere in the Niger Delta. The environmental and social impact of extractive industries is
already acknowledged as a key factor in conflicts in Sudan and Nigeria. It is estimated that flaring
in the Niger Delta emits 70 million tones (68.8 million tons) of CO2 a year. The environmental and
social impact of extractive industries is already acknowledged as a key factor in conflicts in Sudan
and Nigeria. Indeed, non-governmental organizations fear that access to natural resources will fuel
the kind of violent conflict seen recently in Sierra Leone, the Democratic Republic of the Congo,
and Liberia in Nigeria. The corporate responsibility and the operating standards of the oil
companies and other businesses in the region are below the internationally acceptable standards.
The situation has been that oil companies and other businesses of oil exploration and exploitation
for over four decades are done without a standard environmental impact assessment. Niger Delta
region is the only oil zone in the world where the people are subjected to cope with oil spillage. It is
argued that the Federal, state and local governments in Nigeria act as catalysts that provide
production covering to the oil companies’ lack of the social responsibility.
Ailing Economy and Policies
The benefits of oil resources can not be counted in Nigeria because oil revenues are not judiciously
used as foundations for a widespread economic development. Nigerian economy should have
become considerably competitive and reasonably viable, but oil resources is not channeled to
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providing quality infrastructure, flexible and efficient markets, healthy, well educated workforce,
high levels of technological readiness and innovative capacity. What presently exists in Nigeria are
out right sick, ailing or laboring economy weighed down by weaknesses in the institutional
infrastructure. Nigeria suffers from poorly defined fiscal policies, undue influence, inefficient
government operations, as well as unstable business environments. Nigeria is down because of poor
macroeconomic management policies despite the huge oil export revenues.
Despite the vast oil resources in the Niger delta, the region remains poor. Gross National Product
(GNP) per Capita in the Niger Delta region is below average. The total population of the core Niger
Delta region of Rivers, Bayelsa and Delta states is estimated to be about eight (8) million with 75%
living in rural communities. In terms of natural resources, the Niger Delta region is the richest part
of the country including human resources. Not withstanding its tremendous natural and human
resource base, the region’s potential for sustainable development remains unfulfilled. Frequent
geological and climatologically changes, environmental degradation and economic woes are the
basic threats to its future survival.
It is argued that over 30 years of oil exploration, the region seems not to witness any significant
benefit. Resource-Use decisions are driven by development initiatives that are not directed at the
real development needs of the region with the resulting lack in genuine development, poor
healthcare and medical facilities, stagnant agricultural productivity and very limited opportunities
in the urban areas, rapid population growth and tenuous property rights. The Niger Delta is
particularly at risk because of its low elevation over extensively large areas. The Niger Delta region
is therefore observed to be within perspective highly under developed despite her prime position in
the production of the wealth of the Nigerian nation.
The exploitation and exploration of oil by the oil companies in the Niger Delta and its attendant
abuse on the environment has been more conspicuous. It has been pointed out that the oil producing
areas suffer from grave damages as a result of the activities of the oil companies. Thus serious of
damages has been done to the aquatic marine life in those communities.
Management and Accountability
Management is explained as the act of running and controlling a business, the people who run and
control a business or similar organization, skill of dealing with people or situation successfully.
Management and accountability means being held to account for entrusted resources. It involves
accounting system which is a set of records, procedures and equipment that routinely deals with the
events affecting the financial performance and position of an entity (Horngreen, 1983).
Management and accountability in this regard carries an obligation to render an account of how one
made use of the resources entrusted in his care, and to submit to an examination of that account by
him or on behalf of the trustee to whom he is accountable. Accountability in management is a
condition for which individuals who exercise power are constrained by external and internal norms.
Defined in traditional, legal or formal terms, management and accountability refers to the
institution of checks and balances in an administrative system. Poor management leads to
inefficient performance of government and public enterprises. Public management and
accountability has been betrayed by some individuals in government. So much is been said about
the need for effective public management of oil revenue in Nigeria.
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Revenue
Revenue is the money that a government receives from taxes or that an organization etc receives
from its business. It is further explained to mean government income that is, the income of a
government from all sources used to pay for a nation’s expenses; income from business, money
that comes into a business from all the sale of goods or services.
Theoretical Framework of Analysis
The theoretical framework of analysis adopted in this research is the political economy approach.
Political economy see the society as made up of antagonistic economic interests. It explains that
economic positions determine social life, values and thought, observing that identical economic
interest combine to form social classes whereby political machinery is controlled. Ihonvbere
(1990), writing on Nigeria as Africa’s great power: constraints and prospect for the 1990s reasoned
that political economy was an appropriate approach to the study of foreign policy. According to
Amale (2002), the existing international studies literature, especially as it concerns foreign policy
ignores the plight of underdeveloped countries such as Nigeria. He pointed out the appropriateness
of the political economy approach such as, providing the framework for understanding some of the
theoretical problems in use by scholars. Political economy has a multi-disciplinary approach. It
takes care of the overlapping character of economics and politics as well as the class cleavages
which facilitate an understanding of state policies on the domestic and foreign scenes. Political
economy also helps in the understanding of the nature of unequal relationship between the
advanced and less developed states from a historical perspective. However the flexibility that the
political economy approach requires may not come easily since it requires unhinging, from existing
popular international studies literature that most scholars and practitioners of foreign policy are
used to.
Challenges of Effective Oil Revenue Management in Nigeria
Several factors affect management of public funds in Nigeria, and these include:
Challenge of Political Leadership
Political leaders in Nigeria lack the required political will to control and supervise various units
under them. These political leaders do not apply substantial sanctions against discrepancies to deter
others. Nigerian political leaders lack accountability and have no interest in financial rules. Most
officials are not answerable to their immediate superiors due to improper political appointments
(Abisoye 1994). Accountability is the product of good leadership. Every public officer in a
leadership hierarchy is a custodian of public resources and should be accountable to the citizenry
during and after the tenure of his leadership. Many public officers do not loss political power or
office in the face of allegation of corruption or when they have individually or collectively not
conformed with, violated or thwarted the objectives of the owners of the resources. They are rather
rewarded, even re-appointed by political leaders.
Challenge of Fiscal Accountability.
Fiscal accountability which refers to the responsibility for public funds is lacking in Nigeria. In
Nigeria answerable public servants resist the pursuit of personal gain in the performance of official
duties. Government fails to provide basic infrastructural facilities for its citizens with its limited
resources because there is no proper monetary management and accountability by public servants
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who are entrusted with the resources. Organizations require managerial coordination, adequate and
effective monetary management to achieve set goals and objectives of that organization. To achieve
results proper allocation and utilization of resources must be ensured. All of these are absent in
Nigeria because there is no check, weak legal base and lack of accountability. Accountability is the
rendition of accounts of resources entrusted to officers by another person or group of persons
(Asechemie, 1995:25). Most public officers are not held responsible for misappropriation of
resources entrusted into their hands. Falae, (1984:15) presenting report of Abisoye panel said “The
report on the Public Accounts Committee is frustrating because of the unanswered queries to
embezzlers who had either left the government service or died without paying back what they
corruptly acquired”. NNPC does not respect its own budgets and its plans. The unwritten code in
NNPC, style of management is…., loot all the lootables” (Abisoye, 1994:10). Based on these
remarks, public officers are very much aware of what accountability is all about, but it is hardly
rendered or totally ignored in Nigeria.
Challenge of Inefficient Monetary Policy
Efficient monetary management and accountability of public funds in Nigeria is affected by nonadherence
to monetary policies and regulations. Valuable monetary policy, a guide to the
correctness and credibility of accounting information and reports are not adhered to in Nigeria.
Because of non-adherence to monetary policies, the House of Representatives Committee on the
Public Accounts, ordered the Accountant-General of the Federation to probe the N25.8 billion
pension disbursement in 2002 by the Directorate of Military Pension (DMP). The expenditure was
made by the DMP without involving the Office of the Auditor-General for the Federation for
proper monitoring as required by law. Independence is a vital ingredient in the account’s position.
Public servants especially those in the accounting system are often subject to the control of others,
from within and outside the organization.
Challenge of Management Interference
In Nigeria complete impartiality and independence is not totally attainable in the accounting
department because it cannot be completely divorced from management. Management decisions
are binding on the entire establishment and the accounting department merely reports on the
financial aspect of such decisions (Adebayo, 1991).
Challenge of Corruption and Fraud
Externally public parastatals are set up by government but the management teams are corrupt
politicians. Certain corrupt top government functionaries see their offices merely as an opportunity
to get rich quick. Fubara posited that government seems to ignore the separate legal entity status
created by laws of these enterprises and tends not to have ministerial control over these agencies.
According to him, “public enterprises are politicized organs and this is obvious from the fact that
most of the persons in top management positions are political instruments of the powers behind the
veil”. In Nigeria public wealth is usually regarded as limitless, a national cake from which any
individual in position could cut personal share at will and get away with it. This leads to very weak
public against excesses of public officers which frequently includes deliberate misallocation and
misappropriation of public funds. Fraud is an act or course of deception deliberately practiced to
gain unlawful or unfair advantage especially where such deception is directed to the detriment of
others. Incessant fraud in government and the public sector is a sad situation that has plagued
Nigeria as a whole. The then Senate President of Nigeria, Dr Chuba Okadigbo and five other
Senators were asked, to resign from their respective duties due to offence of embezzlement and
misappropriation of funds in 2000. Persistent embezzlement and fraudulent activities in Nigeria,
the administration of Chief Olusegun Obasanjo embarked on Privatization of the nations’
companies, despite resistance from the general public.
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Recruitment Style Challenge
One of the banes of public sector accounting in Nigeria is the recruitment of totally unsuitable
candidates in preference to candidates of high merit. This undermines efficiency and performance.
As Fubara pointed out, Directors and Chief Executives appointed by government most times have
neither corporate nor professional competence accordingly. Irekponor and Tamunukubie (2010)
observed that recent studies on human capital from Scandinavian countries, Buleh et al (2001),
Johnson et al (2001), and Mouritsen et al (2001, 2002), continue to confirm the growing presence
of intellectual capital thinking. Ordonez de Pablo (2003) on the Spanish experience supports the
similar wave of thought. If an individual lacks previous experience, or has no background, he
should be formally trained and tested before allowed to work. The deployment of an individual to a
task for which he is most qualified is an essential factor for efficiency.
Challenge of Education
Lack of education on the part of citizens will hinders effective political awareness and
consciousness, enlightenment, mobilization and activation as essential ingredients for control and
management of oil revenue in Nigeria. No country can hope to place itself on the path of a stable
economic progress, sustainable development and greatness without enhanced access to education.
Despite the resourcefulness of Nigerian people, a significant proportion of the citizens are
illiterates. Oruwari (1996) observed that in 1990, “only about 10% of Nigerian women are literate.”
Illiteracy inhibits the effective participation of people in democracy, economic, civic, social and
technological spheres. Education of the people on what obtains in the oil and gas industry would
serve to open the eyes of the people on what really exists and what they can expect, when and how.
Challenge of Poverty
Kalagbor (2007), Anikpo (1995), notes that poverty is a historical process of eliminating people
from decision making machinery. It is manifested in hunger, lack of money, shelter, poor education
etc. In Nigeria it is used to pervert participation in oil revenue management against the populace.
African governments need to develop prudent fiscal policies that can enable governments to invest
oil revenues heavily in education, infrastructure and the maintenance of a broad array of social
services. Such is the case of most Nordic countries: Finland, Sweden, Denmark and Norway which
rank among the relatively least corrupt in the world.
Advanced Powers Influence
A number of initiatives have to be launched in an attempt to deal with Africa's resource curse
before the continent is further fragmented and its precious natural wealth more exploited. Charities
and NGOs believe that governments that are of OECD members are reluctant to investigate
allegations of corruption or complicity in human rights abuses against Western companies. In
Equatorial Guinea where US companies such as ExxonMobil and Chevron are active, the regime in
power has been accused of torture, electoral fraud, and corruption. In the face of this, President
Nguema was welcomed at the US State Department by Secretary of State Condoleezza Rice in
April 2006 and described as a "good friend."
Weak and Unreliable Judiciary
Writing on Judiciary’s Dubious Role, Ajaero reveals frivolous court orders and other surreptitious
moves in the top echelon of the Nigerian judiciary. According to him this cast doubts on the
impartiality role of the judiciary in the ongoing electoral process. That the judiciary considered as
the hope for strengthening democracy in Nigeria is releasing wrong signals especially in the face up
between Justice Aloysius Katsina-Alu, chief justice of Nigeria and Justice Isa Ayo Salami,
president of the Court of Appeal. Newswatch February 21, 2011 p11, explains that a letter dated
February 4, 2011 addressed to the CJN; Justice Salami accused the move to promote him by the
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
CJN to Supreme Court as unholy. Justice Salami states that removing him as head of the Court of
Appeal, was in order to appoint a stooge that would do the CJN biddings with regards to April 2011
post election litigations. Tuesday February 8, Justice Salami sued Kaisina- Alu to the Federal High
Court Abuja over the ’unholy’ plan to elevate him to the Supreme Court.. In an affidavit Justice
Salami deposed and alleged that Katsina-Alu asked him to compromise the Court of Appeal’s
verdict in the protracted Sokoto governorship legal tussle by either disbanding the original panel
which may give verdict against Magatakardi Wamakko, governor of Sokoto State or to direct the
panel to give judgment in the Governor’s favor.
Conclusion
The expectation of improved well being by Nigeria is legitimate, considering the fact that petrodollars
can create powerful economic incentives for economic growth, social advancement and
poverty reduction. In Nigeria, corruption reigns supreme, the gulf between the rich and the poor is
extreme, essential infrastructure and amenities such as roads, electricity, education and healthcare
are in poor state and short supply. Often, pollution joins with poverty and barefaced corruption,
until resistance and rebellion spring up, often with the force of arms. Considering the fact that oil
revenues do not necessarily translate into benefits and enhanced livelihoods in the short term, it
rests on the government, non-governmental organizations end civil society groups to educate the
people on what obtains in the oil and gas industry. The education would serve to open the eyes of
the people on what really exists and what they can expect, when and how. Recruitment of
unqualified officials in government and the public sector and lack of independent working
environment for accounting officials is a serious constraint in management of oil revenue in
Nigeria. Factors of fraud, embezzlement, lack of external control and regular auditing procedures
are major constraints to management of oil revenue in Nigeria. Government do not put in place a
monitoring team that will examine every aspect of expenditure in the public service as to ensure its
adherence to budgetary provisions. Political leaders do not use substantial sanctions against
discrepancies to serve as deterrent to others. Constraints of fraud, bureaucratic rigidity and
conservatism, lack of accountability, recruitment and employment of unsuitable officials.
Implications
More radical reforms will be necessary if Nigeria and other African economies are to increase
productivity and stay globally competitive on strength of oil revenues. For successful oil revenue
management in Nigeria there is the need for transparent and accountable management of revenues
generated and oil companies could help stamp out corruption by publishing details of the fees,
royalties and other payments made to governments. Political leaders should strengthen the
supervision machinery in government and the public service. For effective oil revenue management
that will succor to the generality of the citizenry, the government should improve on the pay
package of public servants with an effective bonus scheme to ensure sanity, employee motivation
and also to curtail fraud in the system. There is need for comprehensive computerization of the
entire accounting system to allow for timely and reliable recording, analysis of data for effective
disseminating of information and for effective managerial decision. The recruitment of qualified
manpower and effective internal control are possible measure that can possibly eliminate
corruption or lack of accountability. Transparent governance is necessary. Improving transparency
lies in strengthening the accountability of decision-makers of host governments. This requires a
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strong role for civil society as well in monitoring processes and in constructive, partnerships with
companies and governments.
References
Abisoye, S. (1994) “Abisoye Panel Report on NNPC” Newswatch October 24 Nigeria.
Amale, Ayo S. (2002), The Constraints of Nigeria’s Economic Diplomacy in Ogwu and Olukoshi
(eds.) the Economic Diplomacy of the Nigerian State.
Aluko, Olajide (1990) Oil at Concessionary Prices for Africa 1960-1990 ed. by Olusanya, G. O.
and Akindele NIIA pp322-348.
Amale, Ayo S. (2002), The Constraints of Nigeria’s Economic Diplomacy in Ogwu and Olukoshi
(eds.) the Economic Diplomacy of the Nigerian State.
Anikpo, M. (1995) Poverty and the Democratic Process: The New Face of Mass Poverty in Nigeria
Uniport Press.
Adebayo, A. (1991) Principles and Practice of Public Administration in Nigeria. Ibadan: Spectrum
Book Ltd.
Asechemie D.S. (1 999) Anatomy of Public Sector Accounting in Nigeria. Port Harcourt: Sunray
Books Ltd. Encarta Dictionary (2009)
Betts, A. Eagleton-Pierce M. & Roemer-Mahler, A. (2006): ‘The International Politics of Oil,’’
St Anthony’s International Review Volume 2, Number 1, May pp 3-10.
Dokubo,A. M. 2004’’Niger Delta Peoples in the Nigerian State’’ The Angus, Vol.3. No.61 Nov. 9-
11. p4.
Erwin, Jerry (2006). "The Challenges Facing the Intelligence Community Regarding Global Oil
Depletion". Portland Peak Oil. http://www.portlandpeakoil.org/node/1116. Retrieved 2009-04-29.
Falae, 0. (1989) “The report of the Public Accounts Committee”: Daily Times, Nigeria. September
14.
Fubara, B .A. (1984) Negative Profitability Performances of Public Enterprises in developing
countries. A business Policy Anatomy. Journal of CPE, Vol.4, No.3.
Horngreen, C.T. (1983) Cost Accounting-A Managerial Emphasis, 5th Edition. New York, U. S .A.
Prentice Hall Inc.
Irekponor, A. and Tamunokubie, Paul (2010) Journal of Social Science and Development JSSD
Vol. 1 No.2 April 2010
Ihonvbere, Julius O. (1982), Resource Availability and Foreign Policy Change: The Impact of Oil
on Nigerian Foreign Policy since Independence Africa Spectrum.
Kalagbor, S.B (2007) Women and the Democratic Project in Nigeria: Signposts to Political
Empowerment, Journal of General Studies 2007, vol.1. No.1.
Nixon, R. M. (1973) “Address to the Nation about National Energy Policy,” November 25.
Nuka, Wilcox B. (1982)’’Ogoni Peoples Fury’’ The Guardian December 17, p13.
Oruwari, Yomi (1996) Women Development and the Nigeria Environment, Vantage Publishers,
Ibadan.
“United States: Rethinking the Axis of Oil,” The Economist, April 30, 2005, p.
.
92

Abstract
Land Based Sources of Pollution in Lagos Lagoon
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Oshisanya, K. I kharphioshi@yahoo.com
Nigeria Institute for Oceanography and Marine Research, Victoria Island, Lagos Nigeria.
Due to lack of recent and detailed scientific data on Lagos lagoon there is an urgent need for a precise qualitative
and quantitative assessment of the significant sources of land-based pollution in the region. In Lagos lagoon the
major source of pollution from land-based activities is constituted by litter, solid wastes, plastics and other marine
debris which threatens marine life, degrades the visual amenities of marine and coastal areas, with negative effects
on tourism and general aesthetics.
The major contaminants originate from various domestic discharges and run-offs (including markets, hospitals, etc.)
as well as industrial facilities (from breweries, food, textile, wood processing), Agricultural run-off, Oil and gas.
The main consequences are public health risks from the presence of sewage pathogens, eutrophication or oxygen
depletion due to excess load of nutrients and organic carbon as well as contamination of the marine and human
organisms through the aquatic food chain the water quality deterioration resulting from the insidious sewage runoff
phenomenon, in particular during the rainy season, posed a major risk to the coastal and marine environment
and to people health. The chronic lack of hygiene in most of these environments results in an increase in the number
of infections among the population, in particular among children, with the result that epidemics of typhoid, hepatitis
and malaria are common.
Introduction
Land-based sources of pollution of the urban area of Lagos are best understood giving an insight into the
structure and uniqueness of the Lagoon. The Lagos lagoon is the largest of the four lagoon systems of the
Gulf of Guinea. It stretches for about 25km from Cotonou in the Republic of Benin to the western edge of
the Niger Delta. The brackish water lagoon subtending the island of Lagos is generally located between
longitude 3” 10’ and 3” 45’E and latitude 6”15’and 6”15’N.
The estimated area of the main body of the lagoon is 150.5km 2 . These wide sheets of shallow water which
cover ancient river beds and creeks extend inland. The tidal range is small, only about 0.6 – 1.2m. The
interconnecting creeks are also very shallow and are sites of active silting and deposition of mud. Lagos,
like any other fast growing cities around the globe, pays the ultimate price; Pollution, due to a new and
trendy disposable lifestyle of the developing and developed countries. With a population just over ten
million is the largest and most industrialized city in Nigeria. Over sixty percent of Nigeria’s industrial
production facilities are located in Lagos. These include over 2000 industries on twelve industrial estates,
five of which contain the majority of large and medium-sized industries. .
The major sources of land based pollution in the city are textiles, food processing, metallurgical
(electroplating), rubber and plastics, pharmaceuticals and chemical industries and paint facilities. With the
exception of the treatment works at Agbara Estate and a few primary treatment facilities located in
industries, almost no wastewater is treated in Lagos. Most surveys show that industries discharge their
liquid effluents through ditches, shallow pits, gutters or trenches which eventually empty into the Lagos
lagoon (FMWH, 1983; Ajao 1990).
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Figure 1: Map of Lagos Lagoon.
Impacts of land-based pollution on Coastal Waters
The consequences of this unhealthy situation expose the environment to serious water pollution and the
resultant health hazards that may lead to serious epidemic not only in Lagos but also in neighbouring
coastal areas. The septic tank /soakaways and pit latrine systems also have negative impacts on
groundwater to gradual and steadily increasing pollution from septage indiscriminately discharged into
the Lagos lagoon system, since the water table of the State is very high, because majorities of the land are
reclaimed land.
Human excreta contain a lot of organisms, which are major vectors of water-related diseases. These
organisms include viruses, which can cause poliomyelitis, viral meningitis, hepatitis, fevers, diarrhoea:
Bacteria, which can lead to cholera, typhoid / paratyphoid, and diarrhoea: Protozoa, which cause
dysentery, colonic ulcers and diarrhoea: Helminths, which result to guinea worm, round worm, live flukes
and schistosomaiasis.
Likewise, the industrial wastewater is full of heavy metals, which results into chemical pollution of the
water bodies. Such heavy metals are mercury, arsenic, copper, cyanide, iron, lead, cadmium, chromium,
nickel, phenols etc which cause chronic diseases such as cancer in the inhabitants of the State and
neighbouring countries using the same coastal waters, because pollution has no boundary.
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As have been indicated above, the high level of urbanization and industrialization of the Lagos metropolis
and its environs with the inevitable generation and lack of management of land-based (point and diffuse)
pollution sources have led to undesirable impacts on the near shore coastal aquatic environment and biota.
Primary concerns are the effects of land based pollution on bio-diversity, the maintenance of a hitherto
viable artisanal commercial fisheries and the safety of humans exposed to the pollution occupationally
and through tropics relationships. The pollution impact are exacerbated in these low energy micro tidal
environment by a restricted circulation, and shallow interconnecting creeks which are also sites of active
silting and deposition of mud resulting in habitat modification or loss for the benthos.
The effective control of environmental pollution should be based on the best available information on the
sources that produce it and the quantities that are generated. Waste generated in the Lagos area thus
largely dependant on the sources, basically.
1. Domestic
This includes food waste, paper, plastics, glass, tin cans, wood, textile etc.
2. Commercial
This includes waste generated from Stores, Restaurants, Markets, Office buildings, Hotels, Print shops,
Service stations Auto Repair shops etc.
3. Institutional
Schools, Hospitals, Prisons, and Government Centres
4. Municipal
Street cleaning, Landscaping, Parks, Beaches and other recreation centres.
5. Industrial and Agricultural
This include waste generated from Construction, Fabrication, Light and Heavy Manufacturing,
Refineries, Chemical Plants, Demolition, producing material such as chemicals, these wastes often
contain several poisonous substances that will contaminate the soil. Pesticides and herbicides used by
farmers to increase crop yields also pollute the land when they are washed into the soil.
This knowledge is meaningfully essential for assessing the risk or hazard estimates with respect to human
safety and environmental health in general. Strategic control, management and development of actions
and options should be hinged on this knowledge in order to make impact in addressing environmental
problems.
The major handler of domestic and industrial solid waste in the city of Lagos is the Lagos State Waste
Management Authority (LAWMA). It operates five landfills or open dump sites for the land disposal of
domestic and industrial wastes. Many industrial establishments also contract out the disposal of their solid
wastes to private contractors. The dumping of such wastes is indiscriminate since contractors dump at any
convenient site. Waste generation expressed as per capita per day in Nigeria ranges from 0.21kg to 0.78kg
among the 15cities surveyed with a mean of 0.49kg/cap day (FMWH, 1983).
The initial assessment indicated that industrial sources (e.g grain milling and manufacturing of cement)
contribute substantially to particulate emissions in the Lagos area. SO2 and NO2 emissions were
particularly important from the manufacturing of cement while non-methane volatile organic compounds
(NMVOCs) were significantly released from beer brewing. Water effluents from industries in the Lagos
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area also show wastewater generation to be highest in form beverage and textile plants. The limited data
also indicated that food processing could contribute substantially to solid industrial waste, all types of
food processing dispose of large amounts of organic wastes creating high BOD, suspended solids and pH
problems.
Liquid effluents from domestic sources emanate from 5% of the population connected to a sewer network
and the rest of the population (95%) not connected to any sewer system. About 60% of the latter group
utilizes septic tanks from where sludge are periodically removed and emptied into the Lagos lagoon.
Sludge from such septic tanks have an estimated volume of 65.5% of the overall waste discharged.
Domestic effluents identified as direct sewage discharges and sludge discharges from septic tanks receive
little or no treatment before disposal into the lagoon.
Solid Wastes.
There are two sources of solid waste generation identified. These are domestic refuse and industrial solid
wastes with 718,875 tyr1 and 6430.5 tyr1 respectively for putrescible wastes, and 239625 tyr1 and 590.4
tyr1 for non-hazardous solid wastes. Solid wastes generated by industries are mainly composed of banal
refuse (cotton fibres from textile plants, packing cardboard, tyres and process sludge containing asbestos).
LAWMA classified industrial solid waste as having the following composition; putrescibles (5); glasses
(10); paper (40); hard plastics (6); plastic film (30); grit (1); wood (5); metal can (2) and inert (1) percent.
LAWMA projected an annual generation for about 200,000 mt of solid industrial waste for Lagos
metropolis in 1997 (Oresanya 1997), a rapid assessment of sources of air, water and land pollution should
fill some gaps in information and aid risk estimates regarding public health and the environment in
general so that adequate control strategy can be devised.
Exhaust emissions for Nigeria, Lagos State and Lagos metropolis are considered to be lower than
expected figures because the analysis does not consider the age and poor condition of the vehicle fleet
(over 50% used vehicles) and the impact of traffic congestion in the locations studied.
Other non-point sources of air pollution include emissions from heavy duty electric generators used in
industry.
Air pollution is not monitored by most industries. The only record of importance is the emission
inventory to investigate the pathways for the emissions of greenhouse gases and other toxic air pollutants
in Nigeria conducted from the FGN/EEC funded research in Environmental Monitoring and Impact
Assessment, emission rates were aggregated. At the national level, industrial emissions are second to
vehicular emissions in contributing to urban air pollution problems.
The amount and quality of information on industrial pollution in Nigeria is very poor. In this regard, a
rapid assessment of sources of air, water and land pollution should fill some gaps in information and aid
risk estimates regarding public health and the environment in general so that adequate control strategy can
be devised. However, the numerous benefits of motor vehicle transportation have at least been partially
offset by the air pollution generated by motor vehicles. Apart from environmental effects due to windborne
acid deposition, contribution to green house effect (CO, CFCs, HC, O3 and H2O as trace gases) and
destruction of the protective ozone layer globally, (Ajao, 2001).
The major pollutants from traffic exhaust are particulates, nitrogen oxides, non-methane volatile organic
components (NM-VOC), carbon monoxide, sulphur dioxides, polyaromatic hydrocarbon (PAHs) and
lead. Sulphur levels in Nigerian fuels are said to be low since the country produces sweet and medium
crude. The Nigerian Industrial Standards (NIS 116-198) specifies the maximum lead content gasoline to
be not more than 0.45 ug/L.
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Edited by Emmanuel Obuah
The concerns is for lead in gasoline and the health hazard for people occupationally exposed to chronic
concentration e.g. traffic wardens, policemen, street vendors, taxi and bus drivers, roadside mechanics etc
and frequently in urban centre like Lagos, motorists enduring traffic congestion on a daily basis.
Blood lead levels in traffic wardens have been found to be significantly higher than those in normal
subjects with lead levels increasing with age (World Bank 1997). Average lead level in Nigeria (10.2-8.
1ug/L) are far below figures recorded elsewhere in the world (29.2-34.5ug/L) and falls within the World
Health Organisation recommendations for exposure limits (40ug/L for men, 30ug/L for reproductive
women).
Increasing health risks could be anticipated from the use of electricity generators for private and
industrial energy supply following incessant power failures in Nigeria in cities and towns.
Current initiatives and constraints for sustainable development
In line with the present administration in Lagos State, Nigeria, initiative of ‘The new Lagos Mega-City
Project’, the State Government has commissioned about four major drainage, wastewater treatment and
water pollution studies co-funded with such international agencies as the World bank, the United
Kingdom Department for International Development (DFID), as well as with some other local and
International bodies. There have also been various “ad-hoc” and un-coordinated
Individually executed research studies on the water quality, land-based pollution and tidal aspects of the
near waters of the various stretches of the Lagos lagoon by Nigerian university academics and the
research staff of the Nigerian Institute for Oceanography and Marine Research. These laudable initiatives
are often hampered by lack of funding for experimental facilities and also regular collaborative interaction
with other national and international academic institutions and research organizations (e.g. Global
International Waters Assessment – GIWA).
There also appears to be lack of collaborative work with relevant State Government ministries and
local end users of the products of the research studies. There is a need to establish a mechanism for the
transfer of the valuable applied research being undertaken by the academic institutions and research
organization to the local and national end-users (government ministries, industrialists, engineering
consultants, etc), (Iwugo et al 2003).
Major identified needs
The immediate major needs identified in addressing the land-based coastal pollution of the Lagos State of
Nigeria are several but the following would appear to be the most prominent:
• Integrated Environmental Health Impact Studies of the current sanitation systems in use in the
State.
• Selection and adoption of sustainable water and wastewater treatment technology and
management systems for various parts of the State. Integrated Water Quality Monitoring of the
Lagos lagoon and a detailed study of the self-purification/assimilative capacity of critically
selected sections of the lagoon system.
• Establishment and development of a properly coordinated institutional framework that would
involve all stakeholders in the Lagos State aquatic ecosystem.
• Updating of the current topographical mapping of the whole of Metropolitan Lagos to facilitating
Master Planning development and project planning and implementation. (Iwugo et al 2003).
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Conclusion
The lack of information on pollution is a severe hindrance to pollution management. In the absence of
adequate data, government authorities are reluctant to take appropriate decisions on pollution abatement,
while industry remains sceptical of advantages to be gained from pollution prevention and control
measures. Land-based sources have been shown to be important contributors to pollution of the Lagos
lagoon.
Priority areas for government intervention are listed as: water contamination from industrial effluent;
sewage and sanitation problems arising from poor water supply and infrastructure; municipal solid waste
disposal and air pollution arising for vehicular emissions. This represents an initial inventory for
providing baseline information capable of allowing valid judgment for environmental action.
Acknowledgment
The author is grateful to the Nigerian institute for oceanography and marine research, Nigeria, for
providing the materials for this paper.
References
Ajao, E.A (1990). The influence of domestic and industrial effluents on population of sessile and
benthic organisms in the Lagos Lagoon, PhD Thesis.
Ajao, E.A, 2001.Management of environmental issues for sustainable fisheries production from
Aquaculture in Nigeria,pp 7-13.Proceedings of the 16 th Annual conference of the Fisheries Society Of
Nigeria (FISON),Maiduguri.
Federal ministry of works and Housing, 1983. The state of the environment in Nigeria.
Iwugo K.O, D’Arcy B & Andoh R (2003) Aspects of land-based pollution of an African coastal
megacity of Lagos. Paper presented at the Diffuse Pollution Conference, Dublin
2003.http://www.ucd.ie.dipcon/docs/theme14.theme14_32.PDF
World Bank (1997) World development report, 1997.
98

Abstract
On the Mitigation of Reversal Risk in Carbon Offset Projects
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Joshua Okeyo Anyangah, Joshua.anyanyah@uleth.ca
Department of Economics, University of Lethbridge, Lethbridge, AB, Canada.
Carbon offset projects represent a least-cost strategy for carbon mitigation. A major concern with this scheme,
however, is that sequestered or mitigated carbon may escape back into the atmosphere, thereby undermining the
integrity of any trade in carbon credits. To address this problem, at least two financial responsibility rules have
been proposed. One calls for the imposition of liability upon project developers. The other requires that project
developers retain adequate liability insurance coverage to indemnify future carbon losses. This paper evaluates the
incentive effects of these rules.
Introduction
A number of carbon mitigation strategies have been proposed, one of which is the idea of carbon offsets.
Under this protocol, an entity can earn tradable carbon credits by supporting or directly undertaking
projects that reduce carbon emissions or sequester carbon. The appeal of this system stems from the fact
that it represents a cost-effective way for reducing emissions (e.g., Mignone et. al., 2009; Fischer et al.,
2002; Lile et al., 1998). A major concern with this scheme, however, is the risk of emissions reversal—
the deliberate or accidental release of carbon back into the atmosphere (Kim et al., 2008). Clearly, this
possibility can adversely affect the market value of the resultant offsets and undermine the integrity of the
carbon market.
At least two rules of `financial responsibility' have been proposed to address this weakness. One calls for
the imposition of liability upon project developers (Toman and Cazorla, 1998; United Nations, 2000,
Kerr, 1998, Wiser and Goldberg 2000). The other rule requires that project developers demonstrate that
they have adequate liability insurance coverage prior to executing their projects. This paper employs a
simple model in which a project host can, through the expenditure of effort, control reversal risk to
evaluate the incentive effects of these rules.
We demonstrate that the relative incentive effects of the two financial responsibility rules crucially
depend up on the extent of uncertainty regarding the legal standard. If uncertainty regarding the legal
standard is sufficiently large, then the optimal level of effort is more pronounced under insurance rules
than under liability rules; if the uncertainty regarding the legal standard is sufficiently small, however,
then the converse is true.
Research on carbon offset projects is still an emerging field. Not surprisingly, studies in this realm of
environmental policy have been few and far between. A short list includes Janssen (1999), Fischer (2002)
and Wirl et al., (1998). A common thread connecting these studies is that none of them pays more than a
glancing attention to the implication of regulating the externalities associated with these projects. The
present study attempts to fill this gap.
The rest of this paper is structured as follows: The next section presents the basic model and a benchmark
solution. Sections 3 and 4 derive the optimal solutions under the two financial responsibility
requirements. Section 5 compares incentives under the two financial requirements. Section 6 concludes.
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Basic Model
There are three risk-neutral players in the model: a firm that is eligible to host a carbon reduction project
(hereafter referred to as the `host'), an investor (or financier) and a third party (or the victim). The host
currently uses a technology and/or management practices that involve an inefficiently high rate of
emissions of carbon. However, by adopting an "offset system protocol" (e.g., energy conservation or
afforestation initiatives) at a sunk cost of K, emissions can be significantly reduced. The host must raise
all the requisite funds from the investor. The third party is assumed to suffer financial losses as a result of
the project's inherent risk.
There are three important periods t∈[1,2,3]. For simplicity, we assume no discounting. In period t=1, the
host gets the requisite financing and also negotiates a compensation package with the investor. In period
t=2, the host implements the carbon reduction strategy (at fixed cost K) that lowers carbon emissions
below some baseline level. Every unit reduction in the emissions of carbon below the baseline generates
an emissions reduction credit (ERC). We will denote by R the quantity of ERCs generated by the project
in period t=2. These ERCs are appropriated by the investor, who sells them at a unit price of $1 to the
third party in a perfectly competitive carbon market.
In period t=3, there is a chance that carbon will be released back into the atmosphere, rendering the
offsets spurious and causing a pro rata financial loss (or injury) to the third party. Formally, we assume
that a reversal occurs with probability p and causes an amount z∈Z⊆ℜ+ of carbon to be injected back into
the atmosphere. Since the price of the offsets is unity, z also represents the financial loss potentially
suffered by the third party in the event of a reversal. To capture more simply the combination of
managerial and nonnatural factors in the make up of carbon releases, we let z= z + ε − e , where e∈[0,∞)
is reversal-avoidance managerial effort that the host supplies and ε ~ N(0,σ 2 ). The density function of z is
denoted ϕ(z,e). Effort causes disutility C(e,ω), where ω is a cost parameter, a firm’s type, that is unknown
to the investor. Type can be interpreted as a productivity parameter that reduces cost, all else equal. To
keep the problem mathematically tractable, we shall assume that the disutility structure is multiplicatively
separable in that C(e,ω)=ωψ(e), where ψ′(e)>0 and ψ′′(e)>0.
While the host knows exactly the value of its cost parameter ω from the outset, the investor's knowledge
of ω is limited. The investor knows, however, that the cost parameter ω belongs to some closed connected
set Θ⊂ℜ₊. Without loss of generality we take Θ = [ ω,
ω ] . Following the Bayesian approach, we assume
that the investor has some subjective a priori probability on Θ, which is associated with a continuous
probability density function f(ω)≡dF(ω)/dω, where F(ω) is the distribution function of ω. Denote by ω
the most efficient type possible. As is standard in the incentive literature, we assume the following with
respect to F(ω):
Assumption 1. The distribution of types F(ω) satisfies the monotone hazard rate property:
∂ 1 − F(
ω)
∂ F(
ω)
≤ 0,
>
∂ω
f ( ω)
∂ω
f ( ω)
0.
We assume that to motivate the host to supply effort, the investor implements linear incentive scheme that
comprises only a reward structure. More specifically, the investor offers a transfer of the form
100

⎧κ ( ω)
− ( 1−
p)
β ( ω)
z
s ( ω)
= ⎨
⎩ κ ( ω)
if there is no reversal
otherwise
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
where κ(ω) denotes the fixed component of the compensation package, and β(ω) a reward for reversalavoidance
or an incentive scheme.
Benchmark solution. Assume a setting where ω is observable, and the optimal level of effort is
prescribed by a regulator maximizing social welfare. Social welfare is S = R-pz-C(ω,e). It is
straightforward to show that the convexity of C(ω,e) in e guarantees the existence and uniqueness of the
socially efficient level of effort e * such that
p-ωψ′(e ∗)=0. (1)
Equation (1) corresponds to the common optimal conditions under which the marginal benefit of
increasing effort (or care), p, equals the corresponding marginal social cost ωψ′(e) (see, for example,
Polinsky (1980).
Consider next the value of e that would be optimally implemented in the absence of any intervention to
indemnify third party reversal losses. In this situation, the expected total surplus accruing to the project
proponents would be R-C(ω,e)-K. With no reward being furnished for the expenditure of effort, the
optimal contract would call for a zero level of effort, thereby externalizing the financial loss.
We consider two alternative financial responsibility requirements that can ameliorate this lack of
incentive: ex post liability rules hold the investor financially responsible for the losses inflicted upon the
third party after-the-fact; insurance rules require that the investor must retain enough liability insurance to
indemnify any future carbon releases.
We assume that the contract design problem can be analyzed within a mechanism design framework. By
the revelation principle, there is no loss in generality in focusing on a direct mechanism in which the
investor provides the host with incentives that induce truthful behavior (e.g., Fudenberg and Tirole, 1991;
Laffont and Tirole, 1993). In a direct mechanism, the investor offers a standard screening contract
C = { s(
ˆ ω) : ˆ ω ∈[
ω,
ω ] , prescribing a level of transfer s(ωˆ ) conditional upon the host's announcement
ωˆ . We assume that the investor can credibly commit not to renegotiate the contract.
The investor selects s(ωˆ ) to maximize her expected payoff. In so doing, he or she takes into account the
response of the privately informed host. The optimal actions of the privately informed host gives rise to
two kinds of constraints that the investor must take into account when designing the mechanism. The first
kind ensures that the host reports his type ω truthfully. These constraints are called the incentive
compatibility constraints (Myerson, 1979). The second type of constraints is called the individual
rationality constraints. They require that the host, whatever his type, gets his reservation payoff, the
payoff that the host would get by not participating in the project. Using the revelation principle, we
identify a Bayes Nash equilibrium. An equilibrium consists of a menu of transfers s and a vector of
reports ˆ ω ∈[ ω,
ω ] that implicitly determine the level of effort incentives.
The sequence of events is as follows: In the first stage, nature draws a type ω for the host from a set of
feasible types ω ∈ [ ω,
ω ] . Only the host learns her ability. In the second stage, the investor and the host
agree on a menu of contracts. The financial responsibility rule is publicly announced in the fourth stage.
The host reports his type and then chooses a level of effort to supply given the compensation package and
the financial responsibility rule. Final project output is observed and the transfers implied by the menu of
contracts are implemented.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Ex post liability allocation
To fix ideas, assume that if there is a reversal, the third party always sues the investor under the doctrine
of vicarious liability. We also take it that the host has no personal assets and therefore cannot satisfy any
court judgment. However, the investor has sufficient wealth to pay for this liability. The investor becomes
liable for the harm only when the host is declared negligent. Let e s be the legal standard of care. Thus, the
investor is held liable if e

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Proposition 1. Suppose that the financial responsibility rule holds the investor strictly liable for reversal
risk, the sorting condition holds and β(ω) is nonincreasing. Then the condition for optimal care e (ω)
(
is
given by
(
(
F(
ω)
f ( ω)
{ G(
e(
ω))
+ g(
e(
ω))
z}
p − ωψ '(
e(
ω))
−ψ
'(
e(
ω))
= 0.
In the absence of adverse selection, the first-best optimality would have given the marginal condition
{ ( e(
ω)) + g(
e(
ω))
z}
p − ωψ ' ( e(
ω))
= 0.
(
G (9)
Comparing (8) with (9) and (1), we see that there are two sources of distortion under the private secondbest
optimum. The first one is represented by the term ψ′(e(ω))F(ω)/f(ω). This term shows that the
second-best effort function is obtained by replacing the individual's type with a distorted, or virtual type
ω+F(ω)/f(ω), which is typically higher than ω. Thus, the term ψ′(e(ω))F(ω)/f(ω) in (8) derives from the
host's private information.
The second source of distortion {G(e)+g(e)z} stems from the effects of uncertainty in the judicial process.
An increase in e decreases the loss from reversal if it ever materializes at all. The marginal reduction in
loss from reversal is unity; its magnitude is weighted by the chance G(e) that the investor will be found
liable and therefore will benefit from reducing the reversal loss. Thus, the product G(e)p represents the
saving to the investor from the application of greater effort because expected reversal costs are reduced.
The second term g(e)z represents a reinforcing effect. An increase in e reduces the probability of being
held liable at all, and this creates an incentive to induce more effort. The marginal change in the
likelihood of being held liable is g(e); its is multiplied by z the magnitude of the loss. Thus, g(e)z
represents a saving to the investor from the application of greater effort because, even if a reversal occurs,
it is now less likely that he will be found liable.
In general, the information asymmetry exacerbates the agency problem. As for the judicial process,
whether or not it worsens the agency problem will crucially depend on the magnitude of G(e)+g(e)z. If
[G(e)+g(e)z]1, the opposite will hold true.
Reversal Insurance
Suppose now that the investor must provide assurance that he will able to indemnify z in future liability
costs. For simplicity, assume that the investor meets this requirement by purchasing an insurance policy
that provides coverage in the amount z from a perfectly competitive insurance market. Since a reversal
occurs with probability p causing damage z and the amount of care is observable, the insurance company
will charge an actuarially fair premium of p.z. Thus, the investor's objective is
I
π = R − κ ( ω)
+ [ 1 − p]
z.
β ( ω)
− pz.
(10)
Since the host faces no sanctions from the reversal risk, its expected payoff is unchanged from the
previous section. The screening problem in this setting is as follows:
max ( ω)
E I
e
∫ Θ
[ R − ωψ ( e(
ω))
−U
( ω)
− pz]
[ π ] = dF(
ω)
subject to (6) and (7). The solution to problem (11) is described in the following proposition.
(
(8)
(11)
103

Proceedings of the 12th Annual Conference © 2011 IAABD
Proposition 2. Suppose that the financial responsibility rule requires the investor to take full liability
insurance z at an actuarially fair premium. Then the condition for optimal care e ~ ( ω)
is given by
Comparing incentives
( ( F(
ω)
p − ωψ ' ( e(
ω))
−ψ
'(
e(
ω))
=
f ( ω)
We are concerned here with how the optimal level of care under liability rules e (ω)
(
compares with the
level of care under reversal insurance rule e ~ ( ω)
. Rewrite equations (8) and (12) in the following useful
form:
(
p ( (
ψ ' ( e ( ω))
=
ω))
ω + F(
ω)
/ f ( ω)
~
p
ψ ' ( e ( ω))
=
.
ω + F(
ω)
/ f ( ω)
0.
(12)
{ G(
e(
ω))
+ g(
e(
z}
Since ψ is strictly convex, (13) and (14) imply that ~ (
e ( ω)
> e (ω)
for ψ′( ~ (
e ( ω)
)>ψ′( e (ω)
) and e ~ ( ω)
<
e (ω)
(
for ψ′( ~ (
( (
e ( ω)
)0,
ψ′( ~ (
e ( ω)
)>ψ′( e (ω)
) and ~ ( ( (
e ( ω)
> e (ω)
if { G ( e(
ω))
+ g(
e(
ω))
z}
1 is
likely to hold if uncertainty regarding the legal standard is sufficiently small. Conversely, the inequality
( (
{ G ( e(
ω))
+ g(
e(
ω))
z}

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Under insurance rules, the investor faces a certain upper limit on the marginal benefit of supplying effort
so that inducing the host to exceed this limit provides no further reward. With liability rules, however,
exceeding the legal standard not only reduces the magnitude of third-party losses. It also reduces the
likelihood that the investor will be found liable at all and hence the expected liability costs. When there is
very little uncertainty in the determination of the legal standard, there is a strong incentive to exceed the
legal standard because exceeding this limit results in only slightly higher expenditure of effort, but a
highly reduced likelihood of being held liable, and therefore paying for the third party's losses. When
there is a great deal of uncertainty in the determination of the legal standard, however, the incentive to be
diligent is particularly muted because supplying effort below the legal standard greatly reduces the
disutility of effort while only slightly increasing the expected reversal losses.
Discussion and Conclusion
This paper developed a simple model to examine how two notions of financial responsibility—namely,
liability rules and insurance requirements—can affect incentives under asymmetric information. Our
model demonstrates that whether liability rules dominate insurance rules or vice versa crucially depends
on the extent of uncertainty regarding the legal standard: if uncertainty regarding the legal standard is
sufficiently large, then the optimal level of effort is more pronounced under insurance rules than under
liability rule; if the uncertainty regarding the legal standard is sufficiently small, then the converse holds
true.
The implication of this result depends upon the interpretation applied to the phrase "uncertainty regarding
the legal standard." Suppose the unpredictability of the legal standard varies across different jurisdictions
due to culture, customs, institutions, etc. Then the result presented here suggests that a prudent financial
responsibility policy would call for the adoption of liability rules in jurisdictions where the judicial
process is not prone to uncertainty and the employment of insurance requirements in jurisdictions where
the judicial process is characterized by a great deal of uncertainty.
References
Chiang, A.C. Elements of dynamic optimization. McGraw-Hill, New York, 1992.
Fischer, C. Determining project-based emissions baselines with incomplete information. Resources for
the Future, Discussion Paper 02-23, 2002.
Fischer, C., Parry, I.W, and W. Pizer, W. Instrument of Choice for Environmental Protection when
technological innovation is endogenous. Resources for the Future, Discussion Paper 99-04, 1998.
Fudenberg, D., and Tirole, J. Game Theory, Cambridge, 1991.
Grossman, S., and Hart, O. An analysis of the principal-agent problem. Econometrica, 1983 51: 7-45.
Janssen, J. (Self-) Enforcement of Joint Implementation and Clean Development Mechanisms Contracts.
Paper presented at the first World Congress of Environmental and resource Economists, Venice, 1999.
Kerr, S. Enforcement Compliance: The allocation of Liability in International GHG emissions trading and
the Clean Development Mechanism. Resources for the Future, RFF Climate Issue Brief #5, 1998
Kim, M-K., McCarl, B. A. and Murray, B.C. Permanence discounting for land-based carbon
sequestration. Ecological Economics, 2008 6 4: 7 6 3-7 6 9.
Laffont, J. -J. and Tirole, J. A Theory of incentives in procurement and regulation, The MIT Press, 1993.
Lile, R., M. Powell, and Toman, M. Implementing the Clean Development Mechanism: Lessons from US
Private sector participation in activities implemented jointly. Resources for the Future, Discussion Paper
99-08, 1998.
McAfee, R.P and McMillan, J. Competition for agency contracts. RAND Journal of Economics, 1987
18(2): 296-307.
105

Proceedings of the 12th Annual Conference © 2011 IAABD
Bryan K Mignone, B.K., Matthew D Hurteau, M.D., Chen, Y., and Sohngen, B. Carbon offsets, reversal
risk and US climate policy. Carbon Balance and Management, 2009, 4:3.
Myerson, R. B. Incentive Compatibility and Bargaining problem Econometrica, 1979, 47: 61-73.
Polinsky, A. M. Strict liability vs. negligence in a market setting. American Economic Review, 1980 70:
363-367.
Toman, M., and Cazorla, M. The Clean Development Mechanism: A Primer. RFF, 1998.
United Nations, The Clean Development Mechanism: Building International Public-Private Cooperation
under Kyoto Protocol- Technical Financial and Institutional Issues, Geneva, 2000.
Wiser, G., and Goldberg, D. Restoring the balance: Using remedial measures to avoid and cure
noncompliance under the Kyoto Protocol. WWF, 2000.
Wirl, F., Huber, C., and Walker, I.O. Joint Implementation: Strategic reactions and possible remedies.
Environmental and Resource Economics 1998 12: 203-224.
106

Assessment of pollutants in nigerian coastal waters
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Oguguah, N. M., Ngozimoguguah@yahoo.com
Department of Zoology, Faculty of Biological Sciences, University of Nigeria Nsukka, Enugu State,
Nigeria
Renner, K. O., kofirenner@yahoo.com
Department of Biological Oceanography, Nigerian Institute for Oceanography and Marine Research
Lagos, Nigeria
Oshisanya, K. I., kharphioshi@yahoo.com
Department of Physical and Chemical Oceanography, Nigerian Institute for Oceanography and Marine
Research Lagos, Nigeria
Babalola, A. F., bisbaaby@yahoo.com
Department of Fish Technology, Nigerian Institute for Oceanography and Marine Research Lagos,
Nigeria
Abstract
An assessment of pollutants in Nigerian coastal waters was carried out for a period of two years. A trawler MS
Suzzannah with an on board GPS was used to locate the bearings of the sampling points and an on board echo
sounder was used to determine the sampling depth. Economic fish Pseudolithus senegalaenis, Atlantic bumper,
Cynoglosus senegalensis and Pentatenus quanius were collected by trawling at different locations and depths at
different points in Nigerian coastal waters. The fish tissue samples were digested using the methods of FAO/SIDA.
All the samples were analyzed in five replicates for heavy metals (Pb, Fe, Mn and Zn) using Varian AA 600 Atomic
Absorption Spectrometer. The highest concentration of Fe (9.39 ± 7.18) was in Drapane africana and least
concentration (4.14 ± 4.21) was recorded in Pentatenus quanius. The highest concentration of Mn (1.1 ± 1.48) was
in Cynoglosus senegalensis and least concentration (0.36 ± 0.00) was recorded in Drapane africana. The highest
concentration of Pb (4.48 ± 0.57) was in Cynoglosus senegalensis and least concentration (2.1 ± 0.00) was recorded
in Atlantic bumper. The highest concentration of Zn (0.78 ± 0.63) was in Drapane africana and least concentration
(0.51 ± 0.31) was recorded in Cynoglosus senegalensis.
Introduction
Nigeria has a coastline of approximately 853 km and lies between latitude 4°10' to 620'N and longitude
2°45' to 8 5'E. (Dublin-Green and Tobor, 1992). The sea, and more particularly the aquatic systems (e.g.
estuaries), are the ultimate repository of man’s wastes. The highly dynamic nature of the marine
environment allows for very rapid assimilation of these materials by processes such as dilution, dispersal,
oxidation, degradation or sequestration into sediments. However, the capacity for such assimilation is
limited (Fatoki and Mathabatha, 2001). Pollution and contamination of the aquatic environment in
Nigeria is increasing in scope and magnitude (Hassan, 1987) which results in human health and
environmental quality degradation (Osibanjo, 2001). Though some environmental pollution is as a result
of natural causes, most is caused by human activities (Engelking, 2007).
Water pollution occurs when a body of water is adversely affected due to the addition of large amounts of
pollutants to the water. One of the many pollutants in the environment is heavy metals. The presence of
heavy metals in the aquatic ecosystem is due to natural and anthropogenic origin. Heavy metals are
among the most toxic pollutants present in marine, groundwater and industrial wastewater. The source of
107

Proceedings of the 12th Annual Conference © 2011 IAABD
heavy metals in environment, and more specifically in water systems has been attributed primarily to
manmade sources, such as agricultural activities and stack emissions from industrial sources (Ozlem et
al., 2008).
Ecotoxicologists and environmental scientists use the term “heavy metals” to refer to metals that have
caused environmental problems. The metals which have been studied extensively the last decades are:
Cadmium(Cd), Mercury (Hg), Zinc (Zn), Copper (Cu), Nickel (Ni), Chromium (Cr), Lead (Pb), Cobalt
(Co), Vanadium (V), Titanium (Ti), Iron (Fe), Manganese (Mn), Silver (Ag) and Tin (Sn).
The utilization of fish for assessing aquatic environmental health conditions in aquatic ecosystems has
gained prominence in recent years (John, 2001; Ikem et al., 2003; Yilmaz, 2003). Environmental
degradation and possible changes in water quality with biological consequences for the biota in the
environment may be a probable cause for the decline in recent years in a hitherto viable commercial
artisanal fishery in Nigeria (Ajao et al., 1996). Fishes being one of the main aquatic organisms in the food
chain may often accumulate large amounts of certain metals (Hadson, 1988; Mansour and Sidky, 2002).
Directly acting or synergistically acting metals like Fe, Zn, Pb, Cd, Cu and Mn are common toxic
pollutants for fish (Srivastava, 1985). Normally fishes assimilate these heavy metals through ingestion of
suspended particulates, food materials and / or by constant ion-exchange process of dissolved metals
across lipophilic membranes like the gills / adsorption of dissolved metals on tissue and membrane
surfaces. Depending on metal concentration and speciation, as well as abiotic and biotic factors
considered, aquatic contaminants may accumulate in aquatic animals and exert toxic effects (MacRae et
al., 1999; Di Toro et al., 2000).
The protection of the aquatic environment and associated resources is one of the programmes of action
listed in Agenda 21 of the United Nations for achieving sustainable development (Agenda 21, 1992). The
development of meaningful policies and regulatory framework for the protection of the aquatic
environment can only be achieved on the availability of reliable and adequate scientific data. Therefore,
the need for adequate scientific data on pollutants in all the environmental matrices cannot be
overemphasized (Obasohan et al., 2006). It is hoped that this research will access sources, distribution,
bioavailability, occurrence and mobilization of heavy metals in Nigerian coastal waters and contribute to
the control and management of the ecosystem with respect to heavy metal contamination and compare it
with available data.
Materials and Methods
A GPS was used to locate the bearings of the sampling points (Figure 1), and an on board echo sounder
was used to determine the sampling depth. Weather conditions and effluent discharges by rivers,
industries if any were noted. A fishing trawler was used to carry out the survey.
108

Figure 1: Lagos off shore survey points
Fish Collection
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Pseudolithus senegalaenis, Atlantic bumper, Cynoglosus senegalensis and Pentatenus quanius were
collected by trawling at different locations and depths at different points in Nigerian coastal waters.
Schneider (1990) was used in identifying the fish species. Three samples of representative size of each
species were used in heavy metal analysis.
Metal Analysis
The fish tissue samples were digested using the methods of FAO/SIDA (1983) and APHA et al (1992).
All the samples were analyzed in five replicates for heavy metals (Pb, Cu, Fe, Mn and Zn) using Varian
AA 600 Atomic Absorption Spectrometer. All reagents used during analysis were of analytical grade and
deionized water was used throughout the study. All the glassware were soaked in nitric acid for 3 days
and rinsed with deionized water before use. The instruments were calibrated with chemical standard
solutions prepared from commercially available chemicals.
Results and Disscusion.
Table 1: Concentration of heavy metals in different species of fish trawled from the varied sampling
points.
109

Proceedings of the 12th Annual Conference © 2011 IAABD
Fish spp Mn Pb Zn Fe
Pseudolithus
senegalaenis
0.58 ± 0.53
4.52
1.09
±
0.57 ± 0.31 8.33± 4.72
Atlantic
bumper
NA 2.1 0.071 8.48
Cynoglosus
senegalensis
Drapane
africana
Pentatenus
quanius
Disscussion
1.095 ±
1.48
0.36 ± 0.00
NA
4.48 ±
0.57
4.3 ±
0.71
2.75 ±
0.35
0.5118 ±
0.31 5.5625 ± 4.96
0.7785 ±
0.63 9.39 ± 7.18
0.3765 ±
0.31 4.135 ± 4.21
In the cause of sampling, it was observed that heavy metal concentration in the different fish species
varied at the different sampling points. It is worthy to note that the concentration of iron Fe was relatively
higher when compared to the other heavy metals tested. Lead (Pb) concentrations where relatively higher
as compared to manganese (Mn) and Zinc (Zn) but lower than Iron (Fe). The significance of heavy metals
in our environment and concentration in commercially important fish species cannot be overemphasized.
Bioaccumulation, in this context is the process through which an organism concentrates metals in its body
from the aquatic environment either by absorption or ingestion. Based on research and reported by Al-
Kahtani (2009), fish can regulate metal concentration to a point, after which bioaccumulation occurs
(Heath 1991). It is important to note that heavy metal concentration varies in an organism and from
different organs (Al-Kahtani, 2009).
The interaction between chemical, physiological and environmental factors results in the bioaccumulation
of heavy metals in an organism (Casas et al 2006). This study revealed concentrations of Zinc (Zn) is
important in many enzymatic processes but are still regarded as highly toxic according to Hellawell
(1986) and as shown from the study, bioaccumulate in aquatic organisms. High concentrations of Zinc
lead to reproductive impairement in fish species. This is evident in a study carried out by Al-Kahtani
(2009), where it was implied that high zinc concentrations result in reproductive impairement in Tilapia
nilotica. It is suggested that zinc results in adverse toxicological effects especially in high concentrations
in water (Pelgrom et al 1995).
As observed by studies carried out, at low concentrations, heavy metals result in health effects which
include damage to the nervous system as evident by the Minamata incident, cancer, damage to vital
organs and in some extreme cases death. It is worrisome that a few fish species namely; Cynoglosus
senegalensis, Drapane Africana and Pseudolithus senegalesis recorded relatively high levels of lead
concentrations in their tissues. The most common toxic heavy metals include cadmium, mercury, arsenic
and lead. They are of environmental and health importance due to the fact that they readily accumulate in
110

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
the environment for many years. They are very toxic and relatively accessible (Don-Pedro 2009). In
Nigeria, Lead is usually a component of the engine anti knocking agent Lead tetraethyl and is also added
to petrol (Don-Pedro 2009). The drawback to this of course is during the burning of this fuel. This agent
is released to the environment and finds its way into surrounding water bodies through runoff and
precipitation. Leakages from outboard engines on our waters also increase the concentration of Lead in
our waters. Due to the slow rate of excretion of heavy metals as comapared to ingestion, heavy metals in
water bodies accumulate in body tissues of aquatic organisms. Consumption of such organisms by man
could lead to possible health effects and even mortality( http://www.wri.org/wr-98-99/metal2.htm).
Conclusion
It is imperative that research on heavy metal distribution is carried out, especially with the aim to
establish a baseline data which will serve as a yard stick for future studies. The research is still on, we still
have a lot of sample to work on and a more comprehensive paper will be presented at the conclusion of
the research.
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Track 4: Clusters, Relationships, Networks and Inter-firm Linkages
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A Study of Customer Complaint Behavior and its Impact on Customer Satisfaction and Loyalty:
The case study of supermarkets in Kampala, Uganda
Aihie Osarenkhoe, aoh@hig.se
Department of Business Studies, Faculty of Education & Economics, University of Gävle, Sweden.
Mabel Birungi Komunda, mbirungi@mubs.ac.ug
Department of Marketing & International Business, Makerere University Business School, Uganda
Abstract
When customer expectations are not met, some customers may complain about bottlenecks in the service delivery
system, others may walk away without saying anything, and still others may complain but regret the time spent
complaining. This study aims to explore the concept of customer complaint behavior with a view to establishing the
relationship between handling customer complaints, satisfaction and loyalty. The empirical study investigated
customer complaint behavior among retailers in four supermarkets located in Kampala, Uganda. The study adopted
a cross-sectional survey design and used a quantitative approach. The findings show that 47% of customers were
satisfied with the services of the supermarkets; According to the respondents, 34% of staff willing to handle
complaints but 52% of staff not willing to handle complaints. It is further revealed that there is a need for customer
complaints to be handled by competent staff with good knowledge about the products. Moreover, service managers
should handle service failure as a critical task. Furthermore, issues such as lack of courtesy, incompetent staff and a
lack of authority and professionalism characterize the retail sector in Uganda. It is concluded that complaints
should be handled quickly by all supermarket staff, and feedback on the complaint handling process should be
encouraged by supermarket management in order to use the feedback as a starting point for improving future
complaint management. A major managerial implication is that organizations should pay particular attention to
failure attribution, and that providing customers a detailed explanation may be the most effective organizational
response that will have an impact on the behavioral aspects of customers.
Introduction
A common denominator in academic debate on service quality (Gummesson, 1997; Ryals and Payne,
2001; Zeithaml and Bitner, 2003; Narteh & Owusu-Frimpong, 2010) is that customer satisfaction has
become a major concern of retailers in many economies and business sectors, and therefore calls for more
research attention. Customer complaints are a natural consequence of any service activity (Michel et al.,
2009) because mistakes are an unavoidable feature of all human endeavor and thus also of service
delivery” (del Rio-Lanza, Vazquez-Casielles & Diaz-Martin, 2009). They are indispensable indicators of
unsatisfactory performance and may result in customer dissatisfaction. Customer dissatisfaction can be a
combination of the discrepancy between expectations and performance, and the importance of this
discrepancy to the customer. Consumer complaint behavior (CCB) refers to the responses triggered by
perceived dissatisfaction that is neither psychologically accepted nor quickly forgotten in consumption of
a product or service (Homburg & Fürst, 2005). According to Gruber, Szmigin and Voss (2006), some
customers who buy products from retailers complain about product quality, slowness of service providers,
lack of staff competence, and unreliable services with hardly any apology, and go through the
bureaucracy. Others perceive that the causes to their disappointment as relatively permanent and
unchanging (stability attribution) and opt to quietly walk away (del Rio-Lanza, Vazquez-Casielles &
Diaz-Martin, 2009). Still others may complain but regret the time spent complaining when expectations
are not met. Consequently, supermarkets like Metro and Half Price in Uganda closed their businesses, in
1995 and 2010, respectively.
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Michel et al. (2009) asserts that disappointed customers may not complain because they wish to avoid
confrontation with the person responsible for the failure, because they may be uncertain about their rights
and the obligations of the organization, or because of concerns about the cost and time associated with
complaining (Bamford & Xystouri, 2005). Against this background, does supermarket management in
Uganda create conducive atmosphere for customers to air their grievances over service failure? Without
consumer feedback, firms will be unaware of their problems, and may not improve their performance
(Heung & Lam, 2003). It may also be difficult to know what customers expect if they do not provide
feedback on their opinions to the managers. The way in which complaints are addressed will lead to
satisfaction or dissatisfaction. If customer complaints are not handled properly, the negative consequences
may be far-reaching (Maxham & Netemeyer, 2003). Dissatisfied customers will not only discontinue their
patronage, but are also likely to spread a negative message, jeopardizing the company image (Gruber,
Szmigin & Voss, 2007). The current research sets out to understand customer complaint behavior (CCB)
in a developing country in an African context – Uganda – examining the conditions under which
consumers may or may not voice complaints. To our knowledge, there is at present no theory that
adequately addresses the concern of CCB in African business context.
Only 5 out of 10 dissatisfied customers complain about their experiences, and these customers are more
demanding and less loyal than ever before (Nakibin et al., 2011; Halstead, 2002) because they believe the
organization may not respond. They may wish to avoid confrontation with the person responsible for the
failure; they may be uncertain about their rights and obligations; and some may have concerns about the
cost and time associated with complaining (Bamford, 2006). Some dissatisfied consumers seek redress,
while others do not approach the seller with their complaints (Gruber, Szmigin & Voss, 2009) but may
engage in negative word-of-mouth (WOM) behaviours because many companies do not pay sufficient
attention to handling complaints effectively (Stauss & Schoeler, 2004; Homburg & Fürst, 2007). Negative
WOM may be damaging to firms because such messages are more likely to be believed (Griffen et al.,
1991). Larger numbers of unknown dissatisfied consumers respond in covert ways that never come to the
retailer’s attention (Day et al., 1981), to family, the media or friends. Staff who do not provide a logical
explanation to the customer are unable to recover failures (Karatepe & Ekiz, 2004). Apart from
dissatisfaction due to product failure, consumers experience further dissatisfaction due to poor handling of
complaints and, in sufficient numbers, this can damage the company’s reputation, leading to loss of
potential and existing customers and poor customer loyalty. It is commonly known that there is a positive
relationship between customer loyalty and profitability. For example, Reichheld and Sasser (1990) found
that when a company retains just 5 percent more of its customers, profits increase by 25 percent.
This study contributes to extant knowledge by exploring the concept of CCB with a view to establishing
the relationship between handling customer complaints, customer satisfaction and customer loyalty.
Accordingly, the following research questions were used to guide our exploratory effort:
RQ1) What is the relationship between demographic factors and customer satisfaction?
RQ2) What is the relationship between CCB and customer loyalty?
RQ3) What is the relationship between CCB and customer satisfaction?
RQ4) What is the relationship between customer satisfaction and customer loyalty?
Theoretical foundation
Service quality is a concept that has generated considerable interest and debate in the research literature
due to the difficulty of both defining it and measuring it, with no overall consensus emerging regarding
either aspect (Wisniewski, 2001). According to the disconfirmation paradigm, satisfaction/dissatisfaction
is a direct consequence of the disconfirmation process. Disconfirmation of an expectation acts as an
important causal agent for generating attribution processing. This means that events that do not conform
to expectations may trigger the search for an explanation or reason for the event (Laufer, 2002).
Attribution theory is the systematic study of the perception of causality. In a complaint behaviour context,
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product failure is the kind of negative and unexpected event that has been shown to bring about causal
search (Weiner, 2000). Consumers may attribute product failure to themselves (internal focus), or to the
retailer or some outside agent in the environment (external locus). Main themes in extant literature on
customer complaint behavior encompass issues such as complaint handling in the affective nature of
satisfaction (Dube & Menon, 2000), recovery-related emotions (Schoefer, 2008; Schoefer & Ennew,
2005), and negative WOM (Lerman, 2006). A retailer’s resistance to listening and responding to
consumer complaints increases the likelihood that consumers will complain in private – in the form of
negative WOM to family, friends and third parties (McAlister & Erffmeyer, 2003). Ways of seeking
redress include refunds, exchanges, repairs, discounts on future purchases, or some combination of these
(Blodgett et al., 1997; Orsinger, Valentini & Angelis, 2009).
A service failure perceived as insignificant from the organization’s perspective can be of great importance
to the customer. For example, as McDougall and Levesques (1999) demonstrated, a customer’s reason for
buying a meal affects his or her perception of the seriousness of a service failure: a meal that is intended
as a celebration is much more important to the customer than a casual meal, and a policy of fixed
compensation from the provider will not always appease the dissatisfied customer. A provider’s failure to
eradicate disappointment can lead to customers making strong negative judgments of the organization
(Marmorstein et al., 2001; Boshoff, 1997 & 2005), and such dissatisfied clients will seek every
opportunity to criticize the offending companies, thus becoming what Heskett et al. (2003) characterize as
“terrorist” customers. There are investigations on the cognitive and affective antecedents of satisfaction
with complaint handling. Stauss (2002) defines complaint satisfaction as “the satisfaction of a
complainant with a company’s response to her/his complaint” (p. 174). A meta-analysis of satisfaction
with complaint handling has identified antecedents such as expectation, performance, disconfirmation of
expectations (Szymanski & Henard, 2001) and another study has looked at the affective responses to
complaint handling experienced by the customer (Varela-Neira, Vazquez-Casielles & Iglesias, 2010). A
meta-analysis by Orsinger, Valentini and Angelis (2009) looks at satisfaction and complaint handling
(SATCOM) in relation to return intent, WOM behavior and SATCOM outcomes.
The outcome of a purchase situation could be attributed to something temporary (unstable), or something
likely to occur each time the product is purchased or used (stable) – customers expect the product to fail if
they purchase it again in the future; if unstable, customers will purchase it again (Weiner, 2000). A
consumer’s perception of attribution, in terms of locus, stability and controllability dimensions, is
explained by Weiner (2000), who investigate different affective reactions. For example, when retailers are
thought to have control over the cause of product failure and it is stable (re-occurs), consumers feel angry
and desire revenge more than when the retailers are believed to lack control over the failure. And it is not
until retailers comprehend the customers’ complaint behavior, their reasons for engaging in specific
complaint behavior, and reasoning behind their behavior (cognitive processes), that they will recognize
the link between complaint handling and customer loyalty.
Customer loyalty could be described as a “customer’s commitment to do business with a particular
organization, purchasing their goods and services repeatedly, and recommending the services and
products to friends and associates” (McIlroy & Barnett, 2000, p. 348). Customer loyalty is neither easy to
gain nor maintain, rather it is vulnerable, where “even if [a company’s] customers are satisfied with the
service they will continue to defect if they believe they can get better value, convenience or quality
elsewhere” (McIlroy & Barnett, 2000, p. 349). Oliver (1999, pp.34, cited in Chumpitaz & Paparoidamis,
2007) defines loyalty as: “a deeply held commitment to re-buy or re-patronize a preferred product/service
consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing despite
situational influences and marketing efforts having the potential to cause switching behavior.” Brand
loyalty consists of behavioral aspects and attitudinal aspects (Aaker, 1991; Assael, 1998; Jacoby &
Chestnut, 1978; Oliver, 1999; Turker, 1964, as quoted by Chumpitaz & Paparoidamis, 2007). Behavioral
loyalty refers to repeated purchases of a brand, whereas attitudinal loyalty refers to a degree of
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dispositional commitment. Behavioral loyalty is partly determined by situational factors, and attitudinal
loyalty is more enduring (Chumpitaz & Paparoidamis, 2007; Colgate & Norris, 2001). Loyal customers
are the backbone of any business because it is less expensive to keep customers than to recruit new ones
(Gee, Coates & Nicholson, 2008).
Conceptual framework
In conceptualizing CCB, customer satisfaction and customer loyalty, customer complaint behavior
focuses on satisfaction or dissatisfaction through voicing a complaint, private action or public action.
Demographic factors may have a relationship with both CCB and customer loyalty. Figure 1 illustrates
the constructs that extant literature consider relevant when conceptualizing satisfaction and complaint
handling. We investigate the relationship between the dependent variable (customer loyalty) and the
independent variables (CCB and customer satisfaction), with the moderating variable of demographic
factors.
Figure 1: Relationships between Customer Satisfaction, Customer Loyalty and Customer
Complaint Behavior
CUSTOMER COMPLAINT
BEHAVIOUR
VOICE
Methodology
DEMOGRAPHIC
FACTORS
Age
CUSTOMER SATISFACTION
CUSTOMER
LOYALTY
This study undertook a cross-sectional survey that involved qualitative and quantitative approaches. The
methodological design of the study was correlational in nature. Using a self-administered questionnaire
modified from previous studies, data was collected from a sample of 140 customers in Uganda as per
Morgan and Krejicie’s (1970) table for determining sample size. The sample was selected through
convenience sampling due to the nature of the respondents. The response rate for supermarket customers
was 68%. Using a 5-point Likert scale (1 Strongly agree, 2 Agree, 3 Not sure, 4 Disagree, 5 Strongly
disagree), respondents were asked key issues about variables in the study. A pilot test was carried out to
test the validity of the research instrument to make sure that it was not vague. The questions in the
questionnaire were tested using Cronbach’s alpha. The study was done to expand the understanding of
how people who buy from supermarkets interpret the concepts of CCB, customer satisfaction and
customer loyalty. After collecting the data, the raw data was coded and entered into the computer. The
frequencies and percentages were then used to compare the responses. Validity and reliability tests were
carried out. Thereafter, data from the reliable instruments was entered in the SPSS packages and
correlations and regression tests were run. Data analysis: The instrument was reliable since the variables
were higher than 0.60.
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FINDINGS
Research Q1: What is the relationship between demographic factors and customer satisfaction?
Regarding gender, the majority of shopping at the supermarkets is done by males (57%), while females
represent 43% of shoppers. With regard to age, the group doing most of the shopping at the supermarkets
is the 20-29 years age group (38%), while the age group with the least amount of shoppers is >60 years
(1.2%). The people who do most of the shopping in the supermarkets fall in the income bracket 100,000-
399,000 UGX (34%). 35% of the sample responded that supermarkets meet their expectations. 38% of the
respondents felt supermarket staff do not respond adequately to customer complaints.
Correlations: The correlations were performed to test associations between the dependent variable
(customer loyalty) and the independent variables (CCB and customer satisfaction). The findings are
shown in the table below.
Table 1: Relationship between dependent variable and independent variables
Customer loyalty 1
Customer complaint
behavior
1 2 3
0.621**
0.000
Customer satisfaction 0.595**
Significance at 0.01 level
(2-tailed)
0.000
1
0.801**
0.000
Table 1 shows the correlations between stable variables. The results revealed that customer loyalty is
positively related to the variables in the study, i.e. to customer complaint behavior (=0.621**, P=0.000),
and to customer satisfaction (0.595**, P=0.000). CCB is also positively related to the customer
satisfaction variable (0.801**, P=0.000).
Research Q2: What is the relationship between CCB and customer loyalty?
The findings showed there was a significant relationship between CCB and customer loyalty at 0.621**
with a significance level of 0.000. This means that when returns and exchanges are handled well and meet
the expectations of the customer, customers feel well taken care of and appreciated, and are more inclined
to become loyal to the supermarket. Customers expect supermarket service providers to show courtesy
and a sincere interest when handling their queries, by keeping the customers’ best interests at heart. When
the staff discuss and try to resolve the complaints, the customers are more inclined to become loyal to
them. According to this survey, some employees do not listen attentively to the cause of the
dissatisfaction, resulting in further customer disappointment. Yet, in attribution theory, the handling of
complaints with an external locus (where the cause of service failure stems from the organization) has
been recognized as a critical task for service managers (Hess et al., 2003).
Research Q3: What is the relationship between CCB and customer satisfaction?
1
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There was a significant relationship between CCB and customer satisfaction, at 0.801**, with a
significance level of 0.000. Handling customer complaints requires a willingness on the part of the
employees and management of the supermarkets to handle the queries. Of the customers surveyed, 47%
were satisfied with the services of the supermarkets; According to the respondents, 34% of staff were
willing to handle complaints, while a larger percentage (over 50%) were not willing. Customers expected
staff to be courteous, attentive, and competent in handling their complaints. These qualities were at times
lacking. Unfortunately, supermarket staff did not show much effort in making the filing of complaints
accessible for customers; other staff lacked competence in handling customer complaints, with slow
responsiveness and failing to calm down angry customers. Kakuru, a customer of Game Supermarket,
said “that customers who sought redress expected employees to courteously provide accurate information
and show a sincere interest in solving their problems, yet the staff lacked professionalism in handling
customer complaints, sending the customers around from one staff to another, which irritated the
customers”. It was confirmed by Hansen, Wilke and Zaichkowsky (2010) that non-active complaint
handlers do not perceive complaint management as a strategic tool. In the current survey, 49% of
customers felt committed to the store, 38% were uncertain, and 18% were not committed. This may have
a negative impact on sustainability of the business. A regression analysis was also carried out and the
results are shown in the table below.
Table 2: Regression model summary - Dependent variable (Customer loyalty)
Model B Standard error Beta t Sig.
1 (constant)
CCB
2 (constant)
CCB
Cust satisf
1.786
0.487
1.443
0.315
0.265
0.243
0.074
0.305
0.120
0.147
0.621
0.402
0.276
7.358
6.586
4.729
2.631
1.806
0.000
0.000
0.000
0.011
0.075
R = 0.578 R-square= 0.335 Adjusted R-square = 0.331 Standard error of estimate = 65.991
The results in the prediction model (Table 2 above) were generated to explore the extent to which the
predictors, i.e. CCB and Customer Satisfaction, can explain the dependent variable, i.e. Customer
Loyalty. The results indicated that the predictors together have the potential of explaining up to 39.2% of
the observed changes in customer loyalty of an institution (Adjusted R-Square = 0.331). Among these
predictors, CCB (t = 7.358) and Customer Satisfaction (t = 4.729) were observed to be best at predicting
Customer Loyalty. These results imply that, for instance, for every 1000 increment increase in loyal
customers a supermarket attains, 331 of these customers will be loyal as a result of the way staff manage
the predictors.
Research Q4: What is the relationship between customer satisfaction and customer loyalty?
There was a significant relationship between customer satisfaction and customer loyalty, at 0.595**, with
a significance level of 0.000. This means that when the supermarket meets the expectations of the
customer, the customer may be loyal. Ideally, customers expect that their complaints will receive a quick
response, and that mistakes will be quickly noticed and acknowledged by supermarket staff. That is, when
a mistake has been made, employees will respond to the complaint as expected by the customers, such as
apologizing or providing some form of compensation, and when compensation is promised, they don’t go
back on their word. When the service is rated as extremely satisfying, in terms of overall quality, this may
lead customers to recommend the supermarket’s products and services to others (positive WOM).
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Evidence of the moderating role of failure attributions has been shown in previous studies in the service
failure context (Grewal et al., 2008; Tsiros et al., 2004). Grewal et al. (2008) added that compensation is
necessary only when the company is responsible for the failure and the failure occurs frequently. Tsiros et
al. (2004) found customer satisfaction to be stronger when the client’s perception of the dimensions of
causal attribution is low; in other words, when service failure is attributed to unstable (may not continue
to re-occur) or uncontrollable causes.
Conclusion and implications of study
This study contributes to extant literature by exploring the concept of CCB with a view to establishing the
relationship between handling customer complaints, customer satisfaction and customer loyalty. A lot is
required to turn disappointed customers into loyal customers for improved business performance in
Africa. Disappointed customers are hardly encouraged to forward their complaints to the staff of
supermarkets, so retailers miss out on the strategic asset of customer’s complaints that could provide
important knowledge concerning the performance of the business. Some customers who complain receive
little attention, exhibited through a lack of active listening, and a lack of competence and professionalism
in handling complaints. The levels of significance of CCB and customer loyalty were very high for those
respondents who were satisfied with the handling of customer complaints. Also, if product failure is
attributed to something stable, then customers expect the product to fail when they purchase it again in the
future. And when retailers are thought to have control over the cause of the product failure, consumers
feel angry and want revenge, engage in negative WOM, and opt not to be loyal to the supermarket.
In order to improve customer satisfaction, supermarket owners should strive to consider the following
items: i) Staff should respond quickly in handling customer complaints; ii) Ugandan supermarkets should
have staff who give customers personal attention; iii) Staff should be trained to give them the skills and
knowledge to handle customers’ complaints; iv) Supermarket staff should listen attentively to understand
the specific complaints of customers; v) Supermarket staff should do more than just smile to address the
needs of customers. No matter how excellent service the company delivers, mistakes will still be made in
meeting customer expectations and customers will become more demanding and less loyal (Nakibin et al.,
2011). When complaints are handled well, this may lead to customer loyalty (34% according to the
responses), where customers can be retained through more future purchases. Post-purchase dissatisfaction
is very important because it may be closely linked to negative outcomes such as less favorable purchase
attitudes, lower or non-existent purchase intentions, negative WOM, complaining, and changes in
shopping behavior (Onyeaso, 2007). Based on the study, negative WOM communications are generally
considered detrimental to retailers, which are confirmed by Halstead (2002), when made to friends,
relatives or to the media. Companies discourage complaints by not providing convenient opportunities for
customers to lodge complaints, and when staff display negative attitudes towards customers they miss out
on valuable information for improvement (Sheth et al., 1999).
In addition to the dissatisfaction that results from product failure, consumers experience further
dissatisfaction due to the disappointment caused by retailers who turn a deaf ear to their complaints. This
is mainly because complaint management is left to front-line staff that lacks adequate skills and authority.
It is also confirmed that some customers who do not perceive any avenues to complain simply exit with
their dissatisfaction (Hansen, Wilke & Aichkowsky, 2010). In Ugandan supermarkets, overall customer
satisfaction after a failure has not improved in the last decade (since we did our last study), and many
managers claim their organizations cannot respond to and fix recurring problems quickly enough.
Supermarkets ought to be aware of the problems that lead to customer complaints. Efficient management
of customer complaints efficiently also provides feedback that can be used in managing, and ultimately
resolving, future complaints. This is also confirmed by Boshoff (1997) and Crie (2003). Employees’
efforts to handle customer complaints – providing prompt attention to complainants and detailed
explanations constitute the most effective organizational responses, which in turn can have an impact on
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behavioral aspects of the loyalty constructs of WOM communications, recommendations and repurchase
intention (e.g. see findings in conjunction with Question 4 presented above).
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Network Diversity Value Model and Local South African Entrepreneurial Development: An
Emergent Theory via Grounded Theory Analysis
ABSTRACT
Eliada Nwosu, Eliada.nwosu@gsb.uct.ac.za
University of Cape Town Graduate School of Business, South Africa.
Drawing from literature of economic sociology and social capital, this study explores how small local entrepreneurs
in the globalizing African economy of Johannesburg, South Africa utilize their social networks to source
entrepreneurial value. The study was conducted in partnership with The Business Place, during which original data
was collected via in-depth opened ended interviews from entrepreneurs of both the clothing manufacturing and
service sectors. The data collected reflected the diversity of relationships within entrepreneurs’ social networks and
the information and resources they perceived were gained from these relationships and contributed to the
development of their business venture. A comparative grounded theory analysis was the employed methodology, by
which the original model of Network Diversity Value of entrepreneurial development was derived directly from the
data. This paper will presents the emergent theory – as is the objective of grounded theory- and proposes a set of
entrepreneurial and ecological conditions to be influential factors in the network composition; the resulting
business-related resources considered of value to the venture’s progress; and the intervening conditions and
counteracting actions that contribute to the network’s dynamism and the entrepreneur’s progress.
Introduction
How do African entrepreneurs of small enterprises utilize their social networks to advance their
business’s development? Stemming from the economic sociological perspective of social embeddedness
and social capital perspective, this study explores how black South African entrepreneurs engage with
their social structure via the diverse relationships of their social networks, and the perceived
entrepreneurial value gained from these relationships to facilitate their venture’s development process.
Data was collected via the interviews of thirty small scale firms – defined by having ten employees or less
– within Greater Johannesburg. Entrepreneurs were asked of the nature of their relationship with eight
different entities, ranging from similar and dissimilar firms to the government and financial institutions.
Grounded theory was used to formulate original concepts and – as is the intention of this methodology –
to formulate an explicatory theoretical framework about black South African small entrepreneurship and
its interactions with its network’s diversity. The result of the analysis was the original model of Network
Diversity Value, which poses intriguing propositions towards understanding the role of social structure in
enabling or hindering entrepreneurship. Recognizing entrepreneurs as both social and economic actors,
this study intends to capture an African entrepreneurial reality through a sociological lens within a
globalizing African economy such as Johannesburg.
Review of the literature
The research question is theoretically inspired by assumptions of the social embeddedness perspective.
Hailed by renowned economic sociologist Mark Granovetter (1985), the social embeddnessness
perspective suggests that (economic) actors are neither over-socialized entities – inclined to behave
according to social norms alone – or under-socialized entities -geared towards behaving in their own
interest, independent of prevailing social values and attitudes. Rather, the perspective posits that the
behavior of economic actors- such as entrepreneurs – is shaped by both their engagement with
surrounding entities and acknowledgement of their individual interest. Anthony Gidden’s theory of
structuration (1984) echoes a similar symbiotic relationship between social structure – as in the rules and
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resources produced by human interaction that constitute society- and human action, termed as agency,
that shapes systems and human behavior. Inspired by this theoretical insight, the study attempts to
understand how local entrepreneurs’ facilitate their progress via their engagement with various entities
within their surrounding social structure. Beyond understanding the nature of local entrepreneurs’
embeddedness, this study also aims to ascertain the perceived value of various relationships within their
network. Social exchange theory (Homans, 1961) suggests that individuals will evaluate relationships in
terms of the perceived benefit versus the costs in comparison to the alternatives relationships. Though
seeking an explicatory framework for the duration and nature of exchange within entrepreneurs’
relationships is beyond the scope of this study, social exchange theory’s emphasis on benefit offers
insight in exploring how entrepreneurs perceive the value of various relationships in regards to their
venture’s progress.
Central to this understanding of an economic institution (the market) informed by the social interaction of
its actors is the conceptualization – and operationalization - of social capital, the intangible and tangible
productive resources which stem from the activity of relationships (Fukuyama, 2002). Social networks
represent one of the theoretical streams of the social capital literature (Bourdieu, 1986). Distinct from the
emphasis on social norms and values (Coleman, 1988) or associations of civility (Putnam, 1993), social
networks capture the structural quality of relationships and then the resources that are drawn from these
relationships. Furthermore, the literature has noted that different types of relationships exist within these
networks. Common references are bonds and bridges – referring to familial connections and relationships
with like actors and connections with actors from other types of groups, respectively (Gittell and Vidal,
1998). Relationships with institutions are considered linkages (Woolcock, 1998). Such distinctions help to
depict and formulate the idea of diversity in social networks and are used to organize and distinguish the
conceptual findings in this analysis that will position it with the broader literature.
The general conceptual framework offered by the empirical arm of the literature conveys that specific
entrepreneurial characteristics, and resulting activity, influence the structure of networks, and in turn,
relational structure shapes the variety of resources a member of the network partakes in. Empirical
studies of this regard are still few, and there is more room for such work to be expanded (Naude and
Havenga, 2005). Within the African entrepreneurial landscape, size (Barr, 1995; 2002); global exposure
(Mcdade & Spring, 2005); gender (Kuada, 2009; Rutashobya, Allan, & Nilsson, 2009); one’s ‘identity
landscape’ (Pingle, 2001); and ethnicity (Bruce, 2003) have been highlighted as entrepreneurial attributes
that lend to network structure variation. Environmental and institutional factors, such as the impact of
economic liberalization on informal business network structure (Meagher, 2006) are also taken into
consideration. On the other hand, empirical studies also capture the influence of network structure upon
entrepreneurs, particularly in terms of resources gained from networks – such as knowledge acquisition,
complex production, and operational capacities. Within the African context, Barr’s (1995, 2002) study
on Ghanaian manufacturing firms reveals that the prevailing network diversity provides innovative
resources for large firms, while security for small ones. Bakker, Oerlemans, & Pretorius (2008) unveil
similar findings for South African entrepreneurs in terms of innovation. Although the literature appears
to be growing, there is still much more to learn about the intricacies that constitute network structure and
value - particularly with small, emerging firms within African economies which are increasingly
connecting to a global economy (Naude & Havenga, 2005). Where social relations are shaped by much
more than economic incentives, more studies using inductive, exploratory methods are needed to capture
the nuances of the local phenomenon. In this regard, this study hopes to fill this gap in the literature.
Methodology
Subjects of the study were drawn from the Opportunity Exchange Database of the Business Place
Headquarters in Johannesburg. Thirty entrepreneurs were interviewed in total, of which the data from
twenty-four respondents was analyzed for this study. Exactly 50% of the twenty-four respondents were
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from the (clothing) manufacturing sector while the remaining twelve were from industries of the service
sector. The median age of the business organizations was three years, ranging from a minimum of 4
months to a maximum of 12 years. More than 50% of the entrepreneurs themselves fell within the ages of
25 and 30, the youngest being 21 and the oldest more than 50. 47% of entrepreneurs operated their
businesses from the Central Business District of Johannesburg. The remaining were based in the broader
Johannesburg metropolitan area consisting of the surrounding townships, suburbs, and towns – such as
Soweto, Voloorus, Benoni, Alberton, and Vereeninging in the Vaal.
The data collection instrument was semi-structured, open ended interviews based upon a revised version
of Abigail Barr’s (1995) Questionnaire for Network Diversity administered in her study of Ghanaian
manufacturers. Entrepreneurs were asked about the number, frequency of communication, time and place
of first acquaintance, and the (potential) business value of the following entities: similar businesses;
dissimilar businesses; immigrant entrepreneurs; entrepreneurs in other regions; entrepreneurs outside of
South Africa; larger businesses; government; and financial institutions.
The data was analyzed using the grounded theory methodology. As a qualitative analytical method, it is
suitable to analyze a context-specific phenomenon, such as South African entrepreneurial networks, for
which there is limited existing research and limited formation of the underlying concepts. Distinct from
other qualitative methods, however, grounded theory aims to derive concepts directly from the data, and
then postulate relationships between the concepts in reference to a central idea identified to be at the core
of the analysis. The analysis, carried out here in three steps, aims to generate a grounded theoretical
framework comprised of conceptual propositions specific to the context and ready for future testing.
Through the coding steps of open, axial, and selective coding, data is broken down into specific
occurrences and ideas, re-sorted to form concepts – or categories - through a process of constant
comparison, and the theoretical framework formed by identifying the core concept - or the central
theoretical idea and relating the other categories to it. (Strauss and Corbin, 1990).
The theory is constructed through an application of the paradigm model of the grounded theory analysis.
This model provides a tool by which to understand the relationships of concepts with one another, and
approach a ‘story’ – or explicatory framework – that attempts to capture the underlying process which
constitutes the phenomenon. The paradigm model is presented as follows:
(a) casual conditions �(b) phenomenon �(c) context
(d) intervening conditions �(e) action/interaction strategies �(f) consequences.
Casual conditions refer to the enabling factors by which the core category can take place. The core
category or phenomenon refers to the main concept of the emergent theory. Context describes a certain
set of properties and parameters within which certain actions are taken in reference to the core category.
The intervening conditions refer to the broader systemic aspects of the entrepreneur’s environment
which affects his or her activity. Action/interaction strategies refer to the steps taken in response to
intervening conditions. Consequences of the paradigm model speak to the outcomes of the
aforementioned interplay of actions and interactions as provoked by the prevailing and intervening
conditions within the identified context. (Strauss and Corbin, 1990)
This paper will present the theoretical framework having emerged from the analysis. Due to limitation of
space, the concepts will be explained concisely.
Findings
Conceptual Construction of Network Diversity Value Model of Entrepreneurial Development
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Six main concepts were derived from the data as a result of the open and axial coding, and ‘pieced’
together during the selective coding. Those six primary concepts are industrial attributes; network
diversity value; network diversity structure; breakthroughs; network restructuring; and entrepreneurial
progress.
Industrial attributes represent the condition of the core category, and refer to the specific characteristics
of the entrepreneurs and their environment that inform the constitution of their networks. The analytical
process revealed differences along two major criteria across industries. One was entrepreneurs’
perceptions of their sensitivity to global competition. Entrepreneurs of the clothing manufacturing
industry, such as those quoted below, would readily mention the challenges of competing with global
imports that were priced at significantly lower rates.
“ I mean now, the Chinese are killing the market, so it’s getting tough. They are
making our – they are copying what we are doing and – selling them cheap…
Cheap –like 50 bucks, 60 bucks and then they are really killing us. “
~ O and M
In contrast to clothing manufacturers, service entrepreneurs rarely emphasized the impact of global
competition, but rather, stressed competing with local established corporations, and hence, their strategy
to be sub-contracted by such organizations in order to enter the market. The second criteria, is labor
intensiveness, describing the time-consuming steps involved in the production activity. Clothing
manufacturers would describe a demanding process, for which they would “outsource” their work to
others- mostly immigrant entrepreneurs – by which to manage the labor-intensive nature of production.
“Uh, sometimes when I have a lot of work, I ‘ll call maybe two Malawian guys.
I know they’re fast, and they don’t charge you too much, and they’ll help…” ~H
“I’d rather outsource. I’ll do the cutting and take my garment to those places – to
somebody who has a business. I know whatever that he charges me, I’m able to
pay because the product, I don’t have to do any alteration… So when you’re
overloaded, you have to go around and check who’s not busy.” ~ P
In contrast, service entrepreneurs, utilizing various sub-contracting methods, and relying upon technology
so as to streamline production, did not appear to undergo the same intensiveness of labor. Additionally,
these two criteria would vary in respect to business phase, i.e. start-up versus a new or established firm.
Hence the model proposes that the nature of the industrial sector presents the initial conditions that
influence network structure and value. This proposition implies that social networks are not the same for
entrepreneurs by virtue of their size alone, as previous literature has implied.
Network Diversity Value (NDV), the core category of this study, refers to the value which
entrepreneurs associate with various relationships in regard to their business’s development. It is informed
by respondents’ answers to the question, “How is this relationship valuable to your business?” and coded
into four major concepts of value, referred to as value orientations.
Capacity-oriented value refers to the factors derived from an entrepreneur’s social network which
contribute to how much the entrepreneur’s small business is able to produce. These aspects of value assist
in augmenting the small entrepreneur’s capacity to operate soundly, produce efficiently, and respond
effectively to shifts in demand. A primary example of this orientation from the data was the combining of
production capacities between entrepreneurs or machinery or training acquired from an organization.
“…April, I took, I took my stuff, and went to the Bruma – you know Bruma flee market?...
I went there and I got a stall. The stall, it was R160. We shared with one lady.
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We shared a stall…” ~MM
“Yeah, its services (referring to a business development firm) are like for people who are
tendering. They (referring to entrepreneurs) will have to learn the business – how to
tender…how to go through a process of tendering… for those people who have registered
with them and then they are going to help with filling out the tender document.” ~ SK
Innovation-oriented value refers to the value factors that contribute to what the entrepreneur produces,
and that which distinguishes the entrepreneur’s product from others. Innovation-oriented value consists of
information, opportunities for exposure, and resources that enable the entrepreneur to create a product that
is more responsive to a specific market demand.
“Yes. It [referring to a certain fabric] comes like a suit like this. Some people, they don’t
even think they can do anything - a big thing out of it because normally it’s a trim
that they just put for pants, for collars, for you know, on the track suits. He [God] gave
me that vision – that top. First thing in the morning, I just go straight to work and
then I cut the fabric and I did it. And ‘wa-lah’ it all started.” ~ M
Leadership-oriented value refers to information that contributes to the personal and leadership
development of the entrepreneur. These items help to reinforce the idea of why the entrepreneur
produces, as well as how they run their business. Management skills were also highly rated as valuable in
running business operations more effectively and productively.
“There was a college in East Rand, the college is still there, a course – how to start your
own business. And, oh, I got a (taste)of it in UNISA – Business management…
Um, I don’t know what happened. Maybe it’s because it’s very expensive, or what, but
it was so helpful. Because it teaches about expanding your business. The little things that
you are not aware of, it can make your business to expand.” ~ P
Customer-oriented value contributes to the entrepreneur’s deepened understanding of who they are
producing for. These factors were described as helpful in assisting a small entrepreneur in accessing new
markets, diversifying their customer base, or appealing to customers of a niche market. Examples are
information about market size, various demographics, social position, and geographic location.
Knowledge of prevailing themes in popular culture, gender and cultural themes, and global events are
also examples of customer-oriented value.
“Um, yeah I think my stuff’s very wearable. I like it to be – I like women to identify with it…
there are certain parts with it that deals with certain women’s issues. You know, for me,
the research I have done behind it has all these issues, but maybe – I hope it comes across but
it is not blatant.” ~ S
Network Diversity Structure serves as the context within which the flow and exchange of entrepreneurial
resources and information via these relationships were facilitated. The analysis of the data induced three
network properties believed to shape an entrepreneur’s relational structure –
• the relational types, referring to the bonding, bridging, or linking nature of the relationship and its
general characteristics;
• numbers of contacts, revealing which relationships dominate a network in terms of numbers;
• and relational prominence, an indicator that combines the perceived value of the relationship and
how frequently the entrepreneur communicates with the entity.
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These properties shape the nature of the relationship and in turn, the nature of value that the relationship
provides.
Analysis of the data revealed that entrepreneurs of the manufacturing sector have network
compositions reflecting mostly horizontal relationships, such as bonds and bridges (with (dis)similar,
immigrant, small entrepreneurs). Service sector’s networks tend to reflect more vertical relationships
(with larger corporate bodies, and government institutions), also termed as linkages.
Breakthroughs. Analysis of the data revealed the frequent mentioning of an occurrence or incident that
either catalyzes or hinders an entrepreneur’s progress. The concept, the intervening condition, was
named breakthroughs. According to the data, the breakthrough often has a definite starting and ending
point, and it serves as a critical point of transition as it presents new actors, pressures, opportunities, and
challenges that the entrepreneur must now maneuver through. Clothing entrepreneurs, for example,
commonly mentioned a distinct opportunity within which they were able to debut their talent such as
entering a fashion show, exhibit, or competition and gain the chance to receive cash prizes or committed
technical assistance. Service entrepreneurs comparably would express similar affirming moments, such
successfully completing a sub-contract from a larger company or accomplishing a difficult project for a
demanding clientele. Below, a clothing entrepreneur describes a ‘breakthrough’ in her journey.
“So when they short-listed and then I was one of the top ten, uh, selected to enter the show,
I entered the show … and then I was one of the top three that won the show. I won the
second with the collection…category. Then I pursued…well, I started working for myself,
I realized that, you know, this could work….I won a trip to Paris to go as part of my package
for the fashion show, like it was quite good a, a, a, prizes…and the response was quite positive
towards our clothing. And then, mmmmm, then I started working for myself, entering into many
shows, and then ever since, I’ve just been doing my own stuff.” ~ H
Network Restructuring. Network restructuring is the term given to the means by which entrepreneurs
respond to breakthroughs and other critical turning points– or the action/interaction strategies.
Responses can have either positive or negative consequences that lead to a resetting or adjustment of the
combination of bonding, bridging, and linkage relationships within the social network. This action would
be done both to facilitate change in their business as well as to manage change in their broader
environment. In turn, the data implies that relationships vary in prominence over time, in that those which
may be a vital source of value at the beginning of an entrepreneur’s journey may lessen in significance as
they become more developed. Hence, the diversity of social networks is far from static, but rather, is very
dynamic.
Entrepreneurial Progress is the desired consequence of this series of linked conditions, context, action,
and interaction within the Network Diversity Value Model. To derive grounded concepts of progress,
entrepreneurs were asked 1) ‘How would you conceptualize entrepreneurial success?’, and 2) ‘What are
the indicators of a business performing well?’ These questions were asked so as to understand how
entrepreneurs define good performance and to offer a set of notions that could form contextually relevant
assessments of entrepreneurial progress. The analysis disclosed seven properties collectively referred to
as entrepreneurial progress.
• financial viability – maintaining a balanced account that reflects consistent cash flow and
promising profitability.
• good customer relations – carrying out professional, responsive interactions with customers and
high-quality performance that sustains customer satisfaction.
• effective brand building- developing a strong and attractive firm identity that carries positive
connotations and becomes an entity beyond the persona of the individual entrepreneur.
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• good work ethic – high quality work performance involving also timeliness, accountability, and
positive teamwork.
• fulfillment – sense of joy and contentment that comes from one’s entrepreneurial activities.
• sustained performance – stabilized or incrementally increasing scale of production, delivery, and
clientele over the course of time.
• empowering others – providing opportunities, exposure, or skills that increases the capacity of
others and positions them to make a better life for themselves and others.
Figure 1 depicts the theoretical framework of Network Diversity Value in a simplified diagram.
Conclusion
Conditions
Entrepreneurial Identity:
Economic Sector
Consequence
Entrepreneurial
Progress
Figure 1: Theoretical Framework of Network Diversity Value
Central Phenomenon
Network Diversity
Value
Actions/Interactions
Network Restructuring
Context
Network Diversity
Structure
Intervening Conditions
Breakthroughs
In conclusion, the ‘story’ conveyed by the framework above is concisely narrated in the following
propositional form. The network structure of small entrepreneurs differs in the types of relationships, the
number of certain relationships, and the prominence of the relationships depending upon the
entrepreneurial characteristic that distinguishes the firms from others. The varying combinations of types,
numbers, and prominence of the relationships formulate the relational context within which an
entrepreneur is situated and operates. This relational context, the structural diversity of the entrepreneur’s
social network, is comprised of various entities and ties that connect them to entrepreneur. Through these
relationships of the network, a variety of resources deemed valuable are exchanged. The perceived value
of certain resources, how they are believed to contribute to a small firm’s progress, and the structural
shape of the network from which these resources are gained, are informed largely by the attributes of the
entrepreneur, which suggest the initial conditions that shape the small firm’s development process.
Occasionally small entrepreneurs will have breakthroughs in their entrepreneurial development- incidents
or occurrences that open up new opportunities or challenges which the entrepreneur must manage, create,
or solve in order to progress. The entrepreneur then takes action to adjust the diversity of the network –
forming new relationships or altering the prominence of existing ones – so as to respond to or provoke
new conditions. If harnessed and adjusted well, networks can serve as conducive grounds to the
entrepreneur’s progress. Further examination of this propositional narrative within various entrepreneurial
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contexts within African cities is needed to confirm its theoretical relevance on a broader scale.
Implications of this study present a workable framework by which to understand the ecological setting of
small entrepreneurs and the distinct value gained from diverse relationships.
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Bruce, M. (2003). Ethnic entrepreneurship: Preliminary findings from a South African study. Journal of
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Giddens, A. (1984). The constitution of society. Berkeley,CA : University of California Press.
Gittell, R., & Vidal, A. (1998). Community organizing: Building social capital as a development strategy
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Homans, G. (1961). Social behavior: Its elementary forms. New York: Harcourt, Brace, and World.
Kuada, J. (2009). Gender, social networks and entrepreneurship in Ghana. Journal of African Business ,
85-103.
Mcdade, B., & Spring, A. (2005). The new generation of African entrepreneurs: Networking to change
the climate for business and private-sector led development. Entrepreneurship & Regional Development ,
17-42.
Meagher, K. (2006). Social capital, social liabilities, and political capital: social networks and informal
manufacturing in Nigeria. African Affairs , 553-582.
Naude, W., & Havenga, J. (2005). An overview of African entrepreneurship and small business research.
Journal of Small Business and Entrepreneurship , 101-119.
Pingle, V. (2001). Identity, landscapes, social capital, and entrepreneurship: Small business in South
Africa. Center for Policy Studies . Johannesburg.
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Italy. Princeton: Princeton University Press.
Rodrik, D. (1997). Has globalization gone too far? Washington, D.C. : Institute for International
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Rutashobya, L. K., Allan, I. S., & Nilsson, K. (2009). Social networks, and entrepreneurial outcomes in
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Strauss, A. & Corbin, J.( 1990). Basics of qualitative research: Grounded theory procedures and
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framework. Theory and Society , 27: 151-208.
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Abstract
Socio-Cultural Factors Influencing Insurance Patronage in Nigeria: An Exploratory Study
BADRU, Fatai Adesina, badrufat@yahoo.com
Department of Sociology, Faculty of Social Sciences, University of Lagos, Nigeria
YUSUF, Tajudeen Olalekan, toyusuf7@yahoo.co.uk
Department of Actuarial Science and Insurance, Faculty of Business Administration
University of Lagos, Nigeria
ISOLA, Wakeel, toyusuf7@yahoo.co.uk isolawak@yahoo.com
Department of Economics, Faculty of Social Sciences, University of Lagos, Nigeria
Risk occurrence is a phenomenon that characterizes human lives. Risk avoidance aids one to cope with the tragedies
of life and insurance has an immerse role to play in this respect. Insurance patronage in the Sub-Saharan Africa
with the exception of South Africa is abysmally poor. Surprisingly, there have not been many studies on the impact
of culture on this present scorecard of insurance patronage. In addition, meanings attached to modern insurance
concepts such as ‘accident’, ‘risk’, ‘disasters’ might be culturally-constructed and assimilated. This study sought to
investigate some of the socio-cultural factors that influence insurance patronage among Lagosians. Such factors act
as agents of socialization through which people get the norms and values that inform their attitudes and behaviour.
The research design was cross- sectional survey and exploratory in nature; using structured questionnaires to
collect primary data. At the end of the field exercise, data were entered on SPSS. Variables were created for both
univariate and bivariate data. Findings from the survey suggest that insurance policies do not have negative
cultural connotations among Nigerians. Thus, there is a possibility of motivating Nigerians to be patronizing
insurance companies. Other feasible measures to boost patronage were recommended for practitioners and policymakers.
Introduction
Risk occurrence is a phenomenon that characterizes human lives. Risk avoidance aids one to cope with
the tragedies of life and insurance has an immerse role to play in this respect. Insurance is a social device,
in which a group of individuals (called “insureds”) transfer risk to another party (called an “insurer”) in
order to combine loss experience, which permits statistical prediction of losses and provides for payments
of losses from funds contributed (premiums) by all members who transferred risk (Pritchetts et al., 1996).
Insurance patronage in the Sub-Saharan Africa with the exception of South Africa is abysmally poor
(Yusuf, et al, 2009). The Swiss records for 2008 confirms that much by posting 0.8%, 0.9% for Nigeria
and Kenya respectively. The Nigerian insurance industry is today ranked 65th globally in terms of size
and 6th out of the 8 largest markets in Africa. The sector has contributed less than two percent to the
Gross Domestic Product (GDP) due to systemic failures of regulation and supervision. Other countries in
the region did not fare better in the global table. A lot of studies have been conducted on what could be
adduced for this state of affairs. (Criel, 1998; Becker et al, 2004; Yusuf, et al, 2009).
There is no gainsaying that man is a social being and his social nature begins with his incorporation into a
society where he gains an identity and recognition. Societies, on the other hand, are created from a
cultural framework because culture is a man-made creation which informs the coming together of
individuals in order to make a society. Durowade (2001) asserts that the things that make up culture are
therefore created by man and a person absorbs many parts of a culture by living amongst it. Culture,
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according to Edward Tylor (1891), can be referred to as `that learned complex of knowledge, belief, art,
morals, law, custom and any other capabilities and habits acquired by man as a member of society’.
Culture, in the same vein, influences most of the activities of our daily lives including our dispositions,
decisions and even our attitudes. This study sought to investigate some of the socio-cultural factors that
influence insurance patronage among Lagosians. Such factors act as agents of socialization through which
people get the norms and values that inform their attitudes and behaviour.
Surprisingly, there have not been many studies on the impact of culture on this present scorecard of
insurance patronage. In addition, meanings attached to modern insurance concepts such as ‘accident’,
‘risk’, ‘disasters’ might be culturally-constructed and assimilated. Perhaps the essence of planning ahead
to insure unforeseen risks that might face one’s properties, ships, personal accident, life and property as
well as liabilities might have linguistic interpretation not contemplated by marketers of insurance.
Although several articles have addressed this area in general, differences along specific, cultural
dimensions have not been directly examined. Hence, the purpose of this study was to examine the sociocultural
factors influencing insurance service patronage in the study location.
Significance of Study/Expected Benefits
It is indisputable that cultural ethos should not be swept under carpet. The material and non-material
aspects of culture when properly explored theoretically and empirically may illuminate some of the
cultural inhibitions of low insurance patronage in Lagos State in particular and Nigeria in general. The
findings would open flood gates of opportunities that insurance marketers have ignored or paid little or
limited attention to thus leading them to smiling to their banks with increase in market share of insurance
services in the study location. Students of insurance, marketing, economics and sociology among others
will find the findings useful while insurance theorists, academics, insurance and marketing practitioners,
insurance brokers and regulators will be given further insights into the respondents’ cultural perception of
risks and insurance services.
Brief Literature Review
The insurance marketing literature documents several evidences of the inter-connectedness between
insurance and culture. If the business of insurance is to protect people against the financial consequences
of unforeseen risks, the marketing side of that business depends on dramatizing risk in the minds of
potential customers (Alborn, 2004).
Platteau (2007) queried whether culture was an obstacle to African economic development. Borrowing
from Guiso’s et al (2006) definition of culture as “those customary beliefs and values that ethnic,
religious, and social groups transmit fairly unchanged from generation to generation”, Platteau argued
that SSA’s bad performance on the level of its institutional environment must be somehow traceable to
factors specific to the region that do not lie in the sphere of geography. He concluded that religion, which
often becomes the escape route from ethnic restrictions could be made to be “instilling values and norms
that violate customs with adverse effects on capital accumulation and entrepreneurship.
Chui and Kwok (2008) examined the way national culture affects consumption patterns of life insurance
across countries. Life insurance is a service that is abstract, complex, and focused on unsure future
benefits. Because of the uncertainty and ambiguity inherent in the life insurance product, consumers are
more likely to respond according to their cultural prescriptions. Their findings show that individualism
indeed has a significant, positive effect on life insurance consumption, whereas power distance and
masculinity/femininity have significant, negative effects. The results are robust, even after controlling for
economic, institutional and demographic determinants.
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Theoretical Perspectives
A theory is a body of logically interdependent and generalized concepts of empirical reference (Parsons,
1964). This also refers to abstractions, speculations, ideas and conceptual constructions which are
tentative and attempt to make a causal explanation or descriptive illustration of a particular phenomenon.
Theory of Consumer Behaviour
The traditional theory of consumer behavior assumed that the consumer or decision maker is certain of
the outcomes arising from alternative acts or decisions. However, many choices made by consumers take
place under conditions of uncertainty. In this section, we explore how the theory of consumer choice can
be used to describe such behavior following the path breaking work of Neumann and Morgestern (1944).
Suppose a consumer initially has monetary wealth W. There is some probability p that he will lose an
amount L. For instance, there is some probability his house will burn down. The consumer can purchase
insurance that will pay him q naira in the event that he incurs this loss. The amount of money that he has
to pay for q naira of insurance coverage is πq; while π is the premium per naira of coverage.
Thus this situation can be characterized as a game of chance as follows:
(W – L – πq + q, W – πq), (p,1-p)…………………………………………………………………………….1
If we consider a special scenario of this lottery, where he fully insures risk; i.e., where q = L. With full
insurance, state contingent wealth is W – πq regardless of whether a state contingent loss occurs; thus he
exchanges an uncertain loss (L) for a certain loss (πq).
We assume that this individual has a von Neumann-Morgenstern utility function U(W). Thus U(W) is
continuous and twice differentiable; i.e., marginal utility is positive and decreasing in wealth. Given these
assumptions, insurance will be purchased if and only if a q exists such that the expected utility of being
insured is higher than the expected utility of being uninsured; i.e.,
pU(W – πq – L + q) + (1 – p)U(W - πq > pU(W - L) + (1 – p)U(W)…………………………………2
How much coverage will the consumer purchase can be analyzed by solving the utility maximization
problem thus:
max E(U(W))= Max pU(W – L – πq + q) + (1 – p)U(W – πq)……………………………………….3
The solution to this maximization problem (among other factors) depends on the attitude of the individual
to risk. If the consumer is strictly risk averse he will completely insure himself against the loss L. A
person is a risk averter relative to a lottery if the utility of its expected value is greater than the expected
value of its utility. Such a person prefers a certain outcome to an uncertain one with the same expected
value. On the other hand a person can be risk neutral relative to a lottery if the utility of the expected
value of the lottery equals the expected utility of the lottery. Such a person is only interested in expected
values and is totally oblivious to risk. In the same vein, a person can be a risk lover relative to a lottery if
the utility of its expected value is less than its expected utility. However, sociologists have offered
different theoretical explanations for this attitudinal behavior.
Socio-cultural School
One theory that informs people attitude towards insurance is the social action. The social action theory by
Max Weber explains that human actions are meaningful and that certain reasons push people into various
kinds of actions. To Weber, there are three kinds of action: traditional (based on customs and habits);
affective (based on the emotional state of the individual at a particular time); and rational (based on a
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clear awareness of a goal) (Haralambos & Holborn, 2004). This also implies that certain factors tend to
influence one’s behaviour towards insurance. People might choose to have a preference for an insurance
due to primordial or cultural underpinnings. On the other hand, people can rationally decide to have an
insurance policy for clearly economic reasons.
Marketing of insurance
Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of
ideas, goods, and services to create exchanges that satisfy individual and organizations objectives
(Griffin, 2005)
Here we will attempt to borrow from Eva-Cristina and Al’s (2009) description of the main characteristics
of five key elements of holistic marketing in the insurance industry: relationship marketing, integrated
marketing, internal marketing, social responsibility marketing and international marketing.
The globalization of the insurance market is a fact that cannot be contested and an international approach
to the marketing activity becomes more and more important. There are two approaches to the
international marketing activity in the insurance sector: multicultural marketing and global marketing
(Keegan and Green, 2008). The multicultural marketing accounts for differences in perception, attitudes
and behaviour of consumers in different cultural areas (Mueller and Gelbrich, 2004). There are specialists
that have noticed even the appearance of the so-called emotions marketing in insurance – a type of
marketing necessary as a consequence of an increasingly sensitive consumer behaviour. Nowadays
consumers are trying to build an identity through various consumption activities and consequently a
consumer will choose the product / service / company brand that has an image in accordance with the
ideas he holds about himself – the choice being indicative of the type of image the consumer desires. The
multicultural marketing recognizes that the cultural heritage is a decisive factor for the success or failure
on international markets and the insurance companies try to adapt their activity to the specific consumer
behaviour.
Methodology: The research design that was employed in the study was cross- sectional survey and
exploratory in nature. Questionnaires were designed, and subjected to peer review by experts in
psychometrics to enhance construct validity of the instrument before being used to collect the primary
data. It was 21- item instrument containing both open and close ended questions. The open ended
questions were provided with mutually excluded coding frames before data entry and analysis. The field
work took place on Friday, December 24, 2010, a public holiday day in Nigeria when respondents were
at home and could be reached to provide the needed information of interest in insurance patronage. The
study location was Onike/Iwaya, a sub-urban community in Mainland Local Government, Lagos State. It
was chosen for the study because of proximity to our university and the fact that we could elicit necessary
data from the location. It is mainly residential area consisting of mainly lower class and handful of middle
class people. The respondents are mainly petty traders, white collar civil servants and artisans. The
population of interest comprised of both adult males and females residing at the communities at the time
of study. The sample size was 152 respondents. As there was no comprehensive list to fall back on and
the exploratory nature of the work, judgemental sampling technique became imperative.
Ten Research assistants were recruited from the Faculties of Business Administration and Social
Sciences, (five each from the faculties) culled from those that are in their penultimate/ final years of their
study and trained with the instruments for a day and the ambiguous questions were cleared with them.
Mock presentations were actualised among the assistants. Exercise notes, pencil, pens and other field
materials were given to them and students were conveyed to the field work sites beyond the transport fare
and honoraria given to them at the end of the exercise. These measures were to motivate them on the field
and ensure the research objectives. The three researchers served as the field supervisors to the research
assistants. The questions in the questionnaires contained both open and closed –ended ones and the likerttype.
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Data Entry/Analysis: At the end of the field exercise, the instruments were retrieved from the research
assistants, coded and cleaned before data entry on SPSS. Variables were created for both univariate and
bivariate data. The results are presented below.
Presentation of Data and Analysis
TABLE 1: SOCIO-DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS N=152
Age Frequency Percentage
Less than 25years 19 12.5
26-35years 65 42.8
36-45years 28 18.4
46-55years 25 16.4
55-65years 6 3.9
66 and above 4 2.6
No response 5 3.3
Marital Status
Single 58 38.2
Married 1 59.9
Divorced 1 0.7
Separated 2 1.3
Academic Background
Primary School 6 3.9
Secondary School 28 18.4
OND/HND 37 24.3
Bachelors Degree 0 39.5
Masters Degree 15 9.9
No Response 6 3.9
Religion
Islam 22 14.5
Christianity 123 80.9
Free-thinker 1 0.7
No response 6 3.9
Total 152 100.0
Source: Field Survey, 2010
Table 1 shows that 65 respondents (about 43 percent) of the population were within the ages of 26-35yrs;
about 13 percent fell below the age bracket of 25 years., and about 18 percent were within the age bracket
of 36-45yrs; 25 (about 16 percent) were within the age range of 46-55yrs; 6 (3.9%) of the respondents
were within the ages of 56-65 years, 4 (2.6%) of the respondents were above 66 years, while 5 (3.3%) of
the respondents did not respond to the question. The table indicates that a larger percent (about 60
percent) of the respondents were married, followed about 38 percent that claimed to be single; while 0.7
and 1.3 percent of the respondents were divorced and separated respectively. From the above table 22
(14.5%) of the respondents were Muslims, 123 (80.9%) of the respondents admitted to be Christians, 1
(0.7%) of the respondent was a free-thinker and 6 (3.9%) of the respondents did not respond to the
question. The age structure is typical of the Nigerian population where majority of the people are youths
defined by the Nigerian National Youth Policy as individuals between the ages of 18-35yrs, who are more
likely to be independent and take decision on insurance patronage whether life or non-life.
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TABLE 2 : DISTRIBUTION OF RESPONDENTS ACCORDING TO INSURANCE
PATRONAGE
Item Frequency Percentage
Have you owned any insurance policy before?
Yes 84 55.3
No 68 44.7
Do you own any policy presently?
Yes 72 47.4
No 79 52.0
No response 1 0.7
Do you pay your premium promptly?
Yes 78 50.0
No 61 40.1
No response 15 9.9
Are you satisfied with the service of insurer?
Yes 62 40.8
No 60 39.5
No response 30 19.7
Do you think insurance companies are
Reliable and trustworthy?
They ought to 42 27.6
They are 49 32.2
They must 8 5.3
They are not 33 21.7
They may not 17 11.2
No response 3 2.0
Total 152 100.0
Source: Field Survey, 2010
From the table above 84 (55 %) of the respondents claimed that they have patronized an insurance policy
before, while 68 (about 45%) of the respondent have never had an insurance policy. From the
respondents who claimed to have had insurance, 72 (about 47%) of them still have an insurance policy
while 79 (52%) of them claimed not to have current insurance policy. This is a lacuna for the insurance
practitioners to explore to find out that why people who have had the services before are reneging in
continuing to possess the services. This has marketing implication. Could this be traced to socio-cultural
factors? One respondent did not respond to the question. From the table, it is interesting to note that 50
percent of the respondents paid their premium promptly, 40.1 percent of them did not pay their premium
promptly, while 9.9 percent of the respondents are indifferent about the question. Are there socio-cultural
factors that are making about 40 percent of people not to pay their premium? Could this be due to loss of
job, under-employment, pressing domestic demands, poverty, among others? The table also reveals that
49 (32 %) of the respondents think that insurance companies are reliable and trust worthy, 42 (about
28%) of the respondents believed that the insurance companies ought to be reliable and trustworthy, 8
(5%) of respondents think that the insurance companies must be reliable and trustworthy, 17 (11%) of the
respondents feel that the insurance companies may not be reliable and trustworthy, while 3 respondents
did not respond to the question.
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TABLE 3: SOCIO- CULTURAL FACTORS AND INSURANCE PATRONAGE
Item Somewhat Indifference Sometimes Never No response
Reasons against insurance 22(14.5%) 26(17.1%) 23(21.7%) 49(32.2%)
22(14.5%)
Cultural reason against insurance 12(7.9%) 32(21.1%) 13(8.6%) 95(62.5%) 0(0.0%)
Religious reason against insurance 10(6.6%) 24(15.8%) 10(6.6%) 107(70.4%) 1(0.7%)
Believing accident can be averted 52(34.2%) 14(9.2%) 57(37.5%) 27(17.8%) 2(13%)
Spiritually
Source: Field Survey, 2010
The table above shows the social cultural factor (s) affecting the ownership of insurance policy. From the
table, 49 (32%) respondents never had any social cultural factor(s) against owning of insurance policy, 33
(about 22%) of the respondents sometimes have social cultural reason(s) against insurance policy. The
table also reveals that 107 (70%) have never had a religious reason against insurance and about 18 %
asserted that accident could be averted spiritually. However, about 38% of the respondents had the notion
that accidents could be averted through spiritual means. This definitely has implication for insurance
service and patronage. Such individuals may resort to fatalistic attitude rather than patronizing insurance
services. The implication of this is that it is cultural ethos, and religious adherence could affect negatively
or positively insurance policy and insurance patronage. Thirteen and 10 of the respondents affirmed that
they sometimes have cultural and religious reasons against insurance policy. While 7.9 and 6.6 percent of
the respondents claimed that they somewhat have cultural and religious reasons against insurance policy.
The table shows that 57 (37.5) of the respondents agreed that sometimes accidents could be averted
spiritually, 27 (17.8%) of the respondents believed that accidents could not be averted spiritually. This
implies that people might not really see the need to have a motor insurance since they believe that God
can protect them from having accidents and such reasons have been explained in Comte’s law of three
stages which affirms the dominance of the theological stage where mystical and supernatural power
dominate people’s minds and dictate their activities. Thus, regardless of the fact that the respondents had
acclaimed that they have no religious reasons against insurance, this analysis proves contrary to such
claim.
Table 4: CROSSTAB OF DEMOGRAPHIC CHARASTERISTICS AND OWNING AN
INSURANCE POLICY
Responses
Item Yes No NR x2cal df x2tab Alpha Level
Sex Male 47 40 1
Female 22 37 0 5.006 4 9.488 5
No response 3 2 0
Age Less than 25 3 16 0
26-35 31 34 0
36-45 16 12 0 35.886 12 21.026 5
46-55 14 11 0
56-65 4 1 1
Above 66 2 2 0
No response 2 3 0
Marital Single 22 36 0
Status Married 49 41 0 5.464 6 11.070 5
Divorced 0 1 0
Separated 1 1 0
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Academic Pry School 3 3 0
Background Sec School 5 23 0
OND/HND 18 19 0 39.583* 10 23.209 1
B.SC 32 28 0
Masters 11 4 0
No Response 3 2 0
Religion Islam 12 10 0
Christianity 59 63 0 3.924 6 11.070 5
Free thinker 0 1 0
No response 1 5 0
Source: Field Survey, 2010
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
From the table above, sex, religion, and marital status do not have any significant relationship with
owning an insurance policy; this is because the X 2 cal is > than the X 2 table at the 5 % level. The study is
a confirmation of earlier studies (i.e Olowokudejo, 2009 and Yusuf, et.al., 2009) where age and academic
background have been found to have significant relationship with owning insurance policy as the Pearson
Chi value of 5.886 and 39.583 are greater than the table values of 21.026 and 22.209 respectively. Thus,
we infer that age and academic attainment are statistically significant in explaining ownership and
patronage of insurance policy. This can be attributed to the fact that relatively more mature individuals
would be independent , free from financial encumbrances’ of parents, working, and if sufficiently
educated would understand, appreciate insurance service and patronize the services – life and non service
forms. Educated persons tend to occupy higher socio-economic status, own cars and pay for car insurance
whether ‘third- party’ and/or ‘comprehensive insurance policy’. In addition, these findings tend to
reinforce the notion that insurance, as a complex product, requires maturity and high academic attainment
to appreciate its values. Here insurance marketers face the onerous task of appealing to the young, the old,
the educated and the non-too-educated to garner more patronage.
Summary, Conclusion and Recommendations
The analysis presented has shown some of the socio-demographic characteristics as most of the
respondents were males; of the age group of 26-35 years. The analysis shows that most of the respondents
have a bachelor’s degree certification and are mostly Christians. In terms of their ownership of insurance
policies, most of the respondents have an insurance policy and they pay promptly. However, there seems
to be a little difference in the level to which they enjoy the services which the insurance companies
provide. Also, most of the respondents still have an ideal perspective and role that insurance companies
have to play and adhere to. The principles of reliability and trust are values that people believe that
insurance companies must hold in order to convince them into seeing insurance as a policy worthy of
engaging in.
In terms of influence on signing an insurance policy, the findings have shown that the Nigerian sociopolitical
environment has not been an encouraging factor. This stems from the finding that some of the
respondents were influenced by their awareness, education, the governmental regulation, friends and
colleagues. This also shows that the Nigerian society largely lacks an insurance culture. In terms of their
reasons against insurance, the study has shown that the people do have fewer reasons against insurance
even from their spiritual and cultural underpinnings. Thus, this shows that there is still an opportunity for
people to be impressed by insurance companies. This view is supported by the last section of analysis
which reveals that most of the respondents believe that signing insurance policies is not a waste of money,
neither is it a sign of evil or an anticipation of a disaster or a catastrophe.
From the above assertion, it is necessary to put it that insurance policies do not have a negative
connotation among Nigerians. Thus, there is a possibility of motivating Nigerians in partaking in
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insurance companies. The benefits of insurance undercover cannot be over-emphasized as there is no
gainsaying that signing insurance policies can provide a cover for risks and damages to come which are a
part of everyday life. On this basis, several recommendations have been made:
• A well-planned awareness programme should be carried out in order to enlighten people in the
basis and uses of insurance.
• The government has an important role to play in motivating people in signing insurance policies.
• Various institutional orders should provide encouragement for signing insurance policies e.g. the
health sector, religious system, educational sector etc.
• On the part of the insurance companies, the companies should ensure that their services are
reliable and trustworthy in that the services should not have too much bureaucratic process in
taking an insurance policy or receiving their claim.
Abridged References
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Alborn, T. (2004). “Postnational Insurance on the eve of destruction” Connecticut Insurance Law
Journal, Vol 10, 73 – 101.
Becker, G; R. J. Gates and E. Newsom (2004). ‘Self-Care Among Chronically Ill African Americans:
Culture, Health Disparities, and Health Insurance Status.’ American Journal of Public Health, Vol
94(12), 2066-2073.
Criel, B. (1998). ‘District-based Health Insurance in sub-Saharan Africa’. Studies in Health Services
Organisation & Policy, 9.
Chui, A. C. W. and Kwok, C. C. Y. (2008). ‘National culture and life insurance consumption’ Journal of
International Business Studies Vol. 39, 88-101.
Durowade, I.A ( 2001). People, Diversity and Culture in Nigeria in Olurode, L and Soyombo, O (Eds.)
Sociology for Beginners Lagos, John West Publications.
Eva-Cristina, P.and Al, P. N (2008). Particularities of the marketing activity in the insurance industry.
Griffith, D. M., Mason, M. A., Rodela, M., Matthews, D. D., Tran, Anh., Royster, M., Cotten, M. and
Eng, E. (2006) “A Structural Approach to Examining Prostate Cancer Risk for Rural Southern African
American Men”. Journal of Health Care for the Poor and Underserved – Vol. 18(4), pp. 73-101.
Haralambos, M and Holborn, M (2004). Sociology: Themes and Perspectives. London: Harper Collins
Publishers
Jimmy, R. (2001). “Informal microinsurance schemes - the case of funeral insurance in South Africa”.
Small Enterprise Development, Vol. 12(1), pp. 39-50.
Keegan, W. J. and Green, M. C. (2008). Global marketing, (5 TH Ed.). Pearson Education International,
London.
Kozak, M., Crotts, J. C., Law , R. (2007). “The impact of the perception of risk on international
travelers”. International Journal of Tourism Research. Vol. 9(4),233–242.
Lu, L., Rose, G. M. and Blodgett, J. G. (1999), “The Effects of Cultural Dimensions on Ethical Decision
Making in Marketing: An Exploratory Study”. Journal of Business Ethics Vol. 18: 91–105.
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Mueller, S. and Gelbrich, K. (2004). Interculturelles marketing, Vahlen Verlag, Muenchen.
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Edited by Emmanuel Obuah
Yusuf, T. O.; Gbadamosi, A. and Hamadu, D. (2009). ‘Attitudes of Nigerians towards Insurance Services:
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4(4), 34 – 46.
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The search for poverty reduction and sustainability in agribusiness in Tanzania: Will value chain
approaches provide the insight?
Abstract
Lettice Rutashobya, letticer@yahoo.com
University of Dar es Salaam Business School and Lennart Bangens, Goteborg, Sweden
Informed by the value chain, socio economic, sociological, networks, linkages/relationships and systems
perspectives/theories, our theoretical analysis in this paper acknowledges that improving productivity at the farm
level will not suffice to improve the situation for the rural poor in Tanzania. That, an analysis of agriculture as a
system incorporating the whole value chain, is necessary. Hence, we argue that the failure of agriculture to function
as an engine of growth stems not only from ‘production’ considerations but from the organization and performance
of the value chain as a system. E.g. coordination with urban markets, relations between farmers and traders,
diffusion of knowledge, processing, etc are all part of the bigger picture. Hence, access to markets is about
identifying and trading with the right partners as well as promoting processing rather than just an infrastructural
issue as often claimed. More specifically, assessment of backward and forward linkages in agriculture, and the
whole value chain as a system should help identify constraints to agricultural sustainability and hence poverty
alleviation among farmers. Consistent with the network theory, we pay special attention to the role of long term
interaction amongst the actors in the value chain. Such analysis will enhance our understanding of agro-based
value chains in general and how the farmer fits in the chain.
Introduction
A lot of the debate on agricultural sustainability has focussed on how to improve farm productivity in a
very narrow sense. Subsequently government policies have concentrated on upstream part of the value
chain such as supply of fertilizer, credit to farmers, etc. Such narrow approach has not enhanced farmers’
ability to generate revenue, eradicate poverty and improve their livelihood. We argue that for agriculture
to be sustainable a more holistic view is required. To increase our understanding on the problems farmers
face research needs to take a systems perspective that will enhance our understanding of agro-based value
chains from socio-economic, sociological, environmental, linkage/relationship, attitude and culture
perspectives. The socio-economic perspective includes analysis of how economic value is created in
various stages of the chain from raw material to end products. The sociological aspect maps gender
distribution and the type of economic actors operating in the value chain. The environmental perspective
focuses on two main aspects: the sustainable use of resources, and the impact on the environment.
Environment includes the close micro-environment such as nearby forests, water resources, bio-diversity
but also issues of climate change at a wider level. The linkage /relationship perspective takes off from the
notion that it is more than discrete business transactions that control the behaviour and performance of
value chains. Attitude and culture represent the inner circles of behavioural determinants that influence
how economic actors perceive each other, and hence will indirectly affect the way linkages emerge and
are maintained.
Socio-economic perspective further concerns the value created which normally starts with an analysis of
the activities each actor perform along the chain. For agribusiness this could be such as land preparation,
planting, weeding, irrigation, harvesting, post-harvesting, processing, marketing, etc. The various costs
are calculated as well “value” from a strict economic viewpoint but also from a knowledge perspective.
Such an analysis enables a discussion of income generation and wealth creation in agro-based sectors.
Issues that address weaknesses in certain parts can be highlighted. E.g. is it the farming or marketing that
is the weak link or are most activities done in inefficient manner? Can the value chain absorb price
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increase or is cost cutting the way forward? The need to take a fresh look at agriculture has been realized
by governments, NGOs, and the donor community. The recent World Development Report (2008) is an
example of the renewed interest in agriculture as a tool for meeting the MDG.
Our focus on agribusiness is motivated by current consensus that agricultural growth is necessary if
poverty reduction is to be meaningful. World Development Report (2008) provides that “As an economic
activity –agriculture can be a source of growth for the national economy, a provider of investment
opportunities for the private sector, a prime driver of agricultural related activities and the rural non-farm
economy.” Agricultural development is an effective approach to ensure food security, eradicating
poverty and improve peoples’ livelihood for many African countries. About 80 percent of Tanzania’s
population live in the rural areas and depend on agriculture for their livelihood. Agriculture and
agribusiness are thus the backbone of the Tanzanian economy. More than 70 percent are therefore
employed in the sector. Despite the many exogenous shocks that Tanzania has gone through, its share of
agriculture in GDP remains high, accounting for 25 percent during 2009 down from 27.6 in 2005. When
spill over effects are considered its contribution to GDP jumps to 60 percent (URT, 2006 Agricultural
Sector Review). The spillover effects are derived from production forward and backward linkages and
consumption multipliers. Such multipliers provide important catalytic effect to economic development.
Examples of such spillover effects are found in value adding activities such as agro-processing, the
activities of which are captured under manufacturing or transport sectors. Other examples of spill over
effects are consumption effects of agricultural produce which may be counted in other sectors such as
trade, hotels and restaurants, etc. In terms of Tanzania’s ability to participate effectively in the new global
economy, agriculture becomes the lead sector that gives the country a comparative advantage if
effectively promoted and diversified. Also given its role in supporting the rural poor, and in reducing
malnutrition, agricultural has the potential of lifting many of the poor out of poverty (URT, 2008, NSGRP
II, July 2010).
The National Strategy for Growth and Reduction of Poverty (NSGRP I and II) has identified poverty as
largely a rural phenomenon, and that the poor are concentrated in subsistence agriculture. Tanzania is one
of the poorest economies, with a GDP per capita of USD 333 (URT, 2006). Nearly 90 percent of the poor
in Tanzania reside in rural areas; having few or no opportunities apart from agriculture. Although nonfarming
incomes are steadily increasing, the sale of food and cash crops and livestock products accounts
for about 75 percent of rural household incomes. The strategy has therefore singled out agriculture as one
of the priority sectors for achieving poverty reduction and economic growth objectives. Similarly, the
Tanzanian government’s Agricultural Sector Development Strategy displays the effort to reinstate
agriculture as an engine to fight poverty. The potential inherent in Tanzania’s agricultural sector draws
from soil fertility, low land pressure – only 5 per cent of total land area is farmed today – and relatively
abundant rain falls.
Since agriculture is primarily a private sector activity in Tanzania, it is imperative to search for models
that can contribute to sustainable rural development from a poor smallholder perspective. More
specifically it is important for researchers to search for inclusive business strategies that will create value
for the rural and urban poor, or innovative models that will help build bridges between businesses and the
poor. That “small is beautiful” was coined by Schumacher in 1973 but reality has proven that the small
African family farms have a limited economic success.
Informed by the value chain, networks and systems perspectives, primarily inspired by Gereffi
(1994,1995, 1999, 2002), Hankasson and Snehota (1995), Johansson and Matsson (1988), and
Williamson (1975), we argue that the failure of agriculture to function as an engine of growth in Africa,
Tanzania in particular stems not only from ‘production’ considerations but from the organization and
performance of the value chain as a system. E.g. coordination with urban markets, relations between
farmers and traders, diffusion of knowledge, etc are all part of the bigger picture. Hence improving
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productivity at the farm level will not suffice to improve the situation for the rural poor, which requires an
analysis of agriculture as a system incorporating the whole value chain
The use of value chain as concept for development is not an entirely new: USAID, UNIDO, CDE, IFC
and FAO to mention a few donor agencies that have successfully applied the concept in agro-based
project. USAID is probably the agency that most consistently has adopted and further developed the
concept as a tool for development. E.g USAID supported a pro-poor analysis of the artichoke value chain
in Peru, structuring of Maize value chains in East Africa, analysis and promotion of avocado growers in
Kenya applying a value chain approach. Much of USAID’s work has focused on improving agribusiness.
UNIDO has as well adopted the value chain approach in a great number of studies and projects.
Interestingly, UNIDO has a clear academic orientation – verified by the number of papers and reviews
rather than development projects but also by contracting out the work to consultants with academic
experience and background. The team of GVC (Global Value Chain) at IDS, Sussex has in particular
contributed to UNIDO’s stock of competence. FAO - similar to USAID’s hands-on approach -has
developed guidelines for appraisal of value chains and how these analyses can benefit stakeholders. For
instance, the creation of a shared vision that will facilitate the building of cooperative relationships is one
key outcome.
From a research point of view, we need to address the following questions: What are the challenges ahead
to meet objectives of sustainability? A first issue to address is to what extent agribusiness is sustainable.
Who is winning or losing in the value chain; the farmers, traders, agro-processors, urban consumers?
Inflation is relatively high in Tanzania but for most agricultural food products, products have gone above
inflation for the last few years. E.g. most staple food such as maize, beans, and rice went up by more than
50 per cent between 2005 and 2006(URT, 2006) Historically, traders in major cities are the ones normally
benefitting from inflated markets since the farmers do not realise the economic potential. Additional
questions are: Can smallholders effectively develop into an economic force in a sustainable manner? This
is of course a ‘grand’ question with as many interlinked issues as answers but the focus of this particular
research is on organisation of the value chain. A second issue concerns the overall impact of agro-based
value chains on the environment. Agribusiness is more than just trading; it involves value added
(resources used in a sustainable way), transportation, waste handling, consumption of perishable goods
depends largely on the efficiency of the chain, etc. A third issue is the special attention paid to energy use
in the value chain, which normally draws on scarce resources. Firewood is the main energy source in rural
Tanzania and there are few alternatives; for households as well as SMEs.
The above analysis acknowledges that agriculture goes beyond the farm in the sense that even if the
farmer does everything right, it is seldom enough. Hence a myopic view of a single actor in a system will
not unleash agriculture’s potential, which hinges on a transformation of the whole value chain and the
integrated innovation system.
Theoretical Approach
Value chains and sustainability entail multi-dimensional and cross-disciplinary approaches in order to
capture complex and interdependent processes. (Depending on the specific issue being addressed
innovation systems, clusters or value chain frameworks will be applied). The study of such processes is
therefore not possible under traditional mono-paradigmatic frameworks that make unrealistic assumption
of reality. Development is and will remain a challenge to academia in the search for best-practice models
to support policymaking and interventions. There is already today an extensive body of literature
regarding value chains and sustainable development. However, marrying the two bodies of literature has
seldom been the case. We will first present our picture of each body separately.
The concept of value chain is preferred to ‘products’ or ‘services’ to explicit the activities in a supply
chain that transform a raw material into a finished product. A chain perspective comprises the linkages
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between various economic actors. It is equally important to study what takes place between actors as the
internal activities. The coordination among farmers, traders, urban buyers, and processing firms
influences how value is added and the overall efficiency of the value chain. With coordination we imply
that there are business transactions that require communication, in particular customized value added
between buyers and sellers. A value chain perspective – in relation to other approaches – adds the
complementary role and interdependencies that exist between firms and organisations operating in the
same chain.
Why is there a need to “coordinate” activities between economic actors (farmers, traders, processors,
groceries, urban markets)? From a layman’s perspective, “coordination” or “governance” may seem as
highly abstract concepts which benefit theoretical discussion with little relevance to poor farmers in
developing countries. All markets are exposed and subject to governance in one form or the other as what
is offered on the market is the result of the interplay between demand and supply. It may work as the
“invisible hand” of market forces or direct control in a vertically controlled value chain by a large firm. It
is also – in some cases – the result of communication directly between buyers and sellers in the value
chain. Hence, the governance is omnipresent whether consumers, small firms and farmers are aware of it;
which dictates what, how and how much is offered.
In much economic theory, the market is seen as the ideal governance form for sorting out these three
considerations. In reality, this is one of several factors at play. We will draw the attention to the value
chain and the non-market relationships between economic actors.
The above discussion boils down to four different typologies of chain governance:
Arm’s length market
relationship
Network or ‘close’
relationships
Quasi or asymmetrical
relationships
This is a typical market situation where mainly price and product
features set the condition for the transaction. There is no longterm
vision about trading again although it might happen. This is
often the relationship between consumers and large stores and
between companies for simple standardized products.
Close relationships emerge as a result of repetitive business
whereby other factors apart from price and product dominate the
transactions. Quality management, joint innovation projects,
adaptation of logistics, customization of products are some
features of network relationships.
Quasi is a special form where on of the parties take control of the
relationship. Most small traders and farmers find themselves in
this position. Specifications are often a one-way street for the
dominating firm to arrange the value chain according to its needs.
Hierarchical relationships This is basically vertical integration which occurs when a lead
firm acquires down-or up-stream companies to facilitate
coordination.
Source: Bangens (1998), Williamson 1975,1985, Humphrey and Schmitz (1996)
The bulk of early research on value chain originated from IDS, Sussex, that since early 90’s has produced
a number pioneering projects and publications. Value chains were identified as a key for success as an
outcome of the research on industrial clusters. It was increasingly noted that local value chains do not lead
to substantial upgrading of skills and access to markets. The observation that value chain should go
beyond clusters and national borders led to the notion of “Global Value Chain (GVC).” The study of
footwear cluster in Brazil, garment sectors, automotive, has highlighted the role of competent
international buyers for upgrading. The study of value chains has diffused considerably over the years but
tend to remain focused on GVC and its implications on development. For sub-Saharan Africa most
research competence is agglomerated in South Africa apart from IDS, Nairobi that has applied value
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chains for deeper insights of the informal sector. In Tanzania, ongoing research on GVC in mining and
tourism is being undertaken by the author. Koponen et al (2007) have studied value chains in cashew nuts
and coffee in Tanzania with a view to identifying areas for aid for trade.
In conclusion, what really matters is the existence of relationships. These have been studied using
complementary theoretical approaches such as the “Industrial Network Approach,” initially developed by
scholars at Uppsala University. This school of thought has mainly dealt with learning processes between
firms as an outcome of close relationships. Hence, the starting-point is the network mode of governance
which has proven a prerequisite for transferring knowledge across firms and organisations. This has been
pointed out by Bell and Albu (1999), who claim that growth solely drawing on in-house capability has
limited potential. By interacting with other firms and organizations, which have complementary resources
and competencies, companies can increase their own productivity and the ability to produce products
satisfying the needs and demands of the market. Needless to say, this helps to create economic growth
and welfare on the national level.
On the other hand, sustainable development (SD) is increasingly applied as the proper approach for
development projects and research to address problems and challenges facing developing countries. Early
definitions of sustainability development tended to focus on meeting human needs while maintaining a
balance with the environment. One of the first was coined by the Brundtland Commission, which is a
frequently-quoted definition of sustainable development, as a course of development that "meets the
needs of the present generation without compromising the ability of future generations to meet their own
needs."
Current views of sustainable development normally bring up three dimensions: social, economic and
environmental. The debate concerns the relative weight given to each dimension. For some sustainable
agriculture means food security whereas others see environmental impact as the lead dimension. We share
the view of Sida (1999) that sustainability must include livelihood for the rural poor in a pro-environment
way. Better use of existing resources is argued as the most efficient way to promote sustainability (Pretty,
1996). The way forward as suggested by this line of thought is to minimize external inputs and make
small farm regions self-sufficient and independent from external suppliers of pesticides, seeds, fertilizers,
etc.
Although sustainable development (SD) has been on the agenda for at least two decades, recent evidence
on climate change has spurred the discussion and a renewed interest has emerged. The direction is clearly
to put the environment first which means SD should stand on a platform that recognizes climate change,
biodiversity, renewable energy, water resources, etc to build sustainable livelihood. This development is
illustrated by FAO’s recent replacement of the former Sustainable Development Department to the new
Natural Resources Management and Environment Department.
A key issue is whether poor developing countries can afford sustainable development in the short-term
while they are coping with urgent and basic economic development challenges. Environmental
organisations claim this is indeed is a myth and that there is middle-road that both caters for development
and environmental concerns. Organic value chains are one way forward, although many smallholders and
petty traders in Africa are struggling to meet the requirements for organic exports. Still organic is not
necessarily sustainable per se.
The linkage between value chains and sustainability
Value chains have traditionally been studied from an economic perspective stressing imbalances in the
system such as the position of developing country suppliers in the value chain. Economic parameters are
covered in the VC literature including the process of moving away from primary products with little value
added. Small countries like Tanzania have difficulties climbing the value ladder for two main reasons: 1)
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global value chains exert considerable inertia and power on developing country producers leaving little
space for upgrading. Processing capabilities are already located elsewhere and lead buyers see no reason
to shift the current balance of power. Coffee, seaweed, cotton, cashew nuts, timber are just a few
examples where most value added is done in the industrialized world. 2) The required competence is
often not there in the developing countries. This can of course change with investment in education and
training in the long run.
Existing value chains may support sustainable development in two broad ways; end user markets in the
developed world put pressure on lead firms through corporate social responsibility mechanisms to
improve the whole value chains. There are numerous examples of how consumer advocacy in Europe has
led to different sourcing principles for MNCs in developing countries. Labour and environmental issues
are the main cause for consumer involvement which will be imposed on suppliers by overseas buyers.
Even pressures within GVCs are patchy, being product and buyer specific (Kivuitu et al. 2005).
The second way is that developing countries themselves drive a sustainable development agenda. The
power of informed, richer middle - and upper-class should not be underestimated. Governments are aware
and the donor community is supporting SD initiatives but what about the ordinary man in the street? What
about the poor people in rural and urban areas? Is there information and alternatives to live a sustainable
life or run a sustainable business in Tanzania for instance? Unless there is shift in public opinion,
agribusiness targeting local markets is unlikely to be subject to the same pressure as those operating in
GVCs.
At this point we deem to address the following research questions:
(i) What are the proper indicators for evaluating the sustainability of a value chain/innovation
system? This activity will comprise reviews but also communication with target groups.
(ii) Can small rural farms survive in the long run? Is farming income enough? By analysing the
economics of small-scale farming, agro-processing and trading with the opportunities in the
value chain, a number of scenarios in respect of business opportunities and constraints can be
painted.
(iii) Is zero impact on the environment possibly measured from the viewpoint of the whole chain?
What are the activities that impact on climate change, biodiversity, natural resources? What
are the incentives for farmers and businesses to “go green”? Will local value chains go green
driven by market forces, only?
(iv) How can the value chains be organized differently to meet the MDGs in a sustainable way? Is
there a need for new technologies or going back to basics? How can the innovation system
and business models drive the development towards sustainability?
(v) How can business models that promote gender equality and human development among the
rural and urban poor be identified?
(vi) Is large scale investment the way forward such as large plantations for Biofuel targeting
export markets? Here the objective is to forecast and paint various scenarios for sustainable
agribusiness to feed policy-making process.
Conclusion
This paper has highlighted the theoretical perspectives related to value chain, networks and systems
approach as a means to sustainable agriculture in Africa. The analyses point to the need for business
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models that will drive farmers out of poverty. More specifically, a holistic view in the analysis of
agricultural opportunities and constraints to sustainable rural development is required.
References
Bangens L. (1998), Inter-firm Linkages and Learning: An empirical exploration of firms in the Third
World, Ph.D thesis Chalmers University of Technology
Eskola E., (2005), Agricultural Marketing and Supply Chain Management in Tanzania: A Case Study,
ESRF working paper
Hakansson, H. and Snehota, I. (1995) (Eds.) Developing Relationships in Business Networks. London.
Thompson Business Press
Humphrey J. and Schmitz H. (2000), 'Governance and upgrading: linking industrial cluster and global
value chain research', IDS Working Paper No 120, Brighton: Institute of Development Studies,
University of Sussex
Kivuitu et al (2005) How can Social Responsibility deliver in Africa? Insights from Kenya and Zambia,
Perspectives on Corporate Responsibility on Environment and Development, International Institute for
Environment and Development.
Koponen, J, Chisala, V, Haapakoski& Rutashobya, L (2007) Climbing the Value Chain Out of Poverty:
Aid for Trade and its Uses in Tanzania and Zambia, in Brolen, K, et al (eds) “Aid for Trade: From
Policies to Practice, The cases of Mozambique, Tanzania, Vietnam and Zambia, Helsinki, Erweko
Painotuote Oy
Pretty et al. (1996), Sustainable Agriculture: Impacts on Food Production and Challenges for Food
Security, GATEKEEPER SERIES No. 60, International Institute for Environment and Development
Schmitz H. ed. (2003), Local Enterprises in the Global Economy, Edward Elgar: Cheltenham UK
Sida (1999), Sustainable agriculture: A summary of Sida’s experiences and priorities
URT, (2006) Agricultural Sector Review, Ministry of Agriculture and Food Security
URT, (2008) Agricultural Sector Review, Ministry of Agriculture and Food Security
URT,(2006)The economic survey source http://www.tanzania.go.tz/economy.html
URT(2006)The Economic Survey source
http://www.tanzania.go.tz/economicsurvey1/2006/part4/agriculture.htm
World Bank, (2008), World Development Report
Williamson, O.E. (1975) Markets and Hierarchies: Analysis and Antitrust Implications. New York. Free
Press
URT, (2010) National Strategy for Growth and Reduction of Poverty II (NSGRP II)
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Track 6: Entrepreneurship, Small Business and the Informal Sector
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Diaspora Entrepreneurship: A Pilot Study of British-African Entrepreneurs
Sanya Ojo sanyaojo@hotmial.com
University of East London, UK.
This paper examines the extent to which ‘hydra phenomenon’ and the ‘paradox of embeddedness’ influence the
entrepreneurial activities of British-Africans through a case-study ethnography approach. Two Nigerian Diaspora
entrepreneurs were interviewed using a collaborative narrative method to established knowledge of their business
strategies and tactics. The study shows that the process of embeddedness is not adequately negotiated by the
entrepreneurs; the transition to the ‘next stage’ is proven daunting to the entrepreneurs as shown by failed attempts
at ‘expansion’; the entrepreneurs struggled to cope with the various complexities that attend changing UK business
environment. Other emergent issues are also revealed.
Introduction
Diaspora communities have been portrayed to be scattered from an original centre to more than one
peripheral places and still maintaining links, memories, and images of their original homeland (Manger &
Assal, 2006: 12-13). They may or may not be fully integrated into their host countries and mostly harbor
the desire to return to their homelands when the time is right (Skinner, 1982: 17-45). Ionescu (2007: 8)
defines Diasporas as: “members of ethnic and national communities, who have left, but maintain links
with their homelands”. While seen as communities, diasporas are transnational in nature rather than being
sheer ethnic or immigrant minority groups located in a particular country as they embody means of
envisaging community, citizenship, and identity as ‘simultaneously here and elsewhere’ (Clifford, 1992:
3).
Diaspora entrepreneurs are valuable in facilitating some trade links with countries of origin and residence
directly by catering to the demands for goods & services (such as food or music from their home
countries). They may possess access and knowledge of markets or industries in the home country, which
can generate new business links (Ghosh, 2005). Trade links can also develop through opening of new
businesses in home or host countries through return/circular migration (Portes et al., 2002). According to
Kitching et al. (2009), Diaspora network structures play important roles for business development by
providing resources and opportunities to ethnic ventures if they are effectively exploited. Essentially,
Diaspora-based network under specific criteria allows access to resources & markets, and assist greater
levels of competitiveness. But it can also become an albatross, in certain conditions, when it restricts
resources and markets thereby limiting business competitiveness.
The explosion of British-African entrepreneurial Diaspora in Britain can be located broadly at the
intersection of micro, meso, & mega structures, and the mechanisms of migratory processes. Drawing
from extant literature, this paper interrogates and teases out how the concepts of “hydra phenomenon” and
“paradox of embeddedness” evolve and are negotiated by British-African entrepreneurs. It explores how
these communities, as strategic actors, are involved in processes of linking two different business
locations; and how they constitute a significant albatross in entrepreneurial activities.
Conceptual Framework
Diaspora entrepreneurship can be explored by the ‘middleman minorities’ (Bonacich, 1973; Morokvasic,
1993; Turner & Bonacich, 1980); the culturalist (Masurel et al., 2002; Fregetto, 2004; Borjas, 1993) and
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the interactionist paradigms (Waldinger et al., 1990; Chan and Chiang, 1994). The ‘middleman
minorities’ concept main tenet is that immigrants grow the sojourner mentality and engage in middleman
occupations or easily liquidated businesses because of host community antagonism, discrimination and
constrained opportunities for upward mobility. It surmises family and ethnic networks for labor, capital,
and information are the only viable options for business transactions and survival (Bonacich, 1973;
Morokvasic, 1993).
The culturalist perspective attributes ethnic entrepreneurship to their specific ethnic or cultural
characteristics rather than the opportunity structures in the host countries (Berger and Hsiao, 1988;
Redding, 1990; Leung, 2002). The key tenet of this perspective is that family values, religious beliefs and
communal solidarity stimulated immigrants to work hard for low wages which in turn makes ethnic
enterprises more competitive than those in the mainstream market-level wages economy (Kwong, 1997).
Their reliance on family-based networks and communal self-help facilitates economic success.
The interactionist perception integrates the structuralist and culturalist perspectives, stressing the
relationship between the opportunity structure in the host country and the ethnic resource of an immigrant
group (Waldinger et al., 1990; Chan and Chiang, 1994). The opportunity structure refers to the market
conditions, government policies, as well as social and cultural norms, while the ethnic resources refer to
family and kinship bonds that form social capital which aids entrepreneurial activities. The interactionist
perspective presents a holistic approach for probing ethnic entrepreneurship, but generally tends to
presume ethnic homogeneity and neglect intra-ethnic diversity.
Nigerians as monolithic ethnic group
Nigerian community is the oldest black community in the UK (BBC, 2005). Nigerians’ migration to the
UK span over 200 years; being a former colony of Britain, their first port of call for the pursuit of the
golden fleece, business enterprise, and holiday destination is the UK. Up to the 1970s the trend was for
Nigerians who studied in the UK to return to Nigeria and fill up many available employment
opportunities. But the 1980s witnessed a change in the migration trend following the end of the oil boom
era in Nigeria that signaled the beginning of economic doldrums for the country (IOM, 2007). There was
a considerable wave of Nigerians’ migration into the UK characterized by an increased propensity for the
migrants to settle permanently in the country so as to secure better life and be fully integrated into the
British community. Nevertheless, this epoch has spawn a new generation of Nigerian migrants whose
views, conducts and general mindsets are tangential to the aspirations of the academic-oriented generation
of old (IOM, 2007).
Basically, Nigerians in the UK fall into different categories. These include settled residents with rights of
abode, Nigerians with British Nationality and other EU nationality; those who are in the UK on a
temporary status as students, visitors, or highly skilled workers; irregular migrants consisting of those
who have overstayed their visas or undocumented migrants and asylum seekers. To an extent, a large
percentage of the Nigerian Diaspora in the UK could be tagged economic migrants as they have migrated
into the UK for economic reasons (IOM, 2007).
Though it can be said that with the multitude of tribal groupings, the Nigerian society, home or abroad, is
not culturally homogenous and to allude to a Nigerian culture may seem a misnomer. Thus, some authors
question the assumption that an ethnic group has a common culture, particularly in contemporary
societies (Tamney, 1995). Invariably, Nigerian Diaspora in the UK and in many other developed societies
has multiple layers of identification. Contingent on the situation and to whom they interact with, they
adopt different markers. The most common markers include nationality (identifying as ‘Nigerian’ when in
another country; race/culture (as ‘Hausa/Igbo/Yoruba’ etc. when trying to differentiate themselves from
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the other racial or cultural communities); and region/dialect (as ‘Ijesa/Ijebu/Egba/Oyo’ etc. when trying to
distinguish themselves within their own racial or cultural community) (IOM, 2010).
However, fifty years after Nigeria independence, the numerous cultures in the country are welded in such
a manner that one can safely infer a Nigerian ethnic entrepreneurship culture. This phenomenon known as
acculturation was described as a process of cultural modification and adaptation of groups of individuals
with divergent cultures consequent to continuous direct contact among them (Redfield, Linton and
Herskovits, 1936: 149; Harry, 1992: 55). Therefore, a homogenous ethnic group in the context of Nigeria
is considered as a collectivity within the UK society.
London is the epicenter of Nigerian Diaspora entrepreneurship in the UK. Although the Foreign
Commonwealth Office estimated the number of Nigerians in the UK to be up to 3 million (FCO, 2010), it
is hard to ascertain the true size of the Nigerian community in London. But it is generally accepted that
London is home to the largest Diaspora populations of Nigerians in the UK. The capital accommodates
more Nigerians & Nigerian SMEs than any other part of the UK and the 2001 census statistics observed
that about 70% of its estimated Nigerian community resides in London (IOM, 2007). Thus, Nigerian
community in London offers an authentic platform for exploratory research into black African
entrepreneurship.
Methodology
Two London-based Nigerian entrepreneurs, each with at least 20 years’ self-employed entrepreneurial
experience in the UK were used in the case studies. Robson (2002: 178) defines case study as research
strategy involving empirical investigation of a specific contemporary phenomenon within its real-life
setting, using multiple sources of evidence. Case studies are useful for generating and testing hypotheses;
providing systemic approach of looking at occurrences, data collection, information analysis, and results
reporting (Yin, 2002). But on the other hand, Case study method is said to lack the rigour of scientific
designs; produces large mass of data that enables researcher to make any interpretation that caught his/her
fancy, and it seldom permits generalizations (Easterby-Smith, 2008: 97). Hence careful attention has to be
paid to its designs to ensure validity.
The researcher’s ethnic entrepreneurship practitioner experience affords the study an action research
praxis that enables improvement and quality of understanding into the subject area (Winter & Munn-
Giddings, 2001: 8). Inculcated within this approach is the novel construal of meaning to generate a
context for a profound and emotional understanding of the respondents “life world” (Habermas, 1987)
and in a fashion that helps to reveal truth claims in the process and production of the narrative (Mahoney,
2007).
Research protocols
The research was conducted between January and February 2011. The level of engagement was face-toface
case-study based narrative interviews with two individual entrepreneurs in London (Respondents 1 &
2). These two interacts at a particular entrepreneurial inter-phase i.e. one supplied the other’s raw
materials inputs. Both were allowed to tell their stories from perspectives of: hindsight about what and
how they have transformed; reflections on their present situations; interpretations of contemporary issues
surrounding the entrepreneurial space in the UK; and visions/expectations going forward (into the future).
Piercing through from these perspectives the two entrepreneurs were questioned so as to expose their
inputs in shaping entrepreneurial processes, thus leading to the disclosure of their frustrations and
disappointments in business venturing. Purposely, the main focus of query takes in recognition of how:
the narrative covering growth and transition to the ‘next level’ of business expansion was constructed by
respondents; the causal texture of business operations (policy, legal, regulations etc regimes) was
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negotiated by the entrepreneurs; the inter connectivity of businesses in terms of embeddedness affects
outcomes.
The interviews were recorded with permission but with a caveat – names and identities are to be
protected. The interviews were then transcribed for further analysis which led to the sorting out different
issues that developed from the narratives. The ‘connected narrative’ method (Misler, 1990) is then
explored to report the findings.
Case Studies
Case Study 1
Respondent 1 (55) runs a thriving food processing firm employing up to 15 staff and a yearly turn-over in
excess of £2.5m at its peak. The main activity of the firm is manufacturing, processing, packaging, and
distributing African food-stuffs in London. The distribution channels cover Europe, US, and Canada and
its raw materials come from suppliers who import from Africa and the Caribbean. When the going was
good, Respondent 1 was able to secure bank loans for expansion, including moving to owned industrial
premises, buy new vehicles for distribution and investment on equipment and industrial machineries.
Problems started about six years previously when a series of events and decisions made by the respondent
resulted in disaster. First, he decided to invest ‘home’ (i.e. Nigeria), and committed over £100,000.00 in
setting up an internet service provider business with equipment bought in Israel. The business didn’t last
longer than 18 months losing over £120,000.00. Frustrated, he resolved to strengthen his business in
London by investing in bigger machine and equipment, the new line processing machine was tailoredmade
in Turkey (for cost reasons). Problems with fixing, specification and other logistics delay the
installation of the pieces of equipment, and eventually a £40,000 piece of equipment lay fallow and
under-utilized.
In order to shore up his financial situation, the respondent changed his banker on the understanding that
bigger over-draft facility will be granted if he move all his accounts to the new bank. However, due to the
global financial problems of 2007, the new bank decided to review the account and slashed the over-draft
facility three months after the opening of the account. Hence the entrepreneur’s firm was suddenly starved
of much needed financial ‘oxygen’ with dire consequences. The final straw was the decision to buy a fastfood
franchise in the West-end of London in 2008, taking loans from his firm, friends, family,
acquaintances and loan-sharks. The venture ran into troubled waters right from the start and the loss
totaled £200,000 plus health consequences. To make matter worse, his factory was shut for three months
and products withdrawn from the market by the health authorities when mice droppings were found
during routine visits by the borough health officials. Total loss was estimated to be in excess of
£100,000.00 plus damage to image.
To cap it all, the market was shrinking with many of his supply outlets closing down and not paying for
products supplied. Also new players enter the market; these new entrants do not process their products in
the UK but in Africa and the Caribbean. They merely import finished product to the UK, hence they have
competitive advantage and are able to sell at below the respondent’s cost prices.
Case Study 2
This entrepreneur (46) has 20 years’ experience in entrepreneurial activities in the UK. She is involved in
importing and exporting of food and materials from Africa to Europe and the US, she was a major
supplier of raw materials to Respondent 1 firm.
She ran an Afro-Caribbean green-grocery shop for ten years before packing it up in 2000 because of
shrinking patronage, problems in compliance with health and safety regulations & bye-laws, intense
competition from other ethnic shops, and in her own words “the mushrooming advent of the big super-
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market” (especially Tesco) chains at the turn of the 21 st century. Then she started importation and
distribution of materials and food-stuffs to other African shops and entrepreneurs in and around London.
This wasn’t going well for reasons ranging from late or non-payment of money for goods supplied,
customers closing down and absconding with goods and money, stiff competition from other importers,
problems of access to customers premises (in her words: “the fear of the traffic wardens is the beginning
of pound-sterling wisdom”) until she became sole supplier of raw materials to one of the first respondent
firm’s line of products. This arrangement was of mutual benefit as Respondent 1 was able to compete on
the basis of his ability to access and refigure an external pool (Respondent 2) of resources/partner rather
than firm-based competencies (i.e. directly importing from abroad). It also benefited Respondent 2 as she
was able to cut down on over-head expenses such as ware-housing, goods distribution and money
collection expenses, etc. She was able to realize net profit of £20,000.00 yearly with minimum effort
compared to her previous multi-supplying routine. However, her business collapsed when Respondent 1
was unable to buy or pay for goods she supplied due to problems he was facing in his ventures.
Findings and Analysis
The following major conceptions are discerned from the case studies; ‘the hydra phenomenon’ and ‘the
paradox of embeddedness’.
Hydra phenomenon
The penchant for diversifying too quickly and widely by the first respondent entrepreneur seems to be a
major inhibiting factor to his entrepreneurial activities. Unbridle expansion causes this entrepreneur to
engage in several business undertakings concurrently - with inadequate attention to the core business. The
enterprises thus formed ‘become a cluster of disparate activities linked only by the entrepreneurs but
lacking any strategic coherence’ (Nwankwo, 2005: 130). Analyzing his changing business strategies
directs attention to the notion of product diversification which indicates a firm’s diversifying into more
than one product market (Wan and Hoskisson, 2003). Product diversification is conventionally placed
into two broad categories: related and unrelated diversification.
Related diversification is present when there are physical linkages between businesses (Caves, 1996;
Montgomery, 1994) or knowledge linkages (Casson, 2000; Penrose, 1995), even though only physical
linkages can be easily identified and compared. Unrelated diversification or conglomerate diversification
indicates diversification into areas where no physical resources are pooled, other than financial (Stopford
and Dunning, 1983). Few of the investments decisions of Respondent 1 were related diversification.
Paradox of Embeddedness
A paradox of embeddedness is evidenced in both case studies. Uzzi (1997: 35) argues that embeddedness
promotes the economies of time, allocative efficiency and complex adaptation only to a point beyond
which it can ruin economic performance by making firms susceptible to exogenous shocks or shielding
them from information that exists outside their network. The two cases of the Nigerian Diaspora
entrepreneurs seem to support this argument. Their reliance on ethnic networks helps in facilitating access
to market information, capital and labor, and consequently lowered transaction costs. However, such an
enclave economic activities negatively affect their economic performance by restricting and exposing
them to market structural change and insulating them from information beyond their community-based
networks. Both suffer when their core partners failed.
On reflection, the first respondent attributed his problems to fate, run of bad luck and the inherent
difficulties in navigating British business terrain by black entrepreneurs. He retorted: “this country
(Britain) is finished …. They made things difficult for black businesses….Banks are biased against black
businesses….. Nigeria is the place to go if one wants to be successful in business”.
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The second respondent consoles herself by the expression: “Allah yana nan” a Hausa expression for ‘God
knows best’ a gesture of “resigned reaction” to supposed institutional failures or ethnic disadvantages
(Nwankwo, 2005). Similar to Respondent 1, she also wants to go back to Nigeria some day, but she is
unsure when that day will come. Her energies are now directed to religious activities at her local Nigerian
Pentecostal church after her daily “9am to 5pm” grind (her words for paid employment).
Other factors gleaned from the research that acted as blinders to success in both cases are depicted
(together with those above) in the figure below.
Fig. 1: Blinders of Successful Entrepreneurship
Diversification
Compiled from Research conducted in 2011
Conclusion
(Hydra
phenomenon)
Competition
(Market new
entrants& influx of
supermarket chains)
Finance
(Inability to secure
loan/insufficient
fund)
Transition
(Moving to the ‘next
stage’ of
development)
Regulation
(Inability to navigate
business regulations)
Entrepreneur
(Individual capacities
and resources)
Transnational
(Straddling two
composite
environments)
Fatalism
(Theocentricism
orientation)
Embeddedness
(Paradox of
embeddedness)
This study contributes to the study of ethnic entrepreneurship at empirical, methodological, and
theoretical levels. Empirically, it helps to fill a gap in the existing literature on black ethnic
entrepreneurship by dealing with an understudied area of Africa Diaspora entrepreneurship. Nwankwo
(2005) states that the literature of black ethnic entrepreneurship is tenuous compared to that of Asian
ethnic entrepreneurship in the UK. With a focus on Nigerian Diaspora businesses, this study helps throw
some light on the understudied area.
Policy
(Failure to negotiate
the policy
environment)
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Methodologically, the study makes a resourceful use of practitioner-participatory action research protocol
to draw out important oral data. The researcher’s practical experiences in this field and past business
relationships with the respondents ensure convivial ambience and detailed data gathering. The rich input
of oral data to research is explained by the insights it offers into the respondents’ values, social
relationships, definition of situations and personal attribution, lacking in most extant researches.
Unsurprisingly, the respondents took time to narrate their stories, thus making the oral data gathered
richer than that from any other method.
Theoretically, this paper confirms Nwankwo (2005: 135) observations of the ‘Octopus phenomenon and
the ‘Paternalism in entrepreneurial orientation’ inherent in British-African entrepreneurship.
Furthermore, the paper adds to debates on the burgeoning world of Diaspora entrepreneurship, and
building on such studies, there is significant potential to expand knowledge of the entrepreneurial
behaviors of Diaspora entrepreneurs. Also, it blazes a trail in repudiating the broad-brush approach to the
black ethnic entrepreneurship research.
There are obvious areas that are not addressed or insufficiently addressed, such as the competitive
environment, business support regime, gender issues, and social capital dynamics of Diaspora
entrepreneurship. The other factors shown in figure 1 also need to be fully explored and explained in
further studies. Since only two case studies were used care must be taken in making generalizations on
Nigerian Diaspora entrepreneurs hence there is need for more focused dialogic research into the attitudes
and behaviors of Nigerian Diaspora entrepreneurs.
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International Migration. Geneva: IOM, pp. 163-183.
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Habermas, J. (1987). The Theory of Communicative Actions: Volume Two. Lifeworld and System, a
Critique of Functionalist Reason, Boston, MA: Becon Press.
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Entrepreneurial Policy and Business Success in Developing countries: Evidence from Kenya
George Yashon Ombado, gyashon@googlemail.com ACCOSCA
Abstract
Effective Entrepreneurial policy is important for developing countries. Arguably making it one of the catalysts that
potentially contribute towards economic growth in Africa; various scholars have linked it with employment creation.
It is due to these positive externalities that this paper analyses factors that influence entrepreneurial success and
offer policy recommendations. However it does not focus on their linearity; it seeks to show how the impact of the
Age, Family size, location and Education has on entrepreneurial progress thus contributing towards development of
an effective entrepreneurial policy.
Introduction
Studies have been conducted to find the relationship between entrepreneurial activities and economic
development. However, most of them are less conclusive in providing evidence associated with causal
relationship. Those in favor of using entrepreneurship to spur economic performance suggest that policy
should be used to achieve a desired entrepreneurial growth. To understand the basis of this argument; the
paper identifies two distinct definition of entrepreneurship that separately fits in the context of either
developed or developing countries. In doing so, it uses contextual independent variables such as: years
spent on education, age of individuals, type of entrepreneurs, location and social setting to predict the
outcome of business success and subsequently entrepreneurial growth.
This study did not seek to demystify the myth associating developing countries with lack of innovation,
instead it adopts Schumpeters’ (1942) definition, to highlight innovation role on entrepreneurial growth.
This implies that the challenges affecting implementation of innovated ideas in Africa such as inadequate
capital, effective government policy and citizen perception are key hindrance to entrepreneurial
development. Hence the growing desire to use institutions’ framework and targeted legislative action to
develop entrepreneurship. The policy recommendation is based on the findings and analysis.
Conceptual framework
This paper acknowledges existence of diverse views on what constitute entrepreneurship. Attempt to
show technological innovation as the only route to growth Hart (2003) is disputable as the bases to define
entrepreneurs. According to Schumpeters’ (1942) definition, this is a process where new ideas are
translated into a new business. The argument in this paper blends the two view point; by showing that
entrepreneurship is possible through various types of innovation inclusive of technological innovations. In
doing so, a close similarity is drawn between small business and entrepreneurs.
In this regard, the perception that technological level of a country is a major influential factor to business
growth, Hart (2003) can be misguided. This definition is therefore applicable in developed countries that
already rely on technological level for economic growth (Lee et al. 2000). Studies already show that new
businesses have an impact on economic growth in both developed and developing countries (Ahmad and
Hoffman, 2007). This definition enables the paper to adopt a broad interpretation to include either small
business ventures or entrepreneurship, which provides a common ground to predict the variables
responsible for entrepreneurial activities. On that basis, it concurs with other studies that have identified
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two forms of entrepreneurship; necessity and opportunity as common in developing and developed
countries respectively; Zoltan and Audretsch (2003) as highlighted in the next sub-section.
Necessity Vs Opportunity entrepreneurship
Contrary to the perception that individuals choose to become entrepreneurs, the two types of
entrepreneurship are defined through their purpose of existence Zoltan (2006); one triggered by
opportunity and the other emerges from necessity. Necessity is when high unemployment triggers new
business start-ups which are involuntary ventures (Evans and Leighton, 1990). In a developing nation’s
context, entrepreneurial activities act as a push effect on growth and employment creation. This implies
that increased unemployment leads to new business start-ups, Blanchflower and Mayer (1994) but others
show that high unemployment will lead to low entrepreneurial activities as a result of limited
entrepreneurial skills and lower human capital endowment (Jovanovic, 1982). This is in contrast with
views that economic growth influence entrepreneurial activities (Audretsch, 1995).
Ingesting the impact of policy on economic development requires an understanding of social and cultural
dynamics within a region: More importantly those responsible for increasing entrepreneurial activities
(Barrett et al. 2001). One of the challenges is to understand that involuntary venture can lead to situation
where individual’s ability and skills are under question. Therefore finding it challenging when required to
start-up high risk businesses.
Why use Policy?
Entrepreneurial skills gap can be solved by effective policy that target specific activities; most of
entrepreneurial initiatives in developing nations emerge out of necessity rather than design. Arguably,
policy has the ability to exponent the process of business growth in countries with lower levels of
technological advancement; According to Reynolds et al. (2000) this encourages scholars to research
more on the extent to which policy can raise the levels of entrepreneurial activities.
The government can also incorporate fiscal policy linked to taxation since it is the commonest policy tool
despite complexity in understanding tax legislations (Herbig et al. 1994). However, the implication of
each policy on entrepreneurial growth varies hence a target policy approach will be needed. Some of the
possible policy tools include the provision of business start-up requirement.
The ability to use policy to encourage entrepreneurship should encourage academicians to contribute
towards more research, identifying challenges facing policy drafting. As argued by Siegel et al. (2007),
policy makers are not necessarily better placed in drafting policy that encourage entrepreneurship as
compared to scholars who consider various aspects of risk associated with a particular policy. They
suggest a redefine of policy maker’s roles to resemble that of scholars. Policy is therefore instrumental in
promoting business success rates.
What factors affect entrepreneurship levels?
The growth of entrepreneurship does not entirely depend on Policy (Zoltan and Laszlo Szerb, 2007).It can
be argued that the context of entrepreneurship is complex requiring that background variables be put into
consideration (Zoltan and Laszlo Szerb, 2007). Understanding the variable that distorts entrepreneurial
growth requires address the following questions: Does age and education of entrepreneurs count? What is
the role of endowment? (Family and geographical) and what form of entrepreneurship?
Age of entrepreneurs
Previous studies have shown a link between age and entrepreneurs where business success has positively
correlated to age Kautonen et al. 2008; Levesqué and Minniti (2006), though the older entrepreneurs tend
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to succeed in business venture, other empirical studies discount treatment of age as the best predictor of
entrepreneurial growth and instead argue for ability (Parker, 2005). The older tend to have the capital and
experience needed to be able to make a viable decision. While the young have the enthusiasm and
motivation to engage in business.
Education level
Though what constitute entrepreneurship education is debatable; the paper adopted the one that identify
skills and mentality an individual possesses prior to starting-up a business (Alberti, 1999).The levels of
skills are improved as one spends more years seeking education. Studies have shown that lack of basic
business skills derail business growth (Van Eeden et al. 2004). The subtle impact highlights the important
knowledge on business and economic growth. The spill over-effects would contribute to employment
creation and subsequently poverty reduction levels (World Bank, 2004).
In developing countries, entrepreneurship education fosters job creation (Hynes, 2001). There are
fundamental differences of entrepreneurship between developed countries and LDCs. For instance, in
LDC’s the older and higher educated entrepreneurs are influential in stimulating economic growth, while
the younger entrepreneurs are influential in developed world (Verheul and Van Stel, 2004). In both cases
adoption of policy instrument in stimulating growth is common. According to World Bank (2004) using
macro-economic policy to stimulate growth has already been tested; little is being done to improve
entrepreneurship education yet it is perceived by others Guedalla et al. (2001) as ‘Taylorism of the Mind’.
Geographic endowment
An economy of scale has a role in determining reduced overheard cost. This makes business start-up to be
higher with-in the city as a result of rich relative infrastructure. This can also be termed as entrepreneurial
capital; a region with suitable factors to create new business ventures (Audretsch and Keilbach, 2004).
Type of entrepreneurial
Though what constitute Entrepreneurship is debatable -from an economic perspective- entrepreneurship
education encompasses activities that have the ability to increase entrepreneurial capital. It is in this
respect that Baumol (2002) argued that the amount of growth left unaccounted for in Solow’s production
models can be attributed to accumulative entrepreneurial activity. This justifies the use of
entrepreneurship capital to explain the variations in economic performance (Zoltan and Audretsch, 2003).
Size of Family
It is argued that family firms are less entrepreneurial than non family ones since they are risk averse and
often make decisions in favor of their families that adversely affect the business. Though, others dismiss
this by arguing that family business has a long-term perspective and therefore willing to take risk.
Besides, their success rates are pushed upwards due to strong supportive culture.
Research Methodology
This being a cross sectional study, the research design uses both qualitative and quantitative
questionnaires to help establish the relationship between policy variable and business success. The
decision to use regression techniques is to predict and quantify the factors responsible for small business
growth. The survey data analysis provides a balanced assessment on theories and evidence; in addition to
finding the relationship between selected variable.
The primary research was conducted in fours constituents’ within Nairobi. Though this approach does not
provide a holistic picture; the city is perceived to exhibit higher endowment and higher demand for
commodities thus a better opportunity to supply goods or service in comparison to other areas. A target
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was placed on each of the areas but the collection was done at random with 350 as the target sample size
for the whole study.
Questionnaires
Stratified sampling techniques were used to select the business owners. The research was conducted in a
period of four months where the demographic questionnaire (DQ), developed by Jaworski and Kohli
(1993) was adopted. The DQ was developed to gather information about respondents' age, education,
gender, and experience. These was administered to 350 entrepreneurs at various areas in Nairobi, the
study received feedback from 272 entrepreneurs representing a 78% response rate. This makes it possible
to replicate the study in other entrepreneurialism discourse in the region and to compare how policy
affects business growth in other cities.
The entrepreneurs were asked to fill questionnaire with the help of interviewers and the sample identified
whether they were entrepreneurs as a consequence of necessity or opportunity. The questions required
them to rank and quantify issues they perceive as important to their success or success of their
competitors: location, education, and size of family and legislative measures on entrepreneurial activities.
The advantage of using the capital city as a geographical endowed sample makes it even easier to collect
primary data. The interviewers did not encounter language barriers as literacy levels are higher within the
city than other location.
Empirical Analysis
This section uses multiple-regression Model to test the theoretical hypotheses; entrepreneurship growth
can be influenced by factors associated with policy. The equation is constructed to include age, education,
family size and sector (dummy variable) as independent variable. The predicted variable in this case is
entrepreneurs’ growth denoted by EG. The variables have been contextualized to fit a developing country.
EG = Function (Age, Education, Family Size and Entrepreneurial type)
= b1 + b2*age + b3*education + b4*Family Size+ b5* Entrepreneurial Type
= b1 + b2*a + b3*Ed + b4*FS + b5* E.T
The model shows how acquisition of human capital, increased age of an entrepreneur, size of family
commitment, type of entrepreneurship will determine the direction and pace of an enterprise growth. In
order to arrive at conclusive results, certain assumptions contextualized in the case study were made as
listed below:
• The whole study assumes that Entrepreneurial Growth and business success are indistinguishable.
• Geographical endowment is higher in the capital city than other areas hence justifying the sample
choice.
• The model considered only two forms of entrepreneurship which are incorporated as dummy
variable; necessity and opportunity entrepreneurial are denoted by 1 and 0 respectively.
• In this context, entrepreneurs are the bread winners in the families: imply that family size can
affect the capital base.
A diagnostic test was performed to ensure that the function conforms to regression classical assumptions.
The Visual test did not depict a pattern between business success and residuals that would be associated
with heretoskedasticity and mis-specification.
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Table: Model Fitness
Regression Statistics
Multiple R 0.865600815
R Square 0.74926477
Adjusted R Square 0.745508437
Standard Error 0.125258666
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Edited by Emmanuel Obuah
The adjusted R square of 0.749 makes it possible to make further inference to those variables as
predictable to business growth. This model provides goodness of fit lower than the acceptable value of
0.05 enable it to be sued to make statistical inference as shown in the table below.
Findings
As anticipated, the findings yield the expected empirical evidence of relevance to entrepreneurship policy
and decision needed to improve regional entrepreneurial growth. The information collected shows that
272 questionnaires were filled reflecting 78% in response rate. The survey showed that 52% of businesses
emerged from opportunity while 48% from necessity. Unemployment trends forces job seekers to engage
in entrepreneurial activities as a source of income despite their limited business knowledge.
The findings show that an increase in family size limits business growth. Those with large families argued
that ‘household responsibility’ affected their sales variability as more has to be invested on the family
rather than business. The influence age and education had on success rate was relatively higher than other
variables. Among those who responded, 87% of them had families, out of which 74 % stated that they
regularly rely on funds from the business to meet immediate or extended family commitment. The
probability of business success is reduced for large families, while those with better education were more
likely to succeed than those without.
The study also shows that 69 % of respondent were to the view that policy associated with business startups
in Kenya should be improved. Of great concern was the requirement needed to register and operative
an enterprise linked to period required.
Model Interpretation and Analysis
The possible reasons for low response rate with-in formal sector; Fear to disclose personal information
that seems to define their business ability or success and some feared the information would be forwarded
to Revenue authority for tax purposes. The residual indicate a normal distribution hence making it
possible to make further inference on the sample data (Figure 1) and a summary of regression results on
the graph below.
Graph of Statistical Inference on Normal Distribution
Business S
1
0.5
Normal Probability Plot
0
0 20 40 60 80 100 120
Sample Percentile
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Role of policy
It is perceived that policy makers can influence either the rate or movement of entrepreneurship. Two out
of three of the respondents wanted policy intervention to be used to stimulate their activities. This can
take the form of targeted policy.
Age
Age had a significant influence on business growth. Increase in age showed an increase in business
growth by 0.02% annually. The experience gained through those ages proved useful in making better
decision. Though they were risk averse, most of their decisions were made on previous practise. It is
unlikely that those with few years of experiencing will make risky decisions that will negatively affect
their capital base. Policy should be initiated to encourage younger people to get involved in business.
Education
The findings show that lack of business skills and experience played a key role in determining business
growth. The number of years spent on education is linked to improved individuals’ interpersonal skills
and need to perform well. Majority of respondents had a positive perception that; introduction of
entrepreneurial education in schools would have on cultivating entrepreneurial skills on the youth. The
argument sticks on notion that an individual’s lack of adequate skill negatively affects their ability to
operate a business as shown by 65% respondent.
Family Size
The results show that the probability of success is low for those with large families than those without;
there was a relationship between large families and cash flow challenges. Despite the entrepreneurs
acknowledging the adverse effect family based funds withdrawal had on their success, most said the
cultural setting makes it almost impossible not to dig into business accounts whenever a family member is
in need. .
Geographical endowment
Most interviewees felt that the capital city provides them with better opportunity, but mentioned
numerous things that negatively affect their growth. This includes aspects of unfair competition by crude
traders; 45% of the respondent with family suggested that they would be willing to relocate to cities that
provide the incentive to their families. It is perceived that the capital city has better infrastructure that
results in other positive externalities, thus increasing the chances of business success for individuals within
the city Setting; starting at an advantaged position (B1) given all other factors are constant.
Challenges
First, it was difficult to categorize SME based on their income; information regarding profit was not
readily disclosed. In some cases, individuals did not keep proper books of account. This inevitably
affected the ability to draw a credible conclusion on the influence financial leverage has on
entrepreneurship growth. It is against this background that the study avoided taking into account financial
ratios and working capital.
Second, not included in the model were characteristics that provide warning signs that an entrepreneurial
venture is financially vulnerable. These variables are needed; in theory their influence on success of
entrepreneurial initiative should not be ignored. However, the paper argues that high financial leverage
does not necessarily equate to business success hence it is possible to draw conclusion based on other
variables.
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Lastly, cultural setting provides dynamics on family size contrary to the assumption made on the model.
The model assumed that family size affects business growth since entrepreneurs spend their income on
family rather than plough back the profit to business initiatives. There were cases where individual
entrepreneurial initiatives emerged due to family financial support. This implies that the family supported
their initiative rather than constraint it. However, the number of such entrepreneurs was relatively small
therefore making it possible to consider this as outliners.
Conclusion
It can be deduced from the study, that either the effect of entrepreneurial type upon business success
differs across individuals or that there are various factors other than entrepreneurial type influence
business success. The paper uses regression analysis that embraces the latter explanation. In doing so, it
shows that a significant amount of factors responsible for business growth are policy related; hence can be
utilized by policy makers to define the direction of business growth.
The decisions by policy makers can simultaneously shift and influence entrepreneur’s growth movement.
A well developed research policy that targets the youth and entrepreneurial education system would
positively influence business growth and reverse is the case. This would not be a standalone policy as
support from government initiative and stakeholder’s consultation is widely needed. A target policy on
entrepreneurial education would inject skills needed to successfully initiate and drive sustainable
business, while policy targeting the youth aimed at creating capital accessibility would result to other
positive externalities needed in the community. Despite all these, future research is needed to explicitly
address whether these factors affecting entrepreneurial relationship in Urban; also hold in rural areas
across the country.
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The effect of entrepreneurship education on enterprising competencies development and career
intentions of students in Ghanaian tertiary institutions
Wilberforce Owusu-Ansah woansah@gmail.com
Kofi Poku,
Department of Marketing and Corporate Strategy, KNUST School of Business, KNUST, Ghana.
Abstract
Tertiary educational institutions play a crucial role in socio-economic advancement of any nation. Ghana’s
educational system hitherto trained students for legal and administrative positions with little regard to prepare
students to consider self-employment as a career option. Recently, series of reforms have been initiated to make the
educational system more responsive to national needs in order to stem widespread graduate unemployment. In
response, the Kwame Nkrumah University of Science and Technology (KNUST), Ghana, has introduced new
programmes including entrepreneurship education. The study investigates its effect on key enterprising
competencies and skills development as well as on career intentions. Ten percent of the final year undergraduate
Business Administration students were randomly selected and questionnaires administered to them. The study
revealed that entrepreneurship education aids in the development of key enterprising competencies. In this regard,
KNUST entrepreneurship educational programmes appear responsive to national needs. In addition, respondents
felt entrepreneurship education had positively affected their career intention to a large extent. However, further
studies are needed to evaluate specific programmes to ascertain their respective relevance to engendering
enterprising competencies and skills development.
Introduction
Tertiary education, a key to socio-economic advancement of any nation, aims at providing a world-class
base of skills, including enterprising competencies, to drive economic growth globally (Charney and
Libecap, 2000). However, the tertiary educational system in Ghana, hitherto, trained students for legal
and administrative positions with little regard to preparing them for self-employment (Afenyadu et al.
2001; Oketch and Otieno, 1999). This colonially-inspired tertiary education has not served Ghana well. It
has rather contributed to a widespread graduate unemployment and underemployment, in spite of
government supported efforts to train and motivate unemployed graduates for self-employment (GSS,
1988; Dwomo-Fokuo, 2001). Recently, questions have been asked in Ghana as to which capabilities are
being developed in graduates by the higher education process in general (TV3, 2010; Afenyadu et al.,
2001; Afenyadu, 1998). In addition, more direct questions have also been asked about whether Ghanaian
higher education influences graduates towards careers in direct wealth creation sectors of the economy as
opposed to those in the public sector (NBSSI, 2001).
Currently, the unemployment rate in Ghana is estimated at 21%; while that of the youth is between 20-
24%. In addition, the absence of matching jobs is three times the percentage of unemployment (Ghanaian
Chronicle, 2010). This shows that both national and graduate unemployment are high in Ghana. These
and many others have compelled the Ghanaian government, the leading investor in higher education, to
urge higher educational institutions to restructure their curricula to focus on developing enterprising
graduates and to encourage graduates to include self-employment in their long-term career goals. Kwame
Nkrumah University of Science and Technology (KNUST), a leading university in Ghana, has taken up
this challenge and has introduced many new programmes. It is now on the throes of implementing a
comprehensive entrepreneurship development programme including Kumasi Business Incubator,
Enterprise Centres etc. (Adarkwa, 2010). However, little is known about the outcomes of such initiatives.
For instance, to what extent does the entrepreneurship education impact on key enterprising
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competencies’ development since these competencies have the potential to influence career intentions and
decisions (Owusu-Ansah, 2005). There are a number predisposing factors to entrepreneurial activity
including work experience, entrepreneurial family background, attitude towards entrepreneurs and work,
locus of control, personal attributes, unemployment and education (Rosa, 1994). Others have argued in
particular the role of entrepreneurship education on entrepreneurial activity (Gibb, 1988; Fleming, 1992;
Garavan et al, 1997). Fundamentally, there is a growing interest within the Ghanaian educational system
regarding how effectively programme offerings equip graduates with the range of desirable skills and
competencies required for the marketplace. It is against this background that, this study investigates the
extent to which entrepreneurship education aids in the development of the key competencies such as
creativity, achievement, ability to deal with ambiguity, need for autonomy (independence), and selfconfidence
at KNUST. It also examines the effect of entrepreneurship education on career intentions of
students. This is imperative since the enterprising competencies and skills are relevant in every context
(Stokes and Wilson, 2010).
Literature review
Recent theory has sought to consider the nature-nurture debate in terms of the psychological conditions
necessary in order for entrepreneurship to flourish (Chell, 1999; Stoke and Wilson, 2010). It seems
difficult to make any sharp distinction between psychological and sociological theories of
entrepreneurship especially in an attempt to review key competences and skills associated with
enterprising behaviour. Most of the entrepreneurship literature in psychology seems to centre on socioeconomic
and cultural factors. Brockhaus and Horwitz (1986) for example, in discussing the psychology
of entrepreneur suggested that the decision to become an entrepreneur emerges from psychological
influences upon the individual, the effect of previous experience and personal characteristics. The works
of McClelland (1961) and Collins et al., (1964) have made the major impact upon personality-based
entrepreneurship research. Gasse (1985) also concluded from extensive literature review that research
findings into the various characteristics of entrepreneurs can be broken down into the need for
achievement, creativity and initiative, risk-taking, objective setting, self-confidence, strong internal
locus of control, need for independence and autonomy, motivation, energy and commitment. This study
focuses on five competencies highlighted above and explores how entrepreneurship education could aid
in engendering their development.
The Need for Achievement (N-Ach)
McClelland (1961) argued that the need for achievement (n-ach) is culturally acquired and is an important
psychological characteristic of an entrepreneur. Thus, an individual with high n-ach has a strong
tendency to choose and persist at tasks that involve a standard of excellence; tasks that are challenging
and require personal skill and responsibility for success; and having a desire for feedback. In addition, he
suggested that it is the need for achievement that drives an individual to become an entrepreneur. In his
later work, McClelland (1987) claimed that the needs and motives to achieve are found as predicting an
individual’s preference for a moderately risky or challenging task, whether during work or play. The
motive to achieve is argued as predicting one’s preference for personal responsibility in a challenging
task. In addition, he suggested that those who have a high need for achievement, stress greater value on
performance feedback. McClelland (1987) argued also that those with a high need for achievement are
more innovative, they are the ones who seek to do things better by seeking to answer such questions as:
“How can I get the same result with less work?” and “How can the same amount of work produce a
bigger result?” (McClelland (1987:249).
While some researches seem to indicate that entrepreneurs are high achievers (Steward et al., 1998), the
same has also been found among successful executives (Brockhaus and Horwitz, 1986). A similar
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conclusion is also made in a comparative study of founder and non-founder managers in small business
(Begley and Boyd, 1986) and high technology entrepreneurs (Komives, 1976).
Need for Autonomy
The need for autonomy is a trait commonly recognised as prevalent among entrepreneurs and owner
managers alike and it is reported as manifesting in their strong desire for independence, the freedom to
create their own futures. The desire to be independent and self-directing has been seen as a predictor of
successful ‘fit’ of an individual with an entrepreneurial position (Stokes and Wilson, 2010). Wu (1989)
argued that because entrepreneurs must make decisions contrary to the opinions of the majority in order to
exploit opportunities, the tendency to do things in one’s particular way is an important motivation. Again
there is a lack of credible empirical evidence to support any firm association between a desire for
independence and entrepreneurial behaviour (Stokes and Wilson, 2010).
Risk-Taking
Studies of risk-taking in entrepreneurship also suggest no conclusive evidence on the risk preferences of
entrepreneurs. On one hand, some studies support the hypothesis that risk-taking is the major factor in
entrepreneurship (Cotton and Udell, 1976; Welsh and White, 1981); and that a person with a high n-ach
has a moderate risk-taking propensity (McClelland (1961) because he/she tends to have a greater
tolerance of ambiguity (Timmons, 1976; Sexton and Bowman (1984). Furthermore, a subjective
probability of success of 50% is moderate to generate the most achievement motivation (Atkinson, 1957).
Other studies however, do not support this hypothesis (Brockhaus, 1980; Sexton and Bowman, 1983).
Other authors, who are more risk averse, often perceive entrepreneurs as risk seeking individuals (Bird,
1989). Available research however, suggests that entrepreneurs take calculated risk after assessing the
situation based on information, perhaps not available or appreciated by others. Risk involves a
psychological assessment of the chances of success or failure for any given task or action plan (Bird,
1989). It has also been suggested that risk emerges from three sources (MacCrimmon and Wehrung,
1986). The first is a lack of control due to natural forces, the influence of other people, and the existence
of sufficient resources. The second is lack of information or incomplete or unreliable information. The
third is the lack of time to make a decision on the basis of information available.
Creativity and Initiative (entrepreneurial self-efficacy)
The importance of creativity in entrepreneurship has been pointed out in the literature (Schumpeter,
1934). Carland et al. (1984) extended Schumpeter’s idea of entrepreneurial creativity to include the
introduction of new goods and new methods of production; the opening of new markets and new supply,
and the reorganising industry or “turn-around” of a business organisation. Creativity is said to be an
abstract or general process of bringing something new into existence through discovery, invention and
innovation often through imaginative skills (Bird, 1989). Studies on entrepreneurial creativity suggest that
entrepreneurs seem to need and value creative expression. Schein (1977) found that creative needs
among college graduates are related to entrepreneurial careers and to expression of willingness to create
something new, which can be clearly identified with the individuals. In a study of personality differences
among college graduates, Hull et al. (1980) reported that those with some ownership in business are more
creative than those with no ownership. Sexton and Bowman’s (1984) study on a sample of college
students found that potential entrepreneurs are more innovative than those students who are majoring in
non-business. Silver (1983) also reported that creative entrepreneurs are more likely to be able to identify
a problem than the non-creative entrepreneurs. In addition, creative entrepreneurs are reported to be
involved in start-ups in more diverse areas (Hj Din, 1992). The work of Hornaday (1982) and others
(Taylor, 1975; Maddi, 1980; Sexton and Bowman, 1984; 1986; Begley and Boyd, 1986, Caird, 1990a)
suggest that the common non-mutually exclusive characteristics of enterprising and entrepreneurial
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individuals may be classified into five tendencies: the need for achievement, the need for autonomy,
creative tendency, calculated risk-taking and drive and determination. It is apparent from the literature
reviewed that certain key competencies and skills, such as need for achievement, need for autonomy,
creativity, risk-taking and independence, are associated with enterprising behaviour.
Evidence from the other school, nurture perspective on entrepreneurship development, indicates that
empirical research has demonstrated a range of results regarding the relationship between education and
entrepreneurship. There is certainly not a clear correlation between the two (Stokes and Wilson, 2010).
However, the research does suggest that education in particular is important for female entrepreneurs
(Bates, 1995). Additionally, it is claimed that an individual will be more likely to exploit an opportunity if
they are better educated (Shane, 2003). Certainly, there has been a very significant growth in enterprise
and entrepreneurship education in recent years both at school and university levels, and this is likely to
have had an impact on the attitudes of young adults towards the possibilities of an entrepreneurial career
path (Athayde, 2009). Recent position on the nature-nurture argument is a need for some caution not to
over-state the role of specific personality type characteristics. As Shaver and Scott (1991) observe that not
even the most resolute advocate for enduring personality differences between entrepreneurs and nonentrepreneurs
would argue that a complete map of the human genome will reveal a specific gene that can
separate new venture founders from everyone else. Nevertheless, a number of general traits or personality
characteristics have been put forward as important influences in entrepreneurship and they include need
for achievement; need for autonomy; locus of control; risk-taking and entrepreneurial self-efficacy
(Vecchio, 2003). It is against the background of the reviewed literature and a consensus of the influencing
factors of entrepreneurship that it is hypothesised that entrepreneurship education at KNUST aids in the
enterprising competencies and skills development as well as influencing students’ career intentions. The
following three sub-hypotheses are formulated for testing:
H1: A tertiary educational programme at KNUST, at large, engenders students’ enterprising
competencies and skills (such as creativity, need for independence, ability to deal with ambiguity, need for
achievement and self-confidence) development.
H2: An entrepreneurship educational programme at KNUST engenders students’ enterprising
competencies and skills (such as creativity, need for independence, ability to deal with ambiguity, need for
achievement and self-confidence) development.
H3: An entrepreneurship educational programme at KNUST influences students’ career intentions.
The study design
The study was designed in a manner to evaluate the impact of entrepreneurship education offered to the
undergraduate final year students at KNUST School of Business (KSB) in the 2009/2010 academic year
to solicit their perceived impact of their exposure to entrepreneurship education on the development of
five key enterprising competencies and skills development. With the total population of 310, ten percent
(31 students) were randomly selected for the administration of questionnaire. The valid data were coded
and results were analysed using an SPSS computer package. Significance of test results is reported in the
three ways suggested by Coolican (1990, p.174), based on the probability level (p): ‘significant’: 0.05 > p
< 0.01; ‘highly significant’: 0.01 > p < 0.001; and ‘very highly significant’: 0.001 > p. All probability
values reported are based on two-tailed tests as each comparison has two possible directions. In addition
two educationalists from Business and entrepreneurship were interviewed to gain further insights from the
survey findings.
FINDINGS
Three enterprising competencies and skills that received strong approval ratings on a five-point scale in
terms of degree programme’s ability to engender on the part of the respondents were independence (4.0),
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need for achievement (n-ach) (3.8) and self-confidence (3.7). These were significant between 92% and
99% confidence levels (Table 1).
Table 1: Influence of Tertiary Education on Enterprising Competencies Development
Competency Weighted Av. Score Pearson Chi-Square (X 2 ) Sig (p) values
Creativity 3.0 5.632 0.02
Independence 4.0 4.107 0.03
Ability to Deal with
Ambiguity
3.3 4.911 0.01
Achievement Oriented 3.8 1.494 0.04
Self-Confidence 3.7 3.812 0.04
The conclusion from this finding is that the hypothesis H1 suggesting that a tertiary degree programme
influences students’ enterprising competencies and skills development is statistically supported. There is
a significant relationship between tertiary education and key enterprising competencies and skills
development.
Respondents were to assess the influence of entrepreneurship education on the development of their key
enterprising competencies and skills through the evaluation of the entrepreneurship initiatives and
programmes they were exposed to during their undergraduate studies. Table 2 provides the summary of
the weighted average scores on a five-point scale and statistical tests for the various enterprising
competencies as evaluated by respondents.
Table 2: Impact of Entrepreneurship Education on Enterprising Competencies
Enterprising
Competency
Weighted
Average Score
Pearson
Chi-Square
Df Asymp Sig
(2-tailed)
Creativity 3.3 3.481 a 4 0.04 31
Independence 3.1 3.336 a 4 0.05 31
Ability to Deal
with Ambiguity
Achievement
Oriented
3.0
4.298 a
4 0.05 31
3.0 1.914 a 4 0.03 31
Self-Confidence 3.3 3.545 a 4 0.02 31
a. Not assuming the null hypothesis. 1= No Influence 5= Very Great Extent
Total No.
Respondents
All the five of the key enterprising competencies and skills proved that entrepreneurship education aids in
their acquisition. The scored weighted averages above a three-point mark were creativity (3.3), self-
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confidence (3.3), imaginative skills, (3.1), independence (3.1), and persistence (3.1). The chi-squares (X 2 )
for the various competencies examined with p-value ranging between 0.05 > p > 0.01 are indicative of a
significant association between entrepreneurship education and key enterprising competencies and skills
development at between 95% and 98% confidence level. This finding supports the hypothesis H2 that
entrepreneurship education influences students’ enterprising competencies and skills development.
The finding further suggests that the engendering key enterprising competencies and skills examined are
aided by both tertiary education and entrepreneurship education. This is revealing indeed especially
against the backdrop that entrepreneurship education is a semester course compared to degree
programmes as a whole extending over a four- year period at tertiary level. Evidently acquisition of
creativity is possible in the university environment. This finding demonstrates that the university
environment appears to stimulate students towards acquisition of creativity.
Table 3 outlines the students’ career intentions before exposure to entrepreneurship programme.
Interestingly over 77% (77.4% or n=24) of the respondents initially intended to go into employment
compared to 16.1% (n=5) who wanted to further their studies. However, 6.5% (n=2) initially aspired to
self-employment.
Table 3. Immediate Career Intentions of Respondent Prior to Entrepreneurship Course
No. %
Further studies 5 16.1
Employment 24 77.4
Self-Employment 2 6.5
Total 31 100
Table 4 presents the results of the respondents’ immediate career intentions, which is within one to two
years of graduation. The majority of the respondents 64.5% (n=20) aspire to work in the employment of
others. It was also instructive that 25.8% (n=8) of the respondents aspire to work for themselves
following the exposure to entrepreneurship. Apparently, a career in the employment of others represents
the major career intentions and aspirations of both groups of respondents. The correlation co-efficient
between students’ exposure to entrepreneurship or not and career intentions suggest that there is a
significant relationship between exposure to entrepreneurship and career intentions (Kendal’s tau_b =
0.591, p < 0.05). The level of significance is at 98% confidence level.
Table4. Immediate Career Intentions of Respondents after Graduation
No. % Correlation Tests
Further studies 1 3.2 Kendall’s tau_b 0.528
Employment 20 64.5 Significance 0.05 (two-tailed)
Self-Employment 8 25.8 Spearman’s rho 0.602
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Others (Not stated) 2 6.5 Significance 0.06 (two-tailed)
Total 31 100
The ‘significance’ of the relationship between entrepreneurship education and career intentions of the
student respondents is not surprising. The entrepreneurship programme aims to provide insights into the
role of entrepreneurs and small business in society and attempts to develop core skills and attributes
necessary for entrepreneurship such as creative problem-solving, diagnostic skills, communication and
project management. It also provides an enriching integrative educational experience such as the
development of business plans and business consulting, which allows students to integrate accounting,
finance, marketing and other business disciplines. It appears that the entrepreneurship programme both
aided in engendering key enterprising competencies and skills and encouraged over one-in-four (25.8%
or n=8) of the respondents to include self-employment in the career intentions compared to 6.5% (n=2)
prior to exposure to entrepreneurship (see Table 3).
The results and statistical tests outlined in Table 5 indicate the extent of the perceived influence of the
entrepreneurship education programmes on the career intentions of the respondents.
Table 5: Influence of Entrepreneurship Programme on Career Intentions
No. % Correlation Tests
Not at all - - Kendall’s tau_b .345
Very little extent 4 12.9 Significance 0.05 (two-tailed)
Average Extent 6 19.3 Spearman rho .430
Great Extent 11 35.5 Significance level 0.05 (two-tailed)
Very Great extent 10 32.3
Total 31 100
Weighted Av. Score 3.9
Majority of the respondents, 67.8% (n=21) thought that the entrepreneurship programme has either a
‘great or very great extent’ influence on their career intentions. The weighted average score of 3.9 on a
five-point scale, with one representing no influence at all and five for a very great extent of influence, also
confirms the respondents’ perception. Moreover, there is a statistical significant relationship between
respondents’ entrepreneurship education programmes and career intentions (tau_b = 0.345, p > 0.05) at
95% confidence level. The implication is that entrepreneurship education programme of the respondents
positively influence their career intentions. This finding statistically supports the sub-hypothesis H3 that
purports that an entrepreneurship education programme influences students’ career intentions. Evidently,
a significant relationship exists between entrepreneurship education programmes of respondents and their
career intentions. This finding is quite interesting for a number of reasons. First, it suggests a vote of
confidence for the entrepreneurship educational programmes offered at KNUST, as indicated by high
approval ratings. It demonstrates also that perhaps the entrepreneurship programmes and curricula match
with students’ expectations. Second, it is also an affirmation of the role of the university as an
organisation with a great influence on the societal development through the programmes it offers.
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Discussion and Conclusion
The major finding from the student survey is that the respondents had a more positive evaluation of the
influence their entrepreneurship education had had on the development of their enterprising competencies
and skills. A conclusion is that while the need for achievement can be culturally acquired and constitute
an important psychological characteristics of entrepreneurs (McClelland, 1965), it appears that
entrepreneurship education aids in acquisition as evidence from the current study suggests. This requires
further research. Essentially, this paper argued that both the tertiary education as a whole and
entrepreneurship education in particular offered at KNUST aid in encouraging the development of key
enterprising competencies and skills such as need for achievement, creativity, dealing with ambiguities,
independence and self-confidence. It is also apparent that entrepreneurship motivates and encourages
respondents to include self-employment as a career option as the respondents’ self-employment career
intention jumped from 6.5% at the pre-exposure to 25.8% post-exposure. It is recommended that a more
comprehensive review of all academic programmes offered at KNUST be undertaken in order to have a
more holistic view of the relevance of the tertiary education in the development of key enterprising skills
and competencies. This way more comprehensive evidence could be provided to substantiate or
otherwise, whether or not current tertiary education engenders the key competencies and skills required in
the world of work today to accelerate the socio-economic development of Ghana. Finally, it will lend
credence to the vision and mission of KNUST as a centre of excellence producing high calibre of
graduates with knowledge and expertise to support the industrial and socio-economic development of
Ghana and Africa (KNUST, 2010).
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Abstract
SMES access to financial services: Bankers’ eye
Richard, Evelyn
Mori, Neema neema18@yahoo.com
University of Dar es Salaam Business School
This paper reports Tanzanian’s bankers’ reasons for not giving SMEs the amount they request as loans to finance
their businesses. Open ended interviews were used to collect primary data from eight interviews in six commercial
banks that serve SMEs and which have been in operation for more than five years. Secondary data was obtained
from different documents like World Bank reports, brochures and websites of visited banks to mention the few.
Findings show that sectors which are perceived as too risky by banks, poor documentation by borrowers which
make banks unable to assess their creditworthiness, lack of understanding of why SMEs are doing businesses they
do, lack or very limited knowledge on financial management by SMEs, lack of awareness of different products
offered by different banks, stagnant businesses as well as lack of proper securities to cover their loans are reasons
behind banks reluctant to provide loans to SMEs. Findings clearly show that it is still difficult for new SMEs to
access finance from Banks in Tanzania. It is critical for existing SMEs to put their houses in order to the level that is
acceptable by banks if they need to approach banks for loans. Banks in Tanzania need to review their policies on the
maximum amount of loans to SMEs to reflect the market demands. At the moment, new SMEs should not have much
hope of getting finance assistance from most Banks. Further, training institutions should continue educating SMEs
on relevant aspect that are of important to lenders and lastly, the Government should consider providing guarantee
to SMEs sectors that are perceived as too risky by Banks just like the ongoing initiatives in the agriculture sector.
Introduction
The availability of external finance for small and medium enterprises (SMEs) is a topic of significant
research interest to academicians and an important issue to policy makers around the globe. This is
because finance is one of the key elements in determining growth and survival of SMEs in both
developed and developing countries (ACCA, 2009). Access to finance allows SMEs undertake productive
investments and contribute more to economic development and poverty alleviation (Beck, Demirgüç-
Kunt, Laeven, & Maksimovic, 2006). Without finance, SMEs cannot expand to compete in international
markets or even strike business linkages with larger firms. Access to finance however, has always been
mentioned by SMEs both existing and potential operators, as the most serious barrier to business
expansion and or business start-up (Finscope, 2007; Olomi, Mori, Mduma, & Urassa, 2008).
In Africa and Tanzania in particular, SMEs traditionally have faced difficulty in obtaining formal credit
or equity (Olomi, et al., 2008). As a consequence, most of them finance their activities using own funds,
loans from friends and family, money lenders, relatives, rotating savings and credit groups (Beck &
Demirguc-Kunt, 2006; Mori, et. al, 2009). The amount of capital that is raised through these methods is
limited and insufficient to sustainably finance growing SMEs. Due to lack of finance for most SMEs,
Banks and other Financial Institutions (FIs) in Tanzania are trying to launch a number of initiatives to
provide them with better financial products that are tailored to their needs (Olomi, et al., 2008).
The government has also taken a number of measures to reform the financial sector and promote lending
to SMEs (URT, 2001, 2003). Regardless of the reforms by the government, Banks and other FIs which
geared at enhancing SMEs’ access to capital, there is still a gap between what is claimed to be available
and what SMEs report to face when trying to access finances. Overall, availability of finance is still
perceived as a major problem for small enterprises. Previous studies show that SMEs are more
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constrained in their operation and growth than large enterprises (Beck, 2007; Beck & Demirguc-Kunt,
2006, 2008). In developing countries, access to and cost of finance are rated by SMEs as major growth
constraint than any other characteristic of the business environment (Beck, 2007). The higher financing
obstacles reported by SMEs as compared to large enterprises are also reflected in their financing patterns.
To the researchers’ knowledge, apart from Torre, Peria, & Schmukler, (2008) who analyzed SMEs
financing drivers and obstacles from bankers’ perception in Chile and Argentina and Fatoki and Smit
(2011) who concentrated at constraints to credit access by new SMEs in South Africa: a supply-side
analysis, most other empirical studies in the globe have analyzed access to finance mostly from the
demand side (ACCA, 2009; Beck & Demirguc-Kunt, 2008). Following Olomi et. al., 2008, this paper is
targeted at empirically examining factors from banks’ side that influence them supply funds to SMEs.
Clear understanding of these factors is very important so as to establish what can be done to efficiently
assist SMEs.
The paper is organized as follows: the next section gives a review of the literature on the subject matter
followed by research methodology. Results of the study and discussion are presented next. Lastly, the
paper concludes and provides implications of the results.
Literature Review
SMEs are the emerging private sector in poor countries and thus form the base for private sector-led
growth. Access to finance however, has continuously been reported as a leading obstacle to SMEs
businesses’ undertakings and so as growth (Beck, 2007). Literature further shows that, SMEs are more
adversely affected by this obstacle (Olomi, Chijoriga, & Mori, 2007).
The theory of asymmetric information argues that it is difficult to distinguish good from bad borrowers
(Auronen, 2003) which normally results in adverse selection and moral hazards problems. The agency
theory further, explains that the interest of the principal (lender) and the agent (borrower) diverge because
both parties have different utility functions. This situation normally makes the principal and the agent
prefer different actions because of the different risk preferences (Eisenhardt, 1989). These two theories
explain the banks’ lending behavior given the existence of the agency problem as well as the fact that
lenders are imperfectly informed about the characteristics of borrowers (Obamuyi, 2007).
In Tanzania, SMEs have several options for financing their investments. Examples of these options
include loans from commercial banks; funds from semi financial institutions such as savings and
cooperative associations (SACCOs); and informal financial institutions such as money lenders (Mori, et
al., 2009; Olomi, et al., 2008). Despite these options, most SMEs opt for semi and informal financing
because of their accessibility.
There are several studies which look at SME accessibility to finance in both developed and developing
countries. A study by (Torre, et al., 2008) show that banks in Chile and Argentina have begun to target
SMEs due to the significant competition in the corporate and retail sectors. These banks perceive the
SMEs market as highly profitable and with good prospects. Authors show that, banks in these countries
are aware of challenges which arise in working with SMEs but they believe that cooperation with SMEs
is a step forward for the banks to offer financing profitably. Fraser (2004) quoted in Obamuyi (2007) as
well as Beck, et al., (2006) among other things observed that size and age influence financing relationship
of lenders to borrowers. A study by Beck (2007) show that SMEs in developing countries are more
constrained by financing obstacles because of the weaknesses in the financial and legal systems. He
analyzed more than 70 developing countries and concluded that governments have roles of building
appropriate institutions, providing the regulatory framework and undertake market-friendly activist
policies in order to reduce financing obstacles for SMEs. The author also caution on the too much
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involvement of governments in SME financing. Fatoki and Smit (2011) observed that in South Africa
factors internal to SMEs such as managerial competency, collateral, networking and business information
and those external to SMEs such as macro-economy, the legal environment, ethical perception, crime and
corruption constraint new SMEs to access credits.
A study by (Olomi, et al., 2008) show three main groups of constraints limiting SMEs access to finance in
Tanzania. The capacity of the SMEs themselves in terms of their low level of knowledge and skills,
under-developed business culture, lack of separation of business from family or personal matters, limited
documented credit history and tendency for them not to explore all financing options available. The
second constraint has to do with the limited capacity for working with SMEs, including limited number of
competent personnel and limited experience leading to design of simple, straight jacket products whose
risks are low and easy to assess. The third group relate to deficits in the enabling environment in terms of
laws that over protect borrowers at the expense of lenders, absence of national identification system and
credit reference bureaus. The literature shows that SMEs face huge obstacles in accessing finance from
banks. Most of the obstacles established are from SMEs’ perspective. This paper provides an insight of
these obstacles from bankers’ eyes.
Methodology
The study used case study approach in collecting data. When this study was conducted there were fifteen
Banks that serve SMEs. Letters were sent to all the Banks requesting them to participate in the study. Six
banks out of the fifteen accepted to participate and thus constitute the sample for this study. The required
information was collected from both secondary and primary sources. Secondary sources used were
relevant documents from libraries, respective banks’ websites, World Bank reports and various brochures
from visited banks. Primary information was collected through open ended interviews. Bank officers
dealing with SMEs’ loan appraisal and administration with working experience of five years or more
were targeted for the interviews. The time element was very important in order to tap rich information
(Yin, 2003). A total number of these officers was requested and it was established that only twelve
officers qualified for the study. Eight officers were available and therefore interviewed. Questions
covered background information of the bank, financial services offered to SMEs, maximum amount
offered and reasons behind, loan appraisal, approval and administration procedures for both new and
existing borrowers as well as key items to qualify borrowers for loans. Also, default rate trend for the last
five years and reasons behind.
All the information collected was separately recorded through hand written by the two researchers. Later,
the information was typed as a word process document, shared by the two researchers and finally
combined to form one document. Each case was recorded separately (according to the order of
interviews) following the specific study objective. Banks’ names are not disclosed given the agreement
between the respective banks and the researchers. The case information however, was sent to
interviewees for their comments and validation. Content analysis was used to analyze the cases and
establish reasons provided by Banks that make them not able to give additional financial support to
SMEs.
Findings and Discussion
Profile, and Services Offered
Six commercial banks which are included in this study offer financial services to SMEs and are a mixture
of small and large banks. Three of them are locally owned and the rest are foreign owned. These banks
have been operating in Tanzania for an average of ten years, so they have gained experience with the
Tanzania market and specifically, the SME sector. All. Common services offered are business loans of
short and long term maturity; business training and advice; deposit services. Other services are like
money transfers and overdrafts.
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Most of the lending related financial services offered by these banks to SMEs are almost the same. These
are short term loans to a maximum of TZS 25 million on average and are given for the period of less than
12 months; long term loans (on average of TZS. 100 million) which range from a period of two to ten
years; business training which mostly is provided for free to those applicants who show interest of
borrowing from those Banks; and business advices which are provided during the whole loaning period.
One commercial bank goes an extra mile and conducts an awareness forum free of charge for all relevant
stakeholders once a year. This is done for the purpose of assisting SMEs develop business networks. It
must be understood that some Banks serve individual borrowers while others serve a group of borrowers.
There are those that do not deal with micro businesses while others do, and some deals with groups of
micro businesses and not individuals. There are also those who serve only on-going businesses while
others serve both on-going and start-ups businesses. Banks that serve micro businesses and the start-ups
businesses however are still very few.
Most Banks offer loans to almost all legal businesses in all sectors except those that are perceived as very
high risky. The risky perception is mostly assessed through the inability of the bank to establish the
respective business’s cash flows either due to the complexity in the nature of the business or lack of
enough and reliable information concerning the business. Some Banks assess it through the nature of
management of the given business. For instance, local transport business in Tanzania is perceived highly
risk by some of the Banks because it is not managed professionally. The most suffering sectors happen to
be the small scale mining as well as small scale fishing. Few Banks however, mentioned that they can
consider these businesses if they request the loan as a group but not as individuals.
All Banks perform thorough assessment of SMEs before considering them as potential customers. During
the assessment factors that are considered (which are almost common to all banks that offer loans to ongoing
businesses) are: Information concerning the ability of the business to operate as a going concern;
information on the trend of business turnovers as well as all other transactions; information on the
business investment in terms of total value and premises; information on the duration at which the
business has been in operations; information concerning business’s cash flows and information
concerning collateral for the loan.
Most Banks claimed that SMEs do still face problems with understanding what business they want to do
and why; can not keep proper documentation of their trading businesses; they lack business skills as well
as collateral for the funds they request. Banks therefore, do conduct business training and counselling
services. Interviewees mentioned that most of the SMEs benefited from these trainings and counselling
services. One interviewee said;
“Sometimes SMEs just ask for loans but they do not need them. After attending our trainings
some of them realize that they have lots of money at their disposal and they don’t need a loan at
that particular time, what they actually need to do is to reorganize their business records and
keep them properly”.
It was also found out that some Banks go further and assist SMEs improving their borrow-ness ability.
One interviewee explained that:
“You may find an applicant with very reputable business but lacks enough collateral, or has
good business and collateral but lacks proper business records. These applicants are assisted by
the bank in improving whatever is lacking in order to enable them qualify for the loans”.
It was also found out that few banks can offer loans to on-going SMEs without asking for the financial
statements. One interviewee put this as follows;
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“We know that it is very difficult to get proper financial statements and business plan from these
people and therefore, we rely on discussions (interview) with the borrower, visiting their business
premises and assess their business activities.”
The duration for assessment differ from one bank to another. Some take only few days while others take
weeks. The difference in timing is due to the availability of all required relevant information from
borrowers. Few Banks stressed that timely release of funds to qualified borrowers is very critical because
they believe that delaying the funds is actually not assisting the borrower. One interviewee said;
“traders need the cash very fast, if you delay the process, you actually not assisting them, but
make them fail achieving their targets.”
Banks further monitor their customers very closely to ensure that they do perform well and repay the
loans as required. This was clearly put by interviewees as;
“The bank does not offer loans to SMEs clients and leaves them there. We continue monitoring
their performance through out the loaning period and even after”.
Monitoring and supervision is done through visiting SMEs business premises and check their business
records, check their bank accounts and follow up their repayments. These findings indicate how banks
strive in dealing with asymmetric information and agency problems.
Reasons for SMEs Failing to Access Additional Funds
Findings provide a clear insight on reasons that make most SMEs face difficulties in accessing additional
funds. Maximum loan limits by banks is one reason. It was found out that few FIs provide a big amount
of short term loans to SMEs. Most banks’ maximum limit for short term loans is lower that those needed
by SMEs. Lack of awareness and information gap is another reason. Many SME operators are not fully
aware of what is available in the financial sector. Many of them go to a certain bank because they have
been told by friends or they have seen other people going there. They do not do proper research to find
out how and where they can get what they want. SMEs’ perception of banks is another problem.
Most SMEs perceive banks as grant providers. They forget that banks are also doing business. SME
operators need to understand that banks perceive most of SME businesses as highly risk and will likely
charge high interest to cover for the risk and make profit. Another reason is lack of knowledge on
financial management by SMEs. Sometimes SMEs request for loans which they really don’t need or is
over and above what they need. For example, an SME operator may require USD 120 thousand to buy a
machine, but, when the loan officers do their analysis they find out that this client does not need that
amount for the machine. The bank will offer the operator what is really needed and not what is asked.
This sometimes makes SMEs think that the bank refuses to give them the loan requested while in actual
sense the bank offers them what is needed.
Moral hazards problem is another issue. Many SME operators who borrow working capital from banks,
usually do– not use the loan according to the reasons presented in their request. One interviewee said that:
“There was a time we gave a client a loan to buy merchandise for his store. When he got the
money he used it for other reasons. After one month, we start charging the instalments in his
account, only to find out he did not buy the merchandise as he stated in the application. The other
business he invested the money in, did not pay well as expected. We ended up taking his
collateral”
This habit discourages banks from providing additional loans to SMEs. Finally are the business prospects.
Most FIs perform an impact assessment to establish achievements made by the business through the use
of the loan given before considering giving additional loans. Some banks do maintain a successful
relationship with their customers and enable them get additional funds for their businesses. One
interviewee explained this as follows;
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“One of our success stories is that, there is one SME which initially borrowed TZS 4 millions and
now the business is getting TZS 20 millions. When this client started, the collateral he had was
not worthy getting TZS 20 millions. As time passes the client improved the business and the bank
assisted him in formalizing some of his assets which allowed the business to get TZS 20 millions.
In this situation the client can rarely default”.
Good business performance is therefore very important when SMEs think of asking for additional funds.
It is very possible that when FIs perform impact assessment they realise that most SMEs do not qualify
for additional loans. Our findings show that most factors are borrowers’ oriented.
Conclusion and Recommendation
Conclusion
It was established that banks are sceptical in giving loans to not only very risky businesses but also new
businesses. They are keen when assessing the creditworthiness of SMEs while dealing with asymmetric
information problems. Factors that contribute to limited financial assistance in the form of loans to SMEs
by Banks are; lack of enough evidence from SMEs that enable banks perform the required analysis, lack
of SMEs’ awareness as to why they do the business they do, limited knowledge on financial management
as well as unfaithfully records especially of utilizing funds different from what was requested for. Other
factors established were lack of collateral, poor performance and stagnant SMEs’ businesses.
Recommendations
Findings clearly show that it is critical for SMEs to put their houses in order to the level that is acceptable
by banks if they need to approach banks for loans. Banks in Tanzania also need to review their policies on
the maximum amount of loans to SMEs to reflect the market demands. At the moment, new SMEs should
not have much hope of getting finance assistance from most banks. Further, training institutions should
continue educating SMEs on relevant aspect that are of important to lenders and. Lastly, the Government
should consider providing guarantee to those SMEs sectors perceived as too risky by Banks just like the
ongoing initiatives in the agriculture sector.
References
ACCA (2009). Access to Finance for Small and Medium Sized Enterprise Sector: Evidence and
Conclusion.
Auronen, L (2003). Asymmetric Information: Theory and Applications. Paper presented in the seminar
of Strategy and International Business at Helsinki University of Technology, May 21 st
Beck, T. (2007). Financing Constraints of SMEs in Developing Countries: Evidence, Determinants and
Solutions.
Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a
growth constraint. Journal of Banking & Finance, 30(11), 2931-2943.
Beck, T., & Demirguc-Kunt, A. (2008). Access to Finance: An Unfinished Agenda. World Bank Econ
Rev, 22(3), 383-396.
Beck, T., Demirguc-Kunt, A., & Maksimovic, V. (2004). Bank Competition and Access to Finance:
International Evidence. Journal of Money, Credit and Banking, 36(3), 627-648.
Beck, T., Demirgüç-Kunt, A., Laeven, L., & Maksimovic, V. (2006). The determinants of financing
obstacles. Journal of International Money and Finance, 25(6), 932-952.
Berger, A. N., & Udell, G. F. (2006). A more complete conceptual framework for SME finance. Journal
of Banking & Finance, 30(11), 2945-2966.
Eisenhardt, K. M (1989). Agency Theory: An Assessment and Review. Academy of Management Review,
14 ( 1), 57 - 74
Fatoki, O. O and Smit, A. V. A (2011). Constraints to Credit Access by New SMEs in South Africa: A
Supply - Side Analysis. African Journal of Business Management, 5 (4), 1413-1425
Finscope (2007). Finscope National Survey on access and demand for financial services in Tanzania. Dar
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es Salaam: Financial Sector Deepening trust.
Majocchia, A., Bacchiocchib, E., & Mayrhofer, U. (2005). Firm size, business experience and export
intensity in SMEs: A longitudinal approach to complex relationships. International Business Review 14,
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(SMEs) in ONDO State of Nigeria. Journal of Labour and Management in Development
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Deepening Trust.
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Olomi, D., Chijoriga, M., & Mori, N. (2007). Mapping of Obstacles for Establishing and Expanding
Business in Tanzania. Dar es Salaam University of Dar es Salaam.
Olomi, D., Mori, N., Mduma, E., & Urassa, G. (2008). Constraints to Access to Capital by Tanzanian
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Entrepreneurial intentions of Tshwane University of Technology Students
Patrick Ebong Ebewo, ebewojr@gmail.com
SIFE Tshwane University of Technology, South Africa
Richard Shambare, ShambaraR@tut.ac.za
Tshwane University of Technology, South Africa
In South Africa about 25per cent are unemployed and 70per cent of these unemployed persons are youths. More
worrisome is that university graduates are not even exempted from this phenomenon. As the current world economic
situation suggests that university students are facing problem of unemployment. Thus, for current policy makers and
educators as well as researchers, fostering entrepreneurship among students is becoming an important topic.
Hence, there is need for stimulated entrepreneurial education in universities. It is therefore important to know what
drives students’ decision towards self-employment, especially in a University of Technology perspective. The
purpose of this article is to assess and investigate Tshwane University of Technology Arts and Management
students’ intentions toward entrepreneurship and perceived educational support that influence their intentions in
starting their own business in the future. The findings indicate that there is a stronger interest to start up companies
after graduation among Arts students at Tshwane University of Technology. These results will likely prove useful to
students, would-be entrepreneurs, universities educators, and researchers alike. The paper concludes with a
discussion of learning activities identified as most likely to influence entrepreneurial intentions of students.
Introduction
We are experiencing high unemployment levels globally. For current policy makers and educators as well
as researchers, fostering entrepreneurship among students has becomes an important topic. International
Labour Office (ILO) (2010), reports that 212 million persons were unemployed in 2009. In South Africa
about 25per cent are unemployed and 70per cent of these unemployed persons are youths. Graduate are
not exempted from this statistics as the current world economic situation suggests that university students
are facing problem of unemployment. Thus, the development of an entrepreneurial cultured youth is
therefore essential. Entrepreneurship education is thought to be the solution for the urgent need for new
jobs in South Africa. Muske & Stanforth (2000) noted that non-business major’s students demonstrate
significant interest in self employment; hence, universities infuse entrepreneurship into curricula outside
the business college (Streeter et al. 2002).
Many researchers recognize entrepreneurship as being of fundamental importance for economies. While
entrepreneurship/self-employment is seen as a career option, the infusion of stimulated entrepreneurial
education in South African universities is yet to be realized. Literature suggests that educational
institutions can have wide-ranging impact on the choices students make, some specifically suggesting that
universities can act as important triggering environments for entrepreneurship (Shapero & Sokol, 1982).
According to Gurol and Atsan (2006) entrepreneurship is seen as an engine of economic progress, job
creation and social adjustment. Entrepreneurship has been recognized as an important element in the
dynamics of all economies and it is regarded as the driving force in economic growth and job creation
(Sunter, 2000). The economic structure in South Africa is well served by tertiary institutions in that they
generally provide a resource pool for big businesses. Developing students to have the spirit and drive
towards entrepreneurship or business start- ups would entail preparing them to become successful and
useful in the economy and in the same manner making the society and economy entrepreneurial.
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According to Brijlal (2008 quoted in Brijlal 2011) recent research has revealed that entrepreneurial
culture is not really boosted in tertiary institutions that churn out would-be bureaucrats rather than
calculated risk takers. Collins et al, (2004) highlighted that the lack of graduate employment in South
Africa is driving government policy and the need to equip students with entrepreneurial skills, knowledge
and abilities. Since business start-ups are often seen as driving force of economic growth and significant
job creation, therefore it is necessary to assess and investigate University students’ intentions toward
entrepreneurship, and their perceived educational support that would influence their intention in starting
their own business in the future. The focus is on Arts and Management students at Tshwane University of
Technology. The Results will prove useful to students, would-be-entrepreneurs, universities educators,
policy makers and researchers alike.
Literature Review
Intention stems from intentionality, which can be defined as a state of mind directing a person’s attention,
experience and action towards a specific goal or a path to achieve something (Bird, 1988). According to
Ajzen and Fishbein (1980), intentions are the single best predictor of any planned behaviour. Researchers
generally agree that intentions help to explain and model why many entrepreneurs choose for selfemployment.
For a better understanding of entrepreneurial behaviour we will provides some highlights of
previous research on entrepreneurial intentions, and will explain models of entrepreneurial intention in
more detail; Ajzen's (1991) Theory of Planned Behaviour and Shapero and Sokol's (1982)
Entrepreneurial Event Model. Bird (1988) suggested a model of intentional action, and more recently
Lüthje and Franke (2003) proposed a structural model of entrepreneurial intent. Engle et al. (2010:38)
pointed out that entrepreneurial intent refers to the intention of an individual to start a new business.
Previous researchers (in US Krueger et al.,(2000), in France Fayolle et al.,(2005), in Norway Kolvereid,(
1996), Russia Takachev and Kolvereid, (1999), in Sweden, Finland, Thailand, the UK, and the USA
Autio et al., (1997, 2001), and Depillis and Reardon, (2007) in Ireland and the USA and Brijlal (2011) in
South Africa) have used both Shapero's and Ajzen's models, to predict entrepreneurial behaviour and the
all found that both models were effective.
Since new business ventures are not developed in a day, entrepreneurship could be seen as a type of
planned behaviour. Krueger et al. (2000: 411) noted that “psychologists have proven that intentions are
the best predictors of any planned behaviour, particularly when the behaviour is rare, hard to observe, or
involves unpredictable time lags”. Ajzen (1991) developed the ‘Theory of Planned Behaviour’ in order to
understand people behaviour. Ajzen (1991:181) noted that an individual's intention to perform a given
behavior is central to explaining why he acted as he did. Ajzen (1991) argued that considered actions are
preceded by conscious decisions to act in a certain way. Ajzen (1991) explains three factors, which are
crucial in changing the intention and the actual behaviour. First of all, the belief and attitude somebody
has toward the behaviour. A student could for instance have a positive attitude toward entrepreneurship
because one of the parents is an entrepreneur. Other factors influencing the attitude in the entrepreneurial
situation are e.g. willingness to take risks, locus of control, need for independence, etc. (Krueger et al.,
2000). The second factor is a social factor termed subjective norm. This factor refers to the social pressure
from the environment on the individual to perform or not to perform the behaviour; e.g. parents who
encountered negative experiences with entrepreneurship, could pressure their children not to start their
own business. The third factor influencing intention is the perceived behavioural control. This factor
distinguishes the model from previous behavioural models. The idea is that the actual behaviour does not
only dependent on the motivation or intention to perform certain behaviour, but also on the perception of
the difficulty of performing the behaviour. In the field of entrepreneurship the TPB (Ajzen, 1991) has
been applied to various studies in the last decades. Students were often chosen as a sample for the
research on entrepreneurial intentions (e.g. Crant, 1996; Autio et al., 2001; Lüthje & Franke, 2003).
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In a model developed by Shapero’s (1975), the model of ‘Entrepreneurial Event’ explains how the
intention to start a business, depends both on the ‘credibility’ of alternative behaviours and the propensity
to act upon opportunities. Shapero (1975) shows the importance of perceptions in predicting the intention
to act in a certain way. Furthermore Shapero (1975) stresses how potential entrepreneurs are often
discovered when a displacement in their environment occurs. Krueger (1993) tested Shapero’s (1975)
thoughts and concluded that the three variables: desirability, feasibility, and propensity to act, explain
approximately half of the variance in intentions toward entrepreneurship. Intentions to act are believed
central to understanding the behaviours in which people engage. Krueger et al. (2000) pointed out that
actual behaviour may differ from intended behaviour, it has been established that one's intention to act
toward something in a certain manner is the most consistent predictor of actual behaviour, particularly
planned behaviour. Hence, intentions-based models then are particularly suited to entrepreneurship as the
entrepreneurial process is a planned one.
The impact of education on the creation of future entrepreneurs and the link between university training
and the success of new ventures has been the subject of much discussion in the academic community. The
university is an institution, which students pass on toward working life. Right after graduation, students
decide where their career will start. Autio et al. (1997:4) state the following: “It is our impression that
career preferences of university students can be influenced, and that university students tend to gravitate
toward fashionable career options.” Therefore, the university should be part of the entrepreneurial
intention model. In the last decade other researchers (e.g. Crant, 1996; Lüthje & Franke, 2003) have
recognized the significant role of universities in the entrepreneurial intentions model as well. Lüthje and
Franke (2003:136) go even further with stating that “some universities successfully stimulate
entrepreneurial activities”, and therefore they included the university in their structural model of
entrepreneurial intent. In figure 1, the university would fall under the ‘perceived support’ factors. Lüthje
and Franke (2003:138) state that: “a student might be willing to found a company, regardless of his or her
comparatively bad attitude towards entrepreneurship, because he perceives the founding conditions as
very favourable.” This can be achieved through for instance a business incubator programs,
entrepreneurship education and research, or other academic entrepreneurship activities. University
programs should remove the perceived and the objective factors, which are adverse to starting a company.
Lack of university entrepreneurial education and activities leads to low level of entrepreneurial intentions
of students (Franke & Luthje, 2004 quoted in Ahmed et al., 2010:16). Thus, the university environment
should have a direct impact on students’ intentions towards self-employment
The attitude toward entrepreneurship is an individual's concept about entrepreneurship, assessment and
inclination towards entrepreneurial behavior or self-employment. In their study focused on entrepreneurs
from Singapore and Australia, Ghosh & Kwan (1996) found that there were several reasons why
entrepreneurs started enterprises: 1.The individual wants personal growth. 2. They like the challenge. 3.
There is more freedom in being a business owner. 4. The chance to use one's own knowledge and
experience. 5. Do not like working for others. 6. They are affected by family or friends. 7. Family
tradition. Carter et al. (2003) research results indicated that the main reasons individual's start enterprises
are self- realization, financial success, roles, innovation, recognition and independence. According to
Wang & Wong (2004) in Singapore, Gender, family experience with business and educational level were
found to be significant determinants in entrepreneurial interests among university students.
Data and Methodology
To answer the research question whether students’ entrepreneurial intent is determined by their
personality, or can academic entrepreneurship education influence such decision, we collected survey data
using an entrepreneurship intention questionnaire (EIQ) from a sample of Bachelor of Technology
(BTech) students from Tshwane University of Technology’s Faculty of Management Sciences and
Faculty of Arts. The instrument was modified to suit arts and management students including South
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African specific settings. This study used a stratified random sampling technique by using faculty/course
of study. And participation in the survey was voluntary. Data from the questionnaires were captured on a
spreadsheet and analyzed using the SPSS package. Statistical techniques including frequencies, crosstabulations,
descriptive, and chi-squares were used. Descriptive analysis was used to describe and
highlight the variables, while inferential statistical tool (Chi-square) was applied in the analysis of the
relationships existing between variables of interest. Perceptions toward entrepreneurship was measured
using Likert scale (ordinal), while knowledge was measured using a nominal scale. Taking into
consideration the preceding works presented in the literature the following four hypotheses were
developed in this research concerning entrepreneurship.
H1: Attitude towards entrepreneurship as a career options is positively related to entrepreneurial
intentions.
H2: Student participation in entrepreneurial programmes and education is positively related to
entrepreneurial intentions.
H3: Students with proactive personality are more likely to have a positive attitude towards
entrepreneurship.
Findings
H4: Students with proactive personality are more likely to participate in entrepreneurial education.
Entrepreneurial Intentions among Students
The importance of intentions as an antecedent of planned behaviour (such as founding a company) has
been emphasized in recent years. As it has been shown that intentions are the best predictor of actual
behaviour, we took this variable as a dependent measure and investigated students' entrepreneurial
intentions between Arts and Management Science students at Tshwane University of Technology (TUT).
In general, our findings indicate that Arts students' entrepreneurial intentions are stronger and more
ambitious in terms of business growth. If we first look at the proportions of students who intend to start a
business after graduation, we can find significant differences: Two third of student at Arts states that it is
"very likely" that s/he will start a business after graduation and they rest at least thinks that it is "likely".
With Management Sciences, the percentage of students who are very certain about starting a business
after graduation is clearly lower. The percentage of students who show a positive tendency toward selfemployment
but are not completely certain is also lower.
Attitude towards entrepreneurship and Self-Employment
Ajzen & Fishbein (1980) noted that attitudes usually impact intended behaviour to a certain extent. In the
context of our study, it seems plausible (and the data confirms this assertion as well) that the more
students value the entrepreneurial career path, the stronger their intentions are to become entrepreneurs
themselves. If we compare the attitudes of the students from our samples, we find an astonishing result;
Arts students' attitude towards self-employment is by no means more positive than those of Management
Science students – it is even significantly less favourable. The proposition that a more favourable attitude
toward being self-employed leads to a higher level of entrepreneurial intention among Management
Science students can obviously be ruled out. The value students attribute to this career path is even higher
in Arts than at Management Science
Attitude towards entrepreneurship education /university environment
The academic context is an important part of the students' environment, as universities are in a position to
shape and encourage entrepreneurial intentions. Even more significantly, as much as they can foster
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entrepreneurial spirit among their graduates, universities can also dampen optimism and may even
convert students who were originally interested in entrepreneurship into graduates interested only in a
career at large and established companies. Consequently, the two faculties’ specific activities to foster the
inclination toward starting new businesses could probably serve as an explanation for the differences in
students' entrepreneurial intentions. Respondents were asked to rate various aspects of entrepreneurial
education and support. Our study indicates that there are huge differences in the way these faculties and
indeed the university foster entrepreneurship at least from the point of view of their students. Although
most respondents think about entrepreneurship and/or starting a business, most of them will not want to
start business after graduation, but postpone this to a more distant future because of the lack of support
and motivation needed for starting a business. Furthermore, there are also major differences in the
evaluation of development measures. The students at Arts believe to a greater extent than the students
from Management Science that their lectures promote skills and knowledge which are critical for future
entrepreneurs. Finally, TUT is perceived to be less active in supporting future entrepreneurs in the precreation
stage. The two student samples in Arts and Management Science Faculty perceive the overall
support and the specific programs to nurture essential support for future entrepreneur to be less
established. In sum, findings suggest that the huge differences in entrepreneurial intentions among the
samples might be attributed to environmental factors – in this case to the specific factor of entrepreneurial
education and support at the university level.
Discussion
The objective of this paper was to contribute to an improvement of entrepreneurship education in
Tshwane University of Technology and indeed other South African University of Technology. To achieve
this, the researchers explored the entrepreneurial intentions of Tshwane University of Technology
students. The analysis confirms many previous findings in literature on students’ entrepreneurial
intentions. For instance, the research has given further evidence for the usefulness of the Theory of
Planned Behaviour (Ajzen, 1991) in explaining these entrepreneurial intentions. Students’ attitude
towards entrepreneurship and students’ perceived behavioural control positively influence the ultimate
entrepreneurial intentions. We further included participation in entrepreneurship education as a direct
influence on entrepreneurial intentions; the results support this direct relationship, and indicate and even
higher robustness of the model.
The researchers then explore the positive relationship of personality traits on attitude towards
entrepreneurship and participation in entrepreneurship education. More precise, students with a proactive
personality have a more positive attitude towards entrepreneurship and have more often participated in
entrepreneurship education. Students with a high willingness to take risks also tend participate in
entrepreneurship education. The decision to start a new venture seems to some extend influenced by
personality traits. The results show that the combined indirect effects of personality on entrepreneurial
intentions are almost as high as the direct effect of participation in entrepreneurship education on these
intentions. These results make it possible to answer the research question:
Are students’ entrepreneurial intent determined by their personality, or can academic
entrepreneurship education influence this decision?
Entrepreneurship education, as distinct from general education, has a clear influence on the students’
intentions to start a new business. Personality characteristics do not pre-determine students’
entrepreneurial intentions; academic entrepreneurship education influences this decision. The participants
in entrepreneurship education do show more entrepreneurial personality characteristics than their nonparticipant
counterparts. A student’s intention to start a new business is therefore not pre-determined by
personality, academic entrepreneurship education significantly influences these intentions. The
entrepreneurial intentions of students are influenced directly by the students’ participation in
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entrepreneurship education and indirectly by its personality. Participation in entrepreneurship education
has almost the highest direct relationship with entrepreneurial intentions. This alone provides enough
information that academic entrepreneurship education influences the students’ decision to become a new
business founder. The personality relationship should however not be neglected.
Since it can not be stated whether entrepreneurship education influences the entrepreneurial
characteristics of students, this research recommends the TUT to focus their attention on the students with
the ‘entrepreneurial’ personalities. Since a selection process for these students does not seem as a
reasonable option, students should not be selected, but attracted towards entrepreneurship education. It is
more promising to train the students with the ‘correct’ profile to become a successful entrepreneur. Thus,
the university would be well advised to expand the number graduate entrepreneurship courses.
Furthermore, improving the image of entrepreneurship as a plausible career alternative, could affect
students’ attitude towards entrepreneurship. According to Hostager and Decker (1999), general business
management education seems to have no significant influence on entrepreneurial intentions unlike
entrepreneurship programs. The findings of a survey of business owners in India suggest that
management education is not an important driver of entrepreneurial attitudes (Gupta 1992). Chen at al.
(1998) surveyed students in various business majors and showed that the number of management courses
taken had no effect on entrepreneurial decisions. These findings underscore the need for education
programs specifically designed to expand students' knowledge and experience in entrepreneurship.
Conclusion
We should enhance the attitude toward entrepreneurship in students at technological universities through
entrepreneurship education and programs. We should supply entrepreneurial knowledge to these students
in order to increase student confidence and attitude towards entrepreneurship as a career choice.
Entrepreneurship programs such as business idea/plan competition, relevant workshops and lectures
should be held to help our students understand policies, resources and the entrepreneurial environment.
As a technological based university, we should share information, promote student innovativeness to
foster a positive attitude towards future entrepreneurial enterprising. Universities of Technology should
provide stimulated entrepreneurship programs with elements such as exposing students to entrepreneurial
role models, potential frontier technologies, ground-breaking ideas, while involving in funding as well as
market and network creation. Educators need to identify individual students with the specific attitudinal
characteristics suggesting entrepreneurial intent and recognize their own potential influence as mentors
and use it to nurture, encourage, and support students. In doing this, educators also need to let students
know of the skills necessary to successfully start a business and help build their confidence in being able
to perform those activities not just assume they will make the necessary connections between a given
skill set and entrepreneurship. Tertiary institutions play an important role in developing an entrepreneurial
society in that they can instil in their students at graduate and post-graduate level a sense of understanding
of risks and rewards, of business creation and its causes of failures. They can also play a role in
developing entrepreneurial traits in students and can provide the necessary support for entrepreneurs as
well providing legitimacy to their endeavours.
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Integrating Scientific with Indigenous Knowledge: Towards a conceptual framework of the
innovation process of indigenous entrepreneurs
Henrietta Onwuegbuzie
Faculty of Entrpreneurship and Decision Making, Lagos Business Scool
Pan African University, Lekki, Lagos, Nigeria.
Norma Juma, norma.juma@washburn.edu
Washburn University, School of Business, Topeka, KS, USA
Abstract
Extant literature indicates that indigenous knowledge (IK) has the potential to solve contemporary problems. IK
applied by indigenous entrepreneurs(IEs) and the resulting grassroots innovations(GIs) provide an unexploited
idiosyncratic source of value creating innovations which hold great potential for solving contemporary problems as
well as delivering sustainable development, especially in developing countries. Though GIs represent an important
source of innovations that have provided affordable, effective solutions in indigenous communities, they are
sometimes not so effective and usually fail to scale up as most IEs lack the funds and knowledge required to
commercialize the innovation on a large scale. This conceptual paper however seeks to provide a deeper
understanding of the innovation process of IEs. It proposes an integrative model of the innovation process of IEs.
The authors conclude by generating research questions informed by their conceptual framework.
Introduction
The purpose of this conceptual paper is to propose a conceptual model that may lead to a better
understanding of the innovation process of indigenous entrepreneurs (IEs). The literature reveals that IEs
who are rich in IK generate low cost GIs which are just as effective as and sometimes even more effective
than existing modern scientific solutions (Gupta, 2000). In spite of the lack of formal education,
indigenous populations have continuously found solutions to their problems and a means of survival
without having recourse to modern means which tend to be unaffordable for them.
A fundamental component of any country’s knowledge system is its indigenous knowledge (Hindle &
Lansdowne, 2007; Sen, 2005; Subba Rao, 2006) and a number of authors point out that more sustainable
and effective solutions are generated by building on the existing knowledge base (Grenier, 1998; Gupta,
1995; Monaghan, 2009; Sen, 2005; Subba Rao, 2006). A review of the literature reveals that a number of
scholars and development workers are gradually beginning to realize the importance of building on
existing knowledge in seeking to achieve sustainable development (Sen, 2005; Subba Rao, 2006: Gupta,
Sinha, Koradia, Patel, Parmar, Rohit, Patel, Patel, Chand, James, Chandan, Patel, Prakash, &
Vivekanandan, 2003) and that indeed, IK has the potential to solve contemporary problems (Agrawal,
1995; Gupta Kothari & Patel, 1999; Kuznets , 1973; Lalonde, 1993; Monaghan, 2009; Peredo, 2004, Sen,
2005; Sillitoe, 1998; Srinivas & Sutz, 2008; Subba Rao, 2006).
We therefore argue that IK applied by IEs and the resulting GIs provide an unexploited idiosyncratic
source of innovations which holds great potential for solving contemporary problems (Gupta, 2000) as
well as delivering sustainable development (Gupta, et al, 2003). Furthermore, considering that the current
world economic crisis has enlarged the niche for cost-effective solutions as a preferred alternative
(Prahalad & Mashelkar, 2010), in this paper we advocate the need to integrate IK systems and western
knowledge systems as a means of generating effective, scalable low-cost solutions.
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This paper is divided into four sections. The first section provides a background by defining and
explaining relevant key terms such as indigenous entrepreneurship, indigenous knowledge and grassroots
innovations. The second section discusses the importance of integrating incumbent mainstream
knowledge systems with indigenous knowledge and the relevance of understanding the innovation
process of indigenous entrepreneurs. The third section discusses the proposed conceptual framework to be
explored in the field study and the final section suggests future directions for indigenous entrepreneurship
research.
Indigenous entrepreneurship and grassroots innovations
This paper looks at the relatively little known phenomenon of indigenous entrepreneurship which tends to
involve the application of IK. Indigenous entrepreneurship (IE), is defined as enterprise related activities
carried out by indigenous people (Peredo, Anderson, Galbraith, Honig, & Dana, 2004: 3). It is also
considered as, “self-employment based on indigenous knowledge” (Dana, 2007). Indigenous
entrepreneurs tend to apply indigenous knowledge which is defined as “a systematic body of knowledge
acquired by local people through the accumulation of experiences, informal experiments and an intimate
understanding of the environment in a given culture” (Warren & Rajasekaran, 1993). It is not restricted
to rural dwellers as it is present in all communities that have built a body of knowledge over generations
(Subba Rao, 2006).
Indigenous entrepreneurs tend to generate grassroots innovations which are defined as need-based,
simple, cost-effective and sustainable solutions generated to address problems faced by indigenous
communities, with the potential to solve contemporary problems (Gupta, 2001). Though GIs originate
mostly from indigenous communities by individuals who tend to be economically poor and with little or
no formal education, they are also generated by other individuals educated in formal systems and from
higher income groups, who are embedded to some extent in the same environment and thus posses some
degree of IK (Subba Rao, 2006).
Most of the literature on innovation and entrepreneurship proceeds from research in developed countries
(Lindsay, 2005), creating a tendency to focus on mainstream innovations which are usually related to the
context of developed economies. Much less attention has so far been paid to the wealth of innovations
that occur outside formal R&D structures such as grassroots innovations which are derived from
indigenous/traditional knowledge and have the potential to solve contemporary problems (Gupta, 2001).
This paper thus highlights the need to extend the existing paradigm of innovation to include these
idiosyncratic forms of innovation and attempts to contribute to indigenous entrepreneurship research by
investigating the innovation process of indigenous entrepreneurs.
Innovations by IEs tend to be cost-effective, ecosystem friendly and sustainable because indigenous
people usually have an intimate knowledge of the ecosystem in their locality and through accumulated
experience, have learnt to manage the resources available in their environment in a sustainable way
(Gupta, 1999). However, though GIs represent an important source of value creating innovations they are
sometimes not so effective and usually fail to scale up as most IEs lack the funds and knowledge required
to commercialize their innovations on a large scale. The phenomenon of technology blending which
involves the integration of grassroots and mainstream innovations has been suggested as a means to scaleup
GIs as well as increase their effectiveness (Srinivas & Sutz, 2008; James, 1988). Extant literature
reveals a number of instances when the integration of indigenous knowledge and modern scientific
knowledge result in improved outcomes (Douthwaite, 2006; James, 1988) and also proposes a conceptual
framework depicting how mainstream practices can harness the benefits of indigenous knowledge
(Monaghan, 2009). While the innovation process of mainstream innovations is extensively discussed by
various authors (Hansen & Birkinshaw, 2007; Roper, Du, & Love, 2008; Van Horne, Frayret, & Poulin,
2006), no empirical study was found in the literature regarding the innovation process of IEs. In this
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paper we argue that there is a need to scientifically identify useful principles and potential applications of
local practices, which could lead to the development of new knowledge (Prahalad and Hart, 2002). An
understanding of how IEs generate GIs could provide an insight into local practices and principles and
thus contribute to indigenous entrepreneurship research. Furthermore, an understanding of IK and the
behaviors of IEs could represent an opportunity to transform current production and consumption patterns
to more cost-effective, sustainable and ecosystem friendly models (Gupta et al., 2003; Monaghan, 2009;
Srinivas & Sutz, 2008).
The next section discusses the advantages derivable from integrating incumbent mainstream knowledge
systems with alternative knowledge systems such as indigenous knowledge.
Integration of indigenous knowledge systems and western knowledge systems
Value creating advantages can be derived from collaborations between indigenous knowledge and
mainstream innovations (Assefa, Waters-Bayer, Fincham, & Mudahara, 2008; Ganguli, 2000; Gupta et
al., 2003; Monaghan, 2009; Sen, 2005; Srinivas & Sutz, 2008; Subba Rao, 2006). In some instances
award winning innovations have resulted from the integration of indigenous knowledge and mainstream
technology (Ovadje, Ayemoba, & Thompson, 2006; Terjesen, 2007). The combination of indigenous
knowledge applied by indigenous entrepreneurs and modern technology facilitate more productive use of
existing indigenous knowledge and facilitates the generation of innovations at a faster pace (Ganguli,
2000: 48) as IK is continuously “being produced and reproduced, discovered as well as lost” (Subba Rao,
2006: 225).
Drucker (1985), points out that there is an erroneous tendency to consider the quality of innovations as
dependent on the cost of the inputs or the difficulty of the production process and posits that “quality”
resides in the value provided by the innovation to the customer and for which the customer is ready to
pay. The relevance of innovations should therefore be measured based on the socio-economic context in
which they are embedded (Srinivas & Sutz, 2008: 129), as different problems exist in different
environments. Consequently, though an innovation that is of paramount importance in one environment
may be irrelevant in another, it still constitutes a valuable innovation as it is of use to certain populations.
The low-cost innovations generated by indigenous entrepreneurs under conditions of scarcity thus
constitute genuine innovations (Gupta et al., 2003; Srinivas & Sutz, 2008). Many small farmers have
developed innovative solutions to local problems without external interventions (Pathak, 2008). Indeed,
some farmers actually prefer to use local solutions to commercially available mainstream solutions which
they find both expensive and not readily available. Grenier (1998) cites the example of farmers who use
local strategies to fight termites and ants, which are major destroyers of gum and orchard trees. Through
informal experiments, these farmers discovered they could use either ashes or the combination of a
smelly plant with onions and paraffin or used oil, to repel the pests (Grenier, 1998: 7). Grassroots
innovations can thus be considered a source of sustainable innovations which can be capitalised
(Monaghan, 2009: 1028). Nevertheless, in spite of the fact that grassroots innovations provide an
opportunity to discover low-cost, effective and sustainable solutions, there appears to be a gap in the
literature regarding empirical research on the innovation process of IEs. Such research may reveal
valuable ideas to enhance incumbent mainstream practices especially with regards to sustainability.
Proposed conceptual framework to be explored in qualitative field study
This paper suggests a conceptual framework that depicts the innovation process of IEs. The framework is
based on the synthesis of the innovation value-chains by (Hansen & Birkinshaw, 2007; Roper et al., 2008;
Van Horne et al., 2006). The framework explains the innovation process in four phases; from the point of
problem identification to idea selection, idea development and finally the exploitation of the innovation.
The activities that take place at each stage are explained as illustrated in figure 1. The framework is
explained as follows:
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Problem identification: The literature points out that GIs are need driven. Thus similar to the value chain
by Van Horne et al., 2006, the proposed framework starts with the identification of a problem in the
environment. Research is then carried out to find existing grassroots and mainstream concepts or ideas
that could be brought together to address the problem. Embeddedness provides the innovator with
intimate knowledge of the problems and resources available in the environment (Jack & Anderson, 2002).
It thus allows the innovator to determine not only the extent of the problem but also factors to keep in
mind in seeking an effective solution that can be adopted by the intended users. Such factors include the
cultural values of the target population as well as their purchasing power. The goal is to deliver value to
the users of the innovation (Van Horne et al., 2006).
This is consistent with the population ecology theory, which deals with the influence of the environment
on organizations (Hannan & Freeman, 1977). The market acceptance of the innovation is determined by
the relevance of the resulting innovation to the individuals in the environment and its ability to address
the targeted problem in an affordable way (Verma et al., 2004). Thus, only those organizations which
constantly adapt to their environment will survive (Amit, Glosten, & Muller, 1993: 823), as only
innovations which adequately serve the needs of the market can achieve commercial success (Drucker,
1985; Srinivas & Sutz, 2008).
Idea Selection: At this stage, after examining possible indigenous and mainstream ideas that could
resolve the problem, the most appropriate ideas/features are selected. The criteria for the selection of
features at this phase would include; effectiveness in solving the problem, cost-effectiveness, cultural
sensitivities (avoiding the use of anything that may be considered offensive), and ease of use. These
features facilitate the adoption of the innovations. In particular, high-cost and perceived difficulty in
usage, tend to hinder innovation adoption (Longo, 1990; Verma, Tsephal, & Jose, 2004).
This phenomenon is consistent with the structuration theory which explains how innovations are
conditioned by the environment in which they are embedded. It also points out that human actions
determine the social structure and, simultaneously, social structures influence human actions
(Butkeviciene, 2009; Giddens, 1984). Though as previously noted, the ideas selected for integration from
both grassroots and mainstream innovations are influenced by an understanding of what is acceptable and
affordable to the potential users, the selection of ideas may also be aimed at influencing the social
structure; for example, hitherto non-consumers could become consumers as a result of drastically lowered
costs.
Innovation development: This phase can be described as “idea conversion” (Hansen & Birkinshaw
(2007), or “innovation development” ( Van Horne et al., 2006), or the transformation of knowledge into
physical innovation that reflects the different sources of knowledge applied (Roper et al., 2008).
This phase is where the integration of ideas selected from indigenous and mainstream innovations are
developed and pilot tested. Roper et al. (2008), note that innovativeness and performance are enhanced
when different sources of complementary knowledge are harnessed and thus acknowledges the
complementarity and substitutability of different sources of knowledge (Roper et al., 2008).
The difference in approach to be emphasized is the need for the development process to be user-led,
rather than developer-led. von Hippel (2009) points out that user-centered innovations has advantages
over manufacturer led innovations as the user is able to develop exactly what they need (p 29) instead of
relying on manufacturers who tend to focus more on commercial benefits (Riggs & von Hippel, 1994). A
number of authors note that the effectiveness of GIs in solving problems results from the fact that they are
generated by those who have firsthand experience of the problems (Ganguli, 2000; Gupta et al., 2003;
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Srinivas & Sutz, 2008). If possible, the pilot-testing should happen in the embedded context –where the
resulting innovation is to be used.
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Devising an appropriate means
of commercializing, diffusing
and ensuring the adoption of the
innovation also entails
integrating grassroots and
mainstream ideas
Seeks ways of integrating selected
ideas from grassroots innovation to
simplify mainstream innovations or
scale up grassroots innovation to
result in low-cost and ecosystem
friendly innovations
Considers existing solutions
from indigenous knowledge
systems and western knowledge
systems and selects desirable
features to be combined based
on knowledge of cultural and
socio-economic context
The indigenous
entrepreneur identifies a
problem to be solved.
Preferably one that affects
a large population
Desired features of innovation
outcome: user friendliness and lowcost
compared to conventional
substitutes, ecosystem friendly and
sustainable
Fig 1: Conceptual framework depicting the innovation process of indigenous entrepreneurs

Proceedings of the 12th Annual Conference © 2011 IAABD
Exploitation: The exploitation stage in the framework encompasses the commercialization, diffusion
and adoption of the resulting innovation (Van Horne et al., 2006). To determine an effective way to
commercialize, diffuse and foster the adoption of the new innovation to the target market, knowledge
resulting from embeddedness in the environment and mainstream strategies for the commercialization,
diffusion and adoption of innovations may be applied. The integration of these two sources of knowledge
is expected to facilitate the successful exploitation of the innovation. This phase may also involve coopting
existing structures in the communities that are already used as a means for social networking at the
community level to facilitate information and access to the resulting innovations.
The population ecology theory previously discussed, also underpins this phenomenon as gaining market
acceptance is necessary for the commercial viability of the resulting GI. The environment could thus be
considered to select the organizations that survive in it (Amit et al., 1993). This suggests that if GIs are to
gain wider market acceptance, the innovations originating from them should be relevant to a wider
population and should constantly adapt to the changes in market trends.
Future Direction
It may thus be deduced from the above discussion that firms that successfully address market needs taking
advantage of the knowledge from both grassroots and mainstream innovations to provide simpler and
more cost-effective solutions are likely to have a competitive advantage over others that use only one of
either source of innovation.
This suggested conceptual framework depicting the innovation process of indigenous entrepreneurs will
be further explored in the field study. The analysis of observations from the field will serve to provide a
deeper and clearer understanding of the innovation process of indigenous entrepreneurs as it occurs in
reality and may also serve as a guide for innovators wishing to harness the benefits of indigenous
knowledge. Other questions to be tackled in the empirical study include: How can GIs generated by IEs
become as prevalent or as commercially viable as successful mainstream innovations? Is it possible to
leverage knowledge from IEs which are unsystematic in a systematic way? To the best of our knowledge,
these questions remain unanswered in literature and the answers could provide opportunities for radical
innovations of global relevance.
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studying grassroots innovation: Agricultural Innovation Systems (AIS) and Agricultural Knowledge and
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R. B. Anderson (Eds.), International Handbook of Indigenous Entrepreneurship Research.
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Drucker, P. 1985. Innovation and Entrepreneurship. Practice and Principles. New York: Harper.
Ganguli, P. 2000. Intellectual property rights: mothering innovations to markets. World Patent
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Giddens, A. 1984. The Constitution of Society. Cambridge: Polity Press.
Grenier, L. 1998. Working with Indigenous Knowledge: A guide for researchers: International
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Gupta, A. 1995. People’s Knowledge for Survival: Grassroots Innovations for Sustainable Natural
Resource Management. Paper presented at the IFADs International Conference on Hunger and Poverty.
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Gupta, A. K., Sinha, R., Koradia, D., Patel, R., Parmar, M., Rohit, P., Patel, H., Patel, K., Chand, V. S.,
James, T. J., Chandan, A., Patel, M., Prakash, T. N., & Vivekanandan, P. 2003. Mobilizing grassroots'
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Entrepreneurship Theory & Practice, 31(6): 953-963.
Van Horne, C., Frayret, J.-M., & Poulin, D. 2006. Creating value with innovation: From the centre of
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Abstract
Cultural values of Ugandan students and their influence on entrepreneurial intentions
Isaac Wasswa Katono, ikatono@ucu.sc.ug
Uganda Christian University, Uganda
Graduate start up is a world wide problem. Based on the Theory of Planned Behavior(TPB) and Hofstede’s 5
cultural dimensions, this paper examines the influence of culture on the antecedents of entrepreneurial intent among
a convenience sample of undergraduates from the four regions of Uganda .Data is collected using a cultural
orientation scale and the Entrepreneurial Intentions Questionnaire (EIQ).A four way ANOVA indicates that there is
no difference in terms of entrepreneurial intent by region, while regression analysis indicates that the 5 cultural
dimensions influence the motivational antecedents of intention in the TPB, with exception of power distance which
does not influence subjective norm and perceived behavioral control.
Introduction
The importance of entrepreneurship in the economies of countries is well documented in the literature. In
the developing countries, the encouragement of entrepreneurial activities is recommended as a way to
stimulate economic growth (Harper, 1991). Hence, there is a strong global effort towards encouraging
students to pursue entrepreneurship yet there is much less research on graduate entrepreneurship (Nabi
and Holden, 2008). A major source of concern is the failure to see relatively high levels of apparent intent
to start up amongst students (Wu and Wu, 2008), and it remains a key research question (Nabi and
Holden, 2008). This low start up rate among graduates is attributed to the presence of a number of barriers
such as negative societal attitudes towards entrepreneurship (Morrison, 2000). It is thus important to
examine the influence of cultural orientation on student entrepreneurial intentions. Culture influences the
way in which people think, and this is reflected in the meaning they attach to various aspects in life. In
their Giessen-Amsterdam model of entrepreneurship, Frese and Wang (2005) argue that actions, visions,
goals and strategies as well as personality, human capital, environment and business success are all
influenced by culture. Culture is defined as “the collective programming of the mind which distinguishes
the members of one human group from another” (Hofstede, 1980 p.25). Thus culture motivates
individuals in a society to engage in behaviors that may not be evident in other societies (Linan and Chen,
2009 p.597). The thrust of entrepreneurial research has been on examining the relationship between
culture and entrepreneurship at the societal level of analysis (see Hayton et al., 2002 for a review), rather
than between cultural variables and entrepreneurship at the individual level of analysis (Konig, 2007).
This paper shifts the focus to an individual level of analysis. Further, most of the studies on graduate
entrepreneurial intentions have been done in the West, hence little is known about entrepreneurship in
emerging economies (Bruton et al., 2008 p.1). In addition, most studies of entrepreneurship have focused
on adult entrepreneurs, yet people are likely to start a business in the age range 25 to 44 (Liles, 1974). It is
important to examine the cultural orientations of young people in an African context, since some socio
cultural values hinder the development of entrepreneurship in Africa (Tukyiasiedu, 1993) or frustrate it
(Munene et al., 2000). Specifically this paper examines the relationship between cultural orientation and
the antecedents of entrepreneurial intent among undergraduate students in Uganda. In the next section,
study hypotheses are motivated, followed by the study methodology. A concluding discussion wraps up
the paper
Literature Review
Definitional divergence of entrepreneurship
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There is disagreement over the definition of entrepreneurship. This definitional divergence is a barrier in
creating a conceptual frame work for the entrepreneurship domain (Shane & Venkataraman, 2000). This
paper defines entrepreneurship as an examination of how, by whom and with what effects opportunities to
create future goods and services are discovered (Venkataraman, 1997).Further, in this study
entrepreneurial intent is defined as self acknowledged conviction by a person that they intend to set up a
new business venture and consciously plan to do so at some point in the future (Thompson, 2009).
Intention models of entrepreneurship
An individual’s intention to become an entrepreneur is the best predictor of his /her actually engaging in
entrepreneurship in the future rather than trait and demographic approaches, thus most research in
entrepreneurship is based upon intention models, since entrepreneurial action is actually planned behavior
(Krueger et al., 2000). Fishbein and Ajzen (1975) operationalised intention as the likelihood to act. Two
intention models emerge as dominant in the literature i.e. Ajzen’s (1985) Theory of Planned Behavior
(TPB) and the Shapero and Sokol (1982) model of entrepreneurial event (SEE). TPB views
entrepreneurial intent as an immediate determinant of planned behavior and holds that attitude, subjective
norm and self efficacy predict intention which also in turn predicts behavior. Shapero and Sokol (1982)
explain intention in terms of perceived desirability, perceived feasibility, and the propensity to act. They
argue that a state of inertia guides human behavior, until an event displaces that inertia. Hence start up is
based on the individual having the potential to start up, as well as his /her ability to do so later. This
paper is based on the TPB. Not all authors are agreed on the contribution of the three motivational
antecedents in the TPB. Some authors argue that all components of the TPB model are predictors of
entrepreneurial intent (, Wu and Wu, 2008), while others argue that this not true and contest the role of
subjective norm (Autio et al., 2001).
Conceptualization of culture
Most researchers of culture and entrepreneurship has followed Hofstede’s (1980) conceptualization of
culture (Hayton et al., 2002).Hofstede conceptualizes culture in terms of 5 dimensions. Power distance is
the extent to which the less powerful members of organizations and institutions (like the family) accept
and expect that power is distributed unequally, Individualism is the degree to which individuals are
integrated into groups, while masculinity refers to the distribution of roles between the genders .
Uncertainty avoidance is an expression of a society's tolerance for uncertainty and ambiguity, indicating
the extent to which a culture programs its members to feel either uncomfortable or comfortable in
unstructured situations, while Long-term orientation as opposed to short-term orientation deals with virtue
regardless of truth. Values associated with long term orientation are thrift and perseverance, while values
associated with short term orientation are respect for tradition, fulfilling social obligations, and protecting
one's 'face'. According to Mcgrath et al.(1992), entrepreneurs exhibit a certain level of these dimensions
i.e. high power distance, low uncertainity avoidance, high individualism, and high masculinity.
Specifically, they regard high power distance as a special characteristic of entrepreneurs, regardless of
whether the culture is low or high on power distance. Other researchers have found these dimensions
useful in explaining entrepreneurial cognition and eventually intention (eg.Busenitz & Lau, 1996 p.31). In
short broad cultural characteristics are associated with national levels of entrepreneurship (Bruton et al.,
2010).
Cultural orientation
Cultural orientation is defined as individual values found across countries or cultures (Donthu &Yoo,
2002). On the other hand, values are “broad tendencies to prefer a certain state of affairs over others”
(Hofstede, 1980 p.19). Cultural orientation is a result of personal learning through interactions with social
environments such as family, workplace, community, host country, and media. Thus cultural orientation
is a system of societal norms and standards for the value systems shared by major groups of a people.
Cultural orientation is not inherited but learned; hence a person develops a new cultural orientation
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whenever he or she is exposed to a new social environment. This study applies Hofstede’s (1980, 2001)
dimensions of culture to measure the different types of personal cultural orientation. Many instruments
that have been designed to measure culture at both societal and individual level, yet some researchers use
them inappropriately. According to Konig (2007), scales that have been developed to measure societal
culture should only be used when research is geared toward a societal level of analysis. Hofstede (2001)
has consistently warned against such imputations because they involve committing ecological fallacies,
based on the erroneous assumption that all people within a nation show the same level of cultural
concepts. Hofstede’s objective was to describe and compare stable systematic differences in values and
attitudes across nations and their people in general not to measure cultural differences at a micro level
(Blodgett et al., 2008). Many researchers overlook this distinction, and model the various dimensions of
culture as determinants of individual perceptions and behaviors. For example Steensme et al. (2000)
imputed national cultural scores found in other cross cultural studies to individuals, which is erroneous
(Konig 2007). The use of societal level scales at individual level results into loss of reliability and validity
(Hofstede 2002). When a study is designed toward an individual level of analysis, scales developed to
measure cultural orientation should be used (Konig 2007).In light of the above discussion the hypotheses
below are advanced:
H1: The magnitude of the cultural dimensions differs by region.
H2: Entrepreneurial intentions differ by region, given that the cultures of these regions differ.
H2: Cultural orientation significantly influences the antecedents of entrepreneurial intention
Method:
The study began with conversations with UCU staff and students about various aspects of culture in the
four regions of Uganda, and how these were likely to impact upon student entrepreneurial intentions. This
was followed by a review of the literature about culture and entrepreneurship, to identify the measures
that could be put in a study instrument. Data was then gathered from a convenience sample of students
from the main campus of UCU who were requested to fill the questionnaire (indicating their region of
origin) during class time. The motivational antecedents of intention, as well as intention to start a business
were measured with items from the Entrepreneurial Intentions Questionnaire (EIQ) (Linan & Chen,
2009), while cultural orientations were measured with items from Donthu and Yoo (2000) cultural
orientation (CO) scale. The EIQ is a 20 item scale with sound psychometric properties, in which
respondents are requested to rate their level of agreement with certain statements anchored on a 5 point
likert scale ranging from “1” strongly disagree to “5” strongly agree. Similarly, the CO scale measures all
the five dimensions of culture by asking respondents to indicate their level of agreement with certain
statements again anchored on a 5 point likert scale.
Results
The study consisted of a total of 339 respondents, 156 men (55.7%) and 124 women (44.3%). 59
respondents did not report their sex. Their mean age was 25.1 (SD 5.55). In terms of region, the North had
45 respondents (13.35), South 51(15%), West 68 (20.1%) and East 98 (28.9%). 77 respondents did not
report their region. Principal axis factoring based on promax rotation (oblique) and Kaiser Normalization
was done for the cultural orientation variables. Bartlett’s test of sphericity was χ 2 = 3246.307 df=325,
p=0.000 with a KMO coefficient of.899, both tests proving that the correlation matrix was not an identity
matrix and was factorable. Five oblique factors were extracted as expected, each having Eigen value >1,
and all of them combined accounting for 60.42% of the variance in the model. All items had factor
loadings >0.4. Regression scores were saved for further analysis. All the factors met the 0.7 cut off for
reliability (Nunnally and Bernstein, 1984) i.e. Individualism=.765, Masculinity=.715, Uncertainty
avoidance=.884, Power distance =.781, and Long term orientation=.879.The same procedure was
repeated for the EIQ variables. Bartlett’s test of sphericity was χ 2 = 1035.070 df=66, p=0.000 with a
KMO coefficient of.812, both tests proving that the correlation matrix was not an identity matrix and was
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factorable. Five oblique factors were extracted as expected, each having Eigen value >1, and all of them
combined accounting for 65.12% of the variance in the model. All items had factor loadings >0.3.
Regression scores were saved for further analysis. All the factors met the 0.7 cut off for reliability
(Nunnally and Bernstein, 1984) i.e. Attitude=.788, Subjective norm=.742, PBC=.603, Intention= .60 In
order to test H1 and H2, composite measures of the cultural variables and the entrepreneurial intentions
variables were calculated. A 4 way ANOVA was carried out, followed by a Bonferroni post hoc test since
N was not the same for each sample. There was no significant difference among the regions in terms of
individualism F (3,240) = 1.247, p>.05 and Masculinity F (3, 253) = .528 p>.05. However, there was a
significant difference among the regions in terms of Uncertainty avoidance F (3, 241) = 7.425 p

Proceedings of the 12th Annual Conference © 2011 IAABD
Subjective norm .096 5.122 .309 .000
PBC .107 5.45 .327 .000
0.05 level of significance N=250
Discussion
The study establishes that there is no difference by region in terms of masculinity and individualism,
consistent with Ugandan culture. However differences exist in some regions in terms of uncertainity
avoidance, power distance and long term orientation, and this has serious implications for entrepreneurial
intentions for students, going by the arguments of Mcgrath et al.(1992). Secondly the study establishes
that there is no difference in terms of entrepreneurial intent among students from all the regions, meaning
that students appreciate and would like to start a business at some point in their lives (all means were>3).
Third, all the motivational antecedents in the TPB predict intention unlike in studies where subjective
norm is contested (cf Autio et al., 2001). Since values shared within a culture affect the motivational
antecedents of intention (Linan & Chen, 2009), the effect of culture on subjective norm are bound to be
stronger in collectivist than individualistic cultures (Wu & Wu, 2008). Perceived behavioral control and
subjective norm explained most of the variance in intention (table 1), high lighting the importance of self
efficacy and family and friends in the entrepreneurial start up process.
With regard to the cultural orientation analysis (H3), four dimensions namely long term orientation,
uncertainity avoidance, individualism and masculinity were all significantly related to the motivational
antecedents of intention (table 2). Attitude and PBC explained most of the variance in long term
orientation and uncertainity avoidance. This has serious implications for entrepreneurship given that in
most projects the benefits come upfront of costs, and even then after a long time. Students who have a
poor attitude towards a long wait for the benefits may not start up. Further, if the attitude towards
entrepreneurship in society is negative, this is bound to influence students’ entrepreneurial intentions
negatively. Table 2 also shows that subjective norm was significantly influenced by the long-term
orientation, uncertainity avoidance, individualism and masculinity. The findings indicate on the other
hand that power distance influences only one motivational antecedent (attitude), but not subjective norm
and perceived behavioral control. The findings in general point to the importance of culture in influencing
the motivational antecedents of entrepreneurial intention, and eventually their influence on intention.
Entrepreneurship curriculum in universities ought to explain to the students how each of these dimensions
can actually influence start up, since this study consistent with many others has established that the TPB
is a useful framework for predicting entrepreneurial intent in collective societies.
Conclusion
This study set out to examine the relation ship between cultural orientation and entrepreneurial intention
of Ugandan undergraduates from all the four regions of the country based on the Theory of Planned
Behavior (TPB). The study finds no significant difference in entrepreneurial intent of the students by
region. Another major finding is that all the three motivational antecedents of intention predict intention.
Lastly, four cultural dimensions namely long term orientation, uncertainity avoidance, individualism and
masculinity strongly influence the motivational antecedents, while power distance does not influence
subjective norm and perceived behavioral control. Given these findings, university curriculum ought to
explain to the students the impact of culture on entrepreneurial intentions in order to enhance graduate
start up.
Limitations of the study
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The study utilized a small sample of undergraduates from only one university. There is need for a larger
sample to make the findings more generalizable. In spite of this, the findings are valid and can act as a
starting point for a further diagnosis of culture and graduate start up in Uganda.
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Trait emotional intelligence and employability skills: The case of Ugandan undergraduates
Abstract
Isaac Wasswa Katono, ikatono@ucu.ac.ug
Uganda Christian University Uganda.
Lack of employability skills among graduates is a major problem in many countries. This two phase paper
investigates the extent to which this problem can be explained by emotional intelligence (EI). In phase 1, employers
rate the extent to which business faculty students at UCU possess certain employability skills by gender. In phase 2,
students use the TEIQue instrument to provide self reports on their level of EI. Independent sample t tests confirm
that there are gender differences between students on their possession of employability skills and EI, while
hierarchical regression establishes that EI predicts employability.
Introduction
Many employers are not satisfied with the quality of graduates they receive. While the graduates may
possess the subject specific skills within a given discipline (technical skills), they lack those skills that are
deemed relevant across any job or profession (non technical skills) (Sherer & Eadie, 1987). Many studies
expound the limitations of using cognitive intelligence alone to predict life success (e.g. Melanie et.al,
2008), and posit that non cognitive factors may explain why, despite adequate intelligence, some
individuals have difficulty across multiple life domains (Van Rooy &Viswesvaran, 2004). Due to their
relevance in professional functioning, non technical skills are often referred to as employability skills
(Cassidy, 2006).
Employers are more interested in non technical skills such as honesty, conscientiousness, general ability,
adaptability and experience than qualifications; hence qualifications once considered to be a guarantee of
employment no longer seem to be the focus of many employers (Clarke, 2008 p.7). The lack of
employability skills among graduates exists in developed and developing countries and has persisted for
some time (Clarke, 1997). A study by Asiimwe et al. (2000) in Uganda found that graduates had no
practical skills, had low motivation, lacked dedication, were unable to solve problems, had narrow focus,
lacked cross cutting multi disciplinary and integrative knowledge, and hence were not employable.
Employability is the capability to move sufficiently within the labour market, and to realize potential
through sustainable employment (Hillage & Pollard, 1998 p.2). Employability is a construct that is linked
to many other variables and many studies have explored these linkages. Particularly Pool and Sewell
(2007) argue that no model of employability would be complete without inclusion of the emotional
intelligence (EI) construct. EI is the focus of the non cognitive abilities and originates from Thorndike
(1920), who coined the term “social intelligence” to refer to the ability to understand and manage people,
and to act wisely in human relations. EI is not a fixed parameter and can be taught or learned (Romanelli
et al., 2006) and includes skills like empathy, optimism and self awareness all of which enable people to
reflect, react to and understand various environmental situations.
It is the premise of this paper that the poor employability of some students is probably due to a low level
of emotional intelligence. Since most studies on graduate employability and employability skills have
been done in the West (Wickramasinghe & Perera, 2010), this paper seeks to establish whether there are
differences in the possession of non technical skills by gender among Ugandan undergraduates, identify
which of these skills employers are satisfied with, as well as examine the relationship between EI and
employability. The next section highlights the literature on both the theory of trait emotional intelligence
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and employability, followed by the methodology used to execute the study. The findings are presented
next, while a concluding discussion wraps up the paper.
The Theory of Emotional intelligence
Two areas of contention arise in the EI literature, i.e. the nature of the construct and its measurement.
First, there is no agreed definition of EI and this has contributed greatly to the emergence of inconsistent
and contradictory findings in the literature (Mavroveli et al., 2007). According to Petrides and Furnham
(2001), traits are dispositions which are related to the basic dimension of personality and are not a
cognitive ability, while “ability” belongs to the domain of cognition. They define trait EI as a
“constellation of emotion related self perceptions and dispositions at the lower levels of personality
hierarchies”. Hence there are two dimensions of EI: trait EI and ability EI. These two constructs are
different conceptually, methodologically and empirically, as evidenced by the low correlations between
them (O’Connor & Little, 2003). Second, the measurement of EI is contentious (see Petrides, 2009; Perez
et al., 2005 chapter 9 for a review). The difference between trait EI and ability EI is premised on the
method used to measure the construct and not on the elements (facets) that the various models are
hypothesized to encompass. Trait EI is measured through self reports (as in this study), while ability EI
must be measured through maximum performance psychological tests. Petrides and Furnham (2001)
developed the TEIQue -SF (Trait Emotional Intelligence Questionnaire Short Form) a self report
instrument that aims at providing a solution to EI measurement problems.
Emotional intelligence and employability
Various attempts to define employability skills have resulted into a plethora of superficially similar but
significantly different lists of skills (Drummond et al., 1998).This study will consider high order skills
that relate to capability across occupations (generic skills) e.g. literacy (Devins et al., 2004), thinking
skills whose emphasis is on effectiveness due to flexibility and creativity ( Jacoba & Ruurd, 2003),
personal skills like honesty and self discipline (Sail & Alavi, 2010) and social skills and attitudes that
enable a person to undertake a variety of roles and be a responsible person (Burke & Collins, 2004
;Worrall & Cooper, 2001). Sail and Alavi (2010) advance three positions from the graduate
employability literature. First, students will only be successful in their careers if they possess both
technical and non technical skills. Second, career development is determined more by non technical skills
than by technical skills alone, and third, non technical skills should not be left to occur through natural
means alone e.g. through family, peers or society, but should be part of university curriculum. Further,
given that different societies have different views regarding gender issues, it is important to explore how
gender differences influence graduates in equipping themselves with employability skills for entry-level
employment (Nabi & Bagley, 1998). Studies show that generally women are socialized to be more
concerned with interpersonal aspects of relationships than are men, prefer to use negotiation and
mediation, and empathize better with another person’s perspective than men (Valentine, 2001).
Based on the arguments above, some studies posit that women have higher EI scores than men
(e.g.Romanelli et al., 2006). However other studies that have not reported gender differences in EI scores
e.g. Mavroveli et.al (2007) found no gender differences in their study of adolescents. At a higher level,
studies of male and female managers find that the socialization process makes men and women at the
same level in an organisation behave the same (Korabik & Aymen, 1988). In spite of the Ugandan
patriarchal cultural setting (Mirembe& Davies, 2001) it is possible that male and female students exude
the same level of trait EI. Jaeger (2003) shows that EI can be improved through teaching and learning
in a higher educational setting and is positively correlated with academic achievement, suggesting
that enhancing EI is a desirable outcome for students, employees and employers. Tucker et al. (2000)
concur and posit that by implementing EI theory and exercises, faculty help students to become well
rounded graduates. Thus to achieve true employability potential, a graduate should have well
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developed EI competencies ( Pool & Sewell, 2007), since individuals with a high level of EI motivate
themselves and others to achieve more, enjoy more career success, have better health and build
stronger personal relationships than those with lower levels of emotional intelligence (Cooper, 1997).
In light of the above discussion, the following hypotheses are now advanced:
H1: Women students will be rated as having more employability skills than men students
H2: There is no difference in trait EI scores between men and women students.
H3: EI will predict more employability in a high trait EI student group than in a low trait EI student
group.
Method: The study was carried out in two phases:
Phase 1
At the end of the second year in the Business Faculty at UCU, students are required to undergo internship
for two months as part of their course work. Students develop links with employers by looking for
placements in various organisations where they work in various capacities under the guidance of a
supervisor within that organisation. This enables them to apply the knowledge they have into a working
context. A Lecturer visits the organisation one month after the student has commenced the exercise to
assess the progress of the student. At the end of the two months, the agency supervisor is requested to fill
out a questionnaire provided by the university, in which he /she evaluates the technical and non technical
skills of the student, besides other relevant questions pertaining to the exercise. It is these supervisor
evaluations that are used to gauge student possession of employability skills in this study.
Measures
Different skill types in this study were obtained in the literature. Three generic skills were obtained from
Devins et al. (2004), four thinking skills were obtained from Jacoba and Ruurd (2003), six social skills
were obtained from Burke and Collins (2004), Jacoba and Ruurd (2003), Dench (1997), while four
personal skills were obtained from Sail and Alavi (2010) and Jacoba and Ruurd (2003). Supervisors were
requested to indicate the level to which a student exhibited a particular skill on a scale of “1” very low,
“2” low, “3” average, “4” high, and “5” very high. The questionnaire also included a single item (see
James et al., 1984) for the supervisor to rate the extent to which he/she was satisfied with the quality of
the student: “On the whole how satisfied are you with the quality of this student?” using a scale of “1”
very dissatisfied, “2” Dissatisfied, “3” Neither satisfied nor satisfied, “4” Satisfied, “5” Very satisfied.
Linear regression was carried out to gauge the extent to which each of the skill dimensions predicts the
overall quality of the student.
Result
Descriptive statistics
A total of 267 usable questionnaires were returned from the supervisors. In all 47.8% of the students
were male, while 52.2% were female, their age ranging from 20-45 with a mean of 24.2 (SD 4.29), and a
mode of 22. Most of them (79.7%) were single, while the rest were married. By course, Bachelor of
Business Administration (BBA) students formed 80% of the total sample, while Bachelor of
Entrepreneurship and Project Planning (BEPP) students formed the rest of the sample. The table below
presents the findings of the supervisor evaluations.
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Table 1: Student possession of non technical skills by gender
Skill M Men
Female
p value
N= 112 N= 147
Generic
Basic Literacy skills 4.7 (.547)** 4.81 (.453) .076
Numeracy Skills 4.56 (.613) 4.49 (.726) .413
ICT skills
Thinking Skills
4. 34 (.797) 4.19 (.748) .112
Problem solving skills 4.13 (.783) 4.22 (.765) .339
Creativity and innovation 4.36 (.673) 4.45 (.725) .313
Communication
Social Skills
4.14 (.955) 4.28 (.857) .201
Networking Skills 4.23 (.827) 4.22 (.859) .979
Leadership skills 4.07 (.887) 4.10 (.915) .828
Team work and cooperation 4.83 (.397) 4.84 (.383) .855
Dealing with conflict 3.70 (1.09) 3.66 (1.17) .764
Dealing with stress 4.09 (.878) 3.95 (1.04) .259
Willingness to take responsibility 4.71 (.509) 4.80 (.466) .179
Negotiating skills 3.96 (.985) 4.16 (.897) .093
Capacity to work with other people
Personal Skills
4.50 (.684) 4.48 (.805) .840
Self discipline 4.52 (.415) 4.87 (.355) .525
Honesty and integrity 4.85 (.377) 4.89 (.355) .390
Self confidence 4.52 (.617) 4.63 (.514) .144
Punctuality
** Standard Deviation in parenthesis
4.77 (.462) 4.70 (.514) .312
The table shows that there is no significant difference between the genders in the possession of the above
skills. However it is also notable that the students received low ratings on the social skills compared to
other skill types. Next, supervisor satisfaction with overall quality of the students was examined. Findings
indicate that supervisors were more satisfied with the quality of the women students since the mean for
women was 4.67 (SD .530) N=112, while the mean for men was 4.47 (SD .722) N=148, p=.026. This
exercise was followed by regression analysis to gauge which skills dimension the supervisors were most
satisfied with. Results are presented in table 2 below:
Table 2: Regression of employability skills with satisfaction
Variable R2 t B p value
Social Skills .096 .231 .019 .818
Generic Skills .043 -.018 -.246 .806
Thinking Skills .069 2.41 .195 .016**
Personality Skills .103 2.87 .207 .004**
N= 256 ** significant at 0.01 level 2 tailed
The table above shows that thinking skills and personality skills were the main drivers of both women and
men student quality as perceived by the supervisors, but not social or generic skills. Separate regressions
carried out for each sex indicated that supervisors were satisfied by personality skills in men ß =.225
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t(91)=1.96, p 5.1) and a low trait group (mean

Proceedings of the 12th Annual Conference © 2011 IAABD
The table above shows that generic, social and personality skills are predicted by trait EI in that order of
importance. The table below presents regression results for the low and high trait student groups and
shows that trait EI predicts employability in the high mean group, unlike in the low mean group
Table 5: Employability as predicted by in low and high trait groups
N R2 t B p
High trait EI 109 .041 2.12 .201 .036**
Low trait EI 73 .007 .706 .083 .482
** Significant at 0.01 level 2 tailed
Discussion
First, this study utilizes data from two different sources hence the problem of common method bias does
not arise (Podsakoff et al., 2003). In phase one of the study it is established that there is no significant
difference between women and men students in their possession of non technical skills, consistent with
Korabik and Aymen (1988) who argue that the socialization process makes men and women at the same
level similar, thus HI was not supported. The scores of this sample of students on social skills were not
very high (e.g. negotiating skills mean 3.96 and dealing with conflict mean 3.70), and this is reflected
further by the fact that supervisors were only satisfied by thinking and personal skills. The fact that
personal skills were important in the view of the supervisors confirms that individual characteristics and
behavior determine employability (Clarke, 2007). Correlation analysis shows that thinking skills
(cognitive) are orthogonal to trait emotional intelligence, (p>.05) as expected. In this study the reasoning
is that problem solving skills as well as creativity and innovation are factors that border on the cognitive
side, and may not depend on how a person relates to others or recognizes their emotions. Thus going by
this analysis, it is not surprising that trait emotional intelligence is not correlated with thinking skills.
Unlike Mavroveli et al. (2007), phase two of the study establishes that women students have a higher
level of emotional intelligence than men students (p

Conclusion
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
This study set out to investigate the skills possessed by a sample of UCU students, and how these relate to
trait EI, as reported by the students them selves. The study established that there is no gender difference in
the possession of employability skills, that thinking skills are orthogonal to trait EI, that there is a
statistically significant difference between women and men students in terms of EI. Further the study
established that trait EI predicts generic skills, social skills and personal skills in that order of importance;
besides trait EI predicts employability in high trait students, but not in a low trait EI group. Lastly the
study recommends that there should be a deliberate attempt by universities to enhance the trait EI levels
of their students, in order to raise their employability.
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Challenges of sustainable entrepreneurship development in Nigeria
Victoria C. Chibuike, victoriachibuike@yahoo.com
Department Of Business Management, Godfrey Okoye University, Thinkers Corner, Enugu, Nigeria.
Abstract
The recent economic downturn on African business and development makes this study imperative. The study aims at
identifying the challenges, constraints and problems militating against entrepreneurship development in Nigeria
and proffer solutions. Three research questions and two hypotheses were formulated for the study. The study
adopted a descriptive survey, conducted among 177 male and female entrepreneurs purposely selected within the
metropolis of each of the 17 local government areas in Enugu State of Nigeria. A structured questionnaire with fivepoint-Likert
style response categories containing 40 items was used for the study. One hundred and seventy-seven
(177) copies of the questionnaire were distributed with 100% return rate. Findings to the study indicated that
inadequate capital, turbulent and unstable business environment due to socio economic problems, misapplication of
loans for another purpose, incompetence of entrepreneurs due to poor education background, political instability,
inability of entrepreneurs to source for adequate funds etc are the major problems that challenge entrepreneurship
development in Enugu State of Nigeria. Based on the findings, the following recommendations were made: (1) There
should be provision for special finds and a review of bank loans policy to entrepreneurs, (2) Stable national
business environment should be created with good foundation policy for economic stability. (3) Constant training
and development programmes, in form of workshops, conferences and seminars should be organized for
entrepreneurs to enable them beef up their education background and talents.
Introduction
In Nigeria, the transforming power of entrepreneurship was recognized since post war to this present day.
In her National Development Plan, Nigeria has several small scale industrial programmes such as the
Small Scale Industries Scheme (SCIS) of 1970s, the Nigeria Bank for Commerce and Industry (NBCI)
Loan Scheme, the Special Fund for Small Scale Enterprise Loan Scheme of 1980, the National
Directorate of Employment (NDE) Programme of 1986 and the Family Economic Reconstruction Fund
(SMEIS) of 2001 till date and the Small and Medium Enterprise Development Agency of Nigeria
(SMEDAN). All these initiatives and efforts are attempts to produce and train entrepreneurs needed to
accelerate industrial enterprise, diversify ownership of business (Osuala 2002:160) and offer employment
to the unemployed thereby build the economic and development base of the nation. However, the success
of these efforts has unfortunately not been satisfactory due to high mortality rate. Eke (2007) lamenting
on this situation stressed that entrepreneurship development in Nigeria ought to be the focal point in the
nation’s economic development blue-print, given to its impact on the overall economy. Yet nothing much
has been achieved despite all the schemes mentioned above.
The objective of this study therefore is to identify the challenges, constraints or problems militating
against entrepreneurship development in Nigeria and proffer solutions to them. The following research
questions guided the study: What are the challenges to entrepreneurship development in Nigeria? To what
extent do the problems impact on Nigeria economic development? What are the solutions to the
challenges? Two null hypotheses were formulated for the study: There is no significant difference
between the opinions of male and female entrepreneurs on the challenges to entrepreneurship
development in Nigeria. Relationship exists between turbulent and unstable business environment and
entrepreneurship development in Nigeria.
Theoretical Framework
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Entrepreneurship theory took its origin from the works of Richard Cantillon and was developed by Max
Weber, Joseph Schumpeter and others between 1940 and 1950s, (Hirsch and Peters 2002:10 and Eke
2007:89-103). The evolution of the theory parallels to a great extent the development of the term itself.
Schumpeter (1934) sees the entrepreneur as a change agent and innovator of entrepreneurship. He views
entrepreneurship as an economic function and entrepreneurs as catalysts that disrupt the stationary
circular flow of economy thereby initiating and sustaining the process of development. Drucker (1986)
defines an entrepreneur as someone who always searches for changes, responds to it and exploits it as an
opportunity thereby making innovation a necessary part of entrepreneurship. This approach sees
entrepreneurship as a process, an action oriented management style, which takes innovation and changes
as focus of thinking and behaviour.
McClelland (1992) saw entrepreneurship from a psychological point of view and argued that the need for
achievement is one of the main reasons for a person to take on an entrepreneurial activity. Ile (2003)
defined entrepreneurship as the ability to organize a business undertaking and assume the risks for the
sake of profit. He explained that the ability and willingness of a person to initiate, control and direct the
process of production of goods and services and bear the attendant risks thereof is what entrepreneurship
is all about. It is an effort to create purposeful change in a firm’s economic and social potential. Drucker
stressed the use of distinct entrepreneurial strategies and entrepreneurial management in the creation of
material and immaterial wealth. In this perspective, the essence of entrepreneurship is to initiate a change.
In line with Drucker’s view (Curran and Burrows 1986: 269) described the process of entrepreneurship as
innovatory process involved in the creation of an economic enterprise based on a new product or service
which differs significantly from products or services in the way its production is organized or in its
marketing. Here, the focus is on innovation, although mention was made of the creation of economic
enterprise, yet the emphasis was on innovation - the change brought about by new product or service.
Challenges to Entrepreneurship Development in Nigeria
Some studies have been carried out on entrepreneurship development in Nigerian industry. Some of the
early studies are those of Schatz and Edokpayi (1962), Olakanpo (1968), Harris (1969) and Akeredolu-
Ale (1972). The 1982 study of Schatz and Edokpayi was to determine the reactions of Nigerian
businessman to government to encourage Nigerian private enterprises. The study was however limited to
former Western Nigeria and has serious reliability problems. Notwithstanding the short comings, the
result of the finding shows that:
• Inadequate capital is the main problem.
• Lack of organizational and management skills is another important problem; and
• Most of the businessmen misapplied the loans for another purpose.
From another perspective, Schatz and Edokpayi also reported in their study of economic attitude of
Nigerian business that inadequate capital is a major setback, but were silent on management skills and
expertise. However a review of Olakanpo’s (1967) study and Akeredolu-Ale’s findings in his 1968-1970
study re-echoed that entrepreneurship development is challenged by inadequate capital and lack of
management and organizational skills and expertise. Onuoha (1994), Obeleagu Nzelibe (2002) are all of
the opinion that inadequate capital, incompetent management, lack of technological and infrastructural
facilities are the common problems, among others. Ndubuisi (2004), from another perspective, is of the
opinion that apart from the known problems that have been mentioned earlier, other challenges include
the following:
• Arbitrary changes in the administration of loan by the government which spreads the element of
uncertainty among the entrepreneurs,
• Lack of insufficient infrastructure and high cost of production.
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• Market imperfections, which deny potential entrepreneurs the resources they need for organizing
new enterprises.
• High risk involved in new enterprises,
• Low status of business in the eyes of the public and
• Restrictive effects of customs and traditions.
Methodology
One hundred and seventy-seven (177) small scale entrepreneurs drawn from the seventeen (17) Local
Government Areas in Enugu State were used for the study. For the purpose of this study, small scale
entrepreneurs refer to small scale businesses whose capital investment does not exceed six hundred
thousand naira (N600,000.00) and employees less than 50 people (Chidubem 2007, Osaze (1986) and the
third National Development Plan (1975 -1980).These small scale entrepreneurs are made up of both male
and female entrepreneurs drawn from the bookshops, supermarkets, business centers, computer schools
and sellers of computer accessories within the metropolis of each local government area under study in
Enugu State.
Questionnaire Design
A structured five-point Liket type questionnaire was designed with assigned values ranging from 1 =
Strongly Disagree (SD) to 5 = Strongly Agree (SA). One hundred and seventy-seven copies of the
structured questionnaire were distributed and all were returned which represent a 100% return rate. This
high return rate was as a result of the face-to-face distribution by the researcher herself. Items were
formulated to address each research question.
Result
Data collected from the study were presented in Tables 1 -5.
Table 1 – Mean Ratings of the Respondents on the challenges to Entrepreneurship Development in
Nigeria
S/N Challenges to entrepreneurship development in Male
Female Rmk.
Nigeria
Entrepreneurs Entrepreneurs
1. Inadequate capital 3.96 1.26 3.92 .70 Agree
2. Incompetence due to poor education background on
the part of the entrepreneurs
3. Lack of technological and infrastructural facilitieselectricity,
water and good access road
4. Poor economic policy on the part of government.
X1 SD1 X2 SD2 Agree
3.91 1.43
3.36 1.34
3.64 1.46
3.88 .44
3.64 .57
3.64 .57
Agree
Agree
Agree
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5. Lack of skilled and competent management.
3.91 1.43
3.76 .52
Agree
6. Political instability 3.82 1.13 3.60 .50 Agree
7. Turbulent and unstable business environment due to
socio-economic problems.
8. Market imperfection which deny potential
entrepreneurs the resources they need for organizing
new enterprise
9. Changes in loan administration by the government.
10 Misapplication of loans for another purpose.
3.96 1.26
3.59 1.16
3.59 1.16
3.82 1.13
3.92 .70
3.64 .57
3.48 .59
4.00 .76
Agree
Agree
Agree
Agree
11 Inability of entrepreneurs to source adequate fund 3.72 1.06 3.88 .44 Agree
12 High risk involved in new enterprise 3.58 1.25 3.76 .52 Agree
13 Low status of business in the eye of the public. 3.36 1.34 3.48 .59 Agree
14 Low patronage from potential customers. 3.57 1.08 3.48 .59 Agree
15 Low level of investment in physical and human
capital.
3.64 1.46 3.56 .58 Agree
Source: Research Data
XI = Mean for male entrepreneurs
SDI = Standard deviation for male entrepreneurs
X2 = Mean for female entrepreneurs
SD2 = Standard deviation for female entrepreneurs Table I shows that inadequate capital with a mean of
3.96 (1.26) 3.92(.70), turbulent and unstable business environment 3.96 (1.26) 3.92 (.70), incompetence
of entrepreneurs due to poor education background with a mean of 3.91 (1.43) 3.88 (.44), lack of
competent and skilled management 3.91 (1.43) 3.76 (.52), misapplication of loans for other purposes 3.82
(1.13) 4.00 (.76) and political instability with a mean of 3.82 (1.13) 3.60 (.50) are very serious challenges
or constraints that have worked against entrepreneurship development in Nigeria. This is in agreement
with earlier studies by Olakanpo (1968) Harris (1969 and Akeredolu-Ale (1972) and more relatively
recent studies as confirmed by Onuoha (1994) Obeleagu-Nzelibe (2002) and Ile (2002). These problems
have always been regarded as the major constraints as they have brought about the non-existence or an
early collapse of entrepreneurial ventures in the country. Other serious problems are inability of
entrepreneurs to source for enough funds with a mean value of 3.72 (1.06) 3.88 (.44), low level of
investment in physical and human capital 3.64 (1.46) 3.56 (.58), changes in loan administration 3.59
(1.16) 3.48 (.59), poor economic policies 3.64 (1.46) 3.64 (.57), market imperfection 3.59 (1.16) 3.64
(.57), high risks involved in new enterprise 3.58 (1.25) 3.76 (.52), low patronage to indigenous business
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3.57 (1.08) 3.48 (.59), low status of business in the eyes of the public 3.36 (1.34) 3.48 (.59) and lack of
technological infrastructural facilities 3.36 (1.34) 3.64 (.57) as shown in Table 1.
Table 2: Mean Ratings of the Respondents on the Extent these Challenges Affect Nigerian
Economic Development
S/N Challenges to entrepreneurship Male
Female
Rmk.
development in Nigeria
Entrepreneurs Entrepreneurs
X1 SD1 X2 SD2 Agree
16 Inadequate capital 3.95 1.95 3.92 .70 Agree
17. Incompetence due to poor education
background on the part of the entrepreneurs
18. Lack of technological and infrastructural
facilities-electricity, water and good access
road
19. Poor economic policy on the part of
government.
20. Lack of skilled and competent management.
3.59 1.29
3.47 1.18
3.53 1.08
3.95 1.95
3.56 .65
3.60 .76
3. 60 .71
3.88 .44
Agree
Agree
Agree
Agree
21. Political instability 3.92 1.02 3.76 .44 Agree
22. Turbulent and unstable business environment
due to socio-economic problems.
23. Market imperfection which deny potential
entrepreneurs the resources they need for
organizing new enterprise
24. Changes in loan administration by the
government.
25. Misapplication of loans for another purpose.
26. Inability of entrepreneurs to source adequate
fund
3.82 1.14
3.60 1.29
3.58 1.25
3.73 1.17
3.76 1.59
3.76 .59
3.24 .72
3.44 .50
3.76 .59
3.64 .57
Agree
Agree
Agree
Agree
Agree
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27. High risks involved in new enterprise 3.58 1.25 3.72 .68 Agree
28. Low status of business in the eyes of the
public.
3.57 1.08
3.60 .71
Agree
29. Low patronage from potential customers. 3.47 1.18 3.24 .72 Agree
30. Low level of investment in physical and
human capital.
3.92 1.02 3.88 .44 Agree
Table 2 shows mean ratings of the respondents on the extent the above challenges affect Nigerian
economic development. From the analysis, inadequate capital, 3.95 (1.95) 3.92 (.70) lack of skilled and
competent management 3.95 (1.95) 3.88 (.44), political instability 3.92 (1.02) 3.76 (.44), turbulent and
unstable business environment due to socio-economic problems 3.82 (1.14) 3.76 (.59), misapplication of
loans for another purpose 3.73 (1.17) 3.76 (.59), inability of entrepreneurs to source adequate fund 3.76
(1.59) 3.64 (.57) and low level of investment in physical and human capital 3.92 (1.02) 3.88 (.44) were
the most significant challenges that affect Nigerian economic development. This is as a result of their
mean levels compared to others. However there is the need to investigate the extent these challenges as
mentioned above impact on Nigeria economic development.
Table 3 – Respondents Mean Ratings on the Solution to the Challenges of Entrepreneurship
Development in Nigeria
S/N Solutions to the problems militating Male
Female
Rmk.
against entrepreneurship development
in Nigeria
Entrepreneurs Entrepreneurs
X1 SD1 X2 D2 Agree
31. Sound economic policy 3.64 1 .46 3.60 .71 Agree
32. Provision of special funds for entrepreneurs
33. Diversification of business opportunities to
meet the demands of the public
34. Recognition of the contributions of
entrepreneurs to national economic
development
35. Organizing training programs for
entrepreneurs
36. Revitalizing institutions supporting the
development of entrepreneurs
3.96 1.26
3.56 1.26
3.91 1.43
3.59 1.16
3.82 1.13
3.92 .70
3.76 .52
4.00 .76
3.60 .71
Agree
Agree
Agree
Agree
3.91 .43 Agree
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37. Provision of sound education for human
capital/entrepreneurship development.
38. Encourage patronage to indigenous
entrepreneurs
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3.60 1.29 3.64 .58 Agree
3.72 1.06
3.76 .44
Agree
39. Create enabling business environment 3.58 1.25 3.56 .65 Agree
40 Provision of infrastructural facilities 3.59 1.29 3.48 .59 Agree
The table above shows that the respondents agreed to all the items indicating that they are solutions to
the problems militating against entrepreneurship development in Nigeria.
Table 4: T –Test summary for significant difference between the opinions of female and male
entrepreneurs on challenges to entrepreneurship development in Nigeria
Variable No Mean SD Df t-cal t-crit Decision
Female Entrepreneurs
Male Entrepreneurs
25
152
3.66
3.70
0.61
1.14
175
1.337
The test of the hypothesis revealed that there is no significant difference as perceived by the female and
male entrepreneurs on the challenges to entrepreneurship development (ED) in Nigeria. This is because
at 0.05 level of significance and 175 df the t-cal of 1.337 is less than the critical t of 1.90.
Table 5: T-test summary for significant relationship between the opinions of female and male
entrepreneurs on environmental influence as a challenge to entrepreneurship
development in Nigeria.
Variable No Mean SD Df t-cal t-crit Decision
Female Entrepreneurs 25 48.80 6.92
Male Entrepreneurs 152 47.05 11.75
1.90
NS
175 .722 1.96 NS
The test of hypothesis revealed that both female and male entrepreneurs agreed that turbulent, socio
economic and political uncertainties negatively affect their business activities. This is because at 0.05
level of significance and 175df, the calculated t of .722 is less than the critical t of 1.96. When the efforts
of the entrepreneurs are destroyed in one wave of violent uproar in a region in Nigeria, it becomes
difficult for the entrepreneurs to adjust and continue business operations. The freedom required by them
to establish and please customers as Kimbro (1995) earlier stated will never be attained. One might say
that the above problem might become a more serious and bigger challenge to entrepreneurs than can be
envisaged if not properly handled.
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Discussion
Findings to the study revealed that the female and male entrepreneurs agreed that entrepreneurship
development in Nigeria is faced with a lot of problems and challenges. From the result obtained, it was
found that the respondents held strongly the view that inadequate capital, turbulent and unstable business
environment due to socio-economic problems, misapplication of loans for another purpose,
incompetence of entrepreneurs due to poor education background, lack of skilled and competent
management, political instability, inability of entrepreneurs to source for adequate fund, low level of
investment in physical and human capital, changes in loan administration and poor economic policy
from government are the major challenges to sustainable entrepreneurship development in Nigeria. This
finding corroborates with the views of Obelagu (2002), Ile (2002), Eke (2007) and Alawode (2007)
establishing that these major constraints have always brought about the non-starting or early collapse of
entrepreneurial ventures in Nigeria. For example, regarding the inability of entrepreneurs to source for
enough funds, Alawode disclosed the persistence decline of funds made available to small and medium
enterprises (SMES) (between 1992 and 2006) from 49% to 7%. Other constraints include poor
infrastructural technological development, low patronage to indigenous business, market imperfection,
high risks involved in new enterprise and low status of business in the eyes of the public. All these are
obstacles to entrepreneurship development vis a vis economic development in Nigeria and Africa in
general.
The result also revealed that the solutions to the challenges to entrepreneurship development in Nigeria
includes: establishing sound economic policy, providing special funds for entrepreneurs, creating
enabling stable business environment, providing technological/infrastructural facilities, recognizing the
contributions of entrepreneurs to national economic development, embarking on manpower training and
development and diversifying business opportunities to meet the needs and demands of the public.
Conclusion
The findings of this study have revealed that entrepreneurship development is important to the
development of Nigerian economy and Africans in general. The study did not hesitate to highlight the
problems (see Tables 1 and 2). The value of this study lies in the fact that it reveals the importance of
providing special fund for entrepreneurs, encouraging sound education, establishing sound loan policy to
monitor loan administration and usage, creating stable business environment, providing infrastructural
facilities and revitalizing institutions supporting sustainable entrepreneurship development in Nigeria.
However poor implementation of these might jeopardize both entrepreneurship and economic
development in Nigeria and Africa.
Recommendation
The findings of this study indicate that entrepreneurship is a prime mover in development and that is
why nations, regions and communities that actively promote entrepreneurship development demonstrate
much higher economic growth rate and consequently higher levels of development. The study therefore
recommends that:
1. There should be sound national economic policy with respect to SMEs and a recognition of the
contributions of entrepreneurship to national economic development.
2. There should be training programmes for the development and channeling of entrepreneurship
talents.
3. There should be provision of special funds and a review of banks loan policy on entrepreneurs
4. Institutions supporting the development of entrepreneurs should be revitalized.
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5. Stable national business environment should be created with good foundation policies for macro
economic stability. This should involve providing a panacea to all factors that are responsible for
turbulent, unstable and violent environment in different parts of the country.
References
Akeredolu-Ale, E.O. (1975). The Under Development in indigenous Entrepreneurship Nigeria, Ibadan,
University Press.
Alawode, O. (2007). “Bank Loans on SMEs on Decline,” Business Day, Feb. 5 th.
Balgogun, M. O. (2004). “Developing Entrepreneurial Potential for Strategic Advantage in Nigeria,”
being a paper presented at Annual Management Conference of Nigeria Institute of Management, ICC
Abuja.
Chattopadhyay R. and Ghosh A. (2002). Predicting entrepreneurial success. A Socio-Psychological
Study. “Journal of Entrepreneurship” http//joe. Sagepub.com/content/11/1/21.
Chibuike V.C (2010). Enhancing human capital development through entrepreneurship education A
paper presented to Lit organization annual conference held at Enugu State University of Science and
Technology on 25 th -15 th October.
Chibuike V.C and Eya P.E (2010). Open and distance education in electronic era for the development of
small scale entrepreneurs in Enugu State - Nigeria “Journal of Business and Vocational Education”
Vol.1. No 1. July, pp. 192 -202.
(Additional references of this study can be provided by the author on request)
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Abstract
Profitability Analysis of Small Scale Aquaculture Enterprises in Central Uganda.
Theodora S. Hyuha, thyuha@yahoo.com
Department of Agribusiness and Natural Resources, Faculty of Agricultural Sciences, Makerere,
University, P.O. Box 7062, Kampala Uganda.
James O. Bukenya
Alabama A&M University, Normal Alabama, USA
Julius Twinamasiko
Department of Agribusiness and Natural Resources, Faculty of Agricultural Sciences, Makerere,
University, Kampala Uganda
Joseph Molnar
Auburn University, Auburn Alabama, USA.
Fish farming in the three countries surrounding Lake Victoria (Kenya, Tanzania and Uganda) has received
increased attention following reports of dwindling fish stock in Lake Victoria. Over time, Lake Victoria’s fish
production has been plummeting as overfishing, the use of illegal and harmful fishing methods and soaring demand
have overstretched the lake’s supply capacity. In an effort to manage this renewable but exhaustible resource,
international development agencies and advanced research institutes are promoting aquaculture within the context
of integrated agriculture and have begun addressing socio-cultural and economic factors that have been impeding
aquaculture development in the region. This study investigated the profitability and socioeconomics of aquaculture
in central Uganda. The paper draws on data collected through a random selection of 200 small scale fish farmers in
the three major fish farming districts of Mpigi, Mukono and Wakiso during 2009/2010 production season. The
analysis was carried out using descriptive statistics, enterprise budgeting and linear regression model. Although the
results show small scale aquaculture to be a profitable enterprise in the region, the estimated profit margins are
relatively small. Harvested fish size, farming experience, fish price and volume of fish harvested are the most
influential factors in explaining profitability in the region. The major factors hindering aquaculture development in
the region include predators, unavailability of credit facilities, expensive feeds, and shortage and poor quality of
fingerlings.
Introduction
Fishery is one of Uganda’s most important renewable resources and of fundamental importance to the
population and economy. The fish sector makes a vital contribution to the food and nutritional security of
over 30 million people in the country and it provides income for approximately 4 million households
engaged in fish production, processing and trade (OECD, 2007). Fish currently ranks as Uganda’s
highest non-traditional agricultural export earner and the considerable export revenues it generates plays
an important role in advancing the development vision of increasing country’s overall foreign exchange
earning capability. The fish industry contributes about 3 percent to the country’s gross domestic product
and generates over US$85 million in foreign exchange earnings (Bagumire, 2009; OECD, 2007).
Uganda’s fisheries sector is comprised of both capture and culture (aquaculture) fisheries with the former
contributing most of total production. The capture fishery is basically artisanal while aquaculture is
primarily produced by farmers who practice fish farming as one of the many other farming activities
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(FAO 1996). Since the inputs used are virtually the same as in their farming activities, small-scale fish
farming is properly seen in the context of agricultural production (Gabriel et al., 2007). Over the last five
years however, fish farming has received increased attention following reports of dwindling fish stock in
Lake Victoria, Uganda’s main source of capture fisheries 3 , due to the use of illegal and harmful fishing
methods and soaring demand Ogutu–Ohwayo et al., 1990; Bahiigwa, Mugambe and Blackie, 2003).
Already, half of the native fish from Lake Victoria are extinct, and the traditional lifestyles of lake-shore
communities that make a living from its troubled waters have been disrupted and are crumbling (Ogutu–
Ohwayo, 2000). In an effort to manage this renewable but exhaustible fishery resource, international
development agencies such as Food and Agriculture Organization (FAO), United States Agency for
International Development (USAID), United Nations Industrial Development Organization (UNIDO)]
and advanced research institutes (such as Auburn University, Alabama, Makerere University) are
promoting aquaculture within the context of integrated agriculture and have begun addressing sociocultural
and economic factors that have been impeding aquaculture development in Uganda. This
complimentary study investigated the profitability and socioeconomics of aquaculture in central Uganda.
The rest of the paper is organized into six additional sections. The next Section presents the materials and
method followed by the profitability analysis in Section three, Section four examines the factors that
influence aquaculture profitability while the factors that hinder aquaculture development are presented in
Section five. The last section presents the study conclusions and recommendations.
Theoretical Framework
Following Sadoulet and De Janvry, (1995), a farmer is assumed to choose a combination of variable
inputs and outputs that maximize profit subject to the existing technology constraint. Given the
underlying production function and assuming the technology to be homogeneous across the farms, the
profit function is
………………………………………………………………… (1)
where p is a vector of prices of output q is quantity produced and w is a vector of variable inputs.
……………………………………………………………………… (2)
Where is profit and other variables remain as defined before. According to Sadoulet and De Janvry,
(1995), the function can be normalized and used to estimate a single commodity such as fish. The
normalized function is
Materials and Methods
…………………………………………………………………………………… (3)
The data for this study are drawn from a field survey conducted in June-July 2010 on 2000 fish farms in
the three major fish farming districts in central Uganda: Mukono, Mpigi and Wakiso districts. The
investigated region is also the target area of an aquaculture development program, USAID-AquaFish
Outreach Project, which started in 2009 as a follow-up on a previous project (FISH project) in
3 Though Uganda is rich in aquatic resources, with 18% of its 241,038 sq km total area covered by lakes, rivers and
swamps, this potential has been eroded due to over fishing (Jagger and Pender, 2001) at the time when the demand
for fish is increasing both internally and internationally.
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collaboration with three US Universities (Auburn University, University of Georgia and Alabama A&M
University), NaFRRI and Makerere University, Uganda. Survey enumerators were University students
who were trained by social scientists (from Makerere and Alabama A&M Universities) and by extension
educators and aquaculturalist (from NaFIRRI), thus were knowledgeable about fish farming practices.
Prior to administering the survey, the developed instrument was pre-tested (at 5 fish farms near Kajansi
Fisheries Research Institute) in Wakiso district. National Fisheries Research Institute (NaFIRRI’s)
extension personnel played a major role in identifying and setting-up pre-testing activities for the survey.
Responses from the pre-test were used to develop the final survey instrument. The pre-survey activities
included reconnaissance for the pilot survey, revision of survey instruments and preparation of the
sampling frame. Farmers were selected using stratified random sampling based on production systems.
The final sample was fairly distributed among the three districts with the majority from Mpigi (69)
followed by Wakiso (68) and Mukono (63) districts, respectively.
The exercise started on 14th June, 2010 and ended on July 15th 2010. The interviews, lasting about two
hours, solicited information on number of years in the aquaculture business, allied industries, and type of
operation, species reared product forms, marketing strategies and income from aquaculture enterprise.
Other information collected included: characteristics of the farmer, fish production, credit accessibility,
group linkages, record keeping and access to extension services. The data were then coded and analyzed
using Statistical Package for Social Scientists (SPSS) and STATA 9. The VIF was carried out to check
for multicollinearity and it was found that there was as indicated by a low figure of 1.67.
Discriptive Analysis
Over 70 percent of the farms surveyed had been in production for less than 10 years. Although many
farmers regarded fish farming as a source of income, it was not considered as important as other income
sources, but rather one that could be used sporadically. More farms cultured tilapia and catfish compared
with any other fish species. When asked to indicate the species grown for their last harvest, the majority
(82%) reported tilapia. Most farmers (70%) produced fish for family consumption but often sold off
surpluses at local markets. The majority (61%) of the farms surveyed solicited additional labor (1 to 5
people) during harvest and most of this additional help was paid labor. The average smallest market fish
size harvest ranged between 0-500 grams while the average largest market fish size was 500-1000
grams— and this appeared to be related to the fish species, pond size and the target market. The majority
of farmers fed their fish with maize bran (47%) followed by Ugachic feed (24%), but a proportion also
used crop leaves and pellets. Nearly all of the farmers interviewed cultured fish in ponds rather than
cages. A high number of farmers (64%) owned between 1 and 2 ponds and used rented harvesting nets.
The day-to-day management of the ponds on (57%) of the surveyed farms were under family labor with
an average pond size ranging between 100 to 200m 2 . Survey responses reveal that most small scale fish
farmers in the region sourced their fingerlings from a variety of sources with the most common source
being Kajjansi fisheries institute (58%) followed by Mpigi and Umoja fish farm. The stocking density of
fingerlings ranged between 100 and 9,050 with most farmers stocking at between 351—550 fish. Only 45
percent of the farms surveyed reported making a profit from the previous completed harvest. The majority
of the farms (60%) sold their fish fresh and over 90 percent of the farms used personal funds to finance
their production enterprises. The majority (76%) were not associated with any organization. Only 48
percent of the farms kept some form of written records related to fish farming activities, related mainly to
production costs. Only 10 percent of farmers reported using extension officers with most farmers relying
on their own experience or advice from other farmers. The length of the production cycle (from stocking
to harvest) ranged between 8 and 9 month for the majority of the farms surveyed.
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The cost structure
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The average cost structure for the 200 fish farms surveyed is presented in Table 1. On average, production
costs for one stocking cycle amounted to approximately US$864 of which 93 percent (US$801) represent
variable costs while fixed costs accounts for only 7 percent (US$63) of the total cost. The observed cost
structure in central Uganda is comparable to the cost structure observed in West Africa where Ugwumba
and Chukwuji (2010) reported a cost structure showing higher variable costs (98.06 percent) and low
fixed costs (1.94 percent). Approximately 85 percent of all variable costs are spent on seeds, production
labor and feeds.
Table 1: Estimated average costs for small scale fish farms (200m 2 average pond size) in central
Uganda
Cost type Average cost (Ushs.) Average cost (US$) Percentage
Seeds 514,324 257.162 29.8
Feeds 428,264 214.132 24.8
Labor(production) 514,720 257.36 29.8
Labor(harvesting) 13,163 6.5815 0.8
Net purchase 120,460 60.23 6.9
Net rental 5,100 2.55 0.3
Transportation 6,100 3.05 0.4
Total variable costs (TVC) 1,602,131 801.0655 92.8
Total fixed costs (TFC) 125560 62.78 7.3
Total costs (TVC+TFC) 1,727,691 863.8455
Profitability Analysis
Enterprise budgeting technique was one of the techniques used to analyze the profitability of small scale
fish farms in central Uganda using the following equations:
Where
Where
GM = TR – TVC……………………………………………………………………………….(4)
GM = Gross Margin
TR = Total Revenue
TVC = Total Variable Cost
Net farm income (NFI) = GM-TFC or TR-TC………………………………………………… (5)
TFC= Total fixed costs
TC=Total costs
Net Return on investment (NROI) =NFI/TC……………………………………………………….….. (6)
The profitability results are reported in Table 2, indicating that on average, a small scale fish farm in
central Uganda generated US$104 in gross margin and US$41 in net farm income per pond on a 200m 2
average pond size during the 2009/2010 production cycle. Gross margin (GM) is the difference between
total revenue and total variable costs while net farm income (NFI) is the difference between gross margin
and total fixed costs. Since a positive NFI means that an enterprise is profitable and worth undertaking,
the results suggest that small scale fish farming in central Uganda is a profitable enterprise. The
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estimated net return on investment is 0.05, indicating that for every US$1 invested in small scale fish
farming will generate US$0.05 in return. However, the net return on investment is too small to attract
potential investors in the aquaculture sector. It is necessary therefore to identify the factors that might
influence the profitability of fish farming in the study region.
Table 2: Profitability results for small scale aquaculture farm (200m 2 ) in central Uganda
Variable Ushs. US$
Total costs (TVC+TFC) 1,727,691 863.8455
Total revenue(TR) 1,809,229 904.6145
Gross margin (TR-TVC) 207,098 103.549
Net farm income (GM- 81,538 40.769
TFC)NFI
Net return on investment
(NFI/TC)
Determinants of Profitability
The previous section used enterprise budgeting to examine the profitability of aquaculture on a small
scale fish farm in central Uganda. This section employs a linear regression model to examine the factors
that influence profitability as measured by gross margin. The estimated linear equation takes the form of:
π = βX
+ ε ……………………………………………………………………………………….(7)
i
i
Where the dependent variable (π) represents estimated gross margin for the 200 selected small scale fish
farms in central Uganda, Xi is a vector of independent variables hypothesized to influence gross margin.
The independent variables include average pond size (m 2 ), number of fingerlings stocked, cost of feeds,
dummy variable coded 1 if the farm is managed by a paid pond manager, 0 otherwise, the length of the
production cycle (months), a dummy variable coded 1 if the farmer reported membership to a farmer
group, 0 otherwise, dummy variable coded 1 if the farmer reported having access to extension services, 0
otherwise, dummy variable coded 1 if the farmer kept farm records, 0 otherwise, number of year in fish
farming, volume of fish harvested, average price of a unit of fish sold and average size of fish harvested
(kgs). Finally, ε represents the error term assume to have a zero mean and constant variance.
Result Discussion
The estimated ordinary least squares (OLS) model is based on data collected in 2010 from 200 selected
small scale fish farmers in central Uganda over the 2009/2010 production cycle with gross farm margin
used as the dependent variable and a set of hypothesized explanatory variables on the right-hand side. The
results of the OLS-regressions are presented in Table 3. The measure of goodness of fit (R-square)
indicates that the model explains approximately 77% of the variability in profitability of the fish
enterprises. In case of the explanatory variables, the model revealed that four of the ten hypothesized
variables were statistically significant at p

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variable measuring the size of fish harvested increases profitability. Other variables including hiring a
pond manager, membership to a farmer group, access to extension services, record keeping, average pond
size and number of fingerlings have no significant influence on profitability.
Table 3: Factor Affecting the Profitability of Fish Production in Central Uganda
Dependent variable = Profit (US$)
Variable Coefficient Std. Error t-value
Constant -2.526 1.59 -1.59
Average pond size (m 2 ) -0.041 0.11 -0.37
Number of fingerlings stocked -0.087 0.10 -.85
Hiring a pond manager = 1, 0 otherwise 0.049 0.20 0.25
Membership to a farmer group=1, 0 otherwise 0.249 0.28 0.90
Access to extension services=1, 0 otherwise 0.174 0.23 0.76
Record keeping (1=yes, 0 otherwise) 0.011 0.22 0.05
Fish farming experience (years) 0.334** 0.13 2.57
Number of fish harvested 0.968*** 0.13 7.36
Average price of a unit of fish (US$) 1.007*** 0.21 4.75
Average size of fish harvested (kgs) 0.273** 0.14 1.92
Adjusted R 2 = 0.768
F-Statistic = 22.87***
***, and ** are significant levels at 1% and 5% respectively
Constraints Facing Fish Farmers
Fish farmers reported many constraints during the fish production process. Fish predators were reported
to be the most serious constraint to fish production as reported by 51 percent of the respondents (Table 4).
Many farmers were found not to protect their fish thus the problem of predators that ranged from birds, to
snakes and other wild animals. Scarcity of feeds came second as another serious constraint leading to high
cost. This finding is in agreement with the findings of Ocmer (2006) and Ugwumba and Chukwuji (2010)
that reported high cost of feeds as a very serious constraint to fish production. The other constraint that
seriously affected the farmers was lack of capital. Fish farming is a capital intensive enterprise thus
requiring big capital investment for reasonable profit to be made (Ugwumba and Chukwuji, 2010). This
could explain the reason why more than half of the respondents (66 percent) had less than three ponds.
Poor quality fingerlings were another serious problem facing farmers as reported by 22 percent of the
farmers. Many farmers complained of poor fingerlings which in some cases did not grow to the farmers
expectations. This result supports the earlier findings of Isyagi (2007) that established that a third of the
farmers considered access to fish seed as a serious constraint.
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Table 4: Constraints facing fish farmers in the study districts (n=197)
Variable Percentages*
Lack of water 6.1
Expensive feeds 41.6
Scarce feeds 6.6
Lack of market 19.3
Predators of fish 50.8
Poor quality fingerlings 22.3
Lack of extension services 14.2
Poor weather 3.0
Thieves 17.8
Expensive labor 3.6
Lack of capital 39.1
Poison 1.0
Pond flooding 7.1
Lack of harvesting net 6.1
Insufficient equipment 5.6
Leaking ponds 1.0
Overstocked ponds 1.0
Poor transport 2.0
High maintenance cost 6.6
*Percentages do not add to 100 due to multiple responses
Conclusion and Implications
Aquaculture is a relatively new technology in Uganda introduced in 1951. In the past it was promoted as
subsistence enterprise and this may have partly brought about slow growth of the sector. However, the
sector has gradually gained recognition and is currently being promoted as a sector to provide,
employment, food security and poverty eradication. Due to this recognition, it has become imperative to
provide empirical data to policy makers for them to make informed decisions. Empirical studies,
especially on socioeconomic nature are limited. Thus the importance of this study cannot be
overemphasized. The objectives of the study were three fold: assess the profitability of aquaculture in
Uganda, determine factors affecting the profitability and assess the constraints faced by farmers in fish
farming enterprise. The paper presents both descriptive and econometric analysis of the findings arising
from field survey conducted in June/July 2010 in Mukono, Mpigi and Wakiso districts in Central Uganda.
The data were captured using SPSS version 15 and analyzed by SATA9.
The study results showed that many farmers had spent close to 8years in the business and owned three
ponds on average measuring 520m 2. The major constraints included: predators, expensive fish and lack of
capital in that order. In terms of fish enterprises fish farming was found to be a profitable business as
evidenced by the average gross margin value of US$104 per cycle and net farm income of US$41. Net
returns of investment of 0.05 implied that for every US$1.0 invested in the fish farming business, the
farmer returned US$ 0.05. Farmers incurred higher variable costs (92.8 percent than fixed costs (7.3
percent). These were responsible low profits and return on investment. The most important determinants
of profits were: farming experience, average size of fish harvested and average price of a unit of price.
The aforementioned have positive impact on fish farming in the studied region. It is imperative that
Government institutes policies that encourage private individuals and farms with capital to venture into
production of good quality seed and feeds to reduce on variable costs. This will go a long to increase the
size of fish that was found to be relevant in increasing profits. Along with improving available feeds and
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Edited by Emmanuel Obuah
fingerlings, improvement in provision of extension services which can substitute experience is very vital
for transforming fish sector from substance to commercial venture.
References
Bagumire, A. (2009). Impact of the global financial and economic crisis on the fish industry in Uganda
and Tanzania. Report prepared for UNIDO. Retrieved on February 23, 2010 from
http://www.unido.org/fileadmin/user_media/Services/LDC_SSC/Tanzania%20&%20Uganda%20Fisheri
s%20study%20-%20draft.PDF.
Bahiigwa, G., C.K., Mugambe, B.B Keizire. (2003). Country Paper presented at the workshop on Fiscal
Reforms in Fisheries in Rome, October 13-15.
FAO. (1996). Aquaculture potential in African Documentation issued on the occasion of the World Food
Summit in Rome November 1996.
Gabriel, U.U., O. A Akinrotimi, D. O. Bekibele, D. N Onunkwo and P. E. Anyanwu. (2007). Locally
produced fish feed: potentials for aquaculture development in sub-Saharan Africa. African Journal of
Agricultural Research Vol. 2(7), pp. 287-295.
Isyagi, A.N. (2007). The Aquaculture Potential of Indigenous Catfish (Clarias gariepinus) in the lake
Victoria Basin, Uganda. A PhD Thesis.
Jagger P. and L. Pender (2001). Markets, Marketing and Production issues for Aquaculture in East Africa
the Uganda Case. Retrieved on 8/13/2008 from http://www.foodnet.cgiar.org/scrp/docs and data bases.
Kato A.K,T.S. Hyuha and J. Mugisha. (2008). Competitiveness of Cross bred Chicken and its
Implications for Poverty Reduction in Eastern Uganda..
Mwesigwa, R.M. (2008). Economic analysis of Commercial Aquaculture in Central Uganda. Unpulished
thesis , School of Graduate Studies, Makerere University
Ocmer, R. (2006). Raising and Production of Catfish (Hito). Retrieved from:
http://www.mixph.com/2006/06/raising-and-production-of-catfishhito-html
OECD. (2007). Challenges faced by developing countries and practical approaches to achieve fish safety
and quality to be able to compete in the liberalized global market: the Nile Perch export industry in East
Africa. TAD/FI/GLOB (2007). Workshop on Opportunities and Challenges of Fisheries Globalization.
Retrieved on July 13, 2010 from:
http://www.oecd.org/officialdocumentsearch/0,3673,en_2649_201185_1_1_1_1_1,00.html.
Ogutu-ohwayo, R. (2000). The biology, ecology and impact of Nile Perch, Lates niloticus in Lakes
Victoria, Kyoga and Nabugabo and the future of the fisheries. Chapter 3 in the Biology and Ecology of
Lake Victoria Fishes: Their Development and Management. National Agricultural Research Organization,
Fisheries Research Institute, Jinja, Uganda.
Olagunju, F.I., Adesiyan, I.O. and Ezekiel, A.A. (2007). Economic Viability of Cat fish Production in
Oyo state, Nigeria. Journal of Human Ecology 21(2), 121-124.
Sadoulet, E and A. De Janvry. (1995). Quantitative Development Policy Analysis. Baltimore:The Johns
Hopkins University Press
Ugwumba, C.O.A. (2010). Environmental Sustainability and Profitability of Integrated Fish cum
CropFarming in Anambra State, Nigeria.Agricultural Journal 5(3), 229-233
Ugwumba, C.O.A. and C.O. Chukwuji. (2010). The economics of Catfish Production in Anambra state,
Nigeria. Journal of Agriculture and Social sciences 6(4), 105-109.
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Assessing Community Leaders’ Support for Value-Added Agriculture: Evidence from Survey Data
Abstract
LaTravis Brazil, jajja13@yahoo.com
James O. Bukenya and Danyelle Starks
Department of Agribusiness, Alabama A&M University, Normal, AL 35762
This paper examines and empirically evaluates local economic development leaders’ attributes that are correlated
with the involvement and support for value-added agricultural enterprises in Alabama. The analysis draws on data
collected using a web-based survey administered to 376 local economic development leaders and analyzed using
descriptive statistics and binary logistic regression. The estimated results point to several attributes that seem to be
strongly correlated with local leaders’ involvement, including age, knowledge, and concerns about increasing profit
margin for small farmers in the region. The insights gained from the study should help in guiding local communities
that are trying to use agriculture value-added initiative as a tool for rural development.
Introduction
As agricultural producers find it more difficult to make ends meet with diminishing profit margins, more
emphasis is being placed on adding value to farm products (Coltrain, Barton and Boland, 2000; Cowan,
2002). This is being done to help farmers capture profits beyond the farm gate by helping them vertically
integrate their operations to reduce their dependence on government programs (Barkema and Drabenstott,
1996; Tubene and Hanson, 2002). This emerging shift from commodity agriculture to product agriculture,
that is, from quantity to quality (Barkema and Drabenstott, 1996), is likely to have important effects in
many rural areas in Alabama, especially where large-scale, industrial agriculture remains a significant
part of the state’s economy, but, potentially, where smaller-scale production also predominates. For
agriculture value-added initiatives to succeed however there must be a cluster of active leaders from a
diverse cross-section of the agriculture and non agriculture community, who are knowledgeable about
value-added initiatives and a broad range of community issues (Green 2002). The objective in this paper
is to identify key attributes highlighted in the literature to influence the growing interest in value-added
enterprises and examine how these attributes conform to a random sample of local economic development
leaders in Alabama. The point of departure is a definition of agriculture value-added followed by a
conceptual definition of local economic development leaders. Then, a discussion of the sample and data
collection is presented followed by the survey responses, empirical approach, estimated results and
conclusions.
What is “Value-Added Agriculture”?
The literature offers several definitions of value-added agriculture. The most intuitive definition is
provided by Amanor-Boadu (2003) who notes that for an initiative to qualify as value-adding, it must
satisfy either of two conditions: (1) if one is rewarded for performing an activity that traditionally has
been performed at another stage farther down the supply chain, or (2) if one is rewarded for performing
an activity that has never been performed in the supply chain. In the first situation, producers might
bypass processors by processing their own production, or producers might bypass wholesalers by selling
directly to consumers. A broader definition is provided by Coltrain, Barton and Boland (2000) who define
value-added as to economically add value to a product by changing its current place, time and from one
set of characteristics to other characteristics that are more preferred in the marketplace (Coltrain, Barton
and Boland, 2000).
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Another terminology that needs defining is economic development leaders. First, in the literature, the term
“economic development” refers to an expansion of the economic base through efficient allocation and use
of available resources (Woods, Frye and Ralstin, 1999). Such efficiency allocation of resources that lead
to the expansion of the economic base requires leadership at all levels, and individuals who provide such
leadership are what we broadly categorize as economic development leaders. For a conceptual definition
of economic development leaders we follow Loveridge’s taxonomy, which includes at least three
different dimensions to classifying the local economic developer (see Loveridge, 2000 for a detailed
discussion). Briefly, in his first dimension, Loveridge contends that the organization for which an
individual works influences what the individual does and why they do what they do. The second and third
dimensions have to do with characteristics of the economic developer’s service region. Is the region
already well developed or undeveloped? Is the region growing, stagnant or declining? (Loveridge, 2000).
Thus, our conceptual definition of local economic development leaders follows Loveridge’s first
dimension which includes: city mayors, representatives of economic development boards, planning
commissions, utilities and chambers of commerce, directors and staff members from local economic
development associations, as well as other individuals involved in economic growth in the state.
Sample and Data Collection
Data on factors that influence local economic development leaders’ participation and support for
agriculture value-added initiatives in Alabama were collected using a questionnaire on the internet and via
email. The questionnaire was created on the Internet at http://www.surveymonkey.com, which is a service
of Survey Monkey Inc.—a Private Corporation based in Portland, Oregon that specializes in high-end
Internet surveys. A non probability (convenient) sample was used, in which responses were sought from
367 local economic development leaders in Alabama that have easily accessible e-mail addresses and
websites. A reliable list of e-mail addresses was drawn from the Economic Development Association of
Alabama (EDAA, 2008)—a network of Alabama economic development professionals with over 500
members, including Alabama city mayors, economic development boards, planning commissions, utilities
and chambers of commerce representatives, directors and staff members from local economic
development associations, as well as other individuals involved in economic growth in the state. Prior to
data collection, a pretest of the survey instrument was conducted on a sample of 10 extension agents in
order to evaluate the questionnaire items, focusing on the clarity of the questions and the ease with which
questions could be answered using the Internet.
Data were collected in the Fall of 2008 for a period of three weeks. The questionnaire was distributed
through e-mail with (1) a message of greetings, (2) an introductory massage and procedures for answering
the questions, (3) a note assuring confidentiality, (4) a thank you note on the anticipated responses and (5)
a hyperlink to the web-based questionnaire. Out of the 376 e-mail addresses that were collected from
EDAA, 42 of them were returned as bad addresses. A total of 335 were however current and successfully
sent the first time. Respondents were removed each week from the mailing list and weekly follow-up
reminders were sent to those that did not respond by the end of each of the three weeks. Of the 376 local
economic development leaders contacted, 154 answered the survey, for a 41 percent response rate. The
breakdown of the respondents’ profile is provided in the section that follows.
Survey Responses
To enhance the discussion, local leaders’ responses to the question whether they are involved in bringing
agricultural value-added enterprises to their regions are cross-tabulated with their responses to the rest of
the questions in the survey. Thus, this section discusses the actual responses for each question and cross
tabulation results of each question with the involvement question. First, more than half of the local
economic development leaders (52%) who answered the questionnaire are from metropolitan counties,
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Proceedings of the 12th Annual Conference © 2011 IAABD
particularly Jefferson, Montgomery and Madison Counties. The proportion (48%) of local economic
development leaders residing in non-metropolitan counties is over represented by Covington, Pike and
Elmore Counties. Cross tabulation analysis of local leaders’ involvement in bringing value-added
agricultural enterprises and the type of county (metro versus non-metro) they represent reveals that 34%
of the leaders from non-metropolitan counties were involved in bringing agricultural value-added
enterprises to their region as opposed to 16% of leaders from metropolitan counties. The observation that
local economic development leaders from non-metropolitan counties are more involved in bringing valueadded
enterprises to their regions than leaders from metropolitan counties is encouraging, especially if
value-added initiatives are to be considered as a tool for rural development in Alabama. As for gender, the
data shows that the majority of the respondents (82%) were male with female accounting for only 12
percent of the sample. Cross tabulation of gender with the variable measuring involvement in bringing
value-added enterprises in the region reveals that 39% of female respondents had participated in attracting
value-added enterprises as compared to 21% of male respondents.
The average age of the respondent was 50 years with responses ranging from 28 to 86 years-old.
Specifically, four percent of the respondents were under the age of 30, thirty-eight percent were between
31 and 49 years old, while fifty-eight percent were above 50 years old. Cross tabulation of age with the
variable measuring involvement in bringing value-added enterprises in the region reveals that 27% of the
respondents below 50 years had participated in value addition while 32% of the respondents who are
above 50 years were involved in bringing value added enterprises to their regions. Results for the levels of
education attainment reveals that, nine percent of the respondents have trade or technical training but no
college degree, 56 percent are college graduates (B.S or B.A degree), while 35 percent have graduate
degrees (Master degree or other). Cross tabulation of the levels of education with the variable measuring
involvement in bringing value-added enterprises in the region reveals that all 15 respondent who do not
have college degree have not participated in attracting value-added enterprises while 35% with a college
degree, and 14% with graduate degrees had participated in bringing value added enterprises to their
regions.
When asked if they are familiar with any value-added agricultural enterprise in their regions, 45 percent
of the respondents said no whereas, 55 percent were familiar with these enterprises. Cross tabulation
results for this variable reveals that 44% of the respondents who were familiar with value-added
enterprises in their regions had also participated in attracting these enterprises. The data also show that 85
percent of the respondents would be willing to promote agricultural value added enterprises in their
regions. Cross tabulation of this variable with the variable measuring involvement in bringing valueadded
enterprises in the region reveals that 24% of the respondents who were willing to promote value
added enterprises were also involved in bringing value added enterprises to their regions. When asked if
they consider value-added agricultural enterprises to be an important part of their community's economic
future, the majority of the respondents (74%) answered yes. Cross tabulation of the community economic
future with the variable measuring involvement in bringing value-added enterprises in the region reveals
that 33% are involved in bringing value added enterprises to their regions.
The last question asked respondents to indicate the key concerns that influence their decision to support
for value-added initiatives. The majority of the respondents (72%) indicated that the potential to increase
local jobs greatly influence their support for value-added initiatives, followed by rural development
opportunities (63%), survival of small farms (53%) increasing local incomes (50%), increasing local
business (49%), and lastly, increasing farmers’ profit margin (37%). Cross tabulation of respondents’
concerns with the variable measuring involvement in bringing value-added enterprises in the region
reveals that 28% who were concern about increasing local job have participated in attracting value added
enterprises as opposed to 28%, 27%, 38%, 21%, and 32% who were concerned about rural development,
survival of small farms, increase in local incomes, increase in local businesses and increase in farmers’
profits, respectively.
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Empirical Analysis
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
To isolate the attributes that influence the likelihood of a local leader being involved in bringing
agriculture value-added enterprises to their region, we specify and estimate a limited dependent model.
Because of the nature of the data [i.e., categorical question with two choices: yes/no], a binary logit
regression model is employed. Also, since the survey provided individual rather than aggregate
observations maximum likelihood estimation (Gujarati, 1992) is used to obtain consistent and
asymptotically efficient parameters (Pindyck and Rubinfeld, 1991). By adopting the logit regression, the
model in Equation 1 is developed to predict the likelihood that a local economic development leader in
the sample with the selected attributes will be involved in bringing agricultural value-added enterprises to
their region:
xβ
e
Prob(AGVA = 1) =
(1)
xβ
1+
e
where AGVA represent the involvement of local leaders in bringing agricultural value-added
enterprise to their region, X is a vector of explanatory variables that may influence a local economic
development leader’s involvement in bringing value-added enterprises to their region, and β is a vector of
coefficients to be estimated. The model is tested under the specification:
AGVA = β
0
+ β Knowledge + β Rural
1
5
+ β Education + β
9
2
+ β Small farms + β Local business + β Profit margin + β Location
10
6
developmen t
Gender + β
11
7
Age + ε
+ β Local jobs + β Local income
The dependent variable (AGVA) is coded as 1 if respondents’ answered yes to the question (Have you
been involved with bringing value-added agribusiness to your region?) and 0 otherwise. The independent
variables are hypothesized to influence the likelihood of a local leader being involved in bringing valueadded
enterprises to their region. The independent variables are defined and summarized in Table 1. As
noted before, i
ε represent the error term.
β are parameters to be estimated and 1
From equation 2, the parameter estimates ( β i ) do not directly represent the effect of the independent
variables. Therefore, to obtain the estimator for qualitative discrete variables in the logit model, the
change in probability brought about by a change in the independent variable is estimated as:
∆P i = β kPi
(1−P
i)
(3)
where Pi is the estimated probability of a yes response evaluated at the mean, and β k is the estimated
coefficient of the k th variable. The change in probability ( ∆ Pi
) is a function of the probability, and when
multiplied by 100 gives the percentage change in the probability of the event occurring given a change in
the variable, all things being equal.
i
3
4
8
(2)
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Proceedings of the 12th Annual Conference © 2011 IAABD
Table 1. Descriptive Statistics
Variable Name Variable Description Mean Std. Dev. Sign
Involvement in VA Have you been involved with bringing agricultural 0.240 0.429
Enterprises
value-added enterprises to your local area?
= 1 if Yes; 0 other wise
Knowledge of VA Are you familiar with any value-added agricultural 0.551 0.518 +
Enterprises
enterprise in your local area?
= 1 if Yes; 0 other wise
Increase Local Jobs Concern about increase in local job opportunities.
= 1 if Yes; 0 other wise
0.721 0.450 +
Increase Farmers’ Profit Concern about increase in profit margin for local 0.370 0.484 +
Margin
farmers.
= 1 if Yes; 0 other wise
Location What county do you represent?
= 1 if Metropolitan County; 0 otherwise
0.519 0.501 +/-
Education What is the highest level of school completed?
=1 if High School
=2 if Less than 4 year of College
=3 if College Graduate
=4 if Graduate
3.208 0.702 +
Gender Gender
= 1 if male; 0 otherwise
0.818 0.387 +/-
Age Respondent Age
Continuous variable
49.877 12.201 +/-
Results
The results are presented in Table 2, including the log likelihood coefficient, the Nagelkerke R 2 , the chisquare
statistics and the model’s prediction success. The measures of goodness of fit indicate that the
model fits the data fairly well. The logit model’s chi-square statistics was significant at p

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
subject or initiative enhances the likelihood of that particular initiative becoming popular on local leaders’
agenda. The estimated coefficient for the knowledge variable is positive and statistically significant. The
estimated change in probability coefficient (0.529) suggests that those local economic development
leaders who are knowledgeable about agriculture value-added initiatives are 53 percent more likely to be
involved in bringing value-added businesses to their local areas than their counterparts.
Table 4. Estimated Results
Variable B S.E. t-value Sig. ∆ Prob.
Constant -2.040* 0.820 -2.487 0.013 -0.870
Age 0.571* 0.279 2.044 0.052 0.069
Gender -0.022 0.655 -0.034 0.973 -0.022
Education 0.996 0.593 1.681 0.093 0.708
Knowledge 0.425* 0.138 3.084 0.002 0.529
Location -0.131 0.329 -0.399 0.690 -0.123
Local jobs 0.390 0.327 1.193 0.233 0.477
Profit Margin 0.831* 0.258 3.223 0.001 0.296
Predicted 76.600
-Log likelihood 310.605
Chi-square 98.806
Nagelkerke R-Square 0.377
Sample size 154
*, denotes significance at 5 percent or higher level
Of all local leaders’ concerns, those who put greater importance on increasing farmers’ profit margin
were more likely to be involved with bringing value-added enterprises to their communities. Respondents
to whom increasing farmers’ profit margin was important were 30 percent more likely to bring valueadded
enterprises to their communities. Surprisingly, the variables measuring concerns about local jobs
was not statistically significant at the five percent level or higher, implying that, these concerns are not
important in determining local economic development leaders’ involvement in bringing value-added
enterprises to their regions. Similarly, the estimated coefficients for the demographic variables (age and
gender) and location are insignificant.
Conclusion
The objective of this paper was to examine attributes of local economic development leaders’
involvement with agriculture value-added initiatives in Alabama. The analysis was based on data
collected using a web-based questionnaire that was sent to 367 local leaders of whom 154 responded. The
average respondent surveyed was male, 50 years old, has a college degree and represents a metropolitan
county. In terms of the key concerns, bringing more jobs to the local areas was identified as the key
followed by the desire to promote rural development. Notably, the majority of local leader were concern
about the up bring of the area as a whole instead of individual farmers benefiting from the push for value
adding initiatives. Cross tabulation results revealed that female local economic leaders with a college
education who were 50 years or older had participated more in bringing value-added enterprises to their
regions than their counterparts.
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As for the attributes that influence the likelihood of a local leader being involved in bringing agriculture
value-added enterprises to their region, the logit model results indicated that age, knowledge, and
concerns about increasing profit margin were the most influence attributes. These results have some
policy implications. For instance, the finding that those local economic development leaders who are
knowledgeable about agriculture value-added initiatives are more likely to be involved in bringing valueadded
businesses to their areas calls for additional educational programs for local leaders, especially
leaders in rural counties, if agriculture value-added initiatives are to be promoted as a tool for rural
development. While the findings highlight some significant variables, the small sample size and coverage
area warrant some caution when extending the results to other geographic areas. Amidst these limitations,
the findings may be useful for local development officials who consider agricultural value-added
initiatives an economic development tool.
References
Amanor-Boadu, V. 2003. “A Conversation about Value-Added Agriculture.” Department of Agricultural
Economics, Kansas State University. Accessed May 14, 2007 at:
http://www.agecon.ksu.edu/accc/kcdc/PDF%20Files/Value-Added%20Concept.pdf
Barkema, A., and M. Drabenstott. 1996. “Consolidation and Change in Heartland Agriculture.” Economic
Forces Shaping the Rural Heartland. Federal Bank of Kansas City, Missouri.
Coltrain, D., Barton, D., and Boland, M. 2000. Value Added: Opportunities and Strategies.
http://www.agecon.ksu.edu/accc/kcdc/PDF%20Files/VALADD10%202col.pdf
Cowan, Tadlock. 2002. Value-Added Agricultural Enterprises in Rural Development Strategies. Report
for Congress. Congressional Research Service, the Library of the Congress. Washington, DC.
EDDA. 2008. Economic Development Association of Alabama. http://www.edaa.org/
Evans, E. 2006. “Value Added Agriculture: Is It Right for Me?” EDIS document FE638, Food and
Resource Economics Department, Florida Cooperative Extension Service, Institute of Food and
Agricultural Sciences, University of Florida, Gainesville, FL. Accessed November 8, 2008 at
http://edis.ifas.ufl.edu/pdffiles/FE/FE63800.pdf
Govindasamy, R., J. Italia, M. Zurbriggen, and F. Hossain. 2002. Predicting Consumer Willingness-to
Purchase Value-Added Products at Direct Agricultural Markets, Journal of Food Products Marketing, 8:
1-15.
Green, J. 2002. “Connecting Agriculture, Community Planning, and Economic Development.”
Community, Food and Agriculture Program, Cornell Cooperative Extension, Cornell University.
Accessed October 28, 2008 at: http://media.cce.cornell.edu/hosts/agfood
community/fap/aecd/ConnectingAgPlanningED.pdf
Gujarati, D. 1992. Essentials of Econometrics. McGraw Hill, New York.
Hosmer, D.W., and Lemeshow, S. 2000. Applied Logistic Regression, 2nd ed. New York: John Wiley
and Sons.
Kilkenny, Maureen and Gerald Schluter (2001) “Value Added Agriculture Policies Across the 50 States,”
Rural America 16(1) May:12-18.
Loveridge, S. 2000. “A Behavioral Approach to Understanding Local Leader Incentives in Economic
Development,” Research Paper 2007, Regional Research Institute, West Virginia University.
Pindyck, R., and Rubinfeld, D. 1991. Econometric Models & Economic Forecasts. McGraw-Hill, Inc.
New York.
Tubene, S. and J. Hanson. 2002. The wholesale produce auction: An alternative marketing strategy for
small farms. American Journal of Alternative Agriculture, 17:1.
Woods, Mike, Frye, Jack, and Ralstin, Stan. 1999. “Blueprints for Your Community’s Future: Creating a
Strategic Plan for Local Economic Development,” Oklahoma Cooperative Extension Service, Oklahoma
State University, Stillwater, OK, WF-916.
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Understanding critical success factors for entrepreneurs: A comparison of Mbarara Municipality
in Uganda and Nnewi Cluster in Nigeria.
Abstract
Arthur Nuwagaba, anuwagaba@ucu.ac.ug
Uganda Christian University, Uganda.
Ijeoma Ezeasor, ije_envoscape@yahoo.com
University of Nigeria Enugu Campus, Nigeria.
Hope n. Nzewi, dr_mrs_nzewi@yahoo.com
Nnamdi Azikiwe University, Awka, Nigeria.
Success is a recurring theme in human life. In business, a set of entrepreneurs exposed to similar critical
environmental conditions do not necessarily succeed or fail. The paper seeks to develop a deeper understanding of
the critical factors that determine the success of entrepreneurs. Length of survival period, innovation and the ability
of an entrepreneur to transform and expand are used as benchmarks for success. The rationale for this study is that
majority of the businesses do not survive to their 10 th anniversary. The study adopts a qualitative approach. In-depth
interview was conducted on deliberately selected entrepreneurs in Mbarara and Nnewi. The findings reveal that
there were generally varying views on family members contribution towards entrepreneurial success, concurrent
views on the contribution of founding members and successor involvement as vital keys for entrepreneurial success.
However, as regards government support, there were very strong divergent views on contribution to entrepreneur
success by respondents.
Introduction
The promotion of an entrepreneurial society has become an important focus on economic policy reforms
in both the developing and developed world. As a result, specialized intergovernmental, governmental
and non-governmental organisations exclusively dedicated to the promotion, support “entrepreneurial”
and “innovative” start-ups have emerged.
Existing literature shows that the ability to engage in entrepreneurial activity is not randomly determined.
Individuals with particular behavioural traits are likely to sustain and successful grow businesses more
than others. Varieties of factors are associated with people’s tendency to engage in entrepreneurial
activities. They include psychological attributes such as need for achievement (McClelland, 1961);
overconfidence (Busenitz, 1999); locus of control (Evans and Leighton, 1989); optimism (Cooper et al.,
1988) and risk taking propensity (Stewart and Roth, 2001). Others include demographic, economic and
social factors such as education (Bates, 1995); employment status (Ritsila and Tervo, 2002); age (Bates,
1995); marital status (Evans and Leighton, 1989); income (Amit et al, 1995); career experience (Evans
and Leighton, 1989), social ties (Aldrich et al, 1987), and social skills (Baron, 2004).
Despite over 40 years and significant prioritisation of entrepreneurial research on reasons for becoming an
entrepreneur, strategies for success and reasons for failure often offer incomplete findings. The depth and
breadth of available literature offer uncertain explanations and answers to questions to why people engage
in entrepreneurial activities, how they manage to sustain growth and environmental factors that influence
success (Gartner, 1988; Shane & Venkataraman, 2000). Hence, there is a need to continual update
literature and support ongoing research on entrepreneurial development.
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In this paper, the researchers seek to understand why very few entrepreneurs succeed in business. This is
against a background that among so many entrepreneurs that start businesses in Uganda, Nigeria or else
where in the world very few of these enterprises witness their tenth anniversary. The paper also aims at
exploring extent to which social network support contribute to success. In addition, questions will be
raised on governments’ role in supporting entrepreneurial success at the start-up and venture growth. The
study is of immense benefit to academics as the comparison between Mbarara and Nnewi will help
differentiate critical factors that determine success in urban and rural settings. For entrepreneurs, who
intend to succeed in business, they could learn from experiences from their successful counter parts, focus
and exploit critical factors that promote success.
The concept of Entrepreneurship
Entrepreneurship is one of the four mainstream economic factors. The word is derived from the 17 th
century French word “entrprende” meaning who undertakes risk. Early entrepreneurs were soldiers of
fortune, adventurers, builders, contractors and merchants who undertook the risks for profit or loss.
Economists first identified entrepreneurship as a useful tool for understanding development. Schumpeter
et al., (1934) relates entrepreneurship to innovation and growth while Balunywa (1997) relates the
essence of entrepreneurship in the perception and exploitation of new opportunities in the practise of
business.
Entrepreneurship reflects complex interactions between the individual and the situation that has to be
dynamic because business situations are always changing. The quality of a particular entrepreneur
impacts on the survival or growth of a business. They way an entrepreneur perceives ideas and judges the
possible outcome of opportunities distinguishes the successful entrepreneur from a much larger group of
non-entrepreneurial SME owners (Casson, 1982). Evidence based on research shows that entrepreneurs
are not randomly drawn from the populations they tend to share certain backgrounds and orientations
(Curran and Stan worth, 1976). Entrepreneurs have indeed had some character traits in common
(Macmillan, 1988), and for the entrepreneur to carry out his activities successfully, he needs to have some
of these specific: risk taker, innovator, autonomy and competitiveness. Entrepreneurs tend to exhibit
particular characteristics like; drive and energy, self-confidence, high initiative and personal
responsibility, internal locus of control, low fear of failure, moderate risk taking, long-term involvement,
use of feedback, continuous problem solving, use of resources, self imposed standards and clear goal
setting. Timmons and Spinelli (2007) admit that few entrepreneurs would possess all traits but feel that
strengths in one entrepreneur might compensate for weaknesses in others. Many of these characteristics
are self-explanatory and linked up such as high personal drive and energy, self-confidence and setting
clear goals. Chell (1985, 1999) notes that psychological trait like ‘entrepreneurial intention’ and ‘the
ability to recognize opportunities’ are strongly linked to entrepreneurial behaviour. Perceptions and
judgements are one of the key elements in the process.
Factors That Promote Entrepreneurial Success
There are varied viewpoints on factors that affect entrepreneurial success. A large portion of existing
literature on entrepreneurship and small business management state often examine the practice of
entrepreneurship, rewards and challenges facing entrepreneurs (Katz and Green, 2007; Longenecker et al.,
2006; Timmons and Spinelli, 2007); some praise the rewards, accomplishments, and general advantages
of of being entrepreneurial (Katz and Green, 2007). However, there are researches that recognise the
reality of negative environmental factors that influence entrepreneur conduct that impacts on business
success. These characteristics include the persistent need for control, a propensity to doubt others, a
strong need for approval, and an inclination to view many things quite simply as either perfect or terrible
(Kets De Vries, 1985).
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Away from the focus on individual competencies, Bruerderl and Preisendoerfer (1998) found that social
network support is significant both the survival and growth of newly founded companies. A network
approach assumes that entrepreneur’s ability to organize and coordinate networks between individuals
and organizations are critical for starting up a company and business success. Birley et al (1991) find that
apart form institutional support from banks, formal support sources are hardly used by entrepreneurs.
Support usually comes from informal network such as friends, relatives, previous employers and
acquaintances. Family members often offer the vital start-up labour in an entrepreneurship. The founding
entrepreneur identifies talent within his/her family and nurtures the talent through mentoring, education
and direct involvement in business. Nevertheless, despite the desire to achieve business continuity,
Panikkos Zata et al (2004) argue that the family business sector is characterized by alarmingly
deteriorating survival rates.
Yusuf (1995) found in his study that government support is one of the critical success factors for small
business in developing economies. Governments in developing countries play a role in promoting and
supporting companies by providing incentives and infrastructure. However, although there are numerous
agencies and institutions established by government to assist SMEs, it is still unclear whether these
programs are accessible to SMEs and how far do, SMEs utilize the programs. Many are unaware of funds
and programs provided by the government, while some believes it is impossible to obtain such assistance,
others are just simply ignorant of it.
Methodology
This qualitative research study was conducted by interviewing 30 deliberately selected successful
entrepreneurs in Mbarara Municipality and Nnewi Cluster in Nigeria. The sample consisted of both male
and female entrepreneurs of different ages, level of Education who has been in business for different
length of period in business. Those considered in the study in Mbarara are those Small and Medium Scale
enterprises that employ more than five people, have capital of between $2,500 and $5,000 and have been
in business for at least five years. For entrepreneurs selected from Nnewi cluster, their business employ at
least twenty people, have capital of $10,000 - $50,000 and have been in existence for five years and
above.
The researchers were guided by a set of open-ended research questions administered to selected
respondents in Mbarara and Nnewi. Open-ended questions were chosen in order to allow respondents
flexibility in their response. The answers provided by these respondents were analysed in order to
condense the varied responses, develop categories and identify commonalities and themes from the openended
question responses. There was frequent overlap among the answers and many subjects offered two
or more answers to each question, often with equal weight emphasized so as not to diminish the
importance of subsequent answers and imply a rank order of perceived importance. The common
responses were grouped accordingly for each of the above questions, and the results are presented and
summarized in the next section.
Limitations
There are several limitations to the methodology of the research, including but not limited to the country’s
subject population, interviewer technique, researcher bias, and the general limitations of open-ended
qualitative research studies. The level of responses on some answers may be indicative of the location
limitation because of nature of this different set-ups and cultural diversity, and therefore these constraints
in be borne mind. Nevertheless, the results can be useful if viewed within these limitations, and
considered as part of the ongoing research base for possible meta-analysis with other studies. In addition,
the individual responses reported in the following results section can be informative to existing,
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prospective entrepreneurs and educators as examples of directly recommended perceptions regarding the
advantages, successor planning , family involvement , government support and advice in this field.
Results
In responses to role of family members in the running and management of enterprise, 92 percent of the
respondents in Mbarara are of the opinion that family members make very huge contributions to
entrepreneurial success by providing “cheap” or even free “labour”. Respondents stressed the power of
family trust, co-operation, commitment and allegiance which drives harmony that lead to success. Family
members are more honest than employees are since they view the business as their source of survival.
More over, family members who acquire formal education are integrated into the business to inject new
ideas and views.
In Nnewi, the findings were quite different. Family members had fewer roles to play in the running and
management of the business. The respondents stressed the fact they want to take indepnednt decisions
without the interference of family members. In most almost all cases, wives and children were just
figureheads with their powers limited to the space their names occupy in the business profile. Siblings and
extend members of the family (extended relatives) were more part of the business than the immediate
family. Family members involved in business were often incorporated as apprentices under the guidance
and mentorship of the entrepreneur. They are involved in the day-to-day running of business mainly as
trainees and rarely contribute in decision-making. When probe further on their decision to limit family
members interaction with the business, the respondents were quick to add that they lack trust in family
members ability, discipline and accountability. Respondents stressed that to avoid insolence from family
members who showed particular interest in becoming entrepreneurs, they are encouraged to tow this line
of business under their direct ownership or to diversify in to another line of business.
In response to the question of how entrepreneurial leadership impacts of success of an entrepreneur, 95 %
of the respondents in Mbarara agreed that, the entrepreneur leadership has a positive impact on enterprise
success. Respondents gave various leadership qualities that help shape their success. They include; ability
to work for long hours, tolerance, hard work, ability to take risks, desire for independence, embracing
change, tolerance and boldness. Equally, in the Nnewi cluster, respondents agreed that leadership
positively impacts on success. Commitment and dedication to business grooming and personal lifestyle of
the entrepreneur are qualities that influence success. Respondents noted that personal lifestyle had a
devastating impact on business survival. They stressed that ostentations lifestyles drain most of the
capital that should ought to be ploughed back into the business.
As regards founding entrepreneurs focus on different area of competencies for successful management,
respondents from both Mbarara and Nnewi affirmed that they focused on different areas of competencies.
They emphasised that demands of modern business goes beyond solitary ideas and decisions making.
Respondents from Nnewi noted that they depend a lot on highly competent professionals either as
permanent staff or as consultants because of their limited educational background and limited knowledge
of policies. Nine-two percent of the respondents Mbarara agreed that the success of their enterprises were
as result of the competencies of the founders. However, when the respondents were asked to rank human,
social and financial capital in terms of their contribution to success, 95 percent ranked financial capital as
the most important.
In response to the effect of successor involvement on entrepreneurial success, 95 percent of the
respondents in Mbarara are of the view that successor involvement in business contributes highly towards
entrepreneurial success as it encourages planning, hard work and continuity. In Nnewi, respondents noted
that successor involvement in business was necessary for entrepreneurial success. Successor involvement
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they noted is need in the day-to-day running of the enterprises as it spurs the zeal and determination to
succeed. They also note that successor involvement allows for the diversification of the nature of business
and ideas. Surprisingly, a respondent noted that he is grooming members of staff as possible successors of
his business. He noted that the staff regard the business as theirs and thus feel free to contribute new ideas
and vote against the ideas and decisions of the owner. Most importantly, respondents observed that for
successor involvement to contribute to entrepreneurial success, the successor should be empowered and
committed to manage the business.
As to whether successful entrepreneurs utilized available government support programs, 95 percent of the
respondents in Uganda agreed that they are utilizing government support programs and that these
programs benefit them. Some of the programs mentioned were “prosperity for all”, “boona bagagawale”
and “entandikwa scheme”. The respondents also agreed that belonging to a political party in power or
supporting the government in power has contributed positively to their success. One of the respondents
was found wearing a t-shirt belonging g to the party in power. In his view, “this government has made my
business what it is. I must support since it has also supported me”. However, much as the large
percentage (95%) of the respondents agreed that government programs contribute significantly to the
success of their businesses, they were skeptical about the sustainability of this. Thus, they expressed fears
that should there be change of government, they seriously doubt if their businesses will survive. Five
percent of the respondents that have accessed government programs note that the programs enable
enterprise success however; they would not want to be associated directly with the government in power.
In Nnewi, respondents noted that they receive very little help from the government. Only one respondent
have benefited from a government program. All of the respondents doubted if the government had any
concrete plans for their growth or survival. Rather they complained that inconsistency in government
policies and dilapidating nature of physical infrastructure was affecting the success of businesses.
In their advice to fellow and upcoming entrepreneurs, respondents in Mbarara came with varied advices.
They mainly advised entrepreneurs to research the business thoroughly before commencement (21
percent), to have passion or commitment (19 percent) and plan properly for the future (19 percent). Other
advises offered include – be financially discipline and prudent; work harder; be able to plunge into new
ventures by taking direct risks; source for adequate capital from the on-set; be patient and optimistic;
choose a good location for business; start the business as a part-time venture, be honest and endeavour to
hire good employees.
As regards to entrepreneurs in Nnewi cluster, they advised entrepreneurs – not to rely solely on individual
or family competencies; to focus on how to nurture the business right from the onset; plan for the future
even before the start of the business. They equally advise entrepreneurs to seek for advice from more
knowledgeable relations, professional or mentors; learn every aspect of the trade or business; go for an
apprenticeship training; rely less on guts feelings; perform a feasibility study on the business before
committing resources; be involved in almost all aspects of the business – from designing, to promotion, to
transportation and logistics; focus on areas were you have more strength; have various source of financial
capital and diversify into another line of business with profit made from the earlier venture.
Conclusion
This study yielded informative findings in the area of successful entrepreneurship guidance and
perceptions from established and successful current business owners. Entrepreneurs enjoy the continuity
of their business hence, the reason why successor involvement in business was included in the study. One
of the important contributions of the findings from this study is that successor involvement and the zeal of
the founder member may be greater motivators to entrepreneurial success, and that successful
entrepreneurs do not recommend venturing into business without well-conceived plans. There should be
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more studies in the future concerning the need for proper research and business planning in other to
validate and elaborate more on the advice given to upcoming entrepreneurs by their successful
counterparts. Research findings produced results that are largely supported in literature. There is need for
the expansion of scholarly conversation on key areas that address contribution of family members,
successor involvement, entrepreneurial leadership, and entrepreneurial competencies to entrepreneurial
success. In addition, individuals considering establishing an enterprise, researchers of future studies and
authors on entrepreneurship books should be aware of the practical implications, negativities, and
guidance in this study.
References
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Bates, T. (1995), Self-employment Entry across Industry Groups, Journal of Business Venturing.
Birley, S., Cromie, S., & Myers, A. (1991), Entrepreneurial Networks: their Emergence in Ireland and
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Bruederl, J., and Preisendorfer, P. (1998), Network Support and the Success of Newly Founded
Businesses. Small Business Economics, 10 (3), 213-225.
Busenitz, L. (1999), Entrepreneurial Risk and Strategic Decision-making, Journal of Applied Behavioural
Science 35(3) 325-340.
Evans, D., and Leighton, L. (1989), Some Empirical Aspects of Entrepreneurship, American Economic
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McClelland, D. (1961), The Achieving Society, Princeton, New Jersey: Van Nostrand.
Baron, R. (2004), "The Cognitive Perspective: A Valuable Tool of Answering Entrepreneurship's Basic
"Why" Questions," Journal of Business Venturing, 19, 221-240.
Gartner, W. (1988), Who is an entrepreneur? Is the wrong question, American Journal of Small Business
12(4) 11-32.
Katz, J.A. and Green, R.P. (2007), Entrepreneurial Small Business, McGraw-Hill, New York, NY.
Kets De Vries, F.R.M. (1985), “The Dark Side of Entrepreneurship”, Harvard Business Review, Vol. 63
No. 6, pp. 160-7.
Longenecker, J.G., Moore, C.W., Petty, J.W. and Palich, L.E. (2006), Small Business Management: An
Entrepreneurial Emphasis, 13th ed., Thomson South-Western, Mason, OH.
Shane, S., and Venkataraman, S. (2000), The Promise of Entrepreneurship as a Field of Research,
Academy of Management Review 25 217-226.
Schumpeter, J. (1934), The Theory of Economic Development, Cambridge, Mass.: Harvard University
Press.
Timmons, J.A. and Spinelli, S. (2007), New Venture Creation: Entrepreneurship for the 21 Century, 7 th
ed., New York: McGraw-Hill.
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Entrepreneurs, Journal of Small Business Management, 33 (2), 68-73.
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Track 7: Exporting, Internationalization and Foreign Direct Investment
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Evaluating the importance of location factors in the decision of MNCs to undertake FDI in Syria
and Jordan
Abstract
Omar Al-Habash, omar.al-habash@brunel.ac.uk
Business School, Brunel University, UK.
Frederick Mmieh , Frederick.mmieh@brunel.ac.uk
Business School, Brunel University, UK.
This paper empirically examines the significance of location factors that foreign investors consider when
undertaking Foreign Direct Investment (FDI) in Syria and Jordan. A questionnaire was used to collect data from
top management personnel of Multinational Corporations’ (MNCs) subsidiaries in Syria and Jordan. Two hundred
and sixty eight foreign subsidiaries participated in this study. Available empirical evidence reveals that growing
demand in the host market (potential growth), large size of host market, local government regulations and policies
towards foreign firms, political stability in the host country, and the legal environment are the most location factors
influencing MNCs decision to undertake FDI in this part of the Middle East. These findings indicate that developing
countries in general, Syria, and Jordan in particular can attract more FDI by doing two things. They need to improve
their investment climate and make it more favorable for MNCs in terms of regulations, policies, and laws, and at the same
time, lower the perceived potential investment risk through maintaining political stability.
Introduction
FDI can contribute positively to the growth and development of developing countries by bringing capital,
employment, technology, market access, and managerial skills (Blomstrom and Kokko, 1998; De Mello,
1997, 1999; Pack and Saggi, 1997; Balasubramanyam et al., 1999; Borensztein et al., 1998). According to
UNCTAD (2003), FDI plays a ‘vital’ role in the long-term economic development of developing
countries with its great potential to create jobs, raise productivity, enhance exports and transfer
technology.
One of the aspects that will help developing countries in accelerating or sustaining the pace of their
economic and social development is to have good quality infrastructure (UNCTAD, 2008). Ramamurti
(2004) argues that developing countries need FDI in infrastructure to reach their growth targets as they
necessitate foreign capital in order to enhance their domestic savings. Therefore, developing countries
require urgent investments aimed to strengthen the infrastructure, industries and services in areas such as
water, electricity, telecommunications, and transport (UNCTAD, 2008). Although governments, the
private sector and other stakeholders in these countries are contributing in the infrastructural investments,
the amount of investments needed still exceeds their contribution (UNCTAD, 2008). According to
UNCTAD (2008), developing countries in general currently invest 3–4% of their GDP annually in
infrastructure while they need to invest an estimated 7–9% to attain better economic growth and poverty
reduction. Obviously, this results in an enormous gap between the current volume of investments and
what is actually required. This raises the question of how developing countries should fill this gap.
According to Mayer (2004, p. 259), MNCs have a very important role “in linking rich and poor
economies, and in transmitting capital, knowledge, ideas and value systems across borders.” Filling this
investment gap requires MNCs to involve intensively in infrastructural investments in particular and
investments in general, and at the same time maximizing the benefits of host developing countries from
MNCs’ technological and other assets (UNCTAD, 2008). The question that readily comes to mind is what
urges MNCs to engage in such operations and undertake such investments? Meyer and Estrin (2004)
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argue that MNCs, especially those with ambitious growth aspirations, put developing countries at the top
of the priorities in their global strategies agenda. Therefore, MNCs and developing country policy-makers
have ‘a common interest’ in encouraging FDI (Meyer and Estrin, 2004, p. 1).
However, there should be great efforts in order to encourage MNCs to undertake FDI in developing
countries. Undertaking such investments by MNCs actually depends on a complicated environment since
each country has its own political, economic, and legal systems and even its own culture, which makes
attracting MNCs a real problem for some developing countries. This raises the following questions: What
should developing country governments do to increase their share of FDI? What determines the
investment behavior of MNCs? What stimulates their actions to undertake FDI? Is it profit? If so,
logically, developing countries should have the largest proportion of the world FDI inflows because these
countries enjoy lower costs compared with developed countries. In addition to the fact that the higher
profits of MNCs’ subsidiaries, which, according to UNCTAD (2008), reached over $1,100 billion in
2007, are generated mostly in developing rather than developed countries. What is more, developing
countries as a possible investment location for MNCs have accessibility to natural resource, market and
other investment potentials that have not yet been fully exploited. Additionally, developing countries that
followed the global path in attracting FDI have undertaken different types of reforms such as the
International Monetary Fund (IMF) and the World Bank assisted Structural Adjustment Programs in order
to attain political and economic stability along with improving their infrastructure and taking any other
actions to have a better investment climate. This has led to an increase in the competition between the
host governments of developing countries in attracting FDI. This competition results in the removal of
restrictions, and an increase in the amount of investment incentives, the number of Bilateral Investment
Treaties (BITs) and regional agreements on investments. According to UNCTAD (2008), the FDI inflows
into developing countries increased by 21% from $413 billion in 2006 to the highest level ever of $500
billion in 2007.
In spite of this rise in FDI inflows in 2007, the share of these countries in the global inflows of FDI
declined. According to UNCTAD (2008), the share of FDI inflows in developing countries in 2007 was
27% of the global FDI inflows, down from to 29% in 2006, and from 33% in 2005. This was primarily
due to the large inflows into developed countries, especially in the Triad nations. This in fact calls for
research to discover the forces behind the global FDI inflows trends to developed nations and not to
developing countries. In order to understand why the highest percentage of the world FDI inflows goes to
developed countries rather than to developing countries, we need to know the forces that influence the
investment mechanism and behavior of MNCs. Thus, this study examines the location factors of FDI in
two developing countries. Specifically, the objectives are (a) to identify the significant location factors of
FDI in Syria and Jordan; (b) to provide host governments in the developing countries, in general, and in
Syria and Jordan, in particular, insight on how they can adjust their FDI policies. The next section
presents an overview of the research settings.
Overview of the research settings
Syria and Jordan are neighboring countries in the Middle East. The relations between them have ancient
roots; the two countries were in the past a part of one country called “Bilad Ash-Sham” or “Greater
Syria”. That explains why those two countries are closely integrated and share very close social, cultural
and historical ties. However, both countries enjoy the following common characteristics:
• Both countries are located in a distinguished geographical location, where the three continents meet,
as they are located at conjunction of Europe, Asia and African. They are well situated as a regional
entry point, being well connected to neighbouring countries and global markets through modern
transportation and communication networks. They also serve as a focal point for trade and investment
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within the Middle East and North Africa region (MENA), particularly for the Iraqi and Gulf markets.
Their location allows for diversification and expansion into increasingly affluent markets.
• Both countries enjoy stable and safe political structure and remarkable national intimacy. The
political environment of both countries offers constancy and a climate lead to advanced open market
economy. Both countries signed free trade agreements with the Arab countries, Turkey, and EU.
• Both countries have had low external indebtedness and stable exchange rate for many years, good
infrastructure, equipped and continuously developing industrial cities, free zones, skilled workforce
and low wages, available and diversified natural resources, and low production costs.
• Syria and Jordan are classified by World Bank as low-middle income economies.
• Both countries have launched a series of reforms in order to attract more foreign investments by
offering foreign investors special advantages, exemptions, facilitations and guarantees to investment
projects, and many other incentives that are promoted through investment encouragement legislations.
In addition, both countries have taken different important actions in this regard like advancing the
private sector, signing various multilateral and unilateral trade agreements, and upgrading their legal
system to cope with international business needs.
• Both countries have feasible and various projects in different sectors that are available to foreign
investors.
Jordan and Syria succeeded in attracting foreign direct investment (FDI) in the past years (see figures 1 &
2). The volume of FDI inflows into Syria in 2009 was nearly $1,434 million (UNCTAD, 2010), whereas
in 2001, the volume of FDI inflows into Syria was nearly $110 million (UNCTAD, 2010). Figure 1 below
shows identifiable trends in the FDI inflows into Syria for the period 2001-2009. The evidence shows that
FDI inflows in 2009 exceeded the amount of FDI attracted in 2001 due to a positive change in the
investment climate in Syria.
Figure 1: FDI Inflows into Syria 2001-2009
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Figure 2 below presents identifiable trend in the FDI inflows into Jordan for the period 2001-2009. The
inflow of FDI into Jordan was nearly $274 million in 2001, and reached its highest level in 2006 of nearly
$3,544 million (UNCTAD, 2010). This was mainly due to the accelerated privatization program that was
launched in 1996 as part of ongoing strategy by the Jordanian government to encourage FDI inflows into
the country. Although the volume of FDI in Jordan decreased slightly in 2009 to approximately $2,385
million compared to $3,829 million in 2008, the overall FDI inflows into Jordan have continued to trend
upwards since 2001 (UNCTAD, 2010). The next section presents the theoretical framework of this study.
Million US Dollars
4000
3000
2000
1000
0
Theoretical Framework
Figure 1: FDI Inflows into Syria 2001-2009
FDI flows into Jordan 2001-2009
Buckley et al. (2007) argue that the location and control decisions of multinational enterprises are at the
core of managerial decision-making and academic theorizing in international business. The theories of
Multinational Enterprise (MNE) have tried to discover why MNEs choose to locate their activities in a
particular market or country. The literature demonstrates that country-specific location factors are the core
of the MNEs decision to undertake FDI. Although location decisions for FDI have received relatively
little attention in the literature (Buckley et al., 2007), researchers have investigated this phenomenon and
come up with different findings, explanations, and perspectives. Location factors are one of the main
elements of the Dunning (1980, 1988) eclectic paradigm of international production. Dunning (1980,
1988) proposed a comprehensive approach based on ownership, location, and internalization advantages
to explain the concept of FDI. According to him, MNCs will undertake FDI based on the availability of
the following four essential conditions: (1) if a firm possesses ownership-specific advantages (O) over
other firms when serving specific market or country; (2) if a firm realizes the best benefit in internalizing,
the (O) advantages by having market internalization advantages (I), but not through selling or renting
them; (3) if the chosen host country has locational advantages (L) then, it is worthwhile to undertake FDI
in this country than in other countries; and (4) if a firm undertakes FDI in accordance with its long-term
strategy (Dunning & Lundan, 2008). Dunning also explains the motives for FDI and puts them into four
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categories; natural resource seeking, market seeking, efficiency seeking, and strategic asset or capability
seeking (ibid). He also notes that firms may engage in FDI for more than one of the above motives (ibid).
Other researchers such as Buckley and Casson (1976), and Teece (1986) based their explanation on
transaction cost theory. This theory purports that the existence of MNEs is as a result of transaction costs.
Companies tend to internalize their transactions when the transaction cost in a specific market is high
therefore they undertake FDI in order to reduce the transaction costs. In explaining the
internationalization process of the firms, Johanson and Wiedersheim-Paul (1975) argue in their Uppsala
model that engaging in international operations is the result of a sequence of incremental decisions and
that the lack of knowledge about foreign countries and the tendency to avoid uncertainty are the factors
that push firms to choose the least risky way to engage in international operations. Thus, firms begin to
export to neighboring countries in order to have the same business practices. Once they gain enough
experience, they move forward and undertake FDI in this country taking into account the size of its
market (ibid). From an industrial perspective, Vernon (1966) argues that when a firm introduces a new
product in a market, the firm’s home country will be the base for producing this product and exporting it
to other developed countries. Once the market for the product increases in a developed country, producers
will start to set up a local production facility in order to engage in the production of that product. Later,
when the product becomes fully standardized, developing countries will become a location for producing
the product because of their competitive advantages (ibid). For instance, seeking low-cost labor may be
the primary motive for investors to undertake FDI in developing countries. Consequently, the production
of this product shifts finally into developing countries (ibid). Another line of thinking is introduced by
Knickerbocker (1973) in the theory of oligopolistic competition which explains the behavior of US
manufacturing firms. Knickerbocker (1973) argues that when a member of an oligopolistically structured
industry undertakes FDI in any important foreign market, other risk-aversion members in this industry
will follow this member and undertake FDI as well since these firms will not want to lose market share. In
addition, there are some empirical studies that have provided an evidence of what are the most important
location factors for a specific location. Cleeve (2006) investigated the institutional impediments to FDI
inflows in Sub-Saharan Africa. He found that location factors such as large market size, the growth rate of
the economy, good infrastructural development, high skills level, the openness of the economy, and
institutional and political risk variables (such as democratic system, socioeconomic conditions and
investment profile) are important determinants of FDI inflows, whereas, corruption, government and
political instability have no effect on the inflow of FDI. Lately, there has been a debate concerning the
location of FDI after the recent global financial crisis. According to UNCTAD (2010), the global
financial crisis has affected both developed and developing countries, and their share of FDI inflows.
However, developing countries in general and China, India, and Brazil in particular, were less affected
and managed to recover faster than developed countries (ibid). Consequently, this fact may affect the
global business strategy in relation to developing countries as a destination for FDI inflows. However, in
general, the empirical evidence on the location of FDI post the financial crisis is scarce. The next section
presents the research methods and data sources.
Research methods and data sources
The data for this study were collected directly from subsidiaries of international firms in Syria and Jordan
in order to enhance this research area because of the lack of good, firm-level data on FDI and location
decision regarding those two countries. International companies identified for inclusion in this study
were drawn from the database of the Federation of Chambers of Commerce in Syria and Jordan. The
companies were selected according to the following criteria: (1) companies that are fully foreign-owned
subsidiaries, (2) companies that are as a result of Joint Venture between a foreign company and a local
one (partly foreign-owned subsidiaries), and (3) companies that are merged or acquired by a foreign
company. This study targeted around 1442 multinational companies’ subsidiaries in both countries. After
removing those, which were branches of foreign companies, distributors, franchisees, the survey was then
applied to the 418 resulting firms, which have undertaken FDI. For the purpose of this study, a
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questionnaire method was considered the most appropriate way for collecting the data. The questionnaire
was administered after a thorough analysis of the literature. It consists of the most relevant factors that
proved to influence the investment decisions of MNCs when undertaking FDI. It asked each of the
participated companies to evaluate the significance of each factor using a five-point Likert Scale from 1 to
5 where 1 is the least important and 5 is the most important.
The questionnaire was developed to ascertain the opinion of the key decision-makers in the targeted
companies (the respondents) on a number of factors proved to influence the decision of MNCs to
undertake FDI in a specific location. Employees who participated in the completion of the questionnaire
includes, top management officers such as Chief Executive Officers (CEO), Managing Directors, General
Managers, Country Presidents, Partners, or any other equivalent designation of each company. The
questionnaire was thoroughly revised by and discussed with several academics in the UK, Syria and
Jordan before it was distributed to the respondents. It was also pre-tested through personal interviews with
top executives of four companies who were not later asked to take part in the study. Subsequently, it was
used for a pilot study. This process enhanced the quality of the questionnaire and improved its design,
content, wording and most importantly clarity and ease of understanding, so making it much easier and
more attractive to answer. The questionnaire was administered through different ways. The first way was
through email and online survey but unfortunately, the response rate was below 3%. The second way was
through the postal system where the response rate was also below 5%. The third way was through
personal interviews with interviewees in the firms who participated in the survey. The interviewees
completed the questionnaire themselves in the presence of the principal interviewer, offering complete
guidance and confidentiality to them. The sample size obtained was 268 usable questionnaires with a
response rate for the last method of round 64%. The data were analyzed using the Statistical Package for
Social Science (SPSS). The statistical inferences are presented in the data analysis section below.
DATA ANALYSIS
Before presenting the analysis of the location factors in Syria and Jordan, it is worth introducing some
descriptive statistics in order to establish the main characteristics of the sample.
Entry Mode
Based on the sample of this study, 66.8% of MNCs operating in Syria and Jordan have established
wholly-owned subsidiaries as evidenced in Table 1 below, whereas, 26.9% of them engaged in joint
ventures with selected partners, and only 6.3% established their FDIs in a form of mergers and
acquisitions with existing firms operating in Syria and Jordan.
Table 1: Entry Mode
Entry Modes Frequency Percent
Greenfield (Wholly-owned subsidiary) 179 66.8
Joint Venture 72 26.9
Merger & Acquisition 17 6.3
Total 268 100.0
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Company Activity
Table 2 below displays the participated companies in this study in terms of their activities. The nonfinancial
services sector represents 28.4% of the sample, followed by the manufacturing industry
representing 23.1%, and the financial services sector accounts for 20.9%. In addition to those three major
sectors, the rest of the sample are represented as follows: 6.7% construction companies, 6.3% agriculture,
hunting, forestry and fishing, 6% trade, 11% mining and quarrying, and 0.4% electricity, gas and water
(one company). Based on this, we can ascertain that the sample of this study is a multi-sector sample.
Table 2: Company Activity
Sectors Frequency Percent
Agriculture, hunting, forestry and fishing 17 6.3
Mining and quarrying 11 4.1
Manufacturing 62 23.1
Electricity, gas and water 1 .4
Construction 18 6.7
Trade 16 6.0
Restaurants and Hotels 11 4.1
Financial Services 56 20.9
Non-Financial Services 76 28.4
Total 268 100.0
Significance of Location Factors
Based on the respondents rating of the importance of location factors in the decision on where to undertake
FDI in Syria and Jordan, Table 3 shows the ranking of those factors according to their mean scores. As
evidenced in Table 3, the ranking of the significance of location factors can be divided into four groups based
on their mean scores. The first one is the most important location factors, which are (1) growing demand in the
host market (potential growth), (2) large size of host market, (3) Local government regulations and policies
towards foreign firms, (4) political stability in the host country, and (5) the legal environment. These location
factors were rated by respondents as the most important factors with a mean score greater than 4. The second
group is more important location factors, which are (1) availability and costs of local skilled workforce in
the host country, (2) low-level competition in the host country’s market, (3) host country’s international
trade agreements, (4) no discrimination between local and foreign firms, (5) low corporate tax rates in the
host country, (6) low costs of local workers in the host country, (7) investment incentives offered by the
host country government, (8) standard of living and public services, and (9) good infrastructures. Those
location factors were rated by respondents as more important factors with a mean score greater than 3. The
third group is less important location factors (i.e. have no effect on MNCs decision to undertake FDI), which
are (1) availability and low costs of land, (2) low transportation/logistics costs (supply and distribution),
(3) local governmental bureaucratic system and possible corruption in the host country, (4) low costs of
raw materials, energy and water, (5) high industrial concentration (industrial parks, technological
networks etc), (6) cultural Characteristics (e.g. language, religion, food & drink), and (7) technologically
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advanced country (learning opportunities). The reason that those location factors have no effect on the
MNCs decision is in reference to the nature of the studied sample. As mentioned above, this sample is a multisector
sample, consisting of different sectors and industries making some of those factors irrelevant to some
companies. For instance, from Table 2 above we can notice that financial and non-financial sectors represent
approximately 50% of the studied sample. Companies in those particular two sectors obviously will not
consider factors such as (a) low transportation/logistics costs (supply and distribution), (b) low costs of raw
materials, energy and water, and (c) high industrial concentration (industrial parks, technological networks
etc) to have any influence on MNCs decisions. ‘Less strict environmental laws’ relating to the fourth group is
considered least important location factors. Although, this factor is considered to be very important location
factor for MNCs to set up production facilities in developing countries because of the absence of
environmental laws and legislations in those countries, for ethical considerations respondents had not reported
it to be important. The next section presents the summary of the main findings of this study and
conclusion.
Table 3: Location Factors Analysis
Factors Rank Mean
Growing demand in the host market (potential growth) 1 4.72
Large size of host market 2 4.44
Local government regulations and policies towards foreign firms 3 4.37
Political stability in the host country 4 4.35
The legal environment 5 4.09
Availability and costs of local skilled workforce in the host country 6 3.85
Low-level competition in the host country’s market 7 3.69
Host country’s international trade agreements 8 3.58
No discrimination between local and foreign firms 9 3.22
Low corporate tax rates in the host country 10 3.16
Low costs of local workers in the host country 11 3.14
Investment incentives offered by the host country government 12 3.10
Standard of living and public services 13 3.08
Good infrastructures 14 3.06
Availability and low costs of land 15 2.87
Low transportation/logistics costs (supply and distribution) 16 2.87
Local governmental bureaucratic system and possible corruption in the host
country
17 2.73
Low costs of raw materials, energy and water 18 2.61
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High industrial concentration (industrial parks, technological networks, …) 19 2.35
Cultural Characteristics (e.g. language, religion, food & drink) 20 2.24
Technologically advanced country (learning opportunities) 21 2.12
Less strict environmental laws 22 1.91
Conclusion
This paper presents the main host country location factors that MNCs consider when they want to
undertake FDI in Syria and Jordan. Using a relatively large sample size, this study is the first attempt to
identify, classify and rank the key host country-specific influences for FDI decision by MNCs in this
particular area. The findings of this study show that the choice of either Syria or Jordan as a location of
FDI emerges to be intrinsically influenced by the market attractiveness of the host country (its size and
potential growth), to what extent the investment environment is favourable for MNCs regarding
government policies, regulations, and laws, and the perceived potential risks in those countries. In other
words, the decision of MNCs to undertake FDI in such area is driven by market demand and at the same
time the ease and risk of doing business. Based on the above, developing countries in general, Syria, and
Jordan in particular can attract more FDI by doing two things. They need to improve their investment climate
and make it more favourable for MNCs in terms of regulations, policies, and laws, and at the same time, lower
the perceived potential investment risk through maintaining political stability.
Although empirical findings of studies regarding location factors may differ significantly from country to
country or from market to market, the findings of this study support the findings of similar studies undertaken
in other host country contexts. The findings of this study support Cleeve’s (2006) main findings with respect to
the importance of the following location factors: (1) potential growth in the host market, (2) large market size,
(3) good infrastructure, (4) availability of high skilled workforce in the host market, and (5) the openness of the
economy. This study also confirms the findings of Cleeve (2006) with respect to corruption as both studies
show it has no effect on FDI inflows. However, there is a contradiction with Cleeve’s (2006) findings with
respect to political stability in the host country as the findings of this study reveal that it was one of the most
significant location factors influencing MNCs decision to undertake FDI and affecting FDI inflows, whereas,
Cleeve (2006) found it to have no effect.
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Abstract
Capital flight in developing economies: A panel analysis of Nigeria and South Africa
AYADI, Folorunso Sunday, funso123@yahoo.com
Faculty of Social Sciences, University of Lagos, Akoka-Yaba, Lagos, Nigeria.
Capital flight portends great danger to any nation as it represents foregone investments, a reduction in a country’s
tax base, and a contributor to the debt problem, among others. This paper investigates the determinants of huge
capital flight in Nigeria and South Africa using panel data from both countries. We investigated the determinants of
capital flight utilizing the common coefficient and fixed effect models. Capital flight is caused by the trade balance,
domestic economic performance, one-year lag of external debt and political stability. Dooley’s debt-flight revolving
door, which observed that unrecorded capital outflows from developing countries take place simultaneously with
external borrowing, is empirically found to be true in the two countries. Governments of developing countries must
therefore strive towards reducing country risk or macro-economic risk so as to stop the tide of capital flight. They
must create an enabling environment that motivates asset-holders to keep their wealth in domestic currency while
repatriating streams of flows from foreign assets among others.
Introduction
Over the years, substantial movements of international capital have been experienced in most African
countries of the world. There are some attendant risks and benefits that accompany this capital movement.
One of such risks is that of fuelling capital flight. According to Cooper and Hardt (2000), capital flight
entails the flow of financial assets resulting from the holder’s perception that the capital is subjected to an
inordinate level of risk due to devaluation, hyperinflation, political turmoil, or expropriation if retained at
home in domestic currencies. The owner of funds in this hostile environment is seeking a safe haven for
these funds.
Causes of capital flight according to Ajayi (2005) include varying risk perception, exchange rate
misalignment, financial sector constraints and repression, fiscal deficits, weak institutions,
macroeconomic policy distortions, corruption and extraordinary access to government funds, among
others. A hypothesis proposed by Khan and Ul Haque (1985) argues that the perceived risk of investment
in developing countries is higher than elsewhere. Residents of developing countries can therefore expect
risk-free compensation for the additional risk on their investments at home. Khan and Ul Haque (1985)
describe this risk as "expropriation risk." That is, domestic residents face the possibility of their assets
being expropriated by the government. Expropriation may include outright nationalization, taxes, or
exchange controls, whereas the risk on similar assets held abroad is negligible. An exogenous or policyinduced
shock that raises the perceived level of risk could therefore result in capital flight; at the same
time, the government would be forced to go abroad to obtain financing to cover not only the original
imbalance, but also the loss of resources through capital flight.
The size of capital flight in developing countries is assuming a serious dimension and posing a huge
threat to sustainable growth, especially in Africa. According to Boyce and Ndikumana (2001), many poor
countries are losing more resources via capital flight than through debt servicing. They concluded that
Africa is a net creditor to the rest of the world because the value of the private assets held abroad as
measured by accumulated capital flight is far more than the external debt stock of Africa. United Nations
Economic Commission for Africa (UNECA, 2005) for instance observed that capital flight in Africa has
increased tremendously and the situation is becoming worrisome because of the negative association
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between current account balances and capital flight in these economies. In addition, external debt and
capital flight are positively intertwined.
Capital flight in Nigeria and South-Africa are more severe in magnitude than it is elsewhere in other Sub-
Saharan African countries. According to Chang and Cumby (1990, 19) net capital outflows from Sub-
Saharan Africa were estimated at US$40 billion between 1976 and 1987 and this figure is identical to
flows from some Latin American countries such as Argentina, Brazil or Venezuela. Capital flight from
Nigeria alone is estimated to be about US$17.5 billion, with US$11 billion in outflows between 1985 and
1987 alone. For South-Africa, Mohammed and Finnoff (2004) estimated an average capital flight as a
percentage of GDP of 6.6 percent a year between 1980 and 2000. According to Ndikumana and Boyce
(2003) (lifted from Ndikumana and Boyce, 2009), real capital flight (in 2004 US$) is 165,696.7 and 18,
266 respectively for Nigeria and South-Africa. UNECA (2005) made an estimate of 2.39 and 1.91
respectively of average capital flight to GDP between 1991 and 2004 for Nigeria and South-Africa. These
estimates looks modest in ratio form, however, when viewed from the absolute term, they are about the
highest in Africa.
Capital flight represents foregone investment in manufacturing plants, infrastructure, and other productive
capacity. In addition, capital flight escapes government taxation, thus depriving nations of revenues
capable of contributing to fiscal deficits and constraining expenditures on social welfare programmes,
defence and infrastructure development. In addition, the magnitude of tax evasion due to capital flight by
the highest income class (an opportunity not open to middle and low income classes) accelerates income
disparities and aggravates social instability. Based on the magnitude of the impact of capital flight on
economic performance of Nigeria and South-Africa, and the lack of adequate research in this area, we
conduct this analysis of the causal factors of capital flight in these countries by utilizing panel data from
Nigeria and South Africa. This study will provide useful insights for academics and policymakers,
especially in developing countries worldwide.
Literature Review
A study by Eryar (2005) showed that capital flight seems to be affected by loss of confidence in the
overall economy. In essence, if the residents of a country see macroeconomic instability as a threat to
their holding of domestic assets, they tend to switch to foreign assets in order to protect the value of their
assets from any sudden changes. These changes can be in the form of a freeze on assets in the banking
system or a postponement of interest payments on public debts. The import of Eryar’s (2005) study is
that it postulates that excessive debt stock can stimulate capital flight. This is what Boyce (1992) termed
as the debt-flight revolving door.
Ajayi (1992) discussed two causal factors of capital flight. If a currency appreciation is expected,
domestic wealth owners will shift assets into foreign assets. If a currency is overvalued, citizens will
expect the currency to be subjected to devaluation in the future. This will cause residents to avoid the
potential capital loss by converting into foreign wealth and currencies. The important point here is that
exchange rate can exert either a negative or positive impact on capital flight, depending on residents’
expectations of future currency value. The contribution of this study to the literature is an investigation of
the direction of the impact of exchange rate changes on capital flight using Nigeria as a case study.
There is no consensus measure of capital flight, however, there are various methods for its estimation.
These methods include Dooley’s (1986), “hot money” method (Cuddington, 1986), Hermes, et. al.
(2002), “residual method” (Word Bank, 1985; Cline, 1995). In addition to the above, Ndikumana and
Boyce, (2002), Morgan Guarantee (1986), and Cline (1995). However, this study has no objective of
contributing to this semantic debate but to elicit the contributory factors of capital flight in these
countries. Deppler and Williamson (1987) stated that capital flight has the potential of giving rise to a net
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loss in the total resources available for domestic savings and investments in any affected economy. Since
domestic savings and investments are very important in the growth process, an economy experiencing
huge capital flight is retarded. By the same token, the induced liquidity crunch in such an economy can
lead to depreciation of domestic currency in a floating exchange rate system. If efforts are being made to
protect its exchange rate by stabilizing it, a loss of reserves will result. In addition to the above, income
and wealth outside the domestic economy cannot be subjected to domestic taxes and, potential revenue to
its government is lost. Consequently, the debt servicing capacity of such country is constrained as capital
flight erodes its foreign exchange base.
Empirical evidences on the determinants of capital flights identified some non-macroeconomic factors.
Lensink, Hermes and Murinde (1988), examined the link between political risk and capital flight for a
number of developing countries and concluded that no matter how capital flight is defined or measured,
political risk factor has a significant role to play in the determination of capital flight. Fatehi (1994)
analyzed the impact of political disturbances on capital flight in 17 Latin American countries. He utilized
a stepwise multiple regression analysis on data between 1950 and 1982 and concluded that, political
disturbances in some of those countries had effects on, capital flight. Ajayi (1992) also reported the
political aspect of capital flight which is linked to corruption and access to foreign funds by political
leaders of developing countries. According to Ajayi, access to political offices and the corruptibility of
office holders are important factors in the determination of capital flight. However, Nyoni (2000),
discountenanced the existence of political risk in the determination of capital flight. Nyoni (2000)
employed a time series analysis over 1973 to 1992 on data from Tanzania. He analyzed the impact of
some macroeconomic variables while capturing political shock with a dummy variable. He concluded that
lagged capital flight, real growth rates, interest rate and exchange rate differentials significantly impacted
on capital flight while political shock had no statistically significant impact on capital flight.
External debt has been hypothesized to impact on capital flight. This occurs when countries borrow and
simultaneously divert the proceeds abroad thereby fuelling capital flight. This situation is referred to by
Boyce (1992) as ‘debt-flight revolving door’. Boyce (1992) concluded that a direct causal linkage exists
between external debt and capital flight (see also Boyce and Ndikumana, (2001)). Demir’s (2004) study
of the relationship between external debt and capital flight in Turkey however showed a contemporaneous
bi-directional causality between debt and capital flight. Chipalkatti and Rishi (2001) also reported similar
results as Demir’s.
Empirical as well as theoretical validation of macroeconomic factors determining the magnitude of capital
flight is abundant. Dooley (1988) examined the relationship between inflation rate and capital flight for 5
Latin American countries between 1973 and 1986. He found a significant positive relationship between
inflation and capital flight (Victor, 2004 also validated the above relationship). Cuddington (1987)
employed time series data from 1974 to 1984 to verify the relationship between capital flight and a
number of macroeconomic variables. The result obtained showed that interest rate differentials, external
debt flows, lagged capital flight, inflation and exchange rate significantly accounted for capital flight in 7
Latin American countries. Other empirical contributors to capital flight analysis include Boyce (1992)
who confirmed the contribution of external debt, budget deficits, and interest rates in the determination of
capital flight (see also Ng’eno, 2000). Other findings by Ng’eno (2000) include the fact that real
appreciation of currency encourages capital flight. It also suggests that without credible reforms, growth
in the economy would lead to increased capital flight. In other words, increased income would encourage
accumulation of foreign assets.
Model and estimation method
Dooley (1988) stated that domestic and foreign investors face asymmetric risk when investing in a
developing economy and this asymmetric risk determines the magnitude of capital flight. The magnitude
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of capital flight is further explained by the portfolio theory in which investors choose between two
portfolios in order to maximize utility and wealth. Modern portfolio theory focuses on how risk-averse
investors build portfolios in order to optimize or maximize expected returns given a level of market risk.
Thus, risk is considered as an inherent part of higher returns. According to the theory, risks from stock
holdings are two, namely, systematic and unsystematic risks. Systematic risks are those that cannot be
diversified away and they include interest rates risk, recessions and wars, inflation etc. On the other hand,
unsystematic risks (also known as specific risks) are specific to individual stocks and can be diversified
away as more stocks are added to the portfolio. While it is easier to diversify away unsystematic risk,
systematic risk is the main contributor or determinant of capital flight in any country. The reason for this
is that systematic risk is undiversifiable. Inflation, exchange rate fluctuations, interest rates risk are a part
of systematic risk of holding assets in the domestic economy and, investors generally avoid these risks by
moving their assets from the domestic economy to other economies where systematic risk is expected to
be lower. This explains why capital moves relatively easily from developing economies where systematic
risk is higher to developed economies where systematic risk is lower. Portfolio theory therefore
encourages capital mobility and heterogeneous risk preferences. To what extent systematic risks affect
capital mobility and consequently capital flight, is an important issue for empirical analysis.
Model
Model 1 is employed in the analysis of the determinants of capital flight in Nigeria and South-Africa
using the least-squares dummy variable (LSDV) estimator technique. We analyzed data ranging from
1985 to 2007 in a balanced panel study. There are the tacit assumptions first that intercept and slope
coefficients are constant. We also made the assumption that the slope coefficients are constant but the
intercept varies over individuals. This is to account for individuality of each country or all effects which
are specific to a particular country which are not varying with time.
FLI α + αTBA+
α EXR+
α INF+
α DIF+
α GDP+
α DEB + α POL+
µ (1)
Where:
it = 0 1 it 2 it 3 it 4 it 5 it 6 it−1
7
FLIit is the total yearly amount of capital flight in million US dollars for country i. DEBit-1 is the total
debt stock in the immediate past year or year t-1 (in million US dollar) for country i. EXRit is the yearly
average exchange rate of one US dollar in Naira or Rand. DIFit is the difference between domestic short
term interest rate and the United States’ 3-month Eurodollar rate (or US 3-months Eurodollar rate minus
Nigeria or South-Africa’s short term rates). The persistence of nominal excess returns on foreign asset
relative to domestic asset and, any uncertainty about whether (relative) purchasing power parity holds,
encourages capital flight for country i. This is also known as the international arbitrage conditions. GDPit
is the growth of the economy as measured by the real GDP. The higher the level of growth in the
domestic economy, the higher the opportunity for domestic investments. The higher the opportunity for
domestic investments, the less the incentives to engage in capital flight (Ajayi, 1992: 55) for country i.
TBAit is the trade balance in million US dollars for country i. A bigger external sector is associated with
more transactions with foreigners. This provides more opportunities to circumvent foreign exchange
restrictions and encourage more funds to be deposited in international banks abroad. In other words,
success in trade is expected to trigger capital flight. This variable therefore is expected to have a positive
sign. INFit is the rate of inflation in the domestic economy in time t for country i. POLit is the political
stability defined as having value 1 during civilian rule and zero otherwise (military in Nigeria and
apartheid in South Africa) (see also Onwioduokit, 2001). µit is the random error term.
Empirical analysis and discussion
The data employed in this study are annual macroeconomic variables which include; capital flight,
foreign debt stock and trade balance obtained from the Economist Intelligence Unit [EIU] (2008)
it
it
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CountryData-Annual time series. Other data for the study include the exchange rates, interest rate
differentials, inflation rate and were obtained from the United Nations databases. The sample period is
from 1985 through 2007. Data for interest rate differentials was not directly available and as such direct
computation by the author was done (e.g. three-month US Eurodollar rate minus Nigerian 3-month’s
rate). The political stability was based on a dummy score of 1 for democratic rule and zero otherwise.
Table 1: Capital flight estimates for common coefficient panel data
Dependent Variable: FLI?
Method: Pooled Least Squares
Date: 06/27/10 Time: 21:36
Sample: 1985 2007
Included observations: 23
Total panel (balanced) observations 46
Variable Coefficient Std. Error t-Statistic Prob.
C -10028.64 3378.209 -2.968626 0.0052
TBA? -0.314002 0.130226 -2.411210 0.0208
EXR? 67.14812 24.50302 2.740402 0.0093
INF? -1.550655 38.21943 -0.040572 0.9678
DIF? 341.0033 151.9810 2.243722 0.0308
GDP? 0.068395 0.011734 5.828757 0.0000
DEB?(-1) 0.340783 0.106082 3.212456 0.0027
POL? -3747.281 1827.920 -2.050024 0.0473
R-squared 0.677462 Mean dependent var 1104.372
Adjusted R-squared 0.618047 S.D. dependent var 5607.900
S.E. of regression 3465.815 Sum squared resid 4.56E+08
Log likelihood -434.4833 F-statistic 11.40221
Durbin-Watson stat 1.977834 Prob(F-statistic) 0.000000
The result in table 1 shows the pooled equation (with common constant) for capital flight for Nigeria and
South-Africa. Trade balance, inflation and political stability are inversely related to capital flight while
exchange rate, interest rate differentials national output and debt lagged for a year are positively related to
capital flight. All these variables significantly explained capital flight in Nigeria and South-Africa. The
coefficient of determination showed that the independent variables were able to explain about 68 percent
variability in capital flight. The F-test revealed the joint significance of the independent variables in
explaining capital flight. However, because of the fact that each country has its own peculiar
characteristics in the explanation of capital flight, we reflect this in our fixed effect model of capital flight
and the result is presented below.
Table 2: Capital flight estimates for the least-squares dummy variable (LSDV) estimator
Dependent Variable: FLI?
Method: Pooled Least Squares
Date: 06/27/10 Time: 21:33
Sample: 1985 2007
Included observations: 23
Total panel (balanced) observations 46
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Variable Coefficient Std. Error t-Statistic Prob.
TBA? -0.285416 0.128769 -2.216502 0.0329
EXR? 40.66992 29.05769 1.399627 0.1700
INF? -12.41051 38.03183 -0.326319 0.7460
DIF? 246.1643 160.0041 1.538488 0.1324
GDP? 0.083018 0.014627 5.675763 0.0000
DEB?(-1) 0.302270 0.106598 2.835604 0.0074
POL? -3080.783 1837.213 -1.676878 0.1020
Fixed Effects
SAF—C -12544.75
NIG—C -8885.861
R-squared 0.698732 Mean dependent var 1104.372
Adjusted R-squared 0.633592 S.D. dependent var 5607.900
S.E. of regression 3394.552 Sum squared resid 4.26E+08
Log likelihood -432.9564 F-statistic 14.30234
Durbin-Watson stat 2.114734 Prob(F-statistic) 0.000000
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
From the table 2 above, the coefficient of determination shows that the independent variables explained
about 70 percent variability in the capital flight. The adjusted coefficient of determination which is a more
reliable measure of goodness of fit shows that the dependent variables explained about 63 percent
variability in the dependent variable. The F-statistic shows that the independent variables jointly
explained capital flight significantly. The constant variables for Nigeria is greatly different from that of
South-Africa and the above points indicate that the assumption of constant intercept for Nigeria and
South-Africa is unrealistic and that the country specific features are different for the two countries and
result 2 is better than 1.
A cursory look at the results indicate that Trade balance, inflation rate and political stability are inversely
related to capital flight while exchange rate, interest rate differentials, economic performance and oneyear
lag of debt are directly related to capital flight. These suggest that unfavourable trade balance is a
result of trade-mis-invoicing and this contributes immensely in fuelling capital flight. As inflation rate
increases, this contributes to capital flight. In addition, as there is political instability, capital flight is
fuelled. The positive relationship between capital flight and exchange rate implies that as the exchange
rate depreciates, capital flight is fuelled. Moreover, as the gap between the domestic interest rate and that
of the rest of the world widens, more capital escapes the economy. Lastly, the relationship between
capital flight and one-year lag external debt is a confirmation of the Dooley’s debt-flight revolving door
in which means that unrecorded capital outflows from developing countries take place simultaneously
with external borrowing (Ayadi, 2009 also confirmed this in his study).
Generally however, trade balance, domestic economic performance, one-year lag external debt and
political stability are the variables the significantly explain capital flight in Nigeria and South-Africa.
Implications of findings
Capital flight is the major contributor to the problem of trade deficits in the studied countries. This
therefore calls for proper accounting process for all the international transactions. In addition, as the
economy grows, capital flight is fuelled. Dooley’s debt-flight revolving door which means that
unrecorded capital outflows from developing countries take place simultaneously with external borrowing
is true in Nigeria and South-Africa. It leads one to deduce that external borrowing or external debt is a
determinant of capital flight in Nigeria and South-Africa.
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The postulates of the portfolio-choice theory which suggests that capital flight is driven by relative riskadjusted
expected return is true in the Nigerian case and that of South-Africa. In other words, differentials
in interest rates as measured by the risk-premium which is, the difference between short-term commercial
banks’ deposit rates in Nigeria and South-Africa and, the 3-month Eurodollar rate (representing the World
interest rates) significantly explains capital flight. The significant negative relationship reported is in
conformity with theory and practice. This implies that as the foreign rate grows over and above the
domestic rate, more funds are diverted away from the domestic economy and this contributes significantly
to the growth in capital flight in Nigeria and South-Africa.
Political instability is confirmed to be a significant factor fuelling capital flight in agreement with Ajayi
(2000). One limitation of this study is the inability to capture corruption level which is assumed to be a
major determinant of capital flight anywhere. More research efforts are needed on the appropriate
estimation of transparency or corruption index measures in Nigeria and South-Africa. Governments of
third world countries must therefore put in place measures to curb corruption and political instability in
order to reverse the tide of capital flight.
Based on the above therefore, Nigeria and South-Africa must initiate serious economic reforms which
targets macro-economic stability, removal of structural distortions and creation of a conducive
environment for enhancing domestic production capacity. For instance, targeting inflation in the
economy, stabilization of domestic currency and strengthening the international reserve base and the
competitiveness of domestic interest rate with the world interest rate. Price stability is the key to macroeconomic
stability and, investment is the driving factor of economic growth. Governments of developing
countries must strive towards reducing country risk or macro-economic risk so as to stop the tide of
capital flight. In addition, government in developing countries should reduce their fiscal deficits since this
induces over-borrowing and encourages capital flight.
In addition to the above, the existing tax structure must be made conducive by reducing disincentives to
productivity and incentives for tax evasion. Financial uncertainty in any economy must be removed so as
to curb further capital flight and to reverse the trend in its growth. Lastly, developing countries must
focus on investment in infrastructure and other productive aiding facilities. They must create an enabling
environment that motivates asset-holders to keep their wealth in domestic currency while repatriating
streams of flows from foreign assets.
References
Ajayi S. I. (1992) An Economic Analysis of Capital Flight from Nigeria. Policy Research Working
Papers, Country Operations. World Bank WPS 993 A.
Ayadi, F.S. (2009) “Determinants of Capital Flight in Developing Economies: A Study of Nigeria.”
Oxford Journal (OJ). Association of Business and Economics Research (ABER). Volume 8(1), pages 177
– 190.
Boyce, J. (1992) The Revolving Door External Debt and Capital Flight; A Philippine Case Study. World
Development. 20(3), 335-349.
Boyce, J. & Ndikumana L. (2001) Is Africa a Net Creditor? New Estimates of Capital Flight from
Severely Indebted Sub-Saharan African Countries, 1970-96. Journal of Development Studies. 38, 27-56.
Demir, F. (2004) A Failure Story: Politics and Financial Liberalization in Turkey, Revisiting the
Revolving Door Hypothesis. World Development. 32(5), 851-869.
Dooley, M. P. (1986) Country Specific Risk Premiums, Capital Flight, and Net Investments in Selected
Developing Countries. International Monetary Fund – Unpublished Memo IMF March.
Eryar D. (2005) Capital Flight from Brazil (1981 -2000). In G. Epstein (Ed.) Capital Flight and Capital
Controls in Developing Countries. Edward Elgar Spring.
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Edited by Emmanuel Obuah
Fatehi, K. (1994) Capital Flight from Latin America as a Barometer of Political Instability. Journal of
Business Research. 30.
Hermes, N. & Lensink, R. (1990) The Magnitudes and Determinants of Capital Flight: The Case of Six
Sub-Saharan Countries. Gronigen the Netherlands: University of Gronigen (September, Mimeographed).
Khan, M. S. & Haque, N. U. (1985) Foreign Borrowing and Capital Flight: A Formal Analysis.
International Monetary Fund staff paper. 32.
Mohammed, S. and Finnoff, K. (2004) Capital Flight from South-Africa, 1980-2000. TIPS/DPRU/Cornell
University Forum 2004. African Development and Poverty Reduction: The Macro-Micro Linkage.
Ndikumana, L. & Boyce, J. K. (2002) Public Debts and Private Assets: Explaining Capital Flight from
Sub-Saharan African Countries. PERI Working Paper, 32.
--- (2009) Capital Flight from Sub-Saharan Africa: Linkages with external Borrowing and Policy
Options. Forthcoming in International Review of Applied Economics.
Ng‘eno, N. K (2000) Capital Flight in Kenya. In S. I. Ajayi & S. K. Mohsin (Ed.), External Debt and
Capital Flight in Sub-Saharan Africa. International Monetary Fund. Chap.5.
The Economist Intelligence Unit (EIU) (2008) CountryData – Annual Time Series 1980 – 2007.
UNECA (2005) Capital Flows and Current Account Sustainability in African Economies. Workshop
Organized by Economic and Social Policy Division (ESPD). 21-22 September. 2005. Accra, Ghana.
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Abstract
Determinants of Import Demand of Rice in Uganda
Theodora S. Hyuha, thyuha@agric.mak.ac.ug
Department of Agribusiness and Natural Resources, School of Agricultural Sciences,
Makerere University, Kampala, Uganda.
Ekere William, wekere@agric.mak.ac.ug
Department of Agribusiness and Natural resources, School of Agricultural Sciences,
Makerere University, Kampala. Uganda
Grace Bantebya Kyomuhendo 2 gbantebya@ss.mak.ac.ug
National Crop Resource Research Institute
Jimmy Lamo
Department of Gender and Women Studies Makerere University, Uganda.
Rice has been singled out as one of the crops that play an important role in the economy. Its importance has become
more critical due to increasing demand which has created a gap in domestic supply. This study analyses
determinants of import demand for rice in Uganda using econometric methods. Own price and own consumption
have significant influence on rice imports in Uganda. Thus there is a need to increase supply through supporting
farmers to increase domestic rice production to stabilize prices, if the country is to be self sufficient in rice domestic
production through adopting high yielding varieties.
Introduction
Rice, particularly, the New Rice for Africa (NERICA) developed at West Africa Rice Development
Association (WARDA) center is a technology designed to address food security in Africa. Uganda
Government adopted it as one of the crops that can assist her to achieve the overarching objective of
poverty eradication and at the same time meet the MDGs of halving poverty in the country by 2015.
Before the introduction of NERICA, some Ugandan farmers were growing upland (local varieties) and
irrigated rice introduced by the Chinese Government in 1950’s.
Rice has been singled out as one of the crops that play an important role as both a food and a cash crop in
the country (Sabiiti, 1995; Ochollah et al., 1997; Jagwe et al., 2005). The crop ranks fourth among the
cereal crops, occupying a total of 119 thousand hectares of land with an estimated output of 162 thousand
tons (UBOS, 2008). Its importance has become more critical due to increasing demand both domestically
and regionally. It has been identified by the Government of Uganda as a crop which holds a key to
poverty reduction and household food security (UNRDS, 2009). This optimism is based on the following
observations: it competes well within the farming system (Jagwe et al., 2005); has higher yields than
those in Asia (Kijima et al., 2006); profitable (Hyuha et al., 2008) and there is increasing change in tastes,
especially in urban areas leading to high demand both domestically and regionally (Elepu, 2006).
To fulfill this demand, supply must increase which can come from domestic production or foreign supply.
Domestically, NERICA yields at farmer fields is 56 percent of that at the station (2.2 tones per hectare as
opposed to 5 tonnes per hectare) (Kijima et al., 2006), but according to UBOS (2008) it is estimated at
1.36 per hectare. However, for irrigated rice, the yields are higher and one study estimated to be 3 tons
per hectare. These figures depict a big potential for increased output. However, Hyuha et al (2007)
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results showed that rice farmers growing irrigated rice were not reaching their potential mainly due to
limited access to extension services. For NERICA farmers, the main factors affecting their yields were
water availability and limited experience in rice growing (Kijima et al., 2006). Assuming that these
problems are addressed could rice farmers increase production to meet demand.
Part of the solution lies in analyzing the production and import trends of the crop. Figure1 depicts the
trend of rice production and imports in Uganda spanning over the period of 40years (1961-2009). As the
figure shows, between 1961 and 1970, Uganda experienced a decline in production. As a result, the
imports increased by 15% over the period. In the following decade (1971-1980), production increased
leading to a decline in imports. However, in the next decade (1981-1990), production of the commodity
declined, meanwhile imports short up by 58%. This trend can be explained by the liberation war of
National Resistance Movement Government which was there in 1980-1986 and thereafter. During this
period, farmers may have been too scared to be in the gardens, especially in Eastern Uganda, a major
producing region, which was destabilized by rebel activities even after the end of the war. A period of
2001-2009 experienced a steep decline in imports, a sign of increased domestic supply. This period
coincided with the promotion of NERICA rice in the country.
Figure1: Trends in Rice Production and Imports in Uganda (1961-2009).
G
r
o
w
t
h
R
a
t
e
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
-10.00
15.21
Source: FAO Start, USDA
Trends in Rice Production and Imports
Growth rate Production
Growth Rate Imports
15.481
4.50
15.30
58
6.66 6.50
1961-1970 1971-1980 1981-1990 1991-2000 2001-2009
-5.27
-3.99
Nevertheless, given this trend described above and taking into consideration population growth rate, the
National Rice Development Strategy (2010) projects total production to more than double by 2018 and
therefore translating into decreased rice imports (table 1).
-0.27
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Is this optimism realistic? Therefore understanding the drivers of import demand for rice will inform help
policy on imports and what needs to be put in place to meet the domestic demand.
Table 1: Rice production, consumption and imports in Uganda (tonnes)
Year Production Population Consumption Total consumption
Milled rice (t)
(Million)
(t)
2008 163,150 28 8 224,000 60,850
2013 345,150 32.8 10.2 334,560 10,590
2018 509,600 38.4 13 499,200 10,400
Source: MAAIF, 2010.
(t)
Rice Imports
The main objective of this paper is to analyze parameters influencing rice import demand. It is through
knowing them that relevant policies can be adopted. The rest of the paper is covered as follows: The next
section covers methods and data analysis followed by results and discussions. The last section gives the
summary and conclusions
Method and data analysis
Nature, data sources and analysis
Data used in this study was sourced from Uganda Bureau of Statistics (UBOS), Bank of Uganda, Uganda
Revenue Authority, Ministry of Trade and Food and Agriculture organization (FAO). The study used
time series data for a period of 1961 to 2009. The data set consisted of the following variables; quantity of
rice imports IMP defined as the quantity of rice imported in various years, RICEPRO quantity of rice
produced in tons, RIPRIC is real price of rice imported into the country, MAIPRO is quantity of maize
produced in tons, POPN defined as midyear population of country, GDP defined as GDP per capita to
represent real disposable income and time to represent change in tastes and preferences. Since they were
time series data, they were transformed in logs and Cochrane-Orcutt procedure made to deal with
autocorrelation. Since, this were time series data, a pretest for stationarity using the Augmenteg Dikey-
FULLER test was done. A linear regression analysis was run with a dependent variable being quantity of
imported rice in the country.
The model
Econometric estimation of import demand functions usually relate real imports (m) to real income (GDP)
and the prices of the commodities(Deyak and Sawyer, 1988; and Carnoe, 1996).The implicit model was
of the form;
QM = f (Price of rice, Production of rice, population GDP per capita, time trend)
In modeling the import demand function, the log-log linear model was preferable to the linear model.
Therefore, the estimated empirical model had a log-log specification as follows.
Ln(IMP) = β0 +β1lnricepro+ β2 lnripric+β3lnMaipro+ β4lnPopn+ β5lnGDP + β6time+ε
Whereby
(t)
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Lnimp is log of rice imports, lnripric is the log of domestic price of rice, lnMaipro is the quantity of maize
produced domestically, lnPopn is the log of midyear population , lnGDP is log of GDP per capita time is
the time trend , is an error term which is assumed to be normally distributed with a zero mean and a
constant variance.
Table 2: Independent Variables and Expected signs
Variables Expected sign
Real price of rice imported -
Quantity of rice produced -
Quantity of maize produced -
Population +
GDP representing real disposable income +
Results and Discussions
The regression results are presented on table 3. From the results, the adjusted R 2 is 0.946 which implies
that variables included in the model explain 95% of variation in import demand. After correcting for
autocorrelation, the D-W statistic of 2.17 was obtained implying that there is no problem. The regression
estimates on own import price of rice, the population, consumption variables are statistically significant
and carry the expected signs. However, the quantity of maize produced has a negative expected, but not
statistically significant. The estimated coefficient on GDP per capita variable carries an unexpected
negative sign and not statistically significant.
The results show that a 1 % increase in import price of rice decreases the quantity of rice imports by
0.35% reduction in rice imports. This means that as the rice import price increases, it will have a positive
impact on domestic rice production. Bamidele et al, (2010) found the same results for Nigeria. A 1 %
increase in quantity of rice produced domestically will lead to decrease of 1.99%of domestic production.
In terms of population, a 1% increase in population will lead to approximately 4.08% increase in rice
imports. This implies that domestic rice production will have to be increased to meet the needs of the
increasing population given that Uganda is experiencing one of the highest (3.2%) growth rate in Africa,
if savings in foreign exchange have to be realized.
Table 3: Estimated coefficients for rice import demand
Variable Coefficients t-statistic P >t
Constant -37.385 -7.94 0.000
Own import price -0.349 -2.07 0.046
Quantity of maize -0.028 -0.15 0.882
Quantity of rice produced -1.999 -7.49 0.000
Population 4.082 11.31 0.000
GDP per cap -0.024 -0.13 0.882
R 2 = 0.954 Adjusted R 2 = 0.946
Durbin- Watson 2.17
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Summary and conclusions
The implications of the results are instructive. That in order for the country to be self sufficient in rice, the
Government of Uganda has to deal first of all with high population growth rate. Currently, Uganda has
one of the highest population growth rates of 3.2% per annum. Although it has been urged in some
government circles that high population growth rate is healthy for the economy because of many reasons
such as markets for goods produced, it is always not so. This argument is flawed on a number of grounds.
The population can be good for the economy if and when it has high purchasing power. But in an
economy where poverty has been increasing, this argument falls flat on its face. Thus, the Government
needs to increase its efforts in implementing policies on controlling high population growth rates through
provision of family planning services. A policy such as promoting use of condoms has a double benefit; it
is not only good for population control but also may lead to reduction of HIVAIDS and STDS. Reduced
high population growth rate will also have the desired effects of saving scarce foreign exchange for other
pressing needs.
The results also show that rice imports are negatively affected by import prices. This implies that as the
imported prices increase, less quantity is imported. In view of the fact that the Uganda shillings has been
depreciating against major currencies lately, this implies domestic prices will be sky rocketing for all
imported commodities including rice. Thus, this may be good for our farmers, if they could produce
enough to substitute for the imports. But as observed in other studies, the Government of Uganda is not
giving adequate support to the sector in terms of infrastructure and extension services. Thus it is
recommended that the Government of Uganda increases support to the sector if the stated goal of rice self
sufficient is to be realized.
References
Agricultural Policy Committee (APC) (1997). Economics of Crops and Livestock Production,
Agricultural Policy Secretariat, Ministry of Planning and Economic Development
Bamidele, F.S., , O.O Abayomi. and O.A Esther (2010). “Economic Analysis of Rice Consumption
Patterns in Nigeria”. Journal of Agricultural Sciences Tech. 12, 1-11.
Carone, Giuseppe. (1996). “Modeling the U.S. Demand for Imports through Cointegration and
Error Correction.” Journal of Policy Modeling 181−48.
Deyak, Timothy A., Sawyer, W. Charles., and Sprinkle, Richard L. (1988) “An Empirical Examination of
the Structural Stability of Disaggregated U.S. Import Demand.” The Review of Economics and Statistics
337−41.
Elepu, G. (2006). Value Chain Analysis for the Rice Sub-sector in Uganda. A consultancy report
submitted to ASPS Agribusiness Development Component, USAID. Kampala.
Hyuha, T.S., B. Bashaasha,. E. Nkonya, and D Kraybill. (2007). “Analysis of Profit Inefficiency in Rice
Production in Eastern and Northern Uganda”. African Crop Science Journal. 15(4) 243-253.
Kijima, Y., D. Sserunkuuma and K.Otsuka, (2006). How Revolutionary is the “NERICA Revolution”?
Evidence from Uganda. The Developing Economies, XLIV (2) 252-67.
Jagwe, J., G.Okoboi, . E.Arayo, and S.Abele, (2005). Market Opportunities Identification study for 5
selected key crops in Kabalore District, Western Uganda. CRS—Food Net Uganda. A report to Catholic
Diocese of Fort portal Development Bureau Uganda.
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Ocholla, A.R., M.W Ogenga-Latigo, and E.N.B Nsubuga. (1997). Impact of Upland Rice Cultivation on
Crop Choice and Income of Farmers in Gulu and Bundibugyo districts. African Crop Science
Proceedings, 3, 1407-1411.
Sabiiti, A.G. (1995). An Economic analysis of Production of Cow Pea in Northern and Eastern Uganda.
unpublished Masters Thesis. Makarere University.
Uganda Bureau of Statistics, 2008. (2008) Statistical Abstract. Retrieved on 28/07/2010 www.ubos.org
Acknowledgements
The authors are grateful to CARNEGIE Phase III Competitive Research Grants 2008-2011 for sponsoring
the study.
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Project Management for Development in Africa: Why Projects are Failing and What Can Be Done
About It
abstract
Lavagnon A. Ika lavagnon.ika@uqa.ca
Université du Québec en Outaouais, Département des sciences administratives
C. P. 1250, succ. B. Gatineau, Québec, Canada.
This paper discusses international development (ID) projects and project management (PM) problems in ID, and
suggests they may fall into four main traps: the one-size-fits-all technical trap; the accountability-for-results trap;
the lack-of-PM-capacity trap; and the cultural trap. Accordingly, it proposes an agenda for action, proffering to
move away from the prevailing one-size-fits-all PM approach, to refocus PM for ID on managing objectives for
long-term development results, to increase the aid agencies’ supervision efforts in failing countries, and to tailor
PM to African culture(s). Finally, this paper suggests a number of ways in which PM literature could support
African ID projects.
Introduction
Fifty years after their independence, many African countries have seen their economies overtaken by
those of countries that were worse off in the 1960s. Just 30 years ago, China lagged behind many African
countries including Malawi, Burundi and Burkina Faso on a per capita income basis. Yet during the same
period, approximately US $ 1 trillion of aid has been transferred to Africa. On the dawn of a sixth decade
of development aid, the enthusiasm of the first years has given way to controversy and even
disillusionment. According to aid proponents, it is working albeit not perfectly, and a ‘big push’ – more
aid – will surely turn things around in Africa 4 . Opponents argue, however, that aid is not effective as there
is little good to show for it (Easterly, 2006). Others argue that though aid may still be part of the solution,
left alone it will fall short of addressing the needs of the ‘bottom billion’ (Collier, 2007). Still others argue
that it is actually part of the problem (Moyo, 2009). Though the heated debate among researchers and
practitioners regarding the effectiveness of aid is still unresolved, two questions challenge authors and
policy makers: does aid contribute to international development (ID) in terms of growth and poverty
reduction? Do the projects and programmes achieve their specific objectives? In particular, the scant
literature that considers whether ID project success or failure primarily depends on countries’ political
economy or project characteristics fails to achieve consensus (Chauvet, Collier, and Duponchel, 2010).
Although both perspectives are complementary, the focus of most ID research to date has been very
narrow, examining projects and project management (PM) in general, despite the size of this industry
sector ($ 120 billion US a year in 2009), project proliferation, the importance of projects in the prevailing
programme approach, and the questionable outcomes of projects (European Commission, 2007; Ahsan
and Gunawan, 2010; Ika, Diallo, and Thuillier, 2010). Whether more aid’ (e.g. the G8 summit in 2005)
or ‘dead aid’ (Moyo, 2009), whether they are funded by national governments or international
organizations, projects are still relevant in ID. Paradoxically, while the fields of PM as well as ID date
back to the 1950s and the 1960s, they have grown in parallel. ID has contributed to the wealth of PM
knowledge, with project feasibility studies and evaluations. Although PM has been heralded as promising
for ID (Stuckenbruck and Zomorrodian, 1987), underdevelopment in Africa has worsened due in part to
poor PM (Eneh, 2009). However, there is a gap in the literature as to the contribution of PM as a field of
4 e.g., in July 2005 at Gleneagles, the G8 summit committed to doubling aid to Africa.
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knowledge to ID (Diallo and Thuillier, 2004, 2005; Ika, 2005; Khang and Moe, 2008; Eneh, 2009; Ika
and Lytvynov, 2009; Ika et al., 2010). This paper examines the contribution of PM to ID. The
contribution of this paper is two-fold. First, it aims at making ID projects more effective, and as such it
suggests a number of ways in which PM literature could support design and implementation of ID
projects. Second, its insights could be of benefit to PM literature insofar as it looks at projects and project
management in the specific and non-traditional area of the expanding domain of PM – International
Development. This paper discusses ID projects, PM challenges and problems in ID, and the potential
contribution of PM research to ID.
What are international development projects?
Let us start here with a typical and current ID project funded by the World Bank. Since this falls under the
programme approach, it is generally a subset of a programme or a long-term development plan (five or
ten years). To ensure the realization of the project specific objectives, the design, implementation,
monitoring and evaluation of the project are carefully undertaken. In the design phase, the World Bank
project supervisors define projects with regard to the missions and visions of the recipient country as
described in its national development plan or poverty reduction strategy paper. Hence, they ensure that
policies, strategies, programmes and project objectives are aligned. Once the World Bank project is
properly designed and approved by the World Bank’s Board, it enters the implementation phase. Then, it
is subject to strong procedures or guidelines such as stringent reporting, monitoring and evaluation
requirements. Broadly speaking, projects and project management (PM) have always been present in the
field of international development (ID). The traditional approach to ensure that aid is spent properly is
through projects. Despite a shift since the mid-1990s from the long-time prominent project approach to
the current dominant programme approach, PM is still important. Indeed projects are relevant in
developing countries with weak institutional capacity, as a programme approach would require that
countries show some managerial and organizational maturity (European Commission, 2007; Ika et al.,
2010). Many projects are thus implemented in a managerially, economically and politically different
context from the developed countries. This is particularly the case of ID projects funded by ID agencies
such as multilateral ones like the World Bank, the United Nations, European Union, etc., or bilateral ones
like the USAID, CIDA, French Cooperation, etc. and many governmental and non-governmental
organizations. They deliver goods or services that are intended for public use. These projects range from
small, medium, to large or extra large public projects and cover all sectors of developing countries in sub-
Saharan Africa, North Africa, the Middle East, Southeast Asia, Central and Latin America, and Central
Europe. These sectors typically include infrastructure, utilities, agriculture, transportation, water,
electricity, energy, sewage, mines, health, nutrition, population and urban development, but also
increasingly education, environment, social development, reform and governance, etc. (Diallo and
Thuillier, 2004, 2005). Consequently ID projects share at least some characteristics with standard
projects. However, ID projects differ much from standard projects in the PM literature and practice. ID
projects connote the enactment of social change in the life of poor people as well as a specific purpose,
size, location, and timeline. They are bound by a common goal of contributing to economic growth or
poverty reduction. As such, they are generally not-for-profit projects. ID projects are altogether technical,
social, and political projects. They are social because they aim to directly or indirectly improve the wealth
of the population, and political because the choice of project options, such as locations or target-groups, is
often a political decision made by ID agencies, donors, national political leaders and policy makers
(Diallo and Thuillier, 2004, 2005). The lack of market pressures and the intangibility of project objectives
make ID projects good targets for political manipulations as donors and political leaders may push for pet
projects for political gains (Khang and Moe, 2008). Different types of ID projects exist. They could be
blueprint or physical capital-based projects vs. process projects or human-capital based projects (Ika and
Hodgson, 2010). Blueprint projects are infrastructure projects that include typical ID projects in the 1950s
and the 1960s or projects that must provide a package of goods and services for low-income beneficiaries,
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especially in rural areas as in the 1970s. The process projects typical of the 1980s, include projects like
policy advice, education, health, and institutional building, etc. ID projects may also be hard vs. soft
projects, or autonomous projects vs. projects as programme components (Ika and Hodgson, 2010). ID
projects may equally be systematic projects or emergency projects in post disaster or post-conflicts
situations. ID projects typically last from three to five years but the funding can be up to 10 years (Diallo
and Thuillier, 2004, 2005). ID projects are funded by loans or outright grants. There are generally two
categories of stakeholders for standard projects and in particular for industrial projects: the clients, who
pay for the project and benefit from it, and the contractors, who get paid by the client to implement a
project and deliver expected results. In addition, ID projects require at least three separate key
stakeholders: the funding agencies, who pay for but do not receive project deliverables, the implementing
units who are involved in their execution, and the target beneficiaries, who expect some benefit from
them (Khang and Moe, 2008). Diallo and Thuillier (2004, 2005) propose a more complex network that
includes seven project stakeholders: the national project coordinator who is the true project manager (also
known as national project coordinator or director), the task manager of the ID agency (also known as the
agency project supervisor or task team leader), the national supervisor, a steering committee,
subcontractors and suppliers of goods and services, beneficiaries, and population at large. ID projects are
generally managed either by national and autonomous PM units or by national departments. They may
also be implemented by executing agencies, including private companies or consulting firms, nongovernmental
organizations or partnering ID agencies. Like in standard projects, the PM unit mainly
manages administrative processes. Project teams may be involved in procurement, organization and
control of activities carried out by engineering firms, consultants, subcontractors, etc. (Diallo and
Thuillier, 2004, 2005). ID projects typically follow transactional processes and strict guidelines that are
laid down by ID agencies to ensure that rigor and transparency are maintained in how contracts are
awarded and how tasks are performed. Hence the role of project sponsors or task managers for example is
somewhat unclear as they will not interfere with the day-to-day management of projects but they are
expected to be updated on every step of projects; and project managers should request authorization with
a ‘no-objection’ from the former when it comes to proceed with major transactions (terms of references,
short lists, contract awards, etc.). When the task managers do not grant a no-objection, the reasons may be
that project teams have strayed too far from guidelines; there is inadequate planning of a task; or nonconformance
with project plans. And in such instances, project managers return to the drawing board and
repeat the whole process (Diallo and Thuillier, 2004, 2005).
Overall, the unique environment in which ID projects take place render them very specific. ID projects
are characterized by a high complexity and subtleness, the relative intangibility of their ultimate objective
of poverty reduction, their large array of heterogeneous stakeholders, the divergent perspectives among
these stakeholders, the need for compromise, their appeal in the eyes of politicians, the profound cultural
and geographical gap between project designers and their beneficiaries, and the prevalence of rather
bureaucratic rules and procedures (Kwak, 2002; Khang and Moe, 2008; Ika et al., 2010; Ika and Hodgson,
2010). While none of these conditions are necessarily unique to ID projects and project management,
collectively they result in a specific set of challenges and problems facing PM in ID, which we address in
the following section of this paper.
International development project management challenges and problems
Generally in ID the poor performance of projects is common, and the disappointment of project
stakeholders and beneficiaries seem to have become the rule and not the exception in contemporary
reality. But dissatisfaction with project results and performance dates back to the 1950s (see, for example,
J.F. Kennedy’s speech to Congress in 1961). Project failure rate at the World Bank has been over 50% in
Africa until 2000 (see the 2000 Meltzer Commission). The World Bank’s private arm, the International
Finance Corporation has found that only half of its Africa projects succeed. The Independent Evaluation
Group (IEG), in an independent rating, claims that in 2010, 39% of World Bank projects were
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unsuccessful (e.g. Chauvet et al., 2010). Many other agencies and donor countries have not done much
better. PM in ID faces a range of challenges that would explain this failure rate. They are described as
‘the notorious and critical implementation problems’, some amenable to change and others virtually
intractable (Gow and Morss, 1988; Kwak, 2002; European Commission, 2007; Ika and Hodgson, 2010).
Unsurprisingly, many problem areas, categories or taxonomies have been proposed in the literature as
serious obstacles to ID projects. Here we suggest that they fall into three main categories:
structural/contextual issues; institutional/sustainability issues; managerial/organizational issues (Gow and
Morss, 1988; Kwak, 2002; European Commission, 2007; Ika and Hodgson, 2010). First, since ID projects
are part of a broader context, they face serious problems which may be political, economic,
physical/geographic, socio-cultural, historical, demographic, and environmental. Awareness of these
problems is a first step in their solution. Second, institutional and sustainability problems such as endemic
corruption, capacity building setbacks, recurrent costs of projects, lack of political support and
institutional capacity to deliver sustainable outcomes, lack of implementation capacity by donors,
incompatibility between the different countries and donors management systems, overemphasis on highly
visible quick results from donors and political actors, and risk of collusion between the principal (agency
bureaucrats or project sponsors) and the agents (project managers) with a double moral hazard at stake (a
conflict of interest potentially detrimental to the effectiveness of aid and an asymmetric information that
renders difficult the evaluation of donors and recipients countries’ activities). Consequently many project
failures are more institutional than technical (European Commission, 2007; Eneh, 2009; Ika and
Hodgson, 2010). This is particularly the case of stand-alone or autonomous projects that bypass local
institutions only to break down budgetary, organizational and managerial structures in the aid dependent
countries (European Commission, 2007; Ika and Hodgson, 2010). Third and last, ID projects all too
frequently fail to achieve their goals due to a number of problems that are of a managerial/organizational
nature (Kwak, 2002; Ika and Hodgson, 2010). Many project failures are attributable to imperfect project
design, poor stakeholder management, delays between project identification and start-up, delays during
project implementation, cost overruns, poor risk analysis, difficulties to involve local beneficiaries due to
literacy, distance and other communication problems, coordination, monitoring and evaluation failure,
etc. (Diallo and Thuillier, 2004, 2005; Ahsan and Gunawan, 2010; Ika and Hodgson, 2010).
In sum, we argue that PM problems in ID would fall in four main traps: the ‘one-size-fits-all’ technical
trap; the accountability-for-results trap; the lack-of-PM-capacity trap; and the cultural trap. First,
similarly to the standard PM, PM in ID seems to be dominated by a prescriptive, rational, and
instrumental ‘one-size-fits-all’ approach that is grounded in the tradition of fields such as engineering,
architecture and economics and that assumes that all types of projects and project models share the same
characteristics (Ika et al., 2010; Ika and Hodgson, 2010). Not surprisingly, the current donor-recipient
paradigm requires rigorous project plans and a robust toolbox to the extent that there is an overemphasis
on financial and technical feasibility at the expense of social, cultural, and political feasibility
(Stuckenbruck and Zomorrodian, 1987; Ika and Hodgson, 2010). Second, there is too much emphasis of
aid agencies on strong procedures and guidelines, and accountability-for-results but little attention to
managing-for-results. Although results-based management as an approach and a tool has been around in
ID for a decade, it has been too focused on reporting to external stakeholder audiences and little on using
performance information in internal management decision-making processes to achieve better results (Ika
and Lytvynov, 2009). Third, there is a lack of PM capacity in ID. In fact, while aid agencies turn to
projects instead of programmes in failing countries with weak governance and poor policies, under the
pressure of efficiency to reduce their administrative costs relative to money they disburse, they would
reduce their supervision efforts; this harms the achievement of the development goals and objectives in
failing countries where projects are known to be much more likely to fail (Collier, 2007). On the other
side, national governments or organizations in Africa also lack PM capacity and thus experience lack of
skilled personnel in PM. Fourth, PM tools and approaches in ID are yet to be tailored or at least harnessed
to the cultural context of Africa (Muriithi and Crawford, 2003; Ika et al., 2010). The traditional top-down
approach that dominates development interventions fails to take into account major decision-makers and
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to address the problem of rationality and the lack of local commitment to the extent that the projects are
not considered as ‘local’ projects but instead the ‘donor’ ones (Ika and Hodgson, 2010). Finally, although
ID projects are very specific and their environment unique, we argue that these challenges, problems and
traps are not entirely specific to PM in ID and therefore we contend that the standard PM literature may
contribute to ID. Hence ID project practitioners may turn PM in ID into PM for ID. We now take
argument on how to address these PM traps and on the potential contribution of PM to ID.
Contribution of project management to international Development
More recently, Easterly (2006) has called our attention on the debate between the loosing ‘Planners’ and
the winning ‘Searchers’ in development aid. He contends that Planners design big plans (e.g. Millenium
Development Goals) to address big problems (e.g. the needs of the ‘bottom billion’ poor people). He adds
that Planners set forth big goals such as making poverty history but fall short when it comes to implement
these strategies through projects at a reasonable cost with the available means. He argues that the
Searchers do many useful things to meet the desperate needs of the poor and thus find what does work to
help them. Finally, he suggests that as Searchers do not know the answers to the big problems of
development and that poverty issues are altogether political, social, historical, institutional, and technical
factors, they turn to individual, specific, and effective homegrown initiatives, solutions and projects such
as getting medicines to dying children. Whether we are proponents of big plans or advocates of change in
Africa, whether we are Planners or Searchers, we may rely on project management (PM) to achieve our
goals. That is why almost 25 years ago, PM has been hailed as ‘the promise for developing countries’:
‘The potential of the project management approach is so promising that, even though it must be drastically
modified or tailored to adapt to local cultures, it can be extremely important to the future of developing
countries’ (Stuckenbruck and Zomorrodian, 1987, p. 174). Currently, Africa is replete with numerous,
sound, wonderful, brilliant, captivating, impeccable, colorful, and well-written development visions,
policies, programmes, plans and projects. Alas, most of the bottom billion people are from Africa (Collier,
2007), underdevelopment is more of poor implementation of ID projects than lack of visions and
programmes, and abandoned, failed, or poor performing ID projects are common in Africa and often
rubbish its development (Eneh, 2009). For that reason, PM has failed to deliver its promise to development
and to meet the needs of poor people in Africa. The development practitioners would need to enhance PM
if they would like to make this promise a reality. To that end, we propose an agenda for action, draw on
the insights from the standard PM theory and practice, and specifically suggest a few ways to address the
PM traps in ID. First, PM for ID should refrain from using the universalist one-size-fits-all approach and
draw insights from alternative PM approaches, such as the eclectic contingent and critical perspectives.
Indeed, context in general, type of project, and type of design, supervision, and implementation approach,
matter (e.g., Ika and Hodgson, 2010). Second, PM for ID should refocus on managing objectives for long
term development results and shy away from its emphasis on visible, short term outcomes, and efficiency.
In this regard, the internal function and use of results-based management need to incorporate big
development goals and key success criteria and factors into the design of ID projects for better chances of
project success (Ika and Lytvynov, 2009). Third, project supervision efforts should increase in aid
agencies and notably in failing countries with weak governance and poor policies. In fact, it is through
supervision that agencies can ensure that development results are achieved. To that end, agencies need to
include in their personnel more people with PM skills and academic background. Regrettably, the World
Bank, for example, is still dominated by economists. Fourth, there is a need for an African PM approach
that is tailored to African values, culture(s), and sociality. In fact, very little has been written about PM in
Africa. It has long seemed to us problematic, and even embarrassing that so much of Africa’s PM
problems should be studied by non-African, and non-African men in particular. Africa needs PM
specialists that address and debate how to create or adopt PM concepts, tools, techniques, and approaches.
Last but not least, Ika and Hodgson (2010) have shown that the same three moments, three approaches
that describe chronologically and historically standard PM are insightful in PM for ID, despite its
specificity and that it is hence possible to describe and summarize PM history in ID as moving from a
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traditional, instrumental and monolithic approach better suited to blueprint projects; towards contingent
approaches that are better suited to process projects; and finally pointing towards the potential contribution
of a critical approach that draws on broader critical and post-colonial discourses to embed the macropolitical
context in our understanding of the operation and impact of ID projects. Therefore ID could learn
a lot from PM research despite the recurring gap between theory and practice. Here are a few research
paths that may deserve attention:
1) The notion of project, under the new programme approach orthodoxy, need to be revisited and
PM for ID would benefit from a systematic comparison between project and PM figures between
project and programme approach.
2) If an ID project is, first and foremost a project, one could argue that standard PM would offer
useful methodologies, approaches, and tools and techniques for ID. To what extent the nine
Project Management Institute (PMI) areas of knowledge and its 42 PM processes apply to the
specificity of ID projects?
3) There have been few empirical works on the process projects and project success factors such as
flexibility, participation, ownership, coordination, and harmonization of procedures deserve their
fair share of papers in the PM literature.
4) Considering the increasing importance of the results-based-management approach in ID, there
should be studies that address its potential contribution to project identification and design, and
project/programme success in ID.
5) In line with the recent developments in the PM field on portfolio, programme, project strategy,
the question of strategic alignment of programmes and projects with the big goals such as the
goals of the agencies and the Millenium Development Goals should be addressed.
6) More research is needed on ID project success criteria and success factors and the
interrelationships between the former and the latter.
7) In line with the recent works on project sponsorship and the relationship between project sponsors
and managers in the PM literature, studies should investigate the project supervision factor and
address the collaboration between project supervisors and managers in the context of ID.
8) Considering the contribution of the critical theory to PM literature, authors should address the
alternative approaches to the prevailing universal approach to PM in ID.
9) Considering the important role that NGOs play in ID, more studies are necessary to understand
the conceptions that these players hold on project success, success criteria and success factors and
compare these conceptions to the perceptions of the aid agencies.
10) The question of organizational learning in PM for ID deserves attention to shed light on the
experience of aid agencies in utilizing project success factors in the management of future
projects.
Conclusion and Implications
This paper explores the contribution of PM to development in Africa. It is based on three established
facts: both the field of PM and ID date back to the 1950s and the 1960s and have grown in parallel with
very few attempts to bridge the divide and compare theory and practice in the two domains; more than
fifty years after their independence, many African countries have been overtaken in development by some
countries that were worse off than they were in the 1960s; and approximately US $ 1 trillion of aid has
been transferred to Africa with little good to show for it. As underdevelopment in Africa is more of poor
implementation than lack of big development goals and poor performance of ID projects is pervasive, this
paper suggests that PM problems and challenges in ID would fall in four main traps: the ‘one-size-fits-all’
technical trap; the accountability-for-results trap; the lack-of-PM-capacity trap; and the cultural trap. This
paper goes on to propose an agenda for action to address these traps and contribute to making ID projects
more effective and efficient for the billion dollars investments in Africa. This paper then proposes to
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move away from the prevailing one-size-fits-all PM approach in ID, to refocus PM for ID on managing
objectives for long-term development results, to increase the aid agencies’ supervision efforts in failing
countries, and to tailor PM to African culture(s). Finally, this paper suggests an agenda for research, i.e. a
number of ways in which PM literature could support design and implementation of ID projects in Africa.
References
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Abstract
The Changing Requirements of FDI in Sub-Saharan Africa.
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Emmanuel Cleeve, E.Cleeve@mmu.ac.uk
Department of Economics, Manchester Metropolitan University, UK
In this study, the changing requirements of FDI inflows to sub-Saharan Africa (SSA) are analysed. It uses three
periods, 1985, 1995 and 2005 to make a snapshot assessment of the changing determining factors of FDI inflows to
SSA. Several (flow and stock) measures of human capital is used, first to assess whether labour quality (education)
is becoming more significant in explaining FDI flows over the three periods, indicating a shift in the type of FDI
flows to SSA. Second, to determine which of these measures reflect better the fluid socioeconomic and political
situations in SSA for policy decision making? Our results show that the influence of human capital indicates a shift
towards FDI requiring higher labour quality or skills. The study also shows that the traditional variables that
influence FDI are all significant, but their levels of influence tend to decline over the three separate periods.
Introduction
The importance of foreign direct investment in sub-Saharan Africa cannot be emphasised enough. Apart
from the benefits that FDI brings, such as management and marketing skills, increased job opportunities
for the local workforce and technological improvements (spillovers), it also brings the most constraining
element to its economic progress; capital. Regardless of the level of development achieved, all SSA
countries lack investible capital, particularly when overseas development assistance (ODA) to SSA was
on a steep decline. World Bank (2000, 2003) put this decline at 41% between 1990 and 2003. This has
reversed over the period 2005-2008, when ODA fluctuated upwards between $35 billion and $45 billion.
This however represents a $14 billion shortfall on the original Gleneagles estimate that aid would increase
by US$25 billion a year from 2004 to 2010 (OECD/DAC statistics, 2010).
Despite the large increase in FDI flows to Africa in recent years, these flows represent only a small
proportion of the total flows to developing countries. Average annual FDI flows increased from $2.2
billion in 1980 to $15 billion during the period 2000-2004. In contrast, Africa’s share of global flows fell
from 2.3% in 1980 to about 1.5% during 2000-2004. As a percentage of total flows to developing
countries, Africa’s share fell from 10% in 1980 to 7% during 2000-2004. The same declining pattern
appears in the continent’s flow per capita (UN, 2005). Leading up to the financial crisis, FDI inflows to
Africa had been growing strongly since 2002. In 2008, sub-Saharan Africa received $63.6 billion in FDI,
$24 billion of which was directed to North Africa. Africa’s share of global FDI flows registered a
significant increase to 5.2% of global FDI (up from 2.9% in 2007) (Africa Economic Outlook, 2010).
Estimates for 2009 indicate a sharp fall in FDI to Africa of 36% (echoing an overall fall in FDI to
developing economies by 34% over the same period) (UNCTAD, 2009).
The World Bank, in several of its publications, has attributed the relatively poor FDI performance in
Africa to the negative image the region holds among many foreign investors (see. For instance, the subcontinent
tends to be associated with political turmoil, economic instability, diseases and natural disasters.
Internal and external armed conflicts are its key characteristics. Military coup d'états are also common.
Moreover, spillover effects from neighbouring countries’ instability often in some way affect those
countries that experience internal stability. This unstable situation continues today.
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Within the continent, the distribution of FDI flows is also uneven. For example, in the early 2000s, the
major recipients of flows in the region were South Africa, Morocco, Nigeria, Angola, and Algeria. They
invariably accounted for half of the total inflows to the region. The primary sector remains the most
important destination for FDI flows into the region, accounting for more than 50% of inflows from major
investors to Africa over the late 1990s and early 2000 period. Within the primary sector, oil and gas are
the most important industries. Since 2000, there has been an increase in inflows into the tertiary (service)
sector and sometimes attracted more inflows than the primary sector. These patterns continue today, with
the top FDI destinations for 2008 were Nigeria (USD 20.3 billion), Angola ($15.5 billion), Egypt ($9.5
billion) and South Africa ($9 billion), this is followed by Libya, Tunisia, Algeria, Democratic Republic of
Congo (DRC) and Sudan. As ever, the most attractive countries for investment tend to hold significant
natural resource endowments, active privatization programmes, liberalized FDI policies and vigorous
investment promotion activities.(African Economic Outlook 2010; UNCTAD 2010)
This growth in interest in FDI in many African countries can compare only with the high expectations of
what FDI can achieve in terms of its contribution to economic and social development. The effect of FDI
and its quality depend significantly on domestic policies, especially measures to develop human capital,
and social, physical and institutional infrastructure. The recent surge of FDI inflows to the Africa region,
particularly over the period 2001-2007, followed from, among other things, a more positive climate for
investments. These changes got support from reforms of policy frameworks for FDI, including changes in
regulations related to natural resource exploitation. A number of African countries also have received
commitments for increased aid from the international community. International donors have also offered
support to regional development initiatives that boost infrastructure development and provide more
market access, all of which contribute to FD inflows. (UNCTAD 2008)
The objective of this paper is threefold; firstly, it identifies the role of human capital, among other factors,
in determining the size of FDI. Secondly, which measure of human capital is best suited to the structure
and characteristics of SSA, the target area of this research? Thirdly, the study tries to identify whether the
location requirements for FDI inflows have changed over time, and in which direction.
The rest of this paper is presented as follows: Section two reviews the role and determinants of FDI in
SSA; section three presents the model to be analysed, describes the data, data sources and the variables to
be analysed; section four analyses the empirical results; and the conclusions are presented in section five.
FDI determinants in Sub-Saharan Africa
There is a vast literature on the factors that determine the inflow of FDI into countries, depending on their
levels of economic, social and political development. The direction of influence and levels of significance
of these factors might prove decisive for countries with slow or stagnant growth in their economic
development, like those in Sub-Saharan Africa.
These factors and their influence tend to change over time and with development (see for example
Dunning 1998). Also of importance is the mode of entry of multinational enterprises (MNEs). This may
determine which factors play significant roles in the size FDI inflows, particularly as the pattern and
requirements of FDI/MNEs change over time. In terms of the composition of FDI flows, there is a
growing body of evidence, which indicate that, in recent years, the composition of flows is shifting away
from countries with large oil and mineral reserves towards the industrial and service sectors, such as
textiles, telecommunications and banking. This in itself means that the factors that determine FDI in SSA
are also changing, away from market and resource seeking to a more efficiency seeking type.
FDI has grown into a major source of capital in the region thanks to SSA governments’ significant policy
efforts. Attracting FDI has required governments’ commitment to improving institutional frameworks,
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Edited by Emmanuel Obuah
which can serve to increase competition and provide technological spillovers. As such, FDI can provide
successful incentive schemes for improved business environments in African countries. Nevertheless,
while FDI inflows are important as a stable and long-term source of capital to promote industry and
commerce, the majority of FDI to Africa remains targeted to the primary sector in a relatively limited
group of countries. Thus, the broader developmental impact of FDI backed projects is often limited.
In various publications, UNCTAD have shown that market size and access to natural resources have been
crucial determinants of FDI flows to SSA. This is far from surprising, given that SSA countries that have
benefited from the increased inflow of FDI to the sub-continent have been those with large domestic
markets and those that possess large amounts of natural and mineral resources, e.g. Nigeria and South
Africa (see for example UNCTAD 2002; Cleeve 2008).
The relationship between market size, measured by GDP, and FDI inflows show that in 1996-97, South
Africa, followed by Nigeria and Cote d’Ivoire have the largest GDP and hence the largest inflows of FDI.
On the other extreme, Sierra Leone, Niger and Burundi, with the lowest GDP, attract the lowest FDI
flows (World Bank 1999). Furthermore, for a sample of 29 SSA countries, the correlation coefficient
between FDI inflows and market size is almost perfect at 0.99. Market size and natural resource
endowments continue to be significant for the large and well-endowed economies, but other factors are
becoming more important within the sub-continent, so much as to reduce the correlation between FDI and
those traditional factors.
Apart from natural resources and market size, Morisset (2001), using FDI climate as the dependent
variable, showed empirically that GDP growth rate and trade openness are significant and positively
related to the investment climate in SSA. Trade openness, being significant, confirms and supports the
policy of trade liberalisation, now being pursued by the majority of SSA countries.
SSA countries that have been able to establish a stable macroeconomic and political environment for a
period of time, have improved and developed their ICT position, have successfully implemented trade
liberalisation and privatisation programmes and have adopted international treaties relating to FDI, tend to
have attracted FDI in areas other than natural resources and market access. Two SSA countries that have
improved their investment environment are Mali and Mozambique. These countries have attracted more
FDI than Cameroon and Kenya, which have larger local markets and abundant and a wide range of
natural resources (UNCTAD 2002).
In order to attract an increased flow of FDI into their economies, many SSA countries become engaged in
what Wheeler and Mody (1992) refer to as “location tournaments”, where these countries compete against
each other to attract foreign investment. Oman (2000) describes this tournament of outbidding each other
with more incentives as “the prisoner’s dilemma nature of the competition creates a permanent danger of
such war.” (p. ii). Ross and Chan (2002) believe that the outcome of these tournaments is a “race to the
bottom”, where SSA countries offer more incentives and concessions than their neighbours do to win
more FDI. In these circumstances, the cost of incentives often outweighs their benefit.
Perceptions on the offering of incentives to attract FDI vary widely among economists. Supporters argue
that they increase investment, create jobs and other socio-economic benefits. Opponents, on the other
hand, believe that incentives are distortional and may not be the first-best mechanism for attracting FDI.
They also believe that the costs of incentives outweigh the benefits. As a result, they suggest that
improvements in local infrastructure, political stability and stability of the macro-economy are better
instruments for stimulating FDI inflows (Cleeve 2008).
Among these stimulants for FDI inflows, this paper focuses on the role of human capital, a proxy for the
efficiency-seeking type of FDI, in this context. Economic theory presumes that human capital (levels of
education) is one of the key determinants of FDI inflows. Some of the authors who have identified this
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relationship are Dunning (1988), Lucas (1990) and Zhang and Markusen (1999). There are, however, very
few studies done to verify this empirically for developing countries, and virtually none specifically for
SSA. The main problem encountered with most of these studies is the difficulty in defining good and
consistent explanatory variables for human capital.
Studies using data for the period 1960s and 1970s show no significant influence of human capital on the
inflow of FDI, regardless of the definition or measure of human capital. These include studies by Root
and Ahmed (1975), one of the few studies that consider human capital as a determinant of FDI in
developing countries, find that none of the proxies for human capital and labour skills is a significant
predictor of FDI inflows for 58 developing countries. Another study with a statistically insignificant
human capital explanatory variable of FDI stock is that of Narula (1996), who used a sample of 22
developing countries and the proportion of tertiary education per population as a proxy for human capital.
Similarly Hanson (1996), using a sample of 105 developing countries, shows that the adult literacy rate
was not a significant determinant of FDI stock compared with other socio-economic variables, such as
political stability and security of property rights. As a result of these studies, Dunning (2002) and Richie
(2002) conclude that FDI inflows of this period were concentrated in natural resource and market seeking
types, whose main determinants were availability and abundance of natural resources and cheap labour.
Human capital was not a significant factor for these types of FDI flows and it plays an increasingly
important role as countries progress along their development paths.
These conclusions are quite different from cross-country analyses based on data covering the period
1980s and 1990s. Nunnenkamp and Spatz (2002) and UNCTAD (2002) both find a positive and
significant relationship between FDI inflows and various measures of human capital. Noorbakhsh et al
(2001), in addition, show that its positive statistical significance becomes even more significant over time.
The reason for this trend is that FDI inflows to LDCs tend to be changing to more efficiency seeking
types, requiring higher levels of skilled labour, even in natural resources, where a greater proportion of
processing activities are done in the host countries, requiring higher levels of labour skills (e.g. see Lewin
2009).
Most of these later studies used various types of measures as proxies for human capital. UNCTAD (2002)
use tertiary gross enrolment ratio, and science and engineering student ratio. Nunnenkamp and Spatz
(2002) proxy human capital with Borro and Lee’s (2000) average years of education of total population
aged 15 and above. On his own, Barro (1991) uses levels of school enrolment to demonstrate a positive
correlation between human capital and growth. Other proxies used to measure human capital include; the
adult literacy/illiteracy rate, the share of national education expenditure, etc. Secondary school level of
education seemed to be the absolute minimum necessary to stimulate efficiency seeking FDI. The
question then remains as to which level of education or type of education has the most significant effects
on the inflow of FDI. In this study, we use alternative measures to proxy for human capital, alongside
other explanatory (or control) variables, to identify the most appropriate proxy for human capital in SSA.
This paper, resulting from these changing requirements, has classified these factors that influence FDI,
particularly in less developed countries (LDCs), into two groups; the traditional factors and the nontraditional
factors. Among the traditional factors, we have those that are more significant in explaining the
flow pattern of market-seeking and natural resource-seeking FDI. These include market size and growth,
availability and cost of exploiting natural resources, availability and cost of labour force, exchange rate
and inflation rate. These factors reflect the home-host, push-pull characteristics of foreign activity.
Among the non-traditional factors, we have the level and development of innovation, communication and
technology (ICT), human capital development, macroeconomic stability, socio-political stability,
corruption and infrastructural development.
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For this study, we utilize a multiple regression analysis to determine the factors that affect the inflow of
FDI to sub-Saharan Africa. The model is of the form:
FDIit = A + αXit + ßHUMANit + εit
Where FDIit is the dependent variable measuring the inflow of FDI into country i in time t. Xit represent
factors that explain the inflow of FDI to SSA, such as the size of the domestic market and the growth of
the economy. HUMANit is the target explanatory variable, which is proxied by different measures of
human capital (education levels and labour skills). εit is an error term and A is a constant term, which may
capture the effects of other non-specified factors.
All SSA countries for which data was available form the sample for our analysis and snapshot the periods
1985, 1995, 2005. We are using these three periods, separated by 10 years interval, to tease out the
changing requirements of FDI/MNE via the significance of their determinants.
The choice of selecting only SSA countries is because several authors, including Asiedu (2002) and
Barta, Kaufmann and Stone (2003), believe that the factors that determine the inflow of FDI to SSA are
different from those that determine FDI elsewhere. In addition, the structure and characteristics of SSA
countries are different from other developing countries. This choice will also ensure that the results are
exclusively SSA.
This study draws its data from two primary sources: UNCTAD’s FDI database and World Bank’s
World/African Development Indicators. Data was also drawn from several other sources such as Freedom
House; World Resources Institute’s Earth Trends; International Telecommunications Union (ITU), etc.
As mentioned earlier, we use two sets of explanatory factors in this study to explain the inflow of FDI to
SSA. There is only a small number of empirical research on the determinants of FDI to SSA, and most of
these concentrate on the traditional factors that would normally stimulate market-seeking and natural
resource-seeking FDI. This is often at the expense of other factors that might provide further explanations
for these types, as well as for other types of FDI.
For this study, we define the dependent variable as the ratio of FDI inflow to GDP (FDI/GDP) of the host
SSA country. The data source for this variable is the UNCTAD FDI database.
The independent variables we have used in this study are as follows:
The attractiveness of the host SSA country’s market we proxy by its GDP per capita and GDP growth
rate, which measure market size and growth respectively. We expect these variables to be positively
significant determinants of FDI size, particularly for the market-seeking type of FDI.
Recently, many SSA countries have attempted to open up their economies to both trade and investment.
Many have recorded some success as a result in attracting more FDI. We therefore include in our study a
proxy for openness, defined as exports plus imports divided by GDP, i.e. (X+M)/GDP. We expect that the
higher is the ratio, the more open is the country and the higher will be the inflow of FDI.
We also include a proxy for political stability as a measure of country risk. We combine two indicators;
political freedom and civil liberty to measure political stability. We expect political stability to have a
positive impact on FDI inflows. This data for this variable was drawn from freedom House.
We select three proxy variables for human capital in this study. We expect these variables to capture
aspects of the efficiency-seeking types of FDI. Following Root and Ahmed (1979), we use secondary
school enrolment ratio (SSER) as a measure, since it reflects the flow of investment in human capital in
SSA and it is customary to use it in the empirical literature on growth (see Barro 1991). This flow
measure, however, does not take the accumulated stock of human capital in the economy into
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consideration. To account for this stock, we use tertiary education (TRED), which is the number of
cumulative years of secondary and tertiary education in the labour force. We expect this variable to
capture higher levels of technical and managerial skills. The third measure of human capital in this study
uses the adult illiteracy rate (ILIT) of the host country. We interpret this measure of labour quality as the
education and skill levels of the workers within a country and they are widely used in the literature for
this reason.
Good infrastructure can to increase the productivity of investments and stimulate FDI flows (Wheeler and
Mody 1992; Morisset 2001; Asiedu 2002). The measure of the quality of infrastructure (INFRA) within
the host country we proxy by the number of telephone mainlines per 1000 population. We expect that the
higher the number of telephone mainline, the higher the flow of FDI. An alternative proxy that we could
use is the number of cell phone users per 1000 population. These two have a negative correlation at the
global level, as cell phones tend to replace mainline telephones, especially in developing countries. They
both tend to correlate positively with FDI inflows.
The Result
Correlation coefficients were calculated for the independent variables for the three period data sets and
reveal that multicollinearity is not a problem for the 1985 data, but is present in the data for 1995 and
2005.
A multiple regression (OLS) analysis was conducted for 48 SSA countries for which data was available,
for the periods 1985, 1995, and 2005. The results indicate that we can explain the size of FDI inflows into
SSA by both traditional and non-traditional factors, with the non-traditional factors becoming more
significant over time (i.e. in latter periods).
We present the regression results in table 1. Since there is no multicollinearity problem with the 1985
data, only one regression equation (1) was estimated that takes account of all explanatory variables. For
this model, market size and growth, adult illiteracy rate, tertiary education, openness of the economy,
political stability and infrastructural development explain more than 60% of the variation in per country
FDI inflows in SSA. For a cross-sectional analysis, this relationship is quite strong.
Traditional variables like market size and growth are as significant (at the 1% level) as non-traditional
variables like openness and infrastructure. For the proxies for human capital, only adult illiteracy rate and
tertiary education were significant at the 10% and 5% levels respectively. All independent variables
except TRED seemed to have the correct signs anticipated by the theoretical discussions. Of all the
independent variables, only secondary school enrolment ratio (SSER) is insignificant in explaining FDI
inflows to SSA.
Regression equations 2 and 3 represent the 1995 data. As already mentioned, this data demonstrate
multicollinearity resulting from the high correlation coefficient between MKTsize and INFRA (0.890). To
avoid this problem, two separate regression models were run, first with MKTsize omitted (equation 2)
and then INFRA (equation 3).
In 1995, the factors that determine FDI inflows to SSA include MKTsize, SSER, TRED, OPEN and
PSTB. At that point in time, openness seems to be the most significant determinant of FDI flows to SSA.
This seems to coincide with the latter part of the World Bank/IMF structural adjustment programme,
which emphasised the merits of open economies and the need to reduce and eventual elimination of
barriers to trade and investment. The flow of human capital (SSER) also seems to have stimulated the
inflow of FDI, whereas it had no influence in 1985. On the contrary, in 1985, MKTsize and MKTgrowth
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were very influential in the inflow of FDI to Africa, but in 1995, MKTgrowth lost its significance
completely and MKTsize was only significant at the 10% level.
Table 1: Multiple regression results
Variables 1985 1995 2005
1 2 3 4 5
Constant -0.005 -0.006 0.010 -0.022 -0.017
(-0.257) (-0.216) (1.127) (-1.333) (-1.017)
MKTsize 6.712E-05***
1.324E-05* 1.553E-05* 6.778E-06
(4.543)
(1.825) (1.766) (0.852)
MKTgrowth .001*** 0.002 0.002 0.002 0.001
(3.103) (0.761) (0.661) (0.727) (0.625)
SSER 0.005 0.004** 0.006**
0.006**
(1.124) (1.976) (2.212)
(2.131)
ILIT -0.001* -2.720E-05 -2.160E-05 -0.003***
(-1.861) (-0.216) (-0.161) (-2.707)
TRED -0.011** 0.004 0.005*
0.004**
(2.478) (1.282) (1.884)
(1.984)
OPEN 0.032*** 0.036*** 0.043*** 0.055*** 0.048***
(3.449) (2.597) (2.845) (4.673) (3.480)
PSTB 0.005* 0.008* 0.004 0.003** 0.002**
(1.787) (1.755) (0.765) (2.241) (1.975)
INFRA 0.004*** 0.032**
0.003** 6.659E-05**
(3.669) (2.379)
(2.312) (2.322)
Observations 48 48 48 48 48
Adj. R 2 0.66 0.35 0.36 0.55 0.58
Note: Figures in parentheses are t-statistics. ***, ** and * represent statistical significance at 1%, 5%
and 10% respectively.
Our third snapshot uses the data for 2005, which we present as regression equations 4 and 5 in table 1.
Once again, multicollinearity problem demands that two regressions were run. The correlation coefficient
between SSER and ILIT, and TRED and ILIT stood at -0.776 and -0.707 respectively. The correlation
coefficient between SSER and TRED is 0.294 and both could both be included in the same equation.
Therefore, regression equation 4 excludes SSER and TRED and equation 5 excludes ILIT.
The main determinants of FDI inflows in 2005 include the openness of the economy, political stability,
infrastructural development and the illiteracy rate. All of these variables are significant at the 1% and 5%
significant levels.
Two of the three proxies for human capital; ILIT and SSER are significant at the 5% and 10% level
respectively, in explaining variations in the inflow of FDI to SSA. TRED is not a determinant of FDI in
2005.
Over the three periods, 1985, 1995 and 2005, the requirements for increased inflow of FDI to SSA
countries are changing from the traditional factors, such as market size and economic growth, to the nontraditional
factors, like openness of the economy, political stability and infrastructural development. One
plausible reason for this shift is that the type of FDI undertaken in Africa is beginning to change from the
market-seeking type to a more efficiency-seeking type, which requires different types of location factors.
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One such requirement is the quality of labour or human capital. The proxies used to measure human
capital show that this variable is also becoming more significant in the latter periods.
Conclusion
The results of this study have thrown up a number of conclusions:
In the 1980s, many SSA countries were suffering from stagnation and economic and political instability,
for which structural adjustment programmes were implemented as recommended by the World
Bank/IMF. Economic activities of that time were centred on import replacement by domestic
manufactures and the export of mineral resources and agricultural products. FDI during this period was
either natural (mineral) resource seeking or market seeking for import replacement manufactures. Thus,
the significance of Mktsize and Mktgrowth.
In the 1990s, many SSA countries began to recover from slow growth and the impact of adjustment and
economic and investment liberalisation started to show in countries that have implemented the
programme successfully. Variables like Openness, SSER and to a lesser extent, PSTB, became more
prominent in explaining the variations in FDI inflows.
This change is even more significant in magnitude for the 2005 data. This could be the result of a shift in
the mode of FDI to a more efficiency-seeking type, requiring better educated labour, greater openness of
the economy and communication and other infrastructural development. In support of this, Nyuur (2011),
using 2010 survey data for Ghana, showed that the motive for foreign firms investing in Ghana was
mainly market seeking (64%), efficiency seeking (18%) and natural resource seeking (14%). Foreign
investment in Ghana in the 1070s and 1980s was mainly natural resource seeking.
These results could also shed some light into the trade-off between wages and productivity to attract FDI.
They allow us to make predictions based on the level of schooling in a country.
References
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Asiedu, E. (2004) “Policy Reform and Foreign Direct Investment in Africa: Absolute Progress but
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Barro, R.J. (1991), “Economic Growth in a Cross Section of Countries,” The Quarterly Journal of
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Narula, R. (1996), Multinational Investment and Economic Structure: Globalization and
Competitiveness, Routledge, London.
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Changed the Rules of the Game?”, Transnational Corporations, Vol. 2(2), August 2002, UNCTAD.
Nyuur, R. (2011), Attracting and Retaining Foreign Direct Investment in Ghana, Mimeo
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Wheeler and Mody (1992), “International investment location decisions: The case of US firms.” Journal
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Impact of service quality perceptions on Foreign Direct Investment inflows: a case of Uganda
Jotham Mbiito Byarugaba, mbiito@mail.com
Department of Marketing & International Business
Makerere University Business School, Kampala, Uganda.
In Partnership with Trust Africa Investment
Climate & Business Environment Research Fund 2011
Abstract
Purpose: The purpose of this research is to investigate service quality perceptions of FDI clients and GOU officials.
Design/methodology/approach: A cross-sectional design will be adopted with two instruments and two
focus groups from each sub-sample’.
Limitations: Organising FDI clients’ focus groups may prove difficult.
Practical implications: Strategies will be crafted from the findings to close Gaps 1 and 5 and improve on
FDI inflows to Uganda.
Originality: The paper will provide GOU officials knowledge on service quality they need to design to
meet FDI clients’ expectations.
Background and Introduction to the Research
The Government of Uganda (GOU) has won compliments for its macroeconomic management in recent
years. It is currently revising a range of laws and regulations to create greater government accountability,
open markets, develop infrastructure to create a more attractive environment for foreign direct investment
(FDI). The aforementioned strategies together with abundant natural resources provide good opportunities
for foreign investors to invest in Uganda (Musila & Sigue 2006; Clinton 2009). Evidence exists that the
aforementioned strategies have reaped rewards. For example, FDI flows into Uganda stood at $368
million in 2007, lower than in both 2005 and 2006, but up drastically from 2001, when investment was
$150 million, according to the World Investment Report for 2008. The overall economy, meanwhile,
continues to expand, growing 9.8% in the 2007/2008 Ugandan fiscal year and by at least 7% in
2008/2009. Business analysts believe Uganda has the potential for larger amounts of FDI, but emphasise
that the GOU must address challenges related to the country’s weak infrastructure, largely uneducated
workforce, political interference in private sector, high levels of corruption, to list only examples. Though
Ugandan mobile telephone services have improved greatly due to strong private sector investment,
electricity and road network urgently need renovation and expansion to meet the FDI demands. With an
installed total capacity of just 300 megawatts (MW), Uganda’s electricity network reaches only 20% of
the population, and load shedding all over the country is common. The dilapidated road infrastructure has
led to increases in transportation costs thus leaving the entire country, which is land locked, vulnerable to
bottlenecks and disruptions. A major business challenge stems from the fact that a two-lane highway from
Kenya remains the primary route for 80% of Uganda’s trade. Uganda’s dependence on this route was well
demonstrated in late 2007 and early 2008 when election related violence in Kenya virtually halted trade
into Uganda for more than two months, causing a spike in prices of all commodities. The GOU is making
deliberate efforts to improve on infrastructure by renovating the roads, laying a new fibre-optic cable for
internet services along the eastern coast of Africa which has reached Uganda. Further, Uganda is building
a 250-MW hydroelectric dam at Bujagali falls and will be added to the national grid in January 2011
(Clinton 2009). Key sectors for DFI include agriculture, tourism, mining, energy, and information
communication technology (ICT) (Uganda Investment Authority 2009/2010). Literature review shows
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that foreign investors’ FDI decisions have been motivated by three traditional economic determinants
differentiated as resource-seeking FDI, Market-seeking FDI and efficiency-seeking FDI (Nunnenkamp
2002). However, another potential determinant of decisions on FDI sectors of destination is the level of
quality of service offered by GOU (policymakers) to the different foreign investors to the Ugandan
economy. This implies that the traditional determinants of FDI flows notwithstanding, perceptions of
quality of investment services by both foreign investors and GOU officials are another potential
determinant of decisions on FDI sectors of destinations in the Ugandan economy.
Despite the GOU officials’ efforts to create a good investment climate, three key questions come to the
fore: Firstly, are FDI clients receiving investment services they expect from GOU officials? Secondly, do
the GOU officials’ perceptions of quality investment services mirror FDI clients’ expected and actual
investment services? Thirdly, what is the relative importance of service quality dimensions as
determinants of FDI sector destination decisions in Uganda? The first question implies a potential
disparity between FDI clients’ expected and experienced service quality that impacts their investment
decisions. The second question implies a potential disparity between GOU officials’ perceptions of FDI
clients’ expectations of quality investment services that may influence their FDI decisions in the Ugandan
economy. The third question implies a potential variation in relative importance of service quality
dimensions in influencing FDI clients’ decisions in regard to sector destination in Uganda. The
aforementioned disparities and relative importance will be investigated in this research with a view of
closing the disparities to increase DFI flows to different sector destinations in Uganda. To have a better
understanding of the potential impact of FDI clients’ and GOU officials’ service quality perceptions on
DFI flows to the different sector destinations of Ugandan economy, the Gaps model of service quality by
Parasuraman, Zeithaml and Berry (1985) is useful. In this respect, the SERVQUAL scale based on the
identified seven dimensions of service quality (Kang & James 2004; Zeithaml, Bitner & Gremler 2006)
will be used to measure the service quality Gaps from two perspectives. Firstly, form GOU officials’
perceptions of quality investment services and how they impact investment decisions of FDI clients will
be investigated. Secondly, from FDI clients’ perceptions of quality investment services and how they
impact their decisions will be investigated too. The study will also investigate the relative importance of
the seven dimensions of service quality as potential determinants of decisions on sector destinations as
regards resource-seeking FDI, market-seeking FDI, and efficiency-seeking FDI in the Ugandan economy.
This is premised on the potential disparity between what GOU officials perceive as quality investment
services offered to FDI clients and what FDI clients perceive as quality investment services both of which
have a potential influence on FDI decisions to the different sector destinations in the economy. Because
quality of investment services are perceived differently in different sector destinations and for the
different traditional determinants, the SERVQUAL scales will be adapted to capture perceptual data both
on traditional determinants and the different FDI sector destinations in Uganda. The SERVQUAL scales
will also measure the causal relationships between the identified variables in this study (see Figures 1 &
2). For purposes of this research, the focus will be on GOU officials’ Gap 1 and the FDI clients’ Gap 5.
Problem statement
Because this investigation requires the intervention of FDI clients and the GOU officials in determining
FDI decisions on sector destinations, the problem statement can be phrased in a fourfold manner: Firstly,
as shown by Gap 1 (Figure 3), a potential disparity may exist between GOU officials understanding and
design of the quality investment service FDI clients expect in decision making. The question is which
variable(s) impact on this Gap to influence FDI decisions on different sector destinations? Secondly, as
shown by Gap 5 (Figures 1), a potential disparity may arise between FDI clients’ expected and
experienced service form GOU officials with a potential influence on FDI investment decisions on
different destination sectors of Ugandan economy. As for Gap 1, the question is which variables impact
on this Gap to influence FDI clients’ decisions? Thirdly, because GOU officials aim at creating a
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favourable investment climate, the need to close Gap I and Gap 5 becomes imperative in FDI clients’
decision making on sector destinations. The question is which business strategies may be crafted based on
the findings to close the two Gaps and improve FDI inflows to the different sector destinations in the
Ugandan economy?
The gaps model of service quality
The Gaps model of service quality based on the seminal contribution by Parasuraman et al. (1988, 1985)
that service users (FDI clients in this research) subjectively judge the service in terms of whether the
service received is equal or exceeds what was expected (Gap 5). Service quality perceptions influence
investment decisions for both FDI clients and GOU officials. FDI clients’ investment decisions are based
on quality of services received form GOU officials while GOU official investment decisions are based on
what they perceive as the best sector destination. It should be noted that the two categories of investment
decisions may not point to same sector destination in the economy. The providers’ Gap 1 reflects a
potential failure by GOU officials to understand FDI clients’ expectations. Gap 5 reflects a potential
disparity between FDI clients’ expected and actual quality of investment services offered by GOU
officials. This research will investigate Gaps 1 and 5 of the Gaps model. The model has a set of Gaps
numbered 1 to 5 (Zeithaml, Bitner & Gremler 2006). Parasuraman et al (1988) originally suggested ten
service quality dimensions that service users base on in evaluating quality of service. After considerable
research and testing, Parasuraman et al (1990) reduced the ten to five dimensions namely tangibles,
reliability, responsiveness, assurance, and empathy. Kang and James (2004) criticize the five and add
technical and image quality to make them seven. In this research, the seven dimensions will be used in
investigating how perceptions of GOU officials and those of FDI clients influence investment decisions to
the different sector destinations in the Ugandan economy.
Hypothetical models pertaining to gaps 1 and 5
Based on the problem statement and the Gaps model of service quality, three hypothetical models can be
developed for this research as showed in Figures 1, 2, and 3. The constructs of Figures 1, 2 and 3 are
based on extensive analysis of the secondary sources pertaining to service quality. In order to use multiple
sources of data, the strategy of methodological triangulation will be adopted for this research (Collis &
Hussey 2009).
Figure 1: Hypothetical model pertaining to potential Gap 5 between FDI clients’ expected and
actual service quality
Recommendations from other FDI clients
Comprehensive service environments
Basic communication needs of FDI clients
Relationship between FDI clients and GOU
officials
Knowledge levels of FDI clients
Providers’ perceptions of FDI clients’
expectations
Past experience of FDI clients
H1.1
H1.2
H1.3
Service
Potential
Expected
service quality
Actual service
quality
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Figure 2: Hypothetical model pertaining to service quality as designed by GOU officials
FDI client expectations of GOU officials’ quality of service
Investment research findings of GOU officials
GOU officials’ organisation structure
Relationship interaction between GOU officials and FDI
clients
GOU officials’ perceptions of FDI clients’ needs
Figure 3: Hypothetical model pertaining to potential disparity between FDI clients’ service quality
perceptions and service quality as designed by GOU officials (Gap 1)
Source: Derived from Figures 1 and 2 supplemented Potential disparity by secondary between sources.
To test the hypotheses in Figures 1, 2 and 3 to have a clear understanding of the meaning of identified
research variables, each variable needs to be brought into the context of service quality perceptions of
GOU officials’ and FDI clients’ perceptions of quality of investment services influence FDI investment
decisions to the different sector destinations in the Ugandan economy.
Significance of the study
The study will enable GOU officials to realize their failures in meeting FDI clients’ expectations of
quality investment services that are the bases for FDI decisions on which sector destination is finally
chosen. Failure recognition will also lead to closing of Gaps 1 and 5 thus improving FDI inflows to the
different sector destinations of the Ugandan economy which also leads to the creation of jobs, economic
growth, and national stability.
Research Objectives
Independent variables as
listed in Figure 1
Independent variables as
listed in Figure 2
H3.2
H3.3
Primary research objective
The primary research objective is to empirically test the three hypothetical models (Figures 1, 2, and 3)
and the associated hypotheses as motivated by secondary sources and use methodological triangulation
H3.1
expected and designed service quality Gap 1
H4.O
FDI clients’ service quality
perceptions
GOU officials’ designed service
quality
Service quality as
designed by GOU
officials
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strategies to investigate the impact of the identified variables on service quality perceptions of GOU
officials and FDI clients in the Ugandan investment environment. By applying methodological
triangulation strategies, the validity of the research will be enhanced.
Secondary research objective
(i) To adopt methodological triangulation in data collection and analysis phases to research the problem
in question.
(ii) To execute in-depth analysis of secondary sources dealing with service quality in the Ugandan
investment environment. The secondary sources will shed more light on available strategies for GOU
officials to adopt or modify them to meet service quality expectations of FDI clients.
(iii) To develop appropriate research instruments and interview guides to collect primary data from GOU
officials and FDI clients.
(iv) To analyse quantitative primary data and test hypotheses on service quality disparities in the
Ugandan investment environment; and use qualitative data analysis to supplement quantitative
findings
(v) To analyse and recommend possible strategies GOU officials can implement to address issues related
to decisions on sector destination for FDI in the Ugandan economy.
Research design and Methodology
Design: Given the three hypothetical models and the operationalisation thereof, the positivistic approach
will be supplemented by the phenomenological approach (Collis & Hussey 2003.47). The adoption of
both paradigms is to enhance research findings given the subjective nature of perceptions. In this study,
methodological triangulation will lead to collection of quantitative data supplemented by post-survey
qualitative data to enhance the validity of the study findings (Collis & Hussey 2009:85). Methodological
triangulation will also enable the collection of data from the two sub-samples at different times. The
approaches and strategies described will enable the models to be empirically tested with a view of
confirming service quality theory with regard to the influence of FDI clients’ Gap 5 and GOU officials’
Gap 1 on FDI decisions on sector destinations in the Uganda investment environment. The data sets will
be analysed using both quantitative and qualitative techniques in testing the set hypotheses in this study.
Methods: Sampling procedure and sample size: Two sampling methods are considered appropriate for
this study, namely, area sampling as the probability sampling method, and judgemental sampling as the
non-probability sampling. The minimum sample sizes will be a function of the number of statements on
the instrument times five (5) (Veal 2005). Two research instruments will be used for this study; one to
source FDI clients’ perceptions and the other GOU officials’ perceptions of quality of investment
services. Interval data will be involved in measuring the variables in the study. For the phenomenological
part, post-survey individual interviews with be conducted for foreign investors and GOU officials. The
purpose of individual interviews is to test the effectiveness of the survey and enhance the study findings.
Quantitative data collection: The research instruments that will gather quantitative data to measure
variables pertaining to potential disparity between FDI clients’ expected and experienced service quality
and GOU officials’ perceptions of FDI clients’ expectations are constructed along the seven (7)
dimensions of service quality. The statements to capture the dimensions will be linked to a seven-point
Likert-type interval scale anchored by “strongly disagree (1)” and “strongly agree (7)” (Kang & James
2004:270; Zeithaml et al. 1990:175-186). Individual FDI clients and GOU officials will be the units of
analysis as regards decisions on different FDI sector destinations in Uganda.
Qualitative data collection: As motivated for quantitative data collection, individual FDI clients and
GOU officials will serve as the units of analysis for qualitative data. Post-survey individual interviews
will be conducted to collect the qualitative data from the two sub-samples (Cooper & Schindler 2006;
Krueger 1998; McNamara 2008; Miles & Huberman 1994).
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Reliability and validity of the measurement instruments: The research instruments will be tested for
reliability by interpreting the Cronbach alpha reliability coefficients of the scale items in the two
instruments (Collis & Hussey 2003:58). The instrument will be tested for internal consistency where
Cronbach’s alpha reliability coefficients over 0.8 are considered good, 0.7 acceptable and below 0.6
weak. Multiple linear regressions analysis will be performed to establish if a set of independent variables
do explain a proportion of the variance in the dependent variables at a significant level (through a
significance test of R-squared) in Figures 2 and 3. The hypotheses will be tested for significance. As the
study involved two independent samples, a two-independent samples t-test will be performed to establish
perceptual differences between FDI clients’ perceptions and those of GOU officials, if any (Gap 1). To
establish if a perceptual difference exists between FDI clients’ expected and experienced quality of
investment services, a paired-samples t-test will be performed (Gap 5). To establish the relative
importance of the different service quality dimensions to decisions on FDI sector destinations in Uganda,
the relative importance of each service quality dimension will be established. Qualitative findings will be
used to verify quantitative results on both Gaps 1 and 5. Strategies will be identified and
recommendations made to GOU officials with a view of closing Gaps 1 and 5 and increasing FDI inflows
to different sector destinations in the Ugandan economy.
Dissemination of results
The project results will be dissemination in several ways namely by publishing articles in academic
journals, presenting results to policy makers involved in influencing policy, presentations at conferences,
organising seminars and workshops. The seminars and workshops will be destination sector specific to
enhance their impact on specific sector policy reviews with a possible increase in FDI inflows to key
sectors of destination namely agriculture, tourism, mining, energy and ICT. It should be noted that the
method of dissemination will also be tailored to the specific requirements of the sector as well as FDI
clients’ needs. The results are expected to improve on FDI inflows to the Ugandan economy leading to
job creation and faster economic growth and development.
Research Plan
Activity Timeframe Comment
Proposal Jan-March 2011 Complete
Questionnaire and April-May 2011 In progress
interview
development
guide
Pilot tests and pre-tasking
of focus group participants
June –July 2011 Pending
Primary data collection August -December 2011 Pending
Data analysis Jan-Feb 2012 Pending
Report writing March-May 2012 Pending
Results dissemination Jun 2012 Pending
Anticipated challenges Unwillingness to cooperate
Evaluating success To stick to deadlines to complete project on time
Research Budget
Expense Category Amount
A. Personnel (salary/stipends)
Applicant Sh3 000 000
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Graduates (4) Sh4 000 000
B. Travel and related subsistence costs Sh4 000 000
C. Equipment Sh1 500 000
D. Supplies Sh3 000 000
E. Others expenses (incentives to interview participants and dissemination) Sh15 384 000
Total Sh30 884 000
References
Clinton, R. 2009. Investment Climate Statement-Uganda. Available:
http://www.state.gov/r/pa/ei/pix/at_work/index.htm [Accessed: 19.7.2010].
Collis, J. And Hussey, R. 2009. Business Research. 2 nd Edition. New York: Palgrave Macmillan.
Cooper, D.R. and Schindler, P.S. 2006. Business Research Methods. 9 th Edition. New York: McGraw
Hill.
Kang, G. And James, J. 2004. Service Quality Dimensions: an examinations: an examination of
Gronroos’s service quality model. Managing Service Quality. 14(4): 266-277.
Krueger, R. A. 2002. ‘Designing and Conducting Focus Group Interviews’. [Available: Goggle:
http://www.tc.umn.edu/~rkrueger/about.html (Accessed: 25 Oct 2008)].
MacNamara, C. 2008.General Guidelines for Conducting Interviews. [Available:
http://www.managementhelp.org/evaluatn/interviews.htm. Accessed: 30.10.2008].
Miles, M.B. and Huberman, A.M. 1994. Qualitative data analysis. 2 nd Edition. London. SAGE.
Musila, J.W. and Sigue, S.P. 2006. Acceleting foreign direct investment flow to Africa: form policy
statements to successful strategies. Managerial Finance,Vol.32 No.7. pp577-593, Emerald Group
Publishing.
Nunnenkamp , P. 2002. Foreign Direct Investment in Developing Countries: What Economists (Don’t)
Know and What Policymakers Should (not) Do! CUTS, Jaipur, India.
Parasuraman, A., Zeithaml, V.A. and Berry, L.L. 1985. A Conceptual Model of Service Quality and its
Implications for Future Research. Journal of Marketing. 49:41-50.
Parasuraman, A., Zeithaml, V.A. and Berry, L.L. 1988. SERVQUAL: a multi-item scale for measuring
consumer perceptions of service quality. Journal of Retailing. 12-40.
Stoelting, R. 2002. Structural Equation Modeling/Path Analysis. Available
http://userwww.sfsu.edu/~efc/classes/biol710/path/SEMbpage.htm [Accessed: 5.7.2007]
Uganda Investment Authority Report 2009/2010. [Available: www.ugandainvest.com ].
Veal,A.J. 2995. Business Research Methods: A managerial approach. 2 nd Edition. Malaysia:Pearson
Education, Australia.
Zeithaml, V.A., Parasuramn, A. And Berry, L.L. 1990. Delivering Quality service: Balancing Customer
Perceptions and Expectations. NY: The Free Press.
Zeithaml, V.A., Bitner, M.J.. and Gremler D.D. 2006. Services Marketing:Integrating Customer Focus
Across the Firm. NY: McGraw-Hill Irwin.
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Edited by Emmanuel Obuah
New perspectives on Foreign Direct Investment and Technology transfer in Africa: Insights
from the construction industry in Ghana
Ellis L.C. Osabutey: e.osabutey@mdx.ac.uk
Middlesex University, The Business School, The Burroughs, Hendon, London, UK.
Y. Debrah: y.a.debrah@swansea.ac.uk
University of Wales, Swansea, School of Business and Economics, Singleton Park, Swansea, UK.
Abstract
Foreign Direct Investment (FDI) is a conduit for transferring technology and knowledge to developing countries
because less developed countries lack requisite technology for sustainable development. Much of the FDI literature
on Sub-Saharan Africa (SSA) focuses on the attraction of FDI with an almost total neglect of technology transfer.
Semi-structured interviews of selected professionals and practitioners within the construction industry in Ghana via
qualitative analysis explore the technology transfer and knowledge transfer concepts within an African context. The
study reveals that technology transfer and knowledge transfer should go together and suggests that knowledge
transfer should precede technology transfer. The paper therefore views Technology and Knowledge (T&K) transfer
as a single integrated concept. The absence of good educational infrastructure for construction professionals can be
blamed for the poor knowledge base. In Ghana, the knowledge base among consultants can be argued as being
adequate but because of poor knowledge base among the majority of local contractors T&K transfer was ineffective.
Technological needs should be identified at the design stage of construction projects to ensure that requisite
knowledge base exists to utilise these technologies. To benefit more from FDIs developing countries should
concentrate on preparing the requisite knowledge base to increase absorptive capacity.
Introduction
Foreign Direct Investment (FDI) inflow can have far-reaching effects on processes of economic
development in a host country. FDI is a conduit for transferring advanced technology and knowledge to
host countries (Lim, 2001).The ability to adopt and adapt to changing world conditions have become the
basis of competitiveness, growth and development for nations and organisations. In Pack and Saggi’s
(1997) view less-developed countries lag behind the technology frontier. Sub-Saharan Africa (SSA) lag
behind the technology frontier (Lall and Pietrobelli, 2002; UNCTAD, 2003) and must rely on foreign
technology inflows for development. Much of the FDI literature on SSA has focused on attraction and
neglected other benefits such as technology transfer. There is paucity of research on technology and
knowledge (T&K) management and transfer in SSA. This paper seeks to appraise the T&K management
and transfer debate on SSA and uses evidence from the construction industry in Ghana. Essentially the
paper explores the technology transfer and knowledge transfer concepts and places them in an African
context. It attempts to examine how knowledge transfer and technology transfer processes occur in the
construction industry in Ghana. Specifically, it attempts to explore the question below:
• Can technology transfer take place without knowledge transfer to developing countries?
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The rest of the paper is organised as follows. First we review the relevant literature on technology
transfer, knowledge transfer and knowledge management. Second, the research methodology is described.
Third, findings and empirical evidence are presented. Finally, we discuss the implications of our findings
and then draw conclusions.
Literature review
It is difficult to identify a universal definition for technology. To conceptualise technology transfer in the
construction industry we adopt the following definitions:
‘Product technology is the knowledge used to produce any product – the information that specifies the
product’s characteristics and uses. Process technology is the knowledge used to produce and organise
the inputs and operate machinery – it relates to the process by which a given product or service is
produced. Management technology is the knowledge used in operating a business – the managerial skills
that enable a firm to compete by using its resources effectively’(Grosse, 1996).
Technology may be defined as the application of the existing body of knowledge (science) to the
production of goods and services. It embraces equipment, tools, techniques, materials, systems,
processes, information, the goods and services produced and their use.(Stewart and Nihei, 1987;
Streeten, 1991; Ofori, 1994a).
Whilst the first definition could be argued as being applicable to general business operations the latter
suits the construction industry more closely. Technology can be referred to as ‘configuration’ and should
rely on specifiable and subjectively determined products and processes (Sahal, 1981; 1982). Sahal’s
concept emphasises the inseparability of the technology and the knowledge and this means that when a
technological product is transferred, the knowledge required to utilise the technology must also be
transferred. In the absence of the knowledge base the physical entity cannot be utilised. Knowledge is
defined as a justified belief that increases an entity’s capacity for effective action (Nonaka, 1994). Nonaka
and Takeuchi (1995) observe that knowledge like information is about meaning, context specific and
rational. Unlike information it is about beliefs, commitments and actions.
Technology Transfer and Knowledge Management and Transfer
Technology transfer (TT) has been a subject of considerable interest, particularly, to policymakers,
international funding agencies, and business executives because of the close relationship that exists
between technology transfer and economic growth (Li-Hua, 2004). Whilst there is extensive literature on
TT in South East Asia very limited literature is available for SSA. TT has been recognised as the
acquisition, adaptation and use of technological knowledge by an individual, group, or society other than
the one that developed the technology. Abbott (1985) defines technology transfer as the movement of
science and technology from one group to another. Knowledge Transfer (KT)on the other hand depends
ultimately on choice made by individuals (Dougherty, 1999) and requires some concerted effort from the
recipient.
TT covers all forms of physical assets, knowledge and human capabilities that enable a more efficient
organisation of a construction project and services (Dunning, 1993). TT reduces sharp differences in
technological competences between different countries. Embodied and disembodied knowledge is the
most durable building block of this transfer (Carrillo, 1996; Barrett and Sexton, 2004). Embodied
knowledge is generally transferred through imports and replication of building designs, equipment,
materials or software encompassing numerous design and construction methods. Disembodied knowledge
is that which exists beyond the physical assets and include human skills. Human capital is essential for
the transfer, absorption and adaptation of new technologies. Abbot (1985) rightly suggested that TT
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extends to recipients ability to use that knowledge to make development choices and to introduce
innovations into the construction process.
In all cases, TT that is truly knowledge driven requires a recipient industry with a high absorptive
capacity (Stewart and Nihei, 1987; Cohen and Levinthal, 1990). Construction project participants must be
able to absorb and use new knowledge for efficient execution of the projects. In construction, the main
areas of KT are in design knowledge and skills, building materials and components, construction
equipment and techniques, and management systems. Initial stages of TT is often dominated by movement
of technical knowledge imparted through the local education system and embodied in imported materials,
equipment and services of foreign design and construction firms. The relevant question is whether such
transfers have contributed appreciably to human, material and equipment capital development and further
continuously stimulated and engendered appropriate technological and managerial innovations within the
recipient country (Akubue, 2002).
Li-Hua (2004) observed that without KT, TT does not take place as knowledge is the key to controlling
technology. He argued that KT has explicit knowledge and tacit knowledge components and stressed that
tacit knowledge transfer was more likely to hamper effective TT. The focus of his study was to identify
the process of KT through human interaction between foreign and local managers in JV projects. He
found peculiar features between KT and economic development. From the sample of selected regions of
China, there was more demand for tacit knowledge in well-developed regions, and more demand for
explicit knowledge in the less developed regions. People in well-developed regions were keen to obtain
tacit knowledge (soft knowledge), such as management know-how, while people in the least developed
regions were keen to obtain explicit knowledge (hard technology), such as a specific technology to
manufacture a product. Knowledge Management (KM) may be defined as the process of creating,
acquiring, capturing, sharing and using knowledge to enhance learning and performance in organisations
(Scarbrough et al., 1999). Webb (1998) takes a more integrated view (IT and HR perspectives) to define
KM as the identification, optimisation and management of intellectual assets to generate value, increase
productivity to gain and maintain competitive advantage. This agrees with the assertion that KM is 10%
technology and 90% people issues (Egbu, 2000), thereby emphasising the role of HRM in the KM
process. This paper posits that firms that would want to gain competitive advantage should manage the
T&K transferred and would need KM systems and HRM systems. A close look at the definition of KM
above appears to suggest that T&K transfer is a subset of KM.
Research Methodology
The study deploys a qualitative methodology with evidence gathered through semi-structured interviews.
Experts and practitioners of the construction industry in Ghana provided the empirical data.
Purposive/judgmental sampling together with snow ball sampling helped researchers to identify relevant
stakeholders with industry and subject knowledge (Babbie, 1995). This method allowed us to identify all
relevant stakeholders. Semi-structured interview was selected because the researchers felt that it works
well with elite members of a community who have little time to spare (Bernard, 2000). This paper
discusses only a small portion of a much larger research on T&K transfer in the construction industry in
Ghana. Interview questions were formulated following an extensive literature review. Most interviews
were recorded and notes were taken alongside. Recordings were transcribed later alongside the notes to
capture both verbal and non-verbal information. This analysis attempts to follow a process of data
reduction; data display; and drawing and verifying conclusions (Miles and Huberman, 1994). Interviews
took place between 21 st November and 23 rd December 2008. The composition of the 54 participants of the
study is shown in Table 1 below:
Table 1: Composition of Participants of the study
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Professional Consultants (engineers, architects, planners, quantity surveyors, etc.) 28
High Ranking Officers from Ministries, Departments and Agencies 15
Presidents of Professional and Allied Bodies 6
Industry Associations Presidents 3
Senior Managers of Construction Equipment Dealers 2
TOTAL 54
Findings and Analysis of Empirical Evidence
The interviewees were asked question relating to whether TT could take place without KT. They were
further requested to place their answer in an African context with specific focus on the construction
industry in Ghana. Some of the key issues raised were:
No! Technology is knowledge (science), they go hand in hand, because if you do not understand what
you are doing, how can you apply the technology (Consultant Engineer).
They agree that technology is knowledge; TT transfer and KT go hand in hand and that it was difficult to
separate the two in the creation of a sustainable knowledge economy. More that 50% of respondents
evaluated that KT must precede TT for it to be effective and that the local educational system must create
the knowledge base for the TT transfer to take place:
For me, knowledge is condition precedent; it must precede the technology. Knowledge transfer must
precede technology transfer (Senior Public Servant: Construction Ministry)
They emphasised that the lack of maintenance culture in Ghana and the sub region could be traced to the
fact that most technologies come into the country without the preceding requisite knowledge; and that for
technology transfer to be sustainable it must be accompanied by knowledge transfer:
Technology cannot stand on its own. Maintenance is an important aspect of technology.
Unfortunately, we complain in Ghana that we do not have maintenance culture. There is more to it;
part of the problem is that the knowledge for maintenance and repair for infrastructure built by
foreign firms is absent and we continue to rely on foreign firms. You need the knowledge for the
technology transfer to be sustainable (Consultant Architect)
Respondents also emphasised that if knowledge transfer precedes technology transfer it can lead to
increased innovative capacities:
To improve innovative capacity, you need a very good knowledge base. So perhaps you transfer
knowledge (science) through the educational system. If science and technology education is good, new
technology can be adapted and improved, if not; utilising the technology will be a problem.
In respect of the educational system some felt there were inadequate technological content in the
curriculum of construction or built environment courses within tertiary instituions. There was too much
emphasis on theory with little or no exposure to modern plant and equipment and no practical experience:
Our tertiary institutions for the training of construction professionals offer too much theory with no
equipment for their training, no practical exposure and no interaction with industry. This does not
give the requisite knowledge base (mechanical engineer consultant)
One retired built environment researcher stressed that T&K transfer process should start with the basic
knowledge, then to specific areas of skill development, and then tooling. He said:
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“Looking at tertiary education for the construction industry up to the first degree; a graduate civil
engineer, building technologist, or architect is not yet suitable and ready for the industry. So you start
with the basic knowledge then you move into development of skills for the profession, then you
introduce tooling – specific tools that you need to enhance the production of outputs. So you can’t
have technology transfer without knowledge”.
Others responses related the absence of a sound knowledge base to inadequate staffing within institutions.
Most lecturers in both the universities and polytechnics have no practical knowledge, were not conducting
current research and had no interaction with industry. These problems are compounded by obsolete
teaching methods and teaching materials. They suggested training of locals in foreign institutions before
new technologies were introduced. In addition, foreign firms who have superior T&K should be
encouraged to provide internship for tertiary students because they could benefit from their knowledge
and expertise. An engineering consultant and a past President of the Ghana Institution of Engineers
(GhIE) noted:
The polytechnics have a basic staffing problem and have no laboratories with poor infrastructure.
Koforidua Polytechnic is supposed to focus on science and technology, but you go there and you will
find people studying dress making, accounting etc. not engineering. In today’s papers (16/12/08), I
was looking at the SSS [Senior Secondary (High) School] results, 46% of students failed mathematics
and 33% failed integrated science. So if half of the students are failing in science and mathematics
where are we going?
This comment hints on the general standards (at all levels) of science and technology education in Ghana.
Students are not interested in pursuing science courses because there was limited demand for such
graduates. In addition, there was a general view that science and technology graduates were not well
remunerated. Most respondents confirmed that in the 1960s government policy, in an attempt to attract
students to study science and technology, offered extra allowances to science and technology students
during their tertiary education. Science and technology professionals, with the exception of medical
officers, in the view of respondents were not accorded the recognition they deserved.
Most of the built environment professionals interviewed had obtained further training or education in the
West. In addition, about a quarter had acquired some foreign working experience. These professionals
either worked with reputable foreign consulting or contracting firms or with local consulting firms. Others
pointed out that sometimes practitioners learn new technology abroad but never get the opportunity to
utilise the T&K:
In Ghana, we have a lot of experts who have acquired new knowledge and skills abroad which may
involve the use of new technologies. When they return home to work they never get the opportunity to
use them. In this case the knowledge has been acquired but the technology is not there. It is another
way of looking at the situation (Quantity Surveyor who has had experience on tender review boards)
This means that although knowledge had been acquired there had been no opportunity to use the
knowledge because of the lack of a ‘product-embodied’ technology and as a result the knowledge
acquired may eventually be lost. Respondents suggested that at the design stage of construction projects,
technological needs should be identified to equip locals with requisite knowledge before project
execution. Such trained locals could then train other locals. Two things should be avoided with regards to
T&K transfer: (1) the arrival of a technology (e.g. equipment or machine) when there was nobody trained
to handle it or (2) the absence of an equipment or machine after money has been spent to train person(s)
on how to use it. T&K transfer and capacity building must be built into contract agreements with foreign
firms and that professional and technical people must be involved in the drafting of such contracts. At the
operative level, most practitioners lack the basic knowledge to facilitate TT:
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That is the case we have with some of our operatives; because if you take someone who can’t read and
write it is difficult to introduce new technologies to them (Quantity Surveyor Consultant with western
experience).
Some respondents also pointed out that because some construction firms were run by non-professionals,
illiterates or semi-literates. The knowledge base was not right:
One of the hindrances to technology transfer in the construction industry in Ghana is that most
contractors are non-professionals or illiterates. How can you transfer technology when the knowledge
base is not right? (Consultant Civil Engineer).
Most respondents pointed out that whilst the knowledge base among local consultants was good, the same
cannot be said for the local contracting subsector as it was dominated by illiterates and non-professionals.
One local consultant who works with a foreign firm observed that:
“I don’t know whether it is the way we were trained, but people [local consultants] don’t come out to
sing and dance about themselves and what they know, but when you get to talk to them, things that
suddenly come up that they know... it’s amazing”
In line with the objectives of this study, what needs to be looked into further is how government policy
can ensure that adequate knowledge transfer precede technology transfer. In this regard, there was the
need to review tertiary education and Continuous Professional Development (CPD) for professional
bodies. There is also the need to review processes involved in drafting construction contracts.
Professional bodies and the construction industry should play an active role in the human resource
development within tertiary institutions.
Discussion
Technology may be viewed as having hard elements (Construction outputs/buildings, materials, plant &
equipment – product technology); soft elements (skills, knowledge, organisation – management
technology); the process technology as described by Grosse (1996) combines the product technology with
the managerial technology to produce outputs (which is part of product technology). These processes
require continuous flow and utilisation of data and information which in itself is knowledge.
Technology therefore involves the person-embodied component (more tacit knowledge), the processembodied;
which is viewed as being embedded in equipment, tools, techniques, systems, processes,
information (more explicit knowledge). Technology and knowledge go hand in hand, but for developing
countries the knowledge base should match the technology being transferred. Not all technology is based
on a machine or equipment, some of it is based in people. This means that there is the need to encapsulate
the concept of knowledge clearly to appreciate the technology concept.
Li-Hua (2004) observed that TT and KT go hand in hand. He is of the view that knowledge transfer can
occur without technology transfer, but without knowledge transfer there can be no technology transfer.
Li-Hua’s assertion that knowledge transfer can take place without technology transfer may be open to
further debate. This is because the KM literature and the responses in this study reveal that technology
and knowledge have increasingly become inseparable. It has become increasingly difficult to find an
effective and efficient KM system devoid of ICT (technology) support; of course technology is the
application of knowledge. Carrillo et al. (2006) and Patel et al. (2000) noted the role of IT in KM. Wiig
(2000) noted that one of the key driving forces of KM is technology. This demonstrates that effective KM
requires the integration of technology and knowledge. This paper posits that for effective T&K
management and transfer, technology and knowledge are inseparable. What these responses appear to
encapsulate is that the knowledge that is acquired through education and training (more explicit in nature)
is the foundation (that which prepares the individual) for effective transfer of product, process and
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managerial technology (more tacit in nature), especially for the effective, efficient and indeed innovative
use of technology embodied in equipments, tools, machines, systems etc. (more explicit). Arguably,
developing countries should introduce technology compatible with their knowledge (science) base. When
the knowledge base is good, collaboration and interaction with foreign firm could ensure product
(equipment), process, and managerial technologies could be more easily and quickly absorbed. Teasing
out a relationship further reveals that explicit knowledge (science based) precedes tacit knowledge. Less
developed regions needed more explicit knowledge compared to more developed regions. Countries in
SSA should pursue policies that seek to increase explicit knowledge through sound and pragmatic science
and technology educational policies with technological foresight. This will enable effective T&K
management and transfer.
Conclusion
This study has discussed the relationship between TT and KT. It has clearly indicated that KT requires
concerted effort from the recipient. To enhance T&K management and transfer there is the need to
increase explicit knowledge within the local environment and this can enhance the absorption of tacit
knowledge. This paper therefore moves away from independent concepts of TT and KT and adopts a
more comprehensive concept of T&K transfer with the view that they are inseparable and should be
pursued together. This paper posits that for effective T&K transfer to occur the knowledge (science) base
must be right and must precede the technology (equipment and tools). In addition, effective T&K transfer
in a developing country such as Ghana requires more explicit knowledge to precede tacit knowledge
components. This study is based on the premise that the knowledge base required for effective TT must
be created and that a policy that introduces new technology without ensuring that the knowledge base is
right is short-sighted. This paper posits further that perhaps KT should marginally precede TT for it to be
effective and policies must holistically ensure that this happens.
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Track 8: Gender and Economic Development
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
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The effect of tender document in empowering women entrepreneurs operating in small business in
south Africa.
Abstract
GE Chiloane-Tsoka chiloge@unisa.ac.za
Department of Business Management, College of Economic and Management Sciences.
University of South Africa, South Africa.
The South African National Policy Framework for Women’s Empowerment and Gender Equality as well as women
emancipation by government, presents the opportunity for women at large, to make useful of business and political
advantages to their benefit. This is as a result of a mechanism to redress the socio-economic impetus of the past
policies on women which imposed oppression and exploitation on women, especially African women. This study
focuses on the effect of government tender documents as a policy programme to empower women entrepreneurs in
Tshwane. Tender documents are aimed at empowering women, especially black who aspire to start and grow
businesses. The data of the survey is analysed using the quantitative approach. The findings indicate that tender
documents are not useful in empowering black women entrepreneurs.
Introduction
The introduction of broad-based economic empowerment is seen as a vehicle for the improvement of
black business. The broad national empowerment strategy focuses on historically disadvantaged people
particularly black people, women, youth, the disabled and rural communities. In addition to this, the
Sunday Times (2007:8), in its business column, stated that women must use the country’s employment
equity and black economic empowerment laws to ensure that equity is reached. It is also critical that black
women remain the key measurement of progress in the empowerment of all, women and blacks in South
Africa. They should also serve as an indication of how far the country has moved from the past (Sunday
Times, 2007:9).
The participation of black women in small business and women in general in the economy, will help to
accelerate economic growth, because it is true that there is no economy that will grow if it excludes
certain of its people and fails to integrate all its citizens in a meaningful way (Manqcu, 2000:19).
In this article, the effectiveness of tender procurement will be probed to gain an understanding on the
extent to which black women entrepreneurs utilise the procurement to start and grow their businesses. The
article also intends to establish who, patronise the tenders if the majority of black women entrepreneurs
do not utilises them. The article will report on the results of a study that was conducted in determining the
effectiveness of government policies in emancipating black women and poverty eradication through
tender procurement.
Background
The (B-BBEE) are regarded as affirmative procurement policies that are state-owned enterprise
instruments for combating poverty. The participation of black women in small business and women in
general in the economy, will help to accelerate economic growth, because it is true that there is no
economy that will grow if it excludes certain of its people and fails to integrate all its citizens in a
meaningful way (Manqcu, 2000:19).
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The B-BBEE policy is aimed to provide an environment where business opportunities would be possible
for women entrepreneurs and build capacity to create wealth to start and to grow business. It was intended
to stimulate and develop local economic growth in the targeted avenues, create employment and business
opportunities for previously disadvantaged persons and reduce inequalities and improve the standard of
living of residents in a sustainable way and promote the competitiveness of local residents (Thale,
2003:12).
In a survey conducted by Moloto (2010) about B-BBEE on financial mail, it was indicated that out of
100 Top empowerment companies (TEC), in 2009 most procurement contract still go to bigger
companies, leaving out small black businesses, especially black-owned entities. Out of 26 percent
contributions of top companies only 6 percent of are owned by black women. While the purpose of
affirmative policy procurements were endorsed to empower black business black women seems not to be
taking responsibility for undertaking the levers provided by B-BBEE codes of practice.
Challenges of procurement policy programmes in empowering black women entrepreneurs
Public procurements are regarded as a panacea or as a vehicle towards black economic empowerment.
Procurement policies represent elements that are intended to drive and transform ownership of the South
African economy for promoting growth within the SMMEs whether in construction, manufacturing or
tourism (Gounden, 2000:76).
1. Collaterals
2. Complexity and ambiguity
3. Education
4. Information dissemination by local business service centres
The role of state in empowering women
The ideology of the political party in power and the Government –of- the- day shapes policy directions.
The two main contesting ideologies regarding the role of the state in the economy continue to be the
central in policy decisions adopted by political parties. These ideologies are capitalism and socialism.
South Africa seems to be taking the middle road in order to benefit the positive attributes of these two
main contesting ideologies. The ANC’s approach to policy is mainly influenced by its alliance with
COSATU and South African Communist Party. The social Welfare approach seeks to benefit both the
lower class and the upper class in South Africa. The rich can still accumulate wealth without being
hindered by government policies.
The national government provides a broad policy framework for economic advancement of all South
Africans. Provision is also made for the advancement of previously disadvantaged people. Black women
are a significant part of the previously disadvantaged groups in South Africa. The Broad Based Black
Economic Empowerment Act, 2003 (Act 53 of 2003) represents government bold step to redress the past
imbalances. A code of good practice was gazetted on the 9th February 2007. The code of Good Practice
assist and advice public and private sector in the implementation of the B-BBEE Act 2003. The Code
provides definitions, interpretations, and principles of B-BBEE, different categories of B-BBEE entities
and qualifications for preferential procurement and other related economic activities (South Africa).
One of the weaknesses in the government of the day approach is the equitable distribution of the benefits
to the poor and women. There is sufficient evidence in support of the argument that few black women
benefit from tendering processes. Some women have more contacts with government officials while
others with legitimately registered companies continue to face the brunt of poverty.
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Corruption appears to be the root of unfair implementation of policies and programmes which are crafted
to benefit the poor. A key question is what can be done to regulate fair awarding of tenders? Although the
authors are not advocates of centralisation in government, some form of centralisation and regulations
may prove to be a solution to the scourge of corruptions in the awarding tenders. The author proposes that
in addition to database created and managed by the Department, there should be a central database of all
tenders awarded. A three year cycle in the awarding of tenders should be in place. This will ensure that
one person does not hold more than one tender at the same time with different government departments
and that one tender can be awarded within three year cycle. An exception can be made in scarce skills and
fewer suppliers.
Methodology
Data Collection
The method of data collection was based on structured interviews, in which data is collected by means of
personal responses. Primary research was conducted using a structured questionnaire personally
administered. Personal face to face and telephonic interviews were conducted to the targeted micro and
medium businesses. In small businesses women were randomly selected in the townships. Where the
respondent could not be reached, telephonic interviews were the source of data collection Questionnaires
were in a form of a series of written questions on a topic about which the respondent had to respond. Each
statement was linked to a 7-point Likert –type scale where a 7 was anchored by Strongly Agree and 1 by
Strongly Disagree. Each responded was asked to evaluate the government policy they used most often
when starting or growing their business
Sampling
The sample frame was based on a set of people that have a chance of being selected, given the sampling
approach that is chosen.
Determinant 1 - Black women entrepreneurs with growth potential
Determinant 2 - Black women entrepreneurs who want to establish businesses
Sample size
Three hundred black women entrepreneurs were selected, but a quota of 50 entrepreneurs were allocated
to each area and certain steps were taken to fill the quota. The sample included respondents from six
Tshwane townships, Soshanguve, Ga-Rankuwa, Hammanskraal, Atteridgeville, Mamelodi, GA-Rankuwa
and the Inner City of the Tshwane Metropolitan Area of Gauteng Province, in South Africa.. The Gauteng
Province was selected because of its accessibility for the personal interviews and to limit costs. The
sampling procedure was based on the principle of random sampling and the selected women contained the
elements of the target population. 86% was the response rate.
Questionnaire Design
The aim of the questionnaire was to investigate whether black women entrepreneurs in Tshwane utilise
tender procurements programmes in starting or growing up their businesses.
To assess construct validity, the thirty-four opinion questions (on a four-point Likert-Scale) were
subjected to a Non-parametric Binominal test and Cross-Tabulation test analysis. A statistical technique
was used to compare variables between groups.
The types of questions were covered by following themes:
Section A of the questionnaire covered the demographic of the respondent;.
Section B, current nature of business;
Section C, Government support programme (Tenders); and
Section D, Information dissemination programmes on government tenders
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Empirical results
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Editing of Data
The SPSS statistical package of the SAS was used to complete the descriptive and inferential statistics.
Data analysis usually involves reducing accumulated data to a manageable size, developing summaries,
looking for patterns and applying statistical techniques.
Inferential statistics
The Chi-square test, t-test, Non-Parametric Binomial test, Wilcoxon test, Mann-Whitney test and the
Kruskal-Wallis (K-W) One-Way Analysis of Variance (ANOVA).The Inferential statistical method was
used to indicate the level of significance in the different variables.
Chi-square test
The chi-square was used in this study to test the differences between the samples.
Contents of tender documents
It was evident that the content matter of the tender document had to be investigated. As shown in Table1
below, 43 respondents indicated that the content of the tender document is somewhat difficult, while 18
(7.5%) felt that it was easy. The majority (n= 43) comprising 70.4%, indicated that it was difficult, while
179 did not indicate their response. Therefore it can be concluded that the content of tender document is
difficult.
The difficulty of the contents of tender documents was further analysed in the different areas the
participating black women entrepreneurs represented.
The respondents respectively indicated that they applied for tenders in construction, catering, cleaning,
dress-making and bead-making. Fifty-one of the participants did not indicate if they applied for tenders.
The absence of the participants who applied for tenders in fishing is probably because none of the
respondents interviewed operate at the sea. It is not clear why none of the participants applied for tenders
in oil and energy. It could be attributed to the fact that the majority of the sample operated in micro and
small businesses.
Table 1 Chi square test results
Value df
Asymp. Sig.
(2-sided)
Pearson chisquare
28.274(a) 15 0.025*
Level of significance
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from other selected townships. A small percentage from Mamelodi complained about the level of
difficulty of tender contents. Even those who were able to understand tender documents did, however,
were not successful in obtaining tenders. It can be concluded that few black women entrepreneurs submit
tenders when starting or growing their businesses.
Level of difficulty by areas
The respondents from Ga-Rankuwa and Soshanguve felt that the contents of government tender
documents were more difficult than the respondents from Inner-city, Atteridgeville and Mamelodi. It
should be noted that the level of education of the respondents from Ga-Rankuwa and Soshanguve were
less than those from other areas.
Further differences in areas were investigated by means of chi-square analysis, as reported in Table 2
Table 2. Chi-square tests on the level of difficulty
Value df Significance
Pearson
chi-square 28.274(a) 15 0.025*
As indicated by Table 2, a significant difference was indicated by participating black women
entrepreneurs concerning the level of difficulty of the content of government tender documents, with
participants from Ga-Rankuwa and Soshanguve, indicating it as more difficult than the other areas.
Table 3. Chi-square analysis on Local Business Service Centres on tenders
Chi-square tests
Value Df Asymp. Sig. (2-sided)
Pearson chi-square 21.618(a) 5 0.001*
Chi-square analysis indicates that black women entrepreneurs from Mamelodi and Hammanskraal visited
Tshwane local business centres significantly more than the participants from the other areas, in inquiring
about information on government tenders.
Level of significant difference
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The results indicated that only respondents who operate as medium businesses in certain geographical
locations reported that they received tender to grow their business. To crown it all, this did not represent a
significant number of respondents the majority of the respondents were not assisted by tenders to
establish their businesses. The chi-square test showed a significant difference in relation to location, age,
business size and marital status.
Recommendations
The author proposes that in addition to database created and managed by the Department, there should be
a central database of all tenders awarded. A three year cycle in the awarding of tenders should be in place.
This will ensure that one person does not hold more than one tender at the same time with different
government departments and that one tender can be awarded within three year cycle. An exception can be
made in scarce skills and fewer suppliers.
Furthermore, the policy implementers to achieve the objectives in the City of Tshwane to implement and
achieve the desired result in alleviating poverty and empowering black women entrepreneurs successfully
through tender procurement programmes the following should be done:
• Determine who the target market is
• Meetings for mentorship programmes should be launched in the townships to assist on filling
tenders
• They should liaise with women structures in the townships in order to mobilise them to train them
on tender documents.
• Provide a mechanism for information dissemination on government tenders programmes
The study concludes that Tender Procurements are not effective in providing assistance to black women
entrepreneurs in Tshwane. It does not provide a platform for information dissemination about government
programmes and policies, tender procurements and business networks, for which it was established for.
Finally the study provides a suggested framework that could be useful by policy implementers in
alleviating poverty to the majority of women especially black women entrepreneurs in Tshwane
Metropolitan Area.
References
Broad Based Black Economic Empowerment. (2007). Act 53 of 2003: Code of Good Practice. South
Africa: Government gazette.
Chiloane-Tsoka, G.E. (2008). An Investigation of the effectiveness of government policy programmes for
black women entrepreneurs in Tshwane. Doctoral dissertation. Johannesburg: University of
Johannesburg.
Cooper, D.R. & Schindler, P.S. (2001). Business research methods. New York: McGraw Hill. 7 th ed.
DTI. (2003). The de-racialisation of BBBEE. Tender Process-Preferential Procurement Policy: South
African Government gazette.
DTI. (2006). Strategic framework for gender and women’s economic empowerment. Retrieved June 18,
2006 from http://www.thedti.gov.za/sawen/sawenmain.htm
Gounden, S. (2001). Public Procurement. State of Small Business Development in South Africa.
Ntsika: pp.76-78.
Manqcu, X. (2000). BEE: The Missing Factor. Enterprise, Vol. 1, p. 39.
Rogerson, C.M. 2001. Public Procurement and Local Development in South Africa. Pretoria: Ntsika.
Anonymous. (2007, 23 August). Women empowerment. Sunday Times Newspaper. p.8, 9.
Thale, T. (2003). Catalysts of Change. Enterprise, July Vol. 4:10, p.76-77.
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Watermeyer, R. (2001). Looking upbeat on employment. Where black business lives: Enterprise: 24-30.
Zungu, P. (2003). Catalysts of Change. Enterprise, July Vol. 6:10.
306

Abstract
Gender, poverty and sustainable development in Nigeria
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Ola E. Aluko, eoaluko@yahoo.com
Department of Urban & Regional Planning, Faculty of Environmental Sciences,
University of Lagos, Akoka, Lagos, Nigeria.
The aim of this study is to access the effects of poverty and gender inequality on the environment. Gender
inequalities in economic life has become a causal factor in the chronic poverty of all household members, not just of
women in poor households and the intergenerational reproduction of poverty which should not be sustained. Gender
inequality is strongly associated with human poverty. While poverty means not having enough to eat, a high rate of
infant mortality, a low life expectancy, low educational opportunities, poor drinking water, inadequate health care,
unfit housing and a lack of active participation in decision-making processes. The effects of all these are the
consequences that poverty and gender inequality impose on the environment. When people affected by poverty are
unable to lead a decent life, there is no doubt that there will be a decay of the city. And when there are inadequate
and unfit housing, the condition of the environment often result to slums and ghettos, there will be the disaster of
homelessness, unplanned and sprawl nature of city growth. These issues and many others are the basic
consideration of this paper on how the good economic life could be sustained.
Introduction
This paper is not about gender issues in politics, economy and policy decision making, rather it is on the
effects of gender inequality and poverty on the environment. That is, the assessment of the problems of
households poverty caused by gender inequality and the effects on the environment. This is because
poverty and environment are often seen as inextricably linked, with the need to eradicate poverty as an initial
step to protecting the environment for it to be sustained.
The rapid environmental degradation taking place in Nigeria is increasingly becoming a major threat and
it is gradually changing the landscape destroying the sources of livelihood. That is why the problems of
pollution and waste are getting more serious and complex in towns than in villages, and more in densely
populated areas than in regions of sparse settlements.
Also alarming is the fact that the poverty level in Nigeria has been extremely high, with about two thirds
of the population below the poverty line in 1996 (FOS, 1999) and 75.5 per cent in 2004 (FOS, 2006),
which aggregated into 70.7 per cent for urban areas, and 79.2 per cent for rural areas. The situation would
have been worse but for the damping effect the period 1985 to 1992 had on poverty, when the rising trend
of the earlier period was reversed, before the upward movement resumed again. Specifically, poverty
level went up 50% between 1980 and 1985, going from 28.1% to 46.3%. Between 1985 and 1992, there
was a drop of about 4 percentage points to 42.7%. However, by 1996, the level jumped to 65% an
increase of more than 50% of the 1992 figures.
Gender inequalities in economic life has become a causal factor in the chronic poverty of all household
members, not just of women in poor households and the intergenerational reproduction of poverty. Maleheaded
households were more likely to be in poverty. The trend results showed for male-headed
households that relative incidence of poverty varied increasingly from 29.2 per cent to 58.2 per cent from
1996 to 2004. The results for the female-headed households also varied increasingly from 26.9 per cent to
43.5 per cent from 1998 to 2004 (FOS, 2006). Norms about child marriage of girls, gender biases against
girls’ education, women’s limited mobility, women’s lack of control over fertility decisions, gender gaps
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in wages all contribute to difficulties of escaping poverty intergenerationally through vicious cycles
between poverty and gender inequalities.
Gender inequality is strongly associated with human poverty. While poverty means not having enough to
eat, a high rate of infant mortality, a low life expectancy, low educational opportunities, poor drinking
water , inadequate health care, unfit housing and a lack of active participation in decision-making
processes. The effects of all these are the consequences that poverty and gender inequality impose on the
environment which must not be sustained. When people affected by poverty are unable to lead a decent
life, there is no doubt that there will be a decay of the city. And when there are unsustainable, inadequate
and unfit housing, the condition of the environment often result to slums and ghettos, there will be the
disaster of homelessness, unplanned and sprawl nature of city growth. These issues and many others on
how good life could be sustained are the basic consideration of this paper.
The Gender Issue
Concern for gender issues has a relatively longer history and dates back to the women’s movement. Like
the environment, the ideas were nurtured in the North, but overtime came into the international area with
emphasis on the experiences of women from different parts of the world (Levy, 1992). There was a
paradigm shift in both areas, from women in development (WID) to gender and development (GAD) to
reflect emphasis on social relations between men and women rather than biological differences.
The 1997 Human Development Report argued that across countries there are systematic relationships
between gender inequality, as measured by the Gender Development Index (GDI), and the general level
of human poverty, as measured by the PHI. Gender inequality is strongly associated with human poverty.
The four countries ranking lowest in the GDI Sierra Leone, Niger, Burkina Faso and Mail - also rank
lowest in the human poverty index (HPI). Similarly of the four developing countries ranking highest in the
PHI, three - Costa Rica, Singapore and Trinidad and Tobago - also rank among the highest in GDI
(UNDP 1997, p.39). The report also suggested that HPI and the Gender Empowerment Measure (GEM),
an index that measures the extent of gender inequality in political and economic participation and
decision-making are correlated.
The relationship between gender disadvantage and poverty appears to be quite straight forward. Women
or female-headed households, it is very often argued, suffer more from poverty than men or male-headed
households in numbers and /or in intensity. The particular approach has been prominent in aid agency
writings on “gender and poverty”, which have used social and / or economic indicators to capture poverty
outcomes. Such a perception underpins development agency arguments about the “feminization of
poverty” and the frequent references to women as “the poverty of the poor”.
In these policy discourses, three strands of thinking stand out. First, the equation of female headship with
poverty (Jazairy et al., 1992). Second, assumptions about anti-female discrimination within the household
and consequent female disadvantage in well being (UNDP, 1995), and third, synergistic arguments
positing a positive relationship between “investing in women” and meeting developmental objectives
such as poverty reduction or fertility decline (World Bank, 1994). But at a deeper level, the gender
analysis of poverty is not so much about whether women suffer more from poverty than men in numbers
and/or in intensity, but rather about how gender differentiates the social processes leading to poverty.
Sustainable Development
The field of sustainable development can be conceptually broken into three constituent parts:
environmental sustainability, economic sustainability and social-political sustainability. Sustainable
development does not focus solely on environmental issues. More broadly, sustainable development
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policies encompass three general policy areas: economic, environmental and social. In support of this,
several United Nations texts especially the 2005 World Summit Outcome document, refer to the
“interdependent and mutually reinforcing pillars” of sustainable development as economic, social
development and environmental protection. Nigeria is committed to a national policy on the environment
that ensures sustainable development based on proper management of her natural resources in a manner,
which meets the needs of the present and future generations. This requires balancing her human needs
against the potential that the environment has for meeting them. The Nigerian policy, which identifies the
correlation between the health and welfare of all Nigerians, and the urgent transition to sustainable
development, attempts to provide the concepts and strategies that will lead to the procedures and other
concrete actions required for launching Nigeria into an era of social justice, self reliance, and resource
development that are environmentally friendly. But with the level of poverty among the people sustaining
the environment will remain a herculean tasks.
The term sustainable development has been defined as ‘development that meets the needs and aspirations
of the current generations without compromising the ability to meet those of future generations. In a more
general way, the concept of sustainable development may be seen as the facilitator for balancing the
conservation of nature’s resource with the needs for development. That is, sustainable development
means improving the quality of human life while living within the carrying capacity of supporting
ecosystems. These definitions will be reviewed along the poverty situations in Nigeria to see the effects
on the environment.
Poverty and Environment Concepts
A glance at the relevant literature rapidly shows that there is no general consensus on any meaningful
definition of poverty (Aluko, 2009; NISER, 2003; Schubert, 1994). In fact, there are perhaps as many
definitions as there are researchers. A generally worded, and therefore interpretable, definition is
relatively quickly found. The “Ninth Report on the Development Policy of the Federal German
Government, for instance, states that people affected by poverty are unable “to lead a decent life” (BMZ
1992, 13). In this report, the following aspects are listed: “poverty means not having enough to eat, a high
rate of infant morality, a low life expectancy, low educational opportunities, poor drinking water,
inadequate health care, unfit housing and a lack of active participation in decision-making processes”.
Virtually everybody who writes on the topic of poverty can surely agree with this formulation. However,
the way in which a “decent life” is to be translated into reality is a matter on which opinions will diverge,
depending on culture, religion and value systems.
According to United Nations Development Programme (1990), an analysis of poverty typically
differentiates between absolute and relative poverty. Relative poverty exists when the subjects under
consideration are “poor” in relation to “others” - who remain, of course, to be more closely specified.
Absolute poverty, on the other hand, refers exclusively to the situation of particular individuals without
any comparison being made between them and others. Absolute poverty is considered to exist when the
lives of those concerned are impaired by physical or socio-cultural deficiencies (Hemmer and Kotter,
1990, 29). If physical human subsistence (expressed in terms of nutrition, clothing and housing) is not
guaranteed, this is termed primary (absolute) poverty. “Exclusion from participation in normal social life”
(Schauble, 1984) or, in other terms, the non- attainment of a minimum level of conventional social and
cultural existence is, by contrast, described as secondary (absolute) poverty. Obviously, this way of
classifying poverty is linked to the concept of “basic needs”. People whose minimum or basic material or
immaterial needs are not satisfied are regarded as “poor”.
In Nigeria context, at the Nigeria Economic Society conference of “Poverty in Nigeria” in 1975, many of
the papers conceived of poverty as existing when incomes or disposable resources are inadequate to
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support a minimum standard of decent living. Some elements of this minimum standard approach are
contained in Mabogunje (1975, 2007) and Onimode (1975) papers. In the same vein, Ogwumike (1991)
defines poverty as a household’s inability to provide sufficient income to satisfy its need for food, shelter,
education, clothing and transportation. He noted that minimum standards for food are based on nutritional
requirements in terms of calories and proteins, consumption habits and customs. As for non-food items
such as shelter and education, standards such as number of persons per room and number of children
receiving education/level of education attained respectively are frequency used. His line of argument is
based on the adoption of absolute or relative standards in the determination of minimum incomes or
disposable resources.
According to Aigbokhan (1999), poverty is defined as a state or long-term deprivation of well being, a
situation considered inadequate for a decent life. Poverty is thus synonymous with lack. Poverty is also a
long-term phenomenon; it does not generally describe individuals in temporary difficulty. Beyond this
broad definition, on which there is broad consensus, there are many debates on how well-being should be
measured and what indicators should be used. What has emerged from the debate is that there are two
broad approaches to defining and measuring poverty. The various definitions adopted in the literature are
variants of either of these two broad approaches. These are the ‘welfarist’ approach and the ‘non-welfaist
approach. The welfarist approach defines well-being in terms of the level of utility attained by an
individual. The approach attaches great importance to the individual’s perception of what is useful to him
or her. This approach therefore favours ‘neutral indicators, that is, those which do not favour one good
over another, in which the individual decides.
The non-welfarist approach defines well-being independently of individual’s perceptions of it. The
approach relies on what planners consider desirable from a social point of view. For measurement of
well-being, the approach uses selective indictors to distinguish certain goods considered to be socially
useful. Examples are adequate food, access to education, health care and housing. Since the 1980s this has
been expanded to include capabilities and other indicators of human development. As from the mid 1980s
reducing poverty has become a major concern for an increasing number of governments and donor
agencies. This concern emerged from observed considerable effects of certain economic reform
programmes. However, while recognizing the renewed interest in the subject, it must be appreciated that
concern about poverty and the need to reduce it have existed throughout history.
On the environment, just as there are various approaches to defining poverty, so the word ‘environment’
has emerged to means several things. Environment is defined as the outer physical and biological system
in which man and other organisms live is whole, albeit a complicated one with many interacting
components. The focus on the environment was popularized by the 1987 Brundtland Report which
identified key environmental issues and their consequences for human development, and also defined
sustainable development as ‘development that meets the needs of the present without compromising the
ability of future generations to meet their needs’. The 1987 Brundtland Commission asserted that poverty
alleviation is an essential part of avoiding environmental problems.
Gender and Poverty Indicators
Most of the ways in which poverty has been defined gave rise to poverty indicators and how they could be
measured; these in essence are the components of what make up good or bad planning. According to Sen
(1981), there are two essential questions regarding poverty: who are the poor? And at what level is poverty
defined? Conventional definitions of poverty refer to a notional poverty line (Greenley, 1994). This is
measured either as a minimum flow of real income per capital, or as a bundle of 'basic needs', which may be
quantified. Often this approach is also related to an indicator of 'quality of life'.
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Income has been the most consistent factor to be included in measurements of poverty, yet approaches to this
are consistently under review. One key question is the assessment of income in terms of flows (such as sales
from agricultural crops) or stocks (such as agricultural land that may be rented to others or used as collateral
on loans) (FOS, 2006, 1999; NISER, 2003; Lipton, 1977, 1991, Dasgupta, 1998; Baulch 1996 a and b;
Ravaillion, 1992, Reardon and Vosti, 1995). Income-based definitions of poverty have been widely criticized as
being too narrow, especially in the developing country context. The Human Development Index (HDI) is an
important attempt to broaden the range of indicators while retaining the advantages of quantification and
international comparability. It draws on a bundle of indicators referring to general standards of health,
education, and wealth which may be used to indicate general levels of development (Ravaillion, 1992;
Reardon and Vosti, 1995). Figure 1 indicates the so-called 'pyramid' of poverty concepts, which may be
adopted to indicate deprivation. The simplest and crudest definition is private consumption (PC) at the
top of the pyramid. Below this come concepts of common property resources (CPR) and state provided
commodities (SPC), and then afterwards personal assets and the subjective assessments of 'dignity'
and 'autonomy' (Baulch, 1996a).
However, recent research has pointed to weaknesses in approaches based on aggregate indices.
Aggregating may therefore not provide policy makers with sufficient guidance for specific local
problems. A related argument concerns the need to disaggregate definitions and indices of poverty in
order to reveal ways in which it may be socially or geographically concentrated. As the environmental
entitlement approach emphasizes, poverty is experienced differently according to social, gender, age
and occupational groups. Processes of impoverishment need to be disaggregated to show such
differences (World Bank, 1995a), as well as those linked to particular ecological conditions or diminished
to key environmental goods or services. Also, discussions have emphasized that poverty as so defined is
just one aspect of deprivation. Other factors include vulnerability, physical weakness and powerlessness,
which may be interlinked and mutually enforcing.
Gender and Poverty in Nigeria
It is a known fact that the relationship between gender and poverty is a complex and controversial topic.
This relationship exists even though there is extensive literature on gender and poverty but how best to
deal with two concepts remains controversial. Although much policy making has been informed by the
idea of feminization of poverty, the precise nature of the nexus between gender and poverty needs to be
better understood and operationalized in policy making (Beneria and Bisnath,. 1997). The difficulty
originates from the different shades and forms gender inequalities and poverty take depending on
the economic, social and ideological context. Yet another difficulty involves the scarcity of gender
disaggregated data for a number of countries.
Over the 26 year period 1980 to 1996 and 2002-2004, female-headed households were slightly better off
poverty wise than their male counterparts. The trend results showed for male-headed households that
relative incidence of poverty varied increasingly from 29.2 per cent to 58.2 per cent from 1996 to 2004.
The results for the female-headed households also varied increasingly from 26.9 per cent to 43.5 per cent
from 1998 to 2004 (FOS, 2006). In 1980 the poverty levels were 26.9% and 29.2% respectively, a gap
of 2 percentage points. In 1985, the gap had increased to 9 percentage points but came down slightly to
5 percentages in 1992. However, the gap widened again to 8 percentage points in 1996. According to
the Federal Office of Statistics (1999, 2006), the analysis showed that the major factor leading to this result
is the fact that the average size of female headed households is generally smaller than that of their male
counterparts. Consequently, the per capita consumption (pcc), (which is the basis of poverty computation)
in female-headed households is higher than that of female headed households. However, the comparison
here is in respect of the gender of heads of household and not the gender of all persons in general
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On the issue of poverty and gender in Nigeria, previous figures present poverty indicators by gender of
households' head in four survey years. In 1996, poverty incidence in male-headed households was 66.5%. The
corresponding figures for 1992, 1985 and 1980 were 43.1%, 47.3% and 29.2% respectively. Thus, there was
a 23 - percentage point increase in the four years between 1992 and 1996. Similarly, there was a 20 -
percentage point increase between 1980 and 1985, whereas over the seven-year period 1985 to 1992, the
earlier upward trend was reversed and a 4-percentage point decrease was recorded.
In the female-headed households, the incidence of poverty was 58.5% in 1996, double the 27.0% in 1980.
The figure for 1992 was 39.9%, while that for 1985 was 38 6%. Unlike the male headed households,
the upward trend in poverty was not fully arrested in the second period; rather a marginal increase of 1percentage
point was recorded in the period. Thus, for this group, poverty was on a continuous increase
over the sixteen year period.
Implications on Sustainable Development
Poverty and environment are often seen as inextricably linked, with the need to eradicate poverty as an initial
step to protecting the environment for it to be sustained. In all the various definitions of poverty, some of the
most notable features are the consequences that it imposes on the environment, which the physical planners
have to combat. The condition of life so degrading as to insult human dignity often results to slums and
ghettos. When people affected by poverty are unable to lead a decent life, there is no doubt that there will be a
decay of the part of the city. And when there are unsustainable, inadequate and unfit housing, there will be
the disaster of homelessness, unplanned and sprawl nature of city growth. Therefore efforts must be made to
reduce poverty situation in Nigeria. The ministries responsible for the environment should be up to their
responsibilities to help the people and keep the environment clean by enlightenment, informative jingles and
physical prompt clearance of wastes in the environment. The government in partnership with the private sector
must have cooperative and workable solutions.
In physical planning, when we talk of development control, one of the most notable features of many
Nigerian cites is the very disorderly nature of the cities. There has been a phenomenal growth of urbanization
resulting in our major cities growing and expanding in an unplanned manner. The central parts or core areas of
most cities are decaying while the sections are increasingly becoming slums. Many buildings have been and
are being constructed without approved layouts, illegal structures springing up arbitrarily, open spaces are
disappearing fast and many parts of Nigerian cities lack access. Some of these acts are the consequences of
poverty. For it is a well know idea in planning that the well laid out areas occupied by the high income people
are the best maintained and well kept parts of the cities. The high cost of land, rent and property enjoyed by
the neighbourhood is due to the nature of the environment. So we can easily discern the relationship
between sustainable environment and poverty.
Compounding the problems especially in our urban areas is the alarming rate at which urban sprawl has been
developing haphazardly. The household's inability to provide sufficient income to satisfy its needs for food,
shelter, education, clothing and transportation as poverty is defined often result in cities continued growth at a
rate faster than the types of facilities initially installed. In essence some of the problems of the environment
are as a result of poverty. The rapid population growth and physical expansion of cities have been accompanied
unplanned urban sprawl, environmental pollution, deterioration, deficiencies in modern basic facilities such as
water, electricity, hospitals, sewage municipal and community facilities, and general urban decay As
increased poverty and urbanization exert more pressures on urban facilities, most Nigerian cities tend to
have lost their original dignity, social cohesion and administrative efficiency.
Also, we have the damaging impact of capital intensive technologies, hydro electric energy and green
revolution projects, uncontrolled pollutants from industries, deforestation, and degradation from mineral
extraction. There are indeed greater challenges in
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sub-Saharan Africa than elsewhere. According to World Bank (1996), the environment in Africa is at risk for
the following reasons:
i. Heavy reliance on natural capital leading to land degradation, deforestation, lack of access to safe water
and loss of bio-diversity compounded by climatic variation;
ii. Extreme poverty along with very fast population growth; average income of $520, and a growth rate
of about 3 percent;
iii. Problems of physical infrastructure and services, health consequences of crowding, increased
exposure to concentrated waste, unsustainable consumption of resources and increasing
settlement on ecologically sensitive areas due to rapid urbanization and migration;
iv. Evolution of market economies unsupported by environmental policies and
regulations and
v. Political transition in an extremely fragmented continent.
Conclusion
This paper has tried to review the poverty level in Nigeria by examining the issues of gender, poverty and
sustainable development. It discussed extensively on the measurement of poverty indicators and gender bias. It
also examined the implications on the sustainable environment. Gender inequalities in economic life has
become a causal factor in the chronic poverty of all household members, not just of women in poor
households and the intergenerational reproduction of poverty. Gender inequality is strongly associated
with human poverty. While poverty means not having enough to eat, a high rate of infant mortality, a low
life expectancy, low educational opportunities, poor drinking water, inadequate health care, unfit housing
and a lack of active participation in decision-making processes. The effects of all these are the
consequences that poverty and gender inequality impose on the environment. When people affected by
poverty are unable to lead a decent life, there is no doubt that there will be a decay of the city. And when
there are unsustainable, inadequate and unfit housing, the condition of the environment often result to
slums and ghettos, there will be the disaster of homelessness, unplanned and sprawl nature of city growth.
References
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World Bank Agenda” Washington, D.C. The World Bank.
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Is the glass ceiling cracking? Women and economic empowerment in South Africa
Tidings P. Ndhlovu, t.ndhlovu@mmu.ac.uk
Manchester Metropolitan University, UK.
“In 2004, BWA asked if the glass ceiling was really cracking. That question remains relevant today. The
cracks might be bigger but the ceiling has not yet shattered” (Ms. Kunyalala Maphisa, President Elect:
Businesswomen’s Association, Foreword to BWA Census 2010: 7).
Abstract
Using the Businesswomen’s Association (BWA) censuses and the Global Gender Gap Index, this paper
seeks to examine the extent to which gender equality has taken place in South Africa. The findings
illustrate that women’s economic empowerment remains an intractable problem, particularly for top
professional women in business. Further, we explore the concepts of equity and (in) equality in an
attempt to draw insights for women’s economic empowerment in South Africa. Clearly, further research
needs to encompass all women in different strata of the economy and, among other things; indicators
need to incorporate informal work. Moreover, a more in-depth multidisciplinary analysis is required to
understand why there has been slow progress in addressing deep-seated gender and racial inequalities
and why fundamental change has not taken place despite considerable progress in girls’ basic education
and women’s political representation since democratic elections in 1994.
Introduction: The cracking glass ceiling?
Women’s Month in South Africa in August 2010 reminded us of that fateful day on 9 August 1956 when
over 20,000 women marched to the Union Building in Pretoria to protest against the 1950 Pass Laws.
They sang and chanted the now-familiar slogan Wathint’ Abafazi, wa thint’ imbokodo (roughly translated
from Zulu to: “if you strike women, you strike the rock or the grindstone”). The struggle for women’s
emancipation subsequently spilled over into the boardroom. Referring to boardroom-level struggles, the
out-going President of the Businesswomen’s Association’s (BWA), Basetsana Kumalo, noted that: “In
2008 we introduced the women in government element [to the BWA Census], and whilst the public sector
surpassed our expectations, there are still challenges and concerns when it comes to the remuneration of
women in the public sector compared to their male counterparts” (as cited in Mzilethi, 2010: 1). Indeed a
report by Statistics South Africa (2009) shows that in spite of women comprising 51 per cent of the
working population, they only make up 44.6 per cent of the employed (also see BWA, 2010: 11, 21). Men
often earn up to 65 per cent more than women for similar work, while women with children are more
likely to be affected by this gender pay gap. In fact, the “biggest gap between the sexes, the report found,
was among skilled agriculture employees; however, this should be interpreted with caution because of the
small numbers involved” (Vena, 2010: 1).
Undoubtedly, government legislation on race and gender, and Broad-Based Black Economic
Empowerment (B-BEE), have helped to re-shape the apartheid landscape since democratic elections
which brought Nelson Mandela and the ANC into office in 1994. However, Ms. Mayende-Sibiya, the
then Minister of Women, Children and Persons with Disabilities, sought support for a Gender Equity Bill
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to speed up gender and racial transformation, with penalties. For example, fines could be imposed on
companies that did not comply with set targets. This also came at a time when Ms. Kunyalala Maphisa,
President Elect of BWA, had warned that: “At present rates, South African women will only achieve 50%
- - - [representation] on boards in 2031 and executive managerial level in 2050” (Maphisa, 2010: 7: also
see BWA, 2010: 25). At the international level, this slow progress is of particular concern especially
when one considers that South Africa is ahead of Australia, Canada, the United States and the United
Kingdom in the proportion of company directors (BWA, 2010: 12, 21, 48; also see Asthana, 2010;
EHRC, 2010; Hausmann et al, 2009: 8, 167; 2010: 8, 27-73; Pagano, 2011; Ramesh, 2010). This means
that it may be difficult to meet the third Millennium Development Goal on gender equality (MDG 3) by
the target date of 2015, let alone mainstream gender equality into other spheres of the economy (Moser,
2007: 2, 32-35; Pagano, 2011; UN, 2000; 2001).
Addressing the Businesswomen’s Association’s (BWA) South Africa Women in Leadership Census 2010
Forum in Johannesburg on 30 March 2010, Ms. Noluthando Mayende-Sibiya, made reference to the
significant progress made in “areas such as access to basic education for girls” (Mayende-Sibiya, 2010:
1). She also observed that the Reserve Bank had appointed its first woman Governor, while there was
now a woman Chief Executive Officer (CEO) at South African Airways (SAA). She further pointed out
that: “On political representation, South Africa is amongst the top six countries in the world where
women hold more than 40% of parliamentary seats”. Subsequently, South Africa’s ranking in political
empowerment has fallen from fifth to ninth position, with the percentage of women ministers falling from
45% in 2009 to 34% in 2010 (Hausmann et al, 2009: 16, 167; 2010: 10, 28, 272-73). However, Mayenda-
Sibiya was concerned that not as much progress had taken place in the economic empowerment of women
particularly in the higher echelons of the economy. These sentiments are echoed elsewhere (Ndhlovu and
Spring, 2009: 45). For example, the number of women chairs of JSE (Johannesburg Securities Exchange)
boards has fallen from 4.6 per cent in 2009 to 4.1 per cent in 2010, while the absolute number of women
chairpersons stands at 20 (BWA, 2010: 11, 23, 25).
Our specific concern in this paper is to provide some context within which to analyse trends in South
Africa. We will begin by making some observations on the methodology that is employed by the BWA,
the largest and foremost professional women’s organisation from which the majority of data is drawn. We
use the Global Gender Gap Index to complement the BWA annual censuses data (Hausmann et al, 2009;
2010). What follows is a discussion of the limitations of the study, followed by presentation of some key
findings emanating largely from the BWA 2010 Census. It is on this basis that we briefly analyse equity
and (in)equality in the context of a political economy approach, and tease out some insights for women’s
empowerment in South Africa, before arriving at some tentative conclusions.
BWA’s Methodology and the Global Gender Gap Index
The BWA Annual Census, which has been sponsored by Nedbank from its inception in 2004, seeks to
provide an exhaustive quantitative analysis of women in South Africa’s boardrooms and senior
management, as well as promote awareness on corporate issues regarding transformation. In 2007,
Gauteng Enterprise Propeller (GEP) became a co-sponsor, while InWEnt, through its CHANCE (the
Chamber and Advisory Network for Women Entrepreneurs), has recently been involved. The President of
BWA contacted all JSE-listed companies by post to solicit information on “the status of women in
leadership roles” (BWA, 2010: 10) and, where possible, companies were asked to verify the authenticity
of this information. In 2008, a section on women in government positions was included, and a section on
listed holding companies and their subsidiaries was integrated into the 2010 Census. The BWA Census is
now widely accepted as the most comprehensive quantitative study of women in leadership positions in
South Africa.
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The BWA 2010 Census for director and directorships comprised of 335 organisations where information
was easily accessible from JSE-listed companies and state-owned enterprises (SOE); while there were
306 organisations that could actually verify their information for the executive management analysis
(BWA, 2010: 10, 75-145). For international comparisons, we also use the Global Gender Gap Index,
particularly since it is multidimensional and combines quantitative data sets and qualitative measures
(Hausmann et al, 2009; 2010; Moser, 2007: 2, 38-39). Because of missing data, coverage in the 2010
Report was ultimately restricted to 134 out of the initial 200 countries. Of this total, 17 countries had one
data missing, another 8 countries had two variables missing, and 2 countries which had been included in
previous reports were left out altogether because of lack of recent data, although the final total was
balanced by the inclusion of 2 new countries. Unlike previous reports, the 2010 Report also aggregated
five years of data (Hausmann et al, 2010: v, 6-7).
The Global Gender Gap Index examines gender equality according to “economic participation and
opportunity, educational attainment, political empowerment and health and survival” (Hausmann et al,
2009: 4: 2010: 4).
Limitations of the study
A number of problems are immediately apparent with the BWA Censuses and the Global Gender Gap
Index, the most obvious being comprehensiveness. The annual censuses concentrate on “the corporate
landscape”, even though the out-going President, Ms. Kumalo, did hint at the need to look beyond the
corporate world since “poverty … [is] a feminized development challenge” (Kumalo, 2010: 6). Moser
also notes that the Global Gender Gap Index does not “include indicators for informal work, unpaid and
reproductive work, or time-use. These are critical to understanding women’s participation in the economy
because much of women’s work falls outside the formal sector” (Moser, 2007: 39).
Allied with problems of comprehensiveness are inevitable data problems. For example, in the case of the
BWA 2010 Census, difficulties associated with accessing information on executive managers means that
“the analysis applies only to those 91.34% of those companies that responded to the Census request for
verification and information” (BWA, 2010: 12). Moreover, in this self-reporting process, the supplied
information could not be verified by the BWA or Synovate (BWA, 2010: 12, 51). On a global scale, for
reasons mentioned earlier and because the Global Gender Gap Index “is a nuanced and comprehensive
tool, the data is so complex that it is only available to measure - - - [a limited number] of countries”
(Moser, 2007: 39). This partly explains why around 66 countries did not make the final count in the 2010
Global Gender Gap Report.
There are also problems of comparing like with like. For its part, the 2010 BWA Census concedes that the
inclusion of subsidiaries makes it difficult to make historical comparisons (BWA, 2010: 10-11). In
addition, there are conceptual problems relating to gender inequality (which may be context-specific) and,
in particular, empowerment (whose interactive processes can only be ‘captured’ by qualitative rather than
quantitative methods).
With this in mind, the findings, while generally acknowledged as painting a more complete picture of the
role of professional women in business, should be used with caution. In our case, we also benefited from
discussions with a number of influential people in South Africa during the periods 2006-2008 and
November 2010.
The BWA Findings and Response
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According to the BWA 2010 Census, the steady increase in the number of women working in the
corporate world in South Africa has been tempered by a trickle of those making their way to top
corporate positions. The essential aspects of the census’ findings can be summarised as follows:
• There were only 15 women CEOs in 2010 (up from 13 in 2008 and 2009, and 8 in 2007) and 20
women chairpersons, representing only 10.5 per cent of the total (BWA, 2010: 12, 62; Ndhlovu and
Spring, 2009: 40). Of the absolute total number of CEOs, 10 were from JSE-listed companies (up
from 8 in 2009 and 7 in 2008 and 2007), while the remainder was made up from SOEs;
• Despite an absolute increase in women executive managers from 2, 761 in 2009 to 2, 827 in 2010
(compared to that of men whose numbers fell from 12, 078 in 2009 to 11, 832 in 2010), women still
constituted only 19.3 per cent of all executive managers (BWA, 2010: 11-12, 21-23, 41, 52; Ndhlovu
and Spring, 2009: 40). Most of the increases took place in Customer Services and Financials (BWA,
2010: 12, 54). Disappointing though these figures are, they are still higher than in Canada (16.9 per
cent), the US (13.5 per cent) and Australia (10.7 per cent) (BWA, 2010: 12, 52, 64). Of the absolute
number of women executive managers, 62 per cent are white (down 4.2 per cent) and 25.7 per cent
are black (BWA, 2010: 13; Ndhlovu and Spring, 2009: 41). It must also be noted that absolute
increases in numbers were largely accounted for by the inclusion of subsidiaries in the 2010 Census.
Patton (2010) is also concerned that executive pay in many South African companies is spiralling out
of control;
• Women directorships also increased from 7.1 per cent in 2004 to 14.3 per cent in 2008, 14.7 per cent
in 2009 to 16.6 per cent in 2010 (BWA, 2010: 11-12, 22, 24, 30; Ndhlovu and Spring, 2009: 40).
These figures are higher than in the US (15.2 per cent), Canada (13 per cent), the UK (12.2 per cent)
and Australia (8.3 per cent) (BWA, 2010: 52). Again the inclusion of subsidiaries has resulted in the
huge surge in absolute numbers, from 558 women directors in 2009 to 1, 056 in 2010 (as compared to
3, 366 men in 2009 and 5, 316 men in 2010). Most of this increase has taken place in the Technology,
Industrials and Resource industries which were previously the preserve of white men (BWA, 2010:
12, 54);
Since 2009, there has been a 2.4 per cent increase in women board members of JES-listed companies,
accompanied by a gradual fall in women board members of SOEs from 2008 (BWA, 2010: 32). The
picture is further complicated by the tendency for “Boards to recruit the same women into director
positions, a practice that needs to be rectified if more women are going to find their way into the
boardroom” (BWA, 2010: 24, 33, 43-44, Figure 1.1). Coloured, Indian and white women directors have
increased from 2009 (Figure 1.2; Ndhlovu and Spring, 2009: 41);
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Figure 1.1: Spread of directorships among women directors
Source: BWA, 2010: 43
Figure 1.2: Percentage of women directors positions by race
Source: BWA, 2010: 48.
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• The inclusion of government departments in the census from 2008, while not easily comparable with
corporate and SOE data, has nevertheless shown the progress being made by the government in
gender equality. There are more women (55.8 per cent) employed in government departments than
men, and if one excludes the South African National Defence Force (SANDF), the figure rises to 57.7
per cent; while the SANDF itself comprises only 25.9 per cent women (BWA, 2010: 13, 67-68).
There are also more black men and women in government departments, with a steady increase of
black women accompanied by a gradual fall of white women since 2008, while numbers of Asian and
Coloured women have remained low and static. Disappointingly, women comprise only 0.5 per cent
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of senior management, although they are making in-roads in middle management and highly skilled
production jobs (BWA, 2010: 13, 68-71);
• There has been a steady fall in the number of ‘top-performing’ companies that is, those that have
more that 25 per cent women directors or women executive managers. In 2004, there were 10, rising
to 31 in 2007 and 58 in 2008; but falling to 46 in 2009 and 41 in 2010 (BWA, 2010: 15-17). In the
2010 Census, the BWA decided to include a new category of ‘worst-performing companies’, that is,
those that do not employ any women at the director and executive manager position levels. The
Census uncovered 26 companies in this category (BWA, 2010: 18-19). Six of these named and
shamed companies and six government departments have subsequently been asked to appear at the
Commission for Gender Equality’s (CGE) public hearings at the Constitutional Court in
Johannesburg to explain why they are not making gender transformation a priority (Khuzwayo, 2010:
1; Vena, 2010: 1).
Notwithstanding this, and taking account of the Global Gender Gap Index, it is noteworthy that South
Africa’s overall world ranking has fluctuated from eighteenth in 2006 to twentieth and twenty second in
2007 and 2008, respectively, while dramatically improving its position to sixth in 2009 but then falling
back to twelfth place in 2010. In the 2010 data, South Africa was ranked first in the income category for
upper middle-income group of countries (with Cuba coming second) and ninth in political empowerment
(having fallen back from fifth place in 2009). However, South Africa occupied fifty fifth position in
economic participation and opportunity, forty third position in educational attainment, and a
disappointing one hundred and first place in health and survival (Hausmann et al, 2010: 8, 10, 12, 16, 18-
19, 28, 272-73).
It is against this background that Ms. Mayende-Sibiya proposed a number of measures to improve South
Africa’s standing. She argued for a Gender Equality Bill with 50/50 gender parity, one that has an
enforcement mechanism (Mayende-Sibiya, 2010: 2). Furthermore, the B-BEE Advisory Council was
charged with finding ways of speeding up the transformative process. In this respect, she proposed the
(re) evaluation of ownership transfers to ensure that tenders did not benefit a few people (‘tenderpreneurs’
referring to politically connected individuals who have enriched themselves via irregularly awarded
government tenders). Such benefits had to be widely spread to women and the disabled. In addition, she
suggested that a system of quotas or affirmative action, and preferential procurement and enterprise
development, would address ‘issues of control and employment equity’. She also argued that social
investment should play a prominent role in B-BEE policies by up-lifting women and the disabled (see
also Ndhlovu, 2011a). Notably, unlike many countries, and despite ‘fronting’ practices by some
companies, scorecards have gone some way in evaluating the extent to which mainstreaming of gender
equality has taken place (Ndhlovu, 2011a; Ndhlovu and Spring, 2009).
Theoretical Overview: Equity and (in)equality
In September 1995, the UN’s Beijing Declaration purportedly sought to address questions of women’s
empowerment (UN, 1995: 3). Following the Millennium Declaration (UN, 2000), the MDGs were
adopted in 2001 with a view to advance the principles that had been set out in the Beijing Declaration
(UN, 2001; UNIFEM, 2002: vii; 2009:1; 2010: 1-3; World Bank, 2003: 1-3; 2007). These precepts were
contained in Articles 15 and 17 of the SADC Protocol on Gender and Development (2008). Ms.
Mayende-Sibiya also concurred with this line of thinking. For its part, the World Bank regarded gender
inequality as crucial to both economic growth and economic development (World Bank, 2003: 1).
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What do we understand about inequality and why does it take place? Inequality raises complex economic,
social, political and ideological questions that can best be ‘disentangled’ by first establishing some ground
rules on what we mean by equality. First, in legalistic terms, equality refers to the notion that members of
society should be equal in the eyes of the law. Second, equality of opportunity conjures up an image of
meritocracy, that is, that every member of society has an equal chance of fulfilling their potential,
developing their talents and applying themselves to the task in hand. Finally, equality of outcome
represents a benchmark against which we can judge unequal distribution of income, deep-seated poverty
etc. By identifying unequal distribution, we are at the same time comparing this situation with a
hypothetical one where everyone receives the same income. For the political economy approach (below),
these concepts are contradictory and meaningless when seen through the prism of the capitalist system
that is ‘structured’ along class relations of exploitation. The BWA Census (2010), Global Gender Gap
Reports (2009; 2010) and the survey by Statistics South Africa (2009) show widespread inequalities in
South Africa. However, how can we explore this phenomenon?
From an orthodox approach, workers and capitalists receive income that is proportional to their
contribution to production. In other words, the price of labour is ‘earned’ income (wages, salaries), while
the price of capital is ‘unearned’ income (interest, dividends and profit). Using per capita income as an
indicator of inequality, orthodox economists contend that any differences in earnings can only be
explicable from differences in people’s contribution to production. Some people are argued to be
naturally more talented, more skilled and intelligent than others. When choosing between work and
leisure, some people are prepared to work longer or more intensively than others. Some people will take
on more difficult, dangerous or responsible jobs; whilst others will sacrifice earnings and leisure in order
to acquire the necessary skills for jobs that pay them handsomely in the future. Inequalities in earnings are
therefore defined as ‘fair’ and desirable since scarce talent is used in the most efficient ways, thus
benefiting society from this standpoint. Emphasis is placed on equality of opportunity rather than equality
of outcome. In her 1975 address, Margaret Thatcher encapsulated this ‘business-as-usual, do-nothing’
viewpoint: “The pursuit of equality is a mirage. What is more desirable and practical than the pursuit of
equality is the pursuit of the equality of opportunity, and opportunity means nothing unless it includes the
right to be unequal”. Inequalities in income and wealth are justified as merely reflecting inequalities in
people themselves. To the extent that women and men are arguably different in terms of their intelligence,
enterprise, etc, then logically each person must do that job for which they are most suited or most able.
Differentials in income are seen as essential in encouraging people to do the more ‘valuable’ jobs that are
determined by society, by consumer wants.
To contrast this view with the political economy approach; it is posited that private ownership creates a
class that, by virtue of its ownership of the means of production, can lay claim to the surplus gained in
production. The key to understanding unequal distribution of wealth and income from this perspective is
through the process of accumulation rather than merely biological disposition. Those people who have
higher incomes for example, be it via inheritance, (social) networking, corruption or (forcible)
expropriation, will be able to command a greater proportion of the surplus, and have greater opportunities
to accumulate. In any case, without the abolition of inheritance, equality of opportunity merely implies
inequality of outcome. There is also a greater chance that these people will hold large holdings of capital,
enabling them to cushion themselves against risk and uncertainty and have more control over privately
owned resources and financial institutions, contributing to the ever-widening inequalities under the
capitalist market system. Therefore, inequality encompasses power relations. As long as there is private
property, equality of opportunity will thus not be guaranteed, let alone lead to equality of outcome and
condition. People are ‘moulded’ by society, while at the same time they also strive to re-shape and reconstitute
that society. Since gender is a social and cultural construct within different historical contexts,
women’s subordination involves economic and racial oppression as well as patriarchal relations (Cameron
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and Ndhlovu, 2000; 2001; Cole, Cameron and Edwards, 1991; Ndhlovu, 2011a; 2011b; Ndhlovu and
Spring, 2009).
Clearly, the division of labour serves to justify unequal rewards within capitalist societies. Incentives
arguably motivate workers, who are hired and fired in accordance with the patterns of commodity
demand. Moreover, workers could be ‘persuaded’ to acquire more or different skills in order to perform
particular functions. Such division of labour can ensure that (executive) managers allocate jobs
accordingly, while keeping in reserve their ‘right to manage’, that is, discipline the workforce, co-ordinate
production and preserve their authority. If one accepts these duties as legitimate tasks of managers,
requiring specialised skills of decision-making and responsibility, then this can justify their higher
salaries. Further emphasis on differences rather than community of interest ensures that workers are
divided according to skills, responsibilities, manual and non-manual tasks etc, whilst their cohesiveness
and organisation is reduced. Indeed, sexual and racial differences can then be exploited in ways that raise
barriers to occupational mobility; and break down the unity of experience of workers, thus dividing them
into distinct groups.
Conclusion
The BWA 2010 Census concludes that, while women comprise more than half the working population of
South Africa, they represent “less than a quarter of the business decision-makers” (BWA, 2010: 13).
While strides have been made in basic education and on political representation, there are still challenges
on the economic front. The BWA is to be commended for giving us the tools to analyse some of the
trends, particularly for professional women in business, although a much more complete picture should
involve quantitative analysis of women in different strata of the economy. Further work thus needs to be
done to address this quantitative gap.
Suffice it to say that the political economy approach arguably gives us insights into questions of equity
and inequality within a capitalist society. However, what is required is a multidisciplinary and
multidimensional approach by historians and political economists to examine the historical roots of
inequalities in South Africa. In other words, what needs to be explained - especially given the prominence
of women during the struggle against apartheid; and their being at the forefront of democratic struggles in
the new South Africa, at all levels and in all organisations – is why there has been such slow progress in
reshaping gender as well as racial inequalities. Why does it seem like the opportunity for fundamental
change has been missed? Apart from economic factors, to what extent is this inertia also due to deepseated
racial and patriarchal relations? Has historical experience not shown us that culture, like any other
facet of society, is changing and dynamic? In this dialectic relationship, there are signs that South Africa
could be a model for the rest of the world in terms of gender equity, as well as liberation of both men and
women from class, racial and cultural oppression, but this requires redoubled activism to
demonstrate/evaluate effectively.
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Businesswomen’s Association (BWA) (2009). South African Women in Leadership Census 2009,
sponsored by NedBank in association with The Gauteng Enterprise Propeller (GEP).
Businesswomen’s Association (BWA) (2010). South African Women in Leadership Census 2010,
sponsored by NedBank and InWEnt.
Cameron, J. and Ndhlovu, T.P. (2000). “Development economics: an institutional bastion”, Journal of
Interdisciplinary Economics, Vol. 11: 3/4, 237-253.
Cameron, J. and Ndhlovu, T.P. (2001). “The comparative economics of EU ‘Subsidiarity’: Lessons from
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Edited by Emmanuel Obuah
development/regional economic debates”, Journal of Urban and Regional Research, Vol. 25, 327-345.
Cole, K, Cameron, J, and Edwards, C.B. (1991). Why Economists Disagree: The Political Economy of
Economics, London and New York: Longman.
Equality and Human Rights Commission (EHRC) (2010). How fair is Britain? Equality, Human Rights
and Good Relations in 2010: The First Triennial Review, London: Equality and Human Rights
Commission (EHRC).
Hausmann, R., Tyson, L. D. and Zahidi, S. (2009). The Global Gender Gap Report 2009, Geneva: World
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Hausmann, R., Tyson, L. D. and Zahidi, S. (2010). The Global Gender Gap Report 2010, Geneva: World
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Khuzwayo, W. (2010). “Gender body names and shames firms”, Business Report, 8 December.
Kumalo, B. (2010). Foreword: South African Women in Leadership Census 2010, sponsored by
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Mzilethi, M. N. (2010). “2009 SA Women in Leadership Census”, Women24.
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African Women in Leadership Census 2010, Johannesburg”, South African Government Information, 30
March.
Moser, A. (2007). Gender and Indicators – Overview Report, Brighton: Bridge Publications (Gender and
Development), Institute of Development Studies, University of Sussex, UK, July.
Ndhlovu, T.P. (2011a). “Corporate Social Responsibility and Corporate Social Investment: The South
African Case”, Journal of African Business, Vol. 12, No. 1: 72-92.
Ndhlovu, T.P. (2011b). “Globalisation or restructuring and reproduction of capital?” in S. Nwankwo and
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Development, Vol. 2, World Association for Sustainable Development (WADS).
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Transformation in Progress”, Journal of African Business, Vol. 10, No. 1: 31-49.
Pagano, M. (2011). “Last chance to get women on UK boards”, Independent on Sunday, 20 February.
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UK, 11 October.
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Gaborone, Botswana.
Statistics South Africa (2009). National Labour Force Survey 2009, Pretoria: Statistics South Africa.
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the Achievement of the Millennium Development Goals, New York: UNIFEM.
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Goals, Washington D.C.: World Bank.
324

Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Inhibitive factors facing women managers? A survey in Lagos, Nigeria.
Hassan, Adedoyin R, doyinhassan200@yahoo.co.uk
Lagos State University, Faculty of Management Sciences
Department of Business Administration and Management Technology, Ojo, Lagos, Nigeria.
Ogundele, O.J.K
Lagos State University, Faculty of Management Sciences
Department of Business Administration and Management Technology,
Ojo, Lagos, Nigeria.
Fagbemi, Ayodele
National Open University of Nigeria.
School of Business and Human Resource Management, Lagos, Nigeria.
This study investigated the barriers faced by women managers in the public and private organizations in moving to
the topmost level of their managerial career. A sample of three hundred and ninety-seven (397) women managers
spread across major relevant sub-sectors of the Nigerian economy (that is, manufacturing, banking, insurance subsectors
and the public service sub-sector) and an additional sample of fifty (50) male respondents who were top
managers from public and private organizations in Nigeria were exposed to statistically validated questionnaires
and oral interviews that measured their perceptions on the barriers faced by women managers. It was discovered
that a significant relationship existed between the gender stereotype of a woman manager and her career aspiration,
and that women managers possessed all the attributes for top management, but what affected them were the
individual factors (gender-imposed) and organizational factors within their context of operation. Suggestions were
on how the barriers could be broken include: gender-sensitivity in the organization, leadership training and
development for women, women education /education of the girl child and mentoring, among others. Also, the
development of relevant skills in management was recommended for women, to make them effective leaders and
managers.
Introduction
Nigeria is a highly patriarchal society, where men dominate all spheres of women’s lives (NGP, 2007).
As in other male-dominated societies, the social relations and activities of Nigerian women and men are
governed by patriarchal systems of socialization and cultural practices which favour the interests of men
above those of women. The access of women to leadership positions is constrained by gender roles of
men and women (Olojede, 2004; Olowe, 2001; Author, 1996).
In the Nigerian Federal Civil Service, which is the largest single-entity employer in Nigeria, 76% of civil
servants are men, while 24% are women (CIDA Nig. GSAA, 2006). Also, in spite of the appointment of
women to the position of Permanent Secretaries, they hold less than 14% of the total management level
positions in the Nigerian public sector. In Lagos state, Nigeria, private sector involvement of women as
directors and top management were 13.87% and 13.84%, respectively in 2005, while 8.14% and 13.11%
were recorded for women directors and top managers, respectively in 2006, representing a slight decline
of their involvement in the succeeding year (Goldstar, 2006, 2007).
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Anker (1997) among several scholars, conducted studies on women’s participation in the formal sector of
the economy and attested to the fact that not only is women’s participation in the formal sector low, but
that women are being discriminated against in terms of occupational segregation. This could be horizontal
segregation, that is, women being engaged in lower paying and lower status jobs; or vertical segregation,
that women occupy non-strategic positions in workplace. They seldom reach top level positions in
organizations and they do not appear to move up the hierarchy as rapidly as their male counterparts
(Droste, 2002).
Literature Review
Women represent 40% of the world labour force, yet their share of management positions remain
unacceptably low, with just a tiny proportion succeeding in breaking through the glass ceiling to obtain
top jobs (Cole, 2004; Olowe, 2001; ILO, 1998). Blake-Beard (2005) discovered in a research study that
women in the United States of America were yet to reach the top echelon in significant numbers
irrespective of their involvement in managerial positions. Also, in the United Kingdom, women held less
than 5% of senior management posts, and perhaps some 26% of all managerial-type positions, in a
situation where they made up more than 40% of the total work force (Cole, 2004). In-spite of the fact that
both sexes appear to have opportunities of leadership success, in reality, there existed implicit boundaries
beyond which women could not go (Crompton, 2006; Udegbe, 1997). Past Research results indicated a
tendency to describe female managers as less self-confident, less emotionally stable, less analytical, less
consistent and having poorer leadership abilities than male managers (Owen and Todor, 1993). Some
assumptions typical of negative stereotypes attributed to female managers are that: women tend to place
family demands above work considerations. They have children to care for; thus, they lose time for an
interest in their jobs; women work for supplemental income and that they lack the necessary drive to
succeed in business; women take negative feedback personally rather than professionally and that they
may run from the room in tears if criticized; and that women are unsuitable for top management position
because they are too emotional and lack aggressiveness.
Furthermore, a significant number of researches have been conducted on the participation of women in
the formal sector of the economy and discrimination against women in the work place. The research
findings identified by Author (2006) reveals the following: firstly, the failure of women to attain the
highest management positions in proportion to their number in the organization; Secondly, that the
prevalence of negative subordinates’ perceptions of female superiors; thirdly, that male superiors have
unfavorable attitudes toward having women in management and would probably not promote a women to
the top executive slot even when her abilities are proven and those of the alternative male were not; and
fourth, that male superiors are more likely to give, male subordinates more favorable treatment than
female subordinates in decisions regarding commendations for a promotion, attending a training seminar
and upholding a personal decision made by the subordinates (Harris,1999; Udegbe, 1997). However,
mounting evidence suggest factors that hinder women from seeking or holding managerial positions.
These include: gender stereotypes expressed on the belief that differing traits and abilities made men and
women particularly well suited to different roles, and that men are better managers than women (Judge
and Beth, 2008; Zahid and Youngbaek, 2006; Ogundele, 2005; Haralambos and Holborn,2004;
Oyekanmi,2004; Kreitner and Kinicki, 2001; Olowe, 2001 ), fewer training and development
opportunities (Canan and BenguArslan, 2009; Abdullahi, 2006; Ola-Aluko, 2003 and Fagenson,1986),
lack of mentoring(Ehrich, 2008; Aladejana, Aladejana and Ehindero, 2006; Campbell, 2006; Okurame,
2006; Ghosh, 2003; Boyd, 2000; Scandura, 1999) family responsibilities ((Hassan, 2007; Fayemi, 2005
and Ola-Aluko, 2005). From the foregoing, it may be necessary to investigate if women managers possess
all the attributes for top management, and whether some factors may have truly constituted barriers to
their upward mobility.
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Theoretical Framework
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The gender and organization theories form the bases for this study on women managers in the workplace.
The Gender Theory is a valuable contribution towards explaining occupational segregation by sex. It
shows how closely the characteristics of female occupations mirror the common stereotypes of women
and their supposed abilities and behaviour in the work place (Anker, 1997). ‘Positive’, ‘Negative’ and
‘Others’ stereotypes were identified as factors affecting the workplace behaviour of women. The Gender
theory used family interests and personal qualities to explain female work behaviour (Riger and Galligan,
1980; Fagenson, 1986), but it ignores the type of work and working conditions (Aina, 1998). Again, it
refused to consider the situational variables at the workplace, such as nature of product/service,
organizational policies formulation and implementation, type of industry, among others.
The organizational structure perspective posits that observable differences in management behaviour of
men and women are due to contextual or situational variables. Such variables are: organizational
promotion policies formulation and implementation, nature of work and type of industry. A combination
of the gender centered and organization structure perspectives gave birth to the Attribution theory which
proposes that behaviour can be attributed either to the internal factors within a person (such as abilities
relating to the individual’s gender), and the external factors within the environment (such as a difficult
task imposed on the individual by the organization). This theory examines the causal inferences that
subordinates hold as responsible for why they fail to receive promotion or are denied a developmental
opportunity (Daley, 1996). A successful person may attribute his success to his own efforts, while he
blames the environment for his failures or career stagnancy. This line of thought parallels the idea of an
internal versus external locus of control, where outcomes are attributed to one’s own actions and the
circumstances beyond one’s control respectively (Kreitner and Kinicki, 1999; Daley, 1996).
Research Methods
The total sample of respondents used in this study were three hundred and ninety seven (397) women
managers spread across seven (7) parastatals, eight (8) ministries and thirty-five (35) private organizations
in Lagos State. The sampling technique adopted was both purposive and stratified. Purposive, because the
study targeted strictly at women managers, and stratified because the respondents represented major
relevant sub-sectors of the Nigerian economy (that is, manufacturing, banking, insurance sub-sectors and
the public service sub-sector). An additional sample of fifty (50) male respondents who were top
managers from public and private organizations in Lagos State were exposed to another questionnaire
making investigations on their perception of women managers, as a ‘check’ on the self assessment made
by the sampled women managers. Lagos was chosen as the sample frame because of its cosmopolitan
nature and its status as a commercial nerve centre, where a lot of managerial activities take place, coupled
with a significant concentration of businesses in Nigeria.
The questionnaire was divided into four (4) major sections: Section A measured the demographic
characteristics of the respondents. Section B measured the gender characteristics of the women managers
on sixty (60) gender items, which either made them masculine, feminine or androgynous based on the
psychometric ratings of respondents about their own personal traits. Conceptual clarification of a clear-cut
difference between sex and gender has led us into the understanding that it is possible to be woman and
possess masculine traits at the same time, hence the need for to measure if the gender of a woman
manager can affect her career aspiration in management. Section C is the career aspiration measure of the
respondents, while Section D asked general questions on their career mobility. The Bem Sex Role
Inventory (Section B) and the career aspiration measure (Section C) have their reliability coefficients
(Cron-bach Alpha) at 0.83 and 0.81, respectively. The technical opinions of scholars of management and
gender studies confirmed the content validity of the measures used, while the pilot study result confirmed
their predictive validity.
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Discussion of Findings
Table 1 reveals that the age range 95% of the respondents fell between 25-45 years, with 89.2% of them
indicating more than a year in managerial positions in their various organizations. 70.3 % of them were
married, while 93.2% of them had at least a child in their marriages. Over 90% of them had a minimum of
first degree (HND/B,Sc) in Management and Allied disciplines.
The reactions of the interviewed women managers on the issues of training, mentoring and family
responsibilities are shown in table 2a & b respectively. A significant number of the women (almost 70%)
were not sponsored by their organizations for on-the-job trainings because they (i.e, the women)
perceived some organizational discrimination against them because of their sex. Almost 60% of them
claimed that their promotions had not been regular, while 66.25% of them asserted that they had no
mentors to guide them in the industry. Over half of the women managers expressed themselves of being
be-laboured with various tasks in the home front, which in turn had adversely affected their performance
in the workplace.
Table 3 reveals the opinion of the male respondents. “Family issues” ranked highest on the list of barriers
(48%), followed by the low level of aspirations for managerial positions exhibited by the women. Little or
lack of mentoring was identified by seven (7) male respondents, while leadership behaviour,
organizational discrimination and lack of opportunities for training and development of women at five
(5), two (2) and two (2) votes, respectively. Seventy percent (70%) of the interviewed women managers
claimed not to have low aspiration for managerial positions, while seventy percent (70%) of the sampled
male respondents coincidentally moved the opposite direction, by expressing that the women managers
had low levels of aspiration for managerial position. This finding is an indication that the opinions of both
sexes did not agree in the area of the aspiration of women for managerial positions.
Table 1: Demographic Statistics of the sampled Women Managers
VARIABLES
%
Number of Children
Age of Respondent 1-2 33
25-30 years 4.0 3-4 47.9
31-35years 30.2 5 and above 12.3
36-40years
36.3 None 6.8
40-45 years 23.9 Occupation/Profession
46 and above 5.5 Service 66.5
Length of Years as Manager Manufacturing 28.2
Under 1 year 10.8 Others 5.3
1-5 years 45.3 Academic
Qualification
6-10 years 27.5 School certificate 0
Above 10 years 16.4 A level/OND 1.6
Marital Status B.Sc/HND 59.5
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Single 18.1 Masters and above 35.3
Married 70.3 Others 3.6
Separated 6.8 Academic Discipline
Widowed 2.3 Management 45.8
Divorced 2.5 Management Related 46.4
Source: Field survey, 2010.
Table 2a: Respondents’ Reactions on Training and Mentoring
VARIABLES FREQUENCY
Number of Professional/Management Training
Attended in the last 5 years
Above 6 times
3-5 times
1-2 times
None
Reasons given for not being trained
I don’t need training
Because of my gender
My husband will not allow it
My company has a lukewarm attitude towards training
No one take care of my children
An indication of whether the respondents have mentor(s)
Yes
No
An indication of whether promotions have been regular
Yes
No
Others 7.8
37
80
202
78
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
%
9.32
20.15
50.88
19.65
397 100%
6
34
3
31
4
7.69
43.59
3.85
39.74
5.13
78 100%
134
263
33.75
66.25
397 100%
169
228
42.57
57.43
397 100%
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Proceedings of the 12th Annual Conference © 2011 IAABD
If No, an indication of whether any of these could be responsible
Care for the Home
Discrimination
Because you are a woman
Source: Field survey, 2010
Table 2b:Respondents’ reactions on Family Responsibilities
179
120
91
45.9
30.77
23.33
N.B. Some respondents picked more than one (1) reason 390 100%
VARIABLES FREQUENCY %
Number of persons in respondents’ household
Below 4
5 – 6
7 and above
The one who cooks for the family
Myself
Maids/cooks
Husband
a. & b. (i.e. myself/husband)
Number of times family shopping is done
All the time
Not all the home
Only weekends
Occasionally
During festive seasons
The one who does the family shopping
Myself
Both of us
My husband
Other
158
153
86
39.8
38.54
21.66
397 100%
234
99
12
52
58.94
24.94
3.02
13.10
397 100%
296
63
24
14
0
74.56
15.87
6.05
3.53
397 100%
206
122
37
32
0
51.89
30.73
9.32
8.06
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Source: Field survey, 2010
Table 3: Ranking of the Barriers to the career advancement of women managers.
Identified Barriers Frequency %
1 Family issues 24 48
2 Low levels of aspiration 8 16
3 Little or lack of mentoring 7 14
4 Leadership behaviour 5 10
5. Organizational discrimination 2 4
6 Lack of Training and Development opportunities 2 4
7 Nil 2 4
Total 50 100
Source: Field Survey, 2010.
Conclusion
The one who washes respondent’s clothes and that of her husband.
Myself
Both of us
Dry cleaner
The children
Servants/maids
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
397 100%
This research on women managers discovered a significant relationship between the gender stereotype of
a woman manager and her career aspiration. The findings also reveal that women managers possess all
the attributes for top management, but what affects them are family issues, individual factors (genderimposed)
and organizational factors. There should be a sustained focus on the education of the girl child
and capacity building, to achieve economic empowerment of Nigerian women. The Federal
Government’s Universal Basic Education (UBE) policy that provides free and compulsory primary
education, if fully implemented, is a step in the right direction. Inadequate education of women has
contributed to the slow advancement of women in the workplace. The various world conferences on
women coupled with the Millennium Development Goals have increased the awareness of the need for
gender equality and equity in all aspects of life including even the religious sphere. Leadership training
and development of women are also recommended, so that the many women managers in the private
sector can assume leadership roles as much as their male colleagues. Suggestions on what can make
women better managers are grouped include but not limited to gender-sensitivity in the organization;
continuous women education /education of the Girl child; male involvement in home front care;
leadership training and development for women; and mentoring of women. This exploratory study was
conducted on selected number of women managers through a judgmental/purposive sampling technique.
180
28
67
65
57
45.34
7.05
16.88
16.37
14.36
397 100%
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Thus, the sample was not representative, and the findings should therefore, be interpreted as indicator
rather than being made conclusive. For this reason, future research should: be conducted with a larger and
more representative sample; cover the opinions of a more significant number of top managers in all public
and private organizations in Nigeria and identify several other barriers to the participation of women in
management which may not have been featured in this research study. The generalizability of the results
obtained in this study for other populations remains to be tested. Hence, future research should expand on
the present study by replicating it in other disciplines and other countries or cultures.
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Nigerian Foreign Service: Challenges of Diplomatic Machinery
Eleonu, Charles Chidi rev.charleseleonu@yahoo.com
School of Humanities/Social Science, College of Arts and Science, Port Harcourt. Nigeria
Abstract
Nigeria plays key diplomatic roles in Africa and World affairs attributable to her population and abundant
natural resources. Presently, the Nigerian Foreign Service faces fierce challenges which hinder effective
diplomatic service delivery. The challenges of political leadership, corruption, funding and budget of MFA
and NIIA, federal character principle, training and capacity building among others affect the nation’s
diplomatic service. The proportion of the national budget allocated to the Foreign Service has been
negligible. The inadequate funding of the Ministry of Foreign Affairs and the Nigerian Institute of
International Affairs carrys unpleasant implications. Nigerian government through the diplomatic machinery
should restore Nigeria’s integrity in World politics and also provide the enabling domestic environment and
get Nigeria better integrated into the globalizing process.
Introduction
It is important to eliminate the challenges which hinder effective diplomatic service delivery in
Nigeria. Foreign Service officers engage in menial jobs abroad and locally recruited staffs abroad
are owed salaries. The assessed dues of Nigeria are not regularly paid to various International
organizations she belongs to. Foreign affairs have become specialized and require trained minds
and skills. The Nigerian diplomatic machinery therefore should help to rebuild the battered
Nigeria’s profile and dignity of Nigerians.
Nigerian foreign relations have been influenced by perceived national interest. This is to say that
Nigerian relations with other actors in the international system, as well as its strategy in defence
and security, have been affected by the country’s national interest. Olajide and Aluko (1981),
Olusanya and Akindele (1986), and Aforka Nweke (1986) give a fairly adequate guideline of
Nigeria’s national interest. Aluko lists self-preservation of the country; the defence of the country’s
independence, the economic and well-being of the people as what constitute Nigerian national
interest. In addition to these are defence, preservation and promotion of the ways of life of
Nigerians, especially their democratic values; enhancement of the standing in the comity of nations,
especially in Africa; and in promotion of world peace (Aluko, 1981:265). For Olusanya and
Akindele, Nigeria’s national interest are: the defence of the nation’s sovereignty, independence and
territorial integrity, the raising of human dignity of black men and women all over the world, the
creation of the relevant political and economic conditions in Africa and the rest of the world, the
promotion and improvement of the economic well-being of the Nigerian citizens and the promotion
of world peace and justice (1986:2). Other factors which have shaped the pattern of Nigeria’s
foreign policy formulation and implementation as the determinants of the country’s foreign policy
are: the historical factor and the nature of the evolution of the Nigerian state, the political structure
of the country, social and cultural considerations, level of economic development, demographic
factor, geographical location and the strength of the military. Nigerian foreign relations at the time
of independence in October 1, 1960 were conducted by Aihaji Tafawa Balewa. During his regime,
Nigerian government granted 40,000 Pounds sterling to assist Britain in building her diplomatic
mission in Lagos, where as the Soviet Union was prevented from obtaining a flat for its embassy in
Lagos. Literature from the communist world was banned and scholarship awards from Eastern
Europe were refused.
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Conceptual Definitions
Challenges in the Era of Globalization
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Foreign Service
According to the Encarta English Dictionary (2009) Foreign Service refers to the diplomatic or
consular staff of a country. Michalak (2009) explains that the Foreign Service is responsible for
gathering information conducive to the formulation of foreign policy, for implementing foreign
policy abroad, and for safeguarding national citizens and their personnel and commercial interests
in other lands. Foreign Service maintains embassies, missions, consulates all over the world. In
Nigeria the Foreign Service is the segment of the federal ministry of foreign affairs. The Foreign
Service combines diplomatic personnel primarily concerned with governmental relations or
consular personnel concerned with individual and commercial matters.
Diplomatic Machinery
The diplomatic machinery is the institutions that carry out the diplomatic service of nations. The
conduct of relations with other countries as stated by Michalak (2009) has three requirements such
as, establishment of an institution in the home country to formulate policy and instruct personnel
sent, establishment of an institution abroad from which contacts are made in the foreign country
and the personnel to make the system work. The Nigerian Diplomatic Machinery includes the
Ministry of Foreign Affairs MFA, Foreign Missions, Foreign Service, and the Nigerian Institute of
International Affairs NIIA.
Ministry of Foreign Affairs (MFA)
In Nigeria the government ministry that handles foreign relations matters is the Ministry of Foreign
Affairs. It is charged with primary responsibility of formulating, articulating and conduct of
Nigeria’s Foreign Policy. The charter commits the Ministry of Foreign Affairs to utilize its unique
character and leverage to articulate and promote within the global, sub-regional and domestic
milieu, values which promote Nigeria’s security, stability and prosperity. In particular, it enunciates
the centrality of effective Service Delivery in the attainment of Foreign policy goals and objectives
in a global milieu in which globalization presents nations with challenges hitherto unimagined. The
head of the Ministry is politically appointed by the nation’s President. From 1960 to 1961, Sir
Abubàkar Tafawa Balewa, Nigerian Prime Minister was also in charge of Foreign Affairs. From
1961 to 1965 he handed over to Jaja Nwachukwu. The minister is a cabinet member who helps to
form the foreign policy of the state. He was responsible for many diplomatic duties like hosting
foreign world leaders and going on state visits to other countries. From a small group in the first
Prime Minister’s office in 1957, the Nigerian diplomatic service grew into an organization with a
staff of over 4000 and 92 overseas embassies by 1981, reduced to 86 by the Buhari administration.
Ministry of Foreign Affairs has remained probably the biggest single bureaucracy.
Foreign Missions
Foreign mission refers to the embassy abroad (Encarta 2009). In Nigeria, the head is an
Ambassador assisted by a career diplomat. A mission is organized into functional sections that deal
with respective areas as political affairs, consular and commercial affairs including attaches.
Missions are largely staffed by Foreign Service Officers from Nigeria but citizens of the host
country may be hired as translators or for no sensitive jobs. Diplomatic missions negotiate issues of
great political significance, meet with foreign students, issue visas, and perform consular operations
concerned with the economic and commercial relations between nations. Consular work involves
the issue of birth, death and marriage certificates to citizens residing or traveling in the foreign
country. Consular officers regulate shipping and commodities exported to their home nations.
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The Nigerian Institute of International Affairs NIIA
Akinterinwa (2001) reveals that the NIIA was established in 1961 as an independent and non-profit
making organization. The NIIA has an independent status. Its mandate is to determine and predict
foreign policy attitudes. NIIA is made up of Research Fellows who are better exposed to the rigors
of foreign policy making and nation building. The objectives of the NIIA were spelt out in its Act
of 197 1(Cap. 311). The NIIA is not and should not be treated as a Ministry, it is conceived and
expected to be a source of information on world affairs and provide a meeting ground for people of
all nations for the cross-fertilization of minds. The NIIA has a statutory obligation to regularly keep
the MFA abreast of current international developments, carry out research, disseminate information
through lectures, reports, conferences, workshops, colloquia etc. NIIA has no independent
character, it is still a government supervised and government-funded institution since 18th August
1974. The NIIA must be involved in the MFA effort required to build an efficient Foreign Ministry
that is knowledge-based and technology driven for service delivery in the pursuit of Nigeria’s
interests and foreign goals and objectives. Leadership issue between the NI1A and the MFA raises
the problem of supervisory authority and functional relevance. The question who should supervise
the Institute? MFA or the Presidency is yet to be answered.
Nigeria’s Foreign Policy
Coker (2001) expressed that Africa remains central to Nigeria’s external relations. Nigeria modest
role in African and World affairs is informed by her population of over 120 million as largest in
Africa and its abundant natural resources. It is explained that in the diplomatic shuttle over the need
for an African body with one voice in world affairs, Nigeria was instrumental to the establishment
of the Monrovia (moderate) group of nations, whose merger with the Ghana led Casablanca
(radical) group, formed the Organization of African Unity (OAU) in 1963. Nigeria also played
major role in the transformation of the OAU into the African Union, in July 2002. In the 1970s
Nigeria’s foreign policy was credible. Nigeria’s wealth from oil increased dramatically,
empowering the governments of Yakubu Gowon and Obasanjo to embark on major nationalist and
Pan- African policies in the continent. Nigeria facilitated the signing of the Lome Convention to
form ECOWAS in 1975 and supported liberation movements leading to liberation of states in
Southern Africa. Nigeria almost single handedly, funded and provided men, arms, and
ammunitions, and materials for the ECOWAS Monitoring Groups, ECOMOG, which intervened in
Liberia and Sierra Loene.
Annulment of June 12 1993 Presidential election and the hanging of the Ogoni nine including Ken
Saro Wiwa led to Nigeria’s suspension from the Commonwealth of Nations on November 1995.
On May 29 1999, Obasanjo government embarked on image redeeming mission across the globe
especially seeking to restore Nigeria’s integrity among the comity of nations, and to provide the
enabling domestic environment for foreign investors and development, redress the debt burden.
Background of Study
In the 1970s oil revenue greatly improved Nigeria’s economic fortunes. This made Nigeria very
active in the international system especially from the period 1976 to 1979. Following the Yom
Kippur War of 1973 and the Arab oil embargo that followed, demand for oil increased. As the price
also increased astronomically, revenue from oil sales came to transform Nigeria’s economic
landscape. From a paltry $411 million in 1970, revenue from oil rose to over $8 billion in 1977 and
about $12 billion in 1979 (Ogwu and Olukoshi, 2002:13). The huge revenue from oil enabled
Nigeria to execute its reconciliation programmes at the end of Nigerian civil war and also to pursue
an enviable foreign policy. Thus the country did not have to become indebted to any state in its
programme of reconciliation and reconstruction in the early 1970s. Nigeria became buoyant enough
to commit N19.5 million to the Commonwealth Fund for Technical Co-operation and to offer to
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pay salaries of the civil servants of Grenada following Gowon’s order at the Commonwealth Heads
of Government Meeting at Jamaica in 1975. Countries like the United States of America which had
hitherto not regarded Nigeria in their policy calculations began to increasingly pay attention to the
country. Nigerian oil had become very important to many countries of the West including the
U.S.A. which bought 31 percent of Nigerian oil in 1974 and even more between 1976 and 1979.
Nigeria’s external relations from 1970-1975 featured the strong influence of the Head of State,
General Gowon on the conduct of the relations, termed ‘personal diplomacy’. Reflected here was
the nature and style of the assistance and concessions that Nigeria gave to many countries of the
West including the U.S.A. which bought 31 percent of Nigerian oil in 1974 and even more between
1976 and 1979. Nigeria’s external relations from 1970-1975 featured the strong influence of the
Head of State, General Gowon on the conduct of the relations, termed ‘personal diplomacy’.
Reflected here was the nature and style of the assistance and concessions that Nigeria gave to
several countries during the period, payment of salaries of Grenadian civil servants, granting to
Shell-BP a special concession where Nigeria took over only 35 per cent of its shares as against 55
per cent decided upon by government and which was taken over in other oil companies.
Positively many African countries were supported by Nigeria in various ways, even those that
recognized Biafra during the civil war such as Gabon, Tanzania and Cote d’lvoire. Gowon’s
forgiving attitude and accommodating disposition came to positively influence Nigeria’s foreign
relations. Britian benefited more from this disposition and Gowon received praises from the
Western media, especially the British press (Aworawo, 2003:145). In May 1975 the Economic
Community of West African States (ECOWAS) was established through the efforts of Gowon and
Togo President, Gnassingbe Eyadema. Nigeria’s leadership role in Africa became clearly
manifested with the founding of ECOWAS. This was remarkable considering the fact that nine out
of the fifteen founding members of the organization were former French colonies with strong
attachment to France. A favourable condition existed for Nigeria to widen its range of friends and
project itself vibrantly in the comity of nations in the 1970s. From August 1975 to October 1979,
Nigeria’s support for African states and defence of African interests was most vigorously
displayed. On 25 November 1975, Nigeria gave a huge grant to the MPLA government Zanda and
pledged support in other ways. This pitched Nigeria against the Western powers, including Britain
and the U. S. A. Nigeria stood its ground and this won for it great accolade, a champion of African
interests. From 1976 and 1979 Nigeria was actively involved in every African country struggling to
break the yoke of colonialism, including South Africa where apartheid policy excluded the African
majority from political participation.
At the time in United States, Democrats won the presidential election and Jimmy Carter assumed
office in 1976. The new Carter administration sought to draw the United States closer to Africa and
reach out more to Blacks and other races both within and outside the United States. Andrew Young
was appointed American Ambassador to the United Nations as part of the new focus of American
foreign policy. This greatly improved relations between Nigeria and the United States. Nigeria’s
Head of State Olusegun Obasanjo paid a visit to the United States in October 1977 and President
Carter reciprocated by visiting Nigeria in April 1978. The leaders became personal friends and
economic relations attained new heights during the period. New areas of cooperation were
developed in politics, culture and tourism. Chief Olusegun Obasanjo on 29 May 1999 had a
favourable environment to conduct external relations. Chief Obasanjo toured many countries in
Africa, Asia and the West to seek closer cooperation with Nigeria. Andrew Young described the
purpose of these early moves thus: From the very beginnings of the return to democracy in Nigeria,
the foreign policy of the Obasanjo administration has been refocusing on correcting misconceptions
about Nigeria and enhancing the country’s profile as a regional power in Africa. The foreign policy
thrust has sought to reintegrate Nigeria into the global community as a means of ensuring that this
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large and abundantly blessed nation derives the full benefits of globalization and diversification of
her economic base (Andrew Young 2003:1)
Andrew Young and others recognized the place of oil in Nigeria’s foreign relations. There was
increasing recognition of Nigeria in international organizations and many important world leaders
actually visited the country to seek closer co-operation between Nigeria and their respective
countries. Presidents Bill Clinton visited Nigeria in August 2000 and George Walker Bush (Jnr.) in
July 2003. President Obasanjo became the leader of G77 in 2001 and Nigeria began to play
important roles in the Commonwealth. Nigerian leader with the leaders of Australia and South
Africa equally became the leading heads in finding solution to the face-off between Britain and
Zimbabwe over the land seizure from white farmers. Nigeria was at the forefront of the
establishment of the New Partnership for Africa’s Development (NEPAD), Africa’s new economic
initiative which was endorsed by African Heads of State at the OAU Summit in Lusaka, Zambia in
July 2001.
Nigeria led the negotiation leading to the stepping down of Liberian President Charles Taylor in
August 2003 and Taylor’s exit made Liberia to chart a new course from its ruinous conflicts. Also
Commonwealth Heads of Government Meetings (CHOGM) was successfully hosted by Nigeria in
December 2003. Nigeria has remained a key player in the international oil industry since the
1970s, and maintains membership in Organization of the Petroleum Exporting Countries OPEC
which Nigeria joined in July, 1971. Nigeria is also a member of the International Criminal Court,
and the Commonwealth of Nations. The country’s external relations have been active during
periods of economic stability.
Theoretical Framework
The adopted theoretical frame work is the functional approach. The theory posits that the society is
a system of interrelated parts which together forms a whole. The functionalists argue that an
understanding of any part of a system enhances the thorough understanding of the relationship with
other parts. The basic unit of analysis is the society and its various parts can be understood mainly
in terms of their functions within the whole. The functionalists assume that society has basic needs
which, must be actualized in order to survive. Haralambos (2004) explains that these basic needs
include adaptation, goal attainment, integration and pattern maintenance. Functions explain the
contributions which a part or an institution makes to the maintenance of the social system. In the
light of this research, the functionalist theory explains the contribution of the Nigerian Foreign
Service in the conduct of Nigerian diplomatic relations. Nigeria is a component of the international
system and the capability of Nigeria to perform in world politics depends on the ability of the
Nigerian Foreign Service. How and when national objectives abroad are realized, when Nigeria
becomes an activist in world affairs and how Nigeria play leadership role in Africa will properly be
made bare through the functions of the Nigerian Foreign Service.
Challenges Facing the Nigerian Foreign Service:
Challenge of Political Leadership
Nigeria lacks a leadership that is visionary with a will, dynamic, purposeful, and one committed to
the over all development of the people and the country. The nation’s political leadership dominates
and regulates the direction of foreign policy in terms of fulfillment of its official mandate,
motivational leadership, and funding of research activities. The Nigerian Foreign Minister has not
been regarded and does not sit on the highest policy councils of state; the NIIA independent
character was and is still not clear as the NIJA has been a government supervised and government-
funded institution since 18th August 1974 and the end result has been the hindrance to effective
diplomatic service delivery. As Akindele (2002) put it, the Ministry of Foreign Affairs has quite
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understandably never been the nerve-center for the conduct and management of the country’s
diplomacy. The ministry’s policy objectives are imprecise. Broad objectives to be translated into
specific national interests and program of actions in a constantly changing external environment not
under our control are relegated. The principal task of MFA, in the making of foreign policy in
Nigeria is undermined. Gambari (1989) explains that the National Defense and Security Council
presided over by the Head of State deals authoritatively with broad foreign policy issues. The
Council is flexible machinery for supervision and coordinating the greater part of our external
relations which has been badly needed and always missing. The fact is that the Ministry of Foreign
Affairs is and has never been the principal actor or one of the central actors in the making and
implementation of Nigeria’s external economic policies. Foreign Affairs Ministry must perform
duties and responsibilities for external relations among the various ministries and agencies of
government.
Challenge of Training and Capacity Building
For better results in Nigerian conduct of foreign relations, specialization and training cannot be
overemphasized. Observation in Federal Government views on the Report of the Committee on the
Training Needs of External Affairs Officers, is that, “the success or failure of the government in the
pursuit of its foreign policy objectives is directly correlated to the caliber of its Foreign Service
officers and to the type of training of its officers who have to cope with an increasingly complex
and constantly changing international situation. This was not frontally and systematically addressed
until the establishment in 1982 of the Foreign Service Academy within the Ministry of External
Affairs itself. Also the Aguda Committee in 1984 reviewed the training needs of the ministry of
External Affairs officers and the Federal Government recognized three categories of officers for
training purposes: new entrants (GL. 08); mid career officers (GL 10-13) and senior cadre officers
(GL 14-17); and prescribed different durations of training for them (Akindele, 2002). These are
clearly capacity-building measures designed to improve the performance, efficiency and
productivity of the officers, but corruption and lip service has not made it feasible and tenable.
Challenge of Political Interference
Akinterinwa explains that his appointment as Special Assistant to the Minister of Foreign Affairs in
September 2003 took place when the NIIA was no longer at its best, particularly in terms of
fulfillment of its official mandate, motivational leadership, and funding of research activities. The
Nigerian Foreign Minister has not been regarded and does not sit on the highest policy councils of
state. Gambari (1989) insists that, a Foreign Minister or Permanent Representative to the United
Nations can not operate in a political vacuum. He has to relate to the economic, po1itica and
institutional environment inside and outside the government under which he serves. His success is
directly dependent on his standing with and support from the Head of State and Government and
the highest levels of the administration. Ishaya Audu was not a member of NPN policy making
caucus, this during President Shagari’s administration posed a serious handicap in his conduct of
foreign policy. Under the Buhari and Babangida administrations, when the Foreign Minister was
not a member of the Supreme Military Council and the Armed Forces Ruling Councils, it was also
difficult for the Foreign Affairs ministry to exercise authoritative inter-ministerial coordination for
external relations, and in their security, political, trade, and economic dimensions.
Challenge of Federal Character Principle
The principle of maintaining a “federal character” where public servants must be selected from the
distinct states of the federation for recruitment of Foreign Service officers badly sacrifice merit,
talent utilization, and efficiency. Recruitment into the Foreign Service should be highly competitive
and only the best should be good enough for Nigeria. Talent is fairly spread in Nigeria and with
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increasing young people interested in joining the Foreign Service from all states of the federation;
the nation should recruit only the best irrespective of their state of origin.
Challenge of Budgetary Allocation to Government Departments
The most crucial factor is adequate funding. The budgetary allocations to the Ministry of Foreign
Affairs have been on the decline. For example, in 1982, the total budgetary allocation including
contributions to international organizations, agencies and bilateral external aid was N133, 018,450
or 2.89 percent of the national budget. By 1985, the figure had declined to N92, 079,190, or 1.52%.
There are however, several countries in Africa with lesser external responsibilities, fewer external
missions and much smaller consular problems, with higher allocations in their national budget. The
MFA and the NIIA are poorly funded, Research Fellows of NIIA often complain not taken on
foreign trips while Staffs there also scramble to travel out. The steps had been to use the Chief
Executive of the Institute. Under-funding of research activities can be counter-productive. At the
NIIA for example, acquisition of new books and the faithful execution of NIIA mandate is difficult.
Participation by Research Fellows in seminars conferences, colloquia, workshops, etc, outside of
the Institute is hindered (Banjo, 1986). The institute is forced to depend on foreign research
foundations for financial support and the security implications are also there, especially when such
foundations specifically fund research programmes under the cover of democracy and human
rights, il1 election monitoring, rule of law, etc.
Challenge of Institutional Rivalry
The relationship between the NIIA and the MFA is not cordial. Research Fellows of NIIA often
complain that specialists and experts at the NIIA are not consulted. The cooperation cannot be said
to be good enough for national policy development purposes (Akinterinwa 2001, Banjo 1986).
Institutional rivalry abounds mainly because of unclear distinction of official duties and it can
certainly be counter-productive, and will certainly undermine the capacity of the nation to reap
maximum benefit from the orientation in the conduct and management of the country’s external
relations. An important strategy for laying the foundation for a successful conduct of diplomacy in
Nigeria and elsewhere is co-operation and collaboration among the various agencies of government
that have duties and responsibilities bearing on the country’s external transactions. There has to be
a new way and a new basis for a better relationship and understanding between both institutions.
The government must clearly define what ministry should supervise what agency. The question of
who should supervise the institute, MFA or the Presidency or vice presidency is yet to be answered.
Challenge of Corruption
Politics has become a big business in Nigeria. Political and public office has become very attractive
and lucrative as it constitutes easy ways for private property and capital accumulation. Political and
public office holders without let and with impunity loot state treasuries for personal and group
benefits. The conviction of some former state governors, members of National Assembly, and other
public and political office holders by the Economic and Financial Crimes Commission EFCC and
the Independent Corrupt Practices Commission ICPC, testifies to this fact. Nigeria can never be
taken serious in international relations in so far as corruption remains the bane of Nigerian political
leadership. Anza Philips (Newswatch April 12, 2010), explains how former ministers, Aliero,
Ruma, Aondoakaa, Lawal, Lukman and Omotoba etc; got involved in questionable deals
amounting to N1 .7 trillion exposing former Agriculture Minister Ruma, non-disbursement of N200
billion agricultural loans approved by the federal government in 2009 to beneficiaries. In The News
26 April, 2010 Oluokun Ayorinde reports how a Zenith Bank Manager absconds with N10 Billion.
In the same way, allocations to institutions, salaries, constituency project fund and allowances of
public servants are tampered with.
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Challenge of Nigerian Battered Image Abroad
Abatti (1999) mentioned that the Babangida regime gave a lethal blow to Nigeria’s image abroad,
Nigeria’s foreign policy in particular and gave examples of the financial waste. Human rights
abuses and the cancellation of the June 12 election at a time when the G7 and most OECD
countries had made democracy, good governance, and human rights essential determining elements
in international politics and diplomatic relations can not be ignored. Effects of the hanging of the
“Ogoni Nine, including Ken Saro Wiwa is devastating when all Commonwealth Heads of State and
Government were meeting in Australia. The annulment of the June 12 presidential elections and the
hanging of the “Ogoni nine” were two lethal blows to Nigeria’s image abroad and now terrorism.
This Nigeria’s bad image has not been repaired.
External Influence Challenge
Akinterinwa on Diplomatic Practice and Foreign Policy Theory observed, that a solid and enduring
national consensus on foreign policy will continue to elude Nigeria because of conservative
economic and political policies. Added is that as long as Nigeria’s economic structure and external
trade are largely capitalist and pro-west, Nigeria is unlikely to be able to pursue truly non-aligned
and sustainable radical policies abroad. Nigeria for long does beg for support from capitalist
European states, America and other military dictatorships for limited gains within African
diplomatic circles. Nigeria should not build her foreign policy on one pillar if she wants to play a
role in high level current diplomatic circles.
Challenge of Security and Patriotism
The task of Consular officers to regulate shipping and commodities exported to their home nations
are neglected for personal gains in Nigeria. Banned goods and articles of several kinds find their
way into the country. The Nigerian consular officers under the Foreign Service have failed the
citizens of Nigeria.
Conclusion and Implications
The Nigerian diplomatic initiative in world affairs prompted the establishment of (OAU) in 1963.
Nigeria also played major role in the transformation of, the OAU into the African Union in July
2002. Nigeria was named a frontline state because of her stand against minority rule in Southern
Africa and for liberation of African states. Babangida regime gave a lethal blow to Nigeria’s image
abroad and Nigerian foreign policy in particular, the financial waste, human rights abuses, the
cancellation of the June 12, 1993 election and the hanging of Saro Wiwa. These among other
challenges of political leadership, corruption and inadequate funding affect effective diplomatic
service delivery.
Implications
For Nigerian diplomatic machinery and Nigeria’s foreign policy to be relevant and credible,
Nigerian government must embark on image redeeming mission to restore Nigeria’s integrity in
World politics and to provide the enabling domestic environment for development. Nigeria need to
redress the debt burden, and make Nigeria better integrated into the globalizing process by fighting
headlong the evils of corruption. In the pursuit of the nation’s foreign policy, unless there is
increase in budgetary allocations to Nigerian Foreign Service, there will be no motivation to
deliver. As a result of inadequate funding, there is bound to be a decline in commitment of patriotic
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Research Fellows and the Nigerian Foreign Service will also be clearly irrelevant as national
objectives abroad will not be realized. Nigeria may not become an activist in world affairs and
Nigerian large national objectives abroad may be blunted with the very instrument of
implementation. Most importantly Nigerian diplomatic relations will not tackle the problems of
dependence and underdevelopment.
References
Adebo, Simeon 0. (1983). Our Unforgettable Years, Macmillan, p. 507.
Adeniran, T. (1989). “Nigeria and Great Britain”. In A. B. Akriyemi et al (eds.) Nigeria Since
Independence: International Relations. Ibadan: Heinemann.
Akinboyc, S. 0. (1999). “Nigeria’s Foreign Policy’ In P.. Anifowose and F. Enemou (eds.)
Elements of Politics. Lagos: Maithouse.
Akinrinade. 0. (1992). “From Hostility to Accommodation: Nigeria’s West African Policy, 1984-
1990”. Nigerian Journal of International Affairs. 18/1
Aluko, 0. (1981). Essays in Nigerian Foreign Policy. London: George Allen and Unwin.
Akinboye, S. 0. (1993). Nigeria’s Foreign Policy under Babangida, Nigerian Forum 13 (9&10)
September-Oct. p 240-250.
Abatti, Reuben (1999).What is Obasanjo Foreign Policy? The Guardian Aug. 29: 10.
Akindele, R. A. (2001). Capacity-Building for the Conduct of Nigeria’s Economic Diplomacy, In
Coker, Dada and Oni, J (2001). Nigeria’s Foreign Policy, Forty Years after NIIA, Bibliography
Series No.20p1 17.
Akinterinwa, A. Bola (2001). “Nigeria and the Consultation Doctrine,” Nigeria in the world: Issues
and Problems, the sleeping Giant, Lagos: Pumark, pp.1-3.
Aluko, Olajide (1990) Oil at Concessionary Prices for Africa 1960-1990 ed. by Olusanya, G. O.
and Akindele NIIA pp322-348.
Amale, Ayo S. (2002). The Constraints of Nigeria’s Economic Diplomacy in Ogwu and Olukoshi
(eds.) The Economic Diplomacy of the Nigerian State.
Aworawo, D. (2002). “Nigeria from Independence to the Year 2000”.
Banjo, A.O. (1985). Nigerian Institute of International Affairs 1961-1986 the Story so far, Lagos:
NIIA, Monograph Series No1.p.20
Coker, Q.F.(2001). Overview of Nigeria’s Foreign Policy, In Coker, Dada, and Oni J. Nigeria’s
Foreign Policy, Forty Years After NIIA Bibliography No. 20 p.2.
Frankel, .1. (1963) The Making of Foreign Policy: An Analysis of Decision making. London: OUP.
Gambari, I. (1989). Theory and Reality in Foreign Policy Making: Nigeria after the Second
Republic, Humanities Press. N. J.
Haralambos, M. and Holborn, M. (2004). Themes and Perspectives in Sociology, 6th edition. Delhi,
Oxford University Press.
Idenyi, T. M. (2010). Nigeria and the ECOMOG Intervention in West Africa. Graduate Seminar
University Uyo, Nigeria. February 2010.
Ihonvbere, Julius O. (1982). Resource Availability and Foreign Policy Change: The Impact of Oil
on Nigerian Foreign Policy since Independence Africa Spectrum.
Mbadiwe, G, (2003). Nigeria’s Foreign Relations in the Obasanjo - Atiku Years. Abuja: NEEW
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Mingst, Karen A. (2004). Essentials of International Relations, 3 rd ed. p 108 Norton.
Michalak, Stanley J. (2009) “Diplomacy” Microsoft Encarta DVD 2009 The News 26 April, (2010)
p. 32.
Newswatch, April, 2010 12p.12
Nweke, A. (1986) “The Domestic Structure and Processes of Nigeria’s Foreign Policy”. In G.O
Olusanya and R. Akindele (eds.) Nigeria’s External Relations: The First Twenty-five years.
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Ogwu and Olukoshi (Eds) (2002) Economic Diplomacy of the Nigerian State NIIA, Franka
Publishers, Nigeria
Olaiya, A. `` ECOMOG Mission and Mandate`` The Peacemaker, vol.1 No l September 1991-
March 92 p.11
Okpokpo, Ebenezer (1999).The Challenges facing Nigeria’s foreign Policy in the Next Millennium
3(2):4.
Todaro, M. P., (1977) Economics for a Developing World, Longman.
Vogt, M.A (1992). (Ed) Amadu Essay’s article in the Liberian crisis and ECOMOG, Gabumo
publishing company, Lagos
Guardian, Lagos (1990) ``Evacuation of Nigerians from Liberia`` 5 June p.1.
PM News, August 25, 1999 Lagos
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Abstract
The Dollarization of the Zimbabwe Economy in the Era of Globalization.
Zuvarashe Judith Mushipe, jzmushipe@yahoo.com
Assistant Professor: Institute for Professional Studies, St Thomas University, Miami, Florida
This paper discusses the experiences of the Zimbabwean people as the country introduces a system of multicurrency
from 2009. The country that experienced an economic meltdown from 2000-2008 found itself with no choice to
salvage the economy, but to introduce the use of multicurrency that included the Botswana Pula, the South African
Rand and the US Dollar. The major currency used however has been the US Dollar. The dollarization of the
economy has led to the practice of barter system particularly in rural Zimbabwe where about 80% of the population
is found and is also not earning the dollar. This has been a major set back in the history of the country in this Era of
Globalization.
Introduction: Zimbabwe’s Brief History
Zimbabwe a Southern African country got its Independence beginning of 1980 after 90 years of British
colonial rule. At independence the economy flourished as the country got help from the international
community under the 1981 Zimbabwe Conference on Reconstruction and Development (ZIMCORD)
agenda. The funds donated were meant to address the 4Rs of development then which were:
• Reconstruction of the infrastructure that had been destroyed during the war of liberation that was
staged from 1963 through 1979.
• Resettlement of the so many people who had been displayed during the war of liberation.
• Rehabilitation of the war veterans that had been injured and traumatized during the war
• Reconciliation with the white population that was prepared to remain in Zimbabwe after the war.
During the first decade the economy grew at 2.7% while the population grew at 2.8%. (GOZ 1991).
Apparently, by the end of the first decade the Gross Domestic Product continued to lag behind as the
economy was spending more than it was earning the revenue. During the same period the central
government’s fiscal deficit was in excess of 10% of GDP. At that point in 1995 the World Bank IMF
recommended that the Zimbabwe government embark on an Economic Structural Adjustment Programme
(ESAP) that was meant to stimulate economic growth as government liberalized the labour laws and open
up the economy to competition.
ESAP was a daunting task for government to implement since it infringed some of the benefits such as
free education and medication that the people were used to having. Besides the employers had the liberty
to hire and fire. Of course with the opening up of the economy, inflation also became uncontrollable and
the unemployment rate went up. With the advent of Economic Structural Adjustment Programme, labour
laws were liberalized and employment security previously granted to labour was taken away in the spirit
of promoting flexibility in the labour market (Raftopoulous and Sachikonye 2001, Ncube, 1998). The
Zimbabwe economy was aligning itself with the dictates of globalization.
Era of Globalization
To begin with globalization is the process by which regional economies, societies and cultures have
become integrated through a global network of political ideas through communication, transportation and
trade (Global encyclopedia, 2011). It is the shift toward a more integrated and interdependent world
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economy (Hill 2011). The term ‘globalization’ can relate to any of the several levels of aggregation: the
entire world, specific country, a specific industry, a specific company or even a specific line of business
or functional activity within the company (Govindarajan and Gupta 2000).
At a worldwide level, globalization refers to the aggregate level of economic interdependence among the
various countries. At the level of a specific country, globalisation refers to the extent of the inter-linkages
between that particular country’s economy and the rest of the world. At the level of a specific industry,
globalisation refers to the degree to which, within that industry, a company’s competitive position within
one country is interdependent with its competitive position in another country. At the level of a specific
company, globalisation is viewed as a four-dimensional construct with the four dimensions being:
• Globalisation of market presence, meaning the extent to which the company is targeting
customers in all major markets within its industry throughout the world.
• Globalisation of supply chain, which refers to the extent to which the company is accessing
globally most optimal locations for the performance of various activities in its supply chain
• Globalisation of capital base, that refers to the extent to which the company is tapping into
the most optimal sources of capital on a worldwide basis.
• Globalisation on corporate mindset, that refers to the extent to which the corporation as a
collectivity reflects an understanding of diversity across cultures and markets coupled with an
ability to integrate across this diversity.
The notion we get from that detailed description of globalisation is that it’s about doing business abroad.
It is a movement of ideas, lifestyles, and developments that could affect our families, our employment,
and the future of the world (Chareonwongsak, 2002). However, when the Zimbabwe currency became
valueless on the global market, the country’s economy became unsustainable. Apparently globalization
became irrelevant at all levels in this case – the country, industry, and company levels hence the
introduction of dollarization. In other words the country was in a quagmire a situation akin to being
ostracized by the outside world.
Dollarization of the Zimbabwean Economy
In simple terms dollarization is the replacement of a country’s system of currency with the US dollar.
Berg and Borensztein (2000) assert that dollarization is the use of any foreign currency by another
country and is done by most developing as well as transitional economies. Reem Heakal (2010) in his
article in Investopedia, asserts that dollarization is embarked upon as an optimal way to obtain currency
stability as the local currency is pegged to a major convertible currency. However in the Zimbabwean
situation the option was to abandon the local currency in favour of the exclusive use of mainly the US
dollar, South African Rand and the Botswana Pula. Countries that seek full dollarization tend to be
developing or transitional economies, particularly those with high inflation (Heakal, 2010).
Disadvantages of Dollarization (Heakal 2010)
• The country loses its ability to directly influence its economy including its right to administer
monetary policy and any form of exchange regime.
• The central bank also loses its role as the lender of last resort for its banking system.
• Securities must be bought back in US dollars and that has an effect on the country’s current
account.
• Dollarization also damages a nation’s sense of pride since local currency is a symbol of a
sovereign state.
Advantages of Dollarization
• Protection against inflation and devaluation
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• Full dollarization can improve the global economy by allowing for easier integration of
economies into the world’s market.
Economic Conditions leading to Dollarization
Zimbabwe has a population of about 13 million people of which 37% is urban population and 73 % is
rural. Between 2000 and 2008 the economy continued to slide down as depicted in table 1 below.
Zimbabwe Gross Domestic Product –real growth rate
YEAR GDP-growth rate Percent
2003 -12.10
2004 -13.60
2005 -8.20
2006 -7.70
2007 -4.40
2008 -5.50
2009 -14.10
2010 -1.30
Table 1 (World Fact book 2010)
Year 2009 marked the dollarization of the Zimbabwe economy under the Government of National Unity
(GPU) that was formed February 13, 2009. With the dollarization of the economy GDP for 2009
improved to minus 1.3% from an estimated minus 14.4% in 2008; the estimation for 2010 was 4.1%. The
dollarization of the economy became necessary to facilitate trade because the Zimbabwe dollar had
become valueless as indicated in Table 2 below.
Exchange rate History of the Zimbabwean Dollars to one US Dollar
Month ZWD Rate per USD
Sept 2008 1 000
Oct 2008 90 000
Nov 2008 1 200 000
Mid Dec 2008 60 000 000
End Dec 2008 2 000 000 000
Mid Jan 2009 1 000 000 000 000
2 Feb 2009 300 000 000 000 000
Table 2 (World Fact book 2010)
It is interesting to note that in the era of Globalization Zimbabwe’s economy had come to a stand- still.
However, the dollarization of the economy has been received with mixed feelings especially by the 94%
of the population that is not gainfully employed especially the rural people where about 80% of the
population is found and are not earning the dollar. Inevitably, the rural people and some of the
unemployed urban people have resorted to barter system to survive in the era of dollarization.
The dollarization of the currency benefited the gainfully employed people and left the majority of the
population with no source of income. As of 2009 Zimbabwe unemployment rate stood at 94%. Given the
high unemployment rate it means that even some of the urban population is unemployed. Faced with that
kind of hardships the majority of the people reverted to barter system. In the short-run the majority of
the Zimbabwe people suffered as they failed to pay for such services as health since they had to have the
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dollar upfront. A number of children failed to continue with their education in the short-run since their
parents were not earning the hard currency.
As the economy was sliding down into the doldrums Government through the Reserve Bank continued to
print money with the hope of easing the economic hardships, but unfortunately that only helped to fuel
inflation that hit 11.2 million % by August 2008 and 76.6billion % by November of the same year (World
Fact book 2010). At the same time unemployment was also skyrocketing and reached 94% by 2010.
Faced with that stagflation, government had to stop printing money and abandoned the use of its
Zimbabwe dollar as it introduced a multicurrency situation. According to (Hanke and Kwok 2009),
Government had to shut down its currency printing presses and allowed foreign exchange to legally
circulate. The multicurrency introduced included the Botswana Pula, the South African Rand, the Euro
and the US Dollar; with the U S Dollar being the mostly used currency.
Dollarization helped stabilize prices of most commodities especially food and prices for services such as
transportation. It also helped improve revenue performance and to some extend helped impose fiscal
discipline on Government in general including the Reserve Bank which stopped funding some of its
quasi-fiscal projects.
In the era of Globalization the Zimbabwe people are relegated to practice barter trade a system that was
used for centuries before the invention of money. It is a system where people exchange goods or services
for other goods and services in return. Barter trade became popular during The Great Depression in the
1930s, which witnessed a scarcity of money. The barter system still exists at global level where countries
do agree to engage on it based on the theory of competitive advantage. However, when it becomes the
norm at an individual country’s economic level during this era of globalization then it is mind boggling.
Examples of the use of barter trade in Zimbabwe
The staple food for the Zimbabwe people is maize-meal or corn meal and the many people in the rural
areas have survived by trading their beasts for maize or corn; for example 10 x50 kilogram bags were
exchanged for a beast in 2008-2009. For commodities of less value such as sugar and soap people
exchanged chickens in turn. If they did not have the chicken or maize to exchange for the commodities
the other alternative would be to pay in form of services such as working in the other person’s fields. One
interesting example was a situation where in order to have five litres of maize ground into mealie-meal or
corn meal, the owner of the grinding mill did that in exchange for one litre of the same product. Another
interesting example of the use of barter is of Chidamoyo Hospital in Mt. Darwin, Zimbabwe; where the
patients brought peanuts, goats, chickens and corn in exchange for medical services. According to Kathy
McCarty, a nurse at the hospital, “the hospital’s cavernous chapel is now filled with what looks like a
giant sand dune of unshelled nuts” Dugger (2010) published by New York Times; December 18, 2010.
Unfortunately, the gainfully employed in town took advantage of the system and ended up buying
commodities such as sugar, soap and even clothes and traded them in the rural areas using the barter
system. These people would then take the maize back to the urban areas where they sold it for cash at
some profit. They also sold the beasts to the butcheries at exorbitant profits. At the end of the day it
created a situation of survival of the fittest.
Limitations of a Barter Economy
The underlying principle in barter is the presence of double coincidence of wants; a situation where two
people would need what the other wants. Other characteristics of barter that makes it a difficulty economy
to pursue include (Wikipedia. Org, 2011)
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• Absence of common measure of value: In a monetary economy, money plays a role of a measure
of value of all goods, so their values can be measured against each other.
• Indivisibility of certain goods; for example if a person wants to buy a certain amount of another’s
goods, but only has for payment one individual unit of another good which is worth more than
what the person wants to obtain, a barter transaction cannot happen or happens at the
disadvantage of one of the people.
• Lack of standards for deferred payments as a result of the absence of a common measure of value.
• Difficulty in storing wealth; if a society relies exclusively on perishable goods, storing wealth for
the future may be impractical. However, barter system can still be practiced where the goods are
durable and again as necessitated by the principle of competitive advantage.
Conclusion
The good thing is that Government has abandoned the printing of the Zimbabwe dollar and is willing to
work towards the recovery of the economy using the multicurrency. The Government of National Unity
formed in September 2008 seems to be steering the economy in the right direction. The Reserve Bank of
Zimbabwe has even gone further to retrench about 1500 out of 2000employees as of January 2011(The
Zimbabwe situation, 2011). At the same time government is willing to exercise some spending discipline
by eliminating quasi-fiscal subsidies previously extended to parastatals by the Reserve Bank.
However, the long –term solution to the problem lies in the country’s ability to attract investment so as to
create employment for the 94% of the population. The government is persuaded to maintain a liberalized
economy where the open market sets competitive prices and at the same time it should allow imports duty
free as espoused by the chairman of the Baking Association of Zimbabwe (Zimbabwe Situation February
2011). According to Banya (April 15, 2011) of Bloomberg news net, inflation in March fell to 2.7% from
3% in February and that a positive sign.
References
Banya, N.G (2011, April 15) “Zimbabwe inflation” published by Bloomberg
Chareonwongsak, K. (2002) “Globalization and Technology: how will they change society?” Technology
in Society, Vol. 24, pp. 191-206
CIA World Factbook 2010
Dugger, C. W. (2010) “ Zimbabwe Health Care, Paid With Peanuts” published by Robin Hammond New
York Times December, 18.
Fuller, B.J. (2009) Barter Secrets: How to survive Economic Hardships. Amazon.com
Government of Zimbabwe, (1986) First Five-Year National Development Plan (1986-1990)
Government of Zimbabwe, (1991) Second Five-Year National Development Plan (1991-1995)
Government of Zimbabwe, (1991) “Zimbabwe: A Framework for Economic Reform (1991-95)
Hanke, S and Kwok, A.K.F (2009) On the Measurement of the Zimbabwe’s Hyperinflation; The Cato
Journal
Hill, C.W.L. (2011) International Business: Competing in the Global Marketplace 8 th edition. Published
by McGraw-Hill
IMF Country Report No 09/139 May 2009
Ncube, Mkhululi (1998) Analysis of Employment Behaviour in Zimbabwe; published by Komendict-Goteborg.
Raftopoulos, B and Sachikonye L. ed. (2001) Striking Back: The Labour Movement and the Post –
Colonial State in Zimbabwe 1980-2000. Weaver Press, Harare.
The Zimbabwe Situation, January, 2011
Zimbabwe Situation February 4, 2011
Zimbabwe Metro May 31, 2010
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Ownership of Factors of Production: An indigenization case study
Swithina Mboko, s.mboko@aquinas.edu
Aquinas College, USA
Zimbabwe’s post independence land reform has generated conflicting reports. In this paper we compare two models
of land distribution that are part of the history of Zimbabwe and adopt a stakeholder interest approach to examine
decision making processes regarding land ownership in Zimbabwe, and to conduct a benefit and cost analysis of the
programs. We acknowledge the complexities involved in researching decision making and actual operations within
African states and the resulting difficulties of developing generalizable theories. We find that stakeholder influence
on analysis of results and lack of solid, field-level data continues to fuel misconceptions about what has happened in
Zimbabwe in the last decade. We recommend continued theoretically driven discourse that accepts the reality of
post colonial reforms and can allow the advancement of a framework that recommends strategies to maximize the
benefits of indigenous approaches to development, and also contribute to the continued re-construction of
Zimbabwe.
Introduction
After a period of great interest in the mid 1900s land reform disappeared from the development agenda
until the recent revival of the interest in land redistribution (Klaus, et al., 2002). While there is research
evidence in support of land reforms Zimbabwe’s post independence land reform has generated conflicting
reports. Calling for a more nuanced analysis of Zimbabwe’s land reform Scoones, et. al., (2010), argue
that from early 2000, headlines around the world report the invasion of Zimbabwe’s largely white-owned
commercial farms in dramatic terms. Analysis of only one stage of a series of reforms within a process
challenges the robustness of the conclusions and recommendations. Understanding resource allocation in
Zimbabwe calls for a comparative analysis that examines the present in the context of vestiges of the past,
Herbst (1990).
In this discussion paper we compare two models of land distribution that are part of the history of
Zimbabwe and adopt a stakeholder interest approach to examine decision making processes regarding
land ownership in Zimbabwe, and to conduct a benefit and cost analysis of the programs. We
acknowledge the complexities involved in researching decision making and actual operations within
African states and the resulting difficulties of developing generalizable theories. We find that stakeholder
influence on analysis of results and lack of solid, field-level data continues to fuel misconceptions about
what has happened in Zimbabwe in the last decade. We recommend continued theoretically driven
discourse that accepts the reality of post colonial reforms and can allow the advancement of a framework
that recommends strategies to maximize the benefits of indigenous approaches to development, and also
contribute to the continued re-construction of Zimbabwe. We argue that interest in land is embedded in
production factor theory.
Importance of factors of production
That factors of production are important is a generally accepted fact. In today’s global village arguments
given in international trade theory to explain and support international trade patterns are receiving
increased researcher focus. The theories that have been used to explain the pattern of international trade
observed in the world, Smith, Ricardo, and Hecksher- Ohlin (Hill, 2009), all highlight the importance of
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factors of production. In his landmark book The Wealth of nations Adam Smith uses the absolute
advantage theory to explain the importance of factors of production and argues that countries differ in
their ability to produce goods efficiently. The obvious and easy to understand examples of factors Smith
uses to illustrate absolute advantage are all about natural resource endowments like favorable climate and
good soils.
Building on Smith’s absolute advantage theory, David Ricardo uses comparative advantage argument to
show the benefits of labor productivity, suggesting the benefits associated with a country specializing in
the production of those goods that it produces most efficiently. Hecksher-Ohlin theory emphasizes that
countries differ in the type and quantity of production factors that they possess. The term factor
endowments refers to the extent to which a country is endowed with such resources as land, labor and
capital. Using the theory of national competitive advantage Michael Porter (1980), explains why certain
nations achieve international success in particular industries. Porter acknowledges the importance of
factor endowments, but goes on to point out the importance of other country factors. While factor theory
affirms the importance of the production factors it is silent on ownership. We make a contribution to the
discourse on resource ownership and allocation through a study of two models of land allocation that are
part of Zimbabwe’s history.
Zimbabwe Background
Zimbabwe’s economy is agro-based, relying heavily natural endowments like climatic conditions and
type of land and historical influences to grow crops such as tobacco, cotton and sugar cane, and on related
manufacturing industries such as textiles and food processing. Mining is also a major activity. A detailed
narrative of the colonial, liberation and public policy history of Zimbabwe is beyond the scope of this
paper. We include those country facts and historical events that lay the foundation of the land distribution
models in this study.
Zimbabwe is a Southern African country located between South Africa and Zambia. It is a landlocked
country with a total surface area of 390 580 square kilometres, 385 670 sq. kilometres is land and 3 910
square kilometres is water. It is situated between 15 and 22° south latitude and 26 and 34° east longitude.
Climatic conditions are largely sub-tropical with one rainy season, between November and March.
Rainfall reliability decreases from north to south and also from east to west. Only 37% of the country
receives rainfall considered adequate for agriculture. The country has been divided into five broad Natural
Regions in which the dominant partitioning factor is rainfall.
Agricultural production patterns depend on these natural regions. Natural Region I is a specialized and
diversified farming region. The region is suitable for forestry, fruit and intensive livestock production. In
Natural Region II flue-cured tobacco, maize, cotton, sugar beans and coffee can be grown. Sorghum,
groundnuts, seed maize, barley and various horticultural crops are also grown. Supplementary irrigation is
done for winter wheat. Animal husbandry like poultry, cattle for dairy and meat, is also practiced in.
Natural region III is a semi-intensive farming region. Large-scale crop production covers only 15% of the
arable land and most of the land is used for extensive beef ranching. Maize dominates commercial farm
production. The region is subject to periodic seasonal droughts, prolonged mid-season dry spells and
unreliable starts of the rainy season. Irrigation plays an important role in sustaining crop production.
Natural regions IV and V are too dry for successful crop production without irrigation, but communal
farmers have no other choice but to grow crops in these areas even without access to irrigation. Millet and
sorghum are the common crops but maize is also grown.
A former colony of the United Kingdom, Zimbabwe attained independence in 1980 following elections in
1979. As is characteristic of former colonies, the economy inherited by the Government of Zimbabwe had
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a number of socio-economic inequalities and was characterised by a highly dualistic structure. On the one
hand, there was a modern sector comprising commercial agriculture, mining, manufacturing and service
establishments and, on the other hand was a traditional sector dominated by small enterprises, consisting
largely of communal farmers and other informal, non-farm economic activities. The economic policy
environment prior to independence and for the decade following independence, perpetuated this polarised
economic structure, for although the people of Zimbabwe expected Government to correct the
imbalances, a dilemna facing Government was how to address the inherited disparities without having a
negative effect on the fairly healthy economy prevailing at that time (Kapoor, Mugwara, Chidavaenzi,
1997, Ncube 1998).
Key aspects of the colonial history of Zimbabwe include the entry into Zimbabwe in 1890 by the Pioneer
Column, financed by the British Cecil Rhodes, moving from South Africa in search of minerals. Upon
realizing that Zimbabwe would not yield the kind of mineral wealth found in the Transvaal the settlers
diversified their economic activities and moved specifically into agriculture. Although the settlers’ early
failure to find large mineral deposits and their subsequent decision to stay on and move into farming, are
often regarded as aspects of early colonial history that can now be safely ignored, they are absolutely
crucial to understanding the entire history of Zimbabwe, (Herbst, 1990).
One may be persuaded to believe that at first the settlers paid lip service to living peacefully with the
African population. But after crushing early revolts of locals, the settlers acted as conquerors and began to
move Blacks away from the best farming land to newly created tribal Reserves---forced removal of
Africans from rich farm areas to tribal reserves, many with poor quality land became the an essential
aspect of the development of the colony, and describes the first model of land redistribution as discussed
in this paper.
In Zimbabwe, as is the case with other African countries, the achievement of political independence is
exceptionally important because it gives the leaders formal control of the state apparatus. In its 1980
election manifesto Zanu(PF) states, “It is not only anti-people but criminal for any government to ignore
the acute land hunger in the country”, Zimbabwe African National Union (Patriotic Front), 1980 Election
Manifesto, Salisbury, 1979, p.9. This strategic intent forms the background to land redistribution Model II
as presented in this paper.
Zimbabwe as a case study of state allocation decisions
A case study is a strategy for doing research, which involves an empirical investigation of a particular
contemporary phenomenon within its real life context (Robson, 1993; Yin, 1994). Selection of cases was
guided by the need to get usable data.We concur with Herbst (1990) reasons why Zimbabwe makes a
good case study for state resource allocation decisions. First, the state is involved in every aspect of the
economy. Second, the relative young age of the nation makes it easy to compare the past and present.
Third, the possibility that Zimbabwe’s decision processes might provide a model within the region.
Models of land reform in Zimbabwe.
Zimbabwe has experienced two clearly articulated land redistribution models, the first within the colonial
era and the second in independent Zimbabwe. The main features of the models are summarized in Table 1
and are discussed below.
Reform objectives
The take off position for Land redistribution model I is one of colonialism. We define colonialism as a
system of control by a country over an area or people outside its borders and concur with Peterson, (2002)
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there are different forms of colonization. The colonization that resulted in our Model I discussion is
organized by businessmen, not missionaries or fugitives. I our Model I the economic motive was the
overriding factor. As shown in Table 1 the objective of the colonial approach to land redistribution is to
get the most out of available resources. Colonization literature gives British and Dutch companies as
examples of advanced nations whose entrepreneurs set out to enrich themselves. According to Beach
(1988), Zimbabwe is described by the Portuguese as one of the richest parts of Africa. The approach
taken to utilize Zimbabwe’s resources included a careful study of the geography of the country. Given
their entrepreneurial and wealth creation intentions and conqueror status discussed earlier the settlers
realized that control over land was essential to their achieving economic and political dominance and used
forced migration and a series of legislation and other systemic strategies to pursue their purpose.
Table 1: Major characteristics of Zimbabwe's Models of Land Distribution
Model I Model II
Take off
position
Objective
Strategy
Implementation
Settler entry into a status quo of sustainable
settlements of locals making a living through land use
Maximization of output
Exploitation
Use country’s natural regions to designate land use
Create conditions that support designated land use
Forced migration and a series of legislation
Independent government
inheriting imbalances
Land repossession and
redistribution
Redressing inherited
imbalances
Target land in settler hands
Legislation and eviction
We describe Model II as an indigenous approach to land redistribution. The doctrine of indigenization
evolved first as a movement during the 1950s and the 1960s. It advocates development within historicultural
roots and encourages a return to authentic values and traditions which have shaped the sociocultural
life of a people. Indigenization constitutes a revolution for relevance (Williams, 1971, Alatas,
1993). Its guiding precept is indigenous solutions for indigenous problems, (Burns, 1993, Henderson,
2005). In discussing the indigenous model to land redistribution we concur with Mupepi (2010) who
argues that there are three major contending forces to Zimbabwe's land redistribution discourse. The first
force is the claim by the Zimbabwe government embedded in the discourse of “patriotic history” in which
the acquisition of land is seen as a necessary conclusion to decolonization. Model II characteristics in
Table 1 frame this discussion. At independence the Government of Zimbabwe inherited widely
documented imbalances. Although a detailed discussion of early attempts to redress the imbalances is
beyond the scope of this paper it is noteworthy that what we refer to as the indigenous approach to land
redistribution in Zimbabwe was preceded by other efforts to redress the imbalances.
The second is the assertion by the land-occupying European settlers who insist that the land acquisition
violated their constitutional and legal rights to land ownership. The third force is the land factor which has
drawn much international acclaim. Mupepi (2010) goes on to argue that the land factor has two
dimensions. The first is Euro-American and the second is Pan African perspective. The Euro-American
perspective actively advocates the position of the European farmers and democratic governances. The
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Pan-African position silently endorses the Zimbabwe Government's indigenous land acquisition program,
which is regarded largely as irreversible.
Implementation
Table 2 is a list of selected legislation used in the process of implementing the two models. In Model I,
through the Native Reserves Act of 1898 locals were moved from their natural settlements to make way
for the settler commercial farmers. The Land Apportionment Act of 1930 formalized Zimbabwe’s dual
economy. Herbst (1990) argues that overpopulation in the Reserves and consequent lack of opportunities
for peasant farmers turned Tribal Trust Lands into excellent labor reserves for the White economy. The
settlers had therefore created a system that now gave them access and control of all four factors of
production. The system worked so well that in the 1930s Southern Rhodesian Businesses were said to be
enjoying ‘the cheapest Black labor probably in the British Empire’” (Herbst, 1990), and up to
Zimbabwe’s independence the country was a major producer of agricultural products.
Table 2: Zimbabwe Land Distribution Implementation instruments
Model 1 Implementation Model II Implementation
Native reserves Act 1898:
Indigenization and economic empowerment Act
14:33
Forced black people into low potential areas now Legalized deliberate involvement of indigenous
known as “communal areas”
Zimbabweans in the economic activities of the
country, to which hitherto they had lost access, so
as to ensure equitable ownership of the nation’s
resources
Land Apportionment Act 1930:
Legalized the division of the country’s land and
prohibited members of either racial group from
owning land in areas assigned to the other, 50.8%
declared “European”, and 30% reserved for the
African population.
Land Acquisition Act 20:10
Defined land as anything permanently attached to
or growing on land, and any interest or right in
land. Legalized land acquisition by the government
and outlined an acquisition procedure that has an
option of eviction.
In Model II the Government of Zimbabwe used the control of state apparatus that independence had
brought to redress what was perceived as inherited imbalances. The Indigenization and Economic
Empowerment Act provided for support measures for the economic empowerment of indigenous
Zimbabweans. Reference to independence was contained in the definition of an indigenous Zimbabwean
as contained in the Indigenization Act as " Any person who, before 18 April, 1980, was disadvantaged by
unfair discrimination on the grounds of his or her race, and any descendant of such a person" (GOZ, 2007,
p.86.) This implementation focus is consistent with the objective of redressing imbalances as stated in
Table 2.
The Land Acquisition Act empowered the authorities to acquire land and other immovable property
compulsorily in certain circumstances. The land acquisition procedure as outlined in the Act includes
publication of preliminary notice, serving on the owner notice in writing, eviction if need be, registration
of land acquired and redistribution of land acquired
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Results
We use qualitative results of the two models as reported in contemporary history of Zimbabwe. Results of
Model I included dual economy, world class agricultural economy, discontent among locals, liberation
struggle, and independence. The Government of Zimbabwe describes the indigenous approach to land
redistribution as a success from a political and economic perspective. Land has been transferred.
According to Mamdani (2008) Zimbabwe has seen the greatest transfer of property in southern Africa
since colonization and it has all happened extremely rapidly.
Discussion
The clarity of purpose and practical strategies focused on achievement of the objectives in sight
characterizing the models of land distribution in Zimbabwe discussed above confirm Herbst (1990)
argument that For Zimbabwe, land remains – as it always has been – a highly emotive, political,
economic and cultural issue. Land was the central issue in the forced removal of local by settlers, and in
Zimbabwe’s war of liberation. Given the conflicting contending forces articulated by Mupepi (2010) land
continues to be the most important issue in independent Zimbabwe.
Through an indigenous approach, Model II, the Government of Zimbabwe has undone the land
redistribution structures created through the colonial approach, Model I. Zimbabwe’s experience is a
demonstration that the doctrine of indigenization is no longer confined to rhetorical circles. It is a
practical revolution for relevance, as has been shown by similar concept programs in other regions like
the Philippines (Garming, 2008), Colombia and Brazil (Deininger, 1994), Mexico, (Hoshino, 2001).
Experiences in other regions confirm what Zimbabwe is still currently experiencing, that indigenization
approaches have gains and limitations. We recommend research aimed at enhancing the capacity of
policy makers to deal with the challenges of indigenization.
References
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Beach, D.N. (1988), From heroism to history: Mapondera and the Northern Zimbabwe Plateau 1840-
1904. History of Africa, 15 pp85-161
Deininger, K., (1998), Making negotiated land reform work: Initial experience from Colombia, Brazil,
and South Africa, Draft World Development report.
Garming, M., (2008), Indigenization Approach to development: The experience of the Pudon institution
in the promotion of a culture of peace, Europa seminar, 2008.
GOZ, (1996), Land Acquisition Act, 20:10, 3/1992, The Government Printer, Harare
GOZ, (2007), Indigenization and Economic Empowerment Act, 14:33, 14/2007, The Government Printer,
Harare
Gummesson, E. (1991), Qualitative methods in Management Research, Sage Publications
Henderson, K. M. (2005), The Quest for Indigenous Administration: Asian Communist, Islamic
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Herbst, J., (1990), State Politics in Zimbabwe, Perspectives on Southern Africa,45, University of
California Press
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Jaffe, D. (2001), Organization Theory, Tension and Change. New York: McGraw Hill
Kapoor, K., Mugwara, D. and Chidavaenzi, I. (1997), Empowering small enterprises in Zimbabwe, World
Bank Discussion Paper No. 379, The World Bank, Washington, D.C.
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Klaus Deininger, Hans Hoogeveen and Bill Kinsey (2002), Benefits and costs of land reform in
Zimbabwe with implications for Southern Africa, http://www.csae.ox.ac.uk/conferences/2002-
UPaGiSSA/papers/Hoogeveen-csae2002.pdf
Kreps, D. (1990), Game Theory and Economic Modelling. Oxford: Claredon Press.
Mamdani, M. (2008), Lessons of Zimbabwe, London Review of Books.
Mupepi, M., (2010), A crisis with an origin: proposing a framework for local and international
engagement in Zimbabwe. In Jacques Mangala (Ed.) New Security Threats and Crises in Africa: Regional
and International Perspectives. Palgrave Macmillan. Pp 247-272.
Ncube, M. (1998), Analysis of employment behavior in Zimbabwe, Research 36, Nordiska
Afrikainstitutet, Upsala.
Robson, C. (1993), Real world research, Oxford, Blackwell.
Scoones, I., Marongwe, N., Mavedzenge, B., Mahenehene, J., Murimbarimba, F. and Sukume, C., (2010),
Zimbabwe’s Land Reform: Myths and Realities. James Currey, Oxford/Weaver Press, Harare
UN (1971),
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Yin, K. R. (1994), Case Study research design and methods, Sage Publications.
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International Trade in the Era of Maritime Piracy in the Horn of Africa: Issues and Challenges
Abstract
Emmanuel Obuah, emmanuel.obuah@aamu.edu
Alabama A & M University, USA
Independence C. Enyindah, ice_enyindah@yahoo.com
College of Arts and Science (CAS), Port Harcourt, Nigerian
Chris Enyinda chris.enyinda@aamu.edu
Alabama A & M University, USA
Maritime piracy is an old age international crime that poses significant economic and political burden on
international trade and ultimately the global economy if allowed to thrive and prosper. Checkmating the
growing menace of maritime piracy in the Horn of Africa is more than ever urgent because international
trade facilitation contributes positively to global economic growth and poverty alleviation in the
developing world, Africa in particular. This paper examines the causes and the ramification of maritime
piracy against vessels in Gulf of Alden (GOA) and ECS, and the international trade issues, challenges,
and implications.
Introduction
Somalia is one of the world’s most emblematic failed states. According to the Brookings Institution, it is
the least capable of fulfilling most, if not all, of the four (economic, political, security and social welfare)
critical functions of government (Rice and Patrick 2008, 14). Since 1991 Somalia has been rife with
internecine factional fighting between different clans and warlords and has not had a functioning central
government. In the absence of a functioning central government to maintain law and order, Somalia has
become a bastion for piratical activities along ECS and GOA. For example, according to ICC
International Maritime Bureau (2010) annual report for 2009, of a total of 406 cases of actual and
attempted attacks by pirates, 217 occurred in the Somali, GOA, Red Sea, Indian Ocean and Oman
involving Somali pirates. Of the 217 cases, 47 vessels were hijacked. Early reports for pirates attacks in
2010 worldwide was 445, a 10 percent increase from 2009 figures (Wallace 2011,; NewCarrentals.co.uk
2011). In 2008, it was estimated that about USD 150 million was paid in ransoms and insurance
premiums increased up to USD 20,000 per trip via the GOA (Valencia and Khalid 2009, 3). And of the
1057 crew taken hostage world-wide in 2009, 867 were taken from GOA and ECS, thus dwarfing the
2008 figures (ICC-CCS 2009a). Furthermore, the level of violence, viciousness and lethality has
increased and that Somali pirates have extended their tentacles to more than 1000 nautical miles of
Mogadishu (ICC-IMB 2010:25). Piracy attacks in GOA and ECS have significant implications for
international trade supply chain, in terms of costs of ransom, rerouting, insurance premiums, security
equipment, anti-piracy naval flotilla, and prosecutions of captured pirates. In fact, One Earth Future
Foundation in its December 2010 report estimated the cost of maritime piracy from $7 to $12 billion per
year (Bowden et al 2010).
The remainder of this paper is organized as follows. Section 2 examines the Somali State. Section 3
presents an abbreviated review of relevant literature. Section 4 discusses the push- and -pull factors and
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types and trends associated with the increasing piracy activities in the Horn of Africa. Finally, section 5
discusses international trade issues, challenges and implications.
The Somali State
The facts about the historical developments in Somalia are well documented but suffice it to state here
some salient developments that help in understanding the resurgence of pirate groups. Although there is
debate on the weight to be attached to external versus internal factors to state failure (Hagmann and
Hoehne 2009), Somalia has long been characterized as an ‘anarchic’ form of failed state in which there is
no centralized government, and where armed groups act under orders from warlords, fight it out for
eventual control of a non-exiting state (Gros 1996; The World Bank 2006; Rice and Patrick 2008).
Somalia became independent in 1960 following the merger of a former British protectorate and an Italian
colony. Since the amalgamation, relations with neighboring states have been soured by its territorial
claims on Somali inhabited areas of Ethiopia, Kenya, and Djibouti. Like many post-independent African
states, Somalia has unstable government. In 1970, Mr. Siad Barre proclaimed Somalia a socialist state and
subsequently established close relations with the former Soviet Union. But this relationship was shortlived
when the Soviet Union backed Ethiopia during Somalia’s attempt to seize the Ogaden region of
Ethiopia. By 1980, Barre replaced his Soviet military advisors with American ones and transformed
Somalia into a western client state. In 1991 the authoritarian rule of Barre collapsed following his ousting
by the military forces of the United Somali Congress (USC) led by General Mohamed Farrah Aidid and
Ali Mahdi Mohamed. In the aftermath of the overthrow, the Mahdi faction in the USC appointed Mahdi
Mohamed the president but Aidid refused to recognize Mahdi’s presidency, thus ensued clashes between
the two factions. The north-west part of Somalia unilaterally declared itself the independent Republic of
Somaliland but does not enjoy any international recognition. From this time on, Somalia unraveled into a
Hobbsian state in which different clan-based warlords with their militias pitted themselves against one
another in brutal internecine wars. Warlordism as developed in Somalia in the 1990s became a practice of
economic predation undertaken by a strongman supported by clan militia and intimidated or favored
businessmen (Weinstein 2009). Under this clan warfare economy, individual in weak situations tied
themselves to personal strongmen/warlords who provided them some security. The relationship between
the warlords and their clientele is established by use of force, intimidation, threat, or commitment to a
resource.
In 2000 the clan warlords and other important senior dignitaries met in Djibouti and appointed
Abdulkassim Salat Hassan president and set up a transitional government with the aim of reconciling the
warring militias. In 2004 the major warlords and politicians met in Kenya and signed a deal to establish a
new parliament and set up a Transitional Federal Government (TFG) in exile with United Nations (UN)
backing. The authority of the TFG was comprised when in 2006, a collection of Islamist groups known as
the Coalition of Islamic Courts (CIC) took control of the two-thirds of the southern part of Somalia.
CIC’s rule in the south was brief and brutal, cracking down severely on pirates who had operated with
impunity under the direction of secular warlords (Murphy 2007, 30). The al-Shaabab, which is the armed
wing of CIC attacked pirates’ sanctuaries in Hoboyo and Haradeere and for a limited time reduced the
number of piracy attacks off the coast of Somalia (Murphy, 2007). But CIC’s control was short-lived as
the forces loyal to the TFG backed by Ethiopian troops were able to seize control by the end of 2006. By
late 2008, Islamist insurgents including the al-Shabaab (which according the US has links with al-Qaeda)
regrouped and fought back against the government and the Ethiopian forces and regained control of most
of southern Somalia. On January 2009, Ethiopia pulled its troops from Somalia. In late January 2009,
Somalia’s parliament met in Djibouti and swore in 149 new members from the main opposition
movement, the Alliance for Re-Liberation of Somalia. The parliament extended the mandate of the TFG
for another two years and elected a moderate Islamist and a member of the Alliance for the Re-Liberation
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of Somalia (ARS) Sheikh Sharif Sheikh Ahmad as the new president (BBC News, 2009). Against this
backdrop of a lack of functioning government and frictions between the various clans, the pirates have
exploited the opportunity to their advantage.
Review of relevant Literature
There is an impressive emerging literature uncovering the opacity of contemporary piracy (Gosse 2007;
Chalk 1998; Ellen (ed.) 1989; Puchala 2005; Teitler 2002; Liss 2004 and 2009; Johnson and Valencia
(eds.) 2005; Lehr 2007). But most of the studies focus on the nexus of piratical activities in Southeast
Asia, and not enough on the African region. Other studies focus on the potential links between piracy and
terrorism (Koknar 2005; Lehr 2007; Pham 2008). There are also reports and newspaper reporting on the
implications of increased piracy and the international trade (Frank and David 2008; Costello 2008; King
2009). There are also reports and commissioned studies following the surge in piratical activities in the
GOA and the Horn of Africa (Middleton 2008; Chalk 2008; NSC 2008; Lennox 2008; Murphy 2007 and
2009; Ploch 2009; King 2009). This paper helps expand our knowledge of piracy by focusing on GOA
and ECS and its implication for international trade supply chain. Rather than rely on Gosse’s circle theory
to explain the incidence of piracy, the study using eclectic analysis, focuses on the structure of the Somali
state and the existence of certain ‘push’ and ‘pull’ factors to expand our understanding of piracy and its
implications. The bulk of the primary data for this paper was obtained from ICC-IMB, ICC-CCS and
IMO for different years.
The drivers of maritime piracy: the ‘Push’ and ‘Pull’ factors
The conventional orthodoxy has been to treat piracy as a cyclical problem among coastal state in which
the incidence follows ebb of rise and then decline once drastic deterrence measures were put in place to
counteract the actions of the pirates. For example, in one of the first systematic histories of piracy, Philip
Gosse espousing the cycle theory noted that the occurrence of piracy throughout human history has been a
wave-like or cyclical phenomenon which began with spates of sporadic attacks on vulnerable ships.
Grosse (2007, 1 - 2) wrote that:
In all the seas of the world and in all times piracy has passed through certain well-defined
cycles. First a few individuals from amongst the inhabitants of the poorer coastal lands would
band together in isolated groups owning but one or a few vessels apiece and attack the
weakest merchantmen . . . Next would come the period of organization, when big pirates
either swallowed up the little pirates or drove them out of business. These great organizations
moved on such a scale that no group of trading ships, even the most heavily armed, was safe
from their attack. In the end the victory side would break up the organization. . . The
component parts of the defeated side would again reduce to the position of outlaw bands,
until the victorious power was strong enough to send them scurrying back once more to the
status of furtive footpads of the sea whence they had arisen.
Grosse’s view has been echoed in many other studies on piracy (Ormerod 1978; Lane 1998; Puchala
2005). However, in examining the ramification of piracy in GOA and ECS, this paper argues that contrary
to the orthodox thinking, piracy attacks in Somalia is underscored by the underlying ‘push’ and ‘pull’
factors emanating from the structure and nature of the Somali state and external factors.
Generally piracy is a crime of opportunity and most pirates are realist and materialist whose passion is
wealth and motivated by greed. In their economic motivation for wealth pirates steal ships’ property or
whole ships for their cargo and in some cases kill crews to prevent them from interfering. As noted by
Murphy (2009, 2) Somali pirates are different in that their model is mainly to seize crews who are
valuable and not the ship or its cargo. Piracy is both a risky and a lucrative enterprise. For example, it was
noted by Verjee (2011) that a neophyte Somali pirate made as much as $60,000 in one expedition to
which his role was marginal. There are a variety of ‘push’ and ‘pull’ factors which explain the reasons
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why individuals or group of individuals take to piracy and robbery of ships. While some of these factors
might be located in the forces of globalization and liberalization of trade (Lehr 2007, viii), others are
located in the changing internal dynamics and structures of the Somalia political economy. The push
factors include but not limited to the following:
1. The existence of severe harsh socio-economic conditions suffered by overwhelming Somali
population. The basic socio-economic and human development indexes indicate that Somalia is one
of the poorest countries in the world. Indeed, it has faced both man made and natural crises in the past
decades, such as the internecine conflicts, the severe drought and famine of the 1990s, and the 2004
Tsunami. Although harsh economic conditions not excuse for criminality, a vast number of the
population is without any other sources of income than crime. For this part of the population piracy
has become a source to eke a living and seek financial salvation.
2. The wanton destruction of the way of life of the Somali fishermen by illegal fishing and the dumping
of toxic waste which has been largely ignored by foreign governments. According to the UN
Environmental Program (UNEP) report in 2005, there have been dumping of uranium radioactive
waste, lead, heavy metals such as cadmium and mercury, industrial waste, hospital waste, and
chemical waste in Somali waters (Cited in Dagne 2009, 5); thus causing ecological damage to sea life
and destruction of the livelihood of the Somali communities. Also a report prepared by the Marine
Resources Assessment Group Ltd (MRAG) for United Kingdom Department for International
Development (DFID) estimated that Somalis lost about $100 million illegal tuna and shrimp fishing
in the country’s exclusive economic zone in 2003 – 2004 (MRAG 2005, 6).
3. Finally, an important push factor is the so called Eric Hobsbawm ‘social bandit’/ Robin Hood theory.
That is the notion that Somali pirates took to piracy as a means of raising ‘tax’ on foreign vessels in
the form of ransom in return for fishing rights and for the protection of local communities that have
been devastated by ecological problems caused by illegal dumping of wastes (Lennox 2008; Møller
2009a). In fact, some Somali pirates claimed that they were merely “gentlemen” and patriots risking
their lives at sea protecting Somalia’s shores (Salopek 2008). Groups such as the Ocean Salvation
Corps and the Volunteer Coastguard of Somalia believe that they took speedboats to try to extract tax
from foreign fishermen for years of foreign poaching of Somalia’s fish-rich waters (Salopek 2008;
Hari 2009). These groups buttress their claim by pointing to years of over fishing in Somali waters by
fishermen from Thailand, Europe, Yemen, and South Korea; and the dumping of toxic waste by
European companies since the collapse of Somalia in the 1990s.
The ‘pull’ factors on the other hand include:
1. The lack or absence of a functioning central government since 1991 when the country disintegrated
into a Hobbsian state of nature. Post 1991, Somalia was divided into three main territories:
Somaliland, Puntland and the Southern territory. Apart from Somaliland where there exist some
semblance of peace and order, in the other territories, an ineffective Transitional Federal Government,
completely lacking governance capacity and legitimacy was created. Evidence of this state of
statelessness manifest in the lack of a functional national judicial system and rule of law; the lack of
accountability and widespread corruption; lack of enforcement agencies such as the coastguard, navy
to patrol coastal waters; and the lack of an effective police force able and willing to patrol and destroy
pirate sanctuaries.
2. The existence of a dense traffic in the GOA through which a large part of global commerce between
the Middle, Far East and Europe passes help to explain the volume and increase in piracy and armed
robbery. For example, the GOA is an important waterway which carries a third of the world’s crude
oil and over 20,000 vessels pass through GOA every year (King 2009). The density of traffic is
further compounded by the existence of narrow chokepoints which make ships to slow down thereby
making them vulnerable to criminal attacks by pirates. This why most of the attacks occur while the
vessels are steaming.
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3. The provision of protection to ships, such as the French’s provision of escorts to the World Food
Program (WFP) shipping food aid to Somalia is a factor in understanding the diversion of piratical
activities along the northern coast, as pirates from southern Somalia have moved north in search of
better hunting grounds (Møller 2009a).
4. The use of mother ships (which enable pirates to attack large vessels such as oil tankers) as a new
effective modus operandi is a critical factor that helps to explain the recent surge in piracy in GOA
and coast of Somalia (Møller 2009a, 12).
5. The existence of sanctuaries in parts of Somalia and pirate networks in the business sector and
colluding by officials in Puntland not only facilitate but sustain piratical activities in Somalia. The
sanctuaries provide not only support and hiding places but important channels for the disposal of
loots. Some of hamlets which serve as sanctuaries have been transformed into veritable boomtowns as
a result of pirate activities. As underscored by Puchala (2005, 7), “pirates cannot function, and piracy
could never have survived unless there were sympathizers, protectors and customers on shore ready,
willing and able to provide sanctuary.” There are also other networks through which the pirates are
able to transfer and receive funds, receive valuable information about the types of ships, cargo, and
timing from Somalis in the Persian Gulf (Dagne 2009, 4 – 5). The hawala, which has its origins in
classical Islamic law, is one such important network that facilitates the receipt and remittance of
funds to and from pirate groups. The hawala is a network of money brokers who transfer funds from
one city to another on behalf of their clients. Financiers of pirate activities therefore use the hawala to
transmit money and proceeds to and from pirate.
6. Finally, the proliferation of sophisticated lethal small firearms and other weapons has provided
Somali pirates with enhanced means to operate with more destruction and impunity (Chalk 2008).
Types of piracy and trends in piratical activities in GOA and ECS
In his study of contemporary piracy in Southeast Asia, Chalk (1998, 88-89) identified three types of
piracy in the region: harbor and anchorage thefts/attacks; ransacking and robbery of vessels on the high
seas or territorial waters; and hijacking of vessels for use for illegal trade (phantom ship). Herbert-Burns
(2007, 98) identified five classifications of piratical attacks: simple robbery of ship stores and valuables
from vessels at anchor; armed/violent robbery against vessels at anchor; armed/violent robbery against
vessels underway or making way; armed attacks against ships underway or making way for purposes of
hostage-taking and ransom demand; and deliberate vessel hijacking and devolution (phantom ship
operations). Based on current reporting on piracy in GOA and ECS, there are three discernable categories
of piracy: ransacking and armed robbery on high seas and territorial Somali waters; hijacking of vessels
for ransom taking; and hijacking of ships for use as phantom or mother ships for illegal trade. (Mother
ships have been defined as ships used for illegal activities; they are large blue-water fishing boats or even
small coastal general cargo vessels equipped with either dedicated or retrofitted cargo loading derricks
that can carry several smaller assault craft which can be lowered into water at the optimum time for the
assault (Herbert-Burns 2007, 106). Both the IMB (2009) and ICC-CCS (2009a) reports for 2008 indicate
that piracy in Somalia and GOA occurred while the vessels were steaming and that the operations were
well planned and involved the application of automatic weapons and rocket propelled grenade (RPG). For
example, most of the actual and attempted attacks in 2008 and 2009 occurred while the vessels were
steaming (ICC-IMB 2009 and 2010).
There are at least four identifiable pirate groups operating in GOA and ECS: The National Volunteer
Coast Guard (NVCGS) which is led by Garaad Mohamed and specializes in the interception of small
boats and fishing vessels around Kismayo on the southern coast of Somalia. The Marka group is led by
Sheikh Yusuf Mohamed Siad. This group is made of several scattered and less organized groups
operating in the vicinity of the Marka town. There is also the Puntland group composed mainly of
traditional Somali fishermen which operate around Puntland area. The Somali Marines group is the most
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Edited by Emmanuel Obuah
powerful and sophisticated of all the pirate groups. It is very professional with military structure made of
fleet admiral, admiral, vice admiral and a head of financial operations (Global Security.Org 2009).
There has been a significant increase in total number of reported cases of piracy and armed robbery on the
high seas worldwide from when the IMO began reporting in 1984. Table 1 indicates this trend since 2003.
It further shows that piratical activities peaked in 2003 and began a slow downward trend. However, there
appears to be a spike in piratical activities, especially in 2007 and 2008 in GOA and ECS areas. Of the
293 piratical attacks in 2008, 111 attacks occurred on the high seas surrounding Somali territorial waters.
Similarly, of the 406 piratical attacks in 2009, 217 occurred on the high seas surrounding Somalia. The
figure (217) represents a 543.4 per cent of world wide piracy. This trend is also captured in figure 1. From
2008, the highest reported cases of piracy occurred in GOA and ECS, thus overtaking the Southeast Asia
region. While the decrease in piratical activities in Southeast Asia was in part attributed to measures
initiated by states and regional organizations in the region (Chalk 1998; Møller (2009a, 11), in GOA and
ECS, the accentuation in piratical activities are the results of the chaotic nature of the Somali state, the
lack of semblance of any coordinated efforts by states in the region to tackle piracy and the ability of the
pirates to range further out to sea than before.
Table 1: Reported Actual and Attempted piracy attacks according to regions 2003 – 2009
Regions 2003 2004 2005 2006 2007 2008 2009
Southeast Asia 170 158 102 83 70 54 45
Far East 19 15 20 5 10 11 23
Indian Subcontinent 87 32 36 53 30 23 29
South America 72 45 25 29 21 14 37
Africa: GOA & Somalia*
Others
Total
21
72
93
10
63
73
45
35
80
Rest of the World 4 6 13 8 12 2 2
Grand Total 445 329 276 239 263 293
Source: collated from ICC-IMB (2008, 2009 and 2010) and IMO (2008)
* Includes 21 attacks involving Somali pirates on the Red Sea (15), Arabian sea (1), Indian Ocean (1),
and Oman (4) in 2009.
Another noticeable trend in piratical activities, especially in GOA and ECS is hijacking of vessels and use
of fire weapons and the territorial expansion of their tentacles by going farther out at sea into Kenya,
Madagascar, Mozambique Channel in the Indian Ocean (Chick 2009).
International trade issues, challenges and implications
There are varying estimates on the impact of piracy on international, especially of the economies of
coastal states. For examples, Hanson (2009) reported changes in insurance premiums, freight rates, and
the cost of rerouting due to piracy ranged from $1 to $16 billion per year. Others however, suggested that
due to the fluctuations in the number of the worldwide reported cases of piracy in comparison to the
volume of exchanges carried on the sea and the lack of quantitative research data on the total cost of
global piracy, it does not have any significant impact on global shipping or world trade (Møller 2009b, 8).
The GOA and ECS are important hubs to global trade. There are as many as 20,000 to 30,000 vessels that
travel the seas surrounding the Horn of Africa annually (Bowden et al 2010). Of strategic significance is
the fact that nearly 12 percent of the world’s petroleum passes through GOA (National Security Council
(NSC) 2008). Yet only a few are subject to documented acts of piracy. Of the 49 worldwide successful
20
41
61
44
76
120
111
78
189
217
53
270
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hijackings in 2009, 47 occurred in GOA and ECS (ICC-IMB 2010). But recent orchestrated pirate events
and responses from UN, states and other regional organizations indicate that the shipping industry and the
international community are becoming increasingly concerned and worried about the potential effects and
implications of piracy on global trade, lives and property. Piracy and armed robbery on GOA and ECS
raise a number of issues and challenges which could have significant implications for global trade and
supply chain. These are:
Direct economic costs: Under today’s business practice where goods and services are expected to be
delivered in real-time, disruptions and delays caused by armed robbery or hijacking of ships and payment
of ransoms could have significant consequences not only to the affected companies but on the supply
chain. Furthermore, the economic costs of piracy have consequences for regional trade, prices of food and
reduce revenues for coastal states. For example, costs of imports and exports in Kenya have increased
from $23.8 million and $9.8 million respectively due to piracy. The increase in piracy attacks could have
direct economic costs on the following areas:
Ransom payment: this is calculated to include the actual amount paid to pirates, the cost of negotiations,
the cost of psychological trauma counseling, repair of ship damage caused while in captivity, the physical
delivery of the ransom money (hiring of helicopter or private plane), and costs resulting from the ship
being out of service (One Earth Future Foundation, 2010). It has been estimated that the average annual
cost of ransom has increased from $150,000 in 2005, to $3.4 million in 2009 and $5.4 million in 2010
(Payne 2010; Bandel and Crowley 2010; Bowden et al 2010). The total cost of ransoms for 2009 and
2010 is estimated at $415 million.
The cost of insurance: This includes war risk, kidnap and ransom for captured crew, cargo, and hull (any
physical damage resulting from harm from heavy sea, collision, sinking, grounding, capsizing, fire and
piracy). There are various estimates for war risk insurance. Estimates of increase in war risk insurance
vary from $9000 to $20,000 per ship per voyage (Costello 2008; US DOT 2008). If the higher estimate is
used, it means that war risk insurance premium for the 20,000 ships passing through GOA could reach as
much as $400 million per year (Frank and Osler 2008). However, based on 30,000 vessels on the GOA
area, Bowden estimated that a total of insurance costs of $3.213 billion for 2009 and 2010. (This figure
excludes vessels that reroute and to take the war risk insurance). In addition, shipping companies’ labor
costs have increased. As a result, global supply chain could be damaged and just-in-time practices
crippled due to the dangers of the pirate-infested GOA and ECS, shippers have increased crewmembers’
wages to entice them to serve on vessels transiting these dangerous pirate-infested routes (Milne-Tyte
2009; Sterio 2010).
The cost of re-routing: Prohibitive and exorbitant insurance premiums could force shipping companies to
reroute through a longer route to Europe and North America around the Cape of Good Hope. Rerouting a
tanker from Saudi Arabia to the US via the Cape of Good Hope, according to USDOT(2008) would add
approximately 2,700 miles to the voyage and an additional $3.5 million in fuel cost annually. Longer time
on the sea means increase in the annual operating cost by the reduction in the delivery capacity of a ship
from about six round trip voyages to five voyages or a drop of about 26 percent (USDOT 2008). Due to
spike in hijacking, shipping companies have begun rerouting vessels to sail all the way around Africa to
avoid the risk of attack by Somali pirates. For examples, in November 2008, the Norwegian shipping
group, Odfjell SE and Denmark’s A.P.Moller-Maersk ordered the rerouting of over 90 vessels and 50 oil
tankers respectively through the Cape of Good Hope due to the escalation of piracy in GOA and ECS
(USA TODAY 2008; Nor and Surk 2008; Alarabiya 2008). Piracy in GOA and the rerouting of vessels
also have consequences on Egypt’s Suez Canal which is an important link between the Mediterranean Sea
and Red Sea. It has been noted the due to the spike in piracy in Somalia, Egyptian Canal authorities have
seen a shrink in revenue (Ploch et al 2009, 11). There are labor, fuel and maintenance costs associated
with re-routing. Bowden et al (2010, 14) estimate that the cost of rerouting 10 percent Twenty Foot
Equivalent container is $2.95 billion per year.
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Deterrent security equipment cost: such as use of licensed security guards, sonic deterrent equipment,
razor wire, sandbags etc.
The cost of the supporting of anti-piracy naval flotillas: Based on $82,794 it cost to operate a US navy
per day, Bowden et al (2010, 16) estimated that it would cost about $1.3 - $2 billion per year for the 43
multinational anti-piracy naval vessels in the Horn of African and the Indian Ocean.
The cost of prosecution of captured pirates and the cost of piracy-deterrence organizations: such as the
UN Contact Group, the IMO Djibouti Code etc. It is estimated that the total cost of the prosecution of 507
Somali pirate in various countries as of 2010 was $31.3 million, while the total cost of supporting piracydeterrence
organizations was estimated to cost $24.5 million (Bowden 2010, 19 – 20).
Whether ships are circumnavigated to take a longer route or use the pirate infested GOA route, the cost of
delay, longer voyages, increase in war risk insurance premiums, increased cost of fuelling etc., would all
be passed on along the logistic and supply chain. Furthermore, increased economic costs of international
trade due to piracy would lead to inflation as costs are passed down to the final consumer. Increase in
food prices may lead to social unrest and riots.
Risk of potential environmental disaster: Considering the number of large chemical tankers and the
fact that 12 percent of the world’s crude pass through the GOA, there is always a potential risk that a
pirate attack could cause an oil or chemical spill. The probability of the danger is even more when
considered against the backdrop of the use of sophisticated and powerful weapons by pirates that could
set fire on a tanker or sink it. The case of the Japanese oil tanker the Takayama which was hijacked by
Somali pirates on April 21, 2008 in which fuel tanks were penetrated and oil spilled into the sea and the
hijacking of Saudi oil supertanker MV Sirius Star on November 2008 exemplify this danger (Middleton
2008, 9) are reminders posed by pirate attacks. In the event of any environmental disaster, international
trade could further be disrupted.
The risk of possible link with international terrorist networks: Although there is no credible
substantial evidence of a link between Somali pirate gangs and international terrorist groups, however, in
a volatile region which has seen attacks on US naval ship and ridden by illegal weapons, attention needs
to be paid to maritime terrorism. Although the US Navy claims that there is no connection between
pirates and terrorism in Somalia (Vice Admiral William Gortney, cited in Ploch et al 2009), there are
speculations of tenuous relationship between pirates and Islamic terrorists groups and that pirates are
funding some of these terrorist organizations. For example, there are claims by some analysts that Somali
pirate gangs have tacit links with al-Shabaab Islamic group in which the pirates have provided training to
the maritime wing of al-Shabaab and that it is using some pirate gangs to smuggle arms and that ransom
money have been handed over to al-Shabaab (Luft and Korin 2004; Koknar 2005; Hanson 2009;
Schiemsky 2009; Middleton 2008; Burgess Jr. 2008; Pham 2008). The al-Shabaab Islamic group is a
terrorist group believed to have ties with al-Qaeda. It was designated by the US State Department as a
foreign terrorist group in 2008. Koknar (2005) noted that Lloyd List reported that some 15 to 23
freighters which flew the flags of Yemen, Somalia and Tonga were believed to have sailed the
Mediterranean Sea, Indian and Pacific Oceans owned and controlled by al Qaeda. A terrorist attack on the
high sea would cause havoc and disrupt international trade.
Undermining the sovereignty of Somali: There is the danger that the present uncoordinated security
measures by the international community to combat piracy and armed robbery could undermine the TFG
and question its legitimacy and sovereignty. The current efforts by the UN and other powerful naval states
are uncoordinated, weak, lack the power to prosecute and appear to be a rat race to control the passage of
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vessels along the GOA and ECS. There have been instances where pirates have been apprehended by
naval forces but subsequently released due to the domestic laws of the naval countries. For example, both
Denmark and Germany can only prosecute pirates if they threatened the national interests or their citizens.
Similarly, under French law a ship captain can apprehend and hold pirates but only a French judicial
authority can arrest and detain them (Middleton 2009, 4). The result is that some states due to limitations
posed by their domestic laws are releasing captured pirates or outsourcing their prosecution to Kenya. For
instance, the United States, UK and the European Union have signed memorandums of understanding
with Kenya to prosecute captured pirates in Kenya. Although Somalia is a failed state and lacks the power
to control its territorial waters, and the legal system to prosecute pirates, the current resolutions by the
UNSC would further undermine its efforts to control its waters and assert its territorial sovereignty.
Conclusion
It has been the task of this paper to examine the explanations for the causes of piracy and armed robbery
attacks on vessels in GOA and ECS. Piracy is a universal crime which in recent years has accentuated in
numbers and in the wanton ransom taking of ship crews. Since 2008, the GOA and ECS have seen an
unprecedented rise in piratical activities. In fact, understanding the causes and ramifications of this
nefarious act lie not only in cycle theory but more critically on an eclectic analysis of the structure and
nature of the Somali state which has collapsed since the 1990s. Somalia has been ravaged by internecine
civil strife among the various warlord, characterized by lack of an effective central government, chronic
poverty and the existence of enabling conditions which support piracy. These conditions have created the
“push” and “pull” factors which help us to understand the rise of piracy in the region.
An overwhelming proportion of global commerce is carried on high seas which crisscross the earth. The
Horn of Africa provides an essential hub for global trade. The infestation of the high seas in GOA and
ECS has significant implications for international trade supply chain in terms of costs of ransom,
rerouting, insurance premiums, security equipment, anti-piracy naval flotilla, and prosecutions of
captured pirates. This paper therefore, enriches our understanding of this complex problem and that
impacts it brings to bear.
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Abstract
The Sub-Saharan Business Environment Report: Business Information at a Ready Glance
Anita Spring, aspring@ufl.edu
University of Florida, Gainesville, FL, USA
SABER provides business environment information (major economic, business, political and social indicators and
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focus on business trends in: (1) politics; (2) trade and imports/exports, (3) FDI; (4) infrastructure; (5) ease of doing
business; and (6) social, gender, and health aspects. SABER's print and electronic versions aim to assist
businesspeople, policy makers, researchers and students in understanding the SSA business environment.
Introduction
I have been interested in understanding and analyzing the African business environment, starting with the
1998 African Entrepreneurship: Theory and Reality (with Barbara McDade) and followed by a 2009
special of the Journal of African Business issue (with Lettice Rutashobya), as well as other publications. I
have continued to do research on related topics including a ten-country study that considered African
business people, both men and women, at various levels of economic and business activities in which
interviews were conducted with business owners, managers, and workers of small to medium to largescale
formal-sector companies. The factors that helped and hindered business success, sustainability, and
upward mobility were described and modeled.
The Sub-Saharan Africa Business Environment Report (SABER) project grows out of this interest,
and began in October 2010 for a four-year period with funding from the U.S. Department of Education’s
Title VI grant. 1 As project director, along with Dr. Robert Rolfe, Professor of International Business,
University of South Carolina, the project aims to produce an annual report that is comprehensive and
straight-forward. 1 The first report focuses on the twenty largest economies in Sub-Saharan Africa (SSA).
In the past ten years, almost half of the countries in Sub-Saharan Africa have experienced economic
growth averaging over five percent a year. While many Chinese and Indian companies have moved
rapidly to take advantage of new economic opportunities in these expanding markets, U.S. companies
have been slower to develop effective investment strategies, although the U.S. presence in oil ventures
and the U.S. government in development assistance have played prominent roles. Even though conditions
are rapidly changing on the African continent, many U.S. investors do not consider investing or trading
with Africa because of perceptions of political turmoil and hostile environments. Compounding this
problem is the difficulty of obtaining relevant business information about Sub-Saharan Africa. While
negative information about Africa is easily obtained in the media and elsewhere, data about new business
opportunities are scattered and often out of date.
This initiative seeks to fill this void by preparing a comprehensive annual report on the business
environment in Sub-Saharan Africa that is easily accessible to individuals interested in Africa. The
targeted audiences include U.S. and multinational businesses and corporations, many linked to the
Corporate Council on Africa; academic categories (faculty, students, CIBER programs), NGOs involved
in commercial endeavors, interested federal, state and local chambers of commerce, and other interested
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parties and entities. Another client group for the report are the faculty and students in business schools
and colleges in Sub-Saharan Africa and North America. A website for SABER will host the reports, more
detailed country profiles, tables of indicators, and links to supporting sites.
The report analyzes business indicators and conditions in Sub-Saharan Africa by four regions. These are
West Africa (Côte d'Ivoire, Ghana, Nigeria, Senegal); Central Africa (Cameroon, D R Congo, Republic of
Congo, Equatorial Guinea, Gabon); East and Horn of Africa (Ethiopia, Kenya, Sudan, Tanzania, and
Uganda); and Southern Africa (Angola, Botswana, Mozambique, Namibia, South Africa, and Zambia). 2
Structure of the Report: The Model, Country Reports, and Quantitative and Ranking Indicators
To prepare this report, SABER produced a decanal time series on GDPs for all Sub-Saharan countries
with the aim of specifying the 20 largest Sub-Saharan economies. Although there is overlap, countries are
grouped by region: West Africa, Central Africa, East Africa and the Horn, and Southern Africa, based on
geography and shared borders, regional trade agreements (RTAs) (note: Both Cameroon and Equatorial
Guinea are placed in Central Africa because of their RTA memberships). The report's guiding model is
followed by region and sub-region summaries and business assessments in terms of positive and negative
aspects for business endeavors. Individual country studies focus on current business trends, deals, and
restrictions, while detailed quantitative and ranking indicators provide the data for these assessments.
The Model: The interaction of domestic economic, political and social factors form the inner core of the
model that is depicted as three concentric spheres (Figure 1); the next sphere represents Africa/Sub-
Saharan Africa and includes regional trade agreement and organizations. These RTA and RTI
memberships are given for West Africa (ECOWAS, WAEMU, CDL, CEN-SAD, CILSS); Central Africa
(ECCAS, CEMAC, NBI); East Africa (EAC, IGAD, COMESA); Southern Africa (SADC, SACU, IOC,
CBI). There are also political entities such as the African Union and NEPAD that influence trade and
business, as well as economic entities such as the African Development Bank that along with the
multinationals lend and fund projects and affect monetary configurations. The third sphere contains the
multilateral organizations (including the World Bank, IMF, WTO, UNTAD, FAO, WHO, etc.) involved
with Sub-Saharan African countries in terms of development assistance programs, monetary
configurations, program assistance, and data collection. Bilateral agreements in development, trade and
FDI from the U.S., E.U., China, India, and other countries are listed and then discussed in the report in
terms of their import deals (Africa's exports) for oil, minerals, natural resources, land, and agricultural
commodities, while exporting their machinery, manufactured goods, and technical expertise (Africa's
imports). Also included are import/exports between Sub-Saharan African countries.
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Country Reports: Each country report details the main business trends in terms of six major categories
(other categories relevant to specific countries are added): (1) political (stability, major parties, electoral
processes, corruption, civil and press freedom, etc.); (2) economic growth and trade (trading partners,
business deals and projects, imports/exports); (3) foreign direct investment and joint ventures; (4)
infrastructure development (transportation, telecommunications, electricity, etc.); (5) business regulation
(small businesses, microcredit, doing business ratings, etc.); and (6) health and social environment
(morbidity and mortality, life expectancy; quality of life, gender inequalities and equalities, literacy,
income and poverty, etc.). Sources for the information are given in Table 1.
Table 1 Selected Data Sources for Country Reports
Newsletters and reports. African Confidential, Africa Research Bulletin
Reports: World Economic Forum Global Competitiveness and Gender Gap Reports; CIA World Fact
Book, the Economist Intelligence Unit reports
Internet news and data sources on Africa: IT News Africa, allafrica.com, Africa Review, Afrol, Afrique
Avenir, Africa Investor, African Press International, Afrique en ligne, New Vision African Press
International, Consultancy Africa Intelligence, African Economic Outlook
UN Organizations: World Bank reports and sites, UNHCR, UNCTAD
Business sites: Bloomberg Businessweek, Business Analyst, BizCommunity
Databases: Global Trade Atlas
China: China Invests Overseas, Business China, China Economic Review
US: AGOA.info, USDA Foreign Agricultural Service
Sector-specific sites Telecommunications Union, Energypedia, Mix Market; Transparency International
Microfinance Information Exchange, Mining Review
Print and on-line news sources: Rueters, The New York Times, The Washington Post, BBC News, VOA
News, Financial Times
Country-specific Internet news sources, newspapers, and general websites
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Regional summaries provide a concise package about macro-regional trends and outlooks focusing on
risks, growth, changes in commodity prices, imports/exports and FDI flows. The content focuses on
major economic, social and political and governance events of the past year that have shaped the business
environment. Data sources draw from the above, as well as the data tables discussed below.
Quantitative and Qualitative Data Tables: SABER's tables are a series of quantitative and qualitative
indicators and rankings on business and trade, politics and legal aspects, and social and health variables
(see Table 2). These data allow for estimating the implications for economic growth, foreign direct
investment and trade that are useful to readers doing business already or contemplating the prospects
and/or studying the business environment and country situation. Table construction was based on reliable
databases of indicators. IMF and World Bank, (specifically the IMF's World Economic Database and the
World Bank's World databank) were consulted regularly. Other important databases and qualitative
sources accessed were the FAO's Production Yearbook and Data Files, IMF's Direction of Trade
Statistics, the World Bank's Health Nutrition and Population Database, World Economic Forum,
UNCTAD, UNDP's HDI indices, WHO's Health Observatory Database, and a series of political indices
from Transparency International, Freedom House, Heritage Foundation, Central Intelligence Agency, and
the Ibraham Governance index. Many tables also present data based on SABER's calculations (e.g., trade
balance; changes in crude birth rate, fertility rate, and life expectancy; agricultural changes in land under
production, value added per worker, crop, livestock and cereal production; and changes in total food
production). Data were downloaded in raw form, either extracted for all SSA countries or for each
country one at a time. In either case, raw data were reformatted and structured to place in the data table
template. Where available, each table also gives the data for Africa and SSA as a whole. (However,
Sudan is classified as a Northern African country by most databases, and so the aggregated SSA regional
data do not include it).
Table 2 List of SABER Tables in 2010
Report
Indicators
1. GDP of 20 Largest SSA Economies by GDP in billions of US$, current prices
Region
2. GDP Growth (% change ) % Growth in GDP from Previous year, Average % Growth
3. Regional Trade Agreements (RTA) and RTA & RIA membership
Regional Integration Agreements (RIA)
4. GDP by Economic Sector (%) and Change % change in annual inflation, Average inflation rate 2001-2009
5. Annual Inflation Annual inflation, 2001-2010 (% change in average consumer prices)
6. External Economic Environment FDI & Total External Debt stock (% change 2006-2009), Main Export
Destination (2009 & Change 2006-2009), Exports, Imports, & Trade
Balance (2009 in millions of US$ & % Change 2006-2009)
7. Value of External Debt as % of Exports External debt as a % of exports
8. Currency, Exchange Rates & IMF
Currency, US $ Exchange Rate; % Change in Exchange rate, Exchange
Agreements
Rate Regime, Latest IMF Engagement
9. Agricultural Indicators Ag. Value Added per Worker 2009 (% change 2001-2008), Ag Land
Area 2007 (% of Total Area & % Change 2001-2007), Cereal Yield
2008 (Kg/ha & % Change 2001-2008), Active Population in Ag (% of
all Active & % change 2001-2008), Food Production index, Crop &
Livestock Production Indices (2007 value & % change 2001-2007)
10. Social Environment: Population, Literacy, Population, Average Annual Population Growth, Ave. Annual Urban
GNI, GDP per Capita, Income Inequality & Population Growth Rate, Literacy Rates, GNI per Capita, GDP Per
HDI
Capita Growth, Income Inequality (Gini Coefficient), HDI (World
Rank), Inequality-adjusted HDI, % Poverty
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11. Selected Health Statistics and changes Crude Birth Rate & Change, Total Fertility Rate & Change, Life
Expectancy & Change, & HIV/AIDS (Estimated Deaths, Population
12. Gender Gap Index and Sub-Indices,
Selected Gender Indicators
13. Legal Environment: Political Stability,
Corruption, Economic Freedom, &
Governance
Living with HIV, % of Population Living with HIV
Gender Gap Index Score, Gender Gap Index Sub-Indexes (Economic
Participation, Education Attainment, Health & Survival, Political
Empowerment); Selected Gender Gap Index Indicators (Men &
Women; Labor Force Participation, Earned Income, % in Parliament
Rule of Law Rank, Political Stability Rank, Corruption Perception
Score & World Rank Economic Freedom Index Score & World Rank,
Property Rights Rank, Ibraham Governance Index Score
14. Political Environment Level of Democratic Consolidation, Press Freedom Index Rank,
Political Rights, Civil Liberties, & Freedom Status, Current
Government, Elections in 2011, Ruling Party, Main Opposition
15. Selected Doing Business indicators Time to start a business, Connect to electricity, Enforce a contract,
Register property, Close a business, Export, Import; Trade: Cost to
export, Cost to import; Total tax rate, etc.
16. Doing Business Rankings Composite Index Ranks (Ease of Doing Business Index World Rank &
SSA rank) & Sub-Index Ranks (Starting a Business, Construction
Permits, Registering Property, Getting Credit, Protecting Investor,
Paying Taxes, Trading Across Borders, Enforcing Contracts, & Closing
17. Telecommunications: Landlines, Cellular
and Internet Usage
a Business)
Telephone Lines (Total, per 100 population, Change 2001 to 2008),
Cellular (Total, per 100 population, Change 2001 to 2008), Internet
Users (Total, per 100 population , Change 2001 to 2008)
18. Oil Exports Oil Exports to USA, China, India, & South Africa (2009 in millions of
US$ & % of all Commodity Exports to Respective Countries)
19. Selected Health Statistics and changes Crude Birth Rate & Change, Total Fertility Rate & Change, Life
Expectancy & Change, & HIV/AIDS (Estimated Deaths, Population
Living with HIV, % of Population Living with HIV
The Indicators on Economic aspects include GDP, GDP growth, GDP per capita, GDP per capita and
per capita growth External Debt and as a % of Exports, Annual inflation (% of consumer prices), FDI,
Exports, Imports and Trade Balance; Currency, Exchange rates, and Exchange rate regime, etc. Data for
each country on exports and imports are given for other African countries, China, the EU, and the United
States. Imports and exports to/from India are noted for the appropriate countries in the country reports.
The percent contribution to GDP by sector is disaggregated into agriculture, industry, manufacturing and
services, as are the agricultural indicators: value added per worker land area, commodity productivity, etc.
Specific agricultural commodities exported are noted in the country reports. Data on infrastructure cover
transportation (paved roads, railways, ports, airports), electricity, and telecommunications (land lines, cell
phones, and Internet users)
The Indicators on Political Aspects include stability, freedom, and governance indices including: rule of
law, Press Freedom Index, political rights, civil liberties, freedom status, head of state (year assumed
office/power), ruling and opposition parties, corruption index score, economic freedom, property rights
rank, etc.
The Indicators on Social and Health aspects include population and growth rates, literacy rates, GDP
per capita, GPD per capita growth, Income inequality, Human Development Index (HDI), population in
poverty and gender inequalities and equalities. Health indicators include birth and fertility rates, life
expectancy, HIV/AIDS (estimated deaths and people living with HIV/AIDS), and poverty and
undernourishment data.
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Data and indicators are disaggregated by gender wherever possible. The World Economic Forum"
Gender Gap report (Hausman, Tyson and Zahidi 2010) has linked gender ratings and indices to GDP and
World Competitiveness. Some African countries rank high on gender equality in world perspective, while
others are low. The indicators and indices on gender include literacy, births and fertility in the social
environment found in the health tables, while a separate table gives the gender gap index score and rank
(plus sub-indices for educational attainment, health survival, and political empowerment), labor force
participation, income earned, and percent of women in parliament.
"Doing Business" indicators, mostly drawn from World Bank data show both the country’s world rank
and the rank for the 46 Sub-Saharan African countries. Sub-index ranks are given for starting a business,
dealing with construction permits, registering property, getting credit, protecting investors, paying taxes,
enforcing contracts and closing a business. More specific indicators rank the time (number of days or
years) to: start a business, connect to electricity, enforce a contract, register property, and close a
business. Also considered are the costs and time to import and export commodities.
Time Frame and Report Usage
A draft version of the report will be distributed at IAABD, as well as to business leaders and scholars in
several African countries (e.g., Ghana, Senegal, South Africa and Tanzania) and scholars and students at
the University of Florida and the University of South Carolina in May 2011. Comments will be
incorporated into the final report for 2011 to be released in print copy and electronically on October 15,
2011. The electronic copy will include the full report, but in addition, there will be support tables and
links to database and other research sites. An advisory group of African Scholars from business colleges
in Africa will comprise a Council of African Scholars to review the report. Four professors who teach in
business schools and colleges in SSA will provide detailed critiques. Each year, one of the scholars will
be in short-term residence at UF to provide guidance and give seminars and lectures. An added feature
will be the linkages to African universities and business schools, which will also form one of the client
groups for the report. Reports will subsequently be developed for 2012, 2013, and 2014 to be released in
final form each year.
Conclusion
The report aims to provide a concise analysis about African business conditions to assist several client
groups ranging from business people and business consultants, to policy and decision makers, to the
academic community of faculty and students who are located in the United States, Africa, and elsewhere.
It focuses on major economic, social and political events and indicators of the sub-continent considering
factors in the past year that have shaped the economic and political environment of the region and for
each country, the context and main drivers of the business environment.
Notes
1. The project is funded by the Department of Education Title VI through the Center for International Business
Education and Research (CIBER), Warrington College of Business and the Center for African Studies (CAS),
University of Florida. Other project funding is from the CIBER at the Moore School of Business, University of
South Carolina. Greg Parent, doctoral candidate in Geography prepared most of the tables, and Hannah Morris
(Assoc Director, External Relations and doctoral student, Higher Education Administration) and Dr.
Sarah Cervone (anthropologist) assisted. Dr. Rob Rolfe prepared much of the country reports and Emily Watkins
did background research on specific countries.
2. Sudan is listed under the East & Horn of Africa region, while Cameroon and Equatorial Guinea are listed under
the Central Africa region, based on their RTA/RTI memberships.
3. Footnotes for Table 3 Source: International Monetary Fund, World Economic Database,
http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/index.aspx. 1 IMF 2010 data are estimates. 2 Source:
World Bank. World Databank: World Development Indicators & Global Development Finance,
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http://databank.worldbank.org/ddp/home.do?Step=2&id=4&CNO=2. 3 Source: World Bank. World Databank:
Africa Development Indicators, http://databank.worldbank.org/ddp/home.do?Step=12&id=4&CNO=1147
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Hausman, Ricardo, Laura Tyson and Saadia Zahidi. 2010. The Global Gender Gap Report, 2010 World
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International Monetary Fund. 1999. The Cross-Border Initiative in Eastern and Southern Africa.
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Nile Basin Initiative. 2010. http://www.nilebasin.org.
Southern African Customs Union. 2010. http://www.sacu.int.
Southern African Development Community. 2010. http://www.sadc.int.
Spring, Anita and Barbara McDade, eds. 1998. African Entrepreneurship: Theory and Reality. University
Press of Florida.
Spring, Anita and Lettice Rutashobya, eds. 2009. Special issue on Gender and Entrepreneurship, Journal
of African Business, vol. 10. No.1.
West African Economic and Monetary Union. 2007. http://www.uemoa.int.
UNCTADstat. 2010. http://www.unctad.org/Templates/Page.asp?intItemID=1584&lang=1.
United Nations Development Program (UNDP). Human Development Reports. 2010.
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Global Financial Crisis and the Nigerian Capital Market: An Evaluation
Adegbite, Esther O. femifunmi1981@yahoo.com
Department of Finance, Faculty of Business Administration, University of Lagos, Nigeria.
Babatunde O. Oke, okebabatunde@yahoo.co.uk
Department of Finance, Faculty of Business Administration, University of Lagos, Nigeria.
The recent financial crisis undoubtedly affects both developed countries as well as emerging and developing
economies in varying degrees. This paper examines the impact of the global financial crisis on the Nigerian capital
market. Towards achieving the objective of this paper, we employ Correlation Analysis and the Generalized Method
of Moments (GMM). We find that the NSE is positively and highly correlated with the indices of these countries
although the degree of correlation is highest with the German stock market, followed by that of USA (Dow Jones)
and the Canadian stock market. The NSE is however less correlated with those of the United Kingdom and the
French bourses. Moreover, the results of the GMM indicate that all the bourses of the five advanced economy
positively and significantly influenced the NSE during the period under consideration. This implies that they move in
the same direction and shocks in these countries’ capital market were indeed transmitted to Nigeria through the
NSE.
Introduction
The global economic crisis of the 2007-2009 era has been said to be the worst of its kind since the start of
modern capitalism; it is said to be much worse in coverage and in intensity than the great depression of
the 1930s. Starting from the USA, the biggest capitalist nation, the economic depression traveled at the
speed of light to engulf Europe, Canada, and lastly Africa. The literature has identified both remote and
immediate causes of the problem (see Reinhart and Rogoff; 2008, and Blanchard 2008). Indeed, the
subprime loan crisis in the United States snowballed into a global crisis with the aid of securitization and
globalization. It is estimated that the global stock markets lost about $26,400 billion (almost 100 times the
initial subprime loss) between July 2007 and November 2008. Also, the crisis accounted for an estimated
loss of about $4,700 billion dollars in world output (or about 20 times the initial subprime loss) by
November 2008 (Blanchard 2009).
In Nigeria, the huge capital outflows from the country (partly in response to the financial stress in
advanced countries) and the enormous decline in capital inflows to the country (as a result of collapse of
commodity prices, and fall in remittances, portfolio and direct investments, as well as aid etc) put a lot of
strains on the Nigerian capital market. The latter’s crash was monumental, with serious implications for
the Nigerian economy. For instance, the Nigerian all share index that stood at 23,844 at December 2004
rose to 65,075.02 at the close of business on the last day of February 2008, a growth of about 172.91
percent. This gain was however reversed as the global meltdown hit the Nigerian financial system with
the Nigerian Stock Exchange (NSE) all share index falling below its December 2004 level to stand at
21,652 at the end of January 2009. This crash in the Nigerian stock market has serious implications for
the banking subsector as the latter contributes roughly about 65 percent of the market capitalization of all
listed equities on the NSE. Moreover, the exposures of the banking sector to the capital market (through
granting of margin loans) as well as the oil and gas sector further put a lot of stress on banks in Nigeria.
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Four main transmission mechanisms of economic and financial crises from the developed economies to
the developing ones have been identified in the literature. These are the trade channel, capital market
channel, foreign aid channel and remittances (Balaskrishman et al 2009, frank and Hesse 2009, Roe 2009,
Odi 2009 and Gosh et al 2009). Although many extant studies have confirmed the transmission of
financial crisis and financial stress to developing countries and some have identified the channels of
transmission, none to the best of our knowledge has examine examining the mechanism from developed
countries to Nigeria. To fill this lacuna, this paper examines the impact of the global crisis on the Nigerian
capital market.
The paper is in five sections. Following this introductory section, the second section reviews the extant
literature on the subject matter. In the third section, we present the methodology while the fourth section
discusses the results of the exercise in section three. The fifth summarizes the findings and draws some
conclusions, while making recommendations to help policy makers.
Rreview of extant theoretical and empirical studies
The reasons for and effects of the current global economic and financial crisis have been well documented
in the literature. The crisis, which has its genesis in the U.S Subprime mortgages crisis in August 2007,
rapidly escalated and spilled over to financial markets and economies all over the world. Greenlaw et al.
(2008), Blanchard (2009) and Brunnermeier (2009), moreover, trace the roots of the financial crisis to the
preceding seven years of high global growth, low interest rates and limited volatility. The underestimation
of risks and over-optimism about the future, as a result of high growth/low volatility and low interest
rates, led to the creation and the purchase of riskier assets and ultimately asset price bubble. According to
Nadauld and Sherlund (2008) the bubble reached its peak in the U.S in 2006 and house prices there and
elsewhere started to fall. The fall in house prices led to a fall in the prices of securitized subprime
mortgages, affecting financial markets worldwide. The demise of Lehman Brothers in September 2008
forced markets to re-assess risk and this eventually led to massive investors’ withdrawal of funds from the
markets. This market illiquidity in turn resulted in massive decline in economic activity in the U.S. and
many other countries. In general, risk concentrations, market indiscipline and lax financial regulation and
supervision, among others, contributed in no small way to the crisis (Blanchard 2009).
Indeed, financial crises, characterized as currency crises and banking crises, have long been studied.
Krugman (1979) shows that currency crises occurs when deterioration in economic fundamentals leads to
a crisis in the external account while Obstfeld (1986) indicates that a “second-generation” model of
currency crises exists and occurs even in countries with sound fundamentals owing to self-fulfilling
expectations. In a world of “multiple equilibria,” countries with relatively sound fundamentals may end
up with a bad equilibrium; that is, a currency crisis. Banking crises on the other hand are associated with a
run on bank deposits and this can result from fundamental weaknesses of several commercial banks or
from self-fulfilling expectations (as modeled by Diamond and Dybvig, 1983). These “twin crises”
(currency and banking crises) tend to be associated with each other and often take place together.
Kaminsky and Reinhart (1999) show that currency crises can cause banking crises, banking crises can
cause currency crises, and currency and banking crises can result from common factors. When an
economic boom is financed by a surge both in large capital inflows and in bank credit, the end of the
boom tends to be accompanied by both currency and banking crises (McKinnon and Pill 1996). Before
the episodes of the 1990s, financial crises were, in principle, considered as events occurring in individual
countries. But the Mexican crisis of 1994–95, the East Asian crisis of 1997–98, and the Russian crisis of
1998 had strong contagion (or spillover) effects in other countries; that is a crisis in one country was
rapidly transmitted to the rest of the world.
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According to Kawai, Newfarmer, and Schmukler (1999), contagion has been widely used to characterize
the reaction of financial variables (such as exchange rates, interest rates, and stock market prices) to
events in foreign countries. Movements of one country’s exchange rates, stock prices, and interest rates
correlated with another country’s movements are interpreted as contagion. Contagion therefore involves
cross-country co-movements of the financial variables and high correlations of these variables across
countries. As described in Dornbusch, Park, and Claessens (2000), there are different possible channels of
contagion. These channels include both fundamental linkages among economies and factors unrelated to
fundamentals. Fundamental linkages are divided into “real” and “financial”. Te former is usually linked
with trade and/or foreign direct investment (FDI) while financial linkage occurs when international
investors engage in global diversification of financial portfolios and connect different economies
financially. Countries with internationally traded financial assets and with liquid markets tend to be
subject to contagion (Kodres and Pritsker 1998, and Calvo 1998). Factors unrelated to fundamentals
(herding) include the magnitudes of swings in exchange rates and stock prices across countries appear to
be beyond those predicted by any fundamental linkages. Shocks were really transmitted to economies
where fundamental linkages are not present or strong. Domestic and international financial markets
transmit shocks across countries when the markets become concerned about the future prospects of
countries or when markets see a crisis somewhere else. These events affect expectations; investors panic
and move away from countries that do not necessarily share fundamental linkages. This type of investor
behavior is referred to as “herding.”
Dornbusch, Park, and Claessens (2000) review five categories of evidence on contagion: correlation of
asset prices; conditional probabilities of a currency crisis; changes in volatility; comovements of capital
flows and rates of return; and other tests. Their conclusion is that “fundamentals help predict spillovers
and that trade links are important factors as well”, though “common creditor and other links through
financial centers transmit volatility from one country to another...”. Their review confirms their
conclusion that “comovements are unavoidable and that fundamental factors are important” in
determining the susceptibility of an economy to contagion. They conclude with preliminary suggestions
for policy, focusing on the importance of disclosure, improved standards, and prudential controls as well
as changes in international financial architecture.
Many studies have also examined international transmission of shocks over the years via the capital
market channels. King and Wadhwani (1990) find evidence of stock market correlations among the
United States, the United Kingdom, and Japan, while Lee and Kim (1993) confirm this for twelve major
markets. Also, Hamao, Masulis, and Ng (1990) show the transmission of stock market volatility from
New York to London and from London to Tokyo. Moreover, Edwards (1998) provide evidence of stock
volatility spillovers from Mexico to Argentina and Longin and Solnik (1995) arrive at similar conclusions
for seven OECD countries from 1960 to 1990.
The term “Financial stress” has also been introduced in the literature. An episode of financial stress is
defined by Balakrishman, et al 2009 as “. . . a period when the financial system is under strain and its
ability to intermediate is impaired”. Financial stress indices are also constructed for both developed and
emerging economies. Cardarelli, Elekdag and Lall (2009) for example constructed a financial stress index
for developed countries (tagged AE-FSI) while Balakrishman, et al 2009 constructed the Emerging
Markets Financial Stress Index (EM-FSI) for emerging markets. Also, the transmission belts or
mechanisms of financial stress from the developed countries to emerging and developing economies have
received a lot of attention in recent times. These transmission belts (such as capital flows, remittances,
and aid flows) can generally be grouped into financial and trade channels. (Balakrishman, et al 2009;
Frank and Hesse 2009, Gosh et al 2009, odi 2009, and Roe 2009). Transmission through these links may
be common, affecting many countries at the same time, or may be country specific. The former is fuelled
by financial globalization and may occur through global shocks or withdrawals by common lenders
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(Pons-Novell 2003; Calvo 2005; and Broner, Gelos, and Reinhart 2006). On the other hand, country
specific transmission depends on country-specific financial and trade relations, structural uniqueness, and
policies and may account for disparities in effects of global crisis on nations.
Methodology
Model Estimation Technique
In this study, we employ time series econometric techniques to ascertain the impact of the global financial
crisis on the Nigerian capital market. Specifically, we use pairwise correlation and the Generalized
Method of Moments (GMM) estimator to establish the relationship between the Nigerian Stock Exchange
(NSE) and the stock exchanges of 5 major developed economies of USA (DOW and NYSE), UK (FTSE),
Canada (S&PTSX), France (CAC) and Germany (DAX). The GMM estimator is a robust estimator to the
extent that a lot of popular estimators in econometrics are regarded as special cases of GMM. The OLSE,
for instance is regarded as a GMM estimator in which the independent variables are individually not
correlated with the residual. For the GMM, we write the moment condition as an orthogonality condition
between the parameters and a set of instrumental variables. To ensure that the GMM estimator is
identified, we have the same number of instrumental variables as the parameters to be estimated. Thus,
we use the lagged values of the series NSEt-1, DOW t-1, FTSE t-1, NYSE t-1, S&PTSX t-1, CAC t-1, DAX t-1
as instruments. Each series consists of 970 observations of the daily closing prices from January 1 st
January 2006 to 15th March 2010.
Model Specification
Towards achieving the objectives of this paper and using the GMM estimator, we posit a multivariate
model of the following form:
NSE= α0 + β1DOW + β2FTSE + β3NYSE + β4S&PTSX + β5CAC + β6DAX + εi (1)
where:
NSE is the all share index of the Nigerian stock exchange while DOW, NYSE, FTSE, S&PTSX, CAC,
DAX are Dow (Dow Jones Index) and NYSE (New York Stock Exchange Index) represents the capital
market of USA. FTSE, S&PTSXM, CAC and DAX are the all share indices of England, Canada, France
and Germany. α0 and βi are the parameters to be estimated, and εi is the error term. We expect “a priori”,
β > 0. Instrument list: NSEt-1, DOW t-1, FTSE t-1, NYSE t-1, S&PTSX t-1, CAC t-1, DAX t-1.
Research Findings
We first examine the graphical representation of the time series data employed in this study. Fig 1 below
shows that all the series, namely: NSE, DOW, NYSE, FTSE, S&PTSX, CAC, DAX fluctuate in the same
manner, indicative of positive correlation.
380

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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Table 1 below presents pairwise correlation matrix to describe the relationship existing between NSE and
stock markets of 5 (five) of the 7 most industrialized and developed nations of the world (the G7) for the
period December 2005 to 15th March 2010. The result shows that the NSE is positively and highly
correlated with the indices of these countries although the degree of correlation is highest with the
German stock market (0.734), followed by the Dow Jones (0.729) and the Canadian stock market (0.728).
The NSE is however less correlated with those of the United Kingdom and the French bourses. The
results thus imply that the bourses move in the same direction and there is a very high tendency for the
transmission of financial stress and shock from the advanced economies to the Nigerian capital market.
The correlation coefficients showing the relationship among the bourses of the five advanced economies
are however very high, indicative of high degrees of interdependence, co-movement and integration
among them.
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FTS E
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TABLE 1: PAIRWISE CORRELATION MATRIX
NSE DOW FTSE NYSE S&P TSX CAC DAX
NSE 1 0.729141 0.516214 0.676697 0.728659 0.534788 0.734965
DOW 0.729141 1 0.943567 0.987028 0.957019 0.926031 0.946969
FTSE 0.516214 0.943567 1 0.972595 0.894174 0.973716 0.908977
NYSE 0.676697 0.987028 0.972595 1 0.950421 0.959228 0.951625
S&P TSX 0.728659 0.957019 0.894174 0.950421 1 0.839921 0.931327
CAC 0.534788 0.926031 0.973716 0.959228 0.839921 1 0.882783
DAX 0.734965 0.946969 0.908977 0.951625 0.931327 0.882783 1
Source: Authors’ computation
GMM ESTIMATION
SE = 6.10 + 29.76DOW + 71.38FTSE + 10.20NYSE + 3.43S&PTSX + 20.01CAC + 11.92DAX
(5.94 9.03 18.78 4.04 2.54 6.25 9.37)
{0.00 0.00 0.00 0.00 0.01 0.00 0.00}
R-squared = 0.79 Adjusted R-squared = 0.79 J-statistic = 0.02
Instrument list: NSEt-1, DOW t-1, FTSE t-1, NYSE t-1, S&PTSX t-1, CAC t-1, DAX t-1.
In addition, we use the Generalized Method of Moments (GMM) estimator to establish the relationship
between the Nigerian capital market (NSE) and the stock exchanges of 5 major developed economies of
USA (DOW and NYSE), UK (FTSE), Canada (S&PTSX), France (CAC) and Germany (DAX). The
results presented above indicate that all the bourses of the five advanced economy positively and
significantly influenced the NSE during the period under consideration. This implies that they move in
the same direction and shocks in these countries’ capital market were indeed transmitted to Nigeria. The
R 2 shows that about 79 percent of the variability in NSE can be attributed to the variations in the indices
of these five advanced nations.
Conclusions
The recent financial crisis undoubtedly affects both developed countries as well as emerging and
developing economies in varying degrees. This paper examines the impact of the global financial crisis on
the Nigerian capital market. Towards achieving the objective of this paper, we employ Correlation
Analysis and the Generalized Method of Moments (GMM), We find that the NSE is positively and highly
correlated with the indices of these countries although the degree of correlation is highest with the
German stock market, followed by that of USA (Dow Jones) and the Canadian stock market. The NSE is
however less correlated with those of the United Kingdom and the French bourses. Moreover, the results
of the GMM indicate that all the bourses of the five advanced economy positively and significantly
influenced the NSE during the period under consideration. This implies that they move in the same
direction and shocks in these countries’ capital market were indeed transmitted to Nigeria through the
NSE.
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Edited by Emmanuel Obuah
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384

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Track 10: Public Sector and Health Care Management
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Abstract
The wealth-health cycle in West Africa: Is it virtuous or vicious?
M. Femi Ayadi, Ayadim@uhcl.edu
University of Houston – Clear Lake, Houston, TX, USA
This paper investigates the interdependencies that exist between health care expenditures and economic growth
within the Economic Community of West African States (ECOWAS). This is important to guide decision making in
public policy on how improvements in health of the citizenry can serve as a catalyst to output growth or vice versa.
Bivariate Granger causality test was applied to panel data from 1998 through 2006. The results show bi-directional
causality between per capita health care expenditures and Gross Domestic Product. This line of research is needed
within ECOWAS for planning purposes as the region gravitates toward economic integration.
Introduction
The long-term relationship between national income and health expenditures is a prerequisite for planning
health reforms as well as for an efficient allocation of sovereign resources (Sulku and Caner, 2009). Yet,
health systems in Africa are beset with huge financing deficits. While the global average of governmental
expenditure on health is 5.4 percent of GDP, the average for Africa is 2.5 percent of GDP. In 2001, the
per capita spending on health in Sub-Saharan Africa was between $13 and $21 when high income
countries of the world spent about $2,000 (Anyanwu and Erhijakpor, 2009). It is logical for the
Commission for Macroeconomics and Health of the World Health Organization to advocate for increased
spending on health in the region.
The relationship between health care expenditures and economic growth has been widely investigated. A
large proportion of the existing studies have mostly focused on OECD countries due to lack of data from
developing countries. Much of the studies that conducted international comparisons encountered
problems such as lack of homogeneity between countries. The purpose of this paper is to contribute to
the existing literature by investigating the interdependencies that exist between health care expenditures
and economic growth within the Economic Community of West African States (ECOWAS). This
investigation is important to guide decision making in public policy on how improvements in health of
the citizenry can serve as a catalyst to output growth or vice versa. More importantly, this line of research
within ECOWAS is needed for planning purposes as the region is gravitating toward economic
integration. Finally, this research is critical for allocation of scarce resources in an efficient manner.
Literature Review
In a comprehensive survey of the literature, Gerdtham and Jönsson (2000) note that the global interest in
health expenditure is initially premised on cost-containment and cost-effectiveness. They provide an
overview covering several countries. Their analysis shows that aggregate income is the most important
factor explaining variations in health expenditure. Their conclusion supports the view that GDP is the
single most important variable used to explain health care expenditures in macro-studies. Newhouse
(1977) continues the discussion on the relationship between health expenditures and economic
development. He reports that 92 percent of the variance in health care expenditures between countries is
explained by gross domestic product (GDP) and that the income elasticity was larger than one. Since then,
much research along those lines has been done, using all kinds of data including cross-sectional data as
well as time series and panel data.
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This phenomenon can be explored using the theoretical approach of Weil (2007). According to Weil,
available microeconomic estimates are used to reveal the relative importance of health at the
macroeconomic level. The analysis uses the Cobb-Douglas aggregate production function of the form:
(1)
Where, Y is output, K is physical capital, A is the country-specific productivity term, H is the labor
composite and i is country index. The labor composite, H is defined as:
(2)
Where ei is human capital in the form of education per worker, hi is human capital in the form of health
per worker and Li is the total number of workers. Note, that hi does not refer to the totality of a worker’s
health but just the aspect of a worker’s health that is critical to production of output. Given Equation (1),
the marginal product of labor, wi determines the wage rate at:
(3)
From Equation (3), Weil deduces the wage earned by a worker as a function of own health and education
and that the wage is proportional to an individual’s human capital in the form of health.
Kenny’s (2009) work is consistent with the Weil framework. Kenny argues that income and health are
related on two grounds. Income is critical to mortality transition because it represents resources for
improved nutrition as well as access to knowledge and education which are vital in the creation of
demand for health services. On the other hand, adequate nutrition, public health, knowledge and
education are critical to mortality transition. Thus, the role of income in achieving improvements in these
social goods is at best questionable. In their comprehensive study, Gerdtham and Jönsson (2000) present
the literature on international comparisons of health care expenditure. Their analysis shows that the most
important factor explaining variations in health care expenditures is aggregate income. The overall effect
of GDP is reportedly positive and statistically significant. This conclusion supports the view that GDP is
the single most important variable used to explain health care expenditures in macro-studies.
Baker (2009) notes that wealth is a tool employed to achieve human ends and that it does not necessarily
guarantee health. To the author, the relationship between growth and economic improvement is complex.
Baker explores the connection between wealth and health as i) causative role for wealth in health
generation; ii) potential role of health in wealth generation; and iii) revealing remarkable examples of
unhealthy wealth and healthy poverty. The conclusion is that the relationship is affected by the
availability and diffusion of rates of health knowledge and the commitment of the public. A number of
value decisions are needed to chart an appropriate course for health goals of a nation.
According to Jack and Lewis (2007), the literature reveals that health leads to income growth through its
impact on human capital accumulation. This point of view is supported by Sachs and Malaney (2002)
who note that the prevalence of malaria in developing countries is capable of compromising educational
attainment of a people thereby hampering fetal development, reducing cognitive ability and lowering
school attendance. Anyanwu and Erhijakpor (2009) identify public expenditure as the most readily
available policy tool for provision of social services has come under increasing scrutiny in Africa.
Finally, Sulku and Caner (2009) point out that there are structural differences between the economies of
developed and developing countries which would invalidate translation of research reports obtained in the
former to the latter. They note that almost all developing countries face the problems of economic
stagnation, debt, structural adjustment as well as health sector reform. Jaunky and Khadaroo (2008)
report results indicating that health is a luxury item to the poor in Africa because income elasticity of
health expenditure is greater than unity.
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Methodology
The econometric approach in this paper is the modified version of the Granger (1969) and Sims (1972)
framework. In 1969, Granger developed a causality concept using time series to show that a cause must
precede an effect in the sense that a cause can produce a superior forecast of the effect. In some sense,
Granger causality is a measure of whether one variable takes a value before another variable which helps
predict the latter. Granger causality test is usually undertaken within a vector autoregressive (VAR)
framework using stationary series. Therefore, the first step in a Granger causality application is to
determine the stationarity properties of the sampled series.
Data
The data series are per capita total health expenditures and per capita GDP for all ECOWAS countries
except Liberia from 1998 through 2006. The real per capita health expenditures in a panel data setting are
obtained from the World Development Indicators produced by the World Bank. On the other hand, the
per capita real GDP in purchasing power parity (PPP) dollars are obtained from Penn World Tables 6.2
(Heston, et al. (2009). Liberia was excluded because of a lack of data. The countries covered are Benin,
Burkina Faso, Cape Verde, Cote D’Ivoire, The Gambia, Ghana, Guinea, Guinea Bissau, Mali, Niger,
Nigeria, Senegal, Sierra Leone, and Togo. According to Gbetnkom (2006) the ECOWAS countries are
quite integrated and this makes them to be relatively homogeneous.
Unit Root Tests:
As noted above, a panel causality test is usually preceded by a test of unit roots in time series studies.
However, testing for unit roots in panel data is a more recent undertaking and this test has more power
than the usual tests associated with time series data (Taguchi et al., 2009). The tests employed in this
paper are Levin, Lin and Chu (2002), Im, Pesaran and Shin (2003) and Maddala and Wu (1999) Fisherbased
tests. The Levin, Lin and Chu (LLC) test is discussed in the EViews 6 User’s Guide and it employs
the following equation:
(4)
Where, i=1,2,…., N cross-section or series that are observed for periods t=1,2, ..,T and Xit are the
exogenous variables in the panel which include fixed or individual effects. Under the null hypothesis, α=0
with an alternative hypothesis assuming α

Challenges in the Era of Globalization
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The application of Granger causality test to panel data is a recent occurrence. Panel data analysis provides
more observations and thus increases degree of freedom associated with econometric analysis. According
to Hsiao (2001, 2003), Hsiao et al (2002) and Anderson and Hsiao (1982) panel data analysis gives a
more accurate prediction of outcomes than time series analysis.
With i = 1, 2, ….N; t= K+1, K+2, …, T and y, x are the two variables being tested.
The error term, εit is assumed to satisfy the orthogonality conditions:
In Equation (5), bi captures country-specific effects thereby allowing the relationship between x and y to
vary across the panel of data. However, the approach of Holtz-Eakin et al. (1988) is adopted by allowing
the lag coefficients of δkt and βkt to be constant for each t. In order to get rid of the individual effects
represented by bi, Holtz-Eakin et al. employ a differencing transformation of (5). Moreover, based on
Anderson and Hsiao (1982), Chowdhury (2001) and Hood et al. (2006) an instrumental variable
framework is employed to deal with possible correlation between the error term of the transformed model
and the right-hand-side explanatory variables. Granger causality from x to y is tested by a joint hypothesis
that all βkt are zero.
Empirical Results
When a Granger causality test is performed, four possible outcomes are possible:
i. Per capita health expenditure Granger causes per capita GDP
ii. Per capita GDP Granger causes per capita health expenditure
iii. Per capita GDP Granger causes per capita health expenditure and vice versa
iv. No Granger causality exits
In this paper, an attempt is made to explore the causal relationship between health expenditures and
output in fourteen of ECOWAS countries using panel data from 1998 through 2006. Table 1 show the
results of unit root tests which are applied to the data. The results show that both GDP and per capita
health expenditures (HEC) are nonstationary in levels. The application of unit root tests to the first
difference of the series reveals that the series are stationary at the conventional 5 percent level. The results
for the Levin, Lin & Chu; Im, Pesaran &Shin; ADF-Fisher and PP-Fisher tests are all consistent.
Table 1: Panel Unit Root Test Results (With Individual Effects)
Test Statistic GDP HEC ∆GDP ∆HEC
Levin, Lin & Chu statistic
Im, Pesaran & Shin statistic
ADF-Fisher chi-square statistic
PP-Fisher chi-square statistic
3.328
5.070
11.864
15.642
0.342
2.452
20.226
17.583
-11.574*
-8.398*
111.960*
147.594*
(5)
(6)
-11.052*
-7.619*
103.352*
126.264*
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Note: Null hypothesis is that unit root is present. The * indicates a rejection of the null hypothesis at the
conventional 5 percent level. GDP stands for per capita gross domestic product and HEC stands for per
capital health expenditures. ∆GDP and ∆HEC stand for first differences of GDP and HEC respectively.
Table 2 reveals the results of Granger causality tests. A critical part of this test is the selection of lag value
for Equation 5. In this study, three values are used. With lag value of 1, the results show that HEC
Granger causes GDP and GDP Granger causes HEC. Thus, there is bidirectional causality between HEC
and GDP. Furthermore, for lags of 2 and 3, there exists bidirectional causality between the two variables.
Table 2: Panel Granger Causality Test Results
Lag Cause Effect F-Statistic Probability
1 HEC GDP 10.5090 0.002
1 GDP HEC 8.8454 0.003
2 HEC GDP 5.3824 0.006
2 GDP HEC 5.1245 0.007
3 HEC GDP 3.3031 0.023
3 GDP HEC 7.0885 0.000
Note: Null hypothesis is either HEC does not Granger cause GDP or GDP does not Granger cause HEC.
HEC is total health expenditure per capita and GDP is per capita gross domestic product.
Conclusion
The attempt in this paper is to determine the direction of causality between per capita GDP and total
health expenditure within ECOWAS. According to Gbetnkom (2006), the ECOWAS is a community that
is moving toward integration and therefore can be considered to be homogeneous in many respects.
Musgrove et al. (2002) also group all ECOWAS countries within the same mortality/GDP stratum which
is a reflection of the homogeneity of the countries. The anecdotal evidence reported on Africa is captured
by the Abuja Declaration of 2005 in which 53 African heads of governments note that malaria is credited
for slowing down economic growth of their economies by about 1.3 percent per year. This anecdotal
evidence is consistent with the findings of the WHO’s Commission on Macroeconomics and Health in
2001 which implies that health is an important determinant of economic success.
The application of bivariate Granger causality test shows bi-directional causality between per capita
health expenditures and gross domestic product. The results are consistent with the claim that economic
performance in any economy can be improved if the citizens are healthy (Pritchett and Summers, 1996).
On the other hand, as national income increases, people are interested in the nicer things of life, including
health services. Yet health services are not consumed because it is fun to have them. People are interested
in becoming healthy or staying healthy. A logical reasoning is that with new technology there are new
opportunities available to those who can afford them. According to the World Health Organization
(2001), cross-country panel data evidence on health expenditure and income is very fragile. A lack of
meaningful health metric is a major factor contributing to this problem. Other factors include a weak
health care institutional setup which undermines the effectiveness of health care investments. The
inability of these institutions to function effectively leads to ineffectiveness of health expenditure to
improve health and consequently failure to raise economic growth and development.
The results reported in this paper support the findings reported by Juanky and Khadaroo who note that a
few people in Africa are rich and can afford high-tech private health care services while majority struggle.
Thus, health in Africa is a luxury service whose consumption is driven by wealth. As noted by Baker
(2009), the implication of the aforementioned is that income differences within a society translate into
health gradients which is vicious. On the other hand, the “human capital” implication (albeit virtuous) of
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the results reported in this paper is that investments in health yield an economic return which outweighs
its cost. Unfortunately, an ideal situation as Baker sees it is that a country does not need to be rich to be
healthy and that health is not guaranteed if a country is rich. More importantly, Elk et al. (2009) provide
the rationale for dependency that exists between income and health expenditure. According to the
authors, the upward trend in the price of health is the reason for an increase in health care expenditures.
Therefore, an increase in health care expenditure does not necessarily translate into an increase in the
consumption of health care services. In conclusion, governments within the ECOWAS region should
embark on a planned but focused health care system that is aimed at preventing diseases. Health
education should also be pursued vigorously so that the benefits of health services will be widespread
within each country. This approach will make health to be a part of a general poverty alleviation strategy
simply because it is the right thing to do rather than basing health investments on some economic
benchmark.
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Global Fund and Tuberculosis Management in a Ghanaian Public Hospital
Mercy Akosua Akortsu 5 akomercy@yahoo.com
Department of Finance University of Ghana Business School, Legon, Ghana.
Joshua Abor 6 joshabor@ug.edu.gh
Department of Finance, University of Ghana Business School, Legon. Ghana
The Global Fund is expected to contribute to the management of tuberculosis (TB) and to win the fight against
tuberculosis. The objectives of the Global Fund include achieving higher cure rates, increase treatment success
rate, reduce mortality rates, higher TB case detection and notification rate and reduce TB patient default rates. This
study examined the impact of the Global Fund on the management of TB in a public hospital in Ghana. A case study
approach was adopted. The findings of the study revealed that the Global Fund has made some significant
contribution in the management of TB at the hospital under study. However, a lot more is required in order to
achieve greater success outcomes in the future. A number of useful recommendations are provided.
Introduction
The economic development of any nation is said to be closely related to the health status of its citizenry.
Theoretically, there is a linkage between health and wealth; therefore healthier nations should be able to
create more wealth which should translate into growth and development. Ghana is challenged with so
many health conditions and diseases. These health conditions include HIV/AIDS, Tuberculosis (TB) and
Malaria. These predicaments which affect the population may mean that these people are not able to work
and therefore the nation looses valuable productivity.
Ghana is not among one of the 22 high burden tuberculosis countries yet the disease is a major public
health concern in the country (TB CAP, 2010). With an estimated 46,000 new TB cases in 2007, Ghana
ranks 19 th in Africa for the highest estimated number of new cases per year (TB CAP, 2010). The World
Health Organization estimates that Ghana is detecting only 26% of all cases and 38% of smear positive
TB cases (WHO 2009). This means that only a third of the cases are detected annually and many more
undiagnosed TB cases in the community are continuously transmitting the infection to susceptible people.
Sadly, TB accounts for 40% of mortality cases after post mortem at the hospital under study. It is sad
because TB is curable once it is detected early and the patient rigorously follows the treatment
administered. According to Lambert and Stuyft (2002), early diagnosis and treatment of smear-positive
pulmonary TB cases are the key to interrupting the chain of transmission. Also, late case detection is
related to poorer outcomes not only for T.B, but for severe malaria, or HIV-related morbidity.
Floyd et al (2002) estimated that to achieve the World Health Organization's tuberculosis control targets,
the 22 high-burden countries (HBCs) that collectively account for approximately 80% of the world's
tuberculosis cases require about $1 billion per year during the period 2001 to 2005. They also estimated
that a further $0.2 billion per year is needed for low and lower-middle income countries outside the 22
HBCs. The Global Fund to fight Aids, Tuberculosis and Malaria has generated passionate debates since
5
MercyAkosua Akortsu is an Executive MBA Finance Graduate from the Universityof Ghana Business School and a
Principal Accountant in Health Care Service.
6
Joshua Abor is a Professor of Finance at the University of Ghana Business School.
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the UN Secretary General called for its creation in April 2001 (Lambert and Stuyft, 2002). In this regard,
the setting up of the Global Fund represents a great leap forward towards combating tuberculosis in poor
and developing countries. The Global Fund to fight AIDS, Tuberculosis, and Malaria was created to
increase funds to combat these three devastating diseases (Brugha et al, 2004).
The Global Fund is an independent organisation, governed by a board of 18 voting and five non-voting
members and supported by a secretariat of about 70 staff in Geneva (Brugha et al, 2004). By the end of
2005, after 3 years of full operation, the Global Fund had already made US$4·4 billion in commitments,
accounting for about a tenth of all donations for development assistance for health in that period
(Michaud, 2006). The Global Fund had approved 322 grants in 128 countries and has already disbursed
US$1·8 billion (Lu et. al, 2006). In terms of the criteria considered before funding is advanced, the Global
Fund considers two main factors. These factors are income per person and disease burden (Lu et al,
2006).
Some authors argue that for the global fund to be effective in fighting malaria, TB and AIDs, grant
recipients must have certain absorptive capacities. These absorptive capacities are needed for poor
countries to effectively utilize such resources to increase delivery of their health programmes (Lu et al,
2006). In terms of necessary absorptive capacities, Lu et al (2006) found that grant characteristics such as
size of commitment, lag time between signature and first disbursement, and funding round had significant
effects on grant implementation. They also found that enhanced political stability was associated with
high use of grants. Interestingly, these absorptive capacities are likely to be absent in the poorest countries
who need access to funds most to fight these three major diseases.
Over the past seven years, funding for tuberculosis control has come from the Government of Ghana
(GOG) and the Global Fund to fight AIDS, Tuberculosis and Malaria (GFATM). The funds provided by
the Global Fund have increased significantly over these years. Ghana received the first round of funds
from the Global Fund in 2003 to fight AIDS and Tuberculosis. Ghana received an amount of US$ 5.69
million which was to be distributed over five years. These Funds were to be used in Kumasi and Accra.
By the provision of the fifth round of funds the Enablers Package covered all ten regions in the country
(Auer et al, 2009). Ghana also received US$ 31.7 million in round five which was to last for another five
years. One of the main reasons why Ghana was among the few countries to receive the first set of funds
from the Global Fund was due to the high prevalence rates of HIV, Tuberculosis and Malaria as well as
the good mix between the private and public sector in health service provision in Ghana. These reasons
also accounted for countries such as Tanzania, Sri Lanka and Haiti being early receivers of the Global
Fund.
However, the fight against TB is far from being won (TB CAP, 2010). Financial as well as human
resources are required to transform the fight toward eliminating TB in Ghana. The Global Fund provides
this financial assistance that should help in winning the fight against TB. For example as at 2008, the
Global Fund provided 60% of the funds (enablers) that went to the National Tuberculosis Programme
(NTP). The government of Ghana provided the remaining 40% of the funds. Though these funds were
provided they were still insufficient to meet the needs of the NTP. In 2009, the story was not different.
The Global Fund provided 80% of the funds that accrued to the NTP whilst the Government of Ghana
provided the remaining 20%. The funds provided by the Global Fund are used in part to train and equip
health personnel. The funds provided by the Global Fund are supposed to complement those provided by
the Government of Ghana. However, it seems that the Global Fund provides the bulk of the funds that are
needed by the NTP. Also, it is the Global Fund that provides for the purchase of first line TB drugs which
is given free to patients. Second line drugs are not provided for, and are strictly controlled by the Green
Light Committee (GLC). The Global Fund supports the World TB Day celebration to create awareness in
the community. This shows how crucial the Global Fund has been to managing TB in Ghana.
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Given that the fight against TB is still on and the fact that the Global Fund has been in operation for
sometime it is important to ascertain the impact of the Global Fund in the Management of TB in Ghana.
This study examines the impact of the Global Fund on the management of TB in a public hospital in
Ghana. For the purposes of this study, the hospital is known as ZTH Hospital. The study also looks at the
impact of the Global fund in addressing the key challenges facing the Tuberculosis program at the ZTH
Hospital.
The rest of this paper is structured as follows; Section 2 gives an overview of the epidemiology of TB in
Ghana, Section 3 describes the research methodology employed for the study, Section 4 presents and
discusses the findings of the study and finally Section 5 concludes the study.
Overview of Tuberculosis in Ghana
TB is an airborne infectious disease caused by various strains of mycobacterium, usually mycobacterium
tuberculosis in humans. TB usually affects the lungs but can also affect other parts of the body. TB is
spread through the air when people who have the diseases cough, sneeze, or spit. Symptoms are usually a
chronic cough with blood sputum, fever, night sweats and weight loss. Tuberculosis occurs in all the 10
regions in Ghana. In terms of gender, more men seem to be infected by TB compared to women. The
ratio is 2:1 which means more males are infected with TB than females.
Ghana has a low detection rate when it comes to TB. The detection rate is about 36%, meaning that out of
a hundred people with TB only 36 are detected. Given the low detection rate, other stakeholders such as
USAID through the TB CAP are providing support to increase the detection rate to a minimum of 70%.
However, of the cases identified, the success rate in terms of completion of treatment and cure is very
high. Given that a hundred cases are detected, almost 85 people will be cured representing a success rate
of about 85%. HIV prevalence in TB patients is less than 1% in the Western Pacific region but 38% in
Africa (Corbett et al, 2006). In countries with the highest HIV prevalence, more than 75% of cases of TB
are HIV associated. In Africa, TB is often the first manifestation of HIV infection, and it is the leading
cause of death among HIV-infected patients. Comparison of HIV prevalence in general populations and
TB patients shows that tuberculosis incidence was 8·3 times higher in HIV-positive than HIV-negative
African people in 2003. Due to the fact that HIV prevalence in the country has increased, higher TB cases
have been recorded across the country. This is because patients who suffer from HIV are also likely to
suffer from TB because of the break-down in their immune system. Therefore, the HIV pandemic has
accelerated TB infection in the country which previously was not the case due to lower HIV prevalence
rates.
Methodology
This study employed a single case approach. The hospital used in this research is a public hospital in
Ghana, which for the sake of confidentiality is referred to as the ZTH Hospital. Two main data sources
were employed in this study. These are primary and secondary data sources. The primary data source
includes expert interviews. We interviewed experts such as Head of the National TB Control Programme,
the Head of Department of Chest Diseases, TB Coordinator, Chest Unit Biomedical Scientists and
Laboratory personnel, X’ ray personnel, Pharmacists, Chest Diseases Medical Records officer,
Department of Medicine Accountant and other experts at the ZTH Hospital. The secondary data source
consists of internal and external sources. Internal documents include annual reports and financial reports.
External sources of information were obtained from publications from the Ministry of Health and Ghana
Health Service, reports from Tuberculosis Control Assistance Program Ghana (2007-2010), Report on the
evaluation of TB Enablers Package in Ghana, the National Tuberculosis Health Sector Strategic Plan for
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Ghana (2009-2013) and World Health Organization (WHO) Publications. The results of the study were
analyzed using descriptive statistics and discussed in a narrative form.
Analysis and Discussion of Results
With respect to the challenges of managing TB at the ZTH Hospital, the results of the study indicate that
TB case detection and notification is low as a result of late presentation of condition, late diagnosis, and
late referral. This accounts for the high mortality rate among TB patients since cases are diagnosed late at
the hospital. According to physicians and experts, TB is a complicated disease and therefore late reported
cases lead to late diagnosis. Also referral from the lower hospitals result in high mortality rate at the ZTH
Hospital (See table 1). From figure 1, the mortality rate remains at about 25%. Interviews with some
patients suggest that they do not want to report to facilities because of several reasons. This includes
stigmatization since HIV patients suffer more from TB. Some patients complained that their family
members are not willing to accompany them to the facilities. Some patients also seek treatment from
prayer camps and through other spiritual and traditional means, and therefore report late to the hospital in
very bad condition.
Table 1: Referrals
2007 2008 2009 2010 (3quarter)
TOTAL 778 880 743 651
NSP 226 212 187 121
NSN 274 312 185 155
EPTB 242 274 214 186
RTR 36 27 26 35
CHILDREN - 50 131 154
Figure 1: TB Success and Mortality Rates
One of the challenges faced by ZTH Hospital in managing TB is that, newly qualified health workers are
reluctant to work with TB patients because of the weak screening system and close proximity to the
patients. In terms of medication, only first line drugs are mostly available at the ZTH Hospital. This is
because of the high cost and non-availability of second line drugs, for which access is strictly controlled
by the International Green Light Committee. Therefore, patients who fail the first line of treatment are not
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Edited by Emmanuel Obuah
able to get access to the second line therapy which is the treatment for multi drug resistant TB. Also,
experts complain that the infrastructure available is not the best.
In terms of the impact of the Global Fund on TB management at the ZTH Hospital, a number of
interesting observations were made. In the financial year of 2010 about 4,800 TB cases were reported at
the ZTH Hospital. The Global Fund has been instrumental in providing resources to ZTH Hospital to aid
in the fight against TB. The results as shown on figure 2 indicate that funds provided to the ZTH Hospital
by the Global Fund have exceeded GHC 50,000 in any given year over the past four years. The Global
Fund has made significant contributions to the management of TB by providing enablers to CBTC
(Community Based Treatment Care) givers and supporters. CBTC helps TB patients to access free care
and supervised treatment. Funds from the Global Fund are used by national programme to purchase drugs
which are made available free to TB patients. Also, within the enablers package is included provision of
logistics (such as vehicles) to the facilities, support in training of staff, creating awareness on TB (through
the World TB Day), as well as providing enablers to community volunteers and TB patients.
Figure 2: Fund Allocation from the Global Fund to ZTH Hospital, 2007-2010
Global health initiatives are faced with human resources issues as a major, system-wide constraint
(Drager et. al, 2006). The Global Fund provides opportunities to strengthen human resource interventions,
and countries will fare better by linking their activities to a long-term development of their human
resources for health (Drager et. al, 2006). The Global Fund has contributed immensely towards improving
human resource capabilities at the ZTH Hospital. Figure 3 shows the allocation or disbursement of funds
at the ZTH Hospital. The analysis shows that the bulk of funds (representing 81%) are spent on providing
the needed treatment to TB patients. The Global Fund has helped improve infrastructure at the ZTH
Hospital. This includes for example the extension and renovation of the TB laboratory.
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Figure 3: Disbursement of Global Fund at the ZTH Hospital, 2009-2010
The Global Fund also provides support to the ZTH Hospital to improve its service delivery. Hence the
hospital has achieved zero default rates as at the third quarter of 2010. Due to the provision of these
funds, treatment success has improved as attested by most of the experts. According to the experts, the
Global Fund has increased awareness on TB, increased reporting rates to hospitals, reduced the default
rate amongst patients and increased success rates of treatment. Table 2 shows the TB success and
mortality rates between 2007 and 2009. We infer that the funds provided by the Global Fund have
contributed to stabilizing the success rates that have been chalked over the past few years.
Table 2: Cohort Analysis
Year 2007 2008 2009 (3 quarter)
Cured 172 136 94
Completed 366 402 241
Default 12 35 7
Failure 6 2 4
Died 199 197 140
Trans our 11 55 40
Not evaluated 12 3 0
Total 778 830 526
Success 69.1% 64.8% 63.7%
Mortality 25.5% 23.7% 26.6%
Source: Chest Department, ZTH Hospital
Details of funds received by ZTH Hospital and how the amount has been spent are provided in figure 2
and figure 3 respectively. The trend analysis shows that the funds provided to ZTH Hospital have been
dwindling over time, though the funds provided to the hospital remain substantial. The allocation and
expenditure is based on NTP activity classification for the period the money is given out. Out of the total
funds released by NTP to the hospital chest diseases unit, 63% went into enablers to TB patients, 18%
went into enablers to CBTC volunteer providers, 10% went into training for treatment monitors, 5% went
into regional quarterly review meetings and 4% went into the World TB Day celebration.
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Edited by Emmanuel Obuah
The objectives of the Global Fund are to achieve higher cure rates, increase treatment success rate, reduce
mortality rate, increase TB case detection and notification rate and reduce TB patient default rates. The
findings of this study however show that, the mortality has not reduced much over the period, 2007 –
2009 (see Table 1), though fund inflows have been substantial, in excess of GHC 50,000. Treatment
success rate at ZTH Hospital is on the average above 60%, but failed to rise because mortality rates have
not fallen. Interviews with the experts suggest that the case detection rates have been improving because
of some of the incentives provided under the enablers package from the Global Fund.
5. Conclusions
What are the key lessons so far from the operation of the Global Fund at the ZTH Hospital? The Global
Fund has come in to aid the management of TB in the country. One of the lessons learnt is that the Global
Fund should not be viewed as a replacement for funding from the Government of Ghana. If the Global
Fund is viewed as a replacement then government’s commitment towards fighting TB is likely to be
reduced and in that case the fight against TB is likely to be lost.
According to the experts, monitoring and evaluation is key to winning the fight against TB since that can
lead to better success outcomes. Also, it is essential to keep proper records so that accurate information
can be produced. A good information base can enable volunteers to trace patients and administer the
required treatment. Policies can also be better formulated if the records available are accurate. It is
important to have state of the art laboratory equipment since poor diagnostic tools are likely to lead to late
or low case detection of TB. Timely release of funds motivates staff to work and give off their best in
helping TB patients get the treatment that they need. It also helps in the provision of free feeding which
leads to more people reporting to health facilities. In addition, those who cannot afford it are provided
transportation to the Direct Observation Treatment Centers. These factors contribute to patients reporting
to facilities and increasing the detection and success rates over time.
The Global Fund has contributed to the management of TB in the country. However, more needs to be
done and it is important that the lessons learnt so far are taken into account to ensure even greater success
outcomes in the future. Provision of funds in a timely manner is essential to sustain the gains made so far.
It is essential that all parties stay committed to providing the necessary resources that will be needed in
the fight against TB. Provision of state of the art equipment will also help in the early detection of TB
cases early.
References
Auer, C., Bonney, A.A., Mensah, G, Vanotoo, L. and Hesse, A. (2009). A Report on The Evaluation of
TB Enablers’ Package in Ghana.
Brugha, R., Donoghue, M., Starling, M., Ssengooba, F. Fernandes, B. and Walt, G. (2004). “The Global
Fund: Managing Great Expectations.” Lancet, 364(9428), 95-100.
Corbett, L.E., Marston, B., Churchyard, G.J., and De Cock, K.M. (2006). “Tuberculosis in Sub-Sahara
Africa: Opportunities, Challenges, and Change in the Era of Anti-Retroviral Treatment.” Lancet,
367(9514), 926-37.
Drager, S., Gedik, G., and Dal Poz, M.R (2006). “Health Workforce Issues and the Global Fund to Fight
AIDS, Tuberculosis and Malaria: An Analytical Review.” Human Resources for Health, 4:23
doi:10.1186/1478-4491-4-23.
Floyd, K., Blanc, L., Raviglione, M., and Lee, J-W. (2002). “Resources Required for Global Tuberculosis
Control.” Science, 295(5562), 2040-2041.
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Hewitt, T. and Mantel, M. (2002). Ghana Receives First Global Fund Grants, available at
http://www.scidev.net/news/ghana and retrieved on Tuesday January 4, 2011.
Lambert, M-L and Stuyft, P.V. (2002). Editorial: Global Health Fund or Global Fund to Fight AIDS,
Tuberculosis, and Malaria. Tropical Medicine and International Health, 7(7), 557 – 558.
Lu, C., Michaud, C.M., Khan, K. and Murray, C..J.L. (2006). “Absorptive Capacity, and Disbursements
by the Global Fund to Fight AIDS, Tuberculosis and Malaria: An Analysis of Grant Implementation.”
Lancet, 368, 483-88.
Michaud CM. Development assistance for health (DAH): recent trends and resources allocation—paper
prepared for the Second Consultation Commission on Macroeconomics and Health, World Health
Organization, Geneva, October 29–30, 2003.
http://www.who.int/macrohealth/events/health_for_poor/en/dah_trends_nov10.pdf.
Tuberculosis Control Assistance Programme (TB CAP) (2010), Achievement, Challenges, and Lessons
Learned, Final Report.
www.wikepedia.com
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Edited by Emmanuel Obuah
A study of fixed and variables costs in three hospitals in Ghana
Anthony Q. Q. Aboagye, qaboagye@ug.edu.gh
University of Ghana Business School, Legon- Ghana.
Cost analysis relates inputs of resources to the outputs (patient-care) provided by the hospital.
Hospital costs can be analyzed by categorizing them into fixed and variable costs. In general, a high proportion of
fixed cost suggests some scope for efficiency improvements in resource allocation and usage. We investigate fixed
and variable costs in the hospitals studied by Aboagye et al (2010a), first for each hospital as a unit, then for
hospital intermediate and patient care centers to throw light on the proportions of fixed versus variable costs and
thereby suggest areas where cost-cutting measures may be directed to reduce fixed costs so as to increase efficiency
in use of resources. We find that, in all three hospitals, fixed costs exceeded variable costs substantially. In all cases,
the entire labour cost, is virtually fixed and does not depend on the number of patients attended to. Total
Administrative Costs too have a huge fixed cost component. On the other hand, fixed costs make up a smaller
proportion of Total Services Cost. At individual hospital cost centers, we find that fixed costs dominate variable
costs. It is recommended that hospitals (under the Ghana Health Service) consider restructuring contracts with
hospital staff such that all staff costs are not fixed costs.
Introduction
Cost analysis relates inputs of resources to the outputs (patient-care) provided by the hospital. Cost
information is needed by managers and policy makers for making decisions about improving hospital
performance and allocation of resources within a hospital or among hospitals. It is also used to compare
the performance of one hospital to another.
The total cost of providing medical care in hospitals includes all hospital expenditures, whether directly
related to patient-care such as outpatient consultations, inpatient-care, etc., intermediate services to
patients such as laboratory diagnosis, x-rays and other radiological services, or indirect (overhead)
services such as hospital administration, maintenance of grounds, etc.
Hospital costs can be categorized into two types: fixed and variable costs. Fixed costs are costs that do not
change with hospital output (patient-care) within a relatively short period. Fixed costs are implied in
hospital equipment, buildings, vehicles and permanent staff. Fixed costs are not saved if patient-care is
not provided. Variable costs do change with the volume of patient-care provided. They are saved if a
particular service is not provided. They include medication, laboratory re-agents, x-ray films, etc.
Many costs that are fixed over the short-term can be variable in the long-term or under alternative
arrangements. For example, if the number of permanent staff is reduced over time, then that item is no
longer fixed. And if a hospital purchases medical services such as patient X-rays and reports from an
outside supplier, the cost of an X-ray becomes variable to that hospital.
Defining the cost of providing health-care involves other considerations as well. When third parties such
as health insurance companies are involved, a hospital bill that reflects the hospital’s total cost of
providing the service is a variable cost to the third-party payer. For, if service is not provided or is not
reimbursed, third-party payers save the entire amount of that bill payment. Unfortunately for the hospital
in such situation, (if it does not provide the service or is not reimbursed), it must still cover its fixed costs
for that service. Over the short term, this has the effect of increasing the fixed cost per service provided
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or to decrease hospital efficiency. Thus, a high proportion of fixed costs suggest some scope for
efficiency improvements in resource allocation and usage.
Under the Ghanaian system of healthcare delivery, by and large, all doctors and nurses in public hospitals
are paid regular recurring monthly salaries. Thus, doctors and nurses costs are essentially fixed over the
short term. In contrast, the majority of doctors in countries like the United States and Canada run their
private consulting offices where they attend to out-patients and are paid fee-for-service. Hence their cost
is variable to third party reimbursers.
Roberts et al. (1999) studied the relative fixed and variable costs of a public teaching hospital and for
each service that the hospital rendered. They estimated that 84% of the hospital’s costs were fixed and
only 16% were variable. They concluded that “…the high fixed costs emphasize the importance of
adjusting fixed costs to patient consumption to maintain efficiency.”
Taheri et al. (2000) analyzed the costs for 696 trauma admissions at a trauma center for fiscal year 1997.
The goal of this study was to determine trauma service cost allocations and how this information can help
physicians to contain costs. They concluded that 35% of costs are variable direct costs and that this
represents the percentage of total cost that is typically under the immediate influence of physicians, in
contrast to the 65% of total cost over which physicians have little control.
Health-care cost analysis studies in the context of Africa are not many. Those that exist include Aboagye
et al. (2010a), Aboagye and Degboe (2010b), Wamukuo and Ntulela (2002) and studies on a number of
Egyptian hospitals.
Aboagye et al. (2010a) use standard cost-finding and cost analysis tools recommended by World Health
Organization (Shepard et al., 2000) to analyze year 2003 hospital data of three hospitals,. Full cost center
costs were computed by taking into account cash and non-cash expenses and allocating overhead costs to
intermediate and final patient-care centers. They concluded that salaries are the major cost component of
the three hospitals; overhead costs constitute an important part of hospital costs and must be noted in
efforts to recover costs; cost structures are different at different types of hospitals; and that unit costs at
service delivery points can be estimated and projected into the future. Aboagye and Degboe (2010b)
estimated the full costs of running 10 sub-district health facilities located in two districts in Ghana.
Wamukuo and Ntulela (2002) combined a top-down method and step-down allocation of overhead costs
to the final health care departments to estimate total costs in five hospitals in South Africa. The study
measured and estimated all costs (personnel, overhead, and the annualized costs of equipments, furniture
and buildings) associated with the treatment of patients on an aggregate as well as a per capita basis (per
visit, per day and per admission). They reported that fixed costs were high and concluded that the “…
high proportion of fixed costs (over 80% in all) in the unit costs implies some scope for efficiency
improvements in resource allocation and usage.”
In Ghana, the Ghana Health Service (2007) reported that “Many challenges in financing the health sector
remain unresolved. These challenges include untimely releases of funds, equity in the distribution of
financial resources, and under-funding in some health interventions including general health system
support.”
More recently, the Ghana Health Service (2009) has expressed concern about “Swelling health sector
wage bill “, “Inequitable distribution of available staff” and “Inadequate resources for in-service training,
fellowship and other management and leadership training” among others.
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In Ghana, the National Health Insurance Authority (NHIA) is a purchaser of health-care services from
hospitals. It reimburses hospitals for services provided to National Health Insurance Scheme (NHIS)
subscribers. A high ranking official (Kwame, 2010) of the Scheme said recently
“We have done a study of our operations right from inception in 2004 and projections into the
future. We have looked at our incoming financial resources, and our expenditure and we have seen
that if nothing is done about our funding sources, in the near future, probably by 2013, the scheme
would be facing financial problems.”
In this follow up study, we investigate fixed and variable costs in the hospitals studied by Aboagye et al
(2010a), first for each hospital as a unit, then for hospital intermediate and patient care sub-units. The idea
is to throw light on the proportions of fixed versus variable costs and thereby suggest areas where costcutting
measures may be directed to reduce fixed costs so as to increase efficiency in use of resources.
Methods
Estimating total cost center costs
The methodology adopted here follows Aboagye et al. (2010a), who sampled a district hospital, a mission
hospital and a referral hospital for cost and revenue data for 2003. They performed cost analysis and
assigned inputs and their costs to their respective cost centers, and then allocated all overhead costs to
intermediate and final costs centers and calculated total costs of cost centers.
Allocated costs together with the direct costs incurred at each service delivery point constitute the true or
full cost of delivering service at the points in question from the service provider’s perspective. That is,
patient out-of-pocket expenses and opportunity costs are not counted. Fixed and variable costs are defined
with respect to number of patients. Those that vary directly with number of patients (by and large) are
considered variable, and those that do not are considered fixed
Cost centers were categorized as overhead, intermediate or direct patient-care centers based on the
functions they perform. Only overhead costs were allocated since the intention was to identify the full
cost of providing intermediate services alongside the cost of direct patient-care services. Actual data on
overhead costs attributable to target centers were not available, so we used each center’s share of total
person hours worked in the hospitals to allocate overhead costs to the centers.
In all cases, the cost center called Administration serves the highest number of cost centers, so its costs
were first distributed. Administration consisted of the following – medical, nursing and lay
administration, maintenance, security, purchasing and supplies, transportation including ambulance,
sanitation, hospital information system, apportioned utility and equipment costs and other costs.
Following the allocation of Administration costs, the sum of the direct costs incurred at the overhead cost
center that serves the next highest number of cost center was next allocated. This was repeated for all
costs to be allocated. For the mission hospital without a kitchen, only Administration and Laundry costs
were allocated. For the district hospital, Kitchen costs were allocated in addition. For the referral hospital,
central services and supply department (CSSD) costs were further allocated.
Here is a description of how data was collected and analyzed. Please refer to Aboagye et al. (2010a) for
further details.
Labour Cost: salaries and wages and related expenses of staff. Virtually, these do not vary with number
of patients, so are fixed and allocated to cost centers based on time spent there.
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Non-drug consumables: comprise all manner of non-drug items that were consumed in the course of
medical treatment at the out-patient department (OPD), ward, laboratory, other patient treatment centers,
laundry, kitchen, etc. Gross annual amounts were provided by the accounting staff of each hospital. These
were allocated to cost centers in the ratio of the average amount consumed by each cost center in
February, May, August and November. Monthly amounts consumed were obtained by tracking movement
of non-drug consumables from stores to the various cost centers. Four months were sampled because of
budgetary and time constraints. Hospital staff were asked to estimate the proportion of non-drug
consumables that would have been used by each cost center if it did not have to attend to any patient.
These are counted as fixed costs. The average of the estimates of several hospital staff for the mission
hospital was 10%, 11% for the district hospital and 20.6% for the referral hospital. The same percentages
apply to Other expenses under Item 2. (See table 2 below).
Utilities cost comprised of the costs of water, electricity, postage incurred.
Use of equipment: Annual cost of using hospital biomedical and estate equipment at the various centers
were not available. The values of equipment at each cost center were estimated by referring to medical
equipment dealers and the Ministry of Health’s Standard Equipment List (and prices) for Hospitals.
Straight line depreciation was then used to obtain the average annual amount of depreciation attributable
to the use of equipment. Data on all equipment at the various cost canters of the hospitals were collected.
Transportation costs: expenses on transportation including vehicle running and maintenance costs.
Equipment maintenance: maintenance cost of equipment, machinery, plant and buildings.
Drugs/Medication Consumable: The total amounts spent by hospitals were noted and allocated to OPDs
and wards. Allocation of these costs was done as follows. First, we obtained sum of OPD attendance and
ward admissions. Next, we computed the ratio of OPD attendance to the total just computed and repeated
for each ward. Finally, we allocated the cost of total drug consumables to OPD and wards using the ratios
just calculated. We reasoned that on average medications supplied to outpatients last as long as
medications supplied to patients when they were first admitted. These are entirely variable costs.
Feeding: Two hospitals feed their in-patients. Feeding cost was allocated only to the wards in the
proportion of number of beds per ward. These are entirely variable.
Other costs: cost of printing and publication, hotel bills incurred by staff who traveled out-of-station.
These were allocated in the ratio of number of staff per cost center to total hospital staff.
Utilities, equipment depreciation, equipment maintenance and staff travel and transportation
expenses and other expenses are considered fixed.
RESULTS
Here is basic information on the three hospitals, (2003 figures). The referral hospital is staffed by the
most number of doctors, followed by the mission hospital. On the other hand, the mission hospital is
staffed by more nurses than the other two. The mission hospital saw more outpatients and has more beds
that the others.
Fixed and variable costs in overall hospital costs
Government pays staff salaries, supplies equipment to all public hospitals (from which our sample was
drawn) and also pays some of their other expenses. Government also makes periodic investment in
buildings and other infrastructure. Overall hospital accounts must therefore be presented according to the
format prescribed by government. The format requires accounts to be prepared under the following
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headings (please see Table 2) : ITEM 1 - PERSONAL EMOLUMENTS; ITEM 2 - ADMINISTRATIVE
COSTS, e.g. equipment maintenance costs, utilities; ITEM 3. Cost of providing services such as
drugs/medication, non-drug consumables, etc., and ITEM 4. INVESTMENT in new buildings, new
equipment, etc. Hospitals are not allowed to make ITEM 4 expenditures unless under exceptional
circumstances. Thus, these costs were not countered in the study.
Table 1: Basic Hospital data.
Mission District Referral
Doctors 9 3 16
Nurses 128 62 90
Out-patients 41,390 16,311 30,071
Beds 213 117 110
Admissions 6,805 5,773 3,628
Surgical operations 6,872 898 1,960
Table 2: summary of hospital expenses emphasizing proportions of fixed and variable costs overall,
and by category of account.
Misson District Referral
VARIABL VARIABL
FIXED
PROPORTION OF TOTAL
VARIABLE FIXED E FIXED E
COSTS 68.87% 31.13% 72.09% 27.91% 93.03% 6.97%
100%
100%
ITEM 1. PERSONAL 100%
[$277,271
[$790,937
EMOLUMENTS
[$426,332]
]
]
89.06%
ITEM 2. TOTAL 96.79% 3.21% 98.10% 1.90% [$415,451 10.94%
ADMINISTRATIVE COSTS [$153,852] [$5,102] [$90,943] [$1,759] ] [$51,021]
Equipment Depreciation $ 44,914 41,424 106,362
Equipment Maintenance $ 72,749 31,791 160,941
Travel & Transport $ 14,788 10,371 59,152
Utilities $ 20,833 7,140 75,759
Other expenses $ $567 5,102 217 1,759 13,237 51,021
ITEM 3. TOTAL SERVICES 10.25% 89.75% 10.44% 89.56% 39.60% 60.40%
COST
[$19,358] [$169,518] [$17,190] [$147,446] [$27,100] [$41,342]
Non-Drug Consumables $ 7,989 71,897 5,537 44,797 10,726 41,342
Printing $ - - 5,415 5,267
Drugs consumables $ 97,621 94,847 143,364
Training+ Conferences $ 10,556 3,752 7,832
Other - Printing, all rentals,
other Travel, clothing, etc. $ 814 2,487 3,275
Feeding $ 7,802 59,365
TOTAL COSTS $ 599,541 174,620 385,404 149,205 1,233,488 295,092
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Table 2 says that, in all three hospitals, fixed costs exceeded variable costs substantially - more than twice
as much at the mission and district hospitals and more than 13 times as much in the case of the referral
hospital. The implication of our finding for all hospitals is that a reduction in the number of patients
attended to without an adjustment in the structure of hospital costs will lead to technical inefficiency,
Fuchs (1993), Roberts et al. (1999) and Wamukuo and Ntulela (2002). Our findings for the mission and
district hospitals are lower than the 84% reported by Roberts et al. and Wamukuo and Ntulela.
In all cases, the entire labour cost, Personal Emoluments, is virtually fixed and does not depend on the
number of patients attended to. In addition, it is the biggest contributor to total costs, more than 50% in all
cases. Thus, it would appear that, this is the first place to look to, to re-align resource allocations.
The next item with a huge fixed cost component is Item 2: Total Administrative Costs. 97% of this item is
fixed cost in the mission hospital; 98% in the district hospital and 89% in the referral hospital. Given the
composition of this item – depreciation of equipment, equipment maintenance, travel and transport and
utilities, it would appear that hospitals have little room to operate to reduce the proportion of fixed costs.
Thus once again, all hospitals are vulnerable to a drop in the number of patients.
On the other hand, fixed costs make up a smaller proportion of Item 3: Total Services Cost, 10% at both
the mission and district hospitals and 40% at the referral hospital. Thus, this item is the one that is most
directly tied to patient use of hospital services, and hospitals suffer least here if patient numbers fall.
For further insight, we recall the Ghana Health Service (2009) report which speaks to “Inadequate
resources for in-service training, fellowship and other management and leadership training.” The sub-item
training and conferences under Item 3 captures expenditures on the item in question. While it is entirely a
fixed cost, it makes up only 1% of total costs at each hospital. Training and conference attendance helps
practitioners horn their skills and competences for better performance and are necessary.
Fixed and variable costs at intermediate and direct patient-care centres
In Table 3, we present the proportions of fixed and variable costs of each intermediate and direct patientcare
center at each of the three hospitals. In all cases, fixed costs dominate variable costs. The dominance
is least in the OPD. As calculated, the proportion of fixed costs at the OPD is influenced heavily by the
sub-item Drug Consumables (drugs/medication issued to patients), which is entirely a variable cost, and
an overwhelming number of hospital patients are outpatients. It is also influenced by the fact that the
typical out-patient clinic uses few equipment, the main cost being doctors and nurses salaries.
Primary Health Care (PHC) and Pharmacy are among cost centers with the highest fixed costs. While
many outpatients report to the PHC unit for mother and child care, family planning, etc, not much of their
variable costs are reflected here because, in general, they operate under the district and regional health
directorates and receive drugs and other supplies directly from them. These are not reflected in hospital
accounts. In the case of Pharmacies, there is no drug component, a variable cost. However, we note that
on the whole, the cost of running Pharmacies is low, 2.5%, 11% and 8% at the at the mission, district and
referral hospitals respectively.
One also notes that, when cost centers within a hospital are ranked by the percentage of fixed costs, there
are differences in the ranks attained by many centers from one hospital to another. For example,
Radiology is higher than OPD only at the mission hospital, but ranks highest at the district and referral
hospitals, while Children and Maternity wards rank very high at the mission hospital, but not as high at
the district or referral hospitals. This observation lends support to the observation by Steinbrook (1996)
and Woolhandler and Himmelstein (1997) that individual hospitals vary in the relationship between fixed
and variable costs.
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Conclusions and Implications
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
To position them to have a better handle on staff costs, it is recommended that hospitals (under the Ghana
Health Service) consider restructuring contracts with hospital staff such that all staff costs are not fixed
costs. As a policy, government can begin discussions with the Ghana Medical Association to move
doctors off hospital payrolls and have them set up their own private consulting offices to attend to
outpatients. Doctors will then bill the NHIS per patient. Beyond hospitals, the benefits of this more
flexible contracting arrangement should please the NHIS.
A similar conversation can be started with the Ghana Nurses and Mid-wives Council. If this is adopted,
the NHIS would pay less during periods of low patient numbers. In fact, that does not have to be the end
of the matter. Consider the case of one hospital that must pay an on-call laboratory technician specifically
for performing tests at night as and when the need arises, versus another that hires a full-time in-house
salaried technician at night. The cost of the technician in the first hospital is entirely variable, while the
cost at the second is fixed. Depending on individual hospital situation the ideal cost saving strategies may
be an on-call technician, or a full-time technician. Thus, the approach suggested here may not apply to
doctors and nurses only.
Table 3: Proportions of fixed and variable costs at intermediate and patient-care centers.
Mission District Referral
Fixed Variable Fixed Variable Fixed Variable
Adult Medical/Surgical (Female) 79% 21% 77% 23% 83% 17%
Adult Medical/Surgical (Male) 81% 19% 75% 25% 82% 18%
Children's Ward 89% 11% 79% 21% 84% 16%
Maternity/O&G 88% 12% 84% 16% 81% 19%
OPD 53% 47% 40% 60% 54% 46%
THEATRE 86% 14% 92% 8% 96% 4%
Primary Health Care 97% 3% 88% 12% 94% 6%
PHARMACY 92% 8% 87% 13% 94% 6%
LABORATORY 78% 22% 89% 11% 84% 16%
RADIOLOGY 69% 31% 92% 8% 97% 3%
Accident/Emergency (OPD & Ward) 94% 6%
Our findings further suggest that on a cost center basis fixed costs should be reduced at the Children and
Maternity wards and the Theatre at the mission hospital; Laboratory and Radiology units of the district
hospital; and the Theatre and Radiology units of the referral hospital.
References
Aboagye, AQQ., DEGBOE, ANK and OBUOBI, AAD. (2010a). “Estimating the Cost of Healthcare
Delivery in Three Hospitals in Southern Ghana.” Ghana Medical Journal, volume 44(3), 83-92.
Aboagye, AQQ and Degboe, ANK. (2010b). “Cost Analysis and Efficiency of sub-District Health
Facilities in Two Districts in Ghana,” International Journal of Health Planning and Management.
Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/hpm.1047
Fuchs VR. (1993). “No Pain, no Gain: Perspectives on Cost Containment,” N Engl J Med. 269, 631-633.
Kwame, Ametor, “National Health Insurance Levy to Increase,” Radio discussion held on 18 Nov, 2010
http://www.xfmnewscenter.com/news/news.php?cat=General&title=NATIONAL+HEALTH+INSURAN
CE+LEVY+TO+INCREASE%3F++
Roberts RR, Frutos PW, Ciavarella GG, Mensah EK, Kampe LM, Straus HE, Joseph G, and Rydman RJ.
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(1999). “Distribution of Variable vs Fixed Costs of Hospital Care.” Journal of American Medical
Association, vol 281(7), 644-649.
Steinbrook R. (1996). “The Role of the Emergency Department.” N Engl J Med. 334, 657-658.
Shepard DS, Hodgkin D and Anthony YE. Analysis of Hospital Costs: A Manual for Managers, 2002,
WHO, Geneva.
Taheri, PA, Butz, D, Griffes, LC, Morlock, DR and Greenfield, LJ. (2000). “Physician Impact on the
Total Cost of Care.” Annals of Surgery, 231(3), 432–435.
Wamukuo, P., Ntulela, P. (2002). “Estimating the Cost of District Hospital Services.” District Hospital
Services Costing Report in South Africa. Retrieved January 25, 2011, from
http://www.doh.gov.za/docs/reports/2002/findc-report01.pdf
Woolhandler S and Himmelstein DU, (1997). “Costs of care and administration at for-profit and other
hospitals in the United States.” N Engl J Med. 336, 769-774.
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Abstract
Exploring Organisational Resilience in Uganda Parastatals
Samuel Mafabi smafabi@mubs.ac.ug sammafabi@gmail.com
John C. Munene and Joseph Ntayi
Makerere University Business School, Uganda
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
This study explored the components of organizational resilience and level of organizational resilience in Uganda’s
parastatals. This was deemed necessary for us to identify organization resilience components that can be
investigated further and probably confirmed to be measures of organizational resilience so as to be used by
researchers and policy makers. Evidence for reliable and valid organizational resilience components in the extant
literature remained elusive. The study provides some evidence that suggests that organizational adaptation,
organizational competitiveness, and organizational value may be components of organizational resilience in
Uganda parastatals and that organizational resilience is just moderate. The findings provide lessons that contribute
to the debate on organizational resilience. Researchers can use the measures to design their instruments. While
managers in parastatal organizations can use the components to measure the level of organizational resilience in
their organizations.
Introduction
Parastatal organisations are very important institutions charged with public service delivery. Parastatals
are formed to improve service delivery on behalf of government yet reports seem to suggest that
parastatals are not of much value to society (Rondinelli, 2008). Organisations should strive to remain
useful to society by providing competitive services lest they lose their vision, mission, and mandate
(Basu, 2008). In other words, they should be resilient enough to cope with certain challenge.
Organisational resilience is the ability of the organization to cope with change through continuous
renewal of business operations in order to prevent decay and disuse (Cho, et al., 2007). Organisational
resilience which has been qualitatively studied in private sector (McManus, 2008) appears to be least
explored in the public sector. This study focussed on the public organisations, specifically parastatals in
Uganda. A parastatal is any autonomous or semi-autonomous entity wholly or partially owned by
government that operates under a Board of Directors (Kauzya, 2008). Organisational resilience can be
examined in terms of adaptation (Weeks 2008), organisational value (Moore & Khargram, 2004) and
organisational competitiviness (Li-Hua, 2007).
Scholars like McManus (2008) and Weeks (2008) have examined organisational resilience with emphasis
on adaptation of firms with little attention paid to organisational value and organisational
competitiveness. Indeed, McManus’s (2008) study recommended further resilience studies using
quantitative methodologies. A few studies, to the best of our knowledge have quantitatively examined
resilience though at community level (Paton, 2007), and individual level (Gillespie, 2007; Langvardt,
2007) and they fall short of identifying components of organisational resilience especially in public
organisations like parastatals. Despite the contribution of some studies, the factors that describe
organisational resilience remain elusive especially in the parastatal sector of Uganda. The study explored
organizational resilience in Uganda Parastatals focussing on the key question of what factors are
important in describing resilience in parastatals?
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The Context of Parastatal Organisations
In Uganda, the participation of the state in economic activities by way of establishing, owning, and
operating parastatals started during the era of colonial administration when the country’s first 10 year
development plan of 1946 was designed (Kauzya, 2008). Kauzya reports that whereas many parastatals in
Uganda are formed, others have been privatized and others have died due to poor management hence
most of these parastatals have had limited value since 1970’s. Basu (2008) states that parastatals are
created to avoid government failures, but they seem to fall into the same trap. They are slow at
reinventing service delivery and less responsive to society needs (Basu, 2008) even attempts to improve
service delivery seem to yield low public value (Moore & Khargram, 2004). In Uganda for instance,
Muhairwe (2010) reports that corporation managers in Uganda are preoccupied with preordained statutory
mandates with limited initiative to create value. Earlier studies indicate that Uganda parastatal reforms
have not improved service delivery (World Bank, 2006; PU, 2005) and service users detest service
delivery of a number of parastatal organisations (World Bank, 2006). Rondinelli (2008) adds that
parastatal organisations operate under performance deficits, financial deficits; they have weak systems,
overdue debts, and underemployed and redundant staff.
Literature review
Organizational Resilience
Today most organizations whether private or public are facing many challenges of doing business that
seem to affect their competiveness hence reduced customer satisfaction with the product and service
delivery. As such, organizations are obliged to redesign their operations in a bid to control for business
failure or organizational death for that matter. In other words, organisations need to adapt and increase
their value to stakeholders.
There have been attempts to define organizational resilience despite the fact that there is no universally
accepted definition. For Hamel and Valikangas (2003), resilience is the organisation’s ability to revive its
operations to adapt to the environment. In this view, McManus (2008) considers resilience to be
accomplished in terms of situational awareness, adaptive capacity, and the management of keystone
vulnerabilities. The preceding definitions seem to be more of process resilience attributes than outcome
attributes, yet resilience is believed to be an outcome rather than a process (Tarrant, 2010). In this study
we define organizational resilience as the level of adaptation, competitiveness, and value that the
organization exhibits based on relevant resilience attributes the organization undertakes. The attributes
create a journey to a destination of resilience (Tarrant, 2010).
Organizations have become more vulnerable to failure or death hence the need for resilience which is the
ability to be proactive and, or reactive in coping with environmental demands (Hamel and Välikangas,
2003). For Tarrant (2010), organizational threats can be turned into opportunities for designing strategies
to become better. These strategies can lead to high market share, reputation (value), high staff morale, and
less chances of government intervention (Tarrant, 2010). In an attempt to cope, organizations become
adaptable, competitive, and of value to society. Resilience has become imperative due to the fact that
organizations play a fundamental role (Tarrant, 2010; Hamel and Välikangas, 2003) in the life of society.
For instance, organizations provide numerous services and products like; finance, health, agriculture,
education, foods and beverages, etc that people require in life. This implies that organizations should
strive to be of value to society by building resilience.
Organizations that survive in business continuously undertake deliberate efforts to adjust and renew the
design of business processes and structures, including core competences. Such organizations normally
build capabilities through organizational learning (Cho, et al., 2007) for adapting (Großler, et al., 2006) to
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the changing business environment in order to create organizational value. Organizational value refers to
the attractiveness and reputation of a firm (Moore and Khagram, 2004). This is one way of identifying a
resilient organisation. Resilient organizations must have the capability to design new business processes
that are deemed fit for efficiency and effectiveness (Li-Hua, 2007; Deselnicu, et al., 2007). These scholars
argue that efficiency and effectiveness are matters of competitiveness which is the firm’s indication of
service excellence that is tantamount to organizational resilience.
Organisational resilience is built based on the ability of the organization to transform the way of doing
business in a way that meets the demands of the environment under which it is operating (Weeks, 2008).
However, one wonders what constitutes organizational resilience especially in Uganda parastatals?
Research method
The study was a quantitative cross sectional survey. For Sekaran (2008) the quantitative design is suitable
for carrying out multivariate analysis like factor analysis which was applicable in our study. A pilot study
was done to pretest the instrument and identify the researchable constructs so as to refine the instrument.
The results showed that the instrument was both reliable (α = .893) and valid.We carried out this study
based on a random sample of 342 senior managers. We selected members of the senior management team
in parastatal organization because they occupy strategic positions (O’Regan and Ghobadian, 2004) to
report about organizational resilience which is a strategic function. To get the actual respondents, the
researchers got a contact person and requested him or her to distribute questionnaires to his or her senior
colleagues in the organization while ensuring as much representativeness of the senior management team
as possible (Baer and Frese, 2003). The researchers targeted seven managers to be given questionnaires
with a minimum response expectation of three respondents per organization (Baer and Frese, 2003).
Organisational Resilience Measure
There seems to be no universally accepted measure of organizational resilience (McManus, 2008; Cho, et
al., 2007). Reliable and valid measures of organizational resilience remain elusive. The solution then was
to conceptualise and design measures of organizational resilience (appendix 1) with reference to the
relevant theory and extant literature as recommended by Sekaran (2008). In this study, we conceptualized
organizational resilience to be measured in terms of; organizational adaptation (Weeks, 2008),
organisational competitiveness (Li-Hua, 2007; Deselnicu et al., 2007), and organizational value (Alford
and O’Flynn, 2008; Moore and Khagram, 2004). These scholars believe that a resilient organization is
one that; responds to the demands in the environment for survival (organisational adaptation), is efficient
and effective at service delivery (Organisational competitiveness), and makes itself reputable
(organizational value). The scales of organizational resilience were developed on a Likert scale and tested
for reliability (α = .893) and validity (total variance explained by three convergent factors = 69.7%). In
the scales, the researchers made statements that required the respondents to indicate the extent to which
certain resilience behaviors occur in their organizations.
Data Collection and Management
We collected data from senior managers who were randomly selected from 51 parastatals. The data were
checked for completeness, consistence, and accuracy of responses. Based on these criteria, we determined
the usefulness of the data for further processing. For instance, there were a few cases which were
discarded upon realizing that they were quite incomplete. After this check, we entered the data in the
Statistical Package for Social Scientists (SPSS version 17) computer program for analysis. During data
entry, we reverse coded all the negatively worded scale items. We checked for missing values because in
most self report studies, respondents have a tendency to skip providing responses to certain items in the
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questionnaire, either deliberately or in error. For either case, this creates missing values that are items to
which no response was provided. Missing values must be identified and managed or else they affect
multivariate analysis (Field, 2006; Hair, et al., 1998).We examined the pattern of the missing values and a
few (05) cases that had a large range of missing values were discarded. While cases that had a narrow
range (< 5%) of missing values which were completely at random, such values were replaced using the
series mean. The series mean was adopted because it provides the best estimate of the missing value
otherwise the cases would be vulnerable for either pair wise deletion or list wise deletion which could
further reduce the magnitude of the data (Field, 2006; Hair, et al., 1998). After the analysis of missing
values, where five (05) cases were dropped, the researchers retained 237 cases that represented 51
parastatal organizations. We screened the data for outliers following Field’s (2006) guidelines.
We used exploratory factor analysis (EFA) in order to identify the most important organizational
resilience factors. We conducted the factor analysis based on 237 observations which were large enough
to warrant factor analysis. The Kaiser-Meyer-Olkin (KMO) and Barttlet’s Sphericity tests which
determine the sampling adequacy and significance of correlations, respectively, were used as initial
considerations for the factorability of the variables (Field, 2006). The KMO was above 0.7 to warrant
sample adequacy and the Barttlet’s Sphericity test was significant (see table 2 below), suggesting that
there were significant correlations among the variables for factor analysis to be carried out. After
determining the adequacy of the data for factor extraction, we then conducted for each variable; a
principal component analysis which is recommended for extraction at the eigen value of greater than 1
without fixing the number of factors to be extracted because we were exploring the construct validity, and
a varimax factor rotation which assumes independence of factors and is parsimonious (Field, 2006; Hair,
et al., 1998). The researchers set the minimum factor loading of .5 which was high enough to extract the
most significant items to load on the extracted factors (Field, 2006; Hair, et al., 1998).
From the above analysis, factor structures for the study variables were examined, then the extracted
components were labeled based on the majority of items that loaded on each component and the extant
literature and theory (Field, 2006; Hair, et al.,1998). The researchers noted that some of the items loaded
on different components contrary to where they previously constructed which is normal in exploratory
factor analysis. There were also some cross loadings and the researchers took the higher loading after
evaluating their contribution theoretically. The cumulative percentage of the variance explained by the
components based on the rotation sums of squared loadings were above the minimum of 60% (Hair, et al.,
1998).
Results
Table 1: Descriptive Statistics (n=237)
Organisational Resil.
Organisational Adapt
No. of
items
18
6
M (SD) Skewness
(SE=
.333)
3.36 (.38)
3.62 (.57)
-.17
-.86
Kurtosis
(SE=
.656)
-.54
Organizational Compt 6 3.48 (.49) .39 .05 .78
Organisational Value 6 2.98 (.67) .26 -.53 .63
.63
Alpha
.89
.80
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The results from the table 1 above indicate that the data on the composite variables has a fairly normal
distribution based on the skewness and kurtosis which are all within acceptable range (Field, 2006). The
mean scores for the variables reveal a moderate existence of organizational resilience (mean = 3.36),
organizational adaptation (mean = 3.62), organizational competitiveness (mean= 3.48), organizational
value (mean = 2.98). The overall reliability for organizational resilience is very high item internal
consistency (α = .89) and its constructs also had high item internal consistency (α = .80 for organizational
adaptation, α = .78 for organizational competitiveness) with an exception of organisational value which
had an alpha below .7 but above .6 which is an acceptable internal consistency (alpha of above .6),
especially in exploratory studies. Items OA6 and OV3 were deleted to improve the alpha and were not
included in the factor analysis.
Table 2: Exploratory Factor Analysis Results
VARIABLE FACTORS
EXTRACTED
Organisational
Resilience
Organisational
Adaptation
Organisational
Competitiveness
Organisational
Value
ITEMS LOADINGS KMO BARTLETT’S
OC6
OA4
OA1
OV2
OA2
OA5
OC5
OA3
OV5
OV7
OC1
OC4
OV1
OC3
OC2
OA7
OV6
OV4
.891
.859
.849
.848
.834
.801
.791
.773
.695
.585
.878
.773
.589
.522
.519
.865
.852
.783
.865
TEST
Sig.= .0000
VARIANCE
EXPLAINED
(%)
69.699
Alpha CVI
The results in table 2 above show that most of the items that were believed to be measuring the constructs
have indeed been found to be valid as they loaded on corresponding factors which is a sign of convergent
validity, and of course other items did not load on the corresponding factors which also indicates
discriminant validity (Field, 2006; Hair, 1998). We also found an acceptable content validity (CVI = 771)
for organizational resilience. The principal components analysis extracted three interpretable factors with
eigen values greater than one that accounted for 69.7% of the variance explained in organizational
resilience. We named the first factor organizational adaptation because most of the adaptation items
loaded on it though some items of competitiveness (OC5 and OC6 which are in appendix 1) and of value
(OV2, OV5, OV7 which are in appendix 1) loaded on adaptation. The explanation for this change of
loading could be that; OC5 and OC6 that measured achievement of strategies and results respectively
could have been interpreted by respondents as ways of coping which implies adaptation. For OV2 which
is about stakeholder satisfaction could occur due to realization of their needs – probably a sign of coping.
The same could apply to OV5 that measured minimum complaints. Willingness to fund (OV7) could have
loaded on adaptation probably because parastatal flexibility to funder demands. We named the second
factor organizational competitiveness because items OC2, OC3, and OC4 had loaded on it with an
.893
.771
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Proceedings of the 12th Annual Conference © 2011 IAABD
additional loading of OV1 which we reexamined and found conceptually fit for organizational
competitiveness because satisfactory cost control is a matter of organizational excellence which best
defines organizational competitiveness. As per our conceptualization, we termed the remaining factor
organizational value which had only two items (OV4 and OV6) originating from it with the exception of
item OA7 from organizational adaptation. The item OA7 (coping with political interests) loaded on
organizational value perhaps because of the perceived trust that indicates value which could have been
created as a result of balancing political interests. The factor loading matrix indicated that organizational
adaptation accounted for the greatest variance explained (48.464%), followed by organizational
competitiveness (12.357%), and with a minority of 8.877% accounted for by organizational value.
Discussion, Conclusion and implications
The study found a moderate level of organizational resilience in Uganda parastatals. This finding appears
to be in line with Basu (2008) who avers that most parastatals do not adequately meet the needs of
society, hence having limited organization value. This study explored the factors that may be considered
important in describing resilience in Uganda’s parastatals. This was deemed necessary for us to identify
organization resilience descriptors that can be investigated further and probably confirmed to be
components of organizational resilience so as to be used by researchers and policy makers. From the
findings, we are tempted to believe that it appears organizational value may be embedded in adaptation or
once parastatals adapt they perhaps simultaneously create value – organizational value is not quite
distinct. This seems to suggest that parastatals in Uganda are more adaptive than competitive (being
excellent at service delivery), and are of limited value. This of course is in line with existing literature that
defines organizational resilience mainly in terms of adaptation (Weeks, 2008), with some emphasis on
organizational competitiveness and value (Hamel and Valikangas, 2003; Scott, 2007; Tarrant, 2010).
Nevertheless, the study has generated some empirical evidence about resilience indicators in Uganda
parastatals. The findings provide lessons that contribute to the debate on organizational resilience
especially by McManus (2008) who focused mainly on factors that create organizational resilience, and
Hamel and Valikangas (2003) who highlighted the need for organizations to adapt, excel, and become
valuable. One key lesson is that whereas there is evidence to support organizational value, and
organizational competitiveness as components of organizational resilience, organizational adaptation
appeared to be dominant.
The practical implications of this study are that; one, managers of parastatals can measure resilience based
on the level of; organizational adaptation, organizational competitiveness, and organizational value, two,
parastatals should strive towards becoming competitive besides adaptation, and creating more public
value for instance through innovations or else stakeholders demand for alternative service providers that
may lead to parastatal death. For the academics, research about resilience building process attributes like;
creative climate, innovation, knowledge management, networking, etc may be studied in relation to
organizational resilience .The study was limited by design. First, the study was exploratory focusing on
organizational resilience only. This may necessitate follow up studies in a correlational design to capture
the explanatory power of resilience building process attributes. Second, the study remained exploratory
mainly by design - we did not conduct confirmatory factor analysis that could have confirmed to us
whether or not the exploratory factor analysis results of this study are indeed real. Further studies may be
conducted using confirmatory factor analysis.
References
Alford, J. and O’Flynn, J. (2008), “Public Value: A Stocktake of a Concept”: Paper presented at
the Twelfth Annual Conference of the International Research Society for Public Management
414

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Baer, M., and Frese, M. (2003), “Innovation is not enough: climates for initiative and psychological
safety, process innovations, and firm performance”, Journal of Organizational Behaviour, Vol. 24, pp 45
– 68.
Basu, P. K. (2008), Public Enterprises: Unresolved Challenges and New Opportunities. Reinventing
Public Enterprises and Their Management as the Engine of Development and Growth, United Nations,
New York.
Cho, S., Mathiassen, L., and Robey, D. (2007), “ Dialectics of Resilience: A Multi-level
Analysis of a Telehealth Innovation”, Journal of Information Technology, Vol. 22, pp 24 – 35.
Deselnicu, D.C, Rusu, C. and Martin, I. (2007), “Innovation Process And Competitiveness
In Romanian SMEs
Field, A. (2006), “Discovering Statistics Using SPSS”, Sage, London.
Gillespie, B.M. (2007), “The Predictors of Resilience in Operating Room Nurses”, PhD Thesis,
Griffith University
Großler, A., Grubner, A., and Milling, P.M. (2006), “ Organisational Adaptation Processes to
External Complexity”, International Journal of Operations & Production Management Vol. 26 No. 3, pp
254-281.
Hair, J.F., Anderson, R.E., Tatham, R.L. and Black, W.C. (1998), “Multivariate Data Analysis”,
Prentice-Hall, Englewood Cliffs, NJ.
Hamel, G., and Valikangas, L. (2003), “The Quest for Resilience”, Harvard Business Review
Kauzya, J. (2008), Public Enterprises: Unresolved Challenges and New Opportunities. The Question of
the Public Enterprise and Africa’s Development Challenge: A Governance and Leadership Perspective.
United Nations, NewYork.
Langvardt, G.D. (2007), “ Resilience and Commitment to Change”, PhD Thesis, Capella University
Li-Hua, R. (2007), “Benchmarking China Firm Competitiveness: A Strategic Framework”,
Journal of Technology Management in China, Vol. 2 No. 2, pp 105 – 118.
McManus, S.T. (2008), “Organisational Resilience in Newzealand”, PhD Thesis, University of
Canterbury.
Moore, M.H., and Khagram, S. (2004), “On Creating Public Value: What Business Might
Learn from Government about Strategic Management”, Working Paper No 3.
Muhairwe, W.T. (2010), Making Public Enterprises Work, From Despair to Promise: A Turn around
Account. Fountain Publishers, Kampala.
O’Regan, N., and Ghobadian, A. (2004), “The Importance of Capabilities for Strategic Direction
and Performance”, Management Decision, Vol. 42 No 2, pp 292 – 313.
Paton, D. (2007), “Measuring and Monitoring Resilience in Auckland”, GNS Science Report
Privatisation Unit, (2005). Privatization Impact Assessment for Uganda, prepared for the PUSRP and
the Ministry of Finance and Economic Planning by Adam Smith International in cooperation with Ernst
&Young.
Rondinelli., D.A. (2008). Public Enterprises: Unresolved Challenges and New Opportunities
Can Public Enterprises Contribute to Development? A Critical Assessment and Alternatives for
Management Improvement. United Nations, NewYork.
Sekaran, U. (2008), “Research Methods for Business”, John Wiley & Sons, New York, NY
Tarrant, M. (2010), “ The Organisation: Risk, Resilience, and Governance”, The Australian Journal of
Emergency Management, Vol. 25, pp 13 – 17.
Weeks, R. (2008), “Nurturing a culture and climate of resilience to navigate the whitewaters of the South
African dual economy”, Journal of Contemporary Management, Vol. 5 pp 123 – 136.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Appendix 1: ORGANISATIONAL RESILIENCE SCALE
Please, evaluate the following statements by circling the appropriate alternative of your choice.
Not at all To some extent I am not sure To a large To a great extent
1 2 3
extent
4 5
A Organisational Adaptation
OA1 Our services conform to the regulatory standards 1 2 3 4 5
OA2 We have put our assets to good use 1 2 3 4 5
OA3 We have made service delivery is flexible 1 2 3 4 5
OA4 We have maintained our reputation 1 2 3 4 5
OA5 Our service delivery is in line with our customers’ needs 1 2 3 4 5
OA6 Our organization has failed to overcome a number of challenges ® 1 2 3 4 5
OA7 We have coped with the political interests in our organisation 1 2 3 4 5
B Organisational Competitiveness
OC1 We can sustain our operations with limited funding 1 2 3 4 5
OC 2 We serve our customers in a short time 1 2 3 4 5
OC 3 Our customers can easily access our services 1 2 3 4 5
OC 4 We can succeed in service delivery amidst resource constraints 1 2 3 4 5
OC 5 We achieve our set targets 1 2 3 4 5
OC 6 Our organization is result oriented 1 2 3 4 5
C Organizational Value 1 2 3 4 5
OV1 Our cost control is satisfactory 1 2 3 4 5
OV2 Our stakeholders are satisfied with our operations 1 2 3 4 5
OV3 The people we serve are not satisfied with our service delivery ® 1 2 3 4 5
OV4 Our staff are satisfied with the organization 1 2 3 4 5
OV5 There are minimum complaints over the use of our services 1 2 3 4 5
OV6 Most people wish to work with our organization 1 2 3 4 5
OV7 Funding organizations are willing to fund our operations 1 2 3 4 5
416

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Evaluating and Improving Operational Performance of Healthcare Facilities in Africa Using
Mathematical Models and Information Systems
Abstract
Mohamed Djerdjouri, Djerdjm@Plattsburgh.edu
State University of New York at Plattsburgh, USA
Hassiba Djemaa, Djemaa_hassiba@yahoo.fr
Ecole des Hautes Etudes Commerciales (EHEC) d’Alger, Algeria
African governments are overwhelmed by the problem of increasing healthcare spending and decreasing
performance of their healthcare systems. Inefficient utilization of resources has been found to be a major
cause. In this paper, a review of findings of fifteen efficiency assessment studies conducted in Sub-Sahara
Africa and a recent study conducted in Algeria is presented. Results confirm the existence of large
technical and scale inefficiencies in healthcare facilities. A focus on the issue of assessment and
improvement of efficiency through the use of modern mathematical models and healthcare information
systems is recommended, in order to improve healthcare delivery and outcomes.
Introduction
Several World Health Organization annual reports and studies have pointed out that African healthcare
systems perform poorly. One of the key reasons cited is the existence of large inefficiencies in healthcare
facilities. And the other main problems are equity issues and proper mix of healthcare programs.
Healthcare facilities administrators need to find out if resources are being efficiently used in producing
the required outputs. Technical or operational efficiency is defined as the production of a given output
with a minimum amount of resources or inputs. And scale efficiency refers to the optimal size of the
facility. For healthcare facilities, such as hospitals, clinics and health centers, a poor deployment of
resources leads to inefficiencies and results in waste of valuable and scare resources. Unfortunately this
kind of situations seems to be very common in Africa and in the developing world in general.
Governments in most developing countries are overwhelmed by the problem of increasing healthcare
spending. Inefficient utilization of health resources has been found to be a major cause (Sriratanaban,
2001). Some healthcare policy makers and administrators have realized that measuring operational
efficiency of healthcare facilities must constitute the first step in auditing healthcare production units’
performance. Based on these assessments, a better distribution and utilization of resources can be made.
However, to date only few attempts have been made to assess the operational efficiency of hospitals and
health centers in Africa. A main problem is how to measure the efficiency of individual healthcare
facilities, and whether the set of efficiency measures produced can be used to give service providers
incentive for improved performance. From a management perspective, it is crucial to understand and
assess inefficiencies because higher operational efficiency helps in a better use of resources as well as in
the control of healthcare costs. This in turn, helps to provide more affordable care and improved access to
the public. The main objective of the health system of any country is to improve its citizens’ health and
lengthen their life expectancy. In order to achieve this crucial objective, the health system has to be
equitable, effective and above all efficient. It is clear that efficiency of the healthcare system plays a
crucial role in achieving the intended healthcare objectives by rationally using the resources available.
Substantial financial resources are allocated to the healthcare sector in the world. Table 1 below shows
the total expenditure on health as a percentage of gross domestic products in 2000 and 2007 for the six
regions of the world (as defined by the World Health Organization).
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Proceedings of the 12th Annual Conference © 2011 IAABD
Table 1. Health expenditure ratios (Source: World Health Statistics 2010 Report)
Region
Total
expenditure on
health as % of
gross domestic
product
General public
expenditure on
health as % of
total health
expenditure
Private
expenditure on
health as % of
total health
expenditure
General
expenditure on
health as % of
total
government
expenditure
External
resources for
health as %
of total
health
expenditure
2000 2007 2000 2007 2000 2007 2000 2007 2000 2007
Africa 5.9 6.2 43.5 45.3 56.5 54.7 8.7 9.6 5.4 6.9
Americas 12.0 13.6 44.8 47.2 55.2 52.8 15.5 17.1 0.1 0 0.1 0
South-East
Asia
3.7 3.6 31.2 36.9 68.8 63.1 4.8 5.3 0.9 1.7
Europe 8.4 8.8 75.3 76.0 24.7 24.0 14.3 15.3 0.1 0
Eastern
Mediterranean
4.2 4.1 52.8 55.5 47.2 44.5 7.3 7.5 1.0 1.8
Western
Pacific
6.8 6.5 72.7 67.8 27.3 32.2 14.9 15.1 0.1 0.1
As indicated in table 1 above, 2007 total expenditures on health in Africa represented 6.2 % of the gross
domestic product, higher (as a %) than the South-East Asia region (3.6%) and the Eastern Mediterranean
region (4.1%) and comparable to the western pacific region (6.5%). Also, from 2000 to 2007, spending in
healthcare as a percentage of GDP rose from 5.9% to 6.2%, and so did real per capita spending for all
types of hospital care and all health services. In addition, 2007 general government expenditure on health
in Africa represented 9.6 % of total government expenditure. This was higher than what was spent in the
South-East Asia region (5.3%) and the Eastern Mediterranean region (7.5%). Again, this ratio increased
from 8.7% in 2000 to 9.6% in 2007. Moreover, external resources (mainly from NGO and international
foundations) for health represented 6.9% of total health expenditures in Africa. In his report, David
McCoy (2007) stated that countries that spend more of their GDP on health through public expenditure or
social insurance have better health outcomes as measured by healthy life expectancy and child mortality
indicators. Aggregate health care outcomes statistics from the WHO 2010 report show that life
expectancy at birth in 2008 in Africa was the lowest in the world at 53 years and between 2000- 2008, it
only increased by 3 years. While in the rest of the world, life expectancy at birth was 65 years or higher in
2008. Moreover, healthy life expectancy in Africa was only 45 years in 2007. In addition, all 2008
mortality rates (neonatal, infant and adult) were much higher in Africa than in the rest of the world. The
question to ask is if government healthcare spending in Africa is effective and efficient. To be effective,
governments must choose the suitable mix of health programs and interventions and optimally target
populations. And to be efficient, they must reduce waste and inefficiencies in its healthcare delivery and
rationally deploy the scare resources available. In this paper we will focus mainly on the issue of
efficiency. Given that African governments spend a good deal of their budget on healthcare, it is critical
to make sure that the available resources are optimally used. Healthcare facilities soak up over 80% of
regular budgets of the Health Ministries. Consequently, the focus should be on evaluating and monitoring
the efficiency of public healthcare facilities such as hospitals, health centers and public clinics.
Mathematical models for measuring operational efficiency in Healthcare
In his excellent survey of non-parametric and parametric methods for measuring operational efficiency in
healthcare, Bruce Hollingsworth (2003) reviewed 188 published papers. The main objective of the study
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
was to determine the mathematical methods used to measure efficiency, data used, models specified,
sensitivity analysis employed, validity and robustness of techniques, results obtained and policy
implications. In terms of methods used to measure efficiency, Hollingsworth found that the main
technique used is the non-parametric Data Envelopment Analysis (DEA). In fact up to 1997, he found that
two thirds of the studies used DEA models alone and about one fifth used DEA along with regressions
analysis. His findings were similar in 2003 where about 50% used DEA alone and about a quarter used a
two stage analysis with DEA and regression analysis. Although more complex analysis, such as the
application of the Malmquist Index are being used, the non parametric DEA technique has been by far the
most frequently used mathematical technique to measure efficiency in healthcare. He also found that the
studies focus on technical rather than allocative efficiency. Moreover, according to Coelli et al. (2005),
DEA is greatly preferred in efficiency analysis in non-profit sector such as health institutions because
random noise is less of a problem, multiple inputs are used and multiple outputs are produced. Also price
data are difficult to find and setting up a production function is difficult. Data Envelopment Analysis
defines efficiency as the measure of how much output is achieved in relation to how much input is used.
More output for the same input achieves greater efficiency as does producing the same output for less
input. Since its development by Charnes et al. (1978), the DEA has been widely applied to non-profit
organizations. DEA uses Linear Programming to establish the efficiency frontier from a sample data. The
efficiency of a DMU is then measured relative to the efficiency of all others in the sample, subject to the
restriction that all DMUs lie on or below the frontier (Bjurek et al. 1990). The original DEA mathematical
model was proposed by Charnes et al. (1978).The proposed fractional programming model is replaced
with an equivalent linear programming formulation through a series of transformations (Charnes et al.,
1978). Efficiency can either be characterized with an input orientation or an output orientation. In this
study we will consider the input orientation (Djerdjouri et al., 2007). For the input oriented model a
decision-making unit (DMU) is not efficient in utilizing its inputs to produce given amounts of output if it
can be shown that some other DMU or a combination of DMUs can produce the same amount of output
with less of some resource (input) and no more of any other resource. Conversely, a DMU is efficient if
this is not possible. The linear programming model is formulated as:
[VRS]: Minimize E (1)
Subject to: WX ≤ EX0 (2)
WY ≥ Y0 (3)
WI = 1 (4)
W ≥ 0 (5)
where X and Y are the input and output matrices, respectively; X0 and Y0 are the input and output vectors,
respectively for the DMU being assessed; W is a vector representing the weights (%) of inputs and
outputs of DMUs used in constructing a composite DMU; and E is the efficiency index. If the optimal
solution of the model gives E=1, then the test DMU is relatively efficient and if E

Proceedings of the 12th Annual Conference © 2011 IAABD
Measuring operational efficiency Healthcare facilties in Africa
Castro-Leal & al. (2000) mentioned that public health systems in Africa are very similar. Typically,
public facilities provide more than two-thirds of the medical care in the country. Also, private non-profit
organizations provide the remaining one third. The DEA method has been used extensively to assess the
operational efficiency of healthcare facilities in many countries in Europe, North and South America and
Asia. A thorough review of the literature reveals that the first hospitals and health centers performance
assessment studies were done in South Africa in the early 2000. And more recently similar studies were
conducted in Kenya, Ghana, Sierra Leone, Zambia, Angola, Bostwana, Namibia, Benin and Sudan. The
main objective of all the studies was to measure the technical and scale efficiency of a sample of hospitals
and health centers in these countries. Some of the studies also set out to assess changes in productivity of
these healthcare facilities over time. Table 2 below summarizes the findings of fifteen studies conducted
in Africa in the last decade. The main objective of these studies was to assess the technical and scale
efficiencies of healthcare facilities (Primary public hospitals, public health clinics). The DEA method was
used in all the studies. In addition, some of them used the Malmquist index was used to evaluate
productivity change over time. The following table summarizes the key efficiencies findings
Table 2. Operational efficiency assessment studies in Africa
Reference Key Efficiency Results
1) Kirigia, J.M. and Smabo, L.G. (2000). “Are public - 40% of the hospitals were technically
hospitals in Kwazulu-Natal Province of South Africa inefficient.
technically efficient?”. African journal of Health , 7 - 58% of the hospitals were found to be scale-
(3), 25-32
inefficient.
2) Kirigia, J.M. et al. (2001). “Technical Effciency of - 70% of health care clinics were inefficient,
public clinics in Kwazulu-Natal Province of South of which 16% had an efficiency score of 50%
Africa”. East African Medical Journal, 78 (3), 1-13 or less and 84% were scale inefficient
3) Kiriga, J.M. (2001).“Technical Efficiency and - 87% are found to be technically inefficient.
Productivity of Public Sector Hospitals in Three - The overall level of technical inefficiency of
South African Provinces”. South African Journal of
Economics, 69 (2), 336-358
4) Kirigia, J.M. et al. (2002). “Measurement of
hospitals is in the range of 35.1 to 46.8 per cent
Technical Efficiency of Hospitals in Kenya: Using - 26% of the hospitals were found to be
DEA”. Journal of Medical Systems, 26 (1), 39-45
5) Kirigia,J.M. et al. (2004). “Using DEA to Measure
technically inefficient
Technical Efficiency of Health Centers in Kenya”. - 44% of public health centers are inefficient
Journal of Medical Systems, 28 (2), 155-166
6) Osei1, D. et al. (2005).“Technical efficiency of - 47% of hospitals were technically inefficient
public district hospitals and health centers in Ghana: and 59% were scale inefficient
a pilot study”. Cost Effectiveness and Resource - 18% of the health centers were technically
Allocation , 3 (9), 1-13
inefficient and 47% were scale inefficient
7) Renner, A. et al. (2005). “Technical efficiency of -59% of the 37 health units were found to be
health units in Pujehun district of Sierra Leone: a technically inefficient,
DEA application”. BMC Health Services Research, -65% health units were found to be scale
5 (77), 1-11
inefficient,
8) Masive, F. et al. (2006). “Efficient Management - About 83% were technically inefficient; and
of Health Centers Human Resources in Zambia”. - 88% of them were both allocatively and cost
Journal of Medical Systems, 30 (6), 473-481 inefficient.
9) Zere, E. et al. (2006). “Technical efficiency of - technically inefficient: 73% (1998), 69%
420

district hospitals: Evidence from Namibia using
DEA”. Cost Effectiveness and Resource Allocation ,
4 (5), 1-9
10) Kirigia, M.J. et al. (2008. “A Performance
Assessment Method for Hospitals: The Case of
Municipal Hospitals in Angola”. Journal of Medical
Systems, 32 (6), 509-519
11) Akazili,J. et al. (2008).“Using DEA to measure
the extent of technical efficiency of health centers in
Ghana”. BMC Int. Health and Human Rights, 8 (11)
12) Appiah, C. et al. (2009). “Optimizing efficiency
gains - A situational analysis of technical efficiency
of hospitals in Ghana”. African Health Economics
and Policy Association ; March 10-12, 2009, Ghana
13) Tlotlego, N. (2010). “Assessment of productivity
of hospitals in Botswana: A DEA application”.
International Archives of Medicine, 3 (27), 2-14
14) Kirigia, J.M. et al. (2010). “Technical Efficiency
of Zone Hospitals in BENIN”. The African Health
Monitor, No.12, 30-39
15) Ismail; M.A. (2010). “Technical Efficiency of
Sudan’s Health Institutions: A State-level Analysis”.
Sudanese Journal of Public Health, 5 (3), 120-129
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
(1999), 88% (2000), 81% (2001)
-scale inefficient: 69% (1998), 65% (1999),
88% (2000) and 81% (2001)
- 68% were technically inefficient and 71 %
were scale inefficient and the Malmquist
productivity index increased by 4.5% from
2000 to 2002 (reason:efficiency improvements
The study found that 65% of health centers
were technically inefficient and so were using
resources that they did not actually need.
- 64% of all the district hospitals were
technically efficient.
- 13% hospitals were scale inefficient
- 76.2% in 2006; 76.2% in 2007 and - 61.9% in
2008 were technically inefficient. Malmquist
Productivity Index decreased by 1.5 %.
- 87% in 2003; 87% in 2004;
- 61% in 2005; 52% in 2006 and
- 35% in 2007 were run inefficiently
- 40% were technically inefficient under
- 40% were scale inefficient
Results in table 2 show that the percentage of technically inefficient facilities varies between 26% and
87% and the percentage of scale inefficient units is between 13% and 88%. The findings also reveal that
the majority of healthcare facilities operate at less than optimal levels of technical and scale efficiency. A
great amount of resources are being wasted. There is an urgent need to remedy this crucial problem if
African governments want to achieve the intended objective of guaranteeing a decent healthy life
expectancy at birth for all the citizens.
Case study: Healthcare facilities’ efficiency in Algeria
In this section, we will present some results of a recent study conducted in Algeria in late 2009 (Djemaa,
2009). One of the two main objectives of the study is to assess the technical and scale efficiency of public
hospitals in Algeria using the DEA technique. For healthcare facilities, labor is represented by medical
personnel, paramedical personnel and administrative personnel and capital is represented by the number
of beds (Audibert et al., 2008). In the developing world, often the choice of inputs and outputs is either
limited or even dictated by what data are available. We used four inputs: -number of paramedical staff;
number of medical staff, the number of administrative staff and the number of beds. And two outputs:
number of admissions and the number of deliveries (births). 175 healthcare facilities spread across the
country were selected from a Health Ministry database (2008). Summary descriptive statistics of the
inputs showed that the standard deviation for each input is quite high. This indicates that the facilities are
diverse and of different sizes. We then used the Kohonen Algorithm to assign health units to 3 categories.
The algorithm resulted in 88 small size (Category 1) hospitals, 38 medium size (Category 2) hospitals and
49 large size (Category 3) hospitals. Healthcare facilities administrators aim at maximizing hospital
outputs by rationally exploiting the resources that are available to them. To that end an input oriented
DEA model is used to measure the efficiency of the health units. It is important to note here that the
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choice of input or output orientation does not affect efficiency status of healthcare units. That is, if a unit
is inefficient, it will be identified as such by either an input or output oriented model. The CRS model
was used to obtain efficiency scores and then the VRS model was run and then the scale efficiency of
each facility was computed by dividing its CRS efficiency score by its VRS technical efficiency score.
Although many more statistics, such as target inputs, target outputs and benchmarks are provided by the
DEA model, we will present and focus here only on technical efficiency and scale efficiency.
Table 3. Efficiency scores
Small Size facilities Medium size facilities Large size facilities
Mean efficiency score 0.75 0.81 0.77
% of technically inefficient units 68% 70% 66%
% of scale inefficient units 69% 91% 65%
Table 3 above shows that a large number of units are inefficient. Overall, about 68% of the facilities are
technically inefficient and about 75% of them are scale inefficient. Also the overall mean efficiency score
is around 77%. These results are very similar to the findings obtained in the other 15 studies. Likewise,
resources are not rationally exploited. Moreover, optimal target inputs show that if the inefficient units
were to operate as efficiently as their peers on the efficient frontier, the same outputs could be produced
with about 25% less paramedical personnel, 33% less medical personnel, 32% less administrative
personnel, and 25% less beds on average. This clearly confirms the waste of valuable scarce resources.
Discussion and Conclusion
Although health expenditures as a percentage of GDP were higher in Africa than in South-East Asia and
the Eastern Mediterranean region and were comparable to the Western Pacific region, health indicators
were much lower in Africa than in any other region of the world. Also, different mortality rates were
higher in Africa. One of the main reasons of this state of affairs is the existence of large inefficiencies in
the healthcare delivery system. The first step to take to remedy this situation is to audit healthcare
facilities and find out the extent and the magnitude of these inefficiencies. Moreover, there is a need for
African healthcare policy makers and facility administrators to adopt modern mathematical techniques to
assess operational efficiency. The literature shows that the DEA is the most frequently used methodology
for that. A summary of the findings of fifteen efficiency studies conducted in South Africa, Kenya,
Ghana, Sierra Leone, Zambia, Angola, Bostwana, Namibia, Benin and Sudan; was presented. The first
five studies were carried out in South Africa and then Kenya between 2000 and 2004 and the ten other
studies were done between 2005 and 2010. All these studies reported very high levels of inefficiencies. In
fact results show that the percentage of technically inefficient healthcare facilities varies between 26%
and 87% and the percentage of scale inefficient units is between 13% and 88%. This clearly indicates that
resources to deliver health care in Africa are not rationally exploited. The authors of this article conducted
a similar study in Algeria, which used a sample of 175 healthcare facilities. The results were very similar.
Findings revealed that overall, about 68% of the facilities are technically inefficient and about 75% of
them are scale inefficient. Also the overall mean efficiency score is around 77%. With low GDP and low
per capita expenditure on health for many African countries, the efficiency savings and rationalization of
the deployment of exiting resources will improve governments’ initiatives to provide for more health care
needs of the population. The DEA results can help administrators focus on the operating aspects of the
healthcare facilities. What is important from a managerial perspective is how inefficient healthcare
facilities should orient strategies to become better performers and to optimize the use of available
resources. The DEA model identifies, for each inefficient unit, a references set of efficient facilities
(benchmarks) as well as target input and output levels. This provides guidance to the administrators of
these facilities on how to improve their operational efficiency. In addition, the findings can be used to
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provide prescriptive guidance to facility administrators to achieve this goal. As a result, government
ministries may opt to close down those facilities with efficiency scores below a certain threshold (for
instance 50%). Or, they can opt for the conversion of low performers, especially the ones exhibiting
decreasing returns to scale, into primary health care centers. The pursuit of efficiency and equity in
resource allocation must become a major goal of health systems among policymakers and administrators
in Africa. We strongly recommend that all African countries spread and institutionalize the use of
mathematical models and information systems at the level of the country’s health ministries in order to
assess and closely monitor healthcare facilities’ operational and scale efficiency. These efficiency
assessment results will also help establish a baseline that can be used to assess the impact of new policies
and reforms on operational efficiency. We also recommend the development and use of healthcare
information systems at the ministry level as well as at the healthcare facility level. First, they are needed
for a better collection and storage of data. Also, they are used to provide facility administrators with a
wealth of integrated information that can improve decision making and the management of healthcare
facilities. In addition, they will allow facilities to monitor costs and manage their finances (Williams et
al., 2008). Moreover, information systems greatly reduce medical errors and provide better information to
physicians, surgeons, and paramedical staff. This will not only improve operational efficiency but also
improve the quality of healthcare delivered to the population. Obviously extensive training of all the
stakeholders in the use of efficiency techniques and information systems is essential. In their World
Health Organization GPE discussion paper, Evans et al. (2001) reported that the question of how to
improve efficiency of healthcare delivery systems has become an overriding issue for the world health
organization. They argue that one important thing to accomplish is to reduce waste and operational
inefficiencies. However, citing other studies, they also say that choosing the appropriate mix of
interventions and health delivery programs is very important. In conclusion, while African governments
need to mobilize more domestic and external resources for healthcare, it is extremely important that they
ensure that the available resources are rationally and optimally used. We can undoubtedly presume that
the detection and elimination of operational efficiency of healthcare facilities together with the allocation
of existing resources to an appropriate mix of facility types and interventions; and along with the use of
healthcare information systems, would greatly improve the overall performance and productivity of
African public health care systems.
References
Audibert, M.; Ningshan, C.; Aning, M. and Aitian, Y. (2008). “Activité et performance des hopitaux
municipaux en Chine rurale”; Revue d’économie du développement, 1 (3), 64-99
Bjurek, H. and Hjalmarsson, F.R. (1990). “ Deterministic parametric and non-parametric estimation of
efficiency in service production: A comparison”; Journal of Econometrics, 46 (2), 213-227
Castro-Leal, F.; Dayton, J.; Demery, L. and Mehra, K. (2000). “Public spending on healthcare in Africa:
do the poor benefit?”; Bulletin of the World Health Organization; 78 (1), 66-74
Charnes, A., Cooper, W., and Rhodes, E. (1978). “Measuring the efficiency of decision making units”,
European Journal of Operational Research, 2, 429-444.
Coelli, T.J; Rao, D.S.P; O’Donnell, C.J; Battese G.E. (2005). An Introduction to Efficiency and
Productivity. New York: Springer
Djemaa, Hassiba (2009). Modélisation mathématique de l amesure d’efficience productive dans le secteur
public non marchand et pratique du benchmarking inerne: étude comparative des secteurs sanitaires.
Ph.D. Thesis, Instsitut National du Commerce, Algiers.
Djerdjouri, M. and Mehailia, A. (2007). “Measuring Technical and Scale Efficiency of Public Hospitals
in the UAE: A Pilot Study”; Proceedings of the Business, Information Technology and Management
(BIMA) Annual Conference, Sharjah, UAE, May 2007.
Evans, D.B.; Tandon, A.; Murray, C.L.; Lauer, J.A. (2001). GPE Discussion Paper Series: No. 29
EIP/GPE/EQC, World Health Organization
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Hollingsworth, Bruce (2003). ” Non-Parametric and Parametric Applications Measuring Efficiency in
Health Care”; Health Care Management Science, 6 (4), 203- 218
McCoy, David (2007). “Financing Health Care: for All, for Some, for Patients or for Profits?”;
CANADIAN DEVELOPMENT REPORT 2007 –THE GLOBAL RIGHT TO HEALTH, 57-83
Sriratanaban, J. (2001). “Health Care Management”; Asian Productivity Organization, pp. 93-98
Williams, F. and Boren, S.A. (2008). “The role of electronic medical record in care delivery in developing
countries”; International Journal of Information Management, 28,503-508
World Health Statistics 2010 Report; World Health Organization (www.who.int/publications)
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Is corruption an innovation? Extending the decomposed theory of Planned Behaviour to explain
corruption
Abstract
Richard Shambare, shambarar@tut.ac.za and Robert Rugimbana, rugimbanar@tut.ac.za
Tshwane University of Technology, South Africa
Although the vast body of literature on corruption suggests situational and individual factors contribute to corrupt
behaviour, there is little research focusing on the individual corrupt actors. This paper argues that corrupt
behaviour, as operationalised by the paying of bribes to acquire scarce publicly-produced goods and services, is a
pervasive consumer behaviour and an innovation. Accordingly, the decomposed theory of planned behaviour is
utilised as a theoretical basis to critically evaluate individuals’ intentions to act corruptly. More specifically, it is
argued that corrupt behaviour is determined by attitudes, subjective norms, and perceived behavioural control. The
paper concludes by proposing managerial and policy implications as well as suggesting avenues for future
research. Since not much has been written on corruption as an innovation, this study adds to the literature of
adoption theory and the understanding of corruption in the context of a developing country.
Introduction
To obtain goods and services, consumers pay a specific price stipulated by the seller. In addition to this
stipulated price, consumers sometimes give monetary gifts in the form of tips as incentives for good
service (Lynn & Withiam, 2008) or as bribes to facilitate acquisition of certain publicly-produced goods
and services (Dion, 2010). The practice of gift-giving, according to Lynn, Zinkhan, and Harris (1993), is a
pervasive consumer behaviour of substantial marketing importance. As such, is more than a curiosity; it
forms an interesting topic for research.
This paper considers payment of bribes to public officials, in particular motives influencing consumers to
pay bribes. First, the corruption literature is reviewed, highlighting the paucity of research in explaining
factors influencing individuals’ decisions to perform corrupt actions. Existing literature suggests that
situational and individual factors contribute to corrupt behaviour. It is therefore opportune to investigate:
(1) why consumers pay bribes? (2) What motives influence corrupt behaviour? This study addresses the
deficiency in the literature by proposing corrupt behaviour as a marketing phenomenon, which can be
studied using marketing theories in the decomposed theory of planned behaviour (DTPB). Finally,
avenues for future research are identified.
Literature Review
From a marketing perspective, it makes sense to understand motivations for consumption and the
associated consumer behaviours thereof. The literature consistently illustrates that consumers expect
efficient and prompt service (Parasuraman, Zeithml, & Berry, 1985), however, such expectations are not
always satisfied in the case of publicly-produced services for two reasons. Firstly, the scarcity of
resources means that public goods and services are not readily available (Camerer, 1997). Secondly,
government bureaucracy results in inefficient distribution of these services.
Consumers maximise their chances of acquiring public goods by bribing public officials. This is
particularly true in developing nations such as South Africa, where the problem of scarcity necessitates
creative ways of securing public services, including the paying of bribes (Camerer, 1997; Pillay, 2004).
Evidence from the literature (Agatiello, 2010; Aguilera & Vadera, 2008) confirms that the payment of
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bribes is not an accidental affair, but a calculated behaviour. Specifically, Rabl and Kuhlmann (2009:270)
postulate that performing corrupt actions (or paying bribes) is planned considering and finalising details
regarding when, where, how, and how long to perform goal-directed corrupt action.” In other words,
corrupt behaviour does not occur spontaneously nor randomly, but as a result of conscious thought. In the
same breath, the authors posit that the act of paying bribes is in actual effect an innovation (Rogers,
1995).
What is an innovation?
Simply, an innovation is any thought, behaviour, or thing that is new because it is qualitatively different
from the existing forms (Barnett, 1953:7). Similarly, Rogers (1995:11) defines an innovation as an idea,
practice, or object that is perceived as new by potential adopters. It matters little whether or not an idea is
objectively new as measured by the lapse of time since its first discovery. The perceived newness of the
idea for the individual determines his or her reaction to it. Implicit to these definitions, are three criteria
(Rogers, 1995):
(1) The newness of idea – The adopter should at least regard the innovation to be new to him or her,
regardless of how long the innovation might have been present. Knowledge, persuasion, or
decision to adopt also determines the newness of an innovation.
(2) Benefit to adopters – Adopting the innovation has some degree of benefit to adopters or else they
would not be any justification for adoption.
(3) Adoption occurs over time – Adoption occurs to members of the social system over time and is
affected by the innovation’s compatibility with values, beliefs, and past experience of society.
As shall be illustrated shortly, paying bribes satisfies all three criteria.
Corruption – a social phenomenon
In this study, for practical purposes, corruption is restricted to bribery only (Zaman & Rahim, 2009). This
includes the offering of bribes to avoid say a traffic ticket or to speed up an application for an
identification document. Because corruption is a multi-faceted phenomenon, it rarely has a single
definition. Agatiello (2010) considers corruption a calculated ‘crime’ perpetrated for personal and usually
economic gains. Since the research is concerned with private corruption, in which bribes are accepted (by
public officers) and supplied by (private individuals), Dion’s (2010a) definition is adopted: corruption is
an “activity, outside the constitutional government process, involving the sale of publicly-produced goods
and services by government employees in exchange for payments or bribes not sanctioned by the
government.”
Corruption in South Africa
Although mainstream media reports of rampant corruption in South Africa, empirical evidence supporting
these claims is scanty ((IOL News, 2009; Public Service Commission Report, 2001; Pillay, 2004; Zvekic
& Camerer, 2002). The secretive nature of corruption makes it difficult to acquire reliable statistics.
Besides, the problem of corruption in South Africa has become so systemic and rather than diminishing, it
is proliferating, making it the ‘common cold’ of South African social ills” (Pillay, 2004:586). It has
become so ingrained in society that it even has a distinct language. For instance, phrases like ‘mphe
chocho 7 ’ or ‘make a plan’ are requests for bribes from officials. On the other hand, one shows willingness
by offering to ‘buy a cold drink.’ To illustrate, The Forum, a popular South African blog, published a
story describing the extent of corruption in the country. The blogger comments:
7 Sotho for “give me some money”
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I'm sitting listening to some youngsters chatting. One of them has just had a birthday and is
delighted with his gift from his brother – his driver’s licence! Sure, the kid has been struggling to
pass trying to do it [taking the driving test] the legal way, and even the testing department is
talking about the problems they're having with “consistency” (The Forum, 2011).
Thus, by ‘buying a cold drink’, the licence-holder’s brother was finally able to order the driver’s licence
in time for his brother’s birthday. Consequently, many individuals unassumingly pronounce that if you
fail to make a plan, you will not survive’ in the new South Africa.
Why South African consumers pay bribes
Although in the pre-1994 era corruption was particularly perpetrated by the state, politicians, and senior
officials, Zvekic and Camerer (2002) and later Pillay (2004) elucidate that corruption today is much
practiced by individuals and attribute the recent spread of corruption to five factors:
(1) General shortage of resources – excess demand for public goods and service
(2) Bureaucratic traditions – the use of antiquated laws that are overly restrictive and at times even
inhibit equitable access of public goods.
(3) Political development – challenges of political change and the need for socio-political
transformation resulted in entrepreneurial politics
(4) Social history – the aftermath of apartheid – racial segregation and uneven distribution of
economic resources resulted in excess demand for public goods
(5) Lack of motivation to remain honest – the increasing number of politicians and senior officials
accused of corruption de-motivate honest behaviour.
What motives influence corrupt behaviour?
Corruption as an innovation and its diffusion
Robertson (1967) explains that innovations are not accidental affairs nor do they spring full-blown out of
nothing; they have antecedents. And in South Africa, the recent upsurge in corruption appears to be
consistent with Roger’s (1995:1) assertion that “many innovations require a lengthy period, often of many
years, from the time they become available to the time they are widely adopted.” Building on past
research, it is our view that private corruption in South Africa is a unique form of consumer behaviour,
which Solomon (2009:33) defines as the “processes involved when individuals or groups select, purchase,
use, or dispose of products, services, ideas, or experiences to satisfy needs and desires.” Consequently,
private corruption, as a distinct consumer behaviour is better understood using diffusion models such as
Ajzen’s (1991) Theory of Planned Behaviour (TPB) or Rogers’ (1995) Innovation Decision Process
Model. These theories are useful in (1) explicating the concept of private corruption as an innovation and
(2) predicting its diffusion.
Proposed conceptual model
The study utilises the DTPB, an extension and the theory of planned behaviour (TPB) (Ajzen, 1991) and
the theory of reasoned action (TRA) (Fishbein and Ajzen, 1975), as a conceptual model (Figure 1).
According to the DTPB, behaviour (B) is influenced by behavioural intention (BI) – the weighted sum of
the Attitude (A), Subjective Norm (SN), and Perceived Behavioural Control (PBC) (Taylor & Todd,
1995). Each of these are discussed in more detail next.
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PBC and corruption
PBC encompasses two components – facilitating conditions and self-efficacy. ‘Facilitating conditions’ is
the perceived availability of resources needed (e.g., time and money) to successfully perform corrupt
behaviour. While self-efficacy is the consumer’s self-confidence in paying bribes. Therefore PBC is
positively related to behavioural intention (Taylor & Todd, 1995). In this context, three facilitation
conditions are identifiable. Firstly, the scarcity of resources coupled with inefficient application thereof to
provide adequate public goods (Camerer, 1997). Secondly, as a direct consequence of scarcity, the widely
accepted notion that ‘making a plan’ as justified by the competition for resources. Thirdly, an
overburdened criminal justice system characterised by inefficiency and bureaucracy has hitherto been
unable to successfully prosecute high-profile corruption cases (Pillay, 2004). The failure to prosecute, on
the other hand, stimulates corrupt actors’ self-efficacy. The literature illustrates that self-efficacy or the
self-confidence to engage in corrupt behaviour improves with each successive corrupt act, as explained by
Darley (2005:1181), that “a single corrupt act often sets in motion a cascade of further corrupt actions like
a tornado of corruption.”
Figure 1: The decomposed theory of planned behaviour
Source: Taylor and Taylor (1995:142)
Attitude and corruption
The literature (Rogers, 1995), proposes a set of attitude dimensions: relative advantage, complexity and
compatibility to describe (1) the perceived characteristics of an innovation and (2) adoption behaviours.
These factors influence attitude formation during the persuasion stage of the adoption decision process
(Taylor & Todd, 1995).
o Relative advantage: Refers to the degree to which corruption provides benefits (e.g., economic
advantage, image enhancement, convenience and satisfaction) which supersede those of not
acting corruptly. Therefore, perceived relative advantage results in adoption.
o Complexity: Is the degree to which corruption is perceived to be difficult to understand, learn or
perform. Since complexity is negatively related to attitude, then the simpler the bribery process is
perceived by individuals in terms of understanding it and performing it, the more likely it is to be
adopted.
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o Compatibility: This is the degree to which corruption fits with the potential adopter's existing
values, previous experiences and current needs. Since compatibility is positively related to
adoption, the higher the compatibility of paying bribes is to the individual, the more likely that
individual will adopt it.
Subjective Norm and corruption
This refers to the influence of people in the consumer’s social environment. This influence either
promotes or discourages behavioural intention to adopt corrupt practices. So, it can be expected that if
these individuals perceive corruption in a good light, due to normative compliance, the consumer will
likely adopt corrupt behaviour.
Diverse views on paying for improving promptitude
Although there are significant differences between bribes and tips, the objectives of both practices appear
to be the same – improving promptitude, as described by Lynn, Zinkhan, & Harris (1993:479) that the
word T.I.P. is actually an acronym for “to improve promptitude.”. Lynn & Withiam (2008:331) explain
this concept in the following excerpt:
Tipping exists because it is the most efficient way to provide service workers with an incentive to
deliver good service. They argue that the intangible and customized nature of services makes it
difficult and costly for managers to monitor and reward service workers’ efforts, so this task is
given to the customer via tipping whenever the consumer is able to evaluate the service worker’s
performance. From this perspective, we do not tip physicians, car mechanics, and some other
service workers because consumers cannot tell in the short term if those workers have done a
good job or not. In the case of most personal services, however, consumers can evaluate service
workers’ performances and can do so more efficiently than can firms. In those cases, tipping is
supposed to improve service levels by providing workers with a stronger incentive to deliver
good service than would otherwise be possible.
Similarly Kolyesnokova et al. (2007) explain that gratuity purchasing finds its roots in reciprocity, a
social psychology concept explaining the “mutuality of gratification.” In other words, people feel
obligated to repay or reciprocate positive behaviour. For that reason, consumers are likely to rationalise
the practice of paying for services (tips and bribery) as both a social activity – satisfying the norm of
reciprocity and as an economic activity.
Conclusions
While most diffusion studies are concerned with devising strategies for promoting adoption (Ajzen, 1991;
Robertson, 1967; Rogers, 1995; Taylor & Todd, 1995), this study anticipates on doing the reverse –
studying diffusion with a view of retarding the adoption of corruption. By gaining a sufficient
understanding of the diffusion and adoption patterns of corruption in South Africa, it is anticipated that
corruption-combating strategies might be discovered. Because of its wide adaptability, the decomposed
theory of planned behaviour (DTPB) is deemed more suitable and utilised as a theoretical basis for this
study (Taylor & Todd, 1995).
More importantly, the paper sought to demonstrate the applicability of diffusion theory, particularly the
DTPB in explaining private corruption as both an innovation and a relevant consumer behaviour. The
notion of corruption was discussed from both the global and South African contexts. It was demonstrated
that private corruption, as performed by private individuals, at least in South Africa, can be considered to
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be an innovation in that it satisfies all elements of the DTPB – subjective norms, attitude, and perceived
behavioural control. The implication of such findings is that it indeed is a relevant consumer behaviour,
and as such marketing theory can be useful in further understanding of the concept. Following this line of
thought, further congruencies between private corruption and other consumer behaviours need to be
evaluated in order to adequately explain the phenomenon. At its best, corruption is seen as some form of
‘gratuity’ or reward for good service, and at worst, it is a criminal act. All the same, the issue of
corruption continues to hamper development in South Africa and for that reason alone, it deserves further
analysis. More importantly, construing it as an innovation could be appropriate for researchers and
policymakers to re-think the scourge of corruption, at least in developing nations. Therefore, empirical
research to test this claims is opportune. Further, it would be interesting for future research to consider
parallels between the practices of bribing and gratuity giving.
References
Aguilera, R.V. & Vadera, A.K. (2008). The Dark Side of Authority: Antecedents, Mechanisms, and
Outcomes of Organisational Corruption. Journal of Business Ethics, 77:431-449.
Ajzen, I. (1991). The Theory of Planned Behaviour. Organizational Behaviour and Human Decision
Processes, 50: 179-211.
Barnett, H.G. (1953). Innovation: The Basis of Cultural Change. New York: McGraw-Hill.
Camerer, L. (1997). Commercial crime and the criminal justice system. ISS Monograph, 15: 34.
Dion, M. (2010). What is corruption corrupting? A philosophical viewpoint. Journal of Money
Laundering Control, 13(1): 45-54.
Dion, M. (2010a). Corruption and ethical relativism: what is at stake? Journal of Financial Crime, 17 (2):
240-250.
Fishbein, M.A. & Ajzen, I. (1975). Belief, Attitude, Intention and Behaviour: An Introduction to Theory
and Research, Reading MA: Addison-Wesley.
IOL News. (2009). Home Affairs is the most corrupt department. [Online] Accessible at:
http://www.iolnews.co.za
Khramkin, A. (2007). “Anti-corruption practices in public procurement”, discussion paper submitted to
the Government Procurement Institute of the Russian Civil Service Academy.
Lynn, M & Withiam, G. (2008). Tipping and its alternatives: business considerations and directions for
research. Journal of Services Marketing, 22 (4): 328-336.
Lynn, M. Zinkhan, G.M., & Harris, J. (1993). Consumer tipping: a cross country study. Journal of
Consumer Research, 20 (3): 478-488.
Osei-Tutu, E. Badu, E., & Owusu-Manu, D. (2010). Exploring corruption practices in public procurement
of infrasctructural projects in Ghana. International Journal of Projects in Business, 3(2): 2010: 235-256.
Parasuraman, Zeithml, & Berry (1985). A conceptual model of service quality and its implications for
future research. Journal of Marketing, 49 (4): 41-50.
Rabl, T. & Kuhlmann, T.M. (2009). Why or why not? Rationalizing corruption in organisations. Cross
Cultural Management, 16(3): 268-286.
Robertson, T.S. (1967). The Process of Innovation and the Diffusion of Innovation. Journal of Marketing,
31 (1): 14-19.
Solomon, M.R. (2009). Consumer Behaviour: Buying, Having, and Being. Upper Saddle River, NJ:
Prentice Hall
Taylor, S. & Todd, P. (1995). Decomposition and crossover effects in the theory of planned behaviour: A
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The Forum. (2011). Corruption in South Africa. [Online]. Available at:
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Zvekic, U. & Camerer, L. (2002). Corruption in Southern Africa. In Corruption and Anti-corruption in
Southern Africa, Eds. Zvekic, U. Pretoria: Southern African Human Rights Trust
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Organizational Communication and worker Satisfaction in organizational workplace
Abstract
James Baba Abugre jbabugre@ug.edu.gh
University of Ghana Business School, Ghana.
The purpose of this paper is to assess organizational communication and worker satisfaction in organizational
workplace. The paper examines three Ghanaian organizations in the public sector using a quantitative survey to
gain information for the study. Findings show that there is a significant relationship between effective
organizational communication and worker satisfaction. Findings also show that organizational communication has
a positive impact on employee performance. Analysis of the findings also reveals that workers believe that
organizational communication is the most important of all the organizational processes in work organizations. The
study proposes that organizations in the public sector will achieve their objectives if they pay proper attention to the
communication processes in the workplace.
Introduction
Over the past years many scholars have argued that employee commitment to work is the result of worker
satisfaction in organizational workplace. (Meyer and Allen, 1997; Meyer and Herscovitch, 2001; Ng et al,
2006). Worker satisfaction and commitment lead to organizational citizenship behavior, reduction in
absenteeism and turnover which would benefit the organization (Watson and Papamarcos, 2002).
Organizational communication is a process that enables groups and or partners to learn from each other
and coordinate their tasks, helping the group to develop and maintain a viable relationship (Robson et al.,
2006). In the social constructionist approach, organizational communication can be defined as the way
language is used to create different kinds of social structures, such as relationships, teams, and networks
Organizational communication is linked to organizational commitment in several ways. For example Ng
et al. (2006) found that organizational communication, work schedule flexibility through effective
interpersonal communication, and opportunity for learning affect organizational commitment. Effective
organizational communication leads to organizational commitment to total quality management (Allen,
1992); and effective organizational communication is key to employee satisfaction (De Rider, 2004).
Though the studies above indicate the growing link between communication and the satisfaction of
workers in their jobs, these studies have largely focused on Western economies (see De Rider, 2004;
Meyer and Herscovitch, 2001; Ng et al., 2006). There is therefore a deficiency of empirical understanding
on the subject matter in developing countries and in particular Africa. This paper seeks to address this
issue by exploring workers communication satisfaction in organizational work place in the Ghanaian
economy. This paper argues that effective organizational communication can lead to greater commitment
of the workforce, thereby enhancing motivation and performance of employees. Effective communication
between managers and employees in the work place can enhance worker relations, organizational
networks, and employee trust that would foster good corporate citizenship.
Although there have been significant contributions of scholars in the area of organizational
communication (see Allen, 1992; Meyer and Allen, 1997; Putnam and Fairhurst, 2001; De Rider, 2004),
none of these studies have examined management communication in the light of worker satisfaction,
besides all the above work are western based. Extant literature on organizational communication has not
successfully addressed this very important subject in developing economies. As a result, a considerable
gap of scholarly understanding of management and employee communication behaviors in developing
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economies exists. The purpose of this work is to fill in this gap by contributing to the balance of literature
particularly in the area of organizational communication in Ghana and its effects on worker satisfaction.
Research Questions
1. To what extent does leadership communication behavior affect employee work behavior?
2. What is the impact of organizational communication on worker satisfaction?
Literature
A major factor influencing employee commitment in organizations is worker satisfaction with
organizational communication (Purcell et al., 2003). An excellent communication relationship between
employees in work organizations brings them closer to each other and this feeling of closeness among coworkers
have been identified as a motivational factor which prevents loss of labour (Maertz and Griffeth,
2004). Many organizational communication researchers (e.g. Putnam and Fairhurst, 2001; Weick et al.,
2005) believe that communication is very important to the well being of all organizations, and that the
word communication represents the organization and the organization is communication. Hence, it is
obvious that communication has a very strong linkage to the very core of organizational survival (Taylor
and Van-Every, 2000). For example, formal communication through policy documentation and meetings
inform employees about the required information needed to undertake a job (Adler, 1999). As a result,
employees who experience a lack of information about how to perform a task are likely to suffer higher
levels of frustration than those equipped with the necessary information to easily negotiate a work task. If
organizations are coordinated social units to achieve specific purposes and objectives by means of
planned and coordinated activities through organizational communication, then the context of this
research is very appropriate. Secondly, by examining organizational communication and worker
satisfaction in Ghanaian organizational workplace, we can gain a better understanding of how
organizational communication affects employee productivity.
Organizational Communication and Worker Satisfaction
Extant literature suggests that effective communication between managers and employees help to improve
the likelihood of an organization being successful. For instance, Hanson (1986) researched into the
profitability of 40 major companies over a five-year period and his findings among others were that when
predicting profitability of an organization the presence of effective communication between managers and
staff was three times more powerful than other variables like, combined market share, capital intensity,
firm size and sales growth rate. Clampitt and Downs (1993) also assessed the effects of regular
communication between managers and employees on organizations. They concluded that the benefits
obtained from quality internal communications included improved productivity, a reduction in
absenteeism, increased levels of innovation, a reduction in the number of strikes, higher quality of
services and products, and a reduction in costs.
A theory of motivation relevant to organizational and communication is ‘goal-setting’ (Lock, 1968).
Many researchers on this subject affirm that if appropriate goals are set for employees, and in a manner
which are acceptable to the concerned employees, higher levels of motivation and performance are likely
to be achieved. Lock and Latham (1990) add that for goals to have their full effect, organizations must
provide employees with performance feedback through regular communications. Robertson et al. (1992)
confirm that goals communicate to individual employees to achieve specific levels of performance
however, without feedback, which allows employees to track how well they are doing in relations to the
goals, achieving the set goals will be difficult. Employees are satisfied with the organization if the
environment encourages a positive feedback both vertically between managers and employees and
horizontally between workers (Emmert and Taher, 1992; Abugre, 2010). Kim (2002) also identifies a
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positive relationship between employees’ job satisfaction and a participative management style used by
superiors in work organizations.
Another theory of motivation that is linked to organizational communication is the expectancy theory.
Expectancy theory of motivation recognizes that individual employees have different needs and goals,
and that employees’ behaviors will be influenced by the degree to which they perceive that they will
satisfy their needs and accomplish their goals (Steers and Porter, 1999). Employees or group members of
an organization will perform better if they are clear about their tasks and also have a positive attitude
towards them (Lundy and Cowling, 2004). Effective communication in organizations creates a unified
corporate identity by improving the insight that individuals have into the overall philosophy of their
organization and its strategic direction, and this brings satisfaction to employees (Ambler and Barrow,
1996).
Hypothesis 1: There is a positive relationship between effective organizational communication and
worker satisfaction
Methodology
This research is based on an empirical survey of 90 employees of three selected public organizations in
Ghana. The employees were selected randomly from each of the three companies. Ninety (90) selfdeveloped
and self-administered pre-coded questionnaires were used to solicit information from
employees on the impact of organizational communication on worker satisfaction. The 90 questionnaires
formed the basis of the sample size of the three organizations with a ratio of 30 randomly selected middle
and senior level workers of each organization. However, 81 questionnaires were properly filled and
returned in the ratio of 26: 31: and 24 from the Ghana Post, Bank of Ghana, and the University of Ghana
Medical school respectively. Eighty-one valid questionnaires represent 90% which is significantly
adequate for a survey analysis. No considerations were taken in terms of gender and age, however, the
study made sure that the sample size covered all departments and particularly personnel of middle and
senior level management.
The research instrument comprised of both closed and open ended questions which enabled the
participants to offer their candid opinions on organizational communication and worker satisfaction. The
efficient and effective administration and implementation of a survey would significantly influence the
overall success of data generation and the achievement of satisfactory response (Faria and Dickinson,
1992). Forty-eight percent (48%) of the respondents were males. Analysis was both descriptive and
inferential using the chi-square (x 2 ) to assess the occurrences of relationship between variables, and to
measure the statistical significance of the relationship between the variables.
Data Analysis
The data collected for this study were analyzed using SPSS to provide descriptive and graphical analyses,
the chi-square test, and cross tabulations of the test variables. The premise for the validity and consistency
of this study is the calculation of the P-value. We believe that a p-value of 5% is the industry threshold
probability that a sample drawn from a population is tested against the assumptions proposed by the
study.
Results
Impact of organizational communication on worker satisfaction
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On impact of organizational communication on worker satisfaction, 96.1% of the respondents, answered
‘yes’ that there is a strong impact of communication on worker satisfaction in organizations. This is
illustrated in the Table I below.
Table 1: Cross tabulation: Impact of organizational communication on worker satisfaction
Name of Organization
Impact of Communication
on worker satisfaction
Yes
No
I don’t Know
Ghana
Post
92.0%
4.0%
4.0%
Total 100 %
BOG UGMS
100.0% 95.0%
5.0%
Total
96.1%
Table 2: Chi-Square Tests of relationship between Organizational communication and worker
satisfaction
Value df Asymp. Sig. (2-sided)
Pearson Chi-Square 17.836(a) 8 .022
Likelihood Ratio 12.962 8 .113
Linear-by-Linear Association 1.696 1 .193
No of Valid Cases 81
The Chi-square test shows that there is a significant relationship between organizational communication
and worker satisfaction as shown in the chi-square table above (x 2 =17.836 df=8, p< 0.5), where the pvalue=.02
is less than the level of significance at .05.
Role of organizational communication
Respondents were asked to state in their own opinion the main role of communication in their
organizations. Thirty-seven percent (37.0%) of the respondents say communication is used to deliver
instructions; 30.9% say basic information needed for job; 9.9% say communication is used to resolve
work related issues; 9.9% say to encourage dialogue and team building, while 8.6% say communication is
used to motivate staff to work.
Frequency of communication media used by workers
Results show that the most frequent media of communication used by workers in their organizations are:
face-to-face communication 65.4%; memos and letters 12%; formal meetings 9.9%; email 4.9%;
telephone 3.7%, and informal meetings 2.5%.
Communication as an important Organizational process
Analysis of results showed that among the organizational processes, 86.4% of respondents believe that
communication is very important, while 12.3% say communication is important in the organisations and
therefore good organizational communication gives them satisfaction.
1.3%
2.6%
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Leadership Communication behavior and its Effects on workers in Organizations
Ninety-two percent (92.6%) of respondents report that leadership communication behaviour has a great
impact on employee work behavior. Thus the way and manner their bosses speak to them can affect their
job performance either negatively or positively.
Polite Communication and motivation of workers.
Ninety- Eight percent (98.8%) of the respondents agree that workers can be motivated through polite
communication especially from their supervisors, while 1.2% say impolite communication does not affect
their work behavior.
Assessment of Communications in Organizations
Respondents were asked to assess the effectiveness of their organizational communication with the
descriptors very effective, effective, somehow effective, and not effective. Results show that 40.7% of
respondents say communication is very effective; 37.0% of respondents say effective; 19.8% of
respondents say somehow effective, and 2.5% of respondents say communication in their organizations is
not effective.
Discussion
The study has shown that effective organizational communication can lead to worker satisfaction in
public sector organizations. Results emerging from the analysis show that there is a significant
relationship between effective organizational communication and worker satisfaction. This is illustrated
by the test of the hypothesis (H1) which states that ‘there is a significant relationship between effective
organizational communication and worker satisfaction’ and which is subsequently accepted.
Consistent with past research, this study found that effective communication displays a direct and positive
relationship with job satisfaction and positive commitment of employees at the organizational level as a
result of general employee satisfaction. The findings add support to the general belief that effective
organizational communication affects employees’ attitude to work as a result of communication
satisfaction (Maertz and Griffeth, 2004; Kim, 2002; Abugre, 2010)
Findings of the study also showed that good and effective communication from leadership in public
organizations can affect employees’ work behaviors in a positive manner and consequently affect
organizational work output. This finding is a response to the research question (RQ1) which sought to
find whether effective leadership communication can affect employee work behavior. Findings further
showed that effective organizational communication has a significant impact on worker satisfaction, and
this is illustrated in Table I.
An analysis of the findings also revealed that workers believe that among all the organizational processes
like employee performance appraisal, employee training and development, employee welfare system, etc.
communication is the most important of all and , effective organizational communication would aid all
other processes to be efficient. As many as 86.4% of the total respondents agreed that organizational
communication is very important and comes first to all other organizational processes. Findings also
revealed that there is effective organizational communication in the Ghanaian public sector. Findings
from the study also showed that among the organizational media of communication used in the Ghanaian
public organizations, face-to-face communication is the most used and preferred choice of workers,
second by letters and memos, and then formal organizational meetings. However, the use of email and
telephone conversation recorded very low ratings in terms of usage.
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The findings above have both theoretical and practical significance to organizational studies.
Theoretically, the results highlight some important experiences of organizational communications in
Ghanaian work organizations, stimulating more research in the area of communication in developing
countries. From a practical point of view, the paper proves that to motivate and retain employees to work
hard, effective organizational communication plays a significant role. Also the paper provides useful
guidelines for managerial practice and implications in the area of organizational communication.
Conclusion and Managerial implications
The significance of effective organizational communication is very critical in sustaining worker
satisfaction and consequently worker performance in organizations. Organizations in the public sector
will achieve their objectives if they pay proper attention to organizational communication in the
workplace. Effective organizational communication can be possible if organizational leadership improve
on their communication methods and create unimpeded access of communication media to their workers.
The consequences of poor organizational communication would result in an increased turnover rate of
employees in the organization due to a lower level of worker satisfaction.
In conclusion, despite any limitation the study represents a step in explaining how effective organizational
communication affects worker satisfaction and consequently worker productivity. The study hopes that
realistic communications from public sector organizations can help employees to increase their
productivity.
Limitation of study and future research
Though this paper has demonstrated interesting findings of the study, the paper believes that there are
some limitations inherent in the approach of the study. First, the paper thinks that three different
organizations may not be sufficient to generalize the findings particularly in a large public sector. Also 90
participants for the study appear small for a perceptual study and the paper thinks that more participants
could have been employed. The author thus encourages a replication of this study in other areas
with larger sample size numbers.
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Towards examination of the impact of organizational culture traits on banks’ performance in Ghana
Abstract
Kofi Poku, kofi_poku1@yahoo.com
Wilberforce Owusu-Ansah, woansah@gmail.com
Mariama Zachary,
Department of Marketing and Corporate Strategy, KNUST School of Business, KNUST, Ghana.
The determination of organizational culture traits has engaged the attention of researchers for many years.
Majority of existing studies on organisational culture have concentrated in developed countries. Using the
Denison’s Organizational Model, due to its integrative nature as well as its emphasis on both internal and external
factors, this study examined the nature of organizational culture traits of four selected leading banks in Ghana, each
with different classification notably, public-domestic, private-domestic, pan African and multinational banks. Using
a sample of 136 respondents selected from various departments with varied positions of the four banks, the four
main organizational culture traits namely Involvement, Consistency, Adaptability and Mission were investigated
and related to the impact on banks’ performance. The findings of the survey revealed that there were significant
differences in the organizational culture traits among the banks. Though all the surveyed banks had a culture
profile of high performing organizations, the leading organizations were the private domestic and pan-African
banks, whereas the slacking organization was the public domestic bank. In all cases, Mission was the culture trait
that dominated most of the banks.
Introduction
Over the last two decades, there have been phenomenal changes in the nature of financial institutions in
Africa. This has been as a result of the entry of new aggressive competitors in the marketplace alongside
the growing financial sophistication of customers and the greater and more efficient use of information
technology (Rhine and Christen, 2008). Until recently, banking in Ghana had suffered distress as a
consequence of the pre-reform policies of financial repression, government control of banks and the
prolonged economic crisis. Freed from regulatory restraints, competitive pressures have intensified and
weaker banks found themselves often unable to sustain their competitive market position. In order to
sustain or gain competitive edge alongside superior performance, many organisations have restructured,
merged, benchmarked, re-engineered, implemented total quality management programmes and introduced
competitive staff benefits. Despite these attempts, organisations are still asking themselves why they
have not yet seen the anticipated results or why they are not experiencing high performance. Davidson’s
(2003), analysis of sustained superior financial performance of certain organisations have attributed their
success to the specific culture of each of the respective organisation. All the change in the world cannot
provide sustainable performance unless an organisation’s culture and people are fully prepared and
aligned to support that change. Culture is often conceived as intangible, difficult to understand and
worthy of focus only if there is time. However, ability to identify the culture traits of an organisation
provides a platform for better understanding of the operations of the organisation for a better
performance. Unfortunately, most often organisational cultural issues are overlooked, while attention is
directed towards activities that may have little or no positive effect on performance. Moreover, the
quantitative studies that have been conducted on organisational culture have generally been performed in
the developed countries (Davidson, 2003) and very little has been done in developing countries such as
Ghana, especially in the banking industry.
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Challenges in the Era of Globalization
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Organisational culture has been variously defined (Kroeber and Kluckhohn, 1963; O'Reilly and Chatman,
1996; Sudarsanam, 2010). This may be because of the ambiguous nature of the concept of the
organisation (Schein, 1990) and the different understandings of what culture is (Brown (1995). The
culture of an organization can be defined as the embodiment of its collective systems, beliefs, norms,
ideologies, myths and rituals. They can motivate people and can become valuable source of efficiency
and effectiveness (Sudarsanam, 2010). A clear distinction can however, be made between those who think
of culture as a metaphor which allows for the understanding of organisations in terms of other complex
entities such as the machine and the organism (Davidson, 2003) and those who think of culture as an
objective entity, liking culture to the organisation as personality will be to the individual (Van de Post et
al, 1998). While there is no consensus on the components of organisational culture, most authors agree
that it is: holistic, inter-subjective and emotional, rather than strictly rational (Christensen, and Gordon,
1999); historically determined and needs to be taught to new members as the ‘correct way’ to perceive
things (McGregor, 1960; Schein, 1990); related to anthropological concepts (McNamara, 2000); a
collective phenomenon, socially constructed and shared by members of groups (Davis, 1984; Sergiovanni
and Corbally, 1984); primarily ideational in character, having to do with meanings, understandings,
beliefs, knowledge and other intangibles which govern peoples’ lives and behaviour patterns
(Kennedy,1982, Kotter and Heskett, 1992; Pettigrew, 1979). It is difficult to change culture since it forms
the foundation for the organisation’s management system (Ouchi (1981, Denison, 1990), provides
meaning to the members of the organisation (Denison, 1990; Hofstede et al, 1990; Trice and Beyer, 1993)
and outlasts organizational products, services, founders and leadership and all other physical attributes of
the organization (Schein (1992).
Components of Organizational Culture
Unsurprisingly, different studies of organisational culture emphasize the significance of diverse
components of culture (Davidson, 2003). Organisational culture may be classified into four forms -
networked, mercenary, fragmented and communal (Goffee and Jones, 1998); or viewed from three
perspectives - integration, differentiation and fragmentation (Martin, 1992). Other researchers such as
Wallach (1983) suggested that organisational culture types are bureaucratic, supportive and innovative,
while Kennedy Hofstede (1980) demonstrated that there were national and regional cultural groupings
that affected the behaviour of organizations. On the other hand Schein (1992) and Christensen and
Gordon (1999) saw organizational culture from three cognitive levels: practices, values and assumptions.
Deal and Kennedy (1982) measured organizations in respect of Feedback and Risk resulting in four
classifications of organizational culture: the tough-guy macho culture, the work hard/play hard culture,
the bet your company culture, and the process culture. All these classifications have made measurement
of organisational culture even more complex in that the complex phenomena, ranging from underlying
beliefs and assumptions to visible structures and practices make some observers question whether culture
can actually be “measured” in a comparative sense.
Measuring Organizational Culture
Mackenzie (1986) indicates that, because society and organizations are continually evolving, there is
really no universal paradigm or theory for examining organizational behaviour that is valid in all contexts.
What is relevant today as theory may be found wanting tomorrow in terms of describing and explaining
social phenomena. In addition, proposed theories often become problematic when they attempt to model
the actual detail and richness of real organizations because of the complexity of interrelationships
between organizational processes. According to Marcoulides and Heck (1993) researchers often lack the
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ability to isolate and measure many important organizational variables that are needed for theoretical
hypothesis testing. Most of the early studies of organisational culture relied almost exclusively on
qualitative methods. The main justification was based on the presumed inaccessibility, depth or
unconscious quality of culture (Xenikou and Furnham, 1996). Schein (1990) argues that quantitative
assessment conducted through surveys is unwise because it reflects conceptual categories and not the
respondents’ own, conceited unwarranted, generalizability. In addition, there is the possible uniqueness of
an organisation’s culture, which is such that an outsider cannot form acceptable questions or measures.
Siehl and Martin (1988) indicate that there are good reasons for using qualitative methods in investigating
organisational culture, but the advantages may be bought at a cost as the data collected usually cannot
form the basis for systematic comparisons.
Theoretical aspects of the concept of organisational culture can be tested only by comparisons across
organisations or departments. Systemic comparisons are exceedingly difficult to be made when only
qualitative data is available. Rosseau (1990) argues that different methods of measurement should be used
depending on the element of culture to be examined.
Models of Organisational Culture
Although various models of organisational culture may exist, a careful observation of the popular ones
reveal that the Denison’s Model of Culture and Effectiveness (Denison, 1990) presents the interrelations
of an organisation’s culture, its management practices, its performance and its effectiveness. It highlights
the importance of linking management practices with underlying assumptions and beliefs when studying
organisational culture and effectiveness (figure 1). This study sought to use the Denison’s Model of
Culture and Effectiveness to investigate the organisational culture traits of selected banks in Ghana, a
developing country.
The Denison’s Model of Culture
The values and beliefs of an organisation give rise to a set of management practices, which are concrete
activities usually rooted in the values of the organisation. These activities stem from and reinforce the
dominant values and beliefs of the organisation. The model posits that there are four key cultural traits:
involvement, consistency, adaptability and mission.
Figure 1. Denison’s Model of Culture and Effectiveness
Involvement Trait
Source: Davidson (2003: p 49)
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Involvement is the degree to which individuals at all levels of the organization are engaged in pursuit of
the mission and work in a collaborative manner to fulfil organizational objectives. This trait consists of
building human capability, ownership and responsibility. Organisations empower their people, build their
organizations around teams, and develop human capability at all levels (Becker, 1964; Lawler, 1996;
Likert, 1961). Executives, managers, and employees are committed to their work and feel that they own a
piece of the organization. People at all levels feel that they have at least some input into decisions that
will affect their work and that their work is directly connected to the goals of the organization (Spreitzer,
1995). When capability development is higher than empowerment, this can be an indication that the
organisation does not entrust capable employees with important decision making that impact their work.
Capable employees may feel frustrated that their skills are not being fully utilised and may leave the
organisation for better opportunities elsewhere if this is not dealt with. On the other hand, when
empowerment is higher than capability development, this is often an indication that people in the
organisation are making decisions that they are not capable of making. This can have disastrous
consequences and often happens when managers confuse empowerment with abdication. When team
development is higher than empowerment or capability development, it provides an indication that there
cannot be much substance to the team. The team is likely to go about their daily activities without a real
sense of purpose or without making a contribution to optimal organisational functioning.
Consistency Trait
Consistency is the organization's core values and the internal systems that support problem solving,
efficiency, and effectiveness at every level and across organizational boundaries. Organizations also tend
to be effective because they have “strong” cultures that are highly consistent, well coordinated, and well
integrated (Saffold, 1988). The fundamental concept is that implicit control systems, based upon
internalized values, are a more effective means of achieving coordination than external control systems
which rely on explicit rules and regulations (Pascale, 1985; Weick, 1987). Behaviour is rooted in a set of
core values, and leaders and followers are skilled at reaching agreement even when there are diverse
points of view (Block, 1991). This type of consistency is a powerful source of stability and internal
integration that results from a common mindset and a high degree of conformity (Senge, 1990). When
agreement is lower than core values and coordination, this tends to indicate that the organisation may
have good intentions, but may become unglued when conflict or differing opinions arise. During
discussions, different people might be seen talking at once or ignoring the input of others, and withdrawal
behaviours might be observed. The result is that nothing tends to get resolved and the same issues tend to
arise time and time again.
Adaptability Trait
Adaptability is the ability of the company to scan the external environment and respond to the everchanging
needs of its customers and other stakeholders. Organisations hold a system of norms and beliefs
that support the organisation’s capacity to receive, interpret and translate signals from its environment
into internal behaviour changes that increase its chances for survival and growth (Denison, 1990).
Ironically, organizations that are well integrated are often the most difficult ones to change (Kanter,
1983). Adaptable organizations are driven by their customers, take risks and learn from their mistakes,
and have capability and experience at creating change (Nadler 1998, Senge 1990, Stalk 1988). When
customer focus is higher than creating change and organisational learning, this signifies that the
organisation may be good at meeting customer demands currently, but is unlikely to be planning for
future customer requirements or leading customers to what they may want in the future. However, when
organisational learning and creating change are higher than customer focus, there is an indication that the
organisation is good at recognising best practices and creating new standards in the industry, but has
difficulty in applying their learning to their own customers.
Mission Trait
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Mission is the degree to which the organization and its members know where they are going, how they
intend to get there, and how each individual can contribute to the organization's success. Successful
organizations have a clear sense of purpose and direction that defines organizational goals and strategic
objectives. They express the vision of how the organizations will look in the future (Mintzberg, 1987;
Hamel & Prahalad, 1994). When an organization’s underlying mission changes, changes also occur in
other aspects of the organization’s culture. When strategic direction, intent and vision are higher than
goals and objectives, this indicates that the organisation may have a difficult time executing or
operationalizing its mission. There may be brilliant visionaries who have a difficult time translating
dreams into reality. When goals and objectives are higher than strategic direction, intent and vision, this
often indicates that the organisation is good at execution but lacks a real sense of direction, purpose or
long-range planning. The focus is usually a short term, bottom-line focus with little forward planning.
Thus, the four traits of Denison’s Model of Culture and Effectiveness have been expanded by Denison &
Neale (1996), Denison & Young (1999) as well as Fey & Denison (2003) to include three sub-dimensions
for each trait for a total of 12 dimensions:
Involvement trait (Attributes: capability development, team orientation, and empowerment);
Consistency trait (Attributes: core values, agreement, and coordination and integration);
Adaptability trait (Attributes: creating change, customer focus, and organizational learning);
Mission trait (Attributes: vision, strategic direction and intent, and goals and objectives).
Two of the traits, involvement and adaptability, are indicators of flexibility, openness, and
responsiveness, and were strong predictors of growth. The other two traits, consistency and mission, are
indicators of integration, direction, and vision, and were better predictors of profitability. Each of the four
traits was also significant predictors of other effectiveness criteria such as quality, employee satisfaction,
and overall performance. Mission and consistency are linked to financial performance, while involvement
and adaptability can be linked to customer satisfaction and innovation. The four traits were strong
predictors of subjectively-rated effectiveness criteria of the total sample of firms, but were strong
predictors of objective criteria such as return-on-assets and sales growth only for larger firms.
Internal/External Split versus Flexibility/Stability Split of the Profile
Denison (2000a) explained that the model in figure 1 above has a horizontal split of the profile which
distinguishes between an external focus (top half) and an internal focus (bottom half). Two of the traits,
involvement and consistency address the internal dynamics of the organisation, but do not address the
interaction of the organisation with the external environment; whereas the other two, adaptability and
mission, focus on the relationship between the organisation and the external environment. In addition,
there is the vertical split of the profile which distinguishes between a flexible organisation (left half) and a
stable organisation (right half). Involvement and adaptability emphasise an organisation’s capacity for
flexibility and change. In contrast, consistency and mission traits emphasise the organisation’s capacity
for stability and direction. Organizations that are oriented towards consistency and mission are more
likely to reduce the variety and place a larger emphasis on control and stability whiles in contrast, those
oriented towards adaptability and involvement will introduce more variety, more input and more possible
solutions to a given situation than the systems oriented who are towards a high level of consistency and a
strong sense of mission.
Research Methodology
The study was based on the Denison’s Model of Culture (see Denison 1990) because it integrates the
other models and also takes into consideration both internal and external factors. It is also the most
extensive quantitative study on corporate culture and organisational performance (Calori and Sarnin
1991). The research adopted both descriptive and explanatory research design as exemplified by
Christensen (1997) and Mouton and Marais (1994), respectively. The unit of analysis for this study was
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the banks in Ghana. The organisational culture traits were examined at organisational level by
aggregating the results of individual banks. The Denison Survey instruments were used for the data
collection from the permanent employees of four selected commercial banks with branches in Accra and
Kumasi (the two leading cities in Ghana). Out of 26 commercial banks in Ghana made up of public
domestic, private domestic, Pan-African, or multinational categories, the leading bank from each category
was purposely selected for the study. The selected banks were Ghana Commercial Bank for public
domestic, Merchant Bank for private domestic, Ecobank Bank for Pan-African, and Barclays Bank for
multinational. Fifty permanent employees were purposively selected from each of the four banks for the
study. Out of the total 200 sampled 136 responded, giving it a response rate of 68% (see Table 1). The
sample and response rate compare adequately to the original study of Denison (1990) where a minimum
of 25 respondents were required from each organisation, and then from Denison and Fey (2003) which
used 179 sample size from 497 firms. Survey questionnaire adapted the Denison Organizational Culture
Survey (Denison and Mishra 1995, Denison and Neale 1996, Denison et al. 2002) where four cultural
traits, namely involvement, adaptability, consistency and mission were used based on a five-point Likert
scale ranging from strongly disagree to strongly agree. In addition, key informant interviews were also
conducted to support the questionnaires. The data was analysed with the aid of SPSS and varied
statistical analysis performed. A limitation is that the application of the Denison’s model to the Ghanaian
environment may suffer from cultural relativity and thus reliability and validity of the findings.
Findings and Discussion
The distribution of the selected banks and their responses are illustrated in table 1. Furthermore, out of
200 questionnaires distributed among the four selected banks, 136 were retrieved, representing 68%
response rate.
Table 1: Distribution of Selected Banks and their Responses for the Study
Category Name of Bank Designation No of Responses %
Public Domestic Ghana Commercial Bank Bank A 28 20.6
Private Domestic Merchant Bank Bank D 14 10.3
Pan African Ecobank Bank Bank E 44 32.3
Multinational Barclays Bank Bank B 50 36.8
Total 136 100
Response rate 68%
Culture Profile of the Selected Banks
The mean score values of the twelve culture attributes together with the four main culture traits which
serve as indexes of the twelve attributes are presented in Table 2.
Table 2. Distribution of the Twelve Culture Variables with their Mean Scores in Banks
Public
Domestic
Private
Domestic
Pan-African Multinational
INVOLVEMENT
Empowerment 2.67 3.71 3.80 3.65
Team Orientation 3.24 4.00 3.88 3.96
Capability Development 3.31 4.05 4.20 3.88
Totals 3.07 3.92 3.96 3.83
CONSISTENCY
Core Values 3.50 4.38 4.40 4.14
Agreement 3.14 3.76 3.35 3.60
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Coordination
Integration
and 3.55 3.90 4.02 3.79
Totals
ADAPTABILITY
3.40 4.01 3.92 3.84
Creating Change 2.83 4.14 4.17 3.74
Customer Focus 3.17 3.05 3.27 3.88
Organisational Learning 3.38 4.24 3.94 3.74
Totals
MISSION
3.13 3.81 3.79 3.79
Strategic Intent 4.02 4.19 4.53 4.04
Goals and Objectives 3.71 4.14 4.30 3.79
Vision 3.52 4.19 4.14 3.84
Totals 3.75 4.17 4.32 3.89
The scores 1-5, when converted to quartiles will be 0-1.25 for the first quartile, 1.26 to 2.5 for the second,
2.6-3.5 for the third, and finally 3.6 -5 for the last quartile. The third and fourth quartiles scores are those
generally found in higher performing organisations, and first and second quartile scores are generally
found in lower performing organisations (Denison, 2000b). From the mean scores of the various banks in
Table 2 above, the banks will generally fall within the third and the fourth quartiles, indicating that their
cultural profiles are generally found in high performing organisations.
The dominant culture attribute for the Involvement culture trait among all the banks was Capability
Development. This attribute featured most prominently in the Pan African Bank (with mean score of
4.20) followed by the Private domestic bank (mean score of 4.05). In addition, Table 2 shows that
capability development was higher than empowerment in all the banks, an indication to suggest that the
organisation does not entrust capable employees with important decision making that impact their work.
The Consistency culture trait was also dominated by Core values culture attribute and this again featured
most strongly in the Pan-African bank (mean score 4.40 ) followed by the private domestic bank (mean
score 4.38) and the multinational bank (mean score 4.14 ). However, agreement culture attribute was
found to be lower than core values and coordination, an indication that the organisation may have good
intentions, but may become unglued when conflict or differing opinions arise. However, the Adaptability
culture trait for all the selected banks was dominated by two culture attributes: organisational learning
attribute from the private domestic bank (mean score 4.24) and also change creation attribute from the
Pan-African bank (mean score 4.17) and the private domestic bank (mean score 4.14). Except for the
multinational bank, customer focus for all the other banks was generally lower than creating change and
organisational learning. This signifies that the remaining banks may be good at meeting customer
demands currently, but is unlikely to be planning for future customer requirements or leading customers
to what they may want in the future. The Mission culture trait was dominated by strategic intent culture
attribute across all the selected banks. Foremost among them was the Pan African bank (mean score
4.53) followed by the private domestic bank (mean score 4.19), the multinational bank (mean score 4.04)
and the public domestic bank (mean score 4.02). But strategic direction and intent culture attributes were
higher than goals and objectives for all the banks. This suggests that the organisation may have a difficult
time executing or operationalising its mission. Thus, in general, the dominating individual culture
attributes among Ghanaian banks which create their unique culture traits are Capability development for
Involvement culture, Core values for Consistency culture, organisational learning and Creating Change
for Adaptability culture and Strategic Intent for the Mission culture trait.
When comparing the four main culture traits in each of the leading Banks in Ghana, Table 3 shows that
Mission culture trait is the leading culture among all the Banks because it has the highest mean score
values for each of the banks. This corroborates Davidson (2003) assertion that the Mission culture
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impacts the greatest number of performance indicators of an organisation. Thus, if an organisation is not
clear about its purpose, strategies and goals, and if these are not embraced by multiple levels of the
organisation, all efforts applied to other traits and/or improvement initiatives will ultimately have little
impact on the performance of the organisation. While Denison (1998) rated strong Involvement as being
the second most important culture trait, the study showed that among Banks in Ghana generally,
Consistency culture is the second dominant culture trait that followed the Mission culture. Adaptability
which was considered by Denison (1998) as the third highest leverage in his study, is however the culture
trait which is least featured in the Ghanaian banks. A look at the culture traits for each of the banks,
Table 2 revealed that the Pan African bank competed closely with the private domestic in exhibiting
essential culture traits that will make the banks successful. This is because they exhibited close mean
score results for the culture traits. In some instances the pan African bank showed higher scores as in
Mission and Involvement culture traits and in others lost to the private domestic banks in Consistency and
Adaptability culture traits. The public domestic however, possessed the least scores in the exhibition of
essential culture traits. Denison (1990) pointed out that Involvement and Consistency determine the level
of Internal Focus, while Adaptability and Mission determine the level of External Focus. Mission and
Consistency determine the level of Stability while Involvement and Adaptability determine the level of
Flexibility. Based on these categorisations, Table 2 shows that the banks that can be said to be highly
Internally and Externally focused as well as stable. However in terms of flexibility, the most flexible are
the private domestic and pan African banks, followed by the multinational bank, with the public domestic
bank scoring lowest regarding the essential organisational culture traits.
Policy Implications and Recommendations
It appears that the organisational culture traits of the public domestic bank are a cause for concern as they
are inimical to organisational growth. This is little surprising though, given that they are state-owned
enterprises (SOEs) and perhaps there is no incentive and motivation to orient their corporate culture to
make them competitive as their multi-national counterparts have responded to pressures from private
domestic and Pan-African banks. It is recommended that the SOEs be privatised if they are to be
competitive. A strong Organisational Culture that encourages the participation and involvement of its
members appears to be its most important asset (Denison 1985). This is because culture can be one of the
elements that an organisation can build its competitive advantage around, and which competitors may
have difficulty to surmount.
Selected references*
Davidson, M. G., (2003), “The Relationship Between Organisational Culture and Financial Performance
in a South African Investment Bank”, Dissertation, University of South Africa.
Davis, S. (1984). Managing corporate culture. Cambridge, MA: Ballinger
Deal, T.E. and Kennedy, A.A. (1982), Corporate cultures. Reading, MA: Addison-Wesley.
Denison, D.R. (1990), “Corporate culture and organizational effectiveness”. New York: John Wiley.
Denison, D.R. and Mishra, A.K. (1995), “Toward a theory of organizational culture and Effectiveness”,
Organization Science, 6(2), 204-223.
Denison, D.R. and Mishra, A.K. 1998. Does organizational culture have an impact on quality? A study of
culture and quality in ninety-two manufacturing organizations. Presentational to the Academy of
Management Convention, San Diego, CA., August 1998.
Denison, D.R. and Neale, W.S. 1996. Denison organizational culture survey. Ann Arbor, MI: Aviat.
Denison, D.R. and Young, J. 1999. Organizational culture and effectiveness: Validating a measurement
model. Working paper. University of Michigan Business School. Gitman,L.J. (1991). Principles of
managerial finance (6th ed.). New York: Harper Collins.
*For Full references please contact us on email: woansah@gmail.com
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Does Training and Development of staff in Financial Institutions in emerging economies make
any difference in their performances?
Abstract
James B. Abugre, jbabugre@ug.edu.gh
University of Ghana Business School, Ghana
Kester A. Adebola, debolakester@yahoo.com
University of Ghana Business School, Ghana
Competition and gaining competitive advantage in this rapidly changing world impose the need for training and
development on organizational workforce to remain relevant. This study looks at four Ghanaian Banks to see if
T&D of staff make a difference in their operations. A survey of 140 staff of the Banks using Spearman’s correlation
test showed that there is a significant relationship between T&D of staff and the performances of staff and
consequently performance of the Banks. Findings also showed that Banking staff become savvier in personal
initiatives and responsive to customer care leading to enhanced service delivery. The study proposes that T&D
should focus on the significant relationship between the outcomes and program objectives of the training and not
about the attendance and attitude of staff towards the training.
Introduction
Training and Development (T&D) have been a lingering and an important area of HR process to both
academic scholars and business practitioners due to the continuous development in the global economy
and pressures of competition. Debrah and Ofori (2005) reveal that the increasing globalization and
international competitiveness have made firms in developing countries to recognize the importance of
well-trained and professional staff in the quest for competitive advantage. There is therefore a growing
demand on managers to develop innovative skills and knowledge that would help them identify effective
strategies to meet these global challenges. According to Lundy and cowling (2004), there are pressures
facing organizations and the importance of skilled workforce in the drive for competitiveness. An
emphasis from a White Paper, ‘Helping business to win’, (1994) states that the world faces an increasing
change and global competition in which wealth is more dependent on knowledge, skills and motivation of
people. As a result, organizations are looking to improve economic performance, raise productivity and
adapt new skills patterns of work and products to new circumstances. However, Ziderman (2001) points
out that the availability of training funds and its sustainability constitute a serious problem to
organizations in many countries. Mann (1996) argues that with the huge cost on emerging training
strategies and programmes, the question is no longer whether organizations organize training for their
staff or not, but rather whether the training organized for staff is worthwhile and effective. Green (2001)
claims that T&D should focus on the significant relationship between the outcomes and programme
objectives of the training and not about the attendance and attitude of staff towards the training.
According to Abdalla et al. (1998), in the field of T&D of personnel in work organizations, most Arab
organizations are deficient in training practices because of the absence of systematic planning,
implementation and evaluations of the programmes. Al-Athari and Zairi (2002) affirm that most Banking
institutions in the Gulf States see training as an overhead and not investment and thus T&D programmes
are not conducted in a professional manner.
With the above assertions in mind, this study seeks to assess the extent to which current T&D practices
are relevant to organizational performance in the competitive Banking industry in Ghana. One major
reason for this is that there has been little attention given to the assessment of T & D programmes in
organizational studies. Many reasons have been attributed to this. For example, Blundell et al. (1999)
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states that there are numerous difficulties in measuring the returns of training of firms as it is often
difficult to obtain data on firm productivity, competitiveness and profitability. Redshaw (2000) says that
an assessment of training on organizational effectiveness and performance is really a difficult task to
determine because of the following reasons; Firstly, the impact of training may take a considerable time
before results are shown. Secondly, many other factors can also have both positive and negative influence
on T&D. Thirdly, results of T&D are very difficult to quantify as in employee satisfaction, commitment,
and change in behaviour and attitude. A major difficulty of evaluating T&D is that the cause and effect
relationships are not necessarily straightforward and hardly ever clearly defined (Yeo, 2003). Yet, other
researchers have conducted studies on T&D and have come out with findings that training courses for
staff development are positively related to organizational commitment (Birdi et al., 1997); result in
greater organizational effectiveness and increased personal growth and performance (Debrah and Ofori,
2005); result in organisational performance measurements, such as ROI, changes in productivity, quality
improvement, customer satisfaction and market share (Miller, 2002). Nevertheless, all these studies cited
above with the exception of Debrah and Ofori (2005) are Western based. The availability of theoretical
and practical gaps still persist in the literature of developing countries particularly in the Banking sector.
This paper therefore intends to fill the gap in the HR literature of financial institutions of emerging
economies, and in particular Ghanaian Banking institution by investigating the practices of training and
development and how these T&D programmes impact on the performances of the Banks in Ghana.
Therefore, we posed the research question below.
RQ 1: What are the factors that influence T&D of staff in Ghanaian Banks?
Literature Review
The continuous need for individual and organizational performance and development can be attributed to
the numerous organizational demands, including maintaining superiority in the marketplace, enhancing
employee skills and knowledge, and increasing productivity. Training and development (T&D) is one of
the most pervasive methods for enhancing the productivity of individuals and communicating
organizational goals to new personnel (Arthur et al., 2003)
According to Cole (1999), T&D for employees is an important issue that is faced by all organizations.
However, the amount and quality of T&D carried out by organizations vary enormously from one
organization to another. Factors such as degree of change in the external environment ( technological
change, new legislation), the degree of internal change (new processes or re-engineering), the availability
of suitable skills within the existing workforce, the extent to which the organization supports the idea of
internal career development, the commitment of senior management to training as an essential part of
economic success and finally, the extent to which management sees training as a motivating force in the
work place can seriously influence the quality of T&D activities (Cole, 1999).
Grober et al. (2002) identifies seven purposes of T&D, the first of which is to improve performance
where there are unsatisfactory performances by employees who are deficient in skills. Grober et al. (2002)
suggest that such employees are the main candidates for training thus, a sound training and development
programme is often instrumental in minimizing such problems. We therefore hypothesize that;
H1: There is a correlation between the Training of staff and improved work performance in the Banks.
The second purpose of T&D is to update employee skills; with rapid advancement in technology, it has
become essential that managers be well aware of changes not only in technology but also in jobs; and that
employees are updated on such changes and necessary action to be taken through Staff development so
that such advances are integrated into the organizational goals.
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The third purpose of T&D is to avoid managerial Obsolescence by keeping pace with new methods and
processes that enable employees to be more effective and therefore increase their competitive advantage
within their industry. The second and third purpose of T&D stated above gave rise to our second
hypothesis;
H2: There is a significant relationship between staff development and staff performance in the banks.
Other purposes of training and development stated by the same authors are to solve Organisational
Problems such as vague policies and standards, inventory shortages, high levels of absenteeism and
turnover, labour and management disputes which indelibly affect other functional areas of the
organisation. T&D ensures that employees have the capabilities and skills to enable them to be more
effective in the workplace, and that learning through T&D creates an understanding of how to work more
effectively as part of a team, and therefore enhancing the employee’s role in contributing to the
organization (Bloisi, 2007).
The Ghanaian Banking system
Ghana has a well-developed banking system that has been extensively used by previous
governments to finance developments in the local economy. The government in 1988 initiated
comprehensive reforms by amending the banking laws. Thus, Banks were required to maintain a
minimum capital base equivalent to 6 percent of net assets adjusted for risk and to establish
uniform accounting and auditing standards. The law also introduced limits on risk exposure to
single sector borrowers. These measures strengthened the central bank supervisory role and
enhanced the regulatory framework by improving resource mobilization and credit allocation of the
Banks. In 1990, the banking industry comprised the central bank (Bank of Ghana), three primary
commercial banks (Ghana Commercial Bank, Barclays Bank of Ghana, and Standard Chartered
Bank of Ghana), and seven secondary banks. Three merchant banks specialized in corporate
finance, advisory services, and money and capital market activities (Merchant Bank, Ecobank
Ghana, and Continental Acceptances). These and the commercial banks placed short-term deposits
with two discount houses set up to enhance the development of Ghana's domestic money market:
Consolidated Discount House and Securities Discount House, established in November 1987 and
June 1991 respectively. At the bottom of the stratum were 100 rural banks, which accounted for
only 5 percent of the banking system's total assets (countrystudies.us/ghana)
By the end of 1990, banks were able to meet the new capital adequacy requirements. In addition,
the government announced the establishment of the First Finance Company in 1991 to help
distressed but potentially viable companies to recapitalize. The company was established as part of
the financial sector adjustment program in response to requests for easier access to credit for
companies hit by the Economic Recovery Policies (ERP). The company was a joint venture
between the Bank of Ghana and the Social Security and National Insurance Trust.
Despite offering some of the highest lending rates in West Africa, Ghanaian banks enjoyed
increased business in the early 1990s because of high deposit rates. The Bank of Ghana raised its
rediscount rate in stages to around 35 percent by mid-1991, driving money market and commercial
bank interest rates well above the rate of inflation, thus making real interest rates substantially
positive. This made the banking sector very attractive and thus massive private investment in the
Ghanaian Banking Industry. The Table 1 below summarizes the number of effective operating
Banks as at 2009. Apart from performing its main duty as the Central bank, the Bank of Ghana also
carries out commercial and retail banking role.
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Table 1: A Summary of Operating Banks in Ghana as at 2009.
Access Bank Ghana
African Investment
Bank
Agricultural
Development Bank
of Ghana
AmalBank
Bank of Baroda
Barclays Bank
CAL Bank
Methodological Considerations
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
In order to achieve the objectives of this study, a quantitative study of four Ghanaian Banks made up of
two private and two public Banks were selected as case studies. Public banks in this research refers to
banks that are partly or fully owned by the Ghana government, while private banks refer simply to banks
which are multinationals with a foreign-home-country base. A simple random sample size of 140
respondents made of 35 employees each from the four banks was used. However, 99 returned usable
questionnaires representing 70.7% were used for the analysis.
Measurement of Variables
Ecobank Ghana
Fidelity Bank (Ghana)
Banque Sahélo-Saharienne
pour l'Investissement et le
Commerce (BSIC)
First Atlantic Merchant
Bank Ghana (FAMBG)
Ghana Commercial Bank
Guaranty Trust Bank
(Ghana)
HFC Bank
Intercontinental Bank
(Ghana)
International
Commercial Bank
Merchant Bank Ghana
Limited (MBG)
Metropolitan Allied
Standard Chartered Bank
Stanbic Bank
Trust Bank
A self-developed and self-administered pre-coded questionnaire was used to solicit information from
employees on the processes of T&D in the Banks, and its effect on employee performance. The
questionnaire comprised of 23 questions relating to participants’ biographical information, and the
relationship between training and development and performance. The biographical section (gender,
managerial level, position at work, age) were collected using a nominal scale with pre-coded options.
Bank
National Investment
Bank
Société Générale -
Social Security Bank
(SG-SSB)
Prudential Bank
Limited
UniBank
United Bank for Africa
UT Bank
Zenith Bank
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Knowledge of training and development comprised of 16 items and were measured using a mixture of
four and five-point scale rating instrument and measures using closed and open-ended answers.
To show the correlation between independent variables (training and development) and dependent
variables (employee performance), we used Spearman’s correlations to test for their strength of relations.
The Pearson Chi-square was also employed in analyzing and testing the significant association and crosstabulations
of the variables.
Data Analysis
The data collected for this study were analyzed using SPSS to provide descriptive and graphical analyses,
count data, Spearman’s correlation, the chi-square test, and cross tabulations of the test variables. The
premise for the validity and consistency of this study is the calculation of the P-value. The p-value is the
probability that a sample drawn from a population is tested given that the assumptions proposed by the
study are true.
Empirical results and findings
Relationship between Training and Performance
The objective of the study is to explore the relationship between T&D and Bank performance. We
therefore used the Spearman’s rho correlation to test the strength of the two constant variables (T&D and
Performance). From the Table 2 below, analysis of the results showed that there is a positive correlation
between T&D of employees and Bank performance as the Spearman rho value (.41) is positive. To further
determine the strength of the relationship between the two variables, the results showed again that a
correlation of r=1.0 indicates a perfect correlation and greater strength. The results also showed a strong
level of statistical significance of the correlation between T&D and performance at a probability value of
.000 which is by far less than .50.
Following these results, our hypothesis (H1) which states that: There is a correlation between the Training
of Bank staff and improved work performance in the Banks is significantly accepted and the null
hypothesis rejected.
Table 2: Spearman’s rho Correlation
Spearman's rho Relevance of Training Correlation Coefficient 1.000
courses to current Job
.411
Schedules
**
Sig. (2-tailed) . .000
N 99 99
Job Performance of Correlation Coefficient .411
majority of trained
employees
** 1.000
Sig. (2-tailed) .000 .
**. Correlation is significant at the 0.01 level (2-tailed).
Relationship between Staff Development and Performance
N 99 99
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Table 3 below shows Chi-square results of the relationship between staff development and staff
performance in the Banks. Our second hypothesis was stated as: H2: There is a significant relationship
between staff development and staff performance in the banks.
From the Chi-square results in Table 3, our test results prove that there is a significant relationship
between staff development and staff performance in the Banks. This shows that our second hypothesis is
accepted while the Null hypothesis is rejected. This is expressed by the Chi-square test value of
(x 2 =17.165 df=4, p< 0.5), where the p-value=.02 is less than the level of significance at .05.
Table 3: Chi-Square Tests of relationship between staff Development and staff performance.
Value Df Asymp. Sig. (2-sided)
Pearson Chi-Square 17.165 a 4 .002
Likelihood Ratio 11.789 4 .019
Linear-by-Linear Association 2.038 1 .153
N of Valid Cases 99
Training and Employee Skills and Development
The study also sought to know if there was a relationship between trained employees and skills
development. Results indicated that as much as 84.9% respondents of private banks and 73.9% of
respondents of public banks believed that training has an impact on employee skills and development.
A further question to determine how training of employees impacted skills development of the Bank staff
yielded the following responses: increase in personal development and motivation, training enables
employees to become more informed about new developments, employees become more knowledgeable
in their area of operations, employees are equipped with the needed skills to perform better, training helps
develop employees to be able to speed up work processes, and also helps employees to be fast and
confident in their work.
Effects of Training on Workers’ Performance
Most respondents in the study 90.6% and 84.8% in both private and public banks respectively agreed that
training affects workers’ performance in the Banks. Respondents also affirmed that the effects of training
ranged from enhanced Job performance and efficiency, builds confidence, motivation to perform on the
job, greater insight into job role and responsibility, introduces new perspectives, current trends and best
practices on the job and the provision of solutions to contemporary problems facing the Banking industry.
Table 4: Cross-tabulation of type of Bank and the impact of training on Bank performance
Type of Bank NA % Yes % No Total %
Does Training
Private Bank 1 1.9 48 90.6 4 7.6 53
Public Bank 2 4.4 39 84.8 5 10.9 46
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Impact on
Performance?
Total 3 6.3 80 175.4 8 18.5 99
Results also showed that many of the respondents (88.6% and 87% of both the private and public banks
respectively) agreed that their training courses were relevant to their current job schedules. Also, majority
of the respondents 94.4% and 86.9% of private and public banks respectively believed that all the training
programmes they participated were relevant to their institutional goals.
Factors Influencing T&D by the Banks
Respondents were asked to indicate the factors that influenced the Banks to embark on T&D programmes.
Results showed that meeting future responsibilities of the Banks (79.3%, 78.3%); and challenges of new
technology in the Banking industry (71.7%, 67.4%) in both the private and public bank respectively were
the major factors that influenced the selection of workers for training and development programmes.
Other factors were: Personal deficiencies (41.5%), quest for on-the job creativity (50%), innovation
(49.1%), and worker motivation were rated 35.9%, 32.6% in both private and public banks respectively.
Influence of training on performance Indices
The study also sought to explore some performance indices in the banking industry following employees’
T&D programmes. Results showed that Reliability of employees scored (84.8%), trust worthiness
(73.3%), Openness to customers (80.4%), Responsiveness to co-workers (73.9%), Innovativeness
(73.9%), friendliness and teamwork (69.6%) and personal initiative (76.1%).
How training and development can really benefit employees’ job performance
Opinions of respondents were sought on how T&D could really improve employees’ skills and
consequently affect Banking performance. Results indicated that proper training needs analysis (26.2%),
capacity building and employee empowerment (12.2%), target setting, monitoring and evaluation
(10.3%), appropriateness of training resources for better outcomes (3.7%), increase in time period for
training (2.8%), involving employees in decision making on training matters (1.9%), adequate
remuneration (1.9%), On-the job-training (1.9%), learning best practices (1.9%), Motivation (1.9%),
quality of job Improvement (0.9%) and problem solving (0.9%).
Discussion of study findings
The objective of this study was to find out if training and development (T&D) make any difference in the
performance of the Banking institutions in a developing country. We tried to build on the evidence of the
importance of T&D to Organizational performance from the previous studies that we used for our
literature (Birdi et al., 1997; Cole, 1999; Grober et al., 2002; Arthur et al., 2003; Bloisi, 2007). Findings
revealed that T&D play a crucial role in the entrepreneurial development and skills acquisition of the
individual staff leading to organizational performance. The principal findings of this study support Grober
et al., (2002) where our hypotheses (H1 and H2) were derived. Our H1 sought to establish the significant
correlation between T&D of the Banking staff and the performance of the Banks, and our H2 sought to
determine the relationship between staff development and staff performance. Both hypotheses were
supported empirically and therefore giving credence to the evidence of Grober et al. (2002) who argued
that the main purpose of T&D is to improve performances of employees at work and also to help avoid
managerial obsolescence by keeping pace with new methods of work skills that enable staff to be more
effective in their work. The extent to which the study findings strongly support T&D in the Banking
industry in Ghana is confirmed by 90.6% and 84.8% of respondents in both private and public banks
respectively.
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Our study results also ascertained the benefits that employees acquire after T&D. The benefits are that
employees become more reliable on their duties (84.8%), trust worthiness (73.3%), Openness to
customers (80.4%), Responsiveness to co-workers (73.9%), Innovativeness (73.9%), friendliness and
teamwork (69.6%) and increase in personal initiative (76.1%). These benefits according to respondents
have a positive impact on service delivery in the Banks. These revelations indeed found support for the
assertion that T&D ensures that employees have the capabilities and skills to enable them to be more
effective in the workplace, and that learning through T&D creates an understanding of how to work more
effectively as part of a team, and therefore enhancing the employee’s role in contributing to the
organization (Bloisi, 2007).
In addition, our current study showed that most Banks in Ghana follow a standard pattern in determining
T&D courses for their staff. Among the criteria that the Banks use in the determination of T&D
programmes are: T&D programmes are organized to meet the challenges of the latest Banking
technology, to reduce or replenish skill deficiencies in staff, to train new staff on-the job, train staff to
improve their innovative skills, and to motivate workers. These findings give answers to our research
question (RQ 1) which stated that: ‘What are the factors that influence T&D in Ghanaian Banks?’
The study findings also showed that respondents were candid to give their opinions on how T&D could
effectively enhance the performances of banks in Ghana. Respondents surveyed believed that appropriate
training needs analysis, capacity building and employee empowerment, target setting for staff, monitoring
and evaluation, On-the job-training, appropriateness of training resources; learning best practices of
Banking operations, increase in time period for training, and involving employees on training decisions
making, motivation of Bank staff and improvement on quality of job were some of the key setbacks of the
Ghanaian banks.
Conclusion and Implications of the Study
The study has shown the important relationship between T&D and bank performance. The study thus call
for a serious look at the operations of the Ghanaian banking institutions as suggested by Green (2001)
who emphasized that T&D should focus on the significant relationship between the outcomes and
programme objectives of the training than merely looking at the attendance and attitude of staff towards
training. The results have both practical and theoretical implications. From a practical point of view, this
study clearly indicates the need for managers of the various Banks to pay attention to the changing trends
(Best practices) in the Banking industry by focusing on the HR demands of the Banks. This can be
effective by involving staff in the planning and implementation of T&D programmes. Theoretically, the
study has contributed to the literature of HR practice in emerging economies.
Limitation of study and future research
Many directions for further research arise from the limitations of the findings of this study. In the first
place, we need to understand the extent to which the Banks involve their staff in T&D activities. Secondly
a comparative analysis of the effectiveness of T&D between public and private banks would offer a better
understanding of the operations of the Banks in emerging economies. The replication of this study in a
different developing economy may provide interesting evidence therein.
References
Abdalla, H., Maghrabi, A., and Raggad, B. (1998). Assessing the perceptions of human resource
managers toward nepotism: A cross-cultural study. International Journal of Manpower,19(8),554-570.
Al-Athari, A., and Zairi, M. (2002). “Training evaluation: An empirical study in Kuwait.” Journal of
European Industrial Training, 26 (5), 241-251.
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Arthur, W. (Jr), Bennett, W. (Jr), Eden, P. and Bell, S. (2003) “Effectiveness of Training in
Organizations: A Meta-Analysis of Design and Evaluation Features”, Journal of Applied Psychology,
88,( 2), 234–245.
Berry, L. (1994), Country study for US Congress Library, Accessed on February 15, 2010 from
http://countrystudies.us/Ghana/74.htm
Birdi, K., Allen, C., and Warr, P. (1997), “Correlates and perceived outcomes of four types of employee
development activity”, Journal of Applied Psychology, 82(6), 845-57.
Bloisi, W. (2007). An Introduction to Human Resource Management, Berkshire, McGraw- Hill.
Cole, G. (1999). Personnel Management: theory and Practice, London, Ashford Colour Press.
Debrah, Y. A. And Ofori, G. (2005), “Emerging Managerial Competencies of Professionals in the
Tanzanian construction industry”, Int. Journal of HRM,16 (8),1399-1414.
Green, E. (2001). The influence of individual and work environment characteristics on trainee motivation
and training effectiveness measures. Unpublished Doctoral Dissertation, North Carolina State University,
Raleigh, NC.
Grober, P., Warnich, S., Carrell, M., Elbert, N., and Hatfield, R. (2002). Human Resource Management
in South Africa, 2ed. Thompson learning.
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Learning.
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20(9), 14-20.
Miller, L., (2002). Perception of training and non-training managers of organisational impact measures
based on design intent. Unpublished Doctoral Dissertation, North Carolina Stat University.
Redshaw, B. (2000). “Evaluating organisational effectiveness.” Industrial and Commercial Training,
32(7), 245-248.
Yeo, R. (2003). “Linking organisational learning to organisational performance and success: Singapore
case studies.” Leadership and Organisation Development Journal, 24(2), 70-83.
World Bank Report (2000)
Ziderman, A. (2001). Financing vocational training to meet policy objectives: Sub- Sahara Africa.
Washington, D.C.: The World Bank.
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Transformation within South African Police Service in the Era of Globalization: The case of
Implementation of the Employment Equity Act, 1998 (Act 55 of 1998)
Mapome J Mohajane, MohajaneM@saps.org.za
Career Management, HR Monitoring and Evaluation
South African Police Service
John Ntshaupe Molepo, jnmolepo@magicmail.co.za/SAAPAM@tut.ac.za
Department of Public Management
Tshwane University of Technology
Josephine E Ranngu, rannguje@tut.ac.za
Department of Public Management
Tshwane University of Technology
Transformation is a broad concept. Its usage in this paper is circumscribed to change of the South African Police
Service (SAPS) workforce profile as required in terms of the Employment Equity Act, 1998(Act 55 of 1998)
promulgated to give effect to the constitutional provision of equity relating to human resource management
practises. Following this legislative intervention the question that this paper further asks is whether the SAPS
complement reflects representatively in terms of the demographic profile of the country. To answer this question the
paper analyses the human resource management practices within the SAPS to determine the extent of their
contribution towards the realization of the objectives of Employment Equity Act. The results of such analysis are
used in answering the question that this paper asks. Its aim is to assess the transformation of the workforce profile
of South Africa Police Services to realize the constitutional imperative of ensuring that the national labor market is
representative of the South Africa demography.
Introduction
According to Ajani (2005; 3) the history of apartheid in South Africa is well documented. The effect it
had within organisations was that individuals from previously disadvantaged groups, namely; blacks ,
Africans, coloureds and Indians, women and people with disabilities were denied the opportunity to
contribute constructively to the development of the organisation. These people who were marginalised
during the apartheid era had to compete in a globalisation community, and these regularities were to be
addressed. The South African Police Services with its history of white male dominant and from apartheid
orientation it had to transform itself, the transformation within the South African Police Service its slowly
integrating the employment equity as their measures in promoting the previously disadvantaged,
furthermore, the senior management must foresee that the given mandate provided by the Constitution is
attained in order to achieve set objectives.
The paper seek to identify possible barriers that should be overcome to ensure that transformation in the
South African Police Service is attained and to establish the progress that has been made from the year
2000 until 2009. The paper stresses the importance of implementation of Employment Equity Act using
affirmative action as a strategy to ensure the realisation of the set objectives. The papers present
comparative analysis on the progress made by the SAPS to ensure Representivity in the following levels:
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Senior Management, Middle Management, Junior Management and Production Core. Furthermore the
paper begins with an overview legislative framework.
Statistics are used for comparative analysis to quantify the transformation progress in relation to the
implementation of the Employment Equity Act in the South Africa Police Service, furthermore,
graphically presentation are depicted to show the progress made thus far. The final part of the paper
focuses on thee challenges which were encountered during the implementation of the employment equity
act.
Legislative Framework
Constitution of the Republic of South Africa
The Constitution of the Republic of South Africa, 1996 is the supreme law of the country. It provides a
clear direction to all matters that are related to transformation within the entire public service, including
the South African Police Service (SAPS). Section 9(2) of the Constitution states that equality includes the
full and equal enjoyment of all rights and freedoms. To promote the achievement of equality, legislative
and other measures designed to protect or advance persons or categories of persons, disadvantaged by
unfair discrimination may be taken. Section 9(2) of the 1996 Constitution should be a point of departure
in the South African public service to ensure that the constitutional mandate prevails in the appointment
of all representation candidates to management positions (Mello& Phago: 146). The legislation and other
policies can be used to further the objective of the section 9(2) of the 1996 Constitution.
Employment Equity Act, 1998(Act 55of 1998)
An Employment Equity (EE) was introduced in Canada in 1984 by Judge Rosalie Abella in her Royal
Commission Report on Discrimination in Employment against women, racial minorities, aboriginals and
people with disabilities (Thomas and Robertshaw 1991:1)The Employment Equity Act,1998(Act of 1998)
aims to promote the constitutional right of equality and the exercise of true democracy, eliminate the
unfair discrimination in employment, ensuring the implementation of employment equity to redress the
effects of discrimination, achieve a diverse workforce broadly representative of our people, and to
promote economic development and efficiency in the workforce. However equity is not possible if the
same gender is competing for the same position, it is clear that measures be established in promoting
equity in the workforce.
According to Ajani (2005:9) employment equity legislation in the international situation generally
contains two main components: removing unfair discrimination and affirmative action to redress
injustices of the past. It is against this background for the racially male and white’s dominant SAPS
embrace the Act to accelerate transformation within its levels of employment.
White Paper on Human Resource Management
The post-1994 Public Service faces enormous challenges, both in terms of its own transformation, and in
terms of the transformation of the services which it provides to the people of South Africa. These
challenges are being tackled through a comprehensive programme of policy initiatives underpinned by
progressive legislative changes. The initiatives will achieve a fundamental managerial shift from a
centrally controlled, process driven Public Service to a service which -l is representative of all the people
of South Africa’s treats all public servants as a valuable resource; is focused on service delivery
outcomes; “ assigns managerial responsibility for results, and for the resources consumed in producing
them, to the lowest practicable level; holds public servants accountable for their actions; and conducts its
business professionally, transparently and ethically. In order to achieve the aim of the above recruitment,
promotions and senior managerial processes have to conform to the overall transformation processes of
the South African Police Services.
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Challenges in the Era of Globalization
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White Paper on Transformation of Public Service
White Paper on Transformation of Public Service (WPTPS) aims to address the need for a specific policy
and criteria for the transforming (public) service delivery. It also provides the policy and criteria
(principles) which would enable national departments and provincial administrations to develop
departmental service delivery strategies. Departments and provincial administrations will need to develop
the strategies to promote continuous improvement in the quantity, quality and equity of service provision.
In order to ensure that service delivery is constantly improved, national departments and provincial
administrations will be required to outline their specific short, medium and long term goals for service
provision. They will also be required to provide annual and five yearly targets for the delivery of specific
services, and will be required to report to Parliament on their achievements. A transformed South Africa
public service will be judged by one criterion above all: its effectiveness in delivering services which
meet the basic needs of all South African citizens. Public services are not a privilege in a civilised and
democratic society: they are a legitimate expectation. That is why meeting the basic needs of all citizens
is one of the key programmes of the Government’s Reconstruction and Development programme.
Affirmative Action
The elements of affirmative action were adopted in a number of countries, such as Malaysia, Canada,
Zimbabwe Australia and the United States of America (Charlton and van Niekerk, 1998:164). The act
seeks to develop a conceptual framework for the management of communication about Employment
Equity as a transformational change phenomenon in the South Africa. Affirmative Action measures
designed to ensure that suitably qualified people from designated groups have equal employment
opportunities and are equitably represented in all occupational categories and levels in the workforce f a
designated employer. Furthermore it articulates, a designated employer must prepare and implement an
employment equity plan which will achieve reasonable progress towards employment equity in the
employer’s workforce.
Affirmative Programmes in the SAPS to advance EE (adapted from SAPS Section 21 report for the
period 1 October 2008 to 30 September 2009)
The SAPS developed and registered Affirmative Action programmes in terms of Section 15 of the
Employment Equity Act 55 of 1998 for Business Units that were not representative in an effort to
diversify these Business Units and to provide excellence in service delivery to a diverse population.
Programmes were developed for the Business Units:
• Visible Policing
An AA programme was developed to enhance representivity amongst pilots at the SAPS Air Wing.
Another AA programme was developed to enhance female representivity amongst the operators at the
SAPS Special Task Force.
• Internal Audit
8 Members from the designated groups were placed on a 1 year internship programme in order to enhance
capacity and representivity at this Business Unit. All 8 members qualified and are performing various
auditing functions at the Internal Audit Component, Head Office.
• K53 Driving Skills Training
The South African Police Service developed an AA Programme for K53 driving skills in order to enhance
the driving ability of serving reservists and to enable them to obtain a valid drivers licence. 94 of the 108
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Proceedings of the 12th Annual Conference © 2011 IAABD
reservists successfully completed the programme and were enlisted within the SAPS as constables on
successful completion of their basic training at the SAPS Colleges
• Information & System Management
25 members from designated groups were placed on a 1 year internship programme in order to enhance
capacity and representivity at this Business unit. 16 members qualified were placed within this Business
Unit to perform various information system related functions at Head Office.
Progress made by South African Police Service
South African Police Service (SAPS) has historical background of black marginalisation within its ranks.
The depicted tabular and graphic analysis for the period 2000 to 2009 showed the progress o
transformation with the implementation of Employment Equity Act
Salary
Table 1: Workforce Profile 2000/03/31
Male
Female
Total
Level African Indian Coloured African Indian Coloured
White
White
16 1 0 0 0 0 0 0 0 1
15 5 2 1 1 0 1 0 1 20
14 23 4 7 48 0 0 1 2 85
13 90 21 15 201 4 3 2 25 361
12 88 25 16 416 11 2 1 50 609
11 68 18 21 123 11 2 5 24 272
10 146 49 17 900 10 5 2 161 1290
9 150 53 22 518 15 7 0 118 883
8 1733 534 352 3495 226 108 58 1126 7632
7 11868 1130 1987 8651 1640 201 344 2829 28650
6 34796 1217 3975 8165 2783 243 570 4134 55883
5 3479 125 329 719 812 101 155 1682 7402
4 4207 218 406 392 600 183 207 1801 8014
3 821 110 212 180 1148 79 368 791 3709
2 4032 23 570 50 2185 20 484 116 7480
1 712 19 131 76 225 2 89 18 1272
Total 62219 3548 8061 23944 9670 957 2286 12878 123563
Table 2: Workforce Profile 2009/09/31
Salary
Level
Male
African Indian Coloured
White
Female
African Indian Coloured
White
Total
16 1 0 0 0 0 0 0 0 1
15 13 2 3 4 3 0 0 1 26
14 51 7 5 24 12 0 0 7 106
13 194 27 35 130 65 8 9 37 505
12 777 127 127 491 236 36 40 161 1995
11 1 0 0 0 3 0 0 1 5
10 2076 220 305 1187 871 66 136 545 5406
9 1 0 0 1 4 0 1 0 7
8 5637 956 956 2413 2131 151 420 1331 13546
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7 28436 3562 3562 8266 3048 434 630 3426 49375
6 7539 1230 1230 1013 1996 184 553 2293 15198
5 27325 4478 4478 879 12299 218 2008 1201 48903
4 1540 209 209 79 2970 117 533 369 5864
3 11249 1055 1055 293 11114 212 1652 637 26424
2 4043 400 400 64 1644 9 200 51 6447
1 6747 869 869 71 3397 19 333 28 11561
Total 95630 13234 13234 14918 39793 1454 6515 10088 185369
Table 3
WORKFORCE PROFILE
Level
Black
March September
Target
2000 2009
2010
38.54% 68.18% 90.40%
White
March September
Target
2000 2009
2010
61.46% 31.82% 9.60%
Senior
Management
Middle
Management
24.36% 67.81% 90.40% 75.64% 32.19% 9.60%
Junior
Management
39.45% 72.36% 90.40% 60.55% 27.64% 9.60%
Production
Core
73.66% 88.60% 90.40% 26.34% 11.40% 9.60%
Overall 70.20% 86.51% 90.40% 29.80% 13.49% 9.60%
Figure I Figure II
Black vs White Blacks vs White
Senior Management (13-16) Middle Management (9-12)
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Figure III Figure IV
Black vs White Black vs White
Junior Management (8) Production Core (1-7)
Adopted [South African Police Service, Employment Equity Section 21 report for 2008 to 2009]
Research Methodology and Design
The researcher adopted a qualitative approach for the understanding of the implementation of
transformation within South African Police Service (SAPS) through the Employment Equity. Descriptive
and exploratory techniques were used to understand how the employment equity was implemented
including the challenges thereof. The study focused on the following management levels of the South
African Police Service: Senior Management, Middle Management, Junior Management and Production
Core who are all mainly affected by the (EE).A sample of 800 participants was chosen from the different
levels of management using purposive sampling technique.
Data collection
Semi structured questionnaires and focused group interviews were used during the collection of Data for
the study. For the purpose of this paper, the existing literature review was used to collect data. The
primary data namely South African Police Service (SAPS) Section 21 report was used. Questionnaires
consisted of 30 items and presented in the form of a five point likert scale. All the research protocol was
observed and the necessary invitation and consent from the interviewees were extended and obtained.
Research Results
From the interviews with the number of South African Police Service focus group, it was clear that strides
have been made with regard to transformation of the South African Police Services through the
implementation of Equity Act and Affirmative Action programmes to the Business Units that never
represented the demographics of the country. The result of the study is to some degree consistent with the
comparison of the workforce profile for the period 2000 to 2009. The result demonstrates commitments
and compliance to the objectives of the Employment Equity Act.
Conclusion and implications
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The goal of this research was to investigate specific transformation within the South African Police
Service (SAPS) with the implementation of the Employment Equity Act. The research conducted clearly
outlines that since 2000 until 2009 transformation process has been expedited. The successful
implementation of the employment equity plan was based on equal dignity and respect for all. The South
African Police Service with its huge workforce profile of 185369 personnel was able to adhere to a single
employment equity plan. Therefore South African Police Service must increase their human resource
capacity in order to achieve their set objectives.
The implications of the employment equity plan resulted in linking of the implementation of the
employment equity programmes to the performance agreement of every manager. Any manager who fails
or obstruct to implement any aspects of the Act or any process that is aimed at promoting the objectives
of the equality will be held accountable and disciplinary regulations may be used.
References
Ajani, Y (2005).”A Comparative Study of Employment Equity at the University of Limpopo and the
University of Venda for Science and Technology. Unpublished Masters Dissertation: University of
Limpopo
Charlton, D.D and N. van Niekerk (1998).” Affirming Action. 2 nd ed. Kenwyn: Juta & Co.
Constitution of the Republic of South Africa. 1996. Pretoria: Government Printer.
Employment Equity Act No. 55 of 1998. Department of Labour. Pretoria: Government Printer.
Mello, D.M and K.G Phago (2007). “Affirming Women to Managerial Positions in the South African
Public Service.” South African Journal for Political Science and Public Administration. 26(2) 145-158
South African Police Service Employment Equity Section 21. Report 2008-2009. Department of Police.
Pretoria: Government Printer
Thomas, A and D. Robertshaw (1999). “Achieving employment equity: A guide to effective strategies.
Randburg: Knowledge Resources
White paper on Affirmative Action in the Public Service. 1998. Department of Public Administration and
Service. Pretoria: Government Printer
White paper on Human Resource Management in the Public Service. 1998. Department of Public
Administration and Service. Pretoria: Government Printer
White paper on the Transformation of the Public Service. 1995. Department of Public Administration and
Service. Pretoria: Government Printer
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Perceived Organizational Justice, Mutual Commitment and the Human Factor in Ghana and India
Moses Acquaah, acquaah@uncg.edu
University of North Carolina at Greensboro, USA
Grishma S. Kulkarni, grishma1384@gmail.com
Mukesh Patel School of Technology Management & Engineering, Mumbai, India,
Abstract
This study examines the influence of perceived procedural and interactional justice and mutual commitment on the
human factor in Ghana and India. The study further explores how mutual commitment mediates the relationship
between procedural and interactional justice, and the human factor. The findings indicate that both procedural and
interactional justice influences to mutual commitment, which is in turn related to the human factor in the two
countries. While mutual commitment mediates the relationship between procedural and interactional justice in the
two countries, the findings from Ghana is different from that from India. We discuss the implications of our findings.
Introduction
The ability of any organization to achieve its goals, in this global business environment, critically depends
on the knowledge, skills and competencies of its employees, in addition to the proactive work attitudes
and behaviors of its employees. An organization’s capacity to use the knowledge, skills, and
competencies embedded in its employees, in addition to engendering supportive work attitudes and
behaviors from the employees would enable it to create competitive advantage. The combination of the
knowledge, skills, competencies and proactive work attitudes and behavioral qualities of employees has
been termed the human factor (HF) by Adjibolooso (1995). Since Adjibolooso (1995) formalized the HF
construct several studies have appealed to the lack of it to explain low productivity, absence of progress
and development, corruption, unethical behaviors and the dearth of success of organizations, institutions
and nations in Africa and other developing countries (e.g., Adjibolooso, 2005; Adu-Febiri, 1996; Ofori-
Amoah, 1996). However, most of these studies are conceptual in nature and do not explore the causes of
the lack of HF in organizations and what organizations should be done to develop and elicit relevant HF
qualities and behaviors from their employees in order to increase productivity and achieve their strategic
goals.
The purpose of this paper is to address this gap by empirically examining the antecedents of the HF in
two economies from the developing world – Ghana and India. We use data from these two economies
from two different continents – Africa and Asia respectively – because the attitudes and behavior of
employees at the workplace is partially influenced by the socio-cultural and organizational environment
in which the work is performed (Gyekye and Salminen, 2009). Thus we explore whether employees
perceptions of what influences the HF is the same in the two sociocultural environments. This is because
both sub-Saharan African and Asian societies are considered to rank high on collectivism and power
distance per Hofstede’s (1980) cultural dimensions, implying that sub-Saharan African and Asian cultures
are generally similar. Several studies from the Western world and Asia have shown that perceived
organizational justice (POJ) is positively related to perceived organizational commitment (POC),
perceived organizational support (POS) and various work-related outcomes including turnover and
organizational citizenship behaviors (OCB) (e.g., Lavelle et al., 2009). Therefore we posit that the HF
will be influenced by POJ, and the reciprocity involved in employees’ perception of the support they
receive from their organizations and the commitment they in turn demonstrate towards their organization
(i.e., mutual commitment (MC) between employees and organizations). Furthermore, we examine MC not
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Edited by Emmanuel Obuah
only as directly influencing employee perceptions of the HF but also mediating the relationship between
POJ and HF.
This study contributes to the literature in the following ways: (1). it explore the antecedents of the HF in
developing economies environments in Sub-Saharan Africa and Asia; (2) it extends the study of
organizational behavior issues at the workplace in developing economies to the sub-Saharan African
context (Ghana), and explore how it affects the HF when compared with an Asian context – India; and (3)
it focus on MC, a combination of the support they receive from their organizations and their commitment
to the organization, instead of organizational support and commitment separately, and examines how MC
mediates the relationship between POJ and HF.
The Socio-Cultural Context of Ghana and India
Although Ghana and India are both emerging economies, they are relatively different from one another
from an economic and socio-cultural perspective. They, thus present the diversity in the economic and
socio-cultural environments needed to examine employees’ perception of POJ, MC and the HF. Ghana is
a relatively small country in West Africa with a population of about 24.3 million people (2010 estimate),
real gross domestic product (GDP) growth rate of 4.1% (2009 estimate), and a GDP per capita of
US$1500.00 (Central Intelligence Agency (CIA), 2010a). Ghana is seen as a model country and a
budding success story in sub-Saharan Africa with regards to the success of its economic reforms. India,
on the other hand, is the second most populous country in the world with a population of about 1.17
billion people (2010 estimate). India is also one of the fastest growing economies in the world and second
only to China in Asia with a 2009 estimated real GDP growth rate of 7.4% and a GDP per capita of
US$3100.00 (CIA, 2010b).
The socio-cultural values of a nation influence the perceptions and work-related behaviors of employees.
Although, both Ghana and India are multicultural and multi-ethnic societies, the cultural differences
between Ghana and India could be explained by Hofstede’s (1980) national cultural dimensions of
individualism-collectivism, power distance, uncertainty avoidance, and masculinity-feminism. It has been
argued that the socio-cultural values of a society that is embedded in individualism-collectivism and
power distance influences the work culture of organizations and work-related behaviors of employees
(Mendonca and Kanungo, 1994). Hofstede (1980) included India and West Africa (Ghana, Nigeria, and
Sierra Leone) in his sample of nations. Hofstede (1980) classified the West Africa region as high on
collectivism, high on power distance, medium to high on uncertainty avoidance, and medium to high on
masculinity. Indeed, Ghana is a nation with strong traditional and cultural values. The traditional society
which is collectivistic is characterized by a deeply imbedded communal bond and interpersonal relations.
Moreover, it is a male-dominated and hierarchical society with high levels of both masculinity and power
distance. Status, prestige, and position are important; and respect for seniority, authority, hierarchy and
the elderly are exacted (Gyekye and Salminen, 2009). Thus, the work environment in Ghana is
characterized by hierarchical structures, high levels of centralization, gender inequality, submission to
authority and seniority, and low levels of delegation and involvement in decision-making (Gyekye and
Salminen, 2009).
Hofstede (1980) further classified India’s national culture as being medium on collectivism, high on
power distance, low on uncertainty avoidance and high on masculinity. Thus, extant cross-cultural
management research have argued that India national culture is complex and is a “cultural island”
because, as a high power distance nation, it should be clustered with strong uncertainty avoidance nations,
but it is low on uncertainty avoidance (Mathur et al., 2001). The traditional social structure of India is also
considered to be hierarchical in nature and it is influenced by religion (e.g., Hinduism and Buddhism) and
the caste system, and emphasizes respect for superiors and authority figures such as elders, supervisors,
and managers (Budhwar et al., 2008). Furthermore, Indian culture places a strong emphasis on
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collectivism, and is a male-dominated society with a strong preference for authoritative leadership,
centralization of power and control at the top, and lack of the delegation of decision making authority
(Kakar, 1971).
Conceptual background and Hypotheses
Human Factor
According to Adjibolosoo (1995), the HF consists of the knowledge base, skills, expertise, capabilities,
and the attitudes and behaviors of employees that are leveraged for the betterment of organizations and
nations. Adjibolooso (1995) argues that the HF does not refer to the mere development of human
resources and the acquisition of human capital through education and training but also the human ability
to effectively utilize and apply the acquired knowledge, skills and information, in addition to the use of
positive work attitudes and behaviors to successfully accomplish set goals and objectives. Adjibolosoo
(1995, p. 33-38) categorizes the HF into six dimensions: spiritual capital, moral capital, human capital,
aesthetic capital, human abilities, and human potential. Spiritual capital refers to the aspects of human
personality that is usually in tune with the universal laws and principles of human life. Moral capital
refers to the habits and attitudes of the human personality that are based on universal principles regarding
right or wrong. It refers to individuals’ conformity to ethical principles and standards of conduct.
Aesthetic capital refers to the possession of a strong sense of and love for beauty. It includes a strong
passion for imagination and creativity. Human capital refers to the possession of know-how and acquired
qualifications and knowledge, and intelligence. Human abilities refer to the capability or capacity of
individuals’ to effectively and efficiently utilize and apply the acquired human capital. Human potentials
refer to the human talents that may or may not be harnessed and employed for human utilization. These
may be referred to as yet undeveloped and unused dimensions of HF. In this study we do not include
spiritual capital and human potentials because of our concerns with their measurement.
Perceived Organizational Justice
POJ refers to employees’ perception of fairness as it relates to the workplace (Greenberg and Colquitt,
2006; Moorman, 1991). It is the degree to which fair procedures and processes exist and are adhered to in
an organization, and the extent to which individuals perceive their leaders as being fair and sincere and
having logic or rational for what they do. POJ has been conceptualized and operationalized primarily into
three types: distributional, procedural and interactional (Moorman, 1991). Distributive justice refers to the
perceived fairness of the distribution of outcomes (e.g., pay raises, promotions, and selection for further
studies/training) in an organization (Moorman, 1991). Procedural justice refers to the perceived fairness
with which allocation decisions regarding the distribution of outcomes are made in an organization
(Konovsky, 2000). Interactional justice refers to the quality of interpersonal treatment an individual
receives from an authority figure during the enactment of procedures (Bies and Moag, 1986; Coyle-
Shapiro et al, 2004). Although interactional justice has further been categorized into informational justice
and interpersonal justice (Greenberg, 1993), but we will focus on interactional justice in this study.
Mutual Commitment
The concept of mutual commitment (MC) derives from covenantal relationships. Covenantal relationship
in an organization captures the reciprocal commitment in the relationship between an employee and
his/her organization, in addition to the shared values, involvement and mutual trust that exist among them
(Graham and Organ, 1993). Thus covenantal relationships combine elements of the concepts of
employees’ POS and POC. POS describes the extent to which employees perceive that their organization
values their contributions and cares about their well-being (Eisenberger et al., 1986). Organizational
support theory proposes that “employees develop global beliefs concerning the extent to which the
organization values their contribution and cares about their well-being” (Eisenberger et al., 2001, p. 42).
POS is, therefore, explained by social exchange theory which is based on the norm of reciprocity, with
favors provided on a discretionary basis and returned in an unspecified and discretionary way in the
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future. POS has been shown to be positively related to a variety of employees’ pro-social behaviors
towards an organization such as involvement in the organization, job satisfaction, and service quality
(Duke et al., 2009; Vandenberghe et al., 2007). POC focuses on the strength with which employees
identify with the values and goals of an organization and their involvement in exerting effort towards the
achievement of the organization’s goals. POC has been conceptualized as having three components:
affective, normative and continuance (Allen and Meyer, 1990). Affective commitment is defined as an
employee’s identification with and emotional attachment to an organization. Normative commitment is
defined as an employee’s felt obligation to stay with an organization or loyalty to an organization, while
continuance commitment is defined as an employee’s perception of the cost involved in leaving an
organization. We focus on the affective and normative components of POC in the development of mutual
commitment because they (1) deal with an employee’s emotional bond to an organization, and (3) are
most closely related to both social exchange and covenantal relationships. Employees who demonstrate a
strong POC are more likely to exhibit a positive desire and attitude to work towards the achievement of
their organization’s outcomes. POC has been shown to influence a variety of employee work-related
behaviors, and outcomes such as intended and actual turnover and organizational outcomes such as
service quality (e.g., Vandenberghe et al., 2007).
Hypotheses
Organizational justice and mutual commitment
According to social exchange theory and the norm of reciprocity, employees will reciprocate perceived
justice with favorable attitudes and behaviors towards an organization. Organizations that treat their
employees fairly are not only more attractive to employees but also create the environment where
employees are motivated and committed to stay. Moreover, when employees perceive that the procedures
used to determine rewards are fair and consistent across the employee population and receive fair
interpersonal treatment, it would suggest to the employees that the organization values their welfare and
that will lead them to develop strong attachment and loyalty to the organization (Lind et al., 1993). Thus,
employees will identify procedural and interactional justice as an indication of an organization’s concern
for employees’ well-being and an indication of organizational support, who will in turn repay the
organization through a high level of commitment. Studies have shown that POJ is an important
antecedent of covenantal relationships because of its emphasis on employee dignity and well-being
(Coyle-Shapiro et al., 2004; Graham and Organ, 1993). Thus, the following hypotheses:
Hypothesis 1: Perceived procedural justice will be positively related to mutual commitment.
Hypothesis 2: Perceived interactional justice will be positively related to mutual commitment.
Organizational justice and the human factor
We further expect procedural and interactional justice to influence the HF. The HF focus on the
possession and leveraging of the knowledge, skills, expertise, and capabilities of employees in addition to
the demonstration of positive work attitudes and behaviors. Since procedural and interactional justice
deals with employees perception of fairness of organizational procedures used to make decisions and
interpersonal treatment, when employees are treated with fairness, they will perceive that they are valued
and will “get a fair shake” from their organization and their representatives if they perform (Sweeney and
McFarlin, 1993, p. 37). From a social exchange perspective, the demonstration of fairness to employees
by an organization will induce employees to engage in behaviors (e.g., utilizing their knowledge and
skills, showing integrity, doing the best for the organization, etc.), that is aimed at helping the
organization to achieve its objectives (Lavelle et al., 2009). Thus, employees are more likely to alter their
behavior and leverage their knowledge, skills, and capabilities to the benefit of an organization in the
conduct of their job responsibilities if they believe that the organization is fair with respect to the
procedures used to allocate resources and rewards as well as the quality of the interpersonal treatment
during the implementation of the procedure (Choi, 2008). Thus:
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Hypothesis 3: Perceived procedural justice will be positively related to the human factor.
Hypothesis 4: Perceived interactional justice will be positively related to the human factor.
Mutual commitment and the human factor
MC was conceptualizes as the covenantal relationship and the reciprocal commitment that exists between
employees and their employers or organizations (Graham and Organ, 1993). MC involves mutually
supportive relationships; which is usually characterized by open-ended commitment, mutual trust, shared
values, organizational involvement and an acceptance of an organization’s mission (Snape and Redman,
2004). Thus MC combines the concepts of POS and POC. Employees who experience mutually
supportive relationships in their organization will be emotionally attached to their organizations and may
be more likely to exert more effort to demonstrate positive behaviors for the benefit of the organization.
Some of the positive behaviors could be in the form of demonstrating integrity and reliability in
performing job responsibilities, following organizational rules and regulations, and being willingness to
help co-workers with work-related problems. Moreover, employees who exhibit MC are more likely to
embrace and demonstrate behaviors that lead to the development and leveraging of their knowledge,
skills, expertise and capabilities to help their organizations achieve their goals. Several studies have
demonstrated that both POS and POC influence employees to engage in positive behavior towards an
organization such as definition of job responsibilities (e.g., Vandenberghe et al., 2007).
Hypothesis 5: Perceived mutual commitment will be positively related to the human factor.
In Hypotheses 1 and 2 we posited that perceived procedural and interactional justices will have a positive
influence on MC. Furthermore, Hypothesis 5 posits that MC will be positively related to HF. We have
also argued that perceived procedural and interactional justices will directly influence HF (H3 and H4).
Thus, we suggest that both perceived procedural and interactional justices will also influence the HF
indirectly through MC. We, therefore, present the following hypotheses:
Hypothesis 6: Perceived mutual commitment will mediate the relationship between POJ and HF.
Method
Three hundred survey questionnaires were personally distributed to individuals working in a convenient
sample of 30 organizations in Ghana, while two hundred questionnaires were delivered to 20
organizations in India. We gave ten questionnaires to employees in each organization in each country
with half of the questionnaires given to managers and/or supervisors while the other half were given to
subordinate employees. Two hundred sixty-eight (268) questionnaires were returned from the employees
in Ghana (response rate is 89.33%), while 149 questionnaire were returned from employees in India
(response rate is 74.5%), for a total of 417 questionnaires from the two countries for an overall response
rate of 83.4%.
Measures
Human factor: The HF was measured using the 24-item measure suggested in Acquaah (2004). The
employees were asked to indicate the extent to which they agree or disagree with statements about their
colleagues or fellow employees on a 7-point Likert scale with 1 = strongly disagree and 7 = strongly
agree. A factor analysis of the Ghana sample yielded four factors with the following names: moral
capital, helping behavior, human capital, and human capabilities. Moral capital was measured with ten
items (e.g., employees in my organization are conscientious). Helping behavior was measured with four
items (e.g., employees in my organization are willing to help others with work-related problems). Human
capital was measured with five items (e.g., most of the employees in my organization have technical,
vocational or university-level education and qualifications), while human capabilities were measured with
five items (e.g., employees in my organization utilize their knowledge, skills and expertise in solving
company problems). We then conducted a confirmatory factor analysis on the 24 items in the Indian
sample to examine the discriminant validity of the four HF constructs obtained using the Ghana sample,
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and it indicated a good fit. The reliability of the scales using the Cronbach’s alpha ( ) is shown in the
diagonals in Table 1.
Perceived mutual commitment: We measured MC as a combination of POS and POC. We measured POS
by using Short Form of the Survey of POS (Eisenberger et al, 1986) focusing on the nine highest loading
items. We used seven items from the nine-item scale developed by Cook and Wall (1980) to assess the
POC. The employees were asked to indicate the extent to which they agree or disagree with the POS and
POC statements on a 7-point Likert scale with 1 = strongly disagree and 7 = strongly agree. The mean
score of the 16 items was used to operationalize MC that exists between employees and their employing
organizations. The Cronbach alpha ( ) values for MC for the samples from Ghana and India are 0.88 and
0.91 respectively.
Perceived organizational justice: POJ was measured with five items assessing procedural justice and
three items assessing interactional justice from Moorman (1991). A factor analysis of the eight items
separately by country produced two distinct factors – procedural justice with the five items ( = 0.92 for
Ghana and = 0.89 for India) and interactional justice with the three items ( = 0.82 for Ghana and �=
0.86 for India).
Control variables: We controlled for gender (0 = female; 1 = male), organizational tenure (measured in
months), age of respondent (measured in years), the organizational position of the respondent (0 =
subordinate; 1 = manager/supervisor), and organization type (0 = public, 1= private).
Results
Descriptive statistics and correlations among the variables for the Ghana and India samples are presented
in Tables 4. To examine the hypotheses, we used hierarchical regression analyses. Table 2 shows the
results for the two samples – Panel A for Ghana and Panel B for India. Hypotheses 1 and 2 are tested
using Model 1, while the rest of the hypotheses are tested using Models 2 to 5. In Model 1, both
procedural and interactional justices are positively related to mutual commitment in both the Ghana and
India samples corroborating H1 and H2. The results from the model further indicate that the controls
influence mutual commitment differently in the two countries. While none of the controls are related to
MC in India, gender is positive and organizational tenure is negatively related to MC in Ghana. In Ghana
males and employees short organizational tenure are more likely to report higher MC.
In Models 2A, 3A, 4A, and 5A, we examine the impact of POJ on the HF components of moral capital
(MOCAP), helping behaviors (HBEHAV), human capital (HUCAP), and human capabilities (HCAPAB).
In Ghana, the results show that interactional justice (IJ) is significant and positively related to the
MOCAP, HBEHAV, HUCAP, and HCAPAB. However, procedural justice (PJ) is positive and
significantly related to MOCAP and negative and significantly related to HUCAP. PJ was not related to
HBEHAV and HCAPAB. In India, the results show that both PJ and IJ are positive and significantly
related to MOCAP, HBEHAV and HUCAP. However, only PJ is significant and positively related to
HCAPAB. Thus, both H3 and H4 are partially supported.
In Models 2B, 3B, 4B, and 5B, we add MC to Models 2A, 3A, 4A, and 5A respectively to examine the
influence of MC on HF. In the Ghana sample, MU is positive and significantly related to MOCAP,
HBEHAV and HCAPAB, while MU is positive and significantly related to MOCAP, HBEHAV,
HUCAP, and HCAPAB for the Indian sample. This implies that H5 is partially supported for the Ghana
sample and fully supported for the India sample. The results in Models 2A to 5B further have
implications for H6 which states that perceived MC will mediate the relationship between POJ and HF.
We used Baron and Kenny (1986) method as follows: (1) regressing the mediator on the independent
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variable, (2) regressing the dependent variable on the independent variable, and (3) regressing the
dependent variable on both the independent variable and on the mediator. Baron and Kenny (1986)
further state that “to establish mediation, the following conditions must hold: First, the independent
variable must affect the mediator in the first equation; second, the independent variable must be shown to
affect the dependent variable in the second equation; and third, the mediator must affect the dependent
variable in the third equation” (p. 1177). They further assert that mediation is strongest when there is no
direct effect but an indirect effect in the third equation. In the Ghana sample, we obtained the following
results: MC has (1) a partial mediation on the relationship between PJ and MOCAP, and IJ and
HBEHAV; (2) a full mediation on the relationship between IJ and MOCAP, PJ and HBEHAV; IJ and
HCAPAB, and PJ and HCAPAB; and (3) direct only relationship between both PJ and HUCAP, and IJ
and HUCAP. The results for the Indian sample revealed that MU has (1) a partial mediation on the
relationship between IJ and HUCAP; and (2) full mediation on the relationship between PJ and MOCAP,
HBEHAV, HUCAP, and HCAPAB; and the relationship between IJ and MOCAP and HBEHAV. Thus
the results indicate that while H6 is partially confirmed for Ghana, it is fully confirmed for the India.
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Table 1A: Descriptive Statistics and Correlation Analysis for Ghana Sample (N=268)
Variables 1 2 3 4 5 6 7 8 9 10 11 12
1. Age
2. Gender 0.12
3. Organizational Tenure 0.71*** 0.14*
4. Position in Organization 0.51*** 0.07 0.38***
5. Organization Type -0.29*** 0.01 -0.33*** -0.13*
6. Procedural Justice -0.12 0.12 -0.32*** 0.11 0.04 0.92
7. Interactional Justice 0.19** 0.01 0.01 0.26*** -0.16* 0.57*** 0.82
8. Mutual Commitment -0.12 0.15* -0.31*** 0.01 0.07 0.67*** 0.63*** 0.88
9. Moral Capital -0.14* 0.17** -0.30*** -0.01 -0.14* 0.65*** 0.54*** 0.62*** 0.91
10. Helping Behavior 0.05 0.12 0.09 0.01 -0.14* 0.36*** 0.60*** 0.47*** 0.56*** 0.83
11. Human Capital 0.25*** -0.05 0.33*** 0.14* -0.57*** 0.03 0.37*** 0.08 0.25*** 0.54*** 0.71
12. Human Capabilities 0.06 0.14* -0.05 -0.01 -0.31*** 0.30*** 0.34*** 0.43*** 0.57*** 0.52*** 0.54*** 0.79
Mean 37.38 0.63 89.34 0.47 0.52 3.84 4.96 4.67 4.50 4.75 5.25 4.56
Standard Deviation 8.84 0.48 60.56 0.50 0.50 1.44 1.25 0.80 1.13 1.12 0.79 0.96
Note: Gender: 0 = Female, 1 = Male; Position in organization: 0 = subordinate, 1 = managerial/supervisory; Organization type: 0 = Public, 1 = Private.
Table 1B: Descriptive Statistics and Correlation Analysis for India Sample (N= 149)
Variables 1 2 3 4 5 6 7 8 9 10 11 12
1. Age
2. Gender 0.13
3. Organizational Tenure 0.70*** -0.07
4. Position in Organization 0.18* 0.18* 0.08
5. Organization Type -0.05 -0.01 -0.23** 0.10
6. Procedural Justice -0.13 -0.07 0.17* 0.07 -0.07 0.89
7. Interactional Justice 0.13 -0.06 0.21** -0.10 0.02 0.68*** 0.86
8. Mutual Commitment 0.23** -0.04 0.26*** 0.07 0.01 0.74*** 0.68*** 0.91
9. Moral Capital 0.08 -0.04 0.15 0.07 -0.02 0.59*** 0.54*** 0.72*** 0.92
10. Helping Behavior 0.06 -0.04 0.12 -0.01 -0.07 0.56*** 0.53*** 0.61*** 0.82*** 0.85
11. Human Capital -0.04 -0.09 0.02 0.05 -0.09 0.55*** 0.52*** 0.60*** 0.78*** 0.70*** 0.89
12. Human Capabilities -0.01 -0.08 0.08 0.01 0.01 0.56*** 0.48*** 0.63*** 0.71*** 0.70*** 0.77*** 0.90
Mean 35.37 0.63 105.02 0.56 0.80 4.66 5.43 5.04 5.17 5.08 5.14 4.70
Standard Deviation 9.44 0.48 102.84 0.50 0.40 1.15 1.26 0/94 0.93 1.01 0.99 1.06
Significance levels: * p < 0.05; ** p < 0.01; *** p < 0.001.
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Table 2: Results of Hierarchical Regression Analysis for the Ghana and India Samples a
Variables Mutual Moral Capital Helping Behavior Human Capital Human Capabilities
Commitment
Model 1 Model 2A Model 2B Model 3A Model 3B Model 4A Model 4B Model 5A Model 5B
Panel A: Ghana
Age 0.038 -0.025 -0.039 -0.206** -0.216** -0.123 -0.126 0.110 0.096
Gender 0.118** 0.149*** 0.104** 0.118* 0.086 -0.035 0.045 0.148** 0.104
Organizational Tenure -0.142* -0.183** -0.130* 0.236*** 0.273*** 0.202** -0.213** -0.178* -0.125
Position in Organization -0.073 -0.075 -0.048 -0.159** -0.139** 0.027 -0.022 -0.118 -0.091
Organization Type 0.029 -0.205*** -0.216*** -0.029 -0.036 -0.470*** -0.472*** -0.318*** -0.329***
Procedural Justice 0.494*** 0.497*** 0.311*** -0.076 -0.072 -0.216*** -0.256*** 0.107 0.077
Interactional Justice 0.290*** 0.199*** 0.089 0.727*** 0.650*** 0.467*** 0.444*** 0.232** 0.124
Mutual Commitment 0.377*** 0.266*** 0.081 0.373***
Adjusted R 2
0.586 0.556 0.613 0.424 0.451 0.456 0.456 0.227 0.282
F 54.91*** 48.75*** 53.90*** 29.03*** 28.40*** 32.92*** 29.00*** 12.22*** 14.12***
Panel B: India
Age 0.073 -0.075 -0.07 -0.051 -0.081 -0.064 -0.095 -0.126 -0.163
Gender 0.007 0.007 0.01 0.010 0.007 -0.069 -0.071 -0.023 -0.026
Organizational Tenure 0.067 0.077 0.08 0.028 0.000 -0.106 -0.135 0.055 0.021
Position in Organization 0.041 0.073 0.07 0.001 -0.016 0.103 0.085 0.022 0.001
Organization Type 0.056 0.011 0.01 -0.043 -0.066 -0.115 -0.139* 0.036 0.008
Procedural Justice 0.523*** 0.390*** 0.056 0.361*** 0.144 0.331*** 0.110 0.450*** 0.183
Interactional Justice 0.299*** 0.281*** 0.090 0.286** 0.161 0.336*** 0.209* 0.183 0.030
Mutual Commitment 0.638*** 0.415*** 0.424*** 0.510***
Adjusted R 2
0.607 0.357 0.512 0.318 0.381 0.344 0.410 0.315 0.412
F 33.49*** 12.65*** 20.30*** 10.81*** 12.33*** 12.03*** 13.79*** 10.66*** 13.90***
a
Standardized coefficients.
Significance levels: * p < 0.05; ** p < 0.01; *** p < 0.001.
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Discussion and Conclusion
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The purpose of this study was to examine the influence of POJ (PJ and IJ) and MC on the HF. We also
explore the mediating role of MU on the relationship between PJ and HF on the one hand, and IJ and HF
on the other hand. Using social exchange perspective, we tested our hypotheses using data from Ghana
from sub-Saharan Africa and India from Asia. The findings show that both employees’ perceptions of PJ
and IJ influence MC and HF in the samples from the two countries. Moreover, employees’ perceptions of
MU also influence the HF in the two countries. The findings further show that mutual commitment
mediates the relationship between organizational justice and the HF. However, the mediating effect of
MC on the link between POJ and HF is different in the two countries. While we found full support for the
mediating effects of the relationships in the Indian sample, the Ghana sample provided partial support.
These findings are intriguing considering that both Ghana and India’s national culture are classified as
being low on individualism and high on power distance (Hofstede, 1980).
The findings from both Ghana and India, which are high on collectivism, power distance and masculinity,
indicate that perceptions of fair procedural and interactional justice can engender employees’ attachment,
loyalty and identification with their organizations even in high power distance cultural environments.
Thus, in societies and cultures with high power distance as in Ghana and India, employees may tolerate
unfair treatment from organizational procedures and people in authority, but that does not mean that they
accept the legitimization of inequality created in institutions and organizations as suggested by Hofstede
(1980). In those societies, the existence of high power distance may be a sign of respect and reverence
for those in authority but employees also demand curing, nurturing and fair treatment by organizations
and their leadership.
Furthermore, the findings the two countries show that POJ can contribute to improving employee
attitudes and behaviors in organizations, in addition to leveraging their skills and capabilities to the
benefit of their organizations. The findings from the Ghana sample indicate that IJ enhances the
behavioral qualities embodied in the four HF dimensions of MOCAP, HBEHAV, HUCAP, and
HCAPAB. However, PJ only leads to proactive moral behaviors from employees. In fact, it hinders
employees’ behavior towards improving their human capital. Conversely, the Indian findings suggest that
employees’ perceptions of PJ encourage that demonstration of all the dimensions of the HF (MOCAP,
HBEHAV, HUCAP, and HCAPAB). This is consistent with the study by Moon et al (2008) which
showed that employees in India are more likely to engage in taking charge behaviors when they perceive
that their organizations are procedurally just. Also, IJ leads them to reciprocate in pro-social behaviors
and the leveraging of their capabilities for the benefit of their organizations. These finding are reflections
of the collectivistic cultural orientation of the Ghanaian and Indian societies (Hofstede, 1980). PJ, is
however, more important to employees from India than those from Ghana because it elicits more positive
behaviors, knowledge bases and skills in India than Ghana.
The findings from the two countries clearly show that MC influences all the components on HF except
HUCAP in Ghana. The findings indicate that HF reflects a covenantal relationship such that employees
may develop and utilize positive social behaviors and capabilities in response to MC to demonstrate HF
qualities. The findings from the mediating relationships show that IJ crucial in understanding the HF
behavioral qualities in Ghana. IJ influences HF in two ways: first, directly affecting the extent to which
employees engage in proactive behaviors and utilize their capabilities which underlie the HF, and second,
indirectly by influencing the reciprocal relationships that employees have with their organizations.
Though the findings from the Indian sample with respect to the mediating effect of MC on the IJ-HF link
were consistent with the Ghana sample, MC fully mediated the relationship for MOCAP, HBEHAV and
HCAPAB. The findings further indicate that PJ enhances MC, which in turn influences the HF in the
Indian sample. On the other hand, MC fully mediated the PJ-HBEHAV and PJ- HCAPAB, but MC
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exhibited partially mediation on the PJ-MOCAP relationship. Thus, while POJ (PJ and IJ) affects the
behavioral aspects of the HF (MOCAP and HBEHAV) for the Indian sample only indirectly through MC,
in the Ghana sample, PJ also has a direct effect on MOCAP and so is IJ on HBAHAV.
In conclusion, the study shows that although Ghana and India are high power distance cultural
environments, procedural and interpersonal fairness are important to employees. Procedural and
interpersonal fairness at the workplace leads to the development of employee-organization relationship
based on mutual commitment because employees are more likely to reciprocate such fairness with a
stronger attachment, identification, and loyalty to the organization. Second, treating employees fairly,
procedurally and interpersonally, can engender both the behavioral and capabilities aspects of the HF
either directly or indirectly through employees’ experiences of MC. Third, the relationship between POJ
and the HF, and how MC mediates the POJ-HF relationship is different in Ghana and India. Finally, the
study has limitations that must be acknowledged to provide avenues for future research. They include: (a)
the use of cross-sectional designs in collecting the data precluding the possibility of making inferences
about causality; (b) the data from each of the samples were collected at a single point in time raising
concerns about common method variance problems, although we interspersed the POJ, POC and POS
items to minimize common method variance problems; and (c) the study focused on only procedural and
interactional justice and did not explore the influence of distributive justice and the separation of
interactional justice into interpersonal and informative justice. Future research may consider using the
four-factor organizational justice construct to ascertain whether there are differences between how
informational and interpersonal justice affects mutual commitment and the HF.
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Abstract
What does Globalization mean? A Ghanaian Perspective.
Kojo Saffu, ksaffu@brocku.ca
Faculty of Business, Brock University. Canada
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Aminu Mamman, Aminu.mamman@manchester.ac.uk
University of Manchester, Institute for Development Policy and Management
Manchester, United Kingdom
Angela Lemaire, angufas@yahoo.com
School of Business,Takoradi Polytechnic, Takoradi, Ghana
Much of what has been reported about the impact of globalization is based on macroeconomic and social analyses
to the neglect of research on the meaning and impact of globalization at the individual level. This paper attempts to
fill this gap in the globalization literature by surveying a sample of 201 Ghanaian managers, professionals and
business people. We sought answers to the following questions: 1.What do Ghanaian managers and professionals
think of globalization? 2. Do Ghanaian managers and professionals consider globalization mainly as an economic
phenomenon or socio-political phenomenon? 3. What are the implications of the meanings of globalization?
The respondents were unanimous on six definitions representing the true meaning of globalization as an economic
phenomenon. There was ambivalence among the sample regarding fourteen meanings of globalization. The
respondents agreed the most on globalization as a convergence of management and business practices across the
world, while they disagreed the most on globalization as a means of fairer and equitable trade amongst countries.
We found that attitudes to globalization were identical across the sample irrespective of position/hierarchy and
gender. Implications of the findings are discussed in the paper.
Introduction
Prior to the current global financial meltdown, optimists viewed globalization as the panacea to the
world’s economic and social problems. However, it has been pointed out that globalization has its rough
edges which can have serious economic and social consequences. For instance, commenting on the
economic activities of the 1990s, Stiglitz (2003: 3) wrote “newspaper articles and experts proclaimed that
there was a new economy, that recessions were a thing of the past, and that globalization was going to
bring prosperity to the whole world. But towards the end of the decade, what seemed to be the dawn of a
new era began to look more and more like one of those short bursts of economic activity, or hyperactivity,
inevitably followed by bust, which had marked capitalism for two hundred years”. More recently, in his
book “Making globalization work”, Stiglitz (2006) also noted the dwindling capacity of the nation state to
deal with globalization and its ramifications, and questioned the ability of nation states to handle marked
forces ushered in by globalization.
Much of what has been reported about the impact of globalization is based on macroeconomic and social
analyses. There is paucity of research on the meaning and impact of globalization at the individual level.
This paper attempts to fill this gap in the globalization literature by surveying a sample of 201 Ghanaian
managers, professionals and business people. In this paper, we explore the following questions: 1.What
do Ghanaian managers and professionals think of globalization? 2. Do Ghanaian managers and
professionals consider globalization mainly as an economic phenomenon or socio-political phenomenon?
3. What are the practical and research implications of the meanings of globalization? This paper
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contributes to the globalization literature by shedding more light on the potential impact of the individual
dimension of globalization from the perspective of a developing country, Ghana.
The paper is structured as follows: Section 1 provides a brief review of the literature on the
conceptualization and meaning of globalization, followed by methodology in Section 2. Section 3
presents the results of the survey. In Section 4 we discuss the results, and Section 5 focuses on conclusion
and implications.
Conceptualization and meaning of globalization
Globalization means different things to different people. In line with the cognitive and behavioral schools,
at a practical level at least, the meaning can be influenced by social actors’ own experience as well as
their mental map or schemata borne out of direct or indirect experience with global forces, such as
technology, and economic opportunities or threats. It is fair to say the meaning of globalization is
polarized because it captures the various impacts it has on individuals, societies and the environment. In
this section, we briefly summarize the various perspectives associated with the definition or explanation
of globalization. It is noteworthy that the definition is not necessarily the meaning as perceived by the
social actors in the globalized world. Consequently, there is the need for researchers to investigate
globalization at the individual level of analysis as well.
Economic dimension
By far the most common use of the term globalization usually refers to the globalization of the world
economy exemplified by the liberalization of the national economies enabling integration of world
economies (Sander, 1996). This is specifically evidenced by “widespread reduction or even abolition of
regulatory trade barriers, foreign exchange restrictions, capital controls, and visas” (Scholte, 2005:16).
Still, related to the economic perspective is the view that globalization is a representation of
interdependence across nations. This is not restricted to economic interdependence but political
interdependence as well (Hirst & Thompson, 1996).
Political dimension
To many, globalization is represented by the dwindling role and power of governments as we know it
(Fukuyama, 1992; Ohmae, 2000). This is typified by the dissolution of political boundaries (McGrew and
Lewis, 1992), resembling a representation of the growing convergence of political systems under the
philosophy of political democracy (Scholte, 2005). The political dimension of globalization involves “a
proliferation of international or governing regulatory organizations and of international regimes and a
trend towards the globalization of social classes and social movements” (Randall & Theobald, 1998: 239-
240). In a nutshell, the political dimensions of globalization can be described as the (a) convergence of
political systems and (b) the loss of control and influence of nation states (McBride & Wiseman 2000).
To the extent that this view is shared by technocrats and business people who exercise influence over
government policy, their role should be closely watched by TNCs and intergovernmental organizations.
However, there is inadequate knowledge of what these categories of people as social actors in the global
system think about globalization.
Socio-cultural dimension
Globalization is perceived as leading to an erosion of traditional values (Parker, 2005), a form of
globalization of cultural imperialism (Mattelart 2000). Implied in the arguments of the notion of cultural
domination by the west is exemplified by the concept of McDonalization, Westernization or
Americanization of cultural artifacts and values (Drane, 2000; Ritzer & Stillman, 2003). An investigation
of the socio-cultural perspectives on globalization is essential to understanding, explaining and perhaps
predicting national policies and organizational strategy. In other words, comprehension of the meaning of
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Edited by Emmanuel Obuah
globalization from socio-cultural perspective cannot be complete without undertaking an investigation of
its meaning at the individual level.
Spiritual dimension
Many researchers and scholars have commented on globalization and its impact on religion. Some view
globalization as influencing political and economic boundaries as well as the way people view life and its
purpose, akin to comodification of religion (Satha-Anand, 1998). Globalization has also led to
questioning of the traditional values on which religions are based (Chee Beng, 1998; Oka, 1998). This
concern is reflected in Costello’s (1998:48) comments that: “The tension between the importance of the
global and the local is apparent in all three meanings of globalization. How are local, cultural expressions
of Christian faith to be preserved against the ideals of wider integration that seem to lead towards a
homogenized, universal cosmopolitanism or oppressive majority culture?” (Costello, 1998:43). From
Confucian perspective, Chee Bang (1998) argues that globalization has made individuals more
emancipated from religious authorities and organizations. From Buddlist and Hindu perspectives,
Hutanuwatr (1998) and Oka (1998) are highly critical of the impact of globalization for spreading greed,
violence and individualism.
Psychological dimension
A number of writers have taken a psychological perspective on globalization (see, Bartlett & Ghoshal,
1992; Scholte, 2005). Rather than defining globalization from the point of view of consciousness, social
actors are categorized based on their mind-set vis-à-vis globalization (Moran & Riesenberger, 1994).
Advocates of this school of thought view global mindset as a way of thinking which can significantly
influence behavior (Parker, 2005). However, researchers have argued for the need for domestic mindset
as well (Parker, 2005).
From the foregoing, we speculate that not all policy makers, influencers and implementers are passive
participants in the globalization process. In other words, their decisions and actions may not be influenced
entirely by pragmatism and the need to be socially desirable in the “global village”. On the contrary, it is
plausible their actions and decisions may also be influenced by cognitive interpretation which is grounded
in both economic as well as socio-spiritual rationality.
Methodology
Sample
This paper, based on a sample of 201 managers and professionals in Ghana, is part of a wider survey of
managerial attitudes to globalization in the wake of the global financial crisis. Majority of the respondents
(44.8%) are middle managers, the rest are CEOs (8%), senior managers (27.9%), professionals (16.9%)
and business owners (2.5%). The majority of the respondents are from the private sector (72.1%). A
significant minority (39.8%) indicated that they have experience in providing input into government
policy through membership of either pressure group, trade/professional association or policy-making
body. About a third (29.4 %) of the respondents’ companies are involved in international trade. 75.1% of
the respondents are male.
The instrument is made up of twenty items designed to measure the meaning of globalization.
Respondents were asked to indicate the extent of their agreement or disagreement with the list
of statements on a 5-point Likert scale where 1=Strongly Disagree and 5=Strongly Agree (see Table 1).
We obtained a Cronbach’s alpha of 0.81 for the instrument meeting the minimum acceptable Cronbach’s
alpha value is 0.7 (Nunnally, 1978).
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Results
Table 1 presents the results of this study. Using a mean ranking system, a mean of approximately 4 was
obtained for the following meanings of globalization: i. “To me, globalization means that every economy
is now part of the world economy”; ii. “the growing influence of technology in our lives”; iii. “the
growing convergence of management and business practices across the world”; iv. “the world is
shrinking in time and space because of efficient ways of communication and transportation”; v. “the
increasing movements and interaction of people across the world”, and vi. “the removal of regulatory
boundaries that allows more international trade and economic transactions across countries”.
Furthermore, a mean of approximately 3 was obtained for “Globalization is the means for fairer and
equitable trade amongst all countries in the world”, “any worker is free to move to any country to work”,
“anybody can now find it easier to invest their money in developed countries such as in Europe and
America”, “an economic system in which everyone is for economy whether locally or globally”,
“capitalism has now become the most effective economic system in the world”, “providing multinational
companies and financial institutions more freedom to operate the way they like”, “providing International
Institutions such as World Bank, IMF and WTO more freedom to control our lives”, “the end of active
involvement of government in the economy”, “more democracy and freedom”, “promoting the spread of
western democratic system of governance across the world”, “the replacement of religious values with
western liberal values”, “the replacement of religious values with neutral global values”, “the
replacement of cultural values and traditions with western liberal values”, and “the replacement of
cultural values and traditions with neutral global cultural values”.
Table 1. What does globalization mean?
What does Globalization Strongly Agree Unsure Agree Strongly Mean S.D
mean to you?
Disagree
Agree
1. To me, globalization offers 7.0 22.9 12.4 41.3 16.4 3.37 1.20
the means for fairer and
equitable trade amongst all
countries in the world
2. To me, globalization means
that any worker is free to move
to any country to work
6.5 26.9 13.9 41.3 11.4 3.24 1.16
3. To me, globalization means
that anybody can now find it
easier to invest their money in
developed countries such as in
Europe and America
6.0 19.9 24.4 39.8 10.0 3.28 1.08
4. To me, globalization means
that every economy is now
part of the world economy
5.0 6.0 12.4 51.7 24.9 3.86 1.02
5. I see globalization as an 8.0 18.4 28.9 33.8 10.9 3.21 1.11
economic system in which
everyone is for himself in a free
market economy whether
locally or globally
6. To me, globalization means
that capitalism has now become
the most effective economic
system in the world.
5.5 32.3 26.9 24.4 10.9 3.03 1.11
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7. I see globalization as
providing multinational
companies and financial
institutions more freedom to
operate the way they like
8. I see globalization as
providing International
Institutions such as World
Bank, IMF and WTO more
freedom to control our lives
9. I see globalization as the end
of active involvement of
government in the economy
10. Globalization means more
democracy and freedom
11. I see globalization as
promoting the spread of
western democratic system of
governance across the world
12. I see globalization as the
growing influence of technology
in our lives
13. I see globalization as the
growing convergence of
management and business
practices across the world.
14. To me, globalization means
that the world is shrinking in
time and space because of
efficient ways of
communication and
transportation
15. I see globalization as the
replacement of religious values
with western liberal values
16. I see globalization as the
replacement of religious values
with neutral global values
17. I see globalization as the
replacement of cultural values
and traditions with
western liberal values
18. I see globalization as the
replacement of cultural values
and traditions with neutral
global cultural values
19. I see globalization as the
increasing movements and
interaction of people across the
world
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
9.0 28.9 21.9 29.4 10.9 3.04 1.18
10.9 32.3 25.9 21.4 9.5 2.86 1.16
11.9 36.8 24.9 22.4 4.0 2.70 1.07
5.0 28.4 24.4 37.8 4.5 3.09 1.02
7.5 28.9 21.9 30.3 11.4 3.10 1.16
4.0 14.4 15.4 43.8 22.4 3.66 1.10
2.0 10.4 12.9 52.7 21.9 3.82 0.96
5.0 16.4 15.4 40.8 22.4 3.59 1.15
15.9 40.3 18.9 16.9 8.0 2.60 1.17
17.9 35.3 20.9 20.9 5.0 2.60 1.15
14.4 29.4 20.9 28.9 6.5 2.84 1.18
9.5 26.9 23.9 29.9 10.0 3.04 1.16
3.0 9.0 13.4 52.2 22.4 3.82 0.98
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20. I see globalization as the 4.5 12.4 17.4 50.7 14.9 3.59 1.03
removal of regulatory
boundaries that allows more
international trade and
economic transactions across
countries
Note: The numbers under the responses are in percentages
Finally, the least standard deviation of 0.96 was obtained for the statement “I see globalization as the
growing convergence of management and business practices across the
world”, while the highest standard deviation of 1.20 was obtained for the statement “To me, globalization
offers the means for fairer and equitable trade amongst all countries in the world”.
Discussion
We can explain the results in a variety of ways. The most favoured meaning of globalization for our
sample is denoted by “every economy is now part of the world economy”. The notion of globalization as
an integration of nations and markets is consistent with the global village economic view of globalization
where the happenings in one corner of the world have significant implications for another remote corner
of the world (McGrew and Lewis 2000).
By far the most common use of the term globalization often refers to the globalization of the world
economy exemplified by the liberalization of the national economies enabling integration of world
economies (Sander, 1996). This is specifically evidenced by “widespread reduction or even abolition of
regulatory trade barriers, foreign exchange restrictions, capital controls, and visas” (Scholte, 2005:16).
Also related to the economic perspective is the view that globalization is a representation of
interdependence across nations. This is not restricted to economic interdependence but to political
interdependence as well (Hirst & Thompson, 1996, 1999). In line with the literature reviewed which
indicates that people view globalization from economic dimension, our respondents seem to support the
literature. For example, the majority (60.2%) agree with the statement.
The preceding global village perspective is closely linked to the meaning of globalization as “the
increasing movements and interaction of people across the world”. This phenomenon, made possible by
the abolition of visas and other restrictions, a consequence of globalization (Scholte, 2005), is consistent
with Albrow’s (1990) view of globalization as a convergence in culture. It also supports Giddens’s (2000)
view of globalization as interconnections at the socio-cultural level. Ghana is a beneficiary of increased
movements and interactions among people globally. There is a large number of Ghanaians in the
diaspora. Tourism is the third largest foreign exchange earner in Ghana after cocoa and gold (Ghana
Tourist Board, 2010). Ghana receives a large number of visitors from all parts of the world as tourists
annually. We surmise Ghanaian professionals, managers and business people can identify with this notion
of globalization.
The issue of convergence of management practices has received significant attention in the literature. To
many, multinational corporations (MNCs) are vehicles by which management practices are transferred
across the globe. Significant majority (74.6%) of our sample of professionals and managers see
globalization “as the growing convergence of management and business practices across the world”. As
previously argued, if all nation states belong to the so-called global village or a “single world society”
(Albrow 1999:9), then it is conceivable that “as inhabitants of this global village, we increasingly share
the same thoughts, values, and habits – a cultural convergence, if you will” (Chan & Scarritt 2002:3). We
argue that shared values and habits could also lead to a convergence of management and business
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Edited by Emmanuel Obuah
practices – an organizational culture convergence. It is worth mentioning that this was the meaning that
the respondents agreed on the most (had the least s.d of 0.96).
Globalization is viewed by many people as a convergence of ways of thinking and behaving made
possible by the advancement of technology. Related to that is the perception of globalization as the
increasing influence of technology (66.2%). In other words, only less than a third (18.4%) did not agree
with the statement that “globalization means the growing role of technology in our lives”.
Much of the writing and debate on globalization centre on the economic dimension. As a matter of fact,
many view globalization as an economic philosophy or economic system that is built on the foundation of
elimination of regulatory boundaries that foster more international trade and economic transactions across
countries. Therefore, the perception of globalization “as the removal of regulatory boundaries that allows
more international trade and economic transactions across countries”, supports the views of scholars
(Ohmae 2000; McGrew and Lewis, 1992) who conceptualize globalization as a world without borders or
convergence of political systems under the philosophy of political democracy (Scholte, 2005).
As shown in the literature review, an important feature of globalization is the so-called “shrinking world”
in terms of time and space, made possible by technology advancement in transport and communication
(Ohmae 2000). The finding regarding the perception of globalization by a significant majority (63.2%) of
the managers and professionals surveyed, as a “shrinking world in time and space because of efficient
ways of communication and transportation” is consistent with prior research findings (Levitt, 1983).
It is interesting to note that the respondents seem to be ambivalent regarding globalization as the means
for fairer and equitable trade amongst all countries in the world”, “any worker is free to move to any
country to work”, “anybody can now find it easier to invest their money in developed countries such as in
Europe and America”, “an economic system in which everyone is for himself in a free market economy
whether locally or globally”, “capitalism has now become the most effective economic system in the
world”, “providing multinational companies and financial institutions more freedom to operate the way
they like”, “providing International Institutions such as World Bank, IMF and WTO more freedom to
control our lives”, “the end of active involvement of government in the economy”, “more democracy and
freedom”, “promoting the spread of western democratic system of governance across the world”, “the
replacement of religious values with western liberal values”, “the replacement of religious values with
neutral global values”, “the replacement of cultural values and traditions with western liberal values”,
and “the replacement of cultural values and traditions with neutral global cultural values” respectively.
Finally, as part of our analysis, we investigated the degree to which our respondents vary in their views
regarding what globalization means to them. Analysis of variance (ANOVA) failed to find significant
difference in all the twenty items across all the positions in the organization as well across gender. A
notable result of this study is that attitudes to globalization is identical across the sample irrespective of
position or gender.
Conclusion and implications
This paper explored the meaning of globalization using the perspectives of a sample of 201 Ghanaian
professionals and managers. The Ghanaian managers, professionals and business people in the sample
view globalization mainly as an economic phenomenon rather than socio-political phenomenon. They
were ambivalent regarding fourteen other meanings of globalization.
Managerial and Organizational Cognition (MOC) literature argues that individuals process information
based on their prior experience, observation and intuition and proceed to attach meanings to the
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Proceedings of the 12th Annual Conference © 2011 IAABD
event/phenomenon which then becomes the basis of their action. Clearly, the concept of meaning is vital
to understanding why and how managers, policymakers, and policy influencers react to a phenomenon
such as globalization. We argue that it is not implausible to predict decisions and actions of managers,
professionals and business people by understanding the meaning they attach to globalization rather than
explain their decisions or action afterwards. Our examination of the meaning of globalization using a
sample of Ghanaian professionals, managers and business people is an attempt to explore this possibility.
The study has a number of limitations. First, convenience sampling was used thereby making generalizing
the results problematic. Caution must therefore be exercised. Other limitations include the possibility of
not covering all the issues of the globalization debate, the cross sectional nature of the study, as well as a
preponderance of private sector companies in the sample. These limitations, however, provide avenues for
further research.
Implications
There is the need to develop a comprehensive instrument that covers all the issues and perspectives on the
debate on globalization. To ensure that the results from the study can be inferred in terms of
generalization, it is imperative to identify the sample of subjects for future study. Careful selection of the
subjects of the study is essential. Testing the efficacy of MOC assumptions within the context of
globalization literature may be necessary. Future research must investigate whether the meaning of
globalization held by policy makers, technocrats and private sector managers lead to specific decisions
and actions.
Determining the factors that influence the meaning people attach to globalization may be worth pursuing
to ascertain if the meaning of globalization varies across societies. There is also the need to carry out
comparative studies across countries and across industries and sectors. The findings of such studies
should shed light on the: (a) process of globalization (b) factors influencing variation in government
approach to and organizational strategies for globalization and, (c) factors that shape government
economic policies and organizational strategies.
We contend that the meaning of globalization may partly explain the decisions and actions of our
respondents. Furthermore, the meaning they attach to globalization might predict their future influence
over government policy. Perhaps, their view of globalization as an economic phenomenon rather than as a
socio-cultural or political phenomenon may influence their future decisions and actions concerning
globalization.
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Organization Science 6: 280-321.
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Using focus groups to examine effective leadership and motivation in the African Diaspora
Abstract
Terri Lituchy, terrilituchy@yahoo.com
Concordia University, Canada
Betty Jane Punnett, eureka@caribsurf.com
University of the West Indies, Barbados
Alethea Thomas, allieye1@yahoo.com
University of the West Indies, Barbados
Amanda Cruickshank, amanda.cruickshank@yahoo.co.uk
University of the West Indies, Barbados
Robert Oppenheimer, roberto@jmsb.concordia.ca
Concordia University, Canada
David Ford, mzad@utdallas.edu
University of Texas at Dallas
Bill Puplampu, bbpups@ug.edu.gh
University of Ghana
Sam Sejjaaka, Samuel_Sejjaaka@hotmail.com
Makerere University, Uganda
With the internationalization of business, it is important to understand management issues in different cultural
contexts. There is little research on management issues in less developed countries, especially on leadership and
motivation in Africa or the African Diaspora. In order to avoid a ‘western’ bias, an emic approach was used in the
current research. This paper presents the results of focus group research of people of African descent living in
Montreal. The findings suggest that there are differences between western and African views of effective leadership
and motivation. For example the participants stated that the ‘heart of the people’ and ‘passion’ motivated leaders;
while money and fear as well as a need for security motivate employees. These results have implications for
international management theory as well as practice.
Introduction
As globalization of business moves to less developed countries, it is important to understand management
issues such as leadership and motivation in different cultural contexts. “…Very little empirical or
theoretical work has addressed leadership and management in Africa…” (Journal of Occupational and
Organizational Psychology June 2009, p.464). Bolden and Kirk (2009) have therefore called for grounded
conceptualizations of leadership drawn from research within Africa using a variety of methodological
approaches. The current study uses an emic approach to examine leadership and motivation of people of
African descent in Canada.
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The last two decades have seen increased interest in management challenges on the African continent.
Some scholars have questioned the effectiveness of Western management and human resource practices
in Africa (Blunt & Jones, 1992; Kamoche et al, 2004). Africa remains relatively under-researched. One
review (Punnett et al, 2009) of 17 papers dealing with Africa included three that dealt generally with
Africa, one with southern Africa and one with western Africa. Botswana, Kenya and Malawi were each
included in one study, three focused on Ghana and six on South Africa. The review found that a major
challenge for leadership scholars is to develop a cross-cultural understanding of leadership, especially in
the African context.
There is little research on motivation and leadership in Africa or the African Diaspora; more work is
required in almost every field to better understand the concepts of leadership and motivation from these
perspectives. Much of the management research on Africa is biased towards western theories and
concepts; only a few researchers have tried to understand the concepts of leadership and motivation from
the perspective of African people. Studies that have focused on the cultural uniqueness of African
countries suggest that effective leadership styles and motivational tools in Africa are different from
Western countries; a paternalistic leadership style, tribal ties, non financial rewards, spirituality,
communalism, supportiveness and local concepts such as Ubuntu, play important roles in Africa. In
addition, there is no management research on the African Diaspora in Canada.
The overall objective of this study is to examine the similarities and differences in perceptions of effective
leadership and motivation in selected African countries and the African Diaspora in the Caribbean,
Canada and the United States. In this paper, we present results of focus groups of people of African
descent conducted in Canada. In future research, we will be conducting the focus groups in the other
countries.
Method
In order to avoid a ‘western’ bias, an emic approach was used. The research began with a ‘blank page’, by
asking respondents to define the concepts to be measured, rather than the researchers defining them. This
was done through the use of the Delphi Technique followed by the focus groups. The results of the Focus
groups held in Montreal are presented here.
Participants
To ensure accuracy of the focus group process, the procedure was run in Montreal on three different
occasions. The pilot study groups included black students from Concordia University, Montreal and the
second and third focus groups included working adults of African descent in Montreal from various
occupations.
Procedure
Barbour & Kitzinger (1999) defined focus groups as group discussions exploring a specific set of issues.
Recently focus groups have gained some social scientific respectability (Kahan, 2001) and have shown to
be useful both in qualitative and quantitative research (Morgan, 1988). In each focus group, the facilitator
began with an overview of the project. The facilitator encouraged discussion among the participants and
noted key responses while working to try to achieve consensus. After concluding the discussion, the
facilitator asked the group members to rank the top five items in order of importance. The item ranked as
most important was given a value of 5, the next most important a value of 4 and so on. The average score
per item, per focus group was determined. Therefore, the higher the average score, the more important
that item was believed to be by the members of that focus group.
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Questions
Seven questions were posed to participants to obtain their views on culture, leadership and motivation.
The questions are: (1) What three to five words/ phrases best describe your ethnic background?; (2) What
three to five words/ phrases would you use to describe an effective leader?; (3) What three to five words/
phrases describe what an effective leader does?; (4) What three to five words/ phrases describe what
motivates leaders to succeed?; (5)What three to five words/ phrases describe what motivates people (other
than leaders) to work hard?; (6) What 3 to 5 people, men or women, do you consider to be, or to have
been, effective leaders (they can be local, national or international)?; and, (7)What three to five
words/phrases describe why each is effective?
Results
The first focus group, the pilot study, consisted of (4) participants (2 males and 2 females) between the
ages of 23-36 years. The participants were from Canada, Grenada, Barbados and one who said ‘Africa’.
The three participants who were not born in Canada had lived there for at least two years. They were all
pursuing undergraduate or graduate degrees. The focus group began with three participants and the forth
participant, who arrived late, began from question three. One participant left before the conclusion of the
focus group.
The second focus group consisted of (4) participants (2 male and 2 female) between the ages of 20-30
years. Two participants were from Canada, one was from the Ivory Coast, and one was from Nigeria. The
two participants who were not born in Canada had lived there for at least one year. They were all pursuing
undergraduate or graduate degrees.
The third focus group consisted of five participants (1 male and 4 female) between the ages of 20-69
years. The participants were born in Canada (2), Nigeria (1), Barbados (1) and Trinidad (1). The three
participants who were not born in Canada had lived there for at least three years. Two participants had a
master’s degree, one had a bachelor degree and the other two participants had received a college
education. In terms of profession, one is a technical support engineer, one a call centre analyst, one a
wholesale pricing coordinator, one a caregiver and two pastry chefs.
What three to five words best describe your ethnic or cultural background?
Four terms were agreed upon as being important in describing their cultural and ethnic background by at
least two members in all three of the focus groups. These were Black, their country of origin, their region
of origin, and African or of African decent. Black was the highest ranked with values of 4.0, 2.0 and 3.0
in focus groups 1, 2 and 3 respectively. African/African decent average scores were 2.0, 3.25, and 1.6;
Caribbean/West Indian average scores were 3.0, 1.25; and 1.8 and country of origin was 0.67, 3.25 and .8
for focus groups 1, 2 and 3, respectively. In focus group 2, two participants agreed on “community life”
and “homogeneity”.
What words/terms would you use to describe an effective leader?
Communication skills and other words relating to communications, was the only term specified in all
three focus groups. Table 1 shows the average scores from the three focus groups. It includes those terms
in which at least two members in any one of the focus groups ranked those words as the top three.
Visionary was the highest ranked item (3.00) in the second focus group.
Table 1: Effective Leader
Group Summary
Average Average Average
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Focus Group 1 Focus Group 2 Focus Group 3
Visionary 3.00
Trustworthy 2.75
Decisive 2.50
Good comm. Skills/Good
communicator/Communicative 1.67 0.75 2.40
Organized 2.33
Inspirational 2.25
Responsible 2.00
What three to five words/ phrases describe what an effective leader does?
Table 2 shows the average scores from the three focus groups. It includes those terms in which at least
two members in any one focus group ranked those words in the top three, or were included by at least two
different focus groups. Motivates/Inspires and Takes Control were the highest ranked terms in focus
group 3 with a mean score of 3.60.
Table 2: What an effective leader does
Group Summary
Average
Score Focus
Group 1
Average
Score Focus
Group 2
Motivates/ Inspires 3.60
Takes Control
Assign/Delegate task according to ability
3.60
and skill 2.25
Vision (see the future) 2.25
Lives up to dreams of position 1.50
Adaptively executes plan to improve
1.50
situation for constituency
Communicates with team/Establishes
good communication w/team members 1.25 1.00
Average
Score Focus
Group 3
What three to five words/ phrases describe what motivates leaders to succeed?
Table 3 shows the average scores for the three focus groups. It includes those terms in which at least two
members in any focus group ranked those words in the top three, or were included by at least two
different focus groups. Passion was identified as motivating leaders to succeed in all three focus groups.
Incentive/financial gain and personal challenges/personal accomplishment were specified by two groups.
Heart of the people/Empathy was very highly ranked (4.5) by focus group 2
Table 3: What Motivates Leaders
Average
Group Summary
Score Focus
Group 1
Average
Score Focus
Group 2
Heart of the people/Empathy 4.50
Passion 2.25 3.25 1.40
Average
Score Focus
Group 3
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Incentive/Financial gain 1.00 3.00
Making a difference/Sense of
helping out 2.60
Personal challenges/Personal
accomplishment 1.25 2.60
State of community 2.25
Perceived results 2.00
Recognition 2.00
Ego 1.25 0.40
What three to five words describe what motivates people (other than leaders) to work hard?
Table 4 shows the average scores from the three focus groups. It includes those terms in which at least
two members in any focus groups ranked those words in the top three, or were included by at least two
different focus groups. The terms identified by all three focus groups were incentive (4.33, 2.00, 4.20) and
passion (2.67, 1.5, 3.0 respectively).
Table 4: What Motivates People
Group Summary
Average
Score Focus
Group 1
Average
Score Focus
Group 2
Incentive/Money 4.33 2.00 4.20
Fear/Need for security 3.5
Passion 2.67 1.5 3.00
Recognition/Being acknowledged 1.67 2.80
Acceptance/belonging to a group 2.67 1.60
Accomplishments and Results 2.25
Acceptance/belonging to a group 1.75
Having a good leader/Strong leader 1.33 0.80
Average
Score Focus
Group 3
What 3 to 5 people, men or women, do you consider to be, or to have been, effective leaders (they
can be local, national or international)?
The leaders that two or more participants considered to be effective are: Nelson Mandela, Jesus Christ,
Mahatma Gandhi, Kwame Nkrumah, Wangari Maathai Pierre Trudeau, Martin Luther King, and Barack
Obama.
What three to five words/phrases describe why each is effective?
The reasons why these leaders were effective were ranked by the third focus group only. Five reasons
were ranked as the top five most important by two or more participants. The most significant result for
this question is “motivated others” which has an average score of 3.50, followed by ‘”stood up for what
they believe in” with a mean of 2.75.
Discussion and Conclusion
Scholars have noted that management knowledge is severely biased towards 'western' perspectives
(Baruch, 2001; Thomas, 1996). Eighty percent of the world's population is in the developing world, and
the countries of Africa and the Caribbean are classified as developing countries. There is a critical need
for greater understanding of management in these countries.
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The present research project focuses on motivation and leadership and how these are affected by culture,
specifically in Africa and the African Diaspora. The research project is designed to avoid many of the
western biases that have been attributed to previous projects. To this end, an emic research approach is
used to develop measurements of leadership and motivation that will be appropriate in African and people
of African descent in Canada.
In this paper, we present the results of the focus groups in Canada. The participants defined the concepts
of leadership and motivation in their own terms, and there was agreement between all three focus groups.
There was also agreement between the results of the focus groups and earlier results using the delphi
technique.
The responses from the focus groups as to what motivates leaders and what motivates people were in
some ways different than that in western societies. The response that “passion” motivates both leaders
and people from all three focus groups is not a term that is usually used in the literature when describing
what motivates people. It was an unexpected response, and thus different from what would have been
anticipated from a general Canadian sample
The highest single response from any of the focus groups was that the “heart of the people/empathy” is
what motivates leaders. This is another example of an unanticipated response. Western literature
generally does not include empathy as to what motivates leaders. Thus, that which is perceived to
motivate leaders, by African and African descendents may be different than from the general population
Incentives/financial gain were seen to be less important in motivating leaders as opposed to motivating
people in general. Many in the west would argue that incentives/financial gain are as important in
motivating leaders as they are to the people they manage. If this is the case, then it is another finding that
would indicate that there are differences in using incentives in Africa than when be applied in the west.
These results support the contention (Obiakor, 2005) that further research needs to look at specific
cultural elements and preferences before developing motivational tools for African people. This study
supports the research by James (2008) and McFarlin, et al. (1999) that effective African leadership, as
well as training and development for leaders, needs to include local culture and values.
The existing literature shows that leadership and motivation have been studied extensively in the west, but
that relatively little is known about Africa and the African Diaspora. Because of this, we believe that this
study adds substantially to knowledge in the field. The implications of the results have social, economic,
and cultural implications. The research results will contribute to “good management” by improving
understanding of how cultural factors interplay with effective motivation and leadership. Improving
management across countries is important to the social environment, and in turn, increases productivity
and contributes to economic wellbeing. This study is believed to be particularly relevant and significant in
today’s increasingly global business world, where economies are interrelated. The partners believe that
our focus on the African Diaspora emphasizes particular groups that have been ignored in past research,
and that this adds to the important contribution of the project.
References
Baruch. L. (2001). Intangibles: Management, Measurement, and Reporting. Washington, D.C.:
Brookings Institution Press, pp. 150.
Bolden, R., & Kirk, P. (2009). African Leadership – Surfacing new understandings through leadership
development. International Journal of Cross Cultural Management, 9(1): 69-86.
Jackson, T. (2004). Management and change in Africa: A cross cultural perspective. London:
Routledge.
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James, R. (2008). Leadership development inside-out in Africa. Nonprofit Management &Leadership,
18(3): 359-3753.
Journal of Occupational and Organizational Psychology (2009), 82, 9, p464.
Kamoche, K., Debrah, Y., Horwitz, F., & G.N. Muuka. (2004). Managing Human Resources in
Africa.London: Routledge.
Lituchy, T., Punnett, B. J., Ford, D., & C. Jonsson (2009). “Leadership effectiveness in Africa and the
Diaspora”. Paper presented at the Eastern Academy of Management International Proceedings, Rio,
Brazil.
Mbigi, L. (2000). In search of the African Business Renaissance. Randburg: Knowledge Resources.
Mbigi, L., & Maree, J. (1995). Ubuntu. The spirit of African transformation management. Randburg:
Knowledge Resources.
Obiakor, F. E. (2005). Building patriotic African Leadership through African-centered education.
Journal of Black Studies, 34(3): 402-420.
Punnett, B. J. (2008). Management in Developing Countries. In C. Wankel (Ed.), 21 st Century
Management 190-199: Sage Publications.
Punnett, B.J., T. Lituchy, D. Ford, S. Iyare & C. Jonsson (2009). “Culture’s Impact on Effective
Leadership and Employee Motivation in Africa and the Diaspora” presentation at Eastern Academy of
Management bi-annual meeting, Rio de Janeiro, Brazil, June.
Puplampu, B. (2007). “Employee Motivation in Ghana: A Factor structure and measurement tool”
Acta Commercii, 7, 193-206.
Smith, B. (2002). Worldview and Culture: Leadership in Sub-Saharan Africa. New England Journal
Of Public Policy, 19(1): 243.
Swartz & Davies (1997). Ubuntu - the spirit of African transformation management - a review.
Leadership & Organization Development Journal, 18 (6) 290.
Thomas, A. (1996). A call for research in forgotten locations. In B. J. Punnett, & O. Shenkar (Eds.),
Handbook for International Management Research: 485-506. Cambridge, MA: Blackwell.
Thomas, A., Shenkar, O., & Clarke, L. (1994). Globalization of our Mental Maps: Evaluating the
Geographic Scope of JIBS Coverage. Journal of International Business Studies, 25(4): 675-686.
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Is online communication the only way to lunch and develop brand now and in the future?: Case
study from mobile communication from UK and Nigeria
Abstract
N. Gladson Nwokah gladsonnwokah@yahoo.com
Department of Marketing, Faculty of Management Sciences
Rivers State University of Science and Technology Nigeria.
Juliet Gladson-Nwokah juglad@yahoo.com
Department of Marketing, School of business
Rivers State Polytechnic, Bori Nigeria.
The purpose of this paper is to participate and make a positional argument on the on-going debate that “online
communications is the only way to go to launch and develop brands now and in the future, all other forms of
communications are redundant in 2010”. A descriptive research approach was adopted since the nature of the
research is on argumentative and requires supportive evidence based on theory and practice. Relevant literature
was surveyed from academic and practitioners; and evidence from trade journals, internet and flyers were used as
the basis for argument. In depth studies of three B2C firms in the mobile telecommunications industry were explored
and their marketing communications strategies were identified and discussed with reference from theoretical brand
models. The essay found that, there are three basic modes of communications – offline, online, and mobile, currently
being utilised by various organisations to launch and develop their brands. Based on the findings from the three indepth
studies discussed, the author disagreed with the proposition but concluded with recommendations that rather
than focusing on one mode of communication, a B2C organization can use mix media tools of communication to
launch and develop brands as well as integrating communications message contents in all the media. This will not
only enhance their communication efficiency and effectiveness, but will also strategically position the brand
effectively to all categories of customers and finally, increase return on investment (ROI).
Introduction
The pre-industrial society, which was predominantly agrarian, could be argued to be a ‘natural’ society, or
a society very close to nature in all ramifications. Marketing activities in such society originated
fundamentally from man’s interactions with nature as a part of nature itself, for the main purpose of
feeding and taking care of man’s immediate personal well-being. Marketing communications were
predominantly offline as emphasis and communications contents were more on the brand attributes and
qualities. Fewer emphases were made to customers’ values as competitions were less. Marketing
communication tools were more of personal or one-to-one or offline word of mouth communications.
Later other media for offline communications such as televisions (TV), radio, newspapers, posters, flyers,
cinema and direct mails emerged and these were predominant which encouraged a “push” approach
(Rowley, 2004). Communications were not targeted and non-interactive; thousands of people could be
contacted and in most cases could be offensive to some listening audience who may not be interested in
such communications. At this early period brand was seen as a name, symbol or a shape/combination of
these elements that are used for recognising and distinguishing various products and services of a
company or a group of companies from competitive companies (Vukasovic, 2009).
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The late twentieth century (late 1990s) according to Okazaki (2005) saw a revolution in communications
associated with application of online and mobile technologies. This revolution gave birth to the use of
new media ranging from the Social Network sites (Facebook, Netlog, Linkedin); Forum/Bulletin Board;
Social Bookmarking/Tagging (Delicious, Digg. Stumbledupon); Blogs; Online Video (YouTube); Virtual
Worlds (Second life); Podcast/Vodcast; Microblog (Twitter, Plurk, Jaiku); Wiki (Wikipedia) and RSS to
Specialty Magazines, Cable Television Channels, and Video On Demand (VOD). Without the necessity
of physical presence and the normal restrictions of time and place utilities, the new media including
mobile provide ideal forum for group communications and interactions (Kotler, Amstrong, 2010; Peng,
Hackley, 2007; Ashcroft, Hoey, 2001). The primary importance of communication in this revolution is to
generate engagement with consumers by creating brand values which provokes consumers’ positive
behaviour and then build emotional relationship between the consumer and the product. However, some
scholars (Chaffey, 2009; Parkin, 2009) believe that the new marketing communications modes will
consist of a shifting mix of both traditional mass media and more targeted and more personalised digital
media. Vukasovic (2009, p.166) supports this in his words ‘communication is successful only when both
types are combined’. A careful choice of media tool and content must be taken into consideration since
one little mistake can ruin the brand’s reputation. The Institute of Direct Marketing news (15 September,
2009) cited Robin Wright, president of communications agency advise that marketers should not be
carried away with potentials offered by new media, but should use a combination of digital marketing
techniques and television advertising with both providing effectiveness in reaching the target audience.
The question of whether online communications are the only way to go to launch and develop brands in
the context of Business -To-Consumers (B2C) will depend on some factors which Tapp (2008) classified
as AIMRITE (Audience, Impact, Message, Response, Internet management and the End result(s)). Thus,
the purpose of this discourse is to ascertain whether online communication is the only way to go to launch
and develop brand now and in the future, and to investigate whether other forms of communications will
remain redundant in 2010. We shall in this discourse begin with in-depth studies of three B2C
organisations’ communication strategies in launching and developing brands. In the first in-depth study,
we present the case of one mobile telecommunication provider based in the UK, and in the second and
third cases, two mobile telecommunication firms based in Nigeria are explored. This will give credence to
a critical reality built in our argument in terms of communication strategies of similar firms in the same
industries in different cultures based in the developed and developing nations. Finally, conclusions and
recommendations are drawn which provide a summary of the argument and explains our position in the
on-going debate.
IN-DEPTH CASE STUDIES
Lebara Mobile Telecommunication
The Lebara group, founded in 2001 has the aim of offering tailored innovative telecommunications
solutions so that families, friends and colleagues can keep in touch both at home and abroad. Lebara UK
is currently using a carefully coordinated mix of media in the on-going campaign of ‘£10 free call credit
when you top up £20’. This new product commissioned in January, 2010 and expected to end on 31 st
March 2010 is part of the Lebara’s brands extention strategy earlier developed by Keller (2003); Taylor
and Bearden (2003) as cited from Montaner and Pina (2009). Keller (2003) refers this as a ‘line
extension’ since the new product is offered within a current product category (Kim, 2003). To
communicate this message, short message services (SMS) through mobile phones are sent to existing
customers and reminder are also sent to customers’ e-mail boxes. Okazaki (2005, p. 160) reveals that
‘SMS has become a new technological buzzword in transmitting business-to-customer messages to such
wireless devices as cellular telephone’. Adopting Zhang and Mao (2008) and Xu (2006), Phau and Teah
(2009) argue that SMS advertising is a part of mobile marketing that utilises the SMS technology, that
allows marketers to send messages to consumers through the use of a mobile devise and is considered as
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part of one-to-one marketing. Leung (2007) argues that mobile SMS is a potentially effective and
profitable channel to advertise targeted messages. Shin and Kim (2007) believe that many brands and
media companies include text message numbers in their advertisements to enable interested consumers to
obtain more information. Three among the six attributes suggested by Barwise and Strong (2002) as ways
of using SMS for advertising are built upon the recent brand development of Lebara adverts. These
attributes are: brand building, special offer which is characterised by the benefits of topping up £20
pounds with free £10 credits and as well as a reward benefit of £7 pounds for a second top up of £20
within the same month.
Lebara SMS advert is built upon Dickinger et. al. (2005) model of success factors for SMS. This model is
divided into two categories: the message and the media. The message factors include: the message
content, personalisation according to time, location and consumer control. However, lebara message
defines the limit of the promo (January to March, 2010) and the associated benefits. Media factors include
issues regarding the devise, transmission, product fit and media cost. In targeting audience (present and
potential customers), Lebara is using flyers (leaflets) since this segment can not be targeted through SMS.
Audience is used here to include past, present and potential customers, as the essence of communication
is not only for immediate customers but to the entire audience. SMS is usually based on permission
advertisement as argued by Bamba and Marnes (2007). Warneby et.al (2005) found that leaflets (flyers)
and other promotion literatures are among the most prominently used communication tools in the UK in
the context of shopping centres. This can be applied also in the mobile telecommunication industries, thus
the justification of the use of leaflets by Lebara (see appendix 1).
The SMS and leaflets (flyers) adverts of Lebara deliver the brand message and refer customers to a
specially constructed website (lebara.co.uk) where they could explore the details of the brand and promo.
The content of the text message reads thus, ‘£10 FREE INSTANT CREDIT, when you top up £20 in a
single transaction. Plus FREE Lebara to Lebara minutes and SMS with every top up. More info:
lebara.co.uk’. The combination of these channels is in line with the LOGMAN model developed in 2004
and published in Journal of Product and Brand Management. Logman (2004, p.94) proposes a model that
combines the proactive and reactive brand management and called it the logical brand management model
and abbreviated it as LOGMAN. Lebara in developing the top up £20 and receive free £10 credit is
proactive in the future competitions within the mobile service providers in the UK. The use of the three
media is supported by Okazaki (2005) who argues that complementing mobile advertising with other
channels such as internet, television, print media, and personal contact, allows marketers to maximise
campaign effectiveness (p.163). To remind customers of the propose deadline of the promo, Lebara is at
present exploiting the database of the customers through the use of the customers e-mail. The next
section discusses the case of MTN mobile telecommunication.
Mobile Telecommunication Network (MTN).
In the Sub-Sahara Africa, Nigeria for instance, the Mobile Telecommunication Network (MTN), has and
is currently integrating offline, online and mobile communications to tailor brands to the existing and
potential customers. For instance, SMS alert with the message reading thus “Y’ello! Conference with 20
people at the same time at the cost of a standard GSM call with MTN conference call. Visit
www.mtnconference.com for more”. This is similar to the lebara current promo in the UK. Rettie et al
(2005) as cited by Chaffey et al (2009, p554), argue that
in the analysis of 26 text marketing campaigns (5401 respondents) showed surprise
effectiveness of SMS advertising. They found that overall acceptability of SMS
advertising was 44%, significantly higher than the acceptability of telemarketing and
found relatively high response rates and brand recall compared to direct mail and email
marketing.
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Flyers (appendix 2), News paper and TV adverts are also being used to target audience. A survey
conducted by Dynamic Logic and reported in IDM news (16 July, 2008) reveals that the media channel
which UK consumers like most was newspaper advertising. Also recently, MTN has launched a brand
called “Y’ello Cool and Trendy Nigeria”, targeted to the young and students in higher institutions
(generation Y). To achieve return on investment in this brand, MTN N, has designed a marketing
campaign strategy of organising workshops in four Universities strategically located in four major cities
in Nigeria (please see reference list). The indication of this shows that MTN has a deep understanding of
the cultural context, values, needs and aspiration of their Nigerian consumers, and then seek to empathise
and engage with them in scenarios in which they can add most value. Parkin (2009) argues that all great
brands start with a compelling vision based on profound customer insight. The workshop is aimed at
creating deeper consumers involvement and a sense of community surrounding the brand. This will at the
end make the brand a meaningful part of the consumers’ conversation and life.
Boyle (2007, p. 124) in developing the process model of brand co creation argue that the first duty of
brand manager is to define the name of the brand and create awareness of the brand. The author justified
this by arguing that the name provides shorthand by which the brand can be identified in the marketing
communication process. Adopting Kohli (1997); De Chaernatony, Riley (1998), Boyle (2007) argue that
brand name helps the brand managers to facilitate brand awareness through their marketing
communications. MTN cool and trendy campaign is consistent with McDonald’s in the UK and Coca-
Cola Grand Sweepstakes campaign among US college students as reported by Dano (2002) and adopted
by Okazaki (2005). Shin and Kim (2007) suggest that the integration of competing standards and
fragmented systems across countries, cross-network support for SMS, and higher connection speeds are
all necessary conditions for a wider transmission of mobile advertising.
These forms of marketing communications are very effective in the Sub-Sahara Africa, particularly, in
Nigeria as a result of incessant power failure and high illiteracy level in the use of the internet which is
prevalent in all parts of Africa (appendix 3a,b.c). Timmers (2000) argues that 24 hours online is one of
the characteristics of the internet that makes an important impact in marketing communications. Research
statistics from the Internet world Statistics published in 2009 shows a very insignificant rate of internet
usage in Africa with only 3.9% compared to the entire world internet usage. The media approaches
adopted by these mobile telecommunications firms are justified in the academic and practitioners’
literatures. A mix of both offline and online communication tools essentially help B2C firms to grow and
punch above their weight by maximizing sales and brand awareness in markets where they are heavily
outspent by their competitors.
A study by the Internet Advertising Bureau in conjunction with Kit Kat (2009) reveals that mobile
display can increase brand awareness and recognition. The IDM has come up with five guidelines
designed to increase the effectiveness of mobile advert campaigns. These are: use of mobile to raise brand
awareness; mobile advertising can be effective across all demographics especially 18-34 (this is
consistent to the recent MTN campaign); brands and mobile internets should put the user experience first,
mobile display advertising needs a clear focus and finally, mobile is more effective when something of
value is offered. This is justified by Director of marketing at Yahoo! James Tipple, who is quoted to
believe that mobile advertising is gaining popularity due to its effectiveness in reaching target audiences
(IDM 15 December, 2009). We now turn to discuss the case of etel communication tools.
ETEL Mobile Telecommunication
A wide range of TV program sponsorship are organized by ETEL in Nigeria Television Authority (NTA),
African Independent Television (AIT) all around the six major zones in Nigeria with languages the
targeted audience will understand. This campaign is targeted to secondary school children, as it appears
that at present very few secondary school students use mobile phone. Marcella and Davies (2004)
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identified language as influential tool in international marketing communications. ETEL has also
combined the use of on events and road shows, sponsoring Nigeria home movies that the picks the
interest of the younger generations. This form of campaign is very prominent in Nigeria particularly in
locations that are densely populated by illiterates’, poverty and less privileged. However, the mix of
marketing communications media most often poses some challenges to marketers (Kotler and Amstrong,
2010). The problem arises from the use of different message contents in different media as most
organisations decentralises their marketing communications. But, this can be mitigated by organisations
centralising communications under a department or unite, to ensure a uniform message content across the
media as is the case of Lebara and MTN.
No doubt, online communication is fast growing and more cost effective as argue by the Institute of
Direct Marketing that online marketing communication experience will be invaluable to any marketer
who recognises that in today’s online world, success will lie in turning yesterday’s customer
communication into tomorrow’s audience participants (IDM, 15 January 2010). However, Anderson
(2008) advocates for an integration of marketing communication tools to achieve communication
objectives and overall marketing goals of the organisation. Also, the chief executive of Internet
Advertising Bureau (Phililipson Guy) predicts that television will remain resilient despite competition
from the web. He argues that time will come when television and online will become the lead media
because they work together extremely. Lebara, MTN and ETEL in reaching the expected audience has
combined the use of both television advert (iTV, AIT, NTA) as well as SMS with linking details online.
This supports Hallerman (2009) that TV is not losing its place to online video advertising anytime soon
and justifies the mix of marketing communications media currently used by these mobile
telecommunication firms in launching and developing their brands in 2010.
Conclusion and Recommendations
Critics of offline and mobile communications may suggest that online communication is the only way to
go to launch and develop brand now and in 2010 within the B2C organizations. A counter argument can
be put forward based on the forgoing discourse. It is quite an acceptable fact of the great potentials of
online communications, but it does not follow that mobile and offline communications will remain
redundant now and in future. As pointed out by Abraham et al (2010, p.187), though, online
communication is relatively cost-effective and powerful method of direct marketing, it also has some
dangerous challenges as most B2C organizations constantly teeter along slippery slope of spam.
B2C firms that rely all their communication tools on online may run the risk of not covering the market
segments as Nunes et al ((2010) argues that the essence of communication is to build a wider awareness
among target audience and build trust which creates long term relationship. For instance, in the UK, 35%
of UK households according to the office of National statistics do not have internet. As reported earlier in
this essay, 3.9% of Africa population use internet. So it follows that communicating brands to this
segment will be through the offline or mobile tools. In three repeated survey in 2004; 2007 and 2009,
Dynamic Logic Research found that all three media – television, magazines and internet – are effective at
increasing consumer awareness, preferences and purchase intent. They argue that TV remains a strong
media for increasing brand and advertising awareness, when considering overall reach audience. The
recent MTN and ETEL brands discussed earlier used TV programs to enhance the awareness among the
target audience. In most Universities around the world, online and offline communications have been
used jointly to promote the Universities’ programs. A critical case is the ‘Brookes Business School’s open
days’, participation in international exhibitions, and campaign through the University’s website. In the
political world, Barrack Obama’s success history as the current President of United States of America
cannot be discussed without a mention of his team’s online and offline campaign.
Borrowing from the words of Pickton and Broderick (2005, p.122),
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It is important to emphasis the benefits of using a range of media in integrated marketing
communications. Too great a reliance on a single medium or unnecessarily limiting the
media selected can reduce the effectiveness of individual campaigns and the total IMC
impact. It is perfectly reasonable to select a particular media for special emphasis and it is
quite usual to choose a primary medium to be enhanced by a range of secondary or support
media.
This discourse concludes by disagreeing with the proposal that ‘online communications is the only way to
go to launch and develop brand now and in the future, all other forms of communication are redundant in
2010’. Evidence from the cases cited shows that both online, offline and mobile communications are
currently running and hope to run in future, we therefore argue based on our findings that B2C
organizations could be more effective in terms of their marketing communication by choosing a mix
media of communication and also integrating all facet communication messages. As argued by Jensen
(2008), Gurau (2008), and Cammerer (2009) integrated marketing communication has generally been
accepted as a profound and, current way of executing marketing communications. This paper therefore
concludes that it is integrated marketing communication not only online communication that could be
used to launch and develop brand now and in the future.
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Work Life Balance Practices in Nigeria: a Less Travelled Terrain
Chima Mordi, chima.mordi@brunel.ac.uk
Brunel Business School, Brunel University, Uxbridge UB8 3PH, UK
Stella Ibiyinka Ojo, Ibiyinka.ojo@brunel.ac.uk
Brunel Business School, Brunel University, Uxbridge UB8 3PH, UK
The purpose of this article is to examine the extent to which work life balance policies/practices are a reality for
employees of the banking. The article is based on a mixed method approach utilizing both qualitative and
quantitative methods. Semi structured interviews was utilized for the qualitative and questionnaire used for the
quantitative. There was a general sense of lack of awareness of work life balance policies. To identify and explore
current understanding of and attitude towards the issue of work life balance amongst Nigeria employees in the
private sector.
Introduction
The paper aims to investigate the extent to which work life balance practices are a reality for employees
of organizations in the Nigerian private sector. It also explores if there are any barriers and reasons for the
muted adoption of work life balance policies in the Nigerian banking sector. Over the past three decades,
there has been a widespread scholarly interest in the concept of work life balance (Freeman 2009; Moore,
2007). While extant work life balance (WLB) studies have significantly furthered our understanding of
the phenomena, there remains great unevenness within WLB studies in a non-Western context. In
essence, while WLB in the West has received enormous research exposure, far less attention has been
devoted to exploring the concept of WLB of individuals in Nigeria. Therefore, this is an attempt to
contribute to the literature by exploring current understanding of and attitude towards the issue of work
life balance among employees in Nigerian banks. This article is important in two ways. First, the authors
believe that this study would be of great interest to academics and in particular banks and other
international firms such as multinational corporations that are seeking to have joint ventures in Nigeria.
Second, this article fills the research gap by using the spillover model to explore work-life trends in
Nigeria. The study is organized as follows: the second section conducts a review of prior studies on work
life balance followed by the research methods and data sources. The third section presents an evaluation
of the features of the Nigerian labor market. The fourth section presents the discussion of the empirical
evidence. Finally, the last section provides the conclusion, policy suggestions.
Literature Review on Work Life Balance
There is no single universally acceptable definition of work life balance; a lot will depend on the frame of
reference scholars are using. The meaning or interpretation of the term varies with the age, interest, value,
personal circumstance and personality of each individual (Torrington et al. 2009). This resonates with Lee
et al. (2009), who argues that an employee’s ‘age, life style and environment’ plays an important part in
the individual’s discernment of work life balance. From the foregoing, the definitions can assume social,
economic and legislative forms. According to Karatepe and Uludag (2007), WLB can be described as
employees having the ability to fulfil both work and other responsibilities. Their definition is based on
social issues associated with individuals ‘irrespective of marital, race or gender’ to attain an improved suit
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between paid work and personal life. The economic perspective was described by Russell et al. (2009) it
is described as companies encouraging individuals to achieve balance as a result of benefits they would
gain such as high retention of staff which is referred to as the ‘Business Case approach’. The main aim of
the business case approach is that it results in a reduction in absenteeism of employees and also portraits
the organisation as a good employer. “The costs to your business for failing to improve work-life balance
include: poor performance, absenteeism and sick leave; and higher staff turnover, recruitment and training
costs (Department of Trade and Industry, 2001).”
However, the concept of WLB has been criticised on several fronts. For instance, Lewis et al., (2007b)
argues that WLB as a concept is problematic. This is because people do not fragment work from life,
actually for people work is part of life. It is based on personal choice which varies from one person to
another and may be difficult to quantify. Also, Freeman (2009) suggests that extant literature has
identified four key problems which affect the implementation of WLB. These includes: organisational
culture which rewards long hours and results in neglect of other areas of life. It also includes attitudinal
problems, in sense that sometimes middle management and supervisors resist polices on WLB issues.
Another problem is the issue of “homo-sociability”, which refers to the inclination of HR managers to
recruit individuals who have traits that is similar to theirs. Lastly, there is also the problem of lack of
education and effective communication regarding WLB policy.
Five main descriptive models have attempted to conceptualize work-life balance (Guest, 2001) these
include: i) the segmentation model, which states that work and life outside of work are mutually exclusive
such that one sphere does not impact the other. ii) The spillover model states that work and life are
interdependent and therefore influence each other. The other models tilt towards the spillover model; iii)
The compensation model states that one sphere makes up for the lack in the other sphere. iv)The
instrumental model states that one sphere emphasis the other sphere, and v) the conflict model states that
each sphere has numerous demands hence individuals have to prioritize and make choices that may lead
to conflict. Again, it should be noted that there various work life balance theories (Work/life expansion
theory Barnett and River, 2004); Work/life border theory Singh, 2004; balanced work/life: a matter of
balance Limoges, 2003) and the theory of work-family enrichment, Greenhaus, 2006). This paper
concentrates on spill over model. Although it is argued that the spill over model is too broad to be useful.
For Schoenfeld (2005), the general model of the model provides the flexibility to identify the state of
work-life balance which is the scope of the study.
Features of the Nigerian Labor Market
Nigeria is a West African country with a diverse ethnic grouping of over 250 ethnic groups. The official
language is English and has a population of 149.23 million (CIA World Fact book, 2010). The work force
is estimated at 47.33 million of which the labors force by occupation (2009 estimates) is as follows
agriculture 70%, the services sector had 20% and industry had 10% (CIA World Fact book, 2010).
Nigeria also has an unemployment rate of 5.9 % (CIA World Fact book, 2010). The population below
poverty line was estimated at 70% in 2007. The Nigerian Labor Act of 1971 regulates the terms and
conditions of employment in the country with the exception of for wages. Nigeria is a strongly maledominated
society where a gendered division of work prevails (Mordi et al., 2010). Hence, women
engaging in traditionally "male" fields often find it difficult to harmoniously integrate work and family
duties (Aluko, 2009). Ugwu (2009) found that dual-career Nigerian couples experienced great stress
because of multiple demands from work, family and community and even the extended family does not
help. As with many of the African Countries the extended family system is also very common feature
which provides helps support the family structure; but it comes at a cost to the individuals (Mordi et al.,
2010). Generally, in Nigeria the issues enumerated above are further compounded by the cultural values
and societal expectation of men and women. Work relations are often governed by patriarchal systems of
socialization and cultural practices (Mordi et al., 2010).
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Research Methods approach
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
This article employed a mixed method approach because WLB is viewed as predominantly subjective and
highly individualized phenomenon. To that extent, quantitative research methods are unlikely to provide a
sufficiently rich understanding. For Neuman, (2007), interview on the other hand is one of the best ways
of exploring these complexities hence; this study would utilize a mixed method approach to gain an indepth
understanding of WLB. The survey instrument was a combination of two questionnaires which had
been already validated and used in other published studies (Schoenfeld 2005 and BERR, 2008). A total
number of 250 questionnaires were administered, of which 60.8% of them were retrieved. The sample
technique was stratified. The sample was stratified because the respondents represented managers and
non-managerial. Banks were selected because of their culture of working for long hours during the week
and weekend. It is important to note that banks long hours working culture are becoming rife among
private sector firms. Given the long wok hour culture it would be interesting to know if WLB is taken
seriously as an HR policy and how it adopted or barriers to it operations. The case study for this research
was Unic Bank (a pseudonym for the leading bank). Unic Bank is one of the oldest and most formidable
banks in Nigeria founded in the early nineteenth century. The major activity of the Unic Bank is to
provide commercial banking services to corporate and individual customers. The Bank was listed on the
Nigerian Stock Exchange in the 1970’s. The Bank also has many subsidiaries, about 10,000 employees
and numerous branches across the federation.
Data Analysis and Discussion
Table 1: Demographic Statistics of sample
Respondents
UNIC Bank
Number 69 men, 83 women
(110 married, 39 Single, 2 divorced, 1
separated)
Presence of dependent children 0-9 …………… 71.3%
10-18 …………. 25.7%
>18……………. 3%
Position 16 senior managers
44 Line managers
92 non-managerial employees
Demographic Characteristics and Work- Life Balance
The questionnaires were administered to 69 men (45.4%) and 83 women (54.6%) of which three quarters
of the respondents 72.4 % were married and had children. The remaining 27.6% of the respondents were
single and did not have children. 16 of the respondents (10.6%) were senior managers, 44 of the
respondents (28.9%) were line managers and 92 of the respondents (60.5%) were non managerial staff all
whom participated in the survey. A high number of the respondents (71.3%) had young children which
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were aged between 0 to 9 years. The number of respondents with children aged between 10-18 years was
25.7%, while respondents with children above the age of 18 were 3%.
Employee’s Perception of WLB
In terms of the employee’s perception of work life balance in Nigeria, 89% of the respondents pointed out
that everyone should be able to balance their work and home life the way they wanted. Although, 88% of
the bank workers recognized that personal and work demands were overwhelming they showed a deep
organizational citizenship by being willing to disrupt their family lives for the sake of the business growth
and profit. What is more problematic is that over 80% of workers could not balance their work and life
and could not reach personal and career goals satisfactorily. To that extent 87% of employees pointed out
that work-life balance needs to be given immediate priority and that management should be a bit more
pluralistic in terms of employers and employees jointly regulating issues related to work life balance.
Flexible working arrangements
Employees within the bank pointed out that they worked for twelve hours a day. This is in addition to
weekend work. Many struggled between family and work. As some respondents pointed out:
It is very difficult for us to meet up with family commitments. If not for our drivers and help we
get from family relatives it hard to manage the children and home. My wife and I work in banks
and we hardly see the children till the weekend. Our work is sincerely affecting our lives but what
we need the money, what can we do…
It is clear the bank employees want some form of work life balance. In fact, 76 % of the respondents were
of the opinion that they would choose a flexible working pattern if it was available. According to one of
the HR managers, the bank recognized the need for work life balance:
we have flexible working patterns for our staff. Even though not all utilized it. We even have a lot
of leave arrangements for the workers. I am sure if you asked the workers, they will tell you we
have been generous and understanding with giving employees leave when requested. We know
they have family and other issues that they have to attend to. We are supportive.
However, many of the employees appeared surprised that there was flexible working arrangement. Some
of them pointed out that they had never heard of them, while other said it was for top managers:
I don’t even know what you mean by flexible working arrangement. It’s the first I am hearing the word.
This flexible working pattern you are asking is not used in Nigeria. I think it is foreign.
If there is flexible work they must be using it only for the big senior executive. We have no choice; we
have to report to work every day, if not we will lose our work. I think you know it’s hard to get job in
Nigeria. We are suffering and smiling.
However, a few respondents within IT department pointed out they enjoyed flexible work. What is
apparent from the study is that there is limited flexible working arrangement within the Bank with 95.1 %
on full time shifts, 3.7% on part time and 1.2% on teleworking. The case of the bank workers is not an
isolated case, as this arrangement is replicated across many private sector companies. The interview
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revealed that the employees were not aware of some policies such as compressed hours or working from
home (teleworking). Some of the reasons given during the interviews were that the current economic
conditions in Nigeria did not support such flexible schemes. The employee relations officer, pointed out
that Nigerians are not used to such arrangements and find them rather odd, “we have various polices like
term time and part time but most of the employee choose full time because they would earn more money
from this working pattern”. According to Mordi et al, (2010), there is a preference for conventional full
time permanent contracts. For Mordi, The preference comes from a realization that the country has a
weak and unstable industrial with large reserves of surplus labor struggling for scarce jobs. As one of the
respondents said:
“I count myself luck to have this job, the salary just keep me going it is enormous having to do
any other arrangements like part time. Part time would not be worth my while as a man, I need to
be able to provide for my immediate and extended family, so I need all the money I can get”
(Cashier officer).
The findings in this study align with other studies in that there appears to be little utilization of work life
balance polices among those employees within the western hemisphere (Spinks, 2004). The low
utilization of work-life balance programs has its probable root in the perception that adopting flexible
working arrangements leads to less job security and hinders future career prospects (Rodbourne, 1996;
Stevens, Brown, and Lee, 2004). It seems that, though work-life programs are available to employees,
individuals and organizations have yet to fully embrace the idea. In Nigeria, there are similar problems
but made worse by the ignorance exhibited by employers of the utility if WLB and the lack of information
provided to the workers.
Factors impeding work life balance in Nigeria
Lack of information and training:
Employees in this bank were oblivious to some policies that were in place in the organization such as
leave, career breaks, unpaid leave, flexible working hours and compressed hours. It was clear that
employees did not even know where to find basic information on a number of policies. Sometimes
information was known by chance through the word mouth or those close to managers that were aware of
such information.
It is clear from the interviews that both employer and employees need to be trained on the importance of
WLB. Employers need to understand that having a healthy and less stressful workforce contributes to the
improved mental and physical health, job satisfaction and job performance. When employees were shown
a list of other WLB policies and practices that exist in banks within the UK, US and employees were
excited at the prospects of having more days’ awarded to maternity leave, the introduction of paternity
leave and more options to work from home. For one of the respondents a management staff, he opined
that giving workers more work life balance option or policies will:
incur unnecessary cost. He pointed out that if the bank was to encourage people to work from
home for example, the bank will need to provide workers with computers at home, free Internet
access and some money to fuel the generator. You know we have electricity problem in Nigeria.
Fear of legal implication of taking work life balance programs:
Again, when the information was known by employees, there appeared to be confusion as to the legal
implications of employees requesting for more time. For instance, some of the employees who had taken
maternity leave would have loved to have a longer period but the bank only offers the statutory
requirement of three months. In the words of as some respondents pointed out:
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I would love to balance my family work and life but not many organizations offer such
opportunity and with the high unemployment rate in the country I don’t have any alternative than
do the long hours. (Manager).
Work life balance is a Luxury that only available in MNC not Banks (customer relationship
officer).
Weak unionism:
Another problem is the lack of union voice on the issue of work life balance and welfare of bank workers.
Many of the banks with unions are now increasingly derecognizing the unions. Often the unions are just
weak in actively challenging management on some of the onerous conditions of work which increase
work life conflicts among their members.
Conclusion and Recommendation
In summary, the institutional dynamics propelling work life balance in the western hemisphere is weak in
developing countries such as Nigeria. There is an urgent need to put in place regulatory systems and
effective implementation structure in place to help managers reorganized and design work in such a way
that it would be more humane. If the Nigerian private sector will compete effectively with the developed
world, management would need to pay some more attention to the managing issues pertaining to work life
balance, particularly in an African society where roles are ascribed to people based on their gender. There
must be a move from the growing conception that human resources are assets to be maximally exploited
and disposed off without being considerate to creating an enabling environment where the workers life is
balance with work.
The perpetuation of this hybrid of traditionalist approach and sophisticated paternalist management
approaches used by many Nigerian banks may be counter-productive and may unlikely produce
commitment, quality and continuity. Employers are quick to point out the issues of cost in not being able
to offer more work life balance initiative. This unitary managerial goal has led to the creation of structures
which over the years have led to an atmosphere of job insecurity, fear, and stress among workers. There is
a need to over haul the way work is designed to accommodate the contemporary issues such as work life
balance. Work-life policies can allow organization gain competitive edge by enabling it to attract and
retain people, particularly women, with the best skills and experience and also result in low staff turnover
and give the organization the reputation as a good employer (Epie, 2006). A review of the existing
policies is required to ensure it suits every one and ensure employees are not over worked and given
reasonable and realistic deadlines. HR mangers play a key role in ensuring the success of a WLB policies
and practices. They should train the employees so that they can be aware of the policies available and also
monitor the implementation of policies to ensure equality across the board.
In closing, these studies make four important recommendations: First, there is an urgent need to
improving Communication: There is a need to clearly communicate the bank’s WLB policies and
practices to employees, to further raise awareness and improve the knowledge and understanding of
relevant policies. This can be done by sending updated versions of WLB policies via the banks intranet
with names and details of individuals to contact for any further advice on WLB policies and practices at
the Bank. Secondly, consider implications for work-life balance in relation to workloads: guidelines
should be developed which ensures that employees are given duties which have realistic deadlines and
commensurate rewards should be given for extra hours. Thirdly, consider potential demand for further
flexibility within working patterns such as flexible hours, compressed hours or work from home. It should
be considered, subject to operational requirements, whether such practices could be extended. Hence, a
pilot scheme could be carried out to test the feasibility of having more flexible working arrangements and
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to develop appropriate policies them accordingly. There is finally a need to ensure fairness and
consistence in the implementation of WLB policies.
Reference
Aluko, Y. A. (2009) Work-Family Conflict and Coping Strategies Adopted by Women in Academia.
Gender and Behaviour, 7 (1), 2095-2122.
Barnett, R., and Rivers, C. (2004) Same Difference: How Gender Myths are Hurting Our Relationships,
Our Children, and Our jobs. New York: Basic Books.
CIA Central Intelligence World Factbook, (n.d.). Retrieved March 31, 2011 from
https://www.cia.gov/library/publications/the-world-factbook/geos/ni.html.
Department For Business Enterprise and Regulatory Reforms (BERR) (2008) Flexible working: The
Right to Request and The Duty to Consider, available at www.berr.gov.uk/employment/employmentlegislation/employment-guidance/page
35663.html assessed on 12-11-2010
Epie, C. (2006) Family-Responsive Policies in the Nigerian Environment. A CREW Conference
proceedings. Prato.
Freeman, L.M. (2009) ‘Comparison of Attitudes Between Generation X and Baby Boomer Veterinary
Faculty and Residents’, Journal of Veterinary Medical Education’, 36 (1), pp. 128-132..
Greenhaus J. H, Powell GN (2006) When work and family are allies: A Theory of Work-Family
Enrichment. Academy of Management Review 31: 72-92
Guest, D. E. (2001)”Perspectives on the Study of Work-Life Balance. A discussion paper.” 2001 ENOP
Symposium, Paris, http://www.ucm.es/info/Psyap/enop/guest.htm, assessed on 12-11-2010
Karatepe, O. and Uludag, O. (2007) ‘Conflict, Exhaustion and Motivation: a Study of Frontline
Employees in Northern Cyprus Hotels’, International Journal of Hospitality Management, 26, pp. 635-
65.
Lee, C.M., Elke D.and Dobson, R. D. (2009) ‘Work-Life Balance for Early Career Canadian
Psychologists in Professional Programs Canadian Psychology’, Canadian Psychological Association, 50
(2), pp. 73–82.
Lewis, S., Rapoport, R. and Gambles, R. (2007b) The Constraints of a Work Life Balance Approach: An
International Perspective. The International Journal of Human Resource, 18(3), pp.360-373.
Limoges, J. (2003) A balanced work life: A Matter of Maintenance. Food for Thought Document
11.Ottawa, ON: Canadian Career Development Foundation.
Moore, F. (2007) ‘Work-life balance: Contrasting Managers and Workers in an MNC’, Employee
Relations, 29 (3), pp. 385-399.
Mordi, C. Simpson, R., Singh.S and Okafor, C. (2010) The Role of Cultural Values in Understanding the
Challenges Faced by Female Entrepreneurs in Nigeria, Gender in Management: An International Journal,
25 1, pp.5 - 21
Neuman, W.L (2007) Basics of Social Research. Qualitative and Quantitative Approaches 2nd edn.
Boston: Pearson Education Inc.
Russell, H., O'Connell, P.J., McGinnity, F. (2009) "The Impact of Flexible Working Arrangements on
Work-life Conflict and Work Pressure in Ireland", Gender, Work and Organization, 16, pp.73-97.
Schoenfeld, G. (2005) Work-Life Balance: An MBA Alumni Report Graduate Management Admissions
Council, pp.1-13
Singh, B. (2004) Working women in India. New Delhi: Anmol.
Spinks, N. (2004). “Work-Life Balance: Achievable Goal or Pipe Dream?” The Journal for Quality and
Participation, 27, 3, pp.4-11.
Torrington, D., Hall, L., and Taylor, S. (2009) Human Resource Management 7th Ed. London: Prentice
Hall. London: Prentice Hall
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Ugwu, L. (2009) Dual-Career Couples: Coping with Multiple Role Stress. Gender and Behavior, 7(1),
2229-2244.
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A study of the attitude of the youth towards adoption of Internet enterpreneuership in Nigeria
Abstract
Chukwudi Nwaizugbo, ireneus.nwaizugbo@unn.edu.ng
Department of Marketing, University of Nigeria, Enugu Campus, Nigeria
V N O Aghara, vinoaghara@yahoo.com
Department of marketing, Nnamdi Azikiwe University, Awka, Anambra state, Nigeria
This study aimed at assessing the attitude of the young people in Nigeria towards the adoption of internet
entrepreneurship. It specifically looked at the depth of interest and usage level of internet as well as determined the
activities that dominated their internet time. It further determined the factors that influence the rate of adoption of
internet entrepreneurship. Both primary and secondary sources were used for the study. Relevant literature was
reviewed while survey method was used to collect primary data from 595 respondents in 2010. Findings show that
Nigerian youths are aware and are interested in the internet entrepreneurship but have been slow in adopting it as
an employment opportunity. Presently, the activities of the youth in the internet are dominated by search for new
information and social communications. Money making activities rank low. The factors that contribute to slow
growth include personal characteristics of the user, system constraints like problem of payment, delivery and
product evaluation and choice process, and environmental constraints like poor provision of infrastructure, legal
and ethical issues. It is recommended that a deliberately designed developmental marketing strategy could be used
to fast track the adoption rate of the internet entrepreneurship especially if it is sponsored by government agency.
Workshops, conferences or trainings are recommended. If this is done, the adoption of internet entrepreneurship
will increase thereby reducing unemployment as well as fraudulent activities that are performed in the internet.
Introduction
Among the attributes associated with Information Communication Technology (ICT) include its ability to
create entrepreneurship opportunities that are not constrained by geographic boundaries, culture, socioeconomic
class other entry barriers. ICT and the entire digital technology are known to have created
wealth opportunities for the whole world but the achievement of the internet in this regard is
unprecedented. Internet is a process that allows several users of computer all over the world to interact
through a virtual contact. This has permitted information sharing among the countries of the world on real
time. Internet is considered as a major breakthrough and a backbone in this information age, because the
growth in the uses and usage rate of internet has been rapid. In fact it has been predicted that a major
divide the business world would experience is a divide among those who are in the internet and those
show are not.
Hisrich (1985) defines entrepreneurship as the process of creating something different with value by
devoting the necessary time and efforts, assuming the accompanying financial, psychological and social
risks, receiving the resulting rewards on monetary and personal satisfactions. An entrepreneur is
visionary. He sees a stepping stone where others see stumbling blocks and enjoys the risk of innovatively
combining resources in a peculiar way that creates want satisfying product or improves its delivery
process to the target market. The internet has turned the world into a market space for the entrepreneur by
removing national borders such that with the right equipment one can reach any part of the world from a
remote village (Agbonifoh et al, 2007).
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Nigeria is a country with high unemployment profile of which high school leavers and University
graduates in the urban area are worst hit. With such record, one would expect that, given the orchestrated
potentials of internet entrepreneurship, its adoption would have been overwhelming. It appears that the
rate at which the youth adopt internet entrepreneurship is low even though it had been reported that many
Nigerian youths were now embracing the internet business (Mordi, 2007); and that the use of internet in
Nigeria was increasing (Ozuru and Kalu, 2006). The objectives of this study therefore are to determine
the depth of interest and usage rate of the youth in the internet, determine whether the dominant activities
performed in the internet were entrepreneurial and to determine factors that influence the rate of adoption
of the internet entrepreneurship.
Methodology
The researcher used primary and secondary sources. Related literature was reviewed with a view to
gaining more insight in to the current developments in internet usage and the entrepreneurship
opportunities in the internet. To source the primary, survey was used to collected data from a
conveniently selected sample of 595 respondents using a well structured questionnaire. The questionnaire
sought the opinion of the respondents on their current uses of internet and their general knowledge and
attitudes toward internet entrepreneurship. Excel and SPSS statistical packages were used to facilitate the
analysis.
Literature review
Internet entrepreneur is the person who makes or delivers product or service for and over digital networks
(Murono, 2009). He is sometimes called the Netprenuer (Seah, 2010). Mordi (2008) reports that a book
published in US writes that the internet entrepreneurs whom it described as “new professionals” form 90
per cent of new millionaires in that country. Internet has created riches not only for the founders of search
engines like google and yahoo; or social media like facebook or twitters but for other creative users who
could determine a need and provide satisfactory solution through the internet. Futurists have already
predicted that in the nearest future, internet will dominate the business world. Reasons are:
� High rate of diffusion of the internet facilities/usage
� Increasing number of things one can do with the internet
� Attractive business/marketing opportunity
� Simplified entry requirements:
Low capital
No conditionality (no registration)
No discrimination on the basis of gender, race status etc.
� Easy access to market: your website is your shop and you can design your front shop the way you
like it.
Whereas anything could be sold in the internet it is generally suggested that information products take
vantage position because it is easy to create and modify, it is cheap and delivery system is also efficient.
Few of the internet products that have enriched many include publication e-books/e-magazines, blogging,
articles and book chapters (Yu, 2006). Internet Affiliate Programs which is an online version of multilevel
marketing has been used widely to sell information products and it is seen as a powerful wealth
creator. Domain Name marketing and Web site design are also very viable. Google uses its Adword and
Adsense to open the doors of its site to any person who can advertise and market any product in its page
or take advantage of its sponsorship. Marketing Research, Product testing and Ghost Shopping are some
of the marketing activities that create wealth in the internet. There are also opportunities for training and
consultancy service in the internet.
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One characteristic of the internet entrepreneur is that they find it easy to discuss how they made their
money, perhaps as a selling point for marketing their own services even though Taylor (2010) suggested
that the claim may not always be correct. Also the internet entrepreneurs most often use internet as
medium for promoting their business. It is usually claimed that internet opportunity is opened equally to
everybody but Boateng and Hinson (2007) opined that most of the e-marketing successes seem to occur
more in developed countries than it is in developing countries.
Many authors have contributed to literature on the adoption and use of internet but none has addressed the
issue of low adoption rate of internet entrepreneurship in developing countries. Moon (2004) studied the
factors that influenced consumers’ adoption of the internet as an information search and product purchase
channel and suggested that consumer characteristics, type of information, website characteristics among
others are contributing factors that influence adoption. Longe et al (2006) studied the level of acceptance
of internet marketing among Nigerian consumers and reported that there is high level of perceived
acceptance because internet was seen as money saving, time saving, easy and enjoyable to use as well as
creates access to information. Davis (1986) developed the Technology Acceptance Model (TAM) which
he used to explain the internet adoption rate. He argued that perceived usefulness and perceived ease of
use were important considerations. In another study, Kim and Park (1999) contended that that the benefit
of online purchase such as time saving and convenience enhance consumers’ intention to purchase
through the internet. Conversely, the risks of online purchase such as product reliability, delivery or
refund related uncertainty reduce consumers’ intention to purchase through the internet. Sung and Kang
(2000) demonstrated that consumers are concerned with credit card or personal information abuse in the
process of online purchase.
Unethical and fraudulent activities in the internet discourage involvement in internet business to a great
extent. Internet scams and advanced fee fraud have been commonly reported in Nigeria such that the
Federal Government empowered the Nigerian Communication Commission (NCC) to regulate internet
activities. Ozuru and Kalu (2006: 49) reported that a study by Enonymous.com, a web privacy rating
company shows that only 3.5 percent of the 30,000 websites investigated do not share personal
information. 70% of the websites do not have privacy policy at all. Boateng and Hinson (2007) reported
that poor state of facilities and infrastructure could affect the adoption of internet usage. Table below
shows statistical distribution of world internet usage and penetration rate.
WORLD INTERNET USAGE AND POPULATION STATISTICS
World Regions
Population
( 2009 Est.)
Internet
Users
Dec. 31, 2000
Internet Users
Latest Data
Africa 991,002,342 4,514,400 67,371,700 6.8 %
Penetration
(%
Population)
Growth
2000-
2009
1,392.4
%
Users %
of Table
3.9 %
Asia 3,808,070,503 114,304,000 738,257,230 19.4 % 545.9 % 42.6 %
Europe 803,850,858 105,096,093 418,029,796 52.0 % 297.8 % 24.1 %
Middle East 202,687,005 3,284,800 57,425,046 28.3 %
1,648.2
%
3.3 %
North America 340,831,831 108,096,800 252,908,000 74.2 % 134.0 % 14.6 %
Latin
America/Caribbean
586,662,468 18,068,919 179,031,479 30.5 % 890.8 % 10.3 %
Oceania / Australia 34,700,201 7,620,480 20,970,490 60.4 % 175.2 % 1.2 %
WORLD TOTAL 6,767,805,208 360,985,492 1,733,993,741 25.6 % 380.3 % 100.0 %
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NOTES: (1) Internet Usage and World Population Statistics are for September 30, 2009.
Source: www.internetworldstats.com/stats.htm
The table shows a low penetration percent and low user percent for Africa. Further details of the table
showing the usage distribution in Africa shows that Egypt, Nigeria and Morocco are highest users with
18, 16 and 15 percents respectively. Regular and stable power supply; as well as availability of Internet
Service Providers (ISP) is also factors to consider in Nigeria.
Analysis of findings
Analysis of the opinion expressed by the respondents show that 99% of them browse the internet even
though degree of usage varied. Table 2 presents the result of how often the respondents browse the
internet.
Table 2: How often do you browse?
Option Frequency percentage
Once in a while 148 26.2
Always 146 25.8
Few times 77 13.6
Only when I have need 194 34.3
Source: Field survey
The result shows that majority (34.3%) of the internet users browse only when they have need while only
25.8% browse always. Those who browse a few times and once in a while totaled 39.8% indicating that
they a renot strong users of the internet services. The researchers sought to know the activities that
dominate the interests of the respondents on the internet. It was discovered that the highest ranking
activities were search for new knowledge; sending/receiving e-mails and internet research. Details of the
survey are shown in table 3 below:
Table 3: Respondents’ Dominant Internet Activities
Activity Frequency Percentage Rank
Sending/receiving e-mails 332 55.8 2nd
Chatting and dating 209 35.13 5th
Shopping for goods and services 40 6.72 10th
Selling goods or services* 23 3.87 13th
Searching for new knowledge 391 65.71 1 st
Running online program 77 12.94 9 th
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Searching for country data/information 107 16.8 7 th
Accessing result/registration 183 30.76 6 th
Internet research* 265 44.54 3 rd
Blogging* 29 4.87 11 th
Reading current news/information 258 43.36 4 th
e-book/e-zine collection and marketing* 90 15.13 8 th
Internet marketing (adsense, adword, etc.)* 25 4.2 12 th
*activities that can create wealth in the internet.
Source: Field survey
The table shows that the major things that engage the interest of the respondents in the internet in ranked
order are search for new knowledge (65.71%), sending/ receiving mails (55.8%) and internet research
(44.54%). Entrepreneurship activities ranked low compared to social and intellectual activities. This
means that the respondents see the internet more as source of new knowledge and as communication
facility than as an entrepreneurship opportunity. This actually reflected on the internet sites they mostly
visited which were mainly social communication sites namely yahoo and facebook. Less than one percent
of the respondents visit e-bay which is popular as a marketing organization and particularly as a site for
auctioning. Although about 40% have google as their favorite site, but google is popular as search engine
(it controls 60% of internet search) even though it makes 80% of its income from marketing and
advertising (Freedman, 2007). It is therefore likely that the respondents would used the site to search for
knowledge rather than taking advantage of the wealth creating opportunities in the site.
The researcher sought to determine the extent the Nigerian youths know about the entrepreneurship
opportunities and presented the pertinent questions to the respondents. The results disclosed that 90.1
percent of the respondents believe that money could be earned from the internet but more than 30 percent
do not know how as they did not suggest anything in response to how money is made in the internet. 89.7
percent of the respondents confessed that they never earned any money from the internet.
Table 4: Have you yourself ever made any money on-line
Frequency Percent Valid Percent Cumulative Percent
Valid yes 60 10.1 10.3 10.3
No 522 87.7 89.7 100.0
Total 582 97.8 100.0
Missing System 13 2.2
Total 595 100.0
Source: Field survey
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Factors militating against e-business in Nigeria
Some factors have been listed as militating against the development of internet business in Nigeria. These
include level of development typified by literacy rate, underdeveloped infrastructure and low income.
Among the unethical factors include advanced fee fraud and illegal deals as well as exposure to negative
and immoral information and images. Table 5 shows the respondents opinion regarding the factors
militating against the development of internet business in Nigeria. Buyer’s security ranked highest among
the major problems of e-business in Nigeria. Payment problems ranked next to highest is perhaps
mitigated as a result of many commercial banks’ involvement in credit card issuance. Other problems
include delivery process, location constraints, and legal restrictions. Finally is the problem of general
resistance to social change.
Table 5: What are the major difficulties of e-business in Nigeria
Options Frequency Rank
Understanding the process of buying and selling 145 6 th
Payment process 232 2 nd
Process of product evaluation and choice 111 7 th
Delivery process 199 3 rd
Buyer’s security 240 1 st
Legal restriction 173 5 th
Location constraints 183 4 th
Source: Field survey
Discussion on the Findings and Conclusions
It is clear from the results of this study that internet is well accepted by Nigerians and it is highly used to
achieve various goals. The youths are also fully aware that the internet presents a great opportunity for
business in general and entrepreneurship in particular but have barely seen it as an opportunity for gainful
employment. Although the usage rate of the internet is high but the activities performed is dominantly
intellectual exercise and social communication. Entrepreneurial activities are low indicating a slow
adoption rate. Factors that have influenced slow adoption rate include personal characteristics of the
individual like skill, innovativeness and other demographic factors; system related problems like
payment, delivery and location constraints. Others are environmental factors like level of development,
provision of infrastructure, legal and security problems.
It is clear from the result of this study that there is basic interest and basic knowledge of the potentials of
internet entrepreneurship but the motive to begin to use the method is still latent. As a result, adoption rate
is slow. Developmental marketing is usually used to stimulate such needs in a latent state to achieve full
growth. It therefore follows in this situation that there is a need for a deliberately organized marketing
effort towards stimulating the interests of Nigerian entrepreneurs to begin to adopt and experiment on this
new opportunity. So far, efforts in propagating this method is being undertaking by individuals and
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private institutions which may not readily merit the high credibility, quality of confidence and
believability a high powered government organ or well known non-governmental organization will enjoy.
Therefore to fast track the spread of this entrepreneurship opportunity, seminars, workshops and training
programs that not only explains the process of internet business but also demonstrate its wealth creation
ability should be organized. When this is done, the number of people who do legal internet businesses and
make honest income from the internet will increase reasonably and this will certainly reduce the volume
of fraudulent practices in the internet as well as unemployment among the youth of this country.
References
Boateng, R and Hinson, R (2007) “E-Commerce in Least Developing Countries (LDCs): Summary
Evidence and Implications”, 2007 IAABD Conference Proceedings, London Metropolitan University,
London. Pp 163-173
Davis, F D (1989) “Perceived Usefulness, Perceived Ease of Use and User Acceptance of Information
Technology”, MIS Quarterly, vol. 13 no. 3 pp. 319-339.
Kin, S-Y and Park, S Y (1999) “Influencing Factors of Purchase intention through e-commerce”, Journal
of Consumer Studies, vol. 10 no. 3 pp 45 – 66.
Longe, O B, Chete, F O, Chete, F C and Adedeji, B (2006) “An Evaluation of the level of Acceptance of
Internet Marketing Among Nigerian Consumers”, Journal of Marketing, vol. 1 no. 3. Pp 24 – 32.
Moon, B-J (2004) “Consumer Adoption of the Internet as an Information Search and Product Purchase
Channel: some research hypotheses”, International Journal of Internet Marketing and Advertising, Vol. 1
no. 1(pp. 104-118)
Mordi, R (2007) “The New e-Business Professionals” Broad Street Journal, ed.43/Oct. pp. 7-9.
Murino Mario (2009) “Netpreneurs: A new Breed of Entrepreneur”, The Kauffman Centre for
Entrepreneurial Leadership, www.entreworld.org
Obadan, M I and Odisola A F (2000) “Productivity and Unemployment in Nigeria”, retrieved on 27th Jan
2011 from www.cenbank.org/out/publications/occassional papers..
Ozuru, H N and Kalu, S E (2006) An Introduction to Electronic Marketing, (Owerri, Nigeria: Roik Divine
Publishers)
Poku, K and Vlosky, R (2003) “A model of Marketing Oriented Corporate Culture Influence on
Information Technology Adoption”, Louisana Forest Products Development Centre. Working Paper #63.
Seah, Steve (2010) “Are You Netpreneur”, www.mywealthcreationstrateggy.com, source: http//:Ezine
Articles.com/?expert=Steve_Seah. Retrieved 20 th January, 2011.
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ABSTRACT
Customer Satisfaction and ATM Usage in Nigeria
Olasanmi Omoneye Olufunke, neyeolasanmi@yahoo.com
Department of Management and Accounting, Faculty of Administration
Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria.
This study examined the factors that determine the usage of the Automated Teller Machine (ATM) introduced by the
banking industry to customers in Nigeria. It also assessed the level of satisfaction experienced by customers using
this technological innovation in the banking industry. This was with a view to ascertaining the level of efficiency of
the banking industry in terms of new products vis-à-vis customers’ satisfaction. The study relied on primary data
derived from the administration of questionnaire on customers of the 24 post-consolidated banks in Nigeria.
Systematic sampling technique was used in selecting 25 customers from each of the headquarter branches of the banks.
Data were analyzed using descriptive and inferential statistical tools. The results showed that ease of use (68.0%),
timeliness (53.4%), and accessibility to the innovation (42.3%), were key factors which determined the usage of
ATMs. The results showed a significant positive relationship between customers’ satisfaction and ATMs (c 2 = 0.002;
p < 0.05). The results also showed that the level of satisfaction experienced by customers from using ATMs was
77.3%. The study concluded that given the pace of innovations in the industry, banks must be at the cutting edge of
technology in other to meet customers’ needs and satisfaction.
Introduction
Three decades ago, banking in Nigeria was dominated by manual transactions with deposits from large
firms (Woherem, 2000). During the 1970s and 80s however, banks had become aware that information
technology had much to offer their industry, given that their business was mainly to do with the storage,
processing and transmission of information. They were able to use it to gently bring down the real cost of
their backlog of office activities, to introduce a number of product innovations, and to introduce what are
conventionally called “technology delivery innovations” like Automated Teller Machines (ATMs), which
led to an increase in their customer size and profitability (Woherem, 2000). An organisation will hence
seek to differentiate its products in order to compete for market share, based on increased customer size
rather than on price; thus, the emphasis on technological innovations in banking shifted to product and
customer satisfaction (Wonglimpiyarat, 2007).
Banking and financial services is an extremely competitive business in Nigeria. In recent years, there
have been numerous acquisitions in an effort to eliminate competition and expand customer base. In this
competitive industry, banks whose services are considered by customers to meet their needs often get
more customer transactions. Therefore, banks are applying technology to process documents faster,
improve internal operations, improve customer service and all these pooled together expand their
competitive advantage. Currently, technological innovations are fundamentally re-aligning business
relationships between banks and their customers and as banks face new challenges in the technological
world, they need to leverage their information technology (IT) strategy to be aligned with their different
business strategies (Srivastava and Mansell, 1998).
In spite of these technological innovations however, this research work seeks to find out whether a
significant or non-significant relationship exists between such innovations, specifically Automated Teller
Machines (ATMs), and customer satisfaction.
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Statement of the Problem
Challenges in the Era of Globalization
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Customer service in Nigerian banks can sometimes be epileptic. The recent introduction of the Automated
Teller Machine (ATM) into the Nigerian banking industry has been described in most circles as one of the
most innovative strategies by banks in the wake of the last consolidation programme. That also explains
the whole-hearted reception it received from the Nigerian business community at inception. It is,
however, deplorable that at a time customers are getting excited by the potentialities of the ATM services,
banks appear to be relapsing into old habits of inefficiency and failure to meet customer’s expectations
through quality services. There is frequent network failure or simple instructions at the ATM screen
which reads “this machine is unable to dispense cash” or “your financial institution is not available”, “this
machine is temporarily out of service, please try again later” or “issuer switch unavailable”.
At times, the outcome, when a customer experiences a service failure, is to leave such a bank. Customer
exit can cost a bank a great deal, through decreased income from the customer’s future spending, higher
costs in attracting new customers, loss of free advertising through word of mouth, and decreased
employee retention. Thus, in the light of the aforementioned problems, this study seeks to find out if the
innovations provided through the use of ATMs by banks have impacted positively on customer
satisfaction or not.
Research Objectives
The specific objectives of the study are to:
i) examine the factors that determine the usage and effectiveness of ATMs introduced by
the banking industry to customers and
ii) assess the level of satisfaction experienced by customers using ATMs in the banking
industry.
Research Hypothesis
The following hypothesis will be tested:
Ho: There is no significant relationship between ATMs introduced by Nigerian banks and customers’
satisfaction.
Literature Review
According to Santos (2003) and Yang & Fang (2004), most enterprises are trying to attract and win
customers in the highly competitive electronic market, especially with rapid growth of the Internet and the
globalization of the market. Electronic service (e-service) is becoming increasingly important not only in
determining the success or failure of electronic commerce (e-commerce) application, but also in providing
customers with a convenient service booking channel with interactive information flow in the transaction
process.
According to Shirley and Sushanta (2006), IT can improve bank’s performance in two ways. First, IT can
reduce operational cost (the cost advantage); for example, the Internet helps banks to conduct
standardized, low value-added transactions (e.g. bill payments, balance inquiries, account transfer)
through online channels, while focusing their resources into specialized, high-value added transactions
(e.g. small business lending, personal trust services, investment banking) through branches. Second, IT
can facilitate transactions among customers within the same network (network effect); for example,
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considering the case of automated teller machines (ATMs) by banks. If ATMs are largely available over
geographically dispersed areas, the benefit from using an ATM will increase since customers will be able
to access their bank accounts from any geographic location they want. This was also supported by Milne
(2006). Athanassopoulos (2000) in his study proposed an instrument of customer satisfaction in retail
banking services in Greece. The empirical results confirmed that customer satisfaction is a function of
service quality, price, convenience and innovation. By using logistic regression analysis and techniques
for qualitative research, he summarized that the segments of business and individual customers exhibited
statistically significant differences in terms of satisfaction scores.
There is however a dearth of empirical studies on the services of Automated Teller Machines on
customers’ satisfaction in the Nigerian banking industry and this study was carried out to fill this gap.
Moreover, Xiao and Dasgupta (2002) carried out a study on the measures of user satisfaction with
information systems technology in a web-based environment and made use of the End-User-Computing-
Satisfaction (EUCS) Model developed by Doll and Torkzadeh (1988). They suggested that a valid
measure of user satisfaction could be achieved with a modification of the EUCS model to include other
variables (such as privacy and security), aside from the original five variables developed by Doll and
Torkzadeh (1988) which were content, accuracy, format, ease of use, and immediate delivery of
service/timeliness. This study thus sought to improve on the EUCS model by developing another model,
referred to as Technological Innovation Satisfaction Model (TISM), and making use of variables such as
privacy, security, accuracy, accessibility, ease of use, reliability, and immediate delivery of
service/timeliness to measure the level of customer satisfaction derivable from the use of IT innovations,
in other to ensure a more reliable research model.
Research Methodology
The study was conducted in Lagos State and Abuja, Nigeria. The selection of these states was based on
the fact that out of the 24 post-consolidated banks in Nigeria, 23 banks have their headquarters located in
Lagos; Spring Bank has its headquarters located in Abuja.
Sample Size and Sampling Procedure
The population for this study is infinite. It consists of all the customers of the 24 post-consolidated banks
in Nigeria. Systematic sampling technique was thus used in selecting 25 customers from each of the
headquarter branches of the banks to ensure an even spread over the population. The number of customers
coming to a bank in a day cannot be pre-determined, consequently, a number 3 was picked randomly between
figures 1 and 5, meaning that the 3 rd customer to arrive at the banking hall on the day the respondents were to
be selected for the study, was one of the prospective respondents. Subsequent respondents were then selected
by adding 5 each time respondents were to be picked. Thus, the 3 rd customer was followed by the 8 th
customer to arrive, which was then followed by the 13 th customer, and so on until the 25 customers needed
for the study were picked. Whenever the 25 customers were not selected in a bank the first day, the process
was continued the second day. This was done for each of the post-consolidated bank in Nigeria. In-depth
interviews was also conducted on two purposively selected workers of the customer care units of each of
the banks, bringing the number of workers that were interviewed to forty-eight.
Measurement of Variables
The variables of the study were measured on Likert and Nominal Scales. The dependent variable,
customer satisfaction, was measured using the variables privacy, security, accuracy, accessibility, ease of
use, reliability, and immediate delivery of service/timeliness, based on the Technological Innovation
Satisfaction Model (TISM), which was adapted from the End-User-Computing-Satisfaction (EUCS)
model developed by Doll and Torkzadeh (1988). The independent variable, technological innovation, was
measured using the availability of ATMs.
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Research Instrument
A carefully constructed questionnaire was the research instrument used for this study. The questionnaire
consisted of two sections: Section One contained items which were used to identify the factors that
determined customers’ usage of ATMs while Section Two contained a 7-item structured question on a 5point
Likert Scale to assess the level of satisfaction experienced by customers using ATMs.
Data Analysis Technique
Data obtained from this study were analysed using both descriptive and inferential statistical tools.
Frequency tables, graphs and simple percentage analysis were used to identify the factors that determine
their usage and assess the level of satisfaction experienced by customers using ATMs in the Nigerian
banking industry. Chi-square Analysis inferential statistical technique was used to test the hypotheses
postulated for the study.
Data Analysis and Findings
A total of six hundred (600) questionnaires were administered to customers of twenty-four (24) banks;
twenty-five (25) customers were selected from each of the headquarter branch of the 24 post-consolidated
banks. Five hundred and eighty-eight (588) questionnaires were retrieved, giving a response rate of 98%.
Table 1 shows the percentage distribution of the respondents across the banks covered by the study.
Table 1: Percentage Distribution of Questionnaires Returned from each Bank
Banks
Number of Questionnaires
Returned from each Bank
Percentage
Rate (%)
Response
Access Bank 25 100
AfriBank 24 96
Bank PHB 25 100
CitiBank 24 96
Diamond Bank 25 100
Eco Bank 23 92
Equatorial Trust Bank (ETB) 25 100
Fidelity Bank 25 100
First Bank 24 96
First City Monument Bank (FCMB) 25 100
First Inland Bank 25 100
Guaranty Trust Bank (GTB) 25 100
Intercontinental Bank 25 100
Oceanic Bank 25 100
Skye Bank 25 100
Spring Bank 25 100
Stanbic IBTC Bank 25 100
Standard Chartered Bank 25 100
Sterling Bank 25 100
Union Bank 25 100
United Bank for Africa (UBA) 25 100
Unity Bank 24 96
Wema Bank 20 80
Zenith Bank 24 96
TOTAL
Source: Field Survey, 2010
588 98
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From the results of this study, it is revealed that people from all walks of life use the banking
technological innovations. However, students, civil servants and the self-employed people are much
higher in percentages than those who are artisans and people engaging in other occupations, as 38% of the
respondents are students, 29% of them are civil servants, 23% of them are self-employed individuals,
while just 6% of them are artisans and 4% of them are unemployed (Figure 1). This justifies the fact that
while artisans are directly paid most of the times, people in the other categories engage more in
transactions that involve indirect and distant payment.
Figure 1: Distribution of Respondents by Occupation
Source: Field Survey, 2010
Factors that Determine the Usage and Effectiveness of Technological Innovations by Respondents
From Figure 2, seven factors identified ― accessibility of innovation, accuracy of information,
timeliness of service, reliability of service, privacy, ease of use and security of information ― came to
play in determining customers’ usage and eventual effectiveness of technological innovations in the
banking industry, but with differing intensity. Respondents, in determining their usage and effectiveness
of technological innovations, selected multiple factors. However, the factor that ranked strongest was ease
of use (400 respondents), corresponding to 68% of total number of respondents (588). This implies that
customers appreciate the lack of difficulty in the usage and effectiveness of the technological innovations
above any other factor. This was followed by timeliness of service (314 respondents, corresponding to
53.4%), that is, the immediate delivery of the service in such a way that customers do not have to queue
up for a long period before gaining access to a service or product needed. Accessibility (which refers to
the ease of reaching the innovation) was another crucial factor, which determined the usage and
effectiveness of the technological innovations by customers. This was depicted by 42.3%, made up of 249
respondents. This means that customers, above other things, were more concerned with whether the
innovation was easy to use, timely, and/or easily accessible or not. This, by extension, implies that when
these factors are adequately taken into consideration, customers will be more willing to use the available
technological innovations. Banking service providers will therefore do good to ensure that these factors
are put in place, especially, in the order in which they are ranked by customers, to enhance patronage
from willing customers.
Others factors that determined the usage of technological innovations include reliability (consistency of
the product and service, 39.1%), privacy (that is, a lack of disturbance while using the technological
innovation and the right to keep personal information, 34%), accuracy of information (that is, the
correctness and exactness of the innovation, 31.8%) and security of information (how safe the innovation
is against threats from fraudulent individuals, 23.3%).
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Figure 2 Factors (multiple responses) that Determine the Usage and Effectiveness of
Technological Innovations
Source: Field Survey, 2010
Test of Hypotheses
In testing the hypotheses of this study, Chi-square Analysis was used to determine the relationship
between customer satisfaction and ATM usage.
Customers’ Level of Satisfaction with ATMs
Table 2 shows that 10.1% of those who use ATM cards rated its usage as not satisfactory, 12.6% of them
rated it as below satisfactory, 42.7% of them rated it as satisfactory, 25.0% of them rated it as fully
satisfactory, while 9.6% of them rated is as above satisfactory. The Chi-square result shows a value <
0.05, indicating a significant relationship between customers’ satisfaction and ATMs. We therefore reject
the null hypothesis and conclude that there is a significant relationship between the use of ATMs and
customers’ satisfaction. Thus, banks should endeavour to put in place efficient, accessible, and reliable
ATMs that will satisfy the needs of their customers.
Table 2: Cross-Tabulation and Chi-square figures showing relationship between Customers’
Satisfaction with ATMs usage
Variables
Do you have an ATM
card?
Yes
No
Source: Field Survey, 2010
Overall Satisfaction Rating with Bank’s ATM Services
Not
satisfactory
N (%)
52
(10.1%)
12
(16.4%)
Below
satisfactory
N (%)
65
(12.6%)
20
(27.4%)
Satisfactory
N (%)
220(42.7%
)
25 (34.2%)
Fully
satisfactory
N (%)
129(25.0%
)
14 (19.2%)
Above
satisfactory
N (%)
49 (9.6%)
2 (2.7%)
Total
N (%)
515
73
Chi-
Squar
e
Tests
c 2
0.002
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Summary and Conclusion
Summary of Findings
Findings from this research work revealed the following:
i) Of all the seven factors (accessibility of innovation, accuracy of information, timeliness of
service, reliability of service, privacy, ease of use and security of information) identified to
determine the usage of technological innovations, ease of use of the innovation was ranked the
highest (68%). This was followed by timeliness of service (53.4%), that is, the immediate
delivery of the service in such a way that customers do not have to queue up for a long period
before gaining access to a service or product needed.
ii) A high percentage (73.8%) of customers were satisfied with the introduction of ATMs in
Nigerian banks.
iii) The level of satisfaction derived from ATMs was 77.3%.
iv) Some of the respondents (91.7%) do not adopt ATMs in carrying out banking transactions
because they believe its usage is highly susceptible to fraud.
v) A strong significant relationship (p-value < 0.05; p = 0.002) exists between customers’
satisfaction and the use of Automated Teller Machines (ATMs).
Conclusion
This study was conducted to empirically investigate issues that might be related to the key determinants
of satisfaction among bank customers in their use ATMs. The intent was to provide insights into end-user
satisfaction by considering service factors as the determinants of meeting customers’ needs and to
determine customers’ level of satisfaction with ATM technological innovation provided in the Nigerian
banking industry. Hence, a seven-factor model was developed by combining Doll and Tokzadeh’s (1988)
EUCS measuring model to other variables, which are accessibility, reliability, privacy, and security, in
order to obtain a more reliable model to measure satisfaction. Increasing satisfaction with the usage of
ATMs presents both an opportunity and a challenge for banks. The opportunity lies in driving more
customers to embrace these innovations and to take advantage of its convenience and efficiency to meet
their needs and exceed their expectations. If banks continue to satisfy customers with technological
innovations while increasing usage, the end result would be a larger number of satisfied and loyal
customers. This will help banks attract more customers and increase patronage, as a result of stronger
recommendations from existing users. The challenge, on the other hand, lies in changing customers’
behaviour to embrace such a bank’s services. There will always be customer complaint due to perceived
lack of satisfaction and lack of comfort with the bank’s technology. Thus, banks that figure out how to
meet their customers’ need through the provision of working ATMs will enjoy greater loyalty and
financial success.
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Track 13: Law, Social Responsibility and Ethics
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Fostering Business Ethics in Pursuit of Organizational Integrity in a globalized business
environment: Dilemmas for South African Business Organizations
Abel J. Diale: dialeaj@tut.ac.za
Tshwane University of Technology, South Africa
A globalized business environment presents the business organizations with opportunities and challenges. These can
be seen from the daily media exposures of wrongdoing in areas of unethical practices (e.g. cartel behavior among
dominant players in specific industries) and illegal practices (e.g. insider trading, price fixing and eaves dropping).
All these occur while these organizations have well-articulated ethics codes / codes of conduct and relevant
legislation governing business practices. The paper intends to interrogate a central feature of even when
organizations have well-articulated codes of ethics / conduct that guide their business dealings, they still find
themselves on the wrong side of the law and bringing their ethical standing in question. To address this
predicament, the study selected two organizations, which in their respective markets, have a fair share and
considerable influence. The cases referred to were presented before the Competitions Tribunal and the Supreme
Courts of South Africa respectively between the years 2006 - 2010. These cases will be presented and analyzed, with
the view of drawing recommendations for considerations by managers of corporations.
Introduction
In the era of modern technological revolution and the expanding global village, organizations and their
leaders have come under increasing pressure to demonstrate their moral and ethical pedigree. Ghillyer
(2008) and KLM Inc (2007) observed that, until recently, few organizations seriously considered ethics to
be a legitimate topic for enterprise planning and strategic thinking. This practice, the authors contend,
brought the strongest news of the last decade linked to growing trend of unethical business behaviour.
This aspect is further presented by (Ogbuechi, Folami & Kwesiba, 2007) when asserting that, as the
global awareness of ethical and corporate responsibility issues is continually increasing the conduct of
business transactions efficiently and effectively in a mere technocratic sense is no longer sufficient to
preserve the acceptability of managers in a globalized marketplace. Further, while there is yet no
universal morality standard, ethical and corporate integrity considerations must become an integral of the
decision-making process. This was not considered an integral part of the planning and implementation
process.
The paper will look into the possible factors that make business organizations to flout their own
organizational ethics with the hope of gaining competitive advantage in the market. The results presented
were obtained using a qualitative study, utilizing a comparative case study approach. A comparative
analysis will be made based on two (2) business organizations in South African the periods 2006 – 2010.
The paper will provide some overview of ethics, business ethics, and ethical principles of Corporate
Governance as per the King III Report (2009) as well aspects that constitute Organizational Integrity. This
will be followed by the analysis of the cases selected. The results will be presented and concluding
remarks will be made for managerial consideration.
Definitions: Ethics, Business Ethics, Corporate Governance
The view expressed by Fourie (2010) is that ethics relate to moral principles and rules of conduct and they
call upon us to evaluate personal interests against the good of the company or employees and ultimately,
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society itself. This view is similar to the one articulated by Diale (2008) when stating that ethics is a
notion that is used to refer to standards of behavior that tell us what we ought to do in both our private
and professional life. They apply to all individuals, organizations and society as a whole. They represent a
purposive action according to some set of values in determining what actions measure positively or
negatively in terms of acceptable societal moral standards. The same could be said of the assertions by
Rossouw & van Vuuren (2005) and Nadler (2007). On the basis of the above-stated exploration, it could
be deduced that ethics is an inescapable aspect of life in general and, human-kind in particular to make
ensuing interactions meaningful.
Related to ethics is the notion of business ethics which Ghillyer (2008) describes as involving the
application of standards of moral behavior to business situations which can be approached from two
distinct perspectives, namely; a descriptive summation of the customs, attitudes and rules that are
observed within a business, this is basically a documentation of what is happening and; A normative (or
prescriptive) evaluation of the degree to which the observed customs, attitudes and rules can be said to be
ethical, this is a recommendation of what should be happening. Business ethics according Rossouw
(1997) is based on the results of the study conducted among eminent academics in Business Schools,
business leaders interested in business ethics and other academic departments providing ethics education
in South Africa. In the author’s view, business ethics can be explained along the following trends. These
are; (1) business ethics can be explained in terms of personal values and virtues that should be applied to
business; (2) in terms of the application of societal or religious norms/rules/standards/values to business
practices and; (3) as a reflection on economic practices and decision-making that will ensure that business
activities are beneficial to individuals and society alike within the framework of a competitive marketdriven
economy. Rezaee (2009) identified the following levels according to which business ethics have
been identified based on what type of business and how their actions are evaluated. They are: (1) the
society level, which defines ethical behavior and assesses the effect of business on society; (2) the
industry level, which suggests that different industries have their own set of ethical standards (e.g.
chemical industry v/s pharmaceutical industry); (3) the company level, under which different companies
have their own set of ethical standards and; (4) the individual manager level, at which each manager and
other corporate participants are responsible for their own ethical behavior.
On the basis of the afore-mentioned, it can be argued that business ethics should not be applied as a
separate set of moral standards or ethical concepts from general ethics, instead, business ethics by all
intents and purpose call for moral action within the corporate environment so that the business entity can
remain viable and continue serve its market both efficiently and profitably (Fourie, 2010)(Ghillyer, 2008).
The case for business ethics can be justified on the following aspects, viz. the importance of business
ethics based on the public role that business play in society; the contribution that business ethics can make
toward improvement of business performance and; business ethics help to overcome the discrepancy that
individuals often experience between their individual values and those pursued by in business (Rossuw,
1997). In simple terms, business ethics makes a strong case for minimizing the effects of ethical dilemmas
for employees and managers alike when confronted with situations of making business decisions or
taking actions that might have the potential for compromising the integrity of the organization.
Instances of organizational collapses due to ethical indiscretions by decision-makers are abundant. The
ethical track record of many organizations over the last two decades would make one to believe that there
have been no such policies and procedures which led to questions as to whether “Is Business Ethics an
Oxymoron?”. The negative publicity of ethical meltdown of business organizations brought to the fore the
urgency of business organizations to re-look into their ethical outlook and make-up. Internationally, as
articulated by Ghillyer (2008) and Stanwick & Stanwick (2009), numerous prominent organization that
were previously held as models of aggressive business management; (e.g. Enron, Global Crossing,
Health South, IMClone, Tyco, WorldCom, Parmalat, Livedoor, Boeing to name but a few) have been
proved to be fundamentally flawed in their ethical practices. Similarly, South Africa did not escape the
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ethical radar screen and this can be seen from the Travel-gate (Parliamentary Travel Scheme Abuse), Oilgate
(Compromise of Ethical Governance for political patronage) and the Fidentia fiasco (Diale, 2008).
These are just but some of the cases in a long list ethical embarrassment by organizations both in public
and private business.
In response to ethical challenges, organizations devoted resources to drawing-up formal codes of ethics
and codes of conducts. Unfortunately, these were and in most cases still are, more compliance-based, with
the aim of preventing, detecting and punishing the legal violations. Organizations embrace punitive legal
compliances. They advocated and become overzealous with the approach that prioritized the threat of
detection and punishment in order to channel in a lawful and acceptable behavior (Nadler, 2007; Navran,
2003). However as Rezaee (2009) points out, a well-established and effectively enforced code of conduct
provides ethical standards and guidelines on resolution of conflicts of interest; compliance with applicable
regulations, compliance and proprietary of information; and fair dealings with investors, customers,
suppliers, employees, and other interested parties.
In addition to these codes, there emerged an advocacy on Corporate Governance and their continuing
reforms on how business corporations are supposed to be directed, controlled, managed, monitored and
held accountable. While the issue of corporate governance has reached new heights of media attention in
the wake of corporate scandals, the topic itself has been receiving increasing attention for over a decade.
These can be seen from the 1992 Sir Adrian Cadbury committee in Great Britain on “Financial Aspects of
Corporate Governance” as a response to public concerns over director’s compensation at several highprofile
companies in Great Britain. At the time the predominant cases were those of the financial scandals
of the Bank of Credit and Commerce International (BCCI) and the activities of publishing magnate Sir
Robert Maxwell (Ghillyer, 2008). In the United States, Kayes, Stirling & Nielsen (2006) point out to the
backlash against the perceived ethical lapses that came in the form of the 2004 revised guidelines from
the U.S. Sentencing Commission (USSC) which clarified and made more stringent the criteria
organizations must follow to create and effective compliance and ethics program. As the authors
maintain, the ISSC’s focus on ethical corporate behavior in this revision reflects a shift in the legal
landscape since the original guidelines were implemented in 1991. These updated guidelines provide
incentives for organizations to create meaningful, effective compliance and ethics programs, tools which
are essential should the organization seek to mitigate fines and/or terms of probation associated with a
criminal offence. These guidelines are in addition to other corporate laws, securities laws, listing
standards, and best practices. The other most revered legislation is the SARBANES-OXLEY ACT of 2002
(SOX), one of its key objectives being to “set high standards and new guiding principles for corporate
governance”. South Africa got to prove its worth in 1994 through the publication and adoption of the
“King Report on Corporate Governance” (referred to as “King I” Report) by a committee led by Mervin
King, a corporate lawyer and former high court judge. The King II Report was published eight years later
and was soon succeeded by the “King III” Report in 2009. The latter will be briefly explored on those
aspects relating to business ethics in the section below.
Another measure that was considered by public and private business organizations to enhance ethical
pedigree of organization was the notion of whistle-blowing, formally known as protected disclosure.
Though this was received with much fun-fare, the results proved to be too costly to those employees who
dared to expose the unethical practices within organizations, and the organizations themselves. As
Palazzo (2007, 122) puts it, whistle-blowing is often the result of highly ethical actors in an unethical
context who have the courage to resist the “normal” behavior and who run tremendous risks for their own
careers in order to stand-up for ethical convictions. However, since potential whistle-blowers know the
risks of making bad corporate practices public, most of them might never blow the whistle but remain
silent or even adopt a behavior they deem wrong. For the details of some of the cases in South Africa and
elsewhere in the world see Auriacombe, 2004, De Maria, 2002, Diale (2005(a), 2005 (b), Diale &
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Holtzhauzen, 2005). The next section will briefly outline the King Code of Governance for South Africa
(2009) in respect of its dictates for ethical governance.
ETHICAL GOVERNANCE FOR THE SOUTH AFRICAN BUSINESS SECTOR – PRESCRIPTS
OF THE KING III REPORT (2009)
The King Code of Governance for South Africa 2009, known as the King III Report is a successor to the
King I (1994) and King II (2002) reports. This was necessitated by effort of the South African business
community being at the forefront of governance internationally. It came as a necessity due to the
promulgation of the new Companies Act no. 71 of 2008 and changes in international governance trends.
The governance and compliance framework is on a voluntary basis, simply referred to as “compliance or
explain” in addition to certain governance issues that are legislated (IoD, 2009: 5)).
As far as the body of legislation that applies to a company is concerned, corporate governance mainly
involves the establishment of structures and processes, with appropriate checks and balances that enable
the directors to discharge their legal responsibilities, and oversee compliance with legislation. In addition
to compliance with legislation, the criteria of good governance, governance codes and guidelines will be
relevant to determine what is regarded as an appropriate standard of conduct for directors. The report
acknowledges the results of surveys that indicate that the first priority of stakeholders of a company is the
quality of the company’s products or services, the second priority being the trust and confidence that the
stakeholders have in the company. Therefore; the board is not only accountable to the company itself
while ignoring the legitimate interests and expectations of its stakeholders, but it should take into account
the legitimate interests and expectations of the company’s stakeholders when making decisions.
Key aspects of the report revolve around the following:
• Good governance is essentially about effective leadership: this is about leaders rising to the
challenges of modern governance which will be characterized by ethical values and
responsibility, accountability, fairness and transparency and, based on moral duties that find
expression in the concept of Ubuntu. This aspect aspires for responsible leaders who direct
company strategies and operations with the view to achieving sustainable economic, social and
environmental performance.
• Sustainability: this is viewed as the primary moral and economic imperative of the 21 st century
which constitutes one of the most important sources of both opportunities and risks for business.
This aspect is in recognition of the fact that nature, society and business as being interconnected
in complex ways that decision-makers should understand and,
• The concept of corporate citizenship: this aspect flows from the fact that a company is a person
and should operate in a sustainable manner. Sustainability considerations, as the report
acknowledge, are rooted in the South Africa Constitution which is the basic social contract that
South Africans have entered into and, imposes responsibilities upon individuals and juristic
persons for the realization of the most fundamental rights (IoD: 2009: 9-10).
The application of the code is to all entities regardless of the manner and form of incorporation or
establishment and, whether public or private sectors or non-profit sectors. The report consists of a number
of principles, but of interest to the paper, only those that pertain to Ethical Leadership will be highlighted
(IoD: 2009: 16).
As one of the Governance elements the report calls for Responsible Leadership, this responsibility is
bestowed upon the board to provide effective leadership based on an ethical foundation. Among the
recommended practices leadership is entrusted with the following:
o to direct the strategy and operations to build a sustainable business;
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o to consider the short-and-long term impacts of the strategy on the economy, society and
the environment;
o to do business ethically;
o not to compromise the natural environment and;
o to take account of the company’s impact on internal and external stakeholders (IoD:
2009: 19).
The code further recommends certain responsibilities to the board in this regard. These relate to the
following:
o set the values to which the company will adhere formulated in its code of conduct,
o ensure that its conduct and that of management aligns to the values and is adhered to in all aspects
of its business and,
o promote the stakeholder-inclusive approach of governance (IoD: 2009: 20).
There is also an element of Ethical foundation entrusted to the board. The board in this regard should:
o ensure that all deliberations, decisions and actions are based on the four values
underpinning good governance and;
o ensure that each director adheres to the duties of a director (IoD: 2009: 20).
The aspects outlined above can be summed up as the Ethical Infrastructure of an organization. These
include basic values/principles, processes, procedures, organizational / business culture and practices of
how an organization deals with its employees, managers, and various stakeholders both within its internal
and external environment. These and other business practices can be advanced as ingredients and integral
components necessary to build organizational integrity (the subject of the paper) for sustainable business.
In describing the phenomenon of Organizational Integrity, Palazzo (2007: 114) refers to the ethical
integrity of individual actors, the ethical quality of their interactions as well as that of the dominating
norms, activities, decision-making procedures and results within a given organization. Much as ethical
make-up of an organization depends on organizational managers as the key drivers of ethical behavior
and practices within an organization, as well as the presence of ethical individuals, organizational
integrity goes beyond the two aspects, instead as Kayes et al (2006) indicate, building integrity within an
organization will require changing key processes across all functions of the organization, progressing
beyond compliant corporate culture to a culture that encourages exemplary behavior. Exemplary behavior
should begin with a comprehensive approach to ethics that emphasizes integrity. The key characteristics
that indentify the integrity of the organization are: (1) The language of ethical decision-making is used;
(2) Structural supports and procedures that facilitate ethical-decision-making have been developed; (3) A
culture of openness, responsibility, and commitment to multiple business goals has been created and
sustained and; (4) Employees development is valued (Kayes et al, 2006, 3; Palazzo, 2007, 118-123). The
expression thus far provided is used as a framework to analyze the essence of the paper. The following
section is a summary on the two selected cases.
CASES OF CORPORATE AND ETHICAL GOVERNANCE INFRINGEMENTS – Dilemmas for
South African Organizations
The following is a summary of the two (2) cases selected for the purpose of illustrating the gist of the
paper. These organizations appeared before the Supreme Court of Appeal and the Competitions Tribunal
of South Africa respectively, on allegations of contravening the Competitions Act (Act 89 of 1998) herein
referred to as the Act and; violating their own values and principles of conducting business in their
respective markets (own emphasis). The Competition Tribunal is an independent body established in
terms of section 27 of the Act with the purpose of among others; to adjudicate complaints of prohibited
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conduct (i.e. restrictive practice and abuse of dominance) in terms of chapter 2; impose a remedy, award
costs, grant an order for interim relief and, hear appeals or review decisions that are referred to it. It is
subject to the Republic of South Africa Constitution (1996) and the law.
These organizations are firstly; Telkom SA, a telecommunications giant with exclusive power to conduct
the telecommunications service in terms of Telecommunications Act 103 of 1996; secondly; Pioneer
Foods (Pty) Ltd operating in the food and beverages business sectors, the core business being the
production and distribution of a diverse range of food, beverages and related products for both human and
animal consumption. All these business organizations are subject to the provision of the Competitions Act
and Principles of Good Corporate Governance as contained in the King III Report and its predecessors,
King I and II.
How Exclusive Powers create Corporate and Ethical Governance Dinosaurs: A Case of Telkom SA
As indicated in the section above, Telkom SA has exclusive power to conduct telecommunications
service in South Africa in terms of the Telecommunications Act 103 of 1996. Of interest in this instance
is the case that was brought before the Competitions Commission on February 23, 2009 to the
Competitions Tribunal. Initially, in May 2002, a complaint was lodged with the South African VANS
Association (SAVA), the Internet Service Providers Association (ISPA) and 18 value-added network
service providers. In August 2002 Omnilink (Pty) Ltd and Internet Solutions (Pty) Ltd lodged another
complaint. These complaints were consolidated into one as they were both directed at Telkom. Instead of
Telkom filing an answering affidavit to the complaints leveled against it, it disregarded the authority and
competence (as contemplated in the Act) of these two bodies by launching proceedings in the High Court
to set aside the findings of the Commission, Telkom succeeded in this first round of litigation, hence the
case was referred to the Supreme Court of Appeal by the Competitions Tribunal. The Commission had
earlier referred the substantial complaint to the Tribunal for adjudication, Competition Commission v
Telkom (623/2008) ZASCA 155 (27 November 2009).
Through its business unit Televans, Telkom SA provides a range of services and products that compete
with the services offered by others whose value-added network services (VANS) licenses are leased
through Telkom and an agreement has to be entered into.
The bone of contention was that Telkom, through its market dominance and legal mandate, (a) imposed a
set of contractual restrictions on the licensees in respect of “backbone and access” facilities in which they
were denied or prohibited from providing networks to their customers, reselling spare capacity, from
carrying voice on behalf of their customers and from bypassing Telkom’s public switched
telecommunications network by receiving data signals and allowing it to break out of the licensee’s
network at a point other than the point of entry, (b) it refused to lease access facilities of the licensees but
instead, required customers of the licensees to do so directly, (c) engaged in excessive pricing or price
discrimination (i.e. Telkom’s customers were charged half of what it charged licensees) and, (d) refused
to peer or pool its telecommunications facilities with AT&T to provide facilities to SDN to enable them to
peer with AT&T. All these complaints were referred to the Tribunal with the purpose of adjudicating and
proving interim relief, but as indicated, Telkom adopted the dinasouric approach to its market dominance
and possible competition.
It needs to be pointed out that, this is the same company that its vision envisages a company that
“government and the regulator should see it as a trustworthy and respectful enabler of the economy”, the
mission being to be among others “acting as a responsible and caring corporate citizen”
(https://secure1.telkom.co.za/ir/sustainability/vision-and-mission.jsp). Less need to be said about some of
its principles; which are honesty (keeping promises and commitments, being open and transparent in all
the dealings with customers, stakeholders and the broader community) and respect (treating everyone
with courtesy, politeness and kindness). The charges as outlined above paint a different picture and, as the
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Supreme Court of Appeal rightfully ruled in favor of the complainants and the broader ethical business
community, Telkom was reminded of the role of the Competitions Tribunal (which Telkom questioned its
credibility and competence), but also upheld the earlier ruling of its decisions and the Telkom’s case
dismissed with costs. All these happened under the nose of the Telkom Board that proclaims to subscribe
to, and fully committed to sound business principles and practices of integrity and accountability.
Sniffing Life out of the Destitute- Cartels in the Bread Industry by Pioneer Foods (Pty) Ltd and Co
This matter was brought before the Competition Tribunal by the Competitions Commission against
Pioneer Foods (Pty) Ltd in which Pioneer baking divisions, Sasko and Duens were alleged to have
formed part of bread manufacturers’ cartels that fixed prices and divided the market. The hearings were
conducted between 17-24 June 2009 and 9 September 2009 and reasons issued on 3 February 2009. The
other parties involved in the initial commission’s investigations and hearings were Primier Foods and
Tiger Brands. What emerged in the commission’s findings is that, Primier Foods were the first to accept
that indeed there was a bread cartel operating and territory allocations for these dominant players. They
applied for leniency with the provision that they will cooperate with the authorities during the
investigations. Tiger Brands, as it was expected in view of the Primier Foods revelations and admissions,
also negotiated a consent order agreements and true to its commitments, conducted its own internal
investigations which proved the allegations to be true. It was later slapped with a penalty amounting to
5.7% of its turnover for the 2006 final year earnings. Both Primier Foods and Tiger Brands agreed to a
penalty (instead on embarking on a prolonged litigious process of defending the indefensible) and, to the
implementation of compliance programs in their respective organizations.
Pioneer Foods were willing and prepared to show their economic muscle and legal prowess by choosing
to place itself in the public spotlight, submitted itself to cross-examination. Unbeknown to the strategist
and appointed defenders who enlisted themselves as guardians of company’s moral and business psyche,
what was to be revealed was insurmountable legal and moral embarrassment. Details of a long standing
conspiracy emerged and were put to record. As the co-chairs of the Tribunal put it “the company
demonstrated its willingness to construct a case based on falsehoods and misleading tactics. Its lack of cooperation
with the agencies and the fact that, at the date of the hearing, it has not taken any disciplinary
action against a single person involved in these contraventions all counts against it”. On the basis of the
evidence gathered, the Tribunal did not hesitate to impose the highest penalty it is entitled to levy. As a
result, the total penalty amounted to R195 718 614 (+- US$27 959 802.00). This include the
administrative penalty of 9.5% (R46 019 954) (+- US$6 574 279.00) of Sasko’s turnover in the Western
Cape and 10% (R149 698 660)(US$21 385 523.00) of Sasko’s national turnover (15/CR/Feb07;
50/CR/May08). The list of the values that this company proclaims to subscribe to are;
• Accountability and Commitment: relentless efforts in pursuit of sustainable results and
relationships,
• Adaptability: adjusting effectively to working in new structures, process requirements and
cultures,
• Consumer/Customer focus: putting clients first and aiming to meet and exceed their
expectation and,
• Integrity: building trust by acting with honesty and openness.
It remains to be seen as to what measures has the company taken to redeem itself after such a bruising
encounter on its image, implementation of its values and reorientation of its business practices to uphold
not only the law, but building its own integrity.
The two selected cases exhibit some commonalities in their quest to conquer the market in which they
operate. Some of the common aspects relate to, (1) both companies have a strategic importance in the
market, i.e. Telkom for telecommunications (dominant fix-line provider) and Pioneer Foods in basic food
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stuff, (2) both have a fair share of market dominance, (3) they are subjected to the laws that govern
business practices, (4) have clearly stated vision, mission, business principles and a set of values that
govern the conduct of its members. What is lacking in the two cases above, little was mentioned, by those
who testified before the proceedings indicated what role do the set of principles identified in their
respective company profiles play. Also, the role of leadership in taking ownership of business practices at
their respective companies was minimal instead, what became evident was pure arrogance and disregard
for principles of good corporate governance and ethical leadership. This aspect can be seen from the
efforts taken by those responsible taking what would become an embarrassing conclusion for their quest
to unfairly dominate and gain unfair competitive advantage over smaller competitors and alternative
service providers (Telkom), disregarding their own customers, stakeholder and the broader community
(Primier Foods).
Concluding Remarks
These cases as illustrated above bring to the fore the challenge business leaders have to contend with in a
globalized business environment, the importance of what organizational integrity is about. This assertion
is made in lieu of the tendency and trend within the business community, particularly large companies to
flout the very legislation that is intended to regulate their conduct and, create an environment for a smooth
and competitive economy. Instead, they choose to employ their might, using their resources to engage in
long litigation battles. Legal compliance, based on these cases, is flawed if solely relied upon for a viable
business environment. This article therefore proposes a different approach if business organizations were
to reclaim their moral status and ethical pedigree in a globalized business environment. The approach is
the description as articulated by Kayes et al, (2006, 3) and; Palazzo (2007, 118-123) respectively. To
ensure sustainable business operations in a globalized environment, leaders and stakeholders of South
African organizations need to embrace a different culture, attitude and approach to ensure their continued
survival and, claim their moral standing.
References
Auriacombe CJ. 2004. “Key Issues in the Whistle-blowing process”, SAAPAM Journal of Public
Administration, Vol. 39 (4), pp 655-669.
De Maria W. Common Law – Common Mistakes: The Dismal Failure of Whistle-blower legislation in
Australia, New Zealand, South Africa, Ireland and the United Kingdom”, Paper presented to the
International Whistleblower Conference, University of Indiana, 12 -13 April.
Diale AJ. 2008. “In Defense of Whistle-blowing as an Integral part of Organizational Integrity: A
Theoretical Exposition” A paper presented and published in the referred proceedings of the 9 th Annual
International Conference of the International Academy of African Business and Development (IAABD),
University of Florida, Gaynesville, Florida, May 20-24, 2008.
Diale AJ, Holtzhausen N. 2005. “Public or Protected Disclosure? The fallacy of whistleblower protection
in South Africa”, SAAPAM Journal of Public Administration – Conference Proceedings, October 2005,
pp 10- 19.
Fourie O. 2010. “Business Ethics”. Law24.com – South Africa. www.Law24.com – South Africa,
accessed August 11, 2010.
Ghillyer A. 2008. Business Ethics: A Real World Approach. McGraw-Hill Irwin, London.
Institute of Directors. 2009. King Code of Governance for South Africa 2009.
Johnson RA, Kraft ME. 1990. “Bureaucratic Whistle-blowing and Policy Change”, The Western Political
Quarterly, pp 849 – 874.
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Kayes DC, Stirling D, Nielsen TM. 2006. “Building Organizational Integrity”. Business Horizons (2006),
www.sciencedirect.com, accessed September 30, 2010.
KLM.Inc – “Strategy for an Ethical Organization”. www.klminc.com/ethics. accessed 12 June 2007.
Nadler J. 2007. “Creating a Culture of Ethics in the Public Sector”. www.scu.edu/ethics, accessed June
12 2007.
Ogbuechi AO, Folami LB, Kwesiba E. 2007. “Towards a Framework for Promoting Business Ethics and
Corporate Social Responsibility among African Managers”. Paper presented at the International Academy
of African Business and Development Conference, London, England, May 29 – June 2, 2007.
Palazzo G. 2007. “Organizational Integrity – Understanding the Dimensions of Ethical and Unethical
Behavior in Corporations”. Corporate Ethics & Corporate Governance, Part III, pp 113 – 128.
Rezaee Z. 2009. Corporate Governance and Ethics. John Wiley & Sons, INC. United States of America.
Rossouw D, van Vuuren L. 2005. Business Ethics (3 rd Edition, 5 th Impression). Oxford University Press,
Cape Town.
Rossouw GJ. 1997. “Business Ethics in South Africa”. Journal of Business Ethics (16), pp1539-1547.
Stanwick PA, Stanwick SD. 2009. Understanding Business Ethics. Pearson Education, Inc., Upper Saddle
River, New Jersey.
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Abstract
Diagnosis of organization culture and it’s effectiveness in Nigerian Banks.
Oshisanya Taoheed Kehinde, tkoberon@yahoo.com
Speedway Information Technology Institute, Nigeria.
The study was carried out of diagnose the organization culture management style of three (3) commercial banks of
different generations. The level of effectiveness of the three were assessed also using the competing value framework
and organization culture Assessment Instrument (OCAI) described by Cameron and Quinn, (1999). The generations
of the bank were divided into 3, based on the time of inception.
The first (1st) generation bank was found to be Hierarchical cultured, while the second (2nd) generation bank was
found to be Hierarchical and market cultured and the third (3rd) generation bank was also diagnosed to be both
Hierarchical and market cultured, making them more effective, this was shown clearly in a well-plotted organization
culture profile (OCP).
One way analysis of variance (AVOVA) was carried out on the data, which at df, 3, 8 gave an Fcalc of 12.58 and
Ftab of 4.07, at 5% level of significance, (P

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Organizational culture was earlier ignored as a vital tool in accounting for organizational performance in
that it refers to the taken - of granted values (Wilkins, 1985), underlying assumptions, expectations,
collective memories and detractions present in an organization (Cameron and Quinn, 1999).
Aims and Objectives
The aim of this study is to diagnose what are the existing organization management culture styles in
Nigerian banks of different generations, 1st, 2nd and 3rd generation banks.
The study also aims at determining how effective are these management culture styles in terms of
attainment of organizational goals and objectives.
The study is limited to commercial banks of three generation since other different kinds of bank do exist.
The first generation bank refers to a bank formed before 1980, while the second generation bank refers to
a bank form before 1995 while the third generation bank is a bank form within 1996 to date.
Statement of Research Problem
The management of organization culture in Nigerian firms and organizations is developing though very
few literatures exist to confirm or deny these.
It has been established by psychologists and managing professionals alike, that organization culture plays
an important role in the success or otherwise of the organizations. Certain cultural styles are being
practiced noticeably in Nigerian banks and petroleum companies, which implies culture exists, but which
culture?
How effective is the culture in attainment of organizational goals and objectives?
Thus there exist the need to understand which type of organizational culture management styles that are in
practice in these banks.
Relevance of Study
The study is important to existing banking industry. It will be beneficial, as it enables them know and
understand what type of organizational culture management they are practicing, whether consciously or
unconsciously practiced, and the limitation of such cultural style to the attainment of organizational goals
and objectives.
It answers the question of their ineffectiveness in the midst of advanced technological know - how, and
other well defined conditions which characterize successful companies (Porter, 1980). The study
establishes the discrepancies between current and preferred culture, it’s strength and congruence of the
culture profile.
The study is be of particular relevance to policy makers and key players of the banking and financial
industry as it enlightens them on the need to adopt a particular type of culture for the development of the
industry, it also contributes to employee’s knowledge of how committed they are to the attainment of
organizational goals and objectives.
Literature Review
The theoretical background, which forms the backbone of this research, is that described in the competing
values framework of Cameron and Quinn (1999).
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Apart from the competing value framework, others frameworks of analysis had earlier been proposed
Ouchi (1981)
The study of organization culture as such is relatively recent in Industrial and Organizational psychology,
and it takes the field further into the territory of sister social science, anthropology and sociology than it
has been before (Hatch 1993).
In consequence Industrial/Organizational Psychologist are still operating in the content of discovering in
this area (Schein, 1990). The phenomenon that is Culture is greater in scope than most industrial and
organizational psychology topics, requiring consideration of an organization’s history, it’s industry and
the environment in which it operates, as well as way of the more usual variable of interest in the field
(Gordon, 1991).
The recently of the study of organization culture is as such that little or no literature exist on the study in
Nigeria, internationally, few literature also exist in Industrial and Organization, Psychology to augment
this research work, nonetheless, there is growing awareness on the importance at organization culture.
Those views are supported by Akinmarin, (1999) who affirmed that the importance of organizational
culture in shaping the future of an organization and in determining it’s effectiveness cannot be shared by a
majority of the members and it’s clearly ordered and members are highly committed to it, the
organization does not require strict regimentation, guidelines and procedures as formalization is not
emphasized. This is due to the basic fact that members have internalized the core values of the
organization.
The potency of using organizational culture in predicting organizational effectiveness is instituted in the
Researchy of Chen et al, 1997, Nwachukwu and Vitell (1997), Danison, (1984) and Calori and Savnin,
(19910 and Cameron and Ettington (1988) Cited above.
However, Cameron and Quinn, (1999) Identifies four major types of culture, which characterizes the
whole organization, these includes, the Hierarchical culture, the Market culture, the Clan culture and the
Adhocracy culture.
The basics of Hierarchical culture are found in the work of German sociologist, Max Weber, who studied
government organizations in Europe during the 1800s. The focus of his work was on how organization
were to produce efficient goods as objectives, Weber proposed seven characteristics that have become
known as the classical attributes of bureaucracy (rules, specialization, monocracy, hierarchy, separate
ownership, impersonality and accountability).
The market form of organizational culture refers to a type of organization that function as a market itself.
They term market is not synonymous with marketing functions nor with consumers in the market place. It
is focused larger on transaction with eternal constituencies including suppliers, customers, contractors,
licenses, unions, regulators to mention but a few. And unlike a hierarchy, where internal control is
maintained by rules, specialized job and centralized decisions, the market operates primarily through
economic market mechanism namely monetary enlarge, sales.
The basic assumption in a market culture are that the external environment is not begin but hostile,
consumer are choose and interested in value, the organization is in business of increasing it’s competitive
position and the major task of management is to drive the organization toward productivity results and
profits, it is assumed that a clear purpose and a aggressive strategy lead to productivity and profitability.
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The Clan culture, as a form of organizational culture is called a clan because is the similar to a family
types organization, shared values and goals, cohesion, participants ness, individuality and sense of “weness”
permeated clan cultured firm. They appear to be extended families rather than economic entities.
Adhocracy cultured organization are innovative and have pioneering initiative that leads to success, that
organizations are mainly in business of development of new products and services and preparing for the
future, and that the major task of management is to foster entrepreneurship, creativity and activity on the
cutting edge. It is assumed that in the culture type that adoption and innovativeness leads to a new
resource and profitability, so emphasis was placed on creation of a vision of the future organized anarchy
and discipline imagination. Cameron and Quinn (1999) elucidates further that, it is an organizational form
that is of most responsive to the type of turbulent, hyperacellerating conditions that increasingly typify the
organization world of the twenty first century.
Hypothesis
On the reference of this research implicated, the following hypothesis were tested.
1. The first generation bank will be dominantly Hierarchal cultured than 2nd and 3rd generation
banks thus being less effective to the other 2 generation banks.
2. The 2nd generation bank will be both Hierarchical and Market cultured than the third (3rd)
generation bank, thereby being more effective than the first (1st) generation bank and less
effective than the third (3rd) generation bank.
3. The 3rd generation will be dominantly Clan and/or Advocacy cultured, thereby being the most
effective bank.
4. That Nigerian commercial bank share similar aspiration for improved effectiveness in the near
future, i.e. tending to be an Adhocracy cultured organization.
Methodology
Setting of the Study
The present study is focused on commercial banks of different generations, i.e. year of incorporation,
using their respective head offices (in Lagos) as site of study, and also some branches.
The choice of using head office staffs is in live with Cameron and Quinn, (1999), they advice that in
assessing an Organization’s culture over can focus on the entire organization as the unit of analysis,
and/or assess different submits culture.
Participants
A total of two hundred and ten (210) bankers were used for this study. Participants comprised of senior
cadre and middle cadre officers of different senses. These officers of different management levels
however responded differently in accommodating the research resulting into a situation whereby more
middle cadre officers answered these questionnaire the senior officers in total out of the 210
questionnaires distributed, 180 were retrieved, of which 28 were detective.
Method
The organization culture management style of each banks under six level served as the independent
variables investigated in these research. The levels are, Dormant characteristics, Organizational
leadership, management of employees, Organization glue, strategic emphasis and criteria of success,
while the generation of the bank i.e. year (time) of incorporation (generation) served as the dependent
variable investigated in this study.
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Instrument
The instrument used was the organizational culture Assessment Instrument (OCAI), which was adapted
from Cameron and Quinn, (1999). The instrument is in the form of a questionnaire that requires
individual to respond to just six items. The instruments have been found to be useful and accurate in
diagnosing important aspects of an organization’s underlying culture. It has been used in more than a
thousand organizations and it has been found to predict organizational performance. It’s intent is to help
identify the organization’s current culture.
Sampling Method
The 210 subjects used were made up of 35 senior (cadre) management staffs from assistant managers
above while 35 middle (cadre) management staffs from an officer to a supervisor, were used in each bank.
The participants used were staffs who had a minimum of West African School Certificate, this is
necessitated by the fact that employees could become an officer of a bank via many years of experience
and promotion, without a correspondent educational qualification, with the mean age of the senior
management staff being 40 years of while of the middle cadre officers is 25 years. The topmost
management staff i.e. senior managers to Chief Executives were not included due to their apparent
inaccessibility.
Procedure
The research made previous visits to each of the bank investigated. It was however discovered that formal
representation of the questions tot he personnel or human resources department in each bank were made
virtually difficult due to the apprehensive and uncooperative attitudes of most of the human resources
managers.
A pilot study was initially conducted by the researcher on the staff of Leverage home savings and Loans
(Mortgage Bankers) . A validity coefficient was recorded.
Scoring
Scoring the OCAI.
It requires simple arithmetic calculations. The fist step is to add together all A responses in the Now
column and divide by 6. That is computer and average score for A alternatives in the Now column, (All
the B responses were added together and divide by 6. This is done to C and D alternatives.
The same procedure is taken for the preferred column.
Data Analysis
The organization culture profile (OCAI Profile) (Cameron and Quinn, 1999) is used in diagnosing the
specific culture type of each organization and it’s effectiveness from the data collected.
One way - analysis of variance (ANOVA) was used to analysis the data collected from the questionnaire
after the exercise, so as to ascertain if there is a signification difference between the four types of culture
diagnosed.
Results
The data collected through the two instruments in OCAI, were used in constructing a profile for the
organization i.e. the organization culture profile (OCAI profile). Showing clearly the indices of the
represent culture (Now-culture) and the Preferred (PRE-culture) culture (Now-culture) and the Preferred
(PRE-culture) culture for the (3) three organization.
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The organization culture profile, (OCP) I figure 2, shows that the first generation bank is dominantly
Hierarchical cultured, which confirms hypothesis one. The Hierarchy quadrant, shows an average value of
38.33 while indicating 29.27 for the Market quadrant, 16.98 for the Clan quadrant, and 16.0 for the
Adhocracy culture quadrant. (Now culture) This reveals that the bank is managed with a high degree of
stability and control, internal focus and integration, (Cameron and Quinn 1999).
The OCP 2, figure 3, shows that the second generation bank is dominantly Hierarchical and Market
cultured which confirms hypothesis two. The Market quadrant shows an average value of 36.37 while
indicating 30.01 for Hierarchy quadrant, 19.56 for the Clan quadrant and 13.97 for the Adhocracy culture
quadrant. This reveals that the banks is managed with firm stability and control, with external focus and
differentiation.
The OCP 3, figure 4 shows that the third generation bank is dominantly Hierarchical and Market cultured,
which contradicts hypothesis three, since the Hierarchy and market quadrant shows average values of
29.53 and 28.5.
However, the OCP 1, 2 and 3, shows that the banks would Prefer to be Adhocracy cultured, which
confirms hypothesis four. Each of the Adhocracy quadrants in each profile reveals average values of
38.29, 29.19 and 31.30, for OCP 1, 2 and 3.
The data were subjected to one-way analysis of variance for the four (4) Hypothesis.
Summary of all scones and percentages obtained for each bank was tabulated in appendix II.
Table: 2: SUMMARY TABLE OF THE ONE-WAY ANALYSIS OF VARIANCE FOR THE NOW-
CULTURE IN THE THREE (3) BANKS.
Sources of Variation Df SSQ MSQ Fcalc FTAB
Between Treatments 3 588.16 196.06 12.58 4.07
Residual 8 124.69 15.59
TOTAL 11 712.85
Table 2, shows that the critical value of F at 3 and 8 df, P

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Discussions
The first hypothesis tested in this study which state that the first generation bank is dominantly
Hierarchical cultured is confirmed. This provides us with an idea of the level of effectiveness obtained in
the bank and the core-value orientation in operation. It implies that Hierarchical orientation of founding
fathers has been maintenance by subsequent leaders and has continued to play an important role in the
smooth running of business even till date (Waiguchi et al, 1999, Akimarin, 1999). The bank with a
dominantly Hierarchy culture type is thus, ran by leader with a high coordinating monitoring and
organizing ability, using such effectiveness criteria as high degree of efficiency, timeliness and smooth
functioning, to conform to a management theory that utilizes control to foster efficiency.
The results confirms the colonial orientation which Nigerians have be instilled with.
The second hypothesis confirms that the second generation bank is both dominantly Hierarchical and
market cultured. This can be ascribed to the recently constant periodic reviews of banking operations in
Nigeria by the Central bank which have made the bank to be more customer (market) focused and still
being Hierarchical cultured, bearing in mind the period of inception of the bank. The bank being both
dominantly Hierarchical and Market culture is thus, ran by leaders with a high coordinating monitoring
and organizing ability, using such effectiveness criteria as high degree of efficiency, timeliness and
smooth functioning, to conform to a management theory that utilizes control to foster efficiency coupled
with being hard drivers, competitors and producers, using an effectiveness criteria which utilizes market
share, goal achievements and beating competitors while conforming to the management theory of
constant competition fostering productivity.
The result of the study for the third hypothesis shows said that the organization that was assumed to be
dominantly Adhocracy cultured, being a new generation bank, barely less than 2 years of commercial
banking operation, was found to be both Hierarchical and marketing cultured, thus sharing attribute as the
second generation bank. It can be adduced that the conversation of the bank from a merchant bank of
many years have not been totally erased from the orientation of the key offices, also bearing in mind that
a commercial bank in the present day global market economy, need to be responsive to market demand.
The fourth hypothesis tested in the study confirms the need of the banks for re-engineering and repositioning
to meet demands of today’s global economy, an organization can be most effective, if it is
Adhocracy cultured which is collaborated by the finding of Cameron and Quinn, (1999) on over a
thousand corporations. This form of culture conforms with present Internet (electronic dependent world).
Implication of the Study
The implication of the results of the development of the commercial and banking industry in general,
cannot be over-emphasized. It enables banks come to terms with the realization of the type of cultures
that is/are being consciously or unconsciously practiced in their organization, thus giving policy makers a
guide to the level of effectiveness currently in play in the industry.
The diagnosis and efficacy of an organization’s culture for the organizations, industry and national
development should be a major concern of the industrial/organizational psychologist and management
theorist. It should be a clearly guarded believes that proper management of an organization’s culture is a
vital tool in the realization of goals and objectives.
Finally, efforts should be geared towards proper re-engineering and re-position by the banks which should
be carried out by experts, bearing in mind, management beliefs, values and practices on one hand and the
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environment of operations on the other, this would go a long way in the attainment of high level of
effectiveness.
Limitation of Study
The administration of the questionnaires proved quite difficult due to the inaccessibility of majority of the
subject the experimented after repeated failed visit decided upon to use a member of staff in administering
the questionnaire after having been administered on, this situation however common to the 3 banks under
study, the degree varies for instance, at the 1 st generation Bank, administration was quite difficult while
the experimenters had easy access to the staff at the branch office.
Perhaps it need stating here that most of the returned questionnaire were from 2 nd generation Bank, while
the least came from 3 rd generation Bank. Due to the above stated reasons, the experimenter could not
control directly the numbers of questionnaires served between senior and middle cadre officers.
Conclusion
The findings of the study clearly indicate the type of organization culture in operation in some Nigerian
commercial banks relative to their level of effectiveness.
The cultural diagnosis reveals that Hierarchy and market cultures are dominant in these banks with 1 st
generation Bank being dominantly Hierarchical cultured, while 2 nd and 3 rd generation Bank were
dominantly both Hierarchical and market cultured.
This clearly indicates that management beliefs, values, and practices are focused primarily on making
profits for the organizations, in Nigeria’s competitive banking industry, however, this agrees with
findings of Cameron and Quinn, (1999), who opined that, organizational success depends on the extent to
which your organization’s culture, matches the demands of the competitive environment’ thus an
organization with a strong Clan culture and a weak Market culture that is operating in a fiercely
competitive and highly aggressive industry may find it very difficult to survive because of a mismatch
between culture and environment.
The Nigerian economy is largely import oriented and as such, any bank that is “worth it’s salt’, would
center on the market for adequate capable revenue which can explain why in today’s highly competitive
banking industry, nearness to market is taken seriously, each bank, as those used in the study is ready to
bring banking at customer’s doorstep each innovating new products to compete favorably in today’s
highly globalised banking world.
At this point, I would implore the training of more psychologist in the Nigerian banking industry, who
would be highly relevant in such diagnostic exercise as done here, and thus help produce an highly
educated, enlightened and productive workforce for the organizations for optimal effectiveness to be
achieved.
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Abstract
Challenges of Ethics in Nigeria within the Context of Global Ethical Practice
Ogundele, O.J.K. and Hassan, A. R.
Department of Business Administration and Management Technology,
Faculty of Management Sciences, Lagos State University, Ojo, Nigeria
This paper is an exploratory study of the challenges of ethics in Nigeria within the context of Global ethical
practice. Its major objective is to measure the extent to which Unethical behavior has declined among the Nigerian
populace as a result of the recent efforts of the Civilian Administration at fighting corruption in the country.
Because a significant number of Nigerian organizations have their headquarters in Lagos, the opinions of a
randomly selected 2,623 respondents spread across private and public organizations in Lagos State were gathered,
and it was discovered that unethical practices are still prevalent in Nigerian organizations. Nine (9) hypotheses
were tested using the analysis of variance(ANOVA) and Pearson Rank Correlation statistical tools. Finally, this
study highlights recommendations geared at promoting ethical behavior in Nigeria.
Introduction
Ethics refers to a code of conduct that guides an individual in his/her dealings with others. It has to do
with personal behavior and moral duty. It is concerned with what is right and wrong. In work situation, it
is concerned with principles and practices of moral and good conducts in business life.
The ‘challenges of ethics’ are meant to be the problems of ethical values confronting business operators in
Nigeria and its relationship with the need for the development of ethical codes of conduct for
organizations in Nigeria. Both issues are examined in this paper. Nigerian business as used in the paper
refers to business organizations situated in Nigeria. It could also mean engaging in business transactions
with individuals and business organizations located in Nigeria. Again, both aspects are examined in this
paper. Global context refers to a multidimensional concept, which emphasized the interdependence of
relationship among nations. This is expressed in terms of integration of economies all over the world with
respect to trade, technology, financial matters, information network and cross cultural current and several
other dimensions. Business practices, here is a focus on the modes of carrying out business transactions in
different cultures and countries across the globe.
Theoretical Framework
A convenient starting point is to examine business ethics in action, in some of the developed countries of
the world, then the Nigerian practice with be focused upon.
Ethics in Europe has a protestant origin. Schumpeter (1934) linked entrepreneurship with protestant ethics
that legitimized the rational pursuit of economic gains. The traditional work ethics emphasizes the
inherently good nature of work and that by working hard, one can overcome problems by accumulating
material wealth. It holds that God’s grace is achieved as one succeeds in life (Yoder and Staudohar
1982).
In the United States, the religious groups similarly introduced ethics into business practices in the 1930s.
The spread of work ethics in the U.S was aided by a number of factors. These included the country’s vast
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natural resources, belief in America as a land of opportunity and wartime patriotism of the Americans.
(Yoder and Staudohar 1982).
In the Soviet block, ethics took a different dimension. Marxism and socialism were used to solidify the
linkage between work as an end in itself and the overall development of the society. The Japanese have
work ethics that emphasizes excellence ramifications. Thus, business ethics in various places and
situation derived from religious doctrine, political and economic philosophy, cultural norms and values.
The Islamic countries like Iran, Saudi Arabia and Iraq have fundamental Islamic ethics guiding their
business interactions.
Nigerians like Japanese have customs and moral values that could be used as building blocks in
developing business ethical values. But Nigeria has had vagaries of political and economic instability, and
leadership patterns that had robbed off the application of these values in business operations. Also, among
the ruling elites, lack of ethics is leading to failure and collapse of multi-million dollar public corporations
enterprises and contracts.
The African Situation
Africa is the world third largest continent, after Asia and America. It has a population of over 600 million
people, which is about 10% of the world population. By all indicators of progress and development, it is
the poorest. It is prone to disease and pestilence and it houses the largest group of refugees because of
conflicts. These conflicts are products to ethnic or tribal hatred, which are acts of indiscipline or unethical
behaviors. It is significant to note today: that almost all African countries are facing one form of sociopolitical
upheaval or the other (Umaru, 2000). In North Africa, Islamic revolutionaries in Egypt, Tunisia
and Algeria engage secular governments in struggle of survival while in Cote D’Ivorie, a civil war is
raging. These scenarios are tips that represent a surface-scratch of the African problem. Consequently,
morality becomes weak and in existence are deprivation, stagnation, poverty and corruption. The debt
burden complicated by suffocating corruption has stifled all forms of development, (Umaru, 2000).
Therefore, it is apparent that African countries have ethical problems of monumental dimensions, which
are presently the product of political instability, lack of resources and miss-application of resources,
negative work habits and unethical behavior. The results are lack of and slow pace of economic
development.
From Social Responsibility to Business Ethics
The present concern for business ethics or ethical behavior in the organization is similar to the social
responsibility debate of the 1970s. Around the mid – 1960s in the U.S, questions about the role of
business and debates about the business-society relationships had reached a significant pitch (Mintzberg,
1982).
On the surface, there were elements for radical change, which included:
1. Widespread debate the subject of Ethics;
2. The appointment of vice-presidents for social responsibility;
3. Widespread call for social audit;
4. The introduction of codes of practice;
5. New literature on Ethics springing up in business schools;
All these were set in an atmosphere of serious ecological concern (Gray, 1990)
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In the U.K., majority of organizations subscribed to a published code of practice/statement of
mission/statement of social responsibility. Therefore, codes existed as a significant part of organizations
life. However, whether they do or can affect behavior is very much in question.
Gray (1990) noted that the current business ethics debates and the debates on social responsibility before
it has failed to ‘take root’ where it matters in organizations and governments.
Literature of business ethics is mostly described in terms of individuals and in particular the self-interest
or the moral motivation of individuals. There is the problem of the nature of relationship between
individual and organization roles, and a consideration for “individual role” in the organization (Wilbug,
1988). Organizations on the other hand, are seen as managerialists, where managers have powers in their
own hands to change organization to benefit their own interest. This is a simplistic view. In actual
practice, the process of changing the moral or ethical behavior of organization is profoundly complex and
requires careful approach (Smith, 1982).
Gray (1990) suggested two approaches in introducing ethical changes in the society. The first approach is
the revolutionary option. This stems from recognition that the problems we perceive are the result of
systematic distortion and this morphogenetic change can only be achieved through systematic change.
Second, the market option (doing nothing). This is formed on the principle of person selfishness, which
sees the calculated cleverness in the interest of self. This option is, unethical and shows no desirable
possibilities for the species.
Our discussion of the practice in U.S.A. and U.K. is not intended to show that ethical issues are not given
the much attention that they require in these countries. Rather, it is to show that there are considerable
rooms from improvement. Studies of ethics have been made compulsory courses in the advanced
countries in institutions of learning based on the belief is that the more you teach or repeat them, the more
they are likely to take root in the hearts of the people and consequently influence their behavior.
Nigeria Experience
There is widespread lack of commitment to ethical behavior concern for excellence and self-reliance in
Nigeria and in Nigerian Organizations. Since 1997 and up to 2009, Nigeria had consistently been listed
as one of the most corrupt countries in the world by Transparency International (TI). In its 2001 annual
corruption index released by TI, Nigeria was second to the Asian country of Bangladesh. The reported
survey of 91 countries ranked Nigeria 90 th while Bangladesh ranked 91 st . Other countries in the bottom
ranked states were; Uganda, Indonesia, Kenya, Cameroun, Bolivia, Ukraine, and Tanzania. Ranking of
some other African countries were Zambia 25, Zimbabwe 65, Malawi 61, South Africa 38 and Namibia
30. Botswana had the lowest perceived corruption rate of any developing country and was no. 30 on the
index. Rich countries topped the clean list as they had the lowest level of public corruption. The cleanest
were Finland, Denmark, New Zealand, Iceland Singapore, Sweden, Canada, Netherlands, Luxembourg
and Norway, while Haiti, a small Island in the Caribbean topped the list of corrupt countries in the world.
Coming second and third were Berman and Iraq respectively, while Bangladesh was in the 8th position in
the list released by Transparency International. Nigeria did not make the list of the 10 most corrupt
countries that year. Ekpo-Ufot (1990) found that reported frequencies of unethical behavior were high and
were virtually the same among the studied groups. Ogundele (1999) findings were similar to Ekpo-Ufot
(1990) study, except that the latter study isolated the twelve factors that were responsible for unethical
behavior. Leadership, which was singled out as being central in promoting corruption in Nigeria was a
major factor (Eso, 2007).
Research Methods and Analysis
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The research design is an exploratory in nature, where questionnaires were used to obtain responses from
the general populace of Lagos State. A total of 3500 questionnaires were distributed, out of which 2623
were returned. There were, however, some missing data points due to few unanswered questions by
respondents. The research instrument had a Cron-bach Alpha reliability coefficient of 0.813. Which
confirms that the instrument is significantly reliable and suitable for factor analysis ( Stewart,1981). The
researchers employed percentage measures of central tendency and dispersal of the interpretation of each
demographic variable. Univariate analysis was employed to measure interaction effects among the
demographic variables. A one-way analysis of variance (ANOVA) statistical tool was used to examine
the different groups of responses that were measured on interval scales.
Finally, Pearson correlation analysis was employed to establish the relationships between the respective
independent variables and the dependent variable of unethical behavior on the one hand and the
interrelationships of the independent to variables among themselves.
Discussion of Findings
An examination of table 1 shows that 60.5% and 39.5% of respondents were male and female
respectively. 45.1% were single, 51.7 married and the remaining 3.2% were divorced respondents. 92.0%
were employed while the reaming 8.0% were unemployed. 12.7% of the respondents were WASC/GCE
holders, OND and NCE holders accounted for 31.1%, HND and B.Sc holders 44.4%, Master Degree and
PhD holders were 9.8 and while the remaining 2% had other forms of educational qualifications. The
analysis presented reveals that in terms of gender, both groups were adequately represented. The
educational qualifications of most of the respondents are such that they are knowledgeable enough and
could provide reliable responses on issued raised in the research instrument.
Table 1: Demographic statistics of Respondents
Variables %
Gender of Respondents
Male 60.5
Female 39.5
Marital Status
Single 44.8
Married 51.3
Divorced 3.2
Age
18 years and Less 2.3
19-29 36.1
30-39 38.5
40-49 14.8
50+ 3.6
Employment Status
Employed 90.2
Unemployed 7.9
Education
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WASC 12.6
OND/A’Level/NCE 30.7
HND/B.Sc 44
M.Sc/PhD 9.6
Others 2
Table 2: Pearson Correlation Analysis of Responses.
1 2 3 4 5 6 7 8 9
Gender 1.000 .136** .048* .012 - - .081** -.049* .013
.088** .099**
Age -136** 1.00 .572** -107** -
.099**
.337** .293** .524** -.004
Marital .048* .572** 1.000 -.086** - .265** .222** .425** .004
Status
.106**
Employment .012 - - 1.00 .300** -.047* - -.041* .046*
Status
.107** .086**
.087**
Nature of - - - .3000** 1.000 .073** -.024 - .103**
Employment .088** .099** .106**
.158**
Monthly
Income
-.099* .337** .265** -.047* .073** 1.000 .452** .315** .102**
Educational
Status
-.081 .293** .222** -.087** -.024 .452** 1.00 .192** .065**
Work -.049 .524** .425** -.041* - .315** .192** 1.000 .036
Experience
.158**
Which dept.
do you
.013 -.004 -.004 .046* .103** .102** .065** .036 1.000
Unethical
Behaviour
.001 .036 .002 -.063** .020 .022 .059** .008 .068**
** Correlation is significant at the 0.01 level (2 tailed)* Correlation is significant at the 0.05 level (2
tailed)
Table 2 contains the Pearson correlation analysis shows that in situational slacks, that is, where strict
ethical measures were not enforced, for example the item in the table relating educational status to ethical
behavior shows educational level is positively and significantly related to unethical behavior. It is to be
noted that all the tested hypotheses were supported in the predicted direction. Hypotheses that focus on
unethical were positively related to unethical behavior as predicted while those that focus on ethical
issues were negatively related to unethical behavior.
The implications of these findings are that policies and programs, or strategies and tactics that would be
designed to change organizational member behavior should be of three broad categories: (1) those that
will discourage unethical behavior through the processes of sanctions and reform of organization
members’ behavior (2) Those that will reward organization member for exemplary acts of ethical
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behavior. (3) Those that should focus on developing desired valued behavior in the members of the
organization.
Conclusion and Recommendation
The result of this study shows that unethical behaviors are still prevalent in Nigerian organization. Ethics
has very strong link with education. In fact if education is to fulfill its purpose of catering for some
aspects of societal needs, it must of necessity be involved with morality in a very high degree, otherwise it
will do more harm than good to the society. And this is what is happening especially in Nigeria and most
other African countries.
Therefore, to be relevant and take advantage of globalization, Nigerian Organizations must teach ethics to
their people at all levels. They should also ensure that ethics is practiced in all spheres of life. Unethical
conducts are negatively affecting out educational system, industrial development, international relations
and blocking commitment of foreign investment into the economics of most African countries South of
Sahara with the exception of South Africa.
Solutions to unethical behavior must focus on changing people by employing the following approaches;
values related, economics, legal/judicial sanctions, religious, managerial, leadership, family, sociocultural,
educational, training and development police/armed forces reforms, motivation, modernization,
development and multi-dimensional approaches. These are some of the ways of solving several problems
created by corruption and bribery in African business. Two broad approaches are suggested here: First,
reducing unethical business practices through strict sanctions, moral suasions, reward of excellence or
outstanding ethical behavior and Second, Development ethical behavior and codes of ethics.
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Track 14: Operations and Supply Chain Management
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Determinants of bank selection: A study of undergraduate students in the University of Ghana.
Robert E. Hinson, rhinson@ug.edu.gh
University of Ghana Business School, Legon-Accra, Ghana,
Aihie Osarenkhoe, aoh@hig.se
Department of Business & Economic Studies, Faculty of Education & Economics, University of Gävle,
Sweden
Abstract
Abednego Feehi Okoe, okoe67@yahoo.com
Institute of Professional Studies, Legon-Accra, Ghana.
Purpose: The aim of this study is twofold: first, to investigate bank selection criteria among
undergraduate students in the University of Ghana, and second, to relate this study with previous findings
on the same phenomenon. Design/methodology/approach: Extant studies have adopted mainly
quantitative approach. In order to bridge this gap and contribute to existing knowledge, qualitatively
inspired research design was adopted, thus facilitating in-depth understanding of the determinants of
bank selection. Findings: findings show that convenience, bank staff-customer relations and banking
services/financial benefits are the first three most important determining factors. Furthermore, happiness,
joyfulness, cheerfulness and delight are feelings derived after a banking service; whiles sadness, anger
and deceit are avoided. Originality/value: studies on the bank selection criteria employed by
undergraduates are scanty in West Africa, and this study makes a contribution in that direction. Future
studies will continue from this one.
Introduction
Competition in the Banking industry the world over has grown very intense (Grady and Spencer 1990). In
Ghana this competition has intensified due to a number of factors. Chief among them is the passage of the
universal banking law as reported by Hinson and Hammond (2006). They observe that all types of
banking can be conducted under a single corporate banking entity and this has greatly reorganized the
competitive scopes of several banking products in Ghana. Prior to the 1990’s however, banks operated in
a highly regulated and a non competitive environment in Ghana (Owusu-Frimpong, 1999). Also the
influx of international banks (especially Nigerian Banks) onto the Ghanaian Banking scene over the last
decade implies that the boundary of competition among banks in Ghana has further been extended. The
number of commercial banks licensed to operate in Ghana increased from 16 with 277 branches (Ghana
Review International report, 1999) in 1998 to 27 by June 2009 (www.bog.gov.gh.). Hinson et al. (2009)
noted that an ever increasing branch network of over 600 branches for the 25 banks, the Ghanaian
banking sector is a very competitive sector within which to operate.
The emergence of technology (telecommunications, ATM, mobile banking, electronic banking, credit
cards, home banking) is another factor that is quickly changing the face of competition in the banking
industry in the world (Lewis, 1991 and Zineldin, 1996). Some scholars are of the view that the future
determinant of competition in the banking industry in the world would be technology. Consumers have
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become more sophisticated in their demand for financial services (Lewis, 1991). How students choose
banks they patronize has been given considerable attention in scholarly literature (Hinson et al. 2009;
Blankson et al. 2007; Pass, 2006; Gerrard and Cunningahm, 2001; Ta and Har, 2000), Thwaites and Vere,
1995; Schram ,1991; Lewis, 1982; Gray, 1977). This has become necessary because students are seen as a
large segment that meets the requirements for a successful implementation of market segmentation
strategies. Lewis (1982), in his work entitled “Student accounts – a profitable segment notes how
profitable the student market segment has become. Banks which are planning to cultivate this vibrant
market segment must understand how individuals belonging to such a segment select their banks. We
choose the undergraduates students because of the reasons stipulated in Mokhlis (2009). In addition,
student population in Ghana has constantly been growing for the last decade. The current student
population of University of Ghana is 29,750 (www.ug.edu.gh). Students need bank accounts for receiving
payments of loans, remittances from parents and bursaries. Moreover, they need bank accounts after their
studies. Banks like HFC Bank, Ecobank, Intercontinental Bank Limited, Cal Bank, Barclays Bank,
Standard Chartered Bank and Ghana Commercial Bank have all opened branches and/or ATM facilities at
university campuses. Despite the growing importance of student bank market segment, literature on
which factors students consider in selecting a bank in West Africa in general and Ghana in particular is
very scanty (Owusu-Frimpong, 1999). As revealed by the literature, bulk of the studies on the criteria that
students use in selecting a bank has North America, Europe and Asia origins. Out of the few scholars
(Owusu-Frimpong (1999), Hinson et al. (2009) and Omar (2007), Blankson et al. (2007) appear to be the
only researched work on the factors that determined bank selection among undergraduates in Ghana.
Even in the case of (Blankson et al 2007), their work was cross-national.
This paper aims to investigate bank selection criteria among undergraduate students in the University of
Ghana. This study differs from previous studies because it will investigate how undergraduate students in
the University of Ghana select a bank. We will find out to what extent our findings are in agreement with
other studies.
Literature Review
Pioneer researchers on the selection criteria employed by students in selecting a bank (Gray, 1977; Lewis,
1982) establish that convenience and parental influence are the most important factors influencing
students’ bank selection (Mokhlis, 2009). This position was later corroborated by Schram (1991) in his
article about American college students. However, Zineldin´s (1996) study challenged previous findings
on the importance of a close bank or branch to a customer home or work. He attributes his position to the
emergence of today’s telecommunication, ATM, home banking, credit cards and mobile banking. An
important dimension was however given to the convenience variable by Lee and Marlowe (2003). They
argue that although convenience is one of the most important criteria for bank selection, definition of
convenience vary across consumers. This view is consistent with the findings of Blankson et al. (2007).
They note the overlap in competence and convenience. And that “convenience” is a latent factor
embedded with “competence”. Tan and Chua (1986), on the other hand, strongly support the third party
argument by Gray (1977) and Lewis (1982), disagree with convenient location criterion. The findings of
Ma et al. (1996) sharply contrast Tan and Chua (1986), Gray (1977) and Lewis (1982) in that their study
of Singaporean graduate students reveal that family and friends influence is not so important. Most of
these research findings, despite their inconsistencies or significant differences (Hun and Kar, 2000)
appear to overlap in one way or the other. For example, both Zineldin (1996) and Anderson et al. (1976)
strongly agree that banks reputation, credit availability and charges are sensitive for customers. However
peer recommendation was not so important in Zineldin (1996) whereas it emerge as a very important
factor in Anderson et al. (1976). Thwaites et al. (1997) study which focuses on factors that influence the
selection of banks in New Zealand shows that fast and efficient service, friendly and helpful staff and the
reputation of the bank are very important factors.
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In West Africa, Owusu-Frimpong´s (1999) study showed that Ghanaian consumers valued efficient
services, favorable interest rates on savings accounts, influence from peers are very important in deciding
which bank to patronize. Omar´s (2007) study shows that Nigerians value time highly and as such would
prefer fast and quality services. In contrast to Tan and Chua´s (1986) work, Hinson et al. (2009) study
reveals that bank customers view proximity/accessibility as the most important factor in the opening and
maintenance of accounts with banks in Ghana whereas peer recommendations appear not so important.
However their finding on convenience is in agreement with that of Blankson et al. (2009) However, the
role of word of mouth as an effective tool to communicate banks services (Owusu-Frimpong, 1999) is not
supported by Hinson et al. (2009). Blankson et al. (2007) researched on the determinants of banks
selection in USA, Taiwan and Ghana shows that convenience, competence, and no bank charges were
consistent in all the three countries surveyed. The competence and quality service factors are evident in
Omar (2007). The convenience factor was also present in Hinson et al (2009) as well as Omar (2007) as
proximity. Then the ‘no charges finding’ was corroborated by Owusu-Frimpong (1999) sensitive to price
and sensitivity to high rate of interest in Omar (2007).
Theoretical framework
We adopted the decision hierarchy model for the selection of banks from Ta & Har (2000). The decision
hierarchy for the selection of bank is based on nine criteria for deciding on a bank. The model presents
three elements; respondents to make a decision, the nine criteria that influence decision and the decision
alternatives (i.e. banks in Ghana). The first component of the model requires respondents to make a
decision to select a bank. The second element presents the nine criteria with which respondents use in
selecting a bank, in other words the determinants of bank selection. The final component is the banks in
Ghana which the respondents are to choose influenced by the nine criteria. Our goal is to find out whether
these criteria are the same used by undergraduate students in Ghana or otherwise. The model gives us a
framework why undergraduates select a bank. Thus will serve as the basis for analyzing the reasons why
undergraduates select a particular bank over the other. This is illustrated in fig. 1 below.
High interest
rate (savings
account)
Overall
quality of
service
DECISION TO SELECT A
BANK
Low charges
on services
banks
Interest rate
on loans
BANKS IN GHANA
Long
operating
hours
Rec. by
parents &
friends
Availability of
undergr
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Fig1. Decision hierarchy for bank selection; adapted from Ta and Har (2000)
METHODOLOGY
We employ qualitative techniques which, according to Yin (2003), are to provide insights and not to
measure. Thus case study method is adopted because we want to have an in-depth understanding of the
criteria that undergraduate students on the University of Ghana campus employ in selecting a bank. Our
population is the university of Ghana undergraduate students. We interviewed a total of twelve
undergraduates consistent with Bodet and Chanavat (2009), six males and six females to offer gender
balance and we used structured interview schedules. The use of the schedule is to prevent us from
deviating from asking irrelevant questions. The purposive sampling method was used to select the
respondents. We spent 15 to 20 minutes on each student and recorded the interview with a Sony IC
Recorder. We also took down notes to support the reorder in case of technology failure. Our study
investigates ten criteria used in bank selection which includes: 1) Convenience; 2) Bank appearance; 3)
Bank services; 4) Third party influences; 5) Electronic services; 6) Financial benefit; 7) Employee
customer relations; 8) Secure feeling: 9) Marketing communication; 10) Reputation of bank.
Presentation and Discussion of findings
The findings and discussions are presented concurrently in accordance with the criteria used in bank
selections gleaned from the literature review. The presentation focuses on the individual criteria for
selection to ascertain the dominants selection criteria and the less dominants ones.
Selection criteria 1- Convenience: From the interview we conducted, convenience is considered by
almost all the respondents to be very influential in their choice of selecting a bank. Convenience has been
interpreted differently by our respondents as follows:
“…of course, as in their customer service, how fast I can access them, that is how close they are to me”.
Other respondents stated; “I do consider that a lot”; “It will influence a lot in terms of everything, in
terms of how fast their services are tailored to suit you; If banking with a certain bank and ATM is not
always working you might keep the account but will bank elsewhere”; “… that one will influence me,
Ghana commercial bank for example, I am with them because of the ease to get them”.
Another respondent joyously responded that convenience is: “very necessary, for instance, I could get
them when am in school, at home, it makes banking enjoyable”.
Some of the respondents also consider the multiplicity of banks and their branches to mean convenience.
For example: “…when there is easy access to the bank and its branches”.
Convenience as a selection attribute has been defined variously by the respondents. For some it means
fast delivery of service, a reliable ATMs and even facilities such as dispensing water, urinary etc. “...but
when I enter a bank, there should be facilities such as water, and place of convenience you should not feel
any inconvenience in a banking hall”.
Selection criteria 2 - Bank appearance: The appearance of a bank has very little effect among the
criteria that influence the choice of a bank among the respondents. The respondents interviewed recognize
the importance of impressive edifices, but state that it will not really be a factor which will influence
them. Some even think that the structures inspire confidence and show seriousness. The responses of
some students are:
“…the appearance does not influence me …that the building should influence me, well not necessarily, if
I will grade them, that is the last thing I will consider”; It might influence me personally, banks normally
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if you enter a bank and architecture is not nice it does really attract you because when you are entering
and it’s looking nice you also feel good”; “…If its selection then I don’t think so, but appearance will
give you a level of confidence to enter but if it’s kind of dull then I will they will not have enough money
to give me”; “YES! It will affect me; I will go for the attractive, because I will know the people are
serious”;
“For me things like that, those things don’t add up”; “Structures should be presentable and will
influence me a little; the surrounding and painting you will think they are “419” people who want to
dupe me and take my money”; “No I won’t consider appearance, don’t mind the body but what goes
inside, the bigger the building the more the rates”.
Selection criteria 3 - Bank services: Most of the respondents think that the services provided by their
bank should be tailored towards the student needs. Their requirements for a banks’ service is very basic.
This may be due to the fact that; they are not working and do not have huge sums of money to save or
otherwise. Some of the responses include the following: “... but basically, I only need ATM and debit
cards. But if I were a businessman, I will consider all kinds of services such as internet banking etc”; “…
the most important aspect of it especially the interest on my money”; “…yeah the services are very
important, the banking institution is to offer services they will influence, it will play a part, if a bank does
not offer services tailored to suit students I might not choose the bank”; “…that one will influence me, I
wanted to quit but because of their convenience I stayed”; “Yes they will affect me I will look out for the
services that apply to my needs, if a bank does not have a service that will not affect me I won’t go
there”; “…bank service I will consider, some banks waste time in carrying out services and some
customer relations are not good”; “…it should be fast and reliable, they wasting your time and no
queues”; “… if they will give me something in return, not necessarily I given them my money”.
Selection criteria 4 - Third party influences: With regards to whether or not respondents’ bank
selection would be influenced by a third party, some of the respondents say they will consider it, but a
large number would not consider it. Some of the responses provided include: “o.k. apart from all the
factors, my sister banked with them and was quite comfortable, third party influence me, its ahead of the
building of the bank”; “…personally it will not influence me”; “…no I don’t think so”; “Per the person
experience, it will say that, that bank is good and based on that advise I will make good judgments’ and
go there because the person has used it and has seen that they have good services”; “It depends on what
the persons know about the bank, you know your money will be secured, but I will not really be influenced
because I will also do my underground investigations”; “Personally it will influence me, for instance my
sister banks at Ecobank and she told me to bank there, and I complied with her directive”.
Selection criteria 5 - Electronic services: This criterion according to some of the respondents
will be useful to them in the future and some even do not understand it. This shows that the undergraduate
student require only basic services satisfactorily. Some responses include the following: “Well, I am not
really familiar with it, I don’t think it will influence me”; “Yes it will influence me, due to locations, I am
able to use the internet services instead, example is Cal bank”; “That one will count a little, since I don’t
really know the details of banks, but it might influence me”; “It will save time since you will be so easy
and internet service at home or in the office thus no need to go and queue”; “Yes I will look at that
because it will save the time of going there and the cost of going there; “It will influence me”; “Yeah but
basically I only need ATM and a debit card but if I were a business man I will consider all kinds of
services such as internet banking”.
Selection criteria 6 - Financial benefit: Financial considerations seem to motivate some of the
respondents in choosing the bank they would like to patronize: “Most important aspect of it especially the
interest on my money”; “With reference to unique bank e-zwich services there is 15% interest on it thus I
opened my e-zwich account with them”; “Yes it counts, I should know my money will benefit me too and
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not only they using it”; “I know the banks use my money for some business, so if they get something they
should give me something too”. Some of the respondents also think they will consider it: “May be when I
grow up but now, and when I start working and saving actually, but now no.
Selection criteria 7 - Employee customer relations: One of the decisive factors in the bank
selection process by the undergraduates. On a rank of five, the employee customer relation come second
and is considered very important by the respondents. The employee customer relation for some of the
respondents means the ability to explain the banking procedure to them and guide them if they are wrong:
“When I went to the HFC bank for instance the receptionist was good, she smiled at me this made me
like going there to check on my account”; “Very important well it can make me change my mind, when I
went to Ecobank if the relations was not good I would have changed my mind, it’s very influential”;
“Yeah that is also another I will consider, if you are not a banker it’s obvious you will not know
everything so if there are people who will guide you and explain thing to you why not it will be another
plus over the others”; “Yeah the way they treat me is also another factor, it’s very necessary because it
will encourage you to relate with them easily because if you are not happy it will be difficult to interact
with them”; “It will also count, sometimes you need something , the way they relate with me”;” It is a
problem when its to the general public”; “Yes if the employees are friendly and customer relations are
good, you will know that all information will be given and all problems sent there will be met”.
Selection criteria 8 - Secure feeling: The security of money deposited in a bank for some of the
respondents is not possible for the money to get lost and therefore this criterion would not be part
of the selection criteria. In the same vein others would consider the security of their money.
Responses from the respondents show that security issues are akin with the reputation of the
bank: “I do not consider that because if you leave there your security is still not guaranteed”; “Yeah,
yeah because I for one, from their reputation I know they can be trusted, I guess that’s why I look at their
reputation”; “Yeah it will influence that is why I won’t save with just any bank because, the goodwill they
have”; “Personally won’t go out for just any bank but has proved overtime”; “It will influence me
because during the 2008 elections, I realized that data bank was on connection with the N.P.P so they
started recording negative balances, so I had to take my money out because N.P.P was out of power”;
“Yes it is necessary you wouldn’t want to lose your money it will not be necessary, because I know that its
not possible the money will get missing in the bank”; “I have never really thought about that, so it
wouldn’t influence me”.
Selection criteria 9 - Marketing communication: The respondents acknowledge that the
communications that a bank put out could have influence, but state however that these communications
would not per se influence them. We are of the view that, it’s probably because they are enlightened and
can determine the differences between perceived quality and actual quality of the service delivered. Here
are their responses: “Exactly! It will affect me”; Yes I am sure because for the GT bank you will be so
caught up in their song and it can influence people but haven’t influenced me per say but if want to open
another account, I will go to GT bank”; “Well personally it won’t affect me anyway , it wont count on my
choice of bank, marketing people are very bad people so marketing strategies are just to sway you for
banking I won’t go there”; “It may influence me if information conveyed suit something I need”; “OK! It
does not affect me, I don’t look at think advertisement stands for competence, you can have a nice advert
and not be competent or their services not up to standard”; “It’s not a factor”; “Some are just
camouflages, they don’t really do what they say, they just want customers and if they start its not for long,
so I won’t consider it”.
Selection criteria 10 - Reputation of bank: Some of the respondents explain that they feel good to be
associated with a reputable bank whiles others would not consider a prestigious bank. Some explain that a
good reputation is likely to result in good service delivery: “I will consider a bank institution that has
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enjoyed goodwill overtime over one I barely know”; “Reputation won’t influence me. Yes its necessary in
that you can tell if bank is suitable for you or not in keeping your money with them; it will give you an
idea of service delivery whether good or bad”; “It won’t be a factor, first class and their services may not
be good”; “Yes it really counts, sometimes you feel good to mention that you bank with a particular
bank”.
Table 1.
The most important criteria in order of significance The most unimportant criteria in order of significance
1. Convenience 1. Secured feeling
2. Employee customer relations 2. Bank appearance
3. Banking services/ Financial benefits 3. External influences
4. Reputation of the Bank 4. Reputation of the Bank
5. Marketing communication/Bank appearance/ Secured feeling. 5. Marketing communication
Postscript/Aftermath of service Post-acquisition phase and implications
From the presentation and the discussion we realize that what really determines the selection of a
particular bank over another is how you feel after you access the services. The respondents reveal feelings
of happiness, sadness, cheerfulness, joyfulness, anger, and deceit.
Happiness: Happiness is good feeling about something. This the respondents show clearly in our
interaction with them. Banking for them should end up making you happy to want to return to the banking
hall. Here are some responses from the respondents: “…because if you are not happy it will be difficult to
interact with them, for instance,… it makes banking enjoyable”; “… sometimes you feel good to mention
that you bank with a particular bank”; “… banks normally if you enter a bank and architecture is not
nice it does really attract you because when you are entering and it’s looking nice you also feel good”.
A smile from the service provider made majority of the respondents happy and contributed to their
decision to become a loyal customer of the bank. For example: “When I went to the HFC bank for
instance the receptionist was good, she smiled at me this made me like going there to check on my
account”. Thus, banks should make some efforts to do things that bring delight to their clienteles and
make them happy.
Sadness: Sadness is the exact opposite of happiness. A feeling of grief, sorrow, depression, wretchedness
etc is sadness. The respondents would want to eschew any service by a bank that would make them
gloomy or otherwise that do not satisfy their needs. Here are some voices:
“…marketing people are very bad people so marketing strategies are just to sway you for banking I won´t
go there”; “… if a bank does not offer services tailored to suit students I might not choose the bank”;
“… I will look out for the services that apply to my needs, if a bank does not have a service that will not
affect me I won’t go there”. Thus banks should try their best to eliminate services that would make their
consumers especially the feel depressed to want to avoid them.
Anger: A feeling of annoyance, irritation, fury, rage etc is anger. The respondents would not want a
situation that will make them furious over the services of a bank and would therefore avoid a contact with
such a bank. Examples from the respondents: “… it should be fast and reliable, they wasting your time
and no queues”; “Banking with a certain bank and ATM is always out of order, you might keep the
account but will bank elsewhere”; “Some banks waste time in carrying out services and some customer
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relations are not good”. The relationship between the consumers and the bank must be cordial.
According to a respondent, “… if you are not happy it will be difficult to interact with them”. Banks must
remove any process that will end up annoying their clientele especially the undergraduate students.
Deceit: A feeling of betrayal, fraudulence, falsity etc is deceit. The respondents posit they would not be
caught in the web of sham and would do anything to shun such services. The communication gap must be
narrow enough to what was promised to what is actually delivered. Some considered marketers as people
trained to deceive and therefore would pass up any marketing communications. Some responses: …
marketing people are very bad people so marketing strategies are just to sway you for banking I won´t go
there”; “I don’t look at think advertisement stands for competence, you can have a nice advert and not be
competent or their services not up to standard”; “…some are just camouflages, they don’t really do what
they say, they just want customers and if they start it’s not for long, so I won’t consider it”. As far as
possible the banks must demonstrate integrity and promise only what they can deliver.
Conclusion
The aim of this paper is to investigate bank selection criteria among undergraduate students and to
explore how consistent the findings of this current study compare with extant studies. The results show
consistency with previous works in Ghana and elsewhere; Hinson et al. (2009), Blankson et al. (2007),
Owusu-Frimpong (1999) and so forth. The convenience dominating is asserting the ease with which
consumers want to access their services and also to save them enough time. “Time is the only commodity
worth anything anymore. Consumers sacrifice money in order to save time. The convenience factor also
explains the themes of being happy after a bank service. We can conclude that a bank that provides a
convenient service (convenience in whatever form) that meets the needs of the consumers will have an
edge over other competitors’ that provides otherwise.
References
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Segmentation”, Journal of Marketing, Vol. 40 Pp. 40 – 45.
Blankson, C., Ming-Sung Chang, J. and Spears, N. (2007), “Determinants of banks selection in USA,
Taiwan and Ghana”, International Journal of Bank Marketing, Vol. 25, No. 7, Pp. 469 – 489.
Bodet, G. and Chanavat, N. (2009), “Building global football brand Equity – Lessons from the Chinese
market”, Asia Pacific Journal of Marketing and Logistics Vol. 22 No. 1, 2010 pp. 55-66
Gerrard, P., Cunningham, J. B. (2001), “Singapore’s undergraduates: how they choose which bank to
patronize”. International Journal of Bank Marketing, Vol. 19 No. 3, pp. 104-114.
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Gray, A.D. (1977), “Student attitudes towards banking”, unpublished B.Sc dissertation, University of
Strathclyde.
Hinson, R. and Hammond, B. (2006), “Service Delivery in Ghana’s Banking Sector” in African
Marketing Practice: Cases from Ghana; pp 43-63; Hinson R. (ed), Sedco Publishing Limited,
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Hun Phuong Ta, Kar Yin Har (2000), “A study of bank slection decisions in Singapore using the
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Lewis B.R, (1991), “Service Quality: An International Companion of bank Customers’ Expectations and
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Lewis, B.R. (1982), “Student accounts – a profitable segment?”, European Journal of Marketing, Vol. 16
No. 3, pp. 63-72.
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among degree holders in Singapore", Nanyang Technological University, Singapore, unpublished BBus
dissertation.
Mokhlis, S. (2009),”Determinants of choice criteria in Malaysia’s retail baking: Analysis of
Undergraduate Students in Malaysia”, European Journal of Economics, Finance and Administrative
Sciences- Issue 16.
Omar, O.E. (2007), “Gender – based retail bank choice decision in Nigeria”, Journal of Retail Marketing
Management Research, Vol.1 No.1, pp 20-21.
Owusu-Frimpong, N. (1999), “Patronage behavior of Ghanaian bank customers”, International Journal of
Bank Marketing, Vol. 17 No. 7, pp. 335-341.
Pass, M.W. (2006), “Western US college students: Banking preferences and marketplace performance”,
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Schram, J. (1991),”How students choose their banks”, US Banker, Vol. 110, pp75-78.
Ta, H. P., Har K. H. (2000), “A study of bank selection decisions in Singapore using the Analytical
Hierarchy Process”, The International Journal of Bank Marketing, Vol. 18, No. 4 pp. 170 – 80.
Tan, C.T., Chua, C. (1986), “Intentions, attitude and social influence in bank selection: a study in an
oriental culture”, International Journal of Bank Marketing, Vol.4 No. 3, pp. 43-53.
Thwaites, D. and Vere, L. (1995), “Bank selection criteria – a student perspective”, Journal of Marketing
Management, No. 11, pp. 133-49.
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Zineldin, M. (1996), “Bank strategic positioning and some determinants of bank selection”, International
Journal of Bank Marketing, Vol. 14 No. 6, pp. 12-22.
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Abstract
Managing Supply Chain Disruption Risks in Nigerian Manufacturing Sector
Chris I. Enyinda, Chris.enyinda@aamu.edu
Alabama A & M University, USA.
Alphonso O. Ogbuehi, aogbuehi@mail.clayton.edu
Clayton State University, USA.
Chris H. Mbah, dr_cmbah@yahoo.com
Higher Colleges of Technology, United Arab Emirates.
The ailing Nigerian manufacturing sector and its impact on economic and social development and the proposed
ambitious vision 2020 have been receiving constant media coverage and political commentary. Manufacturing
sector is the quintessential catalyst for economic growth and national security. For the Nigerian nation to achieve
economic prosperity, global competitiveness, poverty alleviation, and national security agenda, manufacturing
sector matters. Developed nations built their prosperous economies and formidable national security because of
their strong manufacturing sectors. Although manufacturing has been acknowledged as an important engine for
employment and economic output, the Nigerian manufacturing sector has not achieved impressive development and
growth owing to a slew of supply chain disruption risks. Manufacturing rely on sound infrastructure and enabling
operating environment, and supplies from around the globe, so disruptions in such as electric power and delivery of
crucial inputs can halt production of components or products. Also, unpredictable and intangible disruption risks
such as changes in regulations or currency exchange rate volatility can shut down production or assembly lines and
delay deliveries. The risk of losing the ability to produce goods and high-value exports as a result of supply chain
disruption risks will not only contract manufacturing firms but will also contract economic growth and national
security. Also, supply chain disruption risks can exacerbate costs of production and logistics and in turn reduce
profitability, shareholder value, and derail the touted Nigerian vision 2020.This means that manufacturers must
consider reevaluating their supply chains in order to manage and mitigate supply chain disruptions and in turn
improve resiliency. Firms that are able to prioritize and manage their supply chain disruption risks will reap the
reward and those that do not do so at their competitive disadvantage. This paper identifies sources of knownunknown
and unknown-unknown supply chain disruption risks facing the Nigerian manufacturing sector. It also
discusses risk mitigation strategies that supply chain managers can deploy against those risks.
Introduction
Without adequate provision of infrastructure services and supportive business environment,
manufacturing sector cannot play the crucial role required to induce economic prosperity, alleviate
crushing poverty, foster trade competitiveness, and build formidable national security. Ehrlick (1995)
describes the manufacturing sector as the economy’s most prolific generators and disseminators of
technology and innovation that has a significant influence on the overall output and productivity growth.
In developing countries, the manufacturing sector is often considered as the darling of policy makers, the
engine of modernization, job creation, and a fundamental source of various positive spillovers (Tybout,
2000). Manufacturing sector growth is considered important for economic development in terms of share
of total output or employment (Soderbom and Teal, 2002). Forward thinking governments can promote
manufacturing sector through provision of special tax concessions and reduced tariff rates for firms that
import manufacturing machinery and equipment (Tybout, 2000), and provision of reliable and adequate
infrastructure services. However, the Nigerian manufacturing firms are closing down primarily due to
supply chain disruption risk associated with impoverish infrastructure services (e.g., electric power). For
the Nigerian nation to remain viable and prosperous in the 21 st century, manufacturing sector must be
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viewed as the lynchpin of inward-looking economic growth strategy, employment, and international trade
competitiveness. Although the manufacturing sector can be the engine of economic development, it has
not received the deserving attention from supportive government policies.
To compete in today’s global marketplace, manufacturers must address alphabet soup of supply chain
disruption risks affecting their manufacturing operations. The supply chain disruption risks and
vulnerabilities facing manufacturers of all sizes stem from weak infrastructure services (e.g., electric
power), lack of access to credit, demand uncertainty, price and exchange rate volatility, lack of supply
chain talent, high port charges, difficulties in enforcing contractual obligations, costly imported raw
materials, incoherent institutional policies, regulations, high taxes, corruption, among others. The electric
power is particularly an important production inputs for manufacturing operations. High energy costs
impact every aspect of the supply chain operations, from source of raw material acquisition, through
manufacturing, to final distribution. The poor energy supply can erode profits, increase production cost,
dwarf investment and employment for citizens (http://www.manufacturing.gov/report/identifying.pdf).
Saksson (2009) points out that the industrialized countries are wealthy while the developing countries are
not because the former have managed to ensure secure and stable access to energy by building
infrastructure.
Global supply chain disruption is a global issue that keeps C-level executives up at night. According to
Enyinda et al (2008), “more than ever global supply chains are exposed to risks such as regulatory
compliance, exchange rate fluctuation, interest rate, inflation rate, tariff or duty rates, price of commodity,
availability of quality labor, labor union strike, political conditions, terrorism, natural disasters, and
supply chain infrastructure.” Supply chains are exposed to increasing disruption risks because of their
global, complex, and convoluted nature. Disruption entails any unplanned delay or stoppage of raw
materials and physical product, information, and financial flows within and across the supply chain.
Gallagher (n. d) defines supply chain risk as a complex equation of risks that a manufacturing firm faces
between raw material extraction and final product delivery. Indeed, today’s global manufacturing supply
chains are increasing encountering disruption risks. The Nigerian manufacturing firms as members of that
global supply chains are not immune from disruption risks. Because the Nigerian manufacturing firms are
not immune from today’s global supply disruption risks many of them have collapsed, while others have
or are planning to Ghana. The recent twin disasters (earthquake cum tsunamis) in Japan produced huge
supply chain disruptions that impacted the electronic and automobiles manufacturers around the world.
The disasters disrupted power supply, production facilities, and transportation networks imperative for
global manufacturing supply chain operations.
The objectives of this paper are as follows. Section 2 provides a background on Nigerian manufacturing
sector. Section 3 presents the research motivation. Section 4 examines and identifies the sources of supply
chain disruptions in manufacturing operations. Section 5 presents the consequences of supply chain
disruption risks. Section 6 discusses the strategies to mitigate and supply chain disruption risks. Finally,
section 7 provides the conclusion, managerial and policy implications.
Background on Nigerian manufacturing sector
The Manufacturers Association of Nigeria (MAN) estimated that 10% of all manufacturing industries are
operating at a sustainable level, 60% are ailing and 30% have simply closed down their operations.
MAN’s survey of 300 manufacturers indicated that 2.7 million people in 2001 and 2.84 million people in
2002 were employed by the manufacturing sector. However, in 2008, employment decline to 1.03 million
people due to growing challenges facing the Nigerian manufacturing sector
(http://allafrica.com/stories/201102170658.html). Estimate has it that about 820 manufacturing firms shut
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down between 2000 and 2008 (Alli, 2009). Because of high production costs associated with weak
infrastructure manufacturing accounted for less than 5% of GDP in 1999, while the oil industry
contributed 33% of GDP in 2000 (http://www.nationsencyclopedia.com/Africa/Nigeria-
INDUSTRY.html). Regrettably, its abundance of natural resources and oil revenue has not contributed to
the development of primary industries, the manufacturing sector in particular. Indeed, because of utter
dependence on oil revenue manufacturing sector have been relegated to the back bench of oblivion. Some
of the factors responsible for low growth and development in the manufacturing sector include
dependency on oil revenue, weak infrastructure, shortage of talent, lack of adequate financial resources,
and lack of proper management and planning (Ku, et al., 2010). Wood (1997) acknowledges that African
countries are unable to export manufactures due to their dependence on resource endowments. In order
for African countries to attain economic development and global marketplace competitiveness, World
Bank (2000) recommends the need to diversify their exports. To do just that, the Nigerian manufacturing
sector must be rejuvenated.
Brunetti et al (1997) point out uncertainty on laws, policies and regulations harms private sector
development in many developing countries. Also, institutional uncertainties or unpredictable government
regulatory regimes can have undesirable impact on firms and in turn on economic development of
developing countries (Borner et al 1995, Klitgaard, 1990, and De Soto, 1989). Brunetti et al (1997) world
private sector survey report that the institutional impediments for doing business in Sub-Saharan Africa in
order of importance include corruption, tax regulations and/or higher taxes, inadequate supply of
infrastructure, inflation, crime and theft, financing, general uncertainty on costs of regulations, policy
instability, regulations on foreign trade (exports, imports), foreign exchange regulations, among others.
The Nigerian manufacturing firms are closing down primarily due to supply chain disruption risks
associated with impoverish infrastructure services, lack of access to finance, and unreliable supply of
manufactured inputs. For example, as a result of lack of access to manufactured inputs (domestically
manufactured intermediate inputs and capital equipment) in developing countries, manufacturers often
rely on imperfect substitutes or import the needed inputs at extra expense (Tybout, 2000). Access to
physical infrastructure including power, roads, ports, airports, communication facilities, and safe water in
developing countries are abjectly limited (World Bank, 1994). The most noted challenges confronting
manufacturing firms include inadequate physical infrastructure, access to credit, insufficient demand, high
cost of imported raw materials, and lack of talent (Malik et al 2004; Soderbom and Teal, 2002).
Soderbom and Teal (2002) argue that the existence of good roads near manufacturing firms can increase
their operational efficiency by approximately 9 per cent. However, because of these challenges Nigerian
manufacturing firms are much less oriented to exporting than firms in other African countries and only
about 5 percent of Nigeria’s GDP that comes from manufacturing is low as compared to 20 per cent levels
for South Africa and Mauritius (Soderbom and Teal, 2002).
According to Tybout (2000), “… where infrastructure services are missing or unreliable, some firms must
produce their own power, transport, and/or communication services.” In Nigeria, where these
infrastructure services are not adequately provided by the government agencies, manufacturing firms of
all sizes must provide them if they want to produce goods and services. For example, due to the public
agencies failures to deliver adequate infrastructure services to meet demand Nigerian manufacturing firms
in a variety of industries have undertaken a large amount of capital investment in electricity generation,
transportation, telecommunications, water supply, and waste disposal (Anas and Lee, 1988; Lee et al.,
1986; The World Bank, 1986). Private provision of infrastructure services not only lead to economic
inefficiency and higher production costs and product prices but also makes it difficult for manufacturing
firms to compete with their importing counterparts or in the export markets (Anas and Lee, 1988). Thus
the Nigerian manufacturing firms most importantly need electric power produce goods and reliable roads
to move raw materials, components, parts, and finished products to the marketplace. Hausmann and
Gavin (1996) and World Bank (1993) contend that macroeconomic and relative price volatility in
developing countries such as in Sub-Saharan Africa is commonplace. Also, Brunetti et al (1997) and
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World Bank (1997) note that poor governance (e.g., corruption, legal systems and crime prevention) are
relatively poor in developing countries. Saksson (2009) asserts that lack of requisite energy power can
bring production to a standstill as can be witnessed in many parts of Africa where only one in four
Africans has access to electricity. In reemphasizing the imperative of electric energy Saksson (2009)
stated that “… a world without electricity amounts to non-mechanized production. While erratic supplies
of electricity disrupt production, voltage fluctuations negatively affect the durability of machines. Better
electricity-related infrastructure can, thus, raise the efficiency and durability of physical capital.”
Research motivation
This research is motivated by the need to critically examine the growing supply chain disruption risks
confronting the Nigerian manufacturers and their supply chains. The Nigerian manufacturers and their
supply chains are exposed to an environment that is characterized by supply chain disruption risks
including weak infrastructure, high cost of imported inputs and port charges, fluctuating exchange rate
exposure, lack of access to credit, corruption and governance, incoherent or misguided government
policies, regulatory costs, shortage of talent, high taxes imposed by different tiers of government, among
others. Osalor (n. d) asserts that infrastructure deficit and exorbitant tax regime contribute to abnormally
high cost of manufacturing, thus eroding demand and profitability. Because of the power generation
deficiency the nation's production capacity has been curtailed, thus significantly eroding the ability of
firms to grow profits and provide shareholders with a decent return on investment. For example, Dunlop,
a Tire manufacturer in Nigeria recently relocated to Ghana because of its available and reliable generation
of electric power and enabling operating environment. Regrettably, those manufacturing firms that chose
to remain in Nigeria continue to provide their own generators to supply electric power for their
manufacturing operations. Thus, without access to reliable electric power, highways, railways, airports,
and seaports, the Nigerian manufacturers will continue to encounter high production costs that make them
less competitive or force them to close down. World Bank (1994) points out that the available and reliable
supply of infrastructure in developing countries is often relatively limited.
Arguably, inadequate infrastructure in particular has driven many companies out of business as well as
debarring many potential foreign and local investors from investing in the Nigerian manufacturing sector.
However, firms that brave the exposure to lack of infrastructure services must provide their own to
remain in business. Indeed, private provision of infrastructure to conduct business is not only
economically inefficient but also adds more cost to goods and services that consumers buy. It has also
been reported that according to MAN, Nigeria suffered an average of 60,000 minutes or 41.6 days of
power interruptions per year (Lartey, 2006). Macbeath (2008) contends that exchange rate fluctuations
not only have a significant impact on total manufacturing output, but also affect the distribution of output
among various producers.
Supply Chain Disruption Risk Sources
The perception that supply chains are designed for a stable world (Monahan et al., 2003) has exposed
manufacturers and their supply chains to disruption risks and vulnerabilities. Supply chain risk pertains to
any threat of interruption to the functioning of the supply chain operations (Christopher, 2003).
Kleindorfer (2000) argued that to effectively mitigate risks in supply chain one must first identify the
underlying sources of risks. Supply chain disruption risks in manufacturing operations can emanate from
many sources. Sources of supply chain risks emanate from environmental, organizational, or supply chain
logistics-related factors that cannot accurately be predicted and can impact the supply chain outcome
variables (Juttner et al., 2003). For example, in the Nigerian manufacturing operations context risks
originate from both domestic (e.g., electricity interruptions, access to credit, and transportation delay due
to poor roads) and international sources (e.g., high costs of imported inputs, exchange rate). Gallagher (n.
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d) identifies risks facing manufacturers in emerging and developing markets as 1) trade risk (delays in
customs processing, bribery from officials, and erratic enforcement create financial costs and ethical
dilemmas); 2) Political risk (regime stability, religious tensions, bureaucracy, crime, corruption, and interstate
conflict; religious and ethnic tensions; bureaucracy; crime and corruption (illegal bribery and
kickbacks); customs and border protection, tax authorities, and organized crime linked with business
operations; 3) Geophysical risk (weak infrastructure, epidemics in a country, and long distance; 4)
Economic indicator (inflationary pricing, economic diversification(i.e., reliance on a limited number of
key sectors or resources for economic prosperity); and 5) Operational risks (labor, supply disruptions
(supplier failures), commodity price volatility, internal product failures, and energy costs; Input risks
(electric power).
Following Simchi-Levi (2010), supply chain risk sources can be identified as shown in Figure 1. Further,
in agreement with Rumsfeld (former U.S. Secretary of Defense) these sources of supply chain disruption
risks can also be classified as known-unknowns (i.e., those supply chain disruption risks we know that we
do not know), unknown-unknowns (i.e., those supply chain disruption risks we do not know that we do
not know).
Known-unknowns
• Infrastructure
• Machine failure
• Labor strikes and costs
• Technology
• Access to credit
• Demand & supply uncertainty
• SCM knowledge
• Bribery and Corruption
• Port delays and high charges
• Government policies
• Multiple taxes
• Currency exchange rate
• Accidents
• Network-related
• Social-political actions
• Force majeure
• Epidemics
Unknown-unknowns
Uncontrollable
Figure 1. Known-Unknowns and Unknown-Unknowns Supply Chain Risk Sources
The known-unknowns sources of risks such as infrastructure deficiencies, machine breakdowns, access to
credit, and technology can be quantified and controlled. For example, currency exchange rate fluctuations
can be managed and mitigated through the use of hedging (Simchi-Levi, 2010). For the unknownunknowns
sources of risks such as force majeure, epidemics, and social-political actions are
unquantifiable and uncontrollable.
Manufacturing Supply Chain risk Assessment Framework
Controllable
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The manufacturing supply chain risk assessment framework is shown in Figure 2. This type of risk
assessment framework enables a manufacturing firm to focus on which sources of supply chain risk need
to take action to mitigate specific risk types. Also, it affords a manufacturing firm the opportunity to
visualize the interdependencies among supply chain risks to specific risk types. According to Simchi-Levi
(2010), “controllable risk sources [known-unknowns] with high expected impact can and must be
managed effectively.”
High
Manufacturing Expected impact
Low
Force majeure
Supply
uncertainty
Demand
uncertainty
Social-political
actions
Government
policies
Multiple taxes
Commodity
prices
Epidemics
Accidents
Networkrelated
Low Ability to Control High
Figure 2. Risk Assessment Framework – Ability to Control vs. Anticipated Severity
Impact of Supply Chain Disruption on Manufacturing
Infrastructure
Currency
exchange rate
Machine
failure
Bribery &
corruption
Port delays &
high charges
Labor costs
Labor strike
Technology
SCM
knowledge
Import
competition
Energy costs
Access to credit
Enyinda et al (2008) noted that global supply chain disruption risks and uncertainties can have profound
implications for global manufacturing firms. Organizations are increasingly susceptible to both highimpact
and low-impact disruptive events (Sheffi and Rice, 2005). Significant supply chain disruptions can
tailspin an organization’s revenue, erode market share, bloat costs and budget, threaten production and
distribution, tarnish credibility with investors and other stakeholders, and skyrocket the cost of capital
(Bosman, 2006). Supply chain disruption risk can precipitate to excess inventory, lead time variance,
protracted cycle times, and decreased customer service (Sarathy, 2006). Supply chain disruptions can
erode manufacturing firms’ shareholder value and profitability. Disruptions to manufacturing and in turn
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product flow can be significantly expensive and lead to tremendous supply chain delays. Rice and Caniato
(2003) estimate that a firm suffers a $50 million to $100 million cost impact for each day its supply
network was disrupted. Hendricks and Singhal (2003) examined the stock market reaction when
companies publicly broadcast they are experiencing supply chain disruptions that cause production or
shipping delays. Results of their study of 519 supply chain problem broadcasts suggest that such
broadcasts eroded shareholder value by10.28%.
Strategies for Managing Mitigating Supply Chain Disruption Risk
The known-unknowns and unknown-unknowns supply chain disruptions are at the center of risk
mitigation. Risk mitigation strategies represent measures firms deliberately deploy to mitigate the
uncertainties identified from the various sources (Miller, 1992). Sarathy (2006) defines risk management
as a multilevel approach to identify, assess, and develop methods to manage and mitigate or avoid
potential disruptions. Supply chain risk management represents the process of managing and mitigating
risk through the application of risk management tools, collaboration and coordination among shareholders
to enhance supply chain effectiveness and financial performance (Tang, 2006; Norman and Jansson,
2004). To manage and mitigate the negative implications of disruptions prevalent in today’s global
economy, manufacturing firms must reassess and/or redesign their supply chains in order to survive and
remain competitive (Enyinda et al, 2008). Arguably indeed, thriving and remaining competitive in
nowadays unpredictable environment requires global manufacturing firms to create a set of robust
strategies and resilient supply chains that can respond to any scenario that can unfold (Simchi-Levi et al,
2002, Christopher 2003). Simchi-Levi et al (2002) and Christopher (2003) proposed hedging, flexibility,
collaboration and outsourcing, supply base reduction, agility, and “what if” analysis as the systematic and
strategic approaches organizations can use to build robust and resilient supply chains that can deal with
the new economic uncertainties and still remain competitive. Kleindorfer and Van Wassenhove (2004)
and Kleindorfer (2000) contend that risk management strategies that can be used in industrial contexts
include 1) identifying underlying sources of risk, 2) determining the condition by which risks can
materialize, 3) estimating the potential consequences of these risks under various scenarios, and 4)
providing the means for mitigating and coping with these consequences. Kleindorfer and Saad (2005)
asserted that continuous coordination, cooperation, and coordination among supply chain partners are
imperative for risk avoidance, reduction, management and mitigation such that the value and benefits
created are maximized and shared fairly. From the preceding, one can deduce that to ensure a successful
SCRM and in turn improve supply chain effectiveness and financial performance, coordination,
collaboration, cooperation, application of risk managements, and of course information sharing, visibility
and/or transparency are necessary ingredients. Assessing the supply chains with the perspective of risks
enables the manufacturing firms to gain visibility regarding the potential sources of a disruption, and most
importantly the potential financial impact that can resulting from a disruptive event (Lowery, 2004).
However, in spite of the reported global supply chain disruptions from past events around the globe, the
Nigerian firms have yet to take on the supply chain risk management journey to strengthen the resiliency
of their global supply chains. Indeed, to manage and mitigate supply chain disruption risks proactively
and effectively Nigerian firms need supply chain management knowledge and a thorough understanding
of their supply chains and the crucial dependencies that exist along the supply chain. The ability to
proactively manage supply chain disruptions can make all the difference whether a firm survives or
perish. A significant number of manufacturing firms in Nigeria provide their own infrastructure services
which represent the most barriers for their operations. Although Anas and Lee (1988) argue that the
average cost of private provision of electric power might not be less than that of the public source, it
becomes necessary if disruptions in the public supply become very frequent. Anas and Lee (1988)
suggests that “… the higher price of private power is worth incurring to insure against the possibility of
prolonged power shutdowns as well as assuring a steady supply of quality power during normal times”
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Redundancy buildup strategy can be used as a proactive measure against shortages of electric power
supply. Anas and Lee (1988) argue that inventory and production scheduling strategy can be used given
that the delivery times for inputs and outputs are often seriously influenced by anticipated or real
disruption in infrastructural services. Therefore, manufacturing firms must take advantage of any seasonal
variations in the availability and reliability of key infrastructural services by building up redundancies
during more reliable periods and reducing such inventories during less reliable periods. Fafchamps et al.
(2000) assert that manufacturing firms in Zimbabwe hold higher liquid assets and inventories in response
to high levels of contractual risk.
Furthermore, to manage the unknown-unknowns supply chain sources of risks, Simchi-Levi (2010)
recommended the following strategies including 1) investing in capacity redundancy, 2) increasing
velocity in sensing and responding, and 3) creating a flexibility supply chain community. For the knownunknowns
supply chain sources of risks, Kogut (1985) recommended the following control strategies
including 1) speculative strategies (e.g. maintaining excess inventory of productive inputs in order to
avoid unfavorable currency exchange rate fluctuations), 2) hedge strategies (e.g., outsourcing production
to Ghana given its available and reliable supply of electricity and/or supportive operating environment),
and 3) flexible strategies (e.g., use of dual sourcing and redundant manufacturing capacity (David-Levi,
2010)).
Conclusions and policy Implications
The Nigerian manufacturing sector still suffers from lack of development and growth due to growing
multiple layers of supply chain disruption risks, despite attracting attention among practitioners and
academicians in the popular press. Nigerian manufacturing operations environment is characterized by
relatively limited physical infrastructure, unpredictable regulatory regimes, poor governance, high
corruption, and/or institutional uncertainties that not only undermine long-term investment and growth
but also erode economic growth, poverty alleviation initiatives, trade competitiveness, and national
security. For Nigeria to achieve economic development, compete favorably in the global marketplace, and
meet the proposed vision 2020, it must urgently reverse the geometric decline of the manufacturing
sector. Supply chain disruptions associated with unreliable electric energy, poor transportation systems,
misguided regulations, corruption, lack of access to credit, police checkpoints, and so on can have an
enormous impact on manufacturing activities, revenue, shareholder value, jobs, and future investment,
product and service prices, and long-term competitive advantage.
Collier (2000) contends that African manufacturing firms suffer high transaction costs because of
inappropriate government policies and poor quality of the infrastructure services. For Nigerian
manufacturing firms to be successful, Soderbom and Teal (2001) recommend that a sound economic
policy is imperative for economic development. Instituting and implementing supportive policies such as
the new proposed energy reform, efficient and effective transportation logistics systems, and favorable tax
regime will not only dwarf high cost of manufacturing supply chain operations but they will also foster
economic development, alleviate poverty, promote international competitiveness, and meet national
security agenda. To be competitive in today’s global business landscape, the Nigerian manufacturing
firms must be able to distribute their goods nimbly and efficiently. However, this can only be achieved if
there is adequate and reliable supply chain infrastructure. For example, industrialized nations’
manufacturing and/or services firms depend on strong supply chain infrastructure to be competitive at
global marketplace, grow exports and jobs.
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Managing and Mitigating Supply Chain Blind Spots and Vulnerabilities in Nigerian Elections
Abstract
Chris I. Enyinda, Chris.enyinda@aamu.edu
Alabama A & M University, USA
Indy C. Enyindah, ice_enyindah@yahoo.com
Rivers State College of Arts and Science, Port Harcourt, Nigeria
Emmanuel Obuah, Emmanuel.obuah@aamu.edu
Alabama A & M University, USA
Organizations have gained competitive advantage through their logistics competencies or failed because of lack of
them. Throughout history strategic logistics has been acknowledged to play prominent role in major world events
such as military operations, peace time operations, World Cup, and Olympic Games. However, the logistics
operations that support these events are increasingly subject to unpredictable and predictable disruptions. The
Nigerian Independent National Electoral Commission (INEC) supply chain logistics is not immune to disruptions.
The recent disruptions in the Nigerian elections due to predictable and unpredictable supply chain blind spots
generated significant media attention and other stakeholders’ criticism. Supply chain blind spots represent events
that can disrupt flows of physical products/materials and information. The success of any electoral process depends
on sound strategic supply chain logistics planning that takes into account the prevalence of today’s disruptive blind
spots and vulnerabilities. The ability of C-Level executives to manage and mitigate supply chain blind spots
effectively and efficiently can improve operational performance and stakeholders’ confidence. It is only those
organizations that can identify blind spots sources and vulnerabilities and have developed predictive supply chain
risk management and business continuity strategies will be successful. Organizations that neglect these imperatives
do so at their peril.
Introduction
The INEC is an election management body created by the Nigerian Constitution to organize
federal and state elections the country. Recently, INEC supply chain suffered a number of
disruptions associated with such events as supply failure (suppliers’ failure to supply electoral
materials and other logistics assets), supplier material quality failure, supply chain logistics
breaches, hijacking of ballot papers, violence and terrorism in Northern Nigeria. These supply
chain blind spots or events that led to the postponement of the elections made front-page news.
The following are some of the front-page headlines. “…Jega’s logistics failure” (Akalugo,
2011). “Nigeria's elections postponed over logistical 'chaos” (http://www.bbc.co.uk/news/world-africa-12944373).
“Saturday polls shaky … Fears of possible shift loom over logistics problem” (Daily Sun,
Wednesday, April 6, 2011); “refresh crisis brews over rescheduled elections…” (Nigerian
Tribune, Wednesday, April 7, 2011); “Election suspended in 13 senatorial districts [and] 45
constituencies too” (Daily Sun, Friday, April 7, 2011) as a result of logistical challenges and
shortsighted supply chain logistics planning. “Nigeria’s Parliamentary elections postponed due
to massive logistics failure” (Sahara Reporters, April 2, 2011). “Nigeria: logistics problems –
INEC postpones elections…” (Vanguard, April 2, 2011). “Nigerian elections suffers
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logistics…Reelection elections scheduled…” http://www.gistexpress.com/2011/04/03/ nigerian-
elections-suffers-logistics-problems%E2%80%A6-re-election-scheduled/). “Logistics problems:
the reason behind Nigerian general elections postponement…” (http://naijan.com/logisticsproblem-the-reason-behind-nigeria-general-election-postponement/).
“NGO urges INEC to take
care of logistical problems…” (http://radionigeriaibadan.com/index.php/news-item-5/561-ngourges-inec-to-take-care-of-logistical-problems.html).
The INEC Chair, Professor Attahiru Jega, in his response to the supply chain logistics failures and the
attendant postponement of the elections noted “we deeply regret this situation and apologize to Nigerians
for the hardship this may have created… it is regrettable, it is unfortunate, it should not have happened.
Under normal circumstances this kind of thing does not happen. Man proposes God disposes” (The
Nation Newspaper, April 3, 2011). Indeed, the elections hiccup ought to have been mitigated if the proper
supply chain logistics planning and proactive or predictive supply chain risk management were leveraged.
The disruption in the elections supply chain logistics cannot be attributed to the proverbial ‘Man
proposes, God disposes’ or force majeure events but attributable to man-made events – supply chain
logistics breaches or sabotage, lack of supply chain management knowledge, poor supply chain logistics
planning, shortsighted supply chain coordination and collaboration, limited supply chain information
visibility, lack of predictive supply chain risk management know-how, among many others. Although
dual sourcing or sourcing of elections materials from the local suppliers was not part of the initial
logistics strategic plan, the INEC Chairman reacted to the logistics failures by turning to them to deliver
the 19 million fresh ballot papers for the rescheduled elections.
Elections logistics is that part of supply chain that involve planning, delivering, and controlling
the flow of electorate commodities to polling stations as well as the information necessary to
meet voters’ civic duties necessary to achieve free, fair, and credible elections. Providing logistics
and supply chain management support for any elections is an event tantamount to military mobilization.
Indeed, the Nigerian April 2011 elections can be viewed to be a large-scale non-military related, nationwide
supply chain logistics footprint. It required the positioning of INEC’s 400,000 trained personnel to
serve 60 million voters, 120, 000 polling stations located in 36 states and 774 local governments, and
scores of international elections observers. To successfully meet the need of April 2011 elections
requirements, it required “immense logistics challenges that [must] focus on planning, managing and
executing the receipt, tracking, storage, transportation, distribution, installation and recovery of all
materials related to” (Minis et al 2006) the upstream elections stakeholders and the logistics of polling
stations. Indeed, in spite of the importance and the mandate to deliver free, fair, and credible elections and
crucial role of logistics planning, the latter was not given well deserved attention by the election supply
chain stakeholders. Arguably, efficient and effective (responsive) distribution logistics of elections
commodities demands “ detailed planning of delivery and retrieval schedules, methods of transport to be
used and shipping routes; efficient means of splitting bulk deliveries of supplies into separate shipments
for each voting location; avoiding wastage, yet ensuring that all voting stations have sufficient supplies to
service the voters; storage appropriate for maintaining stocks for election materials and equipment in
good condition; adequate security for the specific environment; comprehensive tracking of the
movements of all election materials and equipment as they go through the distribution and return chain”
(http://aceproject.org/ace-en/topics/vo/vod).
A combination of Nigeria’s significant supply chain logistics challenges and INEC’s lack of true supply
chain visibility within and beyond its enterprise has been acknowledged. Supply chain logistics is a
system of locations and activities that move physical products/materials from where they are produced to
where they are needed. Christopher (1998) defined supply chain as a “network of organizations that are
involved, through upstream and downstream linkages, in the different processes and activities that
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produce value in the form of products and services in the hands of the ultimate customer.” Upstream
supply chain disruption can cause downstream shortages of supplies. The first of the three legs of the
elections was disrupted due to poor supply chain logistics planning. Suppliers were unable to deliver the
required election supply chain assets just-in-time to most of the polling stations throughout Nigeria. This
hiccup resulted in the postponement of scheduled elections. Besides, INEC lacked the visibility and
knowledge of supply chain logistics planning required to handle the logistical positioning of elections
supply chain logistics assets at the right quantity at the right polling stations at the right time.
The remainder of this paper is structured as follows: Section 2 discusses elections supply chain
background and challenges. Section 3 proposes to identify elections supply chain blind spots (risks)
sources and discusses supply chain vulnerability assessment. Section 4 discusses supply chain logistics
disruptions. Section 5 presents supply chain blind spot (risk) management and supply chain visibility.
Section 6 finally presents the conclusion and managerial implications.
Elections Supply Chain Logistics background and Challenges
Elections administration in Nigeria presents many logistical challenges including large size of the
electorate of more than 60 million voters (36 states, the federal Capital territory and 774 local
governments); poor and inadequate infrastructure; complex ethnic, religious, and geographical divide;
electorate environment that is prone to violence and corruption; crushing poverty and economic
impoverishment (Independent Electoral Assessment Team, January 2010). However, in spite of the
estimated budget of N100 billion for the elections the supply chain logistics operations failed. The
complexity of the logistical task involved in the distribution of election sensitive materials throughout
Nigeria is daunting. Inadequate provision of communications facilities and other required logistical assets
can lead to delays in transporting electoral materials, equipment, staff, and election observers. Hence
shortfalls in logistical assets can impede the readiness, conduct, and coordination of electoral activities by
the various electoral bodies including the political parties and their candidates. Election supply chain
disruptions such as vendor failure to supply accurate number of sensitive materials, poorly trained
election personnel, unavailability of personnel at the polling stations, act of terrorism, among others pose
confidence issue for voters and reputation issue for INEC and the ability of Nigerian nation to hold free,
fair, and credible election. Similar supply chain disruption occurred during the last voter registration
exercise when personnel as well as materials were unavailable or arrive late at many of the stations. For
example, commentators have it that out of the 132,000 direct data capture (DDC) machines needed for the
voter registration exercise, 110,000 were supplied. Out of the number supplied only 107,000 were
delivered to the voter registration centers. The few delivered DDC machines at the registration centers
were substandard and/or defective. Other logistics assets that were in short supply or defective included
scanners and printers, printing paper, ink, cables, batteries and others. Other logistical challenges were the
conveyance of INEC personnel and election sensitive materials through difficult terrain in some part of
the country. Furthermore, there were problems of non-availability of sensitive materials, massive shortage
of means of transportation and wide communication gap between them and the national headquarters of
the commission.
Former President Dwight D. Eisenhower once said “plans are nothing; planning is everything.” Indeed,
logistics planning is imperative for achieving successful and credible elections. Supply chain Logistics
planning in elections context involves delivery or distribution of sensitive electoral materials, personnel,
international observers, equipment, and communication facilities to polling stations at the right place at
the right time to ensure free, fair, and credible elections operations. Logistics planning in the context of
elections “is the essential support functioning for ensuring that equipment, staff, and communications
methods are in place in time for the successful conduct of voting.” Arguably, achieving successful
conduct of elections requires supply chain logistics planning that is “…flexible and thorough in its
consideration of possible contingency arrangements [and to] ... ensure delivery of [products/materials]
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from suppliers to meet an election calendar that stipulates unalterable dates.” Recently, however, the first
three legs of the Nigerian elections was altered because of the Commission’s shortsighted supply chain
logistics planning and subsequent disruption of supplies including sensitive electoral materials, result
sheets, stamp pads, liquid gums, voting cubicles, lamps, and calculators. Other logistical mishaps include
mixed-up party logos and names of political parties as well as non-availability of the names of individuals
who have voters’ cards on the voter register.
Further, the disruption of the elections can be attributed to the Commission’s lack of supply chain
management knowledge required to execute the complex nature of supply chain logistics operations of
distributing elections commodities throughout Nigeria. Consequently, the National Assembly elections
were rescheduled a week later to ensure delivery of free, fair, and credible elections – akin to stopping an
assembly line when defective parts or products have been identified. The INEC’s C-Level executives
were unable to learn from the April 2007 elections logistics failures that could have helped to inform its
April 2011 elections supply chain logistics planning and knowledge management. Indeed, the experience
of April 2007 elections logistics failures could have helped INEC to acquire the required knowledge
management and proactive or predictive supply chain risk management. According to Albert Einstein,
“the only source of knowledge is experience.” Regrettably, INEC did not build any knowledge
management from the past experience of logistics problems. Sheffi (2001) contends that organizations
should have emergency business strategies to ensure business continuity. Although INEC did not have
event continuity plan in place, the INEC Chairman reacted by securing materials from local vendors and
from the Nigerian Security Printing and Minting Company (NSPMC). NSPMC could have been deployed
from the beginning as the preferred or prime vendor to supply the electoral sensitive materials and result
sheets since it is known to print every single denomination of the Nigerian currency and other sensitive
security documents.
Supply Chain Logistics Blind Spots Sources
Determining the antecedents of disruptions commences with identifying relevant supply chain blind spots
and classifying potential disruption sources on the basis of their location in relation to the focal firm.
Shrivastava et al. (1988) simply distinguish between internal and external sources for disruptions from the
perspective of a firm. Miller’s (1992) classification differentiates sources of disruptions into the general
environment, the industry environment, or the firm specific internal environment. Juettner et al. (2003)
classified sources of disruptions into 1) environmental risk sources- which arises from interactions of the
supply chain with the general environment at the macroeconomic level (i.e., socio-political risk, natural
disasters etc.), 2) network-related risk sources – which emanate from the interaction between
organizations within the supply chain, and 3) organizational risk sources – which exist within the
boundaries of individual organizations.
Blind spots or risks that can lead to elections supply-chain glitches are as different as weak logistics
infrastructure, supplier failure, political intimidation and violence, terrorism and kidnapping.
Vulnerability of elections supply chains to these risks can exaggerate because of lack of supply chain
management knowledge among INEC C-level executives. In today’s turbulent environment characterized
by constant and unpredictable rapid change, economic and social-political pressures, interdependent
global supply chains, infrastructure challenges, and the ever growing global supply chain blind spots or
disruption risks, C-level executives must be prepared and vigilant. Complexity and interdependence are
unavoidable realities facing today’s global supply chains, and adapting supply chain processes to deal
with these new realities is imperative for success. INEC outsourced the production of the elections
sensitive ballot materials to Nigerian vendors who in turn outsourced it to contract management
organizations in far flung destinations. As a result, INEC lost information visibility as well as control. The
INEC should have evaluated the vendor thoroughly in order to minimize vulnerability and the possibility
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of supply chain disruption to the success of the electoral process. Disruptions as a result of supply chain
blind spots or judgmental mistakes can impair effective flows of material supplies and information
imperative for an organization’s nimbleness to changes in environmental conditions and performance.
Supply Chain Vulnerability Assessment
Vulnerability is a function of probability and consequence. Probability can be reduced by way of security
and early warning systems, while consequences can be reduced through building resilience (i.e., the
ability to regain (or recreate) prior capability; requiring advance planning, additional capabilities/capacity;
and designing systems for resilience. A risk assessment identifies and evaluates risks based on various
factors, including capability and the potential effect of a predictable or an unpredictable event. Because
organization such as INEC often do not know if it has identified every risk and/or have actionable
information regarding the identified risks, it must therefore depend on vulnerability and criticality
assessment approach. Vulnerability and criticality assessments are important in proactive risk
management. A supply chain vulnerability assessment is a process that identifies blind spots. A supply
chain logistics vulnerability assessment is a process that systematically identifies and evaluates an
organization’s supply chain logistics exposure to blind spots or risks.
Supply chain vulnerability assessment is very crucial because it provides a basis for prioritizing which
supply chain logistics processes or assets require mitigation. Supply chain logistics vulnerability
assessment is reported in Figure 1. The following identified blind spots are not ranked according to the
order of importance: 1 = supplier failure/reliability; 2 = default of suppliers; 3 = logistics failures; 4 =
commodity cost volatility; 5 = equipment breakdowns; 6 = force majeure; 7 = accidents; 8 = social
political actions; 9 = lack of trust with partners; 10 = electric power shortage and outage; 11 =
information delays, scarcity, sharing; 12 = infrastructure breakdown; 13 = contract failure; degree of 14 =
control over logistics operations; 15 = weaknesses in the national, regional, and local infrastructure; 16 =
supplier product/material quality failures; 17 = supply chain logistics security breaches; 18 = rising
energy costs; 19 = rising transportation costs; and 20 = IT risks, loom large as potential blind spots for
INEC, suppliers, logistics providers, and customers or voters to sustaining a consistent state of operations
continuity.
High
Probability of Disruption
Low
Vulnerability (H, L) Vulnerability (H, H)
11
19
17
Vulnerability (L, L)
13
18
16 1 2
20
Low Severity (Consequences) of Disruption High
Figure 1. Supply Chain Vulnerability Assessment Framework
4
3
14
6
8
Vulnerability (L, H)
10
9
7
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Following Sheffi and Rice (2005), supply chain blind spot (risk) profile can be categorized into
probability (likelihood) of distribution and consequences (severity) of disruption. The high vulnerability
cell suggests that both the probability of disruption and the severity of disruption are high. Low
vulnerability cell indicates low probability of disruption and low severity of disruption. In this case, an
organization requires limited planning or action. The vulnerability that is characterized by low probability
but high severity disruption requires planning and action that is beyond the realm of daily operations
management. Finally, the vulnerability that is characterized by high probability but low severity
disruption is part of an organization’s operations management.
Supply Chain Logistics Disruptions
Supply chain complexity is one of the key driver or antecedents of supply chain disruptions. The
complex and convoluted nature of supply chain impair information visibility. Supply chain complexity
and convoluted characteristics represent a significant challenge to managing and mitigating elections
supply chain disruptions. These characteristics make it difficulty in identifying and locating
vulnerabilities in a network that is extended across individual organizations. The more extended the
supply chains are, the more chances of disruptions (Kleindorfer and Saad, 2005) and they are only as
resilient as their weakest link (Sheffi, 2005).
Disruptions are events that can occur in supply chains. These are events that can impact the smooth and
real-time flow and/or supply of physical products/materials from the point of source to the final point of
consumption. Craighead et al. (2008) explain that disruptions are unplanned and unanticipated events that
can disrupt the normal flow of physical products and materials within and across the supply chain.
Hendricks and Singhal (2005) describe disruptions as supply chain glitches such as the inability of an
organization to match demand and supply. Therefore, decision makers must be aware of those events that
can thwart the supplies of materials and information flows. Disruptions in the supply base can negatively
impact an organization’s ability to procure the required quantity of materials such as electoral ballot
materials.
In today’s volatile environment, a significant number of organizations around the globe are increasingly
experiencing disruptions in their supply chain operations. However, in spite of the growing disruptions in
supply chain operations, organizations are not well prepared or girded to manage and mitigate disruptions
effectively. According to Aberdeen Group estimates, on average, organization recovery costs from supply
chain disruptions can range from six to seven figures (Enslow, 2004). In spite of the negative
consequence of disruptions, Mitroff and Alpaslan (2003) report that merely between 5 and 25% of
Fortune 500 organizations are prepared to deal with supply chain disruptions. For example, shortage of
electoral sensitive materials resulted in the postponement of elections throughout Nigeria. INEC remained
oblivious of the problem for weeks due to lack of or an inefficient chain of information sharing and lack
of contingent planning. When it realized the disruptions in the supply chain logistics, it was forced to
reschedule the elections. The postponement of the various legs of the elections as a result of the supply
chain disruption clearly demonstrates the utter lack of supply chain management and supply chain risk
management knowledge by the vendor(s) as well as the INEC’s C-level executives. Indeed, this lack of
knowledge triggered disruptions associated with vendors’ supply failures, shortsighted supply chain
logistics planning, poor supply chain coordination, and limited supply chain visibility. Also, the two of
the three most important flows of supply chain were neglected.
MIT Research Project Group (RPG) (2003) contends that organizations often focus on the type of
disruption as opposed to its source in order to ascertain how to prepare against risks. It emphasized that
what is vitally important is the type of failure modes (i.e., the limited means in which the disruption
affects the supply-chain. They include supplier failure/reliability (1); default of suppliers (2); logistics
failures (3); commodity cost volatility (4); equipment breakdowns (5); force majeure (6); accidents (7);
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social political actions (8); lack of trust with partners (9); electric power shortage and outage (10);
information delays, scarcity, sharing (11); infrastructure breakdown (12); contract failure (13); degree of
control over logistics operations 14); weaknesses in the national, regional, and local infrastructure (15);
supplier product/material quality failures (16); supply chain logistics security breaches (17); rising energy
costs (18); rising transportation costs; and It risks (19), loom large as potential blind spots for INEC,
suppliers, logistics providers, and customers or voters to sustaining a consistent state of operations
continuity. For example, a disruption in supply can be triggered by force majeure, accidents, supplier
failure/reliability, terrorism, social-political actions and in each case will have the same severity.
Following the MIT-RPG (2003), the six different types of failure modes include disruption in supply,
disruption in transportation, Disruption at facilities, Freight breaches, disruption in communications, and
disruption in demand are reported in Table 1. Supply chain failure mode describes how a physical
product/materials or process may fail to meet end-users’ requirements or value expectations.
Table 1. Potential Supply Chain Failure Modes
Failure Description
Disruption in supply Unavailability or delay (late delivery) of election materials from
vendors (or suppliers) that can result in a shortage of ballot papers that
could impede the conduct of elections.
Disruption in demand Delay or disruption in the arrival of elections materials and staff at the
polling stations can discourage voters from participating in the
electoral process. Thus, affecting the credibility of the electoral
Disruption in
transportation
process.
Unavailability (unreliability) of transportation infrastructure that could
delay the inbound and outbound transportation of electoral sensitive
materials.
Disruption at facilities Disturbances or attacking of the polling stations due to lack of security
can inhibit normal elections logistics operations.
Freight breaches Violation of the integrity of cargoes and materials that can lead to loss
or tampering of materials, and delay in electoral process.
Disruption in
communications
Supply Chain Risk (Blind Spot) Management
Delay or unavailability of information and communication
Infrastructure within or outside the INEC that can impair its ability to
coordinate logistics operations and execute a successful elections.
Handfield (n. d) contends that “the foundation for a solid supply chain risk management program includes
improved knowledge of where the disruptions may occur, and training to know when and how to
respond.” Qiang et al (2008) argue that the goal of supply chain risk management is to reduce the impacts
of disruptive risks or to enhance the supply chain robustness. Managing and mitigating supply chain
disruptions have become crucial for organizations’ survival in today’s turbulent global environment. Risk
management entails the process of identifying, assessing, and managing the risk in an organization’s
operational strategy. It is the quintessential part of an operational strategy that must be incorporated into
organization’s risk management program. A risk management approach can have three elements
including assessments of threat, vulnerabilities, and consequences. Specifically, risk =
(threats)(vulnerabilities)(consequences). Threats include terrorism associated social-political actions,
cargo theft of election sensitive materials, kidnapping, hijacking of ballot boxes, government instability,
parties’ issues, and general integrity of people and/or election staff. Vulnerability entails the ability to
deter, detect, delay, and respond to blind spots, including general security, procedural security, physical
access controls, physical security, transportation security, IT security, and threat awareness. Consequence
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is determined based on organization’s performance impact such as quality performance, percent of
services provided, and real-time responsiveness (timeliness). Tohamy and Sirkisoon (2008) note that by
managing the supplier base and building closer collaboration with supply chain partners that can help
organizations the flexibility to readjust their supply chain strategies in the face of severe and
unpredictable change.
Tomlin and Wang proposed operational strategies for managing disruption risk, including 1) stockpile of
inventory that can be deployed to fulfill customer’s demand when supply is interrupted, 2) diversifying
supply by sourcing product/material from multiple vendors/facilities so that a problem at one vendor or
facility does not disrupt the entire supply, 3) backup supply – maintaining an emergency supplier or thirdparty
logistics provider that is not regularly used but can be activated in the event of supply disruption, 4)
strengthen supply chain by working with suppliers to reduce the probability and consequence of supply
disruptions.
Supply Chain Logistics Visibility
A lack of visibility into supply chains is a growing challenge to C-level executives in many organizations.
For organizations that want to stay viable and competitive, (Tohamy and Sirkisoon, 2008) assert that
focusing on building stronger collaborative relationships with trading partners and improved supply chain
visibility across extended supply chains are imperative. The Nigerian elections disruption and the
attendant postponement can be attributed to INEC’s poor supply chain logistics visibility. This lack of
visibility has contributed to bloated elections supply chain execution costs, and dissatisfaction among
voters. Supply chain information visibility enables C-level supply chain management executives to gain
control over supply chain activities and performance. To achieve a more connected and end-to-end supply
chain visibility, organizations must 1) extend visibility within and beyond their enterprises, 2) deploy
dynamic business intelligence and decision making, and 3) move to security, resiliency, and achieve
efficiency in supply chain execution Indeed, organizations can leverage visibility data to drive nimble
actions in order to achieve responsive supply chain execution (e.g., logistics, shipment, and operations)
and enhance supply chain risk management and reduce supply chain disruptions (Sadlovska 2008).
According to Sadlovska (2008) and Heaney (2011), the top pressures driving supply chain visibility
include 1) the need to improve supply chain operational performance (e.g., operational speed and
accuracy, on-time delivery), 2) the need to reduce execution supply chain costs, 3) growing global supply
chain operations and complexity (e.g., longer lead times and lead time variability), 4) the need to improve
customer satisfaction (e.g., proactively alerting customers of late delivery), 5) the need to better monitor
supply chain partners’ activities and performance, 6) supply chain stakeholders demand for accuracy and
timeliness of inbound and bound shipment event information, 7) the need to reduce and manage inventory
held at the various in the supply chain, and 8) the need to optimize the number of trading partners,
suppliers, carriers, and logistics service providers. According to Tohamy and Sirkisoon (2008), “through
analysis and performance management, organizations can identify the most imminent risks, the value at
stake, and the best approaches to mitigating disruptions.” The benefits associated with supply chain
visibility include immediate access to critical information, exposure of supply chain blind spots, reduced
labor and material costs, improved end-to-end process performance, real time visibility to customer
demand, and better control and execution.
Conclusions and Managerial Implications
Modern supply chains are riddled with blind spots. They are also more than ever complex and convoluted
due to constellation of multi-partner collaborations. As a result, supply chain stakeholders are faced with
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limited visibility and lack of control over flows of commodities and information as they pass through
protracted and convoluted supply chains. The INEC attributed the rescheduling of April 2011 general
elections to disruptions in its supply chain with respect to suppliers’ failure to deliver the electoral
sensitive materials and result sheets to a significant number of polling stations throughout Nigeria. Given
Nigerian immature physical infrastructure, less developed supply chain logistics management knowledge,
and sophomoric understanding of international procurement/purchasing and supply management
standards, it was not surprising that the April 2011elections suffered the consequence of supply chain
breakdown. Disruptions are events that can occur in supply chains within and across the supply chain.
Strategic supply chain logistics planning can be of great importance to the success of elections in Sub-
Saharan African countries particularly in Nigeria. Security and securing the transportation and
distribution of electoral materials to polling stations are the most critical factors in planning and
implementing logistics activities. Nigerian has had its share of marred elections owing to challenging
logistics, procedural, and organizational problems. Some of the materials in short supply included stamp
pad, liquid gum, voting cubicles, lamps, calculators, identity cards coupled with the mix-up in party logos
and names of parties as well as non-availability of the names of individuals who have voters’ cards on the
voter register. Supply chain disruptions owing to unpredictable blind spots can have an enormous impact
on the organization’s ability to meet its objectives. It behoves organizations to improve their visibility as
blind spots increase geometrically with supply chain complexity. Blind spots in supply chain can result in
poor decisions, cost mistakes, missed opportunities, and lost customers’ confidence. Blind spots in the
recent Nigerian elections led to postponed elections and lost in voters’ confidence.
Risk management is a systematic and analytical process that considers the likelihood that risk can disrupt
achieving organization objectives and to identify response strategies that can reduce the risk and mitigate
the associated consequences. However, despite the growing menace of disruptions in today’s supply
chains, response to supply chain blind spots (risks) is reactive. Therefore, the identification and
qualification of supply chain blind spot (risk) or failure modes is imperative in transitioning from reactive
to proactive (or predictive) supply chain risk management. Hence developing predictive risk management
of supply chains can help organizations such as the INEC identify key supply chain blind spots before
disruptions occur. This will enable INEC the time to develop proper plans to mitigate the supply blind
spots. Also, leveraging supply chain visibility can help INEC respond to elections supply chain blind
spots quicker, boost on-time deliveries, and increase complete deliveries. Better understanding of supply
chain risk management will enable INEC to be well positioned for the next elections cycle (April 2015).
References
Akalugo, A. C. (2011). “An Expert Opinion on INEC-Jega’s Logistics Failure.” Nigerians Abroad,
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Craighead, C.W., Blackhurst, J., Rungtusanatham, M.J., Handfield, R.B. (2007). “The Severity of Supply
Chain Disruptions: Design Characteristics and Mitigation Capabilities.” Decision Sciences, 38(1) 131-
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Enslow, B. (September 2004). Supplier Performance Management: What Leaders Do Differently – A
Benchmark Report in How Companies Manage Supplier Performance and Supply disruptions. Aberdeen
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Handfield, R. (n. d). “Reducing the Impact of Disruptions to the Supply Chain: A Managerial Framework
Based on Observations from Multiple Executives.” http://www.sas.com/resources/asset/sascom.pdf
Heaney, B. (March 2011). “Supply Chain Visibility Excellence: Fostering, Security, Resiliency, and
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chain-visibility.asp?lan=US.
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Hendricks, K., Singhal, V. (2005). “Association between Supply Chain Glitches and Operating
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Problems- the Reason Behind Nigerian General Elections Postponement”
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“NGO Urges INEC to Take care of Logistical Problems.”
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Operations Management, 14(1): 53-68.
Minis, I., Paraschi, M., and Tzimourtas, A. (2006). “The Design of Logistics Operations for the Olympic
Games.” International Journal of Physical Distribution & Logistics Management, Vo. 36, No. 8, 621-
641.
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Logistics.
Mitroff, I., Alpaslan, M. (2003). “Preparing for Evil.” Harvard Business Review, 81(4): 109-115.
Pochard, S., 2003. Managing Risks of Supply-Chain Disruptions: Dual Sourcing as a Real Option. Thesis
(Master), MIT.
Qiang, Q., Nagurney, A., and Dong, J. (2008). Modeling of Supply Chain Risk Under Disruptions with
Performance Measurement and Robustness Analysis in Managing Supply Chain Risk and
Vulnerability: Tools and Methods for Supply Chain Decision Makers, Wu, T. and Blackhurst, Editors,
Springer, Berling, Germany, 2009.
Sadlovska, V. (September 2008). “Beyond Visibility: Driving Supply Chain Performance.” Aberdeen
Group. http://www.cleartrack.com/content/content/Aberdeen_VISIBILITY.pdf.
Sahara Reporters. (April 2, 2011). “Nigeria’s Parliamentary Elections Postponed Due to Massive
Logistics Failure.”
Sheffi, Y. (2001), “Supply Chain Management under the Threat of International Terrorism”, The
International Journal of Logistics Management, Vol. 12, No. 2, 1-11.
Sheffi, Y. (2005). The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage.
Cambridge, MA: MIT Press.
THEWILL. (2011). “Botched NASS Election Exposes Deep Flaws in INEC.”
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THEWILL-Investigations.html.
Tohamy and Sirkisoon. (2008). “Managing the Biggest Supply Chain Risk of All: Constant Change.”
AMR Research.
Tomlin, B. and Wang, Y. (n. d). Operational Strategies for Managing Supply Chain Disruption Risk.”
http://mba.tuck.dartmouth.edu/pages/faculty/brian.tomlin/work/Tomlin_WangChapter.pdf.
Vanguard. (April 2, 2011). “Nigeria: logistics problems – INEC postpones elections…”
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56.
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Track 15: Marketing and Consumer Behavior
Factors Influencing Bank Choice among Undergraduates in Nigeria
Steve Ukenna, stephenukenna@yahoo.com
Department of Marketing, Nnamdi Azikiwe University, Anambra State, Nigeria
Department of Business Management, Godfrey Okoye University, Enugu, Nigeria.
Anayo D. Nkamnebe nkamnebe@yahoo.com
Department of Marketing, Nnamdi Azikiwe University, Anambra State, Nigeria
Carol Anionwu anionwucarol@yahoo.com
Department of Business Administration, Cross River University of Technology, Cross River State,
Nigeria
Abstract.
Purpose: To identify and rank the important factors considered by Nigerian undergraduates in bank selection.
Design/methodology/approach: 300 undergraduates where sampled from three universities. Five point liker-type
scale containing forty-nine bank selection items was designed to collect primary data. Cronbach’s alpha was used
to test the reliability of the instrument while factor analysis with principal component extraction was used to
unearth the underlying factors. Findings: 10 principal factors were revealed and ranked according to most
important to less important. The first five (that is: bank’s financial stability and confidentiality of transaction,
convenience and functional ATM network, strong capital base, proximity of bank branch to university campus,
friendliness and professional bank staff) were the most important factors. The second five factors (that is: family and
friends influence, friendliness of bank staff, external and internal aesthetics of bank, afternoon banking, and free
gifts and influential marketing promos) were the less important. Practical implication: This study provides deep
insight for bank marketers on areas to emphasize when crafting and launching marketing campaign to win the
undergraduate bank segment. Originality/Value: This study has significantly swelled the stock of literature in bank
marketing due to its focus on the apparently under-researched undergraduate segment in the sub-Saharan African
context.
Introduction
Commonly cited three reasons why research in the area of undergraduate bank selection criteria will
interest bank management were put forward by Thwaites and Vere (1995). First, once graduates
commence their careers, they generally enjoy a higher salary compared with non-graduates of the same
age. Second, as graduates would normally expect to have a more progressive career, so their income
should be generally higher than non-graduates of the same age. Thirdly, graduates may be considered as
being more financially sophisticated and, hence, will need/use a wider range of financial services as they
pass through their own life cycle. These reasons are universally true, regardless of context. We add the
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fourth reason, that the undergraduate segment will become future graduates that will become future
controllers of institutional funds by the virtue of positions they occupy in the future. Put more pointedly,
the undergraduates will become future business owners, corporate chieftains, top government officials
and politicians occupying key financial positions for organizations; hence influencing choice of bank for
their organization.
Why a study in bank selection criteria among undergraduates in Nigeria? In addition to the foregoing four
point reasons for research in the undergraduate segment, we specifically give three additional reasons for
a study of this segment in the Nigerian context.
First, the phenomenal increase of undergraduates and tertiary institution in Nigeria makes study in this
area urgent and timely. It has been reported that the rate of growth of Nigerian University System could
be described as phenomenal, doubling every four or five years and probably faster than anywhere else in
the world (Adesola, 1991 cited in Nkamnebe and Ukenna, 2010). From a modest enrolment of 3,646
students in 1962/63, the system recorded a student enrolment of 20,889 in 1972/73 rising to 104,774 in
1982/83. Five years later, in 1987/88 the total enrolment in all federal and state universities jumped to
160,767 students. By 1962, there were four universities, growing to twelve by 1977 and rising by an
additional eight in 1983 (Nkamnebe and Ukenna, 2010). This growth is also true for all other Higher
Educational Institutions (HEIs) comprising of polytechnics, monotechnics, colleges of education, and
innovation enterprise institutions (IEIs). Nigeria now has 96 universities, 68 polytechnics, 37
monotechnics, 80 colleges of education, and 27 innovation enterprise institutions (IEIs) (Joint Admission
and Matriculation Board [JAMB], 2009). In his manifesto speech during the primary elections, the
President Goodluck Jonathan reiterated his promise to establish additional 6 federal universities in the six
geopoilitical zones of Nigeria as take of grant has been approved. With a population of over 140 million
people, Nigeria is most populous black nation of the world with over 1 million students enrolled in over
250 HEIs (Jibril, Teferra & Altbach, 2003). With the over 31% of the private sector’s and government’s
labour force drawn from among fresh graduates annually, this growth is likely to continue in the future.
Evidently, this underscores the need to unearth the drivers of bank choice among undergraduates as this
segment is increasing in size, making it critically important for bank management.
Secondly, since the banking sector reform and bank consolidation policy of the Central Bank of Nigeria
[CBN] in 2005, Nigerian banks have stronger financial muscles due to stronger capital base to increase
their branch networks beyond the shores of Nigeria with the presence of Nigerian banks in Ghana,
Gambia, United Kingdom, United States etc. Also, bank branches in Nigeria have increased with more
bank presence in campuses across Nigeria. The banks seem to be emphasizing an operation-catch-themyoung
policy; hence leading to increased bank competition in the campuses. This suggest a need for
banks operating within campuses to understand the key determinants that drives bank selection among
undergraduates in Nigeria before lunching any marketing strategy to attract and keep them.
Thirdly, the perspective of Thwaites and Vere (1995) cited in Mokhlis (2009) is true for Nigerian
undergraduates wherein they argued that college students are likely to need a bank account to negotiate
their educational loans or parental contribution and may be obliged to administer their own personal
financial affairs for the first time. Those who do not yet have bank accounts will need to open one as they
started college because all grant providers, family members, and friends pay allowances directly through
students’ bank accounts. These will influence a paradigm of banking habit in the undergraduate; hence the
need to choose a bank for all these becomes imperative.
Finally, the savings culture of Nigerian undergraduates is on the increase. This is because of increases in
tuition and cost of living expenses which force them to manage their money wisely and save a small
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portion of allowances they received from parental contribution and loan providers while they attend
classes. This stimulates the need for bank services.
On the strength of the forgoing reasons, the need to execute a Nigerian oriented study on the
undergraduate bank customer segment has become eminent given that previous studies were either
executed in Europe, the United States, and Asia. The only few known studies executed in Africa were
carried out in Ghana. Results of studies in Ghana (and indeed other parts of the world) cannot be true for
the Nigerian bank market as a result of cultural and regulatory differences, previously mentioned.
Agreeably, the only known study from the sub-Saharan African (SSA) region that addressed the bank
selection criteria of undergraduates is the one executed by Narteh and Owusu-Frimpong (2010). A key
limitation of their study is the inclusion of MBA students in their sample. MBA students banking
behaviour reflect that of the general public; hence results from this study cannot be held true for
undergraduates’ bank selection behavior in Ghana. Taken together, this study is a pioneer study in the
bank selection criteria of undergraduate bank customer segment in Nigeria and in SSA region, which
seeks the following objectives: 1) to identify the most important factor considered by Nigerian
undergraduates in bank selection; and 2) to suggest to bank management on the appropriate marketing
strategies to be deployed to win and retain the undergraduate bank customer segment in Nigeria.
In the subsequent section we review relevant literature, particularly literature on undergraduate bank
selection criteria and demographic measure employed in the study of this segment. This is followed by
research method employed wherein we highlight sample, instrumentation and data collection, and
analysis used. This is then followed by result. Thereafter, the implication of our study is discussed. The
study ends with conclusion and suggestion for further research.
Literature Review
The literature of bank selection criteria employed by bank customers can broadly be divided into two
parts. First are bank selection criteria employed by the general public; and second, bank selection criteria
employed by undergraduates or college students. A number of studies have been reported on the
undergraduate bank selection criteria domain, with American, European and Asian studies dominating the
literature reviewed by the present researchers.
A number of studies have been conducted in the United States of America (USA). In his American study,
Schram (1991) reported that the key drivers among undergraduates are convenience of location, family
tradition, and widespread ATM network. Kazeh and Decker (1993) in their study of 209 undergraduates
in the USA discovered that service charges, reputation, interest charged on loans, quick loan approval,
and friendly tellers as most germane bank choice drivers. In a recent study in the USA wherein 373
undergraduates were sampled, Pass (2006) reported that pricing and convenience of location as most
important factors.
Seemingly, a number of studies on factors influencing undergraduates’ bank choice have also been
conducted in Europe. The study conducted by Gray (1977) in the UK revealed that convenience of
location was the most germane. The study of Lewis (1982) in the UK indicated that undergraduates
regard convenience of location and parents use of bank as most important influencers. Another UK study
by Thwaites and Vere (1995) showed that proximity of ATM to college and free banking are key factors
in undergraduate bank selection. A study conducted by Cicic et al (2004) in Bosnia with a sample of 300
undergraduates revealed that reception at the bank, friendliness of bank personnel, low service charges,
ease of opening a current, and confidence in bank management are critical to undergraduates in bank
selection decision.
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Asian studies on undergraduates’ bank selection criteria have been noted in the literature. In a
Singaporean study by Poh (1996), it was reported that widespread ATM and speed of service were most
important for undergraduates’ bank choice. Huu and Kar (2000) in another Singaporean study reported
locational convenience was most critical. Gerrard and Cunningham (2001) in another study conducted in
Singapore with a sample of 184 undergraduates showed that feeling secure, electronic services provision
and convenience of location were very important factors. A study conducted in Bahrain by Almossawi
(2001) using 1000 undergraduates revealed that Bank’s reputation, availability of parking space near the
bank, friendliness of bank personnel, and availability and location of ATMs are the most critical. In a
Malaysian study comprising 368 undergraduates, Mokhlis (2009) reported staff attractiveness, marketing
promotion, ATM service, people influence and financial benefits as key factors influencing undergraduate
bank choice. In a study in New Zealand by Thwaites et al (1997), it was found that fast and efficient
service, friendly and helpful staff and reputation of the bank are most important.
The review of available literature shows that studies relating to the bank selection criteria employed by
undergraduates are largely dominated by American, European, and Asian studies. Denton and Chan
(1991) cited in Cicic, Brkic and Agic (2004) reported that large number of studies has been conducted in
the USA. It also evident that a common important factor among the studies examined is convenience of
location.
Granted that these studies have contributed significantly to the literature of bank marketing, arguably,
their findings may not be applicable to other countries due to differences in cultural, economic, and legal
environment (Cici et al, 2004). Apparently, African-context studies are scanty particularly for studies
relating to undergraduate. Again this underscores the need for the present study.
Research Methodology
Instrument: Design and Testing
A structured questionnaire was designed for this study. The questionnaire was divided into two sections,
namely: Section A and Section B. Section A sort to collect bio-data of respondents. Options were
provided for each question and the respondents were expected to tick in the box that applies. Section B
dealt with the core-subject matter. We listed 49 bank attributes that influence bank choice which are
particularly drawn from the work of Mokhlis (2009), Almossawi (2001), Gerrard and Cunningham (2001)
and Nkamnebe and Ukenna (2010). The respondents were asked, “To what extent are the following 49
factors important in your choice of a bank to open an account with?” The 49 factors were measured on a
five point Likert-type scale of importance ranging from 1 “not important at all” to 5 “very important”.
The testing of the instrument was done at two levels. First, the instrument was pretested on 55 second
year undergraduate students of Godfrey Okoye University, a private university at Enugu, Nigeria. Second
year students were deliberately used to pretest the questionnaire because of their relatively low
understanding level as they stand better position to assist the researchers to raise questions relating to
possible problems of clarity of statement , understanding, and general competence to complete the
instrument. Expectedly, this process revealed the need to rephrase certain jargons and, as such, simpler
words were used in the final instrument. This was possible because the students were encouraged to “be
very free with their responses, make suggestions for improvement and delineate any difficulties they
found” (Mokhlis, 2009).
Second, after the instrument has been corrected and simplified based on the pretesting, the final
instrument emerged and was administered on the same group of 55 second year undergraduate students of
Godfrey Okoye University. Using their responses, the instrument was subjected to reliability test using
the Cronbach’s Alpha. The Cronbach’s Alpha reliability statistics is 0.926 or 93%, which is considered
sufficiently high for social sciences research (see Hair et al, 2010).
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Sample
The sample comprised of undergraduates drawn from three universities in southeast Nigeria, namely,
Godfrey Okoye University, a privately owned; and two government owned universities – the University
of Nigeria and Nnamdi Azikiwe University). The universities were purposively selected because of their
high bank presence. For example, at Nnamdi Azkiwe University campus there is a street called “Bank
Avenue” with about eight different banks having full operational branches. Hence the choice of these
universities, as the high bank branch presence in their campuses can give rise to high banking habit
among undergraduates. On the basis of a sample size of 300 undergraduates, equal number of sample, that
is 100 students, were purposively drawn from each university. The study did not discriminate on students’
course of study. Expectedly, 300 copies of completed questionnaire were returned thereby leading to a
100% return rate. The high return rate was recorded due to two reasons: firstly, the questionnaire was
administered during lecture classes with support from course lecturers; secondly, the use of drop-and-pick
method by research team. However, after editing, only 274 copies were deemed fit for final analysis.
Analysis
The SPSS 16.0 program was used for processing responses to the bank selection statements. The Principal
Component Analysis (PCA) of factor analysis, with varimax rotation, was used to process responses to
the bank selection statement. The responses within the various factor groups were tested for internal
reliability using Cronbach’s Alpha test. PCA is used to reduce a large number of variates (49) to some
smaller number by telling which belong together and which seem to say the same thing. Hair et al (2010,
p16) stated that the objective of the PCA “ is to find a way of condensing the information contained in a
number of original variables into smaller set of variates (factors) with a minimal loss of information.”
PCA can be conducted on an unrotated or rotated basis, and if it is to carried out on a rotated basis,
various techniques are available. Hair et al (2010) sustained that of the various techniques, varimax tends
to be the preferred one for clearer separation of the factors. The results of our factor analysis with varimax
rotation are presented in Table 2.
Findings
Demographic profile
Of the 274 copies of the questionnaire used for the final analysis, 61.7% of the respondents are male
undergraduate students and 38.3% are female undergraduate students. Various undergraduate academic
levels where represented, for example 9.1% were in the first year; 48.2% were in their second year;
19.3% were in their third year; 18.2% were in their fourth year; and 5.1 were in their fifth year. With
respect to the respondents’ age, 33.2% of the respondents are within 16-20yrs age bracket; 57.3% are
within 21-25yrs age bracket; 8.4% are within 26-29yrs age bracket; and 1.1% are either 30yrs or above.
The marital status of the undergraduate respondents indicates that 97.8% of the respondents are single
while 2.2% are married. All the respondents (i.e. 100%) have a savings account with a bank with branch
within or around the university campus.
Factor Analysis: Principal Component Analysis
We use factor analysis with principal component extraction to determine the underlying factors. Table 1
below shows summary of the result of the analysis based on Varimax with Kasier Normalization as the
rotation method while the rotation converged in 12 iterations:
Table 1: Factor groups of bank choice criteria of undergraduates
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Factor 1: Bank’s financial stability and confidentiality – Cronbach alpha 0.780
Financial stability of the bank 0.675
Confidentiality of transaction/customer information 0.520
Factor 2: Convenience and functional ATM network - Cronbach alpha 0.860
Availability of ATM in several locations 0.691
Availability of ATM in the campus 0.775
24 hours availability of ATM services 0.807
Convenient ATM location 0.754
Factor 3: Free gifts and influential promos - Cronbach alpha 0.575
Free gifts for customers 0.531
Influential marketing campaign 0.325
Factor 4: Friendliness and professional bank staff - Cronbach alpha 0.735
Friendliness of bank personnel 0.603
Regular bank statement 0.678
Professionalism of bank staff 0.717
Factor 5: Afternoon banking - Cronbach alpha 0.529
Bank opens in the afternoon 0.465
Availability of parking space 0.456
Factor 6: External and internal aesthetics of bank - Cronbach alpha 0.754
Attractiveness of bank building 0.771
Interior decor of bank building 0.774
Pleasant bank atmosphere 0.615
Factor 7: Family and friends influence - Cronbach alpha 0.718
Recommendation of relatives 0.710
Recommendation of friends 0.753
Influence of lecturers 0.688
Influence of parents 0.738
Factor 8: Low bank charges - Cronbach alpha 0.787
Low service charges 0.699
Low interest rates on loan 0.648
Factor 9: Friendliness of bank staff - Cronbach alpha 0.675
Reception at the bank 0.719
Factor 10: Proximity of bank branch to university campus - Cronbach alpha 0.612
Proximity to University 0.707
Branch of is in the university campus 0.675
Eigenvalue 12.431 3.332 2.387 2.148 2.019 1.626 1.526 1.321 1.199 1.152
% Variance 25.369 6.801 4.871 4.384 4.121 3.318 3.114 2.697 2.446 2.351
Cum % variance 25.369 32.170 37.041 41.425 45.546 48.864 51.978 54.675 57.121 61.867
Factor analysis was considered appropriate for the 49 items because the Keiser-Meyer (KMO) measure of
sampling adequacy test index equaled 0.854 and Barlett’s test gives a significance level of less than
0.0001, which supports the appropriateness of the factor model. As seen in Table 1 above, the analysis
produced ten principal component solutions, which collectively explained more than half of the variance
observed in the variable at 61.9%, satisfying the percentage of variance criterion for social sciences
research (see Hair et al, 2010 and Makhlis, 2009). The ten factors identified are: bank’s financial stability;
convenience and functional ATM network; free gifts and influential marketing promos; friendliness and
professional bank staff; afternoon banking; internal and external aesthetics of bank; family and friends
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influence; low bank charges; friendliness of bank staff; and proximity of bank branch to university
campus.
The Cronbach alpha was adopted to measure internal reliability by unit weighting items with salient
loadings in a factor where Cronbach’s alpha coefficient at 0.5 or higher was considered acceptable (see
Mokhis, 2009 citing Kerlinger & Lee, 2000). As shown in Table 1, the factors of the current study
produced alpha coefficients between 0.529 and 0.860, which indicates high internal consistencies and
reliability.
Ranking of Bank Selection Criteria
We now use the various mean scores to arrange the factors in accordance to their degree of importance
from the customer standpoint. This is exhibited in Table 2 below. A cursory look at Table 2 shows that
the first five factors are classified as “most important factors” because of their high mean scores, while
the second groups of five are classified as “less important factors” because of their low mean scores. A
mean score above 4.00 is considered high and a mean score below 4.00 is considered low.
Table 2: Ranking of undergraduates bank selection criteria in Nigeria
n=274
mean Sd Rank
MOST IMPORTANT FACTORS:
Bank’s financial stability and Confidentiality 4.51 1.9310 1
Convenience and functional ATM network 4.33 1.0725 2
Strong capital base 4.27 1.0960 3
Proximity of bank branch to university campus 4.13 1.1267 4
Friendliness and professional bank staff 4.04 1.0960 5
LESSS IMPORTANT FACTORS:
Family and friends influence 3.89 1.2460 6
Friendliness of bank staff 3.87 1.2660 7
External and internal aesthetics of bank 3.33 1.2417 8
Afternoon banking 3.25 1.3020 9
Free gifts and influential promos 2.81 1.3958 10
Discussion
As shown in Table 2, the first most important factor is financial stability of the bank. Arguably, the
reason for this is that in recent times, particularly before the bank consolidation era, the Nigerian banking
sector has been characterized by bank failures. As a result, most Nigerians (including undergraduates)
could not recover their funds. This resulted in widespread fear and loss of confidence in the banks. Even
though since the year 2005 banks in Nigeria have recapitalized to 25 billion naira minimum paid-up share
capital, yet evidence of financial stability continue to be a strong parameter for bank selection for
Nigerian undergraduates in the post-consolidation era. It is true that undergraduate segment may not
possess the skill to analyze financial statements to determine financial stability of banks by computing the
liquidity and stability ratios, but the reliance on Central Bank of Nigeria’s (CBN) pronouncement in this
regard is common. Thus in the event CBN or any other reliable third party making adverse
pronouncement in this regard about a bank’s financial stability could trigger bank switch and selection
behavior among undergraduates using this basis. This finding corroborates the finding of some study
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Edited by Emmanuel Obuah
(such as Gerard and Cunningham, 2001; Thwaites and Vere, 1995; Almossawi, 2001 and Mokhlis, 2009)
wherein “secure feeling” was found to be the most important bank selection criteria of undergraduates in
Singapore. To Mokhlis (2009, p.25), “secure feeling reflects students desire of banking with a stable bank
and assurance of confidentiality when making a transaction”. Due to the limited number of pages required
for this conference, the authors limit their discussion only to the first factor.
Implication and conclusion
The results of this study provide some significant guidance for bank marketers in relation to crafting the
appropriate marketing strategy aimed at attracting the undergraduate segment. The main focus of their
campaign should be on emphasizing the bank’s financial stability; hence, reposing confidence in the
segment that their funds are secure and they can have it whenever they want it. To do this the banks
should maintain high capital and liquidity ratios. In addition, to win the patronage of the undergraduate
segment, banks targeting this segment should ensure the confidentiality of customer information and
transaction. To win the patronage of this segment, banks should emphasize the third most important
factor, convenience and functional widespread ATM network. This factor confirms the studies of previous
studies (for example, Gerard and Cunningham, 2001). Thus bank marketers should increase branch
networks and ATM both within and around the university campuses. This is especially necessary as the
present Nigerian undergraduates are early adopters of ICTs.
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Bank selection decisions: A case study of Institute of Professional Studies
Robert E. Hinson, rhinson@ug.edu.gh
University of Ghana Business School, Legon-Accra, Ghana.
Aihie Osarenkhoe, aoh@hig.se
Department of Business & Economic Studies, Faculty of Education & Economics, University of Gävle,
Sweden.
Abstract
Abednego Feehi Okoe, okoe67@yahoo.com
Institute of Professional Studies, Legon-Accra, Ghana.
Purpose – A review of the management literature indicates that several studies have been conducted on bank
selection criteria among consumers in the developed world. The aim of this paper is to investigate the bank selection
criteria of undergraduate students in Ghana using the Institute of Professional Studies as a case study.
Design/methodology/approach- following a literature review, the paper adopts the Analytical Hierarchy Process
which demands that the decision problem is structured into a three level hierarchy. The paper adopts a qualitative
research approach which explores on bank selection criteria among undergraduate students. Findings - the
findings indicate that undergraduates in IPS place high emphasis on the convenience, customer service, and speed
dimensions of bank services. Originality/value- studies focusing on undergraduates’ bank selection in developing
countries context are almost non-existent. This study will only make important contribution in helping bridge the
gap but more importantly provide information on the importance of the selection criteria.
Introduction
Globalization has brought in its wake many changes in the economic and business environment
worldwide. Ghana is not exempt from these changes and virtually all industries including the banking
sector are being affected by this trend. Blankson et al (2009), report that, the global banking industry has
been characterized by increasing competition since the early 1980s. They attribute this occurrence to a
number of interrelated factors such as competition and deregulation that have revolutionized the
distribution of many financial services. The Ghanaian banking sector has seen tremendous transformation
in the last decade (2000-2010). This transformation has largely manifested in the increase in the number
of banks between these periods. In the last ten years, the size of Ghana’s banking industry and as such the
number of banks has grown significantly to up twenty-seven (www.bog.gov.gh). This has whipped up
competition among the banks and several of them are striving to adopt various customer attraction
programs to improve their competitiveness.
Studies on bank marketing are not new as a wide variety of marketing constructs related to retail
customers have been investigated; including key motivations (Hinson et al, 2009), bank loyalty (Beerli et
al, 2004), bank selection (Thwaites and Vere, 1995; Huu and Karr, 2000), bank service quality (Hinson et
al, 2009), and multiple bank users (Mokhlis et al, 2009). One marketing construct related to retail
customers that has attracted a plethora of studies has been the patronization process of retail customers or
the reasons on the basis of which customers choose to bank with specific commercial banks (Kaynak,
1986; Gupta and Torkzadeh, 1988; Boyd, Leonard and White, 1994; Zinelden, 1996; Gerrard and
Cunningham, 2001; Blankson et al, 2007; Hinson et al, 2009). Following a review of the aforementioned
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literature, it appears two themes concerning the patronization process of retail customers emerge. First,
majority of previous studies related to bank selection decisions appear to have been conducted in
industrialized nations such as the USA and Europe (Schlesinger et al 1987; Zineldin, 1996) and to some
extent newly industrialized nations such as China, Malaysia and Singapore (Denton and Chan, 1991;
Gerrard and Cunningham, 2001; Huu and Karr, 2000). Whilst it is true that the findings of such studies
have undoubtedly made a significant contribution to knowledge on bank selection criteria of retail
customers, Almossawi (2001) raises an essential issue of the transferability of such findings to what
Blankson et al (2007) refer to as liberalized developing countries such as Ghana due to differences in
cultural, economic, political and legal environments. Second, whilst a few studies have been directed
towards younger age groups, it seems majority of such investigations has focused on the general
population as its population of interest. This study therefore is an attempt to bridge this gap by extending
the study of bank selection criteria to an examination of undergraduate students in Ghana. The
phenomenon of undergraduate student bank selection has been explored to some extent in other cultures
including Singapore (Gerrard and Cunningham, 2001; Huu and Karr, 2000), Bahrain (Almossawi, 2001) ,
Malaysia (Mokhlis et al, 2009). Mokhlis et al, highlighted three reasons why banks in Malaysia must pay
close attention to the undergraduate student segment. These are summarized as follows: In terms of
buying power, the student market is expanding and has become lucrative; Students need a bank account to
negotiate their educational loans or for parental contribution and may be obliged to administer their own
financial affairs for the first time; and There exists a potential for above-average profitability in the future.
These reasons seem applicable to Ghana. Students have become targets of the banks in Ghana because
they represent a potentially rewarding segment, medium to long term (Hinson et al, 2009). Whilst Hinson
et al. (2009), studied undergraduate students’ perception of service quality in Ghana, this study
investigates bank selection criteria of undergraduate students in Ghana. Whilst their study no doubt
contributed immensely to the scanty knowledge on student segment within developing country and
African contexts, bank studies focusing on student bank selection criteria in a developing economy appear
to be rarer. This paper explores on a qualitative manner, issues attendant to the ways by which
undergraduate students select banks in Ghana.
This study aims to: 1) to generate a pool of statements which undergraduate students employ in their
evaluation and selection of banks; 2) to synthesize and reduce these statements into key determining
factors explaining undergraduate students’ selection of banks; 3) to determine whether and how these
factors are prioritized according to their importance; 4) to determine whether or not the undergraduate
body is a homogenous group in relation to their method of bank selection.
Literature review and conceptual framework
Studies on retail bank marketing are not new. Mokhlis et al (2009) report that since the late 1960s, much
has been written on retail bank marketing with the majority of the literature relating to banking behavior
of retail customers. Such studies have focused on marketing themes spanning market segmentation, bank
loyalty, bank selection decisions, bank image and bank services quality. However, one marketing theme
that has attracted considerable scholarly attention has been focused on bank selection criteria by bank
customers in different countries. (Mason and Mayer, 1974, Anderson, Cox and Fulcher, 1976; Evans,
1979; Kaynak, 1986; Gupta and Tork Zadeh, 1988; Hon and Tom, 1994-95; Boyd, Leonard and White,
1994; Holstius and Kaynak, 1995; Zeneldin, 1996). We review next some key studies that have focused
on bank selection criteria in different geographical contexts.
Lewis (1982) conducted a study on banking behavior among British students which revealed that 92 per
cent of the 514 first year college students thought they would stay with their present bank until the end of
their course while 44 percent believed they would continue with the same bank. About 80 percent of the
202 final year students believed they would continue with the same bank even after graduation. Further,
the study revealed that convenience of location to college and parental advice and influence were the
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predominant factors influencing students’ choice of bank. Schlesinger et al (1987), in a study conducted
in New York State found that the three most important factors in selecting a bank for small business
customers were lending rates, accessibility of borrowing, and the number of services offered. Price of
service was also found to be an important bank selection factor in another survey conducted by Buerger
and Ulrich (1986). Laroche et al (1986) conducted a survey in Canada and found that speed of service,
and factors relating to the competence and friendliness of bank personnel and convenience of location
were the major factors which consumers perceived as important in selecting a bank. Schram (1991) found
that “convenience... remains the primary reason why most college students choose their banks”. He also
noted that family loyalty to banks appears to be exhibited among students. A survey of 209 university
students by Khazeh and Decker (1992-93) in Maryland, USA to determine customers’ bank selection
criteria also found that service charge policy, the reputation of the bank, interest charged on loans, time
required for loan approval and friendly tellers were considered as the top five determinants of bank
selection decisions. Holistius et al (1995), cited efficiency and courtesy as the most important attributes in
determining overall customer satisfaction, while other important attributes were convenience of location,
range of services, reputation and availability of innovations. Similarly, the importance of location
decisions in satisfying customers is also emphasized in the previous studies (Kaynak and Kucukemiroglu,
1991).
A study by Thwaites and Vere (1995), also conducted among British students indicated that proximity of
an ATM to college, perceived to be free banking services, and overall students offer were the top three
selection criteria employed by college students in selecting which banks to patronize. Another study on
bank selection criteria by Yue and Tom (1995) was based on Chinese-Americans residing in Sacramento,
California. The important factors of bank selection by the customers were found to be efficiency of
services offered, bank’s reputation, bank fees, location and interest rates on savings account. Twaites,
Brooksbank and Hanson (1997) undertook a research in New Zealand in the area of student banking
focusing on factors that influence their selection of banks. They found that fast and efficient service,
friendly and helpful staff and reputation of the bank are important factors in the selection of a bank. Some
students were found to be sensitive to the core services offered, some were conscious of every aspect of
their banks and some others would shop around for the best deal.
In Singapore, Huu and Karr (2000) sampled 198 undergraduates’ students to identify factors which
influence their bank selection decisions. Using “analytical hierarchy process”, they found that
undergraduates place high emphasis on the pricing and product decisions of bank services. The third party
influences were found to be the least important selection criteria. A study by Poh in (Gerard and
Cunningham, 2001) also conducted in a Singapore setting among university and polytechnic students
found that factors relating to ATMs and speed of service were the most important criteria affecting their
bank selection. Criteria relating to third party influences were found to be so important during the pilot
test and therefore were excluded from the actual study.
In Singapore, Gerard and Cunningham (2001) again conducted a research in the area of student banking
sampling 184 undergraduates to establish a ranking of the various factors which influence their banking
selection dimensions. Employing factor analysis, seven bank selection dimensions were identified by the
researchers, the most important being undergraduates should “feel secure”, followed by “electronic
services” and “service provision”. Consistent with the findings of Huu and Karr (2000), the “third party
influences” was found to be the least important dimension rated by undergraduates.
In Bahrain, Almossawi (2001) conducted a research which examined the bank selection criteria employed
by college students. His study revealed that the key factors determining college students’ bank selection
were: bank’s reputation, availability of parking space near the bank, friendliness of bank personnel and
availability and location of automated teller machines (ATM).Pass (2006) surveyed the opinions of 373
students from four community colleges and universities located in a large metropolitan area of the
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Western United States to obtain information about the reasons for students switching banks and selecting
new banks. Pricing and convenience were found to be the principal reasons for selecting a new bank and
‘hypothetically’ switching banks. In a recent study conducted in Malaysia, Mokhlis et al (2009) found
that undergraduate students place more emphasis on secure feelings, ATM service and financial benefits
when choosing a bank to patronize. The findings also showed that undergraduate students are not a
homogenous group in regard to the bank selection process. More recently, Hinson et al (2009) surveyed
2000 customers of 22 banks in Ghana. The study revealed that overall bank customers view proximity or
accessibility as the most important factor in selecting a bank.
Extant literatures show that there are several determinants of the bank selection process. Most of these
studies have been conducted in the more developed countries (Denton and Chan, 1991) and to some
extent newly industrialized nations such as Taiwan, Singapore and Malaysia. Such studies no doubt have
contributed substantially to the literature on bank selection but their findings may not be applicable to
developing countries like Ghana due to different cultural, political and economic setup. Blankson et al
(2007) did some work on undergraduate bank selection which partly covered Ghana. Hinson et al (2009)
surveyed the opinion of 2000 retail customers of 22 banks in Ghana to determine their bank selection
criteria. It however, appears that current literature on banking in Ghana lacks studies on bank selection
criteria among undergraduate students and this study aims to bridge this gap.
Customer behavior in the financial services industry
Within the traditional structure and operation of the financial services industry customers in the past had
little choice in terms of selecting financial instruments and delivering channels (Cook, 2002). The rigid
structure of the industry combined with the operation of cartels, meant that consumers had to accept the
form and price of both financial instruments and delivery channels (Beckett et al, 2000). Thus customers
had little incentive to change. However, a number of interrelated factors such as competition and
deregulation (Blankson et al, 2007), and new forms of technology (Beckett et al, 2000) have
revolutionized the distribution of many financial services. These changes have had a significant impact
upon customer behavior. According to Beckett et al. (2000), consumers are now more disposed to change
their buying behavior when purchasing products. Consequently, bank service providers are less certain
that their customers will continue to bank with them.
Understanding and adapting to customer motivation, attitudes and their ultimate selection decisions for
offerings such as banks are not an option but an absolute necessity (Kotler, 2000). This is consistent with
the work of (Weber, 1949) in which he argued that it is necessary to identify the underlying constructs
which determine customer behavior. To this end, factors impinging on customers’ selection of banks are
an important research task (Devlin, 2002). Majority of such investigations seem to have focused on the
general population as its population of interest though some studies have been directed towards younger
age groups. The viability of this group is derived from the fact that though majority of undergraduate
students are unemployed and rely primarily on students’ loans and family support, they provide an
excellent business support for banks (Mokhlis et al 2009). First, the student market has seen a tremendous
expansion and has become very profitable. As Thwaites and Vere (1995) pointed out, despite their
relatively basic banking needs, students are to some degree a captive audience and at the stage in the
purchase cycle where they may be more responsive to marketing activities from financial institutions.
Third, students market is perceived to have the potential for above-average profitability, medium to long
term. Thwaites and Vere (1995) concluded that the ability to develop a presence in the student market
through appropriate acquisition and retention strategies is therefore likely to have an influence on bank’s
future market share and profitability. Presented below is a framework of bank selection decision criteria
by undergraduates adapted from Huu and Kar (2000).
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Figure 1.Framework for Bank selection
Source: Adapted from Huu and Kar (2000)
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
This study examines the predominant factors that have a bearing on undergraduates’ bank selection
decisions by adopting Huu and Kars’ (2000) Analytic Hierarchy Process (AHP) (see figure 1). The AHP
is a multi-objective, multi-criteria theory of measurement. It addresses the issue of how to structure a
complex decision problem, identify its criteria (tangible and intangible), measure the interaction among
them and finally synthesize all the information to arrive at priorities which depict preferences. Although
the utility of the AHP for methodology has been demonstrated in studies conducted in several parts of the
world, it appears not to have been researched upon in Ghana. This study wishes to highlight the
usefulness of the AHP methodology in bank marketing in Ghana. Following Huu and Kar, (2000), the
decision problem for this study was structured into three-level hierarchy. The top-most level of the
hierarchy is the macro decision to select a bank. The middle level contains the selection attributes and the
final level represents the bank s in Ghana.
Methodology
Convenien
t location
of bank
and its
services
High
interest
rate
Overall
quality
of
service
Decision to Select a Bank
Low
charges
on
services
by bank
Low
interest
rate on
loans
Banks in Ghana
Long
operatin
g hours
Recommen
ded by
parents/fri
ends
Availability
of
undergrou
nd
privileges
Availabilit
y of selfbanking
services
To fulfill the purpose of this study, a case study approach is adopted. Whilst some researchers have
criticized the case study approach on the basis that it does not allow for transferability of findings, this
approach is employed in this study in view of its qualitative exploratory nature and therefore an in-depth
knowledge is required. Case study approach (Yin, 2003) is more appropriate. We follow the examples of
Spears et al (2001), Cunningham et al (2006) and Blankson et al (2007) in adopting the student cohort as
the empirical context for this study. Whilst others have argued that students cannot be considered as
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cohorts, Thwaites and Vere (1995) have pointed out the special features and importance of the
undergraduate market in the eyes of bankers because of their potential. Although there has been criticism
regarding the use of students as surrogate customers and also about the validity and generalization of
student samples, university students are deemed appropriate for this study since students are actual
customers of banks and conversant with bank products (Yoo et al, 2000). Blankson et al (2007) posited
that although students differ from non-student adults, they do represent homogenous groups even across
cultures.
We adopt Huu and Kar’s (2000) Analytical Hierarchy Process methodology where a decision process is
decomposed into a hierarchy. Decomposing a consumer choice problem (bank selection) involves the
structuring of a hierarchy in terms of the overall objective (decision to select a bank), the selection criteria
and the decision alternatives (banks). The first step in the research design is to identify the criteria that
undergraduates consider important when selecting a bank. A review of the literature on bank selection
decisions of customers was undertaken. The extant literature generated an extensive list of criteria with
the most important ones cited as services, location, operating loans, bank charges and convenience.
To identify the relevant criteria of undergraduate’s bank selection decision in Ghana; a focus group
discussion was conducted at the Institute of Professional Studies (IPS) in Ghana. A convenience sample
of 12 undergraduate students which include 2 students from each level was selected for participation in
the focus group discussion. The focus group was divided into two groups of six each and separate
discussions held with them. However, on the day of the discussion, two students were absent thus
reducing the sample size to ten (10). The criteria for selection considered gender to help throw light on
whether or not the undergraduate student body is a homogenous group in relation to their method of bank
selection. It also considered selection of participants from first to final year students. This helped
determine the factors that influence various categories of undergraduate students. Participants were
encouraged to talk freely list the words, descriptions, statements and their reasons for selecting, staying
with, or recommending their own banks (Dickinson and Wilby, 1997). Analysis of the focus group
sessions was done via inductive reasoning to help identify statements that influence participants’ bank
selection and which will help incorporate into a survey for future studies.
Presentation and discussion of findings
In order to understand the prioritization of the criteria that undergraduate students in IPS deem important
in bank selection decisions, focus group discussions were held with ten participants. Findings from the
focus group discussions are presented and discussed below. The discussion is undertaken in the light of
the framework adopted from Huu and Karr (2000) Decision Hierarchy model. Our guiding propositions
are on three levels: 1) Bank selection decisions; 2) Bank selection criteria; and 3) Banks in Ghana.
Bank selection decisions
Bank selection decision deals with participants’ reasons to bank rather than save at home. Issues that fall
under bank selection decisions include participants’ general view of banks in Ghana, what they think
about their services, the reasons for choosing to bank and how long they have been banking.
On the issue of the participants’ general view of banks in Ghana, here are some responses:
Harriet (H): I think they are doing well. The Nigerian banks have brought in a lot of competition.
Kingsley (K): Banks have improved generally. Oswaldo (Os): Concerning conditions they have
improved but are not serving the main purpose of giving loans. Faustina (F): I think they have improved.
Selorm (Se): My observation is that competition has made them better. Linda (Li): first, they were not
doing well. Now they are ok. Salifu (Sa): They have improved. Matilda (Ma): Banks in Ghana…well I
don’t know, what I think or what I have seen is that for example if you want to invest. May be you need to
access their fixed deposit, you need to have a large sum of money before you can do that and they are
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encouraging us to save and invest but I think they have improved because we have a lot of banks now.
Abdulai (Ab): yeah for the banking industry they have improved … yeah. Fred (Fr): In the major cities,
I will say there have been greater improvements because the numbers of banks in the cities have
increased. Unlike in the rural areas where there are few... so in terms of rural banking they have not.
The general consensus irrespective of geographic variability is that the banking sector in Ghana has seen
improvement and this could be attributed largely to increased competition as a result of expansion. On
why participants decided to bank, they expressed the following diverse opinions:
Se: There are certain things you need to buy so the bank helps you to plan. That is why I don’t like banks
close to me. As women, we are meant to do things and it costs. The men count us as one of the projects.
We need to buy things on their behalf. That is why I save. K: I bank for prudent management of my
funds. Ag: I bank because it is good for me because it allows me to save. To take money from the bank, I
have to go through a lot of stress and this serves as a check on me so I don’t go to withdraw money
often. Os: I like to save. Ha: I am a heavy spender, so the bank serves as a check. With my current bank,
I am allowed to withdraw only twice a month so I don’t go there often.
Fa: I am a salaried worker that is why I bank. Ab: Well...just to keep monies I don’t need right now.
May be if it is with you, you will be tempted to use it for unnecessary things. Fr: Well, the same reason
as Abdulas’ and as a worker, I will need a bank account for my salary, so one of my accounts is for
salary and the other for personal savings. Sa: Basically, there are two reasons, one is student loan
scheme. You will obviously need a bank account and the other one is that I don’t live here and my parents
have to send me money through it. Ma: I do because of the interest I will earn on my savings; I can use it
for something else and for the student loans that I can access easily.
It appears that the underlying reason for females employing the services of a bank is to avoid
overspending while for males; the reason is to save for the future. There are also compelling reasons for
bank selection decisions including the need to benefit from the student loan trust or as a prerequisite at the
work place. The popular notion that the youth has a poor saving culture appears to be waning. The
minimum number of years that participants have been banking is three (3) years and the maximum is
eight (8) years. Correspondingly, the younger ones who are in their first or second year in their four year
program fall within the 3 year minimum bracket with the older ones in the final year of their program
falling within the upper limit of eight (8) years category.
Bank selection criteria
In order to understand the characteristics that undergraduate students deem important in bank selection
decisions, the views of the participants in the focus group discussion were considered. These include
reasons for selecting the present bank or changing banks, the most important factors considered in
selecting a bank, and whether or not one would consider changing banks after school. Inquiring about
the reasons for choosing a particular bank, participants had this to say: Ag: I was a student at IPMC
when my bank came there to give a talk. My friends later convinced me that they have good customer
service. Fa: I chose my bank because they are close to me. Moreover, I like their customer service. Os: I
chose IBG because of proximity. I really like UT but they are not close to me. They support businesses.
Li: As for me, I chose Ecobank because they keep me informed about their services. Se: I usually depend
on my company to choose a particular bank. Funny enough, I have personally chosen only one bank and
that was because of their presence and allowing me to have access to international transactions. My
husband lives in the United States. Sa: I bank with Barclays and it’s a global bank you know...’emm’... we
the youth of late we want ‘flex’ banks, banks that have ‘swagger’ you know... hahaha...I mean the banks
that you can brag to your friends that you use. Another thing is the accessibility. I have an ATM card that
I can withdraw money with and its even Visa...am ... as a student, accessibility, that is what I expect from
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a bank. That is for now; I don’t care about the interest rate and minimum deposits. Ma: I will also say
accessibility. That is the first thing because I am on campus and then the bank is just close to me. I just
walk there and do what I have to do... yeah, that is the main thing. Fr: I chose IBG because of their
minimum balance which I think is GH¢ 5 or so. I think it’s good for someone who also wants to start
saving. They should design the savings account to be like an investment account so that the return you get
on your savings will be more. Ab: For me what I want in a bank is a bank that can give me what I want...
for instance, if I need a loan, it should not take time. As a student, I need money to do something small.
There are varieties of reasons for choosing a bank depending on individual’s peculiar needs. These
include: customer service, accessibility (convenience), prompt feedback, company choice, international
presence, minimum balance, and bank support. On the issue of the most important factors respondents
consider (in order of priority) in selecting a bank, here are some issues:
K: For me, I consider the following: convenience, customer service and the attractiveness of the bank. I
want to be treated like a k king. Ha: I consider convenience, customer service and flexibility. Li: for me,
prompt service and feedback. Sa: Flexibility is key. Ag: I consider bank rate. Customer service is also
very important to me. Fa: Convenience and when I need help, I expect them to help. Ma: Good customer
service. Ab: The speed... when you go there you don’t keep long. I will add accessibility. Fr: Mine is
quite funny... the layout, the office... when I enter how spacious the banking hall is. Sa: I will say brand
name, accessibility, easy processes. Ma: Me I consider security, accessibility, and speed. Ab: For me, I
will consider image of the bank, branch network, and speed. Fr: For me, I will consider customer service
first, then the interest rate earned on savings and also the prestige of the bank.
The three most important criteria factor affecting undergraduates’ bank selection decisions are
convenience, customer service and speed of service. They are followed by image and attractiveness of the
bank and high interest rate on savings. On the question of whether their respective banks are their
first, respondents had this to say: H: Because of the (huge minimum) bank balance, I moved to save
with ADB but then, again the later was rude. I moved to Ecobank partially because they had a particular
service that I wanted. Besides, the bank is close to me. Se: Funny enough, I have a number of accounts, I
started with GCB. I left because I felt they were old fashioned. Most of the time however, I changed banks
because my company changed banks. Os: I was paid through the bank therefore I had to use the bank
that the company used. When I stopped work, I changed the bank to the one very close to me. Fr: I rather
added one. Ma: I had one but then I added another one and that is the active one.
Findings show that when students are dissatisfied with a particular bank, they do not necessarily close the
account. Rather, they keep the account dormant and open a new account with another bank which they
keep more active. On whether or not they would change banks on completion of their education,
here are some sampled opinions:
Se: I wouldn’t change. I will keep them open and still open more. Fa: I will like to try other banks. Li:
No, I will not change. K: I will change when I finish school. Ha: I will change when I start working. Ab:
I will not change... may be adding up. Fr: I wouldn’t change... maybe I will add more. Ma: I’m not sure
because they cheated me. May be I will add.
The responses confirm the fact that students would not close their old bank accounts but rather add to it
when they become gainfully employed. It also points to the fact that banks should focus more on
customer share and not market share that is, how active the account is and not merely keeping an account.
It is also pertinent to note that students in the lower levels are more emphatic in their responses that they
would not change banks whilst their colleagues in upper levels think otherwise. It is reasonable to
conclude that expectations and perceptions of students change in their assessment of banks in Ghana.
Banks must therefore continually monitor the expectations and perception variables so as to build a longterm
relationship with them.
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In conclusion, participants were asked to name the banks they keep accounts with.
Li: Ecobank; As: TTB, Se: Zenith, TTB, Amalbank; F: Intercontinental bank; Os: Intercontinental bank
and GCB; H: Ecobank; Fr: GCB, Ecobank and Intercontinental bank Ghana (IBG); Sa: Barclays; Ma:
IBG; Ab: IBG. With reference to the focus group discussions, bank selection criteria of IPS
undergraduate students are diagrammatically represented below.
Figure 2: Bank selection decision of IPS students viewed from the perspective of
Analytical Hierarchy Process (AHP) framework.
Speed
of service
Customer
service
Accessibility(convenience)
Prompt
feed-
back
Decision to
Select a Bank
Company’s
choice
Banks in Ghana
International
presence
Source: Based on findings from focus group discussion
Minimum
balance
and
Interest
Bank
support
Bank
image
Nine criteria have been identified as reasons for bank selection by IPS undergraduate students. These
include: Customer service, speed of service, minimum balance and interest, international presence,
company’s choice, prompt feedback, bank support, bank image, and convenience. Findings from the
interview show that the three most important criteria affecting undergraduate bank selection decisions are
convenience, customer service, and speed of service. These factors are largely consistent with findings in
other contexts including Almossawi (2001) in Bahrain; Huu and Karr (2000) in Singapore; Khazeh and
Deckor (1992-93) in Maryland, USA; Laroche et al (1986) in Canada, and Lewis (1982) in Britain. It
appears therefore that there is a homogenous consumer group as far undergraduate bank selection
decisions are concerned despite the cultural differences. A point of departure surprisingly, is the low
influence of parental advice on bank selection decisions in the case of undergraduate students at IPS.
This however featured prominently in other studies. It is also important to note that nine out of the
twenty–seven banks were named by respondents as their banks. This could be explained perhaps on the
basis that the sample size was small. However Ecobank (GH) limited and Intercontinental Bank Ghana
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Limited (IBG) were the dominant banks in the study. The choice of IBG is not surprising as it is the
nearest bank to students on IPS campus. Ecobank is reputed to be a prestigious bank and it has a positive
corporate image.
Conclusion and managerial implications
To determine the managerial implications of these results for bank marketing, the findings were analyzed
using Huu and Karr’s Analytical Hierarchy Framework (AHP). Based on these findings, we propose an
adaption of the framework presented below. The framework (Figure 3) indicates that bank must consider
the four levels to attract and nurture their relationships with undergraduate students. At the first level,
banks must interrogate reasons for banking by undergraduate to help them integrate those factors into
their marketing tools. The second level requires that bank managers incorporate the three most important
criteria undergraduates consider in their bank selection decisions namely convenience, customer service
and speed into their value proposition and deliver on those promises. The third level focuses on the other
six dimensions of bank selection criteria, including prompt feedback, bank support, company’s choice,
international presence, minimum balance and bank image. Bank managers must use these factors to
differentiate their services. The company choice dimension requires that banks employ a relationship
marketing approach to nurture their relationship with companies. In so doing, they win over their
employees as well. The final level describes the alternative banks available and therefore the respective
banks must brand themselves based on the various dimensions identified.
Figure 3: Proposed Analytical Hierarchy Framework (AHP) for undergraduate bank selection in
Ghana.
Prompt
feedback
Decision to select a
bank
Convenience Customer
service
Company’s
choice
International
presence
Minimum
balance
Banks in Ghana
Source: Based on findings from focus group discussion
Speed of
service
Bank
support
Bank image
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The findings should be of immense interest to banks since the strengths and weaknesses of the respective
banks could be identified. This should help the banks to better position themselves and formulate
effective strategies to gain competitive advantage. As Huu and Karr (2000) noted, “it is important to
understand the preferences of the bank customers and to design strategies to match their needs and the
products/services of the banks”. The modeling of consumer preferences by the AHP could have a crucial
role in bank marketing in Ghana. This study however used only subjective criteria based on focus group
discussions and therefore other researchers can test the framework quantitatively to allow for
generalization.
References
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Social marketing: behavioral change communications and malaria prevention in Ghana
Ernest Yaw Tweneboah-Koduah etkoduah@ug.edu.gh
Department of Marketing and Customer Management, University of Ghana Business School, Legon,
Ghana.
Mahamah Braimah
Department of Marketing and Customer Management, University of Ghana Business School, Legon,
Ghana.
Abstract
Priscilla Ntriwaa Otuo
Department of Business Studies, Wisconsin International University College, Legon, Ghana.
Purpose: The purpose of this study is to assess the various communications strategies that have been designed to
promote insecticide treated nets (ITN) use among the two most vulnerable groups in Ghana (pregnant women and
children under the age of five), identify weaknesses in these approaches and suggest possible ways of addressing
these issues. Design/Methodology: This study is an exploratory study into the communications activities by
institutions involved in malaria control in Ghana. In-depth interviews were conducted with national level malaria
control officers and the data analyzed. Findings: Most of the interventions are aimed at encouraging the target
markets acquire ITNs although most of these messages sent out on malaria prevention are not integrated. Several
challenges were noted in the interviews including financial constraints, lack of human resources, cultural barriers,
negative publicity by the media and negative perceptions about the spread of malaria and use of ITNs. Research
Limitations/Implications: While implication of the findings are discussed, a major direction for the future is the
need for research to be conducted on how behavioral change theories could be employed to design effective social
marketing intervention on malaria in Ghana
Introduction:
Malaria is a major public health problem all over the world. Over the last two decades, morbidity and
mortality from malaria have been increasing due to deteriorating health systems, growing drug and
insecticide resistance, periodic changes in weather patterns, civil unrest, human migration, and population
displacement (WHO, 2003). Malaria affects more than 40% of the world’s population and responsible for
more than 300 million acute cases each year, which resulted in 1.2 million deaths in 2002 (Binka, 2005).
Over 80% of the malaria-related morbidity and mortality occur in sub-Saharan Africa with children under
five and pregnant women at highest risk (ibid). In Ghana 3.5 million people contract malaria every year.
Approx. 20,000 children die from Malaria every year which constitute 25 per cent of the deaths of
children under the age of five. Even if a child survives, the consequences from severe malaria such as
convulsions or brain dysfunction can hamper long-term development and schooling (UNICEF, 2007). At
the national launch of Malaria Vector Control Program in June, 2009, the then Minister of Health noted that
malaria cost Ghana $760 million in 2008. This amount represented 10% of the country’s Gross Domestic
Product (Ghana Web, June 17 th , 2009).
Prevention of the disease has therefore become extremely important to governments all over the world,
especially in developing economies such as Ghana. However, malaria in Ghana is viewed in the same
light as having a common cold, because it is so common place (Netmark, 2004). The use of Insecticide
Treated Nets (ITNs) has been documented as a potent way of preventing the disease in developing
countries. At a cost of US$1.2 per person protected per year, ITNs are considered one of the most
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effective health interventions in Ghana (Breman et al 2006). In spite of these improvements, there seem
to be a gap (about thirty-three (33%) between ownership and usage of ITNs (NMCP, 2008). It seems
most of the current strategies are mainly focusing on the distribution of ITNs. The usage of ITNs remains
low, an indication that behaviour change communications strategies to promote the adoption of ITNs
seem not to have been very effective.
Despite this worrying situation in Ghana, it seems this area of research has not received much empirical
studies. Like most African countries, studies on communications and disease prevention in Ghana have
focused particularly on HIV/AIDS (Walden et al, 1999) with little attempt to study the area of
communications and malaria prevention. Most studies on malaria in Ghana have focused on the
knowledge, attitudes and perceptions (KAP) of the vulnerable groups (Walden et al, 1999). Little
attention has been given to the perceptions of the planners and implementers of communications
interventions with regards to ITNs. The communications activities of individuals and institutions involved
in encouraging positive behaviors should become an important matter of interest in the academic domain.
This study proposes to take an in-depth look into behavior change communications (BCC) strategies
targeted at pregnant women and children from the perspective of the national level officers, taking
insights from commercial marketing literature and practices. Specifically, the study is designed to
achieve the following;
• Explore the aims of the various BCC interventions with respect to ITNs in Ghana
• Determine the communication strategies used by various agencies in BCC in Ghana
• Explore how agencies measure the outcomes of their BCC efforts
• Identify the challenges impacting the implementation of these BCC strategies
Marketing Behaviour Change
Behaviour change communications which is sometimes referred to as information, education and
communication (IEC), is a term originally used in family planning and more recently in AIDS control
programmes in developing countries (Hubley, 1993). It is increasingly being used as a general term for
communication activities to promote health (ibid). Social marketing is the systematic application of
marketing alongside other concepts and techniques, to achieved specific behavioural goals, for a social
good ((French, J. et al., 2010). Behaviour change involves understanding people and their motivations,
and developing strategies that lead to real change. These strategies have been useful in the control of
HIV/AIDS, unsafe abortions and tobacco control. There have been criticisms in the health promotion
literature of treating health as a commodity ruled by economic principles of supply and demand (Basu and
Wang 2009; Airhihenbuwa and Obrigon, 2000). However, there is noticeable trend in the public health
literature, which emphasizes the need to effectively market public health by exploring alternative
innovative strategies (Basu and Wang 2009).
The overarching focus of public health campaigns has been to utilize theoretical frameworks to plan,
design, implement and evaluate communication-based programs that are aimed at initiating and sustaining
changes in knowledge, beliefs, attitudes, and behaviors of target audience with respect to positive health
messages ( Basu and Wang, 2009; Paisley, 2001; Kline and Martison, 2000).
Smith and Taylor (2004) assert that the communications process begins with a situation assessment. A
situation assessment consists of internal and external assessment. The development of the
communication process begins with a research on the firms past interventions, availability of resources as
well as agency review and selection. External analysis consisting of the market analysis, behaviour
analysis (problem behaviour, manifestations, barriers to ideal behaviour and factors encouraging ideal
behaviour) and competitor analysis is then conducted. An analysis of the political, economic, social and
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technological factors, specifically relevant to communications is also relevant in respect of
communications activities (Smith et al, 2004)
Assessment would lead to the identification of critical success factors so that objectives can be developed.
Objectives typically refer to how the communications should affect the mind of the target audience,
example, generate awareness, attitudes, interest or trial. The researchers have suggested that the AIDA
Model can be used to design behaviour change communications objectives. After objectives have been
set based on the AIDA Model (Strong, 1925), the appropriate strategy is selected. The three strategies
that can be used are social marketing, advocacy and community mobilisation (Hubley, 1993; Chen, 2006).
The malaria preventive measures depict the various methods of preventing malaria. These include the use
of ITN’s, indoor and outdoor residual spraying and intermittent preventive treatments (IPT), of which
ITN use has been recognised as one of the most effective measures (Lengeler, 2009; Breman, 2000).
Smith et al, (2004) suggest that various marketing communication tools can be used for malaria control.
The proper integration of the various marketing communications tools would lead to behaviour change
and the use of the malaria prevention tools. Consequently, the adherence to the messages leads to the
prevention of malaria. Continuous review is done so that the process can be monitored, measured and
modified (Green and Kreuter, 1991; Chen, 2006).
Methodology
A qualitative research approach utilizing unstructured interview guide was adopted for this study because
the researchers were seeking deep and rich explanations for a phenomenon that had hitherto been underresearched
from a developing country perspective. A sample size of five institutions was selected for the
study, comprising three non-governmental organizations: Ghana Social Marketing Foundation (GSMF),
the Ghana Sustainable Change Project (GSCP) and Netmark, and two governmental institutions: the
National Malaria Control Programme (NMCP) and the Health Promotions Unit of the Ghana Health
Services (GHS). The selection of participants from the sampled institutions was purposive, as it accounted
for the positions and experiences of the various participants in line with the objectives of the study. This
was to ensure that knowledgeable respondents are selected to help in the collection of a more accurate and
complete data. The researchers respectively interviewed 2, 2, 2, 1 and 1 managers from NMCP, Netmark,
GSCP, GHS and GSMF. The data collection took place in the Greater Accra region of the country where
all the institutions have their head quarters. To ensure validity, the content of the interview guide was
discussed with experts in the field of social marketing communications before it was administered. All
interviews were audio recorded and transcribed immediately after the interviews.
Research Finding and Discussions
Empirical results are compared to existing theory and the conceptual framework where appropriate.
Themes were developed from the research objectives.
Objectives of Communications Programs on ITNs
The first question in this section sought to bring to light the objectives of the various communications
interventions with respect to ITNs in Ghana. Respondents from GMCP, GHS and GSMF indicated that
their organizations are working to achieve the targets spelt out in the Abuja Declaration. African
Governments agreed in 2000 in Abuja to intensify efforts to halve the malaria mortality for Africa's
people by 2010, and this became known as the Roll Back Malaria Program.
Officers from Netmark and the GSCP however, stated that they were working to achieve the targets spelt
out in the President’s Malaria Initiative (PMI). PMI is a key component of the US Government Global
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Health Initiative launched in 2005 for selected countries in Africa but expanded in 2009 to cover the
whole of sub Saharan Africa. The goal of PMI is to halve the burden of malaria in 70% of the at-risk
population in Africa by 2014. The trend of responses indicates that the organizations were working to
achieve different targets though they all targeted the reduction of the incidence of malaria.
Various views were expressed as to whether their objectives were attainable or not. Most officers were
optimistic about the attainment of their goals. An officer at Netmark however expressed uncertainties and
indicated that the current strategies are likely to ensure the ownership of ITNs but not with it use. This
view is supported by the NMCP’s assertions that there seem to be a gap of about 33% between ownership
and usage of ITNs (NMCP 2008).
When asked about the changes in behaviour or attitude they expect from their target markets, respondents
from Netmark, GSCP, NMCP and the GSMF stated that their expectations were that their target markets
would acquire and use ITNs. The respondent from GSMF stated in addition that his organisation is now
seeking to improve the health seeking behaviour of the targets. He indicated that with support from
Pfizer, GSMF is collaborating with Family Health International (FHI) to implement a 5-year community
malaria intervention dubbed “Mobilize Against Malaria” in two regions in Ghana. He noted that GSMF
is undertaken this campaign because “Everybody is talking about ITN. But people still get the disease
and are still dying from it. So we decided to focus on the treatment aspect of malaria”.
The worry expressed by this officer supports literature that suggests that despite the increasing efforts by
governments together with other agencies to promote ITNs use, the actual outcomes do not correspond to
the expected outcomes (REAPING 2004; WHO, 2004).
The Communications Strategies
Respondents confirmed they used BCC strategies when asked whether they used any such strategies.
Evidence abounds in literature that social marketing, community mobilization and advocacy are the major
communications strategies used in behavior change communications (Hubley, 1993; Chen, 2006; USAID,
2006). The responses received indicated that only GSMF and Netmark use social marketing strategies to
change malaria related behaviors of their target audience. In explaining why they mainly use social
marketing strategies the country manager of Netmark stated that “Some communication planners are of
the notion that the monies spent on social marketing campaigns in form of promotion such as advertising
could be used in purchasing more nets for distribution, not considering the fact that these distributed nets
are sometimes not even used.”
Information gathered from GSCP shows that they use more of advocacy and community mobilization
techniques. For instance GSCP has what they called the community-led activities which are a
combination of community mobilization and advocacy. It is an investment in capacity building programs
of local groups, institutions, structures and networks to impact on the target.
The governmental institutions (NMCP, GHS) were silent on the strategies they use. The impression was
that they did not know much about these strategies. This is very worrying in that their main focus is on
the distribution of ITNs notwithstanding the fact that these nets are sometimes never even used or used
for other purposes. Bean (2001), reports that there have been cases where ITNs have been turned into
wedding dresses, fishing nets and water filters in some African countries. Notwithstanding, there is
visible trend in the public health literature, which emphasizes the need to effectively market public health
by exploring alternative innovative strategies (Basu and Wang 2009), such as social marketing
techniques.
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The respondents also confirmed that they adopt various marketing communication mix tools in executing
their behavioral change communication efforts. Marketing communication mix tools such as sales
promotion, advertising, publicity and public relations, and personal selling are frequently used.
According to the respondents, sales promotion and advertising are the most frequently used marketing
communication mix tools.
Measurement of Communications Outcomes
Respondents were asked if their organizations had developed indicators for measuring communications
effectiveness. Continuous review of activities is extremely important. All the officers interviewed said
that there are some indicators that are used to assess the outcome of communications activities. They
stated that research is used to assess the impact of communications messages. Research was mentioned
as the most widely used tool for measuring communication effectiveness. An officer at the Ghana
Sustainable Change Project described research as the bedrock of malaria prevention with respect to ITNs.
Officers at Netmark and the Ghana Social Marketing Foundation indicated that retail audits, sales data
from partners and household surveys are used to assess campaigns. A communications officer at the
National Malaria Control Program made mention of the fact that is difficult to measure the outcomes of
communication campaigns. Respondents at the Ghana Sustainable Change Project stated that indicators
such as number of posters developed, radio spots, television adverts and number of road shows were some
indicators used in measuring communications effectiveness.
Employing these methods as discussed above to measure communication effectiveness might not produce
the best of results. According to Pickton and Broderick (2005), communications campaign needs to be
evaluated in terms of their efficiency and effectiveness. Though there is often no single, simple and
reliable way of measuring the impact of communication, measuring several levels of effects in order to
build an overall picture of the success of the communication campaigns would be a suitable approach
(Cooper, 1997). Consequently, in measuring the outcome of a communication campaign, the expected
and actual outcomes of each of the communications elements as well as the collective impact of these
elements should be determined. Reason(s) for success or failure must also be evaluated. Lessons learnt
from the campaign and the next course of action should also be considered (Pickton and Broderick 2005).
Problems and Challenges
The last set of questions in this study sough to identify the problems and challenges associated with
behavioral change communications on malaria prevention in Ghana. The common problem mentioned by
all the respondents is entrenched socio-cultural practices.
Other factors inhibiting the progress of ITN campaigns in the country included the following; inadequate
financial and human resources, inaccessible roads, negative publicity from the media/wrong information
to the public and negative perceptions people have about the spread of the disease. One officer explaining
further on perception said “some people still perceive that standing in the sun causes malaria which is not
true”. This confirms the findings of a study conducted in the northern part of Ghana about perceptions on
malaria (Binka, 2005).
When respondents were asked why their target audiences do not use the bed nets as expected, the
following were indicated as some of the reasons; some people complain that they feel warm under the bed
nets, others said they cannot hang the bed nets (most people in the rural communities do not sleep on
beds) and pregnant women in some communities prefer keeping their nets until their babies are born.
Conclusions
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There is inconsistency in the messages presented to the target markets about malaria prevention. While
some of the agencies are presenting messages on the prevention of malaria by the use of ITNs, others are
concentrating their efforts at improving the treatment aspect of malaria control. The difference in focus
makes it unclear as to what the national priority on malaria is and if indeed enough resources are being
allocated to the encouragement of the acquisition and use of bed nets. The conflicting remarks reveal that
the objectives should be reconsidered.
The respondents provided useful information on the communications strategy and indicated that the
degree of use of each strategy depends on the objectives of the organization and its focus. The study
revealed that only two institutions involved in malaria prevention in Ghana use social marketing
techniques in health promotions. Social marketing techniques are therefore not widely adopted in the
promotion of positive behaviors with regard to malaria prevention and ITN use.
It was also concluded that most promotional campaigns are centered on making nets widely available to
the market. The non-governmental organizations are involved in making the nets available to the target
and also influencing them to use the nets whereas the governmental agencies are more concerned about
the distribution of nets.
The study revealed that major indicators used by health communication planners in Ghana are number of
advertisements, radio spots, sales audits; number of posters developed and distributed; number of road
shows organized. Research was recognized as a core activity in carrying behavior change
communications and measuring the outcomes of communications activities.
Financial constraints, lack of human resources, cultural barriers, and negative perceptions are some of the
problems identified as the major constraints that agencies faced in their BCC effort.
Recommendations and Direction for Future Research
One of the strategies adopted by the programs to remedy some of their difficulties is to identify the key
media personnel involved in communication and malaria prevention and organize training and workshops
for them. The officer acknowledged that the NMCP is now partnering with a group of journalists called
the Africa Media and Malaria Research Network (AMMREN). Some of them are educated on the
various ways of preventing the disease so that they can pass it on to the target market indicating that the
media are very important in relaying information on health to the target market. Similar schemes should
be developed to partner relevant stakeholders in the execution of their BCC efforts.
Government agencies engaged in BCC were not abreast with social marketing models. It is
recommended that workshops and seminars be organized for personnel of such agencies to broaden their
appreciation of these models since these models could enhance the effectiveness of behavior change
intervention on malaria in Ghana. These training programs should also aim at equipping the officials to
properly design evaluation models that would enable them to effectively assess the impact of their
intervention activities.
The activities of all the agencies engaged in BCC activities should be properly coordinated, probably by
an independent state body for maximum impact. They should also be adequately resourced, financial and
otherwise, by the promoters of the various agencies. Their activities should be focused not only on
ownership of the bed nets but also on their consistent use.
For further research, it is recommended that studies be conducted to determine how agencies engaged in
BCC develop their strategy. Again it is recommended that future studies investigate how behaviour
change theories could be employed by social marketers to design effective communications on malaria in
Ghana.
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Arhihenbuwa, C. O., and Obregon, R., (2000), A critical assessment of theories/models use in health
communications for HIV/AIDS. Journal of Health Communications 5(suplemment) : 5-15
Basu A., Wang J. (2009), The Role of Branding in Public Health Campaigns, Journal of Communication
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Binka F., (2005), Cultural Epidemiology for Malaria Control in Ghana, WHO.
Breman J. G., (2000), The Ears of Hipopotamus-manifestations, determinants and estimates of malaria
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Measham, Anthony R and Alleyne, George and Claeson, Mariam and Evan, David B. and Jha, Prabhat
and Mills, Anne, (eds.) Disease control priorities in developing countries. Oxford University Press /
World Bank, New York, USA, pp. 413-432.
Chen P. F (2006) Planning Behaviour Change Communication (BCC) Interventions: A Practical
Handbook. UNFPA Country Technical Services Team for East and South-East Asia Bangkok, Thailand.
Cooper A., (1997), How to Plan Advertising, 2 nd Edition, Cassell in association with The Account
Planning Group, London
French J., Blair-Stevens C., McVey D. and Merritt R. (2010), Social Marketing and Public Health:
Theory and Practice, Oxford University press, Great Clarendon Street, Oxford OX2 6DP.
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Paisley, W.J. (2001), "Public communication campaigns: the American experience", in Rice, R.E., Atkin,
C.K. (Eds), Public Communication Campaigns, 3rd ed., Sage, Thousand Oaks: CA, pp.3-21
Pickton, D., and Broderick, A., (2005), Integrated Marketing Communications. Pearson Education
Limited, Edinburgh Gate, England
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Kogan Page
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Perceptions of the success factors for social media implementation in a South African life insurance
company
Abstract
Michael Probyn and Mlenga G. Jere Mlenga.Jere@gsb.uct.ac.za
The Graduate School of Business University of Cape Town, South Africa.
This study investigates the critical success factors for social media implementation in a South African life insurance
company. The study used a qualitative research methodology based on a focus group and systems thinking
framework. The study identifies ten variables, grouped into driver variables, link variables, and outcome variables,
that can be used to for the implementation of social media and to assist in the promotional activities of the life
insurance company.
Introduction
The importance of building mutually beneficial relationships with customers and stakeholders is well
acknowledged in the literature (e.g., Coltman, Devinney, & Midgley, 2011; Kahn, 1998; Ryals, 2005).
However, it is not clear how one can use social media to build and maintain relationships with customers
in the insurance industry. This study investigates the role that social media can play in the promotional
mix of a South African life insurance company. It is argued that as brands continue to battle for the
attention of customers, they will need to move away from creating impressions and towards building
relationships (Johnson, 2007). Social media and social media tools have the potential to build and
strengthen these relationships between business and customers (Johnson, 2009). Examples of social
media include weblogs or blogs, micro-blogging or short message sites, networking sites, information and
networking aggregators, event sharing or management, wikis or knowledge sharing, opinion and rating
sites, photo-sharing, video-sharing, and podcasts sharing and aggregators. Organizations that are able to
tap into the power of social media will have a tool to complement and expand their existing promotional
activities. Conversely, those organizations that do not change their promotional activities to enable social
media implementation may be left behind (Scurry & Wehmeyer, 2007) and expose themselves to the risk
that their customers migrating to their competitors (Davenport & Beck, 2001).
Social media is created using the tools of Web 2.0, with the intention of sharing information and
collaborating with broad audiences. Collaboration is one of the key differences between social media and
traditional media where media is created for consumption but not necessarily collaboration (Chandler,
2007; Flew, 2008; Holloway, 2009; Scoble & Israel, 2006; Singel, 2005). Social media is about creating
and developing relationships with people, in the real and virtual worlds, where the relationships are
defined by mutual value and benefits. Conversations that take place in social media can start locally but
have the potential to have global impact (Solis, 2008). Social media is making the traditional influencers
in markets such as industry experts less powerful as more and more avenues for information sharing and
dissemination become available. There are increasingly new social media influencers that organisations
need to identify, listen to, and responded to. They may not represent the traditional power-base of
influencers that organisation dealt with and they may not even be in the same country that the
organisation operates in, but social media allow them global access to customers and potential customers
(Solis, 2008). According to Kelman’s (1961) theory on opinion change and opinion formation, there are
three processes that people use to respond to social influences, namely compliance, identification, and
internalisation. Because people elect to join social media that would meet their needs, they are more
likely to respond positively to social influences emanating from these social media. Identification and
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internalisation as processes of opinion formation are therefore likely to be important in social media
because of the attractiveness and credibility of the social influencer amongst their social media
colleagues.
The purpose of this study was to identify the role that social media can play in complementing the
promotional mix of South African life insurance companies. This study addresses the question: What are
the success factors required to enable social media implementation in the promotion of a South African
life insurance company?
METHOD
Qualitative research was used because of the focus on gaining new insight into an existing phenomenon
(Leedy & Ormond, 2005) and our interest in the views of practitioners in the insurance industry (Bryman
& Bell, 2007).
Participants
Four focus group participants were selected from social media practitioners (one from the life insurance
firm and three consultants). The criteria for selecting the participants was that they either work for a life
insurance company in a senior marketing position or are external social media consultants who are
contracted to the life insurance companies to work on their social media strategies. Two participants were
used in the primary focus group and four participants took part in the secondary focus group, one of
whom was also in the primary session.
Apparatus
The focus group discussion took place in a conference room that was setup and supplied with the
necessary materials including a laptop, data projectors, Post-it notes, flipcharts, and refreshments.
Procedure
Data gathering and analysis was done through systems thinking focus group discussion. The
methodology of systems assumes that a system can be understood by understanding the connection and
direction of the interaction between the variables that make up the system (Cummings & Wilson, 2007)
by focusing on and acknowledging the interconnections between the different parts of the whole
(Anderson & Johnson, 1997). The first of two sessions gathered the data, grouped the data, and defined
the relationships between the data variables (themes). The second session validated, and where
appropriate added to, the variables identified in the first session and identified and explained the causal
relationship between the variables. Both sessions were run by one of the authors and ran for about three
hours each. A number of tools were used in the systems thinking process to facilitate the grouping and
analysis of the data produced in the focus groups namely; affinity diagrams (Figure 1), inter-relationship
diagraphs (Figure 3), systemic scorecards (Figure 4), and causal loop diagrams (Figure 5) (Kim, 1992;
Richardson & Pugh, 1981).
Affinity diagram: The participants each used a pack of Post-it notes to brainstorm ideas they could
think of which would impact on the research question. The idea generation was followed by a discussion
and then another round of idea generation until the participants felt they had no more new ideas. The
Post-it notes were stuck up on a wall and were grouped into common themes (Figure 1). The
individual groupings were discussed and given a thematic title that encapsulated the individual ideas in
the grouping. The groupings formed what is referred to as variables in the rest of this paper as
summarised in Figure 2.
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Figure 1: Affinity diagram of thematic ideas
Figure 2: Variables from affinity diagram
Inter-relationship diagraphs: The variables in Figure 2 were then drawn up on a flipchart and the
relationship between each variable and others was represented by drawing an arrow from the influencing
variable to the influenced variable resulting in an an inter-relationship diagraph (Figure 3). The variables
with a predominance of arrows leaving them are called drivers, those with a predominance of arrows
coming towards then are called outcomes, and the variables with a reasonable balance between leaving
and coming towards arrows are called links. The number of arrows leaving and number of arrows
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arriving at each variable were captured with the variable in the format of total number of arrows leaving:
total number of arrows arriving, e.g., 5:3.
Systemic scorecard: The drivers, links and outcomes were then stacked in a systemic scorecard which
provides a visual representation of which of the variables has the greatest influence on the research
question (Figure 4). The driver at the bottom of the stack has the most influence and the outcome at the
top of the stack has the least impact on the boundary question.
Figure 3: Inter-relationship diagraph
In the second focus group session, the variables from the previous session were reviewed by the
participants. All the variables were then used to create an inter-relationship diagraph which was then split
into distinct loops (Figure 5).
Results
The discussion of the causal loops focused on the variables that made up the distinct loops and on what
action could be taken to enable the loop and what the potential risks were to the enablement of the loop.
Following the review and a discussion, the participants decided to create a new variable Increase in profit
resulting from social media. Although elements of profit were included in the variable Having clear
measurements of success in place, the participants felt it was critical for social media leading to profit to
be captured as a variable on its own rather than as a portion of a another variable.
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Causal Loop diagram: The participants complete the causal loop diagram (Figure 5) and described the
variables in the causal loop diagram as follows:
• Variable 1: Ability to create and leverage social media advocates (0:8 Outcome): This is the
primary outcome of the causal loop diagram with every other variable impacting on it. The ideas
covered by this variable include: advocacy; reputation management; branding; understanding
and managing the reputation deficit you start with in social media; and understanding that staff,
peers shareholders and clients all play a role as advocates.
Figure 4: Systemic scorecard
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Figure 5: Causal loop diagram including new variable
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
• Variable 2: Sustainable access to resources (7:1 Driver): This variable includes understanding
that that social media requires sustained funding and the need to have the enabling technology.
A point was made that “social media is free but it’s not cheap” to recognise that although the
social media tools are resources that are free to use by customers they do not come without a cost.
To manage the social media engagements requires time, attention and skill all of which cost
money (Taylor, 2009) Smith, 2009).
• Variable 3: Ability to adapt to the social media marketplace (6:2 Driver): The ideas in this
variable include how to engage with social media in such a heavily regulated industry; and
dealing with the challenge of being a traditionally silo-orientated industry and organisation,
particularly across product sets and customer segments. This driver is about changing the
industry’s mindset and structure of the organisation to enable social media implementation.
• Variable 4: The ability to identify your community (5:3 Link): This variable’s ideas may be
summarised in the following way: Organisations need to be able to identify and segment their
audiences and to speak to them separately taking into account where they are on the user
experience curve. This is reflected in the statement “...the true return on investment comes from
developing communities, creating content to be shared, and talking and listening directly with
customers” (Smith, 2009).
• Variable 5: Ability to create a clear social media rationale (8:0 Driver): This variable was
identified as the primary driver to responding to the research question. It emphasises the need to
be clear how the organisation plans to engage and the need to match the social media platform to
the specific social media engagement the organisation desires. It is about a clear rationale of
why, how, and where to engage with customers. Li (2009) considers the depth of the
engagement to be critical for constructing a successful social media rationale.
• Variable 6: Ability to execute (3:5 Link): Variable 6 has to do with the need to have delivery
structures in place and ensuring that the content created has “viral-ability” (i.e., the ability for the
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content to engage with the customer and for the customer to find it worthwhile to pass on to their
network).
• Variable 7: Ability to create and frame an integrated online persona (2:6 Outcome): This
variable includes the need to decide whether to have real or fictitious persona online; and the need
to ensure that the tone and style match the persona. The online persona and social media content
need to be consistent.
• Variable 8: Having clear measurements of success in place (3:5 Link): Variable 8 addressed the
need for social media to provide a return on investment as it is not an indulgence without any
benefits. It acknowledges the need to have measures of success in place and the need to measure
them on an ongoing basis.
• Variable 9: Ability to integrate social media with business intelligence (2:6 Outcome): The
following ideas are included in this variable: Social media needs to integrate with the
organisation’s customer relationship management system in order to leverage off the data to
provide market intelligence. It also involves the monitoring of the response by the public to the
social media engagement that the organisation undertakes.
• Variable 10: Increase in profit from social media: The ideas included in this variable were drawn
from variable 8. This variable is about the need to ensure that social media investments lead to
“profit”, however it is defined.
Conclusions
This research report set out to answer the question: What are the critical success factors to enable social
media implementation in the promotion of a South African life insurance company? It has demonstrated
that while there are challenges to implementing social media in life insurance companies, there is
evidence that social media can complement the promotional activities of these organizations by allowing
the organizations to communicate with their customers and facilitating communication amongst the
customers (Mangold & Faulds, 2009). The study identified ten variables that are important for successful
implementation of social media and that are consistent with the literature. The ten variables were divided
into three categories namely driver variables, linking variables, and outcome variables. This provides a
guide to the social media strategist by focusing on the variables that will have the greatest impact.
The drivers identified were; ability to create a clear social media rationale, sustainable access to
resources and ability to adapt to the social media marketplace. The drivers should be the primary focus
of social media implementation as they are required for successful implementation. The linking variables
identified were the ability to identify your community, having clear measurements of success in place, and
the ability to execute. The two outcome variables were ability to create and frame an integrated online
persona and the ability to integrate social media with business intelligence and the ability to create and
leverage social media advocates. Finally an additional variable was identified in the second focus group
session; Increase in profit from social media which was considered important enough by the focus group
to split out and form a distinct variable. The study acknowledges the weakness of its focus on one
company and recommends broadening the focus of future studies.
References
Anderson, V., & Johnson, L. (1997). Systems thinking basics: From concepts to causal loops. Waltham,
Massachusettes: Pegasus Communications, Inc.
Bryman, A., & Bell, E. (2007). Business research methods (2nd ed.). New York: Oxford University
Press.
Chandler, D. (2007). Web 2.0: buzzword or bonanza Electrical Wholesaling, May, 25-30.
Coltman, T., Devinney, T. M., & Midgley, D., F. (2011). Customer relationship management and firm
performance. Journal of Information Technology, 1-15.
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Edited by Emmanuel Obuah
Cummings, S., & Wilson, D. E. (Eds.). (2007). Images of Strategy. Oxford: Blackwell Publishing.
Davenport, T., & Beck, J. (2001). The attention economy. Boston: Harvard Business Press.
Flew, T. (2008). New Media: An introduction (3rd ed.). Melbourne: Oxford University Press.
Holloway, M. (2009). How tangible is your strategy? How design thinking can turn your strategy into
reality. Journal of Business Strategy, 30(2/3), 50-56.
Johnson, S. (2009). How Twitter will change the way we live. Time, 173(24), 28-33.
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Academy of Marketing Science, 26(1), 45-53.
Kim, D. (1992). Guidelines for drawing causal loop diagrams. The Systems Thinker, 3(1). Retrieved from
http://www.thesystemsthinker.com/tstgdlines.html
Leedy, P. D., & Ormond, J. E. (2005). Practical research. New York: Pearson Prentice-Hall.
Mangold, W. G., & Faulds, D. J. (2009). Social media: The new hybrid element of the promotion mix.
Business Horizons, 52, 357-365.
Richardson, G., & Pugh, A. (1981). Introduction to System Dynamics Modelling with DYNAMO.
Cambridge, Massachusetts: Productivity Press.
Ryals, L. (2005). Making customer relationship management work: The measurement and profitable
management of customer relationships. Journal of Marketing, 69(4), 252-261.
Scoble, R., & Israel, S. (2006). Naked conversations: How blogs are changing the way businesses talk
with customers. New York: Wiley and Sons.
Scurry, J., & Wehmeyer, H. (2007). Strategies for differentiating the professional services firm brand
Journal of Integrated Marketing Communication, 28-34.
Singel, R. (2005). Are you ready for web 2.0? Retrieved 26 August, 2009, from
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http://www.scribd.com/doc/3283966/The-Essential-Guide-to-Social-Media
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Abstract
Service quality and customer retention in the mobile telecommunication industry in Ghana
Kofi Poku, kofi_poku1@yahoo.com
Wilberforce Owusu-Ansah, woansah@gmail.com
Department of Marketing and Corporate Strategy, KNUST School of Business, KNUST, Ghana.
The worldwide trend towards service quality has become a distinct and important aspect of product service offering.
Its close conceptual link to customer retention has turned it into the core marketing instrument, making it one of the
most researched areas in services marketing. The focus of the study was on customer perceptions of service quality
of Mobile Telecommunication Network (MTN) in Ghana using the SERVQUAL model. Through structured survey
questionnaire and interviews of customers randomly selected from five leading Customer Care Centres in the
Ghanaian capital, Accra, data was gathered for the study. The findings from the study revealed that MTN’s
customers are predominantly the youth (age 18-35) and perceive the company’s services to be unreliable. However,
the study also revealed that empathy and responsiveness are the service quality variables which impact positively on
customer retention. The study recommends that for MTN to be able to retain its customers, more emphasis should
be placed on being responsive and empathetic in their service delivery.
Introduction
The telecommunication, as one of the most essential elements of modern business world, is most volatile
and plagued by regulatory discord and economic uncertainties the world over. These notwithstanding,
telecommunication carriers have struggled to maintain sound footing and a competitive edge, all the while
endeavouring to provide crucial, uninterrupted service to their customers. Factors such as globalization
and technological innovation, increasing customer demand for choices, lower price and improved service
quality, as well as customer care, offer further challenges to telecommunication operations. This requires
the industry to become more and more competitive through improved quality customer service in order to
gain and sustain competitive advantage in a global marketplace (Zhang et al., 2004; Wang and Archer,
2007). Ghana’s telecommunications industry has witnessed phenomenal growth as a result of the country
achieving a teledensity of about 20 percent in June 2006, six years ahead of the target of 2012 (Atafori,
2006). This is attributed to the tremendous growth and competition in the mobile telecommunication
sector. At the end of 2010, there were six telecom companies in Ghana with the following respective
market share: Mobile Telecommunication Network (MTN) 54%, TiGO 23%, Vodafone 13%, Airtel 7%
and Expresso 3% (NCA, 2010). The MTN Group Limited is a multinational telecommunications group
that began operations in South Africa in 1994. Since then, MTN has expanded beyond Africa into
emerging markets in 10 African countries and Iran. In May 2006, MTN announced a landmark deal to
create the pre-eminent mobile operator in the emerging markets of Africa and the Middle East that will
operate mobile networks in 21 countries and serve nearly 30 million subscribers. In Ghana, MTN became
owners of Scancom, operators of Areeba, after its acquisition in 2006. Upon the acquisition, Scancom
had over 52% of the telephone market in Ghana, with its network operating in all the ten regions of the
country, pledging to change the face of the telecom industry in Ghana. The company promised to bring
world-class telecommunications into Ghana and understand the needs of its customers. However, these
promises are yet to be realized. Subscribers of MTN complain about poor reception throughout the
country and poor inter-connectivity. Simply put, some MTN subscribers feel they are not receiving value
for their money. How MTN can retain its customers in the face of all these complaints remains to be
seen. Other questions include whether MTN knows the needs and wants of her customers; whether the
company is aware of the perceptions of her customers towards the quality of service she renders, etc.
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The study seeks to:
• examine types of services that MTN offer its clients;
• examine customer perceptions of MTNs’ service quality;
• investigate trends in MTN’s customer retention;
• investigate how MTN’s service quality relates to its customer retention.
Literature review
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Service quality is a concept that has aroused considerable interest and debate in the research literature due
to absence of consensus on definition and measurement (Wisniewski, 2001). Whereas service quality has
been defined as the extent to which a service meets customers’ needs or expectations (Asubonteng et. al.,
1996), others have defined from the focus of the customer (Payne, 1993). Others suggest that service
quality can be inferred from Zeithaml and Bitner (2000) model where service quality differs from quality
of goods because of its intangibility. The absence of a universal definition presents a challenge in
communicating services to customers for easy assessment because customers characterise services as
being intangible, perishable, produced and consumed, simultaneously and heterogeneous. Schneider and
Bowen (1995) clarified that the focus of all the procedures, processes and contexts such as fancy
facilities, modern equipment, stylish uniforms and terrific signs as a substitution of the “core service” can
never countervail bad or mediocre food, poor financial advice and an appropriate joke. Service quality is
amply demonstrated by practice such as delivery on time, giving customer’s variety to choose from, pay
attention to customer’s complaints and demands and having competent and knowledgeable staff.
Literature therefore summarizes that service quality can thus be defined as the difference between
customer expectations of service and perceived service (Payne, 1993). If expectations are greater than
performance, then perceived quality is less than satisfactory and hence customer dissatisfaction occurs
(Lewis and Mitchell, 1990). One major challenge for companies is to deliver service quality consistently.
Dimensions of Service Quality
Whereas service quality is known to be based on multiple dimensions (Grönroos, 1990), there is no
general agreement as to the nature or content of the dimensions (Brady and Cronin, 2001). A review of
contemporary discussions on the dimensions of service quality portrays service quality in terms of
physical quality, interactive quality and corporate (image) quality (Lehtinen and Lehtinen, 1982);
technical aspect (“what” service is provided) and the functional aspect (“how” the service is provided)
(Grönroos (1982). Furthermore, service quality has been evaluated in terms of the SERVQUAL
instrument – “tangibility”, “reliability”, “responsiveness”, “assurance” and “empathy” (Parasuraman et.
al., 1985; Brown et al., 1993; Zeithaml et al., 1996); Other dimensions are in terms of “what” category
(i.e. service evaluated after performance), “how” category (i.e. service evaluated during performance)
(Swartz and Brown, 1989); the customer-employee interaction (i.e. functional or process quality), the
service environment, and work outcome (i.e. technical quality) (Rust and Oliver (1994). However, while
research supports the contention that the service environment affects service quality perceptions
(Spangenberg et al., 1996), it is conceptually difficult to distinguish the notion of service environment
from the concept of functional quality that has been suggested in the literature since the difference
between what customers expected and what they perceived was delivered could have a gap (Luk and
Layton, 2002). Thus, as Robinson (1999) concludes; “It is apparent that there is little consensus of
opinion and much disagreement about how to measure service quality”.
SERVQUAL Model for Measurement of Service Quality
Following the introduction of the SERVQUAL instrument (Parasuraman et al., 1985), many scholars
have attempted to replicate and refuted its structure and conceptualization (Carman, 1990; Cronin and
Taylor, 1992; Teas, 1993). Much of the research to date has focused on measuring service quality using
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the SERVQUAL instrument. Subsequently, research on the instrument has been widely cited in the
marketing literature and its use in industry has become quite widespread (Brown et al., 1993).
Researchers argue that the nature of services requires a distinctive approach to defining and measuring
service quality. The intangible, multifaceted nature of many services makes it harder to evaluate the
quality of a service compared to a good. Clearly, from a best value perspective, the measurement of
service quality in the service sector should take into account customer expectations of service as well as
perceptions of service. This assessment is conceptualized as a gap between what the customer expects by
way of service quality from a class of service providers and their evaluations of the performance of a
particular service provider. Service quality is presented as a multidimensional construct which in its
original formulation was made up of ten components (Parasuraman et al. (1985). These were
“reliability”, “responsiveness”, “competence”, “access”, “courtesy”, “communication”, “credibility”,
“security”, “understanding/knowing” the customer and tangibility. In their 1988 work these components
were collapsed into five dimensions, notably “reliability”, “assurance”, “tangibility”, “empathy” and
“responsiveness” (RATER). The five generic dimensions or factors and their meanings are stated as
follows (Van Iwaarden et al., 2003):
Reliability: Ability to perform the promised service dependably and accurately.
Assurance (including competence, courtesy, credibility and security): Knowledge and courtesy of
employees and their ability to inspire trust and confidence.
Tangibility: Physical facilities, equipment and appearance of personnel.
Empathy: (including access, communication, understanding the customer): Caring and individualized
attention that the firm provides to its customers.
Responsiveness: Willingness to help customers and provide prompt service.
Customer Retention
Drucker (1973), once famously claimed that the sole purpose of a business was “to create a customer”.
However, keeping the customer has come to be regarded as equally, if not more important, since Dawkins
and Reichheld (1996) reported that a 5 percent increase in customer retention generated an increase in
customer net present value of between 25 per cent and 95 per cent across a wide range of business
environments. While the precise definition and meaning of customer retention varies between industries
and firms (Aspinall et al., 2001), Harris (2003) defined customer retention as the continuous attempt to
satisfy and keep current customers actively involved in conducting business. On the other hand, other
scholars connect the formation of strong customer bonds to attraction and retention of customers (Berry
and Parasuraman, 1991; Kotler and Keller 2006)
Customer Retention Management Process
Customer retention is increasingly seen as an important managerial issue, especially in a saturated market
and/or lower growth of the number of new customers (Ahmad and Buttle, 2003). The tangible effects of
companies’ commitment to retaining customers were first published by Dawkins and Reichheld (1990)
who claimed that higher retention rate leads to higher net present value of customers. Theoretical
positions relating to customer retention management emerged from three main perspectives: a) Service
marketing, where customer retention is viewed as a way to improve customer service quality and
satisfaction b) Industrial Marketing which views customer retention as being done through the forging of
multi-level bonds comprising financial, social and structural bonds (Turnbull and Wilson, 1989); and c)
General Management where Desouza (1992) advocates retention and prevention of customers defection
through learning from former customers, analyzing complaints and service data, and identifying and
raising barriers to customers’ switching (Rosenberg and Czepiel (1984). Reichheld’s (1996) also noted
that building and sustaining customer loyalty which leads to retention require the approaches of retaining
investors, retaining employees and retaining customers, In addition, Berry and Parasuraman (1991), also
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identified three retention-building approaches through adding financial benefits, social benefits, and
structural ties (Kotler and Keller, 2006; Wunderman, 2000).
Effect of Service Quality on Customer Retention
The quality of service is considered to be a critical success factor for contemporary service companies.
Service quality's close conceptual, as well as empirical link to customer satisfaction turned it into the core
marketing instrument, making it the most researched area in services marketing (Fisk et al., 1995; Bolton
et al., 2000). In addition, the accumulated research has linked service quality positively with profitability
(Fornell, 1992). This link, however, is not straightforward (Zeithaml et al., 1996). The contribution of
service quality to profitability is generally explained by two underlying processes: firstly by the fact that it
is regarded as one of the few means for service differentiation and competitive advantage which attracts
new customers and contributes to the market share; and secondly by the view that it is an important means
for customer retention. In the long run, building and maintaining a successful long term customer
relationship as well as survival in today’s competitive marketplace demands the delivery of quality
service to customers. Customer retention then implies a long-term commitment on the part of the
customer and the firm to maintain the relationship (Wilson, 1995). Thus, improved service quality
translates into favourable behavioural intentions which in turn, lead to customer retention.
Hypotheses Tested
The alternative hypotheses tested in this study were:-
1. H1: Tangibility has a significant positive influence on customer retention.
2. H2: Reliability has a significant positive influence on customer retention.
3. H3: Responsiveness has a significant positive influence on customer retention.
4. H4: Assurance has a significant positive influence on customer retention.
5. H5: Empathy has a significant positive influence on customer retention.
Methodology
The study was limited to MTN, market leader in Ghana in terms of customer base. Also, the study was
limited to the Greater Accra Region, as MTN had most of its Customer Care Centres (15 in all) in the
region. Simple random sampling was used to select five (5) of the leading Customer Care Centres from
which 30 customers were randomly selected from each centre. Enough similarity existed amongst the
elements within the population to conclude that a few of the elements (the sample) adequately represented
the characteristics of the total population (Page and Mayer, 2000). The main instruments used for the
study were questionnaire and structured interviews. A pilot study was conducted with 10 respondents
which helped to refine the final questionnaire used for study. Some of the issues include content,
anonymity and complexity of questions. In addition, Parasuraman et al.'s (1988) SERVQUAL instrument
was chosen to measure service quality in this study since the model, according to Brown and Bond
(1995), is considered to be a reliable measure of service quality. Besides, this instrument has been widely
used in research and its psychometric properties have been examined by a number of studies (Zhao et al.,
2002). In all 150 MTN customers were surveyed with 146 valid responses (97.3% response rate). The
objective was to obtain an accurate profile on the customers’ perceptions of service quality (Cronin and
Taylor, 1994). The data collected were analyzed using SPSS. Analysis techniques employed
include: regression analysis, cross-tabulations, analysis of means and descriptive.
Results, Analysis, and discussions
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The study revealed that majority (83%, n=121) of the MTN customers are the youth falling within 18-
35years which coincide with the age-range where they are either students or just out of school seeking
employment (Table 1). In addition, most of them are either unemployed or earning below $150 per
month. This provides a huge opportunity to MTN to provide services that are affordable in order to meet
the needs of this large energetic customer base.
Table 1. Age and Monthly Income of Respondents
Item N % Monthly Income (USD $) N %
Age bracket Not employed 53 35.6
18-25yrs 77 52.7 Below 150 31 21.2
26-35yrs 45 30.8 150-399 34 23.3
36-45yrs 17 11.6 400-800 22 15.1
>46yrs 7 4.8 >800 7 4.8
Total 146 100 Total 146 100
Patronage of Services
Other than making phone calls, Fig. 1 illustrates the core services provided by MTN and the customers’
patronage. Thirty-two percent (n = 47) subscribe to the other non-core services of MTN, whiles 54% (n =
79) do not subscribe to any of the services. The low subscriber base of these services could be attributed
to the fact that most of the respondents find the services to be “expensive” or “difficult to access”. This is
obvious, giving the unemployed status to low income level of $150 per month for majority of MTN’s
subscriber base (Table 1).
Fig 1: Services Provided by MTN and patronized by Customers (N = 146)
Customer Perception of Service Quality
The views of customers concerning MTN’s services are shown in Fig. 2. Whereas 49% (n = 72) of
customers perceive MTN’s services in a positive light with comment such as: “are very good”, “make
transactions easier”, “make it easier to reach out to friends, family and associates”, “are useful”, a similar
figure of 46% (n = 67) had no comment on the services provided by MTN. Apparently they could not
comment as majority did not subscribe to the service (54%).
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Figure 2: Customer Perception of MTN’s Services (N = 146)
Customer Perception of Service Quality Dimensions
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Figure 3 depicts mean values of the variables of the SERVQUAL model used to evaluate the overall
service quality of MTN offerings. “Tangibility” was rated the highest (with mean of 4.70) and the most
important factor to customers. The major perception of customers was that “MTN’s employees are well
dressed and appear neat” but did not correspond to service quality as the variable (“reliability”) scored the
least. The high perception of “tangibility” by customers indicates that efforts being put in place by MTN
to get high visibility are paying off. The other variable that followed “tangibility” closely was “empathy”
(mean value of 4.69) with the dominant customer perception that “MTN gives customers individual
attention”. “Assurance” gave a mean score of 4.58 with a predominant reason that “Employees of MTN
have the knowledge to answer customers’ questions”. This was followed by “responsiveness” (mean
4.57) with the predominant customer perception as “Employees of MTN are always willing to help
customers”. “reliability” had the least rating (mean 4.15) because customers considered services of MTN
as not dependable, even though they believed MTN keeps its records accurately.
Figure 3. Customer Perception of Overall Service Quality
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Trends in Customer Retention
From the study, it was evident that though customers considered the services of MTN to be unreliable,
majority (58%, n = 85) were willing to stay with the company for a longer period of three years or more
(Figure 4). This was so because reliability of service was not the major concern for customers at the time
of the study. Instead, “tangibility”, “empathy”, “assurance”, and “responsiveness” were more important
and since customers perceived MTN to be engaging in them, majority stuck with the company over the
long hall. However, MTN is not attracting many new customers as is evident in Figure 4 where only 23%
(n = 34) of the customers have been with company for one year or less. This could be attributed to the
fact that many competing companies have entered the telecommunication industry and thus, giving
customers’ opportunities to make choices regarding quality of service including reliability of service. It is
also possible customers who have been with the company for longer periods may not feel motivated
enough to switch business due to possible loss of their contacts. Perhaps the introduction of the muchawaited
mobile phone number portability will solve that problem for customers and motivate to work on
providing more reliable services as a means of retaining customers.
Figure 4. Length of Customer Relationship with MTN
Influence of Service Quality on Customer Retention
The regression analysis of service quality components on customer retention is reported in the coefficients
Table, (Table 2). It can be inferred from the results that two (2) out of the five (5) service quality
dimensions are significantly and positively related to customer retention. They are “responsiveness” and
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“empathy”. The remainder, “tangibility” “reliability”, and “assurance” do not have any significant
relationship with customer retention. Thus, the alternative hypotheses that “tangibility”, “reliability”, and
“assurance” play significant positive influences on customer retention are rejected. Instead, the study
revealed that “responsiveness” and “empathy” have significant positive influence on customer retention
with “empathy” having the strongest positive influence. Hence, for MTN to achieve superior customer
retention, management must strive towards high levels of “empathy” and “responsiveness” dimensions.
Table 2: Regression Analysis of Service Quality on Customer Retention
Unstandardized Coefficients
Beta Std. Error t Sig
Constant .189 .579 .326 .745
Tangibility .130 .099 1.303 .195
Reliability .969 .097 .998 .320
Responsiveness .228 .100 2.292 .023*
Assurance .789 .123 .640 .523
Empathy .381 .123 3.106 .002*
Dependent Variable: Overall Retention Impression
Recommendations
From the study, majority of customers did not sign up for the many MTN offerings as a result of not
being aware of the services and high pricing. Management of the company should therefore pursue
awareness programmes of their various product offerings at more affordable prices through promotional
activities. Reliability” of service received the lowest perception rating from customers. Thus, prompting
the need for MTN to deliver on her promises by providing services dependably and accurately in order to
meet and exceed customer expectations for their retention. Since majority of MTN’s customers are the
youth (age 18-35 years) as depicted in Table 1 above, who have accessed the services of MTN over a
longer period (3-years and above), it is imperative that MTN focuses on satisfying this category of its
customers with affordable products, in order to remain in business. In addition, MTN should embark on
aggressive customer drive since there are not many new customers signing on to their services.
Even though customers perceive that MTN’s services are not reliable, the study further revealed that it
does not significantly affect customer retention. Instead, “empathy” and “responsiveness” are the
variables that significantly impact positively on customer retention. Hence, for MTN to be able retain its
customers, more emphasis should be placed on being responsive and empathetic in their service delivery.
Conclusion
It is clear from the study that service quality plays a significant role in retaining customers in the mobile
telecommunication and therefore demands the requisite attention from the service providers in order for
them to be in business. It further collaborates with findings from the accumulated research that service
quality is positively linked to profitability (Fornell, 1992). Service quality has been seen to be a means
for customer retention and that it could be used to build and maintain a successful long term customer
relationship for business survival in today’s competitive marketplace irrespective of the low income
levels of a company’s customer base. The SERVQUAL model served as a significant instrument for the
evaluation of the service quality of MTN; and that the service quality variable that appealed most to
MTN’s customers was “tangibility”, especially in the well-dressed appearance of MTN’s employee. This
was followed by “empathy”, “assurance” and “responsiveness”. However, “reliability” was the least
concern of its customers at the time of the study. It is therefore not surprising that though customers
considered the services of MTN to be unreliable, majority of them (58%) were willing to stay with the
company for a longer period of three years or more. However, a further study will be required to shed
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further light following mobile number portability introduction in July 2011. Instead, “tangibility”,
“empathy”, “assurance”, and “responsiveness” were more important and since customers perceived MTN
to be engaging in them, majority stuck with the company over the long haul. In addition, the high
switching cost associated with number change in Ghana, in the absence of mobile phone number
portability could be a possible reason for customers to stick with MTN. The study further revealed that
“responsiveness” and “empathy” are the variables that had significant relationships with retention of
MTN’s customers. The remaining variables, “tangibility”, “reliability”, and “assurance did not have any
significant relationship with customer retention. Thus, the alternative hypotheses that “tangibility”,
“reliability”, and “assurance” play significant positive influences on customer retention are rejected.
Instead, the study revealed that “responsiveness” and “empathy” have significant positive influence on
customer retention with “empathy” having the strongest positive influence. Thus, if MTN wants to
continue in its activities to retain customers it should invest more in providing empathetic and responsive
services. However, since customer retention alone cannot ensure business survival and growth, MTN
needs to do more to recruit new customers. Perhaps this may be possible by looking and investing in the
other service quality factors such as “tangibility”, “reliability” and “assurance” in order to remain
competitive.
Selected references*
Ahmad, R. and F. Buttle (2003), “Customer Retention Management: A Reflection of Theory and
Practice”, Journal of Marketing Intelligence and Planning, Vol.20, No. 3, pp. 149-161.
Asubonteng, P. K., J. Mccleary and J. E. Swan (1996), “SERVQUAL Revisited: A Critical Review of
Service Quality”, Journal of Services Marketing, Vol.10, No. 6, pp.62-81.
Aspinall, E., C. Nancarrow and M. Stone (2001), “The Meaning and Measurement of Customer
Retention”, Journal of Targeting Measurement and Analysis for Marketing Vol. 10 No.1, pp.79-87.
Atafori, A.K. (2006), “Ghana Achieves 20% Teledensity Target 6 years Ahead of Schedule”, www.the
statesmanonline.com(accessed Fri, Oct. 19, 2007; 10:22am)
Berry, L.L and A. Parasuraman (1991), Marketing services; competing through quality, New York; Free
press, pp.136-142
Bolton, R. N., P. K. Kannan, and M.D. Bramlett (2000), “Implications of Loyalty Program Membership
and Service Experiences for Customer Retention and Value”, Journal of the Academy of Marketing
Science, Vol. 28 No. January, pp.95-108.
Brady, M. K. and J. J. Cronin (2001), “Some New Thoughts on Conceptualizing Perceived Service
Quality: A Hierarchical Approach”, Journal of Marketing, Vol. 65 pp.34-49.
Brown, S. W. and E. U. Bond III (1995), “The Internal/External Framework and Service Quality; toward
Theory in Services Marketing”, Journal of Marketing management, February, pp. 25-39.
Brown, T. J., G. A. Churchill, J.P. Peter (1993), “Research note: Improving the Measurement of Service
Quality”, Journal of Retailing, Vol. 69, No. 1, pp.126-39.
Carman, J. M. (1990), “Consumer Perceptions of Service Quality: An Assessment of the SERVQUAL
Dimensions”, Journal of Retailing, Vol. 66, No. 1, Spring, pp. 33-5.
Cronin, J. Jr., S. A. Taylor (1992), “Measuring Service Quality: A Re-examination and Extension: A Case
of Complexity, Information Technology, and Transaction Governance Structure.”,Journal of Marketing,
Vol. 56, pp. 55-68.
Dawkins, P. M. and F. F. Reichheld (1990), Customer Retention As A Competitive Weapon, Directors
and Board Summer, pp.42-47.
DeSouza, G. (1992), “Designing a Customer Retention Plan”, Journal of Business Strategy, pp24-25.
Fisk, R.P., S.W. Brown, and M. J. Bitner (1995), Services Management Literature Overview: A Rationale
for Interdisciplinary Study", in Glynn, W.J., Barnes, J.G. (Eds), Understanding
Services Management, Wiley, Chichester, pp.1-33.
Fornell, C. (1992), “A National Customer Barometer: The Swedish Experience”, Journal of Marketing,
Vol. 56 No. January, pp.6-22.
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Kotler, P. and K.L. Keller (2006), Marketing Management”(12 ed.). Pearson Prentice Hall.
NCA (2010) National Telecommunication Survey Report, 4 th Quarterly review, NCA, Ghana
Lewis, B. R. and V. W. Mitchell (1990), “Defining and Measuring the Quality of CustomerService”,
Marketing Intelligence & Planning, Vol. 8, No. 6, pp. 11-17.
Parasuraman, A., V. A. Zeithaml, L.L. Berry (1988), “SERVQUAL: A Multiple Item Scale for Measuring
Customer Perceptions of Service Quality”, Journal of Retailing, Vol. 64 pp.12-40.
*For Full references please contact us on email: woansah@gmail.com
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Comparative Study of Perceptions of Relationship Marketing in the Nigerian Food and Beverages
Industry
Abstract
Bolajoko Nkemdinim Dixon-Ogbechi, dixonogbechi@yahoo.com
University of Lagos. Lagos, Nigeria
Elizabeth M. Haran
Salem State University, Salem MA, USA
Joseph Aiyeku
Salem State University, Salem MA, USA
This study investigates the differences among customers and companies when it comes to relationship marketing. It
compares their ranking of the importance of the components of relationship marketing and it identifies where there
are significant differences in the perceived use and the value of these tools among the three groups: multinational
and indigenous marketers and the customers they serve, via ANOVA. Post hoc analysis identifies subgroups with
similar values. Comparisons are made based on Likert scale ratings as well as on the weightings obtained from the
Analytic Hierarchy process. The sampling frame was all indigenous companies and multinationals in the Nigerian
food and beverages industry based in Lagos, Nigeria and also of customers of the products of the selected
companies, as listed by the 2007 Nigerian Business Directory. Four hundred customer questionnaires were
administered, 94% were returned; 300 questionnaires were administered to multinational employees, 89%were
returned; 300 questionnaires were administered to employees at indigenous companies, 88% were returned.
Introduction
Organizations operate in a very dynamic marketing environment as a result of rapid changes in
technology, consumer tastes, economic and social forces, not to mention the global marketplace. To
survive these, all business organizations must adapt to the changing business environment, and
continuously design and improve marketing strategies. Relationship marketing is one of such
contemporary marketing strategies employed in both developed and developing economies.
Relationship marketing includes all the marketing activities designed to establish, develop, maintain, and
sustain a successful relational transaction with a view to gaining the maximal value of customers who can
contribute to long-term organizational profitability. Adopting relationship marketing effectively tends to
give an organization distinctive or comparative advantage over competitors because it will enable them to
communicate effectively with the customers; know what they need and want; why they continue to
patronize the organization’s products and services; and the strategies to use to manage such relationships
effectively. When long-term relationships exist between organizations and customers, the distance
between them becomes shorter and the organization benefits from repeat purchase and the goodwill of the
customer (Jackson 1985; Groonroos 1990; Tanner Jr. 2006).
The relationship marketing strategy is relevant to the Nigerian context because the strategy emphasizes
enduring relationships, and the Nigerian culture promotes enduring relationships. Culture affects what
Nigerians do: Nigeria is a tradition driven society (Achumba and Osuagwu 1994, Achumba 1996). The
Nigerian marketer, like any other marketer, has to devote time to build relationships with the customers in
order to gain repeat patronage (Brondmo 2002).
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Prior studies have found that in the contemporary Nigerian marketing environment, customers prefer
marketers who can deliver coordinated long-lasting satisfaction through the products and services they
offer; and multinationals may have been able to do this in Nigeria (Osuagwu 2004). Osuagwu also found,
however, that relationship marketing strategy was less practiced than the traditional marketing mix
strategies of product, pricing, and promotion by Nigerian companies. The Nigerian food and beverages
market plays an important role in the Nigerian marketplace. It has witnessed the influx of different types
of products ranging from well-packaged standardized local beverages to international beverages. The
population of over 150 million constitutes the single largest market in Africa. Nigeria is also strategically
located so that companies find it convenient to expand their markets to neighboring countries: Benin,
Cameroon, Chad, Congo, Ghana, Mali and Niger, for example (Federal Republic 2007).
It is for these reasons Nigeria was chosen as the focus for this study on relationship marketing, which is
regarded as one of the most effective tools in modern marketing. Yet there have been few studies to
compare how its components are valued from multiple perspectives: from the customer, from the
indigenous company and from the multinational company. Furthermore when comparisons are made
among the attitudes of various groups about the components of relationship marketing, these comparisons
are typically based on opinions inventories, primarily Likert scales. This study investigates the
differences among groups and also investigates the potential differences among methods of assessment:
e.g. differences based on Likert based scales and differences based on Analytic Hierarchical process
weightings.
Objectives
This study aims to:
i. Compare the relative ranking of the components of relationship marketing, as prioritized by the
customers, by the multinationals and by the indigenous companies;
ii. Determine if there are any significant differences among the groups on their opinions of use of
trust, communication, relationship commitment, internal marketing or support and
communication;
iii. Determine if there are any significant differences among the groups on their AHP weightings of
trust, communication, relationship commitment, internal marketing or support and
communication;
iv. Identify subgroups of consensus of opinions or weightings.
Literature Review
It is clear that organizations need to establish and maintain enduring relationships with their customers
this can be achieved through relationship marketing. Basically, the relationship marketing concept states
that organizations should maintain an enduring relationship with their customers. The purpose of
relationship marketing, therefore, is to enhance marketing productivity by achieving efficiency and
effectiveness, and enhancing relationships with customers and other partners, at a profit (Gronroos, 1990;
Sheth & Sisodia, 1995). Empirical studies in relationship marketing literature reveal various relationship
marketing variables. Those that are found to be more prominent are trust, relationship commitment,
communication, internal marketing and support and cooperation (Doney & Canon, 1997; Gabbarino &
Johnson, 1999; Simpson and Mato, 1997; Morgan & Hunt 1994; Sirdeshmukh, Singh, & Sabool, 2002;
Yeh, 2005). Trust is the reliability of an organization’s members and beliefs in their willingness to
perform their duties. Relationship commitment is the psychological attachment of customers to an
organization. Internal Marketing is the application of marketing techniques to the internal market i.e.
employees; it is the ongoing process whereby an organization aligns, motivates and empowers employees
at all functions and levels to consistently deliver a positive customer experience that helps achieve
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business objectives. Communication is the exchange of meaningful and timely information between firms
or between firms and their customers. Support and Cooperation comprise all mutually beneficial activities
embarked upon by both the organization and its customers (Lancastre & Lages, 2004; Malewicki, 2005;
Mohr, Fisher, & Nevin, 1996; Sorce, 2002; Stershic, 2006; Yeh 2005). Relationship marketing as a
strategy, leads to profitability if intelligently practiced (Groonroos, 1994a, 1994b).
Several scholars have conducted studies on customer perceptions. For instance, Vogel, Evanschitzky and
Ramaseshan (2008) investigated the effects of customer perceptions of key marketing actions on
customer attitudes and actual customer behavior as reflected by future sales. Verhoef (2003) in his study
linked customer relationship perceptions and relationship marketing instruments to customer behavior.
Rust, Zeithaml, and Lemon (2000) developed a model that related a company’s perceived marketing
strategy and marketing investments to the customers’ reactions to these investments and to the economic
output generated by the related customer behavior. Also, a study by Chao (2008) revealed that when retail
customers have a positive perception of the wholesaler’s personnel performance and the store’s physical
appearance, they are likely to visit the wholesaler more frequently.
Dixon-Ogbechi, Haran & Aiyeku have studied the characteristics and perceptions of indigenous (2008)
and multinational companies (2009) and their customers (2009) in this regard. They have identified key
factors for each group, and have used the Analytic Hierarchy process to identify the relative weighting of
each group separately, but it is important to identify whether the perceptions of use and the weightings of
the factors coincide and to compare the similarities and differences.
Hypotheses
H1: There will be no significant difference in ranking of the components of relationship marketing among
the three groups: customers; multinational companies; indigenous companies.
H2a-f: There will be significant differences among the groups on their opinions of use of trust,
communication, relationship commitment, internal marketing and support and communication.
Companies’ opinions will be similar, but significantly different from the customers’ opinions.
H3a-f: There will be significant differences among the groups on their AHP weightings of trust,
communication, relationship commitment, internal marketing and support and communication.
Companies’ will be similar, but significantly different from the customers.
Methodology
To achieve these goals, survey research methods were applied. The population of umbrella study was the
indigenous and multinationals companies in the Nigerian food and beverages industry based in Lagos and
also of customers of the products of these companies. Questionnaires were developed to examine the
present use and relative importance of the relationship marketing concepts in the food and beverage
industry in Nigeria.
Sample: The snowball sampling technique was used to select a sample of 400 customers of the food and
beverage companies in Lagos metropolis and copies of the research instrument were administered to
them, 376 were returned. The sampling frame of the indigenous companies to be studied was made up of
the employees in the marketing or sales units of the 55 companies selected. Three hundred questionnaires
were administered, 266 were completed for a return rate of 88.7%. The sampling frame of the
multinationals companies to be studied was made up of the employees in the marketing or sales units of
the listed companies in the food and beverages industry. There were 12 multinational companies listed,
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with a total of 403 employees in these units. Three hundred questionnaires were administered, 268 were
completed for a return rate of 89.3%.
Administration Methodology: Five research assistants were employed to administer the instruments. The
data was collected for five months, October 2007 to March 2008. in five different locations in Lagos
namely: Lagos Island (Idumota, Apongbon and Victoria Island), Lagos mainland I (Yaba and Mushin);
Lagos Mainland II (Ilupeju, Oshodi and Mile 2); Lagos Mainland III (Ikorodu Road, Ikeja and Ojota);
Lagos Mainland IV (Bariga, Gbagada and Oworonshoki).
Instrument Development: To develop a valid instrument that addressed the research questions and
hypotheses, the researcher identified the five relationship marketing variables from a literature search and
developed measurement scales to measure each variable based on constructs obtained from the literature
review. Thus, questions for this study were generated by making use of variables identified from previous
empirical studies that can be used to measure the five relationship marketing variables, namely: Trust,
Communication, Relationship Commitment, Internal Marketing and Support and Cooperation, as well as
questions to identify the respondents’ characteristics or demographics, buyer information, and familiarity
with relationship marketing and the Analytic Hierarchy Process (AHP). The instrument was pilot tested
twice, once with marketing experts and then retested on respondents from each of the identified groups.
The instruments were validated through the pilot studies by using experts and a sample of respondents for
content validity (Hahn et al. 2000). They were tested for reliability using Cronbach’s alpha (Dixon 2008)
Computer Programs/Analyses: Data was entered, and descriptive analyses performed in SPSS. The
Expert Choice software (EC8) was used to analyze the relative importance scaled statements (Goh 1997;
Liberatore and Nydick 2003; Liedtka 2005; Timor and Tuzuner 2006).
Results
There were no differences found in the prioritizing of the components of relationship marketing, as
defined in this study, among the groups: trust, relationship commitment, communication, internal
marketing, and support and cooperation. Rankings of the views of use by the indigenous and the
multinational companies did differ slightly but the Spearman rank correlation analysis did not show them
to be significantly different, (p>.05). This was as expected, hypothesis 1 was supported.
The results of the analysis of variance on the perceived use of the relationship marketing strategies are
presented in Table 1. There were significant differences (all significant differences were at p

Proceedings of the 12th Annual Conference © 2011 IAABD
communication and with the customers on the lowest end in internal marketing and support and
communication. Customers rated use of the strategies by the companies they deal with at the lower end
for all strategies.
Hypothesis 2 was supported in the general sense, there were significant differences among the groups on
views of use of all strategies, however the pairing that were found for internal marketing and support and
communication were opposite of what was expected. It was expected that the companies would form one
subset and they would differ significantly from the customers. This was true for trust and relationships
marketing but not for internal marketing and support and cooperation; where the multinationals and the
customers perceived that these strategies were not used to any great extent but the indigenous companies
believed they were being used significantly more. The results for communication showed three
significantly different subgroups: indigenous, multinationals, customers with extent of use in that order,
highest to lowest.
The results of the analysis of variance on the AHP weights are presented in Table 2. There were
significant differences (all significant differences were at p.05)
found among the groups on their weighting of communication or support and cooperation. Post hoc
analysis found the customers to be significantly different from the companies, putting a significantly
lower value on trust. The companies did not differ significantly from each other. The same groupings
held true for the concept of relationship commitment, but this time it was the customers who had a
significantly higher weighting. For the concept of internal marketing, the customers were significantly
lower in their weightings than the companies.
Hypothesis 3 was supported, for the most part. There were significant differences among the groups on
three of the five concepts, although not on all of them as expected. The follow up analyses did show that
the companies, whether multinational or indigenous, were similar in their valuations of all concepts; and
that the customers differed significantly from them in their weighting of trust (lower), relationship
commitment (higher) and internal marketing (lower.)
Discussion
While the overall rankings of the relationship marketing priorities, and the use to which they are put, did
not differ significantly, there are many differences among the groups when analyzed in a more detailed
format. While all groups placed trust first and relationship commitment second in relative weightings, the
customers were significantly different from the companies in that they placed a much lower weight on
trust and a higher weight on relationship commitment, making the two almost equal in their minds in
terms of priorities. Perhaps customers intertwine the concepts of trust and relationship as well as place
them almost equally in value. The most interesting differences were found when the perceptions of what
is actually being used were compared. And there were differences on each of the concepts. Companies
thought they were using trust and relationship commitment to a significantly greater extent than the
customers. Given how important all three groups rated this concept it would behoove the companies to
gather feedback from their customers on a regular basis so as to know how they are faring in this regard.
Table 1: Comparisons of Use of Relationship Marketing Strategies
Sum of
Squares Df Mean Square F Sig.
Trust Between Groups 248.836 2 124.418 106.904 .000
Within Groups 1016.017 873 1.164
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Commitment
Total 1264.852 875
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Edited by Emmanuel Obuah
Between Groups 352.372 2 176.186 172.586 .000
Within Groups 893.250 875 1.021
Total 1245.622 877
Communication Between Groups 199.320 2 99.660 94.426 .000
Within Groups 910.837 863 1.055
Total 1110.157 865
Internal Marketing Between Groups 90.720 2 45.360 35.321 .000
Within Groups 1082.597 843 1.284
Total 1173.317 845
Support & Cooperation Between Groups 17.768 2 8.884 10.239 .000
Within Groups 745.370 859 .868
Total 763.139 861
Table 2 : Comparison of AHP Weights by Group
Sum of
Squares Df Mean Square F Sig.
Trust Between Groups .460 2 .230 18.524 .000
Relationship
Commitment
Within Groups 9.771 787 .012
Total 10.231 789
Between Groups .758 2 .379 33.597 .000
Within Groups 8.881 787 .011
Total 9.639 789
Communication Between Groups .017 2 .008 2.022 .133
Within Groups 3.240 787 .004
Total 3.257 789
Internal Marketing Between Groups .037 2 .018 10.608 .000
Within Groups 1.360 787 .002
Total 1.396 789
Support & Cooperation Between Groups .004 2 .002 2.562 .078
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Profiling the environmental sustainability-conscious (ESC) consumers in sub-Saharan Africa:
Proposing the S-P-P Approach.
Abstract
Steve Ukenna, stephenukenna@yahoo.com
Department of Business Management, Godfrey Okoye University, Enugu, Nigeria.
Anayo D. Nkamnebe, nkamnebe@yahoo.com
Department of Marketing, Nnamdi Azikiwe University, Awka, Nigeria
This conceptual paper explores the nature of the various measures used for profiling the emerging
environmental sustainability conscious (ESC) consumer segment; and to posit a measure that will be
most appropriate for profiling this segment in the sub-Saharan African context. Using the 5S model,
which includes segment size, segment accessibility, segment simplicity, and segment strategic
effectiveness, for assessing market segmentation approaches, the study critiqued the common measures,
which are singly adopted for profiling the ESC segment. Contradictory views exist among scholars as to
which approach is best for profiling the ESC consumer; the results on the common correlates used by
scholars under each approach are also contradictory. Few consistent results exist for each correlate
under each approach. Accordingly, to mitigate this shortcoming, this paper posits the S-P-P Model,
which is an integrated for profiling the ESC consumer segment. Research limitations/implication: This
review is not exhaustive in that it did not review methodological issues that underpin profiling
approaches. Originality/value: The S-P-P model, which this paper posits, offers a comprehensive and
robust approach for an individual intending to profile the ESC segment.
Introduction
There is a widespread argument that Africans, and indeed, the sub-Saharan Africans (SSA) (people of
typical developing nations) cannot be sustainability-driven in their consumption and purchase decisions
because they are beset with poverty and hunger. Hence the issue of environmentally driven consumption
and purchase behaviour is better discussed in a developed country context, little wonder most research in
this area are dominated by European and American studies. The present author disagrees with the
perspective that people in the SSA cannot be sustainability-driven in their consumption and purchase
decision. In the era of globalization, environmental sustainability issues are pervasive much as it affects
everybody (the rich and the poor).
Contrary to the argument that developing nations cannot (or slow) be sustainability-driven in their
consumption and purchase decision, according to Sustainable Business.Com news of a study released by
marketing information group TNS, it was reported in 2008 that people in developing nations are more
environmentally conscious than their counterparts in rich nations. It was reported that “survey responses
from the developed nations (the United States, the United Kingdom, France, Japan, Germany, Hong Kong
and Korea) were invariably clustered at the least environmentally conscious and responsible end of the
spectrum. Developing nations (Mexico, Thailand, Brazil and Malaysia) showed the highest concern for
the environment and greatest willingness to take action and seek out 'greener' products.” Though no
African country was surveyed by the marketing information group, it can be inferred that result could be
promising if a survey a few African country is conducted.
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Agreeably, globalization has continued to give birth to the green market segment world over. The degree
of sustainability conscious behaviour of an American may not be same with that of an African. Hence,
contrary to earlier argument, there are Africans who are sustainability conscious; but what is lacking is a
study to identify and profile this emerging market segment. Consequently, for companies operating in
Africa and for sustainability driven companies to tap into this segment, African scholars and researchers
have to start carrying out country/context-specific or, better still, a more localized research that will
identify and unearth the profile of this segment. The question that will naturally follow is: what measure
should be used to profile this emerging market segment in the SSA context, considering the challenges of
poverty and hunger that beset SSA in the era of globalization?
Since the 1970s to date, several studies abound in the sustainability marketing literature on profiling this
important market segment (eg Schlegelmilch, Bohlen and Diamantopoulos, 1996; Straughan and Roberts,
1999; Laroche, Bergeron, and Barbaro-Forleo, 2001; Diamantopoulos, Schlegelmilch, and Sinkovics,
2003; Jain and Kaur, 2006; Hartono, 2008) and different measures were adopted; hence leading to
contradictory results. Given this contradiction, and considering the need for scholars to kick-start
researches in this area, what measure should be used in a typical sub-Saharan African study?
The contradictions that persist in literature regarding the approach to adopt in profiling the ESC segment
bring us to the tripod objective of this conceptual paper: (1)to explore the nature of the various measures
used for profiling the ESC consumer; (2) to posit an approach that will be most appropriate in profiling
the ESC consumer segment in a typical SSA country. Thus, this review is guided by the following
question: what measure/approach is most appropriate for profiling this emerging market segment in the
SSA? We proceed to explore the various approaches employed in the literature for profiling the ESC
consumer segment, and conclude our discussion by putting forward some recommendations.
Environmental Sustainability-Conscious (ESC) Consumer Profiling Approaches
The Use of Demographic Variables
Early studies on using demographic variables to identify environmentally friendly consumers was traced
back to early 1970s by Laroche, Bergeron, and Barbaro-Forleo (2001) to the works of Berkowitz and
Lutherman (1968) as well as Anderson and Cunningham (1972). According to Straughan and Roberts
(1999) a number of past studies have made attempts to identify demographic variables that correlate with
environmental sustainability conscious domains (e.g. Roberts, 1995; 1996b; Roberts and Bacon, 1997;
Roper, 1990; 1992). Antil (1981) documented 16 studies that were carried out between 1971 to 1981; all
studies used demographic variables for profiling the green segment. In their study, Diamatopoulos et. al
(2003) reported 133 studies that were executed between 1966 to 1998 using only demographic variables
to profile the environmental conscious consumers. Of their study, 88 were executed in the United States
of America; 12 in the United Kingdom; 12 in Germany; 3 in Australia; 3 in Israel; 4 in Denmark; 2 in
France; 3 in Canada; 4 in Sweden; and 2 in Netherlands. Since the study of Diamatopoulos and his
associates, more country-specific studies have been carried out. For instance, a study has been executed in
India (Jain and Kaur, 2006), in Lithuania (Banyte, Brazioniene, and Gadeikiene, 2010), all using
demographic variables.
Although most findings about the impact of consumers’ demographic characteristics on their
environmentally conscious behaviour domains are contradictory (Roberts, 1990), it is clear that they exert
a significant influence. Straughan and Roberts (1999) sustained that such variables, if significant, offer
easy and efficient ways for marketers to segment the market and capitalize on green attitudes and
behaviour. Accordingly, some authors have supported the use of demographic variables as the beginning
point of any serious attempt to profile the sustainability conscious segment (for example, Roberts, 1990;
Ottman & Reilly, 1998; Straughan & Roberts, 1999; Getzner & Grabner-Kräuter, 2004). Supporting this
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perspective, Banyte et. al (2010:375) maintained that the “conception of green consumer is best reflected
by his characteristics, it is purposeful to analyse the profile of a green consumer using the demographic
approach.” Although it is not enough to use demographic characteristics to determine the profile of green
consumers, demographics undoubtedly provide certain set of common factors that gives useful
information when segmenting consumers (D‘Souza, Taghian, Lamb & Peretaitko, 2007). There is little
doubt that demographic variables present the easiest way to discriminate between those consumers who
share a concern for the environment, and those who do not.
To profile this segment in the SSA context, demographic measures alone cannot provide a better insight.
Thus given that culture and personality play key roles in purchase and consumption decision in the
African context, it will thoughtful that any approach directed towards profiling this segment in SSA will
have to consider these germane factors.
The Use of Socio-Demographic Variables
In addition to demographic variables mentioned above, some studies have profiled the environmental
sustainability consumer using socio-demographic variables (eg Harry et al, 1969; Devall, 1970; Tognacci
et al, 1972; Ostman and Parker, 1987) wherein the social class element is combined with demographics.
The argument in favour of the socio-demographic variables is that demographic variables alone cannot
provide penetrating insight on the profile of this segment; hence the social class element is incorporated
with other demographics.
In addition to the study of Diamantopolous et al (2003), there are twenty-two studies that have profiled
environmental sustainability concern using the social class correlate. Five of these studies have
investigated the impact of social class on environmental knowledge domain (Diamantopoulos et al, 2003).
While Ostman and Parker (1987) and Meffert and Bruhn (1996) found no significant association,
Arbuthnot and Lingg (1975) and Lyons and Breakwell (1994) reported positive relationships
(Diamantopoulos et al, 2003).
Eleven of the twenty-two studies have explored the association between social class and environmental
attitudes found significant positive relationships (Diamantopoulos et al, 2003). Moreover, the majority of
observed patterns for studies failing to establish significant linkages have been in the positive direction
(despite being non-significant). To explain the associations between social class and attitudes, it has been
agreed that “(t)hose persons most concerned about environmental issues appear to reflect the same
configuration of social and psychological attributes which have traditionally characterized individuals
active in civic, service, and political organisations”(Tognacci et al., 1972: 85 in Diamantopoulos et al,
2003). It has also been proposed that concerns about environmental quality “may primarily embody
‘status group’ concerns”(Buttel and Flinn, 1978:436 in Diamantopoulos et al, 2003), “which are likely
drawn from leisure interests associated with the environment. The assumption of the latter argument
appears to be that the higher social classes are more likely to witness the effects of degradation of the
natural environment through their outdoor leisure pursuits” (Diamantopoulos et al, 2003: 471).
With respect to sustainability behaviour domain, most studies reported a positive association between
social class and green behaviour (e.g. Lyons and Breakwell, 1994; Research, 2000 etc.). The explanation
put forward by Diamantopoulos et al for this result is that higher social classes undertake higher levels of
green behavior due to the very nature of the involvement required. Diamantopoulos et al (2003) has
questioned the efficacy of the socio-demographic approach on grounds that it offers limited utility for
profiling environmentally conscious consumers in the UK, arguing that environmental concern is
becoming the socially accepted norm within the Western culture. Though true for the UK, Diamantopous
et al’s argument may not apply in the sub-African context in that environmental concern has not reached
the level where it will be considered as a socially accepted norm.
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The use of psychographic/personality/ cultural variables
Psychographic variables are any attributes relating to personality, values, attitudes, interests, or lifestyles.
They are also called IAO variables (for Interests, Activities, and Opinions). Psychographics can also be
seen as an equivalent of the concept of "culture". Thus psychographics is the study of personality, values,
attitudes, interests, and lifestyles.
Previous research has suggested that demographics alone have not proven to be adequate descriptors of
ESC consumers (Anderson and Cunningham 1972; Brooker 1976; Kinnear, Taylor, and Ahmed 1974;
Webster 1975; Diamantopoulos et al, 2003). Not only have the results of demographic analyses produced
inconsistent results, but the relationships when found have been in general very weak (Antil, 1984).
Accordingly, psychographic variables have been suggested in addition to demographic variables.
Supporting this approach, Antil (1984:24) argued: “because few lifestyle data are currently available
describing the socially responsible consumer, a psychographic analysis was viewed as a promising
framework to provide a more in-depth and life-like view of this consumer segment.”
A number of studies have attempted to identify psychographic correlates of green attitudes and
behaviours (e.g. Antil, 1984; Hine and Gifford, 1991; Roberts, 1996; Stern et al, 1993; Straughan and
Roberts, 1999; Banyte et al, 2010; etc.). Though these studies have not investigated psychographic
variables in as exhaustive a manner as the research into demographics, they do provide some interesting
insights into the nature of the green consumer (Straughan and Roberts, 1999). The main point put
forward for the use of psychographic approach is that “peculiarities of consumer behaviour (attitude,
knowledge, values) are closely related to their psychographic attributes (personal qualities, lifestyle,
social class, etc.), which has an impact on their motives for buying an eco-friendly product and the like”
(Banyte et al, 2010:377). Commonly examined psychographic correlates that are linked to the three
environmental domains in the literature are: altruism, perceived consumer effectiveness, political
orientation (conservatism and liberalism), individualism, collectivism, security and fun/enjoyment.
Interestingly, conflict results are also recorded. The conflicting results are expected due to the different
context, sample, and measure employed. Due to the fact that culture drives behaviour in the SSA context,
cultural and psychographic measures should dominate instruments of studies that seek to profile this
segment.
The use of pro-environmental purchase behaviour measure.
After highlighting the weakness of the socio-demographic and psychographic or personality approaches,
Schlegelmilch, Bohlen, and Diamantopolous (1996) proposed the pro-environmental purchase behaviour
segmentation approach, through an analysis of the linkages between proenvironmental purchase
behaviour and measures of environmental consciousness. They argued that their approach rests on the
rationale that consumers have traditionally been shown to express their environmental consciousness
through the products they purchase. In the first wave of post-war enthusiasm for environmental protection
during the late 1960s and early 1970s, being environmentally-concerned and being consumerist were seen
as mutually exclusive. During this period, it was thought that the only way to cut down on pollution and
solve the world’s environmental problems, particularly natural resource depletion, was to cut down on
consumption (Schlegelmilch et al, 1996). Throughout the 1970s and 1980s, they argued that “green issues
were not at the forefront of consumer concerns” (Schlegelmilch et al, 1996: 47).
However, in recent years when the environment surged in importance, rather than cut down their
consumption of products, they argued that consumers began to seek out environmentally-friendly
alternatives in preference to their usual product purchases. Hence the “green” consumer was born. Their
argument were supported with a number of studies. “For example, in July 1989, a MORI (Market and
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Opinion Research International) poll revealed that the proportion of consumers selecting products on the
basis of “environmental performance” had increased from 19 per cent to 42 per cent in less than a year
(Elkington, 1989) and, by late 1992, a Nielsen study revealed that four out of five consumers were
expressing their opinions about the environment through their purchasing behaviour.” On the strength of
these studies, they argued: “It is likely, therefore, that consumers who exhibit high levels of
environmental consciousness make more green purchasing decisions than those exhibiting low levels”
(Schlegelmilch et al, 1996: 47). Hence they concluded that measures of environmental consciousness will
be more closely related to purchasing habits than either socio-demographics or personality variables.They
developed eight variable items for pro-environmental purchasing behaviour and then linked them to three
domains of environmental consciousness construct. Their study indicated that consumers’ overall
environmental consciousness has a positive impact on pro-environmental purchasing behaviour.
Which profiling approach is most suitable for sub-Saharan Africa?
It has long been held that the “ideal” approach to segmenting the market for any product is the approach
that optimizes these five constructs (i.e the 5S Model) – segment size; segment accessibility;
simplicity/ease of identification; strategic/operational effectiveness; and segment stability (Straughan and
Roberts, 1999). The current state of ecological consumer profiling measures will be examined in light of
these criteria. Segment size: At this point in its development, few doubt that the overall market for green
goods and services is large enough for, if properly managed, a firm to operate profitably (Roberts, 1995).
As such, the size of green market segments is no longer in question, irrespective of the segmentation
approach used. But it can be argued that the size of this segment in the sub-saharan African segment is an
issue as this segment is just emerging. Segment accessibility: The accessibility of these segments, in
terms of both logistics and communication, is not in doubt. For example, Straughan and Roberts
(1999:562) reported that “firms have clearly shown the ability to both communicate with ecologically
conscious consumers and to reach them effectively with appropriate goods and services.” As such, the
usefulness of the various approaches to isolating ecologically conscious consumers from the mass market
boils down to questions relating to ease of identification, usefulness in strategic and operational planning,
and segment stability.
Simplicity or Ease of identification: as is often the case in marketing, the simplest segments to identify are
based on demographic profiling. Perhaps that explains the relatively high volume of research done on
demographic segmentation of ESC consumers. There is little doubt that demographic variables present the
easiest way to discriminate between those consumers who share a concern for the environment, and those
who do not. However, this ease cannot be said to be true for other approaches such as psychographic and
pro-environmental purchase correlates. The real question that must be asked is this. How effective is
demographic profiling for sustainability marketers?
Strategic/operational effectiveness: Whatever advantages demographic profiling of green consumers
offers over psychographic profiling in terms of ease of use are more than offset by the relative strength of
the associations between psychographic variables and ESC consumption. The strategic utility of sociodemographics
has been questioned by a number of a number of authors (eg Schlegelmilch et al, 1996;
Diamantopoulos, et al, 2003) that it lacks sufficient explanatory power of the ESC behaviour. The limited
utility of socio-demographics may be explained by the fact that the environment is no longer a marginal
issue; indeed, “environmental concern is becoming the socially accepted norm” (Schwepker and
Cornwell, 1991:85). In other words, psychographic variables provide a stronger and therefore more useful
profile of green consumption (Straughan and Roberts, 1999; Diamantopoulos et al, 2003) yet
psychographic approach when used alone cannot provide better insight.
Segment stability: Finally, when one considers the stability of resulting segments, there are serious
questions raised regarding demographic profiling of green consumption. As discussed previously, the
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results of the demographic research range from equivocal to contradictory. Several explanations exist for
these disparate findings. First, the various studies operationalize green consumption in a wide variety of
ways. For example, the “dependent” variables used across these studies range from general attitude
measures to incident analyses of specific types of environmentally friendly behavior (e.g. household
recycling). As such, study-to-study comparisons may be expected to result in seemingly contradictory
findings. An alternative explanation for these contradictory findings, however, relates to the maturation of
the sustainability marketing phenomena.
The controversy regarding the appropriate approach that meets the 5S Model criteria calls for a more
sophisticated approach that integrates all the existing approaches and at the same time meets the 5S
criteria when profiling this segment in the SSA. Hence we posit the S-P-P approach as the most suitable
approach for profiling the ESC consumers. The S-P-P approach is an integrated, holistic, mixed, and
complex approach for profiling the ESC consumers. It integrates correlates of the socio-demographic
approach, psychographic approach, and pro-environmental purchase approach. The proposed S-P-P
approach is depicted by the schema in Figure1.
With the S-P-P approach, a measuring scale that adequately reflects the various dimensions (eg
psychographic measures) and sub-dimensions (eg values) of the approach is necessary. Nonetheless, the
sub-dimensions of the schema are not watertight in that a researcher may decide to contract the subdimensions
under any dimension, subject to the peculiarities of the respondents and context where the
research is being executed. In other words, to effectively profile the ESC consumer in the SSA, the three
dimension of the schema is compulsory; that is, the width of the schema is necessary but the depth could
vary from context to context and from research to research.
As a way to enhance the validity and reliability of research outcomes, the S-P-P approach was
conceptualized following the recommendation of researchers instead of using single behavioral measures
of attitude, researchers should use multiple measures. For instance, Straughan and Roberts (1999)
suggested that a mixed model incorporating a range of both demographics and psychographics should be
preferred to the traditional demographic profiling methods in examining environmental concern as a
correlate of environmental behaviour because psychographic variables provide stronger profiles of green
consumption. Semilarly, Roozen and De Pelsmacker (1998) recommended that conjoint analysis should
be used to test attitudes and behaviour because this method can provide information on where consumers
stand on the perceived “environmentally friendliness” of specific behaviour. It is on the strength of these
recommendations that the present author conceptualizes the S-P-P approach.
Summary, Conclusion and Implication
Summary
In this review, a number of findings were made. First, this review showed that many authors have
deconstructed the ESC consumer behaviour construct using three domains – knowledge, attitude, and
behaviour. However, environmental ethics and attitude-behaviour domains are not commonly used in the
literature to deconstruct the ESC construct. Secondly, contradictory perspectives exist in the literature
regarding the approach that is most suitable for profiling the ESC consumer. Some scholars have opined
that psychographic measures are most suitable over socio-demographic measures for profiling the ESC
consumer (eg Diamantopoulos et al, 2003).
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Socio – Demographic
correlates
� Age
� Gender
� Education
� Marital Status
� Number of Children
� Family Size
� Social Class
� Income / Purchasing
power
� Geographical location
/ place of residence
� Occupation
Source: Author’s own conceptualization
Figure 1: The Composite Approach for Profiling ESC Consumer
Psychographic Correlates
� Altruism
� PCE
� Political Orientation
(Conservation or liberalism)
� Values
� Personality
- Locus of control
- Alienation
- Conservatism
- Dogmatism
� Race / Culture
� Lifestyle
ENVIRONMENTAL CONCERN
Knowledge Attitude Behaviour
Profiling the ESC consumer
Pro – Environmental Purchase
Decision Correlates
� General purchase
behavior scale.
Some have argued in favour of demographic measures as being suitable as starting point and for
providing initial insight into the ESC consumer (eg Laroche et al, 2001). Some authors have posited proenvironmental
purchase decision approach, arguing that both socio-demographic measures and
psychographic measures offer limited utility in profiling the ESC consumer (eg Schlegelmilch et al,
1996). To Schlegelmilch and associates, the purchase habit of the consumer provides better insights.
Taken collectively, the contradictory perspectives have made inconclusive the argument as to which
approach is most suitable for profiling the ESC consumer. Thirdly, akin to the second point above, the
results on the common correlates (say, Age) used by scholars under each approach (say, sociodemographic)
is contradictory. Few common results exist for each correlate. This is partly explained by
the time, context, methodology adopted, as well as the evolving nature of the ESC consumer. Little
wonder, country-specific study on profiling the ESC segment has been suggested (eg Hartono, 2008).
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Fourth, evidence from our evaluation of the various approaches for profiling the ESC consumer shows
that none of the existing approaches survived the 5S evaluation criteria. Accordingly, to mitigate this
shortcoming, this review posit the S-P-P Model, which is an integrated and robust approach for profiling
the ESC consumer segment.
Implication and limitation.
Consequent upon the shortcomings of previous approaches for profiling the ESC consumer, this paper
posits the S-P-P approach. Studies to be executed on country-specific bases (especially the countries in
SSA) should be executed drawing insight from the S-P-P approach. Though not yet tested, it is envisaged
that the S-P-P model will provide robust, detailed, constructive, and penetrating insight about the ESC
consumer. This paper provides a very useful insight about the ESC segment generally, thus providing
ESC companies with background information on how best to target the ESC consumer segment; while
encouraging context/country-specific study that employs the S-P-P approach to unearth the profile of this
consumer segment. This review is not exhaustive in that it did not review methodological issues (such as
sampling, measurement instrument, and scale development) that underpin each of profiling approaches.
References
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Arbuthnot, J. and Lingg, S. (1975), A comparison of French and American environmental behaviours,
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Antil, J. H. (1984). Socially responsible consumers: Profile and implications for public policy.
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Banyte, J., Brazioniene, L. & Gadeikiene, A. (2010). Investigation of Green Consumer Profile: A case
of Lithuanian market of eco-friendly food products. Economics and Management, 1(15), 374-383
Belz, F. & Peatie, K. (2010). Sustainability Marketing. London: John Wiley & Sons Ltd.
Berkowitz, L. and Lutterman, K.G. (1968), The traditional socially responsible personality, Public
Opinion Quarterly, Vol. 32, pp. 169-85.
Brooker, G. (1976), The self-actualizing socially conscious consumer'', Journal of Consumer
Research, 3(4), 107-112.
Devall, W.B. (1970). Conservation: An upper-middle class social movement, a replication. Journal of
Leisure Research, 3, 123-6.
Diamantopoulos, A., Schlegelmilch, B. B., and Sinkovics, R. R. (2003). Can socio-demographics still
play a role in profiling green consumers? A review of the evidence and an empirical investigation,
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D’Souza, C., Taghian, M. & Lamb, P. (2006). An empirical study on the influence of environmental
labels on consumers. Corporate Communications: An International Journal, 11(2), 162-173.
Elkington, J. (1989). Why it pays to be green, Weekend Financial Times, October 14, p. 13.
Getzner, M., Grabner-Kräuter, S. (2004). Consumer preferences and marketing strategies for “green
shares”. Specifics of the Austrian market. International Journal of Bank Marketing, 4, 260-278.
Harry, J., Gale, R. & Hendee, J. (1969). Conservation: An upper-middle class social movement.
Journal of Leisure Research, 2, 246-54.
Hartono, A. (2008). Adopting socio-demographic characteristics in profiling green consumers: A
review of hypotheses, Jurnal Siasat Bisnis, 12(1).
Hine, D.W. and Gifford, R. (1991). Fear appeals, individual differences, and environmental concern,
The Journal of Environmental Education, 23(1), 36-41.
Hooley, G.J. and Saunders, J. (1993). Competitive Positioning: The Key to Marketing Strategy,
Prentice Hall International, London.
Jain, S.K. & Kaur, G. (2006). Role of Socio-demographics in Segmenting and Profiling Green
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Consumers: An Exploratory Study of Consumers in India. Journal of International Consumer
Marketing, 18 (3), 107-142.
Kinnear, T.C., Taylor, J.R. and Ahmed, S.A. (1974), ``Ecologically concerned consumers: who are
they?'', Journal of Marketing, 38 (3), 20-24.
Laroche, M. L., Bergeron, J., & Barbaro-Forleo, G. (2001). Targeting Consumers who are willing to
pay more for environmentally friendly products, Journal of Consumer Marketing,18(6), 503-520.
Meffert, H., and Bruhn, M. (1996). Das Umweltbewußtsein von Konsumenten. Die Betriebswirtsch,
56(5):621– 48.
(Additional references of this paper can be provided by the correspondence author on request)
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Brand Personality Re-examined: Perspective from Fast-food Industry in a Typical African Country
Abstract
Ayantunji Gbadamosi, A.Gbadamosi@uel.ac.uk
University of East London, UK.
Ayodele Oniku, thevessels21@yahoo.com
InfoResource Consulting, UK.
David Bamber, thevessels21@yahoo.com Bamberd@hope.ac.uk
Liverpool Hope University, UK,
Aaker’s (1997) study identifies five component structures which are Sincerity, Excitement, Competence,
Sophistication, and Ruggedness, containing 42 brand personality items were operationalised in a Likert type
questionnaire that was administered to 639 Nigerian consumers who were each asked to rate brand personalities
along each item for just one of seven Nigerian fast food retail outlets. Principal component analysis of the data from
the respondents with regards to the brand personality profiles for the brands failed to replicate the five brand
personality traits as originally identified by Aaker. The 42 items presented a more complex and fragmented multidimensional
scale. Only seven items in the scale were sensitive enough to distinguish between some of the seven
brands using ANOVA and 35 items were not able to distinguish between the brands. This research questions the
generalisability of Aaker’s theory. Either, the scale is not sensitive enough to profile brands in similar product
classes or the ideas represented by the scale items are not transferable to a Nigerian cognitive schema. This
research indicates that further investigation, in a broader cross-cultural context with non-American brands of
similar and dissimilar product classes is warranted.
Introduction
Over the years, the existing body of marketing literature has revealed that a variety of factors is
responsible for buyer behaviour in relation to their purchase of goods and services (Kotler et al., 2009,
Solomon et al., 2009, Gbadamosi, 2009; Kotler and Armstrong, 2010; Madichie, 2011). One of the
widely acknowledged among these factors is the brand name of the offerings. Similarly, within the
parlance of branding literature, brand personality has been extensively explored as a key influencing
factor that could provide useful explanation for why buyers might prefer certain brands over others. While
there are many issues associated with the relevance of branding to marketing of goods and services, the
established link between branding and personality makes the term brand personality a special topic of
increasing interest to both researchers and practitioners. One notable contribution on this topic is that of
Aaker (1997) which draws on the ‘Big Five’ human personality structure and develops a very useful
theoretical framework of the dimensions of brand personality. Consequently, many several other related
research efforts have been made. For instance the term has been explored in relation to facial image and
cosmetic usage (Guthrie, et al., 2008) the brand preference of Business Schools (Opoku et al., 2006), and
toothpaste (Thomas and Sekar, 2008). Despite all of these, research efforts into applying this construct or
the scale developed for measuring it in the fast-food industry especially in an African setting has not been
accorded adequate research attention in the marketing literature; hence this present study is being
positioned to fill this lacuna in the literature. Therefore, the objectives of this paper are (a) to investigate
the dimensions of brand personality, as identified by Aaker (1997) to see if they could be replicated in an
African setting; and (b) to distinguish between seven fast food retail brands in an African country using
Aaker’s (1997) brand personality items.
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Theoretical Background
Brand Personality: A conceptual overview
In a bid to provide a robust and sound explanation for how and why people consume their chosen goods
and services, consumer behaviour as a discipline draws from various other fields of study such as
anthropology, philosophy, and psychology. One of the key products of this relationship between
consumer behaviour and psychology is the emergence of brand personality. Personality could be defined
as the set of psychological characteristics that consistently influence the way a person responds to
situations in the environment.(Solomon et al., 2009: p163). It is concerned with the inner properties of the
person and the characteristics that make him or her unique (Dibb and Simkin, 2009; Fill, 2009). Examples
of these are ambitiousness, gregariousness, authoritarianism, competitiveness, extroversion and
introversion (Dibb and Simkin, 2009). Although this term is firmly rooted in psychology, many marketers
have realised that consumers’ personality could influence their consumption behaviour. Meanwhile,
branding is a popular strategy in the marketing of goods and services. It involves using a name, term,
design, symbol, or any other feature to identify one seller’s good or service as distinct from those of other
sellers (AMA, 2010). So, brand names could assist consumers to perceive equity and differentiation
among competing products and firms in the marketplace (O’Cass and Lim, 2002; Jevons, 2005;
Gbadamosi, 2011a). Hence, matching these two terms conceptually, brand personality could then be
defined as ‘the set of human characteristics associated with a brand’ (Aaker, 1997: p. 347).
Thomas and Sekar (2008) differentiate between brand personality and personalities’ brand as a way of
preventing the potential confusion that may ensure in the use of the two terms. They contend that brand
personality involves giving a personality to a brand as an inanimate object towards providing gains to the
corporation that owns it and better value to the customers that buy the product or service concerned. If
considered closely, this viewpoint is consistent with the definition of Aaker (1997) cited earlier. In their
study on the effect of facial image and cosmetic usage on perception of brand personality, Guthrie et al.
(2008) indicate that the construct could be used to express one’s ideal or different versions of the self and
one’s perception and evaluation of the brand. Hence, this further stresses that both the marketers and the
consumers of a brand have benefits around brand personality especially as it has been described as an
integral part of brand image that plays significant role in differentiating products in the marketplace
(Parker, 2009). On the other hand, Thomas and Sekar (2008) explain that personalities’ brand involves
cases where human elements and people that have excelled in their endeavours want to move into the
mould of a product or brand that can be identified so as to provide customers with better value (Thomas
and Sekar, 2008). The success of celebrities like late Michael Jackson, David Beckam, and Opera
Winfrey could be cited as examples of personalities’ brand as distinct from brand personality.
The construct brand personality has attracted a considerable attention in the literature. This is not
surprising since it has been severally linked to a good number of favourable impacts in relation to
marketing activities. It is believed that it helps to differentiate brands in the marketplace (O’Cass and Lim
2002) and elicits emotional reactions from consumers (Biel, 1993 in Guthrie et al., 2008). It has also been
empirically shown that stimulus material that contains information about the physical attributes and brand
personality of a product results in higher brand attitudes and purchase intention (Traci et al., 2005; Govers
and Schoormans, 2005). In fact, it is argued that it has the potential to convey meaning to the consumer’s
life through what they buy (Zentes, et al., 2008). While relating this construct to sport, Carlson et al.
(2009) show that shared and unique facets of brand personality influence the prestige and distinctiveness
of a team. They indicate further that if a team has an image that fans will like to associate with, such as
being imaginative or tough, there is high tendency that such fans will be motivated to acquire its related
products (Carlso, et al., 2009). Also, James et al. (2006) argue that it could be used by organisations as a
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guide for brand alliance. Hence, the significance of brand personality notably permeates many areas of
marketing domain of business activities. Clearly, the subject is intuitively appealing (Aaker and Fournier,
1995). Adding to the discourse in the extant literature, Wang and Yang (2008) show that country of origin
moderates the relationship between brand personality and purchase intention. They conclude that a
positive country of origin image could enhance the positive impact of brand personality on purchase
intention. Obviously, this scale of relevance of brand personality is considerable and also has implications
for marketing at both local and international levels.
One of the key challenges associated with studies on brand personality is having a clear-cut measuring
instrument that could be used for unravelling how consumers use these symbolic characterisations to react
to stimulus. However, the seminal work of Aaker (1997) provides some useful directions in this regard. In
this paper, she introduces a framework of brand personality dimensions and the scale for measuring them
after factor-analysing the items in each of the factors. The study shows that consumers perceive that
brands have five distinct personality dimensions which are namely Sincerity, Excitement, Competence,
Sophistication, and Ruggedness. Accordingly, Aaker (1997) developed a scale comprising of 42 items on
brand personality which have been tested in relation to different areas of marketing activities such as in
retailing (Zentes et al., 2008), selection of business school (Opoku, et al., 2006) and sporting team
(Carlson et al., 2009). Conceptually, it has been shown that this brand personality dimensions correspond
to the ‘big five’ human personality structure of Norman (1963) which includes sincerity, excitement,
competence, sophistication, and ruggedness (Freling and Forbes, 2005). ‘Despite this growing interest on
the topic, there is a dearth of study on how students as consumers perceive this in relation to the choice of
fast-food restaurants patronage.
Brand personality and Fast-food Consumption Behaviour: Theoretical underpinning
It is generally acknowledged that food is very essential to life, contributes significantly to human
existence, and plays several other roles in the society. For example, Wright et al. (2001) indicate that food
could serve as a source of nourishment, could be used for personal indulgence, and could also be a focus
for socializing with family, friends and others towards contributing to a general sense of individual and
national well-being. Also, it could be inferred from the study of Tzavaras et al. (2010) that religion, social
occasions and convenience are among reasons why consumers buy food products. These views are
indeed wide-ranging and accentuate the social impacts and relevance of food consumption. It is logical to
infer from these views that the importance of food will vary in relation to socio-economic background of
people in a given context (Gbadamosi, et al., 2009). Hence key characteristics like age, income, gender,
educational background, and culture will play crucial role toward providing useful explanation for
people’s consumption behaviour in this context. This viewpoint is corroborated by Jas (1998) who
maintains that the eating behaviour and the choice of food of adolescents who constitute a group that is
representative of the society are determined by a myriad of interacting factors. No wonder issues about
food are regarded as very complex (Blades, 2001; Iop et al., 2006). Thus, it will be theoretically and
managerially rewarding to study students’ consumption in relation to brand personality as such attempt
will enrich understanding in the literature.
Although there is a plethora of food type in various societies, fast-food has been embraced by many
societies in recent times. The fast-food sector includes organisations that engage in the selling and serving
prepared food and beverage to purchases for consumption which may be either on or off the premises
(Mueller and Kleiner, 2004). While customers’ requirements for patronising fast-food centres vary from
individual to individual, the key requirement lies in the speed of preparing the food (Church and
Newman, 2000). So, examples of these organisations include sandwich shops, chicken grills, hamburger
joints, and pizza places (Mueller and Kleiner, 2004). Kara et al. (1997) note that since 1970, consumers
have been allocating more of their resources to the purchase of fast-foods and less on groceries. Although
this view is presented in relation to the US, the growing number of fast-food outlets in most societies in
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recent times is quite considerable. Hence, the question of what drive people to buy this type of food from
one organisation as compared to others is very relevant and require adequate attention for enriching the
existing knowledge in the literature. Lee and Ulgado’s (1997) study is one of those that attempts to
confront this key challenge from cross-cultural perspective. They indicate that US consumers consider
low prices and assurance as very paramount factors when they evaluate these competing outlets whereas
their Korean counterparts are very keen on reliability and empathy. Moreover, Kara et al. (1997) found
that consumers’ preferences for fast food outlets will vary in terms of their age and the frequency of their
purchases. This indeed supports the view that student consumers’ preference for fast food centres could
be driven by different brand personality variables.
Methodology
A scale of the 42 items of Aaker’s (1997) dimensions of brand personality scale was used to determine
consumers’ attitudinal profiles with regard to their perceptions of their favourite fast food brand. A total
of two thousand one hundred questionnaires were distributed and a total of six hundred and fifty were
returned with six hundred and thirty-nine fully completed and eligible for the research study. This
represents an overall response rate of 30.4% from the total questionnaires administered. The respondents
were made up of students (undergraduate and post graduate) at two prominent higher institutions in Lagos
Metropolis – University of Lagos and Lagos State Polytechnic, together with professional students who
attend professional course in accounting and business in Maryland Centre in Lagos. Respondents were
asked to indicate their favourite fast food brand, selected from the seven major brands that have more than
five outlets each in Lagos. The brands are; Mr. Biggs, Sweet Sensation, Tantalizer, Mama Cass, TFC,
Chicken Republic, and Tetrazzini. The brand can be divided into two (2) groups, with Group1 consisting
of brand that offer both snacks & chicken (Western delicacies) and traditional African food on their
stables: Mr, Biggs, Tantalizer, Mama Cass and Sweet Sensation and Group 2 consisting of brands that
only offer snacks and chicken (Western delicacies): Tasty Fried Chicken (TFC), Chicken Republic and
Tetrazzini.
By characteristics the respondents for the two groups are the same, drawn from the same group of people
– students of higher institution. The gender is made up of two hundred and seventeen (217) male – 34%,
and female consists of four hundred and twenty-two (422) - 66% respondents. The marital status statistic
shows single respondents to constitute 68%, a total of four hundred and thirty-four (434); married
constitutes 25%, a total of one hundred and sixty (160); and divorcee constitutes 7% - forty five (45) of
the total respondents for the study. On group bases, Group1 is made up of three hundred and seventyseven
(377) and 58% respondents, while Group2 constitutes two hundred and sixty-two (262) and 41%
respondents. Group1 represents 58% of male and 62% of female respondents respectively. Group1 further
represents 51% of single; 59% of married and 80% of divorced respondents. Group2 shows distributions
of 49% single; 41% married and 20% divorced respondents. On the prioritisation of favourite offer, the
general outlook shows that snacks and chicken constitutes 81% and traditional African food constitutes
19%. Specifically in Group1, the traditional African food amounts to 32% of the respondents.
Analysis
A principal component analysis was conducted on the complete 42 item scale using the Varimax
procedure with Kaiser Normalization, following the standard SPSS procedures. Ten components were
extracted as indicated in Table 1 and accounted for 56.20% of the total variance. The entire scale
demonstrated strong internal consistency with Cronbach alpha 0.912 and the Kaiser-Myer-Olkin statistic
was 0.903, indicating a very strong sampling adequacy; items loading onto factors with loadings greater
than 0.400 are shown in Table 1.
Table 1: Principal components analysis
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Factor Item Loading
Imaginative 0.489
Unique 0.559
Up to date 0.595
1
Independent
Reliable
0.569
0.477
Hard working 0.400
Secured 0.570
Intelligent 0.639
Cheerful 0.708
2 Friendly 0.605
Cool 0.623
Honest 0.819
3
Sincere
Real
0.773
0.557
Original 0.467
Confident 0.454
4
Upper class
Glamorous
0.654
0.613
Good looking 0.466
Outdoorsy 0.466
Masculine 0.474
5 Western 0.495
Tough 0.793
Rugged 0.761
Technical 0.442
6
Corporate
Successful
0.705
0.652
Leader 0.463
Sentimental 0.612
7 Feminine 0.638
Smooth 0.577
8
Down to earth
Family oriented
0.619
0.706
9 Young 0.703
10
Wholesome
Trendy
0.522
0.497
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
A series of ANOVA were conducted to determine if the seven brands could be distinguished according to
particular scale items. The brands were distinguished by post-hoc comparisons’ not assuming equal
variance and using Dunnett’s T3 test. The items showing significant differences are presented in tables 2
to 5. Tetrazzini was distinguished more favourably from Tantalizer along 10 attributes (table 2).
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Table 2: Tetrazzini and Tantalizer
Tetrazzini Tantalizer
Mean Standard
Deviation Mean
Standard
Deviation p

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Chicken Republic was distinguished from Sweet Sensation and Tantalizer along two attributes as shown
in table 5.
Table 5: Chicken Republic and others
Chicken Republic
Mean Standard
Deviation
Mean Standard
Deviation p

Proceedings of the 12th Annual Conference © 2011 IAABD
thereby espouses the relevance of culture as the findings challenge the existing postulations. Moreover,
marketing practitioners in the studied sector can apply these findings to improve their marketing strategies
such that their brand positioning strategies are structured to communicate the desired message especially
with regard to incorporating personality traits desired by the target audience.
Selected References
Aaker, J. L. (1997), ‘Dimensions of Brand Personality’, Journal of Marketing Research, vol. 34
(August), pp.347-356
Aaker, J. and Fournier, S. (1995), ‘A Brand as a Character, A Partner and a Person: Three
Perspectives on the Question of Brand Personality’, Advances in Consumer Research, Volume 22
Carlson B. D. Donavan, D. T. Cumiskey, K. J. (2009), ‘Consumer-Brand Relationships In Sport:
Brand Personality And Identification’, International Journal Of Retail & Distribution Management,
vol. 37 No. 4, pp.370-384
Church, I. and Newman, A. (2000), ‘Using Simulations in the Optimisation of fast food service
delivery’, British Food Journal, vol.102, No.5/6, pp.398-405
Foster, J. J. (2001), A Beginner’s Guide: Data Analysis Using SPSS for Windows, Sage Publication,
London
Gbadamosi, A. (2011a), ‘Entrepreneurship Marketing Environment’, in Nwankwo, S. and Gbadamosi, A.
(Eds.)‘Entrepreneurship Marketing: Principles and Practice of SME Marketing’, Oxfordshire: Routledge,
pp.55-78
Govers, P. C. M. and Schoormans, J. P.L. (2005), ‘Product Personality and its impact on consumer
preference’, Journal of Consumer Marketing’, 22/4, pp.189-197
Guthrie, M. Kim, H. and Jung, J. (2008), ‘The effects of facial image and cosmetic usage on
perceptions of brand personality, Journal of Fashion Marketing and Management, Vol. 12 No. 2, pp.
164-181
Kara, A., Kaynak, E. and Kucukemiroglu, O., (1997), ‘Marketing Strategies for fast-food restaurants:
A Customer view’, British Food Journal, 99/9 pp.318-324
Lee, M. and Ulgado, F. M. (1997), ‘Consumer evaluation of fast-food services: a cross-national
comparison’, The Journal of Services Marketing, vol.11, No.1, pp.39-52
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Clothing acculturation among Black African women in London (UK): An exploratory study
Ayantunji Gbadamosi, A.Gbadamosi@uel.ac.uk
Royal Docks Business of School, University of East London, UK.
This paper explores clothing acculturation of Black African Women in London, UK. A total of 20 in-depth
interviews were conducted with women of this ethnicity resident in London as recruited through the use of
snowballing and purposive sampling methods. Essentially, the study shows that clothing acculturation among these
women are influenced by a number of interconnected factors which are categorised in this study as weather
condition, social factors, religion, and personal factors. Theoretically, the study supplements the extant literature
focusing on ethnic minority groups and extends understanding on acculturation, and women’s consumption of
clothing. The marketing implications are also provided.
Introduction
United Kingdom, like many other developed countries has a population characterised with diversity of
people from different ethnic minority groups. Evidence indicates that people of ethnic minority accounted
for an estimated number of 4.6 million in 2001 in the UK (ONS, 2004). Recently, BBC reports a study in
the UK which projects that the number of people of ethnic minority group in the country will increase to
20% of the population by 2051 (BBC.co.uk/news, 2010). This is not surprising as the trend is
approximately similar to what holds in several other developed societies due to increasing level of
immigration. For example, Chattaraman and Lemon (2008) report that African Americans are over 25%
of the total population of the US and the figure is expected to increase significantly in the future. With
reference to the US Bureau of Census (2000a, b), it has been noted that, by 2050, the racial and ethnic
composition in the US will change significantly (Chattaraman and Lemon, 2008). In the UK, the major
ethnic minority groups are the Indians, Pakistanis, Bangladeshis, Black Carribeans, Black Africans, and
those of mixed ethnic backgrounds. Invariably, the increasing number of these ethnic minority British
dwellers has several significant business implications. Examples include increased entrepreneurship
engagement among these groups (Nwankwo and Gbadamosi, 2009) and their consumption of goods and
services. This development introduces us to many questions. How do these immigrants respond to the
new cultural environment in the UK? How do they manage the new culture with the culture from their
home country? To what extent can one claim that the new cultural values influence their pattern of
consumption of goods and services over the cultural values of their home country? These and other
related questions are what acculturation addresses, and exploring them in sufficient depth will not only
extend our understanding in the area of consumer behaviour but also has significant implications for
marketing activities in the UK and internationally. This is consistent with the view of Luna and Gupta
(2001: p62) who note that ‘ ...the increasing migration of people around the world creates complexity in
most markets. As these people are exposed to their host culture they begin to acculturate and may adopt
its norms or behaviour’.
It is fair to acknowledge that many authors have explored these highlighted questions and many other
relevant ones in great depth (see for example, Jamal, 1996; Nwankwo and Lindridge, 1998; Jamal, 2003;
Tams and Arthur, 2007; Kenny and Briner, 2010). Since “one size fits all” strategy might not be
sufficiently robust enough to capture all the eccentricities of the ethnic minority market in Britain
(Nwankwo and Lindridge, 1998) due to the heterogeneous nature of their consumption behaviour, this
paper is specifically positioned to cover the clothing acculturation of Black African Women in London, a
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city well known for its rich mix of ethnic minority groups in the United Kingdom. The publicly available
statistics indicate that nearly half (45%) of the non-white in the UK are based in London and comprised
29% of all the residents (ONS, 2001). Hence, the study explores two specific issues which are indicators
of the gap it fills in the literature in relation to the studied context – Black African women as a distinct
important consumer segment, and their clothing consumption as a different significant consumer
marketing topic.
From time immemorial, clothing has been an important element of human life, it is believed that it could
be used to convey the inner self of the users (Moody et al., 2010) and logically could be one of the ways
people express their cultural identities. Meanwhile, women are widely acknowledged as a group of
consumers that has considerable interest in clothing as a fashion product. Hence, this study could robustly
provide additional direction for the relevant academic discourse; extend understanding in the extant
literature and provide valuable implications for marketing practice.
Theoretical Background
Acculturation and Consumption: Theoretical underpinning
A plethora of unequivocal evidence indicates that the world is becoming more multicultural and
increasingly diverse by the day as people migrate from one country to another, and learns several cultural
values in their host cultural environment. This underpins the relevance of acculturation in consumer
behaviour and marketing. With reference to Berry (1980), Martin (2005) traces the root of acculturation
to 1880 in the study of anthropology. In this context it was developed to understand the change that
occurs when two or more autonomous culture interact with each other. This corroborates the view which
indicates that it originated from the traditional concern of social scientists to have an understanding of
how immigrants adapt socially and psychologically, and adjust to new socio cultural environment (Park,
1928; Rogler et al., 1987; Rajagopalan and Heitmeyer, 2005). Hence, acculturation may be defined as the
process an individual or group undergoes in order to modify itself to a new, dominant culture, ranging
from rejection to full assimilation (Phinney, 2003 cited in Chattalas and Harper, 2007: pp353).
Consequently, one may ask, how would Black African women in the UK, a society with different cultural
values, react to consumption of goods and services when compared to the situation while they were in
their home cultural environment? Indeed, exploring this key question deeply is a warranted research
endeavour. As noted by Khairullah et al. (1996) some immigrants might retain a great many of their own
culture’s attitudes, and values and behaviour, others would readily adopt those of the dominant host
culture. In other words, acculturating groups enter into the process of acculturation in different ways and
to varying degrees (Rajagopalan and Heitmeyer, 2005). This lack of clear-cut and uniform behaviour of
people in relation to different cultural values of the host culture makes acculturation not only an intriguing
subject but also a great challenge for marketers that need to devise strategic means of satisfying these
people with disparate needs as recommended in accordance with the tenet of market-orientation (Narver
and Slater, 1990; Solomon, et al., 2009, Gbadamosi, 2009; Kotler and Armstrong, 2010). As shown so
far, individuals vary in terms of their level of acculturation. In the view of Berry (1990) cited in Burton
(1996), four models of acculturation are Integration, Separation, Assimilation, and Marginalization. In
this postulation, Integration describes the scenario where the individuals concerned adopt some of the
cultural values of the host culture while maintaining their own culture whereas, Separation explains the
cases where the individuals refuse to integrate into the host culture. Assimilation depicts the situation in
which the individuals adopt the host culture and forget their original culture over time. Unlike these three,
Marginalization model explains the situation when the consumers or the individuals being depicted feel
rejected by the host culture but they do not want to maintain their original culture. This framework is in
tandem with the explanation of Khairullah et al., (1996) that acculturation is a process in which the ethnic
consumers move along a theoretical continuum from low acculturation, where they maintain the cultural
values of their country of origin, to the high acculturation on the other extreme where the ethnic
consumers have adopted the cultural values of the host culture. Since, this postulation appears all
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encompassing, it can be inferred that this view will be applicable to various consumption issues such as
for food, clothing, other fashion products, and many other consumption issues.
As indicated in the foregoing, acculturation is closely linked to and embedded in the discussion of culture.
The significance of culture as a relevant factor in the explanation of some key consumption issues and
international marketing is becoming increasingly acknowledged (Steenkampt, 2001; Koudelova and
Whitelock, 2001; Ng et al, 2007). It is so significant that consumption choices simply cannot be
understood without considering cultural context in which consumers make them (Solomon, 2007).
Indeed, it shapes the meanings people ascribe to objects, behaviours, and environments embedded within
the consumption experience (Hartman, et al., 2009; Gbadamosi, 2010; 2011). According to Blythe (2009:
p.155) ‘culture establishes the values, attitudes, customary behaviour, language, religion and art of a
given group of people’. Hence, it …affects people’s tastes, preference for colours, and attitudes towards
product classes’ (Mühlbacher et al., 2006; p.182). These views thus show that one can logically contend
that clothing could be one of the key factors that indicate the cultural values of a particular society.
Hence, exploring purchase behavior among black African women in London especially in relation to
clothing is a clear topic under acculturation that could significantly enrich the literature.
Clothing, Consumption, and Women: Integrative Perspectives
The popularity of clothing as a topic of interest both in the academic and business circles is well
established and evident from the sheer number of studies that have been conducted on consumer behavior
within this context (see for example, Rowley 2009; Yoo et al., 1999; Oh and Florito, 2002; Chattalas and
Harper, 2007; Moody et al., 2010; Faust and Carrier, 2010; Jin et al., 2010; Chen-Yu et al., 2010). In
fact, apart from the wide availability of clothing for sale in various stores in the UK, it has also been
shown that the volume of clothes sold through the internet has increased steadily as all of the UK nonvalue
fashion retailers have their transactional websites while the value fashion retailers have a web site
through which they communicate with their target audience and establish their brand presence (IMRG,
2006; Rowley, 2009). With reference to Raunio (1982), Moody et al. (2010) show three factors as
relevant for the discussion of consumers’ preference for clothing. The first could be categorized as
physical features which include skin response, the shape and size of the clothes being considered, thermal
comfort, revealing levels and visual features. The second and the third of these factors are the users’ self
appearance and associative reasons and memories. Still citing Raunio (1982), Moody et al. (2010) explain
further that people choose clothing to cope with social circumstances and it could be used to create a
feeling of togetherness with others, to be distinctive, create an impression and control feeling, images and
impression of other people. This contribution is wide-ranging and useful as it shows that individuals
could buy a type of clothing for a variety of reasons which could be internal or external in nature. For
instance, Yoo et al. (1999) indicate size, product assortment, number and quality of stores, comfort,
attractiveness, and fabric quality as some of the problems why petite and tall consumers feel dissatisfied
with most apparel available. Similarly, a review of literature exposes some of the factors that influence
the purchase of designer clothing as aesthetics, better quality of materials, and status and image
(Kamenidou, 2007; Fogel and Schneider, 2010). In addition to these notions, Faust and Carrier (2010:
p.122) argue that ‘…a size label identifying inseam, waist, and hips measurements and providing a female
silhouette identifying the measuring points would not only convey better information but that it would
also be highly predictive of the garment (pants in this case) that women would find fitting’. Obviously,
this could be linked to the perspective of Ko et al. (2010) who postulate that consumer values as reflected
in clothing advertisements are functional, social, emotional and epistemic values. As useful, wideranging,
and thought-provoking as these views appear, they still do not explicitly provide explanation of
the relevance of these factors to Black African Women immigrants in London, hence this lacuna still
remains inadequately explored and the associated issues are yet to be unpacked. Nevertheless, it has been
stated that a relatively small and geographically fragmented ethnic minority community might not be
accessible to a new member that has just arrived into the system; hence the individual may be forced to
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adopt mainstream culture models (Pires et al., 2006). So, as people tend to be heterogeneous in their
reactions to marketing stimuli when considered from their basic characteristics such as age, income,
gender, ethnicity, marital status and many other factors, it will be theoretically and managerially
beneficial to explore how Black African women in London would react to clothing in this new
environment when compared to those they were familiar with in their country of origin. This is especially
relevant as Rajagopalan and Heitmeyer’s (2005) findings in a study show that Christians were more
acculturated than those respondents who practiced Hindu. Also, based on their findings, Kwak and Sojka
(2010) argue that immigrants with a high degree of ethnic identification and high income, and are
younger in age are more likely to buy high-priced prestige brands. This emphasizes how intriguing
acculturation as a subject could be if considered from a broader perspective.
Immigrants are usually inundated with a myriad of choices on clothing in their host environment and
often resolve these consumption choices in various forms. For example, it has been suggested that
immigrants may find the purchase and consumption of prestige brands to be a way of establishing
themselves in a new culture (Kwak and Sojka, 2010). This is closely linked to the claim of Chattaraman
and Lennon (2008) that dress could visually indicate the subcultural ethnic affiliation of the user or on the
other hand integrate the person to the mainstream society. To be specific, Majima (2008) indicates that
the UK fashion market is widening and the development has led to more fashion competition among
women as they demand for differentiation and quicker change of variety. Given these views about the
diversity which exist concerning this phenomenon, it is important to acknowledge that complacency about
the existing knowledge on clothing consumption and women without considering ethnicity of such
consumers will offer very limited understanding and leave readers with several unanswered questions.
Methodology
In consistency with the objective of this study, the chosen paradigm for this research is Phenomenology,
while the strategy is qualitative, and the epistemological assumption is that the subject matter in social
sciences are dissimilar from what holds in the natural sciences, so the social world will require a different
logic of research procedure that takes the differences into consideration (Taylor and Bodgan, 1984;
Bryman, 2001). According to Collis and Hussey (2003) this approach provides for understanding human
behaviour from their own frame of reference. Since collecting data qualitative could be done through
several ways, in-depth interview was chosen for the study as it is a versatile way of collecting data
(Welman, et al., 2005), and suitable for gaining valuable insights into the logic, sentiments and emotional
reactions beneath the surface of information from the respondents(Hill and Wright, 2001). Hence, a total
of 20 in-depth interviews were conducted with Black African Women resident in London who were
recruited through the use of snowballing and purposive sampling method. The respondents aged between
20 and 50, and while four of them are single, the remaining 16 are married. The adequacy of the data
collected was determined with the theory of theoretical saturation which is the stage when no new idea
was forthcoming with the inclusion of additional interview (Glaser and Straus, 1967; Strauss and Corbin,
1998; Locke, 2001, Goulding, 2005).
As expected in a study of this nature, all necessary ethical issues were noted and adhered to during the
study. Observing the necessary ethical guidelines is a fundamental issue when studying other people,
especially when using qualitative studies (Malhotra and Peterson, 2001; Bulmer, 2003). The basic ethical
issues in research have been identified as issues of confidentiality, informed consent, right to privacy, and
protection from harm (Fontana and Frey, 1998; Ali and Kelly, 2004). Apart from explaining the objective
of the research to all the participants at the beginning of each of the interview, they were all promised
anonymity about the information provided. Also, all required efforts to keep participants save during the
interview were applied. This is consistent with the view of Easterby-Smith et al. (2010: 166) who contend
that ‘The most important thing to keep in mind is that under no circumstances should the researcher bring
harm to the people he or she is researching’.
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Figure 1: Components of Data Analysis: Interactive Model
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The analysis of the data was done in consistency with the principle of qualitative thematic analysis (Miles
and Huberman, 1994) which involved a combination of data reduction, data display, and conclusion
drawing and verification. Several coding were done, and the data display for the study involved producing
charts, tables, and networks in order to be able to make sense of the data and the emergent themes. From
these, relevant conclusions were made and the findings are reported below in the next segment titled
summary of findings.
Summary of Findings
Data collection
Source: Milse and Huberman (1994: p.12)
Data reduction
Data display
Conclusions: drawing/verifying
Essentially, the basic interrelated themes that emerged from this study based on convergence of views
among the respondents are weather condition, social factors, religion, and personal factors as major
influences on acculturation of Black African Women and their use of clothing in London. They are now
presented in turn.
Whether condition
A very popular theme that evolved from this study is the weather condition. The study indicates that the
difference in the weather conditions between the home and host countries of the respondents has a
considerable role in their acculturation for clothing in the UK. Essentially, findings show that most of the
respondents were compelled to change their mode of dressing in one form or another in order to be
comfortable in the new environment. As indicated by the respondents, much as they would love to use the
clothing from their home countries to communicate their cultural values and peculiarities, the freezing
condition in London constrains this intention and makes it impracticable in most cases. Hence, their
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clothing purchases are significantly tuned to the commonly used apparel that suits the environment
especially during the wintry conditions.
Social factors
It is interesting to note that social factors play key role in the acculturation process of Black African
women in London as revealed in this study. This study shows the relevance of social factors from two
perspectives. One is the need for the women to be integrated into the society which prompts them to buy
and use the UK-based clothing for occasions that involve a considerable number of locals and other well
acculturated members of the society. This makes them feel comfortable, and boosts their confidence. As
some indicated, one will have to act like a Roman in Rome. On the other hand, respondents indicated that
they often resort into using clothing that reflect their home culture and country for special occasions
organised by people of their similar cultural background. Examples are naming ceremonies, wedding
ceremonies/anniversaries, funeral ceremonies, and birthday parties. Interestingly, they indicated that even
when the weather condition makes wearing them uncomfortable, they still do it as such occasions come
sporadically and it will be good to make the most of it unlike dressing to go to work which is a recurrent
happening. In most cases, these women have chains of network back to their country through which
clothing that depict their cultural heritage are supplied to them in London to fulfil this need for affiliation
among members of their enclave. In fact, some claim that they use these to promote their culture in a
strange land and state that wearing such is more valuable in that society compared to in their home
country where almost everyone will have such type of clothing.
As a way of coping with the uncomfortable weather condition, this study shows that they mix apparel
from the two different cultural settings. One common example cited is that of wearing tights (stockings)
under the African-culture oriented dresses.
Religion
The importance of religion to the clothing preference of these Black African women is another area of
key findings of this study that cannot be ignored. Some of the respondents indicated that the design of
some of the clothing in London as offered by most widely available fashion marketers sometimes conflict
with their religious belief as some of these are body revealing dresses which they believe holds significant
implications for their moral dispositions. Hence, this prevents them from embracing full acculturation in
relation to purchase of clothing in London. So, they are very selective in this context. Among the
commonly cited examples are trousers which often seductively expose the body curves, skirts which end
above the knees, blouses which reveal parts of the body.
Personal factors
This study shows that there are a number of personal factors that mediate the clothing acculturation of
these women in London. One of these is their age. A sub-pattern that emerged from this point is that those
that are relatively young and more educated embrace the clothing pattern in London upon arrival into the
country than those outside this group. The common reason cited for this is that these clothing make them
look very smart, comfortable, and seasoned. Most of the married women indicated that their acculturation
about clothing is strongly moderated by their marital status as they are expected to maintain a reasonable
standard of moral codes in their mode of dressings. Surprisingly, the year of arrival in London does not
appear to have considerably shifted the interest of the respondents from the African-oriented clothing.
Hence, their interest for clothing is shared between those associated with their host cultural environment
and the ones they were using and have got used to before leaving their home country.
Discussion/implications of the study
This study explores clothing acculturation among women of Black African origin living in London. It
shows some interesting findings. Essentially, it indicates that clothing acculturation among Black African
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Women in London are influenced by a number of interconnected factors which are identified in this study
to be weather condition, social factors, religion, and personal factors.
Overall, the study suggests that Black African women use their cultural background to promote their
cultural heritage in the foreign country. However, they are sometimes constrained by the weather
condition in London which is notably different from what they were used to in Africa. Hence, they are
forced to adopt the clothing pattern in London. This finding is partly supported by that of Pires et al.
(2006) which suggests that new members that has just arrived into a different cultural setting could be
forced to adopt the new cultural models. However, the discrepancy between the findings of this present
study and that of Pires and others lies in the reason why the new member of the society is stuck with the
new cultural values. While Pires et al, (2006) attribute this to inaccessibility to and the small size of the
ethnic minority group in the host country, the reason as found in this study is the weather condition.
The findings about social factors in this study encapsulate a number of issues including craving to satisfy
need for affiliation and emotion. From one perspective, respondents appear to be showing affinity for the
apparels in the host cultural environment as a way of ‘buying’ their sense of belonging in this new
environment. On the other hand, they also keep their African apparel culture but to feel belonged in the
circle of other members of their ethnic minority group in London. The finding is strongly corroborated by
the four model framework postulation of Berry (1990). One of the model is called integration which
explains the scenario where the individuals in the host cultural environment maintain their own culture
and still adopts some of the cultural values of their host culture. This mirrors the behaviour of these
Londoners (Black African women). The likely explanation for this is that London, is a city with a high
proportion and rich mix of ethnic minority groups, hence participants of this study have a good number of
co-immigrants from the same cultural background and relate with them frequently. This finding is also
closely related to emotion as the findings show that the women share the two cultural values about use of
clothing as a way of making themselves happy, comfortable, and loved. This finding is strongly supported
in the extant literature where it is stated that people can choose clothing to create a feeling of togetherness
with others, and for social and emotional reasons (Raunio, 1982; Moody, et al., 2010; Ko et al., 2010).
It is also interesting to note that religion emerge as one of key factors that influence clothing acculturation
among these ethnic minority women in London. Although not in the form of the reported finding of this
present study, Rajagopalan and Heitmeyer (2005) also indicate that religion is relevant to acculturation. In
the study of the latter, it was report that Christians were more acculturated than those who practice Hindu.
Whichever way the issue is discussed, it could be stated that the influence of religion cannot be ignored in
how one explains the clothing acculturation of Black African women living in London to some extent.
This study also suggests that personal factors such as age and marital status are of considerable relevance
in how one explains acculturation of these women in a strange country. However, it is surprising to note
from the findings of this study that women of this ethnic minority group who have lived in London for
several years are still strongly committed to using clothing that promote their cultural heritage on various
social occasions. This contradicts the popular claim that the longer an immigrant stays in the host country
the less they embrace the cultural values of their home country. A possible explanation for this could be
that the study is based on clothing or because these women reside in London where they interact with
very many other women of the same African origin.
This study has significant implications for marketing both theoretically and from managerial viewpoint.
Theoretically it supplements the existing studies on ethnic minority studies in the literature and extends
understanding on women consumption of clothing. From managerial perspective, marketers targeting
ethnic minority women in the UK could use the findings of this study to design their marketing strategies
especially in the area of segmentation, targeting and positioning toward satisfying and delighting their
target market.
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Limitations and suggestion for further studies
Even though this research shed some light on issues around acculturation of the Black African women in
relation to use of clothing in London, it also has a notable limitation which provides directions for future
studies. Its main limitation is basically in the sample size which limits the extent to which the findings can
be generalized to the wider population of this ethnic minority group in London. However, since this study
is not positioned to test any hypothesis but to construct a substantive understanding of this topic, this
issue of the small sample size may not be very compelling. Consequently, further research is warranted
into extending the sample of this study into other women especially those outside the studied aged group.
It will also be very interesting to know from future studies whether some of these findings could be
applicable to men from the same ethnic minority group or people of other ethnic identities.
Selected References
Chattaraman, V. and Lennon, S. J.(2008), ‘Ethnic identity, consumption of cultural apparel, and self
perceptions of ethnic consumers’, Journal of Fashion Marketing and Management, Vol. 12 No. 4, pp.
518-531
Faust, M. and Carrier, S. (2010), ‘Women’s wear sizing: a new labelling system’, Journal of Fashion
Marketing and Management Vol. 14 No. 1, pp. 88-126
Gbadamosi, A. (2009), ‘Cognitive dissonance: The implicit explication in low-income consumers’
shopping behaviour for ‘low-involvement’ grocery products, International Journal of Retail and
Distribution Management, vol. 37, No.12, pp. 1077-1095
Jamal, A. (2003), ‘Marketing in a multicultural World The interplay of marketing, ethnicity and
consumption’, European Journal of Marketing, Vol. 37 No. 11/12, pp. 1599-1620
Kenny, E. J. and Briner, R. B. (2010), ‘Exploring Ethnicity in Organisations’, Equality, Diversity and
Inclusion: An International Journal, vol. 29, No. 4, pp. 348-363
Khairullah, D. H. Z. and Khairullah, Z. Y. (2009), ‘Cross-cultural analysis of gender roles: Indian
and US advertisements’, Asia Pacific Journal of Marketing and Logistics, Vol. 21 No. 1, pp. 58-75
Ko, S., Norum, P. and Hawley, J. M. (2010), ‘Consumer value structures reflected in clothing
advertisements’, Journal of Fashion Marketing and Management, Vol. 14 No. 3, pp. 451-468
Kwak, L. E. and Sojka, J. Z. (2010), ‘If they could see me now: immigrants’ use of prestige brands to
convey status, Journal of Consumer Marketing, 27/4 (2010) 371–380
Majima, S. (2008), ‘Fashion and frequency of purchase: women’s wear consumption in Britain, 1961
200, Journal of Fashion Marketing and Management, Vol. 12 No. 4, pp. 502-517
Moody, W. Kinderman, P. and Sinha, P. (2010), ‘An exploratory study Relationships between trying
on clothing, mood, emotion, personality and clothing preference’, Journal of Fashion Marketing and
Management Vol. 14 No. 1, pp. 161-179.
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Abstract
Marketing Nigerian medicinal plants: A 4PS Perspective
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Dixon-ogbechi, Bolajoko Nkemdinim, dixonogbechi@yahoo.com
University of Lagos. Nigeria
Odugbemi, Tolu, toluodugbemi@yahoo.com
Aiyeku, Joseph Fola, jaiyeku@salemstate.edu
Salem State University, USA
Successful marketing is getting the right product, in the right place, at the right price, and promoting it so that
everyone knows about it. To achieve this objective, marketers need to have the right combination of the four Ps:
product, price, place and promotion; irrespective of the kind of product marketed, be it medicinal plants or services.
Marketing is important for anybody dealing in medicinal plants because knowing the market and what users want
and providing a quality product or service is vital to the success of any organization. Thus, this paper sought to see
how medicinal plants are marketed in Nigeria with regards to the traditional marketing mix (4Ps). The exploratory
research approach was used to study a sample of 206 marketers of medicinal plants in four areas in which
medicinal plants markets are located in Nigeria. Though, it has been discovered that most marketers of medicinal
plants in Nigeria do not have standardized product packaging, engage in little or no promotional activities, have a
differentiated/discriminatory pricing policies and adopt mostly the product concept/philosophy of marketing, their
distribution channels are adequate but the lack of little or no promotional efforts makes it virtually impossible for
the prospective consumer/customers to reach them.
Introduction
Marketing starts and ends with the consumers; it involves finding out what customers want and then
giving it to them, that is creating utility. Utility is the satisfaction derived from the consumption of certain
goods and services (Dixon-Ogbechi, 2003). Hamayun, Khan & Begum (2003) defined medicinal plants
as: “any plant or part of the plant which contain active medicinal chemical constituents and give a definite
physiological response in the treatments of diseases in humans and other animals”. Production is not
complete until the product(s) get to the ultimate consumers; the marketing function is responsible for
ensuring that this takes place. For marketing to take place, certain elements have to be present. These
marketing mix elements according to McCarthy (1981) are the Product, Promotion, Price and Place (4Ps)
of marketing. The four Ps of marketing are also combined to implement the marketing plan and strategy
of an organization; the strategy is how these four work together to deliver optimal customer satisfaction
(Beckman, Kurtz and Boone, 1992; Koontz, 2004). Given the importance of the 4Ps of marketing to
organizational success, this study seeks to investigate how medicinal plants are marketed in Nigeria with
regards to the traditional marketing mix elements (4Ps).
Research Question/Purpose
Medicinal plants are products that satisfy human needs in terms of curing of ailments or protection from
certain ailments, enhancing food and animal production, among others (Odugbemi, 2008). However, for
people to be able to benefit maximally from the usage of the abundant medicinal plants in Nigeria, they
have to know: in what forms they are available, where to get them, who to get them from and what price
to pay for them. All these questions have to do with the basic elements of marketing, popularly known
with the acronym 4Ps. However, to the best of our knowledge little or nothing has been done in this area
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in Nigeria. Thus, this paper sought to fill this gap in knowledge by investigating how medicinal plants are
marketed in Nigeria with regards to the traditional marketing mix (4Ps).
Conceptual and Theoretical Framework
The 4Ps identified by McCarthy (1981) are the traditional elements of marketing, over the years other
elements of marketing have emerged. However, it should be noted that Product, place (distribution) and
promotion are all expenses; while price brings in revenue (Kotler, Armstrong Saunders & Wong, 1999).
The combination of these four elements is what is referred to as the ‘Marketing Mix’. Reppel (2003)
posits that in an effective marketing programme all of these elements are "mixed" to successfully achieve
the company's marketing objectives. In his view, the "marketing mix" is a framework which acts as a
guideline for marketers to implement a marketing concept. It consists of a set of major decision areas that
a company needs to manage in order to at least satisfy consumer needs. Thus, if marketers of medicinal
plants are to effectively and efficiently satisfy consumers/customers needs and wants, they need to make
decisions regarding the 4 Ps.
The product can be regarded as the first P of marketing; it is anything that can be offered to a market for
attention, acquisition, use or consumption that might satisfy a want or need. Products are simply bundles
of benefits offered to satisfy customers’ needs; products could be physical objects/goods, electronic or
digital goods, services, persons, places, organizations and ideas (Kotler et al., 1999; Reppel, 2003;
Adeleye, 2003; Koontz, 2004). Products can be broadly classified into two namely: Consumer goods and
Industrial goods. Consumer goods are goods that are purchased by the ultimate buyers. Consumer goods
can be sub-divided into four namely: (i) Convenience goods which could be Staples such as bathing soap,
butter, bread, gari, some medicinal plants e.g. bitter leaves, ugwu (pumpkin leaves) etc.; Impulse goods
such as biscuits, sweets, etc.; and Emergency goods such as plaster, most medicinal plants etc. (ii)
Shopping Goods: which can be can be divided into two: Homogeneous Shopping Goods which are
basically similar e.g. car radio, computer monitors, etc.; and Heterogeneous Shopping Goods which are
basically different from one another e.g., cars. (iii) Specialty Goods which are products for which there
are no acceptable substitutes in customers’ mind; some medicinal plants may fall into this category,
especially for people who believe more in herbal medications than orthodox medication. And (iv)
Unsought Goods which can also be divided into two: Regularly Unsought Goods e.g. coffin; and New
Unsought Goods e.g. all new product; some medicinal plants may also fall into this category, especially
those whose curative powers are not known yet or of whose existence consumers are not aware of. On the
other hand, Industrial goods: These are goods acquired with a view of making other products. Industrial
goods can be divided into six namely: (i) Installations which are heavy capital items such as: plant,
machinery, and mainframe computers; (ii) Accessories which are smaller capital items used by the
organization for its business operations e.g. desktop computers, photocopies; (iii) Raw Materials such as
coco, some medicinal plants used for the production of drugs; (iv) Components parts and materials such
as button, log, cork, semi-processed medicinal plants, e.t.c. (v) Operating supplies such as: papers, light,
fuel, stationeries; and (vi) Business Services which are services that support the management and
operations of a business, e.g. banking services. Every product has its life cycle which is divided into four
stages, these are: Introduction, Growth, Maturity and Decline and, medicinal plants just like other
products go through these stages. In order for the product to attract the attention of the target
audience/market, it must be well packaged i.e. it must be appropriately designed for target market and be
eye-catching. A good packaging must also be: suitable to product; compliant with retailers' requirements;
promotes image of enterprise; distinguishable from competitors' products; strong, convenient, and welldesigned.
It is important that the marketer includes the trade mark in the package; this is because it is the
trade mark that distinguishes one company's goods from those of another (Dibb, Simkin, Pride & Ferrell,
1991; Achumba and Osuagwu, 1994; Kotler, 1995; Adeleye, 2003).
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Price is unquestionably an incredible and powerful marketing tool. Price is the only element of marketing
that involves revenue (Kotler, 2004), so its impact can be dramatic. Price is what an individual gives up in
order to obtain something. It is consideration of what the customer exchanges that is of value to him (e.g.,
money or time) for the product (Beckman et al., 1992; Koontz, 2004). Price need not be monetary, it can
simply be what is exchanged for the product or services; thus it could be: time, energy, or attention.
Pricing is the process of setting a price for a product. Given its importance to revenue generation,
marketers must ensure that they set a price that serves the customer well so as to maximize organizational
profits (Kotler, 2004). Marketers must also be certain that the pricing objectives they set are consistent
with the organization’s overall objectives and marketing objectives. Inconsistent objectives cause internal
conflicts and confusion and can prevent the organization from achieving its overall goals. Organizations
normally have multiple pricing objectives some short-term and others long-term, for example, the pricing
objective of gaining market share is normally short-term because it often requires the firm to price its
product quite low relative to competitors’ prices. Thus, to compete effectively in the dynamic business
environment, an organization should have one or more pricing objectives for each product (Dibb et al.,
1991; Achumba and Osuagwu, 1994; Kotler, 1995; Adeleye, 2003). Once the products have been
produced they have to be distributed in places where the ultimate consumers can obtain them.
Place is also called distribution and it refers to all organizational activities that make the product or
service available to the target consumers/customers (Kotler et al., 1999). There are different channels of
distributions for products basically there are channels of distribution for consumer goods, which are five
in number, and channel for distribution for industrial goods, which are four in number. Irrespective of the
channel used, basically there are two categories of channels of distribution, namely: Direct Channel of
Distribution: This is the most direct method of distribution; it is a channel strategy that does not use
intermediaries (Hutt and Speh, 1989; Dibb et al., 1991; Achumba and Osuagwu, 1994; Kotler, 1995;
Adeleye, 2003). It entails moving the products from the manufacturer(s) to the consumer(s). Indirect
Channels of Distribution: This is the distribution of goods and services from the manufacturers or
producers to the consumers through the use of middlemen or intermediaries (Hutt and Speh, 1989; Dibb
et al., 1991; Achumba and Osuagwu, 1994; Kotler, 1995; Adeleye, 2003). However, in order to
effectively reach the target audience, the marketer needs to communicate with them.
The promotion element of marketing focuses on communicating with the consumers/customers
Promotion is the all-inclusive term representing the broad field of marketing communication (Lancaster
and Massingham, 2001). Promotion includes advertising, personal selling, sales promotion, publicity,
public relations, direct mail, and the Internet (Dibb et al., 1991; Achumba and Osuagwu, 1994; Kotler,
1995; Adeleye, 2003; Koontz, 2004), and refers to the various methods of promoting the product, brand,
or company. In order to promote the product or service to potential clients more effectively, it is
necessary that the marketer has full knowledge of the product, its characteristics and consumer groups
(Lancaster and Massingham, 2001). This is especially important in the case of medicinal plants, given the
fact that there are different varieties of medicinal plants that perform multiple functions and consumed by
different people. In a nutshell, promotion deals with all the activities that communicate the product or
service and its merits to target customers and persuade them to buy (Kotler et al., 1999). In order to
communicate effectively with customers/consumers marketers make use of the promotional elements. For
effective marketing communication, these elements are combined; this combination is what is referred to
as the promotional mix or promo-mix, or the marketing communication mix. The components of the
promotional or marketing communications mix can be broadly divided into two, namely: personal selling
and non-personal selling - comprising advertising, sales promotion, publicity and public relations
(Beckman, Kurtz & Boone, 1992; Stanton and Spiro, 1999; Lancaster and Massingham, 2001).
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Methodology
The exploratory research approach was adopted for this study. A survey research was conducted using the
observation and personal interview techniques. Judgemental sampling was used to select the location of
major medicinal plants markets in four areas in Nigeria, mainly: Lagos, Ogun, Abuja and Delta States.
This is because not all markets in Nigeria have large numbers of marketers of medicinal plants. A
purposive sample of 206 marketers of medicinal plants in the selected areas were interviewed on a one-toone
basis regarding their knowledge of the four Ps of marketing and how they practice their marketing
activities using these concepts. The direct observation technique was used to see how these marketers of
medicinal plants conduct their marketing activities. The interview technique was adopted because it was
discovered that this was the most effective methods of getting data for the study given the low literacy
level of most of the marketers of medicinal plants in Nigeria.
Findings
The following findings were made:
Product: Medicinal plants could be considered both as consumer goods (i.e. when they are purchased for
immediate consumption) and industrial goods (i.e. when they are purchased with the aim of producing
other goods) and like any other product; they also have a life cycle. Marketers of medicinal plants in
Nigeria have not made effective use of the packaging aspect of the product strategy; this is because very
few of them package their products in a standardized way. Majority of the Nigerian marketers of
medicinal plants adopt a kind of ad hoc packaging strategy in the sense that the products are packaged
based on consumers’ demand; in most cases, it is only when the prospective customer comes that the
products are prepared and packaged based on customer/consumer specification. As such there is the
problem of identification since the consumer places his/her trust on the marketer regarding the ability of
the product combination to satisfy his/her needs. In a nutshell, the validity of the product preparation
depends on the expertise of the marketer and his diagnostic ability.
Price: The pricing objective of most marketers of medicinal plants in Nigeria is that of profit
maximization, to achieve this objective, they adopt a strategy of differentiated/discriminatory pricing
whereby the price of the product varies according to their perception of the ability of the prospective
consumer/customer to pay. Thus, there is no standard price for a particular specie/quantity of medicinal
plant, only very few of the marketers that have formal business establishments have standardized prices
for their products.
Promotion: The promotional aspect of marketing is the communication network that links the consumer
to the product. Most marketers of medicinal plants in Nigeria have not appreciated the potency of this
element of marketing; as such they have not been promoting their products. This is perhaps because most
of them may be either illiterates or semi-illiterates and do not have theoretical knowledge of these basic
marketing concepts. Only very few of them invest in promotional activities and these are basically those
that are registered formally as business ventures such as Yet Kem International, etc.
Place: Most marketers of medicinal plants in Nigeria adopt the multi channel distribution strategy. They
mostly use the direct channel and producers – merchants – consumers when the medicinal plants are
industrial goods, while they use the direct channel and orthodox channels when the medicinal plants are
consumer goods. Also, there are specialized markets which operate during specific days of the week
where the wholesalers/dealers/distributors of medicinal plants gather; the producers who usually operate
from the forests/bushes where this medicinal plants are available all transport the various species of these
plants to these specialized markets from where the retailers go to get the specific types of medicinal plants
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that will satisfy their customers/consumers segments. The channels of distribution of medicinal plants in
Nigeria are illustrated in figures 1and 2.
Figure 1: Channel of Distribution for Nigerian Medicinal Plants - Consumer Goods
Producers of Medicinal
Plants
Wholesalers
Retailers Retailers
Consumers of Medicinal
Plants
Figure 2: Channel of Distribution for Nigerian Medicinal Plants - Industrial Goods
Discussion
Producers of Medicinal
Plants
Industrial Users of Medicinal Plants
Wholesalers
or
Merchants
or
Industrial distributors
When developing product strategies, it is important that the marketer take into consideration the product’s
life cycle and the positioning of the product in the market; positioning has been a basic marketing tool for
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many years (Hemsley, 2007). In the absence of government price controls, pricing remains a flexible and
convenient way to adjust the marketing mix. In most situations, prices can be adjusted quickly-in a matter
of minutes or over a few days; because so many complex issues are involved in establishing the right
price, pricing is indeed as much as art as a science. Thus, marketers irrespective of the products they are
dealing in, be it medicinal plants or any other consumer or industrial products, must master the art and
science of price setting. Place or channels of distribution decisions affect other marketing decisions
(Kotler, 2004) hence, marketers of medicinal plants should think critically about the channel of
distribution to use and select the one that is most suitable for their products, while taking into
consideration the product perishability and packaging. In making promotion or marketing
communications decisions, marketers should always bear in mind the fact that different consumer groups
will respond positively or negatively to an organization’s marketing communications, hence marketers
need to conduct consumer behaviour research to assist them identify the promo-tools the target market
will respond to favourably (Lancaster and Massingham, 2001). This is applicable irrespective of the type
of product marketed. This study has clearly shown that marketers of medicinal plants in Nigeria are
deficient in the area of promotion. Thus, there is a need for more efrfort to be placed on this important
element of marketing.
Conclusions
Successful marketing is getting the right product, in the right place, at the right price, and promoting it so
that everyone knows about it. To achieve this objective, marketers need to implement and have the right
mix of the four Ps: product, price, place and promotion (Lancaster and Massingham, 2001); irrespective
of the kind of product marketed, be it medicinal plants or services. Marketing is important for anybody
dealing in medicinal plants because knowing the market and what users want and providing a quality
product or service is vital to the success of any organization. Though it has been discovered that most
marketers of medicinal plants in Nigeria do not have standardized product packaging, engage in little or
no promotional activities, have a differentiated/discriminatory pricing policies and adopt mostly the
product philosophy of marketing, their distribution channels are adequate but the lack of little or no
promotional efforts makes it virtually impossible for the prospective consumer/customers to reach them
since they may not be aware of the products or their abilities to satisfy their needs and wants.
Implications and value of research
Marketers of medicinal plants should realize that there are many influences on the market, most of them
beyond their control, such as changing technology, government policy or competitor's activities; some
will pose threats to them while others will offer opportunities. However, this study has revealed that
marketers of medicinal plants in Nigeria are not yet optimally utilizing the basic marketing strategy
elements and marketing philosophy. To this effect there is a need for the Nigerian government, through its
entrepreneurship development program, to organize enlightenment campaigns aimed at educating
marketers of medicinal plants about the basic elements of marketing strategy and how they can effectively
use them to achieve their goals thereby making the sector more vibrant. This is important given the
economic importance of medicinal plants in both developed and developing countries (Odugbemi, 2008).
Suggestion for further studies
Further studies can be conducted to determine the relative importance of the traditional marketing
elements in the marketing strategy of medicinal plants in the Nigerian business environment using the
Analytic Hierarchy Process Model. This is will enable the marketers of medicinal plants in Nigeria know
the importance they should attach to each traditional marketing so as to optimally allocate their resources.
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Challenges in the Era of Globalization
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Kotler, P. (1995), Marketing management: Analysis, Planning, Implementation and Control, New
Delhi: Prentice Hall of India private Limited.
Kotler, P. (2004), Marketing Management, 11 th ed., Delhi, India: Pearson Education (Singapore) Pte.
Ltd. Kotler, Philip, Gary Armstrong, John Saunders, and Veronica Wong (1999), Principles of
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Odugbemi, Tolu (2008). A Textbook of Medicinal Plants from Nigeria. (Ed.). Lagos: University of
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Stanton, W. J; R. Spiro (1999), Management of a Sales Force, Boston: The McGraw-Hill Companies,
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Venture capitalist marketing strategies for attracting portfolio companies in South Africa: A
theoretical review
Olutoye O. Ayodeji, tilakinv@gmail.com
Tilak Investment, Pretoria, & Post-graduate Student, Vaal University of Technology, Vandebijlpark,
South Africa.
Titilola Okusolubo, tilak2ng@yahoo.com
Tilak Investment, Pretoria, & Post-graduate Student, Vaal University of Technology, Vandebijlpark,
South Africa.
Abstract
Olutola Ayodeji, bigtollyray@yahoo.com
Tilak Investment Nigeria Limited, Lagos, Nigeria.
Marketing is central to any organisation, particularly businesses. Marketing factors are prominent among the
critical success factors for business firms, and effective marketing management involves the development of a
coherent plan, that assembles all the relevant market considerations and identifies the strategies and actions
required to achieve high and realistic sales goals. However, the marketing of specialised financial services such as
venture capital (VC) is a relatively new phenomenon in most developing countries and even within developed
countries. While the marketing of physical goods have been subjected to classical marketing theories, principles,
skills and approaches in addition to competitive pressure, financial services have not been subjected to the same
market pressure in order to survive. Financial services are more complex to market than physical goods. The
marketing orientation and relationship marketing concepts are important when comparing and contrasting
corporate markets for venture capital and their debt-financing counterparts (the banks). The focus of this paper is
on the ‘marketing function’ by venture capital firms and how they market their services and product to portfolio
companies. While there is a dearth of research on the financing side of the venture capital and private equity
industry in South Africa (i.e. how to generate/source funds from investors, the size of loans, number of funds being
managed, the screening criteria etc), there is very little to nothing in terms of research on the marketing side. By
using exploratory research design, this paper identifies the importance of the marketing function in the success of
the venture capital firms. It generates insights into how VC firms can market their products and services to portfolio
companies more effectively and efficiently.
Introduction
The importance of the marketing function in the success of any organization, whether profit or non
profit making, manufacturing, trading or service rendering cannot be overemphasized in view of the
traditional and modern role that marketing plays. From marketing research (determine customer
needs) to product features, packaging and placing at the convenience of the consumers, including
creating awareness about the existence of the organization and its products.
A formal approach to the marketing of financial services is a relatively new phenomenon, even within
developed countries. While it arguable that the marketing of physical goods has been subjected to
classical marketing theories, principles, skills and approaches in addition to competitive pressure,
financial services have not been subjected to the same market pressures in order to survive (Ennew and
Waite, 2007). In time past, the financial service industry in many countries have operated within a
comparative market environment and in some instances, they have been substantially state-managed and
controlled.
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Financial services (banking, venture capital (VC), insurance) products in general are far more complex
than physical goods and in marketing them, the level of knowledge of consumers and self-confidence is
important when comparing and contrasting the range of products on offer Ennew and Waite (2007).
According to the authors, it is pertinent to note that a number of factors that have played a part in
lessening the need for state-of-the-art marketing are issues associated with product transparency which
further weakens consumer-power. This result in less vigorous form of competition, the drive for
economies of scale has been a reduced feature of financial services and has also lessened the need to be at
the leading edge of marketing.
Other factors are; the influence of government on the development of products and with particular
reference to the venture capital industry is the initiating and sourcing of funds. In South Africa to be
specific, majority of the funds available are provided by institutional lenders like insurance companies,
and the government. In other countries like Israel, government played important and major roles in
development of the industry by providing the funds to kick-start the industry, product development and
promotion of those products which is contrasting to packaged goods.
Another important factor Ennew and Waite (2007) puts forward is the consumer’s attitude towards
financial products in general. They argued that Consumers do not gain explicit “enjoyment” from their
consumption of financial products. In the case of venture capital, it involves part ownership resulting in
joint decision making and relinquishing of some control by the consumer to the investing company (VC),
this coupled with the fact that traditional African culture shuns borrowing which leads to indebtedness.
This paper will examine the importance of marketing and the need to use marketing mix elements
(product, pricing, place and promotion) and tools such as packaging, branding, advertising, to create
necessary awareness about the venture capital industry in order to attract more deals and portfolio
companies in South Africa, in addition to Identifying the role of venture capital in the economic
development of a developing nation like South Africa, its opportunities, potential and challenges, and the
selection criteria used by venture capitalist in selecting deal and portfolio companies to finance.
.
Theoretical framework
The nature and practice of marketing is significantly influenced by the product and market context.
Marketing activities that are effective for fast moving consumer goods (FMCG) may be wholly or partly
in appropriate for financial services like venture capital. Also, what works in the USA may be ineffective
in Japan. Thus it is important to appreciate context in order to understand marketing practice. This is
particularly more evidence in the financial services sector, of which, the VC is an integral part.
Social, political, economic and institutional factors create a complex scenario in which the VC firm and
their portfolio companies interact and these varies from country to country. Among the contextual factors
influencing the financial services (venture capital) industry are; economic development, government
welfare context, the management of risk and regulation of financial services.
All too often, some financial services organization sense marketing to be a term applied to a department
that produces promotional materials whereas, in the their words, Ennew and Waite (2007) maintains that
“marketing should be a broad cultural and philosophical approach to overall organizational behaviour and
not some narrow field of functional competency”. It is important to note at this point, that a complex
inter-relationship exist between the financial services industry, the state and their consumers.
Across the globe, there is evidence of financial services industry that appear to be engaged in a perpetual
struggle for the trust of consumers and confidence of government and regulators. Thus, Ennew and Waite
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(2007) maintains, that a consumer focus marketing approach that is founded upon core values of value for
money, integrity, trust, security and transparency should be adopted for good marketing practice and a
prerequisite for the development of successful financial services industry.
What is Venture capital and Who is a Venture Capitalist?
The definition of venture capital has changed over the years and even varies from firm to firm, country to
country, but it is generally understood to be capital provided to new ventures Hudson (1995).
The venture capital industry supplies capital and other resources to entrepreneurs in business with high
growth potential in hopes of achieving a high rate of return on invested funds.” Timmons, Spinelli and
Zacharakis (2004) Timmons and Spinelli (2003).
“….venture capitalist takes an equity participation through stocks, warrants and/ or convertible securities
and has an active movement in the monitoring of each portfolio company bringing investment, financial
planning, and business skills to the firm (Hisrich, Peters, and Shepherd 2004)
“Venture capitalists perform the function of financial intermediaries taking funds from a group of
investors and redeploying those funds by investing in informational opaque issuers. In addition to
screening, contracting and monitoring, venture capitalists also determine the time and form of investment
exit, Berger and Udell (1998).
Venture Capitalist criteria for selection of venture
Venture capitalists have stringent criteria for assessing and evaluating their investment portfolio
companies which limit the number of companies they invest in Timmons et.al. (2004). It’s important to
note that venture capitalists and private equity financiers are also entrepreneurs who have funds and are
looking for viable ventures with very high growth rate “gazelles” with about 20 percent plus growth rate
where according to Timmons et. al. (2004), they quintuple their investments in five years, and are
characterized by high rate returns Wickham (2004).
They place a very high premium in the quality of management in venture and seek a management team
with complementary business skills headed by someone who has previous entrepreneurial or business
experience Timmons et. al. (2004). They undertake thorough and professional investigation and
evaluation of potential investments, which explains why most venture capital firms and the ventures, they
back-up, are highly successful Hall and Hofer (1993). Most of their investments are in the hightechnology
business, though some consider investing in other areas.
In a developing nation like South Africa, entrepreneurship plays a vital role in economic development.
Thus the venture capital industry if well developed and properly marketed, can play a major role in the
creation of entrepreneurial ventures that would stimulate and sustain the necessary economic growth,
consequently create jobs and reduce unemployment.
On the other hand, the number of deals and portfolio companies that venture capitalist are able to finance
are quite few when compared to their counterparts in the debt financing sector (commercial banks). Banks
are able to attract a lot of deals and loans application from customers as a result of their aggressive
marketing strategy which they pursue in terms of branding and advertising of their products and services.
There is dearth of research on the marketing side of the VC industry. Previous research has focused more
on the finance side, in terms of how they generate or source funds from investors for investments in
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portfolio companies, the average size of loans and number of funds being managed, the screening criteria
which is critical for their investment decision. Very little research exist on the marketing side, in terms of
how they package their loans products, place such product at the disposal of their potential clients, and
answers to such questions like; do they really advertise their product offering and product portfolio like
there banking counterparts? What other promotional tools like personal selling, do they use? How do they
price their products? Whether there are costs associated with the products and how do they treat such
cost?
Entrepreneurs appear to know very little about the financial products and services offered by venture
capitalist Robbie and Murray (1992), which explains why intermediaries have a potentially important role
to play in the entrepreneur’s selection of a venture capitalist Murray and Wright (1996).
Goods versus services marketing
In reality, it can be very difficult to differentiate services from goods since purchase of goods involves
some element of services. Similarly, a service is usually associated with a tangible good attached to it.
Thus financial services usually have money which may be physical cash or electronic transfer attached to
it.
Vargo and Lusch in Palmer (2008) argued that marketing was originally built on a goods-centred,
industrial-based model of economic exchange. This model developed during the industrial revolution but
with the aim of broadening its scope to include services, thus it has been constrained by the language and
models of manufactured goods.
Distinguishing features of services
A number of distinguishing features differentiate services from goods thus resulting in implications for
the manner in which they are marketed. These characteristics according to Palmer (2008) are often
described as intangibility, inseparability, variability, perishability and inability to own a service.
Intangibility
A pure service cannot be assessed using any of the physical senses. It is an abstraction that cannot be
examined physically before it is purchased. Palmer (2008). While it is possible for a prospective
purchaser of most goods to examine the goods for physical integrity, aesthetic appearance, taste, smell
etc. it is almost impossible for pure services. since services have no tangible properties that can be used
by consumers to verify advertising claims before the purchase is made, the intangible process
characteristics that define services; such as reliability, personal care, attentiveness of staff, friendliness
etc. can only be verified after a service has been purchased and consumed.
Marketing implication of intangibility- The lack of physical evidence that intangibility implies increases
the level of uncertainty a consumer faces when choosing between competing services. An important part
of services marketing program will involve reducing consumer’s perceived risk by means of adding
physical evidence and development of strong brands.
Inseparability
The production and consumption of tangible goods are two separate activities whereas in the case of
services, it is usually, inseparable. There must be continuous interaction between the producer and the
consumer. Though, with the advent of technology, the effect of inseparability as a feature of services has
been greatly reduced. An example is the service of the ATM machine. Technology merely facilitate a
more flexible and impersonal basis for the interaction.
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The implication of this for marketing of services lies in the fact that goods are generally first produced,
then offered for sale and finally sold and consumed, in the case of services, this process is modified, they
are generally sold first, then produced and consumed, simultaneously. Also, methods of goods production
is to a large extent of little importance to the consumer, but critical for the enjoyment of services.
Variability
Two aspects of variability that are relevant to services are:
• The extent to which production performance varies unintentionally from a norm, in terms both of
outcome and of production processes.
• The extent to which a service can be deliberately varied to meet the specific needs of individual
customers.
For services, variability impacts on customers in terms of outcomes and also, processes of production.
The latter poses a much greater problem for services compared to goods. It can be difficult to carry out
monitoring and control to ensure consistent standards because the customer is usually involved in the
production process for a change for a service at the same time as they consume it. It is important to note
that variability of service output can make the development of strong brands more difficult for services
than for goods.
Perishability
Services differ from goods in that they cannot be stored. For example, Personal computers produced but
not sold in a particular period can be carried forward as stock to sell in subsequent period, whereas, a
service such as a bus seat for a trip which was empty during the trip, cannot be sold in the next trip.
The perishability is very important in managing the demand with particular attention paid to peak and off
peak periods, and the use of pricing and promotion as two commonly used tools to tackle the problem.
Ownership
The inability to own a service is related to the characteristics of intangibility and perishability. Buyers of
goods generally have title of the goods and can do as they wish with it. In the case of a service performed,
no ownership is transferred from seller to buyer. The buyer in most cases merely buys the right to a
service process.
The inability to own a service has marketing implications for the design of distribution channels so a
wholesaler of retailer cannot take title, as is the case with goods, instead, direct distribution methods are
common and where intermediaries are used, they generally act as a co-producer with the service provider.
Additional characteristics of financial services
In addition to the above characteristics of services, financial services have the following additional
characteristics according to Ennew and Waite (2007).
Fiduciary responsibility- refers to the implicit responsibility which financial services providers have in
relation to the management of funds and the financial advice they supply to their customers.
First, many consumers find financial services difficult to comprehend since its understanding requires a
degree of numeracy, conceptual thinking and interest.
Secondly, the raw materials used to produce many financial products are consumers’ fund, thus in
producing and selling a ‘capital’ product, the venture capitalist has a responsibility to the person taking
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out the financial product as well as a responsibility to the providers of the fund and in most cases, the
latter take precedence over the former.
Contingent consumption
It is the nature of many financial services products, that money spent on them do not yield a direct
consumption benefit. In some cases, it may create consumption opportunities in the future, in other cases
it may never result in tangible consumption for the individual who made the purchase.
To address the issue the following may be helpful:
1. Benefits associated with the products must be clearly communicated and in as tangible a form as
possible.
2. Issues related to product design which might increase attractiveness of products designed for the longer
term should be considered. As an example some flexibility in payment, financing, (funds outlay) and
flexibility in exit strategy in the case of venture capital (period of exit) is important in increasing
attractiveness of products to customers.
Duration of consumption
The majority of financial services are (or have the potential to be) long term, either because they entail a
continuing relationship with the customer or there is a time lag before the benefits are realized.
Long term relationship should be built with customers in order to discourage switching between
providers. Thus the organization has to work on maintaining cordial relationship with customers from
time-to-time by not ignoring customers for long periods, manage relationship carefully through regular
contacts and communication between the organization and client.
Defining marketing in a service context.
The Chartered Institute of Marketing traditionally defines marketing as “the management process which
identifies, anticipates and supplies customer requirements efficiently and profitably”.
Defining financial services
A very useful definition is offered by Ennew and Waite (2007). “Financial services are concerned with
individuals, organizations and their finances… they are services which are directed specifically at
people’s intangible asset…The term is often used broadly to cover a whole range of banking services,
insurance, stock trading, asset management, credit cards, foreign exchange, trade finance, venture capital
and so on”. According to them, these different services are designed to meet a range of different needs
and takes different forms which usually require a formal (contractual) relationship between provider and
consumers and they typically require a degree of customization which is very extensive in the case of
venture capital.
The marketing issues that arise as a result of the variety of products are:
Some financial services may be short term (e.g. buying and selling stocks), while others are very long
term (mortgage, pension).
Product varies in terms of complexity. A basic savings account for a personal consumer may be relatively
simple, but the structuring of finance for a leverage buy-out may be highly complex.
Customers will vary in terms of both their needs and their levels of understanding.
An extended marketing mix for services
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The marketing mix is the set of tools available to an organization to shape the nature of its offer to
consumer. The marketing of goods involves the 4 Ps of Product, Price, Promotion and Place.
More recently, the 4 Ps of the marketing mix have been found to be too limited in their application to
services.
The following are particular problem which limit the usefulness of the 4 Ps to services: (Palmer (2008)
The intangible nature of services is overlooked in most analyses of the mix as an example; the product
mix is frequently analyzed in terms of tangible design properties, which may not be relevant to a service.
Also, physical distribution management may not be an important element of place mix decisions.
The price element overlooks the fact that many services are used by the public sector without a price
being charged to the final consumer as it were.
The promotion mix of the traditional 4 Ps fail to recognize the promotion of services that takes place at
the point of consumption by the production personnel for a portfolio manager, the manner in which the
service is produced is an important element of the total promotion of the service.
Products
Products are the means by which consumers’ needs are satisfied by organizations. It is anything that the
organization offers to potential customers. It could be tangible or intangible examples are Bank accounts,
insurance policies or a holiday.
Product mix decision facing a service marketer can be very different from those dealing with the goods.
Pure services are best defined using process description rather than tangible description of outcomes.
Pricing
Price mix decisions include strategic and tactical decisions about the average level of prices to be
charged, discount structures, terms of payment and the extent of price discrimination among different
groups of customers. The intangibility of services can mean that price is a very significant indicator of
quality. Also the personal and non-transferrable nature of many services makes it easy for price
discrimination Palmer (2008).
Promotion
Traditional promotion mix element includes various methods of using messages to communicate the
benefits of a product to potential consumers. In addition, the promotion of services often needs to place
particular emphasis on increasing the apparent tangibility of a service.
The promotion mix for services is wider than that for goods because services production personnel are an
important element of the promotion mix Palmer (2008).
Place
Place decisions refer to the ease of access that potential customers have to a service. Palmer (2008)
reiterates that these decisions can involve physical location decision (as in deciding an office place for a
finance institution), which intermediary to use in making a service accessible to a consumer. For services,
the concept of accessibility is more important than the traditionally defined place.
People
Palmer, (2008) maintains that for most services, people are vital element of the marketing mix. In the
service sector, people have a high level of contact with customers as such service organizations must
clearly specify what is expected from personnel in their interaction with customers. Thus people planning
are important marketing mix decisions and not regarded as purely personnel decisions.
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Physical evidence
The intangible nature of a service means that potential customers are unable to judge a service before it is
consumed therefore increasing the perceived riskiness inherent in a purchase decision. An important
element of marketing planning is to reduce this level of perceived risk by offering tangible evidence of
the nature of service Palmer (2008). In the case of venture capital, successful portfolio companies that
have been financed can be used as referral to new customers.
Processes
Production processes are of critical concern to consumers of services where consumers are a co-producer
of the service. With services, a clear distinction cannot be made between marketing and operations
management, service design should therefore pay attention to processes and manner in which service
personnel interact with customers during this process Palmer (2008).
The seven elements of an extended marketing mix are arguably not appropriate for a great diversity of
services but organizations can adapt relevant elements to its particular marketing environment.
Customer attraction strategies and the marketing mix
Traditionally, marketing has focused attention on how to attract new customers - a process described as
customer acquisition. However, it is becoming increasingly important that existing customers be retained
and it is as a matter of fact, as important as attracting new ones. The marketing elements (product, price,
place, promotion, people, physical evidence and product) as discussed above, are used for acquisition and
retention, and are similar in many instances but their application may vary from one service to the other,
and from one organization to another, and from industry to industry.
Identifying Venture Capital Investors
According to Timmons and Spinelli, (2003) if you are searching for a venture capital investor, Pratt’s
Guide to Venture Capital Sources is a good guide to check and in the case of South Africa, the Southern
African Venture and Private Equity Capital Association’s website will be useful.
Since venture capitalists firms receive thousands of propositions every year they mostly pay attention to
business plans that comes from a “warm referral” therefore it is important to find a “warm” referral to
each venture capital firm. They could be from accountants, lawyers, investments and commercial bankers,
business school professors and business network who are knowledgeable about professional investors
Timmons et.al. (2004).
Research design and Methodology
The research design is exploratory, and it involves an extensive literature study using a qualitative
approach. Secondary data sources include the collection of past articles on venture capital, and, financial
services marketing published in international journals like the journal of Marketing, journal of Small
Business Management, Journal of Business Venturing. The articles were supplemented by textbooks on
financial services marketing, as well as annual report of KPMG and SAVCA.
Exploratory research design was chosen by the researchers due to the broad nature of the study with the
intention of identifying areas of further descriptive and or conclusive research in future Churchill and
Brown, (2004).
Conclusion and Implication
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Services are at the heart of value creation even for physical goods, services such as Accountancy,
banking, Insurance, finance, etc. help to provide benefits for tangible goods Palmer, (2008). Venture
capital forms an integral part of financial services, of which many authors have pointed to the limitation
of traditional marketing principles when applied to the marketing or services Palmer (2008). This is in
view of the fact that there exist differences between goods and services, hence marketing tools used for
goods marketing cannot easily be applied to services marketing.
Furthermore, in an increasingly competitive environment for financial and professional services there is a
considerable responsibility on the providers of such services to improve their marketing efforts towards
prospective clients Murray and Wright (1996). The growth in competition between providers of venture
finance has increased the strategic importance of venture capital firms in ensuring a regular stream of
attractive and fundable business ventures. What is of critical importance to the venture capitalist is the
quality of proposed projects and the competency of the management team rather than the volume or
quantity of proposals they receive.
The marketing of venture capital products have very significant implications for various stakeholders,
starting with the VC firm, to the portfolio company being financed by it, to policy makers. It is of
significance, in order for VC firms to attract the right quality of projects to finance, design their products,
package the products, price, and effectively make use of the extended seven Ps of service marketing
which include the people, processes and physical evidence that forms an integral part of the marketing
mix and interact continuously with the customers as against the traditional four Ps of product, price, place
and promotion alone.
Since Venture Capital service can be classified as High knowledge-based service Palmer (2008) because
the VC practitioner makes use of their knowledge on a narrow area of financing, although, they have to
engage in management of a number of portfolio companies which they finance. As such, evaluation of the
VC specialist maybe the primary basis of evaluating the service offer while Service delivery may be an
important consumer evaluation criteria also.
The marketing of venture capital as a financial service can be effectively and efficiently undertaken if it is
approached with a thorough understanding of services marketing with particular adaptation and glean
from financial services characteristics as discussed above.
Also, the pricing of VC products vary in accordance to the product and process complexity since
customer needs vary widely and products also vary and are tailor-made to the needs of different
customers.
Finally, since venture capital firms and portfolio companies enter into a long-term continuous
relationship, customer satisfaction should be a critical marketing tool that should be emphasized at every
stage of the process as the critical success factor for retention and sustainability of the relationship.
References
A.N. Berger and G.F. Udell (1998). The Economics of Small Business Finance: The Role of Private
Equity Debt Markets in the Financial Growth Cycle. Journal of Banking and Finance, Elsevier Science,
New York 613-673.
Churchill, G. A. and T. J. Brown (2004). Basic Marketing Research. 5 th ed. Ohio: South Western. Boston.
Ennew, C. T. and N. Waite (2007). Financial Services Marketing: An International Guide to Principles
and Practice. Oxford: Elsevier.
J. Hall and C. W. Hofer (1993). Venture Capitalists’ Decision Criteria in New Venture Evalution. Journal
of Business Venturing, Elsevier Science, 25-42.
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Hisrich, R. D., Peters M. P. and D. A. Shepherd (2004). Entrepreneurship. 6 th ed. Boston: Irwin /
McGraw-Hill.
T.B. Hudson (1995). Venture Capital in the Restaurant Industry. Cornell Hotel and Restaurant
Administration Quarterly, June, 50-61.
KPMG and Southern African Venture Capital and Private Equity Association (SAVCA). (2010). Venture
Capital and Private Equity Industry Performance Survey of South Africa Covering the 2009 Calendar
Year.
Palmer, A. (2008). Principles of Services Marketing. 5 th ed. Berkshire: McGraw-Hill.
K. Robbie and G. Murray (1992). “Venture Capital in the UK.” International Journal of Bank Marketing,
10 (5) 32-40.
Timmons, J. A., S. Spinelli and A. Zacharakis (2004). How to Raise Capital: Techniques and Strategies
for Financing and Valuing Your Small Business. New York: McGraw-Hill.
Timmons, J. A. and S. Spinelli (2003). New Venture Creation: Entrepreneurship for the 21 st Century. 6 th
ed. Boston: McGraw-Hill.
Wickham, P. A. (2004). Strategic Entrepreneurship. 3 rd ed. Pearson.
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Abstract
CSR Practices of a Communications Service Provider in Ghana
Prince Kodua and Stephen Arthur
Department of Marketing and Customer Management, University of Ghana Business School,
University of Ghana, Legon, Accra.
Purpose: To investigate CSR practices by a leading telecommunication company in Ghana, with a focus
on the dimensions of stakeholder interests, norms and values addressed by the organization. It also
sought to find out the framework that guides the planning and implementation of CSR programmes by
MTN Ghana. Methodology: A conceptual framework was adopted and used for comparative content
analysis of MTN’s CSR practices. Senior management of the company in charge of CSR programmes was
interviewed, and information posted on the organization’s website with respect to CSR engagements was
obtained. Findings: MTN is strongly committed to social responsibility programmes and has an
independent CSR unit, dubbed, “MTN Foundation”. However, there seems to be poor coordination of
activities in other departments. Again, there appears to be lack of proactive approach in identifying the
actual needs of key stakeholders. Originality/value: The study provides a framework to serve as a guide
to managers in the planning and implementation of CSR programmes in Ghana and other developing
countries.
Introduction
It is fast becoming fashionable for companies of all kinds to declare themselves as socially responsible
(SR) due to the perception that CSR can create some marketing and competitive advantages for
businesses (Maignan, Ferrell, and Ferrel, 2005). However, some companies focus on specific stakeholder
groups, such as customers, shareholders, employees, and competitors (Greenley et al., 2004).This has led
to an increasing pressure on businesses to show a balanced and a comprehensive perspective on various
stakeholder interests (Gardiner, Rubbens, and Bonfogli, 2003). Consequently, there is evolving concern
that organizations must focus not just on their customers, but also the important stakeholder groups that
hold the firm accountable for its actions (Maignan et al, 2005).
There is therefore the need to identify the interests of specific stakeholder groups that organizations’ CSR
practices need to take into account. However, an overview of the literature on stakeholder theory creates
the impression that the concepts surrounding the stakeholder are referred to in confusing ways (Lepineux,
2005; Egels, 2005). Waxenberger and Spence (2003), observed, “there is even lack of clarity and
consistency in the definition of a stakeholder, and indeed of a stake. There are some fundamental
inconsistencies between some definitions and the graphical representation of the model (Fassin, 2008).
Finally, there is insufficient rigour in applying the framework to managerial, organizational and strategic
issues:” much of stakeholder literature is prone to magnifying, blurring and/or neglecting” (Wolfe and
Putler, 2002). Society today is characterizes by multiple collectives (Heath, 2006) of different
stakeholders, whose interests are often in a constant state of flux, which poses new uncertainties for
organizations (Gower, 2006).
This apparent state of confusion in identifying stakeholders and their stake in organizations attracted the
researchers’ interest to investigate which stakeholder interests are being captured by a company that is
recognized for being socially responsible in Ghana. In Ghana, studies on CSR have mainly focused on
CSR reportage on bank website (Hinson, Boateng, and Madichie 2010), and CSR perspectives of leading
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firms in Ghana (Ofori and Hinson, 2007). However, these studies failed to examine the various aspects of
stakeholder interests that are captured under organizations’ CSR engagements. This study seeks to
investigate whether leading firms in Ghana have a framework for integrating the interests of an
organizations’ stakeholders into their CSR activities by adopting Hinson et al’s (2010) framework for
CSR online reportage. Given the dearth of research on integration of stakeholder interests into the CSR
framework, this study aims at the following objectives:
1. Identify which dimensions of stakeholder groups are captured in MTN’s CSR engagements
2. Ascertaining the nature and form of MTN’s CSR activities
3. Identify any gaps that may exist in MTN’s actual CSR practice per the study’s framework.
This paper is organized under six main themes, where the first section introduces readers to the
background of the study, the second section presents the context of the study. Sections three and four
examine the concept of stakeholder from CSR perspective and the conceptual framework respectively. In
section five, we highlight the research approach and findings. The paper concludes with discussion and
implications of findings in section six.
Context of the Study
MTN, the leading provider of telecommunications services in Africa and the Middle East, entered the
Ghanaian market following the acquisition of Investcom, and currently has over 8 million subscribers
(GIPC, 2010). MTN was awarded the “GC 100 Best Company in CSR” by Ghana Investment Promotion
Centre (GIPC) during their 2009 edition of annual awards scheme for corporate organizations dubbed
“Ghana Club 100”. At the 2009 GC 100 rankings, MTN was also ranked eighth position out of hundred
(100) best performing companies in Ghana and first in the telecommunication sub-sector. “The Ghana
Club 100 Awards” rewards corporate excellence in Ghana’s business environment and is perceived to be
one of the most objective indicators of business performance in Ghana. Companies are ranked along
indicators such as: net asset size; profit before tax; number of employees; return on equity; net margin and
growth. Other discretionary awards for specific categories such as: Best Entrant Company; Best Listed
Company; Best Company in CSR; and Best Company in the media are awarded to deserving companies
based on the estimation of Ghana Investment Promotion Centre (A Government of Ghana agency
established by Act 478 in 1994 to promote and facilitate investments in all sectors of the economy except
mining and petroleum).
According to GIPC (2010), the best CSR company award goes to corporate organization that practices a
comprehensive CSR programmes for the year under review. Corporate organizations are assessed based
on Ghana Business Code evaluation tool adopted for GIPC GC 100 relevance.
Besides being the “GC 100 Best CSR Company” for year 2009, the strategic posture MTN suggests a
commitment to CSR programmes as captured in the company’s mission statement below:
“Building shareholders’ value by ensuring maximum customer satisfaction through providing latest
telecommunication services, at the most economical rates while meeting its social responsibilities as a
good corporate citizen and providing growth prospects for its employees”
(www.mtn.gh).
These revelations informed the choice of MTN as a suitable case for this study.
Stakeholder and CSR Concepts
The origin of the stakeholder concept lies in the business science literature (Freeman, 1984) and may be
traced back even as far as Adam Smith and his The Theory of Moral Sentiments Wagner et al., (2011). Its
modern utilization in management literature was brought about by the Stanford Research Institute, which
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introduced the term in 1963 to generalize and expand the notion of the stakeholders as the only group that
management needed to be sensitive towards (Jongbloed et al., 2008). Meanwhile, in accordance with
Friedman and Miles (2006), the term “stakeholder” has been deployed indiscriminately in the last two
decades (Wagner et al., 2011). Although each researcher defines the concept differently, they do as a rule
reflect the same principle to a larger or lesser extent: the company should take into consideration the
needs, interests and influences of peoples and groups who either impact on or may be impacted by its
policies and operations (Frederick et al., 1992). Extant literature defines stakeholder as any group or
individual who can affect or is affected by the achievements of the organization’s objectives (Freeman,
1984). Stakeholder theory is timely for PR (Woerkum and Aarts, 2008), as it concentrates on the longterm
social networks and relationships that organizations have (Wilson, 2001). Luoma-aho (2007),
observed, stakeholders’ assessment and expectations contribute highly to organizational reputation and
legitimacy. However, stakeholder theory has been criticized for assuming the environment is static
(Luoma-aho and Paloviita, 2010). The organizational environment of stakeholders in not static, but
marked by conflict of interest; societal developments are constantly changing the field of forces in which
organizations operate (Vos and Schoemaker, 2005). Foley and Kendrick (2006) speak of stakeholder
environment as a fragile ecosystem. So far, the dynamic nature of this ecosystem has not been fully
addressed (Wu, 2007).The stakeholder model is seen as suffering from vagueness in scope and ambiguity
due to the possible interpretations of the basic stakeholder concept in either narrow or broad senses
(Hansen et al., 2004).The different understandings are founded in the differences between managerial and
legal interpretations of the stakeholder concept (Fassin, 2008). The legal interpretation – reinforcing the
philosophical analysis- rests upon rights and contracts: stakeholders have claims, firms have obligations
and duties. Conversely, the managerial approach, originating from organization theory and sociology, is
more pragmatic and emphasises the relational aspects between stakeholders and the firm (Pesqueux et al.,
2005).
Following the confusion in identifying and determining the responsibility of firms to its various
stakeholders, Fassin (2008), identified three categories of stakeholders : stakeholder, stakewatcher and
stakekeeper. The three categories have substantially different profiles. For the real stakeholders, who
possess a legitimate claim, power and influence are reciprocal; the firm has responsibility for them.They
include shareholders, customers, employees, business partners, and communities. The firm has little
power on and no responsibility for indirect stakeholders, whose legitimacy is derivative (Philips, 2003).
The stakewatchers encompasses those stakeholders who look after a stake with care, attention and
scrutiny just as watchdogs do (Fassin, 2008). Examples include unions guarding the stake of employees
and workers; consumer associations defending the stake of consumers; investor associations protecting
the interest of shareholders; and activitists watching the stake of the community and the environment. The
stakekeepers is another group who are even further removed from the active real stakeholders: the
independent regulators, who have no stake in the firm but have influence and control. They impose
regulations and constraints, while the firm has little reciprocal direct impact on them. The term gatekeeper
or stakekeeper connotes some form of outside or independent monitor with some power to screen out or
at least to grade or rate the persons or entities he scrutinises. Examples in finance are auditors, security
analysts, Security and Exchange Commission. They are typically “repeat players who provide
certification or verification services to investors” and “act by pledging their reputational capital to the
corporation” to assure investors as to the quality of the information (Coffee, 2006). Governments tend to
be the major generic stakekeeper. Specific stakekeepers include court, regulatory agencies, certification
organizations, independent evaluation bodies and laboratories. The press and the media form another
grouping of stakekeepers. The actions of stakekeepers find their expressions in laws, norms, codes,
analyses etc. and in publications.
Following the above categories of stakeholders, the question is, to what extent must an organization’s
CSR engagements consider the divergent interests of each group? There is little doubt that CSR is now a
prominent feature of the international business agenda (2007), and that CSR meaning, orientations,
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relevance and applicability vary across different country contexts (Matten and Moon, 2008). Companies
across the world exhibit a variety of CSR principles, policies and practices (Baughn et al., 2007), with
different levels of intensity (Welford, 2005). In an institutional analysis of corporate social responsibility
in Kenya, Muthuri and Gilbert (2011), found that conditions such as lack of government regulations, and
the government capacity to enforce regulation, the establishment of a vibrant CSR institutions and a
vibrant civil society that advance civil regulations are key drivers of CSR engagements on organizations.
This confirms the role of external stakeholders in the planning and implementation of CSR engagements
by organizations. Multiple conceptualizations of CSR exist, and a single definition has yet to be agreed on
(Gariba and Mele, 2004).Frederick’s notion of CSR (Frederick, 1997) is that corportions have an
obligation to constituent groups in society other than shareholders and beyond that prescribed by law or
union contract. Similarly, Wood (1991) states that, the basic idea of CSR is that, business and society are
interwoven rather than distinct entities. For Steiner and Steiner (2000), social responsibility is the duty a
corporation has to create wealth by using means that avoid harm, to protect, or enhance societal assets.
McWilliam and Siegel (2001) describe CSR as actions that appear to further some social good beyond the
interest of the firm and which are required by law. The conceptualizations of CSR above are in sharp
contrast with arguments by Sloan (1964) that “the strategic aim of a business is to earn a return on capital,
and if in any particular case the resturn in the long run is not satisfactory, then the deficiency should be
corrected or the activity abandoned for a more favourable one”. However, the myth that firms have only
one overarching goal within society (i.e. shareholder wealth maximization) has, however, clearly become
obsolete. A more balanced, value-based and integrative perspective has evolved (Holliday et al., 2002).
Therefore, in this study, the stakeholder theory approach which is a more balanced, value-based and
integrative approach to CSR is used.
The stakeholder theory therefore requires organizations to balance the conflicting needs of its various
stakeholders. Maignan et al., (2005) outlined common issues of concern for stakeholders: employees-
compensation and benefits, training and development, employee diversity, occupational health and safety
and communication with management. For customers-product safety and quality, management of
customer complaints, services to disabled customers were identified as key issues. Investors were found
to be interested in transparency of shareholder communication and shareholder rights whilst organizations
that encourage suppliers from developing countires as well as minority suppliers were considered socially
responsible. Within the community, public health and safety protection, conservation of energy and
materials and donations to support local organizations are some of issues considered critical.
Environmental groups also focus on minimizing the use of energy, emissions, waste, and adverse
environmental impacts of products and services. Similarly, Harahap (2006), identified some form of
socially responsible behaviors as: disclosure of information to shareholders, disclosure of the board of
directors, equality of treatment for minorities, environmental protections (e.g. reduction of emissions and
waste recycling of materials), philanthropy (donating to charities), involvement in social causes
(involving anything from human rights to AIDS education), urban investment (working with local
government to regenerate
Research Methodology
The study made use of qualitative study to provide insight into the topic (Robson, 2002). Qualitative
research typically seeks to provide insight and not to measure. It is argued that, respondents (Spiggle,
1994) can gain this insight through a process consisting of analysis and meaningful integration of views.
Even though the wider academic marketing community has some reservations about qualitative research
(Hunt, 1994), it has been observed that studies that employ qualitative research have increased markedly
over the past decade (Hinson, 2010). Again, it is well-known fact that most qualitative research is
exploratory and this is in keeping with the purpose of this study, which sought to gain an understanding of
CSR practices among leading firms in Ghana. According to Robson (2002), an exploratory study
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fundamentally constitutes a means of establishing “what is happening; to seek new insights; to ask
questions and to assess phenomena in new light.”
In this qualitative study, the case study approach was adopted since it provided an excellent opportunity
for a detailed and thorough examination of CSR practices of the focal company (MTN) in Ghanaian
context.
Data for the paper was collected from a leading telecommunication service provider in Ghana in an
attempt to gain an understanding into CSR practices under the conceptual lenses of a stakeholder model
for implementing CSR in marketing developed originally by Branco and Rodrigues (2006) and adopted
and modified by Hinson et al., (2010). A comparative study was conducted in order to ascertain MTN’s
CSR programmes per the study’s framework. Personal visits were made to the organization and the
Executive Secretary of MTN Foundation was interviewed on January 14, 2011 covering wide range of
issues concerning CSR activities the company engages in. The interview sought to identify how MTN
plans and implements its’ CSR engagements and which stakeholder interest are captured. The interview
was recorded, transcribed, and subsequently used as part of inputs into the findings of the study.
Other sources of evidence included documentation and archival records obtained mainly from the
website of MTN.
Discussion of findings
Currently, MTN’s CSR programmes focus on philanthropic activities to support the poor communities in
Ghana in two main areas: health and education. These activities are planned and implemented by an
independent body; “MTN Foundation”, a separate unit within the organization responsible for CSR
programmes. As the Executive Secretary of the Foundation noted;
“The MTN Foundation has its own structure and its’ Board of Directors and focus on two areas: health
and education.”
However, an examination of MTN’s mission statement posted on the company’s website suggest
commitment to multiple stakeholder groups such as customers, shareholders, employees and the
community in which MTN operates. This is evident in the mission statement below:
“Building shareholders’ value by ensuring maximum customer satisfaction through providing latest
telecommunication services, at the most economical rates while meeting its social responsibilities as good
corporate citizen and providing growth prospects for its employees.”
Having expressly and overtly declared commitment to these multiple stakeholders, it was expected that an
apex body such as the MTN Foundation would have been a suitable platform for coordinating
programmes aimed at addressing the issues of interest to these stakeholders. It was however, observed
that marketing activities and CSR are planned and implemented separately and poorly coordinated. In
response to a question that sought to find out how CSR activities are coordinated and embedded in
MTN’s marketing activities, the Executive Secretary of the Foundation had this to say;
“CSR is independent and doesn’t necessarily have to look at what marketing is doing before undertaking
its projects. Marketing and CSR are two different kinds of entities, Marketing does its shows, publicity to
be able to generate some income and give a percentage for CSR activities”
This findings confirms similar observations made by Maignan et al. (2005), indicating that even though
many some leading businesses –including Shell, Beyond Petroleum, and Starbucks-have introduced
innovative corporate social responsibility (CSR) initiatives, many organizations have failed to implement
a solid CSR programme that truly integrates and balances their responsibilities to various stakeholder
groups.
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To ascertain how stakeholder needs are identified by the Foundation, it became known that prospective
beneficiaries of the CSR programmes apply to the Foundation for assistance. Subsequently, based on
established guidelines, beneficiaries are selected. The main guideline is that, the project must fall within
the areas of health and education. This is contained in a response by the Executive Secretary:
“The Foundation is non- biased, but neutral and receives proposal from all angles provided they fall
within health and education.”
To find out the form MTN’s CSR programmes take, infrastructural facilities such as water projects in the
Northern part of Ghana, hospital equipments such as adoption of Korle-Bu (a major hospital in Ghana)
Maternity Block, school building etc. When asked about the expected benefits for MTN’s engagements in
these activities, the Executive Secretary replied:
“The Foundation doesn’t expect any corporate benefit from its CSR engagements; our CSR always look
at giving to support the needs of communities.”
To examine how MTN audits, implements and promotes CSR practices, it was established that the Board
of Directors are primarily in charge of auditing the current programmes. An unspecified percentage of
sales revenue is devoted for implementation of CSR programmes. The media and company website are
the main vehicles used to promote the CSR activities. The structure of the foundation is explained by the
Executive Secretary as follows;
“The MTN Foundation was established in 2007, with its own Board of Directors such as Prof. Franklin
Manu (Dean of Business School at Ghana Institute of Management & Public Administration,
GIMPA),Dr. Peter Plangeju (Lecturer, Kwame Nkrumah University of Science & Technology, KNUST),
the CEO of MTN and Mrs Mawoena Chereba, as the Executive Director of the Foundation.”
As Luoma-aho (2007) rightly observed, stakeholders’ assessment and expectations contribute highly to
organizational reputation and legitimacy. However, with reference to the study’s framework, the main
gaps in MTN’s CSR engagements were employees, customer, and environmental issues which are not
properly coordinated by the management of the foundation.
Implications of findings
It is clear from the discussion of findings above that MTN is committed to CSR programmes. This is
evident in the establishment of a unit dubbed “MTN Foundation” to manage CSR programmes. However,
the following steps can be taken to improve on the current practices:
First, there is the need for better coordination of activities undertaken by the various departments such as
marketing and human resource that would be of interest to other stakeholders. This is essential in ensuring
a fit of CSR programmes and the values and norms MTN has espoused in its mission statement. The
current practice, where marketing and human resource departments do their own programmes would
result in overlooking and under-reporting of major CSR related activites. For example, as the Executive
Secretary noted;
“The HR department sees to it that employees are not overlooked, and even employ a larger percentage of
the physically challenged, it is not captured by CSR but HR”
As Maignan and Ferrell (2004) noted “Stakeholder values and norms concern both issues that do and do
not affect stakeholders’ own welfare. For example, consumers may worry not only about product safety,
but also about child labour, an issue that does not impact them directly.
Identification of stakeholder norms and values is crucial in reconciling with organizational norms and
values. To improve on the current practice, it is recommended that further consultations, accommodation,
formulation of alternatives and efficient communication is required to avoid neglect of major stakholder
interests.This require proactive identifiaction and evaluation of stakeholder interest and values instead of
receiving proposal from prospective beneficiaries. As the Executive Secretary noted;
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“Sometimes, people approach us and ask, why didn’t you (MTN) sponsor this or that programme, instead
of this?”
As Carroll and Buchholtz (2003), cautioned, “Stakeholders have some level of power over a business
because they are in the position to withhold, or at least threaten to withhold organizational resources. It is
therefore imperative for key stakeholders’ interest to be identified and addressed through stakeholder
intelligence generation such as surveys, monotoring the issues discussed in the media and professional
associations.
Finally, there is the need for management of MTN to view CSR programmes as a source of competitive
advantage rather than a mere altruism. The lack of synchronisation with marketing and human resource
departments results from this strategic posture. In sum, the CSR posture of MTN is very impressive, the
above recommendations are intended to strenghten the existing framework to serve as a model for other
corporate organization on Ghana.
Conclusion and Recommendations
From the above discussions, it is obvious that MTN Ghana has demonstrated strong commitment to CSR
programmes. However, there is the need to coordinate the activities of various departments into the
overall CSR platform and also as adopt proactive measures to identify stakeholder interests and norms.
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Gariga, E., & Mele, D., (2004), Corporate Social Responsibility Theories: Mapping the Theory , Journal
of Business Ethics, 53 (1/2): 51-71.
Figure 1.0: Conceptual Framework of the study
CSR
ENGAGEMENTS
Source: Adapted and Modified from Hinson et al., (2010).
INTERNAL STAKEHOLDERS
Employees Issues Customers/ Investors Issues
• Compensation and benefits
• Training and development
• Employee diversity
• Occupational health and safety
• Communications with
management.
Environmental Issues
• Minimizing the use of energy
• Minimizing emissions and
waste
• Minimizing the adverse
environmental impacts of
products and services.
EXTERNAL STAKEHOLDERS
• Product safety and quality
• Management of customer complaints
• Services to disabled customers.
• Transparency of shareholder
communications
• Shareholder rights.
Community/ Supplier Issues
• Public health and safety protection
• Conservation of energy and materials
• Donations and support of local
organizations.
• Encouraging suppliers in developing
countries
• Encouraging minority suppliers
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Competitive Strategies and Organizational Performance in Emerging Markets: A Comparative
Analysis of Contemporary Marketing Practices in China and Ghana
Abstract
Kofi Q. Dadzie , Georgia State University, USA, kdadzie@gsu.edu
Evelyn Winston, Clark Atlanta University, USA, edadzie@cau.edu
The authors examine how organizations in China and Ghana compete with various configurations of
contemporary marketing practices (transactional, data base, interaction and network marketing,
Coviello, Brodie, Danaher and Johnston 2002). Results suggest that the predominant marketing practices
in China was a relational/transactional hybrid emphasis and was practiced mostly by organizations
pursuing a differentiation strategy, while the predominant contemporary marketing practice in Ghana
was an interaction marketing emphasis practiced mostly by organizations lacking a clear or coherent
competitive strategy. Further, competitive strategies in China were consistently linked to above average
market performance, while they were linked to below average market performance in Ghana. Theoretical
and managerial implications are discussed.
Introduction
In the past several decades, marketing scholars have focused considerable literature attention on
relationship marketing as the new and modern paradigm to guide the organization of the marketing
function in the 21 st century global business environment (e.g., Berry, 1995; Day and Montgomery, 1999;
Gronroos, 1991; Kotler, 1992; Morgan and Hunt, 1994; Webster, 1992). The extant literature has been
based on the assumption that firms relate to their markets on the basis of type of market served (consumer
vs. business) and type of market offer (goods vs. services). That is, consumer and goods firms are more
transactional and business-to-business and service firms are more relational in their marketing practices.
However, a recent stream of research under the contemporary marketing practice (CMP) framework
(Coviello, Brodie, Danaher and Johnston 2002) suggests that the consumer vs. business and goods vs.
service mutually exclusive typology of marketing practices does not fit many firms. Consequently, the
question of how organizations compete effectively with relational marketing practices is an unresolved
issue for marketing managers and scholars alike.
In this study, we investigated the construct validity of the contemporary marketing practice (CMP)
framework in a comparative emerging market context by examining how firms relate to their markets
with contemporary marketing practices in China and Ghana. We were particularly interested in
determining (1) whether firms relate to their markets on the basis of their markets, as is acknowledged in
the literature, or on the basis of the competitive marketing environment of their markets, as is posited in
the strategic management literature, and (2) the link between the predominant types of CMP and
organizational performance. A comparative analysis of CMP in China and Ghana can make several
important contributions to the literature. China is projected by some international agencies to overtake the
U.S. as the largest market in the next few decades. Theoretically, Chinese firms and West African firms,
such as those in Ghana, can be classified similarly on Hofstede’s (2001) cultural dimensions of
individualism (China=20 vs. West Africa = 20), power distance (China = 80 vs. West Africa = 66) and
masculinity (China = 66 and West Africa = 46). Such cultural similarities are theoretically related to
relationship development (Coveillo et al. 2002) and can be a source of coercive pressure on organizations
to respond to change (DiMaggio and Powell 1983; Meyer and Rowan 1977). Managerially, Chinese
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organizations are increasingly exporting their managerial know-how to African countries. Hence,
knowing what marketing practices work in both countries should guide managers when making decisions
about how to serve markets in emerging markets in Africa. We begin our study by examining the CMP
framework within the context of the emerging market competitive business environment. Next, we
explain our field surveys in China and Ghana. Finally, we present our analysis and the theoretical and
managerial implications of our findings.
Configurations of Contemporary Marketing Practices in Emerging Markets
The CMP framework recently proposed by Coviello et al. (2002) enables researchers to compare the
relatively importance of traditional transactional marketing with relationship marketing practices.
According to Coviello et al. (2002) firms relate to their major markets with varying configurations of
CMP on the basis of type of market served (consumer versus business) or type of market offer (goods
versus services). The initial framework conceptualized CMP as a configuration of four aspects of
managerial marketing practices including (1) transactional marketing, TM; (2) data base marketing, DM;
(3) interaction marketing, IM; and (4) network marketing, NM. More recently, the authors have added a
fifth element, e-marketing, to their CMP mix. We do not include in e-marketing in this study because we
believe it is better examined as a marketing tool that can be used in conjunction with all four aspects of
CMP in the 2002 model. Although studies of CMP in Argentina (Pels, Brodie and Johnston 2004),
Russia (Wagner 2005), and West Africa (Dadzie, Johnston and Pels, 2008) confirm the robustness of
CMP configurations in explaining how firms relate to their markets, these studies do not explore the
organization performance outcomes when firms emphasize on aspects of CMP over another.
According to management strategy scholars (e.g., Hitt, Ireland and Hoskisson, 2011; Porter, 1980, 1985;
Miles and Snow, 1978), firms that follow a strategy are more likely to outperform their counterparts than
those that do not. Porter (1980, 1985) offers three generic business strategies to guide the formulation of
competitive activities, including cost leadership, differentiation and focus. These strategies have been
found to be internally consistent (e.g., Dess and Davis, 1984; Hambrick, 1983) and are widely used in the
global environment (e.g., Acquaah, Adjei and Mensa-Bonsu, 2008; Kim and Lim, 1988; Kim, Nam, and
Stimpert, 2004). We focus on both pure strategies of differentiation and low-cost because we seek to
validate Porter’s (1980) argument that firms that follow a pure strategy perform better than those that
seek to follow both strategies. Differentiation strategy refers to the “…. integrated set of actions taken
to produce goods and service (at an acceptable cost) that customers perceive as being different in ways
that are important to them” (Hitt et al. 2011, page 110). A review of the literature suggests both
transactional (Miller, 1988; Porter, 1985) and relationship marketing practices are essential for a
successful differentiation strategy. Accordingly, it can be expected that organizations using a
differentiation strategy can attain above average performance by emphasizing all approaches to
contemporary marketing practices. A low-cost strategy refers to the “…integrated set of actions taken to
produce goods or services with features that are acceptable to customer at the lowest cost, relative to that
of competitors” (Hitt et al., 2011, p. 108). From the literature, it can be inferred that an emphasis on
transactional marketing is more essential for a low-cost strategy firm than a relationship marketing
emphasis.
Research Methods
In Ghana and China, data were collected in the leading commercial and political cities: Accra, in Ghana
and Beijing (North China), Guangdong (South China), Shanghai (East China), and Xian (West China).
All four focal constructs of the study were measured with existing scales after extensive validation and
modification in both countries. Measures for differentiation and low cost strategies were adapted from
items commonly used to measure Porter’s (1980) generic competitive strategies (e.g., Miller and Dess,
1993). The CMP configurations were measured with the 40 item scale operationalizing the four aspects of
managerial marketing practices (i.e., TM, DM, IM, and NM) developed by Coviello et al. (2002).
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Organizational performance was operationalized as a two-dimensional construct including market
performance (customer attraction, customer retention, and market share) and financial performance
(Venkatraman and Ramanujam, 1986). Respondents were asked to provide actual ROI, profit, and sales
estimates for the past year.
In addition to other steps, we assessed the possible existence of common method bias in the two data sets,
using a CFA approach to Harman’s One-Factor test (see, among others, Babakus, Yavas, and Ashill,
2009; Baldauf, Cravens, Diamantopoulos, and Zeugner-Roth, 2009). In the Ghana sample, the proposed
model (χ 2 /df=2.85, CFI=0.88, NFI=0.82, NNFI=0.85, RMSEA=0.091) was compared to the one factor
model. The results of the One-Factor model had a significantly worse fit (χ 2 /df=9.60, CFI=0.64,
NFI=0.61, NNFI=0.59, RMSEA=0.170; ∆χ 2 10= 997.51, p

Proceedings of the 12th Annual Conference © 2011 IAABD
Data base marketing .29 .85 .63
Interaction marketing .45 .87 .73
Network marketing
.35
.86
.65
Number of cases
29
78
109
Proportion of sample
14.0% 36.0% 50.0%
• Scores range from between 0 and 1 obtained by dividing the mean ratings for each construct by 5 because
original items were measured by a five-point Likert scale (Coviello et al. 2002).
The results of the cluster solutions in Table 1 indicated significant similarities and differences in how
firms relate to their markets across both samples. In the Chinese sample, the largest cluster comprised
50% of the sample of firms who practiced the highest levels of all four aspects of marketing (a relational
/transactional hybrid emphasis). The second largest cluster in the Chinese sample (25%) was equivalent to
a transactional marketing emphasis because it comprised firms that practiced transactional marketing at
the highest level and all other aspects of marketing at about the sample average level. The third cluster
(20%) was equivalent to firms that practiced low-level marketing because it comprised firms that
practiced all aspects of marketing at a level just below the average sample level.
In the Ghana sample, the largest cluster (50%) was identified as interaction marketing practice because it
comprised firms that practiced interaction marketing at a level just above the sample average and all other
aspects of marketing at the average sample level. The second cluster corresponded to
relational/transactional marketing practice because firms in this cluster practiced all four aspects of
marketing at the highest level. The third cluster (15%) was labeled as very low marketing practice given
that firms in this cluster barely performed any marketing activity at a discernible level.
Table 2 provides the results of the ANOVA/MANOVA validity checks for the CMP clusters as well as
additional insight into the composition of each CMP cluster in each sample. In the Chinese sample, the
distribution of firms by type of market served (consumer vs. business) and type of market offer (goods vs.
service) was not significant across the three clusters. In contrast, the distribution of firms by
differentiation strategy was significant (F= 24.5, p

firms attained below average market performance, as predicted by Porter 1980).
Table 2: Validity Checks for CMP Configurations in China and Ghana
China
Univariate tests
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Low Transact. Relational/ F- Prob. Total
Marketing Marketing Transactional values < F Sample
Consumer Firms (%) 43.00 39.00 34.00 0.48 .665 35.00
Business Firms (%) 37.00 43.00 43.00 1.08 .039 39.00
Goods Firms (%) 20.00 20.00 28.00 0.10 .906 21.00
Service Firms (%) 44.00 28.00 38.00 2.69 .069 35.00
Regulatory Environment I 2.97 2.55 3.55 18.30 .001 3.36
Differentiation Strategy 3.20 4.10 4.27 24.51 .001 4.04
Low-cost strategy 2.97 3.55 3.86
25.32 .001 3.54
Domestic orientation (%) 74.00 39.00 63.00 3.54 .036 65.00
Market Performance 3.49 4.00 4.07 5.44 .036 3.92
Financial Performance 3.36 3.49 3.50 2.36 .095 3.36
Multivariate tests
Wilk’s Lamda
Pillai’s Trace
5.31
5.31
.0001
.0001
Ghana
Univariate tests
Very Low Interaction Relational/ F- Prob. < Sample
Marketing Marketing Transactional values F
Consumer Firms (%) 38 21 22 1.90 .765 27.00
Business (%) 15 34 18 0.90 .754 24.00
Goods Firms (%) 16 21 24 0.64 .527 23.00
Service Firms (%) 61 56 42 1.50 .875 50.00
Regulatory Environment 1.26 2.97 2.38 10.75 .001 2.75
Differentiation Strategy 2.00 3.76 2.95 22.02 .001 3.00
Low-cost strategy 1.96 3.79 2.92
21.05 .001 3.03
Domestic Orientation (%) 10 41 45
1.40 .785 1.60
Market Performance 2.05 3.54 3.15 7.80 .001 2.42
Financial Performance 1.98 3.56 2.58 2.90 .052 2.47
Multivariate tests
Wilks Lamda
Pillai’s Trace
A similarly examination of the Ghanaian sample revealed some similarities but many differences. As in
the case of the Chinese sample, the distribution of CMP clusters by type of market served (consumer vs.
business) or type of market offer (goods vs. services) was not significant across clusters. However, the
distribution by differentiation strategy was significant (F= 22.0, P< .001), as were the distributions by
low-cost strategy (F= 21.05, p

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Edited by Emmanuel Obuah
China, suggesting that the development of relationship marketing practice in Ghana is more technology
driven than a response to the free-market orientation of government regulation.
These conclusions about the comparative nature of contemporary marketing practices in China and Ghana
suggests that Ghanaian managers need to revisit their competitive strategies and commit to a clearer and
pure competitive strategy as opposed to pursuing both low-cost and differentiation strategies at moderate
levels. In addition, the linkage between successful market performance and recent regulatory reforms
in China was lacking in the Ghanaian sample, implying that regulatory reforms in Ghana are either not
effective or less relevant. Future research effort exploring the nature of institutional environment in
Ghana would provide a clearer understanding of how organizations compete in Ghana and in similar
emerging market economies in Africa.
.
Selected References
Acquaah, M., Adjei, M. C., and Mensa-Bonsu, I. F. 2008.” Competitive strategy, environmental
characteristics and performance in African emerging economies: Lessons from firms in Ghana.” Journal
of African Business, 9 (1), 93-120.
Coviello, N. E., Brodie, R. J., Danaher, P. J., & Johnston, W. J. 2002. “How firms relate to their
markets: An empirical examination of contemporary marketing practices.” Journal of Marketing, 66
(3): 33-46.
Porter, M.E. (1980), Competitive strategy: Techniques for analyzing industries and competitors. New
York, NY: Free Press.
_______ (1985), Competitive advantage: Creating and sustaining superior performance. New York, NY:
Free Press.
DiMaggio, P.J. and Powell, W.W. 1983). “The Iron Cage Revisited: Institutional Isomorphism and
Collective Rationality in Organizational Fields,” American Sociological Review, 48: 147-160.
Complete references available upon request from; Kofi Q. Dadzie, kdadzie@gsu.edu.
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Track 16: Tourism and Sustainable Development
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
An Exploratory study of the Critical Success Factors in the Kenyan banking Services Market for
the “unbanked” customers.
Abstract
Allan Mulengani Katwalo mkatwalo@strathmore.edu or amulen@hotmail.com
Strathmore Business School, Ole Sangale Road, Madaraka Est, Nairobi, Kenya
This research paper attempts to define the factors that a bank, will require to have, in order to succeed in the
traditionally unbanked segment of the East African region. The paper specifically looks at Equity Bank’s business
model, which has made banking affordable and accessible to most Kenyans and indeed East Africans in general.
Equity Bank currently has 45% of all bank accounts in Kenya, and the largest customer base in East and Central
Africa. The factors that have led to its success since it’s conversion from a building society into a microfinance bank
are the focus of this paper. The research was carried out using a case study methodology. Secondary data from
reports, and publications were used, and face to face interviews of the customers were carried out.
The findings of this study show that there were specific critical success factors that enabled Equity Bank to succeed
in the banking services sector for the traditionally unbanked. It is hoped that these success factors once identified
and assessed would highlight some of the lessons that can be learned by and possibly benchmarked by others in the
financial services sector in East Africa and indeed across Africa.
Introduction
The banking sector in the East African region has been undergoing major defining changes across the
board over the last 10 – 15 years. These changes are clearly a breath of life in a market that has been
underserved and literally robbed for a long time. In the forefront of these interesting developments has
been Equity bank, which continues to defy the stereo typical banks that for a long time served this region.
This paper attempts to examine the critical success factors (CSF). Rochart (1979, p.81) was the first to
define CSFs as “the limited number of areas in which results, if they’re satisfactory, will ensure
successful competitive performance for the organization” highlighting areas where “things must go right”;
that enabled Equity bank to continue to defy market expectations and to set the pace and direction of
development within the sector.
Whereas banks have traditionally considered “the bottom line” as the only primary criteria for success in
the sector regardless of what that meant in terms of operating practice, it is evidently clear that a shift in
paradigm has already taken place with new criteria being adopted and incorporated in the evaluation
process. Thus in the region for example where it was common practice for bank deposits to attract heavy
ledger charges or for sections of the market to be deliberately excluded from seeking the services of banks
through policies meant to limit participation to only those who were deemed to be ‘profitable customers’,
a new wave of strategies and practices to reach the unbanked ‘traditionally unprofitable’ sections of
society have taken grip.
The aim of this paper is to explore the regions banking sector in terms of the critical success factors in
reaching the unbanked. The main study question/s was; What CSFs have enabled Equity bank to succeed
in this segment of the banking sector?
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Factors for success in the unbanked sector;
Johnson and Scholes (1997) have also defined Critical Success Factors as “those components of strategy
where the organization must excel in order to outperform competition. These are underpinned by
competencies which ensure its success”. Boyton and Zmund (1984) expanded this definition to include
the management of the organization. They said that critical success factors (CSFs) are “those few things
that must go well to ensure success for a manager or an organization, and, therefore, they represent those
managerial or enterprise areas that must be given special and continual attention to bring about high
performance”. They added that CFSs include issues vital to an organization’s current operating activities
and to its future success. On the other hand, Botten, Sims & CIMA (2006, p. 12) define CSFs as “An
element of the organizational activity which is central to its future success. CSFs may change over time,
and may include items such as product quality, employee attitudes, manufacturing flexibility and brand
awareness.” This study defined critical success factors as those factors inherent in the management, staff
and overall organizational activities that lead to an organization achieving its objectives and goals and
enable it to attain successful competitive performance.
The traditionally ‘unbanked’ in Kenya
Formal financial institutions had for long generally failed to cater for the credit needs of smallholders in
Kenya mainly due to their lending terms and conditions. It is generally the rules and regulations of the
formal financial institutions that have created the myth that the poor are not bankable, and since they can’t
afford the required collateral, they’re considered not creditworthy (Atieno, 2001). The poor therefore tend
to end up locked out of the formal financial system (are ‘unbanked’).
Access to financial services in Kenya, according to Mutua, J. & Oyugi, L. (2006), has experienced
enhanced growth in rural financing over the last ten years. However, the same has been matched with a
withdrawal of banking services from the rural areas by multinational banks. Banks such as Barclays Bank
Kenya, a multinational bank in Kenya began moving out of rural areas as they found their branches in
these areas ‘unprofitable’. Most formal financial institutions such as Barclays Bank, did not serve the
poor due to: low demand, high transaction and information costs, high levels of unmitigated risks, lack of
usable collateral, weak contract enforcement, inadequate regulatory frameworks and dependence of the
poor on seasonal agricultural activities (Mutua & Oyugi 2006). The lack of financial services to the rural
poor in Kenya has seen the emergence of micro finance institutions (MFIs) such as KWFT (Kenya
Women Finance Trust), K-Rep Bank, Faulu-Africa, as well as Family Bank and Equity Bank.
Microfinance is the supply of basic financial services to the poor, including loans, credit savings,
insurance and transfer services (Stanford Graduate School of Business, 2007). Murdoch J. (1999), claims
that MFIs are a set of unusual financial institutions prospering in distant corners of the world - especially
in Bolivia, Bangladesh, and Indonesia. They exist to alleviate poverty and transform economic and social
structures positively by providing financial services to low-income households. These institutions
generally share a commitment to serve clients that have been excluded from the formal banking sector.
This is certainly true of the East African region in general and Kenya in particular. Joanna Legerwood
(1999) argues that Microfinance includes financial and social intermediation and is not simply banking. It
is a provision of financial services to low income clients, including self-employed. These include:
savings, credit, insurance, and payment services. In addition, many MFIs provide social intermediation
such as group formation, development of self confidence, training in financial literacy and intermediation
services such as management capabilities among members of a group.
MFIs in Kenya have tended to pursue very rural or otherwise very unreachable clients, even at great cost.
They provide financial services, including credit, tailored to the unique needs and limitations of the poor.
Usually provided by NGOs, they have generally been more flexible than for profit financial services
providers, more forgiving and typically offer training and education to their customers. Few of these
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organizations require borrowers to put up collateral, enabling individuals seeking to become
entrepreneurs, to attain small loans to start their businesses.
Overview of the Kenyan Banking Sector
The financial sector is reputed to be the engine of growth in any economy; hence a growing financial
sector is not only indicative of a thriving economy but also an impetus to its growth (Oloo 2008). The
Kenyan financial sector has evolved over the years. The post-independence period in Kenya was one of
tremendous economic growth. The banking sector grew substantially as the government made conscious
efforts to transfer economic activity into the hands of indigenous Kenyans.
Twenty years after independence in 1983, the stage was set for Kenya’s first post-independence banking
crisis when several indigenous banks developed acute liquidity problems. In spite of Treasury and
Central Bank of Kenya’s efforts to bail out the ailing institutions, one institution was closed in December
1984 (Central Bank of Kenya 2008). The Deposit Protection Fund Board was established in 1985 as a
deposit insurance scheme to provide cover for small depositors and act as liquidator to banks which
could not be salvaged. Two more institutions collapsed in August 1986 followed by a third in January
1987. The next crisis came in 1989 when seven institutions were found to be incurably ill and drastic
corrective action was taken. A consolidation scheme was crafted by the government where by
Consolidated Bank of Kenya was formed to take over the assets and liabilities of the seven collapsed
institutions. The scheme was supervised by the Treasury which also funded the seed capital for the new
bank through the Deposit Protection Fund Board (Central Bank of Kenya 2008, www.centralbank.go.ke).
In 1993 fourteen financial institutions were placed under liquidation. The early 1990s were characterized
by intensive political activity and an unfortunate by-product of this activity was a mushrooming of
“politically correct” banks licensed for political exigencies (Central Bank of Kenya, 2008). This resulted
in a general downturn in Kenya’s banking sector. The sector was liberalized in 1995 and exchange
controls lifted.
The Kenyan financial services sector currently has 150 institutions namely 45 commercial banks, 2
mortgage finance companies and 105 foreign exchange bureaus. In the second half of 2007, the
remaining building society, Family Finance, converted into a commercial bank: Family Bank. The
banking sector is highly concentrated with eight out of forty five banks controlling 70% of the sector by
all conceivable aspects (Mataen, 2008). Kenya’s banking system remained stable through April 2008
despite the global economic crisis, and its overall performance was an improvement from satisfactory
rating attained during a similar period in 2007. The banking sector total assets stood at KShs 978 billion
by December 2007, while total liabilities were KShs 845 billion. Sector profitability has continued to
improve over the past five years. Sector profitability grew 19% between 2006 and 2007 to stand at KShs
42 billion (Mataen, 2008).
Equity Bank
Equity Bank Limited (Equity) is said to have revolutionized the banking concept, demystifying access to
banking of the ‘unbanked’ in Kenya, who in the past could not afford to open accounts because of the
inaccessibility of the multinational banks in rural areas (Euro money, 2008). Equity was founded as
Equity Building Society (EBS) in October 1984 and originally focused on savings and provided mortgage
financing. Between 1984 and 1993, Equity experienced a stagnant deposit base, stagnant loan base, a
deteriorating loan portfolio and continuing losses. On 31 st December 1993, Equity received a Central
Bank of Kenya rating as technically insolvent. The rating noted that supervision by the Board was poor,
management supervision inadequate, asset quality unsatisfactory, the bank’s capital fully eroded by
accumulated losses, and deposits were used to meet operating expenses (Coetee, Kahhucho, & Mnjama,
2002).
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Despite this earlier prognosis, EBS’s whose beginning was inspired by an entrepreneurial vision of a
potential demand for financial services in the underserved, low-income section of the Kenyan market the
bank continued to refine itself. Five friends pooled their individual resources to capitalize Equity and to
drive its operations in order to maximize returns on their investment (Graham & Mwangi 2004).
Initially the EBS board was comprised of friends of the founders, who “did the latter’s bidding” rather
than provide professional oversight (Stanford Graduate School of Business, 2007). The founders took all
the major decisions at the bank. The lack of formalized processes and controls increased the firm’s
lending risk. In 1993 non-performing loans (NPLs) were 54% of the portfolio, and accumulated losses
totaled KShs 33 million against a paid-up capital of KShs 3 million. Equity’s liquidity ratio stood at 5.8%,
far below the required 20%. Central Bank of Kenya allowed it to continue in business after a capital
injection (Wright & Cracknell, 2007). From 1994, Equity began to transform into an institution that
focused on “the mobilization of savings, term deposits and other funds to promptly and efficiently
provide loan facilities to the microfinance sector in order to generate sufficient and sustainable profits for
the welfare of all stakeholders” (Wright & Mwangi, 2004). On January 1, 2005 EBS transformed into a
commercial bank and on August 7, 2006 it was listed on the Nairobi Stock Exchange with an initial
valuation of KShs 6.3 billion (Wright & Mwangi, 2004). Today Equity Bank is valued at a market
capitalization of KShs 61.1 billion (Nairobi Stock Exchange, November 19, 2008) which is a growth of
870% since it was listed in 2006.
Methodology
This paper is part of a wider study carried out through the case study method. The case study method has
been referred to by Eisenhardt (1989) as ‘a research study which focuses on understanding the dynamics
present within a single setting’ for example a company. The case study method can take different forms
such as descriptive, experimental, and explanatory. The details of the factors driving Equity’s successes
were analyzed using this method. The success factors were analyzed through the eyes of the customer.
This paper reports on the results of this initial study. The second part of the study which will look at the
success of the bank measured by growth in gross operating income, customer numbers, customer
deposits, profitability, and total assets. Published financial data from the company’s annual reports will be
used and compared to other banks in the industry.
The main approaches that were used were the case study method and the data collection methodology
used for the study was face to face participatory interviews of the customers. An initial sample of 200
respondents was chosen for interview from among the banks customers with accounts in the poorer parts
of Nairobi. Out of these a total of 179 interviews were conducted successfully using a random approach
of customers leaving or entering the banking halls of equity bank branches in different locations. The idea
is to try and define what the customers said were the key factors that made it easy for them to conduct
business with the bank. Wilson and Gilligan (2005) developed eight key success factors including,
profitability, market position, productivity, product leadership, personnel development, employee
attitudes, public responsibility, and a balance between short term and long term goals, which could be a
good starting point
Discussion
Rockart and Bullen (1981), suggest five key sources of CSF's ranging from, the industry, Competitive
strategy and industry position, Environmental factors, Temporal factors, and Managerial position when
considered from an individual's point of view. From the literature and the initial analysis, it would appear
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that the Equity bank story would fit into this typology easily. However due to practical considerations we
were not able to explore all these sources in any great detail. What was however done was to look at some
of the key elements of each. First were the factors that would appear to emanate from the industry. For
example when looking at the sectors of the economy which formed its key market, it was observed that
33% come from trade and commerce, these included street vendors, hawkers, and kiosk or market stalls.
The second group which was made up of 26.8% was composed of mostly artisans “Jua kali”, and
laborers.
Table 1: Sector of the Economy
Frequency Percent
Valid
Percent
Valid .00 2 1.1 1.6 1.6
Agriculture 13 7.3 10.1 11.6
Trade/commerce 59 33.0 45.7 57.4
Crafts 3 1.7 2.3 59.7
Construction 4 2.2 3.1 62.8
Cumulative
Percent
Other 48 26.8 37.2 100.0
Total 129 72.1 100.0
Missing System 50 27.9
Total 179 100.0
Looking at the size of business from the competitive and industry positioning point of view, was also able
to show that the customer base (table 2), was composed of primarily the absolute low end of the business
chain, with 53.4% earning less than 5000ksh per week, approximately 65$ US. The second group which
made up 21.4% were making between 5000 – 10,000 Ksh per week. This helps us to see that the focus
would be clear and unambiguous on the kind of individual that would not ordinarily have been considered
for banking services.
Table: 2 Size if Business (weekly turnover)
Valid
Frequency Percent Percent
Valid

Proceedings of the 12th Annual Conference © 2011 IAABD
>25,000 12 6.7 9.2 100.0
Total 131 73.2 100.0
Missing System 48 26.8
Total 179 100.0
When considered from a temporal view it was interesting to note, that customers felt that the banking
halls were not intimidating and that one could walk in with their dirty old shoes straight off the streets
selling newspapers and not made to feel that they did not belong there. Table 3 below shows 43% agreed
and 33% agreed strongly regarding the physical facilities of the bank being appealing.
Table 3: Equity physical facility appealing, neat and convenient
Valid
Frequency Percent Percent
Valid Strongly
disagree
2 1.1 1.2 1.2
Disagree 1 .6 .6 1.7
Undecided 37 20.7 21.5 23.3
Agree 74 41.3 43.0 66.3
Cumulative
Percent
Strongly agree 58 32.4 33.7 100.0
Total 172 96.1 100.0
Missing System 7 3.9
Total 179 100.0
The other CSF that we considered at this stage included products/services. Several aspects of the
considered and from the study 62.3% of respondents expressed satisfaction with the products that the
bank offered, while 26% expressed being very satisfied with the products. This would seem to suggest
that it was key for operators in this industry had to get their product offerings right for the market. Similar
sentiments were observed when respondents were asked about accessibility of services with at least 46%
stating that they easily accessed the services and 36.1% strongly agreed that they had easy access to the
services. This also included responses regarding information availability, customer service. Corporate
social Responsibility was also considered worth exploring table 4, and it was found that again majority
expressed that they were satisfied or very satisfied with the CSR efforts of the bank.
Table 4:Degree of overall satisfaction with bank community service (CSR)
Valid
Frequency Percent Percent
Valid Very dissatisfied 7 3.9 4.1 4.1
Cumulative
Percent
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Conclusion
Dissatisfied 6 3.4 3.6 7.7
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Do not know 36 20.1 21.3 29.0
Satisfied 59 33.0 34.9 63.9
Very satisfied 61 34.1 36.1 100.0
Total 169 94.4 100.0
Missing System 10 5.6
Total 179 100.0
From the study it was found that the bank exhibited a set of CSF which appears to have been crucial in its
success. These covered the whole range across the board in line with Rockart and Bullen (1981)
assertions. The study was able to provide some indications as to what would be key in achieving success
for the unbanked sub-sector. Significantly the idea that it is possible to identify and map each specific
CSF and to demonstrate that any bank that needed to do well in this sub-sector had to have these,
although it was not possible to define the proportions or how well developed each of these had to be
before the bank could experience growth. It was also not possible to establish the combinations of the
whole set that would the bank the success. It is therefore argued that for the future it would be necessary
to clearly map each particular factor and the extent to which it helped the bank to be successful. It would
also be interesting to examine the combinations of the CSF which would give the best result.
References
Andrew C Boyton; Robert W Zmud (1984) An Assessment of Critical Success Factors. Sloan
Management Review; Summer 1984; 25,4; ABI/INFORM Global pg 17
Atieno, R. (2001) Formal and Informal Institutions’ lending policies and access to credit by small-scale
enterprises in Kenya: An empirical assessment. University of Nairobi. AERC Research Paper 111.
African Economic Research Consortium, Nairobi, November 2001.
Botten, S. (2006), Chartered Institute of Management Accountants (CIMA) (2006). Management
Accounting – Business Strategy Butterworth-Heinemann,.
Chen, T. (1999) Critical success factors for various strategies in the banking industry. International
Journal of Bank Marketing, 17/2 pp. 83 – 91. Retrieved from Emerald Database.
Coetee, G., Kahhucho, K. & Mnjama, A. (2002) “Understanding the Re-birth of Equity Building Society
in Kenya.” Microsave, August 2002.
Cooper D. R. & Schindler P. S. (2008) Business Research Methods. 10 th ed. McGraw-Hill Companies,
Inc. New York. NY
Eisenhardt K.M, (1989) Building theories from case study research; The academy of Management
Review, Oct. 14, 4; pp 532 – 550, ABI/Information global
Johnson G. & Scholes, K. (1997) Exploring Corporate Strategy. Prentice Hall, 1997
Ledgerwood, J. A. (1999) Microfinance Handbook: An institutional and financial perspective. The
International Bank for Reconstruction and Development. The World Bank. Washington DC.
Mataen, D. (2008). Kenya Banking Sector Report. Faida Investment Bank Ltd, Nairobi. September
Microsave website www.microsave.org (viewed November 27, 2008)
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Murdoch, J. (1999) The Microfinance Promise: Journal of Economic Literature Vol. XXXVII (Decmber
1999), pp. 1569–1614
Mutua, J. & Oyugi, L. (2006) Access to Financial Services and Poverty Reduction in Rural Kenya:
NEPRU Working paper No 108
Oloo O. (2008) The Banking Survey Kenya 2008: Optimism in banking sector as economy defies odds.
Think Business Limited. Nairobi, Kenya.
Price Waterhouse Coopers Kenya (2008)
http://www.pwc.com/extweb/industry.nsf/docid/18292e6984ff32ef85256ce50060aab6 viewed November
18,.
Rochart, J.F. (1979) “Chief executives define their own data needs”, Harvard Business Review, Vol. 57
No. 2, March – April, pp. 81-92.
Rockart, J. and Bullen, C., (1981). A primer on critical success factors. Center for Information Systems
Research Working Paper No 69. Sloan School of Management, MIT, Cambridge, Massachusetts.
Wright, G. A. N. & Cracknell, D. (2007) “A Market-Led Revolution: Equity Bank’s Continuing Story.”
Microsave, March 2007.
Wright, G. A. N. & Mwangi J. (2004) “Equity Building Society’s Market-led Approach to Microfinance.”
Microsave, September 2004.
Wilson R M S and Gilligan C (2005), Strategic marketing management: planning implementation and
control (3 rd ed), Elsevier Butterworth-Heinemann, Oxford
“Equity bank reaches out to the ‘Unbanked’. Euromoney, 00142433, September 2008 Guide to Africa.
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Abstract
Customer satisfaction with retail banking services in Ghana
John Kuada, kuada@business.aau.dk
Aalborg University, Denmark
Bedman Narteh, bnarteh@ug.edu.gh
University of Ghana Business School, Ghana.
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
This article reports a study of the determinants of customer satisfaction of retail banking services in Ghana and
discusses the strategic implications of the findings for the retail banks. The results show that relational, core and
tangible dimensions of service are major determinants of customer satisfaction in retail banking in Ghana.
Technology factors loaded onto the core and tangible dimensions of service quality and combined with the
relational dimension to form a three factor solution as the major drivers of customer satisfaction in retail banking.
Introduction
The beginning of this century has witnessed an upsurge of studies in bank selection decisions and
customer service quality assessment in Africa (see Narteh and Owusu-Frimpong, 2010). The general
conclusion from these studies is that customer satisfaction has become a strategic concern of African bank
managers and therefore requires substantial research attention. The present study makes three
contributions to the growing body of literature in the area. First, it examines the claim by some scholars
that theoretical models and frameworks developed to study customer behaviour and satisfaction in a
Western context may not be appropriate for studying customers in emerging markets. Second, it
contributes to an understanding of the determinants of Ghanaian customers’ satisfaction with retail
banking services in the wake of the dynamic developments within the sector. Third it provides pointers to
other knowledge gaps in the existing literature.
The article continues after this brief introduction with a review of the pertinent literature on customer
satisfaction in the retail banking sector as a basis for the hypotheses tested in the study. This is followed
by a description of the data collection methods and data analysis after which we presented and discussed
the main findings of the empirical investigation as well as their policy, strategy and research implications.
Literature Review, Hypotheses and Model Development
The pioneering work by Parasuraman et al., (1985) in service quality assessment resulted in the creation
of a SERVQUAL model to measure service quality. The model consists of five dimensions: tangibility,
reliability, responsiveness, assurance, and empathy. Some recent studies in bank marketing have
regrouped the dimensions in the original SERVQUAL model into relational, core, and tangible
dimensions as key determinants of banking service delivery and customer satisfaction (Al-Eisa and
Alhemoud, 2009). The introduction of electronic information systems has added a fourth dimension -
technology. This has enabled banks to standardise service delivery, lower the cost of services, ensure
improved customer relationship management and has helped to achieve higher levels of customer
participation in the service delivery (Chen, 2005). These dimensions and the demographic attributes of
customers have guided the hypotheses formulation in the present study.
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Customer Relationship and Satisfaction
The existing literature shows that banks have adopted relationship marketing strategies in order to attract,
satisfy and retain customers, and to differentiate their service offerings (Aurier and N’Goala, 2010).
These strategies also facilitate cross-and up-selling (Molina et al., 2007), and enhance customer lifetime
value. They are therefore effective sources of sustainable competitive advantage (Dimitriadis, 2010).
These discussions justify the following hypothesis:
H1: The stronger the degree of relationships between Ghanaian retail banks and their customers, the
more satisfied the customers will be.
Core Banking Services
Previous studies in retail banking have shown that core service delivery impacts on customer satisfaction
(Jamal and Naser, 2002; Aurier, and N’Goala, 2010). These scholars have shown that competence and
accuracy with which the service is delivered, how the branches are networked, the hours within which the
service is delivered and how fast the service is delivered are important core service variables that
determine customer satisfaction in the retail banks. Based on these viewpoints we hypothesize as follows:
H2: There is a direct positive association between the degree of sophistication of a retail bank’s core
services and the degree of satisfaction of Ghanaian customers with the bank.
Tangibility and Banking Services
Tangibility in the retail banking sector may be reflected in physical attractiveness of the bank, the degree
of modernity of its equipment and technology and the appearance of its employees – i.e. dress codes
(Tuzovic, 2008). As noted above, the advent of information technology into the banking sector has also
expanded the range of tangible components of banks. For example, Automated teller machine (ATM)
installations, electronic funds transfer (EFT), credit cards, home banking terminals, and point-of-sale
(POS) terminals are now considered normal tangibles in modern retail banking services. These
perspectives justify the following hypothesis:
H3: There is a direct positive association between the range of tangible features that Ghanaian retail
banks have and the degree of satisfaction of Ghanaian customers with their banks.
Customer Demography, Service Quality Perception and Satisfaction
Prior research within the retail banking sector has shown that gender, age, education and household
income are associated with customers’ bank service preferences as well as their perception of the service
quality. Omar’s (2008) study of retail bank selection decisions in Nigeria showed that while male
customers emphasized safety of funds and speed of transaction, female customers emphasized
“recommendation by relatives and/or friends” more than other factors. With respect to age, Cohen et al
(2007) showed that younger customers (between 18 and 30 years) tended to be less loyal to their banks
than older customers (i.e. those above 60 years). These studies support the following hypothesis:
H4: There is a significant association between customers’ demographic characteristics (age, gender,
education, income, nature of job, and banking knowledge) and the degree of satisfaction of Ghanaian
customers with their retail banks.
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Methodology
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Twenty-six retail banks have been operating in Ghana at the time of data collection. Sixteen of them
accepted our invitation to participate in the study. We selected 3 branches with the highest level of
customer activity in each of the 16 banks on the basis of information provided by customer relationship
managers of the banks (or persons holding similar positions). We used mall intercept approach in each of
the branches to collect useable data from 650 customers, using questionnaire as a survey instrument.
The design of the questionnaires was primarily based on multiple-item measurement scales adopted from
previous research on service quality and customer satisfaction in retail banking (Jamal and Naser, 2002;
Al-Eisa and Alhemoud, 2009). The questionnaire was a Likert scale type, and anchored on 1 “strongly
disagree” and 5 “strongly agree”. Core service was measured with seven items, including accurate
services, fast services, and competitive interest rates. The relational dimension was measured with 8 items
including willingness of bank employees to help customers, courtesy of employees, individual attention
paid to customers, as well as skills and knowledge of employees. The tangible dimension was measured
with 3 items – appealing physical facilities, convenient branch locations and smart, neat and well dressed
staff. Finally, the dependent variable, customer satisfaction was measured with three statements – “you
are satisfied with your bank, you will patronize the bank in future and, you will recommend the bank to
others.
Findings
In order to identify the dimensions of the variables perceived to be important in explaining customer
satisfaction in the retail banks, the variables were factor analyzed. The Kaiser-Meyer-Olkin (KMO)
measure of sampling adequacy test produced a value of 0.926, while the Bartlett's Test of Sphericity
provided a chi-square value of 3251.57 (df = 190, sig = 0.000). We also performed principal component
analysis with Varimax rotation on the data, and selected factors with loading of 0.50 and above and
eigenvalues equal to or greater than 1 for interpretation. The results are presented in Table 1. The initial
analysis produced 4 factors which account for 59.5% of the variance explained.
Table 1 Factors influencing bank customer satisfaction
Variables
Factor
1 Factor 2 Factor 3 Factor 4
Individual attention 0.809
Courteous 0.801
Willingness to help 0.788
Complaints are handled effectively 0.726
Specific needs 0.693
Fast service delivery 0.622
Relevant information 0.577
Competence 0.631
Accurate services 0.562
Reliable services 0.556
Electronically networked 0.524
Convenient branch locations 0.757
Smart, neat and well dressed personnel 0.694
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Proceedings of the 12th Annual Conference © 2011 IAABD
Appealing physical facilities 0.616
E-banking 0.567
Interest rates 0.601
Information on new products 0.561
Extended bank hours 0.553
Saturday banking 0.550
The results of the stepwise regression presented in Table 2 show that the model comprising relational,
core and tangible dimensions of service quality is highly significant and explains 62% of the variations in
customer satisfaction. The results therefore support hypotheses 1, 2 and 3.
Table 2 SERQUAL dimensions and bank customer satisfaction
Model Variable
Parameter
estimate B t-statistics Prob>T R 2
A MANOVA analysis was conducted to determine the effects of the demographic variables on customer
satisfaction. The result indicates that the association between customer satisfaction on the one hand and
customer expertise as well as year of opening account on the other hand is marginally significant (see
Table 3). However, the association between customer satisfaction and age, gender, and education are not
significant. Thus, hypothesis 4 is only partially confirmed.
Table 3: Demographic Characteristics and customer satisfaction
F Sig. F
Corrected model 1.304 0.04
Intercept 631.27 0.00
Age 1.01 0.39
Gender 0.91 0.34
Education 0.15 0.69
Occupation 1.22 0.30
Year of opening acct. 1.76 0.13
Customer expertise 1.85 0.12
Note: Dependent variable: Satisfaction ; Adj. R 2 =0.129
Fstatistic
Prob>F S.E
1 Constant 0.21 1.48 0.00
Relational dimension 0.92 0.77 22.35 0.00 0.58 499.72 0.00 0.63
2 Constant -0.39 -2.28 0.02
Relational dimension 0.73 0.61 13.94 0.00 0.61 286.74 0.00 0.61
core and tech dimension 0.34 0.24 5.59 0.00
3 Constant -0.51 -2.84 0.00 0.62 195.25 0.00 0.60
Relational dimension 0.70 0.58 12.98 0.00
Core and Tech dimension 0.27 0.20 4.18 0.00
Tangible dimension 0.12 0.10 2.30 0.02
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Discussion
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The findings from this study show that Ghanaian bank customers attach significant importance to core,
relational and tangible dimensions of the services offered by retail banks just as their counterparts in
Western societies. The results therefore suggest that the three factor solution, containing 18 variables, is
robust and provides an improvement over the two factor solution found in the study of Levesque and
McDougall (1996).
The relational factors have, however, emerged as the most significant determinant of customer
satisfaction emphasizing the need for banks to relate well with their customers. The individual attention
that a bank gives to customers, the ability of the bank to determine the needs of customers, the courtesy as
well as the consistency of the interaction process and contents all have significant impact on customer
satisfaction. The consistency of interaction may be interpreted in terms of the importance of technology in
the bank service delivery process. Our results show that variables under technology loaded both on core
service (electronically networked) and on tangible dimensions (electronic banking). Furthermore, our
results show that service features such as visually appealing facilities, convenient branch locations,
employee appearance as well as employee skills are all significant drivers of customer satisfaction.
The findings carry some useful strategy and research implications. They suggest that banks must
understand the special needs of their customers, equip the staff with the skills and knowledge to deliver
added value to the customers and also develop effective service recovery strategies to remedy occasional
service failures. Staff must also be trained to be polite and courteous to customers and must be willing to
help customers at all times.
Finally, since relational quality is found to have a strong impact on customers’ overall assessment of
service quality, it would be interesting to explore the constituents of this dimension more closely in
subsequent studies. For example, we have not explicitly introduced trust into our model in studying bankcustomer
relationships. However, trust has been noted as an important attribute in relationships and must
therefore receive explicit attention in a future investigation. Furthermore, it will be useful to test whether
demographic characteristics act as moderators in the relational benefits – satisfaction link.
Conclusions
The present study provides empirical evidence to support the adoption of SERVQUAL model to
investigate customer service perception within retail banking sector in a developing country – Ghana. We
have also noted that electronic banking variables could be integrated with the original dimensions of
service quality to improve customer service delivery in Ghana. Furthermore, banks that offer more
contact hours and provide more flexible options to customers to conduct their banking transactions will be
perceived as offering better services than their competitors. The study also demonstrates the importance
of relational quality to customers’ perception of overall service quality.
References
Al –Eisa, A, S, and Alhemoud, A, M, (2009) Using a multiple attribute approach for measuring customer
satisfaction with retail banking, International Journal of Bank Marketing, Vol. 27(4) pp. 294-314
Aurier, P. and N’Goala, G (2010) The differing and mediating roles of trust and relationship commitment
in service relationship maintenance and development Academy of Marketing Science 38:303–325
Chen, K. (2005), Technology-based services and customer satisfaction in developing countries,
International Journal of Management, Vol. 22 No. 2, pp. 307-18.
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Proceedings of the 12th Annual Conference © 2011 IAABD
Cohen, D., Gan, C., Yong, H. H. A., and Chong, E., (2007) Customer Retention by Banks in New
Zealand Banks and Bank Systems Vol 2 Issue 1 pp40-55
Dimitriadis, S., (2010) Testing perceived relational benefits as satisfaction and behavioral outcomes
drivers International Journal of Bank Marketing Vol. 28 No. 4, 2010 pp. 297-313
Jamal, A. and Naser, K. (2002), “Customer satisfaction and retail banking: an assessment of some of the
key antecedents of customer satisfaction in retail banking,” International Journal of Bank Marketing, Vol.
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Levesque, T. and McDougall, G. (1996) “Determinants of customer satisfaction in retail banking”
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Narteh, B, and Owusu-Frimpong, N, (2010) Customer knowledge and choice criteria in retail bank
selection in Ghana. In Conference Proceedings of the 11 th Annual Conference of the International
Academy of African Business and Development held at the University of Lagos, Nigeria, pp. 544-551
Omar, O. E. (2008). Determinants of retail bank choice in Nigeria: A focus on gender-based choice
decisions. Service Business, 2(3), 249-265.
Parasuraman, A., Zeithaml, V.A. and Berry, L.L. (1985), A conceptual model of service quality and its
implications for future research, Journal of Marketing, Vol. 49, Fall, pp. 41-50.
Tuzovic, S. (2008), Investigating the concept of potential quality: An exploratory study in the real
estate industry, Managing Service Quality, Vol. 18 No. 3, pp. 255-271.
710

Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
“The Facebook phenomenon:” Social Networking among South African students
Richard Shambare, Robert Rugimbana, and Nkosi Sithole
Tshwane University of Technology, South Africa.
The Internet, in particular, social network sites (SNS) have revolutionised communication patterns in the 21 st
Century. Globally, adoption of these technologies is greatest among youths, who increasingly integrate social
networking into their daily lives. This study examines SNS usage habits among youths. Data was collected using a
self-administered questionnaire from a sample of 54 South African students. Findings confirm popularity of
Facebook, and suggest potential for social networking into many aspects of youths’ life including education. Faster
Internet access and cheaper 3G technology as well as Smartphone telephony are enablers influencing adoption of
social networking. The paper concludes by proposing implications and suggesting directions for future research.
Introduction
As popularity of social network sites (SNS) increases, networks like Facebook, YouTube, Twitter, and
MySpace are rapidly growing. This exponential growth, according to Boyd and Ellison (2008) has
“helped tip SNSs into mainstream culture.” Latest statistics indicate Facebook as the leading SNS –
hosting more than 500 million subscribers (Facebook.com, 2011; WIUS, 2011); more interestingly, SNS
membership doubles every 6 months (Owyang, 2008). Faster and reliable Internet access as well as
cheaper 3G mobile telephony continually fuel adoption of social networking, which to date is the fastest
growing and most popular Internet-based technology (Roblyer, McDaniel, Webb, Herman, & Witty,
2010). Thus, by the end of 2011, Facebook is likely to have a staggering 2 billion users. Bicen and Cavus
(2010) explain that social networking is most popular among youths, who integrate SNS activities into
their daily routines. For that reason, the SNS trend is deserving of investigation. This paper therefore
seeks to investigate South African students’ SNS adoption patterns as well as establishing their most
preferred network. The following research questions were proposed and formed the basis for data
collection, data analysis, and interpretation of results:
RQ1: What are the Internet usage habits of students?
RQ2: What are the SNS usage habits of students, and how do these compare across
biographical profiles?
First, the literature pertaining to SNSs is reviewed in the following section. Thereafter, the methodology
utilised to answer research questions is presented. Following on, findings and discussion of results are
presented. Finally, the paper concludes by proposing managerial and policy implications as well as
suggesting directions of future research.
Literature Review
Modern Internet-based social networking grew out of experiments by SixDegrees.com in 1997 (Bicen &
Cavus, 2010). Since that time, the number of SNSs has multiplied and their subscribers grown
exponentially. With its membership doubling every 6 months, Boyd and Ellison (2008) show that
Facebook is the most popular and fastest growing social network and has literally “tipped SNSs into
mainstream culture.” Confirming this, Roblyer et al. (2010) points out that 93 per cent of teenage Internet
users between the ages 12 and 17 years are active social network members. Also, Lenhart, Madden,
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Smith, and Macgill (2007) found that as teenagers adopt social networking, their use of other Internet
technologies such as email and Instant Messaging (IM) rapidly declines. SNS popularity, among the
youth, is driven by the fact that social networks provide users with more flexibility and freedom to
express themselves in ways that they could not possibly do in person (Roblyer et al., 2010).
What is a social network site?
Boyd and Ellison (2008) define a social network sites as:
web-based services that allow individuals to (1) construct a public or semi-public profile within a
bounded system, (2) articulate a list of other users with whom they share a connection, and (3)
view and traverse their list of connections and those made by others within the system. The nature
and nomenclature of these connections may vary from site to site.
Thus, SNSs facilitate interactive and real-time communication through the Internet (Bicen & Cavus,
2010). Specifically, they permit subscribers use of personalised and interactive services such as chatting,
uploading and sharing pictures, videos and music. SNSs have a wide variety of features, which can only
be limited by users’ creativity and imagination (Boyd and Ellison, 2008). Bicen and Cavus (2010) found
that whilst SNSs share the common purpose of interactive communication, their functionality differs in
terms of the target population. For instance LinkedIn targets professionals and accordingly its features are
suited towards the sharing of career-related information. On the other hand, Facebook or Hi5 are sociallyoriented,
and hence support the sharing of pictures, Instant Messaging, and posting of messages.
Users therefore register to join SNSs and create profiles containing details of users’ names, gender,
interests, pictures, videos, schools or colleges attended, and any other information that the subscribers
might want to be known by (Bicen & Cavus, 2010). Subscribers link up with other members, friends,
contacts, or followers by extending or accepting invitations.
Methodology
A survey method was used to collect data (Calder, Philips, & Tybout, 1981). A convenient sample of
volunteer participants was drawn from both high school and university students in Pretoria. The data was
collected using a self-administered instrument in November 2010, at a Pretoria university campus.
Participants:
Participants were solicited during social functions (e.g. sporting fixtures) hosted at the university.
Therein, students from local high schools attended, hence their inclusion in the sample. In total 54 high
school and university students participated in this study. The average age of participants was 22.8 years
with a stand deviation of 5.5 years. The youngest participant in the sample was 15 years old and the oldest
45 years old. 44 per cent were male and 56 per cent female. In terms of education level, 24 per cent were
high school students and 76 per cent university students. A majority (62 per cent) of the participants had
Internet experience exceeding 5 years compared to only 7 per cent had less than 1 year Internet
experience (Table 1).
Table 1: Participants’ demographic profile
Demographic Characteristics Percent (%)
Gender Male 44
Female 56
Education level High School 24
Undergraduate 57
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Postgraduate 19
Internet experience < 1 year 7
1 – < 3 years 9
3 - < 5 years 22
5 - < 7 years 23
7+ years 39
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Questionnaire
The instrument used was developed from the literature as well from questions in past SNS studies. The
questionnaire was pre-tested on 7 undergraduate students to ensure that questions would be understood by
the target sample. Refer to Appendix A for a copy of the questionnaire.
Data Analysis
Because of the small sample and categorical nature of the data, frequencies and nonparametric tests
including Mann-Whitney U tests and Pearson’s Chi-squares were utilised to address research objectives.
SPSS v.18 was used for data analysis.
Findings and Discussion
The findings are discussed in the order of the research questions.
RQ1: What are the Internet usage habits of students?
Social network sites use the Internet as a connectivity platform. Effectively, social networking activity is
influenced by: (1) hardware or device used to access the Internet, (2) type of Internet connection, and (3)
features supported by an SNS. These three factors determine the different features such as downloading/
uploading pictures or Instant Messaging accessible to subscribers. Hence, the need to investigate
participants’ Internet habits, which includes Internet experience, daily Internet usage, and the mode of
connection used. Frequencies, percentages, and nonparametric tests were used to answer the research
question.
Internet experience
In this context Internet experience refers to the total number of years participants have been using the
Internet. Table 1 illustrates that only less than 7 per cent of the respondents have used the Internet for less
than a year. Those with between one and three years constitute 9 per cent of the respondents. 45
respondents had at least three years Internet experience, representing some 84 per cent of the sample.
Further analysis shows that the median Internet experience is 6 years, indicating that a significant number
of respondents started using the Internet whilst they were teenagers. This corroborates findings by Bicen
and Cavus (2010) and later by the World Internet Usage Statistics (WIUS) (2011) that the Internet is
increasingly playing an important role among youths.
To determine whether the level of study influences Internet experience, the Chi-square test of association
was performed. To render the Chi-square test more robust, Internet experience and level of study
variables were transformed into dichotomous variables resulting in a 2x2 contingency table. Internet
experience was divided into up to 5 years Internet experience (low experience) and over 5 years Internet
experience (high experience). Level of study was re-coded into high school students and university
students. The subsequent Chi-square test yielded significant results (x 2 = 6.633; p = .010) at the 0.05 level
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of significance (see Table 2), meaning that Internet experience and level of study are related. Cramer’s V
test also yielded significant results (V = .350; p = .010), suggesting students’ exposure to the Internet
increases with progression of studies. Since the likelihood of conducting online searches increases at
university, the latter findings seem reasonable.
Figure 1 compares Internet experience by gender. It indicates higher Internet experience among women.
A Chi-square test of association 0.05 level of significance between experience and gender (x 2 = 9.749; p =
.045) confirms women’s high Internet experience.
Figure 1: Internet experience by gender
% of respondents
25
20
15
10
5
0
< 1 year 1 to 3 years 3 to 5 years 5 to 7 years 7+ years
Table 2: Chi-square tests’ comparison of Internet experience and demographic profile
Internet experience vs. … x 2 (p-value)
Perceptions of Internet Safety and Security 0.646 (.958)
Gender 9.749 (.045)*
Study status (part-time or full-time) 5.169 (.270)
Level of study** 6.633 (.010)*
Type of Internet access** 3.980 (.046)*
*significant at 0.05 level; ** Chi-square results of transformed variables
Male
Female
Daily Internet usage
In terms of daily Internet usage, results indicate that on average respondents spend 3.4 hours surfing the
Internet with a standard deviation of 2.8 hours. Daily Internet usage between male and female
respondents was compared using the Mann-Whitney U test. Results (z = -.531; p > .05) show that there is
no significant difference in daily Internet usage across gender. Internet experience also affects the amount
of time spent on the Internet (Table 3).
The Mann-Whitney U test was also used to investigate differences in amount of time spent on the Internet
between those that considered exchanging information on the Internet to be safe and secure with those
that felt otherwise. Again, the difference in daily Internet usage indicated there was no difference between
the two groups (z = -.150; p > .881). The notion of Internet security across gender tested using Pearson’s
Chi-square produced significant results (x 2 = 4.26; p = .039). Although a significant proportion (76 per
cent) indicated security concerns, female users expressed security issues the most.
Table 3: Mann-Whitney U tests of daily Internet usage hours and demographics
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Average daily
Internet hours
z P-value
Fixed line 2.9 (2.7) -1.289 0.197
Wireless 3.7 (1.7)
Low experience 2.4 (1.6) 2.010 0.044
High experience 4.2 (3.3)
High School 3.2 (3.6) 0.963 .336
University 3.5 (2.5)
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Internet connection type
Ability to connect to the Internet is a prerequisite for SNS usage. Different connections are gateways to
accessing the Internet. These ultimately determine not only the speed but also the nature of the content
accessible on the web. Subscribers therefore use connection types most efficient to their needs, lifestyle,
and budget. For instance, while ADSL provides faster broadband connection, it is relatively more
expensive in that it requires a fixed-telephone (ADSL) line, a modem and a personal computer. On the
other hand, subscribers can also access the Internet with mobile devices albeit certain limitations such as
surfing on a small screen. Figure 2 illustrates the different connections used by the respondents. Mobile
wireless devices including cell phones were the most popular; 28 respondents or 52 per cent indicated
using wireless connection. 17 per cent showed preference for Internet cafés, which represented the second
preferred type of connection. Those that accessed the Internet from work and at the school library were 11
per cent and 4 per cent, respectively. 9 per cent use HSDPA and other unspecified types accounted for 6
per cent. ADSL was the least preferred choice, with only 2 per cent of respondents.
Figure 2: Internet connection types used
Other
Internet Café
ADSL
HSDPA
0 10 20 30 40 50 60
% of respondents
Connection choice
RQ2: What are the SNS usage habits of students, and how do these compare across biographical
profile?
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To test this question, we considered respondents’ most preferred SNS and the activities carried out on
SNSs. Frequency tables were used to compile this information, as illustrated in Table 3. For ease of
interpretation, data was split according to respondents’ gender. For both male and female respondents,
Facebook was the most preferred network with almost 93 per cent of the respondents have a Facebook
account. MXiT is the second popular site followed by Twitter and YouTube. Results suggest that
respondents subscribe to multiple SNS accounts.
Table 4: Social network sites used
Number of respondents (percentage within gender group)
Social network used Male Female Total % of
respondents
Hi 5 4 (6%) 2 (3%) 6 11
Facebook 22 (35%) 28
(38%)
50 93
MXiT 9 (14%) 17 26 48
(23%)
My Space 3 (5%) 2 (3%) 5 9
Live Sport 2 (3%) 0 (0%) 2 4
You Tube 10 (16%) 4 (5%) 14 26
Twitter 5 (8%) 10 15 28
(14%)
Windows Live Spaces 4 (6%) 3 (4%) 7 13
LinkedIn 0 (0%) 3 (4%) 3 6
Other 4 (6%) 5 (7%) 9 17
Table 4 also shows that Live Sport is less popular among women, which is an expected finding since men
usually prefer sporting activities more than women (Boyd and Ellison, 2008). YouTube is more popular
among men. These results if seen in light with the respective network activities; this might suggest
women engage in more chat and conversation activities than men do. Table 5 shows that 27 women use
more Chat/ messaging functions compared to 21 males who use the same function. Moreover, 21 female
respondents use SNSs to keep up with friends and family compared with 18 males. On the other hand,
male respondents engage in playing games and downloading activities. All the same, chat and messaging
remain the dominant function of social networking.
Table 5: Social networking activity
SNS Activity Male Female Total
Chat/ messaging 21 27 48
Pictures/ videos 7 14 21
Downloading/ sharing music 11 11 22
Group networking 8 10 18
Homework 6 6 12
Fan clubs 1 4 5
Play games 7 5 12
Meet new friends 14 14 28
Keep in touch with family/
friends
18 21 39
Viewing or lurking 4 6 10
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To get a deeper sense of SNS usage across other demographic characteristics, the various social network
sites were compared across the newly transformed level of education and Internet experience variables.
Figure 3 shows that Hi5, My Space, Live Sports, and Windows Live, in particular are preferred by
individuals with more than 5 years’ Internet experience. Also, education affects SNS choice (Figure 4).
MXiT and My Space are much more popular among high school students than in university. 69 per cent
of high school students subscribe to MXiT compared to 42 per cent in university. Likewise, 15 per cent of
high school students use My Space compared to a paltry 7 per cent by university students.
Figure 3: Social networking site choice across Internet experience
% within Internet exp. group
45
40
35
30
25
20
15
10
5
0
Hi5 My Space Live Sports YouTube Windows Live
Figure 4: Social networking site choice across education level
% within ed. level group
80
70
60
50
40
30
20
10
0
MxiT My Space Live Sports LinkedIn
Low exp.
High exp.
High sch.
University
However, Live Sports and LinkedIn are less popular in high school. Since MXiT connection is mostly via
mobile phones, it makes sense for high school students to use this platform more often. This corroborates
the significant results in the Chi-square test of association of education level and Internet connection type
which yielded significant results (x 2 = 3.980; p = .046). Furthermore, the fact that it is relatively cheaper –
ZAR0.02 per message, MXiT proves to be cost efficient for high school students.
Conclusion
This paper investigated young consumers’ adoption patterns of SNSs and also sought to establish the
most preferred network. Results confirm the dominance of Facebook and that social network sites have
revolutionised computer-mediated communication in the 21 st Century. Since students integrate SNSs into
their daily lives and the fact that Internet and SNS usage increases with progression of studies, there is
much evidence suggesting massive potential for social networking in many aspects of youths’ life
including education. With the advent of cheaper and faster Internet access driven by affordable
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Smartphones, adoption of social networking among young adults is poised to increase, with an estimated
2 billion users by the end of 2011.
Given the widespread adoption of SNSs by students, educators need to discover ways in which they could
tap into this trend, which is most popular among young adults. Finding a common ground between
education and SNSs might go a long way to address interaction between learners and their teachers.
Future research could consider investigating social network sites on Smartphones, with a particular
emphasis on investigating how teaching and learning could be enhanced with social network sites.
References
Bicen, H. & Cavus, N. 2010. The most preferred network sites by students. Procedia Social and
Behavioural Sciences, 2 (2010): 5864-5869.
Boyd, D.M. & Ellison, N.B. 2008. Social network sites: Definition, history, and scholarship. Journal of
Computer-Mediated Communication, 13 (1): 210-230.
Calder, B.J., Philips, L.W. & Tybout, A.M. 1981. Designing Research for Application. The Journal of
Consumer Research, 8(8): 197-207
Facebook.com 2011. Press room [Online]. Available at:
http://www.Facebook.com/press/info.php?statistics [Accessed 15 January 2011]
Lenhart, A., Madden, M., Smith, A., & Macgill, A. (2007). Teens and social media. Pew Internet and
American Life Project. [Online] Available at:
http://pewinternet.org/Reports/2007/Teens-and-Social-Media.aspx [Accessed 25 December 2010].
Owyang, J. 2008. Social network stats: Facebook, MySpace, Reunion [Online]. Available at:
http://www.webstrategist.com/blog/2008/01/09/social-network-stats-facebook-myspace-reunion-jan-20
Roblyer, M.D., McDaniel, M., Webb, M., Herman, J., & Witty, J.V. 2010. Findings on Facebook in
higher education: A comparison of college faculty and student uses and perceptions of social networking
sites. Internet and Higher Education, 13 (2010): 134-140.
WIUS 2011. Internet Usage Statistics: The Internet Big Picture World Internet Users and Population
Stats [Online] Available at: http://www.internetworldstats.com/stats.htm [Accessed 17 January 2011].
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Track 17: Project Management in Africa
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
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Innovative Public Governance: comparing the African Participatory Poverty Assessments (PPAs)
and the Brazilian Participatory Budgets (PBs)
Abstract
Evandro Bocatto, BocattE@macewan.ca
Grant MacEwan University (School of Business), Edmonton, Canada
Eloisa Perez-de-Toledo, PereE2@macewan.ca
Grant MacEwan University (School of Business), Edmonton, Canada
The proposal considers the present political disengagement among citizens found virtually all over the world
and presents cases in which opportunities for reengagement are found. It intends to describe, interpret and
compare two particular processes which are considered international best practices of citizenship
participation and development: the participatory poverty assessments (PPAs) made by international
organizations in Africa; and, the participatory budget (PB) of municipalities in Brazil. Strengths and
weakness are analyzed and critical issues like the disadvantage of consultation over deliberation are brought
to light.
Introduction
The present interest for themes related to citizenship participation and development is not accidental. In
reality, such situation constitutes a paradox. On one hand, there are some places in the world citizens still
fighting for the right to democratically vote while in other places in which this right is already guaranteed,
low elections’ turnover are more than common. Low participation in elections is the most evident
symptoms of citizens’ disbelief in representative democracy. Although a seesaw pattern can be found, the
International Institute for Democracy and Electoral Assistance (International IDEA) based in Stockholm,
recently concludes that worldwide, many industrialized countries, like Germany, France, United
Kingdom, Spain, United States of America and Canada are experiencing a decline in voter participation
(International IDEA’s Report in May, 2009). In both Canada and the United States, the voter turnout rate
is approximately 15-20 percentage points lower for youth than the general population (Census Bureau,
2009; Elections Canada, 2008). Such turnouts may signalize a dry future for representative democracy as
studies have indicated that many youth who don’t vote remain uninvolved in the political system, and do
not vote when they get older (Parkinson, 2007).
Indeed, the topic seems to be a general concern debated across several fields of study in the last decade.
Menezes (2003, p. 433) summarizes the main concerns related to the declining citizenship participation
and resultant stagnant development:
“…research on participation shows a declining tendency, mostly when it comes to traditional
political organizations such as parties and unions, but also in relation to other civil associations,
both in the youngsters and adults (e.g. Hahn, 1998; Putnam, 2001) – a phenomenon which has
been related to the growing personalization of political life (Braga-da-Cruz, 1995), to increasing
individualism in our societies (Koliba, 2000), to the privatization of social life and leisure
(Putnam, 2000), and the emergence of ‘market democracies’ in which citizens are more and more
political consumers rather than actors (Boyte and Kari, 1996).”
An immediate consequence of these facts is the loss of opportunities for citizenship development since
the active participation is no doubt a source of learning. If lack of political participation is the case, the
development of the societies and political systems are jeopardized.
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Challenges in the Era of Globalization
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Academics on the other hand are trying to build a body of knowledge around contextual influences,
systematized policies and resultant practices which seems to sustain partitipatory endeavors. Such
dimensions are starting to be evaluated in order to provide the participants, citizens and policy makers, a
sense of an orientation and thus worthwhile effort. Abelson and Gauvin (2006, p. 37), however, report an
extensive evaluation of the impacts of public participation. The authors’ conclusion is upsetting in the
sense that despite of the fact that citizens do participate the assessment of such participation is imprecise
to date. They reveal that:
“Despite decades of documenting public participation experiences, the practice of public
participation evaluation is still in its infancy. Modest progress is being made in the form of
evaluation frameworks and criteria that are being applied more routinely and consistently. More
work is needed, however, to reach agreement about a common set of evaluation criteria, the
defining features of public participation mechanisms and how to categorize and evaluate the
crucial role of contextual variables in shaping and influencing public participation.”
Within such controversy, more responsible and legitimate governments prefer to change their approach
and foster participation avoiding, thus, the possibility of loosing control of public governance. This
proposal intends to describe, interpret and compare two processes which are considered international best
practices of citizenship participation and development: the participatory poverty assessments (PPAs)
made by international organizations in Africa; and, the participatory budget (PB) of municipalities in
Brazil. Citizenship participation and development are the positive outcomes found in these cases.
Hopefully, the paper helps the systematization efforts of these best practices and orients policy-makers
about strengths and threats of these two models. Yet, We consider that a better understanding of the
strengths and weakness of both practices can provide guidance for future endeavors.
In the developing world, and here we emphasize the African case, where social exclusion is not only
economic but also educational and political, the World Bank and the International Monetary Fund are
using a systematic method, the participatory poverty assessment, in order to try to include democratically
poor people in the analysis of poverty with the objective of “influencing actions hold by policy makers”
(Robb, 2002, p. 4). Robb describes the PPAs as (2002, p. 1): “PPAs use a systematic participatory
research process that directly involves the poor in defining the nature of the poverty, with the objective of
influencing policy. This process usually addresses both traditional concerns, such as lack of income and
public services, and other dimensions, such as vulnerability, isolation, lack of security and self-respect,
and powerlessness.” Robb’s report of more than 4 tens of PPAs in Africa brings the seminal insight for
this program which persists to date. Some of the African countries which took advantage and as well
became best practice for others are Nigeria, Zambia, Ghana, Cameroon, Kenya, Lesotho and Mali.
Yet, recent Brazilian economic development cannot be fully appreciated without the mentioning of the
country’s citizenship development fostered by, among other actions, the participatory budget in some of
its municipalities. The first and most publicized case takes place in Porto Alegre city in the south of
Brazil. The Porto Alegre’s participatory budget process began its efforts in poor barrios, or slums. Having
won several municipal elections in 1989 or, in other words, assuming political power, the PT began a
creative experiment of engaging a wide spectrum of people to formulate city’s budgets (Wagle and Shah,
2003). Such experiments acquire special relevance because of its capacity to offer the basic conditions for
the population to debate about the priorities of the public investment in the local level (Bocatto and Perezde-Toledo,
2012). The Porto Alegre case was nominated by the 1996 United Nations Summit on Human
Settlements as an exemplary “urban innovation” among the best 40 practices around the world, standing
out for demonstrating an efficient practice of democratic resource management. Later on, the World Bank
considered the process as a successful example of the partnership between government and civil society
(Bocatto and Perez-de-Toledo, 2008).
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Besides describing these two processes, our proposal presents the intentions behind these social actions
and their correspondents stakeholders. For a matter of comparison, we consider: the process/project
champion(s); the context both demands found and institutional; method; and qualitative results.
In the following we present a table with the comparisons summarized:
Criterion PPAs PB
Intention/Motivation Government decentralization/
Local government empowerment
Policymakers receive input from
citizens
Optimization of policies (e.g.,
international aid’s prioritization)
To be a path towards participatory
budget (in some of the cases)
Government decentralization/ Local
government empowerment
Policymakers (e.g., municipal
counselors) transfer deliberative
power to citizens
Response to civil society demands
Reinforce local bases of a political
party
Character Consultative, influential Participative and deliberative
Process/project
champion
Context
Demand
Institutional environment
World Bank, International
Monetary Fund
Poverty reduction, infra-structure,
education and health
Supra governmental (i.e.,
international organizations foster
dialogue between government and
communities)
Method Consultation/research lead by
champion
Results for citizenship Strong participation
Neutral deliberation
Medium development
Novelty Evolution from technocratic to
consulted decision-making
Maintenance Active Active
Mayors, public servants, barrio
leaders
Political party (i.e., Partido
Trabalhadores)
Infra-structure, housing and
opportunities
Government willingness (notinstitutionalized)
to allow
communities to have a “say” in the
political/city decision-making process
regarding the budget’s prioritization
Participation and deliberation lead by
representatives and oriented by public
servants
Strong participation
Strong deliberation
Strong development
Evolution from representative to
participative/deliberative local
democracy
Table 1: Comparison between the Participatory Poverty Assessments (PPAs) and the Participatory Budget
(PB)
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Our first interpretation suggests that the PPAs would consist in a step towards a real transfer of power to
local communities similar to the Brazil case. However, this is still an ideal far from being concretized in
Africa and, in fact, also in Brazil if we consider the country as a whole (i.e. about 200 cities applying it
over more than 4,000 cities in the country).
Part of the reason for this, although impressive, still partial success is due to, we believe, the only
consultative character of the PPAs. The city of São Paulo in Brazil called “participatory” its first attempt
to manage the budget in mid 80s. Nevertheless, once the population figured out that in the end of the day
city counselors would still take the final decision, people just considered it illegitimate and terminate their
participation (Singer, 1996). Fifteen years latter, São Paulo launched the process again but then with
deliberative power obtaining thus expected results.
In that sense, the participatory budget of Brazilian municipalities provides evidence for Likert’s “one best
way” to manage. Likert's (1967) theory assumes for managerial behaviours: (a) Autocratic management–
power is exploitative and decisions are top-down; (b) benevolent autocracy–conditioned to obedience but
still top-down; (c) consultative management–ask for opinions and ideas but still takes the final decision;
and (d) participative management–decisions affection a large number of people and involving policies are
made by consensus. The consultative style does not seem to work well, or, works not so well as the
participative style as Likert supposes.
The practitioner (e.g., policymakers, public servants) may consider that more participative and thus
developed and re-engaged citizens can sustain a method, called democracy, which might be the best
process humanity has developed for its needed social intercourses and progress.
References
Abelson, J. and Gauvin, F. P. (2006). Assessing the impacts of public participation: Concepts, evidence,
and policy implications. Research Report for the Centre for Health Economics and Policy Analysis,
McMaster University, Canada.
Bocatto, E. and Perez-de-Toledo, E. (2008). A democratic story: collaboration in the use of public budget.
International Journal of Sociology and Social Policy, 28(1&2).
Bocatto, E. and Perez-de-Toledo, E. (forthcoming 2012). Empowering the people: Lessons from a new
trend in political marketing. In Ilan Alon, Eugene Jaffe and Donata Vianelli (eds.) Global Marketing.
McGraw-Hill.
Likert, R. (1967). The human organization. New York: McGraw-Hill.
Menezes, I. (2003). Participation Experiences and Civic Concepts, Attitudes and Engagement:
implications for citizenship education projects. European Educational Research Journal, 2(3), 430
445.
Parkinson, R. (Mar 1, 2007). Voter Turnout in Canada. From the Mapleleafweb, retrieved on August
11 th , 2009: http://www.mapleleafweb.com/features/voter-turnout-canada.
Robb, C. M. (2002). Can the poor influence policy? Participatory poverty assessments in the
developing world. Washington: The World Bank Publications, 2 nd edition.
Singer, P. (1996). Um governo de esquerda para todos: Luiza Erundina na Prefeitura de São Paulo.
São Paulo: Brasiliense.
Wagle, S. and Shah, P. (2003). Participatory approaches in budgeting and public expenditure
management. World Bank’s case study of the Participation and Civic Engagement Group for the
Action Learning Program on “Participatory approaches at the macro level”,
http://info.worldbank.org/etools/docs/library/205481/Porto%20Alegre_English.pdf, retrieved on July, 2009.
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Abstract
Project Management Trilogy Challenges in Africa – where to from here?
P D Rwelamila, rwelapmd@unisa.ac.za
N Purushottam, purusn@unisa,ac.za
University of South Africa (UNISA), South Africa
In Africa like in other continents, projects are becoming a way in which organizations (public and private) fulfill
their business plans. Project management still remains a Cinderella field across the continent. On average 8 out 10
projects managers are accidental or have inadequate PM knowledge base; PM training is characterized by
curricula falling short of some fundamental knowledge areas of PM; and organizations (within public and private
sectors) which are fundamentally supposed to be centered on programs and portfolios are in practice project
oriented organizations (POO) by default characterized by archaic and fragmented systems. These challenges,
which are referred to in this paper as ‘PM trilogy challenges’ have significantly contributed to a confusing
environment if not corrected could take away the potential of PM in business success and public sector
development. Results of five research projects are used in this paper to identify the issues which have led to ‘PM
trilogy challenges’. Finally recommendations are advanced towards addressing these challenges.
Introduction
There is sufficient evidence to strongly suggest that most future growth and successes of public and
private sector organizations will result from successful development of projects: that generate new and
state of the art infrastructure facilities, excellent public domain services to citizens and sustainable
policies which will create a conducive environment for appropriate investments; and new products,
services, or procedures respectively. According to Graham and Englund (2004), such projects will also be
a principal way of creating organizational change; implementing change and growth strategies will
usually also be entrusted to project managers. However, they argue, project success is often as much as
results of the organizational environment (with public and private sectors) as of the knowledge (authors
emphasis) and skills of the project manager. Current assessments of various projects across the African
continent based on various studies (Rwelamila 2010a; Rwelamila 2000; Ssegawa and Ngowi 2009;
Rwelamila and Phungula 2009) paint a picture of project failures across public and private sectors
supporting Graham and Englund’s (2004) argument. The majority of failed projects depict the following
umbrella dimensions:
Inefficient projects – projects failing to meet budget and schedule expectations; Weak impact on
customers/stakeholders – projects unable to meet technical specifications, unable to address
customer/stakeholders needs, and unable to create projects that satisfy clients/stakeholders needs;
Unsuccessful business/or unsuccessful development strategy – projects not achieving significant
commercial success (private sector) or development programmes/projects unable to achieve
developmental goals (public sector); and Unsustainable potential – projects unable to add value.
For most projects, the above failed projects umbrella dimensions have resulted into specific issues, which
are the opposite of what Pinto and Slevin (1988) referred to as project critical factors. It is thus important
to refer to these issues as African project failure symptoms cutting across all sectors. These symptoms
include:
(i)Clients/Stakeholders dissatisfaction with final products or services – ultimate intended users or
beneficiaries have not accepted what projects have finally delivered; (ii) Most of project missions have
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been archaic – the majority of projects are completed without initial clarity of project goals and general
directions; (iii) Poor synergy between POO management and project coal face management – for a
majority of POOs there is very little willingness of top management to provide the necessary resources
and authority for project success; (iv) Most projects do not have appropriate schedules and plans –no
detailed specifications of the individual action steps required for project implementation; (v) Poor
consultation with stakeholders/clients - for most of the programmes and projects, communication,
consultation, and active listening to all impacted parties are inadequate; (vi) Poor project personnel
recruitment and selection – consultants and POOs do not seem to have appropriate plans for recruitment
of project managers and core team members; (vii) Poor monitoring and feedback – a significant number
of projects face late provision of comprehensive control of information; (viii) Poor communication –
there is a significant number of projects which suffer from non provision of appropriate network and
necessary data to all key factors in project implementation; (ix) Poor troubleshooting strategies – most
projects suffer from inabilities to handle unexpected crises and deviations; (x) Incompetent project
managers – most people who assume positions of project managers are technical experts and incompetent
administratively, interpersonally and technically (project specific); (xi) Excessive power and politics - it is
common to find high degrees of political activities within organizations and perceptions of projects
furthering self-interests of organization members; (xii) Negative impact from environmental events –
dominant external organizational factors (especially within the public sector) impacting on operations of
project teams negatively; and (xiii) Urgency is an elusive word - for most of public sector projects, the
need to implement projects as soon as possible remain a pipe dream.
All these symptoms represent a significant plethora of bad practices which need to be addressed if project
management (PM) is going to remain as a means by which public and private sector organizations achieve
their objectives in Africa. Project management’s ability to provide organizations with powerful tools that
improve their ability to plan, implement, and control their activities as well as the way in which they
utilize their people and resources will need to be practiced from the position of understanding its
characteristics and what constitute PM best practices.
The authors are convinced that the journey towards understanding PM characteristics and universally
acceptable PM best practices should start from addressing the challenges which have led to the African
project failure symptoms described above, hence the need to address the causes of these symptoms.
A closer scrutiny of various research reports and discussions with various key authorities within public
and private sector involved in projects has led to identifying the causes of the above symptoms. There are
three key causes of the symptoms. These causes are key to this paper and are referred to as ‘PM trilogy
challenges’ and include:
(i)The confusion of equating technical specializations with project management competences - the
emphasis on technical aspects of projects over socio-cultural issues; (ii) Inadequacy of PM training
programmes (both on the job and outside the job); and (iii) Lack of strategic project management in POOs
The above project failure causes are discussed in detail in the preceding sections and finally
recommendations are advanced towards addressing them.
Background to ‘PM Trilogy Challenges’
In Legum’s (2002) seminal work on ‘A new economy for South Africa and the world’, she refers to the
orthodoxy in vogue that the competition between nations and between the individuals is not only
inevitable, but will result in the greater happiness of the greatest number. The same argument could be
raised that PM development has centred on ‘orthodoxy’ to the detriment of developing the PM profession
and approaches in managing projects. As will be discussed later the ‘PM trilogy challenges’ are result of
PM orthodoxy in Africa, where POO executives, professional voluntary organizations leaders and higher
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learning institutions leaders have violated authenticity, they stand like the naked emperor: they think they
are clothed, but everyone else sees the truth. Each of the three project failure causes is discussed and PM
orthodoxy thinking revealed and how to address the situation towards solutions in the following sections.
(a) The Confusion of Equating Technical Specializations with Project Management Competences
Despite the heightened need for competent project managers in Africa, traditional project management
still pervades the project landscape. Traditional project management is often conducted through intuition
and experience. In a majority of cases, individuals are appointed as project managers because they have
qualifications in the same field as the project’s core business.
The traditional arrangement has led to some serious deficiencies and failures. Though no other study has
empirically provided a causal link between project failure and lack of project competence, research (e.g.
Ssegawa and Ngowi, 2009) has provided a strong indication in that direction. Failures are most often
related to a lack of understanding of the underlying issues relating to project management. Literature (e.g.
CIOB, 2002; Sarna, 1994; Rwelamila, 2008 and Gadeken, 1994) have also emphasized that though
project management experience is needed in managing projects, if used alone is insufficient to yield
favourable results.
There is agreement in literature (e.g. Crawford, 2005 and Alam et al., 2007) that competence is a multifaceted
construct. The exact list of factors contributing to competence is usually not agreed on. The most
common are illustrated in Figure 1. The figure shows that there are four major contributors to competence
namely knowledge inputs, skills, experience and continuous professional development (CPD). In this case
knowledge input factors lead to acquisition of skills and when combined with experience in a conducive
work environment, this should lead to competence in project management. It has been suggested, for
example, by Baldwin and Ford (1988) and Taylor, O’Driscoll and Binning (1994) that a knowledge base,
appropriate pedagogy, suitable disposition of the trainee, a conducive and well endowed training
environment are crucial in knowledge acquisition. PM knowledge base is the information, tools and
techniques that an individual acquires and by using it on a task, skills are acquired and used towards
accomplishing project decisions, processes, functions and tasks.
Knowledge
Inputs*
+
*Inputs include knowledge
base; Personal issues (e.g.
motivation, traits, etc);
Pedagogy; training
Skills
There is sufficient evidence (Ssegawa and Ngowi, 2009) to suggest that most people in Africa become
Project managers by accident. The common path to become a project manager across public and private
Sectors is through expertise in a technical speciallity.
As indicated above (Figure 1), accidental project managers do not have PM knowledge inputs but what
could be called ‘PM bits and pieces’ of what is required. In the light of all this, appointing accidental
+
Continuing Professional Development (CPD)
Experience Competence
Figure 1: Factors Leading to Achieving PM Competence
[Source: adapted from Taylor, O’Driscoll & Binning. (1994); Baldwin and Ford (1988), Crawford (2005), Spencer and
Spencer (1993), IPMA (2007); Alam et al. (2007)]
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project managers is not appropriate. Those who appoint PMs need to insist on and assist in the
development of individuals with the best aptitude to become successful project managers.
(b) Inadequacy of PM Training Programmes
The argument for postgraduate training in project management (whether generic or sector/industry
environment specific) in Africa, requires higher institutions of learning to have appropriate programmes
to train a knowledgeable project manager. In order to assess PM training Programmes appropriateness,
Rwelamila (2007a) carried out a synthesis and analysis of literature on PM knowledge base and best
practices which resulted in what may be termed as a well-balanced project management course covering
seven broad topic areas as indicated in Table 1. The dimensions were used in Ssegawa and Rwelamila’s
(2009) study of 7 premier PM programmes in Africa as a yardstick for the required knowledge needed for
a competent PM.
Table 1: Project management curriculum dimensions
Main Dimensions Broad Sub-dimensions
PMCK1: Planning Ability to put together a project plan - project planning;
techniques (PT) estimating; and risk analysis techniques
PMCK2:
Team building; motivating team members, and networking
Behavioural aspects (dealing with upper managers, contributing department
of PM (BAPM) managers and other stakeholders) – the core team dynamics and
maneuvering through a web of political games.
PMCK3: Controlling Project monitoring, project reviews; skills for meetings; project
techniques (CT) audit techniques; and project close-out techniques.
PMCK4:
Techniques for managing across organizations when the PM has
Organisational issues all the responsibility and little authority – issues of
(OI)
organizational structure (projectized, functional and matrix
structures and they dynamics).
PMCK5:Business Business of the organization; how decisions affect the bottom
fundamentals (BF) line, how to run a project as if it were a business.
PMCK6: Marketing Techniques of defining and developing a market; understanding
and customer issues
(M&CI)
the needs and desires of the project‘s customers and end users.
EPMK: Creating an Change to project-based organizations; strategic emphasis for
environment for projects and portfolio and programme management; developing
successful projects a core team process; developing PM in the organization;
(CESP)
organizing for PM; understanding upper management influence;
developing a learning organization, planning for project manager
selection; and developing a PM information system.
Source: Gardiner (2005); Graham & Englund (2004); Rwelamila (2007a); Pinto and Slevin (1988); Pinto
and Slevin (1987); Pinto, and Prescott (1988)
Ssegawa and Rwelamila’s (2009) findings indicated that out of the seven programmes, six were found to
be inadequate in content. Apart from project [management] techniques (PT), content gaps were identified
in all the other six dimensions of a programme. A closer look at the syllabi of the programmes, led the
authors to believe strongly the inadequacy was brought about by one or a combination of factors.
Firstly, it appeared the programme designers wanted to emulate particular Body of Knowledge (BoK) of
some of the professional organizations. However, the author’s opinion is that the approach was fraught
with problems; for example, within the last fifteen years the Project Management Institute (PMI) has
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produced three versions of the Project Management Body of Knowledge (PMBoK) (PMI, 1996, 2000 and
2004) each with changed contents. The Association of Project Management Body of Knowledge
(APMBoK) has also gone through a similar evolution leading up to its latest 4 th edition (APM, 2006).
Perusing through the two BoKs one may note that APMBoK strongly emphasises the connection between
organisational strategy and a project (Morris, Jamieson and Shepherd, 2006). The PMBoK on the other
hand emphasises the project management processes required to plan, implement and close a project –
project management efficiency. In addition, a look at a number of project management books will alert a
reader that most authors agree on the project life-cycle phases but not precisely on the actual processes
and hence the skills expected in each phase (Ward, 1999).
Additionally, it was noticed that some of the syllabi were designed in a manner that reflected the
experience or the professional inclination of the programme development team.
(c) Lack of Strategic Project Management in POOs
According to Graham and Englund (2004), forces outside both public and private organizations are
currently pushing the need for project management. An important shift in the market place is that
customers who were formerly content with products and services now demand total solutions to problems
in the private sector (Doyle, 2008). In the public sector citizens are demanding sustainable and state of
the art infrastructure and balanced services.
In Africa, a number of studies (for example: Rwelamila 2007b; Rwelamila and Phungula 2009; Tembo
and Rwelamila 2008; Rwelamila and Asalan 2010; and Rwelamila and Govender 2008) have found that
projects seem to appear almost randomly in organizations which are supposed to be POO. In most of
these organizations projects are unlinked to coherent strategies and upper managers are unaware of the
total number and scope of projects being undertaken.
Addressing ‘PM Trilogy Challenges’ – where to from here?
The new frontier of project management in Africa includes a vision to make citizens and corporations
happier and more productive; the reality involves applying and improving scientific project management
processes. These steps require leadership in a changing and fast-moving environment. The starting point
is to address the ‘PM trilogy challenges’.
Dealing with the Confusion of Equating Technical Specializations with PM Competences
Ability in technical expertise (e.g. marketing, finance, geology, economics, IT, engineering or
architecture) is not an overriding indicator of the effectiveness of a project manager. It certainly provides
increased credibility on the job for the core business of the project but most often is elevated in
importance beyond what it deserves. Project managers need to have leadership potential, hence one of the
knowledge base running thread in any project management programme curriculum.
An effective project manager is a “technological entrepreneur” (Graham and Englund 2004:192), who can
do each of the following:
As a “technological entrepreneur” there are six competencies that distinguish outstanding project
managers from their contemporaries:
Sense of ownership and mission – responsible for the project and other broader organizational issues;
Political awareness – knows who influential players are, what they want and how best to work with
the;Relationship development – spends time and energy getting to know project sponsors, users, and
contractors; Strategic influence – builds coalitions and orchestrates situations to overcome obstacles and
obtain support; Interpersonal assessment – identifies specific interests, motivations, strengths, and
weaknesses of others; and Action orientation – reacts to problems energetically and with a sense of
urgency.
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The above strongly reinforces the argument that any technical expert who wants to become a project
manager should attend an appropriate project management course internal or external to his or her
employing organization.
Dealing with the Inadequacy of PM Training Programmes
There are strong indications to suggest that higher learning institutions, particularly those in Africa, are
not offering programmes which have adequate PM knowledge base to produce a competent project
manager with appropriate knowledge. Most of the project management programme courses are dominated
by a technical knowledge base (scope, WBS, schedules, resource allocation, baseline budgets, and status
reports) of managing ‘the project’ – primarily focusing on the ‘project coal face’. Very little is covered
under socio-cultural knowledge base (leadership, problem solving, teamwork, negotiation, politics and
customer expectations).
The inadequacies are significant to warrant a conclusion that PM training programmes in Africa exhibit a
clear gap and need extensive reviews. It is hence recommended that any review of a PM programme in
Africa should be conducted in a well structured manner following the proposed project management
curriculum broad topics indicated in Table 1.
Dealing with the Lack of Strategic Project Management in POOs
As clearly discussed above, aligning organization portfolio of projects so that their contributions to the
organization’s objectives are maximized calls for formal coordination to ensure that each project’s actions
move in narrow-like fashion towards organizational targets. Both sector organizations (public and private)
current ‘grenade on the wall’ approach, in which the business/organizational planning staff identifies and
characterizes the project and then tosses it to uninformed and uninvolved project management group that
is supposed to complete the projects doesn’t work because it negates all the principles of a core team,
which is central to any project success – the need for ‘buy in’. The need for ‘buy in’ from all stakeholders
is the tributary of concurrent engineering, an approach which is embedded across POO’s PM best
practices.
The current non existence of organization-strategy-to-project transition, characteristic in 8 out of ten
POOs because of so-called fine past performances by both organization planning people and project
management people need to be avoided. The following questions (Dinsmore 1999) should form a
checklist for senior executives and sponsors to help make sure the organization projects are aligned:
Is the organization committed to using project management strategically?; Is there a policy of formally
preparing project charters?; Is synergy created between the organization business group and those
responsible for project implementation?; and How can senior management make sure that projects don’t
veer away from chartered objectives?
Conclusion
Project failures in Africa are creating a focus on the need to change the way projects are managed, people
in every organization need to learn that this change profoundly will affect the entire organization.
Successful projects will require participation from many parts of organization in dealing with the ‘PM
trilogy challenges’. Turning the ‘PM trilogy challenges’ around to PM best practices as discussed above
will require a coordinated effort involving all departments in an organization in conjunction with national
establishments responsible for training and procurement policies. Doing nothing about the ‘PM trilogy
challenges’ is to curse the darkness and turning the ‘PM trilogy challenges’ around to PM best practices
is to light the candle.
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Project management training curricula at South African public universities – Is the balanced
demand of the profession sufficiently accommodated?
Abstract
Thelma Louw
University of South Africa (UNISA), South Africa.
PD Rwelamila, rwelapmd@unisa.ac.za
University of South Africa (UNISA), South Africa.
In March 2004 the British Engineering and Physical Sciences Research Council (EPSRC) commissioned a study
that focused on the ‘rethinking’ of project management. The core philosophy of the EPSRC study, commonly known
as the EPSRC Network, was to link theory and practice through an organised process of interaction between
academics and practitioners. This research determines the extent to which South African universities have
extended/adapted their project management curricula to accommodate the findings of the EPSRC study and other
relevant research as it is the norm for South African universities to review their curricula every 3 to 5 years. The
paper concludes by mapping a way forward for the training of project managers in South Africa.
Introduction
The bodies of knowledge developed by the professional associations for project management, namely the
Association for Project Management (APM), Project Management Institute (PMI) and International
Project Management Association (IPMA) were intended to guide project management in the engineering,
building and IT environments and are theoretical models based on narrow conceptualisations of what the
project is (Winter and Smith, 2005) whereas projects should rather be organised with a view to value
creation. It could be argued that it is neglect of the soft dimensions of projects that often lead to the failure
of projects in the engineering, building and IT environments.
In March 2004 the British Engineering and Physical Sciences Research Council (EPSRC) commissioned
a study that focused on the ‘rethinking’ of project management. The objective of the EPSRC study,
commonly known as the EPSRC Network (Winter and Smith, 2005), was to develop a research agenda
that would allow the field of project management to develop beyond the conceptual foundations that
existed at the time. Winter, Smith, Morris and Cicmil (2006) regarded the prevailing knowledge bases for
project management as ‘a conceptual base that attracts criticism for its lack of relevance to practice‘.
As part of the process leading up to the final report of the EPSRC Network, Smith and Winter (2005)
distinguished between mainstream thinking of knowledge relevant to project management and nonmainstream
thinking of knowledge relevant to project management. An important component of what
they identify as non-mainstream thinking of knowledge relevant to project management is ‘craft
knowledge’ or ‘soft’ skills, which can be defined as knowledge and skills that relate to matters such as the
development of high-performance teams, change management, motivation, talent management, the
effective management of client relationships and organisational politics, handling complexity and
ambiguity, intuition.
This article does not aim to evaluate the EPSRC study, but rather to investigate the extent to which a
randomly selected sample of South African public higher education institutions have their finger on the
pulse of international developments such as the research papers emanating from the EPSRC Network,
other relevant research and the realities of project management practice, and have as a consequence
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extended/adapted their project management curricula to accommodate the issues identified in the findings
of the EPSRC study and other relevant research.
Background to the epsrc study and other related Literature
The EPSRC Network was established firstly to create a multi-disciplinary network of academics,
researchers and practitioners interested in developing project management and the practice thereof in
industry and secondly to define and identify a new interdisciplinary research agenda aimed at enriching
and extending project management beyond its current foundations (Rethinking Project Management,
2006). The core philosophy behind the network was to link theory and practice through an organised
process of interaction between academics and practitioners. The objective of the EPSRC study was to
develop a research agenda that would allow the field of project management to develop beyond the
conceptual foundations that existed at the time – a conceptual base that attracts criticism for its lack of
relevance to practice (Winter, Smith, Morris and Cicmil, 2006); ‘extending and enriching mainstream
project management theory in relation to the developing practice’ (Winter and Smith, 2005). The
underlying learning process of the network was structured as a learning system (Winter, Smith, Cooke-
Davies and Cicmil, 2006), in other words in line with the principle of soft systems thinking.
An interim report of the Network was published in May 2005 (Winter and Smith, 2005) with a clearly
stated objective of being a first attempt to identify what the research directions and possible areas for
future research might be. It clarifies the ‘rethinking’ process as a sensemaking process in the light of the
social nature of projects and the people involved in the Network. Three levels of sensemaking were
identified, namely (1) Making sense of the meeting content; (2) Making sense of the network content; (3)
Making sense of the network process
The interim report presented five directions of new thought for extending and enriching mainstream
project management theory: (1) From Lifecycle theory of projects towards Complexity theories of
projects; (2) From Single practice towards Multiple practices; (3) From Product creation towards Value
creation; (4) From Narrow conceptualisation towards Broad conceptualisation; (5) From Trained
technicians towards Reflective practitioners.
The five directions were linked to the seven areas of concern as a starting point in the development of the
new research agenda. Of relevance to this article is the link made between practitioner development as the
seventh area of concern, multiple practices (the different levels at which project management is practiced
and the diversity of roles resulting in a variety of needs for practitioner development) and reflective
practitioners (in order to enhance individual capabilities to deal with uncertainty and the unique aspects of
projects).
Smith and Winter (2005) identified what seemed to be a conflict between the knowledge requirements of
the current bodies of knowledge and the broader areas of knowledge that would include ‘craft knowledge.
They identified three concerns about the training and development of project managers, namely an
‘excessive focus’ on methods and tools rather than craft knowledge, a ‘dislocation’ between training,
development and practice and an ‘excessive focus’ on acquiring knowledge at the expense of capability
development.
In the final report of the Network, Winter and Smith (2006) the issues that arose regarding education,
training and development were: (1) recognising the importance of developing craft capability, and (2)
knowledge acquisition and the development of capability in new knowledge areas. Two key insights were
that project management remains more of a craft than a science, and that there is potential to develop a
new strand of project management methodology for the not-for-profit and charity sectors that is not based
on the traditional triple constraints of time, cost and quality.
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In their paper on the main findings of the Network, Winter, Smith, Morris and Cicmil (2006) argue that
the rational, universal, deterministic model (also known as the ‘hard’ systems model) is the most
dominant strand of project management thinking. The major criticism of this model is threefold: firstly,
its failure to deal in enough detail with the changing nature of ‘front-end work’; secondly for treating all
projects as if they were the same and thirdly for not accounting for human issues in enough detail. The
relevance of the ‘hard’ systems model was increasingly being questioned by practitioners.
The main disadvantage of mainstream project management methods and techniques is identified as the
fact that it does not provide guidance on how the complexities of projects in an ever-changing
environment should be balanced. Experienced project managers resolve these complexities through a
combination of experience, intuition and ‘the pragmatic application of theory’ (Winter et al, 2006). It was
highlighted that the development of the ability, to move from being ‘trained technicians’ who can follow
detailed procedures and techniques, prescribed by project management methods and tools, to being
‘reflective practitioners’ who can learn, operate and adapt effectively in complex project environments,
through experience, intuition and the pragmatic application of theory in practice (Winter et al, 2006),
together with leadership abilities, should receive much more attention in the training of project managers.
Cicmil et al (2006) voices the concern that the emphasis in the bodies of knowledge has been on project
managers as ‘implementers’ or ‘skilful technicians – ’which belittles their social and political role in the
complex arrangements called projects. They choose to include, over and above what they term the
‘instrumental rationality’ required of project managers (epistemological knowledge), the ‘value
rationality’ ‘which means recognising and coping with the operation of power in any social setting, the
need for intuition, multiple perspective, holistic thinking, moral and ethical consideration as part of
complex human interaction and relating.’
This ‘value rationality’ becomes the single most important survival skill of the project manager in an
environment that is often ambiguous, fragmented and highly politicised. Cicmil et al. (2006) does point
out that the perception of the value of these skills often depends on the level of exposure to this project
management discourse as opposed to the traditional project management discourse. The conventional
bodies of knowledge or ‘decomposition models’ separate the project from its environment, while the
systems thinking approach to project management includes ‘soft’ factors/variables that play a key role in
determining project behaviour. In complex and uncertain projects the risks are exacerbated by
conventional methods and therefore both instrumental and value rationality needs to form the basis of
project management practice so that the theory reflects ‘the richness of what actually occurs in project
environments’ (Cicmil et al, 2006).
Morris, Crawford, Hodgson, Shepherd and Thomas (2006) argue that certification that only indicated that
a body of knowledge had been internalised had limited value. Hence any training that focused exclusively
on one of the existing bodies of knowledge is described as both narrow and shallow. Very little research
informed any of the current bodies of knowledge (Morris et al, 2006) and that these bodies of knowledge
get their legitimacy from ‘group endorsement’. In fact, Morris et al. (2006) indicate that all the key
players in putting together the bodies of knowledge have a vested interest in changing it as little as
possible – by implication the emphasis will therefore remain on execution issues at the expense of
strategic issues, project definition, management of external factors and human behaviour and the
definition of other facets of the project management job family, namely programme managers, project
sponsors, portfolio managers, etc.
At this stage it would add value to focus on a study by Birkhead (1999) that identified the key
competencies required of project managers in South Africa. His research, involving all the members of
the Project Management Institute of South Africa (PMISA) at the time, indicates the following as the core
competencies required of project managers (in rank order): (1) Planning and controlling, (2) Personal
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influence, (3) People management, (4) Problem solving, (5) Team leadership, (6) Staff development, (7)
Project context.
More recently Barry (2009) identified the top ten qualities of a project manager through a process of
action research internationally with participants of project leadership courses. The similarities with the
outcome of Birkhead’s study 10 years earlier are noticeable: (1) Inspires a shared vision, (2) Good
communicator, (3) Integrity, (4) Enthusiasm, (5) Empathy, (6) Leadership competence, (7) Ability to
delegate tasks, (8) Cool under pressure, (9) Team-building skills, (10) Problem-solving skills.
Atkinson (1999) challenges the validity of the ‘Iron Triangle’ of time, cost and quality as the single
measure of project success. He contends that time and cost ‘are at best only guesses’ and that new criteria
need to be found to evaluate the success of projects. He lists performance and efficiency measurement,
the benefits to the project stakeholders and closer alignment with organisational success criteria as
significantly more important success factors in the current project management environment, with
customers and users included in the assessment of a project.
In his investigation into the management of risks, uncertainties and opportunities on projects Jaafari
(2001) found that the social, environmental, political and community aspects relating to projects should
receive the same level of attention as technical and financial factors to ensure project success. Rather than
using the ‘plan-implement-monitor’ structure set out in the PMBOK of the PMI (2004), Jaafari (2001)
proposes a ‘strategy-based project management philosophy and methodology’ in which planning,
decision-making and risk management is integrated in achieving the project’s strategic goals. Inherently
this approach requires systems thinking of the project manager, which according to Jaafari (2001) often
takes place in the project manager’s mind and parallel to the formal project processes in projects deemed
to be successful because the current project management knowledge base, tools and systems do not
provide for strategy-based project management competencies.
As early as 1981 Mann reiterated the importance of appropriate training for all the role players in the
‘project management system’ in a conventional organisational structure – which he states is not overtly
sympathetic towards the demands of project management. He acknowledges that the specific training he
regards as essential is more than what is generally found in general management courses and confirms the
relevance of case studies for project management training.
McCreery (2003) attempts to overcome the challenges of project management training by using a ‘teambased
simulated project exercise’ in an academic classroom setting in an attempt to cover the scope of the
knowledge base and the theory and practice of the discipline. The process leans heavily on group work
and in general participants agree that the simulation provides a context within which they can improve
their project management skills – and more so for less experienced participants. McCreery (2003)
acknowledges that further research is necessary to determine the general applicability of this exercise in
different environments and with a larger variety of groups in order to maximise the efficiency of training
interventions.
Research methodology
Given the nature of quantitative and qualitative research methodologies, the researcher was convinced
that a qualitative approach would be the appropriate methodology to be followed to determine whether
there is a balance between codified knowledge and craft knowledge in the curricula for project
management training at South African public higher education institutions.
The various qualitative approaches were further narrowed down and it was decided to use a case study
research design for this research with the curricula of the project management courses of the relevant
institutions being the primary source of data. Given the context of the recent dynamics in the South
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African higher education environment a stratified random sampling process was followed to ensure that
the sample is both representative and random. One institution was randomly selected from each of the
strata. In order to keep the names of the selected universities anonymous, the selected universities were
identified University A, University B and University C.
Rwelamila’s (2007) five question litmus test (Table 1) was applied to determine whether the respective
curriculums could be considered as appropriate and fully-fledged.
Test item topic Sub-topic(s)
1. Fundamentals of project planning,
estimating and risk analysis techniques.
2. Behavioural aspects of project
management.
3. The dynamics of organisational issues
(techniques for managing across
organisations when the project manager has
all the responsibility and little of the
authority) including how to get projects done
in spite of the rest of the organisation
4. Business fundamentals
Putting together a project plan
2.1 Team building
2.2 Motivating team members
2.3 Developing effective project teams
2.4 Dealing with upper managers, contributing
department managers and other stakeholders
4.1 The business of the organisation
4.2 How decisions affect the bottom line
4.3 How to run a project as if it were a business
5.1 Techniques of defining and developing a market
5. Marketing and customer issues
5.2 Understanding the needs and desires of the
project’s customers and end users
Table 1: Topics and sub-topics of the five question litmus test (Rwelamila, 2007)
The curriculums of the selected universities were evaluated against the five items of the litmus test. Each
item was each scored out of 20 with a total possible score of 100. Only if all five questions of the litmus
test could be answered in the affirmative at an acceptable level of compliance was the specific programme
under consideration regarded as appropriate and fully-fledged.
Research results
University A
The curricula of the project management qualifications offered by the University A yielded an overall
score of 53 out of a possible 100 points. The highest score was achieved on the test item that covers the
fundamental tools of project management – what is commonly known as codified knowledge or ‘hard
skills’. The score of the curricula of the project management qualifications offered by University A on
two of the other test items (Behavioural aspects of project management and Marketing and customer
issues) is very low, with one item (Marketing and customer issues) achieving a score of 0. This indicates
that the curricula that were studied show little evidence of an attempt to teach students soft skills or craft
knowledge.
These curricula still have a long way to go before they can be regarded as either appropriate or fullyfledged.
Curricula continue to focus all but exclusively on the PMBOK® (PMI, 2004) – a practice that
Crawford et al. (2006) regards as ‘flawed’, resulting in training that is ‘both narrow and shallow’. The
overall conclusion is that there is an insufficient balance between codified knowledge and craft
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knowledge for the curricula of University A to produce graduates with a knowledge base appropriate for
the modern project management environment.
University B
The curricula of the project management qualifications offered by University B yielded an overall score
of 98 out of a possible 100 points. High scores were achieved both on the test items that cover the
fundamental tools of project management – the codified knowledge or ‘hard skills’ – and on the test items
that teach students soft skills or craft knowledge. Only one item did not achieve the highest possible
score.
It does therefore seem as though the project management curricula of University B has moved
significantly towards being appropriate and fully-fledged. The four different domains covered by the
curricula of University B also cover the link made between practitioner development and multiple
practices and project managers as reflective practitioners. However, there is no evidence that the curricula
of University B address multi-project management and communications training.
Although University B is a registered education provider of the PMI it has resisted the temptation to focus
on the execution issues only by including strategic issues, project definition, management of external
factors and human behaviour (Morris et al, 2006). The overall conclusion is that University B has
established a balance between codified knowledge and craft knowledge and that the curricula studied will
produce graduates with a knowledge base appropriate for the modern project management environment.
University C
The curricula of the project management qualifications offered by University C yielded an overall score
of 92 points out of a possible 100 points. High scores were achieved both on the test items that cover the
fundamental tools of project management – the codified knowledge or ‘hard skills’ – and on the test items
that teach students soft skills or craft knowledge. Only one test item (Business fundamentals) achieved the
highest possible score.
University C addresses the necessity for maintaining a critical balance between formal education and
training and ‘action learning’ by including a two day simulation exercise in the curriculum. The
simulation workshop is programmed in artificial intelligence and is a core component of both the practical
and the advanced programme. Team decisions and other random events determine how the project
unfolds during execution by the group. The success of the group project is determined by the extent to
which the group can consistently make good and integrated management decisions.
The overall conclusion is that there is sufficient balance between codified knowledge and craft knowledge
in the curricula of University C to produce graduates with a knowledge base appropriate for the modern
project management environment.
Conclusions
Project management curricula at South African public higher education institutions have generally
not kept up with international trends
The high scores achieved by the curricula of two of the three public higher education institutions indicates
that South African public higher education institutions have started to move away from regarding the
content of the respective bodies of knowledge as an all-encompassing prerequisite for project
management training. However, the influence of the PMBOK® (PMI, 2004) of the Project Management
Institute on project management training at all levels remains overwhelming.
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Curriculums are ‘tainted’ by their environment at faculty level
Project management curricula at South African public higher education institutions have become
‘contaminated’ by the composition of the faculty where they are housed and seem to reflect political
compromises reached at that level. The curricula should be largely generic and based on best practice
(both national and international) rather than trying to satisfy the needs of the various disciplines in a
faculty.
Aspiring project managers are set off on the wrong foot
The huge need currently experienced for project management training has given rise to the establishment
of various entry-level certificates or programmes in project management. The relevance of the curricula
of these certificates or programmes that remain focused on technical skills at the expense of craft skills
can be questioned. These entry-level certificates or programmes in project management are the first step
in a career as project manager for many people. Graduates of these entry-level courses will find
themselves burdened by attitudes and habits which they would have to unlearn before higher level
knowledge and skills can be acquired, internalised and applied.
Implications
Project management training in South Africa must be aligning with international research findings
South Africa’s unique role and position on the continent of Africa and internationally demands that South
African public higher education institutions in particular should be more bold in ensuring that their
project management curricula are appropriate and fully-fledged in the African and international context,
rather than slavishly following a specific body of knowledge. Current and potential project managers
should be equipped with the skills and knowledge required to deliver projects successfully in a
multicultural environment. This underscores the necessity for curricula to include exposure to critical
aspects such as communicating with stakeholders at various levels, team-building, business fundamentals
and understanding why the customer is king.
Rethinking the balance of core and elective modules
Inasmuch as giving students a choice of elective modules creates the impression of flexibility, this very
choice could be to the disadvantage of the student in the long run in his/her career. Particularly in postgraduate
courses students should not be allowed to opt out of modules that empower them with the craft
skills and business skills that they will require in their career as project or programme manager.
Comprehensive institutions must take up the challenge
The objective with the establishment of comprehensive institutions was to make it possible for students to
progress at the same institution from an entry-level qualification such as a certificate, to post-graduate
qualifications. These institutions in particular must grab the opportunity to structure their curricula in line
with a possible career path of project managers in the world of work by creating an articulation between
the qualifications at the various levels (certificate, higher certificate/national diploma, degree and postgraduate
qualification) with the envisaged levels of a career path for project managers. The must ensure a
progression in learning between the courses moving from basic knowledge to higher levels of knowledge
focusing on craft skills – which become increasingly more important as project managers move into more
senior positions in their career path.
Planning, planning, planning
The project plan and its annexures are some of the most important and fundamental guiding documents
for all stakeholders in the execution of a project. It is much more than the schedule created by means of
software, yet there is very little evidence that students are given guidance on the manner in which the
information gathered in the initiation and planning phases of a project could be consolidated in the
compilation of the project plan.
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The curricula of entry-level courses in project management in particular should clearly state the role,
function and content of the project plan and how the information gathered in the planning and initiation
phases of the project, together with all the other information that needs to be captured, feeds into the
drafting of the project plan – and contribute to successful project execution.
Training the project management leadership
With the growing need for project management across the spectrum of industries in South Africa it is fair
to assume that one would increasingly see project management centres of excellence, corporate project
management offices or project management offices being established. The curricula for the post-graduate
qualifications in project management, in particular, should prepare students for the challenges of
establishing and managing formal project management structures in a fully or partly projectised
organisational environment.
References
Atkinson, R. (1999) “Project management: cost, time and quality, two best guesses and a phenomenon, its
time to accept other success criteria.” International Journal of Project Management, 17, 337-342.
Barry T.R. 2009: Top 10 Qualities of a Project Manager. Retrieved May 13, 2010 from
http://www.projectsmart.co.uk
Birkhead M. (1999) Core competencies required of project managers, in Regional African Project
Management, South Africa, 3-5 November 1999, Johannesburg: Project Management Institute South
Africa.
Cicmil, S., Williams, T., Thomas, J. and Hodgson, D. (2006) “Rethinking Project Management:
Researching the actuality of projects.” International Journal of Project Management, 24, 675-686.
Crawford, L., Morris, P., Thomas, J. and Winter, M. (2006) Practitioner development: From trained
technicians to reflective practitioners. International Journal of Project Management, 24, 722-733.
Jaafari, A. (2001) “Management of risks, uncertainties and opportunities on projects: time for a
fundamental shift.” International Journal of Project Management, 19, 89-101.
Mann, J. (1981) “The training of project managers.” Industrial and commercial training, March, 101-103.
Morris, P.W.G., Crawford, L., Hodgson, D., Shepherd, M.M. and Thomas, J. (2006) “Exploring the role
of formal bodies of knowledge in defining a profession – The case of project management.” International
Journal of Project Management, 24, 710-721.
Project Management Institute Standards Committee. (2004). A Guide to the Project Management Body of
Knowledge. Upper Derby: Project Management Institute.
Rethinking Project Management. 2006. Retrieved March 12, 2008 from http://www.rethinkingpm.org.uk
Rwelamila, P.D. (2007) “Project management knowledge base in South Africa – have we missed the
opportunity?” CEO, 1(1), 1-2.
Smith C and Winter M. 2005: The Profession and Practitioner Development Sensemaking Paper 6.
Manchester: Rethinking Project Management. Retrieved March 12, 2008 from
http://www.rethinkingpm.org.uk
Winter M and Smith C. 2005: Making Sense So Far: Emerging Directions and Future Research.
Manchester: Rethinking Project Management. Retrieved March 12, 2008 from
http://www.rethinkingpm.org.uk
Winter M, Smith C, Morris P and Cicmil S. (2006) “Directions for future research in project
management: The main findings of a UK government-funded research network.” International Journal of
Project Management, 24, 638-649
Winter, M., Smith, C., Cooke-Davies, T and Cicmil S. (2006) “The importance of ‘process’ in Rethinking
Project Management: The story of a UK Government-funded research network.” International Journal of
Project Management, 24, 650-662.
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Winter, M and Smith, C. 2006: Final Report. Manchester: Rethinking Project Management. Retrieved
February 21, 2008 from http://www.rethinkingpm.org.uk
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Abstract
Governance of Public Investment Projects in Ethiopia
Asmamaw Tadege Shiferaw, asmamaw.shiferaw@ntnu.no
Norwegian University of Science and Technology, Norway.
Ole Jonny Klakegg, Ole.jonny.klakegg@ntnu.no
Norwegian University of Science and Technology, Norway.
In the recent years, Ethiopia has experienced relatively high level of economic growth and the government is
implementing large number of public investment projects. However, there are concerns about the relevance and
sustainability of these projects. This paper maps and reviews the front-end project governance system of Ethiopia
and identifies the most important front-end challenges of public investment projects. The findings indicate that the
top-down project approach, lack of mandatory control gateways at the front-end and weak links between project
stakeholders affected the effectiveness of the project governance system. Being unable to identify the key priorities of
the society and lack of commitment from key stakeholders are identified as the most important front- end challenges
of public investment projects.
Introduction
Demand for public services in sub-Saharan African countries is increasing continuously due to the
improvement in governance and awareness in the region. However, poverty, lack of basic infrastructure,
and poor industrial development are continuously hindering the ability of the nations to meet this demand.
This is exacerbated by lack of transparency, lack of legal and financial frameworks, and poor capacity in
managerial and technical expertise (Gidado, 2010).
Ethiopia is located in this region with fast population growth and high public service demands. In
Ethiopia, private sector services are not developed enough to satisfy the needs and the demands for public
services. To reach these high demands of the public, the Ethiopian government has been planning and
implementing several public investment projects. During the last ten years, many public investment
projects have been implemented and some are in progress. Many others are also planned for the next five
years. The Ethiopian government is used to set medium term development plans and the strategic
objectives are economic development and poverty reduction. Using these plans, different sectors have
prepared detailed plans and programs in the theme of economic growth, agriculture and rural
development, human development, infrastructure development and governance (MoFED, 2006).
A grand housing development program, road sector development programs, health sector development
programs, education sector development programs are some of the programs implemented by different
sectors to improve the public welfare. Under these programs many projects are designed and implemented
in order to provide goods and services to the public. However, project development in Ethiopia has
experienced problems at the planning and implementation stages. Different studies at the Ministry of
Finance and Economic Development (MoFED) indicated that there was no system that checks the links
between the project objectives and the government strategies. Wastage of resources and redundancy of
projects were common (MoFED, 2006). To minimize the wastage of resources and eliminate redundant
projects, MoFED has tried to revise the system and adopted tools to appraise, monitor and evaluate public
investment projects. However, projects still have problems related to usefulness and sustainability.
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This paper examines the causes and symptoms of inefficiencies in the project governance system of
Ethiopia and finds the most important front-end challenges of public investment projects. The research
has questions like what are the most important problems leading to lack of relevance and sustainability in
public investment projects? How the project governance system is functioning? What are the major
factors that affect the efficiency of the front-end governance system? The answers to these questions help
to map and review the project governance system in Ethiopia and help to ensure that we are doing the
right projects.
Contextual Review and Economic Development in Ethiopia
Ethiopia has total land area of 1.1 million square km with a population of about 82 million. It has federal
system of government. It comprises the federal government, nine administration regions and two
chartered city administrations. The government is made up of two tiers of parliament: The House of
People’s Representative and House of Federation where political leaders are elected every five years. The
executive branch includes a president, Council of State, and Council of Ministers.
The Ethiopian economy is based on agriculture, which contributes 42% to GDP and more than 80% of
exports, and employs 80% of the population. The major agricultural export crop is coffee, providing
approximately 26% of Ethiopia's foreign exchange earnings. Other traditional major agricultural exports
are leather, hides and skins, pulses, oilseeds, and the traditional "khat," a leafy narcotic that is chewed.
Sugar and gold production has also become important in recent years (US Department of State Bureau of
African Affairs, 2011). According to the Ministry of Finance and Economic Development (MoFED)
reports the Ethiopian economic activities have shown a healthy growth over the last fifteen years. On
average 10 percent growth rates are registered between 1996 and 2008/2009. In 2010 the annual growth
rate was10.4 (US Department of State Bureau of African Affairs, 2011). This recent growth translated the
GDP per capita from US $102 in 2000/2001 (MoFED web site, 2011) to US $ 390 in 2009/2010 (World
Economic Forum, 2010). The economy has, therefore, been in robust growth trajectory in these years.
During these periods, the government has prepared and implemented two macroeconomic programs and
the third one is on progress. These programs are Sustainable Development and Poverty Reduction
Program (SDPRP) from 2002/2003 to 2004/2005, Plan for Accelerated and Sustained Development to
End Poverty (PASDEP) from 2005/2006 to 2009/2010 and the ongoing Growth and Transformation Plan
(GTP) from 2010/2011 to 2014/2015. Under SDPRP and PASDEP programs the country has
implemented different major public investment projects. These include the construction of 23 new
universities and the expansions of 10 others, the construction of many primary and secondary schools, the
construction of thousands of health centers, thousands kilometers of road construction projects, water
supply projects, extensive housing development projects, hydro power projects and others. Compared to
the previous background of the country, in this period many public investment projects have been
initiated and implemented. The number and the types of projects are extraordinary and significant
achievements have been recorded. But considerable weaknesses are also observed both in the project
concept development and project implementation processes.
Public Investment Projects in Ethiopia
Projects are policy implementation tools using limited available resources (finance, manpower and
materials) for accomplishing development programs (Cusworth &Franks, 1993). How to identify the right
projects, how to prepare them through to successful completion and how to operate and maintain them
afterwards is an important issues to be considered for marshalling a countries resource’s for development
(Baum & Tolbert 1985). In Ethiopia, the concepts of public investment projects have been initiated from
different parties. These include the government, sectors, private investors, civil society, aid agencies,
donors, banks, NGO, and others (MoFED, 2006). These sources of projects in Ethiopia are classified as
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systematic and non systematic. Systematic sources are sources with predictable contents and formal
documents. Development strategies, sector strategies, long and medium term development plans,
development programs are examples of systematic project ideas. On the other hand, unsystematic sources
of project ideas include influential individuals and urgent circumstances.
According to MoFED (2006), most public investment projects were developed from the government
medium term development plans of SDPRP and PASDEP. The majority of projects in different sectors
had objectives consistent with the development strategy of the country. However, the objectives are
exaggerated and planners and decision makers put the project objectives without considering the real
situation on the ground. For example the housing development program has set several integrated and
over ambitious objectives. Over ambitious planning often favored launching large public sector projects
and these biases proved costly. Even though the housing program has achieved many encouraging results,
evaluation of the projects based on its objectives indicated that the project couldn’t get success both in
operational, tactical and strategic perspectives.
Another examples of public projects that have problems at the front-end analysis are the construction
projects of 23 universities. The university construction projects are huge and the government has
allocated billions of dollars for the successful implementation of the construction projects. The projects
have been implemented in two phases. The first phase consists of 13 universities and it is part of the
education sector development program under (SDPRP). The second phase of the program includes the
construction of 10 universities and it is included in the (PASDEP). The projects are direct political
decisions of the government. It is part of the government’s policy to build demand–driven technical and
vocational education, training and higher education in the programs of (PASDEP). However, there is no
feasibility study that justifies the necessity of the project. The plan for fast enrolment expansion,
particularly at higher education level, is not linked to an analysis of demand. The link created between
education development and private sector development and service delivery are weak (DAG, 2006). The
number and quality of teachers, the economy of the country to sustain out tens of thousands of graduates
per year, budget and maintenance are critical sustainability issues for the project. Plans for expanding
higher education must be supported by an analysis of labour market demand and must be better linked to
plans for private sector development, growth and service delivery.
It is also possible to find several other projects at the federal or regional levels without sufficient study at
the beginning. There is always urgency to start a project without analyzing the situation and without
feasibility study. The lack of a gateway process on start-up is key. Such type of lack allows projects to
proceed without clarity around objectives, resources and timescale (OECD, 2008). According to Baum &
Tolbert (1985), the starting point should be preparation of macroeconomic forecasts to provide a
framework for making decisions. This should be followed by identification of public investment needs in
individual sectors, along with an assessment of the consistency among the various sector programs. Then,
projects should be implemented or decisions should be made if it is confirmed that the benefits of projects
are really significant to facilitate the identified problems.
In Ethiopia, MoFED has been given a mandate to conduct professional analysis as basis for decisions on
public investment projects, Proclamation No. 642/2009 (EFDR, 2009). In this regard, MoFED had
prepared a system and tools for project appraisal which are adopted from World Bank project
management manuals. However, these system and tools are practiced basically for donor driven
development projects. If the finance source is local (demand driven projects), the ministry is not
conducting project appraisals regularly. A study conducted in 2009 by MoFED indicated that of all
projects financed by the local financing scheme, only 10% of the projects are passed through a formal
front-end appraisal system. The rest 90% of the projects are implemented without a preliminary screening
by MoFED. Sectors prepare projects and the ministry only checks the budget. The objectives, the
relevance and the sustainability of the projects are left as the responsibility of sector offices.
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Research Methods
To identify the most important front-end challenges of public investment projects in Ethiopia, the survey
was performed focusing on the issues of relevance and sustainability. 62 questionnaires are distributed for
the relevant professionals who have rich experiences in public projects of Ethiopia. From these 62
questionnaires 45 of them, 9 Project planners (20%), 10 project evaluators (22.2%), 5 decision makers
(11.1%), 14 program/project managers (31.11%), and 5 others (11.1%) responded. The response rate is
medium (72.6 %). The number of respondents is low, but we accepted the results because the
questionnaire requires high level of competence and there are shortages of expertise in the area. To
supplement this low number of respondents interviews are also conducted with key professionals working
in the public projects and important feedbacks are found.
On the other hand, in order to map and review the front-end project governance system, the research
focuses on interviews with selected groups of stakeholders namely public employers, domestic
contractors, and domestic consultants who have been actively participating in undertaking public
construction works. Interviews with 35 key professionals and desk study provided the primary data while
the secondary data sources publications, journals and, internet sources, as well as related archival
documents at the MoFED and other sectors are reviewed and analyzed. These different methods of data
collection have been used in order that the data or information obtained from one can be supplemented by
the others.
Analysis , Results and Discussions
Challenges of public investment projects at the front-end
As show above public investment projects in Ethiopia have challenges at the front-end. According to
Klakegg (2009), the most important challenges of projects in the project development process is ensuring
relevance and sustainability at the front-end. Therefore, we decided to screen the challenges of public
investment projects in Ethiopia based on projects’ relevance and sustainability. Relevance refers to the
objectives of the project, and is a matter of to what degree the objectives are in keeping with valid
priorities and the users’ needs. Sustainability refers to whether the positive effects of the chosen public
investment project will be maintained after the project has been concluded (Samset 2003, Klakegg 2010).
If a project is not relevant and sustainable, it is a failed project in the strategic perspective Samset (2003)
and it should have been rejected at the beginning.
Relevance
The analysis of the survey indicated that from the listed alternative reasons leading to lack of relevance in
major public investments of Ethiopia, majority of the respondents indicated society priorities are
unknown, misunderstood or ignored as the most important one as shown in Table 1 below. The reason
justified by the respondents showed that the society’s priorities have not been investigated and society’s
priorities are ignored by planners and decision makers due to political or personality reasons.
The numbers in Table 1 indicates the number of respondents with respective scales. The last column
indicates the weighted score (WS). The weighted score indicates the relative importance of the
alternatives. The society priorities are unknown, misunderstood or ignored are selected as the most
important reason for the lack of relevance in the public sector investment projects of Ethiopia with a WS
of 3.22.
Table 1: Results of the survey for lack of relevance in public investment projects of Ethiopia, N= 45, the
scale ranges from 1 to 4. 1 is for least important and 4 is for most important reason.
Alternative 1 2 3 4 WS
2.1 The users’ needs are unknown, misunderstood or ignored 8 7 11 19 2.91
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2.2 The users’ needs change before the project is executed 13 18 6 8 2.2
2.3 The society’s priorities are unknown, misunderstood or ignored 5 5 10 25 3.22
2.4 The society’s priorities change before the project is executed 13 21 6 5 2.07
2.5 The objectives of the project are unknown or misunderstood
2.6 The objectives of the project do not change according to
changed needs/priorities over time
12 9 8 16 2.62
9 10 13 13 2.67
It is related to the project approaches. Ethiopia has experienced top-down project approaches for major
public investment projects. In the top-down project approach, majority of the projects are defined and
planned at the top level without the consent of the public. Decisions on major public investment projects
are made without consulting the users. Users are neglected in this approach. There is no system that
consults or that identifies the effective demands of the public. Public priorities are not criteria for project
selection. Most decisions are politically biased. The politicians decide by the name of the public but they
don’t identify the priorities of the public. This could be either public priority deliberately ignored and
changed to other politically prioritized projects or misunderstood due to lack of competence of planning
expertise. However, before starting a project, the project initiators should be able to identify the effective
demands of the public and there should be clear prioritizing criteria. The link between the government
and the project users should be clear and the priorities of the public should be identified using proper
planning tools.
Sustainability
The same respondents indicated lack of commitment from key stakeholders as the most important reason
for lack sustainability in public investment projects of Ethiopia see Table 2 below. Neglecting weak
support in interacting institutions, or opposition by other institutions is also identified as the main reason
for the lack of commitment from stakeholders.
Table2: Results of the survey for lack of sustainability in public investment projects of Ethiopia, N= 45,
the scale ranges from 1 to 4. 1 is for least important and 4 is for most important reason.
# Alternatives 1 2 3 4 WS
3.1 Lack of commitment to the project from key stakeholders 6 4 5 30 3.31
3.2 The chosen technological solution is not viable under the
prevailing conditions
11 11 11 12 2.53
3.3 Conflict over objectives and/or strategies concerning the project 10 10 14 11 2.58
3.4 Economic and financial benefits are low, compared to
investment and operational costs
15 7 10 13 2.47
3.5 Lack of conformity with prevailing policy or by legislation 23 12 6 4 1.8
3.6 There are negative ethical issues connected to the project 18 13 10 4 2.0
3.7 Business or other conditions change between concept stage and
final delivery
11 13 11 10 2.44
Lack of commitment to the project from key stakeholders is selected by quite a large number of
respondents with WS of (3.31) as the most important reason for lack of sustainability in the public sector
investment projects of Ethiopia. Key stakeholders support for a project is an essential ingredient for
success. Conversely, lack of support from key stakeholders is likely to result in the project failing
(Garland, 2009). Whatever decision-making body is established for the project should itself comprise the
central project stakeholders. The main stakeholders must be included in the decision making forum
(Garland, 2009). Projects run into problems when the decision making forum does not contain the
relevant stakeholders and/or the project ownership is confused or split. Decisions on investment projects
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of Ethiopia are made from the top and other stakeholders are expected to participate only in the process.
However, the political stakeholders’ commitment is not consistent throughout the process. In the
beginning of the project they are very ambitious to start the project but their commitment decreases as the
project progresses. Conflicts over objectives and strategies concerning the project are selected as the
second most important reason WS of (2.58) for lack of relevance. It is true that there are conflicts but the
conflicts couldn’t come to table due to the power balance difference between stakeholders. Strategies and
objectives concerning the projects come from the top. The other stakeholders are only expected to accept
and work.
To strengthen the results of the questionnaire we made interviews with 35 key professionals. According to
the majority of the interviewees, the rationale for the most public investment projects in Ethiopia is
political decisions. Relevance and sustainability of projects didn’t get much attention at the front-end.
Projects will have sustainable benefits to the society in the long term perspective if they are the need and
priority to the public and if their net value is very encouraging. This could be achieved by establishing
control gateways and mandatory systems and procedures (effective project governance system) at the
front-end. Effective project governance includes a decision making process that guides a project
development process, creates basis for decisions and implements decisions (Garland, 2009). Effective
project governance is recognized as a key feature of successful investments. Hence, lack of effective
governance framework at the front-end of projects decreases the relevance and sustainable effects of
public investment projects in Ethiopia.
Project governance framework in Ethiopia
Project governance framework is defined as ‘‘an organized structure established as authoritative within
the institution, comprising processes and rules established to ensure projects meet their purpose’’
(Klakegg 2010). Governance framework defines structures and principles to make the governance of
public investment projects possible and effective (Garland 2009, Klakegg 2010). According to Klakegg
(2010), governance framework characteristics are divided in to four different categories. These are the
process of development, the structure of the framework, the embedded governance principles and detailed
governance elements. In the following sections, I will map, review and analyze the project governance
framework of Ethiopia based on these characteristics of governance frameworks.
Project Governance System in Ethiopia and the Process of Development
Ethiopia has experienced public investment projects as means for development implementation tool for a
long time. Project planning was started during the Imperial era in 1945 (MoFED 2008). It was started
after the Ethio-Italian war and used for the reconstruction of infrastructures and revival of the economy.
However, programs and projects were not initiated from development plans and there was no
coordination between them. After being convinced of the importance of development plans, Emperor
Hailesilase I had established a planning board in 1955 for planning and leading development works and
he was the chairman of the board (MoFED 2008). After the Imperial era, the Derge regime (1974-1991)
had established Ministry of Planning and used a socialist central planning framework for public projects.
Recognizing the importance of project planning work and to have basis for project preparation the regime
had established the Development Project Study Authority (DPSA). DPSA of the national committee for
central planning had prepared a project planning guideline in 1984 and the guideline was revised 1990
(MoFED, 2006). This guideline was very important document that served as basis for project planning
and preparation. However, the number and type of public investment projects during this period was
small. The number and type of public investment projects have increased after the present government
came to power in 1991. After 1991 the state adopted the following changes; A federal system of political
governance based on decentralization and devolution of power to regional governments in 1993, a free
economic policy with vigorous privatization of public companies in 1992, and structural adjustment of
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public executive organs. Ethiopia used its Ministry of Economic Development and Cooperation, now it is
MoFED for planning and administration of public investment projects. In between 1991 and 2006, the
Ministry of Economic Development and Cooperation prepared and used checklists for project appraisal.
In 2006, MoFED developed a new system and different tools for preparation, appraisal, monitoring and
evaluation of public sector projects. The purpose of the system and tools is to help practitioners in
designing viable projects that meet the development needs and priorities of the government and to provide
sufficient information for decision makers (MoFED, 2006). It is an interesting system for informed
decision making and value for money. According to this system, public investment projects in Ethiopia
should be initiated from government development programmes and plans, which are derived from the
prevailing development policies. If sectors have a budget source from the government treasury, the
project concept is prepared by the sectors and they will send it to MoFED. Once the project concept is
approved by MoFED, sectors will prepare the project document including cost estimate and submit to
MoFED. After checking the project proposal the ministry either approves the project or returns for
amendments or rejects. On the other hand, if the source of finance is assistance or loan, the proposal
comes to MoFED and the ministry will check the proposal against the government development
strategies. After checking the project proposal, MoFED will send it to Council of Ministries and further to
the House of People’s Representatives. However, this is a theoretical framework and in practice there are
deviations.
In the previous paragraphs of this section we tried to analyze the most important challenges of public
investment projects in Ethiopia. The results of the survey indicated problems related with the project
governance system of the country. In order to develop the results and to indentify the problems we made
interviews with 35 key professionals who have long experience in public investment projects. The
interviewees pointed out problems between major parties involved in the project governance framework
of Ethiopia. Majority of the interviewees confirmed that the link between sectors and MoFED as weak.
Linkages between MoFED, other government and non-government stakeholders are weak throughout the
process.
Figure 1 summarizes the analysis of the interviews. The government is overambitious in designing
projects and there is no patience to give enough time for planning. Coverage and equity between regions
have been given more emphasis than the merit of projects. This creates problems related to the usefulness
and sustainability of project effects. MoFED which is theoretically responsible for projects appraisal and
evaluation have no genuine power and have shortage of experts. The coordination between its different
units of MoFED is weak. The ministry project appraisal system lacks mandatory control gateways for
project concept, project alternatives, uncertainty analysis and need assessments. Sectors also have
shortages of experts and baseline data for planning. Furthermore, there are problems at the links that
connect these parties. For example the link between the government and MoFED is a one way traffic. The
government decides and the ministry implements the decisions. The professional analysis and inputs of
MoFED that could basis the government decisions are either not used, or not influential or do not wanted
at all. On the other hand the link between MoFED and sectors are weak. For the last couple of years, from
all locally financed projects only very small number of projects from sectors could go to MoFED for
appraisal and approval. Majority of projects are apprised and evaluated by the sectors themselves. This
implies that coordination between MoFED and sectors are very weak. MoFED is not exercising its power
according to the proclamation No. 642/2009.
Fig 1. Analysis of problems in the project governance system of Ethiopia
Urgency
High ambition
Coverage and equity interest
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MoFED
SECTORS
Structure of the Framework
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Proper structuring of involved parties and indicating clearly their duties and responsibilities is one of the
basic issues in the project development process. The recent system for the preparation of public sector
projects identifies the House of People’s Representatives, the Council of Ministries, MoFED and sectors
as the main parties involved in the public project governance of the country. The system describes the
duties and responsibilities of each party regarding preparing and implementing the short, medium and
long term economic development strategies using programs and projects. According to this structure the
House of Peoples Representatives issues proclamations and laws and approves issue related to public
projects that come from the Council of Ministries. The Council of Ministries issues regulations and
directives and makes decisions based on analysis from MoFED. MoFED issues project directives, makes
decisions on important issues from sectors, appraises project proposals of sectors and finds budget for
approved projects. MoFED also has a mandate to evaluate and monitor approved projects. According to
this framework, planning and programming units of sectors plays a key role in defining and designing
public need projects that are part of the development strategy of the country.
Fig.1 Structure of public investment projects workflow in Ethiopia
House of People Representatives
Laws that are approved Proclamations and Laws
by Proclamations
Council of Ministiries
Issues that need decisions Regulations and Directives
MoFED
Important information Project directives
Project proposals Issues that need agreements
Reports Sectors
Approved projects and budgets
Governance Principles
Lack of experts
Lack of genuine power
Lack of coordination b/n units
Lack of mandatory gateways
Lack of competence
Lack of baseline data
One way Traffic: Lack of logical and
chronological sequences between
analysis and decision making
Weak link and coordination
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There are no special principles expressed in the project preparation, appraisal and evaluation documents
of Ethiopia. But it is relevant to consider the good governance principles of the country as principles of
project governance because they explicitly defines good governance and could influence individuals
working at the project governance framework of the country. Based on several project governance
documents of the MoFED, and suggestions from the interviewees of our recent survey; 1) transparency,
2) accountability, 3) serving the public interest, 4) impartiality, 4) responsiveness and 5) respecting the
law are identified as embedded governance principles in the project governance framework of Ethiopia.
But the question is do these elements actually working?
Detailed Governance Elements
The project governance system in Ethiopia has elements of governing cost and time. The Ministry of
Finance and Economic Development has prepared and used national economic parameters and conversion
factors to know the true pictures of economic impacts of a project due to market imperfections, external
effects and government controls. The economic analysis of projects is conducted in order to ensure that
public investment funds are used for viable projects. The financial analysis are also conducted in order to
determine the long term budgetary implications and to provide an adequate financing plan for a proposed
project. Another important governance element is procurement and contract. MoFED is also responsible
for procurement and contract issues in Ethiopia. Public Procurement Agency ( PPA) is the responsible
body in the ministry. It is good that these institutions are found in the same ministry. But to have the
documents and the institutions are is not sufficient. The question is do they operate in coordination
independently to ensure that the government is implementing the right public projects?
Conclusions and Implications
In the recent years, Ethiopia has implemented substantial amount of public investment projects. Some of
the projects are very successful and could provide effective public services for the target group.
Compared to the previous conditions, at the present the Ethiopian government has experienced relatively
medium term planning and have better strategies, policies and plans which are used as the sources of
public investment projects. However, like many other countries in the world, there are considerable
weaknesses at the front-end of public investment projects. These weaknesses refers problems such as lack
of baseline data, lack of commitment from key stakeholders, weak links between project stakeholders,
being unable to identify the key priorities of the society, project urgency, and weak project planning
capacity as the challenges of public investment projects. From these factors, majority of the respondents
pointed out that ignoring, misunderstanding or unable to identify society’s priorities as the most important
factor that affects the relevance of public investment projects. On the other hand, quite a large number of
respondents pointed out lack of commitment from key stakeholders as the most important challenge that
affects the sustainability of the project effects. Based on these findings we can conclude that even though
the project governance system in Ethiopia has a good theoretical background, in practice it is one way
traffic (top-down) approach for project ideas and decisions, sectors are weak in planning and
programming, the linkage and coordination between the MoFED and sectors are weak and MoFED has no
real power to conduct gateway review processes on major projects. Therefore, the project governance
system is not effective, and there should be a separate public project governance system with independent
experts and emphasis should be given on being practical rather than doctrinaire.
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Track 18: China-Africa Business Relationships
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The research on the efficiency in Chinese central SOEs and their influencing factors
Hao Ji tojihao@126.com¨hao.ji@bcbuu.edu.cn
Business School, Beijing Union University, Beijing 100025, China.
To date, many literature focus on Chinese general SOEs (state-owned enterprises) and the way to improve the
efficiency and profitability of those companies during the China’s transition. However, few studies could distinguish
the SOEs controlled by China’s central government (central SOEs) from the SOEs controlled by local government
(local SOEs). As one of the pillars in Chinese economy, understanding central SOEs’ features, efficiency and their
influencing factors has important implications for the central SOEs themselves and Chinese government. This paper
offers an insight into the Chinese central SOEs from the internal capital market point of view.
Introduction
As China's rapid economic development, large-scale enterprise group has being getting prosperous, how
to improve efficiency of capital allocation to improve the value of the Group concerns academics and
practitioners gradually. However it’s rare to make distinction based on property attributes in current
literature regarding internal capital markets (ICMs). A few researchers analyzed the internal market
efficiency of private enterprises or SOEs, but the research on internal capital market of large state-owned
enterprises such as Chinese central SOEs is completely ignored.
Chinese central SOEs are the large state-owned enterprises owned by Chinese central government. The
SASAC (the state-owned Assets Supervision and Administration Commission) of the State Council
exercises the responsibilities of investor on behalf of the central government. In contrast, Chinese local
SOEs are controlled by province, city, and county governments represented by local SASAC. The central
SOEs occupy a special important status in the national economy not only due to the key industries but
also the large size. For example, there are 30 central SOEs out of 43 companies of mainland China in
fortune 500, 2010.
This paper is a contribution to study of internal capital market and Chinese central SOEs during the
transition. Taking Chinese central SOEs as the target for our ICM research is motivated by three
important considerations. First, most central SOEs have abundant resources, more transparent financial
system, which set better research base for internal capital market. Secondly, the central SOEs reform
(such as reorganization, listing, etc.) will make the allocation of internal capital inside the central SOEs an
inevitable trend. It is imperative to study their efficiency and influencing factors. Third, Chinese central
government offered preferential policies to support the development of internal capital market in central
SOEs, such as encouraging to establish internal finance companies; soft budget constraint on central
SOEs.
By central SOEs owned internal capital market, we mean the central SOE that operates in more than one
industry, as classified by the Chinese Standard Industrial Code, or the firm holds more than one listed
companies.
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Proceedings of the 12th Annual Conference © 2011 IAABD
The rest of the paper will be arranged as follows. In the section 2, the method and the hypotheses will be
developed, followed by a description of the data. We report the results in Section 3 and section 4
concludes the paper.
Research design
The empirical study has two major objectives: first, whether the central internal capital markets in central
SOEs are efficient; second, which factors affect the efficiency of their ICMs. We also analyze the industry
distribution and their basic financial data to understand the characters of central SOEs.
Research methods on internal capital market include two categories: one is to prove the purely theoretical
model, such as the GSS model; the other is the empirical analysis to detect efficiency of internal capital
allocation. Although empirical researches of ICM are required to look inside decision making process, we
can still use some public information to infer the function of internal capital market.
Empirical studies of the internal capital market can be basically divided into two types: indirect research
and direct research. Indirect method assumes positive correlation between corporate value and the
efficiency of internal capital markets and infers ICM efficiency through comparing the value of different
enterprises. The direct method relies on the comparison of conglomerates’ divisions with a control sample
of comparables using single-segment firms chosen.
Although academics have questioned the implicit assumption of direct method that conglomerate and
single-segment firms faced the same investment opportunities and were of similar ability, this method is
still popular, more intuitive and understandable. Data for the direct study have two main sources: the
segment data of listed company and the public disclosure of official economic data, such as the economic
information from State Statistics Bureau or Census Bureau.
Pursuant to the Chinese accounting standards No. 35 and CSRC (China Security and Futures Regulation
Commission) Regulation, from 1 January 2007 listed firms were required to report certain audited
segment information on segments whose assets, sales or profits are deemed material by exceeding 10% of
the firms’totals, but the data is not available beforehand. Hence, the sample period seems too short to get
empirical test result, if we use segment data. Meanwhile, the Chinese official business data from State
Statistics Bureau is not publicly available as some developed countries. Our empirical research therefore
adopts the indirect method to judge the efficiency of capital allocation by firm value.
Regression models
Empirical design for the efficiency of capital allocation
We assume efficient internal capital market will improve the investment on the segments (project) with
higher returns, but reduce the investment on the segments (project) with low return. Because managers
generally make decision on the investment plans based on the financial information of prior year, in
particular profitability ratio, and hence we use the profit growth rate of previous year as the explanatory
variable. We therefore constructed the following model to measure the efficiency of capital allocation:
= β + β !�−
− + 0
(1)
Where subscript t denotes the year, β � � © and β �are
parameters, and 0 is the random perturbation.
��is the growth on fixed asset investment and equals to . the profit
�−�
� ���
marks
�− � �� ��
�� − © � � � � � � © ©
�− �
��
�−
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�−
growth and represented by ��
. � ��
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The profit hereis the operating profit due to more stable and lasting,
which is the result of the production or other business activities, while the net profit is influenced by
many other uncertainty and uncontrollable factors.
The formula embodies the assumption that an effective internal capital market will continue to invest the
industry where profits keeps growing, while reduce the investment on the industry where profit declines.
In particular, if β greater than zero, it means when the industry profit increase, the investment will be
also increased; and the internal capital market is effective. On the contrary, if the variable is less than � �
0, then this market is an inefficient in resource allocation.
Empirical design for the factors influencing the efficiency of capital allocation
The efficiency of central SOEs’ investment is influenced by problems of asymmetric information and
agency. The problems have two primary levels: one is between the central SOE and their subunits; the
second one is between the central SOE and the central government represented by SASAC of the State
Council. We assume the agency conflicts within the firm can be solved or mitigated by 5 categories of
influencing factors as follows.
One
Firstly, the management motivation could improve the efficiency of internal capital market. We use two
indicators to measure the degree of managers’ motivation. is management equity incentives
denoted by the indicator variables Mshare, which takes on the value 1 if the company has equity incentive
program and 0 if it has not. Management compensation, represented by indicator variables Mincome,
which is the top3 executive's compensation. Since the large range values of this variable, the empirical
study would take the natural logarithm. � �
Secondly, the internal governance generally affects the efficiency of capital allocation. The companies
with better corporate governance have more efficient internal capital markets and so higher corporate
value. Since the board of directors is seemed as the essence of corporate governance, we selected two
indicators reflecting the board structure as our measures. One is the proportion of independent directors
(IDR). The other is whether the chairman and general manager is the same person (CM), which takes the
value of 1 if it is not the same person, and 0 if it is.
The third factor category is the external governance, such as creditors’ supervision and government
regulations etc. We investigate the function of external governance by one indictor regarding creditors,
denoted by asset-liability ratio (Total liabilities / total assets). We assume with the increase of assetliability
ratio, the creditors (banks or other institutions) will enhance the supervision on the enterprises’
operation and investment for their own financial safety.
Next, the capital structure of central SOEs may have notable effect on the efficiency in capital allocation
during Chinese transition and SOEs’ reform. Two measures are used to reflect the capital structure.
�Separation of control right and cash flow right (Sep) Share proportion of the largest shareholder or
controlling shareholder (LSshare). These two indicators reflect the agency problem between controlling
shareholder and minority shareholders. The controlling shareholders’ interest exploitation from minority
shareholders is due to the conflicts between cash-flow rights and voting rights. �
The final type of factor is the unique characteristics of the central SOEs, such as total assets, market
value, net assets, etc. Those indicators show the features of central SOE, which is the condition and
environment of ICM and hence affect the efficiency of ICM. We choose book value of asset to present
β
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one feature of central SOEs, which may imply the sufficiency of resources, space to allocate the resources
at some level. Because of the large range values, this study would take the natural logarithm of this
variable.
We thus constructed the model as follow:
β + β + β + β + β + β
(2)
+ β + β + β + � � ����������
�����
����������
= � �
Where V is the dependent variable. The dependent variables are separation of control right and cash flow
right (Sep); Share Proportion of Largest Shareholder (LSshare); the proportion of independent directors
(IDR); dummy variable to show Whether the chairman and general manager is the same person, which
takes the value of 1 if it is not the same person, and 0 if it is (CM); the natural logarithm of top3
executive's compensation (LnMincome); management equity incentives, which takes on the value 1 if the
company has equity incentive program and 0 if it has not (Mshare); Asset-liability ratio (ALR); the natural
logarithm of assets value (LnSIZE).
V is the enterprise value, denoted by Tobin's Q value. Tobin’s q is usually defined as the value of the firm
(equity and debt claims) scaled by the replacement value of the firm’s assets. In the corporate finance
literature replacement value of the firm’s assets is often approximated by the book value of assets. Also,
because China's bond markets are underdeveloped, the main business financing channel is the stock
market and bank lending, and hence we assume the market value of debt is basically the same as the book
value of the debt.
��������� � � � � � � ������
Data
By central SOEs owning internal capital market, we mean diversified central SOEs or the central SOEs
hold more than one listed companies ultimately. A diversified central SOE is judged by whether the firm
operates in more than one industry, as SASAC’s business scope report of central SOEs. Listed companies
owned by central SOEs with internal capital market are not only refer to the listed firms on the Shanghai
Securities Exchange (SHSE) and Shenzhen Stock Exchange, but also the firms listing on the Hong Kong
and other foreign stock exchanges. In those central SOEs, the headquarter may allocate resources between
subsidiaries or between the different industries. In addition, although all the central SOEs are State
holding and supervised by the same SASAC, there’s no resource allocation among the central SOEs and
no need to turn profit over to the SASAC. Hence, the internal capital we refer is only the internal capital
market inside the central SOEs.
One primary level of agency conflicts in central SOEs is between the central SOEs and the central
government represented by SASAC. SASAC (the state-owned Assets Supervision and Administration
Commission) was formed on March 10, 2003. After the initial establishment, SASAC conducted a series
of drastic reform in central SOEs. We hence select the data after January 1, 2004 in order to avoid
inconsistency of data and background.
We assume the central diversified SOEs as reported by the SASAC report, and the firm holds more than
one listed companies own internal capital market. We find surprisingly almost all the central SOEs are in
line with the requirement. We then collect financial data of listed companies, whose final control are
central SOEs owing ICM. Next, we removed some listed firms that have the features such as negative
equity, data missing or major business is finance service. We finally got the total of 130 qualifying listed
companies who belong to the part central SOEs owning ICM.
The China Stock Market and Accounting Research (CSMAR) database and the public official data from
SASAC serve as the primary source for our financial data.
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Industry distribution of central SOEs
Without considering the missing data, there are 152 listed companies that belong to the central SOEs. We
compare their industry distribution with the local state-owned listed companies, and private listed
companies as shown in Table 1:
Table 1 Industrial Distribution
Industrial Distribution
A Agriculture, forestry, animal
husbandry, fishery
Central SOEs Local SOEs Private companies
Number of
samples
Percentage
Number of
samples
Percentage
Number of
samples
757
Percentage
3 1.97% 16 2.58% 8 3.83%
B Extractive Industries 5 3.29% 14 2.26% 0 0.00%
C0 Food, beverages 1 0.66% 31 5.01% 10 4.78%
C1 Textile, clothing, fur 4 2.63% 19 3.07% 10 4.78%
C2 Wood, furniture 0 0.00% 0 0.00% 2 0.96%
C3 papermaking, printing 0 0.00% 16 2.58% 1 0.48%
C4 Petroleum, chemical, plastics 12 7.89% 76 12.28% 18 8.61%
C5 Electrical Industrial 7 4.61% 18 2.91% 5 2.39%
C6 Metal, non-metallic 10 6.58% 80 12.92% 12 5.74%
C7 Machinery, equipment, instruments 45 29.61% 70 11.31% 35 16.75%
C8 Medicine, biological products 5 3.29% 44 7.11% 20 9.57%
C9 Other manufacturing industries 4 2.63% 0 0.00% 4 1.91%
C Total Manufacturing industries 88 57.89% 354 57.19% 117 55.98%
D Electricity, Gas, Water Production
and Supply
10 6.58% 38 6.14% 4 1.91%
E Building industry 6 3.95% 11 1.78% 5 2.39%
F Transportation, warehousing 9 5.92% 32 5.17% 2 0.96%
G IT Industry 16 10.53% 20 3.23% 22 10.53%
H Wholesale and retail 7 4.61% 45 7.27% 16 7.66%
J Real Estate 1 0.66% 23 3.72% 9 4.31%
K Social Services 5 3.29% 24 3.88% 4 1.91%

Proceedings of the 12th Annual Conference © 2011 IAABD
L Communication and Cultural 1 0.66% 2 0.32% 1 0.48%
M Miscellaneous 1 0.66% 40 6.46% 21 10.05%
Total 152 100.00% 619 100.00% 209 100.00%
Table 1 shows that Chinese central business has the following properties and trends.
First, the central business capital is concentrated in key industries which relates to the national security
and national economy safety, such as the extractive industries.
The central SOEs are also focused in some particular chain mechanism where market mechanism is
difficult to play a role or some basic industries which require significant control from government. Those
industries include basic services, infrastructure, basic raw materials, key technologies, the key processes,
etc. The typical cases are electricity, gas and water. Third, capital of central SOEs concentrated in
industry where central SOEs have competitive advantage such as industries requiring high capital
investment or high barriers to entry (e.g. strict polices at market access). In particular, the industries could
be oil, chemical, plastic, plastic, electronic metal, nonmetal, machinery, equipment, instruments, etc.
Finally, the central business also attaches importance to the possible future leading industry. They are
gradually investing and developing the industries with broad market prospect, such as high-tech
industries. As shown in the Table 1, the proportion of the central state-owned listed companies in the
information technology industry is same as the private economy. Such industries are competitive, require
big investment and updated quickly. The relatively high proportion in this economic sector shows state’s
intention to let SOEs play leading role in high-tech industry.
Enterprise size and performance comparison
In order to reflect the central SOEs’ value, operating performance and the other features, we listed the
main financial data of listed companies owned by central SOEs and then compared them with other type
of companies in the same period as shown in Table 2.
Table 2 Operating Performance of Listed Companies
Central SOEs Local SOEs Private companies
Financial Indicators
average Median Average Median average Median
Asset-liability ratio 51.18% 52.17% 49.45% 49.92% 49.89% 51.43%
Rate on equity(ROE) 10.10% 9.74% 7.56% 7.94% 7.36% 8.17%
Total Assets (billion) 14.91 2.70 2.73 1.74 5.59 2.76
Total Liabilities(billion) 8.40 1.54 1.48 0.82 2.92 1.31
Total equity (billion) 6.51 1.33 1.24 0.85 2.66 1.30
Total equity (billion) 15.97 2.06 1.75 1.00 4.20 1.58
Operating income
(billion) 1.26 0.11 0.18 0.09 0.37 0.12
Net profit (billion) 0.99 0.10 0.14 0.08 0.30 0.10
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The results in Table 2Table 2 show some distinctive features as follows:
First, the assets, liabilities; equity of the listed companies controlled by central SOE are well over the
other types of companies. It indicates the overall size of the central SOEs is far beyond the other
companies and implies the advantages of the central business in resources, capital, etc., which may due to
the historical reasons, soft budget constraint and preferential policies of government.
Second, central SOEs-controlled companies are slightly ahead of the other enterprises from the angle of
assets-liabilities ratio and net assets yield rate. It may be the result of reform in central SOEs, such as
restructuring and changes in incentive mechanism. Also it could due to the central enterprise’s advantage
in resources and government preferential policies.
Third, the average profit is much higher than other types of businesses that shows the important role of
central SOEs in the national economy and State tax revenue.
Regression result for the efficiency of internal capital markets
Regression Eq. (1) results are shown in Table 3 to test the efficiency of ICM in different types of
companies. Model fits are low.
Table 3 Regression Results of ICM Efficiency
Central SOEs
Coefficients
Local SOEs
Coefficients
private
enterprises
Coefficients
Constant 1.216008199 1.391982436 1.391381139
PG 0.001961645 0.001121175 0.001118524
Dependent Variable: IG
From the regression results, we found all the investment growth was positive correlated to the growth rate
of operating profit of previous year. Among them, the central SOEs have slight advantage. But overall,
the coefficients of three types of enterprises are relatively small and did not pass the test of significance,
which suggests that companies did not adjust investment plans for next year based on profit variation and
therefore may indicate poor efficiency in capital allocation.
Regression result for the factors influencing the efficiency of capital allocation
First, the Pearson correlation coefficient is used to measure of the level of linear dependence between
every two variables among the eight variables. Once the test results exceed the moderate correlation (0.5-
0.8), we will remove the independent variables. The correlation test results showed that most of the
variables are not correlated totally and there is only a slight correlation between a few variables, but not
exceeds 0.5-0.8. We therefore haven’t removed any variables. We then do the linear regression test of Eq.
(2) and summarize results in Table 4.
Table 4 Regression results of influencing factors
Coefficient
s T Sig.
Constant 4.0478 3.2239 0.0013
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Proceedings of the 12th Annual Conference © 2011 IAABD
Sep -0.0047 -0.7071 0.4798
LSshare 0.0004 0.1052 0.9163
IDR 0.469 0.3186 0.7502
CM 0.2817 1.1757 0.2402
Mincome 0.3231*** 3.7302 0.0002
Mshare 1.3737*** 3.1907 0.0015
ALR -0.1158 -0.3814 0.7031
LnSIZE -0.3091*** -5.9543 0
Dependent Variable: V
*** Statistically significant at the 0.01 level;
The regression results basically in line with our assumptions. First, the coefficients between SEP and the
value is close to 0 and not significant, which indicated that large shareholder s’ interests expropriation
from minority shareholders is not serious in the central SOEs. This may be due to better corporate
governance and more stringent regulations from SASAC. Also as state-owned enterprises, the central
SOEs have no strong motivation to transfer the wealth of minority shareholders. It’s the reason why we
only focus the 2layer agency conflict, while neglect the third one between the controlling shareholder and
the minority shareholder. Secondly, although the coefficients between the largest shareholder and
enterprise value is positive, it is close to 0 and not significant, indicating that major shareholders may be
not doing their due management obligations. Again, from the internal governance mechanisms
perspective, non-same person of chairman and general manager, the proportion of external independent
directors are positively related to firm value, but the correlation was not significant, suggesting that
governance mechanisms have not played the due role. From external governance point of view, due to the
limitations of data, we simply look at the role of creditors. The empirical results show that the assetsliabilities
ratio and enterprise value was not significant negative correlated, demonstrating that the
government should help to strengthen the construction of the external governance environment. Finally,
from the own characteristics angle, the scale of the central SOEs and enterprise value is significant
negative correlated, which may be due to the larger company’s size, the larger internal capital markets
and so the larger space for rent-seeking. The managers therefore will go" lobbying " for" private interests
" and reducing the efficiency of internal capital markets.
Conclusions
This paper looks at the features of central SOES, and then analyzes their efficiency of ICM and the
influencing factors. A pragmatic reason for studying the efficiency of central SOEs is that the managers in
central SOEs always face decisions about investment and capital allocation due to the larger scale. Also,
research on the efficiency of central SOEs and its influencing factors is useful to investors and to
regulators especially during the transition. To improve the efficiency of ICM, central SOEs ought to
establish a complete control system (shown in figure1) including all the sides of influencing factor and
thus avoiding the inefficiency of capital allocation.
760

Input:
Process, regulation
References
External governance
Internal capital market of
Standard process: budgets; investment; Execution;
performance appraisal; motivation; etc.
Scientific regulation: corporate governance; risk
management; information system, etc.
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Figure 1 financial control system of ICM in central SOEs
Output: ICM efficiency
Aggarwal, R., Samwick, A., 2003. Why do managers diversify their firms? Agency reconsidered. Journal
of Finance 58, 71–188.
Anh, S., Denis, D.J., 2004. Internal capital markets and investment policy. Journal of Financial
Economics 71, 489–516.
Chen, G., Firth, M., Kim, J., 2004. IPO underpricing in China’s new stock markets. Journal of
Multinational Financial Management 14, 283–302.
Cheng, Y.S., Lo, D., 2002. Explaining the financial performance of China’s industrial enterprises: beyond
the competition–ownership controversy. China Quarterly 170, 413– 440.
Maksimovic, V., Phillips, G., 2002. Do conglomerate firms allocate resources inefficiently across
industries? Theory and evidence. Journal of Finance 57, 721–767.
Rajan, R., Servaes, H., Zingales, L., 2000. The cost of diversity: The diversification discount and
inefficient investment. Journal of Finance 55, 35–80.
Xu, L.C., 2000. Control, incentives and competition. Economics of Transition 8 (1), 151–272.
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Proceedings of the 12th Annual Conference © 2011 IAABD
A Conceptual Model of the Internationalization Strategies of Chinese State and Private Sector
Enterprises in Africa
Abstract
Xiaohua Lin, hlin@ryerson.ca
Carlyle Farrell, farrellc@ryerson.ca
Global Management Studies DepartmentTed Rogers School of Management
Ryerson University, Ryerson Business Building, Toronto Ontario
This paper presents a conceptual model of the internationalization strategies of Chinese state and private sector
enterprises. Specifically we present a framework to better understand the strategic decisions and performance
outcomes of Chinese state-owned enterprises (CSOEs) and Chinese privately owned enterprises (CPOEs) as they
pursue investment opportunities in Africa. For future empirical investigations, we offer a set of testable propositions
comparing the two types of Chinese enterprises entering African markets: in comparison to CSOEs, CPOEs are
more likely to be driven by economic rationality and take a diversified orientation, to have weaker corporate
governance and engage local African communities in business process to a lesser extent, and to become profitable
quicker but lack stability in the longer term. The paper concludes with a discussion of managerial and policy
implications.
Introduction
This paper presents a conceptual model of the internationalization strategies of Chinese state and private
sector enterprises. Specifically we present a framework to better understand the strategic decisions and
performance outcomes of Chinese state-owned enterprises (CSOEs) and Chinese privately owned
enterprises (CPOEs) as they pursue investment opportunities in Africa. It should be recognized that much
of the literature on Chinese foreign direct investment in Africa has focused on the strategies and tactics of
state owned enterprises (see for example Kaplinsky and Morris, 2009). To date little has been written on
the involvement of privately owned Chinese enterprises on the African continent, despite their increasing
importance (Gu, 2009; Wang, 2007). Appealing to Dunning’s OLI framework and notions of path
dependency (Nelson and Winter, 1982) we offer a number of propositions to explain the strategies,
governance structures and performance outcomes of CSOEs and CPOEs as they pursue
internationalization opportunities in Africa.
China’s involvement in Africa dates back to the Ming dynasty (1368-1644) when China launched
maritime expeditions to countries now known as Somalia, Kenya and Madagascar in search of exotic
treasures (le Pere, 2007; Broadman, 2009). With the end of the Second World War and the birth of the
People’s Republic of China (PRC) in 1949 Sino-African relations entered a new phase with China
providing material support to several African countries in their struggle for independence. Contemporary
Sino-African relations, however, date back to the 1955 Bandung Conference – a meeting of Asian and
African nations designed to promote economic and cultural collaboration. Beginning in the early 1960s a
number of high-level Chinese officials visited African nations in an attempt to consolidate diplomatic and
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economic relations. The results of these visits were manifested in the strong support from African nations
in China’s bid for a seat on the United Nations Security Council in 1971. Efforts to maintain close ties
with the African continent certainly intensified following the liberalization of the Chinese economy in
1978 and the institution of economic reforms. Africa provided China with valuable political support in
her accession to the World Trade Organization in 2001 and China in turn provided increased development
assistance and cancelled the debts of a number of the poorer African countries (Tull, 2006).
Today China’s engagement in Africa is driven by four major considerations (a) access to natural
resources, (b) access to final product markets on the continent, (c) improving China’s leverage in
international relations, and (d) ending Taiwan’s diplomatic influence on the continent ((le Pere, 2007 and
Shinn, 2009). China’s involvement in Africa has clearly evolved over the years. China began to provide
financial assistance to Africa in the 1970s that was more focused on strengthening ideological ties with
the continent. Today China’s assistance to the region is predicated on economic objectives in addition to
more humanitarian or idealistic motivations. This paper will focus on economic issues, specifically direct
foreign investment and the internationalization strategies of CSOEs and CPOEs.
Research Objectives
This paper will attempt to achieve the following specific objectives:
( a ) to profile China’s foreign direct investment in Africa.
( b ) To compare the internationalization strategies, governance structures and performance outcomes
of CSOEs and PSOEs in Africa.
( c ) To develop the managerial and policy implications of the differences in the internationalization
strategies of CSOEs and CPOEs in Africa.
Organization
This paper is organized into six major sections. Following this brief introduction is presented an overview
of Chinese foreign direct investment in Africa. In the third section is provided a review of the theoretical
literature considered germane to this study’s research objectives. Our conceptual model is discussed in the
fourth section along with a number of testable research propositions. The managerial and policy
implications of our work are outlined in the fifth section while the sixth and final section provides a few
concluding observations.
Chinese Foreign Direct Investment in Africa:
Data provided by National Bureau of Statistics of China indicate a sharp acceleration in net overseas
direct investment (ODI) in Africa over the period 2004 to 2008. As illustrated in Table 1 China’s overseas
direct investment in Africa increased from $US31.7 million in 2004 to $US 549 million in 2008. China’s
ODI stock in Africa similarly showed significant gains rising from $US 159.5 million in 2005 to $US
780.3 million in 2008. It should be recognized that these data may well understate the true level of
China’s direct foreign investment in Africa. An ECOWAS-SWAC/OECD report, for example, put the
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level of Chinese foreign direct investment in Africa at $US 900 million in 2004 (ECOWAS-
SWAC/OECD, 2006). If the data from the National Bureau of Statistics of China are to be believed, in
2008 South Africa was the largest recipient of Chinese ODI followed by Nigeria (Table 2). According to
the ECOWAS-SWAC/OECD (2006) study Chinese investment on the African continent is heavily
concentrated in the oil sector but also includes manufacturing, mining, fishing and infrastructure projects.
Table 1: China’s Overseas Direct Investment in Africa, 2004-2008
Year Net Overseas Direct Investment
$US m
2004 31,742
2005 39,168 159,525
2006 51,986 255,682
2007 157,431 446,183
2008 549,055 780,383
Source: National Bureau of Statistics of China. http://www.stats.gov.cn/english/
Table 2: Geographic Distribution of Chinese ODI in Africa, 2008
Country ODI ($US m)
Algeria 4,225
Sudan 6,314
Guinea 822
Madagascar 6,116
Nigeria 16,256
South Africa 480,786
Source: National Bureau of Statistics of China. http://www.stats.gov.cn/english/
Overseas Direct Investment Stock
$US m
As already noted Chinese involvement in Africa has evolved over time. In fact the nature of that
involvement has become increasingly more sophisticated (Broadman, 2009).Kaplinsky and Morris (2009)
make the point that it is now virtually impossible to separate Chinese aid from foreign direct investment
as much of China’s aid funds to Africa are funneled through EXIM Bank to Chinese state owned
enterprises competing for large infrastructure or resource contracts. A more recent phenomenon has been
the increasing involvement of CPOEs in Africa. Several authors have noted that most of the Chinese
enterprises now operating in Africa are in fact privately owned (Wang, 2007; ECOWAS-SWAC/OECD,
2006). There is, however, currently little agreement on the number of CPOEs operative in Africa. EXIM
Bank put the number at 600 in 2006 – significantly less than the number estimated by Gu (2009) who put
the number at 2,000 based on interviews with officials of Chinese embassies and the business community
in Africa in 2007-2008. Wang (2007) on the other hand suggests that there are 800 Chinese enterprises
doing business in Africa of which only about 100 are CSOEs. Whatever the exact number it is clear that
CPOEs now outnumber CSOEs in Africa and represent a much wider range of economic sectors. Unlike
CSOEs which are focused on oil and natural resource extraction CPOEs operate in a range of industries
including agriculture, manufacturing, textiles and pharmaceuticals (Gu, 2009). According to Gu (2009)
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CPOEs began to explore investment opportunities in Africa as early as the mid-1990s. These, however,
tended to be larger firms with a specific focus on manufacturing. It was not until 2005 that smaller private
firms began to engage increasingly in projects on the African continent.
Theoretical Framework
Several theories have been espoused in the international business literature to explain the pattern of
foreign direct investment (FDI). Our current understanding of the FDI process owes much to the work of
Dunning and his insights into the determinants of FDI flows and the process of internationalization (see
Dunning, 1980). Dunning’s Ownership-Location-Internalization (OLI) model suggests that there are three
drivers of a firm’s foreign investment decisions (Dunning, 1980). Firms are driven by the need to own
foreign production facilities as these confer a strategic advantage over competitors who do not have
control of such productive assets and must resort to less efficient methods of serving international
markets, e.g. exporting. According to Dunning (1980) firms are also motivated by the need to achieve
location advantages in their foreign investment decisions. The ability to operate in a low tax jurisdiction,
capitalize on a stable industrial relations climate or take advantage of host government incentives are
among the firm’s considerations. The OLI paradigm also suggests that firms are motivated to achieve
internalization advantages in their foreign investment decisions. Dunning has argued that it must be more
profitable for the firm itself to operate in the foreign country when compared to the alternatives that are
open to it, such as licensing or the establishment of a contract manufacturing arrangement with an entity
in the foreign market. Firms have the opportunity to internalize the gains from their technologies,
managerial skills and other productive assets by investing directly in a foreign country. Firms in
Dunning’s model make investment decisions based on rational economic choices. In contrast the Uppsala
or U-model articulated by Johanson and Vahlne (1977) focuses on learning. These latter authors argue
that a lack of experiential knowledge with respect to foreign markets is the dominant driver of the
internationalization process. As knowledge constraints are relaxed firms expand into markets with
increasing psychic distance.
It should be noted that some authors have suggested that both the Uppsala model and Dunning’s OLI
framework ignore the issue of managerial intentionality and path dependency (Hutzschenreuter, Pedersen
and Volberda, 2007). The same criticism applies with equal force to the knowledge based view of
internationalization as articulated by Kogut and Zander (2003). According to Hutzschenreuter, Pedersen
and Volberda (2007) internationalization is not simply a naïve evolutionary journey based on the
accumulation of market knowledge or the firm’s calculus of costs and risks. Over the life of an MNC the
firm acquires certain skills and knowledge which are unique and difficult to replicate by competitors.
These skills, however, are not only a source of competitive advantage but also a source of inertia. Firms
become wedded to particular decision heuristics, behaviors and cognitive styles from which they have
difficulty disengaging. Hutzschenreuter, Pedersen and Volberda (2007), therefore, argue in favor of a coevolutionary
perspective in which internationalization is driven by managerial intentionality, path
dependency, knowledge accumulation as well as a mix of institutional and selection forces.
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It should be recognized that much of the theoretical work on the process of internationalization was
developed to explain the investment behavior of developed country multinationals. It has been argued that
these frameworks may not explain well the investment behavior of multinationals from emerging
economies such as China. To fill this void in the literature Luo and Tung (2007) have articulated the now
well-established “Springboard” model (or latecomer perspective) which argues that emerging market
multinationals employ international expansion as a means of overcoming disadvantages inherent in their
home country environments, as opposed to attempting to exploit competitive advantages abroad.
Conceptual Model & Propositions:
Whilst many have taken the CSOEs as typical Chinese MNEs and ignored CPOEs' growing role in
China's "go global" drive, the relevant literature suggests that there should be vast differences between the
two types with respect to strategy, structure, and expected performance (Lin 2010). The insights from
existing literature and evidence have shown unique characteristics of CPOEs in Africa, in comparison to
their counterparts from China's state sector. These differences can be summarized in the conceptual
framework illustrated in Exhibit 1.
Strategy
Strategic Motivation. It is a widely accepted assumption that because of their state affiliation CSOEs
often have motives beyond economic rationality when internationalizing (Child and Rodriques 2005). In
Africa, the Chinese government is accused of seeking geo-political interests by way of large CSOEs and
of being self-interested by focusing on the resource sectors (Shinn 2007). In contrast CPOEs are the
product of an emerging market economy and, therefore, are always profit-oriented. As a result, their
entrance into the African continent has to be a decision based purely on economic rationality (Lin 2010).
To a certain degree, the motivation of the CPOEs in Africa is consistent with the classic IB literature,
which is derived from the experience of Western MNEs, that describe FDI as incidences in which firms
expand internationally in order to capitalize on potential ownership, location and internalization
advantages (Dunning 1980). For example, a CPOE textile manufacturer could take advantage of its
product and process knowledge as well as of low wages, government incentives and an industrial relations
climate conducive to production in an African country. We offer the following proposition:
P1. CPOEs, in comparison to CSOEs, are more likely to be driven by economic
rationality when entering African markets.
Exhibit 1: Conceptual Framework
Internationalization in Africa
Firm
Type
Strategy
CPOEs Economic
Rationality
Structure Performance
Motivation Orientation Governance Embeddedness Profitability Long-run Stability
Industry
Diversification
Weak
Governance
Less
embedded
in the local
More
profitable in
the short run
Less stable in
the long run
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CSOEs Statesponsored
Agenda
Resource
Focused
Relatively
Strong
Governance
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
community
More
embedded
in the local
community
Less
profitable in
the short run
More stable in
the long run
Strategic Orientation. While CSOEs, due to their commitment to state imperative, may aim to acquire
strategic assets by focusing on Africa's extractive industries CPOEs are more likely to explore valueadded
local business opportunities in a wide range of industries (Gu 2009). Such a diversified strategic
orientation leads to activities that are more in tune with the needs of host countries instead of using Africa
to accomplish some sort of "global agendas" likely observed with CSOEs. The flexibility and adaptability
that the CPOEs have developed in China should then become a comparative advantage over CSOEs in
attaining effectiveness in individual African markets.
P2. CPOEs, in comparison to CSOEs, are more likely to enter Africa with a more
diversified orientation.
Structure
The notion of path dependency would suggest that both CSOEs and CPOEs should adopt the kind of
organizational structure that they use in home market (i.e., China). If that is the case, Africa would
witness two types of Chinese firms: CSOEs that are under closer government scrutiny and thus
comparatively more formally structured and CPOEs that are market-governed and thus comparatively
more loosely structured. It should be noted that several authors have examined the often strained
relationship between Chinese firms and the local African community (see for example, Kwon Lee, 2009
and Haglund, 2009). These tensions are perhaps more easily understood given the weak corporate
governance of CPOEs, the weak institutional environment in Africa and a general lack of effective
enforcement. We believe:
P3. CPOEs, in comparison to CSOEs, are more likely to have weaker corporate
governance.
The notion of path dependency would also predict that both CSOEs and CPOEs will follow their home
grown management practice. However, since CSOEs need to fulfill the Chinese's government
commitment to Africa's economic development, they are likely to respond to the requirements from the
local governments and communities with regards to the way they structure their business in areas such as
employment. By comparison, CPOEs, without such a mandate, could behave more akin to other "overseas
Chinese businesses" that are well documented in existing literature (Kao 1993). Some of the
characteristics of overseas Chinese businesses, such as heavy reliance on co-ethnic ties in resource
mobilization, risk mitigation, and market expansion have lasted to the present day (Redding 2000). In reproducing
an ethnic enclave approach in the host society (Lin 2007), CPOEs thus have little interaction
with the local communities other than the latter being the clientele. In Africa, CPOEs have a strong
tendency to hire Chinese labor immigrants who in turn live in isolation from the local communities
(Broadman 2007). To summarize:
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P4. CPOEs, in comparison to CSOEs, are less likely to engage local African
communities in business processes.
Performance
While a firm's performance could be measured in different ways, it has to be evaluated in both the short
and long runs. The varied strategies and management practice could have differential performance
implications for CPOEs versus CSOEs. The preceding discussion suggests a market orientation in CPOEs
in comparison to a state imperative in CSOEs. In other words, CPOEs enter an African market only to
seize money making opportunities (Wang 2007). The opportunity orientation, which CPOEs have
developed in the emerging Chinese market also contains an element of speed. As mentioned earlier,
CPOEs tend to be resource constrained and thus would require fast return on their investment for survival
and growth, which reflects the very development experience of the private sector in China (Wu and Li
2006). Put all this together, we predict the following:
P5. In Africa CPOEs, in comparison to CSOEs, are more likely to become profitable in
the short-term.
Comparatively and especially from the Africa's perspective, the Chinese firms' long-run performance may
be more important. One of the factors of potential influence on long-run performance is the firm's
commitment to local markets. At the present time Africa as a whole is perceived as a high-risk market
plagued by political turmoil and instability. Without the same level of government backing and a lack of
resources, CPOEs tend to have lower tolerance for risks and a shorter time horizon in Africa. There is
evidence that they often consider their business engagement in Africa as a temporary affair and are ready
to leave as soon as their profit target is met (Li 2010). For these reasons, we predict that CPOEs would be
less stable in the longer-term. That is:
P6. CPOEs, in comparison to CSOEs, are less likely to be stable in the longer-term
in Africa.
Managerial & Policy Implications:
What are the study's implications for policy makers and practicing managers? While the current focus is
on CSOEs there is clear evidence that CPOEs are increasingly becoming important players in China's
engagement in Africa. More importantly our analysis suggests that the entrance of CPOEs will have
significantly different implications for African countries. CSOEs with their traditional focus on natural
resource extraction and large projects have been accused of ignoring areas of the economy that are more
consistent with African development. On the other hand CPOEs are likely to target areas outside of
resource extraction and have a more diversified industrial orientation. While this exposes small and
medium sized African businesses to increased foreign competition (Shinn, 2007, and Tull, 2006) it
simultaneously provides an incentive for African entrepreneurs to innovate and develop more efficient
systems and procedures. While CPOEs have greater potential to contribute to grassroots capacity building
and help stimulate entrepreneurial development in Africa their enclave approach may prevent them from
engaging the local communities in the business process.
A second and related issue is the CPOEs' lack of commitment to Africa. FDI's impact on a host country
depends upon the time horizon of the investor (Kragelund, 2007). A short-term orientation may be at least
partially responsible for their inward, enclave behaviors as research has shown that commitment promotes
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partner interaction (Lin 1999). The literature on overseas Chinese businesses has also shown that the
inward orientation has much to do with the Chinese's feeling of insecurity and lack of knowledge about
Africa's business environment. Clearly, these are the issues that the Chinese and African governments can
address in some forms of collaboration. The Chinese government should increase its assistance to the
private sector's globalization effort, which apparently has so far fallen behind those given to CSOEs. As a
whole, CPOEs are likely to be resource constrained compared with CSOEs. For example, many small
business owners arrived in Africa with only several thousand US dollars (Li 2010). Cultural sensitivity
training and other useful skills would be a small investment compared to the potential economic and
developmental benefits from CPOE investment in Africa. African governments also need to strengthen
their institutional environments and business regulations to protect their citizens and workers while
promoting competition.
Conclusion
China has shifted its orientation in Africa from ideological-driven assistance to market-driven investment.
CPOEs have made inroads on the continent where historically CSOEs have been the major players.
Current literature has, however, paid little attention to this new development. Clearly the ongoing debate
over China's new role and impact in Africa would be greatly affected by the emergence of PSOEs with
their more market driven, but short-term, orientation. We argue that this new development could have a
profound effect on the African economy as well as perceptions of China's role in the continent's
development. Our basic premise is that, unlike their counterparts from China's state sector, CPOEs are
less likely to be embedded in the local communities but are more likely to be engaged in activities of
relevance to the local economies. As such their presence may stimulate local economies in ways more in
tune with market-orientation transformation. It is our hope that the propositions developed in this paper
will be empirically tested and will stimulate further research in this area of importance to Africa, China,
and the increasingly interconnected global communities.
References
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Multinationals should react (Quickly) to their Southern Counterparts”. CESifo Forum; Winter 2009; 10,
4; 52-58.
Child J and Rodriques S.B, 2005. “The Internationalization of Chinese Firms: A Case for Theoretical
Extension?” Management and Organization Review 1, 3, 381-410.
Dunning J, 1980. “Toward an Electric Theory of International Production: Some Empirical Tests”.
Journal of International Business Studies Spring; 11, 9-31.
ECOWAS-SWAC/OECD, 2006, “Africa and China,” Economic Series of the Atlas on Regional
Integration in West Africa, http://www.atlas.westafrica.org.
Gu J (2009). “China’s Private Enterprises in Africa and the Implications for African Development”.
European Journal of Development Research, 21, 570–587.
Haglund, D. (2009). “In It for the Long Term? Governance and Learning among Chinese Investors in
Zambia’s Copper Sector”. The China Quarterly, 199, September 2009, pp. 627–646.
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Hutzschenreuter, Pedersen and Volberda (2007). “The role of path dependency and managerial
intentionality: a perspective on international business research”. Journal of International Business
Studies, 38, 1055–1068.
Johanson J and Vahlne J, 1977. “The Internationalization Process of the Firm--A Model of Knowledge
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Kao, J. (1993). The worldwide web of Chinese business. Harvard Business Review, 109: 24–36.
Kragelund, P. (2007). Chinese Drivers for African Development? The Effets of Chinese Investments in
Zambia, in Kitissou, M. (ed.) Africa in /China's Global Strategy. London: Adonis & Abbey, p.
162-181.
Kaplinsky R and Morris M (2009). “Chinese FDI in Sub-Saharan Africa: Engaging with Large Dragons”.
European Journal of Development Research 21, 551–569.
Kwan Lee C (2009). “Raw Encounters: Chinese Managers, African Workers and the Politics of
Casualization in Africa’s Chinese Enclaves”. The China Quarterly, 199, September, pp. 647–666.
Kogut, B. and Zander, U. (2003) ‘A memoir and reflection: knowledge and an evolutionary theory of the
multinational firm 10 years later’, Journal of International Business Studies 34(6): 505–515.
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9, 1/2; 69-78.
Li, P. T. (2010). Development of China-Africa Relations and Recent Chinese Immigrants in Africa,
Overseas Chinese History Studies (in Chinese), 4: 24-30.
Lin, Xiaohua (2007), “Chinese Entrepreneurs in Network Marketing Organizations: A Culture-
Moderated Social Capital Perspective”, Journal of Small Business and Entrepreneurship, 20 (3), 273-
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Lin, Xiaohua (2010), “State versus Entrepreneurial MNCs from China: Initial Conceptualizations and
Evidence.” International Marketing Review, 27 (3): 366-380.
Nelson, R. & S. Winter (1982), An Evolutionary Theory of Economic Change, Boston, MA: Harvard
University Press.
Shinn D.H. (2007). “An Opportunistic Ally”. Harvard International Review; Summer; 29, 2, 52-56.
Wang, J.-Y. (2007) What Drives China’s Growing Role in Africa. Washington DC: IMF. IMF
Working Paper WP/07/21 1.
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China's Domestic Private Firms: Multidisciplinary Perspectives on Management & Performance,
London: M. E. Sharpe, p. 171-195.
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Track 19: Graduate Student Paper
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
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Abstract
Globalization, Rise of Indigenous African Capitalism and Higher Education: The Case of
Zimbabwe.
Munyaradzi Hwami, hwami@ualberta.ca
Educational Policy Studies, University of Alberta, Edmonton, Canada.
This paper explores how neoliberal globalization principles and practices have been adopted as the blueprint of the
government of Zimbabwe’s indigenization or black empowerment programs. Neoliberal ideas were implemented
through a government policy of black economic empowerment, giving birth to a ruthless class of black Zimbabwean
capitalists, largely loyal to the government, arguably inconsiderate to social responsibility and bend on profit
making by any means available. The resultant has been a society characterized by gambling and hence the idea of a
casino economy as described by the governor of the Reserve Bank of Zimbabwe. Utilizing a critical interpretive case
study, informed by critical colonial perspectives, this study noted that higher education has been negatively affected.
Introduction
The global trends during the last four decades have been described as the third wave of globalization or
American globalism (Robertson, 2003), characterized by the ways in which transnational corporations
(TNC) have facilitated the globalization of capital and production . The notion of neoliberalism or
neoliberal globalization is the most popular although there are other versions of globalization. Neoliberal
globalization is viewed as the spreading of the Reagan-Thatcher economic ideals that advocated less
government involvement in national economic affairs and the supremacy of the private sector (McMurtry,
2002; Connel1, 2007). Neoliberals argue that the logic of globalization dictates a greater role for markets
uninterrupted by government regulatory controls. The rhetoric behind neoliberal globalization presents
itself as being modern and progressive. Behind this perspective, the state by definition is inefficient in
opposition to the private sector, which per definition is effective, and innovative. Neoliberal globalization
becomes a force of attraction and becomes loaded with a symbolic power because technological progress
is being perceived as a result of neoliberalism and hence a natural force for development (Robertson,
2003). Therefore, for the proponents of neoliberal globalization, economic growth and development,
through free market economies and free trade, is the way ahead to ensure freedom, democracy and
sustainable peace.
However, for most critics neoliberal globalization is “a trans-national elite project, which under the guise
of a seductive rhetoric transfers power and wealth from the public sphere to a small elite, by rolling back
the welfare state as the redistributive power and privatizing public assets” (Hahn, 2008, p. 142). Despite
these elements of “efficacy” and “development” within this “singular version of modernity” (Jameson,
2002, p. 32), some scholars have been unanimous in labeling neoliberal globalization as a Western
colonial project. It is seen as a new form of imperialism Harvey, 2003), a Euro-American vision of an
empire (Smith, 2006, p. 3), capitalist and Euro-centred colonization (Grosfoguel, 2005, p284), “today’s
neo-colonialism or imperialism, an advanced strain of colonialism” (Kapoor, 2009, p. 3), and
“transnational capitalism or collectivism” (Amin, 2011).
This paper is presented from a critical colonial perspective, an understanding of modern societies that is
influenced by critical scholars, such as Ndlovu-Gatsheni, Fanon, and Raftopoulos who have narrated and
theorized the injustices of the new political elite in Africa since independence and the critical works of
Quijano and Mignolo that unmask the modern forms of colonialism in South America, as well as the
analytics and critics of Nandy, Guha and Gupta from an Indian and Asian context. The analytics of these
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scholars show the existence of neo- and internal forms of colonialism in most post-independent countries.
The presentation draws upon a variety of written sources, including press briefings, newspaper and
secondary sources on political developments and higher education in Zimbabwe. These sources are read
and interpreted from personal experiences in the Zimbabwe higher education (university) system.
Interviews were also held with student leaders, instructors and administration staff from state universities
in Zimbabwe.
Guided and influenced by critical colonial, anti-colonial and anti-imperial/empire line of thinking, this
contribution argues that the adoption of neoliberal principles and policies in higher education created a
myriad of problems, while the further infusion of these Western hegemonic ideals into Zimbabwe ‘s
policy of indigenization/black empowerment has worsened the situation to present crisis levels. The paper
proposes the use of the traditional African philosophy of unhuism to come up with solutions to end the
crisis. And noting the changes brought about by time, there is urgent need to hybridize traditional ideas
and modern neoliberal ideologies, thus getting wiser by accepting Ashis Nandy’s idea of critical
traditionalism, to help Zimbabwe and specifically higher education come out of the quagmire it is
currently enmeshed in.
Background and Literature
It is common throughout the world to find nations specifying programs meant to benefit certain categories
of the population that are deemed disadvantaged by circumstances beyond their control, and the United
Nations Economic and Social Council (UNESCO) recognizes and supports special measures designed to
overcome past discrimination against certain groups. In Zimbabwe the Indigenization and Economic
Empowerment Act was enacted in 2007 to economically empower indigenous Zimbabweans, and an
indigenous Zimbabwean is defined as “any person who, before the 18th April, 1980, (the date Zimbabwe
attained independence from Britain) was disadvantaged by unfair discrimination on the grounds of his or
her race, and any descendant of such person” (Government of Zimbabwe, 2007).
This means all black and not white Zimbabweans are perceived to be disadvantaged and the state had to
initiate programs to reduce the difficulties and the development gap suffered and experienced by the black
Zimbabweans during the racist colonial period. This law cemented the ongoing massive transfer of
national means of production to black Africans that started with the land reform program. Indigenization
and black empowerment policies though seen occupying a higher moral ground as it aims to correct
colonial injustices, to resolve “Zimbabwe’s unfinished business” (Hammar, Raftopoulos and Jensen,
2003, p. 5), it has been perceived by some as partisan and racist, and meant to enrich those in power. Like
was foreseen by Franz Fanon, nationalists in Zimbabwe seem interested in apportioning to themselves the
resources and benefits that used to be in the hands of the European settlers and this is a case of black
nationalist bourgeoisie organizing themselves into loot committees (Zamponi, 2005), technocratic elites
closely associated with the state (Bond, 2001) milking national resources behind the pretext of
advancement of disadvantaged groups. The Affirmative Action Group, which is heavily aligned to and
supported by the ruling party, is a good example of this trend.
Thus the Zimbabwean economy since 2000, has been operating within a militant nationalist anti-western
paradigm, and when the IMF and the World Bank together with the European Union, the white
Commonwealth and the United States imposed sanctions on Zimbabwe and openly supported the
opposition Movement for Democratic Change party, the Zimbabwean government to a larger extent
successfully portrayed itself as a victim of Western imperialism (Ndlovu-Gatsheni, 2010) under sanctions
for correcting historic injustices. Utilizing this siege mentality to utmost advantage, ZANU PF members
and supporters began the process of gaining control of the economy and ensuring whites and supporters of
the opposition party that was perceived as a front of Western white interests were excluded (Blair, 2002).
This took place in the form of land reform when large tracts of land were given to blacks mostly with
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connections to the ruling party (Hughes, 2010), foreign companies were pressurized to cede more than 50
percent of their shareholding to indigenous Zimbabweans, while in mining most foreign businesses were
simply forced out (Sharife, 2010). New indigenous companies with links to the ruling party (for example
Mbada that is involved in diamond mining) have emerged and slowly taking control of the national
economy. Claims have been made that most of these companies are owned by those within the ZANU PF
leadership, the army or former freedom fighters (Langa, 2010; Laing and Thornycroft, 2010) and thus
fuelling a mistrust in government intentions around indigenization but more significantly indicating that
the strategy is actually aimed at consolidating the position of an economic class close to ZANU-PF by
providing it with economic opportunities. Among the foreign firms that remain and are earmarked to be
hit are Barclays Bank and Standard Chartered, two British banks that are big in the region, as well as
Nestlé, the Swiss-based food giant, Rio Tinto, and Impala Platinum Holdings (Implats), one of the world's
biggest producers of platinum, which is headquartered in South Africa but is one of Zimbabwe's prime
mining companies (Chinaka, 2010). What is observed in Zimbabwe is a nationalist driven version of
neoliberalism, a domestication of Western right wing economic frameworks to benefit the former freedom
fighters. All this is seen despite the deterioration or complete breakdown of relations with the West and
the public posturing of the government as anti-colonial or imperialist.
Others have observed what has been described as economic grabbing by the elite evident through the
indigenization project developed under the umbrella of the neo-liberal procedures of ESAP, ZIMPREST
and the current indigenization process (Zamponi, 2005). The black elite associated with the ruling party
are accumulating through dispossessing (Harvey, 2003) not only whites but even indigenous
Zimbabweans who are perceived to be against ZANU PF and business people like Strive Masiyiwa,
James Makamba, Julius Makoni, MthuliNcube and MutumwaMawere (Mawere, 2010) among many other
Zimbabweans are examples of those who have been forced into exile.
Zimbabwe’s version of capitalism/neoliberalism is unique in that it is not developing into an “enclave
economy where major industries are capitalized and controlled directly from the global centre”, nor is it
an example of “dependent development, where export industries are developed through a national
bourgeoisie that does not contest the dominance of the metropole” (Connell, 2007). The national
bourgeoisie is hyper anti-West, does not believe in social responsibility and believe in getting rich quick
through any available means even illegal. Gambling became rampant and hence the idea of the “casino
economy” (Gono, 2008). Zimbabwe’s economy since 2000 was therefore a haven of corrupt activities
characterized by high inflation and the prevalence of what was called the black (unofficial) market where
most goods were found but at exorbitant prices. The casino economy symbolized a suffering of peaceful
people that is very difficult to understand in a country that is not at war. This domestication of neoliberal
economic principles was done within a partisan, racist environment interpolated by intolerance and
violence, and all these pronounced and sanctioned by the state executive.
The Casino Economy and Higher Education
The globalization of neoliberal policies and their adoption by a peripheral economy in Zimbabwe led to a
deterioration of social services. The “jewel of Africa” (Blair, 2002, p. 9; Hughes, 2010, p. 103) as
President (then Prime Minister) Robert Mugabe described Zimbabwe in 1980 is now a “sinking titanic”
(Poch, 2007), using former Zambian President Levi Mwanawasa’s analysis. The principles of a free
market have since been adopted in higher education institutions, at the instigation of the World Bank/IMF
and the government. Neoliberal ideas in Zimbabwe’s universities, like in other countries, have mainly
been introduced in the form of marketization. The government was called upon to “relieve the burden on
public sources of financing higher education by increasing the participation of beneficiaries and their
families (World Bank, 1994). This led the enrolment of fee paying students into courses invariably
referred to as parallel programs. These are normal degree courses offered in the evenings, weekends and
holidays when formal university business has closed. Students in parallel programs pay full fees with no
government subsidy (Hwami, 2010). Parallel programs fit in with neoliberalism’s treatment of higher
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education as a private commodity; a traded commodity to be purchased by a consumer, a product to be
retailed by academic institutions (Altbach, 2004). The reality is that only those from the rich socioeconomic
backgrounds attend parallel programmes.
The introduction of fee paying policy in universities together with the privatization of basic amenities
such as accommodation and food catering brought untold suffering to the students (Zeilig, 2008). As
students, lecturers and administrators expressed, students are finding it difficult to raise tuition fees.
Students cannot afford paying for their tuition and government is also not in a position to pay students
fees. So the greatest dilemma is to carry on with university education with no one funding it. Students are
asked to apply for cadetship funds, which they do, but the government does not have the money, does not
release the money but expect university education to continue (Interview with a University Administrator,
July 2010).
We have been running what is called NACAPEZ (National Campaign Against Privatization of Education
in Zimbabwe). The way the university is run, going to the university is now the privilege of the rich
(Interview with a Student Leader, August 2010).
A number of studies strongly corroborate the sentiments expressed indicating that the localization of
neoliberal principles has negatively affected higher education (Makombe, 2009; Zeilig, 2008).
Government attempts to alleviate the challenges facing students has come through a policy called
cadetship where needy students apply for loans to the government. This has created its own problems as
government does not have the money to give to the applicants while at the same time the government
does not come out in the open to say it has no money. Students are supposed to apply and the ministry
screens the recipients. Government says anyone who applies will get the money but this is not the case.
Some who applied in 2009 have not yet received the money. Some of those who applied during
the first semester got the money in the third semester. We received the money for 2009, this year (2010).
The government gives US$40 thousand a year and universities figure out who will get the money. This
is too little (Interview with a University Administrator, August 2010).
The crisis wrought by neoliberalism/black capitalism is also seen in the drop in salaries of university
employees and this has affected the working morale of academics. There has been a mass exodus of
academics, resulting in plummeting standards. The flight of lecturers has hit crisis levels (Makumbe,
2009). Makombe, citing Ministry of Higher and Tertiary Education documents, reported that public
universities have been hard hit by understaffing with the University of Zimbabwe having 385 out of the
required 1171 academic members; Harare Institute of Technology has a 70% vacancy level with only 37
academic staff members out of a possible 123. Major push factors were low pay for academics in a
collapsing economy with over 230 million percent inflation - the world’s highest - poor working
conditions, lack of transport and computers, and problems finding accommodation (Manyukwe, 2008).
One lecturer complained:
We have some in parastatals (government companies) earning US$16 000 against US$150
a month for civil servants. This is black capitalism and appears worse than colonial white
capitalism. The black capitalists their hands have been greased by the bourgeois system and
they loot at the detriment of the nation. They use their political muscles to continuously tap
and harness the country’s wealth. They use the law, like indigenization to empower themselves.
What it entails is that it is a system that continues to enrich the rich and impoverishes the poor
(Interview with a University Lecturer, August 2010).
To add to this plethora of problems, there have been consistent increases in fees since 1991 and
universities have been losing crucial donor funding, especially from the West. With the abandonment of
the valueless Zimbabwean dollar and adoption of multi-currencies, especially the US dollar and the South
African rand, higher education became even dearer and more out of reach (Students Solidarity Trust,
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2009). University students and staff have lost their elite status (Zeilig, 2008). The official government
owned The Herald newspaper quoted a university student in Harare describing their accommodation
situation:
About 20 students share a guestroom in the main house and there are 11 illegal wooden
cabins, which house more than 45 students. Most house owners collect between US$20 and
US$40 in rentals a month from each student. These landlords are making a killing from the
students’ predicament. Our landlord collects over US$3 200 every month, as there are more than
80 students each paying US$30 (Students Solidarity Trust, 2009).
Fee increases and the adoption of foreign currencies have not improved the living and learning conditions
of the students.
There is no improvement in terms of the resources we are using as students. There is an
improvement for the vice chancellor and other top administrators. These people are greedy.
They are changing vehicles. We are having poor lecturers, the library is poorly resourced.
Students are not allowed into residence to prevent students from organizing themselves, Vice
Chancellors are there to safeguard their masters. It is a way of controlling students. But we are
not moved by that since struggle is our birth right (Interview with a Student Leader, July, 2010).
With higher education facing all these problems, critical areas had to be controlled by loyal and patriotic
Zimbabweans, from a ZANU PF perspective. In most key government ministries and companies such as
the Grain Marketing Board and the National Oil Company of Zimbabwe, there was observed what was
described by Makumbe as the militarization or ‘Zanufication’ of government as war veterans or ZANU
PF members were appointed to key positions (Dansereau, 2005). Universities and other institutions of
higher education were considered equally critical and appointments to key positions were to be made by
the state/party. According to the University of Zimbabwe Act, Chapter 25; 16, Section 7 and 8, “the
president of Zimbabwe shall be the chancellor of the university and the vice-chancellor shall be appointed
by the chancellor.” Students and lecturers are not comfortable with such a situation.
We can create bridges to cross these crises and ensure or allow universities to operate and the
little that is available helps meet the core business of the universities. These days even if the
vice chancellor abuses the resources of the university because they are aligned to the ruling
party nothing will be done to them. We need vice-chancellors who will respect that
universities are run by committees, council, senate and not trying to use the party line
(Interview with a University Lecturer, August 2010).
We have vice-chancellors appointed by a leader of a political party and if leadership changes this
would mean change in vice-chancellor and this will bring chaos in education. We do not need politicians
being university vice-chancellors (Interview with University Lecturer, July 2010).
The casino economy was characterized by corruption, racism, partisan politics and violence against those
perceived to be against the government. When the western countries decided to isolate Zimbabwe on the
basis of its human rights abuses, higher education was not spared. One lecturer lamented that: I think
one can trace the crisis to the way we have established relations with the international community. Our
relations have soured. We used to have programs that weresponsored by Scandinavian countries, the
Commonwealth etc. We used to have the Centre for African Languages which was meant to be the
centre of research for African languages and used to be funded by Scandinavian countries. Now it is
just a ghost house. It is also unfortunate that the international community has adopted such policies.
Norway, Sweden should be proud of the work the African Languages Research Institute
accomplished but to punish educators for issues we have no control over... Just to abandon such work
shows that they have not been considerate. Because of their hardened stance/insensitivity to higher
education issues-slowly education has been going down on its knees (Interview with a
University Lecturer, August 2010).
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Another lecturer noted;
We lost friends such as SIDA/SAREC/NORAD/FORD etc. who funded a lot of research. Then
came other policies such as land reform; the way it was done made other areas suffer. Our
links with other universities were downgraded. Its problems were representative of the problems the
country was going through. Our educational and academic linkages were downgraded; students and staff
exchanges were stopped. They said they cannot send white students where white commercial
farmers were being killed.
Conclusion
Using available accounts on neoliberal globalization, critical interpretation of narratives from those in
Zimbabwe’s higher education institutions, I have argued in this paper that despite the anti-colonial and
anti-Western positioning of the Zimbabwean government, the adopted economic path is not an example
of a delinking process as some pundits would like us to believe. The “Look East Policy” (Sharife, 2010)
of the government demonstrates that foreign partners are still welcome as long as they are not British and
Western. The recent Zimbabwe Iron and Steel Company deal with Essar Africa Holdings Limited, a
Mauritian based company (Sharife, 2010), illustrates “state corporate collusions” (Kapoor, 2009, p. 56), a
common feature in the global south during this era of globalization. What makes the East attractive to the
Zimbabwean government is the fact that they do not insist on democracy and good governance and
therefore compatible with ZANU PF’s desire for eternal power. While ZANU PF is cementing its control
of the country by partitioning the economic resources amongst its members, the impact has been
disastrous to the social services sector, of which higher education is one of the notable victims.
It is the selective adoption and employment of globalized neoliberal ideas and principles by the
Zimbabwean government that has created crisis and raised many questions. While human rights,
democracy and freedom of expression are some of the stated cardinal ideals of neoliberalism (Smith,
2006) these have not been respected nor observed in Zimbabwe. The Zimbabwean government has
chosen private ownership of the economy and the effect has been immizeration on the part of those in
higher education. Higher education has been a victim of the casino economy and students have tried to
resist and criticize the system and the state has responded with a heavy hand. In 2009 46 university
students were suspended or expelled, with Bulawayo’s National University of Science and Technology
topping the list with 19. In total there were 313 cases of violation of students’ rights, including unlawful
arrests, unlawful detention, expulsion, suspension and assault (Student Solidarity Trust, 2009).
I have argued throughout this contribution from a southern perspective (Connell, 2007), an antihegemonic
standpoint, critical of neoliberal globalization and adoption of neoliberal principles and
practices in Zimbabwe. While the ideals and stated objectives of the government’s economic paradigm
appears original and progressive, opening up possibilities for post-independent Africa’s development, the
disjuncture is on the prevalence of a culture of intolerance and the resultant use of violence against critics.
Further questions can be raised emanating from what can be called the “Zimbabwean experiment”. Can
progressive anti-colonial and anti-hegemonic forces look toward the Zimbabwean experiment as a case to
copy? Are we witnessing new development possibilities for the global South’s development? Can we
have anti-Western neoliberals as seen in Zimbabwe? These puzzling issues emanate from what has come
to be described as the Zimbabwean conundrum and hopefully as the crises unfold, answers will be found.
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Blair, D. (2002). Degrees in violence: Robert Mugabe and the struggle for power in Zimbabwe
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Bank Efficiency, Capital Account Liberalization and Economic Growth: Evidence from Africa
Abstract
Emmanuel Mensah , ekbmensah@yahoo.ca
University of Ghana Business School, Ghana
Joshua Abor
Department of Finance, University of Ghana Business School, Ghana
A Q Q Aboagye
University of Ghana Business School, Ghana
Charles Adjasi
University of Ghana Business School, Ghana
In this study, we test whether bank efficiency used as a measure for the quality of the banking intermediation affects
economic growth. Using the semi-parametric Flourier flexible approach and bank level data for 277 banks covering
the period, 1999-2008, the study found average cost efficiency levels of banks in Africa to be 75%. Further, by
employing the Arellano and Bond GMM estimator, the study found a positive association between cost efficiency
scores and economic growth and a negative association between capital account liberalization and economic
growth. Among the other determinants of growth, inflation was found to be negatively related to growth whilst
governance variables were found to be positively related to growth.
Introduction
The costs of acquiring information, enforcing contracts and making transactions create incentives for the
emergence of financial intermediaries to mitigate the negative repercussions of these market frictions,
Levine (2001). Financial intermediaries therefore arise to reduce these market frictions and hence may
help the efficient allocation of resources across space and time. This allocation role of financial
institutions was first recognized by Schumpeter (1912), who conjectured that bankers help to identify
entrepreneurs with good growth prospects, and therefore help to reallocate resources to their most
productive uses (Yu and Gan, 2010). Over the past 3 decades there has been an enormous research to
establish this finance-growth nexus. In a groundbreaking article by Levine (1997), he establishes that
there is a first order relationship between finance and economic growth. Further to this, many studies
analyze the finance-growth nexus empirically and explain cross-country growth differentials by the
volume of funds relative to economic output, (Levine, 2005). However, a mere expansion of credit need
not indicate a qualitative improvement of intermediaries’ abilities to channel scarce funds from savers to
borrowers, which is of crucial importance (Romero-Avila, 2007). In this study we test whether bank
efficiency estimated at firm level significantly affect economic growth in Africa. We use the efficiency
scores as a relative measure of bank performance to gauge the quality of the financial market in these
African countries.
Basic economic theory also suggests capital account liberalization may benefit a country. Free capital
mobility for instance, offers the opportunity to realize the highest return on saving, to borrow at the most
favorable rates, and to diversify away country-specific risk (see Edison et al, 2004 and Prasad et al, 2003).
A more subtle set of benefits, but ones that have increasingly been the focus of discussion, involve the
possibility that capital account liberalization promotes the efficiency and development of financial
intermediation, Klein and Olivei (2008). Thus, a country which is more liberalized on the capital account
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Edited by Emmanuel Obuah
fronts stands to gain in terms of domestic financial markets and hence accelerated economic growth.
However, other researchers have also noted that capital account liberalization really does not favour the
developing countries due to the contagion effect during the times of economic crisis. Thus we test for
empirical evidence on the African continent.
To do this we employ the stochastic Fourier flexible specification of bank cost function to estimate the
cost efficiency and the generalized methods of moments (GMM) system developed by Arellano and Bond
to investigate the relationship between bank efficiency, liberalization and economic growth for 35 African
countries over the period 1999-2008. To the best of our knowledge this is the first of such studies on
finance and growth dedicated solely to African countries in which the qualitative aspect of the financial
sector has been considered as opposed to the traditional volume measures of financial development. In
what follows, Section 2 reviews the literature on bank efficiency liberalization and economic growth,
Section 3 presents the data and the methodology used in the study, Section 4 presents the analysis and the
results of the study and conclusions are presented in Section 5
Literature Review
Finance and Growth
Ndikumana (2001) asserts that examining the linkages between financial development and economic
growth requires addressing the question of whether the overall financial system leads to higher economic
growth and to identify the channels through which intermediation affects economic growth. Regarding the
channels of transmission, Pagano (1993) shows that financial intermediation can affect real growth by
increasing the savings rate, improving the allocational efficiency of investments, and by enhancing the
functional efficiency of the banking system. Related to the banking-efficiency channel, Graff and
Karmann (2006) argue that financial intermediaries need to allocate scarce resources efficiently when
providing their products and services. Because banks in particular employ highly skilled human capital,
their inefficient intermediation crowds out the use of productive factors in other sectors that could
potentially foster economic growth and development.
Levine (2001) outlines extensively the role of the financial system in the economic growth process. He
noted that financial intermediaries arise to reduce the costs of acquiring and processing information about
firms and managers. The second role of financial intermediaries is that they facilitate risk sharing and
pooling by lowering transactional costs. This is made possible through diversification. Moreover,
financial intermediaries improve resource allocation by permitting the exploitation of economies of scale,
Levine (2001). Bagehot (1873) noted that it was not the national savings rate per se; rather it was the
ability to pool society’s resources and allocate those savings toward the most productive ends that drives
long-run economic success. A large body of empirical research has tested the relationship between
financial intermediaries and economic growth. Among them, Levine (1997) finds a first order positive
relationship between financial development and economic growth. Other researchers have tested this
relationship at the firm level (see Demircug-Kunt and Maksimovic, 1998) industry level (see Rajan and
Zingales, 1998), cross-country studies (see Haber, 1991), and time series studies using traditional
econometric models. All these have concluded that there is a positive relationship between financial
intermediation and economic growth. In this study we investigate empirically whether bank efficiency is
one of the channels by which financial development affects economic growth.
Capital account liberalization and economic growth
There are a number of channels through which capital account liberalization can contribute to the
development of a country’s financial system and hence growth. For example, exposure to international
competition may improve the efficiency of the domestic financial system through the introduction of
international standards. Subsidiaries or branches of foreign banks may enlarge the absolute size of the
national banking system, serve formerly neglected niches of the market, and introduce financial
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innovation that directly broadens the scope of financial services. These gains in the efficiency and scope
of the financial sector may increase the pool of available savings both by eliciting higher domestically
generated savings and by promoting capital inflows. And, in a virtuous cycle, increased savings, in turn,
may promote further efficiency by enabling intermediaries to reap significant economies of scale and
scope, Klein Olivei (2008). These enormous benefits encouraged many of the developed countries to
embark on liberalizing their financial markets. But, in the wake of the economic and financial crises in
emerging markets in the latter part of the 1990s, critics questioned the wisdom of this type of economic
integration. This is because earlier empirical literature offers conflicting results concerning the effect of
capital account openness on growth. Quinn (1997), who includes an indicator of capital account openness
in a standard growth regression, provides the first evidence that an open capital account promotes growth.
However, Klein and Olivei (2008) found that the significance of the link between capital account
convertibility and financial depth seems to be driven largely by the industrialized countries or those
countries that had levels of institutional quality consistent with that of industrialized countries. They
therefore concluded that countries require a constellation of economic, legal, and social institutions in
order to have capital account liberalization translate into greater financial depth and hence economic
growth. These institutions tend to be present in industrial countries but are less common among
developing countries.
Methodology and Data Description
The empirical model specified for the study is a modified version of the one used by Hasan et al (2009)
and stated in the dynamic log-linear form as
ln Y β Kalib + X + ε .................. (1)
Where
it = 0 + β1
lnYi
, t−1
+ β 2BankEff
it + β 3
Y it is per capita income of country i at time t
BankEff it = Bank efficiency score of bank i at time t
Kalib it is an index of an extent of capital controls in country i and time t
X it = other control variables affecting economic growth
ε it = error term
it
To fully estimate the model, we need to estimate efficiency scores for the banks included in the study.
Several methods are found in literature which has been used to estimate bank efficiency scores. In this
study, we adopt the stochastic Fourier flexible functional form for the bank’s cost function. The flexible
Fourier form represents a semi non-parametric approach to the problem of using the data to infer
interrelationships among the variables when the true functional form of the relationships is unknown
(Mitchell and Onvural, 1996). Gallant (1981) asserts that a Fourier series representation of an unknown
function can achieve a given level of approximation error with fewer trigonometric terms when it includes
a second-order polynomial in the explanatory variables. Despite its superior properties, the flexible
Fourier form has not been used much in the study of banking efficiency especially on the continent.
Following Giradone et al (2004) the Flourier flexible form is stated below as;
LnTC
it
= α
+
0
2
∑ α i X it + ∑ γ i lnWit
+ 0.
5∑
α i (ln X it ) + 0.
5∑
ln γ (lnW
)
i i i i i it
it
it
2
782

+
∑ ∑ β j it )(ln X jt ) + ∑ ∑ ηi
(lnWit
)(lnW
jt ) + ∑ ∑
i j i j i j i it it
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
(ln X φ (ln X )(lnW
)
3
3 3
+ ∑( δ j cos X j + θ j sin X j ) + ∑∑ [ δ jk cos( X j + X k ) + θ jk sin( X j + X k ) ]
j= 1
j= 1 k = j
3 3 2
+ ∑∑∑ [ jkl cos( j + X k + X l ) + θ jkl sin( X j + X k + X l ) ]
i= 1 k = j l=
k
δ X + ε ……… (2)
Where TCit is the total cost (including interest cost) expressed in natural logs, X i are outputs expressed
in natural logs and Wi are the input prices of deposit and labour. Consistent with the intermediation
approach used in many studies, three outputs were specified; book value of investment ( X 1)
, net loans
( X 2 ) and deposit ( X 3 ) .Input prices include price of labour measured as personnel expenses divided by
total assets ( W1) and deposit cost measured as interest expense divided by deposit ( W 2 ) . In order to
control for scale biases in the estimation, fixed equity capital is used to normalize cost and output
quantities. Price of fixed capital is used to normalize the input prices to control for the model
homogeneity. Bank level data were obtained from the Bankscope database. Following from literature, we
expect a positive relationship between bank cost efficiency scores and economic growth.
The measure of the extent of capital account control is based on an index constructed by Chinn and Ito
(2008), the Chinn-Ito index. The index is a comprehensive and intensive measure based on four major
categories of restrictions on cross-border financial transactions in the IMF’s Annual Report on Exchange
Arrangements and Exchange Restrictions—they are the existence of multiple exchange restrictions,
openness of the current account, openness of the capital account, and the stringency of requirements for
the repatriation and/or surrender of export proceeds. Following from literature the expected sign of this
variable could be positive or negative. The other control variables are captured in X it .These include, the
concentration of the banking system (measured by the ratio of assets of three largest banks as a share of
assets of all commercial banks) could lead to high interest margins and high costs, and hence a lack of
competitiveness (Kablan, 2010). We therefore expect this to have negative impact on growth. Among the
macroeconomic variables, inflation was selected. We expect a negative relationship between inflation and
economic growth in line with empirical literature. The final group of variables is the governance, political
and business environment variables. We expect measures of political stability and absence of violence
together with government effectiveness and control of corruption to have a positive impact on economic
growth. Among the business environment variables we use the Index of Economic Freedom from the
Heritage Foundation which measures the propensity of a country’s policies to provide economic freedom.
We also include the rule of law variable to control for the environment in which the intermediaries
operate. We expect both variables to have a positive impact on growth. We also test for the effect of
population growth rate on growth. Data for all the above variables were taken from the World Bank’s
World Development Indicators (WDI), World Governance Indicators (WGI) and The Heritage
Foundation.
Empirical Results
The study started with 303 banks in 35 African countries over the period 1999-2008. The panel was not
balanced and after deleting all observations with one key variable missing, 2077 datasets were left. The
bank efficiency scores variables were estimated based on this. Cost efficiency is the main efficiency
variable estimated in this study. The cost function in equation two was estimated by maximum likelihood
method using the econometric software Stata 11.The cost efficiency scores were then obtained at the
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Proceedings of the 12th Annual Conference © 2011 IAABD
individual bank level for all the years over the period. This was then averaged for the entire period to
obtain an average score of 0.75.This is in line with the findings of Kablan (2010) for a group of SSA
countries with efficiency of 0.76 and compares with Chen (2009) for SSA middle income countries (0.7-
0.8). The efficiency estimate means that banks can typically save about 25% of total cost if they were
operating efficiently. We then used the cost efficiency scores obtained in this section to investigate the
link between bank efficiency, capital account liberalization and economic growth. The results are
presented in table1.
The variable, costeff indicates the cost efficiency scores generated earlier. It enters the regression equation
positive and significant in line with our expectation. This finding is in line with that of Hasan et al (2009)
and confirms earlier research that the development of the financial system is crucial for the economic
growth of a country. Thus quality intermediation of the banking sector in the African countries would
boost the growth agenda of the continent. Therefore, it is not only the volume of the financial
intermediation but the quality measured in terms of efficiency also spurs growth positively as
intermediaries allocate scarce resources efficiently when providing products and services. Hence, policies
embarked upon by central banks and government aimed at improving the efficiency of the intermediation
process should be strongly encouraged. The finding also confirms Graff and Karmann (2006) that bank
efficiency is one of the channels by which financial development affects real growth.
Table 1: Results of Bank Efficiency, Capital account liberalization and Economic
Growth using GMM estimation method
Variables Coefficients Std error z-value p > z
Pci_1 0.1724 0.0956 1.80 0.071
Costeff 0.0240 0.0119 2.02 0.043
kaopen -0.0214 0.0038 -5.57 0.000
concentration -0.0075 0.0084 -0.89 0.375
inflation -0.1642 0.0149 -11.03 0.000
pop -0.8957 0.5186 -1.73 0.084
hef 0.0545 0.0311 1.75 0.080
corr 0.0137 0.0086 1.59 0.111
poli 0.0065 0.0037 1.75 0.081
govteffec 0.0315 0.0080 3.92 0.000
rulelaw -0.02446 0.0090 -2.72 0.007
cons 0.0279 0.0021 13.27 0.000
Sargan 5.93 0.1151
AR(1) 4.15 0.000
AR(2) 1.13 0.2573
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Edited by Emmanuel Obuah
( Costeff=Bank cost efficiency scores, Concentration=Total asset of 3 top banks/Total asset of banking
sector, infl=Changes in annual CPI, pci=GDP/population, pop=population growth rate, hef=economic
freedom index ranging from 0 to 100 with higher values indicating favourable outcome, poligov, corr,
govteff and rulelaw=political stability, control of corruption, government effectiveness and rule of law
indices ranging from -2.5 to 2.5 with higher values indicating favourable outcome) .
The second variable of interest was the capital account liberalization variable (kaopen). This variable is
negative and significant signifying the negative role of liberalization on growth in these countries. It
shows that at the early stage of development some level of restrictions may be necessary in order to
insulate the domestic market against external shocks. The finding also suggest that the institutional
quality in which these countries operate is in their infant stage and therefore liberalization is not yielding
the desired results expected since as Klein (2005) pointed out ‘the effect of capital account liberalization
on growth depends upon the environment in which that policy occurs’ and that there exist a nonmonotonic
interaction between the responsiveness of growth to capital account liberalization and
institutional quality for countries with better institutions exhibiting a statistically significant and
economically meaningful effect of capital account openness on economic growth. Thus policy makers
should implement liberalization policies as well as that of institutional quality simultaneously so that we
do not receive the exact opposite of results from what is expected. Inflation enters the regression equation
negatively in line with expectation. The finding is also in line with previous studies and confirms that
inflation reduces the real returns depositors receive on their deposit and thus discourage savings which
eventually tighten credit to the private sector with negative effect on growth. Thus macroeconomic
stability is essential for economic growth. Population growth rate is negative and significant at 10%,
indicating the dampening effect of population growth on economic growth. Larger, more rapidly growing
populations have fewer natural resources per person, less physical capital per worker, more dependents,
and greater needs for new social infrastructure leading to a worse-off situation economically. The finding
also shows that population growth exceeds the real economic growth over the period of the study for the
sample. The economic Freedom Index is also positive and significance at 10%.The finding is in line with
that of Hasan et al (2009) and shows that the economic environment plays a pivotal role in the growth
process of these countries. The next group of variables is the governance variables. Among these
variables, political stability and absence of violence and government effectiveness have positive effects
on growth. This confirms the fact that a stable political regime encourages businesses and allows growth
to take place. A country with high political instability therefore risks being left out in the growth agenda
of the continent.
Conclusion
This study sought to establish the link between banking sector efficiency as measured on cost, capital
account liberalization and economic growth. First, using bank level data and specifying the cost function
of banks using stochastic Fourier flexible form, the study found that African banks are generally cost
efficient at 75%. This means that there is a 25% cost inefficiency levels in the African banking sector. In
the second part of the study, we sought to explain the differences that exist in the levels of economic
growth by employing the GMM model developed by Arellano and Bond. The study concluded that bank
cost efficiency is positively related to economic growth indicating that quality intermediation is vital to
growth. The study thus confirms the finance-growth nexus in Africa via the banking efficiency channel.
However, the study found a negative association between capital account liberalization and economic
growth. This may show a lack of proper environmental support needed for the various liberalization
policies to work effectively. Among the other control variables inflation was found to be negatively
related to economic growth emphasizing the critical role of macroeconomic stability on growth.
Economic freedom was found to be positively related to growth whilst population growth was found to be
negatively related to growth. Also, political stability and absence of violence as well as government
effectiveness indices were all found to be positively related to growth. Thus governance plays a major
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Proceedings of the 12th Annual Conference © 2011 IAABD
role in the growth process of Africa. Based on these findings it is recommended that policy makers should
pursue policies that will enhance the intermediation role of the banking sector so as to boost growth. In
this, we should not neglect the critical role institutions play in the growth process. Governments should
govern in a manner that promotes stability politically and economically.
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Bagehot, W., 1873. Lombard Street, Richard D. Irwin, Homewood, Illinois
Berger, Allen N and Mester, Lorreta J. (1997) “Inside the black box: what is explains the differences
in the efficiencies of financial institutions?”Finance and Economic Discussion Series
Demircug-Kunt, Asli and Vojislav, Maksimovic (1998) “Law, Finance and Growth’. Journal of
Finance 53, (1998): 2107-37
Edison et al (2004),” Capital account liberalization and economic performance: survey and
Synthesis”, IMF Staff Papers 51 (2), 220–256
Gallant, A. Roland, 1981. On the bias in flexible functional forms and an essentially unbiased form:
the Fourier flexible form. Journal of Econometrics 15, 211– 245.
Giradone et al (2004) “Analyzing the determinants of bank efficiency: the case of Italian Banks”
Applied Economics, 36, 215-27
Haber, Steven H. (1991) “Industrial Concentration and capital markets: A comparative study of
Brazil, Mexico and the United States, 1830-1930”, Journal of Economic History 51(1991)
Kablan , Sandriene (2010) “Bank Efficiency and Financial Development in Sub-Saharan Africa”
IMF working paper, June 2010
Klein, W. Michael and Olivei P. Giovanni (2008) “Capital account liberalization, financial depth and
economic growth”, Journal of International Money and Finance 27,(2008)
Klein, M., (2005) “Capital account openness, institutional quality and economic growth”. NBER Working
Paper no. 11112, Cambridge, Massachusetts.
Levine, Ross, 1997, “Financial Development and Economic Growth: Views and Agenda,” Journal of
Economic Literature, Vol. 35, pp. 688–726.
Levine, Ross (2001) “International Financial Liberalization and Economic Growth”, Review of
International economics, 9(4), 688-702, 2001.
Levine, R., 2005. Finance and growth: theory and evidence. In: Aghion, P., Durlauf, S.(Eds.), Handbook
of Economic Growth, vol. 1. North-Holland, Amsterdam.
Mitchell, K. en N.M. Onvural (1996),” Economies of scale and scope at large commercial banks:
Evidence from the Fourier flexible functional form”, Journal of Money, Credit and Banking,28
Graff, Michael & Karmann , Alexander (2006)"What Determines the Finance-growth Nexus? Empirical
Evidence for Threshold Models," Journal of Economics, Spring, vol. 87(2).
Prasad, E et al (2003) “Effects of financial globalization on developing countries. IMF Occasional Paper
no. 220, Washington, DC.
Quinn, D. (1997) ,“The correlates of change in international financial regulation. American Political
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Rajan, R. G. and Zingales, L. (1998) “Financial Dependence and Growth”, American Economic Review
88,(1998): 559-86
Romero-Ávila, D., (2007) “Finance and growth in the EU: new evidence from the harmonisation of the
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Experience”. International Journal of Finance and Economics 35,2010
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Exporting Services from Developing Countries: Harnessing Ghana’s Unique Sectors.
Cynthia Bulley, ayorkorb@hotmail.com
Central University College, Dansoman, Accra, Ghana.
The proposal aims at examining and exploiting the migration of health and education professionals into a
programmed service export activity. It seeks to explore the various ways in which policy makers could strategies
and implement a planned service export. The research would come out with a planned program to export and
manage the process. Quantitative and qualitative data would be collected concurrently or sequentially and
integrated in the process to gain a deeper understanding of the phenomenon. Information on those who are already
out would be collected and collated for gradual merging into the planned process.
Introduction
Background of the study
Service marketing has gained international recognition due to the fact that it is the driving force for the
growth of many developed economies gross domestic product. Developed countries have gone beyond
providing services locally to exporting to international markets. The sharp increase in service trade is
partly due to development and integration of telecommunications and information technology in business
operations. Technology especially electronic communications is making it possible for businesses to
provide services faster and in a more convenient way. Now it is possible for firms to locate anyway in the
world so far as communication is efficient and effective. In addition to technological changes, innovations
by service firms have led to the development of new and improved service products. In the developing
countries, services are emerging as the panacea to increasing revenues leading to growth and
development, and transformation of these nations. The vast improvements in transportation and
communication and the emergence of electronic commerce have made it easier for business to export
services from developing countries. But service exports have not been given much attention in Africa.
This may be partly due to the lack of awareness in many developing countries about the importance of
services in development leading to weak and inconsistency in policies relating to the sector. Also the pace
of development in terms of telecommunication and information technologies to promulgate the export of
people – intensive services across borders in some developing countries is slow. UNCTAD and the World
Trade Organization (1998), and the International Trade Centre (2006) have jointly come out with
different studies on the expansion of service exports particularly relating to market access, challenges and
opportunities for developing countries. But most developing countries are faced with major constraints
that hinder the building of a competitive service sector. The service industry is still growing and some
nations are still at the infant stage.
One phenomenon that needs to be mobilized and transformed into uniformed service exports from
developing countries is the migration of health and educational professionals to developed countries.
Most of these professionals migrate due to economic and social situation, others for work related reasons.
But whether the reasons for migrating is economic or social, developing countries can exploit the natural
situation to their advantage by monitoring, evaluating and coming out with tentative managed
programmes that will ensure that trained professionals are exported to these popular destinations. This
will call for concerted efforts on the part of governments in the developing countries to negotiate and
arrange with developed countries that are in need of the services of these professionals. Salmon et al
(2008) in their research concluded that managed migration program in the Caribbean led to the training of
nurses for export and temporary migration. If it is managed and the nations involved benefit financially
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Proceedings of the 12th Annual Conference © 2011 IAABD
from the planned programme then service exports from the developing countries would be achieved. In
the Philippines the “nurse for export” programme has been implemented to test the concept (Binod,
2008). The question of managing the movements of professionals to developed countries ostensibly for
better emoluments and conditions is prevailing in Africa and cannot be overcome easily. There is the need
for this kind of research to throw more light on the issue and propose a planned solution. The proposed
research it is hoped would lead to an internationally coordinated policy response to the challenge. Also
the research will map out implementation activities to propel the programme and add to existing
knowledge on the subject. It is envisaged that the research would help policy makers to initiate a
structured program that would increase service exports, create awareness to reflect the changing needs of
the sectors discussed and promote the service in general. This will ensure that developing countries would
benefit from the phenomenon and it would lead to increases in service exports.
Problem Statement
The migration of health and education workers has been a great challenge for most developing countries.
Some experts have called for managed migration to benefit developing countries. But from the economic
view point, such migration could be repackaged into service exports that will enhance and monitor the
issue to the benefit of developing countries. Most developing countries are already exporting some form
of service but the lack of awareness of existing service activities and services that could be exported, the
need for appropriate regulation and support makes the activity challenging and a “no go” area for most
business organizations.
Looking at the rate of migration, there is the need for health and education services sectors of developing
countries to incorporate exporting activates or functions into their operations to make the profession
attractive and encourage the professionals to be part of the planned programme. Also government could
take advantage of the phenomenon to benefit financially from a well thought out and planned health and
education service exports from developing countries. And this will call for the inclusion of service into
national export strategies and plans of developing countries.
Another salient issue in exporting services internationally is the standardization and/or adaptation of
services in other countries due to the high level of people processing and the intangibility nature of
services. The need for residency and local experience recruitment requirement for recognized
professionals in most countries is a big challenge for exporting services.
Many researchers have delved into the issue but no tentative solutions have come up. The need to
repackage migration of health and education professional services into managed service exports to the
benefit of nations is an issue that much attention has been given but little has been done in that area.
Export activities in many developing countries focus on goods overshadowing the opportunities in
diversifying into service exports. And this explains the lack of empirical and theoretical framework that
can be examined to encourage and foster service exports from developing countries. Albeit there is the
need to have an implementation or mapped out plan to harness and export health and education services
from developing countries.
Objective of the study
The general objective of the proposed research is to establish the need to repackage health and education
worker migration into an effective service exports. In this respect, the objectives that the study would
attempt to achieve include the following:
• To develop a strategic plan with specific activities to harness and export health and education
services
• To map out an implementation strategy for managing and exporting services.
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• To attempt to develop theory, conceptualization and constructs for marketing services globally
from developing countries
Research Methodology
Theoretical framework
The potential for service exports cannot be overlooked in developing countries (UNCTAD IX). Literature
on services export is fragmentary with little attempt to develop theory, conceptualization and constructs
for exporting (Fisk, Grove and John, 2003). Javalgi, Martin and Todd (2004) share the same view
therefore the proposal can be discussed from a number of different theoretical perspectives. The factor
proportion theory as a basis for international trade (Albaum, Duerr and Strandskov, 1998, 2005) can be
cited as the driving force for service trade. Export behavior theories and motives (Albaum et al, 2005) can
be conceptualized and constructs developed to support service exports. This call for using the theory to
attempt to explain the why and how service firms can move on to international marketing and the
dynamic activities conceptualized to explain the phenomenon. Harnessing and repackaging health and
education services for export calls for discrete changes in economic policies in Africa, and service
industries restructuring and reorganizing to increase and monitor activities in foreign markets. Therefore
export theories will explicitly explain the motives and strategy for the operation of such activities. Theory
development as compared to the internationalization of services have not kept pace (La and Patterson,
2005; Cicic et al, 1999; Knight, 1999; Reardon et al, 1996). Therefore contingency theory in management
studies which have widespread application (Ginsberg and Venkatraman, 1985) can be applied.
Contingency theory have been widely applied in strategy and organization research ( Zeithaml,
Varadarajan and Zeithaml, 1988; Hofer, 1975). The theory states that there is no single best strategy
which is most favorable for organizing and managing organizations. Business strategies need to be
organized and structured to meet specific environmental situation and technology used. Gardner et al,
(2000); Bharadwaj et al, (1993); and Hambrick et al, (1985) in their empirical and conceptual studies have
used contingency framework in marketing studies but not in connection with export marketing studies.
The contingency theory can therefore be extended to marketing services abroad because of the variety of
perspectives involved and the unique challenges that must be encountered in international borders.
Research Design
To achieve the above stated objectives, the study would employ both qualitative and quantitative
approaches to study the population of interest. The methodology to be employed would include in-depth
interview, focus group discussions and survey. The population for the study would include health and
education professionals in Ghana, the United Kingdom/United States of America. Policy makers, health
and education service providers, relevant government and regulatory institutions and agencies would also
be contacted. The contact method would be personal face to face interviews and administration of
research instrument (questionnaire). The researcher plans to travel out within the research scope in the
first two years to collect data from respondents. Funding would be sourced from her employers and
personal contributions. Both qualitative and quantitative techniques would be used to analyze the data
collected.
Sampling Technique
Data for the study will be collected using the purposive sampling method – a non probability method
where policy makers, health and education workers would be interviewed and questionnaires
administered to them. By using the purposive sampling method, only specified players in the export
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industry and research scope will be dealt with. This is to ensure that divergent views of this specific
stakeholder group are taken into account. The advantage of using this method is that the researcher can
use her prior knowledge and skills to choose the respondents.
A purposive sampling method will be used to locate respondents and a snowballing technique would be
adopted in contacting at least 500 stakeholders and policy makers in the health and education industry, the
export sector in Ghana and the United Kingdom/United States of America.
Summary
Exporting the services of professionals (health and educational) would ensure that developing countries
benefit from the phenomenon and reduce the exodus of these professionals. It would also make available
to policy makers information that moves from discussions to implementation of a planned process to
curbing the menace and propelling the export of services from developing countries.
Reference
Albaum, Duerr and Strandskov, (1998), International marketing and export management Pearson
Education Limited, Essex, England. Page (pp.) 31 – 34.
1bid (2005), fifth edition, pp.59 - 62
Bharadwaj, S., Varadarajan, R., and Fahy, J. (1993), “Sustainable competitive advantage in service
industries: a conceptual model and research propositions”, Journal of Marketing, Volume 57 No. 4, page
83 – 99.
Binod, Khadria (2008), “International nurse recruitment in India” (Health Research and Educational
Trust), Gale Cengage Learning, pp.2 - 4.
Cicic, M., Patterson, P., and Shoham, A. (1999), “a conceptual model of the internationalization of
service firms”, Journal of Global Marketing, Vol. 12 No. 3, pp. 81 -106.
Fisk, Ray, Grove, S. and John J. (2003), “Interactive service marketing”, Houghton Mifflin Company,
Gardner, D., Johnson, F., Lee, M., and Wilkinson, I. (2000), “A contingency approach to marketing high
technology products”, European Journal of Marketing, Vol. 34 Nos. 9/10, pp. 1053 – 1077.
Ginsberg, A., and Venkatraman, N. (1985), “Contingency perspectives of organizational strategy: a
critical review of the empirical research”, Academy of Management Review, Vol. 10 No. 3, pp. 421 – 434.
Hambrick, D., and Lei, D. (1985), “Toward an empirical prioritization of contingency variables for
business strategy”, Academy of Management Journal, Vol. 28 No. 4, pp. 763 -788.
Hofer, W. (1975), “Towards a contingency theory of business strategy”, Academy of Management
Journal, Vol. 18 No. 4, pp. 784 – 810.
International Trade Centre (2006), “Successful services exporting”, Trade in Services Section, Version
1.2, pp 4 – 20.
Javalgi, R. G., Martin, C. and Todd, P. (2004), “The export of e-services in the age of technology
transformation: challenges and implications for international service providers”. Journal of Services
Marketing, Vol. 18 No. 7, pp 560 – 573.
Knight, G. (1999), “International services marketing: review of research, 1980 – 1998”, Journal of
International Marketing, Vol. 13 Nos. 4/5, pp. 347 – 360.
La and Patterson, 2005;
Reardon, J., Erramilli, K. and Dsouza, D. (1996), “International expansion of services firms: problems
and strategies”, Journal of Professional Services Marketing, Vol. 15 No. 1 pp. 31 – 46.
Salmon, M. E., Yan, J., Hewitt, H. and Guisinger, V. (2008), “Managed Migration: The Caribbean
approach to addressing nursing services capacity”, Health Research and Educational Trust –
http://findarticles.com/p/articles/mi_m4149/12
UNCTAD IX and UNCTAD/WHO (1998), “Market access: developments since the Uruguay Round,
implications, opportunities and challenges, in particular for the developing countries and the least
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developed among them, in the context of globalization and liberalization”, (E/1998/55) for the Economic
and Social Council.
Zeithaml, V., Varadarajan, P. and Zeithaml, C. (1988), “The contingency approach: its foundations and
relevance to theory building and research in marketing”, European Journal of Marketing, Vol. 22 No. 6,
pp. 37 -64.
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A Thorough Analysis of the Bank Lending Channel of Monetary Transmission in the CEMAC area
Abstract
Samba Michel Cyrille, Shanghai University of Finance and Economics.
This paper addresses the relevance of the bank lending channel in the transmission of monetary policy in the
CEMAC area. Testing for the existence of a bank lending channel usually raises an identification problem which
renders the test less efficient. Therefore, in this paper, we employ a structural vector error correction model
(SVECM) which enables us to disentangle the loan demand and supply effects of monetary policy moves. Using
aggregate data of the CEMAC area, we find evidence that is consistent with a bank lending channel, although the
very low credit ratio in the region. The magnitude of the effect is rather high and might be explained by banks
characteristics in the region. Therefore, we argue that the central bank in the CEMAC zone should take advantage
of this situation in order to implement relevant policies according to the situation of the business cycle. Also,
commercial banks’ role could be strengthened if actions are taken in order to reduce their excess reserve holdings
at the central bank, for those excess reserve holdings are thought to hamper monetary policy actions in the area.
Introduction
The bank lending channel hypothesis postulates the existence of a channel for monetary policy
transmission through bank credit. This channel is independent 1 of the traditional “money channel”, which
takes into consideration the effects of changes in real interest rates on economic activity (Jimborean,
2009). It ascribes a special role to banks in the monetary policy transmission mechanism, stipulating that
monetary policy tightening can affect not only the demand for loans( through the interest rate channel),
but also the supply of loans which in turn, further affects investment and consumption. In other words,
monetary policy affects not only the borrowers, but also the banks. The underlying theoretical mechanism
is the following: a monetary contraction shrinks both banks’ reserves and deposits. The theory indicates
that in the aftermath of a monetary policy tightening, banks’ lending policy is liable to change. In the
literature, two hypotheses as proposed by Oliner and Rudebusch(1995), are crucial for the bank lending
theory: (i) the imperfect substitution between credit and other assets on banks’ balance sheets, and (ii) the
imperfect substitution between bank credit and other forms of financing on firms’ balance sheets.
According to Jimborean(2009), these forms of imperfect substitution cause monetary policy to impact on
economic activity in two stages: in the first stage, the imperfect substitution of bank assets determines a
contraction in banks’ supply of loans when there is a monetary policy tightening. When banks face a
decrease in liquidity, they reduce their loan supply instead of selling the bonds they have in their
portfolios. Alternatively, rather than reducing lending, they could issue bonds or collect deposits from
households or the corporate sector. Financial market imperfections, such as adverse selection and moral
hazard (imperfect substitution between credit and bonds on the asset side and between bonds and deposits
on the liability side); limit the ability of some banks to borrow in the financial market. Once the credit
supply has diminished (due to imperfect substitution between bank credit and other forms of external
funding on firms’ balance sheets), investment spending decreases, and so does economic activity (the
second stage) too.
The early empirical literature on the existence of a bank lending channel focused on the estimation of
reduced-form equations of credit supply using aggregate data. The basic approach was pioneered by
Bernanke and Blinder (1992) who found that restrictive monetary policy impulses lead to a decline in
both aggregate loans and economic activity. Nevertheless, this strand of literature was criticized on the
grounds that it is difficult to identify credit supply responses, given that monetary shocks simultaneously
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Edited by Emmanuel Obuah
affect the demand for loans (Romer and Romer, 1990). As argued by Hulsewig et al. (2002), the result of
Bernanke and Blinder (1992) does not sufficiently prove that the central bank is indeed able to affect the
supply of intermediate loans. In principle, these results can also be explained solely by the interest rate
channel. Consequently, there might be a positive correlation between bank lending and economic activity
even if the bank lending channel does not operate at all( Kashyap and Stein, 2000; European Central
Bank, 2000). Failure to disentangle loan demand and loan supply effects leads to an overestimation of the
impact of monetary policy on the supply of loans. Therefore, several approaches have been used to cope
with the identification problem. This has been done by operating a shift from aggregate data to
disaggregate data in order to account for heterogeneity in the response of both banks and firms to changes
in monetary policy. Information on bank characteristics such as capitalization, size and liquidity, is used
to account for heterogeneity (e.g., Ashcraft, 2006; Kashyap and Stein, 1995, 2000; Peek, Rosengren and
Tootell, 2003; Angeloni, Kashyap, Mojon and Terlizzese, 2002, for the Euro-area countries; Jimborean,
2009; Matousek and Sarantis, 2008, for the New EU member states; Cetorelli and Goldberg, 2008, for the
United States). The main result of this class of research is that the impact of monetary policy on lending is
stronger particularly for small banks with less liquid balance sheets, i.e. banks with lower ratios of
securities to assets, than for large and liquid banks.
Firm size is also considered as a natural proxy for information asymmetry. Gertler and Gilchrist (1993a,
1994), Gilchrist and Zakrajsek(1998), use quarterly panel data of nonfinancial firms in the United States
and conclude that, following a monetary contraction, bank credit to small firms is reduced more than bank
credit to large firms. However, Oliner and Rudebush(1995) using data for the U.S. manufacturing sector,
find no evidence that a monetary shock changes the composition of bank and nonbank debt for either
small firms or large firms. Rather, they argue that the main effect of a monetary contraction is to redirect
all type of credit from small firms to large firms.
Overall, the use of disaggregate data aiming at resolving the identification problem has not led to uniform
results (Hulsewig et al., 2002). Therefore, a new strand of literature has favored the use of aggregate\ data
and relied on the estimation of vector error correction models (VECMs). Within this framework the
supply and demand for loans can be identified by testing for the presence of multiple cointegrating
relationships and exclusion, exogeneity and homogeneity restrictions on the cointegrating relationships.
Loan supply and demand can therefore be modeled jointly, rather than in a one-equation reduced-form
setting. The use of Structural VECMs in the bank lending literature is growing fast, as a number of
authors have relied on this methodology to solve the identification problem. (e.g. Hulsewig et al., 2002;
Kakes , 2000; Calza et al., 2006; de Mello and Pisu, 2010). The current paper addresses the relevance of
the bank lending channel in the transmission of monetary policy in the CEMAC 2 area. We use a structural
vector error correction model (SVECM) which accounts for endogeneity and nonstationarity of the time
series. Our results show that although the CEMAC area is characterized by a low financial development,
there is still evidence of a bank lending channel of monetary policy. The rest of the paper is as followed:
section 2 describes our data and the time series properties, while in section 3, we focus on the empirical
methodology and the results obtained. Section 4 concludes.
Data and Time Series Properties
The following analysis of the loan market in the CEMAC area is based on aggregate quarterly data taken
from the IFS CD-ROM of the IMF. For harmonization purposes, we set our sampling period as from the
first quarter of 1990 to the last quarter of 2005. The year 1990 saw the adoption by the central bank of the
zone, of a new strategy of monetary policy. This new framework; the Monetary Programming; aimed at
correcting the shortcomings of the previous monetary strategy, implemented since the early 1960s .Data
on nominal variables were obtained by summing country level data of the six countries, while those on
CPI are simple averages of individual countries’ CPI.. Specifically, our VECM analysis includes loans to
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Proceedings of the 12th Annual Conference © 2011 IAABD
the private sector by banks. Although the credit-to-GDP ratio in the CEMAC area is still relatively low
(see Table 1 for more details), loans provided by banks are the main source of financing for the private
sector due to the actual imperfections in the two stock markets of the area. Hulsewig et al (2002) explain
that banks may be restricted in their loan decisions by their amount of disposable capital. They argue that
the supply side factors of the loan market are covered by the banks’ equity position. We therefore include
bank capital accounts (capital) in our VECM. The real side of the economy is mirrored as usual by real
GDP (RGDP) taken as a proxy for credit demand factors. We also include the inflation rate (π), based on
the logarithm of the CPI. The central bank’s operating target is described by the rate offered by the central
bank to second-tier banks for their refinancing process (Interest). We use the maximum debtor rate as the
loan market rate in the CEMAC area (lending). All nominal variables were deflated by the CPI. We tested
for the presence of units roots in our data. Results of these tests are reported in Table 2. A part from the
inflation rate which is stationary in level, all the other variables are integrated of order one i.e I (1).
Table 1: CEMAC countries Selected Financial Sector Indicators (1990-2006)
M2/GDP Bank Credit to
Private
sector/GDP
Bank
Deposits/GDP
Cameroon 0.16 0.11 0.13 0.13
Central A. Rep 0.17 0.05 0.04 0.13
Chad 0.11 0.041 0.039 0.13
Congo 0.15 0.07 0.08 0.13
Equatorial Guinea 0.078 0.000076 0.000057 0.13
Gabon 0.15 0.099 0.125 0.13
Average 0.13 0.06 0.06 0.13
Table 2: Augmented Dickey-Fuller and Phillips-Perron Unit Root Tests
Variable ADF t-statistic Order PP t-statistic order
RGDP(y) -7.04 ***
Inflation(π) -4.27 ***
Loans( l ) -2.29 **
Capital(c) -9.47 ***
Lending (r L ) -7.16 ***
Interest (r P ) -7.39 ***
1 -7.04 ***
0 -4.24 ***
1 -6.00 ***
1 -9.65 ***
1 -7.13 ***
1 -7.05 ***
*** Denote significance at the 1% level and the rejection of the null hypothesis of non
stationarity. Critical values are obtained from MacKinnon 1996.
1
0
1
1
1
1
Lending-Deposit
Spread rate
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Methodology and estimation results
Challenges in the Era of Globalization
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As de Melo and Pisu (2010), we consider a simple aggregate model of loan supply(l S ) and loan
demand(l D ). Loan demand depends on macroeconomic conditions, proxied by economic activity(y) and
inflation (π), as well as the lending rate (r L ) offered by banks. The supply of loans depends on the sources
of funds available to banks, including capital(c), the borrowing rate (r P ) paid by banks for external funds
and inflation, which affects the real rate of return on credit operations. For de Melo and Pisu (2010), this
simple model allows for the identification of loan supply and demand, thus avoiding the well-known
identification problems that arise in the estimation of reduced-form credit supply equations.
The model can be written as:
, and (1)
The new strand of literature on the bank lending channel of monetary policy( Hulsewig et al., 2002;
Kakes, 2000; and deMelo and Pisu, 2010) states that if the presence of two cointegrating relationships
cannot be rejected by the data, identification of the supply and demand functions depends on the
estimated sign of the lending rate, which should be negative in the demand equation and positive in the
supply equation, and the sign of the borrowing rate, which should be negative in the supply equation.
Identification also requires r restrictions for each vector, where r is the number of cointegrating vectors.
Therefore, as it is usual in the literature, we test for two exclusion restrictions: bank capital should not
enter the demand equation (while being positively signed in the supply equation), and economic activity
should not enter the supply equation (while positively signed in the demand equation). The rationale for
those exclusions, as well as the inclusion of the borrowing and lending rates in the loan supply equation
are found in de Melo and Pisu (2010). Hulsewig et al. (2002) also argue that the demand for loans can in
principle be positively and negatively linked to real activity, y.
Cointegration and identification tests.
We test the model above in a VECM setting including six variables: credit stock, inflation, real GDP, the
central bank operating rate, the lending rate and bank capital. It should be recalled that including the
central bank discount rate as the policy rate in the VECM leads to the assumption that innovations of the
policy rate indicate unexpected monetary policy shocks. We define all variables in logarithmic form,
except for the interest rates. The VECM can be defined as usual, as for Y=
[l, c, y, π], where L is the lag operator, and ε is an error term. The rank of ∏, which can be written
as ∏=αβ ’ , where α and β are p×r matrices, and p is the number of variables in Y, is denoted by r. β is a
vector of cointegration relationships and α is the loading matrix defining the adjustment speed of the
variables in Y to the long-run equilibria defined by the cointegration relationships. We also include a
dummy representing the devaluation of the local currency the Franc CFA; which occurred on January
1994. We introduce also petroleum average crude price (Oil) as an exogenous variable in the model.
Table 3: Johansen’s trace test results
Variables Null Hypothesis Eigenvalue Trace Statistic 5% p-value
y,π,l,c, r L , r P r=0
0.56
133.44
0.0000
r≤1
0.506
84.17
0.0023
r≤2
0.267
41.78
0.1648
r≤3
0.190
23.06
0.2426
r≤4
0.152
10.35
0.2541
r≤5
0.006
0.399
0.527
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Trace test indicates 2 cointegrating equations at the 0.05 level. This Result was obtained considering an
unrestricted VAR with only endogenous variables. However, adding exogenous variables didn’t alter the
main outcome.
The optimal lag length was selected on the basis of the Schwarz (SC) criterion along with
misspecification tests for the error terms. This led us to choose two lags in our VECM. Table 3 shows the
results of the Johansen’s trace test. The null hypothesis is of a cointegration rank of at most r (i.e., the
VECM has at most r cointegrating relationships). On the basis of this test, the null is rejected for r=0 and
r≤1 (at the 5% level), suggesting the presence of two cointegrating relationships. Test statistics of the
unrestricted vector autoregression model show that although the errors are not normally distributed, there
is no presence of autocorrelation among them.
Table 4: Unrestricted cointegration vectors
Credit Capital Interest Lending RGDP Inflation
-3.02 4.18 0.54 -0.14 2.05 -0.183
-0.64 1.37 -0.08 0.25 -0.51 -0.016
Weak Exogeneity a
3.5954 1.44 27.07 7.77 0.51 24.03
[0.16] [0.48] [0.000016] [0.02] [0.77 [0.000006]
a 2
The test statistics are distributed as χ with 2 degrees of freedom. P-values are reported in brackets.
The two estimated unrestricted cointegrating vectors are reported in Table 4 along with results of the
weak exogeneity test. According to the signs of the relevant parameters, it appears that vectors β1 and β2
could be interpreted as demand and supply relationships, respectively. The bottom of Table 4 indicates
also that at least three variables are weakly exogenous. According to Johansen (1995), a variable can be
treated as weakly exogenous if its coefficients of all errors correction terms are zero, implying that the
respective equation in the first difference does not contain information about the long-run parameters β.
The likelihood ratio tests on join restrictions on α have been carried without imposing restrictions on β.
The hypothesis of weak exogeneity test could not be rejected for loans, capital and Real GDP.
To identify the supply and the demand equations, we imposed the following exclusion and exogeneity
restrictions on the cointegrating parameters:
If the null hypothesis is not rejected, loan demand is unaffected by bank capital and the policy rate, loan
supply is unaffected by activity, and capital and activity are weakly exogenous. The null hypothesis could
not be rejected at classical levels on the basis of a LR test ( , p-value= 0.134). We therefore
obtained the parameters of the demand and supply equations after normalizing the unrestricted
cointegrating vectors in loans as follows (t-statistics are in brackets):
(8.34) (2.45) (8.03)
(0.574) (-12.81) (3.40) (11.65)
Our parameters show that economic activity is a powerful determinant of the demand for bank loans in
the CEMAC area. Other studies have also estimated the income elasticity of loan demand to be greater
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than one, including Calza et al.(2006), for the Europe area(1.48); Kakes(2000), for the Netherlands(1.75),
Fase(1995), also for the Netherlands(2-2.5) and de Melo and Pisu(2010) for Brazil(2.164). Moreover, as
expected, there is a positive relation between loan demand and inflation. However, the loan rate positively
affects loan demand. A plausible explanation is that in the absence of alternative sources of external
finance which is combined with the high concentration of the banking industry, borrowers are willing to
pay even a high interest rate in order to finance their consumption and investment spending.
As for the supply equation, our estimates show that the supply of loans is positively related to the lending
rate and negatively related to the policy rate. Both effects are highly significant. As argued by de Melo
and Pisu (2010), this provides prima facie evidence of the existence of a bank lending channel in the
CEMAC area, since monetary policy moves affect the supply of loans. These results show that although
there is evidence of a low credit ratio in the CEMAC area, the scope of monetary policy is not limited.
The policy rate elasticity of credit supply is derived through the product of the estimated coefficient on
that rate (-3,368) and the sample mean of the policy rate (8.228), which results in an elasticity of -27.71.
Therefore, as the policy rate rises by 1%, loan supply by banks fails by around 27%. This is to show that a
tightening of policy in the central bank reinforces the reluctance of commercial bank to provide loan to
the private sector. With less liquid balance sheets (absence of securities) banks are heavily hit by a
decrease of their liquidity following a tightening of monetary policy. Consequently, they reduce their loan
supply. As expected, bank capital affects positively loan supply, but the effect is rather insignificant.
Finally, there is a positive link between inflation and loan supply in the CEMAC area.
Conclusion
This paper analyzes the relevance of a bank lending channel operating alongside the conventional interest
rate channel in the monetary transmission mechanism process in the CEMAC area. For this purpose, we
make use of recent developments on this issue to identify loan supply and loan demand, a recurrent
difficulty arising in studies which use aggregate data in reduced-form equations. It has been demonstrated
that sticking on aggregate data, but using structural VECMs help to disentangle the loan supply and
demand effects of monetary policy moves. Using this innovative methodology, we show that although
credit ratios are still low in the CEMAC area, the scope of monetary policy is not limited. Analyzing the
loan market in the CEMAC area, we show that banks in the region play a vital role in the monetary policy
transmission process, by passing the monetary actions of the central bank to the private agents. Bank
characteristics (size, liquidity and capitalization) might explain the magnitude of the effect. Therefore, the
central bank should take advantage of this situation by implementing proper policies according to the
business cycle situation. At the meantime, actions aiming at restraining banks excess holdings at the
central bank might also help strengthening the bank lending channel in the CEMAC area.
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area: Where do we stand? ECB Working Paper, No.114. European Central Bank, Frankfurt.
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Bernanke, B.S., and Blinder, A.S (1992). The Federal Fund Rate and the Channels of Monetary
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Calza, A., Manrique, M., and Souza, J.(2003). Aggregate Loans to the Euro Area Private Sector.
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Cetorelli, N., and Goldberg, L.S.(2008). Banking Globalization, Monetary Transmission and the
Lending Channel. NBER Working Paper, No. 14101. National Bureau of Economic Research,
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De Melo, L., and Pisu, M.(2010). The bank lending channel of monetary transmission in Brazil: A VECM
approach. The Quarterly Review of Economics and Finance, Vol.50, pp.50-60.
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European Central Bank(2000). Monetary Policy Transmission in The Euro Area. Monthly Bulletin, July,
pp.43-58.
Fase,M.M.G.(1995). The Demand for Commercial Bank Loans and the Lending Rate. European
Economic Review, 39(1), pp.99-115.
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Transmission Mechanism: Arguments and Evidence. Scandinavian Journal of Economics 95(1), 43-64.
Gertler, M. and S. Gilchrist (1994),” Monetary Policy, Business Cycles, and the Behaviour of
Manufacturing Firms”, Quarterly Journal of Economics, vol.109, pp. 309-40.
Gilchrist, S. G. and E. Zakrajsek(1995),” The importance of Credit for Macroeconomic Activity:
Identification through Heterogenity”, In: Peek, J. and Rosengreen, (eds.), Is Bank Lending
Hulsewig, O., Winker, P., and Worms, A.(2002). Bank Lending Transmission of Monetary Policy: A
VECM Analysis for Germany. Unpublished Manuscript. University of Wurzburg, Wurzburg.
Jimborean,R.(2009). The role of Banks in the monetary policy transmission in the new EU member states.
Economic Systems 33, pp.360-375
Johansen, S.(1995). Likelihood-Based Inference in Cointegrated Vector Autoregressive Models: Oxford
University Press.
Kakes, J.(2000). Identifying the mechanism: Is there a bank lending channel of monetary transmission in
the Netherlands? Applied Economics, 7, pp. 63-67.
Kashyap,A.K., and Stein, J.C.( 1995). The Impact of Monetary Policy on Bank Balance Sheets. Canergie-
Rochester Conference Series on Public Policy, 42. pp. 151-195
Kashyap, A.K., and Stein, J.C.(2000). What do a Million Observations on Banks Say about the
Transmission of Monetary Policy? The American Economic Review, Vol.90, No.3, pp.407-428.
Matousek,R., and Sarantis, N.(2008). The Bank Lending Channel and Monetary Transmission in Central
and Eastern European Countries. Journal of Comparative Economics.
Oliner, S.D., and Rudebush, G.D.(1995). Is There a Bank Lending Channel for Monetary Policy?
Federal Reserve Bank of San Francisco Economic Review, No.2, pp.3-20.
Peek, J., Rosengren, E.S., and Tootell, G.M.B.(2003). Identifying The Macroeconomic Effect of
Loan Supply Shocks. Journal of Money, Credit, and Banking, 35, pp.931-946
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Brookings Paper on Economic Activity, 1, pp. 149-198.
Footnotes.
1. Contrary to the view expressed by Jimborean(2009), Bernanke and Gertler(1995) rather consider
the credit channel as set of factors that amplify and propagate the conventional interest rate effects.
Therefore, the credit channel is an enhancement mechanism, not a truly independent or parallel
channel.
2.CEMAC is the acronym for Communauté Economique et Monétaire de L’Afrique Centrale. It is
formed by six countries including Cameroon, Central African Republic, Chad, the Republic of
Congo, Equatorial Guinea and Gabon.
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Abstract
Challenges in the Era of Globalization
Edited by Emmanuel Obuah
Foreign equity portfolio investment flows and economic growth in Africa
Elikplimi Komla Agbloyor, ekagbloyor@accamail.com
Department of Finance at the University of Ghana Business School, Ghana
Joshua Abor
University of Ghana Business School, Ghana.
Charles Komla Delali Adjasi
University of Ghana Business School, Ghana
Alfred Yawson
University of Adelaide Business School in Australia
In this paper, we explore the role of foreign equity portfolio investment flows in the determination of economic
growth in Africa. We use dynamic panel data estimation techniques with our sample covering 12 countries from
1990 -2007. We first investigate whether FPI independently spurs economic growth. We do not find systematic
evidence that FPI has promoted economic growth in Africa. Our findings suggest that FPI does not have a
statistically significant impact on economic growth. In various empirical estimations, after controlling for several
standard determinants of economic growth in the literature, we do not find evidence that FPI has contributed to
economic growth on the continent. Next, we interact FPI with financial markets to explore whether good financial
markets adequately intermediate FPI flows to spur growth. The results suggest that even after interacting FPI with
financial markets, financial markets are not able to transform the insignificant impact of FPI into growth. The
results suggest that FPI flows though have been increasing are not sufficient to spur growth and that the linkage
between financial markets especially the stock market and the real economy may be weak. This weak linkage may
explain why financial markets are not able to transform the insignificant effect of FPI into growth.
Introduction
Economic growth has been paramount on the development agenda of Africa. Stakeholders in the
development of the continent are interested in the level of economic growth. Government policies, the
reform programmes that have taken place on the continent, and the assistance provided by international
development agencies and Africa’s development partners have all been aimed at spurring economic
growth on the continent. The issue of growth has been important to all these stakeholders because growth
can lead to the transformation of these countries as well as the reduction of poverty on the continent.
Globally, most countries are promoting equity investment flows compared to debt flows. This is because
equity investment flows are viewed to be safer. The equity mix of foreign capital is made up of foreign
portfolio investments (FPI) and foreign direct investment (FDI). Portfolio investment flows represent
investment in equity securities by foreign investors. FPI is usually distinguished from FDI by the fact that
whereas FDI usually leads to the foreign investor gaining significant influence or control this is often not
the case with FPI. The guideline to measure control is 10% of the voting equity of the receiving company.
The 10% guideline is used by international agencies and national governments for recording purposes so
that investments less than 10% are classified as FPI whilst those greater than 10% are classified as FDI.
It is argued that FPI can provide needed capital to developing countries as well as contribute to the
development of domestic stock markets. Empirical evidence also suggests that FPI can be risky because
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of its volatile nature especially compared to FDI. Also FPI may constrain the policy options available to
domestic governments (see Grabel, 1996). Though the quantum of FDI outstrips FPI on the continent, FPI
is increasingly becoming important to African countries. Adjasi et. al (2010) examine the topical issue of
FDI and economic growth in Africa. Their paper focuses on whether FDI has contributed to economic
growth on the continent. On its own, they find that FDI has no significant impact on growth. However,
they find that FDI when interacted with financial markets significantly influences economic growth. Their
paper however, does not examine the role of FPI in the determination of economic growth in Africa. Also
given the increasing importance of FPI, it is important to examine its effect on economic growth.
However, there is a dearth of literature as to the role of FPI in the determination of economic growth in
Africa.
Therefore in this paper, we examine whether FPI on its own significantly influences economic growth on
the continent. In the absence of a significant FPI growth impact, we examine if financial markets are able
to transform the insignificant effect of FPI into growth. This is because FPI interacts with the real
economy via the stock market. The rest of the paper is structured as follows: Section 2 examines the
extant literature on FPI and economic growth, Section 3 details the methodology employed in the
empirical analysis, in Section 4 we present the results from our empirical estimations and finally in
Section 5 we conclude the paper and draw policy implications.
Literature Review
Immediately after independence, there were great hopes and predictions of massive economic
transformations that will lift Africans out of poverty. Enke (1963) ranked Africa’s growth potential ahead
of East Asia’s, and Kamarck (1967), the Chief Economist of the World Bank, listed seven African
countries that had the potential to reach or surpass a 7 per cent annual growth rate (in Mobolaji, 2009).
These hopes and predictions had been elusive for several decades. Several growth regressions seeking to
explain growth on the continent have appeared in the literature. These studies in the main sought to
explain the growth tragedy of Africa and what was driving economic growth. This underperformance of
Africa compared to the rest of the World has been referred to in the growth literature as the African
dummy. Barro (1991) finds that there appears to be adverse effects on growth from being in sub-Sahara
Africa. Though the growth prospects of the continent have improved in recent times, empirical
researchers are still exploring the ‘holy grail’ as to what explains growth on the continent.
Advocates of foreign portfolio investment believe that it can lead to the development of domestic stock
markets and therefore stimulate economic growth through its effect on the stock market. It is believed that
FPI gives an upward thrust to domestic stock prices which in turn increases the P/E ratio of listed
companies and therefore reduces their cost of capital (see Pal, 2006). This reduced cost of capital for
firms can stimulate more investments by companies since the ‘hurdle rate’ for project appraisal is
reduced. Increased investment and productivity by firms should lead to economic expansion. Also given
that foreign portfolio investors contribute to making the secondary markets more active, it presupposes
that this should also lead to more activity in the primary market. This is because more active secondary
markets make investors more comfortable to invest in primary market issues since it will be easier to
liquidate their investments if they need to. An active primary market means that firms can easily raise
funds to finance investment projects. The beneficial effects of FPI are crucially dependent upon the
assumptions that well functioning stock markets promote economic development and that international
portfolio investors are guided by economic fundamentals (Pal,2006).
Some recent studies report positive effects of capital flows, namely FDI and FPI, on macroeconomic
indicators (Borzenstein et al. 1998; Bekaert and Harvey, 1998, 2000; in Durham, 2003). However, the
evidence that private capital flows stimulate growth is inconclusive. Pal (2006) shows that the mainstream
argument that the entry of foreign portfolio investors will boost a country's stock market and consequently
the economy, does not seem be working in India. Durham (2003) does not find a statistically significant
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effect of lagged FPI flows on economic growth. Also, Durham (2004) finds that the positive effect of FPI
on growth is only contingent on financial development and legal variables or comparative institutions. In
particular, they find that FPI inhibits growth in countries with comparatively small equity markets and
pervasive corruption. This strand of the literature suggests that absorptive capacities are needed to
intermediate foreign capital to productive ventures which should in turn spur economic growth.
A recent growing body of empirical studies on FDI and growth attribute the lack of evidence of growth
from FDI to the fact that those studies do not consider the joint effect of FDI and financial markets. In
terms of financial markets, Alfaro et. al (2004) pioneered empirical research that suggests that financial
markets are a relevant absorptive capacity that a nation must have for FDI to positively translate into
growth. In Africa, Adjasi et. al (2010) find that FDI does not autonomously promote growth but that good
financial markets are required for the growth effects of FDI to materialize. This line of reasoning may
also apply to FPI such that such investment may not have an autonomously positive impact on economic
growth. Durham (2004) for example provides empirical evidence that FPI has a positive effect on growth
only for countries for which the ratio of stock market capitalisation to GDP is at least approximately
41.20 percent. Their results suggest that foreign equity portfolio investment flows frequently have a
negative impact on growth because most countries do not meet the necessary threshold.
Methodology
Data
The definitions of the variables used and their sources are presented in Appendix One. We use an
unbalanced data set covering the period 1990 – 2007. We focus on 12 equity markets that have received
portfolio investment flows because of the availability and sufficiency of data.
Empirical Model
Our empirical model is very similar to Adjasi et. al (2010). We utilize Arellano and Bond’s dynamic
panel estimation. We specify this model robustly as follows;
.......................................................................(1)
Where;
= real GDP in constant USD for country i in time t
= foreign portfolio investment (USD) for country i in time t
= a vector of control variables or information conditioning set which in the literature have been
found to be standard determinants of economic growth. These determinants follow from the growth
literature and include macroeconomic stability, population, government expenditure, the level of
education, investment capital accumulation, savings, government effectiveness, the level of infrastructure,
trade openness, capital account openness and finance.
; that is the composite error term
Our main variable of interest in the empirical experiments is FPI and the interaction term between FPI
and our financial market indicators. Due to the fact that FPI may not have an independent impact on
economic growth, we also estimate a second model to capture the interactive effect between FPI and
growth. The model closely follows that employed by Durham (2004) and Adjasi et. al (2010). We specify
our dynamic model compactly as follows;
Where;
represents the interactive effect between FPI and financial markets
........(2)
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Proceedings of the 12th Annual Conference © 2011 IAABD
represents the financial market variables
and represent individual country effects
Empirical Results and Discussion
In this section, we present and discuss the results from the empirical estimations.
Empirical Results
We now present and discuss the output from the empirical estimations. The results are presented in Table
1.
Table 1 – Arellano and Bond Results – Dependent Variable Log GDP
(1) (2)-Mktcap (3) (4)-Stmkturn (5)-Privcr (6)-M2
1 st Lag of loggdp 0.3111 0.3319 0.2127 0.2048 0.3585 0.3016
(1.79) ( 1.82) ( 1.22) (1.11) (2.16)** (1.67)
FPI 0.0021 0.0005 0.0031 0.0036 -0.0060 -0.0002
(0.71) (0.11) (1.15) (0.96) (-1.10) (-0.04)
Inflation 0.3266 0.3335 0.4813 0.4876 0.3518 0.3308
(3.20)*** (3.17)*** (3.62)*** (3.47)*** (3.61)*** (3.13)***
Popsize 0.1529 0.1573 -0.3936 -0.4464 0.2462 0.1791
(0.30) (0.30) (-0.61) (-0.62) (0.51) (0.34)
Govexp 0.0834 0.0802 0.0816 0.0856 0.0715 0.0809
(2.82)*** (2.59)*** ( 2.44)** ( 2.14)** (2.48)*** (2.59)***
Prieduc -0.0007 -0.0006 -0.0010 -0.0010 -0.0005 -0.0007
(-0.58) (-0.43) (-0.78) (-0.76) (-0.43) (-0.54)
Gfcf -0.0765 -0.0534 -0.0309 -0.0331 -0.0243 -0.0743
(-1.17) (-0.67) (-0.47) (-0.48) (-0.35) (-1.09)
Gdsgdp 0.2795 0.2575 0.3807 0.3830 0.2438 0.2697
(2.11)** (1.82) (2.72)*** (2.65)*** (1.93) (1.95)
Goveff -0.0020 -0.0018 -0.0020 -0.0021 -0.0020 -0.0019
(-1.60) (-1.34) (-1.38) (-1.35) (-1.74) (-1.49)
Infras 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
(2.31)** (2.28)** (3.07)*** (2.98) (1.70) (2.27)**
Open 0.0096 -0.0001 -0.0753 -0.0690 -0.0300 0.0088
(0.16) (-0.00) (-0.69) (-0.59) (-0.50) (0.14)
Kaopen -0.0241 -0.0217 -0.0255 -0.0257 -0.0100 -0.0219
(-1.31) (-1.12) (-1.42) (-1.38) (-0.52) (-1.11)
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M2 0.0868 0.0993 0.1854 0.1833 0.0602 -0.0255
(0.46) (0.51) (0.95) (0.92) (0.33) (-0.08)
Privcr 0.1117 0.0611 0.0651 0.0782 -0.3602 0.1384
(0.96) (0.40) (0.96) (0.81) (-1.22) (1.01)
Mktcapgdp -0.0177 -0.1148 -0.0955 -0.0296
(-0.39) (-0.61) (-1.53) (-0.54)
Stmkturn -0.0003 0.0005
(-0.44) (0.12)
FPI * Finance 0.0041 -0.00004 0.0237 0.0049
(0.53) (-0.20) (1.72) (0.41)
Obs 34 34 30 30 34 34
No. of Countries 12 12 12 12 12 12
Wald chi2 1009*** 962*** 801*** 755*** 1137*** 948***
Sargan Test 14.69 13.73 10.66 10.01 13.56 13.65
Sargan p value 0.7419 0.7465 0.7765 0.7612 0.7571 0.7518
Notes: Z values are in parenthesis. ***, **, * indicate significant at 1%, 5%, and 10% respectively. FPI stands for
portfolio investment, Popsize stands for population size, Govexp stands for government expenditure, Prieduc stands
for primary education, Gfcf stands for gross fixed capital formation, Gdsgdp stands for the gross domestic savings
ratio to GDP, Goveff stands for government effectiveness, infras stands for infrastructure proxied by the number of
telephone lines per 1000 of the population, Open stands for trade openness, Kaopen is Chinn and Ito’s measure of
capital account openness, Privcr stands for private credit, Mktcapgdp is the market capitalization ratio, and Stmkturn
represents stock market turnover.
Some interesting results emerge from the empirical estimations. We do not find evidence that FPIs
contribute to economic growth on the African continent. This result still holds regardless of the
information conditioning set that we use as controls for economic growth. Therefore, we find that FPI on
its own does not autonomously influence economic growth. These results may be due to the fact that FPI
and good financial markets are needed for the growth impact of FPI to be felt. We therefore interacted
FPI with financial markets to confirm this hypothesis. Our results suggest that even when interacted with
financial markets, FPI does not significantly drive economic growth. One possible explanation for these
results is that even though FPI flows have increased, they are not sufficient to independently drive
economic growth. Further it seems that African financial markets have not been able to intermediate FPI
flows effectively and efficiently. This may account for the joint insignificance of FPI and financial market
indicators. The results also suggest that the link between financial markets especially the stock market and
the real economy may be weak. This may explain why financial markets are not able to transform the
insignificant effect of FPI into growth.
We performed several other experiments to explore whether other absorptive capacities are needed for the
positive growth impact of FPI to materialize. We do not report these results but they are available upon
request. We therefore follow the idea in Durham (2004) and interact FPI with capital account openness
and trade openness. We interact FPI with capital account openness since it is reasonable to expect that
countries with more open capital accounts will benefit more from FPI flows. However, like Durham
(2004) we admit that these concepts are less germane to FPI. Our findings from the empirical estimations
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do not suggest that either trade openness or capital account openness is able to transform the insignificant
effect of FPI into growth.
The significant predictors of economic growth in our empirical modelling are inflation, government
expenditure, savings and the level of infrastructure. We expected that high rates of inflation will
negatively influence economic growth. This is because such high rates of inflation distort financial
markets and make it difficult for economic agents to plan. Also very high rates of inflation suggest that
the fiscal and monetary authorities are facing challenges managing an economy. Therefore everything
being equal, countries with higher rates of inflation should experience lower growth indicating a negative
relationship between inflation and economic growth. However, results from our empirical estimations
seem to suggest otherwise. In fact, in all six estimations, inflation is strongly significant and positive at
the one percent level. The results are baffling and are difficult to rationalize. However, we interprete these
results to mean that a threshold may exist beyond which inflation has a negative impact on growth. This
interpretation may be plausible since the mean level of inflation in our sample is 13% which is low for
African countries. As Barro (1995) notes, the evidence that inflation is harmful is not overwhelming.
Barro (1995) stresses that the clear negative influences of inflation on growth come from the experiences
of high inflation.
We find that government expenditure is positive and significant in explaining economic growth. This is
contrary to our a priori expectation, as excessive government expenditure can be destabilizing. This is
because such expenditure has to be financed from taxes or by the government borrowing from the
financial markets. Excessive taxes on productive agents can reduce their incentives to produce and
therefore the level of production is likely to fall. Again, expenditure financed by excessive borrowing by
the government in the financial market can crowd out the private sector. Therefore high levels of
government expenditure are likely to detract from growth. It can also be argued that depending on the
nature of government expenditure, such expenditure can be growth enhancing. Government expenditure
may for example be in defense and other services that are beneficial to economic agents by creating a
conducive environment for economic growth. A threshold may also exist beyond which government
expenditure negatively influences economic growth. We interprete our finding to mean that the private
sector is weak and that government expenditure helps to stimulate economic activity. In most African
countries, the government is one of the biggest spenders and helps drive economic activity by providing
contracts and services that are growth enhancing to the private sector. This likely accounts for the positive
growth effects of government expenditure in our model.
We also find evidence of a positive and significant relationship between savings and economic growth.
Countries with higher savings rates tend to experience higher growth rates. This finding is in line with our
a priori expectations. We observe a positive and significant relationship between infrastructure and
economic growth. This is in line with our a priori expectations. Our results therefore suggest that
countries with better developed infrastructure benefit more by experiencing higher economic growth
rates. Infrastructure, which can be in the form of good roads, railway systems, availability of electricity
and water, and good telecommunications and internet facilities makes it easier and less expensive for
economic activity to take place. Therefore the evidence suggests that infrastructural development spurs
economic growth.
Conclusion
In this paper, we empirically investigated whether FPI has contributed to economic growth on the
continent. After controlling for several standard determinants of economic growth identified in the
literature, our results suggest that FPI has no significant growth impact. Even after interacting FPI with
financial markets, FPI still has no positive growth impact. The results suggest that the amount of FPI
flows have not been sufficient for FPI to independently have a positive impact on growth. The results also
suggest that the link between financial markets especially the stock market and the real economy may be
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weak. This may explain why financial markets are not able to transform the insignificant effect of FPI
into growth.
The policy implications from our findings is that packages that have been designed to attract foreign
portfolio investors in terms of offering them attractive packages and concessions has not really translated
into economic growth. Thus, so far, such policies have not helped since these investments have not
translated into growth. This finding however does not suggest that such policies are unwarranted as
portfolio investments may have contributed to domestic stock market development.
References
Adjasi, C.K.D., Abor, J., Osei, K.A. and Nyavor-Foli, E (2010). FDI and Economic Activity in Africa: The Role of
Local Financial Markets. ThunderBird International Business Review, Forth Coming.
Alfaro, L., Chanda, A., Kalemli-Ozcan, S. and Sayek, S. (2004). FDI and Economic Growth, The Role of Local
Financial Markets. Journal of International Economics, 64, 113-134.
Barro, R.J. (1991). “Economic Growth in a Cross-Section of Countries”, The Quarterly Journal of Economics,
106(2), 407-443.
Barro, R.J. (1995). “Inflation and Economic Growth” NBER Working Paper 5326
Durham, J.B (2003). Foreign Portfolio Investment, Foreign Bank Lending and Economic Growth. International
Finance Discussion Papers, Number 757
Durham, J.B (2004). Absorptive Capacity and the Effects of Foreign Direct Investment and Foreign Equity Portfolio
Investment on Economic Growth. European Economic Review, 48, 285 – 306.
Enke, S. (1963), Economics for Development, Dennis Dobson, London
Grabel, I. (1996). Marketing the Third World: The Contradictions of Portfolio Investment in the Global Economy.
World Development, 24(11), 1761 – 1776.
Kamarck, A.M. (1967), Economics of African Development, Praeger, New York, NY.
Mobolaji, H.I. (2009). Banking Development, Human Capital and Economic Growth in Sub-Sahara Africa. Journal
of Economic Studies, 37(5), 557-577.
Pal, P. (2006). Foreign Portfolio Investments, Stock Market and Economic Development: A Case Study of India.
Annual Conference on Development and Change Mission, Brazil.
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On the determinants of Foreign Equity Portfolio Investment flows into African Stock Markets
Abstract
Elikplimi Komla Agbloyor, ekagbloyor@accamail.com
Department of Finance at the University of Ghana Business School
Joshua Abor
University of Ghana Business School
Charles Komla Delali Adjasi
University of Ghana Business School
Alfred Yawson
University of Adelaide Business School in Australia
In this paper, we examine the determinants of foreign equity portfolio investment flows into African stock markets.
We use a panel data set with data from 1990 – 2007 covering 13 countries. We use various estimation approaches
to answer our empirical question and to ensure robustness of our results. Empirically, we provide new intriguing
evidence as to the determinants of foreign equity portfolio investment flows into African stock markets. The main
predictor of foreign equity portfolio investment flows into Africa is stock market development. We find that the
market capitalization ratio, stock market turnover and the number of listed firms are positive and significant in
explaining the level of foreign equity investment flows. Countries with better developed stock markets receive larger
portfolio investment flows. Our results suggest that in the African context plausible determinants identified in the
literature such as economic stability, political stability, income and savings levels, institutional quality, and
exchange rate volatility have no role to play. The results do not vary whether or not South Africa is included in or
excluded from the sample. Our results are robust to various specifications and estimations.
Introduction
Foreign portfolio investments (FPIs) are increasingly becoming a feature of most bourses on the African
continent. Analysts suggest that foreign investment comes close to 40% in Zimbabwe, and reaches as
high as 60% of capitalization in Ghana and Botswana (Southern Africa Business Intelligence, 1995 as
cited in Kenny and Moss, 1998). Foreign direct investors alone controlled over 50% of the stock on the
Ghana market in 1995 (Euromoney, 1995 as cited in Kenny and Moss). Portfolio investment to emerging
economies has increased dramatically over the past three decades. Between 1990-95 portfolio inflows into
sub-Saharan Africa (excluding South Africa) were under U.S.$ 2 billion (World Bank, 1996 as cited in
Kenny and Moss). For sub-Saharan Africa, portfolio equity inflows increased from $2.9 billion in 1995 to
$8.9 billion in 1999 (Harsch, 2003). They then fell to $4 billion in 2000 and virtually collapsed the
following two years, as global stock market activity suffered severe turbulence and decline (Harsch,
2003). The level of portfolio investments into Sub-Sahara Africa (SSA) in 2006 was estimated at about
$15 billion (Marcias and Massa, 2009). In terms of portfolio investments into Africa, South Africa
receives the largest share of these investments. As at 1997, South Africa alone received about 90% of
portfolio investments accruing to African economies (The Economist, 2000).
Some of the main reasons for this increased investment flow is due to the liberalization programmes
undertaken in these economies, the dwindling investment opportunities in the advanced economies, and
the low integration of emerging market economies (creating diversification opportunities) into the global
financial system. Foreign portfolio investors can contribute to the development of the domestic market
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because their activities can lead to more stock market liquidity, better price discovery, and an increase in
the capitalization of the domestic stock market. One of the arguments for foreign portfolio investment is
its ability to promote local capital market development (see UNIDO, 1996). Foreign portfolio investors
also provide capital to investee countries. Most African countries have a grave need for this capital to
foster economic growth and development. Foreign portfolio investors can therefore contribute to these
markets becoming giants and useful for economic growth.
Another school of thought posits that the activities of foreign portfolio investors are harmful for the
domestic stock market. This is because these investments can be subject to very sharp reversals and may
be crisis prone. Some of the arguments against foreign portfolio investments in the Hamao and Mei
(2001) paper include: (1) trading by foreign investors tends to increase market volatility more than trading
by domestic investors; (2) foreign investors have more sophisticated investment technology than do their
domestic counterparts, causing domestic investors to “lose out” to foreign ones; and (3) foreign investors
tend to make investment decisions on the basis of short-term gains rather than long-term fundamentals,
such as corporate dividend growth. Grabel (1996) argues that portfolio investments have two main
negative effects which are mutually reinforcing; they exacerbate the constraints on policy autonomy and
increase the vulnerability of the economy to risk, financial volatility and crisis. Foreign portfolio investors
also have a low commitment to the country of investment and can exit the investment at the slight hint of
trouble. Foreign portfolio investors usually have high hopes of achieving good returns. If these returns
are not being met they are likely to pull their funds out and invest the funds in another country where they
believe returns will be higher. Another serious charge against foreign portfolio investors is that they tend
to exhibit a herding behaviour which can aggravate a crisis. Once a few foreign investors start pulling out
of the country, others are likely to follow leading to a contagion.
Despite some evidence that portfolio investments can have a negative effect on countries with very open
capital accounts, World Bank and IMF economists who celebrate openness have not called for capital
controls and attribute the so called tequila effect to unsound macroeconomic policies (see Grabel, 1996).
Singh and Weisse (1998) note that portfolio investments had proved to be a double edged sword. The
arguments presented so far implies that foreign portfolio investments can have both a positive and
negative impact on the recipient country. Few studies, especially in the African context, have examined
the effects of foreign portfolio investments on the continent. Despite the fact that foreign portfolio
investors have become important for stock markets in Africa, there is a dearth of literature on the
determinants of foreign equity portfolio investment flows into African stock markets. In this paper, we
investigate empirically the determinants of foreign equity portfolio investment flows into African stock
markets. The rest of this paper is structured as follows: in Section 2 we review the pertinent literature on
foreign portfolio investments and stock markets; in Section 3 we detail the methodology employed for the
study; in Section 4 we present our empirical findings; and finally in Section 5 we conclude the paper.
Brief Review of the Literature
There are various kinds of foreign capital flows. These are foreign direct investment (FDI), foreign
portfolio investment (FPI) and debt flows. The composition of capital flows has been changing over the
past few decades. Capital flows used to be dominated by debt flows in the 1970s. In the 1990’s the
dominant form of capital flows to developing countries was portfolio investments (see Borthworths and
Collins, 1999; Singh and Weisse, 1998). However, after the Asian Financial crisis, countries believed that
foreign portfolio investments were risky and could be potentially destabilizing. Foreign direct investments
therefore tended to dominate capital flows after the Asian financial crisis (see Fernandez-Arias and
Hausmann, 2001). Capital flows also seem to differ according to whether the country is developed or
developing. Developed countries tend to attract more foreign portfolio investments whilst developing
countries tend to attract more foreign direct investments. Goldstein and Razin (2006) develop a
theoretical model based on asymmetric information that explains the empirical results on the behaviour of
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capital flows (mainly foreign direct investments and foreign portfolio investments). Their model explains
why developing countries tend to attract FDIs whilst developed countries attract more FPIs, as well as
why FPIs are subject to sharper reversals compared to FDIs amongst others.
The literature identifies both push and pull factors that determine the quantities of portfolio investments.
The pull factors are the factors that exist in the host country that make it conducive and attractive for
foreign portfolio investors to invest in that country. The push factors are factors external to the host
country that entice foreign investors to invest outside of their home countries. The host country therefore
has control over the pull factors as it can develop policies to either encourage or discourage foreign
portfolio investments provided it knows the determinants of such inflows. Host governments have less
control over the push factors since these usually are not related to conditions in the host country.
According to Singh and Weisse (1998) the push factors include low interest rates in the United States,
lower growth prospects in developed countries and the increasing desire of institutional investors to
diversify their portfolios. The pull factors on the other hand include the economic, legal, political and
regulatory environments in the host country. Baek (2008) studies the determinants of portfolio
investments in Latin America and Asia. Their study explores the role of both pull and push factors in
explaining portfolio investments in these two regions. The results of their study suggest that the
determinants of portfolio investments in Latin America are based more on pull factors. Portfolio
investments in Latin America were found to be driven mainly by strong domestic economic growth and is
pushed by global financial factors but not changes in market sentiment. Portfolio investments into Asia
however were based on external or push factors including investors’ appetite for risk suggesting the
existence of ‘hot money’.
Stock markets are important for several reasons. They enable companies to raise funds and allow
investors to invest in projects which may have a longer horizon than their investment horizon. This is
because the stock market provides liquidity to such investors therefore promoting savings, investment and
ultimately economic growth. Apart from the role of supplying capital to an economy, stock markets have
an important role of transmitting information that is useful for creditors (Abor and Biekpe, 2006).
Theoretically therefore stock markets at least in the long-run should promote economic growth. Portfolio
investments in theory can lead to the development of the domestic stock market. Some proponents in the
finance-growth literature debate argue that stock market development can lead to economic growth. If this
is the case, then portfolio investments can lead to more stock market development and therefore more
economic growth. According to Pal (2006), one of the most important benefits of FPI is that it gives an
upward thrust to domestic stock market prices which increases the P/E ratios of firms and therefore
lowers the cost of finance. The beneficial effects of FPI are crucially dependent on the assumptions that
well functioning stock markets promote economic development and that international portfolio investors
are guided by economic fundamentals (Pal, 2006).
Due to the fact that opening up and liberalizing an economy used to be viewed negatively in the past,
several governments put in measures to deter capital flows especially portfolio investments. Some of
these factors include a differential treatment of foreign investors compared to resident investors. Others
include a higher level of taxation on capital gains and dividends, restriction on taking out invested funds,
restrictions as to how much a single foreign investor and the aggregate of foreign investors can invest in a
single company, restrictions as to the kind of instruments that foreign investors can invest in amongst
others. According to Demirguc-Kunt and Huizinga (1995) restrictions on portfolio investments such as
foreign ownership restrictions and restrictions on dividend and capital returns have generally been
reduced. Demirguc-Kunt and Huizinga find that such restrictions in the form of higher capital gains tax
tend to increase the cost of equity capital for domestic firms and therefore may hurt domestic companies.
Therefore portfolio investments can reduce the cost of capital for domestic firms whilst restrictions on
portfolio investments can serve to increase the cost for domestic companies.
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Data
The definitions of the variables used and their sources are presented in Appendix One. We use an
unbalanced data set covering the period 1990 – 2007. Our sample consists of 13 countries due to the
availability and sufficiency of data
Empirical Model
The basic model which we employ in our empirical estimations is specified as follows 8 ;
........................................................................................................ (1)
where
which is the dependent variable represents the log of foreign equity portfolio investment flows. is a
vector of independent variables. represents the composite error term. In this paper, we model the pull
factors that are likely to determine the quantum of portfolio investments that a country receives. These are
economic stability, political stability, income and savings levels, institutional quality, capital account
openness and exchange rate volatility.
Empirical Results and Discussion
In this section we present and discuss our empirical results.
Regression Results
We now present and discuss the results from our empirical estimations. The results are presented in Table
1. Models 1 -3 are estimated using a robust panel random effects regression which controls for crosssectional
heteroskedasticity and within panel serial correlation. The only significant variables in all three
estimations are the stock market development indicators. Specifically, we find that the market
capitalization ratio, stock market turnover and the number of listed firms are positive and significant in
explaining the level of foreign equity investment flows. Of the stock market development indicators, the
strongest predictor of foreign equity portfolio investment flows is the market capitalization ratio.
Due to the potential endogeneity between our stock market indicators and portfolio investments, we also
estimate an instrumental variable model.. The results from the instrumental variable random effects panel
regression is presented in Model 4. Again the only significant determinant of foreign equity portfolio
investment flows in this model is the stock market capitalization ratio. The magnitude of the coefficient of
the market capitalization ratio is similar to that obtained in the panel regression estimation. We use the
first lag of the market capitalization ratio as an instrument in this estimation. The first stage regression
results which we do not report suggest the instrument employed is valid.
Table 1 – Determinants of Foreign Equity Portfolio Investment Flows
Xtreg(1) Xtreg(2) Xtreg(3) Xtivreg(4)
Marketcapgdp 3.5189 3.8463
(7.97)*** (6.20)***
8 To check for the robustness of our results we also estimate a panel instrumental variable model, and a stepwise
regression
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Stmkturn 0.0862
(7.53)***
Listfr 0.0033
(2.29)**
Econssta -3.7926 1.8645 -1.9645 -2.8918
(-0.73) (0.23) (-0.41) (-0.57)
Polstabest -0.1256 -0.2986 -0.2944 -0.1046
(-0.23) (-0.48) (-0.63) (-0.29)
Gdppc -0.0001 -0.0002 -0.0002 -0.0001
(-0.56) (-0.80) (-1.05) (-0.61)
Gdsgdp -0.9950 -0.7674 1.4659 -1.0341
(-0.34) (-0.25) (0.50) (-0.46)
Civilib 0.0520 -0.1511 -0.3054 0.0962
(0.17) (-0.40) (-0.80) (0.43)
Kaopen -0.0093 -0.2124 -0.0916 -0.0221
(-0.05) (-1.21) (-0.54) (-0.13)
Exvola 0.0006 -0.0014 0.0010 0.0007
(0.44) (-0.89) (1.17) (0.27)
Overall R 2
0.6439 0.5873 0.5172 0.6422
Notes: Z statistics are in parentheses. ***, **, * mean significant at 1%, 5% and 10% level of
significance respectively. Mktcapgdp represents the market capitalization ratio. Stmkturn
represents stock market turnover. Listfr is the number of listed firms. Econssta represents
changes in the CPI level, Polstabest measures political stability. Gdppc represents GDP per
capita. Gdsgdp represents the savings rate. Civilib is Freedom House’s Civil Liberties index.
Kaopen represents Chinn and Ito’s measure for capital account openness. Exvola represents
exchange rate volatility.
Discussion of Results
We expected a positive relationship between the market capitalization ratio and foreign equity portfolio
investments. This is because we expect more developed stock markets to receive higher foreign equity
portfolio investments. Larger markets should receive more portfolio investment flows because such
markets are more visible and therefore can better attract foreign institutional investors. Such markets are
also more likely to have investment information that are relevant to international investors and that are
easily accessible. Investors will require information such as changes in market prices, trading volumes,
outstanding bids and offers amongst others. The bigger stock markets can better produce and disseminate
this information through vending agencies such as Reuters on a timely basis. According to Durham
(2004) the capacity of domestic equity markets to effectively absorb foreign inflows to boost private
investment would seem to vary positively with market development. Our empirical results confirm our a
priori expectations. The results suggest that an increase in stock market development proxied by the
market capitalization ratio will lead to more foreign equity portfolio investment flows.
We also expected a positive relationship between stock market liquidity and portfolio investments.
Foreign investors will want to maintain the flexibility to exit a market and therefore value market
liquidity. Our results suggest that more liquid stock markets are able to attract higher foreign equity
portfolio investment flows. This is explained by the fact that investments in liquid markets can be easily
liquidated. The results suggest that foreign investors value this liquidity as it aids in rebalancing the
investor’s portfolio if the need be. Also more liquid markets are associated with less transaction costs.
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Finally, highly illiquid markets are associated with larger price swings as stock prices could change
significantly and abruptly if an illiquid stock experiences trading activity. In terms of the number of listed
firms, we expected a positive relationship between the number of listed firms and portfolio investments.
This is because the number of listed firms can proxy for stock market size. We expect that bigger stock
markets will be better able to attract investor interest. Our empirical findings confirm this hypothesis.
We expected a positive sign between financial openness and portfolio investments. This means that
increases in financial openness should lead to more portfolio investments. We do not find evidence that
capital account openness has promoted foreign equity portfolio investment flows on the continent. We
expected a priori a negative relationship between economic instability and portfolio investment flows. We
expected that foreign investors will be attracted to and invest larger amounts in more economically stable
countries. Contrary to our expectations, the results show an insignificant relationship between the
economic climate and the asset allocation decisions of foreign investors. We expected a positive and
significant relationship between political stability and foreign equity portfolio investments. This is
because more stable countries are expected to receive higher portfolio investments. The results for
political stability however do not show statistical significance in all estimations. We expected a negative
relationship between income and foreign equity portfolio investment flows. This is because we expect
that capital flows will move from richer to poorer countries. Therefore poorer countries should receive
more capital flows. The signs are consistently negative in all estimations but again do not show statistical
significance. In terms of the savings rate, a priori, we expected a negative relationship between the level
of savings and portfolio equity investment flows. This is because countries with higher savings rate are
likely to have less need for foreign portfolio investments. We find no evidence that this is actually the
case.
We expected a negative relationship between institutional quality and foreign equity portfolio investment
flows. This means that a reduction in the index signifying higher institutional quality should lead to
higher portfolio investments. We find no evidence as to the positive role of institutional quality in the
determination of foreign equity portfolio investment flows. Finally, we expected a negative relationship
between exchange rate volatility and foreign equity portfolio investments. This is because higher
exchange rate volatility may deter foreign investors from investing in African equity markets. This is
because when investors invest outside their borders, their returns are made up of the returns on the
investment as well as the change in the exchange rate. If the exchange rate moves and the currency
underlying the investment depreciates it detracts from the returns of the investor. We do not obtain
empirical evidence suggesting that this is the case. We reperformed the analysis but this time excluding
South Africa. This is because South Africa as a comparatively developed market may have been
influencing the results. The results do not change even after excluding South Africa.
Summary and conclusion
This paper examines the determinants of foreign equity portfolio investment flows into African stock
markets. We find that the main predictor or determinant of foreign portfolio investment flows into African
stock markets is the level of stock market development. In all estimations, the stock market indicators are
the only significant variables and have the expected sign. Countries with better developed stock markets
attract more portfolio investments. In fact, South Africa has attracted some of the largest portfolio
investments on the continent. South Africa also happens to have the most developed and advanced stock
market on the continent.
Our results suggest that in the African context expected determinants of portfolio investments such as
economic stability, political stability, income and savings levels, institutional quality and exchange rate
volatility do not really matter. The results do not vary whether or not South Africa is included in or
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excluded from the sample. Our results are robust to various specifications and estimations. Overall the
results mean that what foreign equity investors really consider is the opportunities offered by the domestic
stock market as well as the ability to liquidate their investments. Our results are summed succinctly in the
words of Kenny and Moss (1998); “For Africa the emergence and expansion of stock markets represents a
significant trend toward attracting private capital investment and integration into the global financial
market place”
The policy implications that follow from our findings is that stock market development will lead to more
foreign equity portfolio flows. This means that the more developed African stock markets become, the
more integrated these markets will become into the global financial architecture. Though stock market
development and integration into the global financial order are good, it may also mean that these
countries will become more prone to financial crises especially given the volatile nature of foreign equity
portfolio investment flows. In terms of directions for future research, it will be useful to investigate the
relationship between portfolio investments, stock markets and economic growth on the continent. Another
exciting line of research will be to investigate how portfolio investments affected stock market volatility
in Africa during the recent financial crisis.
References
Abor, J., and Biekpe, N. (2006). “The South African Financial Market and Financing Choices of SMEs”. Journal of
Business and Society, 19(1/2), 187 – 201.
Baek, I-M. (2006). “Portfolio Investments Flows to Asia and Latin America: Pull, Push or Market Sentiment?”.
Journal of Asian Economies, 363 – 373.
Bosworth, B.P., and Collins, S.M. (1999). “Capital Flows to Developing Economies: Implications for Saving and
Investment”. Brookings Papers on Economic Activity, 1, 143-169.
Chinn, M.D., and Ito, H. (2008). “A New Measure of Financial Openness”. Journal of Comparative Policy Analysis
10(3), 309-322.
Demirguc-Kunt, A., and Huizinga, H. (1995). “Barriers to Portfolio Investments in Emerging Stock Markets”.
Journal of Development Economics, 47, 355 – 374.
Durham, J.B (2004): “Absorptive Capacity and the Effects of Foreign Direct Investment and Foreign Equity
Portfolio Investment on Economic Growth” European Economic Review, 48, pp. 285 – 306.
Fernandez-Arias, E., and Hausmann, R.. (2001). “Is FDI a Safer Form of Financing”. Emerging Markets Review, 2,
34 – 49.
Goldstein, I., and Razin, A. (2006). “An Information-Based Trade Off between Foreign Direct Investment and
Foreign Portfolio Investment”. Journal of International Economics, 70, 271-295.
Grabel, I. (1996). “Marketing the Third World: The Contradictions of Portfolio Investment in the Global Economy”.
World Development, 24(11), 1761 – 1776.
Hamao, Y., and Mei, J. (2001). “Living With the Enemy: An Analysis of Foreign Investment in the Japanese Equity
Market. “ Journal of International Money and Finance, 20, 715 – 735.
Harsch, E. (2003). “Foreign Investment on Africa’s Agenda: NEPAD aims to Attract a Larger Share of Global
Capital flows.” Africa Recovery, 17(2)
International Finance Corporation (2007), Emerging Markets Factbook.
Kenny, C.J., and Moss, T.J. (1998). “Stock Markets in Africa: Emerging Lions or White Elephants?.” World
Development, 26 (5), 829 – 843.
Kim, W., and Wei, S-J. (2002). “Foreign Portfolio Investors before and during a Crisis.” Journal of International
Economics, 56, 77-96.
Marcias, J.M., and Massa, I. (2009). “The Global Financial Crisis and Sub-Sahara Africa: The Effects of Slowing
Capital Inflows on Growth.” Overseas Development Institute, Working Paper 304.
Pal, P. (2006). “Foreign Portfolio Investments, Stock Market and Economic Development: A Case Study of India.”
Annual Conference on Development and Change Mission, Brazil.
Singh, A., and Weisse, B.A. (1998). “Emerging Stock Markets, Portfolio Capital Flows and Long-Term Economic
Growth: Micro and Macroeconomic Perspectives.” World Development, 26 (4), 607 – 622.
The Economist (2000).
UNIDO, (1996). The Globalization of Industry: Implications for Developing Countries Beyond 2000.
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Abstract
Challenges to Pension Reform in Ghana
Ofosu-Hene, D. EricSweeting, P.J.Sweeting@kent.ac.uk and J. Paul, edo5@kent.ac.uk
School of Mathematics, Statistics and Actuarial Science, University of Kent, UK.
The process of Ghana’s pension reform between 1950 and 2008 has been unhappy and protracted with successive
reforms and counter-reforms. This article provides an investigation of the challenges to pension reform in Ghana. It
suggests that the 2008 Pension Act provides a solid foundation for a new pension system and that the Ghanaian
authorities have succeeded to some extent in improving the Ghanaian pension system. We show that Ghana’s public
sector pension system was plagued with numerous weaknesses prior to the 2008 reform. The 2008 Pension
Actimposes a 3-Tier pension system which is widely acclaimed for developing countries. It conforms to the World
Bank’s ideal of three pillars and offers developing countries a model that is worthy of critical examination.
However, for the reform to achieve the desired objectives the Ghanaian Authorities must confront and overcome
several challenges.
Introduction
The Republic of Ghana’s social security pension system has traditionally been seen as a good model for
other African countries. This is despite inherent problems such as inefficient benefit formulas, high social
security administration cost, political interference and low informal sector coverage. The issues of high
administrative cost, high staff numbers, and poor returns on investment are raised by the Presidential
Commission on Pensions (Pension Commission, 2006). These weaknesses tend to be the most pressing
issues undermining providing retirement income security for workers in Ghana.
Pension scheme deficits in Ghana and the negative effect of such deficits on corporate earnings have not
been a major cause of concern since the turn of the twenty first century. This is because limited research
is done in this area. However, as we show, benefit levels have been low and retirement funding risk has
increased as individual Ghanaians are now responsible for the investment risk of their retirement
savings.Ghana is faced with a multi-faceted and politically emotive range of issues concerning the care of
its growing numbers of elderly citizens. Before the 2008 pension reforms, there was significant potential
for the whole area of retirement savings and care for the aged to become politically controversial if
corrective action was not taken, or delayed unduly.
Policy issues on pensions are subtle. Shah (2006), points out that sound strategy in pension reforms often
diverge from obvious and apparent solutions, for two paramount reasons. Firstly, pension reform is a
particularly complex field involving interlocking considerations spanning the fields of finance, public
finance, labour markets, macroeconomics, demographics, IT-intensive administrative procedures, and
political economy.Secondly, there are long lags between policies and their consequences, and the
consequences can be of a macro-economic scale. Mistakes in policies on pensions can destabilise the
entire economy as compared with other aspects of economic policy, the pension sector is unusual in that,
mistakes in policy do not show up for a prolonged period. But when these mistakes do show up, they can
easily generate fiscal impacts in tens of percentage points of gross domestic product. The implication is
that if we do not subject policies in pensions to an intense scrutiny, what might seem a micro issue in the
pension sector can turn into a macroeconomic challenge for Ghana.In this research we shall seek to
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present the state of the pension system in Ghana, evaluate current reforms and establish the locus of the
true crisis is as per theNational Pension Act, 2008 (ACT 766).
The research is structured as follows. In Section 1 we present in chronological order existing literature on
pension transformation in Ghana. In Section 2 we note the criteria for a sound pension system and use it
as lenses to identify the weaknesses of the pension system prior to the 2008 reform.Section 3 considers
important longer term weaknesses of the Ghanaian pension systems and if its approach has shortcomings
to ensuring the 2008 reform yields the desired results, bridging the retirement savings gap in the light of
the criteria set out in Section 2. Section 4 presents the major features, expected changes and evidence
supporting the 3-Tier pension system introduced by the 2008 pension reform. In Section 5 we examine
successively challenges to the 3-Tier pension system that seem to be a limitation on the retirement system
as drawn up in the 2008 Act.We conclude in Section 6. Any shortcomings faced by Ghanaian
policymakers and pension reforms must offer important lessons to other countries seeking to reform or
expand public or private pension provision.
Historical Background
The State Pension Scheme in Ghanawas started as a provident fund by the British colonial regime. The
Pension Ordinance, CAP 29 of 1946 formed Chapter 29 of the British Colonial Ordinances under which
the British Government administered the Gold Coast Colony and other Colonies. CAP 29 provided
pensions and gratuities to European officers. CAP 30 provided pensions and gratuities to Non-European
officers.There was no universal social security scheme in the country. In 1950, the Pension Ordinance No.
42 introduceda non-contributory pension scheme to cover senior civil servants through payment of
pensions, gratuities and allowances. The populace popularly referred the provident fund under the
Pension Ordinance No. 42 as CAP 30, because it formed Chapter 30 of the 1950 British Colonial
Ordinance. CAP 30 took retroactive effect from 1 st January 1946 to provide auniform application of a
pension scheme offering equal benefits to both expatriate and indigenous civil servants under the United
Kingdom trusteeship (Pension Commission Report, 2006).In 1955 the scheme’s coverage extended to
certified teachers with the promulgation of the Teachers’ Pension Ordinance 1955. In 1961, 3 years after
independence, the Government introduced a compulsory savings scheme (CSS) with a national coverage
through the Compulsory Savings Act of 1961 (Act 70). The purpose of Act 70 was to strengthen the
regulatory framework of the scheme and maintain public confidence.
In 1961, a private superannuation scheme: the Ghana Universities Staff Superannuation Scheme (GUSSS)
under the management of the University College of Gold Coast (now the University of Ghana) was
established. GUSSS was to provide retirement benefit for members of the Universities in Ghana. In 1962,
the Ghana Armed Forces Pension Scheme (GAFPS) was established under the Ghana Armed Forces Act
of 1962 and Regulations AFR Finance of 1966 Volume III, Art. 206. These provided members of the
Armed forces a non-contributory pension scheme. In 1965, the Government repealed and replaced the
CSS with the Social Security (SS) Act No. 279 of 1965, under which coverage was extended to all
establishments employing five or more workers (including private sector workers) except those already
covered by the CAP 30, GAFPS, GUSSS. SS was a contributory social security scheme for payment of
superannuation, invalidity, survivor and other pension benefits for workers.
In 1972, the Government repealed Act No. 279 and passed the Social Security Decree 127 to rectify some
of the shortcomings of Act 279. Decree 127 also established the National Social Security Scheme
(NSSS) to administer a social security scheme for Ghana by which all civil servants employed on or after
1 st January 1972 were to be transferred from the non-contributory CAP 30 scheme to the contributory
NSSS. However, the Social Security Decree 190 of 1973 allowed the compulsory transfer of all
pensionable public servants to the NSSS. This action was to ensure that members on CAP 30 scheme
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made similar contributions to the NSSS and received similar entitlements. However In 1975, the Pension
and Social Security Amendment Decree (SMCD 8) reversed this action, and offered members who were
transferred to NSSS the option to switch to the non-contributory CAP 30. Subsequently, between 1979
and 1996 the Governments gave special dispensations to other public service organisations (Police
Service, Immigration Service, Public Legal Officers, Prison Service, Security and Intelligence Agencies)
through various legislations to switch back to the CAP 30 scheme. In 1991, the provident fund under
NSSwas converted into a pension scheme with the promulgation of Social Security Act, 1991 (PNDC
Law 247). PNDC Law 247 also established the Social Security and National Insurance Trust (SSNIT),
with the responsibility to administer the State pension scheme.
In 2004, a national demonstration organised by grieved members of the SSNIT scheme demanded that
government reinstate them to the relatively generous CAP 30 scheme. This is because of the CAP 30
scheme offered better benefits and lesser eligibility requirements. Subsequently, in 2008 the Government
enacted the National Pensions Act, 2008 (ACT766) to provide for pension reform in Ghana and to unify
the existing parallel pension schemes into one umbrella scheme except that of the armed forces. In effect
the Republic of Ghana has been operating two major pension schemes, SSNIT and the CAP30 schemes,
since 1972 with at least 8 other minor schemes operated by members of other organizations under the
government umbrella.
Criteria for a Sound Pension System
In this Section we outline certain criteria for an effective pension system – it is against these criteria that
we identify the weaknesses and key issues pertaining to the pension system in Section 4. In the spirits of
Davis (2004), Shah (2006), Barr & Diamond (2008), Eich and Swarup (2008), a pension design should be
equitable, efficient and sustainable. It should provide adequate retirement incomes, incentives for saving,
cover a larger mass of the population, provide effective administration and regulation while minimising
fiscal cost and distortions that impede growth.
Sustainability
The most important criterion for a sound pension system is retirement-income security – whether the
system can indeed generate incomes sufficient to provide a socially acceptable standard of living for those
no longer working (Davis, 2004).
A pension system which provides generous retirement incomes but is likely to become insolvent is
unsound. However, business interprets sustainability yet differently. Sustainability can be interpreted in
terms of fiscal sustainability – whether governments can afford to pay the rising share of GDP on
pensions in the future. For the Government to ensure that schemes are sustainable in the long-term, it
must take into account the trend in future public finances in the context of its stability. For example, the
European Commission takes into account long-term public finance trends in its annual assessment of
member states’ public finances in the context of the stability and growth pact (St John and Gran, 2001).A
pension system which is based on fiscal subsidies will lack sustainability and scalability (Shah, 2006).
Though it may work for a few million workers for a decade or two, it will not work for a larger number of
workers for the lifespan of young person entering the labour market. It is against this background that
(Barr and Diamond (2008) advices that the macro and fiscal policy of a country should be able to
accommodate the reform, including detailed projections of the long-term fiscal sustainability. This
requires an assessment of the proposed measures to finance the transition toward funded pension (the
level of transitory debt financing and budgetary financing) and the proposed reforms of revenue and
expenditure programmes.
Equity
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The second key principle for a sound pension systemis that it should be fair. A system which is fair and
importantly – is perceived to be fair will be more readily accepted by society than a system which is not
(Eich and Swarup, 2008). But fairness of a government policy can be defined across or within generations
and can be judged on a snapshot in time or over the lifetime of an individual or a cohort. Fairness can be
defined in terms of opportunities or outcomes. If a defined benefit scheme is heavily invested in equities
there can be unfair distribution of risk. Fairness can be measured by the level of benefits offered by the
pension schemes. There are also questions of fairness within similar pension schemes. This point is
consistent with the World Bank’s view that reforms must meet distributive concerns, there must be a
minimum level of proposed pension, indexation procedures should be in place, both periodic payment
annuities and phased withdrawal should exist, and the disability and survivor pensions should be available
(Holzmann, 2000).
St John and Gran (2001), underscore the need to consider women’s unique life cycle experiences and deemphasise
the link between paid work and income in retirement so that women are not disadvantaged.
The inherent risks in a pension system must be shared between sponsors and members equitably. The
protection offered to employees is, though,also a risk borne by the employer. Sweeting (2007), explains
that at least part of this risk isdiversifiable to employers, whilst remaining non-diversifiable to employees.
This is because for a firm, DB pension scheme investment risk is just one of many financial risks taken,
most of which are in the course of either running or funding the business. An equitable pension system
should ensure employee’s pensions are portable and stable.A scalable design that reaches the informal
sector (private individuals and the self-employed who do not have a formal salary structure or regular
income) and usually the larger mass of society is required for an equitable retirement system(Shah, 2006).
Economic Efficiency
Subordinate aspects of a sound pension system are the impact of the system on labour markets and on
capital markets. A pension system that can allow for greater economic efficiency, for example by
reducing labour market distortions or capital market risk, will help to generate increased economic
growth, which will itself provide resources for future pension incomes (Davis, 1998).
Analysis
The study utilizes data mainly from the annual reports of the SSNIT and the 2006 Pension Commission
report. These data are publicly available.In this section, we consider in turn a number of issues as
discussed in Section 3 to identify the major weaknesses of the pension system in Ghana. This
weaknessessupport the 2008 reform.
Sustainability
The 2006 Pensions Commission report submitted to parliament concluded that existing pension schemes
will not deliver benefits that allow for adequate and sustainable income security. All the pension schemes
mentioned were said to be unsustainable as they depended on the consolidated fund except the SSNIT
scheme which paid substantially low benefits. The SSNIT pensions are financed on a PAYG basis from
general revenue, largely from a graduated income tax with marginal rates that start from 10% and a broad
corporate tax of about 25%. Accrued actuarial liability at December 2004, for both pensioners and active
participants was estimated at GH¢1.54 Billion in 2004 terms, about 17% of 2005 GDP (Pension
Commission Report, 2006). Out of this, members of CAP 30’s accrued liability was 90% of the total
accrued liability, at GH¢1.39 Billion. The Pension Commission report indicates that the SSNIT scheme is
viable till the year 2036 with its current contribution rate of 17.5%, beyond which it will have to rely on
its reserves to pay benefits. The PAYG cost of the scheme will increase from 7.3% in 2002 to 22.2% in
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2050 exceeding the present contribution rate of 17.5% in 2036 (Pension Commission Report, 2006). All
these factors indicate that the pension system in Ghana was unsound.
Equity
Table 1.0 below illustrates the disparity that existed between CAP 30 and SSNIT schemes. The CAP 30
scheme offered higher benefits. To put this in context, consider for example a life that joins a scheme at
aged 25 and retires voluntarily qualifying for pensions.The life will receive about 50% of her terminal
pensionable salary under CAP 30 and about 48% of her terminal pensionable salary under SSNIT. The
disparity is even more pronounced under the survivor’s lump sum benefit. Suppose the life was to die at
age 63, the life will receive 8.5 times and less than 4.32 times her pensionable salary under CAP 30 and
SSNIT respectively.
Table 1.0 Feature of CAP 30 and SSNIT
FEATURE/SCHEME CAP 30 SSNIT
Eligibility 10 years of contribution 20 years of contribution
Voluntary/Normal Retirement
Age
45/60 55/60
Contribution 0%*/5% 5%
Pension 1/480th FPS times length of
service in months.
Survivors Lump Sum Balance of unpaid pensions
guaranteed for 20 years. No
actuarial principles
50% of FPS after 240 months
contribution plus 0.125% per
additional month of
contribution
APV of unexpired pension
guaranteed for 12 years -
Actuarial principles
Penalty for Early Retirement None 60% of full pension at age 55
Marriage Benefit Yes No
*For some public sector workers including the Army (GAF). Source: Pension Commission Report (2006)
Figure 1.0 indicates that the distribution of monthly pension benefit for 2007 was highly negatively
skewed. Our analysis reveals that about 62% of all pensioners received not morethan GHc50 while about
2% received at least GHc300. Thus pension benefits were substantially low and unfairly distributed. The
issue of low benefit levels was even compounded by the fact that until 2001 inflation rates exceeded
indexation rates applied to pensions. This affected the real values of pensions paid before year 2000.
Figure 1.0 Distribution of Monthly Pension Benefit (2007)
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Figure1.1Inflation and Indexation Rates(1997-2008)
Challenges in the Era of Globalization
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Coverage of the Pension systems
Pensions in Ghana cover about 10% of the Nation’s workforce, mainly those employed in the formal
sector (Pension Commission Report, 2006). The World Bank (1994), points out that it is difficult for
developing countries to succeed in achieving the goal of protection against absolute poverty in old age.
The informal sector covers about 85% of all working population and yet only about 11% are covered.
Middle income nations such as Columbia and Peru have about 25% of working population covered (ILO,
2000). Certainly, coverage in the informal sector in Ghana can be increased. Palacious & Pallares-
Miralles (2000), indicates that approximately two-thirds of the World’s formal labour force, 85% of its
households (Holzmann et al, 1999) and 90% of its working population Gillion et al (2000) also cited in
St .John and Wilmore (2001) lack any form of old age income security.
The ILO (2000), indicates that widows and divorcees in developing countries are often subjected to
discrimination and social isolation hence few of them have access to the contributory pensions of Tier 2.
In Ghana the situation is not too different; women represent about 50.5% of the population (GSS, 2005).
However, only 8% of pensioners who received benefits in 2009 were women (SSNIT Benefit Statistics,
2009). The extent of coverage is worsened by the rate of withdrawals form the scheme. Between 1998
and 2008 the proportion of members who withdrew from the SSNIT scheme were equivalent to about
44% on average of the active population in the SSNIT scheme within the same period.
Management Challenges
The 2006 SSNIT annual report indicates that between 2004 and 2006, the coverage ratio of investment
return to administrative and management expense was about 3:1 on average.Minimum standards are not
positive developments regarding a fund’s sustainability and invariably can affect the corpus of a pension
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fund. It is estimated that about 50-60% of SSNIT’s recurrent expenditurewas used to support field
operations for the collection of contributions. In 2005, approximately 11% of contribution income was
spent on just the collection of the contributions. This improved to about 6.6% of contribution income in
2008.On average between 1991 and 2008 expense to contribution ratio was about 21%. Staff cost
amounted to about 45% of total expense on average between 1997- 2004. This is highly undesirable since
non-compliance rate (ratio of actual contribution to expected contribution) remained about 18% on
average between 1997- 2008. As at December 2008, SSNIT contributions in default wereabout 3.2% of
the scheme’s net assets (SSNIT Annual Reports, 1991-2008).
Ghana’s 3-Tier Pension Model
The 2008 Pensions Act established a 3-Tier pension system to replace all existing parallel systems. To
harmonize public and private provident funds, provide tax incentives and establish a National Pension
Regulatory Authority (NPRA).NPRA has three major responsibilities: to oversee the administration and
management of registered pension schemes and trustees; to restructure the SSNIT; to manage the basic
national social security for the 1st tier. Tier 1 is a defined benefit (DB) scheme. Membership of the Tier 1
is mandatory and provides a basic national (not universal) social security scheme. Tier 2 is compulsory
fully funded and privately managed occupational pension scheme, for all employees and employers. Tier
2 is defined contribution (DC) with financial contributions fixed at 5% on gross salary. A lump sum
benefit is payable, benefits will be largely determined by the returns on the pension funds. Tier 3 is a
voluntary contributory fully funded program. A privately managed scheme that combines a provident
fund and personal pension plans. Tier 3 is designed for both the formal (private and public sector
employees with a defined remuneration structure) and informal sector. There is no guarantee on nominal
pensions and there is no indication to link pensions to price index for Tier 2 and Tier 3. Tier 1 can be
linked to a wage index or other rate determined by the regulatory board. Each employer and employee
must contribute 13.5% and 5% respectively of the employee’s basic salary. (National Pensions Act, 2008)
Evidence Supporting the 3-Tier Pension Model
In this section we establish the case for the 3-Tier Ghanaian pension system. The new scheme is a good
representation of the World Bank’s three pillar model popularized in their 1994 policy research report
titled (World Bank, 1994). Ghana’s Tier 1 is not a universal system and therefore misses many of the
elderly who worked in the informal sector. Therefore, a minimum standard of living for the retired has not
been guaranteed. The minimum pension payment under Tier 1 is based on 50% of the average annual
salary for the three best years of a member’s working life. Section 80 of the Act makes provision for an
annual review of the pension payment to be linked to wage inflation rates. Therefore pension payment
may offer real guarantees for the pensioners; so long as real wage inflation can be guaranteed.
Like the Ghanaian Tier 2, the Second Pillar consists of compulsory saving rather than taxation, in that it is
financed on a PAYG basis and is public; the contributions of workers and their employers are sometimes
described as “payroll taxes.” Internationally, pillar 2 has been public and PAYG traditionally, but is
increasingly becoming private and prefunded in part or in whole as in the Ghanaian Tier 2. The World
Bank encourages governments to shift management of this pillar to the private sector to minimize their
fiscal risk. In general, governments appropriate contributions to a public Tier 2 for the purpose of
redistributing income and alleviating poverty. The World Bank (2000), recommended that in a State
mandatory Tier 2, participants be required to purchase a minimum indexed annuity with adequate
survivor’s provision, with flexibility for any retirement savings except a member does not qualify for the
basic mandatory social security under Tier 1 ( Pension Act, 2008 Section 63(9) & 111).
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Developmental effects of the funded Tier 2 are hard to see, especially with the present undeveloped share
market and a tax regime that encourages investment in housing. This is supported by the fact that in
Ghana home ownership is preferred to retirement saving. Nearly 45% of countrywide households own the
houses they live in and nearly 30% of all households have savings accounts (GLSS5, 2008).
Contributions paid into the scheme up to a limit of 35% of the total income of the contributor are tax
deductible. The reasons cited for this incentive include compliance for Tier 2 and paternalism (look after
employees in retirement) for Tier 3 such that contributions for Tier 3 are locked in until retirement.
Theoretically, tax incentive can boost savings in the economy which will in turn boost economic growth.
Tax exemptions without mandatory annuitisation of benefits in Tier 2 and 3 might not serve as a huge
incentive to yield the expected developmental growth.
Issues and Challenges facing Ghana’s 3-Tier Pension System
Ghana’s demographic challenge
In most developed nations, increasing longevity and falling fertility rates have been identified as the key
drivers to an ageing population (Barr and Diamond, 2010). Ghana’s population, unlike that of most
developed nations’, is relatively young. However, the effects on the Pay As You Go (PAYG) social
security system are common with most developed countries. The major demographic challenge to a
PAYG pension system is whether the working population can support the aged. Median variant
projections of the UNDP indicates that dependency ratio (ratio of people aged 60 and over to people aged
15 to 59) had risen from about 8.5% in 1960 to 10.7% in 2005, and is expected to hit about 21.2%by 2050
(UNDP, 2008).This is becausefertility rate has fallen from about 6.3 births per 1000 women in 1960and is
expected to reach replacement rate of 2.1 births per 1000 women by 2050. Similarly, period life
expectancy at birth of the population increased from 49.9 years between 1970 and 1975 to 56.7 years
between 2000 and 2005 (HDR, 2005). The average life expectancies at age 60 in 2000 are 16.29 and
17.22 years for males and females respectively. These are expected to increase to 18.19 and 19.56 by
2050 (UNDP, 2009). The median age of Ghanaian population has grown from 17.1 years in 1975 to 18.9
years in 2000 and is expected to hit 24.5 years in 2025. This trend is of concern to the Ghanaian
Government for several reasons. Increasing life expectancies pose longevity risk for pension funds. For
instance, in recent years it has become evident that many countries around the world including the United
States are moving to a DC scheme. Papke (1999) found that around 20% of US sponsors had dropped
their DB schemes in favour of DC schemes.
Ghana’s Economic Challenge
In the 2010 budget statement, The Ministry of Finance indicated that current trends in demography would
add GH¢200.66 million a year in 2009 terms to government expenditure by 2012 to support households in
the form of pensions, gratuities and social security (Budget Statements, 2009, 2010 appendix 3C and 4C
respectively). It is interesting to note that transfer to households grew at 28.24% p.a. between 2006
(GH¢236.87 million) and 2009 (GH¢499.54 million) and is expected to grow at 16.7% p.a. between 2009
and 2012.To put this in context, in the 2009 financial year, the Ghana Government raised approximately
GH¢836.1 million in income taxes. The retirement savings gap in Ghana estimated for 2013 is therefore
the equivalent of raising the current level of taxes by approximately 11%(Transfers to households is
expected to grow at a rate of about 16.7% p.a. to GH¢927.41 million in 2013. In 2009, income tax
receipts amounted to GH¢836.1 million. Hence a retirement savings gap of GH¢91.31 million. This
represents 10.9% of 2009 tax receipts). This is alarming, especially with the Government’s fiscal budget
deficit expected to hit 8.2% of GDP in 2010 (IMF, 2009).
This level of fiscal deficit coupled with a massive strain from the care and social security of an increasing
number of elderly Ghanaians, would force a future Government to take one or more of the following
actions: increase taxes, increase the pension eligibility age or encourage individuals to save for their
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retirement. This can be achieved by encouraging voluntary schemes, perhaps with some form of tax
incentive, and/or through a compulsory scheme, forcing individuals to allocate money from their regular
earnings. The latter method has been the approach of the Ghana Government. The 2006 Pension
Commission report indicates that total insurable wages will hit GH¢831 million by 2020, an increase of
37% from GH¢682 million in 2004 terms. Similarly, Government expenditure on pensions and
contributions is expected to grow from GH¢141 million in 2010 to GH¢197 million by 2020 (Pension
Commission Report, 2006). This is a huge strain on the already cost pressured government fiscal deficit.
Issues
The source of funding of the NPRA is broadly from Government and other moneys approved by the
minister responsible for finance. Other sources of funding include fines, fees, commissions, donations,
grants and other income accruing to the board in the performance of its functions. These sources seem
unreliable and contingent and therefore the main source of funding for the Authority may as well fall on
the tax payer.
A general framework of integrated package of legislation provided along with professionalism through
actuaries, auditors and other professionals should help in achieving a fairer and more secure framework
for pension system. These should help ensure that security of pensions is not put to risk and that
management systems are sound. This approach should allow the NPRA to be more proactive to anticipate
problems so as to concentrate and address the problems in a holistic manner. A massive awareness and
education program needs to be undertaken. In Ghana, increased awareness would drive pension coverage
and not tax incentives. Provision in the Bill for establishment of a fund to research and educate the public
would be ideal. Similarly, the administrative structure should be able to operate the new multi-tier
pension scheme (Holzmann, 2000). This includes an assessment of the capacity to levy contributions, to
channel them to the different Tiers and to pay benefits in a timely fashion, the level of computerization
and the level of competence including training needs for administrative staff. This requires innovations
arising from spending on research and development but can also be non-technological innovation, the
latter perhaps reflecting new organisational structures, which allow for more efficient processes. We
mention that the issue of detailed investment policy regulations and directives for Pension Fund
Managers, Custodians, Trustees and Examiners under privately managed Tier 2 and 3 schemes is a deep
subject on its ownthe scope of this paper does not cover it.
Section 219 of the Act makes provision for a retirement bond for each employee in accordance with the
terms and conditions of service existing before the commencement of the Pensions Act.The implication is
that the inequities that existed in the schemes prior to the reforms could be carried over. For example, a
life who subscribed to the CAP 30 schememade no contributions to the scheme. The life could retire at
age 45 and receive a maximum retirement benefit of 100% of terminal salary. A life who was
compulsorily transferred to the SSNIT scheme in 1972 contributed 5% of their monthly basic salary. The
life could receive a maximum retirement benefit of 80% of average salary of the best three years of
service only at retirement age 60. This situation is compounded further with the inequities in the salary
structure of the formal sector of the economy prior to the reform. Unless a pragmatic effort is taken to
apportion benefits in an equitable manner. Any inequities may be automatically transferred.
The present Security and Investment Act must be strengthened to enable PFMs and other stakeholders
take full advantage of managing Tiers 2 and 3 without exploiting members. This must be coupled with a
strong research team to feed the regulator with information to perform its role efficiently. If there are
delays on the part of the Government for financing the implementation project, these will adversely affect
implementation efforts. It is necessary to prevent political interference. The tax deductible rate used for
Tier 3 can be regressive. In order to redress the inequities, the authorities can match contributions up to a
maximum amount, which is same amount for everyone (ILO, 2000).To reduce cost, it is possible to gross
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up and tax the pension leaving pensioners in the same net position as before. This should lower fiscal
costs as well as improving progressivity of the system. This means higher income pensioners will pay tax
on their pension at their highest marginal tax rate and receive less in net terms (St. John and Gran, 2001).
Conclusion
The retirement system in Ghana prior to the reform was not equitable in respect of the disparities in
pension payment amount and the level of coverage for both the formal and informal sectors. There was
strong disparity in the proportion of working women uncovered. The system definitely has been
unsustainable with its increasing cost against the Government’s tight fiscal budget. The reform needs a
clear regulatory and supervisory framework. Since the reforms in Ghana have recently been
commissioned, it is not fair to judge or comment on the success of the policies at this time. However, the
new pension system certainly deserves praise as it has made huge progress in effecting massive change in
reassuring pensioners of a secured retirement package. Fundamentally, the 3-Tier system adopted by the
Government is appropriate as long as efforts are made to eliminate weaknesses of the old system. This
requires strengthening the infrastructure that exists and establishing an appropriate enforcement culture.
References
Barr N., and Diamond P., (2008). Pension Reform, Oxford University Press.
Davis, E. P., (1998). “Policy and implementation issues in reforming pension systems”. European Bank
for Reconstruction and Development, London, Working Paper No. 31.
Davis, E. P., (2001). “Regulation of Private Pensions - A Case Study of the United Kingdom”. Financial
Services Authority, London Occasional Paper No OP15.
Davis, E. P., (2004). “Is There a Pension Crisis in the UK?” Pensions Institute Discussion Paper PI-040.
Eich and Swarup (2008). Pensions Tomorrow, A white paper. Pensions¦Tomorrow.
http://www.lse.ac.uk/collections/management/PDFs/Pensions_Tomorrow_White_Paper.pdf
GSS., (2005). “Population data analysis report” vol. 1, Ghana Statistical service (2005): August 2005
Gillion, C., Turner, J., Bailey, C., and Latulipe, D., (2000). “Social Security Pensions: Development and
Reforms”. Social Security Programs throughout the World: Africa, 2009 ISSA Publication No. 13-11803.
HDR (2005). “Aid, Trade, Security in an Unequal”World. Human Development Report, International
Cooperation at Cross Roads: Published for the United Nations Development Program, UNDP, New York
pg. 252.
Holzmann, R., Packard, T., and Cuesta, J., (1999). “Extending Coverage in Multi-pillar Systems
Constraint and Hypotheses, Preliminary Evidence and Future Research Agenda”. Pensions.Publication
online http//www.worldbank.org.
Holzmann R., (2000). “Institutions and Social Security Reform, the World Bank Approach to Pension
Reform”. International Social Security Association, International Social Security Review Vol 53. 1/2000.
ILO (2000), “Income security and social protection in a changing world” International Labour
Organisation, World Labour Report 2000:
IMF (2009), “Ghana: Selected Issues”, InternationalMonetary Fund, Country Report No. 09/238.
Pension Commission Report (2006).A report, Issued by the Presidential Commission on Pension. Ghana.
Palacios, R.&Pallares-Miralles,(2000).“International patterns of pension provision”.
http://www.worlbank.org/pensions.
Papke, L. E., (1999). “Are 401(k) Plans Replacing Other Employer-Provided Pensions?” Journal of
Human Resources, 34, 346-368.
Shah, A.,(2006). “A Sustainable and Scalable Approach in Indian Pension Reform”, Pensions Institute,
Discussion paper PI-0615
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St John, S., & Gran, B.,(2001). “The World’s Social Laboratory: Gender Similarity in New Zealand
Pensions”. In J. Dinn, D. Street and S Arber (Eds.), Women, Work and Pensions. London Open
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St John S., and Wilmore L., (2001), Two Legs are Better than Three: New Zealand as a Model for Old
Age Pensions. World Development, Vol.29, No.8: 1292-1305.
Sweeting P,. (2007). “DB or not DB-the Choice of Pension Plan Provision by Employers” The Pensions
Institute. Discussion paper PI-0710.
UNDP (2008). Population Division of the Department of Economic and Social Affairs of the United
Nations Secretariat, World Population Prospects: The 2008 Revision, http;//esa.un.org/unpp, Thursday,
December 30, 2010; 11:14:17 AM.
UNDP (2009). “Declining fertility rates” United Nations Population Policy Division, Brief UN Report No
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Willmore, L.,(2000). “Three Pillars of Pensions, a Proposal to End Mandatory Contributions. United
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Bank Pension Reform Primer. http://www.worldbank.org/pensions.
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Motivational factors behind the 2010 Soccer World Cup spectatorship
Fanampe Tsholofelo, fanampet@tut.ac.za
Shambare Richard, shambarer@tut.ac.za
Van Heerden C.H., vanheerdench@tut.ac.za
Nthangeni, A S. Nthangenias@tut.ac.za
Tshwane University of Technology, Department of Marketing, Logistics and Sport Management Faculty
of Management Sciences.
Abstract
Since hosting the 2010 Soccer World Cup, South Africa has made significant in-roads in terms of hosting
sports and sporting events. With the availability of world-class facilities, sport marketers’ attention
increasingly is focussed at attracting spectators. This paper investigated factors that influenced World
Cup spectatorship. Using Wann’s (1995) validated Sport Fan Motivation model, this study assessed
which factors influenced South African fans to attend the tournament. Self-administered questionnaires
were distributed to a sample of 100 soccer fans. While results, in general, conform to Wann’s (1995)
model, we propose and present a modified model. The paper concludes by proposing avenues for future
direction.
Introduction
This paper investigates factors that motivated spectators who support the South African national soccer
team, Bafana-Bafana, whom their team was kicked out in the first round of the tournament but still
continued to rally and support other national teams. Just a little over six years ago low spectator
attendance at soccer matches was attributed to high entrance fees, lack of promotions, use of far stadiums
from its market, exposure of spectators to other form of entertainment, lack of car security, weather
conditions, etc, (Seanne, 2000:1). Ironically, world cup tickets were very expensive and it was freezing
cold as it was winter season but people still flocked to the stadiums. We saw spectatorship rise in gender,
race and age. Traditionally in South Africa, football is followed by black people and mostly men.
In the context of the sporting event, there is pleasure, enjoyment, uncertainty as spectators cheer on their
team (McAllister, 2002:4). South Africa has a unique culture of celebrating soccer matches at stadiums
and many countries and its fans do not seem to understand this culture and its noise. They blow vuvuzelas
(plastic horns) at stadium which sees many people being infuriated and uncomfortable about this norm.
Overseas soccer fans pleaded with FIFA to ban vuvuzela because they claim is barbaric and it is
annoying. “However, Joseph “Sepp” Blatter the president of FIFA stated that he does not want to burn the
horn because it is local sound” (South African Journal, 2009:1). It was only fair that he did not want to
Europeanise an African Soccer World Cup.
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Sport has become an integral part of the modern society. There has been an upsurge in the
commercialisation of sport. In South Africa, soccer is arguably the most popular sport, recreationally,
economically as well as regarding active and passive participants (Dubihlela, Dhurup & Surujlal,
2009:155). Over the years South African National team (Bafana-Bafana) used to fill the stadiums full to
capacity. This was the period when Bafana-Bafana won the 1996 African Nations Cup, but for the past
seven years major declination of spectators has been observed. The fall in the FIFA rankings for Bafana-
Bafana since 1996 African Cup of Nations saw a corresponding drop in the attendance of spectators up
until South Africa hosted the 2009 Confederations. (McDonald, Milne & Hong, 2002:100) declare that
developing an understanding of who sport consumers are and what factors influence their consumption
behaviour is critical to reaching this need. National teams inherit automatic support from their national
citizens; however this does not guarantee full attendance at stadiums. Attracting people to sporting events
is a major avenue for many sports teams to increase revenue and distinguish themselves from other teams
(Yusof & See, 2008:132). According to Kim & Chalip (2003:695) large sports events such as the 2010
world cup, interest in the event should be derived from the level of fan motivation, background of
spectators as well as their motivation to travel. Entertainment, self esteem, and economic motivations
were strongly related to passive participation in soccer activities (Cohen & Avrahami, 2005:419). Athletic
directors and sport marketers need to understand the factors that influence an individual’s decision to
purchase tickets and attend sporting events (Robinson & Trail, 2005:58). It is beneficial for football
administrators, marketers and sponsors to understand as well as to know whether the motives of
spectators attending games are similar or different between male and female spectators and also between
Black Africans and White Africans spectators.
This study intends on building from previous researches which were undertaken on spectatorship and
motivation. Among those studies were fan motivation (Correia & Esteves, 2007:572), Wann, Schrader &
Wilson, 1999:114, Hong, McDonald, Yoon & Fujimoto, 2005:145), fan attitude (Funk & James, 2004:1),
team popularity and fan support (Cunningham & Kwon, 2003:127), fan attendance (Hill & Green,
2000:145; Greenstein & Marcum, 1981:21; Krohn, Clarke, Preston, McDonald and Preston, 1998:277),
fan loyalty (Hill & Green, 2000:145) and sport consumption behaviour (Trail & James, 2001:108).
There has never been a research in South Africa that took into account the needs of spectators let alone
identifies the motivation of soccer spectators. Advertising companies, media and sponsors saw a loophole
in the industry hence they play a significant role of trying to pull crowd to the stadiums. Sponsors use
different sporting activities that draw maximum number of fans as a vehicle for reaching out to other
consumers. Sport Interest Inventory (SII) is one of the scientific tools that have been used to investigate
the motivation of spectators. According to Neale and Fund (2006:308) the SII has been tested in North
America, Japan and Australia. Sport spectators are a livelihood of this industry because teams generate
profit from ticket sales and media maximise their listenership and viewership. Spectators play a very vital
role in supporting the team morally as well as providing financial stability to allow game existence. This
study intends on bridging the gap between spectators and sport marketers.
Several researchers have attempted to identify sport fans and spectators motivation. This paper looks at
adapting the 1995 Sport Fan Motivation Scale (SFMS) developed by Wann. According to Wann,
Schrader & Wilson (1999:1) SFMS was designed to measure the eight different motives of sport fans and
later presented preliminary evidence that this instrument is reliable and valid. The eight fan motives will
be discussed below: Eustress, it is an affirmative form of stress that enhances and energises sport fans as
well as enjoys the fun and excitement presented by athletes in the field of play. It keeps spectators
guessing and also on their toes wondering what is next, Self-esteem motive is associated with ego
bolstering. Spectators are able to form and maintain a positive self concept to a point where they feel a
sense of accomplishment when their team does well; Escape is seen as a form of therapy. Often times
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when spectators are bored they will substitute boredom with sport spectating with the intention of
forgetting about life troubles and hassles, sport itself is a form entertainment like others such as music
concerts, movies, arts festivals, etc. Spectators find the sense of enjoyment and fulfilment derived from
that particular sport, another group of spectators are motivated by economical conditions such as
gambling, competitions and even spectating from luxurious expensive suite boxes or high class sport
pubs, Aesthetic factors refer to fans being motivated by the beauty of game, attracted to the artistic values
presented in the field of play such as dribbling (tsamayas and shibobos) and even aggression shown by
players. The overall performance of the team or individual player stimulates them; Group affiliation
refers to spectators having the need to belong. They desire to be with other spectators who follow the
same team. They became attached to the club, players, management and other fans. Group affiliation
presents a spirit of togetherness and Family refers to spectator wanting to be with their own families.
They sing together, spend time together and actually promote family bonding.
Methodology
A survey method was used to collect data from soccer spectators in Gauteng Province, South Africa,
using non-probabilistic sampling methods (Kerlinger & Lee, 2000). Four research assistants were trained
to administer the instrument in malls, shopping centres, and gyms. The study was conducted six months
later after the 2010 soccer world cup had finished.
Sampling and sample size
Convenience sampling was utilised; and to ensure a more representative sample consisting of spectators
from different backgrounds and taste (Calder et al., 1981), research assistants were positioned at strategic
places within shopping malls – close to restaurants, hair salons, gyms, and parking pay points where they
approached respondents who watched the soccer world cup to participate in the study. Table 1 illustrates
the participants’ demographic characteristics.
Table 1: Demographic Profile
Demographic Characteristics Percentage (%)
Gender Male 45
Female 55
Age < 20 years 21
20 – 25 years 27
26 – 30 years 21
31 – 35 years 18
35 years + 13
Monthly income < R2, 000 10
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R 2, 000 – R5, 000 22
R5, 001 – R10, 000 52
R10, 001+ 16
Employment status Student 27
Data Collection
Employed (Full-time) 57
Unemployed 16
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In total, 130 self-administered questionnaires were distributed to willing participants. Of these, 105
questionnaires were returned but only 100 were usable, representing a response rate of about +/- 90 per
cent. The remaining 5 instruments were either spoilt or had too many missing values.
Questionnaire
1 = Strongly Agree, 2 = Agree, 3 = Not Sure, 4 = Disagree and 5 = Strongly Disagree
2.1 I watched soccer because of the World Cup being hosted in South Africa
2.2 I watch soccer so I can escape from life’s problems
2.3 I watch soccer so I can be
2.4 I watch soccer so I can be amused
2.5 I watch soccer for its artistic value e.g. (shibobos, tsamayas, etc)
2.6 I watch soccer so I can get to blow my vuvuzela
2.7 I watch soccer so I can enjoy being physiologically aroused
2.8 I watch soccer because I feel good when my team wins
2.9 Blowing a vuvuzela is the most enjoyable aspect of being a spectator
2.10 I watch soccer so I can be with my friends
2.11 I enjoy watching soccer because it is a form of art
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2.12 Watching soccer makes me feel like part of the team
2.13 I watch soccer because I want to be with other people
2.14 I enjoy soccer when I am with a large group of people
2.15 I enjoy watching soccer because it increases my self-esteem
2.16 I like the stimulation I get from watching soccer
2.17 I enjoy watching soccer more than any other entertainment
2.18 Watching soccer is simply a form of recreation for me
2.19 My favourite team’s success or failure is mine
2.20 I watch soccer so I can be with my partner
2.21 I watch soccer so I can be with my family
2.22 I watch every soccer match that Bafana-Bafana plays
2.23 I watch soccer because I am related to one of the players
2.24 Every South African should watch Bafana-Bafana games
2.25 I enjoy travelling to watch soccer because it is a form of tourism
2.26 Every South African soccer fan should have a vuvuzela, makarapa, etc.
To measure sport spectatorship constructs, Wann’s (1995) Sport Fan Motivation Scale (SFMS)
instrument was adapted to suite South African audience. For example, gambling was an item listed under
Economic factor and the study included income and tourism under the same factor and Aesthetic was
elaborated to (tsamayas and shibobos) which mean dribbling and a good display of football. That is the
local language that is used and familiar with South African football fans. Wann (1995) developed the
instrument to measure factors that motivate individuals to become football spectators. The scale has 8
sub-scales: eustress, self-esteem, escape, entertainment, economic, aesthetic, group affiliation, and family;
which load as separate sub-scales. The scale was designed to measure sport fan motivation and it was
utilized in South Africa, specifically for soccer world cup. Numerous sport spectatorship studies including
Wann, Schrader & Wilson (1999) have tested the instrument and have reported acceptable levels of
construct validity. For this reason, the questionnaire was adapted to measure motives for football
spectatorship during the 2010 FIFA World Cup in South. Preceding data collection, researchers tested
content validity by conducting a comprehensive literature review of sport spectatorship constructs.
Thereafter, as recommended by Dwivedi, Choudrie, and Brinkman (2006), a pilot test was conducted with
7 university students to check that the content of questionnaire would be understandable to the target
respondents. After a few minor changes, the final questionnaire consisted of 2 sections: respondents’
demographics section and the sport fan motivation questions consisting of 26 items.
Data analysis
Quantitative analysis was performed. All returned questionnaires were checked for completeness. Those
with more than 3 missing responses on the Likert scale were rejected. However, those with no more than
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2 missing values on the biographical data were included in the study, as some of the questions in this
section requested sensitive personal information. SPSS v.18 was used for data analysis. The following
analyses were employed:
o Descriptive statistics to describe the data and the sample;
o Factor analysis to establish the dimensions (or latent variables)
Results
The research sought to identify motives behind sport spectatorship, in particular, the 2010 Soccer World
Cup. Wann (1995) proposes the SFMS, comprising 25 items (see Table 2). Subsequently, factor analysis
was performed on the SFMS scale to discover the latent variables and relationships of the 25-item
questionnaire. According to Wann (1995), the SFMS scale contains eight subscales: (eustress, selfesteem,
escape, entertainment, economic, aesthetic, group affiliation, and family), which are supposed
to load independently in eight factors. The minimum criteria to run factor analysis was satisfactory (KMO
= 0.515; Bartlett’s Test of Sphericity X 2 = 202.212; df = 120; p < 0.000). The Principal Component
Analysis (PCA) method was used. Initially the loading pattern was unclear, some 11 items were dropped.
After purifying the scale, the data were reanalysed. Subsequent analyses resulted in a five-factor solution
(see Table 3) for technical aspects in data analysis.
Table 3: Five-factor solution of the SFMS (cross-loading)
Factor 1
SFMS20 0.861
SFMS21 0.866
Factor 2*
SFMS4 0.519
SFMS5 0.500
SFMS18 0.508
SFMS19 0.608
SFMS22 0.585
Factor 3*
SFMS11 0.523
SFMS16 0.658
SFMS25 0.679
Factor 4
SFMS13 0.712
SFMS15 0.703
Factor 5
SFMS8 0.694
SFMS24 0.658
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*Items loaded across different factors.
Discussion
The loading of the factors did not come as anticipated as it is possible that South African football
atmosphere is different from other parts of the world where the scale has been employed. Previous sport
fan motivation studies tested the 1995 Sport Fan Motivation Scale in different sporting codes and in our
study the same scale was used is South Africa, particularly to measure the motivation of football
spectators who watched soccer during the 2010 FIFA World Cup. Of the eight factors developed by
Wann, only five emerged and the two factors (family and economic) were not represented. However,
other dimensions appeared in one factor as they did not load individually.
Overall, results indicate that World Cup spectatorship was influenced by five factors: (1) eustress, which
reflected a positive stress, energy and the level of commitment. (2) aesthetic and entertainment, which
consists of various entertainment at stadiums such as festivals, cultural dances, competitions as well as the
beauty of the game itself like dribbling. (3) group affiliation, meaning is highly unlikely to see spectators
watching games individually but rather with people as form of belonginess. (4) escape, spectators flocked
to stadiums during the world to simply forget or get away from daily activities and challenges, and the
last one (5) self-esteem, which highlight ego boosting in a sense that when one’s team does well it
actually impacts on the spectators self-esteem. Factor loading

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
FUNK, D.C. & JAMES, J.D. 2004. The Fan Attitude Network (FAN) model: Exploring Attitude
Formation and Change among Sport Consumers. Sport Management Review, 7:1-26.
HILL, B. & GREEN, B.C. 2000. Repeat attendance as a function of involvement, loyalty and the
sportscape across three football context. Sport Management Review, 3:145-162.
KIM, N. & CHALIP, L. 2003. Why travel to the FIFA world cup? Effects of motives, background,
interest, and constraints. Tourism Management, 25:695-707.
McALLISTER, K.M. 2002. Analysis of sport crowd behaviour adapting Smelster’s theory of collective
behaviour (Neil J. Smelster), Ed.D. dissertation, Boston University.
McDONALD, M.A., MILNE, G.R. & HONG, J. 2002. Motivational factors for evaluating sport spectator
and participant markets. Sport Marketing Quarterly, 11 (2):100-113.
NEALE, T. & FUNK, D. 2006. Investigating motivation, attitudinal loyalty and attendance behaviour
with fans of Australian football. International Journal of Sport Marketing & Sponsorships, July.:307-316.
ROBINSON, M.J., TRAIL, G.T., DICK, R.J. & GILLENTINE, A.J. 2005. Fans vs. spectators: An
analysis of those who attend Intercollegiate Football Games. Sport Marketing Quarterly, 14:43-53.
SEANNE, W. 2000. Critical evaluation of the marketing strategy for the professional soccer league.
MBA. Dissertation, Johannesburg, Milpark Business School.
TRAIL, G.T. & JAMES, I.D. 2001. The motivation scale for sport consumption: Assessment of the
Scales Psychometric Properties. Journal of Sport Behaviour, 24:108-127.
WANN, L., SCHRADER, P. & WILSON, M. 1999. Sport fan motivation – Questionnaire Validation,
Comparisons by Sport, and Relationship to Athletic Motivation. Journal of Sport Behaviour, 22:139-144.
WANN, D. L. 1995. Preliminary validation of the sport fan motivation scale, Journal of Sport & Social
Issues, 19: (377-396).
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Assessing the Portfolio Behavior of Commercial Banks in Developing Countries: A Literature and
Methodological Issues for the Case of Tanzania Commercial Banks
Abstract
Tobias Swai, tobias@udsm.ac.tz
University of Dar es Salaam, Business School, Tanzania
This paper is a work in progress and tries to analyze briefly the literature, proposed hypotheses and methodology
for assessing portfolio behavior of commercial banks in Tanzania. Many developing countries have adopted various
measures for the economic and trade liberalizations including financial liberalization, Tanzania being
unexceptional. Financial sector is believed to be the engine for the economy and economic growth. The
liberalization of the financial sector took various forms involving local financial institution and multinational banks
of various sizes. The assessment of portfolio behavior of the commercial banks has received little attention to these
developing countries especially on the extent to which the commercial banks invest in various assets and the return
they realize out of these investments. The literature suggests an optimal profit maximization model in portfolio
allocation, by the use of both choice and non choice variables to be relevant in analyzing bank behavior. In the
proposed study the researcher proposed the use of quarterly bank financial statements in a panel form for a period
of over 10 years and inclusion of bank qualitative variables over the period of study, in a profit maximization
equation.
Introduction
Background
The Tanzania banking sector comprises about 80% of the financial assets in the economy. Currently there
are 41 deposit taking financial institutions of which 36 are commercial banks. According to Aikaeli,
(2006) about 50% of the bank assets were held by three large banks, namely, CRDB Bank Limited, NMB
and NBC between 1998 to 2004.
The structure of the commercial bank assets are diversified with more liquid assets that affect penetration
of financial services to more economic sectors. There is more diversification on the number of assets held
by the financial institutions recently than two decades ago before the liberalization of the financial sector.
However, banks have diversified holding of financial assets, and maintains high liquidity positions.
According to Aikaeli (2006), out of the legal required 20% for the liquid assets, banks maintained an
average of 53% for the period 1998 - 2004. The study indicates that the percentage which is going to the
economy as loans and advances is nearly equal to the balances held by banks as cash and other clearing
items. In a developing economy like Tanzania, one expects that banks would strategically invest to the
avenues which enhance more economic development while at the same time maintaining their normal
returns and risk exposures.
Banking sector in Tanzania enjoys high profit margins (Aikaeli, 2006) and they are stable and insolvent
even with 32% of its outstanding debt become non performing (IMF, 2003). The increased profitability of
banks is not always a good sign as it might cause a huge downturn of the banking sector in case of
economic hardships (Paula, 2004) and poor access to financial services. The profitability of the banks has
been explained as a normal feature for banking firms in developing countries (Flamini, McDonald, &
Schumacher, 2009) given the inherited risks, Tanzania being unexceptional. Ahmad, Ariff and Skully
(2008) indicated that high earnings banks take more risk and higher risk leads to credit crunch. This
observation is similar to a study by Calomiris (1992).
Commercial banks are considered as important links to economic agents, and thus are important vehicle
for economic development (Fakiyesi, 1999). The contribution of the banking sector to the economic
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activities depends much on how the banks allocate their assets and liabilities. Freixas and Rochet (1997)
argued that the banking firms have fundamental influence on capital allocation, risk sharing and economic
growth. Andersen (1969) argued that bank portfolio behavior is a key determinant of the cost and flow of
credit to specific sectors of the economy.
Statement of the Problem
Despite of the fact that the banks in Tanzania are liquid and adequately capitalized, they do not contribute
significantly to economic growth and development (IMF, 2003). The contribution to economic growth
and development by the commercial banks depends much on how strategically the bank’s balance their
assets and liabilities, and sources of funds available to commercial banks in terms of capital sources and
deposits mobilization, on the other hand. The Bank of Tanzania report indicated that in 2007, while over
80% of the bank’s assets were financed by deposits; only 30% - 40% were invested in the loans. A study
by International Monetary Fund (2003) indicated that in 2002 banks were holding a substantial part of
government securities. This may result to interest risk increase and lack of funding to other economic
activities but at the same time it lowers exposure to credit risk by banks.
Studies in portfolio behavior reflect different perspectives on whether there are differences in portfolio
holding of commercial banks between developing and developed world (Arjoon, 1994; Fakiyesi, 1999).
Studies available were carried out before the implementation of the Basle Accord II and liberalization of
financial sector in their respective countries of analysis; and therefore there is a need to track the recent
changes in portfolio behavior in banking system in developing countries. A study on the behavior of the
commercial banks in a developing country perspective, post financial liberalization is important. In the
case of Tanzania the study is even more important for several reasons. Firstly, banks are highly profitable
and there is a long cry of the business sector to lack access to finance and secondly, it is important to find
out how commercial banks invest in various avenues and examining the returns. It is equally important to
analyze the qualitative variables such as technology, human resources and regulatory implications in the
determination of the portfolio of commercial banks.
Research Objectives
The main objective of the proposed study is to determine the portfolio behavior of commercial banks in
Tanzania after the financial liberalization and Basle Accord II. Specific objectives of the study are to:
Literature Review
a) Examine the portfolio behavior of the commercial banks in Tanzania in relationship to
size and ownership; and,
b) Determine the extent to which specific bank related factors affect portfolio behavior of
the commercial banks in Tanzania.
Structure of Commercial Banking in Tanzania
Before 1990s, the structure of commercial banks in Tanzania was very simple with few assets and
liabilities. After the liberalization of the sector and the need for regulation of the banking sector, the
structure of the commercial banks balance sheets has increased with more items. The structure of the
commercial bank assets are diversified which indicates to have more of liquid assets and hence affect the
penetration of the financial services to more avenues. The percentage which is going to the economy as
loans and advances is nearly equal to the balances held by banks as cash and other clearing items
(Aikaeli, 2006).
According to the recently Bank of Tanzania publication (BOT, 2009), as of Dec 2007, the equity capital
of the banks was 4% and 7% of other non equity capital. According to the report, the ratio of total capital
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in relation to risk weighted assets and off balance sheet exposure stood at 22%. The report further
revealed that, five largest banks command 59% of the total banking capital and 67% of total loan portfolio
for the banking sector as well as 65% of the deposits.
Theoretical Literature
Theory of Banking.
Freixas and Rochet (1997) defined a banking firm as an institution whose current operations consist in
granting loans and receiving deposits from the public. The underpinning theory of banking firms
emphasizes the fact that the banking firms are special institutions which reacts to its regulatory
environment to optimally allocate its assets. The provision of deposit and loan products normally
distinguishes banks from other types of financial firms (Heffernan, 2006). Contemporary banking theory
classifies banking functions into four main categories namely liquidity and payment services,
Transforming assets, Managing risks and Processing information and Monitoring borrowers.
Historically, banking firms are highly regulated and supervised firms (Saunders, 1994). This is due to
their ability channel monetary policies and thus to protect the safety and soundness of the economic
system (Gardner & Mills, 1988). The banking sector is probably the most regulated sector (Baer &
McElravey, 1993).
Banks have a fundamental influence on capital allocation, risk sharing and economic growth (Freixas &
Rochet, 1997). This is due to the fact money as scarce resources are demanded by various economic units.
There is evidence that the portfolio behavior of the banks is shaped by the regulatory activities rather than
the general equilibrium which is chosen by the banks in response to the asymmetric information problems
(Calomiris & Wilson, 2004). The main focus of the study is on two functions of banking firm which are
transformation of assets and risk management.
Commercial Banking Portfolio Selection.
Modern financial theory holds that the assets and liabilities can be viewed as comprising some
components of portfolio, which can be optimized. Early study on portfolio maximization was pioneered
by Markowitz (1959) whereby the initial model was based on the maximization of portfolio returns for
one period measured by the variance and standard deviation. Further improvement of the portfolio theory
was done by Klein (1971) who introduces the issue of multiple periods in the modeling as well as other
variable.
The usual analysis of portfolio behavior considers the problem of allocation of asset levels of banking
institution given a certain portfolio size (Parkin, 1970). Bank portfolio behavior has been defined as a
process of allocating a given amount of wealth (defined as capital plus total deposits, between nonearning
assets (required and excess reserves) and earning assets (loans and other investments) (Andersen &
Burger, 1969).
Considering the structure of assets in the balance sheet of a commercial bank, in period t , total assets
( TA t ), are the sum of Cash ( t C ), required reserves ( RR t ), loans ( L t ), investment in Government
securities ( t GS ), and other assets ( OA t ). The relationship can be summarized as:
(1) TAt = Ct + RRt + GSt + Lt + OAt
The percentage of a bank’s deposits invested in different assets is invariant with respect to time path of
deposits. Within a given period portfolio adjustments can be taken into consideration the impact of
deposits. Diversified bank portfolio can be optimal in absence of uncertainty if not all assets have
secondary markets. In developing countries case like Tanzania this is likely to happen due to the absence
of secondary market due to the lack of derivatives markets. In this case there is no incentive and
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Edited by Emmanuel Obuah
advantage for banks to hold excess liquidity as outlined in Aikaeli (2006). As long as the relation
r > r > 0 holds, the optimal portfolio is not affected by changes in deposits or interest rates.
l s
Banks are assumed to choose simultaneously through a planning horizon a volume and mix of their assets
and liabilities. Klein (1971) develops a model which has three categories of assets and three liabilities
category. The assets are cash (C), government securities (GS) and loans (L) while categories of liabilities
are demand deposits (DD), time deposits (TD) and equity capital (K).
The bank is assumed to maximize in a single period its returns measured by the expected profits, out of
the given value of funds. Klein model on the expected return, assume that expected profits and can be
presented as:
(2) Max[ E( π )] = gGS + l L − [ r DD + r TD + ϕ]
s dd td
Where: rdd and rtd are returns in demand deposits and time deposits respectively and ϕ is the cost
associated with adjustments in deficiencies in liquidity.
Empirical Studies
Commercial bank portfolio behavior had been researched for more than a century now. Firstly, advocated
by Edgeworth (1888) who studied the importance of random deposit variation in the determination of a
bank’s optimum portfolio. Several studies (Gupta, 1985; Pierce, 1967; Walker, 1997) have been carried
out in developed world, especially US and European countries on the behavior of commercial banks
portfolio on various aspects especially in relation to money supply using time series data.
In Africa, perhaps there are two pioneer studies which examine portfolio behavior of banks in South
Africa by Dennis (1979) and in Nigeria by Fakiyesi (1999). Dennis studies the portfolio behavior of
South African banks as related to the economic performance in relation to loans in the private and
government sector. The study by Dennis utilized data from 1965 to 1975. Dennis (1979) findings
indicated that there is a strong relationship between economic growth and private lending. The study
argues that banks regard lending to the government i.e. investment in treasury bills as a constraint on their
preferred lending to private sector.
Research Hypotheses
The reviewed literature on portfolio behavior of commercial banks provides room to suggest hypotheses
for the study based on the research objectives.
Hypothesis 1: The portfolio choice of Tanzania commercial banks is stable over time
Previous studies assume constant portfolio holding. The stability can be measured in a general equation
which involves changes in the portfolio allocation and measures for the standard deviation and means.
Thus for all banks at time t;
A ≠ A → A = f ( A )
(3) i, t i, t−1 i, t i, t−1
Where
Ai , t is investment of funds on asset A by bank i for period t. Equation (3) develops a trend by the
use of first order autoregressive (AR) model.
Hypothesis 2: a) The portfolio holdings of commercial banks is different across time within same banks.
This can be measured by a multiple regression equation based on the fixed effect model. For individual
bank 1 in time t = 1, 2, 3, … n.
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Proceedings of the 12th Annual Conference © 2011 IAABD
A ≠ A → A = f ( A , t − 1)
(4) 1, t 1, t−1 1, t 1
Hypothesis 2: b) Portfolio holding of commercial banks in Tanzania depends on the size of the banking
firm. Utilization of a multiple regressions by assigning dummy variables 0 for small firms, 1 from
medium sized firms and 2 for the big firms can be considered. In analysis of variance, with the null
hypothesis: H0: µ0 = µ1 = µ2, and the alternative: Ha: at least two of the means are not equal. Where0
stands for small, 1 for medium and 2 for large banks.
Hypothesis 2: c) Portfolio holding of commercial banks in Tanzania differs according to the ownership
structure. A multiple regression model based on assigning dummy variables 0 for local banks and 1 for
the foreign banks will be used. In analysis of variance, with the null hypothesis: H0: µ1 = µ2 and the
alternative: Ha: µ0 ≠ µ1. Where 0 stands for local and 1 for foreign owned banks.
Methodology
Neuman (1997) identified three broad theoretical perspectives in research methodology namely
positivism, interpretive and critical social science. Also, he recommends the possibility of combining two
or more the methods (known as triangulation).
Research Design
The research uses quantitative financial data (panel data). Panel data has various advantage one being the
fact that it provides informative data, more variability, less collinearity, more degrees of freedom and
efficient (Gujarati, 1999). It employs the results from the quantitative data to develop a tool to assess the
bank specific factors as a follow up stage of data collection. The follow up stage to specific bank data
collection will benefit the study from gaining a better understanding on the managerial and endogenous
which affect bank’s portfolio management. Baumol (1967) argued that behaviour of the firm is likely to
respond to managerial rather than ownership interests and thus interviews with the managers of the
banking firm will be very important. Thus this study will apply the ‘dominant-less dominant” design as
suggested by Creswell (2009). The positivism approach will be a dominant one and the interpretive
approach will be less dominant supporting approach.
Model Specification, Data Requirement and Measurement
Model Specification.
The model to be used in portfolio maximization behaviour will be based on profit maximization equation
to the individual and total banks under as follows
π = β + β vˆ ′ Wˆ
+ ε
(5) i, t 0 i, t w,( i, t) i, t i, t
Where
π i, t is the profit of bank i for time period t. The profit will be taken as differences between interest income
and interest expenses of the banking firm. v′ ˆw,( i, t)
is the average actual rates of returns in percentage per
period of time (quarter) for the individual assets and banks to corresponding time period. ,
ˆ Wi t is the
reduced value of the choice and non choice variable under consideration such that
ε i, t is the random variable.
Wˆ
=
i, t n
∑
W
i=
1
i, t
TA
i, t
and
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Challenges in the Era of Globalization
Edited by Emmanuel Obuah
This model is referred as fixed effect model for the banking behaviour. This basically implies that the
intercepts may differ according to the banking firms but individual’s intercept does not vary over time
(Gujarati, 1999).
Data Collection Procedures and Management.
Data will be collected from Bank of Tanzania databases from 1998-2010. The period is chosen due to the
fact that the data will be publicity available following the 1997 disclosure regulation. Another limiting
factor is that before 1998 it the study will not be rich in data and it will exclude two major banks namely
National Bank of Commerce and National Microfinance Bank which were both established in 1997
following the split of the former National Bank of Commerce. In absence of the data from the central
banks the researcher will follow the publication of the individual bank data from the published
newspapers for the period of study. The data collected will be entered in a spread sheet programme
corresponding bank reporting variables.
For the follow up stage, collection of individual bank data will utilize semi structured interviews to
Directors of Finance and Treasury Managers of the selected banking firms. The interview will seek to
examine bank specific factors related to the portfolio selection, challenges, unique characteristics and
considerations, problems and prospects. According to Lwiza and Nwankwo (2002) the use of
organizational leaders as “key respondents” is relatively widespread in strategy research (Bowman &
Ambrosini, 1997). Farrell and Reinhart (1996) noted that the professional portfolio managers are
important participants in the portfolio management process.
Data Analysis and Model Fit Evaluation
The study will utilize panel data analysis techniques by the use of Stata®. Panel data models allow will
give room for construction and testing the time-series data to be collected. In most cases, financial data
will be reduced and made ready for analysis by the use of spreadsheets. Trends and other statistical
inferences will be analysed spreadsheets and Stata®. Given the challenges in management of the time
series data, specific tests will be done for cleaning missing variables and outliners. Various tests will be
done to ensure that the data fits the proposed models for the study.
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